Freddie Mac 2014 Annual Report Download - page 51

46 Freddie Mac
attack on their systems and networks, or breach of their security measures, may result in harm to our business and business
relationships.
We rely on third parties for certain important functions. Any failures by those vendors and service providers could disrupt
our business operations.
At times, we outsource certain key functions to external parties, including some that are critical to financial reporting, our
mortgage-related investment activity, and mortgage loan underwriting. We may enter into other key outsourcing relationships in
the future. If one or more of these key external parties were not able to perform their functions at all for a period of time,
perform them at an acceptable service level, or handle increased volumes, our business operations could be constrained,
disrupted, or otherwise negatively affected. Our use of vendors also exposes us to the risk of losing intellectual property or
confidential information and to other harm. Our ability to monitor the activities or performance of vendors may be constrained,
which makes it difficult for us to assess and manage the risks associated with these relationships.
Legal and Regulatory Risks
Legislative or regulatory actions could adversely affect our business activities and financial results.
We face significant risks related to legislative or regulatory actions, in addition to those discussed above in
“Conservatorship and Related Matters — The future status and role of Freddie Mac are uncertain.” We operate in a highly
regulated industry and are subject to heightened supervision from FHFA, as our Conservator. Our compliance systems and
programs may not be adequate to ensure that we are in compliance with all legal and other requirements. We could incur fines
or other negative consequences for inadvertent or unintentional violations.
Our business may be directly adversely affected by future legislative and regulatory actions at the federal, state, and local
levels. Legislative or regulatory actions, including actions by FHFA as Conservator, could affect us in a number of ways,
including by imposing significant additional compliance and other costs on us, limiting our business activities and diverting
management attention or other resources. Judicial actions at the federal, state, or local level could have a similar effect. For
example, we could be negatively affected by legislative, regulatory or judicial action that: (a) changes the foreclosure process
of any individual state; (b) limits or otherwise adversely affects the rights of a holder of a first lien on a mortgage (such as
through granting priority rights in foreclosure proceedings for homeowner associations); (c) expands the responsibilities of (and
costs to) servicers for maintaining vacant properties prior to foreclosure; or (d) permits or requires principal reductions, such as
allowing local governments to use eminent domain to seize mortgage loans and forgive principal on the loans. Our business
could also be adversely affected by any modification, reduction, or repeal of the federal income tax deductibility of mortgage
interest payments.
The Dodd-Frank Act significantly changed the regulation of the mortgage and financial services industries and could
continue to affect us in substantial ways. For example, the Dodd-Frank Act and related regulatory changes could cause or
require us to make further changes to our business practices, such as practices related to mortgage underwriting and servicing.
The Dodd-Frank Act establishes new standards and requirements related to asset-backed securities, including recently finalized
rules requiring sponsors of securitization transactions to retain a portion of the underlying loans’ credit risk. These standards
and requirements could adversely affect us, including by establishing additional requirements for securitization structures that
are not fully guaranteed.
Legislation or regulatory actions could indirectly adversely affect us to the extent such legislation or actions affect the
activities of banks, savings institutions, insurance companies, derivative counterparties, securities dealers, and other regulated
entities that constitute a significant portion of our customers or counterparties, or to the extent that they modify industry
practices. Legislative or regulatory provisions that remove incentives for these entities to purchase our securities or enter into
derivatives or other transactions with us could have a material adverse effect on our business results and financial condition.
The Dodd-Frank Act and related current and future regulatory changes may continue to significantly change the business
practices of our customers and counterparties, and it is possible that any such changes will adversely affect our business and
financial results. For example, changes in business practices resulting from the Dodd-Frank Act and related regulatory changes
could have a negative effect on the volume of mortgage originations or could modify or remove incentives for financial
institutions to sell mortgage loans to us, either of which could adversely affect the number of mortgages available for us to
purchase or guarantee.
U.S. banking regulators have substantially revised the capital and liquidity requirements applicable to banking
organizations, based on the Basel III standards developed by the Basel Committee on Banking Supervision. Phase-in of the new
bank capital and liquidity requirements will take several years and there is significant uncertainty about the extent to which
implementation of the new requirements by banking organizations may affect us. For example, the emerging regulatory
framework could decrease demand for our securities and/or affect competition in the market for mortgage originations and
servicing, with possible adverse consequences for our business results and financial condition.
We may make certain changes to our business in an attempt to meet our housing goals and subgoals.
We may make adjustments to our mortgage loan sourcing and purchase strategies in an effort to meet our housing goals
and subgoals, including relaxing some of our underwriting standards and the expanded use of targeted initiatives to reach
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