Freddie Mac 2011 Annual Report Download - page 133

inadequacy of our business continuity and disaster recovery plans that may inhibit our ability to return to normal business
operations in the event of a disaster event.
We expect legal, political and regulatory influences to continue to increase in 2012, which could increase uncertainty
in the mortgage industry, increase our operational and people risks, and increase the uncertainty associated with the use of
our models.
Credit Risk
We are subject primarily to two types of credit risk: institutional credit risk and mortgage credit risk. Institutional
credit risk is the risk that a counterparty that has entered into a business contract or arrangement with us will fail to meet
its obligations. Mortgage credit risk is the risk that a borrower will fail to make timely payments on a mortgage we own
or guarantee. We are exposed to mortgage credit risk on our total mortgage portfolio because we either hold the mortgage
assets or have guaranteed mortgages in connection with the issuance of a Freddie Mac mortgage-related security, or other
guarantee commitment.
Institutional Credit Risk
Since 2008, challenging market conditions have adversely affected the liquidity and financial condition of our
counterparties. The concentration of our exposure to our counterparties increased beginning in 2008 due to industry
consolidation and counterparty failures.
Our exposure to single-family mortgage seller/servicers remained high during 2011 with respect to their repurchase
obligations arising from breaches of representations and warranties made to us for loans they underwrote and sold to us.
We rely on our single-family seller/servicers to perform loan workout activities as well as foreclosures on loans that they
service for us. Our credit losses could increase to the extent that our seller/servicers do not fully perform these obligations
in a timely manner. The financial condition of the mortgage insurance industry continued to deteriorate during 2011, and
the substantial majority of our mortgage insurance exposure is concentrated with four counterparties all of which are
under significant financial stress. In addition, our exposure to derivatives counterparties remains highly concentrated as
compared to historical levels.
We continue to face challenges in reducing our risk concentrations with counterparties. Efforts we make to reduce
exposure to financially weakened counterparties could further increase our exposure to other individual counterparties or
increase concentration risk overall. The failure of any of our significant counterparties to meet their obligations to us
could have a material adverse effect on our results of operations, financial condition, and our ability to conduct future
business. For more information, see “RISK FACTORS — Competitive and Market Risks — 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 do not meet their obligations to us.”
Non-Agency Mortgage-Related Security Issuers
Our investments in securities expose us to institutional credit risk to the extent that servicers, issuers, guarantors, or
third parties providing credit enhancements become insolvent or do not perform their obligations. Our investments in non-
Freddie Mac mortgage-related securities include both agency and non-agency securities. However, agency securities have
historically presented minimal institutional credit risk due to the guarantee provided by those institutions, and the
U.S. government’s support of those institutions.
At the direction of our Conservator, we are working to enforce our rights as an investor with respect to the non-
agency mortgage-related securities we hold, and are engaged in efforts to mitigate losses on our investments in these
securities, in some cases in conjunction with other investors. The effectiveness of our efforts is highly uncertain and any
potential recoveries may take significant time to realize.
In June 2011, Bank of America Corporation announced that it, BAC Home Loans Servicing, LP, Countrywide
Financial Corporation and Countrywide Home Loans, Inc. entered into a settlement agreement with The Bank of New
York Mellon, as trustee, to resolve certain claims with respect to a number of Countrywide first-lien and second-lien
residential mortgage-related securitization trusts. Bank of America indicated that the settlement is subject to final court
approval and certain other conditions. There can be no assurance that final court approval of the settlement will be
obtained or that all conditions will be satisfied. Bank of America noted that, given the number of investors and the
complexity of the settlement, it is not possible to predict the timing or ultimate outcome of the court approval process,
which could take a substantial period of time. We have investments in certain of these Countrywide securitization trusts
and would expect to benefit from this settlement, if final court approval is obtained. For more information, see
“NOTE 16: CONCENTRATION OF CREDIT AND OTHER RISKS.”
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