Freddie Mac 2011 Annual Report Download - page 51

Conservatorship and Related Matters
The future status and role of Freddie Mac is uncertain and could be materially adversely affected by legislative and
regulatory action that alters the ownership, structure, and mission of the company.
The Acting Director of FHFA stated on November 15, 2011 that “the long-term outlook is that neither [Freddie Mac
nor Fannie Mae] will continue to exist, at least in its current form, in the future.” Future legislation will likely materially
affect the role of the company, our business model, our structure, and future results of operations. Some or all of our
functions could be transferred to other institutions, and we could cease to exist as a stockholder-owned company or at all.
If any of these events were to occur, our shares could further diminish in value, or cease to have any value, and there can
be no assurance that our stockholders would receive any compensation for such loss in value.
On February 11, 2011, the Administration delivered a report to Congress that lays out the Administration’s plan to
reform the U.S. housing finance market, including options for structuring the government’s long-term role in a housing
finance system in which the private sector is the dominant provider of mortgage credit. The report recommends winding
down Freddie Mac and Fannie Mae, stating that the Administration will work with FHFA to determine the best way to
responsibly reduce the role of Freddie Mac and Fannie Mae in the market and ultimately wind down both institutions. The
report identifies a number of policy levers that could be used to wind down Freddie Mac and Fannie Mae, shrink the
government’s footprint in housing finance, and help bring private capital back to the mortgage market, including
increasing guarantee fees, phasing in a 10% down payment requirement, reducing conforming loan limits, and winding
down Freddie Mac and Fannie Mae’s investment portfolios, consistent with the senior preferred stock purchase
agreements.
A number of bills were introduced in the Senate and House in 2011 concerning the future state of Freddie Mac and
Fannie Mae. Several of these bills take a comprehensive approach that would wind down Freddie Mac and Fannie Mae
(or completely restructure the companies), while other bills would revise the companies’ operations in a limited manner.
Congress also held hearings related to the long-term future of housing finance, including the role of Freddie Mac and
Fannie Mae. We expect additional legislation relating to Freddie Mac and Fannie Mae to be introduced and considered by
Congress; however, we cannot predict whether or when any such legislation will be enacted. 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.
For more information on the Administration’s February 2011 report, GSE reform legislation, and FHFA’s strategic
plan, see “BUSINESS — Regulation and Supervision — Legislative and Regulatory Developments.”
In addition to legislative actions, FHFA has expansive regulatory authority over us, and the manner in which FHFA
will use its authority in the future is unclear. FHFA could take a number of regulatory actions that could materially
adversely affect our company, such as changing or reinstating our current capital requirements, which are not binding
during conservatorship, or imposing additional restrictions on our portfolio activities or new initiatives.
The conservatorship is indefinite in duration and the timing, conditions, and likelihood of our emerging from
conservatorship are uncertain. Even if the conservatorship is terminated, we would remain subject to the Purchase
Agreement, senior preferred stock, and warrant.
FHFA has stated that there is no exact time frame as to when the conservatorship may end. Termination of the
conservatorship (other than in connection with receivership) also requires Treasury’s consent under the Purchase
Agreement. There can be no assurance as to when, and under what circumstances, Treasury would give such consent.
There is also significant uncertainty as to what changes may occur to our business structure during or following our
conservatorship, including whether we will continue to exist. It is possible that the conservatorship will end with us being
placed into receivership. The Acting Director of FHFA stated on September 19, 2011 that “it ought to be clear to
everyone as this point, given [Freddie Mac and Fannie Mae’s] losses since being placed into conservatorship and the
terms of the Treasury’s financial support agreements, that [Freddie Mac and Fannie Mae] will not be able to earn their
way back to a condition that allows them to emerge from conservatorship.”
In addition, Treasury has the ability to acquire almost 80% of our common stock for nominal consideration by
exercising the warrant we issued to it pursuant to the Purchase Agreement. Consequently, the company could effectively
remain under the control of the U.S. government even if the conservatorship was ended and the voting rights of common
stockholders restored. The warrant held by Treasury, the restrictions on our business contained in the Purchase Agreement,
and the senior status of the senior preferred stock issued to Treasury under the Purchase Agreement, if the senior
46 Freddie Mac