Freddie Mac 2014 Annual Report Download - page 38

33 Freddie Mac
The conservatorship and investment by Treasury have had, and will continue to have, a material adverse effect on our
common and preferred stockholders.
The market price for our common stock and publicly traded classes of preferred stock declined substantially after we
entered into conservatorship. As a result, the investments of our common and preferred stockholders lost substantial value,
which they may never recover. Our shares could further diminish in value, and may not have any value in the long-term.
The conservatorship and investment by Treasury have had, and will continue to have, other material adverse effects on
our common and preferred stockholders, including the following:
• No voting rights during conservatorship. The rights and powers of our stockholders are suspended during the
conservatorship and our common stockholders do not have the ability to elect directors or to vote on other matters.
• Our future profits will effectively be distributed to Treasury. Under the Purchase Agreement and the terms of the senior
preferred stock, we are required to pay quarterly dividends to Treasury equal to the amount, if any, by which our Net
Worth Amount exceeds a permitted Capital Reserve Amount that decreases to zero over time. Accordingly, our future
profits will effectively be distributed to Treasury. Therefore, the holders of our common stock and non-senior
preferred stock will not receive benefits that would otherwise flow from any such future profits.
• Priority of Senior Preferred Stock. The senior preferred stock ranks senior to the common stock and all other series of
preferred stock as to both dividends and distributions upon dissolution, liquidation or winding up of the company.
• Dividends have been eliminated. The Conservator has eliminated dividends on Freddie Mac common and preferred
stock (other than dividends on the senior preferred stock) during the conservatorship. In addition, under the Purchase
Agreement, dividends may not be paid to common or preferred stockholders (other than on the senior preferred stock)
without the consent of Treasury, regardless of whether we are in conservatorship.
• Warrant may substantially dilute investment of current stockholders. If Treasury exercises its warrant to purchase
shares of our common stock equal to 79.9% of the total number of shares outstanding on a fully diluted basis, the
ownership interest in the company of our then existing common stockholders will be substantially diluted. Existing
common stockholders have no assurance that, as a group, they will be able to control the election of our directors or
the outcome of any other vote after the time, if any, that the conservatorship ends and the voting rights of the common
stockholders are restored.
Competitive and Market Risks
Our level of earnings in recent periods is not sustainable over the long term.
The level of our earnings in 2013 and 2014 is not sustainable over the long term. Our 2013 financial results included a
very large benefit related to the release of the valuation allowance against our deferred tax assets. Our 2013 and 2014 financial
results included large amounts of income from settlements of representation and warranty claims arising out of our loan
purchases and settlements of non-agency mortgage-related securities litigation. We do not expect any future settlements of
representation and warranty claims related to our pre-conservatorship loan purchases to have a significant effect on our
financial results. Our 2013 financial results, particularly the level of loan loss provisioning, also benefited from a high level of
home price appreciation.
In addition, declines in the size of our mortgage-related investments portfolio, as required by FHFA and the Purchase
Agreement, will reduce our earnings over the long term. We are subject to significant limitations on our investment activity,
including a requirement to reduce the size of our mortgage-related investments portfolio, and significant constraints on our
ability to purchase or sell mortgage assets. These limitations will reduce the earnings capacity of our mortgage-related
investments portfolio. In addition, many of our mortgage investments do not trade in a liquid secondary market. In some cases,
the size of our holdings relative to normal market activity is large enough that, if we were to attempt to sell a significant
quantity of these assets, market pricing could be significantly disrupted and the price we ultimately realize may be materially
lower than the value at which we carry these investments on our consolidated balance sheets. We can provide no assurance that
the cap on our mortgage-related investments portfolio will not, over time, force us to sell mortgage assets at unattractive prices
or that our current strategies will not have an adverse impact on our business or financial results. For more information, see
“BUSINESS — Conservatorship and Related Matters — Limits on Investment Activity and Our Mortgage-Related Investments
Portfolio.”
Due to the reduced earnings capacity of our mortgage-related investments portfolio, we will have to place greater
emphasis on our guarantee activities to generate revenue. However, our ability to generate revenue through guarantee activities
may be limited for a number of reasons. We may be required to adopt business practices that help serve our public mission and
other non-financial objectives, but that may negatively affect our future financial results. We must obtain FHFA’s approval to
implement across-the-board increases in our guarantee fees, and there can be no assurance FHFA will approve any such
increase requests in the future. The combination of the restrictions on our business activities and our potential inability to
generate sufficient revenue through our guarantee activities to offset the effects of those restrictions may have an adverse effect
on our results of operations and financial condition.
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