Freddie Mac 2012 Annual Report Download - page 68

difficult for us to sell such rights, because there may not be sufficient capacity in the market, particularly in the event of
multiple failures. This option may be difficult to accomplish with respect to our larger seller/servicers due to operational and
capacity challenges of transferring a large servicing portfolio.
Our seller/servicers also have a significant role in servicing loans in our multifamily mortgage portfolio. We are
exposed to the risk that multifamily seller/servicers could come under financial pressure, which could potentially cause
degradation in the quality of the servicing they provide us including their monitoring of each property’s financial
performance and physical condition. This could also, in certain cases, reduce the likelihood that we could recover losses
through lender repurchases, recourse agreements, or other credit enhancements, where applicable.
See “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Single-family Mortgage Seller/
Servicers” and “— Multifamily Mortgage Seller/Servicers” for additional information on our institutional credit risk related
to our mortgage seller/servicers.
Our financial condition or results of operations may be adversely affected by the financial distress of our counterparties
to derivatives, funding, and other transactions.
We use derivatives for several purposes, including to adjust or rebalance our funding mix in response to changes in the
interest-rate characteristics of our mortgage-related assets and to hedge forecasted issuances of debt. The relative
concentration of our derivative exposure among our primary derivative counterparties remains high as compared to historical
levels. This concentration increased in the last several years due to industry consolidation and the failure or downgrade of
certain counterparties, and could further increase. Five of our derivative counterparties each accounted for greater than 10%
of our net uncollateralized exposure, excluding commitments, at December 31, 2012. For a further discussion of our
exposure to derivative counterparties, see “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk —
Derivative Counterparties” and “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS.”
Some of our derivative and other capital markets counterparties have experienced various degrees of financial distress in
the past few years, including liquidity constraints, and credit downgrades. Our financial condition and results of operations
may be adversely affected by the financial distress of these derivative and other capital markets counterparties to the extent
that they fail to meet their obligations to us. For example, our OTC derivative counterparties are required to post collateral to
us in certain circumstances to cover our net exposure to them on derivative contracts. We may incur losses if the collateral
held by us cannot be liquidated at prices that are sufficient to cover the amount of such exposure. We also face the risk that,
if a counterparty becomes insolvent, we may not be able to recover any collateral we posted to the counterparty.
Our ability to engage in routine derivatives, funding, and other transactions could be adversely affected by the actions of
other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or
other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or
the financial services industry generally, could lead to market-wide disruptions in which it may be difficult for us to find
acceptable counterparties for such transactions.
We also use derivatives to synthetically create the substantive economic equivalent of various debt funding structures.
Thus, if our access to the derivative markets were disrupted, it may become more difficult or expensive to fund our business
activities and achieve the funding mix we desire, which could adversely affect our business and results of operations.
Our credit losses and other-than-temporary impairments recognized in earnings could increase if more of our mortgage
or bond insurers become insolvent or fail to perform their obligations to us.
A number of our mortgage insurers (that insure single-family mortgages we purchase or guarantee) and bond insurers
(that insure certain of the non-agency mortgage-related securities we hold) are insolvent or are not fully performing their
obligations to us. We are exposed to the risk that additional mortgage or bond insurance counterparties could become
insolvent or fail to fully perform their obligations to us. The weakened financial condition and liquidity position of many of
these counterparties increases the risk that additional entities will fail to fully reimburse us for claims under insurance
policies. This risk could increase if home prices decline in the future or if the economy worsens.
As a guarantor, we remain responsible for the payment of principal and interest if a mortgage insurer fails to meet its
obligations to reimburse us for claims. Thus, if any of our mortgage insurers that provide credit enhancement fails to fulfill
its obligation, we could experience increased credit losses. In addition, if a regulator determined that a mortgage insurer
lacked sufficient capital to pay all claims when due, the regulator could take action that might impact the timing and amount
63 Freddie Mac