Freddie Mac 2010 Annual Report Download - page 64

other non-bank financial companies. New prudential standards potentially could include capital requirements that are
based on standards applicable to insured depository institutions.
• The Dodd-Frank Act will have a significant impact on the derivatives market, including by subjecting large derivatives
users, which may include Freddie Mac, to extensive new oversight and regulation. These new regulatory standards
could impose significant additional costs on us relating to derivatives transactions and it may become more difficult
for us to enter into desired hedging transactions with acceptable counterparties on favorable terms.
• The Dodd-Frank Act will create new standards and requirements related to asset-backed securities, including requiring
securitizers and potentially originators to retain a portion of the underlying loans’ credit risk. Any such new standards
and requirements could weaken or remove incentives for financial institutions to sell mortgage loans to us.
• The Dodd-Frank Act and related future regulatory changes could negatively impact the volume of mortgage
originations, and thus adversely affect the number of mortgages available for us to purchase.
• Under the Dodd-Frank Act, new minimum mortgage underwriting standards will be required for residential mortgages,
including a requirement that lenders make a reasonable and good faith determination based on “verified and
documented information” that the consumer has a “reasonable ability to repay” the mortgage. The Act requires
regulators to establish a class of qualified loans that will receive certain protections from legal liability, such as the
borrower’s right to rescind the loan and seek damages. Mortgage originators and assignees, including Freddie Mac,
may be subject to increased legal risk for loans that do not meet these requirements.
• Under the Dodd-Frank Act, federal regulators, including FHFA, are directed to promulgate regulations, to be
applicable to financial institutions, including Freddie Mac, that will prohibit incentive-based compensation structures
that the regulators determine encourage inappropriate risks by providing excessive compensation or benefits or that
could lead to material financial loss. It is possible that any such regulations will have an adverse effect on our ability
to retain and recruit management and other valuable employees, as we may be at a competitive disadvantage as
compared to other potential employers not subject to these or similar regulations.
For more information on the Dodd-Frank Act, see “BUSINESS — Regulation and Supervision — Legislative and
Regulatory Developments.”
Legislative or regulatory actions could adversely affect our business activities and financial results.
In addition to possible GSE reform legislation and the Dodd-Frank Act discussed above, our business initiatives may be
directly adversely affected by other legislative and regulatory actions at the federal, state and local levels. We could be
negatively affected by legislation or regulatory action that changes the foreclosure process of any individual state. For
example, various states and local jurisdictions have implemented mediation programs designed to bring servicers and
borrowers together to negotiate workout options. These actions could delay the foreclosure process and increase our
expenses, including by potentially delaying the final resolution of delinquent mortgage loans and the disposition of non-
performing assets. We could also be affected by any legislative or regulatory changes to existing bankruptcy laws or
proceedings or foreclosure processes, including any changes that would allow bankruptcy judges to unilaterally change the
terms of mortgage loans or otherwise require principal reductions. Our business could also be adversely affected by any
modification, reduction or repeal of the federal income tax deductibility of mortgage interest payments.
Legislation or regulatory actions could indirectly adversely affect us to the extent such legislation or actions affect the
activities of banks, savings institutions, insurance companies, securities dealers and other regulated entities that constitute a
significant part of our customer base or counterparties, or could indirectly affect us to the extent that they modify industry
practices. Legislative or regulatory provisions that create or remove incentives for these entities to sell mortgage loans to us,
purchase our securities or enter into derivatives or other transactions with us could have a material adverse effect on our
business results and financial condition.
The Basel Committee on Banking Supervision is in the process of substantially revising capital guidelines for financial
institutions and has recently finalized portions of the so-called “Basel III” guidelines, which would set new capital and
liquidity requirements for banks. Phase-in of Basel III is expected to take several years and there is significant uncertainty
about how regulators might implement these guidelines or how the resulting regulations might impact us. For example, it is
possible that any new regulations on the capital treatment of mortgage servicing rights, risk-based capital requirements for
credit risk, and liquidity treatment of our debt and guarantee obligations could adversely affect our business results and
financial condition.
We may make certain changes to our business in an attempt to meet the housing goals and subgoals set for us by FHFA
that may increase our losses.
We may make adjustments to our mortgage loan sourcing and purchase strategies in an effort to meet our housing goals
and subgoals, including changes to our underwriting guidelines and the expanded use of targeted initiatives to reach
61 Freddie Mac