Freddie Mac 2009 Annual Report Download - page 48

title agent, loan officer, lender or servicer) will engage in fraud by misrepresenting facts about a mortgage loan or a
borrower. We may experience significant financial losses and reputational damage as a result of such mortgage fraud.
The value of mortgage-related securities guaranteed by us and held as investments in securities may decline if we did not
or were unable to perform under our guarantee or if investor confidence in our ability to perform under our guarantee
were to diminish.
We classify our investments in mortgage-related securities as either available-for-sale or trading, and account for them at
fair value on our consolidated balance sheets. A portion of our investments in mortgage-related securities are securities
guaranteed by us. Our valuation of these securities is consistent with GAAP and the legal structure of the guarantee
transaction, which includes the Freddie Mac guarantee to the securitization trusts and on the assets transferred to the
securitization trusts (i.e., Freddie Mac guaranteed PCs and Structured Securities). The valuation of our guaranteed mortgage
securities necessarily reflects investor confidence in our ability to perform under our guarantee and the liquidity that our
guarantee provides. If we did not or were unable to perform under our guarantee, or if investor confidence in our ability to
perform under our guarantee were to diminish, the value of our guaranteed securities may decline, thereby reducing the value
of the securities reported on our consolidated balance sheets and our ability to sell or otherwise use these securities for
liquidity purposes, and adversely affecting our financial condition and results of operations.
Changes in interest rates could negatively impact our results of operations, stockholders’ equity (deficit) and fair value of
net assets.
Our investment activities and credit guarantee activities expose us to interest rate and other market risks. Changes in
interest rates, up or down, could adversely affect our net interest yield. Although the yield we earn on our assets and our
funding costs tend to move in the same direction in response to changes in interest rates, either can rise or fall faster than the
other, causing our net interest yield to expand or compress. For example, due to the timing of maturities or rate reset dates
on variable-rate instruments, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets.
This rate change could cause our net interest yield to compress until the effect of the increase is fully reflected in asset
yields. Changes in the slope of the yield curve could also reduce our net interest yield.
Changes in interest rates could increase our GAAP net loss or deficit in total equity (deficit) materially. Changes in
interest rates may also affect prepayment assumptions, thus potentially impacting the fair value of our assets, including our
investments in mortgage-related securities and unsecuritized mortgage loans. When interest rates fall, borrowers are more
likely to prepay their mortgage loans by refinancing them at a lower rate. An increased likelihood of prepayment on the
mortgages underlying our mortgage-related securities may adversely impact the performance of these securities. An increased
likelihood of prepayment on the mortgage loans we hold may also negatively impact the performance of our investments in
such loans.
Interest rates can fluctuate for a number of reasons, including changes in the fiscal and monetary policies of the federal
government and its agencies, such as the Federal Reserve. Federal Reserve policies directly and indirectly influence the yield
on our interest-earning assets and the cost of our interest-bearing liabilities. The availability of derivative financial
instruments (such as options and interest rate and foreign currency swaps) from acceptable counterparties of the types and in
the quantities needed could also affect our ability to effectively manage the risks related to our investment funding. Our
strategies and efforts to manage our exposures to these risks may not be as effective as they have been in the past. See
“QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK” for a description of the types of
market risks to which we are exposed and how we seek to manage those risks.
Changes in OAS as a result of the completion of the Federal Reserve’s mortgage-related securities purchase program or
other events could materially impact our fair value of net assets and affect future results of operations, stockholders’
equity (deficit) and fair value of net assets.
OAS is an estimate of the yield spread between a given security and an agency debt yield curve. The OAS between the
mortgage and agency debt sectors can significantly affect the fair value of our net assets. The fair value impact of changes in
OAS for a given period represents an estimate of the net unrealized increase or decrease in the fair value of net assets arising
from net fluctuations in OAS during that period. We do not attempt to hedge or actively manage the impact of changes in
mortgage-to-debt OAS.
Changes in market conditions, including changes in interest rates, may cause fluctuations in OAS. A widening of the
OAS on a given asset, which typically causes a decline in the current fair value of that asset, may cause significant mark-to-
fair value losses, and may adversely affect our financial results and stockholders’ equity (deficit), but may increase the
number of attractive investment opportunities in mortgage loans and mortgage-related securities. Conversely, a narrowing or
tightening of the OAS typically causes an increase in the current fair value of that asset, but may reduce the number of
attractive investment opportunities in mortgage loans and mortgage-related securities. Consequently, a tightening of the OAS
45 Freddie Mac