Freddie Mac 2012 Annual Report Download - page 74

In certain circumstances, we compensate customers for the difference in price between our PCs and comparable Fannie
Mae securities, and this could adversely affect the volume and/or profitability of our new single-family guarantee business.
We also incur costs in connection with our efforts to support the liquidity and price performance of our PCs, including
engaging in transactions that yield less than our target rate of return. For more information, see “BUSINESS — Our Business
Segments — Single-Family Guarantee Segment — Securitization Activities” and “— Investments Segment — PC Support
Activities.”
Mortgage fraud could result in significant financial losses and harm to our reputation.
We rely on representations and warranties by seller/servicers about the characteristics of the single-family mortgage
loans we purchase and securitize, and we do not independently verify most of the information that is provided to us before
we purchase the loan. This exposes us to the risk that one or more of the parties involved in a transaction (such as the
borrower, seller, broker, appraiser, title agent, loan officer, lender or servicer) will engage in fraud by misrepresenting facts
about the property underlying the real estate transaction, borrower, or mortgage loan. While we subsequently review a
sample of these loans to determine if such loans are in compliance with our contractual standards, there can be no assurance
that this would detect or deter mortgage fraud, or otherwise reduce our exposure to the risk of fraud. We are also exposed to
fraud by third parties in the mortgage servicing function, particularly with respect to sales of REO properties, single-family
short sales, and other dispositions of non-performing assets. We may experience significant financial losses and reputational
damage as a result of such fraud.
The value of mortgage-related securities guaranteed by us and held as investments may decline if we are unable to
perform under our guarantee or if investor confidence in our ability to perform under our guarantee diminishes.
A portion of our investments in mortgage-related securities are securities guaranteed by us. Our valuation of these
securities is consistent with GAAP and the legal structure of the guarantee transaction. These securities are collateralized by
Freddie Mac assets transferred to the securitization trusts and include: (a) REMICs and Other Structured Securities;
(b) certain Other Guarantee Transactions; and (c) multifamily PCs. The valuation of our guaranteed mortgage-related
securities reflects investor confidence in our ability to perform under our guarantee and the liquidity that our guarantee
provides. If we were unable to perform under our guarantee or if investor confidence in our ability to perform under our
guarantee were to diminish, the value of our guaranteed securities may decline, thereby reducing the value of the securities
reported on our consolidated balance sheets, which could have an adverse effect on our financial condition and results of
operations. This could also adversely affect our ability to sell or otherwise use these securities for liquidity purposes.
Changes in interest rates could negatively impact our results of operations, net worth, and fair value of net assets.
Our investment activities and credit guarantee activities expose us to interest rate and other market risks. Changes in
interest rates, up or down, could adversely affect our net interest yield. Although the yield we earn on our assets and our
funding costs tend to move in the same direction in response to changes in interest rates, either can rise or fall faster than the
other, causing our net interest yield to expand or compress. For example, due to the timing of maturities or rate reset dates on
variable-rate instruments, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets. This
rate change could cause our net interest yield to compress until the effect of the increase is fully reflected in asset yields.
Changes in the slope of the yield curve could also reduce our net interest yield.
Our GAAP results can be significantly affected by changes in interest rates, and adverse changes in interest rates could
adversely affect our net income or net worth. For example, changes in interest rates affect the fair value of our derivative
portfolio. Since we generally record changes in fair values of our derivatives in current income, such changes could
significantly impact our GAAP results. While derivatives are an important aspect of our management of interest-rate risk,
they generally increase the volatility of reported net income (loss), because, while fair value changes in derivatives affect net
income, fair value changes in several of the types of assets and liabilities being hedged do not affect net income. We could
record substantial gains or losses from derivatives in any period, which could significantly contribute to our overall results
for the period and affect our net worth as of the end of such period. It is difficult for us to predict the amount or direction of
derivative results. Additionally, increases in interest rates could increase other-than-temporary impairments on our
investments in non-agency mortgage-related securities. Higher interest rates can result in a reduction in the benefit from
expected structural credit enhancements on these securities.
Changes in interest rates may also affect prepayment assumptions, thus potentially impacting the fair value of our
assets, including our investments in mortgage-related assets. When interest rates fall, borrowers are more likely to prepay
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