Freddie Mac 2010 Annual Report Download - page 60

issues. Our evaluation of these issues, as well as the evaluations made by the seller/servicers, is complicated by the fact that
state law governs the foreclosure process and, thus, the laws and regulations of a large number of different states must be
examined.
Issues related to mortgages recorded through MERS could delay or disrupt foreclosure activities and have an adverse
effect on our business.
The Mortgage Electronic Registration System, or the MERS»System, is an electronic registry that is widely used by
seller/servicers, Freddie Mac, and other participants in the mortgage finance industry, to maintain records of beneficial
ownership of mortgages. The MERS System is maintained by MERSCORP, Inc., a privately held company, the shareholders
of which include a number of organizations in the mortgage industry, including Freddie Mac, Fannie Mae, and certain seller/
servicers, mortgage insurance companies and title insurance companies.
Mortgage Electronic Registration Systems, Inc., or MERS, a wholly-owned subsidiary of MERSCORP, Inc., has the
ability to serve as a nominee for the owner of a mortgage loan and in that role become the mortgagee of record for the loan
in local land records. Freddie Mac seller/servicers may choose to use MERS as a nominee, and to initiate foreclosures in
MERS’ name. Approximately 39% of the loans Freddie Mac owns or guarantees are registered in MERS’ name; the
beneficial ownership and the ownership of the servicing rights related to those loans are tracked in the MERS System.
MERS has been the subject of numerous lawsuits challenging foreclosures on mortgages for which MERS is mortgagee
of record as nominee for the beneficial owner. It is possible that adverse judicial decisions, regulatory proceedings or action,
or legislative action related to MERS, could delay or disrupt foreclosure of mortgages that are registered on the MERS
System. Publicity concerning regulatory or judicial decisions, even if such decisions were not adverse, or MERS-related
concerns about the integrity of the assignment process, could adversely affect the mortgage industry and negatively impact
public confidence in the foreclosure process, which could lead to legislative or regulatory action. Because MERS often
executes legal documents in connection with foreclosure proceedings, it is possible that investigations by governmental
authorities and others into deficiencies in foreclosure practices may negatively impact MERS and the MERS System.
Federal or state legislation or regulatory action also could prevent us from using the MERS System for mortgages that
we currently own, guarantee, and securitize and for mortgages acquired in the future, or could create additional requirements
for the transfer of mortgages that could affect the process for and costs of acquiring, transferring, servicing, and foreclosing
mortgages. Such legislation or regulatory action could increase our costs or otherwise adversely affect our business. For
example, we could be required to transfer mortgages out of the MERS System. There is also uncertainty regarding the extent
to which seller/servicers will choose to use the MERS System in the future.
Failures by MERS to apply prudent and effective process controls and to comply with legal and other requirements in
the foreclosure process could pose legal, operational and reputational risks for us.
We cannot predict the impact that such events or actions may have on our business.
Weaknesses in internal control over financial reporting and in disclosure controls could result in errors and inadequate
disclosures, affect operating results and cause investors to lose confidence in our reported results.
We face continuing challenges because of deficiencies in our controls. Control deficiencies could result in errors, and
lead to inadequate or untimely disclosures, affect operating results and cause investors to lose confidence in our reported
financial results. For information about our ineffective disclosure controls and remaining material weakness in internal
control over financial reporting, see “CONTROLS AND PROCEDURES.”
There are a number of factors that may impede our efforts to establish and maintain effective disclosure controls and
internal control over financial reporting, including: the nature of the conservatorship and our relationship with FHFA; the
complexity of, and significant changes in, our business activities and related GAAP requirements; significant management
changes and internal reorganizations in 2010; uncertainty regarding the sustainability of newly established controls; data
quality or servicing-related issues; and the uncertain impacts of the ongoing housing and credit market volatility on the
results of our models, which are used for financial accounting and reporting purposes. We cannot be certain that our efforts
to improve and maintain our internal control over financial reporting will ultimately be successful.
Effectively designed and operated internal control over financial reporting provides only reasonable assurance that
material errors in our financial statements will be prevented or detected on a timely basis. A failure to maintain effective
internal control over financial reporting increases the risk of a material error in our reported financial results and delay in our
financial reporting timeline. Depending on the nature of a control failure and any required remediation, ineffective controls
could have a material adverse effect on our business.
Ineffective controls could also cause investors to lose confidence in our reported financial information, which may have
an adverse effect on the trading price of our securities.
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