Freddie Mac 2012 Annual Report Download - page 73

at “AAA” and revised the outlook to negative from stable. This action followed Fitch’s affirmation of the U.S. government’s
“AAA” IDR and revision of its long-term rating to negative from stable. S&P, Moody’s, and Fitch have indicated that
additional actions on the U.S. government’s ratings could occur if steps toward a credible deficit reduction plan are not taken
or if the U.S. experiences a weaker than expected economic recovery.
In addition to a downgrade in the credit ratings of or outlook on the U.S. government, a number of other events could
adversely affect our debt credit ratings, including actions by governmental entities or others, changes in government support
for us, future GAAP losses, and additional draws under the Purchase Agreement. Any such downgrades could lead to major
disruptions in the mortgage market and to our business due to lower liquidity, higher borrowing costs, lower asset values, and
higher credit losses, and could cause us to experience net losses and net worth deficits. The full range and extent of the
adverse effects to our business that would result from any such ratings downgrades and market disruptions cannot be
predicted with certainty. However, we expect that they could: (a) adversely affect our liquidity and cause us to limit or
suspend new business activities that entail outlays of cash; (b) make new issuances of debt significantly more costly, or
potentially prohibitively expensive, and adversely affect the supply of debt financing available to us; (c) reduce the value of
our guarantee to investors and adversely affect our ability to issue our guaranteed mortgage-related securities; (d) reduce the
value of Treasury and agency mortgage securities we hold; (e) increase the cost of mortgage financing for borrowers, thereby
reducing the supply of mortgages available to us to purchase; (f) adversely affect home prices, reducing the value of our REO
and likely leading to additional borrower defaults on mortgage loans we guarantee; and (g) trigger additional collateral
requirements under our derivatives contracts.
A significant decline in the price performance of or demand for our PCs could have an adverse effect on the volume
and/or profitability of our new single-family guarantee business.
Security performance is one of Freddie Mac’s more significant risks and competitive issues, with both short- and long-
term implications. Our PCs are an integral part of our mortgage purchase program. Our competitiveness in purchasing single-
family mortgages from our seller/servicers, and thus the volume and/or profitability of our new single-family guarantee
business, can be directly affected by the relative price performance of our PCs and comparable Fannie Mae securities.
The profitability of our securitization financing and our ability to compete for mortgage purchases are affected by the
price differential between PCs and comparable Fannie Mae securities. Freddie Mac fixed-rate PCs provide for faster
remittance of mortgage principal and interest payments to investors than Fannie Mae fixed-rate securities. However, our PCs
have typically traded at prices below the level that we believe reflects the full value of their faster remittance cycle, resulting
in a pricing discount relative to comparable Fannie Mae securities. This difference in relative pricing creates an economic
incentive for customers to conduct a disproportionate share of their single-family business with Fannie Mae and negatively
affects the financial performance of our business.
Recent deterioration in the pricing of our PCs relative to comparable Fannie Mae securities has adversely affected our
competitiveness. Our 2012 mortgage purchase market share was volatile and at times significantly below its average levels
during 2010 and 2011. We believe the primary factor adversely affecting our security performance was the substantially
lower liquidity of our PCs versus comparable Fannie Mae securities. If this trend continues, the volume and/or profitability
of our new single-family guarantee business could be adversely affected. Market conditions can also affect the price
performance of our PCs.
We may be unable to maintain a liquid market for our PCs, which could adversely affect the price performance of PCs
and our single-family market share. A significant reduction in our market share, and thus in the volume of mortgage loans
that we securitize, could further reduce the liquidity of our PCs. While we may employ a variety of strategies in an effort to
support the liquidity and price performance of our PCs and may consider additional strategies, any such strategies may fail or
adversely affect our business or we may cease such activities if deemed appropriate. In addition, we believe the liquidity-
related price differences between our PCs and comparable Fannie Mae securities are, in part, the result of factors that are
largely outside of our control. Thus, while we may employ strategies in an effort to support the liquidity-related price
differences, we do not believe the strategies currently available to us can fully eliminate these price differences over the long-
term. A curtailment of such mortgage-related investments portfolio purchase and retention activities that are undertaken
primarily in an effort to support the price performance of our PCs may result in a decline in the volume and/or profitability of
our new single-family guarantee business, lower comprehensive income, and an accelerated decline in the size of our total
mortgage portfolio.
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