Freddie Mac 2008 Annual Report Download - page 51

Due to the higher rates of delinquency in 2008, we have significantly increased our use of loss mitigation programs.
Working with our Conservator, we are increasing loan modification and refinancing programs. For example, effective
December 15, 2008, we directed our servicers to begin offering fast-track loan modifications to certain troubled borrowers.
We also suspended all foreclosure sales involving occupied single family and 2-4 unit properties with Freddie Mac-owned
mortgages from November 26, 2008 through January 31, 2009 and from February 14, 2009 through March 6, 2009 to allow
more borrowers to take advantage of the loan modification programs. We also suspended evictions on REO properties from
November 26, 2008 through April 1, 2009. Various states have initiated programs to help troubled borrowers find alternatives
to foreclosure.
The success of any of our loss mitigation programs may be constrained by the difficulty in contacting borrowers, the
inability of many borrowers to qualify for the programs, and servicers’ difficulties in processing high volumes of
applications. Loss mitigation programs can increase our expenses, due to the costs associated with contacting eligible
borrowers and processing loan modifications. These programs may result in us making significant concessions to delinquent
borrowers. Even if we are able to modify a loan, there can be no assurance that the loan will not return to delinquent status,
due to the severity of economic conditions affecting delinquent borrowers.
Pursuant to the HASP, we expect that we and our servicers will be involved in significant loan modification and
refinancing activity with respect to mortgages we own or guarantee to reduce interest rates for many borrowers. However,
notwithstanding such reduced interest rates, borrowers may continue to default on their loans, due to the stressful economic
conditions. Thus, the loan modification and refinancing activity may fail to significantly reduce credit losses. In addition, our
role as compliance agent for the HASP is expected to be substantial, requiring significant levels of internal resources and
management attention, which may therefore be shifted away from current corporate initiatives.
Our seller/servicers have a key role in the success of our loss mitigation activities. The significant increases in
delinquent loan volume and the deteriorating conditions of the mortgage market during 2008 placed a strain on the loss
mitigation resources of many of our seller/servicers. A decline in the performance of any seller/servicers in mitigation efforts
could result in missed opportunities for successful loan modifications and an increase in our credit losses.
Depending on the type of loss mitigation activities we pursue, those activities could result in accelerating or slowing
prepayments on our PCs or Structured Securities, either of which could negatively affect the pricing of such PCs or
Structured Securities.
We may experience further write-downs and losses relating to our assets, including our investment securities, net deferred
tax assets, REO properties, mortgage loans or investments in LIHTC partnerships, that could materially adversely affect
our business, results of operations, financial condition, liquidity and net worth.
We have experienced a significant increase in losses and write-downs relating to our assets during 2008, including
significant declines in market value, impairments of our investment securities, market-based write-downs of REO properties,
losses on non-performing loans purchased out of PC pools, and to a much lesser extent losses on our investments in LIHTC
partnerships and other assets. A substantial portion of our impairment losses and write-downs relate to our investments in
non-agency mortgage-related securities backed by subprime, Alt-A and MTA mortgage loans. We also incurred significant
losses during 2008 relating to the non-mortgage investment securities in our cash and other investments portfolio, primarily
as a result of a substantial decline in the market value of these assets due to the financial market crisis. The fair value of the
investment securities we hold may be further adversely affected by continued deterioration in the housing and financial
markets, additional ratings downgrades or other events.
Due to the continued deterioration in the housing and financial markets, we may experience additional write-downs and
losses relating to our assets, including those that are currently AAA-rated, and the fair values of our assets may continue to
decline. This could adversely affect our results of operations, financial condition, liquidity and net worth. In addition, many
of these assets do not trade in a liquid secondary market and the size of our holdings relative to normal market activity are
such that, if we were to attempt to sell a significant quantity of assets, the market pricing in such markets could be
significantly disrupted. Therefore, if we were to sell any of these assets, the price we ultimately realize may be materially
lower than the value at which we carry these assets on our consolidated balance sheets.
In the third quarter of 2008, we recorded a $14.1 billion partial valuation allowance against our net deferred tax assets.
In the fourth quarter of 2008, we recorded an additional $8.3 billion valuation allowance against our net deferred tax assets.
As of December 31, 2008, we determined that a valuation allowance is not necessary for the remainder of our $15.4 billion
of deferred tax asset, which are dependent upon our intent and ability to hold available-for-sale debt securities until the
recovery of unrealized losses that are deemed to be temporary. The future status and role of Freddie Mac could be affected
by the Conservator, and legislative and regulatory action that alters the ownership, structure and mission of the company. The
uncertainty of these developments, as well as future legislative actions, could materially affect our operations, which could in
turn affect our ability or intent to hold investments until the recovery of any temporary unrealized losses. If future events
significantly alter our current outlook, a valuation allowance may need to be established for the remaining deferred tax asset.
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