Freddie Mac 2011 Annual Report Download - page 61

U.S. housing market, such as the MHA Program, may fail to achieve expected results, and new programs could be
instituted that cause our credit losses to increase. For more information, see “MD&A — RISK MANAGEMENT — Credit
Risk.”
Our business volumes are closely tied to the rate of growth in total outstanding U.S. residential mortgage debt and
the size of the U.S. residential mortgage market. Total residential mortgage debt declined approximately 1.8% in the first
nine months of 2011 (the most recent data available) compared to a decline of approximately 3.2% in 2010. If total
outstanding U.S. residential mortgage debt were to continue to decline, there could be fewer mortgage loans available for
us to purchase, and we could face more competition to purchase a smaller number of loans.
While multifamily market fundamentals (i.e., vacancy rates and effective rents) improved during 2011, there can be
no assurance that this trend will continue. Certain local multifamily markets exhibit relatively weak fundamentals,
especially some of those hit hardest by residential home price declines. Any further softening of the broader economy
could have negative impacts on multifamily markets, which could cause delinquencies and credit losses relating to our
multifamily activities to increase beyond our current expectations.
Our refinance volumes could decline if interest rates rise, which could cause our overall new mortgage-related security
issuance volumes to decline.
We continued to experience a high percentage of refinance mortgages in our purchase volume during 2011 due to
continued low interest rates and the impact of our relief refinance mortgages. Interest rates have been at historically low
levels for an extended period of time. Overall originations of refinance mortgages, and our purchases of them, will likely
decrease if interest rates rise and home prices remain at depressed levels. Originations of refinance mortgages will also
likely decline after the Home Affordable Refinance Program expires in December 2013. In addition, many eligible
borrowers have already refinanced at least once during this period of low interest rates, and therefore may be unlikely to
do so again in the near future. It is possible that our overall mortgage-related security issuance volumes could decline if
our volumes of purchase money mortgages do not increase to offset any such decrease in refinance mortgages. This could
adversely affect the amount of revenue we receive from our guarantee activities.
We could incur significant credit losses and credit-related expenses in the event of a major natural disaster or other
catastrophic event in geographic areas in which portions of our total mortgage portfolio and REO holdings are
concentrated.
We own or guarantee mortgage loans and own REO properties throughout the United States. The occurrence of a
major natural or environmental disaster (such as an earthquake, hurricane, tsunami, or widespread damage caused to the
environment by commercial entities), terrorist attack, pandemic, or similar catastrophic event in a regional geographic area
of the United States could negatively impact our credit losses and credit-related expenses in the affected area.
The occurrence of a catastrophic event could negatively impact a geographic area in a number of different ways,
depending on the nature of the event. A catastrophic event that either damaged or destroyed residential real estate
underlying mortgage loans we own or guarantee or negatively impacted the ability of homeowners to continue to make
principal and interest payments on mortgage loans we own or guarantee could increase our serious delinquency rates and
average loan loss severity in the affected region or regions, which could have a material adverse effect on our business,
results of operations, financial condition, liquidity and net worth. Such an event could also damage or destroy REO
properties we own. While we attempt to maintain a geographically diverse portfolio, there can be no assurance that a
catastrophic event, depending on its magnitude, scope and nature, will not generate significant credit losses and credit-
related expenses. We may not have insurance coverage for some of these catastrophic events. In some cases, we may be
prohibited by state law from requiring such insurance as a condition to our purchasing or guaranteeing loans.
We depend on our institutional counterparties to provide services that are critical to our business, and our results of
operations or financial condition may be adversely affected if one or more of our institutional counterparties do not
meet their obligations to us.
We face the risk that one or more of the institutional counterparties that has entered into a business contract or
arrangement with us may fail to meet its obligations. We face similar risks with respect to contracts or arrangements we
benefit from indirectly or that we enter into on behalf of our securitization trusts. Our primary exposures to institutional
counterparty risk are with:
• mortgage seller/servicers;
• mortgage insurers;
56 Freddie Mac