Freddie Mac 2012 Annual Report Download - page 71

companies could affect competition between us and Fannie Mae. It is possible that FHFA could require us and Fannie Mae to
take a uniform approach that, because of differences in our respective businesses, could place Freddie Mac at a competitive
disadvantage to Fannie Mae. FHFA may also prevent us from taking actions that could provide us with a competitive
advantage. Efforts we may make or may be directed to make to increase the profitability of new single-family guarantee
business, such as by tightening credit standards or raising guarantee fees, could cause our market share to decrease and the
volume of our single-family guarantee business to decline. Historically, we also competed with other financial institutions
that retain or securitize mortgages, such as commercial and investment banks, dealers, thrift institutions, and insurance
companies. Many of these institutions have ceased or substantially reduced their activities in the secondary market for single-
family mortgages since 2008. However, 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, and FHFA is taking a number of actions designed to
encourage these other financial institutions to return to the mortgage market.
We could be prevented from competing efficiently and effectively by competitors who use their patent portfolios to
prevent us from using necessary business processes and products, or to require us to pay significant royalties to use those
processes and products.
Beginning in 2010, as multifamily market fundamentals were starting to improve, more market participants began to re-
enter the multifamily market, and as a result we have faced increased competition. Although we continued to be a significant
participant in the multifamily market in 2012, other participants, including life insurers, banks, and CMBS issuers, also were
active in acquiring multifamily mortgages and we expect continued competition in the multifamily market.
Our investment activities may be adversely affected by limited availability of financing and increased funding costs.
The amount, type and cost of our funding, including financing from other financial institutions and the capital markets,
directly impacts our interest expense and results of operations. A number of factors could make such financing more difficult
to obtain, more expensive or unavailable on any terms, both domestically and internationally, including:
• changes in our government support;
• reduced demand for our debt securities;
• competition for debt funding from other debt issuers; and
• downgrades in our credit ratings or the credit ratings of the U.S. government.
Our ability to obtain funding in the public debt markets or by pledging mortgage-related securities as collateral to other
financial institutions could cease or change rapidly, and the cost of available funding could increase significantly, due to
changes in market confidence and other factors. For example, in the fall of 2008, we experienced significant deterioration in
our access to the unsecured medium- and long-term debt markets, and were forced to rely on short-term debt to fund our
purchases of mortgage assets and refinance maturing debt and to rely on derivatives to synthetically create the substantive
economic equivalent of various debt funding structures.
We follow certain liquidity management practices and procedures. However, in the event we were unable to obtain
funding from the public debt markets, there can be no assurance that such practices and procedures would provide us with
sufficient liquidity to meet ongoing cash obligations for an extended period.
Since 2008, the ratings on the non-agency mortgage-related securities we hold backed by Alt-A, subprime, and option
ARM loans have decreased, limiting their availability as a significant source of liquidity for us through sales or use as
collateral in secured lending transactions.
The composition of our mortgage-related investments portfolio has changed significantly since we entered into
conservatorship, as the proportion of single-family whole loans has significantly increased and the proportion of agency
mortgage-related securities has significantly declined. This changing composition presents heightened liquidity risk, which
influences management’s decisions regarding funding and hedging.
Changes in Government Support
Changes or perceived changes in the government’s support of us could have a severe negative effect on our access to the
debt markets and our debt funding costs. Beginning January 1, 2013, the amount of available funding remaining under the
Purchase Agreement is $140.5 billion. This amount will be reduced by any future draws. The provisions of the Purchase
Agreement whereby Treasury’s funding commitment would increase as necessary to accommodate any cumulative reduction
66 Freddie Mac