Freddie Mac 2010 Annual Report Download - page 42

cease to have any value, and there can be no assurance that our stockholders would receive any compensation for such loss
in value.
On February 11, 2011, the Obama Administration delivered a report to Congress that lays out the Administration’s plan
to reform the U.S. housing finance market, including options for structuring the government’s long-term role in a housing
finance system in which the private sector is the dominant provider of mortgage credit. The report recommends winding
down Freddie Mac and Fannie Mae, stating that the Obama Administration will work with FHFA to determine the best way
to responsibly reduce the role of Freddie Mac and Fannie Mae in the market and ultimately wind down both institutions. The
report identifies a number of policy levers that could be used to wind down Freddie Mac and Fannie Mae, shrink the
government’s footprint in housing finance, and help bring private capital back to the mortgage market, including increasing
guarantee fees, phasing in a 10% down payment requirement, reducing conforming loan limits, and winding down Freddie
Mac and Fannie Mae’s investment portfolios, consistent with the senior preferred stock purchase agreements. For more
information, see “BUSINESS — Executive Summary — Long-Term Financial Sustainability and Future Status.”
In addition to legislative actions, FHFA has expansive regulatory authority over us, and the manner in which FHFA will
use its authority in the future is unclear. FHFA could take a number of regulatory actions that could materially adversely
affect our company, such as changing or reinstating our current capital requirements, which are not binding during
conservatorship.
The conservatorship is indefinite in duration and the timing, conditions and likelihood of our emerging from
conservatorship are uncertain. Even if the conservatorship is terminated, we would remain subject to the Purchase
Agreement, senior preferred stock and warrant.
FHFA has stated that there is no exact time frame as to when the conservatorship may end. Termination of the
conservatorship (other than in connection with receivership) also requires Treasury’s consent under the Purchase Agreement.
There can be no assurance as to when, and under what circumstances, Treasury would give such consent. There is also
significant uncertainty as to what changes may occur to our business structure during or following our conservatorship,
including whether we will continue to exist. It is possible that the conservatorship will end with us being placed into
receivership.
As discussed above, on February 11, 2011, the Obama Administration delivered a report to Congress that lays out the
Administration’s plan to reform the U.S. housing finance market. The report recommends winding down Freddie Mac and
Fannie Mae. For more information, see “BUSINESS — Executive Summary — Long-Term Financial Sustainability and
Future Status.”
In addition, Treasury has the ability to acquire almost 80% of our common stock for nominal consideration by
exercising the warrant we issued to it pursuant to the Purchase Agreement. Consequently, the company could effectively
remain under the control of the U.S. government even if the conservatorship was ended and the voting rights of common
stockholders restored. The warrant held by Treasury, the restrictions on our business contained in the Purchase Agreement
and the senior status of the senior preferred stock issued to Treasury under the Purchase Agreement, if the senior preferred
stock has not been redeemed, also could adversely affect our ability to attract new private sector capital in the future should
the company be in a position to seek such capital. Moreover, our draws under Treasury’s funding commitment, the senior
preferred dividend obligation, and commitment fees paid to Treasury could permanently impair our ability to build
independent sources of capital.
We expect to make additional draws under the Purchase Agreement in future periods, which will adversely affect our
future results of operations and financial condition.
It is unlikely that we will generate net income or comprehensive income in excess of our annual dividends payable to
Treasury over the long-term, which will lead us to require additional draws under the Purchase Agreement. A variety of
factors could lead us to make additional draws under the Purchase Agreement in the future, including:
• dividend obligations on the senior preferred stock, which are cumulative and accrue at an annual rate of 10% (or 12%
in any quarter in which dividends are not paid in cash) until all accrued dividends are paid in cash and which at their
current level exceed our annual historical earnings in all but one period;
• future losses, driven by ongoing weak economic conditions, which could cause, among other things, continued high
provision for credit losses, increased REO operations expense and additional unrealized losses on the non-agency
mortgage-related securities we hold;
• required reductions in the size of our mortgage-related investments portfolio and other limitations on our investment
activities that reduce the earnings capacity of our investment activities;
39 Freddie Mac