Freddie Mac 2010 Annual Report Download - page 56

income. Additionally, increases in interest rates could increase other-than-temporary impairments on our investments in non-
agency mortgage-related securities.
Changes in interest rates may also affect prepayment assumptions, thus potentially impacting the fair value of our
assets, including our investments in mortgage-related assets. When interest rates fall, borrowers are more likely to prepay
their mortgage loans by refinancing them at a lower rate. An increased likelihood of prepayment on the mortgages
underlying our mortgage-related securities may adversely impact the value of these securities.
Interest rates can fluctuate for a number of reasons, including changes in the fiscal and monetary policies of the federal
government and its agencies, such as the Federal Reserve. Federal Reserve policies directly and indirectly influence the yield
on our interest-earning assets and the cost of our interest-bearing liabilities. The availability of derivative financial
instruments (such as options and interest rate and foreign currency swaps) from acceptable counterparties of the types and in
the quantities needed could also affect our ability to effectively manage the risks related to our investment funding. Our
strategies and efforts to manage our exposures to these risks may not be effective. In particular, various factors, including
uncertainty concerning trends in home prices, have made it more difficult for us to estimate future prepayments. This could
make it more difficult for us to manage prepayment risk, and could cause our hedging-related losses to increase. See
“QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK” for a description of the types of
market risks to which we are exposed and how we seek to manage those risks.
Changes in OAS could materially impact our fair value of net assets and affect future results of operations and
stockholders’ equity (deficit).
OAS is an estimate of the yield spread between a given security and an agency debt yield curve. This includes
consideration of potential variability in the security’s cash flows resulting from any options embedded in the security, such as
prepayment options. The OAS between the mortgage and agency debt sectors can significantly affect the fair value of our net
assets. The fair value impact of changes in OAS for a given period represents an estimate of the net unrealized increase or
decrease in the fair value of net assets arising from net fluctuations in OAS during that period. We do not attempt to hedge
or actively manage the impact of changes in mortgage-to-debt OAS.
Changes in market conditions, including changes in interest rates, may cause fluctuations in OAS. A widening of the
OAS on a given asset, which typically causes a decline in the current fair value of that asset, may cause significant mark-to-
fair value losses, and may adversely affect our financial results and stockholders’ equity (deficit), but may increase the
number of attractive investment opportunities in mortgage loans and mortgage-related securities. Conversely, a narrowing or
tightening of the OAS typically causes an increase in the current fair value of that asset, but may reduce the number of
attractive investment opportunities in mortgage loans and mortgage-related securities. Consequently, a tightening of the OAS
may adversely affect our future financial results and stockholders’ equity (deficit). See “MD&A — FAIR VALUE
MEASUREMENTS AND ANALYSIS — Discussion of Fair Value Results” for a more detailed description of the impacts of
changes in mortgage-to-debt OAS.
While wider spreads might create favorable investment opportunities, we are limited in our ability to take advantage of
any such opportunities because, under the Purchase Agreement and FHFA regulation, the UPB of our mortgage-related
investments portfolio is subject to a cap that declines by 10% per year beginning in 2010 until it reaches $250 billion. FHFA
has stated its expectation in the Acting Director’s February 2, 2010 letter that any net additions to our mortgage-related
investments portfolio would be related to purchasing delinquent mortgages out of PC pools.
We could experience significant reputational harm, which could affect the future of our company, if our efforts under the
MHA Program, and other initiatives to support the U.S. residential mortgage market do not succeed.
We are focused on the MHA Program and other initiatives to support the U.S. residential mortgage market. If these
initiatives do not achieve their desired results, or are otherwise perceived to have failed to achieve their objectives, we may
experience damage to our reputation, which may impact the extent of future government support for our business and
government decisions with respect to the future status and role of Freddie Mac.
Negative publicity causing damage to our reputation could adversely affect our business prospects, financial results or net
worth.
Reputation risk, or the risk to our financial results and net worth from negative public opinion, is inherent in our
business. Negative public opinion could adversely affect our ability to keep and attract customers or otherwise impair our
customer relationships, adversely affect our ability to obtain financing, impede our ability to hire and retain qualified
personnel, hinder our business prospects or adversely impact the trading price of our securities. Perceptions regarding the
practices of our competitors, our seller/servicers or the financial services and mortgage industries as a whole, particularly as
they relate to the current economic downturn, may also adversely impact our reputation. Adverse reputation impacts on third
parties with whom we have important relationships may impair market confidence or investor confidence in our business
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