Freddie Mac 2012 Annual Report Download - page 61

•Priority of Senior Preferred Stock. The senior preferred stock ranks senior to the common stock and all other series of
preferred stock as to both dividends and distributions upon dissolution, liquidation or winding up of the company.
•Dividends have been eliminated. The Conservator has eliminated dividends on Freddie Mac common and preferred
stock (other than dividends on the senior preferred stock) during the conservatorship. In addition, under the terms of
the Purchase Agreement, dividends may not be paid to common or preferred stockholders (other than on the senior
preferred stock) without the consent of Treasury, regardless of whether or not we are in conservatorship.
•Warrant may substantially dilute investment of current stockholders. If Treasury exercises its warrant to purchase
shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully
diluted basis, the ownership interest in the company of our then existing common stockholders will be substantially
diluted. It is possible that stockholders, other than Treasury, will not own more than 20.1% of our total common stock
for the duration of our existence. Under our charter, bylaws and applicable law, 20.1% is insufficient to control the
outcome of any vote that is presented to the common stockholders. Accordingly, existing common stockholders have
no assurance that, as a group, they will be able to control the election of our directors or the outcome of any other
vote after the time, if any, that the conservatorship ends.
Competitive and Market Risks
Our investment activity is significantly limited under the Purchase Agreement and by FHFA, which will reduce our
earnings from investment activities over time and result in greater reliance on our guarantee activities to generate
revenue.
We are subject to significant limitations on our investment activity, which have and will continue to adversely affect the
earnings capacity of our mortgage-related investments portfolio. These limitations include: (a) a requirement to reduce the
size of our mortgage-related investments portfolio; and (b) significant constraints on our ability to purchase or sell mortgage
assets.
Under the terms of the Purchase Agreement and FHFA regulation, our mortgage-related investments portfolio is subject
to a cap that decreases each year until the portfolio reaches $250 billion. As a result of the August 2012 amendment to the
Purchase Agreement, the annual rate at which the mortgage-related investments portfolio limit declines increased from 10%
to 15%. As a result, the UPB of our mortgage-related investments portfolio could not exceed $650 billion as of December 31,
2012 and may not exceed $553 billion as of December 31, 2013. FHFA has indicated that such portfolio reduction targets
should be viewed as minimum reductions and has encouraged us to reduce the mortgage-related investments portfolio at a
faster rate than required, while indicating that the pace of reducing the portfolio may be moderated by conditions in the
housing and financial markets. Our mortgage-related investments portfolio has contracted considerably since we entered into
conservatorship. Our ability to take advantage of opportunities to purchase or sell mortgage assets at attractive prices has
been, and likely will continue to be, limited. In addition, we can provide no assurance that the cap on our mortgage-related
investments portfolio will not, over time, force us to sell mortgage assets at unattractive prices. For more information on the
various restrictions and limitations on our investment activity and our mortgage-related investments portfolio, see
“BUSINESS — Conservatorship and Related Matters — Limits on Investment Activity and Our Mortgage-Related
Investments Portfolio.”
These limitations will reduce the earnings capacity of our mortgage-related investments portfolio business and require
us to place greater emphasis on our guarantee activities to generate revenue. However, under conservatorship, our ability to
generate revenue through guarantee activities may be limited, as we may be required to adopt business practices that provide
support for the mortgage market in a manner that serves our public mission and other non-financial objectives, but that may
negatively impact our future financial results from guarantee activities. In addition, the overall volume of our guarantee
business will likely decline over time, as one of FHFA’s goals for conservatorship, as set forth in its strategic plan, is to
contract our presence in the mortgage market and shrink our operations. The combination of the restrictions on our business
activities under the Purchase Agreement and FHFA regulation, combined with our potential inability to generate sufficient
revenue through our guarantee activities to offset the effects of those restrictions, may have an adverse effect on our results
of operations and financial condition. There can be no assurance that current or future profitability levels on our new single-
family business would be sufficient to attract new private sector capital in the future, should the company be in a position to
seek such capital. We generally must obtain FHFA’s approval to implement across-the-board price increases in our guarantee
business, and although FHFA has recently directed us to increase our prices, there can be no assurance FHFA will approve
any such increase requests in the future. It is also possible that we could be required to increase our guarantee fees, but not
receive the benefit from such an increase. For example, effective April 1, 2012, at the direction of FHFA, we increased the
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