Freddie Mac 2015 Annual Report Download - page 188

Risk Factors Interest Rate and Other Market Risks
Freddie Mac 2015 Form 10-K 186
INTEREST RATE AND OTHER MARKET RISKS
Changes in interest rates could negatively affect the fair value of financial assets and liabilities,
our results of operations and our net worth.
Our investment and credit guarantee activities in single family and multifamily mortgage assets expose us
to interest rate and other market risks, including prepayment risk.
Interest rates can fluctuate for a number of reasons, including changes in the fiscal and monetary policies
of the federal government and its agencies. Federal Reserve policies directly and indirectly influence the
yield on our interest-earning assets and the cost of our interest-bearing liabilities. Interest rates can also
fluctuate as a result of geopolitical events or changes in general economic conditions, including events or
conditions that alter investor demand for Treasury or other fixed-income securities.
Changes in interest rates could adversely affect the cash flows and prepayment rate on assets that we
own and related debt and derivatives. We incur costs in connection with our efforts to manage these risks.
In addition, changes in interest-rates could adversely affect the prepayment rate on the loans that we
guarantee.
Our financial results can be significantly affected by changes in interest rates and changes in yield curves,
as certain of our assets and liabilities are recorded at fair value. Our interest rate risk management
activities are designed to reduce our economic exposure to changes in interest rates to a low level as per
our models. The accounting treatment for those assets and liabilities, including derivatives, however,
creates volatility in our earnings when interest rates fluctuate as some assets and liabilities are measured
at amortized cost and some are measured at fair value, while all derivatives are measured at fair value.
This volatility generally is not indicative of the underlying economics of our business.
When interest rates decrease, borrowers are more likely to prepay their loans by refinancing them at a
lower rate. An increased likelihood of prepayment on the loans underlying our mortgage-related securities
may adversely affect the value of these securities.
When interest rates increase:
• Our credit losses from loans with adjustable payment terms may increase as borrower payments
increase at their reset dates, which increases the borrower’s risk of default;
• Borrowers with higher risk adjustable-rate loans may have fewer opportunities to refinance into fixed-
rate loans;
• A borrower's payment on additional debt obligations (such as home equity lines of credit and second
liens) that have adjustable payment terms may increase, which in turn increases the risk that the
borrower may default on a loan we own or guarantee; and
• Other-than-temporary impairments on our investments in non-agency mortgage-related securities
could increase due to a reduction in the benefit expected from structural credit enhancements on
these securities.
Changes in spreads could materially affect our results of operations and net worth.
Changes in market conditions, including changes in interest rates, liquidity, prepayment and/or default
expectations, and the level of uncertainty in the market for a particular asset class, may cause
fluctuations in spreads (also referred to as OAS). Our financial results and net worth can be significantly