Freddie Mac 2011 Annual Report Download - page 58

our mortgage-related investments portfolio; and (b) significant constraints on our ability to purchase or sell mortgage
assets.
Under the terms of the Purchase Agreement and FHFA regulation, our mortgage-related investments portfolio is
subject to a cap that decreases by 10% each year until the portfolio reaches $250 billion. As a result, the UPB of our
mortgage-related investments portfolio could not exceed $729 billion as of December 31, 2011 and may not exceed
$656.1 billion as of December 31, 2012. Our mortgage-related investments portfolio has contracted considerably since we
entered into conservatorship, and we are working with FHFA to identify ways to prudently accelerate the rate of
contraction of the portfolio. Our ability to take advantage of opportunities to purchase or sell mortgage assets at attractive
prices has been, and likely will continue to be, limited. In addition, we can provide no assurance that the cap on our
mortgage-related investments portfolio will not, over time, force us to sell mortgage assets at unattractive prices,
particularly given the potential in coming periods for continued high volumes of loan modifications and removal of
seriously delinquent loans, both of which result in the removal of mortgage loans from our PCs for our mortgage-related
investments portfolio. We expect that our holdings of unsecuritized single-family loans will continue to increase in 2012
due to the recent revisions to HARP, which will result in our purchase of mortgage loans with LTV ratios greater than
125%, as we have not yet implemented a securitization process for such loans. For more information on the various
restrictions and limitations on our investment activity and our mortgage-related investments portfolio, see “BUSINESS —
Conservatorship and Related Matters — Impact of Conservatorship and Related Actions on Our Business —Limits on
Investment Activity and Our Mortgage-Related Investments Portfolio.”
These limitations will reduce the earnings capacity of our mortgage-related investments portfolio business and require
us to place greater emphasis on our guarantee activities to generate revenue. However, under conservatorship, our ability
to generate revenue through guarantee activities may be limited, as we may be required to adopt business practices that
provide support for the mortgage market in a manner that serves our public mission and other non-financial objectives,
but that may negatively impact our future financial results from guarantee activities. The combination of the restrictions
on our business activities under the Purchase Agreement and FHFA regulation, combined with our potential inability to
generate sufficient revenue through our guarantee activities to offset the effects of those restrictions, may have an adverse
effect on our results of operations and financial condition. There can be no assurance that the current profitability levels
on our new single-family business would be sufficient to attract new private sector capital in the future, should the
company be in a position to seek such capital. We generally must obtain FHFA’s approval in order to increase pricing in
our guarantee business, and there can be no assurance FHFA will approve any such request. On December 23, 2011,
President Obama signed into law the Temporary Payroll Tax Cut Continuation Act of 2011. Our business and financial
condition will not benefit from the increases in guarantee fees under this law, as we must remit the proceeds from such
increases to Treasury. It is currently unclear what effect this will have on our ability to raise guarantee fees that may be
retained by us. For more information, see “BUSINESS — Regulation and Supervision — Legislative and Regulatory
Developments — Legislated Increase to Guarantee Fees.”
We are subject to mortgage credit risks, including mortgage credit risk relating to off-balance sheet arrangements;
increased credit costs related to these risks could adversely affect our financial condition and/or results of operations.
Mortgage credit risk is the risk that a borrower will fail to make timely payments on a mortgage we own or
guarantee, exposing us to the risk of credit losses and credit-related expenses. We are primarily exposed to mortgage
credit risk with respect to the single-family and multifamily loans that we own or guarantee and hold on our consolidated
balance sheets. We are also exposed to mortgage credit risk with respect to securities and guarantee arrangements that are
not reflected as assets on our consolidated balance sheets. These relate primarily to: (a) Freddie Mac mortgage-related
securities backed by multifamily loans; (b) certain Other Guarantee Transactions; and (c) other guarantee commitments,
including long-term standby commitments and liquidity guarantees.
Significant factors that affect the level of our single-family mortgage credit risk include the credit profile of the
borrower (e.g., credit score, credit history, and monthly income relative to debt payments), documentation level, the
number of borrowers, the features of the mortgage loan, occupancy type, the type of property securing the mortgage, the
LTV ratio of the loan, and local and regional economic conditions, including home prices and unemployment rates. Our
credit losses will remain high for the foreseeable future due to the substantial number of mortgage loans in our single-
family credit guarantee portfolio on which borrowers owe more than their home is currently worth, as well as the
substantial inventory of seriously delinquent loans.
While mortgage interest rates remained low in 2011, many borrowers may not have been able to refinance into lower
interest mortgages or reduce their monthly payments through mortgage modifications due to substantial declines in home
values, market uncertainty, and continued high unemployment rates. Therefore, there can be no assurance that continued
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