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, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from                                        to
Commission File Number: 001-34139
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Freddie Mac
 
Federally chartered 
corporation
 
8200 Jones Branch Drive
McLean, Virginia 
22102-3110
 
52-0904874
 
(703) 903-2000
(State or other jurisdiction of incorporation or organization)
 
(Address of principal executive offices, including zip code)
 
(I.R.S. Employer Identification No.)
 
(Registrant’s telephone 
number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    ý Yes    ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý Yes    ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  ý
 
 
 
Accelerated filer  ¨
 
Non-accelerated filer (Do not check if a smaller reporting company)  ¨
 
Smaller reporting company  ¨
 
Emerging growth company  ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of October 17, 2017, there were 650,054,731 shares of the registrant’s common stock outstanding.



Table of Contents
 
 

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

Freddie Mac Form 10-Q
 
i


Management's Discussion and Analysis
 
Introduction

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in the “Forward-Looking Statements” sections of this Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2016, or 2016 Annual Report, and our Quarterly Reports on Form 10-Q for the first and second quarters of 2017, and the “Business” and “Risk Factors” sections of our 2016 Annual Report.
Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the “Glossary” of our 2016 Annual Report and our Form 10-Q for the second quarter of 2017.
You should read the following MD&A in conjunction with our 2016 Annual Report and our condensed consolidated financial statements and accompanying notes for the three and nine months ended September 30, 2017 included in “Financial Statements.” Throughout this Form 10-Q, we refer to the three months ending December 31, 2017, the three months ended September 30, 2017, the three months ended June 30, 2017, the three months ended March 31, 2017, the three months ended December 31, 2016, the three months ended September 30, 2016, the three months ended June 30, 2016, and the three months ended December 31, 2015 as “4Q 2017,” “3Q 2017,” “2Q 2017,” “1Q 2017,” “4Q 2016,” “3Q 2016,” “2Q 2016,” and “4Q 2015,” respectively. We refer to the nine months ended September 30, 2017 and the nine months ended September 30, 2016 as “YTD 2017” and “YTD 2016,” respectively.
INTRODUCTION
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability, and affordability to the U.S. housing market. We do this primarily by purchasing residential mortgage loans originated by lenders. In most instances, we package these loans into mortgage-related securities, which are guaranteed by us and sold in the global capital markets. We also invest in mortgage loans and mortgage-related securities. We do not originate loans or lend money directly to mortgage borrowers.
We support the U.S. housing market and the overall economy by enabling America’s families to access mortgage loan funding with better terms and by providing consistent liquidity to the multifamily mortgage market. We have helped many distressed borrowers keep their homes or avoid foreclosure. We are working with FHFA, our customers and the industry to build a better housing finance system for the nation.

Freddie Mac Form 10-Q
 
1


Management's Discussion and Analysis
 
Introduction

BUSINESS RESULTS
PORTFOLIO BALANCES
Guarantee Portfolios
a20173q10q_chart-07435.jpg

 
Investments Portfoliosa20173q10q_chart-10089.jpg



•
Our total guarantee portfolio grew $102 billion, or 5%, from September 30, 2016 to September 30, 2017, driven by a 4% increase in our single-family credit guarantee portfolio and a 23% increase in our multifamily guarantee portfolio.
◦
The growth in our single-family guarantee portfolio was driven by an increase in our single-family origination volume as our market share of U.S. single-family origination volume remained stable amid growth in total single-family mortgage debt outstanding resulting from continued improvement in macroeconomic conditions, such as a low unemployment rate and home price appreciation. In addition, new business acquisitions had a higher average loan size compared to older vintages that continue to run off.

Freddie Mac Form 10-Q
 
2


Management's Discussion and Analysis
 
Introduction

◦
The increase in our multifamily guarantee portfolio was due to growth in new multifamily business volume, driven by stronger demand for our loan products due to an elevated number of new apartment completions, strong market fundamentals and low interest rates.
•
Our total investments portfolio declined $63 billion, or 15%, from September 30, 2016 to September 30, 2017, primarily due to repayments and the active disposition of less liquid assets. We continue to reduce the mortgage-related investments portfolio as required by the Purchase Agreement and FHFA.
CONSOLIDATED FINANCIAL RESULTS
Comprehensive income (loss) was $4.7 billion in 3Q 2017, compared to $2.3 billion in 3Q 2016. The increase in comprehensive income was primarily driven by:
•
$4.5 billion (pre-tax) in settlement proceeds in 3Q 2017 from the Royal Bank of Scotland plc (or RBS) related to litigation involving certain of our non-agency mortgage-related securities. We did not have any significant settlements in 3Q 2016.
The increase was partially offset by:
•
$0.9 billion (pre-tax) provision for credit losses in 3Q 2017 attributable to estimated losses related to Hurricanes Harvey, Irma and Maria, which included approximately $0.6 billion related to $2.3 billion in UPB of mortgage loans in Puerto Rico.
Our total equity was $5.3 billion at September 30, 2017. Because our net worth was positive, we are not requesting a draw from Treasury under the Purchase Agreement for 3Q 2017. Our cumulative senior preferred stock dividend payments totaled $110.1 billion as of September 30, 2017. Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock, which remains $72.3 billion. The amount of available funding remaining under the Purchase Agreement is $140.5 billion and would be reduced by any future draws.
CONSERVATORSHIP AND GOVERNMENT SUPPORT FOR OUR BUSINESS
Since September 2008, we have been operating in conservatorship, with FHFA 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 also affect our business activities. Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to have adequate liquidity to conduct normal business activities.

Freddie Mac Form 10-Q
 
3


Management's Discussion and Analysis
 
Introduction

Treasury, as the holder of the senior preferred stock, is entitled to receive cumulative quarterly cash dividends, when, as and if declared by the Conservator, acting as successor to the rights, titles, powers and privileges of our Board of Directors. The dividends we have paid to Treasury on the senior preferred stock have been declared by, and paid at the direction of, the Conservator.
Under the August 2012 amendment to the Purchase Agreement, our dividend requirement each quarter is the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter, less the applicable Capital Reserve Amount, exceeds zero. The Capital Reserve Amount is $600 million in 2017 and will decrease to zero in 2018. If for any reason we were not to pay the dividend in full, the unpaid amount would be added to the liquidation preference, but this would not affect our ability to draw funds from Treasury under the Purchase Agreement.
Based on our Net Worth Amount of $5.3 billion as of September 30, 2017 and the Capital Reserve Amount of $600 million, our dividend requirement to Treasury in December 2017 will be $4.7 billion. Upon the Conservator declaring and directing us to pay a senior preferred stock dividend equal to our dividend requirement before December 31, 2017, we would pay a dividend of $4.7 billion by December 31, 2017. The declining capital reserve required under the terms of the Purchase Agreement (ultimately reaching zero in 2018) increases the risk of our having negative net worth and thus being required to draw from Treasury.



Freddie Mac Form 10-Q
 
4


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


KEY ECONOMIC INDICATORS
The following graphs and related discussions present certain macroeconomic indicators that can significantly affect our business and financial results.
SINGLE-FAMILY HOME PRICES
NATIONAL HOME PRICES
a20173q10q_chart-07282.jpg
(December 2000 = 100)
COMMENTARY
•
Home prices continued to appreciate, increasing by 0.9% during both 3Q 2017 and 3Q 2016 and by 6.9% and 6.5% during YTD 2017 and YTD 2016, respectively, 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, 2017 exceeded their pre-financial crisis peak level of 168 reached in June 2006, based on our index.
•
We expect home price growth will continue in 2018, although at a slower pace than in 2017, due to a gradual increase in housing supply and a moderate increase in mortgage rates.
•
Increases in home prices typically result in lower delinquency rates and lower loss severity. Fewer loan delinquencies, loan workouts and foreclosure transfers will generally reduce our expected credit losses on our total mortgage portfolio.



Freddie Mac Form 10-Q
 
5


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

INTEREST RATES
KEY MARKET INTEREST RATES
a20173q10q_chart-07433.jpga20173q10q_chart-10937.jpg
COMMENTARY
•
The quarterly ending and quarterly average 30-year Primary Mortgage Market Survey (“PMMS”) interest rates were higher at September 30, 2017 than September 30, 2016. Increases in the PMMS rate typically result in decreases in refinance activity and U.S. single-family loan originations.
•
The 10-year LIBOR and 2-year LIBOR interest rates had smaller fluctuations during the 2017 periods than the 2016 periods. Changes in the 10-year and 2-year LIBOR interest rates affect the fair value of certain of our assets and liabilities, including derivatives, measured at fair value. A smaller interest rate fluctuation from period to period generally results in smaller fair value gains and losses, while a larger fluctuation generally results in larger fair value gains and losses.

Freddie Mac Form 10-Q
 
6


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

•
The quarterly ending and quarterly average short-term interest rates, as indicated by the 3-month LIBOR rate, were higher at September 30, 2017 than September 30, 2016. An increase in short-term interest rates generally increases the interest earned on our short-term investments and interest expense on our short-term funding.
•
For additional information on the effect of LIBOR rates on our financial results, see “Our Business Segments - Capital Markets - Market Conditions.”





Freddie Mac Form 10-Q
 
7


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

UNEMPLOYMENT RATE
UNEMPLOYMENT RATE AND JOB CREATION(1) 
a20173q10q_chart-13254.jpg
Source: U.S. Bureau of Labor Statistics

(1)
Excludes Puerto Rico and the U.S. Virgin Islands.
COMMENTARY
•
Average monthly net new jobs (non-farm) and the national unemployment rate were lower in 3Q 2017 than 3Q 2016.
•
Changes in monthly net new jobs and the national unemployment rate can affect several market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies.
•
Decreases in the national unemployment rate typically result in lower levels of delinquencies, which generally result in a decrease in expected credit losses on our total mortgage portfolio.

Freddie Mac Form 10-Q
 
8


Management's Discussion and Analysis
 
Consolidated Results of Operations


CONSOLIDATED RESULTS OF OPERATIONS
You should read this discussion of our consolidated results of operations in conjunction with our condensed consolidated financial statements and accompanying notes.
The table below compares our consolidated results of operations for 3Q 2017 vs. 3Q 2016 and YTD 2017 vs. YTD 2016.
 
 
3Q 2017
 
3Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in millions)
 
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Net interest income
 

$3,489

 

$3,646

 

($157
)
 
(4
)%
 

$10,663

 

$10,494

 

$169

 
2
 %
Benefit (provision) for credit losses
 
(716
)
 
(113
)
 
(603
)
 
(534
)%
 
(178
)
 
1,129

 
(1,307
)
 
(116
)%
Net interest income after benefit (provision) for credit losses
 
2,773

 
3,533

 
(760
)
 
(22
)%
 
10,485

 
11,623

 
(1,138
)
 
(10
)%
Non-interest income (loss):
 
 
 
 
 


 


 
 
 
 
 


 


Gains (losses) on extinguishment of debt
 
27

 
(92
)
 
119

 
129
 %
 
295

 
(266
)
 
561

 
211
 %
Derivative gains (losses)
 
(678
)
 
(36
)
 
(642
)
 
(1,783
)%
 
(2,076
)
 
(6,655
)
 
4,579

 
69
 %
Net impairment of available-for-sale securities recognized in earnings
 
(1
)
 
(9
)
 
8

 
89
 %
 
(17
)
 
(138
)
 
121

 
88
 %
Other gains on investment securities recognized in earnings
 
723

 
309

 
414

 
134
 %
 
840

 
1,062

 
(222
)
 
(21
)%
Other income (loss)
 
5,403

 
605

 
4,798

 
793
 %
 
6,512

 
1,527

 
4,985

 
326
 %
Total non-interest income (loss)
 
5,474

 
777

 
4,697

 
605
 %
 
5,554

 
(4,470
)
 
10,024

 
224
 %
Non-interest expense:
 
 
 
 
 


 


 
 
 
 
 


 


Administrative expense
 
(524
)
 
(498
)
 
(26
)
 
(5
)%
 
(1,548
)
 
(1,421
)
 
(127
)
 
(9
)%
REO operations expense
 
(35
)
 
(56
)
 
21

 
38
 %
 
(128
)
 
(169
)
 
41

 
24
 %
Temporary Payroll Tax Cut Continuation Act of 2011 expense
 
(339
)
 
(293
)
 
(46
)
 
(16
)%
 
(990
)
 
(845
)
 
(145
)
 
(17
)%
Other expense
 
(159
)
 
(138
)
 
(21
)
 
(15
)%
 
(361
)
 
(442
)
 
81

 
18
 %
Total non-interest expense
 
(1,057
)
 
(985
)
 
(72
)
 
(7
)%
 
(3,027
)
 
(2,877
)
 
(150
)
 
(5
)%
Income (loss) before income tax (expense) benefit
 
7,190

 
3,325

 
3,865

 
116
 %
 
13,012

 
4,276

 
8,736

 
204
 %
Income tax (expense) benefit
 
(2,519
)
 
(996
)
 
(1,523
)
 
(153
)%
 
(4,466
)
 
(1,308
)
 
(3,158
)
 
(241
)%
Net income (loss)
 
4,671

 
2,329

 
2,342

 
101
 %
 
8,546

 
2,968

 
5,578

 
188
 %
Total other comprehensive income (loss), net of taxes and reclassification adjustments
 
(21
)
 
(19
)
 
(2
)
 
(11
)%
 
324

 
275

 
49

 
18
 %
Comprehensive income (loss)
 

$4,650

 

$2,310

 

$2,340

 
101
 %
 

$8,870

 

$3,243

 

$5,627

 
174
 %

Freddie Mac Form 10-Q
 
9


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


NET INTEREST INCOME
NET INTEREST YIELD ANALYSIS
The tables below present an analysis of interest-earning assets and interest-bearing liabilities.
 
 
3Q 2017
 
3Q 2016
 
(Dollars in millions)
Average
Balance
 
Interest
Income
(Expense)(1)
 
Average
Rate
 
Average
Balance
 
Interest
Income
(Expense)(1)
 
Average
Rate
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents

$10,064

 

$14

 
0.53
 %
 

$21,664

 

$15

 
0.28
%
 
Securities purchased under agreements to resell
57,107

 
166

 
1.16

 
62,086

 
56

 
0.36

 
Advances to lenders and other secured lending
804

 
5

 
2.51

 
649

 
3

 
2.06

 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
159,640

 
1,572

 
3.94

 
185,235

 
1,779

 
3.84

 
Extinguishment of PCs held by Freddie Mac
(85,198
)
 
(811
)
 
(3.81
)
 
(88,066
)
 
(829
)
 
(3.76
)
 
Total mortgage-related securities, net
74,442

 
761

 
4.09

 
97,169

 
950

 
3.91

 
Non-mortgage-related securities
15,127

 
60

 
1.62

 
15,671

 
26

 
0.67

 
Loans held by consolidated trusts(1)
1,731,577

 
14,617

 
3.38

 
1,654,288

 
13,602

 
3.29

 
Loans held by Freddie Mac(1)
117,298

 
1,250

 
4.26

 
131,945

 
1,395

 
4.23

 
Total interest-earning assets

$2,006,419

 

$16,873

 
3.37

 

$1,983,472

 

$16,047

 
3.24

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

$1,755,578

 

($12,663
)
 
(2.89
)
 

$1,680,388

 

($11,716
)
 
(2.79
)
 
Extinguishment of PCs held by Freddie Mac
(85,198
)
 
811

 
3.81

 
(88,066
)
 
829

 
3.76

 
Total debt securities of consolidated trusts held by third parties
1,670,380

 
(11,852
)
 
(2.84
)
 
1,592,322

 
(10,887
)
 
(2.73
)
 
Other debt:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
68,868

 
(173
)
 
(0.99
)
 
81,057

 
(83
)
 
(0.40
)
 
Long-term debt
259,075

 
(1,319
)
 
(2.02
)
 
302,062

 
(1,384
)
 
(1.82
)
 
Total other debt
327,943

 
(1,492
)
 
(1.80
)
 
383,119

 
(1,467
)
 
(1.53
)
 
Total interest-bearing liabilities
1,998,323

 
(13,344
)
 
(2.67
)
 
1,975,441

 
(12,354
)
 
(2.50
)
 
Expense related to derivatives
—

 
(40
)
 
(0.01
)
 
—

 
(47
)
 
(0.01
)
 
Impact of net non-interest-bearing funding
8,096

 
—

 
0.01

 
8,031

 
—

 
0.01

 
Total funding of interest-earning assets

$2,006,419

 

($13,384
)
 
(2.67
)
 

$1,983,472

 

($12,401
)
 
(2.50
)
 
Net interest income/yield
 
 

$3,489

 
0.70

 
 
 

$3,646

 
0.74

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Loan fees, primarily consisting of amortization of delivery fees, included in interest income were $634 million and $737 million for loans held by consolidated trusts and $37 million and $53 million for loans held by Freddie Mac during 3Q 2017 and 3Q 2016, respectively.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Freddie Mac Form 10-Q
 
10


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


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

$11,417

 

$38

 
0.44
 %
 

$16,112

 

$31

 
0.26
%
Securities purchased under agreements to resell
55,903

 
386

 
0.92

 
57,348

 
149

 
0.35

Advances to lenders and other secured lending
651

 
12

 
2.42

 
419

 
7

 
2.33

Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
168,819

 
4,886

 
3.86

 
193,492

 
5,546

 
3.82

Extinguishment of PCs held by Freddie Mac
(87,883
)
 
(2,456
)
 
(3.73
)
 
(96,388
)
 
(2,679
)
 
(3.71
)
Total mortgage-related securities, net
80,936

 
2,430

 
4.00

 
97,104

 
2,867

 
3.94

Non-mortgage-related securities
18,049

 
207

 
1.54

 
14,219

 
56

 
0.53

Loans held by consolidated trusts(1)
1,720,906

 
43,810

 
3.39

 
1,640,997

 
41,735

 
3.39

Loans held by Freddie Mac(1)
119,843

 
3,870

 
4.31

 
138,648

 
4,318

 
4.15

Total interest-earning assets

$2,007,705

 

$50,753

 
3.37

 

$1,964,847

 

$49,163

 
3.33

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

$1,744,260

 

($38,023
)
 
(2.91
)
 

$1,665,226

 

($36,606
)
 
(2.93
)
Extinguishment of PCs held by Freddie Mac
(87,883
)
 
2,456

 
3.73

 
(96,388
)
 
2,679

 
3.71

Total debt securities of consolidated trusts held by third parties
1,656,377

 
(35,567
)
 
(2.86
)
 
1,568,838

 
(33,927
)
 
(2.88
)
Other debt:
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
72,292

 
(414
)
 
(0.76
)
 
85,995

 
(258
)
 
(0.39
)
Long-term debt
270,251

 
(3,984
)
 
(1.96
)
 
301,791

 
(4,338
)
 
(1.91
)
Total other debt
342,543

 
(4,398
)
 
(1.71
)
 
387,786

 
(4,596
)
 
(1.58
)
Total interest-bearing liabilities
1,998,920

 
(39,965
)
 
(2.66
)
 
1,956,624

 
(38,523
)
 
(2.62
)
Expense related to derivatives
—

 
(125
)
 
(0.01
)
 
—

 
(146
)
 
(0.01
)
Impact of net non-interest-bearing funding
8,785

 
—

 
0.01

 
8,223

 
—

 
0.01

Total funding of interest-earning assets

$2,007,705

 

($40,090
)
 
(2.66
)
 

$1,964,847

 

($38,669
)
 
(2.62
)
Net interest income/yield
 
 

$10,663

 
0.71

 
 
 

$10,494

 
0.71

 
 
 
 
 
 
 
 
 
 
 
 
(1) Loan fees, primarily consisting of amortization of delivery fees, included in interest income were $1.7 billion and $1.9 billion for loans held by consolidated trusts and $132 million and $184 million for loans held by Freddie Mac during YTD 2017 and YTD 2016, respectively.



Freddie Mac Form 10-Q
 
11


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


COMPONENTS OF NET INTEREST INCOME
The table below presents the components of net interest income.
 
3Q 2017
 
3Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Contractual net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee fee income

$808

 

$822

 

($14
)
 
(2
)%
 

$2,495

 

$2,212

 

$283

 
13
 %
Guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011
333

 
292

 
41

 
14
 %
 
974

 
838

 
136

 
16
 %
Other contractual net interest income
1,604

 
1,635

 
(31
)
 
(2
)%
 
4,900

 
5,219

 
(319
)
 
(6
)%
Total contractual net interest income
2,745

 
2,749

 
(4
)
 
—
 %
 
8,369

 
8,269

 
100

 
1
 %
Net amortization - loans and debt securities of consolidated trusts
822

 
884

 
(62
)
 
(7
)%
 
2,442

 
2,191

 
251

 
11
 %
Net amortization - other assets and debt
(38
)
 
60

 
(98
)
 
(163
)%
 
(23
)
 
180

 
(203
)
 
(113
)%
Expense related to derivatives
(40
)
 
(47
)
 
7

 
15
 %
 
(125
)
 
(146
)
 
21

 
14
 %
Net interest income

$3,489

 

$3,646

 

($157
)
 
(4
)%
 

$10,663

 

$10,494

 

$169

 
2
 %

Key Drivers:
•
Guarantee fee income
◦
YTD 2017 vs. YTD 2016 - increased primarily due to higher average contractual guarantee fee rates in our total single-family loan portfolio as well as the continued growth in the size of the Core single-family loan portfolio. Average contractual guarantee fee rates are generally higher on mortgage loans in our Core single-family loan portfolio compared to those in our Legacy and relief refinance single-family loan portfolio.
•
Other contractual net interest income
◦
YTD 2017 vs. YTD 2016 - decreased primarily due to the continued reduction in the balance of our mortgage-related investments portfolio pursuant to the portfolio limits established by the Purchase Agreement and FHFA. See "Conservatorship and Related Matters - Reducing Our Mortgage-Related Investments Portfolio Over Time" for a discussion of the key drivers of the decline in our mortgage-related investments portfolio.
•
Net amortization of loans and debt securities of consolidated trusts
◦
3Q 2017 vs. 3Q 2016 - decreased primarily due to a decrease in prepayments which resulted in reduced amortization income on mortgage loan upfront delivery fees.
◦
YTD 2017 vs. YTD 2016 - increased primarily due to higher unamortized balances on our debt securities of consolidated trusts and higher mortgage loan upfront delivery fee balances, coupled with a decrease in amortization expense on mortgage loans held by consolidated trusts due to a decrease in prepayments.
•
Net amortization of other assets and debt
◦
3Q 2017 vs. 3Q 2016 and YTD 2017 vs. YTD 2016 - decreased primarily due to less accretion of previously recognized other-than-temporary impairment on non-agency mortgage-related securities. The decrease in accretion is due to a decline in the population of impaired securities as a result of our active disposition of these securities.

Freddie Mac Form 10-Q
 
12


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


BENEFIT (PROVISION) FOR CREDIT LOSSES
The benefit (provision) for credit losses predominantly relates to single-family loans and includes components for both collectively and individually impaired loans.
The table below presents the components of our benefit (provision) for credit losses.
 
 
3Q 2017
 
3Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in billions)
 
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Benefit (provision) for newly impaired loans
 

($0.2
)
 

($0.2
)
 

$—

 
—
 %
 

($0.5
)
 

($0.6
)
 

$0.1

 
17
 %
Amortization of interest rate concessions
 
0.1

 
0.2

 
(0.1
)
 
(50
)%
 
0.5

 
0.7

 
(0.2
)
 
(29
)%
Reclassifications of held-for-investment loans to held-for-sale loans
 
—

 
—

 
—

 
N/A

 
0.3

 
0.6

 
(0.3
)
 
(50
)%
Other, including changes in estimated default probability and loss severity
 
(0.6
)
 
(0.1
)
 
(0.5
)
 
(500
)%
 
(0.5
)
 
0.4

 
(0.9
)
 
(225
)%
Benefit (provision) for credit losses
 

($0.7
)
 

($0.1
)
 

($0.6
)
 
(600
)%
 

($0.2
)
 

$1.1

 

($1.3
)
 
(118
)%
Key Drivers:
•
3Q 2017 vs. 3Q 2016 - increase in provision for credit losses due to estimated losses of $0.9 billion (pre-tax) related to Hurricanes Harvey, Irma and Maria, which included approximately $0.6 billion related to $2.3 billion in UPB of mortgage loans in Puerto Rico. This increase was partially offset by improvements in our estimated loss severity.
•
YTD 2017 vs. YTD 2016 - change from benefit to provision for credit losses, driven by estimated losses of $0.9 billion (pre-tax) related to Hurricanes Harvey, Irma and Maria, which included approximately $0.6 billion related to $2.3 billion in UPB of mortgage loans in Puerto Rico. The change from benefit to provision for credit losses was partially offset by the policy change that was elected on January 1, 2017 for loan reclassifications from held-for-investment to held-for-sale. See Note 4 for further information about this change.
Our estimated provision for credit losses related to the hurricanes is based on assumptions about a number of factors, including the probability of borrower default and the severity of property damage. Given the hurricanes occurred late in 3Q 2017, we have limited information available to us at this time related to trends in borrower delinquencies and the severity of property damage in the impacted areas, especially for Puerto Rico. As a result, our estimates will likely change in the future as additional information becomes available.


Freddie Mac Form 10-Q
 
13


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


DERIVATIVE GAINS (LOSSES)
We continue to align our derivative portfolio with the changing duration of our economically hedged assets and liabilities. We manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models. We believe the impact of derivatives on our GAAP financial results should be considered in the context of our overall interest-rate risk profile, including our PMVS and duration gap results. For more information about our interest-rate risk management activities and the sensitivity of reported earnings to those activities, see “Risk Management - Market Risk.”
On February 2, 2017, we began using fair value hedge accounting for certain single-family mortgage loans, which is intended to reduce our GAAP earnings volatility. Changes in the fair value of the derivatives while in fair value hedge relationships are recognized in other income (loss) on our condensed consolidated statements of comprehensive income. See Note 7 for further information on fair value hedge accounting.
The table below presents the gains and losses on derivatives while not designated in fair value hedge relationships and the accrual of periodic cash settlements on all derivatives.
 
3Q 2017
 
3Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
 
(Dollars in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
 
Fair value change in interest-rate swaps

$23

 

$541

 

($518
)
 
(96
)%
 

$116

 

($7,513
)
 

$7,629

 
102
 %
 
Fair value change in option-based derivatives
(198
)
 
(235
)
 
37

 
16
 %
 
(519
)
 
2,841

 
(3,360
)
 
(118
)%
 
Fair value change in other derivatives
(105
)
 
74

 
(179
)
 
(242
)%
 
(379
)
 
(657
)
 
278

 
42
 %
 
Accrual of periodic cash settlements
(398
)
 
(416
)
 
18

 
4
 %
 
(1,294
)
 
(1,326
)
 
32

 
2
 %
 
Derivative gains (losses)

($678
)
 

($36
)
 

($642
)
 
(1,783
)%
 

($2,076
)
 

($6,655
)
 

$4,579

 
69
 %
 

Key Drivers:
•
3Q 2017 vs. 3Q 2016 - Losses increased as long-term interest rates were relatively unchanged during 3Q 2017 but increased slightly during 3Q 2016. The 10-year par swap rate increased 1 basis point during 3Q 2017 and increased 6 basis points during 3Q 2016. The 3Q 2017 interest rate change had minimal effect on Derivative gains (losses), compared to the 3Q 2016 interest rate increase which resulted in fair value gains in our pay-fixed interest rate swaps, partially offset by fair value losses in our receive-fixed swaps and certain option-based derivatives. In addition, we implemented hedge accounting in 1Q 2017, but the effect on Derivative gains (losses) during 3Q 2017 was relatively minor as the change in interest rates was relatively small.
•
YTD 2017 vs. YTD 2016 - Losses decreased as long-term interest rates decreased less during YTD 2017. The 10-year par swap rate decreased 4 basis points during YTD 2017 and decreased 74 basis points during YTD 2016. The smaller interest rate decrease during YTD 2017 resulted in reduced fair value losses in our pay-fixed interest rate swaps, partially offset by reduced fair value gains in our receive-fixed swaps and certain option-based derivatives. In addition, hedge accounting reduced the losses that otherwise would have been included in Derivative gains (losses) during YTD 2017 by $215 million.


Freddie Mac Form 10-Q
 
14


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


OTHER INCOME (LOSS)
The table below presents the components of other income (loss).
 
3Q 2017
 
3Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Other income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-agency mortgage-related securities settlements

$4,525

 

$—

 

$4,525

 
N/A

 

$4,525

 

$—

 

$4,525

 
N/A

Gains (losses) on loans
203

 
139

 

$64

 
46
 %
 
410

 
136

 
274

 
201
 %
Gains (losses) on held-for-sale loan purchase commitments
271

 
391

 
(120
)
 
(31
)%
 
826

 
635

 
191

 
30
 %
(Losses) gains on debt where we elected the fair value option
62

 
(174
)
 
236

 
136
 %
 
(129
)
 
(268
)
 
139

 
52
 %
All other
272

 
249

 
23

 
9
 %
 
744

 
1,024

 
(280
)
 
(27
)%
 Fair value hedge accounting
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Change in fair value of derivatives in qualifying hedge relationships
85

 
—

 
85

 
N/A

 
(215
)
 
—

 
(215
)
 
N/A

Change in fair value of hedged items in qualifying hedge relationships
(15
)
 
—

 
(15
)
 
N/A

 
351

 
—

 
351

 
N/A

Ineffectiveness related to fair value hedge accounting
70

 
—

 
70

 
N/A

 
136

 
—

 
136

 
N/A

Total other income (loss)

$5,403

 

$605

 

$4,798

 
793
 %
 

$6,512

 

$1,527

 

$4,985

 
326
 %
Key Drivers:
•
Non-agency mortgage-related securities settlements
◦
3Q 2017 vs. 3Q 2016 and YTD 2017 vs. YTD 2016 - increased due to the income recognition of proceeds received from the RBS settlement during 3Q 2017. No significant settlements occurred during the 2016 periods. See Note 12 for additional information on the RBS settlement.
•
Gains (losses) on loans
◦
YTD 2017 vs. YTD 2016 - Gains increased due to fewer losses recognized on the reclassification of seriously delinquent loans from held-for-investment to held-for-sale in YTD 2017, partially offset by less interest rate-related gains on multifamily loans in YTD 2017 as a result of smaller decreases in interest rates compared to YTD 2016.
•
Gains (losses) on held-for-sale loan purchase commitments
◦
3Q 2017 vs. 3Q 2016 - Gains decreased primarily due to less spread tightening and the resulting fair value impact on multifamily loan purchase commitments during 3Q 2017.
◦
YTD 2017 vs. YTD 2016 - Gains increased primarily due to a higher outstanding balance of commitments at September 30, 2017, partially offset by smaller gains as a result of less spread tightening. The outstanding commitment balance was higher at September 30, 2017 as a result of stronger demand for multifamily products due to an elevated number of new apartment completions, strong multifamily market fundamentals and low interest rates.

Freddie Mac Form 10-Q
 
15


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


•
(Losses) gains on debt where we elected fair value option
◦
3Q 2017 vs. 3Q 2016 - Gains in 3Q 2017 compared to losses in 3Q 2016 primarily driven by gains recognized on STACR debt notes from widening of spreads between STACR yields and LIBOR during 3Q 2017 compared to 3Q 2016 when spreads tightened.
◦
YTD 2017 vs. YTD 2016 - Losses decreased on STACR debt notes as spreads tightened less between STACR yields and LIBOR during the 2017 periods.
•
All other
◦
YTD 2017 vs. YTD 2016 - declined primarily due to the income recognition of settlement proceeds related to the TBW bankruptcy during YTD 2016.
•
Ineffectiveness related to fair value hedge accounting
◦
3Q 2017 vs. 3Q 2016 and YTD 2017 vs. YTD 2016 - During 1Q 2017, we adopted fair value hedge accounting. Hedge ineffectiveness related to fair value hedge accounting is recognized in other income (loss). See Note 7 for additional information on hedge ineffectiveness.



Freddie Mac Form 10-Q
 
16


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

OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the attribution of total other comprehensive income (loss), net of taxes and reclassification adjustments reported in our condensed consolidated statements of comprehensive income.
 
3Q 2017
 
3Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Other comprehensive income, excluding certain items

$504

 

$336

 

$168

 
50
 %
 

$1,090

 

$948

 

$142

 
15
 %
Excluded items:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities
(34
)
 
(66
)
 
32

 
48
 %
 
(137
)
 
(235
)
 
98

 
42
 %
Realized (gains) losses reclassified from AOCI
(491
)
 
(289
)
 
(202
)
 
(70
)%
 
(629
)
 
(438
)
 
(191
)
 
(44
)%
Total excluded items
(525
)

(355
)

(170
)

(48
)%

(766
)

(673
)

(93
)

(14
)%
Total other comprehensive income (loss)

($21
)
 

($19
)
 

($2
)
 
(11
)%
 

$324

 

$275

 

$49

 
18
 %
Key Drivers:
•
Other comprehensive income, excluding certain items
◦
3Q 2017 vs. 3Q 2016 - increased primarily due to lower interest rate related losses on our available-for-sale securities as interest rates were relatively unchanged during 3Q 2017 but increased slightly during 3Q 2016, coupled with larger market spread related gains during 3Q 2017 as market spreads on agency and non-agency mortgage-related securities tightened more during 3Q 2017.
◦
YTD 2017 vs. YTD 2016 - increased primarily due to larger market spread related gains as market spreads on agency and non-agency mortgage-related securities tightened more during YTD 2017. This was partially offset by smaller interest rate related gains due to smaller declines in long-term interest rates during YTD 2017.
•
Excluded items
◦
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities
▪
3Q 2017 vs. 3Q 2016 and YTD 2017 vs. YTD 2016 - decreased primarily due to a decline in the population of impaired non-agency mortgage-related securities as a result of our active dispositions of these securities.
◦
Realized (gains) losses reclassified from AOCI
▪
3Q 2017 vs. 3Q 2016 - reflected larger amounts of reclassified gains during 3Q 2017 due to a greater volume of sales of non-agency mortgage-related securities and higher unrealized gains on our agency and non-agency mortgage-related securities sold, as a result of additional spread tightening.
▪
YTD 2017 vs. YTD 2016 - reflected larger amounts of reclassified gains during YTD 2017 due to higher unrealized gains on our agency and non-agency mortgage-related securities sold, as a result of additional spread tightening, partially offset by a decline in the volume of sales of agency securities.

Freddie Mac Form 10-Q
 
17


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

OTHER KEY DRIVERS
Key drivers of other line items for 3Q 2017 vs. 3Q 2016 and YTD 2017 vs. YTD 2016 include:
•
Gains (losses) on extinguishment of debt
◦
3Q 2017 vs. 3Q 2016 and YTD 2017 vs. YTD 2016 - improved primarily due to an increase in the amount of gains recognized from the extinguishment of certain fixed-rate debt securities of consolidated trusts, as market interest rates increased between the time of issuance and repurchase. The amount of extinguishment gains or losses may vary, as the type and amount of PCs selected for repurchase are based on our investment and funding strategies, including our efforts to support the liquidity and price performance of our PCs.
•
Other gains on investment securities recognized in earnings
◦
3Q 2017 vs. 3Q 2016 - increased primarily due to additional spread tightening coupled with a greater volume of our non-agency mortgage-related securities sold during 3Q 2017. In addition, we recognized smaller fair value losses on our mortgage and non-mortgage-related securities classified as trading as long-term interest rates were relatively unchanged during 3Q 2017 compared to 3Q 2016 when long-term interest rates increased slightly.
◦
YTD 2017 vs. YTD 2016 - decreased primarily due to the recognition of smaller fair value gains on our mortgage and non-mortgage-related securities classified as trading as long-term interest rates decreased less during YTD 2017, partially offset by larger gains due to additional spread tightening during YTD 2017 on our sales of agency and non-agency mortgage-related securities.
    

Freddie Mac Form 10-Q
 
18


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


ITEM AFFECTING MULTIPLE LINES
The following item affected multiple line items on our consolidated results of operations.
SINGLE-FAMILY LOAN RECLASSIFICATIONS
During 3Q 2017 and 3Q 2016, we reclassified $7.2 billion and $0.3 billion in UPB of seasoned single-family mortgage loans, respectively, from held-for-investment to held-for-sale, as we continue to focus on reducing the balance of our less liquid assets. During YTD 2017 and YTD 2016, we reclassified $20.0 billion and $3.8 billion in UPB of such mortgage loans, respectively. Seasoned single-family mortgage loans include seriously delinquent and reperforming loans.
On January 1, 2017, we elected a new accounting policy for reclassifications from held-for-investment to held-for-sale. Under the new policy, when we reclassify (transfer) a loan from held-for-investment to held-for-sale, we charge off the entire difference between the loan’s recorded investment and its fair value if the loan has a history of credit-related issues. Expenses related to property taxes and insurance are included as part of the charge-off. If the charge-off amount exceeds the existing loan loss reserve amount, an additional provision for credit losses is recorded. If the charge-off amount is less than the existing loan loss reserve amount, a benefit for credit losses is recorded. Any declines in loan fair value after the date of transfer will be recognized as a valuation allowance, with an offset recorded to other income (loss).
This new policy election was applied prospectively, as it was not practical to apply it retrospectively.
The table below presents the effect of single-family loan reclassifications on income before income tax (expense) benefit. Beginning in 1Q 2017, benefit (provision) for credit losses is the only line item affected by the loan reclassifications from held-for-investment to held-for-sale. Prior to this change (including 3Q 2016 and YTD 2016 as presented below), the reclassifications from held-for-investment to held-for-sale affected several line items on our consolidated results of operations.
 
 
3Q 2017
 
3Q 2016
 
Change
 
YTD 2017
 
YTD 2016
 
Change
(Dollars in millions)
 
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Benefit (provision) for credit losses
 

$52

 

$59

 

($7
)
 
(12
)%
 

$352

 

$632

 

($280
)
 
(44
)%
Other income (loss) - lower-of-cost-or-fair-value adjustment
 
—

 
(65
)
 
65

 
100
 %
 
—

 
(799
)
 
799

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

 
(10
)
 
10

 
100
 %
 
—

 
(150
)
 
150

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

$52

 

($16
)
 

$68

 
425
 %
 

$352

 

($317
)
 

$669

 
211
 %

Key Drivers:
•
3Q 2017 vs. 3Q 2016 and YTD 2017 vs. YTD 2016 - Effect on income changed to a gain as a result of price improvements on a higher volume of primarily reperforming loans reclassified from held-for-investment to held-for-sale during the 2017 periods compared to a loss recognized primarily on seriously delinquent loans reclassified from held-for-investment to held-for-sale during the 2016 periods.


Freddie Mac Form 10-Q
 
19


Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


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

$8,183

 

$12,369

 

($4,186
)
 
(34
)%
Restricted cash and cash equivalents
 
7,684

 
9,851

 
(2,167
)
 
(22
)%
Securities purchased under agreements to resell
 
47,202

 
51,548

 
(4,346
)
 
(8
)%
Subtotal
 
63,069

 
73,768

 
(10,699
)
 
(15
)%
Investments in securities, at fair value
 
87,148

 
111,547

 
(24,399
)
 
(22
)%
Mortgage loans, net
 
1,844,892

 
1,803,003

 
41,889

 
2
 %
Accrued interest receivable
 
6,268

 
6,135

 
133

 
2
 %
Derivative assets, net
 
705

 
747

 
(42
)
 
(6
)%
Deferred tax assets, net
 
14,576

 
15,818

 
(1,242
)
 
(8
)%
Other assets
 
13,998

 
12,358

 
1,640

 
13
 %
Total assets
 

$2,030,656

 

$2,023,376

 

$7,280

 
—
 %
 
 
 
 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Accrued interest payable
 

$5,990

 

$6,015

 

($25
)
 
—
 %
Debt, net
 
2,009,578

 
2,002,004

 
7,574

 
—
 %
Derivative liabilities, net
 
212

 
795

 
(583
)
 
(73
)%
Other liabilities
 
9,626

 
9,487

 
139

 
1
 %
Total liabilities
 
2,025,406

 
2,018,301

 
7,105

 
—
 %
Total equity
 
5,250

 
5,075

 
175

 
3
 %
Total liabilities and equity
 

$2,030,656

 

$2,023,376

 

$7,280

 
—
 %
Key Drivers:
As of September 30, 2017 compared to December 31, 2016:
•
Cash and cash equivalents, restricted cash and cash equivalents, and securities purchased under agreements to resell affect one another, so the changes in the balances should be viewed together. The combined balance as of September 30, 2017 declined primarily due to lower near term cash needs for lower upcoming maturities and anticipated calls of other debt and a decrease in prepayment proceeds received by the custodial account driven by increased interest rates as of September 30, 2017 compared to December 31, 2016.
•
Investments in securities, at fair value decreased as we continued to reduce the mortgage-related investments portfolio during 2017 as required by the Purchase Agreement and FHFA.
•
Other assets increased primarily due to the recognition of short-term receivables from sales or maturities of trading or available-for-sale securities.
•
Derivative liabilities, net decreased due to changes in interest rates which were mostly offset by cash collateral received by our derivative counterparties.
•
Total equity increased as a result of higher comprehensive income during YTD 2017 compared to 4Q 2016, partially offset by additional dividends paid related to the $600 million decline in the Capital Reserve Amount in 2017.

Freddie Mac Form 10-Q
 
20


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

Freddie Mac Form 10-Q
 
21


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


SEGMENT COMPREHENSIVE INCOME
The graphs below show our comprehensive income by segment.
(In billions)
a20173q10q_chart-07381.jpg a20173q10q_chart-09066.jpg


Freddie Mac Form 10-Q
 
22


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
a20173q10q_chart-07414.jpg
Source: Inside Mortgage Finance dated August 18, 2017 (latest available IMF purchase/refinance information).

 
Single-Family Serious Delinquency Rates
a20173q10q_chart-09860.jpg
Source: National Delinquency Survey from the Mortgage Bankers Association. Data as of August 24, 2017 (latest available NDS information).

Commentary
•
U.S. single-family loan origination volumes decreased to 495 billion in 3Q 2017 from $585 billion in 3Q 2016, driven by lower refinance volume as a result of higher mortgage rates in 3Q 2017. Mortgage origination data is from Inside Mortgage Finance as of October 27, 2017.
•
In 2018, we expect continued growth in U.S single-family home purchase volume due to a gradual increase in housing supply, and lower refinance volume driven by a moderate increase in mortgage interest rates. Freddie Mac's single-family home purchase and refinance volumes typically follow a similar trend.
•
Single-family serious delinquency (SDQ) rates in the U.S. generally continued to decline on a year-over-year basis due to macroeconomic factors, such as a low unemployment rate and continued home price appreciation. Freddie Mac's delinquency rates typically follow a similar trend resulting in

Freddie Mac Form 10-Q
 
23


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


fewer loan workouts and foreclosure transfers, which generally reduces our expected credit losses on our total single-family mortgage portfolio.

Freddie Mac Form 10-Q
 
24


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


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

(In billions)
a20173q10q_chart-07877.jpga20173q10q_chart-09124.jpg
Percentage of Single-Family Loan Purchases and Guarantees by Loan Purpose

a20173q10q_chart-10758.jpg

Freddie Mac Form 10-Q
 
25


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


Commentary
•
Our loan purchase and guarantee activity:
◦
3Q 2017 vs. 3Q 2016 - decreased due to lower refinance volume driven by higher mortgage rates.
◦
YTD 2017 vs. YTD 2016 - decreased due to lower refinance volume partially offset by an increase in home purchase loan volume as interest and unemployment rates remained low.
•
While Hurricanes Harvey, Irma and Maria did not have an impact on our 3Q 2017 new business volume, we are currently assessing the potential impacts of these events on future new business volume.



Freddie Mac Form 10-Q
 
26


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


Single-Family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfolio
a20173q10q_chart-07277.jpg
Commentary
•
The single-family credit guarantee portfolio increased during YTD 2017 by approximately 3%, driven by increased single-family origination volume. Our market share of U.S. single-family origination volume remained stable amid growth in total U.S. single-family mortgage debt outstanding resulting from continued improvement in macroeconomic conditions, such as a low unemployment rate and home price appreciation. In addition, new business acquisitions had a higher average loan size compared to older vintages that continue to run off.
•
The Core single-family loan portfolio grew to 77% of the single-family credit guarantee portfolio at September 30, 2017 compared to 73% at December 31, 2016.
•
The Legacy and relief refinance single-family loan portfolio declined to 23% of the single-family credit guarantee portfolio at September 30, 2017 compared to 27% at December 31, 2016, driven primarily by liquidations.

Freddie Mac Form 10-Q
 
27


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


Guarantee Fees
The average portfolio Segment Earnings guarantee fee rate reflects an average rate for our total single-family credit guarantee portfolio and is not limited to purchases in the applicable period. This rate consists primarily of:
•
Contractual guarantee fees that we receive over the life of the loans; and
•
Upfront delivery fee income that we amortize over the contractual life of the related loans (usually 30 years). If the related loans prepay, the remaining upfront delivery fee income is recognized immediately.
The average guarantee fee rate charged on new acquisitions consists primarily of:
•
Contractual guarantee fees that we receive over the life of the loans; and
•
Upfront delivery fee income that we recognize over the estimated life of the related loans using our expectations of prepayments and other liquidations.
Average Portfolio Segment Earnings Guarantee Fee Rate(1) a20173q10q_chart-08270.jpg
 
Average Guarantee Fee Rate Charged on New Acquisitions(1)
a20173q10q_chart-10211.jpg

(1) Excludes the legislated 10 basis point increase in guarantee fees.
Commentary
•
Average portfolio Segment Earnings guarantee fee rates:
◦
3Q 2017 vs. 3Q 2016 and YTD 2017 vs. YTD 2016 - decreased slightly due to a decline in the recognition of amortized fees driven by lower prepayments that resulted from higher mortgage rates in the 2017 periods. This decrease was partially offset by an increase in contractual guarantee fees as older vintages were replaced by new loan acquisitions with higher contractual guarantee fees.

Freddie Mac Form 10-Q
 
28


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


•
Average guarantee fee rate charged on new acquisitions:
◦
3Q 2017 vs. 3Q 2016 and YTD 2017 vs. YTD 2016 - decreased due to competitive pricing to maintain market share of U.S. single-family origination volume, partially offset by lower market-adjusted pricing costs based on the improved price performance of our PCs relative to Fannie Mae securities.

Freddie Mac Form 10-Q
 
29


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


Credit Risk Transfer (CRT) Activity
In 2013, we began transferring credit risk on a portion of our Core single-family loan portfolio to the private market, which reduces the risk of future losses to us and taxpayers when borrowers go into default. Our principal methods of credit risk transfer are our STACR debt note and ACIS transactions, where we generally transfer a small portion of the expected credit losses and a significant portion of credit losses in a stressed economic environment. In these transactions, we pay interest and premiums to investors or insurers, respectively, in exchange for their taking on a portion of the credit risk on the mortgage loans in the related reference pool. These payments effectively reduce our guarantee fee income from the PCs of the related reference pools. See “MD&A - Our Business Segments - Single-Family Guarantee - Credit Risk Transfer Transactions” in our 2016 Annual Report for more information on our CRT transactions.
The following chart presents the cumulative issuance amount for the STACR debt note and ACIS transactions as of September 30, 2017 by loss position and the party holding each loss position.
Cumulative STACR Debt Note and ACIS Transactions as of September 30, 2017(1)(2) 
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$725.5
 
Reference Pool

$760.8
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac


$1.6
 
ACIS



$6.8






 
STACR Debt Notes


$20.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
 Loss
 
Freddie Mac

$4.2
 
ACIS

$0.8
 
STACR
Debt Notes
$1.5
 

(1)
The amounts represent the UPB upon issuance of STACR debt notes and execution of ACIS transactions.
(2)
For the current outstanding coverage provided by our STACR debt note and ACIS transactions, see Note 4.
Commentary
•
During YTD 2017, we transferred a portion of the credit losses associated with $175.9 billion in UPB of loans in our single-family loan portfolio primarily through STACR debt note, ACIS, whole loan security, senior subordinate securitization structure, and deep mortgage insurance CRT transactions.
•
During 3Q 2017, we did not have any new STACR debt note or ACIS transactions. However, we completed $1.0 billion of ACIS transactions related to reference pools in transactions executed in prior periods.

Freddie Mac Form 10-Q
 
30


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


•
Our expected guarantee fee income on the PCs related to the STACR and ACIS reference pools has been effectively reduced by approximately 31%, on average, for all transactions executed through September 30, 2017.
•
Due to differences in accounting, there could be a significant time lag between when we recognize a provision for credit losses on the mortgage loans in the reference pools and when we recognize the related recovery for the majority of our STACR debt note transactions. A credit expense on a loan in a reference pool related to these transactions is recorded when it is probable that we have incurred a loss, while a benefit is recorded when an actual loss event occurs.
•
As of September 30, 2017, there has not been a significant number of loans in our STACR debt note and ACIS reference pools that have experienced a credit event. As a result, we experienced minimal write-downs on our STACR debt notes and filed minimal claims for reimbursement of losses under our ACIS transactions. We expect losses may increase on loans in the reference pools in our existing CRT transactions from Hurricanes Harvey and Irma.
•
As of September 30, 2017, we have transferred a portion of the credit risk on nearly 32% of the total outstanding single-family credit guarantee portfolio.
We continue to evaluate our credit risk transfer strategy and to make changes depending on market conditions and our business strategy. The aggregate cost of our credit risk transfer activity will continue to increase as we continue to transfer risk on new originations.


Freddie Mac Form 10-Q
 
31


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, 2017
 
 
CLTV ≤ 80

CLTV > 80 to 100

CLTV > 100

All Loans
(Credit score)
 
% Portfolio

SDQ Rate(1)

% Portfolio

SDQ Rate(1)

% Portfolio

SDQ Rate(1)

% Portfolio

SDQ Rate(1)
 
% Modified
Core single-family loan portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
0.3
%
 
1.89
%
 
—
%
 
NM

 
—
%
 
NM

 
0.3
%
 
2.11
%
 
3.3
%
620 to 659
 
1.7

 
0.98
%
 
0.4

 
1.11
%
 
—

 
NM

 
2.1

 
1.00
%
 
1.4
%
≥ 660
 
64.8

 
0.15
%
 
9.4

 
0.21
%
 
—

 
NM

 
74.2

 
0.16
%
 
0.2
%
Not available
 
—

 
NM

 
—

 
NM

 
—

 
NM

 
—

 
NM

 
3.7
%
Total
 
66.8
%
 
0.18
%
 
9.8
%
 
0.25
%
 
—
%
 
NM

 
76.6
%
 
0.19
%
 
0.3
%