Edgar Filing: FEDERAL HOME LOAN MORTGAGE CORP

Large accelerated filer ¨

Accelerated filer x

Non-accelerated filer (Do not check if a smaller reporting company) ¨

Smaller reporting company ¨

10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2013

¨	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	52-0904874	(703) 903-2000
*(State or other jurisdiction of*	McLean, Virginia 22102-3110	*(I.R.S. Employer*	*(Registrant’s telephone number,*
*incorporation or organization)*	*(Address of principal executive*	*Identification No.)*	*including area code)*
	*offices, including zip 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. x 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). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of April 24, 2013, there were 650,039,533 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS


	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements		100
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1
Executive Summary		1
Selected Financial Data		13
Consolidated Results of Operations		14
Consolidated Balance Sheets Analysis		30
Risk Management		48
Liquidity and Capital Resources		84
Fair Value Balance Sheets and Analysis		88
Off-Balance Sheet Arrangements		92
Critical Accounting Policies and Estimates		93
Forward-Looking Statements		93
Risk Management and Disclosure Commitments		95
Legislative and Regulatory Matters		95
Item 3. Quantitative and Qualitative Disclosures About Market Risk		97
Item 4. Controls and Procedures		98
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		175
Item 1A. Risk Factors		175
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		175
Item 6. Exhibits		176
SIGNATURES		177
GLOSSARY		178
EXHIBIT INDEX		E-1


		i		Freddie Mac

MD&A TABLE REFERENCE


Table		Description	Page
	—	Selected Financial Data		13
	1	Total Single-Family Loan Workout Volumes		3
	2	Single-Family Credit Guarantee Portfolio Summary		5
	3	Credit Statistics, Single-Family Credit Guarantee Portfolio		7
	4	Mortgage-Related Investments Portfolio		12
	5	Summary Consolidated Statements of Comprehensive Income		14
	6	Net Interest Income/Yield and Average Balance Analysis		15
	7	Derivative Gains (Losses)		18
	8	Other Income		19
	9	Non-Interest Expense		20
	10	REO Operations Expense, REO Inventory, and REO Dispositions		20
	11	Composition of Segment Mortgage Portfolios and Credit Risk Portfolios		22
	12	Segment Earnings and Key Metrics — Investments		23
	13	Segment Earnings and Key Metrics — Single-Family Guarantee		25
	14	Segment Earnings Composition — Single-Family Guarantee Segment		26
	15	Segment Earnings and Key Metrics — Multifamily		29
	16	Investments in Securities		31
	17	Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets		33
	18	Additional Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets		34
	19	Mortgage-Related Securities Purchase Activity		34
	20	Non-Agency Mortgage-Related Securities Backed by Subprime First Lien, Option ARM, and Alt-A Loans and Certain Related Credit Statistics		36
	21	Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans		37
	22	Net Impairment of Available-For-Sale Mortgage-Related Securities Recognized in Earnings		37
	23	Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS		40
	24	Mortgage Loan Purchases and Other Guarantee Commitment Issuances		42
	25	Derivative Fair Values and Maturities		43
	26	Changes in Derivative Fair Values		44
	27	Freddie Mac Mortgage-Related Securities		46
	28	Issuances and Extinguishments of Debt Securities of Consolidated Trusts		47
	29	Changes in Total Equity (Deficit)		48
	30	Single-Family Credit Guarantee Portfolio Data by Year of Origination		49
	31	Characteristics of Purchases for the Single-Family Credit Guarantee Portfolio		51
	32	Characteristics of the Single-Family Credit Guarantee Portfolio		52
	33	Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio		56
	34	Single-Family Relief Refinance Loans		59
	35	Single-Family Loan Workouts, Serious Delinquency, and Foreclosures Volumes		60
	36	Quarterly Percentages of Modified Single-Family Loans — Current and Performing		61
	37	Single-Family Serious Delinquency Statistics		62
	38	Credit Concentrations in the Single-Family Credit Guarantee Portfolio		64
	39	Single-Family Credit Guarantee Portfolio by Attribute Combinations		65
	40	Single-Family Credit Guarantee Portfolio Foreclosure and Short Sale Rates		67
	41	Multifamily Mortgage Portfolio — by Attribute		68
	42	Non-Performing Assets		70
	43	REO Activity by Region		71
	44	Single-Family REO Property Status		72
	45	Credit Loss Performance		73
	46	Single-Family Impaired Loans with Specific Reserve Recorded		75
	47	Single-Family Credit Loss Sensitivity		75
	48	Repurchase Request Activity and Counterparty Balances		77
	49	Mortgage Insurance by Counterparty		79
	50	Bond Insurance by Counterparty		80
	51	Derivative Counterparty Credit Exposure		82
	52	Other Debt Security Issuances by Product, at Par Value		86
	53	Other Debt Security Repurchases, Calls, and Exchanges		86
	54	Freddie Mac Credit Ratings		86
	55	Summary of Assets and Liabilities Measured at Fair Value on a Recurring Basis on Our Consolidated Balance Sheets		89
	56	Consolidated Fair Value Balance Sheets		91
	57	Summary of Change in the Fair Value of Net Assets		91
	58	PMVS and Duration Gap Results		98
	59	Derivative Impact on PMVS-L (50 bps)		98


		ii		Freddie Mac

FINANCIAL STATEMENTS


	Page
Consolidated Statements of Comprehensive Income		101
Consolidated Balance Sheets		102
Consolidated Statements of Equity (Deficit)		103
Consolidated Statements of Cash Flows		104
Note 1: Summary of Significant Accounting Policies		105
Note 2: Conservatorship and Related Matters		107
Note 3: Variable Interest Entities		109
Note 4: Mortgage Loans and Loan Loss Reserves		111
Note 5: Individually Impaired and Non-Performing Loans		115
Note 6: Real Estate Owned		120
Note 7: Investments in Securities		121
Note 8: Debt Securities and Subordinated Borrowings		126
Note 9: Derivatives		128
Note 10: Collateral and Offsetting of Assets and Liabilities		131
Note 11: Stockholders’ Equity (Deficit)		134
Note 12: Income Taxes		136
Note 13: Segment Reporting		137
Note 14: Financial Guarantees		140
Note 15: Concentration of Credit and Other Risks		141
Note 16: Fair Value Disclosures		147
Note 17: Legal Contingencies		168
Note 18: Regulatory Capital		172
Note 19: Selected Financial Statement Line Items		173


		iii		Freddie Mac

PART I — FINANCIAL INFORMATION

We continue to operate under the conservatorship that commenced on September 6, 2008, under the direction of FHFA as our Conservator. The Conservator succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any shareholder, officer or director thereof, with respect to the company and its assets. The Conservator has delegated certain authority to our Board of Directors to oversee, and management to conduct, day-to-day operations. The directors serve on behalf of, and exercise authority as directed by, the Conservator. See “BUSINESS — Conservatorship and Related Matters” in our Annual Report on Form 10-K for the year ended December 31, 2012, or 2012 Annual Report, for information on the terms of the conservatorship, the powers of the Conservator, and related matters, including the terms of our Purchase Agreement with Treasury.

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 and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in: (a) the “FORWARD-LOOKING STATEMENTS” sections of this Form 10-Q and our 2012 Annual Report; and (b) the “RISK FACTORS” and “BUSINESS” sections of our 2012 Annual Report.

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

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

AND RESULTS OF OPERATIONS

You should read this MD&A in conjunction with our consolidated financial statements and related notes for the three months ended March 31, 2013 included in “FINANCIAL STATEMENTS,” and our 2012 Annual Report.

EXECUTIVE SUMMARY

Overview

Freddie Mac is a GSE chartered by Congress in 1970 with a public mission to provide liquidity, stability, and affordability to the U.S. housing market. We have maintained a consistent market presence since our inception, providing mortgage liquidity in a wide range of economic environments. We are working to support the recovery of the housing market and the nation’s economy by providing essential liquidity to the mortgage market and helping to stem the rate of foreclosures. We believe our actions are helping communities across the country by providing America’s families with access to mortgage funding at low rates while helping distressed borrowers keep their homes and avoid foreclosure, where feasible.

Summary of Financial Results

During the first quarter of 2013, we continued to observe certain signs of improvement in the housing market, which contributed positively to our financial results. Our comprehensive income for the first quarter of 2013 was $7.0 billion, consisting of $4.6 billion of net income and $2.4 billion of other comprehensive income. By comparison, our comprehensive income for the first quarter of 2012 was $1.8 billion, consisting of $577 million of net income and $1.2 billion of other comprehensive income.

Our total equity was $10.0 billion at March 31, 2013, reflecting our total equity balance of $8.8 billion at December 31, 2012, comprehensive income of $7.0 billion for the first quarter of 2013, and a $5.8 billion dividend payment on the senior preferred stock in March 2013 based on our Net Worth Amount at December 31, 2012. As a result of our positive net worth at March 31, 2013, no draw is being requested from Treasury under the Purchase Agreement for the first quarter of 2013.

Our Primary Business Objectives

We are focused on the following primary business objectives: (a) providing credit availability for mortgages and maintaining foreclosure prevention activities; (b) minimizing our credit losses; (c) developing mortgage market enhancements in support of a new infrastructure for the secondary mortgage market; (d) maintaining sound credit quality on


		1		Freddie Mac

the loans we purchase or guarantee; (e) contracting the dominant presence of the GSEs in the marketplace; and (f) strengthening our infrastructure and improving overall efficiency while also focusing on retention of key employees.

Our business objectives reflect direction we have received from the Conservator, including the 2013 Conservatorship Scorecard. The 2013 Conservatorship Scorecard details specific priorities for Freddie Mac and Fannie Mae in 2013 that build upon the three strategic goals announced in FHFA’s Strategic Plan for Freddie Mac and Fannie Mae: (a) build a new infrastructure for the secondary mortgage market; (b) gradually contract Freddie Mac and Fannie Mae’s dominant presence in the marketplace while simplifying and shrinking their operations; and (c) maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. We continue to align our resources and internal business plans to meet the goals and objectives provided to us by FHFA. For information on the 2013 Conservatorship Scorecard and the Strategic Plan, see our current report on Form 8-K dated March 8, 2013 and “BUSINESS — Regulation and Supervision — Legislative and Regulatory Developments — FHFA’s Strategic Plan for Freddie Mac and Fannie Mae Conservatorships” in our 2012 Annual Report.

Providing Credit Availability for Mortgages and Maintaining Foreclosure Prevention Activities

Our consistent market presence provides lenders with a constant source of liquidity for conforming mortgage products even when other sources of capital have withdrawn. We believe this liquidity provides our customers with confidence to continue lending in difficult environments. We estimate that we, Fannie Mae, and Ginnie Mae collectively guaranteed more than 88% of the single-family conforming mortgages originated during the first quarter of 2013. We also enable mortgage originators to offer homebuyers and homeowners lower mortgage rates on conforming loan products, in part because of the value investors place on GSE-guaranteed mortgage-related securities. In March 2013, we estimated that borrowers were paying an average of 33 basis points less on 30-year, fixed-rate conforming loans than on non-conforming loans. These estimates are based on data provided by HSH Associates, a third-party provider of mortgage market data.

During the three months ended March 31, 2013 and 2012, we purchased or issued other guarantee commitments for $131.9 billion and $105.1 billion in UPB of single-family conforming mortgage loans, representing approximately 636,000 and 491,000 homes, respectively.

We are focused on reducing the number of foreclosures and helping to keep families in their homes. Since 2009, we have helped more than 830,000 borrowers experiencing hardship complete a loan workout. Our relief refinance initiative, including HARP (which is the portion of our relief refinance initiative for loans with LTV ratios above 80%), is a significant part of our effort to keep families in their homes. We purchased $21.5 billion and $17.3 billion in UPB of HARP loans in the first quarters of 2013 and 2012, respectively. We have purchased HARP loans provided to more than one million borrowers since the initiative began in 2009, including approximately 113,000 borrowers during the first quarter of 2013.

Under our loan workout programs, our servicers contact borrowers and attempt to help borrowers experiencing hardship stay in their homes or avoid foreclosure. Our servicers seek and also facilitate the completion of foreclosure alternatives when a home retention solution is not possible. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk” for more information about loss mitigation activities and our efforts to provide credit availability, including through our loan modification initiatives, and our relief refinance mortgage initiative, which includes HARP.

Short sale activity as a percentage of the combined total of short sales and foreclosure transfers increased from 29% in the first quarter of 2012 to 38% in the first quarter of 2013. Due to the recent changes in our short sale process, we believe our short sale activity will remain high in 2013.

The table below presents our single-family loan workout activities for the last five quarters.


		2		Freddie Mac

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


	For the Three Months Ended
	03/31/2013		12/31/2012		09/30/2012		06/30/2012		03/31/2012
	(number of loans)
Loan modifications⁽²⁾		20,613		19,898		20,864		15,142		13,677
Repayment plans		7,644		6,964		7,099		8,712		10,575
Forbearance agreements⁽³⁾		3,104		2,442		2,190		4,738		3,656
Short sales and deed in lieu of foreclosure transactions		14,157		13,849		14,383		12,531		12,245

Total single-family loan workouts		45,518		43,153		44,536		41,123		40,153

(1)

Based on actions completed with borrowers for loans within our single-family credit guarantee portfolio. Excludes those modification, repayment, and forbearance activities for which the borrower has started the required process, but the actions have not been made permanent or effective, such as loans in modification trial periods. Also excludes certain loan workouts where our single-family seller/servicers have executed agreements in the current or prior periods, but these have not been incorporated into certain of our operational systems, due to delays in processing. These categories are not mutually exclusive and a loan in one category may also be included within another category in the same period.

(2)	As of March 31, 2013, approximately 23,000 borrowers were in modification trial periods, including approximately 15,000 borrowers in trial periods for our non-HAMP standard modification.

(3)

Excludes loans with long-term forbearance under a completed loan modification. Many borrowers enter into a short-term forbearance agreement before another loan workout is pursued or completed. We only report forbearance activity for a single loan once during each quarterly period; however, a single loan may be included under separate forbearance agreements in separate periods.

Minimizing Our Credit Losses

To help minimize the credit losses related to our guarantee activities, we are focused on:

•

pursuing a variety of loan workouts, including foreclosure alternatives, in an effort to reduce the severity of losses we experience over time;

•

managing foreclosure timelines to the extent possible, given the lengthy foreclosure process in many states;

•

managing our inventory of foreclosed properties to reduce costs and maximize proceeds; and

•

pursuing contractual remedies against originators, lenders, servicers, and insurers, as appropriate.

We establish guidelines for our servicers to follow and provide them default management tools to use, in part, in determining which type of loan workout would be expected to provide the best opportunity for minimizing our credit losses. Our servicers pursue repayment plans and loan modifications for borrowers facing financial or other hardships because the level of recovery (if a loan reperforms) may often be much higher than would be the case with foreclosure or foreclosure alternatives. In cases where repayment plans and loan modifications are not possible or successful, a short sale transaction typically provides us with a comparable or higher level of recovery than what we would receive through foreclosure and subsequent property sale from our REO inventory. In large part, the benefit of a short sale arises from the avoidance of costs we would otherwise incur to complete the foreclosure and dispose of the property, including maintenance and other property expenses associated with holding REO property.

We continue to face challenges with respect to the performance of certain of our seller/servicers in managing our seriously delinquent loans. As part of our efforts to address this issue and mitigate our credit losses, we have been facilitating the transfer of servicing from certain underperforming servicers to other servicers that specialize in workouts of problem loans. During 2011 and 2012, we made changes to our programs for reviewing the performance of our servicers. These programs include the assessment of certain fees to compensate us for deficiencies in servicer performance. During the first quarter of 2013, we made additional changes that are designed to further encourage more timely resolution of problem loans.

We have contractual arrangements with our seller/servicers under which they agree to sell us mortgage loans, and represent and warrant that those loans have been originated under specified underwriting standards. In addition, our servicers represent and warrant to us that those loans will be serviced in accordance with our servicing contract. If we subsequently discover that the representations and warranties were breached (i.e., contractual standards were not followed), we can exercise certain contractual remedies, including requesting repurchase, to mitigate our actual or potential credit losses. As of March 31, 2013 and December 31, 2012, the UPB of loans subject to repurchase requests issued to our single-family seller/servicers was approximately $2.9 billion and $3.0 billion, respectively (these figures include repurchase requests for which appeals were pending).

Historically, we have used a process of reviewing a sample of the loans we purchase to validate compliance with our underwriting standards. In addition, we review many delinquent loans and loans that have resulted in credit losses, such as


		3		Freddie Mac

through foreclosure or short sale. As part of the 2013 Conservatorship Scorecard, FHFA set a goal for us to complete our demands for remedies for breaches of representations and warranties related to pre-conservatorship loan activity. As a result, we expect to continue our reviews of loans originated prior to 2009 in accordance with FHFA’s guidance, and our repurchase request volumes with our seller/servicers may increase in future periods.

Our credit loss exposure is also partially mitigated by mortgage insurance, which is a form of credit enhancement. Primary mortgage insurance is generally required to be purchased, typically at the borrower’s expense, for certain mortgages with higher LTV ratios. Although we received payments under primary and other mortgage insurance of $444 million and $491 million in the first quarters of 2013 and 2012, respectively, which helped to mitigate our credit losses, many of our mortgage insurers remain financially weak. As a result, we expect to receive substantially less than full payment of our claims from three of our mortgage insurance counterparties that are currently partially paying claims under orders of their state regulators. See “RISK MANAGEMENT — Institutional Credit Risk — Mortgage Insurers” for information on these counterparties. See “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES — Table 4.5 — Recourse and Other Forms of Credit Protection” for more information about credit enhancements of our single-family credit guarantee portfolio.

Developing Mortgage Market Enhancements in Support of a New Infrastructure for the Secondary Mortgage Market

We continue efforts that we believe will create value for the industry by building the infrastructure for a future housing finance system. In this regard, the 2013 Conservatorship Scorecard establishes the following goals for 2013:

•

Common Securitization Platform: Continue the foundational development of the common securitization platform that can be used in a future secondary mortgage market, including by establishing initial ownership and governance for a new business entity that will undertake the effort of building and operating this platform.

•

Contractual and Disclosure Framework: Continue the development of the contractual and disclosure framework to meet the requirements for investors in mortgage securities and credit risk, including by identifying and developing standards in mortgage-related data, disclosure of mortgage security information, and seller/servicer contracts.

•

Uniform Mortgage Data Program: Continue the development of various data standards for the mortgage industry, including completing the identification and development of data standards for Uniform Mortgage Servicing Data.

Maintaining Sound Credit Quality on the Loans We Purchase or Guarantee

We continue to focus on maintaining credit policies, including our underwriting standards, that allow us to purchase and guarantee loans made to qualified borrowers that we believe will provide management and guarantee fee income (excluding the amounts associated with the Temporary Payroll Tax Cut Continuation Act of 2011), over the long-term, that exceeds our expected credit-related and administrative expenses on such loans.

The credit quality of the single-family loans we acquired beginning in 2009 (excluding HARP and other relief refinance mortgages) is significantly better than that of loans we acquired from 2005 to 2008, as measured by original LTV ratios, FICO scores, and the proportion of loans underwritten with fully documented income. The improvement in credit quality of loans we have purchased since 2008 (excluding HARP and other relief refinance mortgages) is primarily the result of: (a) changes in our credit policies, including changes in our underwriting standards; (b) fewer purchases of loans with higher risk characteristics; and (c) changes in mortgage insurers’ and lenders’ underwriting practices.

Underwriting procedures for relief refinance mortgages are limited in many cases, and such procedures generally do not include all of the changes in underwriting standards we have implemented since 2008. As a result, relief refinance mortgages generally reflect many of the credit risk attributes of the original loans. However, our relief refinance mortgage initiative may help reduce our exposure to credit risk in cases where the borrowers’ payments under their mortgages are reduced, thereby strengthening the borrowers’ potential to make their mortgage payments. Relief refinance mortgages of all LTV ratios comprised approximately 19% and 18% of the UPB in our total single-family credit guarantee portfolio at March 31, 2013 and December 31, 2012, respectively.

HARP loans represented 12% and 11% of the UPB of our single-family credit guarantee portfolio as of March 31, 2013 and December 31, 2012, respectively. Mortgages originated after 2008, including HARP loans, represented 67% and 63% of the UPB of our single-family credit guarantee portfolio as of March 31, 2013 and December 31, 2012, respectively, while the single-family loans originated from 2005 through 2008 represented 22% and 24% of this portfolio at these dates, respectively.


		4		Freddie Mac

Approximately 97% and 95% of the single-family mortgages we purchased in the first quarters of 2013 and 2012, respectively, were fixed-rate, first lien amortizing mortgages, based on UPB. Approximately 84% and 87% of the single-family mortgages we purchased in the first quarters of 2013 and 2012, respectively, were refinance mortgages, and in both quarters approximately 19% of these refinance mortgages were HARP loans, based on UPB. HARP loans comprised approximately 16% of our single-family purchase volume in the first quarters of both 2013 and 2012.

Due to our participation in HARP, we purchase a significant number of loans that have original LTV ratios over 100%. The proportion of loans we purchased with LTV ratios over 100% increased from 6% of our single-family mortgage purchases (including HARP loans) in the first quarter of 2012 to 9% of our single-family mortgage purchases in the first quarter of 2013. This increase was due to continued low interest rates and the changes in HARP announced in the fourth quarter of 2011, which allow borrowers (whose loans we already hold in our single-family credit guarantee portfolio) with higher LTV ratios to refinance. Over time, HARP loans may not perform as well as other refinance mortgages because the continued high LTV ratios and reduced underwriting standards of these loans increase the probability of default. In addition, HARP loans may not be covered by mortgage insurance for the full excess of their UPB over 80%.

The table below presents the composition and certain other information about loans in our single-family credit guarantee portfolio, by year of origination at March 31, 2013 and December 31, 2012, and for the first quarter of 2013 and the year ended December 31, 2012.

Table 2 — Single-Family Credit Guarantee Portfolio Summary⁽¹⁾


	At March 31, 2013														Three Months Ended March 31, 2013
	Percent of Portfolio			Average Credit Score⁽²⁾		Current LTV Ratio⁽³⁾			Current LTV Ratio >100%⁽³⁾⁽⁴⁾			Serious Delinquency Rate⁽⁵⁾			Percent of Credit Losses⁽⁶⁾
Loans originated — 2009 to 2013:
Relief refinance loans:
HARP loans		12	%		734		100	%		38	%		0.94	%		3.4	%
Other relief refinance loans		7			747		57			—			0.33			0.3
All other loans		48			757		65			—			0.27			1.8

Subtotal — 2009 to 2013 originations		67			752		70			7			0.38			5.5

Loans originated — 2005 to 2008		22			707		96			40			9.48			84.9
Loans originated — 2004 and prior		11			713		55			5			3.23			9.6

Total		100	%		738		74			14			3.03			100.0	%


	At December 31, 2012														Year Ended December 31, 2012
	Percent of Portfolio			Average Credit Score⁽²⁾		Current LTV Ratio⁽³⁾			Current LTV Ratio >100%⁽³⁾⁽⁴⁾			Serious Delinquency Rate⁽⁵⁾			Percent of Credit Losses⁽⁶⁾
Loans originated — 2009 to 2012:
Relief refinance loans:
HARP loans		11	%		735		100	%		40	%		0.98	%		2.0	%
Other relief refinance loans		7			749		58			—			0.32			0.2
All other loans		45			757		66			<1			0.27			1.4

Subtotal — 2009 to 2012 originations		63			753		71			7			0.39			3.6

Loans originated — 2005 to 2008		24			708		98			42			9.56			87.3
Loans originated — 2004 and prior		13			715		56			6			3.20			9.1

Total		100	%		737		75			15			3.25			100.0	%

(1)

Based on the loans remaining in the portfolio at March 31, 2013 and December 31, 2012, which totaled $1.6 trillion in UPB at both dates, rather than all loans originally guaranteed by us and originated in the respective year. Includes loans acquired under our relief refinance initiative, which began in 2009. For credit scores, LTV ratios, serious delinquency rates, and other information about the loans in our single-family credit guarantee portfolio, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk.”

(2)

Credit score data is based on FICO scores, which are ranked on a scale of approximately 300 to 850 points. Although we obtain updated credit information on certain borrowers after the origination of a mortgage, such as those borrowers seeking a modification, the scores presented in this table represent the credit score of the borrower at the time of loan origination and may not be indicative of the borrowers’ creditworthiness at March 31, 2013.

(3)

We estimate current market values by adjusting the value of the property at origination based on changes in the market value of homes in the same geographical area since origination. See endnote (3) to “Table 32 — Characteristics of the Single-Family Credit Guarantee Portfolio” for information on our calculation of current LTV ratios.

(4)	Calculated as a percentage of the aggregate UPB of loans with LTV ratios greater than 100% in relation to the total UPB of loans in the category.

(5)	See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-family Mortgage Credit Risk — Delinquencies” for further information about our reported serious delinquency rates.

(6)	Historical credit losses for each origination year may not be representative of future results.


		5		Freddie Mac

Contracting the Dominant Presence of the GSEs in the Marketplace

We continue to take steps toward the goal of gradually contracting our presence in the marketplace. For example, the 2013 Conservatorship Scorecard establishes the following goals for 2013 (with credit for partial completion allowed):

•

Single-family: Demonstrate the viability of multiple types of risk transfer transactions involving single-family mortgages with at least $30 billion in aggregate UPB, subject to certain limitations. These transactions are intended to shift mortgage credit risk from us to private capital investors;

•

Multifamily: Reduce the UPB amount of new multifamily business activity (purchases of loans and issuances of other guarantee commitments) relative to 2012 by at least 10% by tightening underwriting, adjusting pricing and limiting product offerings, while not increasing the proportion of retained risk; and

•

Mortgage-related investments portfolio: Reduce the December 31, 2012 mortgage-related investments portfolio balance (exclusive of agency securities, multifamily loans classified as held-for-sale, and single-family loans purchased for cash) by selling 5% of mortgage-related assets.

The 2013 Conservatorship Scorecard states that our transactions related to these goals should be economically sensible, operationally well-controlled, involve a meaningful transference of credit risk, and be transparent to the marketplace. Changes in market and regulatory conditions will be taken into consideration when evaluating our performance against these goals.

Strengthening Our Infrastructure and Improving Overall Efficiency While Also Focusing On Retention of Key Employees

We continue to work both to enhance the quality of our infrastructure and to improve our efficiency to preserve the taxpayers’ investment. We are focusing our resources primarily on key projects, many of which are related to FHFA-mandated strategic initiatives (e.g., initiatives under the Conservatorship Scorecards) that will likely take several years to implement. We are also focused on making significant improvements to our systems infrastructure in order to: (a) replace legacy hardware or software systems at the end of their useful lives and to strengthen our disaster recovery capabilities; and (b) improve our data collection and administration capabilities as well as our ability to assist in the servicing of loans.

We continue to actively manage our administrative expenses. Our administrative expenses increased in the first quarter of 2013 compared to the first quarter of 2012, largely due to: (a) an increase in salaries and employee benefits expense due to increased headcount, and (b) an increase in professional services expense related to initiatives we are implementing under the Conservatorship Scorecards and other FHFA-mandated strategic initiatives. We believe the various FHFA-mandated strategic initiatives will likely continue to require significant resources and thus continue to affect our level of administrative expenses going forward.

Single-Family Credit Guarantee Portfolio

The table below provides certain credit statistics for our single-family credit guarantee portfolio.


		6		Freddie Mac

Table 3 — Credit Statistics, Single-Family Credit Guarantee Portfolio


	As of
	3/31/2013			12/31/2012			9/30/2012			6/30/2012			3/31/2012
Payment status —
One month past due		1.70	%		1.85	%		2.02	%		1.79	%		1.63	%
Two months past due		0.56	%		0.66	%		0.66	%		0.60	%		0.57	%
Seriously delinquent⁽¹⁾		3.03	%		3.25	%		3.37	%		3.45	%		3.51	%
Non-performing loans (in millions)⁽²⁾	$	126,302		$	128,599		$	131,106		$	118,463		$	119,599
Single-family loan loss reserve (in millions)⁽³⁾	$	28,299		$	30,508		$	33,298		$	35,298		$	37,771
REO inventory (in properties)		47,968			49,071			50,913			53,271			59,307
REO assets, net carrying value (in millions)	$	4,246		$	4,314		$	4,459		$	4,715		$	5,333

	For the Three Months Ended
	3/31/2013			12/31/2012			9/30/2012			6/30/2012			3/31/2012
	(in units, unless noted)
Seriously delinquent loan additions⁽¹⁾		65,281			72,626			76,104			75,904			80,815
Loan workout volume⁽⁴⁾		45,518			43,153			44,536			41,123			40,153
REO acquisitions		17,881			18,672			20,302			20,033			23,805
REO disposition severity ratio:⁽⁵⁾
California		31.4	%		34.4	%		37.7	%		41.6	%		44.2	%
Arizona		31.8	%		35.9	%		36.3	%		40.4	%		45.0	%
Florida		40.8	%		42.6	%		44.7	%		46.2	%		48.6	%
Nevada		40.5	%		45.6	%		50.6	%		54.3	%		56.5	%
Illinois		45.7	%		46.5	%		47.7	%		47.8	%		49.3	%
Total U.S		34.4	%		35.2	%		36.2	%		37.9	%		40.3	%
Single-family provision (benefit) for credit losses (in millions)	$	(469	)	$	(658	)	$	650		$	177		$	1,844
Single-family credit losses (in millions)	$	2,063		$	2,396		$	2,936		$	2,858		$	3,435

(1)	See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Delinquencies” for further information about our reported serious delinquency rates.

(2)

Consists of the UPB of loans in our single-family credit guarantee portfolio that have undergone a TDR or that are seriously delinquent. During the third quarter of 2012, we changed the treatment of single-family loans discharged in Chapter 7 bankruptcy to classify these loans as TDRs, regardless of the borrowers’ payment status. As a result, we newly classified approximately $19.5 billion in UPB of loans discharged in Chapter 7 bankruptcy as TDRs in the third quarter of 2012. As of March 31, 2013 and December 31, 2012, approximately $68.5 billion and $65.8 billion in UPB of TDR loans, respectively, were no longer seriously delinquent.

(3)	Consists of the combination of: (a) our allowance for loan losses on mortgage loans held for investment; and (b) our reserve for guarantee losses associated with non-consolidated single-family mortgage securitization trusts and other guarantee commitments.

(4)	See “Table 1 — Total Single-Family Loan Workout Volumes” for information about our problem loan workout activities.

(5)

States presented represent the five states where our credit losses were greatest during the first quarter of 2013. Calculated as the amount of our losses recorded on disposition of REO properties during the respective quarterly period, excluding those subject to repurchase requests made to our seller/servicers, divided by the aggregate UPB of the related loans. The amount of losses recognized on disposition of the properties is equal to the amount by which the UPB of the loans exceeds the amount of sales proceeds from disposition of the properties. Excludes sales commissions and other expenses, such as property maintenance and costs, as well as applicable recoveries from credit enhancements, such as mortgage insurance.

In discussing our credit performance, we often use the terms “credit losses” and “credit-related expenses.” These terms are significantly different. Our “credit losses” consist of charge-offs and REO operations expense, while our “credit-related expenses” consist of our provision (benefit) for credit losses and REO operations expense.

Since the beginning of 2008, on an aggregate basis, we have recorded provision for credit losses associated with single-family loans of approximately $74.7 billion, and have recorded an additional $3.8 billion in losses on loans purchased from PC trusts, net of recoveries. The majority of these losses are associated with loans originated in 2005 through 2008. While loans originated in 2005 through 2008 will give rise to additional credit losses that have not yet been incurred and, thus, have not yet been provisioned for, we believe that, as of March 31, 2013, we have reserved for or charged-off the majority of the total expected credit losses for these loans. Nevertheless, various factors, such as continued high unemployment rates or future declines in home prices, could require us to provide for losses on these loans beyond our current expectations.

Our loan loss reserves for single-family loans declined in each of the last five quarters, which reflects improvement in both borrower payment performance and lower severity ratios for both REO dispositions and short sale transactions due to the improvements in home prices in most areas during these periods. Our REO inventory also declined in each of the last five quarters primarily due to lower foreclosure activity as well as an increase in the volume of borrowers completing short sales rather than foreclosures.

Our average REO disposition severity ratio improved to 34.4% for the first quarter of 2013 compared to 35.2% and 40.3% for the fourth and first quarters of 2012, respectively. Although this ratio improved in each of the last five quarters, it remains high as compared to our experience in periods before 2007.

The serious delinquency rate for our single-family credit guarantee portfolio was 3.03% at March 31, 2013, compared to 3.25% at December 31, 2012, and has improved in each of the last five quarters. Excluding relief refinance loans, the


		7		Freddie Mac

improvement in borrower payment performance during these periods reflects an improved credit profile of borrowers with loans originated since 2008. However, several factors, including the lengthening of the foreclosure process, have resulted in loans remaining in serious delinquency for longer periods than experienced prior to 2008, particularly in states that require a judicial foreclosure process. As of March 31, 2013 and December 31, 2012, the percentage of seriously delinquent loans that have been delinquent for more than six months was 73% and 72%, respectively, and most of these loans have been delinquent for more than one year. The longer a loan remains delinquent, the more challenging and costly it is to resolve.

Although the balance of our non-performing loans declined during the first quarter of 2013, it remained high at March 31, 2013, compared to periods prior to 2009.

The credit losses and loan loss reserves associated with our single-family credit guarantee portfolio remained elevated in the first quarter of 2013, due, in part, to:

•

Losses associated with the continued high volume of foreclosures and foreclosure alternatives. These actions relate to the continued efforts of our servicers to resolve our large inventory of seriously delinquent loans. Due to the length of time necessary for servicers either to complete the foreclosure process or pursue foreclosure alternatives on seriously delinquent loans in our portfolio, we expect our credit losses will continue to remain elevated even if the volume of new seriously delinquent loans continues to decline.

•

Continued negative effect of certain loan groups within the single-family credit guarantee portfolio, such as: (a) loans originated in 2005 through 2008; and (b) loans with higher-risk characteristics (such as those underwritten with certain lower documentation standards and interest-only loans), a significant portion of which were originated in 2005 through 2008. These groups continue to be large contributors to our credit losses.

•

Cumulative decline in national home prices of 22% since June 2006, based on our own index. As a result of this price decline, approximately 14% of loans in our single-family credit guarantee portfolio, based on UPB, had estimated current LTV ratios in excess of 100% (i.e., underwater loans) as of March 31, 2013.

•

Weak financial condition of many of our mortgage insurers, which has reduced our actual recoveries from these counterparties as well as our estimates of expected recoveries.

Some of our loss mitigation activities create fluctuations in our delinquency statistics. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-family Mortgage Credit Risk — Credit Performance — Delinquencies” for further information about factors affecting our reported delinquency rates.

Conservatorship and Government Support for Our Business

We continue to operate under the direction of FHFA, as our Conservator. We are also subject to certain constraints on our business activities imposed by Treasury due to the terms of, and Treasury’s rights under, the Purchase Agreement. We are dependent upon the continued support of Treasury and FHFA in order to continue operating our business. 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. The conservatorship and related matters have had a wide-ranging impact on us, including our regulatory supervision, management, business, financial condition, and results of operations.

There is significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified termination date, and as to what changes may occur to our business structure during or following conservatorship, including whether we will continue to exist. We are not aware of any current plans of our Conservator to significantly change our business model or capital structure in the near-term. Our future structure and role will be determined by the Administration and Congress, and there are likely to be significant changes beyond the near-term. We have no ability to predict the outcome of these deliberations.

Under the Purchase Agreement, we are required to pay dividends to Treasury to the extent that our Net Worth Amount exceeds the permitted Capital Reserve Amount, established at $3 billion for 2013 and declining to zero in 2018. Accordingly, we do not have the ability over the long term to build and retain the capital generated by our business operations, or return capital to stockholders other than Treasury.

We paid dividends of $5.8 billion in cash on the senior preferred stock during the three months ended March 31, 2013, based on our Net Worth Amount at December 31, 2012. Through March 31, 2013, we have paid aggregate cash dividends to


		8		Freddie Mac

Treasury of $29.6 billion, an amount equal to 41% of our aggregate draws received under the Purchase Agreement. Under the Purchase Agreement, the payment of dividends cannot be used to offset prior draws from Treasury. Based on our Net Worth Amount at March 31, 2013, our dividend obligation to Treasury in June 2013 will be $7.0 billion.

The aggregate liquidation preference of the senior preferred stock was $72.3 billion at both March 31, 2013 and December 31, 2012. The remaining funding commitment from Treasury under the Purchase Agreement is $140.5 billion. This amount will be reduced by any future draws. Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited and we will not be able to do so for the foreseeable future, if at all. The aggregate liquidation preference of the senior preferred stock will increase further if we receive additional draws. For a discussion of factors that could result in additional draws, see “RISK FACTORS — Conservatorship and Related Matters — We may request additional draws under the Purchase Agreement in future periods” in our 2012 Annual Report.

For more information on the conservatorship and government support for our business, including the Purchase Agreement, see “BUSINESS — Conservatorship and Related Matters” and “— Treasury Agreements” in our 2012 Annual Report.

Consolidated Financial Results

Net income was $4.6 billion for the first quarter of 2013 compared to net income of $577 million for the first quarter of 2012. Key highlights of our financial results include:

•

Net interest income for the first quarter of 2013 decreased to $4.3 billion from $4.5 billion for the first quarter of 2012, mainly due to the impact of a reduction in the balance of our higher-yielding mortgage-related assets, partially offset by lower funding costs.

•

Benefit (provision) for credit losses for the first quarter of 2013 was $503 million, compared to $(1.8) billion for the first quarter of 2012. The shift from a provision for credit losses in the first quarter of 2012 to a benefit for credit losses in the first quarter of 2013 primarily reflects: (a) declines in the volume of newly delinquent loans (largely due to a decline in the portion of our single-family credit guarantee portfolio originated in 2005 through 2008); and (b) lower estimates of incurred loss due to the positive impact of an increase in national home prices.

•

Non-interest income (loss) was $402 million for the first quarter of 2013, compared to $(1.5) billion for the first quarter of 2012. The improvement was largely driven by derivative gains during the first quarter of 2013 compared to derivative losses during the first quarter of 2012.

•

Non-interest expense increased to $624 million for the first quarter of 2013, from $596 million for the first quarter of 2012, primarily due to an increase in expenses related to amounts paid and due to Treasury related to the legislated 10 basis point increase in guarantee fees, which was implemented in April 2012.

•

Comprehensive income was $7.0 billion for the first quarter of 2013 compared to $1.8 billion for the first quarter of 2012. Comprehensive income for the first quarter of 2013 consisted of $4.6 billion of net income and $2.4 billion of other comprehensive income, primarily due to net unrealized gains on our available-for-sale securities.

Mortgage Market and Economic Conditions

Overview

The U.S. real gross domestic product rose by 2.5% on an annualized basis during the first quarter of 2013, compared to 0.4% during the fourth quarter of 2012, according to the Bureau of Economic Analysis. The national unemployment rate was 7.6% in March 2013, compared to 7.8% in December 2012 and 8.2% in March 2012, based on data from the U.S. Bureau of Labor Statistics. In the data underlying the unemployment rate, an average of approximately 159,000 monthly net new jobs were added to the economy during the twelve months ended March 31, 2013, which shows evidence of a slow, but steady positive trend for the economy and the labor market.

Single-Family Housing Market

The single-family housing market continued to show significant improvement in the first quarter of 2013 despite continued weakness in the employment market and a significant inventory of seriously delinquent loans and REO properties in the market.

Based on data from the National Association of Realtors, sales of existing homes in the first quarter of 2013 averaged 4.94 million (at a seasonally adjusted annual rate), increasing 0.8% from 4.90 million in the fourth quarter of 2012. Based on


		9		Freddie Mac

data from the U.S. Census Bureau and HUD, new home sales in the first quarter of 2013 averaged approximately 424,000 (at a seasonally adjusted annual rate) increasing approximately 10.7% from approximately 383,000 in the fourth quarter of 2012. Home prices increased during the first quarter of 2013, with our nationwide index registering approximately a 1.4% increase from December 2012 through March 2013 without seasonal adjustment. From March 2012 through March 2013 our nationwide home price index increased approximately 6.7%. These estimates were based on our own price index of mortgage loans on one-family homes funded by us or Fannie Mae. Other indices of home prices may have different results, as they are determined using different pools of mortgage loans and calculated under different conventions than our own.

Multifamily Housing Market

Multifamily market fundamentals continued to improve on a national level during the first quarter of 2013, although at a slower pace as compared to 2012. As reported by REIS, Inc., the national apartment vacancy rate was 4.3% and 4.5% at March 31, 2013 and December 31, 2012, respectively, and remained at the lowest levels since 2001. The multifamily sector continued to experience strong investor interest and continued to outperform other commercial real estate sectors. Vacancy rates and effective rents are important to loan performance because multifamily loans are generally repaid from the cash flows generated by the underlying property and these factors significantly influence those cash flows. We believe positive market fundamentals, such as low vacancy rates and increasing effective rents, as well as increasing demand for multifamily housing have contributed to improvement in property values in most markets during the first quarter of 2013.

Mortgage Market and Business Outlook

Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates, and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties. For example, a number of factors could cause the actual performance of the housing and mortgage markets and the U.S. economy in the near term to be significantly worse than we expect, including adverse changes in national or international economic conditions and changes in the federal government’s fiscal or monetary policies. See “FORWARD-LOOKING STATEMENTS” for additional information.

Overview

We continue to expect key macroeconomic drivers of the economy, such as income growth, employment, and inflation, to affect the performance of the housing and mortgage markets in 2013. Since we expect that economic growth will continue and mortgage interest rates will remain low in 2013, we believe that housing affordability will remain relatively high in 2013 for potential home buyers. We also expect that the volume of home sales will likely increase in 2013, compared to 2012 but still remain relatively low compared to historical levels. We also expect to continue to experience high levels of refinancing activity in the near term, due to the impact of the extension of the HARP initiative through 2015 as well as continued low interest rates on fixed-rate single-family mortgages. For information on the HARP initiative, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program.”

While home prices during the first quarter of 2013 remained significantly below their peak levels in most areas, declines in the market’s inventory of homes for sale have supported stabilization and increases in home prices in a number of metropolitan areas. However, to the extent a large volume of loans complete the foreclosure process in a short period, the resulting increase in the market’s inventory of homes for sale could have a negative effect on home prices. Our expectation is that national average home prices will experience a modest increase in 2013.

Single-Family

Our charge-offs remained elevated during the first quarter of 2013 and we expect they will remain elevated during the remainder of the year. This is in part due to the substantial number of underwater mortgage loans in our single-family credit guarantee portfolio. For the near term, we also expect:

•

REO disposition severity ratios and losses on short sale transactions to remain high. However, our recovery rates have been positively affected by recent improvements in home prices and home sales;

•

the amount of non-performing assets and the volume of our loan workouts to remain high;


		10		Freddie Mac

•

continued high volume of loans in the foreclosure process as well as prolonged foreclosure timelines; and

•

continued high rates of rescission and reduced payments for mortgage insurance coverage compared to periods before 2008.

Multifamily

During the first quarter of 2013, we continued to serve as a constant source of liquidity and continued our support of the multifamily market and the nation’s renters, as evidenced by our $6.0 billion of multifamily new business activity (the combination of our loan purchases and issuances of other guarantee commitments), which provided financing for more than 300 properties amounting to nearly 87,000 apartment units. The majority of these apartments were affordable to low and moderate income families. Although demand for multifamily financing is expected to remain strong, we expect lower new business volumes in 2013, because the 2013 Conservatorship Scorecard includes a goal for us to reduce our multifamily new business activity by at least 10% as compared to 2012 levels, and we expect increased competition from other market participants.

We expect continued strength in the multifamily market during 2013. New supply of multifamily housing has been relatively low following the recession of the late-2000s, but has been increasing in recent periods as market fundamentals have remained positive. Our expectation is that at the national level, new supply will not accelerate beyond sustainable levels over the next two years because of constraints, such as rising construction costs and uncertainties in the capital markets. We expect that demand growth, driven by a strengthening economy and positive demographics, will generally be sufficient for the increased supply. However, there may be certain regional markets where new supply could potentially outpace demand, which would be evidenced by excess supply and rising vacancy rates. Currently, the supply and vacancy rate indicators both point to strong and stable markets, but tracking these metrics at the regional level is important to identify potential credit risks. As a result of the positive market fundamentals and continuing strong portfolio performance, we expect our credit losses and delinquency rates to remain low in the remainder of 2013.

Limits on Investment Activity and Our Mortgage-Related Investments Portfolio

The conservatorship has significantly affected our investment activity. FHFA has stated that we will not be a substantial buyer or seller of mortgages for our mortgage-related investments portfolio. Under the terms of the Purchase Agreement and FHFA regulation, the UPB of our mortgage-related investments portfolio is subject to a cap that decreases by 15% each year until the portfolio reaches $250 billion. As a result, the UPB of our mortgage-related investments portfolio may not exceed $553 billion as of December 31, 2013. FHFA has indicated that such portfolio reduction targets should be viewed as minimum reductions and has encouraged us to reduce the mortgage-related investments portfolio at a faster rate than required, while indicating that the pace of reducing the portfolio may be moderated by conditions in the housing and financial markets. This strategy is designed to reduce the portfolio and provide the best return to the taxpayer while minimizing market disruption. In addition, the 2013 Conservatorship Scorecard includes a goal to reduce the December 31, 2012 mortgage-related investments portfolio balance (exclusive of agency securities, multifamily loans classified as held-for-sale, and single-family loans purchased for cash) by selling 5%, or $15.7 billion, of mortgage-related assets.

From time to time, we undertake actions in an effort to support the liquidity and the relative price performance of our PCs to comparable Fannie Mae securities through a variety of activities in our Investments and Single-family Guarantee segments. These activities can include the purchase and sale of Freddie Mac mortgage-related securities, purchases of loans, and dollar roll transactions, as well as the issuance of REMICs and Other Structured Securities. Our purchases and sales of mortgage-related securities and our issuances of REMICs and Other Structured Securities influence the relative supply and demand (i.e., liquidity) for these securities, helping to support the price performance of our PCs. Depending upon market conditions, including the relative prices, supply and demand for our PCs and comparable Fannie Mae securities, as well as other factors, there may be substantial variability in any period in the total amount of securities we purchase or sell, and in the success of our efforts to support the liquidity and price performance of our PCs. We incur costs in connection with our efforts to support the liquidity and price performance of our PCs, including engaging in transactions that yield less than our target rate of return. For more information, see “BUSINESS — Our Business Segments — Investments Segment — PC Support Activities” in our 2012 Annual Report.

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


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Table 4 — Mortgage-Related Investments Portfolio⁽¹⁾


	March 31, 2013		December 31, 2012
	(in millions)
Investments segment — Mortgage investments portfolio	$	360,703	$	375,924
Single-family Guarantee segment — Single-family unsecuritized mortgage loans⁽²⁾		49,544		53,333
Multifamily segment — Mortgage investments portfolio		123,903		128,287

Total mortgage-related investments portfolio	$	534,150	$	557,544

(1)	Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.

(2)	Represents unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment.

The UPB of our mortgage-related investments portfolio at March 31, 2013 was $534.2 billion, a decline of $23.4 billion compared to $557.5 billion at December 31, 2012. The reduction in UPB resulted primarily from liquidations and is consistent with our efforts to reduce the size of our mortgage-related investments portfolio as described above. The mortgage-related investments portfolio is comprised of agency securities, single-family non-agency mortgage-related securities, CMBS, housing revenue bonds, and single-family and multifamily unsecuritized mortgage loans.

We consider the liquidity of the assets in our mortgage-related investments portfolio based on three categories: (a) agency securities; (b) assets that are less liquid than agency securities; and (c) illiquid assets. Assets that are less liquid than agency securities include unsecuritized performing single-family mortgage loans, multifamily mortgage loans, CMBS, and housing revenue bonds. Our less liquid assets collectively represented approximately 28% of the UPB of the portfolio at both March 31, 2013 and December 31, 2012. Illiquid assets include unsecuritized seriously delinquent and modified single-family mortgage loans which we removed from PC trusts, and our investments in non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans. Our illiquid assets collectively represented approximately 35% of the UPB of the portfolio at both March 31, 2013 and December 31, 2012.


		12		Freddie Mac

SELECTED FINANCIAL DATA⁽¹⁾

The selected financial data presented below should be reviewed in conjunction with MD&A and our consolidated financial statements and related notes.


	Three Months Ended March 31,
	2013			2012
	(dollars in millions, except share- related amounts)
Statements of Comprehensive Income Data
Net interest income	$	4,265		$	4,500
Benefit (provision) for credit losses		503			(1,825	)
Non-interest income (loss)		402			(1,516	)
Non-interest expense		(624	)		(596	)
Net income		4,581			577
Total comprehensive income		6,971			1,789
Net loss attributable to common stockholders⁽²⁾		(2,390	)		(1,227	)
Net loss per common share — basic and diluted		(0.74	)		(0.38	)
Cash dividends per common share		—			—
Weighted average common shares outstanding (in thousands) — basic and diluted⁽³⁾		3,238,997			3,241,502

	March 31, 2013			December 31, 2012
	(dollars in millions)
Balance Sheets Data
Mortgage loans held-for-investment, at amortized cost by consolidated trusts (net of allowances for loan losses)	$	1,505,211		$	1,495,932
Total assets		1,979,386			1,989,856
Debt securities of consolidated trusts held by third parties		1,425,913			1,419,524
Other debt		529,936			547,518
All other liabilities		13,566			13,987
Total Freddie Mac stockholders’ equity (deficit)		9,971			8,827
Portfolio Balances⁽⁴⁾
Mortgage-related investments portfolio	$	534,150		$	557,544
Total Freddie Mac mortgage-related securities⁽⁵⁾		1,568,559			1,562,040
Total mortgage portfolio⁽⁶⁾		1,948,263			1,956,276
Non-performing assets⁽⁷⁾		133,094			135,677

	Three Months Ended March 31,
	2013			2012
Ratios⁽⁸⁾
Return on average assets⁽⁹⁾		0.9	%		0.1	%
Non-performing assets ratio⁽¹⁰⁾		7.4			6.8
Equity to assets ratio⁽¹¹⁾		0.5			—

(1)	See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in our 2012 Annual Report and within this Form 10-Q for information regarding our accounting policies and the impact of new accounting policies on our consolidated financial statements.

(2)	For a discussion of how the senior preferred stock dividend affects net income (loss) attributable to common stockholders beginning in the fourth quarter of 2012, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Earnings Per Common Share” in our 2012 Annual Report.

(3)	Includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury as part of the Purchase Agreement, because it is unconditionally exercisable by the holder at a cost of $0.00001 per share.

(4)	Represents the UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.

(5)	See ‘‘Table 27 — Freddie Mac Mortgage-Related Securities’’ for the composition of this line item.

(6)	See ‘‘Table 11 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios’’ for the composition of our total mortgage portfolio.

(7)	See ‘‘Table 42 — Non-Performing Assets’’ for a description of our non-performing assets.

(8)

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

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

(10)	Ratio computed as non-performing assets divided by the ending UPB of our total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities.

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


		13		Freddie Mac

CONSOLIDATED RESULTS OF OPERATIONS

The following discussion of our consolidated results of operations should be read in conjunction with our consolidated financial statements, including the accompanying notes. Also see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” for information concerning certain significant accounting policies and estimates applied in determining our reported results of operations.

Table 5 — Summary Consolidated Statements of Comprehensive Income


	Three Months Ended March 31,
	2013			2012
	(in millions)
Net interest income	$	4,265		$	4,500
Benefit (provision) for credit losses		503			(1,825	)

Net interest income after benefit (provision) for credit losses		4,768			2,675

Non-interest income (loss):
Gains (losses) on extinguishment of debt securities of consolidated trusts		34			(4	)
Gains (losses) on retirement of other debt		(32	)		(21	)
Gains (losses) on debt recorded at fair value		12			(17	)
Derivative gains (losses)		375			(1,056	)
Impairment of available-for-sale securities:
Total other-than-temporary impairment of available-for-sale securities		(21	)		(475	)
Portion of other-than-temporary impairment recognized in AOCI		(22	)		(89	)

Net impairment of available-for-sale securities recognized in earnings		(43	)		(564	)
Other gains (losses) on investment securities recognized in earnings		(276	)		(288	)
Other income		332			434

Total non-interest income (loss)		402			(1,516	)

Non-interest expense:
Administrative expenses		(432	)		(337	)
REO operations expense		(6	)		(171	)
Other expenses		(186	)		(88	)

Total non-interest expense		(624	)		(596	)

Income before income tax benefit		4,546			563
Income tax benefit		35			14

Net income		4,581			577

Other comprehensive income (loss), net of taxes and reclassification adjustments:
Changes in unrealized gains (losses) related to available-for-sale securities		2,280			1,147
Changes in unrealized gains (losses) related to cash flow hedge relationships		90			111
Changes in defined benefit plans		20			(46	)

Total other comprehensive income (loss), net of taxes and reclassification adjustments		2,390			1,212

Comprehensive income	$	6,971		$	1,789


		14		Freddie Mac

Net Interest Income

The table below presents an analysis of net interest income, including average balances and related yields earned on assets and incurred on liabilities.

Table 6 — Net Interest Income/Yield and Average Balance Analysis


	Three Months Ended March 31,
	2013									2012
	Average Balance⁽¹⁾⁽²⁾			Interest Income (Expense)⁽¹⁾			Average Rate			Average Balance⁽¹⁾⁽²⁾			Interest Income (Expense)⁽¹⁾			Average Rate
	(dollars in millions)
Interest-earning assets:
Cash and cash equivalents	$	35,436		$	7			0.07	%	$	51,029		$	4			0.03	%
Federal funds sold and securities purchased under agreements to resell		35,925			11			0.13			26,057			9			0.14
Mortgage-related securities:
Mortgage-related securities⁽³⁾		328,241			3,417			4.16			383,227			4,363			4.55
Extinguishment of PCs held by Freddie Mac		(122,280	)		(1,262	)		(4.13	)		(125,363	)		(1,441	)		(4.60	)

Total mortgage-related securities, net		205,961			2,155			4.19			257,864			2,922			4.53

Non-mortgage-related securities⁽³⁾		14,980			2			0.06			28,464			16			0.23
Mortgage loans held by consolidated trusts⁽⁴⁾		1,495,202			14,504			3.88			1,559,823			17,468			4.48
Unsecuritized mortgage loans⁽⁴⁾		219,067			2,009			3.67			254,877			2,312			3.63

Total interest-earning assets	$	2,006,571		$	18,688			3.73		$	2,178,114		$	22,731			4.18

Interest-bearing liabilities:
Debt securities of consolidated trusts including PCs held by Freddie Mac	$	1,518,006		$	(13,292	)		(3.50	)	$	1,580,749		$	(16,694	)		(4.22	)
Extinguishment of PCs held by Freddie Mac		(122,280	)		1,262			4.13			(125,363	)		1,441			4.60

Total debt securities of consolidated trusts held by third parties		1,395,726			(12,030	)		(3.45	)		1,455,386			(15,253	)		(4.19	)
Other debt:
Short-term debt		119,691			(44	)		(0.15	)		149,130			(40	)		(0.11	)
Long-term debt⁽⁵⁾		416,520			(2,218	)		(2.13	)		496,644			(2,776	)		(2.23	)

Total other debt		536,211			(2,262	)		(1.69	)		645,774			(2,816	)		(1.74	)

Total interest-bearing liabilities		1,931,937			(14,292	)		(2.96	)		2,101,160			(18,069	)		(3.44	)
Expense related to derivatives⁽⁶⁾		—			(131	)		(0.03	)		—			(162	)		(0.03	)
Impact of net non-interest-bearing funding		74,634			—			0.11			76,954			—			0.12

Total funding of interest-earning assets	$	2,006,571		$	(14,423	)		(2.88	)	$	2,178,114		$	(18,231	)		(3.35	)

Net interest income/yield				$	4,265			0.85					$	4,500			0.83

(1)	Excludes mortgage loans and mortgage-related securities traded, but not yet settled.

(2)	We calculate average balances based on amortized cost.

(3)	Interest income (expense) includes accretion of the portion of impairment charges recognized in earnings where we expect a significant improvement in cash flows.

(4)	Non-performing loans, where interest income is generally recognized when collected, are included in average balances.

(5)	Includes current portion of long-term debt.

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

Net interest income decreased by $235 million to $4.3 billion for the three months ended March 31, 2013 compared to $4.5 billion for the three months ended March 31, 2012. Net interest yield increased by two basis points to 85 basis points for the three months ended March 31, 2013 compared to 83 basis points for the three months ended March 31, 2012. The decrease in net interest income was primarily due to the reduction in the balance of higher-yielding mortgage-related assets due to continued liquidations, partially offset by lower funding costs from the replacement of debt at lower rates. The increase in net interest yield was primarily due to the lower funding costs, partially offset by the negative effect of the reduction in the balance of higher-yielding mortgage-related assets.

We recognize interest income on non-performing loans that have been placed on non-accrual status only when cash payments are received. We refer to the interest income that we do not recognize as foregone interest income (i.e., interest income we would have recorded if the loans had been current in accordance with their original terms). Foregone interest income and reversals of previously recognized interest income, net of cash received, related to non-performing loans was $0.6 billion and $0.9 billion during the three months ended March 31, 2013 and 2012, respectively. This amount has declined primarily because of the reduction in the volume of non-performing loans on non-accrual status.


		15		Freddie Mac

During the three months ended March 31, 2013, spreads on our debt and our access to the debt markets remained favorable relative to historical levels. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity.”

Benefit (Provision) for Credit Losses

We maintain loan loss reserves at levels we believe are appropriate to absorb probable incurred losses on mortgage loans held-for-investment and loans underlying our financial guarantees. Our loan loss reserves are increased through the provision for credit losses and are reduced by net charge-offs. The provision for credit losses primarily reflects our estimate of incurred losses for newly impaired loans as well as changes in our estimates of incurred losses for previously impaired loans.

Our benefit (provision) for credit losses was $0.5 billion in the first quarter of 2013 compared to $(1.8) billion in the first quarter of 2012. The shift from a provision for credit losses in the first quarter of 2012 to a benefit for credit losses in the first quarter of 2013 primarily reflects: (a) declines in the volume of newly delinquent loans (largely due to a decline in the portion of our single-family credit guarantee portfolio originated in 2005 through 2008); and (b) lower estimates of incurred loss due to the positive impact of an increase in national home prices. Assuming that all other factors remain the same, an increase in home prices can reduce the likelihood that loans will default and may also reduce the amount of credit loss on the loans that do default. The provision for credit losses in the first quarter of 2012 reflected stabilizing expected loss severity and a decline in the number of seriously delinquent loan additions compared to the preceding period.

During the first quarter of 2013, our charge-offs, net of recoveries for single-family loans, were significantly lower than those recorded in the first quarter of 2012, primarily due to improvements in home prices in recent periods in many of the areas in which we had significant foreclosure and short sale activity. Although our credit losses have significantly declined in the last two quarters, we continue to experience a high volume of foreclosures and foreclosure alternatives as compared to periods prior to 2008. Due to the length of time necessary for servicers either to complete the foreclosure process or pursue foreclosure alternatives on seriously delinquent loans in our portfolio, we expect our credit losses will continue to remain elevated in 2013 even if the volume of new seriously delinquent loans continues to decline.

The total number of single-family seriously delinquent loans declined approximately 7% and 3% during the first quarters of 2013 and 2012, respectively. However, our serious delinquency rates remain high compared to the rates we experienced in years prior to 2009. As of March 31, 2013 and December 31, 2012, the UPB of our single-family non-performing loans was $126.3 billion and $128.6 billion, respectively. These amounts include $68.5 billion and $65.8 billion, respectively, of single-family TDRs that were no longer seriously delinquent. However, loans that have been classified as TDRs remain categorized as non-performing throughout the remaining life of the loan regardless of the payment status. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance, serious delinquency rates, charge-offs, our loan loss reserves balance, and our non-performing assets.

Since the beginning of 2008, on an aggregate basis, we have recorded provision for credit losses associated with single-family loans of approximately $74.7 billion, and have recorded an additional $3.8 billion in losses on loans purchased from our PCs, net of recoveries. The majority of these losses are associated with loans originated in 2005 through 2008. While loans originated in 2005 through 2008 will give rise to additional credit losses that have not yet been incurred, and thus have not been provisioned for, we believe that, as of March 31, 2013, we have reserved for or charged-off the majority of the total expected credit losses for these loans. Nevertheless, various factors, such as continued high unemployment rates or future declines in home prices, could require us to provide for losses on these loans beyond our current expectations. See “Table 3 — Credit Statistics, Single-Family Credit Guarantee Portfolio” for certain quarterly credit statistics for our single-family credit guarantee portfolio.

While we have recorded a benefit for credit losses in each of the last two quarters, this trend may not continue. Our provision for credit losses and amount of charge-offs in the future will be affected by a number of factors. These factors include: (a) the actual level of mortgage defaults, including default rates among borrowers that participated in HARP and HAMP; (b) the effect of the MHA Program, the servicing alignment initiative, and other current and future loss mitigation efforts; (c) any government actions or programs that affect the ability of borrowers to refinance underwater mortgages or obtain modifications; (d) changes in property values; (e) regional economic conditions, including unemployment rates; (f) additional delays in the foreclosure process; (g) third-party mortgage insurance coverage and recoveries; and (h) the realized rate of seller/servicer repurchases.


		16		Freddie Mac

We recognized a benefit for credit losses associated with our multifamily mortgage portfolio of $34 million and $19 million for the first quarters of 2013 and 2012, respectively. Our loan loss reserves associated with our multifamily mortgage portfolio were $340 million and $382 million as of March 31, 2013 and December 31, 2012, respectively. The decline in loan loss reserves for multifamily loans in the first quarter of 2013 was primarily driven by an improvement in the expected performance of the underlying loans and an increased percentage of loans in the portfolio that have credit enhancement from subordination (i.e., K Certificates).

Non-Interest Income (Loss)

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

When we purchase PCs that have been issued by consolidated PC trusts, we extinguish a pro rata portion of the outstanding debt securities of the related consolidated trusts. We recognize a gain (loss) on extinguishment of the debt securities to the extent the amount paid to extinguish the debt security differs from its carrying value. During the three months ended March 31, 2013 and 2012, we extinguished debt securities of consolidated trusts with a UPB of $5.9 billion and $692 million, respectively (representing our purchase of single-family PCs with a corresponding UPB amount). The increase in purchases of single-family PCs in 2013 was due to an increase in the volume of transactions to support the market and pricing of our single-family PCs. Gains (losses) on extinguishment of these debt securities of consolidated trusts were $34 million and $(4) million during the three months ended March 31, 2013 and 2012, respectively. See “Table 19 — Mortgage-Related Securities Purchase Activity” for additional information regarding purchases of mortgage-related securities, including those issued by consolidated PC trusts.

Gains (Losses) on Retirement of Other Debt

Gains (losses) on retirement of other debt were $(32) million and $(21) million during the three months ended March 31, 2013 and 2012, respectively. We recognized losses on the retirement of other debt during the three months ended March 31, 2013 primarily due to the repurchase of higher-cost other debt securities at premiums. We recognized losses on the retirement of other debt during the three months ended March 31, 2012 primarily due to write-offs of unamortized deferred issuance costs. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Other Debt Securities — Other Debt Retirement Activities.”

Gains (Losses) on Debt Recorded at Fair Value

Gains (losses) on debt recorded at fair value primarily relate to changes in the fair value of our foreign-currency denominated debt. During the three months ended March 31, 2013, we recognized gains on debt recorded at fair value of $12 million primarily due to a combination of the U.S. dollar strengthening relative to the Euro and changes in interest rates. During the three months ended March 31, 2012, we recognized losses on debt recorded at fair value of $17 million primarily due to a combination of the U.S. dollar weakening relative to the Euro and changes in interest rates. We mitigate changes in the fair value of our foreign-currency denominated debt by using foreign currency swaps and foreign-currency denominated interest-rate swaps.

Derivative Gains (Losses)

The table below presents derivative gains (losses) reported in our consolidated statements of comprehensive income. See “NOTE 9: DERIVATIVES — Table 9.2 — Gains and Losses on Derivatives” for information about gains and losses related to specific categories of derivatives. Changes in fair value and interest accruals on derivatives not in hedge accounting relationships are recorded as derivative gains (losses) in our consolidated statements of comprehensive income. At March 31, 2013 and December 31, 2012, we did not have any derivatives in hedge accounting relationships; however, there are amounts recorded in AOCI related to closed cash flow hedges. Amounts recorded in AOCI associated with these closed cash flow hedges are reclassified to earnings when the forecasted transactions affect earnings. If it is probable that the forecasted transaction will not occur, then the deferred gain or loss associated with the forecasted transaction is reclassified into earnings immediately.

While derivatives are an important aspect of our strategy to manage interest-rate risk, they generally increase the volatility of reported net income because, while fair value changes in derivatives affect net income, fair value changes in several of the types of assets and liabilities being hedged do not affect net income.


		17		Freddie Mac

Table 7 — Derivative Gains (Losses)


	Derivative Gains (Losses)
	Three Months Ended March 31,
	2013			2012
	(in millions)
Interest-rate swaps	$	1,574		$	1,208
Option-based derivatives⁽¹⁾		(437	)		(1,077	)
Other derivatives⁽²⁾		144			(111	)
Accrual of periodic settlements⁽³⁾		(906	)		(1,076	)

Total	$	375		$	(1,056	)

(1)	Primarily includes purchased call and put swaptions and purchased interest-rate caps and floors.

(2)	Includes futures, foreign-currency swaps, commitments, swap guarantee derivatives, and credit derivatives.

(3)	Includes imputed interest on zero-coupon swaps.

Gains (losses) on derivatives are principally driven by changes in: (a) interest rates and implied volatility; and (b) the mix and volume of derivatives in our derivative portfolio.

During the three months ended March 31, 2013, we recognized gains on derivatives of $0.4 billion primarily as a result of an increase in longer-term interest rates. We recognized fair value gains on our pay-fixed swaps of $3.9 billion, which were largely offset by: (a) fair value losses on our receive-fixed swaps of $2.3 billion; (b) net losses of $0.9 billion related to the accrual of periodic settlements on interest-rate swaps as we were a net payer on our interest-rate swaps based on the coupons of the instruments; and (c) fair value losses of $0.4 billion on our option-based derivatives resulting from losses on our purchased call swaptions. During the three months ended March 31, 2013, the fair value gain (loss) of derivatives also reflects a change in the mix of our derivative portfolio when compared to the three months ended March 31, 2012.

During the three months ended March 31, 2012, we recognized losses on derivatives of $1.1 billion primarily due to losses related to the accrual of periodic settlements on interest-rate swaps as we were in a net pay-fixed swap position. We recognized fair value gains on our pay-fixed swaps of $3.8 billion, which were largely offset by: (a) fair value losses on our receive-fixed swaps of $2.6 billion; and (b) fair value losses on our option-based derivatives of $1.1 billion resulting from losses on our purchased call swaptions. The fair value of derivatives during the three months ended March 31, 2012 reflects a decline in short-term interest rates and an increase in long-term interest rates.

Investment Securities-Related Activities

Impairments of Available-For-Sale Securities

We recorded net impairments of available-for-sale securities recognized in earnings, which were related to non-agency mortgage-related securities, of $43 million and $564 million during the three months ended March 31, 2013 and 2012, respectively. The decrease in net impairments recognized in earnings was driven by improvements in forecasted home prices over the expected life of our available-for-sale securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities,” as well as “NOTE 7: INVESTMENTS IN SECURITIES” in our 2012 Annual Report for additional information.

Other Gains (Losses) on Investment Securities Recognized in Earnings

Other gains (losses) on investment securities recognized in earnings primarily consist of gains (losses) on trading securities. With the exception of principal-only securities, our agency securities, classified as trading, were valued at a net premium (i.e., net fair value was higher than UPB) as of March 31, 2013.

We recognized $(377) million related to losses on trading securities during both the three months ended March 31, 2013 and 2012. The losses on trading securities during both periods were primarily due to the movement of securities with unrealized gains towards maturity.


		18		Freddie Mac

Other Income

The table below summarizes the significant components of other income.

Table 8 — Other Income


	Three Months Ended March 31,
	2013			2012
	(in millions)
Other income:
Gains (losses) on sale of mortgage loans	$	51		$	40
Gains (losses) on mortgage loans recorded at fair value		(42	)		139
Recoveries on loans impaired upon purchase⁽¹⁾		74			89
Guarantee-related income, net⁽²⁾		90			70
All other		159			96

Total other income	$	332		$	434

(1)	Our recoveries principally relate to impaired loans purchased prior to 2010. Consequently, our recoveries on these loans will generally decline over time.

(2)	Most of our guarantee-related income relates to securitized multifamily mortgage loans where we have not consolidated the securitization trusts on our consolidated balance sheets.

Gains (Losses) on Sale of Mortgage Loans

In the first quarters of 2013 and 2012, we recognized $51 million and $40 million, respectively, of gains on sale of mortgage loans with associated UPB of $5.6 billion and $3.7 billion, respectively. The substantial majority of these amounts relate to our securitizations of multifamily loans on our consolidated balance sheets, which we elected to carry at fair value. We recognized higher gains on sale of mortgage loans in the first quarter of 2013, compared to the first quarter of 2012, primarily due to a higher volume of multifamily securitizations.

Gains (Losses) on Mortgage Loans Recorded at Fair Value

In the first quarters of 2013 and 2012, we recognized $(42) million and $139 million, respectively, of gains (losses) on mortgage loans recorded at fair value. These amounts relate to multifamily loans which we had elected to carry at fair value, of which the substantial majority were designated for securitization. We recognized losses on mortgage loans recorded at fair value during the first quarter of 2013 primarily due to an increase in interest rates, compared to gains recognized in the first quarter of 2012 which were the result of favorable non-interest rate-related market movements.

All Other

All other income consists primarily of transactional fees, fees assessed to our servicers for technology use and late fees or other penalties, and other miscellaneous income. All other income increased to $159 million in the first quarter of 2013, compared to $96 million in the first quarter of 2012. The increase was primarily due to an improvement in the fair value of mortgage-servicing rights, including those associated with Taylor, Bean & Whitaker (a former seller/servicer), and increased penalties assessed on certain single-family servicers, including those arising from failures to complete foreclosures within required time periods.

Non-Interest Expense

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


		19		Freddie Mac

Table 9 — Non-Interest Expense


	Three Months Ended March 31,
	2013		2012
	(in millions)
Administrative expenses:
Salaries and employee benefits	$	208	$	176
Professional services		109		71
Occupancy expense		13		14
Other administrative expense		102		76

Total administrative expenses		432		337
REO operations expense		6		171
Other expenses		186		88

Total non-interest expense	$	624	$	596

Administrative Expenses

Administrative expenses increased during the three months ended March 31, 2013 compared to the three months ended March 31, 2012 due to an increase in salaries and employee benefits expense and professional services expense. Salaries and employee benefits expense increased due to increased headcount. Professional services expense increased as a result of initiatives we are implementing under the Conservatorship Scorecards and other FHFA-mandated strategic initiatives.

We believe the various FHFA-mandated strategic initiatives we are pursuing will likely continue to require significant resources and thus continue to affect our level of administrative expenses going forward.

REO Operations Expense

The table below presents the components of our REO operations expense, and information about REO inventory and REO dispositions.

Table 10 — REO Operations Expense, REO Inventory, and REO Dispositions


	Three Months Ended March 31,
	2013			2012
	(dollars in millions)
REO operations expense:
Single-family:
REO property expenses⁽¹⁾	$	245		$	378
Disposition (gains) losses, net⁽²⁾		(159	)		(78	)
Change in holding period allowance, dispositions		(11	)		(57	)
Change in holding period allowance, inventory⁽³⁾		23			1
Recoveries⁽⁴⁾		(90	)		(72	)

Total single-family REO operations expense		8			172
Multifamily REO operations (income) expense		(2	)		(1	)

Total REO operations expense	$	6		$	171

REO inventory (in properties), at March 31:
Single-family		47,968			59,307
Multifamily		6			16

Total		47,974			59,323

REO property dispositions (in properties):
Single-family		18,984			25,033
Multifamily		1			4

Total		18,985			25,037

(1)	Consists of costs incurred to maintain or protect a property after it is acquired in a foreclosure transfer, such as legal fees, insurance, taxes, and cleaning and other maintenance charges.

(2)	Represents the difference between the disposition proceeds, net of selling expenses, and the fair value of the property on the date of the foreclosure transfer.

(3)	Represents the (increase) decrease in the estimated fair value of properties that were in inventory during the period.

(4)	Includes recoveries from primary mortgage insurance, pool insurance and seller/servicer repurchases.


		20		Freddie Mac

REO operations expense was $6 million in the first quarter of 2013, as compared to $171 million in the first quarter of 2012. The decline was primarily due to: (a) a decline in property expenses associated with a lower number of properties in 2013; and (b) improving home prices in certain geographical areas with significant REO activity, which resulted in increased gains on disposition of properties. For information on our REO activity during the first quarter of 2013, see “CONSOLIDATED BALANCE SHEETS ANALYSIS — REO, Net” and “RISK MANAGEMENT— Credit Risk — Mortgage Credit Risk — Non-Performing Assets.”

Other Expenses

Other expenses were $186 million and $88 million in the first quarters of 2013 and 2012, respectively. Other expenses in the first quarter of 2013 include $93 million related to amounts paid and due to Treasury related to the legislated 10 basis point increase in guarantee fees, which was implemented in April 2012. Other expenses also include HAMP servicer incentive fees, costs related to terminations and transfers of mortgage servicing, and other miscellaneous expenses.

Income Tax Benefit

For the three months ended March 31, 2013 and 2012, we reported an income tax benefit of $35 million and $14 million, respectively. See “NOTE 12: INCOME TAXES” for additional information.

Comprehensive Income

Our comprehensive income was $7.0 billion and $1.8 billion for the three months ended March 31, 2013 and 2012, respectively, consisting of: (a) $4.6 billion and $577 million of net income, respectively; and (b) $2.4 billion and $1.2 billion of other comprehensive income, respectively, primarily related to fair value gains on our available-for-sale securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Total Equity (Deficit)” for additional information regarding other comprehensive income.

Segment Earnings

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

The Investments segment reflects results from our investment, funding and hedging activities. The Single-family Guarantee segment reflects results from our single-family credit guarantee activities. The Multifamily segment reflects results from our investment (both purchases and sales), securitization, and guarantee activities in multifamily mortgage loans and securities. For more information, see “NOTE 13: SEGMENT REPORTING” in our 2012 Annual Report.

In presenting Segment Earnings, we make significant reclassifications among certain financial statement line items in order to reflect a measure of net interest income on investments and a measure of management and guarantee income on guarantees that is in line with how we manage our business. We present Segment Earnings by: (a) reclassifying certain investment-related activities and credit guarantee-related activities between various line items on our GAAP consolidated statements of comprehensive income; and (b) allocating certain revenues and expenses, including certain returns on assets and funding costs, and all administrative expenses to our three reportable segments.

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

See “NOTE 13: SEGMENT REPORTING” in our 2012 Annual Report for further information regarding the reclassifications and allocations used to present Segment Earnings.


		21		Freddie Mac

The table below provides information about our various segment mortgage and credit risk portfolios at March 31, 2013 and December 31, 2012. For a discussion of each segment’s portfolios, see “Segment Earnings — Results.”

Table 11 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios⁽¹⁾


	March 31, 2013			December 31, 2012
	(in millions)
Segment mortgage portfolios:
Investments — Mortgage investments portfolio:
Single-family unsecuritized mortgage loans⁽²⁾	$	89,250		$	91,411
Freddie Mac mortgage-related securities		175,952			184,381
Non-agency mortgage-related securities		74,094			76,457
Non-Freddie Mac agency securities		21,407			23,675

Total Investments — Mortgage investments portfolio		360,703			375,924

Single-family Guarantee — Managed loan portfolio:⁽³⁾
Single-family unsecuritized mortgage loans⁽⁴⁾		49,544			53,333
Single-family Freddie Mac mortgage-related securities held by us		175,952			184,381
Single-family Freddie Mac mortgage-related securities held by third parties		1,345,741			1,335,393
Single-family other guarantee commitments⁽⁵⁾		14,705			13,798

Total Single-family Guarantee — Managed loan portfolio		1,585,942			1,586,905

Multifamily — Guarantee portfolio:
Multifamily Freddie Mac mortgage related securities held by us		2,707			2,382
Multifamily Freddie Mac mortgage related securities held by third parties		44,158			39,884
Multifamily other guarantee commitments⁽⁵⁾		9,509			9,657

Total Multifamily — Guarantee portfolio		56,374			51,923

Multifamily — Mortgage investments portfolio:
Multifamily investment securities portfolio		50,188			51,718
Multifamily loan portfolio		73,715			76,569

Total Multifamily — Mortgage investments portfolio		123,903			128,287

Total Multifamily portfolio		180,277			180,210

Less : Freddie Mac single-family and certain multifamily securities⁽⁶⁾		(178,659	)		(186,763	)

Total mortgage portfolio	$	1,948,263		$	1,956,276

Credit risk portfolios:⁽⁷⁾
Single-family credit guarantee portfolio:⁽³⁾
Single-family mortgage loans, on-balance sheet	$	1,622,660		$	1,621,774
Non-consolidated Freddie Mac mortgage-related securities		8,449			8,897
Other guarantee commitments⁽⁵⁾		14,705			13,798
Less: HFA-related guarantees⁽⁸⁾		(5,631	)		(6,270	)
Less: Freddie Mac mortgage-related securities backed by Ginnie Mae certificates⁽⁸⁾		(617	)		(654	)

Total single-family credit guarantee portfolio	$	1,639,566		$	1,637,545

Multifamily mortgage portfolio:
Multifamily mortgage loans, on-balance sheet	$	74,162		$	77,017
Non-consolidated Freddie Mac mortgage-related securities		46,419			41,819
Other guarantee commitments⁽⁵⁾		9,509			9,657
Less: HFA-related guarantees⁽⁸⁾		(1,041	)		(1,112	)

Total multifamily mortgage portfolio	$	129,049		$	127,381

(1)	Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.

(2)	Excludes unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment. The Single-family Guarantee segment earns management and guarantee fees associated with unsecuritized single-family loans in the Investments segment’s mortgage investments portfolio.

(3)

The balances of the mortgage-related securities in the Single-family Guarantee managed loan portfolio are based on the UPB of the security, whereas the balances of our single-family credit guarantee portfolio presented in this report are based on the UPB of the mortgage loans underlying the related security. The differences in the loan and security balances result from the timing of remittances to security holders, which are typically 45 or 75 days after the mortgage payment cycle of fixed-rate and ARM PCs, respectively.

(4)	Represents unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment.

(5)	Represents the UPB of mortgage-related assets held by third parties for which we provide our guarantee without our securitization of the related assets.

(6)

Freddie Mac single-family mortgage-related securities held by us are included in both our Investments segment’s mortgage investments portfolio and our Single-family Guarantee segment’s managed loan portfolio, and Freddie Mac multifamily mortgage-related securities held by us are included in both the multifamily investment securities portfolio and the multifamily guarantee portfolio. Therefore, these amounts are deducted in order to reconcile to our total mortgage portfolio.

(7)	Represents the UPB of loans for which we present characteristics, delinquency data, and certain other statistics in this report. See “GLOSSARY” for further description.

(8)	We exclude HFA-related guarantees and our resecuritizations of Ginnie Mae certificates from our credit risk portfolios and most related statistics because these guarantees do not expose us to meaningful amounts of credit risk due to the credit enhancement provided on them by the U.S. government.


		22		Freddie Mac

Segment Earnings — Results

Investments

The table below presents the Segment Earnings of our Investments segment.

Table 12 — Segment Earnings and Key Metrics — Investments⁽¹⁾


	Three Months Ended March 31,
	2013			2012
	(dollars in millions)
Segment Earnings:
Net interest income	$	1,030		$	1,724
Non-interest income (loss):
Net impairment of available-for-sale securities recognized in earnings		8			(496	)
Derivative gains (losses)		1,387			200
Gains (losses) on trading securities		(392	)		(398	)
Gains (losses) on sale of mortgage loans		(16	)		(14	)
Gains (losses) on mortgage loans recorded at fair value		(157	)		(38	)
Other non-interest income (loss)		759			552

Total non-interest income (loss)		1,589			(194	)

Non-interest expense:
Administrative expenses		(112	)		(92	)

Total non-interest expense		(112	)		(92	)

Segment adjustments⁽²⁾		289			155

Segment Earnings before income tax benefit		2,796			1,593
Income tax benefit		42			35

Segment Earnings, net of taxes		2,838			1,628
Total other comprehensive income, net of taxes		1,956			335

Comprehensive income	$	4,794		$	1,963

Key metrics:
Portfolio balances:
Average balances of interest-earning assets:⁽³⁾⁽⁴⁾
Mortgage-related securities⁽⁵⁾	$	285,996		$	330,593
Non-mortgage-related investments⁽⁶⁾		86,338			105,539
Single-family unsecuritized loans⁽⁷⁾		91,389			109,306

Total average balances of interest-earning assets	$	463,723		$	545,438

Return:
Net interest yield — Segment Earnings basis (annualized)		0.89	%		1.26	%

(1)	For reconciliations of the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 13: SEGMENT REPORTING — Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.”

(2)	For a description of our segment adjustments, see “NOTE 13: SEGMENT REPORTING — Segment Earnings” in our 2012 Annual Report.

(3)	Excludes mortgage loans and mortgage-related securities traded, but not yet settled.

(4)	We calculate average balances based on amortized cost.

(5)	Includes our investments in single-family PCs and certain Other Guarantee Transactions, which are consolidated under GAAP on our consolidated balance sheets.

(6)	Includes the average balances of interest-earning cash and cash equivalents, non-mortgage-related securities, and federal funds sold and securities purchased under agreements to resell.

(7)	Excludes unsecuritized seriously delinquent single-family mortgage loans.

Segment Earnings for our Investments segment increased by $1.2 billion to $2.8 billion in the three months ended March 31, 2013, compared to $1.6 billion in the three months ended March 31, 2012, primarily due to an increase in derivative gains. Comprehensive income for our Investments segment increased by $2.8 billion to $4.8 billion in the three months ended March 31, 2013, compared to $2.0 billion in the three months ended March 31, 2012, due to higher Segment Earnings and other comprehensive income. The other comprehensive income increase was due to higher fair value gains on our non-agency mortgage-related securities.

During the three months ended March 31, 2013, the UPB of the Investments segment mortgage investments portfolio decreased at an annualized rate of 16%. We held $197.4 billion and $208.1 billion of agency securities, $74.1 billion and $76.5 billion of non-agency mortgage-related securities, and $89.3 billion and $91.4 billion of single-family unsecuritized mortgage loans at March 31, 2013 and December 31, 2012, respectively. The decline in UPB of agency securities is due mainly to liquidations. The decline in UPB of non-agency mortgage-related securities is due mainly to the receipt of monthly remittances of principal repayments from both the recoveries from liquidated loans and, to a lesser extent, voluntary repayments of the underlying collateral, representing a partial return of our investments in these securities. The decline in the


		23		Freddie Mac

UPB of single-family unsecuritized mortgage loans is primarily related to our securitization of mortgage loans that we had purchased for cash. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” and “— Mortgage Loans” for additional information regarding our mortgage-related securities and mortgage loans.

Segment Earnings net interest income decreased $694 million, and Segment Earnings net interest yield decreased 37 basis points during the three months ended March 31, 2013, compared to the three months ended March 31, 2012. The primary driver of the decreases was the reduction in the balance of higher-yielding mortgage-related assets due to continued liquidations, partially offset by lower funding costs primarily due to the replacement of debt at lower rates.

Segment Earnings non-interest income (loss) was $1.6 billion in the three months ended March 31, 2013, compared to $(194) million in the three months ended March 31, 2012. This improvement was primarily due to an increase in derivative gains, an improvement in net impairments of available-for-sale securities recognized in earnings and an increase in other non-interest income, partially offset by an increase in losses on mortgage loans recorded at fair value.

While derivatives are an important aspect of our strategy to manage interest-rate risk, they generally increase the volatility of reported Segment Earnings, because while fair value changes in derivatives affect Segment Earnings, fair value changes in several of the types of assets and liabilities being hedged do not affect Segment Earnings. We recorded derivative gains for this segment of $1.4 billion and $200 million during the three months ended March 31, 2013 and 2012, respectively, mainly due to the impact of an increase in long-term interest rates. The increase in gains was primarily due to a change in the mix of our derivative portfolio. See “Non-Interest Income (Loss) — Derivative Gains (Losses)” for additional information on our derivatives.

Net impairments in our Investments segment were a benefit of $8 million and an expense of $(496) million during the three months ended March 31, 2013 and 2012, respectively. The improvement in impairments was primarily due to improvements in forecasted home prices over the expected life of the available-for-sale securities during the three months ended March 31, 2013. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities,” as well as “NOTE 7: INVESTMENTS IN SECURITIES” in our 2012 Annual Report for additional information on our impairments.

We recorded gains (losses) on trading securities of $(392) million and $(398) million during the three months ended March 31, 2013 and 2012, respectively. The losses on trading securities during both periods were primarily due to the movement of securities with unrealized gains towards maturity.

The increase in losses on mortgage loans recorded at fair value to $157 million during the three months ended March 31, 2013 from $38 million during the three months ended March 31, 2012 was primarily due to an increase in interest rates.

We recorded other non-interest income (loss) for this segment of $759 million and $552 million during the three months ended March 31, 2013 and 2012, respectively. The improvement in other non-interest income was primarily due to an increase in amortization income related to premiums on debt securities of consolidated trusts held by third parties. This amortization income increased due to additional prepayments on the debt securities of consolidated trusts held by third parties due in part to the low interest rate environment and additional premiums on new debt securities issued by consolidated trusts. Basis adjustments (premiums or discounts) related to these debt securities of consolidated trusts held by third parties are generated through the securitization and sale of retained mortgage loans or sales of Freddie Mac mortgage-related securities from our mortgage-related investments portfolio.

Our Investments segment’s other comprehensive income increased to $2.0 billion during the three months ended March 31, 2013 compared to $335 million during the three months ended March 31, 2012, primarily due to higher fair value gains on our non-agency mortgage-related securities due to spread tightening. Changes in fair value of the Multifamily segment investment securities, excluding impacts from the changes in interest rates which are included in the Investments segment, are reflected in the Multifamily segment.

For a discussion of items that have affected our Investments segment net interest income over time, and can be expected to continue to do so, see “BUSINESS — Conservatorship and Related Matters — Limits on Investment Activity and Our Mortgage-Related Investments Portfolio” in our 2012 Annual Report.


		24		Freddie Mac

Single-Family Guarantee

The table below presents the Segment Earnings of our Single-family Guarantee segment.

Table 13 — Segment Earnings and Key Metrics — Single-Family Guarantee⁽ ¹⁾


	Three Months Ended March 31,
	2013			2012
	(dollars in millions)
Segment Earnings:
Net interest income (expense)	$	94		$	(32	)
Benefit (provision) for credit losses		244			(2,184	)
Non-interest income:
Management and guarantee income		1,243			1,011
Other non-interest income		241			181

Total non-interest income		1,484			1,192

Non-interest expense:
Administrative expenses		(241	)		(193	)
REO operations expense		(8	)		(172	)
Other non-interest expense		(154	)		(73	)

Total non-interest expense		(403	)		(438	)

Segment adjustments⁽²⁾		(228	)		(196	)

Segment Earnings (loss) before income tax expense		1,191			(1,658	)
Income tax expense		(5	)		(17	)

Segment Earnings (loss), net of taxes		1,186			(1,675	)
Total other comprehensive income (loss), net of taxes		11			(23	)

Total comprehensive income (loss)	$	1,197		$	(1,698	)

Key metrics:
Balances and Volume (in billions, except rate):
Average balance of single-family credit guarantee portfolio and HFA guarantees	$	1,635		$	1,741
Issuance — Single-family credit guarantees⁽³⁾	$	136		$	111
Fixed-rate products — Percentage of purchases⁽⁴⁾		97	%		95	%
Liquidation rate — Single-family credit guarantees (annualized)⁽⁵⁾		35	%		30	%
Management and Guarantee Fee Rate (in bps, annualized):
Contractual management and guarantee fees⁽⁶⁾		14.8			14.3
Amortization of delivery fees⁽⁷⁾		15.6			8.9

Segment Earnings management and guarantee income		30.4			23.2

Credit:
Serious delinquency rate, at end of period		3.03	%		3.51	%
REO inventory, at end of period (number of properties)		47,968			59,307
Single-family credit losses, in bps (annualized)⁽⁸⁾		49.9			78.6
Market:
Single-family mortgage debt outstanding (total U.S. market, in billions)⁽⁹⁾	$	9,924		$	10,079
30-year fixed mortgage rate⁽¹⁰⁾		3.6	%		4.0	%

(1)	For reconciliations of the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 13: SEGMENT REPORTING — Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.”

(2)	For a description of our segment adjustments, see “NOTE 13: SEGMENT REPORTING — Segment Earnings” in our 2012 Annual Report.

(3)	Based on UPB.

(4)	Excludes Other Guarantee Transactions.

(5)	Represents principal repayments relating to loans underlying Freddie Mac mortgage-related securities and other guarantee commitments, including those related to our removal of seriously delinquent and modified mortgage loans and balloon/reset mortgage loans out of PC pools.

(6)	For 2013, includes the effect of the legislated 10 basis point increase in guarantee fees that became effective April 1, 2012, as well as an additional across-the-board increase in guarantee fees that became effective in the fourth quarter of 2012.

(7)	Beginning in the fourth quarter of 2012, includes the impact of buy-down fees.

(8)	Calculated as the amount of single-family credit losses divided by the sum of the average carrying value of our single-family credit guarantee portfolio and the average balance of our single-family HFA initiative guarantees.

(9)	Source: Federal Reserve Flow of Funds Accounts of the United States of America dated March 7, 2013. The outstanding amount for March 31, 2013 reflects the balance as of December 31, 2012.

(10)

Based on Freddie Mac’s Primary Mortgage Market Survey rate for the last week in the period, which represents the national average mortgage commitment rate to a qualified borrower exclusive of any fees and points required by the lender. This commitment rate applies only to financing on conforming mortgages with LTV ratios of 80%.

Segment Earnings (loss) for our Single-family Guarantee segment improved to $1.2 billion in the first quarter of 2013 compared to $(1.7) billion in the first quarter of 2012. The improvement was primarily due to a shift from provision for credit losses of $2.2 billion in the first quarter of 2012 to a benefit for credit losses of $0.2 billion in the first quarter of 2013. Segment Earnings (loss) for the Single-family Guarantee segment is largely driven by management and guarantee fee income, offset by the provision for credit losses.


		25		Freddie Mac

The table below provides summary information about the composition of Segment Earnings (loss) for this segment for the three months ended March 31, 2013 and 2012.

Table 14 — Segment Earnings Composition — Single-Family Guarantee Segment


	Three Months Ended March 31, 2013
	Segment Earnings Management and Guarantee Income⁽¹⁾				Credit-Related Benefit (Expense)⁽²⁾
	Amount		Average Rate⁽³⁾		Amount			Average Rate⁽³⁾			Net Amount⁽⁴⁾
	(dollars in millions, rates in bps)
Year of origination:⁽⁵⁾
2013	$	51		32.6	$	(4	)		2.2		$	47
2012		321		32.6		(82	)		7.8			239
2011		202		37.1		(33	)		6.3			169
2010		189		35.7		(26	)		4.7			163
2009		152		32.9		(7	)		1.5			145
2008		73		32.2		31			(18.1	)		104
2007		69		22.4		145			(54.8	)		214
2006		38		19.0		103			(52.1	)		141
2005		44		19.8		18			(7.8	)		62
2004 and prior		104		22.7		91			(18.5	)		195

Total	$	1,243		30.4	$	236			(5.7	)	$	1,479

Administrative expenses												(241	)
Net interest income (expense)												94
Other non-interest income and expenses, net												(146	)

Segment Earnings (loss), net of taxes											$	1,186


	Three Months Ended March 31, 2012
	Segment Earnings Management and Guarantee Income⁽¹⁾				Credit-Related Benefit (Expense)⁽²⁾
	Amount		Average Rate⁽³⁾		Amount			Average Rate⁽³⁾			Net Amount⁽⁴⁾
	(dollars in millions, rates in bps)
Year of origination:⁽⁵⁾
2012	$	17		13.9	$	(4	)		2.6		$	13
2011		185		25.3		(53	)		7.4			132
2010		195		26.1		(103	)		13.4			92
2009		199		27.4		(106	)		14.7			93
2008		86		25.1		(204	)		73.5			(118	)
2007		83		19.0		(791	)		200.3			(708	)
2006		53		18.9		(463	)		157.2			(410	)
2005		61		19.1		(451	)		135.3			(390	)
2004 and prior		132		20.4		(181	)		25.4			(49	)

Total	$	1,011		23.2	$	(2,356	)		53.9		$	(1,345	)

Administrative expenses												(193	)
Net interest income (expense)												(32	)
Other non-interest income and expenses, net												(105	)

Segment Earnings (loss), net of taxes											$	(1,675	)

(1)

Includes amortization of delivery fees of $471 million and $388 million for the first quarters of 2013 and 2012, respectively. For 2013, includes the effect of the legislated 10 basis point increase in guarantee fees that became effective April 1, 2012, as well as an additional across-the-board increase in guarantee fees that became effective in the fourth quarter of 2012. Beginning in the fourth quarter of 2012, includes the impact of buy-down fees.

(2)	Consists of the aggregate of the Segment Earnings benefit (provision) for credit losses and Segment Earnings REO operations expense. Historical rates of average credit-related expenses may not be representative of future results.

(3)	Calculated as the annualized amount of Segment Earnings management and guarantee income or credit-related expenses, respectively, divided by the sum of the average carrying values of the single-family credit guarantee portfolio and the average balance of our single-family HFA initiative guarantees.

(4)	Calculated as Segment Earnings management and guarantee income less credit-related expenses.

(5)	Segment Earnings management and guarantee income is presented by year of guarantee origination, whereas credit-related expenses are presented based on year of loan origination.

As of March 31, 2013, loans originated after 2008 have, on a cumulative basis, provided management and guarantee income that has exceeded the credit-related and administrative expenses associated with these loans. Nevertheless, various factors, such as continued high unemployment rates, future declines in home prices, or negative impacts of HARP loans (which may not perform as well as other refinance mortgages, due in part to the high LTV ratios of the loans), could require us to incur expenses on these loans beyond our current expectations.


		26		Freddie Mac

For the first quarter of 2013, improvements in credit-related expenses for loans originated in 2005 through 2008 resulted from lower estimates of incurred losses due to improvements in home prices. Our management and guarantee income associated with guarantee issuances in 2005 through 2008 has not been adequate to cover the credit-related and administrative expenses associated with such loans, on a cumulative basis, primarily due to the high rate of defaults on the loans originated in those years coupled with the high volume of refinancing of these loans that has occurred since 2008. High levels of refinancing and delinquency since 2008 have significantly reduced the balance of performing loans originated in 2005 through 2008 that remains in our portfolio and consequently reduced management and guarantee income associated with loans from those years (we do not recognize Segment Earnings management and guarantee income on non-accrual mortgage loans). However, in certain periods, such as the first quarter of 2013, our guarantees of loans originated in 2005 through 2008 may result in management and guarantee income that exceeds its related expenses.

Based on our historical experience, the performance of the loans in an individual origination year can vary over time. The aggregate UPB of loans and the corresponding management and guarantee fee income from an origination year will decline over time due to repayments, refinancing, and other liquidation events. In addition, credit-related expenses related to the remaining loans in the origination year may be volatile due to changes in home prices and generally will increase over time, as some borrowers experience financial difficulties and default on their loans. As a result, there will likely be periods when an origination year is not profitable, though it may remain profitable on a cumulative basis. We currently believe our management and guarantee fee rates for guarantee issuances after 2008 (excluding the amounts associated with the Temporary Payroll Tax Cut Continuation Act of 2011), when coupled with the higher credit quality of the mortgages within these new guarantee issuances, will provide management and guarantee fee income, over the long term, that exceeds our expected credit-related and administrative expenses associated with the underlying loans.

Segment Earnings management and guarantee income increased in the first quarter of 2013, as compared to the first quarter of 2012, primarily due to an increase in amortization of upfront fees, including delivery fees. The higher amortization of upfront fees was due to: (a) the amortization of buy-down fees, which we began recording in the Single-family Guarantee segment during the fourth quarter of 2012; and (b) increased refinance activity during the first quarter of 2013.

At the direction of FHFA, we implemented two across-the-board increases in guarantee fees in 2012. As a result, our fees for loans originated in 2013 are generally higher than the fees for loans in previous years. The rate at which we recognize Segment Earnings management and guarantee income will generally be lower in the early years of a guarantee. As a result, Segment Earnings management and guarantee income for more recent origination years will be lower in the initial years and will increase over time as amortization rates increase due to scheduled monthly payments and other liquidation activity.

Our management and guarantee fee income is also influenced by our PC price performance because we adjust our fees based on the relative price performance of our PCs compared to comparable Fannie Mae securities. A decline in security performance could negatively impact our segment financial results. See “RISK FACTORS — Competitive and Market Risks — A significant decline in the price performance of or demand for our PCs could have an adverse effect on the volume and/or profitability of our new single-family guarantee business” in our 2012 Annual Report for additional information.

The UPB of the Single-family Guarantee managed loan portfolio was $1.6 trillion at both March 31, 2013 and December 31, 2012. The annualized liquidation rate on our securitized single-family credit guarantees was approximately 35% and 30% for the first quarters of 2013 and 2012, respectively, and remained high in the first quarter of 2013 due to significant refinancing activity caused by continued low interest rates and, to a lesser extent, the impact of the HARP initiative, which is now extended until 2015. Issuances of our guarantees were $135.6 billion and $110.6 billion in the first quarters of 2013 and 2012, respectively. Although our issuance activity remained high in the first quarter of 2013, we expect the size of our Single-family Guarantee managed loan portfolio will decline during the remainder of 2013.

Refinance volumes represented 84% of our single-family mortgage purchase volume during the first quarter of 2013, compared to 87% in the first quarter of 2012, based on UPB. Relief refinance mortgages comprised approximately 30% and 31% of our total refinance volume during the first quarters of 2013 and 2012, respectively. Approximately 16% of our single-family purchase volume in both the first quarters of 2013 and 2012 were HARP loans. Over time, HARP loans may not perform as well as other refinance mortgages because of the continued high LTV ratios and reduced underwriting standards of these loans. Based on our historical experience, there is an increased probability of borrower defaults as LTV ratios increase. In addition, HARP loans may not be covered by mortgage insurance for the full excess of their UPB over 80%. For


		27		Freddie Mac

more information about HARP loans and our relief refinance mortgage initiative, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program.”

The credit quality of the single-family loans we acquired beginning in 2009 (excluding HARP loans and other relief refinance mortgages) is significantly better than that of loans we acquired from 2005 through 2008, as measured by original LTV ratios, FICO scores, and the proportion of loans underwritten with fully documented income. HARP loans represented 12% of the UPB of our single-family credit guarantee portfolio as of March 31, 2013. Mortgages originated after 2008, including HARP and other relief refinance loans, represented 67% of the UPB of our single-family credit guarantee portfolio as of March 31, 2013, and the portion of that portfolio represented by such loans continues to increase.

Benefit (provision) for credit losses for the Single-family Guarantee segment was $0.2 billion in the first quarter of 2013, compared to $(2.2) billion in the first quarter of 2012. The shift from a provision for credit losses in the first quarter of 2012 to a benefit for credit losses in the first quarter of 2013 primarily reflects: (a) declines in the volume of newly delinquent loans (largely due to a decline in the portion of our single-family credit guarantee portfolio originated in 2005 through 2008); and (b) lower estimates of incurred loss due to the positive impact of an increase in national home prices. Segment Earnings provision for credit losses in the first quarter of 2012 reflected stabilizing expected loss severity and a decline in the number of seriously delinquent loan additions compared to the preceding period.

The serious delinquency rate on our single-family credit guarantee portfolio was 3.03% and 3.25% as of March 31, 2013 and December 31, 2012 and remains high compared to the rates we experienced in years prior to 2009. Charge-offs, net of recoveries, associated with single-family loans were $2.1 billion and $3.3 billion in the first quarters of 2013 and 2012, respectively. Single-family credit losses as a percentage of the average balance of the single-family credit guarantee portfolio and HFA-related guarantees were 49.9 basis points and 78.6 basis points for the first quarters of 2013 and 2012, respectively. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance, serious delinquency rates, charge-offs, and our non-performing assets.

REO operations expense for the Single-family Guarantee segment was $8 million and $172 million in the first quarters of 2013 and 2012, respectively. The decline was primarily due to: (a) a decline in property expenses associated with a lower number of properties in 2013; and (b) improving home prices in certain geographical areas with significant REO activity, which resulted in increased gains on disposition of properties.

Our REO inventory (measured in number of properties) declined 2% from December 31, 2012 to March 31, 2013 as the volume of our single-family REO dispositions exceeded the volume of single-family REO acquisitions. Although there was an improvement in REO disposition severity during the first quarter of 2013, the REO disposition severity ratios on sales of our REO inventory remain high as compared to periods before 2008. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Non-Performing Assets” for additional information about our REO activity.

Other non-interest expense for the Single-family Guarantee segment was $154 million in the first quarter of 2013, compared to $73 million in the first quarter of 2012. This increase was primarily due to amounts paid and due to Treasury for the legislated 10 basis point increase to guarantee fees, which we implemented in April 2012. As of March 31, 2013, the cumulative total of amounts paid and due to Treasury related to this increase was $201 million.


		28		Freddie Mac

Multifamily

The table below presents the Segment Earnings of our Multifamily segment.

Table 15 — Segment Earnings and Key Metrics — Multifamily⁽¹⁾


	Three Months Ended March 31,
	2013			2012
	(dollars in millions)
Segment Earnings:
Net interest income	$	303		$	318
Benefit for credit losses		34			19
Non-interest income:
Management and guarantee income		46			33
Net impairment of available-for-sale securities recognized in earnings		(11	)		(16	)
Gains on sale of mortgage loans		67			54
Gains on mortgage loans recorded at fair value		115			177
Other non-interest income		114			109

Total non-interest income		331			357

Non-interest expense:
Administrative expenses		(79	)		(52	)
REO operations income (expense)		2			1
Other non-interest expense		(5	)		(15	)

Total non-interest expense		(82	)		(66	)

Segment Earnings before income tax benefit (expense)		586			628
Income tax benefit (expense)		(1	)		(4	)

Segment Earnings, net of taxes		585			624
Total other comprehensive income, net of taxes		423			900

Total comprehensive income	$	1,008		$	1,524

Key metrics:
Balances and Volume:
Average balance of Multifamily loan portfolio⁽²⁾	$	76,136		$	83,130
Average balance of Multifamily guarantee portfolio	$	54,585		$	36,645
Average balance of Multifamily investment securities portfolio	$	50,641		$	58,028
Multifamily new loan purchase and other guarantee commitment volume⁽³⁾	$	6,044		$	5,751
Multifamily units financed from new volume activity⁽³⁾		86,582			86,345
Multifamily K Certificate issuance — guaranteed portion	$	4,770		$	3,139
Multifamily K Certificate issuance — unguaranteed portion	$	788		$	582
Yield and Rate:
Net interest yield — Segment Earnings basis (annualized)		0.95	%		0.90	%
Average Management and guarantee fee rate, in bps (annualized):⁽⁴⁾
K Certificate		19.3			19.4
All other guarantees		74.0			67.0
Total		33.4			38.7
Credit:
Delinquency rate:
Credit-enhanced loans, at period end		0.34	%		0.39	%
Non-credit-enhanced loans, at period end		0.04	%		0.16	%
Total delinquency rate, at period end⁽⁵⁾		0.16	%		0.23	%
Allowance for loan losses and reserve for guarantee losses, at period end	$	340		$	525
Allowance for loan losses and reserve for guarantee losses, in bps		26.2			43.6
Credit losses, in bps (annualized)⁽⁶⁾		—			—
REO inventory, at net carrying value	$	77		$	121
REO inventory, at period end (number of properties)		6			16

(1)	For reconciliations of Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 13: SEGMENT REPORTING — Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.”

(2)	Includes both unsecuritized multifamily mortgage loans and multifamily mortgage loans underlying consolidated trusts.

(3)	Excludes our guarantees issued under the HFA initiative and K Certificate issuances.

(4)

Represents Multifamily Segment Earnings — management and guarantee income, excluding prepayment and certain other fees for each category, divided by the sum of the average UPB of the related category of guarantee. The average UPB of the all other guarantees category includes the average UPB associated with the HFA initiative guarantees, excluding certain bonds under the NIBP.

(5)	See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Multifamily Mortgage Credit Risk” for information on our reported multifamily delinquency rate.

(6)	Calculated as the amount of multifamily credit losses divided by the sum of the average carrying value of our multifamily loan portfolio and the average balance of the multifamily guarantee portfolio, including multifamily HFA initiative guarantees.

Segment Earnings for our Multifamily segment decreased to $585 million in the first quarter of 2013, compared to $624 million in the first quarter of 2012. The decrease in the first quarter of 2013 was primarily due to lower gains on mortgage loans recorded at fair value compared to the first quarter of 2012.


		29		Freddie Mac

Comprehensive income for our Multifamily segment was $1.0 billion in the first quarter of 2013, consisting of: (a) Segment Earnings of $0.6 billion; and (b) $0.4 billion of total other comprehensive income, which was mainly attributable to an increase in the fair value of available-for-sale CMBS in the first quarter of 2013. This increase was driven by continued favorable non-interest rate-related market movements in the first quarter of 2013.

Our multifamily new business activity (loan purchases and other guarantee commitment issuances) increased to $6.0 billion for the first quarter of 2013 compared to $5.8 billion during the first quarter of 2012 as the multifamily market activity continued to be strong in the first quarter of 2013. We issued guarantees on K Certificates of $4.8 billion in UPB in the first quarter of 2013, compared to $3.1 billion during the first quarter of 2012. The UPB of the total multifamily portfolio was $180.3 billion as of March 31, 2013 compared to $180.2 billion at December 31, 2012 as new business activity was largely offset by liquidations of our multifamily investment securities and multifamily loan portfolios. Although demand for multifamily financing is expected to remain strong, we expect lower new business volumes in 2013, because the 2013 Conservatorship Scorecard includes a goal for us to reduce our multifamily new business activity by at least 10% as compared to 2012 levels, and we expect increased competition from other market participants. Our new business activity for 2012 was $28.8 billion.

Segment Earnings net interest income decreased by 5%, to $303 million, in the first quarter of 2013 from $318 million in the first quarter of 2012. The decrease in the first quarter of 2013 was primarily due to lower average balances of the loan and investment securities portfolios in the first quarter of 2013. Net interest yield was 95 and 90 basis points in the first quarters of 2013 and 2012, respectively.

Segment Earnings non-interest income was $331 million and $357 million in the first quarters of 2013 and 2012, respectively. We recognize changes in fair value on multifamily mortgage loans we purchase for securitization as gains (losses) on mortgage loans recorded at fair value while we hold them on our consolidated balance sheets. In the period we sell these loans (primarily through securitization), we recognize a gain or loss on sale of mortgage loans based on proceeds of the sale. Together, these amounts represent the holding period gains or losses associated with the loans. Slightly less favorable non-interest rate-related market movements in the first quarter of 2013 resulted in lower gains on mortgage loans recorded at fair value, but were partially offset by increased gains on sale of mortgage loans due to an increase in the volume of multifamily securitizations compared to the first quarter of 2012. Segment Earnings gains (losses) on mortgage loans recorded at fair value are presented net of changes in fair value due to changes in interest rates.

Segment Earnings management and guarantee income increased to $46 million in the first quarter of 2013 compared to $33 million in the first quarter of 2012 primarily due to the higher average balance of the multifamily guarantee portfolio in the first quarter of 2013, which is attributed to K Certificate issuances during the last 12 months. However, the average total management and guarantee fee rate on our multifamily guarantee portfolio declined to 33 basis points in the first quarter of 2013 from 39 basis points in the first quarter of 2012. The decline primarily reflects the issuances of K Certificates during the last 12 months, which have lower fees than our other guarantee activities as a result of our reduced credit risk exposure due to the use of subordination. The amount of subordination employed in our K Certificates is based on our expectations of potential future credit losses associated with these transactions.

As a result of our underwriting standards and practices, which we believe are prudent, and positive multifamily market fundamentals, the credit quality of the multifamily mortgage portfolio remains strong, and we had no credit losses during the first quarters of 2013 and 2012. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Multifamily Mortgage Credit Risk” for further information about the credit performance of our multifamily mortgage portfolio.

CONSOLIDATED BALANCE SHEETS ANALYSIS

The following discussion of our consolidated balance sheets should be read in conjunction with our consolidated financial statements, including the accompanying notes. Also, see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” for information concerning certain significant accounting policies and estimates applied in determining our reported financial position.

Cash and Cash Equivalents, Federal Funds Sold and Securities Purchased Under Agreements to Resell

Cash and cash equivalents, federal funds sold and securities purchased under agreements to resell, and other liquid assets discussed in “Investments in Securities — Non-Mortgage-Related Securities,” are important to our cash flow and asset and liability management, and our ability to provide liquidity and stability to the mortgage market. We use these assets to


		30		Freddie Mac

help manage recurring cash flows and meet our other cash management needs. We consider federal funds sold to be overnight unsecured trades executed with commercial banks that are members of the Federal Reserve System. Securities purchased under agreements to resell principally consist of short-term contractual agreements such as reverse repurchase agreements involving Treasury and agency securities.

The short-term assets on our consolidated balance sheets also include those related to our consolidated VIEs, which consisted primarily of restricted cash and cash equivalents and securities purchased under agreements to resell at March 31, 2013. These short-term assets related to our consolidated VIEs decreased by $4.8 billion from December 31, 2012 to March 31, 2013, primarily due to a decrease in the level of refinancing activity.

Excluding amounts related to our consolidated VIEs, we held $27.7 billion and $8.5 billion of cash and cash equivalents, no federal funds sold, and $11.4 billion and $18.3 billion of securities purchased under agreements to resell at March 31, 2013 and December 31, 2012, respectively. The aggregate increase in these assets was primarily driven by a shift from non-mortgage-related securities into shorter term cash and cash equivalents. Excluding amounts related to our consolidated VIEs, we held on average $27.5 billion of cash and cash equivalents and $15.6 billion of federal funds sold and securities purchased under agreements to resell during the three months ended March 31, 2013.

For information regarding our liquidity management practices and policies, see “MD&A — LIQUIDITY AND CAPITAL RESOURCES” in our 2012 Annual Report.

Investments in Securities

The table below provides detail regarding our investments in securities as of March 31, 2013 and December 31, 2012. The table does not include our holdings of single-family PCs and certain Other Guarantee Transactions. For information on our holdings of such securities, see “Table 11 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios.”

Table 16 — Investments in Securities


	Fair Value
	March 31, 2013		December 31, 2012
	(in millions)
Investments in securities:
Available-for-sale:
Mortgage-related securities:
Freddie Mac⁽¹⁾	$	52,395	$	58,515
Fannie Mae		13,857		15,280
Ginnie Mae		196		209
CMBS		49,685		51,307
Subprime		28,518		26,457
Option ARM		6,144		5,717
Alt-A and other		10,960		10,904
Obligations of states and political subdivisions		5,305		5,798
Manufactured housing		700		709

Total available-for-sale mortgage-related securities		167,760		174,896

Total investments in available-for-sale securities		167,760		174,896

Trading:
Mortgage-related securities:
Freddie Mac⁽¹⁾		9,647		10,354
Fannie Mae		9,247		10,338
Ginnie Mae		121		131
Other		156		156

Total trading mortgage-related securities		19,171		20,979

Non-mortgage-related securities:
Asset-backed securities		89		292
Treasury bills		—		1,160
Treasury notes		12,329		19,061

Total trading non-mortgage-related securities		12,418		20,513

Total investments in trading securities		31,589		41,492

Total investments in securities	$	199,349	$	216,388

(1)	For information on the types of instruments that are included, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities” in our 2012 Annual Report.


		31		Freddie Mac

Non-Mortgage-Related Securities

Our investments in non-mortgage-related securities provide an additional source of liquidity. We held investments in non-mortgage-related securities of $12.4 billion and $20.5 billion as of March 31, 2013 and December 31, 2012, respectively.

Mortgage-Related Securities

Our investments in mortgage-related securities consist of securities issued by Fannie Mae, Ginnie Mae, and other financial institutions. We also invest in our own mortgage-related securities. However, the single-family PCs and certain Other Guarantee Transactions we purchase as investments are not accounted for as investments in securities because we recognize the underlying mortgage loans on our consolidated balance sheets through consolidation of the related trusts.

The table below provides the UPB of our investments in mortgage-related securities classified as available-for-sale or trading on our consolidated balance sheets. The table below does not include our holdings of our own single-family PCs and certain Other Guarantee Transactions. For further information on our holdings of such securities, see “Table 11 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios.”


		32		Freddie Mac

Table 17 — Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets


	March 31, 2013							December 31, 2012
	Fixed Rate		Variable Rate⁽¹⁾		Total			Fixed Rate		Variable Rate⁽¹⁾		Total
	(in millions)
Freddie Mac mortgage-related securities:⁽²⁾
Single-family	$	45,634	$	6,236	$	51,870		$	50,979	$	7,256	$	58,235
Multifamily		1,116		1,591		2,707			750		1,632		2,382

Total Freddie Mac mortgage-related securities		46,750		7,827		54,577			51,729		8,888		60,617

Non-Freddie Mac mortgage-related securities:
Agency securities:⁽³⁾
Fannie Mae:
Single-family		9,643		11,490		21,133			10,864		12,518		23,382
Multifamily		27		33		60			35		49		84
Ginnie Mae:
Single-family		186		88		274			202		91		293
Multifamily		15		—		15			15		—		15

Total Non-Freddie Mac agency securities		9,871		11,611		21,482			11,116		12,658		23,774

Non-agency mortgage-related securities:
Single-family:⁽⁴⁾
Subprime		301		43,017		43,318			311		44,086		44,397
Option ARM		—		11,617		11,617			—		12,012		12,012
Alt-A and other		1,696		12,645		14,341			1,774		13,036		14,810
CMBS		16,907		29,285		46,192			17,657		30,300		47,957
Obligations of states and political subdivisions⁽⁵⁾		5,171		18		5,189			5,637		19		5,656
Manufactured housing		726		116		842			741		121		862

Total non-agency mortgage-related securities⁽⁶⁾		24,801		96,698		121,499			26,120		99,574		125,694

Total UPB of mortgage-related securities	$	81,422	$	116,136		197,558		$	88,965	$	121,120		210,085

Premiums, discounts, deferred fees, impairments of
UPB and other basis adjustments						(13,595	)						(13,922	)
Net unrealized gains (losses) on mortgage-related securities, pre-tax						2,968							(288	)

Total carrying value of mortgage-related securities					$	186,931						$	195,875

(1)	Variable-rate mortgage-related securities include those with a contractual coupon rate that, prior to contractual maturity, is either scheduled to change or is subject to change based on changes in the composition of the underlying collateral.

(2)

When we purchase REMICs and Other Structured Securities and certain Other Guarantee Transactions that we have issued, we account for these securities as investments in debt securities as we are investing in the debt securities of a non-consolidated entity. We do not consolidate our resecuritization trusts unless we are deemed to be the primary beneficiary of such trusts. We are subject to the credit risk associated with the mortgage loans underlying our Freddie Mac mortgage-related securities. Mortgage loans underlying our issued single-family PCs and certain Other Guarantee Transactions are recognized on our consolidated balance sheets as held-for-investment mortgage loans, at amortized cost. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities” in our 2012 Annual Report for further information.

(3)	Agency securities are generally not separately rated by nationally recognized statistical rating organizations, but have historically been viewed as having a level of credit quality at least equivalent to non-agency mortgage-related securities AAA-rated or equivalent.

(4)	For information about how these securities are rated, see ‘‘Table 23 — Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS.’’

(5)	Consists of housing revenue bonds. Approximately 35% and 36% of these securities held at March 31, 2013 and December 31, 2012, respectively, were AAA-rated as of those dates, based on the UPB and the lowest rating available.

(6)

Credit ratings for most non-agency mortgage-related securities are designated by no fewer than two nationally recognized statistical rating organizations. Approximately 21% of total non-agency mortgage-related securities held at both March 31, 2013 and December 31, 2012, were AAA-rated as of those dates, based on the UPB and the lowest rating available.

The table below provides the UPB and fair value of our investments in mortgage-related securities classified as available-for-sale or trading on our consolidated balance sheets.


		33		Freddie Mac

Table 18 — Additional Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets


	March 31, 2013				December 31, 2012
	UPB		Fair Value		UPB		Fair Value
	(in millions)
Agency pass-through securities⁽¹⁾	$	15,962	$	17,294	$	17,614	$	19,125
Agency REMICs and Other Structured Securities:
Interest-only securities⁽²⁾		—		1,914		—		2,023
Principal-only securities⁽³⁾		2,003		1,898		2,291		2,169
Inverse floating-rate securities⁽⁴⁾		2,331		3,519		2,804		4,106
Other Structured Securities⁽⁵⁾		55,763		60,838		61,682		67,404

Total agency securities		76,059		85,463		84,391		94,827
Non-agency securities⁽⁶⁾		121,499		101,468		125,694		101,048

Total mortgage-related securities	$	197,558	$	186,931	$	210,085	$	195,875

(1)	Represents an undivided beneficial interest in trusts that hold pools of mortgages.

(2)	Represents securities where the holder receives only the interest cash flows.

(3)	Represents securities where the holder receives only the principal cash flows.

(4)

Represents securities where the holder receives interest cash flows that change inversely with the reference rate (i.e., higher cash flows when interest rates are low and lower cash flows when interest rates are high). Additionally, these securities receive a portion of principal cash flows associated with the underlying collateral.

(5)	Includes REMICs and Other Structured Securities. See “GLOSSARY” for more information on these securities.

(6)	Includes fair values of $3 million of interest-only securities at both March 31, 2013 and December 31, 2012.

The total UPB of our investments in mortgage-related securities on our consolidated balance sheets decreased from $210.1 billion at December 31, 2012 to $197.6 billion at March 31, 2013, while the fair value of these investments decreased from $195.9 billion at December 31, 2012 to $186.9 billion at March 31, 2013. The reduction in UPB resulted from liquidations, consistent with our efforts to reduce the size of our mortgage-related investments portfolio, as described in “EXECUTIVE SUMMARY — Limits on Investment Activity and Our Mortgage-Related Investments Portfolio.”

The table below summarizes our mortgage-related securities purchase activity for the three months ended March 31, 2013 and 2012. This activity primarily consists of purchases of single-family PCs and multifamily Other Guarantee Transactions. Our purchases of single-family PCs and certain Other Guarantee Transactions issued by trusts that we consolidated are recorded as an extinguishment of debt securities of consolidated trusts held by third parties on our consolidated balance sheets.

Table 19 — Mortgage-Related Securities Purchase Activity⁽¹⁾


	Three Months Ended March 31,
	2013		2012
	(in millions)
Non-Freddie Mac mortgage-related securities purchased for resecuritization:
Ginnie Mae Certificates	$	—	$	5
Non-Freddie Mac mortgage-related securities purchased as investments in securities:
Agency securities:
Fannie Mae:
Variable-rate		50		50

Total agency securities		50		50

Non-agency mortgage-related securities:
CMBS:
Variable-rate		—		10

Total non-agency mortgage-related securities		—		10

Total non-Freddie Mac mortgage-related securities purchased as investments in securities		50		60

Total non-Freddie Mac mortgage-related securities purchased	$	50	$	65

Freddie Mac mortgage-related securities purchased:
Single-family:
Fixed-rate	$	19,660	$	3,465
Variable-rate		220		132

Total Freddie Mac mortgage-related securities purchased	$	19,880	$	3,597

Mortgage-related securities purchased for Other Guarantee Transactions⁽²⁾	$	4,770	$	3,124

(1)	Based on UPB. Excludes mortgage-related securities traded but not yet settled.

(2)	Primarily consists of purchases of mortgage-related securities backed by Freddie Mac underwritten loans for the subsequent issuances of multifamily K Certificates.


		34		Freddie Mac

The purchases of Freddie Mac mortgage-related securities we made during the three months ended March 31, 2013, as reflected in the table above, primarily related to transactions in support of the liquidity and price performance of our PCs. In addition, during both periods presented above, we purchased mortgage-related securities backed by Freddie Mac underwritten loans in connection with our subsequent issuances of multifamily K Certificates. For more information, see “BUSINESS — Our Business Segments — Investments Segment — PC Support Activities” and “RISK FACTORS — Competitive and Market Risks — A significant decline in the price performance of or demand for our PCs could have an adverse effect on the volume and/or profitability of our new single-family guarantee business” in our 2012 Annual Report.

Unrealized Losses on Available-For-Sale Mortgage-Related Securities

At March 31, 2013, our gross unrealized losses, pre-tax, on available-for-sale mortgage-related securities were $8.5 billion, compared to $12.4 billion at December 31, 2012. The decrease was primarily due to fair value gains related to our investments in single-family non-agency mortgage-related securities, primarily due to the impact of spread tightening and the movement of these securities with unrealized losses towards maturity. We believe the unrealized losses related to these securities at March 31, 2013 were mainly attributable to poor underlying collateral performance, limited liquidity and large risk premiums in the market for residential non-agency mortgage-related securities. All available-for-sale securities in an unrealized loss position are evaluated to determine if the impairment is other-than-temporary. See “Total Equity (Deficit)” and “NOTE 7: INVESTMENTS IN SECURITIES” for additional information regarding unrealized losses on our available-for-sale securities.

Higher-Risk Components of Our Investments in Mortgage-Related Securities

As discussed below, we have exposure to subprime, option ARM, interest-only, and Alt-A and other loans as part of our investments in mortgage-related securities as follows:

•

Single-family non-agency mortgage-related securities: We hold non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans.

•

Single-family Freddie Mac mortgage-related securities: We hold certain Other Guarantee Transactions as part of our investments in securities. There are subprime and option ARM loans underlying some of these Other Guarantee Transactions. For more information on single-family loans with certain higher-risk characteristics underlying our issued securities, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk.”

Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, and Alt-A Loans

We categorize our investments in non-agency mortgage-related securities as subprime, option ARM, or Alt-A if the securities were identified as such based on information provided to us when we entered into these transactions. We have not identified option ARM, CMBS, obligations of states and political subdivisions, and manufactured housing securities as either subprime or Alt-A securities. Since the first quarter of 2008, we have not purchased any non-agency mortgage-related securities backed by subprime, option ARM, or Alt-A loans. The two tables below present information about our holdings of available-for-sale non-agency mortgage-related securities backed by subprime, option ARM and Alt-A loans.


		35		Freddie Mac

T able 20 — Non-Agency Mortgage-Related Securities Backed by Subprime First Lien, Option ARM, and Alt-A Loans and Certain Related Credit Statistics⁽¹⁾


	As of
	3/31/2013			12/31/2012			9/30/2012			6/30/2012			3/31/2012
	(dollars in millions)
UPB:
Subprime first lien⁽²⁾	$	42,998		$	44,066		$	45,166		$	46,306		$	47,478
Option ARM		11,617			12,012			12,477			12,958			13,508
Alt-A⁽³⁾		12,243			12,634			13,055			13,471			13,885
Gross unrealized losses, pre-tax:⁽⁴⁾
Subprime first lien⁽²⁾	$	6,085		$	9,128		$	10,464		$	12,810		$	12,661
Option ARM		1,226			1,785			2,502			2,997			2,909
Alt-A⁽³⁾		781			1,093			1,488			2,082			2,094
Present value of expected future credit losses:⁽⁵⁾
Subprime first lien⁽²⁾	$	6,195		$	7,159		$	7,129		$	6,571		$	7,325
Option ARM		2,896			3,542			3,442			3,296			3,908
Alt-A⁽³⁾		1,450			1,739			1,699			1,956			2,237
Collateral delinquency rate:⁽⁶⁾
Subprime first lien⁽²⁾		38	%		39	%		39	%		40	%		42	%
Option ARM		36			38			40			42			43
Alt-A⁽³⁾		22			23			24			24			25
Average credit enhancement:⁽⁷⁾
Subprime first lien⁽²⁾		14	%		15	%		17	%		19	%		20	%
Option ARM		2			3			4			5			6
Alt-A⁽³⁾		4			4			5			5			6
Cumulative collateral loss:⁽⁸⁾
Subprime first lien⁽²⁾		27	%		26	%		25	%		24	%		23	%
Option ARM		22			21			20			19			18
Alt-A⁽³⁾		11			10			10			9			9

(1)	See “Ratings of Non-Agency Mortgage-Related Securities” for additional information about these securities.

(2)

Excludes non-agency mortgage-related securities backed exclusively by subprime second liens. Certain securities identified as subprime first lien may be backed in part by subprime second-lien loans, as the underlying loans of these securities were permitted to include a small percentage of subprime second-lien loans.

(3)	Excludes non-agency mortgage-related securities backed by other loans, which are primarily comprised of securities backed by home equity lines of credit.

(4)	Represents the aggregate of the amount by which amortized cost, after other-than-temporary impairments, exceeds fair value measured at the individual lot level.

(5)

Represents our estimate of the present value of future contractual cash flows that we do not expect to collect, discounted at the effective interest rate determined based on the security’s contractual cash flows and the initial acquisition costs. This discount rate is only utilized to analyze the cumulative credit deterioration for securities since acquisition and may be lower than the discount rate used to measure ongoing other-than-temporary impairment to be recognized in earnings for securities that have experienced a significant improvement in expected cash flows since the last recognition of other-than-temporary impairment recognized in earnings.

(6)	Determined based on the number of loans that are two monthly payments or more past due that underlie the securities using information obtained from a third-party data provider.

(7)

Reflects the ratio of the current principal amount of the securities issued by a trust that will absorb losses in the trust before any losses are allocated to securities that we own. Percentage generally calculated based on: (a) the total UPB of securities subordinate to the securities we own, divided by (b) the total UPB of all of the securities issued by the trust (excluding notional balances). Only includes credit enhancement provided by subordinated securities; excludes credit enhancement provided by bond insurance.

(8)

Based on the actual losses incurred on the collateral underlying these securities. Actual losses incurred on the securities that we hold are significantly less than the losses on the underlying collateral as presented in this table, as non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A loans were generally structured to include credit enhancements, particularly through subordination and other structural enhancements.

For purposes of our cumulative credit deterioration analysis, our estimate of the present value of expected future credit losses on our available-for-sale non-agency mortgage-related securities decreased to $11.1 billion at March 31, 2013 from $13.2 billion at December 31, 2012. All of these amounts have been reflected in our net impairment of available-for-sale securities recognized in earnings in this period or prior periods. The decrease in the present value of expected future credit losses was primarily driven by: (a) improvements in forecasted home prices over the expected life of our available-for-sale securities; (b) realized cash shortfalls; and (c) mortgage-related security sales.

Since the beginning of 2007, we have incurred actual principal cash shortfalls of $3.1 billion on impaired non-agency mortgage-related securities, including $277 million related to the three months ended March 31, 2013. Many of the trusts that issued non-agency mortgage-related securities we hold were structured so that realized collateral losses in excess of structural credit enhancements are not passed on to investors until the investment matures. We currently estimate that the future expected principal and interest shortfalls on non-agency mortgage-related securities we hold will be less than the fair value declines experienced on these securities. As noted above, at March 31, 2013, our estimate of the present value of expected future credit losses was $11.1 billion.

The investments in non-agency mortgage-related securities we hold backed by subprime, option ARM, and Alt-A loans were generally structured to include credit enhancements, particularly through subordination and other structural


		36		Freddie Mac

enhancements. Bond insurance is an additional credit enhancement covering some of the non-agency mortgage-related securities. These credit enhancements are the primary reason we expect our actual losses, through principal or interest shortfalls, to be less than the underlying collateral losses in the aggregate. During the three months ended March 31, 2013, we continued to experience the erosion of structural credit enhancements on many securities backed by subprime, option ARM, and Alt-A loans due to poor performance of the underlying collateral. For more information on bond insurance coverage, see “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Bond Insurers.”

The table below provides principal repayment and cash shortfall information for our investments in non-agency mortgage-related securities backed by subprime, option ARM, Alt-A and other loans.

Table 21 — Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans⁽¹⁾


	Three Months Ended
	3/31/2013		12/31/2012		9/30/2012		6/30/2012		3/31/2012
	(in millions)
Principal repayments and cash shortfalls:⁽²⁾
Subprime:
Principal repayments	$	1,065	$	1,106	$	1,149	$	1,180	$	1,175
Principal cash shortfalls		14		7		4		7		6
Option ARM:
Principal repayments	$	217	$	239	$	269	$	300	$	272
Principal cash shortfalls		178		226		211		234		169
Alt-A and other:
Principal repayments	$	385	$	423	$	393	$	405	$	374
Principal cash shortfalls		84		81		101		106		97

(1)	See “Ratings of Non-Agency Mortgage-Related Securities” for additional information about these securities.

(2)

In addition to the contractual interest payments, we receive monthly remittances of principal repayments from both the recoveries from liquidated loans and, to a lesser extent, voluntary repayments of the underlying collateral of these securities representing a partial return of our investment in these securities.

We and FHFA, as Conservator, are involved in efforts to mitigate our losses as an investor with respect to certain of the non-agency mortgage-related securities we hold. See “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Agency and Non-Agency Mortgage-Related Security Issuers” for more information.

Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities

The table below provides information about the mortgage-related securities for which we recognized other-than-temporary impairments in earnings.

Table 22 — Net Impairment of Available-For-Sale Mortgage-Related Securities Recognized in Earnings


	Net Impairment of Available-For-Sale Securities Recognized in Earnings
	Three Months Ended
	3/31/2013		12/31/2012		9/30/2012		6/30/2012		3/31/2012
	(in millions)
Subprime:⁽¹⁾
2006 & 2007	$	27	$	591	$	159	$	51	$	433
Other years		6		24		1		7		8

Total subprime		33		615		160		58		441

Option ARM:
2006 & 2007		—		306		62		18		32
Other years		—		122		—		—		16

Total option ARM		—