Freddie Mac 2012 Annual Report Download - page 170

under significant financial stress. In addition, our exposure to derivatives counterparties remains highly concentrated as
compared to historical levels.
We continue to face challenges in reducing our risk concentrations with counterparties. Efforts we make to reduce
exposure to financially weakened counterparties could further increase our exposure to other individual counterparties or
increase concentration risk overall. The failure of any of our significant counterparties to meet their obligations to us could
have a material adverse effect on our results of operations, financial condition, and our ability to conduct future business. For
more information, see “RISK FACTORS — Competitive and Market Risks — 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.”
Non-Agency Mortgage-Related Security Issuers
Our investments in securities expose us to institutional credit risk to the extent that servicers, issuers, guarantors, or
third parties providing credit enhancements become insolvent or do not perform their obligations. Our investments in non-
Freddie Mac mortgage-related securities include both agency and non-agency securities. Agency securities have historically
presented minimal institutional credit risk due to the guarantee provided by those institutions, and the U.S. government’s
support of those institutions. However, we recognized impairment charges in 2012 and 2011 related to certain of our
investments in non-agency mortgage-related securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS —
Investments in Securities” for further information, including a discussion of the higher-risk components of these investments.
At the direction of our Conservator, we are working to enforce our rights as an investor with respect to the non-agency
mortgage-related securities we hold, and are engaged in efforts to mitigate losses on our investments in these securities, in
some cases in conjunction with other investors. The effectiveness of our efforts is highly uncertain and any potential
recoveries may take significant time to realize. For more information, see “RISK FACTORS — Competitive and Market
Risks — Certain strategies to mitigate our losses as an investor in non-agency mortgage-related securities may adversely
affect our relationships with some of our largest seller/servicers and counterparties” and “NOTE 15: CONCENTRATION
OF CREDIT AND OTHER RISKS — Non-Agency Mortgage-Related Security Issuers.”
For information about institutional credit risk associated with our investments in non-mortgage-related securities, see
“NOTE 7: INVESTMENTS IN SECURITIES — Table 7.9 — Trading Securities” as well as “Cash and Other Investments
Counterparties” below.
Single-family Mortgage Seller/Servicers
We acquire a significant portion of our single-family mortgage purchase volume from several large lenders, or seller/
servicers. Our top 10 single-family seller/servicers provided approximately 73% of our single-family purchase volume
during 2012. Wells Fargo Bank, N.A., U.S. Bank, N.A., and JPMorgan Chase Bank, N.A. accounted for 27%, 12%, and 10%,
respectively, of our single-family mortgage purchase volume and were the only single-family seller/servicers that comprised
10% or more of our purchase volume during 2012.
We are exposed to institutional credit risk arising from the potential insolvency of or non-performance by our mortgage
seller/servicers, including non-performance of their repurchase obligations arising from breaches of the representations and
warranties made to us for loans they underwrote and sold to us or failure to honor their recourse and indemnification
obligations to us. We have contractual arrangements with our seller/servicers under which they agree to sell us mortgage
loans, and represent and warrant that those loans have been originated under specified underwriting standards. In addition,
our servicers represent and warrant to us that those loans will be serviced in accordance with our servicing contract. If we
subsequently discover that the representations and warranties were breached (i.e., that contractual standards were not
followed), we can exercise certain contractual remedies to mitigate our actual or potential credit losses. These contractual
remedies include the ability to require the seller/servicer to repurchase the loan at its current UPB and/or make us whole for
losses realized with respect to the loan after consideration of other recoveries, if any. For loans that have proceeded through
foreclosure and REO sale or other workouts (e.g. short sales) and that we have determined were ineligible to be delivered to
us, we will accept reimbursement for realized credit losses in lieu of repurchase. For all other loans that we determine were
ineligible to be delivered to us, we issue a repurchase request for the loan’s UPB, plus interest and fees. In limited
circumstances, we may choose to accept alternative remedies to those stated above, such as allowing a seller/servicer to
indemnify us against losses realized on such mortgages or otherwise compensate us for the risk of continuing to hold the
mortgages. Our decision on whether to accept an alternative remedy is based on a number of factors, including: (a) the
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