Freddie Mac 2010 Annual Report Download - page 61

We face risks and uncertainties associated with the internal models that we use for financial accounting and reporting
purposes, to make business decisions and to manage risks. Market conditions have raised these risks and uncertainties.
We make significant use of business and financial models for financial accounting and reporting purposes and to
manage risk. We face risk associated with our use of models. First, there is inherently some uncertainty associated with
model results. Second, we could fail to properly implement, operate or use our models. Either of these situations could
adversely affect our financial statements and our ability to manage risks.
We use market-based information as inputs to our models. However, it can take time for data providers to prepare
information, and thus the most recent market information may not be available for the preparation of our financial
statements. When market conditions change quickly and in unforeseen ways, there is an increased risk that the inputs
reflected in our models are not representative of current market conditions.
The severe deterioration of the housing and credit markets beginning several years ago and, more recently, the extended
period of economic weakness and uncertainty has increased the risks associated with our use of models. Our models may not
perform as well in situations for which there are few or no recent historical precedents. We have adjusted our models in
response to recent events, but there remains some uncertainty about model results.
Models are inherently imperfect predictors of actual results. Our models rely on various assumptions that may be
incorrect, including that historical experience can be used to predict future results. It has been more difficult to predict the
behaviors of the housing and credit capital markets and market participants over the past several years, due to, among other
factors: (a) the uncertainty concerning trends in home prices; (b) the lack of historical evidence about the behavior of deeply
underwater borrowers, the effect of an extended period of extremely low interest rates on prepayments, and the impact of
widespread loan modification programs, including the potential for the extensive use of principal reductions; and (c) the
impact of the concerns about deficiencies in foreclosure documentation practices and related delays in the foreclosure
process.
We face the risk that we could fail to implement, operate or use our models properly. For example, the assumptions
underlying a model could be invalid, or we could apply a model to events or products outside the model’s intended use. We
may fail to code a model correctly, or we could use incorrect data. The complexity and interconnectivity of our models
create additional risk regarding the accuracy of model output. While we have processes and controls in place designed to
mitigate these risks, there can be no assurances that such processes and controls will be successful.
Management often needs to exercise judgment to interpret or adjust modeled results to take into account new
information or changes in conditions. The dramatic changes in the housing and credit capital markets in recent years have
required frequent adjustments to our models and the application of greater management judgment in the interpretation and
adjustment of the results produced by our models. This further increases both the uncertainty about model results and the
risk of errors in the implementation, operation or use of the models.
We face the risk that the valuations, risk metrics, amortization results, loan loss reserve estimations and security
impairment charges produced by our internal models may be different from actual results, which could adversely affect our
business results, cash flows, fair value of net assets, business prospects and future financial results. Changes in, or
replacements of, any of our models or in any of the assumptions, judgments or estimates used in the models may cause the
results generated by the model to be materially different from those generated by the prior model. The different results could
cause a revision of previously reported financial condition or results of operations, depending on when the change to the
model, assumption, judgment or estimate is implemented. Any such changes may also cause difficulties in comparisons of
the financial condition or results of operations of prior or future periods.
Due to increased uncertainty about model results, we also face increased risk that we could make poor business
decisions in areas where model results are an important factor, including loan purchases, management and guarantee fee
pricing and asset and liability management. Furthermore, any strategies we employ to attempt to manage the risks associated
with our use of models may not be effective. See “MD&A — CRITICAL ACCOUNTING POLICIES AND ESTIMATES”
and “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — Interest-Rate Risk and Other
Market Risks” for more information on our use of models.
Changes in our accounting policies, as well as estimates we make, could materially affect how we report our financial
condition or results of operations.
Our accounting policies are fundamental to understanding our financial condition and results of operations. Certain of
our accounting policies, as well as estimates we make, are “critical,” as they are both important to the presentation of our
financial condition and results of operations and they require management to make particularly difficult, complex or
subjective judgments and estimates, often regarding matters that are inherently uncertain. Actual results could differ from our
estimates and the use of different judgments and assumptions related to these policies and estimates could have a material
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