Freddie Mac 2010 Annual Report Download - page 55

Fannie Mae securities by reducing guarantee fees. However, this could adversely affect the profitability of our single-family
guarantee business.
We may be unable to maintain a liquid and deep market for our PCs, which could also adversely affect the price
performance of PCs. A significant reduction in the volume of mortgage loans that we securitize could reduce the liquidity of
our PCs.
A reduction in the credit ratings for our debt could adversely affect our liquidity.
Nationally recognized statistical rating organizations play an important role in determining, by means of the ratings they
assign to issuers and their debt, the availability and cost of debt funding. We currently receive ratings from three nationally
recognized statistical rating organizations for our unsecured borrowings. Our credit ratings are important to our liquidity.
Actions by governmental entities or others, including changes in government support for us, additional GAAP losses,
additional draws under the Purchase Agreement, a reduction in the credit ratings of or outlook on the U.S. Government, and
other factors could adversely affect the credit ratings on our debt. A reduction in our credit ratings could adversely affect our
liquidity, competitive position, or the supply or cost of debt financing available to us. A reduction in our credit ratings could
also trigger additional collateral requirements under our derivatives contracts. A significant increase in our borrowing costs
could cause us to sustain additional GAAP losses or impair our liquidity by requiring us to seek other sources of financing,
which may be difficult to obtain.
Mortgage fraud could result in significant financial losses and harm to our reputation.
We rely on representations and warranties by seller/servicers about the characteristics of the single-family mortgage
loans we purchase and securitize, and we do not independently verify most of the information that is provided to us before
we purchase the loan. This exposes us to the risk that one or more of the parties involved in a transaction (such as the
borrower, seller, broker, appraiser, title agent, loan officer, lender or servicer) will engage in fraud by misrepresenting facts
about a mortgage loan or a borrower. While we subsequently review a sample of these loans to determine if such loans are in
compliance with our contractual standards, there can be no assurance that this would detect or deter mortgage fraud, or
otherwise reduce our exposure to the risk of fraud. We are also exposed to fraud by third parties in the mortgage servicing
function, particularly with respect to sales of REO properties and other dispositions of non-performing assets. We may
experience significant financial losses and reputational damage as a result of such fraud.
The value of mortgage-related securities guaranteed by us and held as investments may decline if we were unable to
perform under our guarantee or if investor confidence in our ability to perform under our guarantee were to diminish.
A portion of our investments in mortgage-related securities are securities guaranteed by us. Our valuation of these
securities is consistent with GAAP and the legal structure of the guarantee transaction, which includes the Freddie Mac
assets transferred to the securitization trusts that serve as collateral for the mortgage-related securities issued by the trusts
(i.e.: (a) multifamily PCs; (b) REMICs and Other Structured Securities; and (c) certain Other Guarantee Transactions). The
valuation of our guaranteed mortgage securities necessarily reflects investor confidence in our ability to perform under our
guarantee and the liquidity that our guarantee provides. If we were unable to perform under our guarantee or if investor
confidence in our ability to perform under our guarantee were to diminish, the value of our guaranteed securities may
decline, thereby reducing the value of the securities reported on our consolidated balance sheets, which could have an
adverse affect on our financial condition and results of operations. This could also adversely affect our ability to sell or
otherwise use these securities for liquidity purposes.
Changes in interest rates could negatively impact our results of operations, stockholders’ equity (deficit) and fair value of
net assets.
Our investment activities and credit guarantee activities expose us to interest rate and other market risks. Changes in
interest rates, up or down, could adversely affect our net interest yield. Although the yield we earn on our assets and our
funding costs tend to move in the same direction in response to changes in interest rates, either can rise or fall faster than the
other, causing our net interest yield to expand or compress. For example, due to the timing of maturities or rate reset dates
on variable-rate instruments, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets.
This rate change could cause our net interest yield to compress until the effect of the increase is fully reflected in asset
yields. Changes in the slope of the yield curve could also reduce our net interest yield.
Our GAAP results can be significantly affected by changes in interest rates, and adverse changes in interest rates could
increase our GAAP net loss or deficit in total equity (deficit) materially. For example, changes in interest rates affect the fair
value of our derivatives portfolio. Since we generally record changes in fair values of our derivatives in current income, such
changes could significantly impact our GAAP results. While derivatives are an important aspect of our management of
interest-rate risk, they generally increase the volatility of reported net income (loss), because, while fair value changes in
derivatives affect net income, fair value changes in several of the types of assets and liabilities being hedged do not affect net
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