Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from                                        to
Commission File Number: 001-34139
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Freddie Mac
 
Federally chartered 
corporation
 
8200 Jones Branch Drive
McLean, Virginia 
22102-3110
 
52-0904874
 
(703) 903-2000
(State or other jurisdiction of incorporation or organization)
 
(Address of principal executive offices, including zip code)
 
(I.R.S. Employer Identification No.)
 
(Registrant’s telephone 
number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    ý Yes    ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý Yes    ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  ý
 
 
 
Accelerated filer  ¨
 
Non-accelerated filer (Do not check if a smaller reporting company)  ¨
 
Smaller reporting company  ¨
 
Emerging growth company  ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of July 18, 2017, there were 650,054,731 shares of the registrant’s common stock outstanding.



Table of Contents
 
 

TABLE OF CONTENTS
 
Page
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
KEY ECONOMIC INDICATORS
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED BALANCE SHEETS ANALYSIS
OUR BUSINESS SEGMENTS
RISK MANAGEMENT
LIQUIDITY AND CAPITAL RESOURCES
CONSERVATORSHIP AND RELATED MATTERS
REGULATION AND SUPERVISION
OFF-BALANCE SHEET ARRANGEMENTS
FORWARD-LOOKING STATEMENTS
FINANCIAL STATEMENTS
OTHER INFORMATION
CONTROLS AND PROCEDURES
SIGNATURES
GLOSSARY
FORM 10-Q INDEX
EXHIBIT INDEX

Freddie Mac Form 10-Q
 
i


Management's Discussion and Analysis
 
Introduction

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in the “Forward-Looking Statements” sections of this Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2016, or 2016 Annual Report, and our Quarterly Report on Form 10-Q for the first quarter of 2017, and the “Business” and “Risk Factors” sections of our 2016 Annual Report.
Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the “Glossary” sections of this Form 10-Q and our 2016 Annual Report.
You should read the following MD&A in conjunction with our 2016 Annual Report and our condensed consolidated financial statements and accompanying notes for the three and six months ended June 30, 2017 included in “Financial Statements.” Throughout this Form 10-Q, we refer to the three months ended June 30, 2017, the three months ended March 31, 2017, the three months ended December 31, 2016, the three months ended June 30, 2016, and the three months ended December 31, 2015 as “2Q 2017,” “1Q 2017,” “4Q 2016,” “2Q 2016,” and “4Q 2015,” respectively. We refer to the six months ended June 30, 2017 and the six months ended June 30, 2016 as “YTD 2017” and “YTD 2016,” respectively.
INTRODUCTION
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability, and affordability to the U.S. housing market. We do this primarily by purchasing residential mortgage loans originated by lenders. In most instances, we package these loans into mortgage-related securities, which are guaranteed by us and sold in the global capital markets. We also invest in mortgage loans and mortgage-related securities. We do not originate loans or lend money directly to mortgage borrowers.
We support the U.S. housing market and the overall economy by enabling America’s families to access mortgage loan funding with better terms and by providing consistent liquidity to the multifamily mortgage market. We have helped many distressed borrowers keep their homes or avoid foreclosure. We are working with FHFA, our customers and the industry to build a better housing finance system for the nation.

Freddie Mac Form 10-Q
 
1


Management's Discussion and Analysis
 
Introduction

BUSINESS RESULTS
PORTFOLIO BALANCES
Guarantee Portfolios(1) 
a20172q10q_chart-27063.jpg
(1) Excludes multifamily unsecuritized mortgage loans held-
for-sale.
 
Investments Portfoliosa20172q10q_chart-29052.jpg



•
Our total guarantee portfolio grew to $1,958 billion at June 30, 2017 from $1,855 billion at June 30, 2016, an increase of approximately 6%, primarily driven by high single-family refinance activity and a growing home purchase market as interest and unemployment rates remained low as well as new business volume due to the strong demand for multifamily loan products.
•
Our total investments portfolio declined $43 billion, or 11%, from June 30, 2016 to June 30, 2017 as we continued to reduce the mortgage-related investments portfolio as required by the Purchase Agreement and FHFA.

Freddie Mac Form 10-Q
 
2


Management's Discussion and Analysis
 
Introduction

CONSOLIDATED FINANCIAL RESULTS
Comprehensive income (loss) was $2.0 billion in 2Q 2017, compared to $1.1 billion in 2Q 2016, driven by the continued solid business environment and our growing guarantee businesses. The change in comprehensive income was primarily driven by:
•
Net interest income attributable to guarantee fee income of $844 million in 2Q 2017 compared to $680 million in 2Q 2016 primarily driven by an increase in the size of the single-family loan portfolio combined with higher average contractual guarantee fee rates. Average contractual guarantee fee rates are generally higher on mortgage loans in our Core single-family loan portfolio compared to those in our Legacy single-family loan portfolio. In addition, guarantee fee income increased due to higher average multifamily guarantee portfolio balances;
•
Gain of $314 million recognized from price improvements on reperforming loans reclassified from held-for-investment to held-for-sale during the 2017 periods compared to a $267 million loss recognized on seriously delinquent loans reclassified from held-for-investment to held-for-sale during the 2016 periods;
•
Estimated interest-rate related fair value loss of $0.1 billion (after-tax) in 2Q 2017 compared to a $0.4 billion (after-tax) estimated fair value loss in 2Q 2016. The decrease in fair value losses was due to the implementation of fair value hedge accounting in 1Q 2017 coupled with smaller declines in long-term interest rates in 2Q 2017 compared to 2Q 2016; and
•
Estimated spread-related gain of $0.1 billion (after-tax) in 2Q 2017 resulting from market spreads tightening, compared to an estimated $0.1 billion (after-tax) loss in 2Q 2016 resulting from market spreads widening.
Our total equity was $2.6 billion at June 30, 2017. Because our net worth was positive, we are not requesting a draw from Treasury under the Purchase Agreement for 2Q 2017. Our cumulative senior preferred stock dividend payments totaled $108.2 billion as of June 30, 2017. Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock, which remains $72.3 billion. The amount of available funding remaining under the Purchase Agreement is $140.5 billion and would be reduced by any future draws.
CONSERVATORSHIP AND GOVERNMENT SUPPORT FOR OUR BUSINESS
Since September 2008, we have been operating in conservatorship, with FHFA acting as our Conservator. The conservatorship and related matters significantly affect our management, business activities, financial condition, and results of operations. Our future is uncertain, and the conservatorship has no specified termination date. We do not know what changes may occur to our business model during or following conservatorship, including whether we will continue to exist.
Our Purchase Agreement with Treasury and the terms of the senior preferred stock we issued to Treasury constrain our business activities. Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. We believe that the support provided by Treasury pursuant

Freddie Mac Form 10-Q
 
3


Management's Discussion and Analysis
 
Introduction

to the Purchase Agreement currently enables us to have adequate liquidity to conduct our normal business activities.
Treasury, as the holder of the senior preferred stock, is entitled to receive cumulative quarterly cash dividends, when, as and if declared by the Conservator, acting as successor to the rights, titles, powers and privileges of our Board of Directors. The dividends we have paid to Treasury on the senior preferred stock have been declared by, and paid at the direction of, the Conservator.
Under the August 2012 amendment to the Purchase Agreement, our dividend requirement each quarter is the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter, less the applicable Capital Reserve Amount, exceeds zero. The Capital Reserve Amount is $600 million in 2017 and will decrease to zero in 2018. If for any reason we were not to pay the amount of our dividend requirement on the senior preferred stock in full, the unpaid amount would be added to the liquidation preference, but this would not affect our ability to draw funds from Treasury under the Purchase Agreement.
Based on our Net Worth Amount of $2.6 billion as of June 30, 2017 and the Capital Reserve Amount of $600 million in 2017, our dividend requirement to Treasury in September 2017 will be $2.0 billion. If the Conservator declares a senior preferred stock dividend equal to our dividend requirement and directs us to pay it before September 30, 2017, we would expect to pay a dividend of $2.0 billion by September 30, 2017. The declining capital reserve required under the terms of the Purchase Agreement (ultimately reaching zero in 2018) increases the risk of our having negative net worth and thus being required to draw from Treasury.



Freddie Mac Form 10-Q
 
4


Management's Discussion and Analysis
 
Key Economic Indicators | Single-Family Home Prices


KEY ECONOMIC INDICATORS
The following graphs and related discussions present certain macroeconomic indicators that can significantly affect our business and financial results.
SINGLE-FAMILY HOME PRICES
NATIONAL HOME PRICES
a20172q10q_chart-27358.jpg
(December 2000 = 100)
COMMENTARY
•
Home prices continued to appreciate, increasing by 3.9% from 1Q 2017 to 2Q 2017 and 6.0% from 4Q 2016 to 2Q 2017, compared to an increase of 3.7% and 5.6%, respectively, from 1Q 2016 to 2Q 2016 and from 4Q 2015 to 2Q 2016, based on our own non-seasonally adjusted price index of single-family homes funded by loans owned or guaranteed by us or Fannie Mae.
•
National home prices at June 30, 2017 exceeded their pre-financial crisis peak level of 168 reached in June 2006, based on our index.
•
Increases in home prices typically result in lower delinquency rates. Fewer loan delinquencies, loan workouts and foreclosure transfers may reduce our expected credit losses and thereby reduce our provision for credit losses.


Freddie Mac Form 10-Q
 
5


Management's Discussion and Analysis
 
Key Economic Indicators | Interest Rates

INTEREST RATES
KEY MARKET INTEREST RATES
a20172q10q_chart-27298.jpga20172q10q_chart-30390.jpg
COMMENTARY
•
The quarterly ending and quarterly average 30-year Primary Mortgage Market Survey (“PMMS”) interest rates were higher at June 30, 2017 compared to June 30, 2016. Increases in the PMMS rate typically result in decreases in refinance activity and originations.
•
The 10-year LIBOR and 2-year LIBOR interest rates had smaller fluctuations during the 2017 periods than in the 2016 periods. The changes in the 10-year and 2-year LIBOR interest rates affect the fair value of certain of our assets and liabilities, including derivatives, measured at fair value. A smaller interest rate fluctuation from period to period may result in smaller fair value gains and losses, while a larger fluctuation in interest rates may result in larger fair value gains and losses.

Freddie Mac Form 10-Q
 
6


Management's Discussion and Analysis
 
Key Economic Indicators | Interest Rates

•
The Federal Reserve raised short-term interest rates during 2Q 2017. The quarterly ending and quarterly average short-term interest rates, as indicated by the 3-month LIBOR rate, were higher at June 30, 2017 compared to June 30, 2016. The increase in short-term interest rates may increase the interest earned on our short-term investments and interest expense on our short-term funding.
•
For additional information on the effect of LIBOR rates on our financial results, see “Our Business Segments - Capital Markets - Market Conditions.”





Freddie Mac Form 10-Q
 
7


Management's Discussion and Analysis
 
Key Economic Indicators | Unemployment Rate

UNEMPLOYMENT RATE
UNEMPLOYMENT RATE AND JOB CREATION
a20172q10q_chart-27055.jpg
Source: U.S. Bureau of Labor Statistics

COMMENTARY
•
Average monthly net new jobs increased during 2Q 2017 compared to 2Q 2016.
•
The unemployment rate declined in 2Q 2017 compared to 2Q 2016.
•
Changes in the unemployment rate can affect several market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies.
•
Decreases in the unemployment rate typically result in lower levels of delinquencies, which may result in a decrease in expected credit losses on our total mortgage portfolio.

Freddie Mac Form 10-Q
 
8


Management's Discussion and Analysis
 
Consolidated Results of Operations


CONSOLIDATED RESULTS OF OPERATIONS
You should read this discussion of our consolidated results of operations in conjunction with our condensed consolidated financial statements and accompanying notes.
The table below compares our consolidated results of operations for 2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016.
 
 
2Q 2017
 
2Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in millions)
 
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Net interest income
 

$3,379

 

$3,443

 

($64
)
 
(2
)%
 

$7,174

 

$6,848

 

$326

 
5
 %
Benefit (provision) for credit losses
 
422

 
775

 
(353
)
 
(46
)%
 
538

 
1,242

 
(704
)
 
(57
)%
Net interest income after benefit (provision) for credit losses
 
3,801

 
4,218

 
(417
)
 
(10
)%
 
7,712

 
8,090

 
(378
)
 
(5
)%
Non-interest income (loss):
 
 
 
 
 


 


 
 
 
 
 


 


Gains (losses) on extinguishment of debt
 
50

 
(119
)
 
169

 
142
 %
 
268

 
(174
)
 
442

 
254
 %
Derivative gains (losses)
 
(1,096
)
 
(2,058
)
 
962

 
47
 %
 
(1,398
)
 
(6,619
)
 
5,221

 
79
 %
Net impairment of available-for-sale securities recognized in earnings
 
(3
)
 
(72
)
 
69

 
96
 %
 
(16
)
 
(129
)
 
113

 
88
 %
Other gains on investment securities recognized in earnings
 
61

 
450

 
(389
)
 
(86
)%
 
117

 
753

 
(636
)
 
(84
)%
Other income (loss)
 
694

 
(25
)
 
719

 
2,876
 %
 
1,109

 
922

 
187

 
20
 %
Total non-interest income (loss)
 
(294
)
 
(1,824
)
 
1,530

 
84
 %
 
80

 
(5,247
)
 
5,327

 
102
 %
Non-interest expense:
 
 
 
 
 


 


 
 
 
 
 


 


Administrative expense
 
(513
)
 
(475
)
 
(38
)
 
(8
)%
 
(1,024
)
 
(923
)
 
(101
)
 
(11
)%
REO operations expense
 
(37
)
 
(29
)
 
(8
)
 
(28
)%
 
(93
)
 
(113
)
 
20

 
18
 %
Temporary Payroll Tax Cut Continuation Act of 2011 expense
 
(330
)
 
(280
)
 
(50
)
 
(18
)%
 
(651
)
 
(552
)
 
(99
)
 
(18
)%
Other expense
 
(126
)
 
(151
)
 
25

 
17
 %
 
(202
)
 
(304
)
 
102

 
34
 %
Total non-interest expense
 
(1,006
)
 
(935
)
 
(71
)
 
(8
)%
 
(1,970
)
 
(1,892
)
 
(78
)
 
(4
)%
Income (loss) before income tax (expense) benefit
 
2,501

 
1,459

 
1,042

 
71
 %
 
5,822

 
951

 
4,871

 
512
 %
Income tax (expense) benefit
 
(837
)
 
(466
)
 
(371
)
 
(80
)%
 
(1,947
)
 
(312
)
 
(1,635
)
 
(524
)%
Net income (loss)
 
1,664

 
993

 
671

 
68
 %
 
3,875

 
639

 
3,236

 
506
 %
Total other comprehensive income (loss), net of taxes and reclassification adjustments
 
322

 
140

 
182

 
130
 %
 
345

 
294

 
51

 
17
 %
Comprehensive income (loss)
 

$1,986

 

$1,133

 

$853

 
75
 %
 

$4,220

 

$933

 

$3,287

 
352
 %

Freddie Mac Form 10-Q
 
9


Management's Discussion and Analysis
 
Consolidated Results of Operations | Net Interest Income


NET INTEREST INCOME
NET INTEREST YIELD ANALYSIS
The tables below present an analysis of interest-earning assets and interest-bearing liabilities.
 
 
2Q 2017
 
2Q 2016
 
(Dollars in millions)
Average
Balance
 
Interest
Income
(Expense)(1)
 
Average
Rate
 
Average
Balance
 
Interest
Income
(Expense)(1)
 
Average
Rate
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents

$12,135

 

$15

 
0.51
 %
 

$14,948

 

$9

 
0.23
%
 
Securities purchased under agreements to resell
56,196

 
132

 
0.93

 
52,291

 
45

 
0.35

 
Advances to lenders
532

 
3

 
2.30

 
352

 
2

 
2.02

 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
170,864

 
1,651

 
3.87

 
193,637

 
1,851

 
3.82

 
Extinguishment of PCs held by Freddie Mac
(89,913
)
 
(825
)
 
(3.67
)
 
(96,002
)
 
(890
)
 
(3.71
)
 
Total mortgage-related securities, net
80,951

 
826

 
4.08

 
97,635

 
961

 
3.94

 
Non-mortgage-related securities
17,957

 
76

 
1.68

 
12,726

 
17

 
0.53

 
Loans held by consolidated trusts(1)
1,723,103

 
14,594

 
3.39

 
1,638,057

 
13,872

 
3.39

 
Loans held by Freddie Mac(1)
118,012

 
1,254

 
4.25

 
138,469

 
1,366

 
3.95

 
Total interest-earning assets

$2,008,886

 

$16,900

 
3.36

 

$1,954,478

 

$16,272

 
3.34

 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac

$1,746,474

 

($12,819
)
 
(2.94
)
 

$1,662,187

 

($12,139
)
 
(2.92
)
 
Extinguishment of PCs held by Freddie Mac
(89,913
)
 
825

 
3.67

 
(96,002
)
 
890

 
3.71

 
Total debt securities of consolidated trusts held by third parties
1,656,561

 
(11,994
)
 
(2.90
)
 
1,566,185

 
(11,249
)
 
(2.87
)
 
Other debt:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
74,540

 
(145
)
 
(0.77
)
 
76,057

 
(82
)
 
(0.42
)
 
Long-term debt
272,160

 
(1,340
)
 
(1.96
)
 
303,088

 
(1,450
)
 
(1.91
)
 
Total other debt
346,700

 
(1,485
)
 
(1.71
)
 
379,145

 
(1,532
)
 
(1.61
)
 
Total interest-bearing liabilities
2,003,261

 
(13,479
)
 
(2.69
)
 
1,945,330

 
(12,781
)
 
(2.63
)
 
Expense related to derivatives
—

 
(42
)
 
(0.01
)
 
—

 
(48
)
 
(0.01
)
 
Impact of net non-interest-bearing funding
5,625

 
—

 
0.01

 
9,148

 
—

 
0.01

 
Total funding of interest-earning assets

$2,008,886

 

($13,521
)
 
(2.69
)
 

$1,954,478

 

($12,829
)
 
(2.63
)
 
Net interest income/yield
 
 

$3,379

 
0.67

 
 
 

$3,443

 
0.71

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Loan fees, primarily consisting of amortization of delivery fees, included in interest income were $583 million and $634 million for loans held by consolidated trusts and $33 million and $50 million for loans held by Freddie Mac during 2Q 2017 and 2Q 2016, respectively.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Freddie Mac Form 10-Q
 
10


Management's Discussion and Analysis
 
Consolidated Results of Operations | Net Interest Income


 
YTD 2017
 
YTD 2016
(Dollars in millions)
Average
Balance
 
Interest
Income
(Expense)(1)
 
Average
Rate
 
Average
Balance
 
Interest
Income
(Expense)(1)
 
Average
Rate
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents

$12,094

 

$24

 
0.40
 %
 

$13,337

 

$16

 
0.24
%
Securities purchased under agreements to resell
55,301

 
220

 
0.79

 
54,979

 
93

 
0.34

Advances to Lenders
574

 
7

 
2.36

 
303

 
4

 
2.61

Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
173,410

 
3,314

 
3.82

 
197,620

 
3,767

 
3.81

Extinguishment of PCs held by Freddie Mac
(89,226
)
 
(1,645
)
 
(3.69
)
 
(100,549
)
 
(1,850
)
 
(3.68
)
Total mortgage-related securities, net
84,184

 
1,669

 
3.97

 
97,071

 
1,917

 
3.95

Non-mortgage-related securities
19,509

 
147

 
1.51

 
13,494

 
30

 
0.44

Loans held by consolidated trusts(1)
1,715,571

 
29,193

 
3.40

 
1,634,351

 
28,133

 
3.44

Loans held by Freddie Mac(1)
121,115

 
2,620

 
4.33

 
142,000

 
2,923

 
4.12

Total interest-earning assets

$2,008,348

 

$33,880

 
3.37

 

$1,955,535

 

$33,116

 
3.39

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac

$1,738,601

 

($25,360
)
 
(2.92
)
 

$1,657,645

 

($24,890
)
 
(3.00
)
Extinguishment of PCs held by Freddie Mac
(89,226
)
 
1,645

 
3.69

 
(100,549
)
 
1,850

 
3.68

Total debt securities of consolidated trusts held by third parties
1,649,375

 
(23,715
)
 
(2.88
)
 
1,557,096

 
(23,040
)
 
(2.96
)
Other debt:
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
74,003

 
(241
)
 
(0.65
)
 
88,464

 
(175
)
 
(0.39
)
Long-term debt
275,840

 
(2,665
)
 
(1.93
)
 
301,655

 
(2,954
)
 
(1.95
)
Total other debt
349,843

 
(2,906
)
 
(1.66
)
 
390,119

 
(3,129
)
 
(1.60
)
Total interest-bearing liabilities
1,999,218

 
(26,621
)
 
(2.66
)
 
1,947,215

 
(26,169
)
 
(2.69
)
Expense related to derivatives
—

 
(85
)
 
(0.01
)
 
—

 
(99
)
 
(0.01
)
Impact of net non-interest-bearing funding
9,130

 
—

 
0.01

 
8,320

 
—

 
0.01

Total funding of interest-earning assets

$2,008,348

 

($26,706
)
 
(2.66
)
 

$1,955,535

 

($26,268
)
 
(2.69
)
Net interest income/yield
 
 

$7,174

 
0.71

 
 
 

$6,848

 
0.70

 
 
 
 
 
 
 
 
 
 
 
 
(1) Loan fees, primarily consisting of amortization of delivery fees, included in interest income were $1.1 billion for loans held by consolidated trusts during both YTD 2017 and YTD 2016, and were $95 million and $131 million for loans held by Freddie Mac during YTD 2017 and YTD 2016, respectively.



Freddie Mac Form 10-Q
 
11


Management's Discussion and Analysis
 
Consolidated Results of Operations | Net Interest Income


COMPONENTS OF NET INTEREST INCOME
The table below presents the components of net interest income.
 
2Q 2017
 
2Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Contractual net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee fee income

$844

 

$680

 

$164

 
24
 %
 

$1,687

 

$1,390

 

$297

 
21
 %
Guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011
325

 
279

 
46

 
16
 %
 
641

 
546

 
95

 
17
 %
Other contractual net interest income
1,588

 
1,744

 
(156
)
 
(9
)%
 
3,296

 
3,584

 
(288
)
 
(8
)%
Total contractual net interest income
2,757

 
2,703

 
54

 
2
 %
 
5,624

 
5,520

 
104

 
2
 %
Net amortization - loans and debt securities of consolidated trusts
667

 
774

 
(107
)
 
(14
)%
 
1,620

 
1,307

 
313

 
24
 %
Net amortization - other assets and debt
(3
)
 
14

 
(17
)
 
(121
)%
 
15

 
120

 
(105
)
 
(88
)%
Expense related to derivatives
(42
)
 
(48
)
 
6

 
13
 %
 
(85
)
 
(99
)
 
14

 
14
 %
Net interest income

$3,379

 

$3,443

 

($64
)
 
(2
)%
 

$7,174

 

$6,848

 

$326

 
5
 %

Key Drivers:
•
Guarantee fee income
◦
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - increased primarily due to higher average contractual guarantee fee rates and the continued growth in the size of the Core single-family loan portfolio. Average contractual guarantee fee rates are generally higher on mortgage loans in our Core single-family loan portfolio compared to those in our Legacy single-family loan portfolio. In addition, guarantee fee income increased due to higher average multifamily guarantee portfolio balances.
•
Other contractual net interest income
◦
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - decreased primarily due to the continued reduction in the balance of our mortgage-related investments portfolio pursuant to the portfolio limits established by the Purchase Agreement and FHFA. See "Conservatorship and Related Matters - Reducing Our Mortgage-Related Investments Portfolio Over Time" for a discussion of the key drivers of the decline in our mortgage-related investments portfolio.
•
Net amortization of loans and debt securities of consolidated trusts
◦
2Q 2017 vs. 2Q 2016 - decreased during 2Q 2017 primarily due to a decrease in amortization income from debt securities of consolidated trusts due to a decrease in prepayments.
◦
YTD 2017 vs. YTD 2016 - increased during YTD 2017 primarily due to a decrease in amortization expense on mortgage loans held by consolidated trusts due to a decrease in prepayments. In addition, amortization income increased driven by higher unamortized balances on our debt securities of consolidated trusts and higher mortgage loan upfront delivery fee balances.


Freddie Mac Form 10-Q
 
12


Management's Discussion and Analysis
 
Consolidated Results of Operations | Provision for Credit Losses


BENEFIT (PROVISION) FOR CREDIT LOSSES
The benefit (provision) for credit losses predominantly relates to single-family loans and includes components for both collectively and individually impaired loans.
The table below presents the components of our benefit (provision) for credit losses.
 
 
2Q 2017
 
2Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in billions)
 
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Benefit (provision) for newly impaired loans
 

($0.2
)
 

($0.2
)
 

$—

 
—
 %
 

($0.3
)
 

($0.4
)
 

$0.1

 
25
 %
Amortization of interest rate concessions
 
0.2

 
0.2

 
—

 
—
 %
 
0.4

 
0.5

 
(0.1
)
 
(20
)%
Reclassifications of held-for-investment loans to held-for-sale loans
 
0.3

 
0.5

 
(0.2
)
 
(40
)%
 
0.3

 
0.6

 
(0.3
)
 
(50
)%
Other, including changes in estimated default probability and loss severity
 
0.1

 
0.3

 
(0.2
)
 
(67
)%
 
0.1

 
0.5

 
(0.4
)
 
(80
)%
Benefit (provision) for credit losses
 

$0.4

 

$0.8

 

($0.4
)
 
(50
)%
 

$0.5

 

$1.2

 

($0.7
)
 
(58
)%
Key Drivers:
•
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - Benefit for credit losses decreased primarily due to smaller improvements in probability of default and estimated loss severity in the 2017 periods, compared to larger improvements in probability of default and estimated loss severity in the 2016 periods.


Freddie Mac Form 10-Q
 
13


Management's Discussion and Analysis
 
Consolidated Results of Operations | Derivative Gains (Losses)


DERIVATIVE GAINS (LOSSES)
We continue to align our derivative portfolio with the changing duration of our economically hedged assets and liabilities. We manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models. We believe the impact of derivatives on our GAAP financial results should be considered in the context of our overall interest-rate risk profile, including our PMVS and duration gap results. For more information about our interest-rate risk management activities and the sensitivity of reported earnings to those activities, see “Risk Management - Market Risk.”
On February 2, 2017, we began using fair value hedge accounting for certain single-family mortgage loans, which is intended to reduce our GAAP earnings volatility due to large interest-rate movements. Changes in the fair value of the derivatives while in fair value hedge relationships are recognized in other income (loss) on our condensed consolidated statements of comprehensive income. See Note 7 for further information on fair value hedge accounting.
The table below presents the gains and losses on derivatives while not designated in fair value hedge relationships and the accrual of periodic cash settlements on all derivatives.
 
2Q 2017
 
2Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
 
(Dollars in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
 
Fair value change in interest-rate swaps

($580
)
 

($2,364
)
 

$1,784

 
75
 %
 

$93

 

($8,054
)
 

$8,147

 
101
 %
 
Fair value change in option-based derivatives
109

 
1,141

 
(1,032
)
 
(90
)%
 
(321
)
 
3,076

 
(3,397
)
 
(110
)%
 
Fair value change in other derivatives
(196
)
 
(415
)
 
219

 
53
 %
 
(274
)
 
(731
)
 
457

 
63
 %
 
Accrual of periodic cash settlements
(429
)
 
(420
)
 
(9
)
 
(2
)%
 
(896
)
 
(910
)
 
14

 
2
 %
 
Derivative gains (losses)

($1,096
)
 

($2,058
)
 

$962

 
47
 %
 

($1,398
)
 

($6,619
)
 

$5,221

 
79
 %
 

Key Drivers:
•
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - Losses declined as long-term interest rates decreased less during the 2017 periods compared to the 2016 periods. The 10-year par swap rate decreased 12 and 5 basis points during 2Q 2017 and YTD 2017, respectively, and declined 26 and 80 basis points during 2Q 2016 and YTD 2016, respectively. Interest rate decreases resulted in fair value losses in our pay-fixed interest rate swaps and forward commitments to issue PCs, partially offset by fair value gains in our receive-fixed swaps and certain option-based derivatives. In addition, we implemented hedge accounting in 1Q 2017 which reduced the losses that otherwise would have been included in Derivative gains (losses) by $365 million and $300 million for 2Q 2017 and YTD 2017, respectively.


Freddie Mac Form 10-Q
 
14


Management's Discussion and Analysis
 
Consolidated Results of Operations | Other Income (Loss)


OTHER INCOME (LOSS)
The table below presents the components of other income (loss).
 
2Q 2017
 
2Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Other income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on loans

$193

 

($481
)
 

$674

 
140
 %
 

$207

 

($3
)
 

$210

 
7,000
 %
Gains (losses) on held-for-sale loan purchase commitments
331

 
207

 
124

 
60
 %
 
555

 
244

 
311

 
127
 %
(Losses) gains on debt where we elected the fair value option
(102
)
 
(108
)
 
6

 
6
 %
 
(191
)
 
(94
)
 
(97
)
 
(103
)%
All other
245

 
357

 
(112
)
 
(31
)%
 
472

 
775

 
(303
)
 
(39
)%
 Fair value hedge accounting
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Change in fair value of derivatives in qualifying hedge relationships
(365
)
 
—

 
(365
)
 
N/A

 
(300
)
 
—

 
(300
)
 
N/A

Change in fair value of hedged items in qualifying hedge relationships
392

 
—

 
392

 
N/A

 
366

 
—

 
366

 
N/A

Ineffectiveness related to fair value hedge accounting
27

 
—

 
27

 
N/A

 
66

 
—

 
66

 
N/A

Total other income (loss)

$694

 

($25
)
 

$719

 
2,876
 %
 

$1,109

 

$922

 

$187

 
20
 %
Key Drivers:
•
Gains (losses) on loans
◦
2Q 2017 vs. 2Q 2016 - increased primarily due to gains on loans driven by price improvements on the reperforming loans we sold in 2Q 2017 compared to losses driven by the lower-of-cost-or-fair-value adjustments on seriously delinquent loans we reclassified from held-for-investment to held-for-sale in 2Q 2016.
◦
YTD 2017 vs. YTD 2016 - increased primarily due to gains on loans driven by price improvements on the reperforming loans we sold in YTD 2017 compared to the losses driven by the lower-of-cost-or-fair-value adjustments on seriously delinquent loans we reclassified from held-for-investment to held-for-sale in YTD 2016. This was partially offset by a decline in gains in YTD 2017 related to multifamily loans for which we elected the fair value option, as long-term rates declined slightly in YTD 2017, while these loans benefited significantly in YTD 2016 from a large decline in interest rates.
•
Gains (losses) on held-for-sale loan purchase commitments
◦
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - increased due to gains on multifamily held-for-sale purchase commitments in the 2017 periods. K Certificate spreads tightened from improved pricing and market movements, compared to spreads widening in the 2016 periods. In addition, there were higher gains in the 2017 periods driven by a higher outstanding balance of commitments at the end of the period due to a continued strong demand for multifamily products compared to the end of the 2016 period.
•
(Losses) gains on debt where we elected fair value option
◦
YTD 2017 vs. YTD 2016 - losses declined primarily driven by tightening spreads between STACR yields and LIBOR during YTD 2017 compared to YTD 2016 when spreads were relatively unchanged.

Freddie Mac Form 10-Q
 
15


Management's Discussion and Analysis
 
Consolidated Results of Operations | Other Income (Loss)


•
All other
◦
YTD 2017 vs. YTD 2016 - declined primarily due to the recognition of settlement proceeds related to the TBW bankruptcy during YTD 2016.

Freddie Mac Form 10-Q
 
16


Management's Discussion and Analysis
 
Consolidated Results of Operations | Other Comprehensive Income

OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the attribution of the other comprehensive income (loss) reported in our condensed consolidated statements of comprehensive income.
 
2Q 2017
 
2Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Other comprehensive income, excluding certain items

$423

 

$391

 

$32

 
8
%
 

$586

 

$612

 

($26
)
 
(4
)%
Excluded items:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities
(49
)
 
(79
)
 
30

 
38
%
 
(103
)
 
(169
)
 
66

 
39
 %
Realized (gains) losses reclassified from AOCI
(52
)
 
(172
)
 
120

 
70
%
 
(138
)
 
(149
)
 
11

 
7
 %
Total excluded items
(101
)

(251
)

150


60
%

(241
)

(318
)

77


24
 %
Total other comprehensive income (loss)

$322

 

$140

 

$182

 
130
%
 

$345

 

$294

 

$51

 
17
 %
Key Drivers:
•
Other comprehensive income, excluding certain items
◦
2Q 2017 vs. 2Q 2016 - increased primarily due to more market spread tightening on non-agency mortgage-related securities during 2Q 2017 compared to 2Q 2016, resulting in greater spread-related gains, partially offset by smaller interest rate-related gains as long-term interest rates decreased less during 2Q 2017 compared to 2Q 2016.
◦
YTD 2017 vs. YTD 2016 - decreased primarily due to smaller declines in long-term interest rates during YTD 2017 compared to YTD 2016, resulting in lower gains, partially offset by gains from market spreads tightening on agency and non-agency mortgage-related securities during YTD 2017 compared to spreads widening on non-agency mortgage-related securities during YTD 2016.
•
Excluded items
◦
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities
▪
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - decreased primarily due to a decline in the population of impaired securities as a result of our active dispositions of these securities.
◦
Realized (gains) losses reclassified from AOCI
▪
2Q 2017 vs. 2Q 2016 and YTD 2017 vs YTD 2016 - reflected smaller amounts of reclassified gains during the 2017 periods compared to the 2016 periods, due to fewer sales of non-agency mortgage-related securities.

Freddie Mac Form 10-Q
 
17


Management's Discussion and Analysis
Consolidated Results of Operations | Other Key Drivers

OTHER KEY DRIVERS
Key drivers of other line items for 2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 include:
•
Gains (losses) on extinguishment of debt
◦
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - improved primarily due to an increase in the amount of gains recognized from the extinguishment of certain fixed-rate debt securities of consolidated trusts, as market interest rates increased between the time of issuance and repurchase. The amount of extinguishment gains or losses may vary, as the type and amount of PCs selected for repurchase are based on our investment and funding strategies, including our efforts to support the liquidity and price performance of our PCs.
•
Other gains on investment securities recognized in earnings
◦
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - decreased primarily due to the recognition of smaller fair value gains on our mortgage and non-mortgage related securities classified as trading as long-term interest rates decreased less during the 2017 periods compared to the 2016 periods, partially offset by larger fair value gains due to more market spread tightening on our agency mortgage-related securities. In addition, there was a decrease in the sales volume of our available-for-sale non-agency mortgage-related securities during the 2017 periods.


    

Freddie Mac Form 10-Q
 
18


Management's Discussion and Analysis
Consolidated Results of Operations | Items Affecting Multiple Lines


ITEM AFFECTING MULTIPLE LINES
The following item affected multiple line items on our consolidated results of operations.
SINGLE-FAMILY LOAN RECLASSIFICATIONS
During 2Q 2017 and 2Q 2016, we reclassified $11.1 billion and $3.1 billion in UPB of seasoned single-family mortgage loans, respectively, from held-for-investment to held-for-sale, as we continue to focus on reducing the balance of our less liquid assets. During YTD 2017 and YTD 2016, we reclassified $12.8 billion and $3.5 billion in UPB of seasoned single-family mortgage loans, respectively, from held-for-investment to held-for-sale. Seasoned single-family mortgage loans include seriously delinquent loans and reperforming loans. On January 1, 2017, we elected a new accounting policy for reclassifications from held-for-investment to held-for-sale. Under the new policy, when we reclassify (transfer) a loan from held-for-investment to held-for-sale, we charge off the entire difference between the loan’s recorded investment and its fair value if the loan has a history of credit-related issues. Expenses related to property taxes and insurance are included as part of the charge-off. If the charge-off amount exceeds the existing loan loss reserve amount, an additional provision for credit losses is recorded. If the charge-off amount is less than the existing loan loss reserve amount, a benefit for credit losses is recorded. Any declines in loan fair value after the date of transfer will be recognized as a valuation allowance, with an offset recorded to other income (loss).
This new policy election was applied prospectively, as it was not practical to apply it retrospectively.
Beginning in 1Q 2017, benefit (provision) for credit losses is the only line item affected by the loan reclassifications from held-for-investment to held-for-sale. Prior to this change (including 2Q 2016 and YTD 2016 as presented below), the reclassifications from held-for-investment to held-for-sale affected several line items on our consolidated results of operations.
 
 
2Q 2017
 
2Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in millions)
 
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Benefit (provision) for credit losses
 

$314

 

$509

 

($195
)
 
(38
)%
 

$300

 

$573

 

($273
)
 
(48
)%
Other income (loss) - lower-of-cost-or-fair-value adjustment
 
—

 
(667
)
 
667

 
100
 %
 
—

 
(734
)
 
734

 
100
 %
Other expense - property taxes and insurance associated with these loans
 
—

 
(109
)
 
109

 
100
 %
 
—

 
(140
)
 
140

 
100
 %
Effect on income before income tax (expense) benefit
 

$314

 

($267
)
 
581

 
218
 %
 

$300

 

($301
)
 
601

 
200
 %

Key Drivers:
•
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - Effect on income changed to a gain recognized from price improvements on reperforming loans reclassified from held-for-investment to held-for-sale during the 2017 periods compared to a loss recognized on seriously delinquent loans reclassified from held-for-investment to held-for-sale during the 2016 periods.


Freddie Mac Form 10-Q
 
19


Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized consolidated balance sheets.
 
 
June 30, 2017
 
December 31, 2016
 
Change
(Dollars in millions)
 
 
 
 
 
$
 
%
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 

$6,666

 

$12,369

 

($5,703
)
 
(46
)%
Restricted cash and cash equivalents
 
4,464

 
9,851

 
(5,387
)
 
(55
)%
Securities purchased under agreements to resell
 
47,791

 
51,548

 
(3,757
)
 
(7
)%
Subtotal
 
58,921

 
73,768

 
(14,847
)
 
(20
)%
Investments in securities, at fair value
 
98,799

 
111,547

 
(12,748
)
 
(11
)%
Mortgage loans, net
 
1,832,142

 
1,803,003

 
29,139

 
2
 %
Accrued interest receivable
 
6,237

 
6,135

 
102

 
2
 %
Derivative assets, net
 
951

 
747

 
204

 
27
 %
Deferred tax assets, net
 
14,751

 
15,818

 
(1,067
)
 
(7
)%
Other assets
 
10,956

 
12,358

 
(1,402
)
 
(11
)%
Total assets
 

$2,022,757

 

$2,023,376

 

($619
)
 
—
 %
 
 
 
 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Accrued interest payable
 

$6,090

 

$6,015

 

$75

 
1
 %
Debt, net
 
2,009,166

 
2,002,004

 
7,162

 
—
 %
Derivative liabilities, net
 
298

 
795

 
(497
)
 
(63
)%
Other liabilities
 
4,617

 
9,487

 
(4,870
)
 
(51
)%
Total liabilities
 
2,020,171

 
2,018,301

 
1,870

 
—
 %
Total equity
 
2,586

 
5,075

 
(2,489
)
 
(49
)%
Total liabilities and equity
 

$2,022,757

 

$2,023,376

 

($619
)
 
—
 %
Key Drivers:
As of June 30, 2017 compared to December 31, 2016:
•
Cash and cash equivalents, restricted cash and cash equivalents, and securities purchased under agreements to resell affect one another, so the changes in the balances should be viewed together. The combined balance as of June 30, 2017 declined primarily due to lower near term cash needs for lower upcoming maturities and anticipated calls of other debt and a decrease in prepayment proceeds received by the custodial account driven by increased interest rates as of June 30, 2017 compared to December 31, 2016.
•
Investments in securities, at fair value decreased as we continued to reduce the mortgage-related investments portfolio during 2017 as required by the Purchase Agreement and FHFA.
•
Other assets declined primarily because of decreased receivables from servicers and a lower current income tax receivable. Higher mortgage interest rates during 2Q 2017 caused a decline in prepayments, and thus a decrease in receivables from servicers. When a borrower prepays, there is a brief delay before the servicer remits the payoff proceeds to us. In addition, the current income tax receivable decreased primarily due to the accrual of current period tax expense and a reduction of receivables related to prior years.
•
Other liabilities decreased primarily due to the elimination of liabilities related to our purchases of

Freddie Mac Form 10-Q
 
20


Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


non-mortgage-related securities that traded during 4Q 2016 but were settled in 2017.
•
Total equity decreased as a result of lower comprehensive income in 2Q 2017 than in 4Q 2016 coupled with additional dividends paid related to the $600 million decline in the Capital Reserve Amount in 2017.

Freddie Mac Form 10-Q
 
21


Management's Discussion and Analysis
 
Our Business Segments | Segment Earnings


OUR BUSINESS SEGMENTS
We have three reportable segments, which are based on the way we manage our business. Certain activities that are not part of a reportable segment are included in the All Other category.
•
Single-family Guarantee - reflects results from our purchase, securitization, and guarantee of single-family loans and the management of single-family credit risk.
•
Multifamily - reflects results from our purchase, securitization, and guarantee of multifamily loans and securities, our investments in those loans and securities, and the management of multifamily credit risk and market spread risk.
•
Capital Markets (previously reported as the Investments segment) - reflects results from managing the company’s mortgage-related investments portfolio (excluding multifamily investments, single-family seriously delinquent loans, and the credit risk of single-family performing and reperforming loans), treasury function, and interest-rate risk.
The All Other category consists of material corporate-level activities that are infrequent in nature and based on decisions outside the control of the management of our reportable segments.
SEGMENT EARNINGS
During 1Q 2017, we changed how we calculate certain components of our Segment Earnings for our Capital Markets segment. Prior period results have been revised to conform to the current period presentation. For more information on this change and on our segment reclassifications, see Note 11.

Freddie Mac Form 10-Q
 
22


Management's Discussion and Analysis
 
Our Business Segments | Segment Earnings


SEGMENT COMPREHENSIVE INCOME
The graphs below show our comprehensive income by segment, including the All Other category.
a20172q10q_chart-27076.jpg
a20172q10q_chart-27435.jpg


Freddie Mac Form 10-Q
 
23


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


SINGLE-FAMILY GUARANTEE
MARKET CONDITIONS
The following graphs and related discussion present certain market indicators that can significantly affect the business and financial results of our Single-family Guarantee segment.
U.S. Single-Family Originations
a20172q10q_chart-27095.jpg
Source: Inside Mortgage Finance dated May 19, 2017 (latest available IMF purchase/refinance information).

 
Single-Family Serious Delinquency Rates
a20172q10q_chart-28810.jpg
Source: National Delinquency Survey from the Mortgage Bankers Association. Data as of May 16, 2017 (latest available NDS information).

Commentary
•
Single-family loan origination volumes decreased to $455 billion in 2Q 2017 compared to $520 billion in 2Q 2016. Mortgage origination data is from Inside Mortgage Finance as of July 28, 2017. Freddie Mac's single-family loan purchase volumes typically follow similar trends.
•
Single-family serious delinquency (SDQ) rates in the U.S. generally continued to decline on a year-over-year basis due to macroeconomic factors, such as a low unemployment rate and continued home price appreciation. Freddie Mac's delinquency rates followed similar trends resulting in fewer loan workouts and foreclosure transfers and as a result, reduced our provision for credit losses.

Freddie Mac Form 10-Q
 
24


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


BUSINESS RESULTS
The following tables, graphs and related discussion present the business results of our Single-family Guarantee segment.
New Business Activity
UPB of Single-Family Loan Purchases and Guarantees by Loan Purpose

(In billions)
a20172q10q_chart-27044.jpga20172q10q_chart-28418.jpg
Percentage of Single-Family Loan Purchases and Guarantees by Loan Purpose

a20172q10q_chart-30025.jpg

Freddie Mac Form 10-Q
 
25


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


Commentary
•
Our loan purchase and guarantee activity:
◦
2Q 2017 vs. 2Q 2016 - decreased due to lower refinance volume driven by higher rates in early 2017 compared to 2016.
◦
YTD 2017 vs. YTD 2016 - remained relatively unchanged as a decline in refinance activity was offset by higher home purchase loan volume as interest and unemployment rates remained low.

Freddie Mac Form 10-Q
 
26


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


Single-Family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfolio
a20172q10q_chart-27083.jpg
Commentary
•
The single-family credit guarantee portfolio grew to $1,784 billion at June 30, 2017 from $1,755 billion at December 31, 2016, an increase of approximately 2%. We had 10.7 million and 10.6 million loans in our single-family credit guarantee portfolio at June 30, 2017 and December 31, 2016, respectively.
•
The Core single-family loan portfolio grew to 75% of the single-family credit guarantee portfolio at June 30, 2017 compared to 73% at December 31, 2016, primarily driven by high refinance activity and a growing home purchase market as interest and unemployment rates remained low.
•
The Legacy and relief refinance single-family loan portfolio declined to 25% of the single-family credit guarantee portfolio at June 30, 2017 compared to 27% at December 31, 2016, driven primarily by liquidations.

Freddie Mac Form 10-Q
 
27


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


Guarantee Fees
The average portfolio Segment Earnings guarantee fee rate consists of the contractual guarantee fee that we receive over the life of the loans and upfront delivery fee income that we amortize over the contractual life of the related loans (usually 30 years). If the related loans prepay, the remaining upfront delivery fee income is recognized immediately. In addition, the average portfolio Segment Earnings guarantee fee rate reflects an average of our total single-family credit guarantee portfolio and is not limited to purchases in the applicable period.
The average guarantee fee rate charged on new acquisitions consists of the contractual guarantee fee that we receive over the life of the loans and upfront delivery fee income that we recognize over the estimated life of the related loans using our expectations of prepayments and other liquidations.
Average Portfolio Segment Earnings Guarantee Fee Rate(1) a20172q10q_chart-26977.jpg
 
Average Guarantee Fee Rate Charged on New Acquisitions(1)
a20172q10q_chart-28197.jpg

(1) Excludes the legislated 10 basis point increase in guarantee fees.
Commentary
•
Average portfolio Segment Earnings guarantee fee rates:
◦
2Q 2017 vs. 2Q 2016 - decreased slightly due to a decline in the recognition of amortized fees driven by lower prepayments.
◦
YTD 2017 vs. YTD 2016 - remained stable due to higher average contractual guarantee fees, offset by a decline in the recognition of amortized fees.
•
Average guarantee fee rate charged on new acquisitions:
◦
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - decreased due to competitive pricing, partially offset by lower market-adjusted pricing costs based on the price performance of our PCs relative to Fannie Mae securities.

Freddie Mac Form 10-Q
 
28


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


Credit Risk Transfer (CRT) Activity
Since 2013, STACR debt note and ACIS transactions have been our principal methods of transferring a small portion of the expected credit losses and a significant portion of credit losses in a stressed economic environment in our Core single-family loan portfolio. The following charts present the issuance amounts for the STACR and ACIS transactions that occurred during 2Q 2017 and the cumulative issuance amount of all STACR and ACIS transactions as of June 30, 2017 by loss position and the party holding each loss position.
New STACR Debt Note and ACIS Transactions during 2Q 2017(1)
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$98.8
 
Reference Pool

$102.4
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac


$0.4
 
ACIS



$0.5






 
STACR Debt Notes


$1.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
Loss
 
Freddie Mac

$0.5
 
ACIS

$0.1
 
STACR Debt Notes
$0.4
 
 
Cumulative STACR Debt Note and ACIS
Transactions as of June 30, 2017(1)(2) 
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$725.5
 
Reference Pool

$760.8
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac


$1.8
 
ACIS



$6.6






 
STACR Debt Notes


$20.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
 Loss
 
Freddie Mac

$4.2
 
ACIS

$0.7
 
STACR
Debt Notes
$1.5
 

(1)
The amounts represent the UPB upon issuance of STACR debt notes and execution of ACIS transactions.
(2)
For the current outstanding coverage provided by our STACR debt note and ACIS transactions, see Note 4.
Commentary
•
We continued to transfer credit losses to third-party investors, insurers, and selected sellers through CRT transactions. During YTD 2017, we transferred credit losses associated with $170.6 billion in UPB of loans in our Core single-family loan portfolio through STACR debt note, ACIS, whole loan security, and deep mortgage insurance credit risk transfer, or Deep MI, transactions.
•
The interest and premiums we pay on our issued STACR debt note and ACIS transactions to transfer credit risk effectively reduce the guarantee fee income we earn on the PCs related to the respective reference pools. Our expected guarantee fee income on the PCs related to the STACR and ACIS reference pools has been effectively reduced by approximately 31%, on average, for all transactions executed through June 30, 2017. The amount of the effective reduction to our overall guarantee fee income could be affected over time by changes in:
◦
Our risk transfer strategy;
◦
Prepayment and credit experience of the reference pools; or

Freddie Mac Form 10-Q
 
29


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


◦
The economic or regulatory environment that affects the cost of executing these transactions.
•
We continue to evaluate our credit risk transfer strategy and to make changes depending on market conditions. The aggregate cost of our credit risk transfer activity will continue to increase as we continue to transfer risk on new originations.
•
Due to differences in accounting, there could be a significant time lag between when we recognize a provision for credit losses on the mortgage loans in the reference pools and when we recognize the related recovery for the majority of our STACR debt note transactions. A credit expense on a loan in a reference pool related to these transactions is recorded when it is probable that we have incurred a loss, while a benefit is recorded when an actual loss event occurs.
•
As of June 30, 2017, there has not been a significant number of loans in our STACR debt note and ACIS reference pools that have experienced a credit event. As a result, we experienced minimal write-downs on our STACR debt notes and filed minimal claims for reimbursement of losses under our ACIS transactions.
•
As of June 30, 2017, we have transferred a portion of the credit risk on nearly 33% of the total outstanding single-family credit guarantee portfolio.

Freddie Mac Form 10-Q
 
30


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


Mortgage Loan Credit Risk
Certain combinations of loan attributes can indicate a higher degree of credit risk, such as loans with both higher LTV ratios and lower credit scores. The following table presents the combination of credit score and current LTV (CLTV) ratio attributes of loans in our single-family credit guarantee portfolio.
 
 
June 30, 2017
 
 
CLTV ≤ 80

CLTV > 80 to 100

CLTV > 100

All Loans
(Credit score)
 
% Portfolio

SDQ Rate(1)

% Portfolio

SDQ Rate(1)

% Portfolio

SDQ Rate(1)

% Portfolio

SDQ Rate(1)
 
% Modified
Core single-family loan portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
0.2
%
 
1.86
%
 
—
%
 
NM

 
—
%
 
NM

 
0.2
%
 
2.08
%
 
3.2
%
620 to 659
 
1.7

 
0.92
%
 
0.3

 
1.06
%
 
—

 
NM

 
2.0

 
0.95
%
 
1.4
%
≥ 660
 
63.9

 
0.14
%
 
9.2

 
0.21
%
 
—

 
NM

 
73.1

 
0.15
%
 
0.2
%
Not available
 
—

 
NM

 
—

 
NM

 
—

 
NM

 
—

 
NM

 
4.0
%
Total
 
65.8
%
 
0.17
%
 
9.5
%
 
0.25
%
 
—
%
 
NM

 
75.3
%
 
0.18
%
 
0.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legacy and relief refinance single-family loan portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
1.3
%
 
4.26
%
 
0.3
%
 
7.97
%
 
0.2
%
 
13.42
%
 
1.8
%
 
5.35
%
 
24.0
%
620 to 659
 
2.0

 
3.19
%
 
0.5

 
6.18
%
 
0.3

 
11.01
%
 
2.8

 
4.04
%
 
21.0
%
≥ 660
 
16.1

 
1.11
%
 
2.8

 
3.1
%
 
1.1

 
5.52
%
 
20.0

 
1.45
%
 
8.0
%
Not available
 
0.1

 
4.65
%
 
—

 
NM

 
—

 
NM

 
0.1

 
5.21
%
 
17.0
%
Total
 
19.5
%
 
1.59
%
 
3.6
%
 
4.07
%
 
1.6
%
 
7.39
%
 
24.7
%
 
2.07
%
 
10.0
%
(1)
NM - Not meaningful due to the percentage of the portfolio rounding to zero.

Freddie Mac Form 10-Q
 
31


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


Alt-A and Subprime Loans
While we refer to certain loans as subprime or Alt-A for purposes of the discussion below and elsewhere in this Form 10-Q, there is no universally accepted definition of subprime or Alt-A, and the classification of such loans may differ from company to company. For example, some financial institutions may use credit scores to delineate certain residential loans as subprime. We do not rely on these loan classifications to evaluate the credit risk exposure relating to such loans in our single-family credit guarantee portfolio.
Participants in the mortgage market may characterize single-family loans based upon their overall credit quality at the time of origination, generally considering them to be prime or subprime. While we have not historically characterized the loans in our single-family credit guarantee portfolio as either prime or subprime, we monitor the amount of loans we have guaranteed with characteristics that indicate a higher degree of credit risk. In addition, we estimate that approximately $1.2 billion and $1.3 billion of security collateral underlying our other securitization products at June 30, 2017 and December 31, 2016, respectively, were identified as subprime based on information provided to us when we entered into these transactions.
Many mortgage market participants classify single-family loans with credit characteristics that range between their prime and subprime categories as Alt-A because these loans have a combination of characteristics of each category, may be underwritten with lower or alternative income or asset documentation requirements compared to a full documentation loan, or both. Although we have discontinued new purchases of loans with lower documentation standards, we continue to purchase certain amounts of such loans in cases where the loan was either purchased pursuant to a previously issued guarantee, as part of our relief refinance initiative, or as part of another refinance loan initiative and the pre-existing loan was originated under less than full documentation standards. In the event we purchase a refinance loan and the original loan had been previously identified as Alt-A, such refinance loan may no longer be categorized or reported as an Alt-A loan in this Form 10-Q and our other financial reports because the new refinance loan replacing the original loan would not be identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such refinancing not occurred. From the time the relief refinance initiative began in 2009 to June 30, 2017, we have purchased approximately $35.0 billion of relief refinance loans that were previously categorized as Alt-A loans in our portfolio, including $0.4 billion in 2Q 2017.
The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
 
 
June 30, 2017
 
December 31, 2016
(Dollars in billions)
 
UPB
 
CLTV
 
% Modified
 
SDQ Rate
 
UPB
 
CLTV
 
% Modified
 
SDQ Rate
Alt-A
 

$29.5

 
69
%
 
26.7
%
 
4.89
%
 

$32.6

 
72
%
 
25.9
%
 
5.21
%
The UPB of Alt-A loans in our single-family credit guarantee portfolio declined during YTD 2017 primarily due to borrowers refinancing into other mortgage products, foreclosure transfers, and other liquidation events. Significant portions of the Alt-A loans in our portfolio are concentrated in Arizona, California, Florida, and Nevada.

Freddie Mac Form 10-Q
 
32


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


Single-Family Loan Performance
Serious Delinquency Rates
a20172q10q_chart-27008.jpg
Commentary
•
Serious delinquency rates generally continued to decline during the 2017 periods on our single-family credit guarantee portfolio due to home price appreciation and a low unemployment rate, combined with our continued loss mitigation efforts and sales of certain seriously delinquent loans.
•
Delinquency rates declined to 1.23% and 0.33% for loans one month and two months past due, respectively, as of June 30, 2017 compared to 1.28% and 0.37%, respectively, as of June 30, 2016.

Freddie Mac Form 10-Q
 
33


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


Credit Performance
The table below contains certain credit performance metrics of our single-family credit guarantee portfolio. On January 1, 2017, we elected a new accounting policy for loan reclassifications from held-for-investment to held-for-sale that increased the amount of charge-offs recognized during YTD 2017. Under the new policy, when we reclassify (transfer) a loan from held-for-investment to held-for-sale, we charge off the entire difference between the loan’s recorded investment and its fair value if the loan has a history of credit-related issues. Expenses related to property taxes and insurance are included as part of the charge-off. See Note 4 for further information about this change.
(Dollars in millions)
2Q 2017
 
2Q 2016
 
YTD 2017
 
YTD 2016
Charge-offs, gross(1)

$2,153

 

$486

 

$2,893

 

$1,055

Recoveries
(85
)
 
(152
)
 
(182
)
 
(280
)
Charge-offs, net
2,068

 
334

 
2,711

 
775

REO operations expense
37

 
29

 
93

 
113

Total credit losses

$2,105

 

$363

 

$2,804



$888

 
 
 
 
 
 
 
 
Total credit losses(1) (in bps)
46.7

 
8.4

 
31.2

 
10.3


(1)
2Q 2016 and YTD 2016 do not include lower-of-cost-or-fair-value adjustments and other expenses related to property taxes and insurance recognized when we transfer loans from held-for-investment to held-for-sale, which totaled $776 million and $874 million, respectively. 2Q 2017 and YTD 2017 include charge-offs of $1.8 billion and $2.2 billion, respectively, related to the transfer of loans from held-for-investment to held-for-sale.
The table below summarizes the carrying value for individually impaired single-family loans on our condensed consolidated balance sheets for which we have recorded a specific reserve.
 
 
June 30, 2017
 
June 30, 2016
(Dollars in millions)
 
Loan Count
 
Amount
 
Loan Count
 
Amount
TDRs, at January 1
 
485,709

 

$78,869

 
512,253

 

$85,960

New additions
 
20,641

 
2,851

 
22,839

 
3,132

Repayments and reclassifications to held-for-sale
 
(72,254
)
 
(14,776
)
 
(31,989
)
 
(6,327
)
Foreclosure transfers and foreclosure alternatives
 
(5,514
)
 
(751
)
 
(5,938
)
 
(852
)
TDRs, at June 30
 
428,582

 
66,193

 
497,165

 
81,913

Loans impaired upon purchase
 
6,615

 
443

 
8,661

 
614

Total impaired loans with specific reserve
 
435,197

 
66,636

 
505,826

 
82,527

Allowance for loan losses
 
 
 
(8,846
)
 
 
 
(12,357
)
Net investment, at June 30
 
 
 

$57,790

 
 
 

$70,170


Freddie Mac Form 10-Q
 
34


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


The table below presents information about the UPB of single-family TDRs and non-accrual loans on our condensed consolidated balance sheets.
(In millions)
 
June 30, 2017
 
December 31, 2016
TDRs on accrual status
 

$64,351

 

$77,122

Non-accrual loans
 
13,913

 
16,164

Total TDRs and non-accrual loans
 

$78,264

 

$93,286

 
 
 
 
 
Loan loss reserves associated with:
 
 
 
 
  TDRs on accrual status
 

$7,322

 

$10,295

  Non-accrual loans
 
2,044

 
2,290

Total
 

$9,366

 

$12,585

 
 
 
 
 
(In millions)
 
YTD 2017
 
YTD 2016
Foregone interest income on TDRs and non-accrual loans(1)
 

$988

 

$1,249

(1)
Represents the amount of interest income that we would have recognized for loans outstanding at the end of each period, had the loans performed according to their original contractual terms.
Commentary
•
As of June 30, 2017, 57% of the loan loss reserves for single-family mortgage loans related to interest rate concessions provided to borrowers as part of loan modifications.
•
Most of our modified single-family loans, including TDRs, were current and performing at June 30, 2017.
•
We expect our loan loss reserves associated with existing single-family TDRs to continue to decline over time as borrowers continue to make monthly payments under the modified terms and interest-rate concessions are amortized into earnings.
•
See Note 4 for information on our single-family loan loss reserves.
•
Charge-offs, net were higher in the 2017 periods compared to the 2016 periods primarily due to the policy change for loan reclassifications from held-for-investment to held-for-sale. See Note 4 for further information about this change.

Freddie Mac Form 10-Q
 
35


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


Loss Mitigation Activities
Loan Workout Activity
(UPB in billions, number of loan workouts in thousands)
a20172q10q_chart-27032.jpga20172q10q_chart-29467.jpg
Commentary
•
Our loan workout activity declined during the 2017 periods compared to the 2016 periods consistent with the decline in the number of delinquent loans in the single-family credit guarantee portfolio as the economy continued to improve.
•
We continue our loss mitigation efforts through our relief refinance, modification, and other initiatives.

Freddie Mac Form 10-Q
 
36


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


REO Activity
The table below presents a summary of our single-family REO activity.
 
 
2Q 2017
 
2Q 2016
 
YTD 2017
 
YTD 2016
(Dollars in millions)
 
Number of Properties
 
Amount
 
Number of Properties
 
Amount
 
Number of Properties
 
Amount
 
Number of Properties
 
Amount
Beginning balance — REO
 
10,938

 

$1,162

 
15,409

 

$1,611

 
11,418

 

$1,215

 
17,004

 

$1,774

Additions
 
3,299

 
321

 
4,153

 
392

 
6,844

 
667

 
8,784

 
832

Dispositions
 
(4,322
)
 
(437
)
 
(6,278
)
 
(609
)
 
(8,347
)
 
(836
)
 
(12,504
)
 
(1,212
)
Ending balance — REO
 
9,915

 
1,046

 
13,284

 
1,394

 
9,915

 
1,046

 
13,284

 
1,394

Beginning balance, valuation allowance
 
 
 
(19
)
 
 
 
(44
)
 
 
 
(17
)
 
 
 
(52
)
Change in valuation allowance
 
 
 
9

 
 
 
27

 
 
 
7

 
 
 
35

Ending balance, valuation allowance
 


 
(10
)
 


 
(17
)
 
 
 
(10
)
 


 
(17
)
Ending balance — REO, net
 


 

$1,036

 


 

$1,377

 
 
 

$1,036

 


 

$1,377

Commentary
•
Our REO ending inventory declined in the 2017 periods compared to the 2016 periods primarily due to a decrease in REO acquisitions driven by fewer loans in foreclosure and a large proportion of property sales to third parties at foreclosure.

Freddie Mac Form 10-Q
 
37


Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


FINANCIAL RESULTS
The table below presents the components of Segment Earnings and comprehensive income for our Single-family Guarantee segment.
 
 
2Q 2017
 
2Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in millions)
 
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Guarantee fee income
 

$1,506

 

$1,501

 

$5

 
—
 %
 

$2,924

 

$2,786

 

$138

 
5
 %
Benefit (provision) for credit losses
 
12

 
121

 
(109
)
 
(90
)%
 
51

 
410

 
(359
)
 
(88
)%
Other non-interest income (loss)
 
359

 
(99
)
 
458

 
463
 %
 
678

 
125

 
553

 
442
 %
Administrative expense
 
(332
)
 
(314
)
 
(18
)
 
(6
)%
 
(665
)
 
(609
)
 
(56
)
 
(9
)%
REO operations expense
 
(41
)
 
(31
)
 
(10
)
 
(32
)%
 
(100
)
 
(118
)
 
18

 
15
 %
Other non-interest expense
 
(335
)
 
(268
)
 
(67
)
 
(25
)%
 
(653
)
 
(520
)
 
(133
)
 
(26
)%
Segment Earnings before income tax expense
 
1,169

 
910

 
259

 
28
 %
 
2,235

 
2,074

 
161

 
8
 %
Income tax expense
 
(391
)
 
(326
)
 
(65
)
 
(20
)%
 
(747
)
 
(680
)
 
(67
)
 
(10
)%
Segment Earnings, net of taxes
 
778

 
584

 
194

 
33
 %
 
1,488

 
1,394

 
94

 
7
 %
Total other comprehensive income (loss), net of tax
 
—

 
(1
)
 
1

 
100
 %
 
(2
)
 
—

 
(2
)
 
N/A

Total comprehensive income
 

$778

 

$583

 

$195

 
33
 %
 

$1,486

 

$1,394

 

$92

 
7
 %
Key Drivers:
•
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - Total comprehensive income increased primarily driven by:
◦
Gains recognized from price improvements on reperforming loans reclassified from held-for-investment to held-for-sale during the 2017 periods, compared to losses primarily on seriously delinquent loans during the 2016 periods.
This increase was partially offset by:
◦
Decreases in benefit for credit losses during the 2017 periods due to smaller improvements in probability of default and estimated loss severity, compared to larger improvements in probability of default and estimated loss severity during the 2016 periods.




Freddie Mac Form 10-Q
 
38


Management's Discussion and Analysis
 
Our Business Segments | Multifamily


MULTIFAMILY
MARKET CONDITIONS
The graphs and related discussion below present certain multifamily market indicators that can significantly affect the business and financial results of our Multifamily segment.
Change in Effective Rents a20172q10q_chart-26990.jpg
Source: REIS, Inc.

 
Apartment Vacancy Rates
a20172q10q_chart-28403.jpg
Source: REIS, Inc.
Commentary
•
While vacancy rates rose slightly during 2Q 2017 compared to 1Q 2017, effective rents increased primarily due to a decline in rent concessions offered by landlords. The decline in rent concessions was primarily attributable to lower than expected new apartment completions, coupled with an increase in potential renters, as single-family home prices continued to rise.
•
We expect vacancy rates to continue to increase slowly in the upcoming quarters. While increasing vacancy rates will moderate effective rent growth, we expect effective rents for the remainder of the year to be in line with the 2016 rates and the long-term average. Furthermore, we do not expect our financial results for the remainder of the year to be significantly affected by either of these market conditions.

Freddie Mac Form 10-Q
 
39


Management's Discussion and Analysis
 
Our Business Segments | Multifamily


K Certificate Benchmark Spreads
a20172q10q_chart-27028.jpg

Source: Independent dealers

Commentary
•
The profitability of our K Certificate transactions (as measured by gains and losses on sales of mortgage loans) and the valuation of our securitization pipeline of held-for-sale loans are affected by the overall market spread movements (generally reflected in K Certificate benchmark spreads) as well as deal specific attributes, such as structure and credit. These market spread movements and deal specific attributes contribute to our earnings volatility, which we manage by controlling the size of our securitization pipeline of held-for-sale mortgage loans and by entering into certain spread-related derivatives.
•
K Certificate benchmark spreads remained stable during 2Q 2017, ending relatively flat at 63 basis points compared to 62 basis points at the end of 1Q 2017. By comparison, our K Certificate benchmark spreads were more volatile during 1Q 2016 and 2Q 2016.

Freddie Mac Form 10-Q
 
40


Management's Discussion and Analysis
 
Our Business Segments | Multifamily


BUSINESS RESULTS
The graphs, tables and related discussion below present the business results of our Multifamily segment.
New Business Activity
Multifamily New Business Activity

(UPB in billions)

a20172q10q_chart-27110.jpg    a20172q10q_chart-28721.jpg

Commentary
•
The 2017 FHFA Scorecard production cap remains at $36.5 billion. Business activity associated with loans for targeted properties or properties with certain attributes are considered uncapped for purposes of determining the dollar volume of multifamily new business. Reclassifications between new business activity subject to the production cap and new business activity not subject to the production cap may occur during 2017.
•
Outstanding loan purchase commitments were $19.0 billion and $12.6 billion as of June 30, 2017 and June 30, 2016, respectively. Both periods include loan purchase commitments for which we have elected the fair value option.
•
While our multifamily new business activity on a year-to-date basis was relatively flat, this activity was higher during 2Q 2017 compared to 2Q 2016. We expect our full year new business volumes for 2017

Freddie Mac Form 10-Q
 
41


Management's Discussion and Analysis
 
Our Business Segments | Multifamily


to be higher than the 2016 volumes because of continued strong demand for multifamily loan products during 2017 due to an elevated number of new apartment completions, strong multifamily fundamentals and low interest rates. Multifamily market fundamentals are driven primarily by a healthy job market, continued growth in households, high propensity to rent among young adults, and rising single-family home prices.
•
While certain of our new business activity is subject to the 2017 FHFA Scorecard production cap, we have increased our uncapped new business volume as part of our effort to support borrowers in certain property types and communities that meet the criteria for affordability and to support the overall growth of the multifamily mortgage market.
•
Approximately 48% and 49% of our multifamily new business activity during 2Q 2017 and YTD 2017, respectively, counted towards the 2017 FHFA Scorecard production cap, while the remaining 52% and 51% for the same periods was not subject to the production cap.


Freddie Mac Form 10-Q
 
42


Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Multifamily Portfolio and Mortgage Market Support
Total Multifamily Portfolio
a20172q10q_chart-27016.jpg
 
Multifamily Mortgage Investments Portfolioa20172q10q_chart-28570.jpg
Multifamily Mortgage Market Support
The following table summarizes our support of the multifamily mortgage market.
(UPB in millions)
June 30, 2017
 
December 31, 2016
Unsecuritized mortgage loans held-for-sale

$18,423

 

$16,544

Unsecuritized mortgage loans held-for-investment
21,433

 
25,874

Mortgage-related securities
9,533

 
12,517

Guarantee portfolio
173,600

 
157,992

Total multifamily portfolio
222,989

 
212,927

Add: Unguaranteed securities(1)
26,959

 
24,573

Less: Acquired mortgage-related securities(2)
(5,471
)
 
(5,793
)
Total multifamily market support

$244,477

 

$231,707


(1)
Reflects the UPB of unguaranteed securities issued as part of our securitization products.
(2)
Reflects the UPB of mortgage-related securities acquired from our securitization products. This UPB must be removed to avoid a double-count, as it is already reflected within the guarantee portfolio and/or unguaranteed securities.



Freddie Mac Form 10-Q
 
43


Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Commentary
•
Our Multifamily segment provides liquidity and support to the multifamily mortgage market through a combination of activities that include the purchase, guarantee and/or securitization of multifamily mortgage loans and mortgage-related securities. At times, we invest in certain guaranteed senior securities and unguaranteed subordinated securities related to our K Certificate and SB Certificate issuances. However, we have not invested in unguaranteed securities that are in a first loss position.
•
Our total multifamily portfolio grew during YTD 2017 due to our new business volume, which increased because of strong demand for multifamily loan products, outpacing maturities within the portfolio.
•
At June 30, 2017, the UPB of our held-for-sale loans and mortgage-related securities, which are measured at fair value or lower-of-cost-or-fair-value, was relatively unchanged from December 31, 2016. The decline attributable to the runoff of our CMBS portfolio was largely offset by an increase in the balance of our securitization pipeline of held-for-sale loans due to the growth of our new business activity during 2Q 2017 and the reclassification of certain loans from held-for-investment to held-for-sale during 2Q 2017.
•
Our multifamily delinquency rate at June 30, 2017 was 0.01%.

Freddie Mac Form 10-Q
 
44


Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Credit Risk Transfer Activity
New K Certificate and SB Certificate Issuances
(UPB in billions)
a20172q10q_chart-27445.jpg    a20172q10q_chart-29363.jpg
Commentary
•
The volume of our K Certificate and SB Certificate issuances is generally influenced by market demand for multifamily securities, along with the inventory of loans that we have available for securitization. The typical holding period for held-for-sale loans in our securitization pipeline generally ranges between three and six months.
•
Although demand for multifamily securities was strong during both the 2017 periods and the 2016 periods, the volume of our K Certificate and SB Certificate issuances was lower primarily due to a larger inventory of loans being available for securitization during the 2016 periods compared to the 2017 periods. Based on our 2Q 2017 new business volume, we expect our K Certificate and SB Certificate issuances for the remainder of 2017 to exceed the issuances for the same period during 2016.

Freddie Mac Form 10-Q
 
45


Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Average Guarantee Fee Rate on New K Certificates and SB Certificates
a20172q10q_chart-30688.jpg    a20172q10q_chart-31869.jpg


Commentary
•
K Certificate and SB Certificate structures vary by deal. Structural deal features such as term, type of underlying loan product, and subordination levels generally influence the deal's size (UPB) and its risk profile, which ultimately affects the guarantee fee rate set by Freddie Mac, as Guarantor, at the time of securitization.
•
While the average guarantee fee rate on newly issued K Certificate and SB Certificate issuances increased slightly during 2Q 2017 compared to 2Q 2016, the rate was lower during YTD 2017 compared to YTD 2016, primarily due to greater securitization of underlying loan products that by their nature and design have less risk and for which we therefore set a lower guarantee fee rate.
•
During both 2Q 2017 and 2Q 2016, we recorded $0.2 billion in guarantee assets on our condensed consolidated balance sheets, representing the present value of fees we expect to receive in the future from K Certificate and SB Certificate guarantee transactions we executed within these quarters. These fees will be recognized into segment earnings over the expected remaining term of the guarantee contract. As of June 30, 2017, the cumulative balance of unearned guarantee fees on our condensed consolidated balance sheets was $1.5 billion, which will be recognized into earnings over the expected remaining guarantee term of six years. Based on our historical experience, we expect to collect these future fees. However, the actual amount collected will depend on the performance of the underlying collateral subject to our financial guarantee.

Freddie Mac Form 10-Q
 
46


Management's Discussion and Analysis
 
Our Business Segments | Multifamily


FINANCIAL RESULTS
The table below presents the components of Segment Earnings and comprehensive income for our Multifamily segment. As we use derivatives to economically hedge interest rate-related fair value changes of most of our assets measured at fair value, interest rates have a minimal net impact on our total comprehensive income.
 
 
2Q 2017
 
2Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in millions)
 
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Net interest income
 

$292

 

$283

 

$9

 
3
 %
 

$563

 

$535

 

$28

 
5
 %
Guarantee fee income
 
162

 
124

 
38

 
31
 %
 
313

 
232

 
81

 
35
 %
Benefit (provision) for credit losses
 
6

 
6

 
—

 
—
 %
 
12

 
11

 
1

 
9
 %
Gains (losses) on loans and other non-interest income
 
412

 
378

 
34

 
9
 %
 
648

 
1,115

 
(467
)
 
(42
)%
Derivative gains (losses)
 
(180
)
 
(296
)
 
116

 
39
 %
 
(53
)
 
(1,083
)
 
1,030

 
95
 %
Administrative expense
 
(95
)
 
(86
)
 
(9
)
 
(10
)%
 
(190
)
 
(166
)
 
(24
)
 
(14
)%
Other non-interest expense
 
(12
)
 
(9
)
 
(3
)
 
(33
)%
 
(33
)
 
(33
)
 
—

 
—
 %
Segment Earnings before income tax (expense) benefit
 
585

 
400

 
185

 
46
 %
 
1,260

 
611

 
649

 
106
 %
Income tax (expense) benefit
 
(196
)
 
(136
)
 
(60
)
 
(44
)%
 
(422
)
 
(200
)
 
(222
)
 
(111
)%
Segment Earnings, net of taxes
 
389

 
264

 
125

 
47
 %
 
838

 
411

 
427

 
104
 %
Total other comprehensive income (loss), net of tax
 
73

 
7

 
66

 
943
 %
 
69

 
10

 
59

 
590
 %
Total comprehensive income (loss)
 

$462

 

$271

 

$191

 
70
 %
 

$907

 

$421

 

$486

 
115
 %

Key Drivers:
•
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - Total comprehensive income increased primarily driven by:
◦
Improved K Certificate and SB Certificate executions, resulting in greater gains on our mortgage loans. The improved executions primarily resulted from an expanded investor base, structural enhancements made to our K Certificate transactions during the second half of 2016, and less market volatility during the 2017 periods compared to the 2016 periods.
◦
CMBS spreads tightening during the 2017 periods, resulting in fair value gains, compared to CMBS spreads widening during the 2016 periods, resulting in fair value losses.
◦
Higher average multifamily guarantee portfolio balances as a result of ongoing issuances of K Certificates and SB Certificates, resulting in greater guarantee fee income.


Freddie Mac Form 10-Q
 
47


Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


CAPITAL MARKETS
MARKET CONDITIONS
The following graphs and related discussion present the par swap rate curves as of the end of each comparative period. Changes in par swap rates can significantly affect the fair value of our debt, derivatives, and mortgage and non-mortgage-related securities. As a result, changes in par swap rates will affect the business and financial results of our Capital Markets segment.
Par Swap Rate Curves
Rate (%)
a20172q10q_chart-27205.jpga20172q10q_chart-28803.jpg
Sources: BlackRock
Commentary
•
Long-term interest rates decreased during 2Q 2017 and YTD 2017, resulting in lower fair values for our pay-fixed interest rate swaps and higher fair values for our receive-fixed interest rate swaps, certain of our option contracts, and the vast majority of our investments in securities. Long-term interest rates decreased more during 2Q 2016 and YTD 2016, compared to the 2017 periods.



Freddie Mac Form 10-Q
 
48


Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


BUSINESS RESULTS
The graphs and related discussion below present the business results of our Capital Markets segment.
Investing Activity
The following graphs present the Capital Markets segment's total investments portfolio and the composition of its mortgage investments portfolio by liquidity category.

Investments Portfolio
a20172q10q_chart-27004.jpg
 
Mortgage Investments Portfolio
a20172q10q_chart-28456.jpg
Commentary
•
We continue to reduce the size of our mortgage investments portfolio in order to comply with the mortgage-related investments portfolio year-end limits. The balance of our mortgage investments portfolio declined 3.2% from December 31, 2016 to June 30, 2017.
•
The balance of our other investments and cash portfolio declined by 14.8% primarily due to lower near term cash needs for lower upcoming maturities and anticipated calls of other debt as of June 30, 2017 compared to December 31, 2016.
•
The overall liquidity of our mortgage investments portfolio continued to improve as our less liquid assets decreased at a faster pace than the overall decline of our mortgage investments portfolio. The percentage of less liquid assets relative to our total mortgage investments portfolio declined from 34.4% at December 31, 2016 to 33.0% at June 30, 2017, primarily due to repayments and sales of our less liquid assets. We continued to actively reduce the size of our less liquid assets during YTD 2017 by selling $2.8 billion of non-agency mortgage-related securities and $1.1 billion of reperforming loans. Our sales of reperforming loans involved securitization of the loans using a senior subordinate structure.

Freddie Mac Form 10-Q
 
49


Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


Net Interest Yield and Average Balances
Net Interest Yield & Average Investments Portfolio Balances
(UPB in billions)
a20172q10q_chart-27123.jpg    a20172q10q_chart-28849.jpg
Commentary
•
Net Interest Yield
◦
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - remained relatively flat.
•
Average Investments Portfolio Balance
◦
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - declined for the 2017 periods compared to the 2016 periods primarily due to repayments of mortgage-related securities, sales of non-agency mortgage-related securities, and sales and repayments of certain reperforming loans. The overall decline in our average investments portfolio balance is consistent with our efforts to comply with the mortgage-related investments portfolio year-end limits.

Freddie Mac Form 10-Q
 
50


Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


FINANCIAL RESULTS
The table below presents the components of Segment Earnings and comprehensive income for our Capital Markets segment.
 
2Q 2017
 
2Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Net interest income

$875

 

$925

 

($50
)
 
(5
)%
 

$1,804

 

$1,954

 

($150
)
 
(8
)%
Net impairment of available-for-sale securities recognized in earnings
71

 
49

 
22

 
45
 %
 
144

 
130

 
14

 
11
 %
Derivative gains (losses)
(485
)
 
(1,322
)
 
837

 
63
 %
 
(433
)
 
(4,598
)
 
4,165

 
91
 %
Gains (losses) on trading securities
(46
)
 
22

 
(68
)
 
(309
)%
 
(181
)
 
191

 
(372
)
 
(195
)%
Other non-interest income
418

 
550

 
(132
)
 
(24
)%
 
1,162

 
737

 
425

 
58
 %
Administrative expense
(86
)
 
(75
)
 
(11
)
 
(15
)%
 
(169
)
 
(148
)
 
(21
)
 
(14
)%
Segment Earnings before income tax (expense) benefit
747

 
149

 
598

 
401
 %
 
2,327

 
(1,734
)
 
4,061

 
234
 %
Income tax (expense) benefit
(250
)
 
(4
)
 
(246
)
 
(6,150
)%
 
(778
)
 
568

 
(1,346
)
 
(237
)%
Segment Earnings, net of taxes
497

 
145

 
352

 
243
 %
 
1,549

 
(1,166
)
 
2,715

 
233
 %
Total other comprehensive income (loss), net of tax
249

 
134

 
115

 
86
 %
 
278

 
284

 
(6
)
 
(2
)%
Total comprehensive income (loss)

$746

 

$279

 

$467

 
167
 %
 

$1,827

 

($882
)
 

$2,709

 
307
 %
The portion of Total comprehensive income (loss) driven by interest rate-related and market spread-related fair value changes, after-tax, is presented in the table below. These amounts affect various line items in the table above, including Derivative gains (losses), Gains (losses) on trading securities, Other non-interest income, Income tax (expense) benefit, and Total other comprehensive income (loss), net of tax.
 
2Q 2017
 
2Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in billions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Interest rate-related

($0.1
)
 

($0.5
)
 

$0.4

 
80
%
 

($0.1
)
 

($1.9
)
 

$1.8

 
95
%
Market spread-related
0.2

 
0.1

 
0.1

 
100
%
 
0.3

 
(0.3
)
 
0.6

 
200
%
Key Drivers:
•
2Q 2017 vs. 2Q 2016 and YTD 2017 vs. YTD 2016 - Total comprehensive income increased primarily driven by:
◦
Interest rate-related fair value changes during the 2017 periods. Our use of hedge accounting permitted us to offset the fair value losses on certain of our pay-fixed swaps against the fair value gains on certain of our single-family mortgage loans. In addition, smaller declines in long-term interest rates during the 2017 periods compared to the 2016 periods resulted in smaller fair value losses on our pay-fixed interest rate swaps and forward commitments to issue PCs, partially offset by smaller fair value gains on our receive-fixed swaps, certain options based derivatives, and trading and available-for-sale securities.
◦
Overall, greater market spread tightening during the 2017 periods compared to the 2016 periods on our agency and non-agency mortgage-related securities, resulting in larger fair value gains.

Freddie Mac Form 10-Q
 
51


Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


◦
Gains recognized from the extinguishment of certain fixed-rate debt securities of consolidated trusts during the 2017 periods, as market interest rates increased between the time of issuance and repurchase, compared to losses during the 2016 periods when market interest rates decreased between the time of issuance and repurchase.




Freddie Mac Form 10-Q
 
52


Management's Discussion and Analysis
 
Risk Management



RISK MANAGEMENT
Risk is an inherent part of our business activities. We are exposed to four major types of risk: credit risk, market risk, liquidity risk, and operational risk.
For more discussion of these and other risks facing our business and our risk management framework, see "MD&A - Risk Management" and "Risk Factors" in our 2016 Annual Report and "Liquidity and Capital Resources" in this report and in our 2016 Annual Report. See below for updates since our 2016 Annual Report.

CONSERVATORSHIP CAPITAL FRAMEWORK (CCF)
We and Fannie Mae have worked with FHFA to develop an overall risk measurement framework for evaluating Freddie Mac’s and Fannie Mae’s risk management and business decisions during conservatorship, known as the Conservatorship Capital Framework ("CCF"). We are now working with FHFA on the implementation of the CCF. We continue to expect this will result in limited change to our decision making.




Freddie Mac Form 10-Q
 
53


Management's Discussion and Analysis
 
Risk Management | Market Risk

MARKET RISK
Our business segments have inherent exposure to market risk, including interest-rate and spread risks. Interest-rate risk is consolidated and primarily managed by the Capital Markets segment, while spread risk is owned and managed by each individual business segment. Market risk can adversely affect future cash flows, or economic value, as well as earnings and net worth. We manage our exposure to market risk on both an economic and GAAP earnings basis.
ECONOMIC MARKET RISK
The majority of our economic interest-rate risk comes from our investments in mortgage-related assets (securities and loans) and the debt we issue to fund them. Our primary goal in managing interest-rate risk is to reduce the amount of change in the value of our future cash flows due to future changes in interest rates. We use models to analyze possible future interest-rate scenarios, along with the cash flows of our assets and liabilities over those scenarios.
Our primary interest-rate risk measures are duration gap and PMVS. Duration gap measures the difference in price sensitivity to interest rate changes between our financial assets and liabilities and is expressed in months relative to the market value of assets. PMVS is an estimate of the change in the market value of our financial assets and liabilities with spreads held constant from an instantaneous shock to interest rates, assuming no rebalancing actions are undertaken. PMVS is measured in two ways, one measuring the estimated sensitivity of our portfolio market value to a 50 basis point parallel movement in interest rates (PMVS-Level or PMVS-L) and the other to a non-parallel movement resulting from a 25 basis point change in slope of the LIBOR yield curve (PMVS-Yield Curve or PMVS-YC). While we believe that duration gap and PMVS are useful risk management tools, they should be understood as estimates rather than as precise measurements.
The following tables provide duration gap, estimated point-in-time and minimum and maximum PMVS-L and PMVS-YC results, and an average of the daily values and standard deviation. The table below also provides PMVS-L estimates assuming an immediate 100 basis point shift in the LIBOR yield curve. The interest-rate sensitivity of a mortgage portfolio varies across a wide range of interest rates.
 
 
PMVS-YC
 
PMVS-L
(In millions)
 
25 bps
 
50 bps
 
100 bps
Assuming shifts of the LIBOR yield curve:
 
 
 
 
 
 
June 30, 2017
 

$9

 

$39

 

$145

December 31, 2016
 

$7

 

$—

 

$—


Freddie Mac Form 10-Q
 
54


Management's Discussion and Analysis
 
Risk Management | Market Risk

 
 
2Q 2017
 
2Q 2016
(Duration gap in months, dollars in millions)
 
Duration
Gap
 
PMVS-YC
25 bps
 
PMVS-L
50 bps
 
Duration
Gap
 
PMVS-YC
25 bps
 
PMVS-L
50 bps
Average
 
0.1

 

$5

 

$9

 
0.1

 

$4

 

$21

Minimum
 
(0.2
)
 

$—

 

$—

 
(0.1
)
 

$—

 

$—

Maximum
 
0.3

 

$19

 

$59

 
0.5

 

$14

 

$84

Standard deviation
 
0.1

 

$4

 

$13

 
0.1

 

$3

 

$20

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
YTD 2017
 
YTD 2016
(Duration gap in months, dollars in millions)
 
Duration
Gap
 
PMVS-YC
25 bps
 
PMVS-L
50 bps
 
Duration
Gap
 
PMVS-YC
25 bps
 
PMVS-L
50 bps
Average
 
0.1

 

$6

 

$7

 
0.1

 

$6

 

$25

Minimum
 
(0.2
)
 

$—

 

$—

 
(0.2
)
 

$—

 

$—

Maximum
 
0.8

 

$22

 

$63

 
0.7

 

$31

 

$92

Standard deviation
 
0.2

 

$5

 

$14

 
0.2

 

$5

 

$23

Derivatives enable us to reduce our economic interest-rate risk exposure as we continue to align our derivative portfolio with the changing duration of our economically hedged assets and liabilities. The table below shows that the PMVS-L risk levels, assuming a 50 basis point shift in the LIBOR yield curve for the periods presented, would have been higher if we had not used derivatives.
 
PMVS-L (50 bps)
 
 
(In millions)
Before
Derivatives
 
After
Derivatives
 
Effect of
Derivatives
June 30, 2017

$3,531

 

$39

 

($3,492
)
December 31, 2016

$3,651

 

$—

 

($3,651
)
GAAP EARNINGS VARIABILITY
While we manage our interest-rate risk exposure on an economic basis to a low level as measured by our models, our GAAP financial results are still subject to significant earnings variability from period to period. This variability of GAAP earnings and the declining capital reserve required under the terms of the Purchase Agreement (ultimately reaching zero in 2018) increase the risk of our having a negative net worth and thus being required to draw from Treasury. We could face a risk of a draw for a variety of reasons, including interest-rate volatility and spread volatility.
Interest-rate Volatility
We hold assets and liabilities that expose us to interest-rate risk. The way we account for our financial assets and liabilities (i.e., some are measured at amortized cost, while others are measured at fair value), including derivatives, creates volatility in our GAAP earnings when interest rates fluctuate. Based upon the composition of our financial assets and liabilities, including derivatives, at June 30, 2017, we generally recognize fair value losses in earnings when long-term interest rates decline.
In an effort to reduce our GAAP earnings variability, and better align our GAAP results with the economics of our business, we began using fair value hedge accounting for certain single-family mortgage loans during 1Q 2017.


Freddie Mac Form 10-Q
 
55


Management's Discussion and Analysis
 
Risk Management | Market Risk

The table below presents the effect of derivatives used in our interest-rate risk management activities on our comprehensive income, after considering any offsetting interest rate effects related to financial instruments measured at fair value and the effects of fair value hedge accounting.
(In billions)
2Q 2017
 
2Q 2016
 
YTD 2017
 
YTD 2016
Interest rate effect on derivative fair values

($1.1
)
 

($1.7
)
 

($0.6
)
 

($5.7
)
Estimate of offsetting interest rate effect related to financial instruments measured at fair value(1)
0.5

 
1.0

 
—

 
2.9

Gains (losses) on mortgage loans in fair value hedge relationships
0.4

 
—

 
0.4

 
—

Income tax (expense) benefit
0.1

 
0.3

 
0.1

 
1.0

Estimated net interest rate effect on comprehensive income (loss)

($0.1
)
 

($0.4
)
 

($0.1
)
 

($1.8
)

(1)
Includes the interest-rate effect on our trading securities, available-for-sale securities, mortgage loans held-for-sale, and other assets and debt for which we elected the fair value option, which is reflected in other non-interest income (loss) and total other comprehensive income (loss) on our condensed consolidated statements of comprehensive income.
Our fair value hedges are designed to reduce GAAP earnings variability primarily due to large interest rate movements. During 2Q 2017, fair value hedge accounting reduced our GAAP earnings variability due to interest-rate changes by $392 million on a pre-tax basis. See Note 7 for additional information on hedge accounting, including further details on the actual results of fair value hedge accounting on our condensed consolidated statements of comprehensive income.
We evaluate the potential benefits of fair value hedge accounting by evaluating a range of interest rate scenarios and identifying which of those scenarios produces the most adverse GAAP earnings outcome. The interest rate scenarios evaluated include parallel shifts in the yield curve of plus and minus 100 basis points, non-parallel yield curve shifts in which long-term interest rates increase or decrease by 100 basis points, and non-parallel yield curve shifts in which short-term and medium-term interest rates increase or decrease by 100 basis points.
At June 30, 2017, the GAAP adverse scenario both before and after fair value hedge accounting was a non-parallel shift in which long-term rates decrease by 100 basis points. The results of this evaluation are shown in the table below.
 
GAAP Adverse Scenario (Before-Tax)
(Dollars in billions)
Before Hedge Accounting
 
After Hedge Accounting
 
% Change
June 30, 2017

($3.3
)
 

($1.5
)
 
55
%
Spread Volatility
The volatility of market spreads (i.e., credit spreads, liquidity spreads, risk premiums, etc.), or OAS, is the risk associated with changes in the excess of market interest rates over benchmark rates. We hold assets and liabilities that expose us to spread volatility, which may contribute to significant GAAP earnings volatility. For financial assets measured at fair value, we generally recognize fair value losses when market spreads widen. Conversely, for financial liabilities measured at fair value, we generally recognize fair value gains when market spreads widen.

Freddie Mac Form 10-Q
 
56


Management's Discussion and Analysis
 
Risk Management | Market Risk

Comprehensive income (loss) was affected by changes in market spreads in amounts estimated to be $0.1 billion and ($0.1) billion (after-tax) during 2Q 2017 and 2Q 2016, respectively, and $0.2 billion and ($0.7) billion (after-tax) during YTD 2017 and YTD 2016, respectively.
During 2Q 2017 and YTD 2017, tightening of market spreads on both our agency and non-agency mortgage-related securities, partially offset by widening of market spreads on certain multifamily mortgage loans and commitments measured at fair value, resulted in increases in comprehensive income.
During 2Q 2016, fair value losses due to STACR debt notes spread tightening were partially offset by fair value gains from market spreads tightening on our agency and non-agency mortgage-related securities. During YTD 2016, widening of market spreads on our non-agency mortgage-related securities as well as on certain multifamily mortgage loans and commitments measured at fair value resulted in a decrease in comprehensive income.


Freddie Mac Form 10-Q
 
57


Management's Discussion and Analysis
 
Liquidity and Capital Resources | Liquidity Profile

LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY PROFILE
OTHER DEBT ACTIVITIES
Debt securities that we issue are classified either as debt securities of consolidated trusts held by third parties or other debt. We issue other debt to fund our operations. Competition for funding can vary with economic, financial market, and regulatory environments. We issue other debt based on a variety of factors including market conditions and our liquidity requirements. We currently favor a mix of derivatives and shorter- and medium-term debt to fund our business and manage interest-rate risk. This funding mix is a less expensive method than relying more extensively on long-term debt.
The tables below summarize the par value and the average rate of other debt securities we issued or paid off, including regularly scheduled principal payments, payments resulting from calls, and payments for repurchases. We repurchase, call, or exchange our outstanding debt securities from time to time for a variety of reasons, including managing our funding composition and supporting the liquidity of our debt securities.
 
2Q 2017
(Dollars in millions)
Short-term
 
Average Rate
 
Long-term
 
Average Rate
Discount notes and Reference Bills:
 
 
 
 
 
 
 
Beginning balance

$61,073

 
0.66
%
 

$—

 
—
%
Issuances
98,807

 
0.82
%
 
—

 
—
%
Repurchases
—

 
—
%
 
—

 
—
%
Maturities
(107,526
)
 
0.69
%
 
—

 
—
%
Ending Balance
52,354

 
0.91
%
 
—

 
—
%
Securities sold under agreements to repurchase:
 
 
 
 
 
 
 
Beginning balance
6,547

 
0.41
%
 
—

 
—
%
Additions
26,169

 
0.74
%
 
—

 
—
%
Repayments
(27,944
)
 
0.62
%
 
—

 
—
%
Ending Balance
4,772

 
1.01
%
 
—

 
—
%
Callable debt:
 
 
 
 
 
 
 
Beginning balance
—

 
—
%
 
112,790

 
1.52
%
Issuances
—

 
—
%
 
19,121

 
1.94
%
Calls
—

 
—
%
 
(9,756
)
 
1.65
%
Maturities
—

 
—
%
 
(1,705
)
 
0.81
%
Ending Balance
—

 
—
%
 
120,450

 
1.53
%
Non-callable debt:(1)
 
 
 
 
 
 
 
Beginning balance
12,007

 
0.51
%
 
165,594

 
2.25
%
Issuances
5,994

 
0.94
%
 
5,984

 
2.37
%
Repurchases
(500
)
 
0.82
%
 
(1,044
)
 
1.22
%
Maturities
(6,885
)
 
0.40
%
 
(19,255
)
 
1.54
%
Ending Balance
10,616

 
0.82
%
 
151,279

 
2.38
%
Total other debt

$67,742

 
0.89
%
 

$271,729

 
2.00
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Freddie Mac Form 10-Q
 
58


Management's Discussion and Analysis
 
Liquidity and Capital Resources | Liquidity Profile

 
YTD 2017
(Dollars in millions)
Short-term
 
Average Rate
 
Long-term
 
Average Rate
Discount notes and Reference Bills:
 
 
 
 
 
 
 
Beginning balance

$61,042

 
0.47
%
 

$—

 
—
%
Issuances
199,311

 
0.70
%
 
—

 
—
%
Repurchases
(57
)
 
0.91
%
 
—

 
—
%
Maturities
(207,942
)
 
0.58
%
 
—

 
—
%
Ending Balance
52,354

 
0.91
%
 
—

 
—
%
Securities sold under agreements to repurchase:
 
 
 
 
 
 
 
Beginning balance
3,040

 
0.42
%
 
—

 
—
%
Additions
63,145

 
0.45
%
 
—

 
—
%
Repayments
(61,413
)
 
0.41
%
 
—

 
—
%
Ending Balance
4,772

 
1.01
%
 
—

 
—
%
Callable debt:
 
 
 
 
 
 
 
Beginning balance
—

 
—
%
 
98,420

 
1.44
%
Issuances
—

 
—
%
 
37,129

 
1.90
%
Calls
—

 
—
%
 
(11,216
)
 
1.71
%
Maturities
—

 
—
%
 
(3,883
)
 
0.78
%
Ending Balance
—

 
—
%
 
120,450

 
1.53
%
Non-callable debt:(1)
 
 
 
 
 
 
 
Beginning balance
7,435

 
0.41
%
 
186,806

 
2.10
%
Issuances
10,566

 
0.83
%
 
11,118

 
2.31
%
Repurchases
(500
)
 
0.82
%
 
(1,044
)
 
1.22
%
Maturities
(6,885
)
 
0.40
%
 
(45,601
)
 
1.38
%
Ending Balance
10,616

 
0.82
%
 
151,279

 
2.38
%
Total other debt

$67,742

 
0.89
%
 

$271,729

 
2.00
%
(1) Includes STACR debt notes and certain multifamily other debt.
During YTD 2017, we increased our volume of securities sold under agreements to repurchase as these borrowing transactions reduced the cost of our funding. To replace the medium-term (classified as long-term debt in the table above) and long-term debt that was called or matured during the 2017 periods, we primarily issued callable debt. Overall, our outstanding other debt balance continues to decline as we reduce our indebtedness along with the decline in our mortgage-related investments portfolio.

Freddie Mac Form 10-Q
 
59


Management's Discussion and Analysis
 
Liquidity and Capital Resources | Liquidity Profile

The following graphs present our other debt by contractual maturity date and earliest redemption date. The earliest redemption date refers to the earliest call date for callable debt and the contractual maturity date for all other debt.
Contractual Maturity Date as of June 30, 2017
a20172q10q_chart-27690.jpg
 
Earliest Redemption Date as of June 30, 2017a20172q10q_chart-29008.jpg


DEBT SECURITIES OF CONSOLIDATED TRUSTS
The table below shows the issuance and extinguishment activity for the debt securities of our consolidated trusts.
(In millions)
2Q 2017
 
YTD 2017
Beginning balance

$1,618,161

 

$1,602,162

Issuances:
 
 
 
New issuances to third parties
52,719

 
123,721

Additional issuances of securities
30,278

 
61,082

Total issuances
82,997

 
184,803

Extinguishments:
 
 
 
Purchases of debt securities from third parties
(7,756
)
 
(20,271
)
Debt securities received in settlement of advances to lenders
(7,480
)
 
(15,711
)
Repayments of debt securities
(60,303
)
 
(125,364
)
Total extinguishments
(75,539
)
 
(161,346
)
Ending balance

$1,625,619

 

$1,625,619

Unamortized premiums and discounts
46,636

 
46,636

Debt securities of consolidated trusts held by third parties

$1,672,255

 

$1,672,255


Freddie Mac Form 10-Q
 
60


Management's Discussion and Analysis
 
Liquidity and Capital Resources | Liquidity Profile

Debt securities of our consolidated trusts represent our liability to third parties that hold beneficial interests in our consolidated securitization trusts. Our exposure on debt securities of consolidated trusts is limited to the guarantee we provide on the payment of principal and interest on these securities, as the primary source of repayment of these debt securities comes from the cash flows of the mortgage loans held by the trusts which back the securities. At June 30, 2017, our estimated exposure (including the amounts that are due to Freddie Mac for debt securities of consolidated trusts that we purchased) to these debt securities is recognized as the allowance for credit losses on mortgage loans held by consolidated trusts. See Note 4 for details on our allowance for loan losses.
OTHER INVESTMENTS AND CASH PORTFOLIO
The investments in our other investments and cash portfolio are important to our cash flow, collateral management, and asset and liability management and our ability to provide liquidity and stability to the mortgage market. The table below summarizes the balances in our other investments and cash portfolio, which includes the liquidity and contingency operating portfolio.
 
 
June 30, 2017
 
December 31, 2016
(In billions)
 
Liquidity and Contingency Operating Portfolio
 
Custodial Account
 
Other(1)
 
Total Other Investments and Cash Portfolio
 
Liquidity and Contingency Operating Portfolio
 
Custodial Account
 
Other(1)
 
Total Other Investments and Cash Portfolio
Cash and cash equivalents
 

$6.7

 

$—

 

$—

 

$6.7

 

$12.4

 

$—

 

$—

 

$12.4

Restricted cash and cash equivalents
 
—

 
3.4

 
1.1

 
4.5

 
—

 
9.5

 
0.4

 
9.9

Securities purchased under agreements to resell
 
29.9

 
16.4

 
1.5

 
47.8

 
37.5

 
13.6

 
0.4

 
51.5

Non-mortgage related securities
 
21.0

 
—

 
1.0

 
22.0

 
19.6

 
—

 
1.5

 
21.1

Advances to lenders
 
—

 
—

 
1.2

 
1.2

 
—

 
—

 
1.3

 
1.3

Total
 

$57.6



$19.8



$4.8



$82.2



$69.5



$23.1



$3.6



$96.2


(1)
Consists of amounts related to collateral held by us from derivative and other counterparties, investments in unsecured agency debt that we may not otherwise invest in, other than to pledge as collateral to our counterparties when our derivatives are in a liability position, advances to lenders, and other secured lending transactions.
Our non-mortgage-related investments in the liquidity and contingency operating portfolio consist of U.S. Treasury securities and other investments that we could sell to provide us with an additional source of liquidity to fund our business operations. We also maintain non-interest-bearing deposits at the Federal Reserve Bank of New York.


Freddie Mac Form 10-Q
 
61


Management's Discussion and Analysis
 
Liquidity and Capital Resources | Cash Flows


CASH FLOWS
We evaluate our cash flow performance by comparing the net cash flows from operating and investing activities to the net cash flows required to finance those activities. The following graphs present the results of these activities for YTD 2016 and YTD 2017.
a20172q10q_chart-27111.jpga20172q10q_chart-28132.jpga20172q10q_chart-29123.jpg

Commentary
Cash provided by operating activities decreased $2.8 billion primarily due to the following:
•
Decrease in net sales of mortgage loans acquired as held-for-sale, primarily due to a decrease in the volume of our multifamily securitizations.
Cash provided by investing activities decreased $1.4 billion primarily due to the following:
•
A smaller decline in the balance of securities purchased under agreements to resell during YTD 2017 compared to a larger decline in the balance due to lower near-term cash needs during YTD 2016; and
•
Increase in advances to lenders; partially offset by
•
Increase in net proceeds received from sales and repayments of investment securities, driven primarily by the continued reduction in the balance of our mortgage investment portfolio as required by the Purchase Agreement and FHFA; and
•
Decrease in restricted cash due to a decrease in prepayment proceeds received by the custodial account.
Cash used in financing activities increased $4.0 billion primarily due to the following:
•
Decrease in the proceeds from issuances of debt securities of consolidated trusts driven by a decline in the volume of single-family PC issuances for cash; and
•
Increase in the payment of cash dividends on our senior preferred stock; partially offset by
•
Decrease in net repayments of other debt as the volume of call redemptions was lower in YTD 2017 compared to YTD 2016 given the higher interest rates in 2017.


Freddie Mac Form 10-Q
 
62


Management's Discussion and Analysis
 
Liquidity and Capital Resources | Capital Resources


CAPITAL RESOURCES
Our entry into conservatorship resulted in significant changes to the assessment of our capital adequacy and our management of capital. Under the Purchase Agreement, Treasury made a commitment to provide us with equity funding, under certain conditions, to eliminate deficits in our net worth. Obtaining equity funding from Treasury pursuant to its commitment under the Purchase Agreement enables us to avoid being placed into receivership by FHFA and maintain the confidence of the debt markets as a very high-quality credit, upon which our business model is dependent. The amount of available equity funding remaining under the Purchase Agreement is $140.5 billion. This amount will be reduced by any future draws.
At June 30, 2017, our assets exceeded our liabilities under GAAP; therefore, no draw is being requested from Treasury under the Purchase Agreement. Based on our Net Worth Amount of $2.6 billion as of June 30, 2017 and the Capital Reserve Amount of $600 million in 2017, our dividend requirement to Treasury in September 2017 will be $2.0 billion. If the Conservator, acting as successor to the rights, titles, powers and privileges of the Board of Directors, declares a senior preferred stock dividend equal to our dividend requirement and directs us to pay it before September 30, 2017, we would expect to pay a dividend of $2.0 billion by September 30, 2017. Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock, although we are permitted to pay down the liquidation preference of the outstanding shares of senior preferred stock to the extent of accrued and unpaid dividends previously added to the liquidation preference and not previously paid down.
In June 2016, FASB issued guidance related to the measurement of credit losses on financial instruments that will be effective as of January 1, 2020, with early adoption permitted as of January 1, 2019. This guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects lifetime expected credit losses. While we are still evaluating the effect that the adoption of this guidance will have on our financial results, it will increase (perhaps substantially) our provision for credit losses in the period of adoption. As our capital reserve will decline to zero in 2018, this guidance increases the risk that we will need to request a draw from Treasury for the period of adoption.
The table below presents activity related to our net worth during 2Q 2017 and YTD 2017.
(In millions)
2Q 2017
 
YTD 2017
Beginning balance

$2,834

 

$5,075

Comprehensive (loss) income
1,986

 
4,220

Capital draw from Treasury
—

 
—

Senior preferred stock dividends declared
(2,234
)
 
(6,709
)
Total equity / net worth

$2,586

 

$2,586

Aggregate draws under Purchase Agreement

$71,336

 

$71,336

Aggregate cash dividends paid to Treasury

$108,157

 

$108,157



Freddie Mac Form 10-Q
 
63


Management's Discussion and Analysis
Conservatorship and Related Matters


CONSERVATORSHIP AND RELATED MATTERS
REDUCING OUR MORTGAGE-RELATED INVESTMENTS PORTFOLIO OVER TIME
The table below presents the UPB of our mortgage-related investments portfolio for purposes of the limit imposed by the Purchase Agreement and FHFA regulation. The cap for this portfolio will decrease to approximately $288 billion at December 31, 2017.
 
June 30, 2017
 
December 31, 2016
(Dollars in millions)
Liquid
 
Securitiz-ation Pipeline
 
Less Liquid
 
Total
 
Liquid
 
Securitiz-ation Pipeline
 
Less Liquid
 
Total
Capital Markets segment - Mortgage investments portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family unsecuritized loans
 
 
 
 
 
 

 
 
 
 
 
 
 

Performing loans

$—

 

$12,078

 

$—

 

$12,078

 

$—

 

$13,113

 

$—

 

$13,113

Reperforming loans
—

 
—

 
56,936

 
56,936

 
—

 
—

 
58,326

 
58,326

Total single-family unsecuritized loans
—


12,078


56,936


69,014


—

 
13,113

 
58,326


71,439

Freddie Mac mortgage-related securities
127,008

 
—

 
4,250

 
131,258

 
125,652

 
—

 
4,776

 
130,428

Non-agency mortgage-related securities
105

 
—

 
12,140

 
12,245

 
113

 
—

 
16,059

 
16,172

Non-Freddie Mac agency mortgage-related securities
9,842

 
—

 
—

 
9,842

 
11,759

 
—

 
—

 
11,759

Total Capital Markets segment - Mortgage investments portfolio
136,955

 
12,078

 
73,326

 
222,359

 
137,524

 
13,113

 
79,161

 
229,798

Single-family Guarantee segment - Single-family unsecuritized seriously delinquent loans
—

 
—

 
11,939

 
11,939

 
—

 
—

 
13,692

 
13,692

Multifamily segment - unsecuritized loans and mortgage-related securities
7,219

 
18,200

 
23,970

 
49,389

 
7,447

 
16,372

 
31,117

 
54,936

Total mortgage-related investments portfolio

$144,174

 

$30,278

 

$109,235

 

$283,687

 

$144,971

 

$29,485

 

$123,970

 

$298,426

Percentage of total mortgage-related investments portfolio
51
%
 
11
%
 
38
%
 
100
%
 
49
%
 
10
%
 
41
%
 
100
%
Mortgage-related investments portfolio cap at December 31, 2017 and December 31, 2016
 
 
 
 
 
 

$288,408

 
 
 
 
 
 
 

$339,304

90% of mortgage-related investments portfolio cap at December 31, 2017 and December 31, 2016(1)
 
 
 
 
 
 

$259,567

 
 
 
 
 
 
 

$305,374


(1)
Represents the amount that we manage to under our Retained Portfolio Plan, subject to certain exceptions.
The decline in our mortgage-related investments portfolio during YTD 2017 was primarily due to repayments.
While we continued to purchase new single-family seriously delinquent loans, our active disposition of less liquid assets included the following:
•
Sales of $4.4 billion of less liquid assets, including $2.8 billion in UPB of non-agency mortgage-related securities, $0.5 billion in UPB of seriously delinquent unsecuritized single-family loans, and $1.1 billion in UPB of single-family reperforming loans;
•
Securitizations of $0.6 billion in UPB of less liquid multifamily loans; and

Freddie Mac Form 10-Q
 
64


Management's Discussion and Analysis
Conservatorship and Related Matters


•
Transfers of $0.7 billion in UPB of less liquid multifamily loans to the securitization pipeline.
On July 12, 2017, FHFA, as conservator of Freddie Mac and Fannie Mae, reached a settlement with the Royal Bank of Scotland plc, related companies and specifically named individuals (collectively RBS) related to certain of our non-agency mortgage-related securities. Under the terms of the agreement, RBS will pay Freddie Mac approximately $4.5 billion. For more information on this settlement, see Note 12. As the litigation related to this population of securities, which are considered less liquid assets, is now resolved, we expect to be able to further reduce our less liquid assets in future periods.

Freddie Mac Form 10-Q
 
65


Management's Discussion and Analysis
Regulation and Supervision


REGULATION AND SUPERVISION
In addition to our oversight by FHFA as our Conservator, we are subject to regulation and oversight by FHFA under our Charter and the GSE Act and to certain regulation by other government agencies. Furthermore, regulatory activities by other government agencies can affect us indirectly, even if we are not directly subject to such agencies’ regulation or oversight. For example, regulations that modify requirements applicable to the purchase or servicing of mortgages can affect us.
AFFORDABLE HOUSING ALLOCATIONS
The GSE Act requires us to set aside in each fiscal year an amount equal to 4.2 basis points of each dollar of total new business purchases and pay this amount to certain housing funds. During 2Q 2017 and YTD 2017, we completed $88 billion and $186 billion, respectively, of new business purchases subject to this requirement and accrued $37 million and $78 million, respectively, of related expense. We expect to pay this amount (and any additional amounts accrued based on our new business purchases during the remainder of 2017) in February 2018. We are prohibited from passing through these costs to the originators of the loans that we purchase.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
In May 2017, the Director of FHFA testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs that an additional Purchase Agreement draw by Freddie Mac or Fannie Mae could erode investor confidence, which could affect liquidity and increase the cost of mortgage credit for borrowers. To avoid a potential draw, the Director indicated that FHFA has the authority to withhold dividend payments without the consent of Treasury, but that his first option would be to work with the Secretary of the Treasury. He further stressed that any action FHFA may take to avoid additional draws would not be intended to influence the outcome of housing finance reform or as a step toward “recap and release,” which refers to proposals to recapitalize the enterprises with private capital and release them from conservatorship. During subsequent testimony before the same committee, the Secretary of the Treasury stated that it was Treasury’s expectation that dividends would be paid per the terms of the Purchase Agreement.
AFFORDABLE HOUSING GOALS
On July 5, 2017, FHFA published for comment in the Federal Register a proposed rule that would establish the annual single-family and multifamily housing goals for Freddie Mac and Fannie Mae for 2018 through 2020. When finalized, the new goals will replace the current goals which expire at the end of 2017.
The current goals for 2017 and proposed goals for 2018 through 2020 are set forth below:

Freddie Mac Form 10-Q
 
66


Management's Discussion and Analysis
Regulation and Supervision


 
 
Current Goals
 
Proposed Goals
 
 
2017
 
2018 - 2020
Single-family purchase money goals (benchmark levels)(1)
 
 
 
 
Low-income
 
24
%
 
24
%
Very low-income
 
6
%
 
6
%
Low-income areas subgoal
 
14
%
 
15
%
Single-family refinance (benchmark level)(1)
 
 
 
 
Low-income goal
 
21
%
 
21
%
 
 
 
 
 
Multifamily (benchmark levels in units)
 
 
 
 
Low-income goal
 
300,000

 
315,000

Very low-income subgoal
 
60,000

 
60,000

Small property low-income subgoal
 
10,000

 
10,000


(1)
Percentage of overall qualified single-family mortgage purchases.
The public comment period on the proposed rule ends on September 5, 2017.
DUTY TO SERVE UNDERSERVED MARKETS PLAN
On April 13, 2017, we submitted our draft Duty to Serve Underserved Markets Plan to FHFA, as required by the recently finalized Duty to Serve Rule. FHFA released our draft plan for public comment on May 8, 2017, and the public comment period on the plan ended on July 10, 2017. We expect that our final Duty to Serve Underserved Markets Plan will be effective on January 1, 2018.

Freddie Mac Form 10-Q
 
67


Management's Discussion and Analysis
 
Off-Balance Sheet Arrangements

OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain business arrangements that are not recorded on our consolidated balance sheets or that may be recorded in amounts that differ from the full contract or notional amount of the transaction and that may expose us to potential losses in excess of the amounts recorded on our consolidated balance sheets. For a description of our off-balance sheet arrangements, see "MD&A - Off-Balance Sheet Arrangements" in our 2016 Annual Report. See Note 3 for more information on our off-balance sheet securitization activities and other guarantees.
We have certain off-balance sheet arrangements related to our securitization activities involving guaranteed loans and mortgage-related securities, though most of our securitization activities are on-balance sheet. Our off-balance sheet arrangements related to these securitization activities primarily consist of K Certificates and SB Certificates. We also have off-balance sheet arrangements related to certain other securitization products and other mortgage-related guarantees. Our maximum potential off-balance sheet exposure to credit losses relating to these securitization activities and guarantees is primarily represented by the UPB of the underlying loans and securities, which was $182.2 billion and $166.7 billion at June 30, 2017 and December 31, 2016, respectively.

Freddie Mac Form 10-Q
 
68


Management's Discussion and Analysis
Forward-Looking Statements


FORWARD-LOOKING STATEMENTS
We regularly communicate information concerning our business activities to investors, the news media, securities analysts, and others as part of our normal operations. Some of these communications, including this Form 10-Q, contain “forward-looking statements.” Examples of forward-looking statements include, but are not limited to, statements pertaining to the conservatorship, our current expectations and objectives for the Single-family Guarantee, Multifamily, and Capital Markets segments of our business, our efforts to assist the housing market, our liquidity and capital management, economic and market conditions and trends, our market share, the effect of legislative and regulatory developments and new accounting guidance, the credit quality of loans we own or guarantee, and our results of operations and financial condition on a GAAP, Segment Earnings and fair value basis. Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. Forward-looking statements are often accompanied by, and identified with, terms such as “objective,” “expect,” “possible,” “trend,” “forecast,” “anticipate,” “believe,” “intend,” “could,” “future,” “may,” “will,” and similar phrases. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates, and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties, including those described in the “Risk Factors” section of our 2016 Annual Report, and:
•
The actions the U.S. government (including FHFA, Treasury, and Congress) may take, or require us to take, including to support the housing markets or to implement FHFA’s Conservatorship Scorecards and other objectives for us;
•
The effect of the restrictions on our business due to the conservatorship and the Purchase Agreement, including our dividend requirement on the senior preferred stock;
•
Changes in our Charter or in applicable legislative or regulatory requirements (including any legislation affecting the future status of our company);
•
Changes in the fiscal and monetary policies of the Federal Reserve, including any changes to its policy of maintaining sizable holdings of mortgage-related securities and any future sales of such securities;
•
Changes in economic and market conditions, including changes in employment rates, interest rates, spreads, and home prices;
•
Changes in the U.S. residential mortgage market, including changes in the supply and type of loan products (e.g., refinance vs. purchase, and fixed-rate vs. ARM);
•
The success of our efforts to mitigate our losses on our Legacy and relief refinance single-family loan portfolio and our investments in non-agency mortgage-related securities;
•
The success of our strategy to transfer mortgage credit risk through STACR debt note, ACIS, K Certificate, SB Certificate, and other credit risk transfer transactions;
•
Our ability to maintain adequate liquidity to fund our operations;
•
Our ability to maintain the security and resiliency of our operational systems and infrastructure (e.g., against cyberattacks);
•
Our ability to effectively execute our business strategies, implement new initiatives, and improve efficiency;
•
The adequacy of our risk management framework;
•
Our ability to manage mortgage credit risks, including the effect of changes in underwriting and servicing practices;
•
Our ability to limit or manage our economic exposure and GAAP earnings exposure to interest-rate

Freddie Mac Form 10-Q
 
69


Management's Discussion and Analysis
Forward-Looking Statements


volatility and spread volatility, including the availability of derivative financial instruments needed for interest-rate risk management purposes;
•
Our ability to issue new securities, make timely payments and provide initial and ongoing disclosures;
•
Changes or errors in the methodologies, models, assumptions, and estimates we use to prepare our financial statements, make business decisions, and manage risks;
•
Changes in investor demand for our debt or mortgage-related securities (e.g., single-family PCs, multifamily K Certificates and SB Certificates);
•
Changes in the practices of loan originators, servicers, investors and other participants in the secondary mortgage market; and
•
Other factors and assumptions described in this Form 10-Q and our 2016 Annual Report, including in the “MD&A” section.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statements we make to reflect events or circumstances occurring after the date of this Form 10-Q.


Freddie Mac Form 10-Q
 
70


Financial Statements
 







FINANCIAL STATEMENTS


Freddie Mac Form 10-Q
 
71


Financial Statements
Condensed Consolidated Statements of Comprehensive Income

FREDDIE MAC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In millions, except share-related amounts)
2Q 2017
 
2Q 2016
 
YTD 2017
 
YTD 2016
Interest income
 
 
 
 
 
 
 
Mortgage loans

$15,848

 

$15,238

 

$31,813

 

$31,056

Investments in securities
902

 
978

 
1,816

 
1,947

Other
150

 
56

 
251

 
113

Total interest income
16,900

 
16,272

 
33,880

 
33,116

Interest expense
(13,479
)
 
(12,781
)
 
(26,621
)
 
(26,169
)
Expense related to derivatives
(42
)
 
(48
)
 
(85
)
 
(99
)
Net interest income
3,379

 
3,443

 
7,174

 
6,848

Benefit (provision) for credit losses
422

 
775

 
538

 
1,242

Net interest income after benefit (provision) for credit losses
3,801

 
4,218

 
7,712

 
8,090

Non-interest income (loss)
 
 
 
 
 
 
 
Gains (losses) on extinguishment of debt
50

 
(119
)
 
268

 
(174
)
Derivative gains (losses)
(1,096
)
 
(2,058
)
 
(1,398
)
 
(6,619
)
Net impairment of available-for-sale securities recognized in earnings
(3
)
 
(72
)
 
(16
)
 
(129
)
Other gains on investment securities recognized in earnings
61

 
450

 
117

 
753

Other income (loss)
694

 
(25
)
 
1,109

 
922

Non-interest income (loss)
(294
)
 
(1,824
)
 
80

 
(5,247
)
Non-interest expense
 
 
 
 
 
 
 
Salaries and employee benefits
(266
)
 
(240
)
 
(541
)
 
(479
)
Professional services
(118
)
 
(117
)
 
(230
)
 
(218
)
Occupancy expense
(16
)
 
(15
)
 
(29
)
 
(28
)
Other administrative expense
(113
)
 
(103
)
 
(224
)
 
(198
)
Total administrative expense
(513
)
 
(475
)
 
(1,024
)
 
(923
)
Real estate owned operations expense
(37
)
 
(29
)
 
(93
)
 
(113
)
Temporary Payroll Tax Cut Continuation Act of 2011 expense
(330
)
 
(280
)
 
(651
)
 
(552
)
Other expense
(126
)
 
(151
)
 
(202
)
 
(304
)
Non-interest expense
(1,006
)
 
(935
)
 
(1,970
)
 
(1,892
)
Income (loss) before income tax (expense) benefit
2,501

 
1,459

 
5,822

 
951

Income tax (expense) benefit
(837
)
 
(466
)
 
(1,947
)
 
(312
)
Net income (loss)
1,664

 
993

 
3,875

 
639

Other comprehensive income (loss), net of taxes and reclassification adjustments:
 
 
 
 
 
 
 
Changes in unrealized gains (losses) related to available-for-sale securities
295

 
109

 
293

 
228

Changes in unrealized gains (losses) related to cash flow hedge relationships
27

 
32

 
55

 
66

Changes in defined benefit plans
—

 
(1
)
 
(3
)
 
—

Total other comprehensive income (loss), net of taxes and reclassification adjustments
322

 
140

 
345

 
294

Comprehensive income (loss)

$1,986

 

$1,133

 

$4,220

 

$933

Net income (loss)

$1,664

 

$993

 

$3,875

 

$639

Undistributed net worth sweep and senior preferred stock dividends
(1,986
)
 
(933
)
 
(4,220
)
 
(933
)
Net income (loss) attributable to common stockholders

($322
)
 

$60

 

($345
)
 

($294
)
Net income (loss) per common share — basic and diluted

($0.10
)
 

$0.02

 

($0.11
)
 

($0.09
)
Weighted average common shares outstanding (in millions) — basic and diluted
3,234

 
3,234

 
3,234

 
3,234

The accompanying notes are an integral part of these condensed consolidated financial statements.

Freddie Mac Form 10-Q
 
72

Financial Statements
Condensed Consolidated Balance Sheets


FREDDIE MAC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In millions, except share-related amounts)
 
June 30, 2017
 
December 31, 2016
Assets
 
 
 
 
Cash and cash equivalents (Note 12)
 

$6,666

 

$12,369

Restricted cash and cash equivalents (Notes 3, 12)
 
4,464

 
9,851

Securities purchased under agreements to resell (Notes 3, 8)
 
47,791

 
51,548

Investments in securities, at fair value (Note 5)
 
98,799

 
111,547

Mortgage loans held-for-sale (Note 4) (includes $17,982 and $16,255 at fair value)
 
28,019

 
18,088

Mortgage loans held-for-investment (Notes 3, 4) (net of allowance for loan losses of $10,311 and $13,431)
 
1,804,123

 
1,784,915

Accrued interest receivable (Note 3)
 
6,237

 
6,135

Derivative assets, net (Notes 7, 8)
 
951

 
747

Deferred tax assets, net (Note 10)
 
14,751

 
15,818

Other assets (Notes 3, 16) (includes $2,629 and $2,408 at fair value)
 
10,956

 
12,358

Total assets
 

$2,022,757

 

$2,023,376

Liabilities and equity
 
 
 
 
Liabilities
 
 
 
 
Accrued interest payable (Note 3)
 

$6,090

 

$6,015

Debt, net (Notes 3, 6) (includes $6,124 and $6,010 at fair value)
 
2,009,166

 
2,002,004

Derivative liabilities, net (Notes 7, 8)
 
298

 
795

Other liabilities (Notes 3, 16)
 
4,617

 
9,487

Total liabilities
 
2,020,171

 
2,018,301

Commitments and contingencies (Notes 3, 7, and 14)
 

 

Equity (Note 9)
 
 
 
 
Senior preferred stock
 
72,336

 
72,336

Preferred stock, at redemption value
 
14,109

 
14,109

Common stock, $0.00 par value, 4,000,000,000 shares authorized, 725,863,886 shares issued and 650,054,731 shares and 650,046,828 shares outstanding
 
—

 
—

Additional paid-in capital
 
—

 
—

Retained earnings (accumulated deficit)
 
(80,777
)
 
(77,941
)
AOCI, net of taxes, related to:
 
 
 
 
Available-for-sale securities (includes $813 and $782, related to net unrealized gains on securities for which other-than-temporary impairment has been recognized in earnings)
 
1,208

 
915

Cash flow hedge relationships
 
(425
)
 
(480
)
Defined benefit plans
 
18

 
21

Total AOCI, net of taxes
 
801

 
456

Treasury stock, at cost, 75,809,155 shares and 75,817,058 shares
 
(3,883
)
 
(3,885
)
Total equity (See Note 9 for information on our dividend requirement to Treasury)
 
2,586

 
5,075

Total liabilities and equity
 

$2,022,757

 

$2,023,376

The table below presents the carrying value and classification of the assets and liabilities of consolidated VIEs on our consolidated balance sheets.
(In millions)
 
June 30, 2017
 
December 31, 2016
Consolidated Balance Sheet Line Item
 
 
 
 
Assets: (Note 3)
 
 
 
 
Mortgage loans held-for-investment
 

$1,723,922

 

$1,690,218

All other assets
 
28,308

 
32,262

Total assets of consolidated VIEs
 

$1,752,230

 

$1,722,480

Liabilities: (Note 3)
 
 
 
 
Debt, net
 

$1,672,255

 

$1,648,683

All other liabilities
 
4,898

 
4,846

Total liabilities of consolidated VIEs
 

$1,677,153

 

$1,653,529

The accompanying notes are an integral part of these condensed consolidated financial statements.

Freddie Mac Form 10-Q
 
73


Financial Statements
Condensed Consolidated Statements of Cash Flows



FREDDIE MAC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
YTD 2017
 
YTD 2016
Net cash provided by operating activities

$1,310

 

$4,143

Cash flows from investing activities
 
 
 
Purchases of trading securities
(92,192
)
 
(26,500
)
Proceeds from sales of trading securities
84,766

 
17,127

Proceeds from maturities and repayments of trading securities
4,867

 
14,400

Purchases of available-for-sale securities
(4,100
)
 
(19,724
)
Proceeds from sales of available-for-sale securities
8,266

 
9,388

Proceeds from maturities and repayments of available-for-sale securities
7,045

 
8,208

Purchases of held-for-investment mortgage loans
(57,373
)
 
(70,402
)
Proceeds from sales of mortgage loans held-for-investment
1,559

 
1,997

Repayments of mortgage loans held-for-investment
133,221

 
148,157

(Increase) decrease in restricted cash
5,387

 
(2,866
)
Advances to lenders
(16,251
)
 
(9,523
)
Net proceeds from dispositions of real estate owned and other recoveries
989

 
1,388

Net (increase) decrease in securities purchased under agreements to resell
3,757

 
14,655

Derivative premiums and terminations, swap collateral, and exchange settlement payments, net
(1,663
)
 
(6,679
)
Changes in other assets
(160
)
 
(151
)
Net cash provided by investing activities
78,118

 
79,475

Cash flows from financing activities
 
 
 
Proceeds from issuance of debt securities of consolidated trusts held by third parties
83,908

 
110,886

Repayments and redemptions of debt securities of consolidated trusts held by third parties
(145,505
)
 
(153,637
)
Proceeds from issuance of other debt
321,018

 
315,636

Repayments of other debt
(337,840
)
 
(352,214
)
Payment of cash dividends on senior preferred stock
(6,709
)
 
(1,740
)
Changes in other liabilities
(3
)
 
(4
)
Net cash used in financing activities
(85,131
)
 
(81,073
)
Net (decrease) increase in cash and cash equivalents
(5,703
)
 
2,545

Cash and cash equivalents at beginning of year
12,369

 
5,595

Cash and cash equivalents at end of period

$6,666

 

$8,140

 
 
 
 
Supplemental cash flow information
 
 
 
Cash paid for:
 
 
 
Debt interest

$31,970

 

$30,834

Income taxes
487

 
1,337

Non-cash investing and financing activities (Note 4)
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

Freddie Mac Form 10-Q
 
74


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 1


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability, and affordability to the U.S. housing market. We are regulated by FHFA, the SEC, HUD, and Treasury, and are currently operating under the conservatorship of FHFA. For more information on the roles of FHFA and Treasury, see Note 2 in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2016, or 2016 Annual Report. Throughout our unaudited condensed consolidated financial statements and related notes, we use certain acronyms and terms which are defined in the “Glossary” of this Form 10-Q and our 2016 Annual Report. Throughout this Form 10-Q, we refer to the three months ended June 30, 2017, the three months ended March 31, 2017, the three months ended December 31, 2016, the three months ended June 30, 2016, and the three months ended December 31, 2015 as “2Q 2017,” “1Q 2017,” “4Q 2016,” “2Q 2016,” and “4Q 2015,” respectively. We refer to the six months ended June 30, 2017 and the six months ended June 30, 2016 as “YTD 2017” and “YTD 2016,” respectively.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes in our 2016 Annual Report.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and include our accounts as well as the accounts of other entities in which we have a controlling financial interest. All intercompany balances and transactions have been eliminated.
We are operating under the basis that we will realize assets and satisfy liabilities in the normal course of business as a going concern and in accordance with the delegation of authority from FHFA to our Board of Directors and management. Certain amounts in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation. In the opinion of management, all adjustments, which include only normal recurring adjustments, have been recorded for a fair presentation of our unaudited condensed consolidated financial statements.
We evaluate the materiality of identified errors in the financial statements using both an income statement, or “rollover,” and a balance sheet, or “iron curtain,” approach, based on relevant quantitative and qualitative factors. Net income includes certain adjustments to correct immaterial errors related to previously reported periods.
USE OF ESTIMATES
The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, gains, and losses during the reporting period. Management has made significant estimates in preparing the financial statements for

Freddie Mac Form 10-Q
 
75


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 1


establishing the allowance for loan losses and reserve for guarantee losses, valuing financial instruments and other assets and liabilities, and assessing impairments on investments. Actual results could be different from these estimates.
RECENTLY ISSUED ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
Standard
Description
Date of Adoption
Effect on Consolidated Financial Statements
ASU 2016-06, Derivatives and Hedging (Topic 815)
The amendment clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendment is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence.
January 1, 2017
The adoption of this amendment did not have a material effect on our consolidated financial statements.
ASU 2016-17 - Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control
The Board is issuing this Update to amend the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE.
January 1, 2017
The adoption of this amendment did not have a material effect on our consolidated financial statements.



Freddie Mac Form 10-Q
 
76


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 1


Recently Issued Accounting Guidance, Not Yet Adopted Within Our Condensed Consolidated Financial Statements
Standard
Description
Date of Adoption
Effect on Consolidated Financial Statements
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
The main objective of this Update is to address the diversity in practice that currently exists in regards to how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.
January 1, 2018
Upon adoption, the portion of the cash payment attributable to the accreted interest related to zero-coupon debt will be presented in the operating activities section, a classification change from the financing activity section where this item is currently presented. We are evaluating the financial effect the adoption of this amendment will have on our consolidated financial statements.
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
The amendments in this Update address the diversity in the classification and presentation of changes in restricted cash on the statement of cash flows under Topic 230, Statement of Cash Flows. Specifically, this amendment dictates that the statement of cash flows should explain the change in the period of the total of cash, cash equivalents, and restricted cash balances.
January 1, 2018
The adoption of this amendment will not have a material effect on our consolidated financial statements.

ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
January 1, 2020
While we are evaluating the effect that the adoption of this amendment will have on our consolidated financial statements, it will increase (perhaps substantially) our provision for credit losses in the period of adoption.


Freddie Mac Form 10-Q
 
77


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 2


NOTE 2: CONSERVATORSHIP AND RELATED MATTERS
BUSINESS OBJECTIVES
We operate under the conservatorship that commenced on September 6, 2008, conducting our business under the direction of FHFA, as our Conservator. The conservatorship and related matters significantly affect our management, business activities, financial condition and results of operations. Upon its appointment, FHFA, as Conservator, immediately succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any stockholder, officer or director thereof, with respect to the company and its assets. The Conservator also succeeded to the title to all books, records, and assets of Freddie Mac held by any other legal custodian or third party. The Conservator delegated certain authority to the Board of Directors to oversee, and management to conduct, business operations so that the company can continue to operate in the ordinary course. The directors serve on behalf of, and exercise authority as directed by, the Conservator.
We are also subject to certain constraints on our business activities under the Purchase Agreement. However, we believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain our access to the debt markets and to have adequate liquidity to conduct our normal business activities, although the costs of our debt funding could vary.
IMPACT OF CONSERVATORSHIP AND RELATED DEVELOPMENTS ON THE MORTGAGE-RELATED INVESTMENTS PORTFOLIO
For purposes of the limit imposed by the Purchase Agreement and FHFA regulation, the UPB of our mortgage-related investments portfolio cannot exceed $288.4 billion at December 31, 2017 and was $283.7 billion at June 30, 2017. Our Retained Portfolio Plan provides for us to manage the UPB of the mortgage-related investments portfolio so that it does not exceed 90% of the annual cap established by the Purchase Agreement (subject to certain exceptions). Our mortgage-related investments portfolio cap is reduced by 15% annually until it reaches $250 billion. This amount is calculated based on the maximum allowable size of the mortgage-related investments portfolio, rather than the actual UPB of the mortgage-related investments portfolio, as of December 31 of the preceding year. Our ability to acquire and sell mortgage assets is significantly constrained by limitations of the Purchase Agreement and those imposed by FHFA.
GOVERNMENT SUPPORT FOR OUR BUSINESS
We receive substantial support from Treasury and are dependent upon its continued support in order to continue operating our business. Our ability to access funds from Treasury under the Purchase Agreement is critical to:
•
Keeping us solvent;
•
Allowing us to focus on our primary business objectives under conservatorship; and
•
Avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions.
At March 31, 2017, our assets exceeded our liabilities under GAAP; therefore, FHFA did not request a draw on our behalf and, as a result, we did not receive any funding from Treasury under the Purchase Agreement during 2Q 2017. The amount of available funding remaining under the Purchase Agreement is $140.5 billion and would be reduced by any future draws.

Freddie Mac Form 10-Q
 
78


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 2


See Note 6 and Note 9 for more information on the conservatorship and the Purchase Agreement.
RELATED PARTIES AS A RESULT OF CONSERVATORSHIP
We are deemed related parties with Fannie Mae as both we and Fannie Mae have the same relationships with FHFA and Treasury. Common Securitization Solutions, LLC (CSS), was formed in 2013 as a limited liability company equally-owned by Freddie Mac and Fannie Mae. Therefore, CSS is also deemed a related party. During YTD 2017, we contributed $53 million of capital to CSS.


Freddie Mac Form 10-Q
 
79


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 3


NOTE 3: SECURITIZATION AND GUARANTEE ACTIVITIES
Our primary business activities in our Single-family Guarantee and Multifamily segments involve the securitization of loans or other mortgage-related assets using trusts that are VIEs. These trusts issue beneficial interests in the loans or other mortgage-related assets that they own. We guarantee the principal and interest payments on some or all of the issued beneficial interests in substantially all of our securitization transactions. We consolidate VIEs when we have a controlling financial interest in the VIE and are therefore considered the primary beneficiary of the VIE.
VIEs FOR WHICH WE ARE THE PRIMARY BENEFICIARY
The table below presents the carrying value and classification of the assets and liabilities of consolidated VIEs on our consolidated balance sheets.
(In millions)
 
June 30, 2017
 
December 31, 2016
Consolidated Balance Sheet Line Item
 
 
 
 
Assets:
 
 
 
 
Restricted cash and cash equivalents
 

$3,382

 

$9,431

Securities purchased under agreements to resell
 
16,350

 
13,550

Mortgage loans held-for-investment
 
1,723,922

 
1,690,218

Accrued interest receivable
 
5,591

 
5,454

Other assets
 
2,985

 
3,827

Total assets of consolidated VIEs
 

$1,752,230

 

$1,722,480

Liabilities:
 
 
 
 
Accrued interest payable
 

$4,897

 

$4,846

Debt, net
 
1,672,255

 
1,648,683

Other liabilities
 
1

 
—

Total liabilities of consolidated VIEs
 

$1,677,153

 

$1,653,529


Freddie Mac Form 10-Q
 
80


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 3


VIEs FOR WHICH WE ARE NOT THE PRIMARY BENEFICIARY
Our involvement with VIEs for which we are not the primary beneficiary takes one or both of two forms - purchasing an investment in these entities or providing a guarantee to these entities. The following table presents the carrying amounts and classification of the assets and liabilities recorded on our consolidated balance sheets related to our variable interests in unconsolidated VIEs with which we were involved in the design and creation and have a significant continuing involvement, as well as our maximum exposure to loss.
 
 
June 30, 2017
 
December 31, 2016
(In millions)


 
 
Assets and Liabilities Recorded on our Consolidated Balance Sheets(1)


 
 
Assets:


 
 
Investments in securities


$53,400

 

$58,995

Accrued interest receivable

239

 
254

Other assets

1,912

 
1,708

 Liabilities:

 
 
 
Other liabilities

1,759

 
1,604

Maximum Exposure to Loss(2)


$166,005

 

$150,227

Total Assets of Non-Consolidated VIEs


$193,453

 

$175,713


(1)
Includes our variable interests in REMICs and Stripped Giant PCs, K Certificates, SB Certificates, senior subordinate securitization structures, and other securitization products that we do not consolidate.
(2)
Our maximum exposure to loss includes the guaranteed UPB of assets held by the unconsolidated VIEs related to K Certificates, SB Certificates, and senior subordinate securitization structures, as well as the UPB of unguaranteed securities that we acquired from these securitization transactions. Our maximum exposure to loss excludes our investments in securities of unconsolidated VIEs that we guaranteed, because this risk exposure is already reflected in the guaranteed UPB of assets held by the unconsolidated VIEs.
We also obtain interests in various other VIEs created by third parties through the normal course of business, such as through our investments in certain non-Freddie Mac mortgage-related securities, purchases of multifamily loans, guarantees of multifamily housing revenue bonds, as a derivative counterparty, or through other activities. To the extent that we were not involved in the design and creation of these VIEs, they are excluded from the table above. Our interests in these VIEs are generally passive in nature and are not expected to result in us obtaining a controlling financial interest in these VIEs in the future.
FINANCIAL GUARANTEES
The table below shows our maximum potential exposure, recognized liability, and maximum remaining term of our recognized financial guarantees to unconsolidated VIEs and other third parties. This table does not include our unrecognized financial guarantees, such as guarantees to consolidated VIEs or to resecuritization trusts that do not expose us to incremental credit risk.

Freddie Mac Form 10-Q
 
81


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 3


 
June 30, 2017

December 31, 2016
(Dollars in millions, terms in years)
Maximum
Exposure(1)

Recognized
Liability(2)

Maximum
Remaining
Term

Maximum
Exposure(1)

Recognized
Liability(2)

Maximum
Remaining
Term
K Certificates, SB Certificates, senior subordinate securitization structures, and other securitization products

$165,979



$1,693


40


$150,227



$1,532


40
Other mortgage-related guarantees
16,173


660


34

16,445


679


34
Derivative instruments
15,862


133


28

6,396


127


29
(1)
The maximum exposure represents the contractual amounts that could be lost if counterparties or borrowers defaulted, without consideration of possible recoveries under credit enhancement arrangements, such as recourse provisions, third-party insurance contracts, or from collateral held or pledged. For derivative instruments, this amount represents the notional value, although our exposure to certain of these derivative instruments may be unlimited. We generally reduce our exposure to those derivative instruments with unlimited exposure through separate contracts with third parties.
(2)
For K Certificates, SB Certificates, senior subordinate securitization structures, other securitization products, and other mortgage-related guarantees, this amount represents the guarantee obligation on our consolidated balance sheets. This amount excludes our reserve for guarantee losses, which totaled $62 million and $67 million as of June 30, 2017 and December 31, 2016, respectively, and is included within other liabilities on our consolidated balance sheets.
CREDIT ENHANCEMENTS
For many of the loans underlying our single-family PCs, other securitization products, and other mortgage-related guarantees, we obtained credit enhancements from third parties covering a portion of our credit risk exposure. See Note 4 for information about credit enhancements on single-family loans.
In connection with the securitization activities of the Multifamily segment, we have various forms of credit protection. The most prevalent type is subordination, primarily through our K Certificates and SB Certificates. Through subordination, we mitigate our credit risk exposure by structuring our securities to transfer a large majority of expected and stress credit losses to private investors who purchase the subordinate tranches, as shown in the table below. These subordinate tranches will absorb credit losses prior to any loss being recognized pursuant to our financial guarantee contract.
The following table presents the maximum exposure of our recognized financial guarantees to unconsolidated multifamily VIEs and the related maximum coverage provided primarily by the subordinate tranches.
 
 
Maximum Exposure (1) at
 
Maximum Coverage (2) at
(In millions)
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
K Certificates and SB Certificates
 

$154,219

 

$139,416

 

$25,979

 

$23,864

Other securitization products
 
6,068

 
5,545

 
1,428

 
1,359

Total
 

$160,287

 

$144,961

 

$27,407

 

$25,223


(1)
Our maximum exposure to loss includes the guaranteed UPB of assets held by the unconsolidated VIEs.
(2)
For K Certificates and SB Certificates, this represents the UPB of the securities that are subordinate to our guarantee. For other securitization products, this represents the remaining amount of loss recovery that is available subject to the terms of the counterparty agreement or the UPB of the securities that are subordinate to our guarantee.
In addition to subordination, the Multifamily segment also has various other credit enhancements, primarily related to our mortgage loans and other mortgage-related guarantees, in the form of collateral posting requirements, loss sharing agreements, credit-linked notes, and other similar arrangements. These credit enhancements, along with the proceeds received from the sale of the underlying mortgage collateral, will enable us to recover all or a portion of our losses on our mortgage loans or the amounts

Freddie Mac Form 10-Q
 
82


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 3


paid under our financial guarantee contract. Our historical losses and related recoveries pursuant to these agreements have not been significant.
Similar to our unconsolidated VIEs, certain of our mortgage loans held by multifamily consolidated VIEs are credit-enhanced through unguaranteed and subordinated tranches. Our historical losses and related recoveries pursuant to these transactions have also not been significant.



Freddie Mac Form 10-Q
 
83


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES
The table below provides details of the loans on our consolidated balance sheets.
 
 
June 30, 2017
 
December 31, 2016
(In millions)
 
Held by Freddie Mac
 
Held by
consolidated
trusts
 
Total
 
Held by Freddie Mac
 
Held by
consolidated
trusts
 
Total
Held-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Single-family
 

$11,822

 

$—

 

$11,822

 

$2,092

 

$—

 

$2,092

Multifamily
 
18,424

 
—

 
18,424

 
16,544

 
—

 
16,544

Total UPB
 
30,246

 
—

 
30,246

 
18,636

 
—

 
18,636

Cost basis and fair value adjustments, net
 
(2,227
)
 
—

 
(2,227
)
 
(548
)
 
—

 
(548
)
Total held-for-sale loans, net
 
28,019

 
—

 
28,019

 
18,088

 
—

 
18,088

Held-for-investment:
 
 
 
 
 
 
 
 
 
 
 
 
Single-family
 
69,130

 
1,692,614

 
1,761,744

 
83,040

 
1,659,591

 
1,742,631

Multifamily
 
21,433

 
3,419

 
24,852

 
25,873

 
3,048

 
28,921

Total UPB
 
90,563

 
1,696,033

 
1,786,596

 
108,913

 
1,662,639

 
1,771,552

Cost basis adjustments
 
(2,807
)
 
30,645

 
27,838

 
(3,755
)
 
30,549

 
26,794

Allowance for loan losses
 
(7,555
)
 
(2,756
)
 
(10,311
)
 
(10,461
)
 
(2,970
)
 
(13,431
)
Total held-for-investment loans, net
 
80,201

 
1,723,922

 
1,804,123

 
94,697

 
1,690,218

 
1,784,915

Total loans, net
 

$108,220

 

$1,723,922

 

$1,832,142

 

$112,785

 

$1,690,218

 

$1,803,003

On February 2, 2017, we started applying fair value hedge accounting to certain single-family mortgage loans. The fair value hedge accounting related loan basis adjustments are included in the table above.
During 2Q 2017 and 2Q 2016, we purchased $73.3 billion and $90.0 billion, respectively, in UPB of single-family loans and $0.6 billion and $1.2 billion, respectively, in UPB of multifamily loans that were classified as held-for-investment. During YTD 2017 and YTD 2016, we purchased $158.9 billion and $158.2 billion, respectively, in UPB of single-family loans and $1.9 billion and $2.0 billion, respectively, in UPB of multifamily loans that were classified as held-for-investment.
Our sales of multifamily loans occur primarily through the issuance of multifamily K Certificates and SB Certificates. During 2Q 2017 and 2Q 2016, we sold $12.8 billion and $15.4 billion, respectively, in UPB of held-for-sale multifamily loans. During YTD 2017 and YTD 2016, we sold $22.7 billion and $26.2 billion, respectively, in UPB of held-for-sale multifamily loans. See Note 3 for more information on our K Certificates and SB Certificates.
As part of our strategy to mitigate losses and reduce our holdings of less liquid assets, we completed sales of $1.6 billion and $1.0 billion in UPB of seasoned single-family loans during 2Q 2017 and 2Q 2016, respectively, and $1.6 billion and $1.8 billion in UPB of seasoned single-family loans during YTD 2017 and YTD 2016, respectively. Seasoned single-family mortgage loans include seriously delinquent loans and reperforming loans.
We reclassified $11.1 billion and $3.1 billion in UPB of seasoned single-family loans from held-for-investment to held-for-sale during 2Q 2017 and 2Q 2016, respectively, and $12.8 billion and $3.5 billion in UPB of seasoned single-family loans during YTD 2017 and YTD 2016, respectively. In addition, we reclassified $0.7 billion in UPB of multifamily mortgage loans from held-for-investment to held-for-sale during both 2Q 2017 and YTD 2017. We did not reclassify any multifamily mortgage loans during the 2016 periods. For additional information regarding the fair value of our loans classified as held-for-sale, see Note 13.

Freddie Mac Form 10-Q
 
84


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



CREDIT QUALITY
The current LTV ratio is one key factor we consider when estimating our loan loss reserves for single-family loans. As current LTV ratios increase, the borrower’s equity in the home decreases, which may negatively affect the borrower’s ability to refinance (outside of HARP) or to sell the property for an amount at or above the balance of the outstanding loan. A second-lien loan also reduces the borrower’s equity in the home and has a similar negative effect on the borrower’s ability to refinance or sell the property for an amount at or above the combined balances of the first and second loans. As of June 30, 2017 and December 31, 2016, based on data collected by us at loan delivery, approximately 10% and 11%, respectively, of loans in our single-family credit guarantee portfolio had second-lien financing by third parties at origination of the first loan. However, borrowers are free to obtain second-lien financing after origination, and we are not entitled to receive notification when a borrower does so. For further information about concentrations of risk associated with our single-family and multifamily loans, see Note 12.
For reporting purposes:
•
Loans within the Alt-A category continue to be presented in that category following modification, even though the borrower may have provided full documentation of assets and income to complete the modification; and
•
Loans within the option ARM category continue to be presented in that category following modification, even though the modified loan no longer provides for optional payment or adjustable interest-rate provisions.
The table below presents the recorded investment of single-family held-for-investment loans by current LTV ratios. Our current LTV ratios are estimates based on available data through the end of each respective period presented.
 
June 30, 2017
 
December 31, 2016
 
Current LTV Ratio
 
 
 
Current LTV Ratio
 
 
(In millions)
 ≤ 80
 
> 80 to 100
 
> 100(1)
 
Total
 
≤ 80
 
> 80 to 100
 
> 100(1)
 
Total
20 and 30-year or more, amortizing fixed-rate(2)

$1,182,839

 

$216,048

 

$20,941

 

$1,419,828

 

$1,120,722

 

$236,111

 

$30,063

 

$1,386,896

15-year amortizing fixed-rate(2)
274,600

 
8,453

 
588

 
283,641

 
274,967

 
11,016

 
887

 
286,870

Adjustable-rate
50,815

 
3,059

 
49

 
53,923

 
52,319

 
2,955

 
85

 
55,359

Alt-A, interest-only, and option ARM
23,456

 
6,216

 
2,538

 
32,210

 
26,293

 
9,392

 
4,634

 
40,319

Total single-family loans

$1,531,710

 

$233,776

 

$24,116

 

$1,789,602

 

$1,474,301

 

$259,474

 

$35,669

 

$1,769,444

 
(1)
The serious delinquency rate for the total of single-family held-for-investment mortgage loans with current LTV ratios in excess of 100% was 7.51% and 6.80% as of June 30, 2017 and December 31, 2016, respectively.
(2)
The majority of our loan modifications result in new terms that include fixed interest rates after modification. As of June 30, 2017 and December 31, 2016, we have categorized UPB of approximately $28.6 billion and $32.0 billion, respectively, of modified loans as fixed-rate loans (instead of as adjustable rate loans), even though the modified loans have rate adjustment provisions. In these cases, while the terms of the modified loans provide for the interest rate to adjust, such rates and the timing of the adjustment are determined at the time of modification rather than at a subsequent date.
The following table presents the recorded investment in our multifamily held-for-investment loans, by credit quality indicator based on available data through the end of each period presented. These indicators involve significant management judgment.

Freddie Mac Form 10-Q
 
85


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



(In millions)
 
June 30, 2017
 
December 31, 2016
Credit risk profile by internally assigned grade:(1)
 
 
 
 
Pass
 

$23,816

 

$27,830

Special mention
 
868

 
502

Substandard
 
148

 
570

Doubtful
 
—

 
—

Total
 

$24,832

 

$28,902


(1)
A loan categorized as: "Pass" is current and adequately protected by the current financial strength and debt service capacity of the borrower; "Special mention" has signs of potential financial weakness; "Substandard" has a weakness that jeopardizes the timely full repayment; and "Doubtful" has a weakness that makes collection or liquidation in full highly questionable and improbable based on existing conditions.
MORTGAGE LOAN PERFORMANCE
The following tables present the recorded investment of our single-family and multifamily loans, held-for-investment, by payment status.
 
June 30, 2017
(In millions)
Current
 
One
Month
Past Due
 
Two
Months
Past Due
 
Three 
Months or
More Past Due,
or in
 Foreclosure(1)
 
Total
 
Non-accrual
Single-family:
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate

$1,391,450

 

$14,601

 

$3,803

 

$9,974

 

$1,419,828

 

$9,965

15-year amortizing fixed-rate
282,288

 
909

 
146

 
298

 
283,641

 
297

Adjustable-rate
53,362

 
311

 
64

 
186

 
53,923

 
186

Alt-A, interest-only, and option ARM
28,549

 
1,369

 
483

 
1,809

 
32,210

 
1,806

Total single-family
1,755,649

 
17,190

 
4,496

 
12,267

 
1,789,602

 
12,254

Total multifamily
24,825

 
7

 
—

 
—

 
24,832

 
55

Total single-family and multifamily

$1,780,474

 

$17,197

 

$4,496

 

$12,267

 

$1,814,434

 

$12,309

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
(In millions)
Current

One
Month
Past Due

Two
Months
Past Due

Three 
Months or
More Past Due,
or in
 Foreclosure(1)

Total

Non-accrual
Single-family:











20 and 30-year or more, amortizing fixed-rate

$1,354,511

 

$16,645

 

$4,865

 

$10,875



$1,386,896



$10,868

15-year amortizing fixed-rate
285,373

 
1,010

 
178

 
309


286,870


309

Adjustable-rate
54,738

 
354

 
77

 
190


55,359


190

Alt-A, interest-only, and option ARM
35,994

 
1,748

 
650

 
1,927


40,319


1,927

Total single-family
1,730,616


19,757


5,770


13,301


1,769,444


13,294

Total multifamily
28,902

 
—

 
—

 
—


28,902


89

Total single-family and multifamily

$1,759,518



$19,757



$5,770



$13,301



$1,798,346



$13,383


(1)
Includes $5.4 billion and $5.3 billion of loans that were in the process of foreclosure as of June 30, 2017 and December 31, 2016, respectively.

Freddie Mac Form 10-Q
 
86


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The table below summarizes the delinquency rates of loans within our single-family credit guarantee and multifamily mortgage portfolios.
(Dollars in millions)
 
June 30, 2017
 
December 31, 2016
Single-family:(1)
 
 
 
 
Non-credit-enhanced portfolio
 
 
 
 
Serious delinquency rate
 
0.91
%
 
1.02
%
Total number of seriously delinquent loans
 
66,247

 
77,662

Credit-enhanced portfolio:(2)
 
 
 
 
Primary mortgage insurance:
 
 
 
 
   Serious delinquency rate
 
1.20
%
 
1.46
%
   Total number of seriously delinquent loans
 
18,272

 
21,460

Other credit protection:(3)
 
 
 
 
   Serious delinquency rate
 
0.32
%
 
0.43
%
   Total number of seriously delinquent loans
 
8,820

 
9,455

Total single-family:
 
 
 
 
Serious delinquency rate
 
0.85
%
 
1.00
%
Total number of seriously delinquent loans
 
91,796

 
107,170

Multifamily:(4)
 
 
 
 
Non-credit-enhanced portfolio:
 
 
 
 
Delinquency rate
 
0.05
%
 
0.04
%
UPB of delinquent loans
 

$23

 

$19

Credit-enhanced portfolio:
 
 
 
 
Delinquency rate
 
—
%
 
0.02
%
UPB of delinquent loans
 

$5

 

$37

Total Multifamily:
 
 
 
 
Delinquency rate
 
0.01
%
 
0.03
%
UPB of delinquent loans
 

$28

 

$56

 
(1)
Serious delinquencies on single-family loans underlying certain REMICs, other securitization products, and other mortgage-related guarantees may be reported on a different schedule due to variances in industry practice.
(2)
The credit-enhanced categories are not mutually exclusive, as a single loan may be covered by both primary mortgage insurance and other credit protection.
(3)
Consists of single-family loans covered by financial arrangements (other than primary mortgage insurance) that are designed to reduce our credit risk exposure. See "Credit Protection and Other Forms of Credit Enhancement" for more information.
(4)
Multifamily delinquency performance is based on UPB of loans that are two monthly payments or more past due or those in the process of foreclosure.
LOAN LOSS RESERVES
The loan loss reserves represent estimates of probable incurred credit losses. We recognize probable incurred losses by recording a charge to the provision for credit losses in our consolidated statements of comprehensive income. The loan loss reserves include:
•
Our allowance for loan losses, which pertains to all single-family and multifamily loans classified as held-for-investment on our consolidated balance sheets; and
•
Our reserve for guarantee losses, which pertains to single-family and multifamily loans underlying our K Certificates, SB Certificates, other securitization products, and other mortgage-related guarantees.
On January 1, 2017, we elected a new accounting policy for loan reclassifications from held-for-investment to held-for-sale. See the Loan Reclassifications section below for further information about this change.

Freddie Mac Form 10-Q
 
87


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The tables below present our loan loss reserves activity.
 
2Q 2017

2Q 2016
 
Allowance for Loan Losses

 Reserve  for
Guarantee
Losses

 

Allowance for Loan Losses

 Reserve  for
Guarantee
Losses

 
 (In millions)
Held by Freddie Mac

Held By
Consolidated
Trusts


Total

Held by Freddie Mac

Held By
Consolidated
Trusts


Total
Single-family:















Beginning balance

$9,866



$2,854



$54



$12,774



$11,667



$2,819



$57



$14,543

Provision (benefit) for credit losses
(512
)

94


2


(416
)

(740
)

(31
)

2


(769
)
Charge-offs(1)
(2,119
)

(33
)

(1
)

(2,153
)

(467
)

(16
)

(3
)

(486
)
Recoveries
84


1


—


85


148


4


—


152

Transfers, net(2)
222


(161
)

—


61


278


(187
)

—


91

Ending balance
7,541


2,755


55


10,351


10,886


2,589


56


13,531

Multifamily ending balance
14


1


7


22


26


1


18


45

Total ending balance

$7,555



$2,756



$62



$10,373



$10,912



$2,590



$74



$13,576

















 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
YTD 2017

YTD 2016
 
Allowance for Loan Losses

 Reserve  for
Guarantee
Losses

 

Allowance for Loan Losses

 Reserve  for
Guarantee
Losses

 
 (in millions)
Held by Freddie Mac

Held By
Consolidated
Trusts


Total

Held by Freddie Mac

Held By
Consolidated
Trusts


Total
Single-family:















Beginning balance

$10,442



$2,969



$54



$13,465



$12,516



$2,775



$57



$15,348

Provision (benefit) for credit losses
(728
)

200


2


(526
)

(1,175
)

(60
)

4


(1,231
)
Charge-offs(1)
(2,816
)

(76
)

(1
)

(2,893
)

(966
)

(84
)

(5
)

(1,055
)
Recoveries
179


3


—


182


274


6


—


280

Transfers, net(2)
464


(341
)

—


123


237


(48
)

—


189

Ending balance
7,541


2,755


55


10,351


10,886


2,589


56


13,531

Multifamily ending balance
14


1


7


22


26


1


18


45

Total ending balance

$7,555



$2,756



$62



$10,373



$10,912



$2,590



$74



$13,576


(1)
2Q 2016 and YTD 2016 do not include lower-of-cost-or-fair-value adjustments and other expenses related to property taxes and insurance recognized when we transfer loans from held-for-investment to held-for-sale, which totaled $776 million and $874 million, respectively. 2Q 2017 and YTD 2017 include charge-offs of $1.8 billion and $2.2 billion, respectively, related to the transfer of loans from held-for-investment to held-for-sale.
(2)
Consists of approximately $0.1 billion during both 2Q 2017 and 2Q 2016, and $0.1 billion and $0.2 billion during YTD 2017 and YTD 2016, respectively, attributable to capitalization of past due interest on modified loans. Also includes amounts associated with reclassified single-family reserves related to our removal of loans previously held by consolidated trusts, net of reclassifications for single-family loans subsequently resecuritized after such removal.

The allowance for loan losses associated with our held-for-investment unsecuritized loans represented approximately 8.6% and 9.9% of the recorded investment in such loans at June 30, 2017 and December 31, 2016, respectively, and a substantial portion of the allowance associated with these loans represented interest rate concessions provided to borrowers as part of loan modifications. The allowance for loan losses associated with loans held by our consolidated trusts represented approximately 0.2% of the recorded investment in such loans as of both June 30, 2017 and December 31, 2016.

Freddie Mac Form 10-Q
 
88


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The table below presents the volume of single-family and multifamily loans that were newly classified as TDRs, based on the original category of the loan before the loan was classified as a TDR. Loans classified as a TDR in one period may be subject to further action (such as a modification or remodification) in a subsequent period. In such cases, the subsequent action would not be reflected in the table below since the loan would already have been classified as a TDR.
 
 
2Q 2017
 
2Q 2016
 
YTD 2017
 
YTD 2016
(Dollars in millions)
 
Number of 
Loans
 
Post-TDR
Recorded
Investment
 
Number of 
Loans
 
Post-TDR
Recorded
Investment
 
Number of 
Loans
 
Post-TDR
Recorded
Investment
 
Number of 
Loans
 
Post-TDR
Recorded
Investment
Single-family:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
8,019

 

$1,151

 
8,564

 

$1,233

 
16,983

 

$2,434

 
18,896

 

$2,689

15-year amortizing fixed-rate
 
1,090

 
88

 
1,128

 
86

 
2,282

 
176

 
2,446

 
180

Adjustable-rate
 
215

 
32

 
222

 
31

 
465

 
67

 
496

 
71

Alt-A, interest-only, and option ARM
 
601

 
111

 
751

 
129

 
1,281

 
225

 
1,670

 
298

Total single-family
 
9,925

 
1,382

 
10,665

 
1,479

 
21,011

 
2,902

 
23,508

 
3,238

Multifamily
 
—

 
—

 
—

 
—

 
—

 
—

 
2

 
8

Total
 
9,925

 

$1,382

 
10,665

 

$1,479

 
21,011

 

$2,902

 
23,510

 

$3,246

 
(1)
The pre-TDR recorded investment for single-family loans initially classified as TDR during 2Q 2017 and YTD 2017 was $1.4 billion and $2.9 billion, respectively, compared to $1.5 billion and $3.3 billion during 2Q 2016 and YTD 2016, respectively.
The table below presents the volume of our TDR modifications that experienced payment defaults (i.e., loans that became two months delinquent or completed a loss event) during the applicable periods and had completed a modification during the year preceding the payment default. The table presents loans based on their original product category before modification.
 
2Q 2017
 
2Q 2016
 
YTD 2017
 
YTD 2016
(Dollars in millions)
Number of Loans
 
Post-TDR
Recorded
Investment
 
Number of Loans
 
Post-TDR
Recorded
Investment
 
Number of Loans
 
Post-TDR
Recorded
Investment
 
Number of Loans
 
Post-TDR
Recorded
Investment
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
3,301

 

$534

 
3,912

 

$599

 
6,657

 

$1,087

 
7,904

 

$1,233

15-year amortizing fixed-rate
146

 
13

 
192

 
17

 
314

 
26

 
425

 
35

Adjustable-rate
53

 
8

 
64

 
10

 
109

 
16

 
137

 
21

Alt-A, interest-only, and option ARM
283

 
62

 
385

 
71

 
588

 
126

 
844

 
169

Total single-family
3,783

 

$617

 
4,553

 

$697

 
7,668

 

$1,255

 
9,310

 

$1,458

Multifamily
—

 

$—

 
—

 

$—

 
—

 

$—

 
—

 

$—

In addition to modifications, loans may be initially classified as TDRs as a result of other loss mitigation activities (i.e., repayment plans, forbearance agreements, or loans in modification trial periods). During YTD 2017 and YTD 2016, 3,502 and 4,331, respectively, of such loans (with a post-TDR recorded investment of $0.4 billion and $0.5 billion, respectively) experienced a payment default within a year after the loss mitigation activity occurred.

Freddie Mac Form 10-Q
 
89


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Loans may also be initially classified as TDRs because the borrowers’ debts were discharged in Chapter 7 bankruptcy (and the loan was not already classified as a TDR for other reasons). During YTD 2017 and YTD 2016, 465 and 671, respectively, of such loans (with a post-TDR recorded investment of $0.1 billion in both periods) experienced a payment default within a year after the borrowers' Chapter 7 bankruptcy.
Single-Family TDRs
Approximately 41% of the single-family loan modifications completed during both 2Q 2017 and 2Q 2016 and 42% and 41% during YTD 2017 and YTD 2016, respectively, that were classified as TDRs involved interest rate reductions and, in certain cases, term extensions. Approximately 12% and 16% of the single-family loan modifications completed during 2Q 2017 and 2Q 2016, respectively, and 13% and 16% during YTD 2017 and YTD 2016, respectively, that were classified as TDRs involved principal forbearance in addition to interest rate reductions and, in certain cases, term extensions. During 2Q 2017 and 2Q 2016, the average term extension was 174 months and 176 months, respectively, and the average interest rate reduction was 0.7% and 0.8%, respectively, on completed single-family loan modifications classified as TDRs. During YTD 2017 and YTD 2016, the average term extension was 173 months and 178 months, respectively, and the average interest rate reduction was 0.8% in both periods on completed single-family loan modifications classified as TDRs.

Freddie Mac Form 10-Q
 
90


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Impaired Loans
The tables below present the UPB, recorded investment, related allowance for loan losses, average recorded investment and interest income recognized for individually impaired loans.
 
 
June 30, 2017
December 31, 2016
(In millions)
 
UPB
 
Recorded
Investment
 
Associated
Allowance
UPB
 
Recorded Investment
 
Associated
Allowance
Single-family —
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance recorded:(1)
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 

$4,762

 

$3,636

 
N/A


$4,963

 

$3,746

 
N/A

15-year amortizing fixed-rate
 
30

 
26

 
N/A

31

 
26

 
N/A

Adjustable-rate
 
301

 
298

 
N/A

292

 
289

 
N/A

Alt-A, interest-only, and option ARM
 
1,700

 
1,412

 
N/A

1,935

 
1,561

 
N/A

Total with no specific allowance recorded
 
6,793

 
5,372

 
N/A

7,221

 
5,622

 
N/A

With specific allowance recorded:(2)
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
58,365

 
56,915

 

($7,375
)
67,853

 
66,143

 

($9,678
)
15-year amortizing fixed-rate
 
814

 
817

 
(25
)
847

 
851

 
(25
)
Adjustable-rate
 
271

 
265

 
(17
)
319

 
312

 
(19
)
Alt-A, interest-only, and option ARM
 
9,127

 
8,639

 
(1,429
)
12,699

 
12,105

 
(2,258
)
Total with specific allowance recorded
 
68,577

 
66,636

 
(8,846
)
81,718

 
79,411

 
(11,980
)
Combined single-family:
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
63,127

 
60,551

 
(7,375
)
72,816

 
69,889

 
(9,678
)
15-year amortizing fixed-rate
 
844

 
843

 
(25
)
878

 
877

 
(25
)
Adjustable-rate
 
572

 
563

 
(17
)
611

 
601

 
(19
)
Alt-A, interest-only, and option ARM
 
10,827

 
10,051

 
(1,429
)
14,634

 
13,666

 
(2,258
)
Total single-family
 

$75,370

 

$72,008

 

($8,846
)

$88,939

 

$85,033

 

($11,980
)
Multifamily —
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance recorded(1)
 

$153

 

$141

 
N/A


$321

 

$308

 
N/A

With specific allowance recorded
 
25

 
23

 

($5
)
44

 
42

 

($9
)
Total multifamily
 

$178

 

$164

 

($5
)

$365

 

$350

 

($9
)
Total single-family and multifamily
 

$75,548

 

$72,172

 

($8,851
)

$89,304

 

$85,383

 

($11,989
)


Freddie Mac Form 10-Q
 
91


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



 
 
2Q 2017
 
2Q 2016
(In millions)
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Interest
Income
Recognized
On Cash
Basis(3)
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Interest
Income
Recognized
On Cash
Basis(3)
Single-family —
 
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance recorded:(1)
 
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 

$3,801

 

$101

 

$5

 

$4,114

 

$117

 

$4

15-year amortizing fixed-rate
 
27

 
—

 
—

 
35

 
2

 
—

Adjustable rate
 
306

 
3

 
—

 
250

 
2

 
—

Alt-A, interest-only, and option ARM
 
1,509

 
27

 
1

 
1,413

 
27

 
1

Total with no specific allowance recorded
 
5,643

 
131

 
6

 
5,812

 
148

 
5

With specific allowance recorded:(2)
 
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
59,482

 
643

 
60

 
69,118

 
653

 
61

15-year amortizing fixed-rate
 
803

 
5

 
1

 
903

 
8

 
2

Adjustable rate
 
259

 
2

 
—

 
406

 
3

 
1

Alt-A, interest-only, and option ARM
 
9,446

 
100

 
8

 
13,166

 
99

 
7

Total with specific allowance recorded
 
69,990

 
750

 
69

 
83,593

 
763

 
71

Combined single-family:
 
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
63,283

 
744

 
65

 
73,232

 
770

 
65

15-year amortizing fixed-rate
 
830

 
5

 
1

 
938

 
10

 
2

Adjustable rate
 
565

 
5

 
—

 
656

 
5

 
1

Alt-A, interest-only, and option ARM
 
10,955

 
127

 
9

 
14,579

 
126

 
8

Total single-family
 

$75,633

 

$881

 

$75

 

$89,405

 

$911

 

$76

Multifamily —
 
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance recorded(1)
 

$141

 

$2

 

$—

 

$305

 

$4

 

$1

With specific allowance recorded
 
23

 
—

 
1

 
82

 
—

 
—

Total multifamily
 

$164

 

$2

 

$1

 

$387

 

$4

 

$1

Total single-family and multifamily
 

$75,797

 

$883

 

$76

 

$89,792

 

$915

 

$77


Freddie Mac Form 10-Q
 
92


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



 
 
YTD 2017
 
YTD 2016
(In millions)
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Interest
Income
Recognized
On Cash
Basis(3)
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Interest
Income
Recognized
On Cash
Basis(3)
Single-family —
 
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance recorded:(1)
 
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 

$3,916

 

$210

 

$9

 

$4,065

 

$219

 

$6

15-year amortizing fixed-rate
 
27

 
1

 
—

 
35

 
3

 
—

Adjustable rate
 
308

 
6

 
—

 
236

 
4

 
—

Alt-A, interest-only, and option ARM
 
1,582

 
56

 
2

 
1,304

 
52

 
2

Total with no specific allowance recorded
 
5,833

 
273

 
11

 
5,640

 
278

 
8

With specific allowance recorded:(2)
 
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
62,287

 
1,313

 
130

 
69,924

 
1,338

 
135

15-year amortizing fixed-rate
 
814

 
17

 
3

 
923

 
20

 
4

Adjustable rate
 
266

 
5

 
1

 
434

 
8

 
2

Alt-A, interest-only, and option ARM
 
10,431

 
207

 
19

 
13,419

 
223

 
17

Total with specific allowance recorded
 
73,798

 
1,542

 
153

 
84,700

 
1,589

 
158

Combined single-family:
 
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
66,203

 
1,523

 
139

 
73,989

 
1,557

 
141

15-year amortizing fixed-rate
 
841

 
18

 
3

 
958

 
23

 
4

Adjustable rate
 
574

 
11

 
1

 
670

 
12

 
2

Alt-A, interest-only, and option ARM
 
12,013

 
263

 
21

 
14,723

 
275

 
19

Total single-family
 

$79,631

 

$1,815

 

$164

 

$90,340

 

$1,867

 

$166

Multifamily —
 
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance recorded(1)
 

$284

 

$5

 

$1

 

$339

 

$7

 

$2

With specific allowance recorded
 
27

 
1

 
1

 
82

 
2

 
1

Total multifamily
 

$311

 

$6

 

$2

 

$421

 

$9

 

$3

Total single-family and multifamily
 

$79,942

 

$1,821

 

$166

 

$90,761

 

$1,876

 

$169


(1)
Individually impaired loans with no specific related valuation allowance primarily represent those loans for which the collateral value is sufficiently in excess of the loan balance to result in recovery of the entire recorded investment if the property were foreclosed upon or otherwise subject to disposition.
(2)
Consists primarily of loans classified as TDRs.
(3)
Consists of income recognized during the period related to loans on non-accrual status.

Freddie Mac Form 10-Q
 
93


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The table below presents our allowance for loan losses and our recorded investment in loans, held-for-investment, by impairment evaluation methodology.
 
 
June 30, 2017
 
December 31, 2016
(In millions)
 
Single-family
 
Multifamily
 
Total
 
Single-family
 
Multifamily
 
Total
Recorded investment:
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated
 

$1,717,594

 

$24,668

 

$1,742,262

 

$1,684,411

 

$28,552

 

$1,712,963

Individually evaluated
 
72,008

 
164

 
72,172

 
85,033

 
350

 
85,383

Total recorded investment
 
1,789,602

 
24,832

 
1,814,434

 
1,769,444

 
28,902

 
1,798,346

Ending balance of the allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated
 
(1,450
)
 
(10
)
 
(1,460
)
 
(1,431
)
 
(11
)
 
(1,442
)
Individually evaluated
 
(8,846
)
 
(5
)
 
(8,851
)
 
(11,980
)
 
(9
)
 
(11,989
)
Total ending balance of the allowance
 
(10,296
)
 
(15
)
 
(10,311
)
 
(13,411
)
 
(20
)
 
(13,431
)
Net investment in loans
 

$1,779,306

 

$24,817

 

$1,804,123

 

$1,756,033

 

$28,882

 

$1,784,915

CREDIT PROTECTION AND OTHER FORMS OF CREDIT ENHANCEMENT
In connection with many of our single-family loans and other mortgage-related guarantees, we have various forms of credit protection.
The table below presents the UPB of single-family loans on our consolidated balance sheets or underlying certain of our financial guarantees with credit protection and the maximum amounts of potential loss recovery by type of credit protection.

Freddie Mac Form 10-Q
 
94


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



 
 
June 30, 2017
 
December 31, 2016
(In millions)
 
Total Current and Protected UPB(1)
 
Maximum Coverage(1)(2)
 
Collateralized Coverage Remaining (3)
 
Total Current and Protected UPB(1)
 
Maximum Coverage(1)(2)
 
Collateralized Coverage Remaining (3)
Credit enhancements at the time we acquire the loan:
 
 
 
 
 
 
 
 
 
 
 
 
Primary mortgage insurance
 

$309,139

 

$78,955

 

$—

 

$291,217

 

$74,345

 

$—

Seller indemnification(4)
 
1,727

 
21

 
19

 
1,030

 
10

 
10

Deep MI(4)(5)
 
5,417

 
144

 
47

 
3,067

 
81

 
—

Lender recourse and indemnification agreements(6)
 
5,391

 
4,810

 
—

 
5,247

 
4,911

 
—

Pool insurance(6)
 
986

 
562

 
—

 
1,719

 
618

 
—

Other:
 
 
 
 
 
 
 
 
 
 
 
 
HFA indemnification
 
1,533

 
1,533

 
—

 
1,747

 
1,747

 
—

Subordination
 
1,696

 
184

 
—

 
1,874

 
230

 
—

Other credit enhancements(6)
 
15

 
5

 
—

 
17

 
6

 
—

Credit enhancements subsequent to our purchase or guarantee of the loan:
 
 
 
 
 
 
 
 
 
 
 
 
STACR debt note(4)(7)
 
552,118

 
17,062

 
17,062

 
427,978

 
14,507

 
14,507

ACIS transactions(4)(8)
 
545,804

 
6,130

 
1,015

 
453,670

 
5,355

 
877

Whole loan securities and senior subordinate securitization structures(4)
 
4,110

 
588

 
588

 
2,494

 
375

 
375

Less: UPB with more than one type of credit enhancement
 
(695,718
)
 
—

 
—

 
(559,400
)
 
—

 
—

Single-family loan portfolio with credit enhancement
 
732,218

 
109,994

 
18,731

 
630,660

 
102,185

 
15,769

Single-family loan portfolio without credit enhancement
 
1,052,020

 
—

 
—

 
1,124,066

 
—

 
—

Total
 

$1,784,238

 

$109,994

 

$18,731

 

$1,754,726

 

$102,185

 

$15,769

 
(1)
Except for the majority of our single-family credit risk transfer transactions, our credit enhancements generally provide protection for the first, or initial, credit losses associated with the related loans. Excludes: (a) FHA/VA and other governmental loans; (b) credit protection associated with $6.1 billion and $6.7 billion in UPB of single-family loans underlying other structured transactions where data was not available as of June 30, 2017 and December 31, 2016, respectively; and (c) repurchase rights (subject to certain conditions and limitations) we have under representations and warranties provided by our agreements with seller/servicers to underwrite loans and service them in accordance with our standards. The UPB of single-family loans covered by insurance or partial guarantees issued by federal agencies (such as FHA, VA and USDA) was $2.7 billion and $2.8 billion as of June 30, 2017 and December 31, 2016, respectively.
(2)
Except for subordination and whole loan securities, this represents the remaining amount of loss recovery that is available subject to terms of counterparty agreements. For subordination and whole loan securities, this represents the UPB of the securities that are subordinate to our guarantee, which could provide protection by absorbing first losses.
(3)
Collateralized coverage includes cash received by Freddie Mac upon issuance of STACR debt notes and unguaranteed whole loan securities, as well as cash and securities pledged for our benefit primarily related to ACIS transactions.
(4)
Credit risk transfer transactions. The substantial majority of single-family loans covered by these transactions were acquired after 2012.
(5)
Includes approximately $5.4 billion and $3.1 billion in UPB at June 30, 2017 and December 31, 2016, where the related loans are also covered by primary mortgage insurance. Deep MI credit risk transfer, or Deep MI, began in the third quarter of 2016.
(6)
In aggregate, includes approximately $1.0 billion in UPB at both June 30, 2017 and December 31, 2016, respectively, where the related loans are also covered by primary mortgage insurance.

Freddie Mac Form 10-Q
 
95


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



(7)
Includes approximately $172.4 billion and $123.5 billion in UPB at June 30, 2017 and December 31, 2016, respectively, where the related loans are also covered by primary mortgage insurance. Maximum coverage amounts presented represent the outstanding balance of STACR debt notes held by third parties.
(8)
Includes $138.6 billion and $127.4 billion in UPB at June 30, 2017 and December 31, 2016, respectively, where the related loans are also covered by primary mortgage insurance. Maximum coverage amounts presented represent the remaining aggregate limit of insurance purchased from third parties in ACIS transactions.
Primary mortgage insurance and credit risk transfer transactions are the most prevalent types of credit enhancement protecting our single-family credit guarantee portfolio. For information about counterparty risk associated with mortgage insurers, see Note 12.
Our credit risk transfer transactions provide credit enhancement by transferring a portion of our expected credit losses to third-party investors, insurers, and selected sellers. The value of these transactions to us is dependent on various economic scenarios, and we will primarily benefit from these transactions if we experience significant mortgage loan defaults.
LOAN RECLASSIFICATIONS
On January 1, 2017, we elected a new accounting policy for loan reclassifications from held-for-investment to held-for-sale. Under the new policy, when we reclassify (transfer) a loan from held-for-investment to held-for-sale, we charge off the entire difference between the loan’s recorded investment and its fair value if the loan has a history of credit-related issues. Expenses related to property taxes and insurance are included as part of the charge-off. If the charge-off amount exceeds the existing loan loss reserve amount, an additional provision for credit losses is recorded. Any declines in loan fair value after the date of transfer will be recognized as a valuation allowance, with an offset recorded to other income (loss). This new policy election was applied prospectively, as it was not practical to apply it retrospectively.
The new policy election did not affect our net income; however, it affected where the loan reclassifications from held-for-investment to held-for-sale were recorded in our condensed consolidated statements of comprehensive income. Prior to the policy change, upon a loan reclassification from held-for-investment to held-for-sale, we reversed the related allowance for loan losses to the benefit (provision) for credit losses, recorded a valuation allowance for any difference between the loan's recorded investment and its fair value to other income (loss), and recorded property taxes and insurance expenses related to the transferred loans in other expense. Under the new policy, benefit (provision) for credit losses is the only line item affected when a transfer occurs.
NON-CASH INVESTING AND FINANCING ACTIVITIES
During YTD 2017 and YTD 2016, we acquired $106.3 billion and $94.5 billion, respectively, of loans held-for-investment in exchange for the issuance of debt securities of consolidated trusts in guarantor swap transactions. The guarantor swap transactions during YTD 2017 and YTD 2016 included approximately $16.3 billion and $9.4 billion, respectively, of loans received from sellers to satisfy advances that were recorded in other assets on our consolidated balance sheets.
In addition, we acquire REO properties through foreclosure transfers or by deed in lieu of foreclosure. These acquisitions represent non-cash transfers. During YTD 2017 and YTD 2016, we had transfers of $0.6 billion and $0.8 billion, respectively, from loans to REO.


Freddie Mac Form 10-Q
 
96


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 5


NOTE 5: INVESTMENTS IN SECURITIES
The table below summarizes the fair values of our investments in debt securities by classification.
(In millions)
June 30, 2017
 
December 31, 2016
Trading securities

$41,760

 

$44,790

Available-for-sale securities
57,039

 
66,757

Total

$98,799

 

$111,547

As of June 30, 2017 and December 31, 2016, we did not classify any securities as held-to-maturity, although we may elect to do so in the future.
TRADING SECURITIES
The table below presents the estimated fair values of our trading securities by major security type. Our non-mortgage-related securities primarily consist of investments in U.S. Treasury securities.
(In millions)
 
June 30, 2017
 
December 31, 2016
Mortgage-related securities:
 
 
 
 
Freddie Mac
 

$12,953

 

$15,343

Other agency
 
6,706

 
8,161

All other
 
135

 
149

Total mortgage-related securities
 
19,794

 
23,653

Non-mortgage-related securities
 
21,966

 
21,137

Total fair value of trading securities
 

$41,760

 

$44,790

During 2Q 2017 and YTD 2017, we recorded net unrealized gains (losses) on trading securities held at those dates of ($210) million and ($157) million, respectively. During 2Q 2016 and YTD 2016, we recorded net unrealized gains (losses) on trading securities held at those dates of $25 million and $225 million, respectively.


Freddie Mac Form 10-Q
 
97


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 5


AVAILABLE-FOR-SALE SECURITIES
At June 30, 2017 and December 31, 2016, all available-for-sale securities were mortgage-related securities.
The tables below present the amortized cost, gross unrealized gains and losses, and fair value by major security type for our securities classified as available-for-sale.
 
 
June 30, 2017
 
 
 
 
 
 
Gross Unrealized Losses
 
 
(In millions)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Other-Than-Temporary Impairment(1)
 
Temporary Impairment(2)
 
Fair
Value
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 

$40,038

 

$651

 

$—

 

($376
)
 

$40,313

Other agency
 
3,583

 
108

 
—

 
(17
)
 
3,674

Non-agency RMBS
 
7,388

 
1,279

 
(21
)
 
(7
)
 
8,639

Non-agency CMBS
 
3,698

 
244

 
(6
)
 
(4
)
 
3,932

Obligations of states and political subdivisions
 
474

 
7

 
—

 
—

 
481

Total available-for-sale securities
 

$55,181

 

$2,289

 

($27
)
 

($404
)
 

$57,039

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 

 
Gross Unrealized Losses
 
 
(In millions)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Other-Than-Temporary Impairment(1)
 
Temporary Impairment(2)
 
Fair
Value
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 

$43,671

 

$563

 

$—

 

($582
)
 

$43,652

Other agency
 
4,127

 
119

 
—

 
(25
)
 
4,221

Non-agency RMBS
 
10,606

 
1,271

 
(62
)
 
(18
)
 
11,797

Non-agency CMBS
 
6,288

 
160

 
(3
)
 
(23
)
 
6,422

Obligations of states and political subdivisions
 
657

 
8

 
—

 
—

 
665

Total available-for-sale securities
 

$65,349

 

$2,121

 

($65
)
 

($648
)
 

$66,757


(1)
Represents the gross unrealized losses for securities for which we have previously recognized other-than-temporary impairment in earnings.
(2)
Represents the gross unrealized losses for securities for which we have not previously recognized other-than-temporary impairment in earnings.

Freddie Mac Form 10-Q
 
98


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 5


Available-For-Sale Securities in a Gross Unrealized Loss Position
The tables below present available-for-sale securities in a gross unrealized loss position and whether such securities have been in an unrealized loss position for less than 12 months, or 12 months or greater.
 
 
June 30, 2017
 
 
Less than 12 Months
 
12 Months or Greater
(In millions)
 
Fair
Value
 
Gross Unrealized Losses
 
Fair
Value
 
Gross Unrealized Losses
Available-for-sale securities:
 
 
 
 
 
 
 
 
Freddie Mac
 

$14,756

 

($362
)
 

$1,353

 

($14
)
Other agency
 
124

 
(1
)
 
1,707

 
(16
)
Non-agency RMBS
 
47

 
(1
)
 
504

 
(27
)
Non-agency CMBS
 
181

 
—

 
222

 
(10
)
Obligations of states and political subdivisions
 
45

 
—

 
—

 
—

Total available-for-sale securities in a gross unrealized loss position
 

$15,153

 

($364
)
 

$3,786

 

($67
)
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
Less than 12 Months
 
12 Months or Greater
(In millions)
 
Fair
Value
 
Gross Unrealized Losses
 
Fair
Value
 
Gross Unrealized Losses
Available-for-sale securities:
 
 
 
 
 
 
 
 
Freddie Mac
 

$19,786

 

($559
)
 

$1,732

 

($23
)
Other agency
 
542

 
(6
)
 
2,040

 
(19
)
Non-agency RMBS
 
309

 
(1
)
 
2,188

 
(79
)
Non-agency CMBS
 
383

 
(2
)
 
204

 
(24
)
Obligations of states and political subdivisions
 
83

 
—

 
—

 
—

Total available-for-sale securities in a gross unrealized loss position
 

$21,103

 

($568
)
 

$6,164

 

($145
)
At June 30, 2017, the gross unrealized losses relate to 279 separate securities.
Impairment Recognition on Investments in Securities
We recognized $3 million and $72 million in net impairment of available-for-sale securities in earnings, including $2 million and $10 million related to change in status from intent to hold to intent to sell during 2Q 2017 and 2Q 2016, respectively. We recognized $16 million and $129 million in net impairment of available-for-sale securities in earnings, including $5 million and $62 million related to change in status from intent to hold to intent to sell during YTD 2017 and YTD 2016, respectively. For our available-for-sale securities in an unrealized loss position at June 30, 2017, we have asserted that we have no intent to sell and believe it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis.

Freddie Mac Form 10-Q
 
99


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 5


Non-Agency Residential Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans
The table below presents the modeled attributes for the related collateral that are used to determine whether our interests in certain available-for-sale non-agency RMBS backed by subprime, option ARM, and Alt-A loans will experience a cash shortfall.
(Dollars in millions)
June 30, 2017
UPB

$10,742

Weighted average collateral cumulative loss
21
%
Weighted average voluntary prepayment rates
6
%
Our internal models also consider the remaining amount of subordination and other financial support (excluding credit enhancements provided by bond insurance) that will incur losses in the securitization structure before any losses are allocated to securities that we own. Unallocated collateral losses also have been considered in our assessment of other-than-temporary-impairment.
Other-Than-Temporary Impairment on Available-for-Sale Securities
The following table is a rollforward of the amount of credit-related other-than-temporary impairment that has been recognized in earnings for available-for-sale securities that we continue to hold.
(In millions)
2Q 2017
 
2Q 2016
 
YTD 2017
 
YTD 2016
Credit-related other-than-temporary impairment on available-for-sale securities recognized in earnings:
 
 
 
 
 
 
 
Beginning balance — remaining credit losses on available-for-sale securities where a portion of other-than-temporary impairment was recognized in other comprehensive income

$3,779

 

$4,551

 

$4,136

 

$5,306

Additions:
 
 
 
 
 
 
 
Amounts related to credit losses on securities for which an other-than-temporary impairment was previously recognized
1

 
62

 
11

 
67

Reductions:
 
 
 
 
 
 
 
Amounts related to securities which were sold, written off, or matured
(14
)
 
(7
)
 
(36
)
 
(62
)
Amounts related to securities which we intend to sell or it is more likely than not that we will be required to sell before recovery of amortized cost basis
(106
)
 
(21
)
 
(394
)
 
(657
)
Amounts related to amortization resulting from significant increases in cash flows expected to be collected and/or due to the passage of time that are recognized over the remaining life of the security
(56
)
 
(68
)
 
(113
)
 
(137
)
Ending balance — remaining credit losses on available-for-sale securities where a portion of other-than-temporary impairment was recognized in other comprehensive income

$3,604

 

$4,517

 

$3,604

 

$4,517


Freddie Mac Form 10-Q
 
100


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 5


Realized Gains and Losses on Sales of Available-For-Sale Securities
The table below summarizes the gross realized gains and gross realized losses from the sale of available-for-sale securities.
(In millions)
2Q 2017
 
2Q 2016
 
YTD 2017
 
YTD 2016
Gross realized gains

$129

 

$413

 

$347

 

$493

Gross realized losses
(6
)
 
(27
)
 
(34
)
 
(35
)
Net realized gains (losses)

$123

 

$386

 

$313

 

$458


Maturities of Available-For-Sale Securities
The table below presents the remaining contractual maturities of available-for-sale securities by security type.
 
 
As of June 30, 2017
 
 
 
 
 
 
 
 
 
 
After One Year Through Five Years
 
After Five Years Through Ten Years
 
 
 
 
 
 
Total Amortized Cost
 
Total Fair Value
 
One Year or Less
 
 
 
After Ten Years
 
 
 
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
(In millions)
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 

$40,038

 

$40,313

 

$—

 

$—

 

$404

 

$403

 

$2,662

 

$2,671

 

$36,972

 

$37,239

Other agency
 
3,583

 
3,674

 
—

 
—

 
6

 
6

 
48

 
53

 
3,529

 
3,615

Non-agency RMBS
 
7,388

 
8,639

 
—

 
—

 
4

 
4

 
22

 
27

 
7,362

 
8,608

Non-agency CMBS
 
3,698

 
3,932

 
1

 
1

 
—

 
—

 
—

 
—

 
3,697

 
3,931

Obligations of states and political subdivisions
 
474

 
481

 
3

 
3

 
12

 
12

 
46

 
49

 
413

 
417

Total available-for-sale securities
 

$55,181

 

$57,039

 

$4

 

$4

 

$426

 

$425

 

$2,778

 

$2,800

 

$51,973

 

$53,810


Freddie Mac Form 10-Q
 
101


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 6


NOTE 6: DEBT SECURITIES AND SUBORDINATED BORROWINGS
The table below summarizes the interest expense per our condensed consolidated statements of comprehensive income and the balances of total debt, net per our condensed consolidated balance sheets.
 
Balance, Net
 
Interest Expense
(In millions)
June 30, 2017
 
December 31, 2016
 
2Q 2017
 
2Q 2016
 
YTD 2017
 
YTD 2016
Debt securities of consolidated trusts held by third parties

$1,672,255

 

$1,648,683

 

$11,994

 

$11,249

 

$23,715

 

$23,040

Other debt:
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
67,619

 
71,451

 
145

 
82

 
241

 
175

Long-term debt
269,292

 
281,870

 
1,340

 
1,450

 
2,665

 
2,954

Total other debt
336,911

 
353,321


1,485


1,532

 
2,906

 
3,129

Total debt, net

$2,009,166

 

$2,002,004



$13,479



$12,781

 

$26,621



$26,169

Our debt cap under the Purchase Agreement is $407.2 billion in 2017 and will decline to $346.1 billion on January 1, 2018. As of June 30, 2017, our aggregate indebtedness for purposes of the debt cap was $340.0 billion. Our aggregate indebtedness calculation primarily includes the par value of other short- and long-term debt.
DEBT SECURITIES OF CONSOLIDATED TRUSTS HELD BY THIRD PARTIES
The table below summarizes the debt securities of consolidated trusts held by third parties based on underlying loan product type.
 
June 30, 2017
 
December 31, 2016
(Dollars in millions)
Contractual
Maturity
 
UPB
 
Carrying Amount
 
Weighted
Average
Coupon(1)
 
Contractual
Maturity
 
UPB
 
Carrying Amount
 
Weighted
Average
Coupon(1)
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30-year or more, fixed-rate(2)
2017 - 2055
 

$1,222,606

 

$1,259,762

 
3.69
%
 
2017 - 2055
 

$1,193,329

 

$1,229,849

 
3.71
%
20-year fixed-rate
2017 - 2037
 
74,773

 
77,022

 
3.46

 
2017 - 2037
 
74,033

 
76,331

 
3.49

15-year fixed-rate
2017 - 2032
 
264,467

 
270,415

 
2.88

 
2017 - 2032
 
267,739

 
273,978

 
2.90

Adjustable-rate
2017 - 2047
 
50,786

 
51,930

 
2.77

 
2017 - 2047
 
52,991

 
54,205

 
2.69

Interest-only
2026 - 2041
 
8,559

 
8,623

 
3.65

 
2026 - 2041
 
10,007

 
10,057

 
3.47

FHA/VA
2017 - 2046
 
927

 
948

 
4.89

 
2017 - 2046
 
1,015

 
1,038

 
4.92

Total single-family
 
 
1,622,118

 
1,668,700

 
 
 
 
 
1,599,114

 
1,645,458

 
 
Multifamily(2)
2019 - 2034
 
3,501

 
3,555

 
3.47

 
2019 - 2033
 
3,048

 
3,225

 
4.63

Total debt securities of consolidated trusts held by third parties
 
 

$1,625,619

 

$1,672,255

 
 
 
 
 

$1,602,162

 

$1,648,683

 
 
 
(1)
The effective interest rate for debt securities of consolidated trusts held by third parties was 2.84% and 2.63% as of June 30, 2017 and December 31, 2016, respectively.
(2)
Carrying amount includes securities recorded at fair value.

Freddie Mac Form 10-Q
 
102


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 6


Other Debt
The table below summarizes the balances and effective interest rates for other debt. Securities sold under agreements to repurchase are effectively collateralized borrowing transactions where we sell securities with an agreement to repurchase such securities. These agreements require the underlying securities to be delivered to the counterparties to the transactions.
 
 
June 30, 2017
 
December 31, 2016
(Dollars in millions)
 
Par Value
 
Carrying Amount(1)
 
Weighted
Average
Effective Rate(2)
 
Par Value
 
Carrying Amount(1)
 
Weighted
Average
Effective Rate(2)
Other short-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes and Reference Bills®
 

$52,354

 

$52,230

 
0.91
%
 

$61,042

 

$60,976

 
0.47
%
Medium-term notes
 
10,616

 
10,617

 
0.82

 
7,435

 
7,435

 
0.41

Securities sold under agreements to repurchase
 
4,772

 
4,772

 
1.01

 
3,040

 
3,040

 
0.42

Total other short-term debt
 

$67,742

 

$67,619

 
0.90

 

$71,517

 

$71,451

 
0.47

Other long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
Original maturities on or before December 31,
 
 
 
 
 
 
 
 
 
 
 
 
2017
 

$44,462

 

$44,465

 
1.56
%
 

$92,831

 

$92,855

 
1.43
%
2018
 
71,211

 
71,280

 
1.17

 
71,392

 
71,500

 
1.18

2019
 
52,099

 
52,047

 
1.58

 
46,436

 
46,378

 
1.59

2020
 
31,528

 
31,490

 
1.66

 
13,274

 
13,254

 
1.54

2021
 
21,125

 
21,150

 
1.79

 
20,372

 
20,341

 
1.81

Thereafter
 
51,304

 
48,860

 
4.14

 
40,921

 
37,542

 
4.36

Total other long-term debt(3)
 
271,729

 
269,292

 
1.96

 
285,226

 
281,870

 
1.81

Total other debt
 

$339,471

 

$336,911

 
 
 

$356,743

 

$353,321

 
 

(1)
Represents par value, net of associated discounts or premiums, issuance cost and hedge-related basis adjustments. Includes $5.6 billion and $5.9 billion at June 30, 2017 and December 31, 2016, respectively, of other long-term debt that represents the fair value of debt securities with the fair value option elected.
(2)
Based on carrying amount.
(3)
Carrying amount for other long-term debt includes callable debt of $120.4 billion and $97.7 billion at June 30, 2017 and December 31, 2016, respectively.

Freddie Mac Form 10-Q
 
103


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


NOTE 7: DERIVATIVES
USE OF DERIVATIVES
We use derivatives primarily to hedge economic interest-rate sensitivity mismatches between our financial assets and liabilities. We analyze the interest-rate sensitivity of financial assets and liabilities on a daily basis across a variety of interest-rate scenarios based on market prices, models and economics. When we use derivatives to mitigate our exposures, we consider a number of factors, including cost, exposure to counterparty risk, and our overall risk management strategy.
We classify derivatives into three categories:
•
Exchange-traded derivatives;
•
Cleared derivatives; and
•
OTC derivatives.
Exchange-traded derivatives include standardized interest-rate futures contracts and options on futures contracts. Cleared derivatives refer to those interest-rate swaps that the U.S. Commodity Futures Trading Commission has determined are subject to the central clearing requirement of the Dodd-Frank Act. OTC derivatives refer to those derivatives that are neither exchange-traded derivatives nor cleared derivatives.
TYPES OF DERIVATIVES
We principally use the following types of derivatives:
•
LIBOR-based interest-rate swaps;
•
LIBOR- and Treasury-based options (including swaptions); and
•
LIBOR- and Treasury-based exchange-traded futures.
We also purchase swaptions on credit indices in order to obtain protection against adverse movements in multifamily spreads which may affect the profitability of our K Certificate or SB Certificate transactions.
In addition to swaps, futures, and purchased options, our derivative positions include written options and swaptions, commitments, and credit derivatives.
HEDGE ACCOUNTING
Fair Value Hedges
On February 2, 2017, we started applying fair value hedge accounting to certain single-family mortgage loans where we hedge the changes in fair value of these loans attributable to the designated benchmark interest rate (i.e., LIBOR), using LIBOR-based interest-rate swaps. The hedge period is one day, and we re-balance our hedge relationships on a daily basis.
We apply hedge accounting to qualifying hedge relationships. A qualifying hedge relationship exists when changes in the fair value of a derivative hedging instrument are expected to be highly effective in offsetting changes in the fair value of the hedged item attributable to the risk being hedged during the term of the hedge relationship. To assess hedge effectiveness, we use a statistical regression analysis.

Freddie Mac Form 10-Q
 
104


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


We prepare formal contemporaneous documentation, at inception of the hedge relationship, of our risk management objective and strategies for undertaking the hedge.
If a hedge relationship qualifies for hedge accounting, changes in fair value of the hedging instrument (swaps) are recognized in other income (loss), rather than derivative gains (losses), and changes in the fair value of the hedged item (loans) attributable to the risk being hedged are also recognized in other income (loss). The amount by which the gain or loss on the designated derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the risk being hedged is hedge ineffectiveness. Changes in the fair value of the hedged item attributable to the risk being hedged are recognized as a cumulative basis adjustment against the loans. The basis adjustments are amortized into interest income in the same manner as all other basis adjustments related to the loans (i.e., effective interest method over the remaining contractual maturity of the loan).
Cash Flow Hedges
There are amounts recorded in AOCI related to discontinued cash flow hedges which are recognized in earnings when the originally forecasted transactions affect earnings. Amounts reclassified from AOCI are recorded primarily in expense related to derivatives. During YTD 2017 and YTD 2016, we reclassified from AOCI into earnings, pre-tax losses of $85 million and $100 million, respectively, related to closed cash flow hedges. See Note 9 for information about future reclassifications of deferred net losses related to closed cash flow hedges to net income.
For additional discussion of significant accounting policies related to derivatives, see Note 7 in our 2016 Annual Report.

Freddie Mac Form 10-Q
 
105


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


DERIVATIVE ASSETS AND LIABILITIES AT FAIR VALUE
The table below presents the notional value and fair value of derivatives reported on our condensed consolidated balance sheets.
 
June 30, 2017
 
December 31, 2016
 
Notional or
Contractual
Amount
 
Derivatives at Fair Value
 
Notional or
Contractual
Amount
 
Derivatives at Fair Value
(In millions)
Assets
 
Liabilities
 
Assets
 
Liabilities
Not designated as hedges
 
 
 
 
 
 
 
 
 
 
 
Interest-rate swaps:
 
 
 
 
 
 
 
 
 
 
 
Receive-fixed

$315,911

 

$2,473

 

($1,353
)
 

$313,106

 

$4,337

 

($2,703
)
Pay-fixed
213,102

 
1,252

 
(6,723
)
 
271,477

 
2,586

 
(9,684
)
Basis (floating to floating)
50

 
—

 
—

 
1,450

 
1

 
—

Total interest-rate swaps
529,063

 
3,725

 
(8,076
)
 
586,033

 
6,924

 
(12,387
)
Option-based:
 
 
 
 
 
 
 
 
 
 
 
Call swaptions
 
 
 
 
 
 
 
 
 
 
 
Purchased
68,135

 
3,262

 
—

 
60,730

 
2,817

 
—

Written
9,700

 
—

 
(98
)
 
1,350

 
—

 
(78
)
Put swaptions
 
 
 
 
 
 
 
 
 
 
 
Purchased(1)
56,910

 
1,360

 
—

 
48,080

 
1,442

 
—

Written
4,600

 
—

 
(16
)
 
3,200

 
—

 
(28
)
Other option-based derivatives(2)
11,050

 
806

 
—

 
11,032

 
795

 
—

Total option-based
150,395

 
5,428

 
(114
)
 
124,392

 
5,054

 
(106
)
Futures
314,583

 
—

 
—

 
138,294

 
—

 
—

Commitments
76,886

 
156

 
(125
)
 
45,353

 
289

 
(151
)
Credit derivatives
2,684

 
—

 
(49
)
 
2,951

 
1

 
(27
)
Other
2,869

 
1

 
(22
)
 
2,879

 
—

 
(21
)
Total derivatives not designated as hedges
1,076,480

 
9,310

 
(8,386
)
 
899,902

 
12,268

 
(12,692
)
Designated as fair value hedges
 
 
 
 
 
 
 
 
 
 
 
Interest-rate swaps:
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
49,361

 
197

 
(203
)
 
—

 
—

 
—

Total derivatives designated as fair value hedges
49,361

 
197

 
(203
)
 
—

 
—

 
—

Derivative interest receivable (payable)
 
 
1,261

 
(1,496
)
 
 
 
1,442

 
(1,770
)
Netting adjustments(3)
 
 
(9,817
)
 
9,787

 
 
 
(12,963
)
 
13,667

Total derivative portfolio, net

$1,125,841

 

$951

 

($298
)
 

$899,902

 

$747

 

($795
)

(1)
Includes swaptions on credit indices with a notional or contractual amount of $22.9 billion and $10.9 billion, and a fair value of $11 million and $5 million at June 30, 2017 and December 31, 2016, respectively.
(2)
Primarily consists of purchased interest-rate caps and floors and options on Treasury futures.
(3)
Represents counterparty netting and cash collateral netting.
See Note 8 for information related to our derivative counterparties and collateral held and posted.

Freddie Mac Form 10-Q
 
106


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


GAINS AND LOSSES ON DERIVATIVES
The table below presents the gains and losses on derivatives while not designated in fair value hedge relationships and the accrual of periodic cash settlements on all derivatives. These amounts are reported in our condensed consolidated statements of comprehensive income as derivative gains (losses).
(In millions)
2Q 2017
 
2Q 2016
 
YTD 2017
 
YTD 2016
Not designated as hedges
 
 
 
 
 
 
 
Interest-rate swaps:
 
 
 
 
 
 
 
Receive-fixed

$1,093

 

$1,939

 

$524

 

$4,883

Pay-fixed
(1,672
)
 
(4,303
)
 
(430
)
 
(12,938
)
Basis (floating to floating)
(1
)
 
—

 
(1
)
 
1

Total interest-rate swaps
(580
)
 
(2,364
)
 
93

 
(8,054
)
Option based:
 
 
 
 
 
 
 
Call swaptions
 
 
 
 
 
 
 
Purchased
292

 
1,300

 
(39
)
 
3,399

Written
(2
)
 
(18
)
 
1

 
(89
)
Put swaptions
 
 
 
 
 
 
 
Purchased
(239
)
 
(236
)
 
(336
)
 
(514
)
Written
24

 
9

 
42

 
47

Other option-based derivatives(1)
34

 
86

 
11

 
233

Total option-based
109

 
1,141

 
(321
)
 
3,076

Other:
 
 
 
 
 
 
 
Futures
(115
)
 
(287
)
 
(230
)
 
(468
)
Commitments
(61
)
 
(104
)
 
(7
)
 
(230
)
Credit derivatives
(15
)
 
(23
)
 
(31
)
 
(31
)
Other
(5
)
 
(1
)
 
(6
)
 
(2
)
Total other
(196
)
 
(415
)
 
(274
)

(731
)
Accrual of periodic cash settlements:
 
 
 
 
 
 
 
Receive-fixed interest-rate swaps
410

 
622

 
855

 
1,239

Pay-fixed interest-rate swaps
(839
)
 
(1,042
)
 
(1,751
)
 
(2,149
)
Total accrual of periodic cash settlements
(429
)
 
(420
)
 
(896
)
 
(910
)
Total

($1,096
)
 

($2,058
)
 

($1,398
)


($6,619
)
 
(1)
Primarily consists of purchased interest-rate caps and floors and options on Treasury futures.









Freddie Mac Form 10-Q
 
107


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


The tables below present the gains and losses on derivatives while designated in qualifying fair value hedge relationships. During 2016, there were no derivatives designated in qualifying fair value hedge relationships.
 
2Q 2017
 
Gains (Losses) Recorded in Net Income
 
(In millions)
Derivative(1)
Hedged Item(1)
Hedge Ineffectiveness(2)
Interest rate risk on mortgage loans held-for-investment

($365
)

$392


$27

 
YTD 2017
 
Gains (Losses) Recorded in Net Income
 
(In millions)
Derivative(1)
Hedged Item(1)
Hedge Ineffectiveness(2)
Interest rate risk on mortgage loans held-for-investment

($300
)

$366


$66

(1)
Gains or losses on derivatives while in fair value hedge relationships and changes in the fair value of the related hedged items attributable to the risk being hedged are both recorded in other income (loss) in our condensed consolidated statements of comprehensive income.
(2)
No amounts have been excluded from the assessment of effectiveness.

Freddie Mac Form 10-Q
 
108


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


NOTE 8: COLLATERALIZED AGREEMENTS AND OFFSETTING ARRANGEMENTS
DERIVATIVE PORTFOLIO
Derivative Counterparties
Our use of cleared derivatives, exchange-traded derivatives, and OTC derivatives exposes us to counterparty credit risk. For additional information, see Note 8 in our 2016 Annual Report.
Our use of interest-rate swaps and option-based derivatives is subject to internal credit and legal reviews. On an ongoing basis, we review the credit fundamentals of all of our derivative counterparties, clearinghouses, and clearing members to confirm that they continue to meet our internal risk management standards.
Over-The-Counter Derivatives
We use master netting and collateral agreements to reduce our credit risk exposure to our OTC derivative counterparties.
In the event that all of our counterparties for OTC derivatives were to have defaulted simultaneously on June 30, 2017, our maximum loss for accounting purposes after applying netting agreements and collateral on an individual counterparty basis would have been approximately $272 million.
Regulations adopted by certain financial institution regulators (including FHFA) that became effective March 1, 2017 require posting of variation margin without the application of any thresholds for OTC derivative transactions executed after that date. As a result, our and the counterparties' credit ratings are no longer used in determining the amount of collateral to be posted in connection with these transactions.
Cleared and Exchange-Traded Derivatives
The majority of our interest-rate swaps are subject to the central clearing requirement of the Dodd-Frank Act. A reduction in our credit ratings could cause the clearinghouses or clearing members we use for our cleared and exchange-traded derivatives to demand additional collateral.
Other Derivatives
We also execute forward purchase and sale commitments of loans and mortgage-related securities, including dollar roll transactions, that are treated as derivatives for accounting purposes. The total exposure on our forward purchase and sale commitments, which are treated as derivatives,
was $156 million and $289 million at June 30, 2017 and December 31, 2016, respectively.
Many of our transactions involving forward purchase and sale commitments of mortgage-related securities utilize the Mortgage Backed Securities Division of the Fixed Income Clearing Corporation (“MBSD/FICC”) as a clearinghouse. As a clearing member of the clearinghouse, we post margin to the MBSD/FICC and are exposed to the counterparty credit risk of the organization (including its clearing members).

Freddie Mac Form 10-Q
 
109


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
As an investor, we enter into arrangements to purchase securities under agreements to subsequently resell the identical or substantially the same securities to our counterparty. While such transactions involve the legal transfer of securities, they are accounted for as secured financings because the transferor does not relinquish effective control over the securities transferred. Our counterparties to these transactions are required to pledge the purchased securities as collateral for their obligation to repurchase those securities at a later date. These agreements may allow us to repledge all or a portion of the collateral.
We consider the types of securities being pledged to us as collateral when determining how much we lend in transactions involving securities purchased under agreements to resell. Additionally, we regularly review the market values of these securities compared to amounts loaned in an effort to manage our exposure to losses.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are effectively collateralized borrowings where we sell securities with an agreement to repurchase such securities at a future date. Similar to the securities purchased under agreements to resell transactions, these transactions involve the legal transfer of securities. However, they are accounted for as secured financings because they require the identical or substantially the same securities to be subsequently repurchased. We are required to pledge the sold securities to the counterparties to these transactions as collateral for our obligation to repurchase these securities at a later date. These agreements may allow our counterparties to repledge all or a portion of the collateral.
OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES
At June 30, 2017 and December 31, 2016, all amounts of cash collateral related to derivatives with master netting and collateral agreements were offset against derivative assets, net or derivative liabilities, net, as applicable.
During 1Q 2017, we began to utilize the Government Securities Division of the Fixed Income Clearing Corporation (“GSD/FICC”) as a clearinghouse to transact many of our trades involving securities purchased under agreements to resell and securities sold under agreements to repurchase. As a clearing member of GSD/FICC, we are required to post initial and variation margin payments, which expose us to the counterparty credit risk of GSD/FICC and its clearing members. Although our membership provides us with the right to offset certain of our open receivable and payable positions by collateral type, we have elected not to offset these positions within our condensed consolidated balance sheets. As of June 30, 2017, our net exposure to GSD/FICC involving securities purchased under agreements to resell and securities sold under agreements to repurchase is fully collateralized.

Freddie Mac Form 10-Q
 
110


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


The tables below display offsetting and collateral information related to derivatives, securities purchased under agreements to resell, and securities sold under agreements to repurchase. Securities sold under agreements to repurchase are included in debt, net on our condensed consolidated balance sheets. During 1Q 2017, certain rule amendments made by the Chicago Mercantile Exchange became effective. As a result, the legal characterization of variation margin payments for certain of our cleared swaps changed from posting of margin collateral to a settlement. The June 30, 2017 table below reflects this change.

Freddie Mac Form 10-Q
 
111


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


 
June 30, 2017
 
Gross
Amount
Recognized
Amount 
Offset in the 
Consolidated
Balance Sheets
Net Amount
Presented in
the  Consolidated
Balance Sheets
 
Gross Amount
Not Offset in
the  Consolidated
Balance 
Sheets(2)
 
Net
Amount
(In millions)
 
Counterparty Netting
 
Cash Collateral Netting(1)
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
OTC derivatives

$8,726

 

($6,115
)
 

($2,254
)
 

$357

 

($85
)
 

$272

Cleared and exchange-traded derivatives
1,885

 
(1,784
)
 
336

 
437

 
—

 
437

Other
157

 
—

 
—

 
157

 
—

 
157

Total derivatives
10,768

 
(7,899
)
 
(1,918
)
 
951

 
(85
)
 
866

Securities purchased under agreements to resell(3)
47,791

 
—

 
—

 
47,791

 
(47,791
)
 
—

Total

$58,559

 

($7,899
)
 

($1,918
)
 

$48,742

 

($47,876
)
 

$866

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
OTC derivatives

($6,928
)
 

$6,115

 

$709

 

($104
)
 

$—

 

($104
)
Cleared and exchange-traded derivatives
(2,963
)
 
1,784

 
1,179

 
—

 
—

 
—

Other
(194
)
 
—

 
—

 
(194
)
 
—

 
(194
)
Total derivatives
(10,085
)
 
7,899

 
1,888

 
(298
)
 
—

 
(298
)
Securities sold under agreements to repurchase
(4,772
)
 
—

 
—

 
(4,772
)
 
4,772

 
—

Total

($14,857
)
 

$7,899

 

$1,888

 

($5,070
)
 

$4,772

 

($298
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Gross
Amount
Recognized
Amount 
Offset in the 
Consolidated
Balance Sheets
Net Amount
Presented in
the  Consolidated
Balance Sheets
 
Gross Amount
Not Offset in
the  Consolidated
Balance 
Sheets(2)
 
Net
Amount
(In millions)
 
Counterparty Netting
 
Cash Collateral Netting(1)
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
OTC derivatives

$8,531

 

($6,367
)
 

($1,760
)
 

$404

 

($353
)
 

$51

Cleared and exchange-traded derivatives
4,889

 
(4,674
)
 
(162
)
 
53

 
—

 
53

Other
290

 
—

 
—

 
290

 
—

 
290

Total derivatives
13,710

 
(11,041
)

(1,922
)
 
747

 
(353
)
 
394

Securities purchased under agreements to resell(3)
51,548

 
—

 
—

 
51,548

 
(51,548
)
 
—

Total

$65,258

 

($11,041
)


($1,922
)
 

$52,295

 

($51,901
)
 

$394

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
OTC derivatives

($7,298
)
 

$6,367

 

$469

 

($462
)
 

$274

 

($188
)
Cleared and exchange-traded derivatives
(6,965
)
 
4,705

 
2,126

 
(134
)
 
—

 
(134
)
Other
(199
)
 
—

 
—

 
(199
)
 
—

 
(199
)
Total derivatives
(14,462
)
 
11,072


2,595

 
(795
)
 
274

 
(521
)
Securities sold under agreements to repurchase
(3,040
)
 
—

 
—

 
(3,040
)
 
3,040

 
—

Total

($17,502
)
 

$11,072



$2,595

 

($3,835
)
 

$3,314

 

($521
)

Freddie Mac Form 10-Q
 
112


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


(1)
Excess cash collateral held is presented as a derivative liability, while excess cash collateral posted is presented as a derivative asset.
(2)
Does not include the fair value amount of non-cash collateral posted or held that exceeds the associated net asset or liability, netted by counterparty, presented on the consolidated balance sheets. For cleared and exchange-traded derivatives, does not include non-cash collateral posted by us as initial margin with an aggregate fair value of $3.6 billion and $3.4 billion as of June 30, 2017 and December 31, 2016, respectively.
(3)
At June 30, 2017 and December 31, 2016, we had $5.2 billion and $4.0 billion, respectively, of securities pledged to us for transactions involving securities purchased under agreements to resell that we had the right to repledge.
COLLATERAL PLEDGED
Collateral Pledged to Freddie Mac
We have cash pledged to us as collateral primarily related to OTC derivative transactions. The table below shows the line item presentation of the collateral recognized on our condensed consolidated balance sheets. A portion of the cash collateral amount has been re-invested by us in securities purchased under agreements to resell and non-mortgage-related securities.
(In millions)
 
June 30, 2017
 
December 31, 2016
Restricted cash and cash equivalents(1)
 

$1,052

 

$399

Securities purchased under agreements to resell
 
1,127

 
426

Investments in securities - Trading securities
 
400

 
1,000

Total(2)
 

$2,579

 

$1,825

(1)
Includes collateral related to cleared derivatives and certain other counterparties.
(2)
Includes cash collateral held in excess of exposure.

Freddie Mac Form 10-Q
 
113


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


Collateral Pledged by Freddie Mac
The tables below summarize the fair value of the securities we pledged as collateral for derivatives and other transactions where the secured party may repledge the collateral.
 
 
June 30, 2017
(In millions)
 
Derivatives
 
Securities sold under agreements to repurchase
 
Other(2)
 
Total
Debt securities of consolidated trusts(1)
 

$327

 

$—

 

$173

 

$500

Available-for-sale securities
 
—

 
—

 
325

 
325

Trading securities
 
3,263

 
4,813

 
211

 
8,287

Total securities pledged that may be repledged by the secured party
 

$3,590

 

$4,813

 

$709

 

$9,112

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
(In millions)
 
Derivatives
 
Securities sold under agreements to repurchase
 
Other(2)
 
Total
Debt securities of consolidated trusts(1)
 

$686

 

$—

 

$—

 

$686

Available-for-sale securities
 
—

 
—

 
260

 
260

Trading securities
 
3,014

 
3,070

 
—

 
6,084

Total securities pledged that may be repledged by the secured party
 

$3,700

 

$3,070

 

$260

 

$7,030


(1)
Represents PCs held by us in our Capital Markets segment mortgage investments portfolio which are recorded as a reduction to debt securities of consolidated trusts held by third parties on our condensed consolidated balance sheets.
(2)
Includes other collateralized borrowings and collateral related to transactions with certain clearinghouses.
The table below summarizes the underlying collateral pledged and the remaining contractual maturity of our gross obligations under securities sold under agreements to repurchase.
 
 
June 30, 2017
(In millions)
 
Overnight and continuous
 
30 days or less
 
After 30 days through 90 days
 
Greater than 90 days
 
Total
U.S. Treasury securities
 

$—

 

$4,315

 

$498

 

$—

 

$4,813


Freddie Mac Form 10-Q
 
114


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


NOTE 9: STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE
ACCUMULATED OTHER COMPREHENSIVE INCOME
The tables below present changes in AOCI after the effects of our 35% federal statutory tax rate related to available-for-sale securities, closed cash flow hedges, and our defined benefit plans.
 
 
YTD 2017
(In millions)
 
AOCI Related
to Available-
For-Sale
Securities
 
AOCI Related
to Cash Flow
Hedge
Relationships
 
AOCI Related
to Defined
Benefit Plans
 
Total
Beginning balance
 

$915

 

($480
)
 

$21

 

$456

Other comprehensive income before reclassifications(1)
 
486

 
—

 
(3
)
 
483

Amounts reclassified from accumulated other comprehensive income
 
(193
)
 
55

 
—

 
(138
)
Changes in AOCI by component
 
293

 
55

 
(3
)
 
345

Ending balance
 

$1,208

 

($425
)
 

$18

 

$801

 
 
 
 
 
 
 
 
 
 
 
YTD 2016
(In millions)
 
AOCI Related
to Available-
For-Sale
Securities
 
AOCI Related
to Cash Flow
Hedge
Relationships
 
AOCI Related
to Defined
Benefit Plans
 
Total
Beginning balance
 

$1,740

 

($621
)
 

$34

 

$1,153

Other comprehensive income before reclassifications(1)
 
442

 
—

 
1

 
443

Amounts reclassified from accumulated other comprehensive income
 
(214
)
 
66

 
(1
)
 
(149
)
Changes in AOCI by component
 
228

 
66

 
—

 
294

Ending balance
 

$1,968

 

($555
)
 

$34

 

$1,447

 
(1)
For YTD 2017 and YTD 2016, net of tax expense of $0.3 billion and $0.2 billion, respectively, for AOCI related to available-for-sale securities.

Freddie Mac Form 10-Q
 
115


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


Reclassifications from AOCI to Net Income
The table below presents reclassifications from AOCI to net income, including the affected line item in our condensed consolidated statements of comprehensive income.
Details about Accumulated Other
Comprehensive Income Components
 
 
 
 
 
 
 
 
 
Affected Line Item in the Condensed Consolidated Statements of Comprehensive Income
(In millions)
 
2Q 2017
 
2Q 2016
 
YTD 2017
 
YTD 2016
 
 
AOCI related to available-for-sale securities
 
 
 
 
 
 
 
 
 
 
 
 

$123

 

$386

 

$313

 

$458

 
Other gains on investment securities recognized in earnings
 
 
(3
)
 
(72
)
 
(16
)
 
(129
)
 
Net impairment of available-for-sale securities recognized in earnings
 
 
120

 
314

 
297

 
329

 
Total before tax
 
 
(41
)
 
(110
)
 
(104
)
 
(115
)
 
Tax (expense) or benefit
 
 
79

 
204

 
193

 
214

 
Net of tax
AOCI related to cash flow hedge relationships
 
 
 
 
 
 
 
 
 
 
 
 
—

 
(1
)
 
—

 
(1
)
 
Interest expense
 
 
(42
)
 
(48
)
 
(85
)
 
(99
)
 
Expense related to derivatives
 
 
(42
)
 
(49
)
 
(85
)
 
(100
)
 
Total before tax
 
 
15

 
17

 
30

 
34

 
Tax (expense) or benefit
 
 
(27
)
 
(32
)
 
(55
)
 
(66
)
 
Net of tax
AOCI related to defined benefit plans
 
 
 
 
 
 
 
 
 
 
 
 
—

 
1

 
—

 
2

 
Salaries and employee benefits
 
 
—

 
(1
)
 
—

 
(1
)
 
Tax (expense) or benefit
 
 
—

 
—

 
—

 
1

 
Net of tax
Total reclassifications in the period
 

$52

 

$172

 

$138

 

$149

 
Net of tax
Future Reclassifications from AOCI to Net Income Related to Closed Cash Flow Hedges
The total AOCI related to derivatives designated as cash flow hedges was a loss of $0.4 billion and $0.6 billion at June 30, 2017 and June 30, 2016, respectively, composed of deferred net losses on closed cash flow hedges. Closed cash flow hedges involve derivatives that have been terminated or are no longer designated as cash flow hedges. Fluctuations in prevailing market interest rates have no effect on the deferred portion of AOCI relating to losses on closed cash flow hedges.
The previously deferred amount related to closed cash flow hedges remains in our AOCI balance and will be recognized into earnings over the expected time period for which the forecasted transactions affect earnings, unless it is deemed probable that the forecasted transactions will not occur. Over the next 12 months, we estimate that approximately $117 million, net of taxes, of the $0.4 billion of cash flow hedge losses in AOCI at June 30, 2017 will be reclassified into earnings. The maximum remaining length of time over which we have hedged the exposure related to the variability in future cash flows on forecasted transactions, primarily forecasted debt issuances, is 16 years.

Freddie Mac Form 10-Q
 
116


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


SENIOR PREFERRED STOCK
At June 30, 2017, our assets exceeded our liabilities under GAAP; therefore, no draw is being requested from Treasury under the Purchase Agreement. Based on our Net Worth Amount at June 30, 2017 and the Capital Reserve Amount of $600 million in 2017, our dividend requirement to Treasury in September 2017 will be $2.0 billion. If the Conservator, acting as successor to the rights, titles, powers and privileges of the Board of Directors, declares a senior preferred stock dividend equal to our dividend requirement and directs us to pay it before September 30, 2017, we would expect to pay a dividend of $2.0 billion by September 30, 2017. If for any reason we were not to pay the amount of our dividend requirement on the senior preferred stock in full, the unpaid amount would be added to the liquidation preference, but this would not affect our ability to draw funds from Treasury under the Purchase Agreement. See Note 2 for additional information. Our cumulative senior preferred stock dividend payments totaled $108.2 billion as of June 30, 2017. The aggregate liquidation preference on the senior preferred stock owned by Treasury was $72.3 billion as of both June 30, 2017 and December 31, 2016.
STOCK ISSUANCES AND REPURCHASES
We did not repurchase or issue any of our common shares or non-cumulative preferred stock during 2Q 2017, except for issuances of treasury stock relating to stock-based compensation granted prior to conservatorship.
EARNINGS PER SHARE
We have participating securities related to options and restricted stock units with dividend equivalent rights that receive dividends as declared on an equal basis with common shares but are not obligated to participate in undistributed net losses. These participating securities consist of:
•
Vested options to purchase common stock; and
•
Vested restricted stock units that earn dividend equivalents at the same rate when and as declared on common stock.
Consequently, in accordance with accounting guidance, we use the “two-class” method of computing earnings per common share. The “two-class” method is an earnings allocation formula that determines earnings per share for common stock and participating securities based on dividends declared and participation rights in undistributed earnings.
Basic earnings per common share is computed as net income attributable to common stockholders divided by the weighted average common shares outstanding for the period. The weighted average common shares outstanding for the period includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury pursuant to the Purchase Agreement. These shares are included since the warrant is unconditionally exercisable by the holder at a minimal cost.
Diluted earnings per common share is computed as net income attributable to common stockholders divided by the weighted average common shares outstanding during the period adjusted for the dilutive effect of common equivalent shares outstanding. For periods with net income attributable to common stockholders, the calculation includes the effect of the following common stock equivalent shares outstanding:

Freddie Mac Form 10-Q
 
117


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


•
Weighted average shares related to stock options if the average market price during the period exceeds the exercise price; and
•
The weighted-average of restricted stock units.
During periods in which a net loss attributable to common stockholders has been incurred, potential common equivalent shares outstanding are not included in the calculation because it would have an antidilutive effect.
For purposes of the earnings-per-share calculation, all stock options outstanding at June 30, 2017 and June 30, 2016 were out of the money and excluded from the computation of dilutive potential common shares during 2Q 2017 and YTD 2017, and 2Q 2016 and YTD 2016, respectively.
DIVIDENDS DECLARED
No common dividends were declared during YTD 2017. During 1Q 2017 and 2Q 2017, we paid dividends of $4.5 billion and $2.2 billion, respectively, in cash on the senior preferred stock at the direction of our Conservator. We did not declare or pay dividends on any other series of Freddie Mac preferred stock outstanding during YTD 2017.

Freddie Mac Form 10-Q
 
118


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 10


NOTE 10: INCOME TAXES
INCOME TAX (EXPENSE) BENEFIT
For 2Q 2017 and 2Q 2016, we reported an income tax expense of $0.8 billion and $0.5 billion, respectively, resulting in effective tax rates of 33.5% and 31.9%, respectively. For YTD 2017 and YTD 2016, we reported an income tax expense of $1.9 billion and $0.3 billion, respectively, resulting in effective tax rates of 33.4% and 32.8%, respectively. Our effective tax rate differed from the statutory rate of 35% in these periods primarily due to our recognition of low income housing tax credits.
DEFERRED TAX ASSETS, NET
We had net deferred tax assets of $14.8 billion and $15.8 billion as of June 30, 2017 and December 31, 2016, respectively. At June 30, 2017, our net deferred tax assets consisted primarily of basis differences related to derivative instruments and deferred fees.
Based on all positive and negative evidence available at June 30, 2017, we determined that it is more likely than not that our net deferred tax assets will be realized. Therefore, a valuation allowance was not necessary.
UNRECOGNIZED TAX BENEFITS
We evaluated all income tax positions and determined that there were no uncertain tax positions that required reserves as of June 30, 2017.

Freddie Mac Form 10-Q
 
119


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 11


NOTE 11: SEGMENT REPORTING
We have three reportable segments, which are based on the type of business activities each performs - Single-family Guarantee, Multifamily, and Capital Markets (previously reported as the "Investments" segment in our 2016 Annual Report). The chart below provides a summary of our three reportable segments and the All Other category. For more information, see our 2016 Annual Report.
Segment
Description
Financial Performance Measurement Basis
Single-family Guarantee
The Single-family Guarantee segment reflects results from our purchase, securitization, and guarantee of single-family loans and the management of single-family credit risk.
Contribution to GAAP net income (loss)
Multifamily
The Multifamily segment reflects results from our purchase, securitization, and guarantee of multifamily loans and securities, our investments in those loans and securities, and the management of multifamily credit risk and market spread risk.
Contribution to GAAP comprehensive income (loss)
Capital Markets
The Capital Markets segment reflects results from managing the company's mortgage-related investments portfolio (excluding Multifamily segment investments, single-family seriously delinquent loans, and the credit risk of single-family performing and reperforming loans), treasury function, and interest-rate risk.
Contribution to GAAP comprehensive income (loss)
All Other
The All Other category consists of material corporate-level activities that are infrequent in nature and based on decisions outside the control of the management of our reportable segments.
N/A
SEGMENT EARNINGS
We present Segment Earnings by reclassifying certain credit guarantee-related activities and investment-related activities between various line items on our GAAP consolidated statements of comprehensive income and allocating certain revenues and expenses, including funding costs and administrative expenses, to our three reportable segments.
We do not consider our assets by segment when evaluating segment performance or allocating resources. We operate our business in the United States and its territories, and accordingly, we generate no revenue from and have no long-lived assets, other than financial instruments, in geographic locations other than the United States and its territories.
We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator. See Note 2 for information about the conservatorship.
During 1Q 2017, we changed how we calculate certain components of our Segment Earnings for our Capital Markets segment. The purpose of this change is to simplify Segment Earnings results relative to GAAP results in order to better reflect how management evaluates the Capital Markets segment. Prior period results have been revised to conform to the current period presentation. The change includes:
•
The discontinuation of adjustments to net interest income which reflected the reclassification of amortization of upfront cash paid and received upon acquisitions and issuances of swaptions and options from derivative gains (losses) to net interest income for the Capital Markets segment. The discontinuation of the adjustments resulted in an increase to net interest income for the Capital Markets segment of $319 million and $600 million for 2Q 2016 and YTD 2016, respectively, to align with the current presentation.

Freddie Mac Form 10-Q
 
120


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 11


The table below presents Segment Earnings by segment.
(In millions)
2Q 2017
 
2Q 2016
 
YTD 2017
 
YTD 2016
Segment Earnings (loss), net of taxes:
 
 
 
 
 
 
 
Single-family Guarantee

$778

 

$584

 

$1,488

 

$1,394

Multifamily
389

 
264

 
838

 
411

Capital Markets
497

 
145

 
1,549

 
(1,166
)
All Other
—

 
—

 
—

 
—

Total Segment Earnings, net of taxes
1,664

 
993

 
3,875

 
639

Net income

$1,664

 

$993

 

$3,875

 

$639

Comprehensive income (loss) of segments:
 
 
 
 
 
 
 
Single-family Guarantee

$778

 

$583

 

$1,486

 

$1,394

Multifamily
462

 
271

 
907

 
421

Capital Markets
746

 
279

 
1,827

 
(882
)
All Other
—

 
—

 
—

 
—

Comprehensive income of segments
1,986

 
1,133

 
4,220

 
933

Comprehensive income

$1,986

 

$1,133

 

$4,220

 

$933


Freddie Mac Form 10-Q
 
121


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 11


The tables below present detailed reconciliations between our GAAP financial statements and Segment Earnings for our reportable segments and All Other.
 
2Q 2017
 
 
 
 
 
 
 
 
 
Total Segment
Earnings (Loss)
 
 
Total per Condensed
Consolidated
Statements of
Comprehensive
Income
(In millions)
Single-family
Guarantee
 
Multifamily
 
Capital Markets
 
All
Other
 
 
Reclassifications
 
Net interest income

$—

 

$292

 

$875

 

$—

 

$1,167

 

$2,212

 

$3,379

Guarantee fee income(1)
1,506

 
162

 
—

 
—

 
1,668

 
(1,510
)
 
158

Benefit for credit losses
12

 
6

 
—

 
—

 
18

 
404

 
422

Net impairment of available-for-sale securities recognized in earnings
—

 
—

 
71

 
—

 
71

 
(74
)
 
(3
)
Derivative gains (losses)
(17
)
 
(180
)
 
(485
)
 
—

 
(682
)
 
(414
)
 
(1,096
)
Gains (losses) on trading securities
—

 
(16
)
 
(46
)
 
—

 
(62
)
 
—

 
(62
)
Gains (losses) on loans
—

 
42

 
—

 
—

 
42

 
151

 
193

Other non-interest income (loss)
376

 
386

 
419

 
—

 
1,181

 
(665
)
 
516

Administrative expenses
(332
)
 
(95
)
 
(86
)
 
—

 
(513
)
 
—

 
(513
)
REO operations expense
(41
)
 
—

 
—

 
—

 
(41
)
 
4

 
(37
)
Other non-interest expense
(335
)
 
(12
)
 
(1
)
 
—

 
(348
)
 
(108
)
 
(456
)
Income tax expense
(391
)
 
(196
)
 
(250
)
 
—

 
(837
)
 
—

 
(837
)
Net income
778

 
389

 
497

 
—

 
1,664

 
—

 
1,664

Changes in unrealized gains (losses) related to available-for-sale securities
—

 
73

 
222

 
—

 
295

 
—

 
295

Changes in unrealized gains (losses) related to cash flow hedge relationships
—

 
—

 
27

 
—

 
27

 
—

 
27

Changes in defined benefit plans
—

 
—

 
—

 
—

 
—

 
—

 
—

Total other comprehensive income (loss), net of taxes
—

 
73

 
249

 
—

 
322

 
—

 
322

Comprehensive income

$778

 

$462

 

$746

 

$—

 

$1,986

 

$—

 

$1,986

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
YTD 2017
 
 
 
 
 
 
 
 
 
Total Segment
Earnings (Loss)
 
 
Total per Condensed
Consolidated
Statements of
Comprehensive
Income
(In millions)
Single-family
Guarantee
 
Multifamily
 
Capital Markets
 
All
Other
 
 
Reclassifications
 
Net interest income

$—

 

$563

 

$1,804

 

$—

 

$2,367

 

$4,807

 

$7,174

Guarantee fee income(1)
2,924

 
313

 
—

 
—

 
3,237

 
(2,930
)
 
307

Benefit for credit losses
51

 
12

 
—

 
—

 
63

 
475

 
538

Net impairment of available-for-sale securities recognized in earnings
—

 
(4
)
 
144

 
—

 
140

 
(156
)
 
(16
)
Derivative gains (losses)
(32
)
 
(53
)
 
(433
)
 
—

 
(518
)
 
(880
)
 
(1,398
)
Gains (losses) on trading securities
—

 
(15
)
 
(181
)
 
—

 
(196
)
 
—

 
(196
)
Gains (losses) on loans
—

 
9

 
—

 
—

 
9

 
198

 
207

Other non-interest income (loss)
710

 
658

 
1,167

 
—

 
2,535

 
(1,359
)
 
1,176

Administrative expense
(665
)
 
(190
)
 
(169
)
 
—

 
(1,024
)
 
—

 
(1,024
)
REO operations expense
(100
)
 
—

 
—

 
—

 
(100
)
 
7

 
(93
)
Other non-interest expense
(653
)
 
(33
)
 
(5
)
 
—

 
(691
)
 
(162
)
 
(853
)
Income tax expense
(747
)
 
(422
)
 
(778
)
 
—

 
(1,947
)
 
—

 
(1,947
)
Net income
1,488


838


1,549


—

 
3,875

 
—

 
3,875

Changes in unrealized gains (losses) related to available-for-sale securities
—

 
69

 
224

 
—

 
293

 
—

 
293

Changes in unrealized gains (losses) related to cash flow hedge relationships
—

 
—

 
55

 
—

 
55

 
—

 
55

Changes in defined benefit plans
(2
)
 
—

 
(1
)
 
—

 
(3
)
 
—

 
(3
)
Total other comprehensive income (loss), net of taxes
(2
)

69


278


—


345


—


345

Comprehensive income

$1,486

 

$907

 

$1,827

 

$—

 

$4,220

 

$—

 

$4,220


Freddie Mac Form 10-Q
 
122


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 11


 
2Q 2016
 
 
 
 
 
 
 
 
 
Total Segment
Earnings (Loss)
 
 
Total per Condensed
Consolidated
Statements of
Comprehensive
Income
(In millions)
Single-family
Guarantee
 
Multifamily
 
Capital Markets
 
All
Other
 
 
Reclassifications
 
Net interest income

$—

 

$283

 

$925

 

$—

 

$1,208

 

$2,235

 

$3,443

Guarantee fee income(1)
1,501

 
124

 
—

 
—

 
1,625

 
(1,501
)
 
124

Benefit for credit losses
121

 
6

 
—

 
—

 
127

 
648

 
775

Net impairment of available-for-sale securities recognized in earnings
—

 
—

 
49

 
—

 
49

 
(121
)
 
(72
)
Derivative gains (losses)
(21
)
 
(296
)
 
(1,322
)
 
—

 
(1,639
)
 
(419
)
 
(2,058
)
Gains (losses) on trading securities
—

 
42

 
22

 
—

 
64

 
—

 
64

Gains (losses) on loans
—

 
124

 
—

 
—

 
124

 
(605
)
 
(481
)
Other non-interest income (loss)
(78
)
 
212

 
551

 
—

 
685

 
(86
)
 
599

Administrative expenses
(314
)
 
(86
)
 
(75
)
 
—

 
(475
)
 
—

 
(475
)
REO operations expense
(31
)
 
—

 
—

 
—

 
(31
)
 
2

 
(29
)
Other non-interest expense
(268
)
 
(9
)
 
(1
)
 
—

 
(278
)
 
(153
)
 
(431
)
Income tax expense
(326
)
 
(136
)
 
(4
)
 
—

 
(466
)
 
—

 
(466
)
Net income
584


264


145


—

 
993

 
—

 
993

Changes in unrealized gains (losses) related to available-for-sale securities
—

 
7

 
102

 
—

 
109

 
—

 
109

Changes in unrealized gains (losses) related to cash flow hedge relationships
—

 
—

 
32

 
—

 
32

 
—

 
32

Changes in defined benefit plans
(1
)
 
—

 
—

 
—

 
(1
)
 
—

 
(1
)
Total other comprehensive income (loss), net of taxes
(1
)

7


134


—

 
140

 
—

 
140

Comprehensive income

$583

 

$271

 

$279

 

$—

 

$1,133

 

$—

 

$1,133

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
YTD 2016
 
 
 
 
 
 
 
 
 
Total Segment
Earnings (Loss)
 
 
Total per Condensed
Consolidated
Statements of
Comprehensive
Income
(In millions)
Single-family
Guarantee
 
Multifamily
 
Capital Markets
 
All
Other
 
 
Reclassifications
 
Net interest income

$—

 

$535

 

$1,954

 

$—

 

$2,489

 

$4,359

 

$6,848

Guarantee fee income(1)
2,786

 
232

 
—

 
—

 
3,018

 
(2,784
)
 
234

Benefit for credit losses
410

 
11

 
—

 
—

 
421

 
821

 
1,242

Net impairment of available-for-sale securities recognized in earnings
—

 
—

 
130

 
—

 
130

 
(259
)
 
(129
)
Derivative gains (losses)
(29
)
 
(1,083
)
 
(4,598
)
 
—

 
(5,710
)
 
(909
)
 
(6,619
)
Gains (losses) on trading securities
—

 
104

 
191

 
—

 
295

 
—

 
295

Gains (losses) on loans
—

 
621

 
—

 
—

 
621

 
(624
)
 
(3
)
Other non-interest income (loss)
154

 
390

 
740

 
—

 
1,284

 
(309
)
 
975

Administrative expense
(609
)
 
(166
)
 
(148
)
 
—

 
(923
)
 
—

 
(923
)
REO operations expense
(118
)
 
—

 
—

 
—

 
(118
)
 
5

 
(113
)
Other non-interest expense
(520
)
 
(33
)
 
(3
)
 
—

 
(556
)
 
(300
)
 
(856
)
Income tax (expense) benefit
(680
)
 
(200
)
 
568

 
—

 
(312
)
 
—

 
(312
)
Net income (loss)
1,394


411


(1,166
)

—

 
639

 
—

 
639

Changes in unrealized gains (losses) related to available-for-sale securities
—

 
10

 
218

 
—

 
228

 
—

 
228

Changes in unrealized gains (losses) related to cash flow hedge relationships
—

 
—

 
66

 
—

 
66

 
—

 
66

Changes in defined benefit plans
—

 
—

 
—

 
—

 
—

 
—

 
—

Total other comprehensive income (loss), net of taxes
—


10


284


—

 
294

 
—

 
294

Comprehensive income (loss)

$1,394

 

$421

 

($882
)
 

$—

 

$933

 

$—

 

$933


(1)
Guarantee fee income is included in other income (loss) on our GAAP condensed consolidated statements of comprehensive income.

Freddie Mac Form 10-Q
 
123


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 12



NOTE 12: CONCENTRATION OF CREDIT AND OTHER RISKS
SINGLE-FAMILY CREDIT GUARANTEE PORTFOLIO
The table below summarizes the concentration by loan portfolio and geographic area of the approximately $1.8 trillion UPB of our single-family credit guarantee portfolio at both June 30, 2017 and December 31, 2016. See Note 4 and Note 5 for more information about credit risk associated with loans and mortgage-related securities that we hold or guarantee.
 
June 30, 2017
 
December 31, 2016
 
Percent of Credit Losses
 
Percentage  of
Portfolio
 
Serious
Delinquency
Rate
 
Percentage  of
Portfolio
 
Serious
Delinquency
Rate
 
YTD 2017
 
YTD 2016
Loan Portfolio

 
 
 
 
 
 
 
 
 
 
Core single-family loan portfolio
75
%
 
0.18
%
 
73
%
 
0.20
%
 
2
%
 
7
%
Legacy and relief refinance single-family loan portfolio
25

 
2.07
%
 
27

 
2.28
%
 
98

 
93

Total
100
%
 
0.85
%
 
100
%
 
1.00
%
 
100
%
 
100
%
Region(1)(3)
 
 
 
 
 
 
 
 
 
 
 
West
30
%
 
0.49
%
 
30
%
 
0.57
%
 
31
%
 
10
%
Northeast
25

 
1.25
%
 
25

 
1.45
%
 
32

 
40

North Central
16

 
0.81
%
 
16

 
0.93
%
 
15

 
26

Southeast
16

 
1.00
%
 
16

 
1.19
%
 
20

 
19

Southwest
13

 
0.65
%
 
13

 
0.78
%
 
2

 
5

Total
100
%
 
0.85
%
 
100
%
 
1.00
%
 
100
%
 
100
%
State(2)(3)
 
 
 
 
 
 
 
 
 
 
 
California
18
%
 
0.40
%
 
18
%
 
0.46
%
 
21
%
 
4
%
Florida
6

 
1.15
%
 
6

 
1.42
%
 
13

 
8

Illinois
5

 
1.15
%
 
5

 
1.34
%
 
9

 
10

New Jersey
3

 
1.86
%
 
3

 
2.26
%
 
8

 
10

New York
5

 
1.77
%
 
5

 
2.05
%
 
7

 
10

All other
63

 
0.77
%
 
63

 
0.90
%
 
42

 
58

Total
100
%
 
0.85
%
 
100
%
 
1.00
%
 
100
%
 
100
%

(1)
Region designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH, NJ, NY, PA, RI, VT, VA, WV); North Central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI); Southwest (AR, CO, KS, LA, MO, NE, NM, OK, TX, WY).
(2)
States presented based on those with the highest percentage of credit losses during YTD 2017.
(3)
On January 1, 2017, we elected a new accounting policy for reclassifications of loans from held-for-investment to held-for-sale. The charge-offs taken under the new policy affected some states more than others. See Note 4 for further information about this change.
CREDIT PERFORMANCE OF CERTAIN HIGHER RISK SINGLE-FAMILY LOAN CATEGORIES
Participants in the mortgage market often characterize single-family loans based upon their overall credit quality at the time of origination, generally considering them to be prime or subprime. Many mortgage market participants classify single-family loans with credit characteristics that range between their prime and subprime categories as Alt-A. Although we discontinued new purchases of loans with lower documentation standards beginning March 1, 2009, we continued to purchase certain amounts of these loans in cases where the loan was either:

Freddie Mac Form 10-Q
 
124


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 12



•
Purchased pursuant to a previously issued other mortgage-related guarantee;
•
Part of our relief refinance initiative; or
•
In another refinance loan initiative and the pre-existing loan (including Alt-A loans) was originated under less than full documentation standards.
In the event we purchase a refinance loan and the original loan had been previously identified as Alt-A, such refinance loan may no longer be categorized or reported as Alt-A in the table below because the new refinance loan replacing the original loan would not be identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such refinancing not occurred.
Although we do not categorize single-family loans we purchase or guarantee as prime or subprime, we recognize that there are a number of loan types with certain characteristics that indicate a higher degree of credit risk.
For example, a borrower’s credit score is a useful measure for assessing the credit quality of the borrower. Statistically, borrowers with higher credit scores are more likely to repay or have the ability to refinance than those with lower scores.
Presented below is a summary of the serious delinquency rates of certain higher-risk categories (based on characteristics of the loan at origination) of loans in our single-family credit guarantee portfolio. The table includes a presentation of each higher-risk category in isolation. A single loan may fall within more than one category (for example, an interest-only loan may also have an original LTV ratio greater than 90%). Loans with a combination of these attributes will have an even higher risk of delinquency than those with an individual attribute.
 
Percentage of Portfolio(1)
 
Serious Delinquency Rate(1)
(Percentage of portfolio based on UPB)
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
Interest-only
1
%
 
1
%
 
4.45
%
 
4.34
%
Alt-A
2
%
 
2
%
 
4.89
%
 
5.21
%
Original LTV ratio greater than 90%(2)
16
%
 
16
%
 
1.33
%
 
1.58
%
Lower credit scores at origination (less than 620)
2
%
 
2
%
 
5.05
%
 
5.73
%

(1)
Excludes loans underlying certain other securitization products for which data was not available.
(2)
Includes HARP loans, which we purchase as part of our participation in the MHA Program.

Freddie Mac Form 10-Q
 
125


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 12



SELLERS AND SERVICERS
We acquire a significant portion of our single-family and multifamily loan purchase volume from several large sellers. The table below summarizes the concentration of single-family and multifamily sellers who provided 10% or more of our purchase volume.
 
 
YTD 2017
 
YTD 2016
Single-family Sellers
 
 
 
 
Wells Fargo Bank, N.A.
 
17
%
 
13
%
Other top 10 sellers
 
36

 
34

Top 10 single-family sellers
 
53
%
 
47
%
Multifamily Sellers
 
 
 
 
CBRE Capital Markets, Inc.
 
17
%
 
18
%
Berkeley Point Capital LLC
 
12

 
6

Berkadia Commercial Mortgage LLC
 
10

 
20

Holliday Fenoglio Fowler, L.P.
 
10

 
9

Walker & Dunlop, LLC
 
7

 
12

Other top 10 sellers
 
25

 
17

Top 10 multifamily sellers
 
81
%
 
82
%
In recent years, there has been a shift in our purchase volume from depository institutions to non-depository and smaller depository financial institutions. Some of these non-depository sellers have grown rapidly in recent years, and we purchase a significant share of our loans from them. Our top three non-depository sellers provided approximately 14% of our single-family purchase volume during YTD 2017.
Significant portions of our single-family and multifamily loans are serviced by several large servicers. The table below summarizes the concentration of single-family and multifamily servicers who serviced 10% or more of our single-family credit guarantee portfolio and our multifamily mortgage portfolio, excluding loans where we are not in first loss position, primarily K Certificates and SB Certificates.
 
 
June 30, 2017
 
December 31, 2016
Single-family Servicers
 
 
 
 
Wells Fargo Bank, N.A.
 
19
%
 
19
%
Other top 10 servicers
 
39

 
41

Top 10 single-family servicers
 
58
%
 
60
%
Multifamily Servicers
 
 
 
 
Wells Fargo Bank, N.A.
 
16
%
 
15
%
CBRE Capital Markets, Inc.
 
12

 
14

Berkeley Point Capital LLC
 
10

 
8

Berkadia Commercial Mortgage LLC
 
10

 
11

Other top 10 servicers
 
31

 
31

Top 10 multifamily servicers
 
79
%
 
79
%
In recent years, there has been a shift in our servicing from depository institutions to non-depository servicers. Some of these non-depository servicers have grown rapidly in recent years and now service a

Freddie Mac Form 10-Q
 
126


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 12



large share of our loans. As of both June 30, 2017 and December 31, 2016, approximately 10% of our single-family credit guarantee portfolio was serviced by our top three non-depository servicers. Several of these non-depository servicers also service a large share of the loans underlying our investments in non-agency mortgage-related securities. We routinely monitor the performance of our largest non-depository servicers.
MORTGAGE INSURERS
We have counterparty credit risk relating to the potential insolvency of, or non-performance by, mortgage insurers that insure single-family loans we purchase or guarantee. We evaluate the recovery and collectability from mortgage insurers as part of the estimate of our loan loss reserves. See Note 4 for additional information. As of June 30, 2017, mortgage insurers provided coverage with maximum loss limits of $79.5 billion, for $310.1 billion of UPB, in connection with our single-family credit guarantee portfolio. These amounts are based on gross coverage without regard to netting of coverage that may exist to the extent an affected loan is covered under both primary and pool insurance.
The table below summarizes the concentration of mortgage insurer counterparties who provided 10% or more of our overall mortgage insurance coverage. On January 3, 2017, Arch Capital Group Ltd. announced that it had completed its purchase of United Guaranty Corporation at the end of 2016. The table below reflects this transaction. On October 23, 2016, Genworth Financial, Inc. announced that it had entered into an agreement to be acquired by China Oceanwide Holdings Group Co., Ltd. Genworth Mortgage Insurance Corporation is a subsidiary of Genworth Financial, Inc.
 
 
 
 
Mortgage Insurance Coverage
 
 
Credit Rating(1)
 
June 30, 2017
 
December 31, 2016
Arch Mortgage Insurance Company
 
BBB+
 
24
%
 
25
%
Radian Guaranty Inc.
 
BBB-
 
21

 
21

Mortgage Guaranty Insurance Corporation
 
BBB-
 
20

 
20

Genworth Mortgage Insurance Corporation
 
BB+
 
15

 
15

Essent Guaranty, Inc.
 
BBB
 
11

 
10
%
Total
 
 
 
91
%
 
91
%
(1)
Ratings are for the corporate entity to which we have the greatest exposure. Coverage amounts may include coverage provided by affiliates and subsidiaries of the counterparty. Latest rating available as of June 30, 2017. Represents the lower of S&P and Moody’s credit ratings stated in terms of the S&P equivalent.
We received proceeds of $0.2 billion during both YTD 2017 and YTD 2016 from our primary and pool mortgage insurance policies for recovery of losses on our single-family loans. We had outstanding receivables from mortgage insurers of $0.1 billion (excluding deferred payment obligations associated with unpaid claim amounts) as of both June 30, 2017 and December 31, 2016. The balance of these receivables, net of associated reserves, was approximately $0.1 billion at both June 30, 2017 and December 31, 2016.
PMI Mortgage Insurance Co. and Triad Guaranty Insurance Corp. are both under the control of their state regulators and are in run-off. A substantial portion of their claims is recorded by us as deferred payment obligations. As of both June 30, 2017 and December 31, 2016, we had cumulative unpaid deferred payment obligations of $0.5 billion from these insurers. We reserved for all of these unpaid amounts as

Freddie Mac Form 10-Q
 
127


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 12



collectability is uncertain. It is not clear how the regulators of these companies will administer their respective deferred payment plans in the future, nor when or if those obligations will be paid.
OTHER INVESTMENTS AND CASH COUNTERPARTIES
We are exposed to counterparty credit risk relating to the potential insolvency of, or the non-performance by, counterparties relating to other investments and cash (including non-mortgage-related securities and cash equivalents) transactions, including those entered into on behalf of our securitization trusts. Our policies require that the issuer be rated as investment grade at the time the financial instrument is purchased. We base the permitted term and dollar limits for each of these transactions on the counterparty's financial strength in order to further mitigate our risk.
Our other investments and cash counterparties are primarily major financial institutions, including other GSEs, Treasury, the Federal Reserve Bank of New York, highly-rated supranational institutions, and government money market funds. Certain of our securities purchased under agreements to resell are used to provide financing to investors in Freddie Mac securities to increase liquidity and grow the investor base for those securities. These transactions differ from the securities purchased under agreements to resell that we use for liquidity purposes as the counterparties we face may not be major financial institutions and we are exposed to the counterparty risk of these institutions. As of June 30, 2017 and December 31, 2016, including amounts related to our consolidated VIEs, there were $58.9 billion and $73.8 billion, respectively, of cash and securities purchased under agreements to resell invested with counterparties, U.S. Treasury securities classified as cash equivalents, or cash deposited with the Federal Reserve Bank of New York. As of June 30, 2017, all of our securities purchased under agreements to resell were fully collateralized.
NON-AGENCY MORTGAGE-RELATED SECURITY ISSUERS
We are engaged in various loss mitigation efforts concerning certain investments in non-agency mortgage-related securities, including the matters described below.
In 2011, FHFA, as Conservator for Freddie Mac and Fannie Mae, filed lawsuits against a number of corporate families of financial institutions and related defendants alleging securities laws violations and, in some cases, fraud. On July 12, 2017, FHFA reached a settlement with the Royal Bank of Scotland Group plc, related companies and specifically named individuals (collectively RBS). The settlement resolves all claims in the lawsuit filed by FHFA against RBS in the U.S. District Court for the District of Connecticut. Under the terms of the agreement, RBS will pay Freddie Mac approximately $4.5 billion. We expect to recognize this amount within non-interest income on our condensed consolidated statements of comprehensive income during the third quarter of 2017. The separate lawsuit filed by FHFA against Nomura Holding America, Inc. (or Nomura) and RBS in the U.S. District Court for the Southern District of New York remains outstanding. This case went to trial in March 2015. In May 2015, the judge ruled against the defendants and ordered them to pay an aggregate of $806 million, of which $779 million will be paid to Freddie Mac. The order also provides for Freddie Mac to transfer the mortgage-related securities at issue in this trial to the defendants. The defendants have agreed to pay for certain costs, legal fees and expenses if FHFA prevails in the litigation. This expense reimbursement payment is subject to various conditions, and is capped at $33 million (half of any such payment would be made to Freddie Mac). The defendants filed a notice of appeal, and the case is pending before the U.S. Court of Appeals for the Second Circuit.

Freddie Mac Form 10-Q
 
128


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 12



We worked with an investor consortium to enforce certain claims with J.P. Morgan Chase & Co. relating to a number of non-agency mortgage-related securities. A settlement agreement was entered into with respect to these claims. The settlement is subject to certain conditions, which have not yet been satisfied. Our expected benefit from the settlement, which currently totals approximately $29 million, will be recognized in earnings over the expected remaining life of the securities, unless the securities are sold, at which time the benefit would be considered in the sales price of the securities.
The majority of the single-family loans underlying our investments in non-agency mortgage-related securities are serviced by non-depository servicers. As of June 30, 2017 and December 31, 2016, approximately $7.1 billion and $8.4 billion, respectively, in UPB of loans underlying our investments in single-family non-agency mortgage-related securities were serviced by subsidiaries and/or affiliates of Ocwen Financial Corp. Ocwen and its subsidiaries and/or affiliates have been the subject of significant adverse regulatory scrutiny. On April 20, 2017, the CFPB and numerous state regulators initiated legal and regulatory actions against Ocwen and its subsidiaries and/or affiliates challenging various aspects of their mortgage servicing practices. We continue to closely monitor Ocwen's performance.

Freddie Mac Form 10-Q
 
129


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


NOTE 13: FAIR VALUE DISCLOSURE
The accounting guidance for fair value measurements and disclosures defines fair value, establishes a framework for measuring fair value, and sets forth disclosure requirements regarding fair value measurements. This guidance applies whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value. Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or, in the absence of a principal market, in the most advantageous market for the asset or liability.
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain assets and liabilities on a recurring or non-recurring basis.
FAIR VALUE MEASUREMENTS
The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The levels of the fair value hierarchy are defined as follows in priority order:
•
Level 1 - inputs to the valuation techniques are based on quoted prices in active markets for identical assets or liabilities.
•
Level 2 - inputs to the valuation techniques are based on observable inputs other than quoted prices in active markets for identical assets or liabilities.
•
Level 3 - one or more inputs to the valuation technique are unobservable and significant to the fair value measurement.
We use quoted market prices and valuation techniques that seek to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs. Our inputs are based on the assumptions a market participant would use in valuing the asset or liability. Assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
VALUATION RISK AND CONTROLS OVER FAIR VALUE MEASUREMENTS
Valuation risk is the risk that fair values used for financial disclosures, risk metrics and performance measures do not reasonably reflect market conditions and prices.
We designed our control processes so that our fair value measurements are appropriate and reliable, that they are based on observable inputs where possible, and that our valuation approaches are consistently applied and the assumptions and inputs are reasonable. Our control processes provide a framework for segregation of duties and oversight of our fair value methodologies, techniques, validation procedures, and results.

Freddie Mac Form 10-Q
 
130


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


VALUATION TECHNIQUES
HARP Loans
For loans that have been refinanced under HARP, we value our guarantee obligation using the guarantee fees currently charged by us under that initiative. HARP loans valued using this technique are classified as Level 2, as the fees charged by us are observable. The majority of our HARP loans are classified as Level 2. If, subsequent to delivery, the refinanced loan no longer qualifies for purchase based on current underwriting standards (such as becoming past due or being modified), the fair value of the guarantee obligation is then measured using our internal credit models or the median of external sources, if the loan’s principal market has changed to the whole loan market. HARP loans valued using either of these techniques are classified as Level 3 as significant inputs are unobservable.
The total compensation that we receive for the delivery of a HARP loan reflects the pricing that we are willing to offer because HARP is a part of a broader government program intended to provide assistance to homeowners and prevent foreclosures. When HARP ends in September 2017, the beneficial pricing afforded to HARP loans may no longer be reflected in the pricing structure of our guarantee fees. If these benefits were not reflected in the pricing for these loans, the fair value of our loans would have decreased by $3.6 billion and $5.3 billion as of June 30, 2017 and December 31, 2016, respectively. The total fair value of the loans in our portfolio that reflect the pricing afforded to HARP loans as of June 30, 2017 and December 31, 2016 is $41.3 billion and $52.8 billion, respectively.
ASSETS AND LIABILITIES ON OUR CONDENDSED CONSOLIDATED BALANCE SHEETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
The following tables present our assets and liabilities measured on our condensed consolidated balance sheets at fair value on a recurring basis subsequent to initial recognition, including instruments where we have elected the fair value option.









Freddie Mac Form 10-Q
 
131


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
June 30, 2017
(In millions)
Level 1

Level 2

Level 3

Netting Adjustment(1)

Total
Assets:









Investments in securities:









Available-for-sale, at fair value:









Mortgage-related securities:



 

 



Freddie Mac

$—

 

$34,627

 

$5,686

 

$—

 

$40,313

Other agency
—

 
3,623

 
51

 
—

 
3,674

Non-agency RMBS
—

 
—

 
8,639

 
—

 
8,639

Non-agency CMBS
—

 
462

 
3,470

 
—

 
3,932

Obligations of states and political subdivisions
—

 
—

 
481

 
—

 
481

Total available-for-sale securities, at fair value
—

 
38,712


18,327

 
—

 
57,039

Trading, at fair value:




 



 
Mortgage-related securities:




 



 
Freddie Mac
—

 
12,065

 
888

 
—

 
12,953

Other agency
—

 
6,696

 
10

 
—

 
6,706

All other
—

 
27

 
108

 
—

 
135

Total mortgage-related securities
—

 
18,788

 
1,006

 
—

 
19,794

Non-mortgage-related securities
19,860

 
2,106

 
—

 
—

 
21,966

Total trading securities, at fair value
19,860

 
20,894

 
1,006

 
—

 
41,760

Total investments in securities
19,860

 
59,606

 
19,333

 
—

 
98,799

Mortgage loans:

 

 

 

 

Held-for-sale, at fair value
—

 
17,982

 
—

 
—

 
17,982

Derivative assets, net:
 
 
 
 
 
 
 
 
 
Interest-rate swaps
—

 
3,922

 
—

 
—

 
3,922

Option-based derivatives
—

 
5,428

 
—

 
—

 
5,428

Other
—

 
156

 
1

 


 
157

Subtotal, before netting adjustments
—

 
9,506

 
1

 
—

 
9,507

Netting adjustments(1)
—

 
—

 
—

 
(8,556
)
 
(8,556
)
Total derivative assets, net
—

 
9,506

 
1

 
(8,556
)
 
951

Other assets:
 
 
 
 
 
 
 
 


Guarantee asset, at fair value
—

 
—

 
2,480

 
—

 
2,480

Non-derivative held-for-sale purchase commitments, at fair value
—

 
149

 
—

 
—

 
149

All other, at fair value
—

 
—

 
—

 
—

 
—

Total other assets
—

 
149

 
2,480

 
—

 
2,629

Total assets carried at fair value on a recurring basis

$19,860

 

$87,243

 

$21,814

 

($8,556
)
 

$120,361

Liabilities:
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value

$—

 

$19

 

$531

 

$—

 

$550

Other debt, at fair value


 
5,485

 
89

 


 
5,574

Derivative liabilities, net:

 

 

 

 

Interest-rate swaps
—

 
8,279

 
—

 
—

 
8,279

Option-based derivatives
—

 
114

 
—

 
—

 
114

Other


 
125

 
71

 
—

 
196

Subtotal, before netting adjustments
—

 
8,518

 
71

 
—

 
8,589

Netting adjustments(1)
—

 
—

 
—

 
(8,291
)
 
(8,291
)
Total derivative liabilities, net
—

 
8,518

 
71

 
(8,291
)
 
298

Other liabilities:
 
 
 
 
 
 
 
 
 
Non-derivative held-for-sale purchase commitments, at fair value
—

 
11

 
—

 
—

 
11

All other, at fair value
—

 
—

 
17

 
 
 
17

Total liabilities carried at fair value on a recurring basis

$—

 

$14,033



$708

 

($8,291
)
 

$6,450


Freddie Mac Form 10-Q
 
132


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
December 31, 2016
(In millions)
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment(1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
Freddie Mac

$—

 

$33,805

 

$9,847

 

$—

 

$43,652

Other agency
—

 
4,155

 
66

 
—

 
4,221

Non-agency RMBS
—

 
—

 
11,797

 
—

 
11,797

Non-agency CMBS
—

 
3,056

 
3,366

 
—

 
6,422

Obligations of states and political subdivisions
—

 
—

 
665

 
—

 
665

Total available-for-sale securities, at fair value
—

 
41,016

 
25,741

 
—

 
66,757

Trading, at fair value:
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
Freddie Mac
—

 
14,248

 
1,095

 
—

 
15,343

Other agency
—

 
8,149

 
12

 
—

 
8,161

All other
—

 
36

 
113

 
—

 
149

Total mortgage-related securities
—

 
22,433

 
1,220

 
—

 
23,653

Non-mortgage-related securities
19,402

 
1,735

 
—

 
—

 
21,137

Total trading securities, at fair value
19,402

 
24,168

 
1,220

 
—

 
44,790

Total investments in securities
19,402

 
65,184

 
26,961

 
—

 
111,547

Mortgage loans:
 
 
 
 
 
 
 
 
 
Held-for-sale, at fair value
—

 
16,255

 
—

 
—

 
16,255

Derivative assets, net:
 
 
 
 
 
 
 
 
 
Interest-rate swaps
—

 
6,924

 
—

 
—

 
6,924

Option-based derivatives
—

 
5,054

 
—

 
—

 
5,054

Other
—

 
287

 
3

 
—

 
290

Subtotal, before netting adjustments
—

 
12,265


3


—

 
12,268

Netting adjustments(1)
—

 
—

 
—

 
(11,521
)
 
(11,521
)
Total derivative assets, net
—

 
12,265


3


(11,521
)
 
747

Other assets:
 
 
 
 
 
 
 
 
 
Guarantee asset, at fair value
—

 
—

 
2,298

 
—

 
2,298

Non-derivative held-for-sale purchase commitments, at fair value
—

 
108

 
—

 
—

 
108

All other, at fair value
—

 
—

 
2

 
—

 
2

Total other assets
—

 
108

 
2,300

 
—

 
2,408

Total assets carried at fair value on a recurring basis

$19,402

 

$93,812



$29,264



($11,521
)
 

$130,957

Liabilities:
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value

$—

 

$144

 

$—

 

$—

 

$144

Other debt, at fair value
—

 
5,771

 
95

 
—

 
5,866

Derivative liabilities, net:
 
 
 
 
 
 
 
 
 
Interest-rate swaps
—

 
12,387

 
—

 
—

 
12,387

Option-based derivatives
—

 
106

 
—

 
—

 
106

Other
—

 
147

 
52

 
—

 
199

Subtotal, before netting adjustments
—

 
12,640


52


—

 
12,692

Netting adjustments(1)
—

 
—

 
—

 
(11,897
)
 
(11,897
)
Total derivative liabilities, net
—

 
12,640


52


(11,897
)
 
795

Other liabilities:
 
 
 
 
 
 
 
 
 
Non-derivative held-for-sale purchase commitments, at fair value
—

 
37

 
—

 
—

 
37

Total liabilities carried at fair value on a recurring basis

$—

 

$18,592



$147



($11,897
)
 

$6,842


(1)
Represents counterparty netting, cash collateral netting and net derivative interest receivable or payable.

Freddie Mac Form 10-Q
 
133


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


ASSETS ON OUR CONDENSED CONSOLIDATED BALANCE SHEETS MEASURED AT FAIR VALUE ON A NON-RECURRING BASIS
We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis after our initial recognition. These adjustments usually result from the application of lower-of-cost-or-fair-value accounting or measurement of impairment based on the fair value of the underlying collateral.
The table below presents assets measured on our condensed consolidated balance sheets at fair value on a non-recurring basis.
 
June 30, 2017
 
December 31, 2016
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets measured at fair value on a non-recurring basis:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans(1)

$—

 

$258

 

$8,749

 

$9,007

 

$—

 

$199

 

$2,483

 

$2,682

 
(1)
Includes loans that are classified as held-for-investment and have been measured for impairment based on the fair value of the underlying collateral and held-for-sale loans where the fair value is below cost.
LEVEL 3 FAIR VALUE MEASUREMENTS
The tables below present a reconciliation of all assets and liabilities measured on our condensed consolidated balance sheets at fair value on a recurring basis using significant unobservable inputs (Level 3), including transfers into and out of Level 3 assets and liabilities. The tables also present gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recognized in our condensed consolidated statements of comprehensive income for Level 3 assets and liabilities. When assets and liabilities are transferred between levels, we recognize the transfer as of the beginning of the period.

Freddie Mac Form 10-Q
 
134


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
2Q 2017
 
 
 
Realized and unrealized gains (losses)

 

 

 

 

 

 

 

 
 
Balance,
April 1,
2017
 
Included in
earnings
 
Included in
other
comprehensive
income

Total

Purchases

Issues

Sales

Settlements,
net

Transfers
into
Level 3(1)

Transfers
out of
Level 3(1)

Balance,
June 30,
2017

Unrealized
gains (losses)
still held(3)
 
(In millions)
Assets

 

 



















Investments in securities:

 

 



















Available-for-sale, at fair value:

 

 



















Mortgage-related securities:

 

 



 















Freddie Mac

$6,419

 

$10

 

$17

 

$27

 

$258

 

$—

 

($482
)
 

($391
)
 

$—

 

($145
)
 

$5,686

 

($5
)
Other agency
62

 
—

 
—

 
—

 
—

 
—

 
—

 
(3
)
 
—

 
(8
)
 
51

 
—

Non-agency RMBS
9,270

 
153

 
158

 
311

 
—

 
—

 
(477
)
 
(465
)
 
—

 
—

 
8,639

 
70

Non-agency CMBS
3,360

 
2

 
120

 
122

 
—

 
—

 
—

 
(12
)
 
—

 
—

 
3,470

 
2

Obligations of states and political subdivisions
560

 
1

 
(1
)
 
—

 
—

 
—

 
—

 
(79
)
 
—

 
—

 
481

 
—

Total available-for-sale mortgage-related securities
19,671


166


294

 
460

 
258

 
—

 
(959
)

(950
)

—


(153
)

18,327


67

Trading, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Freddie Mac
552

 
(51
)
 
—

 
(51
)
 
474

 
—

 
—

 
—

 
83

 
(170
)
 
888

 
(42
)
Other agency
11

 
(1
)
 
—

 
(1
)
 
—

 
—

 
—

 
—

 
—

 
—

 
10

 
—

All other
109

 
1

 
—

 
1

 
—

 
—

 
—

 
(2
)
 
—

 
—

 
108

 
2

Total trading mortgage-related securities
672


(51
)

—


(51
)

474


—


—


(2
)

83


(170
)

1,006


(40
)
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset
2,340

 
4

 
—

 
4

 
—

 
249

 
—

 
(113
)
 
—

 
—

 
2,480

 
4



 

 



















 
 
 
Realized and unrealized (gains) losses

 

 

 

 

 

 

 

 
 
Balance,
April 1,
2017
 
Included in
earnings
 
Included in
other
comprehensive
income

Total

Purchases

Issues

Sales

Settlements,
net

Transfers
into
Level 3(1)

Transfers
out of
Level 3(1)

Balance,
June 30,
2017

Unrealized
(gains)
losses
still held(3)
 
(In millions)
Liabilities

 

 





 

 

 

 

 

 

 

Debt securities of consolidated trusts held by third parties, at fair value

$530

 

$1

 

$—

 

$1

 

$—

 

$—

 

$—

 

$—

 

$—

 

$—

 

$531

 

$1

Other debt, at fair value
94

 
—

 
—

 
—

 
—

 
—

 
—

 
(5
)
 
—

 
—

 
89

 
—

Net derivatives(2)
61

 
20

 
—

 
20

 
—

 
—

 
—

 
(10
)
 
—

 
—

 
71

 
12

Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All other, at fair value
10

 
6

 
—

 
6

 
1

 
—

 
—

 
—

 
—

 
—

 
17

 
6


Freddie Mac Form 10-Q
 
135


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
YTD 2017
 
 
 
Realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1,
2017
 
Included in
earnings
 
Included in
other
comprehensive
income
 
Total
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3(1)
 
Transfers
out of
Level 3(1)
 
Balance,
June 30,
2017
 
Unrealized
gains (losses)
still held(3)
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac

$9,847

 

($1
)
 

$35

 

$34

 

$494

 

$—

 

($907
)
 

($703
)
 

$17

 

($3,096
)
 

$5,686

 

($10
)
Other agency
66

 
—

 
(1
)
 
(1
)
 
—

 
—

 
—

 
(6
)
 
—

 
(8
)
 
51

 
—

Non-agency RMBS
11,797

 
431

 
60

 
491

 
—

 
—

 
(2,694
)
 
(955
)
 
—

 
—

 
8,639

 
137

Non-agency CMBS
3,366

 
2

 
122

 
124

 
—

 
—

 
—

 
(20
)
 
—

 
—

 
3,470

 
2

Obligations of states and political subdivisions
665

 
1

 
(1
)
 
—

 
—

 
—

 
—

 
(184
)
 
—

 
—

 
481

 
—

Total available-for-sale mortgage-related securities
25,741

 
433


215

 
648

 
494


—


(3,601
)

(1,868
)

17



(3,104
)
 
18,327

 
129

Trading, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Freddie Mac
1,095

 
(84
)
 
—

 
(84
)
 
539

 
—

 
(592
)
 
(9
)
 
131

 
(192
)
 
888

 
(74
)
Other agency
12

 
(2
)
 
—

 
(2
)
 
—

 
—

 
—

 
—

 
—

 
—

 
10

 
(2
)
All other
113

 
1

 
—

 
1

 
—

 
—

 
—

 
(6
)
 
—

 
—

 
108

 
1

Total trading mortgage-related securities
1,220

 
(85
)
 
—

 
(85
)
 
539


—


(592
)

(15
)

131



(192
)
 
1,006

 
(75
)
Other assets:
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 

 

 


 
 
Guarantee asset
2,299

 
(3
)
 
—

 
(3
)
 
—

 
413

 
—

 
(229
)
 
—

 
—

 
2,480

 
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized and unrealized (gains) losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1,
2017
 
Included in
earnings
 
Included in
other
comprehensive
income
 
Total
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3(1)
 
Transfers
out of
Level 3(1)
 
Balance,
June 30,
2017
 
Unrealized
(gains)
losses
still held(3)
 
(in millions)
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value

$—

 

$1

 

$—

 

$1

 

$—

 

$530

 

$—

 

$—

 

$—

—


$—

 

$531

 

$1

Other debt, at fair value
95

 
—

 
—

 
—

 
—

 
—

 
—

 
(6
)
 
—

 
—

 
89

 
—

Net derivatives(2)
50

 
33

 
—

 
33

 
—

 
1

 
—

 
(13
)
 
—

 
—

 
71

 
21

Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All other, at fair value
(2
)
 
7

 
—

 
7

 
12

 
—

 
—

 
—

 
—

 
—

 
17

 
7


Freddie Mac Form 10-Q
 
136


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
2Q 2016
 
 
 
Realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
April 1,
2016
 
Included in
earnings
 
Included in
other
comprehensive
income
 
Total
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Balance,
June 30,
2016
 
Unrealized
gains (losses)
still held(3)
 
(In millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac

$4,369

 

$6

 

$96

 

$102

 

$9,621

 

$—

 

($109
)
 

($61
)
 

$—

 

($2,460
)
 

$11,462

 

$—

Other agency
85

 
(1
)
 
—

 
(1
)
 
—

 
—

 
—

 
(5
)
 
—

 
(6
)
 
73

 
—

Non-agency RMBS
18,768

 
255

 
16

 
271

 
—

 
—

 
(2,443
)
 
(1,099
)
 
—

 
—

 
15,497

 
45

Non-agency CMBS
3,627

 
1

 
10

 
11

 
—

 
—

 
(17
)
 
(10
)
 
—

 
—

 
3,611

 
1

Obligations of states and political subdivisions
1,012

 
—

 
—

 
—

 
—

 
—

 
—

 
(122
)
 
—

 
—

 
890

 
—

Total available-for-sale mortgage-related securities
27,861

 
261

 
122

 
383

 
9,621

 
—

 
(2,569
)
 
(1,297
)
 
—

 
(2,466
)
 
31,533

 
46

Trading, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
123

 
3

 
—

 
3

 
204

 
46

 
(4
)
 
(2
)
 
19

 
(74
)
 
315

 
(3
)
Other agency
29

 
(1
)
 
—

 
(1
)
 
595

 
—

 
—

 
(8
)
 
—

 
—

 
615

 
(1
)
All other
1

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
—

Total trading mortgage-related securities
153

 
2

 
—

 
2

 
799

 
46

 
(4
)
 
(10
)
 
19

 
(74
)
 
931

 
(4
)
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset
1,894

 
10

 
—

 
10

 
219

 
22

 
—

 
(88
)
 
—

 
—

 
2,057

 
10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized and unrealized (gains) losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
April 1,
2016
 
Included in
earnings
 
Included in
other
comprehensive
income
 
Total
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Balance,
June 30,
2016
 
Unrealized
(gains) losses
still held
 
(In millions)
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other debt, at fair value

$—

 

$—

 

$—

 

$—

 

$—

 

$52

 

$—

 

$—

 

$—

 

$—

 

$52

 

$—

Net derivatives(2)
11

 
71

 
—

 
71

 
—

 
—

 
—

 
(55
)
 
—

 
—

 
27

 
19

Other Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All other, at fair value
8

 
7

 
—

 
7

 
—

 
—

 
—

 
—

 
—

 
—

 
15

 
15


Freddie Mac Form 10-Q
 
137


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
YTD 2016
 
 
 
Realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1,
2016
 
Included in
earnings
 
Included in
other
comprehensive
income
 
Total
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Balance,
June 30,
2016
 
Unrealized
gains (losses)
still held(3)
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac

$2,608

 

$20

 

$67

 

$87

 

$9,637

 

$—

 

($471
)
 

($84
)
 

$—

 

($315
)
 

$11,462

 

$—

Other agency
91

 
—

 
—

 
—

 
—

 
—

 
—

 
(11
)
 
—

 
(7
)
 
73

 
—

Non-agency RMBS
20,333

 
374

 
(287
)
 
87

 
—

 
—

 
(3,018
)
 
(1,905
)
 
—

 


 
15,497

 
133

Non-agency CMBS
3,530

 
1

 
98

 
99

 
—

 
—

 
—

 
(18
)
 
—

 


 
3,611

 
1

Obligations of states and political subdivisions
1,205

 
1

 
(2
)
 
(1
)
 
—

 
—

 
—

 
(314
)
 
—

 


 
890

 
—

Total available-for-sale mortgage-related securities
27,767

 
396


(124
)

272


9,637


—


(3,489
)

(2,332
)

—


(322
)

31,533


134

Trading, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
331

 
(8
)
 
—

 
(8
)
 
204

 
46

 
(142
)
 
(2
)
 
19

 
(133
)
 
315

 
(5
)
Other agency
41

 
—

 
—

 
—

 
594

 
—

 
(13
)
 
(7
)
 
—

 
—

 
615

 
(2
)
All other
2

 
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
—

 
—

 
1

 
—

Total trading mortgage-related securities
374

 
(8
)

—


(8
)

798


46


(155
)

(10
)

19


(133
)

931


(7
)
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset
1,753

 
68

 
—

 
68

 
360

 
38

 
—

 
(162
)
 
—

 
—

 
2,057

 
68

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized and unrealized (gains) losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1,
2016
 
Included in
earnings
 
Included in
other
comprehensive
income
 
Total
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Balance,
June 30,
2016
 
Unrealized
(gains) losses
still held
 
(in millions)
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other debt, at fair value

$—

 

$—

 

$—

 

$—

 

$—

 

$52

 

$—

 

$—

 

$—

 

$—

 

$52

 

$—

Net derivatives(2)
8

 
75

 
—

 
75

 
—

 
—

 
—

 
(56
)
 
—

 
—

 
27

 
19

Other Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All other, at fair value
10

 
5

 
—

 
5

 
—

 
—

 
—

 
—

 
—

 
—

 
15

 
15


(1)
Transfers out of Level 3 during 2Q 2017 and YTD 2017 consisted primarily of certain mortgage-related securities due to an increased volume and level of activity in the market and availability of price quotes from dealers and third-party pricing services. Certain Freddie Mac securities are classified as Level 3 at issuance and generally are classified as Level 2 when they begin trading. Transfers into Level 3 during 2Q 2017 and YTD 2017 consisted primarily of certain mortgage-related securities due to a lack of market activity and relevant price quotes from dealers and third-party pricing services.
(2)
Amounts are prior to counterparty netting, cash collateral netting, net trade/settle receivable or payable and net derivative interest receivable or payable.
(3)
Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in unrealized gains and losses related to assets and liabilities classified as Level 3 that were still held at June 30, 2017 and June 30, 2016, respectively. Included in these amounts are other-than temporary impairments recorded on available-for-sale securities.

Freddie Mac Form 10-Q
 
138


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


The tables below provide valuation techniques, the range, and the weighted average of significant unobservable inputs for assets and liabilities measured on our condensed consolidated balance sheets at fair value on a recurring basis using unobservable inputs (Level 3).
June 30, 2017
 
Level 3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs(1)
(Dollars in millions, except for certain unobservable inputs as shown)
Type
 
Range
 
Weighted
Average
Recurring fair value measurements
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Investments in securities
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
 
 
 
 
 
 
 
 
Freddie Mac
$5,493
 
Discounted cash flows
 
OAS
 
31 - 520 bps
 
97 bps
 
193
 
Other
 
 
 
 
 

Total Freddie Mac
5,686
 
 
 
 
 
 
 
 
Other agency
31
 
Median of external sources
 
 
 
 
 
 
 
20
 
Single external source
 
 
 
 
 
 
 
—
 
Other
 
 
 
 
 
 
Total other agency
51
 
 
 
 
 
 
 
 
Non-agency RMBS
7,214
 
Median of external sources
 
External pricing sources
 
$70.0 - $75.4
 
$72.0
 
1,425
 
Other
 
 
 
 
 
 
Total non-agency RMBS
8,639
 
 
 
 
 
 
 
 
Non-agency CMBS
3,469
 
Single external source
 
External pricing source
 
$6.1 - $107.9
 
$95.9
 
1
 
Other
 
 
 
 
 
 
Total non-agency CMBS
3,470
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
444
 
Median of external sources
 
External pricing sources
 
$101.3 - $101.7
 
$101.5
 
37
 
Other
 
 
 
 
 
 
Total obligations of states and political subdivisions
481
 
 
 
 
 
 
 
 
Total available-for-sale mortgage-related securities
18,327
 
 
 
 
 
 
 
 
Trading, at fair value
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
 
 
 
 
 
 
 
 
Freddie Mac
417
 
Discounted cash flows
 
OAS
 
(7,125) - 39,942 bps
 
331 bps
 
119
 
Risk metrics
 
Effective Duration
 
0.00 - 13.15 years
 
10.73 years
 
352
 
Other
 
 
 
 
 
 
Total Freddie Mac
888
 
 
 
 
 
 
 
 
Other agency
10
 
Discounted cash flows
 
 
 
 
 
 
All other
108
 
Discounted cash flows
 
OAS
 
(15) - 788 bps
 
66 bps
Total trading mortgage-related securities
1,006
 
 
 
 
 
 
 
 
Total investments in securities
$19,333
 
 
 
 
 
 
 
 
Other assets:
 
 
 
 
 
 
 
 
 
Guarantee asset, at fair value
$2,480
 
 Discounted cash flows
 
OAS
 
17-198 bps
 
44 bps
Liabilities
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value
531
 
Single External Source
 
External Pricing Sources
 
       $100.0 -$100.3
 
$100.2
Other debt, at fair value
89
 
Other
 
 
 
 
 
 
Net derivatives
71
 
Other
 
 
 
 
 
 
Other liabilities
 
 
 
 
 
 
 
 
 
All other, at fair value
17
 
Other
 
 
 
 
 
 

Freddie Mac Form 10-Q
 
139


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 December 31, 2016
 
Level 3
Fair
Value

Predominant
Valuation
Technique(s)

Unobservable Inputs(1)
(Dollars in millions, except for certain unobservable inputs as shown)
Type

Range

Weighted
Average
Recurring fair value measurements









Assets









Investments in securities









Available-for-sale, at fair value









Mortgage-related securities









Freddie Mac
$7,619
 
Discounted cash flows
 
OAS
 
(146) - 500 bps
 
 91 bps

 
129
 
Median of external sources
 
External pricing sources
 
$100.8 - $103.3
 

$101.8

 
66
 
Single external source
 
 
 
 
 
 
 
60
 
Risk Metrics
 
 
 
 
 
 

1,973

Other







Total Freddie Mac
9,847









Other agency
32
 
Median of external sources
 
 
 
 
 


 
23
 
Single external source
 
 
 
 
 
 

11

Other







Total other agency
66









Non-agency RMBS
9,974

Median of external sources

External pricing sources

$74.0 - $78.8


$76.0


1,823

Other







Total non-agency RMBS
11,797









Non-agency CMBS
3,365

Risk Metrics

Effective duration

2.15 - 10.02 years

8.57 years


1

Other







Total non-agency CMBS
3,366









Obligations of states and political subdivisions
619

Median of external sources

External pricing sources

$100.9 - $101.5


$101.2


46

Other







Total obligations of states and political subdivisions
665









Total available-for-sale mortgage-related securities
25,741









Trading, at fair value
 









Mortgage-related securities










Freddie Mac
452

Risk metrics

Effective duration

(5.07) - 46.37 years

6.94 years

 
311
 
Discounted cash flows
 
OAS
 
(3,346) - 2,460 bps
 
(224) bps

 
5
 
Single external source
 
 
 
 
 
 
 
4
 
Median of external sources
 
 
 
 
 
 

323

Other







Total Freddie Mac
1,095









Other agency
12

Discounted cash flows







All other
113

Risk metrics

Effective duration

0.14 - 4.08 years

2.52 years

Total trading mortgage-related securities
1,220









Total investments in securities
$26,961









Other assets:










Guarantee asset, at fair value
$2,091

 Discounted cash flows

OAS

17 - 198 bps

50 bps


207

Other







Total guarantee asset, at fair value
2,298









All other at fair value
2
 
Other
 
 
 
 
 
 
Total other assets
2,300
 
 
 
 
 
 
 
 
Liabilities
 









Other debt, at fair value
95
 
Other
 
 
 
 
 
 
Net derivatives
49

Other







(1)
Certain unobservable input types, range, and weighted average data are not disclosed in these tables if they are associated with a class: (a) that has a Level 3 fair value measurement that is not considered material; or (b) where we have disclosed the predominant valuation technique with related unobservable inputs for the most significant portion of that class.


Freddie Mac Form 10-Q
 
140


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


The tables below provide valuation techniques, the range, and the weighted average of significant unobservable inputs for assets and liabilities measured on our consolidated balance sheets at fair value on a non-recurring basis using unobservable inputs (Level 3). Certain of the fair values in the tables below were not obtained as of the period end, but were obtained during the period.
June 30, 2017
 
Level 3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs
(Dollars in millions, except for certain unobservable inputs as shown)
Type
 
Range
 
Weighted
Average
Non-recurring fair value measurements
 
 
 
 
 
 
 
 
 
Mortgage loans

$8,749

 
 
 
 
 
 
 
 
 
 
 
Internal model
 
Historical sales
proceeds
 
$3,000 - $900,000
 
$172,706
 
 
 
Internal model
 
Housing sales index
 
42 bps - 367 bps
 
97 bps
 
 
 
Income capitalization(1)
 
Capitalization rates
 
7% - 10%
 
7%
 
 
 
Median of external sources
 
External pricing sources
 
$36.5-$94.8
 
$79.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 December 31, 2016
 
Level 3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs
(Dollars in millions, except for certain unobservable inputs as shown)
Type
 
Range
 
Weighted
Average
Non-recurring fair value measurements
 
 
 
 
 
 
 
 
 
Mortgage loans

$2,483

 
 
 
 
 
 
 
 
 
 
 
Internal model
 
Historical sales
proceeds
 
$3,000 - $770,000
 
$167,137
 
 
 
Internal model
 
Housing sales index
 
42 - 374 bps
 
96 bps
 
 
 
Income capitalization(1)
 
Capitalization rates
 
7%- 10%
 
7%
 
 
 
Median of external sources
 
External pricing sources
 
$37.0 - $94.3
 
$75.0

(1)
The predominant valuation technique used for multifamily loans. Certain loans in this population are valued using other techniques, and the capitalization rate for those is not represented in the “Range” or “Weighted Average” above.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The tables below present the carrying value and estimated fair value of our financial instruments. For certain types of financial instruments, such as cash and cash equivalents, restricted cash and cash equivalents, securities purchased under agreements to resell, advances to lenders and certain other debt, including securities sold under agreements to repurchase, the carrying value on our GAAP balance sheets approximates fair value, and these assets are short-term in nature and have limited market value volatility.

Freddie Mac Form 10-Q
 
141


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
June 30, 2017
 
 
 
Fair Value
(In millions)
GAAP Carrying  Amount
 
Level 1
 
Level 2
 
Level 3
 
Netting 
Adjustments(1)
 
Total
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents

$6,666

 

$6,666

 

$—

 

$—

 

$—

 

$6,666

Restricted cash and cash equivalents
4,464

 
4,464

 
—

 
—

 
—

 
4,464

Securities purchased under agreements to resell
47,791

 
—

 
47,791

 
—

 
—

 
47,791

Investments in securities:

 

 

 

 

 
 
Available-for-sale, at fair value
57,039

 
—

 
38,712

 
18,327

 


 
57,039

Trading, at fair value
41,760

 
19,860

 
20,894

 
1,006

 
—

 
41,760

Total investments in securities
98,799

 
19,860

 
59,606

 
19,333

 
—

 
98,799

Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
Loans held by consolidated trusts
1,723,922

 
—

 
1,588,132

 
146,502

 
—

 
1,734,634

Loans held by Freddie Mac
108,220

 
—

 
32,538

 
78,421

 
—

 
110,959

Total mortgage loans
1,832,142

 
—

 
1,620,670

 
224,923

 
—

 
1,845,593

Derivative assets, net
951

 


 
9,506

 
1

 
(8,556
)
 
951

Guarantee asset
2,480

 
—

 
—

 
2,653

 
—

 
2,653

Non-derivative purchase commitments, at fair value
149

 
—

 
149

 
32

 
—

 
181

Advances to lenders
1,243

 
—

 
—

 
1,243

 
—

 
1,243

Total financial assets

$1,994,685

 

$30,990

 

$1,737,722

 

$248,185

 

($8,556
)
 

$2,008,341

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
Debt, net:
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties

$1,672,255

 

$—

 

$1,678,003

 

$2,095

 

$—

 

$1,680,098

Other debt
336,911

 
—

 
337,717

 
4,224

 
—

 
341,941

Total debt, net
2,009,166

 
—

 
2,015,720

 
6,319

 
—

 
2,022,039

Derivative liabilities, net
298

 
—

 
8,518

 
71

 
(8,291
)
 
298

Guarantee obligation
2,351

 
—

 
—

 
3,216

 
—

 
3,216

Non-derivative purchase commitments, at fair value
11

 
—

 
11

 
28

 
—

 
39

Total financial liabilities

$2,011,826

 

$—

 

$2,024,249

 

$9,634

 

($8,291
)
 

$2,025,592


Freddie Mac Form 10-Q
 
142


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
December 31, 2016
 
 
 
Fair Value
(In millions)
GAAP Carrying Amount
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments(1)
 
Total
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash
equivalents

$12,369

 

$12,369

 

$—

 

$—

 

$—

 

$12,369

Restricted cash and cash equivalents
9,851

 
9,851

 
—

 
—

 
—

 
9,851

Securities purchased under agreements to resell
51,548

 
—

 
51,548

 
—

 
—

 
51,548

Investments in securities:
 
 
 
 
 
 
 
 
 
 


Available-for-sale, at fair value
66,757

 
—

 
41,016

 
25,741

 
—

 
66,757

Trading, at fair value
44,790

 
19,402

 
24,168

 
1,220

 
—

 
44,790

Total investments in securities
111,547

 
19,402


65,184


26,961


—

 
111,547

Mortgage loans:
 
 
 
 
 
 
 
 
 
 


Loans held by consolidated trusts
1,690,218

 
—

 
1,554,143

 
142,121

 
—

 
1,696,264

Loans held by Freddie Mac
112,785

 
—

 
31,004

 
84,227

 
—

 
115,231

Total mortgage loans
1,803,003

 
—


1,585,147


226,348


—

 
1,811,495

Derivative assets, net
747

 
—

 
12,265

 
3

 
(11,521
)
 
747

Guarantee asset
2,298

 
—

 
—

 
2,490

 
—

 
2,490

Non-derivative purchase commitments, at fair value
108

 
—

 
108

 
18

 
—

 
126

Advances to lenders
1,278

 
—

 
—

 
1,278

 
—

 
1,278

Total financial assets

$1,992,749

 

$41,622



$1,714,252



$257,098



($11,521
)
 

$2,001,451

Financial Liabilities
 
 
 
 
 
 
 
 
 
 


Debt, net:
 
 
 
 
 
 
 
 
 
 


Debt securities of consolidated trusts held by third parties

$1,648,683

 

$—

 

$1,651,313

 

$605

 

$—

 

$1,651,918

Other debt
353,321

 
—

 
352,837

 
4,809

 
—

 
357,646

Total debt, net
2,002,004

 
—


2,004,150


5,414


—

 
2,009,564

Derivative liabilities, net
795

 
—

 
12,640

 
52

 
(11,897
)
 
795

Guarantee obligation
2,208

 
—

 
—

 
3,399

 
—

 
3,399

Non-derivative purchase commitments, at fair value
37

 
—

 
37

 
45

 
—

 
82

Total financial liabilities

$2,005,044

 

$—



$2,016,827



$8,910



($11,897
)
 

$2,013,840

(1)
Represents counterparty netting, cash collateral netting and net derivative interest receivable or payable.

Freddie Mac Form 10-Q
 
143


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


FAIR VALUE OPTION
We elected the fair value option for certain multifamily held-for-sale loans, multifamily held-for-sale loan purchase commitments, and certain debt.
The table below presents the fair value and UPB related to certain items for which we have elected the fair value option.
 
 
June 30, 2017
 
December 31, 2016
(In millions)
 
Multifamily
Held-For-Sale
 Loans
 
Other Debt -
Long Term
 
Debt securities of consolidated trusts held by third parties (1)
 
Multifamily
Held-For-Sale
 Loans
 
Other Debt -
Long Term
 
Debt securities of consolidated trusts held by third parties (1)
Fair value
 

$17,982

 

$5,574

 

$531

 

$16,255

 

$5,866

 

$—

Unpaid principal balance
 
17,675

 
5,089

 
530

 
16,231

 
5,584

 
—

Difference
 

$307

 

$485



$1

 

$24

 

$282



$—

(1) Does not include interest-only securities with fair value of $19 million and $144 million as of June 30, 2017 and December 31, 2016, respectively.
Changes in Fair Value under the Fair Value Option Election
We recorded gains of $42 million and $107 million for 2Q 2017 and 2Q 2016, respectively, and $7 million and $579 million for YTD 2017 and YTD 2016, respectively, from the change in fair value on multifamily held-for-sale loans recorded at fair value in other income (loss) in our condensed consolidated statements of comprehensive income.
We recorded gains of $331 million and $207 million for 2Q 2017 and 2Q 2016, respectively, and $555 million and $244 million for YTD 2017 and YTD 2016, respectively, from the change in fair value of multifamily held-for-sale loan purchase commitments recorded at fair value in other income (loss) in our condensed consolidated statements of comprehensive income.
Gains (losses) on debt securities with the fair value option elected were ($102) million and ($108) million for 2Q 2017 and 2Q 2016, respectively, and ($191) million and ($94) million for YTD 2017 and YTD 2016, respectively, and were recorded in other income (loss) in our condensed consolidated statements of comprehensive income.
Changes in fair value attributable to instrument-specific credit risk were not material for 2Q 2017 and YTD 2017 and for 2Q 2016 and YTD 2016 for any assets or liabilities for which we elected the fair value option.

Freddie Mac Form 10-Q
 
144


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


NOTE 14: LEGAL CONTINGENCIES
We are involved as a party in a variety of legal and regulatory proceedings arising from time to time in the ordinary course of business including, among other things, contractual disputes, personal injury claims, employment-related litigation and other legal proceedings incidental to our business. We are frequently involved, directly or indirectly, in litigation involving mortgage foreclosures. From time to time, we are also involved in proceedings arising from our termination of a seller/servicer’s eligibility to sell loans to, and/or service loans for, us. In these cases, the former seller/servicer sometimes seeks damages against us for wrongful termination under a variety of legal theories. In addition, we are sometimes sued in connection with the origination or servicing of loans. These suits typically involve claims alleging wrongful actions of seller/servicers. Our contracts with our seller/servicers generally provide for indemnification of Freddie Mac against liability arising from seller/servicers' wrongful actions with respect to loans sold to or serviced for Freddie Mac.
Litigation and claims resolution are subject to many uncertainties and are not susceptible to accurate prediction. In accordance with the accounting guidance for contingencies, we reserve for litigation claims and assessments asserted or threatened against us when a loss is probable (as defined in such guidance) and the amount of the loss can be reasonably estimated.
PUTATIVE SECURITIES CLASS ACTION LAWSUIT: OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM VS. FREDDIE MAC, SYRON, ET AL.
This putative securities class action lawsuit was filed against Freddie Mac and certain former officers on January 18, 2008 in the U.S. District Court for the Northern District of Ohio purportedly on behalf of a class of purchasers of Freddie Mac stock from August 1, 2006 through November 20, 2007. FHFA later intervened as Conservator, and the plaintiff amended its complaint on several occasions. The plaintiff alleged, among other things, that the defendants violated federal securities laws by making false and misleading statements concerning our business, risk management, and the procedures we put into place to protect the company from problems in the mortgage industry. The plaintiff seeks unspecified damages and interest, and reasonable costs and expenses, including attorney and expert fees.
In October 2013, defendants filed motions to dismiss the complaint. In October 2014, the District Court granted defendants’ motions and dismissed the case in its entirety against all defendants, with prejudice. In November 2014, plaintiff filed a notice of appeal in the U.S. Court of Appeals for the Sixth Circuit. On July 20, 2016, the Court of Appeals reversed the District Court's dismissal and remanded the case to the District Court for further proceedings.
At present, it is not possible for us to predict the probable outcome of this lawsuit or any potential effect on our business, financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible loss or range of possible loss in the event of an adverse judgment in the foregoing matter due to the following factors, among others: the inherent uncertainty of pre-trial litigation and the fact that the District Court has not yet ruled upon motions for class certification or summary judgment. In particular, absent the certification of a class, the identification of a class period, and the identification of the alleged statement or statements that survive dispositive motions, we cannot reasonably estimate any possible loss or range of possible loss.

Freddie Mac Form 10-Q
 
145


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


LITIGATION RELATED TO THE TAYLOR, BEAN & WHITAKER (TBW) BANKRUPTCY
In August 2009, TBW, which had been one of our single-family seller/servicers, filed for bankruptcy in Florida. We entered into a settlement with TBW and the TBW creditors' committee regarding the TBW bankruptcy in 2011. However, we have been involved in litigation with other parties relating to the TBW bankruptcy, as described below.
On or about May 14, 2010, certain underwriters at Lloyds, London and London Market Insurance Companies brought an adversary proceeding in the U.S. Bankruptcy Court for the Middle District of Florida against TBW, Freddie Mac and other parties seeking a declaration rescinding $90 million of mortgage bankers bonds providing fidelity and errors and omissions insurance coverage. Several excess insurers on the bonds thereafter filed similar claims in that action. Freddie Mac filed a proof of loss under the bonds. On April 25, 2016, the Bankruptcy Court approved a settlement agreement among the parties. Upon fulfillment of the terms of the settlement agreement, the Bankruptcy Court dismissed the proceeding with prejudice on June 26, 2017.
LIBOR LAWSUIT
On March 14, 2013, Freddie Mac filed a lawsuit in the U.S. District Court for the Eastern District of Virginia against the British Bankers Association and the 16 U.S. Dollar LIBOR panel banks and a number of their affiliates. The case was subsequently transferred to the U.S. District Court for the Southern District of New York. The complaint alleges, among other things, that the defendants fraudulently and collusively depressed LIBOR, a benchmark interest rate indexed to trillions of dollars of financial products, and asserts claims for antitrust violations, breach of contract, tortious interference with contract and fraud. Freddie Mac filed an amended complaint in July 2013, and a second amended complaint in October 2014. In August 2015, the District Court dismissed the portion of our claim related to antitrust violations and fraud and we filed a motion for reconsideration. On March 31, 2016, the District Court granted a portion of our motion, finding personal jurisdiction over certain defendants, and denied the portion of our motion with respect to statutes of limitation for our fraud claims. Subsequently, in a related case, the U.S. Court of Appeals for the Second Circuit reversed the District Court’s dismissal of certain plaintiffs’ antitrust claims and remanded the case to the District Court for consideration of whether, among other things, the plaintiffs are “efficient enforcers” of the antitrust laws.
On December 20, 2016, after briefing and argument on the defendants' renewed motions to dismiss on personal jurisdiction and efficient enforcer grounds, the District Court denied defendants' motions in part and granted them in part. The District Court held that Freddie Mac is an efficient enforcer of the antitrust laws, but dismissed on personal jurisdiction grounds Freddie Mac's antitrust claims against all defendants except HSBC USA, N.A. Freddie Mac and other plaintiffs requested clarification of the District Court's ruling to determine whether it intended to dismiss defendants located in the United States for lack of personal jurisdiction, which request the District Court denied on February 2, 2017. The Court also effectively dismissed Freddie Mac's remaining antitrust claim against HSBC USA, N.A. Freddie Mac filed a motion for reconsideration of the District Court's opinion dismissing Freddie Mac's (and other plaintiffs') antitrust claims on personal jurisdiction grounds. On February 16, 2017, the Court denied Freddie Mac's motion for reconsideration. On March 14, 2017, Freddie Mac and other plaintiffs sought leave to file an appeal of the dismissal of the antitrust and fraud claims or, in the alternative, for the Court to certify its orders dated February 2, 2017 and February 16, 2017 for interlocutory review. On May 3, 2017, the

Freddie Mac Form 10-Q
 
146


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


District Court denied Freddie Mac’s requests. On May 24, 2017, Freddie Mac filed a petition for a writ of mandamus asking the Second Circuit to direct the District Court to enter a judgment allowing Freddie Mac to appeal or to certify the District Court’s orders for review, which the Second Circuit denied on July 25, 2017. 
LITIGATION CONCERNING THE PURCHASE AGREEMENT
Since July 2013, a number of lawsuits have been filed against us concerning the August 2012 amendment to the Purchase Agreement, which created the net worth sweep dividend provisions of the senior preferred stock. The plaintiffs in the lawsuits allege that they are holders of common stock and/or junior preferred stock issued by Freddie Mac and Fannie Mae. (For purposes of this discussion, junior preferred stock refers to the various series of preferred stock of Freddie Mac and Fannie Mae other than the senior preferred stock issued to Treasury.) It is possible that similar lawsuits will be filed in the future. The lawsuits against us are described below.
Litigation in the U.S. District Court for the District of Columbia
In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations. This case is the result of the consolidation of three putative class action lawsuits: Cacciapelle and Bareiss vs. Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and FHFA, filed on July 29, 2013; American European Insurance Company vs. Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and FHFA, filed on July 30, 2013; and Marneu Holdings, Co. vs. FHFA, Treasury, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, filed on September 18, 2013. (The Marneu case was also filed as a shareholder derivative lawsuit.) A consolidated amended complaint was filed in December 2013. In the consolidated amended complaint, plaintiffs allege, among other items, that the August 2012 amendment to the Purchase Agreement breached Freddie Mac's and Fannie Mae's respective contracts with the holders of junior preferred stock and common stock and the covenant of good faith and fair dealing inherent in such contracts. Plaintiffs sought unspecified damages, equitable and injunctive relief, and costs and expenses, including attorney and expert fees.
The Cacciapelle and American European Insurance Company lawsuits were filed purportedly on behalf of a class of purchasers of junior preferred stock issued by Freddie Mac or Fannie Mae who held stock prior to, and as of, August 17, 2012. The Marneu lawsuit was filed purportedly on behalf of a class of purchasers of junior preferred stock and purchasers of common stock issued by Freddie Mac or Fannie Mae over a not-yet-defined period of time.
Arrowood Indemnity Company vs. Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, FHFA and Treasury. This case was filed on September 20, 2013. The allegations and demands made by plaintiffs in this case were generally similar to those made by the plaintiffs in the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case described above. Plaintiffs in the Arrowood lawsuit also requested that, if injunctive relief were not granted, the Arrowood plaintiffs be awarded damages against the defendants in an amount to be determined including, but not limited to, the aggregate par value of their junior preferred stock, the total of which they stated to be approximately $42 million.
American European Insurance Company, Cacciapalle and Miller vs. Treasury and FHFA. This case was filed as a shareholder derivative lawsuit, purportedly on behalf of Freddie Mac as a “nominal” defendant,

Freddie Mac Form 10-Q
 
147


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


on July 30, 2014. The complaint alleged that, through the August 2012 amendment to the Purchase Agreement, Treasury and FHFA breached their respective fiduciary duties to Freddie Mac, causing Freddie Mac to suffer damages. The plaintiffs asked that Freddie Mac be awarded compensatory damages and disgorgement, as well as attorneys’ fees, costs and other expenses.
FHFA, joined by Freddie Mac and Fannie Mae, moved to dismiss the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case and the other related cases in January 2014. Treasury filed a motion to dismiss the same day. In September 2014, the District Court granted the motions and dismissed the plaintiffs’ claims. In October 2014, plaintiffs in the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case filed a notice of appeal of the District Court’s decision. The scope of this appeal includes the American European Insurance Company shareholder derivative lawsuit. In October 2014, Arrowood filed a notice of appeal of the District Court’s decision. On February 21, 2017, the U.S. Court of Appeals for the District of Columbia Circuit affirmed in part and remanded in part the appealed decision granting the motions to dismiss. The Court of Appeals affirmed dismissal of all claims except certain claims seeking monetary damages for breach of contract and breach of implied duty of good faith and fair dealing. On March 24, 2017, institutional plaintiffs including Arrowood filed a petition for panel rehearing, and on March 31, 2017, the class plaintiffs in the American European Insurance Company litigation also filed a petition for panel rehearing with respect to certain of the claims. On July 17, 2017, the Court of Appeals granted the petitions for rehearing and issued a modified decision, which permitted the institutional plaintiffs to pursue the breach of contract and breach of implied duty of good faith and fair dealing claims that had been remanded. The Court of Appeals also removed language related to the standard to be applied to the implied duty claims, leaving that issue for the District Court to determine on remand.
Litigation in the U.S. Court of Federal Claims
Reid and Fisher vs. the United States of America and Federal Home Loan Mortgage Corporation. This case was filed as a derivative lawsuit, purportedly on behalf of Freddie Mac as a “nominal” defendant, on February 26, 2014. The complaint alleges, among other items, that the net worth sweep dividend provisions of the senior preferred stock constitute an unlawful taking of private property for public use without just compensation. The plaintiffs ask that Freddie Mac be awarded just compensation for the U.S. government’s alleged taking of its property, attorneys’ fees, costs and other expenses.
Rafter, Rattien and Pershing Square Capital Management vs. the United States of America et al. This case was filed as a shareholder derivative lawsuit, purportedly on behalf of Freddie Mac as a “nominal” defendant, on August 14, 2014. The complaint alleges that the net worth sweep dividend provisions of the senior preferred stock constitute an unlawful taking of private property for public use without just compensation, and the U.S government breached an implied-in-fact contract with Freddie Mac. In September 2015, plaintiffs filed an amended complaint, which contains one claim involving Freddie Mac. The amended complaint alleges that Freddie Mac’s charter is a contract with its common stockholders, and that, through the August 2012 amendment to the Purchase Agreement, the U.S. government breached the implied covenant of good faith and fair dealing inherent in such contract. Plaintiffs ask that they be awarded damages or other appropriate relief for the alleged breach of contract as well as attorneys’ fees, costs and expenses.

Freddie Mac Form 10-Q
 
148


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


Litigation in the U.S. District Court for the District of Delaware
Jacobs and Hindes vs. FHFA and Treasury. This case was filed on August 17, 2015 as a putative class action lawsuit purportedly on behalf of a class of holders of preferred stock or common stock issued by Freddie Mac or Fannie Mae. The case was also filed as a shareholder derivative lawsuit, purportedly on behalf of Freddie Mac and Fannie Mae as “nominal” defendants. The complaint alleges, among other items, that the August 2012 amendment to the Purchase Agreement violated applicable state law and constituted a breach of contract, as well as a breach of covenants of good faith and fair dealing. Plaintiffs seek equitable and injunctive relief (including restitution of the monies paid by Freddie Mac and Fannie Mae to Treasury under the net worth sweep dividend), compensatory damages, attorneys’ fees, costs and expenses. The case was stayed pending resolution of FHFA's motion to the U.S. Judicial Panel on Multidistrict Litigation to transfer this case to the U.S. District Court for the District of Columbia. This motion was denied on June 2, 2016, and the stay was lifted on July 13, 2016. Plaintiffs filed an application for certification of a question to the Delaware and Virginia Supreme Courts, which was denied on September 12, 2016. On September 7, 2016, plaintiffs filed a motion to amend the complaint, which the Court granted on February 24, 2017. On April 17, 2017, FHFA, Freddie Mac, Fannie Mae, and Treasury each moved to dismiss the amended complaint. Plaintiffs have opposed that motion.
At present, it is not possible for us to predict the probable outcome of the lawsuits discussed above in the U.S. District Courts and the U.S. Court of Federal Claims (including the outcome of any appeal) or any potential effect on our business, financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible loss or range of possible loss in the event of an adverse judgment in the foregoing matters due to a number of factors, including the inherent uncertainty of pre-trial litigation. In addition, with respect to the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case, the plaintiffs have not demanded a stated amount of damages they believe are due, and the Court has not certified a class.



Freddie Mac Form 10-Q
 
149


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


NOTE 15: REGULATORY CAPITAL
In October 2008, FHFA announced that it was suspending capital classification of us during conservatorship in light of the Purchase Agreement. FHFA continues to monitor our capital levels, but the existing statutory and FHFA-directed regulatory capital requirements are not binding during conservatorship. We and Fannie Mae have worked with FHFA to develop an overall risk measurement framework for evaluating Freddie Mac's and Fannie Mae's risk management and business decisions during conservatorship, known as the Conservatorship Capital Framework ("CCF"). We are now working with FHFA on the implementation of the CCF.
We continue to provide quarterly submissions to FHFA on minimum capital. The table below summarizes our minimum capital requirements and deficits and net worth.
(In millions)
 
June 30, 2017
 
December 31, 2016
GAAP net worth
 

$2,586

 

$5,075

Core capital (deficit)(1)(2)
 

($70,551
)
 

($67,717
)
Less: Minimum capital requirement(1)
 
18,538

 
18,933

Minimum capital surplus (deficit)(1)
 

($89,089
)
 

($86,650
)
 
(1)
Core capital and minimum capital figures are estimates and represent amounts submitted to FHFA. FHFA is the authoritative source for our regulatory capital.
(2)
Core capital excludes certain components of GAAP total equity (i.e., AOCI and the liquidation preference of the senior preferred stock) as these items do not meet the statutory definition of core capital.


Freddie Mac Form 10-Q
 
150


Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 16


NOTE 16: SELECTED FINANCIAL STATEMENT LINE ITEMS
The table below presents the significant components of other income (loss) on our condensed consolidated statements of comprehensive income.
(In millions)
2Q 2017
 
2Q 2016
 
YTD 2017
 
YTD 2016
Other income (loss):
 
 
 
 
 
 
 
Gains (losses) on loans

$193

 

($481
)
 

$207

 

($3
)
Gains (losses) on held-for-sale loan purchase commitments
331

 
207

 
555

 
244

All other
170

 
249

 
347

 
681

Total other income (loss)

$694

 

($25
)
 

$1,109

 

$922

The table below presents the significant components of other assets and other liabilities on our condensed consolidated balance sheets.
(In millions)
June 30, 2017
 
December 31, 2016
Other assets:
 
 
 
Real estate owned, net

$1,036

 

$1,198

Accounts and other receivables(1)
4,534

 
5,083

Guarantee asset
2,480

 
2,298

Advances to lenders
1,243

 
1,278

All other
1,663

 
2,501

Total other assets

$10,956

 

$12,358

Other liabilities:
 
 
 
Guarantee obligation
2,351

 
2,208

Payables related to securities
—

 
4,510

All other
2,266

 
2,769

Total other liabilities

$4,617

 

$9,487

 
(1)
Primarily consists of servicer receivables and other non-interest receivables.

END OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES

Freddie Mac Form 10-Q
 
151


Other Information
 
 

OTHER INFORMATION
LEGAL PROCEEDINGS
We are involved as a party to a variety of legal proceedings. For more information, see Note 14 in this report, our Form 10-Q for the first quarter of 2017 and our 2016 Annual Report.
In addition, a number of lawsuits have been filed against the U.S. government related to the conservatorship and the Purchase Agreement. For information on these lawsuits, see the “Legal Proceedings” sections in our 2016 Annual Report and in our Form 10-Q for the first quarter of 2017. Some of these cases were filed in the U.S. District Court for the Southern District of Texas and the U.S. District Court for the District of Columbia.
On May 22, 2017, the U.S. District Court for the Southern District of Texas dismissed the case in that Court. On May 25, 2017, the plantiffs filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit.
On July 17, 2017, the Court of Appeals for the District of Columbia Circuit granted the petitions for rehearing and issued a modified decision, which permitted the institutional plaintiffs to pursue the breach of contract and breach of implied duty of good faith and fair dealing claims that had been remanded. The Court of Appeals also removed language related to the standard to be applied to the implied duty claims, leaving that issue for the U.S. District Court for the District of Columbia to determine on remand.
In addition, lawsuits were filed in the U.S. District Court for the Western District of Michigan and the U.S. District Court for the District of Minnesota on June 1, 2017 and June 22, 2017, respectively, against FHFA, the Director of FHFA, and Treasury. These new lawsuits seek to invalidate the net worth sweep provisions of the senior preferred stock. These lawsuits also challenge the constitutionality of FHFA’s structure, the appointment of the Director of FHFA and the nature of the delegation of authority to FHFA.
Freddie Mac is not a party to any of these lawsuits.
RISK FACTORS
This Form 10-Q should be read together with the “Risk Factors” section in our 2016 Annual Report, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties could, directly or indirectly, adversely affect our business, financial condition, results of operations, cash flows, strategies, and/or prospects.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
The securities we issue are “exempted securities” under the Securities Act of 1933, as amended. As a result, we do not file registration statements with the SEC with respect to offerings of our securities.

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Other Information
 
 

Following our entry into conservatorship, we suspended the operation of, and ceased making grants under, equity compensation plans. Previously, we had provided equity compensation under those plans to employees and members of the Board of Directors. Under the Purchase Agreement, we cannot issue any new options, rights to purchase, participations, or other equity interests without Treasury’s prior approval. However, grants outstanding as of the date of the Purchase Agreement remain in effect in accordance with their terms.
No stock options were exercised during 2Q 2017. See Note 9 in our 2016 Annual Report for more information.
DIVIDEND RESTRICTIONS
Our payment of dividends on Freddie Mac common stock or any series of Freddie Mac preferred stock (other than senior preferred stock) is subject to certain restrictions as described in "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Dividends and Dividend Restrictions” in our 2016 Annual Report.
INFORMATION ABOUT CERTAIN SECURITIES ISSUANCES BY FREDDIE MAC
Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a material direct financial obligation or become directly or contingently liable for a material obligation under an off-balance sheet arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03 or, if the obligation is incurred in connection with certain types of securities offerings, in prospectuses for those offerings that are filed with the SEC.
Freddie Mac’s securities offerings are exempted from SEC registration requirements. As a result, we do not file registration statements or prospectuses with the SEC with respect to our securities offerings. To comply with the disclosure requirements of Form 8-K relating to the incurrence of material financial obligations, we report these types of obligations either in offering circulars or supplements thereto that we post on our web site or in a current report on Form 8-K, in accordance with a “no-action” letter we received from the SEC staff. In cases where the information is disclosed in an offering circular posted on our web site, the document will be posted within the same time period that a prospectus for a non-exempt securities offering would be required to be filed with the SEC.
The web site address for disclosure about our debt securities, other than debt securities of consolidated trusts, is www.freddiemac.com/debt. From this address, investors can access the offering circular and related supplements for debt securities offerings under Freddie Mac’s global debt facility, including pricing supplements for individual issuances of debt securities. Similar information about our STACR debt notes, Whole Loan Securities and SCR debt notes is available at www.freddiemac.com/creditriskofferings and www.freddiemac.com/multifamily/investors/structured-credit-risk, respectively.
Disclosure about the mortgage-related securities we issue, some of which are off-balance sheet obligations (e.g., K Certificates), can be found at www.freddiemac.com/mbs. From this address, investors can access information and documents about our mortgage-related securities, including offering circulars and related offering circular supplements.


Freddie Mac Form 10-Q
 
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Other Information
 
 

EXHIBITS
The exhibits are listed in the Exhibit Index at the end of this Form 10-Q.

Freddie Mac Form 10-Q
 
154


Controls and Procedures
 
 


CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to management of the company, including the company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we must apply judgment in implementing possible controls and procedures.
Management, including the company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2017. As a result of management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2017, at a reasonable level of assurance, because we have not been able to update our disclosure controls and procedures to provide reasonable assurance that information known by FHFA on an ongoing basis is communicated from FHFA to Freddie Mac’s management in a manner that allows for timely decisions regarding our required disclosure under the federal securities laws. We consider this situation to be a material weakness in our internal control over financial reporting.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING DURING 2Q 2017
We evaluated the changes in our internal control over financial reporting that occurred during 2Q 2017 and concluded that there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Controls and Procedures
 
 


MITIGATING ACTIONS RELATED TO THE MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As described above under “Evaluation of Disclosure Controls and Procedures,” we have one material weakness in internal control over financial reporting as of June 30, 2017 that we have not remediated.
Based on discussions with FHFA and given the structural nature of this material weakness, we believe it is likely that we will not remediate it while we are under conservatorship. However, both we and FHFA have continued to engage in activities and employ procedures and practices intended to permit accumulation and communication to management of information needed to meet our disclosure obligations under the federal securities laws. These include the following:
•
FHFA has established the Division of Conservatorship, which is intended to facilitate operation of the company with the oversight of the Conservator.
•
We provide drafts of our SEC filings to FHFA personnel for their review and comment prior to filing. We also provide drafts of external press releases, statements and speeches to FHFA personnel for their review and comment prior to release.
•
FHFA personnel, including senior officials, review our SEC filings prior to filing, including this Form 10-Q, and engage in discussions with us regarding issues associated with the information contained in those filings. Prior to filing this Form 10-Q, FHFA provided us with a written acknowledgment that it had reviewed the Form 10-Q, was not aware of any material misstatements or omissions in the Form 10-Q, and had no objection to our filing the Form 10-Q.
•
The Director of FHFA is in frequent communication with our Chief Executive Officer, typically meeting (in person or by phone) on at least a bi-weekly basis.
•
FHFA representatives attend meetings frequently with various groups within the company to enhance the flow of information and to provide oversight on a variety of matters, including accounting, credit and capital markets management, external communications, and legal matters.
•
Senior officials within FHFA’s accounting group meet frequently with our senior financial executives regarding our accounting policies, practices, and procedures.
In view of our mitigating actions related to this material weakness, we believe that our condensed consolidated financial statements for 2Q 2017 have been prepared in conformity with GAAP.


Freddie Mac Form 10-Q
 
156


Signatures
 
 


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Federal Home Loan Mortgage Corporation
 
 
By:
 
/s/ Donald H. Layton
 
 
Donald H. Layton
 
 
Chief Executive Officer
Date: August 1, 2017
 
By:
 
/s/ James G. Mackey
 
 
James G. Mackey
 
 
Executive Vice President — Chief Financial Officer
 
 
(Principal Financial Officer)
Date: August 1, 2017
 



Freddie Mac Form 10-Q
 
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Glossary
 
 



GLOSSARY
This Glossary supplements the Glossary contained in our 2016 Annual Report and includes defined terms that are used throughout this report.
Core single-family loan portfolio - Consists of loans in our single-family credit guarantee portfolio that were originated after 2008. We do not include relief refinance loans, including HARP loans, in this loan portfolio as underwriting procedures for relief refinance loans are limited and, in many cases, do not include all of the changes in underwriting standards we have implemented after 2008.
Legacy and relief refinance single-family loan portfolio - Consists of loans in our single-family credit guarantee portfolio that were originated in 2008 and prior, as well as other relief refinance loans, including HARP loans.
Loan liquidations - Loans removed from the portfolio underlying Freddie Mac mortgage-related securities and other mortgage-related guarantees due to terminations including payoff, maturity, repurchase or charge-off, foreclosure alternatives, third-party sales and loans going into REO. Loans are also terminated through reperforming and seriously delinquent loan sales. In addition, periodic paydown of loan principal is also included in loan liquidations.
Performing loan - A loan where the borrower is less than three months past due and is not in the process of foreclosure.
Reperforming loan - A loan that was previously three months or more past due or in the process of foreclosure, but the borrower subsequently made payments such that the loan returns to less than three months past due, or a performing modified loan, which is a loan that was modified and is less than three months past due and is not in the process of foreclosure.




Freddie Mac Form 10-Q
 
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Index
 
 



FORM 10-Q INDEX

Item Number
 
Page(s)
PART I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements
71 - 151
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
1 - 70
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
54 - 57
Item 4.
Controls and Procedures
155 - 156
PART II
OTHER INFORMATION
 
Item 1.
Legal Proceedings
Item 1A
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
152 - 153
Item 6.
Exhibits
 
SIGNATURES
 
EXHIBIT INDEX


Freddie Mac Form 10-Q
 
159

Exhibit Index
 
 


EXHIBIT INDEX
 
Exhibit No.
 
Description*
12.1
  
Statement re: computation of ratio of earnings to fixed charges and computation of ratio of earnings to combined fixed charges and preferred stock dividends
 
 
 
31.1
  
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)
 
  
 
31.2
  
Certification of Executive Vice President —Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)
 
  
 
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
 
  
 
32.2
  
Certification of Executive Vice President —Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101.INS
  
XBRL Instance Document
 
  
 
101.SCH
  
XBRL Taxonomy Extension Schema
 
  
 
101.CAL
  
XBRL Taxonomy Extension Calculation
 
  
 
101.LAB
  
XBRL Taxonomy Extension Labels
 
  
 
101.PRE
  
XBRL Taxonomy Extension Presentation
 
  
 
101.DEF
  
XBRL Taxonomy Extension Definition
 
*
The SEC file numbers for the Registrant’s Registration Statement on Form 10, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K are 000-53330 and 001-34139.
 
 


Freddie Mac Form 10-Q
 
E-1