Freddie Mac 2008 Annual Report Download - page 46

held by us cannot be liquidated at prices that are sufficient to recover the full amount of the loan or derivative exposure due
us.
Our exposure to derivatives counterparties has increased significantly since July 2008, as we have experienced
significant deterioration in our access to the unsecured medium- and long-term debt markets, and have had to rely
increasingly upon derivatives to manage our interest-rate risk. This strategy may increase the volatility of our GAAP results
through mark-to-fair value impacts on our pay-fixed swaps and other derivatives.
In addition, our ability to engage in routine derivatives, funding and other transactions could be adversely affected by
the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result
of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or
more financial services institutions, or the financial services industry generally, could lead to market-wide disruptions in
which it may be difficult for us to find acceptable counterparties for such transactions.
We depend on our institutional counterparties to provide services that are critical to our business and our results of
operations or financial condition may be adversely affected if one or more of our institutional counterparties is unable to
meet their obligations to us.
We face the risk that one or more of the institutional counterparties that has entered into a business contract or
arrangement with us may fail to meet its obligations. We face similar risks with respect to contracts or arrangements we
enter into on behalf of the securitization trusts. Our primary exposures to institutional counterparty risk are with:
• mortgage insurers;
• mortgage seller/servicers;
• issuers, guarantors or third party providers of credit enhancements (including bond insurers);
• mortgage investors;
• multifamily mortgage guarantors;
• issuers, guarantors and insurers of investments held in both our mortgage-related investments portfolio and our cash
and other investments portfolio; and
• derivatives counterparties.
In some cases, our business with institutional counterparties is concentrated. A significant failure by a major
institutional counterparty could have a material adverse effect on our mortgage-related investments portfolio, cash and other
investments portfolio, derivative portfolio or credit guarantee activities. See “NOTE 18: CONCENTRATION OF CREDIT
AND OTHER RISKS” to our consolidated financial statements for additional information. For 2008, our ten largest
mortgage seller/servicers represented approximately 84% of our single-family mortgage purchase volume. We are exposed to
the risk that we could lose purchase volume to the extent these arrangements are terminated or modified and not replaced
from other lenders.
Some of our counterparties also may become subject to serious liquidity problems affecting, either temporarily or
permanently, their businesses, which may adversely affect their ability to meet their obligations to us. Challenging market
conditions have adversely affected and are expected to continue to adversely affect the liquidity and financial condition of a
number of our counterparties, including some seller/servicers, mortgage insurers and bond insurers. Some of our largest
seller/servicers have experienced ratings downgrades and liquidity constraints, and certain large lenders have failed. A default
by a counterparty with significant obligations to us could adversely affect our ability to conduct our operations efficiently
and at cost-effective rates, which in turn could adversely affect our results of operations or our financial condition. Many of
our counterparties provide several types of services to us. Accordingly, if one of these counterparties were to become
insolvent or otherwise default on its obligations to us, it could harm our business and financial results in a variety of ways.
We are also exposed to risk relating to the potential insolvency or non-performance of mortgage insurers and bond
insurers. Most of our mortgage insurer and bond insurer counterparties have experienced ratings downgrades during 2008 and
some in early 2009. To date, none of these counterparties has failed to meet its obligations to us; however we recognized
other-than-temporary impairment losses during 2008 on securities covered by our bond insurers due to concerns over whether
or not they will meet our future claims. At December 31, 2008, our top three mortgage insurers; Mortgage Guaranty
Insurance Corp, Radian Guaranty Inc. and Genworth Mortgage Insurance Corporation, each accounted for more than 10% of
our overall mortgage insurance coverage and collectively represented approximately 65% of our overall mortgage insurance
coverage. As of December 31, 2008, our top four bond insurers; Ambac Assurance Corporation, Financial Guaranty
Insurance Company, MBIA Insurance Corp., and Financial Security Assurance Inc., each accounted for more than 10% of
our overall bond insurance coverage (including secondary policies), and collectively represented approximately 90% of our
bond insurance coverage. See “MD&A — CREDIT RISKS — Institutional Credit Risk” for additional information regarding
our credit risks to our counterparties and how we seek to manage them, and recent consolidation among some of our
institutional counterparties.
43 Freddie Mac