Edgar Filing: FEDERAL HOME LOAN MORTGAGE CORP

Federally chartered corporation

8200 Jones Branch Drive

(703) 903-2000

(State or other jurisdiction of incorporation or organization)

McLean, Virginia 22102-3110

(I.R.S. Employer Identification No.)

(Registrant’s telephone number, including area code)

(Address of principal executive offices, including zip code)

(I.R.S. Employer Identification No.)

2015 2Q 10Q

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, 2015



¨	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

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 ¨

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 21, 2015, there were 650,044,758 shares of the registrant’s common stock outstanding.

Table of Contents

TABLE OF CONTENTS



	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements	76
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1
Executive Summary	1
Selected Financial Data	11
Consolidated Results of Operations	12
Consolidated Balance Sheets Analysis	31
Risk Management	39
Liquidity and Capital Resources	66
Fair Value Hierarchy and Valuations	70
Off-Balance Sheet Arrangements	70
Critical Accounting Policies and Estimates	71
Forward-Looking Statements	71
Legislative and Regulatory Matters	72
Item 3. Quantitative and Qualitative Disclosures About Market Risk	72
Item 4. Controls and Procedures	74
PART II — OTHER INFORMATION	139
Item 1. Legal Proceedings	139
Item 1A. Risk Factors	139
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	139
Item 5. Other Information	140
Item 6. Exhibits	140
SIGNATURES	141
GLOSSARY	142
EXHIBIT INDEX	E-1



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MD&A TABLE REFERENCE



Table	Description	Page
1	Total Single-Family Mortgage Loan Workout Volumes	3
2	Mortgage-Related Investments Portfolio	10
3	Selected Financial Data	11
4	Summary Consolidated Statements of Comprehensive Income	12
5	Net Interest Income/Yield and Average Balance Analysis	13
6	Single-Family Impaired Loans with Specific Reserve Recorded	15
7	TDRs and Non-Accrual Mortgage Loans	16
8	Credit Loss Performance	17
9	Severity Ratios for Single-Family Mortgage Loans	18
10	Derivative Gains (Losses)	18
11	Other Gains (Losses) on Investment Securities Recognized in Earnings	19
12	Other Income (Loss)	20
13	Non-Interest Expense	21
14	Composition of Segment Mortgage Portfolios and Credit Risk Portfolios	23
15	Segment Earnings and Key Metrics — Single-Family Guarantee	24
16	Segment Earnings and Key Metrics — Investments	27
17	Segment Earnings and Key Metrics — Multifamily	29
18	Investments in Securities on Our Consolidated Balance Sheets	31
19	Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets	32
20	Additional Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets	32
21	Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, and Alt-A Loans and Certain Related Credit Statistics	33
22	Mortgage Loan Purchases and Other Guarantee Commitment Issuances	36
23	REO Activity	37
24	Freddie Mac Mortgage-Related Securities	38
25	Issuances and Extinguishments of Debt Securities of Consolidated Trusts	38
26	Changes in Total Equity	39
27	Characteristics of Purchases for the Single-Family Credit Guarantee Portfolio	42
28	Risk Transfer Transactions	44
29	Characteristics of the Single-Family Credit Guarantee Portfolio	46
30	Single-Family Credit Guarantee Portfolio Data by Year of Origination	47
31	Single-Family Serious Delinquency Rate Trend	48
32	Single-Family Serious Delinquency Statistics	49
33	Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio	50
34	Single-Family Loans with Scheduled Payment Changes by Year at June 30, 2015	51
35	Credit Concentrations in the Single-Family Credit Guarantee Portfolio	53
36	Single-Family Credit Guarantee Portfolio by Attribute Combinations	55
37	Single-Family Relief Refinance Mortgage Loans	56
38	Single-Family Mortgage Loan Workout, Serious Delinquency, and Foreclosure Volumes	57
39	Quarterly Percentages of Modified Single-Family Mortgage Loans — Current or Paid Off	58
40	Foreclosure Timelines for Single-Family Mortgage Loans	59
41	Multifamily Mortgage Portfolio — by Attribute	60
42	Mortgage Insurance by Counterparty	63
43	Derivative Counterparty Credit Exposure	65
44	Activity in Other Debt	68
45	Freddie Mac Credit Ratings	68
46	PMVS and Duration Gap Results	73
47	Derivative Impact on PMVS-L (50 bps)	74



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FINANCIAL STATEMENTS




	Page
Condensed Consolidated Statements of Comprehensive Income	77
Condensed Consolidated Balance Sheets	78
Condensed Consolidated Statements of Cash Flows	79
Note 1: Summary of Significant Accounting Policies	80
Note 2: Conservatorship and Related Matters	82
Note 3: Variable Interest Entities	83
Note 4: Mortgage Loans and Loan Loss Reserves	84
Note 5: Impaired Loans	90
Note 6: Real Estate Owned	96
Note 7: Investments in Securities	96
Note 8: Debt Securities and Subordinated Borrowings	100
Note 9: Derivatives	102
Note 10: Collateral and Offsetting of Assets and Liabilities	104
Note 11: Stockholders’ Equity	107
Note 12: Income Taxes	109
Note 13: Segment Reporting	110
Note 14: Financial Guarantees	115
Note 15: Concentration of Credit and Other Risks	116
Note 16: Fair Value Disclosures	121
Note 17: Legal Contingencies	134
Note 18: Regulatory Capital	137
Note 19: Selected Financial Statement Line Items	137



	iii	Freddie Mac Form 10-Q

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PART I — FINANCIAL INFORMATION

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: (a) the “FORWARD-LOOKING STATEMENTS” sections of this Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2014, or 2014 Annual Report, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015; and (b) the “RISK FACTORS” and “BUSINESS” sections of our 2014 Annual Report.

Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the “GLOSSARY.”

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read this MD&A in conjunction with our 2014 Annual Report and our condensed consolidated financial statements and accompanying notes for the three months ended June 30, 2015 and six months ended June 30, 2015 included in “FINANCIAL STATEMENTS.”

EXECUTIVE SUMMARY

Overview

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 mortgage lenders. In most instances, we package these mortgage 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 mortgage loans or lend money directly to consumers.

We support the U.S. housing market and the overall economy by: (a) providing America’s families with access to mortgage funding at lower rates; (b) helping distressed borrowers keep their homes and avoid foreclosure; and (c) providing consistent liquidity to the multifamily mortgage market, which includes providing financing for affordable and workforce rental housing. We are also working with FHFA, our customers and the industry to build a stronger housing finance system for the nation.

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. We are dependent upon the continued support of Treasury and FHFA in order to continue operating our business. We cannot retain capital from the earnings generated by our business operations or return capital to stockholders other than Treasury.

Consolidated Financial Results

Comprehensive income was $3.9 billion for the second quarter of 2015, compared to $1.9 billion for the second quarter of 2014. Comprehensive income for the second quarter of 2015 consisted of $4.2 billion of net income and $(0.3) billion of other comprehensive income (loss). The main drivers of our results for the second quarter of 2015 include net interest income and increases in the fair value of our derivatives.

Our total equity was $5.7 billion at June 30, 2015. Because our net worth was positive at June 30, 2015, we are not requesting a draw from Treasury under the Purchase Agreement for the second quarter of 2015. Through June 30, 2015, we have received aggregate funding of $71.3 billion from Treasury under the Purchase Agreement, and have paid $92.6 billion in aggregate cash dividends to Treasury.

Variability of Earnings

Our financial results are subject to significant earnings variability from period to period. This variability is primarily driven by:

•

Economic vs. Accounting Interest-Rate Risk — We hold assets and liabilities that expose us to interest-rate risk. Through our use of derivatives, we manage our exposure to interest-rate risk on an economic basis to a low level. At times, the accounting measurement approach (i.e., amortized cost vs. fair value) we apply to our financial assets and liabilities, including derivatives, creates volatility in our earnings when we experience interest rate or implied volatility fluctuations that is not indicative of the underlying economics of our business.



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•

Spread Volatility — Spread volatility is the risk associated with changes in interest rates in excess of the changes in the risk-free rates (i.e., credit spreads, liquidity spreads, risk premiums, etc.). We hold assets and liabilities that expose us to spread volatility. However, we have limited ability to manage spread volatility. Changes in spreads may contribute to significant earnings volatility period to period.


•	Non-Recurring Events — From time to time, we will likely experience, and have experienced, significant earnings volatility from non-recurring events related to the financial crisis, including settlements with counterparties and changes in certain valuation allowances (i.e., allowance for loan losses and deferred tax asset).

Our Primary Business Objectives

Our primary business objectives are:


•	to support U.S. homeowners and renters by maintaining mortgage availability even when other sources of financing are scarce and providing struggling homeowners with alternatives that allow them to stay in their homes or to avoid foreclosure;


•	to reduce taxpayer exposure to losses by increasing the role of private capital in the mortgage market and reducing our overall risk profile;


•	to build a commercially strong and efficient business enterprise to succeed in a to-be-determined “future state;” and


•	to support and improve the secondary mortgage market.

Our business objectives reflect direction that we have received from the Conservator, including the 2015 Conservatorship Scorecard. For information on the Scorecard and the related 2014 Strategic Plan, see “BUSINESS — Regulation and Supervision — Legislative and Regulatory Developments — FHFA’s Strategic Plan for Freddie Mac and Fannie Mae Conservatorships” in our 2014 Annual Report.

Supporting U.S. Homeowners and Renters

Maintaining Mortgage Availability

We maintain a consistent presence in the secondary mortgage market, and we are available to purchase mortgage loans even when other sources of financing are scarce. By providing this consistent source of liquidity for mortgage loans, we help provide our customers with confidence to continue lending even in difficult environments. During the first half of 2015, we purchased, or issued other guarantee commitments for, $181.3 billion in UPB of single-family conforming mortgage loans (representing approximately 803,000 homes), compared to $107.6 billion during the first half of 2014 (representing approximately 526,000 homes). Origination volumes in the U.S. residential mortgage market increased during the first half of 2015, as compared to the first half of 2014, due to a significant increase in the volume of refinance mortgage loans driven by lower long-term mortgage interest rates. We estimate that we, Fannie Mae, and Ginnie Mae collectively guaranteed more than 90% of the single-family conforming mortgage loans originated in the U.S. during the first half of 2015.

During the first half of 2015, our total multifamily new business activity was $23.1 billion in UPB, which provided financing for nearly 1,400 multifamily properties (representing more than 310,000 apartment units). Nearly 90% of the units were affordable to families earning at or below the median income in their area. During the first half of 2014, our total multifamily new business activity was $7.1 billion in UPB, which provided financing for approximately 500 multifamily properties (representing approximately 114,000 apartment units).

Providing Struggling Homeowners with Alternatives that Allow Them to Stay in Their Homes or to Avoid Foreclosure

We use a variety of borrower-assistance programs (such as HARP and HAMP) designed to provide struggling borrowers with alternatives to help them stay in their homes. We establish guidelines for our servicers to follow and provide them with default management programs to use in determining which type of borrower-assistance program (i.e., one of our mortgage loan workout activities or our relief refinance initiative) would be expected to enable us to manage our exposure to credit losses. In May 2015, FHFA announced an extension of our participation in HARP and HAMP through 2016.

Our relief refinance initiative is a key program used to keep families in their homes. Our relief refinance initiative includes HARP, which is the portion of the initiative for mortgage loans with LTV ratios above 80%. During the first half of 2015, we purchased or guaranteed $11.2 billion in UPB of relief refinance mortgage loans, including $4.4 billion of HARP mortgage loans. During the first half of 2014, we purchased or guaranteed $16.0 billion in UPB of relief refinance mortgage loans, including $8.9 billion of HARP mortgage loans. We have purchased HARP mortgage loans that were provided to nearly 1.4 million borrowers since the initiative began in 2009, including nearly 26,000 borrowers during the first half of 2015.

When a borrower cannot qualify for refinancing and has financial hardship, we require our servicer to evaluate the mortgage loan for a repayment plan, forbearance agreement, or mortgage loan modification before pursuing a foreclosure or foreclosure alternative, because the level of recovery on a mortgage loan that reperforms is often much higher than for a mortgage loan that proceeds to a foreclosure or foreclosure alternative. Our servicers contact borrowers experiencing hardship with a goal of helping them to stay in their homes or otherwise to avoid foreclosure. Across all our modification programs, we modified $5.5 billion in UPB of mortgage loans during the first half of 2015, compared to $7.0 billion in UPB during the first half of 2014. When a home retention solution is not practicable, we require our servicers to pursue foreclosure alternatives,



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such as short sales, before initiating foreclosure. Since 2009, we have helped approximately 1.1 million borrowers experiencing hardship to complete a mortgage loan workout under these programs.

The table below presents our completed workout activities for mortgage loans within our single-family credit guarantee portfolio during the last five quarters.

Table 1 — Total Single-Family Mortgage Loan Workout Volumes⁽¹⁾

Number of mortgage loans (000)


(1)	Excludes modification, repayment, and forbearance activities that have not been made effective, such as mortgage loans in modification trial periods. As of June 30, 2015, approximately 24,000 borrowers were in modification trial periods. These categories are not mutually exclusive and a mortgage loan in one category may also be included in another category in the same period.

As shown in the table above, the volume of completed mortgage loan workouts has generally declined over the past year. We attribute this decline to overall improvements in the economy and mortgage market, including rising home prices, declining unemployment rates, and declining serious delinquency rates. While we believe our borrower-assistance programs have been largely successful, many borrowers still need assistance. We continue our efforts to: (a) encourage eligible borrowers to refinance their mortgage loans under HARP; (b) develop additional loss mitigation strategies and modify existing programs, as needed; and (c) execute certain neighborhood stabilization activities. As part of these efforts:


•	We participated with FHFA and Fannie Mae in open forum meetings in several cities to inform community leaders about HARP eligibility criteria and benefits.


•	In June 2015, we announced that we are extending our streamlined modification program indefinitely.


•	We also continued to work with FHFA and Fannie Mae to develop and execute neighborhood stabilization plans in certain cities. In these cities we continue to work with locally-based private entities to facilitate REO dispositions and provide an initial period for REO properties to be purchased by owner occupants and others before we consider offers from investors.

Reducing Taxpayer Exposure to Losses and Reducing our Risk Profile

We are working diligently with FHFA to reduce the taxpayers' exposure to losses and our risk profile by:


•	transferring to private investors part of the credit risk of our New single-family book and our total multifamily portfolio;



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•	managing the performance of our servicers through our contracts with them;


•	selling non-performing single-family mortgage loans;


•	improving our returns on property dispositions;


•	protecting our contractual rights with sellers;


•	pursuing our rights against mortgage insurers;


•	recovering losses on non-agency mortgage-related securities; and


•	reducing our mortgage-related investments portfolio over time.

As discussed above, many of our borrower-assistance programs, such as mortgage loan modifications, also help reduce our risk of credit losses.

Transferring Credit Risk

We believe that using credit risk transfer transactions is a prudent way for us to manage credit risk. We continue to reduce our exposure to credit risk in our New single-family book through the use of STACR debt note and ACIS (re)insurance transactions. During the first half of 2015, we completed five STACR debt note transactions and five ACIS (re)insurance transactions. These transactions transferred a portion of credit risk on certain groups of loans in the New single-family book to third-party investors and insurers. The value of these transactions to us is dependent on various economic scenarios, and we will benefit from these transactions if we experience significant mortgage loan defaults. We have a goal to complete credit risk transfer transactions for at least $120 billion in UPB of single-family mortgage loans using at least two transaction types in 2015.

During the first half of 2015, we also completed 12 K Certificate transactions in which we transferred the first loss position associated with the underlying multifamily mortgage loans to third-party investors. We continue to develop other strategies intended to reduce our exposure to multifamily mortgage loans and securities by transferring credit risk to third parties.

Managing the Performance of Our Servicers

The financial institutions that service our single-family mortgage loans (which we refer to as "servicers") are required to service mortgage loans on our behalf in accordance with our standards. We continue to review and monitor the performance of our servicers and to seek improvements for the servicing of non-performing mortgage loans in our portfolio. We periodically facilitate the transfer of servicing for certain groups of mortgage loans that are delinquent or are deemed at risk of default to servicers that we believe have the capabilities and resources necessary to improve the loss mitigation associated with the mortgage loans.

During the first half of 2015, the serious delinquency rate of our single-family credit guarantee portfolio continued to decline, and was 1.53% as of June 30, 2015 (representing the lowest level since November 2008) compared to 1.88% as of December 31, 2014. While our loss mitigation activities (including sales of certain seriously delinquent mortgage loans) and foreclosures have contributed to this decline, we continue to have a large number of seriously delinquent mortgage loans due to aged inventory in certain states, such as New York and New Jersey. The longer a mortgage loan remains delinquent, the more costs we incur. The number of our single-family mortgage loans delinquent for more than one year declined 20% during the first half of 2015.

Selling Non-Performing Single-Family Mortgage Loans

In January 2015, FHFA informed us that it would not object to our sales of certain seriously delinquent single-family mortgage loans. As part of our loss mitigation strategy, we sold seriously delinquent mortgage loans totaling $1.2 billion in UPB during the first half of 2015. Additionally, we held $6.3 billion in UPB of single-family mortgage loans for sale on our consolidated balance sheet at June 30, 2015.

Improving Our Returns on Property Dispositions

We use several strategies to mitigate our credit losses and improve our returns on property dispositions. When a seriously delinquent single-family mortgage loan cannot be resolved through a home retention solution (e.g., a mortgage loan modification), we typically seek to pursue a short sale transaction. A short sale is preferable to a borrower because we provide limited relief to a borrower from repaying the entire amount owed on the mortgage, and in some cases, we provide cash relocation assistance, while allowing the borrower to gracefully exit the home. Freddie Mac avoids the costs we would otherwise incur to complete the foreclosure, and we reduce the time needed to dispose of the property, thereby reducing our exposure to maintenance, property taxes and other expenses. However, some of our seriously delinquent mortgage loans ultimately proceed to foreclosure. In a foreclosure, we may acquire the underlying property (which we refer to as real estate owned, or REO), and later sell it, using the proceeds of the sale to reduce our losses.

Protecting Our Contractual Rights with Sellers

We purchase mortgage loans from financial institutions that originate the mortgage loans (which we refer to as "sellers"). When we purchase mortgage loans, the sellers represent and warrant that the mortgage loans have been originated in



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accordance with our underwriting standards. If we subsequently discover that these standards were not followed, we can exercise certain contractual remedies to mitigate our actual or potential credit losses.

Pursuing Our Rights Against Mortgage Insurers

We pursue claims for coverage under mortgage insurance policies, a form of credit enhancement we use to mitigate our credit loss exposure. Primary mortgage insurance is generally required for mortgage loans with LTV ratios greater than 80%.

We received payments under primary and other mortgage insurance policies of $0.4 billion and $0.6 billion during the first half of 2015 and the first half of 2014, respectively. Although the financial condition of certain of our mortgage insurers has improved in recent years, some have failed to fully meet their obligations to us and there remains a significant risk that others may fail to do so. We expect to receive substantially less than full payment of our claims from two of our mortgage insurers, as they are only permitted to make partial payments under orders from their respective regulators. Many of our mortgage insurers are currently operating below our newly issued eligibility standards that are scheduled to go into effect on December 31, 2015.

We cannot differentiate pricing based on counterparty strength or revoke a mortgage insurer's status as an eligible insurer without FHFA approval. Further, we do not select the insurance provider on a specific loan. Instead, the selection is made by the lender at the time the mortgage loan is originated. Accordingly, we are unable to manage our concentration risk.

Recovering Losses on Non-Agency Mortgage-Related Securities

We incurred substantial losses on our investments in non-agency mortgage-related securities in prior years. We are working, in some cases in conjunction with other investors, to mitigate or recover our losses. In recent years, we and FHFA reached settlements with a number of institutions. Lawsuits against other institutions are currently pending. For more information on these lawsuits, see "NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS."

Reducing Our Mortgage-Related Investments Portfolio Over Time

We are required to reduce the size of our mortgage-related investments portfolio over time pursuant to the Purchase Agreement and by FHFA. We are particularly focused on reducing the balance of less liquid assets in this portfolio. During the first half of 2015, the size of our mortgage-related investments portfolio declined by 6% or $25.9 billion, to $382.5 billion. Reductions in our less liquid assets accounted for the majority of this decline. Our less liquid assets are reduced through: (a) liquidations (including scheduled repayments along with prepayments, charge-offs and cash shortfalls); (b) sales (including sales related to settlements of non-agency mortgage-related securities litigation); and (c) securitizations.

Building a Commercially Strong and Efficient Business Enterprise to Succeed in a To-Be-Determined “Future State”

We continue to take steps to build a stronger, profitable business model. Our goal is to strengthen the business model so we can run our business efficiently and effectively in support of homeowners and taxpayers and, if required as part of a future state for the enterprise, be ready to return to private sector ownership.

Our Single-family Guarantee segment is focused on strengthening our business model by:

•

Better serving our customers: Our customers are our sellers, servicers, and investors/dealers. Based on feedback from our customers, we continue to enhance our processes and programs to improve their experience when doing business with us. This includes providing seller/servicers with greater certainty that the mortgage loans they sell to us or service for us meet our requirements, thereby reducing the number of repurchase requests we make to them and the amount of compensatory fees they pay to us. We are providing greater certainty by enhancing the tools we make available to our customers, and expanding and leveraging the data standards of the Uniform Mortgage Data Program. In January 2015, we launched Loan Coverage Advisor, a new tool that allows our sellers to track significant events for the mortgage loans they sell us, including the dates when the seller obtains relief from certain representations and warranties. Additionally, in May 2015, we announced that, effective June 1, 2015, we will no longer charge a fee to use our Loan Prospector automated underwriting tool. Results from our latest customer satisfaction surveys show that our efforts are being recognized by our sellers and servicers.

•

Providing market leadership and innovation: We continue to develop innovative programs and services that benefit the mortgage industry and our customers and leverage our existing capabilities and product offerings to better meet the needs of an evolving mortgage market. We are doing this primarily by: (a) continuing to execute our credit risk transfer transactions and seeking to expand and refine our offerings of these transactions; (b) expanding access to credit for credit-worthy borrowers, such as through the initiative we announced in December 2014 for loans with LTV ratios up to 97%; and (c) continuing to work with FHFA and Fannie Mae on enhancing the secondary mortgage loan market, including the development of a new common securitization platform and a single (common) security. During the first half of 2015, we completed our first five STACR debt note transactions that transfer a portion of the first loss position in addition to a mezzanine loss position associated with the related reference pool. During the second quarter of 2015, we completed two STACR debt note transactions for which allocation of credit losses to the debt notes will be based on actual losses rather than a calculated loss approach. In March 2015, we and one of our ACIS counterparties revised a number of our existing ACIS policies and changed the coverage from calculated losses using a



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predefined formula to coverage based on actual losses. In June 2015, we completed two ACIS transactions for which recoveries will be based on actual losses rather than calculated losses. We believe that executing future ACIS transactions that provide coverage based on actual losses will lead to broader market acceptance and increased interest in this type of transaction, and thus expand the number of counterparties in this market. In July 2015, we completed the offering of a whole loan security, which is a new type of credit risk transfer transaction for us using a subordinated security structure. We expect to complete more of these transactions in 2015, subject to market conditions.

•

Managing the credit risk of the single-family credit guarantee portfolio: We are managing our credit risk by setting our underwriting standards at a level commensurate with the long-term credit risk appetite of the company. We believe the credit quality of the single-family mortgage loans in our New single-family book reflects sound underwriting standards as evidenced by their average original LTV ratios and credit scores as well as their credit performance in recent periods.

•

Reducing our credit losses and addressing emerging risks: We continue to develop and implement plans intended to reduce our credit losses and identify and address emerging mortgage credit risks. As part of our loss mitigation strategy, we sold certain seriously delinquent mortgage loans during the first half of 2015. In addition, our mortgage portfolio includes several mortgage loan products with terms that may result in scheduled increases in monthly payments after specified initial periods (e.g., HAMP mortgage loans). A significant number of these mortgage loans have experienced, or will experience, payment changes beginning in 2015, which could increase the risk that the borrowers will default. To help address this risk, in the first quarter of 2015 we implemented a sixth year of borrower incentives for HAMP mortgage loans and expanded participation in some of our non-HAMP modification programs to eligible borrowers with HAMP mortgage loans.

•

Optimizing the economics of our single-family business: We seek to achieve strong economic returns on our single-family credit guarantee portfolio while considering and balancing our: (a) housing mission and goals; (b) seller diversification and market share; and (c) security price performance (i.e., the disparities in the trading value of our PCs relative to comparable Fannie Mae securities in the market). However, economic returns on our guarantee activities are limited by, and subject to, FHFA's oversight.


•	Broadening access to credit: We continue to explore the feasibility of: (a) increasing our purchases of mortgage loans securitized by manufactured housing; (b) improving the effectiveness of counseling with borrowers before their home purchase or those experiencing financial hardships; and (c) utilizing alternative credit score models and credit history in mortgage loan eligibility decisions.

Our Investments segment is focused on strengthening our business model by:


•	Reducing the balance of less liquid mortgage assets, specifically non-agency mortgage related securities, and single-family reperforming, performing modified and delinquent loans;


•	Managing the corporate treasury function, including managing funding, interest-rate and liquidity risks, through the use of derivatives, our liquidity and contingency operating portfolio and unsecured debt; and


•	Continuing to provide secondary market liquidity for our agency mortgage-related securities.

Our Multifamily segment is focused on strengthening our business model by:

•

Increasing our commitment to customers: We consider customer focus to be a key priority in our efforts to build value and support the creation of a strong, long-lasting rental housing system that positively affects the economy and communities nationwide. We look to increase efficiencies for our customers by standardizing and improving the ways in which they provide data to us in order to foster greater transparency and liquidity in the market.

•

Providing a reliable flow of capital for affordable and workforce housing: In May 2015, FHFA expanded the affordable housing categories that are excluded from the volume limit in our 2015 Scorecard. These revisions will enable us to further support the needs of the affordable rental housing market across more communities. In addition, we are continuing to grow our presence in the small balance mortgage loan and manufactured housing community mortgage loan markets.

•

Continuing to create innovative programs to transfer credit risk: We are developing and enhancing programs and offerings that support risk transfer and/or mission-focused activities. We are pursuing alternative methods to transfer credit risk of our mortgage portfolio using transactions other than our existing K Certificates to reduce exposure to mortgage credit risk for the company and U.S. taxpayers.


•	Improving our risk-adjusted returns: By leveraging private capital in our K Certificate and other credit risk transfer transactions, we are able to reduce capital allocation costs, decrease our potential exposure to credit losses, and build a steady source of management and guarantee fee income while increasing overall returns.

We are investing in the company, in particular our infrastructure and operations, by:


•	Improving our infrastructure: We continue to make strategic investments to maintain and improve our ability to operate the company for the foreseeable future in conservatorship, and potentially afterwards. We are improving our information technology in a manner designed to address the evolving requirements of the company, the Conservator,



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and the mortgage industry. We are continuously investing to address risk, especially in the information security area and our out-of-region disaster recovery capability. We are striving to operate our information technology at world class levels by investing in capabilities that will support the future mortgage market while also seeking to act as good stewards of our technology assets by maintaining, standardizing and simplifying our existing technology portfolio.

•

Strengthening our operations: We continue to strengthen and streamline our operations. We continue to improve our risk management capabilities by strengthening our three-lines-of-defense risk management framework. We are expanding our second-line-of-defense testing capabilities over our operational controls. We are also conducting a multi-year project focused on identifying and eliminating redundant control activities. In addition, we are conducting select organizational design reviews focused on reducing the number of operating layers within the organization.

Supporting and Improving the Secondary Mortgage Market

Under the direction of FHFA, we continue various efforts to build the infrastructure for a future housing finance system, including the following:


•	Build the Common Securitization Platform: We continue to work with FHFA, Fannie Mae, and Common Securitization Solutions, LLC (or CSS) on the development of a new common securitization platform. CSS is equally owned by us and Fannie Mae, and was formed to build and operate the platform. We and FHFA expect this will be a multi-year effort.

•

Implement the Single-Security Initiative: FHFA is seeking ways to improve the overall liquidity of mortgage-backed securities issued by us and Fannie Mae. This includes working towards the development of a single (common) security, which is intended to reduce the disparities in trading value between our PCs and Fannie Mae's single-class mortgage-backed securities. The proposed single (common) security would be issued and guaranteed by either Freddie Mac or Fannie Mae. One of the goals for the proposed single security is for Freddie Mac PCs and Fannie Mae mortgage-backed securities to be fungible with the single security to facilitate trading in a single TBA market for these securities. We continue to work on a detailed implementation plan, and we expect that the implementation will be a multi-year effort. On May 15, 2015, FHFA issued a report titled “An Update on the Structure of the Single Security,” which provides an update on this project.

•

Improve seller and servicer eligibility standards: In the second quarter of 2015, at the direction of FHFA, we and Fannie Mae announced changes to our single-family seller and servicer eligibility requirements. These changes include revisions to net worth requirements, adoption of new capital and liquidity requirements and enhancements to certain servicer operational requirements. Our revised operational requirements will take effect on August 18, 2015 and our revised financial requirements will take effect on December 31, 2015.


•	Implement the Uniform Mortgage Data Program: We and Fannie Mae continue to collaborate with the industry to develop and implement uniform data standards for single-family mortgage loans. This involves active support for the mortgage loan data standardization initiatives, including the Uniform Closing Dataset and the Uniform Loan Application Dataset.

•

Improve mortgage insurer eligibility standards: In the second quarter of 2015, at the direction of FHFA, we published revised eligibility requirements for mortgage insurers that include financial requirements determined using a risk-based framework. The revised eligibility requirements will become effective for all Freddie Mac-approved mortgage insurers on December 31, 2015. These revised eligibility requirements are designed to strengthen the mortgage insurance industry and enable a financially strong and resilient system that can provide consistent liquidity through the mortgage cycle.


•	Improve the underwriting processes with our single-family sellers: We meet with selected sellers to review and discuss improvements in their underwriting process. We also continually seek improvements to our automated tools for use in evaluating the credit and product eligibility of loans and identifying non-compliance issues.

Mortgage Market and Economic Conditions

Overview


•	The U.S. real gross domestic product rose by 2.3% on an annualized basis during the second quarter of 2015, compared to an annualized increase of 0.6% during the first quarter of 2015, according to the Bureau of Economic Analysis.


•	The national unemployment rate was 5.3% in June 2015, compared to 5.6% in December 2014, based on data from the U.S. Bureau of Labor Statistics.


•	An average of approximately 208,000 and 260,000 monthly net new jobs (non-farm) were added to the economy during the first half of 2015 and the full year of 2014, respectively.


•	The average interest rate on new 30-year fixed-rate conforming mortgage loans was 3.8% during the second quarter of 2015, compared to 3.7% during the first quarter of 2015 and 4.3% during the first half of 2014, based on our weekly Primary Mortgage Market Survey.



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•	As reported by the U.S. Census Bureau, the U.S. homeownership rate was 63.7% in the first quarter of 2015, lower than the high point of 69.2% in the fourth quarter of 2004, and the average of 66.3% since 1990.

Single-Family Housing Market


•	Sales of existing homes during the second quarter of 2015 were 5.30 million, increasing 7% from 4.97 million during the first quarter of 2015 (on a seasonally-adjusted annual basis), based on data from the National Association of Realtors.


•	Sales of new homes during the second quarter of 2015 were approximately 507,000, declining 2% from approximately 517,000 during the first quarter of 2015, (on a seasonally-adjusted annual basis) based on data from the U.S. Census Bureau and HUD.


•	Total mortgage loan origination volume increased during the first half of 2015 compared to the first half of 2014, as lower average long-term mortgage interest rates caused the volume of refinance activity to increase.


•	There was continued home price appreciation during the second quarter and first half of 2015.

◦

Home prices increased on a national basis by 3.7% during the second quarter of 2015 and 5.4% since June 2014 (based on our non-seasonally adjusted index), compared to a 3.3% increase during the second quarter of 2014 and a 6.2% increase from June 2013 to June 2014. These estimates were based on our own price index of one-family homes funded by mortgage loans owned or guaranteed by us or Fannie Mae.


◦	Declines in the market’s inventory of vacant housing have supported stabilization and increases in home prices in a number of metropolitan areas.


◦	National home prices at June 30, 2015 were approximately 6.5% below their peak levels in June 2006 (based on our index).

Multifamily Housing Market


•	The multifamily market continues to experience strong fundamentals. Based on data reported by Reis, Inc.:


◦	The national apartment vacancy rate was 4.2% at June 30, 2015 and remains low compared to the long-term average of 5.6% since 1980.


◦	Effective rents (i.e., the average rent paid by the tenant over the term of the lease adjusted for concessions by the landlord and costs borne by the tenant) grew by 1.1% on an annualized basis during the second quarter of 2015 consistent with the long-term average. The annual growth rate in effective rents has not been less than 3% since 2011.

Significant Trends and Developments

Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties. See “FORWARD-LOOKING STATEMENTS” for additional information.

Single-Family Market and our Single-Family Guarantee Segment


•	Market Conditions - Near-term performance of the single-family housing market is affected by key macroeconomic drivers of the economy, such as income growth, employment, and inflation. In the near term, we believe:


◦	Home price growth rates will continue to be consistent with long-term historical averages (approximately 2 to 5 percent per year).


◦	Mortgage loan interest rates will remain relatively low compared to historical levels, but begin trending slowly upward.


◦	Housing affordability for potential home buyers will remain relatively high in most metropolitan housing markets.


◦	The volume of home sales during 2015 will likely be slightly higher than during 2014.


◦	Relatively weak employment rates in certain areas and relatively modest family income growth are important factors that will continue to have a negative effect on single-family housing demand.


•	Mortgage Loan Volumes


◦	Our mortgage loan purchase activity during the first half of 2015 increased to $181.3 billion in UPB, compared to $107.6 billion in UPB during the first half of 2014. We expect total mortgage loan origination volume during the second half of 2015 will be lower compared to the same period of 2014 due to a decline in the volume of refinance mortgage loans.


◦	Refinance mortgage loans comprised approximately 63% of our single-family loan volume during the first half of 2015, compared to 48% during the first half of 2014.


◦	The volume of our HARP mortgage loan purchases will likely continue to remain low during the second half of 2015 since the pool of borrowers eligible to participate in the program has declined.



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◦	We continue to explore opportunities for expanding our affordable lending programs.


•	Credit Performance


◦	Our charge-offs, gross, were $0.9 billion during the second quarter of 2015 compared to $1.2 billion during the second quarter of 2014. We expect our charge-offs and credit losses to decline over time, but to remain elevated in the near term.


◦	For the near term, we also expect REO disposition and short sale severity ratios to remain high while we expect the number of seriously delinquent mortgage loans and the volume of our mortgage loan workouts may continue to decline.

Multifamily Market and our Multifamily Segment


•	Market Conditions


◦	Lower vacancy rates and higher average rents present favorable conditions for the multifamily market and our business, as multifamily mortgage loans are dependent on the cash flow of the underlying properties.


◦	The decline in the U.S. homeownership rate in recent periods represents a significant increase in demand for rental housing. Net absorption (the change in occupied rental units in the market) also continues to be positive.


◦	We expect that new supply of multifamily housing, at the national level, will be absorbed by market demand in the near term, driven by continued improvements in the economy and favorable demographics.


◦	We believe there has been significant growth in the multifamily market during the first half of 2015. As reported by the Federal Reserve, total multifamily mortgage loan debt outstanding was more than $1.0 trillion at March 31, 2015 (the latest available information), representing an increase of 9% since March 31, 2014.


•	New Business Volumes


◦	Our new multifamily business activity during the first half of 2015 was $23.1 billion compared to $7.1 billion during the first half of 2014.


◦	In May 2015, FHFA announced revisions that expanded the affordable housing categories that are excluded from the volume limit in our 2015 Scorecard. Based on the revised 2015 Scorecard guidance, approximately 70% of our $23.1 billion in new business activity during the first half of 2015 was counted towards the 2015 volume limit and the remaining 30% was excluded from the 2015 Scorecard measure.


◦	While we continue exploring opportunities to provide financing for affordable and workforce housing, we expect to remain within the 2015 Scorecard limit for new business volume.


•	Securitization Activity


◦	Since the beginning of 2009, we have sold more than $100 billion of mortgage loans through K Certificate transactions and transferred the expected credit risk to third party investors through the use of subordination.


◦	We expect to continue transferring credit risk through K Certificate transactions during the second half of 2015. We also expect to identify new opportunities for transferring the mortgage credit risk of our multifamily mortgage portfolio.


•	Credit Performance


◦	The delinquency rate on our multifamily mortgage portfolio was 0.01% at June 30, 2015. Multifamily credit losses as a percentage of the average balance of our multifamily mortgage portfolio were 0.8 basis points in the first half of 2015.


◦	We expect the credit losses and delinquency rates for the multifamily mortgage portfolio to remain low in the near term.

Limits on Investment Activity and Our Mortgage-Related Investments Portfolio

Under the Purchase Agreement and FHFA regulation, the UPB of our mortgage-related investments portfolio is subject to a cap that decreases by 15% each year until the cap reaches $250 billion. As a result, the UPB of our mortgage-related investments portfolio may not exceed $399 billion as of December 31, 2015. Our 2014 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 decisions with respect to managing the decline of the mortgage-related investments portfolio may affect all three business segments. We plan to continue to reduce the balance of the portfolio over the remainder of 2015. In order to achieve all of our portfolio reduction goals, it is possible that we may forgo economic opportunities in one business segment in order to pursue opportunities in another business segment. For more information on the plan, see “BUSINESS — Executive Summary — Our Primary Business Objectives — Reducing Taxpayer Exposure to Losses — Reducing Our Mortgage-Related Investments Portfolio Over Time” in our 2014 Annual Report. The reduction in the mortgage-related investments portfolio will result in a decline in income from this portfolio over time.



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The table below presents the UPB of our mortgage-related investments portfolio, for purposes of the limit imposed by the Purchase Agreement.

Table 2 — Mortgage-Related Investments Portfolio



	June 30, 2015									December 31, 2014
	More Liquid			Less Liquid			Total			More Liquid			Less Liquid			Total
	(in millions)
Investments segment — Mortgage investments portfolio:
Single-family unsecuritized mortgage loans	$	—		$	82,959		$	82,959		$	—		$	82,778		$	82,778
Freddie Mac mortgage-related securities	143,577			6,716			150,293			150,852			7,363			158,215
Non-agency mortgage-related securities	—			34,611			34,611			—			44,230			44,230
Non-Freddie Mac agency mortgage-related securities	14,599			—			14,599			16,341			—			16,341
Total Investments segment — Mortgage investments portfolio	158,176			124,286			282,462			167,193			134,371			301,564
Single-family Guarantee segment — Single-family unsecuritized seriously delinquent mortgage loans	—			23,596			23,596			—			28,738			28,738
Multifamily segment — Mortgage investments portfolio	2,826			73,648			76,474			1,911			76,201			78,112
Total mortgage-related investments portfolio	$	161,002		$	221,530		$	382,532		$	169,104		$	239,310		$	408,414
Percentage of total mortgage-related investments portfolio	42		%	58		%	100		%	41		%	59		%	100		%
Mortgage-related investments portfolio cap at December 31, 2015 and 2014, respectively							$	399,181								$	469,625
90% of mortgage-related investments portfolio cap at December 31, 2015⁽¹⁾							$	359,263


(1)	Represents 90% of the mortgage-related investments portfolio annual cap established by the Purchase Agreement, which we manage to, subject to certain exceptions.

We evaluate the liquidity of the assets in our mortgage-related investments portfolio based on two categories:


•	Single-class and multiclass agency securities (excluding certain structured agency securities collateralized by non-agency mortgage-related securities); and


•	Assets that are less liquid than the agency securities noted above. Assets that we consider to be less liquid than agency securities include unsecuritized single-family and multifamily mortgage loans, certain structured agency securities collateralized by non-agency mortgage-related securities, and our investments in non-agency mortgage-related securities.

The UPB of our mortgage-related investments portfolio was $382.5 billion at June 30, 2015, a decline of $25.9 billion (or 6%) compared to $408.4 billion at December 31, 2014. Our less liquid assets accounted for $17.8 billion of this decline, primarily due to liquidations and our efforts to reduce our holdings of these assets. We sold $8.4 billion of less liquid assets in the first half of 2015, including $1.2 billion in UPB of seriously delinquent unsecuritized single-family loans. In addition, we securitized $3.4 billion in UPB of single-family reperforming and modified loans, which includes HAMP loans, in the first half of 2015. These amounts do not include sales of mortgage loans we purchased for cash and subsequently securitized.



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SELECTED FINANCIAL DATA

The selected financial data presented below should be reviewed in conjunction with our condensed consolidated financial statements and accompanying notes.

Table 3 — Selected Financial Data



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(dollars in millions, except share-related amounts)
Statements of Comprehensive Income Data
Net interest income	$	3,969		$	3,503		$	7,616		$	7,013
Benefit for credit losses	857			618			1,356			533
Non-interest income (loss)	2,541			(1,406		)	394			1,705
Non-interest expense	(1,289		)	(680		)	(2,500		)	(1,451		)
Income tax expense	(1,909		)	(673		)	(2,173		)	(2,418		)
Net income	4,169			1,362			4,693			5,382
Comprehensive income	3,913			1,890			4,659			6,389
Net income (loss) attributable to common stockholders⁽¹⁾	256			(528		)	34			(1,007		)
Net income (loss) per common share – basic and diluted	0.08			(0.16		)	0.01			(0.31		)
Cash dividends per common share	—			—			—			—
Weighted average common shares outstanding (in millions) – basic and diluted	3,234			3,236			3,235			3,237

							June 30, 2015			December 31, 2014
							(dollars in millions)
Balance Sheets Data
Mortgage loans held-for-investment, at amortized cost by consolidated trusts (net of allowances for loan losses)							$	1,586,188		$	1,558,094
Total assets							1,947,462			1,945,539
Debt securities of consolidated trusts held by third parties							1,515,132			1,479,473
Other debt							413,937			450,069
All other liabilities							12,680			13,346
Total stockholders’ equity							5,713			2,651
Portfolio Balances - UPB
Mortgage-related investments portfolio							$	382,532		$	408,414
Total Freddie Mac mortgage-related securities⁽²⁾							1,677,867			1,637,086
Total mortgage portfolio							1,923,976			1,910,106
TDRs on accrual status							83,530			82,908
Non-accrual loans							26,835			33,130

	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Ratios⁽³⁾
Return on average assets⁽⁴⁾	0.9		%	0.3		%	0.5		%	0.6		%
Allowance for loans losses as percentage of mortgage loans, held-for-investment⁽⁵⁾	1.0			1.3			1.0			1.3
Equity to assets ratio⁽⁶⁾	0.2			0.3			0.2			0.4


(1)	For a discussion of the manner in which the senior preferred stock dividend is determined and how it affects net income (loss) attributable to common stockholders, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Earnings Per Common Share” in our 2014 Annual Report.


(2)	See ‘‘Table 24 — Freddie Mac Mortgage-Related Securities’’ for the composition of this line item.


(3)	The dividend payout ratio on common stock is not presented because the amount of cash dividends per common share is zero for all periods presented. The return on common equity ratio is not presented because the simple average of the beginning and ending balances of total stockholders’ equity, net of preferred stock (at redemption value) is less than zero for all periods presented.


(4)	Ratio computed as net income divided by the simple average of the beginning and ending balances of total assets.


(5)	Ratio computed as the allowance for loan losses divided by the total recorded investment of held-for-investment mortgage loans.


(6)	Ratio computed as the simple average of the beginning and ending balances of total stockholders’ equity divided by the simple average of the beginning and ending balances of total assets.



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CONSOLIDATED RESULTS OF OPERATIONS

You should read this discussion of our consolidated results of operations in conjunction with our condensed consolidated financial statements, including the accompanying notes.

Table 4 — Summary Consolidated Statements of Comprehensive Income



	Three Months Ended June 30,									Six Months Ended June 30,
	2015			2014			Variance			2015			2014			Variance
	(in millions)
Net interest income	$	3,969		$	3,503		$	466		$	7,616		$	7,013		$	603
Benefit for credit losses	857			618			239			1,356			533			823
Net interest income after benefit for credit losses	4,826			4,121			705			8,972			7,546			1,426
Non-interest income (loss):
Gains (losses) on extinguishment of debt securities of consolidated trusts	(54		)	(188		)	134			(134		)	(176		)	42
Gains (losses) on retirement of other debt	(26		)	1			(27		)	(25		)	8			(33		)
Derivative gains (losses)	3,135			(1,926		)	5,061			732			(4,277		)	5,009
Net impairment of available-for-sale securities recognized in earnings	(98		)	(157		)	59			(191		)	(521		)	330
Other gains (losses) on investment securities recognized in earnings	152			372			(220		)	569			1,138			(569		)
Other income (loss)	(568		)	492			(1,060		)	(557		)	5,533			(6,090		)
Total non-interest income (loss)	2,541			(1,406		)	3,947			394			1,705			(1,311		)
Non-interest expense:
Administrative expense	(501		)	(453		)	(48		)	(952		)	(921		)	(31		)
REO operations (expense) income	(52		)	50			(102		)	(127		)	(9		)	(118		)
Temporary Payroll Tax Cut Continuation Act of 2011 expense	(235		)	(187		)	(48		)	(457		)	(365		)	(92		)
Other expense	(501		)	(90		)	(411		)	(964		)	(156		)	(808		)
Total non-interest expense	(1,289		)	(680		)	(609		)	(2,500		)	(1,451		)	(1,049		)
Income before income tax expense	6,078			2,035			4,043			6,866			7,800			(934		)
Income tax expense	(1,909		)	(673		)	(1,236		)	(2,173		)	(2,418		)	245
Net income	4,169			1,362			2,807			4,693			5,382			(689		)
Other comprehensive income (loss), net of taxes and reclassification adjustments	(256		)	528			(784		)	(34		)	1,007			(1,041		)
Comprehensive income	$	3,913		$	1,890		$	2,023		$	4,659		$	6,389		$	(1,730	)

Net Interest Income

Net interest income represents the difference between interest income and interest expense (which includes income from management and guarantee fees) and is a primary source of our revenue. When we consolidate a securitization trust, we record interest income on the loans held by the trust and interest expense on the debt securities (e.g. single-family PCs) issued by the trust. The difference between the interest income on the loans and the interest expense on the debt represents the management and guarantee fee we receive as compensation for our guarantee of the principal and interest payments of the issued debt securities. The table below presents an analysis of net interest income, including average balances and related yields earned on assets and incurred on liabilities.



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Table 5 — Net Interest Income/Yield and Average Balance Analysis



	Three Months Ended June 30,
	2015								2014
	Average Balance			Interest Income (Expense)			Average Rate		Average Balance			Interest Income (Expense)			Average Rate
	(dollars in millions)
Interest-earning assets:
Cash and cash equivalents	$	10,172		$	2		0.06	%	$	13,081		$	1		0.04	%
Federal funds sold and securities purchased under agreements to resell	50,358			13			0.10		33,574			5			0.06
Mortgage-related securities:
Mortgage-related securities	233,416			2,270			3.89		256,665			2,557			3.98
Extinguishment of PCs held by Freddie Mac	(109,805		)	(1,017		)	(3.71	)	(110,559		)	(1,037		)	(3.75	)
Total mortgage-related securities, net	123,611			1,253			4.06		146,106			1,520			4.16
Non-mortgage-related securities	11,739			3			0.09		12,318			4			0.10
Mortgage loans held by consolidated trusts⁽¹⁾	1,574,817			13,730			3.49		1,532,968			14,249			3.72
Unsecuritized mortgage loans⁽¹⁾	163,468			1,654			4.05		171,029			1,660			3.88
Total interest-earning assets	$	1,934,165		$	16,655		3.44		$	1,909,076		$	17,439		3.65
Interest-bearing liabilities:
Debt securities of consolidated trusts including PCs held by Freddie Mac	$	1,596,840		$	(12,022	)	(3.01	)	$	1,550,049		$	(13,142	)	(3.39	)
Extinguishment of PCs held by Freddie Mac	(109,805		)	1,017			3.71		(110,559		)	1,037			3.75
Total debt securities of consolidated trusts held by third parties	1,487,035			(11,005		)	(2.96	)	1,439,490			(12,105		)	(3.36	)
Other debt:
Short-term debt	103,045			(36		)	(0.14	)	110,240			(34		)	(0.12	)
Long-term debt	326,659			(1,587		)	(1.94	)	332,560			(1,721		)	(2.07	)
Total other debt	429,704			(1,623		)	(1.51	)	442,800			(1,755		)	(1.59	)
Total interest-bearing liabilities	1,916,739			(12,628		)	(2.63	)	1,882,290			(13,860		)	(2.94	)
Expense related to derivatives⁽²⁾	—			(58		)	(0.01	)	—			(76		)	(0.02	)
Impact of net non-interest-bearing funding	17,426			—			0.02		26,786			—			0.04
Total funding of interest-earning assets	$	1,934,165		$	(12,686	)	(2.62	)	$	1,909,076		$	(13,936	)	(2.92	)
Net interest income/yield				$	3,969		0.82					$	3,503		0.73

	Six Months Ended June 30,
	2015								2014
	Average Balance			Interest Income (Expense)			Average Rate		Average Balance			Interest Income (Expense)			Average Rate
	(dollars in millions)
Interest-earning assets:
Cash and cash equivalents	$	12,762		$	5		0.06	%	$	16,361		$	1		0.01	%
Federal funds sold and securities purchased under agreements to resell	48,894			21			0.09		40,865			10			0.05
Mortgage-related securities:
Mortgage-related securities	239,039			4,636			3.88		264,155			5,164			3.91
Extinguishment of PCs held by Freddie Mac	(110,896		)	(2,051		)	(3.70	)	(113,574		)	(2,134		)	(3.76	)
Total mortgage-related securities, net	128,143			2,585			4.03		150,581			3,030			4.03
Non-mortgage-related securities	10,579			6			0.10		9,094			4			0.08
Mortgage loans held by consolidated trusts⁽¹⁾	1,569,045			27,609			3.52		1,532,692			28,733			3.75
Unsecuritized mortgage loans⁽¹⁾	164,318			3,229			3.93		174,625			3,322			3.80
Total interest-earning assets	$	1,933,741		$	33,455		3.46		$	1,924,218		$	35,100		3.65
Interest-bearing liabilities:
Debt securities of consolidated trusts including PCs held by Freddie Mac	$	1,590,235		$	(24,543	)	(3.09	)	$	1,548,866		$	(26,482	)	(3.42	)
Extinguishment of PCs held by Freddie Mac	(110,896		)	2,051			3.70		(113,574		)	2,134			3.76
Total debt securities of consolidated trusts held by third parties	1,479,339			(22,492		)	(3.04	)	1,435,292			(24,348		)	(3.39	)
Other debt:
Short-term debt	112,386			(74		)	(0.13	)	118,380			(75		)	(0.13	)
Long-term debt	325,657			(3,150		)	(1.93	)	340,596			(3,509		)	(2.06	)
Total other debt	438,043			(3,224		)	(1.47	)	458,976			(3,584		)	(1.56	)
Total interest-bearing liabilities	1,917,382			(25,716		)	(2.68	)	1,894,268			(27,932		)	(2.95	)
Expense related to derivatives⁽²⁾	—			(123		)	(0.01	)	—			(155		)	(0.02	)
Impact of net non-interest-bearing funding	16,359			—			0.02		29,950			—			0.05
Total funding of interest-earning assets	$	1,933,741		$	(25,839	)	(2.67	)	$	1,924,218		$	(28,087	)	(2.92	)
Net interest income/yield				$	7,616		0.79					$	7,013		0.73


(1)	Mortgage loans on non-accrual status, where interest income is generally recognized when collected, are included in average balances.


(2)	Represents changes in fair value of derivatives in closed cash flow hedge relationships that were previously deferred in AOCI and have been reclassified to earnings as the interest expense associated with the hedged forecasted issuance of debt affects earnings.

The increase in net interest income and net interest yield in the three and six months ended June 30, 2015 compared to the three and six months ended June 30, 2014 was driven by:


•	Higher management and guarantee fee income — Management and guarantee fee income increased in the three and six months ended June 30, 2015, compared to the same periods in 2014, as the management and guarantee fees



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received on new business are higher than older vintages that continue to run off. The percentage of our net interest income derived from management and guarantee fees continues to increase. We estimate that more than 40% of our net interest income during the three and six months ended June 30, 2015 was derived from management and guarantee fee income. Net interest income includes the legislated 10 basis point increase in management and guarantee fees, which is remitted to Treasury as part of the Temporary Payroll Tax Cut Continuation Act of 2011. Net interest income includes $233 million and $452 million during the three and six months ended June 30, 2015, respectively, compared to $183 million and $355 million during the three and six months ended June 30, 2014, respectively, related to this increase in fees. We expect that management and guarantee fees will account for an increasing portion of our net interest income.

•

Increased amortization of upfront fees and basis adjustments — During the three and six months ended June 30, 2015, average mortgage interest rates declined as compared to the same periods in 2014. This decline in average mortgage interest rates caused an increase in borrower refinance activity. As borrowers refinance and our liquidation rate increases, the amortization of the upfront fees and basis adjustments associated with these mortgage loans increases, which has a positive effect on net interest income and net interest yield. The timing of the amortization for the mortgage loans differs from the timing of the amortization for the securities backed by these loans, because proceeds received from loans backing securities are remitted to the security holders at a later date. This timing difference can contribute to short-term volatility in net interest income period over period.

•

A decline in the average balance of our higher-yielding assets — There continues to be a reduction in the balance of our higher-yielding assets, consistent with the required reduction of the balance of our mortgage-related investments portfolio. This continued decline in our higher-yielding assets has placed downward pressure on our net interest income and net interest yield and will likely continue to do so in the future.

Benefit for Credit Losses

During the first half of 2015, we reclassified $8.1 billion in UPB of certain seriously delinquent single-family mortgage loans from held-for-investment to held-for-sale. This reclassification affects several income statement line items. Our benefit for credit losses during the first half of 2015 reflects a $1.5 billion reduction of loan loss reserves related to these mortgage loans, which was more than offset by a loss of approximately $1.2 billion included in other non-interest income primarily related to adjusting these loans to the lower-of-cost-or-fair-value and increased non-interest expense of approximately $0.8 billion related to property taxes and insurance associated with these mortgage loans.

Our benefit for credit losses predominantly relates to single-family mortgage loans. The benefit for credit losses during the 2015 periods primarily reflects a reduction of loan loss reserves associated with seriously delinquent single-family mortgage loans that were reclassified from held-for-investment to held-for-sale. The benefit for credit losses during the 2014 periods reflects: (a) moderate home price growth; and (b) settlement agreements with certain sellers; partially offset by (c) incurred losses associated with newly delinquent mortgage loans. Excluding the effect of mortgage loan reclassifications in the 2015 periods and the settlement agreements in the 2014 periods, the (provision) benefit for credit losses remained relatively unchanged. Our benefit for credit losses during the 2015 and 2014 periods also reflects benefits associated with the positive payment performance of our TDR mortgage loans.

Our single-family loan loss reserves declined from $21.8 billion at December 31, 2014 to $17.3 billion at June 30, 2015, primarily reflecting a high level of mortgage loan charge-offs related to our initial adoption of regulatory guidance that changed when we deem a mortgage loan uncollectible and the reclassification of certain seriously delinquent single-family mortgage loans from held-for-investment to held-for-sale.

On January 1, 2015, we adopted regulatory guidance issued by FHFA that establishes guidelines for adverse classification and identification of specified single-family and multifamily assets and off-balance sheet credit exposures, including guidelines for recognizing charge-offs on certain single-family mortgage loans. Upon adoption of the FHFA regulatory guidance on January 1, 2015, we changed the timing of when we deem certain single-family mortgage loans to be uncollectible, and we began to charge-off the amount of recorded investment in excess of the fair value of the underlying collateral for mortgage loans that have been deemed uncollectible prior to foreclosure. These additional charge-offs did not have a material impact on our comprehensive income during the first half of 2015, as we had already reserved for these losses in our allowance for loan losses in prior periods. This adoption resulted in a reduction to both the recorded investment of mortgage loans, held-for-investment, and our allowance for loan losses of $1.9 billion on January 1, 2015.

As of June 30, 2015, approximately 63% of the loan loss reserves for single-family mortgage loans related to interest rate concessions associated with TDRs. A concession can result from various changes in a mortgage loan's contractual terms, but generally arises from a reduction in a mortgage loan's contractual interest rate when a mortgage loan is modified. Due to the large number of mortgage loan modifications completed in recent years, our loan loss reserves attributable to TDRs remain high. Most of our modified mortgage loans (including TDRs) were current and performing at June 30, 2015. However, we establish a reserve for TDR mortgage loans at the time of modification that largely relates to the reduction in the contractual interest rate of the mortgage loan for its remaining term. The portion of the reserve related to the interest rate concession is generally reduced over time as the borrower makes payments under the terms of the modification. We expect our loan loss



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reserves associated with existing TDRs will continue to decline over time as borrowers continue to make monthly payments under the modified terms and the interest rate concessions are recognized as income.

Although the housing market continued to improve in many geographic areas during the first half of 2015, we expect that our loan loss reserves may remain elevated for an extended period because a significant portion of our reserves is associated with individually impaired mortgage loans (e.g., modified mortgage loans) that are current and performing and the resolution of problem mortgage loans takes considerable time, often several years in the case of foreclosure.

Mortgage loans that have been individually evaluated for impairment, such as modified mortgage loans, generally have a higher associated loan loss reserve than loans that have been collectively evaluated for impairment. As of June 30, 2015 and December 31, 2014, the recorded investment of single-family impaired mortgage loans with specific reserves recorded was $90.2 billion and $95.1 billion, respectively, and the loan loss reserves associated with these mortgage loans were $15.5 billion and $17.8 billion, respectively.

The table below summarizes our net investment for individually impaired single-family mortgage loans on our consolidated balance sheets for which we have recorded a specific reserve.

Table 6 — Single-Family Impaired Loans with Specific Reserve Recorded



	2015					2014
	Number of Loans		Amount ⁽¹⁾			Number of Loans		Amount
	(dollars in millions)
TDRs, at January 1,	539,590		$	94,401		514,497		$	92,505
New additions	31,154		4,375			41,859		6,278
Repayments, charge-offs, and reclassifications to held-for-sale	(36,003	)	(7,626		)	(14,280	)	(2,576		)
Foreclosure transfers and foreclosure alternatives	(10,878	)	(1,747		)	(13,371	)	(2,313		)
TDRs, at June 30,	523,863		89,403			528,705		93,894
Loans impaired upon purchase	11,015		814			12,363		1,034
Total impaired loans with specific reserve	534,878		90,217			541,068		94,928
Total allowance for loan losses of individually impaired single-family loans			(15,528		)			(18,093		)
Net investment, at June 30,			$	74,689				$	76,835


(1)	The net investment amount for 2015 includes charge-offs related to our January 1, 2015 adoption of regulatory guidance that changed when we deem loans to be uncollectible.

We place mortgage loans, including TDRs, on non-accrual status when we believe the collectability of interest and principal on a mortgage loan is not reasonably assured, unless the mortgage loan is well secured and in the process of collection. When a mortgage loan is placed on non-accrual status, interest income is recognized only upon receipt of cash payments, and any interest income accrued but uncollected is reversed. See “NOTE 5: IMPAIRED LOANS” for further information about our TDRs and non-accrual and other impaired mortgage loans.



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The table below provides information about the UPB of TDRs and non-accrual mortgage loans on our consolidated balance sheets.

Table 7 — TDRs and Non-Accrual Mortgage Loans



	June 30, 2015		December 31, 2014		June 30, 2014
	(dollars in millions)
TDRs on accrual status:
Single-family	$	83,107	$	82,373	$	81,400
Multifamily	423		535		576
Subtotal —TDRs on accrual status	83,530		82,908		81,976
Non-accrual mortgage loans:
Single-family	26,522		32,745		36,458
Multifamily⁽¹⁾	313		385		511
Subtotal — non-accrual mortgage loans	26,835		33,130		36,969
Total TDRs and non-accrual mortgage loans⁽²⁾	$	110,365	$	116,038	$	118,945

Loan loss reserves associated with:
TDRs on accrual status	$	13,185	$	13,749	$	14,270
Non-accrual mortgage loans	3,455		6,966		7,341
Total loan loss reserves associated with TDRs and non-accrual mortgage loans	$	16,640	$	20,715	$	21,611

Ratio of total loan loss reserves (excluding reserves for TDR concessions) to annualized net charge-offs for single-family mortgage loans	2.4		2.7		2.8
Ratio of total loan loss reserves to annualized net charge-offs for single-family mortgage loans	6.6		5.6		5.5

	Six Months Ended June 30,
	2015				2014
	(in millions)
Foregone interest income on TDR and non-accrual mortgage loans:
Single-family	$	1,572			$	1,842
Multifamily	3				5
Total foregone interest income on TDR and non-accrual mortgage loans	$	1,575			$	1,847


(1)	Includes $302 million, $385 million, and $501 million in UPB of mortgage loans that were current as of June 30, 2015, December 31, 2014, and June 30, 2014, respectively.


(2)	As of January 1, 2015, we adopted regulatory guidance that changed when we deem mortgage loans to be uncollectible. As of June 30, 2015, there was $6.9 billion in UPB of our TDR and non-accrual mortgage loans of which we had charged-off $1.9 billion during the first half of 2015 that reduced the UPB of these mortgage loans.

Credit Loss Performance

Our single-family charge-offs, gross, were higher during the first half of 2015 compared to the first half of 2014 due to our adoption on January 1, 2015 of regulatory guidance that changed when we deem a mortgage loan to be uncollectible. While we do not expect our charge-offs in any of the remaining quarters of 2015 to be as high as the $3.0 billion recorded in the first quarter of the year, we expect our charge-offs and credit losses may continue to remain elevated in the near term. The level of charge-offs should decline as we continue our loss mitigation activities and our efforts to sell seriously delinquent single-family mortgage loans.

The table below provides detail on our credit loss performance associated with mortgage loans and REO assets on our consolidated balance sheets and mortgage loans underlying our non-consolidated mortgage-related financial guarantees.



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Table 8 — Credit Loss Performance



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(dollars in millions)
REO
REO balances, net:
Single-family	$	1,978		$	3,661		$	1,978		$	3,661
Multifamily	—			16			—			16
Total	$	1,978		$	3,677		$	1,978		$	3,677
REO operations expense (income):
Single-family	$	52		$	(48	)	$	127		$	11
Multifamily	—			(2		)	—			(2		)
Total	$	52		$	(50	)	$	127		$	9
Charge-offs
Single-family:
Charge-offs, gross⁽¹⁾	$	877		$	1,242		$	3,855		$	2,717
Recoveries⁽²⁾	(196		)	(343		)	(370		)	(910		)
Single-family, net	$	681		$	899		$	3,485		$	1,807
Multifamily:
Charge-offs, gross	$	6		$	2		$	6		$	2
Recoveries	—			—			—			—
Multifamily, net	$	6		$	2		$	6		$	2
Total Charge-offs:
Charge-offs, gross	$	883		$	1,244		$	3,861		$	2,719
Recoveries	(196		)	(343		)	(370		)	(910		)
Total Charge-offs, net	$	687		$	901		$	3,491		$	1,809
Credit Losses:
Single-family	$	733		$	851		$	3,612		$	1,818
Multifamily	6			—			6			—
Total	$	739		$	851		$	3,618		$	1,818
Total (in bps)⁽³⁾	16.0			18.8			39.3			20.1

(1)

Charge-offs include $25 million and $20 million during the three months ended June 30, 2015 and the three months ended June 30, 2014, respectively, and $52 million and $38 million during the six months ended June 30, 2015 and the six months ended June 30, 2014, respectively, related to losses on mortgage loans purchased under financial guarantees that were recorded within other expenses on our consolidated statements of comprehensive income.

(2)

Includes $0.4 billion during the six months ended June 30, 2014 related to repurchase requests made to our seller/servicers (including $0.3 billion related to settlement agreements with certain sellers to release specified mortgage loans from certain repurchase obligations in exchange for one-time cash payments). Excludes certain recoveries, such as pool insurance, which are included in non-interest income on our consolidated statements of comprehensive income.


(3)	Includes charge-offs of $1.9 billion associated with our initial adoption of regulatory guidance on January 1, 2015. Excluding this amount, the total credit losses (in bps) during the six months ended June 30, 2015 were 18.2.

Our 2005-2008 Legacy single-family book comprised approximately 12% of our single-family credit guarantee portfolio, based on UPB, at June 30, 2015; however, these mortgage loans accounted for approximately 83% of our credit losses during the first half of 2015. Our single-family credit losses during the first half of 2015 were highest in Florida and New Jersey. Collectively, these two states comprised approximately 36% of our total credit losses during the six months ended June 30, 2015.

At June 30, 2015, mortgage loans in states with a judicial foreclosure process comprised 39% of our single-family credit guarantee portfolio, based on UPB, while mortgage loans in these states contributed to approximately 73% of our credit losses during the first half of 2015. Foreclosures generally take longer to complete in states where a judicial foreclosure is required, compared to other states. We expect the portion of our credit losses related to mortgage loans in states with judicial foreclosure processes will remain high in the near term as the substantial backlog of mortgage loans awaiting court proceedings in those states transitions to REO or other loss events. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS” for additional information about our credit losses.

The table below provides information on the severity of losses we experienced on mortgage loans in our single-family credit guarantee portfolio.



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Table 9 — Severity Ratios for Single-Family Mortgage Loans



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
Severity ratios:
REO dispositions and third-party sales⁽¹⁾	33.9	%	32.9	%	34.5	%	34.0	%
Short sales	29.8		30.5		30.5		31.3


(1)	Calculated as combined collateral losses on REO dispositions and third-party sales at foreclosure auction, divided by the combined UPB of the related mortgage loans. Includes selling and repair expenses. Excludes recoveries related to settlement agreements with certain sellers to release specified mortgage loans from certain repurchase obligations in exchange for one-time cash payments.

In recent periods, third-party sales at foreclosure auction have comprised an increasing portion of foreclosure transfers. Third-party sales at foreclosure auction avoid the REO property expenses that we would have otherwise incurred if we held the property in our REO inventory until disposition. Our severity ratios have remained relatively stable during the 2015 periods, compared to the 2014 periods. These severity ratios are influenced by several factors, including the geographic location of the property and the related selling expenses.

Non-Interest Income (Loss)

Gains (Losses) on Extinguishment of Debt Securities of Consolidated Trusts

During the three and six months ended June 30, 2015, we purchased single-family PCs which resulted in an extinguishment of debt securities of consolidated trusts with a UPB of $14.2 billion and $25.0 billion, respectively.

During the three and six months ended June 30, 2014, we purchased single-family PCs which resulted in an extinguishment of debt securities of consolidated trusts with a UPB of $14.9 billion and $22.8 billion, respectively.

Losses recognized in the 2015 and 2014 periods as a result of these purchases were driven by interest rate declines between the time of issuance and the time of repurchase of these debt securities.

Derivative Gains (Losses)

The table below presents derivative gains (losses) reported in our consolidated statements of comprehensive income. See “NOTE 9: DERIVATIVES — Table 9.2 — Gains and Losses on Derivatives” for information about gains and losses related to specific categories of derivatives.

We did not have any derivatives in hedge accounting relationships at June 30, 2015 or December 31, 2014. However, AOCI includes amounts related to closed cash flow hedges.

While derivatives are an important aspect of our strategy to manage interest-rate risk, they increase the volatility of reported comprehensive income because fair value changes on derivatives are included in comprehensive income, while fair value changes associated with some of the assets and liabilities being economically hedged are not. As a result, the timing of earnings recognition related to these assets and liabilities, including derivatives, differs and may not be reflective of the underlying economics of our business. The mix of our derivative portfolio, in conjunction with the mix of our assets and liabilities, affects the volatility of comprehensive income.

Table 10 — Derivative Gains (Losses)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(in millions)
Interest-rate swaps	$	4,840		$	(1,551	)	$	2,179		$	(3,321	)
Option-based derivatives	(1,465		)	197			(449		)	266
Other derivatives⁽¹⁾	292			97			105			125
Accrual of periodic settlements	(532		)	(669		)	(1,103		)	(1,347		)
Total	$	3,135		$	(1,926	)	$	732		$	(4,277	)


(1)	Primarily includes futures, commitments, credit derivatives and swap guarantee derivatives.

Gains (losses) on our derivative portfolio include both derivative fair value changes and the accrual of periodic cash settlements. Gains (losses) on our derivative portfolio can change based on changes in interest rates, implied volatility, and the mix and balance of products in our derivative portfolio. The mix and balance of products in our derivative portfolio change from period to period as we respond to changing interest rate environments, as well as changes in our asset and liability balances and characteristics.

While our sensitivity to interest rates on an economic basis remains low, our exposure to earnings volatility resulting from our use of derivatives has increased in recent periods as we have changed the mix of our derivatives to align with the changing duration of our economically hedged assets and liabilities.



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During the three and six months ended June 30, 2015, we recognized a net gain on derivatives primarily as a result of an increase in longer-term interest rates. During these periods, we recognized fair value gains on our interest-rate swaps of $4.8 billion and $2.2 billion, respectively. These gains were partially offset by fair value losses on our option-based derivatives of $1.5 billion and $0.4 billion, respectively, and net losses of $0.5 billion and $1.1 billion, respectively, related to the accrual of periodic cash settlements on interest-rate swaps as we were a net payer on our interest-rate swaps based on the terms of the instruments.

During the three and six months ended June 30, 2014, we recognized a net loss on derivatives primarily as a result of a decrease in longer-term interest rates. During these periods, we recognized fair value losses on our interest-rate swaps of $1.6 billion and $3.3 billion, respectively and net losses of $0.7 billion and $1.3 billion, respectively, related to the accrual of periodic cash settlements on interest-rate swaps as we were a net payer on our interest-rate swaps based on the terms of the instruments. These losses were partially offset by fair value gains on our option-based derivatives of $0.2 billion and $0.3 billion, respectively.

Impairments of Available-For-Sale Securities

During the three and six months ended June 30, 2015 and 2014, we recorded net impairments of available-for-sale securities recognized in earnings related to non-agency mortgage-related securities. The impairments during all periods were mostly driven by additional securities being included in the population of available-for-sale securities in an unrealized loss position that we intend to sell. This generally reflects our efforts to reduce the balance of less liquid assets in the mortgage-related investments portfolio. During the three and six months ended June 30, 2014, the impairments included amounts where our intent to sell changed as a result of the settlement of a non-agency mortgage-related securities lawsuit where a counterparty agreed to purchase the securities as part of the settlement. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities,” and “NOTE 7: INVESTMENTS IN SECURITIES” for additional information.

Other Gains (Losses) on Investment Securities Recognized in Earnings

The table below presents our other gains (losses) on investment securities recognized in earnings.

Table 11 — Other Gains (Losses) on Investment Securities Recognized in Earnings



	Three Months Ended June 30,					Six Months Ended June 30,
	2015			2014		2015			2014
	(in millions)
Gains (losses) on trading securities	$	(328	)	$	40	$	(273	)	$	33
Gains (losses) on sales of available-for-sale securities	480			332		842			1,105
Total	$	152		$	372	$	569		$	1,138

The losses on trading securities during the 2015 periods were primarily due to the increase in interest rates. As of June 30, 2015, our agency securities classified as trading were generally in an unrealized gain position and therefore we expect to recognize losses on these securities as they approach maturity and move closer to par.

The gains on sales of available-for-sale securities during the 2015 periods were primarily due to sales of non-agency mortgage-related securities consistent with our efforts to reduce the amount of less liquid assets we hold. The gains during the 2014 periods primarily resulted from sales related to our structuring activities. The structuring activities include resecuritizing existing agency securities into REMICs and selling some or all of the REMIC tranches.

Other Income (Loss)

The table below summarizes the significant components of other income (loss).



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Table 12 — Other Income (Loss)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(in millions)
Other income (loss):
Non-agency mortgage-related securities settlements	$	—		$	364		$	—		$	4,897
Gains (losses) on mortgage loans	(924		)	(39		)	(1,124		)	215
Recoveries on mortgage loans acquired with deteriorated credit quality⁽¹⁾	34			59			65			109
Management and guarantee-related income, net⁽²⁾	129			111			236			144
All other	193			(3		)	266			168
Total other income (loss)	$	(568	)	$	492		$	(557	)	$	5,533


(1)	Primarily relates to mortgage loans acquired with deteriorated credit quality prior to 2010. Consequently, our recoveries on these mortgage loans will generally decline over time.


(2)	Primarily relates to securitized mortgage loans where we have not consolidated the securitization trusts on our consolidated balance sheets.

Non-Agency Mortgage-Related Securities Settlements

We received proceeds from eight settlements of lawsuits regarding our investment in certain non-agency mortgage-related securities during the first half of 2014. We did not have any such settlements in the first half of 2015.

Gains (Losses) on Mortgage Loans

Gains (losses) on mortgage loans consist of three components:

•

Gains (losses) on mortgage loans held-for-sale related to lower-of-cost-or-fair-value adjustments were $(0.6) billion and $(0.2) billion during the three months ended June 30, 2015 and the three months ended June 30, 2014, respectively, and were $(1.2) billion and $(0.2) billion during the six months ended June 30, 2015 and the six months ended June 30, 2014, respectively. The higher losses during the 2015 periods were primarily due to a larger volume of mortgage loans reclassified from held-for-investment to held-for-sale during the 2015 periods, compared to the 2014 periods.


•	During the three months ended June 30, 2015 and the three months ended June 30, 2014, we reclassified $4.5 billion and $0.7 billion, respectively, in UPB of single-family mortgage loans from held-for-investment to held-for-sale, and during the six months ended June 30, 2015 and the six months ended June 30, 2014, we reclassified $8.1 billion and $0.7 billion in UPB, respectively.


•	We held $6.3 billion in UPB of single-family mortgage loans for sale on our consolidated balance sheet at June 30, 2015.


•	Gains (losses) realized on the sale of mortgage loans were $(0.1) billion and $0.1 billion during the first half of 2015 and the first half of 2014, respectively.


•	We sold $15.2 billion and $8.4 billion in UPB of multifamily mortgage loans during the first half of 2015 and the first half of 2014, respectively.


•	We sold $0.9 billion and $1.2 billion in UPB of single-family mortgage loans during the three months ended June 30, 2015 and the six months ended June 30, 2015, respectively. We did not sell any single-family mortgage loans during the first half of 2014.


•	Gains (losses) resulting from changes in the fair value of multifamily mortgage loans for which we have elected the fair value option were $0.2 billion and $0.3 billion during the first half of 2015 and the first half of 2014, respectively.

All Other

All other income (loss) includes income recognized from transactional fees, fees assessed to our servicers for technology use and late fees or other penalties, changes in fair value of STACR debt notes (as we have elected to carry certain of these notes at fair value), and other miscellaneous income. The increase in the second quarter of 2015 compared to the second quarter of 2014 was primarily due to fair value gains on certain STACR debt notes due to a decrease in market prices for these notes. The increase in the first half of 2015 compared to the first half of 2014 was primarily due to an increase in certain credit enhancement recoveries associated with single-family mortgage loans. Previously, these recoveries were recognized within our provision for credit losses.

Non-Interest Expense

The table below summarizes the components of non-interest expense.



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Table 13 — Non-Interest Expense



	Three Months Ended June 30,					Six Months Ended June 30,
	2015		2014			2015		2014
	(in millions)
Administrative expense:
Salaries and employee benefits	$	279	$	223		$	511	$	456
Professional services	118		126			231		264
Occupancy expense	14		14			26		27
Other administrative expense	90		90			184		174
Total administrative expense	501		453			952		921
REO operations expense (income)	52		(50		)	127		9
Temporary Payroll Tax Cut Continuation Act of 2011 expense	235		187			457		365
Other expense	501		90			964		156
Total non-interest expense	$	1,289	$	680		$	2,500	$	1,451

Administrative Expense

Administrative expense increased during the three and six months ended June 30, 2015 compared to the three and six months ended June 30, 2014, primarily due to increases in salaries and employee benefits expense associated with the termination of our pension plans. The increase in the six months ended June 30, 2015 was partially offset by lower professional services expense driven by lower expenses associated with FHFA-led lawsuits regarding our investments in certain residential non-agency mortgage-related securities.

REO Operations Expense (Income)

Our REO operations expenses include: (a) REO property expenses; (b) net gains or losses incurred on disposition of REO properties; (c) adjustments to the holding period allowance associated with REO properties to record them at the lower of their carrying amount or fair value less the estimated costs to sell; and (d) recoveries from insurance and other credit enhancements. The increases in REO operations expense during the 2015 periods were primarily due to lower gains on REO dispositions and lower recoveries from mortgage insurance during the 2015 periods. For more information on our REO activity, see “CONSOLIDATED BALANCE SHEETS ANALYSIS — REO, Net.”

Temporary Payroll Tax Cut Continuation Act of 2011 Expense

Pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011, we increased the management and guarantee fee on single-family mortgage loans sold to us by 10 basis points in April 2012. We pay these fees to Treasury on a quarterly basis. We refer to this fee increase as the legislated 10 basis point increase in management and guarantee fees.

As of June 30, 2015 and June 30, 2014, mortgage loans with an aggregate UPB of $967.4 billion (or 58% of the single-family credit guarantee portfolio) and $767.6 billion, respectively, were subject to these fees. As of June 30, 2015, the cumulative total of the amounts paid and due to Treasury for these fees was $1.9 billion. We expect the amount of these fees to continue to increase in the future as we add new business and increase the UPB of mortgage loans subject to these fees.

Other Expense

Other expense includes property taxes and insurance associated with mortgage loans reclassified as held-for-sale, HAMP servicer incentive fees, costs related to terminations and transfers of mortgage loan servicing, and other miscellaneous expenses. The increases during the 2015 periods were primarily driven by property taxes and insurance associated with mortgage loans reclassified as held-for-sale. Property tax and insurance amounts are included in loan loss reserves while the mortgage loans are classified as held-for-investment.

Beginning January 1, 2015, FHFA directed us to allocate funds to the Housing Trust Fund and Capital Magnet Fund. During the first half of 2015, we completed $202.1 billion of new business purchases subject to this allocation and accrued $85 million of related expense. We expect to pay these amounts, and any additional amounts to be accrued based on our new business purchases in the second half of 2015, in February 2016.

Other Comprehensive Income (Loss)

Other comprehensive income (loss) for the three and six months ended June 30, 2015, respectively, was driven by fair value losses resulting from the impact of increasing interest rates on our available-for-sale securities, partially offset by the impact of spread tightening on our non-agency mortgage-related securities. Other comprehensive income for the three and six months ended June 30, 2014, respectively, was driven by fair value gains on our available-for-sale securities resulting from a decline in longer-term interest rates coupled with the impact of spread tightening on our non-agency mortgage-related securities and the movement of these securities with unrealized losses towards maturity.



	21	Freddie Mac Form 10-Q

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Segment Earnings

We have three reportable segments, which are based on the type of business activities each performs — Single-family Guarantee, Investments, and Multifamily. Certain activities that are not part of a reportable segment are included in the All Other category.

We evaluate segment performance and allocate resources based on a Segment Earnings approach. Segment financial performance is measured as follows:


•	Our Single-family Guarantee segment is measured on its contribution to GAAP net income (loss);


•	Our Investments segment is measured on its contribution to GAAP comprehensive income (loss); and


•	Our Multifamily segment is measured on its contribution to GAAP comprehensive income (loss).

In presenting Segment Earnings, we make significant reclassifications among certain financial statement line items to reflect measures of management and guarantee fee income on guarantees and net interest income on investments that are in line with how we manage our business. We also allocate certain revenues and expenses, including certain returns on assets and funding costs, and all administrative expenses to our three reportable segments.

As a result of these reclassifications and allocations, Segment Earnings for our reportable segments should not be used as a substitute for net income (loss) as determined in accordance with GAAP. Our definition of Segment Earnings may differ from similar measures used by other companies. However, we believe that Segment Earnings provides us with meaningful metrics to assess the financial performance of each segment and our company as a whole.

In the second quarter of 2015, we changed our Segment Earnings definition associated with the revenue and expense related to the Temporary Payroll Tax Cut Continuation Act of 2011. As a result of this change, the revenue and expense related to the legislated 10 basis point increase in management and guarantee fee income are now netted within the Single-family Guarantee segment. The purpose of this change is to better reflect how management evaluates the Single-family Guarantee segment. Prior period results have been revised to conform with the current period presentation. We reclassified $187 million and $365 million of Temporary Payroll Tax Cut Continuation Act of 2011 expense into management and guarantee fee income for the three months ended June 30, 2014 and the six months ended June 30, 2014, respectively.



	22	Freddie Mac Form 10-Q

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The table below provides UPB information about our various segment mortgage and credit risk portfolios at June 30, 2015 and December 31, 2014.

Table 14 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios



	June 30, 2015		December 31, 2014
	(in millions)
Segment mortgage portfolios:
Single-family Guarantee — Managed loan portfolio:⁽¹⁾
Single-family unsecuritized seriously delinquent mortgage loans	$	23,596	$	28,738
Single-family Freddie Mac mortgage-related securities held by us	150,293		158,215