Freddie Mac 2015 Annual Report Download - page 181

Risk Factors Credit Risks
Freddie Mac 2015 Form 10-K 179
CREDIT RISKS
We are subject to mortgage credit risks, including mortgage credit risk relating to off-balance
sheet arrangements; credit costs related to these risks could adversely affect our financial
results.
Mortgage credit risk is the risk that a borrower will fail to make timely payments on a loan we own or
guarantee. This exposes us to the risk of credit losses and credit-related expenses, which could adversely
affect our financial results. We are primarily exposed to mortgage credit risk with respect to the single-
family and multifamily loans and securities that we own or guarantee. We are also exposed to mortgage
credit risk with respect to securities and guarantee arrangements that are not reflected as assets on our
consolidated balance sheets. These relate primarily to K Certificates. We also have off-balance sheet
arrangements related to certain other securitization products and other mortgage-related guarantees.
We continue to have a significant number of loans in our single-family credit guarantee portfolio with
certain characteristics, such as Alt-A loans, interest-only loans, option ARM loans, loans with original LTV
ratios greater than 90%, and loans to borrowers with credit scores less than 620 at the time of origination,
that expose us to greater credit risk than other types of loans. See “MD&A - Risk Management - Credit
Risk - Single-Family Mortgage Credit Risk - Monitoring Loan Performance and Characteristics for the
Single-family Credit Guarantee Portfolio and Individual Sellers and Servicers."
Our efforts to increase access to single-family mortgage credit, including our expanded affordable
housing program, may expose us to increased mortgage credit risk.
Our new credit risk transfer transactions may not be available to us in adverse economic
conditions or may provide us with less protection than we expect. These transactions may also
adversely affect our profitability.
We are increasingly using new credit risk transfer transactions to mitigate some of our potential credit
losses. Our ability to use certain types of credit risk transfer transactions (and the cost to us of doing so)
could change rapidly, depending on market conditions. In particular, it is possible that there will not be
sufficient investor demand for certain of our credit risk transfer transactions during a housing downturn.
Some of our credit risk transfer transactions are very new, and it is uncertain if there will be adequate
demand for them over the long term. It is also uncertain how these transactions will ultimately perform
under adverse market conditions, and it is possible that, under such conditions, they will provide us with
less protection than we expect. It is also possible that the costs we incur on our credit risk transfer
transactions could adversely affect the profitability of the loans in our Core single-family book that are
covered by these transactions. Some of the new transactions are complex, which may increase our
exposure to operational risk. There could be a significant difference in time between when we recognize
an expense in earnings and when we recognize the related recovery in earnings, and this lag could
adversely affect our financial results in the earlier period. For more information regarding these
transactions, see Note 4.
We face significant risks related to our delegated underwriting process for single-family loans,
including risks related to data accuracy and mortgage fraud. Recent changes to the process could
increase our risks.
We delegate underwriting for the single-family loans we purchase or securitize to our sellers. Our