Freddie Mac 2009 Annual Report Download - page 46

mortgage industry, causing disruptions to normal operations of major mortgage originators, including some of our largest
customers, and have resulted in the insolvency, closure or acquisition of a number of major financial institutions. These
conditions also resulted in greater volatility, widening of credit spreads and a lack of price transparency and are expected to
contribute to further consolidation within the financial services industry. We operate in these markets and continue to be
subject to adverse effects on our financial condition and results of operations due to our activities involving securities,
mortgages, derivatives and other mortgage commitments with our customers.
Competition from banking and non-banking companies may harm our business.
Competition in the secondary mortgage market combined with a decreased rate of growth in residential mortgage debt
outstanding may make it more difficult for us to purchase mortgages. Furthermore, competitive pricing pressures may make
our products less attractive in the market and negatively impact our financial results. Increased competition from Fannie Mae
and Ginnie Mae may alter our product mix, lower volumes and reduce revenues on new business. Ginnie Mae guarantees the
timely payment of principal and interest on mortgage-related securities backed by federally insured or guaranteed loans,
primarily those insured by FHA or guaranteed by VA. Historically, we also competed with other financial institutions that
retain or securitize mortgages, such as commercial and investment banks, dealers, thrift institutions, and insurance
companies. While many of these institutions have ceased or substantially reduced their activities in the secondary market
since 2008, it is possible that these institutions will reenter the secondary market.
Our business may be adversely affected by limited availability of financing, increased funding costs and uncertainty in
our securitization financing.
The amount, type and cost of our funding, including financing from other financial institutions and the capital markets,
directly impacts our interest expense and results of operations. A number of factors could make such financing more difficult
to obtain, more expensive or unavailable on any terms, both domestically and internationally (where funding transactions
may be on terms more or less favorable than in the U.S.), including:
• termination of, or future restrictions or other adverse changes with respect to, government support programs that may
benefit us;
• reduced demand for our debt securities; and
• competition for debt funding from other debt issuers.
Our ability to obtain funding in the public debt markets or by pledging mortgage-related securities as collateral to other
financial institutions could cease or change rapidly and the cost of the available funding could increase significantly due to
changes in market confidence and other factors. For example, in the fall of 2008, we experienced significant deterioration in
our access to the unsecured medium- and long-term debt markets, and were forced to rely on short-term debt to fund our
purchases of mortgage assets and refinance maturing debt and to rely on derivatives to synthetically create the substantive
economic equivalent of various debt funding structures.
Since 2008, the ratings on our non-agency mortgage-related securities backed by Alt-A, subprime and option ARM
loans have decreased, limiting their availability as a significant source of liquidity for us through sales or use as collateral in
secured lending transactions. In addition, adverse market conditions have negatively impacted our ability to enter into
secured lending transactions using agency mortgage-related securities as collateral. These trends are likely to continue in the
future.
Government Support
Changes or perceived changes in the government’s support of us could have a severe negative effect on our access to the
debt markets and our debt funding costs. Under the amendment to the Purchase Agreement adopted on December 24, 2009,
the $200 billion cap on Treasury’s funding commitment will increase as necessary to accommodate any cumulative reduction
in our net worth during 2010, 2011 and 2012. While we believe that this increased support provided by Treasury will be
sufficient to enable us to maintain our access to the debt markets and ensure that we have adequate liquidity to conduct our
normal business activities over the next three years, the costs of our debt funding could vary. For example, our funding costs
for debt with maturities beyond 2012 could be high. In addition, uncertainty about the future of the GSEs could affect our
debt funding costs. The cost of our debt funding could increase if debt investors believe that the risk that we could be placed
into receivership is increasing. The completion of the Federal Reserve’s debt purchase program could negatively affect the
availability of longer-term debt funding as well as the spreads on our debt, and thus increase our debt funding costs.
Due to the expiration of the Lending Agreement, we no longer have a liquidity backstop available to us (other than
draws from Treasury under the Purchase Agreement and Treasury’s ability to purchase up to $2.25 billion of our obligations
under its permanent statutory authority) if we are unable to obtain funding from issuances of debt or other conventional
sources. At present, we are not able to predict the likelihood that a liquidity backstop will be needed, or to identify the
alternative sources of liquidity that might be available to us if needed, other than from Treasury as referenced above.
43 Freddie Mac