Freddie Mac 2014 Annual Report Download - page 43

38 Freddie Mac
investments in non-agency mortgage-related securities. We evaluate the expected recovery from primary bond insurance
policies as part of our impairment analysis for our investments in securities. If a bond insurer’s performance with respect to its
obligations on our investments in securities is worse than expected, this could contribute to additional net impairment of those
securities.
For more information, see “MD&A — RISK MANAGEMENT — Credit Risk Overview — Institutional Credit Risk
Profile — Mortgage Insurers” and “— Bond Insurers.”
The loss of business volume could result in a decline in our market share and revenues.
Our business depends on our ability to acquire a steady flow of mortgage loans. We purchase a significant percentage of
our single-family mortgages from several large mortgage originators. Similarly, we acquire a significant portion of our
multifamily mortgage loans from several large lenders.
We enter into mortgage purchase commitments with many of our single-family customers that are typically less than one
year in duration. The loss of business from any one of our major lenders could adversely affect our market share and our
revenues.
Our charter requires that single-family mortgages with LTV ratios above 80% at the time of purchase be covered by
mortgage insurance or other credit enhancements. If the availability of mortgage insurance for loans with LTV ratios above
80% is reduced, we may be restricted in our ability to purchase or securitize such loans. This could reduce our overall volume
of new business.
Competition from banking and non-banking companies may harm our business.
Competition in the secondary mortgage market combined with a decline in the amount of residential mortgage debt
outstanding may make it more difficult for us to purchase mortgages. Furthermore, competitive pricing pressures may make our
products less attractive in the market and negatively affect our financial results. Increased competition from Fannie Mae,
Ginnie Mae, FHA/VA, and new entrants may alter our product mix, lower our volumes, and reduce our revenues on new
business.
We also compete with other financial institutions that retain or securitize mortgages, such as commercial and investment
banks, dealers, thrift institutions, and insurance companies. In recent years, FHFA took a number of actions designed to
encourage these other financial institutions to increase their activities in the mortgage market (e.g., increasing our guarantee
fees in 2012), and could take additional actions in the future.
Because of these actions and given that our base fees charged for our guarantee do not vary for differing LTV ratios or
credit scores, there is a risk that financial institutions may buy, or originate, and then retain loans on their balance sheet, or
otherwise seek to structure financial transactions that result in our loan purchases having a higher proportion of lower credit
scores and higher LTV ratios. While we compensate ourselves for higher levels of risk through charging of upfront delivery
fees, the seller may elect to retain loans with better credit characteristics, which could result in us having lower overall
purchase volumes, revenues, and returns (as a result of a more adverse credit risk profile).
FHFA is also Conservator of Fannie Mae, our primary competitor, and FHFA’s actions as Conservator of both companies
could affect competition between us and Fannie Mae. It is possible that FHFA could require us and Fannie Mae to take a
uniform approach that, because of differences in our respective businesses, could place Freddie Mac at a competitive
disadvantage to Fannie Mae. FHFA may also prevent us from taking actions that could provide us with a competitive
advantage.
We could be prevented from competing efficiently and effectively by competitors who use their patent portfolios to
prevent us from using necessary business processes and products, or require us to pay significant royalties to use those
processes and products.
As multifamily market fundamentals have improved over recent years, more life insurers, banks, CMBS conduits, and
other market participants have increased their activities in the multifamily market, and as a result we have faced increased
competition. In addition, FHFA may take actions that could encourage further competition.
Our activities may be adversely affected by limited availability of financing and increased funding costs.
The amount, type and cost of our unsecured funding, including financing from other financial institutions and the capital
markets, directly affects our interest expense and results of operations. A number of factors could make such financing more
difficult to obtain, more expensive or unavailable on any terms, or could cause spreads to widen, both domestically and
internationally, including:
• changes in U.S. government support for us;
• reduced demand for our debt securities;
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