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 March 31, 2016
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission File Number: 001-34139
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Freddie Mac
Federally chartered corporation | 8200 Jones Branch Drive McLean, Virginia 22102-3110 | 52-0904874 | (703) 903-2000 | |||
(State or other jurisdiction of incorporation or organization) | (Address of principal executive offices, including zip code) | (I.R.S. Employer Identification No.) | (Registrant’s telephone number, including area code) | |||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 April 20, 2016, there were 650,046,828 shares of the registrant’s common stock outstanding.
Table of Contents | ||
TABLE OF CONTENTS
Page | |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
EXECUTIVE SUMMARY | |
KEY ECONOMIC INDICATORS | |
CONSOLIDATED RESULTS OF OPERATIONS | |
CONSOLIDATED BALANCE SHEETS ANALYSIS | |
OUR BUSINESS SEGMENTS | |
RISK MANAGEMENT | |
LIQUIDITY AND CAPITAL RESOURCES | |
CONSERVATORSHIP AND RELATED MATTERS | |
REGULATION AND SUPERVISION | |
OFF-BALANCE SHEET ARRANGEMENTS | |
FORWARD-LOOKING STATEMENTS | |
FINANCIAL STATEMENTS | |
OTHER INFORMATION | |
CONTROLS AND PROCEDURES | |
SIGNATURES | |
FORM 10-Q INDEX | |
EXHIBIT INDEX | |
Freddie Mac Form 10-Q | i | |
Management's Discussion and Analysis | Executive Summary | |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in the “Forward-Looking Statements” and “Risk Factors” sections of this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2015, or 2015 Annual Report, and the “Business” section of our 2015 Annual Report.
Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the “Glossary” of our 2015 Annual Report.
You should read the following MD&A in conjunction with our 2015 Annual Report and our condensed consolidated financial statements and accompanying notes for the three months ended March 31, 2016 included in “Financial Statements.”
EXECUTIVE SUMMARY
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability, and affordability to the U.S. housing market. We do this primarily by purchasing residential mortgage loans originated by lenders. In most instances, we package these loans into mortgage-related securities, which are guaranteed by us and sold in the global capital markets. We also invest in mortgage loans and mortgage-related securities. We do not originate loans or lend money directly to consumers.
We support the U.S. housing market and the overall economy by enabling America’s families to access mortgage loan funding with better terms and by providing consistent liquidity to the multifamily mortgage market, which we do primarily by providing financing for workforce housing. We have helped many distressed borrowers keep their homes or avoid foreclosure. We are working with FHFA, our customers and the industry to build a better housing finance system for the nation.
CONSOLIDATED FINANCIAL RESULTS
Comprehensive income (loss) was $(200) million during the three months ended March 31, 2016 compared to $746 million during the three months ended March 31, 2015. The decline in comprehensive income (loss) was primarily driven by two market-related items, including an estimated:
• | $(0.9) billion resulting from a larger decline in interest rates; and |
• | $(0.6) billion resulting from widening spreads. |
Our total equity was $1.0 billion at March 31, 2016. Because our net worth was positive we are not requesting a draw from Treasury under the Purchase Agreement for the first quarter of 2016. Through March 31, 2016, our cumulative senior preferred stock dividend payments totaled $98.2 billion. Under the
Freddie Mac Form 10-Q | 1 | |
Management's Discussion and Analysis | Executive Summary | |
Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock, which remains $72.3 billion. The amount of available funding remaining under the Purchase Agreement is $140.5 billion, and would be reduced by any future draws.
VARIABILITY OF EARNINGS
Our financial results are subject to significant earnings variability from period to period. This variability is primarily driven by:
• | Interest-Rate Volatility — 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 as measured by our models. However, the way we account for our financial assets and liabilities (i.e., some are measured at amortized cost, while others are measured at fair value), including derivatives, creates volatility in our GAAP earnings when interest rates fluctuate. Based upon the composition of our financial assets and liabilities, including derivatives, at March 31, 2016, we generally recognize fair value losses in earnings when interest rates decline. This volatility generally is not indicative of the underlying economics of our business. For information about the sensitivity of our financial results to interest-rate volatility, see "Risk Management - Interest-Rate Risk and Other Market Risks." |
• | Spread Volatility — Spread volatility (i.e., credit spreads, liquidity spreads, risk premiums, etc.), or OAS, is the risk associated with changes in the excess of interest rates over benchmark rates. We hold assets and liabilities that expose us to spread volatility, which may contribute to significant earnings volatility. For financial assets and liabilities measured at fair value, we generally recognize fair value losses when spreads widen. |
The variability of earnings and the declining capital reserve required under the terms of the Purchase Agreement (ultimately reaching zero in 2018) increase the risk of our having a negative net worth and being required to draw from Treasury. We currently face a risk of a draw for a variety of reasons, including if we were to experience a large decrease in interest rates coupled with a large widening of spreads. We continue to assess certain transactions and activities that may reduce or limit our exposure to this variability.
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. The Purchase Agreement also requires our future profits to effectively be distributed to Treasury, and we cannot retain capital from the earnings generated by our business operations (other than a limited amount that will decrease to zero in 2018) or return capital to stockholders other than Treasury. Consequently, our ability to access funds from Treasury under the
Freddie Mac Form 10-Q | 2 | |
Management's Discussion and Analysis | Executive Summary | |
Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to have adequate liquidity to conduct our normal business activities.
Freddie Mac Form 10-Q | 3 | |
Management's Discussion and Analysis | Key Economic Indicators | Single-family Home Prices | |
KEY ECONOMIC INDICATORS
The following graphs and related discussion present certain macroeconomic indicators that can significantly affect our business and financial results.
SINGLE-FAMILY HOME PRICES
COMMENTARY
• | Home prices continued to appreciate during the three months ended March 31, 2016, increasing 1.5%, compared to an increase of 1.6% during the three months ended March 31, 2015, based on our own non-seasonally adjusted price index of single-family homes funded by loans owned or guaranteed by us or Fannie Mae. |
• | National home prices at March 31, 2016 were approximately 5% below their peak level of 167 reached in June 2006, based on our index. |
Freddie Mac Form 10-Q | 4 | |
Management's Discussion and Analysis | Key Economic Indicators | Interest Rates | |
INTEREST RATES
KEY MARKET INTEREST RATES
COMMENTARY
• | Mortgage interest rates, as indicated by the 30-year PMMS rate, decreased during the three months ended March 31, 2016. We expect mortgage interest rates to remain low in 2016, but to begin slowly trending up in the second half of the year. |
• | The average 30-year PMMS rate was 3.74% during the first quarter of 2016, compared to 3.72% during the first quarter of 2015. |
• | Longer-term interest rates, as indicated by the 10-year LIBOR and the 10-year Treasury rate, declined sharply during the three months ended March 31, 2016. The decline in longer-term interest rates coincided with worldwide economic growth forecast downgrades from the International Monetary Fund, increased financial market volatility, investors' flight-to-safety of longer-term U.S. Treasuries, and market expectations that the Federal Reserve would raise its short-term interest rate less rapidly than previously anticipated. |
Freddie Mac Form 10-Q | 5 | |
Management's Discussion and Analysis | Key Economic Indicators | Unemployment Rate | |
UNEMPLOYMENT RATE
UNEMPLOYMENT RATE AND JOB CREATION
Source: U.S. Bureau of Labor Statistics
COMMENTARY
• | An average of approximately 209,000 monthly net new jobs were added to the economy during the first quarter of 2016. The steady flow of jobs has helped to stabilize the unemployment rate at 5%. |
Freddie Mac Form 10-Q | 6 | |
Management's Discussion and Analysis | Consolidated Results of Operations | Comparison | |
CONSOLIDATED RESULTS OF OPERATIONS
You should read this discussion of our consolidated results of operations in conjunction with our condensed consolidated financial statements and accompanying notes.
COMPARISON
The table below compares our consolidated results of operations for the three months ended March 31, 2016 and March 31, 2015.
Three Months Ended March 31, | Change | ||||||||||||||
(dollars in millions) | 2016 | 2015 | $ | % | |||||||||||
Net interest income | $ | 3,405 | $ | 3,647 | $ | (242 | ) | (7 | )% | ||||||
Benefit (provision) for credit losses | 467 | 499 | (32 | ) | (6 | )% | |||||||||
Net interest income after benefit (provision) for credit losses | 3,872 | 4,146 | (274 | ) | (7 | )% | |||||||||
Non-interest income (loss): | |||||||||||||||
Gains (losses) on extinguishment of debt | (55 | ) | (79 | ) | 24 | (30 | )% | ||||||||
Derivative gains (losses) | (4,561 | ) | (2,403 | ) | (2,158 | ) | 90 | % | |||||||
Net impairment of available-for-sale securities recognized in earnings | (57 | ) | (93 | ) | 36 | (39 | )% | ||||||||
Other gains (losses) on investment securities recognized in earnings | 303 | 417 | (114 | ) | (27 | )% | |||||||||
Other income (loss) | 947 | 11 | 936 | 8,509 | % | ||||||||||
Total non-interest income (loss) | (3,423 | ) | (2,147 | ) | (1,276 | ) | 59 | % | |||||||
Non-interest expense: | |||||||||||||||
Administrative expense | (448 | ) | (451 | ) | 3 | (1 | )% | ||||||||
REO operations (expense) income | (84 | ) | (75 | ) | (9 | ) | 12 | % | |||||||
Temporary Payroll Tax Cut Continuation Act of 2011 expense | (272 | ) | (222 | ) | (50 | ) | 23 | % | |||||||
Other (expense) income | (153 | ) | (463 | ) | 310 | (67 | )% | ||||||||
Total non-interest expense | (957 | ) | (1,211 | ) | 254 | (21 | )% | ||||||||
(Loss) income before income tax benefit (expense) | (508 | ) | 788 | (1,296 | ) | (164 | )% | ||||||||
Income tax benefit (expense) | 154 | (264 | ) | 418 | (158 | )% | |||||||||
Net (loss) income | (354 | ) | 524 | (878 | ) | (168 | )% | ||||||||
Total other comprehensive income (loss), net of taxes and reclassification adjustments | 154 | 222 | (68 | ) | (31 | )% | |||||||||
Comprehensive (loss) income | $ | (200 | ) | $ | 746 | $ | (946 | ) | (127 | )% | |||||
Key Drivers:
See "Net Interest Income," "Benefit (Provision) for Credit Losses," "Derivative Gains (Losses)," and "Other Comprehensive Income (Loss)" for a discussion of those items. Key drivers for other line items during the three months ended March 31, 2016 compared to the three months ended March 31, 2015 include:
• | Other gains (losses) on investment securities recognized in earnings decreased due to a decline in sales of available-for-sale non-agency mortgage-related securities in an unrealized gain position. This decrease in sales was attributable to increased market volatility and weaker investor demand for this product type. |
• | Other income (loss) increased due to the following: |
◦ | Reduced lower-of-cost-or-fair-value adjustments as we transferred fewer seriously delinquent |
Freddie Mac Form 10-Q | 7 | |
Management's Discussion and Analysis | Consolidated Results of Operations | Comparison | |
single-family loans from held-for-investment to held-for-sale;
◦ | Minimal gains on STACR debt notes carried at fair value as a result of relatively unchanged spreads between STACR yields and LIBOR during the three months ended March 31, 2016 compared to losses as a result of tightened spreads during the three months ended March 31, 2015; and |
◦ | Increased gains on multifamily mortgage loans for which we have elected the fair value option driven by a larger decline in interest rates in the current period versus during the first quarter of 2015. |
• | Other expense decreased primarily driven by fewer reclassifications of seriously delinquent single-family loans from held-for-investment to held-for-sale. See "Loan Reclassifications" below for the effect of these loan reclassifications on pre-tax net income. |
• | Income tax benefit reflects a pre-tax net loss and income tax expense reflects pre-tax net income in the respective periods. |
The three items discussed below affected multiple line items on our consolidated results of operations.
LOAN RECLASSIFICATIONS
During the three months ended March 31, 2016 and March 31, 2015, we reclassified $0.4 billion and $3.6 billion, respectively, in UPB of seriously delinquent single-family mortgage loans from held-for-investment to held-for-sale. The initial reclassifications of these loans affected several line items on our consolidated results of operations, as shown in the table below.
Three Months Ended March 31, | ||||||||
(in millions) | 2016 | 2015 | ||||||
Benefit for credit losses | $ | 64 | $ | 692 | ||||
Other income (loss) - lower-of-cost-or-fair-value adjustment | (67 | ) | (581 | ) | ||||
Other (expense) income - property taxes and insurance associated with these loans | (31 | ) | (349 | ) | ||||
Effect on income before income tax (expense) benefit | $ | (34 | ) | $ | (238 | ) | ||
INTEREST-RATE RISK MANAGEMENT ACTIVITIES
We fund our business activities primarily through the issuance of unsecured other debt. The type of debt we issue is based on a variety of factors including market conditions and our liquidity requirements.
We currently favor a mix of shorter- and medium-term debt and derivatives to fund our business and manage interest-rate risk. This funding mix is a less expensive method than relying more extensively on long-term debt, and it provides greater flexibility and opportunity to match the duration of our assets and liabilities in the future as we reduce the mortgage-related investments portfolio in accordance with the requirements of the Purchase Agreement and FHFA.
The table below presents the effect of derivatives used in our interest-rate risk management activities on our comprehensive income, after considering the accrual of periodic cash settlements (which is the economic equivalent of interest expense), and the extent to which the effect of interest rate changes on our derivatives was offset by their effect on other financial instruments. The estimated net effect on comprehensive income is essentially the derivative gains (losses) attributable to financial instruments that are not measured at fair value.
Freddie Mac Form 10-Q | 8 | |
Management's Discussion and Analysis | Consolidated Results of Operations | Comparison | |
Three Months Ended March 31, | |||||||
(in billions) | 2016 | 2015 | |||||
Components of derivative gains (losses) | |||||||
Derivative gains (losses) | $ | (4.6 | ) | $ | (2.4 | ) | |
Less: Accrual of periodic cash settlements | (0.5 | ) | (0.6 | ) | |||
Derivative fair value changes | $ | (4.1 | ) | $ | (1.8 | ) | |
Estimated Net Interest Rate Effect | |||||||
Interest rate effect on derivative fair values | $ | (4.0 | ) | $ | (1.7 | ) | |
Estimate of offsetting interest rate effect related to financial instruments measured at fair value | 1.9 | 0.9 | |||||
Income tax benefit (expense) | 0.7 | 0.3 | |||||
Estimated Net Interest Rate Effect on Comprehensive income | $ | (1.4 | ) | $ | (0.5 | ) | |
As this table demonstrates, the estimated net effect of derivatives used in our interest-rate risk management activities on our comprehensive income is volatile, and can be significant. For information about the sensitivity of our financial results to interest-rate volatility, see "Risk Management - Interest-Rate Risk and Other Market Risks."
CHANGES IN SPREADS
Comprehensive income was affected by changes in spreads by an estimated $(0.6) billion and $0.0 billion (after-tax) during the three months ended March 31, 2016 and March 31, 2015, respectively. In the current period, the negative effect was primarily due to spread widening on our non-agency mortgage-related investments measured at fair value. During the three months ended March 31, 2015, there were minimal changes to comprehensive income due to spread tightening on our STACR debt notes that was largely offset by spreads tightening on our mortgage-related investments.
Freddie Mac Form 10-Q | 9 | |
Management's Discussion and Analysis | Consolidated Results of Operations | Net Interest Income | |
NET INTEREST INCOME
NET INTEREST YIELD ANALYSIS
The table below presents an analysis of interest-earning assets and interest-bearing liabilities.
The table below presents an analysis of interest-earning assets and interest-bearing liabilities.
Three Months Ended March 31, | |||||||||||||||||||||
2016 | 2015 | ||||||||||||||||||||
(dollars in millions) | Average Balance(1) | Interest Income (Expense) | Average Rate | Average Balance(1) | Interest Income (Expense) | Average Rate | |||||||||||||||
Interest-earning assets: | |||||||||||||||||||||
Cash and cash equivalents | $ | 11,726 | $ | 7 | 0.25 | % | $ | 15,353 | $ | 3 | 0.07 | % | |||||||||
Securities purchased under agreements to resell | 57,921 | 50 | 0.34 | 47,430 | 8 | 0.07 | |||||||||||||||
Mortgage-related securities: | |||||||||||||||||||||
Mortgage-related securities | 201,604 | 1,916 | 3.80 | 244,662 | 2,366 | 3.87 | |||||||||||||||
Extinguishment of PCs held by Freddie Mac | (105,097 | ) | (960 | ) | (3.65 | ) | (111,988 | ) | (1,034 | ) | (3.69 | ) | |||||||||
Total mortgage-related securities, net | 96,507 | 956 | 3.96 | 132,674 | 1,332 | 4.02 | |||||||||||||||
Non-mortgage-related securities | 14,261 | 13 | 0.36 | 9,419 | 3 | 0.12 | |||||||||||||||
Loans held by consolidated trusts(1) | 1,630,646 | 14,261 | 3.50 | 1,563,272 | 13,879 | 3.55 | |||||||||||||||
Loans held by Freddie Mac(1) | 145,531 | 1,557 | 4.28 | 165,168 | 1,575 | 3.81 | |||||||||||||||
Total interest-earning assets | $ | 1,956,592 | $ | 16,844 | 3.45 | $ | 1,933,316 | $ | 16,800 | 3.47 | |||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||
Debt securities of consolidated trusts including PCs held by Freddie Mac | $ | 1,653,105 | $ | (12,751 | ) | (3.09 | ) | $ | 1,583,630 | $ | (12,521 | ) | (3.16 | ) | |||||||
Extinguishment of PCs held by Freddie Mac | (105,097 | ) | 960 | 3.65 | (111,988 | ) | 1,034 | 3.69 | |||||||||||||
Total debt securities of consolidated trusts held by third parties | 1,548,008 | (11,791 | ) | (3.05 | ) | 1,471,642 | (11,487 | ) | (3.12 | ) | |||||||||||
Other debt: | |||||||||||||||||||||
Short-term debt | 100,871 | (93 | ) | (0.37 | ) | 121,728 | (38 | ) | (0.12 | ) | |||||||||||
Long-term debt | 300,221 | (1,504 | ) | (2.00 | ) | 324,655 | (1,563 | ) | (1.93 | ) | |||||||||||
Total other debt | 401,092 | (1,597 | ) | (1.59 | ) | 446,383 | (1,601 | ) | (1.43 | ) | |||||||||||
Total interest-bearing liabilities | 1,949,100 | (13,388 | ) | (2.75 | ) | 1,918,025 | (13,088 | ) | (2.73 | ) | |||||||||||
Expense related to derivatives | — | (51 | ) | (0.01 | ) | — | (65 | ) | (0.01 | ) | |||||||||||
Impact of net non-interest-bearing funding | 7,492 | — | 0.01 | 15,291 | — | 0.02 | |||||||||||||||
Total funding of interest-earning assets | $ | 1,956,592 | $ | (13,439 | ) | (2.75 | ) | $ | 1,933,316 | $ | (13,153 | ) | (2.72 | ) | |||||||
Net interest income/yield | $ | 3,405 | 0.70 | $ | 3,647 | 0.75 | |||||||||||||||
(1) | Loan fees, primarily consisting of amortization of delivery fees, included in interest income were $485 million and $506 million for loans held by consolidated trusts and were $81 million and $66 million for loans held by Freddie Mac during the three months ended March 31, 2016 and March 31, 2015, respectively. |
Freddie Mac Form 10-Q | 10 | |
Management's Discussion and Analysis | Consolidated Results of Operations | Net Interest Income | |
COMPONENTS OF NET INTEREST INCOME
The table below presents the components of net interest income.
The table below presents the components of net interest income.
Three Months Ended March 31, | Change | |||||||||||||
(dollars in millions) | 2016 | 2015 | $ | % | ||||||||||
Contractual net interest income: | ||||||||||||||
Management and guarantee fee income | $ | 710 | $ | 608 | $ | 102 | 17 | % | ||||||
Management and guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011 | 267 | 217 | 50 | 23 | % | |||||||||
Other contractual net interest income | 1,840 | 2,222 | (382 | ) | (17 | )% | ||||||||
Total contractual net interest income | 2,817 | 3,047 | (230 | ) | (8 | )% | ||||||||
Net amortization - loans and debt securities of consolidated trusts | 533 | 533 | — | — | % | |||||||||
Net amortization - other assets and debt | 106 | 132 | (26 | ) | (20 | )% | ||||||||
Expense related to derivatives | (51 | ) | (65 | ) | 14 | (22 | )% | |||||||
Net interest income | $ | 3,405 | $ | 3,647 | $ | (242 | ) | (7 | )% | |||||
Key Drivers:
During the three months ended March 31, 2016 compared to the three months ended March 31, 2015:
• | Management and guarantee fee income (contractual) increased, as the rates and volume of our single-family credit guarantee business continued to increase. |
• | Other contractual net interest income decreased, as we continued to reduce the balance of our mortgage-related investments portfolio pursuant to the portfolio limits established by the Purchase Agreement and FHFA. |
Freddie Mac Form 10-Q | 11 | |
Management's Discussion and Analysis | Consolidated Results of Operations | Provision for Credit Losses | |
BENEFIT (PROVISION) FOR CREDIT LOSSES
The benefit (provision) for credit losses predominantly relates to single-family loans and includes components for both collectively and individually impaired loans.
The table below presents the components of our benefit (provision) for credit losses.
Three Months Ended March 31, | Change | ||||||||||||||
(dollars in billions) | 2016 | 2015 | $ | % | |||||||||||
Provision for newly impaired loans | $ | (0.2 | ) | $ | (0.2 | ) | $ | — | — | % | |||||
Amortization of interest rate concessions | 0.3 | 0.3 | — | — | % | ||||||||||
Reclassifications of held-for-investment loans to held-for-sale loans | 0.1 | 0.7 | (0.6 | ) | (86 | )% | |||||||||
Other, including changes in estimated default probability and loss severity | 0.3 | (0.3 | ) | 0.6 | (200 | )% | |||||||||
Benefit (provision) for credit losses | $ | 0.5 | $ | 0.5 | $ | — | — | % | |||||||
Key Drivers:
Benefit for credit losses remained unchanged during the three months ended March 31, 2016 compared to the three months ended March 31, 2015, but there were changes in its components primarily due to:
• | Reclassification of fewer seriously delinquent single-family loans from held-for-investment to held-for-sale. During the three months ended March 31, 2016, $0.4 billion in UPB of seriously delinquent single-family loans were reclassified to held-for-sale, compared to $3.6 billion during the three months ended March 31, 2015. See "Loan Reclassifications" for the effect of these loan reclassifications on pre-tax net income; and |
• | Improvement in estimated probability of default and loss severity for single-family loans. |
Freddie Mac Form 10-Q | 12 | |
Management's Discussion and Analysis | Consolidated Results of Operations | Derivative Gains (Losses) | |
DERIVATIVE GAINS (LOSSES)
While our sensitivity to interest rates on an economic basis remains low based on our models, our exposure to earnings volatility resulting from our use of derivatives has increased in recent years as we have changed our derivative portfolio to align with the changing duration of our hedged assets and liabilities. We believe the impact of derivatives on our GAAP financial results should be considered in the context of our overall interest-rate risk profile, including our PMVS and duration gap results. For more information about our interest-rate risk management activities and the sensitivity of reported earnings to those activities, see “Risk Management - Interest-Rate Risk and Other Market Risks.”
The table below presents the components of derivative gains (losses).
Three Months Ended March 31, | Change | |||||||||||||
(dollars in millions) | 2016 | 2015 | $ | % | ||||||||||
Fair value changes: | ||||||||||||||
Change in interest-rate swaps | $ | (5,690 | ) | $ | (2,661 | ) | $ | (3,029 | ) | 114 | % | |||
Change in option-based derivatives | 1,935 | 1,016 | 919 | 90 | % | |||||||||
Accrual of periodic cash settlements | (490 | ) | (571 | ) | 81 | (14 | )% | |||||||
Other | (316 | ) | (187 | ) | (129 | ) | 69 | % | ||||||
Derivative gains (losses) | $ | (4,561 | ) | $ | (2,403 | ) | $ | (2,158 | ) | 90 | % | |||
Key Drivers:
• | We recognized derivative fair value losses during the three months ended March 31, 2016 and March 31, 2015, primarily due to declines in the 10-year par swap rate of 54 basis points and 26 basis points, respectively, in each period. See "Our Business Segments - Investments - Market Conditions" for more information about par swap rates. |
Freddie Mac Form 10-Q | 13 | |
Management's Discussion and Analysis | Consolidated Results of Operations | Other Comprehensive Income | |
OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the attribution of the other comprehensive income (loss) reported in our condensed consolidated statements of comprehensive income.
Three Months Ended March 31, | Change | |||||||||||||
(in millions) | 2016 | 2015 | $ | % | ||||||||||
Other comprehensive income, excluding accretion and reclassifications | $ | 221 | $ | 463 | $ | (242 | ) | (52 | )% | |||||
Accretion due to significant increases in expected cash flows on previously-impaired available-for-sale securities | (90 | ) | (126 | ) | 36 | (29 | )% | |||||||
Reclassifications from AOCI | 23 | (115 | ) | 138 | (120 | )% | ||||||||
Total other comprehensive income (loss) | $ | 154 | $ | 222 | $ | (68 | ) | (31 | )% | |||||
Key Drivers:
Other comprehensive income declined during the three months ended March 31, 2016, compared to the three months ended March 31, 2015, primarily due to:
• | Losses resulting from spread widening for our non-agency mortgage-related securities, partially offset by gains resulting from a larger decline in longer-term interest rates; and |
• | Reclassification of net unrealized losses from AOCI to earnings during 2016 due to fewer sales and lower pricing of our non-agency mortgage-related securities. The declines in both sales and pricing were attributable to increased market volatility and weaker demand for this product type. We reclassified net unrealized gains during 2015 due to greater sales and higher pricing, as a result of declining longer-term interest rates and stabilized collateral performance. |
Freddie Mac Form 10-Q | 14 | |
Management's Discussion and Analysis | Consolidated Balance Sheets Analysis | |
CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized consolidated balance sheets.
Change | |||||||||||||||
(dollars in millions) | March 31, 2016 | December 31, 2015 | $ | % | |||||||||||
Assets: | |||||||||||||||
Cash and cash equivalents | $ | 6,158 | $ | 5,595 | $ | 563 | 10 | % | |||||||
Restricted cash and cash equivalents | 16,671 | 14,533 | 2,138 | 15 | % | ||||||||||
Securities purchased under agreements to resell | 40,098 | 63,644 | (23,546 | ) | (37 | )% | |||||||||
Subtotal | 62,927 | 83,772 | (20,845 | ) | (25 | )% | |||||||||
Investments in securities | 107,595 | 114,215 | (6,620 | ) | (6 | )% | |||||||||
Mortgage loans, net | 1,762,633 | 1,754,193 | 8,440 | — | % | ||||||||||
Accrued interest receivable | 6,091 | 6,074 | 17 | — | % | ||||||||||
Derivative assets, net | 814 | 395 | 419 | 106 | % | ||||||||||
Real estate owned, net | 1,571 | 1,725 | (154 | ) | (9 | )% | |||||||||
Deferred tax assets, net | 18,123 | 18,205 | (82 | ) | — | % | |||||||||
Other assets | 9,346 | 7,313 | 2,033 | 28 | % | ||||||||||
Total assets | $ | 1,969,100 | $ | 1,985,892 | $ | (16,792 | ) | (1 | )% | ||||||
Liabilities and Equity: | |||||||||||||||
Liabilities: | |||||||||||||||
Accrued interest payable | $ | 6,047 | $ | 6,183 | $ | (136 | ) | (2 | )% | ||||||
Debt, net | 1,955,618 | 1,970,269 | (14,651 | ) | (1 | )% | |||||||||
Derivative liabilities, net | 1,632 | 1,254 | 378 | 30 | % | ||||||||||
Other liabilities | 4,803 | 5,246 | (443 | ) | (8 | )% | |||||||||
Total liabilities | 1,968,100 | 1,982,952 | (14,852 | ) | (1 | )% | |||||||||
Total equity | 1,000 | 2,940 | (1,940 | ) | (66 | )% | |||||||||
Total liabilities and equity | $ | 1,969,100 | $ | 1,985,892 | $ | (16,792 | ) | (1 | )% | ||||||
Key Drivers:
As of March 31, 2016 compared to December 31, 2015:
• | Cash and cash equivalents, restricted cash and cash equivalents, and securities purchased under agreements to resell affect one another, so the changes in the balances should be viewed together. The combined balance declined due to reduced near-term cash needs. |
• | Investments in securities declined as we continue to reduce our less liquid mortgage-related securities pursuant to the limits on the size of our portfolio, and we reduced our non-mortgage-related investments portfolio due to a decrease in our near-term cash needs. |
• | Real estate owned, net continued to decline as we continued to sell our existing inventory and the pace of new REO acquisitions slowed as our population of seriously delinquent loans declined. |
• | Other assets increased as receivables from servicers increased driven by borrower prepayment activity. Additionally, our current income tax receivable also contributed to the increase, as our net loss during the three months ended March 31, 2016 reduced our estimated tax liability. |
• | Debt, net decreased as we continued to reduce other debt along with the decline in our mortgage-related investments portfolio. This decrease was partially offset by an increase in debt securities of consolidated trusts held by third parties. |
Freddie Mac Form 10-Q | 15 | |
Management's Discussion and Analysis | Consolidated Balance Sheets Analysis | |
• | Total equity decreased primarily as a result of a comprehensive loss during the three months ended March 31, 2016 compared to comprehensive income during the three months ended December 31, 2015. |
Freddie Mac Form 10-Q | 16 | |
Management's Discussion and Analysis | Our Business Segments | Segment Earnings | |
OUR BUSINESS SEGMENTS
We have three reportable segments, which are based on the way we manage our business. Certain activities that are not part of a reportable segment are included in the All Other category.
• | Single-family Guarantee - reflects results from our purchase, securitization, and guarantee of single-family loans and the management of single-family mortgage credit risk. |
• | Multifamily - reflects results from our purchase, investment, securitization, and guarantee activities in multifamily loans and securities, and the management of multifamily mortgage credit risk. |
• | Investments - reflects results from managing the company’s mortgage-related investments portfolio (excluding Multifamily investments and single-family seriously delinquent loans), treasury function, and interest-rate risk. |
• | All Other - consists of material corporate-level activities that are infrequent in nature and based on decisions outside the control of the management of our reportable segments. |
SEGMENT EARNINGS
During the three months ended March 31, 2016, we changed how we calculate certain components of our Segment Earnings for our Single-family Guarantee and Investments segments. Prior period results have been revised to conform to the current period presentation. For more information on these changes, see Note 11.
SEGMENT COMPREHENSIVE INCOME
The table below shows our comprehensive income by segment, including the All Other category.
The table below shows our comprehensive income by segment, including the All Other category.
Freddie Mac Form 10-Q | 17 | |
Management's Discussion and Analysis | Our Business Segments | Single-Family Guarantee | |
SINGLE-FAMILY GUARANTEE
MARKET CONDITIONS
The following graphs and related discussion present certain market indicators that can significantly affect the business and financial results of our Single-family Guarantee segment.
Single-Family Serious Delinquency Rates
Source: National Delinquency Survey from the Mortgage Bankers Association. The rates are as of December 31, 2015 (latest available information).
Commentary
• | Single-family loan origination volumes in the U.S. decreased during the first quarter of 2016 compared to the first quarter of 2015, driven by a decrease in refinancing activity. |
• | Single-family serious delinquency (SDQ) rates in the U.S. continued to decline due to macroeconomic factors, such as a stable labor market and continued home price appreciation. |
Freddie Mac Form 10-Q | 18 | |
Management's Discussion and Analysis | Our Business Segments | Single-Family Guarantee | |
BUSINESS RESULTS
The following tables, graphs and related discussion present the business results of our Single-family Guarantee segment.
New Business Activity
Percentage of Single-Family Loan Purchases and Guarantees by Loan Purpose
Commentary
• | Our loan purchase activity decreased during the three months ended March 31, 2016 compared to the three months ended March 31, 2015 primarily due to a decrease in refinance loan purchase volume. During the latter part of 2015, mortgage interest rates declined at a slower pace compared to the latter part of 2014. When mortgage interest rates decline, there can be a lag of up to three months between the time the borrower refinances and when we purchase the loan. |
Freddie Mac Form 10-Q | 19 | |
Management's Discussion and Analysis | Our Business Segments | Single-Family Guarantee | |
Single-family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfolio
Commentary
• | The Core single-family book grew to 68% of the single-family credit guarantee portfolio at March 31, 2016 compared to 66% at December 31, 2015. The Core single-family book consists of loans that were originated since 2008, excluding HARP and other relief refinance loans. |
• | The HARP and other relief refinance book represented an additional 17% of the single-family credit guarantee portfolio at March 31, 2016 compared to 18% at December 31, 2015. |
• | The Legacy single-family book declined to 15% of the single-family credit guarantee portfolio at March 31, 2016 compared to 16% at December 31, 2015. |
• | We had 10.7 million loans in our single-family credit guarantee portfolio at both March 31, 2016 and December 31, 2015. |
Freddie Mac Form 10-Q | 20 | |
Management's Discussion and Analysis | Our Business Segments | Single-Family Guarantee | |
Management and Guarantee Fees
Average Management and Guarantee Fee Rate Charged on New Acquisitions(1)
(1) Excludes the legislated 10 basis point increase in management and guarantee fees.
Commentary
• | Average portfolio Segment Earnings management and guarantee fees remained relatively unchanged during the three months ended March 31, 2016 compared to the three months ended March 31, 2015, as higher contractual management and guarantee fee rates during the three months ended March 31, 2016 were offset by lower amortization of upfront fees driven by lower loan liquidations resulting from lower refinance volume. |
• | The average management and guarantee fee rate charged on new acquisitions recognizes upfront delivery fee income over the estimated life of the related loans using our expectations of prepayments and other liquidations, whereas the average portfolio Segment Earnings management and guarantee fee rate recognizes these amounts for the entire portfolio over the contractual life of the related loans (usually 30 years) adjusted for actual prepayments. |
Freddie Mac Form 10-Q | 21 | |
Management's Discussion and Analysis | Our Business Segments | Single-Family Guarantee | |
Credit Risk Transfer Activity
Since 2013, STACR debt note and ACIS transactions have been our principal methods of transferring a portion of the mortgage credit risk subsequent to loan acquisition in our Core single-family book. The following chart presents transactions that occurred during the three months ended March 31, 2016 by loss position and the party holding each loss position.
New STACR Debt Note and ACIS Transactions for the Three Months Ended March 31, 2016(1)
(In billions) | ||||||||||
Senior | Freddie Mac $50.9 | Reference Pool $53.7 | ||||||||
Mezzanine | Freddie Mac $0.1 | ACIS $0.7 | STACR Debt Notes $1.4 | |||||||
First Loss | Freddie Mac $0.4 | ACIS $0.1 | STACR Debt Notes $0.1 | |||||||
(1) | The amounts represent the UPB upon issuance of STACR debt notes and execution of ACIS transactions. |
Commentary
• | We continued to transfer a portion of credit risk to third-party investors, insurers, and selected sellers through credit risk transfer transactions. During the three months ended March 31, 2016, we transferred a portion of the credit risk associated with $53.8 billion in UPB of loans in our Core single-family book through STACR debt note, ACIS, and seller indemnification transactions. |
• | The interest and premiums we pay on our issued STACR debt note and ACIS transactions effectively reduce the management and guarantee fee income we earn on the PCs within the respective reference pools. Our expected management and guarantee fee income on the PCs within the STACR and ACIS reference pools has been effectively reduced by approximately 32%, on average, for all transactions executed through March 31, 2016. The effective reduction to our overall management and guarantee fee income could change over time as we continue our credit risk transfer activities or if there are changes in the economic or regulatory environment that affect the cost of executing these transactions. |
• | As of March 31, 2016, there has not been a significant number of loans in our STACR debt note reference pools that have experienced a credit event. As a result, we have only recognized minimal write-downs on our STACR debt notes and have begun to make minimal claims for reimbursement of losses under our ACIS transactions. |
Freddie Mac Form 10-Q | 22 | |
Management's Discussion and Analysis | Our Business Segments | Single-Family Guarantee | |
Credit Enhancements
The table below provides information on the credit enhanced loans in our single-family credit guarantee portfolio by book as of March 31, 2016. The table includes all types of single-family credit enhancements, including primary mortgage insurance. See Note 4 for additional information about our single-family credit enhancements.
As of March 31, 2016 | |||||||||||||||||||
(dollars in millions) | Total Current UPB | Total Protected UPB(1) | Coverage Remaining(2) | Collateralized Coverage Remaining(3) | Percentage of Coverage Remaining Provided By Credit Risk Transfer Transactions(4) | ||||||||||||||
Core single-family book | $ | 1,153,452 | $ | 478,541 | $ | 73,005 | $ | 14,484 | 25 | % | |||||||||
HARP and other relief refinance book | 296,000 | 32,921 | 9,009 | — | — | % | |||||||||||||
Legacy single-family book | 256,667 | 34,353 | 10,554 | — | — | % | |||||||||||||
Total | $ | 1,706,119 | $ | 545,815 | $ | 92,568 | $ | 14,484 | 19 | % | |||||||||
(1) | Represents the UPB covered by the credit enhancement. |
(2) | Represents the amounts that are still available for us to recover under the credit enhancement. |
(3) | Collateralized coverage includes cash received by Freddie Mac upon issuance of STACR debt notes and unguaranteed whole loan securities, as well as cash and securities pledged for our benefit. All collateralized coverage relates to credit risk transfer transactions in the Core single-family book. |
(4) | Credit risk transfer transactions include STACR debt notes, ACIS insurance policies, seller indemnification agreements, and whole loan securities. The substantial majority of single-family loans covered by these transactions were acquired after 2012. |
Commentary
• | The Core single-family book had credit protection on 41% of total current UPB as of March 31, 2016 compared to 39% as of December 31, 2015. |
Freddie Mac Form 10-Q | 23 | |
Management's Discussion and Analysis | Our Business Segments | Single-Family Guarantee | |
Mortgage Loan Credit Risk
Certain combinations of loan attributes can indicate a higher degree of credit risk, such as loans with both higher LTV ratios and lower credit scores. The following table presents the combination of credit score and current LTV (CLTV) ratio attributes of loans in our single-family credit guarantee portfolio.
March 31, 2016 | |||||||||||||||||||||||||||
CLTV ≤ 80 | CLTV > 80 to 100 | CLTV > 100 | All Loans | ||||||||||||||||||||||||
(credit score) | % Portfolio | SDQ Rate | % Portfolio | SDQ Rate | % Portfolio | SDQ Rate | % Portfolio | SDQ Rate | % Modified | ||||||||||||||||||
Core single-family book: | |||||||||||||||||||||||||||
< 620 | 0.2 | % | 2.12 | % | — | % | 4.13 | % | — | % | 11.61 | % | 0.2 | % | 2.46 | % | 2.9 | % | |||||||||
620 to 659 | 1.3 | 0.95 | % | 0.2 | 1.34 | % | — | 6.42 | % | 1.5 | 1.02 | % | 1.2 | % | |||||||||||||
≥ 660 | 57.1 | 0.14 | % | 8.6 | 0.25 | % | 0.1 | 1.99 | % | 65.8 | 0.16 | % | 0.2 | % | |||||||||||||
Not available | 0.1 | 1.47 | % | — | 3.54 | % | — | 7.53 | % | 0.1 | 3.00 | % | 3.2 | % | |||||||||||||
Total | 58.7 | % | 0.17 | % | 8.8 | % | 0.31 | % | 0.1 | % | 3.36 | % | 67.6 | % | 0.19 | % | 0.2 | % | |||||||||
Relief refinance book: | |||||||||||||||||||||||||||
< 620 | 0.6 | % | 1.59 | % | 0.2 | % | 3.00 | % | 0.1 | % | 4.43 | % | 0.9 | % | 2.25 | % | 3.6 | % | |||||||||
620 to 659 | 0.8 | 1.00 | % | 0.3 | 2.04 | % | 0.2 | 3.33 | % | 1.3 | 1.53 | % | 2.1 | % | |||||||||||||
≥ 660 | 10.7 | 0.29 | % | 3.2 | 0.99 | % | 1.3 | 1.80 | % | 15.2 | 0.53 | % | 0.6 | % | |||||||||||||
Not available | — | 1.35 | % | — | — | % | — | 1.85 | % | — | 1.12 | % | 1.1 | % | |||||||||||||
Total | 12.1 | % | 0.39 | % | 3.7 | % | 1.22 | % | 1.6 | % | 2.15 | % | 17.4 | % | 0.69 | % | 0.9 | % | |||||||||
Legacy single-family book | |||||||||||||||||||||||||||
< 620 | 0.8 | % | 6.23 | % | 0.3 | % | 12.78 | % | 0.2 | % | 20.28 | % | 1.3 | % | 8.49 | % | 31.5 | % | |||||||||
620 to 659 | 1.4 | 4.47 | % | 0.5 | 10.29 | % | 0.3 | 16.84 | % | 2.2 | 6.35 | % | 25.8 | % | |||||||||||||
≥ 660 | 8.2 | 1.92 | % | 2.0 | 7.02 | % | 1.1 | 12.00 | % | 11.3 | 2.89 | % | 12.1 | % | |||||||||||||
Not available | 0.2 | 5.01 | % | — | 17.04 | % | — | 19.12 | % | 0.2 | 5.76 | % | 14.0 | % | |||||||||||||
Total | 10.6 | % | 2.63 | % | 2.8 | % | 8.31 | % | 1.6 | % | 14.18 | % | 15.0 | % | 3.86 | % | 15.5 | % | |||||||||
Freddie Mac Form 10-Q | 24 | |
Management's Discussion and Analysis | Our Business Segments | Single-Family Guarantee | |
Alt-A and Subprime Loans
While we refer to certain loans as subprime or Alt-A for purposes of the discussion below and elsewhere in this Form 10-Q, there is no universally accepted definition of subprime or Alt-A, and the classification of such loans may differ from company to company. For example, some financial institutions may use credit scores to delineate certain residential loans as subprime. We do not rely on these loan classifications to evaluate the credit risk exposure relating to such loans in our single-family credit guarantee portfolio.
Participants in the mortgage market may characterize single-family loans based upon their overall credit quality at the time of origination, generally considering them to be prime or subprime. While we have not historically characterized the loans in our single-family credit guarantee portfolio as either prime or subprime, we monitor the amount of loans we have guaranteed with characteristics that indicate a higher degree of credit risk. In addition, we estimate that approximately $1.4 billion and $1.5 billion of security collateral underlying our other securitization products at March 31, 2016 and December 31, 2015, respectively, were identified as subprime based on information provided to us when we entered into these transactions.
Many mortgage market participants classify single-family loans with credit characteristics that range between their prime and subprime categories as Alt-A because these loans have a combination of characteristics of each category, may be underwritten with lower or alternative income or asset documentation requirements compared to a full documentation loan, or both. Although we have discontinued new purchases of loans with lower documentation standards, we continued to purchase certain amounts of such loans in cases where the loan was either purchased pursuant to a previously issued guarantee, part of our relief refinance initiative, or part of another refinance loan initiative and the pre-existing loan was originated under less than full documentation standards. In the event we purchase a refinance loan and the original loan had been previously identified as Alt-A, such refinance loan may no longer be categorized or reported as an Alt-A loan in this Form 10-Q and our other financial reports because the new refinance loan replacing the original loan would not be identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such refinancing not occurred. From the time the relief refinance initiative began in 2009 to March 31, 2016, we have purchased approximately $33.3 billion of relief refinance loans that were previously categorized as Alt-A loans in our portfolio, including $0.4 billion in the first quarter of 2016.
The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
March 31, 2016 | December 31, 2015 | |||||||||||||||||||||||||
(dollars in billions) | UPB | CLTV | % Modified | SDQ Rate | UPB | CLTV | % Modified | SDQ Rate | ||||||||||||||||||
Alt-A | $ | 38.5 | 76 | % | 23.9 | % | 6.01 | % | $ | 40.2 | 77 | % | 23.1 | % | 6.32 | % | ||||||||||
The UPB of Alt-A loans in our single-family credit guarantee portfolio declined during the first quarter of 2016 primarily due to borrowers refinancing into other mortgage products, foreclosure transfers, and other liquidation events. Significant portions of the Alt-A loans in our portfolio are concentrated in Arizona, California, Florida, and Nevada.
Freddie Mac Form 10-Q | 25 | |
Management's Discussion and Analysis | Our Business Segments | Single-Family Guarantee | |
Single-Family Loan Performance
Serious Delinquency Rates
Commentary
• | Serious delinquency rates continued to decline across our single-family credit guarantee portfolio during the three months ended March 31, 2016 due to the continued strong performance of loans in the Core single-family book, continued loss mitigation and foreclosure activities for loans in the Legacy single-family book, as well as sales of certain non-performing loans. |
• | As part of our strategy to mitigate losses and reduce our holdings of less liquid assets, we sold seriously delinquent loans totaling $0.8 billion in UPB during the three months ended March 31, 2016. |
The sale of seriously delinquent loans during the three months ended March 31, 2016 contributed to a decline in the seriously delinquent rate of the total single-family credit guarantee portfolio and the Legacy single-family book of approximately 0.03% and approximately 0.11%, respectively, as of March 31, 2016.
• | Delinquency rates declined to 1.17% and 0.36% for loans one month and two months past due, respectively, as of March 31, 2016 compared to 1.37% and 0.42%, respectively, as of December 31, 2015. |
Freddie Mac Form 10-Q | 26 | |
Management's Discussion and Analysis | Our Business Segments | Single-Family Guarantee | |
Credit Performance
The table below contains certain credit performance metrics of our single-family credit guarantee portfolio.
Three Months Ended March 31, | |||||||
(dollars in millions) | 2016 | 2015 | |||||
Charge-offs, gross | $ | 569 | $ | 2,951 | |||
Recoveries | (128 | ) | (174 | ) | |||
Charge-offs, net | 441 | 2,777 | |||||
REO operations expense (income) | 84 | 75 | |||||
Total credit losses | $ | 525 | $ | 2,852 | |||
Total credit losses (in bps) | 12.2 | 67.7 | |||||
Ratio of total loan loss reserves (excluding reserves for TDR concessions) to net charge-offs for single-family loans(1) | 2.7 | 2.2 | |||||
Ratio of total loan loss reserves to net charge-offs for single-family loans | 8.2 | 1.7 | |||||
(1) | The ratio for the three months ended March 31, 2015 excludes charge-offs of $1.9 billion associated with our initial adoption of regulatory guidance on January 1, 2015. |
The table below summarizes the carrying value for individually impaired single-family loans on our consolidated balance sheets for which we have recorded a specific reserve.
March 31, 2016 | March 31, 2015 | |||||||||||||
(dollars in millions) | Loan Count | Amount | Loan Count | Amount | ||||||||||
TDRs, at January 1 | 512,253 | $ | 85,960 | 539,590 | $ | 94,401 | ||||||||
New additions | 12,470 | 1,701 | 16,650 | 2,356 | ||||||||||
Repayments and reclassifications to held-for-sale | (10,426 | ) | (1,945 | ) | (9,574 | ) | (2,779 | ) | ||||||
Foreclosure transfers and foreclosure alternatives | (2,962 | ) | (426 | ) | (6,055 | ) | (1,025 | ) | ||||||
TDRs, at March 31, | 511,335 | 85,290 | 540,611 | 92,953 | ||||||||||
Loans impaired upon purchase | 8,137 | 604 | 11,882 | 906 | ||||||||||
Total impaired loans with specific reserve | 519,472 | 85,894 | 552,493 | 93,859 | ||||||||||
Allowance for loan losses | (13,315 | ) | (16,357 | ) | ||||||||||
Net investment, at March 31, | $ | 72,579 | $ | 77,502 | ||||||||||
Freddie Mac Form 10-Q | 27 | |
Management's Discussion and Analysis | Our Business Segments | Single-Family Guarantee | |
The table below presents information about the UPB of single-family TDRs and non-accrual loans on our consolidated balance sheets.
(in millions) | March 31, 2016 | December 31, 2015 | ||||||
TDRs on accrual status | $ | 82,121 | $ | 82,026 | ||||
Non-accrual loans | 20,299 | 22,460 | ||||||
Total TDRs and non-accrual loans | $ | 102,420 | $ | 104,486 | ||||
Loan loss reserves associated with: | ||||||||
TDRs on accrual status | $ | 11,432 | $ | 12,105 | ||||
Non-accrual loans | 2,596 | 2,677 | ||||||
Total | $ | 14,028 | $ | 14,782 | ||||
Three Months Ended March 31, | ||||||||
(in millions) | 2016 | 2015 | ||||||
Foregone interest income on TDRs and non-accrual loans(1) | $ | 697 | $ | 871 | ||||
(1) | Represents the amount of interest income that we would have recognized for loans outstanding at the end of each period, had the loans performed according to their original contractual terms. |
Commentary
• | As of March 31, 2016, 68% of the loan loss reserves for single-family mortgage loans related to interest rate concessions provided to borrowers as part of loan modifications. |
• | Most of our modified single-family loans, including TDRs, were current and performing at March 31, 2016. |
• | We expect our loan loss reserves associated with existing single-family TDRs to continue to decline over time as borrowers continue to make monthly payments under the modified terms and interest-rate concessions are amortized into earnings. |
• | Charge-offs were lower during the three months ended March 31, 2016 compared to the three months ended March 31, 2015 due to: |
◦ | Decreased REO acquisition and foreclosure alternative volumes; and |
◦ | Our initial adoption of an FHFA advisory bulletin on January 1, 2015 that changed when we deem a loan to be uncollectible, which increased charge-offs by $1.9 billion during the three months ended March 31, 2015. |
• | See Note 4 for information on our single-family loan loss reserves. |
Freddie Mac Form 10-Q | 28 | |
Management's Discussion and Analysis | Our Business Segments | Single-Family Guarantee | |
Loss Mitigation Activities
Loan Workout Activity
Commentary
• | Our loan workout activity has declined along with the decline in the number of delinquent loans in the single-family credit guarantee portfolio. |
Freddie Mac Form 10-Q | 29 | |
Management's Discussion and Analysis | Our Business Segments | Single-Family Guarantee | |
REO Activity
The table below presents a summary of our single-family REO activity.
Three Months Ended March 31, | ||||||||||||||
2016 | 2015 | |||||||||||||
(dollars in millions) | Number of Properties | Amount | Number of Properties | Amount | ||||||||||
Beginning balance — REO | 17,004 | $ | 1,774 | 25,768 | $ | 2,684 | ||||||||
Additions | 4,631 | 440 | 7,201 | 683 | ||||||||||
Dispositions | (6,226 | ) | (603 | ) | (10,231 | ) | (983 | ) | ||||||
Ending balance — REO | 15,409 | 1,611 | 22,738 | 2,384 | ||||||||||
Beginning balance, valuation allowance | (52 | ) | (126 | ) | ||||||||||
Change in valuation allowance | 8 | 36 | ||||||||||||
Ending balance, valuation allowance | (44 | ) | (90 | ) | ||||||||||
Ending balance — REO, net | $ | 1,567 | $ | 2,294 | ||||||||||
Commentary
• | Our REO inventory declined during the three months ended March 31, 2016, primarily due to REO dispositions exceeding our acquisitions. REO acquisitions continue to decline due to fewer seriously delinquent loans and a large proportion of property sales to third parties at foreclosure. |
Freddie Mac Form 10-Q | 30 | |
Management's Discussion and Analysis | Our Business Segments | Single-Family Guarantee | |
FINANCIAL RESULTS
The table below presents the components of the Segment Earnings and comprehensive income for our Single-family Guarantee segment.
Three Months Ended March 31, | Change | ||||||||||||||
(dollars in millions) | 2016 | 2015 | $ | % | |||||||||||
Net interest income (loss) | $ | (118 | ) | $ | (137 | ) | $ | 19 | (14 | )% | |||||
Management and guarantee fee income | 1,285 | 1,257 | 28 | 2 | % | ||||||||||
Benefit (provision) for credit losses | 289 | (380 | ) | 669 | (176 | )% | |||||||||
Net interest income and management and guarantee income after benefit (provision) for credit losses | 1,456 | 740 | 716 | 97 | % | ||||||||||
Other non-interest income (loss) | 187 | (183 | ) | 370 | (202 | )% | |||||||||
Non-interest expense: | |||||||||||||||
Administrative expense | (295 | ) | (300 | ) | 5 | (2 | )% | ||||||||
REO operations expense | (84 | ) | (75 | ) | (9 | ) | 12 | % | |||||||
Other non-interest expense | (100 | ) | (92 | ) | (8 | ) | 9 | % | |||||||
Total non-interest expense | (479 | ) | (467 | ) | (12 | ) | 3 | % | |||||||
Segment Earnings before income tax (expense) benefit | 1,164 | 90 | 1,074 | 1,193 | % | ||||||||||
Income tax (expense) benefit | (354 | ) | (30 | ) | (324 | ) | 1,080 | % | |||||||
Segment Earnings, net of taxes | 810 | 60 | 750 | 1,250 | % | ||||||||||
Total other comprehensive income (loss), net of tax | 1 | (1 | ) | 2 | (200 | )% | |||||||||
Total comprehensive income | $ | 811 | $ | 59 | $ | 752 | 1,275 | % | |||||||
Key Drivers:
During the three months ended March 31, 2016 compared to the three months ended March 31, 2015:
• | Benefit for credit losses increased due to improvements in estimated loss severity and probability of default. |
• | Other non-interest income increased primarily due to: |
◦ | Fewer seriously delinquent single-family loans reclassified from held-for-investment to held-for-sale; and |
◦ | Minimal gains on STACR debt notes carried at fair value as a result of relatively unchanged spreads between STACR yields and LIBOR during the three months ended March 31, 2016 compared to losses as a result of tightened spreads during the three months ended March 31, 2015. |
Freddie Mac Form 10-Q | 31 | |
Management's Discussion and Analysis | Our Business Segments | Multifamily | |
MULTIFAMILY
MARKET CONDITIONS
The following graphs and related discussion present certain market indicators that can significantly affect the business and financial results of our Multifamily segment.
Apartment Vacancy Rates and Change in Effective Rents
Source: REIS, Inc.
Commentary
• | The profitability of our K Certificate transactions (as measured by gains and losses on sales of mortgage loans) is affected by the change in K Certificate spreads during the period between our commitment to purchase a loan and execution of the K Certificate transaction. |
• | Macroeconomic market conditions continued to create volatility in the K Certificate benchmark spread during the three months ended March 31, 2016. During January and February of 2016, spread widening had an adverse effect on K Certificate profitability. However, the K Certificate benchmark spread tightened sharply in March 2016 amid a broader rally in the corporate bond market, ending the first quarter at 80 basis points. |
• | During the three months ended March 31, 2016, the rate of increase in effective rents continued to slow marginally and vacancy rates continued to increase slightly. Despite these changes, both market conditions remain strong relative to historic levels. We expect this moderation trend to continue for the remainder of the year, but do not expect it to significantly affect our financial results. |
Freddie Mac Form 10-Q | 32 | |
Management's Discussion and Analysis | Our Business Segments | Multifamily | |
BUSINESS RESULTS
The following tables, graphs and related discussion present the business results of our Multifamily segment.
New Business Activity and Multifamily Portfolio
New Business Activity
Note: Outstanding commitments includes loan purchase commitments for which we have elected the fair value option.Multifamily Portfolio
Commentary
• | We have a goal under the 2016 Conservatorship Scorecard to maintain the dollar volume of multifamily new business activity at or below a production cap of $31 billion. For purposes of determining our performance under the goal, business activity associated with certain targeted loan types is excluded from this production cap. Reclassifications between new business activity subject to |
Freddie Mac Form 10-Q | 33 | |
Management's Discussion and Analysis | Our Business Segments | Multifamily | |
the production cap and new business activity not subject to the production cap will occur during 2016 as updated data becomes available.
• | Approximately two-thirds of our multifamily new business activity during the three months ended March 31, 2016 counted towards the 2016 Scorecard production cap, and the remaining one-third was not subject to the production cap. |
• | Our multifamily portfolio grew during the three months ended March 31, 2016 due to an increase in the guarantee portfolio, which was primarily attributable to our securitization of loans in K Certificate transactions. |
• | Our balance of multifamily held-for-sale loans was $23.6 billion at March 31, 2016. This balance is high relative to historic levels and exposes us to spread risk. However, we expect the balance to decline during the year as we continue to securitize loans into K Certificates and other securitization products. |
• | Our multifamily delinquency rate at March 31, 2016 was 0.04%. |
Freddie Mac Form 10-Q | 34 | |
Management's Discussion and Analysis | Our Business Segments | Multifamily | |
Credit Risk Transfer Activity
Commentary
• | During the three months ended March 31, 2016, we executed nine K Certificate transactions that transferred credit risk associated with $9.8 billion in UPB of loans. Our K Certificate issuance volume increased during the three months ended March 31, 2016 compared to the three months ended March 31, 2015 because of the record origination volume in the multifamily market during 2015. As the overall market grew, we increased our purchases, ending 2015 with a large portfolio of held-for-sale loans which are being securitized in 2016. |
• | We also transferred credit risk associated with $1.0 billion of additional loans through other securitization products, such as small balance loan securitizations. |
• | The average management and guarantee fee rate on newly issued K Certificates remained relatively unchanged during the three months ended March 31, 2016 compared to the three months ended March 31, 2015. |
Freddie Mac Form 10-Q | 35 | |
Management's Discussion and Analysis | Our Business Segments | Multifamily | |
FINANCIAL RESULTS
The table below presents the components of the Segment Earnings and comprehensive income for our Multifamily segment.
Three Months Ended March 31, | Change | ||||||||||||||
(dollars in millions) | 2016 | 2015 | $ | % | |||||||||||
Net interest income | $ | 252 | $ | 242 | $ | 10 | 4 | % | |||||||
Management and guarantee fee income | 108 | 73 | 35 | 48 | % | ||||||||||
Benefit for credit losses | 5 | 3 | 2 | 67 | % | ||||||||||
Net interest income and management and guarantee income after benefit (provision) for credit losses | 365 | 318 | 47 | 15 | % | ||||||||||
Gains (losses) on loans | 497 | 353 | 144 | 41 | % | ||||||||||
Derivative losses | (787 | ) | (199 | ) | (588 | ) | 295 | % | |||||||
Other non-interest income | 240 | 37 | 203 | 549 | % | ||||||||||
Administrative expense | (80 | ) | (70 | ) | (10 | ) | 14 | % | |||||||
Other non-interest expense | (24 | ) | (11 | ) | (13 | ) | 118 | % | |||||||
Segment Earnings before income tax expense | 211 | 428 | (217 | ) | (51 | )% | |||||||||
Income tax expense | (64 | ) | (144 | ) | 80 | (56 | )% | ||||||||
Segment Earnings, net of taxes | 147 | 284 | (137 | ) | (48 | )% | |||||||||
Total other comprehensive income (loss), net of tax | 3 | (20 | ) | 23 | (115 | )% | |||||||||
Total comprehensive income | $ | 150 | $ | 264 | $ | (114 | ) | (43 | )% | ||||||
Key Drivers:
During the three months ended March 31, 2016 compared to the three months ended March 31, 2015:
• | Net interest income increased primarily due to higher average balances of unsecuritized held-for-sale mortgage loans. |
• | Management and guarantee fee income increased primarily due to higher average multifamily guarantee portfolio balances as a result of ongoing issuances of K Certificates. |
• | Gains (losses) on loans increased due to increased interest rate-related fair value gains, partially offset by increased spread-related fair value losses. Interest rate-related fair value gains (which are offset in derivative losses) increased due to larger declines in longer-term interest rates during the three months ended March 31, 2016 compared to the three months ended March 31, 2015. Spread-related fair value losses increased due to increased volatility in K Certificate spreads during the three months ended March 31, 2016 compared to spread-related fair value gains during the three months ended March 31, 2015 when K Certificate spreads were relatively unchanged. |
• | Derivative losses increased due to a larger decline in longer-term interest rates. These losses are offset by fair value changes of the loans and investment securities being economically hedged, and as a result, there is no net impact on total comprehensive income for the Multifamily segment from fair value changes related to interest rate-related derivatives. The fair value changes of the economically hedged assets are included in gains (losses) on loans, other non-interest income and total other comprehensive income (loss). |
• | Other non-interest income increased primarily due to gains recognized on certain held-for-sale loan purchase commitments for which we elected the fair value option beginning in 2016. In addition, we recognized higher guarantee obligation amortization income due to a larger portfolio of guaranteed K Certificates. |
Freddie Mac Form 10-Q | 36 | |
Management's Discussion and Analysis | Our Business Segments | Multifamily | |
• | Total other comprehensive income (loss) remained relatively unchanged. While we recognized increased interest rate-related fair value gains due to a larger decline in longer-term interest rates (which are offset in derivatives losses), we also recognized increased spread-related fair value losses as a result of CMBS spread widening on our available-for-sale securities during the three months ended March 31, 2016 compared to spread tightening during the three months ended March 31, 2015. |
Freddie Mac Form 10-Q | 37 | |
Management's Discussion and Analysis | Our Business Segments | Investments | |
INVESTMENTS
MARKET CONDITIONS
The graphs and related discussion present the par swap rate curves as of the end of each comparative period. As our derivatives and variable-rate debt are generally LIBOR-based, changes in par swap rates can significantly affect the business and financial results of our Investments segment.
Sources: ATLAS, BlackRock
Commentary
• | Longer-term interest rates (e.g., 2-year and 10-year rates) declined as of March 31, 2016 compared to December 31, 2015, and also declined as of March 31, 2015 compared to December 31, 2014. In each case, the decline reduced the fair value of our pay-fixed interest rate swaps and improved the fair values of our receive-fixed interest rate swaps, certain of our option contracts, and the vast majority of our investments in securities. |
• | The decline in longer-term interest rates as of March 31, 2016 was larger than the decline in longer-term interest rates as of March 31, 2015, resulting in greater impacts to our financial results during the three months ended March 31, 2016 compared to the three months ended March 31, 2015. |
Freddie Mac Form 10-Q | 38 | |
Management's Discussion and Analysis | Our Business Segments | Investments | |
BUSINESS RESULTS
The following tables, graphs and related discussion present the business results of our Investments segment.
Investing Activity
The following graphs present the Investments segment's total investments portfolio and the composition of its mortgage investments portfolio by liquidity category.
Commentary
• | We continue to reduce the size of our mortgage investments portfolio in order to comply with the mortgage-related investments portfolio limits. The balance of our mortgage investments portfolio declined 1.8% from December 31, 2015 to March 31, 2016. |
• | The balance of our non-mortgage-related assets portfolio declined 22.6% from December 31, 2015 to March 31, 2016, due to reduced near-term cash needs. |
• | The percentage of less liquid assets relative to our total mortgage investments portfolio declined from 38.8% at December 31, 2015 to 37.2% at March 31, 2016, primarily due to repayments and securitizations of our less liquid assets. We actively managed the size of our less liquid assets by selling $0.8 billion of non-agency mortgage-related securities and enhancing the liquidity of $3.5 billion of single-family reperforming loans and performing modified loans through securitization. We |
Freddie Mac Form 10-Q | 39 | |
Management's Discussion and Analysis | Our Business Segments | Investments | |
retained the resulting Freddie Mac mortgage-related securities created through such securitizations in our mortgage investments portfolio.
• | The overall liquidity of our mortgage investments portfolio continues to improve as our new asset acquisitions have almost entirely consisted of purchases of more liquid assets, including agency mortgage-related securities and loans awaiting securitization into PCs. |
Freddie Mac Form 10-Q | 40 | |
Management's Discussion and Analysis | Our Business Segments | Investments | |
Net Interest Yield and Average Balances
Net Interest Yield & Average Investments Portfolio Balance
Commentary
• | The average balance of the mortgage-related securities that we manage declined 16.0% during the three months ended March 31, 2016 compared to the same period in 2015, primarily due to repayments and the sale of certain non-agency mortgage-related securities. |
• | The average balance of the single-family unsecuritized mortgage loans that we manage declined 10.0% during the three months ended March 31, 2016 compared to the same period in 2015, primarily due to the repayment and securitization of certain reperforming loans and performing modified loans, partially offset by an increase in our purchase of loans for our securitization pipeline. |
• | The average balance of the non-mortgage-related assets that we manage will fluctuate period to period based on our liquidity needs, investment strategy, and investment returns. This portfolio reflects our investments for operating purposes as well as the restricted assets that we hold and invest on behalf of consolidated trusts and cash that has been pledged to us under various agreements. |
• | Net interest yield declined 35 basis points during the three months ended March 31, 2016 compared to the same period in 2015, primarily due to an increase in our funding costs, coupled with a continued reduction in the balance of higher yielding mortgage-related assets in our mortgage investments portfolio due to repayments. |
Freddie Mac Form 10-Q | 41 | |
Management's Discussion and Analysis | Our Business Segments | Investments | |
Funding Activity
We fund our business activities primarily through the issuance of unsecured other debt. The table below summarizes this activity.
We fund our business activities primarily through the issuance of unsecured other debt. The table below summarizes this activity.
Three Months Ended March 31, | |||||||
(Par value in millions) | 2016 | 2015 | |||||
Discount notes and Reference Bills: | |||||||
Beginning balance | $ | 104,088 | $ | 134,670 | |||
Issuances | 105,653 | 61,610 | |||||
Maturities | (134,082 | ) | (79,891 | ) | |||
Ending balance | 75,659 | 116,389 | |||||
Callable debt: | |||||||
Beginning balance | 107,675 | 107,070 | |||||
Issuances | 28,930 | 25,085 | |||||
Repurchases | — | — | |||||
Calls | (27,691 | ) | (10,905 | ) | |||
Maturities | (250 | ) | (1,557 | ) | |||
Ending balance | 108,664 | 119,693 | |||||
Non-callable debt: | |||||||
Beginning balance | 194,372 | 206,393 | |||||
Issuances | 8,438 | 14,088 | |||||
Repurchases | — | — | |||||
Maturities | (8,891 | ) | (13,369 | ) | |||
Ending balance | 193,919 | 207,112 | |||||
Total other debt | $ | 378,242 | $ | 443,194 | |||
Commentary
• | The outstanding balance of our other debt declined during the three months ended March 31, 2016, compared to the same period in 2015, as we required less debt to fund our business operations, as the balance of our mortgage-related investments portfolio continues to decline. |
• | During the three months ended March 31, 2016, we continued to utilize overnight discount notes as a more cost effective tool to manage our intra-day liquidity needs. This resulted in an increase in both issuances and pay-offs of our short-term other debt compared to the same period during 2015. |
• | Issuances and calls of our longer-term callable debt increased during the three months ended March 31, 2016 compared to the same period in 2015, as we refinanced more of our outstanding callable debt due to the low interest rate environment and favorable spreads relative to our non-callable debt. |
Freddie Mac Form 10-Q | 42 | |
Management's Discussion and Analysis | Our Business Segments | Investments | |
Debt Composition
The following graphs present our other debt by contractual maturity date and earliest redemption date. The earliest redemption date refers to the earliest call date for callable debt and the contractual maturity date for all other debt.
Commentary
• | As our long-term debt spreads remained high during the three months ended March 31, 2016, we continue to rely on short-term and medium-term debt issuances for our overall funding needs. Our effective short-term debt percentage, which represents the percentage of our total other debt that is expected to mature within one year, has remained relatively flat at 41.7% as of March 31, 2016 as compared to 41.3% as of December 31, 2015. |
• | Our short-term debt issuances provide us with overall lower funding costs relative to longer-term debt and greater flexibility as we reduce our mortgage-related investments portfolio. We saw improvement in our short-term debt spreads compared to the fourth quarter of 2015, primarily due to declining external competition for new short-term debt issuances. |
Freddie Mac Form 10-Q | 43 | |
Management's Discussion and Analysis | Our Business Segments | Investments | |
• | As of March 31, 2016, $91 billion of the outstanding $109 billion of callable debt may be called within one year. |
Freddie Mac Form 10-Q | 44 | |