Freddie Mac Is Safe and Sound

While no financial institution can perform its task without undertaking some amount of risk, Freddie Mac's strong asset base, our expertise in managing the risks associated with purchasing and investing in mortgages and stringent minimum and risk-based capital requirements ensure that we can continue to fulfill our mission in a safe and responsible manner.

By law, Freddie Mac is limited to purchasing, investing in, and securitizing residential mortgages. Other than government-guaranteed bonds, home mortgages are among the safest assets in which to invest. Borrower default rates on home mortgages are a small fraction of default rates on credit cards, consumer loans, and commercial loans. And Freddie Mac carefully manages the credit risks of our business. Through the use of mortgage insurance and other credit enhancements, Freddie Mac helps reduce the risk from loss in the event of default. Our lender customers also work with borrowers in financial difficulty to help them resolve their problems rather than simply allow them to lose their homes to foreclosure.

Another risk of mortgage investing is posed by shifts in interest rates. Freddie Mac manages these risks by dispersing them into the capital markets by issuing callable and bullet debt and using highly liquid hedging instruments. Freddie Mac keeps its interest rate risk exposure low and discloses its level of exposure to the financial markets on a monthly basis.

Freddie Mac is also required by law to hold sufficient capital to survive extremely adverse credit and interest-rate risk shocks. Our regulatory capital requirements include a ratio-based minimum capital requirement and a risk-based capital requirement designed to ensure we maintain sufficient capital to survive a sustained severe downturn in the economic environment. Our safety and soundness regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), determines the level of risk-based capital we must hold based on a financial stress test that is published quarterly. These capital requirements are the most stringent in the financial services industry. We are also subject to a minimum capital threshold, which currently requires us to hold substantially more capital than our risk-based capital requirement.