Freddie Mac 2012 Annual Report Download - page 65

We could incur significant credit losses and credit-related expenses in the event of a major natural disaster or other
catastrophic event in geographic areas in which portions of our total mortgage portfolio and REO holdings are
concentrated.
We own or guarantee mortgage loans and own REO properties throughout the United States. The occurrence of a major
natural or environmental disaster (such as an earthquake, hurricane, tsunami, flood, or widespread damage caused to the
environment by commercial entities), terrorist attack, pandemic, or similar catastrophic event in a regional geographic area of
the United States could negatively impact our credit losses and credit-related expenses in the affected area.
The occurrence of a catastrophic event could negatively impact a geographic area in a number of different ways,
depending on the nature of the event. A catastrophic event that either damaged or destroyed residential real estate underlying
mortgage loans we own or guarantee or negatively impacted the ability of homeowners to continue to make principal and
interest payments on mortgage loans we own or guarantee could increase our serious delinquency rates and average loan loss
severity in the affected region or regions, which could have a material adverse effect on our business, results of operations,
financial condition, liquidity and net worth. Such an event could also damage or destroy REO properties we own. While we
attempt to maintain a geographically diverse portfolio, there can be no assurance that a catastrophic event, depending on its
magnitude, scope and nature, will not generate significant credit losses and credit-related expenses. We may not have
insurance coverage for some of these catastrophic events. In some cases, we may be prohibited by state law from requiring
such insurance as a condition to our purchasing or guaranteeing loans. In addition, any efforts we make to assist borrowers in
affected areas could increase our expenses.
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.
We face the risk that one or more of the institutional counterparties that has entered into a business contract or
arrangement with us may fail to meet its obligations to us. We face similar risks with respect to contracts or arrangements we
benefit from indirectly or that we enter into on behalf of our securitization trusts. Our primary exposures to institutional
counterparty risk are with:
• mortgage seller/servicers;
• mortgage insurers;
• issuers, guarantors or third-party providers of other credit enhancements (including bond insurers);
• counterparties to short-term lending and other investment-related agreements and cash equivalent transactions,
including such agreements and transactions we manage for our PC trusts;
• derivative counterparties;
• hazard and title insurers;
• mortgage investors; and
• document custodians and funds custodians.
Many of our counterparties provide several types of services to us. In some cases, our business with institutional
counterparties is concentrated. The concentration of our exposure to our counterparties has increased in recent years due to
industry consolidation and counterparty failures or downgrades, and we continue to face challenges in reducing our risk
concentrations with counterparties. Efforts we take to reduce exposure to financially weakened counterparties could further
increase our exposure to other individual counterparties. A significant failure by a major institutional counterparty could
harm our business and financial results in a variety of ways, including by adversely affecting our ability to conduct
operations efficiently and at cost-effective rates, and have a material adverse effect on our investments in mortgage loans,
investments in securities, our derivative portfolio or our credit guarantee activities.
Some of our counterparties may become subject to serious liquidity problems affecting their businesses, either
temporarily or permanently, which may adversely affect their ability to meet their obligations to us. In recent years,
challenging market conditions have, at times, adversely affected the liquidity and financial condition of our counterparties.
These trends may continue. In particular, we believe all of our derivative portfolio and cash and other investments portfolio
counterparties are exposed to fiscally troubled European countries. It is possible that continued adverse developments in the
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