Freddie Mac 2011 Annual Report Download - page 66

to us for review, we attempt to determine whether the insurers’ plans make available sufficient resources to meet their
obligations to policyholders of the insurance entities involved in the restructuring. However, there can be no assurance that
any such restructuring will enable payment in full of all claims in the future. See “NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES — Allowance for Loan Losses and Reserve for Guarantee Losses — Single-
Family Loans” for more information.
We could incur increased credit losses if our seller/servicers enter into arrangements with mortgage insurers for
settlement of future rescission activity and such agreements could potentially reduce the ability of mortgage insurers to
pay claims to us.
Under our contracts with our seller/servicers, the rescission or denial of mortgage insurance on a loan is grounds for
us to make a repurchase request to the seller/servicer. At least one of our largest servicers has entered into arrangements
with two of our mortgage insurance counterparties under which the servicer pays and/or indemnifies the insurer in
exchange for the mortgage insurer agreeing not to issue mortgage insurance rescissions or denials of coverage on Freddie
Mac mortgages. When such an agreement is in place, we are unable to make repurchase requests based solely on a
rescission of insurance or denial of coverage. Thus, there is a risk that we will experience higher credit losses if we do not
independently identify other areas of noncompliance with our contractual requirements and require lenders to repurchase
the loans we own. Additionally, there could be a negative financial impact on our mortgage insurers’ ability to pay their
other obligations to us if the payments they receive from the seller/servicers are insufficient to compensate them for the
insurance claims paid that would have otherwise been denied. As guarantor of the insured loans, we remain responsible
for the payment of principal and interest if a mortgage insurer fails to meet its obligation to reimburse us for claims, and
this could increase our credit losses. In April 2011, we issued an industry letter to our servicers reminding them that they
may not enter into these types of agreements without our consent. Several of our servicers have asked us to consent to
these types of agreements. We are evaluating these requests on a case by case basis.
The loss of business volume from key lenders could result in a decline in our market share and revenues.
Our business depends on our ability to acquire a steady flow of mortgage loans. We purchase a significant percentage
of our single-family mortgages from several large mortgage originators. During 2011 and 2010, approximately 82% and
78%, respectively, of our single-family mortgage purchase volume was associated with our ten largest customers. During
2011, two mortgage lenders (Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A.) each accounted for more than
10% of our single-family mortgage purchase volume and collectively accounted for approximately 40% of our single-
family mortgage purchase volume. Similarly, we acquire a significant portion of our multifamily mortgage loans from
several large lenders.
We enter into mortgage purchase volume commitments with many of our single-family customers that provide for the
customers to deliver to us a certain volume of mortgages during a specified period of time. Some commitments may also
provide for the lender to deliver to us a minimum percentage of their total sales of conforming loans. There is a risk that
we will not be able to enter into new commitments with our key single-family customers that will maintain mortgage
purchase volume following the expiration of our existing commitments with them. Since 2007, the mortgage industry has
consolidated significantly and a smaller number of large lenders originate most single-family mortgages. The loss of
business from any one of our major lenders could adversely affect our market share and our revenues. Many of our seller/
servicers also have tightened their lending criteria in recent years, which has reduced their loan volume, thus reducing the
volume of loans available for us to purchase.
Ongoing weak business and economic conditions in the U.S. and abroad may adversely affect our business and results
of operations.
Our business and results of operations are significantly affected by general business and economic conditions,
including conditions in the international markets for our investments or our mortgage-related and debt securities. These
conditions include employment rates, fluctuations in both debt and equity capital markets, the value of the U.S. dollar as
compared to foreign currencies, the strength of the U.S. financial markets and national economy and the local economies
in which we conduct business, and the economies of other countries that purchase our mortgage-related and debt
securities. Concerns about fiscal challenges in several Eurozone economies intensified during 2011, creating significant
uncertainty in the financial markets and potential increased risk exposure for our counterparties and for us. There is also
significant uncertainty regarding the strength of the U.S. economic recovery. If the U.S. economy remains weak, we could
experience continued high serious delinquencies and credit losses, which will adversely affect our results of operations
and financial condition.
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