Freddie Mac 2010 Annual Report Download - page 48

We are exposed to significant credit risk related to the subprime, Alt-A and option ARM loans that back the non-agency
mortgage-related securities we hold.
Our investments in non-agency mortgage-related securities have included securities that are backed by subprime, Alt-A
and option ARM loans. Since 2007, mortgage loan delinquencies and credit losses in the U.S. mortgage market have
substantially increased, particularly in the subprime, Alt-A and option ARM sectors of the residential mortgage market. In
addition, home prices declined significantly, after extended periods during which home prices appreciated. As a result, the
fair value of these investments has declined significantly since 2007 and we have incurred substantial losses through other-
than-temporary impairments. In addition, many of these investments do not trade in a liquid secondary market and the size of
our holdings relative to normal market activity is such that, if we were to attempt to sell a significant quantity of these
securities, the pricing in such markets could be significantly disrupted and the price we ultimately realize may be materially
lower than the value at which we carry these investments on our consolidated balance sheets.
We could experience additional GAAP losses due to other-than-temporary impairments on our investments in these non-
agency mortgage-related securities if, among other things: (a) interest rates change; (b) delinquency and loss rates on
subprime, Alt-A and option ARM loans increase; or (c) there is a further decline in actual or forecasted home prices. In
addition, the fair value of these investments may decline further due to additional ratings downgrades or market events. Any
credit enhancements covering these securities, including subordination, may not prevent us from incurring losses. During
2010, we continued to experience the depletion of credit enhancements on selected securities backed by subprime first lien,
option ARM and Alt-A loans due to poor performance in the underlying collateral. See “MD&A — CONSOLIDATED
BALANCE SHEETS ANALYSIS — Investments in Securities” for information about the credit ratings for these securities
and the extent to which these securities have been downgraded.
Certain strategies to mitigate our losses as an investor in non-agency mortgage-related securities may adversely affect our
relationships with some of our largest seller/servicers.
On July 12, 2010, FHFA, as Conservator of Freddie Mac and Fannie Mae, announced that it had issued subpoenas to
various entities seeking loan files and other transaction documents related to non-agency mortgage-related securities in which
the two enterprises invested. FHFA stated that the documents will enable it to determine whether issuers of these securities
and others are liable to Freddie Mac and Fannie Mae for certain losses they have suffered on the securities. We are assisting
FHFA in this effort.
We also have joined an investor group that has delivered a notice of non-performance to Bank of New York Mellon, as
Trustee, and Countrywide Home Loans Servicing LP (now known as BAC Home Loans Servicing, LP). The notice related to
the possibility that certain mortgage pools backing certain mortgage-related securities issued by Countrywide Financial and
related entities include mortgages that may have been ineligible for inclusion in the pools due to breaches of representations
or warranties.
These and other loss mitigation efforts may lead to disputes with some of our largest seller/servicers and counterparties
that may result in litigation. The effectiveness of these loss mitigation efforts is highly uncertain and any potential recoveries
may take significant time to realize.
The credit losses we experience in future periods as a result of the housing and economic crisis are likely to be larger,
perhaps substantially larger, than our current loan loss reserves.
Our loan loss reserves, as reflected on our consolidated balance sheets, do not reflect our estimate of the total of all
future credit losses inherent in our single-family and multifamily mortgage loans, including those underlying our financial
guarantees. Rather, pursuant to GAAP, our reserves only reflect probable losses we believe we have already incurred as of
the balance sheet date. Accordingly, although we believe that our credit losses may exceed the amounts we have already
reserved for loans currently identified as impaired, and that additional credit losses will be incurred in the future due to the
housing and economic crisis, we are not permitted under GAAP to reflect the potential impact of these future trends in our
loan loss reserves. As a result of the depth and extent of the housing and economic crisis, there is significant uncertainty
regarding the full extent of future credit losses. Therefore, such credit losses are likely to be larger, perhaps substantially
larger, than our current loan loss reserves. These additional credit losses we incur in future periods will adversely affect our
business, results of operations, financial condition, liquidity and net worth.
Further declines in U.S. home prices or other adverse changes in the U.S. housing market could negatively impact our
business and increase our losses.
Throughout 2010, the U.S. housing market continued to experience adverse trends, including continued price
depreciation, and continued high serious delinquency and default rates. Home sales declined significantly following the
expiration of the federal homebuyer tax credit program in April 2010, which increased the supply of unsold homes and
placed further downward pressure on home prices. These conditions, coupled with high continued unemployment, led to
45 Freddie Mac