Freddie Mac 2011 Annual Report Download - page 67

The mortgage credit markets continue to be impacted by a decrease in availability of corporate credit and liquidity
within the mortgage industry, causing disruptions to normal operations of major mortgage servicers and, at times,
originators, including some of our largest customers. This has also contributed to significant volatility, wide credit spreads
and a lack of price transparency, and the potential for further consolidation within the financial services industry.
Competition from banking and non-banking companies may harm our business.
Competition in the secondary mortgage market combined with a decline in the amount of residential mortgage debt
outstanding may make it more difficult for us to purchase mortgages. Furthermore, competitive pricing pressures may
make our products less attractive in the market and negatively impact our financial results. Increased competition from
Fannie Mae, Ginnie Mae, and FHA/VA may alter our product mix, lower volumes, and reduce revenues on new business.
FHFA is also Conservator of Fannie Mae, our primary competitor, and FHFA’s actions as Conservator of both companies
could affect competition between us and Fannie Mae. It is possible that FHFA could require us and Fannie Mae to take a
common approach that, because of differences in our respective businesses, could place Freddie Mac at a competitive
disadvantage to Fannie Mae. Efforts we may make or may be directed to make to increase the profitability of new single-
family guarantee business, such as by tightening credit standards or raising guarantee fees, could cause our market share
to decrease and the volume of our single-family guarantee business to decline. Historically, we also competed with other
financial institutions that retain or securitize mortgages, such as commercial and investment banks, dealers, thrift
institutions, and insurance companies. While many of these institutions have ceased or substantially reduced their
activities in the secondary market for single-family mortgages since 2008, it is possible that these institutions will reenter
the market.
Beginning in 2010, some market participants began to re-emerge in the multifamily market, and we have faced
increased competition from other institutional investors.
We could be prevented from competing efficiently and effectively by competitors who use their patent portfolios to
prevent us from using necessary business processes and products, or to require us to pay significant royalties to use those
processes and products.
Our investment activities may be adversely affected by limited availability of financing and increased funding costs.
The amount, type and cost of our funding, including financing from other financial institutions and the capital
markets, directly impacts our interest expense and results of operations. A number of factors could make such financing
more difficult to obtain, more expensive or unavailable on any terms, both domestically and internationally, including:
• termination of, or future restrictions or other adverse changes with respect to, government support programs that
may benefit us;
• reduced demand for our debt securities;
• competition for debt funding from other debt issuers; and
• downgrades in our credit ratings or the credit ratings of the U.S. government.
Our ability to obtain funding in the public debt markets or by pledging mortgage-related securities as collateral to
other financial institutions could cease or change rapidly, and the cost of available funding could increase significantly
due to changes in market confidence and other factors. For example, in the fall of 2008, we experienced significant
deterioration in our access to the unsecured medium- and long-term debt markets, and were forced to rely on short-term
debt to fund our purchases of mortgage assets and refinance maturing debt and to rely on derivatives to synthetically
create the substantive economic equivalent of various debt funding structures.
We follow certain liquidity management practices and procedures. However, in the event we were unable to obtain
funding from the public debt markets, there can be no assurance that such practices and procedures would provide us with
sufficient liquidity to meet ongoing cash obligations for an extended period.
Since 2008, the ratings on the non-agency mortgage-related securities we hold backed by Alt-A, subprime, and
option ARM loans have decreased, limiting their availability as a significant source of liquidity for us through sales or use
as collateral in secured lending transactions. In addition, adverse market conditions have negatively impacted our ability to
enter into secured lending transactions using agency securities as collateral. These trends are likely to continue in the
future.
The composition of our mortgage-related investments portfolio has changed significantly since we entered into
conservatorship, as our holdings of single-family whole loans have significantly increased and our holdings of agency
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