Freddie Mac 2011 Annual Report Download - page 60

Certain strategies to mitigate our losses as an investor in non-agency mortgage-related securities may adversely affect
our relationships with some of our largest seller/servicers.
On September 2, 2011, FHFA announced that, as Conservator for Freddie Mac and Fannie Mae, it had filed lawsuits
against 17 financial institutions and related defendants alleging: (a) violations of federal securities laws; and (b) in certain
lawsuits, common law fraud in the sale of residential non-agency mortgage-related securities to Freddie Mac and Fannie
Mae. These institutions include some of our largest seller/servicers and counterparties. FHFA, as Conservator, filed a
similar lawsuit against UBS Americas, Inc. and related defendants on July 27, 2011. FHFA seeks to recover losses and
damages sustained by Freddie Mac and Fannie Mae as a result of their investments in certain residential non-agency
mortgage-related securities issued by these financial 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 other efforts to mitigate losses on our investments in these
securities, in some cases in conjunction with other investors. For example, FHFA, as Conservator of Freddie Mac and
Fannie Mae, has issued subpoenas to various entities seeking loan files and other transaction documents related to non-
agency mortgage-related securities in which the two enterprises invested. FHFA stated that the documents will enable it to
determine whether issuers of these securities and others are liable to Freddie Mac and Fannie Mae for certain losses they
have suffered on the securities. We are assisting FHFA in this effort.
These and other loss mitigation efforts may lead to further disputes with some of our largest seller/servicers and
counterparties that may result in further litigation. This could adversely affect our relationship with any such company and
could, for example, result in the loss of some or all of our business with a large seller/servicer. The effectiveness of these
loss mitigation efforts is highly uncertain and any potential recoveries may take significant time to realize. For more
information, see “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk —Non-Agency Mortgage-
Related Security Issuers.”
The credit losses we experience in future periods as a result of the housing and economic downturn are likely to be
larger, perhaps substantially larger, than our current loan loss reserves.
Our loan loss reserves, as reflected on our consolidated balance sheets, do not reflect the total of all future credit
losses we will ultimately incur with respect to our single-family and multifamily mortgage loans, including those
underlying our financial guarantees. Rather, pursuant to GAAP, our reserves only reflect probable losses we believe we
have already incurred as of the balance sheet date. Accordingly, although we believe that our credit losses may exceed the
amounts we have already reserved for loans currently identified as impaired, and that additional credit losses will be
incurred in the future due to the housing and economic downturn, we are not permitted under GAAP to reflect the
potential impact of these future trends in our loan loss reserves. As a result of the depth and extent of the housing and
economic downturn, there is significant uncertainty regarding the full extent of future credit losses. Therefore, such credit
losses are likely to be larger, perhaps substantially larger, than our current loan loss reserves. Additional credit losses we
incur in future periods will adversely affect our business, results of operations, financial condition, liquidity, and net
worth.
Further declines in U.S. home prices or other adverse changes in the U.S. housing market could negatively impact our
business and increase our losses.
Throughout 2011, the U.S. housing market continued to experience adverse trends, including continued price
depreciation, continued high serious delinquency and default rates, and extended foreclosure timelines. Low volumes of
home sales and the continued large supply of unsold homes placed further downward pressure on home prices. These
conditions, coupled with continued high unemployment, led to continued high loan delinquencies and provisioning for
loan losses. Our credit losses remained high in 2011, in part because home prices have experienced significant cumulative
declines in many geographic areas in recent years. We expect that national average home prices will continue to remain
weak and will likely decline over the near term, which could result in a continued high rate of serious delinquencies or
defaults and a level of credit-related losses higher than our expectations when our guarantees were issued.
We prepare internal forecasts of future home prices, which we use for certain business activities, including:
(a) hedging prepayment risk; (b) setting fees for new guarantee business; and (c) portfolio activities. It is possible that
home price declines could be significantly greater than we anticipate, or that a sustained recovery in home prices would
not begin until much later than we anticipate, which could adversely affect our performance of these business activities.
For example, this could cause the return we earn on new single-family guarantee business to be less than expected. This
could also result in higher losses due to other-than-temporary impairments on our investments in non-agency mortgage-
related securities than would otherwise be recognized in earnings. Government programs designed to strengthen the
55 Freddie Mac