Freddie Mac 2012 Annual Report Download - page 64

The credit losses we experience in future periods could be larger, perhaps substantially larger in the event of another
recession or another sharp drop in home prices, than our current loan loss reserves.
Our loan loss reserves, as reflected on our consolidated balance sheets, do not reflect the total of all future credit losses
we will ultimately incur with respect to our single-family and multifamily mortgage loans, including those underlying our
financial guarantees. Rather, pursuant to GAAP, our reserves only reflect probable losses we believe we have already
incurred as of the balance sheet date. Accordingly, it is likely that the credit losses we ultimately incur on the loans we
currently own or guarantee will exceed the amounts we have already reserved for such loans. If we were to experience
another recession or another sharp drop in home prices, it is possible that the credit losses we ultimately incur related to such
an event could be larger, perhaps substantially larger, than our current loan loss reserves. Additional credit losses we incur in
future periods will adversely affect our business, results of operations, financial condition, liquidity, and net worth.
Future declines in U.S. home prices or other adverse changes in the U.S. housing market could negatively impact our
business and increase our losses.
Our financial results and business volumes can be significantly, negatively affected by declines in home prices and other
adverse changes in the housing market. Although the single-family housing market exhibited certain signs of improvement in
2012, our credit losses remained high, in part because home prices have experienced significant cumulative declines in many
geographic areas since 2006. While we expect modest home price increases in 2013, there can be no assurance that this will
occur. In addition, it is likely that we will continue to experience a high rate of serious delinquencies or defaults and an
elevated level of credit losses.
We prepare internal forecasts of future home prices, which we use for certain business activities, including: (a) hedging
prepayment risk; (b) setting fees for new guarantee business; and (c) portfolio activities. It is possible that a sustained
recovery in home prices would not begin until much later than we anticipate, or that home prices could decline in the future,
which could adversely affect our performance of these business activities. For example, this could cause the return we earn
on new single-family guarantee business to be less than expected. This could also result in higher losses due to other-than-
temporary impairments on our investments in non-agency mortgage-related securities (which would be recognized in
earnings) or fair value declines on our investments in non-agency mortgage-related securities (which would be recognized in
AOCI). Government programs designed to strengthen the U.S. housing market, such as the MHA Program, may fail to
achieve expected results, and new programs could be instituted that cause our credit losses to increase. For more information,
see “MD&A — RISK MANAGEMENT — Credit Risk.”
Our business volumes are closely tied to the rate of growth in total outstanding U.S. residential mortgage debt and the
size of the U.S. residential mortgage market. Total residential mortgage debt declined approximately 2.3% in the first nine
months of 2012 (the most recent data available) compared to a decline of approximately 2.4% in 2011. If total outstanding
U.S. residential mortgage debt were to continue to decline, there would likely be fewer mortgage loans available for us to
purchase, and we could face more competition to purchase a smaller number of loans.
While multifamily market fundamentals (i.e., vacancy rates and effective rents) improved on a national level during
2012, this trend may not continue. The multifamily market is affected by regional and local economic factors, such as
employment rates, construction cycles, and the relative affordability of single-family home prices, all of which influence
supply and demand for multifamily properties and pricing for apartment rentals. Any softening of the broader economy could
have negative impacts on multifamily markets, which could cause delinquencies and credit losses relating to our multifamily
activities to increase beyond our current expectations.
Our refinance volumes could decline if interest rates rise, which could cause our overall new mortgage-related security
issuance volumes to decline.
We continued to experience a high percentage of refinance mortgages in our purchase volume during 2012 due to
continued low interest rates and the impact of our relief refinance initiatives. However, originations of refinance mortgages
will likely decline if HARP expires as currently scheduled in December 2013. Interest rates have been at historically low
levels for an extended period of time. In addition, many eligible borrowers have already refinanced at least once during this
period of low interest rates, and therefore may be unlikely to do so again in the near future. Overall originations of refinance
mortgages, and our purchases of them, will likely decrease if interest rates rise. It is possible that our overall mortgage-
related security issuance volumes could decline if our volumes of purchase money mortgages do not increase to offset any
such decrease in refinance mortgages. This could adversely affect the amount of revenue we receive from our guarantee
activities.
59 Freddie Mac