Freddie Mac 2014 Annual Report Download - page 49

44 Freddie Mac
organizations in the mortgage industry (including Freddie Mac). A significant portion of the loans we own or guarantee are
registered in the MERS System.
Numerous lawsuits have been filed challenging foreclosures conducted using the MERS System. It is possible that
adverse judicial decisions, regulatory proceedings or action, or legislative action could: (a) prevent us from using the MERS
System, (b) delay or disrupt foreclosure of mortgages that are registered on the MERS System, or (c) create additional
requirements for the transfer of mortgages. Any of these developments could increase our costs or otherwise adversely affect
our business. For example, we could be required to transfer mortgages out of the MERS System.
We could also be adversely affected if MERSCORP Holdings and its subsidiaries fail to apply prudent and effective
controls and to comply with legal and other requirements in the foreclosure process.
Weaknesses in internal control over financial reporting and in disclosure controls and procedures could result in errors and
inadequate disclosures, and affect operating results.
Our business could be adversely affected by control deficiencies or failures. Control deficiencies could result in errors in
our financial statements, lead to inadequate or untimely disclosures, and affect operating results. For information about
management's conclusion that our disclosure controls and procedures are ineffective and the related material weakness in
internal control over financial reporting, see “CONTROLS AND PROCEDURES.”
There are a number of factors that may impede our efforts to establish and maintain effective disclosure controls and
procedures and internal control over financial reporting, including: (a) the nature of the conservatorship and our relationship
with FHFA; (b) the complexity of, and significant changes in, our business activities and related GAAP requirements;
(c) employee and management turnover; (d) internal corporate reorganizations; (e) data quality; and (f) servicing-related issues.
Effectively designed and operating internal control over financial reporting provides only reasonable assurance that
material errors in our financial statements will be prevented or detected on a timely basis. A failure to maintain effective
internal control over financial reporting increases the risk of a material error in our reported financial results and a delay in our
financial reporting timeline.
We face risks and uncertainties associated with the models that we use for financial accounting and reporting purposes, to
make business decisions, and to manage risks. Market conditions have raised these risks and uncertainties.
We face risk associated with our use of models for financial accounting and reporting purposes and for managing
business risks. First, there is inherent uncertainty associated with model results. Second, we could fail to properly implement,
operate, or use our models. Either of these situations could adversely affect our financial statements, financial and risk-related
disclosures, and ability to manage risks.
Models are inherently imperfect predictors of actual results. We use market-based information to construct our models.
However, it can take time for data providers to prepare information, and thus the most recent information may not be available
for use with the model. When market conditions change quickly and in unforeseen ways, there is an increased risk that our
models are not representative of current market conditions. For example, models may not fully capture the effect of certain
economic events or government policies, which makes it more difficult to assess model performance and requires a higher
degree of management judgment. Our models may not perform as well in situations for which there are few or no recent
historical precedents. We have adjusted our models in response to recent events, but there remains considerable uncertainty
about model results. Our models rely on various assumptions that may be invalid, including that historical experience can be
used to predict future results.
We face the risk that we could fail to implement, operate, adjust or use our models properly. We may fail to code a model
correctly or we could use incorrect data. The complexity and interconnectivity of our models create additional risk regarding
the accuracy of model output.
We use third-party models for certain purposes. While the use of such models may reduce risk (e.g., where no internal
model is available), it may expose us to additional risk, as third parties typically do not provide us with proprietary information
regarding their models. We also may have little or no control over the process by which the models are adjusted or changed. As
a result, we may not fully account for the risks associated with the use of such models.
Management often needs to exercise judgment to interpret or adjust modeled results to take into account new information
or changes in conditions. The dramatic changes in the housing and credit capital markets in recent years have required frequent
adjustments to our models and the application of greater management judgment in the interpretation and adjustment of the
results produced by our models. This further increases both the uncertainty about model results and the risk of errors in the
implementation, operation, or use of the models.
We face the risk that the valuations, risk metrics, amortization results, loan loss reserve estimations, and security
impairment charges produced by our models may be different from actual results, which could adversely affect our business
results, cash flows, net worth, business prospects, and future financial results.
We also face the risk that we could make poor business decisions in areas where model results are an important factor,
including loan purchases, securitizations and sales of loans, purchases and sales of securities, funding strategy, management
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