Freddie Mac 2005 Annual Report Download - page 28

of this material weakness. Also, we use a process of delegated underwriting for the single-family mortgages we purchase or
securitize. In this process, we provide originators with a series of mortgage underwriting guidelines and they represent and
warrant to us that the mortgages sold to us meet these guidelines. See ""MD&A Ì RISK MANAGEMENT Ì Credit
Risks Ì Mortgage Credit Risk Ì Mortgage Credit Risk Management Strategies Ì Underwriting Requirements and Quality
Control Standards'' and ""Ì Institutional Credit Risk Ì Mortgage Seller/Servicers'' for information about how we mitigate
the risks associated with delegated underwriting.
Our risk management eÅorts may prove to be ineÅective at mitigating the risks we seek to manage.
We must eÅectively identify, manage, monitor and mitigate operational risks, interest-rate and other market risks and
credit risks related to our business. Although we have devoted signiÑcant resources to develop our risk management policies
and procedures and expect to continue to do so in the future, our risk management policies, procedures and techniques may
not be suÇcient to mitigate the risks we have identiÑed or to appropriately identify additional risks to which we are subject.
In the area of operational risk, we have identiÑed a number of material weaknesses and signiÑcant deÑciencies in our
internal control over Ñnancial reporting. We may identify additional weaknesses and deÑciencies. In addition, there are a
number of risk factors that may impede our eÅorts to remediate our internal control weaknesses and deÑciencies, including:
the complexity associated with the interdependent nature of the remediation activities; uncertainty regarding the quality
and sustainability of newly established controls; potentially ineÅective compensating controls; the number of simplifying
assumptions; and controls remediation work that is focused on controls related to Ñnancial reporting and not on other non-
Ñnancial statement related controls. See ""MD&A Ì RISK MANAGEMENT'' for a discussion of our approach to
managing the risks we face. Furthermore, there is a risk that we may not have suÇcient personnel or personnel with
suÇcient training in these key roles.
Our inability to hire, train and retain qualiÑed employees could impair our business and operations.
Our continued success depends, in large part, on our ability to hire and retain highly qualiÑed people. Our business is
complex and many of our positions require speciÑc skills. Our turnover rates have been high in recent periods and have
strained our existing resources. If we continue to experience high turnover rates or are unable to attract, train and retain
talented people, our business and operations could be impaired or disrupted. Competition for highly qualiÑed personnel is
intense and there can be no assurances that we will retain our key personnel or that we will be successful in attracting,
training or retaining other highly qualiÑed personnel in the future. See ""MD&A Ì RISK MANAGEMENT Ì Opera-
tional Risks'' for a description of deÑciencies and weaknesses related to our staÇng and turnover.
Legal and Regulatory Risks
Developments aÅecting our legislative and regulatory environment could materially harm our business prospects or
competitive position.
Developments aÅecting our applicable legislative or regulatory environment, including our charter, aÅordable housing
goals, or regulatory capital requirements (including the 30 percent mandatory target capital surplus OFHEO imposed on us
in January 2004), the interpretation of these requirements by our regulators, the adequacy of internal systems, controls and
processes related to these requirements, the exercise or assertion of regulatory or administrative authority beyond current
practice, or the enactment of proposed legislation (in whole or in part) as discussed in ""BUSINESS Ì REGULATION
AND SUPERVISION Ì GSE Regulatory Oversight Legislation'' could adversely aÅect: our ability to fulÑll our mission;
our ability to meet our aÅordable housing goals; our ability or intent to retain investments; the size and growth of our
mortgage portfolios; our future earnings, stock price and stockholder returns; the value of our assets; the rate of growth of the
fair value of our assets; and our ability to recruit qualiÑed oÇcers and directors. OFHEO is considering whether additional
remedial actions may be appropriately applied to us, and has asked us to consider agreeing to limitations on our portfolio
activities for some period of time. See ""MD&A Ì CONSOLIDATED RESULTS OF OPERATIONS Ì Gains
(Losses) on Investment Activity Ì Total security impairments'' for a description of OFHEO's directive to divest certain
mortgage-backed securities. HUD has also indicated that it will soon initiate a review of certain of our investments and other
assets and liabilities to ensure conformity with our charter and investment guidelines. In addition, Treasury announced that
it will conduct a review of its process for approving our debt oÅerings.
We are also exposed to the risk that weaknesses in our internal systems, controls and processes could aÅect the accuracy
of the data we provide to HUD or OFHEO or our compliance with legal requirements, and could ultimately lead to
regulatory actions (by HUD, OFHEO or both) or other adverse impacts on our business (including our ability or intent to
retain investments).
Furthermore, we could be required, or may Ñnd it advisable, to change the nature or extent of our business activities if
our various exemptions and special attributes were modiÑed or eliminated, new or additional fees or substantive regulation of
our business activities were imposed, our relationship to the federal government were altered or eliminated, or our charter,
12 Freddie Mac