Freddie Mac 2008 Annual Report Download - page 45

worth. See “MD&A — CONSOLIDATED BALANCE SHEETS ANALYSIS — Mortgage-Related Investments Portfolio” for
information about the credit ratings for these securities and the extent to which these securities have been downgraded.
The credit losses we experience in future periods as a result of the housing and economic crisis are likely to be larger,
perhaps substantially larger, than our current loan loss reserves.
Our loan loss reserves, as reflected on our balance sheet, do not reflect our estimate of the future credit losses inherent
in our single-family and multifamily mortgage loans, including those underlying our financial guarantees. Rather, pursuant to
GAAP, our reserves only reflect probable losses we believe we have already incurred as of the balance sheet date. Because
of the housing and economic crisis, there is significant uncertainty regarding the full extent of future credit losses. The credit
losses we experience in future periods will adversely affect our business, results of operations, financial condition, liquidity
and net worth.
A continued decline in U.S. home prices or other changes in the U.S. housing market could negatively impact our
business and increase our losses.
Throughout 2008, the U.S. housing market experienced significant adverse trends, including accelerating price
depreciation, rising delinquency and default rates and high unemployment. These conditions led to significant increases in
our loan delinquencies and credit losses and higher provisioning for loan losses, all of which have adversely affected our
results of operations. We expect that home prices will experience significant further deterioration in 2009, which could result
in a continued increase in delinquencies or defaults and a level of credit-related losses higher than our expectations when our
guarantees were issued, which could significantly increase our losses. For more information, see “MD&A — CREDIT
RISKS.” Government programs designed to halt the decline in the U.S. housing market, such as the HASP, may fail.
Our business volumes are closely tied to the rate of growth in total outstanding U.S. residential mortgage debt and the
size of the U.S. residential mortgage market. The rate of growth in total residential mortgage debt was (0.3%) in 2008
compared to 7.2% in 2007. If the rate of growth in total outstanding U.S. residential mortgage debt were to continue to
decline, there could be fewer mortgage loans available for us to purchase, and we could face more competition to purchase a
smaller number of loans.
Apartment market fundamentals began to deteriorate more rapidly in the second half of 2008, due to increased vacancy
rates, declining rent levels and a weakening employment market. Given the significant weakness currently being experienced
in the U.S. economy, it is likely that apartment fundamentals will continue to deteriorate during 2009, which could cause us
to incur significant credit and other losses relating to our multifamily activities.
Our financial condition or results of operations may be adversely affected if mortgage seller/servicers fail to perform their
obligations to service loans in our single-family mortgage portfolio as well as to repurchase loans sold to us in breach of
representations and warranties.
Our seller/servicers have a significant role in servicing loans in our single-family mortgage portfolio, which includes an
active role in our loss mitigation efforts. We also require seller/servicers to make certain representations and warranties
regarding the loans they sell to us. If loans are sold to us in breach of those representations and warranties, we have the
contractual right to require the seller/servicer to repurchase those loans from us. Our seller/servicer counterparties may fail to
perform their obligation to service loans in our single-family mortgage portfolio as well as to repurchase loans, which could
adversely affect our financial condition or results of operations. The risk of such a failure has increased as deteriorating
market conditions have affected the liquidity and financial condition of many of our seller/servicers, including some of our
largest seller/servicers. If a servicer is unable to fulfill its repurchase or other responsibilities, we may be unable to sell the
applicable servicing rights to a successor servicer and recover, from the sale proceeds, amounts owed to us by the defaulting
servicer. Recent market turmoil has disrupted the market for mortgage servicing rights, which increases the risk that we may
be unable to sell such rights or may not receive a sufficient price for them. The inability to realize the anticipated benefits of
our loss mitigation plans, a lower realized rate of seller/servicer repurchases or default rates and severity that exceed our
current projections could cause our losses to be significantly higher than those currently estimated. See “MD&A — CREDIT
RISKS — Institutional Credit Risk — Mortgage Seller/Servicers” for additional information on our institutional credit risk
related to our mortgage seller/servicers.
Our financial condition or results of operations may be adversely affected by the financial distress of our derivative and
other counterparties.
Due to market events in the second half of 2008, some of our derivative and other counterparties have experienced
various degrees of financial distress, including liquidity constraints, credit downgrades and bankruptcy. Our ten largest
derivative counterparties for 2008 represented approximately 69% of the total notional amount of our derivative portfolio.
Our financial condition and results of operations may be adversely affected by the financial distress of these derivative and
other counterparties in the event that they fail to meet their obligations to us. For example, we may incur losses if collateral
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