Freddie Mac 2010 Annual Report Download - page 51

Our seller/servicers have a significant role in servicing loans in our single-family credit guarantee portfolio, which
includes an active role in our loss mitigation efforts. Therefore, a decline in their performance could impact the overall
quality of our credit performance, which could adversely affect our financial condition or results of operations and have
significant impacts on our ability to mitigate credit losses. The risk of such a decline in performance remains high as
servicers continue to face challenges in building capacity to process the large volumes of problem loans and as weak
economic conditions continue to affect the liquidity and financial condition of many of our seller/servicers, including some
of our largest seller/servicers. Any efforts we take to attempt to improve our servicers’ performance could adversely affect
our relationships with such servicers, many of which also sell loans to us.
The inability to realize the anticipated benefits of our loss mitigation plans, a lower realized rate of seller/servicer
repurchases or default rates and severity that exceed our current projections could cause our losses to be significantly higher
than those currently estimated.
Our seller/servicers also have a significant role in servicing loans in our multifamily mortgage portfolio. We are exposed
to the risk that multifamily seller/servicers could come under financial pressure due to the current stressful economic
environment, which could potentially cause degradation in the quality of servicing they provide or, in certain cases, reduce
the likelihood that we could recover losses through lender repurchases or through recourse agreements or other credit
enhancements, where applicable.
See “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Mortgage Seller/Servicers” for
additional information on our institutional credit risk related to our mortgage seller/servicers.
Our financial condition or results of operations may be adversely affected by the financial distress of our counterparties
to derivatives, funding and other transactions.
We use derivatives for several purposes, including to rebalance our funding mix in order to more closely match changes
in the interest rate characteristics of our mortgage-related assets and to hedge forecasted issuances of debt. The relative
concentration of our derivative exposure among our primary derivative counterparties remains high. This concentration
increased in the last several years due to industry consolidation and the failure of certain counterparties, and could further
increase. One of our derivative counterparties accounted for greater than 10% of our net uncollateralized exposure, excluding
commitments, at December 31, 2010. For a further discussion of our derivative counterparty exposure, see “MD&A — RISK
MANAGEMENT — Credit Risk — Institutional Credit Risk — Derivative Counterparties” and “NOTE 19:
CONCENTRATION OF CREDIT AND OTHER RISKS.”
Some of our derivative and other capital markets counterparties have experienced various degrees of financial distress in
the past few years, including liquidity constraints, credit downgrades and bankruptcy. Our financial condition and results of
operations may be adversely affected by the financial distress of these derivative and other capital markets counterparties to
the extent that they fail to meet their obligations to us. For example, we may incur losses if collateral held by us cannot be
liquidated at prices that are sufficient to recover the full amount of the loan or derivative exposure due us.
In addition, our ability to engage in routine derivatives, funding and other transactions could be adversely affected by
the actions of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing,
counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services
institutions, or the financial services industry generally, could lead to market-wide disruptions in which it may be difficult for
us to find acceptable counterparties for such transactions.
We also use derivatives to synthetically create the substantive economic equivalent of various debt funding structures.
Thus, if our access to the derivative markets were disrupted, it may become more difficult or expensive to fund our business
activities and achieve the funding mix we desire, which could adversely affect our business and results of operations.
Our credit and other losses could increase if our mortgage or bond insurers become insolvent or fail to perform their
obligations to us.
We are exposed to risk relating to the potential insolvency or non-performance of mortgage insurers that insure single-
family mortgages we purchase or guarantee and bond insurers that insure bonds we hold as investment securities on our
consolidated balance sheets. The weakened financial condition and liquidity position of these counterparties increases the risk
that these entities will fail to reimburse us for claims under insurance policies. This risk could increase if home prices
deteriorate further or if the economy worsens.
As a guarantor, we remain responsible for the payment of principal and interest if a mortgage insurer fails to meet its
obligations to reimburse us for claims. Thus, if any of our mortgage insurers that provide credit enhancement fails to fulfill
its obligation, we could experience increased credit losses. In addition, if a regulator determined that a mortgage insurer
lacked sufficient capital to pay all claims when due, the regulator could take action that might impact the timing and amount
of claim payments made to us. We independently assess the financial condition, including the claims-paying resources, of
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