Freddie Mac 2015 Annual Report Download - page 200

Risk Factors Other Risks
Freddie Mac 2015 Form 10-K 198
Competition from banking and non-banking institutions (including Fannie Mae, Ginnie Mae, and
FHA/VA) may harm our business. FHFA’s actions as Conservator of both companies could affect
competition between us and Fannie Mae.
Competition in the secondary mortgage market may make it more difficult for us to purchase mortgage
loans. Furthermore, competitive pricing pressures may make our products less attractive in the market
and negatively affect our financial results. Increased competition from Fannie Mae, Ginnie Mae, FHA/VA,
and new entrants may alter our product mix, lower our volumes, and reduce our revenues on new
business.
We also compete with other financial institutions that retain or securitize loans, such as commercial and
investment banks, dealers, thrift institutions, and insurance companies. In recent years, FHFA took a
number of actions designed to encourage these other financial institutions to increase their activities in
the mortgage market (e.g., increasing our guarantee fees in 2012), and could take additional actions in
the future. Because of these actions and because our base management and guarantee fees do not vary
based on LTV ratios or credit scores, there is a risk that financial institutions may retain loans with better
credit characteristics rather than sell them to us, or otherwise seek to structure financial transactions that
result in our loan purchases having a higher proportion of loans with lower credit scores and higher LTV
ratios. While we compensate ourselves for higher levels of credit risk through charging upfront delivery
fees, sellers' retention of loans with better credit characteristics could result in us having lower overall
purchase volumes, revenues, and returns (as a result of us having loans with a more adverse credit risk
profile).
FHFA is also Conservator of Fannie Mae, our primary competitor. FHFA’s actions as Conservator of both
companies could affect competition between us and Fannie Mae. It is possible that FHFA could require us
and Fannie Mae to take a uniform approach that, because of differences in our respective businesses,
could place Freddie Mac at a competitive disadvantage to Fannie Mae. FHFA may also prevent us from
taking actions that could give us a competitive advantage.
We have faced increased competition in the multifamily market in recent years from life insurers, banks,
CMBS conduits, and other market participants as multifamily market fundamentals have improved. FHFA
may take actions that could encourage further competition.
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 our 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 loan purchase program. Our competitiveness in purchasing single-family loans from
our sellers and the volume and/or profitability of our new single-family guarantee business is directly
affected by the price performance of our PCs relative to comparable Fannie Mae securities.
Freddie Mac fixed-rate PCs provide for faster scheduled monthly remittance of loan principal and interest
payments to investors than Fannie Mae fixed-rate securities. Despite the faster remittance cycle of our
PCs, our PCs have typically traded at a 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.