Freddie Mac 2008 Annual Report Download - page 50

mortgage-related investments portfolio, our derivative portfolio and our guarantee asset. When interest rates fall, borrowers
are more likely to prepay their mortgage loans by refinancing them at a lower rate. An increased likelihood of prepayment
on the mortgages underlying our mortgage-related securities may adversely impact the performance of these securities and
the valuation of our guarantee asset. An increased likelihood of prepayment on the mortgage loans we hold may also
negatively impact the performance of our mortgage-related investments portfolio. In 2008, interest rate declines were a
primary contributor to losses on guarantee asset and derivative losses of $22 billion.
Interest rates can fluctuate for a number of reasons, including changes in the fiscal and monetary policies of the federal
government and its agencies, such as the Federal Reserve. Federal Reserve policies directly and indirectly influence the yield
on our interest-earning assets and the cost of our interest-bearing liabilities. One of our primary strategies for managing
interest-rate risk is the issuance of a broad range of callable and non-callable debt instruments. Due to deteriorating market
conditions beginning in July 2008, we have not been able to follow this strategy consistently, as our ability to issue long-
term and callable debt has been extremely limited. We have been forced to rely on increased use of short-term debt and
derivative instruments. However the availability of derivative financial instruments (such as options and interest-rate and
foreign-currency swaps) from acceptable counterparties of the types and in the quantities needed may be limited, particularly
in the current environment, which could also adversely affect our ability to effectively manage the risks related to our
investment funding. Thus, our strategies and efforts to manage our exposures to these risks may not be as effective as they
have been in the past. See “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK” for a
description of the types of market risks to which we are exposed and how we seek to manage those risks.
Changes in OAS could materially impact our fair value of net assets and affect future results of operations, stockholders’
equity (deficit) and fair value of net assets.
OAS is an estimate of the yield spread between a given security and an agency debt yield curve. The OAS between the
mortgage and agency debt sectors can significantly affect the fair value of our net assets. The fair value impact of changes in
OAS for a given period represents an estimate of the net unrealized increase or decrease in the fair value of net assets arising
from net fluctuations in OAS during that period. We do not attempt to hedge or actively manage the impact of changes in
mortgage-to-debt OAS. Changes in market conditions, including changes in interest rates, may cause fluctuations in the OAS.
A widening of the OAS on a given asset typically causes a decline in the current fair value of that asset, may cause
significant mark-to-fair value losses, and may adversely affect our financial results and stockholders’ equity (deficit), but
may increase the number of attractive opportunities to purchase new assets for our mortgage-related investments portfolio.
Conversely, a narrowing or tightening of the OAS typically causes an increase in the current fair value of that asset, but may
reduce the number of attractive opportunities to purchase new assets for our mortgage-related investments portfolio.
Consequently, a tightening of the OAS may adversely affect our future financial results and stockholders’ equity (deficit).
See “MD&A — CONSOLIDATED FAIR VALUE BALANCE SHEETS ANALYSIS — Discussion of Fair Value Results” for
a more detailed description of the impacts of changes in mortgage-to-debt OAS.
Negative publicity causing damage to our reputation could adversely affect our business prospects, financial results or
capital.
Reputation risk, or the risk to our financial results and capital from negative public opinion, is inherent in our business.
Negative public opinion could adversely affect our ability to keep and attract customers or otherwise impair our customer
relationships, adversely affect our ability to obtain financing, impede our ability to hire and retain qualified personnel, hinder
our business prospects or adversely impact the trading price of our securities. Perceptions regarding the practices of our
competitors or the financial services and mortgage industries as a whole, particularly as they relate to the current economic
crisis, may also adversely impact our reputation. Adverse reputation impacts on third parties with whom we have important
relationships may impair market confidence or investor confidence in our business operations as well. In addition, negative
publicity could expose us to adverse legal and regulatory consequences, including greater regulatory scrutiny or adverse
regulatory or legislative changes. These adverse consequences could result from perceptions concerning our activities and
role in addressing the mortgage market crisis or our actual or alleged action or failure to act in any number of activities,
including corporate governance, regulatory compliance, financial reporting and disclosure, purchases of products perceived to
be predatory, safeguarding or using nonpublic personal information, or from actions taken by government regulators and
community organizations in response to our actual or alleged conduct.
Business and Operational Risks
Programs to reduce foreclosures, modify loan terms and refinance mortgages may fail to mitigate our credit losses and
may adversely affect our results of operations or financial condition.
Loss mitigation activities are a key component of our strategy for managing and resolving troubled assets and lowering
credit losses. However, there can be no assurance that any of our loss mitigation strategies will be successful and that credit
losses will not escalate.
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