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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
Commission File Number: 001-34139
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Freddie Mac
Federally chartered
corporation
(State or other jurisdiction of
incorporation or organization)
8200 Jones Branch Drive
McLean, Virginia 22102-3110
(Address of principal executive offices,
including zip code)
52-0904874
(I.R.S. Employer
Identification No.)
(703) 903-2000
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Voting Common Stock, no par value per share (OTCQB: FMCC)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCI)
5% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCKK)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCG)
5.1% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCH)
5.79% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCK)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCL)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCM)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCN)
5.81% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCO)
6% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCP)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCJ)
5.7% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCKP)
Variable Rate, Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCCS)
6.42% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCCT)
5.9% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKO)
5.57% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKM)
5.66% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKN)
6.02% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKL)
6.55% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKI)
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKJ)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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. Yes [X] 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). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ X ]
Accelerated filer [ ]
Non-accelerated filer (Do not check if a smaller reporting company) [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates computed by reference to the price at which the common equity was last sold on
June 28, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter) was $877.6 million.
As of February 14, 2014, there were 650,039,533 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
Table of Contents
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosure
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Mortgage Market and Economic Conditions, and Outlook
Consolidated Results of Operations
Consolidated Balance Sheets Analysis
Risk Management
Liquidity and Capital Resources
Fair Value Balance Sheets and Analysis
Off-Balance Sheet Arrangements
Contractual Obligations
Critical Accounting Policies and Estimates
Risk Management and Disclosure Commitments
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
GLOSSARY
EXHIBIT INDEX
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MD&A TABLE REFERENCE
Table Description
1 Total Single-Family Loan Workout Volumes
2 Mortgage-Related Investments Portfolio
3 Affordable Housing Goals for 2013 and 2014
4 Affordable Housing Goals and Results for 2011 and 2012
5 Quarterly Common Stock Information
6 Selected Financial Data
7 Mortgage Market Indicators
8 Summary Consolidated Statements of Comprehensive Income
9 Net Interest Income/Yield, Average Balance, and Rate/Volume Analysis
10 Net Interest Income
11 Derivative Gains (Losses)
12 Other Income (Loss)
13 Non-Interest Expense
14 REO Operations (Income) Expense
15 Composition of Segment Mortgage Portfolios and Credit Risk Portfolios
16 Segment Earnings and Key Metrics — Single-Family Guarantee
17 Segment Earnings Composition — Single-Family Guarantee Segment
18 Segment Earnings and Key Metrics — Investments
19 Segment Earnings and Key Metrics — Multifamily
20 Investments in Available-For-Sale Securities
21 Investments in Trading Securities
22 Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets
23 Additional Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets
24 Mortgage-Related Securities Purchase Activity
Non-Agency Mortgage-Related Securities Backed by Subprime First Lien, Option ARM, and Alt-A Loans and Certain
Related Credit Statistics
25
26 Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans
27 Net Impairment of Available-For-Sale Mortgage-Related Securities Recognized in Earnings
28
Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and
CMBS
29 Mortgage Loan Purchases and Other Guarantee Commitment Issuances
30 Derivative Fair Values and Maturities
31 Reconciliation of the Par Value and UPB to Total Debt, Net
32 Other Short-Term Debt
33 Freddie Mac Mortgage-Related Securities
34 Issuances and Extinguishments of Debt Securities of Consolidated Trusts
35 Changes in Total Equity (Deficit)
36 Single-Family Credit Guarantee Portfolio Data by Year of Origination
37 Characteristics of Purchases for the Single-Family Credit Guarantee Portfolio
38 Characteristics of the Single-Family Credit Guarantee Portfolio
39 Single-Family Loans Scheduled Payment Change to Include Principal by Year at December 31, 2013
40 Serious Delinquency Rates by Year of Payment Change to Include Principal
41 Single-Family Next Scheduled Adjustable-Rate Resets by Year at December 31, 2013
42 Serious Delinquency Rates by Year of First Rate Reset
43 Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio
44 Step-Rate Modified Loans
45 Single-Family Loan Workout, Serious Delinquency, and Foreclosure Volumes
46 Quarterly Percentages of Modified Single-Family Loans — Current and Performing
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47 Single-Family Relief Refinance Loans
48 Single-Family Serious Delinquency Statistics
49 Credit Concentrations in the Single-Family Credit Guarantee Portfolio
50 Single-Family Credit Guarantee Portfolio by Attribute Combinations
51 Single-Family Credit Guarantee Portfolio Foreclosure and Short Sale Rates
52 Multifamily Mortgage Portfolio — by Attribute
53 Non-Performing Assets
54 REO Activity by Region
55 Single-Family REO Property Status
56 Credit Loss Performance
57 Severity Ratios for Single-Family Loans
58 Single-Family Charge-offs and Recoveries by Region
59 Loan Loss Reserves Activity
60 Single-Family Impaired Loans with Specific Reserve Recorded
61 Single-Family Credit Loss Sensitivity
62 Repurchase Request Activity
63 Loans Released from Repurchase Obligations
64 Mortgage Insurance by Counterparty
65 Bond Insurance by Counterparty
66 Derivative Counterparty Credit Exposure
67 Activity in Other Debt
68 Freddie Mac Credit Ratings
69 Consolidated Fair Value Balance Sheets
70 Summary of Change in the Fair Value of Net Assets
71 Contractual Obligations by Year at December 31, 2013
72 PMVS and Duration Gap Results
73 Derivative Impact on PMVS-L (50 bps)
74 2014 Target TDC
75 Board of Directors Committee Membership
76 2013 Target TDC
77 Achievement of Conservatorship Scorecard Performance Measures
78 Achievement of Complementary Corporate Goals
79 2013 Deferred Salary
80 Summary Compensation Table — 2013
81 Grants of Plan-Based Awards — 2013
82 Outstanding Equity Awards at Fiscal Year-End — 2013
83 Pension Benefits — 2013
84 Non-Qualified Deferred Compensation
85 Potential Payments Upon Termination of Employment or Change-in-Control as of December 31, 2013
86 Board Compensation — 2013 Non-Employee Director Compensation Levels
87 2013 Director Compensation
88 Stock Ownership by Directors, Executive Officers, and Greater-Than-5% Holders
89 Equity Compensation Plan Information
90 Auditor Fees
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Equity (Deficit)
Consolidated Statements of Cash Flows
Note 1: Summary of Significant Accounting Policies
Note 2: Conservatorship and Related Matters
Note 3: Variable Interest Entities
Note 4: Mortgage Loans and Loan Loss Reserves
Note 5: Individually Impaired and Non-Performing Loans
Note 6: Real Estate Owned
Note 7: Investments in Securities
Note 8: Debt Securities and Subordinated Borrowings
Note 9: Derivatives
Note 10: Collateral and Offsetting of Assets and Liabilities
Note 11: Stockholders’ Equity (Deficit)
Note 12: Income Taxes
Note 13: Segment Reporting
Note 14: Financial Guarantees
Note 15: Concentration of Credit and Other Risks
Note 16: Fair Value Disclosures
Note 17: Legal Contingencies
Note 18: Regulatory Capital
Note 19: Selected Financial Statement Line Items
Quarterly Selected Financial Data
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PART I
This Annual Report on Form 10-K 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-K and
we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this
Form 10-K. Actual results might differ significantly from those described in or implied by such statements due to various
factors and uncertainties, including those described in the “BUSINESS — Forward-Looking Statements” and “RISK
FACTORS” sections of this Form 10-K.
Throughout this Form 10-K, we use certain acronyms and terms that are defined in the “GLOSSARY.”
Executive Summary
ITEM 1. BUSINESS
You should read this Executive Summary in conjunction with our MD&A and consolidated financial statements and
related notes for the year ended December 31, 2013.
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
essential mortgage liquidity in a wide range of economic environments. We are working to support the continued recovery of
the housing market and the nation’s economy by: (a) providing America’s families with access to mortgage funding at low rates
while helping distressed borrowers keep their homes and avoid foreclosure, where possible; and (b) providing consistent
liquidity to the multifamily mortgage market, which includes providing financing for affordable rental housing. At the same
time, we are working with FHFA, our customers and the industry to build a stronger housing finance system for the nation.
Conservatorship and Government Support for Our Business
We continue to operate in conservatorship that began in September 2008, under the direction of FHFA, as our
Conservator. The conservatorship and related matters continue to have a wide-ranging impact on us, including our
management, business, financial condition, and results of operations. There is significant uncertainty as to our future, as
conservatorship has no specified termination date, and it is unknown what changes may occur to our business model during or
following conservatorship, including whether we will continue to exist.
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. We do not have the authority over the long term to build and retain capital from the earnings
generated by our business operations, or return capital to stockholders other than Treasury.
For more information on the conservatorship and government support for our business, including the Purchase
Agreement, see “Conservatorship and Related Matters” and “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS."
Consolidated Financial Results for 2013
During 2013, we continued to see improvement in the housing market, which contributed positively to our financial
results. Comprehensive income was $51.6 billion for 2013 compared to $16.0 billion for 2012. Comprehensive income for
2013 consisted of $48.7 billion of net income and $2.9 billion of other comprehensive income. Our net income for 2013
includes: (a) a benefit for federal income taxes of $23.3 billion that primarily resulted from our conclusion to release our
valuation allowance against our net deferred tax assets; (b) improvements in the fair value of our derivatives from increases in
long-term interest rates; (c) benefits for credit losses resulting from declines in the volume of newly delinquent loans, lower
estimates of incurred losses largely resulting from an increase in national home prices and representation and warranty
settlements of pre-conservatorship loan origination activity; and (d) settlements of $5.5 billion primarily related to lawsuits
regarding our investments in certain residential non-agency mortgage-related securities. Our total equity was $12.8 billion at
December 31, 2013. As a result of our positive net worth at December 31, 2013, no draw is being requested from Treasury
under the Purchase Agreement for the fourth quarter of 2013. Through December 31, 2013, we have paid aggregate cash
dividends to Treasury that slightly exceed our aggregate draws received under the Purchase Agreement. At December 31, 2013,
our aggregate funding received from Treasury under the Purchase Agreement was $71.3 billion. For a discussion of the factors
that led to our conclusion to release the valuation allowance against our net deferred tax assets, see “MD&A —
CONSOLIDATED BALANCE SHEETS ANALYSIS — Deferred Tax Assets and Liabilities” and “NOTE 12: INCOME
TAXES.”
The level of earnings we have experienced in recent periods is not sustainable over the long term. While our recent
financial results, particularly our benefit (provision) for credit losses, benefited significantly from strong home price
appreciation we are beginning to see moderation in home price growth. In addition, our recent financial results include large
benefits related to the release of our deferred tax asset valuation allowance and settlements of residential non-agency mortgage-
related securities litigation and claims for breaches of representations and warranties by our sellers. These trends are not
expected to continue over the long term. Our settlements with sellers for claims for breaches of representations and warranties
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primarily related to pre-conservatorship loan activity are largely complete. Our residential non-agency mortgage-related
securities litigation is ongoing with many large institutions and we expect additional settlements in 2014. In addition, declines
in the size of our mortgage-related investments portfolio, as required by FHFA and the Purchase Agreement, will reduce
earnings over time. Our financial results will also continue to be positively or negatively affected by changes in interest rates,
yield curves, and mortgage spreads, which can cause significant earnings and net worth variability.
Our Primary Business Objectives
We are focused on the following primary business objectives: (a) reducing taxpayer exposure to losses by reducing and
managing our overall risk profile, especially to mortgage-related risks; (b) supporting U.S. homeowners and renters by
providing lenders with a constant source of liquidity for mortgage products even when other sources of financing are scarce; (c)
building a commercially strong and efficient business enterprise; and (d) positioning the company, in particular our people and
infrastructure, to succeed in a to-be-determined “future state.”
Reducing Taxpayer Exposure to Losses by Reducing and Managing Our Overall Risk Profile, Especially to Mortgage-
Related Risks
We continue to actively manage and reduce the high credit risk related to our 2005-2008 Legacy single-family book by:
(a) providing homeowners with alternatives that allow them to stay in their homes; (b) maximizing the proceeds from short
sales and REO sales; (c) actively managing our servicers; (d) pursuing our rights with our sellers; (e) enforcing our rights with
other counterparties; and (f) reducing our mortgage-related investments portfolio. The 2005-2008 Legacy single-family book
represented 16% of our single-family credit guarantee portfolio at December 31, 2013, but comprised 81% of our credit losses
during 2013.
Providing Homeowners with Alternatives that Allow Them to Stay in Their Homes
We establish guidelines for our servicers to follow and provide them default management programs to use, in part, in
determining which type of loan workout would be expected to provide us with an opportunity to manage our exposure to credit
losses. Our servicers pursue repayment plans and loan modifications for borrowers facing financial or other hardships because
the level of recovery on a reperforming loan may often be much higher than would be the case with foreclosure or foreclosure
alternatives. Since 2009, we have helped approximately 953,000 borrowers experiencing hardship complete a loan workout.
Under our loan workout programs, our servicers contact borrowers experiencing hardship with a goal of helping them 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.
Beginning in 2009, we introduced a variety of borrower-assistance programs, including HAMP, to help keep families in
their homes. We continued to expand these programs in 2013. In July 2013, as part of the servicing alignment initiative, we
implemented a new streamlined modification initiative, which provides an additional modification opportunity to many
delinquent borrowers who are at least 90 (but not more than 720) days delinquent. Across all our modification programs, we
modified $17.4 billion and $15.1 billion in UPB of loans in 2013 and 2012, respectively.
Our relief refinance initiative, including HARP (which is the portion of our relief refinance initiative for loans with LTV
ratios above 80%), is another key program used by our seller/servicers to help keep families in their homes. In 2013 and 2012,
we purchased or guaranteed $99.2 billion and $122.8 billion in UPB of relief refinance loans, respectively, which included
$62.5 billion and $86.9 billion in UPB of HARP loans, respectively. We have purchased HARP loans provided to nearly
1.3 million borrowers since the initiative began in 2009, including approximately 340,000 borrowers during 2013. See “Table
47 — Single-Family Relief Refinance Loans” for more information about the volume of our relief refinance purchases.
As of December 31, 2013, the borrower’s monthly payment for all of our completed HAMP modifications was reduced
on average by an estimated $531, which amounts to an average of $6,372 per year, and a total of $1.5 billion in annual
reductions (these amounts are calculated by multiplying the number of completed modifications by the average reduction in
monthly payment, and have not been adjusted to reflect the actual performance of the loans following modification).
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The table below presents our single-family loan workout activities for the last five years.
Table 1 — Total Single-Family Loan Workout Volumes(1)
(1) Based on workouts 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 December 31, 2013, approximately 21,000 borrowers were in modification trial periods, including approximately 16,000 borrowers in trial
periods for our non-HAMP 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 within the year;
however, a single loan may be included under separate forbearance agreements in each year.
While we believe our home retention programs have been largely successful, many borrowers still need our assistance.
See “MD&A — RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk” for
more information about loss mitigation activities and our efforts to keep families in their homes, including through our loan
modification initiatives and our relief refinance mortgage initiative.
Maximizing the Proceeds from Short Sales and REO Sales
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 a foreclosure and subsequent property sale from our REO
inventory. In large part, the benefit of a short sale is that we avoid costs we would otherwise incur to complete the foreclosure
and dispose of the property, including maintenance, property taxes, and other expenses associated with holding REO property.
We believe our REO disposition and short sale severity ratios in 2013 were positively affected by changes made in 2012
to our process for evaluating the market value and determining the list price for our REO properties when we offer them for
sale, as well as repairing a higher percentage of our REO properties prior to listing them.
Actively Managing our Servicers
We continue to face challenges with respect to the performance of certain of our single-family servicers in managing our
seriously delinquent loans. Our servicers represent and warrant to us that loans serviced on our behalf will be serviced in
accordance with our servicing contract. These contractual obligations provide us with remedies for breaches in servicing. These
contractual remedies include the ability to require the servicer to pay compensatory or other fees, repurchase the loan at its
current UPB, and/or reimburse us for losses realized. During 2013, we began to increase our review of servicing related
violations, including by issuing notices of defect to our servicers for certain violations of our servicing standards. As of
December 31, 2013, we had: (a) $0.6 billion of outstanding repurchase requests; and (b) $0.3 billion of outstanding notices of
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defect, with our servicers, based on the UPB of the related loans. We also recognized $0.4 billion of compensatory fees during
2013 primarily for servicer failures to complete a foreclosure within our timelines.
We continue to have a large population of seriously delinquent loans, many of which have been delinquent for more than
one year; these loans tend to be more challenging to resolve. As of December 31, 2013, our serious delinquency rate for the
aggregate of those states that require a judicial foreclosure and all other states was 3.31% and 1.63%, respectively. Foreclosures
generally take longer to complete in states where judicial foreclosures are required, compared to other states. During 2013, the
average time to foreclose on properties in judicial states was 943 days compared to 567 days in non-judicial states for loans in
our single-family credit guarantee portfolio, excluding those underlying our Other Guarantee Transactions.
As part of our efforts to maximize foreclosure alternatives, increase problem loan workouts, and mitigate our credit
losses, we have continued to facilitate the transfer of servicing for certain pools of loans with higher credit risk from
underperforming servicers to other servicers that specialize in workouts of problem loans. During 2013, we facilitated the
transfer of servicing for $55.6 billion in UPB of loans from our primary servicers to specialty servicers.
Pursuing Our Rights with Our Sellers
We have contractual arrangements with our sellers under which they agree to sell us mortgage loans, and represent and
warrant that those loans have been originated under specified underwriting standards. If we subsequently discover that the
representations and warranties were breached (i.e., that contractual standards were not followed), we can exercise certain
contractual remedies to mitigate our actual or potential credit losses. These remedies include the ability to require the seller to
repurchase the loan at its current UPB and/or reimburse us for losses realized.
We continue to recover credit losses from seller/servicers in the normal course of business related to breaches of
representations and warranties for loans they sold to us or service for us. In addition, in 2013, we also actively pursued seller
representation and warranty settlements of pre-conservatorship loan activity, agreeing to settlements with nine of our larger
sellers and several of our smaller sellers covering approximately 49% of the 2005-2008 Legacy single-family book as of
December 31, 2013. During 2013, we recovered amounts from seller/servicers with respect to $5.6 billion in UPB of loans
subject to our repurchase requests, including $2.1 billion related to settlement agreements. Approximately 23% of the $5.6
billion in UPB associated with repurchase requests were satisfied by the reimbursement of losses (excluding amounts related to
settlement agreements). As of December 31, 2013, we had $1.6 billion of outstanding repurchase requests with sellers, based on
UPB of the loans. In November 2013, FHFA announced that we had substantially achieved the 2013 Conservatorship Scorecard
goal to complete our requests for remedies for breaches of seller representations and warranties related to pre-conservatorship
loan origination activity.
Enforcing Our Rights with Other Counterparties
We continue to pursue claims for coverage under mortgage insurance policies in the normal course of business. We also
continued to actively pursue settlements with mortgage insurance counterparties. We use mortgage insurance, which is a form
of credit enhancement, to mitigate our credit loss exposure. Primary mortgage insurance is generally required to be purchased
at loan origination, typically at the borrower’s expense, for certain mortgages with higher LTV ratios, from an insurer that is
typically selected by the lender. We received payments under primary and other mortgage insurance of $2.0 billion in each of
2013 and 2012 which helped to mitigate our credit losses. Although the financial condition of certain of our mortgage insurers
improved moderately in 2013 as a result of strong home price appreciation and their having raised additional capital, there is
still a significant risk that these counterparties may fail to meet their obligations to pay our claims. We expect to receive
substantially less than full payment of our claims from three of our seven larger mortgage insurance counterparties, as they are
currently partially paying claims under orders of their regulators and are no longer rated by S&P or Moody's. Of our four
largest mortgage insurers, three are rated B, and one is rated BBB+, as of February 14, 2014. We consider the collectability of
our claims against our mortgage insurers when determining the receivables and estimating our allowance for loan losses on our
consolidated balance sheets.
Our ability to manage our exposure to mortgage insurers may be limited as: (a) certain of our mortgage insurers are
operating below our eligibility thresholds; and (b) our ability to revoke a mortgage insurer's status as an eligible insurer may
require FHFA approval. We are working with FHFA and Fannie Mae to improve mortgage insurance standards. We are
developing counterparty risk management standards for mortgage insurers that include revised eligibility requirements. In
December 2013, FHFA announced that we and Fannie Mae, in collaboration with our mortgage insurers, had completed
development of new master policies, for which the mortgage insurers are expected to seek state regulatory approval. These
changes to the master policies are intended to provide greater certainty of coverage, facilitate timely claims processing, and
help address the significant problems we faced in recent years in resolving repurchase requests related to mortgage insurance
rescission. We expect to finalize changes to financial requirements and other standards for mortgage insurer eligibility in 2014.
At the direction of our Conservator, we are also working to enforce our rights as an investor with respect to the non-
agency mortgage-related securities we hold, and are engaged in various efforts, in some cases in conjunction with other
investors, to mitigate or recover losses on our investments in these securities. During 2013, we and FHFA reached settlements
with a number of institutions pursuant to which we received an aggregate of $5.5 billion. In addition, in February 2014, we and
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FHFA entered into an agreement with Morgan Stanley, and related parties, to settle litigation related to certain residential non-
agency mortgage-related securities we hold for $625 million. This settlement will be reflected in our consolidated financial
results for the first quarter of 2014. Lawsuits against a number of large institutions are currently pending. See “NOTE 15:
CONCENTRATION OF CREDIT AND OTHER RISKS” for more information about our recent agreements with non-agency
mortgage-related security issuers.
We are also working to enforce our rights in the Lehman bankruptcy. In February 2014, we reached a settlement with
Lehman Brothers Holdings Inc. pursuant to which we will receive $767 million to resolve our claims related to Lehman’s
bankruptcy. Consequently, we adjusted our December 31, 2013 estimate of the expected recoveries of our short-term lending
receivable by $350 million, which reduced other expenses by the same amount. For more information, see “NOTE 17: LEGAL
CONTINGENCIES."
Reducing Our Mortgage-Related Investments Portfolio
During 2013, we continued to reduce the size of our mortgage-related investments portfolio, as required under the terms
of the Purchase Agreement and FHFA regulation. Our mortgage-related investments portfolio declined 17%, or $96.5 billion,
from $557.5 billion as of December 31, 2012 to $461.0 billion as of December 31, 2013 and was below the required limit. Our
less liquid assets accounted for $70.9 billion of this decline primarily due to: (a) liquidations; and (b) consistent with our 2013
Conservatorship Scorecard goal, sales of $16.8 billion which exceeded our scorecard goal.
While our on-going focus remains on reducing our less liquid assets, we continue to purchase certain of these assets as
part of our business strategies. In 2014, we plan to continue to reduce our mortgage-related investments portfolio, consistent
with the Purchase Agreement and FHFA regulation, through liquidations and sales, subject to a variety of constraints, including
market conditions.
Supporting U.S. Homeowners and Renters by Providing Lenders with a Constant Source of Liquidity for Mortgage
Products even when Other Sources of Financing are Scarce
We maintain a consistent market presence by providing lenders with a constant source of liquidity for mortgage products
even when other sources of financing are scarce. This liquidity provides our customers with confidence to continue lending
even in difficult environments. During 2013 and 2012, we purchased or issued other guarantee commitments for $422.7 billion
and $426.8 billion in UPB of single-family conforming mortgage loans, representing approximately 2.1 million and 2.0 million
homes, respectively. We estimate that we, Fannie Mae, and Ginnie Mae collectively guaranteed more than 90% of the single-
family conforming mortgages originated since 2008. During 2013, our multifamily new business activity (i.e., loan purchases
and issuances of Other Structured Securities and other guarantee commitments), totaled $25.9 billion, and provided financing
for nearly 1,600 properties amounting to nearly 388,000 apartment units. The vast majority of these apartments were affordable
to low and moderate income families.
Building a Commercially Strong and Efficient Business Enterprise
Single-Family Guarantee Segment Strategies
Our single-family business is our core business line. We continue to take steps to build a stronger, profitable business
model for our ongoing business. Our goal is to strengthen the business model in order to run the business efficiently and
effectively in support of homeowners and taxpayers and, if required as part of a future state for the enterprise, to be able to
promptly return to private sector ownership.
Our Single-family Guarantee segment is focused on strengthening our business model by:
• Leveraging the fundamentals: We are leveraging our existing product offerings to better meet the needs of an evolving
mortgage market. This includes working to reduce repurchase requests and penalties, in the form of fees, by providing
greater certainty for seller/servicers that the loans they sell to us or service for us meet our requirements. We are doing
this by enhancing the tools we make available to our customers (including Loan Prospector, Loan Quality Advisor,
and Home Value Estimator), and expanding and leveraging the data standards of the Uniform Mortgage Data Program.
We intend to continue to simplify, streamline, and strengthen our operations, while keeping pace with regulatory
requirements, such as those implemented under the Dodd-Frank Act.
• Better serving our customers: Our customers are our sellers, servicers, and investor/dealers. Based on feedback we
have received directly from our customers through our Customer Advisory Boards, surveys, and ongoing
conversations, we are enhancing our processes and programs to improve our customers’ experience when doing
business with us.
• Managing the credit risk of the single-family credit guarantee portfolio: We are managing our credit risk by setting our
underwriting standards at a level commensurate with the long-term credit risk appetite of the company. We use a
process of delegated underwriting for the single-family mortgages we purchase or securitize. In this process, our
contracts with seller/servicers describe mortgage eligibility and underwriting standards, and the seller/servicers
represent and warrant to us that the mortgages sold to us meet these standards. Beginning in 2009, we have made
various changes to our credit policies, including changes to improve our underwriting standards, purchased fewer
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loans with higher risk characteristics, and assisted in improving our mortgage insurers’ and lenders’ underwriting
practices. As a result, the credit quality of the New single-family book is significantly better than that of the
2005-2008 Legacy single-family book, as measured by original LTV ratios, FICO scores, and the proportion of loans
underwritten with full documentation, as well as delinquency rates and credit losses.
• Transferring the credit risk of the single-family credit guarantee portfolio: We consider risk transfer transactions to be
a prudent way to manage risk in our business. We executed three transactions during 2013 that transfer a mezzanine
credit loss position on certain groups of loans in the New single-family book. These transactions are intended to shift
mortgage credit risk from us to private investors and are consistent with our 2013 Scorecard goal. While these
transactions have been relatively small compared to our overall mortgage credit risk, we believe they have attracted
broad interest in the market. We will seek to expand and refine our offerings of credit risk transfer transactions in the
future.
• Optimizing the economics of the single-family credit guarantee portfolio: We strive to achieve the highest economic
returns on our portfolio while considering and balancing our: (a) customer diversification; and (b) housing mission
and goals. We also align our mortgage-related securities offerings and disclosures with customer needs and investor
demand to balance the achievement of the above objectives while considering the relative performance of our
securities in the market.
Investments Segment Strategies
Our Investments segment is a key business operation, which has certain objectives in 2014, including:
• Maintaining a presence in the agency mortgage-related securities market. Our activities in this market may include
outright purchases and sales, dollar roll transactions, and structuring existing agency securities into REMICs and
selling some or all of the tranches.
• Maintaining a portfolio of liquid securities consistent with our liquidity management guidelines. In managing the
reduction of our mortgage-related investments, we evaluate the liquidity of these investments based on two categories:
(a) single-class and multiclass agency securities; and (b) assets that are less liquid than agency securities. We are
focusing our efforts on reducing the balance of less liquid assets in the mortgage-related investments portfolio. Our
liquid assets collectively represented approximately 40% of UPB of the portfolio at December 31, 2013, compared to
38% at December 31, 2012.
• Managing the single-family performing loans obtained through our cash purchase program. We purchase loans from
lenders for cash and, in conjunction with the single-family business, securitize the majority of these loans into Freddie
Mac agency securities that may be sold to dealers or investors, or retained in our mortgage investments portfolio as
agency securities.
• Managing single-family re-performing loans and performing modified loans. This includes securitizing loans, and
could include selling loans or other disposition strategies in the future.
• Managing single-family delinquent loans along with the single-family business. This includes removing seriously
delinquent loans from PC pools and could include selling loans, securitizing loans, or other disposition strategies in
the future.
• Reducing the overall balance of our holdings of non-agency mortgage-related securities through liquidations and sales,
subject to a variety of constraints, including market conditions.
• Managing the treasury function, including funding and liquidity, for the overall company, through the issuance of
short-term and long-term unsecured debt. We maintain a liquidity and contingency portfolio of cash and non-mortgage
investments for short-term liquidity management.
• Managing the interest-rate risk for the overall company through the use of derivatives and unsecured debt.
Multifamily Segment Strategies
Our Multifamily business is also a key business operation, and provides a consistent source of liquidity to the multifamily
mortgage market while maintaining a strong credit and capital management discipline. We accomplish this primarily by
focusing on our business model of aggregating and securitizing mortgage loans in order to transfer the expected credit risk
associated with the loans to third-party investors who hold the subordinated securities. The nature of our Multifamily business
is in line with the general concept that private investors should absorb the first and predominant losses before any taxpayer
exposure; we believe this positions the business well for the future. Additionally, we plan to continue to execute our mission to
provide and support a consistent supply of affordable rental housing.
As a result of our prudent underwriting standards and practices, and the continued positive multifamily market
fundamentals, the credit quality of the multifamily mortgage portfolio remains strong, and multifamily credit losses during
2013 were less than 0.01% (or less than one basis point) as a percentage of the combined average balance of our multifamily
loan and guarantee portfolios.
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We continued to expand our K Certificate issuances in the multifamily market with a 32% increase in this activity in
2013, based on UPB, compared to 2012. We were able to increase our securitization volumes in 2013 despite our 10%
reduction in new loan purchase volume. During 2013, we reduced the UPB of loans we held in our portfolio for securitization
as we were able to reduce the time between loan purchase and securitization. Our K Certificate transactions allow us to sell a
portion of mortgage credit risk to private investors who purchase subordinated tranches at the time of transaction execution. As
a result of repayments, K Certificate issuances, and sales of loans in our multifamily mortgage portfolio, the non-credit
enhanced portion of this portfolio declined by 21% during 2013. In addition, our CMBS portfolio (backed by multifamily
loans) declined by 37% during 2013, principally from our sales of these securities. These actions significantly reduced our
exposure to credit risk in our Multifamily business.
Positioning the Company, in Particular Our People and Infrastructure, to Succeed in a to-be-determined “future state”
Development of a New Secondary Mortgage Market
Under the direction of FHFA and in accordance with the 2013 Conservatorship Scorecard, we continue various efforts to
build the infrastructure for a future housing finance system, including the following:
• Common Securitization Platform: On October 7, 2013, FHFA announced the formation of Common Securitization
Solutions, LLCSM ("CSS"), which will build and operate the future new common securitization platform. In addition,
FHFA announced that: (a) office space has been leased for CSS; and (b) an executive recruitment firm has been retained
to identify candidates for the positions of Chief Executive Officer and Chairman of the Board of Managers of CSS. CSS
is equally-owned by Freddie Mac and Fannie Mae. In connection with the formation of CSS, we entered into a limited
liability company agreement with Fannie Mae and anticipate entering into additional agreements with Fannie Mae
relating to CSS in the future.
• Contractual and Disclosure Framework: FHFA directed us to work with Fannie Mae to implement a set of uniform
contractual terms and standards for transparency that can inform the single-family mortgage securitization market in the
future. During 2013, a team from Freddie Mac and Fannie Mae performed analysis and developed preliminary
recommendations for: (a) fully-guaranteed (GSE) mortgage-related securities; (b) non- or partially guaranteed (GSE)
mortgage-related securities; and (c) new master trust agreements for these types of securities.
• Uniform Mortgage Data Program: We and Fannie Mae are collaborating with the industry to develop and implement
uniform data standards for single-family mortgages. We have already made significant progress by completing initial
phases of this program, including: (a) standard appraisal data elements; (b) the Uniform Collateral Data Portal, which
allows us to aggregate this data from sellers; and (c) the Uniform Loan Delivery Dataset, which defines common data
elements for each loan we acquire or guarantee. During 2013, we expanded the data elements in the Uniform Loan
Delivery Dataset and aligned the dataset with recent changes required by the Consumer Financial Protection Bureau, or
CFPB.
• Representation and Warranty Framework: At the direction of FHFA, we and Fannie Mae launched a new representation
and warranty framework for conventional loans purchased by the GSEs on or after January 1, 2013. The objective of the
new framework is to clarify lenders’ repurchase exposures and liability on future sales of mortgage loans to Freddie
Mac and Fannie Mae. Under it, lenders are relieved of certain repurchase obligations for loans that meet specific
payment requirements three years after purchase (and one year for HARP and other relief refinance mortgages).
• Lender placed insurance standards: As part of the servicing alignment initiative, we announced changes in our servicing
standards for situations in which our servicers obtain property hazard insurance on properties securing single-family
loans we own or guarantee. As a result, effective June 1, 2014, our seller/servicers may not receive compensation or
other payment from insurance carriers nor may they use their own or affiliated entities to insure or reinsure a property.
In addition, we also worked to help our seller/servicers improve their underwriting processes for loans that they sell to us.
As part of these efforts and in accordance with the 2013 Conservatorship Scorecard, we made progress in the following areas
during 2013:
• Began an initiative for enhanced early-risk assessment by seller/servicers, including implementation of Loan Quality
Advisor, a new automated tool for use in evaluating the credit eligibility of loans and identifying non-compliance
issues;
• Announced requirements for our seller/servicers in response to certain final rules from the CFPB, including rules
concerning the requirements for borrowers' ability to repay and high-cost mortgages, that were implemented beginning
in January 2014. See “BUSINESS — Legislative and Regulatory Developments — Dodd-Frank Act” for further
information on the final rules;
•
Implemented standard timelines, appeal requirements, and alternative remedies for resolution of repurchase obligations
as part of our efforts to enhance post-delivery quality control practices and transparency associated with our new
representation and warranty framework; and
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• Expanded our loan review sampling strategy, specifically focusing on newly purchased mortgage loans, to evaluate
compliance with our standards.
Investing in Human, Technology and Other Resources
We continue to make strategic investments to maintain and improve our ability to operate the company for the foreseeable
future in conservatorship and potentially afterwards. Our human capital risks have abated considerably in recent periods, as
evidenced by low voluntary turnover and vacancy rates. In 2011, we experienced increased levels of voluntary turnover while
the Administration and Congress publicly debated our future business model and compensation structure, and the possibility
remains that we may experience increased turnover again in the future. However, during 2013 we continued to attract well-
qualified candidates, as evidenced by our hiring of five new senior officers.
Our information technology risk also continues to decline. For example, in 2013, we completed a three-year multimillion
dollar project to move our key legacy applications and infrastructure to current, supported technology. We are investing each
year to maintain our technology and are focused on standardizing and simplifying the technology portfolio. We continue to
focus on emerging information security risks and hired a new Chief Information Security Officer in 2013.
Streamlining, Simplifying and Strengthening Operations
We continue to strengthen our operations. Beginning in mid-2012 and continuing through 2013, we took steps to enhance
management’s focus on control issues by elevating awareness of those issues across the company and stressing timely
remediation. As a result, the number of outstanding control issues reached its lowest level since conservatorship. We also
continue to work to improve our operating efficiency. In 2013, we began a multi-year project focused on simplifying our
control structure and eliminating redundant control activities. We updated our risk and control framework to increase our
emphasis on risk management and are conducting detailed operational controls design reviews to identify ways to simplify our
controls structure.
We are reviewing our information technology architecture design with a focus on simplifying our information technology
environment. We are also building our out-of-region disaster recovery capabilities.
Our Business
We conduct business in the U.S. residential mortgage market and the global securities market, subject to the direction of
our Conservator, FHFA, and under regulatory supervision of FHFA, the SEC, HUD, and Treasury. The size of the U.S.
residential mortgage market is affected by many factors, including changes in interest rates, home ownership rates, home
prices, the supply of housing and lender preferences regarding credit risk and borrower preferences regarding mortgage debt.
The amount of residential mortgage debt available for us to purchase and the mix of available loan products are also affected by
several factors, including the volume of mortgages meeting the requirements of our charter, our own preference for credit risk
reflected in our purchase standards and the mortgage purchase and securitization activity of other financial institutions. We
operate our business solely in the United States and its territories, and accordingly, we generate no revenue from and have no
long-lived assets other than financial instruments in geographic locations outside the United States and its territories.
In addition to the directives given to us by our Conservator, our charter forms the framework for our business activities,
the initiatives we bring to market and the services we provide to the nation’s residential housing and mortgage industries. Our
charter also determines the types of mortgage loans that we are permitted to purchase. Our statutory mission as defined in our
charter is to:
•
•
•
•
provide stability in the secondary market for residential mortgages;
respond appropriately to the private capital market;
provide ongoing assistance to the secondary market for residential mortgages (including activities relating to
mortgages for low- and moderate-income families, involving a reasonable economic return that may be less than the
return earned on other activities); and
promote access to mortgage credit throughout the U.S. (including central cities, rural areas, and other underserved
areas).
Our charter does not permit us to originate mortgage loans or lend money directly to consumers in the primary mortgage
market. We provide liquidity, stability and affordability to the U.S. housing market primarily by providing our credit guarantee
for residential mortgages originated by mortgage lenders. We use mortgage securitization as an integral part of our activities.
In certain circumstances, we also provide our guarantee without securitization of the related assets (we refer to these
transactions as other guarantee commitments).
Our charter limits our purchases of single-family loans to the conforming loan market. The conforming loan market is
defined by loans originated with UPBs at or below limits determined annually based on changes in FHFA’s housing price index,
a method established and maintained by FHFA for determining the national average single-family home price. Since 2006, the
base conforming loan limit for a one-family residence has been set at $417,000, and higher limits have been established in
certain “high-cost” areas (currently, up to $625,500 for a one-family residence). Higher limits also apply to two- to four-family
residences and for mortgages secured by properties in Alaska, Guam, Hawaii, and the U.S. Virgin Islands. For more
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information, see “Regulation and Supervision — Legislative and Regulatory Developments — FHFA Request for Public Input
on Proposed Gradual Decrease of Loan Limits.”
Our charter generally prohibits us from purchasing first-lien single-family mortgages if the outstanding UPB of the
mortgage at the time of our purchase exceeds 80% of the value of the property securing the mortgage unless we have one of the
following credit protections:
• mortgage insurance on the portion of the UPB of the mortgage that exceeds 80%;
•
•
a seller’s agreement to repurchase or replace any mortgage that has defaulted; or
retention by the seller of at least a 10% participation interest in the mortgage.
Our charter requirement for credit protection on mortgages with LTV ratios greater than 80% does not apply to
multifamily mortgages or to mortgages that have the benefit of any guarantee, insurance or other obligation by the U.S. or any
of its agencies or instrumentalities (e.g., the FHA, the VA or the USDA Rural Development). Additionally, as part of HARP, we
purchase single-family mortgages that refinance borrowers whose mortgages we currently own or guarantee without obtaining
additional credit enhancement in excess of that already in place for any such loan, even if the LTV ratio of the new loan is
above 80%.
Under our charter, our mortgage purchase operations are confined, so far as practicable, to mortgages that we deem to be
of such quality, type and class as to meet generally the purchase standards of other private institutional mortgage investors. This
is a general marketability standard.
Overview of the Mortgage Securitization Process
Mortgage securitization is a process by which we purchase mortgage loans that lenders originate, and pool these loans
into mortgage-related securities that are sold in global capital markets, generating proceeds that support future loan origination
activity by lenders. The primary Freddie Mac guaranteed mortgage-related security is the single-class PC. We also aggregate
and resecuritize mortgage-related securities that are issued by us, other GSEs, HFAs, or private (non-agency) entities, and issue
other single-class and multiclass mortgage-related securities to third-party investors.
The following diagram illustrates how we support mortgage market liquidity when we create PCs through mortgage
securitizations. These PCs can be sold to investors or held by us or our lender customers.
Mortgage Securitizations
In general, for single-family loans, the securitization and Freddie Mac guarantee process works as follows: (a) a lender
originates a mortgage loan to a borrower purchasing a home or refinancing an existing mortgage loan; (b) we purchase the loan
from the lender and place it with other mortgages into a security that is sold to investors (this process is referred to as
“pooling”); (c) the lender may then use the proceeds from the sale of the loan or security to originate another mortgage loan;
(d) we provide a credit guarantee (for a fee) to those who invest in the security; (e) the borrower’s monthly payment of
mortgage principal and interest (net of a servicing fee and our management and guarantee fee) is passed through to the
investors in the security; and (f) if the borrower stops making monthly payments - because a family member loses a job, for
example - we step in and, pursuant to our guarantee, make the applicable payments to investors in the security. In the event a
borrower defaults on the mortgage, our servicer works with the borrower to find a solution to help them stay in the home, or
sell the property and avoid foreclosure, through our many different workout options. If this is not possible, we ultimately
foreclose and sell the home.
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We issue mortgage-related securities in the form of PCs, REMICs and Other Structured Securities, and Other Guarantee
Transactions. Each of these types of mortgage-related securities is discussed below.
PCs
Our PCs are single-class pass-through securities that represent undivided beneficial interests in trusts that hold pools of
mortgages we have purchased. For our fixed-rate PCs, we guarantee the timely payment of principal and interest. For our ARM
PCs, we guarantee the timely payment of the weighted average coupon interest rate for the underlying mortgage loans. We also
guarantee the full and final payment of principal for ARM PCs; however, we do not guarantee the timely payment of principal
on ARM PCs. We issue most of our PCs in transactions in which our customers provide us with mortgage loans in exchange for
PCs. We refer to these transactions as guarantor swaps.
We guarantee our PCs in exchange for compensation, which consists primarily of a combination of management and
guarantee fees paid on a monthly basis as a percentage of the UPB of the underlying loans (referred to as base fees), and initial
upfront payments (referred to as delivery fees). We may also make upfront payments to buy-up the monthly management and
guarantee fee rate, or receive upfront payments to buy-down the monthly management and guarantee fee rate. These upfront
payments are paid in conjunction with the formation of a PC to provide for a uniform coupon rate for the mortgage pool
underlying the issued PC. The following diagram illustrates a guarantor swap transaction.
Guarantor Swap
We also issue PCs in transactions in which we purchase mortgage loans for cash and securitize them for sale to third
parties. We often sell PCs in a “cash auction", as illustrated in the following diagram.
Cash Purchase Process and Securitization of PCs
Institutional and other fixed-income investors, including pension funds, insurance companies, securities dealers, money
managers, REITs, and commercial banks, purchase our PCs. In recent years, the Federal Reserve has purchased significant
amounts of mortgage-related securities issued by us, Fannie Mae and Ginnie Mae. These purchases, which are ongoing, have
affected mortgage spreads and the demand for and values of our PCs. The Federal Reserve began to taper these purchases in
January 2014, but no assurance can be given that the Federal Reserve will continue its current practices.
PCs differ from most other fixed-income securities in several ways. For example, and most significantly, single-family
PCs can be partially or fully prepaid at any time. Homeowners have the right to prepay their mortgage at any time (known as
the prepayment option), and homeowner mortgage prepayments are passed through to the PC holder. Consequently, mortgage-
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related securities implicitly have a call option that significantly reduces the average life of the security from the contractual
loan maturity. As a result, our PCs generally provide a higher nominal yield than certain other fixed-income products. In
addition, in contrast to U.S. Treasury securities, PCs are not backed by the full faith and credit of the United States and are
instead backed by interests in real estate, in addition to our own guarantee.
From time to time we undertake actions in an effort to support the liquidity and price performance of our PCs relative to
comparable Fannie Mae securities through a variety of activities, including the resecuritization of PCs into REMICs and Other
Structured Securities. Other strategies may include: (a) encouraging sellers to pool mortgages that they deliver to us into PC
pools with a larger and more diverse population of mortgages; (b) influencing the volume and characteristics of mortgages
delivered to us by tailoring our loan eligibility guidelines and other means; and (c) engaging in portfolio purchase and retention
activities. See “Investments Segment — Market Presence and 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. The profitability of our multifamily business could
be adversely affected by a significant decrease in demand for K Certificates.” for additional information about our efforts to
support the liquidity and relative price performance of our PCs.
REMICs and Other Structured Securities
Our REMICs and Other Structured Securities represent beneficial interests in pools of PCs and certain other types of
mortgage-related assets. We create these securities (which can be single-class or multiclass types) primarily by using PCs or
previously issued REMICs and Other Structured Securities as the underlying collateral.
Single-class securities involve the straight pass-through of all of the cash flows of the underlying collateral to holders of
the beneficial interests. Our primary multiclass securities qualify for tax treatment as REMICs. Multiclass securities divide all
of the cash flows of the underlying mortgage-related assets into two or more classes designed to meet the investment criteria
and portfolio needs of different investors by creating classes of securities with varying maturities, payment priorities and
coupons, each of which represents a beneficial ownership interest in a separate portion of the cash flows of the underlying
collateral. Usually, the cash flows are divided to modify the relative exposure of different classes to interest-rate risk, or to
create various coupon structures. The simplest division of cash flows is into principal-only and interest-only classes.
Similar to our PCs, we guarantee the payment of principal and interest to the holders of tranches of our REMICs and
Other Structured Securities. We do not charge a management and guarantee fee for these securities if the underlying collateral
is already guaranteed by us since no additional credit risk is introduced. Because the collateral underlying nearly all of our
single-family REMICs and Other Structured Securities consists of other mortgage-related securities that we guarantee, there are
no economic residual interests in the related securitization trust. We do not issue tranches of securities in these transactions that
have concentrations of credit risk beyond those embedded in the underlying assets. The following diagram provides a general
example of how we create REMICs and Other Structured Securities.
REMICs and Other Structured Securities
We issue many of our REMICs and Other Structured Securities in transactions in which securities dealers or investors sell
us mortgage-related assets or we exchange our own mortgage-related assets (e.g., PCs and REMICs and Other Structured
Securities) for the REMICs and Other Structured Securities. The creation of REMICs and Other Structured Securities allows
for setting differing terms for specific classes of investors, and our issuance of these securities can expand the range of
investors in our mortgage-related securities to include those seeking specific security attributes. For REMICs and Other
Structured Securities that we issue to third parties, we typically receive a transaction, or resecuritization, fee. This transaction
fee is compensation for facilitating the transaction, as well as future administrative responsibilities.
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Other Guarantee Transactions
We also issue mortgage-related securities to third parties in exchange for non-Freddie Mac mortgage-related securities.
We refer to these as Other Guarantee Transactions. The non-Freddie Mac mortgage-related securities are transferred to trusts
that were specifically created for the purpose of issuing securities, or certificates, in the Other Guarantee Transactions.
Other Guarantee Transactions can generally be segregated into two different types. In one type, we purchase only senior
tranches from a non-Freddie Mac senior-subordinated securitization, place the senior tranches into securitization trusts, and
issue Other Guarantee Transaction certificates guaranteeing the principal and interest payments on those certificates. In this
type of transaction, our credit risk is reduced by the structural credit protections from the related subordinated tranches, which
we do not issue or guarantee. In the second type, we purchase single-class pass-through securities, place them in securitization
trusts, and issue Other Guarantee Transaction certificates guaranteeing the principal and interest payments on those certificates.
Our Other Guarantee Transactions backed by single-class pass-through securities do not benefit from structural or other credit
enhancement protections.
Although Other Guarantee Transactions generally have underlying mortgage loans with varying risk characteristics, we
do not issue tranches that have concentrations of credit risk beyond those embedded in the underlying assets, as all cash flows
of the underlying collateral are passed through to the holders of the securities and there are no economic residual interests in the
securitization trusts. Additionally, there may be other credit enhancements and structural features retained by the seller that
provide credit protection to our interests, and reduce the likelihood that we will have to perform under our guarantee of the
senior tranches. In exchange for providing our guarantee, we receive a management and guarantee fee and/or other delivery
fees.
Our primary Other Guarantee Transactions are multifamily K Certificates. In substantially all of these transactions, we
guarantee only the most senior tranches of the securities, and as a result, the expected credit risk associated with these loans is
sold in subordinated tranches to third-party investors. We do not issue or guarantee the subordinate tranches, which are
considered CMBS. However, we may purchase a portion of either the guaranteed certificates or the unguaranteed CMBS, based
on market conditions.
The following diagram provides an example of our K Certificate transactions.
K Certificate Transaction
In 2009 and 2010, we entered into transactions under Treasury’s NIBP with HFAs, for the partial guarantee of certain
single-family and multifamily HFA bonds, which were Other Guarantee Transactions with significant credit enhancement
provided by Treasury. The securities issued by us pursuant to the NIBP were purchased by Treasury. See “NOTE 2:
CONSERVATORSHIP AND RELATED MATTERS — Housing Finance Agency Initiative” for further information.
For information about the amount of mortgage-related securities we have issued, see “Table 33 — Freddie Mac
Mortgage-Related Securities.” For information about the relative performance of mortgages underlying these securities, see
“MD&A — RISK MANAGEMENT — Credit Risk.”
Our Business Segments
Our operations consist of three reportable segments, which are based on the type of business activities each performs:
Single-family Guarantee, Investments, and Multifamily. Certain activities that are not part of a reportable segment are included
in the All Other category.
We evaluate segment performance and allocate resources based on a Segment Earnings approach. For more information
on our segments, including financial information, see “MD&A — CONSOLIDATED RESULTS OF OPERATIONS —
Segment Earnings” and “NOTE 13: SEGMENT REPORTING.”
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Single-Family Guarantee Segment
In our Single-family Guarantee segment, we purchase and guarantee single-family mortgage loans originated by our
seller/servicers in the primary mortgage market. In most instances, we use the mortgage securitization process to package the
mortgage loans into guaranteed mortgage-related securities. We guarantee the payment of principal and interest on the
mortgage-related securities in exchange for management and guarantee fees.
Single-Family Mortgage Market
The U.S. residential mortgage market consists of a primary mortgage market that links homebuyers and lenders (i.e., our
sellers) and a secondary mortgage market that links lenders and investors. We participate in the secondary mortgage market
primarily by purchasing mortgage loans and mortgage-related securities and by issuing guaranteed mortgage-related securities.
In the Single-family Guarantee segment, we purchase and securitize “single-family mortgages,” which are mortgages that are
secured by one- to four-family properties.
The terms of single-family mortgage loans that we purchase or guarantee allow borrowers to prepay these loans, thereby
allowing borrowers to refinance their loans when mortgage rates decline. Because of the nature of long-term, fixed-rate
mortgage loans, borrowers with these mortgage loans are protected against rising interest rates, but are able to take advantage
of declining rates through refinancing. When a borrower prepays a mortgage loan that we have securitized, the outstanding
balance of the security owned by investors is reduced by the amount of the prepayment. Unscheduled reductions in loan
principal, regardless of whether they are voluntary or involuntary, result in prepayments of security balances. Consequently, the
owners of our guaranteed securities are subject to prepayment risk on the related mortgage loans, which is primarily the risk
that the investor will receive an unscheduled early return of the principal, and therefore may not earn the rate of return
originally expected on the investment.
Our Customers
Our customers in the Single-family Guarantee segment are predominantly lenders and loan servicers in the primary
mortgage market that originate mortgages for homeowners and service these loans for us. These companies include mortgage
banking companies, commercial banks, community banks, credit unions, HFAs, and thrift institutions. Many of these
companies perform both roles for us as seller/servicers. In addition, we view investors and dealers in our guaranteed mortgage-
related securities and STACR debt notes as customers.
We acquire a significant portion of our mortgages from several lenders that are among the largest mortgage loan
originators in the U.S. During 2013, two mortgage lenders, Wells Fargo Bank, N.A and JPMorgan Chase Bank, N.A., each
accounted for 10% or more of our single-family mortgage purchase volume and together accounted for approximately 30% of
our single-family mortgage purchase volume. Our top ten lenders accounted for approximately 64% and 73% of our single-
family mortgage purchase volume during 2013 and 2012, respectively.
We do not have our own mortgage loan servicing operation. Instead, our customers perform the primary servicing
function on our loans on our behalf. A significant portion of our single-family mortgage loans is serviced by several of our large
customers. For additional information about our relationships with our customers, see “MD&A — RISK MANAGEMENT —
Credit Risk — Institutional Credit Risk — Single-Family Mortgage Seller/Servicers.”
Our Competition
Historically, the principal competitors of our Single-family Guarantee segment have been Fannie Mae, Ginnie Mae (with
FHA/VA), and other financial institutions that retain or securitize mortgages, such as commercial and investment banks,
dealers, and thrift institutions. Since 2008, most of our non-GSE competitors have ceased their securitization business or
severely curtailed these activities relative to their previous levels. However, in recent periods, many of our non-GSE
competitors that ceased securitization activity have continued to originate or purchase single-family loans and began to hold
them on their balance sheets as investments rather than securitize them with the GSEs. We compete on the basis of price,
products, the structure of our securities, and service. Competition to acquire single-family mortgages can also be significantly
affected by changes in our credit standards.
The conservatorship, including direction provided to us by our Conservator, may affect our ability to compete. FHFA has
required that we and Fannie Mae adopt uniform approaches in a number of areas. For more information, see “RISK FACTORS
— Conservatorship and Related Matters — Competition from banking and non-banking companies, as well as efforts by FHFA
to reduce the GSEs' dominance in the marketplace, may harm our business."
Guarantee Fees and Contractual Arrangements
We enter into mortgage loan purchase volume agreements with many of our single-family customers that outline the
terms under which we agree to purchase loans from them. Some of these agreements, however, require the lenders to deliver to
us a minimum percentage of their total sales of conforming loans. These agreements include specified pricing schedules for our
management and guarantee fees that are negotiated at the outset of the contract. For the majority of the mortgages we purchase,
however, the management and guarantee fees are not specified contractually. Instead, we bid for some or all of the lender's
mortgage loan volume on a monthly basis at a management and guarantee fee rate that we specify.
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Our mortgage loan purchase volumes from individual customers can fluctuate significantly. If a mortgage lender fails to
meet its contractual commitment, we have a variety of contractual remedies, which may include the right to assess certain fees.
Our mortgage loan purchase contracts contain no penalty or liquidated damages clauses based on our inability to take delivery
of presented mortgage loans. However, if we were to fail to meet our contractual commitment, we could be deemed to be in
breach of our contract and could be liable for damages in a lawsuit. For agreements that include specified management and
guarantee fees, we can change such fees at our discretion, with notice. However, the lenders generally have the option to
terminate these agreements when changes to our fees occur, unless the fee changes are broad-based as defined in the
agreements.
We seek to issue guarantees with fee terms that we believe are commensurate with the risks assumed and that will, over
the long-term: (a) provide management and guarantee fee income that exceeds our anticipated credit-related and administrative
expenses on the underlying loans; and (b) provide a return on the capital that would be needed to support the related credit risk.
To compensate us for higher levels of risk in some mortgage products, we charge upfront delivery fees above the base
management and guarantee fee, which are calculated based on credit risk factors such as the mortgage product type, loan
purpose, LTV ratio and other loan or borrower characteristics. Historically, we have varied our guarantee and delivery fee
pricing for different customers, mortgage products, and mortgage or borrower underwriting characteristics based on our
assessment of credit risk and loss mitigation related to single-family loans, as well as other factors.
We implemented several increases in delivery fees in recent years that are applicable to single-family mortgage loans with
certain higher-risk loan characteristics. Certain of these fee increases do not apply to relief refinance mortgages with LTV ratios
greater than 80% and with settlement dates on or after July 1, 2011. We have established maximum limits on the amount of
delivery fees that are imposed for relief refinance mortgages, regardless of the LTV ratio of the loan.
We also implemented two across-the-board increases in guarantee fees in 2012. Effective April 1, 2012, at the direction of
FHFA, both we and Fannie Mae increased the guarantee fee on single-family residential mortgages sold to us by 10 basis
points. Under the Temporary Payroll Tax Cut Continuation Act of 2011, the proceeds from this increase are being remitted to
Treasury to fund the payroll tax cut. We pay these fees to Treasury on a quarterly basis and refer to this fee increase as the
legislated 10 basis point increase in guarantee fees. In the fourth quarter of 2012, both we and Fannie Mae implemented, at
FHFA’s direction, a further increase in guarantee fees on single-family mortgages of an average of 10 basis points.
In December 2013, FHFA announced a number of additional changes to our (and Fannie Mae's) guarantee fee rates that
were scheduled to become effective in March and April of 2014. In January 2014, FHFA announced that it was delaying the
implementation of these changes.
Securitization Activities
We primarily issue and guarantee PCs, and REMICs and Other Structured Securities. Except for our participation in the
NIBP, we have not completed an Other Guarantee Transaction in our Single-family Guarantee segment in several years. See
"Our Business — Overview of the Mortgage Securitization Process” for additional information about our securitization
activities.
Single-Family PC Trust Documents
We establish trusts for all of our issued PCs pursuant to our PC master trust agreement. In accordance with the terms of
our PC trust documents, we have the option, and in some instances the requirement, to remove specified mortgage loans from
the applicable trust. To remove these loans, we pay the trust an amount equal to the current UPB of the mortgage loan, less any
outstanding advances of principal that have been distributed to PC holders. Our payments to the trust are distributed to the PC
holders at the next scheduled payment date.
We have the option to remove a mortgage loan from a PC trust under certain circumstances to resolve an existing or
impending delinquency or default. Since 2010, our practice generally has been to remove substantially all single-family
mortgage loans that are 120 days or more delinquent from our issued PCs. From time to time, we reevaluate our practice of
removing delinquent loans from PCs and alter it if circumstances warrant.
We are required to remove a mortgage loan (or, in some cases, substitute a comparable mortgage loan) from a PC trust in
the following situations:
•
•
•
if a court of competent jurisdiction or a federal government agency, duly authorized to oversee or regulate our mortgage
purchase business, determines that our purchase of the mortgage was unauthorized and a cure is not practicable without
unreasonable effort or expense, or if such a court or government agency requires us to repurchase the mortgage;
if a borrower exercises its option to convert the interest rate from an adjustable-rate to a fixed-rate on a convertible
ARM; and
in the case of balloon-reset loans, shortly before the mortgage reaches its scheduled balloon-reset date.
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The To Be Announced Market
Because our fixed-rate single-family PCs are considered to be homogeneous, and are issued in high volume and are
highly liquid, they generally trade on a “generic” basis by PC coupon rate, also referred to as trading in the TBA market. A
TBA trade in Freddie Mac securities represents a contract for the purchase or sale of PCs to be delivered at a future date;
however, the specific PCs that will be delivered to fulfill the trade obligation, and thus the specific characteristics of the
mortgages underlying those PCs, are not known (i.e., “announced”) at the time of the trade, but only shortly before the trade is
settled. The use of the TBA market increases the liquidity of mortgage investments and improves the distribution of investment
capital available for residential mortgage financing, thereby helping us to accomplish our statutory mission. The Securities
Industry and Financial Markets Association publishes guidelines pertaining to the types of mortgages that are eligible for TBA
trades. Certain of our PC securities are not eligible for TBA trades, such as those backed by relief refinance mortgages with
LTV ratios greater than 105%.
Other Guarantee Commitments
In certain circumstances, we provide our guarantee of mortgage-related assets held by third parties, in exchange for a
management and guarantee fee, without our securitization of the related assets. For example, we provide long-term standby
commitments to certain of our single-family customers, which obligate us to purchase seriously delinquent loans that are
covered by those agreements.
Underwriting Requirements and Quality Control Standards
We use a process of delegated underwriting for the single-family mortgage loans we purchase or securitize. In this
process, our contracts with seller/servicers describe mortgage eligibility and underwriting standards, and the seller/servicers
represent and warrant to us that the mortgage loans sold to us meet these standards. In our contracts with individual seller/
servicers, we may waive or modify selected underwriting standards. Through our delegated underwriting process, mortgage
loans and the borrowers’ ability to repay the loans are evaluated using a number of critical risk characteristics, including, but
not limited to, the borrower’s credit score and credit history, the borrower’s monthly income relative to debt payments (or DTI),
the original LTV ratio, the type of mortgage product, the property type and market value, and the occupancy type of the loan.
Our single-family loans are generally underwritten with a requirement for a maximum original LTV ratio of 95% (excluding
jumbo conforming, cash-out refinance, and HARP mortgages). We prescribe maximum LTV ratio limits of 80% for cash-out
refinance loans and 90% for jumbo conforming mortgages.
Due to adverse market and economic conditions, and based in part on our reviews of the underwriting quality for loans
originated in 2005 through 2007, we implemented several credit limits since 2008. These credit limits are defined by specified
criteria such as the LTV ratio, credit score and DTI ratio. For documentation to substantiate assets and income, we require the
borrower to provide at least one paystub, one IRS Form W-2, and one current bank statement. FICO scores are the most
commonly used credit scores today. FICO scores are ranked on a scale of approximately 300 to 850 points. Statistically,
borrowers with higher credit scores are more likely to repay or have the ability to refinance than those with lower scores.
The majority of our single-family mortgage purchase volume is evaluated using automated underwriting software, either
our proprietary software (Loan Prospector), the seller/servicers’ own software, or Fannie Mae’s proprietary software. The
percentage of our single-family mortgage purchase volume (acquired under purchase volume agreements and excluding HARP
and other relief refinance loans) evaluated by the loan originator using Loan Prospector prior to being purchased by us was
45% and 55% during 2013 and 2012, respectively. Beginning in 2009, we added a number of additional credit standards for
loans evaluated by other underwriting software to improve the quality of loans we purchase that are evaluated using such other
software. In addition, we monitor the performance of loans delivered to us that were underwritten using underwriting software
other than Loan Prospector to determine whether the performance is in line with our risk tolerance.
As part of our quality control process, we review the underwriting documentation for certain loans we have purchased for
compliance with our standards. In recent years, we have worked actively with our seller/servicers to improve loan underwriting
quality. We give our seller/servicers an opportunity to appeal ineligible loan determinations in response to our request for the
repurchase of the loan. For the last two years, we have required certain of our larger seller/servicers to maintain ineligible loan
rates below a stated threshold (generally 5%), with financial consequences for non-compliance. In addition, for all of our
largest seller/servicers, we actively manage the current quality of loan originations by providing monthly communications
regarding loan defect rates and the causes of those defects as identified in our performing loan quality control sampling
reviews. If necessary, we work with seller/servicers to develop an appropriate plan of corrective action.
Through 2012, for loans with identified underwriting deficiencies, we required either immediate repurchase or allowed
performing loans to remain in our portfolio subject to our continued right to issue a repurchase request to the seller at a later
date. Depending on our evaluation of counterparty financial strength, certain sellers are eligible for repurchase alternatives,
including recourse and indemnification. In 2013, we entered into a number of agreements with our sellers to release certain
pools of loans from certain repurchase obligations associated with underwriting deficiencies in exchange for a one-time cash
payment.
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At the direction of FHFA, we and Fannie Mae revised our representation and warranty framework for conventional loans
purchased by the GSEs on or after January 1, 2013. Under this new framework, lenders are relieved of certain seller's
repurchase obligations for loans that meet specific payment requirements. This includes, subject to certain exclusions, loans
with 36 months (12 months for relief refinance mortgages) of consecutive, on-time payments after we purchase them.
Under the new framework, Freddie Mac and Fannie Mae, under the supervision of FHFA, have established consistent
standards for:
•
•
•
conducting quality control reviews earlier in the loan process, generally between 30 to 120 days after loan purchase;
requiring lenders to submit requested loan files for review within specified timelines;
evaluating loan files on a more comprehensive basis to ensure a focus on identifying significant deficiencies; and
• making available more transparent appeals processes for lenders to appeal repurchase requests.
Additionally, we use tools and available data to help us identify potentially defective loans prior to purchasing them. The
changes to the representation and warranty process are key elements of the seller/servicer contract harmonization project that
supported FHFA’s strategic plan for the Freddie Mac and Fannie Mae conservatorships announced in 2012.
In addition to representations and warranties for underwriting, our seller/servicers are required to service loans in
accordance with our guidelines. Similar to seller violations, we can require servicers to repurchase loans or provide alternative
remedies in the case of servicing violations. For certain servicing violations, we typically first issue a notice of defect and allow
the servicer a period of time to correct the problem. If the servicing violation is not corrected, we then may issue a repurchase
request. For breaches of servicing violations related to loans that have proceeded through foreclosure and REO sale or other
workouts (e.g. short sales), we will accept reimbursement for realized credit losses in lieu of repurchase.
For more information, see “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Single-
Family Mortgage Seller/Servicers.”
Credit Enhancements
Our charter requires that single-family mortgages with LTV ratios above 80% at the time of purchase be covered by
specified credit enhancements or participation interests. Primary mortgage insurance is the most prevalent type of credit
enhancement protecting our single-family credit guarantee portfolio, and is typically provided on a loan-level basis. Generally,
in order to file a claim under a primary mortgage insurance policy, the insured loan must be in default and the borrower’s
interest in the underlying property must have been extinguished, such as through a short sale or foreclosure action. The
mortgage insurer has a prescribed period of time within which to process a claim and make a determination as to its validity
and amount.
For some mortgage loans, we elect to share the default risk by transferring a portion of that risk to various third parties
through a variety of other credit enhancements. Other types of credit enhancements that we use are lender recourse (under
which we may require a lender to repurchase a loan upon default), indemnification agreements (under which we may require a
lender to reimburse us for credit losses realized on mortgages), collateral pledged by lenders, and subordinated security
structures. Lender recourse and indemnification agreements are typically entered into contemporaneously with the purchase of
a mortgage loan as an alternative to requiring primary mortgage insurance on the loan or in exchange for a lower guarantee fee
on the loan.
We executed three transactions during 2013 that provide us with partial credit protection on certain groups of loans in our
New single-family book. These transactions are intended to shift mortgage credit risk from us to private investors. The
transactions include two structured agency credit risk (STACR) debt note transactions in which we issued unsecured debt
securities that reduced our exposure to credit risk, as illustrated below:
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Risk Transfer - STACR® (Debt Issuance)
STACR debt notes allow us to transfer a mezzanine loss position on recently acquired single-family mortgage loans to
third parties that invest in the issued notes. In a STACR debt note transaction, we create a reference pool consisting of recently
acquired single-family mortgage loans. We then create a hypothetical securitization structure with notional credit risk
positions, or tranches (e.g., first loss, mezzanine, and senior). We issue STACR debt notes (which relate to the mezzanine loss
position) to investors. We are obligated to make payments of principal and interest on the STACR debt notes. The principal
balance of the STACR debt notes is reduced when certain specified credit events (such as a loan becoming 180 days
delinquent) occur on the loans in the reference pool. In turn, this may reduce the total amount of payments we ultimately make
on the STACR debt notes. However, principal reductions will first occur on the first loss position (which is retained by us) until
it is fully reduced before the STACR debt notes begin participating in reductions to the principal balances. The interest rate on
STACR debt is generally higher than on our other unsecured debt securities due to the potential for reductions to its principal
balance.
In 2013, we also executed a second type of risk transfer transaction in which we purchased an insurance policy on a
portion of the mezzanine loss position that was not issued in the first STACR debt transaction. Under this insurance policy, we
pay monthly premiums that are determined based on the outstanding balance of the STACR debt reference pool and we receive
compensation upon the occurrence of specified credit events (such as a loan becoming 180 days delinquent) up to an aggregate
limit determined in the contract.
Our use of certain types of credit enhancements to reduce our exposure to mortgage credit risk generally increases our
exposure to institutional credit risk. See “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk” for
information about our counterparties that provide credit enhancement on loans in our single-family credit guarantee portfolio,
including information about our mortgage loan insurers.
Single-Family Loan Workouts and the MHA Program
Loan workout activities are a key component of our loss mitigation strategy for managing and resolving troubled assets
and lowering credit losses. Our single-family loss mitigation strategy emphasizes early intervention by servicers in delinquent
mortgages and provides alternatives to foreclosure. Our single-family loss mitigation activities include providing our single-
family servicers with default management programs designed to help them manage non-performing loans more effectively and
to assist borrowers in maintaining home ownership where possible, or facilitate foreclosure alternatives when continued
homeownership is not an option. We require our single-family seller/servicers to first evaluate problem loans for a repayment or
forbearance plan before considering modification. If a borrower is not eligible for a modification, our seller/servicers pursue
other workout options before considering foreclosure.
Our loan workouts include:
•
Forbearance agreements, where reduced payments or no payments are required during a defined period, generally less
than one year. They provide additional time for the borrower to return to compliance with the original terms of the
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mortgage or to implement another loan workout. During 2013, the average time period granted for completed short-
term forbearance agreements was between two and three months.
• Repayment plans, which are contractual plans to make up past due amounts. These plans assist borrowers in returning
to compliance with the original terms of their mortgages. During 2013, the average time period granted for completed
repayment plans was between two and six months.
• Loan modifications, which may involve changing the terms of the loan, or adding outstanding indebtedness, such as
delinquent interest, to the UPB of the loan, or a combination of both. During 2013, we granted principal forbearance
but did not utilize principal forgiveness for our loan modifications. Principal forbearance is a change to a loan’s terms
to designate a portion of the principal as non-interest-bearing and non-amortizing. A borrower may only receive one
HAMP modification; however, a loan may generally be modified twice (although only once during a 12 month period)
under our standard loan modification program or once under our streamlined modification program. However, we
reserve the right to approve additional non-HAMP loan modifications to the same borrower, based on the borrower’s
individual facts and circumstances.
•
Short sale and deed in lieu of foreclosure transactions.
We participate in the MHA Program, which is designed to help in the housing recovery, promote liquidity and housing
affordability, expand foreclosure prevention efforts, and set market standards. Participation in the MHA Program is an integral
part of our mission of providing stability to the housing market. Through our participation in this program, we help borrowers
maintain home ownership. Some of the key initiatives of this program include HAMP and HARP, which are discussed below.
See “MD&A — RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-family Mortgage Credit Risk —
Single-Family Loan Workouts and the MHA Program" for additional information about our loan workout activities, as well as
HARP and our relief refinance mortgage initiative.
Home Affordable Modification Program
Under this program, we offer loan modifications to financially struggling homeowners with mortgages on their primary
residences that reduce the monthly principal and interest payments on their mortgages. HAMP requires that each borrower
complete a trial period during which the borrower will make monthly payments based on the estimated amount of the
modification payments. Trial periods are required to be at least three months. After the final trial-period payment is received by
our servicer, the borrower and the servicer will enter into the modification. HAMP is available for loans originated on or before
January 1, 2009. The program is scheduled to end with trial period plan effective dates on or before March 1, 2016 and
modification effective dates on or before September 1, 2016.
The guidelines for HAMP were revised effective June 1, 2010 to address certain underwriting issues experienced in the
beginning of the program. Since that date, we have experienced a significantly better modification completion rate under the
program. When a borrower’s trial period is canceled, the loan is considered for our other workout activities.
HAMP includes the following features:
• Under HAMP, the goal is to reduce the borrower’s monthly mortgage payments to 31% of gross monthly income,
which may be achieved through a combination of methods, including interest rate reductions, term extensions, and
principal forbearance. Although HAMP allows the use of principal reduction to achieve reduced payments for
borrowers, we have only used forbearance and have not used principal reduction in modifying our loans.
• Borrowers whose loans are modified through HAMP accrue monthly incentive payments (in the form of credits) that
are applied annually to reduce up to $1,000 of their principal per year, for five years, as long as they are making timely
payments under the modified loan terms. Servicers are paid incentive fees for each completed HAMP modification. We
bear the costs of borrower incentive payments and servicer incentive fees for our HAMP loans, without reimbursement
of such costs from Treasury.
We are the compliance agent for Treasury for certain foreclosure avoidance activities under HAMP by mortgage holders
other than Freddie Mac and Fannie Mae. Among other duties, as the program compliance agent, we conduct examinations and
review servicer compliance with the published requirements for the program.
Non-HAMP Modifications
Similar to HAMP, our non-HAMP standard loan modification initiative also requires a three-month trial period. The
standard modification offers eligible borrowers an extension of the loan’s term to 480 months and a fixed interest rate. Similar
to HAMP modifications, servicers are paid incentive fees for each completed non-HAMP modification. Unlike with HAMP
modifications, our non-HAMP standard modification does not provide for borrower incentive payments.
In March 2013, as part of the servicing alignment initiative, we announced a new streamlined modification initiative,
which provides an additional modification opportunity to certain borrowers who are at least 90 (but not more than 720) days
delinquent. Borrowers are not required to apply for assistance or provide income or hardship documentation. This modification
requires a three-month trial period and offers eligible borrowers the same mortgage terms as the non-HAMP standard
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modification. This initiative was implemented in July 2013 (with earlier adoption permitted), and is scheduled to end in
December 2015.
Relief Refinance Mortgage Initiative and the Home Affordable Refinance Program
Our relief refinance opportunities, including HARP (which is the portion of our relief refinance initiative for loans with
LTV ratios above 80%), are a significant part of our effort to keep families in their homes. Our relief refinance initiative began
in 2009 and is designed to provide eligible homeowners an opportunity to refinance their mortgage without obtaining new
mortgage insurance in excess of what was already in place. Our relief refinance initiative enables us to assist homeowners by
making their mortgage payments more affordable by employing one or more of the following changes: (a) a reduction in
payment; (b) a reduction in interest rate; (c) movement to a more stable mortgage product type (i.e., from an adjustable-rate
mortgage to a fixed-rate mortgage); or (d) a reduction in amortization term.
The relief refinance mortgage initiative, including HARP, originally permitted eligible borrowers with Freddie Mac
mortgages (that were originated on or before May 31, 2009) and LTVs up to 125% to refinance their mortgages. We
implemented a number of changes to HARP and the relief refinance mortgage initiative in late 2011 and during 2012. These
changes included: (a) removing the 125% LTV ratio ceiling for fixed-rate mortgages; and (b) relieving the lenders of certain
representations and warranties on the original mortgage being refinanced. In addition, in April 2013, we extended HARP to
December 31, 2015, at the direction of FHFA.
Relief refinance mortgages (including HARP loans) generally present higher risk to us than other refinance loans we have
purchased since 2009. However, relief refinance mortgages (including HARP loans) generally have performed better than
loans with similar characteristics remaining in our single-family credit guarantee portfolio that were originated prior to 2009.
For more information, see “MD&A — RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Loan
Workouts and the MHA Program — Relief Refinance Mortgage Initiative and Home Affordable Refinance Program.”
Servicing Alignment Initiative
Under the servicing alignment initiative, we made a number of changes to our single-family loan workout activities to
align with Fannie Mae, including the non-HAMP standard loan modification and the streamlined modification initiatives, a new
standard short sale process (implemented in late 2012) and a new deed in lieu of foreclosure process (implemented in early
2013). During 2013, we and Fannie Mae further aligned certain standards for servicing non-performing loans owned or
guaranteed by the companies pursuant to the FHFA-directed servicing alignment initiative. We believe that the servicing
alignment initiative will continue to: (a) change, among other things, the way servicers communicate and work with troubled
borrowers; (b) bring greater consistency and accountability to the servicing industry; and (c) help more distressed homeowners
avoid foreclosure. We have provided standards to our servicers under this initiative that require them to initiate earlier and more
frequent communication with delinquent borrowers, employ consistent requirements for collecting documents from borrowers,
and follow consistent timelines for responding to borrowers and for processing foreclosures.
Under these new servicing standards, we pay various incentives to servicers for completing workouts of problem loans.
We also assess compensatory fees if servicers do not achieve certain benchmarks with respect to servicing delinquent loans.
Incentive fees paid to servicers and compensatory fees received from servicers are recorded in other expenses and other
income, respectively, within our consolidated statements of comprehensive income. These incentives may result in our payment
of increased fees to our seller/servicers, the cost of which may be partially mitigated by the compensatory fees paid to us by our
servicers that do not perform as required.
For more information regarding credit risk, see “MD&A — RISK MANAGEMENT — Credit Risk,” “NOTE 4:
MORTGAGE LOANS AND LOAN LOSS RESERVES,” and “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-
PERFORMING LOANS.”
Investments Segment
The Investments segment reflects results from three primary activities: (a) managing the company’s mortgage-related
investments portfolio, excluding Multifamily segment investments; (b) managing the treasury function, including funding and
liquidity, for the overall company; and (c) managing interest-rate risk for the overall company.
Management of the company’s mortgage-related investments portfolio, excluding investments held by the Multifamily
segment, primarily consists of:
• Managing agency mortgage-related securities, including PCs and REMICs, issued by Freddie Mac, Fannie Mae, and
Ginnie Mae. Our activities may include outright purchases and sales, dollar roll transactions, and structuring existing
agency securities into REMICs and selling some or all of the tranches.
• Managing single-family performing loans obtained through our cash purchase program. We purchase loans from
lenders for cash and, in conjunction with the single-family business, securitize the majority of these loans into Freddie
Mac agency securities that may be sold to dealers or investors or retained in our mortgage investments portfolio as
agency securities.
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• Managing single-family re-performing loans and performing modified loans. This includes securitizing loans, and
could include selling loans or other disposition strategies in the future.
• Managing single-family delinquent loans along with the single-family business. This includes removing seriously
delinquent loans from PC pools and could include selling loans, securitizing loans, or other disposition strategies in
the future.
•
Reducing the overall balance of our holdings of non-agency mortgage-related securities through liquidations and
sales, subject to a variety of constraints, including market conditions.
Managing the treasury function, including funding and liquidity, for the overall company primarily consists of funding the
company’s investments in mortgage loans, mortgage-related securities and other assets and its business activities, primarily
through the issuance of short-term and long-term unsecured debt. We maintain a liquidity and contingency portfolio of cash and
non-mortgage investments for short-term liquidity management.
Managing interest-rate risk for the overall company primarily consists of using derivatives, primarily interest-rate swaps
and options, and unsecured debt to manage the interest rate exposure of the company’s mortgage-related investments portfolio,
including investments held by the Multifamily segment. In addition to hedging the interest-rate risk of this portfolio, the
Investments segment manages the buy-ups and float that are generated from the Single-family Guarantee segment after initial
loan acquisition.
Our Customers
Within our core business, our unsecured debt securities are initially purchased by dealers and redistributed to their
customers, including insurance companies, money managers, central banks, depository institutions, and pension funds. Our
customers under our mortgage loan cash purchase program are a variety of lenders, as discussed in “Single-Family Guarantee
Segment — Our Customers.”
Our Competition
Our competitors are firms that invest in mortgage-related assets, purchase mortgage loans, and issue corporate debt. As a
result, we have a variety of principal competitors, including Fannie Mae, REITs, supranationals (international institutions that
provide development financing for member countries), commercial and investment banks, dealers, thrift institutions, insurance
companies, and the FHLBs.
Market Presence and PC Support Activities
From time to time, we may undertake various activities in an effort to support: (a) our presence in the agency securities
market; or (b) the liquidity and price performance of our PCs relative to comparable Fannie Mae securities. These activities
may include the purchase and sale of agency securities, purchases of loans, and dollar roll transactions, as well as the issuance
of REMICs and Other Structured Securities. Depending upon market conditions, there may be substantial variability in any
period in the total amount of securities we purchase or sell. In some cases, purchasing or selling agency securities could
adversely impact our security performance. While we may employ a variety of strategies in an effort to support the liquidity
and price performance of our PCs and may consider additional strategies, any such strategies may fail or adversely affect our
business or we may cease such activities if deemed appropriate. For more information about our efforts to support the liquidity
and relative price performance for PCs, see “Our Business — Overview of the Mortgage Securitization Process.”
We incur costs in connection with our efforts to support our presence in the agency securities market or the liquidity and
price performance of our PCs, including engaging in transactions that yield less than our target rate of return. We may increase,
reduce or discontinue these or other related activities at any time, which could affect our market presence or the liquidity and
price performance of our PCs. For more information, 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. The profitability of our multifamily business could be adversely affected by a
significant decrease in demand for K Certificates.”
Multifamily Segment
Our Multifamily segment provides liquidity to the multifamily market and supports a consistent supply of affordable
rental housing by purchasing and securitizing mortgage loans secured by properties with five or more units. The Multifamily
segment reflects results from our investment (both purchases and sales), securitization, and guarantee activities in multifamily
mortgage loans and securities. Our primary business model is to purchase multifamily mortgage loans for aggregation and then
securitization through issuance of multifamily K Certificates. With this model, we utilize securitization to substantially reduce
our credit risk while providing liquidity to the multifamily market. Historically, we were primarily a buy and hold investor in
multifamily mortgage assets (both loans held for investment and investment securities, primarily CMBS), but while these
legacy investments continue to be significant, we have not focused on this investment strategy since 2009.
The multifamily property market is affected by local and regional economic factors, such as employment rates,
construction cycles, preferences for homeownership versus renting, and relative affordability of single-family home prices, all
of which influence the supply and demand for multifamily properties and pricing for apartment rentals. Our multifamily loan
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volume is largely sourced through established institutional channels where we are generally providing post-construction
financing to larger apartment project operators with established performance records.
Our underwriting decisions are largely based on the assessment of the property’s ability to provide rents that will generate
sufficient operating cash flows to support payment of debt service obligations (both principal and interest) as measured by the
expected DSCR and the loan amount relative to the value of the property as measured by the LTV ratio. Multifamily mortgages
generally are without recourse to the borrower (i.e., the borrower is not liable for any deficiency remaining after foreclosure
and sale of the property), except in the event of fraud or certain other specified types of default. Therefore, repayment of the
mortgage depends on the ability of the underlying property to generate cash flows sufficient to cover the related debt
obligations. That, in turn, depends on conditions in the local rental market, local and regional economic conditions, the physical
condition of the property, the quality of property management, and the level of operating expenses.
Our Customers
We acquire our multifamily mortgage loans from a network of approved seller/servicers. For 2013, our top two
multifamily sellers, CBRE Capital Markets, Inc. and Berkadia Commercial Mortgage, LLC, each accounted for more than
10%, and together accounted for approximately 36%, of our multifamily new business volume. Our top 10 multifamily lenders
represented an aggregate of approximately 77% of our multifamily purchase volume for 2013.
A significant portion of our multifamily mortgage loans are serviced by several of our large customers. See “MD&A —
RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Seller/Servicers” for additional information.
Our Competition
In the Multifamily segment, we compete on the basis of: (a) price; (b) products, including our use of certain securitization
structures; and (c) service. Our principal competitors are Fannie Mae, FHA, commercial and investment banks, CMBS
conduits, dealers, thrift institutions, and life insurance companies.
Underwriting Requirements and Quality Control Standards
Our process and standards for underwriting multifamily mortgages differ from those used for single-family mortgages as
we use a prior approval underwriting approach on loans we purchase or guarantee. With this approach, we maintain our credit
discipline by completing our own underwriting and credit review for each newly-originated multifamily loan prior to
purchasing it. This process includes review of third-party appraisals and cash flow analysis. Our underwriting standards focus
on loan quality measurement based, in part, on the LTV ratio and DSCR. The DSCR estimates a multifamily borrower’s ability
to service its mortgage obligation using the secured property’s cash flow, after deducting non-mortgage expenses from income.
The higher the DSCR, the more likely a multifamily borrower will be able to continue servicing its mortgage obligation. Our
standards for multifamily loans specify maximum original LTV ratio and minimum DSCR that vary based on the loan
characteristics, such as loan type (new acquisition or supplemental financing), loan term (intermediate or longer-term), and loan
features (interest-only or amortizing, fixed- or variable-rate). Our multifamily loans are generally underwritten with
requirements for a maximum original LTV ratio of 80% and a DSCR of greater than 1.25 (which for interest-only and partial
interest-only loans is based on an assumed monthly payment that reflects amortization of principal). In certain circumstances,
our standards for multifamily loans allow for certain types of loans to have an original LTV ratio over 80% and/or a DSCR of
less than 1.25, typically where this will serve our mission and contribute to achieving our affordable housing goals. In addition
to DSCR and LTV ratio, we consider other qualitative factors, such as borrower experience and the strength of the local market,
in the credit decision we make on each loan.
Multifamily seller/servicers make representations and warranties to us about the mortgage and about certain information
submitted to us in the underwriting process. We have the right to require that a seller/servicer repurchase a multifamily
mortgage for which there has been a breach of representation or warranty. However, because of our evaluation of underwriting
information for most multifamily properties prior to purchase, repurchases have been rare.
We generally require multifamily seller/servicers to service mortgage loans they have sold to us in order to mitigate
potential losses. This includes property monitoring tasks beyond those typically performed by single-family servicers. We are
the master servicer for loans in our multifamily mortgage portfolio, except those we securitize (i.e., K Certificates) since we
transfer the master servicing responsibilities to the trustees on behalf of the bondholders in accordance with the securitization
and trust documents. For unsecuritized loans over $1 million in our portfolio, servicers must generally submit an annual
assessment of the mortgaged property to us based on the servicer’s analysis of the property as well as the borrower’s quarterly
financial statements. In situations where a borrower or property is in distress, the frequency of communications with the
borrower may be increased. Because the activities of multifamily seller/servicers are an important part of our loss mitigation
process, we rate their performance regularly and may conduct on-site reviews of their servicing operations in an effort to
confirm compliance with our standards.
Loss Mitigation Activities
For loans for which we are the master servicer, if a borrower is in distress, we may offer a workout option to the borrower.
For example, we may modify the terms of a multifamily mortgage loan (e.g., providing a short-term loan extension of up to 12
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months), which gives the borrower an opportunity to bring the loan current and retain ownership of the property. These
arrangements are made with the expectation that we will recover our initial investment or minimize our losses. We do not enter
into these arrangements in situations where we believe we would experience a loss in the future that is greater than or equal to
the loss we would experience if we foreclosed on the property at the time of the agreement.
Securitization Activities
We primarily securitize mortgage loans through Other Guarantee Transactions (i.e., K Certificates) in our multifamily
business. To a lesser extent, we provide guarantees of the payment of principal and interest on tax-exempt multifamily pass-
through certificates backed by multifamily housing revenue bonds. These housing revenue bonds are collateralized by
mortgage loans on low- and moderate-income multifamily housing developments. We refer to these transactions as Other
Structured Securities. See “Our Business — Overview of the Mortgage Securitization Process” for additional information about
our securitization activities.
From time to time, we may undertake various activities in an effort to support the liquidity of our K Certificates. These
activities are similar to those described above in “Investments Segment — Market Presence and PC Support Activities.”
Other Guarantee Commitments
In certain circumstances, we provide our guarantee of mortgage-related assets held by third parties, in exchange for a
management and guarantee fee, without our securitization of the related assets. For example, we guarantee the payment of
principal and interest on certain tax-exempt multifamily housing revenue bonds secured by low- and moderate-income
multifamily mortgage loans. In addition, during 2010 and 2009, we issued guarantees under the TCLFP on securities backed by
HFA bonds as part of the HFA Initiative (certain of which are still outstanding). See “NOTE 2: CONSERVATORSHIP AND
RELATED MATTERS — Housing Finance Agency Initiative” for further information.
Conservatorship and Related Matters
We have been operating under conservatorship, with FHFA acting as our Conservator, since September 6, 2008. The
conservatorship and related matters have had a wide-ranging impact on us, including our management, business, financial
condition and results of operations.
In connection with our entry into conservatorship, we entered into the Purchase Agreement with Treasury, pursuant to
which we issued to Treasury both senior preferred stock and a warrant to purchase common stock. We refer to the Purchase
Agreement and the warrant as the “Treasury Agreements.” By their terms, the Purchase Agreement, senior preferred stock and
warrant will continue to exist even if we are released from the conservatorship. For a description of certain risks to our business
relating to the conservatorship and Treasury Agreements, see “RISK FACTORS — Conservatorship and Related Matters.”
On February 21, 2012, FHFA sent to Congress a strategic plan for the next phase of the conservatorships of Freddie Mac
and Fannie Mae. The plan outlined how FHFA, as Conservator, intends to guide us and Fannie Mae over the next few years,
and identified the strategic goals of (a) building a new infrastructure for the secondary mortgage market; (b) gradually
contracting Freddie Mac and Fannie Mae’s dominant presence in the marketplace while simplifying and shrinking their
operations; and (c) maintaining foreclosure prevention activities and credit availability for new and refinanced mortgages. In
March 2012, FHFA began instituting annual Conservatorship Scorecards that establish objectives, performance targets and
measures, and provide the implementation roadmap for FHFA’s strategic plan.
We receive substantial support from Treasury and FHFA, as our Conservator and regulator, and are dependent upon their
continued support in order to continue operating our business. This support includes our ability to access funds from Treasury
under the Purchase Agreement, which is critical to: (a) keeping us solvent; (b) allowing us to focus on our primary business
objectives under conservatorship; and (c) avoiding the appointment of a receiver by FHFA under statutory mandatory
receivership provisions. In recent years, the Federal Reserve has purchased significant amounts of mortgage-related securities
issued by us, Fannie Mae, and Ginnie Mae.
The conservatorship, the Purchase Agreement and the senior preferred stock and warrant issued to Treasury have
materially limited the rights of our common and preferred stockholders (other than Treasury as holder of the senior preferred
stock) and had a number of adverse effects on our common and preferred stockholders. See “RISK FACTORS —
Conservatorship and Related Matters — The conservatorship and investment by Treasury has had, and will continue to have, a
material adverse effect on our common and preferred stockholders.”
Supervision of Our Company During Conservatorship
Upon its appointment, FHFA, as Conservator, immediately succeeded to all rights, titles, powers and privileges of
Freddie Mac, and of any stockholder, officer or director of Freddie Mac with respect to Freddie Mac and its assets. Under
conservatorship, we have additional heightened supervision and direction from our regulator, FHFA, which is also acting as our
Conservator.
During the conservatorship, the Conservator has delegated certain authority to the Board of Directors to oversee, and to
management to conduct business operations so that the company can continue to operate in the ordinary course. The directors
serve on behalf of, and exercise authority as directed by, the Conservator. The Conservator retains the authority to withdraw or
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revise its delegations of authority at any time. The Conservator also retained certain significant authorities for itself, and did not
delegate them to the Board. For more information on limitations on the Board’s authority during conservatorship, see
“DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE — Authority of the Board and Board
Committees.”
Because the Conservator succeeded to the powers, including voting rights, of our stockholders, who therefore do not
currently have voting rights of their own, we have not held stockholders’ meetings (or prepared or provided proxy statements
for the solicitation of proxies) since we entered into conservatorship, nor do we expect to do so while we are under
conservatorship.
We describe the powers of our Conservator in further detail below under “Powers of the Conservator.”
Impact of Conservatorship and Related Actions on Our Business
We conduct our business subject to the direction of FHFA as our Conservator. While the conservatorship has benefited us
through, for example, improved access to the debt markets because of the support we receive from Treasury, 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.
The Conservator continues to determine, and direct the efforts of the Board of Directors and management to address, the
strategic direction for the company. While the Conservator has delegated certain authority to management to conduct business
operations, many management decisions are subject to review and approval by FHFA and Treasury. In addition, management
frequently receives directions from FHFA on various matters involving day-to-day operations.
Our current business objectives reflect direction we received from the Conservator (including the 2013 Conservatorship
Scorecard). At the direction of the Conservator, we have made changes to certain business practices that are designed to provide
support for the mortgage market in a manner that serves our public mission and other non-financial objectives but may not
contribute to our profitability. Certain of these objectives are intended to help homeowners and the mortgage market and may
help to mitigate future credit losses. However, some of our initiatives are expected to have an adverse impact on our near- and
long-term financial results. In 2013, the Conservator required us to contract our presence in specific ways in the mortgage
market and simplify our operations. The Conservator also stated that it is focusing on retaining value in the business operations
of Freddie Mac and Fannie Mae, overseeing remediation of identified weaknesses in corporate operations and risk
management, and ensuring that sound corporate governance principles are followed. Given the important role the
Administration and our Conservator have placed on Freddie Mac in addressing housing and mortgage market conditions and
our public mission, we may be required to take additional actions that could have a negative impact on our business, operating
results or financial condition, and thus could contribute to a need for additional draws under the Purchase Agreement.
For more information on the impact of conservatorship and our current business objectives, see "Executive Summary —
Our Primary Business Objectives," "RISK FACTORS — Conservatorship and Related Matters — We are under the control of
FHFA, and our business activities are subject to significant restrictions. We may be required to take actions that materially
adversely affect our business and financial results," and "NOTE 2: CONSERVATORSHIP AND RELATED MATTERS."
Limits on Investment Activity and Our Mortgage-Related Investments Portfolio
Our mortgage-related investments portfolio consists of agency securities, single-family non-agency mortgage-related
securities, CMBS, housing revenue bonds, and single-family and multifamily unsecuritized mortgage loans. Our ability to
acquire and sell mortgage assets is significantly constrained by limitations under the Purchase Agreement and those imposed by
FHFA. Under 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 could not exceed $553 billion as of December 31, 2013 and may not exceed $470 billion as of December
31, 2014. 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.
In addition, the 2013 Conservatorship Scorecard included a goal to reduce the December 31, 2012 mortgage-related
investments portfolio balance by selling 5%, or $15.7 billion in UPB, of mortgage-related assets (exclusive of agency
securities, multifamily loans classified as held-for-sale, and single-family loans purchased for cash). We sold $16.8 billion of
these assets and FHFA has stated that we met this scorecard goal for 2013. The reduction in the mortgage-related investments
portfolio will result in a decline in income from this portfolio over time.
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 2 — Mortgage-Related Investments Portfolio(1)
Investments segment — Mortgage investments portfolio
Single-family Guarantee segment — Single-family unsecuritized mortgage loans(2)
Multifamily segment — Mortgage investments portfolio
Total mortgage-related investments portfolio
December 31, 2013
December 31, 2012
$
$
(in millions)
331,071
$
37,726
92,227
461,024
$
375,924
53,333
128,287
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.
The UPB of our mortgage-related investments portfolio at December 31, 2013 was $461.0 billion, a decline of 17%
compared to $557.5 billion at December 31, 2012. The reduction in UPB resulted primarily from liquidations (i.e., principal
repayments) and is consistent with our efforts to reduce the size of our mortgage-related investments portfolio as described
above.
We evaluate the liquidity of the assets in our mortgage-related investments portfolio based on two categories: (a) single-
class and multiclass agency securities; and (b) assets that are less liquid than agency securities. Assets that we consider to be
less liquid than agency securities include unsecuritized performing single-family mortgage loans, multifamily mortgage loans,
CMBS, housing revenue bonds, 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 less liquid assets collectively represented approximately 60% of the UPB of the portfolio at
December 31, 2013, compared to 62% at December 31, 2012.
Powers of the Conservator
Under the GSE Act, the conservatorship provisions applicable to Freddie Mac are based generally on federal banking law.
As discussed below, FHFA has broad powers when acting as our Conservator. For more information on the GSE Act, see
“Regulation and Supervision.”
General Powers of the Conservator
Upon its appointment, the Conservator immediately succeeded to all rights, titles, powers and privileges of Freddie Mac,
and of any stockholder, officer or director of Freddie Mac with respect to Freddie Mac and its assets. The Conservator also
succeeded to the title to all books, records and assets of Freddie Mac held by any other legal custodian or third party.
Under the GSE Act, the Conservator may take any actions it determines are necessary to put us in a safe and solvent
condition and appropriate to carry on our business and preserve and conserve our assets and property. The Conservator’s
powers include the ability to transfer or sell any of our assets or liabilities (subject to certain limitations and post-transfer notice
provisions) without any approval, assignment of rights or consent of any party. The GSE Act, however, provides that mortgage
loans and mortgage-related assets that have been transferred to a Freddie Mac securitization trust must be held by the
Conservator for the beneficial owners of the trust and cannot be used to satisfy our general creditors.
We remain liable for all of our obligations relating to our outstanding debt and mortgage-related securities. FHFA has
stated that our obligations will be paid in the normal course of business during the conservatorship.
Security Interests Protected; Exercise of Rights Under Qualified Financial Contracts
The Conservator must recognize legally enforceable or perfected security interests, except where such an interest is taken
in contemplation of our insolvency or with the intent to hinder, delay or defraud us or our creditors. In addition, the GSE Act
provides that no person will be stayed or prohibited from exercising specified rights in connection with qualified financial
contracts, including termination or acceleration (other than solely by reason of, or incidental to, the appointment of the
Conservator), rights of offset, and rights under any security agreement or arrangement or other credit enhancement relating to
such contract. Such rights in connection with qualified financial contracts that arise solely by reason of, or incidental to, the
appointment of a receiver may be exercised only after: (a) 5:00 p.m. on the business day following the receiver’s appointment;
or (b) notice to such person that such contract has been transferred by the receiver to another person. The term qualified
financial contract means any securities contract, commodity contract, forward contract, repurchase agreement, swap agreement,
and any similar agreement as determined by FHFA by regulation, resolution or order.
Modification of Statutes of Limitations
Under the GSE Act, notwithstanding any provision of any contract, the statute of limitations with regard to any action
brought by the Conservator is: (a) for claims relating to a contract, the longer of six years or the applicable period under state
law; and (b) for tort claims, the longer of three years or the applicable period under state law, in each case, from the later of
September 6, 2008 or the date on which the cause of action accrues.
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Treatment of Breach of Contract Claims
Under the GSE Act, any final and unappealable judgment for monetary damages against the Conservator for breach of an
agreement executed or approved in writing by the Conservator will be paid as an administrative expense of the Conservator.
Attachment of Assets and Other Injunctive Relief
Under the GSE Act, the Conservator may seek to attach assets or obtain other injunctive relief without being required to
show that any injury, loss or damage is irreparable and immediate.
Treasury Agreements
Treasury entered into several agreements with us in connection with our entry into conservatorship, as described below.
Purchase Agreement, Senior Preferred Stock, and Common Stock Warrant
Purchase Agreement
On September 7, 2008, we, through FHFA, in its capacity as Conservator, and Treasury entered into the Purchase
Agreement. The Purchase Agreement was subsequently amended and restated on September 26, 2008, and further amended on
May 6, 2009, December 24, 2009, and August 17, 2012. Pursuant to the Purchase Agreement, on September 8, 2008 we issued
to Treasury: (a) one million shares of Variable Liquidation Preference Senior Preferred Stock (with an initial liquidation
preference of $1 billion), which we refer to as the senior preferred stock; and (b) a warrant to purchase, for a nominal price,
shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted
basis at the time the warrant is exercised, which we refer to as the warrant. The terms of the senior preferred stock and warrant
are summarized in separate sections below. We did not receive any cash proceeds from Treasury as a result of issuing the senior
preferred stock or the warrant. However, deficits in our net worth have made it necessary for us to make substantial draws on
Treasury’s funding commitment under the Purchase Agreement. As a result, the aggregate liquidation preference of the senior
preferred stock has increased from $1.0 billion as of September 8, 2008 to $72.3 billion at December 31, 2013. 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 senior preferred stock and warrant were issued to Treasury as an initial commitment fee in consideration of the initial
commitment from Treasury to provide up to $100 billion (subsequently increased to $200 billion and further increased as
necessary to accommodate any cumulative reduction in our net worth during 2010, 2011, and 2012) in funds to us under the
terms and conditions set forth in the Purchase Agreement. As of December 31, 2013, the amount of available funding
remaining under the Purchase Agreement was $140.5 billion. This amount will be reduced by any future draws.
In addition to the issuance of the senior preferred stock and warrant, we are required under the Purchase Agreement to
pay a quarterly commitment fee to Treasury. Under the Purchase Agreement, the fee is to be determined in an amount mutually
agreed to by us and Treasury with reference to the market value of Treasury’s funding commitment as then in effect. However,
as long as the net worth sweep dividend provisions described below under "Senior Preferred Stock" remain in form and content
substantially the same, no periodic commitment fee under the Purchase Agreement will be set, accrue or be payable. Treasury
had previously waived the fee for all prior quarters.
The Purchase Agreement provides that, on a quarterly basis, we generally may draw funds up to the amount, if any, by
which our total liabilities exceed our total assets, as reflected on our GAAP balance sheet for the applicable fiscal quarter
(referred to as the deficiency amount), provided that the aggregate amount funded under the Purchase Agreement may not
exceed Treasury’s commitment. The Purchase Agreement provides that the deficiency amount will be calculated differently if
we become subject to receivership or other liquidation process. The deficiency amount may be increased above the otherwise
applicable amount upon our mutual written agreement with Treasury. In addition, if the Director of FHFA determines that the
Director will be mandated by law to appoint a receiver for us unless our capital is increased by receiving funds under the
commitment in an amount up to the deficiency amount (subject to the maximum amount that may be funded under the
agreement), then FHFA, in its capacity as our Conservator, may request that Treasury provide funds to us in such amount. The
Purchase Agreement also provides that, if we have a deficiency amount as of the date of completion of the liquidation of our
assets, we may request funds from Treasury in an amount up to the deficiency amount (subject to the maximum amount that
may be funded under the agreement). Any amounts that we draw under the Purchase Agreement will be added to the liquidation
preference of the senior preferred stock. No additional shares of senior preferred stock are required to be issued under the
Purchase Agreement.
The Purchase Agreement provides that the Treasury’s funding commitment will terminate under any of the following
circumstances: (a) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding commitment at
that time; (b) the payment in full of, or reasonable provision for, all of our liabilities (whether or not contingent, including
mortgage guarantee obligations); and (c) the funding by Treasury of the maximum amount of the commitment under the
Purchase Agreement. In addition, Treasury may terminate its funding commitment and declare the Purchase Agreement null
and void if a court vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of the Conservator
or otherwise curtails the Conservator’s powers. Treasury may not terminate its funding commitment under the Purchase
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Agreement solely by reason of our being in conservatorship, receivership or other insolvency proceeding, or due to our
financial condition or any adverse change in our financial condition.
The Purchase Agreement provides that most provisions of the agreement may be waived or amended by mutual written
agreement of the parties; however, no waiver or amendment of the agreement is permitted that would decrease Treasury’s
aggregate funding commitment or add conditions to Treasury’s funding commitment if the waiver or amendment would
adversely affect in any material respect the holders of our debt securities or Freddie Mac mortgage guarantee obligations.
In the event of our default on payments with respect to our debt securities or Freddie Mac mortgage guarantee
obligations, if Treasury fails to perform its obligations under its funding commitment and if we and/or the Conservator are not
diligently pursuing remedies in respect of that failure, the holders of these debt securities or Freddie Mac mortgage guarantee
obligations may file a claim in the United States Court of Federal Claims for relief requiring Treasury to fund to us the lesser
of: (a) the amount necessary to cure the payment defaults on our debt and Freddie Mac mortgage guarantee obligations; and
(b) the lesser of: (i) the deficiency amount; and (ii) the maximum amount of the commitment less the aggregate amount of
funding previously provided under the commitment. Any payment that Treasury makes under those circumstances will be
treated for all purposes as a draw under the Purchase Agreement that will increase the liquidation preference of the senior
preferred stock.
The Purchase Agreement has an indefinite term and can terminate only in limited circumstances, which do not include the
end of the conservatorship. The Purchase Agreement therefore could continue after the conservatorship ends.
Senior Preferred Stock
Shares of the senior preferred stock have a par value of $1, and have a stated value and initial liquidation preference
equal to $1,000 per share. The liquidation preference of the senior preferred stock is subject to adjustment. Dividends that are
not paid in cash for any dividend period will accrue and be added to the liquidation preference of the senior preferred stock. In
addition, any amounts Treasury pays to us pursuant to its funding commitment under the Purchase Agreement (and any
quarterly commitment fees that are not paid in cash to Treasury nor waived by Treasury) will be added to the liquidation
preference of the senior preferred stock. As described below, we may make payments to reduce the liquidation preference of the
senior preferred stock in limited circumstances.
Treasury, as the holder of the senior preferred stock, is entitled to receive cumulative quarterly cash dividends, when, as
and if declared by our Board of Directors. Through December 31, 2012, the senior preferred stock accrued quarterly cumulative
dividends at a rate of 10% per year. However, under the August 2012 amendment to the Purchase Agreement, the fixed
dividend rate was replaced with a net worth sweep dividend beginning in the first quarter of 2013. Under the net worth sweep
dividend, our dividend obligation each quarter is the amount, if any, by which our Net Worth Amount at the end of the
immediately preceding fiscal quarter, less the applicable Capital Reserve Amount, exceeds zero. For more information
regarding our net worth sweep dividend, see “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS.”
The senior preferred stock is senior to our common stock and all other outstanding series of our preferred stock, as well
as any capital stock we issue in the future, as to both dividends and rights upon liquidation. The senior preferred stock provides
that we may not, at any time, declare or pay dividends on, make distributions with respect to, or redeem, purchase or acquire, or
make a liquidation payment with respect to, any common stock or other securities ranking junior to the senior preferred stock
unless: (a) full cumulative dividends on the outstanding senior preferred stock (including any unpaid dividends added to the
liquidation preference) have been declared and paid in cash; and (b) all amounts required to be paid with the net proceeds of
any issuance of capital stock for cash (as described in the following paragraph) have been paid in cash. Shares of the senior
preferred stock are not convertible. Shares of the senior preferred stock have no general or special voting rights, other than
those set forth in the certificate of designation for the senior preferred stock or otherwise required by law. The consent of
holders of at least two-thirds of all outstanding shares of senior preferred stock is generally required to amend the terms of the
senior preferred stock or to create any class or series of stock that ranks prior to or on parity with the senior preferred stock.
We are not permitted to redeem the senior preferred stock prior to the termination of Treasury’s funding commitment set
forth in the Purchase Agreement; however, we are permitted to pay down the liquidation preference of the outstanding shares of
senior preferred stock to the extent of: (a) accrued and unpaid dividends previously added to the liquidation preference and not
previously paid down; and (b) quarterly commitment fees previously added to the liquidation preference and not previously
paid down. In addition, if we issue any shares of capital stock for cash while the senior preferred stock is outstanding, the net
proceeds of the issuance must be used to pay down the liquidation preference of the senior preferred stock; however, the
liquidation preference of each share of senior preferred stock may not be paid down below $1,000 per share prior to the
termination of Treasury’s funding commitment. Following the termination of Treasury’s funding commitment, we may pay
down the liquidation preference of all outstanding shares of senior preferred stock at any time, in whole or in part. If, after
termination of Treasury’s funding commitment, we pay down the liquidation preference of each outstanding share of senior
preferred stock in full, the shares will be deemed to have been redeemed as of the payment date.
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Common Stock Warrant
The warrant gives Treasury the right to purchase shares of our common stock equal to 79.9% of the total number of
shares of our common stock outstanding on a fully diluted basis on the date of exercise. The warrant may be exercised in whole
or in part at any time on or before September 7, 2028.
Covenants Under Treasury Agreements
The Purchase Agreement and warrant contain covenants that significantly restrict our business activities. For example, as
a result of these covenants, we can no longer obtain additional equity financing (other than pursuant to the Purchase
Agreement) and we are limited in the amount and type of debt financing we may obtain.
The Purchase Agreement provides that, until the senior preferred stock is repaid or redeemed in full, we may not, without
the prior written consent of Treasury:
•
•
•
•
•
•
•
•
declare or pay any dividend (preferred or otherwise) or make any other distribution with respect to any Freddie Mac
equity securities (other than with respect to the senior preferred stock or warrant);
redeem, purchase, retire or otherwise acquire any Freddie Mac equity securities (other than the senior preferred stock
or warrant);
sell or issue any Freddie Mac equity securities (other than the senior preferred stock, the warrant and the common
stock issuable upon exercise of the warrant and other than as required by the terms of any binding agreement in effect
on the date of the Purchase Agreement);
terminate the conservatorship (other than in connection with a receivership);
sell, transfer, lease or otherwise dispose of any assets, other than dispositions for fair market value: (a) to a limited life
regulated entity (in the context of a receivership); (b) of assets and properties in the ordinary course of business,
consistent with past practice; (c) of assets and properties having fair market value individually or in aggregate less
than $250 million in one transaction or a series of related transactions; (d) in connection with our liquidation by a
receiver; (e) of cash or cash equivalents for cash or cash equivalents; or (f) to the extent necessary to comply with the
covenant described below relating to the reduction of our mortgage-related investments portfolio;
issue any subordinated debt;
enter into a corporate reorganization, recapitalization, merger, acquisition or similar event; or
engage in transactions with affiliates unless the transaction is: (a) pursuant to the Purchase Agreement, the senior
preferred stock or the warrant; (b) upon arm’s length terms; or (c) a transaction undertaken in the ordinary course or
pursuant to a contractual obligation or customary employment arrangement in existence on the date of the Purchase
Agreement.
These covenants generally also apply to our subsidiaries.
The Purchase Agreement also requires us to reduce the amount of mortgage assets we own, as described in "Limits on
Investment Activity and our Mortgage-Related Investments Portfolio." Under the Purchase Agreement, we also may not incur
indebtedness that would result in the par value of our aggregate indebtedness exceeding 120% of the amount of mortgage assets
we are permitted to own on December 31 of the immediately preceding calendar year. The mortgage asset and indebtedness
limitations are determined without giving effect to the changes to the accounting guidance for transfers of financial assets and
consolidation of VIEs, under which we consolidated our single-family PC trusts and certain of our Other Guarantee
Transactions in our financial statements as of January 1, 2010.
In addition, the Purchase Agreement provides that we may not enter into any new compensation arrangements or increase
amounts or benefits payable under existing compensation arrangements of any named executive officer or other executive
officer (as such terms are defined by SEC rules) without the consent of the Director of FHFA, in consultation with the Secretary
of the Treasury.
The Purchase Agreement also provides that, on an annual basis, we are required to deliver a risk management plan to
Treasury setting out our strategy for reducing our enterprise-wide risk profile and the actions we will take to reduce the
financial and operational risk associated with each of our reportable business segments.
The warrant we issued to Treasury includes, among others, the covenant that we may not, without the prior written
consent of Treasury, permit any of our significant subsidiaries to issue capital stock or equity securities, or securities
convertible into or exchangeable for such securities, or any stock appreciation rights or other profit participation rights to any
person other than Freddie Mac or its wholly-owned subsidiaries.
Regulation and Supervision
In addition to our oversight by FHFA as our Conservator, we are subject to regulation and oversight by FHFA under our
charter and the GSE Act, which was modified substantially by the Reform Act. We are also subject to certain regulation by
other government agencies.
Federal Housing Finance Agency
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FHFA is an independent agency of the federal government responsible for oversight of the operations of Freddie Mac,
Fannie Mae and the FHLBs. In the discussion below, we refer to Freddie Mac and Fannie Mae as the “enterprises.”
Under the GSE Act, FHFA has safety and soundness authority that is comparable to, and in some respects, broader than
that of the federal banking agencies.
FHFA is responsible for implementing the various provisions of the GSE Act that were added by the Reform Act. In
general, we remain subject to existing regulations, orders and determinations until new ones are issued or made.
Receivership
Under the GSE Act, FHFA must place us into receivership if FHFA determines in writing that our assets are less than our
obligations for a period of 60 days. FHFA notified us that the measurement period for any mandatory receivership
determination with respect to our assets and obligations would commence no earlier than the SEC public filing deadline for our
quarterly or annual financial statements and would continue for 60 calendar days after that date. FHFA also advised us that, if,
during that 60-day period, we receive funds from Treasury in an amount at least equal to the deficiency amount under the
Purchase Agreement, the Director of FHFA will not make a mandatory receivership determination.
In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other reasons,
including critical undercapitalization.
On June 20, 2011, FHFA published a final rule that addresses conservatorship and receivership operations of Freddie
Mac, Fannie Mae and the FHLBs. The final rule establishes a framework to be used by FHFA when acting as conservator or
receiver, supplementing and clarifying statutory authorities. Among other provisions, the final rule indicates that FHFA will not
permit payment of securities litigation claims during conservatorship and that claims by current or former shareholders arising
as a result of their status as shareholders would receive the lowest priority of claim in receivership. In addition, the final rule
indicates that administrative expenses of the conservatorship will also be deemed to be administrative expenses of a subsequent
receivership and that capital distributions may not be made during conservatorship, except as specified in the final rule.
Capital Standards
FHFA suspended capital classification of us during conservatorship in light of the Purchase Agreement. The existing
statutory and FHFA-directed regulatory capital requirements are not binding during the conservatorship. We continue to
provide our submission to FHFA on minimum capital. These capital standards are described in "NOTE 18: REGULATORY
CAPITAL." Under the GSE Act, FHFA has the authority to increase our minimum capital levels or to establish additional
capital and reserve requirements for particular purposes.
In September 2013, FHFA released a final rule that will require FHFA-regulated entities to conduct annual stress tests to
determine whether such companies have sufficient capital to absorb losses as a result of adverse economic conditions. Under
the rule, Freddie Mac is required to: (a) conduct annual stress tests using scenarios specified by FHFA that reflect a minimum of
three sets of economic and financial conditions (baseline, adverse, and severely adverse); and (b) beginning in 2014, publicly
disclose the results of the stress test under the “severely adverse” scenario.
For additional information, see “MD&A — LIQUIDITY AND CAPITAL RESOURCES — Capital Resources, the
Purchase Agreement, and the Dividend Obligation on the Senior Preferred Stock” and “RISK FACTORS — Legal and
Regulatory Risks.”
New Products
The GSE Act requires the enterprises to obtain the approval of FHFA before initially offering any product (including new
mortgage products), subject to certain exceptions. The GSE Act also requires us to provide FHFA with written notice of any
new activity that we consider not to be a product. While FHFA has published an interim final rule on prior approval of new
products, it has stated that permitting us to engage in new products is inconsistent with the goals of conservatorship and
instructed us not to submit such requests under the interim final rule. This could have an adverse effect on our business and
profitability in future periods.
Affordable Housing Goals
We are subject to annual affordable housing goals. In light of these housing goals, we may make adjustments to our
mortgage loan sourcing and purchase strategies, which could potentially increase our credit losses. These strategies could
include entering into some purchase and securitization transactions with lower expected economic returns than our typical
transactions. We have at times relaxed some of our underwriting criteria to obtain goal-qualifying mortgage loans and made
additional investments in higher risk mortgage loan products that we believed were more likely to serve the borrowers targeted
by the goals, but have not done so to a significant extent since we entered into conservatorship. In February 2010, the then
Acting Director of FHFA stated that FHFA does not intend for us to undertake uneconomic or high risk activities in support of
the housing goals nor does it intend for the state of conservatorship to be a justification for withdrawing our support from these
market segments.
If the Director of FHFA finds that we failed to meet a housing goal and that achievement of the housing goal was
feasible, the GSE Act states that the Director may require the submission of a housing plan with respect to the housing goal for
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approval by the Director. The housing plan must describe the actions we would take to achieve the unmet goal in the future.
FHFA has the authority to take actions against us, including issuing a cease and desist order or assessing civil money penalties,
if we: (a) fail to submit a required housing plan or fail to make a good faith effort to comply with a plan approved by FHFA; or
(b) fail to submit certain data relating to our mortgage purchases, information or reports as required by law. See “RISK
FACTORS — Legal and Regulatory Risks — We may make certain changes to our business in an attempt to meet our housing
goals and subgoals.”
FHFA has established four goals and one subgoal for single-family owner-occupied housing, one multifamily special
affordable housing goal, and one multifamily special affordable housing subgoal. Three of the single-family housing goals and
the subgoal target purchase money mortgages for: (a) low-income families; (b) very low-income families; and/or (c) families
that reside in low-income areas. The single-family housing goals also include one that targets refinancing mortgages for low-
income families. The multifamily special affordable housing goal targets multifamily rental housing affordable to low-income
families. The multifamily special affordable housing subgoal targets multifamily rental housing affordable to very low-income
families.
The single-family goals are expressed as a percentage of the total number of eligible mortgages underlying our total
single-family mortgage purchases. The multifamily goals are expressed in terms of minimum numbers of units financed.
The single-family goals include: (a) an assessment of performance as compared to the actual share of the market that
meets the criteria for each goal; and (b) a benchmark level to measure performance. Where our performance on a single-family
goal falls short of the benchmark for a goal, we still could achieve the goal if our performance meets or exceeds the actual
share of the market that meets the criteria for the goal for that year. For example, if the actual market share of mortgages to
low-income families relative to all mortgages originated to finance owner-occupied single-family properties is lower than the
23% benchmark rate, we would still satisfy this goal if we achieve that actual market percentage.
Affordable Housing Goals for 2013 and 2014
FHFA’s affordable housing goals for Freddie Mac for 2013 and 2014 are set forth below. FHFA has not yet issued the
affordable housing goals for 2015.
Table 3 — Affordable Housing Goals for 2013 and 2014
Single-family purchase money goals (benchmark levels):
Low-income
Very low-income
Low-income areas(1)
Low-income areas subgoal
Single-family refinance low-income goal (benchmark level)
Multifamily low-income goal (in units)
Multifamily low-income subgoal (in units)
Goals for 2013
Goals for 2014
23%
7%
21%
11%
20%
215,000
50,000
23%
7%
TBD
11%
20%
200,000
40,000
(1) FHFA will annually set the benchmark level for the low-income areas goal based on the benchmark level for the low-income areas subgoal, plus an
adjustment factor reflecting the additional incremental share of mortgages for low- and moderate-income families in designated disaster areas in the three
most recent years for which such data are available. For 2013, FHFA set the benchmark level at 21%.
We expect to report our performance with respect to the 2013 affordable housing goals in March 2014. At this time, based
on preliminary information, we believe we met the single-family purchase money low-income areas subgoal, the single-family
refinance low-income goal and both multifamily goals for 2013, but believe we failed to meet the FHFA benchmark level for
the other single-family goals. In such cases, FHFA regulations allow us to achieve a goal if our qualifying share matches that of
the market, as measured by the Home Mortgage Disclosure Act. Because the Home Mortgage Disclosure Act data for 2013 will
not be released until September 2014, FHFA will not be able to make a final determination on our performance until that time.
If we fail to meet both the FHFA benchmark level and the market level, we may enter into discussions with FHFA concerning
whether these goals were infeasible under the terms of the GSE Act, due to market and economic conditions and our financial
condition. We view the purchase of mortgage loans that are eligible to count toward our affordable housing goals to be a
principal part of our mission and business and we are committed to facilitating the financing of affordable housing for low- and
moderate-income families.
Duty to Serve Underserved Markets
The GSE Act establishes a duty for Freddie Mac and Fannie Mae to serve three underserved markets (manufactured
housing, affordable housing preservation and rural areas) by developing loan products and flexible underwriting guidelines to
facilitate a secondary market for mortgages for very low-, low- and moderate-income families in those markets. Effective for
2010 and subsequent years, FHFA is required to establish a process for annually: (a) evaluating whether and to what extent
Freddie Mac and Fannie Mae have complied with the duty to serve underserved markets; and (b) rating the extent of
compliance.
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In June 2010, FHFA published in the Federal Register a proposed rule regarding the duty of Freddie Mac and Fannie Mae
to serve the underserved markets. FHFA has not yet issued a final rule. We cannot predict the content of any such final rule, or
the impact that the final rule will have on our business or operations.
Affordable Housing Goals and Results for 2011 and 2012
In October 2013, FHFA informed us that it had reviewed our performance with respect to the affordable housing goals for
2012, and determined that we achieved all of our housing goals.
Our housing goals and results for 2011 and 2012 are set forth in the table below.
Table 4 — Affordable Housing Goals and Results for 2011 and 2012
Single -family purchase money goals
(benchmark levels):
Low-income
Very low-income
Low-income areas(3)
Low-income areas subgoal
Single -family refinance low-income goal
(benchmark level)
Multifamily low-income goal (in units)
Multifamily low-income subgoal (in units)
Goals for
2011
Market Level
for 2011 (1)
Results for
2011 (2)
Goals for
2012
Market Level
for 2012 (1)
Results for
2012
27%
8%
24%
13%
21%
161,250
21,000
26.5%
8.0%
22.0%
11.4%
21.5%
N/A
N/A
23.3%
6.6%
19.2%
9.2%
23.4%
23%
7%
20%
11%
20%
229,001
35,471
225,000
59,000
26.6%
7.7%
20.5%
13.6%
22.3%
N/A
N/A
24.4%
7.1%
20.6%
11.4%
22.4%
298,529
60,084
(1) Determined by FHFA based on its analysis of market data.
(2) We failed to achieve any of the four single-family purchase money goals for 2011. FHFA did not require us to submit a housing plan for the goals that we
did not achieve in 2011.
(3) FHFA annually sets the benchmark level for the low-income areas goal based on the benchmark level for the low-income areas subgoal, plus an
adjustment factor reflecting the additional incremental share of mortgages for low- and moderate-income families in designated disaster areas in the three
most recent years for which such data are available. For 2011 and 2012, FHFA set the benchmark level for the low-income areas goal at 24% and 20%,
respectively.
Affordable Housing Allocations
The GSE Act requires us to set aside in each fiscal year an amount equal to 4.2 basis points (or 0.042%) of each dollar of
the UPB of total new business purchases, and allocate or transfer such amount to: (a) HUD to fund a Housing Trust Fund
established and managed by HUD; and (b) a Capital Magnet Fund established and managed by Treasury. FHFA has the
authority to suspend our allocation upon finding that the payment would contribute to our financial instability, cause us to be
classified as undercapitalized or prevent us from successfully completing a capital restoration plan. In November 2008, FHFA
advised us that it has suspended the requirement to set aside or allocate funds for the Housing Trust Fund and the Capital
Magnet Fund until further notice. For more information, see "LEGAL PROCEEDINGS."
Prudential Management and Operations Standards
FHFA has established prudential standards relating to the management and operations of Freddie Mac, Fannie Mae, and
the FHLBs. The standards address a number of business, controls, and risk management areas. The standards specify the
possible consequences for any entity that fails to meet any of the standards or otherwise fails to comply (including submission
of a corrective plan, limits on asset growth, increases in capital, limits on dividends and stock redemptions or repurchases, a
minimum level of retained earnings or any other action that the FHFA Director determines will contribute to bringing the entity
into compliance with the standards). In addition, a failure to meet any standard also may constitute an unsafe or unsound
practice, which may form the basis for FHFA initiating an administrative enforcement action.
Portfolio Activities
The GSE Act provides FHFA with power to regulate the size and content of our mortgage-related investments portfolio.
The GSE Act requires FHFA to establish, by regulation, criteria governing portfolio holdings to ensure the holdings are backed
by sufficient capital and consistent with the enterprises’ mission and safe and sound operations. In establishing these criteria,
FHFA must consider the ability of the enterprises to provide a liquid secondary market through securitization activities, the
portfolio holdings in relation to the mortgage market and the enterprises’ compliance with the prudential management and
operations standards prescribed by FHFA.
On December 28, 2010, FHFA issued a final rule adopting the portfolio holdings criteria established in the Purchase
Agreement, as it may be amended from time to time, for so long as we remain subject to the Purchase Agreement.
See “Conservatorship and Related Matters — Limits on Investment Activity and Our Mortgage-Related Investments
Portfolio” for additional information on restrictions on our portfolio activities.
Anti-Predatory Lending
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Predatory lending practices are in direct opposition to our mission, goals, and practices. We instituted anti-predatory
lending policies intended to prevent the purchase or assignment of mortgage loans with unacceptable terms or conditions or
resulting from unacceptable practices. These policies include processes related to the origination, delivery and validation of
loans sold to us. In addition to the purchase policies we instituted, we promote consumer education and financial literacy efforts
to help borrowers avoid abusive lending practices and we provide competitive mortgage products to reputable mortgage
originators so that borrowers have a greater choice of financing options.
Subordinated Debt
FHFA directed us to continue to make interest and principal payments on our subordinated debt, even if we fail to
maintain required capital levels. As a result, the terms of any of our subordinated debt that provide for us to defer payments of
interest under certain circumstances, including our failure to maintain specified capital levels, are no longer applicable. In
addition, the requirements in the agreement we entered into with FHFA in September 2005 with respect to issuance,
maintenance, and reporting and disclosure of Freddie Mac subordinated debt have been suspended during the term of
conservatorship and thereafter until directed otherwise. See “NOTE 18: REGULATORY CAPITAL — Subordinated Debt
Commitment” for more information regarding subordinated debt.
Department of Housing and Urban Development
HUD has regulatory authority over Freddie Mac with respect to fair lending. Our mortgage purchase activities are subject
to federal anti-discrimination laws. In addition, the GSE Act prohibits discriminatory practices in our mortgage purchase
activities, requires us to submit data to HUD to assist in its fair lending investigations of primary market lenders with which we
do business and requires us to undertake remedial actions against such lenders found to have engaged in discriminatory lending
practices. In addition, HUD periodically reviews and comments on our underwriting and appraisal guidelines for consistency
with the Fair Housing Act and the anti-discrimination provisions of the GSE Act.
Department of the Treasury
Treasury has significant rights and powers with respect to our company as a result of the Purchase Agreement. In
addition, under our charter, the Secretary of the Treasury has approval authority over our issuances of notes, debentures and
substantially identical types of unsecured debt obligations (including the interest rates and maturities of these securities), as
well as new types of mortgage-related securities issued subsequent to the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989. The Secretary of the Treasury has performed this debt securities approval function by
coordinating GSE debt offerings with Treasury funding activities. In addition, our charter authorizes Treasury to purchase
Freddie Mac debt obligations not exceeding $2.25 billion in aggregate principal amount at any time.
Securities and Exchange Commission
We are subject to the reporting requirements applicable to registrants under the Exchange Act, including the requirement
to file with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Although
our common stock is required to be registered under the Exchange Act, we continue to be exempt from certain federal securities
law requirements, including the following:
•
Securities we issue or guarantee are “exempted securities” under the Securities Act and may be sold without
registration under the Securities Act;
• We are excluded from the definitions of “government securities broker” and “government securities dealer” under the
Exchange Act;
• The Trust Indenture Act of 1939 does not apply to securities issued by us; and
• We are exempt from the Investment Company Act of 1940 and the Investment Advisers Act of 1940, as we are an
“agency, authority or instrumentality” of the U.S. for purposes of such Acts.
Legislative and Regulatory Developments
We discuss certain significant legislative and regulatory developments below. For more information regarding these and
other legislative and regulatory developments that could impact our business, see “RISK FACTORS — Conservatorship and
Related Matters” and “— Legal and Regulatory Risks.”
Legislation Related to Freddie Mac and its Future Status
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. Congress continues to hold hearings and consider legislation on the future state of Freddie Mac,
Fannie Mae and the housing finance system. Recent developments are discussed below.
In June 2013, the “Let the GSEs Pay Us Back Act of 2013” was introduced in the House of Representatives. The bill
would amend Freddie Mac and Fannie Mae’s Purchase Agreements with Treasury to:
•
terminate the dividends on the senior preferred stock;
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•
•
treat the funds received by a GSE from Treasury under the Purchase Agreement (including funds received prior to the
amendment) as a fully amortizing loan from Treasury to the GSE with a maturity of 30 years and an annual interest
rate of 5%; and
credit the dividends previously paid by a GSE on the senior preferred stock as payments of principal and interest under
such loan.
In June 2013, the “Housing Finance Reform and Taxpayer Protection Act of 2013” was introduced in the Senate with bi-
partisan co-sponsors. The bill would substantially alter the current housing finance system. Among other things, the bill would:
•
•
•
•
require the wind down of Freddie Mac and Fannie Mae. The companies’ charters would be repealed within five years
of enactment (except for charter provisions relating to the rights of holders of the companies’ outstanding debt and
mortgage-backed security obligations), and the companies would then not have authority to conduct new business. A
full faith and credit U.S. government guarantee would be extended to the then outstanding debt obligations of the
companies and mortgage-backed securities guaranteed by the companies;
require that any proceeds from the wind down go first to the holders of Freddie Mac's and Fannie Mae’s senior
preferred stock, then preferred shareholders and then common shareholders, with the amount of proceeds to be paid to
these shareholders to be determined by the U.S. government;
set certain requirements relating to the disposition of the functions, activities, infrastructure and property of Freddie
Mac and Fannie Mae; and
decrease conforming loan limits in high cost areas and require the gradual reduction of Freddie Mac's and Fannie
Mae’s retained mortgage portfolios.
In July 2013, the “Protect American Taxpayers and Homeowners Act of 2013” was approved by the House Financial
Services Committee. The bill would also substantially alter the current housing finance system. Among other things, the bill
would:
•
•
require FHFA to place Freddie Mac and Fannie Mae into receivership within five years of enactment (or potentially
longer, in certain circumstances). The companies’ charters would be repealed at that time (except for charter
provisions relating to the rights of holders of the companies’ outstanding debt and mortgage-backed security
obligations), and the companies would then not have authority to conduct new business. A full faith and credit U.S.
government guarantee would be extended to the then outstanding debt obligations of the companies and mortgage-
backed securities guaranteed by the companies; and
place certain restrictions on Freddie Mac's and Fannie Mae’s activities prior to being placed into receivership,
including decreasing conforming loan limits in high cost areas, gradually reducing the size of Freddie Mac's and
Fannie Mae’s retained mortgage portfolios to $250 billion each, and requiring the companies to enter into additional
risk sharing transactions to cover at least 10% of their new single-family business each year. Under the bill, the
companies would likely be required to increase their guarantee fees.
In addition, bills were introduced in the Senate in 2013 that focus on preventing the use of Freddie Mac and Fannie Mae
guarantee fees to offset government spending. For example, the Jumpstart GSE Reform Act would bar any increase in
guarantee fees charged by Freddie Mac and Fannie Mae to offset government spending, and would prohibit the sale of the
senior preferred stock by Treasury without Congressional approval and other structural reform. In addition, the Senate passed a
2014 budget resolution that established certain procedural requirements designed to make it more difficult to use Freddie Mac
and Fannie Mae guarantee fees to offset other government spending.
We anticipate that other bills related to Freddie Mac, Fannie Mae and the future of the mortgage finance system will be
introduced. We cannot predict whether any of such bills will be enacted.
For more information, see “RISK FACTORS — Conservatorship and Related Matters — The future status and role of
Freddie Mac are uncertain.”
FHFA’s Strategic Plan for Freddie Mac and Fannie Mae Conservatorships
On February 21, 2012, FHFA sent to Congress a strategic plan for the next phase of the conservatorships of Freddie Mac
and Fannie Mae. The plan set forth objectives and steps FHFA is taking or will take to meet FHFA’s obligations as Conservator.
In March 2012, FHFA began instituting annual Conservatorship Scorecards for us and Fannie Mae that establish objectives,
performance targets and measures, and provide the implementation roadmap for the strategic plan.
FHFA’s plan provides lawmakers and the public with an outline of how FHFA as Conservator intends to guide Freddie
Mac and Fannie Mae over the next few years, and identifies three strategic goals:
• Build. Build a new infrastructure for the secondary mortgage market.
• Contract. Gradually contract Freddie Mac's and Fannie Mae’s dominant presence in the marketplace while
simplifying and shrinking their operations.
• Maintain. Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.
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For information about the 2013 Conservatorship Scorecard, and our performance with respect to it, see “EXECUTIVE
COMPENSATION — Compensation Discussion and Analysis.”
Administration Report on Reforming the U.S. Housing Finance Market
On February 11, 2011, the Administration delivered a report to Congress that lays out the Administration’s plan to reform
the U.S. housing finance market, including options for structuring the government’s long-term role in a housing finance system
in which the private sector is the dominant provider of mortgage credit. The report recommends winding down Freddie Mac
and Fannie Mae, stating that the Administration will work with FHFA to determine the best way to responsibly reduce the role
of Freddie Mac and Fannie Mae in the market and ultimately wind down both institutions. The report states that these efforts
must be undertaken at a deliberate pace, which takes into account the impact that these changes will have on borrowers and the
housing market.
The report states that the government is committed to ensuring that Freddie Mac and Fannie Mae have sufficient capital
to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations, and further
states that the Administration will not pursue policies or reforms in a way that would impair the ability of Freddie Mac and
Fannie Mae to honor their obligations. The report states the Administration’s belief that under the companies’ senior preferred
stock purchase agreements with Treasury, there is sufficient funding to ensure the orderly and deliberate wind down of Freddie
Mac and Fannie Mae, as described in the Administration’s plan.
Dodd-Frank Act
The Dodd-Frank Act, which was signed into law on July 21, 2010, significantly changed the regulation of the financial
services industry, including by creating new standards related to regulatory oversight of systemically important financial
companies, derivatives, capital requirements, asset-backed securitization, mortgage underwriting, and consumer financial
protection. The Dodd-Frank Act has directly affected and will continue to directly affect the business and operations of Freddie
Mac by subjecting us to new and additional regulatory oversight and standards, including with respect to our activities and
products. We may also be affected by provisions of the Dodd-Frank Act and implementing regulations that affect the activities
of other financial services entities that are our customers and counterparties.
Implementation of the Dodd-Frank Act is being accomplished through numerous rulemakings, some of which are still in
process, and some of which only recently became effective. Accordingly, it is difficult to assess fully the impact of the Dodd-
Frank Act on Freddie Mac and the financial services industry at this time. The Dodd-Frank Act also mandates the preparation
of studies on a wide range of issues, which could lead to additional legislation or regulatory changes.
Recent developments with respect to Dodd-Frank rulemakings that may have a significant impact on Freddie Mac
include the following:
• CFPB final rules: The Consumer Financial Protection Bureau, or CFPB, adopted a number of final rules in early 2013
relating to mortgage origination, finance, and servicing practices. The rules generally went into effect in January 2014.
The rules include an ability-to-repay rule, which requires mortgage originators to make a reasonable and good faith
determination that a borrower has a reasonable ability to repay the loan according to its terms. This rule provides
certain protection from liability for originators making loans that satisfy the definition of a qualified mortgage. In May
2013, FHFA directed Freddie Mac and Fannie Mae to limit future single-family acquisitions to loans that are qualified
mortgages under applicable CFPB regulations, including those mortgages meeting the special or temporary qualified
mortgage definition for us and Fannie Mae, as the case may be. The directive generally restricts us and Fannie Mae
from acquiring loans that are: (a) not fully amortizing; (b) have a term greater than 30 years; or (c) have points and
fees in excess of 3% of the total loan amount.
Other rules address consumer protection and high cost mortgages, mortgage servicing, escrow accounts, loan
origination compensation, and appraisals. These rules will, individually and in combination, significantly change
many aspects of the mortgage industry and may affect us both directly and indirectly. Examples of indirect effects
include possible changes in pricing and other practices by customers and counterparties, which could cause the
volume of mortgage originations to decline, which would in turn adversely affect our business and financial results.
Some of these changes could slow the rate of foreclosures and result in significant changes to mortgage servicing and
foreclosure practices that could adversely affect our business. In addition, mortgage originators and assignees,
including Freddie Mac, may be subject to increased legal risk for loans that do not meet the requirements of the new
rules.
• Credit risk retention proposed rule: In August 2013, six agencies, including FHFA, jointly proposed a rule concerning
credit risk retention. This rule revises a 2011 proposal that would implement the credit risk retention requirements of
the Dodd-Frank Act. The rule generally would require a securitizer of asset-backed securities to retain no less than five
percent of the credit risk of the assets underlying such securities. The rule would provide an exemption from this
requirement for asset-backed securities collateralized exclusively by qualified residential mortgages (or “QRMs”), and
would define a QRM by reference to the definition of a “qualified mortgage” under the Truth in Lending Act. The
proposal also requests comment on an alternative definition of QRM that would significantly reduce the number of
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loans that would qualify as QRM. As in the 2011 proposal, Freddie Mac’s fully guaranteed securitizations generally
would satisfy the risk retention requirements for so long as we are in conservatorship or receivership and receiving
federal financial support. This exemption would not apply to securitization structures that are not fully guaranteed.
Under the proposal, the effective date of any final risk retention rule with respect to residential mortgage
securitizations will be one year after such rule is finalized.
We continue to review and assess the impact of rulemakings and other activities under the Dodd-Frank Act. For more
information, see “RISK FACTORS — Legal and Regulatory Risks — Legislative or regulatory actions could adversely affect
our business activities and financial results.”
Financial Crimes Enforcement Network's Anti-money Laundering Final Rule
On February 20, 2014, the Financial Crimes Enforcement Network finalized its regulations that will require Freddie Mac
to establish a written anti-money laundering program, file suspicious activity reports with the Network, and comply with
certain statutory and regulatory information sharing procedures. These regulations may require operational changes, as they
differ in certain respects from the regulations we are currently subject to concerning the reporting of fraudulent financial
instruments.
FHFA Advisory Bulletin
In April 2012, FHFA issued Advisory Bulletin AB 2012-02, “Framework for Adversely Classifying Loans, Other Real
Estate Owned, and Other Assets and Listing Assets for Special Mention” (the “Advisory Bulletin”), which is applicable to
Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The Advisory Bulletin establishes guidelines for adverse
classification and identification of specified single-family and multifamily assets and off-balance sheet credit exposures. The
Advisory Bulletin indicates that this guidance considers and is generally consistent with the Uniform Retail Credit
Classification and Account Management Policy issued by the federal banking regulators in June 2000.
Among other requirements, this Advisory Bulletin requires that we classify the portion of an outstanding single-family
loan balance in excess of the fair value of the underlying property, less costs to sell and adjusted for any credit enhancements,
as a “loss” no later than when the loan becomes 180 days delinquent, except in certain specified circumstances (such as those
involving properly secured loans with an LTV ratio equal to or less than 60%). For multifamily loans, the Advisory Bulletin
requires that any portion of a loan balance that exceeds the amount secured by the fair value of the collateral, less costs to sell,
for which there is no available and reliable source of repayment other than the sale of the underlying real estate collateral, to be
classified as a “loss.” The Advisory Bulletin also requires us to charge off the portion of the loan classified as a “loss.” The
Advisory Bulletin specifies that, if we subsequently receive full or partial payment of a previously charged-off loan, we may
report a recovery of the amount, either through our loss reserves or as a reduction in our foreclosed property expenses. In May
2013, FHFA issued an additional Advisory Bulletin clarifying the implementation timeline for AB 2012-02, requiring that:
(a) the asset classification provisions of AB 2012-02 should be implemented by January 1, 2014; and (b) the charge-off
provisions of AB 2012-02 should be implemented no later than January 1, 2015.
We establish an allowance for loan losses against our loans either through our collective loss reserve or our loss reserve
for individually impaired loans. Thus, at the time single-family loans become 180 days delinquent, we have already established
an allowance for loan losses against them. The Advisory Bulletin requires us to change our practice for determining when a
loan is deemed uncollectible to the date the loan is classified as a “loss” as described above. This is a change from our current
practice for determining when a loan is deemed to be uncollectible, which is based on historical data and results in a loan being
deemed to be uncollectible at the date of foreclosure or other liquidation event (such as a deed-in-lieu of foreclosure or a short
sale).
In the period in which we adopt the Advisory Bulletin, our allowance for loan losses on the impacted loans will be
eliminated and the corresponding recorded investment in the loan will be reduced by the amounts that are charged off. Under
our existing accounting practices and upon adoption of the Advisory Bulletin, the ultimate amount of losses we realize on our
loan portfolio will be the same over time; however, the timing of when we recognize the losses in our financial statements will
differ.
We are working with FHFA to consider how the Advisory Bulletin may impact our credit risk management practices. A
significant percentage of our modifications are initiated after loans become 180 days delinquent. This is a result of a number of
factors, including servicer backlogs, lack of borrower responsiveness to loss mitigation efforts, and extended foreclosure
timelines, which affect the willingness of borrowers to engage regarding loss mitigation options. Given the current rate of
modification activity after loans become 180 days delinquent, the benefit we expect from borrower re-performance is
significant in estimating the losses for this population of loans. In July, we introduced a streamlined modification program,
which may accelerate the timing of our modifications; however, we still expect a meaningful amount of modifications to be
initiated after our loans become 180 days delinquent. As we obtain incremental information on the performance of this
program, we will enhance our loss estimates, as necessary, to reflect the change in the expected timing and volume of
modifications.
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We are working with FHFA to resolve certain implementation issues related to our adoption of the Advisory Bulletin.
However, we do not expect that the Advisory Bulletin will have a material impact on our financial position or results of
operations.
FHFA Request for Public Input on Proposed Gradual Decrease of Loan Limits
On December 16, 2013, FHFA announced that it is requesting public input on the implementation of a plan to gradually
reduce the maximum size of single-family mortgage loans that we and Fannie Mae may purchase. In areas where the statutory
maximum loan limit for one-unit properties is currently $417,000, FHFA’s plan would set the loan purchase limit at $400,000,
which represents a reduction of approximately four percent. The loan purchase limit would be reduced by the same percentage
in "higher cost" areas, where current limits can be as high as $625,500. The loan purchase limits in such areas would be no
greater than $600,000. Implementation of a decrease in loan limits would, over time, reduce the income we earn from our
single-family credit guarantee activities. FHFA has indicated that the contemplated plan is not a final decision.
FHFA Request for Public Input on Reducing Freddie Mac and Fannie Mae Multifamily Businesses
On August 9, 2013, FHFA announced that it is evaluating alternatives for reducing Freddie Mac and Fannie Mae’s
presence in the multifamily housing finance market in 2014 and is seeking public input on the potential market impact of
various strategies. FHFA stated that the strategies may include:
• Restrictions on available loan terms;
•
Simplification and standardization of loan products;
• Limits on property financing;
• Limits on business activities; and,
• Other options that FHFA should consider to contract the enterprises’ multifamily businesses.
Input from the public was due October 8, 2013 in order for FHFA to consider the responses for potential inclusion in our
2014 Conservatorship Scorecard and provide for continued gradual contraction of the GSEs' multifamily business.
Employees
At February 14, 2014, we had 5,053 full-time and 59 part-time employees. Our principal offices are located in McLean,
Virginia.
Available Information
SEC Reports
We file reports and other information with the SEC. In view of the Conservator’s succession to all of the voting power of
our stockholders, we have not prepared or provided proxy statements for the solicitation of proxies from stockholders since we
entered into conservatorship, and do not expect to do so while we remain in conservatorship. We make available free of charge
through our website at www.freddiemac.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and all other SEC reports and amendments to those reports as soon as reasonably practicable after we
electronically file the material with, or furnish it to, the SEC. In addition, materials that we file with the SEC are available for
review and copying at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information
regarding companies that file electronically with the SEC.
We are providing our website addresses and the website address of the SEC here or elsewhere in this Form 10-K solely
for your information. Information appearing on our website or on the SEC’s website is not incorporated into this Form 10-K.
Information about Certain Securities Issuances by Freddie Mac
Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a material
direct financial obligation or become directly or contingently liable for a material obligation under an off-balance sheet
arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03 or, if the obligation is incurred in
connection with certain types of securities offerings, in prospectuses for that offering that are filed with the SEC.
Freddie Mac’s securities offerings are exempted from SEC registration requirements. As a result, we are not required to
and do not file registration statements or prospectuses with the SEC with respect to our securities offerings. To comply with the
disclosure requirements of Form 8-K relating to the incurrence of material financial obligations, we report our incurrence of
these types of obligations either in offering circulars (or supplements thereto) that we post on our website or in a current report
on Form 8-K, in accordance with a “no-action” letter we received from the SEC staff. In cases where the information is
disclosed in an offering circular posted on our website, the document will be posted on our website within the same time period
that a prospectus for a non-exempt securities offering would be required to be filed with the SEC.
The website address for disclosure about our debt securities is www.freddiemac.com/debt. From this address, investors
can access the offering circular and related supplements for debt securities offerings under Freddie Mac’s global debt facility,
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including pricing supplements for individual issuances of debt securities. Similar information about our STACR debt securities
is available at www.freddiemac.com/creditsecurities.
Disclosure about the mortgage-related securities we issue, some of which are off-balance sheet obligations, can be found
at www.freddiemac.com/mbs. From this address, investors can access information and documents about our mortgage-related
securities, including offering circulars and related offering circular supplements.
Forward-Looking Statements
We regularly communicate information concerning our business activities to investors, the news media, securities
analysts, and others as part of our normal operations. Some of these communications, including this Form 10-K, contain
“forward-looking statements.” Examples of forward-looking statements include, but are not limited to, statements pertaining to
the conservatorship, our current expectations and objectives for our single-family, multifamily, and investment businesses, our
loan workout initiatives and other efforts to assist the housing market, liquidity, capital management, economic and market
conditions and trends, market share, the effect of legislative and regulatory developments and new accounting guidance, credit
quality of loans we own or guarantee, and results of operations and financial condition on a GAAP, Segment Earnings, and fair
value basis. Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our
control. Forward-looking statements are often accompanied by, and identified with, terms such as “objective,” “expect,”
“possible,” “trend,” “forecast,” “anticipate,” “believe,” “intend,” “could,” “future,” “may,” “will,” and similar phrases. 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, including those described in the “RISK FACTORS”
section of this Form 10-K, and:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the actions the U.S. government (including FHFA, Treasury, and Congress) may take, or require us to take, including
to further support the housing recovery or to implement FHFA’s strategic plan for us and Fannie Mae;
the effect of the restrictions on our business due to the conservatorship and the Purchase Agreement, including our
dividend obligation on the senior preferred stock;
our ability to maintain adequate liquidity to fund our operations, including following any changes in the support
provided to us by Treasury, or any changes in our credit ratings or those of the U.S. government;
changes in our charter or in applicable legislative or regulatory requirements (including any legislation on the future
status of our company), or in the regulation of the housing finance and financial services industries;
changes in the fiscal and monetary policies of the Federal Reserve, including the effect of the tapering of its program
of purchasing mortgage-related securities and any future sales of such securities;
the extent of our success in our efforts to mitigate our losses on our Legacy single-family books and our investments
in non-agency mortgage-related securities;
the adequacy of our operating systems and infrastructure, and our ability to maintain the security of such systems and
infrastructure;
changes in accounting standards, or in our accounting policies or estimates;
changes in economic and market conditions, including changes in employment rates, interest rates, yield curves,
mortgage and debt spreads, and home prices;
changes in the U.S. residential mortgage market, including changes in the supply and type of mortgage products (e.g.,
refinance versus purchase, and fixed-rate versus ARM);
our ability to effectively execute our business strategies, implement new initiatives, and improve efficiency;
our ability to recruit and retain executive officers and other key employees;
the adequacy of our risk management framework, internal control over financial reporting, and disclosure controls and
procedures;
the failure of our customers, vendors, service providers, and counterparties to fulfill their obligations to us;
our ability to manage mortgage credit risks, including the effect of changes in underwriting and servicing practices;
our ability to manage interest-rate and other market risks, including the availability of derivative financial instruments
needed for risk management purposes;
changes or errors in the methodologies, models, assumptions and estimates we use to prepare our financial statements,
make business decisions, and manage risks;
changes in investor demand for our debt or mortgage-related securities (e.g., single-family PCs and multifamily K
Certificates);
adverse judgments or settlements in connection with judicial or regulatory proceedings;
changes in the practices of loan originators, investors and other participants in the secondary mortgage market;
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•
•
the occurrence of a major natural or other disaster in areas in which our offices or portions of our total mortgage
portfolio are concentrated; and
other factors and assumptions described in this Form 10-K, including in the “MD&A” section.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any
forward-looking statements we make to reflect events or circumstances occurring after the date of this Form 10-K.
Investing in our securities involves risks, including the risks described below and in “BUSINESS,” “MD&A,” and
elsewhere in this Form 10-K. These risks and uncertainties could, directly or indirectly, adversely affect our business, financial
condition, results of operations, cash flows, strategies and/or prospects.
ITEM 1A. RISK FACTORS
Conservatorship and Related Matters
The future status and role of Freddie Mac are uncertain.
There is significant uncertainty about our future status and role and we could be materially adversely affected by
legislative and regulatory action that alters the ownership, structure, and mission of the company. The then Acting Director of
FHFA stated on November 15, 2011 that "the long-term outlook is that neither [Freddie Mac nor Fannie Mae] will continue to
exist, at least in its current form, in the future." Future legislation will likely materially affect the role of the company, our
business model, our structure, and future results of operations. Some or all of our functions could be transferred to other
institutions, and we could cease to exist as a stockholder-owned company or at all. If any of these events were to occur, our
shares could further diminish in value, or cease to have any value, and there can be no assurance that our stockholders would
receive any compensation for such loss in value.
Several bills were introduced in Congress in 2013 concerning the future status of Freddie Mac, Fannie Mae, and the
mortgage finance system, including bills which provide for the wind down of Freddie Mac and Fannie Mae. The
Administration (as discussed in its February 2011 report to Congress) has recommended reducing the role of Freddie Mac and
Fannie Mae and ultimately winding down both companies.
The conservatorship is indefinite in duration and the timing, conditions, and likelihood of our emerging from
conservatorship are uncertain. Termination of the conservatorship (other than in connection with receivership) also requires
Treasury’s consent under the Purchase Agreement. There can be no assurance as to when, and under what circumstances,
Treasury would give such consent. It is possible that the conservatorship will end with us being placed into receivership. Even
if the conservatorship is terminated, we would remain subject to the Purchase Agreement and the senior preferred stock. In
addition, because Treasury holds a warrant to acquire almost 80% of our common stock for nominal consideration, the
company could effectively remain under the control of the U.S. government even if the conservatorship is ended and the voting
rights of common stockholders restored.
During 2013 and 2014, a number of lawsuits were filed against the U.S. government challenging certain government
actions related to the conservatorship (including actions taken in connection with the imposition of conservatorship) and the
Purchase Agreement. This may add to the uncertainty surrounding our company’s future.
For more information, see “BUSINESS — Regulation and Supervision — Legislative and Regulatory Developments.”
We may request additional draws under the Purchase Agreement in future periods.
We may request additional draws under the Purchase Agreement in future periods. The need for any such future draws
will be determined by a variety of factors that could adversely affect our net worth or our ability to generate comprehensive
income, including the following:
• changes in home prices;
•
the success of our foreclosure prevention and loss mitigation efforts;
• adverse changes in interest rates, yield curves, implied volatility or mortgage spreads, which could increase realized
and unrealized fair value losses recorded in earnings or AOCI;
•
•
•
reductions in the size of our mortgage-related investments portfolio or required sales of higher yielding assets, and
other limitations on our investment activities that reduce our earnings capacity;
reductions in the maximum UPB of single-family loans we are permitted to purchase or other restrictions on our
single-family guarantee activities that could reduce our income from these activities;
restrictions on the volume of multifamily business we may conduct or other limits on multifamily business activities
that could reduce our income from these activities;
• adverse changes in our liquidity or funding costs, or limitations in our access to public debt markets;
• changes in accounting practices or guidance (e.g., implementation of FHFA's April 2012 Advisory Bulletin);
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• effects of the MHA Program and other government initiatives, including any future requirements to reduce the
principal amount of loans, which could increase the likelihood of prepayment of mortgages and potentially reduce our
net interest income;
• changes in housing or economic conditions, legislation, or other factors that affect our assessment of our ability to
realize our net deferred tax asset, and cause us to establish a valuation allowance against our net deferred tax asset; or
• changes in business practices resulting from legislative and regulatory developments or direction from our
Conservator.
We do not have the authority over the long term to build and retain capital from the earnings generated by our business
operations, as a result of the net worth sweep dividend. This increases the likelihood of draws in future periods, particularly as
the permitted Capital Reserve Amount (which is $2.4 billion for 2014) declines over time. Additional draws under the Purchase
Agreement will increase the liquidation preference of the senior preferred stock, which was $72.3 billion as of December 31,
2013. In addition, draws we take for deficits in our net worth will reduce the amount of available funding remaining under the
Purchase Agreement, which was $140.5 billion as of December 31, 2013. Additional draws and corresponding increases in the
already substantial liquidation preference, along with limited flexibility to redeem the senior preferred stock, may add to the
uncertainty regarding our long-term financial sustainability.
We are under the control of FHFA, and our business activities are subject to significant restrictions. We may be required to
take actions that materially adversely affect our business and financial results.
We may be required to undertake activities that are unprofitable, costly to implement, expose us to additional credit and
other risks, or that otherwise adversely affect our business over the short- or long-term. We are under the control of FHFA, as
our Conservator, and are not managed to maximize stockholder returns. FHFA determines the strategic direction of our
company. FHFA has changed our business objectives significantly since we entered into conservatorship, and could make
additional changes at any time. We are also subject to significant restrictions under the Purchase Agreement and senior
preferred stock. Other agencies of the U.S. government, as well as Congress, also could require us to take actions that adversely
affect our business and financial results.
FHFA has required us to make changes to our business that have adversely affected our financial results, and may require
us to make additional changes in the future. For example, FHFA is requiring us to contract our presence in the mortgage market
and simplify our operations. These actions will adversely affect our profitability over the long term. FHFA also may require us
to provide additional support for the mortgage market in a manner that serves our public mission, but that adversely affects our
financial results, such as by engaging in more expensive loss mitigation efforts. From time to time, FHFA and Treasury have
prevented us from engaging in business activities or transactions that we believe would benefit our business and financial
results, and may do so in the future. FHFA may require us to engage in activities that are operationally difficult to implement.
FHFA, as our Conservator, could also take a number of actions that could materially adversely affect our company, such as
reducing the maximum UPB of single-family loans we are permitted to purchase or limiting the amount of securities we could
sell for liquidity management purposes. Significant strategy changes, either from FHFA or Treasury, could have an adverse
impact on the earnings of our business.
We currently face a variety of different, and potentially competing, business objectives and new FHFA-mandated
activities (e.g., the initiatives we are pursuing under the 2013 Conservatorship Scorecard). It may be difficult for us to devote
sufficient resources and management attention to these multiple priorities, some of which present significant operational
challenges to us. See “BUSINESS — Executive Summary — Our Primary Business Objectives” for more information.
The Purchase Agreement and terms of the senior preferred stock include significant restrictions on our ability to manage
our business, including limitations on the amount of indebtedness we may incur, the size of our mortgage-related investments
portfolio, and the circumstances in which we may pay dividends, transfer certain assets, raise capital, and pay down the
liquidation preference on the senior preferred stock. These limitations could have a material adverse effect on our future results
of operations and financial condition. Over the long-term, as a result of the net worth sweep dividend provisions of the senior
preferred stock, we do not have the authority to build and retain capital from the earnings generated by our business operations
and will not be able to build or retain any net worth surplus or return capital to stockholders other than Treasury. In deciding
whether or not to consent to any request for approval it receives from us under the Purchase Agreement, Treasury has the right
to withhold its consent for any reason and is not required by the agreement to consider any particular factors, including whether
or not management believes that the transaction would benefit the company. The warrant held by Treasury, the restrictions on
our business contained in the Purchase Agreement, and the senior status and net worth dividend provisions of the senior
preferred stock issued to Treasury under the Purchase Agreement also could adversely affect our ability to attract new private
sector capital in the future should the company be in a position to seek such capital.
Our regulator may, and in some cases must, place us into receivership, which would result in the liquidation of our assets; if
this occurs, there may not be sufficient funds to pay the claims of the company, repay the liquidation preference of our
preferred stock, or make any distribution to the holders of our common stock.
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We could be put into receivership at the discretion of the Director of FHFA at any time for a number of reasons, including
critical undercapitalization. In addition, FHFA could be required to place us in receivership if Treasury is unable to provide us
with funding requested under the Purchase Agreement to address a deficit in our net worth. Treasury might not be able to
provide the requested funding if, for example, the U.S. government were shut down or if the U.S. government reached its
borrowing limit and, as a result, Treasury was unable to obtain funds sufficient to cover the request. For more information, see
"BUSINESS — Regulation and Supervision — Federal Housing Finance Agency — Receivership."
A receivership would terminate the conservatorship. The appointment of FHFA as our receiver would terminate all rights
and claims that our stockholders and creditors may have against our assets or under our charter arising as a result of their status
as stockholders or creditors, other than the potential ability to be paid upon our liquidation. Unlike conservatorship, the purpose
of which is to conserve our assets and return us to a sound and solvent condition, the purpose of receivership is to liquidate our
assets and resolve claims against us. Bills pending in Congress provide for Freddie Mac to eventually be placed into
receivership.
In the event of a liquidation of our assets, there can be no assurance that there would be sufficient proceeds to pay the
secured and unsecured claims of the company, repay the liquidation preference of any series of our preferred stock or make any
distribution to the holders of our common stock. To the extent that we are placed into receivership and do not or cannot fulfill
our guarantee to the holders of our mortgage-related securities, such holders could become unsecured creditors of ours with
respect to claims made under our guarantee. Only after paying the secured and unsecured claims of the company, the
administrative expenses of the receiver and the liquidation preference of the senior preferred stock, which ranks senior to our
common stock and all other series of preferred stock upon liquidation, would any liquidation proceeds be available to repay the
liquidation preference on any other series of preferred stock. Finally, only after the liquidation preference on all series of
preferred stock is repaid would any liquidation proceeds be available for distribution to the holders of our common stock.
If we are placed into receivership or no longer operate as a going concern, we would no longer be able to assert that we
will realize assets and satisfy liabilities in the normal course of business, and, therefore, our basis of accounting would change
to liquidation-based accounting. Under the liquidation basis of accounting, assets are stated at their estimated net realizable
value and liabilities are stated at their estimated settlement amounts, which could adversely affect our net worth. In addition,
the amounts in AOCI would be reclassified to earnings.
The conservatorship and investment by Treasury has had, and will continue to have, a material adverse effect on our
common and preferred stockholders.
The market price for our common stock and publicly traded classes of preferred stock declined substantially after we
entered into conservatorship. As a result, the investments of our common and preferred stockholders lost substantial value,
which they may never recover. Our shares could further diminish in value, and they are not likely to have any value in the
longer-term. In November 2011, the then Acting Director of FHFA stated that "[Freddie Mac and Fannie Mae’s] equity holders
retain an economic claim on the companies but that claim is subordinate to taxpayer claims. As a practical matter, taxpayers are
not likely to be repaid in full, so [Freddie Mac and Fannie Mae] stock lower in priority is not likely to have any value."
The conservatorship and investment by Treasury have had, and will continue to have, other material adverse effects on
our common and preferred stockholders, including the following:
• No voting rights during conservatorship. The rights and powers of our stockholders are suspended during the
conservatorship and our common stockholders do not have the ability to elect directors or to vote on other matters.
• Our future profits will effectively be distributed to Treasury. Under the Purchase Agreement, we are required to pay
dividends to the extent that our Net Worth Amount exceeds a permitted Capital Reserve Amount that decreases over
time. Accordingly, over the long-term, our future profits will effectively be distributed to Treasury. Therefore, the
holders of our common stock and non-senior preferred stock will not receive benefits that would otherwise flow from
any such future profits.
• Priority of Senior Preferred Stock. The senior preferred stock ranks senior to the common stock and all other series of
preferred stock as to both dividends and distributions upon dissolution, liquidation or winding up of the company.
• Dividends have been eliminated. The Conservator has eliminated dividends on Freddie Mac common and preferred
stock (other than dividends on the senior preferred stock) during the conservatorship. In addition, under the Purchase
Agreement, dividends may not be paid to common or preferred stockholders (other than on the senior preferred stock)
without the consent of Treasury, regardless of whether or not we are in conservatorship.
• Warrant may substantially dilute investment of current stockholders. If Treasury exercises its warrant to purchase
shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully
diluted basis, the ownership interest in the company of our then existing common stockholders will be substantially
diluted. Existing common stockholders have no assurance that, as a group, they will be able to control the election of
our directors or the outcome of any other vote after the time, if any, that the conservatorship ends.
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Competitive and Market Risks
Our level of earnings in recent periods is not sustainable over the long term.
The level of earnings we have experienced in recent periods is not sustainable over the long term. While our recent
financial results, particularly our benefit (provision) for credit losses, benefited significantly from strong home price
appreciation we are beginning to see moderation in home price growth. In addition, our recent financial results include large
benefits related to the release of our deferred tax asset valuation allowance and settlements of residential non-agency mortgage-
related securities litigation and claims for breaches of representations and warranties by our sellers. These trends are not
expected to continue over the long term. Our settlements with sellers for claims for breaches of representations and warranties
primarily related to pre-conservatorship loan activity are largely complete. Our residential non-agency mortgage-related
securities litigation is ongoing with many large institutions and we expect additional settlements in 2014. In addition, declines
in the size of our mortgage-related investments portfolio, as required by FHFA and the Purchase Agreement, will reduce
earnings over time. Our financial results will also continue to be positively or negatively affected by changes in interest rates,
yield curves, and mortgage spreads, which can cause significant earnings and net worth variability.
We are subject to significant limitations on our investment activity, including a requirement to reduce the size of our
mortgage-related investments portfolio, and significant constraints on our ability to purchase or sell mortgage assets. As it is
likely that the overall volume of our business will decline, our debt funding needs will likely also decline. It may become
probable that our previously forecasted debt issuances will not occur, resulting in the deferred gain or loss associated with these
forecasted transactions being reclassified from AOCI into earnings immediately. In addition, many of our mortgage investments
do not trade in a liquid secondary market and the size of our holdings relative to normal market activity is such that, if we were
to attempt to sell a significant quantity of these assets, the pricing in such markets could be significantly disrupted and the price
we ultimately realize may be materially lower than the value at which we carry these investments on our consolidated balance
sheets. We can provide no assurance that the cap on our mortgage-related investments portfolio will not, over time, force us to
sell mortgage assets at unattractive prices or that our current strategies will not have an adverse impact on our business or
financial results. For more information, see “BUSINESS — Conservatorship and Related Matters — Limits on Investment
Activity and Our Mortgage-Related Investments Portfolio.”
These limitations will reduce the earnings capacity of our mortgage-related investments portfolio business and require us
to place greater emphasis on our guarantee activities to generate revenue. However, under conservatorship, our ability to
generate revenue through guarantee activities may be limited for a number of reasons, including that we may be required to
adopt business practices that provide support for the mortgage market in a manner that serves our public mission and other non-
financial objectives, but that may negatively impact our future financial results. In addition, the overall volume of our guarantee
business will likely decline over time, as one of FHFA’s goals is to contract our presence in the mortgage market. We generally
must obtain FHFA’s approval to implement across-the-board price increases in our guarantee business, and there can be no
assurance FHFA will approve any such increase requests in the future. The combination of the restrictions on our business
activities and our potential inability to generate sufficient revenue through our guarantee activities to offset the effects of those
restrictions may have an adverse effect on our results of operations and financial condition.
Our single-family credit guarantee and multifamily mortgage portfolios are subject to mortgage credit risks, including
mortgage credit risk relating to off-balance sheet arrangements; credit costs related to these risks could adversely affect our
financial condition and/or results of operations.
Mortgage credit risk is the risk that a borrower will fail to make timely payments on a mortgage we own or guarantee,
exposing us to the risk of credit losses and credit-related expenses. We are primarily exposed to mortgage credit risk with
respect to the single-family and multifamily loans and securities that we own or guarantee and hold on our consolidated balance
sheets. We are also exposed to mortgage credit risk with respect to securities and guarantee arrangements that are not reflected
as assets on our consolidated balance sheets. These relate primarily to: (a) Freddie Mac mortgage-related securities backed by
multifamily loans (e.g., K Certificates we guarantee); (b) certain single-family Other Guarantee Transactions; and (c) other
guarantee commitments, including long-term standby commitments and liquidity guarantees.
We expect our credit losses to remain elevated for the near term due to the large number of single-family non-performing
loans that will likely be resolved. We also continue to have significant amounts of mortgage loans in our single-family credit
guarantee portfolio with certain characteristics, such as Alt-A loans, interest-only loans, option ARM loans, loans with original
LTV ratios greater than 90%, and loans where borrowers had FICO scores less than 620 at the time of origination, that expose
us to greater credit risk than do other types of mortgage loans. See “Table 43 — Certain Higher-Risk Categories in the Single-
Family Credit Guarantee Portfolio” for more information.
Our loan loss reserves do not reflect the total of all future credit losses we will ultimately incur with respect to the single-
family and multifamily mortgage loans we currently own or guarantee. Rather, pursuant to GAAP, our reserves only reflect
probable losses we believe we have already incurred as of the balance sheet date. Accordingly, it is likely that the credit losses
we ultimately incur on the loans we currently own or guarantee will exceed the amounts we have already reserved for such
loans. If we were to experience another recession or another sharp drop in home prices, it is possible that the credit losses we
ultimately incur related to such an event could be larger, perhaps substantially larger, than our current loan loss reserves.
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We use certain credit enhancements to mitigate some of our potential credit losses. However, such credit enhancements
may provide less protection than we expect, or otherwise fail to prevent us from incurring credit losses on the related loans. For
more information, see "NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES — Credit Protection and Other
Forms of Credit Enhancement."
For more information on our mortgage credit risk with respect to single-family and multifamily loans, see “MD&A —
RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk.”
We are exposed to significant credit risk related to the subprime, Alt-A, and option ARM loans that back the non-agency
mortgage-related securities we hold in our mortgage-related investments portfolio.
Our investments in non-agency mortgage-related securities include securities that are backed by subprime, Alt-A, and
option ARM loans. As of December 31, 2013, we held $59.3 billion in UPB of such securities, which represented
approximately 13% of our total mortgage-related investments portfolio. We also hold non-agency mortgage-related securities
backed by manufactured housing loans and home equity lines of credit. The credit performance of the loans underlying these
non-agency mortgage-related securities has declined since 2007, and although it has stabilized in recent periods, it remains
weak. If we were to attempt to sell a significant quantity of these securities, the pricing in such markets could be significantly
disrupted and the price we ultimately realize may be materially lower than the value at which we carry these investments on our
consolidated balance sheets. The population of non-agency mortgage-related securities that management intends to sell may
increase, which would cause us to immediately recognize in earnings any unrealized losses on these securities.
Since 2007, the fair value of these investments has declined significantly, and we have recorded substantial other-than-
temporary impairments, both of which have adversely affected our net worth. We may experience additional fair value declines
and losses in the future due to a number of factors, including if delinquency and loss rates on the underlying loans increase. The
quality of the servicing performed on the underlying loans can significantly affect the performance of these securities, including
the timing and amount of losses incurred on the underlying loans and thus the timing and amount of losses we recognize on our
securities. Our ability to influence servicing performance is limited. In addition, there is a general lack of transparency in the
market for the non-agency mortgage-related securities we hold, and the information disclosed by the trustees of the trusts that
issued these securities is not sufficient to allow us to adequately analyze decisions made by servicers that may directly impact
the cash flows on such securities. The servicing of the loans is significantly concentrated among several companies, which may
increase this risk. Any credit enhancements covering these securities may not prevent us from incurring losses. See “MD&A —
CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” for information about these securities and
related credit enhancements.
Future declines in U.S. home prices or other adverse changes in the U.S. housing market could negatively impact our
business and adversely affect our earnings and equity.
Our financial results and business volumes can be negatively affected by declines in home prices and other adverse
changes in the housing market. Although the single-family housing market improved in 2013, our credit losses remained high
compared to levels before 2009, in part because home prices have experienced significant cumulative declines in many
geographic areas since 2006. While we expect home prices to increase moderately in 2014, there can be no assurance that this
will occur.
We prepare internal forecasts of future home prices, which we use for certain business activities, including: (a) hedging
prepayment risk; (b) estimating expected costs of new guarantee business; and (c) portfolio activities. If future home prices are
lower than our forecasts, this could cause the return we earn on new single-family guarantee business to be less than expected
or cause us to incorrectly hedge prepayment and other market risks associated with our mortgage-related investments. This
could also result in higher losses due to other-than-temporary impairments on our investments in non-agency mortgage-related
securities (which would be recognized in earnings) or fair value declines on our investments in non-agency mortgage-related
securities (which would be recognized in AOCI). For more information, see “MD&A — RISK MANAGEMENT — Credit
Risk.”
Our business volumes (i.e., mortgage loan purchases and guarantee issuances) are closely tied to the rate of growth in
total outstanding U.S. residential mortgage debt, the size of the U.S. residential mortgage market, and the amount of new
mortgage originations. Total residential mortgage debt declined approximately 0.7% in the first nine months of 2013 (the most
recent data available) compared to a decline of approximately 2.5% in 2012.
While the multifamily market has experienced strong rent growth and occupancy trends in the past four years, these
trends are not likely to continue at their current pace as apartment fundamentals are already very favorable, with vacancy rates
at their lowest level since 2001. New supply of multifamily housing has been increasing in recent periods and could potentially
outpace demand, which could result in excess supply and rising vacancy rates. Any softening of multifamily markets could
cause delinquencies and credit losses relating to our multifamily activities to increase beyond our current expectations.
We could incur significant losses in the event of a major natural disaster or other catastrophic event.
We own or guarantee mortgage loans and own REO properties throughout the United States. The occurrence of a major
natural or environmental disaster or similar catastrophic event in a regional geographic area of the United States could
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negatively impact our credit losses and credit-related expenses in the affected area. A catastrophic event that either damages or
destroys residential real estate underlying mortgage loans we own or guarantee, or negatively affects the ability of homeowners
to continue to make payments on mortgage loans we own or guarantee, could increase our serious delinquency rates and
average loan loss severity in the affected region or regions, which could have a material adverse effect on our business and
financial results. Such an event could also damage or destroy REO properties we own. We may not have insurance coverage for
some of these catastrophic events.
We depend on our institutional counterparties to provide services that are critical to our business, and our results of
operations or financial condition may be adversely affected if one or more of our counterparties do not meet their
obligations to us.
We face the risk that one or more of the institutional counterparties that has entered into a business contract or
arrangement with us may fail to meet its obligations to us. Our important institutional counterparties include seller/servicers,
mortgage insurers, and bond insurers, and counterparties to derivatives and short-term lending and other funding transactions.
A significant failure by a major institutional counterparty could harm our business and financial results in a variety of
ways, as many of our major counterparties provide several types of services to us. The concentration of our exposure to our
counterparties remains high and we continue to face challenges in reducing our risk concentrations with counterparties. Efforts
we take to reduce exposure to financially weakened counterparties could concentrate our exposure to other individual
counterparties, and increase our costs and reduce our revenue. In recent years, challenging market conditions have, at times,
adversely affected the liquidity and financial condition of our counterparties, and some of our major counterparties have failed.
Similar events may occur in future periods.
Our business could be adversely affected if counterparties to derivatives and short-term lending and other transactions fail
to meet their obligations to us.
We have significant exposure to institutions in the financial services industry relating to derivatives, funding, short-term
lending, securities and other transactions. These transactions are critical to our business, including our ability to: (a) manage
interest rate and other risks related to our investments in mortgage-related assets; and (b) fund our business operations. In
addition to these institutions, we face the risk of operational failure of any of the clearing members, exchanges, clearinghouses,
or other financial intermediaries we use to facilitate these transactions. If a clearing member or clearinghouse were to fail, we
could experience losses related to any collateral we had posted with such clearing member or clearinghouse to cover initial or
variation margin. Similarly, if our counterparties in short-term lending transactions fail, we have exposure to losses if the
transaction was unsecured or to the extent the value of the collateral posted to us is insufficient. A failure of any of these
various parties could adversely affect our ability to engage in derivatives and other transactions, service our customers, and
manage our exposure to interest rate and other risks. We believe all of our derivative portfolio and cash and other investments
portfolio counterparties are exposed to fiscally troubled European countries. It is possible that continued adverse developments
in the Eurozone could significantly affect such counterparties. In turn, this could adversely affect their ability to meet their
obligations to us.
For more information, see “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Cash and
Other Investments Counterparties,” “— Derivative Counterparties” and “— Selected European Sovereign and Non-Sovereign
Exposures.”
Our financial condition or results of operations may be adversely affected if mortgage seller/servicers fail to perform their
repurchase and other obligations to us.
Our seller/servicers have a significant role in servicing loans in our single-family credit guarantee portfolio, as they
perform the primary servicing function for us. Therefore, we could be adversely affected if they lack appropriate process
controls, experience a failure in their controls, or experience an operating disruption in their ability to service mortgage loans.
Our servicers have an active role in our loss mitigation efforts, and a decline in their performance could impact our credit
performance (including through missed opportunities for mortgage modifications), which could adversely affect our financial
condition or results of operations and have a significant effect on our ability to mitigate credit losses. The risk of such a decline
in performance remains high due to a number of factors, including the continued high volume of seriously delinquent loans and
the fact that the servicing function has become significantly more complex in recent years. Any efforts we take to attempt to
improve our servicers’ performance (such as requiring that they pay us compensatory fees for underperformance) could
adversely affect our relationships with such servicers, many of which also sell loans to us.
In recent periods, servicers that specialize in servicing troubled loans have experienced rapid growth in their servicing
portfolios, and they now service a large share of our loans. Although the ability of these servicers to service troubled loans may
benefit us by reducing our credit losses, the rapid expansion of their servicing portfolios could expose us to increased risks in
the event that it results in operational strains that adversely affect their servicing performance or weakens their financial
strength.
If a servicer does not fulfill its servicing obligations (including its repurchase or other responsibilities), we may seek to
recover the amounts that such servicer owes us, such as by attempting to sell the applicable mortgage servicing rights to a
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different servicer and applying the proceeds to such owed amounts. However, we face the risk that we might not receive a
sufficient price for the mortgage servicing rights or that we may be unable to find buyers who are willing to assume the
representations and warranties of the former servicer and have sufficient capacity to service the affected mortgages. This option
may be difficult to accomplish with respect to our larger seller/servicers due to operational and capacity challenges of
transferring a large servicing portfolio.
Our seller/servicers also have a significant role in servicing loans in our multifamily mortgage portfolio. We are exposed
to the risk that multifamily seller/servicers could come under financial pressure, which could potentially cause degradation in
the quality of the servicing they provide us including their monitoring of each property’s financial performance and physical
condition.
We require seller/servicers to make certain representations and warranties regarding the loans they sell to us and/or
service for us. If loans are sold to us in breach of those representations and warranties, we have the contractual right to require
the seller/servicer to repurchase those loans from us. We also may have other contractual remedies, including the right to be
indemnified against losses on the loans. We have similar rights and remedies with respect to loans they service on our behalf. If
a seller/servicer does not satisfy its contractual obligations to us with respect to a loan, we will be subject to the full range of
credit risks posed by the loan if the loan fails to perform, including the risk that a mortgage insurer may deny or rescind
coverage on the loan (if the loan is insured) and the risk that we will incur credit losses on the loan through the workout or
foreclosure process. It may be difficult, expensive, and time-consuming to enforce (through the exercise of contractual
remedies, including legal proceedings) a seller/servicer's repurchase obligations, in the event a seller/servicer fails to perform
such obligations. As of December 31, 2013, the UPB of loans subject to repurchase requests based on breaches of
representations and warranties (related to loans sold to us and/or serviced for us) issued to our single-family seller/servicers
was approximately $2.2 billion.
During 2013, we entered into a number of agreements with sellers to resolve certain existing and future repurchase
obligations, and we may enter into additional agreements with sellers or servicers in the future. The amounts we receive under
any such agreements may be less than the losses we ultimately incur.
If, as we expect, there is a decline in origination volume and a change in the mix of originations (refinance vs. purchase)
in 2014, the competitive and financial pressures on single-family originators and servicers could increase, and thereby increase
our counterparty risk with respect to these entities.
For more information, see “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Single-
family Mortgage Seller/Servicers” and “— Multifamily Mortgage Seller/Servicers.”
Our losses could increase if more of our mortgage or bond insurers become insolvent or fail to perform their obligations to
us.
A number of our mortgage insurers (that insure single-family mortgages we purchase or guarantee) and bond insurers
(that insure certain of the non-agency mortgage-related securities we hold) are insolvent or are not fully performing their
obligations to us. We are exposed to the risk that additional mortgage or bond insurance counterparties could become insolvent
or fail to fully perform their obligations to us. The weakened financial condition and liquidity position of many of these
counterparties increases the risk that additional entities will fail to fully reimburse us for claims under insurance policies.
As a guarantor, we remain responsible for the payment of principal and interest if a mortgage insurer fails to meet its
obligations to reimburse us for claims. Thus, if any of our mortgage insurers fails to fulfill its obligations, we could experience
increased credit losses. In addition, if a regulator determined that a mortgage insurer lacked sufficient capital to pay all claims
when due, the regulator could take action that might affect the timing and amount of claim payments made to us. A regulator
could also restrict an insurer's ability to write new business.
The majority of our mortgage insurance exposure is concentrated in four insurers, certain of which have been under
financial stress during the last several years. Our ability to reduce our exposure to individual mortgage insurers is limited, and
we continue to acquire significant amounts of new loans with mortgage insurance from mortgage insurers that have credit
ratings that are below investment grade. In addition, we expect to receive substantially less than full payment of our mortgage
insurance claims from three of our mortgage insurers: Triad Guaranty Insurance Corporation, Republic Mortgage Insurance
Company, and PMI Mortgage Insurance Co.
In the event a mortgage insurer falls out of compliance with regulatory capital requirements, it may attempt various
strategies (such as a corporate restructuring or raising additional capital) designed to enable it to continue to write new
business. There can be no assurance that any such restructuring or recapitalization will enable payment in full of all of our
claims in the future.
With respect to bond insurers, if a bond insurer was to become insolvent, it is likely that we would not collect our claims
from it. This would affect our ability to recover certain unrealized losses on our investments in non-agency mortgage-related
securities, and could contribute to net impairment of available-for-sale securities recognized in earnings. We evaluate the
expected recovery from primary bond insurance policies as part of our impairment analysis for our investments in securities. If
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a bond insurer’s performance with respect to its obligations on our investments in securities is worse than expected, this could
contribute to additional net impairment of those securities.
Some of our larger bond insurers are in runoff mode and are not writing new business. We expect to receive substantially
less than full payment from Ambac Assurance Corporation and Financial Guaranty Insurance Company. We believe that we
will likely receive substantially less than full payment of our claims from some of our other bond insurers, because we believe
they also lack sufficient ability to fully meet all of their expected lifetime claims-paying obligations to us as such claims
emerge.
For more information, see “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Mortgage
Insurers” and “— Bond Insurers.”
The loss of business volume could result in a decline in our market share and revenues.
Our business depends on our ability to acquire a steady flow of mortgage loans. We purchase a significant percentage of
our single-family mortgages from several large mortgage originators. During 2013, approximately 64% of our single-family
mortgage purchase volume was associated with our ten largest customers. Similarly, we acquire a significant portion of our
multifamily mortgage loans from several large lenders.
We enter into mortgage purchase commitments with many of our single-family customers that are typically less than one
year in duration. The loss of business from any one of our major lenders could adversely affect our market share and our
revenues. Many of our seller/servicers also have tightened their lending criteria in recent years, which has reduced their loan
volume, thus reducing the volume of loans available for us to purchase.
We are engaged in various loss mitigation and recovery efforts concerning: (a) representation and warranty claims on
single-family loans we own or guarantee; and (b) certain of our investments in non-agency mortgage-related securities. Some
of these efforts involve litigation against some of our largest single-family customers. These and other loss mitigation and
recovery efforts could adversely affect our relationship with any such customer and could, for example, result in the loss of
some or all of our business with the customer.
Our charter requires that single-family mortgages with LTV ratios above 80% at the time of purchase be covered by
mortgage insurance or other credit enhancements. Our purchases of mortgages with LTV ratios above 80% (other than relief
refinance mortgages) have generally been low in recent years, as compared to 2005 - 2008 levels, in part because mortgage
insurers tightened their eligibility requirements with respect to the issuance of insurance on new mortgages with higher LTV
ratios. If the availability of mortgage insurance for loans with LTV ratios above 80% is reduced, we may be restricted in our
ability to purchase or securitize such loans. This could reduce our overall volume of new business.
Competition from banking and non-banking companies, as well as efforts by FHFA to reduce the GSEs' dominance in the
marketplace, may harm our business.
Competition in the secondary mortgage market combined with a decline in the amount of residential mortgage debt
outstanding may make it more difficult for us to purchase mortgages. Furthermore, competitive pricing pressures may make our
products less attractive in the market and negatively affect our financial results. Increased competition from Fannie Mae,
Ginnie Mae, FHA/VA, and new entrants may alter our product mix, lower our volumes, and reduce our revenues on new
business.
Historically, we also competed with other financial institutions that retain or securitize mortgages, such as commercial
and investment banks, dealers, thrift institutions, and insurance companies. Many of these institutions have ceased or
substantially reduced their securitization activities since 2008. However, in recent periods, a number of our non-GSE
competitors increased their retention of loans on their balance sheets. In addition, one of FHFA’s goals for conservatorship, as
set forth in its strategic plan, is to contract our presence in the mortgage market and shrink our operations, and FHFA is taking a
number of actions designed to encourage these other financial institutions to return to the mortgage market.
FHFA is also Conservator of Fannie Mae, our primary competitor, and FHFA’s actions as Conservator of both companies
could affect competition between us and Fannie Mae. It is possible that FHFA could require us and Fannie Mae to take a
uniform approach that, because of differences in our respective businesses, could place Freddie Mac at a competitive
disadvantage to Fannie Mae. FHFA may also prevent us from taking actions that could provide us with a competitive
advantage.
Actions we may take or may be directed to take to reduce the GSEs' dominance of new single-family guarantee business,
such as by tightening credit standards or raising guarantee fees, could cause our share of the total mortgage market to decrease
and the volume of our single-family guarantee business to decline.
We could be prevented from competing efficiently and effectively by competitors who use their patent portfolios to
prevent us from using necessary business processes and products, or to require us to pay significant royalties to use those
processes and products.
As multifamily market fundamentals have improved over recent years, more life insurers, banks, CMBS conduits, and
other market participants have re-entered or increased their activities in the multifamily market, and as a result we have faced
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increased competition. In addition, FHFA's efforts to decrease our presence in this market (e.g., the requirement to reduce our
new multifamily business volume by at least 10% in 2013) could encourage further competition.
Our investment activities may be adversely affected by limited availability of financing and increased funding costs.
The amount, type and cost of our unsecured funding, including financing from other financial institutions and the capital
markets, directly affects our interest expense and results of operations. A number of factors could make such financing more
difficult to obtain, more expensive or unavailable on any terms, both domestically and internationally, including:
• changes in our government support;
•
reduced demand for our debt securities;
• competition for debt funding from other debt issuers; and
• downgrades in our credit ratings or the credit ratings of the U.S. government.
Our ability to obtain funding in the public unsecured debt markets or by pledging mortgage-related securities as collateral
to other institutions could cease or change rapidly, and the cost of available funding could increase significantly, due to changes
in market confidence and other factors. We may incur costs, including potentially higher funding costs, for our liquidity
management practices and procedures and there can be no assurance that such practices and procedures would provide us with
sufficient liquidity to meet our ongoing cash obligations under all circumstances. In particular, we believe that our liquidity
contingency plans may be difficult or impossible to execute during a liquidity crisis or period of significant market turmoil. If
we cannot access the unsecured debt markets, our ability to repay maturing indebtedness and fund our operations could be
eliminated or significantly impaired, as our alternative sources of liquidity (e.g., cash and other investments) may not be
sufficient to meet our liquidity needs.
Wider spreads could cause a reduction in long-term debt issuances and an increased reliance on short-term debt
issuances. Significant issuances of short-term debt could lead to a funding gap between short- and long-term debt and could
increase rollover risk (i.e., the risk that we may be unable to refinance our debt when it becomes due), and could increase the
use of derivatives and the volatility of reported net income.
Our mortgage-related investments portfolio has contracted significantly since we entered into conservatorship. A
significant portion of the assets remaining in the portfolio are those we consider to be less liquid, and our ability to use these
assets as a significant source of liquidity (for example, through sales or use as collateral in secured lending transactions) is
limited.
We pay cash dividends (known as the net worth sweep dividend) to Treasury on the senior preferred stock on a quarterly
basis. The amount of the net worth sweep dividend could vary substantially from quarter to quarter for a number of reasons,
including as a result of non-cash changes in net worth. It is possible that, due to non-cash increases in net worth, the amount of
our dividend for a quarter could exceed the amount of available cash, which could have an adverse effect on our financial
results.
Changes in Government Support
Treasury supports us through the Purchase Agreement and Treasury’s ability to purchase up to $2.25 billion of our
obligations under its permanent statutory authority. Unlike certain of our competitors, we do not have access to the Federal
Reserve's discount window. Changes or perceived changes in the government’s support of us could have a severe negative
effect on our access to the unsecured debt markets and our debt funding costs. As of December 31, 2013, the amount of
available funding remaining under the Purchase Agreement was $140.5 billion. This amount will be reduced by any future
draws. While we believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to
maintain our access to the unsecured debt markets and to have adequate liquidity to conduct our normal business activities, our
access to the unsecured debt markets and the costs of our debt funding could be adversely affected by a number of factors,
including (a) uncertainty about the future of the GSEs; (b) if debt investors believe that the risk that we could be placed into
receivership is increasing; and (c) if we were to make significant draws in the future, and thereby significantly reduce the
amount of available funding remaining under the Purchase Agreement. For more information, see “MD&A — LIQUIDITY
AND CAPITAL RESOURCES — Liquidity — Capital Resources, the Purchase Agreement, and the Dividend Obligation on
the Senior Preferred Stock.”
Demand for Debt Funding
If investor demand for our debt securities were to decrease, our liquidity, business, and results of operations could be
materially adversely affected. The willingness of domestic and foreign investors to purchase and hold our debt securities can be
influenced by many factors, including changes in the world economy, changes in foreign-currency exchange rates, regulatory
and political factors, as well as the availability of and preferences for other investments. If investors were to divest their
holdings or reduce their purchases of our debt securities, our funding costs could increase and our business activities could be
curtailed. The market for our debt securities may become less liquid as our mortgage-related investments portfolio winds down.
This could lead to a decrease in demand for our debt securities and an increase in our funding costs.
Competition for Debt Funding
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We compete for debt funding with Fannie Mae, the FHLBs, and other institutions. Competition for debt funding from
these entities can vary with changes in economic, financial market, and regulatory environments. Increased competition for
debt funding may result in a higher cost to finance our business, which could negatively affect our financial results. An inability
to issue debt securities at attractive rates in amounts sufficient to fund our business activities and meet our obligations could
have an adverse effect on our business, liquidity, financial condition, and results of operations. See “MD&A — LIQUIDITY
AND CAPITAL RESOURCES — Liquidity — Other Debt Securities” for a description of our debt issuance programs. Our
funding costs and liquidity contingency plans may also be affected by changes in the amount of, and demand for, debt issued by
Treasury.
Line of Credit
We maintain a secured intraday line of credit to provide additional intraday liquidity to fund our activities through the
Fedwire system. This line of credit requires us to post collateral to the institution providing the line of credit. In certain
circumstances, this secured counterparty may be able to repledge the collateral underlying our financing without our consent. In
addition, because the secured intraday line of credit is uncommitted, we may not be able to continue to draw on it if and when
needed.
Any downgrade in the credit ratings of the U.S. government would likely be followed by a downgrade in our credit ratings. A
downgrade in the credit ratings of our debt could adversely affect our liquidity and other aspects of our business.
Nationally recognized statistical rating organizations play an important role in determining, by means of the ratings they
assign to issuers and their debt, the availability and cost of funding. Our credit ratings are important to our liquidity. We
currently receive ratings from three nationally recognized statistical rating organizations (S&P, Moody’s, and Fitch) for our
unsecured borrowings. These ratings are primarily based on the support we receive from Treasury, and therefore are affected by
changes in the credit ratings of the U.S. government. Any downgrade in the credit ratings of the U.S. government would be
expected to be followed or accompanied by a downgrade in our credit ratings.
Our senior long-term debt credit rating was downgraded in 2011 by S&P, following S&P’s downgrade of the credit rating
of the U.S. government, and it is possible we could experience further downgrades. S&P, Moody’s, and Fitch have recently
indicated that they could take actions on the U.S. government’s ratings if steps toward a credible deficit reduction plan are not
taken or if the U.S. experiences a weaker than expected economic recovery. For more information, see “MD&A —
LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Credit Ratings.”
In addition to a downgrade in the credit ratings of or outlook on the U.S. government, a number of other events could
adversely affect our debt credit ratings, including actions by governmental entities or others, changes in government support for
us, future GAAP losses, and additional draws under the Purchase Agreement. Any such downgrades could lead to major
disruptions in the mortgage and financial markets and to our business due to lower liquidity, higher borrowing costs, lower
asset values, and higher credit losses, and could cause us to experience net losses and net worth deficits.
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. The profitability of our multifamily business could be adversely
affected by a significant decrease in demand for K Certificates.
Security performance is one of Freddie Mac’s more significant risks and competitive issues, with both short- and long-
term implications. Our PCs are an integral part of our mortgage purchase program. Our competitiveness in purchasing single-
family mortgages from our seller/servicers, and thus the volume and/or profitability of our new single-family guarantee
business, can be directly affected by the price performance of our PCs relative to comparable Fannie Mae securities.
The profitability of our securitization financing and our ability to compete for mortgage purchases are affected by the
price differential between PCs and comparable Fannie Mae securities. Freddie Mac fixed-rate PCs provide for faster monthly
remittance of mortgage principal and interest payments to investors than Fannie Mae fixed-rate securities. However, our PCs
have typically traded at prices below the level that we believe reflects the full value of their faster remittance cycle, resulting in
a pricing discount relative to comparable Fannie Mae securities. This difference in relative pricing creates an economic
incentive for customers to conduct a disproportionate share of their single-family business with Fannie Mae and negatively
affects the financial performance of our business.
We may be unable to maintain a liquid market for our PCs, which could adversely affect the price performance of PCs
and our single-family market share. A significant reduction in our market share, and thus in the volume of mortgage loans that
we securitize, could further reduce the liquidity of our PCs. While we may employ a variety of strategies in an effort to support
the liquidity and price performance of our PCs and may consider additional strategies, any such strategies may fail or adversely
affect our business or we may cease such activities if deemed appropriate. In addition, we believe the liquidity-related price
differences between our PCs and comparable Fannie Mae securities are, in part, the result of factors that are largely outside of
our control. Thus, while we may employ strategies in an effort to support the liquidity-related price differences, we believe the
strategies currently available to us may not reduce or eliminate these price differences over the long-term. A curtailment of
mortgage-related investments portfolio purchases, sales, or retention activities may result in a decline in the volume and/or
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profitability of our new single-family guarantee business, lower comprehensive income, and an accelerated decline in the size
of our total mortgage portfolio.
In certain circumstances, we compensate customers for the difference in price between our PCs and comparable Fannie
Mae securities, and this could adversely affect the volume and/or profitability of our new single-family guarantee business. We
also 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 —
Single-Family Guarantee Segment — Securitization Activities” and “— Investments Segment — Market Presence and PC
Support Activities.”
The current Multifamily segment business model is highly dependent on the ability of Freddie Mac to finance purchased
loans through securitization into K Certificates. A significant decrease in demand for K Certificates over a long period of time
could have an adverse impact on the profitability of the Multifamily segment business. We employ a variety of strategies in an
effort to support the liquidity of our K Certificates, and may consider additional strategies if deemed appropriate. From time to
time, we purchase and sell both guaranteed K Certificates and related unguaranteed CMBS through our mortgage-related
investments portfolio.
Mortgage fraud could result in significant financial losses and harm to our reputation.
We rely on representations and warranties by seller/servicers about the characteristics of the single-family mortgage loans
we purchase and securitize, and we do not independently verify most of the information that is provided to us before we
purchase the loan. This exposes us to the risk that one or more of the parties involved in a transaction (such as the borrower,
seller, broker, appraiser, title agent, loan officer, lender or servicer) will engage in fraud by misrepresenting facts about the
property underlying the real estate transaction, borrower, or mortgage loan. While we subsequently review a sample of these
loans to determine if such loans are in compliance with our contractual standards, there can be no assurance that this will detect
or deter mortgage fraud, or otherwise reduce our exposure to the risk of fraud. We are also exposed to fraud by third parties in
the mortgage servicing function, particularly with respect to sales of REO properties, single-family short sales, and other
dispositions of non-performing assets.
Changes in interest rates could negatively impact our results of operations, net worth, and fair value of net assets.
Our investment activities and credit guarantee activities expose us to interest rate and other market risks, including
prepayment risk. Changes in interest rates could adversely affect our net interest yield, the value of our mortgage assets, and the
prepayment rate on mortgage loans we own or guarantee. We incur costs in connection with our efforts to manage these risks.
Our financial results can be significantly affected by changes in interest rates and changes in yield curves, especially
results driven by financial instruments that are measured at fair value for accounting purposes either through earnings or in
AOCI. These instruments include derivatives, trading securities, available-for-sale securities, and loans with the fair value
option elected. Additionally, increases in interest rates could increase other-than-temporary impairments on our investments in
non-agency mortgage-related securities. Higher interest rates can result in a reduction in the benefit from expected structural
credit enhancements on these securities.
Changes in interest rates may also affect prepayment projections, thus potentially affecting the fair value of our assets,
including our investments in mortgage-related assets. When interest rates fall, borrowers are more likely to prepay their
mortgage loans by refinancing them at a lower rate. An increased likelihood of prepayment on the mortgages underlying our
mortgage-related securities may adversely affect the value of these securities.
When interest rates increase, our credit losses from loans with adjustable payment terms (e.g., ARM loans) may increase
as borrower payments increase at their reset dates, which increases the borrower’s risk of default. Rising interest rates may also
reduce the opportunity for these borrowers to refinance into a fixed-rate loan. Similarly, many borrowers may have additional
debt obligations (such as home equity lines of credit and second liens) that also have adjustable payment terms. If a borrower's
payment on his or her other debt obligations increases (due to rising interest rates or change in amortization), it may increase
the risk that the borrower may default on a loan we own or guarantee.
Interest rates can fluctuate for a number of reasons, including changes in the fiscal and monetary policies of the federal
government and its agencies, such as the Federal Reserve. Federal Reserve policies directly and indirectly influence the yield
on our interest-earning assets and the cost of our interest-bearing liabilities.
Changes in OAS could materially impact our results of operations, net worth, and fair value of net assets.
OAS is a model-based estimate of the incremental yield spread between a particular financial instrument and a
benchmark yield curve. This includes consideration of potential variability in the instrument’s cash flows resulting from any
options embedded in the security, such as prepayment options. The OAS between the mortgage and agency debt sectors can
significantly affect the fair value of our net assets. The fair value impact of changes in OAS for a given period represents an
estimate of the net unrealized increase or decrease in the fair value of net assets arising from net fluctuations in OAS during
that period.
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Changes in market conditions, including changes in interest rates, liquidity, prepayment and/or default expectations, and
the level of uncertainty in the market for a particular asset class may cause fluctuations in OAS. Our financial results can be
significantly affected by changes in OAS, especially results driven by financial instruments that are measured at fair value for
accounting purposes either through earnings or in AOCI. These instruments include trading securities, available-for-sale
securities, and loans with the fair value option elected. A widening of the OAS on a given asset, which is typically associated
with a decline in the current fair value of that asset, may cause significant fair value losses, and may adversely affect our near-
term financial results and net worth. Conversely, a narrowing or tightening of the OAS is typically associated with an increase
in the current fair value of that asset, but may reduce the number of attractive investment opportunities in mortgage loans and
mortgage-related securities, and could increase the cost of our activities to support our market presence and the price
performance of our PCs. Consequently, a tightening of the OAS may adversely affect our future financial results and net worth.
See “MD&A — FAIR VALUE BALANCE SHEETS AND ANALYSIS — Consolidated Fair Value Balance Sheets Analysis —
Discussion of Fair Value Results” for a more detailed description of the impacts of changes in mortgage-to-debt OAS.
While wider spreads might create favorable investment opportunities, we are limited in our ability to take advantage of
any such opportunities due to various restrictions on our mortgage-related investments portfolio activities. See “BUSINESS —
Conservatorship and Related Matters — Limits on Investment Activity and Our Mortgage-Related Investments Portfolio.”
Negative publicity causing damage to our reputation could adversely affect our business, financial results, or net worth.
Reputation risk, or the risk to our financial results and net worth from negative public opinion, is inherent in our business.
Negative public opinion could adversely affect our ability to keep and attract customers or otherwise impair our customer
relationships, adversely affect our ability to obtain financing, impede our ability to hire and retain qualified personnel, hinder
our business prospects, or adversely impact the trading price of our securities. Perceptions regarding the practices of our
competitors, our seller/servicers or the financial services and mortgage industries as a whole, particularly as they relate to the
recent housing and economic downturn, may also adversely impact our reputation. Adverse reputation impacts on third parties
with whom we have important relationships may impair market confidence or investor confidence in our business operations as
well. In addition, negative publicity could expose us to adverse legal and regulatory consequences, including greater regulatory
scrutiny or adverse regulatory or legislative changes, and could affect what changes may occur to our business structure during
or following conservatorship, including whether we will continue to exist.
Our efforts to reduce foreclosures, modify loan terms and refinance mortgages may adversely affect our financial results.
The servicing alignment initiative, MHA Program (which includes HAMP and HARP), and other loss mitigation
activities are a key component of our strategy for managing and resolving troubled assets and lowering credit losses. However,
our loss mitigation strategies may not be successful and our credit losses may continue to remain high. The costs we incur
related to loan modifications and other activities have been, and will likely continue to be, significant. For example, with
respect to HAMP loan modifications, we bear the full cost of the monthly payment reductions related to modifications of loans
we own or guarantee, and all applicable servicer and borrower incentives, and are not reimbursed for these costs by Treasury.
We could be required or elect to make changes to our implementation of our loss mitigation activities that could make
these activities more costly to us, both in terms of credit expenses and the cost of implementing and operating the activities. For
example, we could be required to use principal reduction to achieve reduced payments for borrowers. This could further
increase our costs, as we could bear some or all of the costs of such reductions.
A significant number of loans are in the trial period of HAMP or our non-HAMP loan modification programs. A number
of loans will fail to complete the applicable trial period or qualify for our other loss mitigation programs. For these loans, the
trial period will have effectively delayed the foreclosure process and could increase our losses, to the extent the prices we
ultimately receive for the foreclosed properties are less than the prices we could have received had we foreclosed upon the
properties earlier. These delays in foreclosure could also cause our REO operations expense to increase, perhaps substantially.
Certain of our modified loans (primarily HAMP loans) have provisions whereby the interest rates on such loans, which
initially were set at a below-market rate, will increase gradually until they reach the market rate that was in effect at the time of
the modification. This increase in payments may increase the risk that these borrowers will default.
Mortgage modification initiatives, particularly any future focus on principal reductions, which at present we do not offer
to borrowers, have the potential to change borrower behavior and mortgage underwriting. Principal reductions may create an
incentive for borrowers that are current to become delinquent in order to receive a principal reduction. This, coupled with
continued high volumes of underwater mortgages, could significantly affect borrower attitudes towards homeownership, the
commitment of borrowers to making their mortgage payments, the way the market values residential mortgage assets, the way
in which we conduct business and, ultimately, our financial results.
Depending on the type of loss mitigation activities we pursue, those activities could result in accelerating or slowing
prepayments on our PCs and REMICs and Other Structured Securities, either of which could affect the pricing of such
securities.
Our current loss mitigation activities may lead to faster prepayments, which could have an impact on the earnings from
mortgage-related assets we hold in our Investments segment mortgage investments portfolio. In addition, loss mitigation
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activities may adversely affect our ability to securitize and sell the loans subject to those activities (e.g., modified single-family
mortgage loans).
At the direction of FHFA, we implemented a series of changes to HARP in late 2011 and 2012. We subsequently made
similar changes to the relief refinance mortgage initiative for loans with LTV ratios of 80% and less. There can be no assurance
that the benefits from the revised programs will exceed our costs. For example, we may face greater exposure to credit and
other losses on HARP and other relief refinance loans (starting in late 2012) because we are relieving lenders of certain
representations and warranties on the original mortgage being refinanced. In addition, due to the impact of HARP and other
refinance initiatives of Freddie Mac and Fannie Mae, we could experience declines in the fair values of certain agency security
investments classified as available-for-sale or trading resulting from changes in expectations of mortgage prepayments and
lower net interest yields over time on other mortgage-related investments. Furthermore, HARP and similar programs make it
harder to estimate prepayments, which could adversely affect our ability to hedge our mortgage-related investments.
We are devoting significant internal resources to the implementation of the servicing alignment initiative and the MHA
Program. The costs we incur related to these initiatives have been, and will likely continue to be, significant. The size and scope
of these efforts may also limit our ability to pursue other business opportunities or corporate initiatives.
For more information on our loss mitigation activities, see “MD&A — RISK MANAGEMENT — Credit Risk —
Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program.”
We may experience further write-downs and losses relating to our assets that could materially adversely affect our financial
results, liquidity and net worth.
We experienced significant losses and write-downs relating to certain of our assets in recent years, particularly between
2008 and 2012, including significant declines in market value, impairments of our investment securities, write-downs of REO
properties, losses on non-performing loans removed from PC pools, and impairments on other assets. We may experience
additional write-downs and losses relating to our assets, including those that are currently AAA-rated, and the fair values of our
assets may decline in the future. This could adversely affect our financial results, liquidity, and net worth. We may decide to
pursue certain mortgage-related investments portfolio strategies for economic reasons that could result in the immediate
recognition of losses, such as paying a premium to repurchase debt or engaging in certain asset structuring activities that result
in the write-off of premiums.
We have a significant deferred tax asset ($22.7 billion as of December 31, 2013), primarily resulting from our decision to
release the valuation allowance on our deferred tax assets in the third quarter of 2013. In future periods we will continue to
evaluate our ability to realize the net deferred tax asset. If future events significantly alter our current outlook, we may need to
reestablish the valuation allowance. If this occurs, we would incur additional income tax expense and might require additional
draws under the Purchase Agreement, which could be significant. For more information, see "MD&A — CONSOLIDATED
BALANCE SHEETS ANALYSIS — Deferred Tax Assets and Liabilities."
There may not be an active, liquid trading market for our equity securities.
Our common stock and the publicly traded classes of our preferred stock trade exclusively on the OTCQB Marketplace.
Trading volumes on the OTCQB Marketplace can fluctuate significantly, and may not be stable, which could make it difficult
for investors to execute transactions in our securities and could make the prices of our securities decline or be volatile.
Operational Risks
Our business may be adversely affected if we are unable to hire and retain qualified employees.
Our performance is largely dependent on the talents and efforts of highly skilled individuals. Our ability to recruit and
retain executives and other employees with the necessary skills to conduct our business has at times in the past been, and may
in the future be, adversely affected by the actions taken by Congress, Treasury, and the Conservator (e.g., significant
restrictions on compensation), or that may be taken by them or other government agencies in the future, the uncertainty
regarding the duration of the conservatorship, the potential for future legislative or regulatory actions that could significantly
affect our existence and our role in the secondary mortgage market, and negative publicity concerning the GSEs. We face
competition from inside and outside of the financial services industry for qualified employees. Additionally, an improving
economy may put additional pressures on turnover, as more attractive opportunities become available to our employees.
Accordingly, we may not be able to retain or replace executives or other employees with the requisite institutional knowledge
and the technical, operational, risk management, and other key skills needed to conduct our business effectively.
We have incurred, and will continue to incur, expenses and we may otherwise be adversely affected by delays and
deficiencies in the foreclosure process.
We have been, and will likely continue to be, adversely affected by delays and deficiencies in the foreclosure process,
which could increase our expenses. The average length of time for foreclosure of a Freddie Mac loan significantly increased in
recent years, particularly in states that require a judicial foreclosure process, and may further increase. Delays in the foreclosure
process could cause our expenses to increase for a number of reasons. For example, properties awaiting foreclosure could
deteriorate until we acquire ownership of them through foreclosure. This would increase our expenses to repair and maintain
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the properties when we do acquire them. Such delays may also adversely affect the values of, and our losses on, the non-agency
mortgage-related securities we hold. Delays in the foreclosure process may also adversely affect trends in home prices
regionally or nationally, which could also adversely affect our financial results.
It also is possible that mortgage insurance claims could be reduced or denied if servicers do not follow proper procedures
in addressing seriously delinquent borrowers, including if servicers do not complete foreclosures within required timelines.
Delays in the foreclosure process could create fluctuations in our single-family credit statistics. For example, our
realization of credit losses, which consists of REO operations income (expense) plus charge-offs, net, could be delayed because
we typically record charge-offs at the time we take ownership of a property through foreclosure. Delays could also temporarily
increase the number of seriously delinquent loans that remain in our single-family mortgage portfolio, which could result in
higher reported serious delinquency rates and a larger number of non-performing loans than would otherwise have been the
case.
Issues related to the MERS System could delay or disrupt foreclosure activities and could have an adverse effect on our
business.
The MERS® System is an electronic registry that is widely used by seller/servicers, Freddie Mac, and other participants in
the mortgage finance industry to maintain records of beneficial ownership of mortgages. The MERS System is owned and
operated by MERSCORP Holdings, Inc., a privately held company, the shareholders of which include a number of
organizations in the mortgage industry (including Freddie Mac).
Numerous lawsuits have been filed challenging foreclosures conducted using the MERS System. It is possible that
adverse judicial decisions, regulatory proceedings or action, or legislative action could delay or disrupt foreclosure of
mortgages that are registered on the MERS System.
Federal or state legislation or regulatory action could prevent us from using the MERS System for mortgages that we
own, guarantee, and securitize, or could create additional requirements for the transfer of mortgages that could affect the
process for and costs of acquiring, transferring, servicing, and foreclosing on mortgages. Such legislation or regulatory action
could increase our costs or otherwise adversely affect our business. For example, we could be required to transfer mortgages
out of the MERS System. Approximately 45% of the loans Freddie Mac owns or guarantees were registered in MERS’ name as
of December 31, 2013.
Failures by MERSCORP Holdings and its subsidiaries to apply prudent and effective process controls and to comply with
legal and other requirements in the foreclosure process could pose legal, reputational, and operational risks for us.
Weaknesses in internal control over financial reporting and in disclosure controls could result in errors and inadequate
disclosures, affect operating results, and cause investors to lose confidence in our reported results.
Our business could be adversely affected by control deficiencies or failures. Control deficiencies could result in errors in
our financial statements, lead to inadequate or untimely disclosures, and affect operating results. Control deficiencies could also
cause investors to lose confidence in our reported financial results, which may have an adverse effect on the trading price of our
securities. For information about our ineffective disclosure controls and our one material weakness in internal control over
financial reporting, see “CONTROLS AND PROCEDURES.”
There are a number of factors that may impede our efforts to establish and maintain effective disclosure controls and
internal control over financial reporting, including: (a) the nature of the conservatorship and our relationship with FHFA;
(b) the complexity of, and significant changes in, our business activities and related GAAP requirements; (c) employee and
management turnover; (d) data quality; and (e) servicing-related issues.
Effectively designed and operated internal control over financial reporting provides only reasonable assurance that
material errors in our financial statements will be prevented or detected on a timely basis. A failure to maintain effective
internal control over financial reporting increases the risk of a material error in our reported financial results and delay in our
financial reporting timeline.
We face risks and uncertainties associated with the models that we use for financial accounting and reporting purposes, to
make business decisions, and to manage risks. Market conditions have raised these risks and uncertainties.
We face risk associated with our use of models for financial accounting and reporting purposes, and to manage business
risks. First, there is inherent uncertainty associated with model results. Second, we could fail to properly implement, operate, or
use our models. Either of these situations could adversely affect our financial statements, financial and risk-related disclosures,
and our ability to manage risks.
We use market-based information to construct our models. However, it can take time for data providers to prepare
information, and thus the most recent information may not be available for the preparation of our financial statements. When
market conditions change quickly and in unforeseen ways, there is an increased risk that our models are not representative of
current market conditions. For example, models may not fully capture the effect of certain economic events or government
policies, which makes it more difficult to assess model performance and requires a higher degree of management judgment.
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Our models may not perform as well in situations for which there are few or no recent historical precedents. We have adjusted
our models in response to recent events, but there remains considerable uncertainty about model results.
Models are inherently imperfect predictors of actual results. Our models rely on various assumptions that may be
incorrect, including that historical experience can be used to predict future results. In recent years, it has been more difficult to
predict the behaviors of the housing and credit capital markets and market participants.
We face the risk that we could fail to implement, operate, adjust or use our models properly. For example, the
assumptions underlying a model could be invalid, or we could apply a model to events or products outside the model’s intended
use. We may fail to code a model correctly or we could use incorrect data. The complexity and interconnectivity of our models
create additional risk regarding the accuracy of model output.
We have increased our use of third-party models. While the use of such models may reduce risk (e.g., where no internal
model is available), it may expose us to additional risk as third-parties typically do not provide us with proprietary information
regarding their models. We also may have little control over the process by which the models are adjusted or changed. As a
result, we may not fully account for the risks associated with the use of such models.
Management often needs to exercise judgment to interpret or adjust modeled results to take into account new information
or changes in conditions. The dramatic changes in the housing and credit capital markets in recent years have required frequent
adjustments to our models and the application of greater management judgment in the interpretation and adjustment of the
results produced by our models. This further increases both the uncertainty about model results and the risk of errors in the
implementation, operation, or use of the models.
We face the risk that the valuations, risk metrics, amortization results, loan loss reserve estimations, and security
impairment charges produced by our models may be different from actual results, which could adversely affect our business
results, cash flows, fair value of net assets, business prospects, and future financial results.
We also face risk that we could make poor business decisions in areas where model results are an important factor,
including loan purchases, securitizations and sales of loans, purchases and sales of securities, funding strategy, management
and guarantee fee pricing, interest-rate risk management, market risk management, credit risk management, quality-control
sampling strategies for loans in our single-family credit guarantee portfolio, and representation and warranty and other
settlements with our counterparties. Furthermore, any strategies we employ to attempt to manage the risks associated with our
use of models may not be effective. See “MD&A — CRITICAL ACCOUNTING POLICIES AND ESTIMATES” and
“QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — Interest-Rate Risk and Other Market
Risks” for more information on our use of models.
Changes in our accounting policies, as well as estimates we make, could materially affect how we report our financial
condition or results of operations.
Our accounting policies are fundamental to understanding our financial condition and results of operations. Certain of our
accounting policies, as well as estimates we make, are “critical,” as they are both important to the presentation of our financial
condition and results of operations and they require management to make particularly difficult, complex or subjective
judgments and estimates, often regarding matters that are inherently uncertain. Actual results could differ from our estimates
and the use of different judgments and assumptions related to these policies and estimates could have a material impact on our
consolidated financial statements. For a description of our critical accounting policies, see “MD&A — CRITICAL
ACCOUNTING POLICIES AND ESTIMATES.”
From time to time, the FASB and the SEC change the financial accounting and reporting guidance that governs the
preparation of our financial statements. The implementation of new or revised accounting guidance could result in material
adverse effects to our net worth and result in or contribute to the need for additional draws under the Purchase Agreement.
FHFA may require us to change our accounting policies, including to align more closely with those of Fannie Mae. FHFA
may also require us and Fannie Mae to have the same independent public accounting firm. Either of these events could
significantly increase our expenses and require a substantial time commitment of management. For example, in April 2012,
FHFA issued an Advisory Bulletin that could have a significant effect on our provision for credit losses in the future. The
accounting methods outlined in FHFA’s advisory bulletin are significantly different from our current methods of accounting for
single-family loans that are 180 days or more delinquent. For more information, see “BUSINESS — Regulation and
Supervision — Legislative and Regulatory Developments — FHFA Advisory Bulletin.”
A failure in our operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our
business, damage our reputation, and cause losses.
We face significant levels of operational risk, due to a variety of factors, including the complexity of our business
operations and the amount of change to our core systems required to keep pace with regulatory and other requirements.
Shortcomings or failures in our internal processes, people, or systems could lead to impairment of our liquidity, financial
and economic loss, errors in our financial statements, disruption of our business, liability to customers, further legislative or
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regulatory intervention, or reputational damage. Our application portfolio contains certain legacy systems that require manual
support and intervention, which may lead to heightened risk of system failures.
Our business is highly dependent on our ability to process a large number of transactions on a daily basis and manage and
analyze significant amounts of information, much of which is provided by third parties. The transactions we process are
complex and are subject to various legal, accounting, and regulatory standards. The types of transactions we process and the
standards relating to those transactions can change rapidly in response to external events, such as the implementation of
government-mandated programs and changes in market conditions. Our financial, accounting, data processing, or other
operating systems and facilities may fail to operate properly or become disabled, adversely affecting our ability to process these
transactions. Our systems may contain design flaws. The information provided by third parties may be incorrect, or we may fail
to properly manage or analyze it. The inability of our systems to accommodate an increasing volume of transactions or new
types of transactions or products could constrain our ability to pursue new business initiatives or change or improve existing
business activities.
We also face increased operational risk due to the magnitude and complexity of the new initiatives we are undertaking,
including our effort to help build a new housing finance system. Some of these initiatives require significant changes to our
operational systems. In some cases, the changes must be implemented within a short period of time. Our legacy systems may
also create increased operational risk for these new initiatives.
Our employees could act improperly for their own gain and cause unexpected losses or reputational damage. While we
have processes and systems in place designed to prevent and detect fraud, there can be no assurance that such processes and
systems will be successful.
Most of our key business activities are conducted in our offices in Virginia and represent a concentrated risk of people,
technology, and facilities. As a result, a power outage or other infrastructure disruption in the area near our offices could
significantly adversely affect our ability to conduct normal business operations. A terrorist event or natural disaster in the area
near our offices could have a similar impact. Any measures we take to mitigate this risk may not be sufficient to respond to the
full range of events that may occur.
We may not be able to protect the security of our systems or the confidentiality of our information from cyber attack and
other unauthorized access, disclosure, and disruption.
Our operations rely on the secure receipt, processing, storage, and transmission of confidential and other information in
our computer systems and networks and with our business partners. Like many corporations and government entities, from time
to time we have been, and likely will continue to be, the target of attempted cyber attacks. Although Freddie Mac devotes
significant resources to protecting its various systems and processes, there is no assurance that Freddie Mac’s security measures
will provide fully effective security. Our computer systems, software, and networks may be vulnerable to cyber attack,
unauthorized access, computer viruses or other malicious code, or other attempts to harm our systems or misuse or steal
confidential information. If one or more of such events were to occur, this potentially could jeopardize or result in the
unauthorized disclosure, misuse or corruption of confidential and other information (including information of borrowers, our
customers or our counterparties), or otherwise cause interruptions or malfunctions in our operations or the operations of our
customers or counterparties. This could result in significant losses or reputational damage, adversely affect our relationships
with our customers and counterparties, negatively impact our competitive position, and otherwise harm our business. We could
also face regulatory action. We might be required to expend significant additional resources to modify our protective measures
or to investigate and remediate vulnerabilities or other exposures, and we might be subject to litigation and financial losses that
are not fully insured. In addition, there can be no assurance that our business partners and counterparties are adequately
protecting the confidential and other information that we share with them. As a result, a cyber attack on their systems and
networks, or breach of their security measures, may result in harm to our business and business relationships.
We rely on third parties for certain important functions. Any failures by those vendors could disrupt our business
operations.
At times, we outsource certain key functions to external parties, including some that are critical to financial reporting, our
mortgage-related investment activity, and mortgage loan underwriting. We may enter into other key outsourcing relationships in
the future. If one or more of these key external parties were not able to perform their functions for a period of time, at an
acceptable service level, or for increased volumes, our business operations could be constrained, disrupted, or otherwise
negatively affected. Our use of vendors also exposes us to the risk of a loss of intellectual property or of confidential
information or other harm. We may also be exposed to reputational harm, to the extent vendors do not conduct their activities
under appropriate ethical standards. Our ability to monitor the activities or performance of vendors may be constrained.
Legal and Regulatory Risks
Legislative or regulatory actions could adversely affect our business activities and financial results.
In addition to possible GSE reform discussed in “Conservatorship and Related Matters — The future status and role of
Freddie Mac are uncertain,” our business may be directly adversely affected by other legislative and regulatory actions at the
federal, state, and local levels. Legislative or regulatory actions could affect us in a number of ways, including by imposing
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significant additional costs on us and diverting management attention or other resources. Judicial actions at the federal, state, or
local level could have a similar effect. We could be negatively affected by legislation or regulatory action that changes the
foreclosure process of any individual state. For example, various states and local jurisdictions have implemented mediation
programs designed to bring servicers and borrowers together to negotiate workout options. These actions could delay the
foreclosure process and increase our expenses, including by potentially delaying the final resolution of seriously delinquent
mortgage loans and the disposition of non-performing assets. We could also be affected by any legislative or regulatory changes
that would expand the responsibilities and liability of servicers and assignees for maintaining vacant properties prior to
foreclosure. These laws and regulatory changes could significantly expand mortgage costs and liabilities. We could be affected
by legislative or regulatory changes that permit or require principal reductions. Our business could also be adversely affected
by any modification, reduction, or repeal of the federal income tax deductibility of mortgage interest payments. A number of
local governments are considering or may consider using eminent domain to seize mortgage loans and forgive principal on the
loans. Such seizures, if they are successful, could result in further losses and write-downs relating to our investment securities
and could increase our credit losses. We are subject to lawsuits challenging our statutory exemption from certain real estate
transfer taxes. If we were to lose this exemption, our financial results could be adversely affected.
The Dodd-Frank Act, which was signed into law on July 21, 2010, significantly changed the regulation of the mortgage
and financial services industries and could affect us in substantial and unforeseeable ways. For example, the Dodd-Frank Act
and related current and future regulatory changes could require us to change our business practices, such as practices related to
mortgage underwriting and servicing. The Dodd-Frank Act will create new standards and requirements related to asset-backed
securities, including requiring securitizers and potentially originators to retain a portion of the underlying loans’ credit risk. Any
such new standards and requirements could modify or remove incentives for financial institutions to sell mortgage loans to us.
For more information on the Dodd-Frank Act, see “BUSINESS — Regulation and Supervision — Legislative and Regulatory
Developments.”
Legislation or regulatory actions could indirectly adversely affect us to the extent such legislation or actions affect the
activities of banks, savings institutions, insurance companies, securities dealers, and other regulated entities that constitute a
significant part of our customer base or counterparties, or could indirectly affect us to the extent that they modify industry
practices. Legislative or regulatory provisions that remove incentives for these entities to sell mortgage loans to us, purchase
our securities or enter into derivatives or other transactions with us could have a material adverse effect on our business results
and financial condition. The Dodd-Frank Act and related current and future regulatory changes may significantly change the
business practices of our customers and counterparties, and it is possible that any such changes will adversely affect our
business and financial results. For example, the Dodd-Frank Act and related regulatory changes could have a negative effect on
the volume of mortgage originations, and thus adversely affect the number of mortgages available for us to purchase or
guarantee.
U.S. banking regulators have substantially revised the capital and liquidity requirements applicable to banking
organizations, based on the Basel III standards developed by the Basel Committee on Banking Supervision. Phase-in of the new
bank capital and liquidity requirements (some of which have not been finalized) will take several years and there is significant
uncertainty about the extent to which implementation of the new requirements by banking organizations may affect us. For
example, the emerging regulatory framework could affect demand for our securities and/or competition in the market for
mortgage originations and servicing, with possible adverse consequences for our business results and financial condition.
We may make certain changes to our business in an attempt to meet our housing goals and subgoals.
We may make adjustments to our mortgage loan sourcing and purchase strategies in an effort to meet our housing goals
and subgoals, including changes to our underwriting standards and the expanded use of targeted initiatives to reach underserved
populations. For example, we may purchase loans that offer lower expected returns on our investment and potentially increase
our exposure to credit losses. Doing so could cause us to forgo other purchase opportunities that we would expect to be more
profitable. If our current efforts to meet the goals and subgoals prove to be insufficient, we may need to take additional steps
that could potentially adversely affect our profitability. FHFA has not yet published a final rule with respect to our duty to serve
underserved markets. However, it is possible that we could also make changes to our business in the future in response to this
duty. If we do not meet our housing goals or duty to serve requirements, and FHFA finds that the goals or requirements were
feasible, we may become subject to a housing plan that could require us to take additional steps that could have an adverse
effect on our results of operations and financial condition.
We are involved in legal proceedings that could result in the payment of substantial damages or otherwise harm our
business.
We are a party to various claims and other legal proceedings. We also have been, and in the future may be, involved in
government investigations and IRS examinations. In addition, certain of our former officers are involved in legal proceedings
for which they may be entitled to reimbursement by us for costs and expenses of the proceedings. We may be required to
establish reserves and to make substantial payments in the event of adverse judgments or settlements of any such claims,
investigations, proceedings, or examinations. Any legal proceeding, governmental investigation, or IRS examination issue,
even if resolved in our favor, could result in negative publicity or cause us to incur significant legal and other expenses.
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Furthermore, developments in, outcomes of, impacts of, and costs, expenses, settlements, and judgments related to these legal
proceedings and governmental investigations and examinations may differ from our expectations and exceed any amounts for
which we have reserved or require adjustments to such reserves. The defense of, or other involvement in, these various matters
could divert management’s attention and other resources from the needs of the business. In addition, a number of lawsuits have
been filed against the U.S. government relating to conservatorship and the Purchase Agreement that could adversely affect us.
See “LEGAL PROCEEDINGS” and “NOTE 17: LEGAL CONTINGENCIES” for information about these various pending
legal proceedings.
None.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
Our principal offices consist of five office buildings in McLean, Virginia. We own four of the office buildings,
comprising approximately 1.3 million square feet. We occupy the fifth building, comprising approximately 200,000 square feet,
under a lease from a third party.
ITEM 3. LEGAL PROCEEDINGS
We are involved as a party to a variety of legal proceedings arising from time to time in the ordinary course of business.
See “NOTE 17: LEGAL CONTINGENCIES” for more information regarding our involvement as a party to various legal
proceedings.
Litigation Against the U.S. Government Concerning Conservatorship and the Purchase Agreement
Between June and September 2013, a number of lawsuits were filed against the U.S. government and, in some cases, the
Secretary of the Treasury and the then Acting Director of FHFA challenging certain government actions related to the
conservatorship (including actions taken in connection with the imposition of conservatorship) and the Purchase Agreement.
Several of the lawsuits seek to invalidate the net worth sweep dividend provisions of the senior preferred stock, which were
implemented pursuant to the August 2012 amendment to the Purchase Agreement. Another lawsuit challenging the Purchase
Agreement was filed in February 2014, and it is possible that additional similar lawsuits will be filed in the future. Freddie Mac
is not a party to any of these lawsuits. However, a number of other lawsuits have been filed against Freddie Mac concerning the
August 2012 amendment to the Purchase Agreement. See “NOTE 17: LEGAL CONTINGENCIES— Litigation Concerning
the Purchase Agreement” for more information on the lawsuits filed against Freddie Mac.
It is not possible for us to predict the outcome of these lawsuits, or the actions the U.S. government (including Treasury
and FHFA) might take in response to any ruling or finding in any of these lawsuits or any future lawsuits. However, it is
possible that we could be adversely affected by these events, including, for example, by changes to the Purchase Agreement, or
any resulting actual or perceived changes in the level of U.S. government support for our business.
Litigation Concerning Housing Trust Fund
On July 9, 2013, plaintiffs filed a lawsuit in the U.S. District Court for the Southern District of Florida styled Samuels et
al. vs. FHFA and DeMarco. Freddie Mac is not a party to this lawsuit. In the lawsuit, plaintiffs challenge FHFA’s decision to
suspend Freddie Mac's and Fannie Mae’s payments to an affordable housing trust fund managed by HUD. In November 2008,
FHFA advised us that it has suspended the requirement to set aside or allocate funds for this trust fund until further notice. See
“BUSINESS — Regulation and Supervision — Federal Housing Finance Agency — Affordable Housing Allocations” for more
information. In October 2013, FHFA moved to dismiss the complaint and shortly thereafter plaintiffs filed an amended
complaint. Plaintiffs’ amended complaint alleges that FHFA’s actions in ordering Freddie Mac and Fannie Mae to suspend
payments to the trust fund, and FHFA’s failure to review its decision to suspend payments once Freddie Mac and Fannie Mae’s
financial circumstances changed, violated the Administrative Procedure Act. The plaintiffs ask that the Court, among other
items, vacate and set aside FHFA’s decision to indefinitely suspend payments by Fannie Mae and Freddie Mac to the trust fund,
and order FHFA to instruct Freddie Mac and Fannie Mae to proceed as if FHFA’s suspension of payments to the trust fund had
never taken place. Plaintiffs also seek reasonable attorneys’ fees and costs. On December 6, 2013, FHFA filed a motion to
dismiss the amended complaint, which plaintiffs have opposed.
It is not possible for us to predict the outcome of this lawsuit, or the actions FHFA might take in response to any ruling or
finding in this lawsuit. If we are required to contribute some or all of the amounts we would have contributed to the trust fund
in past years had FHFA not suspended these allocations or to begin contributing these amounts in the future, it could have an
adverse impact on our financial results.
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
Market Information
Our common stock, par value $0.00 per share, trades on the OTCQB Marketplace, operated by the OTC Markets Group
Inc., under the ticker symbol “FMCC.” As of February 14, 2014, there were 650,039,533 shares of our common stock
outstanding.
The table below sets forth the high and low bid information for our common stock on the OTCQB Marketplace for the
indicated periods and reflects inter-dealer prices, without retail mark-up, mark-down, or commission, and may not necessarily
represent actual transactions.
Table 5 — Quarterly Common Stock Information
2013 Quarter Ended
December 31
September 30
June 30
March 31
2012 Quarter Ended
December 31
September 30
June 30
March 31
Holders
$
$
High
Low
$
$
3.24
1.65
5.00
1.44
0.32
0.33
0.33
0.42
1.26
0.98
0.67
0.27
0.24
0.14
0.24
0.21
As of February 14, 2014, we had 1,904 common stockholders of record.
Dividends and Dividend Restrictions
We did not pay any cash dividends on our common stock during 2013 or 2012. Our payment of dividends is subject to
the following restrictions:
Restrictions Relating to the Conservatorship
As Conservator, FHFA announced on September 7, 2008 that we would not pay any dividends on Freddie Mac’s common
stock or on any series of Freddie Mac’s preferred stock (other than the senior preferred stock). FHFA has instructed our Board
of Directors that it should consult with and obtain the approval of FHFA before taking actions involving dividends. In addition,
FHFA has adopted a regulation prohibiting us from making capital distributions during conservatorship, except as authorized
by the director of FHFA.
Restrictions Under the Purchase Agreement
The Purchase Agreement prohibits us and any of our subsidiaries from declaring or paying any dividends on Freddie Mac
equity securities (other than with respect to the senior preferred stock or warrant) without the prior written consent of Treasury.
Restrictions Under the GSE Act
Under the GSE Act, FHFA has authority to prohibit capital distributions, including payment of dividends, if we fail to
meet applicable capital requirements. Under the GSE Act, we are not permitted to make a capital distribution if, after making
the distribution, we would be undercapitalized, except the Director of FHFA may permit us to repurchase shares if the
repurchase is made in connection with the issuance of additional shares or obligations in at least an equivalent amount and will
reduce our financial obligations or otherwise improve our financial condition. If FHFA classifies us as undercapitalized, we are
not permitted to make a capital distribution that would result in our being reclassified as significantly undercapitalized or
critically undercapitalized. If FHFA classifies us as significantly undercapitalized, approval of the Director of FHFA is required
for any capital distribution; the Director may approve a capital distribution only if the Director determines that the distribution
will enhance the ability of the company to meet required capital levels promptly, will contribute to the long-term financial
safety-and-soundness of the company, or is otherwise in the public interest. Our capital requirements have been suspended
during conservatorship.
Restrictions Under our Charter
Without regard to our capital classification, we must obtain prior written approval of FHFA to make any capital
distribution that would decrease total capital to an amount less than the risk-based capital level or that would decrease core
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capital to an amount less than the minimum capital level. As noted above, our capital requirements have been suspended during
conservatorship.
Restrictions Relating to Subordinated Debt
During any period in which we defer payment of interest on qualifying subordinated debt, we may not declare or pay
dividends on, or redeem, purchase or acquire, our common stock or preferred stock. Our qualifying subordinated debt provides
for the deferral of the payment of interest for up to five years if either: (a) our core capital is below 125% of our critical capital
requirement; or (b) our core capital is below our statutory minimum capital requirement, and the Secretary of the Treasury,
acting on our request, exercises his or her discretionary authority pursuant to Section 306(c) of our charter to purchase our debt
obligations. FHFA has directed us to make interest and principal payments on our subordinated debt, even if we fail to maintain
required capital levels. As a result, the terms of any of our subordinated debt that provide for us to defer payments of interest
under certain circumstances, including our failure to maintain specified capital levels, are no longer applicable. As noted above,
our capital requirements have been suspended during conservatorship.
Restrictions Relating to Preferred Stock
Payment of dividends on our common stock is also subject to the prior payment of dividends on our 24 series of preferred
stock and one series of senior preferred stock, representing an aggregate of 464,170,000 shares and 1,000,000 shares,
respectively, outstanding as of December 31, 2013. Payment of dividends on all outstanding preferred stock, other than the
senior preferred stock, is subject to the prior payment of dividends on the senior preferred stock. We paid dividends on the
senior preferred stock during 2013 at the direction of the Conservator, as discussed in “MD&A — LIQUIDITY AND
CAPITAL RESOURCES — Capital Resources, the Purchase Agreement, and the Dividend Obligation on the Senior Preferred
Stock” and “NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT) — Dividends Declared.” We did not declare or pay dividends
on any other series of preferred stock outstanding in 2013.
Recent Sales of Unregistered Securities
The securities we issue are “exempted securities” under the Securities Act of 1933, as amended. As a result, we do not
file registration statements with the SEC with respect to offerings of our securities.
Following our entry into conservatorship, we suspended the operation of, and ceased making grants under, equity
compensation plans. Previously, we had provided equity compensation under these plans to employees and members of our
Board of Directors. Under the Purchase Agreement, we cannot issue any new options, rights to purchase, participations, or
other equity interests without Treasury’s prior approval. However, grants outstanding as of the date of the Purchase Agreement
remain in effect in accordance with their terms. No stock options were exercised during the three months ended December 31,
2013. See “NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT)” for more information.
Issuer Purchases of Equity Securities
We did not repurchase any of our common or preferred stock during 2013. Additionally, we do not currently have any
outstanding authorizations to repurchase common or preferred stock. Under the Purchase Agreement, we cannot repurchase our
common or preferred stock without Treasury’s prior consent, and we may only purchase or redeem the senior preferred stock in
certain limited circumstances set forth in the certificate of designation of the senior preferred stock.
Transfer Agent and Registrar
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
Telephone: 781-575-2879
http://www.computershare.com/investors
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The selected financial data presented below should be reviewed in conjunction with MD&A and our consolidated
ITEM 6. SELECTED FINANCIAL DATA
financial statements and related notes.
Table 6 — Selected Financial Data(1)
Statements of Comprehensive Income Data
Net interest income
Benefit (provision) for credit losses
Non-interest income (loss)
Non-interest expense
Income tax benefit
Net income (loss) attributable to Freddie Mac
Total comprehensive income (loss) attributable to Freddie
Mac
Loss attributable to common stockholders(2)
Loss per common share – basic and diluted
Cash dividends per common share
Weighted average common shares outstanding (in
thousands) – basic and diluted(3)
Balance Sheets Data
Mortgage loans held-for-investment, at amortized cost by
consolidated trusts (net of allowances for loan losses)
Total assets
Debt securities of consolidated trusts held by third parties
Other debt
All other liabilities
Total Freddie Mac stockholders’ equity (deficit)
Portfolio Balances(4)
Mortgage-related investments portfolio
Total Freddie Mac mortgage-related securities(5)
Total mortgage portfolio(6)
Non-performing assets(7)
Ratios(8)
Return on average assets(9)
Non-performing assets ratio(10)
Equity to assets ratio(11)
At or For The Year Ended December 31,
2013
2012
2011
2010
2009
(dollars in millions, except share-related amounts)
$
16,468
$
17,611
$
18,397
$
16,856
$
2,465
8,519
(2,089)
23,305
48,668
51,600
(3,531)
(1.09)
—
(1,890)
(4,083)
(2,193)
1,537
10,982
16,039
(2,074)
(0.64)
—
(10,702)
(10,878)
(2,483)
400
(5,266)
(1,230)
(11,764)
(3.63)
—
(17,218)
(11,588)
(2,932)
856
(14,025)
282
(19,774)
(6.09)
—
17,073
(29,530)
(2,732)
(7,195)
830
(21,553)
(2,913)
(25,658)
(7.89)
—
3,238,047
3,240,028
3,244,896
3,249,369
3,253,836
$
1,529,905
$
1,495,932
$
1,564,131
$
1,646,172
$
1,966,061
1,433,984
506,767
12,475
12,835
1,989,856
1,419,524
547,518
13,987
8,827
2,147,216
1,471,437
660,546
15,379
2,261,780
1,528,648
713,940
19,593
(146)
(401)
—
841,784
—
780,604
56,808
4,278
$
461,024
$
557,544
$
653,313
$
696,874
$
755,272
1,592,511
1,914,661
127,991
1,562,040
1,956,276
135,677
1,624,684
2,075,394
129,152
1,712,918
2,164,859
125,405
1,854,813
2,250,539
104,984
2.5%
7.1
0.5
0.5%
7.5
0.2
(0.2)%
6.8
—
(0.6)%
6.4
(0.2)
(2.5)%
5.2
(1.6)
(1) See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for information regarding our accounting policies and the impact of new
accounting policies on our consolidated financial statements. Effective January 1, 2010, we adopted amendments to the accounting guidance for
transfers of financial assets and the consolidation of VIEs. This had a significant impact on our consolidated financial statements. Consequently, certain
of the line items in our consolidated financial statements for 2009 are not comparable with those of more recent years.
(2) For a discussion of how the change in the manner in which the senior preferred stock dividend is determined 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.”
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.
(3)
(4) Represents the UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(5) See ‘‘Table 33 — Freddie Mac Mortgage-Related Securities’’ for the composition of this line item.
(6) See ‘‘Table 15 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios’’ for the composition of our total mortgage portfolio.
(7) See ‘‘Table 53 — 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 Freddie Mac
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) attributable to Freddie Mac 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 Freddie Mac stockholders’ equity (deficit) divided by the simple
average of the beginning and ending balances of total assets.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read this MD&A in conjunction with "BUSINESS — Executive Summary" and our consolidated financial
statements and related notes.
MORTGAGE MARKET AND ECONOMIC CONDITIONS, AND OUTLOOK
Mortgage Market and Economic Conditions
Overview
The U.S. real gross domestic product rose by 2.7% during 2013, measured on a fourth quarter to fourth quarter basis,
compared to 2.0% in 2012, according to the Bureau of Economic Analysis. The national unemployment rate was 6.7% in
December 2013, compared to 7.9% in December 2012, based on data from the U.S. Bureau of Labor Statistics. In the data
underlying the unemployment rate, an average of approximately 194,000 monthly net new jobs (non-farm) were added to the
economy during 2013, which shows evidence of a slow, but steady positive trend for the economy and the labor market. Long-
term interest rates, such as those of 30-year fixed-rate mortgages, generally increased during 2013. For example, based on our
weekly Primary Mortgage Market Survey, the rate on 30-year fixed-rate conforming mortgages with an average LTV ratio of
80% averaged 4.5% in December 2013 compared to 3.4% in December 2012. This increase led to a significant reduction of
single-family refinance mortgage activity in 2013.
Table 7 — Mortgage Market Indicators
Home sale units (in thousands)(1)
National home price change(2)
Single-family originations (in billions)(3)
ARM share(4)
Refinance share(5)
U.S. single-family mortgage debt outstanding (in billions)(6)
U.S. multifamily mortgage debt outstanding (in billions)(6)
Year Ended December 31,
2013
2012
2011
5,518
9.3%
5,028
5.9%
1,890
$
2,120
$
14%
73%
9,864
908
$
$
11%
84%
9,930
881
$
$
4,566
(3.2)%
1,495
12 %
79 %
10,183
857
$
$
$
(1) Consists of sales of new and existing homes in the U.S. Source: National Association of Realtors news release dated February 21, 2014 (sales of
existing homes) and U.S. Census Bureau news release dated January 27, 2014 (sales of new homes).
(2) Calculated internally using estimates of changes in single-family home prices by state, which are weighted using the property values underlying our
single-family credit guarantee portfolio to obtain a national index. The rate for each year presented incorporates property value information on loans
purchased by both Freddie Mac and Fannie Mae through December 31, 2013 and the percentage change will be subject to revision based on more
recent purchase information. 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.
(3) Source: Inside Mortgage Finance estimates of originations of single-family first-and second liens dated January 31, 2014.
(4) ARM share of the dollar amount of total mortgage applications. Source: Mortgage Bankers Association’s Mortgage Applications Survey. Data reflect
annual average of weekly figures.
(5) Refinance share of the number of conventional mortgage applications. Source: Mortgage Bankers Association’s Mortgage Applications Survey. Data
reflect annual average of weekly figures.
(6) Source: Federal Financial Accounts of the United States dated December 9, 2013. The outstanding amounts for 2013 presented above reflect balances
as of September 30, 2013.
Single-Family Housing Market
The single-family housing market improved significantly in 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 2013 were 5.09 million, increasing
9% from 4.66 million in 2012. Based on data from the U.S. Census Bureau and HUD, sales of new homes in 2013 were
428,000, increasing 16% from 368,000 in 2012. Home prices increased during both 2013 and 2012, with our nationwide index
registering approximately a 9.3% increase from December 2012 through December 2013 and a 5.9% increase from December
2011 to December 2012. Despite these increases, our national home price index reflects a cumulative decline of 15% since June
2006. 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.
The serious delinquency rate of our single-family loans declined during both 2013 and 2012 and was 2.39% as of
December 31, 2013. The Mortgage Bankers Association reported in its National Delinquency Survey that serious delinquency
rates on all single-family loans in the survey declined to 5.4% as of December 31, 2013, down from 6.8% at December 31,
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2012. Borrower delinquency rates have been generally worse in areas with higher unemployment rates and where declines in
property values have been more significant during recent years.
Based on the National Delinquency Survey’s data, we estimate that we owned or guaranteed approximately 23% of the
single-family mortgages outstanding in the U.S. at December 31, 2013, based on number of loans. At December 31, 2013, we
held or guaranteed approximately 255,000 seriously delinquent single-family loans, representing approximately 10% of the
seriously delinquent single-family mortgages in the market as of that date.
Multifamily Housing Market
The multifamily market has experienced strong rent and occupancy trends over the last several years, although the pace
slowed in 2013. These strong fundamentals, coupled with low interest rates, drove an increase in investor demand for
multifamily properties. The most recent preliminary data reported by Reis, Inc. indicated that the national apartment vacancy
rate declined by 50 basis points during 2013 to 4.1% in the fourth quarter, representing the lowest level since 2001. In addition,
Reis, Inc. reported that effective rents grew by 3.2% during 2013, compared to 3.9% during 2012. 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. According to the latest information available
from Moody's Analytics, Inc. and Real Capital Analytics, Inc., apartment prices rose approximately 12% nationally in 2013 and
have returned to the peak values experienced in 2007 for most markets. As a result, the multifamily sector continued to
experience strong investor interest and continued to outperform most other commercial real estate sectors in 2013.
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.
Although national home prices have increased for the last two years, home prices at December 31, 2013 remained
significantly below their peak levels in many geographical areas. Declines in the market’s inventory of vacant housing have
supported stabilization and increases in home prices in a number of metropolitan areas. However, we believe that home prices
will not continue at the same growth rate experienced in 2013, but will gradually moderate in 2014 and will return towards
growth rates that are consistent with long-term historical averages (approximately 2 to 5 percent growth on an annual basis). To
the extent a large volume of loans completes 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.
Single-Family
We continue to expect key macroeconomic drivers of the economy, such as income growth, employment, and inflation,
will affect the performance of the housing and mortgage markets in 2014. Since we expect that economic growth will continue
and mortgage interest rates will remain low in 2014, compared to historical levels (although higher than in 2013), we believe
that housing affordability will remain relatively high in 2014 for potential home buyers. We also expect that the volume of
home sales will likely increase in 2014, but not return to the historically high levels experienced in 2005 to 2007. Important
factors that we believe will continue to negatively affect single-family housing demand are the relatively high unemployment
rate and relatively low consumer confidence measures. Consumer confidence measures, while up from recession lows of 2009,
remain below long-term averages and suggest that households will likely continue to be cautious in home buying.
We expect the UPB of our single-family credit guarantee portfolio will be relatively unchanged at the end of 2014
compared to 2013, as an expected decline in purchase volume is expected to be offset by a decline in prepayments. However,
we believe that the recent increase and potential further increases in mortgage interest rates will result in a decline, which could
be significant, in overall single-family mortgage originations in 2014 compared with 2013, driven by a decline in refinancings.
During the second half of 2013, refinancings, including HARP, comprised approximately 61% of our single-family purchase
and issuance volume, compared with 81% in the first half of 2013 and approximately 82% for all of 2012. As a result of the
expected declines in overall originations, our purchase volumes will likely also decline, potentially significantly, during 2014.
We expect HARP activity to decline in 2014, since the pool of borrowers eligible to participate in the program has declined and
mortgage interest rates increased during 2013.
Our charge-offs remained elevated during 2013 compared to levels before 2009 and we expect they will continue to be
elevated during 2014. 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 and short sale severity ratios to remain high. However, our recovery rates have been positively affected
by recent improvements in home prices and home sales; and
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• The amount of non-performing assets and the volume of our loan workouts to remain high.
Our guarantee fee rate charged on new acquisitions increased in 2013 as a result of two across-the-board increases in
guarantee fees implemented in 2012. In December 2013, FHFA directed us to make additional changes to our management and
guarantee fee rates in 2014. In January 2014, FHFA announced it was delaying the implementation of these changes. FHFA
may direct us to implement further increases in our guarantee fees in the future.
Multifamily
We expect that, at the national level, new supply of multifamily housing will not significantly exceed market demand in
the near term due to constraints, such as rising construction costs and the availability of financing relative to other real estate
sectors. We expect that demand growth, driven by a strengthening economy and positive demographics, will generally be
sufficient for the increase in supply. However, there may be certain local markets where new supply may outpace demand,
which would be evidenced by excess supply and rising vacancy rates. 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 2014. We believe
the long-term outlook for the national multifamily market continues to be favorable as strong demand will support healthy cash
flows and stable property values.
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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 8 — Summary Consolidated Statements of Comprehensive Income
Year Ended December 31,
2013
2012
(in millions)
2011
Net interest income
Benefit (provision) for credit losses
Net interest income after benefit (provision) for credit losses
Non-interest income (loss):
Gains (losses) on extinguishment of debt securities of consolidated trusts
Gains (losses) on retirement of other debt
Derivative gains (losses)
Impairment of available-for-sale securities:
Total other-than-temporary impairment of available-for-sale securities
Portion of other-than-temporary impairment recognized in AOCI
Net impairment of available-for-sale securities recognized in earnings
Other gains (losses) on investment securities recognized in earnings
Other income
Total non-interest income (loss)
Non-interest expense:
Administrative expenses
REO operations income (expense)
Other expenses
Total non-interest expense
Income (loss) before income tax benefit
Income tax benefit
Net income (loss)
Other comprehensive income (loss), net of taxes and reclassification
adjustments:
Changes in unrealized gains (losses) related to available-for-sale securities
Changes in unrealized gains (losses) related to cash flow hedge relationships
Changes in defined benefit plans
Total other comprehensive income (loss), net of taxes and reclassification
adjustments
Comprehensive income (loss)
Net Interest Income
$
16,468
$
2,465
18,933
314
132
2,632
(763)
(747)
(1,510)
301
6,650
8,519
(1,805)
140
(424)
(2,089)
25,363
23,305
48,668
2,406
316
210
2,932
17,611
$
(1,890)
15,721
(58)
(77)
(2,448)
(1,236)
(932)
(2,168)
(1,522)
2,190
(4,083)
(1,561)
(59)
(573)
(2,193)
9,445
1,537
10,982
4,769
414
(126)
5,057
18,397
(10,702)
7,695
(219)
44
(9,752)
(2,101)
(200)
(2,301)
(896)
2,246
(10,878)
(1,506)
(585)
(392)
(2,483)
(5,666)
400
(5,266)
3,465
509
62
4,036
$
51,600
$
16,039
$
(1,230)
The table below summarizes our net interest income and net interest yield and provides an attribution of changes in
annual results to changes in interest rates or changes in volumes of our interest-earning assets and interest-bearing liabilities.
Average balance sheet information is presented because we believe end-of-period balances are not representative of activity
throughout the periods presented. For most components of the average balances, a daily weighted average balance was
calculated for the period. When daily average balance information was not available, a simple monthly average balance was
calculated.
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Table 9 — Net Interest Income/Yield, Average Balance, and Rate/Volume Analysis
Average
Balance(1)(2)
2013
Interest
Income
(Expense)(1)
Average
Rate
Year Ended December 31,
2012
Interest
Income
(Expense)(1)
(dollars in millions)
Average
Rate
Average
Balance(1)(2)
Average
Balance(1)(2)
2011
Interest
Income
(Expense)(1)
Average
Rate
Interest-earning assets:
Cash and cash equivalents
Federal funds sold and securities purchased
under agreements to resell
Mortgage-related securities:
Mortgage-related securities(3)
Extinguishment of PCs held by Freddie
Mac
Total mortgage-related securities, net
Non-mortgage-related securities(3)
Mortgage loans held by consolidated
trusts(4)(5)
Unsecuritized mortgage loans(4)(6)
Total interest-earning assets
Interest-bearing liabilities:
Debt securities of consolidated trusts
including PCs held by Freddie Mac
Extinguishment of PCs held by Freddie
Mac
Total debt securities of consolidated
trusts held by third parties
Other debt:
Short-term debt
Long-term debt(7)
Total other debt
Total interest-bearing liabilities
Expense related to derivatives(8)
Impact of net non-interest-bearing funding
Total funding of interest-earning assets
Net interest income/yield
$
31,087
$
44,897
15
36
0.05% $
35,476
$
0.08
38,944
20
66
0.06% $
45,381
$
0.17
27,557
34
33
0.07%
0.12
313,707
12,787
4.08
357,197
15,853
4.44
442,284
20,357
4.60
(127,999)
(5,045)
(3.94)
(119,181)
(5,328)
(4.47)
(162,600)
(7,665)
(4.71)
185,708
21,385
1,511,128
203,760
$ 1,997,965
$ 1,532,032
$
$
7,742
26
57,189
7,694
72,702
4.17
0.12
3.78
3.78
3.63
238,016
23,763
1,529,213
237,942
$ 2,103,354
(52,395)
(3.42)
$ 1,552,207
$
$
10,525
58
65,089
8,960
84,718
4.42
0.25
4.26
3.77
4.03
279,684
24,587
1,627,956
244,134
$ 2,249,299
(61,437)
(3.96)
$ 1,643,939
12,692
99
77,158
9,124
99,140
4.54
0.40
4.74
3.74
4.41
(74,784)
(4.55)
$
$
(127,999)
5,045
3.94
(119,181)
5,328
4.47
(162,600)
7,665
4.71
1,404,033
(47,350)
(3.37)
1,433,026
(56,109)
(3.92)
1,481,339
(67,119)
(4.53)
132,674
393,094
525,768
1,929,801
—
68,164
$ 1,997,965
(178)
(8,251)
(8,429)
(55,779)
(455)
—
(56,234)
16,468
$
$
(0.13)
(2.10)
(1.60)
(2.89)
(0.02)
0.10
(2.81)
0.82
129,504
463,308
592,812
2,025,838
—
77,516
$ 2,103,354
(176)
(10,217)
(10,393)
(66,502)
(605)
—
(67,107)
17,611
$
$
(0.14)
(2.21)
(1.75)
(3.28)
(0.03)
0.12
(3.19)
0.84
186,304
503,842
690,146
2,171,485
—
77,814
$ 2,249,299
(331)
(12,538)
(12,869)
(79,988)
(755)
—
(80,743)
18,397
$
$
(0.18)
(2.49)
(1.86)
(3.68)
(0.04)
0.13
(3.59)
0.82
Interest-earning assets:
Cash and cash equivalents
Federal funds sold and securities purchased
under agreements to resell
Mortgage-related securities:
Mortgage-related securities(3)
Extinguishment of PCs held by Freddie
Mac
Total mortgage-related securities, net
Non-mortgage-related securities(3)
Mortgage loans held by consolidated
trusts(4)(5)
Unsecuritized mortgage loans(4)(6)
Total interest-earning assets
Interest-bearing liabilities:
Debt securities of consolidated trusts
including PCs held by Freddie Mac
Extinguishment of PCs held by Freddie
Mac
Total debt securities of consolidated
trusts held by third parties
Other debt:
Short-term debt
Long-term debt(7)
Total other debt
Total interest-bearing liabilities
Expense related to derivatives(8)
Total funding of interest-earning assets
Net interest income
2013 vs. 2012 Variance Due to
2012 vs. 2011 Variance Due to
Rate(9)
Volume(9)
Total
Change
Rate(9)
Volume(9)
Total
Change
(in millions)
$
(8)
$
(38)
3
8
$
(5)
$
(2)
$
(12)
$
(14)
(30)
16
17
33
(1,229)
(1,837)
(3,066)
(376)
(2,213)
(5)
283
(2,783)
(32)
(761)
(7,900)
(1,290)
(4,258)
(1,266)
$(12,016)
789
$ 9,042
$
$
659
(570)
(27)
(7,139)
24
(7,758)
8,253
(659)
$
$
(706)
379
(327)
(38)
(7,566)
69
(7,848)
9,337
$
$
(3,798)
(4,504)
1,958
(1,840)
(3)
2,337
(2,167)
(41)
(4,503)
(12,069)
(233)
(6,574)
(164)
$(14,422)
4,010
$ 13,347
376
(283)
(379)
(1,958)
(2,337)
7,594
1,165
8,759
8,958
2,052
11,010
2
474
476
8,070
150
8,220
462
$
$
(4)
1,492
1,488
2,653
—
2,653
(1,605)
(2)
1,966
1,964
10,723
150
$ 10,873
$ (1,143)
$
$
67
1,360
1,427
10,385
150
10,535
2,687
$
$
88
961
1,049
3,101
—
3,101
(3,473)
155
2,321
2,476
13,486
150
$ 13,636
(786)
$
$
$
$
$
(1) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) We calculate average balances based on amortized cost.
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(3)
Interest income (expense) includes accretion of the portion of impairment charges recognized in earnings where we expect significant increases in cash flows from the
impaired securities.
(4) Non-performing loans, where interest income is generally recognized when collected, are included in average balances.
(5) Loan fees, primarily consisting of delivery fees, included in interest income for mortgage loans held by consolidated trusts were $1.2 billion, $929 million, and $405 million
for 2013, 2012, and 2011, respectively.
(6) Loan fees, primarily consisting of delivery fees and multifamily prepayment fees, included in unsecuritized mortgage loan interest income were $294 million, $446 million,
and $223 million for 2013, 2012, and 2011, respectively.
Includes current portion of long-term debt.
(7)
(8) 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.
(9) Rate and volume changes are calculated on the individual financial statement line item level. Combined rate/volume changes were allocated to the individual rate and
volume change based on their relative size.
The table below summarizes components of our net interest income.
Table 10 — Net Interest Income
Contractual amounts of net interest income(1)
Amortization income (expense), net:(2)
Accretion of impairments on available-for-sale securities(3)
Asset-related amortization income (expense), net:
Mortgage loans held by consolidated trusts
Unsecuritized mortgage loans
Mortgage-related securities
Other assets
Asset-related amortization expense, net
Debt-related amortization income (expense), net:
Debt securities of consolidated trusts
Other debt securities
Debt-related amortization income, net
Total amortization income, net
Expense related to derivatives(4)
Net interest income
Year Ended December 31,
2013
2012
(in millions)
2011
$
14,114
$
16,162
$
18,448
521
(4,935)
266
(168)
(282)
(5,119)
7,726
(319)
7,407
2,809
(455)
214
(4,536)
156
(59)
(281)
(4,720)
7,112
(552)
6,560
2,054
(605)
115
(1,942)
182
(239)
(122)
(2,121)
3,383
(673)
2,710
704
(755)
$
16,468
$
17,611
$
18,397
(1)
Includes the reversal of interest income accrued, net of interest received on a cash basis, related to mortgage loans that are on non-accrual status.
(2) Represents amortization related to premiums, discounts, deferred fees and other adjustments to the carrying value of our financial instruments, and the
reclassification of previously deferred balances from AOCI for certain derivatives in closed cash flow hedge relationships related to individual debt
issuances and mortgage purchase transactions.
(3) The portion of the impairment charges recognized in earnings where we expect significant increases in cash flows is recognized as net interest income.
(4) 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 $1.1 billion to $16.5 billion for 2013 compared to $17.6 billion for 2012. Net interest
yield decreased by two basis points to 82 basis points for 2013 compared to 84 basis points for 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. Excluding the impact of the legislated 10 basis point increase in guarantee fees, which was implemented in April
2012, net interest income decreased by $1.6 billion for 2013 compared to 2012. Net interest income includes $519 million and
$105 million for 2013 and 2012, respectively, related to this increase in guarantee fees. The decrease in net interest yield was
primarily due to the negative impact of the reduction in higher-yielding mortgage-related assets, partially offset by the benefit
of lower funding costs from the replacement of debt at lower rates.
Net interest income decreased by $0.8 billion to $17.6 billion for 2012 compared to $18.4 billion for 2011. The decrease
in net interest income was primarily attributable to the reduction in the balance of higher-yielding mortgage-related assets due
to continued liquidations. Net interest yield increased by two basis points to 84 basis points for 2012 compared to 82 basis
points for 2011. The increase in net interest yield was primarily due to the benefit of lower funding costs from the replacement
of debt at lower rates, partially offset by the negative impact of the reduction in 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 $2.0
billion, $3.1 billion and $4.0 billion during 2013, 2012, and 2011, respectively. These amounts have declined primarily because
of the reduction in the volume of non-performing loans on non-accrual status.
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The objectives set for us under our charter and conservatorship, restrictions in the Purchase Agreement and restrictions
imposed by FHFA have negatively impacted, and will continue to negatively impact, our net interest income. For example, our
mortgage-related investments portfolio is subject to a cap that decreases by 15% each year until the portfolio reaches $250
billion. This decline in asset balances will cause a reduction in our interest income from this portfolio over time. For more
information on the various restrictions and limitations on our investment activity and our mortgage-related investments
portfolio, see “BUSINESS — Conservatorship and Related Matters — Limits on Investment Activity and Our Mortgage-
Related Investments Portfolio.”
During 2013, we had sufficient access to the debt markets. 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 $2.5 billion in 2013, $(1.9) billion in 2012, and $(10.7) billion in 2011. The
significant improvements in benefit (provision) for credit losses in 2013 and 2012 reflect: (a) declines in the volume of newly
delinquent loans (largely due to a decline in the 2005-2008 Legacy single-family book); and (b) lower estimates of incurred
losses largely resulting from 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
losses on the loans that do default. Our benefit (provision) for credit losses in 2013 also reflects $1.7 billion of benefit related to
settlement agreements with certain sellers to release specified loans from certain repurchase obligations in exchange for one-
time cash payments primarily associated with our Legacy single-family books.
While we have recorded a benefit for credit losses in each of the last five quarters, this trend is not expected to continue.
As noted above, we executed settlement agreements with many of our significant sellers that positively affected our results in
2013. Our provision for credit losses and amount of charge-offs in the future will be affected by a number of factors, including:
(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 effect of additional
settlement agreements with sellers, if any.
During 2013, our charge-offs, net of recoveries for single-family loans, were significantly lower than those recorded in
2012, primarily due to: (a) higher recoveries related to repurchase requests from certain sellers; and (b) improvements in home
prices in many of the areas in which we have had significant foreclosure and short sale activity. Our recoveries in 2013 and
2012 included approximately $2.8 billion and $0.7 billion, respectively, related to repurchase requests from our seller/servicers
(including $2.1 billion and $0, respectively, related to settlement agreements related to repurchase requests from certain
sellers). Although our credit losses have declined in each of the last five quarters, we continue to experience a high volume of
foreclosures and foreclosure alternatives as compared to periods prior to 2008. We expect our credit losses will continue to
remain elevated in 2014 even if the volume of new seriously delinquent loans continues to decline.
The total number of single-family seriously delinquent loans declined approximately 28% and 15% during 2013 and
2012, respectively. As of December 31, 2013 and 2012, the UPB of our single-family non-performing loans was $121.8 billion
and $128.6 billion, respectively. However, these amounts include $78.0 billion and $65.8 billion, respectively, of single-family
TDRs that were no longer seriously delinquent. Loans that have been classified as TDRs remain categorized as non-performing
throughout the remaining life of the loan regardless of whether the borrower makes payments which return the loan to a current
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.
We recognized a benefit for credit losses associated with our multifamily mortgage portfolio of $218 million, $123
million and $196 million for 2013, 2012, and 2011, respectively. The benefit for credit losses in 2013 was primarily driven by
an improvement in the expected performance of the underlying loans.
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.
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We extinguished debt securities of consolidated trusts with a UPB of $44.4 billion, $13.5 billion, and $75.4 billion, in
2013, 2012, and 2011 respectively, (representing our purchase of single-family PCs with a corresponding UPB amount).
Purchases of single-family PCs increased in 2013 primarily due to improved investment opportunities. The decrease in
purchases of single-family PCs in 2012 compared to 2011 was due to a decrease in the volume of dollar roll transactions to
support the market and pricing of our single-family PCs.
Gains (losses) on extinguishment of these debt securities of consolidated trusts were $314 million, $(58) million, and
$(219) million in 2013, 2012, and 2011, respectively. In 2013, we recognized gains as interest rates increased between the time
of issuance and repurchase of these debt securities. We recognized losses in 2012 and 2011 as interest rates declined between
the time of issuance and repurchase of these debt securities.
See “Table 24 — 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
We repurchase or call our outstanding other debt securities from time to time when we believe it is economically
beneficial and to manage the mix of liabilities funding our assets. When we repurchase or call outstanding debt securities, or
holders put outstanding debt securities to us, we recognize a gain or loss to the extent the amount paid to redeem the debt
security differs from its carrying value. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for more
information regarding our accounting policies related to debt retirements.
Gains (losses) on retirement of other debt were $132 million, $(77) million, and $44 million in 2013, 2012, and 2011,
respectively. We recognized gains on the retirement of other debt in 2013 primarily as a result of exercising our call option for
other debt held at premiums. Losses on the retirement of other debt in 2012 primarily resulted from write-offs of unamortized
deferred issuance costs related to calls of other debt securities. We recognized gains on the retirement of other debt during 2011
primarily due to the repurchase of other debt securities at less than par. For more information, see “LIQUIDITY AND
CAPITAL RESOURCES — Liquidity — Other Debt Securities.”
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 December
31, 2013, 2012, and 2011, 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 could increase the volatility of
reported net income because, while fair value changes in derivatives from fluctuations in interest rates and yield curves affect
net income, fair value changes in several of the types of assets and liabilities being hedged do not affect net income.
Table 11 — Derivative Gains (Losses)
Interest-rate swaps
Option-based derivatives(1)
Other derivatives(2)
Accrual of periodic settlements
Total
Derivative Gains (Losses)
Year Ended December 31,
2013
2012
(in millions)
2011
8,598
$
(204) $
(10,367)
(2,422)
(77)
(3,467)
1,250
308
(3,802)
2,632
$
(2,448) $
7,176
(1,529)
(5,032)
(9,752)
$
$
(1) Primarily includes purchased call and put swaptions and purchased interest-rate caps and floors.
(2) Primarily includes futures, foreign-currency swaps, commitments, credit derivatives and swap guarantee derivatives.
Gains (losses) on derivatives are principally driven by changes in: (a) interest rates and implied volatility; and (b) the mix
and balance of products in our derivative portfolio.
Our mix and balance of derivatives change from period to period as we respond to changing interest rate environments. A
receive-fixed swap results in our receipt of a fixed interest-rate payment from our counterparty in exchange for a variable-rate
payment. Conversely, a pay-fixed swap requires us to make a fixed interest-rate payment to our counterparty in exchange for a
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variable-rate payment. Receive-fixed swaps increase in value and pay-fixed swaps decrease in value when interest rates
decrease (with the opposite being true when interest rates increase).
Purchased call and put swaptions, where we make premium payments, are options for us to enter into receive- and pay-
fixed swaps, respectively. Conversely, written call and put swaptions, where we receive premium payments, are options for our
counterparty to enter into receive and pay-fixed swaps, respectively. The fair values of both purchased and written call and put
swaptions are sensitive to changes in interest rates and are also driven by the market’s expectation of potential changes in future
interest rates (referred to as “implied volatility”). Purchased swaptions generally become more valuable as implied volatility
increases and less valuable as implied volatility decreases. Recognized losses on purchased options in any given period are
limited to the premium paid to purchase the option plus any unrealized gains previously recorded. Potential losses on written
options are unlimited.
During 2013, we recognized a net gain on derivatives of $2.6 billion as net fair value gains of $8.6 billion on our interest-
rate swap portfolio, primarily driven by an increase in longer-term interest rates, were partially offset by: (a) a net loss of $3.5
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 (b) a fair value loss of $2.4 billion on our option-based derivatives.
During 2012, we recognized losses on derivatives of $2.4 billion, primarily due to losses 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.
We recognized fair value losses on our pay-fixed swaps, which were offset by: (a) fair value gains on our receive-fixed swaps;
and (b) fair value gains on our option-based derivatives resulting from gains on our purchased call swaptions due to a decrease
in interest rates. In 2012, the effect of the decline in interest rates and a steepening of the yield curve was coupled with a change
in the mix of our derivative portfolio, whereby we increased our holdings of receive-fixed swaps relative to pay-fixed swaps to
rebalance our portfolio during a period of steadily declining interest rates, and increased our issuances of debt with longer-term
maturities.
During 2011, we recognized losses on derivatives of $9.8 billion, primarily due to declines in long-term swap interest
rates. Specifically, during 2011, we recognized fair value losses on our pay-fixed swap positions of $23.0 billion, partially
offset by fair value gains on our receive-fixed swaps of $12.6 billion. We also recognized fair value gains of $7.2 billion during
2011 on our option-based derivatives, resulting from gains on our purchased call swaptions as interest rates decreased.
Additionally, we recognized losses of $5.0 billion related to the accrual of periodic settlements during 2011 due to our net pay-
fixed swap position and a declining interest rate environment during the year.
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 $1.5 billion, $2.2 billion and $2.3 billion during 2013, 2012, and 2011, respectively. The
decreases in net impairments recognized in earnings during these periods were driven by improvements in forecasted home
prices over the expected life of our available-for-sale securities. During 2013, the improvements in forecasted home prices were
offset primarily by the impact of two changes: (a) the incorporation in the fourth quarter of 2013 of new information, which
enhanced the assumptions used to estimate the contractual loan terms for certain modified loans collateralizing non-agency
mortgage-related securities for which actual data about those terms was unavailable to the market; and (b) an increase in the
population of available-for-sale securities in an unrealized loss position which we intend to sell. During 2012, the
improvements in forecasted home prices were offset by the impact of our implementation, in the fourth quarter of 2012, of a
third-party model, which enhanced our approach to estimating other-than-temporary impairments of our single-family non-
agency mortgage-related securities. The decision to transition to a third-party model was made to increase the level of
disaggregation for certain assumptions used in projecting cash flow estimates of these 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”
for additional information.
Other Gains (Losses) on Investment Securities Recognized in Earnings
Other gains (losses) on investment securities recognized in earnings consists of gains (losses) on trading securities and
gains (losses) on sales of available-for-sale securities. Trading securities mainly consist of Treasury securities, agency fixed-
rate and variable-rate pass-through mortgage-related securities, and agency REMICs, including inverse floating-rate, interest-
only and principal-only 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 December 31, 2013.
Other gains (losses) on investment securities recognized in earnings does not include the interest earned on investment
securities, which is recorded as part of net interest income. For information about our interest-rate risk management strategy
and framework, see “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.”
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We recognized $(1.6) billion, $(1.7) billion, and $(1.0) billion related to losses on trading securities during 2013, 2012,
and 2011, respectively. The losses on trading securities during all periods were primarily due to the movement of securities
with unrealized gains towards maturity.
We recognized $1.9 billion, $152 million, and $58 million of gains on sales of available-for-sale securities during 2013,
2012, and 2011, respectively. The increase in gains during 2013 resulted from increased sales volume related to our 2013
Conservatorship Scorecard goal to sell 5% of less liquid mortgage-related assets. In November 2013, FHFA announced that we
achieved this scorecard objective.
Other Income (Loss)
The table below summarizes the significant components of other income.
Table 12 — Other Income (Loss)
Other income (loss):
Non-agency mortgage-related securities settlements
Gains (losses) on mortgage loans
Recoveries on loans impaired upon purchase(1)
Guarantee-related income, net(2)
All other
Total other income (loss)
Year Ended December 31,
2013
2012
(in millions)
2011
$
$
5,501
$
— $
(336)
261
400
824
1,010
380
343
457
—
829
473
245
699
6,650
$
2,190
$
2,246
(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.
Non-Agency Mortgage-Related Securities Settlements
Non-agency mortgage-related securities settlements were $5.5 billion in 2013 compared to $0 in both 2012 and 2011. We
had settlements with seven counterparties in 2013, while we had no such settlements in 2012 or 2011. For information on these
settlements, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Non-Agency Mortgage-Related
Security Issuers.”
Gains (Losses) on Mortgage Loans
We recognized gains (losses) on mortgage loans of $(0.3) billion, $1.0 billion and $0.8 billion during 2013, 2012 and
2011, respectively. The substantial majority of these amounts relate to multifamily loans which we designated for securitization
and elected to carry at fair value. The losses in 2013 were primarily due to an increase in interest rates, compared to declines in
interest rates in 2012. The gains in 2012 were due to favorable market spread movements, declines in interest rates, and higher
balances of multifamily loans on our consolidated balance sheets. During 2013, 2012 and 2011, we sold $28.3 billion, $20.8
billion and $13.7 billion, respectively, in UPB of multifamily loans primarily through K Certificate transactions.
All Other
All other income (loss) includes income recognized from transactional fees, fees assessed to our servicers for technology
use and late fees or other penalties, and other miscellaneous income. All other income (loss) was $0.8 billion in 2013,
compared to $0.5 billion in 2012 and $0.7 billion in 2011. The increase in 2013 was primarily due to higher compensatory fees
assessed on servicers that failed to meet our timelines to complete a foreclosure of a loan.
Non-Interest Expense
The table below summarizes the components of non-interest expense.
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Table 13 — Non-Interest Expense
Administrative expenses:
Salaries and employee benefits
Professional services
Occupancy expense
Other administrative expense
Total administrative expenses
REO operations (income) expense
Other expenses
Total non-interest expense
Administrative Expenses
Year Ended December 31,
2013
2012
2011
(in millions)
$
$
833
543
54
375
1,805
(140)
424
$
810
361
57
333
1,561
59
573
832
270
62
342
1,506
585
392
$
2,089
$
2,193
$
2,483
Our administrative expenses increased in 2013 and 2012 primarily due to an increase in professional services expense
related to: (a) FHFA-led lawsuits regarding our investments in certain residential non-agency mortgage-related securities; (b)
quality control reviews for single-family loans we acquired prior to being placed in conservatorship; (c) Conservatorship
Scorecard initiatives, including development of the common securitization platform; and (d) infrastructure improvement
projects, including establishment of an off-site, back-up data facility.
REO Operations (Income) Expense
The table below presents the components of our REO operations (income) expense.
Table 14 — REO Operations (Income) Expense
REO operations (income) expense:
Single-family:
REO property expenses(1)
Disposition (gains) losses, net(2)
Change in holding period allowance, dispositions
Change in holding period allowance, inventory(3)
Recoveries(4)
Total single-family REO operations (income) expense
Multifamily REO operations (income) expense
Total REO operations (income) expense
$
$
Year Ended December 31,
2013
2012
2011
(dollars in millions)
962
$
1,203
$
(746)
(35)
58
(363)
(124)
(16)
(140) $
(682)
(108)
(9)
(342)
62
(3)
59
$
1,205
179
(456)
302
(634)
596
(11)
585
(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.
REO operations (income) expense was $(140) million in 2013, as compared to $59 million in 2012 and $585 million in
2011. The improvement in 2013 compared to 2012 was primarily due to: (a) a decline in REO property expenses associated
with a lower number of REO properties; and (b) improving home prices in certain geographical areas with significant REO
activity. The improvement in 2012 compared to 2011 was primarily due to improving home prices in certain geographical areas
with significant REO activity, partially offset by lower recoveries on REO properties, primarily due to reduced recoveries from
mortgage insurers and a decline in reimbursements of losses from seller/servicers associated with repurchase requests.
We believe the volume of our single-family REO acquisitions in recent years was less than it otherwise would have been
due to the length of the foreclosure process and increased volume of foreclosure alternatives. Lower acquisitions, coupled with
high disposition levels, led to lower REO property levels in both 2013 and 2012, compared to the respective prior year. We
expect the length of the foreclosure process will continue to remain above historical levels. Additionally, we expect our REO
activity to remain at elevated levels, as we have a large inventory of seriously delinquent loans in our single-family credit
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guarantee portfolio. For information on our REO activity, see “CONSOLIDATED BALANCE SHEETS ANALYSIS — REO,
Net” and “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Non-Performing Assets.”
Other Expenses
Other expenses were $424 million, $573 million, and $392 million in 2013, 2012, and 2011 respectively. Other expenses
in 2013 and 2012 include expenses related to the legislated 10 basis point increase in guarantee fees, which was implemented in
April 2012. The expense for these fees was $533 million in 2013 and $108 million in 2012. These fees are remitted to Treasury
on a quarterly basis. In addition, in February 2014, we reached a settlement with Lehman Brothers Holdings Inc. pursuant to
which we will receive $767 million to resolve our claims related to Lehman’s bankruptcy. Consequently, we adjusted our
December 31, 2013 estimate of the expected recoveries of our short-term lending receivable by $350 million, which reduced
other expenses by the same amount. For information on this settlement, see "NOTE 17: LEGAL CONTINGENCIES.” The
increase in other expenses in 2012 compared to 2011 was also due to expenses to establish legal reserves related to pending
litigation. 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 2013, we reported an income tax benefit of $23.3 billion primarily due to the release of the $26.4 billion valuation
allowance against our net deferred tax assets compared to an income tax benefit of $1.5 billion and $0.4 billion for 2012 and
2011, respectively. For 2014, we expect that our effective tax rate will approximate the corporate statutory rate, which is
currently 35%. See “NOTE 12: INCOME TAXES” for a discussion of the factors that led to our conclusion to release the
valuation allowance against our net deferred tax assets in 2013.
Comprehensive Income (Loss)
Our comprehensive income (loss) was $51.6 billion, $16.0 billion, and $(1.2) billion for the years ended December 31,
2013, 2012, and 2011, respectively, consisting of: (a) $48.7 billion, $11.0 billion, and $(5.3) billion of net income (loss),
respectively; and (b) $2.9 billion, $5.1 billion, and $4.0 billion of other comprehensive income, respectively. The other
comprehensive income in these periods primarily related to fair value gains on our single-family non-agency mortgage-related
available-for-sale securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Total Equity (Deficit)” for
additional information regarding total other comprehensive income.
Segment Earnings
Our operations consist of three reportable segments, which are based on the type of business activities each performs —
Single-family Guarantee, Investments, and Multifamily. Certain activities that are not part of a reportable segment are included
in the All Other category.
The Single-family Guarantee segment reflects results from our single-family credit guarantee activities. In our Single-
family Guarantee segment, we purchase and guarantee single-family mortgage loans originated by our seller/servicers in the
primary mortgage market. In most instances, we use the mortgage securitization process to package the mortgage loans into
guaranteed mortgage-related securities. We guarantee the payment of principal and interest on the mortgage-related securities
in exchange for management and guarantee fees. Segment Earnings for this segment consist primarily of management and
guarantee fee revenues, including amortization of upfront fees, less credit-related expenses, administrative expenses, allocated
funding costs, and amounts related to net float benefits or expenses.
The Investments segment reflects results from three primary activities: (a) managing the company’s mortgage-related
investments portfolio, excluding Multifamily segment investments; (b) managing the treasury function, including funding and
liquidity, for the overall company; and (c) managing interest-rate risk for the overall company. In our Investments segment, we
invest principally in mortgage-related securities and single-family performing mortgage loans. Segment Earnings for this
segment consist primarily of the returns on these investments, less the related funding, hedging, and administrative expenses. In
addition, the Investments segment reflects changes in the fair value of the Multifamily segment investment securities, primarily
CMBS, and held-for-sale loans that are associated with changes in interest rates.
The Multifamily segment reflects results from our investment (both purchases and sales), securitization, and guarantee
activities in multifamily mortgage loans and securities. Our primary business model is to purchase multifamily mortgage loans
for aggregation and then securitization through issuance of multifamily K Certificates. To a lesser extent, we provide
guarantees of the payment of principal and interest on tax-exempt multifamily pass-through certificates backed by multifamily
housing revenue bonds. In addition, we guarantee the payment of principal and interest on tax-exempt multifamily housing
revenue bonds secured by low- and moderate-income multifamily mortgage loans. Segment Earnings for this segment consist
primarily of the interest earned on assets related to multifamily investment activities and management and guarantee fee
income, less credit-related expenses, administrative expenses, and allocated funding costs. In addition, the Multifamily segment
reflects the impact of changes in fair value of our investment securities and held-for-sale loans associated with market factors
other than changes in interest rates, such as liquidity and credit.
We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct
of our business under the direction of the Conservator. The financial performance of our Single-family Guarantee segment and
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Multifamily segment are measured based on each segment’s contribution to GAAP net income (loss). Our Investments segment
is measured on its contribution to GAAP comprehensive income (loss), which consists of the sum of its contribution to:
(a) GAAP net income (loss); and (b) GAAP total other comprehensive income (loss), net of taxes. The sum of Segment
Earnings for each segment and the All Other category equals GAAP net income (loss). Likewise, the sum of comprehensive
income (loss) for each segment and the All Other category equals GAAP comprehensive income (loss).
The All Other category consists of material corporate level activities that are: (a) infrequent in nature; and (b) based on
decisions outside the control of the management of our reportable segments. By recording these types of activities to the All
Other category, we believe the financial results of our three reportable segments reflect the decisions and strategies that are
executed within the reportable segments and provide greater comparability across time periods. The All Other category also
includes the deferred tax asset valuation allowance associated with previously recognized income tax credits carried forward,
the release of our valuation allowance against our net deferred tax assets, amounts related to the termination of our pension
plan, and tax settlements, as applicable. Segment Earnings for the All Other category was $23.9 billion, $788 million, and
$49 million for 2013, 2012, and 2011, respectively. Segment Earnings for the All Other category for 2013 reflects a benefit for
federal income taxes that resulted from the release of our valuation allowance against our net deferred tax assets. Segment
Earnings for the All Other category for 2012 primarily reflects an agreement in principle we reached with the IRS regarding
litigation related to various uncertain tax positions. Based on the favorable resolution of the matters in dispute, the previously
unrecognized tax benefits were reduced to zero in the fourth quarter of 2012. For more information regarding the litigation with
the IRS, see “NOTE 17: LEGAL CONTINGENCIES — IRS Litigation.”
In presenting Segment Earnings, we make significant reclassifications among certain financial statement line items in
order to reflect a measure of management and guarantee income on guarantees and a measure of net interest income on
investments that is in line with how we manage our business. These include reclassifying certain credit guarantee-related
activities and investment-related activities between various line items on our GAAP consolidated statements of comprehensive
income. We also allocate 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 “BUSINESS — Our Business Segments” for further information regarding our segments, including the descriptions
and activities of our segments, and “NOTE 13: SEGMENT REPORTING” for further information regarding the
reclassifications and allocations used to present Segment Earnings.
The table below provides information about our various segment mortgage and credit risk portfolios at December 31,
2013 and 2012. For a discussion of each segment’s portfolios, see “Segment Earnings — Results.”
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Table 15 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios(1)
December 31, 2013
December 31, 2012
(in millions)
Segment mortgage portfolios:
Single-family Guarantee — Managed loan portfolio:(2)
Single-family unsecuritized mortgage loans(3)
Single-family Freddie Mac mortgage-related securities held by us
Single-family Freddie Mac mortgage-related securities held by third parties
Single-family other guarantee commitments(4)
Total Single-family Guarantee — Managed loan portfolio
Investments — Mortgage investments portfolio:
Single-family unsecuritized mortgage loans(5)
Freddie Mac mortgage-related securities
Non-agency mortgage-related securities
Non-Freddie Mac agency mortgage-related securities
Total Investments — Mortgage investments portfolio
Multifamily — Guarantee portfolio:
Multifamily Freddie Mac mortgage related securities held by us
Multifamily Freddie Mac mortgage related securities held by third parties
Multifamily other guarantee commitments(4)
Total Multifamily — Guarantee portfolio
Multifamily — Mortgage investments portfolio:
Multifamily investment securities portfolio
Multifamily unsecuritized loan portfolio
Total Multifamily — Mortgage investments portfolio
Total Multifamily portfolio
Less: Freddie Mac single-family and certain multifamily securities(6)
Total mortgage portfolio
Credit risk portfolios:(7)
Single-family credit guarantee portfolio:(2)
Single-family mortgage loans, on-balance sheet
Non-consolidated Freddie Mac mortgage-related securities
Other guarantee commitments(4)
Less: HFA initiative-related guarantees(8)
Less: Freddie Mac mortgage-related securities backed by Ginnie Mae certificates(8)
Total single-family credit guarantee portfolio
Multifamily mortgage portfolio:
Multifamily mortgage loans, on-balance sheet(9)
Non-consolidated Freddie Mac mortgage-related securities
Other guarantee commitments(4)
Less: HFA initiative-related guarantees(8)
Total multifamily mortgage portfolio
$
37,726
$
165,247
1,361,972
19,872
1,584,817
84,411
165,247
64,524
16,889
331,071
2,787
62,505
9,288
74,580
33,056
59,171
92,227
166,807
(168,034)
1,914,661
$
53,333
184,381
1,335,393
13,798
1,586,905
91,411
184,381
76,457
23,675
375,924
2,382
39,884
9,657
51,923
51,718
76,569
128,287
180,210
(186,763)
1,956,276
$
$
$
$
$
1,630,859
$
1,621,774
6,961
19,872
(4,051)
(541)
1,653,100
59,615
64,848
9,288
(905)
$
$
132,846
$
8,897
13,798
(6,270)
(654)
1,637,545
77,017
41,819
9,657
(1,112)
127,381
(1) Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) 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 is typically 45 or 75 days
after the mortgage payment cycle of fixed-rate and ARM PCs, respectively.
(3) Represents unsecuritized seriously delinquent single-family loans.
(4) Represents the UPB of mortgage-related assets held by third parties for which we provide our guarantee without our securitization of the related assets.
(5) Excludes unsecuritized seriously delinquent single-family loans. The Single-family Guarantee segment earns management and guarantee fees
associated with unsecuritized single-family loans in the Investments segment’s mortgage investments portfolio.
(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.
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(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 initiative-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.
Includes both unsecuritized multifamily mortgage loans and multifamily mortgage loans in consolidated trusts.
(9)
Segment Earnings — Results
Single-Family Guarantee
The table below presents the Segment Earnings of our Single-family Guarantee segment.
Table 16 — Segment Earnings and Key Metrics — Single-Family Guarantee(1)
Year Ended December 31,
2013
2012
2011
(dollars in millions)
$
320
$
Segment Earnings:
Net interest income (expense)
Benefit (provision) for credit losses
Non-interest income:
Management and guarantee income
Other non-interest income
Total non-interest income
Non-interest expense:
Administrative expenses
REO operations income (expense)
Other non-interest expense
Total non-interest expense
Segment adjustments(2)
Segment Earnings (loss) before income tax (expense) benefit
Income tax (expense) benefit
Segment Earnings (loss), net of taxes
Total other comprehensive income (loss), net of taxes
Total comprehensive income (loss)
Key metrics:
Balances and Volume (in billions, except rate):
Average balance of single-family credit guarantee portfolio and HFA guarantees
Issuance — Single-family credit guarantees(3)
Fixed-rate products — Percentage of purchases(4)
Liquidation rate — Single-family credit guarantees(5)
Average Management and Guarantee Rate (in bps):(6)
Segment Earnings management and guarantee income(7)
Guarantee fee charged on new acquisitions(8)
Credit:
Serious delinquency rate, at end of period
REO inventory, at end of period (number of properties)
Single-family credit losses, in bps(9)
Market:
Single-family mortgage debt outstanding (total U.S. market, in billions)(10)
30-year fixed mortgage rate(11)
$
$
$
$
1,409
4,930
1,162
6,092
(1,025)
124
(712)
(1,613)
(694)
5,514
282
5,796
49
(147)
$
(3,168)
4,389
931
5,320
(890)
(62)
(393)
(1,345)
(832)
(172)
8
(164)
(63)
5,845
$
(227)
$
1,644
435
$
$
96%
28%
30.0
51.4
2.39%
47,307
28.8
1,692
446
$
$
96%
33%
25.9
38.3
3.25%
49,071
68.3
9,864
$
4.5%
9,930
$
3.4%
(23)
(12,294)
3,647
1,216
4,863
(888)
(596)
(321)
(1,805)
(699)
(9,958)
(42)
(10,000)
30
(9,970)
1,801
305
92%
24%
20.2
26.8
3.58%
60,535
72.0
10,183
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.”
(3) Represents the UPB of loans underlying Freddie Mac mortgage-related securities and other guarantee commitments.
(4) Excludes Other Guarantee Transactions.
(5) Represents principal repayments relating to loans underlying Freddie Mac mortgage-related securities and other guarantee commitments, including
(6)
those related to our removal of seriously delinquent and modified mortgage loans and balloon/reset mortgage loans from PC pools.
Includes the effect of the legislated 10 basis point increase in guarantee fees that became effective April 1, 2012. 2013 also includes an additional
across-the-board increase in guarantee fees that became effective in the fourth quarter of 2012. Also includes the effect of pricing adjustments that are
based on the price performance of our PCs relative to comparable Fannie Mae securities.
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(7) Consists of the contractual management and guarantee fee rate as well as amortization of delivery and other upfront fees (using the original contractual
maturity date of the related loans) for the entire single-family credit guarantee portfolio.
(8) Represents the estimated rate of management and guarantee fees for new acquisitions during the period assuming amortization of delivery fees using
the estimated life of the related loans rather than the original contractual maturity date of the related loans.
(9) 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-related guarantees.
(10) Source: Federal Reserve Financial Accounts of the United States of America dated December 9, 2013. The outstanding amount for December 31, 2013
reflects the balance as of September 30, 2013.
(11) 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 $5.8 billion in 2013 compared to $(0.2)
billion in 2012, and $(10.0) billion in 2011. The improvement in 2013 was primarily due to a shift from provision for credit
losses of $3.2 billion in 2012 to a benefit for credit losses of $1.4 billion in 2013 and increased management and guarantee
income. The improvement in 2012, compared to 2011, was primarily due to a significant decline in Segment Earnings provision
for credit losses.
Segment Earnings (loss) for the Single-family Guarantee segment is largely driven by management and guarantee fee
income and the benefit (provision) for credit losses. The table below provides summary information about the composition of
Segment Earnings (loss) for this segment, by guarantee and loan origination years, for 2013 and 2012.
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Table 17 — Segment Earnings Composition — Single-Family Guarantee Segment
Year Ended December 31, 2013
Segment Earnings
Management and
Guarantee Income(1)
Credit-Related
Benefit (Expense) (2)(3)
Amount
Average
Rate(4)
Amount
Average
Rate(4)
Net
Amount(5)
(dollars in millions, rates in bps)
$
$
$
$
614
845
458
422
407
2,746
1,065
774
345
4,930
34.4
32.5
34.7
34.5
29.3
33.0
33.1
23.3
21.7
30.0
$
$
(12)
(21)
(19)
(14)
(17)
(83)
(563)
1,826
353
1,533
(0.7) $
(0.7)
(1.4)
(1.1)
(1.2)
(1.0)
(16.7)
60.5
20.2
9.2
$
$
602
824
439
408
390
2,663
502
2,600
698
6,463
(1,025)
320
38
5,796
Year Ended December 31, 2012
Segment Earnings
Management and
Guarantee Income(1)
Credit-Related
Benefit (Expense) (2)
Amount
Average
Rate(4)
Amount
Average
Rate(4)
Net
Amount(5)
(dollars in millions, rates in bps)
380
610
586
672
2,248
601
1,057
483
4,389
27.9
32.0
32.0
29.9
30.6
24.8
21.8
21.1
25.9
$
$
(13)
(33)
(61)
(120)
(227)
(640)
(2,440)
77
(3,230)
(0.9) $
(1.7)
(3.3)
(5.5)
(3.1)
(24.3)
(54.3)
3.1
(19.0) $
$
367
577
525
552
2,021
(39)
(1,383)
560
1,159
(890)
(147)
(286)
(164)
Year of origination:(5)
2013
2012
2011
2010
2009
Subtotal - New single-family book
HARP and other relief refinance loans(6)
2005-2008 Legacy single-family book
Pre-2005 Legacy single-family book
Total
Administrative expenses
Net interest income (expense)
Other non-interest income (expenses), net
Segment Earnings (loss), net of taxes
Year of origination:(5)
2012
2011
2010
2009
Subtotal - New single-family book
HARP and other relief refinance loans(6)
2005-2008 Legacy single-family book
Pre-2005 Legacy single-family book
Total
Administrative expenses
Net interest income (expense)
Other non-interest income (expenses), net
Segment Earnings (loss), net of taxes
(1) Reflects the monthly management and guarantee fees. Beginning in the fourth quarter of 2012, includes the net impact of buy-down transactions.
Includes amortization of delivery and other upfront fees based on the original contractual maturity date of the related loans of $2.3 billion and
$1.9 billion for 2013 and 2012, respectively. Includes the effect of the legislated 10 basis point increase in guarantee fees that became effective April 1,
2012. Results for 2013 also include an additional across-the-board increase in guarantee fees that became effective in the fourth quarter of 2012. Prior
period information has been revised to conform with the current period presentation. See endnote (6) for further information.
(2) Consists of the aggregate of the Segment Earnings benefit (provision) for credit losses and Segment Earnings REO operations income (expense).
Historical rates of average credit-related benefit (expense) may not be representative of future results. Prior period information has been revised to
conform with the current period presentation. See endnote (6) for further information.
(3) Reflects our settlement agreements with certain sellers in 2013 for release of certain repurchase obligations primarily associated with loans in our
Legacy single-family books in exchange for one-time cash payments.
(4) Calculated as the amount of Segment Earnings management and guarantee income or credit-related benefit (expense), 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-related
guarantees. Prior period information has been revised to conform with the current period presentation. See endnote (6) for further information.
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(5) Calculated as Segment Earnings management and guarantee income less credit-related benefit (expense). Prior period information has been revised to
conform with the current period presentation. See endnote (6) for further information.
(6) Segment Earnings management and guarantee income is presented by year of guarantee origination (except for HARP and other relief refinance loans),
whereas credit-related benefit (expense) is presented based on year of loan origination. HARP and other relief refinance loans are presented separately
rather than in the year that the refinancing occurred (from 2009 to 2013). All other refinance loans are presented in the year that the refinancing
occurred. Prior period information has been revised to conform with the current period presentation.
We continue to maintain a consistent market presence by providing lenders with a constant source of liquidity for
conforming mortgage products. Issuances of our guarantees were $435 billion and $446 billion in 2013 and 2012, respectively,
and predominantly consisted of refinance mortgages, including HARP and other relief refinance loans. During 2013,
refinancings comprised approximately 73% of our single-family purchase and issuance volume, compared with 82% in 2012
and 78% in 2011.
We refer to single-family loans we acquired beginning in 2009, excluding HARP and other relief refinance mortgages, as
our New single-family book. We do not include relief refinance mortgages, including HARP loans, in our New single-family
book, since underwriting procedures for relief refinance mortgages are limited, and, in many cases, 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 (many of which were originated between 2005 and 2008).
Our New single-family book continues to represent an increasing share of our overall single-family guarantee portfolio
and comprised 54% of this portfolio as of December 31, 2013. The New single-family book has low delinquency rates and
credit losses. The serious delinquency rate for the New single-family book was 0.24% as of December 31, 2013 and its credit
losses were $135 million in 2013, representing 3% of our credit losses. As of December 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. We expect this book to continue to be profitable for us over the long term.
For more information on the composition of our single-family credit guarantee portfolio, see "Table 36 — Single-Family Credit
Guarantee Portfolio Data by Year of Origination."
We executed three transactions during 2013 that transfer a mezzanine credit loss position on certain groups of loans in
our New single-family book. These transactions were consistent with our 2013 Conservatorship Scorecard goal to 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
investors. These transactions consisted of two STACR debt note transactions as well as an additional risk transfer transaction
using third-party insurance. In November 2013, FHFA announced that we had achieved this Scorecard objective. We will seek
to expand and refine our offerings of credit risk transfer transactions in the future. For more information on our STACR debt
note transactions, see "BUSINESS — Our Business Segments — Single-Family Guarantee Segment — Credit Enhancements."
In 2013, we recognized credit-related benefits associated with our 2005-2008 Legacy single-family book largely due to:
(a) improvements in home prices, which resulted in lower estimates of incurred losses; and (b) settlement agreements with
certain sellers to release specified loans from certain repurchase obligations in exchange for one-time cash payments. However,
on a cumulative basis, 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, primarily due to the high
rate of defaults on the loans originated in those years.
HARP and other relief refinance loans represent a significant portion of our single-family credit guarantee portfolio.
Relief refinance mortgages (including HARP loans) generally present higher risk to us than other refinance loans we have
purchased since 2009 because:
•
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;
• many of these loans have relatively high LTV ratios (e.g., greater than 90%), which can increase the probability of
default and increase the amount of our loss if the borrower does default;
• HARP loans may not be covered by mortgage insurance for the full excess of their UPB over 80%; and
•
beginning with changes announced in the fourth quarter of 2011, we have relieved the lenders of certain representations
and warranties on the original mortgage being refinanced, which limits our ability to seek recovery or repurchase from
the seller for breach.
However, relief refinance mortgages (including HARP loans) generally have performed better than loans with similar
characteristics remaining in our single-family credit guarantee portfolio that were originated prior to 2009. For information on
the potential credit risks related to these loans, see "RISK MANAGEMENT — Credit Risk —Mortgage Credit Risk — Single-
Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program."
Segment Earnings management and guarantee income was $4.9 billion in 2013 compared to $4.4 billion 2012 and $3.6
billion in 2011. The improvement in 2013 compared to 2012 was primarily due to an increase in amortization of buy-down fees
(which we began recording in the Single-family Guarantee segment during the fourth quarter of 2012). Segment Earnings
management and guarantee income also benefited in 2013 from higher guarantee fees. At the direction of FHFA, we
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implemented two across-the-board increases in guarantee fees in 2012. The average management and guarantee fee we charged
for new acquisitions in 2013 was 51.4 basis points (including the legislated 10 basis point increase), compared to 38.3 basis
points in 2012. The guarantee fee we charge on new acquisitions generally consists of a combination of delivery fees as well as
a base monthly fee. The average guarantee fee charged on new acquisitions represents our expected guarantee fee rate over the
estimated life of the related loans using certain assumptions for prepayments and other liquidations. We seek to issue
guarantees with fee terms that we believe are commensurate with the risks assumed and that will, over the long-term: (a)
provide management and guarantee fee income that exceeds our anticipated credit-related and administrative expenses on the
underlying loans; and (b) provide a return on the capital that would be needed to support the related credit risk.
The improvement in Segment Earnings management and guarantee income in 2012 compared to 2011 was primarily due
to an increase in amortization of both delivery fees and buy-down fees. We amortize these upfront fees based on the original
contractual maturity date of the loan rather than the loan’s estimated life. As a result, the amount of Segment Earnings
management and guarantee income we recognize related to upfront fees is lower in the initial years of a loan and increases
during periods of high refinance or prepayment activity as unamortized upfront fees for loans are recognized in income when
the loans are refinanced or prepaid.
Our Segment Earnings management and guarantee fee income is 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. The profitability of our multifamily business could be
adversely affected by a significant decrease in demand for K Certificates” for additional information.
In December 2013, FHFA announced a number of additional increases to our guarantee fee rates. In January 2014, FHFA
announced that it was delaying the implementation of these changes.
The UPB of the Single-family Guarantee managed loan portfolio was $1.6 trillion at both December 31, 2013 and 2012.
We expect the UPB of our single-family credit guarantee portfolio will be relatively unchanged at the end of 2014 compared to
2013. However, we believe that the recent increase in mortgage interest rates and potential further increases will result in a
decline, which could be significant, in overall single-family mortgage originations. As a result, we expect our purchase volumes
will likely decline, potentially significantly, during 2014. The expected decline in purchase volume is expected to be offset by a
decline in prepayments resulting from higher mortgage interest rates.
The liquidation rate on our single-family credit guarantees was approximately 28%, 33%, and 24% for 2013, 2012, and
2011, respectively. Although the annualized liquidation rate remained high in 2013, it declined compared to 2012 primarily due
to an increase in interest rates and lower refinancing activity.
Benefit (provision) for credit losses for the Single-family Guarantee segment was $1.4 billion in 2013, $(3.2) billion in
2012, and $(12.3) billion in 2011. The significant improvements in benefit (provision) for credit losses in 2013 and 2012
reflect: (a) declines in the volume of newly delinquent loans (largely due to a decline in our 2005-2008 Legacy single-family
book); and (b) lower estimates of incurred losses largely resulting from 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 losses on the loans that do default. Our benefit (provision) for credit losses in
2013 also reflects $1.7 billion of benefit related to settlement agreements with certain sellers for the release of repurchase
obligations in exchange for one-time cash payments, primarily associated with our Legacy single-family books. See
“NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS - Seller/Servicers” for more information about these
agreements.
The serious delinquency rate on our single-family credit guarantee portfolio was 2.39%, 3.25%, and 3.58% as of
December 31, 2013, 2012, and 2011, respectively. Charge-offs, net of recoveries, associated with single-family loans were
$4.9 billion, $11.6 billion, and $12.4 billion in 2013, 2012, and 2011, respectively. Our recoveries in 2013 and 2012 included
approximately $2.8 billion and $0.7 billion, respectively, related to repurchase requests from our seller/servicers (including
amounts related to settlement agreements with certain sellers to release specified loans from certain repurchase obligations in
exchange for one-time cash payments). Single-family credit losses as a percentage of the average balance of the single-family
credit guarantee portfolio and HFA initiative-related guarantees were 28.8 basis points, 68.3 basis points, and 72.0 basis points
for 2013, 2012 and 2011, respectively. 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, and our non-performing assets.
Other non-interest income for the Single-family Guarantee segment was $1.2 billion in 2013, compared to $0.9 billion in
2012 and $1.2 billion in 2011. The increase in 2013 was primarily due to higher compensatory fees assessed on servicers that
failed to meet our timelines to complete a foreclosure of a loan. These compensatory fees increased to approximately $0.4
billion in 2013, compared to approximately $0.2 billion and $0.1 billion in 2012 and 2011, respectively. The decrease in other
non-interest income in 2012 compared to 2011 was primarily due to: (a) income recognized in 2011 related to proceeds
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received from certain repurchase settlements while no such income was recognized in 2012; and (b) lower recoveries related to
loans impaired upon purchase in 2012.
REO operations income (expense) for the Single-family Guarantee segment was $124 million in 2013, compared to $(62)
million in 2012, and $(596) million in 2011. The improvement in 2013 compared to 2012 was primarily due to: (a) a decline in
REO property expenses associated with a lower number of REO properties; and (b) improving home prices in certain
geographical areas with significant REO activity. The improvement in 2012 compared to 2011 was primarily due to improving
home prices in certain geographical areas with significant REO activity, partially offset by lower recoveries on REO properties,
primarily due to reduced recoveries from mortgage insurers and a decline in reimbursements of losses from seller/servicers
associated with repurchase requests.
Our REO inventory (measured in number of properties) declined 4% and 19% in 2013 and 2012, respectively, primarily
due to lower foreclosure activity as a result of our loss mitigation efforts and a declining amount of delinquent loans. Although
there was an improvement in REO disposition severity during 2013 and 2012, 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 $0.7 billion in 2013, compared to $0.4 billion in
2012 and $0.3 billion in 2011. The increase in 2013 and 2012, compared to the respective prior year, was primarily due to
expenses related to the legislated 10 basis point increase to guarantee fees, which we implemented in April 2012. As of
December 31, 2013, the cumulative total of amounts paid and due to Treasury related to this increase was $641 million,
including $533 million for 2013.
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Investments
The table below presents the Segment Earnings of our Investments segment.
Table 18 — Segment Earnings and Key Metrics — Investments(1)
Segment Earnings:
Net interest income
Non-interest income (loss):
Net impairment of available-for-sale securities recognized in earnings
Derivative gains (losses)
Gains (losses) on trading securities
Gains (losses) on mortgage loans
Other non-interest income
Total non-interest income (loss)
Non-interest expense:
Administrative expenses
Other non-interest expense
Total non-interest expense
Segment adjustments(2)
Segment Earnings before income tax benefit
Income tax (expense) benefit
Segment Earnings, net of taxes
Total other comprehensive income, net of taxes
Comprehensive income
Key metrics:
Portfolio balances:
Average balances of interest-earning assets:(3)(4)
Mortgage-related securities(5)
Non-mortgage-related investments(6)
Single-family unsecuritized loans(7)
Total average balances of interest-earning assets
Return:
Net interest yield — Segment Earnings basis
Year Ended December 31,
2013
2012
2011
(dollars in millions)
$
3,525
$
5,726
$
7,168
(974)
6,806
(1,588)
(817)
9,612
13,039
(523)
349
(174)
1,037
17,427
(825)
16,602
3,685
(1,831)
1,970
(1,755)
303
2,741
1,428
(430)
(1)
(431)
799
7,522
690
8,212
3,185
20,287
$
11,397
$
(1,833)
(3,597)
(993)
529
1,437
(4,457)
(398)
(2)
(400)
661
2,972
394
3,366
3,107
6,473
278,200
$
308,698
$
386,115
97,070
88,827
98,176
97,951
97,519
94,894
464,097
$
504,825
$
578,528
0.76%
1.13%
1.24%
$
$
$
(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.”
(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.
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.
(6)
(7) Excludes unsecuritized seriously delinquent single-family mortgage loans.
2013 vs. 2012
Segment Earnings for our Investments segment increased by $8.4 billion to $16.6 billion in 2013 compared to
$8.2 billion in 2012, primarily due to increases in other non-interest income and derivative gains. Comprehensive income for
our Investments segment increased by $8.9 billion to $20.3 billion in 2013 compared to $11.4 billion in 2012, primarily due to
higher Segment Earnings.
During 2013, the UPB of the Investments segment mortgage investments portfolio decreased by 12%. We held
$182.1 billion and $208.1 billion of agency securities, $64.5 billion and $76.5 billion of non-agency mortgage-related
securities, and $84.4 billion and $91.4 billion of single-family unsecuritized mortgage loans at December 31, 2013 and 2012,
respectively. The decline in UPB of agency securities is due mainly to liquidations. The decline in UPB of these non-agency
mortgage-related securities is due mainly to the receipt of principal repayments from both the recoveries from liquidated loans
and voluntary repayments of the underlying collateral, representing a partial return of our investments in these securities, and
sales during 2013. The decline in the UPB of single-family unsecuritized mortgage loans is primarily related to prepayments of
mortgage loans held and the securitization of mortgage loans that we had purchased for cash, and includes the securitization of
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reperforming loans and modified loans, partially offset by the addition of newly performing loans from the Single-family
Guarantee segment. 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 by $2.2 billion and Segment Earnings net interest yield decreased by
37 basis points during 2013 compared to 2012. The primary drivers of the decreases were the reduction in the balance of
higher-yielding mortgage-related assets due to continued liquidations coupled with purchases at lower yields. These factors
were partially offset by lower funding costs primarily due to the replacement of debt at lower rates.
Segment Earnings non-interest income was $13.0 billion in 2013 compared to $1.4 billion in 2012. The improvement was
primarily due to increases in other non-interest income and derivative gains and a decrease in net impairments of available-for-
sale securities recognized in earnings, partially offset by losses on mortgage loans.
We recorded derivative gains for this segment of $6.8 billion during 2013 compared to $2.0 billion during 2012. The
increase in derivative gains was primarily due to an increase in longer-term interest rates during 2013, compared to a decrease
in longer-term interest rates during 2012, coupled with a change in the mix of our derivatives. See “Non-Interest Income (Loss)
— Derivative Gains (Losses)” for additional information on our derivatives.
Net impairment of available-for-sale securities recognized in earnings in our Investments segment was $1.0 billion during
2013 compared to $1.8 billion during 2012. The decrease in net impairments was primarily due to improvements in forecasted
home prices over the expected life of the available-for-sale securities during 2013. During 2013, the improvements in
forecasted home prices were offset primarily by the impact of two changes: (a) the incorporation in the fourth quarter of 2013
of new information, which enhanced the assumptions used to estimate the contractual loan terms for certain modified loans
collateralizing non-agency mortgage-related securities for which actual data about those terms was unavailable to the market;
and (b) an increase in the population of available-for-sale securities in an unrealized loss position which we intend to sell. In the
fourth quarter of 2012, we implemented the use of a third-party model, which enhanced our approach to estimating other-than-
temporary impairments of our single-family non-agency mortgage-related securities. The decision to transition to a third-party
model was made to increase the level of disaggregation for certain assumptions used in projecting cash flow estimates of these
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” for additional information on our impairments.
We recorded gains (losses) on trading securities of $(1.6) billion during 2013 compared to $(1.8) billion during 2012. The
losses on trading securities during both periods were primarily due to the movement of securities with unrealized gains towards
maturity.
We recorded gains (losses) on mortgage loans, primarily related to movements in interest rates on our multifamily held-
for-sale loans, of $(817) million during 2013 compared to $303 million during 2012. The losses on mortgage loans during 2013
were primarily due to an increase in interest rates while the gains on mortgage loans during 2012 were due to a decline in
interest rates.
We recorded other non-interest income for this segment of $9.6 billion during 2013 compared to $2.7 billion during 2012.
The increase in other non-interest income primarily resulted from: (a) settlements associated with our investments in certain
non-agency mortgage-related securities; (b) increased gains on sales of available-for-sale securities resulting from increased
sales volume related to our 2013 Conservatorship Scorecard goal to sell 5% of less liquid mortgage-related assets, as well as
sales of agency REMIC securities; and (c) increased gains on the retirement of other debt largely due to higher premiums held
on the debt that was called in 2013. The gains on sales of available-for-sale securities includes the estimated amount of gains on
sales of Multifamily segment CMBS attributed to changes in interest rates. For information on the settlement agreements, see
“NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Non-Agency Mortgage-Related Security Issuers.”
We recorded a benefit in other non-interest expense for this segment of $349 million during 2013 compared to an expense
of $1 million in 2012. The benefit in 2013 resulted from an adjustment of $350 million to expected recoveries of our short-term
lending receivable related to a settlement with Lehman Brothers Holdings Inc. in February 2014. For information on this
settlement, see "NOTE 17: LEGAL CONTINGENCIES.”
Our Investments segment’s other comprehensive income was $3.7 billion during 2013 compared to $3.2 billion during
2012. The increase in other comprehensive income was primarily due to higher fair values on our single-family non-agency
mortgage-related securities, as these securities were affected by spread tightening in 2013, partially offset by losses on our
agency mortgage-related securities resulting from the increase in long-term interest rates. 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.
2012 vs. 2011
Segment Earnings for our Investments segment increased by $4.8 billion to $8.2 billion in 2012 compared to $3.4 billion
in 2011, primarily due to derivative gains during 2012 versus derivative losses during 2011. Comprehensive income for our
Investments segment increased by $4.9 billion to $11.4 billion in 2012, compared to $6.5 billion in 2011, primarily due to
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higher Segment Earnings. Other comprehensive income was relatively unchanged in 2012 compared to 2011, as higher gains
on our non-agency mortgage-related securities were largely offset by the impact of a smaller decline in interest rates and less
spread tightening on our agency securities.
During 2012, the UPB of the Investments segment mortgage investments portfolio decreased by 16%. We held $208.1
billion and $253.6 billion of agency securities, $76.5 billion and $86.5 billion of non-agency mortgage-related securities, and
$91.4 billion and $109.2 billion of single-family unsecuritized mortgage loans at December 31, 2012 and 2011, respectively.
The decline in UPB of agency securities is due mainly to liquidations. The decline in UPB of these non-agency mortgage-
related securities is due mainly to the receipt 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 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 $1.4 billion, and Segment Earnings net interest yield decreased 11 basis
points during 2012 compared to 2011. 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 $1.4 billion in 2012 compared to $(4.5) billion in 2011. This
improvement was primarily due to derivative gains during 2012 versus derivative losses during 2011 and an increase in other
non-interest income, partially offset by an increase in losses on trading securities.
We recorded derivative gains (losses) for this segment of $2.0 billion during 2012 compared to $(3.6) billion during 2011.
This improvement was primarily due to the impact of a smaller decline in interest rates coupled with a yield curve steepening in
2012 compared to 2011. In addition, a change in the mix of our derivatives portfolio, whereby we increased our holdings of
receive-fixed swaps relative to pay-fixed swaps as we rebalanced our portfolio during a period of steadily declining interest
rates in 2012, contributed to the gain.
Impairments recorded in our Investments segment were $1.8 billion during both 2012 and 2011. In the fourth quarter of
2012 we implemented the use of a third-party model, which enhanced our approach to estimating other-than-temporary
impairments of our single-family non-agency mortgage-related securities as discussed above. Absent the adverse impact from
the implementation of the third-party model, our 2012 impairments were otherwise positively impacted by improvements in
forecasted home prices over the expected life of the available-for-sale securities and lower interest rates, resulting in a benefit
from expected structural credit enhancements on the securities.
We recorded gains (losses) on trading securities of $(1.8) billion during 2012 compared to $(1.0) billion during 2011. The
losses on trading securities during both periods were primarily due to the movement of securities with unrealized gains towards
maturity. These losses were partially offset by the increase in the fair value of our trading securities as a result of the decline in
interest rates during 2012 and 2011. The increased losses in 2012 compared to 2011 resulted from lower interest rate-related
gains in 2012 as interest rates declined less in 2012 compared to 2011.
We recorded gains (losses) on mortgage loans of $303 million during 2012, compared to $529 million during 2011. The
gains on mortgage loans during both periods were primarily due to declines in interest rates.
Other non-interest income (loss) for this segment was $2.7 billion during 2012 compared to $1.4 billion during 2011. 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 an increase in
basis adjustments. Basis adjustments 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 total other comprehensive income was relatively unchanged at $3.2 billion during 2012
compared to $3.1 billion during 2011, as higher gains on our non-agency mortgage-related securities were largely offset by the
impact of a smaller decline in interest rates and less spread tightening on our agency securities.
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.”
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Multifamily
The table below presents the Segment Earnings of our Multifamily segment.
Table 19 — Segment Earnings and Key Metrics — Multifamily(1)
Year Ended December 31,
2013
2012
2011
(dollars in millions)
Segment Earnings:
Net interest income
Benefit for credit losses
Non-interest income:
Management and guarantee income
Net impairment of available-for-sale securities recognized in earnings
Gains on mortgage loans
Other non-interest income
Total non-interest income
Non-interest expense:
Administrative expenses
REO operations income (expense)
Other non-interest expense
Total non-interest expense
Segment Earnings before income tax benefit (expense)
Income tax benefit (expense)
Segment Earnings, net of taxes
Total other comprehensive income (loss), net of taxes
Total comprehensive income
Key metrics:
Balances and Volume:
Average balance of Multifamily unsecuritized loan portfolio
Average balance of Multifamily guarantee portfolio
Average balance of Multifamily investment securities portfolio
Multifamily new business activity(2)
Multifamily units financed from new business activity(2)
Multifamily K Certificate transactions — guaranteed portion
Multifamily K Certificate transactions — unguaranteed portion(3)
Yield and Rate:
Net interest yield — Segment Earnings basis
Average Management and guarantee fee rate, in bps:(4)
K Certificate guarantees
All other guarantees
Total
Credit:
Delinquency rate:
Credit-enhanced loans, at period end
Non-credit-enhanced loans, at period end
Total delinquency rate, at period end(5)
Allowance for loan losses and reserve for guarantee losses, at period end
Credit losses, in bps(6)
REO inventory, at net carrying value
REO inventory, at period end (number of properties)
$
1,186
$
1,291
$
218
206
(15)
481
648
1,320
(257)
16
(24)
(265)
2,459
(81)
2,378
(923)
1,455
$
123
151
(123)
707
363
1,098
(241)
3
(129)
(367)
2,145
1
2,146
1,935
4,081
69,583
63,689
44,226
25,872
387,940
23,696
4,340
$
$
$
$
$
$
80,826
43,247
54,992
28,774
435,653
17,922
3,281
$
$
$
$
$
$
$
1,200
196
127
(353)
300
128
202
(220)
11
(69)
(278)
1,320
(1)
1,319
899
2,218
83,593
29,861
61,296
20,325
311,046
11,722
1,936
1.03%
0.95%
0.83%
19.7
74.8
31.8
19.0
68.4
35.6
0.11%
0.07%
0.09%
151
0.9
10
1
$
$
0.36%
0.10%
0.19%
382
2.8
64
6
$
$
21.2
62.7
42.4
0.52%
0.11%
0.22%
545
6.3
133
20
$
$
$
$
$
$
$
$
$
(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) Represents loan purchases and issuances of other guarantee commitments and Other Structured Securities. Excludes Other Guarantee Transactions.
(3) Represents subordinated securities (i.e., CMBS), which are not issued or guaranteed by us.
(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 HFA initiative-related guarantees, excluding certain bonds under the NIBP.
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(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 (gains) divided by the sum of the average carrying value of our multifamily loans (on-balance
sheet) and the average balance of the multifamily guarantee portfolio, including multifamily HFA initiative-related guarantees.
Segment Earnings for our Multifamily segment was $2.4 billion in 2013, compared to $2.1 billion in 2012 and $1.3
billion in 2011. The increase in 2013 was primarily due to increased non-interest income and increased benefit for credit losses,
while the increase in 2012 was mainly due to increased non-interest income.
Comprehensive income for our Multifamily segment was $1.5 billion and $4.1 billion for 2013 and 2012, respectively,
and consisted of: (a) Segment Earnings of $2.4 billion and $2.1 billion, respectively; and (b) $(0.9) billion and $1.9 billion of
total other comprehensive income (loss), respectively. Total other comprehensive loss for our Multifamily segment in 2013 was
primarily related to the realization of fair value gains in current period Segment Earnings that were previously deferred in
AOCI associated with certain available-for-sale securities that were sold during 2013. Total other comprehensive income for
our Multifamily segment in 2012 was mainly due to an increase in the fair value of available-for-sale CMBS, which was driven
by favorable non-interest rate-related market spread movements.
In 2013, we continued to provide liquidity to the multifamily market and support affordable rental housing by acquiring
and securitizing mortgages secured by nearly 1,600 properties amounting to nearly 388,000 rental units. Between 2009 and
2013, we sold $71.5 billion in UPB of multifamily loans through 56 K Certificate transactions, which represented
approximately $61.0 billion in Other Guarantee Transactions that we issued and guaranteed, and $10.5 billion in unguaranteed
private-label bonds (i.e., CMBS). The vast majority of the apartments we financed in 2013 were affordable to low and moderate
income families.
We met the 2013 Conservatorship Scorecard goal of reducing our new multifamily business volume by at least 10% as
compared to 2012 levels. As a result, our multifamily new business activity declined to $25.9 billion in 2013 compared to $28.8
billion for 2012. In addition to managing our new business volume, we experienced increased competition from other market
participants and, as a result, we believe that our portion of new business in the multifamily market declined during 2013.
We sold $28.3 billion in UPB of multifamily loans in 2013 primarily through K Certificate transactions compared to
$20.8 billion in 2012. The UPB of the total multifamily portfolio declined to $166.8 billion as of December 31, 2013 from
$180.2 billion as of December 31, 2012, primarily due to the sale of available-for-sale CMBS related to our 2013
Conservatorship Scorecard goal to sell 5% of less liquid mortgage-related assets, and liquidations of our multifamily loan
portfolio and investment securities. This decline was partially offset by an increase in our multifamily guarantee portfolio
resulting from our issuance of K Certificates.
While we had a record level of Multifamily Segment Earnings in 2013, this is not sustainable over the long-term. Our
recent financial results have benefited significantly from the strength of the multifamily market in the last several years, gains
on sales of mortgage loans from our securitization activity as well as gains on sales of CMBS investments. Consistent with the
2013 Conservatorship Scorecard, we had significant sales of our CMBS during 2013. These sales, combined with principal
repayments on CMBS and unsecuritized mortgage loans, reduced the size of the Multifamily investments portfolio and resulted
in a decline in our Segment Earnings net interest income in 2013. These and any other significant strategy changes, either from
management, FHFA, or Treasury, could have an adverse impact on the future earnings of our Multifamily segment.
Segment Earnings net interest income was $1.2 billion in 2013 compared to $1.3 billion in 2012 and $1.2 billion in 2011.
The decrease in 2013 was primarily due to lower average balances of the multifamily loan and investment securities portfolios.
The increase in 2012 was primarily due to the cumulative effect of new business volumes since 2008, which have higher yields
relative to allocated funding costs compared to pre-2008 volumes.
Segment Earnings non-interest income was $1.3 billion, $1.1 billion, and $0.2 billion in 2013, 2012 and 2011,
respectively. The increase in 2013 compared to 2012 was primarily due to higher other non-interest income which resulted
from increased gains on sale of $12.4 billion in UPB of available-for-sale CMBS discussed above. This increase was partially
offset by a decrease in gains on mortgage loans due to less favorable non-interest rate-related market movements during 2013
compared to 2012. The increase in 2012 compared to 2011 was mainly due to: (a) higher gains on mortgage loans resulting
from favorable non-interest rate-related market movements during 2012; and (b) lower impairments on available-for-sale
securities compared to 2011, which reflects improvement in the performance of the underlying collateral.
Segment Earnings management and guarantee income increased to $206 million in 2013, compared to $151 million in
2012, and $127 million in 2011. The increase in both 2013 and 2012 was primarily due to the higher average balance of the
multifamily guarantee portfolio, which was primarily due to increased issuances of K Certificates. However, the average total
management and guarantee fee rate on our multifamily guarantee portfolio declined to 31.8 basis points in 2013 from 35.6 basis
points in 2012 and 42.4 basis points in 2011. These declines primarily reflect the increased issuances of guaranteed K
Certificates during recent periods, which have lower fees than our other multifamily guarantee activities as a result of our
limited credit risk exposure due to the use of subordination.
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Segment Earnings benefit for credit losses was $218 million, $123 million and $196 million in 2013, 2012 and 2011
respectively. The continued recognition of benefit for credit losses was primarily due to an improvement in the expected
performance of the underlying loans.
As a result of our prudent underwriting standards and practices, and the continued positive multifamily market
fundamentals, the credit quality of the multifamily mortgage portfolio remains strong. Multifamily credit losses as a percentage
of the combined average balance of our multifamily loan and guarantee portfolios were 0.9 basis points, 2.8 basis points, and
6.3 basis points in 2013, 2012 and 2011, respectively. 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 help
manage recurring cash flows and meet our other cash management needs. We consider federal funds sold to be overnight
unsecured trades executed with insured depository institutions that are members of the Federal Reserve System. Federal funds
sold trades are not insured. 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 December 31,
2013. These short-term assets related to our consolidated VIEs decreased by $18.2 billion from December 31, 2012 to
December 31, 2013, primarily due to a decrease in the level of refinancing activity.
Excluding amounts related to our consolidated VIEs, we held $11.3 billion and $8.5 billion of cash and cash equivalents
(including non-interest bearing deposits of $7.2 billion and $7.3 billion at the Federal Reserve Bank of New York), no federal
funds sold, and $59.2 billion and $18.3 billion of securities purchased under agreements to resell at December 31, 2013 and
2012, respectively. The increase in these liquid assets at December 31, 2013 compared to December 31, 2012 was due in part to
the concern that the U.S. would exhaust its borrowing authority under the statutory debt limit.
Excluding amounts related to our consolidated VIEs, we held on average $22.6 billion and $24.5 billion of cash and cash
equivalents and $55.7 billion and $27.6 billion of federal funds sold and securities purchased under agreements to resell during
the three and twelve months ended December 31, 2013, respectively. The larger average balance during the fourth quarter of
2013 of federal funds sold and securities purchased under agreements to resell was primarily due to our obligation to pay to
Treasury the significant senior preferred stock dividend at the end of 2013.
For information regarding our liquidity management practices and policies, see “LIQUIDITY AND CAPITAL
RESOURCES.”
Investments in Securities
The two tables below provide detail regarding our investments in securities as of December 31, 2013, 2012, and 2011.
The tables do not include our holdings of single-family PCs and certain Other Guarantee Transactions. For information on our
holdings of such securities, see “Table 15 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios.”
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Table 20 — Investments in Available-For-Sale Securities
December 31, 2013
Available-for-sale mortgage-related securities:
Freddie Mac
Fannie Mae
Ginnie Mae
CMBS
Subprime
Option ARM
Alt-A and other
Obligations of states and political subdivisions
Manufactured housing
Total investments in available-for-sale mortgage-related securities
December 31, 2012
Available-for-sale mortgage-related securities:
Freddie Mac
Fannie Mae
Ginnie Mae
CMBS
Subprime
Option ARM
Alt-A and other
Obligations of states and political subdivisions
Manufactured housing
Total investments in available-for-sale mortgage-related securities
December 31, 2011
Available-for-sale mortgage-related securities:
Freddie Mac
Fannie Mae
Ginnie Mae
CMBS
Subprime
Option ARM
Alt-A and other
Obligations of states and political subdivisions
Manufactured housing
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in millions)
Fair Value
$
39,001
$
1,847
$
(189) $
10,140
149
29,151
29,897
6,617
8,322
3,533
629
660
18
1,524
382
338
526
23
61
(3)
—
(337)
(2,780)
(381)
(142)
(61)
(6)
40,659
10,797
167
30,338
27,499
6,574
8,706
3,495
684
$
$
$
$
127,439
$
5,379
$
(3,899) $
128,919
53,965
$
14,183
183
47,606
35,503
7,454
11,861
5,647
716
4,602
1,099
26
3,882
83
48
244
154
24
$
(52) $
(2)
—
(181)
(9,129)
(1,785)
(1,201)
(3)
(31)
58,515
15,280
209
51,307
26,457
5,717
10,904
5,798
709
177,118
$
10,162
$
(12,384) $
174,896
74,711
$
19,023
219
53,637
41,347
9,019
13,659
7,782
820
6,429
1,303
30
2,574
60
15
32
108
6
$
(48) $
(4)
—
(548)
(13,408)
(3,169)
(2,812)
(66)
(60)
81,092
20,322
249
55,663
27,999
5,865
10,879
7,824
766
Total investments in available-for-sale mortgage-related securities
$
220,217
$
10,557
$
(20,115) $
210,659
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Table 21 — Investments in Trading Securities
Trading mortgage-related securities:
Freddie Mac
Fannie Mae
Ginnie Mae
Other
Total trading mortgage-related securities
Trading non-mortgage-related securities:
Asset-backed securities
Treasury bills
Treasury notes
FDIC-guaranteed corporate medium-term notes
Total trading non-mortgage-related securities
Total fair value of investments in trading securities
Non-Mortgage-Related Securities
2013
$
9,349
7,180
98
141
16,768
—
2,254
4,382
—
6,636
December 31,
2012
(in millions)
2011
$
10,354
$
10,338
131
156
20,979
292
1,160
19,061
—
20,513
$
23,404
$
41,492
$
16,047
15,165
156
164
31,532
302
100
24,712
2,184
27,298
58,830
Our investments in non-mortgage-related securities provide an additional source of liquidity. We held investments in non-
mortgage-related securities with a fair value of $6.6 billion and $20.5 billion as of December 31, 2013 and 2012, respectively.
While our investments in non-mortgage-related securities declined at December 31, 2013 compared to December 31, 2012, our
other liquid assets increased. For more information on liquid assets, see "Cash and Cash Equivalents, Federal Funds Sold and
Securities Purchased Under Agreements to Resell."
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 on our consolidated
balance sheets 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 15 — Composition
of Segment Mortgage Portfolios and Credit Risk Portfolios.”
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Table 22 — Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets
Freddie Mac mortgage-related securities:(2)
Single-family
Multifamily
Total Freddie Mac mortgage-related securities
Non-Freddie Mac mortgage-related securities:
Agency securities:(3)
Fannie Mae:
Single-family
Multifamily
Ginnie Mae:
Single-family
Multifamily
Total Non-Freddie Mac agency securities
Non-agency mortgage-related securities:
Single-family:(4)
Subprime
Option ARM
Alt-A and other
CMBS
Obligations of states and political subdivisions(5)
Manufactured housing
Total non-agency mortgage-related securities(6)
Total UPB of mortgage-related securities
December 31, 2013
December 31, 2012
Fixed
Rate
Variable
Rate(1)
Total
Fixed
Rate
Variable
Rate(1)
Total
(in millions)
$
38,472
$
1,318
39,790
4,401
1,469
5,870
$
42,873
$
50,979
$
2,787
45,660
750
51,729
7,256
1,632
8,888
$
58,235
2,382
60,617
7,240
3
150
15
7,408
116
—
1,417
13,069
3,524
577
18,703
9,421
16,661
10,864
12,518
23,382
—
78
—
3
228
15
35
202
15
49
91
—
84
293
15
9,499
16,907
11,116
12,658
23,774
39,583
10,426
9,594
16,254
14
201
76,072
39,699
10,426
11,011
29,323
3,538
778
94,775
311
—
1,774
17,657
5,637
741
26,120
44,086
12,012
13,036
30,300
19
121
99,574
$
65,901
$
91,441
157,342
$
88,965
$ 121,120
44,397
12,012
14,810
47,957
5,656
862
125,694
210,085
(13,922)
(288)
$ 195,875
Premiums, discounts, deferred fees, impairments of UPB and other basis
adjustments
Net unrealized gains (losses) on mortgage-related securities, pre-tax
Total carrying value of mortgage-related securities
(14,036)
2,381
$ 145,687
(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” 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 28 — 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 28% and 36% of these securities held at December 31, 2013 and 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 16% and 21% of total non-agency mortgage-related securities held at December 31, 2013 and 2012, respectively, 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.
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Table 23 — Additional Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets
Agency pass-through securities(1)
Other agency securities:
Interest-only securities(2)
Principal-only securities(3)
Inverse floating-rate securities(4)
Other Structured Securities(5)
Total agency securities
Non-agency securities(6)
Total mortgage-related securities
December 31, 2013
December 31, 2012
UPB
Fair Value
UPB
Fair Value
(in millions)
$
12,951
$
13,867
$
17,614
$
19,125
—
2,724
1,594
45,298
62,567
94,775
1,966
2,252
2,280
47,885
68,250
77,437
—
2,291
2,804
61,682
84,391
125,694
$
157,342
$
145,687
$
210,085
$
2,023
2,169
4,106
67,404
94,827
101,048
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. Includes $0.6 billion and $0.5 billion in fair value at December 31, 2013
and 2012, respectively, consisting of our K Certificates that we issued and guarantee in Other Guarantee Transactions.
(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 reference
rates are low and lower cash flows when reference rates are high). Additionally, these securities receive a portion of principal cash flows associated
with the underlying collateral.
Includes REMICs and Other Structured Securities. See “GLOSSARY” for more information on these securities.
Includes fair values of $2 million and $3 million of interest-only securities at December 31, 2013 and 2012, respectively.
(5)
(6)
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 $157.3 billion at December 31, 2013, while the fair value of these investments
decreased from $195.9 billion at December 31, 2012 to $145.7 billion at December 31, 2013. The reduction in UPB of agency
mortgage-related securities primarily resulted from liquidations. The reduction in non-agency mortgage-related securities is due
to the receipt of principal repayments from both the recoveries from liquidated loans and voluntary repayments of the
underlying collateral, representing a partial return of our investments in these securities, and sales, consistent with our efforts to
reduce the size of our mortgage-related investments portfolio, as described in “BUSINESS — Conservatorship and Related
Matters — Limits on Investment Activity and Our Mortgage-Related Investments Portfolio.”
The table below summarizes our mortgage-related securities purchase activity for 2013, 2012, and 2011.
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Table 24 — Mortgage-Related Securities Purchase Activity(1)
Non-Freddie Mac mortgage-related securities purchased for resecuritization:(2)
Ginnie Mae Certificates
$
26
$
21
$
77
Non-Freddie Mac mortgage-related securities purchased as investments in securities:
Year Ended December 31,
2013
2012
2011
(in millions)
Agency securities:
Fannie Mae:
Fixed-rate
Variable-rate
Total agency securities
Non-agency mortgage-related securities:
CMBS:(3)
Fixed-rate
Variable-rate
Total non-agency mortgage-related securities
Total non-Freddie Mac mortgage-related securities purchased as investments in securities
Total non-Freddie Mac mortgage-related securities purchased
Freddie Mac mortgage-related securities purchased:
Single-family:
Fixed-rate
Variable-rate
Multifamily:
Fixed-rate
Variable-rate
Total Freddie Mac mortgage-related securities purchased
Mortgage-related securities purchased for Other Guarantee Transactions(4)
4,251
50
4,301
30
65
95
4,396
4,422
$
$
—
170
170
10
69
79
249
270
$
5,835
2,297
8,132
14
179
193
8,325
8,402
$
94,608
$
49,607
$
94,543
885
3,542
5,057
—
—
119
—
355
117
$
$
95,493
23,696
$
$
53,268
17,908
$
$
100,072
11,527
(1) Based on UPB. Excludes mortgage-related securities traded but not yet settled.
(2) Excludes tax-exempt multifamily housing revenue bonds for securitization in guarantee swap transactions.
(3) Consists of our purchases of subordinated tranches issued in K Certificate transactions.
(4) Primarily consists of purchases of mortgage-related securities backed by Freddie Mac underwritten loans for the subsequent issuances of multifamily
K Certificates.
The purchases of Freddie Mac mortgage-related securities that we made during 2013, as reflected in the table above,
primarily consisted of purchases of single-family PCs related to our investment activities. 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. For more information, see
“BUSINESS — Our Business Segments — Investments Segment — Market Presence and 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. The profitability of our
multifamily business could be adversely affected by a significant decrease in demand for K Certificates.”
Unrealized Losses on Available-For-Sale Mortgage-Related Securities
At December 31, 2013, our gross unrealized losses, pre-tax, on available-for-sale mortgage-related securities were
$3.9 billion, compared to $12.4 billion at December 31, 2012. The decrease was largely the result of 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 December 31, 2013 were mainly attributable to poor underlying collateral performance, limited liquidity and 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.
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•
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 table below presents information about our holdings of available-for-
sale non-agency mortgage-related securities backed by subprime, option ARM and Alt-A loans.
Table 25 — Non-Agency Mortgage-Related Securities Backed by Subprime First Lien, Option ARM, and Alt-A Loans
and Certain Related Credit Statistics(1)
UPB:
Subprime first lien(2)
Option ARM
Alt-A(3)
Gross unrealized losses, pre-tax:(4)
Subprime first lien(2)
Option ARM
Alt-A(3)
Present value of expected future credit losses:(5)
Subprime first lien (2)
Option ARM
Alt-A (3)
Collateral delinquency rate:(6)
Subprime first lien(2)
Option ARM
Alt-A(3)
Average credit enhancement:(7)
Subprime first lien(2)
Option ARM
Alt-A(3)
Cumulative collateral loss:(8)
Subprime first lien(2)
Option ARM
Alt-A(3)
12/31/2013
9/30/2013
6/30/2013
3/31/2013
12/31/2012
(dollars in millions)
As of
$
$
$
$
39,417
10,426
9,147
$
40,491
10,755
9,866
$
41,608
11,190
11,118
2,779
$
4,666
$
5,281
$
381
135
6,299
1,802
1,165
$
619
304
3,575
1,683
1,149
$
635
579
4,047
2,094
1,338
$
$
$
$
42,998
11,617
12,243
6,085
1,226
781
6,195
2,896
1,450
44,066
12,012
12,634
9,128
1,785
1,093
7,159
3,542
1,739
35%
32
22
9%
—
—
30%
24
13
36%
33
22
10%
—
1
29%
24
13
37%
34
22
12%
1
3
29%
23
12
38%
36
22
14%
2
4
27%
22
11
39%
38
23
15%
3
4
26%
21
10
(1) See “Ratings of Non-Agency Mortgage-Related Securities” for additional information about these securities. The book and fair values of our mortgage-
related securities and the information in this table were not affected by the settlement amounts we received in 2013 related to our investments in certain
non-agency mortgage-related securities. For more information, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Non-
Agency Mortgage-Related Security Issuers.”
(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 pools of loans underlying 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 primarily consist 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
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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 $9.7 billion at December 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; and (b) realized cash shortfalls. The decrease in the present value of expected future credit losses was offset by the
incorporation in the fourth quarter of 2013 of new information, which enhanced the assumptions used to estimate the
contractual loan terms for certain modified loans collateralizing non-agency mortgage-related securities for which actual data
about those terms was unavailable to the market. This enhancement resulted in a lower net present value of projected cash
flows on our non-agency mortgage-related securities and increased our net other-than-temporary impairments recognized in
earnings by $0.7 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
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 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. As of December 31, 2013, on an average basis, the structural credit enhancements on
our securities backed by option ARM and certain Alt-A loans have been more than fully depleted. We have also determined that
there is substantial uncertainty surrounding certain bond insurers’ ability to pay our future claims on expected credit losses
related to our non-agency mortgage-related security investments. For more information, see "Table 7.3 — Significant Modeled
Attributes for Certain Available-For-Sale Non-Agency Mortgage-Related Securities." For more information on bond insurance
coverage, see “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Bond Insurers.”
Since the beginning of 2007, we have incurred actual principal cash shortfalls of $3.7 billion on impaired available-for-
sale non-agency mortgage-related securities, including $152 million and $955 million related to the three and twelve months
ended December 31, 2013, respectively. 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.
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 26 — Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans(1)
Principal repayments and cash shortfalls:(2)
Subprime:
Principal repayments
Principal cash shortfalls
Option ARM:
Principal repayments
Principal cash shortfalls
Alt-A and other:
Principal repayments
Principal cash shortfalls
12/31/2013
9/30/2013
6/30/2013
3/31/2013
12/31/2012
Three Months Ended
(in millions)
$
$
$
1,021
$
1,048
$
1,087
$
1,065
$
8
$
192
100
324
$
43
35
226
161
$
418
$
51
15
239
188
$
418
$
74
14
217
178
$
385
$
84
1,106
7
239
226
423
81
(1) See “Ratings of Non-Agency Mortgage-Related Securities” for additional information about these securities. The book and fair values of our mortgage-
related securities and the information in this table were not affected by the settlement amounts we received in 2013 related to our investments in certain
non-agency mortgage-related securities. For more information, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Non-
Agency Mortgage-Related Security Issuers.”
In addition to the contractual interest payments, we receive principal repayments from both the recoveries from liquidated loans and voluntary
repayments of the underlying collateral of these securities representing a partial return of our investment in these securities.
(2)
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We and FHFA, as Conservator, are involved in various efforts to mitigate or recover 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, consisting entirely of non-agency mortgage-related securities.
Table 27 — Net Impairment of Available-For-Sale Mortgage-Related Securities Recognized in Earnings
Net Impairment of Available-For-Sale Securities Recognized in Earnings
12/31/2013
9/30/2013
Three Months Ended
6/30/2013
(in millions)
3/31/2013
12/31/2012
Subprime:(1)
2006 & 2007
Other years
Total subprime
Option ARM:
2006 & 2007
Other years
Total option ARM
Alt-A:
2006 & 2007
Other years
Total Alt-A
Other loans
Total subprime, option ARM, Alt-A and other loans
CMBS
Manufactured housing
$
1,141
$
26
1,167
26
15
41
4
54
58
30
1,296
1
—
$
4
41
45
1
11
12
1
64
65
1
123
3
—
Total available-for-sale mortgage-related securities
$
1,297
$
126
$
12
1
13
4
1
5
1
24
25
—
43
—
1
44
$
$
27
6
33
—
—
—
—
—
—
—
33
10
—
43
$
591
24
615
306
122
428
37
100
137
—
1,180
58
1
$
1,239
(1)
Includes all first and second liens.
We recorded net impairment of available-for-sale securities recognized in earnings of $1.3 billion and $1.5 billion during
the three and twelve months ended December 31, 2013, respectively, compared to $1.2 billion and $2.2 billion during the three
and twelve months ended December 31, 2012, respectively.
We review our investments in available-for-sale securities that are in an unrealized loss position to determine which
securities, if any, we intend to sell, given market conditions and other information as of the balance sheet date. For any
available-for-sale security for which we concluded we had the intent to sell as of December 31, 2013, we recorded the
unrealized loss as a net impairment of available-for-sale securities recognized in earnings. The intent to sell population is
determined using management judgment based on a variety of factors, including economics and other considerations and, in the
case of single-family non-agency mortgage-related securities, whether such securities are subject to FHFA-led lawsuits or other
loss mitigation measures. During the three and twelve months ended December 31, 2013, we recorded net impairment of
available-for-sale securities recognized in earnings of $434 million and $568 million, respectively, due to our intent to sell
certain securities. We recorded the remaining impairments because our estimate of the present value of expected future credit
losses on certain individual available-for-sale securities increased during the period. The securities that we have the intent to
sell are based on our current operational plans, models and strategies. If there is a change in our operational plans, models or
strategies, it could change the population of securities we intend to sell and thereby have a potentially significant impact on
earnings. For more information, including information regarding model changes or enhancements related to impairments
implemented in the fourth quarters of 2013 and 2012, see "CONSOLIDATED RESULTS OF OPERATIONS — Non-Interest
Income (Loss) — Investment Securities-Related Activities" and “NOTE 7: INVESTMENTS IN SECURITIES — Other-Than-
Temporary Impairments on Available-for-Sale Securities.”
While it is reasonably possible that collateral losses on our available-for-sale securities where we have not recorded an
impairment charge in earnings could exceed our credit enhancement levels, we do not believe that those conditions were likely
at December 31, 2013. Based on our conclusion that we do not intend to sell our remaining available-for-sale securities that are
in an unrealized loss position (other than those securities noted above) and it is not more likely than not that we will be required
to sell these securities before a sufficient time to recover all unrealized losses and our consideration of other available
information, we have concluded that the reduction in fair value of these securities was temporary at December 31, 2013 and
have recorded these unrealized losses in AOCI.
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The credit performance of loans underlying our holdings of non-agency mortgage-related securities has declined since
2007 and, although it has stabilized in recent periods, it remains weak. This decline has been particularly severe for subprime,
option ARM, and Alt-A and other loans. Our investments in non-agency mortgage-related securities have been negatively
affected by high unemployment, a large inventory of seriously delinquent mortgage loans and unsold homes, tight credit
conditions, and weak consumer confidence. In addition, the loans which serve as collateral for the securities we hold have
significantly greater concentrations in the states that have undergone the greatest economic stress during the housing crisis that
began in 2006, such as California and Florida. Loans in these states are more likely to become seriously delinquent and the
credit losses associated with such loans are likely to be higher than in other states.
Our assessments concerning other-than-temporary impairment require significant judgment and the use of models, and
are subject to potentially significant change as conditions evolve. In addition, changes in the performance of the individual
securities and in mortgage market conditions may also affect our impairment assessments. Depending on the structure of the
individual mortgage-related security and our estimate of collateral losses relative to the amount of credit support expected to be
available for the tranches we own, a change in collateral loss estimates can have a disproportionate impact on the loss estimate
for the security. Additionally, servicer performance, loan modification programs and backlogs, and various forms of
government intervention in the housing market can significantly affect the performance of these securities, including the timing
of loss recognition of the underlying loans and thus the timing of losses we recognize on our securities. Impacts related to
changes in interest rates may also affect our losses due to the structural credit enhancements on our investments in non-agency
mortgage-related securities. The lengthening of the foreclosure timelines that has occurred in recent years can also affect our
losses. For example, while defaulted loans remain in the trusts prior to completion of the foreclosure process, the subordinate
classes of securities issued by the securitization trusts may continue to receive interest payments, rather than absorbing default
losses. This may reduce the amount of funds available for the tranches we own. Given the uncertainty of the housing and
economic environment, it is difficult to estimate the future performance of mortgage loans and mortgage-related securities with
high assurance, and actual results could differ materially from our expectations. Furthermore, various market participants could
arrive at materially different conclusions regarding estimates of future principal cash shortfalls.
For more information on risks associated with the use of models, see “RISK FACTORS — Operational Risks — We face
risks and uncertainties associated with the models that we use for financial accounting and reporting purposes, to make
business decisions, and to manage risks. Market conditions have raised these risks and uncertainties.”
Ratings of Non-Agency Mortgage-Related Securities
The table below shows the ratings of non-agency mortgage-related securities backed by subprime, option ARM, Alt-A
and other loans, and CMBS held at December 31, 2013 based on their ratings as of December 31, 2013, as well as those held at
December 31, 2012 based on their ratings as of December 31, 2012. Ratings presented represent the lower of S&P, Fitch and
Moody's credit ratings, with Fitch and Moody's stated in terms of the S&P equivalent.
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Table 28 — Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other
Loans, and CMBS
Credit Ratings as of December 31, 2013
UPB
Percentage
of UPB
Amortized
Cost
(dollars in millions)
Gross
Unrealized
Losses
Bond
Insurance
Coverage(1)
Subprime loans:
AAA-rated
Other investment grade
Below investment grade(2)
Total
Option ARM loans:
AAA-rated
Other investment grade
Below investment grade(2)
Total
Alt-A and other loans:
AAA-rated
Other investment grade
Below investment grade(2)
Total
CMBS:
AAA-rated
Other investment grade
Below investment grade(2)
Total
Total subprime, option ARM, Alt-A and other loans, and CMBS:
AAA-rated
Other investment grade
Below investment grade(2)
Total
Total investments in mortgage-related securities
Percentage of subprime, option ARM, Alt-A and other loans, and
CMBS of total investments in mortgage-related securities
Credit Ratings as of December 31, 2012
Subprime loans:
AAA-rated
Other investment grade
Below investment grade(2)
Total
Option ARM loans:
AAA-rated
Other investment grade
Below investment grade(2)
Total
Alt-A and other loans:
AAA-rated
Other investment grade
Below investment grade(2)
Total
CMBS:
AAA-rated
Other investment grade
Below investment grade(2)
Total
Total subprime, option ARM, Alt-A and other loans, and CMBS:
AAA-rated
Other investment grade
Below investment grade(2)
Total
Total investments in mortgage-related securities
Percentage of subprime, option ARM, Alt-A and other loans, and
CMBS of total investments in mortgage-related securities
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
88
1,829
37,782
39,699
—
24
10,402
10,426
26
564
10,421
11,011
14,286
12,786
2,251
29,323
14,400
15,203
60,856
90,459
157,342
57%
263
2,033
42,101
44,397
—
40
11,972
12,012
48
1,272
13,490
14,810
24,646
20,615
2,696
47,957
24,957
23,960
70,259
119,176
210,085
57%
93
—% $
5
95
100% $
—% $
—
100
100% $
—% $
5
95
100% $
49% $
43
8
100% $
16% $
17
67
100% $
1% $
4
95
100% $
—% $
—
100
100% $
—% $
9
91
100% $
51% $
43
6
100% $
21% $
20
59
100% $
85
1,758
28,054
29,897
$
$
— $
23
6,594
6,617
$
25
527
7,772
8,324
14,299
12,740
2,239
29,278
14,409
15,048
44,659
74,116
263
1,988
33,252
35,503
$
$
$
$
$
$
$
$
— $
40
7,414
7,454
$
48
1,283
10,532
11,863
24,676
20,568
2,490
47,734
24,987
23,879
53,688
102,554
$
$
$
$
$
$
(1) $
(31)
(2,748)
(2,780) $
— $
(1)
(380)
(381) $
— $
(7)
(135)
(142) $
— $
(131)
(206)
(337) $
(1) $
(170)
(3,469)
(3,640) $
(20) $
(112)
(8,997)
(9,129) $
— $
(4)
(1,781)
(1,785) $
(2) $
(120)
(1,079)
(1,201) $
(4) $
(87)
(90)
(181) $
(26) $
(323)
(11,947)
(12,296) $
2
355
1,315
1,672
—
17
8
25
5
210
1,613
1,828
41
1,653
1,557
3,251
48
2,235
4,493
6,776
13
371
1,474
1,858
—
32
12
44
6
261
1,862
2,129
41
1,698
1,568
3,307
60
2,362
4,916
7,338
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(1) Represents the amount of UPB covered by bond insurance. This amount does not represent the maximum amount of losses we could recover, as the
bond insurance also covers interest.
Includes securities with S&P equivalent credit ratings below BBB– and certain securities that are no longer rated.
(2)
Mortgage Loans
The UPB of mortgage loans on our consolidated balance sheets was $1.7 trillion at both December 31, 2013 and 2012.
Most of the loans on our consolidated balance sheets are securitized (e.g., held in PC trusts). The unsecuritized loans on our
consolidated balance sheets generally consist of loans held for investment purposes, loans that are awaiting securitization, or
delinquent or modified loans that we removed from PC trusts.
Based on the amount of the recorded investment of single-family loans on our consolidated balance sheets, approximately
$41.5 billion, or 2.5%, of these loans were seriously delinquent or in foreclosure as of December 31, 2013, compared to
$59.8 billion, or 3.6%, as of December 31, 2012. The majority of these loans are unsecuritized, and were removed by us from
our PC trusts. As guarantor, we have the right to remove mortgages that back our PCs from the underlying loan pools under
certain circumstances. See “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS” for more
information on our removal of single-family loans from PC trusts.
The UPB of unsecuritized single-family mortgage loans declined by $22.6 billion to $122.1 billion at December 31, 2013
from $144.7 billion at December 31, 2012, primarily due to: (a) loan prepayments, foreclosure transfers, and foreclosure
alternative activities; and (b) securitization of loans through our PC cash auction process, net of related purchases. This decline
was partially offset by our removal of seriously delinquent single-family loans from PC trusts. As of December 31, 2013 and
2012, the balance of unsecuritized single-family mortgage loans included $78.0 billion and $65.8 billion, respectively, in UPB
of mortgage loans classified as TDRs that were no longer seriously delinquent.
The UPB of unsecuritized multifamily mortgage loans was $59.2 billion at December 31, 2013 and $76.6 billion at
December 31, 2012. This decline was primarily due to principal repayments as well as our securitization of loans through K
Certificates, which exceeded new purchases of loans for securitization.
We maintain an allowance for loan losses on mortgage loans that we classify as held-for-investment on our consolidated
balance sheets. We also maintain a reserve for guarantee losses that is associated with Freddie Mac mortgage-related securities
backed by multifamily loans, certain single-family Other Guarantee Transactions, and other guarantee commitments for which
we have incremental credit risk. Collectively, we refer to our allowance for loan losses and our reserve for guarantee losses as
our loan loss reserves. Our loan loss reserves were $24.7 billion and $30.9 billion at December 31, 2013 and 2012, respectively,
including $24.6 billion and $30.5 billion, respectively, related to single-family loans. At December 31, 2013 and 2012, our loan
loss reserves, as a percentage of our total mortgage portfolio, excluding non-Freddie Mac securities, were 1.4% and 1.7%,
respectively, and as a percentage of the UPB associated with our non-performing loans were 20.0% and 23.5%, respectively.
See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” and “NOTE 4: MORTGAGE LOANS AND LOAN
LOSS RESERVES” for information on seriously delinquent single-family loans as well as further detail about the mortgage
loans and associated allowance for loan losses recorded on our consolidated balance sheets.
The table below summarizes the amount of mortgages we purchased and the amount of guarantees we issued in the
applicable periods. The activity presented in the table consists of: (a) mortgage loans in consolidated single-family PCs issued
in the period (regardless of whether such securities are held by us or third parties); (b) single-family and multifamily mortgage
loans purchased, but not securitized, in the period; and (c) mortgage loans underlying our mortgage-related financial guarantees
issued in the period, which are not consolidated on our balance sheets.
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Table 29 — Mortgage Loan Purchases and Other Guarantee Commitment Issuances(1)
Year Ended December 31,
2013
2012
2011
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
(dollars in millions)
Mortgage loan purchases and guarantee issuances:
Single-family:
30-year or more amortizing fixed-rate
$
287,773
63% $
275,632
60% $
194,746
57%
20-year amortizing fixed-rate
15-year amortizing fixed-rate
Adjustable-rate(2)
FHA/VA and other governmental
Total single-family(3)
Multifamily(4)
Total mortgage loan purchases and other
guarantee commitment issuances(5)
Percentage of mortgage purchases and other guarantee
commitment issuances with credit enhancements(6)
21,658
97,025
16,007
279
422,742
25,872
5
22
4
<1
94
6
29,614
103,141
18,075
387
426,849
28,774
7
23
4
<1
94
6
21,378
78,543
25,685
441
320,793
20,325
6
23
8
<1
94
6
$
448,614
100% $
455,623
100% $
341,118
100%
16%
12%
8%
(1) Based on principal amount of the loans. Excludes mortgage loans traded but not yet settled. Excludes the removal of seriously delinquent loans and
(2)
(3)
(4)
(5)
balloon/reset mortgages from PC trusts.
Includes amortizing ARMs with 1-, 3-, 5-, 7-, and 10-year initial fixed-rate periods. We have not purchased option ARM loans in our single-family
credit guarantee portfolio since 2007.
Includes $29.0 billion, $32.6 billion, and $27.7 billion of conforming jumbo loan purchases and $1.0 billion, $0.9 billion, and $0.5 billion of
conforming jumbo loans underlying other guarantee commitment issuances for the years ended December 31, 2013, 2012, and 2011, respectively.
Includes other guarantee commitments associated with mortgage loans as well as tax-exempt multifamily assets. See endnote (5) for further
information.
Includes issuances of other guarantee commitments on single-family loans of $9.9 billion, $6.8 billion, and $4.4 billion and issuances of other
guarantee commitments on multifamily loans of $0.7 billion, $2.4 billion, and $1.0 billion during the years ended December 31, 2013, 2012, and 2011,
respectively.
(6) Excludes credit enhancement coverage occurring subsequent to our purchase or guarantee, such as through STACR debt notes or other risk transfer
transactions. See “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES — Credit Protection and Other Forms of Credit Enhancement” for
further details on credit enhancement of mortgage loans in our multifamily mortgage and single-family credit guarantee portfolios.
See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Table 15.2 — Certain Higher-Risk
Categories in the Single-Family Credit Guarantee Portfolio” for information about certain mortgage loans in our single-family
credit guarantee portfolio that we believe have higher-risk characteristics.
Derivative Assets and Liabilities, Net
The composition of our derivative portfolio changes from period to period as a result of purchases and terminations of
derivatives, assignments of derivatives prior to their contractual maturity, and expiration of derivatives at their contractual
maturity. See “NOTE 9: DERIVATIVES” for additional information regarding our derivatives and “NOTE 10: COLLATERAL
AND OFFSETTING OF ASSETS AND LIABILITIES — Collateral Pledged” for more information about collateral held and
posted.
The table below shows the fair value for each derivative type, the weighted average fixed rate of our pay-fixed and
receive-fixed swaps, and the maturity profile of our derivative positions reconciled to the amounts presented on our
consolidated balance sheets as of December 31, 2013. A positive fair value in the table below for each derivative type is the
estimated amount, prior to netting where allowable, that we would be entitled to receive at that date if the derivatives of that
type were terminated. A negative fair value for a derivative type is the estimated amount, prior to netting where allowable, that
we would owe at that date if the derivatives of that type were terminated.
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Table 30 — Derivative Fair Values and Maturities
December 31, 2013
Fair Value(1)
Notional or
Contractual
Amount(2)
Total Fair
Value
Less than
1 Year
1 to 3
Years
Greater than 3
and up to 5 Years
In Excess
of 5 Years
(dollars in millions)
$
262,566
$
2,206
$
171
$
660
$
1,265
$
Interest-rate swaps:
Receive-fixed:
Swaps
Weighted average fixed rate(3)
Forward-starting swaps(4)
Weighted average fixed rate(3)
Total receive-fixed
Basis (floating to floating)
Pay-fixed:
Swaps
Weighted average fixed rate(3)
Forward-starting swaps(4)
Weighted average fixed rate(3)
Total pay-fixed
Total interest-rate swaps
Option-based:
Call swaptions
Purchased
Written
Put swaptions
Purchased
Other option-based derivatives(5)
Total option-based
Futures
Foreign-currency swaps
Commitments
Swap guarantee derivatives
Subtotal
Credit derivatives
Subtotal
1.04%
—
—%
171
—
(61)
1.90%
—
—%
(61)
110
1,553
(153)
165
—
1,565
—
39
(8)
—
0.97%
—
—%
660
4
(1,878)
2.28%
—
—%
(1,878)
(1,214)
88
(48)
115
—
155
—
—
—
(1)
1.66%
49
1.88%
1,314
—
(2,667)
3.14%
—
—%
(2,667)
(1,353)
449
—
79
—
528
—
—
—
(3)
110
2.91%
(218)
3.58%
(108)
—
(403)
3.17%
(330)
3.75%
(733)
(841)
283
—
339
1,038
1,660
—
—
—
(27)
792
19,161
(169)
281,727
300
2,037
4
235,097
(5,009)
7,500
(330)
242,597
524,624
(5,339)
(3,298)
2,373
(201)
698
1,038
3,908
—
39
(8)
(31)
59,290
5,945
33,410
23,365
122,010
50,270
528
18,731
3,477
719,640
5,386
725,026
Derivative interest receivable (payable), net
Derivative cash collateral (held) posted, net
Total
$
725,026
$
610
$
1,706
$
(1,060)
$
(828)
$
(6)
604
(592)
871
883
(1) Fair value is categorized by maturity based on the period from December 31, 2013 until the contractual maturity of the derivative.
(2) Notional or contractual amounts are used to calculate the periodic settlement amounts to be received or paid and generally do not represent actual
amounts to be exchanged. Notional or contractual amounts are not recorded as assets or liabilities on our consolidated balance sheets.
(3) Represents the notional weighted average rate for the fixed leg of the swaps.
(4) Represents interest-rate swap agreements that are scheduled to begin on future dates ranging from less than one year to twelve years as of
December 31, 2013.
(5) Primarily includes purchased interest-rate caps and floors.
At December 31, 2013, the net fair value of our total derivative portfolio was $883 million, as compared to $479 million
at December 31, 2012. The derivative portfolio notional amount decreased to $725 billion at December 31, 2013 compared to
$746 billion at December 31, 2012. During 2013, we changed the mix and balance of products in our derivative portfolio in
response to an increase in longer-term interest rates. See “NOTE 9: DERIVATIVES” for the notional or contractual amounts
and related fair values of our total derivative portfolio by product type at December 31, 2013 and 2012, as well as “NOTE 10:
COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES — Collateral Pledged” for information about derivative
collateral held and posted.
See “CONSOLIDATED RESULTS OF OPERATIONS — Non-Interest Income (Loss) — Derivative Gains (Losses)” for
a description of gains (losses) on our derivative positions.
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REO, Net
We acquire properties, which are recorded as REO assets on our consolidated balance sheets, typically as a result of
borrower defaults (and subsequent foreclosures) on mortgage loans that we own or guarantee. The balance of our REO, net,
was $4.6 billion at December 31, 2013 and $4.4 billion at December 31, 2012, despite a 4% decline in our REO inventory, due
to the positive impact of improvements in home prices in most geographical areas during 2013. During 2013, we increased our
pricing of single-family properties at single-family foreclosure sale, resulting in fewer third-party buyers of these properties at
the time of foreclosure and a higher level of our single-family REO acquisitions than there otherwise would have been. In
addition, the volume of our single-family REO acquisitions in recent periods has been significantly affected by: (a) the length
of the foreclosure process, which extends the time it takes for loans to be foreclosed upon and the underlying properties to
transition to REO; and (b) a high volume of foreclosure alternatives, which result in fewer loans proceeding to foreclosure, and
thus fewer properties transitioning to REO. We expect that the length of the foreclosure process will continue to remain above
historical levels and may increase further. Additionally, we expect our REO activity to remain at elevated levels, as we have a
large inventory of seriously delinquent loans in our single-family credit guarantee portfolio. See “RISK MANAGEMENT —
Credit Risk — Mortgage Credit Risk — Non-Performing Assets” for additional information about our REO activity.
Deferred Tax Assets and Liabilities
We had a net deferred tax asset of $22.7 billion as of December 31, 2013 compared to a net deferred tax asset of
$778 million as of December 31, 2012. During 2013, the change in our net deferred tax asset of $21.9 billion was primarily
due to the release of the valuation allowance. See "NOTE 12: INCOME TAXES" for additional information.
As discussed below, after weighing all of the evidence at September 30, 2013, we determined that the positive evidence
relating to the realizability of our deferred tax assets, particularly the evidence that was objectively verifiable, outweighed the
negative evidence. Accordingly, we concluded that it is more likely than not that our deferred tax assets will be realized and we
released the valuation allowance against our net deferred tax assets.
On a quarterly basis, we determine whether a valuation allowance is necessary on our net deferred tax asset. In doing so,
we consider all evidence available, both positive and negative, in determining whether, based on the weight of the evidence, it
is more likely than not that the deferred tax assets will be realized. In conducting our assessment at September 30, 2013, we
evaluated all available objective evidence including, but not limited to: (a) our three-year cumulative income position; (b) the
trend of our financial and tax results; (c) the amount of taxable income reported in our 2012 federal tax return; (d) our tax net
operating loss and tax credit carryforwards and the length of carryforward periods available to utilize these assets under current
tax law; and (e) our access to capital under the agreements associated with conservatorship. Furthermore, we evaluated all
available subjective evidence including, but not limited to: (a) difficulty in predicting unsettled circumstances related to the
conservatorship; (b) the amount of our forecasted 2013 taxable income; and (c) forecasts of future book and tax income. Our
consideration of the evidence requires significant judgment regarding estimates and assumptions that are inherently uncertain,
particularly about our future business structure and financial results.
We are not permitted to consider the impacts proposed legislation may have on our business operations or the mortgage
industry in our analysis because the timing and certainty of those actions are unknown and beyond our control.
The positive evidence at September 30, 2013, that outweighed the negative evidence included the following:
• Our three-year cumulative income position;
• The strong positive trend in our financial performance over six consecutive quarters;
• The 2012 taxable income reported in our federal tax return which was filed in 2013;
• Our forecasted 2013 and future period taxable income;
• Our net operating loss carryforwards do not begin to expire until 2030; and
• The continuing positive trend in the housing market.
When comparing evidence available for 2013 versus 2012, we noted a number of positive developments. During 2013,
we filed our 2012 federal tax return, which reflected taxable income. This was our first year reporting taxable income since
2007. Furthermore, we continued an improved trend in earnings. Our current base forecast of taxable income also improved
resulting in a decline in the number of years of projected income required in order to fully realize our net deferred tax asset.
These positive developments in addition to the positive evidence discussed above resulted in our conclusion to release the
valuation allowance against our net deferred tax assets at September 30, 2013. Given the continued positive trend in our
financial performance through the fourth quarter, we determined that a valuation allowance against our net deferred tax asset
was not necessary at December 31, 2013.
In future quarters we will continue to evaluate our ability to realize the net deferred tax asset. If evidence in future
periods changes such that it is more likely than not that part or all of the net deferred tax asset will not be realized, we will
reestablish a valuation allowance at that time. Examples of factors that could affect our assessment are: (a) a significant
downturn in the housing markets or economy that negatively impacts our future financial results; (b) changes to our business
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operations resulting from enacted legislation; and (c) a change in corporate legal structure that would limit our ability to realize
the assets under existing tax laws. If we determine that it is appropriate to establish a valuation allowance in the future, it would
result in an additional income tax expense and might require additional draws under the Purchase Agreement.
Other Assets
Other assets consist of accounts and other receivables, the guarantee asset related to non-consolidated trusts and other
guarantee commitments, and other miscellaneous assets. Other assets decreased to $8.5 billion as of December 31, 2013 from
$13.8 billion as of December 31, 2012 primarily due to a decrease in servicer receivables resulting from a decrease in mortgage
loans paid off by borrowers at the end of the period that had not yet been remitted to us. For more information on other assets,
see “NOTE 19: SELECTED FINANCIAL STATEMENT LINE ITEMS.”
Total Debt, Net
Total debt, net on our consolidated balance sheets consists of: (a) debt securities of consolidated trusts held by third
parties; and (b) other debt.
•
PCs and Other Guarantee Transactions issued by our consolidated trusts and held by third parties are recognized as debt
securities of consolidated trusts held by third parties on our consolidated balance sheets. Debt securities of consolidated
trusts held by third parties represent our liability to third parties that hold beneficial interests in our consolidated trusts.
The debt securities of our consolidated trusts may be prepaid at any time, as the loans that collateralize the debt may be
prepaid without penalty at any time.
• Other debt consists of unsecured short-term and long-term debt securities we issue to third parties to fund our business
activities. It is classified as either short-term or long-term based on the contractual maturity of the debt instrument. See
“LIQUIDITY AND CAPITAL RESOURCES” for information about our other debt.
The table below reconciles the par value of other debt and the UPB of debt securities of consolidated trusts held by third
parties to the amounts shown in our consolidated balance sheets.
Table 31 — Reconciliation of the Par Value and UPB to Total Debt, Net
Total debt:
Other debt:
Par value
Unamortized balance of discounts and premiums(1)
Hedging-related and other basis adjustments(2)
Subtotal
Debt securities of consolidated trusts held by third parties:
UPB
Unamortized balance of discounts and premiums
Subtotal
Total debt, net
December 31,
2013
2012
(in millions)
$
511,345
$
(4,667)
89
506,767
1,399,456
34,528
1,433,984
$
1,940,751
$
552,472
(5,031)
77
547,518
1,387,259
32,265
1,419,524
1,967,042
(1) Primarily represents unamortized discounts on zero-coupon debt.
(2) Primarily represents deferrals related to debt instruments that were in hedge accounting relationships, and changes in the fair value attributable to
instrument-specific interest-rate and credit risk related to STACR debt notes (beginning in 2013) and foreign-currency denominated debt.
The table below summarizes our other short-term debt.
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Table 32 — Other Short-Term Debt
Reference Bills
securities and discount notes
®
Medium-term notes
Federal funds purchased and securities sold under
agreements to repurchase
Other short-term debt
Reference Bills
securities and discount notes
®
Medium-term notes
Federal funds purchased and securities sold under
agreements to repurchase
Other short-term debt
Reference Bills
securities and discount notes
®
Medium-term notes
Federal funds purchased and securities sold under
agreements to repurchase
Other short-term debt
December 31,
Balance, Net(1)
Weighted
Average
Effective Rate(2)
2013
Average Outstanding
During the Year
Weighted
Average
Effective Rate(4)
Balance, Net(3)
(dollars in millions)
Maximum
Balance, Net
Outstanding at
Any Month End
$
$
$
$
$
$
137,712
4,000
—
141,712
0.13% $
0.16
—
0.13
130,919
2,291
15
0.13% $
0.16
0.16
140,082
4,000
—
December 31,
Balance, Net(1)
Weighted
Average
Effective Rate(2)
2012
Average Outstanding
During the Year
Weighted
Average
Effective Rate(4)
Balance, Net(3)
(dollars in millions)
Maximum
Balance, Net
Outstanding at
Any Month End
117,889
0.15% $
126,919
0.14% $
155,285
—
—
117,889
—
—
0.15
December 31,
Balance, Net(1)
Weighted
Average
Effective Rate(2)
21
12
0.44
0.28
250
—
2011
Average Outstanding
During the Year
Weighted
Average
Effective Rate(4)
Balance, Net(3)
(dollars in millions)
Maximum
Balance, Net
Outstanding at
Any Month End
161,149
0.11% $
181,209
0.17% $
250
—
161,399
0.24
—
0.11
826
13
0.23
0.16
196,126
2,564
—
(1) Represents par value, net of associated discounts and premiums, of which $0 billion, $0 billion, and $0.2 billion of short-term debt represents the fair
value of debt securities with the fair value option elected at December 31, 2013, 2012, and 2011, respectively.
(2) Represents the approximate weighted average effective rate for each instrument outstanding at the end of the period, which includes the amortization of
discounts or premiums and issuance costs.
(3) Represents par value, net of associated discounts, premiums, and issuance costs. Issuance costs are reported in the other assets caption on our
consolidated balance sheets.
(4) Represents the approximate weighted average effective rate during the period, which includes the amortization of discounts or premiums and issuance
costs.
The table below presents the UPB for Freddie Mac-issued mortgage-related securities by the underlying mortgage
product type.
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Table 33 — Freddie Mac Mortgage-Related Securities(1)
December 31, 2013
December 31, 2012
Issued by
Consolidated
Trusts
Issued by
Non-Consolidated
Trusts
Total
Issued by
Consolidated
Trusts
Issued by
Non-Consolidated
Trusts
Total
(in millions)
PCs and Other Structured Securities:
Single-family:
30-year or more amortizing fixed-rate
$
1,040,602
$
— $ 1,040,602
$
1,039,439
$
— $ 1,039,439
20-year amortizing fixed-rate
15-year amortizing fixed-rate
Adjustable-rate(2)
Interest-only(3)
FHA/VA and other governmental
Total single-family
Multifamily
81,214
291,347
66,250
29,083
3,366
1,511,862
—
Total single-family and multifamily
1,511,862
Other Guarantee Transactions:
Non-HFA bonds:
Single-family(4)
Multifamily
Total Non-HFA bonds
HFA Initiative Bonds:(5)
Single-family
Multifamily
Total HFA Initiative Bonds
Total Other Guarantee Transactions
REMICs and Other Structured Securities
backed by Ginnie Mae certificates(6)
Total Freddie Mac Mortgage-Related
Securities
Less: Repurchased Freddie Mac
Mortgage-Related Securities(7)
8,396
444
8,840
—
—
—
8,840
—
—
—
—
—
—
—
4,778
4,778
3,079
59,326
62,405
3,341
744
4,085
81,214
291,347
66,250
29,083
3,366
78,122
270,032
68,470
41,275
3,084
1,511,862
1,500,422
4,778
—
1,516,640
1,500,422
11,475
59,770
71,245
3,341
744
4,085
10,455
448
10,903
—
—
—
—
—
—
—
—
—
4,224
4,224
3,415
36,732
40,147
4,827
863
5,690
78,122
270,032
68,470
41,275
3,084
1,500,422
4,224
1,504,646
13,870
37,180
51,050
4,827
863
5,690
66,490
75,330
10,903
45,837
56,740
541
541
—
654
654
$
1,520,702
$
71,809
$ 1,592,511
$
1,511,325
$
50,715
$ 1,562,040
Total UPB of debt securities of
consolidated trusts held by third parties
$
1,399,456
(121,246)
(124,066)
$
1,387,259
(1) Amounts are based on UPB of the securities and exclude mortgage-related securities traded, but not yet settled.
(2)
Includes $0.9 billion and $1.0 billion in UPB of option ARM mortgage loans as of December 31, 2013 and 2012, respectively. See endnote (4) for
additional information on option ARM loans that back our Other Guarantee Transactions.
(3) Represents loans where the borrower pays interest only for a period of time before the borrower begins making principal payments. Includes both
fixed- and variable-rate interest-only loans.
(4) Backed by non-agency mortgage-related securities that include prime, FHA/VA, and subprime mortgage loans and also include $5.5 billion and
$6.3 billion in UPB of securities backed by option ARM mortgage loans at December 31, 2013 and 2012, respectively.
(5) Consists of bonds we acquired and resecuritized under the NIBP.
(6) Backed by FHA/VA loans.
(7) Represents the UPB of repurchased Freddie Mac mortgage-related securities that are consolidated on our balance sheets and includes certain remittance
amounts associated with our security trust administration that are payable to third-party mortgage-related security holders. Our holdings of non-
consolidated Freddie Mac mortgage-related securities are presented in “Table 22 — Characteristics of Mortgage-Related Securities on Our
Consolidated Balance Sheets.”
Excluding Other Guarantee Transactions, the percentage of amortizing fixed-rate single-family loans underlying our
consolidated trust debt securities, based on UPB, was approximately 94% and 93% at December 31, 2013 and 2012,
respectively. The UPB of multifamily Other Guarantee Transactions, excluding HFA initiative-related bonds, increased to $59.8
billion as of December 31, 2013 from $37.2 billion as of December 31, 2012, due to multifamily loan securitization activity
related to K Certificate transactions.
The table below shows issuances and extinguishments of the debt securities of our consolidated trusts during 2013 and
2012, as well as the UPB of consolidated trusts held by third parties.
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Table 34 — Issuances and Extinguishments of Debt Securities of Consolidated Trusts(1)
Beginning balance of debt securities of consolidated trusts held by third parties
Issuances to third parties of debt securities of consolidated trusts:
Issuances based on underlying mortgage product type:
30-year or more amortizing fixed-rate
20-year amortizing fixed-rate
15-year amortizing fixed-rate
Adjustable-rate
FHA/VA
Multifamily
Debt securities of consolidated trusts retained by us at issuance(2)
Net issuances of debt securities of consolidated trusts
Reissuances of debt securities of consolidated trusts previously held by us(3)
Total issuances to third parties of debt securities of consolidated trusts
Extinguishments, net(4)
Ending balance of debt securities of consolidated trusts held by third parties
Year Ended December 31,
2013
2012
(in millions)
$
1,387,259
$
1,452,476
290,568
21,985
96,498
16,036
532
—
(38,390)
387,229
55,704
442,933
284,381
31,142
105,603
18,189
—
448
(36,317)
403,446
29,384
432,830
(430,736)
(498,047)
$
1,399,456
$
1,387,259
(1) Based on UPB.
(2) Represents the UPB of mortgage loans that we had purchased for cash, subsequently securitized, and retained in our mortgage-related investments
portfolio.
(3) Represents our sales of PCs and certain Other Guarantee Transactions previously held by us.
(4) Represents: (a) UPB of our purchases from third parties of PCs and Other Guarantee Transactions issued by our consolidated trusts; (b) principal
repayments related to PCs and Other Guarantee Transactions issued by our consolidated trusts; and (c) certain remittance amounts associated with our
trust security administration that are payable to third-party mortgage-related security holders as of December 31, 2013 and 2012.
Extinguishments, net decreased in 2013 primarily due to a decrease in refinance activity resulting from an increase in
interest rates. Reissuances of debt securities of consolidated trusts previously held by us increased due to increased sales from
the mortgage-related investments portfolio.
Other Liabilities
Other liabilities consist of servicer liabilities, the guarantee obligation, the reserve for guarantee losses on non-
consolidated trusts and other mortgage-related financial guarantees, accounts payable and accrued expenses, and other
miscellaneous liabilities. Other liabilities of $5.5 billion as of December 31, 2013 declined slightly from $6.1 billion as of
December 31, 2012 primarily due to a decline in servicer liabilities as a result of a decrease in the population of seriously
delinquent loans. See “NOTE 19: SELECTED FINANCIAL STATEMENT LINE ITEMS” for additional information.
Total Equity (Deficit)
The table below presents the changes in total equity (deficit) and certain capital-related disclosures.
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Table 35 — Changes in Total Equity (Deficit)
Beginning balance
Net income
Other comprehensive income (loss), net of taxes:
Changes in unrealized gains (losses) related to available-for-sale
securities
Changes in unrealized gains (losses) related to cash flow hedge
relationships(1)
Changes in defined benefit plans
Comprehensive income
Capital draw funded by Treasury
Three Months Ended
Twelve Months
Ended
12/31/2013
9/30/2013
6/30/2013
3/31/2013
12/31/2012
12/31/2013
(in millions)
$
33,436
$
7,357
$
8,613
30,486
$
9,971
4,988
8,827
4,581
$
$
4,907
4,457
8,827
48,668
970
66
186
9,835
—
(127)
(717)
2,280
1,261
76
2
30,437
—
84
2
4,357
—
90
20
6,971
—
94
(84)
5,728
—
2,406
316
210
51,600
—
(47,591)
(1)
12,835
71,336
71,345
Senior preferred stock dividends declared
(30,436)
(4,357)
(6,971)
(5,827)
(1,808)
Other
Total equity (deficit)/Net worth
Aggregate draws under the Purchase Agreement (as of period end)(2)
Aggregate senior preferred stock dividends paid to Treasury in cash
(as of period end)
$
$
$
—
(1)
—
—
12,835
$ 33,436
$
7,357
$
9,971
71,336
$ 71,336
$ 71,336
$ 71,336
71,345
$ 40,909
$ 36,552
$ 29,581
—
8,827
71,336
23,754
$
$
$
$
$
$
(1) Represents the reclassification of losses into earnings related to our closed cash flow hedges as the originally forecasted transactions affected earnings.
(2) Does not include the initial $1.0 billion liquidation preference of senior preferred stock that we issued to Treasury in September 2008 as an initial
commitment fee and for which no cash was received. Under the Purchase Agreement, the payment of dividends cannot be used to reduce prior draws
from Treasury.
We requested $0 million and $19 million in draws from Treasury under the Purchase Agreement to eliminate quarterly
deficits in net worth for 2013 and 2012, respectively. At December 31, 2013, our assets exceeded our liabilities under GAAP;
therefore no draw is being requested from Treasury under the Purchase Agreement for the fourth quarter of 2013. We paid cash
dividends to Treasury of $47.6 billion and $7.2 billion during 2013 and 2012, respectively. Based on our Net Worth Amount at
December 31, 2013 and the 2014 Capital Reserve Amount of $2.4 billion, our dividend obligation to Treasury in March 2014
will be $10.4 billion.
Our available-for-sale securities net unrealized gains (losses) was $1.0 billion and $(1.4) billion at December 31, 2013
and 2012, respectively. This $2.4 billion improvement in AOCI was primarily due to fair value gains on our non-agency
mortgage-related securities due to the the impact of spread tightening and the movement of these securities with unrealized
losses towards maturity.
RISK MANAGEMENT
Our investment and credit guarantee activities expose us to three broad categories of risk: (a) credit risk; (b) interest-rate
and other market risks; and (c) operational risk. See “RISK FACTORS” for additional information regarding these and other
risks. See “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK” for information about our
interest rate and other market risks.
Risk management is a critical aspect of our business. We manage risk through a framework whereby our executive
management is responsible for independent risk evaluation. Within this framework, executive management monitors
performance against our risk management strategies and established risk limits and reporting thresholds, identifies and assesses
potential issues and provides oversight regarding changes in business processes and activities. For information about our
Board’s role in oversight of risk management, see “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE — Board Leadership Structure and Role in Risk Oversight.”
We utilize an internal economic capital framework and models to help inform our risk management process. Our
economic capital framework provides a risk-based measurement of capital to reflect relevant market, credit, counterparty, and
operational risks. We assign economic capital internally to asset classes based on their respective risks. We use economic
capital as an input to inform economic decisions, establish risk limits, measure profitability, and estimate fair values.
We believe that there was significant progress in resolving some of the legal and regulatory issues in the market during
2013. However, the legal, political and regulatory influences on the financial services industry have continued to create
significant challenges and, as a result, we believe that our risk profile remained elevated in 2013. Drivers of this continued
elevated risk are: (a) continued uncertainty in the mortgage industry, including the future structure of the U.S. housing market;
and (b) continued pressure on mortgage seller/servicers, including changing practices in underwriting and foreclosure processes
as well as on-going litigation by federal agencies related to prior practices.
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Management took actions in 2013 to mitigate risks associated with our operations and control environment. For a
discussion of the operational risks we face and our mitigation actions, see “Operational Risks.”
We expect legal, political and regulatory influences to continue to be significant factors in 2014, which could further
increase uncertainty in the mortgage industry, increase our operational and people risks, or increase the uncertainty associated
with the use of our models.
Credit Risk
We are subject primarily to two types of credit risk: mortgage credit risk and institutional credit risk. Mortgage credit risk
is the risk that a borrower will fail to make timely payments on a mortgage we own or guarantee. Institutional credit risk is the
risk that a counterparty that has entered into a business contract or arrangement with us will fail to meet its obligations to us.
Mortgage Credit Risk
We are exposed to mortgage credit risk principally in our single-family credit guarantee and multifamily mortgage
portfolios because we either hold the mortgage assets or have guaranteed mortgages in connection with the issuance of a
Freddie Mac mortgage-related security, or other guarantee commitment. All mortgages that we purchase or guarantee have an
inherent risk of default. We are also exposed to mortgage credit risk related to our investments in non-Freddie Mac mortgage-
related securities. For information about our holdings of these securities, see “CONSOLIDATED BALANCE SHEETS
ANALYSIS — Investments in Securities — Mortgage-Related Securities.”
Single-Family Mortgage Credit Risk
Single-family mortgage credit risk is primarily influenced by the credit profile of the borrower of the mortgage (e.g.,
credit score, credit history, and monthly income relative to debt payments), documentation level, the number of borrowers, the
features of the mortgage itself, the purpose of the mortgage, occupancy type, property type and value, the LTV ratio, and local
and regional economic conditions, including home prices and unemployment rates.
We use a process of delegated underwriting for the single-family mortgages we purchase or securitize. In this process, our
contracts with seller/servicers describe mortgage eligibility and underwriting standards, and the seller/servicers represent and
warrant to us that the mortgages sold to us meet these standards. Through our delegated underwriting process, mortgage loans
and the borrowers’ ability to repay the loans are evaluated using a number of critical risk characteristics. For more information
on the underwriting process, see “BUSINESS — Our Business Segments — Single-Family Guarantee Segment —
Underwriting Requirements and Quality Control Standards.”
We were significantly adversely affected by deteriorating conditions in the single-family housing and mortgage markets
during 2006 to 2008. The mortgage market began to undergo significant changes starting in 2008. Financial institutions
tightened their underwriting standards and, since 2009, the mortgage origination market has consisted predominately of fixed-
rate amortizing loans.
Conditions in the mortgage market improved in most geographical areas during the last two years. However, many
single-family mortgage loans, especially those originated from 2005 through 2008, were adversely affected by the
compounding pressures on household wealth caused by significant declines in home values during the housing crisis that began
in 2006 and the ongoing weak employment environment in many areas. The UPB of our single-family non-performing loans
declined during 2013, but remained at elevated levels compared to our historical experience.
The table below presents certain credit information about loans in our single-family credit guarantee portfolio by year of
origination as of December 31, 2013 and for the year then ended.
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Table 36 — Single-Family Credit Guarantee Portfolio Data by Year of Origination(1)
December 31, 2013
Year Ended
December 31, 2013
Percent of
Portfolio
Average
Credit
Score(2)
Original
LTV Ratio
Current
LTV Ratio(3)
Current
LTV Ratio
>100%(3)(4)
Serious
Delinquency
Rate(5)
Percent of
Credit Losses
16%
16
8
7
7
54
21
16
9
100%
755
761
757
754
751
757
735
704
711
739
71%
69%
—%
0.01%
69
69
69
69
69
89
75
72
75
61
58
60
62
63
81
87
50
69
—
—
—
1
—
21
29
3
10
0.04
0.18
0.39
0.88
0.24
0.64
8.77
3.24
2.39
<1%
<1
<1
1
2
3
7
81
9
100%
Year of Origination
2013
2012
2011
2010
2009
Subtotal - New single-
family book
HARP and other relief
refinance loans(6)
2005-2008 Legacy single-
family book
Pre-2005 Legacy single-
family book
Total
(1) Based on the year of origination (except for HARP and other relief refinance loans) for loans remaining in the portfolio at December 31, 2013, which
totaled $1.7 trillion, rather than all loans originally guaranteed by us and originated in the respective year.
(2) Based on FICO score of the borrower as of the date of loan origination and may not be indicative of the borrowers’ current creditworthiness. Excludes
less than 1% of loans in the portfolio because the FICO scores at origination were not available.
(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.
(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 “Credit Performance — Delinquencies” for further information about our reported serious delinquency rates.
(6) HARP and other relief refinance loans are presented separately rather than in the year that the refinancing occurred (from 2009 to 2013). All other
refinance loans are presented in the year that the refinancing occurred.
Improvement in home prices in many areas of the U.S. during 2013 generally led to improved current LTV ratios of the
loans in our portfolio as of December 31, 2013. Loans with current LTV ratios greater than 100% comprised 10% and 15%, of
our single-family credit guarantee portfolio, based on UPB at December 31, 2013 and 2012, respectively, and comprised
approximately 68% and 82% of our credit losses recognized in 2013 and 2012, respectively. For the loans in our single-family
credit guarantee portfolio with estimated current LTV ratios greater than 80%, the borrowers had a weighted average credit
score at origination of 722 at both December 31, 2013 and 2012.
As of December 31, 2013, 8.0% of the total number of single-family loans we purchased or guaranteed that were
originated in 2005 to 2008 had been foreclosed or completed a short sale transaction resulting in a loss (before consideration of
recoveries). In addition, approximately 8.8% of loans originated in those years that remained in our single-family credit
guarantee portfolio as of December 31, 2013 were seriously delinquent. Many of the loans from those years have been
modified, as shown in “Table 49 — Credit Concentrations in the Single-Family Credit Guarantee Portfolio.” The gradual
reduction of our 2005-2008 Legacy single-family book has positively impacted the payment performance of our single-family
credit guarantee portfolio. However, the rate at which this replacement is occurring continues to be negatively affected by a low
volume of new purchase mortgage originations and a lengthy foreclosure process in many states.
Characteristics of the Single-Family Credit Guarantee Portfolio
The average UPB of loans in our single-family credit guarantee portfolio was approximately $155,000 and $151,000 at
December 31, 2013 and 2012, respectively. We purchased or issued other guarantee commitments for approximately 2,070,000
and 2,036,000 single-family loans totaling $422.7 billion and $426.8 billion of UPB during 2013 and 2012, respectively. Our
single-family credit guarantee portfolio consists of first-lien mortgage loans predominately secured by the borrower’s primary
residence. Approximately 96% of the single-family mortgages we purchased or guaranteed in 2013 were fixed-rate amortizing
mortgages, based on UPB, and the remainder were ARM mortgage loans. Approximately 73% of the single-family mortgages
we purchased or guaranteed in 2013 were refinance mortgages, including approximately 23% that were relief refinance
mortgages, based on UPB.
The credit quality of the single-family loans in our New single-family book is significantly better than that of our
2005-2008 Legacy single-family book, as measured by original LTV ratios, FICO scores, the proportion of loans underwritten
with full documentation, as well as delinquency rates and credit losses. Our New single-family book comprised an increasing
proportion of the portfolio during 2013, and the proportion of loans originated prior to 2009 continued to decline.
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The percentage of home purchase loans in our loan acquisition volume was at a low level and refinance loan activity
remained high during 2013. During 2013 and 2012, we purchased or guaranteed more than 1.5 million and approximately 1.7
million, respectively, of single-family loans that were refinance mortgages, totaling $308.7 billion and $351.1 billion in UPB,
respectively. Our purchases of refinance mortgages declined for the three most recent quarters, which we believe was a result of
rising mortgage interest rates. As of December 31, 2013 and 2012, there were approximately 10.7 million and 10.9 million
loans, respectively, in our single-family credit guarantee portfolio, including 2.0 million and 1.6 million relief refinance
mortgages, respectively.
The tables below provide additional characteristics of single-family mortgage loans purchased during 2013, 2012 and
2011, and of our single-family credit guarantee portfolio at December 31, 2013, 2012 and 2011.
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Table 37 — Characteristics of Purchases for the Single-Family Credit Guarantee Portfolio(1)
Original LTV Ratio Range
60% and below
Above 60% to 70%
Above 70% to 80%
Above 80% to 100%
Above 100% to 125%
Above 125%
Total
Weighted average original LTV ratio
Credit Score(2)
740 and above
700 to 739
660 to 699
620 to 659
Less than 620
Not available
Total
Percent of Purchases During the Year Ended December 31,
2013
2012
2011
Relief Refi
All Other
Total
Relief Refi
All Other
Total
Relief Refi
All other
Total
3%
19%
22%
4%
21%
25%
6%
23%
29%
2
3
7
5
3
23%
91%
11%
5
4
2
1
<1
23%
12
33
13
<1
<1
77%
71%
55%
15
6
1
<1
<1
14
36
20
5
3
100%
75%
66%
20
10
3
1
<1
77%
100%
2
3
8
7
5
29%
97%
17%
6
4
1
1
<1
29%
12
29
9
<1
<1
71%
68%
55%
11
4
1
<1
<1
14
32
17
7
5
100%
76%
72%
17
8
2
1
<1
71%
100%
3
5
8
4
—
26%
77%
16%
5
3
1
1
<1
26%
13
32
6
<1
—
74%
67%
55%
13
5
1
<1
<1
16
37
14
4
—
100%
70%
71%
18
8
2
1
<1
74%
100%
Weighted average credit score:
Total mortgages
727
756
749
740
762
756
744
759
755
Loan Purpose
Purchase
Cash-out refinance
Other refinance(3)
Total
Property Type
Detached/townhome(4)
Condo/Co-op
Total
Occupancy Type
Primary residence
Second/vacation home
Investment
Total
Percent of Purchases During the
Year Ended December 31,
2013
2012
2011
27%
16
57
100%
93%
7
100%
88%
4
8
100%
18%
15
67
100%
94%
6
100%
91%
4
5
100%
22%
18
60
100%
94%
6
100%
92%
4
4
100%
(1) Percentages are based on the UPB of the single-family credit guarantee portfolio.
(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’ current creditworthiness.
(3) Other refinance loans include: (a) refinance mortgages with “no cash out” to the borrower; and (b) refinance mortgages for which the delivery data
(4)
provided was not sufficient for us to determine whether the mortgage was a cash-out or a no cash-out refinance transaction.
Includes manufactured housing and homes within planned unit development communities. The UPB of manufactured housing mortgage loans
purchased during the years ended December 31, 2013, 2012, and 2011 was $776 million, $676 million, and $376 million, respectively.
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Table 38 — Characteristics of the Single-Family Credit Guarantee Portfolio(1)
2013
Portfolio Balance at December 31,(2)
2012
2011
Original LTV Ratio Range
60% and below
Above 60% to 70%
Above 70% to 80%
Above 80% to 100%
Above 100%
Total
Weighted average original LTV ratio
Estimated Current LTV Ratio Range(3)
60% and below
Above 60% to 70%
Above 70% to 80%
Above 80% to 90%
Above 90% to 100%
Above 100% to 120%
Above 120%
Total
Weighted average estimated current LTV ratio:
Relief refinance mortgages(4)
All other mortgages
Total mortgages
Credit Score(5)
740 and above
700 to 739
660 to 699
620 to 659
Less than 620
Not available
Total
Weighted average credit score:
Relief refinance mortgages(4)
All other mortgages
Total mortgages
Loan Purpose
Purchase
Cash-out refinance
Other refinance(6)
Total
Property Type
Detached/townhome(7)
Condo/Co-op
Total
Occupancy Type
Primary residence
Second/vacation home
Investment
Total
22%
15
38
19
6
100%
75%
33%
18
20
12
7
6
4
100%
81%
66
69
58
20
13
6
3
<1
100%
735
740
739
26%
22
52
100%
93%
7
100%
90%
4
6
100%
22%
15
40
18
5
100%
74%
28%
14
21
13
9
8
7
100%
83%
74
75
56
21
14
6
3
<1
100%
741
736
737
27%
24
49
100%
92%
8
100%
90%
5
5
100%
23%
16
42
17
2
100%
72%
25%
12
18
15
10
10
10
100%
79%
80
80
55
21
14
7
3
<1
100%
744
734
735
30%
27
43
100%
92%
8
100%
91%
5
4
100%
(1) Ending balances are based on the UPB of the single-family credit guarantee portfolio. Other Guarantee Transactions with ending balances of $1 billion
at both December 31, 2013 and 2012, and $2 billion at December 31, 2011 are excluded since these securities are backed by non-Freddie Mac issued
securities for which the loan characteristics data was not available.
Includes loans acquired under our relief refinance initiative, which began in 2009.
(2)
(3) The current LTV ratios are management estimates, which are updated on a monthly basis. Current market values are estimated by adjusting the value of
the property at origination based on changes in the market value of homes in the same geographical area since that time.
(4) Relief refinance mortgages of all LTV ratios comprised approximately 21%, 18%, and 11% of our single-family credit guarantee portfolio by UPB as
of December 31, 2013, 2012, and 2011, respectively.
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(5) 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’ current creditworthiness.
(6) Other refinance loans include: (a) refinance mortgages with “no cash out” to the borrower; and (b) refinance mortgages for which the delivery data
provided was not sufficient for us to determine whether the mortgage was a cash-out or a no cash-out refinance transaction.
Includes manufactured housing and homes within planned unit development communities.
(7)
LTV Ratio
An increase in the estimated current LTV ratio of a loan indicates that the borrower’s equity in the home has declined,
and can negatively affect the borrower’s ability to refinance (outside of HARP) or sell the property for an amount at or above
the balance of the outstanding mortgage loan. Based on our historical experience, there is an increase in borrower default risk
as LTV ratios increase. Due to our participation in HARP, we purchase a significant number of loans that have LTV ratios over
100%. HARP loans with LTV ratios over 100% represented 8% and 12% of our single-family mortgage purchases in 2013 and
2012, respectively. The percentage of mortgages in our single-family credit guarantee portfolio with estimated current LTV
ratios greater than 100% was 10% and 15% at December 31, 2013 and 2012, respectively, and the serious delinquency rate for
these loans was 9.9% and 12.7%, respectively. The portion of our single-family credit guarantee portfolio with estimated
current LTV ratios greater than 100% declined during 2013 primarily due to improving home prices during the period.
Credit Score
Credit scores are a useful measure for assessing the credit quality of a borrower. Credit scores are numbers reported by
credit repositories, based on statistical models, that summarize an individual’s credit record. FICO scores are the most
commonly used credit scores today. Statistically, borrowers with higher credit scores are more likely to repay or have the ability
to refinance than those with lower scores. Credit scores presented within this Form 10-K are at the time of origination and may
not be indicative of the borrowers’ creditworthiness at December 31, 2013.
Loan Purpose
Loan purpose indicates how the borrower intends to use the funds from a mortgage loan. In a purchase transaction, the
funds are used to acquire a property. In a cash-out refinance transaction, in addition to paying off existing mortgage liens, the
borrower obtains additional funds that may be used for other purposes, including paying off subordinate mortgage liens and
providing unrestricted cash proceeds to the borrower. In other refinance transactions, the funds are used to pay off existing
mortgage liens and may be used in limited amounts for certain specified purposes; such refinances are generally referred to as
“no cash-out” or “rate and term” refinances. The percentage of home purchase loans in our loan acquisition volume remained at
a low level during 2013, as low interest rates contributed to high refinance activity. Cash-out refinancings generally have had a
higher risk of default than mortgages originated in no cash-out, or rate and term, refinance transactions.
Property Type
Townhomes and detached single-family houses are the predominant type of single-family property. Condominiums are a
property type that historically experiences greater volatility in home prices than detached single-family residences.
Condominium loans in our single-family credit guarantee portfolio have a higher percentage of first-time homebuyers and
homebuyers whose purpose is for investment or for a second home. In practice, investors and second home borrowers often
seek to finance the condominium purchase with loans having a higher original LTV ratio than other borrowers. Approximately
36% of the condominium loans within our single-family credit guarantee portfolio are in California, Florida, and Illinois, which
are among the states that have been most adversely affected by the recent housing and economic downturn. Condominium
loans comprised 12% and 15% of our credit losses during 2013 and 2012, respectively, while these loans comprised 8% of our
single-family credit guarantee portfolio at both December 31, 2013 and 2012.
Occupancy Type
Borrowers may purchase a home as a primary residence, second home or investment property that is typically a rental
property. Mortgage loans on properties occupied by the borrower as a primary residence tend to have a lower credit risk than
mortgages on investment properties or secondary residences.
Geographic Concentration
Local economic conditions can affect borrowers’ ability to repay loans and the value of the collateral underlying the
loans. Because our business involves purchasing mortgages from every geographic region in the U.S., we maintain a
geographically diverse single-family credit guarantee portfolio. In recent years, our credit losses have been greatest in those
states that experienced significant cumulative declines in property values since 2006, such as California, Florida, Nevada and
Arizona. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS” for more information concerning the
distribution of our single-family credit guarantee portfolio by geographic region.
Mortgages with Second Liens
The presence of a second lien can increase the risk that a borrower will default. A second lien reduces the borrower’s
equity in the home, and has a negative effect on the borrower’s ability to refinance or sell the property for an amount at or
above the combined balances of the first mortgage and second lien. As of both December 31, 2013 and 2012, based on data
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collected by us at loan delivery, approximately 14% of the loans in our single-family credit guarantee portfolio had second-lien
financing by third parties at origination of the first mortgage. As of both December 31, 2013 and 2012, we estimate that these
loans comprised 17% of our seriously delinquent loans based on UPB. Borrowers are free to obtain second-lien financing after
origination and we are not entitled to receive notification when a borrower does so. Therefore, it is likely that additional
borrowers have post-origination second-lien mortgages.
Attribute Combinations
Certain combinations of loan characteristics often can indicate a higher degree of credit risk. For example, single-family
mortgages with both high LTV ratios and borrowers who have lower credit scores typically experience higher rates of serious
delinquency and default. We estimate that there were $12.8 billion and $12.0 billion at December 31, 2013 and 2012,
respectively, of loans in our single-family credit guarantee portfolio with both original LTV ratios greater than 90% and FICO
scores less than 620 at the time of loan origination. We continue to purchase certain of these loans if they are covered by credit
enhancements for the UPB in excess of 80% or if they are HARP loans. Certain mortgage product types, including interest-only
or option ARM loans, have features that may also add to credit risk. See “Table 50 — Single-Family Credit Guarantee Portfolio
by Attribute Combinations” for information about certain attribute combinations of our single-family mortgage loans.
Single-Family Mortgage Product Types
Product mix affects the credit risk profile of our total mortgage portfolio. The primary mortgage products in our single-
family credit guarantee portfolio are first lien, fixed-rate mortgage loans secured by the borrower’s primary residence. See
“Other Categories of Single-Family Mortgage Loans” below for additional information on higher-risk mortgages in our single-
family credit guarantee portfolio.
For purposes of presentation within this Form 10-K and elsewhere in our reporting, we have categorized a number of
modified loans as fixed-rate loans (instead of as adjustable rate loans), even though the modified loans have rate adjustment
provisions. In these cases, while the terms of the modified loans provide for the interest rate to adjust in the future, the rate is
determined at the time of modification rather than at a subsequent date.
The following paragraphs provide information on the interest-only, option ARM, adjustable rate, and conforming jumbo
loans in our single-family credit guarantee portfolio. Interest-only and option ARM loans are higher-risk mortgage products
based on the features of these types of loans, and have experienced significantly higher serious delinquency rates than fixed-
rate amortizing mortgage products.
Interest-Only Loans
Interest-only loans have an initial period during which the borrower pays only interest, and at a specified date the
monthly payment increases to begin reflecting repayment of principal. Interest-only loans represented approximately 2% and
3% of the UPB of our single-family credit guarantee portfolio at December 31, 2013 and 2012, respectively. We discontinued
purchasing such loans on September 1, 2010. The balance of these loans has declined significantly in recent years as many of
these borrowers have repaid their loans, completed foreclosure transfers or foreclosure alternatives, refinanced or received loan
modifications into an amortizing loan product (and thus these loans are no longer classified as interest-only loans).
The table below presents information for mortgage loans in our single-family credit guarantee portfolio, excluding Other
Guarantee Transactions, at December 31, 2013 that contain interest-only payment terms. The reported balances in the table
below are aggregated by interest-only loan product type and categorized by the year in which the loan begins to require
payments of principal. At December 31, 2013, approximately 10% of these interest-only loans are scheduled to begin requiring
payments of principal in 2014 or 2015. The timing of the actual change in payment terms may differ from those presented due
to a number of factors, including refinancing.
Table 39 — Single-Family Loans Scheduled Payment Change to Include Principal by Year at December 31, 2013(1)
2013 and Prior
2014
2015
2016
2017
2018
Thereafter
Total
(in millions)
ARM/interest-only
Fixed/interest-only
Total
$
$
10,889
—
10,889
$
$
581
9
590
$
$
2,740
178
2,918
$
$
4,153
857
5,010
$
$
6,769
4,128
10,897
$
$
2,720
861
3,581
$
$
565
269
834
$
$
28,417
6,302
34,719
(1) Based on the UPBs of mortgage products that contain interest-only provisions and that begin amortization of principal in each of the years shown.
These reported balances are based on the UPB of the underlying mortgage loans and do not reflect the publicly-available security balances we use to
report the composition of our PCs and REMICs and Other Structured Securities. Excludes: (a) mortgage loans underlying Other Guarantee
Transactions since the payment change information is not available to us for these loans; and (b) any mortgage loans which completed a modification
before the end of the respective period and for which the terms of the loan were changed to an amortizing loan product.
The table below presents the trend of serious delinquency information for interest-only mortgage loans in our single-
family credit guarantee portfolio, excluding Other Guarantee Transactions, categorized by the year in which the loan begins to
require payments of principal. Loans where the year of payment change is 2013 or prior have already changed to require
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payments of principal as of December 31, 2013; loans where the year of payment change is 2014 or later still require only
payments of interest as of December 31, 2013 and will not require payments of principal until a future period.
Table 40 — Serious Delinquency Rates by Year of Payment Change to Include Principal(1)
Year of payment change:
2011 and prior
2012
2013
2014 and after
As of December 31, 2013
2013
2012
2011
7.61%
12.50
13.73
14.22
10.58%
19.35
18.11
17.67
13.22%
20.98
17.08
18.52
(1) Based on loans remaining in the single-family guarantee portfolio as of December 31, 2013, 2012, and 2011, rather than all loans guaranteed by us and
originated in the respective year. Excludes mortgage loans which completed a modification before the end of the respective period and for which the
terms of the loan were changed to an amortizing loan product.
As shown in the table above, the trend in serious delinquency rates of interest-only loans that experienced a change to
become amortizing (when the loans begin to require payments of principal) during the last three years has not been
significantly affected by the change in the payment terms. We believe that the serious delinquency rates of interest-only loans
during the last three years have been more affected by macro-economic conditions, such as unemployment rates and cumulative
home price declines in many geographic areas since 2006, than by the increase in the borrower’s monthly payment. In addition,
a number of these loans were categorized as Alt-A, due to reduced documentation standards at the time of loan origination. The
overall serious delinquency rate for all interest-only loans in our single-family credit guarantee portfolio was 12.5% as of
December 31, 2013. Approximately 69% of all interest-only loans in our single-family credit guarantee portfolio had not yet
begun amortization of principal and 37% of all interest-only loans in our single-family credit guarantee portfolio had current
LTV ratios greater than 100% as of December 31, 2013. Since a substantial portion of these loans were originated in 2005
through 2008 and are located in geographical areas that have been most impacted by declines in home prices since 2006, we
believe that the serious delinquency rate for interest-only loans will remain high in 2014.
Option ARM Loans
Most option ARM loans have initial periods during which the borrower has various options as to the amount of each
monthly payment, until a specified date, when the terms are recast. We have not purchased option ARM loans in our single-
family credit guarantee portfolio since 2007. At both December 31, 2013 and 2012, option ARM loans represented less than 1%
of the UPB of our single-family credit guarantee portfolio. Included in this exposure was $5.5 billion and $6.3 billion of option
ARM securities underlying certain of our Other Guarantee Transactions at December 31, 2013 and 2012, respectively. While
we have not categorized these option ARM securities as either subprime or Alt-A securities for presentation within this Form
10-K and elsewhere in our reporting, they could exhibit similar credit performance to collateral identified as subprime or Alt-A.
For reporting purposes, loans within the option ARM category continue to be presented in that category following a
modification of the loan, even though the modified loan no longer provides for optional payment provisions. As of
December 31, 2013 and 2012, approximately 11.0% and 8.1%, respectively, of the option ARM loans within our single-family
credit guarantee portfolio had been modified. For information on our exposure to option ARM loans through our holdings of
non-agency mortgage-related securities, see “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in
Securities.”
Adjustable-Rate Mortgage Loans
Adjustable-rate mortgage loans may have initial periods during which the interest rate and monthly payment remains
fixed, until a specified date, when the interest rate begins to adjust, or they may adjust at regular intervals after origination
(typically annually). At each reset date, the loan's interest rate is adjusted based on a market index rate, subject to specific
terms, including a limit on the amount of change in the rate from the preceding period's interest rate. In a rising interest rate
environment, ARM borrowers typically default at a higher rate than fixed-rate borrowers.
The table below presents information for mortgage loans in our single-family credit guarantee portfolio, excluding Other
Guarantee Transactions and certain REMICs, at December 31, 2013 that contain adjustable payment terms. The reported
balances in the table below are aggregated by product type and categorized by year of the next scheduled contractual reset date.
At December 31, 2013, approximately 54% of these loans have interest rates that are scheduled to reset in 2014 or 2015. The
timing of the actual reset dates may differ from those presented due to a number of factors, including prepayments or the
borrower's exercising the terms of the mortgage (certain of which could delay or accelerate the timing of the reset date).
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Table 41 — Single-Family Next Scheduled Adjustable-Rate Resets by Year at December 31, 2013(1)
ARMs/amortizing
ARMs/interest-only(2)
Balloon/resets(3)
Total
2014
2015
2016
2017
2018
Thereafter
Total
(in millions)
$
$
21,467
$
3,559
$
6,711
$
6,704
$
7,301
$
20,651
$
25,056
48
1,132
4
856
—
1,072
—
265
—
36
1
66,393
28,417
53
46,571
$
4,695
$
7,567
$
7,776
$
7,566
$
20,688
$
94,863
(1) Based on the UPBs of mortgage products that contain adjustable-rate interest provisions and are scheduled to reset during the periods specified above.
These reported balances are based on the UPB of the underlying mortgage loans and do not reflect the publicly-available security balances we use to
report the composition of our PCs and REMICs and Other Structured Securities. Excludes: (a) mortgage loans underlying Other Guarantee
Transactions and certain REMICs since rate reset information is not available to us for these loans; and (b) any amortizing ARM loans which
completed a modification before the end of the respective period and for which the terms of the loan were changed to a fixed-rate loan product.
(2) Reflects the UPB of interest-only loans that reset in each of the years shown. We report loans in the interest-only category if their original terms include
interest-only provisions for a pre-determined period of time before the monthly payment changes to include amortization of principal. Includes $10.9
billion of loans that were interest-only at origination that have converted to include amortization of principal as of December 31, 2013.
(3) Effective January 1, 2013, we no longer purchase balloon/reset mortgages.
The table below presents serious delinquency information for adjustable-rate mortgage loans in our single-family credit
guarantee portfolio, excluding Other Guarantee Transactions, categorized by the year in which the loan first had an interest rate
reset. Loans where the year of first interest rate reset is 2013 or prior have already had one or more interest rate resets as of
December 31, 2013; loans where the year of first interest rate reset is 2014 or later have not yet had an interest rate reset as of
December 31, 2013 and will not have an interest rate reset until a future period.
Table 42 — Serious Delinquency Rates by Year of First Rate Reset(1)
Year of payment change:
2011 and prior
2012
2013
2014 and after
2013
December 31,
2012
2011
4.42%
13.40
10.32
2.03
5.99%
19.44
13.69
3.64
7.48%
22.69
12.78
5.21
(1) Based on loans remaining in the single-family credit guarantee portfolio as of December 31, 2013, 2012, and 2011, rather than all loans guaranteed by
us and originated in the respective year. Excludes mortgage loans which completed a modification before the end of the respective period and for which
the terms of the loan were changed to a fixed-rate loan product.
As shown in the table above, the trend in serious delinquency rates of adjustable-rate loans that experienced an interest
rate reset during the last three years has not been significantly affected by the change in interest rate of the loan. Except for
interest-only loans that began to amortize at the reset date, there were not significant increases to the borrowers’ payments
when these loans reached their first reset dates because market interest rates have generally declined in recent years. In recent
years, ARM loans have experienced high serious delinquency rates well before reaching the dates at which the loans have
reached their first rate reset. We believe that serious delinquency rates of ARM loans during the last three years have been more
affected by macro-economic conditions, such as unemployment rates and cumulative home price declines in many geographic
areas since 2006, than by changes in the interest rates of the loans. See "RISK FACTORS — Competitive and Market Risks —
Changes in interest rates could negatively impact our results of operations, net worth and fair value of net assets" for
additional information. Since a substantial portion of ARM loans were originated in 2005 through 2008 and are located in
geographical areas that have been most affected by declines in home prices since 2006, we believe that the serious delinquency
rate for ARM loans will continue to remain high in 2014.
Conforming Jumbo Loans
For loans originated after September 30, 2011, conforming jumbo loans on a one-family residence have UPB at
origination that is greater than $417,000 and up to $625,500 in certain “high-cost” areas. We purchased or guaranteed
$30.0 billion and $33.5 billion of conforming jumbo loans during the years ended December 31, 2013 and 2012, respectively.
The UPB of conforming jumbo loans in our single-family credit guarantee portfolio as of December 31, 2013 and 2012 was
$69.0 billion and $57.0 billion, and comprised 4% and 3% of the portfolio, respectively. The average size of these loans was
approximately $518,000 and $530,000 at December 31, 2013 and 2012, respectively. See “BUSINESS — Our Business” for
further information on the conforming loan limits.
Other Categories of Single-Family Mortgage Loans
While we have classified certain loans as subprime or Alt-A for purposes of the discussion below and elsewhere in this
Form 10-K, there is no universally accepted definition of subprime or Alt-A, and our classification of such loans may differ
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from those used by other companies. For example, some financial institutions may use FICO scores to delineate certain
residential mortgages as subprime. In addition, we do not rely primarily on these loan classifications to evaluate the credit risk
exposure relating to such loans in our single-family credit guarantee portfolio. For a definition of the subprime and Alt-A
single-family loans and securities in this Form 10-K, see “GLOSSARY.”
Subprime Loans
Participants in the mortgage market may characterize single-family loans based upon their overall credit quality at the
time of origination, generally considering them to be prime or subprime. While we have not historically characterized the loans
in our single-family credit guarantee portfolio as either prime or subprime, we monitor the amount of loans we have guaranteed
with characteristics that indicate a higher degree of credit risk (see “Higher-Risk Loans in the Single-Family Credit Guarantee
Portfolio” and “Table 50 — Single-Family Credit Guarantee Portfolio by Attribute Combinations” for further information). In
addition, we estimate that approximately $1.8 billion and $2.0 billion of security collateral underlying our Other Guarantee
Transactions at December 31, 2013 and 2012, respectively, were identified as subprime based on information provided to us
when we entered into these transactions.
We also categorize our investments in non-agency mortgage-related securities as subprime if they were identified as such
based on information provided to us when we entered into these transactions. At December 31, 2013 and 2012, we held
$39.7 billion and $44.4 billion, respectively, in UPB of non-agency mortgage-related securities backed by subprime loans.
Approximately 5% of these securities were investment grade at both December 31, 2013 and 2012. The credit performance of
loans underlying these securities deteriorated significantly since 2008. For more information on our exposure to subprime
mortgage loans through our investments in non-agency mortgage-related securities see “CONSOLIDATED BALANCE
SHEETS ANALYSIS — Investments in Securities.”
Alt-A Loans
Although there is no universally accepted definition of Alt-A, many mortgage market participants classify single-family
loans with credit characteristics that range between their prime and subprime categories as Alt-A because these loans have a
combination of characteristics of each category, may be underwritten with lower or alternative income or asset documentation
requirements compared to a full documentation mortgage loan, or both. The UPB of Alt-A loans in our single-family credit
guarantee portfolio declined to $56.9 billion as of December 31, 2013 from $73.7 billion as of December 31, 2012 primarily
due to refinancing into other mortgage products, foreclosure transfers, and other liquidation events. For reporting purposes,
loans within the Alt-A category continue to be reported in that category following a modification of the loan, even though the
borrower may have provided full documentation of assets and income before completing the modification. As of December 31,
2013 and 2012, approximately 16.3% and 11.8%, respectively, of the Alt-A loans within our single-family credit guarantee
portfolio had completed a modification. As of December 31, 2013, for Alt-A loans in our single-family credit guarantee
portfolio, the average FICO score at origination was 711. Although Alt-A mortgage loans comprised approximately 3% and 5%
of our single-family credit guarantee portfolio as of December 31, 2013 and 2012, respectively, these loans represented
approximately 26% and 23% of our credit losses during 2013 and 2012, respectively.
Although we discontinued new purchases of mortgage loans with lower documentation standards for assets or income
beginning March 1, 2009, we continued to purchase certain amounts of these mortgages in cases where the loan was either:
(a) purchased pursuant to a previously issued other guarantee commitment; (b) part of our relief refinance mortgage initiative;
or (c) in another refinance mortgage initiative and the pre-existing mortgage (including Alt-A loans) was originated under less
than full documentation standards. In the event we purchase a refinance mortgage and the original loan had been previously
identified as Alt-A, such refinance loan may no longer be categorized or reported as an Alt-A mortgage in this Form 10-K and
our other financial reports because the new refinance loan replacing the original loan would not be identified by the seller/
servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such
refinancing not occurred. From the time the relief refinance initiative began in 2009 to December 31, 2013, we have purchased
approximately $28.9 billion of relief refinance mortgages that were previously categorized as Alt-A loans in our portfolio,
including $6.7 billion in 2013.
We also hold investments in non-agency mortgage-related securities backed by single-family Alt-A loans. At
December 31, 2013 and 2012, we held investments of $11.0 billion and $14.8 billion in UPB, respectively, of non-agency
mortgage-related securities backed by Alt-A and other mortgage loans. Approximately 5% and 9% of these securities were
categorized as investment grade at December 31, 2013 and 2012, respectively. The credit performance of loans underlying
these securities deteriorated significantly since 2008. We categorize our investments in non-agency mortgage-related securities
as Alt-A if the securities were identified as such based on information provided to us when we entered into these transactions.
For more information on our exposure to Alt-A mortgage loans through our investments in non-agency mortgage-related
securities see “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities.”
Higher-Risk Loans in the Single-Family Credit Guarantee Portfolio
The table below presents information about certain categories of single-family mortgage loans within our single-family
credit guarantee portfolio that we believe have certain higher-risk characteristics. These loans include categories based on
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product type and borrower characteristics present at origination. The table includes a presentation of each higher risk category
in isolation. A single loan may fall within more than one category (for example, an interest-only loan may also have an original
LTV ratio greater than 90%). Loans with a combination of these characteristics will have an even higher risk of default than
those with a single characteristic.
Table 43 — Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio(1)
Loans with one or more specified characteristics
Categories (individual characteristics):
Alt-A
Interest-only(5)
Option ARM(6)
Original LTV ratio greater than 90%, non-HARP mortgages
Original LTV ratio greater than 90%, HARP mortgages
Lower FICO scores at origination (less than 620)(7)
Loans with one or more specified characteristics
Categories (individual characteristics):
Alt-A
Interest-only(5)
Option ARM(6)
Original LTV ratio greater than 90%, non-HARP mortgages
Original LTV ratio greater than 90%, HARP mortgages
Lower FICO scores at origination (less than 620)(7)
$
$
As of December 31, 2013
UPB
Estimated
Current LTV(2)
Percentage
Modified(3)
(dollars in billions)
Serious
Delinquency
Rate(4)
364.5
56.9
34.7
6.4
103.4
154.3
47.8
94%
8.1%
5.3%
87
93
86
91
103
83
16.3
0.2
11.0
10.1
0.5
17.4
10.1
12.5
12.3
5.7
1.0
10.0
As of December 31, 2012
UPB
Estimated
Current LTV(2)
Percentage
Modified(3)
(dollars in billions)
Serious
Delinquency
Rate(4)
355.3
73.7
50.2
7.3
98.5
120.4
50.9
101%
7.6%
7.5%
100
110
105
100
108
89
11.8
0.3
8.1
9.4
0.2
15.3
11.4
16.3
16.3
7.8
1.0
12.2
(1) Categories are not additive and a single loan may be included in multiple categories if more than one characteristic is associated with the loan.
(2) See endnote (3) to “Table 38 — Characteristics of the Single-Family Credit Guarantee Portfolio” for information on our calculation of current LTV
ratios.
(3) Represents the percentage of loans based on loan count in our single-family credit guarantee portfolio at period end that have been modified, including
those with no changes in the interest rate or maturity date, but where past due amounts are added to the outstanding principal balance of the loan.
Excludes loans underlying certain Other Guarantee Transactions for which data was not available.
(4) See “Credit Performance — Delinquencies” for further information about our reported serious delinquency rates.
(5) When an interest-only loan is modified to require repayment of principal, the loan is removed from the interest-only category. The percentages of
interest-only loans which have been modified at period end reflect loans that have not yet been assigned to their new product category (post-
modification), primarily due to delays in processing.
(6) For reporting purposes, loans within the option ARM category continue to be reported in that category following modification, even though the
modified loan no longer provides for optional payment provisions.
(7) See endnote (2) to “Table 37 — Characteristics of Purchases for the Single-Family Credit Guarantee Portfolio” for information on our presentation of
FICO scores.
A significant portion of the loans in the higher-risk categories presented in the table above are included in our 2005-2008
Legacy single-family book. We have fully discontinued purchases of Alt-A (effective March 1, 2009), interest-only (effective
September 1, 2010), and option ARM (since 2007) loans. The UPB of loans with one or more of these higher-risk
characteristics in our single-family credit guarantee portfolio increased during 2013 primarily due to increased purchases of
loans with original LTV ratios greater than 90% resulting from significant HARP activity. The balance of our non-HARP
mortgages with original LTV ratios greater than 90% increased $4.9 billion from December 31, 2012 to December 31, 2013,
since we continue to purchase certain of these loans if they are covered by credit enhancements for the UPB in excess of 80%.
We also continue to purchase single-family loans with FICO scores below 620 in limited amounts if they meet our underwriting
standards.
Credit Enhancements
The use of credit enhancements is intended to mitigate some of our potential credit losses. Our charter requires that
single-family mortgages with LTV ratios above 80% at the time of purchase be covered by specified credit enhancements or
participation interests (subject to certain exceptions, such as discussed below with respect to HARP). As guarantor, we remain
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responsible for the payment of principal and interest if mortgage insurance or other credit enhancements do not provide full
reimbursement for covered losses. Our credit losses could increase if an entity that provides credit enhancement fails to fulfill
its obligation (e.g., a mortgage insurer fails to pay a claim), as this would reduce the amount of our credit loss recoveries.
At December 31, 2013 and 2012, our credit-enhanced mortgages represented 17% and 13%, respectively, of our single-
family credit guarantee portfolio, excluding those backing Ginnie Mae Certificates and HFA bonds guaranteed by us under the
HFA initiative, based on UPB. Our financial guarantees backed by Ginnie Mae Certificates and HFA bonds under the HFA
initiative are excluded because we consider the incremental credit risk to which we are exposed to be insignificant. In recent
years, the percentage of our single-family loan purchases with credit enhancement coverage has been affected by high volumes
of refinance activity. Refinance loans (other than HARP loans) typically have lower LTV ratios than home purchase loans, and
are more likely to have an LTV ratio below 80% and not require credit protection as specified in our charter. Under HARP, we
allow eligible borrowers who have mortgages with current LTV ratios over 80% to refinance their mortgages without obtaining
new mortgage insurance in excess of the insurance coverage that was already in place.
We recognized recoveries from credit enhancements (excluding recoveries that represent reimbursements for our
expenses, such as REO operations expenses) of $1.5 billion and $1.6 billion that reduced our charge-offs of single-family loans
during 2013 and 2012, respectively. Substantially all of these amounts represent recoveries associated with our primary and
pool mortgage insurance policies. During the third quarter of 2013, we entered into an agreement with one of our mortgage
insurers to resolve outstanding and future primary mortgage insurance claims related to certain loans. We recognized recoveries
of $0.2 billion in the third quarter of 2013 related to this agreement. In addition, we recognized recoveries from credit
enhancements of $0.2 billion and $0.1 billion during 2013 and 2012, respectively, as part of REO operations income
(expenses). These recoveries were also primarily associated with our primary and pool mortgage insurance policies.
We executed three transactions during 2013 that transfer a mezzanine credit loss position on certain groups of loans in our
New single-family book. We believe approximately $45 billion of UPB related to these transactions qualified toward our 2013
Conservatorship Scorecard goal to 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 a significant portion of the mortgage credit risk from us to private investors. In July 2013, we executed a STACR debt note
transaction for $500 million in UPB which provides us with credit protection coverage for $22.5 billion of UPB of loans in our
single-family credit guarantee portfolio. A second STACR debt note transaction for $630 million in UPB, which provides us
with credit protection coverage for an additional $35.3 billion of UPB, settled in November 2013. In the first and second
STACR debt note transactions, we are exposed to the first $68 million and $106 million, respectively, of calculated losses
associated with the reference pool of mortgage loans and a portion of credit events thereafter. The UPB of the STACR debt
notes held by third parties represents the maximum amount of credit protection that is available to us from such third parties
through the transaction.
In November 2013, we further reduced our exposure to credit losses from the reference pool of mortgage loans associated
with the first STACR debt note transaction by obtaining third-party insurance to cover up to $77.4 million of our mezzanine
exposure to credit losses. In November 2013, FHFA announced that we had achieved the 2013 Scorecard goal for risk transfer
transactions.
Certain of our single-family Other Guarantee Transactions utilize subordinated security structures as a form of credit
enhancement. At December 31, 2013 and 2012, the UPB of single-family Other Guarantee Transactions with subordination
coverage at origination was $2.6 billion and $3.0 billion, and the subordination coverage on these securities was $399 million
and $503 million, respectively. At December 31, 2013 and 2012, the serious delinquency rate on single-family Other Guarantee
Transactions with subordination coverage was 19.0% and 20.5%, respectively.
See “Institutional Credit Risk” for information about our counterparties that provide credit enhancement on loans in our
single-family credit guarantee portfolio, including information about our mortgage loan insurers. See “NOTE 4: MORTGAGE
LOANS AND LOAN LOSS RESERVES” for additional information about credit protection and other forms of credit
enhancements covering loans in our single-family credit guarantee portfolio. See “CONSOLIDATED BALANCE SHEETS
ANALYSIS — Investments in Securities — Mortgage-Related Securities” for credit enhancement and other information about
our investments in non-Freddie Mac mortgage-related securities.
Single-Family Loan Workouts and the MHA Program
Loan workout activities are a key component of our loss mitigation strategy for managing and resolving troubled assets
and lowering credit losses. Our loan workouts consist of: (a) forbearance agreements; (b) repayment plans; (c) loan
modifications; and (d) foreclosure alternatives (i.e., short sales or deed in lieu of foreclosure transactions). Our single-family
loss mitigation strategy emphasizes early intervention by servicers in delinquent mortgages and provides alternatives to
foreclosure.
Our seller/servicers have an active role in our loss mitigation efforts. A decline in their performance could affect the
overall quality of our credit performance (including by missing opportunities for mortgage modifications), which could have
significant effects on our ability to mitigate credit losses. The risk of such a decline in performance remains high. In 2012, we
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began to permit the transfer of servicing for certain groups of loans that were delinquent or were deemed at risk of default to
servicers that we believe have capabilities and resources necessary to improve the loss mitigation associated with the loans.
Depending on our experience with the results of these transfers and specific servicer experience and capacity, we may permit
additional transfers in the future. For more information, see “RISK FACTORS — Competitive and Market Risks — Our
financial condition or results of operations may be adversely affected if mortgage seller/servicers fail to perform their
repurchase and other obligations to us.”
During 2013, we helped approximately 168,000 borrowers either stay in their homes or sell their properties and avoid
foreclosures through our various workout programs, and we completed approximately 82,000 foreclosures. We bear the full
costs associated with our loan workouts and foreclosure alternatives on mortgages that we own or guarantee, and do not receive
any reimbursement from Treasury. These costs include borrower and servicer incentive fees as well as the cost of any monthly
payment reductions.
Home Affordable Modification Program and Non-HAMP Modifications
Our primary loan modification initiatives are HAMP and our non-HAMP standard loan modification initiatives. HAMP
commits U.S. government, Freddie Mac and Fannie Mae funds to help eligible homeowners avoid foreclosures and keep their
homes through mortgage modifications. Under this program, we offer loan modifications to financially struggling homeowners
with mortgages on their primary residences that reduce the monthly principal and interest payments on their mortgages. HAMP
requires that each borrower complete at least a three month trial period during which the borrower will make monthly payments
based on the estimated amount of the modification payments. HAMP is scheduled to end in December 2015. In March 2013, as
part of the servicing alignment initiative, we announced a streamlined modification initiative, which provides an additional
modification opportunity to certain borrowers. The modification that borrowers receive under this initiative will have the same
mortgage terms as our non-HAMP standard modification.
During 2013, approximately 83,000 borrowers having loans with aggregate UPB of $17.4 billion completed
modifications under all of our programs, and, as of December 31, 2013, approximately 21,000 borrowers were in the
modification trial period. For information about the percentage of completed loan modifications that remained current, see
“Table 46 — Quarterly Percentages of Modified Single-Family Loans — Current and Performing.”
During 2013 and 2012, approximately 60,000 and 29,000 borrowers, respectively, completed a non-HAMP loan
modification. As of December 31, 2013, the percentage of our non-HAMP modifications that were completed in 2010, 2011,
2012, and 2013, that subsequently became seriously delinquent, proceeded to foreclosure transfer, completed a short sale, or
were remodified was approximately 39%, 36%, 16%, and 7%, respectively. Based on information provided by the MHA
Program administrator, our servicers had completed more than 239,000 loan modifications under HAMP from the introduction
of the initiative in 2009 through December 31, 2013, compared to approximately 217,000 cumulative HAMP completions as of
December 31, 2012. According to the administrator, the number of our loans in the HAMP trial period declined to 4,970 as of
December 31, 2013 from 9,440 as of December 31, 2012. As of December 31, 2013, the percentage of our HAMP
modifications that were completed in 2010, 2011, 2012, and 2013 that subsequently became seriously delinquent, proceeded to
foreclosure transfer, completed a short sale, or were remodified was approximately 26%, 19%, 12%, and 5%, respectively.
The portion of our modification volume that was HAMP-related declined and the portion of modification volume that
was non-HAMP-related increased in 2013 compared to 2012. We attribute this shift in the composition of our modification
volume to both the availability of our non-HAMP modifications and the fact that a large number of the borrowers that were
eligible for HAMP have already completed a modification or attempted but failed to complete the modification. We expect that
our new streamlined modification initiative may cause our non-HAMP modification volume to be elevated in the first half of
2014.
The costs we incur related to HAMP have been, and will likely continue to be significant. We incurred $109 million and
$177 million of servicer incentive expenses on HAMP loans during 2013 and 2012, respectively. We also incur certain
incentives for borrowers who continue to perform under their HAMP modification, which are included within our benefit
(provision) for credit losses on our consolidated statements of comprehensive income. The servicer incentive costs we incur
related to our non-HAMP modifications have also been significant. We recently announced changes to certain servicer
incentive fees for HAMP modifications completed on or after April 1, 2014.
Many of our HAMP loans have provisions for reduced interest rates that remain fixed for the first five years of the
modification and then increase at a rate of up to one percent per year until the interest rate has been adjusted to the market rate
that was in effect at the time of the modification. Certain of our non-HAMP loan modifications have similar features and,
collectively, we refer to these types of loans as “step-rate modified loans.” The risk of default may increase for borrowers with
step-rate modified loans due to the increase in monthly payments resulting from these scheduled increases in the contractual
interest rate of the loan. A significant number of HAMP loan modifications were completed in 2010 and these loans will begin
to experience their scheduled interest rate increases in 2015. As of December 31, 2013, the average current contractual interest
rate for all step-rate modified loans was 2.3% and the average final interest rate that these loans are scheduled to reach in the
future was 4.5%.
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The table below presents information about step-rate modified loans.
Table 44 — Step-Rate Modified Loans(1)
Year of completed modification:
2009
2010
2011
2012 and after
Total
As of December 31, 2013
UPB
Serious
Delinquency(2)
Year of Payment Change(3)
2014
2015
2016
(in billions, except rates)
2017 and
After
$
$
4.2
18.1
10.5
11.0
43.8
11% $
4.2
$
4.0
$
3.5
$
12
11
6
10
—
—
—
18.0
—
—
16.7
10.6
—
$
4.2
$
22.0
$
30.8
$
0.7
14.7
9.6
11.0
36.0
(1) Consists of step-rate modified loans (HAMP and non-HAMP) remaining in the single-family credit guarantee portfolio as of December 31, 2013,
excluding those underlying Other Guarantee Transactions. Includes the portion, if any, of UPB that is non-interest bearing under the terms of the
modification. Excludes loans in a modification trial period and those that were subsequently remodified under a non-HAMP initiative and no longer
have step-rate terms.
(2) Based on loan count.
(3) Represents the UPB of all step-rate modified loans that are scheduled to experience an increase in their contractual interest rate in a given year.
Individual loans will appear in each year for which they are scheduled to experience a rate increase.
Loan Workout Volumes and Modification Performance
The table below presents single-family loan workout volumes, serious delinquency rates, and foreclosure volumes for
2013, 2012 and 2011.
Table 45 — Single-Family Loan Workout, Serious Delinquency, and Foreclosure Volumes(1)
Home retention actions:
Loan modifications
with no change in terms(2)
with term extension
with change in interest rate and, in certain cases, term
extension
with change in interest rate, term extension and principal
forbearance
Total loan modifications(3)
Repayment plans(4)
Forbearance agreements(5)
Total home retention actions
Foreclosure alternatives:
Short sale
Deed in lieu of foreclosure transactions
Total foreclosure alternatives
Total single-family loan workouts
Seriously delinquent loan additions
Single-family foreclosures(6)
Seriously delinquent loans, at period end
Years Ended December 31,
2013
2012
2011
Number
of Loans
Loan
Balances
Number
of Loans
Loan
Balances
Number
of Loans
Loan
Balances
(dollars in millions)
213
$
6,645
25
700
533
$
3,894
95
313
4,371
$
16,354
778
3,011
46,739
7,314
38,871
6,246
68,584
15,231
9,368
17,407
4,016
2,331
23,754
9,016
437
9,453
33,207
29,591
83,188
28,610
12,019
123,817
41,362
2,720
44,082
167,899
$
237,580
81,605
255,325
8,483
15,137
4,746
2,557
22,440
11,626
179
11,805
34,245
26,283
69,581
33,350
13,026
115,957
51,972
1,036
53,008
168,965
$
305,449
105,060
352,860
5,319
24,339
4,787
3,821
32,947
10,524
94
10,618
43,565
19,865
109,174
33,421
19,516
162,111
45,623
540
46,163
208,274
$
374,970
121,751
414,134
(1) Based on completed actions 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 (see endnote 5).
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(2) Under this modification type, past due amounts are added to the principal balance and amortized based on the original contractual loan terms.
(3)
Includes completed loan modifications under HAMP; however, the number of such completions differs from that reported by the MHA Program
administrator in part due to differences in the timing of recognizing the completions by us and the administrator.
(4) Represents the number of borrowers as reported by our seller/servicers that have completed the full term of a repayment plan for past due amounts.
Excludes borrowers that are actively repaying past due amounts under a repayment plan, which totaled 16,768, 15,467, and 21,382 borrowers as of
December 31, 2013, 2012, and 2011, respectively.
(5) Excludes loans with long-term forbearance under a completed loan modification. Many borrowers complete 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 quarter; however, a single loan
may be included under separate forbearance agreements in separate periods.
(6) Represents the number of our single-family loans that completed foreclosure transfers, including third-party sales at foreclosure auction in which
ownership of the property is transferred directly to a third party rather than to us.
The number of seriously delinquent loans declined during 2013, and our loan modification volume increased in 2013
compared to 2012. The volume of foreclosures declined by 22% in 2013 compared to 2012, primarily due to lower volumes of
single-family loans becoming seriously delinquent and continued high volumes of loan workouts in 2013. We expect our loan
modification volume will decline in 2014, as compared to 2013.
The UPB of loans in our single-family credit guarantee portfolio for which we have completed a loan modification
increased to $82 billion as of December 31, 2013 from $75 billion as of December 31, 2012. The number of modified loans in
our single-family credit guarantee portfolio continued to increase and such loans comprised approximately 3.8% and 3.4% of
our single-family credit guarantee portfolio as of December 31, 2013 and December 31, 2012, respectively. For the year ended
December 31, 2013, approximately 56% of our loan modifications related to loans which were 180 days or more delinquent
prior to the modification effective date. The estimated weighted average current LTV ratio for all modified loans in our single-
family credit guarantee portfolio was 100% at December 31, 2013. The serious delinquency rate on these loans was 13.3% as
of December 31, 2013.
The volume of short sale transactions remained at elevated levels in 2013 compared to our historical experience.
However, our short sale activity declined in the last three quarters of 2013, which we believe is due to rising interest rates and
strengthening home prices in most geographical areas, which make short sales a less attractive option for borrowers.
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The table below presents the percentage of modified single-family loans that were current and performing in each of the
last eight quarterly periods.
Table 46 — Quarterly Percentages of Modified Single-Family Loans — Current and Performing(1)
HAMP loan modifications:
3Q 2013
2Q 2013
1Q 2013
4Q 2012
3Q 2012
2Q 2012
1Q 2012
4Q 2011
Quarter of Loan Modification Completion(2)
Time since modification:
3 to 5 months
6 to 8 months
9 to 11 months
12 to 14 months
15 to 17 months
18 to 20 months
21 to 23 months
24 to 26 months
87%
88%
84
89%
85
82
88%
87%
89%
89%
89%
85
83
80
85
82
80
78
85
84
81
80
79
84
81
81
79
77
76
85
81
79
79
77
76
75
Non-HAMP loan modifications:
3Q 2013
2Q 2013
1Q 2013
4Q 2012
3Q 2012
3Q 2012
1Q 2012
4Q 2011
Quarter of Loan Modification Completion(2)
Time since modification:
3 to 5 months
6 to 8 months
9 to 11 months
12 to 14 months
15 to 17 months
18 to 20 months
21 to 23 months
24 to 26 months
82%
83%
77
84%
78
74
83%
82%
84%
72%
78%
79
75
72
79
75
72
69
79
77
74
71
69
64
60
62
59
56
55
69
62
58
59
57
56
55
Total (HAMP and Non-HAMP):
3Q 2013
2Q 2013
1Q 2013
4Q 2012
3Q 2012
3Q 2012
1Q 2012
4Q 2011
Quarter of Loan Modification Completion(2)
Time since modification:
3 to 5 months
6 to 8 months
9 to 11 months
12 to 14 months
15 to 17 months
18 to 20 months
21 to 23 months
24 to 26 months
84%
85%
79
86%
81
78
85%
84%
87%
85%
86%
81
78
75
82
78
76
73
83
81
78
77
75
80
77
76
74
73
71
80
75
73
73
71
70
68
(1) Represents the percentage of loans that are current and performing (no payment is 30 days or more past due) or have been paid in full. Excludes loans
in modification trial periods.
(2) Loan modifications are recognized as completed in the quarterly period in which the servicer has reported the modification as effective and the
agreement has been accepted by us. For loans that have been remodified (e.g., where a borrower has received a new modification after defaulting on the
prior modification) the rates reflect the status of each modification separately. For example, in the case of a remodified loan where the borrower is
performing, the previous modification would be presented as being in default in the applicable period.
Relief Refinance Mortgage Initiative and Home Affordable Refinance Program
Our relief refinance mortgage initiative, including HARP (which is the portion of our relief refinance initiative for loans
with LTV ratios above 80%), gives eligible homeowners with existing loans that are owned or guaranteed by us an opportunity
to refinance into loans with more affordable monthly payments and/or fixed-rate terms. While HARP is targeted at borrowers
with current LTV ratios above 80%, our relief refinance initiative also allows borrowers with LTV ratios of 80% and below to
participate. We implemented a number of changes to HARP and the relief refinance initiative in late 2011 and during 2012.
These changes allow more borrowers to participate in the program and benefit from refinancing their home mortgages,
including borrowers whose mortgages have LTV ratios above 125%. In addition, in April 2013, we extended HARP by two
years to December 31, 2015, at the direction of FHFA.
Relief refinance mortgages (including HARP loans) generally present higher risk to us than other refinance loans we have
purchased since 2009 because:
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•
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;
• many of these loans have relatively high LTV ratios (e.g., greater than 90%), which can increase the probability of
default and increase the amount of our loss if the borrower does default;
• HARP loans may not be covered by mortgage insurance for the full excess of their UPB over 80%; and
•
beginning with changes announced in the fourth quarter of 2011, we have relieved the lenders of certain representations
and warranties on the original mortgage being refinanced, which limits our ability to seek recovery or repurchase from
the seller for breach. All relief refinance mortgages with application dates on or after November 19, 2012 have reduced
representations and warranties from the seller. We continue to bear the credit risk for refinanced loans under this
program, to the extent that such risk is not covered by existing mortgage insurance or other existing credit
enhancements.
However, relief refinance mortgages (including HARP loans) generally have performed better than loans with similar
characteristics remaining in our single-family credit guarantee portfolio that were originated prior to 2009 because, under the
relief refinance initiative:
•
•
borrowers must meet eligibility requirements, such as having no more than one late payment within the previous 12
months and no late payments within the six months prior to refinancing; and
the new mortgage results in one or more of the following borrower benefits compared to the original loan: (a) a reduced
monthly payment; (b) a lower interest rate; (c) a shorter loan term; or (d) replacement of an adjustable interest rate with
a fixed interest rate.
Although our refinancing activity moderated in the second half of 2013, relief refinance activity remained high in 2013
driven by relatively low interest rates compared to historical levels and the changes to the HARP program noted above. The
following table provides information about the volume of our relief refinance purchases as well as information about the
serious delinquency rates of these loans.
Table 47 — Single-Family Relief Refinance Loans(1)
Purchases of relief refinance mortgages:
HARP:
Above 125% LTV ratio
Above 100% to 125% LTV ratio
Above 80% to 100% LTV ratio
Other (80% and below LTV ratio)
Total relief refinance mortgages
Balance of relief refinance mortgages:
HARP:
Above 125% LTV ratio
Above 100% to 125% LTV ratio
Above 80% to 100% LTV ratio
Other (80% and below LTV ratio)
Total relief refinance mortgages
$
$
$
$
Year Ended December 31, 2013
Year Ended December 31, 2012
UPB
Number of
Loans
Average Loan
Balance(2)
UPB
Number of
Loans
Average loan
Balance(2)
(dollars in millions, except for average loan balances)
11,574
21,005
29,958
36,658
99,195
62,652
$
110,302
167,420
270,138
610,512
185,000
190,000
179,000
136,000
162,000
$
20,364
29,648
36,886
35,870
$
122,768
98,559
$
144,529
191,208
252,569
686,865
207,000
205,000
193,000
142,000
179,000
As of December 31, 2013
As of December 31, 2012
UPB
Number of
Loans
Serious
Delinquency
Rate
UPB
Number of
Loans
Serious
Delinquency
Rate
(dollars in millions)
30,579
68,416
114,688
127,991
341,674
158,531
344,832
610,128
936,038
2,049,529
0.90% $
1.01
0.85
0.32
0.64
$
20,163
52,761
100,122
114,164
287,210
98,371
251,497
499,125
774,212
1,623,205
0.29%
1.20
1.00
0.32
0.66
(1) Consists of all single-family relief refinance mortgage loans that we either purchased or guaranteed during the period, including those associated with
other guarantee commitments and Other Guarantee Transactions.
(2) Rounded to the nearest thousand.
For more information on relief refinance loans, including HARP, in our single-family credit guarantee portfolio, see
"Table 36 — Single-Family Credit Guarantee Portfolio Data by Year of Origination," and "Table 37 — Characteristics of
Purchases for the Single-Family Credit Guarantee Portfolio."
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Credit Performance
Delinquencies
We report single-family serious delinquency rate information based on the number of loans that are three monthly
payments or more past due or in the process of foreclosure, as reported by our servicers. Mortgage loans that have been
modified are not counted as seriously delinquent as long as the borrower is less than three monthly payments past due under the
modified terms. Single-family loans for which the borrower is subject to a forbearance agreement or a repayment plan will
continue to reflect the past due status of the borrower.
Our single-family delinquency rates include all single-family loans that we own, that back Freddie Mac securities, and
that are covered by our other guarantee commitments, except Freddie Mac financial guarantees that are backed by either Ginnie
Mae Certificates or HFA bonds due to the credit enhancements provided on them by the U.S. government.
Some of our workout and other loss mitigation activities create fluctuations in our delinquency statistics. For example,
single-family loans that we report as seriously delinquent before they enter a modification trial period continue to be reported
as seriously delinquent for purposes of our delinquency reporting until the modifications become effective and the loans are
removed from delinquent status by our servicers. Consequently, the volume and timing of loan modifications affect our
reported serious delinquency rate. In addition, there may be temporary timing differences, or lags, in the reporting of payment
status and modification completion due to differing practices of our servicers that can affect our delinquency reporting.
Our serious delinquency rates have been affected by delays, including those due to increases in foreclosure process
timeframes, general constraints on servicer capacity (which affects the rate at which servicers modify or foreclose upon loans),
and court backlogs (in states that require a judicial foreclosure process). These situations generally extend the time it takes for
the loans to be modified, foreclosed upon, or otherwise resolved, and thus transition out of serious delinquency. As of
December 31, 2013 and 2012, the percentage of seriously delinquent loans that have been delinquent for more than six months
was 71% and 72%, respectively, and most of these loans have been delinquent for longer than one year. Loans that have been
delinquent for more than a year are more challenging to resolve as many of these borrowers: (a) may not be in contact with the
servicer; (b) may not be eligible for modifications; or (c) are in geographic areas where the foreclosure process has lengthened
or is subject to judicial review. The longer a loan remains delinquent, the greater the associated costs we incur, in part due to
expenses associated with loss mitigation and foreclosure.
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The table below presents serious delinquency rates and information about seriously delinquent loans in our single-family
credit guarantee portfolio.
Table 48 — Single-Family Serious Delinquency Statistics
Credit Protection:
Non-credit-enhanced
Credit-enhanced(1)
Total(2)
State:(3)(4)
Florida
New York
New Jersey
California
Illinois
All others
Total
As of December 31, 2013
As of December 31, 2012
As of December 31, 2011
Percentage
of Portfolio
Serious
Delinquency
Rate
Percentage
of Portfolio
Serious
Delinquency
Rate
Percentage of
Portfolio
Serious
Delinquency
Rate
83%
17
100%
2.04%
4.83
2.39
87%
13
100%
2.66%
7.34
3.25
86%
14
100%
2.84%
8.03
3.58
# of Seriously
Delinquent
Loans
Serious
Delinquency
Rate
# of Seriously
Delinquent
Loans
Serious
Delinquency
Rate
# of Seriously
Delinquent
Loans
Serious
Delinquency
Rate
Percent
Percent
Percent
42,948
21,459
19,306
15,620
15,521
137,907
252,761
17%
6.44%
8
8
6
6
55
100%
4.41
6.20
1.30
2.79
1.85
69,034
22,592
21,742
27,620
22,923
185,683
349,594
20%
9.87%
6
6
8
7
53
100%
4.59
6.87
2.34
4.08
2.45
82,006
20,950
19,538
42,530
28,039
217,218
410,281
20%
10.89%
5
5
10
7
53
100%
4.02
5.80
3.43
4.72
2.68
# of Seriously
Delinquent
Loans
Percent
# of Seriously
Delinquent
Loans
Percent
# of Seriously
Delinquent
Loans
Percent
Aging, by locality:(4)
Judicial review states:(5)
Less than or equal to 1 year
More than 1 year and less than
or equal to 2 years
More than 2 years
Non-judicial states:(5)
Less than or equal to 1 year
More than 1 year and less than
or equal to 2 years
More than 2 years
Combined:(5)
Less than or equal to 1 year
More than 1 year and less than
or equal to 2 years
More than 2 years
59,129
30,604
65,154
60,175
17,968
19,731
119,304
48,572
84,885
23%
12
26
24
7
8
47
19
34
Total
252,761
100%
Payment Status:
One month past due
Two months past due
1.73%
0.57%
23%
14
22
25
9
7
48
23
29
100%
79,422
50,506
77,766
87,641
30,435
23,824
167,063
80,941
101,590
349,594
1.85%
0.66%
24%
17%
16%
28%
10%
5%
52%
27%
21%
100%
99,388
67,894
63,429
115,495
42,950
21,125
214,883
110,844
84,554
410,281
2.02%
0.70%
(1) See “Institutional Credit Risk” for information about our counterparties that provide credit enhancement on loans in our single-family credit guarantee
portfolio.
(2) As of December 31, 2013, 2012, and 2011, approximately 61%, 68% and 68%, respectively, of the single-family loans reported as seriously delinquent
were in the process of foreclosure.
(3) Represent the states with the highest number of seriously delinquent loans as of December 31, 2013.
(4) Excludes loans underlying certain single-family Other Guarantee Transactions since the geographic information is not available to us for these loans.
(5) For this presentation, the states and territories classified as having a judicial foreclosure process consist of: CT, DE, FL, HI, IA, IL, IN, KS, KY, LA,
ME, ND, NE, NJ, NM, NY, OH, OK, OR, PA, PR, SC, SD, VI, VT, and WI. All other states are classified as having a non-judicial foreclosure process.
The serious delinquency rate of our single-family credit guarantee portfolio declined to 2.39% as of December 31, 2013
(which is the lowest level since March 2009) from 3.25% as of December 31, 2012, continuing the trend of improvement that
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began in 2010. As of December 31, 2013, our serious delinquency rate for the aggregate of those states that require a judicial
foreclosure and all other states was 3.31% and 1.63%, respectively, compared to 4.32% and 2.35%, respectively, as of
December 31, 2012.
During the years ended December 31, 2013 and 2012, the nationwide average for completion of a foreclosure (as
measured from the date of the last scheduled payment made by the borrower) on our single-family delinquent loans, excluding
those underlying our Other Guarantee Transactions, was 773 days and 611 days, respectively, which included: (a) an average of
943 days and 773 days, respectively, for foreclosures completed in states that require a judicial foreclosure process; and (b) an
average of 567 days and 475 days, respectively, for foreclosures completed in states that do not require a judicial foreclosure
process. During 2013, a significant number of loans that had been subject to delays discussed above (and that had been
delinquent for more than a year) completed the foreclosure process, which caused the nationwide average for foreclosure
completions to increase compared to 2012.
Serious delinquency rates for interest-only and option ARM products (which together represented approximately 2% of
our total single-family credit guarantee portfolio at December 31, 2013) were 12.5% and 12.3% as of December 31, 2013,
respectively, as compared to 16.3% for both at December 31, 2012. Serious delinquency rates of single-family fixed rate,
amortizing loans with a term of 20 years or more, a more traditional mortgage product, were approximately 2.8% and 3.7% at
December 31, 2013 and 2012, respectively.
The tables below present serious delinquency rates categorized by borrower and loan characteristics, including
geographic region and origination year, and indicate that certain concentrations of loans have been more adversely affected by
declines in home prices and weak economic conditions during the housing crisis that began in 2006. We purchased significant
amounts of loans originated in 2005 through 2008 with higher-risk characteristics and, as of December 31, 2013, we continued
to experience high serious delinquency rates on those loans.
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Table 49 — Credit Concentrations in the Single-Family Credit Guarantee Portfolio
$
$
$
Geographical distribution:
Arizona, California, Florida, and Nevada(3)
Illinois, Michigan, and Ohio(4)
New York and New Jersey(5)
All other states
Year of origination(6):
2013
2012
2011
2010
2009
HARP and other relief refinance loans(6)
2005-2008 Legacy single-family book
Pre-2005 Legacy single-family book
Geographical distribution:
Arizona, California, Florida, and Nevada(3)
Illinois, Michigan, and Ohio(4)
New York and New Jersey(5)
All other states
Year of origination(6):
2012
2011
2010
2009
HARP and other relief refinance loans(6)
2005-2008 Legacy single-family book
Pre-2005 Legacy single-family book
Credit Losses
Geographical distribution:
Arizona, California, Florida, and Nevada(3)
Illinois, Michigan, and Ohio(4)
New York and New Jersey(5)
All other states
Year of origination(6):
2013
2012
2011
2010
2009
Subtotal - New single-family book
HARP and other relief refinance loans(6)
2005-2008 Legacy single-family book
Pre-2005 Legacy single-family book
As of December 31, 2013
Alt-A
UPB
Non Alt-A
UPB
Total
UPB
(dollars in billions)
Estimated
Current LTV
Ratio(1)
Percentage
Modified(2)
Serious
Delinquency
Rate
$
23
4
7
23
—
—
—
—
—
—
48
9
$
399
172
138
887
270
265
120
113
120
342
220
146
422
176
145
910
270
265
120
113
120
342
268
155
68%
76
67
69
69
61
58
60
62
81
87
50
5.9%
3.9
4.3
3.0
—
—
—
0.1
0.5
0.3
16.5
4.6
3.0%
2.1
5.1
1.9
—
—
0.2
0.4
0.9
0.6
8.8
3.2
As of December 31, 2012
Alt-A
UPB
Non Alt-A
UPB
Total
UPB
(dollars in billions)
Estimated
Current LTV
Ratio(1)
Percentage
Modified(2)
Serious
Delinquency
Rate
$
30
5
9
30
—
—
—
—
—
62
12
$
386
171
134
873
254
158
156
177
287
326
206
416
176
143
903
254
158
156
177
287
388
218
82%
82
69
72
67
64
65
67
83
98
56
5.4%
3.5
3.5
2.7
—
—
—
0.2
0.1
11.0
3.3
5.0%
3.0
5.5
2.4
—
0.1
0.3
0.7
0.7
9.6
3.2
2013
2012
Alt-A
Non Alt-A
Total
Alt-A
Non Alt-A
Total
(in millions)
802
158
56
231
—
—
—
—
—
—
—
1,190
57
$
1,438
$
2,240
$
1,816
$
773
106
1,224
—
2
9
29
95
135
348
2,688
370
931
162
1,455
—
2
9
29
95
135
348
3,878
427
276
60
550
N/A
—
—
—
—
—
—
2,601
101
$
4,526
1,500
118
2,779
N/A
—
3
23
134
160
263
7,544
956
6,342
1,776
178
3,329
N/A
—
3
23
134
160
263
10,145
1,057
(1) See endnote (3) to “Table 38 — Characteristics of the Single-Family Credit Guarantee Portfolio” for information on our calculation of estimated
current LTV ratios.
(2) Represents the percentage of loans, based on loan count, in our single-family credit guarantee portfolio at period end that have been modified,
including those with no changes in interest rate or maturity date, but where past due amounts are added to the outstanding principal balance of the loan.
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(3) Represents the four states that had the largest cumulative declines in home prices during the housing crisis that began in 2006, as measured using
Freddie Mac’s home price index.
(4) Represents selected states in the North Central region that have experienced adverse economic conditions since 2006.
(5) Represents two states with a judicial foreclosure process in which there are a significant number of seriously delinquent loans within our single-family
credit guarantee portfolio.
(6) HARP and other relief refinance loans are presented separately rather than in the year that the refinancing occurred (from 2009 to 2013). All other
refinance loans are presented in the year that the refinancing occurred. Prior period information has been revised to conform with the current period
presentation.
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Table 50 — Single-Family Credit Guarantee Portfolio by Attribute Combinations
Current LTV Ratio
(1)
Current LTV Ratio
of > 80 to 100(1)
Current LTV > 100(1)
Current LTV Ratio All Loans(1)
Percentage
of
Portfolio(2)
Serious
Delinquency
Rate
Percentage
of
Portfolio(2)
Serious
Delinquency
Rate
Percentage
of
Portfolio(2)
Serious
Delinquency
Rate
Percentage
of
Portfolio(2)
Percentage
Modified(3)
Serious
Delinquency
Rate
As of December 31, 2013
1.1%
7.9%
0.8%
11.9%
0.7%
17.9%
2.6%
21.3%
11.0%
0.2
0.1
<0.1
<0.1
1.4
2.4
0.5
0.1
0.1
<0.1
3.1
46.7
15.8
3.4
0.6
<0.1
66.5
0.3
50.4
16.5
3.6
0.7
0.1
3.8
9.9
12.3
3.9
7.0
5.3
2.2
4.9
9.8
3.6
4.5
1.1
0.4
1.0
4.3
2.0
0.8
5.6
1.6
0.5
1.6
5.0
9.2
<0.1
<0.1
<0.1
<0.1
0.8
1.1
0.1
0.1
0.1
<0.1
1.4
14.6
1.1
0.5
0.6
0.1
16.9
0.1
16.6
1.2
0.6
0.7
0.1
3.8
16.0
20.9
9.8
11.9
9.1
2.5
11.0
15.9
5.5
9.0
2.7
0.4
5.1
10.1
1.8
2.8
12.0
3.7
0.6
6.2
11.0
6.2
<0.1
<0.1
<0.1
<0.1
0.7
1.2
<0.1
<0.1
0.1
<0.1
1.3
6.3
0.4
0.2
0.6
<0.1
7.5
<0.1
8.1
0.3
0.2
0.8
0.1
3.0
28.7
31.3
17.5
18.3
15.2
2.1
25.3
28.3
6.3
15.8
7.3
0.7
16.3
18.9
3.0
8.0
22.6
9.3
0.9
18.4
20.4
12.1
0.2
0.1
<0.1
<0.1
2.9
4.7
0.6
0.2
0.3
<0.1
5.8
67.6
17.3
4.1
1.8
0.1
90.9
0.4
75.1
18.0
4.4
2.2
0.3
1.1
13.3
0.6
5.5
17.4
16.3
0.5
3.5
0.4
2.4
12.6
3.8
0.1
0.8
0.2
0.9
2.6
7.9
5.4
0.1
1.4
0.2
9.2
3.7
12.9
22.8
5.7
10.0
8.0
2.2
8.5
19.5
4.9
7.2
1.9
0.4
2.3
11.3
2.1
1.7
8.5
2.8
0.5
3.1
12.5
8.6
71.3%
1.3%
19.2%
3.8%
9.5%
9.9%
100.0%
3.8%
2.4%
0.1%
0.4
0.3
0.3
0.3
1.4
0.5
0.8
0.6
0.5
0.7
3.1
10.7
17.6
9.4
8.6
20.2
66.5
0.3
11.5
19.0
10.3
9.4
21.1
5.4%
10.3
7.5
5.3
4.8
7.0
3.6
6.6
5.0
3.2
3.4
4.5
0.6
1.2
1.2
0.6
0.6
0.8
5.6
0.9
1.8
1.8
1.0
0.8
0.3%
0.2
0.1
0.1
0.1
0.8
0.3
0.3
0.3
0.2
0.3
1.4
3.8
4.6
3.2
1.8
3.5
16.9
0.1
4.2
5.1
3.7
2.1
4.1
8.6%
18.1
11.7
10.3
9.2
11.9
6.7
14.0
9.2
6.8
7.5
9.0
1.9
4.3
2.9
1.4
2.9
2.8
12.0
2.6
5.8
4.0
2.5
3.5
0.1%
0.2
0.2
<0.1
0.2
0.7
0.3
0.4
0.3
<0.1
0.3
1.3
1.5
1.4
2.0
0.2
2.4
7.5
<0.1
1.9
1.9
2.5
0.3
2.9
13.4%
25.6
20.8
15.8
13.1
18.3
11.1
23.0
18.2
11.7
12.4
15.8
5.3
12.0
10.0
3.9
6.4
8.0
22.6
6.9
15.1
12.1
6.6
7.4
0.5%
0.8
0.6
0.4
0.6
2.9
1.1
1.5
1.2
0.7
1.3
5.8
16.0
23.6
14.6
10.6
26.1
90.9
0.4
17.6
26.0
16.5
11.8
28.1
16.5%
19.6
18.2
11.8
19.9
17.4
11.9
13.4
13.2
7.8
16.1
12.6
2.1
2.4
3.0
1.2
3.7
2.6
7.9
3.3
3.8
4.6
2.2
4.7
8.0%
14.4
11.2
6.7
7.4
10.0
5.8
10.3
8.5
4.2
5.8
7.2
1.2
2.2
2.4
0.8
1.3
1.7
8.5
1.8
3.2
3.4
1.4
1.7
71.3%
1.3%
19.2%
3.8%
9.5%
9.9%
100.0%
3.8%
2.4%
By Product Type
FICO scores < 620:
20 and 30- year or more
amortizing fixed-rate
15- year amortizing fixed-rate
ARMs/adjustable rate(4)
Interest-only(5)
Other(6)
Total FICO scores < 620
FICO scores of 620 to 659:
20 and 30- year or more
amortizing fixed-rate
15- year amortizing fixed-rate
ARMs/adjustable rate(4)
Interest-only(5)
Other(6)
Total FICO scores of 620 to 659
20 and 30- year or more
amortizing fixed-rate
15- year amortizing fixed-rate
ARMs/adjustable rate(4)
Interest-only(5)
Other(6)
Total FICO scores not available
All FICO scores:
20 and 30- year or more
amortizing fixed-rate
15- year amortizing fixed-rate
ARMs/adjustable rate(4)
Interest-only(5)
Other(6)
Total single-family credit
guarantee portfolio(7)
By Region(8)
FICO scores < 620:
North Central
Northeast
Southeast
Southwest
West
Total FICO scores < 620
FICO scores of 620 to 659:
North Central
Northeast
Southeast
Southwest
West
Total FICO scores of 620 to 659
North Central
Northeast
Southeast
Southwest
West
Total FICO scores not available
All FICO scores:
North Central
Northeast
Southeast
Southwest
West
Total single-family credit
guarantee portfolio(7)
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By Product Type
FICO scores < 620:
20 and 30- year or more
amortizing fixed-rate
15- year amortizing fixed-rate
ARMs/adjustable rate(4)
Interest-only(5)
Other(6)
Total FICO scores < 620
FICO scores of 620 to 659:
20 and 30- year or more
amortizing fixed-rate
15- year amortizing fixed-rate
ARMs/adjustable rate(4)
Interest-only(5)
Other(6)
Total FICO scores of 620 to 659
20 and 30- year or more
amortizing fixed-rate
15- year amortizing fixed-rate
ARMs/adjustable rate(4)
Interest-only(5)
Other(6)
Total FICO scores not available
All FICO scores:
20 and 30- year or more
amortizing fixed-rate
15- year amortizing fixed-rate
ARMs/adjustable rate(4)
Interest-only(5)
Other(6)
Total single-family credit
guarantee portfolio(7)
By Region(8)
FICO scores < 620:
North Central
Northeast
Southeast
Southwest
West
Total FICO scores < 620
FICO scores of 620 to 659:
North Central
Northeast
Southeast
Southwest
West
Total FICO scores of 620 to 659
North Central
Northeast
Southeast
Southwest
West
Total FICO scores not available
All FICO scores:
North Central
Northeast
Southeast
Southwest
West
Total single-family credit
guarantee portfolio(7)
Current LTV
80(1)
Current LTV Ratio
of > 80 to 100(1)
Current LTV > 100(1)
Current LTV Ratio All Loans(1)
Percentage
of
Portfolio(2)
Serious
Delinquency
Rate
Percentage
of
Portfolio(2)
Serious
Delinquency
Rate
Percentage
of
Portfolio(2)
Serious
Delinquency
Rate
Percentage
of
Portfolio(2)
Percentage
Modified(3)
Serious
Delinquency
Rate
As of December 31, 2012
1.0%
8.3%
0.8%
13.4%
0.9%
22.9%
2.7%
18.8%
13.4%
0.2
0.1
<0.1
<0.1
1.3
2.2
0.6
0.1
<0.1
<0.1
2.9
40.1
14.7
3.0
0.4
<0.1
58.2
0.3
43.4
15.4
3.3
0.5
0.1
4.2
10.0
15.0
4.0
7.2
5.5
2.5
5.1
10.7
2.8
4.7
1.1
0.4
1.0
4.2
1.9
0.9
5.4
1.7
0.6
1.6
4.9
9.6
<0.1
<0.1
<0.1
<0.1
0.8
1.3
<0.1
0.1
0.1
<0.1
1.5
17.0
1.0
0.7
0.7
0.1
19.5
0.1
19.1
1.1
0.8
0.8
0.1
8.0
16.5
20.8
8.4
13.4
9.7
5.1
11.7
17.2
4.6
9.7
2.9
0.9
4.6
9.7
1.5
3.0
11.6
4.0
1.2
5.8
10.7
6.8
<0.1
<0.1
0.1
<0.1
1.0
1.7
<0.1
0.1
0.2
<0.1
2.0
9.8
0.3
0.5
1.6
0.1
12.3
0.1
12.6
0.3
0.6
1.8
0.1
9.5
26.7
33.6
14.9
23.2
18.8
8.4
23.7
30.0
7.0
19.5
9.4
2.3
15.4
20.6
2.5
10.6
23.0
11.8
2.8
17.1
22.0
10.2
0.2
0.1
0.1
<0.1
3.1
5.2
0.6
0.3
0.3
<0.1
6.4
66.9
16.0
4.2
2.7
0.2
90.0
0.5
75.1
16.8
4.7
3.1
0.3
1.2
11.4
0.6
4.9
15.3
13.8
0.6
2.6
0.5
1.9
10.7
3.3
0.1
0.6
0.2
0.7
2.3
6.5
4.9
0.1
1.2
0.2
7.9
4.5
14.1
27.6
5.7
12.2
9.8
2.7
10.9
24.4
4.7
9.0
2.6
0.5
3.4
15.0
1.9
2.3
8.9
3.7
0.6
4.3
16.3
8.9
62.7%
1.4%
21.9%
4.1%
15.4%
12.7%
100.0%
3.4%
3.3%
0.2%
0.5
0.2
0.2
0.2
1.3
0.5
0.9
0.5
0.5
0.5
2.9
9.4
15.9
8.3
8.0
16.6
58.2
0.3
10.1
17.1
9.1
8.9
17.5
5.9%
10.4
7.9
5.2
4.9
7.2
3.9
6.6
5.4
3.3
3.4
4.7
0.7
1.2
1.3
0.7
0.6
0.9
5.4
1.0
1.9
1.9
1.1
0.8
0.2%
0.2
0.2
0.1
0.1
0.8
0.3
0.4
0.3
0.2
0.3
1.5
4.4
5.2
3.5
2.1
4.3
19.5
0.1
4.8
5.9
4.0
2.5
4.7
10.4%
19.7
13.5
11.2
10.2
13.4
7.7
14.4
10.2
7.6
8.0
9.7
2.2
4.6
3.3
2.0
2.8
3.0
11.6
3.0
6.1
4.5
3.2
3.3
0.2%
0.2
0.3
<0.1
0.3
1.0
0.4
0.4
0.5
0.1
0.6
2.0
2.3
1.9
3.0
0.3
4.8
12.3
0.1
3.0
2.5
3.8
0.4
5.7
18.1%
30.6
27.7
19.5
17.3
23.2
14.5
25.8
23.9
14.5
16.1
19.5
7.0
14.2
14.2
5.9
9.1
10.6
23.0
9.0
17.6
16.7
9.3
10.2
0.6%
0.9
0.7
0.3
0.6
3.1
1.2
1.7
1.3
0.8
1.4
6.4
16.1
23.0
14.8
10.4
25.7
90.0
0.5
17.9
25.5
16.9
11.8
27.9
14.8%
16.6
16.0
10.6
18.0
15.3
10.2
11.1
11.0
6.8
14.2
10.7
1.9
2.0
2.5
1.1
3.4
2.3
6.5
3.0
3.3
4.0
2.1
4.4
10.5%
16.1
14.5
7.4
10.1
12.2
7.5
11.5
11.3
4.8
8.3
9.0
1.7
2.6
3.7
1.0
2.3
2.3
8.9
2.5
3.8
5.0
1.7
2.8
62.7%
1.4%
21.9%
4.1%
15.4%
12.7%
100.0%
3.4%
3.3%
(1) The current LTV ratios are our estimates. See endnote (3) to “Table 38 — Characteristics of the Single-Family Credit Guarantee Portfolio” for further
information.
(2) Based on UPB of the single-family credit guarantee portfolio.
(3) See endnote (2) to “Table 49 — Credit Concentrations in the Single-Family Credit Guarantee Portfolio” for further information.
(4)
(5)
Includes balloon/reset and option ARM mortgage loans.
Includes both fixed rate and adjustable rate loans. The percentages of interest-only loans which have been modified at period end reflect that a number
of these loans have not yet been assigned to their new product category (post-modification), primarily due to delays in processing.
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(6) Consist of FHA/VA and other government guaranteed mortgages.
(7) The total of all FICO scores categories may not sum due to the inclusion of loans where FICO scores are not available in the respective totals for all
loans. See endnote (5) to “Table 38 — Characteristics of the Single-Family Credit Guarantee Portfolio” for further information about our presentation
of FICO scores.
(8) Presentation with the following regional designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD,
NH, NJ, NY, PA, RI, VT, VA, WV); North Central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI);
and Southwest (AR, CO, KS, LA, MO, NE, NM, OK, TX, WY).
The table below presents foreclosure and short sale rate information for loans in our single-family credit guarantee
portfolio based on year of origination.
Table 51 — Single-Family Credit Guarantee Portfolio Foreclosure and Short Sale Rates
Year of Origination(2):
2013
2012
2011
2010
2009
Subtotal — New single-family book
HARP and other relief refinance loans(2)
2005-2008 Legacy single-family book
Pre-2005 Legacy single-family book(3)
Total
As of December 31,
2013
Percentage
of Portfolio
Foreclosure
and Short
Sale Rate(1)
2012
Foreclosure
and Short
Sale Rate(1)
2011
Foreclosure
and Short
Sale Rate(1)
16%
16
8
7
7
54
21
16
9
100%
—%
—
0.03
0.11
0.34
0.12
0.56
8.03
1.34
N/A
— %
0.01
0.05
0.23
0.09
0.36
6.87
1.20
N/A
N/A
— %
0.01
0.11
0.05
0.20
5.35
1.04
(1) Calculated for each year of origination as the number of loans that have proceeded to foreclosure transfer or short sale and resulted in a credit loss,
excluding any subsequent recoveries, during the period from origination to December 31, 2013, 2012, and 2011, respectively, divided by the number of
loans originated in that year that were acquired in our single-family credit guarantee portfolio.
(2) HARP and other relief refinance loans are presented separately rather than in the year that the refinancing occurred (from 2009 to 2013). All other
refinance loans are presented in the year that the refinancing occurred. Prior period information has been revised to conform with the current period
presentation.
(3) The foreclosure and short sale rate presented for the Pre-2005 Legacy single-family book represents the rate associated with loans originated in 2000
through 2004.
Loans originated from 2005 through 2008 have experienced higher foreclosure and short sale rates than loans originated
in other years. We attribute this performance to a number of factors, including: (a) the expansion of credit terms under which
loans were underwritten during these years; (b) an increase in the origination and our purchase of interest-only and Alt-A
mortgage products in these years; and (c) an environment of persistently high unemployment, decreasing home sales, and
broadly declining home prices in the periods following the loans’ origination.
Multifamily Mortgage Credit Risk
To manage our multifamily mortgage portfolio credit risk, we focus on several key areas: (a) using prudent standards and
processes with a pre-approval underwriting approach on the loans we purchase or guarantee; (b) selling the expected credit risk
to private investors who hold the subordinated tranches in our multifamily K Certificate transactions; (c) portfolio
diversification, particularly by product and geographical area; and (d) portfolio management activities, including loss
mitigation and use of credit enhancements. We monitor the loan performance, the underlying properties and a variety of
mortgage loan characteristics that may affect the default experience on our multifamily mortgage portfolio, such as DSCR,
LTV ratio, geographic location, payment type, and loan maturity. See “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-
PERFORMING LOANS” for information about loss mitigation activities that we have classified as TDRs and subsequent
performance information of these loans. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS” for more
information about the loans in our multifamily mortgage portfolio, including geographic concentrations of these loans.
The table below provides certain attributes of our multifamily mortgage portfolio at December 31, 2013 and 2012.
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Table 52 — Multifamily Mortgage Portfolio — by Attribute
UPB at
Delinquency Rate(1) at
December 31,
2013
December 31,
2012
December 31,
2013
December 31,
2012
(dollars in billions)
Original LTV ratio
Below 75%
75% to 80%
Above 80%
Total
Weighted average LTV ratio at origination
Maturity Dates
2013
2014
2015
2016
2017
2018
Beyond 2018
Total
Year of Acquisition or Guarantee(2)
2006 and prior
2007
2008
2009
2010
2011
2012
2013
Total
Current Loan Size
Above $25 million
Above $5 million to $25 million
$5 million and below
Total
Legal Structure
Unsecuritized loans
K Certificates
Other Freddie Mac mortgage-related securities
Other guarantee commitments
Total
Credit Enhancement
Credit-enhanced
Non-credit-enhanced
Total
Payment Type
Interest-only
Partial interest-only(3)
Amortizing
Total
$
$
$
93.1
34.1
5.6
132.8
$
70%
N/A
$
$
$
$
$
$
$
$
$
$
$
$
$
2.1
6.9
11.2
10.0
17.0
85.6
132.8
19.1
15.1
13.2
11.2
10.9
15.9
23.7
23.7
132.8
50.6
73.2
9.0
132.8
59.2
59.8
4.8
9.0
132.8
70.2
62.6
132.8
20.1
32.6
80.1
$
$
$
$
$
$
$
$
$
$
132.8
$
87.6
34.0
5.8
127.4
70%
3.3
5.8
9.8
13.0
10.9
17.3
67.3
127.4
25.2
17.8
16.6
12.2
12.0
17.0
26.6
127.4
48.5
70.0
8.9
127.4
76.6
37.2
4.2
9.4
127.4
47.8
79.6
127.4
22.8
29.8
74.8
127.4
0.06%
0.15
0.19
0.09%
0.04%
0.22
2.31
0.19%
N/A
0.86%
0.12%
0.05
—
0.43
—
0.08
0.09%
—%
0.54
0.18
—
0.13
—
—
—
0.09%
0.05%
0.11
0.14
0.09%
0.08%
0.07
0.59
—
0.09%
0.11%
0.07
0.09%
0.14%
—
0.12
0.09%
—
0.53
0.05
0.02
—
0.24
0.19%
0.17%
0.86
0.30
—
—
—
—
N/A
0.19%
0.06%
0.26
0.37
0.19%
0.08%
0.07
3.20
0.13
0.19%
0.36%
0.10
0.19%
0.05%
0.05
0.30
0.19%
N/A
(1) Our delinquency rates for multifamily loans are positively affected to the extent we have been successful in working with troubled borrowers to modify
their loans prior to becoming delinquent or by providing temporary relief through short-term loan extensions or forbearance agreements. See
“Multifamily Delinquencies” below for more information about our multifamily delinquency rates.
(2) Based on either: (a) the year of acquisition, for loans recorded on our consolidated balance sheets; or (b) the year that we issued our guarantee, for the
remaining loans in our multifamily mortgage portfolio.
(3) Represent loans that have an interest-only period and where the borrower’s payments were interest-only at the respective reporting date. Loans which
have reached the end of their interest-only period by the respective reporting date have converted to, and are classified as, amortizing loans.
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Multifamily Product Types
Most multifamily loans require a significant lump sum (i.e., balloon) payment of unpaid principal at maturity. Therefore,
the borrower’s potential inability to refinance or pay off the loan at maturity is a primary concern for us. Borrowers may be less
able to refinance their obligations during periods of rising interest rates, which could lead to default if the borrower is unable to
find affordable refinancing before the loan matures. Of the $132.8 billion in UPB of our multifamily mortgage portfolio as of
December 31, 2013, approximately 7% will mature during 2014 and 2015, and the remaining 93% will mature in 2016 and
beyond.
Our multifamily mortgage portfolio consists of product types that are categorized based on loan terms. Multifamily loans
may: (a) be amortizing or interest-only (for the full term or a portion thereof); and (b) have a fixed or variable rate of interest.
Our multifamily loans generally have shorter terms than single-family mortgages and typically have balloon maturities ranging
from five to ten years. At December 31, 2013 and 2012, approximately 60% and 59%, respectively, of our multifamily
mortgage portfolio consisted of amortizing loans, which reduce our credit exposure over time since the UPB of the loan
declines with each mortgage payment. In addition, as of December 31, 2013 and 2012, approximately 25% and 23%,
respectively, of our multifamily mortgage portfolio consisted of partial interest-only loans, which after a defined period of time
will begin to include amortization of principal.
Multifamily Credit Enhancements
Our primary business model in the Multifamily segment is to purchase multifamily mortgage loans for aggregation and
then securitization through issuance of multifamily K Certificates. With this model, we have securitized $71.5 billion in UPB of
multifamily loans between 2009 and 2013 and have attracted private capital to the multifamily market from investors who
purchase subordinated securities that we do not issue or guarantee. These securities are backed by loans that are sourced by our
seller/servicers and directly underwritten by us. Our K Certificate transactions are structured such that private investors (who
hold unguaranteed subordinated securities) are the first to absorb losses on the underlying loans and the amount of
subordination to the guaranteed certificates is set at a level that we believe is sufficient to cover the expected credit losses on
the loans. As a result, we believe private investors will absorb the expected credit risk in these transactions and thereby reduce
the loss exposure to us and U.S. taxpayers. As of December 31, 2013, we have not realized any credit losses on our K
Certificates. At December 31, 2013 and 2012, the UPB of K Certificates with subordination coverage was $59.3 billion and
$36.7 billion, respectively, and the average subordination coverage on these securities was 18% and 17%, respectively. See
“NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES” for additional information about credit protections and
other forms of credit enhancements covering loans in our multifamily mortgage portfolio.
Multifamily Delinquencies
We report multifamily delinquency rates based on UPB of mortgage loans in our multifamily mortgage portfolio that are
two monthly payments or more past due or in the process of foreclosure, as reported by our servicers. Mortgage loans that have
been modified are not counted as delinquent as long as the borrower is less than two monthly payments past due under the
modified terms.
There were 16 and 33 delinquent loans in our multifamily mortgage portfolio at December 31, 2013 and 2012,
respectively. Improvements in market fundamentals and multifamily property values led to improved delinquency rates for
most major participants in the market during 2013. Our multifamily mortgage portfolio delinquency rate of 0.09% and 0.19% at
December 31, 2013 and 2012, respectively, reflects continued strong portfolio performance and improving market
fundamentals. Our delinquency rate for credit-enhanced loans was 0.11% and 0.36% at December 31, 2013 and 2012,
respectively, and for non-credit-enhanced loans was 0.07% and 0.10% at December 31, 2013 and 2012, respectively. As of
December 31, 2013, approximately 62% of our multifamily loans that were two or more monthly payments past due, measured
on a UPB basis, had credit enhancements that we currently believe will mitigate our expected losses on those loans and
guarantees.
Non-Performing Assets
Non-performing assets consist of non-performing loans and REO assets, net. We place non-performing loans on non-
accrual status when we believe the collectability of interest and principal on a loan is not reasonably assured, unless the loan is
well secured and in the process of collection. When a loan is placed on non-accrual status, any interest income accrued but
uncollected is reversed. Thereafter, interest income is recognized only upon receipt of cash payments.
We classify TDRs as non-performing loans. TDRs represent those loans where we have granted a concession to a
borrower that is experiencing financial difficulties. Loans that have been classified as TDRs remain categorized as non-
performing throughout the remaining life of the loan regardless of whether the borrower makes payments which return the loan
to a current payment status. TDRs include HAMP and non-HAMP loan modifications, as well as loans in modification trial
periods and loans subject to certain other loss mitigation actions. See “NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES” and “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS” for further
information about our TDRs.
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The table below provides detail on non-performing loans and REO assets on our consolidated balance sheets and non-
performing loans underlying our financial guarantees.
Table 53 — Non-Performing Assets(1)
December 31,
2013
2012
2011
2010
2009
(dollars in millions)
Non-performing mortgage loans — on balance sheet:
Single-family TDRs:
Less than three monthly payments past due
$
78,033
$
65,784
$
44,440
$
26,612
$
Seriously delinquent
Multifamily TDRs(2)
Total TDRs
Other seriously delinquent single-family loans(3)
Other multifamily loans(4)
19,573
712
98,318
23,280
590
22,008
815
88,607
39,711
1,411
11,639
893
56,972
63,205
1,819
3,144
911
30,667
84,272
1,750
Total non-performing mortgage loans — on balance sheet
122,188
129,729
121,996
116,689
Non-performing mortgage loans — off-balance sheet:
Single-family loans
Multifamily loans
Total non-performing mortgage loans — off-balance sheet
Real estate owned, net
Total non-performing assets
Loan loss reserves as a percentage of our non-performing mortgage loans
Total non-performing assets as a percentage of the total mortgage portfolio,
excluding non-Freddie Mac securities
871
381
1,252
4,551
1,096
474
1,570
4,378
1,230
246
1,476
5,680
1,450
198
1,648
7,068
$ 127,991
$ 135,677
$ 129,152
$ 125,405
$ 104,984
20.0%
7.1%
23.5%
7.5%
32.0%
6.8%
33.7%
6.4%
33.8%
5.2%
711
477
229
1,417
12,106
1,196
14,719
85,395
178
85,573
4,692
(1) Mortgage loan amounts are based on UPB and REO, net is based on carrying values.
(2) As of December 31, 2013, 2012, 2011, 2010, and 2009, approximately $0.7 billion, $0.8 billion, $0.9 billion, $0.9 billion, and $0.3 billion of these
amounts were current, respectively.
(3) Represents loans recognized by us on our consolidated balance sheets, including loans removed from PC trusts due to the borrower’s serious
delinquency.
(4) Of these amounts, $0.6 billion, $1.4 billion, $1.8 billion, $1.6 billion, and $1.1 billion of UPB were current at December 31, 2013, 2012, 2011, 2010,
and 2009, respectively.
Our non-performing assets declined to $128.0 billion as of December 31, 2013, from $135.7 billion as of December 31,
2012. We expect our non-performing assets, including loans deemed to be TDRs, to remain at elevated levels in 2014. Our loan
loss reserves as a percentage of our non-performing mortgage loans also declined at December 31, 2013 compared to
December 31, 2012 primarily due to a decline in our loan loss reserves. See “Credit Loss Performance — Loan Loss Reserves”
for more information about the decline in our loan loss reserves.
The table below provides detail by region for REO activity. Our REO activity consists almost entirely of single-family
residential properties. See “Table 50 — Single-Family Credit Guarantee Portfolio by Attribute Combinations” for information
about regional serious delinquency rates of loans in our single-family credit guarantee portfolio.
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Table 54 — REO Activity by Region(1)
REO Inventory
Single-family:
Inventory, beginning of year
Acquisitions, by region:
Northeast
Southeast
North Central
Southwest
West
Total single-family acquisitions
Dispositions, by region:
Northeast
Southeast
North Central
Southwest
West
Total single-family dispositions
Inventory, end of year
Multifamily:
Inventory, beginning of year
Acquisitions
Dispositions
Inventory, end of year
Total inventory, end of year
December 31,
2013
2012
2011
(number of properties)
49,071
10,023
23,827
20,834
6,996
9,001
70,681
(7,071)
(20,956)
(25,946)
(8,395)
(10,077)
(72,445)
47,307
6
4
(9)
1
60,535
7,352
23,906
27,586
10,197
13,771
82,812
(7,544)
(25,803)
(28,137)
(12,134)
(20,658)
(94,276)
49,071
20
6
(20)
6
72,079
6,969
23,182
26,255
12,858
29,367
98,631
(8,883)
(28,298)
(25,970)
(13,098)
(33,926)
(110,175)
60,535
14
25
(19)
20
47,308
49,077
60,555
(1) See endnote (8) to “Table 50 — Single-Family Credit Guarantee Portfolio by Attribute Combinations” for a description of these regions.
Our REO inventory (measured in number of properties) declined 4% from December 31, 2012 to December 31, 2013
primarily due to lower foreclosure activity in 2013 as a result of our loss mitigation efforts (e.g., a significant number of
borrowers completing short sales rather than foreclosures) and a declining amount of delinquent loans. We expect our REO
acquisitions and dispositions to remain at elevated levels in the near term, as we have a large REO inventory and a significant
number of seriously delinquent loans in our single-family credit guarantee portfolio.
The volume of our single-family REO acquisitions in recent periods has been significantly affected by the lengthening of
the foreclosure process, which extends the time it takes for loans to be foreclosed upon and the underlying property to transition
to REO. We expect that the length of the foreclosure process will continue to remain above historical levels, particularly in
states that require a judicial foreclosure process. Foreclosures generally take longer to complete in states where judicial
foreclosures (those conducted under the supervision of a court) are required than in states where non-judicial foreclosures are
permitted. In addition, our expanded loss mitigation efforts are providing borrowers with viable alternatives to foreclosure. As a
result of the continued high level of loss mitigation efforts, fewer of our loans are proceeding through foreclosure to REO
acquisition.
Our single-family REO acquisitions in 2013 were most significant in the states of Florida, Illinois, Michigan, and Ohio,
which collectively represented 40% of total single-family REO acquisitions during that period, based on the number of
properties, and comprised 42% of our total single-family REO property inventory at December 31, 2013. We experienced an
increase in REO acquisitions during 2013 compared to 2012 in the Northeast region and REO acquisitions remained high in the
Southeast region. The high REO acquisition volume in these regions was primarily due to higher foreclosure volume in
Maryland, Pennsylvania, and Florida. The North Central region had the largest number of REO properties and comprised 33%
and 42% of our REO property inventory, based on the number of properties, as of December 31, 2013 and 2012, respectively.
This region generally has experienced more challenging economic conditions, includes a number of states with longer
foreclosure timelines due to the local laws and foreclosure process, and has housing markets with generally lower demand and
lower home values than in other regions. See "NOTE 6: REAL ESTATE OWNED" for more information on our REO
properties.
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Our REO acquisition activity is disproportionately high for certain types of loans in our single-family credit guarantee
portfolio, including loans with certain higher-risk characteristics. For example, the percentage of interest-only and Alt-A loans
in our single-family credit guarantee portfolio, based on UPB, was approximately 2% and 3%, respectively, at December 31,
2013. The percentage of our REO acquisitions in 2013 that had been financed by either of these loan types represented
approximately 24% of our total REO acquisitions, based on loan amount prior to acquisition. In addition, loans from our
2005-2008 Legacy single-family book comprised approximately 78% of our REO acquisition activity during 2013.
We continue to experience significant variability in the average time for foreclosure by state. For example, during 2013,
the average time for completion of foreclosures associated with loans in our single-family credit guarantee portfolio, excluding
Other Guarantee Transactions, ranged from 391 days in Michigan to 1,231 days in Florida (as measured from the date of the
last scheduled payment made by the borrower).
We are unable to market a significant portion of our REO property inventory at any given time, which can increase the
average holding period of our inventory. For example, some jurisdictions require a period of time after foreclosure during
which the borrower may reclaim the property. During this period, we generally are not able to sell the property. As of both
December 31, 2013 and 2012, the percentage of our single-family REO property inventory that had been held for sale longer
than one year was 5.8%. Though it varied significantly in different states, the average holding period of our single-family REO
properties, excluding any post-foreclosure period during which borrowers may reclaim a foreclosed property, was 209 days and
200 days, for our REO dispositions during 2013 and 2012, respectively.
The table below provides information about our REO properties at December 31, 2013 and 2012.
Table 55 — Single-Family REO Property Status
Unable to market:
Redemption period(1)
Occupied (waiting for eviction or vacancy)
Other(2)
Subtotal — unable to market
Pre-listing(3)
Pending settlement for sale(4)
Available for sale
Total
As of December 31,
2013
2012
(Percent of properties)
11%
18
4
33
23
14
30
100%
15%
18
3
36
23
14
27
100%
(1) Consists of properties located in jurisdictions that require a period of time after foreclosure during which the borrower may reclaim the property.
Includes properties where marketing is on hold, including where we are involved in litigation or other legal and regulatory issues concerning the
(2)
property.
(3) Consists of properties that are not being actively marketed because we are evaluating the property condition and preparing the property for sale.
(4) Consists of properties where we have an executed sales contract and settlement has not yet occurred.
As shown in the table above, a significant portion of the properties in our REO inventory are unable to be marketed
because they remain occupied or are located in states with a redemption period, particularly in the states of Illinois, Michigan,
and Minnesota. The percentage of our REO inventory that is in the pre-listing category also remained high at December 31,
2013, primarily because many of these properties are under repair or are otherwise being prepared for sale.
Credit Loss Performance
Many loans that are seriously delinquent, or in foreclosure, result in credit losses. The table below provides detail on our
credit loss performance associated with mortgage loans and REO assets on our consolidated balance sheets and underlying our
non-consolidated mortgage-related financial guarantees.
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Table 56 — Credit Loss Performance
REO
REO balances, net:
Single-family
Multifamily
Total
REO operations (income) expense:
Single-family
Multifamily
Total
Charge-offs
Single-family:
Charge-offs, gross(1) (including $9.0 billion, $13.5 billion, and $14.7 billion relating to
loan loss reserves, respectively)
Recoveries(2)
Single-family, net
Multifamily:
Charge-offs, gross(1) (including $7 million, $36 million, and $75 million relating to loan
loss reserves, respectively)
Recoveries(2)
Multifamily, net
Total Charge-offs:
Charge-offs, gross(1) (including $9.0 billion, $13.6 billion, and $14.8 billion relating to
loan loss reserves, respectively)
Recoveries(2)
Total Charge-offs, net
Credit Losses(3)
Single-family
Multifamily
Total
Total (in bps)(4)
December 31,
2013
2012
2011
(dollars in millions)
$
$
$
$
$
$
$
$
$
$
$
$
4,541
10
4,551
$
$
(124) $
(16)
(140) $
4,314
64
4,378
62
(3)
59
$
$
$
$
9,225
$
13,825
$
(4,313)
4,912
$
(2,262)
11,563
$
29
$
(1)
28
$
39
$
(2)
37
$
9,254
$
13,864
$
(4,314)
4,940
4,788
12
4,800
26.7
$
$
$
(2,264)
11,600
11,625
34
11,659
63.8
$
$
$
5,548
132
5,680
596
(11)
585
15,149
(2,764)
12,385
83
(1)
82
15,232
(2,765)
12,467
12,981
71
13,052
68.1
(1) Represent the carrying amount of a loan that has been discharged in order to remove the loan from our consolidated balance sheet at the time of
resolution, regardless of when the impact of the credit loss was recorded on our consolidated statements of comprehensive income. Charge-offs
primarily result from foreclosure transfers and short sales and are generally calculated as the recorded investment of a loan at the date it is discharged
less the estimated value in final disposition or actual net sales in a short sale. Multifamily charge-offs also include cumulative fair value losses
recognized through the date of foreclosure for loans which we elected to carry at fair value at the time of our purchase.
(2) Recoveries of charge-offs primarily result from foreclosure alternatives and REO acquisitions on loans where: (a) a share of default risk has been
assumed by mortgage insurers, servicers, or other third parties through credit enhancements; or (b) we received a reimbursement of our losses from a
seller/servicer associated with a repurchase request on a loan that experienced a foreclosure transfer or a foreclosure alternative. Includes $2.8 billion,
$0.7 billion, and $1.0 billion in 2013, 2012, and 2011, respectively, related to repurchase requests from our seller/servicers (including $2.1 billion in
2013 and $0, in both 2012 and 2011, respectively, related to settlement agreements with certain sellers to release specified loans from certain
repurchase obligations in exchange for one-time cash payments).
(3) Excludes foregone interest on non-performing loans, which reduces our net interest income but is not reflected in our total credit losses. In addition,
excludes certain other market-based credit losses, including those: (a) incurred on our investments in mortgage loans and mortgage-related securities;
and (b) recognized in our consolidated statements of comprehensive income.
(4) Calculated as credit losses divided by the average carrying value of our total mortgage portfolio, excluding non-Freddie Mac mortgage-related
securities and that portion of REMICs and Other Structured Securities that are backed by Ginnie Mae Certificates.
Our credit losses are generally measured at the conclusion of the loan and related collateral resolution process. Our
expenses associated with home retention actions (e.g., loan modifications) are generally not reflected in our credit losses. There
is a significant lag in time from the start of loan workout activities by our servicers on problem loans (e.g., seriously delinquent
loans) to the final resolution of those loans by the completion of foreclosures (and subsequent REO sales) and foreclosure
alternatives (e.g., short sales). Single-family charge-offs, gross, for 2013 and 2012, were $9.2 billion and $13.8 billion,
respectively, and were associated with approximately $21.2 billion and $28.1 billion in UPB of loans for 2013 and 2012. Our
single-family charge-offs, gross, declined in 2013, compared to 2012, primarily due to improvements in home prices in recent
periods in many of the areas in which we have had significant foreclosure and short sale activity. The decline in single-family
charge-offs, net, in 2013 also includes recoveries of: (a) $2.1 billion related to settlement agreements with certain sellers to
release specified loans from certain repurchase obligations in exchange for one-time cash payments; and (b) $0.2 billion related
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to an agreement to resolve outstanding and future primary mortgage insurance claims on certain loans with one of our mortgage
insurers.
To a lesser extent, charge-offs also declined due to slowing volumes of foreclosures in our single-family guarantee
portfolio since fewer loans transitioned to foreclosure in 2013, compared to 2012. We expect our charge-offs and credit losses
to continue to remain elevated in 2014 due to the large number of single-family non-performing loans that will likely be
resolved.
Our single-family credit losses during 2013 were high in California (since it represents a significant portion of our single-
family credit guarantee portfolio) and credit losses continued to be disproportionately high in Florida, Nevada, and Arizona.
Collectively, these four states comprised approximately 47% of our total credit losses in 2013. We estimate that these states had
the largest cumulative declines in home prices during the housing crisis that began in 2006, as measured by our home price
index. Our 2005-2008 Legacy single-family book comprised approximately 16% of our single-family credit guarantee
portfolio, based on UPB at December 31, 2013; however, these loans accounted for approximately 81% of our credit losses
during 2013. In addition, although Alt-A loans comprised approximately 3% of our single-family credit guarantee portfolio at
December 31, 2013, these loans accounted for approximately 26% of our credit losses during 2013. At December 31, 2013,
loans in states with a judicial foreclosure process comprised 40% of our single-family credit guarantee portfolio, based on
UPB, while loans in these states contributed to approximately 61% of our credit losses recognized in 2013. We expect the
portion of our credit losses related to loans in states with judicial foreclosure processes will remain high in the near term as the
substantial backlog of loans awaiting court proceedings in those states transitions to REO or other loss events.
The table below provides loss severity information for loans in our single-family credit guarantee portfolio.
Table 57 — Severity Ratios for Single-Family Loans
REO disposition severity ratio:(1)
Florida
Illinois
California
Nevada
Maryland
Total U.S
Short sale severity ratio(2)
12/31/2013
9/30/2013
6/30/2013
3/31/2013
12/31/2012
For the Three Months Ended
40.4%
40.5%
42.9%
44.5%
46.2%
43.4
24.4
36.1
37.4
35.8
32.5
43.7
28.7
36.4
38.0
34.9
34.5
47.2
30.2
37.9
39.0
35.8
36.5
49.9
35.2
44.1
42.3
39.1
38.0
50.1
38.1
49.0
47.8
39.5
38.6
(1) States presented represent the five states where our credit losses were greatest during 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, net of selling expenses.
(2) Calculated as the amount of our losses recorded on short sales during the respective quarterly period divided by the aggregate UPB of the related loans.
The amount of losses recognized on short sales is equal to the amount by which the UPB of the loans exceeds the amount of sales proceeds, net of
selling expenses.
The table below provides detail by region for charge-offs and recoveries.
Table 58 — Single-Family Charge-offs and Recoveries by Region(1)
Year Ended December 31,
2013
Charge-offs,
gross
Recoveries(2)
Charge-offs,
net
Charge-offs,
gross
2012
Recoveries(2)
(in millions)
Charge-offs,
net
Charge-offs,
gross
Recoveries(2)
Charge-offs,
net
2011
Northeast
Southeast
North Central
Southwest
West
Total
$
1,357
$
(656) $
701
$
1,180
$
(249) $
931
$
1,033
$
(226) $
3,015
1,870
394
2,589
(1,331)
(810)
(245)
(1,271)
1,684
1,060
149
1,318
3,530
2,726
647
5,742
(694)
(526)
(160)
(633)
2,836
2,200
487
5,109
3,210
2,502
777
7,627
(693)
(615)
(243)
(987)
807
2,517
1,887
534
6,640
$
9,225
$
(4,313) $
4,912
$
13,825
$
(2,262) $
11,563
$
15,149
$
(2,764) $
12,385
(1) See endnote (8) to “Table 50 — Single-Family Credit Guarantee Portfolio by Attribute Combinations” for a description of these regions.
(2) See endnote (2) to "Table 56 — Credit Loss Performance" for information about our recoveries of charge-offs.
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As shown in the table above, our charge-offs, net, declined during 2013 compared to 2012 in all regions of the U.S., and
benefited from settlement agreements in 2013 with several of our sellers to release specified loans from certain repurchase
obligations in exchange for one-time cash payments. We continued to experience high foreclosure volume in the North Central
region during 2013, particularly in Illinois, Michigan, and Ohio. In addition, the volume of foreclosures and related charge-offs
increased in 2013 compared to 2012 in the Southeast region, which was due to significant foreclosure activity in the state of
Florida. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS” for additional information about our credit
losses.
Loan Loss Reserves
We maintain mortgage-related loan loss reserves at levels we believe appropriate to absorb probable incurred losses on
mortgage loans held-for-investment on our consolidated balance sheets and those underlying Freddie Mac mortgage-related
securities and other guarantee commitments. Determining the loan loss reserves is complex and requires significant
management judgment about matters that involve a high degree of subjectivity. See “NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES” for information on our accounting policies for allowance for loan losses and reserve for guarantee
losses and impaired loans.
The table below summarizes our loan loss reserves activity for held-for-investment mortgage loans recognized on our
consolidated balance sheets and underlying Freddie Mac mortgage-related securities and other guarantee commitments, in total.
Table 59 — Loan Loss Reserves Activity(1)
Total loan loss reserves:
Beginning balance
Adjustments to beginning balance(2)
Provision (benefit) for credit losses
Charge-offs, gross(3)
Recoveries(4)
Transfers, net(5)
Ending balance
Components of loan loss reserves:
Single-family
Multifamily
2013
2012
2011
2010
2009
Year Ended December 31,
(dollars in millions)
$
30,890
$
39,461
$
39,926
$
33,857
$
15,618
—
(2,465)
(9,002)
4,314
992
24,729
24,578
151
$
$
$
—
1,890
(13,556)
2,264
831
30,890
30,508
382
$
$
$
—
10,702
(14,810)
2,765
878
39,461
38,916
545
$
$
$
(186)
17,218
(16,322)
3,363
1,996
39,926
39,098
828
$
$
$
—
29,530
(9,402)
2,088
(3,977)
33,857
33,026
831
$
$
$
Total loan loss reserve, as a percentage of the total mortgage
portfolio, excluding non-Freddie Mac securities
1.37%
1.71%
2.08%
2.03%
1.69%
(1) Consists of reserves for loans held-for-investment and those underlying Freddie Mac mortgage-related securities and other guarantee commitments.
(2) Adjustments relate to the adoption of amendments to the accounting guidance for transfers of financial assets and consolidation of VIEs.
(3) Charge-offs related to loan loss reserves represent the amount of a loan that has been discharged to remove the loan from our consolidated balance
sheet principally due to either a foreclosure transfer or a short sale. Charge-offs exclude $252 million, $308 million, $422 million, $528 million, and
$280 million, for the years ended December 31, 2013, 2012, 2011, 2010, and 2009, respectively, related to: (a) amounts recorded as losses on loans
purchased within other expenses on our consolidated statements of comprehensive income, which relate to certain loans purchased under financial
guarantees; or (b) cumulative fair value losses recognized through the date of foreclosure for Multifamily loans which we elected to carry at fair value
at the time of our purchase.
(4) See endnote (2) to "Table 56 — Credit Loss Performance" for information about our recoveries of charge-offs.
(5) Consist primarily of: (a) amounts related to settlement agreements with certain sellers where the transfer relates to recoveries received under these
agreements to compensate us for previously incurred and recognized losses; (b) reclassified single-family reserves related to our removal of loans
previously held by consolidated trusts; and (c) net amounts attributable to recapitalization of past due interest on modified mortgage loans.
Our single-family loan loss reserves declined from $30.5 billion at December 31, 2012 to $24.6 billion at December 31,
2013, reflecting continued high levels of loan charge-offs compared to levels before 2009. This decline was also due to
improvements in borrower payment performance and lower severity ratios for REO dispositions and short sale transactions
largely resulting from the improvements in home prices in most areas during the period.
In recent periods, including 2013, the portion of our loan loss reserves attributable to individually impaired loans
increased while the portion of our loan loss reserves determined on a collective basis declined. Our loan loss reserves
attributable to individually impaired loans represent 75% of our loan loss reserves at December 31, 2013. This reflects a
significant increase in TDRs over the past three years and the reserves associated with these loans largely reflect the
concessions we have provided to the borrowers at the point of loan modification. The majority of these modified loans were
current and performing at December 31, 2013. Although the housing market continued to significantly improve in many
geographic areas, we expect that our loan loss reserves may remain elevated for an extended period because: (a) a significant
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portion of our reserves are associated with loans classified as individually impaired (e.g., modified loans) that are less than
three months past due, and we are required to maintain a loss reserve on such loans until they are fully repaid or complete a
short sale or foreclosure; and (b) the resolution of problem loans takes considerable time, often several years in the case of
foreclosure.
As of December 31, 2013 and 2012, the recorded investment of individually impaired single-family mortgage loans was
$98.1 billion and $89.3 billion, respectively, and the loan loss reserves associated with these loans were $18.6 billion and $17.9
billion, respectively. Our loan loss reserve associated with individually impaired single-family loans as a percentage of the total
recorded investment of these loans was 19% and 20% of the balance as of December 31, 2013 and 2012, respectively. Our loan
loss reserve associated with collectively evaluated single-family loans as a percentage of the total recorded investment of these
loans was 0.4% and 0.8% of the balance as of December 31, 2013 and 2012, respectively. See “Table 4.4 — Net Investment in
Mortgage Loans” for information about collectively evaluated and individually evaluated loans on our consolidated balance
sheets. See “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS” for additional information about
our impaired loans. See “CONSOLIDATED RESULTS OF OPERATIONS — Benefit (Provision) for Credit Losses,” for a
discussion of our benefit (provision) for credit losses.
The table below summarizes our net investment for individually impaired single-family mortgage loans on our
consolidated balance sheets for which we have recorded a specific reserve.
Table 60 — Single-Family Impaired Loans with Specific Reserve Recorded
TDRs (recorded investment):
TDRs, at January 1,
New additions
Repayments
Loss events(1)
TDRs, at December 31,
Other (recorded investment)(2)
Total impaired loans with specific reserve
Total allowance for loan losses of individually impaired single-family loans
Net investment, at December 31,
2013
2012
# of Loans
Amount
# of Loans
Amount
(dollars in millions)
449,145
$
129,428
(29,877)
(34,199)
514,497
13,790
528,287
$
83,484
20,234
(5,074)
(6,139)
92,505
1,195
93,700
(18,554)
75,146
252,749
$
226,214
(10,442)
(19,376)
449,145
18,416
467,561
$
53,494
35,816
(2,070)
(3,756)
83,484
1,672
85,156
(17,935)
67,221
(1) Foreclosure transfers or foreclosure alternatives, such as a deed in lieu of foreclosure or short sale transaction.
(2) Loans impaired upon purchase as of December 31.
Credit Risk Sensitivity
Under a 2005 agreement with FHFA, then OFHEO, we are required to disclose the estimated increase in the NPV of
future expected credit losses for our single-family credit guarantee portfolio over a ten year period as the result of an immediate
5% decline in home prices nationwide, followed by a stabilization period and return to the base case. This sensitivity analysis is
hypothetical and may not be indicative of our actual results. We do not use this analysis for determination of our reported
results under GAAP. The estimate of our portfolio’s credit sensitivity to a 5% home price decline (with this scenario’s
assumptions) has decreased during 2013, which we believe is primarily due to the combination of improvement in home prices
in most of the U.S. as well as the decline in our 2005-2008 Legacy single-family book.
The table below presents the estimated credit loss sensitivity of our single-family credit guarantee portfolio, based on
assumptions required by FHFA, both before and after consideration of credit enhancements, measured at the end of the last five
quarterly periods.
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Table 61 — Single-Family Credit Loss Sensitivity
At:
December 31, 2013
September 30, 2013
June 30, 2013
March 31, 2013
December 31, 2012
Before Receipt of
Credit Enhancements(1)
After Receipt of Credit
Enhancements(2)
NPV(3)
NPV Ratio(4)
(dollars in millions, ratios in bps)
NPV(3)
NPV Ratio(4)
$
$
$
$
$
3,931
4,059
4,000
4,961
6,356
23.8
24.6
24.3
30.3
38.8
$
$
$
$
$
3,628
3,734
3,663
4,575
5,908
21.9
22.6
22.2
27.9
36.1
(1) Assumes that none of the credit enhancements currently covering our mortgage loans have any mitigating effect on our credit losses.
(2) Assumes we collect amounts due from credit enhancement providers after giving effect to certain assumptions about counterparty default rates.
(3) Based on the single-family credit guarantee portfolio, excluding REMICs and Other Structured Securities backed by Ginnie Mae Certificates.
(4) Calculated as the ratio of NPV of increase in credit losses to the single-family credit guarantee portfolio, defined in note (3) above.
Institutional Credit Risk
The concentration of our exposure to our counterparties increased beginning in 2008 due to industry consolidation and
counterparty failures. Many of our remaining counterparties were adversely affected in recent years by challenging market and
economic conditions as well as the stress on their resources to meet increased regulatory requirements and oversight.
We continue to face challenges in reducing our risk concentrations with counterparties. Efforts we make to reduce
exposure to financially weakened counterparties could further increase our exposure to other individual counterparties or
increase concentration risk overall. The failure of any of our significant counterparties to meet their obligations to us could
have a material adverse effect on our results of operations, financial condition, and our ability to conduct future business. For
more information, see “RISK FACTORS — Competitive and Market Risks —We depend on our institutional counterparties to
provide services that are critical to our business, and our results of operations or financial condition may be adversely affected
if one or more of our counterparties do not meet their obligations to us.”
Single-family Mortgage Seller/Servicers
We acquire a significant portion of our single-family mortgage purchase volume from several large lenders, or seller/
servicers. Our top 10 single-family seller/servicers provided approximately 64% of our single-family purchase volume during
2013. Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A. accounted for 17% and 13%, respectively, of our single-family
mortgage purchase volume and were the only single-family seller/servicers that comprised 10% or more of our purchase
volume during 2013.
We have contractual arrangements with our seller/servicers under which they agree to sell us mortgage loans, and
represent and warrant that those loans meet specified eligibility and 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., that contractual standards were not followed), we can exercise certain
contractual remedies to mitigate our actual or potential credit losses. These contractual remedies include the ability to require
the seller/servicer to repurchase the loan at its current UPB, reimburse us for losses realized with respect to the loan after
consideration of other recoveries, if any, and/or indemnify us. For certain servicing violations, we typically first issue a notice
of defect and allow the servicer a period of time to correct the problem. If the servicing violation is not corrected, we then may
issue a repurchase request. For breaches related to loans that have proceeded through foreclosure and REO sale or other
workouts (e.g. short sales), we will accept reimbursement for realized credit losses. For breaches related to other loans, we
issue a repurchase request for the loan’s UPB, plus interest and fees. We require a seller/servicer to repurchase a mortgage (or
provide an alternative remedy) after we issue a repurchase request, unless the seller/servicer avails itself of an appeals process
provided for in our contracts, in which case the deadline for repurchase is extended pending a decision on the appeal.
We revised our representation and warranty framework for conventional loans purchased on or after January 1, 2013. We
may face greater exposure to credit and other losses under this new framework since it relieves lenders of certain repurchase
obligations in specific cases (such as for loans that perform for 36 consecutive months, with certain exclusions). The new
framework does not affect seller/servicers’ obligations under their contracts with us with respect to loans sold to us prior to
January 1, 2013. The new framework also does not affect their obligation to service these loans in accordance with our
servicing standards. For additional information, see “BUSINESS — Our Business Segments —Single-Family Guarantee
Segment” and "Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA
Program — Relief Refinance Mortgage Initiative and Home Affordable Refinance Program."
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The table below provides a summary of our repurchase request (both seller and servicing related) activity for 2013, 2012,
and 2011.
Table 62 — Repurchase Request Activity(1)
Beginning balance
Issuances
Collections(2)
Cancellations and other(3)
Ending balance
2013
Year Ended December 31,
2012
(in millions)
2011
$
$
3,028
$
10,797
(5,638)
(5,996)
$
2,716
9,246
(3,487)
(5,447)
2,191
$
3,028
$
3,807
9,172
(4,490)
(5,773)
2,716
(1) Amounts are based on the UPB of the loans associated with the repurchase requests. The balance as of December 31, 2013 includes: (a) $1.6 billion in
UPB related to repurchase claims for violations of seller representations and warranties; and (b) $0.6 billion in UPB related to repurchase claims for
violations of servicing guidelines. The balance as of December 31, 2013 excludes $0.3 billion in UPB related to notices of defect for servicing
violations.
(2) Requests collected are based on the UPB of the loans associated with the repurchase requests, which in many cases is more than the amount of
payments received for reimbursement of losses for requests associated with foreclosed mortgage loans, negotiated agreements, and other alternative
remedies. Includes $2.1 billion during 2013 related to settlement agreements with certain sellers to release specified loans from certain repurchase
obligations in exchange for one-time cash payments. For the years ended December 31, 2013, 2012, and 2011 approximately 23%, 35%, and 31%
respectively, of the requests collected in each period were satisfied by reimbursement of losses associated with the request (excluding amounts related
to settlement agreements).
(3) Consists primarily of those requests that were resolved by the servicer providing missing documentation or rescinded through a successful appeal of the
request. Also includes other items that affect the UPB of the loan while the repurchase request is outstanding, such as payments made on the loan.
Our exposure to single-family mortgage seller/servicers has been high in recent years with respect to their repurchase
obligations arising from breaches of representations and warranties made to us for loans they underwrote and sold to us, or that
they service for us. FHFA set a goal for us (in the 2013 Conservatorship Scorecard) to complete our requests for remedies for
breaches of seller representations and warranties related to pre-conservatorship loan activity. Although we resolved a significant
amount of requests in 2013, including through negotiated agreements, the balance of repurchase requests outstanding remained
high as of December 31, 2013 due to the increased claims issued to meet the Scorecard goal. During 2013, we recovered
amounts from seller/servicers with respect to $5.6 billion in UPB of loans subject to our repurchase requests, including $2.1
billion related to settlement agreements with certain sellers (including nine of our largest sellers) to release specified loans from
certain repurchase obligations in exchange for one-time cash payments. As a result, the UPB of loans subject to open
repurchase requests with our largest seller/servicers has declined significantly. See “NOTE 15: CONCENTRATION OF
CREDIT AND OTHER RISKS — Seller/Servicers” for more information about these agreements. We did not enter into any
such agreements during 2012 or 2011. In November 2013, FHFA announced that we had substantially achieved this 2013
Scorecard goal. Consequently, we believe that our repurchase request volumes with our sellers will likely decrease in 2014.
The UPB of loans subject to open repurchase requests (both seller and servicer related) decreased to $2.2 billion at
December 31, 2013 from $3.0 billion at December 31, 2012 as the combined volume of requests collected and canceled
exceeded the volume of requests issued. As measured by UPB, approximately 27% and 41% of the repurchase requests
outstanding at December 31, 2013 and 2012, respectively, were outstanding for four months or more since issuance of the
initial requests (these figures include repurchase requests for which appeals were pending). In 2013, we began to increase our
review of servicing related violations, including by instituting a process of issuing notices of defect for certain servicing
violations. Notices of defect issued in 2013 primarily related to the conveyance of properties to us without clear and marketable
title.
As of December 31, 2013, two of our largest seller/servicers (Bank of America, N.A. and JPMorgan Chase Bank, N.A.)
had aggregate outstanding repurchase requests, based on UPB, of $0.9 billion, and approximately 49% were outstanding for
four months or more since issuance of the initial request. The amount we expect to collect on the outstanding requests is
significantly less than the UPB of the related loans primarily because many will likely be satisfied by reimbursement of our
realized credit losses by seller/servicers, instead of repurchase of loans at their UPB. Some of these requests also may be
rescinded in the course of the contractual appeal process. Based on our historical loss experience and the fact that many of
these loans are covered by credit enhancements (e.g., mortgage insurance), we expect the actual credit losses experienced by us
should we fail to collect on these repurchase requests will also be less than the UPB of the loans.
Repurchase requests related to mortgage insurance rescission and claim denial tend to be outstanding longer than other
repurchase requests for a number of reasons, including: (a) lenders may not agree with the basis used by the mortgage insurers
to rescind coverage; (b) the mortgage insurers’ appeals process for rescissions can be lengthy (as long as one year or more); (c)
lenders expect us to suspend repurchase enforcement until after the appeal decision by the mortgage insurer is made (although
this is not our practice); and (d) in certain cases, we have agreed to consider a repurchase alternative that would allow certain of
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our seller/servicers to provide us a commitment for the amount of lost mortgage insurance coverage in lieu of a full repurchase.
Of the total amount of repurchase requests outstanding at December 31, 2013 and 2012, approximately $0.2 billion and $1.2
billion, respectively, were issued due to mortgage insurance rescission or mortgage insurance claim denial.
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
through foreclosure or short sale. The loan review and appeal process is lengthy, but we have completed a substantial number
of reviews and compiled results of our review of 2012 originations. Based on reviews completed through December 31, 2013,
the average aggregate deficiency rate across all seller/servicers for loans funded during 2012, 2011, and 2010 (excluding HARP
and other relief refinance loans) was approximately 3%, 5%, and 13%, respectively. These rates may change in the future as our
seller/servicers may appeal our findings. The most common underwriting deficiencies found in our review of loans funded
during 2012 (excluding HARP and other relief refinance loans) were related to the delivery of inaccurate data, which
invalidated the Loan Prospector automated underwriting decision. In recent periods, we also made revisions to our loan review
process that are designed to standardize the process and facilitate more timely review of loans we purchase.
Our estimate of recoveries from seller and servicer repurchase obligations is considered in our allowance for loan losses;
however, our actual recoveries may be different than our estimates. We believe we have appropriately provided for these
exposures, based upon our estimates of incurred losses, in our loan loss reserves; however, our actual losses may exceed our
estimates.
The table below summarizes the percentage of our single-family credit guarantee portfolio by year of loan origination
that is subject to agreements releasing loans from certain repurchase obligations, including defaulted counterparties. Since
January 1, 2009, we have entered into 12 negotiated agreements and have released repurchase obligations with 70 other seller/
servicers as of December 31, 2013.
Table 63 — Loans Released from Repurchase Obligations(1)
Year of origination:
Negotiated agreements:
2009 and thereafter
2008
2007
2006
2005
2004 and prior
Subtotal
Other released loans:
(2)
2010 and thereafter
2009
2008
2007
2006
2005 and prior
Total
As of December 31, 2013
UPB
(in billions)
$
37.1
33.6
61.4
49.8
58.8
114.7
355.4
0.5
5.9
5.2
9.9
5.8
6.9
Percentage of
Single-family
Credit Guarantee
Portfolio
2.3%
2.0
3.7
3.0
3.6
6.9
21.5
<0.1
0.4
0.3
0.6
0.4
0.4
$
389.6
23.6%
(1)
Includes all loans released from certain repurchase obligations, except those loans subject to reduced repurchase obligations associated with our relief
refinance mortgage initiative and our new representation and warranty framework that became effective January 1, 2013.
(2) Consist primarily of loans associated with seller/servicers that were no longer in business at December 31, 2013, and result from a discharge of the
seller/servicer's obligation or determination of the settlement amount in bankruptcy or receivership proceedings.
We do not have our own mortgage loan servicing operation. Instead, our customers perform the primary servicing
function on our loans on our behalf. A significant portion of our single-family mortgage loans are serviced by several large
seller/servicers. If our servicers lack appropriate process controls, experience a failure in their controls, or experience an
operating disruption in their ability to service mortgage loans, our business and financial results could be adversely affected.
Our top two single-family loan servicers, Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A., serviced approximately
24% and 13%, respectively, of our single-family mortgage loans as of December 31, 2013, and together serviced approximately
37% of our single-family mortgage loans. 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
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losses, we facilitated the transfer of servicing for $55.6 billion in UPB of loans from our primary servicers to specialty servicers
during 2013. Some of these specialty servicers have grown rapidly in the last two years and now service a large share of our
loans. We also seek remedies such as compensatory fees for failure to perform certain requirements with respect to the
servicing of delinquent loans.
We rely on our seller/servicers to perform loan workout activities as well as foreclosures on loans that they service for us.
Our credit losses could increase to the extent that our seller/servicers do not fully perform these obligations in a timely manner.
We also continue to be adversely affected by the length of the foreclosure timeline, particularly in states that require a judicial
foreclosure process, which has provided challenges to our seller/servicers because they have had to change their processes for
compliance with the requirements of each jurisdiction. For more information on our exposure to our seller/servicers, see “RISK
FACTORS — Competitive and Market Risks — Our financial condition or results of operations may be adversely affected if
mortgage seller/servicers fail to perform their repurchase and other obligations to us."
As part of the servicing alignment initiative, we announced changes in our servicing standards for situations in which our
servicers obtain property hazard insurance on properties securing single-family loans we own or guarantee. As a result,
effective June 1, 2014, our seller/servicers may not receive compensation or other payment from insurance carriers nor may
they use their own or affiliated entities to insure or reinsure a property.
Multifamily Mortgage Seller/Servicers
We acquire a significant portion of our multifamily new business volume from several large sellers. We are exposed to
certain institutional credit risks arising from the potential non-performance by our multifamily sellers and mortgage servicers.
Our top two multifamily sellers, CBRE Capital Markets, Inc. and Berkadia Commercial Mortgage LLC, accounted for 22% and
14%, respectively, of our multifamily new business volume for 2013. Our top 10 multifamily sellers represented an aggregate
of approximately 77% of our multifamily new business volume for 2013.
A significant portion of our multifamily mortgage portfolio is serviced by several large multifamily servicers. As of
December 31, 2013, our top three multifamily servicers, Berkadia Commercial Mortgage LLC, Wells Fargo Bank, N.A., and
CBRE Capital Markets, Inc., each serviced more than 10% of our multifamily mortgage portfolio, excluding K Certificates,
and together serviced approximately 37% of this portfolio.
In our multifamily business, we are exposed to the risk that multifamily seller/servicers could come under financial
pressure, which could potentially cause degradation in the quality of the servicing they provide us, including their monitoring
of each property’s financial performance and physical condition. This could also, in certain cases, reduce the likelihood that we
could recover losses through lender repurchases, recourse agreements or other credit enhancements, where applicable. This risk
primarily relates to multifamily loans that we hold on our consolidated balance sheets where we retain all of the related credit
risk. We monitor the status of all our multifamily seller/servicers in accordance with our counterparty credit risk management
framework.
Mortgage Insurers
We have institutional credit risk relating to the potential insolvency of, or non-performance by, mortgage insurers that
insure single-family mortgages we purchase or guarantee. As a guarantor, we remain responsible for the payment of principal
and interest if a mortgage insurer fails to meet its obligations to reimburse us for claims. If any of our mortgage insurers fails to
fulfill its obligations, we could experience increased credit losses.
We attempt to manage this risk by establishing eligibility standards for mortgage insurers and by monitoring our exposure
to individual mortgage insurers. Our monitoring includes performing periodic analysis of the financial capacity of individual
mortgage insurers under various adverse economic conditions. Our ability to manage this risk may be limited as: (a) certain of
our mortgage insurers are operating below our eligibility thresholds; and (b) our ability to revoke a mortgage insurer's status as
an eligible insurer may require FHFA approval. The 2013 Conservatorship Scorecard includes a goal for us to develop
counterparty risk management standards for mortgage insurers that include aligned master policies and eligibility requirements.
In connection with this goal, we expect to publish changes to financial requirements and other standards for mortgage insurer
eligibility in 2014. In December 2013, FHFA announced that we and Fannie Mae, in collaboration with our mortgage insurers,
had completed development of new master policies, for which the mortgage insurers are expected to seek state regulatory
approval. These new master policies provide for: (a) assurance of coverage including setting standards for certain
circumstances when coverage should be maintained or revoked; (b) specific timeframes for the processing and payment of
claims; (c) loss mitigation provisions that support strategies developed during the housing crisis to help troubled homeowners;
and (d) standards for enhanced information sharing between insurers, servicers and Freddie Mac. These changes help address
the significant problems we faced in recent years in resolving repurchase requests related to mortgage insurance rescission.
As part of the estimate of our loan loss reserves, we evaluate the recovery and collectability related to mortgage insurance
policies on mortgage loans we own or guarantee. We also evaluate the collectability of outstanding receivables from these
counterparties related to unpaid claims.
The majority of our mortgage insurance exposure is concentrated with four mortgage insurers, certain of which have been
under financial stress during the last several years. Some of our eligible mortgage insurers have, in the past, exceeded risk to
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capital ratios required by their state insurance regulators. Although the financial condition of these mortgage insurers improved
moderately in 2013 as a result of strong home price appreciation and their having raised additional capital, there is still a
significant risk that these counterparties may fail to meet their obligations to pay our claims. Except for those insurers under
regulatory or court ordered supervision, which no longer issue new coverage, we continue to acquire new loans with mortgage
insurance from the mortgage insurers shown in the table below, many of which have credit ratings below investment grade. Our
ability to reduce our exposure to individual mortgage insurers is limited. In recent years, new entrants have emerged that will
diversify a concentrated industry. For more information, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER
RISKS — Mortgage Insurers" and “RISK FACTORS — Competitive and Market Risks — Our losses could increase if more of
our mortgage or bond insurers become insolvent or fail to perform their obligations to us."
The table below summarizes our exposure to mortgage insurers as of December 31, 2013. In the event that a mortgage
insurer fails to perform, the coverage outstanding represents our maximum exposure to credit losses resulting from such failure.
Our most significant exposure to these insurers is through primary mortgage insurance. As of December 31, 2013, we had
primary mortgage insurance coverage on loans that represented approximately 12% of the UPB of our single-family credit
guarantee portfolio.
Table 64 — Mortgage Insurance by Counterparty(1)
Counterparty Name
Credit Rating
Credit Rating
Outlook
Primary
Insurance(2)
Pool
Insurance(2)
Primary
Insurance(3)
Pool
Insurance(3)
As of December 31, 2013
UPB of Covered Loans
Coverage Outstanding
Mortgage Guaranty Insurance Corporation (MGIC)
Radian Guaranty Inc. (Radian)
B
B
United Guaranty Residential Insurance Company
BBB+
Genworth Mortgage Insurance Corporation
PMI Mortgage Insurance Co. (PMI)(4)
Republic Mortgage Insurance Company (RMIC)(5)
Essent Guaranty, Inc.
Triad Guaranty Insurance Corporation (Triad)
(6)
CMG Mortgage Insurance Company
B
Not Rated
Not Rated
BBB
Not Rated
BBB-
Positive
$
Stable
Stable
Stable
N/A
N/A
Stable
N/A
Positive
$
44.9
44.0
41.3
28.3
14.5
11.7
10.6
5.3
2.8
(in billions)
$
1.6
3.5
0.1
0.2
0.3
0.6
—
0.2
<0.1
11.3
11.0
10.3
7.1
3.6
2.9
2.6
1.3
0.7
Total
$
203.4
$
6.5
$
50.8
$
$ <0.1
1.0
<0.1
<0.1
0.1
0.1
—
<0.1
—
1.2
(1) Ratings and outlooks are for the corporate entity to which we have the greatest exposure. Coverage amounts may include coverage provided by
consolidated affiliates and subsidiaries of the counterparty. Latest rating available as of February 14, 2014. Represents the lower of S&P and Moody’s
credit ratings and outlooks stated in terms of the S&P equivalent.
(2) These amounts are based on gross coverage without regard to netting of coverage that may exist to the extent an affected mortgage is covered under
both types of insurance. See “Table 4.5 — Recourse and Other Forms of Credit Protection” in “NOTE 4: MORTGAGE LOANS AND LOAN LOSS
RESERVES” for further information.
(3) Represents the remaining aggregate contractual limit for reimbursement of losses under the respective policy type. These amounts are based on gross
(4)
coverage without regard to netting of coverage that may exist to the extent an affected mortgage is covered under both types of insurance.
In April 2013, PMI began paying valid claims 55% in cash and 45% in deferred payment obligations and made a one-time cash payment to us for
claims that were previously settled for 50% in cash.
(5) Under a plan announced in November 2012, RMIC is paying all valid claims settled on or after January 19, 2012, 60% in cash and 40% in deferred
(6)
payment obligations.
In June 2009, Triad began paying valid claims 60% in cash and 40% in deferred payment obligations under order of its state regulator. In October 2013,
Triad’s plan of rehabilitation was approved. In December 2013, under this plan, Triad began paying valid claims 75% in cash and a one-time cash
payment was made to us for claims previously settled for 60% in cash.
We received proceeds of $2.0 billion in each of 2013 and 2012 from our primary and pool mortgage insurance policies
for recovery of losses on our single-family loans, including $255 million in the third quarter of 2013 associated with a
settlement agreement with Radian. We had outstanding receivables from mortgage insurers (including deferred payment
obligations associated with unpaid claim amounts), net of associated reserves, of $0.5 billion and $0.8 billion at December 31,
2013 and 2012, respectively.
In December 2012, we entered into a settlement agreement with MGIC concerning our current and future claims under
certain of its pool insurance policies. The Radian and MGIC settlement agreements are described in "NOTE 15:
CONCENTRATION OF CREDIT AND OTHER RISKS - Mortgage Insurers."
We have not purchased pool insurance on single-family loans since March 2008 and have reached the maximum limit of
recovery on certain pool insurance policies. Our pool insurance policies generally have original coverage periods that range
from 10 to 12 years. In many cases, we entered into these agreements to cover higher-risk mortgage product types delivered to
us through loan purchase transactions for cash rather than guarantor swaps. As of December 31, 2013, pool insurance policies
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that will expire: (a) during 2014 covered approximately $1.5 billion in UPB of loans, and the remaining contractual limit for
reimbursement of losses on such loans was approximately $0.2 billion; (b) between 2015 and 2019 covered approximately $3.6
billion in UPB of loans, and the remaining contractual limit for reimbursement of losses on such loans was approximately $0.2
billion; and (c) after 2019 covered approximately $1.4 billion in UPB of loans, and the remaining contractual limit for
reimbursement of losses on such loans was approximately $0.8 billion. Any losses in excess of the contractual limit will be
borne by us. These figures include coverage under our pool insurance policies based on the stated coverage amounts under such
policies and we may exhaust such coverage before these policies expire. As noted below, we do not expect to receive full
payment of our claims from several of these insurers.
PMI, RMIC, and Triad are all under regulatory or court ordered supervision, and a substantial portion of their claims are
recorded by us as deferred payment obligations. These insurers continue to pay a portion of their respective claims in cash.
However, the state regulators of these companies have generally not allowed them to pay their respective deferred payment
obligations. If, as we currently expect, these insurers do not pay the full amount of their deferred payment obligations, we
would lose a portion of the coverage from these insurers shown in the table above. As of December 31, 2013, we had
cumulative unpaid deferred payment obligations of $0.6 billion from these insurers. We reserved for substantially all of these
unpaid amounts as collectability is uncertain.
Bond Insurers
Bond insurance, which may be either primary or secondary policies, is a credit enhancement covering certain of the non-
agency mortgage-related securities we hold. Primary policies are acquired by the securitization trust issuing the securities we
purchase, while secondary policies are acquired by us. Bond insurance exposes us to the risk that the bond insurer will be
unable to satisfy claims.
The table below presents our coverage amounts of bond insurance, including secondary coverage, for the non-agency
mortgage-related securities we hold. In the event a bond insurer fails to perform, the coverage outstanding represents our
maximum principal exposure to credit losses related to such a failure.
Table 65 — Bond Insurance by Counterparty(1)
Counterparty Name
Credit Rating
Credit Rating
Outlook
As of December 31, 2013
Gross
Unrealized
Losses(2)
Coverage
Outstanding(3)
(dollars in millions)
Percent of
Total Coverage
Outstanding(3)
Ambac Assurance Corporation (Ambac)(4)
Financial Guaranty Insurance Company (FGIC)(4)
National Public Finance Guarantee Corp.
MBIA Insurance Corp.
Assured Guaranty Municipal Corp.
Syncora Guarantee Inc. (Syncora)(4)
CIFG Assurance Corporation
Total
Not Rated
Not Rated
BBB+
B-
A
Not Rated
Not Rated
N/A
N/A
Positive
Positive
Stable
N/A
N/A
$
239
$
33
62
5
10
—
6
3,645
1,393
1,059
901
693
48
30
47%
18
14
11
9
1
<1
$
355
$
7,769
100%
(1) Ratings and outlooks are for the corporate entity to which we have the greatest exposure. Coverage amounts may include coverage provided by
consolidated affiliates and subsidiaries of the counterparty. Latest ratings available as of February 14, 2014. Represents the lower of S&P and Moody’s
credit ratings stated in terms of the S&P equivalent.
(2) Represents the amount of gross unrealized losses on the non-agency mortgage-related securities with insurance.
(3) Represents maximum principal exposure to credit losses.
(4) Ambac, FGIC, and Syncora are currently operating under regulatory or court ordered supervision.
We monitor the financial strength of our bond insurers in accordance with our risk management policies. Some of our
larger bond insurers are in runoff mode where no new business is being written. We expect to receive substantially less than full
payment of our claims from Ambac and FGIC as these companies are either insolvent or in rehabilitation. We believe that we
will also likely receive substantially less than full payment of our claims from some of our other bond insurers because we
believe they also lack sufficient ability to fully meet all of their expected lifetime claims-paying obligations to us as such claims
emerge.
In June 2013, FGIC’s plan of rehabilitation was approved, under which permitted claims will be paid 17% in cash and the
remainder in deferred payment obligations. FGIC has begun payment of initial permitted claims and settlement of deferred
payment obligations in accordance with the plan. In the third quarter of 2012, Ambac, which had not paid claims since March
2010, began making cash payments equal to 25% of the permitted amount of each policy claim. In 2013, Ambac also began
making supplemental payments, equal to all or a portion of the permitted policy claim, with respect to certain specified
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securities. For more information concerning Ambac and FGIC, see “NOTE 15: CONCENTRATION OF CREDIT AND
OTHER RISKS — Bond Insurers.”
In the event one or more of our other bond insurers were to become subject to a regulatory order or insolvency
proceeding, our ability to recover certain unrealized losses on our non-agency mortgage-related securities would be negatively
affected. We considered our expectations regarding our bond insurers’ ability to meet their obligations in making our
impairment determinations on our non-agency mortgage-related securities at December 31, 2013 and 2012. See “NOTE 7:
INVESTMENTS IN SECURITIES — Other-Than-Temporary Impairments on Available-For-Sale Securities” for additional
information regarding impairment losses on securities covered by bond insurers.
Cash and Other Investments Counterparties
We are exposed to institutional credit risk arising from the potential insolvency or non-performance of counterparties of
non-mortgage-related investment agreements and cash equivalent transactions, including those entered into on behalf of our
securitization trusts. Our policies require that the issuer be rated as investment grade at the time the financial instrument is
purchased. We base the permitted term and dollar limits for each of these transactions on the counterparty's financial strength in
order to further mitigate our risk.
Our cash and other investment counterparties are primarily major financial institutions, Treasury, and the Federal Reserve
Bank of New York. As of December 31, 2013 and 2012, including amounts related to our consolidated VIEs, there were $85.9
billion and $60.7 billion, respectively, of: (a) cash and securities purchased under agreements to resell invested with
institutional counterparties; (b) Treasury securities classified as cash equivalents; or (c) cash deposited with the Federal Reserve
Bank of New York. Although we monitor the financial strength of our counterparties to these transactions and have collateral
maintenance requirements for our securities purchased under agreements to resell, we have exposure to loss should any of our
counterparties fail. See "RISK FACTORS — Our business could be adversely affected if counterparties to derivatives and
short-term lending and other transactions fail to meet their obligations to us" for further information. See “NOTE 15:
CONCENTRATION OF CREDIT AND OTHER RISKS” for further information on counterparty credit ratings and
concentrations within our cash and other investments.
For information about institutional credit risk associated with our investments in non-mortgage-related securities, see
“NOTE 7: INVESTMENTS IN SECURITIES — Table 7.8 — Trading Securities.”
Agency and Non-Agency Mortgage-Related Security Issuers
Our investments in securities expose us to institutional credit risk to the extent that servicers, issuers, guarantors, or third
parties providing credit enhancements become insolvent or do not perform their obligations. Our investments in non-Freddie
Mac mortgage-related securities include both agency and non-agency securities. Agency securities have historically presented
minimal institutional credit risk due to the guarantee provided by those institutions, and the U.S. government’s support of those
institutions. However, we recognized impairment charges in 2013 and 2012 related to certain of our investments in non-agency
mortgage-related securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” for
further information about these securities, including a discussion of the higher-risk components of these investments.
At the direction of our Conservator, we are working to enforce our rights as an investor with respect to the non-agency
mortgage-related securities we hold, and are engaged in various efforts, in some cases in conjunction with other investors, to
mitigate or recover losses on our investments in these securities. During 2013, we and FHFA reached settlements with a
number of parties pursuant to which we received an aggregate of approximately $5.5 billion. In February 2014, we and FHFA
entered into an agreement with Morgan Stanley, and related parties, to settle litigation related to certain residential non-agency
mortgage-related securities we hold. Under the agreement, we will be paid $625 million, which will be reflected in our
consolidated financial results for the first quarter of 2014. Lawsuits against a number of parties are currently pending. The
effectiveness of our efforts is uncertain and any potential recoveries may take significant time to realize. For more information
on these efforts, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Non-Agency Mortgage-Related
Security Issuers.”
Document Custodians
We use third-party document custodians to provide loan document certification and custody services for the loans that we
purchase and securitize. In many cases, our seller/servicer customers or their affiliates also serve as document custodians for us.
Our ownership rights to the mortgage loans that we own or that back our PCs and REMICs and Other Structured Securities
could be challenged if a seller/servicer intentionally or negligently pledges or sells the loans that we purchased or fails to obtain
a release of prior liens on the loans that we purchased, which could result in financial losses to us. When a seller/servicer or one
of its affiliates acts as a document custodian for us, the risk that our ownership interest in the loans may be adversely affected is
increased, particularly in the event the seller/servicer were to become insolvent. We seek to mitigate these risks through legal
and contractual arrangements with these custodians that identify our ownership interest, as well as by establishing qualifying
standards for document custodians and requiring transfer of the documents to our possession or to an independent third-party
document custodian if we have concerns about the solvency or competency of the document custodian.
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Derivative Counterparties
We use cleared derivatives, exchange-traded derivatives, and OTC derivatives, and are exposed to institutional credit risk
with respect to these derivatives.
• Cleared derivatives: The Dodd-Frank Act requires central clearing of many types of derivatives. Pursuant to the Dodd-
Frank Act, the U.S. Commodity Futures Trading Commission ("CFTC") has determined that the types of interest-rate
swaps that we use most frequently are subject to the central clearing requirement, for transactions executed or
modified on or after June 10, 2013. We refer to these interest-rate swaps as cleared derivatives. We are required to post
initial and variation margin with our clearing member in connection with such transactions. As a result, our exposure
to the clearinghouse we use to clear such interest-rate derivatives, and to the clearing members that administer our
transactions once accepted for clearing, has increased and will become more concentrated over time. However, the use
of cleared derivatives mitigates our institutional credit risk exposure to individual counterparties because a central
counterparty is substituted for individual counterparties, and our exposure to individual counterparties associated with
interest-rate swaps will decrease over time due to the central clearing requirement. In addition, the CFTC has recently
certified that certain interest-rate swaps must be traded on exchanges or comparable trading facilities beginning in
February 2014.
• Exchange-traded derivatives: We are an active user of exchange-traded derivatives, such as Treasury and Eurodollar
futures, and are required to post initial and variation margin with our clearing member in connection with such
transactions. The posting of this margin exposes us to institutional credit risk in the event that our clearing member or
the exchange’s clearinghouse fail to meet their obligations. However, the use of exchange-traded derivatives mitigates
our institutional credit risk exposure to individual counterparties because a central counterparty is substituted for
individual counterparties, and changes in the value of open exchange-traded contracts are settled daily via payments
made through the financial clearinghouse established by each exchange.
• OTC derivatives: OTC derivatives refer to those derivatives that are neither cleared derivatives nor exchange-traded
derivatives. OTC derivatives expose us to institutional credit risk to individual counterparties, because these
transactions are executed and settled directly between us and each counterparty, exposing us to potential losses if a
counterparty fails to meet its contractual obligations. When our net position with a counterparty in OTC derivatives
subject to a master netting agreement has a market value above zero (i.e., it would be an asset reported as derivative
assets, net on our consolidated balance sheets), the counterparty is obligated to deliver collateral in the form of cash,
securities, or a combination of both, in an amount equal to that market value (less a small unsecured “threshold”
amount in most cases) as necessary to satisfy its net obligation to us under the master netting agreement.
We seek to manage our exposure to institutional credit risk related to our derivative counterparties using several tools,
including:
•
•
•
review and analysis of external ratings;
standards for approving new derivative counterparties, clearinghouses, and clearing members;
ongoing monitoring and internal analysis of our positions with, and credit rating of, each counterparty, clearinghouse,
and clearing member;
• managing diversification mix among counterparties;
• master netting agreements and collateral agreements; and
•
stress-testing to evaluate potential exposure under possible adverse market scenarios.
On an ongoing basis, we review the credit fundamentals of all of our derivative counterparties, clearinghouses, and
clearing members to confirm that they continue to meet our internal standards. We assign internal ratings, credit capital, and
exposure limits to each counterparty based on quantitative and qualitative analysis, which we update and monitor on a regular
basis. We conduct additional reviews when market conditions dictate or certain events affecting an individual counterparty
occur.
The relative concentration of our derivative exposure among our primary OTC derivative counterparties remains high as
compared to levels experienced prior to 2009. This concentration could further increase. See “NOTE 10: COLLATERAL AND
OFFSETTING OF ASSETS AND LIABILITIES” for additional information.
The table below summarizes our exposure to our derivative counterparties, which represents the net positive fair value of
derivative contracts, related accrued interest and collateral held by us from our counterparties, after netting by counterparty or
clearing member where allowable (i.e., net amounts due to us under derivative contracts which are recorded as derivative
assets). For OTC interest-rate swaps, option-based derivatives, and foreign-currency swaps that are in an asset position, we
hold collateral against those positions in accordance with agreed upon thresholds. The collateral posting thresholds we assign
these counterparties depend on the credit rating of the counterparty and are based on our credit risk policies. In addition, we
have OTC interest-rate swap, option-based derivative, and foreign-currency swap liabilities where we post collateral to
counterparties in accordance with agreed upon thresholds. Pursuant to certain collateral agreements we have with these
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counterparties, the collateral posting threshold we are assigned is based on S&P or Moody’s credit rating of our long-term
senior unsecured debt securities. The lowering or withdrawal of our credit rating by S&P or Moody’s may increase our
obligation to post collateral, depending on the amount of the counterparty’s exposure to Freddie Mac with respect to the
derivative transactions. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Derivative Assets and Liabilities, Net”
and “Table 30 — Derivative Fair Values and Maturities” for a reconciliation of fair value to the amounts presented on our
consolidated balance sheets as of December 31, 2013, which includes both cash collateral held and posted by us, net.
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Table 66 — Derivative Counterparty Credit Exposure
Number of
Counterparties(2)
Notional or
Contractual
Amount(3)
Total
Exposure at
Fair Value(4)
Exposure,
Net of
Collateral(5)
Weighted Average
Contractual
Maturity
(in years)
Collateral
Posting
Threshold
As of December 31, 2013
4
3
9
1
1
1
19
$
52,687
$
31,910
345,824
35,935
33
38,442
504,831
188,236
18,731
3,477
9,751
(dollars in millions)
191
$
1,052
931
300
2
—
2,476
790
61
—
—
$
725,026
$
3,327
$
As of December 31, 2012
49
13
110
16
—
—
188
382
61
—
—
631
$10 million or less
$1 million or less
$1 million or less
$1 million or less
$ —
$ —
4.3
6.0
5.1
6.7
0.6
5.4
5.2
Number of
Counterparties(2)
Notional or
Contractual
Amount(3)
Total
Exposure at
Fair Value(4)
Exposure,
Net of
Collateral(5)
Weighted Average
Contractual
Maturity
(in years)
Collateral
Posting
Threshold
4
4
5
4
1
18
$
41,169
$
— $
(dollars in millions)
86,717
343,353
148,271
42,643
662,153
42,673
25,530
3,628
11,847
1,220
734
6
—
1,960
66
20
—
1
—
15
32
22
—
69
66
20
—
1
$
745,831
$
2,047
$
156
$10 million or less
$1 million or less
$1 million or less
$1 million or less
$ —
5.6
6.0
5.8
5.7
6.0
5.8
Rating(1)
AA-
A+
A
A-
BBB+
BBB
Subtotal
Cleared and exchange-traded
derivatives
Commitments
Swap guarantee derivatives
Other derivatives(6)
Total derivatives
Rating(1)
AA-
A+
A
A-
BBB+
Subtotal
Cleared and exchange-traded
derivatives
Commitments
Swap guarantee derivatives
Other derivatives(6)
Total derivatives
(1) Ratings of our OTC interest-rate swap, options-based derivative (excluding certain written options), and foreign-currency swap derivative
counterparties. We use the lower of S&P and Moody’s ratings to manage collateral requirements. In this table, the Moody’s rating of the legal entity is
stated in terms of the S&P equivalent.
(2) Based on legal entities.
(3) Notional or contractual amounts are used to calculate the periodic settlement amounts to be received or paid and generally do not represent actual
amounts to be exchanged.
(4) For each counterparty, this amount includes derivatives with a positive fair value (recorded as derivative assets, net), including the related accrued
interest receivable/payable, when applicable. For counterparties included in the subtotal and the cleared and exchange-traded derivatives category,
positions are shown netted at the counterparty or clearing member level, as applicable, including accrued interest receivable/payable and trade/settle
fees.
(5) Calculated as Total Exposure at Fair Value less both cash and non-cash collateral held as determined at the counterparty level. At December 31, 2013
and 2012, $432 million and $501 million, respectively, of non-cash collateral had been posted to us. Includes amounts related to our posting of cash
collateral in excess of our derivative liability as determined at the counterparty level. For more information about collateral we have posted in
connection with cleared and exchange-traded derivatives, see “NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES —
Collateral Pledged.”
(6) Consists primarily of certain written options and certain credit derivatives. Written options do not present counterparty credit exposure because we
receive a one-time up-front premium in exchange for giving the holder the right to execute a contract under specified terms, which generally puts us in
a liability position.
Over time, our exposure to individual derivative counterparties varies depending on changes in fair values, which are
affected by changes in period-end interest rates, the implied volatility of interest rates, foreign-currency exchange rates, and the
amount of derivatives held. See “NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES —
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Derivative Portfolio — Master Netting and Collateral Agreements” for more information about our maximum loss for
accounting purposes and concentrations of counterparty risk related to derivative counterparties.
Approximately 94% of our counterparty credit exposure for OTC interest-rate swap, option-based, and foreign-currency
swap derivatives was collateralized at December 31, 2013 (excluding amounts related to our posting of cash collateral in excess
of our derivative liability as determined at the counterparty level). The remaining exposure was primarily due to exposure
amounts below the applicable counterparty collateral posting threshold, as well as market movements during the time period
between when a derivative was measured at fair value and the date we received the related collateral. In some instances, these
market movements result in us having provided collateral that has fair value in excess of our obligation, which represents our
overcollateralization exposure. Collateral is typically transferred within one business day based on the values of the related
derivatives.
In the event an OTC derivative counterparty defaults, our economic loss may be higher than the uncollateralized
exposure of our derivatives if we are not able to replace the defaulted derivatives in a timely and cost-effective fashion (e.g.,
due to a significant interest rate movement during the period or other factors). We could also incur economic loss if non-cash
collateral posted to us by the defaulting counterparty and held by the custodian cannot be liquidated at prices that are sufficient
to recover the amount of such exposure. We regularly review the market values of the securities pledged to us to manage our
exposure to loss. When non-cash collateral is posted to us, we require collateral in excess of our exposure to satisfy the net
obligation to us in accordance with the counterparty agreement.
As noted above, beginning with contracts executed or modified on or after June 10, 2013, the types of interest-rate swaps
that we use most frequently became subject to the central clearing requirement. Our exposure to cleared and exchange-traded
derivatives was $382 million and $66 million as of December 31, 2013 and 2012, respectively. We net our exposure to cleared
derivatives by clearinghouse and clearing member. Exchange-traded derivatives are settled on a daily basis through the
payment of variation margin. We are required to post margin in connection with our cleared and exchange-traded derivatives.
At December 31, 2013, the majority of our exposure for our cleared and exchange-traded derivatives resulted from our posting
of initial margin. The amount of initial margin we must post for cleared and exchange-traded derivatives may be based, in part,
on S&P or Moody’s credit rating of our long-term senior unsecured debt securities. The lowering or withdrawal of our credit
rating by S&P or Moody’s may increase our obligation to post collateral, depending on the amount of the counterparty’s
exposure to Freddie Mac with respect to the derivative transactions. For information about margin we have posted in
connection with cleared and exchange-traded derivatives, see “NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS
AND LIABILITIES — Collateral Pledged.”
The total exposure on our forward purchase and sale commitments for mortgages and mortgage-related securities, treated
as derivatives for accounting purposes, was $61 million and $20 million at December 31, 2013 and 2012, respectively. Many of
our transactions involving forward purchase and sale commitments of mortgage-related securities, including our dollar roll
transactions, utilize the Mortgage Backed Securities Division of the Fixed Income Clearing Corporation (“MBSD/FICC”) as a
clearinghouse. As a clearing member of the clearinghouse, we post margin to the MBSD/FICC and are exposed to the
institutional credit risk of the organization.
Selected European Sovereign and Non-Sovereign Exposures
The sovereign debt of Spain, Italy, Ireland, Portugal, Greece, and Cyprus (which we refer to herein as the “troubled
European countries”) and the credit status of financial institutions with significant exposure to the troubled European countries
has been adversely affected due to ongoing weaknesses in the economic and fiscal situations of those countries.
As of December 31, 2013, we did not hold any debt issued by the governments of the troubled European countries and
did not hold any financial instruments entered into with sovereign governments in those countries. As of that date, we also did
not hold any debt issued by corporations or financial institutions domiciled in the troubled European countries and did not hold
any other financial instruments entered into with corporations or financial institutions domiciled in those countries. However,
the parent entities of three of our seller/servicers are headquartered in a troubled European country. We do not currently believe
that our exposure to these seller/servicers is significant. For purposes of this discussion, we consider an entity to be domiciled
in a country if its parent entity is headquartered in that country.
Our derivative portfolio and cash and other investments portfolio counterparties include a number of major European and
non-European financial institutions. Many of these institutions operate in Europe, and we believe that all of these financial
institutions have direct or indirect exposure to the troubled European countries. For many of these institutions, their direct and
indirect exposures to the troubled European countries change on a daily basis. We monitor our major counterparties’ exposures
to the troubled European countries, and adjust our exposures and risk limits to individual counterparties accordingly. Our
exposures to derivative portfolio and cash and other investments portfolio counterparties are described in “Derivative
Counterparties,” “Cash and Other Investments Counterparties” and “NOTE 10: COLLATERAL AND OFFSETTING OF
ASSETS AND LIABILITIES.”
It is possible that continued adverse developments in Europe could significantly affect our counterparties that have direct
or indirect exposure to the troubled European countries. In turn, this could adversely affect their ability to meet their obligations
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to us. For more information, see “RISK FACTORS — Competitive and Market Risks – Our business could be adversely
affected if counterparties to derivatives and short-term lending and other transactions fail to meet their obligations to us.”
Operational Risks
We continue to make strategic investments to maintain and improve our ability to operate the company for the foreseeable
future in conservatorship and potentially afterwards. We also continue to strengthen our operations. Beginning in mid-2012 and
continuing through 2013, we took steps to enhance management’s focus on control issues by elevating awareness of those
issues across the company and stressing timely remediation. In addition, our human capital risks have abated considerably in
recent periods, as evidenced by low voluntary turnover and vacancy rates. However, we continue to face significant levels of
operational risk. Operational risks are inherent in all of our business activities and can become apparent in various ways,
including accounting or operational errors, business interruptions, fraud, and failures of the technology used to support our
business activities. We face a variety of operational risks, including those described below and in “RISK FACTORS –
Operational Risks.”
We have faced challenges with respect to managing servicers and credit loss mitigation due to a number of factors,
including high volumes of seriously delinquent loans and inadequate systems. We may face increased operational risk due to
the servicing alignment initiative and other new FHFA-mandated activities, such as the initiatives we are pursuing under the
Conservatorship Scorecard. While the servicing alignment initiative is a top priority for the company, it may pose significant
short-term operational challenges in data management and place additional strain on existing systems, processes, and key
resources. See “BUSINESS — Our Business Segments — Single-Family Guarantee Segment — Servicing Alignment
Initiative” for more information. There also have been a number of legislative and regulatory developments in recent periods
affecting single-family mortgage servicing and foreclosure practices. As a result, we may be required to make additional
significant changes to our practices, which could further increase our operational risk.
Our business decision-making, risk management, and financial reporting are highly dependent on our use of models,
including those developed internally and by third-parties. We face risk associated with our use of models, as there is inherent
uncertainty associated with model results and we could fail to properly implement, operate, or use our models or model inputs.
We also face risk that we could make poor business decisions in areas where model results are an important factor. We have
taken certain actions to mitigate the risk to the extent possible, including efforts in the area of model oversight and governance,
adding modeling and review resources where appropriate, and providing transparency to management over model issues and
changes. See “RISK FACTORS — Operational Risks — We face risks and uncertainties associated with the models that we use
for financial accounting and reporting purposes, to make business decisions, and to manage risks. Market conditions have
raised these risks and uncertainties.”
Our information technology risk continues to decline. For example, in 2013, we completed a three-year multi-million
dollar project to move our key legacy applications and infrastructure to current, supported technology. We are investing each
year to maintain our technology and are focused on standardizing and simplifying the technology portfolio. We also continue
to focus on emerging information security risks. However, our primary business processing and financial accounting systems
lack sufficient flexibility to handle all the complexities of, and changes in, our business transactions and related accounting
policies and methods. This requires us to rely more extensively on spreadsheets and other end-user computing systems. These
systems could have a higher risk of operational failure and error than our primary systems which are subject to our information
technology general controls. We believe we are mitigating this risk through active monitoring of, and improvements to, controls
over the development and use of end-user computing systems.
We continue to work to improve our operating efficiency. In 2013, we began a multi-year project focused on simplifying
our control structure and eliminating redundant control activities.
In order to manage the risk of inaccurate or unreliable valuations of our financial instruments, we engage in an ongoing
internal review of our valuations. We perform analysis of valuations on a monthly basis to confirm the reasonableness of the
valuations. For more information on the controls in our valuation process, see “FAIR VALUE BALANCE SHEETS AND
ANALYSIS — Consideration of Credit Risk in Our Valuation — Valuation Processes and Controls over Fair Value
Measurement.”
We are building our out-of-region disaster recovery capabilities. However, Freddie Mac management has determined that
current business recovery capabilities may not be effective in the event of a catastrophic regional business event (e.g., a disaster
that affects our Northern Virginia facilities) and could result in a significant business disruption and inability to process
transactions through normal business processes. While we are implementing a remediation plan designed to address the current
capability gaps, any measures we take to mitigate this risk may not be sufficient to respond to the full range of catastrophic
events that may occur. The remediation plan is designed to improve Freddie Mac’s ability to recover an acceptable level of
critical business functionality within predetermined time frames to address regional business disruptions, such as a terrorist
event, natural disaster, loss of infrastructure services, denial of access, and/or a pandemic. For more information, see “RISK
FACTORS — Operational Risks — A failure in our operational systems or infrastructure, or those of third parties, could
impair our liquidity, disrupt our business, damage our reputation, and cause losses.”
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Management, including the company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of
the effectiveness of our internal control over financial reporting and our disclosure controls and procedures as of December 31,
2013. As of December 31, 2013, we had one material weakness related to conservatorship, which remained unremediated,
causing us to conclude that our internal control over financial reporting was not effective and that our disclosure controls and
procedures were not effective at a reasonable level of assurance. In view of the mitigating actions we have undertaken related
to the material weakness, we believe that our consolidated financial statements for the year ended December 31, 2013 have
been prepared in conformity with GAAP. For additional information, see “CONTROLS AND PROCEDURES.”
Liquidity
LIQUIDITY AND CAPITAL RESOURCES
•
•
•
•
•
•
•
•
•
•
Our business activities require that we maintain adequate liquidity to fund our operations, which include the following:
principal payments due to the maturity, redemption or repurchase of our other debt securities;
interest payments on our other debt securities;
dividend obligations on our senior preferred stock;
cash purchases of single-family and multifamily loans;
purchases of mortgage-related securities and non-mortgage investments;
removal of modified or seriously delinquent loans from PC trusts;
any shortfall related to the payments of principal and interest on our mortgage-related securities (i.e., debt securities
issued by consolidated trusts), and any other payments related to our guarantees of mortgage assets;
any disposition costs related to our REO;
depending on market conditions and the mix of derivatives we employ in connection with our ongoing risk
management activities, our derivative portfolio can be either a net source or a net use of cash. For example, depending
on the prevailing interest-rate environment, interest-rate swap agreements could cause us either to make interest
payments to counterparties or to receive interest payments from counterparties. Purchased options require us to pay a
premium while written options allow us to receive a premium;
collateral that we are required to pledge to third parties in connection with secured financing and daily trade activities.
In accordance with contracts with certain derivative counterparties, we post collateral for derivatives in a net loss
position, after netting by counterparty, above agreed-upon posting thresholds. See “NOTE 10: COLLATERAL AND
OFFSETTING OF ASSETS AND LIABILITIES” for information about assets we pledge as collateral; and
•
administrative expenses.
We fund our cash needs primarily by issuing short-term and long-term debt. Other sources of cash include:
interest and principal payments on and sales of securities or mortgage loans that we hold in our mortgage-related
investments portfolio or cash and other investments portfolio;
repurchase transactions with counterparties;
•
•
• management and guarantee fees we receive in connection with our guarantee activities (excluding those fees associated
with the legislated 10 basis point increase we remit to Treasury); and
•
quarterly draws from Treasury under the Purchase Agreement, which are made if we have a quarterly deficit in our net
worth.
In addition to the uses and sources of cash described above, we are involved in various legal proceedings, including those
discussed in “LEGAL PROCEEDINGS,” which may result in a need to use cash to settle claims or pay certain costs or receipt
of cash from settlements.
We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain
our access to the debt markets and to have adequate liquidity to conduct our normal business activities. However, the costs and
availability of our debt funding could vary for a number of reasons, including the uncertainty about the future of the GSEs,
concern that the U.S. would exhaust its borrowing authority under the statutory debt limit, and any future downgrades in our
credit ratings or the credit ratings of the U.S. government. For more information, see “Other Debt Securities — Credit Ratings”
and “RISK FACTORS — Competitive and Market Risks — Any downgrade in the credit ratings of the U.S. government would
likely be followed by a downgrade in our credit ratings. A downgrade in the credit ratings of our debt could adversely affect
our liquidity and other aspects of our business.”
We make extensive use of the Fedwire system in our business activities. The Federal Reserve requires that we fully fund
our account in the Fedwire system to the extent necessary to cover cash payments on our debt and mortgage-related securities
each day, before the Federal Reserve Bank of New York, acting as our fiscal agent, will initiate such payments. We routinely
use an open line of credit with a third party, which provides intraday liquidity to fund our activities through the Fedwire system.
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This line of credit is an uncommitted intraday loan facility. As a result, while we expect to continue to use the facility, we may
not be able to draw on it, if and when needed. This line of credit requires that we post collateral that, in certain circumstances,
the secured party has the right to repledge to other third-parties, including the Federal Reserve Bank of New York. As of
December 31, 2013, we pledged approximately $10.5 billion of securities to this secured party. See “NOTE 10: COLLATERAL
AND OFFSETTING OF ASSETS AND LIABILITIES” for further information.
For more information on our short- and long-term liquidity needs, see “CONTRACTUAL OBLIGATIONS.”
Our securities and other obligations are not guaranteed by the U.S. government and do not constitute a debt or obligation
of the U.S. government or any agency or instrumentality thereof, other than Freddie Mac. We continue to manage our debt
issuances to remain in compliance with the aggregate indebtedness limits set forth in the Purchase Agreement.
Liquidity Management
Maintaining sufficient liquidity is of primary importance to and a cost of our business. Under our liquidity management
practices and policies, we:
• maintain cash and non-mortgage investments to enable us to meet ongoing cash obligations for a limited period of
time, assuming no access to unsecured debt markets; and
• maintain unencumbered securities with a value greater than or equal to the largest projected daily cash shortfall for an
extended period of time, assuming no access to unsecured debt markets. However, since we do not have access to the
Federal Reserve’s discount window, it is uncertain that we would have access to liquidity when it is needed.
To facilitate cash management, we forecast cash outflows and inflows using assumptions and models. These forecasts
help us to manage our liabilities with respect to asset purchases and runoff, when financial markets are not in crisis. For further
information on our management of interest-rate risk associated with asset and liability management, see “QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.”
On July 15, 2013, FHFA provided updated liquidity guidance which requires that our cash and other investments portfolio
consist of a certain portion of short-maturity U.S. Treasury securities and deposits at the Federal Reserve Bank of New York.
Additionally, the guidance provides that our cash and other investments portfolio may also include overnight and term
repurchase agreements, unsecured Federal Funds, and bank certificates of deposit. During 2013, the majority of the funds used
to cover our short-term cash liquidity needs was deposited with the Federal Reserve Bank of New York, invested in short-term
assets with a rating of A-1/P-1 or AAA, or was issued by a counterparty with that rating. In the event of a downgrade of a
position or counterparty, as applicable, below minimum rating requirements, we make an assessment whether to exit the
existing position or continue to do business with the counterparty.
On February 18, 2014, FHFA issued guidelines for liquidity risk management at Freddie Mac and Fannie Mae. The
guidelines describe the principles the companies should follow to identify, measure, monitor, and control liquidity risk.
Notwithstanding these practices and policies, our ability to maintain sufficient liquidity, including by pledging mortgage-
related and other securities as collateral to other institutions, could cease or change rapidly and the cost of the available funding
could increase significantly due to changes in market interest rates, market confidence, operational risks, and other factors. For
more information, see “RISK FACTORS — Competitive and Market Risks — Our investment activities may be adversely
affected by limited availability of financing and increased funding costs.”
Other Debt Securities
We fund our business activities primarily through the issuance of short- and long-term debt. Competition for funding can
vary with economic, financial market, and regulatory environments. Historically, we have mainly competed for funds in the
debt issuance markets with Fannie Mae and the FHLBs.
To fund our business activities, we depend on the continuing willingness of investors to purchase our debt securities. The
required reduction in our mortgage-related investments portfolio has reduced our funding needs. We expect that this trend will
continue over time as the mortgage-related investments portfolio shrinks. Changes or perceived changes in the government’s
support of us could have a severe negative effect on our access to the debt markets and on our debt funding costs. In addition,
any change in applicable legislative or regulatory exemptions, including those described in “BUSINESS — Regulation and
Supervision,” could adversely affect our access to some debt investors, thereby potentially increasing our debt funding costs.
During the three months and year ended December 31, 2013, we had sufficient access to the debt markets due largely to
support from the U.S. government. Our effective short-term debt was 43% of outstanding other debt at December 31, 2013 as
compared to 42% at December 31, 2012. Effective short-term debt is the aggregate of short-term debt and the current portion of
long-term debt (the portion due within one year). The categories of short-term debt (due within one year) and long-term debt
(due after one year) are based on the original contractual maturity of the debt instruments classified as other debt. We rely
significantly on our ability to issue debt on an on-going basis to refinance our short-term debt.
Our debt cap under the Purchase Agreement was $780.0 billion in 2013 and declined to $663.0 billion on January 1,
2014. As of December 31, 2013, we estimate that our aggregate indebtedness was $511.3 billion, or $268.7 billion below the
applicable debt cap. Our aggregate indebtedness is calculated as the par value of other debt. We disclose the amount of our
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indebtedness on this basis monthly under the caption “Other Debt Activities — Total Debt Outstanding” in our Monthly
Volume Summary reports, which are available on our web site at www.freddiemac.com and in current reports on Form 8-K we
file with the SEC.
Other Debt Activities
The table below summarizes the par value of other debt securities we issued or paid off, based on settlement dates, during
2013 and 2012. We repurchase, call, or exchange our outstanding medium- and long-term debt securities from time to time for
a variety of reasons, including: (a) to help support the liquidity and predictability of the market for our other debt securities; (b)
to manage our mix of liabilities funding our assets; or (c) for economic reasons.
Table 67 — Activity in Other Debt
Beginning balance
Issued during the period:
Short-term:
Amount
Weighted-average effective interest rate
Long-term:
Amount
Weighted-average effective interest rate
Total issued:
Amount
Weighted-average effective interest rate
Paid off during the period:(1)
Short-term:
Amount
Weighted-average effective interest rate
Long-term:(2)
Amount
Weighted-average effective interest rate
Total paid off:
Amount
Weighted-average effective interest rate
Ending balance
For the Year Ended December 31,
2013
2012
(dollars in millions)
552,472
$
674,314
297,349
$
290,501
0.12%
0.13%
112,220
$
164,746
0.98%
1.23%
409,569
$
455,247
0.35%
0.53%
(273,513)
$
(334,014)
0.13%
0.11%
(177,183)
$
(243,075)
1.57%
1.89%
(450,696)
$
(577,089)
0.70%
0.86%
511,345
$
552,472
$
$
$
$
$
$
$
$
(1) Consists of all payments on debt, including regularly scheduled principal payments, payments at maturity, payments resulting from calls, and payments
for repurchases. Calls and repurchases of zero-coupon debt are reported at original face value, which does not equal the amount of actual cash payment.
(2) For the years ended December 31, 2013 and 2012, respectively, includes foreign exchange translation of $31 million and $7 million for foreign-
currency denominated debt.
Other Short-Term Debt
We fund our operating cash needs, in part, by issuing Reference Bills® securities and other discount notes, which are
short-term instruments with maturities of one year or less that are sold on a discounted basis, paying only principal at maturity.
Our Reference Bills securities program consists of large issues of short-term debt that we auction to dealers on a regular
schedule. We issue discount notes with maturities ranging from one day to one year in response to investor demand and our
cash needs. For purposes of presentation in this report, short-term debt also includes certain medium-term notes that have
original maturities of one year or less.
See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Total Debt, Net” for more information about our other
short-term debt.
Other Long-Term Debt
We issue debt with maturities greater than one year primarily through our medium-term notes program and our Reference
Notes® securities program.
Medium-term Notes
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We issue a variety of fixed- and variable-rate medium-term notes, including callable and non-callable fixed-rate
securities, zero-coupon securities and variable-rate securities, with various maturities ranging up to 30 years. For purposes of
presentation in this report, medium-term notes with original maturities of one year or less are classified as short-term debt.
Medium-term notes typically contain call provisions, effective as early as three months or as long as ten years after the
securities are issued.
Reference Notes Securities
Reference Notes securities are regularly issued, U.S. dollar denominated, non-callable fixed-rate securities, which we
generally issue with original maturities ranging from two through ten years. While we issued €Reference Notes ® securities
denominated in Euros in the past, our last non-U.S. dollar denominated debt matured in January 2014.
STACR
In 2013, we completed our first two STACR debt note transactions. For more information, see "RISK MANAGEMENT
— Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Credit Enhancements" and "NOTE 8:
DEBT AND SUBORDINATED BORROWNGS — Table 8.2 — Other Long-Term Debt."
Subordinated Debt
During 2013 and 2012, we did not call or issue any Freddie SUBS® securities. At both December 31, 2013 and 2012, the
balance of our subordinated debt outstanding was $0.4 billion. Our subordinated debt in the form of Freddie SUBS securities is
a component of our risk management and disclosure commitments with FHFA. See “BUSINESS — Regulation and
Supervision — Federal Housing Finance Agency — Subordinated Debt” for a discussion of changes affecting our subordinated
debt as a result of our placement into conservatorship and the Purchase Agreement, and the Conservator’s suspension of certain
requirements relating to our subordinated debt. Under the Purchase Agreement, we may not issue subordinated debt without
Treasury’s consent.
Credit Ratings
Our ability to access the capital markets and other sources of funding, as well as our cost of funds, is highly dependent
upon our credit ratings. The table below indicates our credit ratings as of February 14, 2014.
Table 68 — Freddie Mac Credit Ratings
Nationally Recognized Statistical
Rating Organization
S&P
Moody’s
Fitch
Senior long-term debt(1)
Short-term debt(2)
Subordinated debt(3)
Preferred stock(4)
AA+
A-1+
AA-
D
Aaa
P-1
Aa2
Ca
Outlook
Stable
Stable
AAA
F1+
AA-
C/RR6(5)
Rating Watch
Negative (includes AAA-rated
long-term Issuer Default Rating)
(1) Consists of medium-term notes and U.S. dollar Reference Notes securities.
(2) Consists of Reference Bills securities and discount notes.
(3) Consists of Freddie SUBS securities.
(4) Does not include senior preferred stock issued to Treasury.
(5) Preferred stock is not on Rating Watch Negative.
Our credit ratings and outlooks are primarily based on the support we receive from Treasury, and therefore, are affected
by changes in the credit ratings and outlooks of the U.S. government. S&P and Moody's affirmed our senior long-term debt and
subordinated debt ratings and revised the outlooks on the ratings to stable from negative in June 2013 and July 2013,
respectively. These actions followed S&P's and Moody's affirmation of the U.S. government's long-term debt ratings and
revision of the rating outlooks to stable from negative. In October 2013, Fitch placed our AAA-rated long-term Issuer Default
Rating (IDR), as well as our senior long-term debt, short-term debt and subordinated debt ratings, on Rating Watch Negative
(RWN). This action followed Fitch’s placement of the U.S. government's debt ratings on RWN.
During 2013, there were two changes to our credit ratings. In December 2013, S&P raised our subordinated debt rating to
‘AA-’ from ‘A’ due to the timely repayment of principal and interest on this debt since entering conservatorship and continued
government support for our debt securities. In addition, in November 2013, S&P lowered our preferred stock rating to ‘D’ from
‘C’ based on the fact that these securities have missed dividend payments and are expected to continue to miss dividend
payments going forward.
For information about factors that could lead to future ratings actions, and the potential impact of a downgrade in our
credit ratings, see “RISK FACTORS — Competitive and Market Risks — Any downgrade in the credit ratings of the U.S.
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government would likely be followed by a downgrade in our credit ratings. A downgrade in the credit ratings of our debt could
adversely affect our liquidity and other aspects of our business.”
A security rating is not a recommendation to buy, sell or hold securities. It may be subject to revision or withdrawal at
any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.
Cash and Cash Equivalents, Federal Funds Sold, Securities Purchased Under Agreements to Resell, and Non-Mortgage-
Related Securities
Excluding amounts related to our consolidated VIEs, we held $77.1 billion and $47.3 billion in the aggregate of cash and
cash equivalents, securities purchased under agreements to resell, and non-mortgage-related securities at December 31, 2013
and 2012, respectively. These investments are important to our cash flow and asset and liability management and our ability to
provide liquidity and stability to the mortgage market. At December 31, 2013, our non-mortgage-related securities consisted of
Treasury notes and Treasury bills that we could sell to provide us with an additional source of liquidity to fund our business
operations. We also maintained non-interest-bearing deposits at the Federal Reserve Bank of New York, which are included in
cash and cash equivalents on our consolidated balance sheets. For additional information on these assets, see
“CONSOLIDATED BALANCE SHEETS ANALYSIS — Cash and Cash Equivalents, Federal Funds Sold and Securities
Purchased Under Agreements to Resell” and “— Investments in Securities — Non-Mortgage-Related Securities.”
Mortgage Loans and Mortgage-Related Securities
We invest principally in mortgage loans and mortgage-related securities, certain categories of which are largely
unencumbered and highly liquid. Our primary source of liquidity among these mortgage assets is our holdings of single-class
and multiclass agency securities. While our holdings of unsecuritized performing single-family mortgage loans, CMBS, non-
agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans, and unsecuritized seriously
delinquent and modified single-family mortgage loans are also potential sources of liquidity, we consider them to be less liquid
than agency securities.
We are subject to limits on the amount of mortgage assets we can sell in any calendar month without review and approval
by FHFA and, if FHFA so determines, Treasury. See “BUSINESS — Conservatorship and Related Matters — Limits on
Investment Activity and Our Mortgage-Related Investments Portfolio” for more information on the relative liquidity of our
mortgage assets.
Cash Flows
Our cash and cash equivalents increased by $2.8 billion to $11.3 billion during 2013, as compared to a decrease of $19.9
billion to $8.5 billion during 2012 and a decrease of $8.6 billion to $28.4 billion during 2011. Cash flows provided by operating
activities during 2013, 2012, and 2011 were $18.5 billion, $8.5 billion, and $10.3 billion, respectively, primarily driven by cash
proceeds from net interest income. Cash flows provided by operating activities during 2013 also included settlements we
received related to lawsuits regarding our investments in certain residential non-agency mortgage-related securities. Cash flows
provided by investing activities during 2013, 2012, and 2011 were $391.3 billion, $494.4 billion, and $373.7 billion,
respectively, primarily resulting from net proceeds received as a result of repayments of single-family held-for-investment
mortgage loans. Cash flows used for financing activities during 2013, 2012, and 2011 were $407.0 billion, $522.8 billion, and
$392.6 billion, respectively, largely attributable to funds used to repay debt securities of consolidated trusts held by third parties
and payments of cash dividends on senior preferred stock.
Capital Resources, the Purchase Agreement, and the Dividend Obligation on the Senior Preferred Stock
Our entry into conservatorship resulted in significant changes to the assessment of our capital adequacy and our
management of capital. On October 9, 2008, FHFA announced that it was suspending capital classification of us during
conservatorship in light of the Purchase Agreement. FHFA continues to monitor our capital levels, but the existing statutory and
FHFA-directed regulatory capital requirements are not binding during conservatorship. We continue to provide submissions to
FHFA on minimum capital. See “NOTE 18: REGULATORY CAPITAL” for our minimum capital requirement, core capital,
and GAAP net worth results as of December 31, 2013 and 2012. In addition, notwithstanding our failure to maintain required
capital levels, FHFA directed us to continue to make interest and principal payments on our subordinated debt. For more
information, see “BUSINESS — Regulation and Supervision — Federal Housing Finance Agency — Subordinated Debt.”
Since our entry into conservatorship, Treasury and FHFA have taken a number of actions that affect our cash requirements
and ability to fund those requirements. The conservatorship, and the resulting support we have received from Treasury, has
enabled us to access debt funding on terms sufficient for our needs. Under the Purchase Agreement, Treasury made a
commitment to provide us with funding, under certain conditions, to eliminate deficits in our net worth. The Purchase
Agreement provides that, if FHFA determines as of quarter end that our liabilities have exceeded our assets under GAAP,
Treasury will contribute funds to us in an amount equal to the difference between such liabilities and assets; a higher amount
may be drawn if Treasury and Freddie Mac mutually agree that the draw should be increased beyond the level by which
liabilities exceed assets under GAAP. In each case, the amount of the draw cannot exceed the maximum aggregate amount that
may be funded under the Purchase Agreement. The amount of available funding remaining under the Purchase Agreement is
currently $140.5 billion. This amount will be reduced by any future draws.
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At December 31, 2013, our assets exceeded our liabilities under GAAP; therefore no draw is being requested from
Treasury under the Purchase Agreement. In future periods, we may experience variability in our net income and/or
comprehensive income due to changes in factors such as interest rates, yield curves, mortgage spreads, and home prices. Such
changes could adversely affect our net worth and result in additional draws under the Purchase Agreement. The Capital Reserve
Amount decreases from $3.0 billion for 2013 to $2.4 billion for each quarterly payment in 2014, which increases the risk that
we may require a draw. For more information, see “RISK FACTORS — Conservatorship and Related Matters — We may
request additional draws under the Purchase Agreement in future periods.”
Under the GSE Act, FHFA must place us into receivership if FHFA determines in writing that our assets are and have
been less than our obligations for a period of 60 days. Obtaining funding from Treasury pursuant to its commitment under the
Purchase Agreement enables us to avoid being placed into receivership by FHFA. See “BUSINESS — Regulation and
Supervision — Federal Housing Finance Agency — Receivership” for additional information on mandatory receivership.
In addition, the GSE Act requires us to set aside or allocate monies each year to certain funds managed by HUD and
Treasury. However, FHFA has suspended this requirement. For more information, see “BUSINESS — Regulation and
Supervision — Federal Housing Finance Agency — Affordable Housing Allocations.” We are also required under the Purchase
Agreement to pay a quarterly commitment fee to Treasury. However, an amendment to the Purchase Agreement suspended this
fee for each quarter commencing January 1, 2013 for as long as the net worth sweep dividend provisions are applicable.
Based on our Net Worth Amount at December 31, 2013, our dividend obligation to Treasury in March 2014 will be
$10.4 billion. We paid dividends of $47.6 billion in cash on the senior preferred stock during 2013. Through December 31,
2013, we have paid aggregate cash dividends to Treasury of $71.3 billion, an amount that slightly exceeds our aggregate draws
received under the Purchase Agreement.
At December 31, 2013, our aggregate funding received from Treasury under the Purchase Agreement was $71.3 billion.
This aggregate funding amount does not include the initial $1.0 billion liquidation preference of senior preferred stock that we
issued to Treasury in September 2008 as an initial commitment fee and for which no cash was received.
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. In addition, under the Purchase Agreement, the payment of
dividends cannot be used to reduce prior draws from Treasury. Accordingly, while we have paid aggregate cash dividends to
Treasury of $71.3 billion, the liquidation preference on the senior preferred stock remains $72.3 billion.
For more information on these matters, see “BUSINESS — Conservatorship and Related Matters” and “— Regulation
and Supervision.”
FAIR VALUE BALANCE SHEETS AND ANALYSIS
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of
certain assets and liabilities on a recurring or non-recurring basis. Fair value represents the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The three levels of the fair value hierarchy under the accounting guidance for fair value measurements and disclosures
are described below:
• Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or
liabilities;
• Level 2: Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets
and liabilities in markets that are not active; inputs other than quoted market prices that are observable for the asset or
liability; and inputs that are derived principally from or corroborated by observable market data for substantially the full
term of the assets or liabilities; and
• Level 3: Unobservable inputs for the asset or liability that are supported by little or no market activity and that are
significant to the fair values.
We categorize assets and liabilities recorded or disclosed at fair value within the fair value hierarchy based on the
valuation processes used to derive their fair values and our judgment regarding the observability of the related inputs. Those
judgments are based on our knowledge and observations of the markets relevant to the individual assets and liabilities and may
vary based on market conditions. We review ranges of third-party prices and transaction volumes, and hold discussions with
dealers and pricing service vendors to understand and assess the extent of market benchmarks available and the judgments or
modeling required in their processes. Based on these factors, we determine whether the inputs are observable and whether the
principal markets are active or inactive. For additional information regarding our classification of assets and liabilities within
the fair value hierarchy and the valuation techniques used to measure fair value, see “NOTE 16: FAIR VALUE
DISCLOSURES.”
Level 3 Recurring Fair Value Measurements
At December 31, 2013 and 2012, we measured and recorded: (a) 31% and 28% of total assets carried at fair value on a
recurring basis; and (b) 11% and 7% of total liabilities carried at fair value on a recurring basis using unobservable inputs
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(Level 3). These percentages were calculated before the impact of counterparty and cash collateral netting. The process for
determining fair value using unobservable inputs is generally more subjective and involves a higher degree of management
judgment and assumptions than the measurement of fair value using observable inputs. See “NOTE 16: FAIR VALUE
DISCLOSURES — Changes in Fair Value Levels” for a discussion of changes in our Level 3 assets and liabilities and “—
Table 16.2 — Fair Value Measurements of Assets and Liabilities Using Significant Unobservable Inputs” for the Level 3
reconciliation.
Consideration of Credit Risk in Our Valuation
We consider credit risk in the valuation of our assets and liabilities through consideration of credit risk of the
counterparty in asset valuations and through consideration of our own institutional credit risk in liability valuations on our
GAAP consolidated balance sheets.
We consider credit risk in our valuation of investments in mortgage-related securities based on fair value measurements
that are largely the result of price quotes received from multiple dealers or pricing services. Some of the key valuation drivers
of such fair value measurements include the collateral type, collateral performance, credit quality of the issuer, tranche type,
weighted average life, vintage, coupon, and interest rates. We also make adjustments for items such as credit enhancements or
other types of subordination and liquidity, where applicable. In cases where internally developed models are used, we use
market-based inputs or calibrate such inputs to market data. For a discussion of types and characteristics of mortgage loans
underlying our mortgage-related securities, see “Table 22 — Characteristics of Mortgage-Related Securities on Our
Consolidated Balance Sheets” and “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family
Mortgage Credit Risk.”
We also consider credit risk when we evaluate the valuation of our derivative positions, including the impact of
institutional credit risk in the event that the counterparty does not honor its payment obligation. However, our fair value of
derivatives is not adjusted for credit risk because we obtain collateral from, or post collateral to, counterparties, typically within
one business day of the daily market value calculation. See “RISK MANAGEMENT — Credit Risk — Institutional Credit
Risk — Derivative Counterparties” for a discussion of our counterparty credit risk.
See “NOTE 16: FAIR VALUE DISCLOSURES — Valuation Techniques for Assets and Liabilities Measured in Our
Consolidated Balance Sheets at Fair Value” for additional information regarding the valuation of our assets and liabilities.
Valuation Processes and Controls over Fair Value Measurement
We designed our control processes so that our fair value measurements are appropriate and reliable, that they are based on
observable inputs where possible, and that our valuation approaches are consistently applied and the assumptions and inputs are
reasonable. Our control processes provide a framework for segregation of duties and oversight of our fair value methodologies,
techniques, validation procedures, and results.
See “NOTE 16: FAIR VALUE DISCLOSURES — Valuation Processes and Controls Over Fair Value Measurement” for
additional information.
Consolidated Fair Value Balance Sheets Analysis
The consolidated fair value balance sheets in the table below are a supplemental disclosure not intended to be in
conformity with GAAP, and present our estimates of the fair value of our assets and liabilities at December 31, 2013 and 2012.
The valuations of financial instruments included on our consolidated fair value balance sheets are in accordance with the
accounting guidance for fair value measurements and disclosures. In conjunction with the preparation of our consolidated fair
value balance sheets, we use a number of financial models. See “QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK — Interest-Rate Risk and Other Market Risks,” and “RISK FACTORS” and “RISK
MANAGEMENT — Operational Risks” for information concerning the risks associated with these models.
Key Components of Changes in the Fair Value of Net Assets
Our attribution of changes in the fair value of net assets relies on models, assumptions, and other measurement
techniques that evolve over time. The following are the key components of the attribution analysis:
Core Spread Income
Core spread income on our investments in mortgage loans and mortgage-related securities is a fair value estimate of the
net current period accrual of income from the spread between our mortgage-related investments and our other debt, calculated
on an option-adjusted basis. OAS is an estimate of the yield spread between a given financial instrument and a benchmark
(LIBOR, agency or Treasury) yield curve, after consideration of potential variability in the instrument’s cash flows resulting
from any options embedded in the instrument, such as prepayment options.
Changes in Mortgage-To-Debt OAS
The fair value of our net assets can be significantly affected from period to period by changes in the net OAS between the
mortgage and agency debt sectors. The fair value impact of changes in OAS for a given period represents an estimate of the net
unrealized increase or decrease in fair value of net assets arising from net fluctuations in OAS during that period.
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Changes in Interest-Rate Risk
Changes in interest-rate risk represents the estimated net increase or decrease in the fair value of net assets resulting from
net modeled exposures related to changes in the interest-rate risks we actively manage. The interest-rate risks to which we are
exposed as a result of our investment activities that we actively manage include duration and convexity risks, yield curve risk,
and volatility risk.
We seek to manage these risk exposures within prescribed limits as part of our overall investment strategy. Taking these
risk positions and managing them within established limits is an integral part of our investment activity. See “QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — Interest-Rate Risk and Other Market Risks” for more
information.
Change in the Fair Value of Credit Guarantee Activities
Change in the fair value of credit guarantee activities represents the estimated impact on the fair value of the credit
guarantee business resulting from changes in the amount of such business we conduct plus the effect of changes in interest
rates, projections of the future credit outlook and other market factors (e.g., impact of the passage of time on cash flow
discounting). Our estimated fair value of credit guarantee activities will change as credit conditions change.
Limitations
Our consolidated fair value balance sheets do not capture all elements of value that are implicit in our operations as a
going concern because they only capture the values of the current investment and guarantee portfolios as of the dates presented.
For example, our consolidated fair value balance sheets do not capture the value of new investment and guarantee business that
would likely replace current business (for example, as prepayments and other liquidations occur), nor do they include any
estimation of intangible or goodwill values. Thus, the fair value of net assets presented on our consolidated fair value balance
sheets does not represent an estimate of our net realizable, liquidation, or market value as a whole. Furthermore, amounts we
ultimately realize from the disposition of assets or settlement of liabilities may vary significantly from the fair values presented.
Judgments, assumptions and methodologies used by management may have a significant effect on our measurements of
fair value, and the use of different judgments, assumptions and methodologies, as well as changes in market conditions, could
have a material effect on the fair value of net assets presented on our consolidated fair value balance sheets. For example, the
fair value of certain financial instruments is based on our current principal market (i.e., the market with the greatest volume and
level of activity for the financial instruments) as of the dates presented. As market conditions change or new markets evolve,
our principal market may change, which could significantly affect the fair value of those instruments.
We report certain assets and liabilities that are not financial instruments, such as property and equipment, REO, and our
net deferred tax assets, as well as certain financial instruments that are not subject to the disclosure requirements in the
accounting guidance for financial instruments, such as pension liabilities, at their carrying amounts on our consolidated fair
value balance sheets. We do not believe these items have a significant impact on our overall fair value results. Other non-
financial assets and liabilities on our consolidated balance sheets represent deferrals of costs and revenues that are amortized,
such as deferred debt issuance costs and deferred fees. Cash receipts and payments related to these items are generally
recognized in the fair value of net assets when received or paid, with no basis reflected on our consolidated fair value balance
sheets.
Our senior preferred stock held by Treasury in connection with the Purchase Agreement is recorded at the stated
liquidation preference for purposes of the consolidated fair value balance sheets, which is the same as the carrying value in our
consolidated balance sheets, and may not reflect fair value. As the senior preferred stock is restricted as to its redemption, we
consider the liquidation preference to be the most appropriate measure for purposes of the consolidated fair value balance
sheets.
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Table 69 — Consolidated Fair Value Balance Sheets
December 31,
2013
2012
Carrying
Amount(1)
Fair
Value
Carrying
Amount(1)
Fair
Value
(in billions)
Assets
Cash and cash equivalents
Restricted cash and cash equivalents
Federal funds sold and securities purchased under agreements to resell
Investments in securities:
Available-for-sale, at fair value
Trading, at fair value
Total investments in securities
Mortgage loans:
Mortgage loans held by consolidated trusts
Unsecuritized mortgage loans
Total mortgage loans
Derivative assets, net
Other assets
Total assets
Liabilities
Debt, net:
Debt securities of consolidated trusts held by third parties
$
$
$
Other debt
Total debt, net
Derivative liabilities, net
Other liabilities
Total liabilities
Net assets
Senior preferred stock
Preferred stock
Common stock
Total net assets
$
11.3
12.2
62.4
128.9
23.4
152.3
1,529.9
154.9
1,684.8
1.1
42.0
11.3
12.2
62.4
128.9
23.4
152.3
1,507.7
138.2
1,645.9
1.1
42.0
$
8.5
$
14.6
37.6
174.9
41.5
216.4
1,495.9
190.4
1,686.3
0.7
25.8
1,966.1
$
1,927.2
$
1,989.9
$
1,434.0
$
1,436.9
$
1,419.5
$
506.8
1,940.8
0.2
12.2
1,953.2
72.3
14.1
(73.5)
12.9
512.8
1,949.7
0.2
18.5
1,968.4
72.3
4.4
(117.9)
(41.2)
547.5
1,967.0
0.2
13.8
1,981.0
72.3
14.1
(77.5)
8.9
Total liabilities and net assets
$
1,966.1
$
1,927.2
$
1,989.9
$
(1) Equals the amount reported on our GAAP consolidated balance sheets.
Discussion of Fair Value Results
The table below summarizes the change in the fair value of net assets for 2013.
Table 70 — Summary of Change in the Fair Value of Net Assets
8.5
14.6
37.6
174.9
41.5
216.4
1,540.1
167.6
1,707.7
0.7
25.8
2,011.3
1,487.1
565.6
2,052.7
0.2
16.7
2,069.6
72.3
0.9
(131.5)
(58.3)
2,011.3
Beginning balance
Changes in fair value of net assets, before capital transactions
Subtotal - balance before 2013 capital transactions
Capital transactions:
Dividends and share issuances, net(1)
Ending balance
(1) We did not receive funds from Treasury during 2013 under the Purchase Agreement.
2013
(in billions)
(58.3)
64.7
6.4
(47.6)
(41.2)
$
$
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During 2013, the fair value of net assets, before capital transactions, increased by $64.7 billion. The increase in the fair
value of net assets, before capital transactions, during 2013 was primarily due to: (a) the release of our valuation allowance
against our net deferred tax assets; (b) an increase in the fair value of our single-family mortgage loans as the result of
continued improvement in the credit environment and home prices, partially offset by the effect of a change in estimate related
to enhancements implemented to align our economic capital methodology with external capital benchmarks; (c) a benefit from
settlements related to lawsuits regarding our investments in certain non-agency single-family mortgage-related securities; (d) a
benefit from representation and warranty settlements related to pre-conservatorship loan origination activity; and (e) high
estimated core spread income on our mortgage-related securities and a tightening of OAS levels on our non-agency single-
family mortgage-related securities. See “Table 69 — Consolidated Fair Value Balance Sheets” for additional details.
When the OAS on a given asset widens, the fair value of that asset will typically decline, all other market factors being
equal. However, we believe such OAS widening has the effect of increasing the likelihood that, in future periods, we will
recognize income at a higher spread on this existing asset. The reverse is true when the OAS on a given asset tightens —
current period fair values for that asset typically increase due to the tightening in OAS, while future income recognized on the
asset is more likely to be earned at a reduced spread. However, as market conditions change, our estimate of expected fair value
gains and losses from OAS may also change, and the actual core spread income recognized in future periods could be
significantly different from current estimates.
OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain business arrangements that are not recorded on our consolidated balance sheets or may be recorded
in amounts that differ from the full contract or notional amount of the transaction and that may expose us to potential losses in
excess of the amounts recorded on our consolidated balance sheets.
Securitization Activities and Other Guarantee Commitments
We have certain off-balance sheet arrangements related to our securitization activities involving guaranteed mortgages
and mortgage-related securities, though most of our securitization activities are on-balance sheet. Our off-balance sheet
arrangements related to these securitization activities primarily consist of: (a) Freddie Mac mortgage-related securities backed
by multifamily loans (e.g., K Certificates); and (b) certain single-family Other Guarantee Transactions. We also have off-
balance sheet arrangements related to other guarantee commitments, including long-term standby commitments and liquidity
guarantees.
We guarantee the payment of principal and interest on non-consolidated Freddie Mac guaranteed mortgage-related
securities we issue and on mortgage loans covered by our other guarantee commitments. Our maximum potential off-balance
sheet exposure to credit losses relating to these securitization activities and the other guarantee commitments is primarily
represented by the UPB of the underlying loans and securities, which was $101.0 billion and $74.2 billion at December 31,
2013 and December 31, 2012, respectively.
As part of the guarantee arrangements pertaining to certain multifamily housing revenue bonds and securities backed by
multifamily housing revenue bonds, we provided commitments to advance funds, commonly referred to as “liquidity
guarantees,” which were $10.0 billion and $10.2 billion at December 31, 2013 and December 31, 2012, respectively. These
guarantees require us to advance funds to third parties that enable them to repurchase tendered bonds or securities that are
unable to be remarketed. In addition, as part of the HFA initiative, we, together with Fannie Mae, provide liquidity guarantees
for certain variable-rate single-family and multifamily housing revenue bonds, under which Freddie Mac generally is obligated
to purchase 50% of any tendered bonds that cannot be remarketed within five business days. At December 31, 2013 and
December 31, 2012, there were no liquidity guarantee advances outstanding.
Our exposure to losses on the transactions described above would be partially mitigated by the recovery we would
receive through exercising our rights to the collateral backing the underlying loans and the available credit enhancements,
which may include recourse and primary insurance with third parties. In addition, we provide for incurred losses each period on
these guarantees within our provision for credit losses. See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS —
Housing Finance Agency Initiative” and “NOTE 14: FINANCIAL GUARANTEES” for more information on our off-balance
sheet securitization activities and other guarantee commitments.
Other Agreements
We own interests in numerous entities that are considered to be VIEs for which we are not the primary beneficiary and
which we do not consolidate in accordance with the accounting guidance for the consolidation of VIEs. These VIEs relate
primarily to our investment activity in mortgage-related assets and non-mortgage assets, and include LIHTC partnerships,
certain Other Guarantee Transactions, and certain asset-backed investment trusts. Our consolidated balance sheets reflect only
our investment in the VIEs, rather than the full amount of the VIEs’ assets and liabilities. See “NOTE 3: VARIABLE
INTEREST ENTITIES” for additional information related to our variable interests in these VIEs.
As part of our credit guarantee business, we routinely enter into forward purchase and sale commitments for mortgage
loans and mortgage-related securities. Some of these commitments are accounted for as derivatives. Their fair values are
reported as either derivative assets, net or derivative liabilities, net on our consolidated balance sheets. For more information,
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see “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Derivative Counterparties.” We also enter into
purchase commitments primarily related to future guarantor swap transactions for single-family loans, and, to a lesser extent,
commitments to purchase or guarantee multifamily mortgage loans. These non-derivative commitments totaled $289.7 billion
and $291.5 billion, in notional value at December 31, 2013 and 2012, respectively.
In connection with the execution of the Purchase Agreement, we, through FHFA, in its capacity as Conservator, issued a
warrant to Treasury to purchase 79.9% of our common stock outstanding on a fully diluted basis on the date of exercise. See
“NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT)” for further information.
CONTRACTUAL OBLIGATIONS
The table below provides aggregated information about the listed categories of our contractual obligations as of
December 31, 2013. These contractual obligations affect our short- and long-term liquidity and capital resource needs. The
table includes information about undiscounted future cash payments due under these contractual obligations, aggregated by
type of contractual obligation, including the contractual maturity profile of our debt securities (other than debt securities of
consolidated trusts held by third parties). The timing of actual future payments may differ from those presented due to a number
of factors, including discretionary debt repurchases. Our contractual obligations include other purchase obligations that are
enforceable and legally binding, and exclude contracts that we may cancel at will without penalty. For purposes of this table,
purchase obligations are included through the termination date specified in the respective agreement, even if the contract is
renewable.
In the table below, the amounts of future interest payments on debt securities outstanding at December 31, 2013 are based
on the contractual terms of our debt securities at that date. These amounts were determined using certain assumptions
including, that: (a) variable-rate debt continues to accrue interest at the contractual rates in effect at December 31, 2013 until
maturity; and (b) callable debt continues to accrue interest until its contractual maturity. The amounts of future interest
payments on debt securities presented do not reflect certain factors that will change the amounts of interest payments on our
debt securities after December 31, 2013, such as: (a) changes in interest rates; (b) the call or retirement of any debt securities;
and (c) the issuance of new debt securities. Accordingly, the amounts presented in the table do not represent a forecast of our
future cash interest payments or interest expense.
The table below excludes certain obligations that could significantly affect our short- and long-term liquidity and capital
resource needs. These items, which are listed below, have generally been excluded because the amount and timing of the
related future cash payments are uncertain:
•
•
•
•
•
•
future payments related to debt securities of consolidated trusts held by third parties, because the amount and timing of
such payments are generally contingent upon the occurrence of future events and are therefore uncertain. These
payments generally include payments of principal and interest we make to the holders of our guaranteed mortgage-
related securities in the event a loan underlying a security becomes delinquent. We also remove mortgages from pools
underlying our PCs in certain circumstances, including when loans are 120 days or more delinquent, and retire the
associated PC debt;
any future cash payments associated with the liquidation preference of the senior preferred stock, as well as the
quarterly commitment fee (which has been suspended) and the dividends on the senior preferred stock because the
timing and amount of any such future cash payments are uncertain. As of December 31, 2013, the aggregate liquidation
preference of the senior preferred stock was $72.3 billion. See “BUSINESS — Conservatorship and Related Matters —
Treasury Agreements” for additional information;
future cash settlements on derivative agreements not yet accrued, because the amount and timing of such payments are
dependent upon changes in the underlying financial instruments in response to items such as changes in interest rates
and are therefore uncertain;
future dividends on the preferred stock we have issued (other than the senior preferred stock), because dividends on
these securities are non-cumulative and because we are currently prohibited from paying dividends on these securities;
the guarantee arrangements pertaining to multifamily housing revenue bonds, where we provided commitments to
advance funds, commonly referred to as “liquidity guarantees,” because the amount and timing of such payments are
generally contingent upon the occurrence of future events and are therefore uncertain; and
future cash contributions to our Pension Plan, as the plan is currently over-funded and benefit accruals ceased at the end
of 2013. See "EXECUTIVE COMPENSATION — Pension Plan" and "EXECUTIVE COMPENSATION —
Supplemental Executive Retirement Plan — Pension SERP Benefit" for additional information on our Pension Plan.
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Table 71 — Contractual Obligations by Year at December 31, 2013
Long-term debt(1)
Short-term debt(1)
Interest payable(2)
Other liabilities reflected on our
consolidated balance sheet:
Other contractual liabilities(3)(4)
Purchase obligations:
Purchase commitments(5)
Other purchase obligations(6)
Operating lease obligations
Total
2014
2015
2016
2017
2018
Thereafter
(in millions)
$
369,578
$
78,115
$
70,303
$
63,564
$
51,908
$
33,418
$
72,270
141,767
39,829
141,767
12,329
—
5,656
—
4,558
—
3,235
—
2,195
—
11,856
1,581
923
13,002
13,002
198
29
134
13
8
—
33
6
8
—
15
6
9
—
6
2
7
—
2
1
626
—
8
1
Total specified contractual obligations
$
565,984
$
246,283
$
76,006
$
68,151
$
55,160
$
35,623
$
84,761
(1) Represents par value. Callable debt is included in this table at its contractual maturity. For additional information about our debt, see “NOTE 8: DEBT
SECURITIES AND SUBORDINATED BORROWINGS.”
(2)
(3)
Includes estimated future interest payments on our short-term and long-term debt securities as well as the accrual of periodic cash settlements of
derivatives, netted by counterparty. Also includes accrued interest payable recorded on our consolidated balance sheet, which consists primarily of the
accrual of interest for our PCs and certain Other Guarantee Transactions, and the accrual of interest on short-term and long-term debt.
Includes obligations related to our non-qualified defined benefit plan, qualified and non-qualified defined contribution plans, retiree medical plan, and
other benefit plans.
(4) Other contractual liabilities include future cash payments due under our contractual obligations to make delayed equity contributions to LIHTC
partnerships and payables to the consolidated trusts established for the administration of cash remittances received related to the underlying assets of
Freddie Mac mortgage-related securities.
(5) Purchase commitments represent our obligations to purchase mortgage loans and mortgage-related securities from third parties. The majority of
purchase commitments included in this caption are accounted for as derivatives in accordance with the accounting guidance for derivatives and
hedging.
(6) Primarily includes unconditional purchase obligations that are legally binding and that are subject to a cancellation penalty. Does not include contracts
that we may cancel at will without penalty.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires us to make a number of judgments, estimates,
and assumptions that affect the reported amounts within our consolidated financial statements. Certain of our accounting
policies, as well as estimates we make, are critical, as they are both important to the presentation of our financial condition and
results of operations and require management to make difficult, complex, or subjective judgments and estimates, often
regarding matters that are inherently uncertain. Actual results could differ from our estimates and the use of different judgments
and assumptions related to these policies and estimates could have a material impact on our consolidated financial statements.
Our critical accounting policies and estimates relate to: (a) the allowance for loan losses and the reserve for guarantee
losses; (b) fair value measurements; (c) impairment recognition on investments in securities; and (d) our ability to realize net
deferred tax assets. For additional information about our critical accounting policies and estimates and other significant
accounting policies, as well as recently issued accounting guidance, see “NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES.”
Allowance for Loan Losses and Reserve for Guarantee Losses
The allowance for loan losses and the reserve for guarantee losses represent estimates of probable incurred credit losses.
The allowance for loan losses pertains to all single-family and multifamily loans classified as held-for-investment on our
consolidated balance sheets, whereas the reserve for guarantee losses relates to single-family and multifamily loans underlying
our non-consolidated Freddie Mac mortgage-related securities and other guarantee commitments. We use the same
methodology to determine our allowance for loan losses and reserve for guarantee losses, as the relevant factors affecting credit
risk are the same. Collectively, we refer to our allowance for loan losses and our reserve for guarantee losses as our loan loss
reserves.
Determining the appropriateness of the loan loss reserves is a complex process that is subject to numerous estimates and
assumptions requiring significant management judgment about matters that involve a high degree of subjectivity. This process
involves the use of models that require us to make judgments about matters that are difficult to predict, the most significant of
which are the probability of default and loss severity on single-family loans. We regularly evaluate the underlying estimates and
models we use when determining loan loss reserves and update our assumptions to reflect our historical experience and current
view of economic factors. See “RISK FACTORS — Operational Risks — We face risks and uncertainties associated with the
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models that we use for financial accounting and reporting purposes, to make business decisions, and to manage risks. Market
conditions have raised these risks and uncertainties.”
We believe the level of our loan loss reserves is appropriate based on internal reviews of the factors and methodologies
used. No single statistic or measurement determines the appropriateness of the loan loss reserves. Changes in one or more of
the estimates or assumptions used to calculate the loan loss reserves could have a material impact on the loan loss reserves and
provision for credit losses.
Single-Family Loan Loss Reserves
Most single-family loans are aggregated into pools based on similar risk characteristics and measured collectively using a
statistically based model that evaluates a variety of factors affecting collectability, including but not limited to: (a) estimated
current LTV ratios; (b) loan product type; (c) delinquency/default status and history; and (d) geographic location. Inputs used
by the model are regularly updated for changes in the underlying data, assumptions, and market conditions. We consider the
output of this model, together with other information such as our expectations with respect to the following: (a) future levels of
loan modifications; (b) future repurchases by seller/servicers of loans; (c) the adequacy of third-party credit enhancements; (d)
the effects of changes in government policies and programs; (e) the effects of macroeconomic variables such as rates of
unemployment; and (f) the effects of home price changes on borrower behavior. The inability to realize the benefits of our loss
mitigation activities, a lower realized rate of seller/servicer repurchases, declines in home prices, deterioration in the financial
condition of our mortgage insurance counterparties, or increases in delinquency rates would cause our losses to be significantly
higher than those currently estimated.
Individually impaired single-family loans include loans that have undergone a TDR and are measured for impairment as
the excess of our recorded investment in the loan over the present value of the expected future cash flows. Our expectation of
future cash flows incorporates many of the judgments indicated above.
Multifamily Loan Loss Reserves
To determine loan loss reserves for the multifamily loan portfolio, including determining which loans are individually
impaired, we consider all available evidence including, but not limited to, operating cash flows from the underlying property as
represented by its current DSCR, the fair value of collateral underlying the loans, evaluation of the repayment prospects, the
expected adequacy of third-party credit enhancements, year of origination, certain macroeconomic data, and available
economic data related to multifamily real estate, including apartment vacancy and rental rates.
Multifamily loans evaluated collectively for impairment are aggregated into book year vintages and measured by
benchmarking published historical commercial mortgage data to those vintages based upon some of the factors listed above.
Individually impaired multifamily loans are generally measured for impairment based on the fair value of the underlying
collateral, as reduced by estimated disposition costs, as multifamily loans are generally collateral-dependent and most
multifamily loans are non-recourse to the borrower. As a result, the cash flows of the underlying property (including any
associated credit enhancements) serve as the source of funds for repayment of the loan.
Fair Value Measurements
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of
certain assets and liabilities on a recurring or non-recurring basis. Assets and liabilities within our consolidated financial
statements measured at fair value include: (a) mortgage-related and non-mortgage related securities; (b) mortgage loans held-
for-sale; (c) derivative instruments; (d) certain debt securities of consolidated trusts held by third parties and certain other debt;
and (e) REO. The accounting guidance for fair value measurements and disclosures defines fair value, establishes a framework
for measuring fair value, and sets forth disclosure requirements regarding fair value measurements. This accounting guidance
also establishes a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value
based on the assumptions a market participant would use at the measurement date. Fair value measurements under this
hierarchy are distinguished among quoted market prices, observable inputs, and unobservable inputs. The measurement of fair
value requires management to make judgments and assumptions. The process for determining fair value using unobservable
inputs is generally more subjective and involves a higher degree of management judgment and assumptions than the
measurement of fair value using observable inputs. These judgments and assumptions may have a significant effect on our
measurements of fair value, and the use of different judgments and assumptions, as well as changes in market conditions, could
have a material effect on our consolidated statements of comprehensive income and consolidated balance sheets. See
“NOTE 16: FAIR VALUE DISCLOSURES” and “FAIR VALUE BALANCE SHEETS AND ANALYSIS” for additional
information regarding fair value hierarchy and measurements.
Impairment Recognition on Investments in Securities
We evaluate available-for-sale securities in an unrealized loss position as of the end of each quarter for other-than-
temporary impairment. An unrealized loss exists when the fair value of an individual security is less than its amortized cost
basis. As discussed further below, certain other-than-temporary impairment losses are recognized in earnings.
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If we intend to sell the security or believe it is more likely than not that we will be required to sell the security prior to
recovery of its amortized cost basis, the security’s entire decline in fair value is deemed to be other-than-temporary and is
recorded within our consolidated statements of comprehensive income as net impairment of available-for-sale securities
recognized in earnings. If we do not intend to sell the security and we believe it is not more likely than not that we will be
required to sell prior to recovery of the security’s unrealized loss, we recognize only the credit component of other-than-
temporary impairment in earnings and the amounts attributable to all other factors are recorded in AOCI. The credit component
represents the amount by which the present value of cash flows expected to be collected from the security is less than the
amortized cost basis of the security.
The evaluation of whether unrealized losses on available-for-sale securities are other-than-temporary requires significant
management judgments and assumptions and consideration of numerous factors. We perform an evaluation on a security-by-
security basis considering all available information. The relative importance of this information varies based on the facts and
circumstances surrounding each security, as well as the economic environment at the time of assessment. See “NOTE 7:
INVESTMENTS IN SECURITIES — Impairment Recognition on Investments in Securities” and “CONSOLIDATED
BALANCE SHEETS ANALYSIS — Investments in Securities” for more information on impairment recognition on securities.
We believe our judgments and assumptions used in our evaluation of other-than-temporary impairment are reasonable.
However, different judgments or assumptions could have resulted in materially different recognition of other-than-temporary
impairment. It is possible that the losses we ultimately realize could be significantly higher or lower than the losses we have
recognized to date in our consolidated statements of comprehensive income.
Realizability of Deferred Tax Assets, Net
Deferred tax assets reflect timing differences between the recognition of income/expenses for financial reporting purposes
and the recognition of income/expenses for tax reporting purposes. Deferred tax assets are created when: (a) expenses are
recognized for financial reporting purposes prior to the corresponding recognition of expenses for tax reporting purposes; and/
or (b) income is recognized for tax reporting purposes prior to the corresponding recognition of income for financial reporting
purposes. The realization of these net deferred tax assets is dependent upon the generation of sufficient taxable income of the
appropriate character (i.e., ordinary income or capital gains) in the available carryback and carryforward years under the tax
law, which would include reversals of existing taxable temporary differences and liabilities associated with unrecognized tax
benefits. Valuation allowances are recorded to reduce net deferred tax assets when it is more likely than not that all or part of
our tax benefits will not be realized.
On a quarterly basis, we determine whether a valuation allowance is necessary on our net deferred tax asset. In doing so,
we consider all evidence available, both positive and negative, in determining whether, based on the weight of the evidence, it
is more likely than not that the deferred tax assets will be realized. In conducting our assessment, we evaluate all available
objective evidence including, but not limited to: (a) our three-year cumulative income position; (b) the trend of our financial
and tax results; (c) the amount of taxable income reported in our federal income tax return; (d) our tax net operating loss and
tax credit carryforwards and the length of carryforward periods available to utilize these assets under current tax law; and (e)
our access to capital under the agreements associated with conservatorship. Furthermore, we evaluate all available subjective
evidence including, but not limited to: (a) difficulty in predicting unsettled circumstances related to the conservatorship; (b) our
estimated taxable income; and (c) forecasts of future book and tax income. Our consideration of the evidence requires
significant judgment regarding estimates and assumptions that are inherently uncertain, particularly about our future business
structure and financial results.
We are not permitted to consider the impacts proposed legislation may have on our business operations or the mortgage
industry in our analysis because the timing and certainty of those actions are unknown and beyond our control.
During 2013, we concluded that it was more likely than not that our deferred tax assets would be realized and we released
the valuation allowance against our net deferred tax assets. In future quarters we will continue to evaluate our ability to realize
our net deferred tax assets. If evidence in future periods changes such that it is more likely than not that part or all of the net
deferred tax assets will not be realized, we will reestablish a valuation allowance at that time. For more information see
“NOTE 12: INCOME TAXES.”
RISK MANAGEMENT AND DISCLOSURE COMMITMENTS
In October 2000, we announced our adoption of a series of commitments designed to enhance market discipline, liquidity
and capital. In September 2005, we entered into a written agreement with FHFA, then OFHEO, that updated these
commitments and set forth a process for implementing them. A copy of the letters between us and OFHEO dated September 1,
2005 constituting the written agreement has been filed as an exhibit to our Registration Statement on Form 10, filed with the
SEC on July 18, 2008, and is available on the Investor Relations page of our web site at www.freddiemac.com/investors/
sec_filings/index.html.
In November 2008, FHFA suspended our periodic issuance of subordinated debt disclosure commitment during the term
of conservatorship and thereafter until directed otherwise. In March 2009, FHFA suspended the remaining disclosure
commitments under the September 1, 2005 agreement until further notice, except that: (a) FHFA will continue to monitor our
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adherence to the substance of the liquidity management and contingency planning commitment through normal supervision
activities; and (b) we will continue to provide interest-rate risk and credit risk disclosures in our periodic public reports.
Our monthly average PMVS results, duration gap, and related disclosures are provided in our Monthly Volume Summary
reports, which are available on our web site, www.freddiemac.com and in current reports on Form 8-K we file with the SEC.
For disclosures concerning our PMVS and duration gap, see “QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK — Interest-Rate and Other Market Risks — PMVS and Duration Gap.” For disclosures concerning
credit risk sensitivity, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Credit Risk Sensitivity.”
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest-Rate Risk and Other Market Risks
Our mortgage-related investments portfolio (i.e., mortgage loans and mortgage-related securities), non-mortgage
investments, and unsecured debt expose us to interest-rate risk and other market risks, including basis and spread risk, and
prepayment risk arising from credit risk primarily: (a) from the uncertainty as to when borrowers will pay the outstanding
principal balance of mortgage loans and mortgage-related securities; and (b) unexpected prepayments or differences in
expected cash flows due to default of the underlying borrower or modification of loan terms by the servicer. For a majority of
our mortgage-related investments, the mortgage borrower has the option to make unscheduled payments of additional principal
or to completely pay off a mortgage loan at any time before its scheduled maturity date (without having to pay a prepayment
penalty) or make principal payments in accordance with their contractual obligation. For more information on credit risk, see
"MD&A — RISK MANAGEMENT — Credit Risk."
Our credit guarantee activities also expose us to interest-rate risk because changes in interest rates can cause fluctuations
in the fair value of our existing credit guarantees. We generally do not hedge these changes in fair value except for interest-rate
exposure related to buy-ups and float. Float, which arises from timing differences between when the borrower makes principal
payments on the loan and the reduction of the PC balance, can lead to significant interest expense if the interest rate paid to a
PC investor is higher than the reinvestment rate earned by the securitization trusts on payments received from mortgage
borrowers and paid to us as trust management income.
Changes in prepayments, defaults, basis and spreads, or unexpected prepayments could result in significant economic
losses and have an adverse impact on earnings and net worth. In addition, these risks could result in realized losses upon the
sale of assets. While we manage interest-rate risk, we have limited ability to manage basis and spread risk. We use derivatives
as an important part of our strategy to manage interest-rate and prepayment risk. When determining to use derivatives to
mitigate our exposures, we consider a number of factors, including cost, exposure to counterparty risks, and our overall risk
management strategy. See “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk” and “RISK
FACTORS” for a discussion of our market risk exposures, including those related to derivatives, institutional counterparties,
and other market risks.
Interest-Rate Risk Management Strategy and Framework
We employ a risk management framework, using the fair value of financial instruments, that seeks to maintain certain
interest rate characteristics of our assets and liabilities within our risk limits through a number of different strategies, including:
•
•
•
asset selection and structuring: We may acquire or structure mortgage-related securities with certain expected
prepayment and other characteristics;
callable and non-callable unsecured debt; and
interest rate derivatives, including swaptions and swaps.
To maintain our interest-rate risk exposure across a range of interest-rate scenarios within our risk limits, we analyze the
interest-rate sensitivity of financial assets and liabilities at the instrument level on a daily basis and across a variety of interest
rate scenarios. For risk management purposes, the interest-rate characteristics of each instrument are determined daily based on
market prices and models. The fair values of our assets, liabilities and derivatives are primarily based on either third-party
prices, or observable market-based inputs. For more information, see “NOTE 16: FAIR VALUE DISCLOSURES — Valuation
Processes and Controls over Fair Value Measurement.”
Annually, the Business and Risk Committee of our Board of Directors establishes certain Board limits for interest-rate
risk measures, and if we exceed these limits we are required to notify the Business and Risk Committee and address the limit
breach. These limits encompass a range of interest-rate risks that include duration risk, convexity risk, volatility risk, and yield
curve risk associated with our use of various financial instruments, including derivatives. Also, on an annual basis, our
Enterprise Risk Management division establishes management limits and makes recommendations with respect to the limits to
be established at the Board level. These limits are reviewed by our Enterprise Risk Management Committee, which is
responsible for reviewing performance as compared to the established limits. The management limits are set at values below
those set at the Board level, which is intended to allow us to follow a series of predetermined actions in the event of a breach of
the management limits and helps ensure proper oversight to reduce the possibility of exceeding the Board limits.
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The principal types of interest-rate risk and other market risks to which we are exposed are described below.
Duration Risk and Convexity Risk
Duration is a measure of a financial instrument’s price sensitivity to a 100 basis point change in interest rates along the
yield curve (expressed in percentage terms). Convexity is a measure of how much a financial instrument’s duration changes as
interest rates change. Similar to the duration calculation, we compute each instrument’s convexity by applying the shock, both
upward and downward, to the LIBOR curve and evaluating the impact on the duration. Currently, short-term interest rates are at
historically low levels and, at some points, the LIBOR curve is less than 25 basis points. As a result, the basis point shock to the
LIBOR curve described above is bounded by zero. Our convexity risk primarily results from prepayment risk.
Yield Curve Risk
Yield curve risk is the risk that non-parallel shifts in the yield curve (such as a flattening or steepening) will adversely
affect the fair value of net assets and ultimately adversely affect our net worth. Because changes in the shape, or slope, of the
yield curve often arise due to changes in the market’s expectation of future interest rates at different points along the yield
curve, we evaluate our exposure to yield curve risk by examining potential reshaping scenarios at various points along the yield
curve. Our yield curve risk under a specified yield curve scenario is reflected in our PMVS-YC disclosure.
Volatility Risk
Volatility risk is the risk that changes in the market’s expectation of the magnitude of future variations in interest rates
will adversely affect the fair value of net assets and ultimately adversely affect our net worth. Volatility risk arises from the
prepayment risk that is inherent in mortgages or mortgage-related securities. In general, as expected future interest rate
volatility increases, the homeowner’s prepayment option increases in value, thus negatively impacting the value of the
mortgage security backed by the underlying mortgages. We manage volatility risk by maintaining a portfolio of callable debt,
without a related swap, and option-based interest rate derivatives. We actively manage and monitor our volatility risk exposure
over a range of changing interest rate scenarios.
Basis Risk
Basis risk is the risk that interest rates in different market sectors will not move in tandem and will adversely affect the
fair value of net assets and ultimately adversely affect our net worth. This risk arises principally because the mortgage-related
investments generally do not move in tandem with our financial liabilities and derivatives. We are continually exposed to
significant basis risk, also referred to as mortgage-to-debt OAS risk or spread risk, arising from funding mortgage-related
investments with debt securities. See “MD&A — FAIR VALUE BALANCE SHEETS AND ANALYSIS — Consolidated Fair
Value Balance Sheets Analysis — Key Components of Changes in Fair Value of Net Assets — Changes in Mortgage-To-Debt
OAS” for additional information. We also incur basis risk when we use LIBOR- or Treasury-based instruments in our risk
management activities.
Model Risk
Models, including mortgage prepayment models, interest rate models, home price models, mortgage default models, and
model adjustments based on new information or changes in conditions, are an integral part of our investment framework. As
market conditions change rapidly, the assumptions that we use in our models for our sensitivity analyses (including PMVS and
duration gap measures) may not keep pace with these market changes. As such, these analyses are not intended to provide
precise forecasts of the effect a change in market interest rates would have on the estimated fair values of our assets. We
manage our model risk by reviewing the performance of our models. To improve the accuracy of our models, changes to the
underlying assumptions or modeling techniques are made on a periodic basis. Model development and model testing are
reviewed and approved independently by our Enterprise Risk Management division. Model performance is also reported
regularly through a series of internal management committees. See “MD&A — RISK MANAGEMENT — Operational Risks”
and “RISK FACTORS — Operational Risks — We face risks and uncertainties associated with the models that we use for
financial accounting and reporting purposes, to make business decisions, and to manage risks. Market conditions have raised
these risks and uncertainties” for a discussion of the risks associated with our use of models. Given the importance of models
to our investment management practices, model changes undergo a rigorous review process. As a result, it is common for
model changes to take several months to complete, which could affect our estimation of risk metrics.
Foreign-Currency Risk
Foreign-currency risk is the risk that fluctuations in currency exchange rates (e.g., Euros to the U.S. dollar) will adversely
affect the fair value of debt denominated in currencies other than the U.S. dollar, our functional currency. We mitigated
virtually all of our foreign-currency risk by entering into swap transactions that effectively converted foreign-currency
denominated obligations into U.S. dollar-denominated obligations. We no longer have any significant risks associated with
fluctuations in currency exchange rates, because our last non-U.S. dollar denominated debt matured in January 2014.
Portfolio Market Value Sensitivity and Measurement of Interest-Rate Risk
PMVS and Duration Gap
Our primary interest-rate risk measures are PMVS and duration gap.
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PMVS is an estimate of the change in the market value of our net assets and liabilities from an instantaneous 50 basis
point shock to interest rates, assuming no rebalancing actions are undertaken and assuming the mortgage-to-LIBOR basis does
not change. PMVS is measured in two ways, one measuring the estimated sensitivity of our portfolio market value to parallel
movements in interest rates (PMVS-Level or PMVS-L) and the other to nonparallel movements (PMVS-YC).
• We calculate our exposure to changes in interest rates using effective duration. Effective duration measures the
percentage change in the price of financial instruments from a 1% change in interest rates. Financial instruments with
positive duration increase in value as interest rates decline. Conversely, financial instruments with negative duration
increase in value as interest rates rise.
• Together, duration and convexity provide a measure of an instrument’s overall price sensitivity to changes in interest
rates. We utilize the aggregate duration and convexity risk of all interest-rate sensitive instruments on a daily basis to
estimate the two PMVS metrics. The duration and convexity measures are used to estimate PMVS under the following
formula:
PMVS = –[Duration] multiplied by [rate shock] plus [0.5 multiplied by Convexity] multiplied by [rate shock]2
In the equation, [rate shock] represents the interest-rate change expressed in fair value terms. Assuming an adverse 50
basis point change, the result of this formula is the fair value of sensitivity to the change in rate, which is expressed as:
PMVS = (0.5 absolute value of duration) + (0.125 convexity), assuming convexity is negative.
• To estimate PMVS-L, an instantaneous parallel 50 basis point shock is applied to the yield curve, as represented by the
US swap curve, holding all spreads to the swap curve constant. This shock is applied to the duration and convexity of
all interest-rate sensitive financial instruments. The resulting change in market value for the aggregate portfolio is
computed for both the up rate and down rate shock and the change in market value in the more adverse scenario of the
up and down rate shocks is the PMVS. In cases where both the up rate and down rate shock results in a positive impact,
the PMVS is zero. Because this process uses a parallel, or level, shock to interest rates, we refer to this measure as
PMVS-L.
• To estimate sensitivity related to the shape of the yield curve, a yield curve steepening and flattening of 25 basis points
is applied to the duration of all interest-rate sensitive instruments. The resulting change in market value for the
aggregate portfolio is computed for both the steepening and flattening yield curve scenarios. The more adverse yield
curve scenario is then used to determine the PMVS-yield curve. Because this process uses a non-parallel shock to
interest rates, we refer to this measure as PMVS-YC.
• The 50 basis point shift and 25 basis point change in slope of the LIBOR yield curve used for our PMVS measures
reflect reasonably possible near-term changes that we believe provide a meaningful measure of our interest-rate risk
sensitivity. Our PMVS measures assume instantaneous shocks. Therefore, these PMVS measures do not consider the
effects on fair value of any rebalancing actions that we would typically expect to take to reduce our risk exposure.
Duration gap measures the difference in price sensitivity to interest rate changes between our assets and liabilities, and is
expressed in months relative to the market value of assets. For example, assets with a six month duration and liabilities with a
five month duration would result in a positive duration gap of one month. A duration gap of zero implies that the duration of
our assets equals the duration of our liabilities. As a result, the change in the value of assets from an instantaneous move in
interest rates, either up or down, would be expected to be accompanied by an equal and offsetting change in the value of
liabilities, thus leaving the fair value of net assets unchanged. A positive duration gap indicates that the duration of our assets
exceeds the duration of our liabilities which, from a net perspective, implies that the fair value of net assets will increase in
value when interest rates fall and decrease in value when interest rates rise. A negative duration gap indicates that the duration
of our liabilities exceeds the duration of our assets which, from a net perspective, implies that the fair value of net assets will
increase in value when interest rates rise and decrease in value when interest rates fall.
We estimate the sensitivity to changes in interest rates of the fair value of all financial assets, liabilities, and derivatives
on a pre-tax basis. We also take into account the cash flows related to certain credit guarantee-related items, including buy-ups
and expected gains or losses due to net interest from float. In making these calculations, we do not consider the sensitivity to
interest-rate changes of the following assets and liabilities:
• Credit guarantee activities. We do not consider the sensitivity of the fair value of credit guarantee activities to changes
in interest rates except for the guarantee-related items mentioned above (i.e., buy-ups and float), because we do not
actively manage the change in the fair value of our guarantee business that is attributable to changes in interest rates.
We do not believe that periodic changes in fair value due to movements in interest rates are the best indication of the
long-term value of our guarantee business because these changes do not take into account the potential for new future
guarantee business activity.
• Other assets with minimal interest-rate sensitivity. We do not include other assets, primarily non-financial instruments
such as fixed assets and REO, because we estimate their impact on PMVS and duration gap to be minimal.
Limitations of Market Risk Measures
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Our PMVS and duration gap estimates are determined using models that involve our judgment of interest-rate and
prepayment assumptions. Accordingly, while we believe that PMVS and duration gap are useful risk management tools, they
should be understood as estimates rather than as precise measurements. There could be times when we hedge differently than
our model estimates during the period (i.e., when we are making changes or market updates to these models). While PMVS and
duration gap estimate our exposure to changes in interest rates, they do not capture the potential impact of certain other market
risks, such as changes in volatility, basis, and foreign-currency risk. The impact of these other market risks can be significant.
There are inherent limitations in any methodology used to estimate exposure to changes in market interest rates. Our
sensitivity analyses for PMVS and duration gap contemplate only certain movements in interest rates and are performed at a
particular point in time based on the estimated fair value of our existing portfolio. These sensitivity analyses do not consider
other factors that may have a significant effect on our financial instruments, most notably business activities and strategic
actions that management may take in the future to manage interest-rate risk. As such, these analyses are not intended to provide
precise forecasts of the effect a change in market interest rates would have on the estimated fair value of our net assets.
In addition, it has been more difficult in recent years to measure and manage the interest-rate risk related to mortgage
assets as risk for prepayment model error remains high due to the low interest rate environment and uncertainty regarding
default rates, unemployment, government policy changes and programs, loan modifications, and the volatility and impact of
home price movements on mortgage durations. Misestimation of prepayments, resulting in over or under hedging of interest-
rate risk, could result in significant economic losses and have an adverse impact on earnings. In addition, this misestimation
could result in realized losses upon the sale of assets.
Duration Gap and PMVS Results
The table below provides duration gap, estimated point-in-time and minimum and maximum PMVS-L and PMVS-YC
results, and an average of the daily values and standard deviation for the years ended December 31, 2013 and 2012. The
table below also provides PMVS-L estimates assuming an immediate 100 basis point shift in the LIBOR yield curve. We do not
hedge the entire prepayment risk exposure embedded in our mortgage assets. The interest-rate sensitivity of a mortgage
portfolio varies across a wide range of interest rates. Therefore, the difference between PMVS at 50 basis points and 100 basis
points is non-linear.
Our PMVS-L (50 basis points) exposure at December 31, 2013 was $176 million, which decreased compared to
December 31, 2012 primarily due to a decrease in our negative convexity exposure. On an average basis for the year ended
December 31, 2013, our PMVS-L (50 basis points) was $235 million, primarily resulting from our negative convexity exposure
on our mortgage assets.
Table 72 — PMVS and Duration Gap Results
Assuming shifts of the LIBOR yield curve:
December 31, 2013
December 31, 2012
Average
Minimum
Maximum
Standard deviation
PMVS-YC
25 bps
PMVS-L
50 bps
100 bps
(in millions)
$
$
— $
49
$
176
296
$
$
368
900
Duration
Gap
2013
PMVS-YC
25 bps
Year Ended December 31,
PMVS-L
50 bps
Duration
Gap
2012
PMVS-YC
25 bps
PMVS-L
50 bps
(in months)
(dollars in millions)
(in months)
(dollars in millions)
0.2
$
(1.2) $
2.0
0.5
$
$
21
$
— $
78
16
$
$
235
—
673
121
(0.1) $
(2.4) $
1.5
0.5
$
$
38
1
129
34
$
$
$
$
198
—
661
108
Derivatives have historically enabled us to reduce our interest-rate risk exposure, which could have been higher without
the use of derivatives. The table below shows that the PMVS-L risk levels for the periods presented would have been higher if
we had not used derivatives. The derivative impact on our PMVS-L (50 basis points) was $(2.0) billion at December 31, 2013,
an increase of $1.1 billion from December 31, 2012. The increase was primarily driven by an increase in the estimated duration
of our mortgage assets caused by the increase in interest rates during 2013.
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Table 73 — Derivative Impact on PMVS-L (50 bps)
At:
December 31, 2013
December 31, 2012
Duration Gap Results
Before
Derivatives
After
Derivatives
(in millions)
Effect of
Derivatives
$
$
2,166
1,189
$
$
176
296
$
$
(1,990)
(893)
We actively measure and manage our duration gap exposure on a daily basis. In addition to duration gap management, we
also measure and manage the price sensitivity of our portfolio to a number of different specific interest rate changes along the
yield curve. The price sensitivity of an instrument to specific changes in interest rates is known as the instrument’s key rate
duration risk. By managing our duration exposure both in aggregate through duration gap and to specific changes in interest
rates through key rate duration, we expect to limit our fair value exposure to interest rate changes for a wide range of interest
rate yield curve scenarios. However, hedging our overall duration gap exposure could result in increased volatility in our
financial results, as our derivatives and the majority of our financial assets are measured at fair value, while our financial
liabilities are generally not measured at fair value. Our average duration gap, rounded to the nearest month, for the months of
December 2013 and 2012 was zero months in both periods. Our average duration gap, rounded to the nearest month, during the
years ended December 31, 2013 and 2012 was zero months in both periods.
The disclosure in our Monthly Volume Summary reports, which are available on our web site at www.freddiemac.com
and in current reports on Form 8-K we file with the SEC, reflects the average of the daily PMVS-L, PMVS-YC and duration
gap estimates for a given reporting period (a month, quarter or year).
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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To the Board of Directors and Stockholders of Freddie Mac
Report of Independent Registered Public Accounting Firm
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive
income, of equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Freddie Mac, a
stockholder-owned government-sponsored enterprise, and its subsidiaries (the "Company") at December 31, 2013 and 2012,
and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on
criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) because a material weakness in internal control over financial reporting related to
disclosure controls and procedures that do not provide adequate mechanisms for information known to the Federal Housing
Finance Agency (“FHFA”) that may have financial statement disclosure ramifications to be communicated to management of
Freddie Mac existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in
Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. We considered this material
weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2013 consolidated financial
statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not
affect our opinion on those consolidated financial statements. The Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in management's report referred to above. Our responsibility is to express
opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
As discussed in "Note 2: Conservatorship and Related Matters", in September 2008, the Company was placed into
conservatorship by the FHFA. The U.S. Department of Treasury (“Treasury”) has committed financial support to the Company
and management continues to conduct business operations pursuant to the delegated authorities from FHFA during
conservatorship. The Company is dependent upon the continued support of Treasury and FHFA.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
February 27, 2014
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FREDDIE MAC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Interest income
Mortgage loans:
Held by consolidated trusts
Unsecuritized
Total mortgage loans
Investments in securities
Other
Total interest income
Interest expense
Debt securities of consolidated trusts
Other debt:
Short-term debt
Long-term debt
Total interest expense
Expense related to derivatives
Net interest income
Benefit (provision) for credit losses
Net interest income after benefit (provision) for credit losses
Non-interest income (loss)
Gains (losses) on extinguishment of debt securities of consolidated trusts
Gains (losses) on retirement of other debt
Derivative gains (losses)
Impairment of available-for-sale securities:
Total other-than-temporary impairment of available-for-sale securities
Portion of other-than-temporary impairment recognized in AOCI
Net impairment of available-for-sale securities recognized in earnings
Other gains (losses) on investment securities recognized in earnings
Other income
Non-interest income (loss)
Non-interest expense
Salaries and employee benefits
Professional services
Occupancy expense
Other administrative expenses
Total administrative expenses
Real estate owned operations income (expense)
Other expenses
Non-interest expense
Income (loss) before income tax benefit
Income tax benefit
Net income (loss)
Year Ended December 31,
2013
2012
2011
(in millions, except share-related amounts)
$
57,189
$
65,089
$
7,694
64,883
7,768
51
72,702
8,960
74,049
10,583
86
84,718
77,158
9,124
86,282
12,791
67
99,140
(47,350)
(56,109)
(67,119)
(178)
(8,251)
(55,779)
(455)
16,468
2,465
18,933
314
132
2,632
(763)
(747)
(1,510)
301
6,650
8,519
(833)
(543)
(54)
(375)
(1,805)
140
(424)
(2,089)
25,363
23,305
48,668
(176)
(10,217)
(66,502)
(605)
17,611
(1,890)
15,721
(58)
(77)
(2,448)
(1,236)
(932)
(2,168)
(1,522)
2,190
(4,083)
(810)
(361)
(57)
(333)
(1,561)
(59)
(573)
(2,193)
9,445
1,537
10,982
4,769
414
(126)
5,057
16,039
10,982
(13,056)
(2,074)
(0.64)
$
$
$
$
(331)
(12,538)
(79,988)
(755)
18,397
(10,702)
7,695
(219)
44
(9,752)
(2,101)
(200)
(2,301)
(896)
2,246
(10,878)
(832)
(270)
(62)
(342)
(1,506)
(585)
(392)
(2,483)
(5,666)
400
(5,266)
3,465
509
62
4,036
(1,230)
(5,266)
(6,498)
(11,764)
(3.63)
Other comprehensive income (loss), net of taxes and reclassification adjustments:
Changes in unrealized gains (losses) related to available-for-sale securities
Changes in unrealized gains (losses) related to cash flow hedge relationships
Changes in defined benefit plans
Total other comprehensive income (loss), net of taxes and reclassification adjustments
Comprehensive income (loss)
Net income (loss)
Undistributed net worth sweep and senior preferred stock dividends
Loss attributable to common stockholders
Loss per common share — basic and diluted
2,406
316
210
2,932
51,600
48,668
(52,199)
(3,531)
(1.09)
$
$
$
$
$
$
$
$
Weighted average common shares outstanding (in thousands) — basic and diluted
3,238,047
3,240,028
3,244,896
The accompanying notes are an integral part of these consolidated financial statements.
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FREDDIE MAC
CONSOLIDATED BALANCE SHEETS
Assets
Cash and cash equivalents (includes $1 and $1, respectively, related to our consolidated VIEs)
Restricted cash and cash equivalents (includes $12,193 and $14,289, respectively, related to our
consolidated VIEs)
Federal funds sold and securities purchased under agreements to resell (includes $3,150 and
$19,250, respectively, related to our consolidated VIEs)
Investments in securities:
Available-for-sale, at fair value (includes $70 and $132, respectively, pledged as collateral that
may be repledged)
Trading, at fair value (includes $365 and $0, respectively, pledged as collateral that may be
repledged)
Total investments in securities
Mortgage loans:
Held-for-investment, at amortized cost:
By consolidated trusts (net of allowances for loan losses of $3,006 and $4,919, respectively)
Unsecuritized (net of allowances for loan losses of $21,612 and $25,788, respectively)
Total held-for-investment mortgage loans, net
Held-for-sale, at fair value
Total mortgage loans, net
Accrued interest receivable (includes $5,111 and $5,426, respectively, related to our consolidated
VIEs)
Derivative assets, net
Real estate owned, net (includes $49 and $45, respectively, related to our consolidated VIEs)
Deferred tax assets, net
Other assets (Note 19) (includes $2,172 and $7,986, respectively, related to our consolidated VIEs)
Total assets
Liabilities and equity (deficit)
Liabilities
Accrued interest payable (includes $4,702 and $5,142, respectively, related to our consolidated
VIEs)
Debt, net:
Debt securities of consolidated trusts held by third parties (includes $59 and $70 at fair value,
respectively)
Other debt (includes $2,683 and $2,187 at fair value, respectively)
Total debt, net
Derivative liabilities, net
Other liabilities (Note 19) (includes $6 and $1, respectively, related to our consolidated VIEs)
$
$
Total liabilities
Commitments and contingencies (Notes 9, 14, and 17)
Equity (deficit)
Senior preferred stock, at redemption value
Preferred stock, at redemption value
Common stock, $0.00 par value, 4,000,000,000 shares authorized, 725,863,886 shares issued and
650,039,533 shares and 650,033,623 shares outstanding, respectively
Additional paid-in capital
Retained earnings (accumulated deficit)
AOCI, net of taxes, related to:
Available-for-sale securities (includes $1,100 and $6,606, respectively, related to net unrealized
losses on securities for which other-than-temporary impairment has been recognized in
earnings)
Cash flow hedge relationships
Defined benefit plans
Total AOCI, net of taxes
Treasury stock, at cost, 75,824,353 shares and 75,830,263 shares, respectively
Total equity (deficit) (See NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT) for information on
our dividend obligation to Treasury)
Total liabilities and equity (deficit)
$
December 31, 2013
December 31, 2012
(in millions,
except share-related amounts)
$
11,281
$
12,265
62,383
128,919
23,404
152,323
1,529,905
146,158
1,676,063
8,727
1,684,790
6,150
1,063
4,551
22,716
8,539
1,966,061
$
8,513
14,592
37,563
174,896
41,492
216,388
1,495,932
176,177
1,672,109
14,238
1,686,347
6,875
657
4,378
778
13,765
1,989,856
6,803
$
7,710
1,433,984
506,767
1,940,751
180
5,492
1,953,226
72,336
14,109
—
—
(69,719)
962
(1,000)
32
(6)
(3,885)
1,419,524
547,518
1,967,042
178
6,099
1,981,029
72,336
14,109
—
1
(70,796)
(1,444)
(1,316)
(178)
(2,938)
(3,885)
12,835
1,966,061
$
8,827
1,989,856
The accompanying notes are an integral part of these consolidated financial statements.
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FREDDIE MAC
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
Shares Outstanding
Senior
Preferred
Stock
Preferred
Stock
Common
Stock
Senior
Preferred
Stock, at
Redemption
Value
Preferred
Stock, at
Redemption
Value
Common
Stock, at
Par Value
Additional
Paid-In
Capital
Retained
Earnings
(Accumulated
Deficit)
AOCI,
Net of
Tax
Treasury
Stock, at
Cost
Total
Equity
(Deficit)
(in millions)
1
—
—
—
—
—
—
—
—
—
—
1
1
—
—
—
—
—
—
—
—
—
—
1
1
—
—
—
—
—
1
464
649
$
64,200
$
14,109
$
— $
7
$
(62,733)
$ (12,031)
$
(3,953)
$
(401)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
7,971
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
464
464
650
650
$
$
72,171
72,171
$
$
14,109
14,109
$
$
— $
— $
—
—
—
—
—
—
—
—
—
—
464
464
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
650
650
—
—
—
—
—
—
—
—
165
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
72,336
72,336
$
$
14,109
14,109
$
$
— $
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11
1
(44)
28
—
—
3
3
—
—
—
—
2
1
(24)
19
—
—
1
1
—
—
—
(1)
—
(5,266)
—
—
(5,266)
4,036
4,036
—
—
—
—
(28)
(6,495)
(3)
—
—
—
—
—
—
—
—
—
—
—
—
—
44
—
—
—
$
$
(74,525)
$ (7,995)
(74,525)
$ (7,995)
$
$
(3,909)
(3,909)
$
$
10,982
—
—
10,982
5,057
5,057
—
—
—
—
(19)
(7,233)
(1)
—
—
—
—
—
—
—
—
—
—
—
—
—
24
—
—
—
(5,266)
4,036
(1,230)
7,971
11
1
—
—
(6,495)
(3)
(146)
(146)
10,982
5,057
16,039
165
2
1
—
—
(7,233)
(1)
$
$
(70,796)
$ (2,938)
(70,796)
$ (2,938)
$
$
(3,885)
(3,885)
$
$
8,827
8,827
48,668
—
—
48,668
—
(47,591)
2,932
2,932
—
—
—
—
—
—
—
48,668
2,932
51,600
(1)
(47,591)
464
650
$
72,336
$
14,109
$
— $
— $
(69,719)
$
(6)
$
(3,885)
$ 12,835
Balance as of December 31, 2010
Comprehensive income (loss):
Net loss
Other comprehensive income, net of
taxes
Comprehensive income (loss)
Increase in liquidation preference
Stock-based compensation
Income tax benefit from stock-based
compensation
Common stock issuances
Transfer from retained earnings
(accumulated deficit) to additional paid-
in capital
Senior preferred stock dividends declared
Dividend equivalent payments on expired
stock options
Ending balance at December 31, 2011
Balance as of December 31, 2011
Comprehensive income:
Net income
Other comprehensive income, net of
taxes
Comprehensive income
Increase in liquidation preference
Stock-based compensation
Income tax benefit from stock-based
compensation
Common stock issuances
Transfer from retained earnings
(accumulated deficit) to additional paid-
in-capital
Senior preferred stock dividends declared
Dividend equivalent payments on expired
stock options
Ending balance at December 31, 2012
Balance as of December 31, 2012
Comprehensive income:
Net income
Other comprehensive income, net of
taxes
Comprehensive income
Common stock issuances
Senior preferred stock dividends declared
Ending balance at December 31, 2013
The accompanying notes are an integral part of these consolidated financial statements.
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FREDDIE MAC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Derivative (gains) losses
Asset related amortization — premiums, discounts, and basis adjustments
Debt related amortization — premiums and discounts on certain debt securities and basis
adjustments
Net discounts paid on retirements of other debt
Net premiums received from issuance of debt securities of consolidated trusts
(Gains) losses on extinguishment of debt securities of consolidated trusts and other debt
(Benefit) provision for credit losses
Losses on investment activity
Deferred income tax (benefit) expense
Purchases of held-for-sale mortgage loans
Sales of mortgage loans acquired as held-for-sale
Repayments of mortgage loans acquired as held-for-sale
Payments to servicers for pre-foreclosure expense and servicer incentive fees
Change in:
Accrued interest receivable
Accrued interest payable
Income taxes receivable or payable
Other, net
Net cash provided by operating activities
Cash flows from investing activities
Purchases of trading securities
Proceeds from sales of trading securities
Proceeds from maturities of trading securities
Purchases of available-for-sale securities
Proceeds from sales of available-for-sale securities
Proceeds from maturities of available-for-sale securities
Purchases of held-for-investment mortgage loans
Repayments of mortgage loans acquired as held-for-investment
Decrease (increase) in restricted cash
Net proceeds from dispositions of real estate owned and other recoveries
Net (increase) decrease in federal funds sold and securities purchased under agreements to resell
Derivative premiums and terminations and swap collateral, net
Net cash provided by investing activities
Cash flows from financing activities
Proceeds from issuance of debt securities of consolidated trusts held by third parties
Repayments of debt securities of consolidated trusts held by third parties
Proceeds from issuance of other debt
Repayments of other debt
Increase in liquidation preference of senior preferred stock
Payment of cash dividends on senior preferred stock
Excess tax benefits associated with stock-based awards
Payments of low-income housing tax credit partnerships notes payable
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow information
Cash paid (received) for:
Debt interest
Net derivative interest carry
Income taxes
Non-cash investing and financing activities:
Underlying mortgage loans related to guarantor swap transactions
Debt securities of consolidated trusts held by third parties established for guarantor swap transactions
Elimination of investments in securities and debt securities of consolidated trusts held by third parties
related to net consolidation of variable interest entities for which we are the primary beneficiary
Transfers from held-for-investment mortgage loans to held-for-sale mortgage loans
2013
Year Ended December 31,
2012
(in millions)
2011
$
48,668
$
10,982
$
(5,266)
(6,097)
4,627
(6,779)
(1,562)
3,534
(446)
(2,465)
1,545
(23,422)
(23,103)
28,131
167
(1,302)
725
(849)
117
(2,957)
18,532
(53,753)
57,380
12,542
(9,681)
24,675
33,630
(79,028)
410,643
2,327
11,274
(24,820)
6,062
391,251
110,244
(430,055)
701,236
(740,842)
—
(47,591)
—
(7)
(407,015)
2,768
8,513
11,281
65,614
3,701
—
340,900
340,990
(1,876)
224
$
$
(1,350)
4,624
(5,782)
(680)
3,897
135
1,890
2,680
3
(25,340)
21,769
59
(1,269)
1,187
(1,094)
(1,523)
(1,722)
8,466
(33,880)
17,641
31,106
(3,252)
1,729
38,517
(79,492)
522,242
13,471
11,265
(25,519)
569
494,397
91,544
(494,115)
718,252
(831,393)
165
(7,233)
1
(13)
(522,792)
(19,929)
28,442
8,513
75,328
4,044
(18)
358,074
358,074
(4,590)
6
$
$
4,721
2,063
(1,629)
(713)
4,091
175
10,702
2,368
(117)
(16,550)
14,027
54
(1,169)
651
(1,080)
(281)
(1,727)
10,320
(47,977)
33,734
14,545
(12,171)
2,643
34,316
(44,129)
369,981
(19,952)
12,665
34,480
(4,447)
373,688
96,042
(436,320)
1,024,323
(1,078,050)
7,971
(6,495)
1
(50)
(392,578)
(8,570)
37,012
28,442
84,370
4,791
(1)
280,621
280,621
—
—
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Freddie Mac was chartered by Congress in 1970 to stabilize the nation’s residential mortgage market and expand
opportunities for home ownership and affordable rental housing. Our statutory mission is to provide liquidity, stability and
affordability to the U.S. housing market. We are a GSE regulated by FHFA, the SEC, HUD, and Treasury, and are currently
operating under the conservatorship of FHFA. For more information on the roles of FHFA and Treasury, see “NOTE 2:
CONSERVATORSHIP AND RELATED MATTERS.”
We are involved in the U.S. housing market by participating in the secondary mortgage market. We do not participate
directly in the primary mortgage market. Our participation in the secondary mortgage market includes providing our credit
guarantee for mortgages originated by mortgage lenders in the primary mortgage market and investing in mortgage loans and
mortgage-related securities.
Our operations consist of three reportable segments, which are based on the type of business activities each performs —
Single-family Guarantee, Investments, and Multifamily. Our Single-family Guarantee segment reflects results from our single-
family credit guarantee activities. In our Single-family Guarantee segment, we purchase and guarantee single-family mortgage
loans originated by our seller/servicers in the primary mortgage market. In most instances, we use the mortgage securitization
process to package the loans into guaranteed mortgage-related securities. We guarantee the payment of principal and interest on
the mortgage-related securities in exchange for management and guarantee fees. Our Investments segment reflects results from
three primary activities: (a) managing the company’s mortgage-related investments portfolio, excluding Multifamily segment
investments; (b) managing the treasury function, including funding and liquidity, for the overall company; and (c) managing
interest-rate risk for the overall company. In our Investments segment, we invest principally in mortgage-related securities and
single-family performing mortgage loans. Our Multifamily segment reflects results from our investment (both purchases and
sales), securitization, and guarantee activities in multifamily mortgage loans and securities. In our Multifamily segment, our
primary business model is to purchase multifamily mortgage loans for aggregation and then securitization through issuance of
multifamily K Certificates. See “NOTE 13: SEGMENT REPORTING” for additional information.
We are focused on the following primary business objectives: (a) reducing taxpayer exposure to losses by reducing and
managing our overall risk profile, especially to mortgage-related risks; (b) supporting U.S. homeowners and renters by
providing lenders with a constant source of liquidity for mortgage products even when other sources of financing are scarce; (c)
building a commercially strong and efficient business enterprise; and (d) positioning the company, in particular our people and
infrastructure, to succeed in a to-be-determined "future state." For information regarding these objectives, see “NOTE 2:
CONSERVATORSHIP AND RELATED MATTERS — Business Objectives.”
Throughout our consolidated financial statements and related notes, we use certain acronyms and terms which are defined
in the “GLOSSARY.”
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with GAAP and include our
accounts as well as the accounts of other entities in which we have a controlling financial interest. All intercompany balances
and transactions have been eliminated.
Our current accounting policies are described below. We are operating under the basis that we will realize assets and
satisfy liabilities in the normal course of business as a going concern and in accordance with the delegation of authority from
FHFA to our Board of Directors and management. Certain amounts in prior periods’ consolidated financial statements have
been reclassified to conform to the current presentation.
We evaluate the materiality of identified errors in the financial statements using both an income statement, or “rollover,”
and a balance sheet, or “iron curtain,” approach, based on relevant quantitative and qualitative factors. Net income (loss)
includes certain adjustments to correct immaterial errors related to previously reported periods.
We recorded the cumulative effect of the correction of certain miscellaneous errors related to previously reported periods
in the year ended December 31, 2013. We concluded that these errors are not material individually or in the aggregate to our
previously issued consolidated financial statements for any of the periods affected, or to our earnings for the full year ended
December 31, 2013, or to the trend of earnings.
Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect: (a) the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and
(b) the reported amounts of revenues and expenses and gains and losses during the reporting period. Management has made
significant estimates in preparing the financial statements, including, but not limited to, establishing the allowance for loan
losses and reserve for guarantee losses, valuing financial instruments and other assets and liabilities, assessing impairments on
investments, and assessing our ability to realize net deferred tax assets. Actual results could be different from these estimates.
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Change in Estimate
Other-Than-Temporary Impairment of Non-Agency Mortgage-Related Securities
During the fourth quarter of 2013, we incorporated new information which enhanced the assumptions used to estimate
the contractual loan terms for certain modified loans collateralizing non-agency mortgage-related securities for which actual
data about those terms was unavailable to the market. This enhancement resulted in a lower net present value of projected cash
flows on our non-agency mortgage-related securities and increased our net other-than-temporary impairments recognized in
earnings by $0.7 billion.
Single-Family Loan Loss Reserve Severity
During the second quarter of 2013, we updated our method of estimating loss severity rates for single-family loan loss
reserves to change from the most recent six months of sales experience on our distressed property dispositions to the most
recent three months of sales experience on our distressed property dispositions. This change did not have a material impact on
our consolidated financial statements.
Consolidation and Equity Method of Accounting
The consolidated financial statements include our accounts and those of our subsidiaries. We consolidate entities in which
we have a controlling financial interest. All intercompany transactions have been eliminated in consolidation.
For each entity with which we are involved, we determine whether the entity should be consolidated in our financial
statements. The method for determining whether a controlling financial interest exists varies depending on whether the entity is
a VIE or non-VIE. A VIE is an entity: (a) that has a total equity investment at risk that is not sufficient to finance its activities
without additional subordinated financial support provided by another party; (b) where the group of equity holders does not
have: (i) the power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the
entity’s economic performance; (ii) the obligation to absorb the entity’s expected losses; or (iii) the right to receive the entity’s
expected residual returns; or (c) where the voting rights of some investors are disproportionate to their obligation to absorb
expected losses or their right to expected residual returns (or both) and substantially all of the entity’s activities are conducted
on behalf of an investor that has disproportionately few voting rights.
We consolidate VIEs in which we hold a controlling financial interest and are therefore deemed to be the primary
beneficiary. An enterprise has a controlling financial interest in, and thus is deemed to be the primary beneficiary of, a VIE if it
has both: (a) the power to direct the activities of the VIE that most significantly impact its economic performance; and
(b) exposure to losses or benefits of the VIE that could potentially be significant to the VIE. We perform ongoing assessments
to determine if we are the primary beneficiary of the VIEs with which we are involved and, as such, conclusions may change
over time as the nature and extent of our involvement changes.
We use securitization trusts in our securities issuance process that are VIEs. We are the primary beneficiary of trusts that
issue our single-family PCs and certain Other Guarantee Transactions. See “NOTE 3: VARIABLE INTEREST ENTITIES” for
more information. When we transfer assets into a VIE that we consolidate at the time of the transfer (or shortly thereafter), we
recognize the assets and liabilities of the VIE at the amounts that they would have been recognized if they had not been
transferred, and no gain or loss is recognized on these transfers. For all other VIEs that we consolidate, we recognize the assets
and liabilities of the VIE at fair value, and we recognize a gain or loss for the difference between: (a) the fair value of the
consideration paid and the fair value of any noncontrolling interests held by third parties; and (b) the net amount, as measured
on a fair value basis, of the assets and liabilities consolidated.
For entities that are not VIEs, the usual condition of a controlling financial interest is ownership of a majority voting
interest in an entity. We use the equity method of accounting for entities over which we have the ability to exercise significant
influence, but not control.
Fair Value Measurements
Consistent with the accounting guidance for fair value measurements and disclosures, we use a three-level fair value
hierarchy that prioritizes the inputs to the valuation techniques used to measure the fair value of assets and liabilities, giving
highest priority to quoted prices in active markets and lowest priority to unobservable inputs. Fair value represents the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Fair value measurements under this hierarchy are distinguished among three levels: quoted market prices,
observable inputs, and unobservable inputs. We use quoted market prices and valuation techniques that seek to maximize the
use of observable inputs, where available, and minimize the use of unobservable inputs. Our inputs are based on the
assumptions a market participant would use in valuing the asset or liability. Assets and liabilities are classified in their entirety
within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. When assets and
liabilities are transferred between levels, we recognize the transfer as of the beginning of the period. See “NOTE 16: FAIR
VALUE DISCLOSURES” for additional information regarding the fair value measurements and the hierarchy.
Securitization Activities through Issuances of Freddie Mac Mortgage-Related Securities
Overview
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When we securitize mortgages that we purchase, we issue mortgage-related securities such as PCs that can be sold to
investors or held by us. We issue mortgage-related securities in the form of PCs, REMICs and Other Structured Securities, and
Other Guarantee Transactions. Guarantor swaps are transactions where financial institutions exchange mortgage loans for PCs
backed by these mortgage loans. Multilender swaps are similar to guarantor swaps, except that formed PC pools include loans
that are contributed by more than one party. We issue PCs through various swap-based exchanges significantly more often than
through cash-based transfers. We issue REMICs and Other Structured Securities in transactions in which securities dealers or
investors sell us mortgage-related assets in exchange for REMICs and Other Structured Securities. We also issue Other
Guarantee Transactions to third parties in exchange for non-Freddie Mac mortgage-related securities.
PCs
Our PCs are pass-through debt securities that represent undivided beneficial interests in a pool of mortgages held by a
securitization trust. For our fixed-rate PCs, we guarantee the timely payment of interest and principal. For our ARM PCs, we
guarantee the timely payment of the weighted average coupon interest rate for the underlying mortgage loans. We do not
guarantee the timely payment of principal for ARM PCs; however, we do guarantee the full and final payment of principal.
In return for providing our guarantee of the payment of principal and interest, we earn a management and guarantee fee
that is paid to us over the life of an issued PC, representing a portion of the interest collected on the underlying loans.
PC Trusts
We are the primary beneficiary of VIE securitization trusts that issue our single-family PCs and therefore consolidate the
assets and liabilities of these trusts at either their: (a) carrying value, if the underlying assets are contributed by us to the trust;
or (b) fair value, for those securitization trusts established for our guarantor swap program. Mortgage loans underlying our
issued single-family PCs are recognized on our consolidated balance sheets as mortgage loans held-for-investment by
consolidated trusts, at amortized cost. The corresponding single-family PCs held by third parties are recognized on our
consolidated balance sheets as debt securities of consolidated trusts held by third parties. Refer to “Mortgage Loans” and “Debt
Securities Issued” below for further information on the subsequent accounting treatment of these assets and liabilities,
respectively.
REMICs and Other Structured Securities
Our single-family REMICs and Other Structured Securities use resecuritization trusts that meet the definition of a VIE
and represent beneficial interests in groups of PCs and other types of mortgage-related assets. We create these securities
primarily by using PCs or previously issued REMICs and Other Structured Securities as collateral. Similar to our PCs, we
guarantee the payment of principal and interest to the holders of the tranches of our REMICs and Other Structured Securities.
However, for REMICs and Other Structured Securities where we have already guaranteed the underlying assets, there is no
incremental exposure to credit loss assumed by us.
With respect to the resecuritization trusts used for our single-family REMICs and Other Structured Securities whose
underlying assets are PCs or previously issued REMICs and Other Structured Securities, we do not have rights to receive
benefits or obligations to absorb losses that could potentially be significant to the trusts because we have already provided a
guarantee on the underlying assets. Additionally, our involvement with these trusts does not provide us with any power that
would enable us to direct the significant economic activities of these entities. Although we may be exposed to prepayment risk
through our ownership of the securities issued by these trusts, we do not have the ability through our involvement with the trust
to impact the economic risks to which we are exposed. As a result, we are not the primary beneficiary of, and therefore do not
consolidate, the resecuritization trusts used for REMICs and Other Structured Securities whose underlying assets are PCs or
previously issued REMICs and Other Structured Securities, unless we hold substantially all of the outstanding beneficial
interests that have been issued by the trust.
We receive a transaction fee from third parties for issuing our single-family REMICs and Other Structured Securities
whose underlying assets are PCs or previously issued REMICs and Other Structured Securities. We defer the portion of the
transaction fee that is equal to the estimated value of our future administrative responsibilities for these issued REMICs and
Other Structured Securities. These responsibilities include ongoing trustee services, administration of pass-through amounts,
paying agent services, tax reporting, and other required services. We estimate the value of these future responsibilities based on
quotes from third-party vendors who perform each type of service and, where quotes are not available, based on our estimates
of what those vendors would charge. The remaining portion of the transaction fee relates to compensation earned in connection
with structuring-related services we rendered to third parties and is allocated between REMICs and Other Structured Securities
we retain, if any, and the REMICs and Other Structured Securities acquired by third parties, based on the relative fair value of
the securities. The portion of the fee allocated to any REMICs and Other Structured Securities we retain is deferred as a
carrying value adjustment and is amortized into interest income using the effective interest method over the contractual lives of
these securities. The fee allocated to REMICs and Other Structured Securities acquired by third parties is recognized
immediately in earnings as other income.
Our multifamily Other Structured Securities use securitization trusts that meet the definition of a VIE. Our multifamily
Other Structured Securities typically involve our acquisition of tax-exempt multifamily housing revenue bonds, placement of
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those bonds in a securitization trust, and issuance of tax-exempt senior certificates as well as subordinate certificates that
provide structural credit protection. The housing revenue bonds are collateralized by low- and moderate-income multifamily
housing developments. We guarantee the principal and interest on the senior certificates and, because the underlying collateral
is not already guaranteed by us, we receive a management and guarantee fee.
With respect to the securitization trusts used for our multifamily Other Structured Securities whose underlying assets are
multifamily housing revenue bonds, our involvement with these trusts either does not provide us with any power that would
enable us to direct the significant economic activities of these entities or rights to receive benefits or obligations to absorb
losses that could potentially be significant to the trusts. As a result, we are not the primary beneficiary of, and therefore do not
consolidate, the securitization trusts used for Other Structured Securities whose underlying assets are multifamily housing
revenue bonds.
Other Guarantee Transactions
Other Guarantee Transactions are mortgage-related securities that we issue to third parties in exchange for non-Freddie
Mac mortgage-related securities. Other Guarantee Transactions typically involve us purchasing either the senior tranches from
a non-Freddie Mac senior-subordinated securitization or single-class pass-through securities, placing the acquired assets into a
securitization trust, providing a guarantee of the principal and interest of the acquired assets and issuing securities backed by
these assets. To the extent that we are deemed to be the primary beneficiary of such a securitization trust, we recognize the
mortgage loans underlying the Other Guarantee Transaction as mortgage loans held-for-investment, at amortized cost.
Correspondingly, we recognize the issued securities held by third parties as debt securities of consolidated trusts. However, to
the extent we are not deemed to be the primary beneficiary of such a securitization trust, we initially recognize a guarantee
asset and a guarantee obligation at fair value to the extent a management and guarantee fee is charged. We do not receive
transaction fees, apart from our management and guarantee fee, for these transactions.
Our primary Other Guarantee Transactions are multifamily K Certificates. In substantially all of these transactions, we
guarantee only the most senior tranches of the securities and our initial involvement with the trusts that issue the K Certificates
does not provide us with any power that would enable us to direct the significant economic activities of these entities. As a
result, we are not the primary beneficiary of, and therefore do not consolidate, these trusts when K Certificates are initially
issued. To the extent that our involvement with the trusts changes, we evaluate whether we have become the primary
beneficiary.
Purchases and Sales of Freddie Mac Mortgage-Related Securities
PCs
When we purchase PCs that have been issued by consolidated PC trusts, we extinguish the outstanding debt securities of
the related consolidated trust. We recognize a gain (loss) on extinguishment of the debt securities to the extent the amount paid
to redeem the debt differs from its carrying value, adjusted for any related purchase commitments accounted for as derivatives.
When we sell PCs that have been issued by consolidated PC trusts, we recognize a liability to the third-party beneficial
interest holders of the related consolidated trust as debt securities of consolidated trusts held by third parties. That is, our sale of
PCs issued by consolidated PC trusts is accounted for as the issuance of debt.
Single-Class REMICs and Other Structured Securities
The collateral for our single-class REMICs and Other Structured Securities includes PCs and previously issued single-
class REMICs and Other Structured Securities. We do not consolidate these resecuritization trusts as we are not deemed to be
the primary beneficiary of the trusts. Our single-class REMICs and Other Structured Securities pass through all of the cash
flows of the underlying PCs directly to the holders of the securities and are deemed to be substantially the same as the
underlying PCs. As a result, when we purchase single-class REMICs and Other Structured Securities, we extinguish a pro rata
portion of the outstanding debt securities of the related PC trust on our consolidated balance sheets.
When we sell single-class REMICs and Other Structured Securities, we recognize a liability to the third-party beneficial
interest holders of the related consolidated PC trust as debt securities of consolidated trusts held by third parties. That is, our
sale of single-class REMICs and Other Structured Securities is accounted for as the issuance of debt.
Multiclass REMICs and Other Structured Securities
The collateral for our single-family multiclass REMICs and Other Structured Securities includes PCs and previously
issued REMICs and Other Structured Securities. We do not consolidate most of these resecuritization trusts as we are not
deemed to be the primary beneficiary of the trusts unless we hold substantially all of the outstanding beneficial interests that
have been issued by the trust. In our single-family multiclass REMICs and Other Structured Securities, the cash flows of the
underlying PCs are divided (e.g., stripped and/or time tranched). Due primarily to this division of cash flows, these securities
are not deemed to be substantially the same as the underlying PCs. As a result, when we purchase single-family multiclass
REMICs and Other Structured Securities, we record these securities as investments in debt securities rather than as the
extinguishment of debt since we are investing in the debt securities of a non-consolidated entity. See “Investments in
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Securities” for further information regarding our accounting for investments in multiclass REMICs and Other Structured
Securities.
We recognize, as assets, both the investment in single-family multiclass REMICs and Other Structured Securities and the
mortgage loans backing the PCs held by the trusts which underlie the single-family multiclass REMICs and Other Structured
Securities. Additionally, we recognize, as liabilities, the unsecured debt issued to third parties to fund the purchase of the
single-family multiclass REMICs and Other Structured Securities as well as the debt issued to third parties of the PC trusts we
consolidate which underlie the single-family multiclass REMICs and Other Structured Securities. This results in recognition of
interest income from both assets and interest expense from both liabilities.
The collateral for our multifamily multiclass Other Structured Securities typically includes multifamily housing revenue
bonds which are collateralized by low- and moderate-income multifamily housing developments. We do not consolidate the
securitization trusts that issue these securities as we are not deemed to be the primary beneficiary of the trusts. When we
purchase multifamily multiclass Other Structured Securities, we record them as investments in debt securities. See
“Investments in Securities” for further information regarding our accounting for investments in multiclass REMICs and Other
Structured Securities.
When we sell multiclass REMICs and Other Structured Securities in which we are not the primary beneficiary of the
resecuritization trust, we account for the transfer in accordance with the accounting guidance for transfers of financial assets.
To the extent the transfer of multiclass REMICs and Other Structured Securities qualifies as a sale, we de-recognize all assets
sold and recognize all assets obtained and liabilities incurred. Any gain (loss) on the sale of multiclass REMICs and Other
Structured Securities is reflected in our consolidated statements of comprehensive income as a component of other gains
(losses) on investment securities recognized in earnings. To the extent the transfer of multiclass REMICs and Other Structured
Securities does not qualify as a sale, we account for the transfer as a financing transaction and recognize a liability for the
proceeds received from third parties in the transfer.
Other Guarantee Commitments
In certain circumstances, we also provide our guarantee of mortgage-related assets held by third parties, in exchange for a
guarantee fee, without our securitization of the related assets. For example, we provide long-term standby commitments to
certain of our single-family customers, which obligate us to purchase seriously delinquent loans that are covered by those
agreements. We also provide guarantee commitments on multifamily housing revenue bonds that were issued by HFAs as well
as guarantees under the TCLFP on securities backed by HFA bonds.
Cash and Cash Equivalents
Highly liquid investment securities that have an original maturity of three months or less are accounted for as cash
equivalents. In addition, cash collateral that we have the right to use for general corporate purposes and that we obtain from
counterparties to derivative contracts is recorded as cash and cash equivalents.
Restricted Cash and Cash Equivalents
Cash collateral accepted from counterparties that we do not have the right to use for general corporate purposes is
recorded as restricted cash in our consolidated balance sheets. Restricted cash includes cash remittances received on the
underlying assets of our consolidated trusts, which are deposited into a separate custodial account. These cash remittances
include both scheduled and unscheduled principal and interest payments. The cash remittances are segregated in the separate
custodial account until they are remitted to the PC, REMIC and Other Structured Securities holders on their respective security
payment dates, and are not commingled with our general operating funds. As securities administrator, we invest the cash held in
the custodial account, pending distribution to our PC, REMIC, and Other Structured Securities holders, in short-term
investments and are entitled to the interest income earned on these short-term investments, which is recorded as interest
income, other on our consolidated statements of comprehensive income.
Mortgage Loans
Upon acquisition, we classify a loan as either held-for-sale or held-for-investment. Mortgage loans that we have the
ability and intent to hold for the foreseeable future are classified as held-for-investment. Loans we acquire and which we intend
to securitize using an entity we will consolidate will be classified as held-for-investment both prior to and subsequent to their
securitization, in accordance with our intent and ability to hold such loans for the foreseeable future.
Held-for-investment mortgage loans are reported in our consolidated balance sheets at their outstanding UPB, net of
deferred fees and other cost basis adjustments (including unamortized premiums and discounts, delivery fees and other pricing
adjustments). These deferred items are amortized into interest income over the contractual lives of the loans using the effective
interest method. We recognize interest income on an accrual basis except when we believe the collection of principal and
interest in full is not reasonably assured. If the collection of principal and interest in full is not reasonably assured, we cease the
accrual of interest income and any interest income accrued but uncollected is reversed.
Mortgage loans not classified as held-for-investment are classified as held-for-sale. Held-for-sale loans are reported at
lower-of-cost-or-fair-value on our consolidated balance sheets. Any excess of a held-for-sale loan’s cost over its fair value is
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recognized as a valuation allowance in other income on our consolidated statements of comprehensive income, with changes in
this valuation allowance also being recorded in other income. Premiums, discounts, and other cost basis adjustments recognized
upon acquisition on single-family loans classified as held-for-sale are deferred and not amortized. We elected the fair value
option for multifamily mortgage loans held for sale that we intend to securitize and sell to investors. See “NOTE 16: FAIR
VALUE DISCLOSURES — Fair Value Option — Multifamily Held-For-Sale Mortgage Loans” and “NOTE 16: FAIR VALUE
DISCLOSURES — Fair Value Option — Changes in Fair Value under the Fair Value Option Election.” Thus, these
multifamily mortgage loans are measured at fair value on a recurring basis, with subsequent gains or losses related to changes
in fair value reported in other income in our consolidated statements of comprehensive income. We do not have any held-for-
sale loans reported at the lower-of-cost-or-fair-value on our consolidated balance sheets as of December 31, 2013 or 2012.
Cash flows related to mortgage loans held by our consolidated trusts are classified as either investing activities (e.g.,
principal repayments) or operating activities (e.g., interest payments received from borrowers included within net income
(loss)). In addition, cash flows related to purchases of mortgage loans held-for-sale are classified in operating activities. When
mortgage loans held-for-sale are sold or securitized, proceeds from the sale or securitization and any related gain or loss are
classified in operating activities.
Non-Performing Loans
Non-performing loans consist of: (a) single-family and multifamily loans that have undergone a TDR; (b) single-family
seriously delinquent loans; (c) multifamily loans that are three or more payments past due or in the process of foreclosure; and
(d) multifamily loans that are deemed impaired based upon management judgment. We place mortgage loans on non-accrual
status when we believe collectability of principal and interest in full is not reasonably assured, which generally occurs when a
loan is three monthly payments past due, unless the loan is well secured and in the process of collection based upon an
individual loan assessment. A loan is considered past due if a full payment of principal and interest is not received within one
month of its due date. When a loan is placed on non-accrual status, any interest income accrued but uncollected is reversed.
Thereafter, interest income is recognized only upon receipt of cash payments.
A non-accrual mortgage loan may be returned to accrual status when the collectability of principal and interest in full is
reasonably assured. For single-family loans, we determine that collectability is reasonably assured when we have received
payment of principal and interest such that the loan becomes less than three monthly payments past due. For multifamily loans,
the collectability of principal and interest is considered reasonably assured based on a quantitative and qualitative analysis of
the factors specific to the loan being assessed. Upon a loan’s return to accrual status, all previously reversed interest income is
recognized and amortization of any basis adjustments into interest income is resumed.
Allowance for Loan Losses and Reserve for Guarantee Losses
The allowance for loan losses and the reserve for guarantee losses represent estimates of probable incurred credit losses.
The allowance for loan losses pertains to all single-family and multifamily loans classified as held-for-investment on our
consolidated balance sheets whereas the reserve for guarantee losses relates to single-family and multifamily loans underlying
our non-consolidated Freddie Mac mortgage-related securities and other guarantee commitments. Total held-for-investment
mortgage loans, net are shown net of the allowance for loan losses on our consolidated balance sheets. The reserve for
guarantee losses is included within other liabilities on our consolidated balance sheets. Collectively, we refer to our allowance
for loan losses and our reserve for guarantee losses as our loan loss reserves. We recognize probable incurred losses by
recording a charge to the provision for credit losses in our consolidated statements of comprehensive income. Determining the
appropriateness of the loan loss reserves is a complex process that is subject to numerous estimates and assumptions requiring
significant judgment about matters that involve a high degree of subjectivity.
We estimate credit losses related to homogeneous pools of loans in accordance with the accounting guidance for
contingencies. Accordingly, we maintain an allowance for loan losses on mortgage loans held-for-investment when it is
probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Loans that we evaluate for
individual impairment are measured in accordance with the accounting guidance for receivables.
For both the single-family and multifamily portfolios, we charge off (in full or in part) our recorded investment in a loan
in the period it is determined that the loan (or a portion thereof) is uncollectible, which generally occurs at final disposition of
the loan through foreclosure or other loss event. However, if losses are evident prior to final disposition, earlier recognition of a
charge-off is required by our policies. We also consider charge-offs for certain very small balance loans and upon the
occurrence of certain events such as natural disasters. A charge-off is also recorded if we realize a specific credit loss upon the
modification of a loan in a TDR. We do not have any established threshold in terms of days past due beyond which we partially
or fully charge-off loans.
Single-Family Loans
We determine single-family loan loss reserves both on a collective and individual basis. For further discussion on
individually impaired single-family loans, refer to “Impaired Loans” below.
We estimate loan loss reserves on homogeneous pools of single-family loans using a statistically based model that
evaluates a variety of factors affecting collectability. The homogeneous pools of single-family mortgage loans are determined
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based on common underlying characteristics, including estimated current LTV ratios, trends in home prices, loan product type,
and geographic region. In determining the loan loss reserves for single-family loans at the balance sheet date, we evaluate key
inputs and factors including, but not limited to:
•
•
•
•
•
•
•
•
estimated current LTV ratios and historical trends in home prices;
loan product type;
delinquency/default status and history;
actual and estimated rates of collateral loss severity for similar loans;
geographic location;
loan age;
sourcing channel;
occupancy type;
• UPB at origination;
•
•
•
•
•
•
•
expected ability to partially mitigate losses through loan modification or other alternatives to foreclosure;
expected proceeds from mortgage insurance contracts that are contractually attached to a loan or other credit
enhancements that were entered into contemporaneously with and in contemplation of a guarantee or loan purchase
transaction;
expected repurchases of mortgage loans by seller/servicers;
counterparty credit of mortgage insurers and seller/servicers;
pre-foreclosure real estate taxes and insurance;
estimated selling costs should the underlying property ultimately be sold; and
trends in the timing of foreclosures.
For additional information on estimated current LTV ratios and single-family loan loss reserves, see “NOTE 4:
MORTGAGE LOANS AND LOAN LOSS RESERVES — Credit Quality of Mortgage Loans.”
Freddie Mac relies upon third-parties to provide primary servicing for the performing and non-performing loan portfolio.
At loan delivery, the seller provides us with the loan data, which includes loan characteristics and underwriting information.
Each month, the servicers provide us with monthly loan level servicing data, including delinquency and loss information.
Certain loan servicing data is reported to us on a real-time basis, such as loan pay-offs and foreclosure events. However,
certain monthly servicing data, including delinquency status, is delivered on a one-month delay. For example, December loan
delinquency data delivered to Freddie Mac at the end of December or beginning of January reflects the loan delinquency status
related to the December 1 payment cycle. We incorporate the delinquency status data into our allowance for loan loss
calculation generally without adjustment for the one-month delay.
Our single-family loan loss reserve default models are estimated based on the most recent 12 months of actual loan
performance data, including loan status and delinquency data reported by our servicers. The loan performance data provides a
loan level history of delinquency, foreclosures, foreclosure alternatives, modifications, and seller/servicer repurchases. Our
single-family loan loss reserve severity is estimated from the most recent: (a) three months of sales experience realized on our
distressed property dispositions; and (b) six months of mortgage insurance recoveries and pre-foreclosure expenses on our
distressed properties including REO, short sales, and third-party sales. Our single-family loan loss severity estimate also
captures current business area practices and expectations about recoveries due to seller/servicer repurchases. We use historical
trends in home prices in our single-family loan loss reserve process, primarily through the use of estimated current total LTV
ratios in our default models and through the use of recent home price sales experience in our severity estimate. However, we do
not use a forecast of trends in home prices in our single-family loan loss reserve process.
Our loan loss reserves reflect our best current estimates of incurred losses. Our loan loss reserve estimate includes
projections related to loss mitigation activities, including loan modifications for troubled borrowers, and projections of
recoveries through repurchases by seller/servicers of defaulted loans due to failure to follow contractual underwriting
requirements at the time of the loan origination. These projections are based on our recent historical experience and current
business practices and require significant management judgment. We monitor our projections of recoveries through seller/
servicer repurchases to ensure that these projections are reasonable and consistent with our assessment of the credit capacity of
our seller/servicer counterparties. For loans where foreclosure is probable, impairment is measured on an aggregate basis based
upon an estimate of the underlying collateral value. At an individual loan level, our estimate also considers the effect of
historical home price changes on borrower behavior and the impact of our loss mitigation actions, including our loan
modification efforts.
Our reserve estimate also reflects our best projection of defaults we believe are likely to occur as a result of loss events
that have occurred through December 31, 2013 and 2012, respectively. However, fluctuations in the national housing market,
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the uncertainty in other macroeconomic factors, and variations in success rates of modification efforts under HAMP and other
loan workout programs, make estimating defaults inherently imprecise.
We validate and update our models and factors to capture changes in actual loss experience, as well as the effects of
changes in underwriting practices and in our loss mitigation strategies. We also consider macroeconomic and other factors that
impact the quality of the loans underlying our portfolio including regional housing trends, applicable home price indices,
unemployment and employment dislocation trends, the effects of changes in government policies and programs, consumer
credit statistics, and the extent of third-party insurance. We consider our assessment of these factors in determining our loan
loss reserves.
We apply proceeds from primary mortgage insurance that is contractually attached to a loan and other credit
enhancements, including repurchase recoveries, entered into contemporaneously with and in contemplation of a guarantee or
loan purchase transaction, as a recovery of our recorded investment in a charged-off loan, up to the amount of loss recognized
as a charge-off. Proceeds from credit enhancements received in excess of our recorded investment in charged-off loans are
recorded as a decrease to REO operations expense in our consolidated statements of comprehensive income when received. We
record receivables for proceeds from primary mortgage insurance and other credit enhancements, including repurchase
recoveries, when the proceeds are estimable and collectability is reasonably assured. We generally accrue receivables for
primary mortgage insurance, pool insurance, and most other types of credit enhancements as we have a history of collection of
these types of recoveries and the amounts are estimable based on the contractual terms of the agreements. However, due to the
uncertainty of the timing and amount of collections of repurchase recoveries, we generally do not accrue receivables for
repurchase recoveries and instead record repurchase recoveries received on a cash basis.
Multifamily Loans
For multifamily loans identified as impaired, we individually determine the loan loss reserves. Refer to “Impaired Loans”
below for further discussion on individually impaired multifamily loans. Multifamily loans evaluated collectively for
impairment are aggregated into book year vintages and measured by benchmarking published historical commercial mortgage
data to those vintages based upon available economic data related to multifamily real estate, including apartment vacancy and
rental rates.
Impaired Loans
We consider a loan to be impaired when it is probable, based on current information, that we will not receive all amounts
due (including both principal and interest) in accordance with the contractual terms of the original loan agreement. Delays in
the timing of our expected receipt of these amounts that are more than insignificant are considered in making this assessment.
Single-Family Loans
Individually impaired single-family loans primarily include loans that have undergone a TDR. These loans are measured
individually for impairment as discussed in the "Troubled Debt Restructurings" section of this note that follows. All other
single-family loans are aggregated and measured collectively for impairment based on similar risk characteristics. Collective
impairment is measured as described above in the “Allowance for Loan Losses and Reserve for Guarantee Losses — Single-
Family Loans” section of this note. If we determine that foreclosure on the underlying collateral is probable, we measure
impairment based upon the fair value of the collateral, as reduced by estimated disposition costs and adjusted for estimated
proceeds from insurance and similar sources. Interest income recognition on impaired single-family loans is discussed
separately in the "Mortgage Loans — Non-Performing Loans" section of this note above.
Multifamily Loans
Multifamily impaired loans include TDRs, loans three monthly payments or more past due, and loans that are deemed
impaired based on management judgment. Factors considered by management in determining whether a loan is impaired
include, but are not limited to, the underlying property’s operating performance as represented by its current DSCR, available
credit enhancements, estimated current LTV ratio, management of the underlying property, and the property’s geographic
location.
Multifamily loans are generally measured individually for impairment based on the fair value of the underlying
collateral, as reduced by estimated disposition costs, as the repayment of these loans is generally provided from the cash flows
of the underlying collateral and any associated credit-enhancement. Except for cases of fraud and certain other types of
borrower defaults, most multifamily loans are non-recourse to the borrower. As a result, the cash flows of the underlying
property (including any associated credit enhancements) serve as the source of funds for repayment of the loan. Interest income
recognition on multifamily impaired loans is subject to our non-accrual policy as discussed in “Mortgage Loans — Non-
Performing Loans.”
Troubled Debt Restructurings
Both single-family and multifamily loans which experience a modification to their contractual terms which results in a
concession being granted to a borrower experiencing financial difficulties are considered TDRs. A concession is deemed
granted when, as a result of the restructuring, we do not expect to collect all amounts due, including interest accrued, at the
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original contractual interest rate. As appropriate, we also consider other qualitative factors in determining whether a concession
is deemed granted, including whether the borrower’s modified interest rate is consistent with that of a non-troubled borrower.
We do not consider restructurings that result in a delay in payment that is insignificant to be a concession. We generally
consider a delay in monthly amortizing payments of three months or less to be insignificant. We generally consider all other
delays to be more than insignificant. A concession typically includes one or more of the following being granted to the
borrower: (a) a trial period where the expected permanent modification will change our expectation of collecting all amounts
due at the original contract rate; (b) a delay in payment that is more than insignificant; (c) a reduction in the contractual interest
rate; (d) interest forbearance for a period of time that is not insignificant or forgiveness of accrued but uncollected interest
amounts; (e) principal forbearance that is more than insignificant or a reduction in the principal amount of the loan; and
(f) discharge of the borrower’s obligation in Chapter 7 bankruptcy.
On July 1, 2011, we adopted an amendment to the accounting guidance related to the classification of loans as TDRs.
This amendment clarified when a restructuring such as a loan modification is considered a TDR. For additional information,
see “Recently Adopted Accounting Guidance — A Creditor’s Determination of Whether a Restructuring is a Troubled Debt
Restructuring,” below.
Impairment of a loan having undergone a TDR is generally measured as the excess of our recorded investment in the loan
over the present value of the expected future cash flows, discounted at the loan’s original effective interest rate for fixed-rate
loans or at the loan’s effective interest rate prior to the restructuring for ARM loans. Our expectation of future cash flows
incorporates, among other items, an estimated probability of default which is based on a number of market factors as well as
the characteristics of the loan, such as past due status. Subsequent to the restructuring date, interest income is recognized at the
modified interest rate, subject to our non-accrual policy as discussed in “Mortgage Loans — Non-Performing Loans” above,
with all other changes in the present value of expected future cash flows being recognized as a component of the provision for
credit losses in our consolidated statements of comprehensive income.
Investments in Securities
Investments in securities consist primarily of mortgage-related securities. We classify securities as “available-for-sale” or
“trading.” We currently do not classify any securities as “held-to-maturity,” although we may elect to do so in the future.
Securities classified as available-for-sale and trading are reported at fair value with changes in fair value included in AOCI and
other gains (losses) on investment securities recognized in earnings, respectively. See “NOTE 16: FAIR VALUE
DISCLOSURES” for more information on how we determine the fair value of securities.
We elected the fair value option for certain available-for-sale mortgage-related securities, including investments in
securities that: (a) can contractually be prepaid or otherwise settled in such a way that we may not recover substantially all of
our initial recorded investment; or (b) are not of high credit quality at the acquisition date and are identified as within the scope
of the accounting guidance for investments in beneficial interests in securitized financial assets. These securities are classified
as trading securities. By electing the fair value option for these instruments, we reflect valuation changes through our
consolidated statements of comprehensive income in the period they occur. For additional information on our election of the
fair value option, see “NOTE 16: FAIR VALUE DISCLOSURES.”
We record purchases and sales of securities that are exempt from the accounting guidance for derivatives and hedge
accounting on a trade date basis. Securities underlying forward purchases and sales contracts that are not exempt from the
requirements of derivatives and hedge accounting are recorded on the expected settlement date with a corresponding
commitment recorded on the trade date.
For most of our investments in securities, interest income is recognized using the effective interest method. Deferred
items, including premiums, discounts, and other basis adjustments, are amortized into interest income over the contractual lives
of the securities.
For certain investments in securities, interest income is recognized using the prospective effective interest method. We
specifically apply this accounting to beneficial interests in securitized financial assets that: (a) can contractually be prepaid or
otherwise settled in such a way that we may not recover substantially all of our recorded investment; (b) are not of high credit
quality at the acquisition date; or (c) have been determined to be other-than-temporarily impaired. We recognize as interest
income (over the life of these securities) the excess of all estimated cash flows attributable to these interests over their book
value using the effective interest method. We update our estimates of expected cash flows periodically and recognize changes
in the calculated effective interest rate on a prospective basis.
We evaluate available-for-sale securities in an unrealized loss position as of the end of each quarter for other-than-
temporary impairment. An unrealized loss exists when the fair value of an individual security is less than its amortized cost
basis. As discussed further below, certain other-than-temporary impairment losses are recognized in earnings.
If we intend to sell the security or believe it is more likely than not that we will be required to sell the security prior to
recovery of its amortized cost basis, the security’s entire decline in fair value is deemed to be other-than-temporary and is
recorded within our consolidated statements of comprehensive income as net impairment of available-for-sale securities
recognized in earnings. If we do not intend to sell the security and we believe it is not more likely than not that we will be
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required to sell prior to recovery of the security’s unrealized loss, we recognize only the credit component of other-than-
temporary impairment in earnings and the amounts attributable to all other factors are recorded in AOCI. The credit component
represents the amount by which the present value of cash flows expected to be collected from the security is less than the
amortized cost basis of the security. The present value of expected future cash flows represents our estimate of future
contractual cash flows that we expect to collect, discounted at the original effective interest rate or the effective interest rate
determined based on significantly improved cash flows subsequent to initial impairment.
The evaluation of whether unrealized losses on available-for-sale securities are other-than-temporary requires significant
management judgments and assumptions and consideration of numerous factors. We perform an evaluation on a security-by-
security basis considering all available information. The relative importance of this information varies based on the facts and
circumstances surrounding each security, as well as the economic environment at the time of assessment. For information
regarding important factors, judgments and assumptions, see “NOTE 7: INVESTMENTS IN SECURITIES — Impairment
Recognition on Investments in Securities.”
Gains and losses on the sale of securities are included in other gains (losses) on investment securities recognized in
earnings, including those gains (losses) reclassified into earnings from AOCI. We use the specific identification method for
determining the cost basis of a security in computing the gain or loss.
For securities classified as trading or available-for-sale and those securities where we elected the fair value option, we
classify the cash flows as investing activities because we hold these securities for investment purposes. In cases where the
transfer of available-for-sale securities represents a secured borrowing, we classify the related cash flows as financing
activities.
Repurchase and Resale Agreements and Dollar Roll Transactions
We enter into repurchase and resale agreements primarily as an investor or to finance certain of our security positions.
Such transactions are accounted for as secured financings because the transferor does not relinquish control over the transferred
assets.
We also engage in dollar roll transactions whereby we enter into an agreement to sell and subsequently repurchase (or
purchase and subsequently resell) agency securities. When these transactions involve securities issued by consolidated entities,
they are treated as issuances and extinguishments of debt. When these transactions involve securities issued by entities we do
not consolidate, they are treated as purchases and sales as the security initially transferred is not required to be the same or
substantially the same as the security subsequently returned.
Debt Securities Issued
Debt securities that we issue are classified on our consolidated balance sheets as either debt securities of consolidated
trusts held by third parties or other debt. The debt securities of our consolidated trusts are prepayable without penalty at any
time. Other debt represents short-term and long-term debt securities that we issue to third parties to fund our general business
activities.
Both debt of our consolidated trusts and other debt, except for certain debt for which we elected the fair value option, are
reported at amortized cost. Deferred items, including premiums, discounts, and hedging-related basis adjustments are reported
as a component of total debt, net. Issuance costs are reported as a component of other assets. These items are amortized and
reported through interest expense using the effective interest method over the contractual life of the related indebtedness.
Amortization of premiums, discounts, and issuance costs begins at the time of debt issuance. Amortization of hedging-related
basis adjustments begins upon the discontinuation of the related hedge relationship.
We elected the fair value option on certain debt securities of consolidated trusts held by third parties and certain other
debt. The change in fair value for debt recorded at fair value is reported as other income in our consolidated statements of
comprehensive income. For debt where we have elected the fair value option, upfront costs and fees are recognized in earnings
as incurred and not deferred. For additional information on our election of the fair value option, see “NOTE 16: FAIR VALUE
DISCLOSURES.”
When we repurchase or call outstanding debt securities, we recognize a gain or loss related to the difference between the
amount paid to redeem the debt security and the carrying value in earnings as a component of gains (losses) on retirement of
other debt. Contemporaneous transfers of cash between us and a creditor in connection with the issuance of a new debt security
and satisfaction of an existing debt security are accounted for as either an extinguishment or a modification of an existing debt
security. If the debt securities have substantially different terms, the transaction is accounted for as an extinguishment of the
existing debt security. The issuance of a new debt security is recorded at fair value, fees paid to the creditor are expensed and
fees paid to third parties are deferred and amortized into interest expense over the life of the new debt security using the
effective interest method. If the terms of the existing debt security and the new debt security are not substantially different, the
transaction is accounted for as a modification of the existing debt. Fees paid to the creditor are deferred and amortized over the
life of the modified unsecured debt security using the effective interest method and fees paid to third parties are expensed as
incurred.
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Cash flows related to debt securities issued by our consolidated trusts are classified as either financing activities (e.g.,
repayment of principal to PC holders) or operating activities (e.g., interest payments to PC holders included within net income
(loss)). Other than interest paid, cash flows related to other debt are classified as financing activities. Interest paid on other debt
is classified as operating activities.
Derivatives
Derivatives are reported at their fair value on our consolidated balance sheets. Derivatives in a net asset position,
including net derivative interest receivable or payable, are reported as derivative assets, net. Similarly, derivatives in a net
liability position, including net derivative interest receivable or payable, are reported as derivative liabilities, net. We offset fair
value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value
amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement. Changes
in fair value and interest accruals on derivatives are recorded as derivative gains (losses) in our consolidated statements of
comprehensive income.
We evaluate whether financial instruments that we purchase or issue contain embedded derivatives. We elected to
measure newly acquired or issued financial instruments that contain embedded derivatives at fair value, with changes in fair
value recorded in our consolidated statements of comprehensive income.
At December 31, 2013 and 2012, we did not have any derivatives in hedge accounting relationships; however, there are
amounts recorded in AOCI related to discontinued cash flow hedges which are recognized in earnings when the originally
forecasted transactions affect earnings. If it becomes probable the originally forecasted transaction will not occur, the associated
deferred gain or loss in AOCI would be reclassified to earnings immediately.
In the consolidated statements of cash flows, cash flows related to the acquisition and termination of derivatives, other
than forward commitments, are generally classified in investing activities. Cash flows related to forward commitments are
classified within the section of the consolidated statements of cash flows in accordance with the cash flows of the financial
instruments to which they relate.
REO
REO is initially recorded at fair value less costs to sell and is subsequently carried at the lower of cost or fair value less
costs to sell. When we acquire REO, losses arise when the carrying value of the loan (including accrued interest) exceeds the
fair value of the foreclosed property, net of estimated costs to sell and expected recoveries through credit enhancements. Losses
are charged off against the allowance for loan losses at the time of REO acquisition. REO gains arise and are recognized
immediately in earnings when the fair value of the foreclosed property less costs to sell plus expected recoveries through credit
enhancements exceeds the recorded investment in the loan (including all amounts due from the borrower).
Amounts we expect to receive from third-party insurance (primary mortgage insurance and pool insurance) and most
other credit enhancements are recorded as receivables when REO is acquired. The receivable is adjusted when the actual claim
is filed and is reported as a component of other assets on our consolidated balance sheets. We do not record receivables for
repurchase recoveries. We record these on a cash basis due to uncertainty of the timing and amount of collections.
Material development and improvement costs relating to REO are capitalized. Operating expenses specifically
identifiable with an REO property are included in REO operations income (expense) in our consolidated statements of
comprehensive income; all other expenses are recognized within other administrative expenses in our consolidated statements
of comprehensive income. Declines in the fair value of REO are provided for and charged to REO operations income
(expense). Any gains and losses from REO dispositions are included in REO operations income (expense).
Income Taxes
We use the asset and liability method of accounting for income taxes for financial reporting purposes. Under this method,
deferred tax assets and liabilities are recognized based upon the expected future tax consequences of existing temporary
differences between the financial reporting and the tax reporting basis of assets and liabilities using enacted statutory tax rates
as well as tax net operating loss and tax credit carryforwards. To the extent tax laws change, deferred tax assets and liabilities
are adjusted, when necessary, in the period that the tax change is enacted. Valuation allowances are recorded to reduce net
deferred tax assets when it is more likely than not that all or part of our tax benefits will not be realized. The realization of these
net deferred tax assets is dependent upon the generation of sufficient taxable income from current operations and from
unrecognized tax benefits.
Income tax benefit (expense) includes: (a) deferred tax benefit (expense), which represents the net change in the deferred
tax asset or liability balance during the year plus any change in a valuation allowance; and (b) current tax benefit (expense),
which represents the amount of tax currently payable to or receivable from a tax authority including any related interest and
penalties plus amounts accrued for unrecognized tax benefits (also including any related interest and penalties). Income tax
benefit (expense) excludes the tax effects related to adjustments recorded to equity, such as unrealized gains and losses related
to available-for-sale securities.
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Regarding tax positions taken or expected to be taken (and any associated interest and penalties), we recognize a tax
position so long as it is more likely than not that it will be sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits of the position. We measure the tax position at the largest amount
of benefit that is greater than 50% likely of being realized upon ultimate settlement. See “NOTE 12: INCOME TAXES” for
additional information.
Earnings Per Common Share
The August 2012 amendment to the Purchase Agreement changed the manner in which the dividend on the senior
preferred stock is determined. For each quarter from January 1, 2013 through and including December 31, 2017, the dividend
payment will be the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter, less
the applicable Capital Reserve Amount, exceeds zero. For each quarter beginning January 1, 2018, the dividend payment will
be the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter exceeds zero. The
dividend is presented in the period in which it is determinable for the senior preferred stock as a reduction to net income (loss)
available to common stockholders and net income (loss) per common share. The dividend is declared and paid in the following
period and recorded as a reduction to equity in the period declared.
We have participating securities related to options and restricted stock units with dividend equivalent rights that receive
dividends as declared on an equal basis with common shares but are not obligated to participate in undistributed net losses.
These participating securities consist of: (a) vested options to purchase common stock; and (b) vested and unvested restricted
stock units that earn dividend equivalents at the same rate when and as declared on common stock. Consequently, in
accordance with accounting guidance, we use the “two-class” method of computing earnings per common share. The “two-
class” method is an earnings allocation formula that determines earnings per share for common stock and participating
securities based on dividends declared and participation rights in undistributed earnings.
Basic earnings per common share is computed as net income attributable to common stockholders divided by the
weighted average common shares outstanding for the period. The weighted average common shares outstanding for the period
includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury
pursuant to the Purchase Agreement. This warrant is included since it is unconditionally exercisable by the holder at a minimal
cost. See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS” for further information.
Diluted earnings per common share is computed as net income attributable to common stockholders divided by the
weighted average common shares outstanding during the period adjusted for the dilutive effect of common equivalent shares
outstanding. For periods with net income attributable to common stockholders, the calculation includes the effect of the
following common equivalent shares outstanding: (a) the weighted average shares related to stock options if the average market
price during the period exceeds the exercise price; and (b) the weighted average of unvested restricted stock units. During
periods in which a net loss attributable to common stockholders has been incurred, potential common equivalent shares
outstanding are not included in the calculation because it would have an antidilutive effect. See “NOTE 11:
STOCKHOLDERS’ EQUITY (DEFICIT) — Stock-Based Compensation” for additional information on our earnings-per-share
calculation.
Comprehensive Income
Comprehensive income includes all changes in equity during a period, except those resulting from investments by
stockholders. We define comprehensive income as consisting of net income (loss) plus after-tax changes in: (a) the unrealized
gains and losses on available-for-sale securities; (b) the effective portion of derivatives accounted for as cash flow hedge
relationships; and (c) defined benefit plans.
Recently Adopted Accounting Guidance
Fair Value Measurement
On January 1, 2012, we adopted an amendment to the accounting guidance pertaining to fair value measurement and
disclosure. This amendment provided: (a) clarification about the application of existing fair value measurement and disclosure
requirements; and (b) changes to the guidance for measuring fair value and disclosing information about fair value
measurements. The adoption of this amendment did not have a material impact on our consolidated financial statements.
Reconsideration of Effective Control for Repurchase Agreements
On January 1, 2012, we adopted an amendment to the accounting guidance for transfers and servicing with regard to
repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets
before their maturity. This amendment removed the criterion related to collateral maintenance from the transferor’s assessment
of effective control. It focuses the assessment of effective control on the transferor’s rights and obligations with respect to the
transferred financial assets and not whether the transferor has the practical ability to perform in accordance with those rights or
obligations. The adoption of this amendment did not have a material impact on our consolidated financial statements.
A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring
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On July 1, 2011, we adopted an amendment to the accounting guidance related to the classification of loans as TDRs,
which clarifies when a restructuring such as a loan modification is considered a TDR. This amendment clarifies the guidance
regarding a creditor’s evaluation of whether a debtor is experiencing financial difficulty and whether a creditor has granted a
concession to a debtor for purposes of determining if a restructuring constitutes a TDR.
Both single-family and multifamily loans that experience restructurings resulting in a concession being granted to a
borrower experiencing financial difficulties are considered TDRs. The amendment provides guidance to determine whether a
borrower is experiencing financial difficulties, which is largely consistent with the guidance for debtors. This change does not
have a significant impact on our determination of whether a borrower is experiencing financial difficulties. Pursuant to this
amendment, a concession is deemed to have been granted when, as a result of the restructuring, we do not expect to collect all
amounts due, including interest accrued, at the original contractual interest rate. The amendment also specifies that a
concession shall not be determined by comparing the borrower’s pre-restructuring effective interest rate to the post-
restructuring effective interest rate. These changes resulted in a significant impact on our determination of whether a
concession has been granted.
The amendment was effective for interim and annual periods beginning on or after June 15, 2011 and applied as of July 1,
2011 to restructurings occurring on or after January 1, 2011. We recognized additional provision for credit losses of $0.2 billion
during the third quarter of 2011 due to the population of restructurings occurring in the first half of 2011 that became TDRs.
Please refer to “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS” for further disclosures
regarding our loan restructurings accounted for and disclosed as TDRs and for discussion regarding how modifications and
other loss mitigation activities are factored into our allowance for loan losses.
Recently Issued Accounting Guidance, Not Yet Adopted Within These Consolidated Financial Statements
Accounting for Investments in Qualified Affordable Housing Projects
In January 2014, the FASB issued an amendment to the accounting guidance related to accounting for investments in
qualified affordable housing projects. This amendment permits entities to elect to account for their investments in qualified
affordable housing projects using the proportional amortization method if certain conditions are met. The amendment is
effective for interim and annual periods beginning after December 15, 2014 and is to be applied retrospectively, with early
adoption permitted. We do not expect that the adoption of this amendment will have a material impact on our consolidated
financial statements.
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure
In January 2014, the FASB issued an amendment to the accounting guidance related to reclassifying residential real estate
collateralized consumer mortgage loans upon foreclosure. This amendment clarifies that a creditor is considered to have
received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (a) the
creditor obtaining legal title to the residential real estate property upon completion of a foreclosure; or (b) the borrower
conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in
lieu of foreclosure or through a similar legal agreement. This amendment is effective for interim and annual periods beginning
after December 15, 2014 with early adoption permitted. This amendment can be adopted either prospectively or retrospectively.
We do not expect that the adoption of this amendment will have a material impact on our consolidated financial statements.
Entry Into Conservatorship
NOTE 2: CONSERVATORSHIP AND RELATED MATTERS
On September 6, 2008, the Director of FHFA placed us into conservatorship. On September 7, 2008, Treasury and FHFA
announced several actions regarding Freddie Mac and Fannie Mae. These actions included the execution of the Purchase
Agreement, pursuant to which we issued to Treasury both senior preferred stock and a warrant to purchase common stock.
Business Objectives
We continue to operate under the direction of FHFA, as our Conservator. The conservatorship and related matters have
had a wide-ranging impact on us, including our management, business, financial condition and results of operations. Upon its
appointment, FHFA, as Conservator, immediately succeeded to all rights, titles, powers and privileges of Freddie Mac, and of
any stockholder, officer or director thereof, with respect to the company and its assets. The Conservator also succeeded to the
title to all books, records, and assets of Freddie Mac held by any other legal custodian or third party. During the
conservatorship, the Conservator has delegated certain authority to the Board of Directors to oversee, and management to
conduct business operations so that the company can continue to operate in the ordinary course. The directors serve on behalf
of, and exercise authority as directed by, the 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. However, we believe that the support provided by Treasury pursuant to the
Purchase Agreement currently enables us to maintain our access to the debt markets and to have adequate liquidity to conduct
our normal business activities, although the costs of our debt funding could vary. Our ability to access funds from Treasury
under the Purchase Agreement is critical to keeping us solvent.
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The Conservator continues to determine, and direct the efforts of the Board of Directors and management to address, the
strategic direction for the company. While the Conservator has delegated certain authority to management to conduct business
operations, many management decisions are subject to review and approval by FHFA and Treasury. In addition, management
frequently receives directions from FHFA on various matters involving day-to-day operations.
Our current business objectives reflect direction we have received from the Conservator (including the Conservatorship
Scorecards). At the direction of the Conservator, we have made changes to certain business practices that are designed to
provide support for the mortgage market in a manner that serves our public mission and other non-financial objectives but may
not contribute to our profitability.
Certain of these objectives are intended to help homeowners and the mortgage market and may help to mitigate future
credit losses. However, some of our initiatives are expected to have an adverse impact on our near- and long-term financial
results. Given the important role the Administration and our Conservator have placed on Freddie Mac in addressing housing
and mortgage market conditions and our public mission, we may be required to take additional actions that could have a
negative impact on our business, operating results or financial condition.
The Conservator is requiring us to contract our presence in the mortgage market and simplify our operations. The
Conservator also stated that it is focusing on retaining value in the business operations of Freddie Mac and Fannie Mae,
overseeing remediation of identified weaknesses in corporate operations and risk management, and ensuring that sound
corporate governance principles are followed.
On February 21, 2012, FHFA sent to Congress a strategic plan for the next phase of the conservatorships of Freddie Mac
and Fannie Mae. The plan set forth objectives and steps FHFA is taking or will take to meet FHFA’s obligations as Conservator.
FHFA stated that the steps envisioned in the plan are consistent with each of the housing finance reform frameworks set forth in
the report delivered by the Administration to Congress in February 2011, as well as with the leading congressional proposals
previously introduced. FHFA indicated that the plan leaves open all options for Congress and the Administration regarding the
resolution of the conservatorships and the degree of government involvement in supporting the secondary mortgage market in
the future.
FHFA’s plan provides lawmakers and the public with an outline of how FHFA, as Conservator, intends to guide Freddie
Mac and Fannie Mae over the next few years, and identifies three strategic goals:
• Build. Build a new infrastructure for the secondary mortgage market.
• Contract. Gradually contract Freddie Mac's and Fannie Mae’s dominant presence in the marketplace while simplifying
and shrinking their operations.
• Maintain. Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.
The Conservatorship Scorecards, instituted by FHFA, established objectives, performance targets and measures, and
provided the implementation roadmap for FHFA’s strategic plan. We continue to align our resources and internal business plans
to meet the goals and objectives provided to us by FHFA.
There is significant uncertainty as to the ultimate impact that our efforts to aid the housing and mortgage markets,
including our efforts in connection with the MHA Program, will have on our future capital or liquidity needs. We are allocating
significant internal resources to the implementation of the various initiatives under the MHA Program and to the servicing
alignment initiative, which has increased, and will continue to increase, our expenses. We cannot currently estimate whether, or
the extent to which, costs incurred in the near term from HAMP, HARP, or other MHA Program efforts may be offset, if at all,
by the prevention or reduction of potential future costs of serious delinquencies and foreclosures due to these initiatives.
There is significant uncertainty as to our future, as the conservatorship has no specified termination date, and it is
unknown what changes may occur to our business model during or following conservatorship, including whether we will
continue to exist. The then Acting Director of FHFA stated on September 19, 2011 that “it ought to be clear to everyone at this
point, given [Freddie Mac and Fannie Mae’s] losses since being placed into conservatorship and the terms of the Treasury’s
financial support agreements, that [Freddie Mac and Fannie Mae] will not be able to earn their way back to a condition that
allows them to emerge from conservatorship.” The then Acting Director of FHFA stated on November 15, 2011 that “the long-
term outlook is that neither [Freddie Mac nor Fannie Mae] will continue to exist, at least in its current form, in the future.” 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.
On February 11, 2011, the Administration delivered a report to Congress that lays out the Administration’s plan to reform
the U.S. housing finance market, including options for structuring the government’s long-term role in a housing finance system
in which the private sector is the dominant provider of mortgage credit. The report recommends winding down Freddie Mac
and Fannie Mae, and states that the Administration will work with FHFA to determine the best way to responsibly reduce the
role of Freddie Mac and Fannie Mae in the market and ultimately wind down both institutions. The report states that these
efforts must be undertaken at a deliberate pace, which takes into account the impact that these changes will have on borrowers
and the housing market.
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The report states that the government is committed to ensuring that Freddie Mac and Fannie Mae have sufficient capital
to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations, and further
states that the Administration will not pursue policies or reforms in a way that would impair the ability of Freddie Mac and
Fannie Mae to honor their obligations. The report states the Administration’s belief that under the companies’ senior preferred
stock purchase agreements with Treasury, there is sufficient funding to ensure the orderly and deliberate wind down of Freddie
Mac and Fannie Mae, as described in the Administration’s plan.
The report identifies a number of policy levers that could be used to wind down Freddie Mac and Fannie Mae, shrink the
government’s footprint in housing finance, and help bring private investors back to the mortgage market, including increasing
guarantee fees, phasing in a 10% down payment requirement, reducing conforming loan limits, and winding down Freddie Mac
and Fannie Mae’s investment portfolios, consistent with the senior preferred stock purchase agreements. These
recommendations, if implemented, would have a material impact on our business volumes, market share, results of operations,
and financial condition.
On December 23, 2011, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act of 2011.
Among its provisions, this law directed FHFA to require Freddie Mac and Fannie Mae to increase guarantee fees by no less
than 10 basis points above the average guarantee fees charged in 2011 on single-family mortgage-backed securities. Effective
April 1, 2012, at the direction of FHFA, the guarantee fee on single-family residential mortgages sold to Freddie Mac and
Fannie Mae was increased by 10 basis points. Under the law, the proceeds we receive from this increase are being remitted to
Treasury to fund the payroll tax cut, rather than retained by us.
On August 31, 2012, FHFA announced that it had directed Freddie Mac and Fannie Mae to further increase guarantee
fees on single-family mortgages by an average of 10 basis points, which was implemented in 2012. In December 2013, FHFA
announced a number of additional changes to our (and Fannie Mae's) guarantee fee rates that were scheduled to become
effective in March and April of 2014. In January 2014, FHFA announced that it was delaying the implementation of these
changes.
Purchase Agreement
Overview
On September 7, 2008, we, through FHFA, in its capacity as Conservator, and Treasury entered into the Purchase
Agreement. The Purchase Agreement was subsequently amended and restated on September 26, 2008, and further amended on
May 6, 2009, December 24, 2009, and August 17, 2012. Under the Purchase Agreement, the $200 billion maximum amount of
the commitment from Treasury was increased to accommodate the cumulative reduction in our net worth during 2010, 2011
and 2012. The amount of available funding remaining under the Purchase Agreement was $140.5 billion as of December 31,
2013. This amount will be reduced by any future draws.
The Purchase Agreement requires Treasury, upon the request of the Conservator, to provide funds to us after any quarter
in which we have a negative net worth (that is, our total liabilities exceed our total assets, as reflected on our GAAP balance
sheet). In addition, the Purchase Agreement requires Treasury, upon the request of the Conservator, to provide funds to us if the
Conservator determines, at any time, that it will be mandated by law to appoint a receiver for us unless we receive these funds
from Treasury. In exchange for Treasury’s funding commitment, we issued to Treasury, as an aggregate initial commitment fee:
(a) one million shares of Variable Liquidation Preference Senior Preferred Stock (with an initial liquidation preference of $1
billion), which we refer to as the senior preferred stock; and (b) a warrant to purchase, for a nominal price, shares of our
common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis at the
time the warrant is exercised, which we refer to as the warrant. We received no other consideration from Treasury for issuing
the senior preferred stock or the warrant.
Treasury, as the holder of the senior preferred stock, is entitled to receive quarterly cash dividends, when, as and if
declared by our Board of Directors. Through December 31, 2012, the senior preferred stock accrued quarterly cumulative
dividends at a rate of 10% per year. However, under the August 2012 amendment to the Purchase Agreement, the fixed
dividend rate was replaced with a net worth sweep dividend beginning in the first quarter of 2013.
For each quarter from January 1, 2013 through and including December 31, 2017, the dividend payment will be the
amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter, less the applicable
Capital Reserve Amount, exceeds zero. The term Net Worth Amount is defined as: (a) the total assets of Freddie Mac
(excluding Treasury’s commitment and any unfunded amounts thereof), less; (b) our total liabilities (excluding any obligation
in respect of capital stock), in each case as reflected on our consolidated balance sheets prepared in accordance with GAAP. If
the calculation of the dividend payment for a quarter does not exceed zero, then no dividend will accrue or be payable for that
quarter. The applicable Capital Reserve Amount was $3 billion for 2013, will be $2.4 billion for 2014, and will be reduced by
$600 million each year thereafter until it reaches zero on January 1, 2018. For each quarter beginning January 1, 2018, the
dividend payment will be the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal
quarter exceeds zero. The amounts payable for dividends on the senior preferred stock could be substantial and will have an
adverse impact on our financial position and net worth. To the extent we draw on Treasury’s funding commitment, the
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liquidation preference of the senior preferred stock is increased by the amount of funds we receive. The senior preferred stock
is senior in liquidation preference to our common stock and all other series of preferred stock.
As a result of the net worth sweep dividend provisions of the senior preferred stock, we do not have the authority over the
long term to build and retain capital from the earnings generated by our business operations, or return capital to stockholders
other than Treasury.
In addition to the issuance of the senior preferred stock and warrant, we are required under the Purchase Agreement to
pay a quarterly commitment fee to Treasury. Under the Purchase Agreement, the fee is to be determined in an amount mutually
agreed to by us and Treasury with reference to the market value of Treasury’s funding commitment as then in effect. However,
pursuant to the August 2012 amendment to the Purchase Agreement, for each quarter commencing January 1, 2013, and for as
long as the net worth sweep dividend provisions remain in form and content substantially the same, no periodic commitment
fee under the Purchase Agreement will be set, accrue or be payable. Treasury had previously waived the fee for all prior
quarters.
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 under the Purchase Agreement or if any dividends or quarterly
commitment fees payable under the Purchase Agreement are not paid in cash (this quarterly commitment fee has been
suspended). We may need to make additional draws in future periods due to a variety of factors that could adversely affect our
net worth.
The Purchase Agreement includes significant restrictions on our ability to manage our business, including limiting the
amount of indebtedness we can incur and capping the size of our mortgage-related investments portfolio. While the senior
preferred stock is outstanding, we are prohibited from paying dividends (other than on the senior preferred stock) or issuing
equity securities without Treasury’s consent.
The Purchase Agreement has an indefinite term and can terminate only in limited circumstances, which do not include the
end of the conservatorship. The Purchase Agreement therefore could continue after the conservatorship ends. Treasury has the
right to exercise the warrant, in whole or in part, at any time on or before September 7, 2028.
Purchase Agreement Covenants
The Purchase Agreement provides that, until the senior preferred stock is repaid or redeemed in full, we may not, without
the prior written consent of Treasury:
•
•
•
•
•
•
•
•
declare or pay any dividend (preferred or otherwise) or make any other distribution with respect to any Freddie Mac
equity securities (other than with respect to the senior preferred stock or warrant);
redeem, purchase, retire or otherwise acquire any Freddie Mac equity securities (other than the senior preferred stock or
warrant);
sell or issue any Freddie Mac equity securities (other than the senior preferred stock, the warrant and the common stock
issuable upon exercise of the warrant and other than as required by the terms of any binding agreement in effect on the
date of the Purchase Agreement);
terminate the conservatorship (other than in connection with a receivership);
sell, transfer, lease or otherwise dispose of any assets, other than dispositions for fair market value: (a) to a limited life
regulated entity (in the context of a receivership); (b) of assets and properties in the ordinary course of business,
consistent with past practice; (c) of assets and properties having fair market value individually or in aggregate less than
$250 million in one transaction or a series of related transactions; (d) in connection with our liquidation by a receiver;
(e) of cash or cash equivalents for cash or cash equivalents; or (f) to the extent necessary to comply with the covenant
described below relating to the reduction of our mortgage-related investments portfolio;
issue any subordinated debt;
enter into a corporate reorganization, recapitalization, merger, acquisition or similar event; or
engage in transactions with affiliates unless the transaction is: (a) pursuant to the Purchase Agreement, the senior
preferred stock or the warrant; (b) upon arm’s length terms; or (c) a transaction undertaken in the ordinary course or
pursuant to a contractual obligation or customary employment arrangement in existence on the date of the Purchase
Agreement.
The covenants generally also apply to our subsidiaries.
The Purchase Agreement also requires us to reduce the amount of mortgage assets we own. The Purchase Agreement, as
revised in the August 2012 amendment, provides that we could not own mortgage assets with UPB in excess of $650 billion on
December 31, 2012 and on December 31 of each year thereafter, may not own mortgage assets with UPB in excess of 85% of
the aggregate amount of mortgage assets we are permitted to own as of December 31 of the immediately preceding calendar
year, provided that we are not required to own less than $250 billion in mortgage assets. Under the Purchase Agreement, we
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also may not incur indebtedness that would result in the par value of our aggregate indebtedness exceeding 120% of the amount
of mortgage assets we are permitted to own on December 31 of the immediately preceding calendar year. The mortgage asset
and indebtedness limitations are determined without giving effect to the changes to the accounting guidance for transfers of
financial assets and consolidation of VIEs, under which we consolidated our single-family PC trusts and certain of our Other
Guarantee Transactions in our financial statements as of January 1, 2010.
In addition, the Purchase Agreement provides that we may not enter into any new compensation arrangements or increase
amounts or benefits payable under existing compensation arrangements of any named executive officer or other executive
officer (as such terms are defined by SEC rules) without the consent of the Director of FHFA, in consultation with the Secretary
of the Treasury.
The Purchase Agreement also provides that, on an annual basis, we are required to deliver a risk management plan to
Treasury setting out our strategy for reducing our enterprise-wide risk profile and the actions we will take to reduce the
financial and operational risk associated with each of our reportable business segments.
Warrant Covenants
The warrant we issued to Treasury includes, among others, the following covenants: (a) our SEC filings under the
Exchange Act will comply in all material respects as to form with the Exchange Act and the rules and regulations thereunder;
(b) without the prior written consent of Treasury, we may not permit any of our significant subsidiaries to issue capital stock or
equity securities, or securities convertible into or exchangeable for such securities, or any stock appreciation rights or other
profit participation rights to any person other than Freddie Mac or its wholly-owned subsidiaries; (c) we may not take any
action that will result in an increase in the par value of our common stock; (d) unless waived or consented to in writing by
Treasury, we may not take any action to avoid the observance or performance of the terms of the warrant and we must take all
actions necessary or appropriate to protect Treasury’s rights against impairment or dilution; and (e) we must provide Treasury
with prior notice of specified actions relating to our common stock, such as setting a record date for a dividend payment,
granting subscription or purchase rights, authorizing a recapitalization, reclassification, merger or similar transaction,
commencing a liquidation of the company or any other action that would trigger an adjustment in the exercise price or number
or amount of shares subject to the warrant.
Termination Provisions
The Purchase Agreement provides that the Treasury’s funding commitment will terminate under any of the following
circumstances: (a) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding commitment at
that time; (b) the payment in full of, or reasonable provision for, all of our liabilities (whether or not contingent, including
mortgage guarantee obligations); and (c) the funding by Treasury of the maximum amount of the commitment under the
Purchase Agreement. In addition, Treasury may terminate its funding commitment and declare the Purchase Agreement null
and void if a court vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of the Conservator
or otherwise curtails the Conservator’s powers. Treasury may not terminate its funding commitment under the Purchase
Agreement solely by reason of our being in conservatorship, receivership or other insolvency proceeding, or due to our
financial condition or any adverse change in our financial condition.
Waivers and Amendments
The Purchase Agreement provides that most provisions of the agreement may be waived or amended by mutual written
agreement of the parties; however, no waiver or amendment of the agreement is permitted that would decrease Treasury’s
aggregate funding commitment or add conditions to Treasury’s funding commitment if the waiver or amendment would
adversely affect in any material respect the holders of our debt securities or Freddie Mac mortgage guarantee obligations.
Third-party Enforcement Rights
In the event of our default on payments with respect to our debt securities or Freddie Mac mortgage guarantee
obligations, if Treasury fails to perform its obligations under its funding commitment and if we and/or the Conservator are not
diligently pursuing remedies in respect of that failure, the holders of these debt securities or Freddie Mac mortgage guarantee
obligations may file a claim in the United States Court of Federal Claims for relief requiring Treasury to fund to us the lesser
of: (a) the amount necessary to cure the payment defaults on our debt and Freddie Mac mortgage guarantee obligations; and
(b) the lesser of: (i) the deficiency amount; and (ii) the maximum amount of the commitment less the aggregate amount of
funding previously provided under the commitment. Any payment that Treasury makes under those circumstances will be
treated for all purposes as a draw under the Purchase Agreement that will increase the liquidation preference of the senior
preferred stock.
Impact of Conservatorship and Related Developments on the Mortgage-Related Investments Portfolio
The UPB of our mortgage-related investments portfolio, for purposes of the limit imposed by the Purchase Agreement, as
amended on August 17, 2012, and FHFA regulation, may not exceed $553 billion at December 31, 2013 and was $461 billion at
December 31, 2013. The annual 15% reduction in the size of our mortgage-related investments portfolio until it reaches $250
billion is calculated based on the maximum allowable size of the mortgage-related investments portfolio, rather than the actual
UPB of the mortgage-related investments portfolio, as of December 31 of the preceding year. Our ability to acquire and sell
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mortgage assets is significantly constrained by limitations of the Purchase Agreement and those imposed by FHFA. The 2013
Conservatorship Scorecard included a goal to reduce the December 31, 2012 mortgage-related investments portfolio balance
(exclusive of agency securities, multifamily held-for-sale loans, and single-family loans purchased for cash) by selling 5% of
less liquid mortgage-related assets. In November 2013, FHFA announced that we had achieved this scorecard objective.
Government Support for our Business
We receive substantial support from Treasury and FHFA, as our Conservator and regulator, and are dependent upon their
continued support in order to continue operating our business. This support includes our ability to access funds from Treasury
under the Purchase Agreement, which is critical to: (a) keeping us solvent; (b) allowing us to focus on our primary business
objectives under conservatorship; and (c) avoiding the appointment of a receiver by FHFA under statutory mandatory
receivership provisions. At September 30, 2013, our assets exceeded our liabilities under GAAP; therefore FHFA did not
request a draw on our behalf and, as a result, we did not receive any funding from Treasury under the Purchase Agreement
during the three months ended December 31, 2013. Since conservatorship began through December 31, 2013, we have paid
cash dividends of $71.3 billion to Treasury at the direction of the Conservator.
At December 31, 2013, our assets exceeded our liabilities under GAAP; therefore no draw is being requested from
Treasury under the Purchase Agreement for the fourth quarter of 2013.
See “NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS” and “NOTE 11: STOCKHOLDERS’
EQUITY (DEFICIT)” for more information on the terms of the conservatorship and the Purchase Agreement.
Housing Finance Agency Initiative
In 2009, we entered into a Memorandum of Understanding with Treasury, FHFA, and Fannie Mae, which sets forth the
terms under which Treasury and, as directed by FHFA, we and Fannie Mae, would provide assistance to state and local HFAs
so that the HFAs can continue to meet their mission of providing affordable financing for both single-family and multifamily
housing. FHFA directed us and Fannie Mae to participate in the HFA initiative on a basis that is consistent with the goals of
being commercially reasonable and safe and sound. Treasury’s participation in these assistance initiatives does not affect the
amount of funding that Treasury can provide to Freddie Mac under the Purchase Agreement.
The primary initiatives are as follows:
• TCLFP — In December 2009, on a 50-50 pro rata basis, Freddie Mac and Fannie Mae agreed to provide $8.2 billion of
credit and liquidity support, including outstanding interest at the date of the guarantee, for variable rate demand
obligations, or VRDOs, previously issued by HFAs. This support was provided through the issuance of guarantees,
which provide credit enhancement to the holders of such VRDOs and also create an obligation to provide funds to
purchase any VRDOs that are put by their holders and are not remarketed. Treasury provided a credit and liquidity
backstop on the TCLFP. These guarantees replaced existing liquidity facilities from other providers. The guarantees
were scheduled to expire on December 31, 2012. However, Treasury gave TCLFP participants the option to extend their
individual TCLFP facilities to December 31, 2015. Certain participants elected to extend their TCLFP facilities to
December 2015.
• NIBP — In December 2009, on a 50-50 pro rata basis, Freddie Mac and Fannie Mae agreed to issue in total $15.3
billion of partially guaranteed pass-through securities backed by new single-family and certain new multifamily
housing bonds issued by HFAs. Treasury purchased all of the pass-through securities issued by Freddie Mac and Fannie
Mae. This initiative provided financing for HFAs to issue new housing bonds.
Treasury will bear the initial losses of principal up to 35% of total principal for these two initiatives combined, and
thereafter Freddie Mac and Fannie Mae each will be responsible only for losses of principal on the securities that it issues to the
extent that such losses are in excess of 35% of all losses under both initiatives. Treasury will bear all losses of unpaid interest.
Under both initiatives, we and Fannie Mae were paid fees at the time bonds were securitized and are also paid ongoing fees for
as long as the bonds remain outstanding.
Related Parties as a Result of Conservatorship
As a result of our issuance to Treasury of the warrant to purchase shares of our common stock equal to 79.9% of the total
number of shares of our common stock outstanding, on a fully diluted basis, we are deemed a related party to the U.S.
government. Except for the transactions with Treasury discussed above in “Business Objectives,” “Government Support for our
Business” and “Housing Finance Agency Initiative” as well as in “NOTE 8: DEBT SECURITIES AND SUBORDINATED
BORROWINGS,” and “NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT),” no transactions outside of normal business
activities have occurred between us and the U.S. government (or any of its related parties) during the years ended
December 31, 2013, 2012 and 2011. In addition, we are deemed related parties with Fannie Mae as both we and Fannie Mae
have the same relationships with FHFA and Treasury. All transactions between us and Fannie Mae have occurred in the normal
course of business in conservatorship. On October 7, 2013, FHFA announced the formation of Common Securitization
Solutions, LLCSM (CSS). CSS is equally-owned by Freddie Mac and Fannie Mae. In connection with the formation of CSS, we
entered into a limited liability company agreement with Fannie Mae and anticipate entering into additional agreements with
Fannie Mae relating to CSS in the future.
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NOTE 3: VARIABLE INTEREST ENTITIES
We have interests in various entities that are considered to be VIEs, including securitization trusts we use in our securities
issuance process. We are required to evaluate VIEs at inception and on an ongoing basis. When we determine that we are the
primary beneficiary of a VIE, we consolidate the assets and liabilities of the trust on our balance sheets. See “NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Consolidation and Equity Method of Accounting” for further
information regarding the consolidation of certain VIEs.
VIEs for which We are the Primary Beneficiary
See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Securitization Activities through
Issuances of Freddie Mac Mortgage-Related Securities” for information on the nature of single-family PC trusts, REMICs and
Other Structured Securities, and Other Guarantee Transactions.
Single-family PC Trusts
Our single-family PC trusts issue pass-through securities that represent undivided beneficial interests in pools of
mortgages held by these trusts. PCs are designed so that we bear the credit risk inherent in the loans underlying the PCs through
our guarantee of principal and interest payments on the PCs. The PC holders bear the interest rate or prepayment risk on the
mortgage loans and the risk that we will not perform on our obligation as guarantor. For purposes of our consolidation
assessments, our evaluation of power and economic exposure with regard to PC trusts focuses on credit risk because the credit
performance of the underlying mortgage loans was identified as the activity that most significantly impacts the economic
performance of these entities. We have the power to impact the activities related to this risk in our role as guarantor and master
servicer.
Specifically, in our role as master servicer, we establish requirements for how mortgage loans are serviced and what steps
are to be taken to mitigate credit losses (e.g., modification, foreclosure). Additionally, in our capacity as guarantor, we have the
ability to remove defaulted mortgage loans out of the PC trust to help mitigate credit losses. See “NOTE 5: INDIVIDUALLY
IMPAIRED AND NON-PERFORMING LOANS” for further information regarding our removal of mortgage loans out of PC
trusts. These powers allow us to direct the activities of the VIE (i.e., the PC trust) that most significantly impact its economic
performance. In addition, we determined that our guarantee to each PC trust to provide principal and interest payments
obligates us to absorb losses that could potentially be significant to the PC trusts. Accordingly, we concluded that we are the
primary beneficiary of our single-family PC trusts.
At both December 31, 2013 and 2012, we were the primary beneficiary of, and therefore consolidated, single-family PC
trusts with assets totaling $1.5 trillion, as measured using the UPB of issued PCs. The assets of each PC trust can be used only
to settle obligations of that trust. In connection with our PC trusts, we have credit protection in the form of primary mortgage
insurance, pool insurance, recourse to lenders, and other forms of credit enhancement. We also have credit protection for
certain of our PC trusts that issue PCs backed by loans or certificates of federal agencies (such as FHA, VA, and USDA). See
“NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES — Credit Protection and Other Forms of Credit
Enhancement” for additional information regarding third-party credit enhancements related to our PC trusts.
REMICs and Other Structured Securities
REMICs and Other Structured Securities are mortgage-related securities that we issue to third parties. We do not
consolidate the trusts that issue these securities unless we hold substantially all of the beneficial interests in the trust and are
therefore considered to be the primary beneficiary. We had investments of approximately $3.5 billion and $4.2 billion in UPB,
as of December 31, 2013 and 2012, respectively, where we held substantially all the outstanding beneficial interests in the trusts
and consolidated them on our balance sheets.
Other Guarantee Transactions
In Other Guarantee Transactions, we issue mortgage-related securities to third parties in exchange for non-Freddie Mac
mortgage-related securities. The degree to which our involvement with securitization trusts that issue Other Guarantee
Transactions provides us with power to direct the activities that most significantly impact the economic performance of these
VIEs (e.g., the ability to direct the servicing of the underlying assets of these entities) and obligation to absorb losses that could
potentially be significant to the VIEs varies by transaction. For all Other Guarantee Transactions, our variable interest in these
VIEs represents some form of credit guarantee, whether covering all the issued beneficial interests or only the most senior ones.
The nature of our credit guarantee typically determines whether we have power to direct the activities that most significantly
impact the economic performance of the VIE.
We consolidate Other Guarantee Transactions when our credit guarantee is in a first loss position to absorb credit losses
on the underlying assets of these entities as of the reporting date and we also have the ability to direct the servicing of the
underlying assets, which is the power to direct the activities that most significantly impact the economic performance of these
VIEs. For those Other Guarantee Transactions in which our credit guarantee is not in a first loss position to absorb credit losses
on the underlying assets of these entities as of the reporting date (i.e., our credit guarantee is in a secondary loss position), or
we do not have the ability to direct the servicing of the underlying assets, we are not the primary beneficiary, and we do not
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consolidate the VIE. Our consolidation determination took into consideration the specific facts and circumstances of our
involvement with each of these entities. As a result, we have concluded that we are the primary beneficiary of Other Guarantee
Transactions with underlying assets totaling $8.9 billion and $11.0 billion at December 31, 2013 and 2012, respectively.
VIEs for which We are not the Primary Beneficiary
The table below presents the carrying amounts and classification of the assets and liabilities recorded on our consolidated
balance sheets related to our variable interests in non-consolidated VIEs, as well as our maximum exposure to loss as a result of
our involvement with these VIEs. Our involvement with VIEs for which we are not the primary beneficiary generally takes one
of two forms: (a) purchasing an investment in these entities; or (b) providing a guarantee to these entities. Our maximum
exposure to loss for those VIEs in which we have purchased an investment is calculated as the maximum potential charge that
we would recognize in earnings if that investment were to become worthless. This amount does not include other-than-
temporary impairments or other write-downs that we previously recognized through earnings. Our maximum exposure to loss
for those VIEs for which we have provided a guarantee represents the contractual amounts that could be lost under the
guarantees if counterparties or borrowers defaulted, without consideration of possible recoveries under credit enhancement
arrangements. We do not believe the maximum exposure to loss disclosed in the table below is representative of the actual loss
we are likely to incur, based on our historical loss experience and after consideration of proceeds from related collateral
liquidation, including possible recoveries under credit enhancement arrangements.
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84,765
7,414
—
—
226
14
—
(2)
—
—
50,306
8,727
261
407
—
(12)
58
—
—
—
—
7
477
(35)
(558)
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Table 3.1 — Variable Interests in VIEs for which We are not the Primary Beneficiary
December 31, 2013
Mortgage-Related
Security Trusts
Asset-Backed
Investment
Trusts(1)
Freddie Mac
Securities(2)
Non-Freddie Mac
Securities(1)
(in millions)
Unsecuritized
Multifamily
Loans (3)
Other(1)
$
— $
6
$
— $
8
$
Assets and Liabilities Recorded on our Consolidated Balance
Sheets
Assets:
Restricted cash and cash equivalents
Investments in securities:
Available-for-sale, at fair value
Trading, at fair value
Mortgage loans:
Held-for-investment, unsecuritized
Held-for-sale
Accrued interest receivable
Other assets
Liabilities:
Derivative liabilities, net
Other liabilities
—
—
—
—
—
—
—
—
—
292
—
—
—
—
—
—
—
40,659
9,349
—
—
232
833
(3)
(875)
72,072
84,731
$
$
—
—
324
—
558
(1)
(667)
51,045
59,302
$
$
Maximum Exposure to Loss
Total Assets of Non-Consolidated VIEs(4)
$
$
— $
— $
92,559
506,699
$
$
59,710
105,120
$
$
10,415
23,707
Assets and Liabilities Recorded on our Consolidated Balance
Sheets
Assets:
Restricted cash and cash equivalents
Investments in securities:
Available-for-sale, at fair value
Trading, at fair value
Mortgage loans:
Held-for-investment, unsecuritized
Held-for-sale
Accrued interest receivable
Derivative assets, net
Other assets
Liabilities:
Derivative liabilities, net
Other liabilities
December 31, 2012
Mortgage-Related
Security Trusts
Asset-Backed
Investment
Trusts(1)
Freddie Mac
Securities(2)
Non-Freddie Mac
Securities(1)
(in millions)
Unsecuritized
Multifamily
Loans(3)
Other(1)
$
— $
24
$
— $
22
$
119
58,515
10,354
110,583
10,617
—
—
62,245
14,238
326
—
381
—
(29)
—
—
—
—
7
1
482
(40)
(635)
—
—
350
—
2
—
(2)
Maximum Exposure to Loss
Total Assets of Non-Consolidated VIEs(4)
$
$
292
10,901
$
$
128,475
768,704
$
$
77,213
130,512
$
$
10,871
25,004
(1) For our involvement with non-consolidated asset-backed investment trusts, non-Freddie Mac security trusts, and certain other VIEs where we do not
provide a guarantee, our maximum exposure to loss is computed as the carrying amount if the security is classified as trading or the amortized cost if
the security is classified as available-for-sale for our investments and related assets recorded on our consolidated balance sheets, including any
unrealized amounts recorded in AOCI for securities classified as available-for-sale. See “NOTE 7: INVESTMENTS IN SECURITIES” for additional
information regarding our asset-backed investments and non-Freddie Mac securities.
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(2) Freddie Mac securities include our variable interests in single-family multiclass REMICs and Other Structured Securities, multifamily PCs, multifamily
Other Structured Securities, and Other Guarantee Transactions that we do not consolidate. Our maximum exposure to loss includes guaranteed UPB of
assets held by the non-consolidated VIEs related to multifamily PCs, multifamily Other Structured Securities, and Other Guarantee Transactions for
which we record a guarantee asset (component of Other Assets) and guarantee obligation (component of Other Liabilities) on our consolidated balance
sheets. Our maximum exposure to loss excludes most of our investments in single-family multiclass REMICs and Other Structured Securities as we
already consolidate most of the collateral of these trusts on our consolidated balance sheets. Our investments in single-family REMICs and Other
Structured Securities that are not consolidated do not give rise to any additional exposure to credit loss as we already consolidate the underlying
collateral.
(3) For unsecuritized multifamily loans, our maximum exposure to loss includes accrued interest receivable associated with these loans. See “NOTE 4:
MORTGAGE LOANS AND LOAN LOSS RESERVES” for additional information about our unsecuritized multifamily loans.
(4) Except for unsecuritized multifamily loans, this represents the remaining UPB of assets held by non-consolidated VIEs using the most current
information available, where our continuing involvement is significant. For unsecuritized multifamily loans, this represents the fair value of the
property serving as collateral for the loan. We do not include the assets of our non-consolidated trusts related to single-family REMICs and Other
Structured Securities backed by our PCs in this amount as we already consolidate the underlying collateral of these trusts on our consolidated balance
sheets.
Mortgage-Related Security Trusts
Freddie Mac Securities
Freddie Mac securities related to our variable interests in non-consolidated VIEs primarily consist of our REMICs and
Other Structured Securities and Other Guarantee Transactions. At both December 31, 2013 and 2012, our involvement with
most of our REMICS and Other Structured Securities as well as certain Other Guarantee Transactions does not provide us with
the power to direct the activities that most significantly impact the economic performance of these VIEs. As a result, we hold a
variable interest in, but are not the primary beneficiary of those securitization trusts. For non-consolidated REMICs and Other
Structured Securities and Other Guarantee Transactions, our investments are primarily included in either available-for-sale
securities or trading securities on our consolidated balance sheets. See “NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES — Securitization Activities through Issuances of Freddie Mac Mortgage-Related Securities” for
additional information on accounting for purchases of securities issued by resecuritization trusts. Our investments in these
trusts are funded through the issuance of unsecured debt, which is recorded as other debt on our consolidated balance sheets.
Non-Freddie Mac Securities
We invest in a variety of mortgage-related securities issued by third-parties, including non-Freddie Mac agency
securities, CMBS, other private-label securities backed by various mortgage-related assets, and obligations of states and
political subdivisions. These investments typically represent interests in trusts that consist of a pool of mortgage-related assets
and act as vehicles to allow originators to securitize those assets. Securities are structured from the underlying pool of assets to
provide for varying degrees of risk, including potential loss from the credit risk and interest-rate risk of the underlying pool of
mortgages. The originators of the financial assets or the underwriters of the securities offering create the trusts and typically
own the residual interest in the trust assets. See “NOTE 7: INVESTMENTS IN SECURITIES” for additional information
regarding our non-Freddie Mac securities.
Our investments in these non-Freddie Mac securities at December 31, 2013 were made between 1994 and 2013. We are
not generally the primary beneficiary of non-Freddie Mac securities trusts because our investments are passive in nature and do
not provide us with the power to direct the activities of the trusts that most significantly impact their economic performance.
We were not the primary beneficiary of any significant non-Freddie Mac securities trusts as of December 31, 2013 or 2012. At
both December 31, 2013 and 2012, our exposure was limited to the amount of our investment. Our investments in these trusts
are funded through the issuance of unsecured debt, which is recorded as other debt on our consolidated balance sheets.
Unsecuritized Multifamily Loans
We purchase loans made to various multifamily real estate entities. We primarily purchase such loans for securitization.
The loans we acquire usually are, at origination, equal to 80% or less of the value of the related underlying property. The
remaining 20% of value is typically funded through equity contributions by the partners or members of the borrower entity. In a
few cases, the 20% not funded through the loan we acquire also includes subordinate loans or mezzanine financing from third-
party lenders.
We held more than 5,000 and 6,000 unsecuritized multifamily loans at December 31, 2013 and 2012, respectively. The
UPB of our investments in these loans was $59.2 billion and $76.6 billion as of December 31, 2013 and 2012, respectively, and
was included in unsecuritized held-for-investment mortgage loans, at amortized cost, and held-for-sale mortgage loans at fair
value on our consolidated balance sheets. We are not generally the primary beneficiary of the multifamily real estate borrowing
entities because the loans we acquire are passive in nature and do not provide us with the power to direct the activities of these
entities that most significantly impact their economic performance. However, when a multifamily loan becomes delinquent, we
may become the primary beneficiary of the borrowing entity depending upon the structure of this entity and the rights granted
to us under the governing legal documents. At both December 31, 2013 and 2012, the amount of unsecuritized multifamily
loans for which we could be considered the primary beneficiary of the underlying borrowing entity was not material. See
“NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES” for more information.
Other
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Our involvement with other VIEs primarily includes certain of our other mortgage-related guarantees and other guarantee
commitments that we account for as derivatives.
At December 31, 2013 and 2012, we were the primary beneficiary of one and two, respectively, real estate entities that
invest in multifamily property, related to credit-enhanced multifamily housing revenue bonds that were not deemed to be
material. We were not the primary beneficiary of the remainder of other VIEs because our involvement in these VIEs is passive
in nature and does not provide us with the power to direct the activities of the VIEs that most significantly impact their
economic performance. See “Table 3.1 — Variable Interests in VIEs for which We are not the Primary Beneficiary” for the
carrying amounts and classification of the assets and liabilities recorded on our consolidated balance sheets related to our other
variable interests in non-consolidated VIEs, as well as our maximum exposure to loss as a result of our involvement with these
VIEs.
NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES
We own both single-family mortgage loans, which are secured by one to four unit residential properties, and multifamily
mortgage loans, which are secured by properties with five or more residential rental units. Our single-family loans are
predominately first lien, fixed-rate mortgages secured by the borrower’s primary residence. For a discussion of our significant
accounting policies regarding our mortgage loans and loan loss reserves, see “NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES.”
The table below summarizes the types of loans on our consolidated balance sheets as of December 31, 2013 and 2012.
Table 4.1 — Mortgage Loans
Single-family:(1)
Fixed-rate
Amortizing
Interest-only
Total fixed-rate
Adjustable-rate
Amortizing
Interest-only
Total adjustable-rate
Other Guarantee Transactions
FHA/VA and other governmental
Total single-family
Multifamily:(1)
Fixed-rate
Adjustable-rate
Other governmental
Total multifamily
Total UPB of mortgage loans
Deferred fees, unamortized premiums, discounts
and other cost basis adjustments
Fair value adjustments on loans held-for sale(2)
Allowance for loan losses on mortgage loans held-
for-investment
Total mortgage loans, net
Mortgage loans, net:
Held-for-investment
Held-for-sale
Total mortgage loans, net
December 31, 2013
Held by
Consolidated
Trusts
Unsecuritized
December 31, 2012
Held by
Consolidated
Trusts
Total
Total
Unsecuritized
(in millions)
$
113,597
$
1,402,841
$ 1,516,438
$
131,061
$
1,356,030
$ 1,487,091
1,476
115,073
4,826
6,302
1,407,667
1,522,740
2,445
133,506
8,874
11,319
1,364,904
1,498,410
1,935
4,576
6,511
—
553
65,429
23,841
89,270
8,431
3,354
67,364
28,417
95,781
8,431
3,907
2,630
7,323
9,953
—
1,285
67,067
31,590
98,657
10,407
3,062
69,697
38,913
108,610
10,407
4,347
122,137
1,508,722
1,630,859
144,744
1,477,030
1,621,774
50,701
8,467
3
59,171
181,308
444
—
—
444
51,145
8,467
3
59,615
1,509,166
1,690,474
66,384
10,182
3
76,569
221,313
448
—
—
448
66,832
10,182
3
77,017
1,477,478
1,698,791
(4,817)
23,745
18,928
(5,376)
23,373
17,997
6
—
6
266
—
266
(21,612)
154,885
146,158
8,727
154,885
$
$
$
$
$
$
(3,006)
(24,618)
(25,788)
(4,919)
(30,707)
1,529,905
$ 1,684,790
1,529,905
$ 1,676,063
—
8,727
1,529,905
$ 1,684,790
$
$
$
190,415
176,177
14,238
190,415
$
$
$
1,495,932
$ 1,686,347
1,495,932
$ 1,672,109
—
14,238
1,495,932
$ 1,686,347
(1) Based on UPB and excluding mortgage loans traded, but not yet settled.
(2) Consists of fair value adjustments associated with multifamily mortgage loans for which we have made a fair value election.
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During 2013 and 2012, we purchased $412.9 billion and $420.0 billion, respectively, in UPB of single-family mortgage
loans, and $1.3 billion and $1.1 billion, respectively, in UPB of multifamily loans that were classified as held-for-investment.
Our sales of multifamily mortgage loans occur primarily through the issuance of multifamily K Certificates, which we
categorize as Other Guarantee Transactions. During 2013 and 2012, we sold $28.3 billion and $20.8 billion, respectively, of
held-for-sale multifamily mortgage loans. See “NOTE 14: FINANCIAL GUARANTEES” for more information on our
issuances of Other Guarantee Transactions. We did not have significant reclassifications of mortgage loans into held-for-sale
from held-for-investment during 2013.
Credit Quality of Mortgage Loans
We evaluate the credit quality of single-family loans using different criteria than the criteria we use to evaluate
multifamily loans. The current LTV ratio is one key factor we consider when estimating our loan loss reserves for single-family
loans. As estimated current LTV ratios increase, the borrower’s equity in the home decreases, which negatively affects the
borrower’s ability to refinance (outside of HARP) or to sell the property for an amount at or above the balance of the
outstanding mortgage loan. A second-lien mortgage also reduces the borrower’s equity in the home, and has a similar negative
effect on the borrower’s ability to refinance or sell the property for an amount at or above the combined balances of the first
and second mortgages. As of both December 31, 2013 and 2012, based on data collected by us at loan delivery, approximately
14% of loans in our single-family credit guarantee portfolio had second-lien financing by third parties at origination of the first
mortgage. However, borrowers are free to obtain second-lien financing after origination, and we are not entitled to receive
notification when a borrower does so. Therefore, it is likely that additional borrowers have post-origination second-lien
mortgages. For further information about concentrations of risk associated with our single-family and multifamily mortgage
loans, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS.”
The table below presents information on the estimated current LTV ratios of single-family loans on our consolidated
balance sheets, all of which are held-for-investment. Our current LTV ratio estimates are based on available data through the
end of each respective period presented.
Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio
As of December 31, 2013
As of December 31, 2012
Estimated Current LTV Ratio(1)
Estimated Current LTV Ratio(1)
> 80 to 100
> 100(2)
Total
> 80 to 100
> 100(2)
Total
(in millions)
Single-family loans:
20 and 30-year or more, amortizing
fixed-rate(3)
15-year amortizing fixed-rate(3)
Adjustable-rate(4)
Alt-A, interest-only, and option
ARM(5)
$ 819,509
$
269,110
$ 124,491
$
1,213,110
$ 699,386
$
309,099
$ 188,048
$
1,196,533
270,211
56,208
19,658
6,714
5,748
1,578
295,617
249,666
64,500
50,764
18,473
10,341
5,433
4,845
273,572
65,950
29,927
21,564
25,089
76,580
27,642
24,030
52,057
103,729
Total single-family loans
$1,175,855
$
317,046
$ 156,906
1,649,807
$1,027,458
$
361,943
$ 250,383
1,639,784
Multifamily loans
Total recorded investment of held-for-
investment loans
50,874
$
1,700,681
63,032
$
1,702,816
(1) The current LTV ratios are management estimates, which are updated on a monthly basis. Current market values are estimated by adjusting the value of
the property at origination based on changes in the market value of homes in the same geographical area since that time. The value of a property at
origination is based on: (a) for purchase mortgages, either the lesser of the appraised value of the property at the time of mortgage origination or the
mortgage borrower’s purchase price; or (b) for refinance mortgages, a third-party appraisal. Changes in market value are derived from our internal
index which measures price changes for repeat sales and refinancing activity on the same properties using Freddie Mac and Fannie Mae single-family
mortgage acquisitions, including foreclosure sales. Estimates of the current LTV ratio include the credit-enhanced portion of the loan and exclude any
secondary financing by third parties. The existence of a second lien reduces the borrower’s equity in the property and, therefore, can increase the risk of
default.
(2) The serious delinquency rate for the total of single-family held-for-investment mortgage loans with estimated current LTV ratios in excess of 100% was
9.9% and 12.7% as of December 31, 2013 and 2012, respectively.
(3) The majority of our loan modifications result in new terms that include fixed interest rates after modification. As of December 31, 2013 and 2012, we
have categorized UPB of approximately $43.8 billion and $43.4 billion, respectively, of modified loans as fixed-rate loans (instead of as adjustable rate
loans), even though the modified loans have rate adjustment provisions. In these cases, while the terms of the modified loans provide for the interest
rate to adjust in the future, such future rates are determined at the time of modification rather than at a subsequent date.
Includes balloon/reset mortgage loans and excludes option ARMs.
(4)
(5) We have discontinued our purchases of Alt-A, interest-only, and option ARM loans. For reporting purposes: (a) loans within the Alt-A category
continue to be presented in that category following modification, even though the borrower may have provided full documentation of assets and income
to complete the modification; and (b) loans within the option ARM category continue to be presented in that category following modification, even
though the modified loan no longer provides for optional payment provisions.
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For information about the payment status of single-family and multifamily mortgage loans, including the amount of such
loans we deem impaired, see “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS.” For a discussion
of certain indicators of credit quality for the multifamily loans on our consolidated balance sheets, see “NOTE 15:
CONCENTRATION OF CREDIT AND OTHER RISKS — Multifamily Mortgage Portfolio.”
Allowance for Loan Losses and Reserve for Guarantee Losses, or Loan Loss Reserves
Our loan loss reserves consist of our: (a) allowance for loan losses on mortgage loans that we classify as held-for-
investment on our consolidated balance sheets; and (b) reserve for guarantee losses associated with Freddie Mac mortgage-
related securities backed by multifamily loans, certain single-family Other Guarantee Transactions, and other guarantee
commitments, for which we have incremental credit risk.
A significant portion of the unsecuritized single-family loans on our consolidated balance sheets are seriously delinquent
and/or TDR loans that we previously removed from our PC pools. These seriously delinquent and TDR loans typically have a
higher associated allowance for loan loss than loans that remain in consolidated trusts. Single-family loans that remain in
consolidated trusts are generally aggregated and measured collectively for impairment based on similar risk characteristics of
the loans.
The table below presents our loan loss reserves activity for the single-family and multifamily loans that we own or
guarantee.
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Table 4.3 — Detail of Loan Loss Reserves
Year Ended December 31,
2013
2012
Allowance for Loan Losses
Held By
Consolidated
Trusts
Unsecuritized
Reserve
for
Guarantee
Losses(1)
Allowance for Loan Losses
Held By
Consolidated
Trusts
Unsecuritized
Reserve
for
Guarantee
Losses(1)
Total
Total
(in millions)
$
25,449
$
4,918
$
141
$ 30,508
$
30,406
$
8,351
$
159
$ 38,916
Single-family:
Beginning balance
Provision (benefit) for credit
losses
Charge-offs(2)
Recoveries(3)
Transfers, net(4)
Ending balance
Multifamily:
Beginning balance
Provision (benefit) for credit
losses
Charge-offs(2)
Recoveries(3)
Transfers, net(4)
Ending balance
Total:
Beginning balance
Provision (benefit) for credit
losses
Charge-offs(2)
Recoveries(3)
Transfers, net(4)
Ending balance
(3,995)
(8,181)
3,810
4,404
21,487
339
(208)
(7)
1
—
125
25,788
(4,203)
(8,188)
3,811
4,404
21,612
$
$
$
$
$
$
$
$
$
$
Total loan loss reserve as a percentage of the total mortgage
portfolio, excluding non-Freddie Mac securities
1,790
(804)
503
(3,401)
3,006
1
(1)
—
—
$
$
—
— $
(42)
(10)
—
(4)
85
(2,247)
(8,995)
4,313
999
$ 24,578
42
$
382
(9)
—
—
(7)
26
$
(218)
(7)
1
(7)
151
4,919
$
183
$ 30,890
1,789
(804)
503
(3,401)
3,006
$
(51)
(10)
—
(11)
111
(2,465)
(9,002)
4,314
992
$ 24,729
1.37%
$
$
$
$
$
(3,186)
(12,559)
2,136
8,652
25,449
506
(132)
(34)
—
(1)
339
30,912
(3,318)
(12,593)
2,136
8,651
25,788
$
$
$
$
$
5,199
(950)
126
(7,808)
4,918
$
— $
—
—
—
1
1
8,351
5,199
(950)
126
(7,807)
4,919
$
$
$
—
2,013
(11)
—
(7)
141
(13,520)
2,262
837
$ 30,508
39
9
(2)
2
(6)
42
$
545
(123)
(36)
2
(6)
382
$
198
$ 39,461
9
1,890
(13)
2
(13)
183
(13,556)
2,264
831
$ 30,890
1.71%
(1) Loans associated with our reserve for guarantee losses are those loans that underlie our non-consolidated securitization trusts and other guarantee
commitments and are evaluated for impairment on a collective basis. Our reserve for guarantee losses is included in other liabilities on our consolidated
balance sheets.
(2) Charge-offs represent the amount of a loan that has been discharged to remove the loan from our consolidated balance sheet principally due to either
foreclosure transfers or short sales. Charge-offs exclude $252 million and $308 million for the years ended December 31, 2013 and 2012, respectively,
related to: (a) amounts recorded as losses on loans purchased within other expenses on our consolidated statements of comprehensive income, which
relate to certain loans purchased under financial guarantees; or (b) cumulative fair value losses recognized through the date of foreclosure for
Multifamily loans which we elected to carry at fair value at the time of our purchase. We record charge-offs and recoveries on loans held by
consolidated trusts when a loss event (such as a foreclosure transfer or foreclosure alternative) occurs on a loan while it remains in a consolidated trust.
(3) Recoveries of charge-offs primarily result from foreclosure alternatives and REO acquisitions on loans where: (a) a share of default risk has been
assumed by mortgage insurers, servicers, or other third parties through credit enhancements; or (b) we received a reimbursement of our losses from a
seller/servicer associated with a repurchase request on a loan that experienced a foreclosure transfer or a foreclosure alternative.
(4) For the years ended December 31, 2013 and 2012, consists of: (a) approximately $3.4 billion and $7.8 billion, respectively, of reclassified single-
family reserves related to our removal of loans previously held by consolidated trusts; and (b) approximately $1.0 billion and $0.8 billion, respectively,
attributable to capitalization of past due interest on modified mortgage loans.
The table below presents our allowance for loan losses and our recorded investment in mortgage loans, held-for-
investment, by impairment evaluation methodology.
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Table 4.4 — Net Investment in Mortgage Loans
Recorded investment:
Collectively evaluated
Individually evaluated
Total recorded investment
Ending balance of the allowance for loan losses:
Collectively evaluated
Individually evaluated
Total ending balance of the allowance
December 31, 2013
December 31, 2012
Single-family Multifamily
Total
Single-family Multifamily
Total
(in millions)
$
1,551,667
$
49,598
$
1,601,265
$
1,550,493
$
60,836
$
1,611,329
98,140
1,649,807
1,276
50,874
99,416
89,291
1,700,681
1,639,784
2,196
63,032
91,487
1,702,816
(5,939)
(18,554)
(24,493)
(45)
(80)
(125)
(5,984)
(18,634)
(24,618)
(12,432)
(17,935)
(30,367)
(135)
(205)
(340)
(12,567)
(18,140)
(30,707)
Net investment in mortgage loans
$
1,625,314
$
50,749
$
1,676,063
$
1,609,417
$
62,692
$
1,672,109
A significant number of unsecuritized single-family mortgage loans on our consolidated balance sheets are individually
evaluated for impairment while substantially all single-family mortgage loans held by our consolidated trusts are collectively
evaluated for impairment. The ending balance of the allowance for loan losses associated with our held-for-investment
unsecuritized mortgage loans represented approximately 12.9% and 12.8% of the recorded investment in such loans at
December 31, 2013 and 2012, respectively. The ending balance of the allowance for loan losses associated with mortgage loans
held by our consolidated trusts represented approximately 0.2% and 0.3% of the recorded investment in such loans as of
December 31, 2013 and 2012, respectively.
Credit Protection and Other Forms of Credit Enhancement
In connection with many of our mortgage loans held-for-investment and other mortgage-related guarantees, we have
credit protection in the form of primary mortgage insurance, pool insurance, recourse to lenders, and other forms of credit
enhancements.
The table below presents the UPB of loans on our consolidated balance sheets or underlying our financial guarantees with
credit protection and the maximum amounts of potential loss recovery by type of credit protection.
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Table 4.5 — Recourse and Other Forms of Credit Protection(1)
Single-family:
Primary mortgage insurance
Risk transfer transactions(3)
Lender recourse and indemnifications
Pool insurance(4)
HFA indemnification(5)
Subordination(6)
Other credit enhancements
Total
Multifamily:
K Certificates(7)
Subordination(6)
HFA indemnification(5)
Other credit enhancements
Total
UPB at
Maximum Coverage(2) at
December 31, 2013
December 31, 2012
December 31, 2013
December 31, 2012
(in millions)
$
203,470
$
188,419
$
50,823
$
46,685
56,903
7,119
4,683
4,051
2,644
38
278,908
59,326
4,435
905
6,666
$
$
—
7,875
7,307
6,270
2,960
62
212,893
36,732
3,817
1,112
7,235
$
$
1,183
6,726
1,186
3,323
399
38
63,678
10,601
756
699
1,834
$
$
71,332
$
48,896
$
13,890
$
$
$
$
—
7,718
1,355
3,323
503
62
59,646
6,256
442
699
2,263
9,660
(1)
Includes the credit protection associated with unsecuritized mortgage loans, loans held by our consolidated trusts as well as our non-consolidated
mortgage guarantees and excludes FHA/VA and other governmental loans. Except for subordination coverage, these amounts exclude credit protection
associated with $11.5 billion and $13.8 billion in UPB of single-family loans underlying Other Guarantee Transactions as of December 31, 2013 and
2012, respectively, for which the information was not available. Also excludes repurchase rights (subject to certain conditions and limitations) we have
under representations and warranties provided by our agreements with seller/servicers to underwrite loans and service them in accordance with our
standards.
(2) Except for subordination and K Certificates, this represents the remaining amount of loss recovery that is available subject to terms of counterparty
agreements. For subordination and K Certificates coverage, this represents the UPB of the securities that are subordinate to our guarantee, which could
provide protection by absorbing first losses.
(3) Represents: (a) STACR debt note transactions in which we issue and sell debt securities, the principal balance of which is subject to the credit and
prepayment risk of a reference pool of single-family mortgage loans owned or guaranteed by Freddie Mac; and (b) a transaction in which we purchased
an insurance policy on a portion of the mezzanine loss position that was not issued in one of the STACR debt note transactions. UPB amounts
presented represent the UPB of the loans in the reference pool. Maximum coverage amounts presented represent the outstanding balance of the debt
securities held by third parties as well as the remaining aggregate limit of insurance purchased from a third party.
(4) Maximum coverage amounts presented have been limited to the UPB at period end. Excludes approximately $1.8 billion and $3.3 billion in UPB at
December 31, 2013 and 2012, respectively, where the related loans are also covered by primary mortgage insurance.
(5) Represents the amount of potential reimbursement of losses on securities we have guaranteed that are backed by state and local HFA bonds related to
the HFA initiative, under which Treasury bears initial losses on these securities up to 35% of the original UPB issued under the HFA initiative on a
combined program-wide basis. Treasury will also bear losses of unpaid interest.
(6) Represents Freddie Mac issued mortgage-related securities with subordination protection, excluding multifamily K Certificates and those securities
backed by state and local HFA bonds related to the HFA initiative. Excludes mortgage-related securities where subordination coverage was exhausted.
Maximum coverage amounts are limited to the UPB.
(7) Represents multifamily K Certificates with subordination protection.
Primary mortgage insurance is the most prevalent type of credit enhancement protecting our single-family credit
guarantee portfolio, and is provided on a loan-level basis. Pool insurance contracts provide insurance on a group of mortgage
loans up to a stated aggregate loss limit. We have not purchased pool insurance on single-family loans since March 2008.
During 2013 and 2012, we also reached the maximum limit of recovery on certain pool insurance contracts. For information
about counterparty risk associated with mortgage insurers, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER
RISKS — Mortgage Insurers.”
We executed two structured agency credit risk (STACR) debt note transactions during 2013 in which we issued unsecured
debt securities that reduce our exposure to credit risk. In a STACR debt note transaction, we create a reference pool consisting
of a large group of recently acquired single-family mortgage loans. We then create a hypothetical securitization structure with
notional credit risk positions, or tranches (e.g., first loss, mezzanine, and senior). We issue STACR debt notes that relate to the
mezzanine tranches, though the notes are not backed or collateralized by mortgage loans in the reference pool. The principal
balance of the STACR debt notes is reduced when certain specified credit events (such as a loan becoming 180 days
delinquent) occur on the loans in the reference pool. In turn, this may reduce the total amount of payments we ultimately make
on the STACR debt notes.
We also have credit enhancements protecting our multifamily mortgage portfolio. Subordination, primarily through our
K Certificates, is the most prevalent type, whereby we mitigate our credit risk exposure by structuring our securities to sell the
expected credit risk to private investors who purchase the subordinate tranches.
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We also have credit protection for certain of the mortgage loans on our consolidated balance sheets that are covered by
insurance or partial guarantees issued by federal agencies (such as FHA, VA, and USDA). The total UPB of these loans was
$3.9 billion and $4.3 billion as of December 31, 2013 and 2012, respectively.
NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS
Individually Impaired Loans
Individually impaired single-family loans include performing and non-performing TDRs, as well as loans acquired under
our financial guarantees with deteriorated credit quality. Individually impaired multifamily loans include performing and non-
performing TDRs, loans three monthly payments or more past due, and loans that are impaired based on management
judgment. For a discussion of our significant accounting policies regarding impaired and non-performing loans, which are
applied consistently for multifamily loans and single-family loan classes, see “NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES.”
Total loan loss reserves consist of a specific valuation allowance related to individually impaired mortgage loans, and a
general reserve for other probable incurred losses. Our recorded investment in individually impaired mortgage loans and the
related specific valuation allowance are summarized in the table below by product class (for single-family loans).
Table 5.1 — Individually Impaired Loans
Balance at
December 31, 2013
For The Year Ended
December 31, 2013
UPB
Recorded
Investment
Associated
Allowance
Net
Investment
Average
Recorded
Investment
Interest
Income
Recognized
(in millions)
Interest
Income
Recognized
On Cash
Basis(1)
Single-family —
With no specific allowance recorded(2):
20 and 30-year or more, amortizing fixed-rate(3)
15-year amortizing fixed-rate(3)
Adjustable rate(4)
Alt-A, interest-only, and option ARM(5)
Total with no specific allowance recorded
With specific allowance recorded:(6)
$
5,927
$
3,355
$
— $
3,355
$
3,370
$
394
$
62
19
1,758
7,766
34
13
1,038
4,440
—
—
—
—
34
13
1,038
4,440
31
13
978
4,392
6
1
72
473
20 and 30-year or more, amortizing fixed-rate(3)
75,633
74,554
(14,431)
60,123
69,922
2,127
15-year amortizing fixed-rate(3)
Adjustable rate(4)
Alt-A, interest-only, and option ARM(5)
Total with specific allowance recorded
Combined single-family:
1,324
967
1,324
962
(43)
(84)
1,281
878
1,109
855
17,210
16,860
(3,996)
12,864
16,526
50
22
369
95,134
93,700
(18,554)
75,146
88,412
2,568
20 and 30-year or more, amortizing fixed-rate(3)
81,560
77,909
(14,431)
63,478
73,292
2,521
15-year amortizing fixed-rate(3)
Adjustable rate(4)
1,386
986
1,358
975
(43)
(84)
Alt-A, interest-only, and option ARM(5)
18,968
17,898
(3,996)
Total single-family(7)
Multifamily —
With no specific allowance recorded(8)
With specific allowance recorded
Total multifamily
Total single-family and multifamily
$ 102,900
$
$
694
608
1,302
$ 104,202
$
$
$
$
98,140
$
(18,554) $
681
595
1,276
99,416
$
$
$
— $
(80)
681
515
(80) $
1,196
(18,634) $
80,782
1,315
891
13,902
79,586
1,140
868
17,504
92,804
1,108
891
1,999
94,803
$
$
$
$
$
$
$
$
56
23
441
3,041
48
41
89
3,130
$
$
$
$
34
1
—
6
41
282
11
6
69
368
316
12
6
75
409
20
31
51
460
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Balance at
December 31, 2012
For The Year Ended
December 31, 2012
UPB
Recorded
Investment
Associated
Allowance
Net
Investment
Average
Recorded
Investment
Interest
Income
Recognized
(in millions)
Interest
Income
Recognized
On Cash
Basis(1)
Single-family —
With no specific allowance recorded(2):
20 and 30-year or more, amortizing fixed-rate(3)
$
6,582
$
3,236
$
— $
3,236
$
3,136
$
339
$
15-year amortizing fixed-rate(3)
Adjustable rate(4)
Alt-A, interest-only, and option ARM(5)
Total with no specific allowance recorded
With specific allowance recorded:(6)
64
19
1,799
8,464
30
12
857
4,135
—
—
—
—
30
12
857
25
7
847
4,135
4,015
6
—
63
408
20 and 30-year or more, amortizing fixed-rate(3)
67,473
66,501
(13,522)
52,979
55,431
1,632
15-year amortizing fixed-rate(3)
Adjustable rate(4)
1,134
883
1,125
874
(55)
(107)
1,070
767
714
558
Alt-A, interest-only, and option ARM(5)
16,946
16,656
(4,251)
12,405
14,278
31
14
326
Total with specific allowance recorded
86,436
85,156
(17,935)
67,221
70,981
2,003
Combined single-family:
20 and 30-year or more, amortizing fixed-rate(3)
74,055
69,737
(13,522)
56,215
58,567
1,971
15-year amortizing fixed-rate(3)
Adjustable rate (4)
Alt-A, interest-only, and option ARM(5)
Total single-family(7)
Multifamily —
With no specific allowance recorded(8)
With specific allowance recorded
Total multifamily
Total single-family and multifamily
1,198
902
18,745
94,900
978
1,248
2,226
97,126
$
$
$
$
$
$
$
$
1,155
886
(55)
(107)
1,100
779
17,513
(4,251)
13,262
89,291
$
(17,935) $
71,356
966
1,230
2,196
91,487
$
$
$
— $
(205)
(205) $
966
1,025
1,991
(18,140) $
73,347
739
565
15,125
74,996
1,420
1,470
2,890
77,886
$
$
$
$
$
$
$
$
37
14
389
2,411
61
68
129
2,540
$
$
$
$
46
1
—
11
58
279
8
5
82
374
325
9
5
93
432
37
51
88
520
(1) Consists of income recognized during the period related to loans categorized as non-accrual.
(2)
Individually impaired loans with no specific related valuation allowance primarily represent mortgage loans removed from PC pools and accounted for
in accordance with the accounting guidance for loans and debt securities acquired with deteriorated credit quality that have not experienced further
deterioration.
Includes balloon/reset mortgage loans and excludes option ARMs.
(3) See endnote (3) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”
(4)
(5) See endnote (5) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”
(6) Consists primarily of mortgage loans classified as TDRs.
(7) As of December 31, 2013 and 2012 includes $95.1 billion and $86.4 billion, respectively, of UPB associated with loans for which we have recorded a
specific allowance, and $7.8 billion and $8.5 billion, respectively, of UPB associated with loans that have no specific allowance recorded. See endnote
(2) for additional information.
Individually impaired multifamily loans with no specific related valuation allowance primarily represent those loans for which the collateral value is
sufficiently in excess of the loan balance to result in recovery of the entire recorded investment if the property were foreclosed upon or otherwise
subject to disposition.
(8)
Interest income foregone on individually impaired loans was $2.7 billion, $2.3 billion and $1.6 billion for the years ended
December 31, 2013, 2012 and 2011 respectively.
Mortgage Loan Performance
We do not accrue interest on loans three months or more past due.
The table below presents the recorded investment of our single-family and multifamily mortgage loans, held-for-
investment, by payment status.
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Table 5.2 — Payment Status of Mortgage Loans(1)
December 31, 2013
Current
One
Month
Past Due
Two
Months
Past Due
Three Months or
More Past Due,
or in Foreclosure
Total
Non-accrual
(in millions)
Single-family —
20 and 30-year or more, amortizing fixed-rate(2)
15-year amortizing fixed-rate(2)
Adjustable-rate(3)
Alt-A, interest-only, and option ARM(4)
Total single-family
Total multifamily
$ 1,157,057
$
19,743
$
6,675
$
29,635
$ 1,213,110
$
29,620
293,286
62,987
62,356
1,575,686
50,827
1,196
495
2,898
24,332
—
271
147
1,157
8,250
21
864
871
10,169
41,539
295,617
64,500
76,580
1,649,807
26
50,874
863
871
10,162
41,516
627
Total single-family and multifamily
$ 1,626,513
$
24,332
$
8,271
$
41,565
$ 1,700,681
$
42,143
December 31, 2012
Current
One
Month
Past Due
Two
Months
Past Due
Three Months or
More Past Due,
or in Foreclosure
Total
Non-accrual
(in millions)
Single-family —
20 and 30-year or more, amortizing fixed-rate(2)
15-year amortizing fixed-rate(2)
Adjustable-rate(3)
Alt-A, interest-only, and option ARM(4)
Total single-family
Total multifamily
$ 1,125,996
$
21,509
$
8,051
$
40,977
$ 1,196,533
$
40,833
270,730
63,736
82,438
1,542,900
63,000
1,320
614
3,439
26,882
—
338
212
1,582
10,183
2
1,184
1,388
16,270
59,819
273,572
65,950
103,729
1,639,784
30
63,032
1,177
1,383
16,237
59,630
1,457
Total single-family and multifamily
$ 1,605,900
$
26,882
$
10,185
$
59,849
$ 1,702,816
$
61,087
(1) Based on recorded investment in the loan. Mortgage loans that have been modified are not counted as past due as long as the borrower is current under
the modified terms. The payment status of a loan may be affected by temporary timing differences, or lags, in the reporting of this information to us by
our servicers.
(2) See endnote (3) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”
(3)
(4) See endnote (5) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”
Includes balloon/reset mortgage loans and excludes option ARMs.
We have the option under our PC agreements to remove mortgage loans that underlie our PCs under certain
circumstances to resolve an existing or impending delinquency or default. Our practice generally has been to remove loans
from PC trusts when the loans have been delinquent for 120 days or more. As of December 31, 2013, there were $1.1 billion in
UPB of loans underlying our PCs that were 120 days or more delinquent, and that met our criteria for removing the loan from
the PC trust. Generally, we remove these delinquent loans from the PC trust, and thereby extinguish the related PC debt at the
next scheduled PC payment date, unless the loans proceed to foreclosure transfer, complete a foreclosure alternative or are paid
in full by the borrower before such date.
When we remove mortgage loans from PC trusts, we reclassify the loans from mortgage loans held-for-investment by
consolidated trusts to unsecuritized mortgage loans held-for-investment and record an extinguishment of the corresponding
portion of the debt securities of the consolidated trusts. We removed $18.2 billion and $29.6 billion in UPB of loans from PC
trusts (or purchased delinquent loans associated with other guarantee commitments) during the years ended December 31, 2013
and 2012.
The table below summarizes the delinquency rates of mortgage loans within our single-family credit guarantee and
multifamily mortgage portfolios.
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Table 5.3 — Delinquency Rates
Single-family:(1)
Non-credit-enhanced portfolio (excluding Other Guarantee Transactions):
Serious delinquency rate
Total number of seriously delinquent loans
Credit-enhanced portfolio (excluding Other Guarantee Transactions):
Serious delinquency rate
Total number of seriously delinquent loans
Other Guarantee Transactions:(2)
Serious delinquency rate
Total number of seriously delinquent loans
Total single-family:
Serious delinquency rate
Total number of seriously delinquent loans
Multifamily:(3)
Non-credit-enhanced portfolio:
Delinquency rate
UPB of delinquent loans (in millions)
Credit-enhanced portfolio:
Delinquency rate
UPB of delinquent loans (in millions)
Total Multifamily:
Delinquency rate
UPB of delinquent loans (in millions)
December 31, 2013
December 31, 2012
1.99%
183,822
4.34%
56,794
10.91%
14,709
2.39%
255,325
0.07%
46
$
0.11%
75
$
0.09%
121
$
2.62%
244,533
6.83%
90,747
10.60%
17,580
3.25%
352,860
0.10%
76
0.36%
172
0.19%
248
$
$
$
(1) Single-family mortgage loans that have been modified are not counted as seriously delinquent if the borrower is less than three monthly payments past
due under the modified terms. Serious delinquencies on single-family mortgage loans underlying certain REMICs and Other Structured Securities,
Other Guarantee Transactions, and other guarantee commitments may be reported on a different schedule due to variances in industry practice.
(2) Single-family Other Guarantee Transactions generally have underlying mortgage loans with higher risk characteristics, but some single-family Other
Guarantee Transactions may provide inherent credit protections from losses due to underlying subordination, excess interest, overcollateralization and
other features.
(3) Multifamily delinquency performance is based on UPB of mortgage loans that are two monthly payments or more past due or those in the process of
foreclosure and includes multifamily Other Guarantee Transactions (e.g., K Certificates). Excludes mortgage loans that have been modified as long as
the borrower is less than two monthly payments past due under the modified contractual terms.
We continue to implement a number of initiatives to refinance and modify loans, including the MHA Program and the
servicing alignment initiative. Our implementation of the MHA Program, for our loans, includes the following: (a) an initiative
to allow mortgages currently owned or guaranteed by us to be refinanced without obtaining additional credit enhancement
beyond that already in place for the loan (i.e., our relief refinance mortgage, which is our implementation of HARP); (b) an
initiative to modify mortgages for both homeowners who are in default and those who are at risk of imminent default (i.e.,
HAMP); and (c) an initiative designed to permit borrowers who meet basic HAMP eligibility requirements to sell their homes
in short sales or to complete a deed in lieu of foreclosure transaction. As part of accomplishing certain of these initiatives, we
pay various incentives to servicers and borrowers. We bear the full costs associated with these loan workout and foreclosure
alternatives on mortgages that we own or guarantee, including the cost of any monthly payment reductions, and do not receive
any reimbursement from Treasury.
Troubled Debt Restructurings
Single-Family TDRs
We require our single-family servicers to contact borrowers who are in default and to evaluate loan workout options in
accordance with our requirements. We establish guidelines for our servicers to follow and provide them default management
programs designed to help them manage non-performing loans more effectively and to assist borrowers in maintaining home
ownership where possible, or facilitate foreclosure alternatives when continued homeownership is not an option. We require
our single-family servicers to first evaluate problem loans for a repayment or forbearance plan before considering modification.
If a borrower is not eligible for a modification, our seller/servicers pursue other workout options before considering
foreclosure. We receive information related to loan workouts, such as completed modifications and loans in a modification trial
period, and other alternatives to foreclosure from our servicers at the loan level on at least a monthly basis. For loans in a
modification trial period, we do not receive the terms of the expected completed modification until the modification is
completed. For these loans, we only receive notification that they are in a modification trial period. See “NOTE 1: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES — Allowance for Loan Losses and Reserve for Guarantee Losses” for more
detail.
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Repayment plans are agreements with the borrower that give the borrower a defined period of time to reinstate the
mortgage by paying regular payments plus an additional agreed upon amount in repayment of the past due amount. These
agreements are considered TDRs if they result in a delay in payment that is considered to be more than insignificant.
Forbearance agreements are agreements between the servicer and the borrower where reduced payments or no payments
are required during a defined period. These agreements are considered TDRs if they result in a delay in payment that is
considered to be more than insignificant.
For HAMP loan modifications, our servicers typically obtain information on income, assets, and other borrower
obligations to consider eligibility for modification and determine modified loan terms. Under HAMP, the goal of a single-
family loan modification is to reduce the borrower’s monthly mortgage payments to a specified percentage of the borrower’s
gross monthly income, which may be achieved through a combination of methods, including: (a) interest rate reduction;
(b) term extension; and (c) principal forbearance. Principal forbearance is when a portion of the principal is made non-interest-
bearing and non-amortizing, but this does not represent principal forgiveness. Although HAMP contemplates that some
servicers will also make use of principal forgiveness to achieve reduced payments for borrowers, we have only used
forbearance of principal and have not used principal forgiveness in modifying our loans.
We implemented a non-HAMP standard loan modification initiative in late 2011, which replaced our previous non-
HAMP modification initiative beginning January 1, 2012. Our HAMP and non-HAMP modification initiatives are available for
borrowers experiencing what is generally expected to be a longer-term financial hardship. In July 2013, we implemented a
streamlined (non-HAMP) modification initiative, which provides an additional modification opportunity to certain borrowers,
and it is scheduled to end in December 2015. The modification that borrowers receive under this initiative will have the same
mortgage terms as our non-HAMP standard modification. Borrowers are not required to apply for assistance or provide income
or hardship documentation for this type of modification.
Both HAMP and our non-HAMP standard modification require a three month trial period during which the borrower will
make monthly payments based on the estimated amount of the modification payments. After the final trial-period payment is
received by our servicer, the borrower and servicer enter into the modification. We consider restructurings under these
initiatives as TDRs at the inception of the trial period if the expected modification will result in a change in our expectation to
collect all amounts due at the original contract rate. Since we do not receive the terms of the modification until completion of
the trial period, we estimate the impairment for loans in a modification trial period that are considered TDRs using the average
impairment recorded for completed modifications and the estimated likelihood of completion of the trial period. If the borrower
fails to successfully complete the trial period, the impairment for the loan is then based on the original terms of the loan. If the
borrower successfully completes the trial period, the impairment for the loan is then based on the modified terms of the loan.
These subsequent adjustments to impairment are based on the success or failure of the borrower to complete the trial period and
are recorded through the provision for credit losses.
During 2013 approximately 56% of completed single-family loan modifications that were classified as TDRs involved
interest rate reductions and term extensions and approximately 36% involved principal forbearance in addition to interest rate
reductions and term extensions. During 2013, the average term extension was 161 months and the average interest rate
reduction was 2.2% on completed single-family loan modifications classified as TDRs.
Multifamily TDRs
The assessment as to whether a multifamily loan restructuring is considered a TDR contemplates the unique facts and
circumstances of each loan. This assessment considers qualitative factors such as whether the borrower’s modified interest rate
is consistent with that of a borrower having a similar credit profile at the time of modification. In certain cases, for maturing
loans we may provide short-term loan extensions of up to one year with no changes to the effective borrowing rate. In other
cases, we may make more significant modifications of terms for borrowers experiencing financial difficulty, such as reducing
the interest rate or extending the maturity for longer than one year. In cases where we do modify the contractual terms of the
loan, the changes in terms may be similar to those of single-family loans, such as an extension of the term, reduction of
contractual rate, principal forbearance, or some combination of these features.
TDR Activity and Performance
The table below presents the volume of single-family and multifamily loans that were newly classified as TDRs during
the year ended December 31, 2013 and 2012, based on the original category of the loan before the loan was classified as a
TDR. Loans classified as a TDR in one period may be subject to further action (such as a modification or remodification) in a
subsequent period. In such cases, the subsequent action would not be reflected in the table below since the loan would already
have been classified as a TDR.
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Table 5.4 — TDR Activity, by Segment
Single-family(1)
20 and 30-year or more, amortizing fixed-rate(2)
15-year amortizing fixed-rate
Adjustable-rate(3)
Alt-A, interest-only, and option ARM(4)
Total Single-family
Multifamily
Total
Year Ended December 31, 2013
Year Ended December 31, 2012
# of Loans
Post-TDR
Recorded
Investment
# of Loans
Post-TDR
Recorded
Investment
(dollars in millions)
101,538
$
16,014
177,930
$
27,076
11,671
3,604
17,770
134,583
8
825
574
3,941
21,354
98
17,549
6,496
35,012
236,987
20
134,591
$
21,452
237,007
$
1,176
977
7,834
37,063
202
37,265
(1) The pre-TDR recorded investment for single-family loans initially classified as TDR during the years ended December 31, 2013 and 2012, was $21.2
billion and $37.0 billion, respectively. 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 and when the loans were not already classified as TDRs for
other reasons. As a result, the 2012 period reflects the initial classification of such loans as TDRs.
(2) See endnote (3) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”
(3)
(4) See endnote (5) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”
Includes balloon/reset mortgage loans.
The measurement of impairment for single-family TDRs is based on the excess of our recorded investment in the loan
over the present value of the loan’s expected future cash flows. For multifamily loans, we use an estimate of the fair value of
the loan’s collateral rather than the present value of expected future cash flows to determine the amount of impairment.
Generally, restructurings of single-family loans that are TDRs have a higher allowance for loan losses than restructurings that
are not considered TDRs because TDRs involve a concession being granted to the borrower. Our process for determining the
appropriate allowance for loan losses for both single-family and multifamily loans considers the impact that our loss mitigation
activities, such as loan restructurings, have on probabilities of default. For single-family loans evaluated individually and
collectively for impairment that have been modified, the probability of default is affected by the incidence of redefault that we
have experienced on similar loans that have completed a modification. For multifamily loans, the incidence of redefault on
loans that have been modified does not directly affect the allowance for loan losses as our multifamily loans are generally
evaluated individually for impairment based on the fair value of the underlying collateral. The process for determining the
appropriate allowance for loan losses for multifamily loans evaluated collectively for impairment considers the incidence of
redefault on loans that have completed a modification.
The table below presents the volume of payment defaults (i.e., loans that became two months delinquent or completed a
loss event) of our TDR modifications based on the original category of the loan before modification and excludes loans subject
to other loss mitigation activity that were classified as TDRs during the period. Substantially all of our completed single-family
loan modifications classified as a TDR during 2013 resulted in a modified loan with a fixed interest rate.
Table 5.5 — Payment Defaults of Completed TDR Modifications, by Segment(1)
Single-family
20 and 30-year or more, amortizing fixed-rate(3)
15-year amortizing fixed-rate
Adjustable-rate
Alt-A, interest-only, and option ARM(4)
Total single-family
Multifamily
Year Ended December 31, 2013
Year Ended December 31, 2012
# of Loans
Post-TDR
Recorded
Investment(2)
# of Loans
Post-TDR
Recorded
Investment(2)
(dollars in millions)
14,964
$
2,766
15,718
$
2,905
471
237
2,256
17,928
$
— $
52
50
587
3,455
—
716
331
3,042
19,807
6
$
$
73
71
805
3,854
82
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(1) Represents TDR loans that experienced a payment default during the period and had completed a modification during the year preceding the payment
default. A payment default occurs when a borrower either: (a) became two or more months delinquent; or (b) completed a loss event, such as a short
sale or foreclosure transfer. We only include payment defaults for a single loan once during each quarterly period within a year; however, a single loan
will be reflected more than once if the borrower experienced another payment default in a subsequent quarterly period.
(2) Represents the recorded investment at the end of the period in which the loan was modified and does not represent the recorded investment as of
December 31.
(3) See endnote (3) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”
(4) See endnote (5) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.”
In addition to modifications, loans may be initially classified as TDRs as a result of other loss mitigation activities (i.e.,
repayment plans, forbearance agreements, or trial period modifications). During the years ended December 31, 2013 and 2012,
8,473 and 5,220 of such loans, respectively, with a post-TDR recorded investment of $1.4 billion and $0.9 billion, respectively,
experienced a payment default.
Loans may also be initially classified as TDRs because the borrowers’ debts were discharged in Chapter 7 bankruptcy
(and the loan was not already classified as a TDR for other reasons). During the years ended December 31, 2013 and 2012,
17,225 and 9,390, respectively, of such loans (with a post-TDR recorded investment of $2.8 billion and $1.5 billion,
respectively) experienced a payment default.
NOTE 6: REAL ESTATE OWNED
We obtain REO properties: (a) when we are the highest bidder at foreclosure sales of properties that collateralize non-
performing single-family and multifamily mortgage loans owned by us; or (b) when a delinquent borrower chooses to transfer
the mortgaged property to us in lieu of going through the foreclosure process (i.e., deed in lieu of foreclosure). Upon acquiring
single-family properties, we establish a marketing plan to sell the property as soon as practicable by determining an estimated
market value and listing it for sale with a real estate broker. Upon acquiring multifamily properties, we may operate them using
third-party property management firms for a period to stabilize value and then sell the properties through commercial real
estate brokers. However, certain jurisdictions require a period of time after foreclosure during which the borrower may reclaim
the property. During the period when the borrower may reclaim the property, or we are completing the eviction process, we are
not able to market the property and this extends our holding period for these properties. See “NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES” for a discussion of our significant accounting policies for REO.
The table below provides a summary of the change in the carrying value of our combined single-family and multifamily
REO balances. For the periods presented in the table below, the weighted average holding period for our disposed properties
was less than one year.
Table 6.1 — REO
Beginning balance — REO
Additions
Dispositions
Ending balance — REO
Beginning balance, valuation allowance
Change in valuation allowance
Ending balance, valuation allowance
Ending balance — REO, net
Year Ended December 31,
2013
2012
(in millions)
2011
4,407
$
5,827
$
6,498
(6,303)
4,602
(29)
(22)
(51)
7,029
(8,449)
4,407
(147)
118
(29)
4,551
$
4,378
$
7,368
8,970
(10,511)
5,827
(300)
153
(147)
5,680
$
$
The REO balance, net at December 31, 2013 and 2012 associated with single-family properties was $4.5 billion and $4.3
billion, respectively, and the balance associated with multifamily properties was $10 million and $64 million, respectively. The
Southeast region represented approximately 34% and 29% of our single-family REO additions during 2013 and 2012,
respectively, based on the number of properties, and the North Central region represented approximately 29% and 33% of our
single-family REO additions during these periods. Our single-family REO inventory consisted of 47,307 properties and 49,071
properties at December 31, 2013 and 2012, respectively. In recent years, the foreclosure process has been significantly slowed
in many geographical areas, particularly in states that require a judicial foreclosure process, which extends the time it takes for
loans to be foreclosed upon and the underlying property to transition to REO. See “NOTE 15: CONCENTRATION OF
CREDIT AND OTHER RISKS” for additional information about regional concentrations in our portfolio.
Our REO operations expenses include: (a) REO property expenses; (b) net gains or losses incurred on disposition of REO
properties; (c) adjustments to the holding period allowance associated with REO properties to record them at the lower of their
carrying amount or fair value less the estimated costs to sell; and (d) recoveries from insurance and other credit enhancements.
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An allowance for estimated declines in the REO fair value during the period properties are held reduces the carrying value of
REO property. Excluding holding period valuation adjustments and recoveries, we recognized gains (losses) of $761 million,
$693 million, and $(165) million on REO dispositions during 2013, 2012, and 2011 respectively. We increased (decreased) our
valuation allowance for properties in our REO inventory by $58 million, $(7) million, and $304 million in 2013, 2012, and
2011, respectively.
REO property acquisitions that result from extinguishment of our mortgage loans held on our consolidated balance sheets
are treated as non-cash transfers. The amount of non-cash acquisitions of REO properties during the years ended December 31,
2013, 2012, and 2011 was $6.1 billion, $6.8 billion, and $8.7 billion, respectively.
NOTE 7: INVESTMENTS IN SECURITIES
The table below summarizes amortized cost, estimated fair values, and corresponding gross unrealized gains and gross
unrealized losses for available-for-sale securities by major security type. At December 31, 2013 and 2012, all available-for-sale
securities are mortgage-related securities.
Table 7.1 — Available-For-Sale Securities
December 31, 2013
Available-for-sale securities:
Freddie Mac
Fannie Mae
Ginnie Mae
CMBS
Subprime
Option ARM
Alt-A and other
Obligations of states and political subdivisions
Manufactured housing
Total available-for-sale securities
December 31, 2012
Available-for-sale securities:
Freddie Mac
Fannie Mae
Ginnie Mae
CMBS
Subprime
Option ARM
Alt-A and other
Obligations of states and political subdivisions
Manufactured housing
Total available-for-sale securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in millions)
Fair
Value
$
39,001
$
1,847
$
(189) $
10,140
149
29,151
29,897
6,617
8,322
3,533
629
660
18
1,524
382
338
526
23
61
(3)
—
(337)
(2,780)
(381)
(142)
(61)
(6)
40,659
10,797
167
30,338
27,499
6,574
8,706
3,495
684
$
$
127,439
$
5,379
$
(3,899) $
128,919
53,965
$
14,183
183
47,606
35,503
7,454
11,861
5,647
716
4,602
1,099
26
3,882
83
48
244
154
24
$
(52) $
(2)
—
(181)
(9,129)
(1,785)
(1,201)
(3)
(31)
58,515
15,280
209
51,307
26,457
5,717
10,904
5,798
709
$
177,118
$
10,162
$
(12,384) $
174,896
Available-For-Sale Securities in a Gross Unrealized Loss Position
The table below shows the fair value of available-for-sale securities in a gross unrealized loss position, and whether they
have been in that position less than 12 months, or 12 months or greater, including the non-credit-related portion of other-than-
temporary impairments, which have been recognized in AOCI.
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Table 7.2 — Available-For-Sale Securities in a Gross Unrealized Loss Position
Less than 12 Months
Gross Unrealized Losses
12 Months or Greater
Total
Gross Unrealized Losses
Gross Unrealized Losses
December 31,
2013
Fair
Value
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Total
Fair
Value
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Total
Fair
Value
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Total
(in millions)
Available-for-
sale securities:
Freddie Mac
$ 7,957
$
— $
(144)
$ (144)
$
649
$
— $
(45)
$
(45)
$
8,606
$
— $
(189)
$
(189)
Fannie Mae
CMBS
Subprime
Option ARM
Alt-A and
other
Obligations of
states and
political
subdivisions
Manufactured
housing
Total available-
for-sale
securities in a
gross unrealized
loss position
248
1,147
472
77
262
1,885
—
—
(7)
(19)
(2)
(5)
(7)
—
(2)
(78)
—
—
—
(2)
(85)
(19)
(2)
19
1,992
19,103
2,608
—
(16)
(2,448)
(374)
(1)
(236)
(313)
(5)
(1)
(252)
(2,761)
(379)
267
3,139
19,575
2,685
—
(23)
(2,467)
(376)
(3)
(314)
(313)
(5)
(3)
(337)
(2,780)
(381)
(5)
1,854
(113)
(24)
(137)
2,116
(118)
(24)
(142)
(49)
(56)
—
—
24
65
—
(4)
(5)
(2)
(5)
(6)
1,909
65
(7)
(4)
(54)
(2)
(61)
(6)
$12,048
$
(40)
$
(273)
$ (313)
$ 26,314
$
(2,955)
$
(631)
$ (3,586)
$ 38,362
$
(2,995)
$
(904)
$ (3,899)
Less than 12 Months
Gross Unrealized Losses
12 Months or Greater
Total
Gross Unrealized Losses
Gross Unrealized Losses
December 31,
2012
Fair
Value
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Total
Fair
Value
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Total
Fair
Value
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Total
(in millions)
Available-for-
sale securities:
Freddie Mac
$ 1,811
$
— $
(25)
$
(25)
$
1,872
$
— $
(27)
$
(27)
$
3,683
$
— $
(52)
$
170
340
298
82
50
37
46
—
—
(23)
(3)
(4)
—
—
—
(3)
—
—
—
(1)
—
—
(3)
(23)
(3)
55
3,425
25,676
5,182
—
(22)
(7,830)
(1,759)
(2)
(156)
(1,276)
(23)
(2)
(178)
(9,106)
(1,782)
225
3,765
25,974
5,264
—
(22)
(7,853)
(1,762)
(2)
(159)
(1,276)
(23)
(52)
(2)
(181)
(9,129)
(1,785)
(4)
7,938
(961)
(236)
(1,197)
7,988
(965)
(236)
(1,201)
(1)
—
45
222
—
(26)
(2)
(5)
(2)
(31)
82
268
—
(26)
(3)
(5)
(3)
(31)
Fannie Mae
CMBS
Subprime
Option ARM
Alt-A and
other
Obligations of
states and
political
subdivisions
Manufactured
housing
Total available-
for-sale
securities in a
gross unrealized
loss position
$ 2,834
$
(30)
$
(29)
$
(59)
$ 44,415
$
(10,598)
$
(1,727)
$ (12,325)
$ 47,249
$
(10,628)
$
(1,756)
$ (12,384)
(1) Represents the gross unrealized losses for securities for which we have previously recognized other-than-temporary impairments in earnings.
(2) Represents the gross unrealized losses for securities for which we have not previously recognized other-than-temporary impairments in earnings.
At December 31, 2013, total gross unrealized losses on available-for-sale securities were $3.9 billion. The gross
unrealized losses relate to 994 individual lots representing 956 separate securities, including securities with non-credit-related
other-than-temporary impairments recognized in AOCI. We purchase multiple lots of individual securities at different times and
at different costs. We determine gross unrealized gains and gross unrealized losses by specifically evaluating investment
positions at the lot level; therefore, some of the lots we hold for a single security may be in an unrealized gain position while
other lots for that security may be in an unrealized loss position, depending upon the amortized cost of the specific lot.
Impairment Recognition on Investments in Securities
We recognize impairment losses on available-for-sale securities within our consolidated statements of comprehensive
income as net impairment of available-for-sale securities recognized in earnings when we conclude that a decrease in the fair
value of a security is other-than-temporary. For information regarding our evaluation of our available-for-sale securities for
impairment, see "NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities."
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The evaluation of whether unrealized losses on available-for-sale securities are other-than-temporary requires significant
management judgments and assumptions and consideration of numerous factors. We perform an evaluation on a security-by-
security basis considering all available information. The relative importance of this information varies based on the facts and
circumstances surrounding each security, as well as the economic environment at the time of assessment. Important factors
include, but are not limited to:
• whether we intend to sell the security or it is more likely than not that we will be required to sell the security before
sufficient time elapses to recover all unrealized losses;
•
the use of a third-party model for single-family non-agency mortgage-related securities that considers the credit
performance of the underlying collateral, including current LTV ratio, delinquency status, servicer performance, loan
modification terms and status, and borrower credit information. The model also incorporates assumptions about the
economic environment, including future home prices, unemployment, and interest rates to project underlying collateral
prepayment speeds, default rates, loss severities, and delinquency rates. Our estimation approach for CMBS includes
the use of a separate third-party model that utilizes underlying collateral performance, current and expected credit
enhancements, and incorporates assumptions about the underlying collateral cash flows; and
•
the incorporation of security-level subordination information and the priority of cash flow payments by the models to
project and estimate cash flows expected to be collected for each security.
See “Table 7.2 — Available-For-Sale Securities in a Gross Unrealized Loss Position” for the length of time our available-
for-sale securities have been in an unrealized loss position. Also see “Table 7.3 — Significant Modeled Attributes for Certain
Available-For-Sale Non-Agency Mortgage-Related Securities” for the modeled default rates and severities that were used to
determine whether our senior interests in certain non-agency mortgage-related securities would experience a cash shortfall.
As noted in “Table 7.4 — Net Impairment of Available-For-Sale Securities Recognized in Earnings,” our net impairment
on available-for-sale securities during 2013 includes certain securities that we have the intent to sell prior to the recovery of the
unrealized loss. In cases where we have the intent to sell or it is more likely than not that we will be required to sell the security
before recovery of its amortized cost, the security’s entire decline in fair value would be deemed to be other-than-temporary
and is recorded within our consolidated statements of comprehensive income as net impairment of available-for-sale securities
recognized in earnings. For the remaining available-for-sale securities in an unrealized loss position at December 31, 2013, we
have asserted that we have no intent to sell and that we believe it is not more likely than not that we will be required to sell the
security before recovery of its amortized cost basis.
Freddie Mac and Fannie Mae Securities
We record the purchase of mortgage-related securities issued by Fannie Mae as investments in securities in accordance
with the accounting guidance for investments in debt and equity securities. In contrast, our purchase of mortgage-related
securities that we issued (e.g., PCs, REMICs and Other Structured Securities, and Other Guarantee Transactions) is recorded as
either investments in securities or extinguishment of debt securities of consolidated trusts depending on the nature of the
mortgage-related security that we purchase. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES —
Securitization Activities through Issuances of Freddie Mac Mortgage-Related Securities” for additional information.
We hold these investments in securities that are in an unrealized loss position at least to recovery and typically to
maturity. As the principal and interest on these securities are guaranteed and we do not intend to sell these securities and it is
not more likely than not that we will be required to sell such securities before a recovery of the securities' amortized cost basis,
we consider these unrealized losses to be temporary.
Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans
We believe the unrealized losses on the non-agency mortgage-related securities we hold are a result of poor underlying
collateral performance, limited liquidity, and risk premiums. Our review of the securities backed by subprime, option ARM,
and Alt-A and other loans includes the third-party loan level default modeling and analyses of the individual securities based on
underlying collateral performance, including the collectability of amounts from bond insurers. In evaluating collectability from
bond insurers, we consider factors that affect both the bond insurers’ financial performance and ability to pay their obligations.
We consider loan level information including estimated current LTV ratios, FICO scores, and other loan level characteristics.
For additional information regarding bond insurers, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS
— Bond Insurers.”
The table below presents the modeled attributes, including default rates, prepayment rates, and severities, without regard
to subordination, that are used to determine whether our interests in certain available-for-sale non-agency mortgage-related
securities will experience a cash shortfall.
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Table 7.3 — Significant Modeled Attributes for Certain Available-For-Sale Non-Agency Mortgage-Related Securities
Issuance Date
2004 and prior:
UPB
Weighted average collateral defaults(3)
Weighted average collateral severities(4)
Weighted average voluntary prepayment rates(5)
Average credit enhancements(6)
2005:
UPB
Weighted average collateral defaults(3)
Weighted average collateral severities(4)
Weighted average voluntary prepayment rates(5)
Average credit enhancements(6)
2006:
UPB
Weighted average collateral defaults(3)
Weighted average collateral severities(4)
Weighted average voluntary prepayment rates(5)
Average credit enhancements(6)
2007:
UPB
Weighted average collateral defaults(3)
Weighted average collateral severities(4)
Weighted average voluntary prepayment rates(5)
Average credit enhancements(6)
Total:
UPB
Weighted average collateral defaults(3)
Weighted average collateral severities(4)
Weighted average voluntary prepayment rates(5)
Average credit enhancements(6)
December 31, 2013
Alt-A(1)
Subprime First
Lien(2)
Option ARM
Fixed Rate
Variable Rate
Hybrid Rate
(dollars in millions)
$
896
$
49
$
498
$
336
$
342
37%
58%
7%
38%
23 %
46 %
8 %
4 %
13 %
47 %
11 %
15 %
31 %
43 %
7 %
15 %
19 %
37 %
8 %
12 %
$
3,687
$
2,221
$
714
$
591
$
3,068
46%
60%
4%
46%
34 %
51 %
7 %
3 %
20 %
46 %
9 %
— %
40 %
48 %
7 %
21 %
24 %
41 %
9 %
2 %
$
16,547
$
4,870
$
397
$
846
$
907
54%
61%
2%
5%
44 %
53 %
6 %
(5)%
28 %
47 %
8 %
— %
47 %
53 %
6 %
(9)%
26 %
40 %
10 %
(3)%
$
18,287
$
3,286
$
138
$
1,085
$
225
53%
61%
2%
4%
44 %
52 %
6 %
4 %
47 %
52 %
6 %
(1)%
46 %
52 %
6 %
(20)%
43 %
48 %
7 %
— %
$
39,417
$
10,426
$
1,747
$
2,858
$
4,542
52%
61%
2%
9%
42 %
52 %
6 %
— %
22 %
47 %
9 %
4 %
43 %
51 %
6 %
(4)%
25 %
41 %
9 %
1 %
(1) Excludes non-agency mortgage-related securities backed by other loans, which primarily consist of securities backed by home equity lines of credit.
(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) The expected cumulative default rate is expressed as a percentage of the current collateral UPB.
(4) The expected average loss given default is calculated as the ratio of cumulative loss over cumulative default for each security.
(5) The security’s voluntary prepayment rate represents the average of the monthly voluntary prepayment rate weighted by the security’s outstanding UPB.
(6) Positive values reflect the amount of subordination and other financial support (excluding credit enhancement provided by bond insurance) that will
incur losses in the securitization structure 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). Negative values are shown when unallocated collateral losses will be allocated to the securities that we own in excess of current remaining
credit enhancement, if any. The unallocated collateral losses have been considered in our assessment of other-than-temporary impairment.
In evaluating the non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans for
other-than-temporary impairment, we noted that the percentage of securities that were AAA-rated and the percentage that were
investment grade declined significantly since acquisition. While these ratings have declined, the ratings themselves are not
determinative that a loss is more or less likely. While we may consider credit ratings in our analysis, we believe that our
detailed security-by-security analyses provide a more comprehensive view of the ultimate collectability of contractual amounts
due to us.
Our analysis is subject to change as new information regarding delinquencies, severities, loss timing, prepayments, and
other factors becomes available. While it is possible that, under certain conditions, collateral losses on our remaining available-
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for-sale securities for which we have not recorded an impairment charge could exceed our credit enhancement levels and a
principal or interest loss could occur, we do not believe that those conditions were likely as of December 31, 2013.
Commercial Mortgage-Backed Securities
CMBS are exposed to stresses in the commercial real estate market. We use an external model to identify securities that
may have an increased risk of failing to make their contractual payments. We then perform an analysis of the underlying
collateral on a security-by-security basis to determine whether we will receive all of the contractual payments due to us. While
it is possible that, under certain conditions, collateral losses on our CMBS for which we have not recorded an impairment
charge could exceed our credit enhancement levels and a principal or interest loss could occur, we do not believe that those
conditions were likely as of December 31, 2013.
Obligations of States and Political Subdivisions
These investments consist of housing revenue bonds. We believe the unrealized losses on obligations of states and
political subdivisions are primarily a result of movements in interest rates and liquidity and risk premiums. We believe that any
credit risk related to these securities is minimal because of the issuer guarantees provided on these securities.
Bond Insurance
We rely on bond insurance to provide credit protection on some of our non-agency mortgage-related securities.
Circumstances in which: (a) it is expected that a principal and interest shortfall will occur; and (b) there is substantial
uncertainty surrounding a bond insurer’s ability to pay all future claims can give rise to recognition of other-than-temporary
impairment recognized in earnings. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Bond
Insurers” for additional information.
Other-Than-Temporary Impairments on Available-for-Sale Securities
The table below summarizes our net impairment of available-for-sale securities recognized in earnings by security type.
Table 7.4 — Net Impairment of Available-For-Sale Securities Recognized in Earnings
Available-for-sale securities:(1)
CMBS
Subprime
Option ARM
Alt-A and other
Manufactured housing
Total net impairment of available-for-sale securities recognized in earnings
Net Impairment of Available-For-Sale Securities
Recognized in Earnings For the Year Ended December 31,
2013
2012
(in millions)
2011
$
$
(14) $
(1,258)
(58)
(179)
(1)
(138) $
(1,274)
(556)
(196)
(4)
(353)
(1,315)
(424)
(198)
(11)
(1,510) $
(2,168) $
(2,301)
(1)
Includes $568 million, $0 million, and $181 million of other-than-temporary impairments recognized in earnings for the years ended December 31,
2013, 2012, and 2011, respectively, as we had the intent to sell the related securities before recovery of their amortized cost basis.
The table below presents the changes in the unrealized credit-related other-than-temporary impairment component of the
amortized cost related to available-for-sale securities: (a) that we have written down for other-than-temporary impairment; and
(b) for which the credit component of the loss has been recognized in earnings. The credit-related other-than-temporary
impairment component of the amortized cost represents the difference between the present value of expected future cash flows
at the time of impairment, including the estimated proceeds from bond insurance, and the amortized cost basis of the security
prior to considering credit losses. The beginning balances represent the other-than-temporary impairment credit loss
components related to available-for-sale securities for which other-than-temporary impairment occurred prior to January 1,
2013 and January 1, 2012, respectively, but will not be realized until the securities are sold, written off, or mature. Net
impairment of available-for-sale securities recognized in earnings is presented as additions in two components based upon
whether the current period is: (a) the first time the debt security was credit-impaired; or (b) not the first time the debt security
was credit-impaired. The credit loss component is reduced if we sell, intend to sell or believe we will be required to sell
previously credit-impaired available-for-sale securities. Additionally, the credit loss component is reduced by the amortization
resulting from significant increases in cash flows expected to be collected that are recognized over the remaining life of the
security.
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Table 7.5 — Other-Than-Temporary Impairments Related to Credit Losses on Available-For-Sale Securities
Year Ended
December 31,
2013
2012
(in millions)
Credit-related other-than-temporary impairments on available-for-sale securities recognized in earnings:
Beginning balance — remaining credit losses on available-for-sale securities where other-than-temporary impairments were
recognized in earnings
$ 16,745
$ 15,988
Additions:
Amounts related to credit losses for which an other-than-temporary impairment was not previously recognized
Amounts related to credit losses for which an other-than-temporary impairment was previously recognized
Reductions:
Amounts related to securities which were sold, written off, or matured
Amounts for which we intend to sell the security or it is more likely than not that we will be required to sell the security before
recovery of its amortized cost basis
Amounts related to amortization resulting from significant increases in cash flows expected to be collected and/or due to the
passage of time that are recognized over the remaining life of the security
46
896
141
2,027
(1,193)
(1,289)
(1,536)
(15)
(495)
(107)
Ending balance — remaining credit losses on available-for-sale securities where other-than-temporary impairments were recognized
in earnings(1)
$ 14,463
$ 16,745
(1) Excludes other-than-temporary impairments on securities that we intend to sell or it is more likely than not that we will be required to sell before
recovery of the unrealized losses.
Realized Gains and Losses on Sales of Available-For-Sale Securities
The table below illustrates the gross realized gains and gross realized losses from the sale of available-for-sale securities.
Table 7.6 — Gross Realized Gains and Gross Realized Losses on Sales of Available-For-Sale Securities
Gross realized gains
Mortgage-related securities:
Freddie Mac
Fannie Mae
CMBS
Option ARM
Alt-A and other
Obligations of states and political subdivisions
Subprime
Total mortgage-related securities gross realized gains
Gross realized gains
Gross realized losses
Mortgage related securities:(1)
Freddie Mac
CMBS
Option ARM
Alt-A and other
Subprime
Total mortgage-related securities gross realized losses
Gross realized losses
Net realized gains (losses)
Year Ended December 31,
2013
2012
2011
(in millions)
$
547
$
17
1,301
1
70
13
1
1,950
1,950
(25)
—
(4)
(19)
(3)
(51)
(51)
$
34
14
82
3
—
19
—
152
152
—
—
—
—
—
—
—
$
1,899
$
152
$
77
14
37
—
—
11
—
139
139
—
(81)
—
—
—
(81)
(81)
58
(1) The individual sales do not change our conclusion, at period end, that we do not intend to sell our remaining mortgage-related available-for-sale
securities that are in an unrealized loss position and it is not more likely than not that we will be required to sell these securities before a sufficient time
to recover all unrealized losses.
Maturities of Available-For-Sale Securities
The table below summarizes the remaining contractual maturities of available-for-sale securities.
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Table 7.7 — Maturities of Available-For-Sale Securities(1)
As of December 31, 2013
After One Year Through
After Five Years
Total
Amortized
Cost
Total
Fair
Value
One Year or Less
Five Years
Through Ten Years
After Ten Years
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(dollars in millions)
Available-for-sale securities:
Freddie Mac
Fannie Mae
Ginnie Mae
CMBS
Subprime
Option ARM
Alt-A and other
Obligations of states and
political subdivisions
Manufactured housing
Total available-for-sale
securities
$ 39,001
$ 40,659
$
10,140
149
29,151
29,897
6,617
8,322
3,533
629
10,797
167
30,338
27,499
6,574
8,706
3,495
684
$127,439
$128,919
$
4
3
—
—
—
—
1
5
—
13
$
$
$
4
3
—
—
—
—
2
5
—
570
275
7
677
—
—
71
39
—
$
599
291
8
735
—
—
70
42
—
613
163
12
—
—
—
12
106
—
$
654
177
14
—
—
—
12
107
—
$ 37,814
$ 39,402
9,699
130
28,474
29,897
6,617
8,238
3,383
629
10,326
145
29,603
27,499
6,574
8,622
3,341
684
$
14
$ 1,639
$
1,745
$
906
$
964
$124,881
$ 126,196
Weighted Average Yield(2)
2.99%
5.62%
5.19%
5.16%
2.95%
(1) Maturity information provided is based on contractual maturities, which may not represent the expected life as obligations underlying these securities
may be prepaid at any time without penalty.
(2) The weighted average yield is calculated based on a yield for each individual lot held at December 31, 2013 excluding any fully taxable-equivalent
adjustments related to tax exempt sources of interest income. The numerator for the individual lot yield consists of the sum of: (a) the year-end interest
coupon rate multiplied by the year-end UPB; and (b) the annualized amortization income or expense calculated for December 2013 (excluding the
accretion of non-credit-related other-than-temporary impairments and any adjustments recorded for changes in the effective rate). The denominator for
the individual lot yield consists of the year-end amortized cost of the lot excluding effects of other-than-temporary impairments on the UPB of impaired
lots.
Trading Securities
The table below summarizes the estimated fair values by major security type for trading securities. Our trading securities
mainly consist of Treasury securities, agency fixed-rate and variable-rate pass-through mortgage-related securities, and agency
REMICs, including inverse floating rate, interest-only and principal-only securities.
Table 7.8 — Trading Securities
Mortgage-related securities:
Freddie Mac
Fannie Mae
Ginnie Mae
Other
Total mortgage-related securities
Non-mortgage-related securities:
Asset-backed securities
Treasury bills
Treasury notes
Total non-mortgage-related securities
Total fair value of trading securities
December 31, 2013
December 31, 2012
(in millions)
$
$
9,349
7,180
98
141
16,768
—
2,254
4,382
6,636
$
23,404
$
10,354
10,338
131
156
20,979
292
1,160
19,061
20,513
41,492
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 December 31, 2013.
For the years ended December 31, 2013, 2012, and 2011, we recorded net unrealized losses on trading securities held at
those dates of $(1.6) billion, $(1.7) billion and $(1.0) billion, respectively.
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NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS
Debt securities that we issue are classified on our consolidated balance sheets as either debt securities of consolidated
trusts held by third parties or other debt. We issue other debt to fund our operations.
Under the Purchase Agreement, without the prior written consent of Treasury, we may not incur indebtedness that would
result in the par value of our aggregate indebtedness exceeding 120% of the amount of mortgage assets we are allowed to own
on December 31 of the immediately preceding calendar year. Because of this debt limit, we may be restricted in the amount of
debt we are allowed to issue to fund our operations. Under the Purchase Agreement, the amount of our “indebtedness” is
determined without giving effect to the January 1, 2010 change in the accounting guidance related to transfers of financial
assets and consolidation of VIEs. Therefore, “indebtedness” does not include debt securities of consolidated trusts held by third
parties. We also cannot become liable for any subordinated indebtedness without the prior consent of Treasury. See “NOTE 2:
CONSERVATORSHIP AND RELATED MATTERS” for information regarding restrictions on the amount of mortgage-related
securities that we may own.
Our debt cap under the Purchase Agreement was $780.0 billion in 2013 and declined to $663.0 billion on January 1,
2014. As of December 31, 2013, we estimate that our aggregate indebtedness was $511.3 billion, or $268.7 billion below the
applicable debt cap. Our aggregate indebtedness is calculated as the par value of other debt.
In the tables below, the categories of short-term debt (due within one year) and long-term debt (due after one year) are
based on the original contractual maturity of the debt instruments classified as other debt.
During 2013, 2012, and 2011, we recognized fair value gains (losses) of $(11) million, $16 million, and $91 million,
respectively, on our foreign-currency denominated debt, of which $(31) million, $(7) million, and $40 million, respectively,
were gains (losses) related to foreign-currency translation.
Other Short-Term Debt
As indicated in "Table 8.1 — Other Short-Term Debt", a majority of other short-term debt consisted of Reference Bills®
securities and discount notes, paying only principal at maturity. Reference Bills® securities, discount notes, and medium-term
notes are unsecured general corporate obligations. Certain medium-term notes that have original maturities of one year or less
are classified as other short-term debt for purposes of this presentation.
The table below summarizes the balances and effective interest rates for other short-term debt.
Table 8.1 — Other Short-Term Debt
December 31, 2013
December 31, 2012
Par Value
Balance, Net(1)
Weighted Average
Effective Rate(2)
Par Value
Balance, Net(1)
Weighted Average
Effective Rate(2)
(dollars in millions)
Other short-term debt:
Reference Bills® securities and discount
notes
Medium-term notes
Total other short-term debt
$ 137,767
4,000
$ 141,767
$
$
137,712
4,000
141,712
0.13% $ 117,930
0.16
0.13
—
$ 117,930
$
$
117,889
—
117,889
0.15%
—
0.15
(1) Represents par value, net of associated discounts or premiums.
(2) Represents the weighted average effective rate that remains constant over the life of the instrument, which includes the amortization of discounts or
premiums, and issuance costs.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are effectively collateralized borrowing transactions where we sell
securities with an agreement to repurchase such securities. These agreements require the underlying securities to be delivered to
the dealers who are the counterparties to the transactions. Federal funds purchased are unsecuritized borrowings from
commercial banks that are members of the Federal Reserve System. We had no balances in federal funds purchased and
securities sold under agreements to repurchase at either December 31, 2013 or 2012.
Other Long-Term Debt
The table below summarizes our other long-term debt.
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Table 8.2 — Other Long-Term Debt
Other long-term debt:
Other senior debt:(4)
Fixed-rate:
Medium-term notes — callable(5)
Medium-term notes — non-
callable
U.S. dollar Reference Notes
securities — non-callable
€Reference Notes securities —
non-callable
Variable-rate:
2014 - 2028
37,878
38,107
2014 - 2032
190,371
190,406
2014
528
529
Medium-term notes — callable
2014 - 2028
6,001
Medium-term notes — non-
callable
STACR
Zero-coupon:
2014 - 2026
2023
18,533
1,107
Medium-term notes — callable
2037 - 2040
1,200
Medium-term notes — non-
callable
2014 - 2039
12,217
6,001
18,533
1,155
311
8,334
N/A
369,025
41
364,653
Hedging-related basis adjustments
Total other senior debt
Other subordinated debt:
Fixed-rate
Zero-coupon
Total other subordinated debt
Total other long-term debt
December 31, 2013
December 31, 2012
Contractual
Maturity(1)
Par Value
Balance, Net(2)
Weighted Average
Effective Rate(3)
(dollars in millions)
Par Value
Balance, Net(2)
Weighted Average
Effective Rate(3)
2014 - 2037
$ 101,190
$
101,236
1.51% $
94,655
$
94,842
1.62%
0.99
2.71
4.38
1.66
0.22
4.29
5.82
3.08
42,623
42,877
225,857
225,885
1,167
1,187
6,953
46,194
—
6,953
46,197
—
1,300
324
15,240
10,923
N/A
433,989
57
429,245
1.08
2.82
4.58
2.57
0.27
—
5.71
4.03
6.59
10.51
2016 - 2018
2019
221
332
553
218
184
402
6.60
10.51
221
332
553
218
166
384
$ 369,578
$
365,055
2.08% $ 434,542
$
429,629
2.15%
(1) Represents contractual maturities at December 31, 2013.
(2) Represents par value of long-term debt securities and subordinated borrowings, net of associated discounts or premiums and hedge-related basis
adjustments, with $2.6 billion and $2.2 billion, respectively, of other long-term debt that represents the fair value of debt securities with the fair value
option elected at December 31, 2013 and 2012.
(3) Represents the weighted average effective rate that remains constant over the life of the instrument, which includes the amortization of discounts or
premiums, issuance costs, and hedging-related basis adjustments.
(4) For debt denominated in a currency other than the U.S. dollar, the outstanding balance is based on the exchange rate at December 31, 2013 and 2012,
respectively.
(5)
Includes callable FreddieNotes
®
securities of $0.8 billion and $1.2 billion at December 31, 2013 and 2012, respectively.
A portion of our other long-term debt is callable. Callable debt gives us the option to redeem the debt security at par on
one or more specified call dates or at any time on or after a specified call date.
Debt Securities of Consolidated Trusts Held by Third Parties
Debt securities of consolidated trusts held by third parties represents our liability to third parties that hold beneficial
interests in our consolidated securitization trusts (i.e., single-family PC trusts and certain single-family and multifamily Other
Guarantee Transactions).
The table below summarizes the debt securities of consolidated trusts held by third parties based on underlying mortgage
product type.
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Table 8.3 — Debt Securities of Consolidated Trusts Held by Third Parties
December 31, 2013
December 31, 2012
Contractual
Maturity(1)
UPB
Balance,
Net(2)
Weighted
Average
Coupon(1)
Contractual
Maturity(1)
UPB
Balance,
Net(2)
Weighted
Average
Coupon(1)
(dollars in millions)
(dollars in millions)
Single-family:(3)
30-year or more, fixed-rate
2014 - 2052
$
969,270
$
993,683
4.14%
2013 - 2048
$
960,176
$
982,718
4.53%
20-year fixed-rate
15-year fixed-rate
Adjustable-rate
Interest-only(4)
FHA/VA
Total single-family
Multifamily(5)
2014 - 2034
2014 - 2029
2014 - 2047
2026 - 2041
2014 - 2041
75,910
270,513
60,683
21,352
1,284
78,252
277,018
61,830
21,390
1,303
3.81
3.23
2.64
3.70
5.67
2013 - 2033
2013 - 2028
2013 - 2047
2026 - 2041
2013 - 2041
73,902
257,083
62,424
31,588
1,638
76,079
263,244
63,649
31,642
1,663
4.09
3.59
2.88
4.37
5.67
1,399,012
1,433,476
1,386,811
1,418,995
2018 - 2019
444
508
4.96
2018 - 2019
448
529
4.96
Total debt securities of consolidated trusts held by
third parties(6)
$ 1,399,456
$ 1,433,984
$ 1,387,259
$ 1,419,524
(1) Based on the contractual maturity and interest rate of debt securities of our consolidated trusts held by third parties.
(2) Represents par value, net of associated discounts, premiums, and other basis adjustments.
(3) Debt securities of consolidated trusts held by third parties are prepayable as the loans that collateralize the debt may prepay without penalty at any time.
Includes interest-only securities and interest-only mortgage loans that allow the borrowers to pay only interest for a fixed period of time before the
(4)
loans begin to amortize.
(5) Balance, Net includes interest-only securities recorded at fair value.
(6) The effective rate for debt securities of consolidated trusts held by third parties was 3.39% and 3.49% as of December 31, 2013 and 2012, respectively.
The table below summarizes the contractual maturities of other long-term debt securities and debt securities of
consolidated trusts held by third parties at December 31, 2013.
Table 8.4 — Contractual Maturity of Other Long-Term Debt and Debt Securities of Consolidated Trusts Held by Third
Parties
Annual Maturities
Other long-term debt:
2014
2015
2016
2017
2018
Thereafter
Debt securities of consolidated trusts held by third parties(3)
Total
Net discounts, premiums, hedge-related and other basis adjustments(4)
Total debt securities of consolidated trusts held by third parties and other long-term debt
Par Value(1)(2)
(in millions)
78,115
70,303
63,564
51,908
33,418
72,270
1,399,456
1,769,034
30,005
1,799,039
$
$
(1) Represents par value of long-term debt securities and subordinated borrowings and UPB of debt securities of our consolidated trusts held by third
parties.
(2) For other debt denominated in a currency other than the U.S. dollar, the par value is based on the exchange rate at December 31, 2013.
(3) Contractual maturities of debt securities of consolidated trusts held by third parties may not represent expected maturity as they are prepayable at any
time without penalty.
(4) Other basis adjustments primarily represent changes in fair value attributable to instrument-specific credit risk and interest-rate risk related to other
foreign-currency denominated debt.
Line of Credit
At both December 31, 2013 and 2012, we had one secured, uncommitted intraday line of credit with a third party totaling
$10 billion. We use this line of credit regularly to provide us with additional liquidity to fund our intraday payment activities
through the Fedwire system in connection with the Federal Reserve’s payments system risk policy, which restricts or eliminates
daylight overdrafts by the GSEs. No amounts were drawn on this line of credit at December 31, 2013 and 2012. We expect to
continue to use the current facility to satisfy our intraday financing needs; however, as the line is uncommitted, we may not be
able to draw on it if and when needed.
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Subordinated Debt Interest and Principal Payments
The terms of certain of our subordinated debt securities provide for us to defer payments of interest in the event we fail to
maintain specified capital levels. However, in a September 23, 2008 statement concerning the conservatorship, the Director of
FHFA stated that we would continue to make interest and principal payments on our subordinated debt, even if we fail to
maintain required capital levels.
Use of Derivatives
NOTE 9: DERIVATIVES
We use derivatives primarily to manage the interest rate and prepayment risk associated with our investments in
mortgage-related assets, net of related liabilities. We analyze the interest-rate sensitivity of financial assets and liabilities on a
daily basis across a variety of interest-rate scenarios based on market prices and models. We use derivatives to hedge interest-
rate sensitivity mismatches between our assets and liabilities. For example, if rates increase and the duration of our assets
extends more than the duration of our liabilities, we would rebalance our interest-rate exposure by entering into pay-fixed
interest-rate swaps or selling Treasury-derivatives. If rates decrease and the duration of our assets shortens more than the
duration of our liabilities, we would rebalance our interest-rate exposure by entering into receive-fixed interest-rate swaps or
purchasing Treasury-derivatives. When we use derivatives to mitigate our exposures, we consider a number of factors,
including cost, exposure to counterparty risk, and our overall risk management strategy.
We classify derivatives into three categories: (a) exchange-traded derivatives; (b) cleared derivatives; and (c) OTC
derivatives. Cleared derivatives refer to those interest-rate swaps that the U.S. Commodity Futures Trading Commission has
determined are subject to the central clearing requirement of the Dodd-Frank Act. OTC derivatives refer to those derivatives
that are neither exchange-traded derivatives nor cleared derivatives.
Types of Derivatives
We principally use the following types of derivatives:
• LIBOR- and Euribor-based interest-rate swaps;
• LIBOR- and Treasury-based options (including swaptions); and
• LIBOR- and Treasury-based exchange-traded futures.
In addition to swaps, futures, and purchased options, our derivative positions include written options and swaptions,
commitments, swap guarantees, and credit derivatives.
Written Options and Swaptions
Written call and put swaptions are sold to counterparties allowing them the option to enter into receive- and pay-fixed
interest rate swaps, respectively. Written call and put options on mortgage-related securities give the counterparty the right to
execute a contract under specified terms, which generally occurs when we are in a liability position. We may, from time to time,
write other derivative contracts such as interest-rate futures.
Commitments
We routinely enter into commitments that include our: (a) commitments to purchase and sell investments in securities;
(b) commitments to purchase mortgage loans; and (c) commitments to purchase and extinguish or issue debt securities of our
consolidated trusts. Most of these commitments are considered derivatives and therefore are subject to the accounting guidance
for derivatives and hedging.
Swap Guarantee Derivatives
In connection with some of the guarantee arrangements pertaining to multifamily housing revenue bonds and multifamily
pass-through certificates, we may also guarantee the sponsor’s or the borrower’s obligations as a counterparty on any related
interest-rate swaps used to mitigate interest-rate risk, which are accounted for as swap guarantee derivatives.
Credit Derivatives
We entered into credit-risk sharing agreements for certain credit enhanced multifamily housing revenue bonds held by
third parties in exchange for a monthly fee. In addition, we have purchased mortgage loans containing debt cancellation
contracts, which provide for mortgage debt or payment cancellation for borrowers who experience unanticipated losses of
income dependent on a covered event. The rights and obligations under these agreements have been assigned to the servicers.
However, in the event the servicer does not perform as required by contract we would be obligated under our guarantee to make
the required contractual payments.
For a discussion of our significant accounting policies related to derivatives, see “NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES — Derivatives.”
Derivative Assets and Liabilities at Fair Value
The table below presents the location and fair value of derivatives reported on our consolidated balance sheets.
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Table 9.1 — Derivative Assets and Liabilities at Fair Value
December 31, 2013
December 31, 2012
Notional or
Contractual
Amount
Derivatives at Fair Value
Assets
Liabilities
Notional or
Contractual
Amount
Derivatives at Fair Value
Assets
Liabilities
(in millions)
Total derivative portfolio
Derivatives not designated as hedging
instruments under the accounting guidance for
derivatives and hedging
Interest-rate swaps:
Receive-fixed
Pay-fixed
Basis (floating to floating)
Total interest-rate swaps
Option-based:
Call swaptions
Purchased
Written
Put Swaptions
Purchased
Other option-based derivatives(1)
Total option-based
Futures
Foreign-currency swaps
Commitments
Credit derivatives
Swap guarantee derivatives
Total derivatives not designated as hedging
instruments
Derivative interest receivable (payable)
Netting adjustments(2)
$
281,727
$
242,597
300
524,624
59,290
5,945
33,410
23,365
122,010
50,270
528
18,731
5,386
3,477
725,026
$
(2,438) $
275,099
$
13,782
$
4,475
5,540
4
10,019
2,373
—
698
1,041
4,112
—
39
61
—
—
(10,879)
—
(13,317)
—
(201)
—
(3)
(204)
—
—
(69)
(6)
(31)
14,231
1,243
(14,411)
(13,627)
(1,835)
15,282
270,092
2,300
547,491
37,650
6,195
43,200
31,540
118,585
41,123
1,167
25,530
8,307
3,628
745,831
177
6
13,965
7,360
—
288
2,449
10,097
37
73
20
1
—
24,193
1,409
(24,945)
Total derivative portfolio, net
$
725,026
$
1,063
$
(180) $
745,831
$
657
$
(97)
(30,147)
—
(30,244)
—
(749)
—
(1)
(750)
(2)
(6)
(47)
(5)
(35)
(31,089)
(2,239)
33,150
(178)
(1) Primarily includes purchased interest-rate caps and floors.
(2) Represents counterparty netting and cash collateral netting. Net cash collateral posted was $871 million and $8.2 billion at December 31, 2013 and
2012, respectively.
The carrying value of our derivatives on our consolidated balance sheets is equal to their fair value, including net
derivative interest receivable or payable and net trade/settle receivable or payable, and is net of cash collateral held or posted,
where allowable. Derivatives in a net asset position are reported as derivative assets, net. Similarly, derivatives in a net liability
position are reported as derivative liabilities, net.
Non-cash collateral held is not recognized on our consolidated balance sheets as we do not obtain effective control over
the collateral, and non-cash collateral posted is not de-recognized from our consolidated balance sheets as we do not relinquish
effective control over the collateral. Therefore, non-cash collateral held or posted is not presented as an offset against derivative
assets or derivative liabilities on our consolidated balance sheets.
See “NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES” for information related to our
derivative counterparties and collateral held and posted.
Gains and Losses on Derivatives
The table below presents the gains and losses on derivatives reported in our consolidated statements of comprehensive
income.
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Table 9.2 — Gains and Losses on Derivatives
Derivatives not designated as hedging
instruments under the accounting
guidance for derivatives and hedging
Interest-rate swaps:
Receive-fixed
Foreign-currency denominated
U.S. dollar denominated
Total receive-fixed swaps
Pay-fixed
Basis (floating to floating)
Total interest-rate swaps
Option based:
Call swaptions
Purchased
Written
Put swaptions
Purchased
Written
Other option-based derivatives(2)
Total option-based
Futures
Foreign-currency swaps
Commitments
Credit derivatives
Swap guarantee derivatives
Other(3)
Subtotal
Accrual of periodic settlements:(4)
Receive-fixed interest-rate swaps
Pay-fixed interest-rate swaps
Foreign-currency swaps
Other
Total accrual of periodic settlements
Total
Derivative Gains (Losses)(1)
Year Ended December 31,
2013
2012
(in millions)
2011
$
(21) $
(33) $
(10,400)
(10,421)
19,021
(2)
8,598
(2,547)
546
(8)
—
(413)
(2,422)
21
30
(131)
(3)
9
(3)
2,686
2,653
(2,865)
8
(204)
1,365
(38)
(273)
6
190
1,250
12
(8)
298
—
7
(1)
6,099
1,354
3,764
(7,233)
—
2
(3,467)
2,632
$
3,511
(7,318)
4
1
(3,802)
(2,448) $
$
(49)
12,686
12,637
(22,999)
(5)
(10,367)
10,234
(2,337)
(1,614)
14
879
7,176
(150)
(41)
(1,340)
—
3
(1)
(4,720)
4,173
(9,241)
22
14
(5,032)
(9,752)
(1) Gains (losses) are reported as derivative gains (losses) on our consolidated statements of comprehensive income.
(2) Primarily includes purchased interest-rate caps and floors.
(3)
Includes fees and commissions paid on cleared and exchange-traded derivatives and, in 2011, a $3 million benefit related to the bankruptcy of Lehman
Brothers Holdings Inc.
(4) For derivatives not in qualifying hedge accounting relationships, the accrual of periodic cash settlements is recorded in derivative gains (losses) on our
consolidated statements of comprehensive income.
Hedge Designation of Derivatives
At December 31, 2013 and 2012, we did not have any derivatives in hedge accounting relationships; however, there are
deferred net losses recorded in AOCI related to closed cash flow hedges. Net deferred gains and losses on closed cash flow
hedges (i.e., where the derivative is either terminated or redesignated) are included in AOCI until the related forecasted
transaction affects earnings or is determined to be probable of not occurring. Amounts reported in AOCI linked to interest
payments on long-term debt are recorded in other debt interest expense and amounts not linked to interest payments on long-
term debt are recorded in expense related to derivatives. In the years ended December 31, 2013 and 2012, we reclassified from
AOCI into earnings (effective portion) a loss of $460 million and $612 million, respectively, related to closed cash flow hedges.
See “NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT) — Accumulated Other Comprehensive Income — Future
Reclassifications from AOCI to Net Income Related to Closed Cash Flow Hedges” for information about future
reclassifications of deferred net losses related to closed cash flow hedges to net income.
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NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES
Derivative Portfolio
Derivative Counterparties
Our use of cleared derivatives, exchange-traded derivatives, and OTC derivatives exposes us to institutional credit risk.
The requirement that we post initial and variation margin in connection with cleared and exchange-traded derivatives, such as
cleared interest-rate swaps and futures contracts, exposes us to institutional credit risk in the event that our clearing members or
the financial clearinghouses fail to meet their obligations. The use of cleared and exchange-traded derivatives decreases our
institutional credit risk exposure to individual counterparties because a central counterparty is substituted for individual
counterparties. OTC derivatives expose us to institutional credit risk to individual counterparties because transactions are
executed and settled between us and each counterparty, exposing us to potential losses if a counterparty fails to meet its
obligations.
Our use of interest rate swaps, option-based derivatives, and foreign-currency swaps is subject to internal credit and legal
reviews. On an ongoing basis, we review the credit fundamentals of all of our derivative counterparties, clearinghouses, and
clearing members to confirm that they continue to meet our internal risk management standards.
Master Netting and Collateral Agreements
We use master netting and collateral agreements to reduce our credit risk exposure to our derivative counterparties for
interest-rate swap, option-based, and foreign-currency swap derivatives. Master netting agreements provide for the netting of
amounts receivable and payable from an individual counterparty, which reduces our exposure to a single counterparty in the
event of default. On a daily basis, the market value of each counterparty’s derivatives outstanding is calculated to determine the
amount of our net credit exposure, which is equal to derivatives in a net gain position by counterparty after giving consideration
to collateral posted.
Our collateral agreements require most counterparties to post collateral to us for the amount of our net exposure to them
above the counterparty’s collateral posting threshold. Collateral posting thresholds are tied to a counterparty’s credit rating.
Bilateral collateral agreements are in place for all of our active OTC derivative counterparties. For OTC derivatives, we are
subject to collateral posting thresholds based on S&P or Moody’s credit rating of our long-term senior unsecured debt
securities. The amount of initial margin we must post for cleared and exchange-traded derivatives may be based, in part, on
S&P or Moody’s credit rating of our long-term senior unsecured debt securities. The lowering or withdrawal of our credit rating
by S&P or Moody’s may increase our obligation to post collateral, depending on the amount of the counterparty’s exposure to
Freddie Mac with respect to the derivative transactions. Collateral is typically transferred within one business day based on the
values of the related derivatives. This time lag in posting collateral can affect our net uncollateralized exposure to derivative
counterparties.
Collateral posted by a derivative counterparty is typically in the form of cash, although U.S. Treasury securities and
Freddie Mac mortgage-related securities may also be posted. In the event a counterparty defaults on its obligations under the
derivatives agreement and the default is not remedied in the manner prescribed in the agreement, we have the right under the
agreement to direct the custodian bank to transfer the collateral to us or to sell the collateral and transfer the proceeds to us. At
December 31, 2013 and 2012, all amounts of cash collateral related to derivatives were offset against derivative assets, net or
derivative liabilities, net, as applicable.
Our net uncollateralized exposure to derivative counterparties for OTC interest-rate swap, option-based, and foreign-
currency swap derivatives was $188 million and $69 million at December 31, 2013 and 2012, respectively. In the event that all
of our counterparties for these derivatives were to have defaulted simultaneously on December 31, 2013, our maximum loss for
accounting purposes after applying netting agreements and collateral on an individual counterparty basis would have been
approximately $188 million. Four counterparties each accounted for greater than 10% and collectively accounted for 56% of
our net uncollateralized exposure to derivative counterparties, excluding cleared and exchange-traded derivatives,
commitments, swap guarantee derivatives, certain written options, and certain credit derivatives at December 31, 2013. These
counterparties were Royal Bank of Canada, Credit Suisse International, Deutsche Bank, A.G. and Goldman Sachs Capital
Markets, L.P., all of which were rated “A” or above using the lower of S&P’s or Moody’s rating stated in terms of the S&P
equivalent as of December 31, 2013.
Beginning with contracts executed or modified on or after June 10, 2013, the types of interest-rate swaps that we use
most frequently became subject to the central clearing requirement. Our exposure to cleared and exchange-traded derivatives
was $382 million and $66 million as of December 31, 2013 and 2012, respectively. We net our exposure to cleared derivatives
by clearinghouse and clearing member. Exchange-traded derivatives are settled on a daily basis through the payment of
variation margin. We are required to post margin in connection with our cleared and exchange-traded derivatives. At
December 31, 2013, the majority of our exposure for our cleared and exchange-traded derivatives resulted from our posting of
initial margin. For information about margin we have posted in connection with cleared and exchange-traded derivatives, see
“— Collateral Pledged.”
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The total exposure on our forward purchase and sale commitments, which are treated as derivatives, was $61 million and
$20 million at December 31, 2013 and 2012, respectively. Many of our transactions involving forward purchase and sale
commitments of mortgage-related securities, including our dollar roll transactions, utilize the Mortgage Backed Securities
Division of the Fixed Income Clearing Corporation (“MBSD/FICC”) as a clearinghouse. As a clearing member of the
clearinghouse, we post margin to the MBSD/FICC and are exposed to the institutional credit risk of the organization.
The table below displays information related to derivatives and securities purchased under agreements to resell on our
consolidated balance sheets.
Table 10.1 — Offsetting of Financial Assets and Liabilities
December 31, 2013
Gross
Amount
Recognized(1)
Amount Offset
in the Consolidated
Balance Sheets
Net Amount
Presented in
the Consolidated
Balance Sheets(2)
(in millions)
Gross Amount
Not Offset in
the Consolidated
Balance Sheets
Net
Amount
13,886
$
(13,266) $
1,527
61
15,474
62,383
(1,145)
—
(14,411)
—
620
382
61
1,063
62,383
$
(432) $
—
—
(432)
(62,383)
77,857
$
(14,411) $
63,446
$
(62,815) $
(14,616) $
14,545
$
(71) $
(737)
(109)
737
—
—
(109)
(15,462) $
15,282
$
(180) $
— $
—
—
— $
188
382
61
631
—
631
(71)
—
(109)
(180)
Gross
Amount
Recognized(1)
Amount Offset in
the Consolidated
Balance Sheets
December 31, 2012
Net Amount
Presented in the
Consolidated
Balance Sheets(2)
(in millions)
Gross Amount
Not Offset in the
Consolidated
Balance Sheets
Net
Amount
25,515
$
(24,945) $
570
$
(501) $
66
21
25,602
37,563
—
—
(24,945)
—
63,165
$
(24,945) $
66
21
657
37,563
38,220
$
—
—
(501)
(37,563)
(38,064) $
(33,233) $
33,150
$
(8)
(87)
—
—
(83) $
(8)
(87)
(33,328) $
33,150
$
(178) $
— $
—
—
— $
69
66
21
156
—
156
(83)
(8)
(87)
(178)
Assets:
Derivatives:
Over-the-counter interest-rate and foreign-
currency swaps, and option-based derivatives
Cleared and exchange-traded derivatives
Other(3)
Total derivatives
Securities purchased under agreements to resell
Total
Liabilities:
Derivatives:
Over-the-counter interest-rate and foreign-
currency swaps, and option-based derivatives
Cleared and exchange-traded derivatives
Other(3)
Total
Assets:
Derivatives:
Over-the-counter interest-rate and foreign-
currency swaps, and option-based derivatives
Cleared and exchange-traded derivatives
Other(3)
Total derivatives
Securities purchased under agreements to resell
Total
Liabilities:
Derivatives:
Over-the-counter interest-rate and foreign-
currency swaps, and option-based derivatives
Cleared and exchange-traded derivatives
Other(3)
Total
$
$
$
$
$
$
$
$
(1) For derivatives, includes interest receivable or payable and trade/settle receivable or payable.
(2) For derivatives, includes cash collateral posted or held in excess of exposure.
(3)
Includes commitments, swap guarantee derivatives, certain written options and credit derivatives.
Collateral Pledged
Collateral Pledged to Freddie Mac
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Our counterparties are required to pledge collateral for transactions involving securities purchased under agreements to
resell. Also, most derivative instruments are subject to collateral posting thresholds as prescribed by the collateral agreements
with our counterparties. Under the derivative collateral agreements, U.S. Treasury securities, Freddie Mac mortgage-related
securities, and cash may be pledged. We consider the types of securities being pledged to us as collateral when determining
how much we lend in transactions involving securities purchased under agreements to resell. Additionally, we regularly review
the market values of these securities compared to amounts loaned and derivative counterparty collateral posting thresholds in
an effort to manage our exposure to losses. We had cash and cash equivalents pledged to us related to OTC derivative
instruments of $1.9 billion and $1.5 billion at December 31, 2013 and 2012, respectively. At December 31, 2013 and 2012, we
had $432 million and $501 million, respectively, of collateral in the form of securities pledged to and held by us related to OTC
derivative instruments. Although it is our practice not to repledge assets held as collateral, a portion of the collateral may be
repledged based on master netting agreements related to our derivative instruments. In addition, we had $646 million of cash
pledged to us related to cleared derivatives at December 31, 2013. Also, at December 31, 2013 and 2012, we had $5.0 billion
and $1.5 billion, respectively, of securities pledged to us for transactions involving securities purchased under agreements to
resell that we had the right to repledge. From time to time we may obtain pledges of collateral from certain seller/servicers as
additional security for certain of their obligations to us, including their obligations to repurchase mortgages sold to us in breach
of representations and warranties. This collateral may, at our discretion, take the form of cash, cash equivalents, or agency
securities.
In addition, we hold cash and cash equivalents as collateral in connection with certain of our multifamily guarantees and
mortgage loans as credit enhancements. The cash and cash equivalents held as collateral related to these transactions at
December 31, 2013 and 2012 was $66 million and $158 million, respectively.
We consider federal funds sold to be overnight unsecured trades executed with insured depository institutions that are
members of the Federal Reserve System. Federal funds sold trades are uninsured. We did not hold any federal funds sold at
December 31, 2013 and 2012.
Collateral Pledged by Freddie Mac
We are required to pledge collateral for margin requirements with third-party custodians in connection with secured
financings and derivative transactions with some counterparties. The amount of collateral pledged related to our derivative
instruments is determined after giving consideration to our credit rating. As of December 31, 2013, we had one secured,
uncommitted intraday line of credit with a third party in connection with the Federal Reserve’s payments system risk policy,
which restricts or eliminates daylight overdrafts by the GSEs, in connection with our use of the Fedwire system. In certain
circumstances, the line of credit agreement gives the secured party the right to repledge the securities underlying our financing
to other third parties, including the Federal Reserve Bank of New York. We pledge collateral to meet our collateral
requirements under the line of credit agreement upon demand by the counterparty.
The table below summarizes all securities pledged as collateral by us, including assets that the secured party may
repledge and those that may not be repledged.
Table 10.2 — Collateral in the Form of Securities Pledged
Securities pledged with the ability for the secured party to repledge:
Debt securities of consolidated trusts held by third parties(1)
Available-for-sale securities
Trading securities
Securities pledged without the ability for the secured party to repledge:
Debt securities of consolidated trusts held by third parties(1)
Total securities pledged
December 31, 2013
December 31, 2012
(in millions)
10,654
$
70
365
—
11,089
$
10,390
132
—
148
10,670
$
$
(1) Represents PCs held by us in our Investments segment mortgage investments portfolio and pledged as collateral which are recorded as a reduction to
debt securities of consolidated trusts held by third parties on our consolidated balance sheets.
Securities Pledged with the Ability of the Secured Party to Repledge
At December 31, 2013, we pledged securities with the ability of the secured party to repledge of $11.1 billion, of which
$10.5 billion was collateral posted in connection with our secured uncommitted intraday line of credit with a third party as
discussed above. Of the remainder at December 31, 2013, we pledged $0.6 billion in connection with derivatives and securities
transactions.
At December 31, 2012, we pledged securities with the ability of the secured party to repledge of $10.5 billion, of which
$10.5 billion was collateral posted in connection with our secured uncommitted intraday line of credit with a third party as
discussed above. Of the remainder at December 31, 2012, we pledged $65 million in connection with derivative transactions.
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Securities Pledged without the Ability of the Secured Party to Repledge
At December 31, 2013 and 2012, we pledged securities, without the ability of the secured party to repledge, of $0 million
and $148 million, respectively, at a clearinghouse in connection with our securities transactions.
Cash Pledged
At December 31, 2013, we pledged $3.4 billion of collateral in the form of cash and cash equivalents, of which $3.2
billion related to our OTC derivative agreements as we had $3.2 billion of such derivatives in a net loss position. At
December 31, 2012, we pledged $9.8 billion of collateral in the form of cash and cash equivalents, of which $9.7 billion related
to our OTC derivative agreements as we had $9.7 billion of such derivatives in a net loss position. The remaining $275 million
and $110 million was posted at clearing members or clearinghouses in connection with derivatives and securities transactions at
December 31, 2013 and 2012, respectively. The aggregate fair value of all derivative instruments with credit-risk-related
contingent features that were in a liability position on December 31, 2013, was $3.2 billion for which we posted collateral of
$3.2 billion in the normal course of business. If the credit-risk-related contingent features underlying these agreements were
triggered on December 31, 2013, we would have been required to post an additional $42 million of collateral to our
counterparties.
Accumulated Other Comprehensive Income
NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT)
The table below presents changes in AOCI after the effects of our 35% federal statutory tax rate related to available-for-
sale securities, closed cash flow hedges, and our defined benefit plans.
Table 11.1 — Changes in AOCI by Component, Net of Tax
Year Ended December 31, 2013
AOCI Related
to Available-
For-Sale
Securities(1)
AOCI Related
to Cash Flow
Hedge
Relationships(2)
AOCI Related
to Defined
Benefit Plans
Total
Beginning balance
Other comprehensive income before reclassifications(3)
Amounts reclassified from accumulated other comprehensive income
Changes in AOCI by component
Ending balance
Beginning balance
Other comprehensive income before reclassifications(3)
Amounts reclassified from accumulated other comprehensive income(4)
Changes in AOCI by component
Ending balance
$
$
$
$
(1,444) $
2,659
(253)
2,406
(in millions)
(1,316) $
—
316
316
962
$
(1,000) $
32
$
(178) $
(2,938)
169
41
210
2,828
104
2,932
(6)
Year Ended December 31, 2012
AOCI Related
to Available-
For-Sale
Securities(1)
AOCI Related
to Cash Flow
Hedge
Relationships(2)
AOCI Related
to Defined
Benefit Plans
Total
(6,213) $
3,458
1,311
4,769
(in millions)
(1,730) $
—
414
414
(52) $
(7,995)
(131)
5
(126)
3,327
1,730
5,057
(1,444) $
(1,316) $
(178) $
(2,938)
(1) The amounts reclassified from AOCI represent the gain or loss recognized in earnings due to a sale of an available-for-sale security or the recognition
of a net impairment recognized in earnings. See “NOTE 7: INVESTMENTS IN SECURITIES” for more information.
(2) The amounts reclassified from AOCI represent the AOCI amount that was recognized in earnings as the originally hedged forecasted transactions
affected earnings, unless it was deemed probable that the forecasted transaction would not occur. If it is probable that the forecasted transaction will not
occur, then the deferred gain or loss associated with the hedge related to the forecasted transaction would be reclassified into earnings immediately. See
“NOTE 9: DERIVATIVES” for more information about our derivatives.
(3) For the years ended December 31, 2013 and 2012, net of tax expense of $1.4 billion and $1.9 billion, respectively, for AOCI related to available-for-
sale securities.
(4) For the year ended December 31, 2012, net of tax benefit of $706 million for AOCI related to available-for-sale securities and net of tax benefit of $198
million for AOCI related to cash flow hedge relationships.
Reclassifications from AOCI to Net Income
The table below presents reclassifications from AOCI to net income, including the affected line item in our consolidated
statements of comprehensive income.
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Table 11.2 — Reclassifications from AOCI to Net Income
Details about Accumulated Other
Comprehensive Income Components
Three Months Ended
December 31, 2013
Year Ended
December 31, 2013
Affected Line Item in the Consolidated
Statements of Comprehensive Income
AOCI related to available-for-sale
securities
(in millions)
$
717
$
AOCI related to cash flow hedge
relationships
AOCI related to defined benefit plans
(1,297)
(580)
203
(377)
(1)
(94)
(95)
29
(66)
8
(43)
(35)
Total reclassifications in the period
$
(478) $
1,899
Other gains (losses) on investment securities recognized in
earnings
Net impairment of available-for-sale securities recognized
in earnings
389 Total before tax
(1,510)
(136) Tax (expense) or benefit
253 Net of tax
(5)
Interest expense — Other debt
(455) Expense related to derivatives
(460) Total before tax
144 Tax (expense) or benefit
(316) Net of tax
2
Salaries and employee benefits
(43) Tax (expense) or benefit
(41) Net of tax
(104) Net of tax
Future Reclassifications from AOCI to Net Income Related to Closed Cash Flow Hedges
As shown in “Table 11.1 — Changes in AOCI by Component, Net of Tax,” the total AOCI related to derivatives
designated as cash flow hedges was a loss of $1.0 billion and $1.3 billion at December 31, 2013 and 2012, respectively,
composed of deferred net losses on closed cash flow hedges. Closed cash flow hedges involve derivatives that have been
terminated or are no longer designated as cash flow hedges. Fluctuations in prevailing market interest rates have no effect on
the deferred portion of AOCI relating to losses on closed cash flow hedges.
The previously deferred amount related to closed cash flow hedges remains in our AOCI balance and will be recognized
into earnings over the expected time period for which the forecasted transactions affect earnings. Over the next 12 months, we
estimate that approximately $214 million, net of taxes, of the $1.0 billion of cash flow hedge losses in AOCI at December 31,
2013 will be reclassified into earnings. The maximum remaining length of time over which we have hedged the exposure
related to the variability in future cash flows on forecasted transactions, primarily forecasted debt issuances, is 20 years.
However, 74% and 89% of AOCI relating to closed cash flow hedges at December 31, 2013 will be reclassified to earnings
over the next five and ten years, respectively.
Issuance of Senior Preferred Stock
Pursuant to the Purchase Agreement described in “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS,” we
issued one million shares of senior preferred stock to Treasury on September 8, 2008. The senior preferred stock was issued to
Treasury in partial consideration of Treasury’s commitment to provide funds to us under the Purchase Agreement.
Shares of the senior preferred stock have a par value of $1, and have a stated value and initial liquidation preference
equal to $1,000 per share. The liquidation preference of the senior preferred stock is subject to adjustment. Dividends that are
not paid in cash for any dividend period will accrue and be added to the liquidation preference of the senior preferred stock. In
addition, any amounts Treasury pays to us pursuant to its funding commitment under the Purchase Agreement and any quarterly
commitment fees that are not paid in cash to Treasury nor waived by Treasury will be added to the liquidation preference of the
senior preferred stock. As described below, we may make payments to reduce the liquidation preference of the senior preferred
stock in limited circumstances. As discussed in “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS — Purchase
Agreement,” the quarterly commitment fee has been suspended.
Treasury, as the holder of the senior preferred stock, is entitled to receive quarterly cash dividends, when, as and if
declared by our Board of Directors. Through December 31, 2012, the senior preferred stock accrued quarterly cumulative
dividends at a rate of 10% per year. However, under the August 2012 amendment to the Purchase Agreement, the fixed
dividend rate was replaced with a net worth sweep dividend beginning in the first quarter of 2013. Total dividends paid in cash
during 2013, 2012, and 2011 at the direction of the Conservator were $47.6 billion, $7.2 billion, and $6.5 billion, respectively.
See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS” for a discussion of our net worth sweep dividend.
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The senior preferred stock is senior to our common stock and all other outstanding series of our preferred stock, as well
as any capital stock we issue in the future, as to both dividends and rights upon liquidation. The senior preferred stock provides
that we may not, at any time, declare or pay dividends on, make distributions with respect to, or redeem, purchase or acquire, or
make a liquidation payment with respect to, any common stock or other securities ranking junior to the senior preferred stock
unless: (a) full cumulative dividends on the outstanding senior preferred stock (including any unpaid dividends added to the
liquidation preference) have been declared and paid in cash; and (b) all amounts required to be paid with the net proceeds of
any issuance of capital stock for cash (as described in the following paragraph) have been paid in cash. Shares of the senior
preferred stock are not convertible. Shares of the senior preferred stock have no general or special voting rights, other than
those set forth in the certificate of designation for the senior preferred stock or otherwise required by law. The consent of
holders of at least two-thirds of all outstanding shares of senior preferred stock is generally required to amend the terms of the
senior preferred stock or to create any class or series of stock that ranks prior to or on parity with the senior preferred stock.
We are not permitted to redeem the senior preferred stock prior to the termination of Treasury’s funding commitment set
forth in the Purchase Agreement; however, we are permitted to pay down the liquidation preference of the outstanding shares of
senior preferred stock to the extent of: (a) accrued and unpaid dividends previously added to the liquidation preference and not
previously paid down; and (b) quarterly commitment fees previously added to the liquidation preference and not previously
paid down. In addition, if we issue any shares of capital stock for cash while the senior preferred stock is outstanding, the net
proceeds of the issuance must be used to pay down the liquidation preference of the senior preferred stock; however, the
liquidation preference of each share of senior preferred stock may not be paid down below $1,000 per share prior to the
termination of Treasury’s funding commitment. Following the termination of Treasury’s funding commitment, we may pay
down the liquidation preference of all outstanding shares of senior preferred stock at any time, in whole or in part. If, after
termination of Treasury’s funding commitment, we pay down the liquidation preference of each outstanding share of senior
preferred stock in full, the shares will be deemed to have been redeemed as of the payment date.
The table below provides a summary of our senior preferred stock outstanding at December 31, 2013.
Table 11.3 — Senior Preferred Stock
Draw Date
Shares
Authorized
Shares
Outstanding
Total
Par Value
Initial
Liquidation
Preference
Price per Share
Total
Liquidation
Preference(1)
Senior preferred stock:
10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
10%
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
September 8, 2008
(2)
November 24, 2008
March 31, 2009
June 30, 2009
June 30, 2010
September 30, 2010
December 30, 2010
March 31, 2011
September 30, 2011
December 30, 2011
March 30, 2012
June 29, 2012
(in millions, except initial liquidation preference price per share)
1.00
1.00
$
1.00
$
1,000
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
1,000
13,800
30,800
6,100
10,600
1,800
100
500
1,479
5,992
146
19
Total, senior preferred stock
1.00
1.00
$
1.00
$
72,336
(1) Amounts stated at redemption value.
(2) We did not receive any cash proceeds from Treasury as a result of issuing these shares.
(3) Represents an increase in the liquidation preference of our senior preferred stock due to the receipt of funds from Treasury.
No cash was received from Treasury under the Purchase Agreement in 2013, because we had positive net worth at
December 31, 2012, March 31, 2013, June 30, 2013, and September 30, 2013 and, consequently, FHFA did not request a draw
on our behalf. At December 31, 2013, our assets exceeded our liabilities under GAAP; therefore no draw is being requested
from Treasury under the Purchase Agreement. Our quarterly senior preferred stock dividend is the amount, if any, by which our
Net Worth Amount at the end of the immediately preceding fiscal quarter exceeds the applicable Capital Reserve Amount,
which was established at $3 billion for 2013 and declines to zero in 2018. Based on our Net Worth Amount at December 31,
2013, our dividend obligation to Treasury in March 2014 will be $10.4 billion. See “NOTE 2: CONSERVATORSHIP AND
RELATED MATTERS — Government Support for our Business” for additional information. The aggregate liquidation
preference on the senior preferred stock owned by Treasury was $72.3 billion and $72.3 billion as of December 31, 2013 and
2012, respectively. See “NOTE 18: REGULATORY CAPITAL” for additional information.
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Common Stock Warrant
Pursuant to the Purchase Agreement described in “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS,” on
September 7, 2008, we, through FHFA, in its capacity as Conservator, issued a warrant to purchase common stock to Treasury.
The warrant was issued to Treasury in partial consideration of Treasury’s commitment to provide funds to us under the terms
set forth in the Purchase Agreement.
The warrant gives Treasury the right to purchase shares of our common stock equal to 79.9% of the total number of
shares of our common stock outstanding on a fully diluted basis on the date of exercise. The warrant may be exercised in whole
or in part at any time on or before September 7, 2028, by delivery to us of: (a) a notice of exercise; (b) payment of the exercise
price of $0.00001 per share; and (c) the warrant. If the market price of one share of our common stock is greater than the
exercise price, then, instead of paying the exercise price, Treasury may elect to receive shares equal to the value of the warrant
(or portion thereof being canceled) pursuant to the formula specified in the warrant. Upon exercise of the warrant, Treasury
may assign the right to receive the shares of common stock issuable upon exercise to any other person.
We account for the warrant in permanent equity. At issuance on September 7, 2008, we recognized the warrant at fair
value, and we do not recognize subsequent changes in fair value while the warrant remains classified in equity. We recorded an
aggregate fair value of $2.3 billion for the warrant as a component of additional paid-in-capital. We derived the fair value of the
warrant using a modified Black-Scholes model. If the warrant is exercised, the stated value of the common stock issued will be
reclassified to common stock in our consolidated balance sheets. The warrant was determined to be in-substance non-voting
common stock, because the warrant’s exercise price of $0.00001 per share is considered non-substantive (compared to the
market price of our common stock). As a result, the warrant is included in the computation of basic and diluted earnings (loss)
per share. The weighted average shares of common stock outstanding for the years ended December 31, 2013, 2012, and 2011,
respectively, included shares of common stock that would be issuable upon full exercise of the warrant issued to Treasury.
Preferred Stock
The table below provides a summary of our preferred stock outstanding at December 31, 2013. We have the option to
redeem our preferred stock on specified dates, at their redemption price plus dividends accrued through the redemption date.
However, without the consent of Treasury, we are restricted from making payments to purchase or redeem preferred stock as
well as paying any preferred dividends, other than dividends on the senior preferred stock. In addition, all 24 classes of
preferred stock are perpetual and non-cumulative, and carry no significant voting rights or rights to purchase additional Freddie
Mac stock or securities. Costs incurred in connection with the issuance of preferred stock are charged to additional paid-in
capital.
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Table 11.4 — Preferred Stock
Issue Date
Shares
Authorized
Shares
Outstanding
Total
Par Value
Redemption
Price per
Share
Total
Outstanding
Balance(1)
Redeemable
On or After(2)
OTCQB
Symbol(3)
(in millions, except redemption price per share)
Preferred stock:
1996 Variable-rate(4)
5.81%
5%
1998 Variable-rate(6)
5.10%
5.30%
5.10%
5.79%
1999 Variable-rate(7)
2001 Variable-rate(8)
2001 Variable-rate(9)
5.81%
6%
2001 Variable-rate(10)
5.70%
5.81%
2006 Variable-rate(11)
6.42%
5.90%
5.57%
5.66%
6.02%
6.55%
2007 Fixed-to-floating
rate(12)
Total, preferred stock
April 26, 1996
October 27, 1997
March 23, 1998
September 23 and 29,
1998
September 23, 1998
October 28, 1998
March 19, 1999
July 21, 1999
November 5, 1999
January 26, 2001
March 23, 2001
March 23, 2001
May 30, 2001
May 30, 2001
October 30, 2001
January 29, 2002
July 17, 2006
July 17, 2006
October 16, 2006
January 16, 2007
April 16, 2007
July 24, 2007
September 28, 2007
December 4, 2007
5.00
3.00
8.00
4.40
8.00
4.00
3.00
5.00
5.75
6.50
4.60
3.45
3.45
4.02
6.00
6.00
15.00
5.00
20.00
44.00
20.00
20.00
20.00
240.00
464.17
5.00 $
5.00 $
50.00 $
3.00
8.00
4.40
8.00
4.00
3.00
5.00
5.75
6.50
4.60
3.45
3.45
4.02
6.00
6.00
15.00
5.00
20.00
44.00
20.00
20.00
20.00
3.00
8.00
4.40
8.00
4.00
3.00
5.00
5.75
6.50
4.60
3.45
3.45
4.02
6.00
6.00
15.00
5.00
20.00
44.00
20.00
20.00
20.00
240.00
240.00
464.17 $
464.17
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
25.00
25.00
25.00
25.00
25.00
25.00
250
150
400
220
400
200
150
250
287
325
230
173
173
201
300
300
750
250
500
June 30, 2001
FMCCI
October 27, 1998
(5)
March 31, 2003 FMCKK
September 30, 2003
FMCCG
September 30, 2003
FMCCH
October 30, 2000
March 31, 2004
(5)
(5)
June 30, 2009
FMCCK
December 31, 2004
FMCCL
March 31, 2003 FMCCM
March 31, 2003
FMCCN
March 31, 2011 FMCCO
June 30, 2006
FMCCP
June 30, 2003
FMCCJ
December 31, 2006
FMCKP
March 31, 2007
(5)
June 30, 2011
FMCCS
June 30, 2011
FMCCT
September 30, 2011 FMCKO
1,100
December 31, 2011 FMCKM
500
500
500
March 31, 2012 FMCKN
June 30, 2012
FMCKL
September 30, 2017
FMCKI
6,000
December 31, 2012
FMCKJ
$
14,109
(1) Amounts stated at redemption value.
(2)
In accordance with the Purchase Agreement, until the senior preferred stock is repaid or redeemed in full, we may not, without the prior written consent
of Treasury, redeem, purchase, retire or otherwise acquire any Freddie Mac equity securities (other than the senior preferred stock or warrant).
(3) Preferred stock trades exclusively through the OTCQB Marketplace unless otherwise noted.
(4) Dividend rate resets quarterly and is equal to the sum of three-month LIBOR plus 1% divided by 1.377, and is capped at 9.00%.
(5)
(6) Dividend rate resets quarterly and is equal to the sum of three-month LIBOR plus 1% divided by 1.377, and is capped at 7.50%.
(7) Dividend rate resets on January 1 every five years after January 1, 2005 based on a five-year Constant Maturity Treasury rate, and is capped at 11.00%.
Issued through private placement.
Optional redemption on December 31, 2004 and on December 31 every five years thereafter.
(8) Dividend rate resets on April 1 every two years after April 1, 2003 based on the two-year Constant Maturity Treasury rate plus 0.10%, and is capped at
11.00%. Optional redemption on March 31, 2003 and on March 31 every two years thereafter.
(9) Dividend rate resets on April 1 every year based on 12-month LIBOR minus 0.20%, and is capped at 11.00%. Optional redemption on March 31, 2003
and on March 31 every year thereafter.
(10) Dividend rate resets on July 1 every two years after July 1, 2003 based on the two-year Constant Maturity Treasury rate plus 0.20%, and is capped at
11.00%. Optional redemption on June 30, 2003 and on June 30 every two years thereafter.
(11) Dividend rate resets quarterly and is equal to the sum of three-month LIBOR plus 0.50% but not less than 4.00%.
(12) Dividend rate is set at an annual fixed rate of 8.375% from December 4, 2007 through December 31, 2012. For the period beginning on or after
January 1, 2013, dividend rate resets quarterly and is equal to the higher of: (a) the sum of three-month LIBOR plus 4.16% per annum; or (b) 7.875%
per annum. Optional redemption on December 31, 2012, and on December 31 every five years thereafter.
Stock-Based Compensation
Following the implementation of the conservatorship in September 2008, we suspended the operation of our ESPP, and
are no longer making grants under our 2004 Employee Plan or our Directors’ Plan. We collectively refer to the 2004 Employee
Plan and the 1995 Employee Plan as the Employee Plans. Under the Purchase Agreement, we cannot issue any new options,
rights to purchase, participations or other equity interests without Treasury’s prior approval. However, grants outstanding as of
the date of the Purchase Agreement remain in effect in accordance with their terms.
We did not repurchase or issue any of our common shares or non-cumulative preferred stock during 2013 and 2012,
except for issuances of treasury stock as reported on our consolidated statements of equity (deficit) relating to stock-based
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compensation granted prior to conservatorship. Common stock delivered under these stock-based compensation plans consists
of treasury stock or shares acquired in market transactions on behalf of the participants. During 2013, restrictions lapsed on
7,976 restricted stock units. At December 31, 2013, 20,341 restricted stock units remained outstanding. There are no remaining
restrictions on outstanding restricted stock units. In addition, there were 41,160 shares of restricted stock outstanding at both
December 31, 2013 and 2012. During 2013, no stock options were exercised and 492,861 stock options were forfeited or
expired. At December 31, 2013, 816,435 stock options were outstanding.
For purposes of the earnings-per-share calculation, antidilutive potential common shares excluded from the computation
of dilutive potential common shares were 998,707, 1,606,097, and 3,383,185 at December 31, 2013, 2012, and 2011,
respectively.
Dividends Declared
No common dividends were declared in 2013. During the three months ended March 31, 2013, June 30, 2013, September
30, 2013, and December 31, 2013, we paid dividends of $5.8 billion, $7.0 billion, $4.4 billion, and $30.4 billion, respectively,
in cash on the senior preferred stock at the direction of our Conservator. We did not declare or pay dividends on any other series
of Freddie Mac preferred stock outstanding during 2013.
Delisting of Common Stock and Preferred Stock from NYSE
On July 8, 2010, we delisted our common and 20 previously listed classes of preferred stock from the NYSE pursuant to
a directive by our Conservator.
Our common stock and the classes of preferred stock that were previously listed on the NYSE are traded exclusively in
the OTCQB Marketplace. Shares of our common stock now trade under the ticker symbol FMCC. We expect that our common
stock and the previously listed classes of preferred stock will continue to trade in the OTCQB Marketplace so long as market
makers demonstrate an interest in trading the common and preferred stock.
Income Tax Benefit
NOTE 12: INCOME TAXES
The table below presents the components of our federal income tax benefit for 2013, 2012, and 2011. We are exempt
from state and local income taxes.
Table 12.1 — Federal Income Tax Benefit
Current income tax (expense) benefit
Deferred income tax benefit (expense)
Total income tax benefit
2013
Year Ended December 31,
2012
(in millions)
2011
$
$
(117) $
23,422
23,305
$
1,540
(3)
1,537
$
$
283
117
400
Our income tax benefit for 2013 primarily relates to the release of the valuation allowance against our net deferred tax
assets.
The table below presents a reconciliation between our federal statutory income tax rate and our effective tax rate for
2013, 2012, and 2011.
Table 12.2 — Reconciliation of Statutory to Effective Tax Rate
2013
Year Ended December 31,
2012
2011
Amount
Percent
Amount
Percent
Amount
Percent
(dollars in millions)
Statutory corporate tax rate
$
(8,877)
35.0 % $
(3,306)
35.0 % $
Tax-exempt interest
Tax credits
Valuation allowance:
Current year activity
Release of valuation allowance
Unrecognized tax benefits
Other
Total valuation allowance
Other
Effective tax rate
101
495
5,156
26,369
—
138
31,663
(77)
23,305
$
(0.4)
(2.0)
(20.3)
(104.0)
—
(0.5)
(124.8)
0.3
(91.9)% $
230
133
536
2,637
—
1,205
45
3,887
287
1,537
(1.4)
(5.7)
(27.9)
—
(12.8)
(0.5)
(41.2)
(3.0)
(16.3)% $
1,983
179
566
(2,728)
—
(21)
403
(2,346)
18
400
35.0%
3.2
10.0
(48.2)
—
(0.4)
7.2
(41.4)
0.3
7.1%
Freddie Mac
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In 2013, our effective tax rate differs from the statutory rate of 35% primarily due to the release of the valuation
allowance against our net deferred tax assets. In 2012 and 2011, our effective tax rate differs from the statutory tax rate of 35%
primarily due to the valuation allowance on a portion of our net deferred tax assets and the recognition of uncertain tax
positions.
Deferred Tax Assets and Liabilities
During 2013, we released our valuation allowance previously recorded on our net deferred tax asset. Deferred tax assets
are created when: (a) expenses are recognized for financial reporting purposes prior to the corresponding recognition of
expenses for tax reporting purposes; and/or (b) income is recognized for tax reporting purposes prior to the corresponding
recognition of income for financial reporting purposes. The table below presents the balance of significant deferred tax assets,
liabilities, and the valuation allowance at December 31, 2013 and 2012.
Table 12.3 — Deferred Tax Assets and Liabilities
Deferred tax assets:
Deferred fees
Basis differences related to derivative instruments
Credit related items and allowance for loan losses
Unrealized (gains) losses related to available-for-sale securities
LIHTC and AMT credit carryforward
Net operating loss carryforward
Other items, net
Total deferred tax assets
Deferred tax liabilities:
Basis differences related to assets held for investment(1)
Unrealized (gains) losses related to available-for-sale securities
Basis differences related to debt
Total deferred tax liabilities
Valuation allowance
Deferred tax assets (liabilities), net
2013
2012
(in millions)
$
5,035
$
6,946
3,648
—
3,997
3,978
40
23,644
(375)
(518)
(35)
(928)
—
$
22,716
$
4,330
10,294
6,785
778
3,408
11,479
146
37,220
(4,609)
—
(149)
(4,758)
(31,684)
778
(1) The deferred tax liability balance for basis differences related to assets held for investment includes a basis adjustment on seriously delinquent loans.
This deferred tax liability offsets a portion of the deferred tax asset for credit related items and the allowance for loan losses.
As of December 31, 2013, we had a net operating loss carryforward of $11.4 billion and a LIHTC carryforward of
$3.6 billion that will expire over multiple years beginning in 2030 and 2027, respectively. Our AMT credit carryforward of
$445 million will not expire.
Valuation Allowance Against Net Deferred Tax Assets
As discussed below, after weighing all of the evidence at September 30, 2013, we determined that the positive evidence
relating to the realizability of our deferred tax assets, particularly the evidence that was objectively verifiable, outweighed the
negative evidence. Accordingly, we concluded that it is more likely than not that our deferred tax assets will be realized and we
released the valuation allowance against our net deferred tax assets.
On a quarterly basis, we determine whether a valuation allowance is necessary on our net deferred tax asset. In doing so,
we consider all evidence available, both positive and negative, in determining whether, based on the weight of the evidence, it
is more likely than not that the deferred tax assets will be realized. In conducting our assessment at September 30, 2013, we
evaluated all available objective evidence including, but not limited to: (a) our three-year cumulative income position; (b) the
trend of our financial and tax results; (c) the amount of taxable income reported in our 2012 federal income tax return; (d) our
tax net operating loss and tax credit carryforwards and the length of carryforward periods available to utilize these assets under
current tax law; and (e) our access to capital under the agreements associated with conservatorship. Furthermore, we evaluated
all available subjective evidence, including but not limited to: (a) difficulty in predicting unsettled circumstances related to the
conservatorship; (b) our estimated 2013 taxable income; and (c) forecasts of future book and tax income. Our consideration of
the evidence requires significant judgment regarding estimates and assumptions that are inherently uncertain, particularly about
our future business structure and financial results.
We are not permitted to consider the impacts proposed legislation may have on our business operations or the mortgage
industry in our analysis because the timing and certainty of those actions are unknown and beyond our control.
The positive evidence at September 30, 2013, that outweighed the negative evidence included the following:
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• Our three-year cumulative income position;
• The strong positive trend in our financial performance over six consecutive quarters;
• The 2012 taxable income reported in our federal tax return which was filed in 2013;
• Our forecasted 2013 and future period taxable income;
• Our net operating loss carryforwards do not begin to expire until 2030; and
• The continuing positive trend in the housing market.
When comparing evidence available at 2013 versus 2012, we noted a number of positive developments. During 2013, we
filed our 2012 federal tax return, which reflected taxable income. This was our first year reporting taxable income since 2007.
Furthermore, we continued an improved trend in earnings. Our current base forecast of taxable income also improved resulting
in a decline in the number of years of projected income required in order to fully realize our net deferred tax asset. These
positive developments in addition to the positive evidence discussed above resulted in our conclusion to release the valuation
allowance against our net deferred tax assets at September 30, 2013. Given the continued positive trend in our financial
performance through the fourth quarter, we determined that a valuation allowance against our net deferred tax asset was not
necessary at December 31, 2013.
In future quarters we will continue to evaluate our ability to realize the net deferred tax asset. If evidence in future
periods changes such that it is more likely than not that part or all of the net deferred tax asset will not be realized, we will
reestablish a valuation allowance at that time.
Unrecognized Tax Benefits and IRS Examinations
Table 12.4 — Unrecognized Tax Benefits
Balance at January 1
Changes based on tax positions in prior years
Changes based on tax positions in current years
Decreases in unrecognized tax benefits due to settlements with taxing authorities
Balance at December 31
2013
2012
(in millions)
2011
— $
1,355
$
—
—
—
(41)
(28)
(1,286)
— $
— $
1,220
130
6
(1)
1,355
$
$
We have evaluated all income tax positions and determined that there are no uncertain tax positions that require reserves
as of December 31, 2013.
The IRS is currently examining our income tax returns for tax years 2008 through 2011. We are currently working with
the IRS to finalize the stipulation of settled issues and closing agreement for years 1998 through 2010 related to our tax
accounting method for certain hedging transactions, and expect that a final decision can be entered within the next 12 months.
For additional information, see “NOTE 17: LEGAL CONTINGENCIES.”
We have accrued gross interest receivable of $529 million and $523 million as of December 31, 2013 and 2012,
respectively, related to payments on account with the IRS. We anticipate refunds of accrued interest receivable upon final
settlement of the Statutory Notices for the 1998 to 2005 tax years.
For a discussion of our significant accounting policies related to income taxes, please see “NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES — Income Taxes.”
NOTE 13: SEGMENT REPORTING
We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct
of our business under the direction of the Conservator. See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS” for
additional information about the conservatorship.
We present Segment Earnings by: (a) reclassifying certain credit guarantee-related activities and investment-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. These reclassifications and allocations are described in “Segment Earnings.”
We do not consider our assets by segment when evaluating segment performance or allocating resources. We operate our
business solely in the U.S. and its territories. Therefore, we do not generate any revenue from and do not have any long-lived
assets other than financial instruments in geographic locations outside of the U.S. and its territories.
Segments
Our operations consist of three reportable segments, which are based on the type of business activities each performs —
Single-family Guarantee, Investments, and Multifamily. The chart below provides a summary of our three reportable segments
and the All Other category as of December 31, 2013. Certain immaterial changes were made to our Segment Earnings
definitions in 2013. As reflected in the chart, certain activities that are not part of a reportable segment are included in the All
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Other category. The All Other category consists of material corporate level activities that are: (a) infrequent in nature; and
(b) based on decisions outside the control of the management of our reportable segments. By recording these types of activities
to the All Other category, we believe the financial results of our three reportable segments reflect the decisions and strategies
that are executed within the reportable segments and provide greater comparability across time periods.
Segment
Single-family
Guarantee
Investments
Multifamily
All Other
Description
Activities/Items
The Single-family Guarantee segment reflects results from our
single-family credit guarantee activities. In our Single-family
Guarantee segment, we purchase and guarantee single-family
mortgage loans originated by our seller/servicers in the primary
mortgage market. In most instances, we use the mortgage
securitization process to package the mortgage loans into
guaranteed mortgage-related securities. We guarantee the payment
of principal and interest on the mortgage-related securities in
exchange for management and guarantee fees. Segment Earnings
for this segment consist primarily of management and guarantee
fee revenues, including amortization of upfront fees, less credit-
related expenses, administrative expenses, allocated funding costs,
and amounts related to net float benefits or expenses.
The Investments segment reflects results from three primary
activities: (a) managing the company’s mortgage-related
investments portfolio, excluding Multifamily segment
investments; (b) managing the treasury function, including
funding and liquidity, for the overall company; and (c) managing
interest-rate risk for the overall company. In our Investments
segment, we invest principally in mortgage-related securities and
single-family performing mortgage loans. Segment Earnings for
this segment consist primarily of the returns on these investments,
less the related funding, hedging, and administrative expenses. In
addition, the Investments segment reflects changes in the fair
value of the Multifamily segment securities, primarily CMBS, and
held-for-sale loans that are associated with changes in interest
rates.
The Multifamily segment reflects results from our investment
(both purchases and sales), securitization, and guarantee activities
in multifamily mortgage loans and securities. Our primary
business model is to purchase multifamily mortgage loans for
aggregation and then securitization through issuance of
multifamily K Certificates. To a lesser extent, we provide
guarantees of the payment of principal and interest on tax-exempt
multifamily pass-through certificates backed by multifamily
housing revenue bonds. In addition, we guarantee the payment of
principal and interest on tax-exempt multifamily housing revenue
bonds secured by low- and moderate-income multifamily
mortgage loans. Segment Earnings for this segment consist
primarily of the interest earned on assets related to multifamily
investment activities and management and guarantee fee income,
less credit-related expenses, administrative expenses, and
allocated funding costs. In addition, the Multifamily segment
reflects the impact of changes in fair value of our investment
securities and held-for-sale loans associated with market factors
other than changes in interest rates, such as liquidity and credit.
The All Other category consists of material corporate-level
activities that are: (a) infrequent in nature; and (b) based on
decisions outside the control of the management of our reportable
segments.
• Management and guarantee fees on PCs, including those retained
by us, and single-family mortgage loans in the mortgage
investments portfolio, inclusive of up-front credit delivery fees
• Recognition and remittance to Treasury of guarantee fees resulting
from the 10 basis point legislated increase
• Adjustments for security performance
• Credit losses on all single-family assets
• Guarantee buy-downs
• Expected net float income or expense on the single-family credit
guarantee portfolio
Deferred tax asset valuation allowance
•
• Allocated debt costs, administrative expenses and taxes
• Representation and warranty settlements
•
Investments in mortgage-related securities and single-family
performing mortgage loans
Investments in short-term asset-backed securities
•
• All other traded instruments / securities, excluding CMBS and
multifamily housing revenue bonds
Interest rate risk management returns
• Debt issuances
•
• Guarantee buy-ups, net of execution gains / losses
• Cash and liquidity management
• Deferred tax asset valuation allowance
• Allocated administrative expenses and taxes
• Non-agency mortgage-related securities settlements
• Multifamily mortgage loans held-for-sale and associated
securitization activities
Investments in CMBS, multifamily housing revenue bonds, and
multifamily mortgage loans held-for-investment
•
• Allocated debt costs, administrative expenses and taxes
• Other guarantee commitments on multifamily housing revenue
bonds
• Other Structured Securities of multifamily housing revenue bonds
• Deferred tax asset valuation allowance
• Tax settlements, as applicable
• Legal settlements, as applicable
• The deferred tax asset valuation allowance and release of tax asset
valuation allowance associated with previously recognized income
tax credits carried forward
• Termination of our pension plan
Segment Earnings
The financial performance of our Single-family Guarantee segment and Multifamily segment are measured based on each
segment’s contribution to GAAP net income (loss). Our Investments segment is measured on its contribution to GAAP
comprehensive income (loss), which consists of the sum of its contribution to: (a) GAAP net income (loss); and (b) GAAP total
other comprehensive income (loss), net of taxes.
The sum of Segment Earnings for each segment and the All Other category equals GAAP net income (loss). Likewise,
the sum of comprehensive income (loss) for each segment and the All Other category equals GAAP comprehensive income
(loss). However, the accounting principles we apply to present certain financial statement line items in Segment Earnings for
our reportable segments, in particular Segment Earnings management and guarantee income and net interest income, differ
significantly from those applied in preparing the comparable line items in our consolidated financial statements prepared in
accordance with GAAP. Accordingly, the results of such line items differ significantly from, and should not be used as a
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substitute for, the comparable line items as determined in accordance with GAAP. For reconciliations of the Segment Earnings
line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “Table
13.2 — Segment Earnings and Reconciliation to GAAP Results.”
Many of the reclassifications, adjustments and allocations described below relate to the amendments to the accounting
guidance for transfers of financial assets and consolidation of VIEs, which we adopted effective January 1, 2010. These
amendments require us to consolidate our single-family PC trusts and certain Other Guarantee Transactions, which makes it
difficult to view the results of the three operating segments from a GAAP perspective. For example, as a result of the
amendments, the net guarantee fee earned on mortgage loans held by our consolidated trusts is included in net interest income
on our GAAP consolidated statements of comprehensive income. Through the reclassifications described below, we move the
net guarantee fees earned on mortgage loans into Segment Earnings management and guarantee income.
Credit Guarantee Activity-Related Reclassifications
In preparing certain line items within Segment Earnings, we make various reclassifications to earnings determined under
GAAP related to our credit-guarantee activities, including those described below. All credit guarantee-related income and costs
are included in Segment Earnings management and guarantee income.
• Net guarantee fee is reclassified in Segment Earnings from net interest income to management and guarantee income.
•
Implied management and guarantee fee related to unsecuritized mortgage loans held in the mortgage investments
portfolio is reclassified in Segment Earnings from net interest income to management and guarantee income.
• The portion of the amount reversed for accrued but uncollected interest upon placing loans on a non-accrual status that
relates to guarantee fees is reclassified in Segment Earnings from net interest income to management and guarantee
income. The remaining portion of the allowance for lost interest is reclassified in Segment Earnings from net interest
income to provision for credit losses.
Investment Activity-Related Reclassifications
In preparing certain line items within Segment Earnings, we make various reclassifications to earnings determined under
GAAP related to our investment activities, including those described below. Through these reclassifications, we move certain
items into or out of net interest income so that, on a Segment Earnings basis, net interest income reflects how we measure the
effective yield earned on securities held in our mortgage investments portfolio and our cash and other investments portfolio.
We use derivatives extensively in our investment activity. The reclassifications described below allow us to reflect, in
Segment Earnings net interest income, the costs associated with this use of derivatives.
• The accrual of periodic cash settlements of all derivatives is reclassified in Segment Earnings from derivative gains
(losses) into net interest income to fully reflect the periodic cost associated with the protection provided by these
contracts.
• Up-front cash paid or received upon the purchase or writing of swaptions and other option contracts is reclassified in
Segment Earnings prospectively on a straight-line basis from derivative gains (losses) into net interest income over the
contractual life of the instrument to fully reflect the periodic cost associated with the protection provided by these
contracts.
Amortization related to certain items is not relevant to how we measure the effective yield earned on the securities held in
our investments portfolios. Therefore, as described below, we reclassify these items in Segment Earnings from net interest
income to non-interest income.
• Amortization related to derivative commitment basis adjustments associated with mortgage-related and non-mortgage-
related securities.
• Amortization related to accretion of other-than-temporary impairments on available-for-sale securities held.
• Amortization related to premiums and discounts associated with PCs and Other Guarantee Transactions issued by our
consolidated trusts that we previously held and subsequently transferred to third parties. The amortization is related to
deferred gains (losses) on transfers of these securities.
Segment Adjustments
In presenting Segment Earnings management and guarantee income and net interest income, we make adjustments to
better reflect how management measures and assesses the performance of each segment and the company as a whole. These
adjustments relate to amounts that are not reflected in net income (loss) as determined in accordance with GAAP. These
adjustments are reversed through the segment adjustments line item within Segment Earnings, so that Segment Earnings (loss)
for each segment equals GAAP net income (loss) for each segment. Segment adjustments consist of the following:
• We adjust our Segment Earnings management and guarantee income for the Single-family Guarantee segment to
include the amortization of buy-down fees and credit delivery fees recorded in periods prior to the January 1, 2010
adoption of accounting guidance for the transfers of financial assets and the consolidation of VIEs. As of December 31,
2013, the unamortized balance of buy-down fees was $0.4 billion and the unamortized balance of credit delivery fees
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was $0.9 billion. We consider such fees to be part of the effective rate of the guarantee fee on guaranteed mortgage
loans. These adjustments are necessary to better reflect the realization of revenue associated with guarantee contracts
over the life of the underlying loans.
• We adjust our Segment Earnings net interest income for the Investments segment to include the amortization of cash
premiums and discounts, as well as buy-up fees, on the consolidated Freddie Mac mortgage-related securities we
purchase as investments. As of December 31, 2013, the unamortized balance of such premiums and discounts, net was
$3.2 billion and the unamortized balance of buy-up fees was $0.5 billion. These adjustments are necessary to reflect the
effective yield realized on investments in consolidated Freddie Mac mortgage-related securities purchased at a premium
or discount or with buy-up fees.
Segment Allocations
The results of each reportable segment include directly attributable revenues and expenses. Administrative expenses that
are not directly attributable to a segment are allocated to our segments using various methodologies, depending on the nature of
the expense (i.e., semi-direct versus indirect). Net interest income for each segment includes allocated debt funding costs
related to certain assets of each segment. These allocations, however, do not include the effects of dividends paid on our senior
preferred stock. The tax credits generated by the LIHTC partnerships and any valuation allowance on these tax credits are
allocated to the Multifamily segment. The deferred tax asset valuation allowance and release of the tax asset valuation
allowance associated with previously recognized income tax credits carried forward, termination of our pension plan, and legal
and tax settlements, as applicable, are allocated to the All Other category. All remaining taxes are calculated based on a 35%
federal statutory rate as applied to pre-tax Segment Earnings.
The table below presents Segment Earnings by segment.
Table 13.1 — Summary of Segment Earnings and Comprehensive Income (Loss)
Segment Earnings (loss), net of taxes:
Single-family Guarantee
Investments
Multifamily
All Other(1)
Total Segment Earnings (loss), net of taxes
Net income (loss)
Comprehensive income (loss) of segments:
Single-family Guarantee
Investments
Multifamily
All Other(1)
Comprehensive income (loss) of segments
Comprehensive income (loss)
$
$
$
$
Year Ended December 31,
2013
2012
(in millions)
2011
5,796
$
(164) $
(10,000)
16,602
2,378
23,892
48,668
48,668
5,845
20,287
1,455
24,013
51,600
$
$
8,212
2,146
788
10,982
10,982
$
3,366
1,319
49
(5,266)
(5,266)
(227) $
(9,970)
11,397
4,081
788
16,039
6,473
2,218
49
(1,230)
(1,230)
51,600
$
16,039
$
(1) For the year ended December 31, 2013, includes a benefit for federal income taxes that resulted from the release of our valuation allowance against our
net deferred tax assets.
The table below presents detailed reconciliations between our GAAP financial statements and Segment Earnings by
financial statement line item for our reportable segments and All Other.
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Table 13.2 — Segment Earnings and Reconciliation to GAAP Results
Single-
family
Guarantee
Investments
Multifamily
All
Other
Year Ended December 31, 2013
Total
Segment
Earnings
(Loss),
Net of Tax
Reconciliation to Consolidated Statements of
Comprehensive Income
Reclassifications(1)
Segment
Adjustments(2)
Total
Reconciling
Items
Total per
Consolidated
Statements of
Comprehensive
Income
Net interest income
$
320
$
3,525
$
1,186
$ — $
(in millions)
$
5,031
10,400
$
1,037
$
11,437
$
16,468
218
—
1,627
838
—
838
2,465
5,136
(4,171)
(694)
(4,865)
271
Benefit (provision) for
credit losses
Non-interest income
(loss):
Management and
guarantee income(3)
Net impairment of
available-for-sale
securities recognized in
earnings
Derivative gains
(losses)
Gains (losses) on
trading securities
Gains (losses) on
mortgage loans
Other non-interest
income
Non-interest expense:
Administrative
expenses
REO operations income
(expense)
Other non-interest
expense
Segment adjustments(2)
Income tax (expense)
benefit
Net income
Total other comprehensive
income (loss), net of taxes
Comprehensive income
1,409
4,930
—
(3)
—
—
1,165
(1,025)
124
(712)
(694)
282
5,796
49
—
—
(974)
6,806
(1,588)
(817)
9,612
(523)
—
349
1,037
(825)
16,602
3,685
206
(15)
18
(10)
481
640
(257)
16
(24)
—
—
—
—
—
—
—
—
—
(37)
—
(81)
23,929
2,378
23,892
(989)
6,821
(1,598)
(336)
11,417
(1,805)
140
(424)
343
23,305
48,668
(521)
(4,189)
—
—
(2,357)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(521)
(4,189)
—
—
(2,357)
—
—
—
(343)
(343)
—
—
—
—
—
—
(1,510)
2,632
(1,598)
(336)
9,060
(1,805)
140
(424)
—
23,305
48,668
2,932
51,600
$
5,845
$
20,287
$
1,455
$24,013
$
51,600
$
— $
— $
— $
(923)
121
2,932
236
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Single-
family
Guarantee
Investments Multifamily
All
Other
Year Ended December 31, 2012
Total
Segment
Earnings
(Loss),
Net of Tax
Reconciliation to Consolidated Statements of
Comprehensive Income
Reclassifications(1)
Segment
Adjustments(2)
Total
Reconciling
Items
Total per
Consolidated
Statements of
Comprehensive
Income
Net interest income
$
(147)
$
5,726
$
1,291
$ — $
(in millions)
$
6,870
9,942
$
799
$
10,741
$
17,611
Benefit (provision) for
credit losses
Non-interest income (loss):
Management and
guarantee income(3)
Net impairment of
available-for-sale
securities recognized in
earnings
Derivative gains (losses)
Gains (losses) on trading
securities
Gains (losses) on
mortgage loans
(3,168)
4,389
—
—
—
—
Other non-interest income
931
Non-interest expense:
Administrative expenses
REO operations income
(expense)
Other non-interest
expense
Segment adjustments(2)
Income tax benefit
Net income (loss)
Total other comprehensive
income (loss), net of taxes
Comprehensive income
(loss)
(890)
(62)
(393)
(832)
8
(164)
(63)
—
—
(1,831)
1,970
(1,755)
303
2,741
(430)
—
(1)
799
690
8,212
3,185
123
—
(3,045)
1,155
—
1,155
(1,890)
151
—
4,540
(3,507)
(832)
(4,339)
201
(123)
7
81
707
275
(241)
3
(129)
—
1
2,146
1,935
—
—
—
—
—
—
—
(50)
—
838
788
—
(1,954)
1,977
(1,674)
1,010
3,947
(1,561)
(59)
(573)
(33)
1,537
10,982
5,057
(214)
(4,425)
—
—
(2,951)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
33
—
—
—
(214)
(4,425)
—
—
(2,951)
—
—
—
33
—
—
—
(2,168)
(2,448)
(1,674)
1,010
996
(1,561)
(59)
(573)
—
1,537
10,982
5,057
$
(227)
$
11,397
$
4,081
$ 788
$
16,039
$
— $
— $
— $
16,039
Single-
family
Guarantee
Investments Multifamily
All
Other
Year Ended December 31, 2011
Total
Segment
Earnings
(Loss),
Net of Tax
Reconciliation to Consolidated Statements of
Comprehensive Income
Reclassifications(1)
Segment
Adjustments(2)
Total
Reconciling
Items
Total per
Consolidated
Statements of
Comprehensive
Income
Net interest income
$
(23)
$
7,168
$
1,200
$ — $
Benefit (provision) for
credit losses
Non-interest income (loss):
Management and
guarantee income(3)
Net impairment of
available-for-sale
securities recognized in
earnings
Derivative gains (losses)
Gains (losses) on trading
securities
Gains (losses) on
mortgage loans
(12,294)
3,647
—
—
—
—
—
—
(1,833)
(3,597)
(993)
529
Other non-interest income
1,216
1,437
196
127
(353)
3
39
300
86
Non-interest expense:
Administrative expenses
REO operations income
(expense)
Other non-interest
expense
Segment adjustments(2)
Income tax (expense)
benefit
Net income (loss)
Total other comprehensive
income, net of taxes
Comprehensive income
(loss)
(888)
(596)
(321)
(699)
(42)
(10,000)
30
(398)
(220)
—
(2)
661
394
3,366
3,107
11
(69)
—
(1)
1,319
899
(in millions)
$
8,345
9,391
$
661
$
10,052
$
18,397
(12,098)
1,396
—
1,396
(10,702)
3,774
(2,905)
(699)
(3,604)
170
(2,186)
(3,594)
(954)
829
2,739
(1,506)
(585)
(392)
(38)
400
(5,266)
4,036
(115)
(6,158)
—
—
(1,609)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
38
—
—
—
(115)
(6,158)
—
—
(1,609)
—
—
—
38
—
—
—
(2,301)
(9,752)
(954)
829
1,130
(1,506)
(585)
(392)
—
400
(5,266)
4,036
—
—
—
—
—
—
—
—
—
—
—
49
49
—
$
(9,970)
$
6,473
$
2,218
$
49
$
(1,230)
$
— $
— $
— $
(1,230)
237
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(1)
See “Segment Earnings — Investment Activity-Related Reclassifications” and “— Credit Guarantee Activity-Related Reclassifications” for information regarding these
reclassifications.
See “Segment Earnings — Segment Adjustments” for information regarding these adjustments.
(2)
(3) Management and guarantee income total per consolidated statements of comprehensive income is included in other income on our GAAP consolidated statements of
comprehensive income.
The table below presents comprehensive income (loss) by segment.
Table 13.3 — Comprehensive Income (Loss) of Segments
Year Ended December 31, 2013
Other Comprehensive Income (Loss), Net of Taxes
Changes in
Unrealized Gains
(Losses) Related to
Available-For-Sale
Securities
Changes in
Unrealized Gains
(Losses) Related to
Cash Flow Hedge
Relationships
Net Income
(Loss)
Changes in
Defined
Benefit Plans
Total Other
Comprehensive
Income (Loss),
Net of Taxes
Comprehensive
Income
(Loss)
(in millions)
Total comprehensive income (loss) of segments:
Single-family Guarantee
$
5,796
$
— $
— $
Investments
Multifamily
All Other
Total per consolidated statements of
comprehensive income
16,602
2,378
23,892
3,338
(932)
—
316
—
—
49
31
9
121
$
49
$
3,685
(923)
121
5,845
20,287
1,455
24,013
51,600
$
48,668
$
2,406
$
316
$
210
$
2,932
$
Year Ended December 31, 2012
Other Comprehensive Income (Loss), Net of Taxes
Changes in
Unrealized Gains
(Losses) Related to
Available-For-Sale
Securities
Changes in
Unrealized Gains
(Losses) Related to
Cash Flow Hedge
Relationships
Net Income
(Loss)
Changes in
Defined
Benefit Plans
Total Other
Comprehensive
Income (Loss),
Net of Taxes
Comprehensive
Income
(Loss)
(in millions)
Total comprehensive income (loss) of segments:
Single-family Guarantee
$
(164)
$
— $
— $
Investments
Multifamily
All Other
Total per consolidated statements of
comprehensive income
8,212
2,146
788
2,821
1,948
—
414
—
—
$
(63)
$
(227)
(63)
(50)
(13)
—
3,185
1,935
—
11,397
4,081
788
16,039
$
10,982
$
4,769
$
414
$
(126)
$
5,057
$
Year Ended December 31, 2011
Other Comprehensive Income (Loss), Net of Taxes
Changes in
Unrealized Gains
(Losses) Related to
Available-For-Sale
Securities
Changes in
Unrealized Gains
(Losses) Related to
Cash Flow Hedge
Relationships
Net Income
(Loss)
Changes in
Defined
Benefit Plans
Total Other
Comprehensive
Income (Loss),
Net of Taxes
Comprehensive
Income
(Loss)
(in millions)
Total comprehensive income (loss) of segments:
Single-family Guarantee
$
(10,000)
$
— $
— $
Investments
Multifamily
All Other
Total per consolidated statements of
comprehensive income
3,366
1,319
49
2,573
892
—
508
1
—
30
26
6
—
$
30
$
(9,970)
3,107
899
—
6,473
2,218
49
$
(5,266)
$
3,465
$
509
$
62
$
4,036
$
(1,230)
NOTE 14: FINANCIAL GUARANTEES
We provide financial guarantees to securitization trusts that issue mortgage-related securities backed by single-family
mortgage loans, which we consolidate. During the years ended December 31, 2013 and 2012, we issued approximately $425.6
billion and $439.3 billion, respectively, in UPB of Freddie Mac mortgage-related securities backed by single-family mortgage
loans (excluding those backed by HFA bonds). For guarantees to consolidated securitization trusts, our exposure to these
guarantees is generally the UPB of the loans recorded on our consolidated balance sheets.
We also provide guarantees to non-consolidated securitization trusts that issue mortgage-related securities as well as in
other guarantee commitments. If we are exposed to incremental credit risk by providing these guarantees, we charge a
management and guarantee fee and recognize a guarantee asset, guarantee obligation, and a reserve for guarantee losses, as
necessary.
The table below presents our maximum potential exposure, our recognized liability, and the maximum remaining term of
our financial guarantees that are not consolidated on our balance sheets.
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Table 14.1 — Financial Guarantees
December 31, 2013
December 31, 2012
Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term
Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term
(dollars in millions, terms in years)
Non-consolidated Freddie Mac securities(3)
$
71,809
$
Other guarantee commitments
Derivative instruments(4)
Servicing-related premium guarantees
29,160
9,856
281
731
791
239
—
40
36
32
5
$
50,715
$
23,455
10,306
210
430
575
789
—
41
37
33
5
(1) Maximum exposure represents the contractual amounts that could be lost under the non-consolidated guarantees if counterparties or borrowers
defaulted, without consideration of possible recoveries under credit enhancement arrangements, such as recourse provisions, third-party insurance
contracts, or from collateral held or pledged. The maximum exposure disclosed above is not representative of the actual loss we are likely to incur,
based on our historical loss experience and after consideration of proceeds from related collateral liquidation. The maximum exposure for our liquidity
guarantees is not mutually exclusive of our default guarantees on the same securities; therefore, these amounts are included within the maximum
exposure of non-consolidated Freddie Mac securities and other guarantee commitments.
(2) For non-consolidated Freddie Mac securities and other guarantee commitments, this amount represents the guarantee obligation on our consolidated
balance sheets. This amount excludes our reserve for guarantee losses, which totaled $111 million and $183 million as of December 31, 2013 and 2012,
respectively, and is included within other liabilities on our consolidated balance sheets.
In addition to our guarantee of principal and interest, we also provide liquidity guarantees for certain multifamily housing revenue bonds included in
this category. However, no advances under these liquidity guarantees were outstanding at December 31, 2013 or 2012.
(3)
(4) See “NOTE 9: DERIVATIVES” for information about these derivative guarantees.
Non-Consolidated Freddie Mac Securities
We issue three types of mortgage-related securities: (a) PCs; (b) REMICs and Other Structured Securities; and (c) Other
Guarantee Transactions. We guarantee the payment of principal and interest to the trusts which issue these securities, which are
backed by pools of mortgage-related assets, irrespective of the cash flows received from the borrowers.
Our single-family securities issued in resecuritizations of our PCs and other previously issued REMICs and Other
Structured Securities are not consolidated unless we hold substantially all of the beneficial interests of the trust and are
therefore considered the primary beneficiary of the trust. Our resecuritizations of PCs and other previously issued REMICs and
Structured Securities do not give rise to any additional exposure to credit loss as we already consolidate the underlying
collateral. The securities issued in these resecuritizations consist of single-class and multiclass securities backed by PCs,
REMICs, interest-only strips, and principal-only strips. Since these resecuritizations do not increase our credit-risk, no
guarantee asset or guarantee obligation is recognized for these transactions and they are excluded from the table above.
During 2013 we issued approximately $23.7 billion, compared to $17.5 billion in 2012, in UPB of Other Guarantee
Transactions, all of which were backed by multifamily mortgage loans, for which a guarantee asset and guarantee obligation
were recognized.
For many of the loans underlying our non-consolidated guarantees, there are credit protections from third parties,
including subordination, covering a portion of our exposure. See “NOTE 4: MORTGAGE LOANS AND LOAN LOSS
RESERVES” for information about credit protections on loans we guarantee.
Other Guarantee Commitments
We provide long-term standby commitments to certain of our customers, which obligate us to purchase seriously
delinquent loans that are covered by those agreements. During 2013 and 2012, we issued and guaranteed $9.9 billion and $6.8
billion, respectively, in UPB of long-term standby commitments. These long-term standby commitments totaled $19.2 billion
and $12.4 billion of UPB at December 31, 2013 and 2012, respectively. We also had other guarantee commitments on
multifamily housing revenue bonds that were issued by HFAs of $9.1 billion and $9.4 billion in UPB at December 31, 2013 and
2012, respectively. In addition, as of December 31, 2013 and 2012, we had issued guarantees under the TCLFP on securities
backed by HFA bonds with UPB of $0.9 billion and $1.7 billion, respectively.
Derivative Instruments
Derivative instruments include written options, written swaptions, interest-rate swap guarantees, and short-term default
guarantee commitments accounted for as credit derivatives. See “NOTE 9: DERIVATIVES” for further discussion of these
derivative guarantees.
We guarantee the performance of interest-rate swap contracts in two circumstances. First, in connection with certain other
guarantee commitments, we guarantee that a multifamily borrower will perform under an interest-rate swap contract linked to
the borrower’s ARM. And second, in connection with our issuance of certain REMICs and Other Structured Securities, which
are backed by tax-exempt bonds, we guarantee that the sponsor of the transaction will perform under the interest-rate swap
contract linked to the senior variable-rate certificates that we issued.
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Freddie Mac
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We also have issued certain REMICs and Other Structured Securities with stated final maturities that are shorter than the
stated maturity of the underlying mortgage loans. If the underlying mortgage loans to these securities have not been purchased
by a third party or fully matured as of the stated final maturity date of such securities, we will sponsor an auction of the
underlying assets. To the extent that purchase or auction proceeds are insufficient to cover unpaid principal amounts due to
investors in such REMICs and Other Structured Securities, we are obligated to fund such principal. Our maximum exposure on
these derivative guarantees represents the outstanding UPB of the REMICs and Other Structured Securities subject to stated
final maturities.
Other Indemnifications
In connection with certain business transactions, we may provide indemnification to counterparties for claims arising out
of breaches of certain obligations (e.g., those arising from representations and warranties) in contracts entered into in the
normal course of business. Our assessment is that the risk of any material loss from such a claim for indemnification is remote
and there are no significant probable and estimable losses associated with these contracts. In addition, we provided
indemnification for litigation defense costs to certain former officers who are subject to ongoing litigation. See “NOTE 17:
LEGAL CONTINGENCIES” for further information on ongoing litigation. The recognized liabilities on our consolidated
balance sheets related to indemnifications were not significant at December 31, 2013 and 2012.
As part of the guarantee arrangements pertaining to multifamily housing revenue bonds, we provided commitments to
advance funds, commonly referred to as “liquidity guarantees.” These guarantees require us to advance funds to enable others
to repurchase any tendered tax-exempt and related taxable bonds that are unable to be remarketed. Any such advances are
treated as loans and are secured by a pledge to us of the repurchased securities until the securities are remarketed. We hold cash
and cash equivalents on our consolidated balance sheets for the amount of these commitments. No advances under these
liquidity guarantees were outstanding at December 31, 2013 and 2012.
Single-Family Credit Guarantee Portfolio
NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS
Our business activity is to participate in and support the residential mortgage market in the United States, which we
pursue by both issuing guaranteed mortgage securities and investing in mortgage loans and mortgage-related securities.
The table below summarizes the concentration by year of origination and geographical area of the approximately $1.7
trillion and $1.6 trillion UPB of our single-family credit guarantee portfolio at December 31, 2013 and 2012, respectively. See
“NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES”, "NOTE 4: MORTGAGE LOANS AND LOAN
LOSS RESERVES”, and “NOTE 7: INVESTMENTS IN SECURITIES” for more information about credit risk associated with
loans and mortgage-related securities that we hold.
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Freddie Mac
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Table 15.1 — Concentration of Credit Risk — Single-Family Credit Guarantee Portfolio
December 31, 2013
December 31, 2012
Percent of Credit Losses(1)
Year Ended
Percentage of
Portfolio(2)
Serious
Delinquency
Rate
Percentage of
Portfolio(2)
Serious
Delinquency
Rate
December 31,
2013
December 31,
2012
16%
16
8
7
7
54
21
16
9
100%
28%
26
18
16
12
100%
26%
11
9
54
100%
—%
—
0.2
0.4
0.9
0.2
0.6
8.8
3.2
2.4%
1.7%
3.2
1.8
3.4
1.4
2.4%
3.0%
2.1
5.1
1.9
2.4%
N/A
14%
10
10
11
45
18
24
13
100%
28%
25
18
17
12
100%
25%
11
9
55
100%
N/A
—%
0.1
0.3
0.7
0.3
0.7
9.6
3.2
3.3%
2.8%
3.8
2.5
5.0
1.7
3.3%
5.0%
3.0
5.5
2.4
3.3%
<1%
<1
<1
1
2
3
7
81
9
100%
24%
15
23
35
3
100%
47%
19
3
31
100%
N/A
<1%
<1
1
1
2
2
87
9
100%
44%
8
20
24
4
100%
54%
15
2
29
100%
Year of Origination
2013
2012
2011
2010
2009
Subtotal - New single-family book
HARP and other relief refinance loans(3)
2005 to 2008 Legacy single-family book
Pre-2005 Legacy single-family book
Total
Region(4)
West
Northeast
North Central
Southeast
Southwest
Total
State
Arizona, California, Florida, and Nevada(5)
Illinois, Michigan, and Ohio(6)
New York and New Jersey(7)
All other
Total
(1) Credit losses consist of the aggregate amount of charge-offs, net of recoveries, and REO operations expense in each of the respective periods and
exclude foregone interest on non-performing loans and other market-based losses recognized on our consolidated statements of comprehensive income.
(2) Based on the UPB of our single-family credit guarantee portfolio, which includes unsecuritized single-family mortgage loans held by us on our
consolidated balance sheets and those underlying Freddie Mac mortgage-related securities, or covered by our other guarantee commitments.
(3) HARP and other relief refinance loans are presented separately rather than in the year that the refinancing occurred (from 2009 to 2013). All other
refinance loans are presented in the year that the refinancing occurred. Prior period information has been revised to conform with the current period
presentation.
(4) Region designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH, NJ, NY, PA, RI, VT, VA,
WV); North Central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI); Southwest (AR, CO, KS, LA,
MO, NE, NM, OK, TX, WY).
(5) Represents the four states that had the largest cumulative declines in home prices during the housing crisis that began in 2006, as measured using
Freddie Mac’s home price index.
(6) Represents selected states in the North Central region that have experienced adverse economic conditions since 2006.
(7) Represents two states with a judicial foreclosure process in which there are a significant number of seriously delinquent loans within our single-family
credit guarantee portfolio.
Credit Performance of Certain Higher Risk Single-Family Loan Categories
Participants in the mortgage market often characterize single-family loans based upon their overall credit quality at the
time of origination, generally considering them to be prime or subprime. Many mortgage market participants classify single-
family loans with credit characteristics that range between their prime and subprime categories as Alt-A because these loans
have a combination of characteristics of each category, may be underwritten with lower or alternative income or asset
documentation requirements compared to a full documentation mortgage loan, or both. However, there is no universally
accepted definition of subprime or Alt-A. Although we discontinued new purchases of mortgage loans with lower
documentation standards for assets or income beginning March 1, 2009, we continued to purchase certain amounts of these
mortgages in cases where the loan was either: (a) purchased pursuant to a previously issued other guarantee commitment;
(b) part of our relief refinance mortgage initiative; or (c) in another refinance mortgage initiative and the pre-existing mortgage
(including Alt-A loans) was originated under less than full documentation standards. In the event we purchase a refinance
mortgage and the original loan had been previously identified as Alt-A, such refinance loan may no longer be categorized or
reported as Alt-A in the table below because the new refinance loan replacing the original loan would not be identified by the
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Table of Contents
seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had
such refinancing not occurred.
Although we do not categorize single-family mortgage loans we purchase or guarantee as prime or subprime, we
recognize that there are a number of mortgage loan types with certain characteristics that indicate a higher degree of credit risk.
For example, a borrower’s credit score is a useful measure for assessing the credit quality of the borrower. Statistically,
borrowers with higher credit scores are more likely to repay or have the ability to refinance than those with lower scores.
Presented below is a summary of the serious delinquency rates of certain higher-risk categories (based on characteristics
of the loan at origination) of single-family loans in our single-family credit guarantee portfolio. The table includes a
presentation of each higher-risk category in isolation. A single loan may fall within more than one category (for example, an
interest-only loan may also have an original LTV ratio greater than 90%). Loans with a combination of these attributes will
have an even higher risk of delinquency than those with an individual attribute.
Table 15.2 — Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio(1)
Interest-only
Option ARM(2)
Alt-A(3)
Original LTV ratio greater than 90%(4)
Lower FICO scores at origination (less than 620)
Percentage of Portfolio(1)
Serious Delinquency Rate
December 31, 2013
December 31, 2012
December 31, 2013
December 31, 2012
2%
<1
3
16
3
3%
<1
5
13
3
12.5%
12.3
10.1
3.2
10.0
16.3%
16.3
11.4
4.8
12.2
(1) Based on UPB.
(2) For reporting purposes, loans within the option ARM category continue to be reported in that category following modification, even though the
modified loan no longer provides for optional payment provisions.
(3) Alt-A loans may not include those loans that were previously classified as Alt-A and that have been refinanced as either a relief refinance mortgage or
in another refinance mortgage initiative.
Includes HARP loans, which we are required to purchase as part of our participation in the MHA Program.
(4)
The percentage of borrowers in our single-family credit guarantee portfolio, based on UPB, with estimated current LTV
ratios greater than 100% was 10% and 15% at December 31, 2013 and 2012, respectively. An increase in the estimated current
LTV ratio of a loan indicates that the borrower’s equity in the home has declined, and can negatively affect the borrower’s
ability to refinance (outside of HARP) or to sell the property for an amount at or above the balance of the outstanding mortgage
loan. The serious delinquency rate for single-family loans with estimated current LTV ratios greater than 100% was 9.9% and
12.7% as of December 31, 2013 and 2012, respectively. Loans in our 2005-2008 Legacy single-family book have been more
affected by declines in home prices during the housing crisis that began in 2006 than loans originated in other years. Our
2005-2008 Legacy single-family book comprised approximately 16% of our single-family credit guarantee portfolio, based on
UPB at December 31, 2013, and these loans accounted for approximately 81% and 87% of our credit losses during 2013 and
2012, respectively.
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. See “NOTE 7: INVESTMENTS IN SECURITIES” for further information on these categories
and other concentrations in our investments in securities.
Multifamily Mortgage Portfolio
The table below summarizes the concentration of multifamily mortgages in our multifamily mortgage portfolio by certain
attributes. Information presented for multifamily mortgage loans includes certain categories based on loan or borrower
characteristics present at origination. The table includes a presentation of each category in isolation. A single loan may fall
within more than one category (for example, a loan with an original LTV ratio greater than 80% may also have an original
DSCR below 1.10).
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Table 15.3 — Concentration of Credit Risk — Multifamily Mortgage Portfolio
State(2)
California
Texas
New York
Florida
Virginia
Maryland
All other states
Total
Region(3)
Northeast
West
Southwest
Southeast
North Central
Total
Other Categories(4)
Original LTV ratio greater than 80%
Original DSCR below 1.10
December 31, 2013
December 31, 2012
UPB
Delinquency
Rate(1)
UPB
Delinquency
Rate(1)
(dollars in billions)
$
$
$
$
$
22.4
16.7
11.4
9.3
7.0
6.7
59.3
132.8
37.5
33.8
26.2
24.1
11.2
132.8
5.6
2.2
0.03% $
0.02
0.12
0.28
0.37
—
0.08
0.09% $
0.10% $
0.07
0.05
0.16
0.07
21.1
15.9
10.7
8.4
6.6
6.9
57.8
127.4
36.1
31.8
25.4
23.4
10.7
0.09% $
127.4
0.19% $
—
5.8
2.3
0.12%
0.13
0.09
0.12
—
—
0.32
0.19%
0.04%
0.09
0.22
0.54
0.19
0.19%
2.31%
2.97
(1) Based on the UPB of multifamily mortgages two monthly payments or more delinquent or in foreclosure.
(2) Represents the six states with the highest UPB at December 31, 2013.
(3) See endnote (4) to “Table 15.1 — Concentration of Credit Risk — Single-Family Credit Guarantee Portfolio” for a description of these regions.
(4) These categories are not mutually exclusive and a loan in one category may also be included within another category.
One indicator of risk for mortgage loans in our multifamily mortgage portfolio is the amount of a borrower’s equity in the
underlying property. A borrower’s equity in a property decreases as the LTV ratio increases. Higher LTV ratios negatively
affect a borrower’s ability to refinance or sell a property for an amount at or above the balance of the outstanding mortgage.
The DSCR is another indicator of future credit performance. The DSCR estimates a multifamily borrower’s ability to service
its mortgage obligation using the secured property’s cash flow, after deducting non-mortgage expenses from income. The
higher the DSCR, the more likely it is that a multifamily borrower will be able to continue servicing its mortgage obligation.
We estimate that the percentage of loans in our multifamily mortgage portfolio with a current LTV ratio of greater than
100% was approximately 2% and 3% at December 31, 2013 and 2012, respectively, and our estimate of the current average
DSCR for these loans was 0.95 and 1.0, respectively. We estimate that the percentage of loans in our multifamily mortgage
portfolio with a current DSCR less than 1.0 was 3% at both December 31, 2013 and 2012 and the average current LTV ratio of
these loans was 95% and 111%, respectively. Our estimates of current DSCRs are based on the latest available income
information for these properties and our assessments of market conditions. Our estimates of the current LTV ratios are based on
values we receive from a third-party service provider as well as our internal estimates of property value, for which we may use
changes in tax assessments, market vacancy rates, rent growth and comparable property sales in local areas as well as third-
party appraisals for a portion of the portfolio. We periodically perform our own valuations or obtain third-party appraisals in
cases where a significant deterioration in a borrower’s financial condition has occurred, the borrower has applied for
refinancing, or in certain other circumstances where we deem it appropriate to reassess the property value. Although we use the
most recently available financial results of our multifamily borrowers to estimate a property’s value, there may be a significant
lag in reporting, which could be six months or more, as they complete their financial results in the normal course of business.
Our internal estimates of property valuation are derived using techniques that include income capitalization, discounted cash
flows, comparable sales, or replacement costs.
Seller/Servicers
We acquire a significant portion of our single-family mortgage purchase volume from several large seller/servicers and
we are exposed to the risk that we could lose purchase volume to the extent certain arrangements with these lenders are
terminated. Our top 10 single-family seller/servicers provided approximately 64% of our single-family purchase volume during
2013. Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A. accounted for 17% and 13%, respectively, of our single-family
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mortgage purchase volume and were the only single-family seller/servicers that comprised 10% or more of our purchase
volume during 2013.
We are exposed to institutional credit risk arising from the potential insolvency or non-performance by our seller/
servicers of their obligations to repurchase mortgages or (at our option) indemnify us in the event of: (a) breaches of the
representations and warranties they made when they sold the mortgages to us; or (b) failure to comply with our servicing
requirements. Our contracts require that a seller/servicer repurchase a mortgage after we issue a repurchase request, unless the
seller/servicer avails itself of an appeals process provided for in our contracts, in which case the deadline for repurchase is
extended until we decide on the appeal. As of December 31, 2013 and 2012, the UPB of loans subject to our repurchase
requests (seller and servicer related) issued to our single-family seller/servicers was approximately $2.2 billion and $3.0 billion,
of which approximately 27% and 41%, respectively, were outstanding for four months or more since issuance as measured by
the related UPB of the loans (these figures include repurchase requests for which appeals were pending). As of December 31,
2013, two of our largest seller/servicers (Bank of America, N.A. and JPMorgan Chase Bank, N.A.) had aggregate repurchase
requests outstanding, based on UPB, of $0.9 billion, and approximately 49% were outstanding for four months or more since
issuance. During 2013 and 2012, we recovered amounts that covered losses with respect to $5.6 billion and $3.5 billion,
respectively, in UPB of loans subject to our repurchase requests.
During 2013, we entered into settlement agreements with a number of counterparties to release specified loans from
certain seller repurchase obligations in exchange for one-time cash payments, which totaled approximately $2.4 billion in
aggregate. These agreements related to loans with $280.4 billion in aggregate principal amount (as of the dates of the respective
agreements) and we recognized a benefit for credit losses of $1.7 billion included within our consolidated statement of
operations during 2013. The counterparties to these agreements included GMAC Mortgage LLC, Wells Fargo Bank, N.A.,
CitiMortgage, Inc., Citibank, N.A., SunTrust Mortgage, Inc., JPMorgan Chase Bank, N.A., Bank of America, N.A., FifthThird
Bank, N.A., PNC Bank, N.A., U.S. Bancorp, and Flagstar Bank, FSB.
As of December 31, 2013, single-family loans with aggregate UPB of approximately $389.6 billion (representing 24% of
our single-family credit guarantee portfolio) had been released from repurchase obligations primarily because either: (a) the
mortgages are subject to negotiated agreements; or (b) the seller/servicers were no longer in business and their obligations have
been discharged or a settlement amount was determined in bankruptcy or receivership proceedings.
At the direction of FHFA, Freddie Mac and Fannie Mae have launched a new representation and warranty framework for
conventional loans purchased by the GSEs on or after January 1, 2013. The objective of the new framework is to clarify
lenders’ repurchase exposures and liability on future sales of mortgage loans to Freddie Mac and Fannie Mae. The new
framework does not affect seller/servicers’ obligations under their contracts with us with respect to loans sold to us prior to
January 1, 2013. The new framework also does not affect their obligation to service these loans in accordance with our
servicing standards. Under this new framework, lenders will be relieved of certain repurchase obligations for loans that meet
specific payment requirements. This includes, subject to certain exclusions, loans with 36 months (12 months for relief
refinance mortgages) of consecutive, on-time payments after we purchase them.
As of December 31, 2013, approximately 24% in UPB of loans in our single-family credit guarantee portfolio were
purchased during 2013 and subject to this representation and warranty framework.
The ultimate amounts of recovery payments we receive from seller/servicers related to their repurchase obligations may
be significantly less than the amount of our estimates of potential exposure to losses. Our estimate of probable incurred losses
for exposure to seller/servicers for their repurchase obligations is considered in our allowance for loan losses. See “NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Allowance for Loan Losses and Reserve for Guarantee
Losses” for further information. We believe we have appropriately provided for these exposures, based upon our estimates of
incurred losses, in our loan loss reserves; however, our actual losses may exceed our estimates.
We are also exposed to the risk that seller/servicers might fail to service mortgages in accordance with our contractual
requirements, resulting in increased credit losses. For example, our seller/servicers have an active role in our loss mitigation
efforts, including under the servicing alignment initiative and the MHA Program, and therefore, we have exposure to them to
the extent a decline in their performance results in a failure to realize the anticipated benefits of our loss mitigation plans. Since
we do not have our own servicing operation, if our servicers lack appropriate process controls, experience a failure in their
controls, or experience an operating disruption in their ability to service mortgage loans, our business and financial results
could be adversely affected.
A significant portion of our single-family mortgage loans are serviced by several large seller/servicers. Our top two
single-family loan servicers, Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A., serviced approximately 24% and 13%,
respectively, of our single-family mortgage loans, as of December 31, 2013 and together serviced approximately 37% of our
single-family mortgage loans.
As of December 31, 2013 our top three multifamily servicers, Berkadia Commercial Mortgage LLC, Wells Fargo Bank,
N.A., and CBRE Capital Markets, Inc., each serviced more than 10% of our multifamily mortgage portfolio, excluding K
Certificates, and together serviced approximately 37% of this portfolio.
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In our multifamily business, we are exposed to the risk that multifamily seller/servicers could come under financial
pressure, which could potentially cause degradation in the quality of the servicing they provide us, including their monitoring
of each property’s financial performance and physical condition. This could also, in certain cases, reduce the likelihood that we
could recover losses through lender repurchases, recourse agreements, or other credit enhancements, where applicable. This
risk primarily relates to multifamily loans that we hold on our consolidated balance sheets where we retain all of the related
credit risk. We monitor the status of all our multifamily seller/servicers in accordance with our counterparty credit risk
management framework.
Mortgage Insurers
We have institutional credit risk relating to the potential insolvency of, or non-performance by, mortgage insurers that
insure single-family mortgages we purchase or guarantee. We evaluate the recovery and collectability from insurance policies
for mortgage loans that we hold for investment as well as loans underlying our non-consolidated Freddie Mac mortgage-related
securities or covered by other guarantee commitments as part of the estimate of our loan loss reserves. See “NOTE 1:
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Allowance for Loan Losses and Reserve for Guarantee
Losses” for additional information. As of December 31, 2013, mortgage insurers provided coverage with maximum loss limits
of $52.0 billion, for $209.9 billion of UPB, in connection with our single-family credit guarantee portfolio. These amounts are
based on gross coverage without regard to netting of coverage that may exist to the extent an affected mortgage is covered
under both primary and pool insurance. Our top four mortgage insurer counterparties, Mortgage Guaranty Insurance
Corporation (MGIC), Radian Guaranty Inc. (Radian), United Guaranty Residential Insurance Company, and Genworth
Mortgage Insurance Corporation each accounted for more than 10% and collectively represented approximately 78% of our
overall mortgage insurance coverage at December 31, 2013. Three of our mortgage insurance counterparties are no longer rated
by either S&P or Moody’s because they are under court-ordered or state supervision. Of our four largest counterparties, three
are rated B, and one is rated BBB+, as of December 31, 2013, based on the lower of the S&P or Moody’s rating scales and
stated in terms of the S&P equivalent.
We and MGIC were involved in litigation concerning our current and future claims under certain of MGIC’s pool
insurance policies. In the litigation, we contended that the policies had approximately $0.5 billion more in coverage than MGIC
contended was provided for under the policies. In December 2012, we entered into a settlement agreement with MGIC
concerning this dispute. Under the terms of the settlement, MGIC paid us $100 million in December 2012, and is paying us an
additional $167.5 million in monthly installments over four years beginning on January 2, 2013.
We received proceeds of $2.0 billion during both 2013 and 2012 from our primary and pool mortgage insurance policies
for recovery of losses on our single-family loans. We had outstanding receivables from mortgage insurers of $0.7 billion and
$1.3 billion (excluding deferred payment obligations associated with unpaid claim amounts) as of December 31, 2013 and
2012, respectively. The balance of our outstanding accounts receivable from mortgage insurers, net of associated reserves, was
approximately $0.5 billion and $0.8 billion at December 31, 2013 and 2012, respectively.
In August 2013, we entered into an agreement with Radian involving approximately 26,000 single-family loans held by
us and insured by Radian that were in default as of December 31, 2011. The agreement generally resolves outstanding and
future primary mortgage insurance claims by us against Radian with respect to these loans. In connection with this agreement,
Radian paid us $255 million and also deposited $205 million in an escrow account in which we hold a secured interest. Subject
to terms and conditions of the agreement, the funds in the escrow account will be returned to Radian to the extent of Radian's
final rescission, cancellation, curtailment or denial of filed claims. Freddie Mac will receive any funds in the account that are
not returned to Radian. The agreement does not affect our right to pursue repurchase remedies against seller/servicers related to
Radian's insurance rescissions and claim denials on these loans.
In August 2011, we suspended Republic Mortgage Insurance Corporation (or RMIC) and its affiliates, and PMI Mortgage
Insurance Co. (or PMI) and its affiliates as approved mortgage insurers for Freddie Mac loans, making loans insured by them
ineligible for sale to Freddie Mac (except relief refinance loans with pre-existing insurance). Both RMIC and PMI ceased
writing new business during the third quarter of 2011. RMIC instituted a partial claim payment plan in January 2012, under
which claim payments were made 50% in cash and 50% in deferred payment obligations for an initial period not to exceed one
year. In November 2012, RMIC announced that its state regulator approved its corrective plan, which provided for the run-off
of its existing business. Under the corrective plan, RMIC is paying claims, settled on or after January 19, 2012, 60% in cash
and a deferred payment obligation for the remaining 40% which will be retained in claim reserves until a future pay-out date.
PMI instituted a partial claim payment plan in October 2011, under which claim payments were made 50% in cash, with the
remaining amount deferred as a policyholder claim. In April 2013, PMI began paying valid claims 55% in cash and 45% in
deferred payment obligations and made a one-time cash payment to us for claims that were previously settled at 50% in cash.
In June 2009, Triad began paying valid claims 60% in cash and 40% in deferred payment obligations under order of its
state regulator. In October 2013, Triad’s plan of rehabilitation was approved. In December 2013, under this plan, Triad began
paying valid claims 75% in cash and a one-time cash payment was made to us for claims previously settled for 60% in cash.
It is not clear how the regulators of PMI, RMIC, or Triad will administer the balance of their respective deferred payment
plans, nor when or if those obligations will be paid.
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Bond Insurers
Bond insurance, which may be either primary or secondary policies, is a credit enhancement covering some of the non-
agency mortgage-related securities we hold. Primary policies are acquired by the securitization trust issuing the securities we
purchase, while secondary policies are acquired by us. At December 31, 2013, the maximum principal exposure to credit losses
related to such policies was $7.8 billion. At December 31, 2013, our top four bond insurers, Ambac Assurance Corporation (or
Ambac), Financial Guaranty Insurance Company (or FGIC), National Public Finance Guarantee Corp., and MBIA
Insurance Corp., each accounted for more than 10% of our overall bond insurance coverage and collectively represented
approximately 90% of our total coverage.
In June 2012, a rehabilitation order was signed granting the Superintendent of Financial Services of the State of New
York the authority to take possession and/or control of FGIC’s property and assets and to conduct FGIC’s business. In
September 2012, the Superintendent of Financial Services filed a proposed plan of rehabilitation for FGIC. Certain trustees
objected to the proposed plan, and a revised plan was filed in December 2012. In June 2013, FGIC’s plan of rehabilitation was
approved under which permitted claims will be paid 17% in cash and the remainder in deferred payment obligations. FGIC has
begun payment of initial permitted claims and settlement of deferred obligations in accordance with the plan.
In the third quarter of 2012, Ambac, which had not paid claims since March 2010, began making partial cash payments of
the permitted amount of each policy claim. In 2013, Ambac also began making supplemental payments, equal to all or a portion
of the permitted policy claim, with respect to certain specified securities. In March 2010, Ambac established a segregated
account for certain Ambac-insured securities, including some of those held by Freddie Mac. Upon the request of the Wisconsin
Office of the Commissioner of Insurance, the Wisconsin circuit court put the segregated account into rehabilitation (i.e., a state
insolvency proceeding). The Office of the Commissioner of Insurance subsequently filed a plan of rehabilitation with the court.
The plan was approved by the court in January 2011, but has not yet been implemented due to various disputes among
interested parties. In November 2010, Ambac Financial Group Inc., the parent company of Ambac, filed for bankruptcy.
We expect to receive substantially less than full payment of our claims from Ambac and FGIC as these companies are
either insolvent or in rehabilitation. We believe that we will also likely receive substantially less than full payment of our claims
from some of our other bond insurers, because we believe they also lack sufficient ability to fully meet all of their expected
lifetime claims-paying obligations to us as such claims emerge. We evaluate the expected recovery from primary bond
insurance policies as part of our impairment analysis for our investments in securities. See “NOTE 7: INVESTMENTS IN
SECURITIES” for further information on our evaluation of impairment on securities covered by bond insurance.
Cash and Other Investments Counterparties
We are exposed to institutional credit risk arising from the potential insolvency or non-performance of counterparties of
non-mortgage-related investment agreements and cash equivalent transactions, including those entered into on behalf of our
securitization trusts. Our policies require that the issuer be rated as investment grade at the time the financial instrument is
purchased. We base the permitted term and dollar limits for each of these transactions on the counterparty's financial strength in
order to further mitigate our risk.
Our cash and other investment counterparties are primarily major institutions, Treasury, and the Federal Reserve Bank of
New York. As of December 31, 2013 and 2012, including amounts related to our consolidated VIEs, there were $85.9 billion
and $60.7 billion, respectively, of: (a) cash and securities purchased under agreements to resell invested with institutional
counterparties; (b) Treasury securities classified as cash equivalents; or (c) cash deposited with the Federal Reserve Bank of
New York. As of December 31, 2013 these included:
•
•
•
•
•
$50.3 billion of securities purchased under agreements to resell with 11 counterparties that had short-term S&P ratings
of A-1 or above;
$6.1 billion of securities purchased under agreements to resell with one counterparty that had a short-term S&P rating
of A-2;
$6.0 billion of securities purchased under agreements to resell with one counterparty that does not have a short-term
S&P or other third-party credit rating, but was evaluated under the company's counterparty credit risk system and was
determined to be eligible for this transaction (by providing more than 100% in approved collateral);
$3.9 billion of cash equivalents invested in Treasury securities; and
$19.4 billion of cash deposited with the Federal Reserve Bank of New York (as a non-interest-bearing deposit).
In February 2014, we reached a settlement with Lehman Brothers Holdings Inc. pursuant to which we will receive $767
million to resolve our claims related to Lehman’s bankruptcy. Consequently, we adjusted our December 31, 2013 estimate of
the expected recoveries of our receivable by $350 million, which reduced other expenses by the same amount. For more
information, see “NOTE 17: LEGAL CONTINGENCIES."
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Non-Agency Mortgage-Related Security Issuers
We are engaged in various loss mitigation efforts concerning certain investments in non-agency mortgage-related
securities, including the activities discussed below. The effectiveness of these various loss mitigation efforts is uncertain, in part
because our rights as an investor are limited, and any potential recoveries may take significant time to realize.
In 2011, FHFA, as Conservator for Freddie Mac and Fannie Mae, filed lawsuits against 18 corporate families of financial
institutions and related defendants seeking to recover losses and damages sustained by Freddie Mac and Fannie Mae as a result
of their investments in certain residential non-agency mortgage-related securities issued or sold by, or backed by mortgages
originated by, these financial institutions or control persons thereof. These institutions include some of our largest seller/
servicers and counterparties, including counterparties to debt funding and derivatives transactions. We and FHFA reached
settlements with the following parties in 2013:
• General Electric Company and affiliates (January 2013)
• Citigroup Inc. and affiliates (May 2013)
• UBS Americas, Inc. (July 2013)
•
JPMorgan Chase & Co. and certain affiliated entities and other persons (October 2013)
• Ally Financial Inc. (October 2013)
• Deutsche Bank AG (December 2013)
Lawsuits against a number of other parties are currently pending.
In addition, during September 2013, we reached a settlement with Wells Fargo Bank, N.A. and affiliates concerning
claims related to certain residential non-agency mortgage-related securities.
During 2013, we recognized $5.5 billion within non-interest income on our consolidated statements of comprehensive
income associated with these settlements. In February 2014, we and FHFA entered into an agreement with Morgan Stanley, and
related parties, to settle litigation related to certain residential non-agency mortgage-related securities we hold. Under the
agreement, we will be paid $625 million, which will be reflected in our consolidated financial results for the first quarter of
2014.
In June 2011, Bank of America Corporation, BAC Home Loans Servicing, LP, Countrywide Financial Corporation and
Countrywide Home Loans, Inc. entered into a settlement agreement with The Bank of New York Mellon, as trustee, to resolve
certain claims with respect to a number of Countrywide first-lien and second-lien residential mortgage-related securitization
trusts. We have investments in certain of these Countrywide securitization trusts and would expect to benefit from this
settlement, if final court approval is obtained. Bank of America indicated that the settlement would be subject to final court
approval and certain other conditions. In January 2014, a New York state court approved a significant portion of the settlement.
There can be no assurance that final court approval of the entire settlement will be obtained or that all conditions will be
satisfied. Given the complexity of the settlement and the possibility that the January 2014 court decision will be appealed, it is
not possible to predict the timing or ultimate outcome of the court approval process, which could take substantial additional
time.
Derivative Portfolio
Our use of cleared derivatives, exchange-traded derivatives, and OTC derivatives exposes us to institutional credit risk.
The requirement that we post initial and variation margin in connection with exchange-traded derivatives and cleared
derivatives exposes us to institutional credit risk in the event that our clearing members or the clearinghouse fail to meet their
obligations. However, the use of exchange-traded derivatives and cleared derivatives mitigates our institutional credit risk
exposure to individual counterparties because a central counterparty is substituted for individual counterparties, and changes in
the value of open exchange-traded contracts and cleared derivatives are settled or collateralized daily via payments made
through the clearinghouse. OTC derivatives, however, expose us to institutional credit risk to individual counterparties because
transactions are executed and settled between us and each counterparty, exposing us to potential losses if a counterparty fails to
meet its contractual obligations.
For more information about our derivative counterparties as well as related master netting and collateral agreements, see
“NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES.”
NOTE 16: FAIR VALUE DISCLOSURES
The accounting guidance for fair value measurements and disclosures defines fair value, establishes a framework for
measuring fair value, and sets forth disclosure requirements regarding fair value measurements. This guidance applies
whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value. Fair value
measurement assumes that the transaction to sell the asset or transfer the liability takes place either in the principal market for
the asset or liability, or, in the absence of a principal market, in the most advantageous market for the asset or liability.
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We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of
certain assets and liabilities on a recurring or non-recurring basis.
Fair Value Measurements
The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy that
prioritizes the inputs into the valuation techniques used to measure fair value. The fair value hierarchy gives the highest
priority, Level 1, to measurements based on quoted prices in active markets for identical assets or liabilities. The next highest
priority, Level 2, is given to measurements based on observable inputs other than quoted prices in active markets for identical
assets or liabilities. The lowest priority, Level 3, is given to measurements based on unobservable inputs. Assets and liabilities
are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value
measurement.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The table below presents our assets and liabilities measured in our consolidated balance sheets at fair value on a recurring
basis subsequent to initial recognition, including instruments where we have elected the fair value option, as of December 31,
2013 and 2012.
Table 16.1 — Assets and Liabilities Measured at Fair Value on a Recurring Basis
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Fair Value at December 31, 2013
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(in millions)
Netting
Adjustment(1)
Total
Assets:
Investments in securities:
Available-for-sale, at fair value:
Mortgage-related securities:
$
Freddie Mac
Fannie Mae
Ginnie Mae
CMBS
Subprime
Option ARM
Alt-A and other
Obligations of states and political
subdivisions
Manufactured housing
Total available-for-sale securities, at
fair value
Trading, at fair value:
Mortgage-related securities:
Freddie Mac
Fannie Mae
Ginnie Mae
Other
Total mortgage-related securities
Non-mortgage-related securities:
Treasury bills
Treasury notes
Total non-mortgage-related securities
Total trading securities, at fair
value
Total investments in securities
Mortgage loans:
Held-for-sale, at fair value
Derivative assets, net:
Interest-rate swaps
Option-based derivatives
Other
Subtotal, before netting adjustments
Netting adjustments(1)
Total derivative assets, net
Other assets:
Guarantee asset, at fair value
All other, at fair value
Total other assets
Total assets carried at fair value on a
recurring basis
Liabilities:
Debt securities of consolidated trusts held by
third parties, at fair value
Other debt, at fair value
Derivative liabilities, net:
$
$
Interest-rate swaps
Option-based derivatives
Other
Subtotal, before netting adjustments
Netting adjustments(1)
Total derivative liabilities, net
Total liabilities carried at fair value on
a recurring basis
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,254
4,382
6,636
6,636
6,636
—
—
—
—
—
—
—
—
—
—
$
38,720
10,666
155
27,229
—
—
—
—
—
76,770
9,006
6,959
24
133
16,122
—
—
—
16,122
92,892
8,727
10,009
4,112
99
14,220
—
14,220
—
—
—
$
1,939
131
12
3,109
27,499
6,574
8,706
3,495
684
52,149
343
221
74
8
646
—
—
—
646
52,795
—
10
—
1
11
—
11
1,611
9
1,620
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(13,168)
(13,168)
—
—
—
40,659
10,797
167
30,338
27,499
6,574
8,706
3,495
684
128,919
9,349
7,180
98
141
16,768
2,254
4,382
6,636
23,404
152,323
8,727
10,019
4,112
100
14,231
(13,168)
1,063
1,611
9
1,620
6,636
$
115,839
$
54,426
$
(13,168) $
163,733
— $
—
—
—
—
—
—
—
59
$
1,155
— $
1,528
— $
—
59
2,683
13,022
201
68
13,291
—
13,291
295
3
38
336
—
336
—
—
—
—
(13,447)
(13,447)
13,317
204
106
13,627
(13,447)
180
— $
14,505
$
1,864
$
(13,447) $
2,922
249
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Fair Value at December 31, 2012
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(in millions)
Netting
Adjustment(1)
Total
Assets:
Investments in securities:
Available-for-sale, at fair value:
Mortgage-related securities:
$
Freddie Mac
Fannie Mae
Ginnie Mae
CMBS
Subprime
Option ARM
Alt-A and other
Obligations of states and political
subdivisions
Manufactured housing
Total available-for-sale securities, at
fair value
Trading, at fair value:
Mortgage-related securities:
Freddie Mac
Fannie Mae
Ginnie Mae
Other
Total mortgage-related securities
Non-mortgage-related securities:
Asset-backed securities
Treasury bills
Treasury notes
Total non-mortgage-related securities
Total trading securities, at fair
value
Total investments in securities
Mortgage loans:
Held-for-sale, at fair value
Derivative assets, net:
Interest-rate swaps
Option-based derivatives
Other
Subtotal, before netting adjustments
Netting adjustments(1)
Total derivative assets, net
Other assets:
Guarantee asset, at fair value
All other, at fair value
Total other assets
Total assets carried at fair value on a
recurring basis
Liabilities:
Debt securities of consolidated trusts held by
third parties, at fair value
Other debt, at fair value
Derivative liabilities, net:
$
$
Interest-rate swaps
Option-based derivatives
Other
Subtotal, before netting adjustments
Netting adjustments(1)
Total derivative liabilities, net
Total liabilities carried at fair value on
a recurring basis
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,160
19,061
20,221
20,221
20,221
—
27
—
37
64
—
64
—
—
—
$
56,713
15,117
193
47,878
—
—
—
—
—
119,901
9,189
10,026
39
135
19,389
292
—
—
292
19,681
139,582
—
13,920
10,097
92
24,109
—
24,109
—
—
—
$
1,802
163
16
3,429
26,457
5,717
10,904
5,798
709
54,995
1,165
312
92
21
1,590
—
—
—
—
1,590
56,585
14,238
18
—
2
20
—
20
1,029
114
1,143
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(23,536)
(23,536)
—
—
—
58,515
15,280
209
51,307
26,457
5,717
10,904
5,798
709
174,896
10,354
10,338
131
156
20,979
292
1,160
19,061
20,513
41,492
216,388
14,238
13,965
10,097
131
24,193
(23,536)
657
1,029
114
1,143
20,285
$
163,691
$
71,986
$
(23,536) $
232,426
— $
—
5
—
3
8
—
8
$
70
—
— $
2,187
— $
—
70
2,187
30,213
749
52
31,014
—
31,014
26
1
40
67
—
67
—
—
—
—
(30,911)
(30,911)
30,244
750
95
31,089
(30,911)
178
8
$
31,084
$
2,254
$
(30,911) $
2,435
250
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(1) Represents counterparty netting, cash collateral netting and net derivative interest receivable or payable. The net cash collateral posted was $871
million and $8.2 billion, respectively, at December 31, 2013 and 2012. The net interest receivable (payable) of derivative assets and derivative
liabilities was $(0.6) billion and $(0.8) billion at December 31, 2013 and 2012, respectively, which was mainly related to interest rate swaps.
Changes in Fair Value Levels
We monitor the availability of observable market data to: (a) assess the appropriate classification of financial instruments
within the fair value hierarchy; and (b) transfer assets and liabilities between Level 1, Level 2, and Level 3 accordingly.
Observable market data includes, but is not limited to, quoted prices and market transactions. Changes in economic conditions
or the volume and level of activity in a market generally will drive changes in availability of observable market data. Changes
in availability of observable market data, which also may result in changing the valuation technique used, are generally the
cause of transfers between Level 1, 2, or 3.
For the year ended December 31, 2013, our transfers between Level 1 and Level 2 assets and liabilities were $27 million
and $5 million, respectively. For the year ended December 31, 2012, our transfers between Level 1 and Level 2 assets and
liabilities were less than $1 million.
The table below presents a reconciliation of all assets and liabilities measured in our consolidated balance sheets at fair
value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2013 and 2012,
including transfers into and out of Level 3 assets and liabilities. The table also presents gains and losses due to changes in fair
value, including both realized and unrealized gains and losses, recognized in our consolidated statements of comprehensive
income for Level 3 assets and liabilities for the years ended December 31, 2013 and 2012. When assets and liabilities are
transferred between levels, we recognize the transfer as of the beginning of the period.
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Table 16.2 — Fair Value Measurements of Assets and Liabilities Using Significant Unobservable Inputs
Realized and unrealized gains (losses)
Year Ended December 31, 2013
Balance,
January 1,
2013
Included in
earnings(1)(2)(3)(4)
Included in
other
comprehensive
income(1)
Total
Purchases
Issues
Sales
(in millions)
Settlements,
net
Transfers
into
Level 3(5)
Transfers
out of
Level 3(5)
Balance,
December 31,
2013
Unrealized
gains
(losses)
still held(6)
Assets
Investments in
securities:
Available-for-sale,
at fair value:
Mortgage-
related
securities:
Freddie Mac
Fannie Mae
Ginnie Mae
CMBS
Subprime
Option ARM
Alt-A and other
Obligations of
states and
political
subdivisions
Manufactured
housing
Total
available-
for-sale
mortgage-
related
securities
Trading, at fair
value:
Mortgage-
related
securities:
Freddie Mac
Fannie Mae
Ginnie Mae
Other
Total
trading
mortgage-
related
securities
Mortgage loans:
Held-for-sale, at
fair value
Other assets:
Guarantee asset(7)
All other, at fair
value
Total other
assets
Liabilities
Other debt, at fair
value
$
1,802
$
163
16
3,429
26,457
5,717
10,904
5,798
709
2
—
—
6
(1,260)
(61)
(128)
13
(1)
$
109
$ 111
$
239
$ — $
(86)
$
(152)
$
(3)
—
(3)
—
(266)
(260)
6,648
1,694
1,341
5,388
1,633
1,213
(188)
(175)
62
61
—
—
—
—
—
—
(10)
—
—
—
—
—
—
—
—
—
—
—
(36)
(403)
(75)
(2,001)
(29)
(4)
(24)
(3,943)
(701)
(1,410)
(533)
(1,585)
—
(86)
25
—
—
—
—
—
—
—
—
$
— $
1,939
$
—
—
—
—
—
—
—
—
131
12
3,109
27,499
6,574
8,706
3,495
684
—
—
—
—
(1,258)
(58)
(179)
—
(1)
54,995
(1,429)
9,397
7,968
229
—
(3,134)
(7,934)
25
—
52,149
(1,496)
1,165
312
92
21
(50)
(42)
(1)
—
—
—
—
—
(50)
(42)
(1)
—
1,271
269
(1,476)
2
3
—
—
—
—
(2)
—
—
(64)
(25)
(15)
(3)
1,590
(93)
—
(93)
1,276
269
(1,478)
(107)
14,238
1,029
114
1,143
—
4
30
34
—
—
—
—
—
4
30
34
—
—
—
—
—
688
—
—
—
(135)
688
(135)
—
(110)
—
(110)
Realized and unrealized (gains) losses
1
43
—
—
44
—
—
—
—
(773)
(67)
(5)
(10)
343
221
74
8
(53)
(42)
(1)
—
(855)
646
(96)
(14,238)
—
—
—
—
1,611
9
1,620
—
4
7
11
Balance,
January 1,
2013
Included in
earnings(1)(2)(3)(4)
Included in
other
comprehensive
income(1)
Total
Purchases
Issues
Sales
(in millions)
Settlements,
net
Transfers
into
Level 3(5)
Transfers
out of
Level 3(5)
Balance,
December 31,
2013
Unrealized
(gains)
losses
still held(6)
$
2,187
$
11
$
— $
11
$
— $1,130
$ — $
(670)
$
— $
(1,130)
$
1,528
$
Net derivatives(8)
47
301
—
301
—
12
—
(35)
—
—
325
4
274
252
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Realized and unrealized gains (losses)
Year Ended December 31, 2012
Balance,
January 1,
2012
Included in
earnings(1)(2)(3)(4)
Included in
other
comprehensive
income(1)
Total
Purchases
Issues
Sales
(in millions)
Settlements,
net
Transfers
into
Level 3
Transfers
out of
Level 3
Balance,
December 31,
2012
Unrealized
gains
(losses)
still held(6)
Assets
Investments in
securities:
Available-for-sale,
at fair value:
Mortgage-
related
securities:
Freddie Mac
$
2,048
$
— $
Fannie Mae
Ginnie Mae
CMBS
Subprime
Option ARM
Alt-A and
other
Obligations
of states and
political
subdivisions
Manufactured
housing
Total
available-
for-sale
mortgage-
related
securities
Trading, at fair
value:
Mortgage-
related
securities:
Freddie Mac
Fannie Mae
Ginnie Mae
Other
Total
trading
mortgage-
related
securities
Mortgage loans:
Held-for-sale, at
fair value
Other assets:
Guarantee asset(7)
All other, at fair
value
Total other
assets
Liabilities
Other debt, at fair
value
Net derivatives(8)
$
18
$
— $ — $ — $
(144)
$
— $
(120)
$
1,802
$
172
12
3,756
27,999
5,865
10,868
7,824
766
—
—
76
(1,274)
(552)
18
1
—
(38)
4,301
1,417
1
—
38
3,027
865
(196)
1,822
1,626
19
(4)
108
127
47
43
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(331)
—
(15)
(31)
(4)
(34)
(4,569)
(998)
—
(1,601)
(482)
(1,671)
—
(100)
21
8
—
—
—
11
—
—
—
—
—
—
—
—
—
—
163
16
3,429
26,457
5,717
—
—
—
—
(1,274)
(556)
10,904
(196)
5,798
709
—
(4)
59,310
(1,931)
7,676
5,745
—
—
(828)
(9,152)
40
(120)
54,995
(2,030)
1,866
538
22
90
(389)
(131)
1
—
—
—
—
—
(389)
(131)
1
—
25
(5)
—
—
95
—
—
18
(76)
5
—
(10)
(206)
(35)
(16)
(3)
92
—
98
—
(242)
(60)
(13)
(74)
1,165
312
92
21
(390)
(131)
1
(1)
2,516
(519)
—
(519)
20
113
(81)
(260)
190
(389)
1,590
(521)
9,710
1,011
— 1,011
25,340
— (21,764)
752
151
903
(23)
(37)
(60)
—
—
—
(23)
(37)
(60)
—
—
—
382
—
382
—
—
—
(59)
(82)
—
(82)
—
—
—
—
—
—
—
—
14,238
263
1,029
114
1,143
(23)
(37)
(60)
Realized and unrealized (gains) losses
Balance,
January 1,
2012
Included in
earnings(1)(2)(3)(4)
Included in
other
comprehensive
income(1)
Total
Purchases
Issues
Sales
(in millions)
Settlements,
net
Transfers
into
Level 3
Transfers
out of
Level 3
Balance,
December 31,
2012
Unrealized
(gains)
losses
still held(6)
$
— $
(17)
(16)
$
30
— $ (16)
$
— $ — $ — $
(812)
$
3,015
$
— $
2,187
$
—
30
—
3
—
(2)
—
33
47
(6)
15
(1) Changes in fair value for available-for-sale investment securities are recorded in AOCI, while gains and losses from sales are recorded in other gains
(losses) on investment securities recognized in earnings on our consolidated statements of comprehensive income. For mortgage-related securities
classified as trading, the realized and unrealized gains (losses) are recorded in other gains (losses) on investment securities recognized in earnings on
our consolidated statements of comprehensive income.
(2) Changes in fair value of derivatives not designated as accounting hedges are recorded in derivative gains (losses) on our consolidated statements of
comprehensive income.
(3) Changes in fair value of the guarantee asset are recorded in other income on our consolidated statements of comprehensive income.
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(4) For held-for-sale mortgage loans with the fair value option elected, gains (losses) on fair value changes and from sales of mortgage loans are recorded
in other income on our consolidated statements of comprehensive income.
(5) Transfers out of Level 3 during the year ended December 31, 2013 are due to: (a) our enhancement to our pricing methodology for multifamily
mortgage loans, held-for-sale, to more directly reflect the increasingly observable nature of our exit market of loan securitization; and (b) an increased
volume and level of activity in the market and availability of price quotes from dealers and third-party pricing services for: (i) trading mortgage-related
securities; and (ii) STACR debt notes included in other debt at fair value.
(6) Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in unrealized gains and losses related to
assets and liabilities classified as Level 3 that were still held at December 31, 2013 and 2012, respectively. Included in these amounts are credit-related
other-than-temporary impairments recorded on available-for-sale securities.
(7) We estimate that all amounts recorded for unrealized gains and losses on our guarantee asset relate to those guarantee asset amounts still recorded on
our balance sheet. The amounts reflected as included in earnings represent the periodic fair value changes of our guarantee asset.
(8) Net derivatives include derivative assets and derivative liabilities prior to counterparty netting, cash collateral netting, net trade/settle receivable or
payable and net derivative interest receivable or payable.
Assets Measured at Fair Value on a Non-Recurring Basis
We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis after our initial
recognition. These adjustments usually result from application of lower-of-cost-or-fair-value accounting or write-downs of
individual assets. These assets include impaired held-for-investment multifamily mortgage loans and REO, net.
The table below presents assets measured in our consolidated balance sheets at fair value on a non-recurring basis at
December 31, 2013 and 2012, respectively.
Table 16.3 — Assets Measured at Fair Value on a Non-Recurring Basis
Quoted Prices
in Active
Markets
for Identical
Assets (Level 1)
2013
Significant
Other
Observable
Inputs
(Level 2)
Fair Value at December 31,
Significant
Unobservable
Inputs
(Level 3)
Total
Quoted Prices
in Active
Markets
for Identical
Assets (Level 1)
(in millions)
2012
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets measured at
fair value on a non-
recurring basis:
Mortgage loans:(1)
Held-for-investment
REO, net(2)
Total assets measured
at fair value on a non-
recurring basis
$
$
— $
—
— $
—
515
$
515
$
1,837
1,837
— $
—
— $
—
1,025
$ 1,025
776
776
— $
— $
2,352
$ 2,352
$
— $
— $
1,801
$ 1,801
Assets measured at fair value on a non-recurring basis:
Mortgage loans:(1)
Held-for-investment
REO, net(2)
Total gains (losses)
Total Gains (Losses)(3)
Year Ended December 31,
2013
2012
(in millions)
2011
$
$
22
$
(50)
(28) $
(49) $
(22)
(71) $
(16)
(118)
(134)
(1) Represents carrying value and related write-downs of loans for which adjustments are based on the fair value amounts. These loans consist of impaired
multifamily mortgage loans that are classified as held-for-investment and have a related valuation allowance.
(2) Represents the fair value and related losses of foreclosed properties that were measured at fair value subsequent to their initial classification as REO,
net. The carrying amount of REO, net was written down to fair value of $1.8 billion, less estimated costs to sell of $118 million (or approximately $1.7
billion) at December 31, 2013. The carrying amount of REO, net was written down to fair value of $0.8 billion , less estimated costs to sell of $50
million (or approximately $0.7 billion) at December 31, 2012.
(3) Represents the total net gains (losses) recorded on items measured at fair value on a non-recurring basis for the years ended December 31, 2013, 2012,
and 2011, respectively.
Valuation Processes and Controls Over Fair Value Measurement
We designed our control processes so that our fair value measurements are appropriate and reliable, that they are based on
observable inputs where possible, and that our valuation approaches are consistently applied and the assumptions and inputs are
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reasonable. Our control processes provide a framework for segregation of duties and oversight of our fair value methodologies,
techniques, validation procedures, and results.
Groups within our Finance division, independent of our business functions, execute and validate the valuation processes
and are responsible for determining the fair values of the majority of our financial assets and liabilities. In determining fair
value, we consider the credit risk of our counterparties in estimating the fair values of our assets and our own credit risk in
estimating the fair values of our liabilities. The fair values determined by our Finance division are further verified by an
independent group within our Enterprise Risk Management (ERM) division.
The validation procedures performed by ERM are intended to ensure that the prices we receive from third parties are
consistent with our observations of market activity, and that fair value measurements developed using internal data reflect the
assumptions that a market participant would use in pricing our assets and liabilities. These validation procedures include
performing a monthly independent verification of fair value measurements through independent modeling, analytics, and
comparisons to other market source data, if available. Where applicable, prices are back-tested by comparing actual settlement
prices to our fair value measurements. Analytical procedures include automated checks consisting of prior-period variance
analysis, comparisons of actual prices to internally calculated expected prices based on observable market changes, analysis of
changes in pricing ranges, relative value comparisons, and comparisons using modeled yields. Thresholds are set for each
product category by ERM to identify exceptions that require further analysis. If a price is outside of our established thresholds,
we perform additional validation procedures, including supplemental analytics and/or follow up discussions with the third-party
provider. If we are unable to validate the reasonableness of a given price, we ultimately do not use that price for fair value
measurements in our consolidated financial statements. These reviews are risk-based, cover all product categories, and are
executed before we finalize the prices used in preparing our fair value measurements for our financial statements.
In addition to performing the validation procedures noted above, ERM provides independent risk governance over all
valuation processes by establishing and maintaining a corporate-wide valuation control policy. ERM also independently
reviews key judgments, methodologies, and valuation techniques to ensure compliance with established policies.
Our Valuation & Finance Model Committee (“Valuation Committee”), which includes representation from our business
areas, ERM, and Finance divisions, provides senior management’s governance over valuation processes, methodologies,
controls and fair value measurements. Identified exceptions are reviewed and resolved through the verification process and the
fair value measurements used in the financial statements are approved at the Valuation Committee.
Where models are employed to assist in the measurement and verification of fair values, changes made to those models
during the period are reviewed and approved according to the corporate model change governance process, with all material
changes reviewed at the Valuation Committee. Inputs used by models are regularly updated for changes in the underlying data,
assumptions, valuation inputs, and market conditions, and are subject to the valuation controls noted above.
Use of Third-Party Pricing Data in Fair Value Measurement
As discussed in the sections that follow, many of our valuation techniques use, either directly or indirectly, data provided
by third-party pricing services or dealers. The techniques used by these pricing services and dealers to develop the prices
generally are either: (a) a comparison to transactions involving instruments with similar collateral and risk profiles, adjusted as
necessary based on specific characteristics of the asset or liability being valued; or (b) industry-standard modeling, such as a
discounted cash flow model. The prices provided by the pricing services and dealers reflect their observations and assumptions
related to market activity, including risk premiums and liquidity adjustments. The models and related assumptions used by the
pricing services and dealers are owned and managed by them and, in many cases, the significant inputs used in the valuation
techniques are not reasonably available to us. However, we have an understanding of the processes and assumptions used to
develop the prices based on our ongoing due diligence, which includes discussions with our vendors at least annually and often
more frequently. We believe that the procedures executed by the pricing services and dealers, combined with our internal
verification and analytical procedures, provide assurance that the prices used in our financial statements comply with the
accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would
use in pricing our assets and liabilities. The price quotes we receive are non-binding both to us and to our counterparties.
In many cases, we receive prices from third-party pricing services or dealers and use those prices without adjustment, and
the significant inputs used to develop the prices are not reasonably available to us. For a large majority of the assets and
liabilities we value using pricing services and dealers, we obtain prices from multiple external sources and use the median of
the prices to measure fair value. This technique is referred to below as “median of external sources.” The significant inputs
used in the fair value measurement of assets and liabilities that are valued using the median of external sources pricing
technique are the third-party prices. Significant increases (decreases) in any of the third-party prices in isolation may result in a
significantly higher (lower) fair value measurement. In limited circumstances, we may be able to receive pricing information
from only a single external source. This technique is referred to below as “single external source.”
In limited circumstances, we receive prices or pricing-related data that we adjust or use as an input to our models or other
valuation techniques to measure fair value, as described in “Valuation Techniques for Assets and Liabilities Measured in Our
Consolidated Balance Sheets at Fair Value — Derivative Assets, Net and Derivative Liabilities, Net.” In other limited
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circumstances, we receive prices from a third-party provider and use those prices without adjustment, but the inputs used by the
third-party provider to develop the prices are reasonably available to us, as described in “Valuation Techniques for Assets and
Liabilities Measured in Our Consolidated Balance Sheets at Fair Value — Mortgage Loans, Held-for-Sale” and “ — Other
Assets and Other Liabilities.”
Valuation Techniques for Assets and Liabilities Measured in Our Consolidated Balance Sheets at Fair Value
We categorize assets and liabilities that we measure and report in our consolidated balance sheets at fair value within the
fair value hierarchy based on the valuation techniques used to derive the fair value and our judgment regarding the
observability of the related inputs. The following is a description of the valuation techniques we use for fair value measurement
and disclosure; the significant inputs used in those techniques (if applicable); our basis for classifying the measurements as
Level 1, Level 2, or Level 3 of the fair value hierarchy; and, for those measurements classified as Level 3 of the hierarchy, a
narrative description of the sensitivity of the fair value measurement to changes in significant unobservable inputs and a
description of any interrelationships between those unobservable inputs. Although the sensitivities of the unobservable inputs
are generally discussed below in isolation, interrelationships exist among the inputs such that a change in one unobservable
input typically results in a change to one or more of the other inputs. For example, the most common interrelationship that
impacts the majority of our fair value measurements is between future interest rates, prepayment speeds, and probabilities of
default. Generally, a change in the assumption used for future interest rates results in a directionally opposite change in the
assumption used for prepayment speeds and a directionally similar change in the assumption used for probabilities of default.
Each technique discussed below may not be used in a given reporting period, depending on the composition of our assets
and liabilities measured at fair value and relevant market activity during that period.
Investments in Securities
Mortgage-Related Securities
Agency Securities
Agency securities, both trading and available-for-sale, consist of mortgage-related securities issued and guaranteed by
Freddie Mac, Fannie Mae, and Ginnie Mae. The valuation techniques for agency securities vary depending on the type of
security.
Fixed-rate single-class securities are valued using observable prices for similar securities in the TBA market. The
observable TBA prices vary based on agency, term, coupon, and settlement date. In addition, we may adjust the TBA price
accordingly based on matrices we receive from external dealers for securities with specific collateral characteristics if we
observe those collateral characteristics to be trading at a premium or discount to the TBA price. Significant inputs used in this
technique are the TBA prices and the security characteristics mentioned above. These securities have observable market pricing
and are classified as Level 2.
Adjustable-rate single-class securities and the majority of multiclass securities are valued using the median of external
sources. For certain multiclass securities, we are able to receive prices from only a single external source. Adjustable-rate
single-class securities and the multiclass securities valued using these techniques generally have observable market prices and
are classified as Level 2. However, certain multiclass securities valued using these techniques are classified as Level 3 when
there is a low volume or level of activity in the market for those securities.
Certain multiclass securities for which we are not able to obtain external prices due to limited relevant market activity are
valued using a discounted cash flow technique. Under this technique, securities are valued by starting with a third-party market
price for a similar security within our portfolio. We then use our proprietary prepayment and interest rate models to calculate an
OAS for the similar security, which is used to determine the net present value of the projected cash flows for the security to be
valued. The significant unobservable input used in the fair value measurement of these securities is the OAS. Significant
increases (decreases) in the OAS in isolation would result in a significantly lower (higher) fair value measurement. These
securities are classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
Certain complex multiclass securities for which current cash flow information is not readily available are valued using a
risk-metric pricing technique. Under this technique, securities are valued by starting with a prior period price and adjusting that
price for market changes in certain key risk metrics such as key rate durations. If necessary, our judgment is applied to adjust
the price based on specific security characteristics. The significant unobservable inputs used in the fair value measurement of
these securities are the key risk metrics. Significant increases (decreases) in key rate durations in isolation would result in a
significantly lower (higher) fair value measurement. These securities are classified as Level 3 as significant inputs used in the
fair value measurement are unobservable.
Commercial Mortgage-Backed Securities
The majority of our CMBS are valued using the median of external sources. For a small number of CMBS, we are able to
receive prices from only a single external source. CMBS valued using these techniques generally have observable market
pricing and are classified as Level 2. However, certain CMBS valued using these techniques are classified as Level 3 when
there is a low volume or level of activity in the market for those securities.
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Subprime, Option ARM, and Alt-A and Other (Mortgage-Related); Obligations of States and Political Subdivisions; and
Manufactured Housing
Subprime, option ARM, and Alt-A and other securities consist of non-agency mortgage-related securities backed by
subprime, option ARM, and/or Alt-A and other collateral. Obligations of states and political subdivisions consist primarily of
housing revenue bonds. Manufactured housing securities consist of non-agency mortgage-related securities backed by loans on
manufactured housing properties. These types of securities are all valued based on the median of external sources and are
classified as Level 3 due to the low volume and level of activity in the markets for these securities.
Non-Mortgage-Related Securities
Asset-Backed Securities
Asset-backed securities consist primarily of private-label non-mortgage-related securities. These securities are valued
using the median of external sources. These securities have observable market pricing and are classified as Level 2.
Treasury Bills and Treasury Notes
Treasury bills and Treasury notes are valued using quoted prices in active markets for identical assets and are classified as
Level 1.
Mortgage Loans, Held-for-Sale
Mortgage loans, held-for-sale consist of multifamily mortgage loans with the fair value option elected and are measured
at fair value on a recurring basis. Mortgage loans, held-for-sale are primarily valued using market prices from a third-party
pricing service that uses a discounted cash flow technique calibrated to the exit price for these loans as reflected in the K
Certificate securitization market. Under this technique, the pricing service forecasts cash flows for the various mortgage loans
and discounts them at a market rate, including a spread that is based on our recent securitization activity, which we have
defined as our principal exit market. These loans are classified as Level 2 given the observable nature of our securitization
pricing.
Mortgage Loans, Held-for-Investment
Mortgage loans, held-for-investment are measured at fair value on a non-recurring basis and represent multifamily
mortgage loans that have been written down to the fair value of the underlying collateral due to impairment. The underlying
collateral is primarily valued using either an income capitalization technique or third-party appraisals.
Under the income capitalization technique, the collateral is valued by discounting the present value of future cash flows
by applying an overall capitalization rate to the forecasted net operating income. The significant unobservable input used in the
fair value measurement of these loans is the capitalization rate, which is determined through analysis of the DSCR. Significant
increases (decreases) in the capitalization rate in isolation would result in a significantly lower (higher) fair value measurement.
Under the third-party appraisal technique, we use the prices provided by third-party appraisers without adjustment. The
third-party appraisers consider the physical condition of the property and use comparable sales and other market data in
determining the appraised value.
Impaired multifamily mortgage loans held-for-investment are classified as Level 3 as significant inputs used in the fair
value measurement are unobservable.
Derivative Assets, Net and Derivative Liabilities, Net
Derivative assets and derivative liabilities consist of interest-rate swaps, option-based derivatives, and other derivatives,
such as exchange-traded futures, foreign-currency swaps, and certain forward purchase and sale commitments.
Interest-Rate Swaps
Interest-rate swaps consist of receive-fixed, pay-fixed, and basis swaps. The majority of our interest-rate swaps are
valued using a discounted cash flow technique. Under this technique, interest-rate swaps are valued by using the appropriate
yield curves to discount the expected cash flows of both the fixed and variable rate components of the swap contracts. The
significant inputs used in the fair value measurement of these derivatives are market-based interest rates. These derivatives are
classified as Level 2 as the significant inputs used in the fair value measurement are observable in active markets.
Option-Based Derivatives
Option-based derivatives consist of interest rate caps, interest rate floors, call swaptions, and put swaptions. We value the
majority of our option-based derivatives using option-pricing models. Dealer-supplied interest rate volatility matrices are a key
input into these models. Within each matrix, prices are provided for a range of option terms, swap terms, and strikes. Our
models then interpolate to determine the volatility for each instrument and use that volatility as an input to the option-pricing
model. These derivatives are classified as Level 2 as the significant inputs used are observable in active markets.
Other Derivatives
Other derivatives consist of exchange-traded futures, foreign-currency swaps, and certain forward purchase and sale
commitments.
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Exchange-traded futures are valued using quoted prices in active markets for identical assets or liabilities and are
classified as Level 1.
Foreign-currency swaps are valued using a discounted cash flow technique. Under this technique, foreign-currency swaps
are valued using yield curves derived from observable market data to calculate and discount the expected cash flows for the
swap contracts. The significant inputs used in the fair value measurement of these derivatives are market-based interest rates
and foreign currency exchange rates. These derivatives are classified as Level 2 as the significant inputs used in the fair value
measurement are observable in active markets.
Certain purchase and sale commitments are also considered to be derivatives and are valued using the same techniques
we use to value the underlying instruments we are committing to purchase or sell. These instruments generally have observable
market pricing and are classified as Level 2. Valuation techniques for commitments to purchase or sell investment securities
and to extinguish or issue debt securities of consolidated trusts are further discussed in “Investments in Securities.” Valuation
techniques for commitments to purchase single-family mortgage loans are further discussed in “Valuation Techniques for
Assets and Liabilities Not Measured in Our Consolidated Balance Sheets at Fair Value, but for Which the Fair Value is
Disclosed — Mortgage Loans.”
Other Assets and Other Liabilities
Other assets consist of our guarantee asset related to guarantees issued to unconsolidated securitization trusts and
mortgage servicing rights. Other liabilities, from time to time, consist of mortgage servicing rights.
Guarantee Asset
Our guarantee asset is primarily related to our multifamily guarantees. The multifamily guarantee asset is valued using a
discounted cash flow technique. Under this technique, the present value of future cash flows related to our management and
guarantee fee is discounted based on the current OAS-to-benchmark interest rates for new guarantees, which are driven by
changes in our estimates of credit risk and changes in the credit profile of the multifamily guarantee portfolio. The significant
unobservable input used in the fair value measurement of the guarantee asset is the OAS-to-benchmark rates. Significant
increases (decreases) in the OAS in isolation would result in a significantly lower (higher) fair value measurement.
Our guarantee asset also consists of single family guarantees primarily related to long-term standby commitments, the
vast majority of which is valued using the median of external sources. Under this technique, we obtain multiple price quotes
from dealers, who provide estimates based on pricing for comparable benchmark securities with specific adjustments to reflect
the unique characteristics of this asset class.
The guarantee asset is classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
All Other Assets and Liabilities
All other assets and, from time to time, other liabilities consist primarily of mortgage servicing rights. Mortgage servicing
rights are valued using a discounted cash flow technique by a third-party vendor that specializes in valuing and brokering sales
of mortgage servicing rights. Under this technique, the cash flows from the mortgage servicing rights are discounted based on
estimated prepayment rates, estimated costs to service both performing and non-performing loans, and estimated servicing
income per loan (including ancillary income). The significant unobservable inputs used in the fair value measurement of
mortgage servicing rights are the estimates of prepayment rates, costs to service per loan, and servicing income per loan.
Significant increases (decreases) in cost to service per loan, and prepayment rate in isolation would result in a significantly
lower (higher) fair value measurement. Significant increases (decreases) in servicing income per loan in isolation would result
in a significantly higher (lower) fair value measurement. Mortgage servicing rights are classified as Level 3 as significant
inputs used in the fair value measurement are unobservable.
REO, Net
REO, net consists primarily of single-family REO. REO, net is initially measured at its fair value less costs to sell, and is
subsequently measured at the lower of cost or fair value less costs to sell. REO, net is valued using an internal model. Under
this technique, our internal model uses actual REO disposition prices for the prior three months, calibrated to the most recent
month's disposition prices, to determine the average sales proceeds per property at the state level, expressed as a fixed
percentage based on the ratio of the disposition price to the UPB of the associated loan. This fixed percentage is then applied to
the UPB immediately prior to the acquisition to determine the fair value of the individual property. Certain adjustments, such as
state-level adjustments, are made to the estimated fair value, as applicable. The significant unobservable input used in the fair
value measurement of REO, net is the historical average sales proceeds per property by state. Significant increases (decreases)
in the historical average sales proceeds per property by state in isolation would result in a significantly higher (lower) fair value
measurement. REO, net is classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
Debt Securities of Consolidated Trusts Held by Third Parties, at Fair Value
We elected the fair value option for certain debt securities of consolidated trusts held by third parties. These consist of
certain multifamily K Certificates where we are in a first loss position and certain REMIC interest-only mortgage-related debt
securities. These are valued using either the median of external sources or a single external source (which may be the
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counterparty to the transaction) and are classified as Level 2 due to market pricing that is observable. See “Fair Value Option —
Debt Securities of Consolidated Trusts Held by Third Parties” for additional information.
Other Debt, at Fair Value
We elected the fair value option on: (a) STACR debt notes; (b) extendible variable-rate notes containing quarterly options
for investors to extend the maturity of the notes; and (c) foreign-currency denominated debt instruments. Our STACR debt
notes are valued using the median of external sources and are classified as Level 2 based on observable market prices.
Extendible variable-rate notes and foreign-currency denominated debt are valued using either the median of external sources or
a single external source (which may be the counterparty to the transaction) and are classified as Level 3 due to the low volume
and level of activity in the market for these types of debt instruments. See “Fair Value Option — Other Debt” for additional
information.
Quantitative Information about Level 3 Fair Value Measurements for Assets and Liabilities Measured in Our
Consolidated Balance Sheets at Fair Value
The table below provides valuation techniques, the range, and the weighted average of significant unobservable inputs for
assets and liabilities measured in our consolidated balance sheets at fair value on a recurring basis using unobservable inputs
(Level 3) as of December 31, 2013 and 2012.
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Table 16.4 — Quantitative Information about Recurring Level 3 Fair Value Measurements
Total
Fair
Value
Level 3
Fair
Value
(dollars in millions)
Predominant
Valuation
Technique(s)
December 31, 2013
Unobservable Inputs(1)
Type
Range
Weighted
Average
Recurring fair value measurements
Assets
Investments in securities
Available-for-sale, at fair value
Mortgage-related securities
Agency securities:
Freddie Mac
Total Freddie Mac
Fannie Mae
Total Fannie Mae
Ginnie Mae
Total Ginnie Mae
CMBS
Total CMBS
Subprime, option ARM, and Alt-A:
Subprime
Total subprime
Option ARM
Total option ARM
Alt-A and other
$
$
40,659
10,797
167
30,338
27,499
6,574
Total Alt-A and other
8,706
Obligations of states and political subdivisions
Total obligations of states and political subdivisions
3,495
Manufactured housing
Total manufactured housing
684
1,547
133
259
1,939
91
26
14
131
6
6
12
2,942
167
3,109
25,367
2,132
27,499
4,995
705
874
6,574
4,028
3,503
1,175
8,706
3,067
428
3,495
577
107
684
Total available-for-sale mortgage-related
securities
Trading, at fair value
128,919
52,149
Mortgage-related securities
Agency securities:
Freddie Mac
Total Freddie Mac
Fannie Mae
Total Fannie Mae
Ginnie Mae
Total Ginnie Mae
Other
Total other
Total trading mortgage-related securities
297
46
343
191
30
221
74
74
7
1
8
646
9,349
7,180
98
141
16,768
Total investments in securities
$
145,687
$
52,795
Risk metric
Single external source
Other
Effective duration(2)
External pricing source
2.25 - 5.17 years
2.44 years
$99.3 - $99.3
Single external source
External pricing source
Median of external sources
External pricing sources
$110.5 - $110.5
$104.1 - $105.3
Other
Median of external sources
Discounted cash flows
Single external source
External pricing source
$90.9 - $90.9
Other
Median of external sources
External pricing sources
$64.5 - $73.8
Other
Median of external sources
External pricing sources
Discounted cash flows
OAS
$60.8- $67.0
461 - 944 bps
Other
Single external source
External pricing source
Median of external sources
External pricing sources
$83.4 - $83.4
$72.5 - $79.1
Other
Median of external sources
External pricing sources
$98.7 - $99.7
Other
Median of external sources
External pricing sources
$86.7 - $92.8
Other
$
$
$
$
$
$
$
$
$
$
99.3
110.5
104.7
90.9
68.7
64.4
729 bps
83.4
75.7
99.2
89.7
Discounted cash flows
OAS
(5) - 9,441 bps
364 bps
Other
Discounted cash flows
Other
Median of external sources
Single external source
Other
OAS
(2,257) - 2,295 bps
199 bps
Other assets:
Guarantee asset, at fair value
Total guarantee asset, at fair value
All other, at fair value
Total all other, at fair value
Total other assets
Liabilities
Other debt, at fair value
Total other debt recorded at fair value
Net derivatives
Total net derivatives
1,163
448
1,611
9
9
1,620
1,000
528
1,528
283
37
5
325
1,611
9
1,620
2,683
(883)
Discounted cash flows
OAS
16 - 202 bps
Median of external sources
External pricing sources
$11.6 - $25.4
$
53 bps
19.2
Other
Single external source
Median of external sources
External pricing source
External pricing sources
$100.0 - $100.0
$100.0 - $100.1
Single external source
Discounted cash flows
Other
External pricing source
$0.8 - $0.8
$
$
100.0
100.0
0.8
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Recurring fair value measurements
Assets
Investments in securities
Available-for-sale, at fair value
Mortgage-related securities
Agency securities:
Freddie Mac
Total Freddie Mac
Fannie Mae
Total Fannie Mae
Ginnie Mae
Total Ginnie Mae
CMBS
Total CMBS
Subprime, option ARM, and Alt-A:
Subprime
Total subprime
Option ARM
Total option ARM
Alt-A and other
Total Alt-A and other
Obligations of states and political subdivisions
Trading, at fair value
Mortgage-related securities
Agency securities:
Freddie Mac
Total Freddie Mac
Fannie Mae
Total Fannie Mae
Ginnie Mae
Total Ginnie Mae
Other
Total other
Total trading mortgage-related securities
Total investments in securities
Mortgage loans:
Held-for-sale, at fair value
Other assets:
Guarantee asset, at fair value
Total guarantee asset, at fair value
All other, at fair value
Total all other, at fair value
Total other assets
Liabilities
Other debt, at fair value
Total other debt recorded at fair value
Net derivatives
Total
Fair
Value
Level 3
Fair
Value
(dollars in millions)
Predominant
Valuation
Technique(s)
December 31, 2012
Unobservable Inputs(1)
Type
Range
Weighted
Average
$
$
58,515
15,280
209
51,307
26,457
5,717
10,904
10,354
10,338
131
156
20,979
195,875
14,238
$
$
$
$
Effective duration(2)
0.89 -1.98 years
0.89 years
External pricing sources
External pricing source
$103.9 - $106.0
$116.0 - $116.0
External pricing source
Effective duration(2)
$99.4 - $99.4
9.3 -14.8 years
External pricing sources
$54.4 - $64.4
External pricing sources
$43.8 - $52.6
External pricing sources
External pricing source
$69.6 - $77.9
$71.8 - $71.8
External pricing sources
$102.3 - $103.2
External pricing sources
$80.0 - $85.5
$
$
$
$
$
$
$
$
$
105.2
116.0
99.4
12.0 years
59.2
47.9
73.8
71.8
102.7
82.8
OAS
OAS
(33,702) - 3,251 bps
502 bps
(1,263) - 3,251 bps
810 bps
Risk metric
Other
Median of external sources
Single external source
Other
Discounted cash flows
Median of external sources
Single external source
Risk metric
Other
Median of external sources
Other
Median of external sources
Other
Median of external sources
Single external source
Other
Median of external sources
Other
Median of external sources
Other
Discounted cash flows
Other
Discounted cash flows
Median of external sources
Other
Discounted cash flows
Median of external sources
1,477
325
1,802
78
65
20
163
8
8
16
2,462
432
535
3,429
24,890
1,567
26,457
5,631
86
5,717
8,562
1,901
441
10,904
5,533
265
5,798
693
16
709
54,995
1,112
53
1,165
312
312
87
5
92
12
9
21
1,590
56,585
14,238
Discounted cash flows
DSCR
Current LTV
1.25 - 6.88
19% - 80%
1.97
69%
OAS
0 - 368 bps
55 bps
Discounted cash flows
Other
Discounted cash flows
Other
870
159
1,029
112
2
114
1,143
1,188
999
2,187
47
1,029
114
1,143
2,187
(479)
Prepayment rate
Servicing income per loan
Cost to service per loan
7.73% -39.87%
0.19% - 0.52%
$78 - $354
21.23%
0.25%
141
101.7
99.9
$
$
$
Median of external sources
Single external source
External pricing sources
External pricing source
$101.7 - $102.0
$99.9 - $99.9
Other
Total obligations of states and political subdivisions
5,798
Manufactured housing
Total manufactured housing
Total available-for-sale mortgage-related
709
174,896
(1) Certain unobservable input types, range, and weighted average data are not disclosed in this table if they are associated with a class: (a) that has a Level 3 fair
value measurement that is not considered material; or (b) where we have disclosed the predominant valuation technique with related unobservable inputs for
the most significant portion of that class.
(2) Effective duration is used as a proxy to represent the aggregate impact of key rate durations.
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The table below provides valuation techniques, the range, and the weighted average of significant unobservable inputs for
assets and liabilities measured in our consolidated balance sheets at fair value on a non-recurring basis using unobservable
inputs (Level 3) as of December 31, 2013 and 2012.
Table 16.5 — Quantitative Information about Non-Recurring Level 3 Fair Value Measurements
December 31, 2013
Total
Fair
Value
Level 3
Fair
Value
(dollars in millions)
Predominant
Valuation
Technique(s)
Unobservable Inputs(1)
Type
Range
Weighted
Average
Non-recurring fair value
measurements
Mortgage loans
Held-for-investment
$
298
217
Income capitalization
Third-party appraisal
Capitalization rates(2)
Property value
Total held-for-investment
$
515
REO, net
515
1,837
Internal model(3)
Historical average sales
proceeds per property
by state(4)
Total REO, net
1,837
1,837
6% - 9%
$4 million -
$44 million
$17,500 -
$318,391
7%
$27 million
$
105,508
December 31, 2012
Total
Fair
Value
Level 3
Fair
Value
(dollars in millions)
Predominant
Valuation
Technique(s)
Unobservable Inputs(1)
Type
Range
Weighted
Average
Non-recurring fair value
measurements
Mortgage loans
Held-for-investment
Total held-for-investment
$
1,025
REO, net
Total REO, net
776
$
711
314
Income capitalization
Third-party appraisal
Capitalization rates(2)
Property value
1,025
771
5
776
Internal model(3)
Other
Historical average sales
proceeds per property
by state(4)
5% - 9%
$2 million -
$43 million
$32,186 -
$356,397
7%
$21 million
$102,697
(1) Certain unobservable input types, range, and weighted average data are not disclosed in this table if they are associated with a class: (a) that has a
Level 3 fair value measurement that is not considered material; or (b) where we have disclosed the predominant valuation technique with related
unobservable inputs for the most significant portion of that class.
(2) The capitalization rate “Range” and “Weighted Average” represent those loans that are valued using the Income Capitalization approach, which is the
predominant valuation technique used for this population. Certain loans in this population are valued using other techniques, and the capitalization rate
for those is not represented in the “Range” or “Weighted Average” above.
(3) Represents an internal model that uses actual REO disposition prices for the prior three months, calibrated to the most recent month's disposition prices,
to determine the average sales proceeds per property at the state level, expressed as a fixed percentage based on the ratio of the disposition price to the
UPB of the associated loan. This valuation technique is used to measure both the initial value of REO and the subsequent write-down to current fair
value.
(4) Represents the average of three months of REO sales proceeds by state. The national average REO disposition severity ratio for our REO properties
was 35.8% and 39.5% for the years ended December 31, 2013 and 2012, respectively.
Fair Value of Financial Instruments
The table below presents the carrying value and estimated fair value of our financial instruments as of December 31,
2013 and 2012.
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Table 16.6 — Fair Value of Financial Instruments
Carrying Amount(1)
Level 1
Level 2
Level 3
Netting Adjustments
Total
(in millions)
December 31, 2013
Fair Value
Financial Assets
Cash and cash equivalents
Restricted cash and cash equivalents
Federal funds sold and securities purchased
under agreements to resell
Investments in securities:
Available-for-sale, at fair value
Trading, at fair value
Total investments in securities
Mortgage loans:
Mortgage loans held by consolidated trusts
Unsecuritized mortgage loans
Total mortgage loans(2)
Derivative assets, net
Guarantee asset
Total financial assets
Financial Liabilities
Debt, net:
Debt securities of consolidated trusts held
by third parties
Other debt
Total debt, net
Derivative liabilities, net
Guarantee obligation
Total financial liabilities
$
$
$
$
11,281
12,265
$
7,360
12,264
$
$
3,921
1
62,383
—
62,383
128,919
23,404
152,323
1,529,905
154,885
1,684,790
1,063
1,611
1,925,716
$
—
6,636
6,636
—
—
—
—
—
26,260
$
76,770
16,122
92,892
1,258,049
16,145
1,274,194
14,220
—
1,447,611
$
— $
—
—
52,149
646
52,795
249,693
122,065
371,758
11
1,879
426,443
$
— $
—
—
—
—
—
11,281
12,265
62,383
128,919
23,404
152,323
—
—
—
(13,168)
—
(13,168) $
1,507,742
138,210
1,645,952
1,063
1,879
1,887,146
1,433,984
$
— $
1,435,894
$
1,004
$
— $
1,436,898
506,767
1,940,751
180
1,522
1,942,453
$
—
—
—
—
— $
499,756
1,935,650
13,291
—
1,948,941
$
13,089
14,093
336
3,067
17,496
$
—
—
(13,447)
—
(13,447) $
512,845
1,949,743
180
3,067
1,952,990
Carrying Amount(1)
Level 1
Level 2
Level 3
Netting Adjustments
Total
(in millions)
December 31, 2012
Fair Value
Financial Assets
Cash and cash equivalents
Restricted cash and cash equivalents
Federal funds sold and securities purchased
under agreements to resell
Investments in securities:
Available-for-sale, at fair value
Trading, at fair value
Total investments in securities
Mortgage loans:
Mortgage loans held by consolidated trusts
Unsecuritized mortgage loans
Total mortgage loans
Derivative assets, net
Guarantee asset
Total financial assets
Financial Liabilities
Debt, net:
Debt securities of consolidated trusts held
by third parties
Other debt
Total debt, net
Derivative liabilities, net
Guarantee obligation
$
$
$
8,513
14,592
$
8,513
14,576
$
— $
16
37,563
—
37,563
174,896
41,492
216,388
1,495,932
190,415
1,686,347
657
1,029
1,965,089
$
—
20,221
20,221
—
—
—
64
—
43,374
$
119,901
19,681
139,582
1,130,438
16,428
1,146,866
24,109
—
1,348,136
$
— $
—
—
54,995
1,590
56,585
409,722
151,175
560,897
20
1,325
618,827
$
— $
—
—
—
—
—
8,513
14,592
37,563
174,896
41,492
216,388
—
—
—
(23,536)
—
(23,536) $
1,540,160
167,603
1,707,763
657
1,325
1,986,801
1,419,524
$
— $
1,484,228
$
2,867
$
— $
1,487,095
547,518
1,967,042
178
1,004
1,968,224
—
—
8
—
8
$
546,955
2,031,183
31,014
—
2,062,197
$
18,646
21,513
67
2,487
24,067
$
—
—
(30,911)
—
(30,911) $
565,601
2,052,696
178
2,487
2,055,361
Total financial liabilities
(1) Equals the amount reported on our GAAP consolidated balance sheets.
$
$
(2) The fair value of single-family mortgage loans as of December 31, 2013 includes the effect of a change in estimate related to enhancements
implemented to align our economic capital methodology with external capital benchmarks.
Valuation Techniques for Assets and Liabilities Not Measured in Our Consolidated Balance Sheets at Fair Value, but for
Which the Fair Value is Disclosed
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The following is a description of the valuation techniques we use for items not measured in our consolidated balance
sheets at fair value , but for which the fair value is disclosed, the significant inputs used in those techniques (if applicable), and
our basis for classifying the measurements as Level 1, Level 2, or Level 3 of the valuation hierarchy. Each technique discussed
below may not be used in a given reporting period, depending on the composition of our assets and liabilities measured at fair
value and relevant market activity during that period.
Cash and Cash Equivalents (including Restricted Cash and Cash Equivalents)
Cash and cash equivalents (including restricted cash and cash equivalents) largely consist of highly liquid investment
securities with an original maturity of three months or less used for cash management purposes, as well as cash held at financial
institutions and cash collateral posted by our derivative counterparties. Given that these assets are short-term in nature with
limited market value volatility, the carrying amount on our GAAP consolidated balance sheets is deemed to be a reasonable
approximation of fair value. Cash and restricted cash are classified as Level 1. Cash equivalents (including restricted cash
equivalents) are primarily classified as Level 2 because we use observable inputs other than quoted prices in active markets for
identical assets to determine the fair value measurement. However, cash equivalents (including restricted cash equivalents) for
which we can obtain quoted prices in active markets for identical assets are classified as Level 1.
Federal Funds Sold and Securities Purchased Under Agreements to Resell
Federal funds sold and securities purchased under agreements to resell principally consist of short-term contractual
agreements such as reverse repurchase agreements involving Treasury and agency securities and federal funds sold. Given that
these assets are short-term in nature, the carrying amount on our GAAP consolidated balance sheets is deemed to be a
reasonable approximation of fair value. Federal funds sold and securities purchased under agreements to resell are classified as
Level 2 because these assets have observable market pricing, but quoted prices for identical assets are not available.
Mortgage Loans
Single-family and certain multifamily mortgage loans are classified as held-for-investment and recorded at amortized
cost. Other multifamily mortgage loans that are held for investment are recorded at the fair value of the underlying collateral
upon impairment. Multifamily held-for-sale mortgage loans are recorded at fair value due to the election of the fair value
option.
Single-Family Loans
Determination of Principal Market
In determining the fair value of single-family mortgage loans, valuation outcomes can vary widely based on management
judgments and decisions used in determining: (a) the principal market; (b) modeling assumptions, including default, severity,
home prices, and risk premiums; and (c) inputs used to determine variables including risk premiums, credit costs, security
pricing, and implied management and guarantee fees. Our principal markets include the GSE securitization market and the
whole loan market. To determine the principal market, we considered the market with the greatest volume and level of activity
and our ability to access that market. In the absence of a market with active trading, we determined the market that would
maximize the amount we would receive upon sale. We determined that the principal market is the whole loan market for loans
that: (a) are four or more months delinquent; (b) are in foreclosure; (c) have completed a HAMP loan modification; (d) have
completed a non-HAMP loan modification but have not been current for at least 12 consecutive months; or (e) have been
modified through a process that included forbearance on a portion of the outstanding balance. The total UPB of loans where the
whole loan market is the principal market was approximately $101.2 billion and $110.0 billion as of December 31, 2013 and
2012, respectively. We determined that the principal market for all other loans, regardless of whether the loan is currently
securitized or whether the loan is eligible for purchase under current underwriting standards, is the GSE securitization market.
The total UPB of loans where the GSE securitization market is the principal market was approximately $1.5 trillion as of both
December 31, 2013 and 2012.
Whole Loan Market as Principal Market
Loans where we determine that the principal market is the whole loan market are valued using the median of external
sources. Under the median of external sources technique, prices for single-family loans are obtained from multiple dealers.
These dealers reference market activity for deeply delinquent and modified loans, where available, and use internal models and
their judgment to determine default rates, severity rates, home prices, and risk premiums. Single-family mortgage loans valued
using this technique are classified as Level 3 due to the low volume and level of activity in this market.
GSE Securitization Market as Principal Market
Loans where we determine that the principal market is the GSE securitization market are valued using the build-up
technique. Under the build-up technique, the fair value of single-family mortgage loans is based on the estimate of the price we
would receive if we were to securitize the loans. These loans are valued by starting with benchmark security pricing for
actively traded mortgage-related securities with similar characteristics; adding in the value of our management and guarantee
fee, which is the compensation we receive for performing our management and guarantee activities; and subtracting the value
of the credit obligation related to performing our guarantee.
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The security price is based on benchmark security pricing for similar actively traded mortgage-related securities, adjusted
as necessary based on security characteristics. This security pricing process is consistent with our approach for valuing similar
securities retained in our investment portfolio or issued as debt to third parties. See “Valuation Techniques for Assets and
Liabilities Measured in Our Consolidated Balance Sheets at Fair Value — Investments in Securities.”
The management and guarantee fee is valued by estimating the present value of the additional cash flows related to our
management and guarantee fee. The management and guarantee fees for the majority of our loans are valued using third-party
dealer prices on hypothetical interest-only securities based on collateral characteristics from our single-family credit guarantee
portfolio. For loans where third-party market data is not readily available, we use a discounted cash flow approach, leveraging
the dealer prices received for the majority of our loans and including only those cash flows related to our management and
guarantee fee.
The credit obligation related to performing our guarantee is valued by estimating the fair value of the related credit and
other costs (such as general and administrative expenses) and benefits (such as credit enhancements) inherent in our guarantee
obligation. For loans that qualify for purchase under current underwriting standards, we use the delivery and guarantee fees that
we charge under our current market pricing as a market observation. For loans that do not qualify for purchase based on current
underwriting standards, we use our internal credit models, which incorporate factors such as loan characteristics, loan
performance status information, expected losses, and risk premiums.
Single-family mortgage loans that qualify for purchase under current underwriting standards are classified as Level 2 as
the significant inputs used for the valuation of these loans, such as security pricing, our externally published credit pricing
matrices, and third-party prices used in valuing the management and guarantee fee, are observable, while the unobservable
inputs, such as general and administrative expenses and credit enhancements, are not significant to the fair value measurement.
Single-family mortgage loans that do not qualify for purchase under current underwriting standards are classified as Level 3 as
the credit cost is based on our internal credit models which use unobservable inputs that are significant to the fair value
measurement.
HARP Loans
For loans that have been refinanced under HARP, we value our guarantee obligation using the delivery and guarantee fees
currently charged by us under that initiative. HARP loans valued using this technique are classified as Level 2, as the fees
charged by us are observable. If, subsequent to delivery, the refinanced loan no longer qualifies for purchase based on current
underwriting standards (such as becoming past due or being modified), the fair value of the guarantee obligation is then
measured using: (a) our internal credit models; or (b) the median of external sources, if the loan’s principal market has changed
to the whole loan market. HARP loans valued using either of these techniques are classified as Level 3 as significant inputs are
unobservable. The majority of our HARP loans are classified as Level 2.
The total compensation that we receive for the delivery of a HARP loan reflects the pricing that we are willing to offer
because HARP is a part of a broader government program intended to provide assistance to homeowners and prevent
foreclosures. When HARP ends (currently scheduled for December 31, 2015), the beneficial pricing afforded to HARP loans
will no longer be reflected in our delivery and guarantee fee pricing structure. If these benefits were not reflected in the pricing
for these loans, the fair value of our mortgage loans would have decreased by $18.5 billion and $11.2 billion as of
December 31, 2013 and 2012, respectively. The total fair value of the loans in our portfolio that reflects the pricing afforded to
HARP loans as of December 31, 2013 and 2012 as presented in our consolidated fair value balance sheets is $145.0 billion and
$153.1 billion, respectively.
Multifamily Loans
For a discussion of the techniques used to determine the fair value of held-for-sale and impaired held-for-investment
multifamily mortgage loans, see “Valuation Techniques for Assets and Liabilities Measured in Our Consolidated Balance
Sheets at Fair Value — Mortgage Loans, Held-for-Sale” and “— Mortgage Loans, Held-for-Investment,” respectively. Non-
impaired multifamily mortgage loans are primarily valued using market prices from a third-party pricing service that uses a
discounted cash-flow technique. Under this technique, the pricing service forecasts cash flows for the various mortgage loans
and discounts them at a market rate, including a spread that is based on pricing data obtained from purchases and sales of
similar mortgage loans, adjusted based on the mortgage's current LTV ratio and DSCR. The significant unobservable inputs
used in the fair value measurement of these loans are the current LTV ratio and DSCR. These loans are classified as Level 3 as
significant inputs used in the fair value measurement are unobservable.
Total Debt, Net
Total debt, net represents debt securities of consolidated trusts held by third parties and other debt that we issued to
finance our assets. On our consolidated GAAP balance sheets, total debt, net, excluding debt securities for which the fair value
option has been elected, is reported at amortized cost, which is net of deferred items, including premiums, discounts, and
hedging-related basis adjustments.
For debt securities of consolidated trusts, the valuation techniques we use are similar to the techniques we use to value
our investments in agency securities for GAAP purposes. See “Valuation Techniques for Assets and Liabilities Measured in Our
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Consolidated Balance Sheets at Fair Value — Investments in Securities — Mortgage-Related Securities — Agency Securities”
for additional information regarding the valuation techniques we use.
Other debt includes short-term zero-coupon discount notes, callable debt, and non-callable debt. Short-term zero-coupon
discount notes are valued using a yield analysis technique. Under this technique, the debt instruments are valued using
published yield matrices which are based on the days to maturity of the debt and converted into a price. Significant inputs used
in this technique are the published yield matrices. Short-term zero-coupon discount notes are classified as Level 2 as the
significant inputs used are observable in active markets. Other debt securities, including both callable and non-callable debt, are
valued using a single external source or median of external sources. These debt securities generally have observable market
pricing and are classified as Level 2. However, certain other debt securities are classified as Level 3 when there is a low volume
or level of activity in the market for those types of debt securities.
Total debt, net for which we have elected the fair value option includes certain debt securities of consolidated trusts held
by third parties and certain other debt. We report these items at fair value on our GAAP consolidated balance sheets. See
“Valuation Techniques for Assets and Liabilities Measured in Our Consolidated Balance Sheets at Fair Value — Debt Securities
of Consolidated Trusts Held by Third Parties, at Fair Value” and “— Other Debt, at Fair Value” for additional information.
Guarantee Obligation
Our guarantee obligation is classified as Level 3 as significant inputs used in the fair value measurement are
unobservable. The technique for estimating the fair value of our guarantee obligation is described in the “Mortgage Loans —
Single-Family Loans” section above.
Fair Value Option
We elected the fair value option for certain types of investments in securities, multifamily held-for-sale mortgage loans,
and certain debt.
Investments in Securities
We elected the fair value option for certain mortgage-related securities to better reflect the natural offset these securities
provide to fair value changes recorded historically on our guarantee asset at the time of our election. In addition, upon adoption
of the accounting guidance for the fair value option, we elected this option for securities within the scope of the accounting
guidance for investments in beneficial interests in securitized financial assets to better reflect any valuation changes that would
occur subsequent to impairment write-downs previously recorded on these instruments. Related interest income continues to be
reported as interest income in our consolidated statements of comprehensive income. See “NOTE 1: SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities” for additional information about the measurement
and recognition of interest income on investments in securities. For information regarding the net unrealized gains (losses) on
trading securities, which include gains (losses) for other items that are not selected for the fair value option, see Gains (loss) on
trading securities within “Table 13.2 — Segment Earnings and Reconciliation to GAAP Results."
Multifamily Held-For-Sale Mortgage Loans
We elected the fair value option for multifamily mortgage loans that were purchased for securitization. These multifamily
mortgage loans are classified as held-for-sale mortgage loans in our consolidated balance sheets to reflect our intent to sell in
the future. Related interest income continues to be reported as interest income in our consolidated statements of comprehensive
income. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Mortgage Loans” for additional
information about the measurement and recognition of interest income on our mortgage loans.
Debt Securities of Consolidated Trusts Held by Third Parties
We elected the fair value option for certain debt securities of consolidated trusts held by third parties. These consist of
certain multifamily K Certificates where we are in a first loss position and certain REMIC interest-only mortgage-related debt
securities. We elected the fair value option on these debt instruments as they contain embedded derivatives that require
bifurcation. Fair value changes for debt securities of consolidated trusts held by third parties are recorded in other income in
our consolidated statements of comprehensive income. Related interest expense continues to be reported as interest expense in
our consolidated statements of comprehensive income. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES — Debt Securities Issued” for additional information about the measurement and recognition of interest expense on
debt securities issued.
Other Debt
We elected the fair value option on: (a) STACR debt notes; (b) extendible variable-rate notes containing quarterly options
for investors to extend the maturity of the notes; and (c) foreign-currency denominated debt. We elected the fair value option
for STACR debt notes and extendible variable-rate notes as they contain potential embedded derivatives requiring bifurcation.
In the case of foreign-currency denominated debt, we entered into derivative transactions that effectively converted these
instruments to U.S. dollar denominated floating rate instruments. We elected the fair value option on these debt instruments to
better reflect the economic offset that naturally results from the debt due to changes in interest rates. Fair value changes for debt
for which we have elected the fair value option are recorded in other income in our consolidated statements of comprehensive
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income. Related interest expense continues to be reported as interest expense in our consolidated statements of comprehensive
income. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Debt Securities Issued” for additional
information about the measurement and recognition of interest expense on debt securities issued.
The table below presents the fair value and UPB related to certain items for which we have elected the fair value option
at December 31, 2013 and 2012.
Table 16.7 — Difference between Fair Value and Unpaid Principal Balance for Certain Financial Instruments with Fair
Value Option Elected
Fair value
Unpaid principal balance
Difference
December 31,
2013
2012
Multifamily
Held-For-Sale
Mortgage Loans
Other Debt -
Long Term
Multifamily
Held-For-Sale
Mortgage Loans
Other Debt -
Long Term
$
$
8,727
8,721
6
$
$
(in millions)
2,683
2,635
48
$
$
14,238
13,972
266
$
$
2,187
2,167
20
Changes in Fair Value under the Fair Value Option Election
We recorded gains (losses) of $(0.3) billion, $1.0 billion and $0.8 billion for the years ended December 31, 2013, 2012,
and 2011, respectively, from the change in fair value on multifamily held-for-sale mortgage loans recorded at fair value in other
income in our consolidated statements of comprehensive income.
Gains (losses) on debt securities with the fair value option elected were $(37) million, $16 million, and $91 million for
the years ended December 31, 2013, 2012, and 2011, respectively, and were recorded in other income in our consolidated
statements of comprehensive income.
Changes in fair value attributable to instrument-specific credit risk were not material for the years ended December 31,
2013, 2012, or 2011 for any assets or liabilities for which we elected the fair value option.
NOTE 17: LEGAL CONTINGENCIES
We are involved as a party in a variety of legal and regulatory proceedings arising from time to time in the ordinary
course of business including, among other things, contractual disputes, personal injury claims, employment-related litigation
and other legal proceedings incidental to our business. We are frequently involved, directly or indirectly, in litigation involving
mortgage foreclosures. From time to time, we are also involved in proceedings arising from our termination of a seller/
servicer’s eligibility to sell mortgages to, and/or service mortgages for, us. In these cases, the former seller/servicer sometimes
seeks damages against us for wrongful termination under a variety of legal theories. In addition, we are sometimes sued in
connection with the origination or servicing of mortgages. These suits typically involve claims alleging wrongful actions of
seller/servicers. Our contracts with our seller/servicers generally provide for indemnification against liability arising from their
wrongful actions with respect to mortgages sold to or serviced for Freddie Mac.
Litigation and claims resolution are subject to many uncertainties and are not susceptible to accurate prediction. In
accordance with the accounting guidance for contingencies, we reserve for litigation claims and assessments asserted or
threatened against us when a loss is probable (as defined in such guidance) and the amount of the loss can be reasonably
estimated.
During 2013, we paid approximately $10 million for the advancement of legal fees and expenses of former officers
pursuant to our indemnification obligations to them. These fees and expenses related to certain of the matters described below,
and are being partially offset by insurance payments. This figure does not include certain administrative support costs and
certain costs related to document production and storage.
Putative Securities Class Action Lawsuits
Ohio Public Employees Retirement System (“OPERS”) vs. Freddie Mac, Syron, et al. This putative securities class action
lawsuit was filed against Freddie Mac and certain former officers on January 18, 2008 in the U.S. District Court for the
Northern District of Ohio purportedly on behalf of a class of purchasers of Freddie Mac stock from August 1, 2006 through
November 20, 2007. FHFA later intervened as Conservator. The plaintiff alleges that the defendants violated federal securities
laws by making false and misleading statements concerning our business, risk management, and the procedures we put into
place to protect the company from problems in the mortgage industry. The plaintiff seeks unspecified damages and interest, and
reasonable costs and expenses, including attorney and expert fees. The plaintiff amended its complaint on several occasions.
Defendants filed motions to dismiss the second and third amended complaints, which the Court denied. On April 13, 2013, the
judge who had presided over the case since 2008 recused himself, and the case was reassigned to a new judge. On August 23,
2013, the new judge granted defendants' motion to vacate the previous judge's orders denying defendants' motions to dismiss.
Defendants filed new motions to dismiss the complaint on October 8, 2013.
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At present, it is not possible for us to predict the probable outcome of this lawsuit or any potential effect on our business,
financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible loss or
range of possible loss in the event of an adverse judgment in the foregoing matter due to the following factors, among others:
the inherent uncertainty of pre-trial litigation; the fact that the Court has not yet ruled upon defendants' new motion to dismiss
the complaint; and the fact that the Court has not yet ruled upon motions for class certification or summary judgment. In
particular, absent the certification of a class, the identification of a class period, and the identification of the alleged statement
or statements that survive dispositive motions, we cannot reasonably estimate any possible loss or range of possible loss.
Kuriakose vs. Freddie Mac, Syron, Piszel and Cook. Another putative class action lawsuit was filed against Freddie Mac
and certain former officers on August 15, 2008 in the U.S. District Court for the Southern District of New York for alleged
violations of federal securities laws. The case is purportedly brought on behalf of a class of purchasers of Freddie Mac stock
from November 21, 2007 through September 7, 2008. FHFA later intervened as Conservator. The plaintiffs claimed that
defendants made false and misleading statements about Freddie Mac’s business that artificially inflated the price of Freddie
Mac’s common stock, and sought unspecified damages, costs, and attorneys’ fees. The plaintiffs twice amended their
complaint, and sought leave to amend a third time. On September 24, 2012, the Court granted with prejudice defendants’
motions to dismiss plaintiffs’ second amended complaint in its entirety, denied plaintiffs’ motion to file a third amended
complaint, and directed that the case be closed. Judgment was entered in favor of the defendants on September 27, 2012. On
October 26, 2012, plaintiffs filed a notice of appeal in the U.S. Court of Appeals for the Second Circuit. By order dated
November 5, 2013, the U.S. Court of Appeals for the Second Circuit affirmed the District Court's decisions granting
defendants' motions to dismiss and denying plaintiffs' motion to file a third amended complaint. On November 19, 2013,
plaintiffs filed a petition for panel rehearing, which was denied.
At present, it is not possible for us to predict the probable outcome of this lawsuit or any potential effect on our business,
financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible loss or
range of possible loss in the event of an adverse judgment in the foregoing matter due to the following factors, among others:
the inherent uncertainty of the appellate process, including the outcome of any petition for certiorari; the inherent uncertainty of
pre-trial litigation in the event the case is ultimately remanded to the District Court in whole or in part; and the fact that the
parties have not briefed and the District Court has not yet ruled upon motions for class certification or summary judgment. In
particular, absent resolution of the appellate process, the certification of a class, the identification of a class period, and the
identification of the alleged statement or statements that survive dispositive motions, we cannot reasonably estimate any
possible loss or range of possible loss.
Related Third Party Litigation and Indemnification Requests
On December 16, 2011, the SEC announced that it had charged three former executives of Freddie Mac with securities
laws violations. These executives are former Chairman of the Board and Chief Executive Officer Richard F. Syron, former
Executive Vice President and Chief Business Officer Patricia L. Cook, and former Executive Vice President for the single-
family guarantee business Donald J. Bisenius.
On September 23, 2008, a plaintiff filed a putative class action securities lawsuit in the U.S. District Court for the
Southern District of New York styled Mark vs. Goldman, Sachs & Co., J.P. Morgan Chase & Co., and Citigroup Global
Markets Inc. On January 29, 2009, another plaintiff filed a putative class action lawsuit in the same Court styled Kreysar vs.
Syron, et al. The cases, which were subsequently consolidated by the Court, concern the company’s November 29, 2007 public
offering of $6 billion of 8.375% Fixed to Floating Rate Non-Cumulative Perpetual Preferred Stock.
In the consolidated complaint, plaintiffs alleged that three former Freddie Mac officers (including Syron and former
Executive Vice President and Chief Financial Officer Anthony S. Piszel), certain underwriters and Freddie Mac’s auditor
violated federal securities laws by making material false and misleading statements in connection with the company’s
November 2007 public offering. The complaint further alleged that certain defendants and others made additional false
statements following the offering. After a series of motions and amendments to the complaint, only Syron and Piszel remain as
defendants.
The plaintiffs moved for class certification, which motion was ultimately denied by the Court. On May 31, 2012, the U.S.
Court of Appeals for the Second Circuit denied plaintiffs’ motion for leave to appeal on an interlocutory basis the denial of
class certification. In August 2012, plaintiffs sought leave to file another motion for class certification, which request the Court
denied on September 25, 2012.
Freddie Mac is not named as a defendant in the consolidated lawsuit, but the underwriters previously gave notice to
Freddie Mac of their intention to seek full indemnity and contribution under the underwriting agreement in this case, including
reimbursement of fees and disbursements of their legal counsel. At present, it is not possible for us to predict the probable
outcome of the lawsuit or any potential effect on our business, financial condition, liquidity, or results of operations. In
addition, we are unable to reasonably estimate the possible loss or range of possible loss in the event of an adverse judgment in
the foregoing matter due to the inherent uncertainty of litigation and the fact that plaintiffs may appeal the denial of class
certification. Absent the certification of a specified class, the identification of a class period, and the identification of the
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alleged statement or statements that survive dispositive motions, we cannot reasonably estimate any possible loss or range of
possible loss.
Two other lawsuits have been filed against certain underwriters of the company’s November 2007 public offering.
Plaintiffs in the cases generally allege that the underwriters made materially misleading statements and omissions in connection
with the offering. Freddie Mac is not named as a defendant in either lawsuit. On July 6, 2011, a lawsuit styled Liberty Mutual
Insurance Company, Peerless Insurance Company, Employers Insurance Company of Wausau, Safeco Corporation and Liberty
Life Assurance Company of Boston vs. Goldman, Sachs & Co. was filed in the U.S. District Court for Massachusetts. In a
second lawsuit, Western and Southern Life Insurance Company and others asserted claims against GS Mortgage Securities
Corp., Goldman Sachs Mortgage Company and Goldman Sachs & Co. in the Court of Common Pleas, Hamilton County, Ohio.
Lehman Bankruptcy
On September 15, 2008, Lehman Brothers Holdings Inc. ("Lehman") filed a chapter 11 bankruptcy petition in the U.S.
Bankruptcy Court for the Southern District of New York. Thereafter, many of Lehman’s U.S. subsidiaries and affiliates also
filed bankruptcy petitions (collectively, the “Lehman Entities”). Freddie Mac had numerous relationships with the Lehman
Entities which gave rise to several claims. On September 22, 2009, Freddie Mac filed proofs of claim in the Lehman
bankruptcies aggregating approximately $2.1 billion. On December 6, 2011, the Court confirmed Lehman’s chapter 11 plan of
liquidation (the "Liquidation Plan"), which provides for the liquidation of the bankruptcy estate’s assets over the next three
years. Our claims consist primarily of (a) a $1.2 billion claim (for which we asserted priority status) relating to losses incurred
on short-term lending transactions with certain Lehman Entities; and (b) an $869 million unsecured claim relating to Lehman’s
repurchase obligations for breaches of representations and warranties on single-family loans sold to us. The Liquidation Plan
addressed these claims as follows:
•
Short-term lending claim: The Liquidation Plan treated this claim as a senior unsecured claim, pursuant to which we
would have ultimately received an estimated distribution of approximately 21% (or approximately $250 million).
However, the Liquidation Plan left open for subsequent determination whether our claim would be accorded priority
status, and the Lehman estate set aside $1.2 billion to pay our claim in full if, after litigation or settlement, it was
allowed as a priority claim. On September 13, 2013, Lehman filed a motion to have the Court classify and allow the
claim as a senior unsecured claim. Freddie Mac opposed the motion and, as a result, the issue of the proper
classification of the claim was in litigation between the parties.
• Repurchase claim: The Liquidation Plan did not adjudge or allow this claim, but instead permitted claims allowance
proceedings to continue. To the extent the claim was allowed, it would have been treated as a general unsecured claim,
for which Freddie Mac would ultimately have received a distribution of approximately 19.9% of the allowed amount.
On February 12, 2014, Freddie Mac and Lehman entered into a settlement agreement, under which Lehman would pay us
a lump sum of $767 million to resolve our claims. On February 19, 2014, the settlement was approved by the Court.
Taylor, Bean & Whitaker and Ocala Funding, LLC Bankruptcies
On August 24, 2009, TBW, which had been one of our single-family seller/servicers, filed for bankruptcy in the U.S.
Bankruptcy Court for the Middle District of Florida. We entered into a settlement regarding the TBW bankruptcy in 2011.
However, we continue to be involved in certain matters relating to the TBW bankruptcy, as described below.
On July 10, 2012, Ocala Funding, LLC, or Ocala, which is a wholly owned subsidiary of TBW, filed for bankruptcy in
the U.S. Bankruptcy Court for the Middle District of Florida. In connection with the bankruptcy filing, Ocala also filed a
motion seeking an examination of and subsequent document discovery from Freddie Mac and FHFA, asserting that it has
“viable, legitimate and valuable causes of action against Freddie Mac” to recover approximately $805 million of funds that
were allegedly transferred from Ocala to Freddie Mac custodial accounts maintained by TBW, prior to the TBW bankruptcy. In
its filings, Ocala also indicated that it wishes to use the examination to obtain information relating to whether it may have other
claims against Freddie Mac relating to TBW’s fraudulent conduct prior to the TBW bankruptcy. In June 2013, the Court
confirmed Ocala’s plan of liquidation. The plan established a liquidation trust, and authorizes it to investigate and initiate
actions to recover on claims and causes of action, such as those asserted against Freddie Mac. Discovery is proceeding.
On or about May 14, 2010, certain underwriters at Lloyds, London and London Market Insurance Companies brought an
adversary proceeding in the U.S. Bankruptcy Court for the Middle District of Florida against TBW, Freddie Mac and other
parties seeking a declaration rescinding $90 million of mortgage bankers bonds providing fidelity and errors and omissions
insurance coverage. Several excess insurers on the bonds thereafter filed similar claims in that action. Freddie Mac has filed a
proof of loss under the bonds. The underwriters moved for partial summary judgment against Freddie Mac in April 2013.
Discovery is proceeding. We are unable at this time to estimate our potential recovery, if any, in this case.
IRS Litigation
In 2010 and 2011, we received Statutory Notices from the IRS assessing a total of $3.0 billion of additional income taxes
and penalties for the 1998 to 2007 tax years. We filed a petition with the U.S. Tax Court on October 22, 2010 in response to the
Statutory Notices for the 1998 to 2005 tax years and, in 2012, paid the tax assessed in the Statutory Notices for the years 2006
and 2007 of $36 million. In the fourth quarter of 2012 we reached an agreement in principle with the IRS for all years,
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including 2006 and 2007, to favorably resolve the matters in dispute and reduced the previously unrecognized tax benefits to
zero. We are currently working with the IRS to finalize the stipulation of settled issues and closing agreement, and expect that a
final decision can be entered within the next 12 months.
Lawsuits Involving Real Estate Transfer Taxes
Beginning in 2011 in Michigan, counties in numerous states filed lawsuits challenging Freddie Mac and Fannie Mae’s
statutory exemption from real estate transfer taxes imposed on the transfer of real property for which Freddie Mac or Fannie
Mae was the grantor or grantee. Currently, approximately 30 lawsuits are pending in 16 states and the District of Columbia,
including 19 appeals. We have received favorable rulings from district courts in 35 of the cases (seven of which have been
affirmed on appeal), and the only unfavorable ruling was overturned on appeal in May 2013. Plaintiffs in these cases are
generally seeking a declaration that Freddie Mac and Fannie Mae are not exempt from transfer taxes, damages for unpaid
transfer taxes, as well as other items, which may include penalties, interest, liquidated penalties, pre-judgment interest, costs
and attorneys’ fees. In these actions, FHFA, Freddie Mac and Fannie Mae assert that the enterprises are not liable for the
transfer taxes based on federal statutory tax exemptions applicable to each.
At present, it is not possible for us to predict the probable outcome of the remaining lawsuits or any potential effect on
our business, financial condition, liquidity, or results of operation. In addition, we are unable to reasonably estimate the
possible loss or range of possible loss with respect to the remaining lawsuits due to the following factors, among others:
(a) none of the plaintiffs have demanded a stated amount of damages they believe are due; and (b) discovery regarding the
amount of damages has not yet been conducted.
LIBOR Lawsuit
On March 14, 2013, Freddie Mac filed a lawsuit in the U.S. District Court for the Eastern District of Virginia against the
British Bankers Association and the 16 U.S. Dollar LIBOR panel banks and a number of their affiliates. The case was
subsequently transferred to the U.S. District Court for the Southern District of New York. The complaint alleges, among other
things, that the defendants fraudulently and collusively suppressed LIBOR, a benchmark interest rate indexed to trillions of
dollars of financial products, and asserts claims for antitrust violations, breach of contract, tortious interference with contract
and fraud. Freddie Mac filed an amended complaint on July 22, 2013.
Litigation Concerning the Purchase Agreement
In July and September 2013, four lawsuits were filed against us in the U.S. District Court for the District of Columbia
concerning the August 2012 amendment to the Purchase Agreement. It is possible that similar lawsuits will be filed in the
future. The lawsuits are as follows:
• A putative class action lawsuit filed on July 29, 2013 styled Cacciapelle and Bareiss vs. Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation and FHFA;
• A putative class action lawsuit filed on July 30, 2013 styled American European Insurance Company vs. Federal
National Mortgage Association, Federal Home Loan Mortgage Corporation and FHFA;
• A putative class action and shareholder derivative lawsuit filed on September 18, 2013 styled Marneu Holdings, Co.
vs. FHFA, Treasury, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation; and
• A lawsuit filed on September 20, 2013 styled Arrowood Indemnity Company vs. Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation, FHFA and Treasury.
The Cacciapelle and American European Insurance Company lawsuits were filed purportedly on behalf of a class of
purchasers of junior preferred stock issued by Freddie Mac or Fannie Mae who held stock prior to, and as of, August 17, 2012.
The Marneu lawsuit was filed purportedly on behalf of a class of purchasers of junior preferred stock and purchasers of
common stock issued by Freddie Mac or Fannie Mae over a not-yet-defined period of time. Plaintiffs in the Arrowood lawsuit
allege that they are holders of junior preferred stock issued by Freddie Mac and Fannie Mae. (For purposes of this discussion,
junior preferred stock refers to the various series of preferred stock of Freddie Mac and Fannie Mae other than the senior
preferred stock issued to Treasury.)
In the lawsuits, plaintiffs allege that the amendment to the Purchase Agreement in August 2012 (which implemented the
net worth sweep dividend provisions of the senior preferred stock) breached Freddie Mac's and Fannie Mae's respective
contracts with the holders of junior preferred stock and common stock and the covenant of good faith and fair dealing inherent
in such contracts. Plaintiffs seek unspecified damages, equitable and injunctive relief, and costs and expenses, including
attorney and expert fees. Plaintiffs in the Arrowood lawsuit also request that, if injunctive relief is not granted, the Arrowood
plaintiffs be awarded damages against the defendants in an amount to be determined including, but not limited to, the aggregate
par value of their junior preferred stock, the total of which they state is $42,297,500.
Plaintiffs in the Marneu and Arrowood lawsuits also make certain claims against, and seek certain remedies from,
Treasury and FHFA.
The Court consolidated three of the cases (Cacciapelle, American European Insurance Company and Marneu) together in
a new case styled In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations. A
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consolidated amended complaint was filed on December 3, 2013. The consolidated amended complaint makes essentially the
same allegations against Freddie Mac as the original complaints described above. FHFA, joined by Freddie Mac and Fannie
Mae, moved to dismiss the consolidated complaint and the other related cases (including Arrowood) on January 17, 2014.
Treasury filed a motion to dismiss the same day.
At present, it is not possible for us to predict the probable outcome of these lawsuits or any potential effect on our
business, financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible
loss or range of possible loss in the event of an adverse judgment in the foregoing matters due to a number of factors, including
the inherent uncertainty of pre-trial litigation. In addition, with respect to the consolidated lawsuits, the plaintiffs have not
demanded a stated amount of damages they believe are due and the Court has not certified a class.
We received a letter dated October 16, 2013 addressed to the Chief Executive Officer, the Board of Directors and the then
Acting Director of FHFA, purportedly on behalf of holders of common stock and junior preferred stock of Freddie Mac. We
received a similar letter dated January 6, 2014, and two more dated January 7, 2014, each on behalf of a plaintiff in the
consolidated lawsuits. The letters demand that Freddie Mac commence legal action against the U.S. government to recover all
losses sustained by Freddie Mac as a result of the August 2012 amendment to the Purchase Agreement. The letters also demand
that Freddie Mac take action to terminate the August 2012 amendment to the Purchase Agreement. On January 15, 2014, FHFA
(as Conservator) informed the purported shareholders named in the October 16, 2013 letter that the Conservator does not intend
to authorize Freddie Mac or its directors or officers on behalf of Freddie Mac to take the actions that such shareholders demand.
NOTE 18: REGULATORY CAPITAL
On October 9, 2008, FHFA announced that it was suspending capital classification of us during conservatorship in light
of the Purchase Agreement. FHFA continues to closely monitor our capital levels, but the existing statutory and FHFA-directed
regulatory capital requirements are not binding during conservatorship. We continue to provide quarterly submissions to FHFA
on minimum capital, but no longer provide submissions on risk-based capital.
Our regulatory minimum capital is a leverage-based measure that is generally calculated based on GAAP and reflects a
2.50% capital requirement for on-balance sheet assets and a 0.45% capital requirement for off-balance sheet obligations. Based
upon our adoption of amendments to the accounting guidance for transfers of financial assets and consolidation of VIEs, we
determined that, under the new consolidation guidance, we are the primary beneficiary of trusts that issue our single-family
PCs and certain Other Guarantee Transactions and, therefore, effective January 1, 2010, we consolidated on our balance sheet
the assets and liabilities of these trusts. Pursuant to regulatory guidance from FHFA, our minimum capital requirement was not
affected by adoption of these amendments. Specifically, upon adoption of these amendments, FHFA directed us, for purposes of
minimum capital, to continue reporting single-family PCs and certain Other Guarantee Transactions held by third parties using
a 0.45% capital requirement. FHFA reserves the authority under the GSE Act to raise the minimum capital requirement for any
of our assets or activities.
Regulatory Capital Standards
The GSE Act established minimum, critical, and risk-based capital standards for us, however per guidance received from
FHFA we no longer are required to submit risk-based capital reports to FHFA.
Prior to our entry into conservatorship, those standards determined the amounts of core capital that we were to maintain
to meet regulatory capital requirements. Core capital consisted of the par value of outstanding common stock (common stock
issued less common stock held in treasury), the par value of outstanding non-cumulative, perpetual preferred stock, additional
paid-in capital and retained earnings (accumulated deficit), as determined in accordance with GAAP.
Minimum Capital
The minimum capital standard required us to hold an amount of core capital that was generally equal to the sum of 2.50%
of aggregate on-balance sheet assets and approximately 0.45% of the sum of our PCs held by third parties and other aggregate
off-balance sheet obligations.
Critical Capital
The critical capital standard required us to hold an amount of core capital that was generally equal to the sum of 1.25% of
aggregate on-balance sheet assets and approximately 0.25% of the sum of our PCs held by third parties and other aggregate off-
balance sheet obligations.
Performance Against Regulatory Capital Standards
The table below summarizes our minimum capital requirements and deficits and net worth.
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Table 18.1 — Net Worth and Minimum Capital
GAAP net worth(1)
Core capital (deficit)(2)(3)
Less: Minimum capital requirement(2)
Minimum capital surplus (deficit)(2)
December 31, 2013
December 31, 2012
$
$
$
(in millions)
12,835
$
(59,495) $
21,404
(80,899) $
8,827
(60,571)
22,063
(82,634)
(1) Net worth (deficit) represents the difference between our assets and liabilities under GAAP.
(2) Core capital and minimum capital figures for December 31, 2013 are estimates. FHFA is the authoritative source for our regulatory capital.
(3) Core capital excludes certain components of GAAP total equity (deficit) (i.e., AOCI and the liquidation preference of the senior preferred stock) as
these items do not meet the statutory definition of core capital.
Following our entry into conservatorship and consistent with the objectives of conservatorship, we have focused our risk
and capital management on, among other things, maintaining a positive balance of GAAP equity in order to reduce the
likelihood that we will need to make additional draws on the Purchase Agreement with Treasury. The Purchase Agreement
provides that, if FHFA determines as of quarter end that our liabilities have exceeded our assets under GAAP, Treasury will
contribute funds to us in an amount at least equal to the difference between such liabilities and assets.
Under the GSE Act, FHFA must place us into receivership if FHFA determines in writing that our assets are and have
been less than our obligations for a period of 60 days. FHFA has notified us that the measurement period for any mandatory
receivership determination with respect to our assets and obligations would commence no earlier than the SEC public filing
deadline for our quarterly or annual financial statements and would continue for 60 calendar days after that date. FHFA has
advised us that, if, during that 60-day period, we receive funds from Treasury in an amount at least equal to the deficiency
amount under the Purchase Agreement, the Director of FHFA will not make a mandatory receivership determination. If funding
has been requested under the Purchase Agreement to address a deficit in our net worth, and Treasury is unable to provide us
with such funding within the 60-day period specified by FHFA, FHFA would be required to place us into receivership if our
assets remain less than our obligations during that 60-day period.
At December 31, 2013, our assets exceeded our liabilities under GAAP; therefore no draw is being requested from
Treasury under the Purchase Agreement. As of December 31, 2013, our aggregate funding received from Treasury under the
Purchase Agreement was $71.3 billion. This aggregate funding amount does not include the initial $1 billion liquidation
preference of senior preferred stock that we issued to Treasury in September 2008 as an initial commitment fee and for which
no cash was received. We paid quarterly dividends of $5.8 billion, $7.0 billion, $4.4 billion, and $30.4 billion on the senior
preferred stock in cash in March 2013, June 2013, September 2013, and December 2013, respectively, at the direction of the
Conservator.
Subordinated Debt Commitment
In October 2000, we announced our adoption of a series of commitments designed to enhance market discipline, liquidity
and capital. In September 2005, we entered into a written agreement with FHFA that updated those commitments and set forth a
process for implementing them. FHFA, as Conservator of Freddie Mac, has suspended the requirements in the September 2005
agreement with respect to issuance, maintenance and reporting and disclosure of Freddie Mac subordinated debt during the
term of conservatorship and thereafter until directed otherwise.
NOTE 19: SELECTED FINANCIAL STATEMENT LINE ITEMS
Settlement agreements primarily related to lawsuits regarding our investments in certain non-agency mortgage-related
securities is a significant component of other income during 2013. For more information, see “NOTE 15: CONCENTRATION
OF CREDIT AND OTHER RISKS — Non-Agency Mortgage-Related Security Issuers.”
The table below presents the significant components of other assets and other liabilities on our consolidated balance
sheets.
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Table 19.1 — Significant Components of Other Assets and Other Liabilities on Our Consolidated Balance Sheets
Other assets:
Accounts and other receivables(1)
Guarantee asset
All other
Total other assets
Other liabilities:
Servicer liabilities
Guarantee obligation
Accounts payable and accrued expenses
All other
Total other liabilities
(1) Primarily consists of servicer receivables.
December 31, 2013
December 31, 2012
(in millions)
$
$
$
$
$
$
$
4,367
1,611
2,561
8,539
2,277
1,522
886
807
5,492
$
10,091
1,029
2,645
13,765
3,304
1,004
984
807
6,099
END OF CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES
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QUARTERLY SELECTED FINANCIAL DATA
(UNAUDITED)
1Q
2Q
2013
3Q
4Q
Full-Year
(in millions, except share-related amounts)
$
4,265
$
4,144
$
4,276
$
3,783
$
Net interest income
Benefit (provision) for credit losses
Non-interest income (loss):
Derivative gains (losses)
Net impairments of available-for-sale securities recognized
in earnings
Other non-interest income (loss)
Non-interest income (loss)
Non-interest expense:
Administrative expenses
REO operations income (expense)
Other non-interest expense
Non-interest expense
Income tax (expense) benefit
Net income
Total other comprehensive income (loss), net of taxes
Comprehensive income
Income (loss) attributable to common stockholders(1)
Income (loss) per common share – basic and diluted(2)
Net interest income
Benefit (provision) for credit losses
Non-interest income (loss):
Derivative gains (losses)
Net impairments of available-for-sale securities recognized
in earnings
Other non-interest income
Non-interest income (loss)
Non-interest expense:
Administrative expenses
REO operations income (expense)
Other non-interest expense
Non-interest expense
Income tax benefit
Net income
Total other comprehensive income (loss), net of taxes
Comprehensive income
Income (loss) attributable to common stockholders(1)
Income (loss) per common share – basic and diluted(2)
$
$
$
$
$
$
$
$
$
$
$
503
375
(43)
70
402
(432)
(6)
(186)
(624)
35
4,581
2,390
6,971
$
$
$
(2,390) $
(0.74) $
623
1,138
1,362
(44)
(640)
678
(444)
110
(164)
(498)
41
4,988
$
(631) $
4,357
631
0.19
$
$
$
(74)
(126)
1,889
1,689
(455)
79
(201)
(577)
23,960
30,486
$
(49) $
30,437
50
0.02
$
$
$
201
969
(1,297)
6,078
5,750
(474)
(43)
127
(390)
(731)
8,613
1,222
9,835
$
$
$
(1,822) $
(0.56) $
16,468
2,465
2,632
(1,510)
7,397
8,519
(1,805)
140
(424)
(2,089)
23,305
48,668
2,932
51,600
(3,531)
(1.09)
1Q
2Q
2012
3Q
4Q
Full-Year
(in millions, except share-related amounts)
4,500
$
4,386
$
4,269
$
4,456
$
(1,825)
(1,056)
(564)
104
(1,516)
(337)
(171)
(88)
(596)
14
577
1,212
1,789
$
$
$
(1,227) $
(0.38) $
(155)
(882)
(98)
229
(751)
(401)
30
(165)
(536)
76
(610)
(488)
(267)
195
(560)
(401)
49
(121)
(473)
302
3,020
$
(128) $
2,892
1,212
0.37
$
$
$
2,928
2,702
5,630
1,119
0.35
$
$
$
$
$
700
(22)
(1,239)
5
(1,256)
(422)
33
(199)
(588)
1,145
4,457
1,271
5,728
$
$
$
(3,178) $
(0.98) $
17,611
(1,890)
(2,448)
(2,168)
533
(4,083)
(1,561)
(59)
(573)
(2,193)
1,537
10,982
5,057
16,039
(2,074)
(0.64)
(1) For a discussion of how the change in the manner in which the senior preferred stock dividend is determined 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.”
(2) Earnings (loss) per common share is computed independently for each of the quarters presented. Due to the use of weighted average common shares
outstanding when calculating earnings (loss) per share, the sum of the four quarters may not equal the full-year amount. Earnings (loss) per common
share amounts may not recalculate using the amounts shown in this table due to rounding.
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None.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the
information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is
accumulated and communicated to management of the company, including the company’s Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing our disclosure controls
and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and we must apply judgment in implementing possible
controls and procedures.
Management, including the company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of
the effectiveness of our disclosure controls and procedures as of December 31, 2013. As a result of management’s evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not
effective as of December 31, 2013, at a reasonable level of assurance, because we have not been able to update our disclosure
controls and procedures to provide reasonable assurance that information known by FHFA on an ongoing basis is
communicated from FHFA to Freddie Mac’s management in a manner that allows for timely decisions regarding our required
disclosure under the federal securities laws. As discussed below, we consider this situation to be a material weakness in our
internal control over financial reporting. Based on discussions with FHFA and the structural nature of this continuing weakness,
we believe it is likely that we will not remediate this material weakness while we are under conservatorship.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial Officer and effected by the Board of Directors, management
and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It is
a process that involves human diligence and compliance and is, therefore, subject to lapses in judgment and breakdowns
resulting from human error. It also can be circumvented by collusion or improper management override. Because of its
limitations, there is a risk that internal control over financial reporting may not prevent or detect, on a timely basis, errors that
could cause a material misstatement of the financial statements.
We assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making our
assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or
COSO, in Internal Control — Integrated Framework (1992 Framework). A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis by a
company’s internal controls. Based on our assessment, we identified a material weakness related to our inability to update our
disclosure controls and procedures in a manner that adequately ensures the accumulation and communication to management of
information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws, including
disclosures affecting our consolidated financial statements.
We have been under conservatorship of FHFA since September 6, 2008. FHFA is an independent agency that currently
functions as both our Conservator and our regulator with respect to our safety, soundness and mission. Because we are in
conservatorship, some of the information that we may need to meet our disclosure obligations may be solely within the
knowledge of FHFA. As our Conservator, FHFA has the power to take actions without our knowledge that could be material to
investors and could significantly affect our financial performance. Although we and FHFA have attempted to design and
implement disclosure policies and procedures that would account for the conservatorship and accomplish the same objectives
as disclosure controls and procedures for a typical reporting company, there are inherent structural limitations on our ability to
design, implement, test or operate effective disclosure controls and procedures under the current circumstances. As our
Conservator and regulator, FHFA is limited in its ability to design and implement a complete set of disclosure controls and
procedures relating to us, particularly with respect to current reporting pursuant to Form 8-K. Similarly, as a regulated entity,
we are limited in our ability to design, implement, operate and test the controls and procedures for which FHFA is responsible.
For example, FHFA may formulate certain intentions with respect to the conduct of our business that, if known to management,
would require consideration for disclosure or reflection in our financial statements, but that FHFA, for regulatory reasons, may
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be constrained from communicating to management. As a result, we have concluded that this control deficiency constitutes a
material weakness in our internal control over financial reporting.
Because of this material weakness, we have concluded that our internal control over financial reporting was not effective
as of December 31, 2013 based on the COSO criteria (1992 Framework). PricewaterhouseCoopers LLP, an independent
registered public accounting firm, audited the effectiveness of our internal control over financial reporting as of December 31,
2013 and also determined that our internal control over financial reporting was not effective. PricewaterhouseCoopers LLP’s
report appears in “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA — Report of Independent Registered Public
Accounting Firm.”
Mitigating Actions Related to the Material Weakness in Internal Control Over Financial Reporting
As described under "Management's Report on Internal Control Over Financial Reporting,” we have one material
weakness in internal control over financial reporting as of December 31, 2013 that we have not remediated.
Given the structural nature of this material weakness, we believe it is likely that we will not remediate it while we are
under conservatorship. However, both we and FHFA have continued to engage in activities and employ procedures and
practices intended to permit accumulation and communication to management of information needed to meet our disclosure
obligations under the federal securities laws. These include the following:
•
FHFA has established the Office of Conservatorship Operations, which is intended to facilitate operation of the
company with the oversight of the Conservator.
• We provide drafts of our SEC filings to FHFA personnel for their review and comment prior to filing. We also provide
drafts of external press releases, statements and speeches to FHFA personnel for their review and comment prior to
release.
•
FHFA personnel, including senior officials, review our SEC filings prior to filing, including this Form 10-K, and engage
in discussions regarding issues associated with the information contained in those filings. Prior to filing this Form 10-K,
FHFA provided us with a written acknowledgement that it had reviewed the Form 10-K, was not aware of any material
misstatements or omissions in the Form 10-K, and had no objection to our filing the Form 10-K.
• The Director of FHFA is in frequent communication with our Chief Executive Officer, typically meeting (in person or
by phone) on at least a bi-weekly basis.
•
•
FHFA representatives hold frequent meetings with various groups within the company to enhance the flow of
information and to provide oversight on a variety of matters, including accounting, credit and capital markets
management, external communications, and legal matters.
Senior officials within FHFA’s accounting group meet frequently with our senior financial executives regarding our
accounting policies, practices, and procedures.
In view of our mitigating actions related to this material weakness, we believe that our consolidated financial statements
for the year ended December 31, 2013 have been prepared in conformity with GAAP.
Changes in Internal Control Over Financial Reporting During the Quarter Ended December 31, 2013
We evaluated the changes in our internal control over financial reporting that occurred during the quarter ended
December 31, 2013 and concluded that the following matter has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting:
• On November 11, 2013, James G. Mackey, Executive Vice President — Chief Financial Officer, joined Freddie Mac,
replacing Ross J. Kari.
Election of Directors
ITEM 9B. OTHER INFORMATION
Upon the appointment of FHFA as our Conservator on September 6, 2008, the Conservator immediately succeeded to all
rights, titles, powers and privileges of Freddie Mac, and of any stockholder, officer or director thereof, with respect to the
company and its assets, including, without limitation, the right of holders of our common stock to vote with respect to the
election of directors and any other matter for which stockholder approval is required or deemed advisable.
On February 24, 2014, the Conservator executed a written consent re-electing each of the then-current directors as
members of our Board of Directors, effective as of that date. The individuals elected as directors by the Conservator are listed
below.
Carolyn H. Byrd
Richard C. Hartnack
Steven W. Kohlhagen
Donald H. Layton
Christopher S. Lynch
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Sara Mathew
Saiyid T. Naqvi
Nicolas P. Retsinas
Eugene B. Shanks, Jr.
Anthony A. Williams
The terms of the directors elected under the February 24, 2014 consent will continue until the date of the next annual
meeting of stockholders or the Conservator next elects directors by written consent, whichever occurs first.
2014 Target Total Direct Compensation
The Compensation Committee’s 2014 Target TDC recommendation for each Named Executive Officer who is a current
employee was approved by FHFA and remains unchanged from the 2013 Target TDC, with the exception of Mr. Weiss. For Mr.
Weiss, approved increases were $5,000 for Base Salary and $20,000 for Target TDC. These increases were determined after
taking into account his performance, the scope and breadth of his responsibilities compared to those of other executives at the
company, and that no competitive market data match was available due to the unique nature of his responsibilities.
The following table sets forth the components of compensation on an annual basis for each of our Named Executive
Officers who is a current employee.
Table 74 — 2014 Target TDC
Named Executive Officer
Donald H. Layton
James G. Mackey
David B. Lowman
William H. McDavid
Jerry Weiss
Base Salary
Fixed
Deferred Salary
At-Risk
Deferred Salary
Target TDC
$
600,000
$
— $
— $
500,000
500,000
500,000
500,000
1,600,000
1,600,000
1,320,000
900,000
900,000
900,000
780,000
600,000
600,000
3,000,000
3,000,000
2,600,000
2,000,000
2014 Complementary Corporate Goals
On January 28, 2014 Freddie Mac adopted corporate performance objectives for 2014 (the “2014 Complementary
Corporate Goals”). Under the terms of the 2014 Executive Management Compensation Program, one-half of a participating
officer’s At-Risk Deferred Salary (or 15% of Target TDC) is subject to reduction based on an assessment of the company’s
performance against the 2014 Complementary Corporate Goals and the officer’s individual performance.
The 2014 Complementary Corporate Goals are as follows:
•
People: Maximize the contributions of our people.
• Customers: Strive to achieve industry-leading customer experience levels.
• Mission: Help people own, rent, and stay in their homes.
•
Financial Performance: Improve our efficiency and core financial performance.
• Risk Management: Make risk management a competitive advantage.
• Technology and Infrastructure: Utilize technology and infrastructure to prepare for a future competitive market.
• Execution: Do everything better, faster and more cost effectively through superior execution.
Within the seven categories listed above, there are a number of more specific criteria. For example:
•
People: Build the right culture; retain high performer talent; and improve leadership diversity.
• Customers: Strengthen market presence and relevance; continue focus on five distinct customer sets, both direct and
indirect; provide more efficient customer service; and expand customer communication.
• Mission: Achieve single-family affordable housing goals; increase percent of multifamily purchases with rents less than
or equal to small area fair market rents; and increase loan modifications and repayment plans efficiency ratio.
•
Financial Performance: Improve single-family profitability; maintain profitable multifamily business; actively manage
retained portfolio assets; and strengthen expense management discipline.
• Risk Management: Reinforce risk ownership; make informed risk-reward decisions; and maintain control environment.
• Technology and Infrastructure: Deploy an out-of-region disaster recovery capability; enhance availability of critical,
customer-facing applications; and improve facilities utilization.
• Execution: Emphasis on timeliness and quality and focus on efficiency.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Background
On September 6, 2008, the Director of FHFA appointed FHFA as our Conservator. Upon its appointment as Conservator,
FHFA immediately succeeded to, among other things, the right of holders of our common stock to vote with respect to the
election of directors. During conservatorship, stockholders do not have the ability to recommend director nominees or vote for
the election of our directors. Accordingly, we will not solicit proxies, distribute a proxy statement to stockholders, or hold an
annual meeting of stockholders in 2014. Instead, the Conservator has elected directors by a written consent in lieu of an annual
meeting, as it has done in previous years.
Directors
On November 24, 2008, the Conservator reconstituted our Board of Directors and delegated certain powers to the Board
while reserving certain powers of approval to itself. See “Authority of the Board and Board Committees.” The Conservator
determined that the Board is to have a non-executive Chairman, and is to consist of a minimum of nine and not more than
13 directors, with the Chief Executive Officer being the only corporate officer serving as a member of the Board.
On February 24, 2014 the Conservator executed a written consent, effective as of that date, re-electing each of the then-
current directors as a member of our Board of Directors. The terms of those directors will end: (a) on the date of the next annual
meeting of our stockholders; or (b) when the Conservator next elects directors by written consent, whichever occurs first.
Currently, we have ten directors. The Board is conducting a search for individuals qualified to fill the remaining seats on the
Board that are currently vacant.
Our Board seeks candidates for director who have achieved a high level of stature, success, and respect in their principal
occupations. Each of our current directors was selected as a candidate because of his or her character, judgment, experience,
and expertise. The qualifications of candidates also were evaluated in light of the requirement in our charter, as amended by the
Reform Act, that our Board must at all times have at least one individual from the homebuilding, mortgage lending and real
estate industries, and at least one person from an organization representing consumer or community interests or one person who
has demonstrated a career commitment to the provision of housing for low-income households. Consistent with the
examination guidance for corporate governance issued by FHFA, the factors considered also include the knowledge directors
would have, as a group, in the areas of business, finance, accounting, risk management, public policy, mortgage lending, real
estate, low-income housing, homebuilding, regulation of financial institutions, and any other areas that may be relevant to our
safe and sound operation. Additionally, in accordance with the guidance issued by FHFA, we considered whether a candidate’s
other commitments, including the number of other board memberships held by the candidate, would permit the candidate to
devote sufficient time to the candidate’s duties and responsibilities as a director. See “CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE — Board Diversity” for additional information
concerning the Board’s consideration of diversity in identifying director nominees and candidates.
The following is a brief discussion of: the age and length of Board service of each director; each director’s experience,
qualifications, attributes, and/or skills that led to his or her selection as a director; and other biographical information about
each director, as of February 24, 2014:
• Carolyn H. Byrd joined the Board in December 2008. She is 65 years old. She is an experienced finance executive
who has held a variety of leadership positions. She also has significant public company audit committee experience.
Ms. Byrd’s internal audit and public company audit committee experience enables her to support the Board’s oversight
of our internal control over financial reporting and compliance matters.
Ms. Byrd has served as Chairman and Chief Executive Officer of GlobalTech Financial, LLC, a financial services
company she founded, since 2000. From 1997 to 2000, Ms. Byrd was President of Coca-Cola Financial Corporation.
From 1977 to 1997, Ms. Byrd held a variety of domestic and international positions with The Coca-Cola Company,
including Chief of Internal Audits and Director of the Corporate Auditing Department. She is currently a director of
AFC Enterprises, Inc., where she is a member of the Audit Committee and the Corporate Governance and Nominating
Committee, and of Regions Financial Corporation, where she is chair of the Audit Committee and a member of the
Risk Committee. Ms. Byrd is a former member of the board of directors and audit committee member of Circuit City
Stores, Inc. and RARE Hospitality International, Inc., and she also served on the board of directors of St. Paul
Travelers Companies, Inc.
• Richard C. Hartnack joined the Board in May 2013. He is 68 years old. Mr. Hartnack is a seasoned industry
executive with proven leadership experience and a deep understanding of our industry. He has detailed knowledge of
underwriting, servicing and technology.
Mr. Hartnack was vice chairman and head of consumer and small business banking at U.S. Bancorp until his
retirement in February 2013. Prior to joining U.S. Bancorp in 2005, Mr. Hartnack served as vice chairman, director
and head of the community banking group at Union Bank of California from 1991. Previously, he was executive vice
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president at First Chicago Corporation where he was responsible for community banking. Earlier, he was in charge of
corporate banking at First Interstate Bank of Oregon, where he began his banking career in 1971. He is a past director
of the Federal Reserve Bank of San Francisco, MasterCard International (U.S. Region), UnionBanCal Corporation and
U.S. Bank (a subsidiary of U.S. Bancorp). He also previously served as chairman of the California Bankers
Association and the Bank Administration Institute.
•
Steven W. Kohlhagen joined the Board in February 2013. He is 66 years old. He is nationally recognized as a leading
financial expert with extensive knowledge of mortgage finance and the capital markets. He brings to the Board a
unique combination of senior executive leadership skills and a deep understanding of economics, modeling and
complex financial instruments.
Over the course of his career, Mr. Kohlhagen held senior executive positions at leading financial institutions. From
1992 to 2003 he worked at First Union National Bank (predecessor to Wachovia National Bank and Wells Fargo), last
serving as managing director of the Fixed Income Division. Mr. Kohlhagen served in senior roles at AIG Financial
Products from 1990 to 1992, Stamford Capital Group from 1987 to 1990, Bankers Trust Corporation from 1985 to
1987, and Lehman Brothers, Inc. from 1983 to 1985. Mr. Kohlhagen’s public sector experience encompasses
consulting work for the Organization for Economic Cooperation and Development from 1980 to 1981, the United
States Department of the Treasury from 1976 to 1977, and the Federal Reserve Board in 1976. He was also senior staff
economist for the Council of Economic Advisors, White House Staff from 1978 to 1979.
Mr. Kohlhagen has been a director: since 2006, of AMETEK Inc., a global manufacturer of electronic instruments and
electromechanical devices, where he is a member of the Audit Committee; since 2012, of Abtech Holdings Inc., a
developer and manufacturer of environmental technologies, where he is a member of the Audit Committee; since
2013, of GulfMark Offshore Inc., a marine transportation services company, where he is a member of the Audit
Committee and Compensation Committee; and, since 2007, of Reval Inc., a financial risk management and treasury
management systems provider, where he is a member of the Governance and Nominating Committee. Mr. Kohlhagen
served as a director of the IQ Mutual Funds, a family of Merrill Lynch registered, closed-end investment companies,
from 2005 to 2010. Since 2001, Mr. Kohlhagen has been an Advisory Board member of the Stanford Institute for
Economic Policy Research. He has also served on the Board of Advisors of Roper St. Francis Cancer Center,
Charleston, S.C., since 2011. In addition, he served as a professor of international economics and finance at the
University of California, Berkeley from 1973 to 1983.
• Donald H. Layton joined the Board in May 2012, upon commencement of his employment as Chief Executive Officer.
He is 63 years old. He is an experienced finance executive and leader of finance and investment organizations.
Mr. Layton’s experience as a leader of financial organizations enables him to provide valuable business and operating
perspectives to the Board.
Prior to joining Freddie Mac, Mr. Layton worked for nearly 30 years at JPMorgan Chase and its predecessors, starting
as a trainee and rising to vice chairman and a member of the company’s three-person Office of the Chairman, retiring
in 2004. In his career at JPMorgan Chase, Mr. Layton’s responsibilities spanned capital markets and investment
banking, consumer banking and operating services. From 2002 to 2004, he was responsible for the company’s Chase
Financial Services unit, which included the fourth largest mortgage firm in the U.S. He was co-chief executive officer
of J.P. Morgan, the investment bank of JPMorgan Chase, overseeing the entire range of the investment bank’s global
activities, from 2000 to 2002. Prior to the merger of Chase Manhattan and J.P. Morgan in 2000, Mr. Layton was
responsible for Chase’s worldwide capital markets and trading activities, including foreign exchange, risk management
products, emerging markets, and fixed income, as well as its operating services businesses. He additionally supervised
the bank’s investment portfolio for many years. More recently, Mr. Layton served as chairman and chief executive
officer of online brokerage E*TRADE Financial Corporation. He joined E*TRADE Financial Corporation as
chairman in November 2007 and became chief executive officer in March 2008, retiring in December 2009.
Mr. Layton also served as a senior advisor to the Securities Industry and Financial Markets Association from 2006 to
2008 and is chairman of the board of the Partnership for the Homeless, a nonprofit dedicated to reducing homelessness
in New York City. Mr. Layton was a member of the board of directors of Assured Guaranty Ltd. from May 2006 to
May 2012 and a member of the board of directors of American International Group, Inc. from April 2010 to May
2012.
• Christopher S. Lynch joined the Board in December 2008. He is 56 years old. He is an experienced senior accounting
executive who served as the lead audit signing partner and account executive for several large financial institutions
with mortgage lending businesses. He also has significant public company audit committee experience and risk
management experience. Mr. Lynch’s extensive experience in finance, accounting and risk management enables him to
provide valuable guidance to the Board on complex accounting and risk management issues.
Mr. Lynch has served as Non-Executive Chairman of Freddie Mac since December 2011. Mr. Lynch is an independent
consultant providing a variety of services to financial intermediaries, including corporate restructuring, risk
management, strategy, governance, financial and regulatory reporting and troubled-asset management. Mr. Lynch
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retired from KPMG LLP in May 2007, where he held a variety of leadership positions, including National Partner in
Charge — Financial Services, the U.S. firm’s largest industry division. Mr. Lynch chaired KPMG’s Americas
Financial Services Leadership team, was a member of the Global Financial Services Leadership and the
U.S. Industries Leadership teams and led the Banking & Finance practice. Mr. Lynch also served as a partner in
KPMG’s Department of Professional Practice and as a Practice Fellow at the Financial Accounting Standards Board.
Mr. Lynch also is a director of American International Group, Inc., where he is the Chair of the Audit Committee and a
member of the Finance and Risk Management Committee. In addition, Mr. Lynch serves on the National Audit
Committee Chair Advisory Council of the National Association of Corporate Directors. Mr. Lynch is a frequent
speaker on matters pertaining to corporate governance, risk management, corporate restructuring, executive
development, housing finance, and regulatory reporting.
•
Sara Mathew joined the Board in December 2013. She is 58 years old. She is an executive with global financial and
general management experience. Ms. Mathew’s extensive business, financial and management experience, and her
public company board and audit committee experience, enable her to contribute to the Board’s oversight of the
management and operation of the Company and of its financial reporting.
From 2001 until December 2013, Ms. Mathew worked at The Dun & Bradstreet Corporation ("D&B"), serving as
Chairman, President and Chief Executive Officer from 2010-2013. In 2007, she was appointed President and Chief
Operating Officer, in January 2010, Chief Executive Officer and in December 2010, Chairman. Before joining D&B,
Ms. Mathew spent 18 years at The Procter & Gamble Company in a variety of finance and management positions: her
last position was Vice President, Finance, Australia, Asia and India from 2000 - 2001. Since 2005, Ms. Mathew has
been a director of Campbell Soup Company, Inc., a manufacturer and marketer of branded convenience food products,
where she is chair of the Audit Committee and a member of the Governance Committee. Since 2013, Ms. Mathew also
has served as a director of Avon, a leading global beauty company, where she is a member of the Finance Committee.
Ms. Mathew served as a director of D&B from 2008-2013. Since 2012, Ms. Mathew has been on the International
Advisory Council for Zurich Financial Services Group, a multi-line insurance provider.
•
Saiyid T. Naqvi joined the Board in August 2013. He is 64 years old. He is a seasoned financial executive with
proven leadership experience and detailed knowledge of mortgage and consumer financial operations, as well as a
deep background in risk and operational management.
Mr. Naqvi led PNC Mortgage Corporation of America as president and chief executive officer between 1995 and
2001, when PNC Financial Services Group sold its mortgage business. In 2009, Mr. Naqvi returned to supervise the
bank's integration of National City Mortgage Company and to head the newly constituted PNC Mortgage as president
and chief executive officer. PNC Mortgage operates as a division of PNC Bank, National Association, which is a
subsidiary of PNC Financial Services Group. Until his retirement in April 2013, Mr. Naqvi was responsible for
management of PNC Mortgage’s $121 billion portfolio and national network of 91 retail mortgage offices. Between
2001 and 2009, he held a number of leadership positions, including president of Harley-Davidson Financial Services,
Inc., chief executive officer of DeepGreen Financial, Inc., and president and chief executive officer of Setara
Corporation. Mr. Naqvi formerly served on the boards of Genworth Financial, Inc. and Hanover Capital Mortgage
Holdings, Inc.
• Nicolas P. Retsinas joined the Board in June 2007. He is 67 years old. He is an experienced leader in the governmental
and educational sectors, with in-depth knowledge of the mortgage lending, real estate and homebuilding industries. He
also has represented consumer and community interests and has demonstrated a career commitment to the provision of
housing for low-income households. Mr. Retsinas’ public, private and academic experience, including his service on
the boards of several not-for-profit organizations, enables him to bring to the Board broad knowledge and
understanding of housing and consumer and community issues.
Mr. Retsinas is a senior lecturer in Real Estate at the Harvard Business School and is Director Emeritus of Harvard
University’s Joint Center for Housing Studies, where he served as Director from 1998 to 2010. He is also a lecturer in
Housing Studies at the Graduate School of Design. Prior to his Harvard appointment, Mr. Retsinas served as Assistant
Secretary for Housing — Federal Housing Commissioner at the United States Department of Housing and Urban
Development from 1993 to 1998 and as Director of the Office of Thrift Supervision from 1996 to 1997. He served on
the Board of the Federal Deposit Insurance Corporation from 1996 to 1997, the Federal Housing Finance Board from
1993 to 1998 and the Neighborhood Reinvestment Corporation from 1993 to 1998. Mr. Retsinas also formerly served
on the Board of Trustees for the National Housing Endowment and Enterprise Community Partners. Currently,
Mr. Retsinas serves on the Board of Directors of the Center for Responsible Lending, as a member of the Bipartisan
Policy Center’s Housing Commission, and as chair of the Providence Housing Authority.
• Eugene B. Shanks, Jr. joined the Board in December 2008. He is 66 years old. He is an experienced finance executive
with leadership and risk management expertise. Mr. Shanks’ leadership and risk management experience enables him
to provide the Board with valuable guidance on risk management issues and our strategic direction.
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Mr. Shanks is a Trustee of Vanderbilt University, a member of the Advisory Board of the Stanford Institute for
Economic Policy Research, a director of ACE Limited, where he serves as a member of the Risk and Finance
Committee, a Senior Advisor to Bain and Company, and a founding director at The Posse Foundation. From
November 2007 until August 2008, Mr. Shanks was a senior consultant to Trinsum Group, Incorporated, a strategic
consulting and asset management company. From 1997 until its sale in 2002, Mr. Shanks was President and Chief
Executive Officer of NetRisk, Inc., a risk management software and advisory services company he founded. From
1973 to 1978 and from 1980 to 1995, Mr. Shanks held a variety of positions with Bankers Trust New York
Corporation, including head of Global Markets from 1986 to 1992 and President and Director from 1992 to 1995.
From 1978 to 1980, he was Treasurer of Commerce Union Bank in Nashville, Tennessee.
• Anthony A. Williams joined the Board in December 2008. He is 62 years old. He is an experienced leader in national,
state and local governments, with extensive knowledge concerning real estate and housing for low-income individuals.
He also has significant experience in financial matters and is an experienced academic focusing on public management
issues. Mr. Williams’ leadership and operating experience in the public sector allows him to provide a unique
perspective on state and local housing issues.
Mr. Williams is the CEO and Executive Director of the Federal City Council of Washington, DC, an organization
instrumental in local projects such as the Metro, Ronald Reagan Building and International Trade Center, and
revitalization of Union Station. He was the Bloomberg Lecturer in Public Management at Harvard’s Kennedy School
of Government from 2009 through 2012. He also served as the Executive Director of Global Government Practice
from January 2010 until January 2012 and as a Senior Fellow from January 2012 until June 2012 at the Corporate
Executive Board Company. Since September 2011, Mr. Williams has been affiliated with McKenna, Long & Aldridge,
LLP, a law firm, and from May 2009 until September 2011 he was affiliated with the law firm of Arent Fox LLP.
Mr. Williams served as Chief Executive Officer of Primum Public Realty Trust, from January 2007 until December
2008.
Mr. Williams was elected to two terms as the fourth mayor of Washington, D.C. from 1999 to January 2007, having
served as Chief Financial Officer from 1995 to 1998. He also served as President of the National League of Cities and
as Vice-Chair of the Metropolitan Washington Council of Governments. From 1993 to 1995, Mr. Williams was the
first Chief Financial Officer for the U.S. Department of Agriculture. From 1991 to 1993, Mr. Williams was the Deputy
State Comptroller of Connecticut. From 1989 to 1991, Mr. Williams was the Executive Director of the Community
Development Agency of St. Louis, Missouri. From 1988 to 1989, he worked as Assistant Director of the Boston
Redevelopment Agency where he led the Department of Neighborhood Housing and Development, one of the
authority’s primary divisions. Mr. Williams also previously served as a director of Meruelo Maddux Properties, Inc.
Mr. Williams is also on the board of the Calvert Sage Fund and of each fund comprising the Calvert Multiple Funds.
Authority of the Board and Board Committees
The directors serve on behalf of, and exercise authority as directed by, the Conservator. The Conservator has delegated to
the Board and its committees authority to function in accordance with the duties and authorities set forth in applicable statutes,
regulations, guidance, orders and directives and our Bylaws and Board committee charters, but reserved certain items requiring
Conservator approval. On November 15, 2012, the Conservator revised and expanded the categories of items requiring
Conservator approval, instructing the Board that it should oversee that management consults with and obtains approval of the
Conservator before taking action in the following areas:
• matters requiring the approval of or consultation with Treasury under the covenants of the Purchase Agreement (see
“BUSINESS — Conservatorship and Related Matters — Treasury Agreements – Covenants Under Treasury
Agreement”);
•
•
redemptions or repurchases of subordinated debt, except as necessary to comply with the limit in the Purchase
Agreement;
increases in Board risk limits, material changes in accounting policy, and reasonably foreseeable material increases in
operational risk;
• matters that relate to the Conservator’s powers, the status of Freddie Mac in conservatorship, or the legal effect of the
conservatorship on contracts, such as, but not limited to, the initiation of material actions in connection with litigation
addressing the actions or authority of the Conservator, repudiation of contracts, qualified financial contracts in dispute
due to conservatorship status, and counterparties attempting to nullify or amend contracts due to conservatorship status;
retention and termination of external auditors and law firms serving as consultants to the Board;
•
•
•
agreements relating to litigation, claims, regulatory proceedings, or tax-related matters where the value of the claim is in
excess of $50 million, including related matters that aggregate to more than $50 million (but excluding loan workouts);
alterations or changes to the terms of any master agreement between us and any of our top five single-family sellers or
servicers that are not otherwise mandated by FHFA and that will alter, in a material way, the business relationship
between the parties;
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•
•
•
•
•
•
•
•
termination of a contract (other than by expiration pursuant to its terms) between us and any of our top five single-
family sellers or servicers;
actions that, in the reasonable business judgment of management at the time that the action is to be taken, are likely to
cause significant reputational risk to us or result in substantial negative publicity;
creation of any subsidiary or affiliate, or entering into a substantial transaction with a subsidiary or affiliate, except for
the creation of, or a transaction with, a subsidiary or affiliate undertaken in the ordinary course of business (e.g.,
creation of a securitization trust or REMIC);
setting or increasing the compensation or benefits payable to directors;
entering into new compensation arrangements or increasing amounts or benefits payable under existing compensation
arrangements for senior vice presidents and above and other officers as FHFA may deem necessary to successfully
execute its role as Conservator;
any establishment or modification by us of performance management processes for such officers, including the
establishment or modification of a Conservator scorecard;
any assessment by us of our performance against a Conservator scorecard; and
establishing the annual operating budget.
FHFA has indicated that it expects the Board to review and approve all matters that will require Conservator approval
before such matters are submitted to FHFA. In addition, FHFA requires us to provide timely notice to it of any planned changes
in business processes or operations, including changes to single-family or multifamily credit policies and loss mitigation
strategies that management has determined in its reasonable business judgment to be significant, other than changes made at the
direction or request of FHFA. FHFA will then determine whether any such actions or plans require Conservator and/or Board
review or approval. Finally, in September 2013, FHFA informed us that mortgage servicing right (MSR) sales and transfers and
servicing transfers would require Conservator approval until further notice. FHFA modified this in October 2013 to require
reporting to FHFA of all such sales and transfers and FHFA approval for sales or transfers involving 25,000 or more loans.
Prior Board approval is not required.
The Board has five standing committees: Audit; Business and Risk; Compensation; Executive; and Nominating and
Governance. All standing committees other than the Executive Committee meet regularly. The membership of each committee
as of February 24, 2014 is shown in the table below.
Table 75 — Board of Directors Committee Membership
Director
C. Byrd
R. Hartnack
S. Kohlhagen
D. Layton
C. Lynch
S. Mathew
S. Naqvi
N. Retsinas
E. Shanks
A. Williams
= Member of the Committee
C =Chairman of the Committee
Compensation
Executive
Nominating and
Governance
Audit
C
Business
and Risk
C
C
C
C
Charters describing the duties of the committees have been adopted by the Board and approved by the Conservator. All of
the charters of standing committees are available on our website at www.freddiemac.com/governance/bd committees.html.
Our Board has an independent Non-Executive Chairman, whose responsibilities include presiding over meetings of the
Board, regularly scheduled executive sessions of the non-employee directors, and executive sessions including only the
independent directors that occur at least once annually if any of the non-employee directors are not independent. Mr. Lynch has
served as Non-Executive Chairman since December 2011.
Communications with Directors
Interested parties wishing to communicate any concerns or questions about Freddie Mac to the Non-Executive Chairman
of the Board or to our non-employee directors as a group may do so by U.S. mail, addressed to the Corporate Secretary, Freddie
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Mac, Mail Stop 200, 8200 Jones Branch Drive, McLean, VA 22102-3110. Communications may be addressed to a specific
director or directors or to groups of directors, such as the independent or non-employee directors.
Executive Officers
As of February 25, 2014, our executive officers are as follows:
Name
Donald H. Layton
James G. Mackey
David M. Brickman
David B. Lowman
William H. McDavid
Jerry Weiss
Paige H. Wisdom
Michael T. Hutchins
Timothy F. Kenny
Robert Lux
Robert D. Mailloux
Dwight P. Robinson
Carol A. Wambeke
Age
Year of
Affiliation
Position
63
46
48
56
67
56
52
58
52
50
46
60
54
2012
2013
1999
2013
2012
2003
2008
2013
2007
2010
2002
1998
1997
Chief Executive Officer
Executive Vice President — Chief Financial Officer
Executive Vice President — Multifamily
Executive Vice President —Single-Family Business
Executive Vice President — General Counsel & Corporate Secretary
Executive Vice President — Chief Administrative Officer
Executive Vice President — Chief Enterprise Risk Officer
Senior Vice President — Investments and Capital Markets
Senior Vice President — General Auditor
Senior Vice President — Chief Information Officer
Senior Vice President — Corporate Controller & Principal Accounting Officer
Senior Vice President — Human Resources, Diversity and Outreach
Senior Vice President — Chief Compliance Officer
The following is a brief biographical description of each executive officer who is not also a member of the Board.
James G. Mackey was appointed Executive Vice President - Chief Financial Officer in November 2013. Mr. Mackey
joined us from Ally Financial Inc., an auto finance and direct banking financial services company, where he served as
Executive Vice President and Chief Financial Officer beginning in June 2011, after serving as Interim Chief Financial Officer
from April 2010. Mr. Mackey joined Ally Financial in March 2009 as Group Vice President and Senior Finance Executive.
Previously, Mr. Mackey served as Chief Financial Officer for the Corporate Investments, Corporate Treasury and Private
Equity divisions at Bank of America Corporation, a financial services firm, from 2007 to 2009.
David M. Brickman was appointed Executive Vice President — Multifamily in February 2014 and prior to that served as
our Senior Vice President — Multifamily from July 2011. In these roles, he has been responsible for overall management of our
Multifamily business line. From June 2011 until July 2011, he served as Senior Vice President — Multifamily Commercial
Mortgage-Backed Security Capital Markets. From March 2004 until June 2011, he served as Vice President in charge of
various units responsible for Multifamily Capital Markets. In his previous roles at Freddie Mac, Mr. Brickman led the
multifamily pricing, costing and research teams, was responsible for the development and implementation of new quantitative
pricing models and financial risk analysis frameworks for all multifamily programs, and designed several of Freddie Mac’s
multifamily financing products, including the Capital Markets Execution and the K-Deal Securitization Program. Prior to
joining Freddie Mac in 1999, Mr. Brickman co-led the Mortgage Finance and Credit Analysis group in the consulting practice
at PricewaterhouseCoopers LLP.
David B. Lowman was appointed Executive Vice President - Single-Family Business in May 2013. Previously, Mr.
Lowman served as a Senior Advisor to The Boston Consulting Group. Prior to that, he was the Chief Executive Officer of
Chase Home Lending from 2006 to 2011. Before Chase Home Lending, he spent a decade in senior leadership roles in various
lending businesses of Citigroup, including head of CitiMortgage and Citicorp Trust Bank, FSB. Before joining Citigroup, Mr.
Lowman spent 11 years at The Prudential Home Mortgage Company, Inc. in progressively senior leadership roles. He started
his career at KPMG where his clients included banks, thrifts and mortgage bankers.
William H. McDavid was appointed Executive Vice President — General Counsel and Corporate Secretary in July 2012.
Previously, Mr. McDavid was Co-General Counsel of JPMorgan Chase from 2004 until his retirement in 2006, and was
General Counsel of JPMorgan Chase from 2000 to 2004. Prior to that, he was General Counsel of various predecessors to
JPMorgan Chase, including The Chase Manhattan Corporation from 1996 to 2000 and of Chemical Banking Corporation from
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1988 to 1996. From 1981 to 1988, he was an Associate General Counsel at Bankers Trust Company, and from 1972 to 1981 he
was an attorney with the law firm of Debevoise & Plimpton.
Jerry Weiss was appointed Executive Vice President — Chief Administrative Officer in August 2010. In this role,
Mr. Weiss manages the services and operations of Freddie Mac’s Strategy; External Relations, including Government and
Industry Relations; Public Relations and Corporate Marketing; Internal Communications; Models, Mission and Research;
Conservatorship and Corporate Initiatives; Enterprise Project Management; and Making Home Affordable — Compliance
organizations. For a period subsequent to his appointment as Executive Vice President — Chief Administrative Officer, he also
served as our Chief Compliance Officer from August 2010 until June 2011. Prior to August 2010, Mr. Weiss served as our
Senior Vice President and Chief Compliance Officer and in various other senior management capacities since joining us in
October 2003. Prior to joining us, Mr. Weiss worked from 1990 at Merrill Lynch Investment Managers, most recently as First
Vice President and Global Head of Compliance. From 1982 to 1990, Mr. Weiss was with a national law practice in
Washington, D.C., where he specialized in securities regulation and corporate finance matters.
Paige H. Wisdom has served as our Chief Enterprise Risk Officer since April 2010. She currently serves as our Executive
Vice President — Chief Enterprise Risk Officer, a position to which she was appointed in October 2010. Prior to this
appointment, she served as our Senior Vice President — Chief Enterprise Risk Officer from April 2010 until October 2010. In
these roles, Ms. Wisdom has been responsible for providing overall leadership and direction for enterprise risk management
and leading an integrated framework for managing credit risk, market risk, operational risk and all other aspects of risk across
the organization. Prior to this, she served as the Senior Vice President — Business Unit Chief Financial Officer from January
2008 until April 2010. From August 2004 until December 2007, Ms. Wisdom served as a Business Unit Chief Financial Officer
at Bank of America for key businesses including: Global Business and Financial Services; Business Lending; and Global
Technology, Service and Fulfillment. Prior to joining Bank of America, Ms. Wisdom served at Bank One Corporation/
JPMorgan from June 2000 until July 2004, as the Chief Financial Officer, Corporate Bank and Co-Head Credit Portfolio
Management. Prior to that, she served in capital markets positions at UBS/Warburg Dillon Read, Citibank Salomon Smith
Barney, and Swiss Bank Corporation.
Michael T. Hutchins was appointed Senior Vice President - Investments and Capital Markets in July 2013. Previously,
Mr. Hutchins was Co-Founder and Chief Executive Officer of PrinceRidge, a financial services firm. Prior to founding
PrinceRidge, he was with UBS from 1996-2007, holding a variety of positions, including the Global Head of the Fixed Income
Rates & Currencies Group. Prior to UBS, Mr. Hutchins worked at Salomon Brothers from 1986 - 1996, where he held a
number of management positions, including Co-Head of Fixed Income Capital Markets.
Timothy F. Kenny was appointed Senior Vice President — General Auditor in July 2008. Prior to this appointment,
Mr. Kenny served as Vice President and Interim General Auditor starting in May 2008. Before that, he served as our Vice
President — Assistant General Auditor from September 2007 to May 2008. From 2001 to 2007, Mr. Kenny was a Managing
Director with BearingPoint, Inc. (formerly KPMG Consulting, Inc.) where he directed a large team of financial professionals
on a variety of financial risk management consulting projects with Ginnie Mae, the Federal Housing Administration, private
sector mortgage bankers and other federal credit agencies. He joined KPMG LLP, the predecessor organization to KPMG
Consulting, in 1986, was promoted to a KPMG Audit Partner in 1997, and served in that position until the separation of KPMG
Consulting from KPMG LLP in February 2001. From 2004 until 2008, Mr. Kenny was a member of the board of directors of
Farmer Mac, a government sponsored enterprise that has established a secondary market for agricultural loans.
Robert Lux was appointed Senior Vice President – Chief Information Officer in October 2010. Prior to joining Freddie
Mac, from 2008 to 2010, Mr. Lux served as a Principal at Towers Watson, a leading global professional services company,
where he was responsible for leading teams on three continents in the delivery of commercial risk modeling applications for the
insurance industry. From 2003 to 2008, Mr. Lux held a series of positions with increasing responsibilities, including service as
the Chief Architect for GMAC Financial Services and Chief Technology Officer for GMAC Residential Capital. Prior to that,
he held information technology leadership positions at Electronic Data Systems and Reuters Group PLC.
Robert D. Mailloux was appointed Senior Vice President — Corporate Controller & Principal Accounting Officer in
April 2010. Prior to holding his current position, Mr. Mailloux served as our Vice President — Acting Corporate Controller
beginning in October 2008. Prior to that appointment, he served as Vice President — Multifamily & Corporate Segment
Controller, from May 2008 until October 2008, and as Vice President — Corporate Financial Accounting from September 2004
until May 2008. Before that, Mr. Mailloux held the position of Director — Corporate Reporting and Analysis from March 2002
until September 2004. Before joining us, Mr. Mailloux served for 12 years at a leading accounting firm, where he managed a
variety of large audit and consulting engagements in the financial services and real estate industries.
Dwight P. Robinson was appointed Senior Vice President — Human Resources, Diversity and Outreach in September
2012. Prior to holding his current position, Mr. Robinson served as Senior Vice President – Housing Outreach and Chief
Diversity Officer beginning in October 2011. Prior to that appointment, he served as Senior Vice President – Corporate
Relations & Housing Outreach beginning in February 2005. Prior to that appointment, Mr. Robinson served as Senior Vice
President — Corporate Relations beginning in September 1999. Mr. Robinson joined us in March 1998 as Vice President —
Industry Relations. Prior to joining Freddie Mac, from 1994 to 1998 Mr. Robinson served as the Deputy Secretary of HUD,
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functioning as Chief Operating Officer. Before assuming the position at HUD, from 1993 to 1994 Mr. Robinson served as the
president of Ginnie Mae, where he was responsible for all major policy decisions affecting Ginnie Mae issuers and purchasers
worldwide.
Carol A. Wambeke was appointed Senior Vice President — Chief Compliance Officer in June 2011. In this position, she
manages Freddie Mac’s compliance with legal and regulatory requirements and related controls that govern the company’s
business activities. Prior to this, Ms. Wambeke served as Vice President of Compliance & Regulatory Affairs from June 2008
until June 2011. In this role, she was responsible for coordinating regulatory-related activities across the company and advising
management on regulatory concerns and initiatives. Prior to transferring to the Compliance Division, she was Vice President —
Regulatory Reporting & Analysis from February 2005 to June 2008 and Vice President — Regulatory Capital Operations from
March 2004 to February 2005. She joined Freddie Mac in 1997 as a senior economist and served in various positions prior to
2004 with responsibility for financial and housing economics and regulatory capital management.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the directors and executive officers of a reporting company and persons who
own more than 10% of a registered class of such company’s equity securities to file reports of ownership and changes in
ownership with the SEC. Based solely on a review of such reports, we believe that during 2013 all of our directors and
executive officers complied with such reporting obligations, except that the Form 3 for Devajyoti Ghose, a former Section 16
officer, which had initially been filed on time on May 25, 2011, was amended on March 1, 2013 to include 1,750 shares of
common stock inadvertently omitted from the original Form 3 due to an oversight of the reporting officer.
Codes of Conduct
We have separate codes of conduct applicable to all employees and to Board members that outline the principles, policies,
and laws governing their activities. Upon joining us or our Board, all employees and directors, respectively, are required to sign
acknowledgements that they have read the applicable code and agree to abide by it. In addition, all employees and directors
must respond to an annual questionnaire concerning code compliance. The employee code also serves as the code of ethics for
senior executives and financial officers required by the Sarbanes-Oxley Act and SEC regulations. Copies of our employee and
director codes of conduct are available, and any amendments or waivers that would be required to be disclosed are posted, on
our website at www.freddiemac.com.
Audit Committee Financial Expert
We have a standing Audit Committee that satisfies the “audit committee” definition under Section 3(a)(58)(A) of the
Exchange Act and the requirements of Rule 10A-3 under the Exchange Act. Although our stock was delisted from the NYSE in
July 2010, certain of the corporate governance requirements of the NYSE Listed Company Manual, including those relating to
audit committees, continue to apply to us because they are incorporated by reference in the FHFA corporate governance
regulations. Our Audit Committee satisfies the “audit committee” requirements set forth in Sections 303A.06 and 303A.07 of
the NYSE Listed Company Manual. The current members of the Audit Committee are Carolyn H. Byrd, Richard C. Hartnack,
Christopher S. Lynch, Sara Mathew and Anthony A. Williams, all of whom the Board determined in January 2014 are
independent within the meaning of Rule 10A-3 under the Exchange Act and Section 303A.02 of the NYSE Listed Company
Manual.
Ms. Byrd has been a member of the Audit Committee since December 2008 and is currently its chairman. The Board
initially determined in March 2012 and again determined in January 2014 that Ms. Byrd meets the definition of an “audit
committee financial expert” under SEC regulations.
Compensation Discussion and Analysis
ITEM 11. EXECUTIVE COMPENSATION
This section contains information regarding our compensation programs and policies, which reflect direction we have
received from FHFA as Conservator and which have been approved by FHFA. These programs and policies were applicable to
the following individuals, who were determined, pursuant to SEC rules, to be our Named Executive Officers, or NEOs, for the
year ended December 31, 2013.
• Donald H. Layton, Chief Executive Officer
•
James G. Mackey, Executive Vice President — Chief Financial Officer
• Ross J. Kari, Former Executive Vice President — Chief Financial Officer
• David B. Lowman, Executive Vice President — Single-Family Business
• William H. McDavid, Executive Vice President — General Counsel and Corporate Secretary
•
Jerry Weiss, Executive Vice President — Chief Administrative Officer
For further information on our primary business objectives and the progress we made during 2013 in accomplishing those
objectives, see “BUSINESS — Executive Summary.”
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Executive Management Compensation Program
Since Freddie Mac was placed in conservatorship in 2008, our executive compensation program has undergone numerous
changes, resulting in a significant decrease in the amount of compensation paid to our senior executive team. Specific changes
include:
• Reduction of target compensation by 10% in 2009 and by 10% again in 2012 for most of the senior executives working
for us at the beginning of those years;
• Termination of the pension plan and Pension SERP at the end of 2013 at FHFA's direction;
•
Institution by FHFA of a freeze in salary and total compensation for all of 2011 and 2012, such that changes to base
salaries and Target TDC were only provided for promotions and other significant increases in responsibility;
• Reduction of annual CEO compensation to $600,000; and
• Elimination of bonuses and the potential for the at-risk elements of compensation for our senior executives to exceed
target levels, regardless of the level of company and/or individual performance.
As a result of these and other actions taken since we were placed in conservatorship, the aggregate level of compensation
for our executives is now well below the 50th percentile of the competitive market.
The company's current status, uncertain future, and the level of compensation paid to our executives all contribute to
concerns about our ability to attract and retain competent and experienced executives and employees. However, our public
mission and certain features of our executive compensation program have enabled us to do so despite the challenges resulting
from our current circumstances. Our public mission to expand opportunities for homeownership and affordable rental housing
attracts employees at all levels who seek to help rebuild the nation's housing finance system and be involved in the ongoing
recovery of the housing market. Also, the higher proportion of fixed compensation in our executive compensation program —
only 30% of pay is at-risk, significantly below the levels at companies with which we compete for talent — provides a degree
of certainty that offsets, at least to some degree, the uncertain future of the company and the below market compensation levels.
Overview of Program Structure
The 2013 Executive Management Compensation Program, or the Executive Compensation Program, was adopted
effective January 1, 2013. It replaced the program that was in place during 2012. There were three primary changes introduced
in 2013, as follows:
1. The forfeiture provision for Fixed Deferred Salary was extended, such that the 25-month vesting schedule will reset
annually and earned but unpaid amounts will be reduced by 2% for each full or partial month by which a termination
precedes January 31 of the second year following the performance year;
2. A retirement provision was added that provides that officers who are at least 65 years old, regardless of their length of
service, will be considered retirement-eligible and not subject to the 2% reduction described above; and
3. At-Risk Deferred Salary was linked to corporate goals which are complementary to Conservatorship Scorecard
objectives (the Complementary Corporate Goals), such that the portion of At-Risk Deferred Salary that in prior years
was linked only to individual performance is now linked to both individual performance and the company’s
performance against the Complementary Corporate Goals.
For a description of our executive compensation program for 2014, see our Current Report on Form 8-K filed on
December 10, 2013.
Compensation in 2013 for each NEO other than Mr. Layton was governed by the Executive Compensation Program. A
further discussion of Mr. Layton’s compensation is set forth below in “— Chief Executive Officer Compensation.” The
Executive Compensation Program attempts to balance our need to retain critical executive talent and attract new executive
talent with the promotion of the conservatorship objectives, the Complementary Corporate Goals and the interests of taxpayers.
All compensation under the Executive Compensation Program is delivered exclusively in cash because we cannot provide
equity-based compensation to our employees under the terms of the Purchase Agreement, unless such grants are approved by
Treasury.
Although the Compensation Committee plays a significant role in considering and recommending executive
compensation, FHFA continues to be actively involved in determining such compensation. During conservatorship, the
Compensation Committee’s authority and flexibility have been exercised while recognizing the following circumstances:
• When FHFA was appointed as our Conservator in September 2008, it assumed all of the rights, titles, powers, and
privileges of the company and its stockholders, directors and management, including the authority to set executive
compensation. Under the terms of the Purchase Agreement, FHFA is required to consult with Treasury on any increases
in compensation or new compensation arrangements for our executive officers.
• Our directors serve on behalf of FHFA and exercise their authority as directed by FHFA. More information about the
role of our directors is provided above in “DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE — Authority of the Board and Board Committees.”
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•
•
FHFA has directed that its approval be obtained before taking action involving: (i) entering into new compensation
arrangements or increasing amounts or benefits payable under existing compensation arrangements for officers at the
senior vice president level and above and for other officers as FHFA may deem necessary to successfully carry out its
role as Conservator; (ii) any establishment or modification by us of performance management processes for such
officers; and (iii) any assessment by us of our performance against conservatorship scorecards.
FHFA retains the authority not only to approve both the terms and amount of any compensation prior to payment to any
of our executive officers, but also to modify any existing compensation arrangements.
Executive Compensation Best Practices
We employ the following executive compensation best practices:
• No agreements that guarantee a specific amount of compensation for a specified term of employment;
• No tax “gross-ups”;
• Limited executive perquisites;
• Clawback provisions that result in a significant portion of compensation earned being subject to recapture and/or
forfeiture; and
• No golden parachute payments or other change in control provisions in any of our compensation or benefit programs.
Chief Executive Officer Compensation
Mr. Layton’s compensation consists solely of an annual Base Salary of $600,000, a level established by FHFA. He does
not participate in the Executive Compensation Program and therefore has no compensation subject to either corporate or
individual performance, nor is his compensation subject to recapture as discussed further in "— Recapture and Forfeiture
Agreement." Mr. Layton is, however, eligible to participate in all other employee benefit plans offered to Freddie Mac’s other
senior executives pursuant to the terms of those plans.
Elements of Target Total Direct Compensation (Target TDC)
Compensation under the Executive Compensation Program for the NEOs other than Mr. Layton consists solely of salary
with two components — Base Salary and Deferred Salary — which are described in the table below.
Element of
Compensation
Base Salary
Deferred Salary
Description
Earned and paid each bi-weekly
pay period
Fixed Deferred Salary is earned
each bi-weekly pay period. The
amount earned each quarter is
paid on the last business day of
the corresponding quarter of the
following year, referred to as the
Approved Payment Schedule
At-Risk Deferred Salary is
earned and paid in the same
manner as Fixed Deferred
Salary, but is subject to reduction
based on corporate and
individual performance
Primary
Compensation Objective
To provide a fixed level of
compensation to each NEO
for the responsibility level of
his/her position
Key Features
Cannot exceed $500,000 per year,
except as approved by FHFA
To encourage executive
retention
Equal to Target TDC less Base Salary
and At-Risk Deferred Salary
To encourage achievement of
corporate and individual
performance goals
Equal to 30% of Target TDC. Half of
At-Risk Deferred Salary is subject to
reduction based on Conservatorship
Scorecard performance, and half is
subject to reduction based on a
combination of corporate performance
against Complementary Corporate
Goals and individual performance.
The objectives against which 2013
corporate performance was measured
are described in “At-Risk Deferred
Salary Based on Conservatorship
Scorecard Performance” and “At-Risk
Deferred Salary Based on
Complementary Corporate Goals and
Individual Performance.”
See Other Executive Compensation Considerations — Effect of Termination of Employment for more information on the
effect of a termination of employment, including a discussion of the timing and payment of any unpaid portion of Deferred
Salary upon all types of termination events.
Performance Measures for the Performance-Based Elements of Compensation
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The performance measures for At-Risk Deferred Salary, together with a description of the assessment of actual
performance against such measures, are presented below in “Determination of Actual 2013 Compensation — At-Risk Deferred
Salary Based on Conservatorship Scorecard Performance” and “— At-Risk Deferred Salary Based on Complementary
Corporate Goals and Individual Performance.” These performance measures were chosen because they reflected our 2013
priorities during conservatorship.
Determination of 2013 Target TDC for NEOs
Role of Compensation Consultants
As part of the annual process to determine the Target TDC for each of the NEOs other than Mr. Layton, whose
compensation is fixed as described in “— Chief Executive Officer Compensation,” the Compensation Committee receives
guidance from Meridian Compensation Partners, LLC (Meridian), its independent compensation consultant. In addition to the
annual process to determine Target TDC, Meridian provides guidance to the Compensation Committee during the course of the
year on other executive compensation matters.
Meridian has not provided the Compensation Committee with any non-executive compensation services, nor has the firm
provided any consulting services to our management. Additionally, during 2013, the Committee reviewed Meridian's
independence based on the factors outlined in Rule 10C-1(b)(4) under the Exchange Act and determined that Meridian
continues to be independent.
2013 Comparator Group Companies
The Compensation Committee annually evaluates each senior executive’s Target TDC in relation to the compensation of
executives in comparable positions at companies that are either in a similar line of business or are otherwise comparable for
purposes of recruiting and retaining individuals with the requisite skills and capabilities. We refer to this group of companies as
the Comparator Group.
When there is either no reasonable match or insufficient data from the Comparator Group for a position, or if Meridian
believes that additional data sources would strengthen the analysis of competitive market compensation levels, the
Compensation Committee may use alternative survey sources.
Prior to the Compensation Committee’s review to determine the Comparator Group companies to be used to establish
2013 Target TDC, FHFA recommended that Freddie Mac and Fannie Mae align their Comparator Groups so that consistent
compensation data is used by both companies for the same or similar senior officer positions. Representatives of the two
companies and their independent compensation consultants identified a group of companies to be used by both us and Fannie
Mae as the 2013 Comparator Group. The 2013 Comparator Group included five new companies — Ally Financial, AIG,
BB&T, Fifth Third Bancorp, and Regions Financial — and excluded the three credit card issuers — American Express,
MasterCard, and Visa — that were included in the 2012 Comparator Group. Additionally, we are included in our own
Comparator Group to ensure that both we and Fannie Mae use identical data for compensation benchmarking.
The Comparator Group consisted of the following companies for 2013:
Allstate
Ally Financial
AIG
Bank of America*
Bank of New York Mellon
BB&T
Capital One
Citigroup*
Fannie Mae
Fifth Third Bancorp
Freddie Mac
The Hartford
JPMorgan Chase*
MetLife
Northern Trust
PNC
Prudential
Regions Financial
State Street
SunTrust
U.S. Bancorp
Wells Fargo*
*
Only mortgage or real estate division-level compensation data from these diversified banking firms may be utilized where available and appropriate for
the position being benchmarked.
The Compensation Committee has determined, in consultation with FHFA and Fannie Mae, that these same companies
will comprise the 2014 Comparator Group.
Establishing Target TDC
For 2013, consistent with both 2012 and 2011, annual Target TDC adjustments were limited by FHFA to generally occur
only when an executive was promoted or experienced a significant change in responsibilities. In addition, FHFA’s view is that
the compensation for our senior officers, in the aggregate, should be positioned closer to the 25th percentile of the competitive
market, rather than our practice prior to entering conservatorship, which generally was to target compensation, in the aggregate,
at the 50th percentile of the competitive market.
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The Compensation Committee developed its 2013 Target TDC recommendations for the NEOs by reviewing data from
the Comparator Group and, as appropriate, alternative survey sources. For Messrs. Kari, Lowman, Mackey and McDavid, the
Compensation Committee reviewed competitive market data solely from the Comparator Group. For Mr. Weiss, our EVP-
Chief Administrative Officer, no reasonable match was available in either the Comparator Group or one of the alternative
survey sources due to the unique nature of his responsibilities. As a result, the compensation level for his role was evaluated by
comparing the scope and breadth of his responsibilities with those of other executive-level positions at the company.
The Compensation Committee’s 2013 Target TDC recommendation for each of the NEOs other than Mr. Layton was
reviewed and approved by FHFA. The following table sets forth the components of 2013 Target TDC for each of our NEOs
and the percentage change, if any, compared to 2012 Target TDC.
Table 76 — 2013 Target TDC
Named Executive Officer
Donald H. Layton
James G. Mackey
Ross J. Kari
David B. Lowman
William H. McDavid
Jerry Weiss
2013 Target TDC (Annualized)
Base
Salary
Fixed
Deferred
Salary
At-Risk
Deferred
Salary
Target TDC
Percent
Change v.
Prior Year
$
600,000
$
— $
— $
500,000
675,000
500,000
500,000
495,000
1,600,000
1,530,000
1,600,000
1,320,000
891,000
900,000
945,000
900,000
780,000
594,000
600,000
3,000,000
3,150,000
3,000,000
2,600,000
1,980,000
0%
N/A
0%
N/A
0%
0%
Determination of Actual 2013 Compensation
As discussed more fully below, the Compensation Committee and FHFA considered our achievements in pursuing our
primary business objectives, as well as other factors, in determining the funding levels for the following elements of
compensation in 2013.
At-Risk Deferred Salary Based on Conservatorship Scorecard Performance
Half of each NEO's 2013 At-Risk Deferred Salary, or 15% of Target TDC, was subject to reduction based on the
company's performance, as assessed by FHFA, against the objectives in the 2013 Conservatorship Scorecard. Following the
end of the year, FHFA independently assessed the company’s 2013 performance against the Conservatorship Scorecard, taking
into consideration the following:
• The quality, thoroughness, creativity, effectiveness, and timeliness of our work products;
• Collaboration and cooperation with FHFA, Fannie Mae and the industry; and
• The extent to which the outcomes of our activities support a competitive secondary mortgage market with lower
barriers to entry and exit of participants.
In particular, FHFA noted the following specific factors in assessing our performance against the Conservatorship Scorecard:
• The company's accomplishment of the vast majority of Conservatorship Scorecard objectives, scoring 100% on most of
its objectives;
• The thought leadership and creativity provided by Freddie Mac personnel involved in the risk sharing transactions; and
• The on-time delivery of the integration plan for the Common Securitization Platform.
Based on the company’s performance against the Conservatorship Scorecard, including these considerations, FHFA
determined that the funding level for this portion of At-Risk Deferred Salary should be 97%. The table below presents the
objectives and FHFA's assessment of our achievement against those objectives.
Table 77 — Achievement of Conservatorship Scorecard Performance Measures
Performance Goals
FHFA's Summary of Performance
1 Build a new infrastructure for the secondary mortgage market (30%)
Common Securitization Platform (CSP)
In conjunction with FHFA, continue the foundational development of the CSP:
All goals were achieved with the following exceptions, which
will be carried over to the 2014 Scorecard:
• Establish initial ownership and governance structure for the CSP. Assign
dedicated resources and establish independent location site for the CSP Team.
•
•
Completion of functional requirements
Development of a servicer integration plan
• Develop the design, scope and functional requirements for the CSP's modules and
develop the initial business operational process model.
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• Develop multi-year plans, inclusive of CSP build, test and deployment phases, and
the Enterprises' related system and operational changes.
• Develop and begin testing the CSP.
• Support FHFA progress reports to the public on the design, scope and functional
requirements. Update documents based on feedback received.
Contractual Disclosure Framework (CDF)
Continue the development of the CDF to meet the requirements for investors in
mortgage securities and credit risk:
•
Identify and develop standards in data (i.e., leveraging the work underway in the
Uniform Mortgage Data Program), disclosure and Seller/Servicer contracts.
• Develop and execute work plans for alignment activities between the Enterprises
with regard to the common standards and creation of legal/contractual documents
to facilitate varied credit risk transfer transactions.
• Engage with the public in a variety of forums to seek feedback and incorporate
revisions.
• Support FHFA progress reports to the public.
Uniform Mortgage Data Program (UMDP)
• Complete identification and development of data standards for Uniform Mortgage
Servicing Data (UMSD), leveraging the Mortgage Industry Standards
Maintenance Organization process. Establish timeline to implement data
collection and use of UMSD data in enhanced disclosures and risk management
strategy,
• Develop plan to standardize origination data (e.g., HUD-1 and Uniform
Residential Loan Application) as well as timeline for implementation.
All goals were achieved in accordance with roadmaps,
milestones and guidance from FHFA
All goals (including, for the fourth quarter, an alternative goal
established by FHFA as discussed below) were achieved.
An alternative milestone to provide a plan for publication of a
timeline for the announcement and collection of standardized
closing disclosure data was achieved. This alternative milestone
was established by FHFA due to a delay in the issuance of the
final rule and closing disclosure form by the Consumer Financial
Protection Bureau.
2
Contract the Enterprises dominant presence in the marketplace while simplifying and shrinking certain operations
(by line of business) (50%)
Single Family - Each Enterprise will demonstrate the viability of multiple types of
risk transfer transactions involving single family mortgages with at least $30 billion of
unpaid principal balances in 2013. (Risk transfer transactions of less than $10 billion
receive no credit toward this goal, while results between $10 billion and $30 billion
will receive partial credit.)
Multi-Family - Reduce the UPB amount of new multifamily business relative to 2012
by at least 10% by tightening underwriting, adjusting pricing and limiting product
offerings, while not increasing the proportion of the Enterprises' retained risk.
(Reductions between 0% and 10% will receive partial credit.)
All goals related to risk transfer transactions were achieved,
demonstrating the viability of multiple types of risk transfer
transactions involving single-family mortgages.
The goal was achieved
Retained Portfolio - Reduce the December 31, 2012 retained portfolio balance
(exclusive of agency securities) by selling 5% of assets. (Sales between 0% and 5%
will receive partial credit.)
The goal was achieved
Scoring Note: In assessing results for these measures under Performance Goal 2, FHFA considered changes in market and regulatory
conditions, and whether the transactions:
• Were economically sensible;
• Were operationally well-controlled;
Involved a meaningful transference of credit risk; and
•
• Were transparent to the marketplace.
FHFA also assessed whether the utility of the transaction furthered the long-term strategic goal of risk transfer, in judging whether to award credit for
individual transactions in meeting the totals set forth for each measure.
3 Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages (20%)
• Adapt quickly to statutory, regulatory, and market changes through appropriate
modifications and/or enhancements to loss mitigation and refinance options.
The goals were substantially achieved. However, in several
instances, the company's analysis was delayed or less complete
than desired. Additionally, program reporting for streamlined
modifications was less robust than desired. Certain initiatives
are ongoing and will be carried over to the 2014 Scorecard.
• Enhance post-delivery quality control practices and transparency associated with
All goals were achieved
new representation and warranty framework.
• Complete representation and warranty demands for pre-conservatorship loan
The goal was substantially achieved
activity.
• Develop counterparty risk management standards for mortgage insurers that
include uniform master policies and eligibility requirements.
The goals related to both mortgage insurance master policy
eligibility and mortgage insurer eligibility were achieved
•
Incorporate policies related to lender placed insurance (LPI) within the Servicing
Alignment initiative.
All goals were achieved. Additionally, the company is on
schedule with an ongoing obligation to work with FHFA to
identify additional LPI cost savings.
At-Risk Deferred Salary Based on Complementary Corporate Goals and Individual Performance
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The other half of each NEO's At-Risk Deferred Salary, also equal to 15% of Target TDC, was subject to reduction based
on a combination of the company's performance against the Complementary Corporate Goals and their individual performance.
The six Complementary Corporate Goals were established to drive how we manage and improve the commercial aspects of our
business and are intended to complement the FHFA Strategic Plan and Conservatorship Scorecard. Certain of the individual
performance objectives for the NEOs were either Conservatorship Scorecard objectives or Complementary Corporate Goals or
directly supported their achievement.
No weightings were assigned to the Complementary Corporate Goals. As a result, it was necessary for the Compensation
Committee to apply judgment in determining the overall level of performance. In making its determination, the Committee
primarily considered the fact that the vast majority of the Complementary Corporate Goals were achieved.
The Compensation Committee therefore determined that no reduction should be applied to this portion of At-Risk
Deferred Salary.
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Table 78 — Achievement of Complementary Corporate Goals
Complementary Corporate Goal and Specific Criteria
People - Make Freddie Mac a fulfilling place to work
• Achieve culture change goals at all levels
• Invest in people to strengthen commitment
• Enhance diversity efforts targeting higher-level
positions
Customers - Substantially enhance the customer
experience
• Strengthen market presence and relevance
• Increasingly focus on five distinct customer sets, both
direct and indirect
• Address customer dissatisfiers
• Focus on service
Enhanced Mission - Help people own, rent, and stay in
their homes
• Continue to provide liquidity
• Enhance our reputation by considering the impact of
our actions
Financial Performance - Enhance business capabilities
and performance to position the company for financial
success in a competitive future
• Improve single-family profitability and market
presence
• Maintain profitable and quality multifamily business
• Enhance retained portfolio value and market presence
• Strengthen our expense management discipline
• Sharpen our decision-making capabilities
Risk Management - Take responsibility for risk
management to make it a competitive advantage
• Reinforce risk ownership by instilling “everyone is a
risk manager”
• Address risks and resolve findings in a timely manner
by being proactive
• Make informed risk-reward decisions
Assessment of Performance
While we met or exceeded all but one of the external
benchmarks related to the employee survey used to
measure success for this goal, we did not achieve the
desired level of increased positive responses for several
of the survey questions.
With one exception, we achieved or exceeded all aspects
of this goal, which included completing a process for
identifying and addressing causes of dissatisfaction
among our key customers. We also established
measurable service level standards designed to have a
significant positive impact on external customer service.
These actions were borne out by increased customer
satisfaction index scores among both single-family and
multifamily customers.
All elements of this goal were either met or exceeded,
including those related to HARP purchases, loan
modifications, short sales, REO dispositions in repaired
condition and cases resolved with a non-foreclosure
solution.
With one exception, all elements of this goal were either
met or exceeded. While we succeeded in strengthening
our expense management discipline, our general and
administrative expenses were higher than anticipated due
primarily to FHFA-driven activity, specifically private
label securities litigation and development of the
Common Securitization Platform.
All but one element of this goal was either met or
exceeded. While closure of significant deficiencies has
far outpaced identification of new issues, we did not
achieve timely remediation of all open issues.
Execution - Improve the urgency and quality of execution While we established and executed internal service-level
• Focus on quality
• Increase decisiveness
agreements, we did not do so by the date set by
management. All other aspects of this goal were either
met or exceeded, including:
• Developing customer satisfaction scorecards;
• Delivering projects managed by the Enterprise
Project Management Office on schedule and on
budget; and
• Conducting more than the planned number of
process improvement reviews to identify
opportunities to reduce bureaucracy or improve the
speed of decision-making.
The Committee then assessed the individual performance of each NEO, receiving input from Mr. Layton. The Committee
used its judgment to determine the reduction, if any, for each NEO. In each case, the Compensation Committee's determination
was consistent with Mr. Layton's recommendation. FHFA reviewed and approved these determinations.
Each NEO's individual performance and the reduction, if any, to this portion of his At-Risk Deferred Salary, is discussed
below. The relatively narrow spread of the individual differentiation between the largest and smallest reductions for the portion
of At-Risk Deferred Salary based on performance against the Complementary Corporate Goals and individual performance
(expressed as a percentage of each NEO’s target) reflects the Compensation Committee's attempt to balance the contributions
of each NEO toward the high level of performance against the Complementary Corporate Goals, with the need to differentiate
between levels of individual performance.
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Mr. Layton's performance is not discussed below because his compensation does not include Deferred Salary.
James G. Mackey, Executive Vice President – Chief Financial Officer. The Compensation Committee determined that the
payment to Mr. Mackey for the portion of his At-Risk Deferred Salary that was subject to reduction based on Complementary
Corporate Goals and individual performance would be $64,772. This amount is equal to his target for the portion of the year he
was employed. Upon joining the company on November 11, 2013, Mr. Mackey focused on the year-end financial process,
identifying strategic changes that will enable the company to operate more effectively and efficiently, and successfully
transitioning into his new role. In addition, we generally do not perform a full assessment of performance – or reduce elements
of compensation based on individual performance – for employees who join the company on or after September 1 due to the
difficulty associated with evaluating new employee performance over fewer than four full months of service. Accordingly, the
CEO and the Compensation Committee determined there should be no reduction to this element of Mr. Mackey’s At-Risk
Deferred Salary.
Ross J. Kari, Former Executive Vice President – Chief Financial Officer. The Compensation Committee determined that
the payment to Mr. Kari for the portion of his At-Risk Deferred Salary that was subject to reduction based on Complementary
Corporate Goals and individual performance would be $448,875, compared with his target of $472,500. In recommending and
determining this amount, the CEO and the Compensation Committee considered that, during Mr. Kari’s tenure as our CFO –
which ended in November 2013 – the Finance Division generally met or exceeded the majority of its goals. These included
issuing timely and accurate financial statements, coordinating the cross-divisional effort that ultimately resulted in the release
of the valuation allowance associated with our deferred tax assets, supporting business units in the production of management
reports for business performance reviews, implementing numerous process improvements throughout the Finance Division to
enhance efficiency, and improving processes for remediating control issues.
David B. Lowman, Executive Vice President – Single-Family Business. The Compensation Committee determined that
the payment to Mr. Lowman for the portion of his At-Risk Deferred Salary that was subject to reduction based on
Complementary Corporate Goals and individual performance would be $294,886. This amount is equal to his target for the
portion of the year he was employed. In recommending and determining this amount, the CEO and the Compensation
Committee considered the impact Mr. Lowman had, since being hired in May 2013, in the accomplishment of the 2013
Conservatorship Scorecard objectives and Complementary Corporate Goals for which the Single Family Division was
primarily responsible. He personally led several representation and warranty settlement negotiations and successfully
organized resources to quickly and effectively reduce the volume of impaired loans in the Legacy single-family guarantee
book. More broadly, he provided strong leadership that was instrumental in enabling the Single Family Business to accomplish
a variety of significant objectives. Specifically, Mr. Lowman’s strong customer focus and problem-solving abilities were
instrumental in the business executing on its plan to significantly improve customer service levels and increase market share
across multiple customer segments. Those qualities were also evident in the business's successful execution of three risk
transfer transactions which we believe provide substantial credit risk protection for $57.8 billion of loans in our New single-
family book.
William H. McDavid, Executive Vice President – General Counsel and Corporate Secretary. The Compensation
Committee determined that the payment to Mr. McDavid for the portion of his At-Risk Deferred Salary that was subject to
reduction based on Complementary Corporate Goals and individual performance would be $390,000. This amount is equal to
his target. In recommending and determining this amount, the CEO and the Compensation Committee considered Mr.
McDavid’s achievements and leadership of the Legal Division in 2013. In addition to serving as the primary liaison to our
Board of Directors and providing high-quality legal advice to the rest of the organization, Mr. McDavid personally supervised a
variety of demanding and complex legal issues during 2013. Most notably, the Legal Division played a critical role in
negotiating $7.8 billion in various legal settlements. Mr. McDavid also implemented several operational and organizational
changes in the Legal Division that increased its effectiveness and efficiency. Additionally, the division led an effort that
resulted in the streamlining and modernization of internal company policies.
Jerry Weiss, Executive Vice President – Chief Administrative Officer. The Compensation Committee determined that the
payment to Mr. Weiss for the portion of his At-Risk Deferred Salary that was subject to reduction based on Complementary
Corporate Goals and individual performance would be $282,150, compared with his target of $297,000. In recommending and
determining this amount, the CEO and the Compensation Committee considered the positive impact that Mr. Weiss’s leadership
of the Chief Administrative Officer organization had on the accomplishment of the 2013 Conservatorship Scorecard objectives
and Complementary Corporate Goals. In addition to the role Mr. Weiss has played as the company’s primary senior executive
liaison to FHFA and Treasury, he also led the company’s efforts that resulted in significant progress on two major
Conservatorship Scorecard objectives – the Common Securitization Platform and the Contractual Disclosure Framework. Mr.
Weiss also provided leadership in coordinating the company’s strategy and policy activities related to the future state of the
GSEs. For the Complementary Corporate Goals, Mr. Weiss guided his portfolio of activities to execute in a more strategic and
efficient manner, which enhanced their enterprise-wide support for a number of business initiatives, as well as reduced costs.
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The following chart compares the target and actual amounts of 2013 Deferred Salary for each NEO other than
Mr. Layton. The actual amount earned is scheduled to be paid in equal quarterly installments on the last business day of each
calendar quarter of 2014.
Table 79 — 2013 Deferred Salary
Target 2013 Deferred Salary
At-Risk
Actual 2013 Deferred Salary
At-Risk
Named
Executive
Officer
Mr. Mackey1
Mr. Kari
Mr. Lowman1
Mr. McDavid
Mr. Weiss
Fixed
Conservatorship
Scorecard
Complementary
Goals/
Individual
Total Target
Deferred
Salary
Fixed
Conservatorship
Scorecard
Complementary
Goals/
Individual
Total Actual
Deferred
Salary
$ 230,303
$
64,773
$
64,772
$
359,848
$ 230,303
$
62,830
$
64,772
$
357,905
1,530,000
1,048,485
1,320,000
891,000
472,500
294,887
390,000
297,000
472,500
294,886
390,000
297,000
2,475,000
1,530,000
1,638,258
1,048,485
2,100,000
1,320,000
1,485,000
891,000
458,325
286,040
378,300
288,090
448,875
294,886
390,000
282,150
2,437,200
1,629,411
2,088,300
1,461,240
(1) Amounts for Messrs. Lowman and Mackey are pro-rated based on their dates of hire in May and November, 2013, respectively.
Written Agreements Relating to Our NEOs' Employment
We entered into letter agreements with each of our NEOs in connection with their hiring, as described further below.
Although the letter agreements set forth specific initial levels of Base Salary and, where applicable, Target TDC, the
compensation of each NEO is subject to change by FHFA and, other than in the case of Mr. Layton, is subject to the terms of
the Executive Compensation Program.
We also entered into restrictive covenant and confidentiality agreements with each of our NEOs in connection with their
hiring. The non-competition and non-solicitation provisions included in the restrictive covenant and confidentiality agreements
are described in “Potential Payments Upon Termination of Employment or Change-in-Control.”
Executive Compensation Program participants are not currently entitled to a guaranteed level of severance benefits upon
any type of termination event. For additional information on compensation and benefits payable in the event of a termination of
employment, see “Potential Payments Upon Termination of Employment or Change-in-Control” below.
Mr. Layton
We entered into: (a) a letter agreement; and (b) a restrictive covenant and confidentiality agreement with Mr. Layton in
connection with his employment as our Chief Executive Officer. The terms of Mr. Layton’s letter agreement provide him with
an annual Base Salary of $600,000 and the opportunity to participate in all employee benefit plans offered to Freddie Mac’s
senior executive officers pursuant to the terms of these plans. Copies of Mr. Layton's letter agreement and restrictive covenant
and confidentiality agreement were filed as Exhibits 10.1 and 10.2, respectively, to our Current Report on Form 8-K filed on
May 10, 2012.
Mr. Mackey
We entered into: (a) a letter agreement; and (b) a restrictive covenant and confidentiality agreement with Mr. Mackey in
connection with his employment as our CFO. The terms of Mr. Mackey’s letter agreement provide him with the following
during his employment with Freddie Mac, subject to the terms of the Executive Compensation Program: an annual Base Salary
of $500,000; Target TDC opportunity of $3,000,000, which consists of the Base Salary of $500,000 and Deferred Salary of
$2,500,000; and the opportunity to participate in all employee benefit plans offered to Freddie Mac’s senior executive officers
pursuant to the terms of these plans.
Mr. Mackey's letter agreement also provided for a cash sign-on award of $960,000 in recognition of the forfeited
compensation at his prior employer and commuting expenses during the first several months of employment. This award will
be paid in installments during Mr. Mackey’s first year of employment with us, as follows: (i) first installment: $510,000 on the
same date on which Mr. Mackey received his first payment of Base Salary; (ii) second installment: $225,000 on the six-month
anniversary of his hire date; and (iii) third installment: $225,000 on the one-year anniversary of his hire date. If Mr. Mackey is
not an employee of Freddie Mac on an installment payment date, the installment will be forfeited. Additionally, each
installment will be subject to repayment in the event that, prior to the first anniversary of an installment payment date, Mr.
Mackey terminates his employment with Freddie Mac for any reason or Freddie Mac terminates his employment due to the
occurrence of any of the Forfeiture Events described in his Recapture and Forfeiture Agreement. Copies of Mr. Mackey's
letter agreement and restrictive covenant and confidentiality agreement were filed as Exhibits 10.1 and 10.2, respectively, to
our Current Report on Form 8-K filed on September 30, 2013.
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Mr. Lowman
We entered into: (a) a letter agreement; and (b) a restrictive covenant and confidentiality agreement with Mr. Lowman
in connection with his employment as our Executive Vice President - Single-Family Business. The terms of Mr. Lowman’s
letter agreement provide him with the following during his employment with Freddie Mac, subject to the terms of the
Executive Compensation Program: an annual Base Salary of $500,000; Target TDC opportunity of $3,000,000, which consists
of the Base Salary of $500,000 and Deferred Salary of $2,500,000; and the opportunity to participate in all employee benefit
plans offered to Freddie Mac’s senior executive officers pursuant to the terms of these plans.
Mr. Lowman's letter agreement also provided for a cash sign-on award of $150,000 for commuting expenses during the
first year of employment. Under the terms of the letter agreement, Mr. Lowman is required to repay a pro-rata portion of the
sign-on award he received upon his hire in May 2013 in the event that, prior to the first anniversary of his hire date, he
terminates his employment for any reason or Freddie Mac terminates his employment due to the occurrence of any of the
Forfeiture Events described in his Recapture and Forfeiture Agreement. Copies of Mr. Lowman's letter agreement and
restrictive covenant and confidentiality agreement are filed as Exhibits 10.48 and 10.49, respectively, to this Annual Report on
Form 10-K.
Mr. McDavid
We entered into: (a) a letter agreement; and (b) a restrictive covenant and confidentiality agreement with Mr. McDavid
in connection with his employment as our Executive Vice President - General Counsel and Corporate Secretary. The terms of
Mr. McDavid’s letter agreement provide him with the following during his employment with Freddie Mac, subject to the terms
of the Executive Compensation Program: an annual Base Salary of $500,000; Target TDC opportunity of $2,600,000, which
consists of the Base Salary of $500,000 and Deferred Salary of $2,100,000; and the opportunity to participate in all employee
benefit plans offered to Freddie Mac’s senior executive officers pursuant to the terms of these plans. Copies of Mr. McDavid's
letter agreement and restrictive covenant and confidentiality agreement were filed as Exhibits 10.1 and 10.2, respectively, to
our Current Report on Form 8-K filed on July 9, 2012.
Messrs. Kari and Weiss
We do not have any continuing obligations under the letter agreements that were entered into with Messrs. Kari or Weiss
at the time of their employment. The restrictive covenant and confidentiality agreements entered into by Messrs. Kari and
Weiss were filed, respectively, as Exhibit 10.9 to our Quarterly Report on Form 10-Q filed on November 6, 2009 and Exhibit
10.49 to our Annual Report on Form 10-K filed on March 9, 2012.
Recapture and Forfeiture Agreement
Freddie Mac has adopted, with the approval of FHFA, the Recapture and Forfeiture Agreement (the “Recapture
Agreement”). An NEO's agreement to the Recapture Agreement is a condition of participation in the Executive Compensation
Program. We entered into a Recapture Agreement with each of our NEOs other than Mr. Layton. We did not enter into a
Recapture Agreement with Mr. Layton because he only receives Base Salary, which is not subject to recapture.
The Recapture Agreement provides for the recapture and/or forfeiture of Deferred Salary earned, paid or to be paid
pursuant to the terms of the Executive Compensation Program if, after providing the required notice, our Board of Directors, in
the good faith exercise of its sole discretion, determines that a Forfeiture Event has occurred. The Forfeiture Events and the
Deferred Salary subject to recapture and/or forfeiture are described below.
• Materially Inaccurate Information
Forfeiture Event: The NEO has earned or obtained the legally binding right to a payment of Deferred Salary based
on materially inaccurate financial statements or any other materially inaccurate performance measure.
Compensation Subject to Recapture and/or Forfeiture: Any Deferred Salary in excess of the amount that the
Board of Directors determines would likely have been otherwise earned using accurate measures during the two
years prior to the Forfeiture Event.
•
Termination for Felony Conviction or Willful Misconduct
Forfeiture Event: The NEO’s employment is terminated in any of the following circumstances:
Termination of employment because the NEO is convicted of, or pleads guilty or nolo contendere to, a
felony;
Subsequent to termination of employment, the NEO is convicted of, or pleads guilty or nolo contendere to, a
felony, based on conduct occurring prior to termination, and within one year of such conviction or plea, the
Board of Directors determines that such conduct is materially harmful to Freddie Mac.
Termination of employment because, or within two years of termination, the Board of Directors determines
that, the NEO engaged in willful misconduct in the performance of his or her duties that was materially
harmful to Freddie Mac.
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Compensation Subject to Recapture and/or Forfeiture: Any Deferred Salary earned during the two years prior to
the date that the NEO is terminated, any Deferred Salary scheduled to be paid within two years after termination
and any cash payment made or to be made as consideration for any release of claims agreement.
• Gross Neglect or Gross Misconduct
Forfeiture Event: The NEO’s employment is terminated because, in carrying out his or her duties, the NEO
engages in conduct that constitutes gross neglect or gross misconduct that is materially harmful to Freddie Mac,
or within two years after the NEO’s termination of employment, the Board of Directors determines that the NEO,
prior to his or her termination, engaged in such conduct.
Compensation Subject to Recapture and/or Forfeiture: Any Deferred Salary paid at the time of termination or
subsequent to the date of termination, including any cash payment made as consideration for any release of claims
agreement.
• Violation of a Post-Termination Non-Competition Covenant
•
Forfeiture Event: The NEO violates a post-termination non-competition covenant set forth in the restrictive
covenant and confidentiality agreement in effect when a payment of Deferred Salary is scheduled to be made.
• Compensation Subject to Recapture and/or Forfeiture: 50% of the Deferred Salary paid during the twelve months
immediately preceding the violation and 100% of any unpaid Deferred Salary.
Under the Recapture Agreement, the Board of Directors has discretion to determine the appropriate dollar amount, if any,
to be recaptured from and/or forfeited by the NEO, which is intended to be the gross amount of compensation in excess of what
Freddie Mac would have paid the NEO had Freddie Mac taken the Forfeiture Event into consideration at the time such
compensation decision was made.
A copy of the form of the Recapture Agreement was filed as Exhibit 10.3 to our Current Report on Form 8-K filed on
June 12, 2013. The Recapture Agreement applicable to compensation earned in 2012 was filed as Exhibit 10.3 to our quarterly
report on Form 10-Q filed on November 6, 2012 and the Recapture Policy applicable to compensation earned in 2011 was filed
as Exhibit 10.4 to our Current Report on Form 8-K filed on December 24, 2009.
The following additional event is applicable only to the CEO and CFO, to the extent they have compensation subject to
recapture.
• Accounting Restatement Resulting from the Executive’s Misconduct - If misconduct by the CEO and/or CFO
necessitates the preparation of an accounting restatement due to material non-compliance with financial reporting
requirements, the compensation subject to recapture will be determined in accordance with Section 304 of the
Sarbanes-Oxley Act.
Indemnification Agreements
We have also entered into indemnification agreements with certain of our current and former directors and executive
officers, each an indemnitee, including each of our NEOs. With respect to indemnification agreements entered into with
executive officers in or after August 2011, the form of agreement has been revised to provide that indemnification rights under
the agreement would terminate if and when the executive officer remained with Freddie Mac after ceasing to report directly to
the CEO with respect to any claims arising from matters occurring after the officer was no longer a direct CEO report. Similar
indemnification rights would continue to be available to such executive officers under the Bylaws going forward. The
indemnification agreements provide that we will indemnify the indemnitee to the fullest extent permitted by our Bylaws and
Virginia law. This obligation includes, subject to certain terms and conditions, indemnification against all liabilities and
expenses (including attorneys’ fees) actually and reasonably incurred by the indemnitee in connection with any threatened or
pending action, suit or proceeding, except such liabilities and expenses as are incurred because of the indemnitee’s willful
misconduct or knowing violation of criminal law. The indemnification agreements provide that if requested by the indemnitee,
we will advance expenses, subject to repayment by the indemnitee of any funds advanced if it is ultimately determined that the
indemnitee is not entitled to indemnification. The rights to indemnification under the indemnification agreements are not
exclusive of any other right the indemnitee may have under any statute, agreement or otherwise. Our obligations under the
indemnification agreements will continue after the indemnitee is no longer a director or officer of the company with respect to
any possible claims based on the fact that the indemnitee was a director or officer, and the indemnification agreements will
remain in effect in the event the conservatorship is terminated. The indemnification agreements also provide that
indemnification for actions instituted by FHFA will be governed by the standards set forth in FHFA's Notice of Proposed
Rulemaking, transmitted to the Federal Register on November 6, 2008, implementing 12 U.S.C. 4518. That proposed
rulemaking has not yet been finalized. In the preamble to FHFA's final rule on Golden Parachute Payments, published in the
Federal Register on January 28, 2014, FHFA indicated that a final rule on indemnification payment provisions remains under
review.
Other Executive Compensation Considerations
Effect of Termination of Employment
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Under the Executive Compensation Program, Base Salary ceases upon an NEO’s termination of employment, regardless
of the reason for such termination. The timing and payment of any unpaid portion of Deferred Salary is based upon the reason
for termination, which is discussed in “Potential Payments Upon Termination of Employment or Change-in-Control —
Potential Payments Under the Executive Compensation Program.”
Perquisites
We believe that perquisites should be a minimal part of the compensation package for our NEOs. Total annual
perquisites for any NEO cannot exceed $25,000 without FHFA approval, and we do not provide a gross-up to cover any taxes
due on the perquisite itself. The only perquisite provided to our NEOs during 2013 was reimbursement for assistance with
personal financial planning, tax planning, and/or estate planning, up to an annual maximum benefit that varies by position.
Supplemental Executive Retirement Plan
In 2013, our NEOs were eligible to participate in our Supplemental Executive Retirement Plan, or SERP. The SERP is
designed to provide participants with the full amount of benefits to which they would have been entitled under our Pension
Plan and Thrift/401(k) Savings Plan if those plans: (a) were not subject to certain dollar limits under the Internal Revenue
Code; and (b) did not exclude from “compensation” Deferred Base Salary prior to 2012 and amounts deferred under our
Executive Deferred Compensation Plan (discussed below).
Effective January 1, 2012, eligibility for the “Pension SERP Benefit” (as defined in the SERP) is limited, and Executives
(as defined in the SERP) whose employment with the company commenced after December 31, 2011 (or who are rehired after
that date) are not eligible for the Pension SERP Benefit.
On August 27, 2012, the SERP was amended, with approval of FHFA. Under this amendment, which became effective as
of January 1, 2012, benefits under the SERP are limited to two times a participant’s Base Salary in any calendar year in which
the participant’s compensation is covered by the Executive Compensation Program.
On October 24, 2013, the Company received a directive from FHFA to terminate the Pension Plan as well as the Pension
SERP Benefit and the pre-2005 Thrift/401(k) components (together, the “Terminating SERP”) of the SERP. No Pension SERP
Benefit accruals or Pension Plan accruals will occur after December 31, 2013. The accruals associated with the Terminating
SERP will be distributed within twelve to twenty-four months of October 24, 2013.
For additional information regarding this benefit see “Compensation Tables” below.
Stock Ownership, Hedging and Pledging Policies
In November 2008, FHFA approved the suspension of our stock ownership guidelines, because we had ceased paying our
executives stock-based compensation. Also, the Purchase Agreement prohibits us from issuing any shares of our equity
securities without the prior written consent of Treasury. The suspension of stock ownership requirements is expected to
continue through the conservatorship and until such time that we resume granting stock-based compensation.
All employees, including our NEOs, are prohibited from purchasing and selling derivative securities related to our equity
securities, including warrants, puts and calls, or from dealing in any derivative securities other than pursuant to our stock-based
benefit plans. All directors and employees (including our NEOs) are prohibited from transacting in options (other than options
granted by us) or other hedging instruments as specified in our Insider Trading Policy. In addition, all directors and employees
(including our NEOs) are prohibited from holding our securities in a margin account or pledging our securities as collateral for
a loan.
Section 162(m) Limits on the Tax Deductibility of Our Compensation Expenses
Section 162(m) of the Internal Revenue Code imposes a $1 million limit on the amount that a company may annually
deduct for compensation to its CEO and certain other NEOs, unless, among other things, the compensation is “performance-
based,” as defined in section 162(m). Given the conservatorship and the desire to maintain flexibility to promote our corporate
goals, At-Risk Deferred Salary is not structured to qualify as performance-based compensation under section 162(m).
Compensation Committee Interlocks and Insider Participation
None of the members of the Board of Directors who served on the Compensation Committee during fiscal year 2013
were our officers or employees or had any relationship with us that would be required to be disclosed by us under Item 407(e)
(4) of Regulation S-K.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management
and, based on such review and discussion, has recommended to the Board that the Compensation Discussion and Analysis be
included in this Annual Report on Form 10-K.
This report is respectfully submitted by the members of the Compensation Committee of the Board.
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Anthony A. Williams, Chairman
Steven W. Kohlhagen
Christopher S. Lynch
Sara Mathew
Saiyid T. Naqvi
Compensation and Risk
With respect to 2013, our management conducted an assessment of our compensation plans and programs that were in
place during the year and that were applicable to employees at all levels, including the Executive Compensation Program. The
purpose of the assessment was to determine whether the design and operation of our compensation plans create incentives for
employees to take inappropriate risks that are reasonably likely to have a material adverse effect on us. The assessment was
conducted by members of our enterprise risk management and human resources teams.
The review included an evaluation of:
the mix of fixed and at-risk compensation;
eligibility for participation in compensation programs;
the process by which Target TDC levels are established;
the process for establishing performance objectives and for evaluating performance against those objectives; and
the involvement of the Compensation Committee and FHFA in the compensation process.
•
•
•
•
•
The assessment was discussed with the Compensation Committee in December 2013. Management’s conclusion, with
which the Compensation Committee concurred, is that our compensation policies and practices in place during 2013 do not
create risks that are reasonably likely to have a material adverse effect on us.
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Compensation Tables
The following tables set forth compensation information for our NEOs: our CEO, CFO, former CFO and the three
other most highly compensated executive officers who were serving as executive officers as of December 31, 2013.
Table 80 — Summary Compensation Table — 2013
Name and Principal
Position
Year
Earned
During
Year(1)
Deferred(2) Bonus(3)
Salary
Non-Equity Incentive
Plan Compensation (4)
At-Risk
Deferred
Salary
Target
Opportunity
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings(5)
All Other
Compensation (6)
Total
Donald H. Layton
2013
$
600,000 $
— $
— $
— $
— $
— $
23,827 $ 623,827
Chief Executive Officer
2012
368,750
—
—
—
James G. Mackey
2013
70,881
230,303
510,000
127,602
EVP — Chief Financial
Officer
Ross J. Kari
2013
675,000
1,530,000
— 907,200
—
—
—
—
—
— 368,750
— 938,786
82,457
114,362 3,309,019
Former EVP — Chief
Financial Officer
2012
675,000
1,530,000
— 921,375
554,167
156,794
133,464 3,970,800
2011
675,000
829,167
— 721,375
988,771
118,428
55,292 3,388,033
David B. Lowman
2013
329,502
1,048,485
150,000
580,926
EVP — Single-Family
Business
William H. McDavid
2013
500,000
1,320,000
— 768,300
EVP — General Counsel
and Corporate Secretary
Jerry Weiss
2013
495,000
891,000
— 570,240
—
—
—
EVP — Chief
Administrative Officer
2012
495,000
891,000
— 579,150
348,333
2011
450,000
508,334
— 442,249
618,732
—
—
— 2,108,913
29,713 2,618,013
26,394
84,015 2,066,649
218,711
164,482
94,584 2,626,778
73,735 2,257,532
(1) The amounts shown reflect Base Salary under the Executive Compensation Program as described in “Compensation Discussion and Analysis —
Executive Management Compensation Program.”
(2) The amounts shown for 2013 and 2012 reflect the Fixed Deferred Salary earned under the terms of the Executive Compensation Program. The
Fixed Deferred Salary earned during each calendar quarter is paid in cash on the last business day of the corresponding quarter in the following
year. The remaining portion of Deferred Salary is reported in “Non-Equity Incentive Plan Compensation” and is referred to as "At-Risk" because it
is subject to reduction based upon corporate and individual performance. The amounts shown for 2011 reflect the Fixed Deferred Base Salary
earned under the prior executive compensation program in place for that year. The timing of payments for Fixed Deferred Base Salary earned
during 2011 is the same as described above under the Executive Compensation Program. As with the amounts reported for 2013 and 2012, a
portion of 2011 Deferred Base Salary is reflected in "Non-Equity Incentive Plan Compensation" because it is performance-based.
(3) The amounts shown reflect cash sign-on payments made to Messrs. Mackey and Lowman upon their hiring in 2013. See “Compensation Discussion
and Analysis — Written Agreements Relating to Our NEOs' Employment" for additional information.
(4) The 2013 amounts reflect At-Risk Deferred Salary earned during 2013. At-Risk Deferred Salary earned during each calendar quarter will be paid
on the last business day of the corresponding quarter in 2014. See “Compensation Discussion and Analysis — Executive Management
Compensation Program — Performance Measures for the Performance-Based Elements of Compensation.”
The 2012 amounts reflect (i) At-Risk Deferred Salary earned during each calendar quarter in 2012 and paid on the last business day of the
corresponding quarter in 2013, and (ii) the portion of the 2011 Target Opportunity that was earned in 2012 and paid in February 2013.
The 2011 amounts reflect (i) the At-Risk Deferred Base Salary earned during each calendar quarter in 2011 and paid on the last business day of the
corresponding quarter in 2012, and (ii) the portions of the 2011 and 2010 Target Opportunities that were earned in 2011 and paid in February 2012.
(5) The amounts reported in this column reflect the actuarial increase in the present value of each NEO's accrued benefits under the Pension Plan and
the Pension SERP Benefit determined using the time periods and assumptions applied in our consolidated financial statements for the years ended
December 31, 2013, 2012, and 2011, respectively.
Messrs. Kari and Weiss are the only NEOs who were eligible to participate in the Pension Plan or Pension SERP because participation was limited
to those individuals who were hired (or rehired) prior to January 1, 2012.
The amounts reported do not include values associated with retiree medical benefits, which are generally available on the same terms to all
employees.
(6) Amounts reflect (i) contributions we made to our tax-qualified Thrift/401(k) Savings Plan; (ii) accruals we made pursuant to the Thrift/401(k)
SERP Benefit; and (iii) Perquisites. The amounts for 2013 are as follows:
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Mr. Layton
Mr. Mackey
Mr. Kari
Mr. Lowman
Mr. McDavid
Mr. Weiss
Thrift/401(k)
Savings Plan
Contributions
Thrift/401(k)
SERP Benefit
Accruals
$
3,300
$
20,527
$
Perquisites
—
21,550
—
300
21,700
—
92,812
—
29,413
62,315
—
—
—
—
—
—
Employer contributions to the Thrift/401(k) Savings Plan are available on the same terms to all of our employees. After the first year of
employment, we match up to 6% of eligible compensation at 100% of the employee’s contributions. Employee contributions and our matching
contributions are invested in accordance with the employee’s investment elections and are immediately vested. In addition, on a discretionary
basis, we may make an additional contribution to our Thrift/401(k) Savings Plan (referred to as the "Discretionary Contribution" for 2013 and as
the "Basic Contribution" for years prior to 2013). In 2013, eligible employees received a Discretionary Contribution equal to 2.5% of
compensation earned in the prior year. This contribution is vested 100% after an employee has completed three years of service. Amounts for the
Thrift/401(k) Savings Plan contributions and Thrift/401(k) SERP Benefit accruals are presented without regard to vesting status. For additional
information regarding the Thrift/401(k) SERP Benefit, see “Non-qualified Deferred Compensation” below.
Perquisites are valued at their aggregate incremental cost to us. During the years reported, the aggregate value of perquisites received by all NEOs
was less than $10,000. In accordance with SEC rules, amounts shown under “All Other Compensation” do not include perquisites or personal
benefits for an NEO that, in the aggregate, amount to less than $10,000.
Grants of Plan-Based Awards — 2013
The following table contains information concerning grants of plan-based awards to each of the NEOs during 2013.
We are prohibited from issuing equity securities without Treasury’s consent under the terms of the Purchase Agreement.
Accordingly, no stock awards were granted during 2013. For a description of the performance and other measures used to
determine payouts, see “Compensation Discussion & Analysis — Executive Management Compensation Program —
Elements of Target Total Direct Compensation (Target TDC),” “— Performance Measures for the Performance-Based
Elements of Compensation,” “— Determination of 2013 Target TDC for NEOs,” and “— Determination of Actual 2013
Compensation.”
Table 81 — Grants of Plan-Based Awards — 2013
Name
Mr. Layton(2)
Mr. Mackey
Mr. Kari
Mr. Lowman
Mr. McDavid
Mr. Weiss
At-Risk Deferred Salary Award
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards(1)
Threshold
Target/Maximum
Conservatorship Scorecard
Complementary Goals/Individual
Total
Conservatorship Scorecard
Complementary Goals/Individual
Total
Conservatorship Scorecard
Complementary Goals/Individual
Total
Conservatorship Scorecard
Complementary Goals/Individual
Total
Conservatorship Scorecard
Complementary Goals/Individual
Total
Conservatorship Scorecard
Complementary Goals/Individual
Total
$ — $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
64,773
64,772
129,545
472,500
472,500
945,000
294,887
294,886
589,773
390,000
390,000
780,000
297,000
297,000
594,000
(1) The amounts reported reflect At-Risk Deferred Salary granted in 2013 which is subject to reduction based on (i) corporate performance against the
Conservatorship Scorecard; and (ii) an officer's individual performance and the company's performance against the Complementary Corporate Goals.
The amount of At-Risk Deferred Salary actually earned can range from 0% of target (reported in the Threshold column) up to a maximum of 100% of
target (reported in the Target/Maximum column). Actual At-Risk Deferred Salary amounts earned are reported in the “Non-Equity Incentive Plan
Compensation” column of “Table 80 — Summary Compensation Table — 2013.”
(2) Mr. Layton is not eligible to receive Deferred Salary.
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Outstanding Equity Awards at Fiscal Year-End — 2013
The following table shows outstanding equity awards held by the NEOs as of December 31, 2013. As of December 31,
2013, there were no outstanding RSUs.
Table 82 — Outstanding Equity Awards at Fiscal Year-End — 2013
Name
Mr. Layton
Mr. Mackey
Mr. Kari
Mr. Lowman
Mr. McDavid
Mr. Weiss
Number of Securities
Underlying Unexercised Options
Grant Date
Exercisable
Unexercisable
Option Exercise
Price(2)
Option
Expiration
Date
Option Awards(1)
—
—
—
—
—
8/9/2004
5/6/2005
6/5/2006
—
—
—
—
—
4,970
5,640
5,980
— $
—
—
—
—
—
—
—
—
—
—
—
—
64.36
62.69
60.45
—
—
—
—
—
8/8/2014
5/5/2015
6/4/2016
(1) Consistent with the terms of our 2004 Employee Plan, the option exercise price was set at a price equal to the fair market value of our common stock on
the grant date.
(2) Amounts reported in this table represent the unexercised portion of stock option awards. The vesting schedules are as follows:
• Stock options granted on August 9, 2004 vested at a rate of 25% beginning on the first anniversary of the grant date, and 25% on April 1, 2006,
April 1, 2007, and April 1, 2008.
• Stock options granted on May 6, 2005 and June 5, 2006 vested at a rate of 25% annually beginning on the first anniversary of the grant dates.
Option Exercises and Stock Vested — 2013
During 2013, no options were exercised and no RSUs vested.
Pension Benefits — 2013
The following table shows the actuarial present value of the accumulated retirement benefits payable to each of the NEOs
under our Pension Plan and the Pension SERP Benefit (the component of the SERP that relates to the Pension Plan), computed
as of December 31, 2013. A summary of the material terms of each plan follows the table, including information on early
retirement. On October 24, 2013, the Company received a directive from FHFA to terminate the Pension Plan as well as the
Terminating SERP. No Pension SERP Benefit accruals or Pension Plan accruals will occur after December 31, 2013. The
accruals associated with the Terminating SERP will be distributed within twelve to twenty-four months of October 24, 2013.
Table 83 — Pension Benefits — 2013
Name
Mr. Layton
Mr. Mackey
Mr. Kari
Mr. Lowman
Mr. McDavid
Mr. Weiss
Plan Name
Pension Plan
Pension SERP Benefit
Pension Plan
Pension SERP Benefit
Pension Plan
Pension SERP Benefit
Pension Plan
Pension SERP Benefit
Pension Plan
Pension SERP Benefit
Pension Plan
Pension SERP Benefit
Number of Years
Credited Service(1)
Present value of
Accumulated Benefit(2)
Payments During
Last Fiscal Year
— $
— $
—
—
—
4.2
4.2
—
—
—
—
10.2
10.2
—
—
—
92,944
334,477
—
—
—
—
279,052
536,777
—
—
—
—
—
—
—
—
—
—
—
—
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(1) Amounts reported represent the credited years of service for each NEO as of December 31, 2013, under the Pension Plan and the Pension SERP
Benefit, respectively.
(2) Amounts reported reflect the present value, expressed as a lump sum as of December 31, 2013, of each NEO’s benefits under the Pension Plan and the
Pension SERP Benefit, respectively. Amounts reported are calculated assuming a lump sum payment date as of December 31, 2014. Pension Plan and
Pension SERP Benefits reflected are fully vested. Messrs. Layton, Mackey, Lowman and McDavid were not eligible to participate in the Pension Plan
or Pension SERP Benefit since they were hired after December 31, 2011, when the plans closed to new hires.
Pension Plan
The Pension Plan is a tax-qualified, defined benefit pension plan, covering substantially all employees hired before 2012
who have attained age 21 and completed one year of service with us. The Pension Plan was closed to new entrants effective
January 1, 2012. On October 24, 2013, we received a directive from FHFA to cease accruals under the Pension Plan effective
December 31, 2013 and to commence terminating the Pension Plan. As shown above, Messrs. Weiss and Kari were eligible to
participate in the Pension Plan. Pension Plan benefits are based on an employee’s years of service through December 31, 2013,
and compensation through December 29, 2013, up to limits imposed by law. Specifically, the normal retirement benefit under
the Pension Plan for service after December 31, 1988 is a monthly payment commencing at age 65 calculated as follows:
•
1% of the participant’s highest average monthly compensation for the 36-consecutive month period during which the
participant’s compensation was the highest;
• multiplied by the participant’s full and partial years of credited service through December 31, 2013 under the Pension
Plan.
For purposes of the Pension Plan, compensation includes cash payments to each employee for Base Salary, Deferred
Salary under the Executive Compensation Program, supplemental pay under our current pay structure for vice presidents and
below, as well as overtime pay, shift differentials, non-deferred bonuses paid under a corporate-wide annual bonus program (if
any) or pursuant to a functional incentive plan (excluding the value of any stock options or cash equivalents), commissions and
salary reductions under the Thrift/401(k) Savings Plan and the Flexible Benefits Plan (i.e. our cafeteria plan under Internal
Revenue Code Section 125), and qualified transportation benefits under Internal Revenue Code Section 132(f)(4).
Compensation does not include, among other things, supplemental compensation plans providing temporary pay, Deferred Base
Salary amounts under the prior pay structure and amounts deferred under the EDCP (discussed below), amounts paid after
termination of employment other than amounts included in a final paycheck, or amounts paid after the last pay date of 2013
(December 27, 2013).
The normal form of benefit under the Pension Plan is an annuity providing monthly payments for the life of the
participant (and a survivor annuity for the participant’s spouse if applicable). Optional forms of benefit payment are available.
A benefit with an actuarial present value equal to or less than $5,000 may only be paid as a lump sum. Participants that
terminate after December 31, 2011, may elect a lump sum payout.
Participants under the Pension Plan who terminate employment before age 55 with at least five years of service are
considered “terminated vested” participants. Terminated vested participants may commence their benefit under the Pension
Plan as early as age 55. The benefit is equal to the vested portion of the participant’s accrued benefit, reduced by 1/180th for
each of the first 60 months, and by 1/360th for each of the next 60 months, by which the commencement of such benefits
precedes age 65. As a result of the Pension Plan termination directed by FHFA, unvested active participants as of December 31,
2013 became vested.
An early retirement benefit is available to a participant who terminates employment on or after age 55 with at least five
years of service. For service before January 1, 2011, this early retirement benefit is reduced by 3% for each year (prorated
monthly for partial years) by which the commencement of such benefits precedes the earlier of: (a) the participant’s attainment
of age 65; or (b) the participant’s attainment of age 62 or later with at least 15 years of service. For service after December 31,
2010, the reduction is 5% for each year (prorated monthly for partial years) by which the commencement of benefits precedes
the participant’s attainment of age 65. For participants with service prior to January 1, 2011 and after December 31, 2010, the
reductions are separately calculated, and the early retirement benefit is the sum of the two calculations. Death benefits are
available provided the participant was vested.
Supplemental Executive Retirement Plan — Pension SERP Benefit
To be eligible for the Pension SERP Benefit for any year, the NEO must have been eligible to participate in the Pension
Plan. Of the NEOs, only Messrs. Kari and Weiss were eligible to participate in the Pension Plan. Eligibility for the Pension
SERP Benefit and the Pension Plan has been eliminated for employees (including executive officers) hired or rehired after
December 31, 2011. See “Other Executive Compensation Considerations — Supplemental Executive Retirement Plan” above.
The Pension SERP Benefit component of the SERP is an unfunded (benefits are paid from general assets), non-qualified
plan designed to provide participants with the full amount of benefits to which they would have been entitled under the Pension
Plan if that plan: (a) was not subject to certain dollar limits under the Internal Revenue Code; and (b) did not exclude from
“compensation” Deferred Base Salary amounts prior to 2012 and amounts deferred under our EDCP (discussed below). For
example, the Pension Plan was only permitted under the Internal Revenue Code to consider the first $255,000 of an employee’s
compensation during 2013 for the purpose of determining the participant’s compensation-based normal retirement benefit. The
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SERP was previously amended to provide that the maximum covered compensation for purposes of the SERP, relative to an
NEO, may not exceed two times the NEO’s Base Salary.
The Pension SERP Benefit is calculated as the participant’s accrued annual benefit payable at age 65 (or current age, if
greater) under the Pension Plan without application of the limits described in the preceding paragraph, less the participant’s
actual accrued benefit under the Pension Plan. The Pension SERP Benefit is vested for each participant to the same extent that
the participant is vested in the corresponding benefit under the Pension Plan.
Non-qualified Deferred Compensation
Executive Deferred Compensation Plan
The EDCP is a non-qualified plan and is unfunded (benefits are paid from our general assets). The EDCP has, in the past,
allowed the NEOs to defer receipt of a portion of their annual base pay and cash bonus (and to defer settlement of RSUs
granted between 2002 and 2007). Deferrals of pay under the EDCP were suspended beginning with calendar year 2011 and
continue to be suspended. None of the NEOs have a balance under the EDCP.
Supplemental Executive Retirement Plan — Thrift/401(k) SERP Benefit
The Thrift/401(k) SERP Benefit component of the SERP is an unfunded (benefits are paid from general assets), non-
qualified defined contribution plan designed to provide participants with the full amount of benefits that they would have been
entitled to under the Thrift/401(k) Savings Plan if that plan: (a) was not subject to certain dollar limits under the Internal
Revenue Code; and (b) did not exclude from “compensation” Deferred Base Salary amounts prior to 2012 and amounts
deferred under our EDCP. For example, in 2013 under the Internal Revenue Code, only the first $255,000 of an employee’s
compensation was considered when determining our percentage-based matching contribution and the Discretionary
Contribution for any participant in the Thrift/401(k) Savings Plan. The SERP was amended to provide that the maximum
covered compensation for purposes of the SERP, relative to an NEO, may not exceed two times the NEO’s Base Salary. We
believe the Thrift/401(k) SERP Benefit is an appropriate benefit because offering such a benefit helps us remain competitive
with companies in the Comparator Group.
The Thrift/401(k) SERP Benefit equals the amount of the employer matching contributions and Discretionary
Contributions (or, prior to January 1, 2013, Basic Contributions) for each NEO that would have been made to the Thrift/401(k)
Savings Plan during the year, based upon the participant’s eligible compensation, without application of the above limits, less
the amount of the matching contributions and Discretionary Contributions (or, prior to January 1, 2013, Basic Contributions)
actually made to the Thrift/401(k) Savings Plan during the year. Participants are credited with earnings or losses in their
Thrift/401(k) SERP Benefit accounts based upon each participant’s individual direction of the investment of such notional
amounts among the virtual investment funds available under the SERP. Such investment options are based upon and mirror the
performance of the investment options available under the Thrift/401(k) Savings Plan. As of December 31, 2013, there were 21
investment options in which participants’ notional amounts could be deemed invested.
To be eligible for the Thrift/401(k) SERP Benefit, the NEO must be eligible for matching contributions and Discretionary
Contributions (or, prior to January 1, 2013, Basic Contributions) under the Thrift/401(k) Savings Plan for part of the year. In
addition, to be eligible for the portion of the Thrift/401(k) SERP Benefit attributable to employer matching contributions, the
NEO must contribute the maximum amount permitted under the terms of the Thrift/401(k) Savings Plan on a pre-tax basis.
The portion of the Thrift/401(k) SERP Benefit that is attributable to employer matching contributions is vested when accrued,
while the accrual relating to the Basic Contribution paid prior to 2008 is subject to five-year cliff vesting, the accrual relating to
the Basic Contribution attributable to calendar years 2008-2011 is subject to five-year graded vesting of 20% per year, and,
through 2013, the accrual relating to the Discretionary Contribution is subject to three-year cliff vesting.
The Thrift/401(k) SERP Benefits that vest on or after January 1, 2005 are generally distributed in a lump sum payable
90 days after the end of the calendar year in which separation from service occurs. A six-month delay in commencement of
distributions on account of separation from service applies to key employees, in accordance with Internal Revenue Code
Section 409A. If the NEO dies, the vested Thrift/401(k) SERP Benefit is paid in the form of a lump sum within 90 days of
death.
As discussed in "Other Executive Compensation Considerations — Supplemental Executive Retirement Plan" above, the
Thrift/401(k) SERP Benefits that vested prior to January 1, 2005 are part of the Terminating SERP. The final settlement of this
benefit will be in the form of lump sum payments to each participant with a vested right to such benefit not less than twelve
months but no more than twenty-four months after October 24, 2013.
The following table shows the contributions, earnings, withdrawals and distributions, and accumulated balances under the
Thrift/401(k) SERP Benefit for each NEO. As of December 31, 2013, none of the NEOs was a participant in the EDCP.
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Table 84 — Non-Qualified Deferred Compensation
Name
Mr. Layton
Executive
Contribution in
Last FY ($)(1)
Freddie Mac
Accruals in
Last FY ($)(2)
Aggregate
Earnings in
Last FY ($)(3)
Aggregate
Withdrawals/
Distributions ($)
Aggregate
Balance at
Last FYE ($)(4)
Thrift/401(k) SERP Benefit
$
— $
20,527
$
4
$
— $
20,531
Mr. Mackey
Thrift/401(k) SERP Benefit
Mr. Kari
Thrift/401(k) SERP Benefit
Mr. Lowman
Thrift/401(k) SERP Benefit
Mr. McDavid
Thrift/401(k) SERP Benefit
Mr. Weiss
Thrift/401(k) SERP Benefit
—
—
—
—
—
—
—
92,812
(4,590)
—
29,413
—
5
62,315
133,495
—
—
—
—
—
—
235,094
—
29,418
672,437
(1) The SERP does not allow for employee contributions.
(2) Amounts reported reflect accruals under the Thrift/401(k) SERP Benefit during 2013. These amounts are also reported in the “All Other
Compensation” column in the Summary Compensation Table.
(3) Amounts reported represent the total interest and other earnings credited to each NEO under the Thrift/401(k) SERP Benefit.
(4) Amounts reported reflect the accumulated balances under the Thrift/401(k) SERP Benefit for each NEO. Messrs. Mackey and Lowman have not
satisfied the one year service requirement for matching and Discretionary Contributions. Messrs. Layton, McDavid and Weiss are fully vested in their
account balances. Mr. Kari is only partially vested in his account balance and the difference between his aggregate balance above and his vested
balance is equal to the unvested Basic Contribution plus earnings. The vested and unvested components under the Thrift/401(k) SERP Benefit for Mr.
Kari are $226,128 and $8,966, respectively. For a more detailed discussion of the matching contribution accruals and Discretionary Contribution
accruals, see “Supplemental Executive Retirement Plan—Thrift/401(k) SERP Benefit” above.
The following 2012 Thrift/401(k) SERP Benefit accrual amounts were reported in the column "All Other Compensation" in the 2012 Summary
Compensation Table as compensation for each NEO for whom accruals were made and reported during 2012: Mr. Layton: $0, Mr. Kari: $110,200, Mr.
Weiss: $70,750. See our Form 10-K filed February 28, 2013. The following 2011 Thrift/401(k) SERP Benefit accrual amounts were reported in the
column "All Other Compensation" in the 2011 Summary Compensation Table as compensation for each NEO for whom such accruals were made and
reported during 2011: Mr. Kari: $33,750, Mr. Weiss: $40,500. See our Form 10-K filed March 9, 2012.
Potential Payments Upon Termination of Employment or Change-in-Control
We have entered into certain agreements and maintain certain plans that call for us to pay compensation to our NEOs in
the event of a termination of employment. The table below describes the compensation and benefits that would have been
payable to each NEO had the officer terminated his employment under various circumstances as of December 31, 2013.
Mr. Layton is excluded from this table because he is not entitled to receive any payments in connection with a termination of
employment, and Mr. Kari's actual termination benefits are described in the text following the table. The actual payment of any
level of termination benefits is subject to FHFA review and approval. For more information, see “Employment and Separation
Agreements” below.
The table below does not address changes in control, as we are not obligated to provide any additional compensation to
our NEOs in connection with a change in control, nor does it address potential payments upon a termination for cause, which is
a termination resulting from the occurrence of an event or conduct described in the Recapture Agreement. All earned but
unpaid Deferred Salary is subject to forfeiture upon the occurrence of such a termination. However, the amount of
compensation, if any, to be recaptured and/or forfeited is determined by the Board of Directors, which can only occur following
the occurrence of a for cause termination. See Other Executive Compensation Considerations — Recapture and Forfeiture
Agreement.
Additionally, each of our NEOs is subject to a restrictive covenant and confidentiality agreement with us. Each agreement
provides that the NEO will not seek employment with designated competitors that involves performing similar duties for a
specified period immediately following termination of employment, regardless of whether the executive’s employment is
terminated by the executive, by us, or by mutual agreement. The specified period is twenty-four months for Messrs. Layton and
Kari and twelve months for the remaining four NEOs. During the twelve-month period immediately following termination,
each executive also agrees not to solicit or recruit any of our managerial employees. The agreement also provides for
confidentiality of information that constitutes trade secrets or proprietary or other confidential information.
The table below does not include vested balances in the Thrift/401(k) SERP Benefit or vested benefits in the Pension
SERP Benefit. Amounts shown in the table also do not include certain items available to all employees generally upon a
termination event.
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There were no outstanding RSUs held by NEOs as of December 31, 2013, and Mr. Weiss is the only NEO holding stock
options. No value is included in the table for stock options, because the exercise prices for all such options outstanding are
substantially higher than the closing price of our common stock on December 31, 2013.
Potential Payments Under the Executive Compensation Program
The Executive Compensation Program addresses the treatment of Base Salary and Deferred Salary upon various
termination events.
Base Salary ceases upon an NEO’s termination of employment, regardless of the termination reason. An NEO generally
does not need to be employed by us on the payment date to receive payments of Deferred Salary that are unpaid at the time of
termination of employment. The discussion that follows describes the effect of various termination events upon unpaid
Deferred Salary.
•
Forfeiture Event — All earned but unpaid Fixed and At-Risk Deferred Salary is subject to forfeiture upon the
occurrence of a Forfeiture Event, as described above under “— Recapture and Forfeiture Agreement.”
• Death — All earned but unpaid Fixed and At-Risk Deferred Salary is paid in full as soon as administratively possible,
but not later than 90 calendar days after the date of death and any earned but unpaid At-Risk Deferred Salary is not
subject to reduction based on corporate and individual performance.
• Long-Term Disability — All earned but unpaid Fixed and At-Risk Deferred Salary is paid in full in accordance with the
Approved Payment Schedule and any earned but unpaid At-Risk Deferred Salary is not subject to reduction based on
corporate and individual performance.
• Any Other Reason (including, but not limited to, voluntary termination, retirement, and involuntary termination for any
reason other than a Forfeiture Event) — All earned but unpaid Deferred Salary is paid in accordance with the Approved
Payment Schedule and earned but unpaid At-Risk Deferred Salary remains subject to the performance assessment and
reduction process. Except in the case of retirement, the amount of earned but unpaid Fixed Deferred Salary will be
reduced by 2% for each full or partial month by which the NEO’s termination precedes January 31 of the second
calendar year following the calendar year in which the Fixed Deferred Salary is earned. No such reduction is
applicable if an NEO retires, which is deemed to have occurred upon a voluntary termination of employment after
attaining or exceeding 65 years of age, without regard to length of service.
Table 85 — Potential Payments Upon Termination of Employment or Change-in-Control as of December 31, 2013
James G. Mackey
Deferred Salary:
Fixed(1)
At Risk-Conservatorship Scorecard(2)
At Risk-Complementary Goals/Individual(3)
Total
David B. Lowman
Deferred Salary:
Fixed(1)
At Risk-Conservatorship Scorecard(2)
At Risk-Complementary Goals/Individual(3)
Total
William H. McDavid
Deferred Salary:
Fixed(1)
At Risk-Conservatorship Scorecard(2)
At Risk-Complementary Goals/Individual(3)
Total
Jerry Weiss
Deferred Salary:
Fixed(1)
At Risk-Conservatorship Scorecard(2)
At Risk-Complementary Goals/Individual(3)
Total
Death
Disability
Retirement(4)
All Other Not
For Cause
Terminations(5)
$
$
$
$
$
$
$
$
230,303
$
230,303
$
— $
170,424
64,773
64,772
64,773
64,772
—
—
62,830
64,772
359,848
$
359,848
$
— $
298,026
1,048,485
$
1,048,485
$
— $
294,887
294,886
294,887
294,886
—
—
775,879
286,040
294,886
1,638,258
$
1,638,258
$
— $
1,356,805
1,320,000
$
1,320,000
$
1,320,000
$
390,000
390,000
390,000
390,000
378,300
390,000
2,100,000
$
2,100,000
$
2,088,300
$
—
—
—
—
891,000
$
891,000
$
— $
297,000
297,000
297,000
297,000
—
—
659,340
288,090
282,150
1,485,000
$
1,485,000
$
— $
1,229,580
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(1)
In accordance with early termination provisions in the Executive Compensation Program, the amounts disclosed for Deferred Salary: Fixed in the All
Other Not For Cause Terminations column have been reduced by 26% to reflect a December 31, 2013 termination scenario.
(2) The amounts reported for Deferred Salary: At Risk-Conservatorship Scorecard in the Retirement and All Other Not For Cause Terminations columns
reflect the funding level determined by FHFA with respect to performance against the 2013 Conservatorship Scorecard.
(3) The amounts reported for Deferred Salary: At Risk-Complementary Goals/Individual in the Retirement and All Other Not For Cause Terminations
columns reflect the assessment of 2013 performance approved by the Compensation Committee and FHFA.
(4) Mr. McDavid is the only NEO who meets the requirement for retirement eligibility under the 2013 Executive Compensation Program.
(5) All Other Not For Cause Terminations refer to voluntary terminations other than for retirement and involuntary terminations other than for cause. No
amounts are displayed for Mr. McDavid because he is retirement eligible.
Former Named Executive Officer – Mr. Kari
On December 18, 2012, Mr. Kari notified the company of his intent to retire in the second half of 2013 following his 55th
birthday. While Mr. Kari's tenure as Chief Financial Officer ended in November 2013, he continued to serve in an advisory
capacity through January 8, 2014 to facilitate a smooth transition of his duties. Under the terms of the Executive Compensation
Program, Mr. Kari is entitled to receive the 2013 Deferred Salary amounts reported in Table 80 — Summary Compensation
Table — 2013, with the exception of Fixed Deferred Salary, which is subject to an early termination reduction that will reduce
the amount paid from $1,530,000 to $1,132,200. Deferred Salary amounts to which Mr. Kari is entitled will be paid in 2014
according to the Approved Payment Schedule. He is not eligible to receive any additional termination benefits.
Additionally, Mr. Kari forfeited $8,966 of unvested Thrift/401(k) SERP benefits as a result of his termination.
Alternative Settlement Provisions for Equity Awards in the Event of Certain Terminations
Stock Options
The stock options granted to Mr. Weiss that were exercisable as of December 31, 2013 include alternative settlement
provisions in the event of certain terminations, as follows:
• Death. Stock options remain exercisable until the earlier of the original expiration date or three years after the date of
termination in the event of death.
• Disability. Stock options remain exercisable for the full balance of their term in the event of disability.
• Retirement. Stock options remain exercisable for the full balance of their term in the event of retirement.
• All Other Terminations. If the individual’s employment is terminated for any reason other than those described above,
the stock options remain exercisable until the earlier of the original expiration date or 90 days following termination.
Employment and Separation Agreements
The various agreements entered into in connection with the employment of our NEOs are summarized above. See
“Compensation Discussion and Analysis — Written Agreements Relating to Our NEOs' Employment.”
Director Compensation
After we entered conservatorship, FHFA approved compensation for Board members in the form of cash retainers only,
paid on a quarterly basis. Under the terms of the Purchase Agreement, without Treasury’s consent, we are prohibited from
making stock grants to directors while this agreement remains in effect. We do not maintain any pension or retirement plans for
directors. Non-employee directors are reimbursed for reasonable out-of-pocket costs for attending meetings of the Board or a
Board committee of which they are a member and for other reasonable expenses associated with carrying out their
responsibilities as directors.
The reasons for this shift toward compensation delivered entirely in cash were similar, in the case of director
compensation, to some of those described above regarding the structural change in executive compensation (see
“Compensation Discussion and Analysis — Executive Management Compensation Program — Overview of Program
Structure”). However, the considerations underlying director and executive compensation differed in one key respect. There is
no provision in the director compensation program for pay that varies depending on business results. Although such incentive
compensation is deemed appropriate to give management strong incentives to devise and execute business plans and achieve
positive financial results, it is viewed in the case of directors as inconsistent with their oversight role.
Board compensation levels during conservatorship are shown in the table below.
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Table 86 — Board Compensation — 2013 Non-Employee Director Compensation Levels
Board Service
Cash Compensation
Annual Retainer
Annual Retainer for Non-Executive Chairman
Committee Service (Cash)
Annual Retainer for Audit Committee Chair
Annual Retainer for Business and Risk Committee Chair
Annual Retainer for Committee Chairs (other than Audit or Business and Risk)
Annual Retainer for Audit Committee Members
$
$
160,000
290,000
25,000
15,000
10,000
10,000
The following table summarizes the 2013 compensation provided to all persons who served as non-employee directors
during 2013.
Table 87 — 2013 Director Compensation
Name
C. Lynch
L. Bammann(1)
C. Byrd
R. Hartnack(1)
S. Kohlhagen(1)
S. Mathew(1)
S. Naqvi(1)
N. Retsinas
E. Shanks, Jr.
A. Williams
Fees Earned or
Paid in Cash
Change in Pension Value and
Nonqualified Deferred
Compensation Earnings(2)
All Other
Compensation(3)
Total
$
300,000
$
— $
102,242
185,000
104,615
147,973
8,587
64,348
160,000
170,000
180,000
—
—
—
—
—
—
—
—
—
— $
—
20,000
20,000
20,000
—
20,000
5,750
20,000
—
300,000
102,242
205,000
124,615
167,973
8,587
84,348
165,750
190,000
180,000
(1) The amount represents partial annual compensation for the period served during 2013. Mr. Kohlhagen joined the Board in February 2013, Mr.
Hartnack joined the Board in May 2013, Mr. Naqvi joined the Board in August 2013, and Ms. Mathew joined the Board in December 2013. Ms.
Bammann resigned from the Board in July 2013.
(2) We do not have any pension or retirement plans for our non-employee directors.
(3)
In 2013, the Freddie Mac Foundation provided a dollar-for-dollar match to eligible organizations and institutions, up to an aggregate amount of $20,000
per director per calendar year. Matching contributions made to charities designated by the non-employee directors were as follows: Ms. Byrd, $20,000;
Mr. Hartnack, $20,000; Mr. Kohlhagen, $20,000; Mr. Naqvi, $20,000; Mr. Retsinas, $5,750; and Mr. Shanks, Jr., $20,000.
Indemnification. We have also made arrangements to indemnify our directors against certain liabilities which are similar
to the terms on which our executive officers are indemnified. For a description of such terms, see “— Written Agreements
Relating to Our NEOs' Employment— Indemnification Agreements.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Security Ownership
Our only class of voting stock is our common stock. (Upon its appointment as Conservator, FHFA immediately
succeeded to the voting rights of holders of our common stock.) The following table shows the beneficial ownership of our
common stock as of February 25, 2014 by our current directors, our NEOs, all of our directors and executive officers as a
group, and holders of more than 5% of our common stock. Beneficial ownership is determined in accordance with SEC rules
for computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that
person. As of February 25, 2014, each director and NEO, and all of our directors and executive officers as a group, owned less
than 1% of our outstanding common stock. Unless otherwise noted, the information presented below is based on information
provided to us by the individuals or entities specified in the table.
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Table 88 — Stock Ownership by Directors, Executive Officers, and Greater-Than-5% Holders
Position
Common Stock
Beneficially Owned
Excluding
Stock Options(1)
Stock Options
Exercisable
Within 60 Days of
Feb. 25, 2014
Total Common Stock
Beneficially Owned
Name
Carolyn H. Byrd
Richard C. Hartnack
Steven W. Kohlhagen
Christopher S. Lynch
Sara Mathew
Saiyid T. Naqvi
Nicolas P. Retsinas
Eugene B. Shanks, Jr.
Anthony A. Williams
Donald H. Layton
James G. Mackey
Ross J. Kari
David B. Lowman
Director
Director
Director
Director
Director
Director
Director
Director
Director
Chief Executive Officer
EVP — Chief Financial Officer
Former EVP — Chief Financial Officer
EVP — Single Family Business
William H. McDavid
EVP — General Counsel & Corp. Sec.
Jerry Weiss
All directors and executive officers as a group (23 persons)
EVP — Chief Administrative Officer
5% Holder
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
Pershing Square Capital Management, L.P.
888 Seventh Avenue, 42nd Floor
New York, New York 10019
—
—
—
—
—
—
10,824(2)
—
—
—
—
—
—
—
102,261(2)
—
—
—
—
—
—
—
—
—
—
—
—
—
16,590
37,240
—
—
—
—
—
—
10,824
—
—
—
—
—
—
16,590
139,501
Common Stock Beneficially
Owned
Percent of Class
Variable(3)
Common
79.9%
9.77%(4)
(1)
(2)
(3)
Includes shares of stock beneficially owned as of February 25, 2014.
Includes distribution of 6,866 RSUs and 169 dividend equivalents on RSUs, previously deferred with no remaining restrictions.
In September 2008, we issued to Treasury a warrant to purchase, for one one-thousandth of a cent ($0.00001) per share, shares of our common stock
equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis at the time the warrant is exercised. The warrant
may be exercised in whole or in part at any time until September 7, 2028. As of the date of this filing, Treasury has not exercised the warrant. The
information above assumes Treasury beneficially owns no other shares of our common stock.
(4) The source of this data is the Schedule 13D filed with the SEC by Pershing on November 15, 2013. Pershing's beneficial ownership percentage
calculation is based solely on the 650,039,533 shares of our common stock outstanding as reported in our Form 10-Q for the Quarter ended September
30, 2013, and excludes the shares issuable to Treasury pursuant to the warrant. According to the Schedule 13D, Pershing Square Capital Management,
L.P., as investment adviser for a number of funds for which it purchased the shares reported in the table above, and PS Management GP, LLC, its
general partner, may be deemed to share voting and dispositive power for the shares. Pershing Square GP, LLC, as general partner of two of the funds,
may be deemed to share voting and dispositive power for 21,592,526 of the shares held for the account of Pershing Square, L.P. and 451,065 shares of
common stock held for the account of Pershing Square II, L.P. As the Chief Executive Officer of Pershing Square Capital Management, L.P. and
managing member of each of PS Management GP, LLC and Pershing Square GP, LLC, William A. Ackman may be deemed to share voting and
dispositive power for all of the shares reported in the table above.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information about our common stock that may be issued upon the exercise of options,
warrants, and rights under our existing equity compensation plans at December 31, 2013. Our stockholders have approved the
ESPP, the 2004 Employee Plan and the 1995 Employee Plan (together, the Employee Plans), and the Directors’ Plan. We
suspended the operation of these plans following our entry into conservatorship and are no longer granting awards under such
plans.
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Table 89 — Equity Compensation Plan Information
Plan Category
Equity compensation plans approved
by stockholders
Equity compensation plans not
approved by stockholders
Number of securities to be issued
upon exercise of outstanding
options,
warrants and rights
Weighted average exercise price of
outstanding options,
warrants and rights
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding
securities reflected in column (a))
877,936(1)
None
$57.01(2)
N/A
35,051,033(3)
None
Includes 61,501 restricted stock units and shares of restricted stock issued under the Directors’ Plan and the Employee Plans.
(1)
(2) For the purpose of calculating this amount, the restricted stock units and shares of restricted stock are assigned a value of zero.
(3)
Includes 27,570,685 shares, 5,845,739 shares, and 1,634,609 shares available for issuance under the 2004 Employee Plan, the ESPP and the Directors’
Plan, respectively. No shares are available for issuance under the 1995 Employee Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Policy Governing Related Person Transactions
The Board has adopted a written policy governing the approval of related person transactions. This policy sets forth
procedures for the review and approval or ratification of transactions involving related persons, which consist of any person
who is, or was at any time since the beginning of our last completed fiscal year, a director, a director nominee, an executive
officer, or an immediate family member of any of the foregoing persons.
Under authority delegated by the Board, our General Counsel and the Nominating and Governance Committee (or its
Chair under certain circumstances), each, an Authorized Approver, are responsible for applying the Related Person Transactions
Policy. Transactions covered by the Related Person Transactions Policy consist of any transaction, arrangement or relationship
or series of similar transactions, arrangements or relationships, in which: (a) the aggregate amount involved exceeded or is
expected to exceed $120,000; (b) we were or are expected to be a participant; and (c) any related person had or will have a
direct or indirect material interest. The Related Person Transactions Policy includes a list of categories of transactions identified
by the Board as having no significant potential for an actual conflict of interest or the appearance of a conflict or improper
benefit to a related person, and thus not considered potential related person transactions subject to review.
Our Legal Division assesses whether any proposed transaction involving a related person is covered by the Related
Person Transactions Policy. If so, the transaction is reviewed by the appropriate Authorized Approver. In consultation with the
Chair of the Nominating and Governance Committee, the General Counsel may refer any proposed transaction to the
Nominating and Governance Committee for review and approval.
If possible, approval of a related person transaction is obtained prior to the effectiveness or consummation of the
transaction. If advance approval of a related person transaction by the appropriate Authorized Approver is not feasible or
otherwise not obtained, then the transaction is considered promptly by the appropriate Authorized Approver to determine
whether ratification is warranted.
In determining whether to approve or ratify a related person transaction covered by the Related Person Transactions
Policy, the appropriate Authorized Approver reviews and considers all relevant information which may include: (a) the nature
of the related person’s interest in the transaction; (b) the approximate total dollar value of, and extent of the related person’s
interest in, the transaction; (c) whether the transaction was or would be undertaken in the ordinary course of our business;
(d) whether the transaction is proposed to be, or was, entered into on terms no less favorable to us than terms that could have
been reached with an unrelated third party; and (e) the purpose, and potential benefits to us, of the transaction.
Corporate Governance Guidelines
In September 2013, the Board adopted our amended Corporate Governance Guidelines, or our Guidelines, which are
available on our website at www.freddiemac.com/governance/pdf/gov_guidelines.pdf.
Director Independence
The non-employee members of the Board evaluated the independence, as defined in both Sections 4 and 5 of our
Guidelines and in Section 303A.02 of the NYSE Listed Company Manual, of (i) each of the non-employee members of our
Board currently serving, each of whom also served on our Board in 2013, and (ii) Ms. Linda B. Bammann, who served on our
Board until July 2013. In connection with these evaluations, the non-employee members of the Board determined that (i) all
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current members of our Board (other than Mr. Layton, our CEO) are independent and (ii) Ms. Bammann was independent
during her service in 2013. Mr. Layton is not considered an independent director because he is our CEO.
The non-employee members of the Board also concluded that all current members of the Audit Committee, the
Compensation Committee, and the Nominating and Governance Committee are independent within the meaning of both
Sections 4 and 5 of our Guidelines and Section 303A.02 of the NYSE Listed Company Manual. The non-employee members of
the Board also determined that all current members of the Audit Committee are independent within the meaning of Rule 10A-3
promulgated under the Exchange Act, and Section 303A.06 of the NYSE Listed Company Manual.
In determining the independence of each Board member, the non-employee members of the Board reviewed the
following categories or types of relationships, in addition to those specifically addressed by the standards contained in
Section 5 of our Guidelines, to determine whether those relationships, either individually or when aggregated with other
relationships, would constitute a material relationship between the Director and us that would impair a Director’s judgment as a
member of the Board or create the perception or appearance of such an impairment:
• Board Memberships With For-Profit Business Partners. During 2013 and currently, Ms. Byrd and Messrs. Lynch,
Retsinas, and Shanks serve as directors of other companies that engage or have engaged in business with us resulting in
payments between us and such companies during the past three fiscal years. After considering the nature and extent of
the specific relationship between each of those companies and us, and the fact that these Board members are directors of
these other companies rather than employees, the non-employee members of the Board concluded that those business
relationships do not constitute material relationships between any of the Directors and us that would impair their
independence as our Directors.
• Board Memberships With Charitable Organizations To Which We Have Made Contributions. During 2013, Mr. Retsinas
served as a board member of a charitable organization that received monetary contributions from us or the Freddie Mac
Foundation. The total annual amount contributed was below the applicable threshold in our Guidelines that would
require a specific determination that Mr. Retsinas is independent in spite of the contributions. The non-employee
members of the Board considered the contributions and the nature of the organization and concluded that the
relationship with the charitable organization did not constitute a material relationship between Mr. Retsinas and us that
would impair his independence as our Director.
• Financial Relationships with For-Profit Business Partners. Mr. Hartnack owns stock of US Bancorp. In the aggregate,
this stock represents a material portion of his net worth. US Bancorp conducts significant business with Freddie Mac,
including as a single-family seller/servicer and as trustee of some of Freddie Mac’s securitization transactions. In order
to eliminate any potential conflict of interest that might arise as a result of this stock ownership, Mr. Hartnack has
agreed to recuse himself from discussing and acting upon any matters that are to be considered by the full Board or any
of the committees of which he is a member, and that relate directly to US Bancorp. The Audit Committee Chairman, in
consultation with the Non-Executive Chairman, will address any questions that may arise regarding whether recusal
from a particular discussion or action is appropriate.
In evaluating Mr. Hartnack’s independence in light of his ownership of US Bancorp stock, the non-employee members
of the Board considered the nature and extent of Freddie Mac’s business relationship with US Bancorp and any
potential impact that his stock ownership might have on his independent judgment as a Freddie Mac director, taking
into account the recusal arrangement. The non-employee members of the Board concluded that Mr. Hartnack’s recusal
arrangement concerning US Bancorp would address any actual or potential conflicts of interest that might arise with
respect to his ownership of US Bancorp stock. Accordingly, the non-employee members concluded that Mr. Hartnack’s
ownership of US Bancorp stock does not constitute a material relationship between him and Freddie Mac that would
impair his independence as a Freddie Mac director.
Mr. Naqvi owns stock of PNC Financial Services Group, Inc. (PNC). In the aggregate, this stock represents a material
portion of his net worth. PNC conducts significant business with Freddie Mac, including as a single-family seller/
servicer and as trustee of some of Freddie Mac’s securitization transactions. In order to eliminate any potential conflict
of interest that might arise as a result of this stock ownership, Mr. Naqvi has agreed to recuse himself from discussing
and acting upon any matters that are to be considered by the full Board or any of the committees of which he is a
member (including the Business and Risk Committee), and that relate directly to PNC. The Audit Committee
Chairman, in consultation with the Non-Executive Chairman, will address any questions that may arise regarding
whether recusal from a particular discussion or action is appropriate.
In evaluating Mr. Naqvi’s independence in light of his ownership of PNC stock, the non-employee members of the
Board considered the nature and extent of Freddie Mac’s business relationship with PNC and any potential impact that
his stock ownership might have on his independent judgment as a Freddie Mac director, taking into account the recusal
arrangement. The non-employee members of the Board concluded that Mr. Naqvi’s recusal arrangement concerning
PNC would address any actual or potential conflicts of interest that might arise with respect to his ownership of PNC
stock. Accordingly, the non-employee members concluded that Mr. Naqvi’s ownership of PNC stock does not constitute
a material relationship between him and Freddie Mac that would impair his independence as a Freddie Mac director.
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Ms. Bammann, who served as a director until July 2013, owned stock of JPMorgan Chase. In the aggregate, this stock
represented a material portion of her net worth. JPMorgan Chase conducts significant business with Freddie Mac,
including, among other things, as a single-family and multifamily seller/servicer, as an underwriter of our debt and
mortgage securities and as a capital markets counterparty. In order to eliminate any potential conflict of interest that
might arise as a result of this stock ownership, Ms. Bammann agreed to recuse herself from discussing and acting upon
any matters that were to be considered by the full Board or any of the committees of which she was a member
(including the Business and Risk Committee, which she chaired), and that related directly to JPMorgan Chase. The
Audit Committee Chairman, in consultation with the Non-Executive Chairman, had the authority to address any
questions regarding whether recusal from a particular discussion or action was appropriate.
In evaluating Ms. Bammann’s independence in light of her ownership of JPMorgan Chase stock, in 2013 the non-
employee members of the Board considered the nature and extent of Freddie Mac’s business relationship with
JPMorgan Chase and any potential impact that her stock ownership might have had on her independent judgment as a
Freddie Mac director, taking into account the recusal arrangement. The non-employee members of the Board concluded
that Ms. Bammann’s recusal arrangement concerning JPMorgan Chase would address any actual or potential conflicts
of interest that might arise with respect to her ownership of JPMorgan stock. Accordingly, the non-employee members
concluded that Ms. Bammann’s ownership of JPMorgan Chase stock did not constitute a material relationship between
her and Freddie Mac that impaired her independence as a Freddie Mac director.
Board Diversity
The Board identifies Director nominees or candidates for the Conservator to consider for election by written consent and
when there is a vacancy on the Board, at which time the Board may exercise the authority delegated to it by the Conservator to
fill such vacancies, subject to review by the Conservator.
Our charter provides that our Board must at all times have at least one person from the homebuilding, mortgage lending,
and real estate industries, and at least one person from an organization representing community or consumer interests or one
person who has demonstrated a career commitment to the provision of housing for low-income households. In addition, the
examination guidance for corporate governance issued by FHFA provides that in identifying individuals for nomination for
election to the Board, the Board should consider the knowledge of such individuals, as a group, in the areas of business,
finance, accounting, risk management, public policy, mortgage lending, real estate, low-income housing, homebuilding,
regulation of financial institutions, and any other areas that may be relevant to our safe and sound operation.
In addition, the Board has adopted a formal policy (articulated in our Guidelines) with regard to the consideration of
diversity in identifying director nominees and candidates. As articulated in the policy, the Board seeks to have a diversity of
talent, perspectives, experience and cultures among its members, including minorities, women and individuals with disabilities,
and considers such diversity in the candidate solicitation and nomination processes. The policy also states that the Board seeks
to have a diversity of talent on the Board and that candidates are selected, in part, for their experience and expertise. The policy
also explains that when identifying director nominees, the Nominating and Governance Committee considers, among other
factors, our needs, the talents and skills then available on the Board, and, with respect to incumbent directors, their continued
involvement in business and professional activities relevant to us, the skills and experience that should be represented on the
Board, the availability of other individuals with desirable skills to join the Board, and the desire to maintain a diverse Board.
FHFA also has adopted a final rule regarding minority and women inclusion that became effective in January 2011. The
final rule implements section 1116 of the Reform Act and generally requires us to promote diversity and the inclusion of
women, minorities, and individuals with disabilities in all activities, including considering diversity in the process of
nominating directors, as required by these regulations.
Board Leadership Structure and Role in Risk Oversight
The positions of Chief Executive Officer and Non-Executive Chairman of the Board are held by different individuals.
This leadership structure was established by the Conservator when it appointed separate individuals to hold those two positions
in September 2008. The examination guidance for corporate governance issued by FHFA provides that once separated, the
functions of the Chief Executive Officer and the Non-Executive Chairman of the Board should remain separated until such time
as the Director of FHFA determines otherwise.
The responsibility for risk oversight is shared by two committees of the Board, the Business and Risk Committee and the
Audit Committee, with primary risk oversight responsibility allocated to the Business and Risk Committee. The Business and
Risk Committee is responsible for assisting the Board in the oversight, on an enterprise-wide basis, of our risk management
framework, including management of credit risk (including counterparty risk), market risk (including interest rate and liquidity
risk), model risk, operational risk, strategic risk, and reputation risk. The risk oversight responsibilities of the Audit Committee
include reviewing generally: (a) management’s guidelines and policies governing the processes for assessing and managing our
risks; and (b) our major financial risk exposures and the steps management has taken to monitor and control such exposures.
Copies of the Charters of the Audit Committee and the Business and Risk Committee are available on our website at http://
www.freddiemac.com/governance/bd committees.html.
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The Enterprise Risk Management Division (“ERM”) is responsible for the independent assessment and management of
risks across the company, including credit, market, model and operational risk. ERM’s mandate is primarily governed through a
Board – approved enterprise risk management policy that establishes the Board’s risk appetite, risk limits and Board reporting
thresholds (the “ERM Policy”). ERM is led by the Executive Vice President — Chief Enterprise Risk Officer, who reports
directly to the Chief Executive Officer. The Executive Vice President — Chief Enterprise Risk Officer also reports to the
Business and Risk Committee of the Board of Directors on a quarterly basis and to the full Board of Directors, as appropriate.
ERM’s Board reports include standard quarterly risk reports and ad hoc agenda items on specific topics. The ERM Policy and
the ERM framework outlined therein apply to all areas of the company, and are complemented by underlying policies at the
division and department levels that support the management, monitoring and reporting of risk across the company. The overall
ERM framework includes a risk inventory, risk appetite, risk limits, as well as monitoring and reporting requirements. The
Chief Executive Officer has also established a corporate enterprise risk management committee (the “ERMC”) to monitor,
coordinate and oversee the management of the company’s risks consistent with the ERM Policy. The Executive Vice
President — Chief Enterprise Risk Officer chairs the ERMC, which comprises most members of senior management. ERM
aggregates risk exposures managed throughout the company from the relevant risk owners for review and discussion at the
ERMC. The ERMC is supported by the following subcommittees: Operational Risk, Single Family Risk, Multifamily Risk,
I&CM Risk, Economic Capital Working Group and Loan Loss Reserves and Loss Forecast. Information flows from the
subcommittees to the ERMC as appropriate, and information and reports to be provided to the Board’s Business and Risk
Committee, the Board or any other Board committee are usually reviewed and discussed in the ERMC prior to the relevant
Board or Board committee meeting. Other committees providing escalation of risk exposures, as necessary, include the
Valuation and Finance Model Committee and the Remediation Committee. In addition, the Board specifically evaluates the
company's performance against the Risk Management prong of the Complementary Corporate Goals. See "CD&A— At-Risk
Deferred Salary Based on Complementary Corporate Goals and Individual Performance."
For a discussion of the Compensation Committee’s conclusion that our compensation policies and practices do not create
risks that are reasonably likely to have a material adverse effect on us, see “Executive Compensation — Compensation and
Risk.”
Transactions with 5% Shareholders
In connection with our entry into conservatorship, we issued a warrant to Treasury to purchase shares of our common
stock equal to 79.9% of the total number of shares of our common stock outstanding, on a fully diluted basis. There were a
number of transactions between us and Treasury since the beginning of 2013, as discussed in “BUSINESS — Conservatorship
and Related Matters,” “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS,” as well as in "NOTE 8: DEBT
SECURITIES AND SUBORDINATED BORROWINGS," and "NOTE 11: STOCKHOLDERS' EQUITY (DEFICIT)."
FHFA, as conservator, approved the Purchase Agreement and our administrative role in the MHA Program and the
Memorandum of Understanding with Treasury, FHFA, and Fannie Mae (see “NOTE 2: CONSERVATORSHIP AND
RELATED MATTERS — Housing Finance Agency Initiative”). The remaining transactions described in the sections
referenced above did not require review and approval under any of our policies and procedures relating to transactions with
related persons.
Transactions with Institutions Related to Directors
In the ordinary course of business, we were a party during 2013, and expect to continue to be a party during 2014, to
certain business transactions with institutions affiliated with members of our Board. Management believes that the terms and
conditions of the transactions were no more and no less favorable to us than the terms of similar transactions with unaffiliated
institutions to which we are, or expect to be, a party. None of these transactions were required to be disclosed under SEC rules.
Transactions with Institutions Related to Executive Officers
Mr. Layton joined us in May 2012 as CEO and as a member of the Board of Directors. Mr. Layton previously served as a
senior executive officer of JPMorgan Chase, ending his service in 2004.
Freddie Mac has an extensive business relationship with JPMorgan Chase (through its subsidiaries). As of December 31,
2013, JPMorgan Chase was Freddie Mac’s second largest servicer, and serviced approximately 1.26 million loans for Freddie
Mac. JPMorgan Chase had an aggregate unpaid principal balance of loans of approximately $208.2 billion as of December 31,
2013 and approximately $207.8 billion as of January 31, 2014. JPMorgan Chase sold approximately $53.9 billion in single-
family loans to Freddie Mac in 2013.
JPMorgan Chase also is a significant capital markets, derivatives and multifamily counterparty and is an underwriter of
our debt and mortgage securities. As of January 31, 2014, JPMorgan Chase and its subsidiaries had an aggregate notional
balance of $44.4 billion of derivatives (which included $20 billion of exchange-traded instruments) with Freddie Mac. From
January 1, 2013 through January 31, 2014, JPMorgan Chase served as underwriter for $35.9 billion of Freddie Mac’s debt
securities and $20.4 billion of Freddie Mac’s mortgage-related securities.
Mr. Layton receives a pension from JPMorgan Chase in connection with his retirement in 2004. In addition, Mr. Layton
has a deferred compensation balance under JPMorgan Chase’s Deferred Compensation Plan, of which approximately 80% is
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payable in fifteen annual installments beginning in January 2016 and earns a return based upon a defined list of mutual funds
that Mr. Layton designates. The remaining 20% is in the form of a “private equity balance” that is payable as proceeds are
realized from the underlying private equity transactions into which the funds were invested. Mr. Layton’s deferred
compensation balance is less than ten percent of his total net worth on an after-tax basis. Mr. Layton also has brokerage and
deposit accounts with JPMorgan Chase.
The amount of Mr. Layton’s pension and deferred compensation do not depend in any way on JPMorgan Chase’s results
as long as JPMorgan Chase is able to meet its obligations. In addition, in order to eliminate any potential conflicts of interest,
Mr. Layton agreed to recuse himself from acting upon matters directly relating to JPMorgan Chase that may be considered by
the Board of Directors, or presented to him in his capacity as CEO and a member of the Board, if such matter has the potential
to impact JPMorgan Chase’s ability to satisfy its obligations to him. Mr. Layton does not have a material interest in our
relationship with JPMorgan Chase and the relationships described above were not required to be reviewed, approved or ratified
under our Related Person Transactions Policy.
Conservatorship Agreements
Treasury, FHFA, and the Federal Reserve have taken a number of actions to support us during conservatorship, including
entering into the Purchase Agreement, described in this Form 10-K. See “BUSINESS — Conservatorship and Related Matters"
and “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS — Related Parties as a Result of Conservatorship.”
Description of Fees
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following is a description of fees billed to us by PricewaterhouseCoopers LLP, our independent public accountants,
during 2013 and 2012.
Table 90 — Auditor Fees(1)
Audit Fees(2)
Audit-Related Fees(3)
Tax Fees(4)
All Other Fees(5)
Total
2013
2012
30,085,013
$
30,651,367
105,025
9,314
12,000
76,119
109,250
—
30,211,352
$
30,836,736
$
$
(1) These fees represent amounts billed within the designated year and include reimbursable expenses of $199,956 and $365,016 for 2013 and 2012,
respectively.
(2) Audit fees include fees and reimbursable expenses billed by PricewaterhouseCoopers LLP in connection with the AU 722 quarterly reviews of our
interim financial information and the audit of our annual consolidated financial statements. The audit fees billed during 2013 include fees and
reimbursable expenses related to the 2013 ($19,610,667) and 2012 ($10,474,346) audits. In addition to the amounts shown above, approximately
$8.3 million of fees and reimbursable expenses will be billed in 2014 for the 2013 audit. The audit fees billed during 2012 include fees and
reimbursable expenses related to the 2012 ($19,911,326) and 2011 ($10,740,041) audits. Audit fees of $138,500 and $84,500 in 2013 and 2012,
respectively, related to the Freddie Mac Foundation are excluded because these fees are incurred and paid separately by the Freddie Mac Foundation.
(3) The 2013 and 2012 audit-related fees include fees billed by PricewaterhouseCoopers LLP for the performance of certain agreed-upon procedures
regarding aspects of compliance with the Purchase Agreement covenants ($87,700 and $67,119, respectively), as well as the renewal of our Comperio
subscription ($9,000 for each year). The 2013 audit-related fees also include fees billed by PricewaterhouseCoopers LLP for the performance of a
compliance evaluation of the minimum servicing standards as set forth in the Uniform Single Attestation Program for Mortgage Bankers and the
provision of an attestation report ($8,325).
(4) The tax fees billed in 2013 and 2012 related to non-audit tax advisory services to provide assistance with the Internal Revenue Service tax audit matters
and ongoing examinations, including information requests and associated responses.
(5) All other fees for 2013 resulted from our subscription to a web-based suite of human resources benchmark data provided by PricewaterhouseCoopers
LLP ($12,000).
Approval of Independent Auditor Services and Fees
As provided in its charter, the Audit Committee appoints, subject to FHFA approval, our independent public accounting
firm and reviews the scope of the annual audit and pre-approves, subject (as required) to FHFA approval, all audit and non-
audit services permitted under applicable law to be performed by the independent public accounting firm.
The Sarbanes-Oxley Act and related rules adopted by the SEC require that all services provided to companies subject to
the reporting requirements of the Exchange Act by their independent auditors be pre-approved by their audit committee or by
authorized members of the committee, with certain exceptions. The Audit Committee’s charter requires that the Audit
Committee pre-approve any audit services, and any non-audit services permitted under applicable law, to be performed by our
independent auditors (or to designate one or more members of the Audit Committee to pre-approve such services and report
such pre-approval to the Audit Committee).
Audit services that are within the scope of an auditor’s engagement approved by the Audit Committee prior to the
performance of those services are deemed pre-approved and do not require separate pre-approval. Audit services not within the
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scope of an Audit Committee-approved engagement, as well as permissible non-audit services, must be separately pre-approved
by the Audit Committee.
When the Audit Committee pre-approves a service, the Audit Committee typically sets a dollar limit for such service.
Management endeavors to obtain pre-approval of the Audit Committee, or of the Chairman of the Audit Committee (when the
Chairman of the Audit Committee has been delegated such authority), before it incurs fees exceeding the dollar limit. If the
Chairman of the Audit Committee approves the increase, the Chairman will report such approval at the Audit Committee’s next
scheduled meeting.
The pre-approval procedure is administered by our senior financial management, which reports throughout the year to the
Audit Committee. The Audit Committee pre-approved all audit, audit-related, tax, and other services performed in 2013 and
2012.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) Documents filed as part of this report:
(1) Consolidated Financial Statements
The consolidated financial statements required to be filed in this Form 10-K are included in Part II, Item 8.
(2) Financial Statement Schedules
None.
(3) Exhibits
An Exhibit Index has been filed as part of this Form 10-K beginning on page E-1 and is incorporated herein by
reference.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
Federal Home Loan Mortgage Corporation
By:
/s/ Donald H. Layton
Donald H. Layton
Chief Executive Officer
Date: February 27, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
/s/ Christopher S. Lynch*
Christopher S. Lynch
/s/ Donald H. Layton
Donald H. Layton
/s/ James G. Mackey
James G. Mackey
/s/ Robert D. Mailloux
Robert D. Mailloux
/s/ Carolyn H. Byrd*
Carolyn H. Byrd
/s/ Richard C. Hartnack*
Richard C. Hartnack
/s/ Steven W. Kohlhagen*
Steven W. Kohlhagen
/s/ Sara Mathew*
Sara Mathew
/s/ Saiyid T. Naqvi*
Saiyid T. Naqvi
/s/ Nicolas P. Retsinas*
Nicolas P. Retsinas
/s/ Eugene B. Shanks, Jr.*
Eugene B. Shanks, Jr.
/s/ Anthony A. Williams*
Anthony A. Williams
*By:
/s/ William H. McDavid
William H. McDavid
Attorney-in-Fact
Non-Executive Chairman of the Board
February 27, 2014
Chief Executive Officer and Director
(Principal Executive Officer)
February 27, 2014
Executive Vice President — Chief Financial Officer
(Principal Financial Officer)
February 27, 2014
Senior Vice President — Corporate Controller and
Principal Accounting Officer (Principal Accounting Officer)
February 27, 2014
Director
Director
Director
Director
Director
Director
Director
Director
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
February 27, 2014
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This Glossary includes acronyms and defined terms that are used throughout this report.
1995 Employee Plan — 1995 Stock Compensation Plan, as amended
2004 Employee Plan — 2004 Stock Compensation Plan, as amended and restated June 6, 2008
GLOSSARY
2005-2008 Legacy single-family book — Consists of mortgage loans in our single-family credit guarantee portfolio that were
originated in 2005 through 2008.
Administration — Executive branch of the U.S. government.
Agency securities — Generally refers to mortgage-related securities issued by the GSEs or government agencies.
Alt-A loan — Although there is no universally accepted definition of Alt-A, many mortgage market participants classify
single-family loans with credit characteristics that range between their prime and subprime categories as Alt-A because these
loans have a combination of characteristics of each category, may be underwritten with lower or alternative income or asset
documentation requirements compared to a full documentation mortgage loan, or both. In determining our Alt-A exposure on
loans underlying our single-family credit guarantee portfolio, we classified mortgage loans as Alt-A if the lender that delivers
them to us classified the loans as Alt-A, or if the loans had reduced documentation requirements as well as a combination of
certain credit characteristics and expected performance characteristics at acquisition which, when compared to full
documentation loans in our portfolio, indicate that the loan should be classified as Alt-A. In the event we purchase a refinance
mortgage in either our relief refinance mortgage initiative or in another mortgage refinance initiative and the original loan had
been previously identified as Alt-A, such refinance loan may no longer be categorized or reported as an Alt-A mortgage in this
report and our other financial reports because the new refinance loan replacing the original loan would not be identified by the
servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such
refinancing not occurred. For non-agency mortgage-related securities that are backed by Alt-A loans, we categorize our
investments in non-agency mortgage-related securities as Alt-A if the securities were identified as such based on information
provided to us when we entered into these transactions.
AMT — Alternative Minimum Tax
AOCI — Accumulated other comprehensive income (loss), net of taxes
ARM — Adjustable-rate mortgage — A mortgage loan with an interest rate that adjusts periodically over the life of the
mortgage loan based on changes in a benchmark index.
Board — Board of Directors
Bond insurers — Companies that provide credit insurance principally covering securitized assets in both the primary issuance
and secondary markets.
BPs — Basis points — One one-hundredth of 1%. This term is commonly used to quote the yields of debt instruments or
movements in interest rates.
Cash and other investments portfolio — Our cash and other investments portfolio is comprised of our cash and cash
equivalents, federal funds sold and securities purchased under agreements to resell, and investments in non-mortgage-related
securities.
CD&A — Compensation Discussion and Analysis
CEB — The Corporate Executive Board Company
CEO — Chief Executive Officer
CFO — Chief Financial Officer
Charter — The Federal Home Loan Mortgage Corporation Act, as amended, 12 U.S.C. § 1451 et seq.
CMBS — Commercial mortgage-backed security — A security backed by mortgages on commercial property (often including
multifamily rental properties) rather than one-to-four family residential real estate. Although the mortgage pools underlying
CMBS can include mortgages financing multifamily properties and commercial properties, such as office buildings and hotels,
the classes of CMBS that we hold receive distributions of scheduled cash flows only from multifamily properties. Military
housing revenue bonds are included as CMBS within investments-related disclosures. We have not identified CMBS as either
subprime or Alt-A securities.
Comprehensive income (loss) — Consists of net income (loss) plus total other comprehensive income (loss).
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Conforming loan/Conforming jumbo loan/Conforming loan limit — A conventional single-family mortgage loan with an
original principal balance that is equal to or less than the applicable statutory conforming loan limit, which is a dollar amount
cap on the size of the original principal balance of single-family mortgage loans we are permitted by law to purchase or
securitize. The conforming loan limit is determined annually based on changes in FHFA’s housing price index. Any decreases
in the housing price index are accumulated and used to offset any future increases in the housing price index so that statutory
conforming loan limits do not decrease from year-to-year. Since 2006, the base conforming loan limit for a one-family
residence has been set at $417,000, and higher limits have been established in certain “high-cost” areas (currently, up to
$625,500 for a one-family residence). Higher limits also apply to two- to four-family residences, and for mortgages secured by
properties in Alaska, Guam, Hawaii and the U.S. Virgin Islands.
Actual high-cost area loan limits are set by FHFA for each county (or equivalent), and the loan limit for specific high-cost
areas may be lower than the maximum amounts. We refer to loans that we have purchased with UPB exceeding the base
conforming loan limit (i.e., $417,000) as conforming jumbo loans.
Beginning in 2008, pursuant to a series of laws, our loan limits in certain high-cost areas were increased temporarily
above the limits that otherwise would have been applicable (up to $729,750 for a one-family residence). The latest of these
increases expired on September 30, 2011.
Conservator — The Federal Housing Finance Agency, acting in its capacity as conservator of Freddie Mac.
Convexity — A measure of how much a financial instrument’s duration changes as interest rates change.
Core spread income — Refers to a fair value estimate of the net current period accrual of income from the spread between
mortgage-related investments and debt, calculated on an option-adjusted basis.
Covered Officer — Those executives in the following positions, each of whom are compensated pursuant to the Executive
Management Compensation Program: (a) Chief Executive Officer; (b) Chief Operating Officer; (c) Chief Financial Officer;
(d) all Executive Vice Presidents; and (e) all Senior Vice Presidents. Each of the Named Executive Officers is a Covered
Officer.
Credit enhancement — Any number of different financial arrangements that are designed to reduce credit risk by partially or
fully compensating an investor in the event of certain financial losses. Examples of credit enhancements include mortgage
insurance, overcollateralization, indemnification agreements, and government guarantees.
Credit losses — Consists of charge-offs, net and REO operations expense.
Credit-related (benefit) expense (or credit-related expense) — Consists of our provision (benefit) for credit losses and REO
operations expense.
Deed in lieu of foreclosure — An alternative to foreclosure in which the borrower voluntarily conveys title to the property to
the lender and the lender accepts such title (sometimes together with an additional payment by the borrower) in full satisfaction
of the mortgage indebtedness.
Delinquency — A failure to make timely payments of principal or interest on a mortgage loan. For single-family mortgage
loans, we generally report delinquency rate information based on the number of loans that are seriously delinquent. For
multifamily loans, we report delinquency rate information based on the UPB of loans that are two monthly payments or more
past due or in the process of foreclosure.
Derivative — A financial instrument whose value depends upon the characteristics and value of an underlying financial asset
or index, such as a security or commodity price, interest or currency rates, or other financial indices.
Directors’ Plan — 1995 Directors’ Stock Compensation Plan, as amended and restated
Dodd-Frank Act — Dodd-Frank Wall Street Reform and Consumer Protection Act.
Dollar roll transactions — Transactions whereby we enter into an agreement to sell and subsequently repurchase (or purchase
and subsequently resell) agency securities.
DSCR — Debt Service Coverage Ratio — An indicator of future credit performance for multifamily loans. The DSCR
estimates a multifamily borrower’s ability to service its mortgage obligation using the secured property’s cash flow, after
deducting non-mortgage expenses from income. The higher the DSCR, the more likely a multifamily borrower will be able to
continue servicing its mortgage obligation.
Duration — Duration is a measure of a financial instrument’s price sensitivity to changes in interest rates.
Duration gap — One of our primary interest-rate risk measures. Duration gap is a measure of the difference between the
estimated durations of our interest rate sensitive assets and liabilities. We present the duration gap of our financial instruments
in units expressed as months. A duration gap of zero implies that the change in value of our interest rate sensitive assets from an
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instantaneous change in interest rates would be expected to be accompanied by an equal and offsetting change in the value of
our debt and derivatives, thus leaving the net fair value of equity unchanged.
EDCP — Executive Deferred Compensation Plan
Effective rent — The average rent actually paid by the tenant over the term of a lease.
ESPP — Employee Stock Purchase Plan
Euribor — Euro Interbank Offered Rate
EVP — Executive Vice President
Exchange Act — Securities and Exchange Act of 1934, as amended
Executive Compensation Program — Executive Management Compensation Program, as amended and restated
Fannie Mae — Federal National Mortgage Association
FASB — Financial Accounting Standards Board
FDIC — Federal Deposit Insurance Corporation
Federal Reserve — Board of Governors of the Federal Reserve System
FHA — Federal Housing Administration
FHFA — Federal Housing Finance Agency — An independent agency of the U.S. government with responsibility for
regulating Freddie Mac, Fannie Mae, and the FHLBs.
FHLB — Federal Home Loan Bank
FICO score — A credit scoring system developed by Fair, Isaac and Co. FICO scores are the most commonly used credit
scores today. FICO scores are ranked on a scale of approximately 300 to 850 points with a higher value indicating a lower
likelihood of credit default.
Fixed-rate mortgage — Refers to a mortgage originated at a specific rate of interest that remains constant over the life of the
loan. For purposes of presentation in this report and elsewhere in our reporting, we have categorized a number of modified
loans as fixed-rate loans (instead of as adjustable rate loans), even though the modified loans have rate adjustment provisions.
In these cases, while the terms of the modified loans provide for the interest rate to adjust in the future, such future rates are
determined at the time of the modification rather than at a subsequent date.
Foreclosure alternative — A workout option pursued when a home retention action is not successful or not possible. A
foreclosure alternative is either a short sale or deed in lieu of foreclosure.
Foreclosure transfer — Refers to our completion of a transaction provided for by the foreclosure laws of the applicable state,
in which a delinquent borrower’s ownership interest in a mortgaged property is terminated and title to the property is
transferred to us or to a third party. State foreclosure laws commonly refer to such transactions as foreclosure sales, sheriff’s
sales, or trustee’s sales, among other terms. When we, as mortgage holder, acquire a property in this manner, we pay for it by
extinguishing some or all of the mortgage debt.
Freddie Mac mortgage-related securities — Securities we issue and guarantee, including PCs, REMICs and Other Structured
Securities, and Other Guarantee Transactions.
GAAP — Generally accepted accounting principles in the United States of America.
Ginnie Mae — Government National Mortgage Association, which guarantees the timely payment of principal and interest on
mortgage-related securities backed by federally insured or guaranteed loans, primarily those insured by FHA or guaranteed by
the VA.
GSE Act — The Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Reform Act.
GSEs — Government sponsored enterprises — Refers to certain legal entities created by the U.S. government, including
Freddie Mac, Fannie Mae, and the FHLBs.
Guarantee fee — The fee that we receive for guaranteeing the payment of principal and interest to mortgage security investors,
which consists primarily of a combination of management and guarantee fees paid on a monthly basis, as a percentage of the
UPB of the underlying loans, and initial upfront payments, such as delivery fees.
Guidelines — Corporate Governance Guidelines, as revised
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HAMP — Home Affordable Modification Program — Refers to the effort under the MHA Program whereby the
U.S. government, Freddie Mac and Fannie Mae commit funds to help eligible homeowners avoid foreclosure and keep their
homes through mortgage modifications.
HARP — Home Affordable Refinance Program — Refers to the effort under the MHA Program that seeks to help eligible
borrowers with existing loans that are guaranteed by us or Fannie Mae to refinance into loans with more affordable monthly
payments and/or fixed-rate terms without obtaining new mortgage insurance in excess of what is already in place. Originally,
only borrowers who had mortgages sold to Freddie Mac or Fannie Mae with note dates on or before May 31, 2009 with current
LTV ratios above 80% (and up to 125%) were eligible to refinance their mortgages under the program. In October 2011, HARP
was expanded to allow eligible borrowers who have mortgages with current LTV ratios above 125% to refinance under the
program. The relief refinance initiative, under which we also allow borrowers with LTV ratios of 80% and below to participate,
is our implementation of HARP for our loans.
HFA — State or local Housing Finance Agency
HFA initiative — An initiative among Treasury, FHFA, Freddie Mac, and Fannie Mae that commenced in 2009. Under the
HFA initiative, we and Fannie Mae provide assistance to state and local HFAs so that the HFAs can continue to meet their
mission of providing affordable financing for both single-family and multifamily housing. The HFA initiative includes the
NIBP and the TCLFP.
HUD — U.S. Department of Housing and Urban Development —HUD has authority over Freddie Mac with respect to fair
lending.
Implied volatility — A measurement of how the value of a financial instrument changes due to changes in the market’s
expectation of potential changes in future interest rates. A decrease in implied volatility generally increases the estimated fair
value of our mortgage assets and decreases the estimated fair value of our callable debt and options-based derivatives, while an
increase in implied volatility generally has the opposite effect.
Initial margin — The collateral that we post with a derivatives clearinghouse in order to do business with such clearinghouse.
The amount of initial margin varies over time.
Interest-only loan — A mortgage loan that allows the borrower to pay only interest (either fixed-rate or adjustable-rate) for a
fixed period of time before principal amortization payments are required to begin. After the end of the interest-only period, the
borrower can choose to refinance the loan, pay the principal balance in total, or begin paying the monthly scheduled principal
due on the loan.
IRS — Internal Revenue Service
K Certificates — Multifamily regularly-issued, structured pass-through securities backed primarily by recently originated
multifamily mortgage loans purchased by Freddie Mac. We categorize K Certificates that we guarantee as Other Guarantee
Transactions. See “Other Guarantee Transactions” for more information.
LIBOR — London Interbank Offered Rate
LIHTC partnerships — Low-income housing tax credit partnerships — Prior to 2008, we invested as a limited partner in
LIHTC partnerships, which are formed for the purpose of providing funding for affordable multifamily rental properties. These
LIHTC partnerships invest directly in limited partnerships that own and operate multifamily rental properties that generate
federal income tax credits and deductible operating losses.
Liquidation preference — Generally refers to an amount that holders of preferred securities are entitled to receive out of
available assets, upon liquidation of a company. The initial liquidation preference of our senior preferred stock was $1.0 billion.
The aggregate liquidation preference of our senior preferred stock includes the initial liquidation preference plus amounts
funded by Treasury under the Purchase Agreement. In addition, dividends and periodic commitment fees not paid in cash are
added to the liquidation preference of the senior preferred stock. We may make payments to reduce the liquidation preference
of the senior preferred stock only in limited circumstances.
LTV ratio — Loan-to-value ratio — The ratio of the unpaid principal amount of a mortgage loan to the value of the property
that serves as collateral for the loan, expressed as a percentage. Loans with high LTV ratios generally tend to have a higher risk
of default and, if a default occurs, a greater risk that the amount of the gross loss will be high compared to loans with lower
LTV ratios. We report LTV ratios based solely on the amount of the loan purchased or guaranteed by us, generally excluding
any second-lien mortgages (unless we own or guarantee the second lien).
MD&A — Management’s Discussion and Analysis of Financial Condition and Results of Operations
MHA Program — Making Home Affordable Program — Formerly known as the Housing Affordability and Stability Plan, the
MHA Program was announced by the Administration in February 2009. The MHA Program is designed to help in the housing
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recovery, promote liquidity and housing affordability, expand foreclosure prevention efforts and set market standards. The
MHA Program includes HARP and HAMP.
Mortgage assets — Refers to both mortgage loans and the mortgage-related securities we hold in our mortgage-related
investments portfolio.
Mortgage-related investments portfolio — Our investment portfolio, which consists of mortgage-related securities and
single-family and multifamily mortgage loans. The size of our mortgage-related investments portfolio under the Purchase
Agreement is determined without giving effect to the January 1, 2010 change in accounting guidance related to transfers of
financial assets and consolidation of VIEs. Accordingly, for purposes of the portfolio limit, when PCs and certain Other
Guarantee Transactions are purchased into the mortgage-related investments portfolio, this is considered the acquisition of
assets rather than the reduction of debt.
Mortgage-to-debt OAS — The net OAS between the mortgage and agency debt sectors. This is an important factor in
determining the expected level of net interest yield on a new mortgage asset. Higher mortgage-to-debt OAS means that a newly
purchased mortgage asset is expected to provide a greater return relative to the cost of the debt issued to fund the purchase of
the asset and, therefore, a higher net interest yield. Mortgage-to-debt OAS tends to be higher when there is weak demand for
mortgage assets and lower when there is strong demand for mortgage assets.
Multifamily mortgage — A mortgage loan secured by a property with five or more residential rental units.
Multifamily mortgage portfolio — Consists of multifamily mortgage loans held by us on our consolidated balance sheets as
well as our guarantee of non-consolidated Freddie Mac mortgage-related securities, and other guarantee commitments, but
excluding those underlying our guarantees of HFA bonds under the HFA initiative.
Net worth (deficit) — The amount by which our total assets exceed (or are less than) our total liabilities as reflected on our
consolidated balance sheets prepared in conformity with GAAP.
Net worth sweep dividend, Net Worth Amount, and Capital Reserve Amount — For each quarter from January 1, 2013
through and including December 31, 2017, the dividend payment on the senior preferred stock will be the amount, if any, by
which our Net Worth Amount at the end of the immediately preceding fiscal quarter, less the applicable Capital Reserve
Amount, exceeds zero. The term Net Worth Amount is defined as: (a) the total assets of Freddie Mac (excluding Treasury’s
commitment and any unfunded amounts thereof), less; (b) our total liabilities (excluding any obligation in respect of capital
stock), in each case as reflected on our consolidated balance sheets prepared in accordance with GAAP. If the calculation of the
dividend payment for a quarter does not exceed zero, then no dividend shall accrue or be payable for that quarter. The
applicable Capital Reserve Amount was $3 billion for 2013, will be $2.4 billion for 2014, and will be reduced by $600 million
each year thereafter until it reaches zero on January 1, 2018. For each quarter beginning January 1, 2018, the dividend payment
will be the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter exceeds zero.
New single-family book — Consists of mortgage loans in our single-family credit guarantee portfolio that were originated in
2009 to 2013, excluding HARP and other relief refinance mortgages. We do not include relief refinance mortgages, including
HARP loans, as underwriting procedures for relief refinance mortgages are limited, and, in many cases, do not include all of the
changes in underwriting standards we have implemented since 2008.
NIBP — New Issue Bond Program is a component of the HFA initiative in which we and Fannie Mae issued partially-
guaranteed pass-through securities to Treasury that are backed by bonds issued by various state and local HFAs. The program
provides financing for HFAs to issue new housing bonds. Treasury is obligated to absorb any losses under the program up to a
certain level before we are exposed to any losses.
Non-performing loan — Single-family and multifamily loans that have undergone a TDR, single-family seriously delinquent
loans, multifamily loans that are three or more payments past due or in the process of foreclosure, and multifamily loans that
are deemed impaired based on management judgment.
NPV — Net present value
NYSE — New York Stock Exchange
OAS — Option-adjusted spread — An estimate of the incremental yield spread between a particular financial instrument (e.g.,
a security, loan or derivative contract) and a benchmark yield curve (e.g., LIBOR or agency or U.S. Treasury securities). This
includes consideration of potential variability in the instrument’s cash flows resulting from any options embedded in the
instrument, such as prepayment options.
OFHEO — Office of Federal Housing Enterprise Oversight, the predecessor to FHFA.
Option ARM loan — Mortgage loans that permit a variety of repayment options, including minimum, interest-only, fully
amortizing 30-year and fully amortizing 15-year payments. The minimum payment alternative for option ARM loans allows the
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borrower to make monthly payments that may be less than the interest accrued for the period. The unpaid interest, known as
negative amortization, is added to the principal balance of the loan, which increases the outstanding loan balance. For our non-
agency mortgage-related securities that are backed by option ARM loans, we categorize securities as option ARM 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 securities as either subprime or Alt-A securities.
Original LTV Ratio — A credit measure for mortgage loans, calculated as the UPB of the mortgage we guarantee including
the credit-enhanced portion, divided by the lesser of the appraised value of the property at the time of mortgage origination or
the mortgage borrower’s purchase price. Second liens not owned or guaranteed by us are excluded from the LTV ratio
calculation. The existence of a second-lien mortgage reduces the borrower’s equity in the home and, therefore, can increase the
risk of default and the amount of the gross loss if a default occurs.
OTC — Over-the-counter
OTCQB — A marketplace, operated by the OTC Markets Group Inc., for OTC-traded U.S. companies that are registered and
current in their reporting with the SEC or a U.S. banking or insurance regulator.
Other guarantee commitments — Mortgage-related assets held by third parties for which we provide our guarantee without
our securitization of the related assets.
Other Guarantee Transactions — Transactions in which third parties transfer non-Freddie Mac mortgage-related securities to
trusts specifically created for the purpose of issuing mortgage-related securities, or certificates. See "K Certificates" for more
information. We exclude our securitizations of Ginnie Mae securities and tax-exempt multifamily housing revenue bonds from
this classification.
PCs — Participation Certificates — Securities that we issue as part of a securitization transaction. Typically we purchase
mortgage loans from parties who sell mortgage loans, place a pool of loans into a PC trust and issue PCs from that trust. The
PCs are generally transferred to the seller of the mortgage loans in consideration of the loans or are sold to third-party investors
if we purchased the mortgage loans for cash.
Pension Plan — Employees’ Pension Plan
Pension SERP Benefit — The component of the SERP that relates to the Pension Plan.
PMVS — Portfolio Market Value Sensitivity — One of our primary interest-rate risk measures. PMVS measures are estimates
of the amount of average potential pre-tax loss in the market value of our net assets due to parallel (PMVS-L) and non-parallel
(PMVS-YC) changes in LIBOR.
Pre-2005 Legacy single-family book — Consists of mortgage loans in our single-family credit guarantee portfolio that were
originated in 2004 and prior.
Primary mortgage market — The market where lenders originate mortgage loans and lend funds to borrowers. We do not
lend money directly to homeowners and do not participate in this market.
Purchase Agreement / Senior Preferred Stock Purchase Agreement — An agreement the Conservator, acting on our behalf,
entered into with Treasury on September 7, 2008, which was subsequently amended and restated on September 26, 2008 and
further amended on May 6, 2009, December 24, 2009, and August 17, 2012.
Recorded Investment — The dollar amount of a loan recorded on our consolidated balance sheets, excluding any valuation
allowance, such as the allowance for loan losses, but which does reflect direct write-downs of the investment. For mortgage
loans, direct write-downs consist of valuation allowances associated with recording our initial investment in loans acquired
with evidence of credit deterioration at the time of purchase. Recorded investment excludes accrued interest income.
Reform Act — The Federal Housing Finance Regulatory Reform Act of 2008, which, among other things, amended the GSE
Act by establishing a single regulator, FHFA, for Freddie Mac, Fannie Mae, and the FHLBs.
REIT — Real estate investment trust
Relief refinance mortgage — A single-family mortgage loan delivered to us for purchase or guarantee that meets the criteria
of the Freddie Mac Relief Refinance Mortgagesm initiative. Part of this initiative is our implementation of HARP for our loans,
and relief refinance options are also available for certain non-HARP loans. Although HARP is targeted at borrowers with
current LTV ratios above 80%, our initiative also allows borrowers with LTV ratios of 80% and below to participate.
REMIC — Real Estate Mortgage Investment Conduit — A type of multiclass mortgage-related security that divides the cash
flows (principal and interest) of the underlying mortgage-related assets into two or more classes that meet the investment
criteria and portfolio needs of different investors.
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REMICs and Other Structured Securities (or in the case of Multifamily securities, Other Structured Securities) — Single-
and multiclass securities issued by Freddie Mac that represent beneficial interests in pools of PCs and certain other types of
mortgage-related assets. REMICs and Other Structured Securities that are single-class securities pass through the cash flows
(principal and interest) on the underlying mortgage-related assets. REMICs and Other Structured Securities that are multiclass
securities divide the cash flows of the underlying mortgage-related assets into two or more classes designed to meet the
investment criteria and portfolio needs of different investors. Our principal multiclass securities qualify for tax treatment as
REMICs. We include our securitizations of Ginnie Mae securities and tax-exempt multifamily housing revenue bonds in this
classification.
REO — Real estate owned — Real estate which we have acquired through foreclosure or through a deed in lieu of foreclosure.
RSU — Restricted stock unit
S&P — Standard & Poor’s
SEC — Securities and Exchange Commission
Secondary mortgage market — A market consisting of institutions engaged in buying and selling mortgages in the form of
whole loans (i.e., mortgages that have not been securitized) and mortgage-related securities. We participate in the secondary
mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed
mortgage-related securities, principally PCs.
Senior preferred stock — The shares of Variable Liquidation Preference Senior Preferred Stock issued to Treasury under the
Purchase Agreement.
Seriously delinquent — Single-family mortgage loans that are three monthly payments or more past due or in the process of
foreclosure as reported to us by our servicers.
SERP — Supplemental Executive Retirement Plan
Short sale — Typically an alternative to foreclosure consisting of a sale of a mortgaged property in which the homeowner sells
the home at market value and the lender accepts proceeds (sometimes together with an additional payment or promissory note
from the borrower) that are less than the outstanding mortgage indebtedness in full satisfaction of the loan.
Single-family credit guarantee portfolio — Consists of unsecuritized single-family loans, single-family loans held by
consolidated trusts, and single-family loans underlying non-consolidated Other Guarantee Transactions and loans covered by
other guarantee commitments. Excludes our REMICs and Other Structured Securities that are backed by Ginnie Mae
Certificates and our guarantees under the HFA initiative.
Single-family mortgage — A mortgage loan secured by a property containing four or fewer residential dwelling units.
Spread — The difference between the yields of two debt securities, or the difference between the yield of a debt security and a
benchmark yield, such as LIBOR.
STACR — Structured Agency Credit Risk transaction, in which we issue and sell debt securities, the principal balance of
which is subject to the credit and prepayment risk of a reference pool of single-family mortgage loans owned or guaranteed by
Freddie Mac.
Strips — Mortgage pass-through securities created by separating the principal and interest payments on a pool of mortgage
loans. A principal-only strip entitles the security holder to principal cash flows, but no interest cash flows, from the underlying
mortgages. An interest-only strip entitles the security holder to interest cash flows, but no principal cash flows, from the
underlying mortgages.
Subprime — Participants in the mortgage market may characterize single-family loans based upon their overall credit quality
at the time of origination, generally considering them to be prime or subprime. Subprime generally refers to the credit risk
classification of a loan. There is no universally accepted definition of subprime. The subprime segment of the mortgage market
primarily serves borrowers with poorer credit payment histories and such loans typically have a mix of credit characteristics
that indicate a higher likelihood of default and higher loss severities than prime loans. Such characteristics might include,
among other factors, a combination of high LTV ratios, low credit scores or originations using lower underwriting standards,
such as limited or no documentation of a borrower’s income. While we have not historically characterized the loans in our
single-family credit guarantee portfolio as either prime or subprime, we monitor the amount of loans we have guaranteed with
characteristics that indicate a higher degree of credit risk. Notwithstanding our historical characterizations of the single family
credit guarantee portfolio, certain security collateral underlying our Other Guarantee Transactions has been identified as
subprime based on information provided to Freddie Mac when the transactions were entered into. We also categorize our
investments in non-agency mortgage-related securities as subprime if they were identified as such based on information
provided to us when we entered into these transactions.
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SVP — Senior Vice President
Swaption — An option contract to enter into an interest-rate swap. In exchange for an option premium, a buyer obtains the
right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date.
Target TDC — Target total direct compensation
TBA — To be announced
TCLFP — Temporary Credit and Liquidity Facility Program is a component of the HFA initiative in which we and Fannie Mae
issued credit and liquidity guarantees to holders of variable-rate demand obligations issued by various state and local HFAs.
Treasury is obligated to absorb any losses under the program up to a certain level before we are exposed to any losses. The
program was scheduled to expire on December 31, 2012. However, Treasury gave participants the option to extend their
individual TCLFP facilities to December 31, 2015. Certain participants elected to extend their TCLFP facilities to
December 2015.
TDR — Troubled debt restructuring — A type of loan modification in which the changes to the contractual terms result in
concessions to borrowers that are experiencing financial difficulties. Beginning in the third quarter of 2012, TDRs also include
single-family loans discharged in Chapter 7 bankruptcy, regardless of the borrowers’ payment status.
Thrift/401(k) SERP Benefit — The component of the SERP that relates to the Thrift/401(k) Savings Plan.
Total other comprehensive income (loss) (or other comprehensive income (loss)) — Consists of the after-tax changes in:
(a) the unrealized gains and losses on available-for-sale securities; (b) the effective portion of derivatives accounted for as cash
flow hedge relationships; and (c) defined benefit plans.
Total mortgage portfolio — Includes mortgage loans and mortgage-related securities held on our consolidated balance sheets
as well as the balances of our non-consolidated issued and guaranteed single-class and multiclass securities, and other
mortgage-related financial guarantees issued to third parties.
Treasury — U.S. Department of the Treasury
UPB — Unpaid principal balance
USDA — U.S. Department of Agriculture
VA — U.S. Department of Veterans Affairs
Variation margin — Payments we make to or receive from a derivatives clearinghouse based on the change in fair value of a
derivative instrument. Variation margin is typically transferred within one business day.
VIE — Variable Interest Entity — A VIE is an entity: (a) that has a total equity investment at risk that is not sufficient to
finance its activities without additional subordinated financial support provided by another party; or (b) where the group of
equity holders does not have: (i) the ability to make significant decisions about the entity’s activities; (ii) the obligation to
absorb the entity’s expected losses; or (iii) the right to receive the entity’s expected residual returns.
Warrant — Refers to the warrant we issued to Treasury on September 7, 2008 pursuant to the Purchase Agreement. The
warrant provides Treasury the ability to purchase, for a nominal price, shares of our common stock equal to 79.9% of the total
number of shares of Freddie Mac common stock outstanding on a fully diluted basis on the date of exercise.
Workout, or loan workout — A workout is either: (a) a home retention action, which is either a loan modification, repayment
plan, or forbearance agreement; or (b) a foreclosure alternative, which is either a short sale or a deed in lieu of foreclosure.
XBRL — eXtensible Business Reporting Language
Yield curve — A graphical display of the relationship between yields and maturity dates for bonds of the same credit quality.
The slope of the yield curve is an important factor in determining the level of net interest yield on a new mortgage asset, both
initially and over time. For example, if a mortgage asset is purchased when the yield curve is inverted (i.e., short-term interest
rates higher than long-term interest rates), our net interest yield on the asset will tend to be lower initially and then increase
over time. Likewise, if a mortgage asset is purchased when the yield curve is steep (i.e., short-term interest rates lower than
long-term interest rates), our net interest yield on the asset will tend to be higher initially and then decrease over time.
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Exhibit No.
Description*
EXHIBIT INDEX
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
Federal Home Loan Mortgage Corporation Act (12 U.S.C. §1451 et seq.), as amended through July 21, 2010 (incorporated by reference to
Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010, as filed on August 9, 2010)
Bylaws of the Federal Home Loan Mortgage Corporation, as amended and restated December 20, 2012 (incorporated by reference to
Exhibit 3.1 to the Registrant’s Current Report on Form 8-K as filed on December 20, 2012)
Eighth Amended and Restated Certificate of Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of Voting Common Stock (no par value per share) dated September 10, 2008 (incorporated by
reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K as filed on September 11, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00 per share), dated April 23, 1996 (incorporated by
reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 5.81% Non-Cumulative Preferred Stock (par value $1.00 per share), dated October 27, 1997 (incorporated by reference to
Exhibit 4.3 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 5% Non-Cumulative Preferred Stock (par value $1.00 per share), dated March 23, 1998 (incorporated by reference to
Exhibit 4.4 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 5.1% Non-Cumulative Preferred Stock (par value $1.00 per share), dated September 23, 1998 (incorporated by reference to
Exhibit 4.5 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Amended and Restated Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00 per share), dated September 29,
1998 (incorporated by reference to Exhibit 4.6 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 5.3% Non-Cumulative Preferred Stock (par value $1.00 per share), dated October 28, 1998 (incorporated by reference to
Exhibit 4.7 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 5.1% Non-Cumulative Preferred Stock (par value $1.00 per share), dated March 19, 1999 (incorporated by reference to
Exhibit 4.8 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 5.79% Non-Cumulative Preferred Stock (par value $1.00 per share), dated July 21, 1999 (incorporated by reference to
Exhibit 4.9 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00 per share), dated November 5, 1999 (incorporated by
reference to Exhibit 4.10 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00 per share), dated January 26, 2001 (incorporated by
reference to Exhibit 4.11 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00 per share), dated March 23, 2001 (incorporated by
reference to Exhibit 4.12 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 5.81% Non-Cumulative Preferred Stock (par value $1.00 per share), dated March 23, 2001 (incorporated by reference to
Exhibit 4.13 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00 per share), dated May 30, 2001 (incorporated by reference
to Exhibit 4.14 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
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Exhibit No.
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
4.26
4.27
10.1
10.2
10.3
10.4
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 6% Non-Cumulative Preferred Stock (par value $1.00 per share), dated May 30, 2001 (incorporated by reference to Exhibit
4.15 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Description*
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 5.7% Non-Cumulative Preferred Stock (par value $1.00 per share), dated October 30, 2001 (incorporated by reference to
Exhibit 4.16 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 5.81% Non-Cumulative Preferred Stock (par value $1.00 per share), dated January 29, 2002 (incorporated by reference to
Exhibit 4.17 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of Variable Rate, Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated July 17, 2006 (incorporated by
reference to Exhibit 4.18 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 6.42% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated July 17, 2006 (incorporated by
reference to Exhibit 4.19 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 5.9% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated October 16, 2006 (incorporated by
reference to Exhibit 4.20 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 5.57% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated January 16, 2007 (incorporated by
reference to Exhibit 4.21 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 5.66% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated April 16, 2007 (incorporated by
reference to Exhibit 4.22 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 6.02% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated July 24, 2007 (incorporated by
reference to Exhibit 4.23 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of 6.55% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated September 28, 2007 (incorporated by
reference to Exhibit 4.24 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and
Conditions of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated December 4, 2007
(incorporated by reference to Exhibit 4.25 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Amended and Restated Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations,
Restrictions, Terms and Conditions of Variable Liquidation Preference Senior Preferred Stock (par value $1.00 per share), dated
September 27, 2012 (incorporated by reference to Exhibit 4.26 to the Registrant’s Annual Report on Form 10-K as filed on February 28,
2013)
Federal Home Loan Mortgage Corporation Global Debt Facility Agreement, dated March 1, 2013 (incorporated by reference to Exhibit
4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, as filed on May 8, 2013)
Federal Home Loan Mortgage Corporation 2004 Stock Compensation Plan (as amended and restated as of June 6, 2008) (incorporated by
reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)†
First Amendment to the Federal Home Loan Mortgage Corporation 2004 Stock Compensation Plan (incorporated by reference to Exhibit
10.2 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)†
Second Amendment to the Federal Home Loan Mortgage Corporation 2004 Stock Compensation Plan (incorporated by reference to
Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, as filed on August 7, 2009)†
Form of Nonqualified Stock Option Agreement for executive officers under the Federal Home Loan Mortgage Corporation 2004 Stock
Compensation Plan for awards on and after March 4, 2005 but prior to January 1, 2006 (incorporated by reference to Exhibit 10.3 to the
Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)†
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Exhibit No.
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
Form of Nonqualified Stock Option Agreement for executive officers under the Federal Home Loan Mortgage Corporation 2004 Stock
Compensation Plan for awards on and after January 1, 2006 (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration
Statement on Form 10 as filed on July 18, 2008)†
Description*
Federal Home Loan Mortgage Corporation Global Amendment to Affected Stock Options under Nonqualified Stock Option Agreements
and Separate Dividend Equivalent Rights, effective December 31, 2005 (incorporated by reference to Exhibit 10.9 to the Registrant’s
Registration Statement on Form 10 as filed on July 18, 2008)†
Federal Home Loan Mortgage Corporation 1995 Stock Compensation Plan (incorporated by reference to Exhibit 10.10 to the Registrant’s
Registration Statement on Form 10 as filed on July 18, 2008)†
First Amendment to the Federal Home Loan Mortgage Corporation 1995 Stock Compensation Plan (incorporated by reference to Exhibit
10.11 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)†
Second Amendment to the Federal Home Loan Mortgage Corporation 1995 Stock Compensation Plan (incorporated by reference to
Exhibit 10.12 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)†
Third Amendment to the Federal Home Loan Mortgage Corporation 1995 Stock Compensation Plan (incorporated by reference to Exhibit
10.13 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)†
Form of Nonqualified Stock Option Agreement for executive officers under the Federal Home Loan Mortgage Corporation 1995 Stock
Compensation Plan (incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form 10 as filed on July 18,
2008)†
Federal Home Loan Mortgage Corporation Employee Stock Purchase Plan (as amended and restated as of January 1, 2005) (incorporated
by reference to Exhibit 10.16 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)†
Federal Home Loan Mortgage Corporation 1995 Directors’ Stock Compensation Plan (as amended and restated June 8, 2007)
(incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)†
Federal Home Loan Mortgage Corporation Directors’ Deferred Compensation Plan (as amended and restated April 3, 1998) (incorporated
by reference to Exhibit 10.25 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)†
First Amendment to the Federal Home Loan Mortgage Corporation Directors’ Deferred Compensation Plan (as amended and restated
April 3, 1998) (incorporated by reference to Exhibit 10.27 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2008, as filed on March 11, 2009)†
Federal Home Loan Mortgage Corporation Executive Deferred Compensation Plan (as amended and restated effective January 1, 2008)
(incorporated by reference to Exhibit 10.28 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)†
First Amendment to the Federal Home Loan Mortgage Corporation Executive Deferred Compensation Plan (as amended and restated
effective January 1, 2008) (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2008, as filed on November 14, 2008)†
Federal Home Loan Mortgage Corporation Supplemental Executive Retirement Plan (as amended and restated effective January 1, 2008)
(incorporated by reference to Exhibit 10.33 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)†
First Amendment to the Federal Home Loan Mortgage Corporation Supplemental Executive Retirement Plan (As Amended and Restated
January 1, 2008) (incorporated by reference to Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2009, as filed on February 24, 2010)†
Second Amendment to the Federal Home Loan Mortgage Corporation Supplemental Executive Retirement Plan (as Amended and
Restated January 1, 2008) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K as filed on June 28,
2011)†
Third Amendment to the Federal Home Loan Mortgage Corporation Supplemental Executive Retirement Plan (as Amended and Restated
January 1, 2008) (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q as filed on November 6,
2012)†
Fourth Amendment to the Federal Home Loan Mortgage Corporation Supplemental Executive Retirement Plan (As Amended and
Restated January 1, 2008) (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q as filed on
August 7, 2013) †
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Exhibit No.
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
Fifth Amendment to the Federal Home Loan Mortgage Corporation Supplemental Executive Retirement Plan (as Amended and Restated
January 1, 2008) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, as filed on October 25, 2013)
†
Description*
Federal Home Loan Mortgage Corporation Long-Term Disability Plan (incorporated by reference to Exhibit 10.34 to the Registrant’s
Registration Statement on Form 10 as filed on July 18, 2008)†
First Amendment to the Federal Home Loan Mortgage Corporation Long-Term Disability Plan (incorporated by reference to
Exhibit 10.35 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)†
Second Amendment to the Federal Home Loan Mortgage Corporation Long-Term Disability Plan (incorporated by reference to Exhibit
10.36 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)†
Executive Management Compensation Program (as amended and restated as of June 2, 2011) (incorporated by reference to Exhibit 10.4
to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, as filed on August 8, 2011)†
Federal Home Loan Mortgage Corporation Mandatory Executive Deferred Base Salary Plan, Effective as of January 1, 2009
(incorporated by reference to Exhibit 10.45 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009,
as filed on February 24, 2010)†
First Amendment To The Federal Home Loan Mortgage Corporation Mandatory Executive Deferred Base Salary Plan (As Effective
January 1, 2009) (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2011, as filed on August 8, 2011)†
Second Amendment To The Federal Home Loan Mortgage Corporation Mandatory Executive Deferred Base Salary Plan (As Effective
January 1, 2009) (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2012, as filed on August 7, 2012)†
Executive Management Compensation Recapture Policy (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on
Form 8-K, as filed on December 24, 2009)†
2012 Executive Management Compensation Program Recapture and Forfeiture Agreement (incorporated by reference to Exhibit 10.3 to
the Registrant’s Quarterly Report on Form 10-Q as filed on November 6, 2012)†
2013 Executive Management Compensation Program for Virginia-Based Covered Officers (incorporated by reference to Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K as filed on June 12, 2013) †
2013 Executive Management Compensation Program for Non-Virginia-Based Covered Officers (incorporated by reference to Exhibit
10.2 to the Registrant’s Current Report on Form 8-K as filed on June 12, 2013) †
2013 Executive Management Compensation Program Recapture and Forfeiture Agreement (incorporated by reference to Exhibit 10.3 to
the Registrant’s Current Report on Form 8-K as filed on June 12, 2013) †
2014 Executive Management Compensation Program for Virginia-Based Covered Officers (incorporated by reference to Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K as filed on December 10, 2013) †
2014 Executive Management Compensation Program for Non-Virginia-Based Covered Officers (incorporated by reference to Exhibit
10.2 to the Registrant’s Current Report on Form 8-K as filed on December 10, 2013) †
Memorandum Agreement, dated May 7, 2012, between Freddie Mac and Donald H. Layton (incorporated by reference to Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K as filed on May 10, 2012)†
Restrictive Covenant and Confidentiality Agreement, dated May 7, 2012, between Freddie Mac and Donald H. Layton (incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K as filed on May 10, 2012)†
Memorandum Agreement, dated September 24, 2013, between Freddie Mac and James Mackey (incorporated by reference to Exhibit 10.1
to the Registrant’s Current Report on Form 8-K, as filed on September 30, 2013) †
Restrictive Covenant and Confidentiality Agreement, dated September 25, 2013, between Freddie Mac and James Mackey (incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, as filed on September 30, 2013) †
Memorandum Agreement, dated September 24, 2009, between Freddie Mac and Ross J. Kari (incorporated by reference to Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K, as filed on September 24, 2009)†
E-4
Freddie Mac
Table of Contents
Exhibit No.
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
Recapture Agreement, dated September 24, 2009, between Freddie Mac and Ross J. Kari (incorporated by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K, as filed on September 24, 2009)†
Description*
Restrictive Covenant and Confidentiality Agreement, dated September 24, 2009, between Freddie Mac and Ross J. Kari (incorporated by
reference to Exhibit 10.9 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009, as filed
on November 6, 2009)†
Restrictive Covenant and Confidentiality Agreement, dated October 15, 2004, between Freddie Mac and Jerry Weiss (incorporated by
reference to Exhibit 10.49 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed on March 9,
2012)†
Memorandum Agreement, dated July 3, 2012, between Freddie Mac and William H. McDavid (incorporated by reference to Exhibit 10.1
to the Registrant’s Current Report on Form 8-K, as filed on July 9, 2012)†
Restrictive Covenant and Confidentiality Agreement, dated July 6, 2012, between Freddie Mac and William H. McDavid (incorporated by
reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, as filed on July 9, 2012)†
Memorandum Agreement, dated April 7, 2013, between Freddie Mac and David B. Lowman†
Restrictive Covenant and Confidentiality Agreement, dated April 9, 2013, between Freddie Mac and David B. Lowman†
Description of non-employee director compensation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K as filed on December 23, 2008)†
PC Master Trust Agreement dated October 24, 2013 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on
Form 10-Q as filed on November 7, 2013)
Form of Indemnification Agreement between the Federal Home Loan Mortgage Corporation and executive officers (for agreements with
officers entered into prior to August 2011) and outside Directors (incorporated by reference to Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K as filed on December 23, 2008)†
Form of Indemnification Agreement between the Federal Home Loan Mortgage Corporation and executive officers (for agreements with
officers entered into beginning in August 2011) (incorporated by reference to Exhibit 10.54 to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2011, as filed on March 9, 2012)†
Consent of Defendant Federal Home Loan Mortgage Corporation with the Securities and Exchange Commission, dated September 18,
2007 (incorporated by reference to Exhibit 10.65 to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Letters, dated September 1, 2005, setting forth an agreement between Freddie Mac and FHFA (incorporated by reference to Exhibit 10.67
to the Registrant’s Registration Statement on Form 10 as filed on July 18, 2008)
Amended and Restated Senior Preferred Stock Purchase Agreement dated as of September 26, 2008, between the United States
Department of the Treasury and Federal Home Loan Mortgage Corporation, acting through the Federal Housing Finance Agency as its
duly appointed Conservator (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2008, as filed on November 14, 2008)
Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of May 6, 2009, between the United States
Department of the Treasury and Federal Home Loan Mortgage Corporation, acting through the Federal Housing Finance Agency as its
duly appointed Conservator (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the period
ended March 31, 2009, as filed on May 12, 2009)
Second Amendment dated as of December 24, 2009, to the Amended and Restated Senior Preferred Stock Purchase Agreement dated as
of September 26, 2008, between the United States Department of the Treasury and Federal Home Loan Mortgage Corporation, acting
through the Federal Housing Finance Agency as its duly appointed Conservator (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, as filed on December 29, 2009)
Third Amendment dated as of August 17, 2012, to the Amended and Restated Senior Preferred Stock Purchase Agreement dated as of
September 26, 2008, between the United States Department of the Treasury and Federal Home Loan Mortgage Corporation, acting
through the Federal Housing Finance Agency as its duly appointed Conservator (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, as filed on August 17, 2012)
Warrant to Purchase Common Stock, dated September 7, 2008 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K as filed on September 11, 2008)
E-5
Freddie Mac
Table of Contents
Exhibit No.
10.61
10.62
12.1
24.1
31.1
31.2
32.1
32.2
Memorandum of Understanding Among the Department of Treasury, the Federal Housing Finance Agency, the Federal National Mortgage
Association, and the Federal Home Loan Mortgage Corporation, dated October 19, 2009 (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K, as filed on October 23, 2009)
Description*
Omnibus Consent to HFA Initiative Program Modifications, dated November 23, 2011, among the U.S. Department of the Treasury, the
Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Federal Housing Finance Agency
(incorporated by reference to Exhibit 10.62 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011, as
filed on March 9, 2012)
Statement re: computation of ratio of earnings to fixed charges and computation of ratio of earnings to combined fixed charges and
preferred stock dividends
Powers of Attorney
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)
Certification of Executive Vice President —Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
Certification of Executive Vice President —Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.LAB
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation
101.DEF
XBRL Taxonomy Extension Definition
*
†
The SEC file numbers for the Registrant’s Registration Statement on Form 10, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K are 000-53330 and 001-34139.
This exhibit is a management contract or compensatory plan or arrangement.
E-6
Freddie Mac
RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Exhibit 12.1
Year Ended December 31,
2013
2012
2011
2010
2009
(dollars in millions)
Net income (loss) before income tax benefit (expense) and cumulative effect of changes in
accounting principles
$
25,363
$
9,445
$
(5,666) $ (14,882) $ (22,384)
Add:
Low-income housing tax credit partnerships
Total interest expense
Interest factor in rental expenses
Earnings (loss), as adjusted
Fixed charges:
Total interest expense
Interest factor in rental expenses
Total fixed charges
Senior preferred stock and preferred stock dividends(1)
Total fixed charges including preferred stock dividends
Ratio of earnings to fixed charges(2)
Ratio of earnings to combined fixed charges and preferred stock dividends(3)
—
—
—
—
55,779
66,502
79,988
92,131
4
4
4
5
4,155
22,150
7
$
81,146
$
75,951
$
74,326
$
77,254
$
3,928
$
55,779
$
66,502
$
79,988
$
92,131
$
22,150
4
4
4
5
7
$
55,783
$
66,506
$
79,992
$
92,136
$
22,157
52,199
7,229
6,498
5,749
4,105
$ 107,982
$
73,735
$
86,490
$
97,885
$
26,262
1.45
—
1.14
1.03
—
—
—
—
—
—
(1) Senior preferred stock and preferred stock dividends represent pre-tax earnings required to cover any senior preferred stock and preferred stock
dividend requirements computed using our effective tax rate, whenever there is an income tax provision, for the relevant periods.
(2) Ratio of earnings to fixed charges is computed by dividing earnings (loss), as adjusted by total fixed charges. For the ratio to equal 1.00, earnings
(loss), as adjusted must increase by $5.7 billion, $14.9 billion, and $18.2 billion for the years ended December 31, 2011, 2010, and 2009, respectively.
(3) Ratio of earnings to combined fixed charges and preferred stock dividends is computed by dividing earnings (loss), as adjusted by total fixed charges
including preferred stock dividends. For the ratio to equal 1.00, earnings (loss), as adjusted must increase by $26.8 billion, $12.2 billion, $20.6 billion,
and $22.3 billion for the years ended December 31, 2013, 2011, 2010, and 2009, respectively.
Exhibit 24.1
Power of Attorney
Annual Report on Form 10-K
Freddie Mac
KNOW ALL PERSONS BY THESE PRESENTS, that I, the undersigned, a
director of Freddie Mac (formally known as the Federal Home Loan Mortgage
Corporation), a federally chartered corporation, hereby constitute and appoint Donald H.
Layton, James G. Mackey and William H. McDavid, and each of them severally, my true
and lawful attorney-in-fact with power of substitution and resubstitution to sign in my
name, place and stead, in any and all capacities, to do any and all things and execute any
and all instruments that such attorney may deem necessary or advisable under the
Securities Exchange Act of 1934 and any rules, regulations and requirements of the
U.S. Securities and Exchange Commission in connection with the Annual Report on
Form 10-K for the year ended December 31, 2013 and any and all amendments thereto,
as fully for all intents and purposes as I might or could do in person, and hereby ratify
and confirm all said attorneys-in-fact, each acting alone, and his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of January 17,
2014.
/s/ Carolyn H. Byrd______
Carolyn H. Byrd
Power of Attorney
Annual Report on Form 10-K
Freddie Mac
KNOW ALL PERSONS BY THESE PRESENTS, that I, the undersigned, a
director of Freddie Mac (formally known as the Federal Home Loan Mortgage
Corporation), a federally chartered corporation, hereby constitute and appoint Donald H.
Layton, James G. Mackey and William H. McDavid, and each of them severally, my true
and lawful attorney-in-fact with power of substitution and resubstitution to sign in my
name, place and stead, in any and all capacities, to do any and all things and execute any
and all instruments that such attorney may deem necessary or advisable under the
Securities Exchange Act of 1934 and any rules, regulations and requirements of the
U.S. Securities and Exchange Commission in connection with the Annual Report on
Form 10-K for the year ended December 31, 2013 and any and all amendments thereto,
as fully for all intents and purposes as I might or could do in person, and hereby ratify
and confirm all said attorneys-in-fact, each acting alone, and his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of January 16,
2014.
/s/ Richard C. Hartnack___
Richard C. Hartnack
Power of Attorney
Annual Report on Form 10-K
Freddie Mac
KNOW ALL PERSONS BY THESE PRESENTS, that I, the undersigned, a
director of Freddie Mac (formally known as the Federal Home Loan Mortgage
Corporation), a federally chartered corporation, hereby constitute and appoint Donald H.
Layton, James G. Mackey and William H. McDavid, and each of them severally, my true
and lawful attorney-in-fact with power of substitution and resubstitution to sign in my
name, place and stead, in any and all capacities, to do any and all things and execute any
and all instruments that such attorney may deem necessary or advisable under the
Securities Exchange Act of 1934 and any rules, regulations and requirements of the
U.S. Securities and Exchange Commission in connection with the Annual Report on
Form 10-K for the year ended December 31, 2013 and any and all amendments thereto,
as fully for all intents and purposes as I might or could do in person, and hereby ratify
and confirm all said attorneys-in-fact, each acting alone, and his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of January 17,
2014.
/s/ Steven W. Kohlhagen__
Steven W. Kohlhagen
Power of Attorney
Annual Report on Form 10-K
Freddie Mac
KNOW ALL PERSONS BY THESE PRESENTS, that I, the undersigned, a
director of Freddie Mac (formally known as the Federal Home Loan Mortgage
Corporation), a federally chartered corporation, hereby constitute and appoint Donald H.
Layton, James G. Mackey and William H. McDavid, and each of them severally, my true
and lawful attorney-in-fact with power of substitution and resubstitution to sign in my
name, place and stead, in any and all capacities, to do any and all things and execute any
and all instruments that such attorney may deem necessary or advisable under the
Securities Exchange Act of 1934 and any rules, regulations and requirements of the
U.S. Securities and Exchange Commission in connection with the Annual Report on
Form 10-K for the year ended December 31, 2013 and any and all amendments thereto,
as fully for all intents and purposes as I might or could do in person, and hereby ratify
and confirm all said attorneys-in-fact, each acting alone, and his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of January 24,
2014.
/s/ Christopher S. Lynch__
Christopher S. Lynch
Power of Attorney
Annual Report on Form 10-K
Freddie Mac
KNOW ALL PERSONS BY THESE PRESENTS, that I, the undersigned, a
director of Freddie Mac (formally known as the Federal Home Loan Mortgage
Corporation), a federally chartered corporation, hereby constitute and appoint Donald H.
Layton, James G. Mackey and William H. McDavid, and each of them severally, my true
and lawful attorney-in-fact with power of substitution and resubstitution to sign in my
name, place and stead, in any and all capacities, to do any and all things and execute any
and all instruments that such attorney may deem necessary or advisable under the
Securities Exchange Act of 1934 and any rules, regulations and requirements of the
U.S. Securities and Exchange Commission in connection with the Annual Report on
Form 10-K for the year ended December 31, 2013 and any and all amendments thereto,
as fully for all intents and purposes as I might or could do in person, and hereby ratify
and confirm all said attorneys-in-fact, each acting alone, and his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of February 5,
2014.
/s/ Sara Mathew_______
Sara Mathew
Power of Attorney
Annual Report on Form 10-K
Freddie Mac
KNOW ALL PERSONS BY THESE PRESENTS, that I, the undersigned, a
director of Freddie Mac (formally known as the Federal Home Loan Mortgage
Corporation), a federally chartered corporation, hereby constitute and appoint Donald H.
Layton, James G. Mackey and William H. McDavid, and each of them severally, my true
and lawful attorney-in-fact with power of substitution and resubstitution to sign in my
name, place and stead, in any and all capacities, to do any and all things and execute any
and all instruments that such attorney may deem necessary or advisable under the
Securities Exchange Act of 1934 and any rules, regulations and requirements of the
U.S. Securities and Exchange Commission in connection with the Annual Report on
Form 10-K for the year ended December 31, 2013 and any and all amendments thereto,
as fully for all intents and purposes as I might or could do in person, and hereby ratify
and confirm all said attorneys-in-fact, each acting alone, and his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of January 17,
2014.
/s/ Saiyid T. Naqvi______
Saiyid T. Naqvi
Power of Attorney
Annual Report on Form 10-K
Freddie Mac
KNOW ALL PERSONS BY THESE PRESENTS, that I, the undersigned, a
director of Freddie Mac (formally known as the Federal Home Loan Mortgage
Corporation), a federally chartered corporation, hereby constitute and appoint Donald H.
Layton, James G. Mackey and William H. McDavid, and each of them severally, my true
and lawful attorney-in-fact with power of substitution and resubstitution to sign in my
name, place and stead, in any and all capacities, to do any and all things and execute any
and all instruments that such attorney may deem necessary or advisable under the
Securities Exchange Act of 1934 and any rules, regulations and requirements of the
U.S. Securities and Exchange Commission in connection with the Annual Report on
Form 10-K for the year ended December 31, 2013 and any and all amendments thereto,
as fully for all intents and purposes as I might or could do in person, and hereby ratify
and confirm all said attorneys-in-fact, each acting alone, and his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of January 18,
2014.
/s/ Nicolas P. Retsinas_____
Nicolas P. Retsinas
Power of Attorney
Annual Report on Form 10-K
Freddie Mac
KNOW ALL PERSONS BY THESE PRESENTS, that I, the undersigned, a
director of Freddie Mac (formally known as the Federal Home Loan Mortgage
Corporation), a federally chartered corporation, hereby constitute and appoint Donald H.
Layton, James G. Mackey and William H. McDavid, and each of them severally, my true
and lawful attorney-in-fact with power of substitution and resubstitution to sign in my
name, place and stead, in any and all capacities, to do any and all things and execute any
and all instruments that such attorney may deem necessary or advisable under the
Securities Exchange Act of 1934 and any rules, regulations and requirements of the
U.S. Securities and Exchange Commission in connection with the Annual Report on
Form 10-K for the year ended December 31, 2013 and any and all amendments thereto,
as fully for all intents and purposes as I might or could do in person, and hereby ratify
and confirm all said attorneys-in-fact, each acting alone, and his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of January 17,
2014.
/s/ Eugene B. Shanks, Jr.__
Eugene B. Shanks, Jr.
Power of Attorney
Annual Report on Form 10-K
Freddie Mac
KNOW ALL PERSONS BY THESE PRESENTS, that I, the undersigned, a
director of Freddie Mac (formally known as the Federal Home Loan Mortgage
Corporation), a federally chartered corporation, hereby constitute and appoint Donald H.
Layton, James G. Mackey and William H. McDavid, and each of them severally, my true
and lawful attorney-in-fact with power of substitution and resubstitution to sign in my
name, place and stead, in any and all capacities, to do any and all things and execute any
and all instruments that such attorney may deem necessary or advisable under the
Securities Exchange Act of 1934 and any rules, regulations and requirements of the
U.S. Securities and Exchange Commission in connection with the Annual Report on
Form 10-K for the year ended December 31, 2013 and any and all amendments thereto,
as fully for all intents and purposes as I might or could do in person, and hereby ratify
and confirm all said attorneys-in-fact, each acting alone, and his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of January 16,
2014.
/s/ Anthony A. Williams____
Anthony A. Williams
PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a)
CERTIFICATION
I, Donald H. Layton, certify that:
Exhibit 31.1
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2013 of the Federal Home Loan Mortgage
Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: February 27, 2014
/s/ Donald H. Layton
Donald H. Layton
Chief Executive Officer
PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a)
CERTIFICATION
I, James G. Mackey, certify that:
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2013 of the Federal Home Loan Mortgage
Corporation;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: February 27, 2014
/s/ James G. Mackey
James G. Mackey
Executive Vice President — Chief Financial Officer
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
Exhibit 32.1
AS ENACTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the year ended December 31, 2013 of the Federal Home Loan
Mortgage Corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Donald H. Layton, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 27, 2014
/s/ Donald H. Layton
Donald H. Layton
Chief Executive Officer
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
Exhibit 32.2
AS ENACTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K for the year ended December 31, 2013 of the Federal Home Loan
Mortgage Corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, James G. Mackey, Executive Vice President – Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: February 27, 2014
/s/ James G. Mackey
James G. Mackey
Executive Vice President — Chief Financial Officer
Exhibit 10.48
Date
April 7, 2013
From
Donald H. Layton
To
David B. Lowman
Subject
Your Compensation as Executive Vice President – Single-Family Business
On behalf of the Compensation Committee (the “Committee”) of Freddie Mac’s Board of
Directors (the “Board”), this memorandum sets forth Freddie Mac’s agreement to employ you as
its Executive Vice President – Single-Family Business, effective May 20, 2013, pursuant to the
terms and conditions set forth herein. The terms and conditions set forth herein have been
approved by the Committee and the Federal Housing Finance Agency (“FHFA”) and supersede
any previous communications you may have had with Freddie Mac, FHFA, or the United States
Department of Treasury (“Treasury”).
As Freddie Mac’s Executive Vice President – Single-Family Business, you shall report to me,
Freddie Mac’s Chief Executive Officer, or my successor, and have the same status, privileges,
and responsibilities normally inherent in such capacity in corporations of similar size and
character. You shall also perform such additional duties as the Board may from time to time
reasonably assign to you.
During your employment, you agree to devote substantially all of your time, attention, and
energies to Freddie Mac’s business, and to not be engaged in any other business activity,
whether or not such business activity is pursued for gain, profit, or other pecuniary advantage,
other than for service on outside boards in accordance with our Outside Employment and Other
Outside Activities Policy. This restriction shall not prevent you from devoting a reasonable
amount of time to charitable or public interest activities or from making passive investments of
your assets in such form or manner as you desire, consistent with Freddie Mac’s Personal
Securities Investment policy, and except as provided herein.
Please review and confirm that such terms and conditions conform to your understanding by
returning to Scott Coolidge, Freddie Mac’s Senior Vice President – Human Resources, a signed
copy of this letter.
Compensation Terms – David B. Lowman – April 7, 2013
Page 2 of 5
I. Compensation
Your compensation is governed by the 2013 Executive Management Compensation Program
(“2013 EMCP”). To participate in the 2013 EMCP, you must agree to the terms of the 2013
EMCP Program Document and a Recapture and Forfeiture Agreement, both of which will be
provided for your review after these documents are finalized. The 2013 EMCP Program
Document will outline the terms and conditions of our compensation program for senior
executives, while the Recapture and Forfeiture Agreement will describe the circumstances
under which certain compensation is subject to forfeiture and repayment. In the event that you
do not agree to the terms of either or both documents, you will be paid only Base Salary
Your target total direct compensation (“Target TDC”) will be $3,000,000, which will be pro-rated
in the first calendar year of employment based on your agreed upon hire date. Your Target
TDC will consist of two components – Base Salary and Deferred Salary – which are
summarized below.
Base Salary – Base Salary is paid in cash. The annualized amount of your Base Salary is
$500,000.
Deferred Salary – Deferred Salary is earned on a semi-monthly basis. The amount earned in
each quarter is paid in cash on the last business day of the corresponding quarter of the
following calendar year. The annualized amount of your Deferred Salary is $2,500,000 and is
comprised of the following two components:
• At-Risk Deferred Salary – This portion of your Deferred Salary is equal to thirty percent
(30%) of your Target TDC, or $900,000, up to half of which may be reduced based on the
company’s performance against objectives established by FHFA and up to half of which
may be reduced based on performance against objectives established by Freddie Mac
and your individual performance.
• Fixed Deferred Salary – This portion of your Deferred Salary is equal to your Target TDC
less your Base Salary and At-Risk Deferred Salary, and is equal to $1,600,000.
Compensation Terms – David B. Lowman – April 7, 2013
Page 3 of 5
Cash Award – In consideration of your accepting this offer and beginning employment with
Freddie Mac, you will receive a cash award in the amount of $150,000. You will receive this
cash award on the same date on which you receive your first payment of Base Salary. The
cash award is not considered “compensation” for purposes of our tax qualified Thrift/401(k)
Savings Plan and our non-qualified Supplemental Executive Retirement Plan.
The cash award is subject to repayment if your employment terminates prior to the one-year
anniversary of your date of hire for either of the following reasons:
• You voluntarily resign employment; or,
• We terminate your employment due to the occurrence of any of the Forfeiture Events
described in the Recapture and Forfeiture Agreement that you will be required to sign
in order to participate in the 2013 EMCP.
The amount to be repaid will be $12,500 (1/12th of the amount of the cash award) for each full
month by which your termination precedes the one-year anniversary of your date of hire.
II. Benefits
You will be eligible to participate in all employee benefit plans offered to Freddie Mac’s senior
executive officers (as may be modified or terminated from time to time by Freddie Mac in its
sole discretion) pursuant to the terms set forth in the applicable plan. In summary, our current
benefit plans consist of the following:
• Healthcare Coverage– We offer a competitive healthcare program that provides medical,
dental and vision coverage for you and your eligible dependents with several options to
choose from.
•
Income Protection – We provide short- and long-term disability income protection, life
insurance, accidental death and personal loss insurance, and business travel accident
insurance.
• Vacation - As an officer, you will accrue 20 days of vacation annually. This equates to 6.46
hours each semi-monthly pay period. You begin accruing vacation starting with your first
full pay period. Beginning in your second calendar year of employment you have the
option to purchase up to five (5) additional days of vacation.
• Thrift/401(k) Savings Plan – You will be able to contribute to our Thrift/401(k) Savings Plan
on a pre-tax and/or after-tax basis. Freddie Mac will begin matching a portion of your
contributions after one year of service at up to six percent of pay. This plan also includes
an annual company discretionary contribution that is based on company performance.
This contribution, which is in addition to the matching contribution, is determined using a
defined formula and is subject to a three-year vesting schedule.
• Supplemental Executive Retirement Plan (SERP) – The SERP is an unfunded
nonqualified plan for officers intended to make up for employer-provided contributions
under the Thrift/401(k) Savings Plan that are capped due to Internal Revenue Code
limitations.
Compensation Terms – David B. Lowman – April 7, 2013
Page 4 of 5
Under separate cover, we are sending details of our employee benefit plans. As a new
employee, you may select the benefit plans that best meet your needs by logging on to
Fidelity’s NetBenefits website at http://netbenefits.fidelity.com. Shortly after your start date, you
will receive an email from the Freddie Mac Benefits Center instructing you to log on to
NetBenefits to make your elections.
Note that you will not receive any information at your home address. Your enrollment window is
open for 30 days following your hire date. During orientation, our benefit plans and information
about enrollment will be explained in greater detail. Please visit our new employee website,
http://www.freddiemac.com/careers/newemployee/, for information about working at Freddie
Mac.
III. Personal Securities investments
You agree that following the vesting of your rights in certain shares of JPMorgan Chase & Co.
common stock on January 20, 2014, you will act in good faith, considering relevant market
conditions, to reduce your ownership interest in JPMorgan Chase & Co. to less than 5% of your
household's Simplified Net Worth (as that term is defined in Freddie Mac's Personal Securities
Investments Policy, a copy of which is attached).
IV. Restrictive Covenant and Confidentiality Agreement
The terms of your compensation provided in this letter are also contingent upon your agreement
to be bound by the terms of the enclosed Restrictive Covenant and Confidentiality Agreement,
which you must sign and return together with a signed copy of this letter.
V. FHFA’s Review and Approval Authority
The terms and conditions of your compensation have been reviewed and approved by FHFA in
consultation with Treasury as required under the terms of the company’s Preferred Stock
Agreement. Notwithstanding such approval and any provision of this letter, you acknowledge
and understand that any compensation paid or to be paid during or after your employment
remains subject to any withholding, escrow or prohibition consistent with FHFA’s authority
pursuant to the Federal Home Loan Corporation Act, as amended, or the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992, as amended.
VI. Reservations of Rights:
This letter is not intended, nor shall it be interpreted, to constitute a contract of employment for
a specified duration. Your employment is at-will and both you and Freddie Mac retain the
discretion to terminate the employment relationship at any time for any lawful reason with or
without notice.
This offer of employment is contingent upon Freddie Mac’s satisfaction in its sole discretion with
your references and the results of your background checks and drug test.
Compensation Terms – David B. Lowman – April 7, 2013
Page 5 of 5
During the course of your review of this memorandum, Freddie Mac expects that you have had
the opportunity to consult and receive assistance from appropriate advisors, including legal, tax,
and financial advisors.
This memorandum shall be construed, and the rights and obligations herein determined,
exclusively in accordance with the substantive law of the Commonwealth of Virginia, excluding
provisions of Virginia law concerning choice-of-law that would result in the law of any state
other than Virginia being applied.
/s/ Donald H. Layton__________________
Donald H. Layton
Chief Executive Officer
I agree to the terms of this Agreement.
4/10/13_________
Date
/s/ David B. Lowman__________________
David B. Lowman
4-9-2013_______
Date
1
Exhibit 10.49
RESTRICTIVE COVENANT AND CONFIDENTIALITY AGREEMENT
In exchange for the mutual promises and consideration set forth below, this Restrictive Covenant and
Confidentiality Agreement (“Agreement”) is entered into by and between the Federal Home Loan
Mortgage Corporation (“Freddie Mac” or “Company”) and David B. Lowman (“Executive” or “you”),
effective on the date the Executive assigns a personal signature to page 5 of this Agreement.
I.
Definitions
The following terms shall have the meanings indicated when used in this Agreement.
Competitor: The following entities, and their respective parents, successors, subsidiaries, and
A.
affiliates are competitors: (i) Fannie Mae (ii) all Federal Home Loan Banks (including the Office of
Finance); and (iii) such other entities to which Executive and the Company may agree in writing from
time-to-time.
Confidential Information: Information or materials in written, oral, magnetic, digital, computer,
B.
photographic, optical, electronic, or other form, whether now existing or developed or created during the
period of Executive’s employment with Freddie Mac, that constitutes trade secrets and/or proprietary or
confidential information. This information includes, but is not limited to: (i) all information marked
Proprietary or Confidential; (ii) information concerning the components, capabilities, and attributes of
Freddie Mac’s business plans, methods, and strategies; (iii) information relating to tactics, plans, or
strategies concerning shareholders, investors, pricing, investment, marketing, sales, trading, funding,
hedging, modeling, sales and risk management; (iv) financial or tax information and analyses, including
but not limited to, information concerning Freddie Mac’s capital structure and tax or financial planning;
(v) confidential information about Freddie Mac’s customers, borrowers, employees, or others; (vi) pricing
and quoting information, policies, procedures, and practices; (vii) confidential customer lists; (viii)
proprietary algorithms; (ix) confidential contract terms; (x) confidential information concerning Freddie
Mac’s policies, procedures, and practices or the way in which Freddie Mac does business; (xi) proprietary
or confidential data bases, including their structure and content; (xii) proprietary Freddie Mac business
software, including its design, specifications and documentation; (xiii) information about Freddie Mac
products, programs, and services which has not yet been made public; (xiv) confidential information
about Freddie Mac’s dealings with third parties, including dealers, customers, vendors, and regulators;
and/or (xv) confidential information belonging to third parties to which Executive received access in
connection with Executive’s employment with Freddie Mac. Confidential Information does not include
general skills, experience, or knowledge acquired in connection with Executive’s employment with
Freddie Mac that otherwise are generally known to the public or within the industry or trade in which
Freddie Mac operates.
II.
Non-Competition
Executive recognizes that as a result of Executive’s employment with Freddie Mac, Executive has access
to and knowledge of critically sensitive Confidential Information, the improper disclosure or use of which
would result in grave competitive harm to Freddie Mac. Therefore, Executive agrees that neither during
Executive’s employment with Freddie Mac, nor for the twelve (12) months immediately following
termination of Executive’s employment for any reason, will Executive consider offers of employment
from, seek or accept employment with, or otherwise directly or indirectly provide professional services to
any Competitor, if the Executive will be rendering duties, responsibilities or services for the Competitor
that are of the type and nature rendered or performed by you during the past two years of your
2
employment with Freddie Mac. Executive acknowledges and agrees that this covenant has unique,
substantial and immeasurable value to Freddie Mac, that Executive has sufficient skills to provide a
livelihood for Executive while this covenant remains in force, and that this covenant will not interfere
with Executive’s ability to work consistent with Executive’s experience, training and education. This
non-competition covenant applies regardless of whether Executive’s employment is terminated by
Executive, by Freddie Mac, or by a joint decision.
If Executive is a licensed lawyer, this non-competition covenant shall be interpreted in a manner
consistent with any rule applicable to a licensed legal professional in the jurisdiction(s) of the Executive’s
licensure or registration that concerns the Executive’s employment as counsel with, or provision of legal
services to, a Competitor.
III.
Non-Solicitation and Non-Recruitment
During Executive’s employment with Freddie Mac and for a period of twelve (12) months after
Executive’s termination date, Executive will not solicit or recruit, attempt to solicit or recruit or assist
another in soliciting or recruiting any Freddie Mac managerial employee (including manager-level,
Executive-level, or officer-level employee) with whom Executive worked, or any employee whom
Executive directly or indirectly supervised at Freddie Mac, to leave the employee’s employment with
Freddie Mac for purposes of employment or for the rendering of professional services. This prohibition
against solicitation does not apply if Freddie Mac has notified the employee being solicited or recruited
that his/her employment with the Company will be terminated pursuant to a corporate reorganization or
reduction-in-force.
If Employee is a licensed lawyer, this non-solicitation covenant shall be interpreted in a manner consistent
with any rule applicable to a licensed legal professional in the jurisdiction(s) of Employee’s licensure or
registration.
IV.
Treatment of Confidential Information
Non-Disclosure. Executive recognizes that Freddie Mac is engaged in an extremely competitive
A.
business and that, in the course of performing Executive’s job duties, Executive will have access to and
gain knowledge about Confidential Information. Executive further recognizes the importance of carefully
protecting this Confidential Information in order for Freddie Mac to compete successfully. Therefore,
Executive agrees that Executive will neither divulge Confidential Information to any persons, including to
other Freddie Mac employees who do not have a Freddie Mac business-related need to know, nor make
use of the Confidential Information for the Executive’s own benefit or for the benefit of anyone else other
than Freddie Mac. Executive further agrees to take all reasonable precautions to prevent the disclosure of
Confidential Information to unauthorized persons or entities, and to comply with all Company policies,
procedures, and instructions regarding the treatment of such information.
Return of Materials. Executive agrees that upon termination of Executive’s employment with
B.
Freddie Mac for any reason whatsoever, Executive will deliver to Executive’s immediate supervisor all
tangible materials embodying Confidential Information, including, but not limited to, any documentation,
records, listings, notes, files, data, sketches, memoranda, models, accounts, reference materials, samples,
machine-readable media, computer disks, tapes, and equipment which in any way relate to Confidential
Information, whether developed by Executive or not. Executive further agrees not to retain any copies of
any materials embodying Confidential Information.
Post-Termination Obligations. Executive agrees that after the termination of Executive’s
C.
employment for any reason, Executive will not use in any way whatsoever, nor disclose any Confidential
Information learned or obtained in connection with Executive’s employment with Freddie Mac without
first obtaining the written permission of the Senior Vice President of Human Resources of Freddie Mac.
3
Executive further agrees that, in order to assure the continued confidentiality of the Confidential
Information, Freddie Mac may correspond with Executive’s future employers to advise them generally of
Executive’s exposure to and knowledge of Confidential Information, and Executive’s obligations and
responsibilities regarding the Confidential Information. Executive understands and agrees that any such
contact may include a request for assurance and confirmation from such employer(s) that Executive will
not disclose Confidential Information to such employer(s), nor will such employer(s) permit any use
whatsoever of the Confidential Information. To enable Freddie Mac to monitor compliance with the
obligations imposed by this Agreement, Executive further agrees to inform in writing Freddie Mac’s
Senior Vice President of Human Resources of the identity of Executive’s subsequent employer(s) and
Executive’s prospective job title and responsibilities prior to beginning employment. Executive agrees
that this notice requirement shall remain in effect for twelve (12) months following the termination of
Executive’s Freddie Mac employment.
Ability to Enforce Agreement and Assist Government Investigations. Nothing in this Agreement
D.
prohibits or otherwise restricts you from: (1) making any disclosure of information required by law; (2)
assisting any regulatory or law enforcement agency or legislative body to the extent you maintain a legal
right to do so notwithstanding this Agreement; (3) filing, testifying, participating in or otherwise assisting
in a proceeding relating to the alleged violation of any federal, state, or local law, regulation, or rule, to
the extent you maintain a legal right to do so notwithstanding this Agreement; or (4) filing, testifying,
participating in or otherwise assisting the Securities and Exchange Commission or any other proper
authority in a proceeding relating to allegations of fraud.
V.
Consideration Given to Executive
In exchange for agreeing to be bound by the terms, conditions, and restrictions stated in this Agreement,
Freddie Mac will provide the Executive with employment as Executive Vice President – Single Family
Business, which itself is adequate consideration for Executive’s agreement to be bound by the provisions
of this Agreement.
VI.
Reservation of Rights
Executive agrees that nothing in this Agreement constitutes a contract or commitment by Freddie Mac to
continue Executive’s employment in any job position for any period of time, nor does anything in this
Agreement limit in any way Freddie Mac’s right to terminate Executive’s employment at any time for any
reason.
VII. Compliance with the Code of Conduct and Corporate Policies & Procedures, Including
Personal Securities Investments Policy
As a Freddie Mac employee, Executive will be subject to Freddie Mac’s Code of Conduct (“Code”) and
to Corporate Policy 3-206, Personal Securities Investments Policy (“Policy”) that, among other things,
limit the investment activities of Freddie Mac employees. Executive agrees to fully comply with the Code
and the Policy, copies of which are enclosed for Executive’s review.
Executive agrees to consult with Freddie Mac’s Chief Compliance Officer as soon as practical prior to
beginning employment about any investments that Executive or a “covered household member,” as that
term is defined in the Policy, may have that may be prohibited by the Policy. Executive also agrees to
disclose prior to beginning employment any other matter or situation that may create a conflict of interest
as such term is defined in the Code.
4
In addition, prior to beginning employment, Executive agrees to disclose to Freddie Mac's Human
Resources Division the terms of any employment, confidentiality or stock grant agreements to which
Executive may currently be subject that may affect Executive’s future employment or recruiting activities
so that Freddie Mac may ensure that Executive’s employment by Freddie Mac and conduct as a Freddie
Mac employee are not inconsistent with any of their terms.
VIII. Absence of Any Conflict of Interest
Executive represents that Executive does not have any confidential information, trade secrets or other
proprietary information that Executive obtained as the result of Executive’s employment with another
employer that Executive will be using in Executive’s position at Freddie Mac. Executive also represents
that Executive is not subject to any employment, confidentiality or stock grant agreements, or any other
restrictions or limitations imposed by a prior employer, which would affect Executive’s ability to perform
the duties and responsibilities for Freddie Mac in the job position offered, and further represents that
Executive has provided Freddie Mac with copies of any non-competition, non-solicitation or similar
agreements or limitations that have not expired, so that Freddie Mac can make an independent judgment
that Executive’s employment with Freddie Mac is not inconsistent with any of its terms.
IX.
Enforcement
Executive acknowledges that Executive may be subject to discipline, up to and including
A.
termination of employment, for Executive’s breach or threat of breach of any provision of this Agreement.
Executive agrees that irreparable injury will result to Freddie Mac’s business interests in the event
B.
of breach or threatened breach of this Agreement, the full extent of Freddie Mac’s damages will be
impossible to ascertain, and monetary damages will not be an adequate remedy for Freddie Mac.
Therefore, Executive agrees that in the event of a breach or threat of breach of any provision(s) of this
Agreement, Freddie Mac, in addition to any other relief available, shall be entitled to temporary,
preliminary, and permanent equitable relief to restrain any such breach or threat of breach by Executive
and all persons acting for and/or in concert with Executive, without the necessity of posting bond or
security, which Executive expressly waives.
Executive agrees that each of Executive’s obligations specified in this Agreement is a separate
C.
and independent covenant, and that all of Executive’s obligations set forth herein shall survive any
termination, for any reason, of Executive’s Freddie Mac employment. To the extent that any provision of
this Agreement is determined by a court of competent jurisdiction to be unenforceable because it is
overbroad, that provision shall be limited and enforced to the extent permitted by applicable law. Should
any provision of this Agreement be declared or determined by any court of competent jurisdiction to be
unenforceable or invalid under applicable law, the validity of the remaining obligations will not be
affected thereby and only the unenforceable or invalid obligation will be deemed not to be a part of this
Agreement.
This Agreement is governed by, and will be construed in accordance with, the laws of the
D.
Commonwealth of Virginia, without regard to its or any other jurisdiction’s conflict-of-law provisions.
Executive agrees that any action related to or arising out of this Agreement shall be brought exclusively in
the United States District Court for the Eastern District of Virginia, and Executive hereby irrevocably
consents to personal jurisdiction and venue in such court and to service of process by United States Mail
or express courier service in any such action.
5
E.
If any dispute(s) arise(s) between Freddie Mac and Executive with respect to any matter which is
the subject of this Agreement, the prevailing party in such dispute(s) shall be entitled to recover from the
other party all of its costs and expenses, including its reasonable attorneys’ fees.
Executive has been advised to discuss all aspects of this Agreement with Executive’s private
attorney. Executive acknowledges that Executive has carefully read and understands the terms
and provisions of this Agreement and that they are reasonable. Executive signs this Agreement
voluntarily and accepts all obligations contained in this Agreement in exchange for the
consideration to be given to Executive as outlined above, which Executive acknowledges is adequate
and satisfactory, and which Executive further acknowledges Freddie Mac is not otherwise obligated
to provide to Executive. Neither Freddie Mac nor its agents, representatives, directors, officers or
employees have made any representations to Executive concerning the terms or effects of this
Agreement, other than those contained in this Agreement.
By: /s/ David B. Lowman_________________
David B. Lowman
Date: 4/9/2013