Freddie Mac 2011 Annual Report Download - page 64

sufficient price for such rights or that we may be unable to find buyers who: (a) have sufficient capacity to service the
affected mortgages in compliance with our servicing standards; (b) are willing to assume the representations and
warranties of the former servicer regarding the affected mortgages (which we typically require); and (c) have sufficient
capacity to service all of the affected mortgages. Increased industry consolidation, bankruptcies of mortgage bankers or
bank failures may also make it more difficult for us to sell such rights, because there may not be sufficient capacity in the
market, particularly in the event of multiple failures. This option may be difficult to accomplish with respect to our larger
seller/servicers due to operational and capacity challenges of transferring a large servicing portfolio. The financial stress
on servicers and increased costs of servicing may lead to strategic defaults (i.e., defaults done deliberately as a financial
strategy, and not involuntarily) by servicers, which would also require us to seek a successor servicer.
Our seller/servicers also have a significant role in servicing loans in our multifamily mortgage portfolio. We are
exposed to the risk that multifamily seller/servicers could come under financial pressure, which could potentially cause
degradation in the quality of the servicing they provide us including their monitoring of each property’s financial
performance and physical condition. This could also, in certain cases, reduce the likelihood that we could recover losses
through lender repurchases, recourse agreements, or other credit enhancements, where applicable.
See “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Single-family Mortgage Seller/
Servicers” and “— Multifamily Mortgage Seller/Servicers” for additional information on our institutional credit risk
related to our mortgage seller/servicers.
Our financial condition or results of operations may be adversely affected by the financial distress of our
counterparties to derivatives, funding, and other transactions.
We use derivatives for several purposes, including to regularly adjust or rebalance our funding mix in response to
changes in the interest-rate characteristics of our mortgage-related assets and to hedge forecasted issuances of debt. The
relative concentration of our derivative exposure among our primary derivative counterparties remains high. This
concentration increased in the last several years due to industry consolidation and the failure of certain counterparties, and
could further increase. Three of our derivative counterparties each accounted for greater than 10% of our net
uncollateralized exposure, excluding commitments, at December 31, 2011. For a further discussion of our exposure to
derivative counterparties, see “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Derivative
Counterparties” and “NOTE 16: CONCENTRATION OF CREDIT AND OTHER RISKS.”
Some of our derivative and other capital markets counterparties have experienced various degrees of financial distress
in the past few years, including liquidity constraints, credit downgrades, and bankruptcy. Our financial condition and
results of operations may be adversely affected by the financial distress of these derivative and other capital markets
counterparties to the extent that they fail to meet their obligations to us. For example, our OTC derivative counterparties
are required to post collateral in certain circumstances to cover our net exposure to them on derivative contracts. We may
incur losses if the collateral held by us cannot be liquidated at prices that are sufficient to cover the amount of such
exposure.
Our ability to engage in routine derivatives, funding, and other transactions could be adversely affected by the actions
of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty,
or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services
institutions, or the financial services industry generally, could lead to market-wide disruptions in which it may be difficult
for us to find acceptable counterparties for such transactions.
We also use derivatives to synthetically create the substantive economic equivalent of various debt funding structures.
Thus, if our access to the derivative markets were disrupted, it may become more difficult or expensive to fund our
business activities and achieve the funding mix we desire, which could adversely affect our business and results of
operations.
Our credit losses and other-than-temporary impairments recognized in earnings could increase if our mortgage or bond
insurers become insolvent or fail to perform their obligations to us.
We are exposed to risk relating to the potential insolvency of or non-performance by mortgage insurers that insure
single-family mortgages we purchase or guarantee and bond insurers that insure certain of the non-agency mortgage-
related securities we hold. The weakened financial condition and liquidity position of these counterparties increases the
risk that these entities will fail to fully reimburse us for claims under insurance policies. This risk could increase if home
prices deteriorate further or if the economy worsens.
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