Freddie Mac 2011 Annual Report Download - page 75

legislative action related to MERS, could delay or disrupt foreclosure of mortgages that are registered on the MERS
System. Publicity concerning regulatory or judicial decisions, even if such decisions were not adverse, or MERS-related
concerns about the integrity of the assignment process, could adversely affect the mortgage industry and negatively impact
public confidence in the foreclosure process, which could lead to legislative or regulatory action. Because MERS often
executes legal documents in connection with foreclosure proceedings, it is possible that investigations by governmental
authorities and others into deficiencies in foreclosure practices may negatively impact MERS and the MERS System.
Federal or state legislation or regulatory action could prevent us from using the MERS System for mortgages that we
currently own, guarantee, and securitize and for mortgages acquired in the future, or could create additional requirements
for the transfer of mortgages that could affect the process for and costs of acquiring, transferring, servicing, and
foreclosing mortgages. Such legislation or regulatory action could increase our costs or otherwise adversely affect our
business. For example, we could be required to transfer mortgages out of the MERS System. There is also uncertainty
regarding the extent to which seller/servicers will choose to use the MERS System in the future.
Failures by MERS to apply prudent and effective process controls and to comply with legal and other requirements
in the foreclosure process could pose legal and operational risks for us. We may also face significant reputational risk due
to our ties to MERS, as we are a shareholder of MERSCORP, Inc., and a Freddie Mac officer serves on the board of
directors of both entities.
We cannot predict the impact that such events or actions may have on our business. On April 13, 2011, the Office of
the Comptroller of the Currency, the Federal Reserve, the FDIC, the Office of Thrift Supervision, and FHFA entered into
a consent order with MERS and MERSCORP, Inc., which stated that such federal regulators had identified certain
deficiencies and unsafe or unsound practices by MERS and MERSCORP, Inc. that present financial, operational,
compliance, legal, and reputational risks to MERSCORP, Inc. and MERS, and to its participating members, including
Freddie Mac. The consent order requires MERS and MERSCORP, Inc. to, among other things, create and submit plans to
ensure that MERS and MERSCORP, Inc. (a): are operated in a safe and sound manner and have adequate financial
strength and staff; (b) improve communications with MERSCORP, Inc. shareholders and members; (c) intensify the
monitoring of and response to litigation; and (d) establish processes to ensure data quality and strengthen certain aspects
of corporate governance. The federal banking regulators have also indicated that MERSCORP, Inc. should take action to
simplify its governance structure, which could involve us giving up certain governance rights. It is unclear what changes
will ultimately be made and whether there will be any consequent impact on Freddie Mac’s relationship with and rights
with respect to the two entities.
Weaknesses in internal control over financial reporting and in disclosure controls could result in errors and inadequate
disclosures, affect operating results, and cause investors to lose confidence in our reported results.
We face continuing challenges because of deficiencies in our controls. Control deficiencies could result in errors, and
lead to inadequate or untimely disclosures, and affect operating results. Control deficiencies could also cause investors to
lose confidence in our reported financial results, which may have an adverse effect on the trading price of our securities.
For information about our ineffective disclosure controls and two material weaknesses in internal control over financial
reporting, see “CONTROLS AND PROCEDURES.”
There are a number of factors that may impede our efforts to establish and maintain effective disclosure controls and
internal control over financial reporting, including: (a) the nature of the conservatorship and our relationship with FHFA;
(b) the complexity of, and significant changes in, our business activities and related GAAP requirements; (c) significant
employee and management turnover; (d) internal reorganizations; (e) uncertainty regarding the sustainability of newly
established controls; (f) data quality or servicing-related issues; and (g) the uncertain impacts of the ongoing housing and
economic downturn on the results of our models, which are used for financial accounting and reporting purposes.
Disruptive levels of employee turnover could negatively impact our internal control environment, including internal
control over financial reporting, and ability to issue timely financial statements. During 2011, we experienced significant
changes to our internal control environment as a result of resignations, terminations, or changes in responsibility. We
cannot be certain that our efforts to improve and maintain our internal control over financial reporting will ultimately be
successful.
Effectively designed and operated internal control over financial reporting provides only reasonable assurance that
material errors in our financial statements will be prevented or detected on a timely basis. A failure to maintain effective
internal control over financial reporting increases the risk of a material error in our reported financial results and delay in
our financial reporting timeline. Depending on the nature of a control failure and any required remediation, ineffective
controls could have a material adverse effect on our business.
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