Freddie Mac 2014 Annual Report Download - page 126

121 Freddie Mac
lifetime claims-paying obligations to us as such claims emerge. For more information on our bond insurers, see "NOTE 15:
CONCENTRATION OF CREDIT AND OTHER RISKS — Bond Insurers."
Cash and Other Investments Counterparties
We are exposed to institutional credit risk arising from the potential insolvency or non-performance of counterparties of
non-mortgage-related investment agreements and cash equivalent transactions, including those entered into on behalf of our
securitization trusts.
Our policies require that the counterparty be evaluated using our internal counterparty rating model prior to the time a
financial instrument is purchased. We base the permitted term and dollar limits for each of these transactions on the
counterparty's financial strength in order to further mitigate our risk.
Our cash and other investments (including cash equivalents) counterparties are primarily major financial institutions,
Treasury, and the Federal Reserve Bank of New York. As of December 31, 2014 and 2013, including amounts related to our
consolidated VIEs, there were $71.4 billion and $85.9 billion, respectively, of: (a) cash and securities purchased under
agreements to resell invested with institutional counterparties; (b) Treasury securities classified as cash equivalents; and
(c) cash deposited with the Federal Reserve Bank of New York. Although we monitor the financial strength of our
counterparties to these transactions and have collateral maintenance requirements for our securities purchased under
agreements to resell, we have exposure to loss should any of our counterparties fail. See "RISK FACTORS — Competitive and
Market Risks — Our business could be adversely affected if counterparties to derivatives and short-term lending and other
transactions fail to meet their obligations to us" for further information. See “NOTE 15: CONCENTRATION OF CREDIT
AND OTHER RISKS” for further information on counterparty credit ratings and concentrations within our cash and other
investments.
Our investments in non-mortgage-related securities at December 31, 2014 and 2013 were in U.S. Treasury securities.
Agency and Non-Agency Mortgage-Related Security Issuers
Our investments in securities expose us to institutional credit risk to the extent that servicers, issuers, guarantors, or third
parties providing credit enhancements become insolvent or do not perform their obligations.
Risk Management Framework
Our investments in non-Freddie Mac mortgage-related securities include both agency and non-agency securities. Agency
securities have historically presented minimal institutional credit risk due to the guarantee provided by, and the U.S.
government’s support of, those institutions. Our investments in non-agency mortgage-related securities were principally made
prior to 2009. Since 2009, our efforts to manage risk on these legacy investments have included sales of certain assets as well
as litigation and other loss recovery efforts.
At the direction of our Conservator, we are working to enforce our rights as an investor with respect to the non-agency
mortgage-related securities we hold, and are engaged in various efforts, in some cases in conjunction with other investors, to
mitigate or recover losses on our investments in these securities. The effectiveness of our efforts is uncertain and any potential
recoveries may take significant time to realize.
Our loss mitigation activities include litigation against the issuers of certain of these securities. During 2014, we and
FHFA reached settlements with certain parties pursuant to which we received an aggregate of approximately $6.1 billion.
Lawsuits against a number of other parties are currently pending. For more information on our loss mitigation efforts related to
the non-agency mortgage-related securities we hold, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS
— Non-Agency Mortgage-Related Security Issuers.”
There is a general lack of transparency in the market for the non-agency mortgage-related securities we hold, and the
information disclosed by the trustees of the trusts that issued these securities is often not sufficient to allow us to adequately
analyze decisions made by servicers that may directly impact the cash flows on such securities. As a result, as part of our loss
mitigation efforts and in the exercise of our rights as an investor, we seek to obtain information from servicers and trustees
related to the performance and servicing of the loans underlying the securities. Certain of this information may not be publicly
available. While our ability to influence servicing performance is limited, it is possible that our loss mitigation activities may, in
some cases, influence the performance of these securities. The quality of the servicing performed on the underlying loans can
significantly affect the performance of these securities, including the timing and amount of losses incurred on the underlying
loans and thus the timing and amount of losses we recognize on our securities. We may cease our loss mitigation activities at
any time, including in connection with sales of these securities as we continue to reduce the size of our mortgage-related
investments portfolio. However, a number of other parties (including other investors, regulators, or the mortgage servicers
themselves) may also take actions that could also affect the performance of these securities.
We have continued to recognize impairment charges in recent years related to certain of our investments in non-agency
mortgage-related securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” for
further information about these securities, including a discussion of the higher-risk components of these investments.
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