Freddie Mac 2009 Annual Report Download - page 70

We are exposed to mortgage credit risk on our total mortgage portfolio because we either hold the mortgage assets or have
guaranteed mortgages in connection with the issuance of a PC, Structured Security or other mortgage-related guarantee.
Institutional credit risk is the risk that a counterparty that has entered into a business contract or arrangement with us will
fail to meet its obligations. Our exposure to both mortgage and institutional credit risks remains high due to continued
weakness in the mortgage and credit markets.
Institutional Credit Risk
Our primary institutional credit risk exposure arises from agreements with:
• mortgage seller/servicers;
• mortgage insurers;
• issuers, guarantors or third-party providers of other credit enhancements (including bond insurers);
• counterparties to short-term lending and other investment-related agreements and cash equivalent transactions,
including such investments we manage for our PC trusts;
• derivative counterparties;
• hazard and title insurers;
• mortgage investors and originators; and
• document custodians and funds custodians.
A significant failure to perform by a major entity in one of these categories could have a material adverse effect on the
assets in our total mortgage portfolio or other financial assets on our consolidated balance sheets. The weakened financial
condition and liquidity position of some of our counterparties may adversely affect their ability to perform their obligations
to us, or the quality of the services that they provide to us. Our exposure to individual counterparties may become more
concentrated due to the needs of our business and consolidation in the industry. In addition, any efforts we take to reduce
exposure to financially weakened counterparties could result in increased exposure among a smaller number of institutions.
The failure of any of our primary counterparties to meet their obligations to us could have additional material adverse effects
on our results of operations and financial condition.
In addition to obligations to us under certain recourse agreements, our seller/servicers are required to repurchase
mortgages sold to us when we determine there are breaches of the representations and warranties made to us. In lieu of
repurchase, we may choose to allow a seller/servicer to indemnify us against losses on such mortgages. Some of our seller/
servicers failed to perform their repurchase obligations due to lack of financial capacity, while many of our larger, higher
credit-quality seller/servicers have not fully performed their repurchase obligations in a timely manner. As of December 31,
2009 and 2008, we had outstanding repurchase requests to our seller/servicers with respect to loans with an unpaid principal
balance of approximately $4 billion and $3 billion, respectively. At December 31, 2009, nearly 30% of our outstanding
repurchase requests were outstanding for more than 90 days. Our credit losses may increase to the extent our seller/servicers
do not fully meet their repurchase obligations. Enforcing repurchase obligations with lender customers who have the
financial capacity to perform those obligations could also negatively impact our relationships with such customers and ability
to retain market share.
Mortgage Credit Risk
Mortgage and credit market conditions remained challenging in 2009 due to a number of factors, including the
following:
• the effect of changes in other financial institutions’ underwriting standards in past years, which allowed the
origination of significant amounts of higher risk mortgage products in 2006 and 2007 and the first half of 2008. These
mortgages performed particularly poorly during the current housing and economic downturn, and have defaulted at
historically high rates. However, even with the subsequent tightening of underwriting standards, economic conditions
will continue to negatively impact more recent originations;
• declines in home prices nationally and regionally since 2006;
• increases in unemployment;
• continued high incidence of institutional insolvencies;
• higher levels of mortgage foreclosures and delinquencies;
• continued delays in completing foreclosures due to extended timelines in many states and constraints on servicers’
capacity to service high volumes of delinquent loans;
• continued high incidence of fraud by borrowers, mortgage brokers and other parties involved in real estate
transactions;
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