Freddie Mac 2010 Annual Report Download - page 43

• pursuit of public mission-oriented objectives that could produce suboptimal financial returns, such as our efforts under
the MHA Program, the continued use or expansion of foreclosure suspensions, and other foreclosure prevention
efforts, including any future requirements to reduce the principal amount of loans;
• adverse changes in interest rates, the yield curve, implied volatility or mortgage-to-debt OAS, which could reduce net
interest income and increase realized and unrealized mark-to-fair-value losses recorded in earnings or AOCI;
• limitations in our access to the public debt markets, or increases in our debt funding costs;
• establishment of a valuation allowance for our remaining deferred tax asset;
• limitations on our ability to develop new products;
• changes in business practices and requirements resulting from legislative or regulatory developments;
• changes in accounting practices or standards; and
• the quarterly commitment fee we must pay to Treasury under the Purchase Agreement (Treasury has waived the fee
for the first quarter of 2011). The amount of the fee has not yet been established and could be substantial. Treasury
has indicated that it remains committed to protecting taxpayers and ensuring that our future positive earnings are
returned to taxpayers as compensation for their investment.
Under the Purchase Agreement, 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. Although additional draws under the
Purchase Agreement will allow us to remain solvent and avoid mandatory receivership, they will also increase the liquidation
preference of, and the dividends we owe on, the senior preferred stock. Based on the aggregate liquidation preference of the
senior preferred stock of $64.2 billion as of December 31, 2010, Treasury is entitled to annual cash dividends of
$6.42 billion, which exceeds our annual historical earnings in all but one period. Increases in the already substantial
liquidation preference and senior preferred dividend obligation, along with limited flexibility to redeem the senior preferred
stock, will adversely affect our results of operations and financial condition and add to the significant uncertainty regarding
our long-term financial sustainability.
Our business objectives and strategies have in some cases been significantly altered since we were placed into
conservatorship, and may continue to change, in ways that negatively affect our future financial condition and results of
operations.
FHFA, as Conservator, has directed the company to focus on managing to a positive stockholders’ equity. At the
direction of the Conservator, we have made changes to certain business practices that are designed to provide support for the
mortgage market in a manner that serves our public mission and other non-financial objectives but may not contribute to our
goal of managing to a positive stockholders’ equity. Some of these changes have increased our expenses or caused us to
forego revenue opportunities. For example, FHFA has directed that we implement various initiatives under the MHA
Program. We expect to incur significant costs associated with the implementation of these initiatives and we cannot currently
estimate whether, or the extent to which, costs incurred in the near term from these initiatives may be offset, if at all, by the
prevention or reduction of potential future costs of serious delinquencies and foreclosures due to these initiatives. The
Conservator and Treasury have also not authorized us to engage in certain business initiatives and transactions, including the
purchase or sale of certain assets, which we believe may have had a beneficial impact on our results of operations or
financial condition, if executed. Our inability to execute such initiatives and transactions may adversely affect our
profitability. Other agencies of the U.S. government, as well as Congress, also have an interest in the conduct of our
business. We do not know what actions they may request us to take.
In view of the conservatorship and the reasons stated by FHFA for its establishment, it is likely that our business model
and strategic objectives will continue to change, possibly significantly, including in pursuit of our public mission and other
non-financial objectives. Among other things, we could experience significant changes in the size, growth and characteristics
of our guarantee and investment activities, and we could further change our operational objectives, including our pricing
strategy in our core mortgage guarantee business. Accordingly, our strategic and operational focus may not always be
consistent with the generation of net income. It is possible that we will make material changes to our capital strategy and to
our accounting policies, methods, and estimates. It is also possible that the company could be restructured and its statutory
mission revised. In addition, we may be directed to engage in initiatives that are operationally difficult or costly to
implement.
In a letter to the Chairmen and Ranking Members of the Congressional Banking and Financial Services Committees
dated February 2, 2010, the Acting Director of FHFA stated that minimizing our credit losses is our central goal and that we
will be limited to continuing our existing core business activities and taking actions necessary to advance the goals of the
conservatorship. The Acting Director stated that FHFA does not expect we will be a substantial buyer or seller of mortgages
for our mortgage-related investments portfolio, except for purchases of delinquent mortgages out of PC pools. The Acting
40 Freddie Mac