Freddie Mac 2011 Annual Report Download - page 29

seller/servicers are an important part of our loss mitigation process, we rate their performance regularly and may conduct
on-site reviews of their servicing operations in an effort to confirm compliance with our standards.
For loans for which we oversee servicing, if a borrower is in distress, we may offer a workout option to the borrower.
For example, we may modify the terms of a multifamily mortgage loan, which gives the borrower an opportunity to bring
the loan current and retain ownership of the property. These arrangements are made with the expectation that we will
recover our initial investment or minimize our losses. We do not enter into these arrangements in situations where we
believe we would experience a loss in the future that is greater than or equal to the loss we would experience if we
foreclosed on the property at the time of the agreement.
Conservatorship and Related Matters
Overview and Entry into Conservatorship
We have been operating under conservatorship, with FHFA acting as our conservator, since September 6, 2008. The
conservatorship and related matters have had a wide-ranging impact on us, including our regulatory supervision,
management, business, financial condition and results of operations.
On September 7, 2008, the then Secretary of the Treasury and the then Director of FHFA announced several actions
taken by Treasury and FHFA regarding Freddie Mac and Fannie Mae. These actions included the execution of the
Purchase Agreement, pursuant to which we issued to Treasury both senior preferred stock and a warrant to purchase
common stock. At that time, FHFA set forth the purpose and goals of the conservatorship as follows: “The purpose of
appointing the Conservator is to preserve and conserve the company’s assets and property and to put the company in a
sound and solvent condition. The goals of the conservatorship are to help restore confidence in Fannie Mae and Freddie
Mac, enhance their capacity to fulfill their mission, and mitigate the systemic risk that has contributed directly to the
instability in the current market.” We refer to the Purchase Agreement and the warrant as the “Treasury Agreements.”
There is significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified
termination date, and as to what changes may occur to our business structure during or following conservatorship,
including whether we will continue to exist. We are not aware of any current plans of our Conservator to significantly
change our business model or capital structure in the near-term. Our future structure and role will be determined by the
Administration and Congress, and there are likely to be significant changes beyond the near-term. We have no ability to
predict the outcome of these deliberations. On February 2, 2012, the Administration announced that it expects to provide
more detail concerning approaches to reform the U.S. housing finance market in the spring, and that it plans to begin
exploring options for legislation more intensively with Congress. On February 21, 2012, FHFA sent to Congress a
strategic plan for the next phase of the conservatorships of Freddie Mac and Fannie Mae.
We receive substantial support from Treasury and FHFA, as our Conservator and regulator, and are dependent upon
their continued support in order to continue operating our business. This support includes our ability to access funds from
Treasury under the Purchase Agreement, which is critical to: (a) keeping us solvent; (b) allowing us to focus on our
primary business objectives under conservatorship; and (c) avoiding the appointment of a receiver by FHFA under
statutory mandatory receivership provisions. During 2011, the Federal Reserve took several actions designed to support an
economic recovery and maintain historically low interest rates, including resumption of purchases of agency securities,
which impacted and will continue to impact the demand for and value of our PCs in the market.
Our annual dividend obligation on the senior preferred stock exceeds our annual historical earnings in all but one
period. Although we may experience period-to-period variability in earnings and comprehensive income, it is unlikely that
we will regularly generate net income or comprehensive income in excess of our annual dividends payable to Treasury. As
a result, there is significant uncertainty as to our long-term financial sustainability.
For a description of certain risks to our business relating to the conservatorship and Treasury Agreements, see “RISK
FACTORS.”
Supervision of Our Company During Conservatorship
Upon its appointment, FHFA, as Conservator, immediately succeeded to all rights, titles, powers and privileges of
Freddie Mac, and of any stockholder, officer or director of Freddie Mac with respect to Freddie Mac and its assets, and
succeeded to the title to all books, records and assets of Freddie Mac held by any other legal custodian or third party.
Under conservatorship, we have additional heightened supervision and direction from our regulator, FHFA, which is also
acting as our Conservator.
During the conservatorship, the Conservator has delegated certain authority to the Board of Directors to oversee, and
to management to conduct, day-to-day operations so that the company can continue to operate in the ordinary course of
24 Freddie Mac