Freddie Mac 2010 Annual Report Download - page 148

Table 59 — Single-Family Credit Loss Sensitivity
NPV
(3)
NPV Ratio
(4)
NPV
(3)
NPV Ratio
(4)
Before Receipt of
Credit Enhancements
(1)
After Receipt of
Credit Enhancements
(2)
(dollars in millions)
At:
December 31, 2010 .................................................... $ 9,926 54.9 bps $ 9,053 50.0 bps
September 30, 2010 ................................................... $ 9,099 49.5 bps $ 8,187 44.6 bps
June 30, 2010 . . ..................................................... $ 8,327 44.5 bps $ 7,445 39.8 bps
March 31, 2010
(5)
..................................................... $10,228 54.4 bps $ 9,330 49.6 bps
December 31, 2009 .................................................... $12,646 67.4 bps $11,462 61.1 bps
(1) Assumes that none of the credit enhancements currently covering our mortgage loans has any mitigating impact on our credit losses.
(2) Assumes we collect amounts due from credit enhancement providers after giving effect to certain assumptions about counterparty default rates.
(3) Based on the single-family credit guarantee portfolio, excluding REMICs and Other Structured Securities backed by Ginnie Mae Certificates.
(4) Calculated as the ratio of NPV of increase in credit losses to the single-family credit guarantee portfolio, defined in note (3) above.
(5) Credit loss projections in this sensitivity analysis beginning as of March 31, 2010 declined, in part, because as of March 31, 2010, we adjusted our
model used in this analysis for both serious delinquency and loss severity projections. The enhanced model reduces our serious delinquency projections
for loans that are at least one year of age based on the mortgage product type, borrower’s credit score and other attributes. Other changes to the model
included incorporating recent delinquency experiences to better forecast serious delinquencies for fixed coupon Alt-A mortgages. Severity assumptions
for certain loans with reduced documentation, regardless of whether the loan has a fixed or variable coupon, were increased based on our experience
with these loans.
Interest Rate and Other Market Risks
For a discussion of our interest rate and other market risks, see “QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.”
Operational Risks
Risk types have become increasingly inter-related such that an operational breakdown, can result in a credit or market
related event or loss. Operational risks are inherent in all of our business activities and can become apparent in various ways,
including accounting or operational errors, business interruptions, fraud and failures of the technology used to support our
business activities. Our risk of operational failure may be increased by vacancies or turnover in officer and key business unit
positions and failed or inadequate internal controls. These operational risks may expose us to financial loss, interfere with
our ability to sustain timely and reliable financial reporting, or result in other adverse consequences.
Our business decision-making, risk management and financial reporting are highly dependent on our use of models. In
recent periods, external market factors have contributed to increased risk associated with the use of these models. We are
taking certain actions to address our model oversight and governance process, including clarifying roles, aligning model
resources and providing more transparency to management over model issues and changes.
Our primary business processing and financial accounting systems lack sufficient flexibility to handle all the
complexities of, and changes in, our business transactions and related accounting policies and methods. This requires us to
rely more extensively on spreadsheets and other end-user computing systems. These systems are likely to have a higher risk
of operational failure and error than our primary systems, which are subject to our information technology general controls.
We believe we are mitigating this risk through active monitoring of, and improvements to, controls over the development and
use of end-user computing systems.
In order to manage the risk of inaccurate or unreliable valuations of our financial instruments, we engage in an ongoing
internal review of our valuations. We perform analysis of internal valuations on a monthly basis to confirm the
reasonableness of the valuations. For more information on the controls in our valuation process, see “FAIR VALUE
MEASUREMENTS AND ANALYSIS — Fair Value Measurements — Controls over Fair Value Measurement.”
Announcements in the fall of 2010 of deficiencies in foreclosure documentation by several large seller/servicers and
designated counsel firms have raised various concerns relating to foreclosure practices. The integrity of the foreclosure
process is critical to our business, and our financial results could be adversely affected by deficiencies in the conduct of that
process. For further information about foreclosure documentation deficiencies and our other operational risks, see “RISK
FACTORS — Operational Risks.”
Management, including the company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of
the effectiveness of our internal control over financial reporting and our disclosure controls and procedures as of
December 31, 2010. As of December 31, 2010, we had one material weakness which remained unremediated related to
conservatorship, causing us to conclude that both our internal control over financial reporting and our disclosure controls and
procedures were not effective as of December 31, 2010. Given the structural nature of this weakness, we believe it is likely
that we will not remediate this material weakness while we are under conservatorship. In view of our mitigating activities
related to the material weakness, we believe that our consolidated financial statements for the year ended December 31, 2010
have been prepared in conformity with GAAP. For additional information on our disclosure controls and procedures and
related material weakness in internal control over financial reporting, see “CONTROLS AND PROCEDURES.”
145 Freddie Mac