Freddie Mac 2010 Annual Report Download - page 49

increases in credit losses and continued high loan delinquencies and provisioning for loan losses, all of which have adversely
affected our financial condition and results of operations. We expect that national home prices in 2011 will likely be lower
than in 2010, which could result in a continued high rate of serious delinquencies or defaults and a level of credit-related
losses higher than our expectations when our guarantees were issued. It is possible that home price declines could be
significantly greater than we anticipate, or that a sustained recovery in home prices would not begin until much later than we
anticipate, which could result in higher losses due to other-than-temporary impairments on our investments in non-agency
mortgage-related securities than would otherwise be recognized in earnings. Government programs designed to strengthen the
U.S. housing market, such as the MHA Program, may fail to achieve expected results, and new programs could be instituted
that cause our credit losses to increase. For more information, see “MD&A — RISK MANAGEMENT — Credit Risk.”
Our business volumes are closely tied to the rate of growth in total outstanding U.S. residential mortgage debt and the
size of the U.S. residential mortgage market. Total residential mortgage debt declined approximately 2.3% in the first nine
months of 2010 compared to a decline of 1.9% in 2009. If total outstanding U.S. residential mortgage debt were to continue
to decline, there could be fewer mortgage loans available for us to purchase, and we could face more competition to
purchase a smaller number of loans.
While major national multifamily market fundamentals (i.e., vacancy rates and effective rents) improved during 2010,
there can be no assurance that this trend will continue. Additionally, certain local markets continue to exhibit weak
fundamentals. We expect that our multifamily non-performing assets may increase due to the continuation of the challenging
economic conditions particularly in certain geographical areas. Improvements in loan performance have historically lagged
improvements in broader economic and market trends during market recoveries. As a result, we may continue to experience
elevated credit losses related to multifamily activities in the first half of 2011, even if market conditions continue to improve.
In addition, given the significant weakness currently being experienced in the U.S. economy, it is also possible that
apartment fundamentals could deteriorate during 2011, which could cause delinquencies and credit losses relating to our
multifamily activities to increase beyond our current expectations.
Our refinance volumes could decline if interest rates rise, which could cause our overall new issuance volumes to decline.
We continued to experience a high composition of refinance mortgages in our purchase volume during 2010, due to
continued low interest rates and the impact of our relief refinance mortgages. Interest rates have been at historically low
levels for an extended period of time, but have recently begun to increase. Overall originations of refinance mortgages, and
our purchases of them, will likely decrease if interest rates continue to rise. Originations of refinance mortgages will also
likely decline after the Home Affordable Refinance Program expires in June 2011. It is possible that our overall issuance
volumes could decline if our volumes of purchase money mortgages do not increase to offset any such decrease in refinance
mortgages. This could adversely affect the amount of revenue we receive from our guarantee activities.
We depend on our institutional counterparties to provide services that are critical to our business, and our results of
operations or financial condition may be adversely affected if one or more of our institutional counterparties do not meet
their obligations to us.
We face the risk that one or more of the institutional counterparties that has entered into a business contract or
arrangement with us may fail to meet its obligations. We face similar risks with respect to contracts or arrangements we
benefit from indirectly or that we enter into on behalf of our securitization trusts. Our primary exposures to institutional
counterparty risk are 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 agreements and transactions we manage for our PC trusts;
• derivative counterparties;
• hazard and title insurers;
• mortgage investors and originators; and
• document custodians and funds custodians.
Many of our counterparties provide several types of services to us. In some cases, our business with institutional
counterparties is concentrated. A significant failure by a major institutional counterparty could harm our business and
financial results in a variety of ways and have a material adverse effect on our investments in mortgage loans, investments in
securities, our derivative portfolio or our credit guarantee activities. See “NOTE 19: CONCENTRATION OF CREDIT AND
OTHER RISKS” for additional information.
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