Freddie Mac 2014 Annual Report Download - page 41

36 Freddie Mac
results. Such an event could also damage or destroy REO properties we own. We may not have insurance coverage for some of
these catastrophic events.
We depend on our institutional counterparties to provide services that are critical to our business, and our financial results
may be adversely affected if one or more of our counterparties do not meet their obligations to us.
We face the risk that one or more of the institutional counterparties that has entered into a business contract or
arrangement with us may fail to meet its obligations to us. Our important institutional counterparties include seller/servicers,
mortgage insurers, insurers and reinsurers in ACIS transactions, bond insurers, and counterparties to derivatives and short-term
lending and other funding transactions.
A significant failure by a major institutional counterparty could harm our business and financial results in a variety of
ways, as many of our major counterparties provide several types of services to us. The concentration of our exposure to our
counterparties remains high, and we continue to face challenges in reducing our risk concentrations with counterparties. Efforts
we take to reduce exposure to financially weak counterparties could concentrate our exposure to other counterparties, and
increase our costs and reduce our revenue. Challenging market conditions have, at times, adversely affected the liquidity and
financial condition of our counterparties, and some of our major counterparties have failed. Similar events may occur in future
periods. Many of our counterparties are subject to increasingly complex regulatory requirements and oversight, which place
additional stress on their resources.
Our business could be adversely affected if counterparties to derivatives and short-term lending and other transactions fail
to meet their obligations to us.
We have significant exposure to institutions in the financial services industry relating to derivatives, funding, short-term
lending, securities and other transactions. These transactions are critical to our business, including our ability to: (a) manage
interest rate and other risks related to our investments in mortgage-related assets; (b) fund our business operations; and (c)
service our customers. In addition, we face the risk of operational failure of any of the clearing members, exchanges,
clearinghouses, or other financial intermediaries we use to facilitate these transactions. If a clearing member or clearinghouse
were to fail, we could experience losses related to any collateral we had posted with such clearing member or clearinghouse to
cover initial or variation margin. Similarly, if our counterparties in short-term lending transactions fail, we have exposure to
losses if the transaction is unsecured or the value of the collateral posted to us is insufficient. We believe most of our derivative
portfolio and cash and other investments portfolio counterparties are exposed to fiscally troubled European countries. It is
possible that continued adverse developments in the Eurozone could significantly affect such counterparties. In turn, this could
adversely affect their ability to meet their obligations to us.
For more information, see “MD&A — RISK MANAGEMENT — Credit Risk Overview — Institutional Credit Risk
Profile — Cash and Other Investments Counterparties” and “— Derivative Counterparties.”
Our financial results may be adversely affected if mortgage seller/servicers fail to perform their repurchase and other
obligations to us.
Our servicers perform the primary servicing function on our behalf with respect to single-family loans. Our servicers play
an active role in our loss mitigation efforts, as we rely on them to perform loan workout activities as well as foreclosures on
loans that they service for us. A decline in their performance could affect the overall quality of our credit performance
(including by missing opportunities for repayment plans and mortgage modifications), which could significantly affect our
ability to mitigate credit losses.
Our credit losses could increase to the extent that our servicers do not fully perform their servicing obligations in a timely
manner. The risk of such a decline in performance remains high due to a number of factors, including the continued high
volume of seriously delinquent loans and the fact that the servicing function has become significantly more complex since the
onset of the housing and economic downturn. We could be adversely affected if our servicers lack appropriate controls,
experience a failure in their controls, or experience an operating disruption in their ability to service mortgage loans (including
as a result of legal or regulatory actions or ratings downgrades). Any efforts we take to attempt to improve our servicers’
performance (such as requiring that they pay us compensatory fees for underperformance) could adversely affect our
relationships with such servicers, many of which also sell loans to us.
If a servicer does not fulfill its servicing obligations (including its repurchase or other responsibilities), we may seek to
recover the amounts that such servicer owes us, such as by attempting to sell the applicable mortgage servicing rights to a
different servicer and applying the proceeds to such owed amounts. However, we face the risk that we might not receive a
sufficient price for the mortgage servicing rights or that we may be unable to find buyers who are willing to assume the
representations and warranties of the former servicer and who have sufficient capacity to service the affected mortgages. This
option may be difficult to accomplish with respect to our larger seller/servicers due to the operational and capacity challenges
presented by transfers of large servicing portfolios.
We require seller/servicers to make certain representations and warranties regarding the loans they sell to us and/or
service for us. If loans are sold to us in breach of those representations and warranties, we may have the contractual right to
require the seller/servicer to repurchase those loans from us. We also may have other contractual remedies, including the right
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