Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 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 October 19, 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
INTRODUCTION
KEY ECONOMIC INDICATORS
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED BALANCE SHEETS ANALYSIS
OUR BUSINESS SEGMENTS
RISK MANAGEMENT
LIQUIDITY AND CAPITAL RESOURCES
CONSERVATORSHIP AND RELATED MATTERS
REGULATION AND SUPERVISION
OFF-BALANCE SHEET ARRANGEMENTS
FORWARD-LOOKING STATEMENTS
FINANCIAL STATEMENTS
OTHER INFORMATION
LEGAL PROCEEDINGS
RISK FACTORS
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
EXHIBITS
CONTROLS AND PROCEDURES
SIGNATURES
FORM 10-Q INDEX
EXHIBIT INDEX

Freddie Mac Form 10-Q
 
i


Management's Discussion and Analysis
 
Introduction

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in the “Forward-Looking Statements” sections of this Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2015, or 2015 Annual Report, and our Quarterly Reports on Form 10-Q for the first and second quarters of 2016, the “Risk Factors” sections of our 2015 Annual Report and our Quarterly Report on Form 10-Q for the first quarter of 2016, 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 and our Quarterly Report on Form 10-Q for the second quarter of 2016.
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 and nine months ended September 30, 2016 included in “Financial Statements.” Throughout this Form 10-Q, we refer to the three months ended September 30, 2016 and the three months ended September 30, 2015 as “3Q 2016” and “3Q 2015,” respectively, and we refer to the nine months ended September 30, 2016 and the nine months ended September 30, 2015 as “YTD 2016” and “YTD 2015,” respectively.
INTRODUCTION
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability, and affordability to the U.S. housing market. We do this primarily by purchasing residential mortgage loans originated by lenders. In most instances, we package these loans into mortgage-related securities, which are guaranteed by us and sold in the global capital markets. We also invest in mortgage loans and mortgage-related securities. We do not originate loans or lend money directly to borrowers.
We support the U.S. housing market and the overall economy by enabling America’s families to access mortgage loan funding with better terms and by providing consistent liquidity to the multifamily mortgage market, 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 $2.3 billion in 3Q 2016 compared to $(0.5) billion in 3Q 2015. The increase in comprehensive income was primarily driven by two market-related items, including an estimated:

Freddie Mac Form 10-Q
 
1


Management's Discussion and Analysis
 
Introduction

•
$1.4 billion increase resulting from changes in interest rates during 3Q 2016 compared to 3Q 2015; and
•
$1.2 billion increase resulting from spreads tightening during 3Q 2016 compared to spreads widening during 3Q 2015.
Our total equity was $3.5 billion at September 30, 2016. Because our net worth was positive we are not requesting a draw from Treasury under the Purchase Agreement for 3Q 2016. Following payment of our dividend obligation of $2.3 billion in December 2016, our cumulative senior preferred stock dividend payments will total $101.4 billion. Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock, which remains $72.3 billion. The amount of available funding remaining under the Purchase Agreement is $140.5 billion, and would be reduced by any future draws.
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 September 30, 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 — The volatility of spreads (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 measured at fair value, we generally recognize fair value losses when spreads widen. Conversely, for financial liabilities measured at fair value, we generally recognize fair value gains 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 thus being required to draw from Treasury. We could 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. In an effort to reduce the probability of a draw due to changes in interest rates, we entered into certain structured transactions during the first half of 2016 that have resulted in additional financial assets being recognized and measured at fair value. In addition, we continue to explore other strategies and activities that may reduce the probability of a draw.

Freddie Mac Form 10-Q
 
2


Management's Discussion and Analysis
 
Introduction

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 capital reserve 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 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
NATIONAL HOME PRICES
a20163q10q_chart-30844.jpg
(December 2000 = 100)
COMMENTARY
•
Home prices continued to appreciate during 3Q 2016 and YTD 2016, increasing 0.9% and 6.5%, respectively, compared to an increase of 0.8% and 6.3%, respectively, during 3Q 2015 and YTD 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 September 30, 2016 surpassed their previous 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

a20163q10q_chart-31719.jpga20163q10q_chart-33907.jpg
COMMENTARY
•
Both ending and average mortgage interest rates, as indicated by the 30-year PMMS rate, decreased during 3Q 2016 and YTD 2016.
•
The average 30-year PMMS rate was 3.45% and 3.59% during 3Q 2016 and YTD 2016, respectively, compared to 3.95% and 3.83% during 3Q 2015 and YTD 2015, respectively.
•
Quarterly ending longer-term interest rates, as indicated by the 10-year LIBOR and the 10-year Treasury rates, increased during 3Q 2016, but still declined overall during YTD 2016.

Freddie Mac Form 10-Q
 
5


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

UNEMPLOYMENT RATE
UNEMPLOYMENT RATE AND JOB CREATION
a20163q10q_chart-31584.jpg
Source: U.S. Bureau of Labor Statistics

COMMENTARY
•
An average of approximately 192,000 and 178,000 monthly net new jobs were added to the economy during 3Q 2016 and YTD 2016, respectively. The unemployment rate was relatively unchanged in 3Q 2016.

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 3Q 2016 vs. 3Q 2015 and YTD 2016 vs. YTD 2015.
 
 
3Q 2016
 
3Q 2015
 
Change
 
YTD 2016
 
YTD 2015
 
Change
(dollars in millions)
 
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Net interest income
 
$
3,646

 
$
3,743

 
$
(97
)
 
(3
)%
 
$
10,494

 
$
11,359

 
$
(865
)
 
(8
)%
Benefit (provision) for credit losses
 
(113
)
 
528

 
(641
)
 
(121
)%
 
1,129

 
1,884

 
(755
)
 
(40
)%
Net interest income after benefit (provision) for credit losses
 
3,533

 
4,271

 
(738
)
 
(17
)%
 
11,623

 
13,243

 
(1,620
)
 
(12
)%
Non-interest income (loss):
 
 
 
 
 

 


 
 
 
 
 


 


Gains (losses) on extinguishment of debt
 
(92
)
 
4

 
(96
)
 
(2,400
)%
 
(266
)
 
(155
)
 
(111
)
 
72
 %
Derivative gains (losses)
 
(36
)
 
(4,172
)
 
4,136

 
(99
)%
 
(6,655
)
 
(3,440
)
 
(3,215
)
 
93
 %
Net impairment of available-for-sale securities recognized in earnings
 
(9
)
 
(54
)
 
45

 
(83
)%
 
(138
)
 
(245
)
 
107

 
(44
)%
Other gains on investment securities recognized in earnings
 
309

 
256

 
53

 
21
 %
 
1,062

 
825

 
237

 
29
 %
Other income (loss)
 
605

 
125

 
480

 
384
 %
 
1,527

 
(432
)
 
1,959

 
(453
)%
Total non-interest income (loss)
 
777

 
(3,841
)
 
4,618

 
(120
)%
 
(4,470
)
 
(3,447
)
 
(1,023
)
 
30
 %
Non-interest expense:
 
 
 
 
 

 


 
 
 
 
 


 


Administrative expense
 
(498
)
 
(465
)
 
(33
)
 
7
 %
 
(1,421
)
 
(1,417
)
 
(4
)
 
—
 %
REO operations expense
 
(56
)
 
(116
)
 
60

 
(52
)%
 
(169
)
 
(243
)
 
74

 
(30
)%
Temporary Payroll Tax Cut Continuation Act of 2011 expense
 
(293
)
 
(248
)
 
(45
)
 
18
 %
 
(845
)
 
(705
)
 
(140
)
 
20
 %
Other expense
 
(138
)
 
(270
)
 
132

 
(49
)%
 
(442
)
 
(1,234
)
 
792

 
(64
)%
Total non-interest expense
 
(985
)
 
(1,099
)
 
114

 
(10
)%
 
(2,877
)
 
(3,599
)
 
722

 
(20
)%
Income (loss) before income tax (expense) benefit
 
3,325

 
(669
)
 
3,994

 
(597
)%
 
4,276

 
6,197

 
(1,921
)
 
(31
)%
Income tax (expense) benefit
 
(996
)
 
194

 
(1,190
)
 
(613
)%
 
(1,308
)
 
(1,979
)
 
671

 
(34
)%
Net income (loss)
 
2,329

 
(475
)
 
2,804

 
(590
)%
 
2,968

 
4,218

 
(1,250
)
 
(30
)%
Total other comprehensive income (loss), net of taxes and reclassification adjustments
 
(19
)
 
(26
)
 
7

 
(27
)%
 
275

 
(60
)
 
335

 
(558
)%
Comprehensive income (loss)
 
$
2,310

 
$
(501
)
 
$
2,811

 
(561
)%
 
$
3,243

 
$
4,158

 
$
(915
)
 
(22
)%
Key Drivers:
See "Net Interest Income," "Benefit (Provision) for Credit Losses," "Derivative Gains (Losses)," and "Other Comprehensive Income (Loss)" for a discussion of those line items. Key drivers for other line items for 3Q 2016 vs. 3Q 2015 and YTD 2016 vs. YTD 2015 include:
•
Gains (losses) on extinguishment of debt
◦
3Q 2016 vs. 3Q 2015 and YTD 2016 vs. YTD 2015 - Losses on extinguishment of debt increased primarily due to an increase in the amount of losses recognized from the extinguishment of certain fixed-rate debt securities of consolidated trusts. While our repurchase activity remained relatively flat during each comparative period, we recognized increased losses

Freddie Mac Form 10-Q
 
7


Management's Discussion and Analysis
 
Consolidated Results of Operations | Comparison

during the 2016 periods primarily due to larger declines in market interest rates between the time of issuance and repurchase of certain debt securities of consolidated trusts.
•
Other gains on investment securities recognized in earnings
◦
YTD 2016 vs. YTD 2015 - increased primarily due to the recognition of greater gains on our agency mortgage-related securities classified as trading, as longer-term interest rates declined by a larger amount during YTD 2016 compared to YTD 2015, partially offset by a decrease in realized gains, as we sold fewer non-agency mortgage-related securities classified as available-for-sale during YTD 2016. Our sales of non-agency mortgage-related securities will continue to vary as our portfolio that is saleable, based on a variety of criteria, has decreased.
•
Other income (loss)
◦
3Q 2016 vs. 3Q 2015 - other income (loss) improved reflecting:
*
Gains on multifamily loans and commitments for which we elected the fair value option due to higher spread-related fair value gains during 3Q 2016. Spread-related fair value gains increased due to tightening of the K Certificate benchmark spreads during 3Q 2016 compared to 3Q 2015 when the spreads widened; and
*
Reduced lower-of-cost-or-fair-value adjustments as we reclassified fewer seriously delinquent single-family loans from held-for-investment to held-for-sale during 3Q 2016; partially offset by
*
Losses on STACR debt notes carried at fair value driven by tightening spreads between STACR yields and LIBOR during 3Q 2016 compared to gains as a result of widening spreads during 3Q 2015.
◦
YTD 2016 vs. YTD 2015 - other income (loss) improved reflecting:
*
Reduced lower-of-cost-or-fair-value adjustments as we reclassified fewer seriously delinquent single-family loans from held-for-investment to held-for-sale during YTD 2016; and
*
Gains on multifamily mortgage loans and commitments for which we elected the fair value option due to both increased interest rate-related and spread-related fair value gains. Interest rate-related fair value gains increased due to larger declines in longer-term interest rates during YTD 2016 compared to YTD 2015. Spread-related fair value gains increased due to K Certificate benchmark spreads tightening during YTD 2016 compared to the spreads widening during YTD 2015.
•
Other expense
◦
3Q 2016 vs. 3Q 2015 and YTD 2016 vs. YTD 2015 - decreased primarily due to 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. This was partially offset by higher credit risk transfer ("CRT") expense which resulted from an increase in the outstanding cumulative volume of ACIS transactions.
The three items discussed below affected multiple line items on our consolidated results of operations.
LOAN RECLASSIFICATIONS
During 3Q 2016 and 3Q 2015, we reclassified $0.3 billion and $2.5 billion, respectively, in UPB of seriously delinquent single-family mortgage loans from held-for-investment to held-for-sale. During YTD 2016 and YTD 2015, we reclassified $3.8 billion and $10.6 billion, respectively, in UPB of such mortgage

Freddie Mac Form 10-Q
 
8


Management's Discussion and Analysis
 
Consolidated Results of Operations | Comparison

loans. The initial reclassifications of these loans affected several line items on our consolidated results of operations, as shown in the table below.
(in millions)
 
3Q 2016
 
3Q 2015
 
YTD 2016
 
YTD 2015
Benefit for credit losses
 
$
59

 
$
485

 
$
632

 
$
1,977

Other income (loss) - lower-of-cost-or-fair-value adjustment
 
(65
)
 
(403
)
 
(799
)
 
(1,616
)
Other expense - property taxes and insurance associated with these loans
 
(10
)
 
(241
)
 
(150
)
 
(1,037
)
Effect on income before income tax (expense) benefit
 
$
(16
)
 
$
(159
)
 
$
(317
)
 
$
(676
)
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.
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). The estimated net interest rate effect on comprehensive income is essentially the derivative gains (losses) attributable to financial instruments that are not measured at fair value.
(in billions)
3Q 2016
 
3Q 2015
 
YTD 2016
 
YTD 2015
Components of derivative gains (losses)
 
 
 
 
 
 
 
Derivative gains (losses)
$
—

 
$
(4.1
)
 
$
(6.6
)
 
$
(3.4
)
Less: Accrual of periodic cash settlements
(0.4
)
 
(0.5
)
 
(1.3
)
 
(1.6
)
Derivative fair value changes
$
0.4

 
$
(3.6
)
 
$
(5.3
)
 
$
(1.8
)
Estimated Net Interest Rate Effect
 
 
 
 
 
 
 
Interest rate effect on derivative fair values
$
0.5

 
$
(3.6
)
 
$
(5.2
)
 
$
(1.7
)
Estimate of offsetting interest rate effect related to financial instruments measured at fair value
(0.5
)
 
1.5

 
2.4

 
1.0

Income tax benefit (expense)
—

 
0.7

 
1.0

 
0.2

Estimated Net Interest Rate Effect on Comprehensive income
$
—

 
$
(1.4
)
 
$
(1.8
)
 
$
(0.5
)
As this table demonstrates, the estimated net effect of derivatives on our comprehensive income is volatile, and can be significant. However, the estimated net interest rate effect during 3Q 2016 was minimal as the impact of a modest increase in longer-term interest rates was offset by the impact of yield curve flattening. For information about the sensitivity of our financial results to interest-rate volatility, see "Risk Management - Interest-Rate Risk and Other Market Risks."

Freddie Mac Form 10-Q
 
9


Management's Discussion and Analysis
 
Consolidated Results of Operations | Comparison

CHANGES IN SPREADS
Comprehensive income (loss) was affected by changes in spreads in amounts estimated to be $0.7 billion and $(0.5) billion (after-tax) during 3Q 2016 and 3Q 2015, respectively, and $0.2 billion (after-tax) during both YTD 2016 and YTD 2015. During 3Q 2016 and YTD 2016, spreads tightening on our agency and non-agency mortgage-related securities and our multifamily mortgage loans and commitments measured at fair value resulted in an increase in comprehensive income. During 3Q 2015, the negative effect on comprehensive income was primarily due to spreads widening on these investments. During YTD 2015, spreads tightening on our agency and non-agency mortgage-related securities was partially offset by spreads widening on our multifamily mortgage loans measured at fair value, resulting in an increase in comprehensive income.

Freddie Mac Form 10-Q
 
10


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


NET INTEREST INCOME
NET INTEREST YIELD ANALYSIS
The tables below present an analysis of interest-earning assets and interest-bearing liabilities.
 
 
3Q 2016
 
3Q 2015
 
(dollars in millions)
Average
Balance
 
Interest
Income
(Expense)(1)
 
Average
Rate
 
Average
Balance
 
Interest
Income
(Expense)(1)
 
Average
Rate
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
21,664

 
$
15

 
0.28
 %
 
$
11,849

 
$
1

 
0.04
%
 
Securities purchased under agreements to resell
62,735

 
59

 
0.38

 
53,046

 
18

 
0.13

 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
185,235

 
1,779

 
3.84

 
217,830

 
2,092

 
3.84

 
Extinguishment of PCs held by Freddie Mac
(88,066
)
 
(829
)
 
(3.76
)
 
(105,709
)
 
(951
)
 
(3.60
)
 
Total mortgage-related securities, net
97,169

 
950

 
3.91

 
112,121

 
1,141

 
4.07

 
Non-mortgage-related securities
15,671

 
26

 
0.67

 
8,738

 
4

 
0.17

 
Loans held by consolidated trusts(1)
1,654,288

 
13,602

 
3.29

 
1,601,069

 
14,032

 
3.51

 
Loans held by Freddie Mac(1)
131,945

 
1,395

 
4.23

 
156,248

 
1,563

 
4.00

 
Total interest-earning assets
$
1,983,472

 
$
16,047

 
3.24

 
$
1,943,071

 
$
16,759

 
3.45

 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
$
1,680,388

 
$
(11,716
)
 
(2.79
)
 
$
1,621,197

 
$
(12,315
)
 
(3.04
)
 
Extinguishment of PCs held by Freddie Mac
(88,066
)
 
829

 
3.76

 
(105,709
)
 
951

 
3.60

 
Total debt securities of consolidated trusts held by third parties
1,592,322

 
(10,887
)
 
(2.73
)
 
1,515,488

 
(11,364
)
 
(3.00
)
 
Other debt:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
81,057

 
(83
)
 
(0.40
)
 
99,050

 
(40
)
 
(0.16
)
 
Long-term debt
302,062

 
(1,384
)
 
(1.82
)
 
310,204

 
(1,559
)
 
(2.01
)
 
Total other debt
383,119

 
(1,467
)
 
(1.53
)
 
409,254

 
(1,599
)
 
(1.56
)
 
Total interest-bearing liabilities
1,975,441

 
(12,354
)
 
(2.50
)
 
1,924,742

 
(12,963
)
 
(2.70
)
 
Expense related to derivatives
—

 
(47
)
 
(0.01
)
 
—

 
(53
)
 
(0.01
)
 
Impact of net non-interest-bearing funding
8,031

 
—

 
0.01

 
18,329

 
—

 
0.03

 
Total funding of interest-earning assets
$
1,983,472

 
$
(12,401
)
 
(2.50
)
 
$
1,943,071

 
$
(13,016
)
 
(2.68
)
 
Net interest income/yield
 
 
$
3,646

 
0.74

 
 
 
$
3,743

 
0.77

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Loan fees, primarily consisting of amortization of delivery fees, included in interest income were $737 million and $500 million for loans held by consolidated trusts and were $53 million and $80 million for loans held by Freddie Mac during 3Q 2016 and 3Q 2015, respectively.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Freddie Mac Form 10-Q
 
11


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


 
 
 
 
 
 
 
 
 
 
 
 
 
YTD 2016
 
YTD 2015
(dollars in millions)
Average
Balance
 
Interest
Income
(Expense)(1)
 
Average
Rate
 
Average
Balance
 
Interest
Income
(Expense)(1)
 
Average
Rate
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
16,112

 
$
31

 
0.26
 %
 
$
12,458

 
$
6

 
0.06
%
Securities purchased under agreements to resell
57,767

 
156

 
0.36

 
50,278

 
39

 
0.11

Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
193,492

 
5,546

 
3.82

 
231,969

 
6,728

 
3.87

Extinguishment of PCs held by Freddie Mac
(96,388
)
 
(2,679
)
 
(3.71
)
 
(109,167
)
 
(3,002
)
 
(3.67
)
Total mortgage-related securities, net
97,104

 
2,867

 
3.94

 
122,802

 
3,726

 
4.05

Non-mortgage-related securities
14,219

 
56

 
0.53

 
9,965

 
10

 
0.12

Loans held by consolidated trusts(1)
1,640,997

 
41,735

 
3.39

 
1,579,720

 
41,641

 
3.51

Loans held by Freddie Mac(1)
138,648

 
4,318

 
4.15

 
161,628

 
4,792

 
3.95

Total interest-earning assets
$
1,964,847

 
$
49,163

 
3.33

 
$
1,936,851

 
$
50,214

 
3.46

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
$
1,665,226

 
$
(36,606
)
 
(2.93
)
 
$
1,600,556

 
$
(36,858
)
 
(3.07
)
Extinguishment of PCs held by Freddie Mac
(96,388
)
 
2,679

 
3.71

 
(109,167
)
 
3,002

 
3.67

Total debt securities of consolidated trusts held by third parties
1,568,838

 
(33,927
)
 
(2.88
)
 
1,491,389

 
(33,856
)
 
(3.03
)
Other debt:
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
85,995

 
(258
)
 
(0.39
)
 
107,941

 
(114
)
 
(0.14
)
Long-term debt
301,791

 
(4,338
)
 
(1.91
)
 
320,506

 
(4,709
)
 
(1.96
)
Total other debt
387,786

 
(4,596
)
 
(1.58
)
 
428,447

 
(4,823
)
 
(1.50
)
Total interest-bearing liabilities
1,956,624

 
(38,523
)
 
(2.62
)
 
1,919,836

 
(38,679
)
 
(2.69
)
Expense related to derivatives
—

 
(146
)
 
(0.01
)
 
—

 
(176
)
 
(0.01
)
Impact of net non-interest-bearing funding
8,223

 
—

 
0.01

 
17,015

 
—

 
0.02

Total funding of interest-earning assets
$
1,964,847

 
$
(38,669
)
 
(2.62
)
 
$
1,936,851

 
$
(38,855
)
 
(2.68
)
Net interest income/yield
 
 
$
10,494

 
0.71

 
 
 
$
11,359

 
0.78


(1)
Loan fees, primarily consisting of amortization of delivery fees, included in interest income were $1.9 billion and $1.6 billion for loans held by consolidated trusts and were $184 million and $289 million for loans held by Freddie Mac during YTD 2016 and YTD 2015, respectively.

Freddie Mac Form 10-Q
 
12


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.
 
3Q 2016
 
3Q 2015
 
Change
 
YTD 2016
 
YTD 2015
 
Change
(dollars in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Contractual net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee fee income
$
822

 
$
663

 
$
159

 
24
 %
 
$
2,212

 
$
1,899

 
$
313

 
16
 %
Guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011
292

 
246

 
46

 
19
 %
 
838

 
693

 
145

 
21
 %
Other contractual net interest income
1,635

 
1,944

 
(309
)
 
(16
)%
 
5,219

 
6,336

 
(1,117
)
 
(18
)%
Total contractual net interest income
2,749

 
2,853

 
(104
)
 
(4
)%
 
8,269

 
8,928

 
(659
)
 
(7
)%
Net amortization - loans and debt securities of consolidated trusts
884

 
808

 
76

 
9
 %
 
2,191

 
2,190

 
1

 
—
 %
Net amortization - other assets and debt
60

 
135

 
(75
)
 
(56
)%
 
180

 
417

 
(237
)
 
(57
)%
Expense related to derivatives
(47
)
 
(53
)
 
6

 
(11
)%
 
(146
)
 
(176
)
 
30

 
(17
)%
Net interest income
$
3,646

 
$
3,743

 
$
(97
)
 
(3
)%
 
$
10,494

 
$
11,359

 
$
(865
)
 
(8
)%

Key Drivers:
•
Guarantee fee income (contractual)
◦
3Q 2016 vs. 3Q 2015 and YTD 2016 vs. YTD 2015 - increased during the 2016 periods due to higher average contractual guarantee fee rates, reflecting the continued growth in the size of the Core single-family book, and a larger overall single-family credit guarantee portfolio. Average contractual guarantee fees are generally higher on mortgage loans in our Core single-family book compared to those in our Legacy single-family book.
•
Other contractual net interest income
◦
3Q 2016 vs. 3Q 2015 and YTD 2016 vs. YTD 2015 - decreased during the 2016 periods primarily due to the continued reduction in the balance of our mortgage-related investments portfolio pursuant to the portfolio limits established by the Purchase Agreement and FHFA. See "Conservatorship and Related Matters - Reducing Our Mortgage-Related Investments Portfolio Over Time" for a discussion of the key drivers of the decline in our mortgage-related investments portfolio.
•
Net amortization of other assets and debt
◦
3Q 2016 vs. 3Q 2015 and YTD 2016 vs. YTD 2015 - decreased during the 2016 periods primarily due to less accretion of previously recognized other-than-temporary impairment. The decrease in accretion during the 2016 periods is due to a decline in the population of impaired securities as a result of our active disposition of these securities and the recognition of less other-than-temporary impairment due to stabilized collateral performance.

Freddie Mac Form 10-Q
 
13


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.
 
 
3Q 2016
 
3Q 2015
 
Change
 
YTD 2016
 
YTD 2015
 
Change
(dollars in billions)
 
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Provision for newly impaired loans
 
$
(0.2
)
 
$
(0.2
)
 
$
—

 
—
 %
 
$
(0.6
)
 
$
(0.8
)
 
$
0.2

 
(25
)%
Amortization of interest rate concessions
 
0.2

 
0.3

 
(0.1
)
 
(33
)%
 
0.7

 
0.9

 
(0.2
)
 
(22
)%
Reclassifications of held-for-investment loans to held-for-sale loans
 
—

 
0.5

 
(0.5
)
 
(100
)%
 
0.6

 
2.0

 
(1.4
)
 
(70
)%
Other, including changes in estimated default probability and loss severity
 
(0.1
)
 
(0.1
)
 
—

 
—
 %
 
0.4

 
(0.2
)
 
0.6

 
(300
)%
Benefit (provision) for credit losses
 
$
(0.1
)
 
$
0.5

 
$
(0.6
)
 
(120
)%
 
$
1.1

 
$
1.9

 
$
(0.8
)
 
(42
)%
Key Drivers:
•
3Q 2016 vs. 3Q 2015 - Benefit (provision) for credit losses changed to a provision in 3Q 2016 compared to a benefit in 3Q 2015 primarily because:
◦
Fewer seriously delinquent single-family loans were reclassified from held-for-investment to held-for-sale in 3Q 2016. During 3Q 2016, $0.3 billion in UPB of seriously delinquent single-family loans were reclassified to held-for-sale, compared to $2.5 billion during 3Q 2015. See "Loan Reclassifications" for the effect of these loan reclassifications on benefit (provision) for credit losses and pre-tax net income.
◦
Management qualitatively increased the modeled estimate of incurred losses for mortgage loans during 3Q 2016 due to several factors. Sales prices of foreclosed properties have not improved over the last few years as much as national home price appreciation. Additionally, we have observed rising delinquency rates and increases in loan loss reserves at several large financial institutions for certain consumer financing receivables, such as credit card receivables and auto loans, which can be indicators for increases in mortgage loan defaults.
•
YTD 2016 vs. YTD 2015 - Benefit for credit losses declined in YTD 2016 compared to YTD 2015 primarily because fewer seriously delinquent single-family loans were reclassified from held-for-investment to held-for-sale in YTD 2016. During YTD 2016, $3.8 billion in UPB of seriously delinquent single-family loans were reclassified to held-for-sale, compared to $10.6 billion during YTD 2015. The smaller benefit for credit losses from the reclassifications of loans was partially offset by improvements in estimated loss severity and probability of default during YTD 2016 compared to YTD 2015.

Freddie Mac Form 10-Q
 
14


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


DERIVATIVE GAINS (LOSSES)
Our sensitivity to interest rates on an economic basis remains low based on our models. Furthermore, our exposure to earnings volatility resulting from our use of derivatives has recently decreased as we have rebalanced our derivative portfolio in response to the declining interest-rate environment. We also entered into certain structured transactions during the first half of 2016, which resulted in more financial assets being recognized and measured at fair value. We continue to align our derivative portfolio 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).
 
3Q 2016
 
3Q 2015
 
Change
 
YTD 2016
 
YTD 2015
 
Change
(dollars in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Fair value change in interest-rate swaps
$
541

 
$
(4,693
)
 
$
5,234

 
(112
)%
 
$
(7,513
)
 
$
(2,514
)
 
$
(4,999
)
 
199
 %
Fair value change in option-based derivatives
(235
)
 
1,171

 
(1,406
)
 
(120
)%
 
2,841

 
722

 
2,119

 
293
 %
Accrual of periodic cash settlements
(416
)
 
(536
)
 
120

 
(22
)%
 
(1,326
)
 
(1,639
)
 
313

 
(19
)%
Fair value change in other derivatives
74

 
(114
)
 
188

 
(165
)%
 
(657
)
 
(9
)
 
(648
)
 
7,200
 %
Derivative gains (losses)
$
(36
)
 
$
(4,172
)
 
$
4,136

 
(99
)%
 
$
(6,655
)
 
$
(3,440
)
 
$
(3,215
)
 
93
 %
Key Drivers:
•
3Q 2016 vs. 3Q 2015 - Derivative fair value losses declined during 3Q 2016 compared to 3Q 2015 primarily due to an increase in longer-term interest rates during 3Q 2016, compared to a decrease in longer-term interest rates during 3Q 2015. The improvement in fair value was partially offset by losses in our receive-fixed swaps and option-based derivatives. The 10-year par swap rate increased 6 basis points during 3Q 2016, while the 10-year par swap rate declined 44 basis points during 3Q 2015.
•
YTD 2016 vs. YTD 2015 - We recognized derivative fair value losses during YTD 2016 and YTD 2015 primarily due to declines in interest rates in both periods. The decline in fair value was partially offset by gains in our receive-fixed swaps and option-based derivatives. The 10-year par swap rate declined 74 basis points and 28 basis points during YTD 2016 and YTD 2015, respectively.
•
See "Our Business Segments - Investments - Market Conditions" for more information about par swap rates.

Freddie Mac Form 10-Q
 
15


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.
 
3Q 2016
 
3Q 2015
 
Change
 
YTD 2016
 
YTD 2015
 
Change
(in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Other comprehensive income, excluding accretion and reclassifications
$
336

 
$
217

 
$
119

 
55
 %
 
$
948

 
$
754

 
$
194

 
26
 %
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities
(66
)
 
(108
)
 
42

 
(39
)%
 
(235
)
 
(354
)
 
119

 
(34
)%
Reclassifications from AOCI
(289
)
 
(135
)
 
(154
)
 
114
 %
 
(438
)
 
(460
)
 
22

 
(5
)%
Total other comprehensive income (loss)
$
(19
)
 
$
(26
)

$
7

 
(27
)%
 
$
275


$
(60
)
 
$
335

 
(558
)%
Key Drivers:
•
Other comprehensive income, excluding accretion and reclassifications
◦
3Q 2016 vs. 3Q 2015 - increased primarily due to unrealized gains from spreads tightening for our agency and non-agency mortgage-related securities during 3Q 2016 compared to unrealized losses from spreads widening for these securities during 3Q 2015. The increase attributable to spread changes was partially offset by unrealized losses due to an increase in longer-term interest rates during 3Q 2016 compared to unrealized gains due to a decrease in longer-term interest rates during 3Q 2015.
◦
YTD 2016 vs. YTD 2015 - increased primarily due to a larger decline in longer-term interest rates during YTD 2016 compared to YTD 2015, which resulted in greater unrealized gains on our available-for-sale mortgage-related securities. The increase attributable to interest rate changes was partially offset by less spread tightening for our agency and non-agency mortgage-related securities during YTD 2016 compared to YTD 2015.
•
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities
◦
3Q 2016 vs. 3Q 2015 and YTD 2016 vs. YTD 2015 - decreased during the 2016 periods primarily due to a decline in the population of impaired securities as a result of our active dispositions of these securities, coupled with less new other-than-temporary impairment due to stabilized collateral performance.
•
Reclassifications from AOCI
◦
3Q 2016 vs. 3Q 2015 - increased due to greater sales of agency and non-agency mortgage-related securities in an unrealized gain position.

Freddie Mac Form 10-Q
 
16


Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized consolidated balance sheets.
 
 
September 30, 2016
 
December 31, 2015
 
Change
(dollars in millions)
 
 
 
 
 
$
 
%
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
3,940

 
$
5,595

 
$
(1,655
)
 
(30
)%
Restricted cash and cash equivalents
 
19,131

 
14,533

 
4,598

 
32
 %
Securities purchased under agreements to resell
 
55,673

 
63,644

 
(7,971
)
 
(13
)%
Subtotal
 
78,744

 
83,772

 
(5,028
)
 
(6
)%
Investments in securities
 
115,393

 
114,215

 
1,178

 
1
 %
Mortgage loans, net
 
1,782,436

 
1,754,193

 
28,243

 
2
 %
Accrued interest receivable
 
6,103

 
6,074

 
29

 
—
 %
Derivative assets, net
 
1,499

 
395

 
1,104

 
279
 %
Real estate owned, net
 
1,272

 
1,725

 
(453
)
 
(26
)%
Deferred tax assets, net
 
18,730

 
18,205

 
525

 
3
 %
Other assets
 
11,085

 
7,313

 
3,772

 
52
 %
Total assets
 
$
2,015,262

 
$
1,985,892

 
$
29,370

 
1
 %
 
 
 
 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Accrued interest payable
 
$
5,890

 
$
6,183

 
$
(293
)
 
(5
)%
Debt, net
 
1,999,841

 
1,970,269

 
29,572

 
2
 %
Derivative liabilities, net
 
1,178

 
1,254

 
(76
)
 
(6
)%
Other liabilities
 
4,843

 
5,246

 
(403
)
 
(8
)%
Total liabilities
 
2,011,752

 
1,982,952

 
28,800

 
1
 %
Total equity
 
3,510

 
2,940

 
570

 
19
 %
Total liabilities and equity
 
$
2,015,262

 
$
1,985,892

 
$
29,370

 
1
 %
Key Drivers:
As of September 30, 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 as of September 30, 2016 decreased due to higher near term cash needs at December 31, 2015 for upcoming maturities and anticipated calls of other debt. However, the amounts held by consolidated trusts increased primarily due to an increase in prepayment proceeds. Our use of these proceeds is restricted by the provisions of the Master Trust Agreement as the proceeds are trust assets that will be distributed to the holders of our debt securities of consolidated trusts shortly following receipt.
•
Derivative assets, net increased primarily due to an increase in non-cash collateral posted by our derivative counterparties. While we generally offset the obligation to return cash collateral against the fair value of our derivative assets on our consolidated balance sheets, we do not offset non-cash collateral received against the fair value of our derivative assets.
•
Real estate owned, net continued to decline as we continued to sell our existing inventory. In addition, REO acquisitions continue to decline due to fewer seriously delinquent loans (see "Our

Freddie Mac Form 10-Q
 
17


Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


Business Segments - Single-Family Loan Performance"), due in part to sales of certain seriously delinquent loans, and a large proportion of property sales to third parties at foreclosure.
•
Other assets increased primarily because of receivables from servicers. Lower mortgage interest rates during YTD 2016 caused an increase in prepayments, and thus, an increase in receivables from servicers. When a borrower prepays, there is a brief delay before the servicer remits the payoff proceeds to us.
•
Total equity increased as a result of higher comprehensive income in 3Q 2016 than in the fourth quarter of 2015.

Freddie Mac Form 10-Q
 
18


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, securitization, and guarantee of multifamily loans and securities, our investments in those 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, single-family seriously delinquent loans, and the credit risk of single-family performing 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 first and third quarters of 2016, we changed how we calculate certain components of our Segment Earnings for our Single-family Guarantee, Multifamily, and Investments segments. Prior period results have been revised to conform to the current period presentation. For more information on these changes and on our segment reclassifications, see Note 11 in this Form 10-Q and Note 12 in our 2015 Annual Report.

Freddie Mac Form 10-Q
 
19


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


SEGMENT COMPREHENSIVE INCOME
The tables below show our comprehensive income by segment, including the All Other category.
a20163q10q_chart-30565.jpg
a20163q10q_chart-33500.jpg

Freddie Mac Form 10-Q
 
20


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


SINGLE-FAMILY GUARANTEE
MARKET CONDITIONS
The following graphs and related discussion present certain market indicators that can significantly affect the business and financial results of our Single-family Guarantee segment.
U.S. Single-Family Originations
a20163q10q_chart-30443.jpg
Source: Inside Mortgage Finance dated August 19, 2016 (latest available IMF purchase/refinance information).

 
Single-Family Serious Delinquency Rates
a20163q10q_chart-32229.jpg
Source: National Delinquency Survey from the Mortgage Bankers Association. The rates are as of August 11, 2016 (latest available NDS information).


Commentary
•
Single-family loan origination volumes:
◦
3Q 2016 vs. 3Q 2015 - increased to $580 billion in 3Q 2016 compared to $455 billion in 3Q 2015, driven by an increase in refinancing activity due to continued low mortgage interest rates and continued home price appreciation. Mortgage origination data from Inside Mortgage Finance as of October 28, 2016.
◦
YTD 2016 vs. YTD 2015 - increased to $1,470 billion in YTD 2016 compared to $1,350 billion in YTD 2015.
•
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
 
21


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
Single-Family Loan Purchases and Guarantees

(UPB in billions)
a20163q10q_chart-28346.jpg        a20163q10q_chart-29559.jpg

Percentage of Single-Family Loan Purchases and Guarantees by Loan Purpose

            a20163q10q_chart-30886.jpg

Freddie Mac Form 10-Q
 
22


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


Commentary
•
Our loan purchase and guarantee activity:
◦
3Q 2016 vs. 3Q 2015 - increased due to higher refinance loan purchase volume as quarterly average mortgage interest rates were lower in 3Q 2016 as compared to 3Q 2015.
•
On August 25, 2016, FHFA announced that Freddie Mac and Fannie Mae would be implementing a new refinance offering aimed at borrowers with high LTV ratios. The new offering will not be available until October 2017. In the interim, Freddie Mac and Fannie Mae have been directed to extend HARP through September 30, 2017.

Freddie Mac Form 10-Q
 
23


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


Single-Family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfolio
a20163q10q_chart-29351.jpg
Commentary
•
The Core single-family book grew to 71% of the single-family credit guarantee portfolio at September 30, 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 16% of the single-family credit guarantee portfolio at September 30, 2016 compared to 18% at December 31, 2015.
•
The Legacy single-family book declined to 13% of the single-family credit guarantee portfolio at September 30, 2016 compared to 16% at December 31, 2015, primarily as a result of liquidations.
•
We had 10.7 million loans in our single-family credit guarantee portfolio at both September 30, 2016 and December 31, 2015.

Freddie Mac Form 10-Q
 
24


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


Guarantee Fees
The average portfolio Segment Earnings guarantee fee rate recognizes upfront delivery fee income for the entire portfolio over the contractual life of the related loans (usually 30 years) adjusted for actual prepayments, whereas the average guarantee fee rate charged on new acquisitions recognizes these amounts over the estimated life of the related loans using our expectations of prepayments and other liquidations.
Average Portfolio Segment Earnings Guarantee Fee Rate(1) a20163q10q_chart-31028.jpg
 
Average Guarantee Fee Rate Charged on New Acquisitions(1)
a20163q10q_chart-32240.jpg


(1) Excludes the legislated 10 basis point increase in guarantee fees.
Commentary
•
Average portfolio Segment Earnings guarantee fee rates:
◦
3Q 2016 vs. 3Q 2015 and YTD 2016 vs. YTD 2015 - increased primarily due to higher amortization of upfront fees resulting from increased loan liquidations. Higher average contractual guarantee fees, reflecting the continued growth in the size of the Core single-family book in our single-family credit guarantee portfolio, also contributed. Average contractual guarantee fees are generally higher on mortgage loans in our Core single-family book compared to those in our Legacy single-family book.
•
Average guarantee fee rate charged on new acquisitions:
◦
3Q 2016 vs. 3Q 2015 and YTD 2016 vs. YTD 2015 - increased primarily due to changes in the product mix of our single-family new business purchases as new acquisitions have included a relatively higher proportion of 30-year fixed-rate mortgages which generally have higher guarantee fee rates.

Freddie Mac Form 10-Q
 
25


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 expected credit losses and a significant portion of stress credit losses subsequent to loan acquisition in our Core single-family book to third parties. The following charts present transactions that occurred during 3Q 2016 and the cumulative amount of such transactions as of September 30, 2016 by loss position and the party holding each loss position.
New STACR Debt Note and ACIS
Transactions during 3Q 2016(1)
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$38.4
 
Reference Pool

$40.6
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac


$0.5
 
ACIS



$0.0
 
STACR Debt Notes


$1.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
Loss
 
Freddie Mac

$0.4
 
ACIS

$0.0
 
STACR Debt Notes
$0.1
 
 
Cumulative STACR Debt Note and ACIS
Transactions as of September 30, 2016(1) 
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$537.0
 
Reference Pool

$565.1
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac


$1.7
 
ACIS



$4.8
 
STACR Debt Notes


$16.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
Loss
 
Freddie Mac

$3.2
 
ACIS

$0.5
 
STACR Debt Notes
$0.9
 

(1)
The amounts represent the UPB upon issuance of STACR debt notes and execution of ACIS transactions.
•
We continued to transfer a portion of expected credit losses and a significant portion of stress credit losses to third-party investors, insurers, and selected sellers through CRT transactions. During YTD 2016, we transferred a portion of the expected credit losses and a significant portion of stress credit losses associated with $181.8 billion in UPB of loans in our Core single-family book through STACR debt note, ACIS, seller indemnification, whole loan security and Deep Mortgage Insurance CRT, or Deep MI, transactions. Deep MI transactions are described below.
•
The interest and premiums we pay on our issued STACR debt note and ACIS transactions effectively reduce the guarantee fee income we earn on the PCs within the respective reference pools. Our expected guarantee fee income on the PCs within the STACR and ACIS reference pools has been effectively reduced by approximately 33%, on average, for all transactions executed through September 30, 2016. The amount of the effective reduction to our overall 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. We expect that the aggregate cost of our credit risk transfer activity will continue to increase as we enter into additional transactions.
•
Due to differences in accounting, there could be a significant lag in time between when we recognize a provision for credit losses and when we recognize the related recovery from our actual loss STACR debt note transactions. A credit expense on a loan in a reference pool related to these transactions is

Freddie Mac Form 10-Q
 
26


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


recorded when it is probable that we have incurred a loss, while a recovery is recorded when an actual loss event occurs.
•
As of September 30, 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 experienced minimal write-downs on our STACR debt notes and filed minimal claims for reimbursement of losses under our ACIS transactions.
•
In 3Q 2016, we announced a pilot of a new credit risk transfer offering called Deep MI, which is a credit enhancement purchased by us that takes effect immediately upon the sale of the mortgage loan to Freddie Mac. The pilot transaction provides additional coverage beyond primary mortgage insurance on 30-year fixed-rate mortgages with LTV ratios between 80% and 95%. The pilot has a 6-month loan aggregation period which ends in the first quarter of 2017.

Freddie Mac Form 10-Q
 
27


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 September 30, 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 September 30, 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
 
$
1,228,915

 
$
567,381

 
$
82,484

 
$
17,049

 
25
%
HARP and other relief refinance book
 
275,857

 
29,967

 
8,208

 
—

 
—
%
Legacy single-family book
 
228,029

 
30,042

 
9,309

 
—

 
—
%
Total
 
$
1,732,801

 
$
627,390

 
$
100,001

 
$
17,049

 
21
%

(1)
Represents the UPB for which credit enhancements exist.
(2)
Represents the amounts available for us to recover under the credit enhancements.
(3)
Collateralized coverage includes cash received by Freddie Mac upon issuance of STACR debt notes and unguaranteed whole loan securities, as well as cash and securities pledged for our benefit primarily related to ACIS transactions.
(4)
Credit risk transfer transactions include STACR debt notes, ACIS insurance policies, seller indemnification agreements, whole loan securities, and Deep MI. 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 46% of total current UPB as of September 30, 2016 compared to 39% as of December 31, 2015. Credit protection increased primarily as a result of our ongoing credit risk transfer transactions.
•
At September 30, 2016, as noted above, credit risk transfer transactions provided 25% of the coverage remaining on our Core single-family book, an increase from 23% at December 31, 2015. The increase reflects additional CRT transactions during 2016.

Freddie Mac Form 10-Q
 
28


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.
 
 
September 30, 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
%
 
1.96
%
 
—
%
 
3.74
%
 
—
%
 
14.77
%
 
0.2
%
 
2.28
%
 
3.1
%
620 to 659
 
1.5

 
0.92
%
 
0.2

 
1.20
%
 
—

 
5.88
%
 
1.7

 
0.97
%
 
1.3
%
≥ 660
 
59.3

 
0.14
%
 
9.6

 
0.22
%
 
0.1

 
1.58
%
 
69.0

 
0.15
%
 
0.2
%
Not available
 
—

 
1.62
%
 
0.1

 
3.28
%
 
—

 
6.89
%
 
0.1

 
2.83
%
 
3.8
%
Total
 
61.0
%
 
0.17
%
 
9.9
%
 
0.27
%
 
0.1
%
 
2.94
%
 
71.0
%
 
0.19
%
 
0.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Relief refinance book:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
0.6
%
 
1.61
%
 
0.2
%
 
2.91
%
 
0.1
%
 
4.53
%
 
0.9
%
 
2.18
%
 
4.1
%
620 to 659
 
0.8

 
1.03
%
 
0.3

 
2.05
%
 
0.1

 
3.36
%
 
1.2

 
1.49
%
 
2.4
%
≥ 660
 
10.2

 
0.30
%
 
2.5

 
1.02
%
 
1.1

 
1.79
%
 
13.8

 
0.51
%
 
0.7
%
Not available
 
—

 
0.54
%
 
—

 
—
%
 
—

 
—
%
 
—

 
0.38
%
 
1.2
%
Total
 
11.6
%
 
0.41
%
 
3.0
%
 
1.26
%
 
1.3
%
 
2.18
%
 
15.9
%
 
0.67
%
 
1.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legacy single-family book:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
0.7
%
 
5.86
%
 
0.2
%
 
11.84
%
 
0.2
%
 
19.03
%