Freddie Mac 2015 Annual Report Download - page 192

Risk Factors Operational Risks
Freddie Mac 2015 Form 10-K 190
We face risks and uncertainties associated with the models that we use to inform business and
risk management decisions and for financial accounting and reporting purposes.
Models are inherently imperfect predictors of actual results. We use models to forecast significant factors
in our businesses including, but not limited to, interest rates, house prices, and mortgage rates. We also
use models to project borrower prepayment and default behavior over long periods of time. There is
inherent uncertainty associated with model projections of economic variables and the downstream
forecasts of prepayment and default behavior dependent on these variables.
Uncertainty and risks related to models may arise from a number of sources. First, we could fail to
implement, operate, adjust, or use our models as intended. We may fail to code a model correctly, we
could use incorrect data inputs, or model implementation software could malfunction. The complexity and
interconnectivity of our models create additional risk regarding the accuracy of model output. We may not
be able to deploy or update models in a timely manner. Second, the data we use to train or feed our
models, much of which we receive from third-party data providers, may be inaccurate. Third, when market
conditions change in unforeseen ways, our model projections may not accurately reflect these conditions.
For example, models may not fully reflect the effect of certain government policy changes. In such cases,
it is often necessary to make assumptions and judgments to accommodate the effect of scenarios that are
not sufficiently well represented in the historical data. While we may adjust our models in response to new
events, considerable residual uncertainty remains. Finally, we also use select third-party vendor models.
While the use of such models may reduce our risk where no internal model is available, it exposes us to
additional risk, as third parties typically do not provide us with proprietary information regarding their
models. We have little control over the process by which vendor models are adjusted or changed. As a
result, we may be unable to fully evaluate the risks associated with the use of such models.
We risk making poor business decisions in situations where we rely on models to provide key information.
Our use of models could affect decisions concerning the purchase, sale and securitization of loans, the
purchase and sale of securities, funding, the setting of management and guarantee fee prices, and the
management of interest-rate, market, or credit risk. Our use of models also affects our quality-control
sampling strategies for loans in our single-family credit guarantee portfolio and potential settlements with
our counterparties. See “MD&A - Critical Accounting Policies and Estimates” and “Interest-Rate Risk and
Other Market Risks” for more information on our use of models.