Freddie Mac 2011 Annual Report Download - page 177

Operational Risks
Risk types have become increasingly inter-related such that an operational breakdown can result in a credit- or
market- related event or loss. Operational risks are inherent in all of our business activities and can become apparent in
various ways, including accounting or operational errors, business interruptions, fraud, and failures of the technology used
to support our business activities. Our risk of operational failure may be increased by vacancies or turnover in officer and
key business unit positions and failed or inadequate internal controls. These operational risks may expose us to financial
loss, interfere with our ability to sustain timely and reliable financial reporting, or result in other adverse consequences.
We have faced challenges with respect to managing servicers and credit loss mitigation due to a number of factors,
including high volumes of seriously delinquent loans and inadequate systems. Implementation of the revised HARP
initiative will place additional strain on existing systems, processes, and key resources. On December 23, 2011, President
Obama signed into law the Temporary Payroll Tax Cut Continuation Act of 2011. While we continue to assess the impact
of this law on us, we currently believe that implementation of this law will present operational and accounting challenges
for us. For more information, see, “BUSINESS — Regulation and Supervision — Legislative and Regulatory
Developments.” We may also face increased operational risk due to the requirement that we and Fannie Mae align certain
single-family mortgage servicing practices for non-performing loans. On April 28, 2011, FHFA announced a new set of
aligned standards for servicing by Freddie Mac and Fannie Mae. Implementing this servicing alignment initiative has
become a top priority for the company, but may pose significant short-term operational challenges in data management
and place additional strain on existing systems, processes, and key resources, particularly if the requirements were to
change or new requirements were to be imposed on servicers whether through government directives or servicer
settlements with the state attorneys general. See “Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit
Risk — Single-Family Loan Workouts and the MHA Program” for more information. There also have been a number of
other regulatory developments in recent periods impacting single-family mortgage servicing and foreclosure practices,
including top servicers entering into consent orders with federal banking regulators. The servicing model for single-family
mortgages may face further significant changes in the future. As a result, we may be required to make additional
significant changes to our practices, which could further increase our operational risk. See “BUSINESS — Regulation and
Supervision — Legislative and Regulatory Developments —Developments Concerning Single-Family Servicing Practices”
for more information.
Our business decision-making, risk management, and financial reporting are highly dependent on our use of models.
In recent periods, external market factors have increasingly contributed to a growing risk associated with the use of these
models. For example, certain economic events or the implementation of government policies could create increased model
uncertainty as models may not fully capture these events, which makes it more difficult to assess model performance and
requires a higher degree of management judgment. We have taken certain actions to mitigate this risk to the extent
possible, including additional efforts in the area of model oversight and governance pertaining to clarifying roles, aligning
model resources, and providing more transparency to management over model issues and changes.
Our primary business processing and financial accounting systems lack sufficient flexibility to handle all the
complexities of, and changes in, our business transactions and related accounting policies and methods. This requires us to
rely more extensively on spreadsheets and other end-user computing systems. These systems are likely to have a higher
risk of operational failure and error than our primary systems, which are subject to our information technology general
controls. We believe we are mitigating this risk through active monitoring of, and improvements to, controls over the
development and use of end-user computing systems.
In order to manage the risk of inaccurate or unreliable valuations of our financial instruments, we engage in an
ongoing internal review of our valuations. We perform analysis of valuations on a monthly basis to confirm the
reasonableness of the valuations. For more information on the controls in our valuation process, see “FAIR VALUE
MEASUREMENTS AND ANALYSIS — Fair Value Measurements — Controls over Fair Value Measurement.”
Our risks related to employee turnover are increasing. Throughout 2011 and early 2012, Congress continued to
publicly debate our: (a) current primary business objectives and whether we should be doing more to help distressed
homeowners; (b) future business structure following conservatorship, including whether we will continue to exist; and
(c) current compensation structure, including whether senior executives should be entitled to bonuses or whether all
employees should be placed on the government pay scale. Moreover, the Administration has called for a “wind down” of
the GSEs, an ongoing development our employees follow closely. The visible public debate regarding the future role of
the GSEs continues within the media and Congress.
Uncertainty surrounding our future business model, organizational structure, and compensation structure is adversely
impacting our internal control environment. We believe these factors are also contributing to increased levels of voluntary
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