Freddie Mac 2014 Annual Report Download - page 45

40 Freddie Mac
issuance programs. Our funding costs and liquidity contingency plans may also be affected by changes in the amount of, and
demand for, debt issued by Treasury.
Any downgrade in the credit ratings of the U.S. government would likely be followed by a downgrade in our credit ratings. A
downgrade in the credit ratings of our debt could adversely affect our liquidity and other aspects of our business.
Nationally recognized statistical rating organizations play an important role in determining the availability and cost of
funding by means of the ratings they assign to issuers and their debt. Our credit ratings are important to our liquidity. We
currently receive ratings from three nationally recognized statistical rating organizations (S&P, Moody’s, and Fitch) for our
unsecured debt. These ratings are primarily based on the support we receive from Treasury, and therefore are affected by
changes in the credit ratings of the U.S. government. Any downgrade in the credit ratings of the U.S. government would be
expected to be followed by or accompanied by a downgrade in our credit ratings. In addition to a downgrade in the credit
ratings of or outlook on the U.S. government, a number of other events could adversely affect our debt credit ratings, including
actions by governmental entities, changes in government support for us, future GAAP losses, and additional draws under the
Purchase Agreement. Any such downgrades could lead to major disruptions in the mortgage and financial markets and to our
business due to lower liquidity, higher borrowing costs, lower asset values, and higher credit losses, and could cause us to
experience net losses and net worth deficits.
For more information, see “MD&A — LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Credit Ratings.”
A significant decline in the price performance of or demand for our PCs could have an adverse effect on the volume and/or
profitability of our new single-family guarantee business. The profitability of our multifamily business could be adversely
affected by a significant decrease in demand for K Certificates.
The price performance of our PCs relative to comparable Fannie Mae securities is one of Freddie Mac’s more significant
risks and competitive issues, with both short- and long-term implications. Our PCs are an integral part of our mortgage
purchase program. Our competitiveness in purchasing single-family mortgages from our seller/servicers, and thus the volume
and/or profitability of our new single-family guarantee business, can be directly affected by the price performance of our PCs
relative to comparable Fannie Mae securities.
The profitability of our securitization financing and our ability to compete for mortgage purchases are affected by the
price differential between PCs and comparable Fannie Mae securities. Freddie Mac fixed-rate PCs provide for faster scheduled
monthly remittance of mortgage principal and interest payments to investors than Fannie Mae fixed-rate securities. However,
our PCs have typically traded at prices below the level that we believe reflects the full value of their faster monthly remittance
cycle, resulting in a pricing discount relative to comparable Fannie Mae securities. This difference in relative pricing creates an
economic incentive for sellers to conduct a disproportionate share of their single-family business with Fannie Mae and
negatively affects the financial performance of our business.
There may not be a liquid market for our PCs, which could adversely affect the price performance of PCs and our single-
family market share. A significant reduction in our market share, and thus in the volume of mortgage loans that we securitize,
or a reduction in the trading volume of our PCs, could further reduce the liquidity of our PCs. While we may employ a variety
of strategies in an effort to support the liquidity and price performance of our PCs and may consider additional strategies, any
such strategies may fail or adversely affect our business, or we may cease such activities if deemed appropriate. In addition, we
believe the liquidity-related price differences between our PCs and comparable Fannie Mae securities are, in part, the result of
factors that are largely outside of our control. (For example, the level of the Federal Reserve’s purchases of agency mortgage-
related securities could affect the demand for and values of our PCs.) Thus, while we may employ strategies in an effort to
address the liquidity-related price differences, we believe the strategies currently available to us may not reduce or eliminate
these price differences over the long-term. A curtailment of mortgage-related investments portfolio purchases, sales, or
retention activities may result in a decline in the volume and/or profitability of our new single-family guarantee business, lower
comprehensive income, and an accelerated decline in the size of our total mortgage portfolio.
In certain circumstances, we compensate customers for the difference in price between our PCs and comparable Fannie
Mae securities by reducing our guarantee fees, and this could adversely affect the volume and/or profitability of our new single-
family guarantee business. We also incur costs in connection with our efforts to support the liquidity and price performance of
our PCs, including by engaging in transactions that yield less than our target rate of return. For more information, see
“BUSINESS — Our Business — Our Business Segments — Single-Family Guarantee Segment — Securitization Activities”
and “— Investments Segment — Market Presence and PC Support Activities.”
In accordance with FHFA’s 2014 Strategic Plan and the 2014 and 2015 Conservatorship Scorecards, we are working
towards the development of a single (common) security, which is designed to reduce the price performance disparities between
Freddie Mac mortgage-related securities and Fannie Mae mortgage-related securities. This initiative is complex and involves
significant cost and operational risk, and may require us to align our business processes more closely with those of Fannie Mae.
There can be no assurance that this initiative will succeed in reducing the trading value disparities.
Our current Multifamily business model is highly dependent on our ability to finance purchased loans through
securitization into K Certificates. A significant decrease in demand for K Certificates could have an adverse impact on the
Table of Contents