Federally chartered | 52-0904874 | 8200 Jones Branch Drive | 22102-3110 | (703) 903-2000 | ||||
corporation | McLean, Virginia | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | (Address of principal executive offices) | (Zip Code) | (Registrant’s telephone number, including area code) |
Large accelerated filer x | Accelerated filer ¨ | |||||
Non-accelerated filer (Do not check if a smaller reporting company) ¨ | Smaller reporting company ¨ | |||||
Emerging growth company ¨ |
Table of Contents |
n About Freddie Mac | |
n Our Business | |
n Forward-Looking Statements | |
SELECTED FINANCIAL DATA | |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
n Key Economic Indicators | |
n Consolidated Results of Operations | |
n Consolidated Balance Sheets Analysis | |
n Our Business Segments | |
n Risk Management | |
l Credit Risk | |
l Operational Risk | |
l Market Risk | |
n Liquidity and Capital Resources | |
n Conservatorship and Related Matters | |
n Regulation and Supervision | |
n Contractual Obligations | |
n Off-Balance Sheet Arrangements | |
n Critical Accounting Policies and Estimates | |
RISK FACTORS | |
LEGAL PROCEEDINGS | |
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | |
CONTROLS AND PROCEDURES | |
DIRECTORS, CORPORATE GOVERNANCE, AND EXECUTIVE OFFICERS | |
n Directors | |
n Corporate Governance | |
n Executive Officers | |
EXECUTIVE COMPENSATION | |
n Compensation Discussion and Analysis | |
n Compensation and Risk | |
n 2017 Compensation Information for NEOs | |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | |
PRINCIPAL ACCOUNTING FEES AND SERVICES | |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | |
GLOSSARY | |
EXHIBIT INDEX | |
SIGNATURES | |
FORM 10-K INDEX |
FREDDIE MAC | 2017 Form 10-K | i |
Introduction | About Freddie Mac |
FREDDIE MAC | 2017 Form 10-K | 1 |
Introduction | About Freddie Mac |
n | The senior preferred stock dividend for the dividend period from October 1, 2017 through and including December 31, 2017 was reduced to $2.25 billion. |
n | The applicable Capital Reserve Amount from January 1, 2018 and thereafter will be $3.0 billion, rather than zero as previously provided. If for any reason we were not to pay our dividend requirement on the senior preferred stock in full in any future period, the applicable Capital Reserve Amount would thereafter be zero. |
n | The liquidation preference of the senior preferred stock increased by $3.0 billion, to $75.3 billion, on December 31, 2017. |
FREDDIE MAC | 2017 Form 10-K | 2 |
Introduction | About Freddie Mac |
FREDDIE MAC | 2017 Form 10-K | 3 |
Introduction | About Freddie Mac |
n | 2017 vs. 2016 and 2016 vs. 2015 - In 2017, the total guarantee portfolio grew $119 billion, or 6%, driven by a 4% increase in our single-family credit guarantee portfolio and a 28% increase in our multifamily guarantee portfolio. The total guarantee portfolio grew $91 billion, or 5%, in 2016, driven by a 3% increase in our single-family credit guarantee portfolio and a 32% increase in our multifamily guarantee portfolio. |
l | The growth in our single-family credit guarantee portfolio in 2017 and 2016 was driven in part by an increase in U.S. single-family mortgage debt outstanding as a result of continued home price |
FREDDIE MAC | 2017 Form 10-K | 4 |
Introduction | About Freddie Mac |
n | 2017 vs. 2016 and 2016 vs. 2015 - Declined $52 billion, or 13%, and $55 billion, or 12%, in 2017 and 2016, respectively, primarily due to repayments and the active disposition of less liquid assets. |
l | We continue to reduce the mortgage-related investments portfolio as required by the Purchase Agreement and FHFA. |
FREDDIE MAC | 2017 Form 10-K | 5 |
Introduction | About Freddie Mac |
n | 2017 vs. 2016 |
l | Continued growth in our single-family credit guarantee portfolio and higher average contractual guarantee fee rates, offset by the continued reduction in the balance of our mortgage-related investments portfolio, resulted in lower net interest income. |
l | Decline in benefit for credit losses in 2017 primarily driven by estimated losses related to the hurricanes. |
l | Increased spread-related fair value gains driven by market spread tightening primarily on non-agency mortgage-related securities, partially offset by increased interest rate-related fair value losses driven by lower levels of volatility. |
l | Gains on sales of reperforming loans in 2017, compared to losses on sales of seriously delinquent loans in 2016. |
l | Proceeds received in 2017 from the Royal Bank of Scotland plc (or RBS) related to litigation involving certain of our non-agency mortgage-related securities. |
l | Higher income tax expense due to a reduction in our net deferred tax asset driven by the impact of the Tax Cuts and Jobs Act enacted in December 2017, which reduced the statutory corporate income tax rate from 35% to 21%. |
FREDDIE MAC | 2017 Form 10-K | 6 |
Introduction | About Freddie Mac |
n | 2016 vs. 2015 |
l | Continued growth in our single-family credit guarantee portfolio and higher average contractual guarantee fee rates, as well as higher amortization of upfront fees due to increased loan prepayments, offset by the continued reduction in the balance of our mortgage-related investments portfolio, resulted in lower net interest income. |
l | Decline in benefit for credit losses in 2016 due to a decrease in the number of seriously delinquent loans reclassified from held-for-investment to held-for-sale. |
l | Higher fair value gains in 2016 due to an increase in long-term interest rates compared to 2015 when long-term interest rates declined slightly. |
l | Higher fair value gains in 2016 driven by tightening K Certificate benchmark spreads, coupled with improved pricing on K Certificates and SB Certificates and higher new business volume, compared to losses during 2015 as market spreads widened. |
FREDDIE MAC | 2017 Form 10-K | 7 |
Introduction | Our Business |
n | A Better Freddie Mac; and |
n | A Better Housing Finance System |
n | Being a very effective operating organization; |
n | Being a market leader through customer focus and innovation; and |
n | Managing risk and economic capital for quality risk-adjusted returns. |
n | Modernizing and improving the functioning of the mortgage markets; |
n | Developing greater responsible access to affordable housing; and |
n | Reducing taxpayer exposure to mortgage risks. |
FREDDIE MAC | 2017 Form 10-K | 8 |
Introduction | Our Business |
n | Provide stability in the secondary mortgage market for residential loans; |
n | Respond appropriately to the private capital market; |
n | Provide ongoing assistance to the secondary mortgage market for residential loans (including activities relating to loans for low- and moderate-income families, involving a reasonable economic return that may be less than the return earned on other activities) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing; and |
n | Promote access to mortgage loan credit throughout the United States (including central cities, rural areas and other underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing. |
FREDDIE MAC | 2017 Form 10-K | 9 |
Introduction | Our Business |
FREDDIE MAC | 2017 Form 10-K | 10 |
Introduction | Our Business |
FREDDIE MAC | 2017 Form 10-K | 11 |
Introduction | Forward-Looking Statements |
n | The actions the U.S. government (including FHFA, Treasury and Congress) may take, or require us to take, including to support the housing markets or to implement FHFA's Conservatorship Scorecards and other objectives for us; |
n | The effect of the restrictions on our business due to the conservatorship and the Purchase Agreement, including our dividend requirement on the senior preferred stock; |
n | Changes in our Charter or in applicable legislative or regulatory requirements (including any legislation affecting the future status of our company); |
n | Changes in the fiscal and monetary policies of the Federal Reserve, including the balance sheet normalization program announced in October 2017 to reduce the Federal Reserve's holdings of mortgage-related securities; |
n | Changes in tax laws, including those made by the Tax Cuts and Jobs Act enacted in December 2017; |
n | Changes in accounting policies, practices or guidance (e.g., FASB's accounting standards update related to the measurement of credit losses of financial instruments); |
n | Changes in economic and market conditions, including changes in employment rates, interest rates, spreads and home prices; |
n | Changes in the U.S. residential mortgage market, including changes in the supply and type of loan products (e.g., refinance vs. purchase, and fixed-rate vs. ARM); |
n | The success of our efforts to mitigate our losses on our Legacy and relief refinance single-family loan portfolio; |
n | The success of our strategy to transfer mortgage credit risk through STACR debt note, ACIS, K Certificate, SB Certificate and other credit risk transfer transactions; |
n | Our ability to maintain adequate liquidity to fund our operations; |
FREDDIE MAC | 2017 Form 10-K | 12 |
Introduction | Forward-Looking Statements |
n | Our ability to maintain the security and resiliency of our operational systems and infrastructure (e.g., against cyberattacks); |
n | Our ability to effectively execute our business strategies, implement new initiatives and improve efficiency; |
n | The adequacy of our risk management framework; |
n | Our ability to manage mortgage credit risk, including the effect of changes in underwriting and servicing practices; |
n | Our ability to limit or manage our economic exposure and GAAP earnings exposure to interest-rate volatility and spread volatility, including the availability of derivative financial instruments needed for interest-rate risk management purposes; |
n | Our operational ability to issue new securities, make timely and correct payments on securities and provide initial and ongoing disclosures; |
n | Changes or errors in the methodologies, models, assumptions and estimates we use to prepare our financial statements, make business decisions and manage risks; |
n | Changes in investor demand for our debt or mortgage-related securities; |
n | Changes in the practices of loan originators, servicers, investors and other participants in the secondary mortgage market; |
n | The occurrence of a major natural or other disaster in areas in which our offices or significant portions of our total mortgage portfolio are located; and |
FREDDIE MAC | 2017 Form 10-K | 13 |
Selected Financial Data |
As of or For the Year Ended December 31, | ||||||||||||||||
(Dollars in millions, except share-related amounts) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||
Statements of Comprehensive Income Data | ||||||||||||||||
Net interest income | $14,164 | $14,379 | $14,946 | $14,263 | $16,468 | |||||||||||
Benefit (provision) for credit losses | 84 | 803 | 2,665 | (58 | ) | 2,465 | ||||||||||
Non-interest income (loss) | 6,869 | 500 | (3,599 | ) | (113 | ) | 8,519 | |||||||||
Non-interest expense | (4,283 | ) | (4,043 | ) | (4,738 | ) | (3,090 | ) | (2,089 | ) | ||||||
Income tax (expense) benefit | (11,209 | ) | (3,824 | ) | (2,898 | ) | (3,312 | ) | 23,305 | |||||||
Net income | 5,625 | 7,815 | 6,376 | 7,690 | 48,668 | |||||||||||
Comprehensive income | 5,558 | 7,118 | 5,799 | 9,426 | 51,600 | |||||||||||
Net income (loss) attributable to common stockholders | (3,244 | ) | 97 | (23 | ) | (2,336 | ) | (3,531 | ) | |||||||
Net income (loss) per common share - basic and diluted | (1.00 | ) | 0.03 | (0.01 | ) | (0.72 | ) | (1.09 | ) | |||||||
Cash dividends per common share | — | — | — | — | — | |||||||||||
Weighted average common shares outstanding - basic and diluted (in millions) | 3,234 | 3,234 | 3,235 | 3,236 | 3,238 | |||||||||||
Balance Sheets Data | ||||||||||||||||
Loans held-for-investment, at amortized cost by consolidated trusts (net of allowances for loan losses) | $1,774,286 | $1,690,218 | $1,625,184 | $1,558,094 | $1,529,905 | |||||||||||
Real estate owned, net | 892 | 1,198 | 1,725 | 2,558 | 4,551 | |||||||||||
Total assets | 2,049,776 | 2,023,376 | 1,985,892 | 1,945,360 | 1,965,831 | |||||||||||
Debt securities of consolidated trusts held by third parties | 1,720,996 | 1,648,683 | 1,556,121 | 1,479,473 | 1,433,984 | |||||||||||
Other debt | 313,634 | 353,321 | 414,148 | 449,890 | 506,537 | |||||||||||
All other liabilities | 15,458 | 16,297 | 12,683 | 13,346 | 12,475 | |||||||||||
Total stockholders' equity | (312 | ) | 5,075 | 2,940 | 2,651 | 12,835 | ||||||||||
Portfolio Balances - UPB | ||||||||||||||||
Mortgage-related investments portfolio | $253,455 | $298,426 | $346,911 | $408,414 | $461,024 | |||||||||||
Total Freddie Mac mortgage-related securities | 1,962,372 | 1,832,810 | 1,729,493 | 1,637,086 | 1,592,511 | |||||||||||
Total mortgage portfolio | 2,097,630 | 2,011,414 | 1,941,587 | 1,910,106 | 1,914,661 | |||||||||||
TDRs on accrual status | 51,720 | 77,399 | 82,347 | 82,908 | 78,708 | |||||||||||
Non-accrual loans | 17,817 | 16,272 | 22,649 | 33,130 | 43,457 | |||||||||||
Ratios | ||||||||||||||||
Return on average assets | 0.3 | % | 0.4 | % | 0.3 | % | 0.4 | % | 2.5 | % | ||||||
Allowance for loan losses as percentage of loans, held-for-investment | 0.5 | 0.7 | 0.9 | 1.3 | 1.4 | |||||||||||
Equity to assets | 0.1 | 0.2 | 0.1 | 0.4 | 0.5 |
FREDDIE MAC | 2017 Form 10-K | 14 |
Management's Discussion and Analysis | Key Economic Indicators | Single-Family Home Prices |
n | Changes in home prices affect the amount of equity that borrowers have in their homes. Borrowers with less equity typically have higher delinquency rates. |
n | As home prices decline, the severity of losses we incur on defaulted loans that we hold or guarantee increases because the amount we can recover from the property securing the loan decreases. Increases in home prices lower the losses we incur on defaulted loans. |
n | Home prices continued to appreciate during 2017, increasing 7.1%, compared to an increase of 6.4% during 2016, based on our own non-seasonally adjusted price index of single-family homes funded by loans owned or guaranteed by us or Fannie Mae. |
n | We expect near-term home price growth will moderate driven by a gradual increase in housing supply and modestly higher mortgage interest rates. |
FREDDIE MAC | 2017 Form 10-K | 15 |
Management's Discussion and Analysis | Key Economic Indicators | Single-Family Home Prices |
n | We do not expect national home prices to be substantially affected by the Tax Cuts and Jobs Act, but home price growth in housing markets with higher state and local taxes (e.g., New Jersey and New York) could be affected. |
FREDDIE MAC | 2017 Form 10-K | 16 |
Management's Discussion and Analysis | Key Economic Indicators | Interest Rates |
n | The 30-year Primary Mortgage Market Survey ("PMMS") interest rate is indicative of what a consumer could expect to be offered on a first-lien, prime, home purchase or refinance mortgage with an LTV of 80%. Increases in the PMMS rate typically result in decreases in refinancing activity and originations. Decreases in the PMMS rate typically result in increases in refinancing activity and originations. |
n | 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 | 2017 Form 10-K | 17 |
Management's Discussion and Analysis | Key Economic Indicators | Interest Rates |
n | Changes in the 3-month LIBOR rate affect the interest earned on our short-term investments and interest expense on our short-term funding. |
n | For additional information on the effect of LIBOR rates on our financial results, see Our Business Segments - Capital Markets - Market Conditions. |
n | Mortgage interest rates for 30-year fixed-rate loans are closely related to other long-term interest rates such as the 10-year LIBOR rate. When the 10-year LIBOR rate increases, mortgage interest rates for 30-year fixed-rate loans usually also increase. When the 10-year LIBOR rate declines, mortgage interest rates for 30-year fixed-rate loans usually also decline. |
n | Mortgage interest rates, as indicated by the PMMS rate, were lower at the end of 2017 than the end of 2016, while long-term interest rates, as indicated by the 10-year LIBOR rate, were higher. The PMMS rate and 10-year LIBOR rate were both higher at the end of 2016 than the end of 2015. |
n | The quarterly ending and quarterly average short-term interest rates, as indicated by the 3-month LIBOR rate, were higher at the end of 2017 than the end of 2016 and higher at the end of 2016 than the end of 2015. |
n | The Federal Reserve raised short-term interest rates five times over the last three years, most recently in December 2017. |
FREDDIE MAC | 2017 Form 10-K | 18 |
Management's Discussion and Analysis | Key Economic Indicators | Unemployment Rate |
n | Changes in 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. |
n | Decreases in the national unemployment rate typically result in lower levels of delinquencies, which often result in a decrease in expected credit losses on our total mortgage portfolio. |
n | Increases in the national unemployment rate typically result in higher levels of delinquencies, which often result in an increase in expected credit losses on our total mortgage portfolio. |
n | During 2017, average monthly net new jobs (non-farm) decreased, while the national unemployment rate declined to the lowest level since December 2000. |
FREDDIE MAC | 2017 Form 10-K | 19 |
Management's Discussion and Analysis | Consolidated Results of Operations |
Year Over Year Change | ||||||||||||||||||||||
Year Ended December 31, | 2017 vs. 2016 | 2016 vs. 2015 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | 2015 | $ | % | $ | % | |||||||||||||||
Net interest income | $14,164 | $14,379 | $14,946 | ($215 | ) | (1 | )% | ($567 | ) | (4 | )% | |||||||||||
Benefit (provision) for credit losses | 84 | 803 | 2,665 | (719 | ) | (90 | )% | (1,862 | ) | (70 | )% | |||||||||||
Net interest income after benefit (provision) for credit losses | 14,248 | 15,182 | 17,611 | (934 | ) | (6 | )% | (2,429 | ) | (14 | )% | |||||||||||
Non-interest income (loss): | ||||||||||||||||||||||
Gains (losses) on extinguishment of debt | 341 | (211 | ) | (240 | ) | 552 | 262 | % | 29 | 12 | % | |||||||||||
Derivative gains (losses) | (1,988 | ) | (274 | ) | (2,696 | ) | (1,714 | ) | (626 | )% | 2,422 | 90 | % | |||||||||
Net impairment of available-for-sale securities recognized in earnings | (18 | ) | (191 | ) | (292 | ) | 173 | 91 | % | 101 | 35 | % | ||||||||||
Other gains (losses) on investment securities recognized in earnings | 1,054 | (78 | ) | 508 | 1,132 | 1,451 | % | (586 | ) | (115 | )% | |||||||||||
Other income (loss) | 7,480 | 1,254 | (879 | ) | 6,226 | 496 | % | 2,133 | 243 | % | ||||||||||||
Total non-interest income (loss) | 6,869 | 500 | (3,599 | ) | 6,369 | 1,274 | % | 4,099 | 114 | % | ||||||||||||
Non-interest expense: | ||||||||||||||||||||||
Administrative expense | (2,106 | ) | (2,005 | ) | (1,927 | ) | (101 | ) | (5 | )% | (78 | ) | (4 | )% | ||||||||
REO operations expense | (189 | ) | (287 | ) | (338 | ) | 98 | 34 | % | 51 | 15 | % | ||||||||||
Temporary Payroll Tax Cut Continuation Act of 2011 expense | (1,340 | ) | (1,152 | ) | (967 | ) | (188 | ) | (16 | )% | (185 | ) | (19 | )% | ||||||||
Other expense | (648 | ) | (599 | ) | (1,506 | ) | (49 | ) | (8 | )% | 907 | 60 | % | |||||||||
Total non-interest expense | (4,283 | ) | (4,043 | ) | (4,738 | ) | (240 | ) | (6 | )% | 695 | 15 | % | |||||||||
Income before income tax expense | 16,834 | 11,639 | 9,274 | 5,195 | 45 | % | 2,365 | 26 | % | |||||||||||||
Income tax expense | (11,209 | ) | (3,824 | ) | (2,898 | ) | (7,385 | ) | (193 | )% | (926 | ) | (32 | )% | ||||||||
Net income (loss) | 5,625 | 7,815 | 6,376 | (2,190 | ) | (28 | )% | 1,439 | 23 | % | ||||||||||||
Total other comprehensive income (loss), net of taxes and reclassification adjustments | (67 | ) | (697 | ) | (577 | ) | 630 | 90 | % | (120 | ) | (21 | )% | |||||||||
Comprehensive income (loss) | $5,558 | $7,118 | $5,799 | ($1,560 | ) | (22 | )% | $1,319 | 23 | % |
FREDDIE MAC | 2017 Form 10-K | 20 |
Management's Discussion and Analysis | Consolidated Results of Operations | Net Interest Income |
n | Contractual net interest income - consists of two components: |
l | Guarantee fees on debt securities issued by consolidated trusts. We record interest income on loans held by consolidated trusts and interest expense on the debt securities issued by the trusts. The difference between the interest income on the loans and the interest expense on the debt represents the guarantee fee income we receive as compensation for our guarantee of the principal and interest payments of the issued debt securities. This difference includes the legislated 10 basis point increase in guarantee fees that is remitted to Treasury as part of the Temporary Payroll Tax Cut Continuation Act of 2011; and |
l | The difference between the interest income earned on all other interest-earning assets, excluding loans held by consolidated trusts, and the interest expense incurred on the liabilities used to fund those assets. |
n | Amortization of cost basis adjustments - consists of cost basis adjustments, such as premiums and discounts on loans, investment securities and debt that are amortized into interest income or interest expense based on the effective yield over the contractual life of the associated financial instrument. |
n | Hedge accounting impact - consists of deferred gains and losses on closed cash flow hedges related to forecasted debt issuances that are reclassified from AOCI to net interest income when the related forecasted transaction affects net interest income. Upon adoption of amended hedge accounting guidance in 4Q 2017, for qualifying fair value hedges, we began recording both the change in the fair value of the hedging instrument, including the accrual of periodic cash settlements, and the change in the fair value of the hedged item attributable to the risk being hedged, within net interest income. See Note 9 for additional detail on this change. |
FREDDIE MAC | 2017 Form 10-K | 21 |
Management's Discussion and Analysis | Consolidated Results of Operations | Net Interest Income |
Year Over Year Change | ||||||||||||||||||||||
Year Ended December 31, | 2017 vs. 2016 | 2016 vs. 2015 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | 2015 | $ | % | $ | % | |||||||||||||||
Contractual net interest income: | ||||||||||||||||||||||
Guarantee fee income | $3,270 | $2,997 | $2,722 | $273 | 9 | % | $275 | 10 | % | |||||||||||||
Guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011 | 1,314 | 1,142 | 957 | 172 | 15 | % | 185 | 19 | % | |||||||||||||
Other contractual net interest income | 6,400 | 6,896 | 8,106 | (496 | ) | (7 | )% | (1,210 | ) | (15 | )% | |||||||||||
Total contractual net interest income | 10,984 | 11,035 | 11,785 | (51 | ) | — | % | (750 | ) | (6 | )% | |||||||||||
Net amortization - loans and debt securities of consolidated trusts | 3,258 | 3,333 | 2,883 | (75 | ) | (2 | )% | 450 | 16 | % | ||||||||||||
Net amortization - other assets and debt | (85 | ) | 202 | 506 | (287 | ) | (142 | )% | (304 | ) | (60 | )% | ||||||||||
Hedge accounting impact | 7 | (191 | ) | (228 | ) | 198 | 104 | % | 37 | 16 | % | |||||||||||
Net interest income | $14,164 | $14,379 | $14,946 | ($215 | ) | (1 | )% | ($567 | ) | (4 | )% |
n | Guarantee fee income |
l | 2017 vs. 2016 and 2016 vs. 2015 - increased during both comparative periods as a result of higher average contractual guarantee fee rates, as well as the continued growth in the size of the Core single-family loan portfolio. Average contractual guarantee fees 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. |
n | Other contractual net interest income |
l | 2017 vs. 2016 and 2016 vs. 2015 - decreased during both comparative 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 - Limits on Our Mortgage-Related Investments Portfolio and Indebtedness for additional discussion of the limits on the mortgage-related investments portfolio. |
n | Net amortization of loans and debt securities of consolidated trusts |
l | 2016 vs. 2015 - increased primarily due to higher amortization of mortgage loan upfront fees and basis adjustments on debt securities of consolidated trusts. The increase in amortization was primarily driven by higher prepayment rates on single-family loans during 2016 compared to 2015. |
FREDDIE MAC | 2017 Form 10-K | 22 |
Management's Discussion and Analysis | Consolidated Results of Operations | Net Interest Income |
n | Net amortization of other assets and debt |
l | 2017 vs. 2016 and 2016 vs. 2015 - decreased during both comparative periods primarily due to less accretion of previously recognized other-than-temporary impairments 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 and a decline in new other-than-temporary impairments recognized. |
n | Hedge accounting impact |
l | 2017 vs. 2016 - increased primarily due to the inclusion of fair value hedge accounting results within net interest income beginning in 4Q 2017, due to the adoption of amended hedge accounting guidance. In prior periods, this activity was included in other income and derivative gains (losses). |
FREDDIE MAC | 2017 Form 10-K | 23 |
Management's Discussion and Analysis | Consolidated Results of Operations | Net Interest Income |
Year Ended December 31, | |||||||||||||||||||||||||||
2017 | 2016 | 2015 | |||||||||||||||||||||||||
(Dollars in millions) | Average Balance | Interest Income (Expense) | Average Rate | Average Balance | Interest Income (Expense) | Average Rate | Average Balance | Interest Income (Expense) | Average Rate | ||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||||||||
Cash and cash equivalents | $10,965 | $48 | 0.44 | % | $16,932 | $42 | 0.25 | % | $12,482 | $8 | 0.06 | % | |||||||||||||||
Securities purchased under agreements to resell | 57,883 | 588 | 1.02 | 59,639 | 217 | 0.36 | 51,219 | 58 | 0.11 | ||||||||||||||||||
Advances to lenders and other secured lending | 859 | 21 | 2.42 | 484 | 11 | 2.28 | 161 | 4 | 2.48 | ||||||||||||||||||
Mortgage-related securities: | |||||||||||||||||||||||||||
Mortgage-related securities | 164,663 | 6,402 | 3.89 | 189,982 | 7,262 | 3.82 | 226,162 | 8,706 | 3.85 | ||||||||||||||||||
Extinguishment of PCs held by Freddie Mac | (87,665 | ) | (3,264 | ) | (3.72 | ) | (94,624 | ) | (3,509 | ) | (3.71 | ) | (107,986 | ) | (3,929 | ) | (3.64 | ) | |||||||||
Total mortgage-related securities, net | 76,998 | 3,138 | 4.08 | 95,358 | 3,753 | 3.94 | 118,176 | 4,777 | 4.04 | ||||||||||||||||||
Non-mortgage-related securities | 17,558 | 277 | 1.58 | 15,734 | 102 | 0.65 | 10,699 | 17 | 0.16 | ||||||||||||||||||
Loans held by consolidated trusts(1) | 1,730,000 | 58,746 | 3.40 | 1,649,727 | 55,417 | 3.36 | 1,590,768 | 55,867 | 3.51 | ||||||||||||||||||
Loans held by Freddie Mac(1) | 117,043 | 4,989 | 4.26 | 135,882 | 5,623 | 4.14 | 157,261 | 6,359 | 4.04 | ||||||||||||||||||
Total interest-earning assets | $2,011,306 | $67,807 | 3.37 | % | $1,973,756 | $65,165 | 3.30 | % | $1,940,766 | $67,090 | 3.46 | % | |||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||||||||
Debt securities of consolidated trusts including PCs held by Freddie Mac | $1,753,983 | ($50,920 | ) | (2.90 | )% | $1,674,474 | ($48,108 | ) | (2.87 | )% | $1,611,388 | ($49,465 | ) | (3.07 | )% | ||||||||||||
Extinguishment of PCs held by Freddie Mac | (87,665 | ) | 3,264 | 3.72 | (94,624 | ) | 3,509 | 3.71 | (107,986 | ) | 3,929 | 3.64 | |||||||||||||||
Total debt securities of consolidated trusts held by third parties | 1,666,318 | (47,656 | ) | (2.86 | ) | 1,579,850 | (44,599 | ) | (2.82 | ) | 1,503,402 | (45,536 | ) | (3.03 | ) | ||||||||||||
Other debt: | |||||||||||||||||||||||||||
Short-term debt | 72,071 | (615 | ) | (0.85 | ) | 86,284 | (350 | ) | (0.41 | ) | 108,096 | (173 | ) | (0.16 | ) | ||||||||||||
Long-term debt | 264,354 | (5,372 | ) | (2.03 | ) | 298,040 | (5,837 | ) | (1.96 | ) | 313,502 | (6,435 | ) | (2.05 | ) | ||||||||||||
Total other debt | 336,425 | (5,987 | ) | (1.78 | ) | 384,324 | (6,187 | ) | (1.61 | ) | 421,598 | (6,608 | ) | (1.57 | ) | ||||||||||||
Total interest-bearing liabilities | 2,002,743 | (53,643 | ) | (2.68 | ) | 1,964,174 | (50,786 | ) | (2.58 | ) | 1,925,000 | (52,144 | ) | (2.71 | ) | ||||||||||||
Impact of net non-interest-bearing funding | 8,563 | — | 0.01 | 9,582 | — | 0.01 | 15,766 | — | 0.02 | ||||||||||||||||||
Total funding of interest-earning assets | $2,011,306 | ($53,643 | ) | (2.67 | )% | $1,973,756 | ($50,786 | ) | (2.57 | )% | $1,940,766 | ($52,144 | ) | (2.69 | )% | ||||||||||||
Net interest income/yield | $14,164 | 0.70 | % | $14,379 | 0.73 | % | $14,946 | 0.77 | % |
(1) | Loan fees, primarily consisting of amortization of upfront fees, included in interest income were $2.4 billion, $2.6 billion and $2.0 billion for loans held by consolidated trusts and $162 million, $215 million and $383 million for loans held by Freddie Mac during 2017, 2016 and 2015, respectively. |
FREDDIE MAC | 2017 Form 10-K | 24 |
Management's Discussion and Analysis | Consolidated Results of Operations | Net Interest Income |
Variance Analysis | ||||||||||||||||||||
2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||||
(Dollars in millions) | Rate | Volume | Total Change | Rate | Volume | Total Change | ||||||||||||||
Interest-earning assets: | ||||||||||||||||||||
Cash and cash equivalents | $8 | ($2 | ) | $6 | $34 | $— | $34 | |||||||||||||
Securities purchased under agreements to resell | 380 | (9 | ) | 371 | 147 | 12 | 159 | |||||||||||||
Advances to lenders and other secured lending | 1 | 9 | 10 | — | 7 | 7 | ||||||||||||||
Mortgage-related securities: | ||||||||||||||||||||
Mortgage-related securities | 123 | (983 | ) | (860 | ) | (61 | ) | (1,383 | ) | (1,444 | ) | |||||||||
Extinguishment of PCs held by Freddie Mac | (14 | ) | 259 | 245 | (74 | ) | 494 | 420 | ||||||||||||
Total mortgage-related securities, net | 109 | (724 | ) | (615 | ) | (135 | ) | (889 | ) | (1,024 | ) | |||||||||
Non-mortgage-related securities | 161 | 14 | 175 | 74 | 11 | 85 | ||||||||||||||
Loans held by consolidated trusts | 609 | 2,720 | 3,329 | (2,479 | ) | 2,029 | (450 | ) | ||||||||||||
Loans held by Freddie Mac | 165 | (799 | ) | (634 | ) | 146 | (882 | ) | (736 | ) | ||||||||||
Total interest-earning assets | $1,433 | $1,209 | $2,642 | ($2,213 | ) | $288 | ($1,925 | ) | ||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||
Debt securities of consolidated trusts including PCs held by Freddie Mac | ($508 | ) | ($2,304 | ) | ($2,812 | ) | $3,246 | ($1,889 | ) | $1,357 | ||||||||||
Extinguishment of PCs held by Freddie Mac | 14 | (259 | ) | (245 | ) | 74 | (494 | ) | (420 | ) | ||||||||||
Total debt securities of consolidated trusts held by third parties | (494 | ) | (2,563 | ) | (3,057 | ) | 3,320 | (2,383 | ) | 937 | ||||||||||
Other debt: | ||||||||||||||||||||
Short-term debt | (331 | ) | 66 | (265 | ) | (218 | ) | 41 | (177 | ) | ||||||||||
Long-term debt | (214 | ) | 679 | 465 | 299 | 299 | 598 | |||||||||||||
Total other debt | (545 | ) | 745 | 200 | 81 | 340 | 421 | |||||||||||||
Total interest-bearing liabilities | ($1,039 | ) | ($1,818 | ) | ($2,857 | ) | $3,401 | ($2,043 | ) | $1,358 | ||||||||||
Net interest income | $394 | ($609 | ) | ($215 | ) | $1,188 | ($1,755 | ) | ($567 | ) |
FREDDIE MAC | 2017 Form 10-K | 25 |
Management's Discussion and Analysis | Consolidated Results of Operations | Benefit (Provision) for Credit Losses |
n | Collectively impaired loans - The provision for collectively impaired loans is primarily driven by the volume of newly impaired loans and changes in estimated probabilities of default and estimated loss severities for these loans. Estimated probabilities of default and estimated loss severities are based on current conditions and historical data and are heavily influenced by changes in home prices. These estimates are also affected by a number of other factors, such as local and regional economic conditions, changes in reperformance and default rates and the success of our borrower assistance programs. |
n | Individually impaired loans - The provision for individually impaired loans is primarily driven by the volume of our loss mitigation activity (e.g., loan modifications) that results in loans being considered TDRs, the payment performance of our individually impaired mortgage portfolio and changes in estimated probabilities of default and estimated loss severities, which affect the future cash flows we expect to receive from these loans. Estimated probabilities of default and estimated loss severities for individually impaired loans are based on the same current conditions and historical data and are affected by the same factors noted above for collectively impaired loans. |
n | Actual level of loan defaults; |
n | The effect of loss mitigation efforts; |
n | Any government actions or programs that affect the ability of borrowers to refinance loans, such as loans with an LTV ratio greater than 100%, or obtain modifications; |
n | Changes in property values; |
FREDDIE MAC | 2017 Form 10-K | 26 |
Management's Discussion and Analysis | Consolidated Results of Operations | Benefit (Provision) for Credit Losses |
n | Regional economic conditions, including unemployment rates; |
n | Additional delays in the foreclosure process; and |
n | Third-party mortgage insurance coverage and recoveries. |
Year Over Year Change | ||||||||||||||||||||||
Year Ended December 31, | 2017 vs. 2016 | 2016 vs. 2015 | ||||||||||||||||||||
(Dollars in billions) | 2017 | 2016 | 2015 | $ | % | $ | % | |||||||||||||||
Benefit (provision) for newly impaired loans | ($0.7 | ) | ($0.8 | ) | ($0.9 | ) | $0.1 | 13 | % | $0.1 | 11 | % | ||||||||||
Amortization of interest rate concessions | 0.7 | 0.9 | 1.2 | (0.2 | ) | (22 | )% | (0.3 | ) | (25 | )% | |||||||||||
Reclassifications of held-for-investment loans to held-for-sale loans | 0.5 | 0.8 | 2.3 | (0.3 | ) | (38 | )% | (1.5 | ) | (65 | )% | |||||||||||
Other, including changes in estimated default probability and loss severity | (0.4 | ) | (0.1 | ) | 0.1 | (0.3 | ) | (300 | )% | (0.2 | ) | (200 | )% | |||||||||
Benefit (provision) for credit losses | $0.1 | $0.8 | $2.7 | ($0.7 | ) | (88 | )% | ($1.9 | ) | (70 | )% |
n | 2017 vs. 2016 - Benefit for credit losses declined in 2017 compared to 2016 primarily driven by: |
l | Estimated losses related to hurricanes in 2017; |
l | A decrease in the accretion of TDR concessions due to a significant increase in the reclassification of reperforming loans from held-for-investment to held-for-sale; and |
l | A change in accounting policy that was elected on January 1, 2017 for loan reclassification from held-for-investment to held-for-sale. See Item Affecting Multiple Lines - Single-Family Loan Reclassifications for further information about this change. |
l | Improvement in our estimated loss severity. |
n | 2016 vs. 2015 - Benefit for credit losses declined in 2016 compared to 2015 primarily due to a decrease in the number of seasoned single-family loans reclassified from held-for-investment to held-for sale in 2016. |
FREDDIE MAC | 2017 Form 10-K | 27 |
Management's Discussion and Analysis | Consolidated Results of Operations | Derivative Gains (Losses) |
n | Fair value changes - Represent changes in the fair value of our derivatives based on market conditions at the end of the period or at the time the derivative instrument is terminated. These amounts may or may not be realized over time, depending on future changes in market conditions and the terms of our derivative instruments. |
n | Accrual of periodic cash settlements - Consists of the net amount we accrue during a period for interest-rate swap payments that we will make or receive. This accrual represents the ongoing cost of our hedging activities, and is economically equivalent to interest expense. |
n | Changes in interest rates - Our primary derivative instruments are interest-rate swaps, including pay-fixed and receive-fixed interest-rate swaps. With a pay-fixed interest-rate swap, we pay a fixed |
FREDDIE MAC | 2017 Form 10-K | 28 |
Management's Discussion and Analysis | Consolidated Results of Operations | Derivative Gains (Losses) |
n | Implied volatility - Many of our assets and liabilities have embedded prepayment options. We use option-based derivatives, including swaptions, to economically hedge the prepayment options embedded in our mortgage assets and callable debt. Fair value gains and losses on swaptions are sensitive to changes in both interest rates and implied volatility, which reflects the market’s expectation of future changes in interest rates. Assuming all other factors are unchanged, including interest rates, purchased swaptions generally become more valuable as implied volatility increases and less valuable as implied volatility decreases, with the opposite being true for written swaptions. |
n | Changes in the shape of the yield curve - We own assets and have outstanding debt with different cash flows along the yield curve. We use derivatives to hedge the yield exposure of assets and debt, resulting in derivatives with different maturities. As a result, changes in the shape of the yield curve will affect our derivative gains (losses). |
n | Changes in the composition of our derivative portfolio - The mix and balance of our derivative portfolio changes from period to period as we enter into or terminate derivative instruments to respond to changes in interest rates and changes in the balances and modeled characteristics of our assets and liabilities. Changes in the composition of our derivative portfolio will affect the derivative gains and losses we recognize in a given period, thereby affecting the volatility of comprehensive income. |
Year Over Year Change | ||||||||||||||||||||||
Year Ended December 31, | 2017 vs. 2016 | 2016 vs. 2015 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | 2015 | $ | % | $ | % | |||||||||||||||
Fair value change in interest-rate swaps | $626 | $178 | ($778 | ) | $448 | 252 | % | $956 | 123 | % | ||||||||||||
Fair value change in option-based derivatives | (1,041 | ) | 421 | 258 | (1,462 | ) | (347 | )% | 163 | 63 | % | |||||||||||
Fair value change in other derivatives | 17 | 887 | 22 | (870 | ) | (98 | )% | 865 | 3,932 | % | ||||||||||||
Accrual of periodic cash settlements | (1,590 | ) | (1,760 | ) | (2,198 | ) | 170 | 10 | % | 438 | 20 | % | ||||||||||
Derivative gains (losses) | ($1,988 | ) | ($274 | ) | ($2,696 | ) | ($1,714 | ) | (626 | )% | $2,422 | 90 | % |
n | 2017 vs. 2016 - Losses increased, driven by lower levels of volatility during 2017, resulting in larger losses in our options portfolio, coupled with lower fair value gains in our pay-fixed interest rate swaps as long-term interest rates increased less. This was partially offset by reduced fair value losses in our receive-fixed interest rate swaps. |
n | 2016 vs. 2015 - Derivative losses declined during 2016 primarily due to an increase in longer-term interest rates during the fourth quarter of 2016 resulting in an improvement in the fair value of our |
FREDDIE MAC | 2017 Form 10-K | 29 |
Management's Discussion and Analysis | Consolidated Results of Operations | Derivative Gains (Losses) |
FREDDIE MAC | 2017 Form 10-K | 30 |
Management's Discussion and Analysis | Consolidated Results of Operations | Other Income (Loss) |
Year Over Year Change | ||||||||||||||||||||||
Year Ended December 31, | 2017 vs. 2016 | 2016 vs. 2015 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | 2015 | $ | % | $ | % | |||||||||||||||
Other income (loss) | ||||||||||||||||||||||
Non-agency mortgage-related securities settlements | $4,532 | $— | $65 | $4,532 | N/A | ($65 | ) | N/A | ||||||||||||||
Gains (losses) on loans | $928 | ($463 | ) | ($2,094 | ) | $1,391 | 300 | % | $1,631 | 78 | % | |||||||||||
Gains (losses) on held-for-sale loan purchase commitments | 1,098 | 663 | — | 435 | 66 | % | 663 | N/A | ||||||||||||||
All other | 786 | 1,054 | 1,150 | (268 | ) | (25 | )% | (96 | ) | (8 | )% | |||||||||||
Fair value hedge accounting | ||||||||||||||||||||||
Change in fair value of derivatives in qualifying hedge relationships | (215 | ) | N/A | N/A | (215 | ) | N/A | N/A | N/A | |||||||||||||
Change in fair value of hedged items in qualifying hedge relationships | 351 | N/A | N/A | 351 | N/A | N/A | N/A | |||||||||||||||
Total other income (loss) | $7,480 | $1,254 | ($879 | ) | $6,226 | 496 | % | $2,133 | 243 | % |
n | 2017 vs. 2016 - Other income (loss) increased reflecting: |
l | Increased income from our litigation settlement related to our non-agency mortgage-related securities. While we had one large settlement with RBS during 2017, we did not have any significant settlements during 2016; and |
l | Greater gains recognized on a higher volume of reperforming loans reclassified from held-for-investment to held-for-sale and subsequently sold, coupled with less loss recognized in 2017 on the reclassification of seriously delinquent loans from held-for-investment to held-for-sale as a result of an accounting policy change in 2017. See Item Affecting Multiple Lines - Single-Family Loan Reclassifications for more information. |
n | 2016 vs. 2015 - Other income (loss) increased reflecting: |
l | Decreased lower-of-cost-or-fair-value adjustments as we reclassified fewer seasoned single-family loans from held-for-investment to held-for-sale during 2016; and |
l | Increased gains on multifamily mortgage loans and commitments for which we have elected the fair value option, due to increased market spread-related fair value gains. K Certificate benchmark spreads tightened during 2016 compared to these spreads widening during 2015. |
FREDDIE MAC | 2017 Form 10-K | 31 |
Management's Discussion and Analysis | Consolidated Results of Operations | Other Comprehensive Income (Loss) |
Year Over Year Change | ||||||||||||||||||||||
Year Ended December 31, | 2017 vs. 2016 | 2016 vs. 2015 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | 2015 | $ | % | $ | % | |||||||||||||||
Other comprehensive income, excluding certain items | $1,084 | ($29 | ) | $374 | $1,113 | 3,838 | % | ($403 | ) | (108 | )% | |||||||||||
Excluded items | ||||||||||||||||||||||
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities | (164 | ) | (299 | ) | (449 | ) | 135 | 45 | % | 150 | 33 | % | ||||||||||
Realized (gains) losses reclassified from AOCI | (987 | ) | (369 | ) | (502 | ) | (618 | ) | (167 | )% | 133 | 26 | % | |||||||||
Total excluded items | (1,151 | ) | (668 | ) | (951 | ) | (483 | ) | (72 | )% | 283 | 30 | % | |||||||||
Total other comprehensive income (loss) | ($67 | ) | ($697 | ) | ($577 | ) | $630 | 90 | % | ($120 | ) | (21 | )% |
n | Other comprehensive income, excluding certain items |
l | 2017 vs. 2016 - increased primarily due to market spread related gains as market spreads on non-agency and agency mortgage-related securities tightened more during 2017, coupled with smaller interest rate-related losses due to smaller increases in long-term interest rates during 2017. |
l | 2016 vs. 2015 - decreased primarily due to unrealized losses resulting from an increase in longer-term interest rates, coupled with a decrease in unrealized gains as our non-agency mortgage-related securities portfolio continued to decline consistent with the reduction of our mortgage-related investments portfolio pursuant to the limits established by the Purchase Agreement and FHFA. |
FREDDIE MAC | 2017 Form 10-K | 32 |
Management's Discussion and Analysis | Consolidated Results of Operations | Other Comprehensive Income (Loss) |
n | Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities |
l | 2017 vs. 2016 and 2016 vs. 2015 - decreased during both comparative periods primarily due to a decline in the population of impaired securities as a result of our active dispositions of these securities, coupled with a decline in new other-than-temporary impairments. |
n | Realized (gains) losses reclassified from AOCI |
l | 2017 vs. 2016 - reflected larger amounts of reclassified gains during 2017 due to higher realized gains on our non-agency and agency mortgage-related securities sold, as a result of additional spread tightening and an increase in sales of non-agency mortgage-related securities. |
l | 2016 vs. 2015 - reflected smaller amounts of reclassified gains during 2016 primarily due to a decline in sales of non-agency mortgage-related securities in an unrealized gain position. |
FREDDIE MAC | 2017 Form 10-K | 33 |
Management's Discussion and Analysis | Consolidated Results of Operations | Other Key Drivers |
n | Gains (losses) on extinguishment of debt |
l | 2017 vs. 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 (i.e., PCs), 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. |
l | 2016 vs. 2015 - losses decreased primarily due to an increase in longer-term interest rates during the fourth quarter of 2016, coupled with a decline in our repurchase of single-family PCs. The increase in longer-term interest rates resulted in net extinguishment gains for PCs repurchased during the fourth quarter, which partially offset the net extinguishment losses recognized for PCs repurchased during the nine months ended September 30, 2016. |
n | Other gains (losses) on investment securities recognized in earnings |
l | 2017 vs. 2016 - improved primarily due to the recognition of smaller fair value losses on our mortgage and non-mortgage-related securities classified as trading as long-term interest rates increased less during 2017, coupled with larger gains due to additional spread tightening during 2017 on our sales of agency and non-agency mortgage-related securities. |
l | 2016 vs. 2015 - worsened as we recognized net losses during 2016 compared to net gains during 2015, primarily due to losses on our mortgage-related and non-mortgage-related securities as a result of increasing longer-term interest rates, coupled with less realized gains from our available-for-sale securities, as we sold fewer non-agency securities in an unrealized gain position. |
n | Net impairment of available-for-sale securities recognized in earnings |
l | 2017 vs. 2016 and 2016 vs. 2015 - decreased primarily due to a decline in the population of non-agency mortgage-related securities, including those non-agency mortgage-related securities we intend to sell, as we continue to reduce the less liquid assets in our mortgage-related investments portfolio. |
n | Other expense |
l | 2016 vs. 2015 - decreased primarily driven by property taxes and insurance costs associated with seasoned single-family loans reclassified from held-for-investment to held-for-sale as we reclassified fewer loans in 2016 compared to 2015. These costs are considered part of the loan loss reserves while the loans are classified as held-for-investment. See Item Affecting Multiple Lines - Single-Family Loan Reclassifications for more information. |
n | Income tax expense |
l | 2017 vs. 2016 - increased primarily as a result of the impact of the Tax Cuts and Jobs Act enacted in December 2017, which reduced the statutory corporate income tax rate from 35% to 21%. We measured our net deferred tax asset using the reduced rate and recognized a charge to |
FREDDIE MAC | 2017 Form 10-K | 34 |
Management's Discussion and Analysis | Consolidated Results of Operations | Other Key Drivers |
l | 2016 vs. 2015 - increased primarily due to an increase in pre-tax income. |
FREDDIE MAC | 2017 Form 10-K | 35 |
Management's Discussion and Analysis | Consolidated Results of Operations | Item Affecting Multiple Lines |
Year Over Year Change | ||||||||||||||||||||||
Year Ended December 31, | 2017 vs. 2016 | 2016 vs. 2015 | ||||||||||||||||||||
(Dollars in millions) | 2017 | 2016 | 2015 | $ | % | $ | % | |||||||||||||||
Benefit (provision) for credit losses | $546 | $812 | $2,314 | ($266 | ) | (33 | )% | ($1,502 | ) | (65 | )% | |||||||||||
Other income (loss) - lower-of-cost-or-fair-value adjustment | — | (1,005 | ) | (2,193 | ) | 1,005 | 100 | % | 1,188 | 54 | % | |||||||||||
Other (expense) - property taxes and insurance associated with these loans | — | (195 | ) | (1,178 | ) | 195 | 100 | % | 983 | 83 | % | |||||||||||
Effect on income before income tax expense | $546 | ($388 | ) | ($1,057 | ) | $934 | 241 | % | $669 | 63 | % |
n | 2017 vs. 2016 - Effect on income before income tax expense changed to a gain due to a higher volume primarily of reperforming loans reclassified from held-for-investment to held-for-sale during 2017 compared to a loss recognized primarily on seriously delinquent loans reclassified from held-for-investment to held-for-sale during 2016. |
n | 2016 vs. 2015 - Effect on income before income tax expense decreased due to a decline in the number of seasoned single-family loans reclassified from held-for-investment to held-for-sale. |
FREDDIE MAC | 2017 Form 10-K | 36 |
Management's Discussion and Analysis | Consolidated Balance Sheet Analysis |
As of December 31, | Year Over Year Change | ||||||||||||
(Dollars in millions) | 2017 | 2016 | $ | % | |||||||||
Assets: | |||||||||||||
Cash and cash equivalents | $6,848 | $12,369 | ($5,521 | ) | (45 | )% | |||||||
Restricted cash and cash equivalents | 2,963 | 9,851 | (6,888 | ) | (70 | )% | |||||||
Securities purchased under agreements to resell | 55,903 | 51,548 | 4,355 | 8 | % | ||||||||
Subtotal | 65,714 | 73,768 | (8,054 | ) | (11 | )% | |||||||
Investments in securities, at fair value | 84,318 | 111,547 | (27,229 | ) | (24 | )% | |||||||
Mortgage loans, net | 1,871,217 | 1,803,003 | 68,214 | 4 | % | ||||||||
Accrued interest receivable | 6,355 | 6,135 | 220 | 4 | % | ||||||||
Derivative assets, net | 375 | 747 | (372 | ) | (50 | )% | |||||||
Deferred tax assets, net | 8,107 | 15,818 | (7,711 | ) | (49 | )% | |||||||
Other assets | 13,690 | 12,358 | 1,332 | 11 | % | ||||||||
Total assets | $2,049,776 | $2,023,376 | $26,400 | 1 | % | ||||||||
Liabilities and Equity: | |||||||||||||
Liabilities: | |||||||||||||
Accrued interest payable | $6,221 | $6,015 | $206 | 3 | % | ||||||||
Debt, net | 2,034,630 | 2,002,004 | 32,626 | 2 | % | ||||||||
Derivative liabilities, net | 269 | 795 | (526 | ) | (66 | )% | |||||||
Other liabilities | 8,968 | 9,487 | (519 | ) | (5 | )% | |||||||
Total liabilities | 2,050,088 | 2,018,301 | 31,787 | 2 | % | ||||||||
Total equity | (312 | ) | 5,075 | (5,387 | ) | (106 | )% | ||||||
Total liabilities and equity | $2,049,776 | $2,023,376 | $26,400 | 1 | % |
n | Cash and cash equivalents, restricted cash and cash equivalents and securities purchased under agreements to resell affect one another and changes in the balances should be viewed together (e.g., cash and cash equivalents can be invested in securities purchased under agreements to resell or other investments). The decrease in the combined balance was primarily due to lower near term cash needs for fewer upcoming maturities and anticipated calls of other debt, and a decrease in prepayment proceeds received by the custodial account driven by increased interest rates, at the end of 2017 compared to the end of 2016. |
FREDDIE MAC | 2017 Form 10-K | 37 |
Management's Discussion and Analysis | Our Business Segments | Segment Earnings |
Segment/Category | Description | Primary Income Drivers | Primary Expense Drivers | ||
Single-family Guarantee | Reflects results from our purchase, securitization and guarantee of single-family loans and the management of single-family mortgage credit risk | • | Guarantee fee income | • | Credit-related expenses |
• | Administrative expenses | ||||
• | Credit risk transfer expenses | ||||
Multifamily | Reflects results from our purchase, sale, securitization and guarantee of multifamily loans and securities, our investments in those loans and securities and the management of multifamily mortgage credit risk and market spread risk | • | Net interest income | • | Losses on loans |
• | Guarantee fee income | • | Investment losses | ||
• | G |