Freddie Mac 2012 Annual Report Download - page 79

could increase our costs or otherwise adversely affect our business. For example, we could be required to transfer mortgages
out of the MERS System. There is also uncertainty regarding the extent to which seller/servicers will choose to use the
MERS System in the future.
Failures by MERS to apply prudent and effective process controls and to comply with legal and other requirements in
the foreclosure process could pose legal and operational risks for us. We may also face significant reputational risk due to our
ties to MERS, as we are a shareholder of MERSCORP and a Freddie Mac officer serves on MERSCORP’s board of
directors. In April 2011, federal banking regulators and FHFA entered into a consent order with MERSCORP and MERS,
which stated that such regulators had identified a number of deficiencies and unsafe or unsound practices by both entities that
present financial, operational, compliance, legal and reputational risk to both entities and to participating members, including
Freddie Mac. The regulators required MERSCORP and MERS to take certain corrective actions, including simplifying
MERSCORP’s governance structures. Such changes have resulted in our giving up certain governance rights. For example,
while Freddie Mac had the right to appoint a Freddie Mac officer to serve on MERS’ board of directors in the past, it is not
certain if this will continue. It is unclear what the consequent impact of these changes will be on Freddie Mac’s relationship
with and rights with respect to the two entities.
Weaknesses in internal control over financial reporting and in disclosure controls could result in errors and inadequate
disclosures, affect operating results, and cause investors to lose confidence in our reported results.
We face continuing challenges because of deficiencies in our controls. Control deficiencies could result in errors, and
lead to inadequate or untimely disclosures, and affect operating results. Control deficiencies could also cause investors to
lose confidence in our reported financial results, which may have an adverse effect on the trading price of our securities. For
information about our ineffective disclosure controls and one material weakness in internal control over financial reporting,
see “CONTROLS AND PROCEDURES.”
There are a number of factors that may impede our efforts to establish and maintain effective disclosure controls and
internal control over financial reporting, including: (a) the nature of the conservatorship and our relationship with FHFA;
(b) the complexity of, and significant changes in, our business activities and related GAAP requirements; (c) employee and
management turnover; (d) internal reorganizations; (e) uncertainty regarding the sustainability of newly established controls;
(f) data quality or servicing-related issues; and (g) the uncertain long-term impacts of the recent housing and economic
downturn on the results of our models, which are used for financial accounting and reporting purposes. Disruptive levels of
employee turnover could negatively impact our internal control environment, including internal control over financial
reporting, and ability to issue timely financial statements. We cannot be certain that our efforts to improve and maintain our
internal control over financial reporting will ultimately be successful.
Effectively designed and operated internal control over financial reporting provides only reasonable assurance that
material errors in our financial statements will be prevented or detected on a timely basis. A failure to maintain effective
internal control over financial reporting increases the risk of a material error in our reported financial results and delay in our
financial reporting timeline. Depending on the nature of a control failure and any required remediation, ineffective controls
could have a material adverse effect on our business.
We face risks and uncertainties associated with the models that we use for financial accounting and reporting purposes,
to make business decisions, and to manage risks. Market conditions have raised these risks and uncertainties.
We make significant use of business and financial models for financial accounting and reporting purposes and to
manage risk. We face risk associated with our use of models. First, there is inherent uncertainty associated with model
results. Second, we could fail to properly implement, operate, or use our models. Either of these situations could adversely
affect our financial statements and our ability to manage risks.
We use market-based information as inputs to our models. However, it can take time for data providers to prepare
information, and thus the most recent information may not be available for the preparation of our financial statements. When
market conditions change quickly and in unforeseen ways, there is an increased risk that the inputs reflected in our models
are not representative of current market conditions.
The severe deterioration of the housing and credit markets beginning in 2008 and, more recently, the extended period of
economic weakness and uncertainty have increased the risks associated with our use of models. For example, certain
economic events or the implementation of government policies could create increased model uncertainty as models may not
fully capture these events, which makes it more difficult to assess model performance and requires a higher degree of
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