Freddie Mac 2008 Annual Report Download - page 53

Recent market conditions impair the reliability of the internal models we use for financial accounting and reporting
purposes, to make business decisions and to manage risks, and our business could be adversely affected if those models
fail to produce reliable results.
We make significant use of business and financial models for financial accounting and reporting purposes and to
manage risk. For example, we use models in determining the fair value of financial instruments for which independent price
quotes are not available or reliable or in extrapolating third-party values to certain of our assets and liabilities. We also use
models to measure and monitor our exposures to interest-rate and other market risks and credit risk. The information
provided by these models is also used in making business decisions relating to strategies, initiatives, transactions and
products.
We use market-based information as inputs to our models. The turmoil in the housing and credit markets creates
additional risk regarding the reliability of our models, particularly since we are making adjustments to our models in
response to rapid changes in economic conditions. This may increase the risk that our models could produce unreliable
results or estimates that vary widely or prove to be inaccurate.
Models are inherently imperfect predictors of actual results because they are based on assumptions and/or historical
experience. Our models could produce unreliable results for a number of reasons, including incorrect coding of the models,
invalid or incorrect assumptions underlying the models, the need for manual adjustments to respond to rapid changes in
economic conditions, incorrect data being used by the models or actual results that do not conform to historical trends and
experience. In addition, the complexity of the models and the impact of the recent turmoil in the housing and credit markets
create additional risk regarding the reliability of our models, since models may not function well in situations for which there
are few or no recent historical precedents, such as the extreme economic conditions we are now experiencing. The
valuations, risk metrics, amortization results, loan loss reserve estimations and security impairment charges produced by our
internal models may be different from actual results, which could adversely affect our business results, cash flows, fair value
of net assets, business prospects and future financial results. Changes in any of our models or in any of the assumptions,
judgments or estimates used in the models may cause the results generated by the model to be materially different. The
different results could cause a revision of previously reported financial condition or results of operations, depending on when
the change to the model, assumption, judgment or estimate is implemented. Any such changes may also cause difficulties in
comparisons of the financial condition or results of operations of prior or future periods. If our models are not reliable, we
could also make poor business decisions, impacting loan purchases, management and guarantee fee pricing, asset and
liability management, or other decisions. Furthermore, any strategies we employ to attempt to manage the risks associated
with our use of models may not be effective. See “MD&A — CRITICAL ACCOUNTING POLICIES AND ESTIMATES —
Valuation of Financial Instruments” and “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK — Interest-Rate Risk and Other Market Risks” for more information on our use of models.
Changes in our accounting policies, as well as estimates we make, could materially affect how we report our financial
condition or results of operations; our financial results and net worth may also be adversely affected by the accounting
effects of our activities under conservatorship, including our implementation of HASP. In particular, (i) proposed
amendments to SFAS 140 and FIN 46(R); and (ii) potential accounting effects of our implementation of HASP could
have a significant impact on our net worth, and could require us to request additional draws under the Purchase
Agreement.
Our accounting policies are fundamental to understanding our financial condition and results of operations. We have
identified certain accounting policies and estimates as being “critical” to the presentation of our financial condition and
results of operations because they require management to make particularly subjective or complex judgments about matters
that are inherently uncertain and for which materially different amounts could be recorded using different assumptions or
estimates. For a description of our critical accounting policies, see “MD&A — CRITICAL ACCOUNTING POLICIES AND
ESTIMATES.” As new information becomes available and we update the assumptions underlying our estimates, we could be
required to revise previously reported financial results.
From time to time, the FASB and the SEC can change the financial accounting and reporting standards that govern the
preparation of our financial statements. These changes are beyond our control, can be difficult to predict and could
materially impact how we report our financial condition and results of operations. We could be required to apply a new or
revised standard retrospectively, which may result in the revision of prior period financial statements by material amounts.
The implementation of new or revised accounting standards could result in material adverse effects to our stockholders’
equity (deficit) and result in or contribute to the need for additional draws under the Purchase Agreement.
For example, FASB has proposed changes to SFAS 140 and FIN 46(R), which may be effective as early as January
2010. If the FASB adopts the changes as proposed, we would be required to consolidate our PC trusts in our financial
statements. If we are required to consolidate a significant portion of the assets and liabilities of our PC trusts, this could have
a significant adverse impact on our net worth and could require us to take additional draws under the Purchase Agreement.
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