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, 2015
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
(703) 903-2000
(Registrant’s telephone number,
Identification No.)
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. [X]
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 30, 2015 (the last business day of the registrant’s most recently completed second fiscal quarter) was $1.4 billion.
As of February 4, 2016, there were 650,045,962 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
Table of Contents
TABLE OF CONTENTS
INTRODUCTION
ABOUT FREDDIE MAC
EXECUTIVE SUMMARY
OUR BUSINESS
FORWARD-LOOKING STATEMENTS
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
KEY ECONOMIC INDICATORS
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED BALANCE SHEETS ANALYSIS
OUR BUSINESS SEGMENTS
RISK MANAGEMENT
SINGLE-FAMILY MORTGAGE CREDIT RISK
MULTIFAMILY MORTGAGE CREDIT RISK
MORTGAGE-RELATED SECURITIES CREDIT RISK
LIQUIDITY AND CAPITAL RESOURCES
CONSERVATORSHIP AND RELATED MATTERS
REGULATION AND SUPERVISION
CONTRACTUAL OBLIGATIONS
OFF-BALANCE SHEET ARRANGEMENTS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
RISK FACTORS
LEGAL PROCEEDINGS
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTROLS AND PROCEDURES
DIRECTORS, CORPORATE GOVERNANCE, AND EXECUTIVE OFFICERS
DIRECTORS
CORPORATE GOVERNANCE
EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
COMPENSATION AND RISK
2015 COMPENSATION INFORMATION FOR NEOs
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRINCIPAL ACCOUNTING FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
GLOSSARY
FORM 10-K INDEX
EXHIBIT INDEX
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E-1
Freddie Mac 2015 Form 10-K
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Introduction
About Freddie Mac | Executive Summary
INTRODUCTION
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. 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 “ABOUT FREDDIE MAC - 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.”
ABOUT FREDDIE MAC
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability,
and affordability to the U.S. housing market. We do this primarily by purchasing residential mortgage
loans originated by lenders. In most instances, we package these loans into mortgage-related securities,
which are guaranteed by us and sold in the global capital markets. We also invest in mortgage loans and
mortgage-related securities. We do not originate loans or lend money directly to consumers.
We support the U.S. housing market and the overall economy by enabling America’s families to access
mortgage loan funding at lower rates and by providing consistent liquidity to the multifamily mortgage
market, which we do primarily by providing financing for workforce housing. We have helped many
distressed borrowers keep their homes or avoid foreclosure. We are working with FHFA, our customers
and the industry to build a stronger housing finance system for the nation.
EXECUTIVE SUMMARY
CONSERVATORSHIP AND GOVERNMENT SUPPORT FOR OUR BUSINESS
Since September 2008, we have been operating in conservatorship, with FHFA acting as our
Conservator. The conservatorship and related matters significantly affect our management, business
activities, financial condition, and results of operations. Our future is uncertain, and the conservatorship
has no specified termination date. We do not know what changes may occur to our business model
during or following conservatorship, including whether we will continue to exist.
Our Purchase Agreement with Treasury and the terms of the senior preferred stock we issued to Treasury
constrain our business activities. However, we believe that the support provided by Treasury pursuant to
the Purchase Agreement currently enables us to have adequate liquidity to conduct our normal business
activities. The Purchase Agreement also requires our future profits to effectively be distributed to
Treasury, and we cannot retain capital from the earnings generated by our business operations (other
than a limited amount that will decrease to zero in 2018) or return capital to stockholders other than
Treasury. Consequently, our ability to access funds from Treasury under the Purchase Agreement is
critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory
mandatory receivership provisions.
For more information on the conservatorship and government support for our business, see
“Conservatorship and Related Matters” and Note 2.
Freddie Mac 2015 Form 10-K
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Introduction
About Freddie Mac | Executive Summary
The tables below show our cumulative draws from Treasury and cumulative dividend payments to
Treasury under the Purchase Agreement. The Treasury draw amounts shown are the total draws
requested based on our quarterly net deficits for the periods presented. Draw requests are funded in the
quarter subsequent to any net deficit. Under the Purchase Agreement, the payment of dividends does not
reduce the outstanding liquidation preference of the senior preferred stock, which remains $72.3 billion.
The amount of available funding remaining under the Purchase Agreement is $140.5 billion, and would be
reduced by any future draws.
Draws From Treasury
Dividend Payments to Treasury
(in billions)
Total Senior Preferred Stock Outstanding
Less: Initial Liquidation Preference
Treasury Draws
$
$
$
Total
72.3
1.0
71.3
(in billions)
Dividend Payments as of 12/31/15
Q1 2016 Dividend Obligation
Total Dividend Payments
$
$
$
Total
96.5
1.7
98.2
Freddie Mac 2015 Form 10-K
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Introduction
About Freddie Mac | Executive Summary
CONSOLIDATED FINANCIAL RESULTS
Comprehensive Income
Our comprehensive income for 2015 declined compared to 2014, primarily as a result of the following
items:
•
Lower other income, as we did not have any significant litigation settlements in 2015 related to our
investments in non-agency mortgage-related securities. By comparison, we had a number of
significant litigation settlements in 2014;
• We recorded fair value losses in 2015 on certain mortgage loans and mortgage-related securities that
are measured at fair value due to spread widening, while in 2014 we recorded gains due to spread
tightening; partially offset by
Lower derivative fair value losses in 2015 than in 2014. Longer-term interest rates declined less in
2015 than in 2014, when the yield curve also flattened, leading to lower losses.
•
Our comprehensive income for 2014 declined compared to 2013, primarily as a result of events that
occurred in 2013 but which did not occur in 2014, including:
• The release of the valuation allowance on our deferred tax asset; and
• Representation and warranty settlements related to our pre-conservatorship single-family loan
purchases.
Freddie Mac 2015 Form 10-K
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Introduction
About Freddie Mac | Executive Summary
Variability of Earnings
Our financial results are subject to significant earnings variability from period to period. This variability is
primarily driven by:
•
Interest-Rate Volatility — We hold assets and liabilities that expose us to interest-rate risk. Through
our use of derivatives, we manage our exposure to interest-rate risk on an economic basis to a low
level as measured by our models. However, the way we account for our financial assets and liabilities
(i.e., some are measured at amortized cost, while others are measured at fair value), including
derivatives, creates volatility in our earnings when interest rates fluctuate. Based upon the
composition of our financial assets and liabilities, including derivatives, at December 31, 2015, we
generally recognize fair value losses in earnings when interest rates decline. This volatility generally
is not indicative of the underlying economics of our business. This volatility and the declining capital
reserve required under the terms of the Purchase Agreement (ultimately reaching zero in 2018) will
increase the risk of our having a negative net worth and being required to draw from Treasury. We are
exploring ways in which we can limit or manage our exposure to this volatility. For information about
the sensitivity of our financial results to interest-rate volatility, see "MD&A - Risk Management -
Interest-Rate Risk and Other Market Risks."
• Spread Volatility — Spread volatility (i.e., credit spreads, liquidity spreads, risk premiums, etc.), or
OAS, is the risk associated with changes in interest rates in excess of benchmark rates. We hold
assets and liabilities that expose us to spread volatility, which may contribute to significant earnings
volatility. For financial assets and liabilities measured at fair value, we generally recognize fair value
losses when spreads widen. However, we may enter into transactions or take other steps to limit or
manage our exposure to spread volatility.
• Non-Recurring Events — From time to time, we have experienced and will likely continue to
experience significant earnings volatility from non-recurring events, including events such as
settlements with counterparties and changes in certain valuation allowances.
Freddie Mac 2015 Form 10-K
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Introduction
About Freddie Mac | Our Business
OUR BUSINESS
PRIMARY BUSINESS STRATEGIES
Our primary business strategies describe how we plan to pursue our Charter Mission over a timeframe of
three to five years, or approximately through 2018 to 2020. Our core assumption is that the
conservatorship will continue with no material changes during that period. These strategies complement
FHFA's annual Conservatorship Scorecards.
Charter Mission
We are a government-sponsored enterprise with a specific and limited corporate purpose (i.e., “Charter
Mission”) to support the liquidity, stability and affordability of U.S. housing mortgage markets as a
participant in the secondary mortgage market, while operating as a commercial enterprise earning an
appropriate return. Everything we do must be done within the specific constraints of our Charter Mission.
Our Twin Goals
We established overarching twin goals to enable us to reach our Charter Mission:
• A Better Freddie Mac; and
• A Better Housing Finance System
Our Key Strategies
A Better Freddie Mac
We are focused on operating as a very well-run large financial institution, by:
• Being a very effective operating organization;
• Being a market leader through customer focus and innovation; and
• Managing risk and economic capital for quality risk-adjusted returns.
A Better Housing Finance System
We are focused on providing leadership, through innovation and constructive forward-looking
engagement with FHFA to improve the liquidity, stability, and affordability of the U.S. housing markets, by:
• Modernizing and improving the functioning of the mortgage markets;
• Developing greater responsible access to housing finance; and
• Reducing taxpayer exposure to mortgage risks.
For further information on our goals and detailed strategies for each of our business segments, see
"MD&A — Our Business Segments."
Freddie Mac 2015 Form 10-K
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Introduction
About Freddie Mac | Our Business
OUR CHARTER
Our Charter forms the framework for our business activities. Our statutory mission as defined in our
Charter is to:
• Provide stability in the secondary market for residential loans;
• Respond appropriately to the private capital market;
• Provide ongoing assistance to the secondary market for residential loans (including activities relating
to loans for low- and moderate-income families, involving a reasonable economic return that may be
less than the return earned on other activities) by increasing the liquidity of mortgage investments and
improving the distribution of investment capital available for residential mortgage financing; and
• Promote access to mortgage loan credit throughout the U.S. (including central cities, rural areas, and
other underserved areas) by increasing the liquidity of mortgage investments and improving the
distribution of investment capital available for residential mortgage financing.
Our Charter permits us to purchase first-lien single-family loans with LTV ratios at the time of our
purchase of less than or equal to 80%. Our Charter also permits us to purchase first-lien single-family
loans that do not meet this criterion if we have certain specified credit protections, which include
mortgage insurance on the portion of the UPB of the loan that exceeds an 80% LTV ratio, a seller's
agreement to repurchase or replace a defaulted loan, or the retention by the seller of at least a 10%
participation interest in the loan.
This Charter requirement does not apply to multifamily loans or to loans 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
loans that refinance loans we currently own or guarantee without obtaining additional credit enhancement
in excess of that already in place for any such loan, even when the LTV ratio of the new loan is above
80%.
Our Charter does not permit us to originate loans or lend money directly to consumers in the primary
mortgage market. Our Charter limits our purchase of single-family loans to the conforming loan market,
which consists of loans originated with UPBs at or below limits determined annually based on changes in
FHFA’s housing price index. 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 to
loans secured by properties in Alaska, Guam, Hawaii, and the U.S. Virgin Islands.
Freddie Mac 2015 Form 10-K
6
Introduction
About Freddie Mac | Our Business
BUSINESS SEGMENTS
We have three reportable segments: Single-family Guarantee, Multifamily, and Investments. Certain
activities that are not part of a reportable segment are included in the All Other category. For more
information on our segments, see “MD&A - Our Business Segments" and Note 12.
EMPLOYEES
At February 4, 2016, we had 5,416 full-time and 46 part-time employees.
PROPERTIES
Our principal offices consist of four office buildings we own in McLean, Virginia, comprising approximately
1.3 million square feet. We operate our business 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 other than the United States and its territories.
AVAILABLE INFORMATION
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. Pursuant to SEC rules, our annual reports on Form 10-K contain certain
information typically provided in an annual proxy statement.
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 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 and 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.
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 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
Freddie Mac 2015 Form 10-K
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Introduction
About Freddie Mac | Our Business
obligations, we report 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 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, including pricing supplements for individual issuances of debt
securities. Similar information about our STACR debt notes is available at www.freddiemac.com/
creditriskofferings.
Disclosure about the mortgage-related securities we issue, some of which are off-balance sheet
obligations (e.g., K Certificates), 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 the Single-family Guarantee, Multifamily, and Investments segments of our business, our
efforts to assist the housing market, our liquidity and capital management, economic and market
conditions and trends, our market share, the effect of legislative and regulatory developments and new
accounting guidance, the credit quality of loans we own or guarantee, and our 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 support the housing markets or to implement FHFA’s Conservatorship
Scorecards and other objectives for us;
• 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;
• Changes in our Charter or in applicable legislative or regulatory requirements (including any
legislation affecting the future status of our company);
• Changes in the fiscal and monetary policies of the Federal Reserve, including any changes to its
policy of maintaining sizable holdings of mortgage-related securities and any future sales of such
securities;
Freddie Mac 2015 Form 10-K
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Introduction
About Freddie Mac | Forward-Looking Statements
• The success of our efforts to mitigate our losses on our Legacy single-family book and our
investments in non-agency mortgage-related securities;
• The success of our strategy to transfer mortgage credit risk through STACR debt note, ACIS, K
Certificate and other credit risk transfer transactions;
• Our ability to maintain the security of our operating systems and infrastructure (e.g., against
cyberattacks);
• Changes in economic and market conditions, including changes in employment rates, interest rates,
spreads, and home prices;
• Changes in the U.S. residential mortgage market, including changes in the supply and type of loan
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;
• The adequacy of our risk management framework;
• Our ability to manage mortgage credit risks, including the effect of changes in underwriting and
servicing practices;
• Our ability to limit or manage our exposure to interest-rate volatility and spread volatility, including the
availability of derivative financial instruments needed for interest-rate 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);
• Changes in the practices of loan originators, investors and other participants in the secondary
mortgage market; and
• Other factors and assumptions described in this Form 10-K, including in the “MD&A” section.
Forward-looking statements are made only as of the date of this Form 10-K, 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.
Freddie Mac 2015 Form 10-K
9
Selected Financial Data
SELECTED FINANCIAL DATA
The selected financial data presented below should be reviewed in conjunction with MD&A and our
consolidated financial statements and accompanying notes.
(dollars in millions, except share-related amounts)
2015
2014
2013
2012
2011
Statements of Comprehensive Income Data
Net interest income
$
14,946
$
14,263
$
16,468
$
17,611
$
18,397
At or For the Year Ended December 31,
(Provision) benefit for credit losses
Non-interest income (loss)
Non-interest expense
Income tax (expense) benefit
Net income (loss)
Comprehensive income (loss)
Net loss attributable to common stockholders
Net loss per common share - basic and diluted
Cash dividends per common share
Weighted average common shares outstanding -
basic and diluted (in millions)
Balance Sheets Data
Loans held-for-investment, at amortized cost by
consolidated trusts (net of allowances for loan
losses)
2,665
(3,599)
(4,738)
(2,898)
6,376
5,799
(23)
(0.01)
—
(58)
(113)
(3,090)
(3,312)
7,690
9,426
(2,336)
(0.72)
—
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)
—
3,235
3,236
3,238
3,240
3,245
$ 1,625,184
$ 1,558,094
$ 1,529,905
$ 1,495,932
$ 1,564,131
Total assets
1,986,050
1,945,539
1,966,061
1,989,856
2,147,216
Debt securities of consolidated trusts held by third
parties
Other Debt
All other liabilities
Total stockholders' equity (deficit)
Portfolio Balances - UPB
1,556,121
1,479,473
1,433,984
1,419,524
1,471,437
414,306
450,069
506,767
547,518
12,683
2,940
13,346
2,651
12,475
12,835
13,987
8,827
660,546
15,379
(146)
Mortgage-related investments portfolio
$
346,911
$
408,414
$
461,024
$
557,544
$
653,313
Total Freddie Mac mortgage-related securities
1,729,493
1,637,086
1,592,511
1,562,040
1,624,684
Total mortgage portfolio
TDRs on accrual status
Non-accrual loans
Ratios
Return on average assets
1,941,587
1,910,106
1,914,661
1,956,276
2,075,394
82,347
22,649
82,908
33,130
78,708
43,457
66,590
63,005
45,254
76,575
0.3%
0.4%
2.5%
0.5%
(0.2)%
Allowance for loan losses as percentage of loans,
held-for-investment
Equity to assets
0.9
0.1
1.3
0.4
1.4
0.5
1.8
0.2
2.2
—
Freddie Mac 2015 Form 10-K
10
Management's Discussion and Analysis
Key Economic Indicators | Single-family Home Prices
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
KEY ECONOMIC INDICATORS
The following graphs and related discussion present certain macroeconomic indicators that can
significantly affect our business and financial results.
SINGLE-FAMILY HOME PRICES
NATIONAL HOME PRICES
EFFECT ON FINANCIAL RESULTS
• Changes in home prices affect the amount
of equity that borrowers have in their homes.
Borrowers with less equity typically have
higher delinquency rates.
• As home prices decline, the severity of
losses we incur on defaulted loans that we
hold or guarantee increases because the
amount we can recover from the property
securing the loan decreases.
• Declines in home prices typically result in
increases in expected credit losses on the
mortgage-related securities we hold.
• Declines in home prices may result in
declines in the value of our non-agency
mortgage-related securities as lower home
values may increase default rates and affect
the prepayment activities of the borrowers.
(December 2000 = 100)
COMMENTARY
• Home prices continued to appreciate during 2015, increasing 6.2%, compared to an increase of 5.2%
during 2014, based on our own non-seasonally adjusted price index of single-family homes funded by
loans owned or guaranteed by us or Fannie Mae.
• National home prices at the end of 2015 remained approximately 6% below their June 2006 peak
levels, based on our index.
• We expect near-term home price growth rates to moderate gradually and return to growth rates
consistent with long-term historical averages of approximately 2% to 5% per year.
Freddie Mac 2015 Form 10-K
11
Management's Discussion and Analysis
Key Economic Indicators | Interest Rates
INTEREST RATES
KEY MARKET INTEREST RATES AT
QUARTER END
EFFECT ON FINANCIAL RESULTS
• The 30-year Primary Mortgage Market
Survey ("PMMS") interest rate represents
the national average of mortgage rates on
new 30-year fixed-rate mortgages. Declines
in the PMMS rate typically result in
increases in refinancing activity and
originations.
• Changes in interest rates affect the fair
value of certain of our assets and liabilities,
including derivatives, on our consolidated
balance sheets measured at fair value on a
recurring basis.
• For additional information on the effect of
LIBOR swap rates on our financial results,
see "Our Business Segments - Investments
- Market Conditions."
COMMENTARY
• Mortgage interest rates for 30-year fixed-rate loans are typically closely related to other long-term
interest rates such as the 10-year Treasury rate and the 10-year LIBOR rate. When these rates
decline, mortgage interest rates for 30-year fixed-rate loans usually also decline.
• Mortgage interest rates, as indicated by the 30-year PMMS rate, increased at the end of 2015.
However, the average 30-year PMMS rate was 3.85% in 2015 compared to 4.17% in 2014, resulting
in higher refinancing activity and higher overall origination activity during 2015.
Longer-term interest rates, as indicated by the 10-year LIBOR rate and the 10-year Treasury rate,
declined sharply in 2014 but moderated in 2015.
•
• The Federal Reserve decided in December 2015 to begin raising short-term interest rates but
committed to a measured pace of monetary tightening. However, the magnitude and timing of the
impact of the Federal Reserve’s action on mortgage and other longer-term rates is uncertain.
Freddie Mac 2015 Form 10-K
12
Management's Discussion and Analysis
Key Economic Indicators | Unemployment Rate
UNEMPLOYMENT RATE
UNEMPLOYMENT RATE AND JOB
CREATION
EFFECT ON FINANCIAL RESULTS
• Changes in the unemployment rate can
affect several market factors, including the
demand for both single-family and
multifamily housing and the level of loan
delinquencies.
Increases in the unemployment rate typically
result in higher levels of delinquencies,
which often result in an increase in expected
credit losses on our total mortgage portfolio.
•
• Decreases in the unemployment rate
typically result in lower levels of
delinquencies, which often result in a
decrease in expected credit losses on our
total mortgage portfolio.
Source: U.S. Bureau of Labor Statistics
COMMENTARY
• Monthly net new job growth decreased during 2015, but remained above 200,000 per month on
average.
• The unemployment rate continued to decline from the peak of 10.0% reached in October 2009.
• We expect the unemployment rate to decline slightly throughout 2016 and 2017.
Freddie Mac 2015 Form 10-K
13
Management's Discussion and Analysis
Consolidated Results of Operations | Comparison
CONSOLIDATED RESULTS OF OPERATIONS
You should read this discussion of our consolidated results of operations in conjunction with our
consolidated financial statements and accompanying notes. See “Critical Accounting Policies and
Estimates” for information concerning certain significant accounting policies and estimates applied in
determining our reported results of operations and Note 1 for information on our accounting policies.
The table below compares our consolidated results of operations for the past three years.
(dollars in millions)
Net interest income
Year Ended December 31,
Change 2015-2014
Change 2014-2013
2015
2014
2013
$
%
$
%
$ 14,946
$ 14,263
$ 16,468
$
683
5 % $ (2,205)
(13)%
Benefit (provision) for credit losses
2,665
(58)
2,465
2,723
(4,695)%
(2,523)
(102)%
Net interest income after benefit (provision) for
credit losses
Non-interest income (loss):
17,611
14,205
18,933
3,406
24 %
(4,728)
(25)%
Gains (losses) on extinguishment of debt
(240)
(422)
446
Derivative gains (losses)
(2,696)
(8,291)
2,632
182
5,595
(43)%
(868)
(195)%
(67)% (10,923)
(415)%
Net impairment of available-for-sale securities
recognized in earnings
Other gains (losses) on investment securities
recognized in earnings
Other income (loss)
Total non-interest income (loss)
Non-interest expense:
Administrative expense
REO operations (expense) income
Temporary Payroll Tax Cut Continuation Act of
2011 expense
Other (expense) income
Total non-interest expense
(292)
(938)
(1,510)
646
(69)%
572
(38)%
508
1,494
301
(986)
(66)%
1,193
396 %
(879)
8,044
(3,599)
(113)
6,650
8,519
(8,923)
(111)%
1,394
21 %
(3,486)
3,085 %
(8,632)
(101)%
(1,927)
(1,881)
(1,805)
(338)
(967)
(1,506)
(196)
(775)
(238)
140
(533)
(46)
(142)
(192)
2 %
72 %
25 %
(76)
4 %
(336)
(240)%
(242)
45 %
109
(1,268)
533 %
(347)
(318)%
(4,738)
(3,090)
(2,089)
(1,648)
53 %
(1,001)
48 %
(57)%
Income before income tax (expense) benefit
9,274
11,002
25,363
(1,728)
(16)% (14,361)
Income tax (expense) benefit
(2,898)
(3,312)
23,305
414
(13)% (26,617)
(114)%
Net income
6,376
7,690
48,668
(1,314)
(17)% (40,978)
(84)%
Total other comprehensive income (loss), net of
taxes and reclassification adjustments
(577)
1,736
2,932
(2,313)
(133)%
(1,196)
(41)%
Comprehensive income
$ 5,799
$ 9,426
$ 51,600
$ (3,627)
(38)% $(42,174)
(82)%
Key Drivers:
• Net interest income increased in 2015 compared to 2014, primarily due to an increase in
management and guarantee fee income and amortization of upfront fees and basis adjustments as a
result of higher prepayment rates. This increase was partially offset by a reduction in the amount of
contractual net interest income derived from our mortgage-related investments portfolio, as this
portfolio has continued to decline pursuant to the portfolio limits established by the Purchase
Agreement and by FHFA. Net interest income decreased in 2014 compared to 2013, primarily due
to a reduction in our mortgage-related investments portfolio and less amortization of upfront fees and
basis adjustments as a result of lower prepayment rates. See “Net Interest Income” for more
information.
• Benefit (provision) for credit losses was a benefit in 2015 and was driven by the reclassification of
loans from held-for-investment to held-for-sale. Excluding the effect of the reclassification of loans,
Freddie Mac 2015 Form 10-K
14
Management's Discussion and Analysis
Consolidated Results of Operations | Comparison
the amount of our benefit was not significant. The (provision) for credit losses in 2014 reflects a
decline in the volume of newly impaired loans and a smaller benefit from settlement agreements with
certain sellers to release specified loans from certain repurchase obligations in 2014 compared to
2013. See "Benefit (Provision) For Credit Losses" for more information.
• Gains (losses) on extinguishment of debt in 2015, 2014, and 2013 primarily resulted from
purchases of single-family PCs (which are accounted for as the extinguishment of debt). We
extinguished debt securities of consolidated trusts with a UPB of $54.6 billion, $49.2 billion, and $44.4
billion in 2015, 2014, and 2013, respectively. Losses in 2015 and 2014 were driven by interest rate
declines between the time of issuance and the time of repurchase of these debt securities.
• Changes in derivative gains (losses) primarily resulted from changes in interest rates. In 2015,
longer-term interest rates declined less than they did in 2014, and resulted in lower fair value losses.
Derivative losses also include the accrual of periodic cash settlements, which is the net amount we
accrued during the period for interest-rate swap payments that we will make. In 2014, derivative
losses primarily resulted from the effect of a flattening of the yield curve on the fair value of our
interest-rate swaps. See "Derivative Gains (Losses)" for more information.
• Net impairments of available-for-sale securities recognized in earnings declined in 2015
compared to 2014 because the unrealized losses associated with securities we intend to sell were
lower due to improvements in forecasted home prices, declines in market interest rates, and
continued tightening of credit spreads for our non-agency mortgage-related securities. Net
impairments of available-for-sale securities recognized in earnings declined in 2014 compared to
2013 primarily as a result of increased impairments in 2013 due to the availability of more detailed
information which enhanced the assumptions used to estimate the contractual loan terms for certain
modified loans collateralizing our non-agency mortgage-related securities. See "Conservatorship And
Related Matters - Limits On Our Mortgage-Related Investments Portfolio And Indebtedness" for
additional information concerning our efforts to reduce our less liquid assets.
• Other gains (losses) on investment securities recognized in earnings. The decrease in gains in
2015 compared to 2014 was primarily due to a decrease in sales of agency mortgage-related
securities. The increase in gains in 2014 compared to 2013 was primarily the result of the effect of a
decline in longer-term interest rates on the fair values of our trading securities.
• Changes in other income (loss) were primarily driven by non-agency mortgage-related securities
settlements, lower-of-cost-or-fair-value adjustments for mortgage loans transferred to held-for-sale,
and changes in fair value of multifamily mortgage loans for which we have elected the fair value
option, as discussed below.
The change between 2015 and 2014 was primarily driven by:
$6.0 billion decline in income from non-agency mortgage-related securities litigation
settlements, as there was only one settlement in 2015;
$2.0 billion increase in write-downs due to lower-of-cost-or-fair-value adjustments for
mortgage loans transferred from held-for-investment to held-for-sale (see "Effect of Loan
Reclassifications" for more information); and
$0.7 billion decline in the fair value of these multifamily mortgage loans, due to the widening
of K Certificate benchmark spreads observed in the market.
The change between 2014 and 2013 was primarily driven by:
Freddie Mac 2015 Form 10-K
15
Management's Discussion and Analysis
Consolidated Results of Operations | Comparison
$0.6 billion increase in income from non-agency mortgage-related securities settlements, as
the majority of such settlements occurred in 2014;
$1.6 billion increase in the fair value of these multifamily mortgage loans, due to the
tightening of K Certificate benchmark spreads observed in the market; and
$0.2 billion increase in write-downs due to lower-of-cost-or-fair-value adjustments for
mortgage loans transferred from held-for-investment to held-for-sale.
• Administrative expense increased in 2015 and 2014 primarily because of costs associated with the
FHFA-mandated termination of our pension plans. This increase was partially offset by lower
professional services expense driven by lower expenses associated with FHFA-led lawsuits regarding
our investments in certain non-agency mortgage-related securities.
• REO operations expense increased in 2015 and 2014 compared to the respective prior year. REO
property expenses declined in 2015 and 2014, consistent with a decline in REO inventory in each
year. However, the REO property expenses were offset to a lesser extent by gains on the disposition
of REO properties and recoveries from mortgage insurance, compared to the respective prior year.
• Temporary Payroll Tax Cut Continuation Act of 2011 expense continued to increase as a result of
the increase in the population of loans subject to this expense. As of December 31, 2015, $1.1 trillion
of loans (or 63% of the single-family credit guarantee portfolio) were subject to these fees. We expect
the amount of these fees will continue to increase in the future as we add new business and the
population of loans subject to these fees increases.
• Other expense increased during 2015 compared to 2014, primarily driven by property taxes and
insurance costs associated with loans reclassified from held-for-investment to held-for-sale. These
costs are considered part of the loan loss reserves while the loans are classified as held-for-
investment. See "Effect of Loan Reclassifications" for more information. In addition, beginning
January 1, 2015, FHFA directed us to allocate funds that will be distributed to certain housing funds
pursuant to the GSE Act. During 2015, we completed $393.8 billion of new business purchases
subject to this allocation and accrued $165 million of related expense. We expect to pay these
amounts in February 2016. Other expense increased during 2014 compared to 2013, due to a
settlement with Lehman Brothers Holdings Inc. to resolve our claims related to Lehman’s bankruptcy
which reduced other expenses in 2013.
•
Income tax expense decreased in 2015 due to a decrease in pre-tax income. Income tax expense
in 2014 reflects our return to a normal income tax recognition environment after the release of the
valuation allowance against our net deferred tax asset in 2013.
• Other comprehensive income was a loss in 2015 compared to income in 2014, primarily due to less
spread tightening for our non-agency mortgage-related securities and less impairment
reclassifications from AOCI into earnings. These factors were partially offset by a lower amount of
accretion being recognized during 2015 compared to 2014. Other comprehensive income
decreased during 2014 compared to 2013, primarily due to less spread tightening for our non-agency
mortgage-related securities, partially offset by a flattening of the yield curve during 2014.
The three items discussed below affected multiple line items on our consolidated results of operations.
Effect of Loan Reclassifications
In 2014, management, with the approval of FHFA, decided to pursue sales of certain seriously delinquent
single-family mortgage loans. During 2015, we expanded this program to include sales of certain
Freddie Mac 2015 Form 10-K
16
Management's Discussion and Analysis
Consolidated Results of Operations | Comparison
performing loans that are held by consolidated trusts in which we own all of the trusts' outstanding
beneficial interests.
During 2015 and 2014, we reclassified $13.6 billion and $0.7 billion, respectively, in UPB of single-family
mortgage loans from held-for-investment to held-for-sale. The initial reclassifications of these loans
affected several line items on our consolidated results of operations, as shown in the table below.
(in millions)
Benefit for credit losses
Other income (loss) - lower-of-cost-or-fair-value adjustment
Other (expense) income - property taxes and insurance associated with these loans
Effect on income before income tax (expense) benefit
Interest-Rate Risk Management Activities
Year Ended December 31,
2015
2014
$
$
2,314
$
(2,193)
(1,178)
(1,057) $
147
(195)
(62)
(110)
We fund our business activities primarily through the issuance of unsecured short- and long-term debt.
The type of debt we issue is based on a variety of factors including market conditions and our liquidity
requirements.
We use derivatives to economically hedge interest-rate sensitivity mismatches between our assets and
liabilities. For example, depending on our strategic objectives and the duration of our mortgage-related
assets, we may fund our business using longer-term debt or using a mix of derivatives and shorter- and
medium-term debt. Through our use of derivatives, we manage our exposure to interest-rate risk on an
economic basis to a low level as measured by our models. For more information about our interest-rate
risk management and the sensitivity of reported earnings to our interest-rate risk management activities,
see “Risk Management - Interest Rate Risk and Other Market Risk.”
We currently favor a mix of derivatives and shorter- and medium-term debt to fund our business and
manage interest-rate risk. This funding mix is a less expensive method than relying more extensively on
long-term debt, and it provides greater flexibility and opportunity to match the duration of our assets and
liabilities in the future as we reduce the mortgage-related investments portfolio in accordance with the
requirements of the Purchase Agreement and FHFA.
While our interest-rate risk management activities reduce our economic exposure to interest-rate risk to a
low level, as measured by our models, the accounting treatment for our assets and liabilities, including
derivatives, creates volatility in our earnings when interest rates fluctuate. Some assets and liabilities are
measured at amortized cost and some are measured at fair value, while all derivatives are measured at
fair value. These measurement differences create volatility in our earnings that generally is not indicative
of the underlying economics of our business.
The table below presents the effect of derivatives used in our interest-rate risk management activities on
our comprehensive income, after considering the accrual of periodic cash settlements (which is the
economic equivalent of interest expense), and the extent to which the effect of interest rate changes on
our derivatives was offset by their effect on other financial instruments. The estimated net effect on
comprehensive income is essentially the derivative gains (losses) attributable to financial instruments that
are not measured at fair value.
Freddie Mac 2015 Form 10-K
17
Management's Discussion and Analysis
Consolidated Results of Operations | Comparison
(in billions)
Components of derivative gains (losses)
Derivative gains (losses)
Less: Accrual of periodic cash settlements
Derivative fair value changes
Estimated Net Interest Rate Effect
Interest rate effect on derivative fair values
Estimate of offsetting interest rate effect related to financial instruments
measured at fair value
Income tax benefit (expense)
Estimated Net Interest Rate Effect on Comprehensive income
Year Ended December 31,
2015
2014
2013
$
$
$
$
(2.7) $
(2.2)
(0.5) $
(8.3) $
(2.6)
(5.7) $
(0.5) $
(5.5) $
0.2
0.1
2.0
1.2
(0.2) $
(2.3) $
2.6
(3.5)
6.1
5.9
(4.0)
(0.7)
1.2
As this table demonstrates, the estimated net effect of derivatives used in our interest-rate risk
management activities on our comprehensive income is volatile, and can be significant. For information
about the sensitivity of our financial results to interest-rate volatility, see "Risk Management - Interest-
Rate Risk and Other Market Risks."
Effects of Changes in Asset Spreads
Comprehensive income was impacted by an estimated $(0.1) billion, $2.0 billion, and $2.5 billion (after-
tax) for 2015, 2014, and 2013, respectively, due to the impact of credit spread tightening (widening) on
certain mortgage loans and mortgage-related securities measured at fair value.
Freddie Mac 2015 Form 10-K
18
Management's Discussion and Analysis
Consolidated Results of Operations | Net Interest Income
NET INTEREST INCOME
EXPLANATION OF KEY DRIVERS OF NET INTEREST INCOME
Net interest income consists of several primary components:
• Contractual net interest income - consists of two primary components:
The difference between the interest income earned on the assets in our investments portfolio
and the interest expense incurred on the liabilities used to fund those assets; and
Management and guarantee fees on loans held by consolidated trusts. We record interest income
on loans held by consolidated trusts and interest expense on the debt securities issued by the
trusts. The difference between the interest income on the loans and the interest expense on the
debt represents the management and guarantee fee income we receive as compensation for our
guarantee of the principal and interest payments of the issued debt securities. This difference
includes the legislated 10 basis point increase in management and guarantee fees that is
remitted to Treasury as part of the Temporary Payroll Tax Cut Continuation Act of 2011.
Contractual net interest income is primarily driven by the volume of assets in the mortgage-related
investments and guarantee portfolios and the interest rate differential between those interest-earning
assets and the related interest-bearing liabilities.
• Amortization of cost basis adjustments - consists of cost basis adjustments, such as premiums
and discounts on loans, investment securities, and debt that are amortized into interest income or
interest expense based on the effective yield over the contractual life of the associated financial
instrument.
The majority of our total net amortization relates to loans and debt securities of consolidated trusts,
while amortization related to investment securities, other debt, and other assets and liabilities makes
up a smaller portion. The net amortization of loans and debt securities of consolidated trusts is
primarily driven by actual prepayments on the underlying loans.
Net amortization of loans and debt securities of consolidated trusts generally increases net interest
income as it includes amortization of the upfront delivery fees we receive when we acquire a loan.
Increases in actual prepayments result in higher net amortization, while decreases in actual
prepayments result in lower net amortization. The timing of amortization of loans may differ from the
timing of amortization of the securities backed by the loans, as the proceeds received from the loans
backing these securities are remitted to the security holders at a date subsequent to the date
proceeds from the loans are received.
• Expense related to derivatives - consists of deferred gains and losses on closed cash flow hedges
related to forecasted debt issuances that are reclassified from AOCI to net interest income when the
related forecasted transaction affects net interest income.
Freddie Mac 2015 Form 10-K
19
Management's Discussion and Analysis
Consolidated Results of Operations | Net Interest Income
NET INTEREST YIELD ANALYSIS
The table below presents an analysis of interest-earning assets and interest-bearing liabilities. Mortgage
loans on non-accrual status, where interest income is generally recognized when collected, are included
in the average balances.
Year Ended December 31,
2015
Interest
Income
(Expense)
Average
Balance
Average
Rate
Average
Balance
2014
Interest
Income
(Expense)
Average
Rate
Average
Balance
2013
Interest
Income
(Expense)
Average
Rate
$
12,482
$
8
0.06% $
13,889
$
4
0.03% $
31,087
$
15
0.05%
51,380
62
0.12
42,905
28
0.06
44,897
36
0.08
226,162
8,706
3.85
256,548
10,027
3.91
313,707
12,787
4.08
(107,986)
(3,929)
(3.64)
(111,545)
(4,190)
(3.76)
(127,999)
(5,045)
(3.94)
118,176
4,777
4.04
145,003
5,837
4.03
185,708
7,742
4.17
10,699
17
0.16
9,983
6
0.06
21,385
26
0.12
1,590,768
55,867
3.51
1,540,570
57,036
3.70
1,511,128
57,189
3.78
157,261
6,359
4.04
170,017
6,569
3.86
203,760
7,694
3.78
$1,940,766
$
67,090
3.46
$1,922,367
$
69,480
3.61
$1,997,965
$
72,702
3.63
$1,611,388
$
(49,465)
(3.07)
$1,557,895
$
(52,193)
(3.35)
$1,532,032
$
(52,395)
(3.42)
(107,986)
3,929
3.64
(111,545)
4,190
3.76
(127,999)
5,045
3.94
1,503,402
(45,536)
(3.03)
1,446,350
(48,003)
(3.32)
1,404,033
(47,350)
(3.37)
108,096
313,502
421,598
(173)
(6,207)
(6,380)
(0.16)
(1.98)
(1.51)
118,211
331,887
450,098
(145)
(6,768)
(6,913)
(0.12)
(2.04)
(1.54)
132,674
393,094
525,768
(178)
(8,251)
(8,429)
(0.13)
(2.10)
(1.60)
1,925,000
(51,916)
(2.70)
1,896,448
(54,916)
(2.89)
1,929,801
(55,779)
(2.89)
—
(228)
(0.01)
—
(301)
(0.02)
—
(455)
(0.02)
15,766
—
0.02
25,919
—
0.04
68,164
—
0.10
$1,940,766
$
$
(52,144)
(2.69)
$1,922,367
14,946
0.77%
$
$
(55,217)
(2.87)
$1,997,965
14,263
0.74%
$
$
(56,234)
(2.81)
16,468
0.82%
(dollars in millions)
Interest-earning assets:
Cash and cash
equivalents
Securities purchased
under agreements to
resell
Mortgage-related
securities:
Mortgage-related
securities
Extinguishment of
PCs held by Freddie
Mac
Total mortgage-
related securities,
net
Non-mortgage-related
securities
Loans held by
consolidated trusts(1)
Loans held by Freddie
Mac(1)
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
Total other debt
Total interest-
bearing liabilities
Expense related to
derivatives
Impact of net non-
interest-bearing funding
Total funding of
interest-earning
assets
Net interest income/
yield
(1) Loan fees, primarily consisting of amortization of delivery fees, included in interest income for loans held by consolidated trusts were $2.0
billion, $1.4 billion, and $1.2 billion, respectively, and were $383 million, $373 million, and $294 million in 2015, 2014, and 2013, respectively,
for loans held by Freddie Mac.
Freddie Mac 2015 Form 10-K
20
Management's Discussion and Analysis
Consolidated Results of Operations | Net Interest Income
NET INTEREST INCOME RATE / VOLUME ANALYSIS
The table below presents a rate and volume analysis of our net interest income. Our net interest income
reflects the reversal of interest income accrued, net of interest received on a cash basis, related to
mortgage loans that are on non-accrual status.
(in millions)
Interest-earning assets:
2015 vs. 2014 Variance Due to
Total
Change
Volume
Rate
2014 vs. 2013 Variance Due to
Total
Change
Volume
Rate
Cash and cash equivalents
$
6
$
(2) $
4
$
(5) $
(6) $
(11)
Securities purchased under agreements to
resell
Mortgage-related securities:
24
10
34
(7)
(1)
(8)
Mortgage-related securities
(149)
(1,172)
(1,321)
(508)
(2,252)
(2,760)
Extinguishment of PCs held by Freddie
Mac
Total mortgage-related securities, net
Non-mortgage-related securities
Loans held by consolidated
trusts
Loans held by Freddie Mac
129
(20)
11
132
261
(1,040)
(1,060)
—
11
229
(279)
(10)
626
855
(1,626)
(1,905)
(10)
(2,991)
297
1,822
(507)
(1,169)
(1,256)
1,103
(210)
175
(1,300)
(1,125)
(20)
(153)
Total interest-earning assets
$
(2,673) $
283
$
(2,390) $
(1,382) $
(1,840) $
(3,222)
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
Total other debt
$
4,476
$
(1,748) $
2,728
$
1,079
$
(877) $
202
(129)
(132) $
(261)
(229)
(626) $
(855)
4,347
(1,880) $
2,467
850
(1,503)
(653)
(41)
193
152
13
368
381
(28)
561
533
15
229
244
1,094
154
18
1,254
1,272
(231)
—
33
1,483
1,516
863
154
Total interest-bearing liabilities
4,499
(1,499)
3,000
Expense related to derivatives
73
—
73
Total funding of interest-earning
assets
Net interest income
$
$
4,572
1,899
$
$
(1,499) $
3,073
(1,216) $
683
$
$
1,248
$
(231) $
1,017
(134) $
(2,071) $
(2,205)
Freddie Mac 2015 Form 10-K
21
Management's Discussion and Analysis
Consolidated Results of Operations | Net Interest Income
COMPONENTS OF NET INTEREST INCOME
The table below presents the components of net interest income.
(in millions)
2015
2014
2013
$
%
$
%
Year Ended December 31,
Change 2015-2014
Change 2014-2013
Contractual net interest income:
Management and guarantee fee income
$ 2,722
$ 2,399
$ 2,111
$
323
13 % $
288
14 %
Management and guarantee fee income
related to the Temporary Payroll Tax Cut
Continuation Act of 2011
957
759
519
Other contractual net interest income
8,106
9,070
11,484
Total contractual net interest income
11,785
12,228
14,114
Net amortization - loans and debt securities of
consolidated trusts
2,883
1,913
2,791
Net amortization - other assets and debt
506
423
18
Expense related to derivatives
(228)
(301)
(455)
198
(964)
(443)
970
83
73
26 %
240
(11)%
(2,414)
(4)%
(1,886)
46 %
(21)%
(13)%
51 %
20 %
(24)%
(878)
(31)%
405
154
2,250 %
(34)%
(13)%
Net interest income
$ 14,946
$14,263
$ 16,468
$
683
5 % $ (2,205)
Key Drivers:
• Management and guarantee fee income increased during 2015, compared to 2014 and 2013, as
the rates and volume of our guarantee businesses increased. Specifically, management and
guarantee fee rates received on new business are higher than the rates received on older vintages
that continue to pay-down. Furthermore, the size of our single-family credit guarantee portfolio
continues to grow as we continue to securitize single-family loans into PCs. The increase in
management and guarantee fee income, combined with a decline in our other contractual net interest
income, resulted in management and guarantee fee income becoming a larger component of our
contractual net interest income. We expect this trend to continue in the future. See the Single-family
Guarantee segment's "Business Results" section in "Our Business Segments" for additional
discussion.
• Other contractual net interest income declined in 2015 and 2014, primarily due to the reduction in
the balance of our mortgage-related investments portfolio, as we continue to manage the size and
composition of this portfolio pursuant to the limits established by the Purchase Agreement and by
FHFA. Although we reinvested a portion of the proceeds received from pay-downs and dispositions,
the new mortgage-related assets we acquired have lower yields as a result of a lower interest rate
environment. We expect our other contractual net interest income to continue to decline in the near
future as we reduce our mortgage-related investments portfolio. See "Conservatorship and Related
Matters - Limits on Our Mortgage-Related Investments Portfolio and Indebtedness" for additional
discussion of the limits on the mortgage-related investments portfolio.
• Net amortization of loans and debt securities of consolidated trusts increased in 2015 compared
to 2014 due to an increase in the amortization of upfront fees and basis adjustments on debt
securities of consolidated trusts. This increase was primarily driven by higher prepayment rates on
single-family loans in 2015 compared to 2014. Conversely, net amortization of loans and debt
securities of consolidated trusts was lower in 2014 compared to 2013, due to slower prepayment
rates on single-family loans and timing differences between the amortization of the loan and debt
securities basis adjustments.
Freddie Mac 2015 Form 10-K
22
Management's Discussion and Analysis
Consolidated Results of Operations | Provision for Credit Losses
BENEFIT (PROVISION) FOR CREDIT LOSSES
EXPLANATION OF KEY DRIVERS OF PROVISION FOR CREDIT LOSSES
The benefit (provision) for credit losses predominantly relates to single-family loans and includes
components for both collectively impaired loans and individually impaired loans.
• Collectively impaired loans - The provision for collectively impaired loans is primarily driven by the
volume of newly delinquent loans and changes in estimated probabilities of default and estimated
loss severities for the loans. Estimated probabilities of default and estimated loss severities are based
on current conditions and historical data and are heavily influenced by changes in home prices, but
are also affected by a number of other factors, such as local and regional economic conditions,
changes in reperformance and default rates, and the success of our borrower assistance programs.
Individually impaired loans - The provision for individually impaired loans is primarily driven by the
volume of our loss mitigation activity (e.g., loan modifications) that results in loans being considered
TDRs, the payment performance of our individually impaired mortgage portfolio, and changes in
estimated probabilities of default and estimated loss severities, which affect the future cash flows we
expect to receive from these loans. Estimated probabilities of default and estimated loss severities for
individually impaired loans are based on the same current conditions and historical data and are
affected by the same factors noted above for collectively impaired loans.
•
As we continue to perform loss mitigation activities that result in loans being considered individually
impaired, the portion of our allowance for loan losses and provision for credit losses related to collectively
impaired loans continues to decline.
Our allowance for loan losses and provision for credit losses are significantly affected by the "interest rate
concessions" we make on loans that we have modified (i.e., reductions in the contractual interest rate).
When a loan is modified and considered individually impaired, we generally measure impairment based
on the present value of the expected future cash flows discounted at the loan’s original effective interest
rate. Under this methodology, we record a loss at the time a loan is modified equal to the difference in the
present value of expected cash flows resulting from the change in the modified loan’s contractual interest
rate, which increases the provision for credit losses in that period. When a modified loan subsequently
performs according to its new contractual terms and we receive the new contractual cash flows (i.e.,
principal and interest payments), a portion of the discount that was previously applied to those cash flows
is amortized into earnings each period and is recognized as a reduction in the provision for credit losses
in the period in which the cash flows are received. We refer to this reduction in the provision for credit
losses as the "amortization of interest rate concessions."
Our provision for credit losses and the amount of charge-offs that we record in the future will be affected
by a number of factors, such as the actual level of loan defaults; the effect of loss mitigation efforts; any
government actions or programs that affect the ability of borrowers to refinance loans with an LTV ratio
greater than 100% or obtain modifications; changes in property values; regional economic conditions,
including unemployment rates; additional delays in the foreclosure process; and third-party mortgage
insurance coverage and recoveries.
Freddie Mac 2015 Form 10-K
23
Management's Discussion and Analysis
Consolidated Results of Operations | Provision for Credit Losses
BENEFIT (PROVISION) FOR CREDIT LOSSES
The table below presents the components of our benefit (provision) for credit losses.
(dollars in billions)
2015
2014
2013
$
%
$
%
Year Ended December 31,
Change 2015-2014
Change 2014-2013
Provision for newly impaired loans
$
(0.9) $
(1.7) $
(2.5) $
0.8
47 % $
Amortization of interest rate concessions
Reclassifications of held-for-investment loans to
held-for-sale loans
Other, including changes in estimated default
probability and loss severity
Benefit (provision) for credit losses
$
1.2
2.3
0.1
2.7
1.4
0.1
0.1
$
(0.1) $
1.0
—
4.0
2.5
$
Key Drivers:
0.8
0.4
0.1
32 %
40 %
N/A
(0.2)
(14)%
2,200 %
2.2
—
2.8
— %
(3.9)
(98)%
2,800 % $
(2.6)
(104)%
• The main driver of the benefit for credit losses in 2015 was the reclassifications of loans from held-for-
investment to held-for sale in connection with our efforts to sell seriously delinquent single-family
loans. See "Effect of Loan Reclassifications" for the effect of these loan reclassifications on pre-tax
net income.
• The provision for newly impaired loans decreased in 2015 and 2014 due to declines in the volume of
newly delinquent single-family loans in both years.
• The benefit (provision) for credit losses in 2014 and 2013 reflect benefits of $0.3 billion and $1.7
billion, respectively, 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 book.
Freddie Mac 2015 Form 10-K
24
Management's Discussion and Analysis
Consolidated Results of Operations | Derivative Gains (Losses)
DERIVATIVE GAINS (LOSSES)
EXPLANATION OF KEY DRIVERS OF DERIVATIVE GAINS (LOSSES)
Derivative instruments are a key component of our interest-rate risk management strategy. We use
derivatives to economically hedge our interest-rate risk exposure. We primarily use interest-rate swaps,
option-based derivatives such as swaptions, and futures to manage our exposure to changes in interest-
rates. We consider the cost of derivatives used in interest-rate risk management to be an inherent part of
the cost of funding our mortgage-related investments portfolio.
In addition, while not part of our interest-rate risk management activities, we routinely enter into
commitments to purchase and sell loans and mortgage-related securities. The majority of these
commitments are accounted for as derivative instruments.
Derivative gains (losses) consist of both fair value changes and accrual of periodic cash settlements:
• Fair value changes - Represent changes in the fair value of our derivatives based on market
conditions at the end of the period or at the time the derivative instrument is terminated. These
amounts may or may not be realized over time, depending on future changes in market conditions
and the terms of our derivative instruments.
• Accrual of periodic cash settlements - Consists of the net amount we accrue during a period for
interest-rate swap payments that we will make or receive. This accrual represents the ongoing cost of
our hedging activities, and is economically equivalent to interest expense.
Gains and losses on derivatives are affected by a number of factors, including:
• Changes in interest rates - Our primary derivative instruments are interest-rate swaps, including
pay-fixed and receive-fixed interest-rate swaps. With a pay-fixed interest-rate swap, we pay a fixed
rate of interest and receive a variable rate of interest based on a specified notional balance (the
notional balance is for calculation purposes only). With a pay-fixed interest-rate swap, as interest
rates decline, we recognize derivative losses, as the amount of interest we pay remains fixed, and the
amount of interest we receive declines. As rates rise, we recognize derivative gains, as the amount of
interest we pay remains fixed, but the amount of interest we receive increases. With a receive-fixed
interest-rate swap, the opposite results occur.
•
Implied volatility - Many of our assets and liabilities have embedded prepayment options. We use
option-based derivatives, including swaptions, to economically hedge the prepayment options
embedded in our mortgage assets and callable debt. Fair value gains and losses on swaptions are
sensitive to changes in both interest rates and implied volatility, which reflects the market’s
expectation of future changes in interest rates. Assuming all other factors are unchanged, including
interest rates, purchased swaptions generally become more valuable as implied volatility increases
and less valuable as implied volatility decreases, with the opposite being true for written swaptions.
• Changes in the shape of the yield curve - We own assets and have outstanding debt with different
cash flows along the yield curve. We use derivatives to hedge the yield exposure of assets and debt,
resulting in derivatives with different maturities. As a result, changes in the shape of the yield curve
will affect our derivative gains (losses).
Freddie Mac 2015 Form 10-K
25
Management's Discussion and Analysis
Consolidated Results of Operations | Derivative Gains (Losses)
• Changes in the composition of our derivative portfolio - The mix and balance of our derivative
portfolio changes from period to period as we enter into or terminate derivative instruments to
respond to changes in interest rates and changes in the balances and modeled characteristics of our
assets and liabilities. Changes in the composition of our derivative portfolio will affect the derivative
gains and losses we recognize in a given period, thereby affecting the volatility of comprehensive
income.
While our sensitivity to interest rates on an economic basis remains low based on our models, our
exposure to earnings volatility resulting from our use of derivatives has increased in recent years as we
have changed the mix of our derivative portfolio to align with the changing duration of our hedged assets
and liabilities. We believe the impact of derivatives on our GAAP financial results should be considered in
the context of our overall interest-rate risk profile, including our PMVS and duration gap results. For more
information about our interest-rate risk management activities and the sensitivity of reported earnings to
those activities, see “Risk Management - Interest Rate Risk And Other Market Risks.”
COMPONENTS OF DERIVATIVE GAINS (LOSSES)
The table below presents the components of derivative gains (losses).
(in millions)
Fair value changes:
Year Ended December 31,
Change 2015-2014
Change 2014-2013
2015
2014
2013
$
%
$
%
Change in interest-rate swaps
$
(778) $ (7,294) $
8,598
$
6,516
(89)% $ (15,892)
(185)%
Change in option-based derivatives
258
1,437
(2,422)
(1,179)
Accrual of periodic cash settlements
(2,198)
(2,625)
(3,467)
Other
22
191
(77)
427
(169)
(82)
(16)
(88)
3,859
842
268
(159)
(24)
(348)
Derivative gains (losses)
$ (2,696) $ (8,291) $
2,632
$
5,595
(67)% $ (10,923)
(415)%
Key Drivers:
• We recognized derivative losses in 2015 primarily from the accrual of periodic cash settlements. Fair
value changes were less significant in 2015, as interest rates declined slightly.
• We recognized derivative losses in 2014 primarily as a result of the impact of a flattening yield curve
as shorter-term interest rates increased and longer-term interest rates declined during 2014.
• We recognized derivative gains in 2013 primarily as a result of an increase in longer-term interest
rates.
Freddie Mac 2015 Form 10-K
26
Management's Discussion and Analysis
Consolidated Results of Operations | Other Comprehensive Income
OTHER COMPREHENSIVE INCOME (LOSS)
EXPLANATION OF KEY DRIVERS OF OTHER COMPREHENSIVE INCOME (LOSS)
Our investments in securities classified as available-for-sale are measured at fair value on our
consolidated balance sheets. The fair value of these securities is primarily affected by changes in interest
rates, credit spreads, and the movement of these securities towards maturity. All unrealized gains and
losses on these securities are excluded from earnings and reported in other comprehensive income until
realized. We reclassify our unrealized gains and losses from AOCI to earnings upon the sale of the
securities or if the securities are determined to be other-than-temporarily impaired.
If, subsequent to the recognition of other-than-temporary impairment, our expectation of the cash flows
we will receive on a previously impaired security has significantly increased, we will accrete that increase
in cash flows into the security's amortized cost basis and use the new amortized cost basis for future
impairment evaluation. The increased amortized cost basis will generally reduce the amount of unrealized
gains that we would have otherwise recognized if not for the accretion.
The following table presents the attribution of the other comprehensive income (loss) reported in our
consolidated statements of comprehensive income.
(in millions)
Other comprehensive income, excluding accretion and reclassifications
Accretion due to significant increases in expected cash flows on previously-
impaired available-for-sale securities
Reclassifications from AOCI
Total other comprehensive income (loss)
Key Drivers:
Year Ended December 31,
2015
2014
2013
374
$
2,563
$
3,167
(449)
(502)
(519)
(308)
(339)
104
(577) $
1,736
$
2,932
$
$
• Other comprehensive income was a loss in 2015 compared to income in 2014, primarily due to less
spread tightening for our non-agency mortgage-related securities and less impairment
reclassifications from AOCI into earnings. Other comprehensive income declined during 2014
compared to 2013, primarily due to less spread tightening for our non-agency mortgage-related
securities, partially offset by a flattening of the yield curve.
• We recognized lower unrealized gains as a result of our accretion of the increase in expected cash
flows to the amortized cost basis of the previously-impaired available-for-sale securities in all periods
presented. Accretion was higher during 2015 and 2014 compared to 2013, as a result of improving
collateral performance and declining longer-term interest rates.
• We reclassified unrealized gains and losses from AOCI to earnings as a result of our sales of
available-for-sale mortgage-related securities in all periods presented. During 2015 and 2014, we
reclassified net unrealized gains as a result of improved pricing due to declining longer-term interest
rates and stabilized collateral performance. Conversely, during 2013, we reclassified net unrealized
losses as a result of rising longer-term interest rates.
Freddie Mac 2015 Form 10-K
27
Management's Discussion and Analysis
Consolidated Balance Sheets Analysis
CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized consolidated balance sheets.
(dollars in millions)
Assets:
December 31,
2015
2014
$ Change
% Change
Cash and cash equivalents
$
5,595
$
10,928
$
Restricted cash and cash equivalents
14,533
8,535
Securities purchased under agreements
to resell
Investments in securities
Mortgage loans, net
Accrued interest receivable
Derivative assets, net
Real estate owned, net
Deferred tax assets, net
Other assets
Total assets
Liabilities and Equity:
Liabilities:
Accrued interest payable
Debt, net
Derivative liabilities, net
Other liabilities
Total liabilities
Total equity
63,644
114,215
1,754,193
6,074
395
1,725
18,205
7,471
51,903
136,987
1,700,580
6,034
822
2,558
19,498
7,694
1,986,050
$
1,945,539
$
6,183
$
6,325
$
1,970,427
1,929,542
1,254
5,246
1,983,110
2,940
1,963
5,058
1,942,888
2,651
$
$
Total liabilities and equity
$
1,986,050
$
1,945,539
$
(5,333)
5,998
11,741
(22,772)
53,613
40
(427)
(833)
(1,293)
(223)
40,511
(142)
40,885
(709)
188
40,222
289
40,511
(49)%
70
23
(17)
3
1
(52)
(33)
(7)
(3)
2 %
(2)%
2
(36)
4
2
11
2 %
Key Drivers:
• Cash and cash equivalents, restricted cash and cash equivalents, and securities purchased
under agreements to resell affect one another, so the changes in the balances should be viewed
together. For example, cash and cash equivalents and restricted cash and cash equivalents can be
invested in securities purchased under agreements to resell or other investments in securities (i.e.,
non-mortgage-related securities). The drivers of the increase in the combined balance are higher
near-term cash needs for upcoming maturities and anticipated calls of other debt, and an increase in
principal and interest payments received from servicers for unsecuritized mortgage loans owned by
us.
•
Investments in securities continued to decline as we continued to reduce the less liquid assets in
our mortgage-related investments portfolio, partially offset by increases in Treasury securities for
upcoming maturities and anticipated calls of other debt.
• Mortgage loans, net increased, driven by an increase in acquisitions of purchase money loans,
which resulted from higher volumes of home sales and home price appreciation.
• Real estate owned, net continued to decline as we continued to sell our existing inventory and the
pace of new REO acquisitions slowed as our population of seriously delinquent loans declined.
• Deferred tax assets, net declined primarily due to the reduction of deferred differences related to the
allowance for loan losses and credit-related items.
Freddie Mac 2015 Form 10-K
28
Management's Discussion and Analysis
Consolidated Balance Sheets Analysis
• Debt, net increased as debt securities of consolidated trusts held by third parties rose as a result of
the increase in the acquisition and securitization of mortgage loans in 2015 due to higher volumes of
home sales and home price appreciation. This increase in debt securities of consolidated trusts held
by third parties was partially offset by declines in other debt as we continued to reduce our
indebtedness along with the decline in our mortgage-related investments portfolio.
• Total equity increased as a result of higher comprehensive income in the fourth quarter of 2015
compared to the fourth quarter of 2014 and was partially offset by dividends paid related to the $600
million decline in the Capital Reserve Amount in 2015.
Freddie Mac 2015 Form 10-K
29
Management's Discussion and Analysis
Our Business Segments | Segment Earnings
OUR BUSINESS SEGMENTS
As shown in the table below, we have three reportable segments, which are based on the way we
manage our business. Certain activities that are not part of a reportable segment are included in the All
Other category.
Segment
Single-
family
Guarantee
Description
Primary Income Drivers
Primary Expense Drivers
Reflects results from our
purchase, securitization, and
guarantee of single-family loans
and the management of single-
family mortgage credit risk
• Management and guarantee
fee income
• Credit-related expenses
• Administrative expenses
• Net interest income
• Management and guarantee
fee income
• Gains and losses on loans
•
Investment gains and losses
• Derivative gains and losses
• Net interest income
Investment gains and losses
•
• Derivative gains and losses
• Gains and losses on loans
•
Investment gains and losses
• Derivative gains and losses
• Administrative expenses
• Credit-related expenses
• Other-than-temporary
impairments on non-agency
mortgage-related securities
•
Investment gains and losses
• Derivative gains and losses
• Administrative expenses
N/A
N/A
Multifamily Reflects results from our
investment, securitization, and
guarantee activities in multifamily
loans and securities, and the
management of multifamily
mortgage credit risk
Investments Reflects results from managing
All Other
the company’s mortgage-related
investments portfolio (excluding
Multifamily investments and
single-family seriously delinquent
loans), treasury function, and
interest-rate risk
Consists of material corporate
level activities that are infrequent
in nature and based on decisions
outside the control of the
management of our reportable
segments
SEGMENT EARNINGS
We evaluate segment performance and allocate resources based on a Segment Earnings approach:
• We make significant reclassifications among certain line items in our GAAP financial statements to
reflect measures of management and guarantee fee income on guarantees and net interest income
on investments that are in line with how we manage our business.
• We allocate certain revenues and expenses, including certain returns on assets and funding costs,
and all administrative expenses to our three reportable segments.
• The sum of Segment Earnings for each segment and the All Other category equals GAAP net income
(loss) and the sum of comprehensive income (loss) for each segment and the All Other category
equals GAAP comprehensive income (loss).
In the second quarter of 2015, we changed our Segment Earnings definition associated with the expense
related to the Temporary Payroll Tax Cut Continuation Act of 2011. As a result of this change, the expense
related to the legislated 10 basis point increase is now netted within management and guarantee fee
income. The purpose of this change is to better reflect how management evaluates the Single-family
Freddie Mac 2015 Form 10-K
30
Management's Discussion and Analysis
Our Business Segments | Segment Earnings
Guarantee segment. Prior period results have been revised to conform to the current period presentation.
We reclassified $775 million and $533 million of Temporary Payroll Tax Cut Continuation Act of 2011
expense into management and guarantee fee income for 2014 and 2013, respectively.
Segment Earnings 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. We believe that Segment Earnings provides us with meaningful
metrics to assess the financial performance of each segment and our company as a whole. See Note 12
for additional details on Segment Earnings, including additional financial information for our segments.
SEGMENT COMPREHENSIVE INCOME
The table below shows our comprehensive income by segment, including the All Other category.
Freddie Mac 2015 Form 10-K
31
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
SINGLE-FAMILY GUARANTEE
BUSINESS OVERVIEW
In our Single-family Guarantee segment, we purchase, securitize, and guarantee single-family loans
originated by lenders and we manage our single-family mortgage credit risk. Our Single-family Guarantee
segment supports our primary business strategies by creating:
A Better Freddie Mac:
• Providing market leadership by delivering quality offerings, programs, and services to an increasingly
•
diversified customer base and an evolving mortgage market;
Improving the customer experience through continued enhancement of our products, programs,
processes, and technology; and
• Establishing efficient risk management activities that are appropriate for the expected level of risk.
A Better Housing Finance System:
• Developing innovative technology platforms to provide sellers and Freddie Mac with better methods
of assessing and managing single-family mortgage credit risk;
• Developing and implementing initiatives to reduce taxpayer exposure and offer private investors new
and innovative ways to share in the credit risk of the Core single-family book;
• Expanding access to mortgage credit in a responsible manner to support our Charter Mission as well
as to meet specific mandated goals;
• Working with FHFA, Fannie Mae, and Common Securitization Solutions, LLC ("CSS") on the
•
development of a new common securitization platform; and
Implementing the single (common) security initiative for Freddie Mac and Fannie Mae, which is
intended to reduce the disparities in trading value between our PCs and Fannie Mae's single-class
mortgage-related securities.
The U.S. residential mortgage market consists of a primary mortgage market that links homebuyers and
lenders and a secondary mortgage market that links lenders and investors. We participate only in the
secondary mortgage market. The size of the U.S. residential mortgage market is affected by many
factors, including changes in interest rates, unemployment rates, homeownership rates, housing prices,
the supply of housing, 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 loans meeting the
requirements of our Charter, our own preference for credit risk reflected in our purchase standards, and
the loan purchase and securitization activity of other financial institutions.
Products and Activities
Securitization and Guarantee Products
In a typical loan securitization, we purchase loans that lenders originate and then pool these loans into
mortgage-related securities that can be sold in the capital markets. We typically guarantee the payment of
principal and interest on the mortgage-related securities in exchange for management and guarantee fee
income. We administer the collection of borrowers' payments on their loans and the distribution of
payments to the investors in the mortgage-related securities, net of our management and guarantee fee
Freddie Mac 2015 Form 10-K
32
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
income. When a borrower prepays a loan that we have securitized, the outstanding balance of the
security owned by investors is reduced by the amount of the prepayment. If the borrower becomes
delinquent, we continue to make the applicable payments to the investors in the mortgage-related
securities pursuant to our guarantee. When that occurs, we work to mitigate our losses through our loan
workout programs, which are discussed in more detail in "Risk Management." If we are unable to achieve
a successful loan workout, we pursue foreclosure of the underlying property.
We establish trusts for mortgage-related securities we issue pursuant to Master Trust Agreements and
serve as trustee for the trusts. We have the option, and in some instances the requirement, to purchase
specified loans, including certain delinquent loans, from the trusts at a purchase price equal to the current
UPB of the loan, less any outstanding advances of principal that have been previously distributed. For
information on an operational risk issue relating to the Master Trust Agreement, see "Risk Management -
Operational Risk."
The management and guarantee fee we charge on new acquisitions generally consists of a combination
of upfront delivery fees and a base monthly fee paid as a percentage of the UPB of the underlying loan.
We may also make upfront payments to buy up the monthly management and guarantee fee rate ("buy-
up fees"), or receive upfront payments to buy down the monthly management and guarantee fee rate
(“buy-down fees”). These fees are paid in conjunction with the formation of a PC to provide for a uniform
coupon rate for the mortgage pool underlying the PC. The payments made to buy up the management
and guarantee fee rate are not considered compensation for the credit risk assumed for purposes of our
financial statements. Consequently, these amounts are allocated to the Investments segment.
We enter into loan purchase agreements with many of our single-family customers that outline the terms
under which we agree to purchase loans from them over a period of time. For the majority of the loans we
purchase, the management and guarantee fees are not specified contractually. Instead, we bid for some
or all of the lender's loan volume on a monthly basis at a management and guarantee fee rate that we
specify. As a result, our loan purchase volumes from individual customers can fluctuate significantly.
We seek to issue guarantees with fee terms that are commensurate with the risks assumed and that will,
over the long-term, provide management and guarantee fee income that exceeds the credit-related and
administrative expenses on the underlying loans and provide a return on the capital that would be needed
to support the related credit risk. We do not have the ability to fully price for our credit risk at the loan level
as our base fee does not differentiate by LTV ratio, credit score, and certain other credit-related factors.
We must obtain FHFA’s approval to implement across-the-board increases in our management and
guarantee fees. To compensate us for higher levels of risk in some loan products, we charge upfront
delivery fees above our base fees, which are calculated based on credit risk factors such as the loan
product type, loan purpose, LTV ratio, and credit score. While we vary our guarantee and, in certain
cases, delivery fee pricing for different customers, loan products, and loan or borrower underwriting
characteristics based on our assessment of credit risk, the seller may elect to retain loans with better
credit characteristics. The sellers' decisions with respect to loan retention, or sale to us, could result in our
purchases having a more adverse credit profile.
In 2012, at FHFA's direction, we increased management and guarantee fees by 10 basis points. Under
the Temporary Payroll Tax Cut Continuation Act of 2011, the proceeds from this increase are being
remitted to Treasury on a quarterly basis to fund the payroll tax cut. We refer to this fee increase as the
legislated 10 basis point increase in management and guarantee fees.
Freddie Mac 2015 Form 10-K
33
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
As part of our Single-family Guarantee business, we issue the types of guarantee and securitization
products described below. In these securitization products, Freddie Mac functions in its capacity as
depositor, guarantor, administrator, and trustee.
• PCs - our primary single-family mortgage securitization and guarantee process involves our issuance
of single-class PCs, which are pass-through securities that represent undivided beneficial interests in
trusts that hold pools of loans. 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 loans. We also guarantee the full and final payment of principal, but
not the timely payment of principal, on ARM PCs.
• Guarantor Swap PCs - we issue most of our PCs in guarantor swap transactions in which our
customers provide us with loans in exchange for PCs, as shown in the diagram below:
• Cash PCs - we also issue PCs in transactions in which we purchase performing loans (which we
sometimes refer to as a securitization pipeline) and securitize them for retention in our mortgage-
related investments portfolio or for sale to third parties, as shown in the diagram below. We also use
this process to securitize reperforming loans.
Freddie Mac 2015 Form 10-K
34
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Resecuritization Products - our resecuritization products represent beneficial interests in pools of PCs
and certain other types of mortgage assets. We create these securities primarily by using PCs or our
previously issued resecuritization products as the underlying collateral. We believe our issuance of these
securities expands the range of investors in our mortgage-related securities to include those seeking
specific security attributes. Similar to our PCs, we guarantee the payment of principal and interest to the
investors in our resecuritization products. 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, although we typically receive a transaction fee as compensation for creating the security and
future administrative responsibilities. All of the cash flows from the collateral underlying our
resecuritization products are generally passed through to investors in these securities. We do not issue
resecuritization products that have concentrations of credit risk beyond those embedded in the underlying
assets. In many of our resecuritization transactions, securities dealers or investors deliver mortgage
assets in exchange for the resecuritization product. In certain cases, we may also exchange our own
mortgage assets for the resecuritization product. The following diagram provides a general example of
how we create resecuritization products:
Freddie Mac 2015 Form 10-K
35
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
We issue the following types of resecuritization products:
• Giant PCs - Giant PCs are resecuritizations of previously issued PCs or Giant PCs. Giant PCs are
single-class securities that involve the straight pass through of all of the cash flows of the underlying
collateral to holders of the beneficial interests.
• Stripped Giant PCs - Stripped Giant PCs are multiclass securities that are formed by resecuritizing
previously issued PCs or Giant PCs and issuing principal-only and interest-only securities backed by
the cash flows from the underlying collateral.
• REMICs - REMICs are resecuritizations of previously issued PCs, Giant PCs, Stripped Giant PCs, or
REMICs. REMICs are multiclass securities that divide all of the cash flows of the underlying collateral
into two or more classes with varying maturities, payment priorities and coupons.
• Other securitization products - From time to time, we issue guaranteed mortgage-related securities
collateralized by non-Freddie Mac mortgage-related securities. However, we have not entered into
these types of transactions as part of our Single-family Guarantee business in several years. In 2009
and 2010, we entered into transactions under Treasury’s NIBP with HFAs. See Note 2 for further
information.
Long-term standby commitments - we provide a guarantee on mortgage assets held by third parties, in
exchange for management and guarantee fees, without securitizing those assets. Long-term standby
commitments obligate us to purchase seriously delinquent loans that are covered by those commitments.
From time to time, we have consented to the termination of our long-term standby commitments and
simultaneously entered into guarantor swap transactions with the same counterparty, issuing PCs backed
by many of the same loans.
Freddie Mac 2015 Form 10-K
36
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Credit Risk Transfer Transactions
Most of our credit risk transfer transactions are designed to transfer a portion of the credit risk on groups
of previously acquired loans to third-party investors. These transactions are intended to attract private
capital from new types of investors that have not historically invested in single-family mortgage credit risk.
The following strategic considerations were incorporated into the design of our credit risk transfer
transactions:
• Repeatable and scalable execution with a broad appeal to diversified investors;
• Execution at a cost that is economically sensible;
• Minimal effect on the TBA market;
• Minimize changes required of, and effects on, sellers and servicers by having Freddie Mac serve as
the credit manager for investors; and
• Avoid or seek to mitigate the risk that our losses are not reimbursed timely and in full.
The value of these transactions to us is dependent on various economic scenarios, and we will primarily
benefit from these transactions if we experience significant loan defaults. These new credit risk transfer
transactions include:
• STACR debt notes - In this transaction, we create a reference pool of loans from our Core single-
family book and an associated securitization structure with notional credit risk positions (e.g., first
loss, mezzanine, and senior positions). The notional amounts of the credit risk positions are reduced
when certain specified credit events occur on the loans in the reference pool. The notional amounts of
the credit risk positions may also be reduced based on scheduled and unscheduled principal
payments that occur on the loans in the reference pool.
In STACR debt note transactions, losses may be allocated to the notional balances based on
calculated losses using a predefined formula or based on the actual losses on the loans in the
reference pool. For loans that are covered by credit risk transfer transactions based on calculated
losses, we may write down STACR debt notes or receive reimbursement of losses when the loans
experience a credit event, which predominantly includes a loan becoming 180 days delinquent. For
loans that are covered by credit risk transfer transactions based on actual losses, we may write down
STACR debt notes or receive reimbursement of losses once an actual loss event (e.g., third-party
foreclosure sale, short sale or REO disposition) occurs.
We issue STACR debt notes related to certain of the notional credit risk positions to third-party
investors and retain the remaining credit risk. We make payments of principal and interest on the
issued notes, but are not required to repay principal to the extent that the notional credit risk position
is reduced as a result of a specified credit event. The interest rate on STACR debt notes is generally
higher than on our other unsecured debt securities due to the potential for reductions to their principal
balance. The following diagram illustrates a typical STACR debt note transaction:
Freddie Mac 2015 Form 10-K
37
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
• ACIS insurance policies - In this transaction, we purchase insurance policies, typically underwritten
by a group of insurers and reinsurers, that provide credit protection for certain specified credit events
that occur and are allocated to the non-issued notional credit risk positions of a STACR debt note
transaction (i.e., the risk positions that Freddie Mac retains). Under each insurance policy, we pay
monthly premiums that are determined based on the outstanding balance of the STACR debt note
reference pool. When specific credit events occur, we receive compensation from the insurance
policy up to an aggregate limit based on a predefined formula or based on actual losses. We require
insurers and reinsurers to partially collateralize their exposure to reduce the risk that we will not be
reimbursed for our claims under the policies.
In 2015, we began offering two new types of credit risk transfer transactions:
• Whole loan securities - In this transaction, we issue guaranteed senior securities and unguaranteed
subordinated securities backed by single-family loans. The unguaranteed subordinated securities will
absorb first losses on the related loans.
• Seller indemnification agreement - In this transaction, we enter into an agreement upon loan
acquisition with a seller under which the seller will absorb a portion of losses on the related single-
family loans in exchange for a fee or a reduction in our management and guarantee fee. The
indemnification amount may be fully or partially collateralized.
We also use other types of credit enhancements, such as primary mortgage insurance, to mitigate our
credit risk exposure. See “Risk Management” for additional information on our credit risk transfer
transactions, as well as the other types of credit enhancements we use.
Freddie Mac 2015 Form 10-K
38
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Customers
Our customers in the Single-family Guarantee segment are predominantly lenders that originate loans for
new or existing homeowners and sell them to us, and financial institutions that service these loans for us.
These companies include mortgage banking companies, commercial banks, community banks, credit
unions, other non-depository financial institutions, HFAs, and thrift institutions. Many of these companies
are both sellers and servicers for us. In addition, our customers include investors and dealers in our
guaranteed mortgage-related securities and investors and counterparties in credit risk transfer
transactions.
We acquire a significant portion of our loans from several lenders that are among the largest originators in
the U.S. In addition, a significant portion of our single-family loans is serviced by several large servicers.
The graphs below present the concentration of our single-family purchase volume for 2015 and our loan
servicing as of December 31, 2015 among our top five customers.
Freddie Mac 2015 Form 10-K
39
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Percentage of Single-Family Purchase
Volume
Percentage of Single-Family Servicing
Volume
For additional information about seller/servicer concentration risk and our relationships with our seller/
servicer customers, see “Risk Management - Credit Risk - Institutional Credit Risk - Sellers and
Servicers.”
Freddie Mac 2015 Form 10-K
40
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Competition
Our principal competitors in the Single-family Guarantee segment are Fannie Mae, Ginnie Mae (with
FHA/VA), and other financial institutions that retain or securitize loans, such as commercial and
investment banks, dealers, and thrift institutions. We compete on the basis of price, products, securities
structure, and service. Competition to acquire single-family loans 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. For more information, see “Risk Factors - Other Risks -
Competition from banking and non-banking institutions (including Fannie Mae, Ginnie Mae, and FHA/VA)
may harm our business. FHFA’s actions as Conservator of both companies could affect competition
between us and Fannie Mae."
Our Segment Earnings management and guarantee fee income is influenced by our PC price
performance because we adjust our fees based on the price performance of our PCs relative to
comparable Fannie Mae securities (we refer to this as market-adjusted pricing).
From time to time we undertake a variety of actions in an effort to support the liquidity and price
performance of our PCs relative to comparable Fannie Mae securities. These actions may include:
• Resecuritizing PCs;
• Encouraging sellers to pool loans that they deliver to us into PC pools with a larger and more diverse
•
population of loans; and
Influencing the volume and characteristics of loans delivered to us by tailoring our loan eligibility
guidelines and by other means.
For additional information about our efforts to support the liquidity and relative price performance of our
PCs, see “Investments - Market Conditions” and “Risk Factors - Other 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 our K Certificates.”
Freddie Mac 2015 Form 10-K
41
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
MARKET CONDITIONS
The graphs and related discussion below present certain single-family market indicators, for the most
recent five years, that can significantly affect the business and financial results of our Single-family
Guarantee segment.
U.S. Single-Family Originations
U.S. Single-Family Home Sales
Source: Inside Mortgage Finance dated January 29, 2016.
Source: National Association of Realtors news release dated
January 22, 2016.
Commentary
• There was a significant increase in single-family loan origination volumes in the U.S. in 2015, driven
by an increase in refinancing activity as a result of lower average mortgage interest rates.
• We expect the volume of home sales in 2016 to grow slightly from 2015.
Freddie Mac 2015 Form 10-K
42
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Single-Family Mortgage Debt
Outstanding as of December 31,
Single-Family Serious Delinquency Rates as
of December 31,
Source: Federal Reserve Financial Accounts of the United
States of America dated December 10, 2015. For 2015, the
amount is as of September 30, 2015 (latest available
information).
Commentary
Source: National Delinquency Survey from the Mortgage
Bankers Association. For 2015, the rates (excluding Freddie
Mac) are as of September 30, 2015 (latest available
information).
• Single-family serious delinquency rates in the U.S. continued to decline due to macroeconomic
factors, such as decreased unemployment rates and continued home price appreciation.
• The U.S. single-family mortgage debt outstanding increased in 2015 compared to 2014, which
resulted in an increase in the supply of loans available for us to purchase.
• As reported by the U.S. Census Bureau, the U.S. homeownership rate was 63.8% in the fourth
quarter of 2015, compared to a high point of 69.2% in the fourth quarter of 2004, and the average of
66.2% since 1990.
Freddie Mac 2015 Form 10-K
43
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
BUSINESS RESULTS
The graphs and related discussion below present the business results of our Single-family Guarantee
segment over the last three years.
New Business Activity
Single-Family Loan Purchases and
Guarantees
Number of Families Helped to Own a Home
Commentary
• We maintain a consistent market presence by providing lenders with a constant source of liquidity for
conforming loan products. We funded approximately 12.5 million single-family homes since 2009 and
purchased nearly 1.4 million HARP loans since the initiative began in 2009, including nearly 45,000
during 2015.
• Our loan purchase activity increased significantly in 2015 compared to 2014, due to acquisitions of
purchase money loans resulting from higher volumes of home sales and home price appreciation.
Our loan purchase activity declined in 2014 to its lowest level since 2000. The decrease in our loan
purchase activity in 2014 compared to 2013 was due to decreased refinancing activity driven by
higher average mortgage interest rates in 2014.
Freddie Mac 2015 Form 10-K
44
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
• We continued working to improve access to affordable mortgage credit, including the introduction of a
new loan initiative in March 2015 with a down payment option as low as three percent to help
qualified borrowers with limited savings buy a home. We also continue to explore the feasibility of:
Increasing our purchases of loans securitized by permanently affixed manufactured housing;
Improving the effectiveness of pre-purchase and early delinquency counseling for borrowers;
Utilizing alternative credit score models and credit history standards in loan eligibility
decisions; and
Increasing support for first-time home buyers.
We are responsibly expanding our programs and outreach capabilities to better serve low and
moderate income borrowers and underserved markets. Expanding access to affordable mortgage
credit will continue to be a top priority in 2016.
• We expect our purchase volume in 2016 to be similar to 2015, with HARP activity remaining low
during 2016 since the pool of borrowers eligible to participate in the program has declined.
Freddie Mac 2015 Form 10-K
45
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Single-family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfolio as
of December 31,
Total Single-Family Loans as of December
31,
Commentary
• The Core single-family book grew to 66% of the single-family credit guarantee portfolio at December
31, 2015. We exclude HARP and other relief refinance loans from the Core single-family book
because such loans generally reflect credit risk attributes of the original loans (many of which were
originated between 2005 and 2008).
Freddie Mac 2015 Form 10-K
46
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
• The HARP and other relief refinance book represented an additional 18% of the single-family credit
guarantee portfolio at December 31, 2015.
• The Legacy single-family book declined to 16% of the single-family credit guarantee portfolio at
December 31, 2015.
Freddie Mac 2015 Form 10-K
47
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Management and Guarantee Fees
Average Portfolio Segment Earnings
Management and Guarantee Fee Rate(1) for
the Year Ended December 31,
Average Management and Guarantee Fee
Rate(1) Charged on New Acquisitions for the
Year Ended December 31,
(1) Excludes the legislated 10 basis point increase in management and guarantee fees.
Commentary
• Average portfolio Segment Earnings management and guarantee fees increased in 2015 compared
to 2014, due to higher amortization of upfront fees, driven by higher loan liquidations resulting from a
lower interest rate environment, as well as the acquisition of new loans with higher management and
guarantee fee rates.
• The difference between the average management and guarantee fee rate charged on new
acquisitions and the average portfolio Segment Earnings management and guarantee fee rate, in
basis points, reflects different methodologies for recognizing upfront delivery fee income. The average
management and guarantee fee rate charged on new acquisitions recognizes upfront delivery fee
income over the estimated life of the related loans using our expectations of prepayments and other
liquidations, whereas the average portfolio Segment Earnings management and guarantee fee rate
recognizes these amounts over the contractual life of the related loans (usually 30 years). In addition,
the average portfolio Segment Earnings management and guarantee fee rate reflects an average of
our total mortgage portfolio and is not limited to purchases in the applicable year. Loans acquired
prior to 2012 have lower contractual management and guarantee fee rates than loans we have
acquired since that time.
• Management and guarantee fees charged on new acquisitions decreased during 2015, compared to
2014, due to a combination of competitive pricing and increased market-adjusted pricing costs based
on the price performance of our PCs relative to Fannie Mae securities.
Freddie Mac 2015 Form 10-K
48
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Credit Risk Transfer Activity
Since 2013, STACR debt note and ACIS transactions have been our principal method of transferring a
portion of the mortgage credit risk subsequent to loan acquisition in our Core single-family book. The
following charts present transactions that occurred in 2015 and the cumulative amount of transactions at
December 31, 2015.
New STACR Debt Note and ACIS
Transactions for the Year Ended December
31, 2015(1)
Cumulative STACR Debt Note and ACIS
Transactions as of December 31, 2015(1)
(In billions)
Freddie Mac
$169.4
(In billions)
Freddie Mac
$365.5
Senior
Senior
Freddie
Mac
ACIS
STACR Debt
Notes
Reference
Pool(2)
$179.2
Mezzanine
$0.4
$1.7
$5.6
Freddie
Mac
ACIS
STACR Debt
Notes
Mezzanine
$0.9
$3.2
$12.0
Reference
Pool
$384.6
First
Loss
Freddie Mac
$1.0
ACIS
$0.4
STACR
Debt
Notes
$0.7
First
Loss
Freddie Mac
$1.9
ACIS
$0.4
STACR
Debt
Notes
$0.7
(1) The amounts represent the UPB upon issuance of
(1) The amounts represent the UPB upon issuance of
STACR debt notes and execution of ACIS transactions.
STACR debt notes and execution of ACIS transactions.
(2) Excludes additional STACR debt note and ACIS
transactions of $0.4 billion and $0.7 billion, respectively,
related to reference pools in transactions executed in
prior periods.
Commentary
• We continued to transfer a portion of credit losses to third-party investors, insurers, and selected
sellers through credit risk transfer transactions. In 2015, we transferred a portion of the credit risk
associated with $181.2 billion in UPB of loans in our Core single-family book using four types of credit
risk transfer transactions. Significant developments in 2015 include completion of the following credit
risk transfer transactions:
STACR debt notes and ACIS transactions that transferred some of the credit risk related to
the first loss positions. Prior to 2015, we retained all of the first loss positions of these
transactions;
STACR debt notes and ACIS transactions that allocated credit losses based on actual losses
rather than calculated losses. Five of our eight STACR debt notes transactions completed in
2015 followed this new approach as did seven of our ten ACIS transactions;
Freddie Mac 2015 Form 10-K
49
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Two whole loan security transactions where we issued $0.9 billion in UPB of guaranteed
securities and $0.1 billion in UPB of unguaranteed subordinated securities; and
One seller indemnification agreement transaction.
• Since 2013, we have completed 34 credit risk transfer transactions that, upon execution of the
transaction, covered $386.6 billion in principal of loans in our Core single-family book.
• The interest and premiums we pay on our issued STACR debt note and ACIS transactions to transfer
credit risk effectively reduce the management and guarantee income we earn on the PCs within the
respective pools. Our expected management and guarantee fee income on the PCs within the
STACR and ACIS reference pools has been effectively reduced by approximately 30%, on average,
for transactions executed as of December 31, 2015. The reduction to our overall management and
guarantee income could change over time as we continue our credit risk transfer activities or if there
are changes in the economic or regulatory environment that impact the cost of executing these
transactions.
• As of December 31, 2015 there has not been a significant number of loans in our STACR debt note
reference pools that have experienced a credit event. As a result of the credit performance of these
loans, we have only recognized small write-downs on our STACR debt notes and have begun to
make claims for reimbursement of losses under our ACIS transactions.
• The 2016 Conservatorship Scorecard sets a goal for us to complete credit risk transfer transactions
on at least 90% of the UPB of certain categories of newly acquired single-family loans, such as non-
HARP fixed-rate loans with terms greater than 20 years and LTV ratios above 60%.
Freddie Mac 2015 Form 10-K
50
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Loss Mitigation Activities
Number of Families Helped to Avoid
Foreclosure
Loan Workout Activity
Commentary
• We continue to help struggling families retain their homes or otherwise avoid foreclosure through loan
workouts, helping approximately 1.2 million borrowers since 2009. Our loan workout activity has
declined over the last several years, along with a decline in the size of our seriously delinquent single-
family loan portfolio. One of our loan workout programs, HAMP, terminates in December 2016.
• When a home retention solution is not practicable, we require our servicers to pursue foreclosure
alternatives, such as short sales, before initiating foreclosure. When foreclosure is unavoidable and
we acquire the property as REO, we have helped to stabilize communities by focusing on REO sales
to owner-occupants, who have made up 67% of purchasers since the beginning of 2009.
• As part of our strategy to mitigate losses and reduce our holdings of less liquid assets, we sold
seriously delinquent loans totaling $2.9 billion in UPB during 2015. Of the $7.7 billion in UPB of
single-family loans classified as held-for-sale at December 31, 2015, $5.7 billion related to loans that
were seriously delinquent. We believe selling these loans provides better economic returns than
continuing to hold them.
• See “Risk Management” for additional information on our loan workout activities.
Freddie Mac 2015 Form 10-K
51
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
FINANCIAL RESULTS
The table below presents the components of the Segment Earnings and comprehensive income for our
Single-family Guarantee segment.
Year Ended December 31,
Change 2015-2014
Change 2014-2013
(dollars in millions)
2015
2014
2013
$
%
$
Net interest income (expense)
$
(111) $
(111) $
320
$
—
— % $
(431)
Benefit (provision) for credit losses
2,030
(982)
1,409
3,012
(307)%
(2,391)
Non-interest income:
Management and guarantee fee income
Other non-interest income (loss)
Total non-interest income
Non-interest expense:
Administrative expense
REO operations (expense) income
Other non-interest expense
Total non-interest expense
Segment adjustments
Segment Earnings before income tax
(expense) benefit
Income tax (expense) benefit
Segment Earnings, net of taxes
Total other comprehensive income (loss),
net of tax
5,406
(1,422)
3,984
4,397
712
5,109
4,397
1,162
5,559
(1,285)
(1,170)
(1,025)
(334)
(1,445)
(3,064)
(254)
2,585
(807)
1,778
(205)
(191)
124
(179)
(1,566)
(1,080)
(303)
(694)
2,147
(600)
1,547
5,514
282
5,796
12
(10)
49
Total comprehensive income
$
1,790
$
1,537
$
5,845
$
1,009
(2,134)
(1,125)
(115)
(129)
(1,254)
(1,498)
49
438
(207)
231
22
253
Key Drivers:
23 %
(300)%
(22)%
10 %
63 %
657 %
96 %
(16)%
20 %
35 %
15 %
%
(135)%
(170)%
— %
(39)%
(8)%
14 %
(265)%
7 %
45 %
(56)%
—
(450)
(450)
(145)
(329)
(12)
(486)
391
(3,367)
(61)%
(882)
(313)%
(4,249)
(73)%
(220)%
(59)
(120)%
16 % $ (4,308)
(74)%
• The benefit for credit losses in 2015 was primarily due to a reduction of loan loss reserves
associated with the reclassification of mortgage loans from held-for-investment to held-for-sale.
Excluding the effect of loan reclassifications and other related subsequent activity in 2015 and
settlement agreements in 2014, the provision for credit losses decreased compared to 2014 primarily
due to decreases in newly impaired loans. The (provision) for credit losses in 2014 reflects
decreases for both newly impaired loans and settlement agreements with certain sellers to release
specified loans from certain repurchase obligations.
• Management and guarantee fee income increased in 2015 primarily due to higher amortization of
upfront fees, driven by higher loan liquidations resulting from lower average mortgage interest rates,
higher average management and guarantee fee income rates, and an increase in the single-family
credit guarantee portfolio.
• Other non-interest income decreased in 2015 primarily due to increased lower-of-cost-or-fair value
adjustments on loans that were reclassified from held-to-investment to held-for-sale, fair value losses
on STACR debt notes carried at fair value due to an increase in market prices for these notes, as well
as higher STACR transaction volumes, and losses on our investment in CSS. Other non-interest
income decreased in 2014 primarily due to fair value losses on guarantee assets and lower-of-cost-
or-fair-value adjustments on loans held-for-sale, compared to gains on guarantee assets in 2013 due
to an increase in interest rates during that year.
Freddie Mac 2015 Form 10-K
52
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
• Administrative expense increases resulted, in part, from our investments in our technology to better
support our lenders and Freddie Mac's products and programs, as well as the new common
securitization platform and the single (common) security initiative.
• REO operations expense increased in 2015 and 2014 compared to the respective prior year. REO
property expenses declined in 2015 and 2014, consistent with a decline in REO inventory in each
year. However, the REO property expenses were offset to a lesser extent by gains on the disposition
of REO properties and recoveries from mortgage insurance, compared to the respective prior year.
• Other non-interest expense increased in 2015 primarily due to property taxes and insurance
expense associated with loans reclassified as held-for-sale and expenses related to the allocation of
funds to certain housing funds pursuant to the GSE Act during 2015.
Freddie Mac 2015 Form 10-K
53
Management's Discussion and Analysis
Our Business Segments | Multifamily
MULTIFAMILY
BUSINESS OVERVIEW
The Multifamily segment provides liquidity to the multifamily market and supports a consistent supply of
workforce housing by purchasing and securitizing loans secured by properties with five or more units. The
Multifamily segment reflects results from our investment, securitization, and guarantee activities in
multifamily loans and securities and the management of multifamily mortgage credit risk. The Multifamily
segment supports our primary business strategies by creating:
A Better Freddie Mac:
• Continuing to provide financing to the multifamily mortgage market and expanding our market
•
presence for workforce housing in line with our mission;
Improving our risk-adjusted returns by leveraging private capital in our credit risk transfer
transactions; and
• Maintaining strong credit and capital management discipline.
A Better Housing Finance System:
• Operating in a customer focused manner, in an effort to build value and support the creation of a
•
strong, long-lasting rental housing system;
Identifying new opportunities beyond our existing K Certificate transactions to transfer credit risk to
third parties and reduce taxpayer exposure; and
• Fostering innovation of products that expand the availability of workforce housing in the marketplace.
We use a prior-approval underwriting approach for multifamily loans, in contrast to the delegated
underwriting approach used in our Single-family Guarantee segment. Under this approach, we maintain
credit discipline by completing our own underwriting and credit review for each new loan prior to issuance
of a loan commitment, including review of third-party appraisals and cash flow analysis.
Multifamily loans are typically without recourse to the borrower, making repayment dependent on cash
flows generated by the underlying property. Cash flows generated by a property are significantly
influenced by vacancy and rental rates, as well as conditions in the local rental market, the physical
condition of the property, the quality of property management, and the level of operating expenses.
Multifamily property markets are 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.
Products and Activities
Securitization and Guarantee Products
In our Multifamily segment, we primarily issue the following types of securitization and guarantee products
which make up our guarantee portfolio:
Freddie Mac 2015 Form 10-K
54
Management's Discussion and Analysis
Our Business Segments | Multifamily
• K Certificates - Our primary business model is to purchase multifamily loans for aggregation and
securitization through the issuance of multifamily K Certificates, which allows us to transfer the vast
majority of the expected credit losses of the loans to third-party investors. As shown in the diagram
below, in a typical K Certificate transaction, we sell multifamily loans to a non-Freddie Mac
securitization trust that issues senior and subordinated securities, and simultaneously purchase and
place the senior securities into a Freddie Mac securitization trust that issues guaranteed K
Certificates. In substantially all of these transactions, we guarantee only the senior securities issued
by the Freddie Mac securitization trust and do not issue or guarantee the subordinated securities
issued by the non-Freddie Mac securitization trust. As a result, the vast majority of the expected credit
risk is sold to the third-party investors in the subordinated securities, thereby reducing our credit risk
exposure. We receive a management and guarantee fee in exchange for guaranteeing the K
Certificates. Profitability on our K Certificates is evaluated in terms of management and guarantee fee
income and gains on the sales of loans. We attempt to maximize our returns by optimizing the
combination of gains we earn when we sell the loans for securitization and the management and
guarantee fees we will earn over time.
We may purchase or retain a portion of the K Certificates or the unguaranteed subordinated
securities, and, from time to time, we may undertake other activities to support the liquidity of K
Certificates. For more information, see “Risk Factors - Other 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 our K
Certificates.”
• Other securitization products - We purchase small balance multifamily loans and sell them to a
third-party securitization trust in transactions that are similar to our K Certificate transactions and that
transfer a portion of the credit risk of the loans to third-party investors. From time to time, we also
issue other types of securitization products, including PCs backed by multifamily loans and pass
Freddie Mac 2015 Form 10-K
55
Management's Discussion and Analysis
Our Business Segments | Multifamily
through certificates backed by multifamily housing revenue bonds. In 2009 and 2010, we entered into
transactions under Treasury’s NIBP with HFAs. See Note 2 for further information.
• Other mortgage-related guarantees - We guarantee mortgage-related assets held by third parties
in exchange for management and guarantee fee income without securitizing those assets. For
example, we provide guarantees on certain tax-exempt multifamily housing revenue bonds secured
by low- and moderate-income multifamily loans.
Investing Activities
• Mortgage loans - Our primary business model is to acquire loans for aggregation and then to
securitize the loans through the issuance of K Certificates. However, we continue to hold a portfolio of
multifamily mortgage loans that we acquired under our prior buy-and-hold investment strategy. This
portfolio is declining over time.
• Agency mortgage-related securities - We may purchase or retain a portion of the K Certificates
and other types of multifamily securitization products we issue, depending on market conditions, and
we may also buy or sell these securities in the secondary market.
• Non-Agency mortgage-related securities - We may purchase a portion of the unguaranteed
subordinated securities related to our securitization transactions, depending on market conditions.
• CMBS - We are not currently an active purchaser of CMBS. However, we continue to hold a portfolio
of CMBS and other multifamily investment securities that we acquired under our prior buy-and-hold
investment strategy. This portfolio is declining over time.
Customers
Our multifamily loan volume is sourced through our approved lenders. We generally provide post-
construction financing to apartment project operators with established performance records. The following
graphs show the concentration of our 2015 multifamily new business volume by our largest sellers and
loan servicing by our largest servicers as of December 31, 2015. Any seller or servicer with a 10% or
greater share is listed separately.
Freddie Mac 2015 Form 10-K
56
Management's Discussion and Analysis
Our Business Segments | Multifamily
Percentage of Multifamily New Business
Volume
Percentage of Multifamily Servicing Volume
Competition
We compete on the basis of price, service, and products, including our use of certain securitization
structures. Our principal competitors in the Multifamily segment are Fannie Mae, FHA, commercial and
investment banks, CMBS conduits, dealers, thrift institutions, and life insurance companies.
Freddie Mac 2015 Form 10-K
57
Management's Discussion and Analysis
Our Business Segments | Multifamily
MARKET CONDITIONS
The graphs and related discussion below present certain multifamily market indicators, for the most
recent five years, that can significantly affect the business and financial results of our Multifamily
segment.
Change in Effective Rents for Period Ending
December 31,
Apartment Vacancy Rates as of December
31,
Source: REIS, Inc.
Source: REIS, Inc.
Commentary
• Effective rents (i.e., the average rent paid by the tenant over the term of the lease, adjusted for
concessions by the landlord and costs borne by the tenant) remain strong, but the rate of increase is
expected to moderate in the future, consistent with the rise in vacancy rates. Vacancy rates increased
slightly since 2013 from what is likely the cyclical low.
• Multifamily property prices have been especially strong, with 13% growth in 2015. Multifamily property
price growth may slow from this level with the expected moderation in the rate of effective rent
increase, the rising vacancy rate, as well as improving returns for other investment types.
Freddie Mac 2015 Form 10-K
58
Management's Discussion and Analysis
Our Business Segments | Multifamily
Apartment Completions and Net Absorption
K Certificate Benchmark Spread as of
December 31,
Source: REIS, Inc.
Commentary
Source: J.P. Morgan
• Apartment completions are an indication of the supply of rental housing. Net absorption, which is a
measurement of the rate at which available apartments are occupied, is an indication of demand for
rental housing.
• While supply (indicated by completions) has been on the rise and has driven the increase in
vacancies, demand (indicated by net absorption) has also been strong for rental housing in recent
periods because of an improving job market and lower homeownership rates. However, in the longer
term, the increasing supply may have unfavorable impacts on rental and vacancy rates.
• The K Certificate benchmark spread represents the spread of a typical 10-year senior K Certificate
over the U.S. swap curve. In 2015, the spread widened due to broad macroeconomic market volatility
and uncertainty.
• The profitability of our K Certificate transactions (as measured by gains and losses on sales of
mortgage loans) is impacted by the change in the K Certificate benchmark spread during the period
between loan purchase and execution of the K Certificate transaction. During 2015, spread widening
had an adverse effect on K Certificate profitability.
Freddie Mac 2015 Form 10-K
59
Management's Discussion and Analysis
Our Business Segments | Multifamily
Multifamily Mortgage Debt Outstanding as of
December 31,
Multifamily Delinquency Rates as of
December 31,
Source: Federal Reserve Financial Accounts of the United
States of America dated December 10, 2015. For 2015, the
amount is as of September 30, 2015 (latest available
information).
Source: Freddie Mac, FDIC Quarterly Banking Profile,
Trepp, LLC. (MF CMBS market, excluding REOs), American
Council of Life Insurers (ACLI). For 2015, the amounts for
FDIC insured institutions and ACLI investment bulletin are as
of September 30, 2015 (latest available information).
Commentary
• There was significant growth in the multifamily market during 2015. As reported by the Federal
Reserve, total multifamily mortgage debt outstanding was approximately $1.1 trillion at September 30,
2015 (the latest available information), representing an increase of $95.0 billion (or 10%) since
September 30, 2014, one of the largest annual increases ever reported by the Federal Reserve.
• Our share of multifamily mortgage debt outstanding has remained relatively stable over the past
several years in the 12-14% range.
• Our multifamily delinquency rates during 2015 remained among the lowest in the industry, primarily
due to our prior-approval underwriting approach discussed earlier.
• We expect continued growth in the multifamily mortgage market due to increasing property prices and
new completions, along with favorable investment opportunities. In addition, we expect to maintain
our share of multifamily mortgage debt outstanding in 2016.
• We expect the credit losses and delinquency rates for the multifamily mortgage portfolio to remain low
in the near term.
Freddie Mac 2015 Form 10-K
60
Management's Discussion and Analysis
Our Business Segments | Multifamily
BUSINESS RESULTS
The graphs and related discussion below present the business results of our Multifamily segment over the
last three years.
New Business Activity
New Business Activity for the Year Ended
December 31,
Acquisition of Units by Area Median Income
(AMI) for the Year Ended December 31,
Commentary
• We met the 2015 Conservatorship Scorecard goal of maintaining the dollar volume of multifamily new
business activity at or below a production cap of $30.0 billion. For purposes of determining our
performance under the goal, business activity associated with certain targeted loan types is excluded
from this production cap.
Freddie Mac 2015 Form 10-K
61
Management's Discussion and Analysis
Our Business Segments | Multifamily
•
In May 2015, FHFA expanded the affordable housing categories excluded from the production cap in
our 2015 scorecard. These revisions enabled us to further support the needs of the workforce
housing market across more communities. Based on this guidance, approximately 63% of our
multifamily new business activity during 2015 counted towards the 2015 scorecard production cap,
and the remaining 37% was uncapped.
• Nearly 90% of the eligible units we financed during 2015 were affordable to families earning at or
below the median income in their area (eligible units are multifamily units that qualify toward our
affordable housing goal). We increased our support of workforce housing in the multifamily mortgage
market during 2015 through new initiatives, including purchases of manufactured housing community
loans and small balance loans.
• We expect our overall new business volume to increase in 2016; however, we expect our volume in
the capped categories to be at or below the 2016 Conservatorship Scorecard cap of $31.0 billion. We
also expect to introduce new initiatives to support liquidity and workforce housing in the multifamily
mortgage markets.
• We expect the increased competition from other market participants, particularly banking institutions,
to continue.
Freddie Mac 2015 Form 10-K
62
Management's Discussion and Analysis
Our Business Segments | Multifamily
Multifamily Portfolio
Multifamily Portfolio as of December 31,
Net Interest Yield Earned For the Year Ended
December 31,
Commentary
• Our Multifamily portfolio grew in 2015 due to an increase in the guarantee portfolio, which was
primarily attributable to our securitization of loans in K Certificate transactions. This growth was
consistent with the overall increase in multifamily mortgage debt outstanding in the U.S.
• Our portfolio of interest-earning assets continued to decline in 2015 as a result of reductions in our
unsecuritized loan and mortgage-related securities portfolios, consistent with our plans to reduce our
holdings of less liquid assets. The interest earning assets that liquidated had lower net interest yields
relative to the average portfolio, resulting in an increase in net interest yields in 2015.
• We expect a continued increase in the size of our guarantee portfolio as a result of ongoing K
Certificate transactions and a reduction in our unsecuritized loan and mortgage-related security
portfolios due to ongoing principal repayments.
Freddie Mac 2015 Form 10-K
63
Management's Discussion and Analysis
Our Business Segments | Multifamily
Management and Guarantee Fees
Average Management and Guarantee Fee
Rate Charged on New K Certificates for the
Year Ended December 31,
Average Portfolio Management and
Guarantee Fee Rate as of December 31,
Commentary
• The guarantee portfolio increased in 2015 as a result of our ongoing issuance of K Certificates.
• The average management and guarantee fee rate on both the overall guarantee portfolio and on
newly issued K Certificates increased in 2015, primarily as a result of increased securitizations of
products for which we charge higher fees. We expect the average management and guarantee fee
rate charged for new K Certificate issuances in 2016 to be consistent with the rates in 2015.
Freddie Mac 2015 Form 10-K
64
Management's Discussion and Analysis
Our Business Segments | Multifamily
• The average management and guarantee fee rate charged on K Certificates is generally lower than
the average management and guarantee fee rate charged on our other securitization products and
other mortgage-related guarantees. The lower management and guarantee fee rate on K Certificates
is driven by higher levels of subordination that absorb the vast majority of the expected credit losses.
Freddie Mac 2015 Form 10-K
65
Management's Discussion and Analysis
Our Business Segments | Multifamily
Credit Risk Transfer Activity
New K Certificate Issuances for the Year
Ended December 31,
Cumulative K Certificate Issuances as of
December 31,
Commentary
•
In addition to the credit risk we transferred on the K Certificates issued in 2015, we also transferred
credit risk associated with $1.7 billion of additional loans through other securitization products, such
as small balance loan securitizations.
• More than 90% of the loans we purchased in 2015 were designated for securitization.
• We resecuritized $3.4 billion of less liquid non-agency mortgage-related securities, transferring a
portion of the credit risk to private investors.
• While we expect to use K Certificates as the primary method to transfer credit risk in 2016, we also
expect to introduce new initiatives to transfer risk.
Freddie Mac 2015 Form 10-K
66
Management's Discussion and Analysis
Our Business Segments | Multifamily
FINANCIAL RESULTS
The table below presents the components of the Segment Earnings and comprehensive income for our
Multifamily segment.
(dollars in millions)
Net interest income
Benefit for credit losses
Non-interest income:
Management and guarantee fee income
Gains (losses) on loans
Derivative gains
Other non-interest income
Total non-interest income
Non-interest expense:
Administrative expense
REO operations (expense) income
Other non-interest expense
Total non-interest expense
Segment Earnings before income tax
expense
Income tax expense
Segment Earnings, net of taxes
Total other comprehensive income (loss),
net of tax
Year Ended December 31,
Change 2015 - 2014
Change 2014 - 2013
2015
2014
2013
$
%
$
$
927
$
948
$
1,186
$
26
55
218
(21)
(29)
(2)% $
(53)%
(238)
(163)
%
(20)%
(75)%
85
33 %
48
23 %
(963)
(111)%
1,206
(359)%
339
(93)
372
17
635
(325)
(4)
(56)
(385)
1,203
(376)
827
254
870
335
234
1,693
(274)
9
(23)
(288)
2,408
(772)
1,636
206
(336)
1,281
1,203
2,354
(257)
16
(24)
(265)
3,493
(443)
3,050
37
(217)
(1,058)
(51)
(13)
(33)
(97)
(1,205)
396
(809)
11 %
(93)%
(62)%
19 %
(144)%
143 %
34 %
(50)%
(51)%
(49)%
(946)
(969)
(661)
(17)
(7)
1
(23)
(1,085)
(329)
(1,414)
(74)%
(81)%
(28)%
7 %
(44)%
(4)%
9 %
(31)%
74 %
(46)%
(89)%
— %
Total comprehensive income
$
566
$
1,459
$
1,455
$
(893)
(61)% $
4
Key Drivers:
(261)
(177)
(1,595)
(84)
47 %
1,418
• Net interest income declined in 2015 compared to 2014 primarily due to a segment allocation in
2015 of debt extinguishment costs related to the transfer of $1.2 billion of seasoned mortgage loans
to a consolidated K Certificate trust. This decline was partially offset by higher net interest income in
2015 due to changes in the composition of our multifamily portfolio, as lower yielding legacy loans
and securities were replaced with purchases of higher-yielding loans to support future securitizations.
The decline in 2014 compared to 2013 was primarily due to lower average multifamily portfolio
balances of interest-earning assets.
• Benefit for credit losses declined each year. The credit performance of the multifamily mortgage
portfolio remained strong each year and the number of loans subject to a loan loss reserve has
declined over time. Loans purchased for securitization are recorded at fair value and are therefore not
subject to a loan loss reserve.
• Management and guarantee fee income increased each year, primarily due to higher average
multifamily guarantee portfolio balances as a result of ongoing issuances of K Certificates.
• Gains (losses) on loans was a loss in 2015 as loans are sensitive to changes in K Certificate
benchmark spreads observed in the market as well as to interest rate-related fair value changes (for
which resulting gains (losses) are offset in derivatives gains (losses)). The significant widening of K
Certificate benchmark spreads coupled with higher loan purchase and securitization volume resulted
in losses on loans in 2015, as compared to gains on loans recognized in 2014 when spreads
tightened. The change from losses in 2013 to gains in 2014 was attributable to interest rate-related
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Multifamily
fair value changes (that are offset in derivative gains (losses)), as rates increased in 2013 but
decreased in 2014.
• Derivative gains (losses) for the Multifamily segment are offset by fair value changes of the loans
and investment securities being hedged. As a result, there is no net impact on total comprehensive
income for the Multifamily segment from fair value changes related to interest rate-related
derivatives. The fair value changes of the hedged assets are included in gains (losses) on loans,
other non-interest income and total other comprehensive income.
• Other non-interest income and total other comprehensive loss (excluding the interest rate-related
fair value changes that are offset in derivative gains (losses)) declined each year, primarily due to
declining sales of available-for-sale securities where gains had previously been recognized in AOCI.
We sold $1.0 billion of investment securities in 2015, compared to $2.6 billion during 2014 and $13.6
billion in 2013.
Freddie Mac 2015 Form 10-K
68
Management's Discussion and Analysis
Our Business Segments | Investments
INVESTMENTS
BUSINESS OVERVIEW
The Investments segment reflects results from three primary activities:
• Managing the company’s mortgage-related investments portfolio, excluding Multifamily segment
investments and single-family seriously delinquent loans;
• Managing the treasury function for the company, including funding and liquidity; and
• Managing interest-rate risk for the company.
The objectives of our Investments segment are to make appropriate risk and capital management
decisions and to be a market leader. The Investments segment supports our primary business strategies
by creating:
A Better Freddie Mac:
• Engaging in economically sensible transactions to reduce our less liquid assets, including non-agency
mortgage-related securities, and to reduce the balance of our reperforming loans and our performing
modified loans;
• Managing the mortgage-related investments portfolio’s risk-versus-return profile based on our internal
economic capital framework;
• Enhancing the liquidity of our issued securities in the secondary mortgage market to support our
business needs;
• Responding to market opportunities by efficiently funding the company's business activities; and
• Managing the company's economic interest-rate risk through the use of derivatives and other debt.
A Better Housing Finance System:
• Expanding and improving the delivery of mortgage capital markets services through our cash loan
purchase program, in conjunction with the Single-family Guarantee segment.
Although we manage our business on an economic basis, we may forgo certain investment opportunities
for a variety of reasons, including the limit on the size of our mortgage-related investments portfolio or the
risk that a particular accounting treatment may create earnings volatility as well as result in a future draw
from Treasury. For additional information on the limits on the mortgage-related investments portfolio
established by the Purchase Agreement and by FHFA, see "Conservatorship and Related Matters - Limits
on Our Mortgage-Related Investments Portfolio and Indebtedness."
Products and Activities
Investing and Related Activities
In our Investments segment, we manage the following types of products:
• Agency mortgage-related securities - We primarily invest in Freddie Mac mortgage-related
securities, but may also invest in Fannie Mae and Ginnie Mae mortgage-related securities from time
to time. Our activities with respect to this product may include purchases and sales, dollar roll
transactions, and structuring activities (e.g., resecuritizing existing agency securities into REMICs and
selling some or all of the resulting REMIC tranches).
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
• Non-agency mortgage-related securities - We generally no longer purchase non-agency
mortgage-related securities, but continue to have a large portfolio of non-agency mortgage-related
securities that we acquired in prior years. We are working, in some cases in conjunction with other
investors, to mitigate or recover losses we recognized in prior years. In recent years, we and FHFA
reached settlements with a number of institutions. Lawsuits against other institutions are currently
pending. Our activities with respect to this product are primarily sales but could include other
disposition strategies in the future.
• Single-family unsecuritized loans - Single-family unsecuritized loans are classified into three
categories:
Loans acquired through our cash loan purchase program that are awaiting securitization;
Reperforming loans and performing modified loans; and
Seriously delinquent loans that we have removed from PC pools (this loan category is
managed by both the Investments and Single-family Guarantee segments, but is included in
the Single-family Guarantee segment's investment portfolio and financial results).
The strategies employed to manage each category may differ. We securitize a majority of the loans
acquired through our cash loan purchase program into Freddie Mac mortgage-related securities,
primarily PCs, which may be sold to investors or retained in our mortgage-related investments
portfolio. As part of the Retained Portfolio plan, we are reducing the balance of our reperforming and
performing modified loans through a variety of methods, including disposition through structured
transactions, with the resulting securities being sold to investors or retained in our mortgage-related
investments portfolio. In the future, we may seek to sell these loans directly or pursue other
disposition strategies. Seriously delinquent loans continue to be reduced through loss mitigation and
foreclosure activities, as well as through sales of certain non-performing loans.
• Non-mortgage-related assets - We maintain a portfolio consisting primarily of cash, Treasury
securities, and securities purchased under agreements to resell, principally for short-term liquidity
management. This portfolio also includes cash invested on behalf of our consolidated trusts and cash
pledged to us under various agreements.
We evaluate the liquidity of our mortgage-related assets based on three categories (in order of liquidity):
• Liquid: single-class and multi-class agency securities, excluding certain structured agency securities
collateralized by non-agency mortgage-related securities;
• Securitization Pipeline: performing single-family loans purchased for cash and primarily held for a
short period until securitized, with the resulting Freddie Mac issued securities being sold or retained;
and
• Less Liquid: assets that are less liquid than agency securities and loans in the securitization
pipeline (e.g., reperforming loans and performing modified loans and non-agency mortgage-related
securities).
As a well-established disposition path exists for our single-family loans included in the securitization
pipeline, we consider those assets to be more liquid than non-agency securities and reperforming loans
and performing modified loans, but less liquid than single-class and multi-class agency securities.
As part of our Retained Portfolio plan, we are focused on reducing the balance of less liquid assets that
we hold in the mortgage-related investments portfolio through a combination of pay-downs, sales and
securitizations.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
We may undertake various activities in an effort to support our presence in the agency securities market
or to support the liquidity of our PCs, including the price performance relative to comparable Fannie Mae
securities. These activities may include the purchase and sale of agency securities, the purchase of
loans, dollar roll transactions, and structuring activities, such as resecuritization of existing agency
securities and the sale of some or all of the resulting 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, the purchase or sale of agency securities could adversely affect the price performance of our PCs
relative to comparable Fannie Mae securities.
We incur costs in connection with our efforts to support our presence in the agency securities market and
to support the liquidity and price performance of our PCs, including by engaging in transactions that yield
less than our target rate of return. For more information, see “Risk Factors - Other 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 our K Certificates.”
Funding and Liquidity Management Activities
Our Treasury function manages the funding needs of the company, including the Investments segment,
primarily through the issuance of unsecured other debt. The type and term of debt issued is based on a
variety of factors and is designed to efficiently meet our ongoing cash needs and to comply with our
Liquidity Management Framework. This Framework provides a mechanism for us to sustain significant
periods of market illiquidity, while being able to maintain certain business activities and remain current on
all obligations. See "Liquidity and Capital Resources - Liquidity Management Framework" for additional
discussion of our Liquidity Management Framework.
We use the following types of products as part of our funding and liquidity management activities:
• Discount Notes and Reference Bills - We issue short-term instruments with maturities of one year
or less. These products are generally sold on a discounted basis, paying principal only at maturity.
Reference Bills are auctioned to dealers on a regular schedule, while discount notes are issued in
response to investor demand and our cash needs.
• Medium-term Notes - We issue a variety of fixed-rate and variable-rate medium-term notes,
including callable and non-callable fixed-rate securities, and zero-coupon securities, with various
maturities.
• Reference Notes Securities - Reference Notes securities are non-callable fixed-rate securities,
which we currently issue with original maturities greater than two years.
To maintain sufficient short-term liquidity, we may hold a combination of cash, cash-equivalent, and non-
mortgage-related investments in our liquidity and contingency operating portfolio. These instruments are
limited to those we expect to be liquid and readily convertible into cash. We also lend available cash on a
short-term basis through transactions where we purchase securities under agreements to resell. This
portfolio is designed to allow us to meet all of our obligations in the event that we lose access to the
unsecured debt markets for a period of time.
Interest-Rate and Other Risk Management Activities
Our goal is to manage the economic interest-rate risk for the company within management approved
levels, as measured by our models. See "Risk Management - Interest-Rate Risk and Other Market Risks”
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
for additional information, including the measurement of the interest rate sensitivity of our financial assets
and liabilities.
Typically there is an interest rate risk mismatch between our financial assets and the other debt that we
use to fund those assets. For example, many investors in our callable Medium-term Notes prefer to have
final maturities of 5 years or less. While this type of debt helps us to meet our need for longer-term
liquidity, it may not match the mortgage assets' interest-rate risk characteristics. In this case, we would
typically use interest-rate derivatives to reduce the economic risk exposure between our financial assets
and liabilities. Using our risk management framework described in the "Risk Management - Interest Rate
and Other Market Risks" section, we seek to reduce this impact to low levels.
We also could consider the expected holding periods of our financial assets and liabilities. Our debt terms
are generally shorter than our assets' projected life. As a result, we will likely have to reissue debt to
continue to hold the assets. Changes in spreads on future debt issuances may impact the future cash
flows of our portfolio. We at times attempt to manage the impact of interest-rates on future debt issuance.
Additionally, financial assets that are likely to be sold prior to their final maturity may have a different debt
and derivative mix than financial assets that we plan to hold for a longer period. As a result, interest rate
risk measurements for those assets may include additional assumptions (such as a view on expected
changes in spreads) concerning their price sensitivity rather than just a longer-term view of cash flows.
To manage our interest rate risk, we primarily use interest rate swaps, options, swaptions, and futures.
When we use derivatives to mitigate our risk exposures, we consider a number of factors, including cost,
exposure to counterparty risk, and our overall risk management strategy.
Customers
Our unsecured other debt securities and structured mortgage-related securities are initially purchased by
dealers and redistributed to their customers. The customers for these securities generally include state
and local governments, insurance companies, money managers, central banks, depository institutions,
and pension funds. Our customers under our loan cash purchase program are a variety of lenders, as
discussed in “Single-Family Guarantee - Business Overview - Customers.”
Competition
Our competitors in the Investments segment are firms that invest in loans and mortgage-related assets,
and issue corporate debt, including Fannie Mae, REITs, supranationals (international institutions that
provide development financing for member countries), commercial and investment banks, dealers, thrift
institutions, insurance companies, the Federal Farm Credit Banks, and the FHLBs.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
MARKET CONDITIONS
The following graph and related discussion presents the par swap rate curve for the most recent three
years. As our derivatives and variable-rate debt are generally LIBOR-based, changes in par swap rates
can significantly affect the business and financial results of our Investments segment.
Par Swap Rates as of December 31,
Sources: Bloomberg, ICAP
Commentary
• We primarily use LIBOR-based derivatives and fixed-rate debt to hedge our interest rate risk. The
mortgage-related investments portfolio's exposure to interest rate risk is calculated by our models that
project loan and security cash flows over a variety of scenarios. For additional information on our
exposure to interest rate risk, see "Risk Management - Interest-Rate Risk and Other Market Risks."
• Changes in interest rates affect the fair value of our derivatives. Our primary derivative instruments
are interest-rate swaps, including pay-fixed and receive-fixed interest-rate swaps. With a pay-fixed
interest-rate swap, as interest rates decline, we recognize derivative losses. Conversely, as interest
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
rates rise, we recognize derivative gains. The opposite is true with respect to a receive-fixed interest-
rate swap.
• As our derivative portfolio is referenced to different maturity terms along the yield curve, a change in
the shape of the yield curve (flattening or steepening) will also affect the fair value of our derivatives.
• The Federal Reserve decided in December 2015 to begin raising short-term interest rates but
committed to a measured pace of monetary tightening. As a result, shorter-term interest rates,
including the 3-month LIBOR rates, increased in December 2015. However, the magnitude and timing
of the impact of the Federal Reserve’s action on mortgage and other longer-term rates is uncertain.
Freddie Mac 2015 Form 10-K
74
Management's Discussion and Analysis
Our Business Segments | Investments
BUSINESS RESULTS
The tables, graphs and related discussion below present the business results of our Investments
segment.
Investing Activity
The following table presents the Investments segment's investments portfolio.
December 31, 2015
Securiti-
zation
Pipeline
Less
Liquid
December 31, 2014
Securiti-
zation
Pipeline
Less
Liquid
Total
Total
Liquid
(in millions)
Liquid
Mortgage investments portfolio:
Single-family unsecuritized
loans
Performing loans
$
— $ 10,041
$
— $ 10,041
$
— $ 7,497
$
— $ 7,497
Reperforming loans and
performing modified loans
Total single-family unsecuritized
loans
Freddie Mac mortgage-related
securities
Non-agency mortgage-related
securities
Non-Freddie Mac agency
mortgage-related securities
Total - Mortgage investments
portfolio
Non-mortgage-related assets
portfolio
—
—
135,869
—
12,958
—
67,036
67,036
10,041
67,036
77,077
—
—
—
75,281
75,281
7,497
75,281
82,778
—
—
—
6,076
141,945
150,852
27,754
27,754
—
—
12,958
16,341
—
—
—
7,363
158,215
44,230
44,230
—
16,341
$148,827
$ 10,041
$100,866
$259,734
$167,193
$ 7,497
$126,874
$301,564
100,913
—
— 100,913
78,040
—
—
78,040
Total Investments Portfolio
$249,740
$ 10,041
$100,866
$360,647
$245,233
$ 7,497
$126,874
$379,604
Commentary
• Consistent with our efforts to improve the overall liquidity of our mortgage investments portfolio, our
new asset acquisitions have almost entirely consisted of purchases of agency mortgage-related
securities and loans awaiting securitization into PCs. During 2015, the percentage of our less liquid
assets relative to our total mortgage investments portfolio declined 3.3% to 38.8%.
• We expect to reduce the balance of our less liquid assets through a combination of pay-downs,
securitizations, and sales.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
Net Interest Yield and Average Balances
Net Interest Yield & Average Investments Portfolio Balance
Commentary
• The average balance of the mortgage-related securities that we manage declined by 10.3% during
2015 compared to 2014, consistent with the company's efforts to comply with the mortgage-related
investments portfolio limits. The decline in the balance of our mortgage-related securities was
primarily due to pay-downs of certain agency mortgage-related securities and pay-downs and sales of
certain non-agency mortgage-related securities.
• The average balance of the single-family unsecuritized mortgage loans that we manage declined by
4.6% during 2015 compared to 2014, primarily due to the securitization of certain reperforming loans
and performing modified loans.
• The average balance of the non-mortgage-related assets that we manage will fluctuate period to
period based on our liquidity needs, investment strategy, and investment returns. This portfolio
reflects our investments for operating purposes as well as the restricted assets that we hold and
invest on behalf of consolidated trusts and cash that has been pledged to us under various
agreements.
• Net interest yield declined 29 basis points during 2015, primarily due to a decline in the average yield
earned from the mortgage-related assets that we manage. This decline was primarily driven by the
pay-down of certain higher-yielding agency securities. Although we acquired additional agency
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
securities to replace certain of those securities that paid down, the new securities have lower yields
due to an overall lower interest rate environment. The decline in average yield earned was also driven
by an increase in the amount of premium amortization recognized for loans held by consolidated
trusts due to higher borrower prepayments. The amortization of loan premiums is generally offset by
the amortization of the related debt premiums that were recognized upon the issuance of a PC.
However, while loan premiums are amortized into net interest income, the related debt premiums are
amortized into other non-interest income.
• We expect our net interest yield and average investments portfolio balance to continue to decline in
2016 as we manage the size of our mortgage-related assets.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
Reduction In Less Liquid Assets
Securitizations of Reperforming Loans and
Performing Modified Loans
Sales of Less Liquid Assets
Commentary
• Since 2013, we have focused on reducing, in an economically sensible manner, our holdings of
certain less liquid assets, including reperforming and performing modified single-family loans and
non-agency mortgage-related securities. Our principal disposition strategies for our less liquid assets
include securitizations and sales.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
Funding Activity
The table below summarizes our funding activity.
(in millions)
Discount notes and Reference Bills:
Beginning balance
Issuances
Maturities
Other
Ending balance
Callable debt:
Beginning balance
Issuances
Repurchases
Calls
Maturities
Other
Ending balance
Non-callable debt:
Beginning balance
Issuances
Repurchases
Maturities
Other
Ending balance
Total other debt
Commentary
Year Ended December 31,
2015
2014
2013
$
134,670
$
137,767
$
427,964
(458,546)
—
217,717
(220,747)
(67)
117,930
293,350
(273,513)
—
104,088
134,670
137,767
107,070
128,612
—
(124,435)
(3,572)
—
108,391
102,908
66,128
(2,592)
(61,288)
(3,563)
(6)
69,738
(1,879)
(59,557)
(2,816)
(3)
107,675
107,070
108,391
206,393
42,520
(397)
(54,144)
—
264,080
21,595
(1,413)
(77,869)
—
331,634
45,353
(197)
(112,731)
21
194,372
206,393
264,080
$
406,135
$
448,133
$
510,238
• We fund our business activities primarily through the issuance of unsecured other short-term (e.g.,
discount notes and Reference Bills), medium-term and long-term debt. The outstanding balance of
our other debt declined during 2015, as we required less debt to fund our business operations, as the
balance of our mortgage-related investments portfolio continued to decline.
• During 2015, we began to utilize overnight discount notes as a more cost effective tool to manage our
intra-day liquidity needs. This resulted in an increase in both issuances and pay-offs of our short-term
other debt.
•
Issuances and calls of our longer-term callable debt increased during 2015, as we refinanced more of
our outstanding callable debt due to the low interest rate environment. See "Market Conditions" for
additional discussion of interest rates.
Freddie Mac 2015 Form 10-K
79
Management's Discussion and Analysis
Our Business Segments | Investments
Debt Composition
Contractual Maturity Date as of December 31,
2015
Earliest Call Date as of December 31, 2015
Commentary
• As our long-term debt spreads remained high in 2015, we continued to rely on short-term and
medium-term debt issuances to fund our business. Short-term debt as a percentage of total other
debt has remained relatively flat at 41.3% in 2015, down 1.3% and 1.5% from 2014 and 2013,
respectively.
• Our short-term debt issuances provide us with overall lower funding costs relative to longer-term debt
and greater flexibility as we reduce our mortgage-related investments portfolio. However, in recent
years, we have witnessed a significant increase in FHLB short-term debt issuances and outstanding
balances. Increased competition from the FHLBs with respect to short-term debt issuances may have
caused our short-term debt spreads to increase during the last quarter of 2015.
• During 2015, spreads on our callable debt were favorable relative to our non-callable medium-term
and long-term debt. Furthermore, our callable debt provides us with flexibility in the event that our
liquidity condition changes. As a result, we issued more callable debt during 2015 compared to 2014.
As of December 31, 2015, $93 billion of the outstanding $108 billion of callable debt may be called in
2016.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
FINANCIAL RESULTS
The table below presents the components of the Segment Earnings and comprehensive income for our
Investments segment.
Year Ended December 31,
Change 2015 - 2014 Change 2014 - 2013
2015
2014
2013
$
%
$
%
$
1,734 $
2,966 $
3,525 $
(1,232)
(42)% $
(559)
(16)%
(dollars in millions)
Net interest income
Non-interest income:
Net impairment of available-for-sale securities
recognized in earnings
Derivative gains (losses)
Gains (losses) on trading securities
Non-agency mortgage-related securities
settlements
Other non-interest income
Total non-interest income
Non-interest expense:
Administrative expense
Other non-interest (expense) income
Total non-interest expense
Segment adjustments
Segment Earnings before income tax
expense
Income tax expense
Segment Earnings, net of taxes
(140)
(974)
(5,158)
5,543
560
5,088
(400)
834
(99)
(10,701)
(276)
(1,466)
(461)
167
1,190
420
(70)
(737)
65
3,614
3,292
(317)
(4)
(321)
781
6,084
2,797
3,307
5,501
3,401
12,005
(437)
(6)
(443)
635
(523)
349
(174)
1,037
5,486
6,465
16,393
(1,715)
(1,945)
(463)
3,771
4,520
15,930
(6,019)
(99)
817
(15)
120
2
122
146
(979)
230
(749)
29
—
(27)
(33)
(28)
23
(15)
(12)
(17)
583
(604)
(8,698)
86
(355)
(269)
(402)
(9,928)
(1,482)
(11,410)
(86)
(193)
(81)
(18)
(72)
(16)
(102)
155
(39)
(61)
320
(72)
(55)
(68)%
Total other comprehensive income (loss), net of
tax
(356)
1,951
4,357
(2,307)
(118)
(2,406)
Total comprehensive income
$
3,415 $
6,471 $ 20,287 $
(3,056)
(47)% $(13,816)
Certain of our financial assets and liabilities are measured at amortized cost, while others, including
derivatives, are measured at fair value. We use derivatives to economically hedge the interest-rate
exposure related to our financial assets. As a result, changes in interest rates create volatility in our
Segment Earnings, as the volatility created by interest rate changes is recognized in the Investment
segment, unless otherwise allocated to other segments. The volatility in our Segment Earnings generally
is not indicative of the underlying economics of our business.
Key Drivers:
• Net interest income declined in 2015 and 2014, primarily due to the continued reduction in the
balance of our mortgage-related assets. The decline in our mortgage-related assets balance during
2015 was due to pay-downs and sales and other active dispositions.
• Net impairment of available-for-sale securities recognized in earnings was in a net recovery
position during 2015 compared to a net loss position in 2014, primarily due to the accretion of
previously recognized other-than-temporary impairments exceeding new other-than-temporary
impairments. Net impairment of available-for-sale securities recognized in earnings declined during
2014 compared to 2013, primarily due to a larger amount of accretion being recognized in 2014 and
lower new other-than-temporary impairments.
• Changes in derivative gains (losses) primarily resulted from changes in longer-term interest rates.
Longer-term interest rates declined in both 2015 and 2014, while interest rates increased during
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
2013. See "Consolidated Results of Operations - Derivative Gains (Losses)" for additional
information.
• The losses on trading securities during all periods were primarily due to the movement of securities
in an unrealized gain position towards maturity. The losses on trading securities in 2015 were larger
than 2014, as a result of agency spreads widening in 2015 compared to tightening in 2014. The
losses on trading securities in 2013 were primarily driven by increases in longer-term interest rates.
• Non-agency mortgage-related securities settlements declined significantly during 2015 compared
to 2014, as a majority of our non-agency mortgage-related securities litigation settled during 2014 and
2013. We continue to have ongoing litigation with respect to certain other non-agency mortgage-
related securities. In 2015, we entered into one small settlement to resolve a claim with respect to
certain non-agency mortgage-related securities that we hold, while we reached settlements with 10
institutions during 2014. Income from the settlement of non-agency mortgage-related securities
litigation was significant during 2014, however it was relatively flat compared to 2013.
• Other non-interest income increased during 2015 compared to 2014, primarily due to an increase in
the amortization of basis adjustments associated with debt securities of consolidated trusts. This
increase was a result of higher prepayment rates during 2015 compared to 2014. Other non-interest
income decreased during 2014 compared to 2013, primarily due to a decrease in the amortization of
basis adjustments associated with debt securities of consolidated trusts, as a result of slower
prepayment rates. See "Key Economic Indicators" for a discussion of mortgage interest rates, which
are generally correlated to the amount of refinance activity.
Income tax expense decreased during 2015 compared to 2014, as result of lower Segment Earnings
and a relatively flat effective tax rate (see Note 11). Income tax expense increased during 2014
compared to 2013, as a result of a full year of income tax expense in 2014. In 2013, we released the
valuation allowance against our net deferred tax assets, creating less income tax expense for the
year.
•
• Other comprehensive income was a loss during 2015 compared to income during 2014, primarily
due to less spread tightening for our non-agency mortgage-related securities and less impairment
reclassifications from AOCI to earnings. The decrease in other comprehensive income during 2014
compared to 2013 was primarily due to less spread tightening for our non-agency mortgage-related
securities, partially offset by a flattening of the yield curve during 2014. Other comprehensive income
in all periods reflects the reversals of unrealized losses due to the accretion of other-than-temporary
impairments in earnings and the reclassification of unrealized gains and losses related to available-
for-sale securities that were sold during the respective periods.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | All Other
ALL OTHER
COMPREHENSIVE INCOME
The table below shows our comprehensive income (loss) for the All Other category.
Year Ended December 31,
Change 2015-2014
Change 2014-2013
(in millions)
2015
2014
2013
$
%
$
%
Comprehensive income
(loss) - All Other
$
28
$
(41) $
24,013
$
69
(168)% $ (24,054)
(100)%
Comprehensive income (loss) 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.
Freddie Mac 2015 Form 10-K
83
Management's Discussion and Analysis
Risk Management | Overview
RISK MANAGEMENT
OVERVIEW
Risk is an inherent part of our business activities. We are exposed to four major types of risk: credit risk,
interest rate and other market risks, liquidity risk, and operational risk. We primarily discuss credit risk,
interest-rate and other market risks, and operational risk in this section. See "Liquidity and Capital
Resources" for a discussion of liquidity risk. For more discussion of these and other risks facing our
business, see “Risk Factors.”
RISK MANAGEMENT FRAMEWORK
We manage risk using a three-lines-of-defense risk management framework. The diagram below provides
examples of how the three lines of defense complement each other under our risk management
framework. These roles and responsibilities continue to evolve.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | Overview
Third Line
Internal Audit Division
Evaluates the design
adequacy, operational
effectiveness, and
efficiency of governance,
risk management, and
control processes,
including, but not limited
to, the manner in which
the first and second lines
of defense achieve risk
management and control
objectives
RISK
CATEGORY
Credit
Lines of Defense
Second Line
ERM Division
Compliance Division
Establish credit risk
appetite, policy, limits,
monitoring metrics and
credit risk decision
review process
First Line
Business Units
Identify, assess,
measure and manage
risk within established
credit policy guidelines
Establish key risk
indicators and various
other metrics
Interest Rate and Other
Market Risks
Identify, assess,
measure and manage
duration gap, PMVS, and
other measures on a
daily basis, including
spread risk
Establish interest rate
and other market risks
appetite, policy, limits,
monitoring metrics and
assess measurement
methodologies
Establish key risk
indicators and various
other metrics
Liquidity
Operational
Identify, assess,
measure and manage
cash balances and short-
and long-term liquidity
needs on a daily basis
Establish liquidity risk
appetite, policy, limits,
monitoring metrics and
assess measurement
methodologies
Establish key risk
indicators and various
other metrics
Identify, assess,
measure and manage
risk, while establishing
and implementing
operational processes
and controls
Establish key risk
indicators and various
other metrics
Establish operational risk
appetite, policy, limits,
monitoring metrics and
evaluate loss event data
and perform root cause
analysis and testing
Freddie Mac 2015 Form 10-K
85
Management's Discussion and Analysis
Risk Management | Overview
RISK MANAGEMENT GOVERNANCE STRUCTURE
We manage risk using a governance structure that includes enterprise-wide oversight by the Board and
its committees, CERO, CCO, and our corporate Enterprise Risk Committee ("ERC").
The discussion and diagram below present the structure of our three-lines-of-defense risk management
framework and our governance structure.
We have made considerable enhancements to our risk management framework in recent years,
including:
• Revising our integrated enterprise risk management framework to enable us to place more focus on
high risk business processes and activities; and
•
Leveraging our enterprise risk management framework to begin implementation of a redesigned,
enhanced, and still maturing three-lines-of-defense methodology.
We use this still maturing three-lines-of-defense methodology to both strengthen risk ownership in our
business units and add clarity to risk management roles and responsibilities. Our framework focuses on
balancing ownership of risk by our business units with corporate oversight and independent assurance of
the design and effectiveness of our risk management activities. For more information on the role of the
Board and its committees, see "Directors, Corporate Governance, and Executive Officers - Board and
Committee Information."
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | Overview
Freddie Mac 2015 Form 10-K
87
Management's Discussion and Analysis
Risk Management | Overview
ECONOMIC CAPITAL
We use an internal economic capital framework as a component in our risk management process, which
includes a risk-based measurement of capital adjusted for relevant interest rate and other market, credit,
and operational risks. We assign economic capital internally to asset classes based on their respective
risks. Economic capital is a factor we consider when we make economic decisions, establish risk limits,
and measure profitability. We are working with FHFA to develop an overall risk measurement framework
for evaluating Freddie Mac's and Fannie Mae's business decisions during conservatorship.
Freddie Mac 2015 Form 10-K
88
Management's Discussion and Analysis
Risk Management | Credit Risk
CREDIT RISK
OVERVIEW
We are exposed to both mortgage credit risk and institutional credit risk. Mortgage credit risk is the risk
that a borrower will fail to make timely payments on a loan that 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.
We are exposed to three types of mortgage credit risk:
• Single-family mortgage (SF) credit risk, through our ownership or guarantee of loans in the single-
family credit guarantee portfolio;
• Multifamily mortgage (MF) credit risk, through our ownership or guarantee of loans in the
multifamily mortgage portfolio; and
• Mortgage-related securities (MRS) credit risk, through our ownership of non-Freddie Mac
mortgage-related securities in the mortgage-related investments portfolio.
We also hold investments in certain non-mortgage-related securities. As of December 31, 2015, 2014,
and 2013, the fair value of our investments in these securities was $17.2 billion, $6.7 billion and $6.6
billion, respectively, and consisted of investments in Treasury securities. As Treasury securities are
backed by the full faith and credit of the U.S. government, we consider these securities to be free of credit
risk. We may also invest in other types of non-mortgage-related securities that may expose us to
institutional credit risk.
In the sections below, we generally discuss our risk management framework and current risk environment
for each of the three types of mortgage credit risk and for institutional credit risk.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | SF Credit Risk
SINGLE-FAMILY MORTGAGE CREDIT RISK
We manage our exposure to single-family mortgage credit risk using the following principal strategies:
• Maintaining policies and procedures for new business activity, including prudent underwriting
standards;
• Offering private investors new and innovative ways to share in the credit risk of the Core single-family
book;
• Monitoring loan performance and characteristics for the single-family credit guarantee portfolio and
individual sellers and servicers;
• Engaging in loss mitigation activities; and
• Managing foreclosure and REO activities.
Maintaining Policies and Procedures for New Business Activity, Including Prudent Underwriting
Standards
We use a delegated underwriting process in connection with our acquisition of single-family loans
whereby we set eligibility and underwriting standards and sellers represent and warrant to us that loans
they sell to us meet these standards. Our eligibility and underwriting standards evaluate loans based on a
number of characteristics, including those discussed in the “Monitoring Loan Performance and
Characteristics for the Single-family Credit Guarantee Portfolio and Individual Sellers and Servicers”
section below. We can exercise certain contractual remedies, including requiring repurchase of the loan,
for loans that do not meet our standards.
Limits are established on the purchase of loans with certain higher risk characteristics. These limits are
designed to balance our credit risk exposure with the facilitation of affordable housing in a responsible
manner. Our purchase guidelines generally provide for a maximum original LTV ratio of 95%, with certain
exceptions such as a maximum LTV ratio of 80% for cash-out refinance loans, and no maximum LTV ratio
for fixed-rate HARP loans. In March 2015, we began to purchase certain loans with LTV ratios up to 97%
under an initiative designed to serve a targeted segment of creditworthy borrowers. We fully discontinued
purchases of Alt-A loans in 2009, interest-only loans in 2010, and option ARM loans in 2007.
The majority of our purchase volume is evaluated using our own proprietary underwriting software (Loan
Prospector (“LP”)), the seller’s software, or Fannie Mae’s software. During 2015 and 2014, 54% and 47%,
respectively, of our purchase volume was evaluated using LP. The performance of non-LP loans is
monitored to ensure compliance with our risk appetite.
We employ a quality control process to review loan underwriting documentation for compliance with our
standards on a sample basis. Many delinquent loans and all loans that result in credit losses are also
reviewed. Sellers may appeal ineligible loan determinations prior to repurchase of the loan. Our reviews
of 2014 originations are largely complete, while our reviews of 2015 originations are ongoing. The
average aggregate ineligible loan rate across all sellers for loans funded during 2014, 2013, and 2012,
excluding HARP and other relief refinance loans, was approximately 1.1%, 1.4%, and 3.0%, respectively,
based on reviews completed through 2015. The most common underwriting defect found in our review of
loans funded during 2014 related to the delivery of insufficient income data.
We made changes in recent periods to standardize our quality control process and facilitate more timely
reviews. These changes allow us to identify breaches of representations and warranties early in the life of
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | SF Credit Risk
the loan. We also implemented new tools, such as our proprietary Quality Control Information Manager, to
provide greater transparency into our customer quality control reviews. We also have a process of
targeted quality control sampling reviews of loans with certain characteristics. In January 2015, we
launched Loan Coverage Advisor, a new tool that allows our sellers to track significant events for the
loans they sell us, including when the seller obtains relief from its obligation to repurchase loans due to
breach of certain representations and warranties. Also, in October 2015, we announced Loan Advisor
Suite, which is a set of integrated software applications designed to give lenders a way to originate and
deliver high quality mortgage loans to us and to actively monitor representation and warranty relief earlier
in the mortgage loan production process. Further enhancements are expected in 2016.
If we discover that the representations or warranties related to a loan 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 any other recoveries, and/or indemnify us. At the direction of FHFA, we implemented a
new remedies framework for the categorization of loan origination defects for loans with settlement dates
on or after January 1, 2016. Among other items, the framework provides that "significant defects" will
result in a repurchase request or a repurchase alternative, such as recourse or indemnification.
At the direction of FHFA, we made a number of changes to our representation and warranty framework
for our purchases of conventional mortgage loans in recent years. FHFA may require further changes to
the framework in the future. Under the revised framework, sellers are relieved of repurchase obligations
for breaches of certain representations and warranties for certain types of loans, including:
•
•
•
Loans with 36 months (12 months for relief refinance loans) of consecutive, on-time payments after
purchase, subject to certain exclusions;
Loans that have established an acceptable payment history; and
Loans that have satisfactorily completed a quality control review.
As part of the revised framework, we also made changes that provide additional clarity on life-of-
mortgage loan exclusions from repurchase relief. These changes are designed to provide sellers with a
higher degree of certainty regarding their repurchase exposure and liability on loan sales to us.
In February 2016, at the direction of FHFA, we published guidelines for a new independent dispute
resolution process for alleged breaches of representations and warranties on loans sold to us. Under the
new process, a neutral third party resolves demands that remain unresolved after the existing appeal and
escalation processes have been exhausted.
The tables below show the credit profile of the single-family loans we purchased or guaranteed in the last
three years.
Freddie Mac 2015 Form 10-K
91
Management's Discussion and Analysis
Risk Management | SF Credit Risk
Weighted Average Original LTV Ratio
Weighted Average Credit Score
The table below contains additional information about the single-family loans we purchased or
guaranteed in the last three years.
(dollars in millions)
Year Ended December 31,
2015
2014
2013
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
30-year or more amortizing fixed-rate
$
262,209
75% $
192,458
75% $
287,773
68%
20-year amortizing fixed-rate
15-year amortizing fixed-rate
Adjustable-rate
FHA/VA and other governmental
16,470
58,958
12,760
163
5
17
3
—
8,677
38,200
15,711
207
4
15
6
—
21,658
97,025
16,007
279
5
23
4
—
Total
$
350,560
100% $
255,253
100% $
422,742
100%
Percentage of purchases:
With credit enhancements
Detached/townhome property type
Primary residence
Loan purpose:
Purchase
Cash-out refinance
Other refinance
Freddie Mac 2015 Form 10-K
23%
92%
90%
44%
21%
35%
25%
92%
88%
52%
17%
31%
17%
93%
88%
27%
16%
57%
92
Management's Discussion and Analysis
Risk Management | SF Credit Risk
The table below contains additional detail on the relief refinance loans we purchased.
(UPB in millions)
Above 125% Original LTV
Above 100% to 125% Original LTV
Above 80% to 100% Original LTV
80% and below Original LTV
Total
UPB
569
2,043
4,938
11,980
19,530
$
$
Year Ended December 31,
2015
Loan
Count
Average
Loan Size
UPB
3,766
11,784
28,999
85,677
130,226
$
$
$
$
$
151,000
$
173,000
170,000
140,000
150,000
$
1,439
4,295
8,356
13,204
27,294
2014
Loan
Count
Average
Loan Size
8,794
24,113
49,340
96,409
178,656
$
$
$
$
$
164,000
178,000
169,000
137,000
153,000
Offering Private Investors New and Innovative Ways to Share in the Credit Risk of the Core Single-
Family Book
Our Charter requires coverage by specified credit enhancements or participation interests on single-
family loans with LTV ratios above 80% at the time of purchase. In addition to obtaining credit
enhancements required by our Charter, we also enter into various other types of transactions in which we
transfer mortgage credit risk to third parties.
We use the following types of credit enhancements to transfer a portion of the credit risk on a loan or
group of loans at the time we acquire the loan.
• Primary mortgage insurance - Most of our loans with LTV ratios above 80% are protected by
primary mortgage insurance. Primary mortgage insurance provides loan-level protection against
default up to a specified amount and is typically paid for by the borrower. Generally, an 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, before a claim can be filed under a primary
mortgage insurance policy. 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.
• Seller indemnification agreement - An agreement with a seller upon loan acquisition under which
the seller will absorb a portion of the losses on the related single-family loans in exchange for a fee or
a guarantee fee reduction. The indemnification amount may be fully or partially collateralized.
• Lender recourse and indemnification agreements - Require a lender to repurchase a loan upon
default or to reimburse us for realized credit losses. Lender recourse and lender indemnification
agreements are entered into as an alternative to requiring primary mortgage insurance or in
exchange for a lower management and guarantee fee. We have not used lender recourse or lender
indemnification agreements on a widespread basis in recent years.
• Pool insurance - Provides insurance on a group of loans up to a stated aggregate loss limit. We
have not purchased pool insurance policies since 2008, and the majority of our pool insurance
policies will expire in the next five years.
We also enter into the following types of credit risk transfer transactions subsequent to our purchase or
guarantee of loans.
• STACR debt notes - Are unsecured debt obligations. We issue STACR debt notes related to certain
notional credit risk positions to third-party investors. We make payments of principal and interest on
the issued notes. The amount of principal that we are required to pay the STACR debt note investors
is linked to the credit performance of certain loans (referred to as a reference pool) that we have
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | SF Credit Risk
previously guaranteed. As a result, we are not required to repay principal to the extent that the
notional credit risk position is reduced as a result of a specified credit event.
• ACIS insurance policies - Provide credit protection on a portion of the non-issued notional credit risk
positions we retain in a STACR debt note transaction. We receive compensation from the insurance
policy up to an aggregate limit when specified credit events occur.
• Whole loan security - We issue guaranteed senior securities and unguaranteed subordinated
securities backed by certain single-family loans that we purchased previously. The unguaranteed
subordinated securities will absorb first losses on the related loans. We retain a portion of the
subordinated securities.
See "Our Business Segments - Single-Family Guarantee" for additional information on these credit risk
transfer transactions.
The table below provides information on the credit-enhanced loans in our single-family credit guarantee
portfolio. "Other" credit-enhanced loans include loans covered by our credit risk transfer transactions. The
credit enhanced categories are not mutually exclusive as a single loan may be covered by both primary
mortgage insurance and other credit protection.
As of December 31,
2015
2014
2013
(Percentage of portfolio based on
UPB)
% of
Portfolio
Serious
Delinquency
Rate
% of
Portfolio
Serious
Delinquency
Rate
% of
Portfolio
Serious
Delinquency
Rate
Non-credit-enhanced
Credit-enhanced:
Primary mortgage insurance
Other
Total
70%
1.30%
77%
1.74%
83%
2.09%
15%
20%
N/A
2.06%
0.58%
1.32%
14%
12%
N/A
3.10%
1.21%
1.88%
12%
5%
N/A
4.40%
3.66%
2.39%
Freddie Mac 2015 Form 10-K
94
Management's Discussion and Analysis
Risk Management | SF Credit Risk
The table below provides information on the credit enhanced loans in our single-family credit guarantee
portfolio by book as of December 31, 2015 and 2014. The table includes all types of single-family credit
enhancements.
As of December 31, 2015
(dollars in millions)
Core single-family book
Total Current
UPB
Total
Protected
UPB
Coverage
Remaining
$
1,128,732
$
441,426
$
Collateralized
Coverage
Remaining (1)
13,015
$
HARP and other relief refinance book
Legacy single-family book
302,564
270,591
33,900
36,867
Total
$
1,701,887
$
512,193
$
89,770
$
As of December 31, 2014
69,217
9,272
11,281
—
—
13,015
(dollars in millions)
Core single-family book
Total Current
UPB
Total
Protected
UPB
Coverage
Remaining
$
994,454
$
300,379
$
Collateralized
Coverage
Remaining (1)
6,011
$
HARP and other relief refinance book
Legacy single-family book
331,059
339,609
37,804
48,149
Total
$
1,665,122
$
386,332
$
75,315
$
50,350
10,339
14,626
—
—
6,011
Percentage of
Coverage
Remaining
Provided By
Credit Risk
Transfer
Transactions(2)
23%
—%
—%
18%
Percentage of
Coverage
Remaining
Provided By
Credit Risk
Transfer
Transactions(2)
13%
—%
—%
8%
(1) Collateralized coverage includes cash received by Freddie Mac upon issuance of STACR debt notes and unguaranteed
whole loan securities, as well as cash and securities pledged for our benefit. All collateralized coverage relates to credit risk
transfer transactions in the Core single-family book.
(2) Credit risk transfer transactions include STACR debt notes, ACIS insurance policies, seller indemnification agreements, and
whole loan securities. The substantial majority of single-family loans covered by these transactions were acquired after
2012.
The table below provides information on estimated recoveries we could receive from our most significant
credit risk transfer transactions (i.e., STACR debt notes and ACIS insurance policies) under various home
price scenarios. The timing of our recognition of the recoveries in our statements of comprehensive
income will depend on the type of credit risk transfer transaction and whether we are reimbursed based
on calculated losses or actual losses, which may result in timing differences between the recognition of
recoveries and the related credit event.
In estimating the recoveries from our STACR debt note and ACIS transactions, we performed a sensitivity
analysis under three scenarios, based on our actual loss and prepayment experience related to loans that
were originated during periods that experienced above average home price appreciation (47%), moderate
home price appreciation (7%), and severe home price depreciation (-24%), over a four-year period. For
this analysis, we grouped loans using LTV ratios and FICO scores and applied historical losses and
prepayments experienced by these groups to similar groups within the reference pools related to our
STACR debt note and ACIS transactions. Our recoveries were estimated based on loan losses, net of
mortgage insurance claim amounts. These are estimated projections prepared for illustrative purposes
only. Our actual losses under the chosen scenarios could differ materially from these estimates. In
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | SF Credit Risk
addition, these estimates do not include interest expense and transaction costs we incur to issue our
STACR debt notes, and premiums we pay on ACIS transactions.
(dollars in millions)
As of December 31,
2015
UPB of loans covered by STACR debt notes
and ACIS insurance policies
$
328,872
Performance Under Home Price Scenarios at December 31, 2015
Above Average Home
Price Appreciation
Moderate Home Price
Appreciation
Severe Home Price
Depreciation
Amount
bps
Amount
bps
Amount
bps
Estimated credit losses
Estimated recoveries from STACR debt
notes and ACIS insurance policies
Loss coverage ratio
$
$
199
66
33%
6
2
$
$
N/A
1,431
44
$ 10,679
507
35%
15
$
7,993
N/A
75%
325
243
N/A
Monitoring Loan Performance and Characteristics for the Single-family Credit Guarantee Portfolio
and Individual Sellers and Servicers
We review loan performance, including delinquency statistics and loan characteristics in conjunction with
housing market and economic conditions, to determine if our pricing and eligibility standards reflect the
risk associated with the loans we purchase and guarantee. We review the payment performance of our
loans to facilitate early identification of potential problem loans, which could inform our loss mitigation
strategies. We also review performance metrics for additional loan characteristics that may expose us to
concentrations of credit risk, including:
• Higher risk loan attributes and attribute combinations;
• Higher risk loan product types; and
• Geographic concentrations.
We actively monitor seller and servicer performance, including compliance with our standards, and
periodically review their operational processes. We also periodically change seller/servicer guidelines
based on the results of our mortgage portfolio monitoring, if warranted.
The credit quality of our single-family loan purchases remained strong during the past several years. The
majority of our loan purchases over the last several years have been fixed-rate loans.
Single-Family Credit Guarantee Portfolio
Serious delinquency rates continued to decline across our total single-family credit guarantee portfolio in
2015 as economic conditions in many parts of the U.S. continued to improve. Improvement in home
prices in many areas of the U.S. during 2015 generally led to improved current LTV ratios of the loans in
our single-family credit guarantee portfolio as of December 31, 2015, which contributed to lower credit
losses (excluding charge-offs related to the adoption of the FHFA advisory bulletin) and an improving
overall credit profile.
The improvement in our serious delinquency rate in 2015 is primarily due to the better performance of
newly acquired loans in the Core single-family book, continued loss mitigation and foreclosure activities
for loans in the Legacy single-family book as well as sales of certain non-performing loans. The gradual
reduction of our Legacy single-family book also contributed to the improvement in the serious delinquency
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | SF Credit Risk
rate. However, we still have a large number of seriously delinquent loans relative to our historical
experience.
Our loss mitigation activities may create fluctuations in our delinquency statistics. For example, loans in
modification trial periods, loans subject to forbearance agreements, and loans in repayment plans
continue to be reported as seriously delinquent. There may also be temporary lags in the reporting of
payment status and modification completion due to differing practices of our servicers that can affect our
delinquency statistics.
The charts below show the credit losses and serious delinquency rates for each of our single-family
books. Our Core single-family book and our HARP and other relief refinance book continue to perform
well and account for a small percentage of our credit losses, as shown below. Our Legacy single-family
book continues to decline as a percentage of our overall portfolio, but continues to account for the
majority of our credit losses.
Portfolio Composition and Credit Losses
Serious Delinquency Rates as of December
31,
Freddie Mac 2015 Form 10-K
97
Management's Discussion and Analysis
Risk Management | SF Credit Risk
The table below provides credit quality information about our single-family books.
(dollars in billions)
Core single-family book
HARP and other relief refinance
book
Legacy single-family book
Total
UPB
$
1,129
303
270
$
1,702
December 31, 2015
Average
Credit
Score
Original
LTV Ratio
Current
LTV
Ratio
Current
LTV Ratio
>100%
Foreclosure
and Short
Sale Rate(1)
Alt-A %
754
731
702
741
72%
89%
75%
75%
61%
70%
66%
63%
—%
10%
12%
4%
0.15%
—%
0.95%
4.09%
N/A
—%
15%
2%
(1) The foreclosure and short sale rate presented for the Legacy single-family book represents the rate associated with loans
originated in 2000 through 2008.
The table below contains a description of some of the loan characteristics we monitor in our single-family
credit guarantee portfolio.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | SF Credit Risk
Characteristic
Description
LTV Ratio
Credit Score
Loan Purpose
Property Type
Occupancy Type
Product Type
Ratio of the UPB of the loan to the
value of the underlying property
collateralizing the loan. Original LTV
ratio is at loan origination, while current
LTV ratio is based on the current UPB
to the estimated current property value.
Statistically-derived number used by
lenders to assess a borrower’s
likelihood to repay debt. We primarily
use FICO scores, which are currently
the most commonly used credit scores.
Impact on Credit Quality
• Measures ability of the underlying
property to cover our exposure on the
loans
• Higher LTV ratios indicate higher risk, as
proceeds from sale of the property may
not cover our exposure on the loans
• Borrowers with higher credit scores are
generally more likely to repay or have the
ability to refinance than those with lower
scores
• Credit scores presented in this Form 10-K
are at the time of origination and may not
be indicative of the borrowers’ current
creditworthiness
Indicates how the borrower intends to
use the proceeds from a loan (i.e.,
purchase, cash-out refinance, or other
refinance)
• Cash-out refinancings generally have had
a higher risk of default than loans
originated in purchase or other refinance
transactions
Indicates whether the property is a
detached single-family house,
townhouse, condominium, or co-op
• Detached single-family houses and
townhouses are the predominant type of
single-family property
• Condominiums historically have
experienced greater volatility in home
prices than detached single-family
houses, which may expose us to more
risk
Indicates whether the borrower intends
to use the property as a primary
residence, second home, or investment
property
• Loans on primary residence properties
tend to have lower credit risk than loans
on second homes or investment
properties
Indicates the type of loan based on key
loan terms, such as the contractual
maturity, type of interest rate, and
payment characteristics of the loan
• Loan products that contain terms which
result in scheduled changes in monthly
payments may result in higher risk
• Shorter loan terms result in faster
repayment of principal and may indicate
lower risk
• Second liens can increase the risk of
default
• Borrowers are free to obtain second-lien
financing after origination, and we are not
entitled to receive notification when a
borrower does so
Second Liens
Indicates whether the underlying
property has more than one loan
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | SF Credit Risk
The table below contains details on characteristics of the loans in our single-family credit guarantee
portfolio as of December 31, 2015, 2014, and 2013.
(percentage of portfolio based on UPB)
2015
December 31,
2014
2013
Original LTV Ratio Range
60% and below
Above 60% to 80%
Above 80% to 100%
Above 100%
Portfolio weighted average original LTV ratio
Current LTV Ratio Range
60% and below
Above 60% to 80%
Above 80% to 100%
Above 100%
Portfolio weighted average current LTV ratio
Credit Score
740 and above
700 to 739
660 to 699
620 to 659
Less than 620
Portfolio weighted average credit score
Loan Purpose
Purchase
Cash-out refinance
Other refinance
20%
53%
22%
5%
75%
43%
37%
16%
4%
63%
59%
21%
13%
5%
2%
741
32%
21%
47%
21%
52%
21%
6%
75%
39%
37%
18%
6%
66%
58%
20%
13%
6%
3%
740
30%
21%
49%
22%
53%
19%
6%
75%
33%
38%
19%
10%
69%
58%
20%
13%
6%
3%
739
26%
22%
52%
In addition, at December 31, 2015, 2014, and 2013:
• More than 90% of our loans were secured by detached homes or townhomes;
• Approximately 90% of our loans were secured by properties used as the borrower’s primary
residence; and
• More than 90% of our loans were fixed-rate.
At December 31, 2015, approximately 13% of our loans had second-lien financing by the originator or
other third party at origination, and these loans comprised approximately 17% of our seriously delinquent
loan population. It is likely that additional borrowers have post-origination second-lien financing.
Higher Risk Loan Attributes and Attribute Combinations
Certain of the loan attributes shown above may indicate a higher risk of default. In particular, loans with
original LTV ratios over 90% and/or credit scores below 620 at origination may be higher risk. The table
below provides information on loans in our portfolio with these characteristics. The table includes a
presentation of each higher risk category in isolation. A single loan may fall within more than one
category.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | SF Credit Risk
(dollars in billions)
UPB
CLTV
% Modified
SDQ Rate
December 31, 2015
Original LTV ratio greater than 90%, HARP loans
Original LTV ratio greater than 90%, all other loans
Loans with credit scores below 620 at origination
(dollars in billions)
Original LTV ratio greater than 90%, HARP loans
Original LTV ratio greater than 90%, all other loans
Loans with credit scores below 620 at origination
$
$
$
$
$
$
134.2
144.8
41.3
89%
84%
74%
1.3%
8.4%
20.7%
1.16%
2.72%
6.67%
December 31, 2014
UPB
CLTV
% Modified
SDQ Rate
149.0
123.2
44.9
96%
87%
79%
0.8%
9.4%
19.2%
1.18%
3.97%
8.57%
In addition, certain combinations of loan attributes can indicate an even higher degree of credit risk, such
as loans with both higher LTV ratios and lower credit scores. The following tables show the combination
of credit score and current LTV ratio attributes of loans in our single-family credit guarantee portfolio.
December 31, 2015
CLTV > 80 to 100
CLTV > 100
All Loans
%
Portfolio
SDQ
Rate
%
Portfolio
SDQ
Rate
%
Portfolio
SDQ
Rate
%
Portfolio
SDQ
Rate
%
Modified
0.2%
1.3
55.8
—
57.3%
0.6%
0.7
10.7
—
12.0%
0.8%
1.5
8.5
0.2
11.0%
2.32%
1.05%
0.15%
1.58%
0.18%
1.65%
1.03%
0.29%
1.37%
0.40%
6.57%
4.73%
1.99%
5.12%
2.74%
—%
0.2
8.7
0.1
9.0%
0.2%
0.4
3.4
—
4.71%
1.49%
0.28%
4.41%
0.34%
3.06%
2.12%
1.02%
—%
—% 14.84%
0.2%
—
0.1
—
0.1%
0.1%
0.2
1.5
—
7.80%
1.85%
9.97%
3.49%
4.65%
3.31%
1.85%
5.08%
2.20%
1.5
64.6
0.1
66.4%
0.9%
1.3
15.6
—
17.8%
4.0%
1.25%
1.8%
0.3% 13.74%
0.2% 21.39%
1.3%
0.5
2.2
—
10.85%
7.26%
17.07%
0.4
1.2
—
17.73%
12.84%
21.12%
2.4
11.9
0.2
3.0%
8.66%
1.8% 15.03%
15.8%
2.74%
1.13%
0.17%
3.41%
0.21%
2.38%
1.60%
0.56%
1.47%
0.72%
9.09%
6.82%
3.08%
5.95%
4.12%
2.9%
1.2%
0.2%
3.1%
0.2%
3.4%
2.0%
0.6%
0.6%
0.8%
30.7%
25.0%
11.6%
13.5%
14.9%
(credit score)
Core single-family book:
< 620
620 to 659
Not available
Total
Relief refinance book:
< 620
620 to 659
Not available
Total
Legacy single-family
book
< 620
620 to 659
Not available
Total
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | SF Credit Risk
As of December 31, 2014
CLTV > 80 to 100
CLTV > 100
All Loans
%
Portfolio
SDQ
Rate
%
Portfolio
SDQ
Rate
%
Portfolio
SDQ
Rate
%
Portfolio
SDQ
Rate
%
Modified
0.2%
1.0
50.3
0.1
51.6%
0.4%
0.7
10.5
—
11.6%
0.8%
1.6
10.2
0.2
12.8%
2.77%
1.21%
0.16%
1.64%
0.19%
1.85%
1.12%
0.28%
1.79%
0.38%
7.93%
5.71%
2.26%
5.75%
3.13%
—%
0.2
7.9
—
8.1%
0.3%
0.4
4.5
—
5.05%
2.11%
0.39%
3.93%
0.47%
3.10%
2.02%
0.90%
—%
—% 16.43%
0.2%
—
0.1
—
7.48%
2.14%
10.06%
1.2
58.3
0.1
0.1%
3.75%
59.8%
0.2%
0.3
2.6
—
4.15%
2.86%
1.53%
1.04%
1.83%
0.9%
1.4
17.6
—
19.9%
3.34%
1.38%
0.19%
3.77%
0.24%
2.63%
1.71%
0.58%
1.25%
0.75%
2.5%
1.1%
0.1%
2.1%
0.2%
2.3%
1.3%
0.4%
0.4%
0.5%
5.2%
1.11%
3.1%
0.4% 15.58%
0.4% 23.56%
1.6% 11.29%
0.7
3.2
—
12.36%
8.11%
18.51%
0.6
2.2
—
20.05%
14.31%
25.47%
2.9
15.6
0.2
4.3%
9.62%
3.2% 16.56%
20.3%
8.66%
3.90%
6.96%
5.13%
27.1%
21.7%
9.6%
11.4%
12.5%
(credit score)
Core single-family book:
< 620
620 to 659
Not available
Total
Relief refinance book:
< 620
620 to 659
Not available
Total
Legacy single-family
book
< 620
620 to 659
Not available
Total
Higher Risk Loan Product Types
There are several types of loan products that contain terms which result in scheduled changes in the
borrower’s monthly payments after specified initial periods, such as interest-only and option ARM loans.
These products may result in higher credit risk because the payment changes typically increase the
borrower’s monthly payment, resulting in a higher risk of default. The majority of these loans are in our
Legacy single-family book. Only a small percentage of our Core single-family book consists of ARM loans.
The balance of interest-only and option ARM loans declined significantly in recent years as many of these
borrowers have repaid or refinanced their loans, received loan modifications, or completed foreclosure
alternatives or foreclosure transfers.
While we have not categorized option ARM loans as either subprime or Alt-A for presentation in 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.
Freddie Mac 2015 Form 10-K
102
Management's Discussion and Analysis
Risk Management | SF Credit Risk
The table below provides credit characteristic information on higher risk loan product types.
(dollars in billions)
Amortizing ARM and option ARM(1)
Interest-only
Step-rate modified
(dollars in billions)
Amortizing ARM and option ARM(1)
Interest-only
Step-rate modified
December 31, 2015
UPB
CLTV
% Modified
SDQ Rate
71.5
22.0
38.3
56%
80%
85%
1.6%
0.1%
100%
1.61%
6.02%
7.34%
December 31, 2014
UPB
CLTV
% Modified
SDQ Rate
75.3
27.8
42.3
60%
87%
93%
1.5%
0.2%
100%
2.28%
9.36%
9.20%
$
$
$
$
$
$
(1) Includes $5.0 billion and $5.7 billion in UPB of option ARM loans as of December 31, 2015 and 2014, respectively. As of
December 31, 2015 and 2014, the option ARM loans had: (a) current LTV ratios of 71% and 79%, (b) loan modification
percentages of 14.0% and 12.5%; and (c) serious delinquency rates of 8.01% and 9.87%, respectively.
The table below shows the timing of scheduled payment changes for certain types of loans within our
single-family credit guarantee portfolio. The amounts in the table below are aggregated by product type
and categorized by the year in which the loan will experience a payment change. The timing of the actual
payment change may differ from that presented in the table due to a number of factors, including if the
borrower refinances the loan. Loans where the year of first payment change is 2015 or prior have already
had one or more payment changes as of December 31, 2015; loans where the year of first payment
change is 2016 or later have not had a payment change as of December 31, 2015 and will not experience
a payment change until a future period. Step-rate modified loans are shown in each year that the
borrower will experience a scheduled interest-rate increase; therefore, a single loan may be included in
multiple periods. However, the total of step-rate loans in the table reflects the ending UPB of such loans
as of December 31, 2015.
December 31, 2015
(in millions)
2015 and
Prior
2016
2017
2018
2019
2020
Thereafter
Total(1)
ARM/amortizing
$
16,451
$
3,505
$
3,984
$
4,712
$
8,297
$
9,653
$
19,436
$
66,038
ARM/interest-only
Fixed/interest-only
Step-rate modified
9,291
80
2,938
399
4,697
1,817
1,916
395
110
6
254
4
—
120
16,926
24,318
25,895
17,184
6,151
4,431
2,616
19,206
2,821
38,343
Total
$
42,748
$
31,160
$
36,393
$
24,207
$
14,564
$
14,342
$
22,172
$ 126,408
(1) Excludes mortgage loans underlying certain other securitization products, since the payment change information is not
available to us for these loans.
We believe that the performance of these types of loans has been more affected by macroeconomic
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. However, we continue to monitor the
performance of these loans as many have experienced a payment change or are scheduled to have a
payment change in 2016 or 2017, which is likely to subject the borrowers to higher monthly payments.
Since a substantial portion of these loans were originated in 2005 through 2008 and are located in
geographic areas that were most affected by declines in home prices that began in 2006, we believe that
the serious delinquency rate for these types of loans will remain high in 2016.
Freddie Mac 2015 Form 10-K
103
Management's Discussion and Analysis
Risk Management | SF Credit Risk
Other Higher Risk Loans - Alt-A and Subprime Loans
While we have referred to 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 the
classification of such loans may differ from company to company. For example, some financial institutions
may use credit scores to delineate certain residential loans as subprime. We do not rely on these loan
classifications to evaluate the credit risk exposure relating to such loans in our single-family credit
guarantee portfolio.
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. In addition, we estimate that approximately $1.5 billion and $1.7 billion of security
collateral underlying our other securitization products at December 31, 2015 and 2014, respectively, were
identified as subprime based on information provided to us when we entered into these transactions.
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 loan, or both. Although we have
discontinued new purchases of loans with lower documentation standards, we continued to purchase
certain amounts of such loans in cases where the loan was either purchased pursuant to a previously
issued guarantee, part of our relief refinance initiative, or part of another refinance loan initiative and the
pre-existing loan was originated under less than full documentation standards. In the event we purchase
a refinance loan 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 loan 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, 2015, we have purchased approximately $32.8 billion of relief refinance loans that were
previously categorized as Alt-A loans in our portfolio, including $1.6 billion in 2015.
The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
December 31, 2015
December 31, 2014
(dollars in billions)
UPB
CLTV
%
Modified
SDQ Rate
UPB
CLTV
%
Modified
SDQ Rate
Alt-A
$
40.2
77%
23.1%
6.32% $
48.3
82%
19.9%
8.53%
The UPB of Alt-A loans in our single-family credit guarantee portfolio declined during 2015 primarily due
to borrowers refinancing into other mortgage products, foreclosure transfers, and other liquidation events.
Significant portions of the Alt-A loans in our portfolio are concentrated in Arizona, California, Florida, and
Nevada.
Geographic Concentrations
We purchase mortgage loans from across the U.S. and maintain a geographically diverse portfolio.
However, local economic conditions can affect borrowers’ ability to repay and the value of the underlying
Freddie Mac 2015 Form 10-K
104
Management's Discussion and Analysis
Risk Management | SF Credit Risk
collateral, leading to concentrations of credit risk in certain geographic areas.
The following table presents certain geographic concentrations in our single-family credit guarantee
portfolio. The states presented below had the largest number of seriously delinquent loans as of
December 31, 2015. See Note 13 for additional information on the concentration of credit risk in our
single-family credit guarantee portfolio.
(dollars in
millions)
Florida
New York
SDQ
Loan
Count
14,070
13,981
New Jersey
11,978
Illinois
California
8,841
7,669
As of December 31, 2015
% of SDQ
Loans
SDQ
Rate
Full Year
2015
Credit
Losses
As of December 31, 2014
SDQ
Loan
Count
% of SDQ
Loans
SDQ
Rate
Full Year
2014
Credit
Losses
As of December 31, 2013
SDQ
Loan
Count
% of SDQ
Loans
SDQ
Rate
Full Year
2013
Credit
Losses
10%
2.16% $
867
25,656
13%
3.92% $
1,079
42,948
17%
6.44% $
1,374
10
2.94%
9
6
5
3.90%
1.62%
0.60%
568
702
388
219
19,462
16,960
11,902
11,386
10
4.06%
8
6
6
5.49%
2.17%
0.92%
170
244
403
201
21,459
19,306
15,521
15,620
8
8
6
6
4.41%
6.20%
2.79%
1.30%
48
115
625
594
All Others
83,182
60
1.12%
2,036
112,700
57
1.52%
1,822
137,907
55
1.85%
2,032
Total
139,721
100%
1.32% $
4,780
198,066
100%
1.88% $
3,919
252,761
100%
2.39% $
4,788
The following table presents our single-family charge-offs and recoveries in each geographic region. See
"Single-Family Credit Guarantee Portfolio" in Note 13 for a description of these regions.
Year Ended December 31,
2015
Recoveries
Charge-
offs,
gross
Charge-
offs,
net
Charge-
offs,
gross
2014
Recoveries
Charge-
offs,
net
Charge-
offs,
gross
2013
Recoveries
Charge-
offs,
net
$
2,093
$
(207) $
1,886
$
1,138
$
(238) $
900
$
1,357
$
(656) $
701
1,294
869
701
206
(204)
(149)
(105)
(52)
1,090
720
596
154
1,703
1,018
875
238
(393)
(259)
(283)
(85)
1,310
759
592
153
3,015
1,870
2,589
394
(1,331)
(810)
(1,271)
(245)
1,684
1,060
1,318
149
$
5,163
$
(717) $
4,446
$
4,972
$
(1,258) $
3,714
$
9,225
$
(4,313) $
4,912
(in millions)
Northeast
Southeast
North Central
West
Southwest
Total
Freddie Mac 2015 Form 10-K
105
Management's Discussion and Analysis
Risk Management | SF Credit Risk
The table below presents the concentration of loans in each geographic region by current LTV ratio.
CLTV Ratio <= 80%
CLTV Ratio > 80% to 100%
CLTV Ratio > 100%
All Loans
% of Portfolio
SDQ Rate
% of Portfolio
SDQ Rate
% of Portfolio
SDQ Rate
% of Portfolio
SDQ Rate
December 31, 2015
North
Central
Northeast
Southeast
Southwest
West
Total
North
Central
Northeast
Southeast
Southwest
West
Total
13%
20
12
10
25
80%
0.73%
1.28%
1.08%
0.76%
0.52%
0.87%
3%
5
3
2
3
16%
1.91%
3.55%
2.54%
1.45%
1.96%
2.41%
1%
1
1
—
1
4%
6.23%
13.35%
7.15%
6.47%
5.34%
8.08%
17%
26
16
12
29
100%
1.13%
2.04%
1.57%
0.88%
0.79%
1.32%
CLTV Ratio <= 80%
CLTV Ratio > 80% to 100%
CLTV Ratio > 100%
All Loans
% of Portfolio
SDQ Rate
% of Portfolio
SDQ Rate
% of Portfolio
SDQ Rate
% of Portfolio
SDQ Rate
December 31, 2014
12%
20
11
10
23
76%
0.86%
1.67%
1.44%
0.96%
0.67%
1.13%
4%
5
3
2
4
18%
2.37%
4.98%
3.28%
2.06%
2.70%
3.21%
1%
1
2
—
2
6%
6.77%
15.21%
9.27%
6.98%
6.23%
9.06%
17%
26
16
12
29
100%
1.48%
2.81%
2.40%
1.16%
1.23%
1.88%
Credit Losses and Recoveries
Charge-offs were higher in 2015 than in 2014 primarily due to our adoption on January 1, 2015 of an
FHFA advisory bulletin that changed when we deem a loan to be uncollectible. We expect the level of
charge-offs in 2016 to be lower than 2015 as we continue our loss mitigation activities and our efforts to
sell seriously delinquent single-family loans. See "Change in Estimate" in Note 1 for information about our
adoption of the FHFA advisory bulletin and its effect on charge-offs and credit losses.
The tables below contain certain credit performance metrics of our single-family credit guarantee portfolio.
(dollars in millions)
Charge-offs, gross
Recoveries
Charge-offs, net
REO operations expense (income)
Total credit losses
Year Ended December 31,
2015
2014
2013
$
5,163
$
4,972
$
9,225
(717)
(1,258)
(4,313)
4,446
334
3,714
205
4,912
(124)
$
4,780
$
3,919
$
4,788
Total credit losses (in bps)
28.1
23.4
28.8
Payment Status:
One month past due
Two months past due
Seriously delinquent
As of December 31,
2015
2014
2013
1.37%
0.42%
1.32%
1.52%
0.49%
1.88%
1.73%
0.57%
2.39%
Credit loss recoveries during 2015, 2014, and 2013 included $0 billion, $0.3 billion, and $2.1 billion,
respectively, related to settlement agreements with certain sellers that released specified loans from
Freddie Mac 2015 Form 10-K
106
Management's Discussion and Analysis
Risk Management | SF Credit Risk
certain repurchase obligations in exchange for one-time cash payments. We recognized recoveries from
primary mortgage insurance (excluding recoveries that represent reimbursements for our expenses, such
as REO operations expenses) of $0.5 billion, $0.7 billion, and $1.5 billion that reduced our charge-offs of
single-family mortgage loans during 2015, 2014, and 2013, respectively. We also recognized recoveries
from primary mortgage insurance of $76 million, $180 million, and $196 million during 2015, 2014, and
2013, respectively, as part of REO operations (expense) income.
Our credit losses and seriously delinquent loan population are concentrated in the Legacy single-family
book. In addition, our credit losses and seriously delinquent loan population are also concentrated within
loans having certain characteristics, as shown in the table below. These categories are not mutually
exclusive; for example, an Alt-A loan can be associated with a property located in a judicial foreclosure
state and/or have a current LTV ratio of greater than 100%. Additional detail on loans in judicial
foreclosure states is presented in the “Managing Foreclosure and REO Activities” section.
December 31, 2015
% of
Portfolio
Serious
Delinquency
Rate
Year Ended
December 31,
2015
December 31, 2014
% of Credit
Losses
% of
Portfolio
Serious
Delinquency
Rate
Year Ended
December 31,
2014
% of Credit
Losses
CLTV > 100%
Alt-A loans
Judicial foreclosure states
4%
2%
39%
8.08%
6.32%
1.84%
49%
23%
70%
6%
3%
40%
9.06%
8.53%
2.61%
61%
16%
68%
Loan Loss Reserves
Our loan loss reserves continued to decline in recent years, consistent with the decline in our serious
delinquency rate. Although the housing market continued to improve in many geographic areas in 2015,
we expect that our loan loss reserves may remain elevated for an extended period because a significant
portion of our reserves is associated with interest rate concessions related to performing TDRs, which will
decrease over time as borrowers make payments under the terms of their modified loans. Additionally, the
resolution of certain seriously delinquent loans takes considerable time, often several years in the case of
foreclosure.
The table below summarizes our single-family loan loss reserves activity.
(dollars in millions)
Beginning balance
Provision (benefit) for credit losses
Charge-offs, gross
Recoveries
Transfers, net
Ending balance
Year Ended December 31,
2015
2014
2013
2012
2011
$
21,793
$
24,578
$
30,508
$
38,916
$
39,098
(2,639)
(5,071)
717
548
113
(4,892)
1,258
736
(2,247)
(8,995)
4,313
999
2,013
(13,520)
2,262
837
10,898
(14,735)
2,764
891
$
15,348
$
21,793
$
24,578
$
30,508
$
38,916
As a percentage of our single-family credit
guarantee portfolio
0.90%
1.31%
1.49%
1.86%
2.23%
Freddie Mac 2015 Form 10-K
107
Management's Discussion and Analysis
Risk Management | SF Credit Risk
TDRs and Individually Impaired Loans
Single-family loans that have been individually evaluated for impairment, such as modified loans,
generally have a higher associated loan loss reserve than loans that have been collectively evaluated for
impairment. Due to the large number of loan modifications completed in recent years, a significant portion
of our loan loss reserves is attributable to individually impaired single-family loans. The reserves
associated with individually impaired loans, which comprised approximately 67% of the loan loss reserves
for single-family loans as of December 31, 2015, largely reflect interest rate concessions for the borrower.
Most of our modified single-family loans, including TDRs, were current and performing at December 31,
2015. We expect our loan loss reserve associated with existing single-family TDRs to continue to decline
over time as borrowers continue to make monthly payments under the modified terms and interest rate
concessions are amortized into earnings.
The table below summarizes the carrying value for individually impaired single-family loans on our
consolidated balance sheets for which we have recorded a specific reserve.
(dollars in millions)
TDRs, beginning balance
New additions
Repayments and reclassifications to held-for-sale
Foreclosure transfers and foreclosure alternatives
TDRs, ending balance
Loans impaired upon purchase
Total impaired loans with specific reserve
Allowance for loan losses
Net investment, at December 31,
2015
2014
Loan Count
Amount
Loan Count
Amount
539,590
$
59,887
(69,720)
(17,871)
511,886
9,535
521,421
$
94,401
8,227
(13,975)
(2,789)
85,864
678
86,542
(14,019)
72,523
514,497
$
84,334
(33,104)
(26,137)
539,590
9,949
549,539
$
92,505
12,581
(6,218)
(4,467)
94,401
741
95,142
(17,837)
77,305
The table below provides information about the UPB of single-family TDRs and non-accrual loans on our
consolidated balance sheets.
(in millions)
TDRs on accrual status
Non-accrual loans
Total TDRs and non-accrual loans
Loan loss reserves associated with:
TDRs on accrual status
Non-accrual loans
Total
(in millions)
Foregone interest income on TDRs
and non-accrual loans(1)
$
$
$
$
$
December 31,
2015
2014
2013
2012
2011
82,026
$
82,373
$
78,033
$
65,784
$
22,460
32,745
42,829
61,517
44,440
74,686
104,486
$
115,118
$
120,862
$
127,301
$
119,126
12,105
$
13,728
$
14,239
$
12,430
$
2,677
6,935
8,805
14,602
14,782
$
20,663
$
23,044
$
27,032
$
11,595
20,770
32,365
2015
2014
2013
2012
2011
Year Ended December 31,
2,690
$
3,235
$
3,552
$
4,126
$
4,369
(1) Represents the amount of interest income that we would have recognized for loans outstanding at the end of each period,
had the loans performed according to their original contractual terms.
Freddie Mac 2015 Form 10-K
108
Management's Discussion and Analysis
Risk Management | SF Credit Risk
Engaging in Loss Mitigation Activities
Servicers perform loss mitigation activities as well as foreclosures on loans that they service for us. Our
loss mitigation strategy emphasizes early intervention by servicers in delinquent loans and offers
alternatives to foreclosure by providing servicers with default management programs designed to manage
non-performing loans more effectively and to assist borrowers in maintaining home ownership or to
facilitate foreclosure alternatives. In recent years, our ability to engage in loss mitigation activities has
been adversely affected by delays, including those due to increases in foreclosure process timeframes,
general constraints on servicer capacity that affect the rate at which servicers modify or foreclose upon
loans, and court backlogs in states that require a judicial foreclosure process.
We offer a variety of borrower assistance programs, including refinance programs for certain eligible
loans and loan workout activities for struggling borrowers. Our loan workouts include both home retention
options and foreclosure alternatives. We also engage in transfers of servicing on and sales of non-
performing loans.
The relief refinance program (including HARP) and HAMP, which are discussed below, will end in
December 2016. However, pursuant to the 2016 Conservatorship Scorecard, we are developing loss
mitigation options for borrowers, including loan modifications, and a refinance program for loans with high
LTV ratios.
We are the compliance agent for Treasury for certain foreclosure avoidance activities under HAMP.
Among other duties, as the program compliance agent, we conduct examinations and review servicer
compliance with the published requirements for the program.
Relief Refinance Program
As part of our loss mitigation activities, servicers contact borrowers that are eligible for the relief refinance
initiative. In recent years, our relief refinance program has been one of our more significant borrower
assistance programs. Our relief refinance initiative allows eligible homeowners whose loans we already
own or guarantee to refinance with more favorable terms (such as reduction in payment, reduction in
interest rate, extension of amortization term, or movement to a more stable loan) and without the need to
obtain additional mortgage insurance. Our relief refinance program includes HARP, the portion of our
relief refinance initiative for loans with LTV ratios above 80%.
The following table includes information about the performance of our relief refinance mortgage portfolio.
As of December 31,
2015
2014
(dollars in millions)
UPB
Loan Count
SDQ Rate
UPB
Loan Count
SDQ Rate
Above 125% Original LTV
$
Above 100% to 125% Original LTV
Above 80% to 100% Original LTV
80% and below Original LTV
28,241
59,305
97,375
117,677
157,035
323,795
567,201
942,183
1.38% $
1.20%
0.86%
0.36%
30,233
66,091
109,618
125,158
162,299
346,220
609,239
957,435
Total
$
302,598
1,990,214
0.72% $
331,100
2,075,193
1.36%
1.19%
0.93%
0.36%
0.75%
These loans have continued to perform well relative to loans with similar characteristics in the Legacy
single-family book.
Freddie Mac 2015 Form 10-K
109
Management's Discussion and Analysis
Risk Management | SF Credit Risk
Loan Workout Activities
When refinancing is not practicable, we require our servicers first to evaluate the loan for a forbearance
agreement, repayment plan or loan modification, because our level of recovery on a loan that reperforms
is often much higher than for a loan that proceeds to a foreclosure alternative or foreclosure. We offer the
following types of home retention options:
• Forbearance agreements - Arrangements that require reduced payments during a defined period,
generally less than one year, to allow borrowers to return to compliance with the original mortgage
terms or to implement another loan workout. For agreements completed in 2015, the average time
period for reduced payments was between three and four months.
• Repayment plans - Contractual plans designed to repay past due amounts to allow borrowers to
return to compliance with the original mortgage terms. For plans completed in 2015, the average time
period to repay past due amounts was approximately four months.
• Loan modifications - Contractual plans that may involve changing the terms of the loan, adding
outstanding indebtedness, such as delinquent interest, to the UPB of the loan, or a combination of
both, including principal forbearance, but not principal forgiveness. We offer two main types of loan
modifications:
HAMP loan modifications - The goal of a HAMP loan modification is to reduce the borrower’s
monthly mortgage loan payment to 31% of gross monthly income. HAMP is available for loans
originated on or before January 1, 2009. A borrower may receive only one HAMP modification.
HAMP modifications contain the following features:
• Trial period - HAMP requires completion of a trial period of at least three months, during
•
which the borrower makes monthly payments based on the modified terms of the loan, prior
to receiving the final modification. Borrowers who fail to complete the trial period are
considered for our other workout activities.
Incentive payments - Borrowers receive monthly incentive payments in the form of credits to
reduce the principal balance of their loans by up to $1,000 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 these incentives and are
not reimbursed by Treasury, except as discussed below.
• Newly introduced incentive program - In January 2015, at the instruction of FHFA, we
implemented an additional $5,000 incentive program for eligible borrowers who remain in
good standing through the sixth year of their HAMP loans. The incentive is applied toward
reducing the borrowers' outstanding loan balance. Treasury will pay this incentive on the
majority of our eligible HAMP modified loans. Incentive payments began in late 2015.
Servicers are required to offer the borrowers who receive incentive payments an opportunity
to modify their loan by reamortizing the UPB over the remaining term of the loan, which could
lower the borrowers’ monthly principal and interest payments and further reduce the risk of
borrower default.
Non-HAMP loan modifications - Primarily consist of our standard non-HAMP modification
program and a streamlined modification initiative for certain eligible borrowers. Each of these
programs requires completion of a trial period of at least three months prior to receiving the
modification. If a borrower fails to complete the trial period, the loan is considered for our other
workout activities. The streamlined modification offers eligible borrowers the same loan terms as
the non-HAMP standard modification, including an extension of the loan’s term to 480 months and
a fixed interest rate. Servicers are paid incentive fees for each completed non-HAMP modification,
Freddie Mac 2015 Form 10-K
110
Management's Discussion and Analysis
Risk Management | SF Credit Risk
but these programs do not include any borrower incentive payments. Loans may generally be
modified three times under our non-HAMP loan modification programs, but only once during a 12
month period. In June 2015, we announced that we are extending our streamlined modification
program indefinitely. In July 2015, we implemented a new modification initiative to help reduce the
risk of default on step-rate modified loans under HAMP. Under this initiative, eligible borrowers with
a step-rate modified loan will be evaluated for either a non-HAMP standard modification or a non-
HAMP streamlined modification. In September 2015, we announced changes designed to expand
the pool of borrowers eligible to participate in our modification programs.
When a seriously delinquent single-family loan cannot be resolved through a home retention option, we
typically seek to pursue a foreclosure alternative or sale of the non-performing loan. We offer the following
types of foreclosure alternatives:
• Short sale - The borrower sells the property for less than the total amount owed under the terms of
the loan. A short sale is preferable to a borrower because we provide limited relief to the borrower
from repaying the entire amount owed on the loan and, in some cases, we also provide cash
relocation assistance, while allowing the borrower to exit the home in an orderly manner. A short sale
allows Freddie Mac to avoid the costs we would otherwise incur to complete the foreclosure and
subsequently sell the property.
• Deed in lieu of foreclosure - The borrower voluntarily agrees to transfer title of the property to us
without going through formal foreclosure proceedings.
We discuss sales of non-performing loans below in "Servicing Transfers and Sales of Non-Performing
Loans."
Our loan modification volume declined during 2015 compared to 2014, primarily due to lower volumes of
seriously delinquent loans. As of December 31, 2015, the borrower’s monthly payment for all of our
completed HAMP modifications was reduced on average by an estimated $527 at the time of
modification, which amounts to an average of $6,323 per year, and a total of $1.6 billion in annual
reductions (as calculated by multiplying the number of completed modifications by the average reduction
in annual payment, without adjustment for actual loan performance following modification). In recent
years, our non-HAMP modifications represented the majority of our modification volume. The portion of
our modification volume that is HAMP-related continued to decline in 2015 primarily due to the decline in
the number of borrowers eligible for HAMP. We incurred $69 million and $112 million of servicer incentive
expenses on modified loans during 2015 and 2014, respectively.
The volume of foreclosures has moderated in recent periods, primarily due to declining volumes of
seriously delinquent loans, the success of our loan workout programs, and our sales of non-performing
loans. The volume of our short sale transactions declined in 2015 compared to 2014, continuing the trend
in recent periods. Similarly, the volume of short sales in the overall market also declined in recent periods
as home prices have continued to increase.
The following graphs provide detail about our single-family loan workout activities and foreclosures.
Freddie Mac 2015 Form 10-K
111
Management's Discussion and Analysis
Risk Management | SF Credit Risk
Home Retention Actions
Foreclosure Alternatives and Foreclosures
The table below contains credit characteristic data on our single-family modified loans.
(dollars in billions)
HAMP
Non-HAMP
Total
(dollars in billions)
HAMP
Non-HAMP
Total
December 31, 2015
UPB
% of
Portfolio
CLTV Ratio
SDQ Rate
40.5
43.0
83.5
2%
3
5%
85%
88%
86%
7.54%
12.90%
10.54%
December 31, 2014
UPB
% of
Portfolio
CLTV Ratio
SDQ Rate
44.9
40.2
85.1
3%
2
5%
93%
94%
93%
9.61%
14.77%
12.28%
$
$
$
$
Freddie Mac 2015 Form 10-K
112
Management's Discussion and Analysis
Risk Management | SF Credit Risk
The table below contains information about the payment performance of modified loans in our single-
family credit guarantee portfolio, based on the number of loans that were current or paid off one year and,
if applicable, two years after modification.
Current or paid off
one year after modification:
HAMP
Non-HAMP
Total
Current or paid off
two years after modification:
HAMP
Non-HAMP
Total
4Q 2014
3Q 2014
2Q 2014
1Q 2014
4Q 2013
3Q 2013
2Q 2013
1Q 2013
Quarter of Loan Modification Completion
80%
65%
67%
N/A
N/A
N/A
80%
66%
69%
N/A
N/A
N/A
79%
68%
70%
N/A
N/A
N/A
82%
71%
74%
N/A
N/A
N/A
81%
70%
72%
79%
68%
70%
80%
73%
75%
78%
71%
73%
80%
74%
76%
78%
71%
73%
82%
76%
78%
79%
72%
74%
Our HAMP modifications continue to perform better than our non-HAMP modifications. As shown in the
table above, the one-year performance of our non-HAMP modified loans has declined in comparison to
the performance of our HAMP modified loans. This decline in performance may be attributable to features
of our streamlined modification, which in contrast to our other types of loan modifications include no
documentation requirements, and include borrowers who may have previously defaulted on a HAMP
modification.
Servicing Transfers and Sales of Non-Performing Loans
From time to time, we facilitate the transfer of servicing for certain groups of loans that are delinquent or
are deemed at risk of default to servicers that we believe have capabilities and resources necessary to
improve the loss mitigation associated with the loans. See "Sellers and Servicers" in Institutional Credit
Risk below for additional information on these activities.
During 2015 and 2014, we completed sales of $2.9 billion and $0.6 billion, respectively, in UPB of
seriously delinquent single-family loans. Of the $7.7 billion in UPB of single-family loans classified as
held-for-sale at December 31, 2015, $5.7 billion related to loans that were seriously delinquent. We
believe the sale of these loans provides better economic returns than continuing to hold them. The FHFA
requirements guiding these transactions, including bidder qualifications, loan modifications, and
performance reporting, are designed to improve borrower outcomes.
Managing Foreclosure and REO Activities
In a foreclosure, we may acquire the underlying property and later sell it, using the proceeds of the sale to
reduce our losses.
We typically acquire properties as a result of borrower defaults and subsequent foreclosures on loans that
we own or guarantee. We evaluate the condition of, and market for, newly acquired REO properties to
determine if repairs are needed, determine occupancy status and whether there are legal or other issues
to be addressed, and determine our sale or disposition strategy. When we sell an REO property, we
typically provide an initial period where we consider offers by owner occupants and others before offers
by investors. We also consider alternative disposition processes, such as REO auctions, bulk sales
Freddie Mac 2015 Form 10-K
113
Management's Discussion and Analysis
Risk Management | SF Credit Risk
channels, and partnering with locally-based entities to facilitate dispositions.
In recent years, the volume of REO acquisitions has been significantly affected by 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. As of December 31, 2015 and 2014, the percentage of seriously
delinquent loans that have been delinquent for more than six months was 64% and 69%, respectively.
Delays in Foreclosure Process and Average Foreclosure Completion Timelines
Our serious delinquency rates and credit losses continue to be adversely affected by delays in the
foreclosure process in states where a judicial foreclosure is required. Foreclosures generally take longer
to complete in such states, resulting in concentrations of delinquent loans in those states, as shown in the
table below. At December 31, 2015, loans in states with a judicial foreclosure process comprised 39% of
our single-family credit guarantee portfolio.
The table below presents the length of time our loans have been seriously delinquent, by jurisdiction type.
As of December 31,
2015
2014
2013
Loan Count
Percent
Loan Count
Percent
Loan Count
Percent
Aging, by locality:
Judicial states:
<= 1 year
> 1 year and <= 2 years
> 2 years
Non-judicial states:
<= 1 year
> 1 year and <= 2 years
> 2 years
Combined:
<= 1 year
> 1 year and <= 2 years
> 2 years
Total
40,265
16,199
28,265
38,010
8,660
8,322
78,275
24,859
36,587
29%
12
20
27
6
6
56
18
26
50,138
21,919
48,984
49,657
12,989
14,379
99,795
34,908
63,363
25%
11
25
25
7
7
50
18
32
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
139,721
100%
198,066
100%
252,761
100%
The longer a loan remains delinquent, the greater the associated costs we incur. Loans that remain
delinquent for more than one year are more challenging to resolve as many of these borrowers may not
be in contact with the servicer, may not be eligible for loan modifications, or may determine that it is not
economically beneficial for them to enter into a loan modification due to the amount of costs incurred on
their behalf while the loan was delinquent. 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 number of
our single-family loans delinquent for more than one year declined 37% during 2015.
Our servicing guidelines do not allow initiation of the foreclosure process on a primary residence until a
loan is at least 121 days delinquent, regardless of where the property is located. However, we evaluate
Freddie Mac 2015 Form 10-K
114
Management's Discussion and Analysis
Risk Management | SF Credit Risk
the timeliness of foreclosure completion by our servicers based on the state where the property is
located. In September 2015, we announced an extension of foreclosure timelines in our guidelines for 34
states or other jurisdictions. Our servicing guide provides for instances of allowable foreclosure delays in
excess of the expected timelines for specific situations involving delinquent loans, such as when the
borrower files for bankruptcy or appeals a denial of a loan modification.
During 2015, a significant number of loans that had been subject to delays and that had been delinquent
for more than a year completed the foreclosure process, which caused the total average time for
foreclosure completions to increase compared to 2014, as shown in the table below.
The table presents average completion times for foreclosures of our single-family loans.
(average days)
Judicial states:
Florida
New Jersey
New York
All other judicial states
Judicial states, in aggregate
Non-judicial states, in aggregate
Total
Year Ended December 31,
2015
2014
2013
1,332
1,602
1,553
828
1,076
637
892
1,311
1,372
1,325
796
1,031
636
867
1,226
1,228
1,120
772
952
575
774
We believe that our average foreclosure timeline is likely to remain elevated in the near term due to the
backlog of loans that have been delinquent for more than one year, particularly in the judicial states of
Florida, New Jersey, and New York.
In recent periods, third-party sales at foreclosure auction comprised a higher proportion of our foreclosure
transfers. Third-party sales at foreclosure auction allow us to avoid the REO property expenses that we
would have otherwise incurred if we held the property in our REO inventory until disposition.
Our REO inventory declined in 2015 primarily due to REO dispositions exceeding our acquisitions. REO
acquisitions continue to decline due to a declining number of seriously delinquent loans and a larger
proportion of property sales to third parties at foreclosure.
We expect the rate of decline in our REO inventory will slow as a larger portion of newly acquired REO
properties are older, low value, and rural properties which are more challenging to market and sell. In
addition, legal-related delays (i.e., redemption periods and eviction procedures) and a business strategy
to repair more homes affect significant portions of our REO inventory, resulting in extended holding
periods. As our REO inventory declines, we would expect REO dispositions to decline as well.
The table below shows our single-family REO activity.
(number of properties)
2015
2014
2013
Year Ended December 31,
Inventory, beginning of the period
Acquisitions
Dispositions
Inventory, end of the period
Freddie Mac 2015 Form 10-K
25,768
23,171
(31,935)
17,004
47,307
42,265
(63,804)
25,768
49,071
70,681
(72,445)
47,307
115
Management's Discussion and Analysis
Risk Management | SF Credit Risk
Severity Ratios
Severity ratios are the percentages of our realized losses when loans are resolved by the completion of
foreclosures (and subsequent third-party sales or REO dispositions) or foreclosure alternatives (e.g.,
short sales). Severity ratios are calculated as the amount of our recognized losses divided by the
aggregate UPB of the related loans. The amount of recognized losses 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
capitalized repair and selling expenses, if applicable.
The table below presents single-family severity ratios.
REO dispositions and third-party foreclosure sales
Short sales
Year Ended December 31,
2015
2014
2013
34.3%
30.1%
34.2%
31.6%
36.1%
36.0%
Our severity ratios have remained relatively stable during 2015 compared to 2014. These severity ratios
are influenced by several factors, including the geographic location of the property and the related selling
expenses for REO dispositions and short sales.
REO Property Status
A significant portion of our REO properties are unable to be marketed at any given time because the
properties are occupied, under repair, or subject to a redemption period, which is a post-foreclosure
period during which borrowers may reclaim a foreclosed property. Redemption periods can increase the
average holding period of our inventory, and have done so in recent years. As of December 31, 2015,
approximately 50% of our REO properties were unable to be marketed because the properties were
occupied, under repair, or located in states with a redemption period, and 12% of the properties were
being evaluated for listing and determination of our sales or disposition strategy. As of December 31,
2015, approximately 25% of our REO properties were listed and available for sale, and 13% of our
inventory was pending the settlement of sales. Though it varied significantly in different states, the
average holding period of our single-family REO properties, excluding any redemption period, was 255
days and 226 days for our REO dispositions during 2015 and 2014, respectively.
Freddie Mac 2015 Form 10-K
116
Management's Discussion and Analysis
Risk Management | MF Credit Risk
MULTIFAMILY MORTGAGE CREDIT RISK
We manage our exposure to multifamily mortgage credit risk using the following principal strategies:
• Maintaining policies and procedures for new business activity, including prudent underwriting
standards;
• Transferring the vast majority of expected credit losses to third parties through K Certificates and
similar securitizations; and
• Managing our portfolio, including loss mitigation activities.
Maintaining Policies and Procedures for New Business Activity, Including Prudent Underwriting
Standards
We use a prior approval underwriting approach for multifamily loans, in contrast to the delegated
underwriting approach used for single-family loans. Under this approach, we maintain credit discipline by
completing our own underwriting and credit review for each new loan prior to issuance of a loan
commitment, including review of third-party appraisals and cash flow analysis. Our underwriting standards
focus on the LTV ratio and DSCR, which estimates ability to repay using the secured property’s cash flow,
after expenses. A higher DSCR indicates lower credit risk. Our standards require maximum LTV ratios
and minimum DSCRs that vary based on the characteristics and features of the loan. Loans are generally
underwritten with a maximum original LTV ratio of 80% and a DSCR of greater than 1.25, assuming
monthly payments that reflect amortization of principal. However, certain loans may have a higher LTV
ratio and/or a lower DSCR, typically where this will serve our mission and contribute to achieving our
affordable housing goals. For more detail on LTV ratios of our portfolio, see "Managing Our Portfolio,
Including Loss Mitigation Activities" in this section. Consideration is also given to other qualitative factors,
such as borrower experience and the strength of the local market. Sellers provide certain representations
and warranties to us regarding the loans they sell to us, and are required to repurchase loans for which
there has been a breach of representation or warranty. However, repurchases of multifamily loans have
been extremely rare due to our underwriting approach prior to purchase.
Multifamily loans may be amortizing or interest-only (for the full term or a portion thereof) and have a fixed
or variable rate of interest. Multifamily loans generally have shorter terms than single-family loans and
typically have maturities ranging from five to ten years. Most multifamily loans require a balloon payment
at maturity, making ability to refinance or pay off the loan at maturity a key attribute. Some borrowers may
be unable to refinance during periods of rising interest rates or adverse market conditions.
The table below presents our multifamily loan purchases and other guarantee issuances, by product term.
(dollars in millions)
2015
December 31,
2014
2013
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
10-year loans, fixed or adjustable
$
20,603
43% $
11,069
39% $
14,977
7-year loans, fixed or adjustable
Other
Total
16,875
9,786
36
21
11,773
5,494
42
19
7,393
3,502
$
47,264
100% $
28,336
100% $
25,872
100%
58%
29
13
Freddie Mac 2015 Form 10-K
117
Management's Discussion and Analysis
Risk Management | MF Credit Risk
Transferring the Vast Majority of Expected Credit Losses to Third Parties Through K Certificates
and Similar Securitizations
We seek to transfer multifamily mortgage credit risk primarily through K Certificate transactions in which
we transfer substantially all of the first loss position associated with the underlying multifamily loans to
third-party investors. The amount of subordination to the guaranteed certificates in our K Certificate
transactions is set at a level that we believe is sufficient to cover the vast majority of the expected credit
losses on the loans. We continue to develop other strategies to reduce our credit exposure to multifamily
loans and securities by transferring credit risk to third parties.
We securitized $128.4 billion in UPB of multifamily loans in K Certificate transactions between 2009 and
2015. Excluding transactions without subordination, the average level of subordination on all outstanding
K Certificates was 18% as of both December 31, 2015 and 2014. Since we began issuing K Certificates,
we have experienced no credit losses associated with our guarantees on these securities. See “Our
Business Segments - Multifamily” for more information on K Certificates.
The table below shows the delinquency rates for both credit-enhanced and non-credit-enhanced loans in
our multifamily mortgage portfolio.
2015
December 31,
2014
2013
Non-credit-enhanced
32%
0.03%
40%
0.02%
47%
0.07%
% of Portfolio
Delinquency
Rate
% of Portfolio
Delinquency
Rate
% of Portfolio
Delinquency
Rate
Credit-enhanced:
K Certificates
Other
Total
61
7
100%
0.02%
—%
0.02%
53
7
100%
0.01%
0.35%
0.04%
45
8
100%
0.07%
0.29%
0.09%
Managing Our Portfolio, Including Loss Mitigation Activities
To help mitigate our potential losses, we generally require sellers to act as the primary servicer for loans
they have sold to us, including property monitoring tasks beyond those typically performed by single-
family servicers. For securitized loans, we typically transfer the master servicing role to the trustees on
behalf of the bondholders in accordance with the securitization and trust documents. Servicers for
unsecuritized loans over $1 million 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 financial
statements. In situations where a borrower or property is in distress, the frequency of communications
with the borrower may be increased. We rate servicing performance on a regular basis and we may
conduct on-site reviews to confirm compliance with our standards.
We primarily use credit enhancements, such as the subordination provided by K Certificates, to mitigate
our credit losses. For unsecuritized loans, we may offer a workout option to give the borrower an
opportunity to bring the loan current and retain ownership of the property, such as providing a short-term
extension of up to 12 months. These arrangements are entered into 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. Our multifamily
loan modification and other workout activities have been minimal in the last three years.
Freddie Mac 2015 Form 10-K
118
Management's Discussion and Analysis
Risk Management | MF Credit Risk
In addition, after the loans have been securitized and the vast majority of the expected credit losses has
been transferred to third-party investors, we monitor the performance of our K Certificates and other
similar types of transactions to assess our potential exposure to losses. Due to the subordination
protection associated with our K Certificates and most of our other securitization products, our primary
credit risk exposure in our multifamily mortgage portfolio results from our unsecuritized loans. By their
nature, loans awaiting securitization that we hold for sale remain on our balance sheet for a shorter period
of time than loans we hold for investment.
We report multifamily delinquency rates based on UPB of 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.
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.
Freddie Mac 2015 Form 10-K
119
Management's Discussion and Analysis
Risk Management | MF Credit Risk
The table below presents information about the composition and delinquency rates of the multifamily
mortgage portfolio.
(dollars in billions)
Unsecuritized loans
K Certificates
Other securitization products
Other mortgage-related guarantees
Total
Unsecuritized loans, excluding HFS loans:
Original LTV ratio:
Below 75%
75% to 80%
Above 80%
Total
Weighted average LTV ratio at origination
Maturity dates:
2015
2016
2017
2018
2019
Thereafter
Total
Year of acquisition:
2010 and prior
2011 and after
Total
K Certificates and other securitization
products:
Year of issuance:
2010 and prior
2011
2012
2013
2014
2015
Total
Subordination level at issuance:
No subordination
Less than 10%
10% to 15%
Greater than 15%
Total
$
$
$
$
$
$
$
$
$
$
$
$
December 31,
2015
2014
UPB
Delinquency
Rate
UPB
Delinquency
Rate
49.1
103.1
6.7
9.5
168.4
21.2
7.1
1.2
29.5
68%
N/A
1.9
4.6
7.8
6.9
8.3
29.5
23.1
6.4
29.5
10.5
10.7
15.8
22.9
17.5
32.4
109.8
2.0
5.1
44.0
58.7
109.8
0.04% $
0.02%
—%
—%
53.0
76.0
5.0
9.3
0.02% $
143.3
—% $
—%
—%
—% $
N/A $
—%
—%
—%
—%
—%
—% $
—% $
—%
—% $
0.07% $
0.12%
—%
—%
—%
—%
0.02% $
0.01% $
—%
0.05%
—%
0.02% $
30.4
9.8
0.7
40.9
68%
3.0
5.8
5.8
8.4
7.4
10.5
40.9
35.5
5.4
40.9
11.0
11.2
16.4
23.9
18.5
N/A
81.0
0.7
4.4
32.0
43.9
81.0
0.02%
0.01%
0.64%
—%
0.04%
0.04%
—%
—%
0.03%
—%
—%
—%
—%
0.15%
—%
0.03%
0.03%
—%
0.03%
0.39%
—%
—%
—%
—%
N/A
0.05%
0.06%
—%
0.14%
—%
0.05%
Our REO activity has remained low in the past several years as a result of the strong property
performance of our multifamily mortgage portfolio. As of December 31, 2015, we had one REO property.
Freddie Mac 2015 Form 10-K
120
Management's Discussion and Analysis
Risk Management | MF Credit Risk
Credit Losses and Recoveries
Our multifamily credit losses remain low as a result of the strong property performance of our multifamily
mortgage portfolio. The table below contains details on our multifamily credit losses and delinquencies.
(dollars in millions)
Charge-offs, gross(1)
Recoveries
Charge-offs, net
REO operations expense (income)
Credit losses (gains)
Credit losses (gains) (in bps)
Number of delinquent loans
$
$
Year Ended December 31,
2015
2014
2013
$
9
—
9
4
13
$
0.8
4
3
$
(1)
2
(9)
(7) $
(0.5)
8
29
(1)
28
(16)
12
0.9
16
(1)
Includes cumulative fair value losses recognized through the date of foreclosure for Multifamily loans we elected to carry at
fair value at the time of our purchase.
Loan Loss Reserves
The table below summarizes our multifamily loan loss reserves activity.
(dollars in millions)
Beginning balance
Provision for credit losses
Charge-offs, gross
Recoveries
Transfers, net
Ending balance
Year Ended December 31,
2015
2014
2013
2012
2011
$
94
$
151
$
382
$
545
$
(26)
(9)
—
—
59
$
(55)
(3)
1
—
94
$
(218)
(7)
1
(7)
(123)
(36)
2
(6)
$
151
$
382
$
828
(196)
(75)
1
(13)
545
As a percentage of total multifamily mortgage
portfolio
0.04%
0.07%
0.11%
0.30%
0.47%
TDRs and Non-accrual Loans
The table below provides information about the UPB of multifamily TDRs and non-accrual loans on our
consolidated balance sheets.
Freddie Mac 2015 Form 10-K
121
Management's Discussion and Analysis
Risk Management | MF Credit Risk
(in millions)
TDRs on accrual status
Non-accrual loans
Total TDRs and non-accrual loans
Loan loss reserves associated with:
TDRs on accrual status
Non-accrual loans
Total
(in millions)
Foregone interest income
2015
2014
2013
2012
2011
December 31,
321
189
510
$
$
9
$
12
21
$
535
385
920
21
31
52
$
$
$
$
675
628
$
806
$
1,488
1,303
$
2,294
$
814
1,889
2,703
15
65
80
$
$
48
$
157
205
$
45
201
246
Year Ended December 31,
2015
2014
2013
2012
2011
3
$
4
$
8
$
11
$
15
$
$
$
$
$
The balance of our multifamily TDR and non-accrual loans has declined for the last four years, which
reflects continued strong portfolio performance and positive market fundamentals.
Freddie Mac 2015 Form 10-K
122
Management's Discussion and Analysis
Risk Management | MRS Credit Risk
MORTGAGE-RELATED SECURITIES CREDIT RISK
Our mortgage-related securities portfolio consists of investments in agency and non-agency mortgage-
related securities. Agency mortgage-related securities have historically presented minimal credit risk as a
result of the guarantee provided by, and the U.S. government’s support of, the institutions that issue
agency securities. Substantially all of our purchases of mortgage-related securities in recent years
consisted of agency securities, as we generally no longer purchase non-agency mortgage-related
securities. As a result, the amount of our non-agency mortgage-related securities, relative to our overall
mortgage-related securities portfolio, declined in recent years. As our investments in non-agency
mortgage-related securities do not include a guarantee from a GSE or governmental agency, we have
credit risk exposure to the underlying collateral of these securities. Such credit risk exposure principally
arises from the non-agency mortgage-related securities that we purchased prior to entering into
conservatorship.
The following two tables present the composition of our mortgage-related securities portfolio by product
and include our holdings of Freddie Mac mortgage-related securities issued by non-consolidated trusts.
While we hold certain investments in Freddie Mac mortgage-related securities issued by consolidated
trusts (e.g., PCs), these securities are eliminated in consolidation and are excluded from these tables.
Available-For-Sale Securities
(in millions)
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
2015
December 31,
2014
2013
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
32,684
$
33,527
$
37,710
$
39,099
$
39,001
$
40,659
7,033
150
12,009
12,499
3,423
2,788
1,187
488
7,262
162
12,448
12,802
3,678
3,278
1,205
575
10,860
11,313
10,140
10,797
183
20,988
20,210
5,460
4,500
2,166
556
199
21,822
20,589
5,649
5,043
2,198
638
149
29,151
29,897
6,617
8,322
3,533
629
167
30,338
27,499
6,574
8,706
3,495
684
$
72,261
$
74,937
$
102,633
$
106,550
$
127,439
$
128,919
Freddie Mac 2015 Form 10-K
123
Management's Discussion and Analysis
Risk Management | MRS Credit Risk
Trading Securities
(in millions)
Trading mortgage-related securities:
Freddie Mac
Fannie Mae
Ginnie Mae
Other
December 31,
2015
2014
2013
$
15,513
$
17,469
$
6,438
30
146
6,099
16
171
9,349
7,180
98
141
Total trading mortgage-related securities
$
22,127
$
23,755
$
16,768
Risk Management Activities - Non-Agency Mortgage-Related Securities
We manage our exposure to the credit risk of our non-agency mortgage-related securities using the
following principal strategies:
• Selling or securitizing certain assets; and
• Pursuing litigation and other loss recovery efforts.
For information on litigation related to certain of our non-agency mortgage-related securities, see Note 13.
Our investments in non-agency mortgage-related securities declined in recent years, as we continue our
efforts to dispose of certain non-agency mortgage-related securities in an economically sensible manner.
However, we still have a significant portfolio of non-agency mortgage-related securities. While the credit
performance of loans underlying our holdings of single-family non-agency mortgage-related securities
stabilized in recent periods, it remains weak and is susceptible to changes in economic conditions, such
as home prices, mortgage interest rates, and unemployment rates. See "Key Economic Indicators" for a
discussion of how these conditions influence the performance of our securities.
We discuss the credit risk associated with our non-agency mortgage-related securities in the following
sections.
Higher Risk Components of Our Investments in Non-Agency Mortgage-Related Securities
We have exposure to subprime, option ARM, interest-only, Alt-A and other loans through our investments
in non-agency mortgage-related securities and certain Freddie Mac other securitization products. 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 categorized option ARM, CMBS, obligations of states and political
subdivisions, and manufactured housing securities as either subprime or Alt-A securities.
While approximately 86% of our investments in CMBS (by UPB) are investment grade or above, 96% of
our investments in subprime, option ARM, and Alt-A securities are below investment grade as of
December 31, 2015. As a result, we have identified our investments in securities backed by subprime,
option ARM, and Alt-A loans as having the highest credit risk exposure.
Freddie Mac 2015 Form 10-K
124
Management's Discussion and Analysis
Risk Management | MRS Credit Risk
The following table presents certain credit-related statistics concerning our available-for-sale, non-agency
mortgage-related securities backed by subprime, option ARM, and Alt-A loans.
(in millions)
UPB:
Subprime
Option ARM
Alt-A
Gross unrealized losses, pre-tax:
Subprime
Option ARM
Alt-A
Present value of expected future credit
losses:
Subprime
Option ARM
Alt-A
Principal repayments:
Subprime
Option-ARM
Alt-A
Principal cash shortfalls:
Subprime
Option ARM
Alt-A
Collateral delinquency rate:
Subprime
Option ARM
Alt-A
Average credit enhancement:
Subprime
Option ARM
Alt-A
Cumulative collateral loss:
Subprime
Option ARM
Alt-A
12/31/2015
9/30/2015
6/30/2015
3/31/2015
12/31/2014
As of
$
17,295
$
18,539
$
20,987
$
23,790
$
27,682
5,309
2,696
5,604
3,066
6,938
3,622
$
350
$
394
$
388
$
62
13
74
22
85
22
7,704
4,318
497
164
30
$
8,287
4,549
610
183
32
$
2,712
$
2,717
$
3,196
$
2,894
$
4,262
$
$
$
$
676
188
580
153
187
4
9
13
27%
23
18
6%
(1)
1
34%
26
16
$
$
731
219
602
191
232
4
23
20
28%
23
18
7%
(1)
1
33%
26
15
$
$
885
262
631
156
213
37
42
22
29%
24
19
8%
(1)
1
33%
25
16
$
$
745
290
649
149
198
18
50
(1)
31%
26
20
9%
—
2
33%
25
15
987
457
770
154
199
2
52
21
32%
27
20
9%
—
2
32%
25
15
The UPB of our investments in non-agency mortgage-related securities shown above includes many
securities that were subject to litigation settlements in recent years. The UPB amounts were not affected
by the amounts we received in the settlements. See Note 13 for information on recent settlements.
Since the beginning of 2007, we experienced actual principal cash shortfalls of $4.4 billion on impaired
available-for-sale non-agency mortgage-related securities. Most of these shortfalls occurred on securities
backed by subprime, option ARM, and Alt-A loans.
Freddie Mac 2015 Form 10-K
125
Management's Discussion and Analysis
Risk Management | MRS Credit Risk
Other-Than-Temporary Impairment of Available-For-Sale Mortgage-Related Securities
We evaluate our available-for-sale securities, including non-agency mortgage-related securities, in an
unrealized loss position, as of each balance sheet date, to determine whether the decline in value is
other-than-temporary. An unrealized loss exists when the fair value of a security is less than its amortized
cost basis. Other-than-temporary impairment is considered to have occurred if the fair value of the
security is less than its amortized cost basis and we intend to sell the security or it is more likely than not
that we will be required to sell the security prior to recovery of its amortized cost basis. Under these
circumstances, the security's entire decline in fair value is deemed other-than-temporary and is
recognized in earnings.
We determine the population of securities that we intend to sell as of each balance sheet date. To
determine this population, we use management judgment, based on a variety of factors, including market
conditions, current operational plans, models and strategies and whether such securities are subject to
FHFA-led lawsuits or other loss mitigation measures. Changes in our operational plans, models or
strategies could change the population of securities we intend to sell and could have a potentially
significant impact on earnings.
If we do not intend to sell the security or it is not more likely than not that we will be required to sell the
security prior to recovery of its amortized cost basis, the unrealized loss is separated into two
components, the amount representing the credit loss and the amount related to all other factors. The
other-than-temporary impairment amount related to the credit loss is recognized in earnings, while the
amount related to all other factors, such as interest rate changes, is recorded to other comprehensive
income, net of taxes. The credit-related impairment is calculated as 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 evaluation of whether an unrealized loss is other-than-temporary requires significant judgment,
assumptions, and consideration of numerous factors that may change over time. For example, the timing
of our recognition of principal cash shortfalls varies based on the structure of our investments, as many of
the trusts that issued non-agency mortgage-related securities were structured so that realized collateral
losses in excess of structural credit enhancements are not passed on to investors until the investment
matures. In addition, our investments in non-agency mortgage-related securities backed by subprime,
option ARM, and Alt-A loans were structured to include credit enhancements, particularly through
subordination and other structural enhancements. We may also have credit enhancements through bond
insurance on certain non-agency mortgage-related securities. As it is difficult to estimate the future
performance of loans and mortgage-related securities with a high degree of assurance, actual results
could materially differ from our expectations.
The following table summarizes the impairment recognized in earnings for our available-for-sale
mortgage-related securities.
(in millions)
Net impairment of available-for-sale securities recognized in earnings:
Intent to sell
Other
Total net impairment of available-for-sale securities recognized in earnings
Freddie Mac 2015 Form 10-K
Year Ended December 31,
2015
2014
2013
$
$
240
$
52
292
$
817
121
938
$
$
568
942
1,510
126
Management's Discussion and Analysis
Risk Management | MRS Credit Risk
Over the last several years, consistent with our efforts to reduce the balance of our less liquid mortgage-
related assets, we continued to identify additional available-for-sale securities that we intend to sell. As a
result, we recognized the full amount of the unrealized loss on these securities in earnings. The “intent to
sell” related impairment recognized in earnings declined during 2015 compared to 2014, as the
unrealized losses associated with those securities we intend to sell were lower due to improvements in
forecasted home prices, declines in market interest rates, and tightening of credit spreads on non-agency
mortgage-related securities. See “Conservatorship and Related Matters - Limits on Our Mortgage-Related
Investments Portfolio and Indebtedness” for additional information on the limits on our mortgage-related
investments portfolio.
The "other" impairment amount relates to increases in our estimate of the present value of expected
future credit losses on certain individual available-for-sale securities. The portion of the impairment
related to credit losses has declined since 2013, as a result of improved pricing, stabilized collateral
performance, and our efforts to sell certain of the non-agency mortgage-related securities. We sell non-
agency mortgage-related securities for a variety of reasons, including return versus risk profile.
Freddie Mac 2015 Form 10-K
127
Management's Discussion and Analysis
Risk Management | Institutional Credit Risk
INSTITUTIONAL CREDIT RISK
We are exposed to institutional credit risk as a result of our contracts with seller/servicers, mortgage and
bond insurers, derivative counterparties, including clearing members and clearinghouses, cash and other
investments counterparties, mortgage-related security issuers, and document custodians. We manage
our exposure to institutional credit risk using the following principal strategies:
• Maintaining eligibility standards;
• Evaluating counterparty financial strength and performance and monitoring our exposure; and
• Working with underperforming counterparties and limiting our losses from their nonperformance of
obligations, when possible.
In the sections below, we discuss our management of institutional credit risk for each type of counterparty
to which we have significant exposure.
Sellers and Servicers
Overview
In our single-family guarantee business, we do not originate loans or have our own loan servicing
operation. Instead, our sellers and servicers perform the primary loan origination and loan servicing
functions on our behalf. We establish standards for our sellers and servicers to follow and have
contractual arrangements with them under which they represent and warrant that the loans they sell to us
meet our standards and that they will service loans in accordance with our standards. If we discover that
the representations or warranties related to a loan were breached (i.e., that contractual standards were
not followed), we can exercise certain contractual remedies to mitigate our actual or potential credit
losses. If our sellers or servicers lack appropriate controls, experience a failure in their controls, or
experience an operating disruption, including as a result of legal or regulatory actions or ratings
downgrades, we could experience a decline in mortgage servicing quality and/or be less likely to recover
losses through lender repurchases, recourse agreements, or other credit enhancements, where
applicable.
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.
Maintaining Eligibility Standards
Our eligibility standards for sellers and servicers require the following: a demonstrated operating history in
residential mortgage origination and servicing, or an eligible agent acceptable to us; adequate insurance
coverage; a quality control program that meets our standards; and sufficient net worth, liquidity, and
funding sources.
In 2015, at the direction of FHFA, we and Fannie Mae announced changes to our single-family seller and
servicer eligibility requirements. These changes include revisions to net worth requirements, adoption of
Freddie Mac 2015 Form 10-K
128
Management's Discussion and Analysis
Risk Management | Institutional Credit Risk
new capital and liquidity requirements and enhancements to certain servicer operational requirements.
Our revised operational requirements took effect in August 2015 and our revised financial requirements
took effect on December 31, 2015.
Evaluating Counterparty Financial Strength and Performance and Monitoring our Exposure
We perform ongoing monitoring and review of our exposure to individual sellers or servicers in
accordance with our counterparty risk management framework, including requiring our counterparties to
provide regular financial reporting to us. We also monitor and rate our sellers and servicers' compliance
with our standards and periodically review their operational processes. We may disqualify or suspend a
seller or servicer with or without cause at any time. Once a seller/servicer is disqualified or suspended, we
no longer purchase loans originated by that counterparty and no longer allow that counterparty to service
loans for us, while seeking to transfer servicing of existing portfolios.
As discussed in more detail in “Our Business Segments", we acquire a significant portion of both our
single-family and multifamily loan purchase volume from several large lenders, and a large percentage of
our loans are also serviced by several large servicers.
We have significant exposure to non-depository and smaller depository financial institutions in our single-
family business. These institutions may not have the same financial strength or operational capacity, or be
subject to the same level of regulatory oversight, as our largest mortgage seller or servicer counterparties.
Although our business with our single-family loan sellers is concentrated, a number of our largest single-
family loan seller counterparties reduced or eliminated their purchases of loans from mortgage brokers
and correspondent lenders in recent years. As a result, we acquire a greater portion of our single-family
business volume directly from non-depository and smaller depository financial institutions.
Also in recent years, there has been a shift in our single-family servicing from depository institutions to
non-depository institutions. Some of these non-depository institutions have grown rapidly in recent years
and now service a large share of our loans. We estimate that from December 31, 2012 to December 31,
2015, the percentage of our single-family credit guarantee portfolio that was serviced by non-depository
servicers grew from 19% to 29%. Approximately 35% and 44% of our single-family credit guarantee
portfolio that was serviced by our non-depository servicers was serviced by our three largest non-
depository servicers, on a combined basis, as of December 31, 2015 and 2014, respectively. Certain non-
depository servicers have been the subject of scrutiny from regulators.
Ocwen Financial Corp. (Ocwen) is one of our significant non-depository servicers of single-family
loans. Ocwen and its subsidiaries and/or affiliates have been the subject of significant adverse regulatory
scrutiny, and we have taken steps to reduce our exposure to them. We reduced the UPB of our loans
serviced by Ocwen to $26.4 billion at December 31, 2015 from $50.9 billion at December 31, 2014, or a
reduction of approximately 48%. We continue to closely monitor Ocwen’s performance.
Working with Underperforming Counterparties and Limiting our Losses from their
Nonperformance of Obligations, when Possible
We require certain of our larger single-family sellers to maintain ineligible loan rates below a stated
threshold, with financial consequences for non-compliance. In addition, we actively manage the current
quality of loan originations of our largest single-family sellers by performing loan quality control sampling
reviews and communicating loan defect rates and the causes of those defects to such sellers on a
Freddie Mac 2015 Form 10-K
129
Management's Discussion and Analysis
Risk Management | Institutional Credit Risk
monthly basis. If necessary, we work with these sellers to develop an appropriate plan of corrective
action.
We use a variety of tools and techniques to engage our single-family sellers and servicers and limit our
losses, including the following:
• Repurchases and other remedies - For certain violations of our single-family selling or servicing
policies, we can require the counterparty to repurchase loans or provide alternative remedies, such
as reimbursement of realized losses or indemnification. We typically first issue a notice of defect and
allow a period of time to correct the problem prior to issuing a repurchase request.
In January 2016, at the direction of FHFA, we implemented a new remedies framework for the
categorization of loan origination defects. Among other items, the framework provides that "significant
defects" will result in a repurchase request or a repurchase alternative, such as recourse or
indemnification. We may require the seller to pay us additional fees or provide us with additional data
on the loan.
The UPB of loans subject to repurchase obligations from single-family loan sellers declined to $0.2
billion at December 31, 2015 from $0.3 billion at December 31, 2014. See Note 13 for additional
information about loans subject to repurchase obligations.
•
Incentives and compensatory fees - We pay various incentives to single-family servicers for
completing workouts of problem loans. We also assess compensatory fees if single-family servicers
do not achieve certain benchmarks with respect to servicing delinquent loans.
• Servicing transfers - From time to time, we facilitate the transfer of servicing for certain groups of
single-family loans that are delinquent or are deemed at risk of default to servicers that we believe
have the 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, subject to FHFA approval in
the case of larger transfers.
Mortgage and Bond Insurers
Overview
We have exposure to mortgage and bond insurers through credit enhancements we obtained on single-
family loans and certain investments in non-agency mortgage-related securities. We also have exposure
to insurers through our ACIS transactions. If any of our mortgage or bond insurers fail to fulfill their
obligations, we may not receive reimbursement for credit losses to which we are contractually entitled
pursuant to our credit enhancement arrangements.
Freddie Mac 2015 Form 10-K
130
Management's Discussion and Analysis
Risk Management | Institutional Credit Risk
With respect to primary mortgage insurers, we currently cannot differentiate pricing based on counterparty
strength or revoke a primary mortgage insurer's status as an eligible insurer without FHFA approval.
Further, we do not select the insurance provider on a specific loan, since the selection is made by the
lender at the time the loan is originated. Accordingly, we are unable to manage our concentration risk with
respect to primary mortgage insurers. However, in recent years, new entrants emerged that will likely help
diversify our concentrated primary mortgage insurer exposure among more market participants over time.
As part of our ACIS credit risk transfer initiative, we regularly obtain insurance coverage from global
insurers and reinsurers. This initiative incorporates several features designed to increase the likelihood
that we will recover on the claims we file with the insurers, including the following:
•
In each ACIS transaction, we require the individual ACIS insurers and reinsurers to post collateral to
cover portions of their exposure, which helps to promote certainty of coverage and timely claim
payment; and
• While private mortgage insurance companies are required to be monoline (i.e., to participate solely in
the mortgage insurance business, although the holding company may be a diversified insurer), our
ACIS insurers and reinsurers participate in multiple types of insurance businesses, which helps to
diversify their risk exposure.
We acquired our bond insurance coverage when purchasing non-agency mortgage-related securities in
prior years and have not obtained any new bond insurance coverage in many years.
Maintaining Eligibility Standards
We maintain eligibility standards for mortgage insurers. In 2015, at the direction of FHFA, we published
revised eligibility requirements for mortgage insurers, in conjunction with Fannie Mae, which became
effective for all Freddie Mac-approved mortgage insurers on December 31, 2015. These revised eligibility
requirements include financial requirements determined using a risk-based framework, and were
designed to promote the ability of mortgage insurers to fulfill their intended role of providing consistent
liquidity throughout the mortgage cycle. Our mortgage insurers are required to submit audited financial
information and certify compliance with these new requirements by March 1, 2016. We will confirm our
mortgage insurers' capital adequacy as part of reviewing eligibility compliance subsequent to receiving
relevant information.
In 2014, we issued and implemented revised master policies for mortgage insurers that are designed to
provide greater certainty of coverage and facilitate timely claims processing.
Evaluating Counterparty Financial Strength and Performance and Monitoring our Exposure
We monitor our exposure to individual insurers by performing periodic analysis of the financial capacity of
each insurer under various adverse economic conditions.
The table below summarizes our exposure to single-family primary mortgage insurers as of December 31,
2015. In the event a mortgage insurer fails to perform, the coverage amounts represent our maximum
exposure to credit losses resulting from such a failure.
Freddie Mac 2015 Form 10-K
131
Management's Discussion and Analysis
Risk Management | Institutional Credit Risk
(in millions)
United Guaranty Residential Insurance
Company (United Guaranty)
Radian Guaranty Inc. (Radian)
Mortgage Guaranty Insurance
Corporation (MGIC)
Genworth Mortgage Insurance
Corporation
Essent Guaranty, Inc.
Credit
Rating(1)
BBB+
BB+
BB+
BB+
BBB
Credit
Rating
Outlook(1)
Watch
Negative
Stable
Stable
Stable
Stable
PMI Mortgage Insurance Co. (PMI)
Not Rated
N/A
Republic Mortgage Insurance Company
(RMIC)
Not Rated
N/A
Arch Mortgage Insurance Company
BBB+
Stable
Triad Guaranty Insurance Corporation
(Triad)
Others
Total
Not Rated
N/A
N/A
N/A
December 31, 2015
UPB
Coverage
Primary
MI
Pool
Insurance
Primary
MI
Pool
Insurance
$
56,931
$
19
$
14,675
$
55,170
1,905
14,125
54,505
36,589
22,696
9,489
7,335
5,301
3,564
5,483
148
14,034
24
—
91
55
—
20
—
9,387
5,824
2,360
1,831
1,308
896
1,320
12
623
2
23
—
62
26
—
5
—
$ 257,063
$
2,262
$
65,760
$
753
(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 4,
2016. Represents the lower of S&P and Moody’s credit ratings and outlooks stated in terms of the S&P equivalent.
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. Although the financial condition of
our mortgage insurers has improved in recent years, there is still a risk that some of these counterparties
may fail to fully meet their obligations under a stress economic scenario since they are monoline entities
primarily exposed to mortgage credit risk.
On January 26, 2016, as part of its strategic plan update, American International Group, Inc., announced
the planned initial public offering of up to a 19.9% stake in its mortgage insurance subsidiary, United
Guaranty. Because United Guaranty is an approved mortgage insurer, we will evaluate the impact to
United Guaranty's financial strength as part of approving the planned offering.
PMI and Triad are both in rehabilitation and no longer issue new insurance. Both of these insurers pay a
substantial portion of their claims as deferred payment obligations. RMIC is under regulatory supervision
and is no longer issuing new insurance; however, it continues to pay its claims in cash.
If, as we currently expect, PMI and Triad do not pay the full amount of their deferred payment obligations
in cash, we would lose a portion of the coverage from these insurers shown in the table above. As of
December 31, 2015, we had cumulative unpaid deferred payment obligations of $0.5 billion from these
insurers, although we are fully reserved for all of these unpaid amounts as collectability is uncertain.
Except for those insurers in rehabilitation or under regulatory supervision, which no longer issue new
coverage, we continue to acquire new loans with mortgage insurance from the mortgage insurers shown
in the table above, many of which have credit ratings below investment grade.
The table below summarizes our exposure to bond insurers as of December 31, 2015. 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.
Freddie Mac 2015 Form 10-K
132
Management's Discussion and Analysis
Risk Management | Institutional Credit Risk
December 31, 2015
UPB
Credit
Rating
Outlook(1)
Gross
Unrealized
Losses
Coverage
Outstanding
% of Total
Coverage
Outstanding
(dollars in millions)
Ambac Assurance Corporation (Ambac)
Credit
Rating(1)
Not Rated
National Public Finance Guarantee Corp.
A-
N/A
Negative
$
Financial Guaranty Insurance Company
(FGIC)
MBIA Insurance Corp.
Assured Guaranty Municipal Corp.
Syncora Guarantee Inc.
CIFG Assurance North America, Inc.
Total
Not Rated
N/A
B-
A
Not Rated
Not Rated
Stable
Stable
N/A
N/A
$
7
3
4
—
—
—
—
2,888
1,046
714
697
303
30
30
51%
18%
12%
12%
5%
1%
1%
$
14
$
5,708
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 rating available as of February 4,
2016. Represents the lower of S&P and Moody’s credit ratings and outlooks stated in terms of the S&P equivalent.
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. Some of our bond insurers are in runoff mode and not writing new business.
Derivative Counterparties
Overview
We use cleared derivatives, exchange-traded derivatives, and OTC derivatives, and are exposed to the
non-performance of each of our derivative counterparties. The Investments segment manages this risk for
the company. Our derivative counterparty credit exposure relates principally to interest-rate derivative
contracts. We maintain internal standards for approving new derivative counterparties, clearinghouses,
and clearing members.
• Cleared derivatives - 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 of the Dodd-Frank Act, which has resulted in additional costs. We are required to post
initial and variation margin with our clearing members in connection with such transactions. Our
exposure to the clearinghouses we use to clear such interest-rate derivatives, and to the clearing
members that administer our transactions once accepted for clearing, has increased and may
become more concentrated over time. This concentration exposes us to the risk of a failure of a
clearinghouse. However, the use of cleared derivatives mitigates our institutional credit risk exposure
to individual counterparties because a central counterparty is substituted for individual counterparties.
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
margin, depending on the amount of the counterparty’s exposure to Freddie Mac with respect to the
derivative transactions.
• Exchange-traded derivatives - We are required to post initial and variation margin with our clearing
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | Institutional Credit Risk
members in connection with exchange-traded derivatives. The posting of this margin exposes us to
institutional credit risk in the event that our clearing members or the exchanges' 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 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 a
counterparty in OTC derivatives that is subject to a master netting agreement has a net obligation to
us with a market value above an agreed upon threshold, the counterparty is obligated to deliver
collateral in the form of cash, securities, or a combination of both to satisfy its obligation to us under
the master netting agreement. Our OTC derivatives also require us to post collateral to counterparties
in accordance with agreed upon thresholds when we are in a derivative liability position. The
collateral posting thresholds we assign to our OTC counterparties, as well as the ones they assign to
us, are generally based on S&P or Moody’s credit rating. 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.
In the event a 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 losses 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.
Evaluating Counterparty Financial Strength and Performance and Monitoring Our Exposure
Over time, our exposure to derivative counterparties varies depending on changes in fair values, which
are affected by changes in interest rates and other factors. Due to risk limits with certain counterparties,
we may be forced to execute transactions with lower returns with our counterparties when managing our
interest-rate risk. We manage our exposure through master netting and collateral agreements and stress-
testing to evaluate potential exposure under possible adverse market scenarios. Collateral is typically
transferred within one business day based on the values of the related derivatives. We regularly review
the market values of the securities pledged to us as non-cash collateral to manage our exposure to loss.
We conduct additional reviews of our exposure when market conditions dictate or certain events affecting
an individual counterparty occur. 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.
The table below reconciles the net asset fair value of derivative contracts on our consolidated balance
sheets to our net exposure after considering non-cash collateral held, which is not netted on our
consolidated balance sheets.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | Institutional Credit Risk
(dollars in millions)
OTC interest-rate swap and swaption counterparties (by rating):
AA- or above
A+, A, or A-
BBB+, BBB, or BBB-
Total OTC
Cleared and exchange-traded derivatives
Total
As of December 31, 2015
Number of
Counter-
parties
Fair Value -
Gain positions
Fair Value - Gain
positions, net of
collateral
5
9
3
17
$
270
$
1,568
—
1,838
—
17
$
1,838
$
2
59
—
61
—
61
Approximately 97% of our exposure at fair value for OTC interest-rate swap and option-based derivatives,
excluding amounts related to our posting of cash collateral in excess of our derivative liability determined
at the counterparty level, was collateralized at December 31, 2015. The remaining exposure was primarily
due to market movements between the measurement of a derivative at fair value and our receipt of the
related collateral, as well as exposure amounts below the applicable counterparty collateral posting
threshold.
The concentration of our derivative exposure among our primary OTC derivative counterparties remains
high and could further increase.
We have posted non-cash collateral of $2.8 billion for initial margin related to cleared and exchange-
traded derivatives as of December 31, 2015.
We also execute forward purchase and sale commitments of mortgage-related securities, including dollar
roll transactions, that are treated as derivatives for accounting purposes and 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. In the event a clearing member fails and causes losses to the
MBSD/FICC clearing system, we could be subject to the loss of the margin that we have posted to the
MBSD/FICC. Moreover, our exposure could exceed the amount of margin we have posted to the MBSD/
FICC, as clearing members are generally required to cover losses caused by defaulting members on a
pro rata basis. It is difficult to estimate our maximum exposure, as this would require an assessment of
transactions that we and other members of the MBSD/FICC may execute in the future. We believe that it
is unlikely we will have to make any material payments under these arrangements and the risk of loss is
expected to be remote because of the MBSD/FICC’s financial safeguards and our ability to terminate our
membership in the clearinghouse (which would limit our loss).
Other Counterparties
We have exposure to other types of counterparties to transactions that we enter into in the ordinary
course of business, including the following:
• Cash and other investments counterparties - We are exposed to the non-performance of
counterparties relating to cash and other investments (including non-mortgage-related investments
and cash equivalent) transactions, including those entered into on behalf of our securitization trusts.
Our policies require that the counterparty be evaluated using our internal counterparty rating model
prior to our entering into such transactions. We monitor the financial strength of our counterparties to
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | Institutional Credit Risk
these transactions and may use collateral maintenance requirements to manage our exposure to
individual counterparties. The permitted term and dollar limits for each of these transactions are also
based on the counterparty’s financial strength. Our cash and other investments (including non-
mortgage-related investments and cash equivalents) counterparties are primarily major financial
institutions, Treasury, and the Federal Reserve Bank of New York. Our investments in non-mortgage-
related securities at December 31, 2015 and 2014 were in U.S. Treasury securities.
• Mortgage related-security issuers and servicers - We are exposed to the non-performance of
servicers and issuers of our investments in non-Freddie Mac mortgage-related securities, which can
result in credit losses, impairments and declines in the fair value of these securities. See the
“Mortgage-Related Securities Credit Risk” section for more information on how we manage risk
associated with non-agency mortgage-related securities. A significant portion of the single-family
loans underlying our investments in non-agency mortgage-related securities is serviced by non-
depository servicers. These servicers may not have the same financial strength, internal controls or
operational capacity as depository servicers. As of December 31, 2015 and 2014, approximately
$13.0 billion and $17.9 billion, respectively, of our investments in single-family non-agency mortgage-
related securities, based on UPB, were serviced by subsidiaries and/or affiliates of Ocwen.
• 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/servicers or their affiliates also serve as document custodians for us. Our ownership rights to
the loans that we own or that back our securitization products could be challenged if a seller/servicer
intentionally or negligently pledges, sells, 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.
To manage these risks, we maintain legal and contractual arrangements that identify our ownership
interest in the loans and establish qualifying standards for our document custodians. We also monitor
the financial strength of our document custodians on an ongoing basis in accordance with our
counterparty risk management framework, and we require transfer of documents to our possession or
to a different third-party document custodian if we have concerns about the solvency or competency
of the document custodian.
• The MERS® System - The MERS System is an electronic registry that is widely used by seller/
servicers, Freddie Mac, and other participants in the mortgage industry to maintain records of
beneficial ownership of loans. 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). A significant portion of the loans we own or guarantee are
registered in the MERS System. Our business could be adversely affected if we were prevented from
using the MERS System, or if our use of the MERS System adversely affects our ability to enforce
our rights with respect to our loans registered in the MERS System.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | Operational Risk
OPERATIONAL RISK
We define operational risk as the risk of loss resulting from inadequate or failed internal processes,
people, systems, or external events. Operational risk is inherent in all of our activities. Operational risk
events include accounting or operational errors, business interruptions, non-compliance with legal or
regulatory requirements, fraudulent acts, inappropriate acts by employees, information security incidents,
or vendors who do not perform in accordance with their contracts. These events could result in financial
loss, legal actions, regulatory fines, and reputational harm.
Operational Risk Management and Risk Profile
Our operational risk management framework includes risk identification, assessment, measurement,
mitigation and reporting. When operational risk events are identified, our policies require that the events
be documented and analyzed to determine whether changes are required in our systems and/or
processes to further mitigate the risk of future events.
During 2015 we continued to enhance and refine our three-lines-of-defense framework to both strengthen
risk ownership in our business units and add clarity to risk management roles and responsibilities. Our
framework focuses on balancing ownership of risk by our business units with corporate oversight and
independent assurance of the design and effectiveness of our risk management activities.
We moved several key functions within the organization to better align business decision-making with the
first-line-of-defense. We expanded our second-line-of-defense testing capabilities over our operational
controls. We continue a multi-year project focused on identifying and eliminating redundant control
activities. In addition, we conducted select organizational design reviews focused on reducing the number
of operating layers within the organization. We believe these enhancements will improve our risk
management effectiveness.
In order to evaluate and monitor operational risk, each business unit completes a quarterly assessment
using the Risk and Control Self-Assessment (RCSA) framework. The framework is designed to identify
and assess the business unit's exposure to operational risk and determine if additional action is required
to manage the risk to an acceptable level.
In addition to the RCSA process, we employ several tools to identify and measure operational risks,
including loss event data, key risk indicators, root cause analysis, and testing. While our operational risk
framework includes tools to support effective management of operational risk, the primary responsibility
for managing both the day-to-day risk and longer-term or emerging risks lies with the business units.
We continue to strengthen our operational controls. During 2015, we continued to improve our operational
control environment and reduced our outstanding control issues to low levels. We continued to improve
our out-of-region disaster recovery capabilities. Our out-of-region data center, which became operational
in 2014, improved our ability to recover our business systems in the event of a catastrophic regional
business event, such as a disaster that affects our Northern Virginia production data centers. However,
we continue to face significant levels of operational risks, including those discussed in “Risk Factors -
Operational Risks.”
We face increased operational risk due to the magnitude and complexity of FHFA initiatives and other
new initiatives we are undertaking, including initiatives we are pursuing under the Conservatorship
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | Operational Risk
Scorecards. We continue to make various multi-year investments to build the infrastructure for a future
housing finance system, including the development of the common securitization platform by the CSS,
which is jointly owned by Freddie Mac and Fannie Mae, and a single (common) security. With regard to
the common securitization platform, while we exercise influence over CSS through our Board
representation, we do not control its day to day operations. As a result, if this initiative is not successful,
we may not recover our investments. In addition, the transition to the common securitization platform,
which is currently scheduled to begin in late 2016, presents significant operational and technological
challenges.
The threat landscape in cyber security is changing rapidly and growing in sophistication. We may not be
able to protect our systems with complete assurance or fully protect the confidentiality of our information
from a cyber attack or other unauthorized access, disclosure, or disruption. We continue to invest in the
information security area to strengthen our capabilities and help us defend against advanced threats. In
2014, we launched a multi-year data protection initiative designed to mitigate this risk.
Operational Risk Related to the Use of Models
Our business activities rely on the use of models. We use a variety of models to inform management
decisions related to our businesses. These include models that forecast significant factors such as
interest rates, mortgage rates, and house prices, as well as models that project future cash flows related
to borrower prepayment and default behavior. Risks emerge when unexpected changes cause future
outcomes to be different from the outcomes projected by our models.
Model development, changes to existing models, and model risks are managed in each line of business
according to our three-lines-of-defense framework. New model development and changes to existing
models undergo a rigorous review process. Each business periodically reviews model performance,
embedded assumptions, and modeling techniques, and updates its models as it deems appropriate. The
Enterprise Risk Management Division, the second-line-of-defense, develops corporate model risk policies
and independently reviews the work done by the first-line-of-defense. The Internal Audit Division, the
third-line-of-defense, provides additional periodic independent assessment that model governance,
policies, and procedures are followed appropriately.
Given the importance and complexity of models in our business, model development may take several
months to complete. Delays in our model development process could affect our ability to make sound
business and risk management decisions, and increase our exposure to risk. We have procedures
designed to mitigate this risk.
We face heightened exposure to risk in our model governance processes at this time, as we continue to
transition to our enhanced three-lines-of-defense framework. We intend to make additional changes to
strengthen our model governance processes. We also are having difficulty finding and retaining high
quality technical model staff.
A corporate Model Operating Committee serves as a coordination forum for any issues arising from
models that are used across divisions. Issues that remain unresolved at the Model Operating Committee
are escalated to the ERC as necessary. We face significant risks associated with our use of models, as
discussed in "Risk Factors - Operational Risks - We face risks and uncertainties associated with the
models that we use to inform business and risk management decisions and for financial accounting and
reporting purposes."
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Management's Discussion and Analysis
Risk Management | Operational Risk
Operational Risk Issue Relating to Master Trust Agreement
Loan payments remitted to the company from seller/servicers are deposited into a custodial account that
contains both property of the company and property of the company's securitization trusts, including:
• Mortgage payments of principal and/or interest owed to investors;
• Mortgage payments of principal and/or interest owed to the company;
• Management and guarantee fees due to the company;
• Excess payments as to which a refund or credit may be owed to a seller/servicer; and
• Earnings owed to the company from the investment of the funds in the custodial account.
The custodial account also holds the securitization trusts' funds arising from transactions between the
company and the trusts, such as advances and guarantee payments by the company to the trusts and
payments by the company for its purchases of defaulted loans from the trusts. Funds in the custodial
account are restricted (i.e., not available for the company's general corporate purposes) even though
some of the funds in that account are owed to the company. Amounts owed to the company are
reclassified as unrestricted when funds are transferred into an operating cash account.
The company's processes and controls provide reasonable assurance that: (i) amounts that should be
received from seller/servicers into the custodial account are so received; and (ii) amounts that should be
paid to holders of its PCs are so paid. However, the company has concluded that some of its operating
procedures are not sufficiently detailed to comply with certain of its obligations under its PC Master Trust
Agreement or to enable the company to optimize its cash management.
Specifically, the company:
• Has not kept detailed pool-by-pool records of funds in the custodial account, as required by the
Master Trust Agreement; and
• Has not been withdrawing from the custodial account all amounts due to the company, as required by
the Master Trust Agreement, except for earnings from investment of funds.
Also, instead of recording separate, individual payments in the custodial account to reflect transactions
between the company and the trusts, the company has been netting amounts due to and due from the
trusts and then making monthly transfers to the custodial account of any aggregate net amount required
to be paid to the trusts. Since amounts owing to the company have generally exceeded amounts owed by
the company to the trusts in recent periods, this practice has led to a build-up in the custodial account of
funds that may belong to the company.
The company initiated a project to correct these operational deficiencies, to attribute the funds in the
custodial account as between the securitization trusts and the company and to record the relevant
transactions and balances at a more detailed level. The company does not believe that this issue has had
or will have a material adverse effect on holders of the company's PCs or on the company's financial
condition or results.
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Management's Discussion and Analysis
Risk Management | Operational Risk
Effectiveness of Our Disclosure Controls and Procedures
Management, including the company’s CEO and CFO, conducted an evaluation of the effectiveness of
our disclosure controls and procedures as of December 31, 2015. As of December 31, 2015, we had one
material weakness related to conservatorship, which remained unremediated, causing us to conclude that
our disclosure controls and procedures were not effective at a reasonable level of assurance. For
additional information, see “Controls and Procedures.”
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | Interest Rate Risk and Other Market Risks
INTEREST-RATE RISK AND OTHER MARKET RISKS
Our core businesses have embedded exposure to interest-rate risk and other market risks. Interest-rate
risk is consolidated and managed by the Investments segment, while spread risk is owned and managed
by each individual business segment. Interest-rate risk and other market risks can adversely affect future
cash flows, or economic value, as well as earnings and net worth.
The majority of our interest-rate risk comes from our mortgage-related assets (securities and loans) and
the debt we issue to fund them. Typically, an existing loan or bond investment is worth less to an investor
when interest rates (yields) rise and worth more when they decline. In addition, for a majority of our
mortgage-related assets, the borrower has the option to make unscheduled principal payments at any
time before maturity without incurring a prepayment penalty. Thus, our mortgage-related asset portfolio is
also exposed to the uncertainty as to when borrowers will exercise their option and pay the outstanding
principal balance of their loans. We face similar (and in most cases directionally opposite) exposure
related to unsecured debt. Unsecured debt is typically worth less to an investor when interest rates
(yields) rise and more when they decline. In addition, we issue debt with embedded options, such as an
option to call, which provides us flexibility concerning the timing of our debt maturities. We actively
manage our economic exposure to interest rate fluctuations.
Our primary goal in managing interest-rate risk is to reduce the amount of change in the value of our
future cash flows due to future changes in interest rates. We use models to analyze possible future
interest-rate scenarios, along with the cash flow of our assets and liabilities over those scenarios.
The choice of the benchmark rate used to model and hedge our positions is a significant assumption. The
effectiveness of our hedges ultimately depends on how closely the different instruments (assets, liabilities,
and derivatives) react to the underlying chosen benchmark. In the simplest example, all instruments
would have interest-rate risk based on the same underlying benchmark, in our case, the swap rate. In
practice, however, different instruments react differently versus the benchmark rate, which creates a
spread between the benchmark rate and the instrument. As the spreads of these instruments move
differently, our ability to predict the behavior of each instrument relative to the others is reduced,
potentially affecting the effectiveness of our hedges.
Although the mortgage-related investments portfolio is the main contributor of interest-rate risk to the
company, other core businesses also contribute to our interest-rate risk and may be managed
differently. Unlike the mortgage-related investments portfolio's long-term holding period for assets, the
securitization pipeline typically has a much shorter holding period. Since these assets are typically sold
shortly after purchase, the risk from these assets is generally tied to changes in current market prices (vs
long-term future cash flow value). Hedging these businesses at times requires additional assumptions
concerning risk metrics to accommodate changes in pricing that may not be related to the future cash
flow of the assets. This could create a perceived risk exposure as the hedged risk may differ from the
model risk.
We employ a risk management framework 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, such as acquiring or structuring mortgage-related securities with
certain expected prepayment and other characteristics;
Issuance of both callable and non-callable unsecured debt; and
•
• Use of interest rate derivatives, including swaptions and swaps.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | Interest Rate Risk and Other Market Risks
To maintain our interest-rate risk exposure within our risk limits across a range of interest-rate scenarios,
we analyze the interest-rate sensitivity of financial assets and liabilities at the instrument level on a daily
basis across a variety of interest-rate scenarios. For risk management purposes, the interest-rate risk
characteristics are determined daily based on market prices and models. The fair values of our assets
and liabilities, including derivatives, are primarily based on either third-party prices or observable market-
based inputs.
The 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 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, our ERM division establishes management 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. Our ERC is responsible for reviewing
performance as compared to the Board and management limits.
We generally do not hedge changes in fair value of our credit guarantees except for interest-rate
exposure related to buy-ups and float. Float, which arises from timing differences between the borrower's
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 borrowers and paid to us as trust management income.
Changes in prepayments, defaults, or spreads can adversely affect our economic cash flows, earnings,
and net worth.
We use derivatives as an important part of our strategy to manage interest-rate risk. When deciding 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 “Credit Risk - Institutional Credit Risk”
and “Risk Factors” for more discussion of our market risk exposures, including those related to
derivatives, institutional counterparties, and other market risks.
Measurement of Interest-Rate Risk
The principal types of interest-rate and other market risks to which we are exposed are described below.
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Management's Discussion and Analysis
Risk Management | Interest Rate Risk and Other Market Risks
Risk
Yield Curve
Risk
Description
Risk Exposure
Yield curve risk is the risk that changes in the
level and shape of the yield curve, such as a
level change, or a flattening or steepening, will
adversely affect our economic value. Our yield
curve risk under a specified yield curve scenario
is reflected in our PMVS-YC disclosure.
• A change in the level of interest rates
(represented by a parallel shift of the yield
curve, all else constant) exposes our assets and
liabilities to risk, potentially affecting future
expected cash flows and their present values.
• Similarly, changes in the shape or slope of the
yield curve (often reflecting changes in the
market’s expectation of future interest rates)
exposes our assets and liabilities to risk,
potentially affecting expected future cash flows
and their present values.
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
our economic value.
• We are exposed to volatility risk in both our
mortgage-related assets and liabilities,
especially in instruments with embedded
options.
Spread Risk Spread risk is the risk that yields in different
asset classes may not move together and may
adversely affect our economic value.
• This risk arises principally because interest
rates on our mortgage-related investments may
not move in tandem with interest rates on our
financial liabilities and derivatives, potentially
affecting the effectiveness of our hedges.
• We are continually exposed to significant spread
risk, also referred to as mortgage-to-debt OAS
risk, arising from funding mortgage-related
investments with debt securities.
• We also incur spread risk when we use LIBOR-
or Treasury-based instruments in our risk
management activities.
• We are exposed to spread risk arising from the
difference in time between when we commit to
purchase a multifamily mortgage loan and when
we securitize the loan. During this time, spreads
can widen, causing losses due to changes in
fair value. We also have spread risk on the K
Certificates we hold in our mortgage-related
investments portfolio.
Our primary interest-rate risk measures are duration gap and PMVS.
• Duration gap - Measures the difference in price sensitivity to interest rate changes between our
financial 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 economic value 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 economic value 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 economic value will increase in value when interest rates rise and decrease in value when interest
rates fall.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | Interest Rate Risk and Other Market Risks
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 several
types of our financial assets are measured at fair value, while our financial liabilities are generally not
measured at fair value.
• PMVS - An estimate of the change in the market value of our financial assets and liabilities with
spreads held constant from an instantaneous shock to interest rates, assuming no rebalancing
actions are undertaken and assuming the mortgage rate-to-LIBOR basis does not change. PMVS is
measured in two ways, one measuring the estimated sensitivity of our portfolio market value to a 50
basis point parallel movement in interest rates (PMVS-Level or PMVS-L) and the other to a
nonparallel movement (PMVS-Yield Curve or PMVS-YC), resulting from a 25 basis point change in
slope of the LIBOR yield curve. 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.
• We calculate our exposure to changes in interest rates using effective duration and effective
convexity based on our models. Effective duration measures the percentage change in the price
of financial instruments from a 100 basis point 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. The net effective duration of our
portfolio is expressed in months as our duration gap.
• Effective convexity measures the change in effective duration for a 100 basis point change in
interest rates. Effective duration is not constant over the entire yield curve and effective convexity
measures how effective duration changes over large changes in interest rates.
• 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 using 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 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 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
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Management's Discussion and Analysis
Risk Management | Interest Rate Risk and Other Market Risks
down rate shocks is the PMVS. In cases where both the up rate and down rate shocks result in a
positive effect, 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 using 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. Because this process uses a non-parallel shock to interest rates,
we refer to this measure as PMVS-YC.
We estimate the sensitivity to changes in interest rates of the fair value of all financial assets and
liabilities, including derivatives, on a pre-tax basis. 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
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 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
Our PMVS and duration gap estimates are determined using models that involve our judgment of interest-
rate and prepayment assumptions. 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, such as 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 effect of certain other market
risks, such as changes in volatility and spread risk. The effect 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. 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
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | Interest Rate Risk and Other Market Risks
programs, loan modifications, and the volatility and impact of home price movements on mortgage
durations. Mis-estimation 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 mis-
estimation could result in realized losses upon the sale of assets.
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, 2015 and 2014. 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. We are providing certain of the disclosures below pursuant to a disclosure
commitment with FHFA.
(in millions)
Assuming shifts of the LIBOR yield curve:
December 31, 2015
December 31, 2014
PMVS-YC
25 bps
PMVS-L
50 bps
100 bps
$
$
12
$
— $
50
102
$
$
186
396
Year Ended December 31,
2015
2014
(duration gap in
months, dollars in
millions)
Average
Minimum
Maximum
Standard deviation
Duration
Gap
PMVS-YC
25 bps
PMVS-L
50 bps
Duration
Gap
PMVS-YC
25 bps
PMVS-L
50 bps
0.2
$
(0.4) $
1.0
0.3
$
$
17
$
— $
47
12
$
$
90
23
249
40
(0.1) $
(2.4) $
$
0.7
0.4
$
14
$
— $
65
14
$
$
69
—
509
79
Derivatives have historically enabled us to reduce our interest-rate risk exposure. The table below shows
that the PMVS-L risk levels assuming a 50 basis point shift in the LIBOR yield curve for the periods
presented would have been higher if we had not used derivatives.
(in millions)
December 31, 2015
December 31, 2014
PMVS-L (50 bps)
Before
Derivatives
After
Derivatives
Effect of
Derivatives
$
$
3,373
3,226
$
$
50
102
$
$
(3,323)
(3,124)
While we manage our interest-rate risk exposure on an economic basis to a low level as measured by our
models, the accounting treatment for our financial assets and liabilities (i.e., some are measured at
amortized cost, while others are measured at fair value), including derivatives, creates volatility in our
earnings when interest rates fluctuate. Based upon the composition of our financial assets and liabilities,
including derivatives, at December 31, 2015, we generally recognize fair value losses in earnings when
interest rates decline. The table below presents the estimated adverse net effect on pre-tax earnings of
certain immediate shifts in interest rates. These estimates are essentially the derivative gains (losses)
attributable to financial instruments that are not measured at fair value, as discussed in "Consolidated
Results of Operations - Interest-Rate Risk Management Activities." The methodology used to calculate
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Risk Management | Interest Rate Risk and Other Market Risks
these figures is consistent with the methodology used to calculate our PMVS-YC and PMVS-L metrics
above.
(in millions)
December 31, 2015
December 31, 2014
GAAP FV-YC
GAAP FV-L
25 bps
50 bps
100 bps
$
$
635
672
$
$
1,630
1,176
$
$
3,573
2,597
The disclosure in our Monthly Volume Summary reports, which are available on our web site
www.freddiemac.com, reflects the average of the daily PMVS-L, PMVS-YC, and duration gap estimates
for a given reporting period (a month, a quarter, or year).
Freddie Mac 2015 Form 10-K
147
Management's Discussion and Analysis
Liquidity and Capital Resources | Overview
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
Our business activities require that we maintain adequate liquidity to fund our operations, which primarily
include the following:
• Principal payments due to the maturity, redemption or repurchase of our short- and long-term debt;
•
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 mortgage loans from PC trusts;
• Any shortfall related to the payments of principal and interest on our debt securities issued by
consolidated trusts and any other payments related to our guarantees of mortgage assets;
• Any costs related to the disposition of our REO properties;
• Payments related to derivative contracts;
• Posting or pledging collateral to third parties in connection with secured financing and daily trade
activities; and
• Administrative expenses.
We fund our cash needs primarily by issuing short- and long-term debt. Other sources of cash primarily
include:
•
Interest and principal payments on and sales of securities or loans that we hold in our mortgage-
related investments portfolio or our liquidity and contingency operating 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.
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. For a description of our debt products, see “Our
Business Segments - Investments.”
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Management Framework
LIQUIDITY MANAGEMENT FRAMEWORK
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 and any future downgrades in our credit
ratings or the credit ratings of the U.S. government.
We make extensive use of the Federal Reserve's payment system in our business activities. The Federal
Reserve requires that we fully fund our accounts at the Federal Reserve Bank of New York 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. Although we
seek to maintain sufficient intraday liquidity to fund our activities through the Federal Reserve's payment
system, we have limited access to cash once the debt markets are closed for the day. Insufficient cash
may cause our account to be overdrawn, potentially resulting in penalties and reputational harm.
Maintaining sufficient liquidity is of primary importance to, and a cost of, our business. Under our liquidity
management practices and policies, we:
• Manage intraday cash needs and provide for the contingency of an unexpected cash demand;
• 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;
• 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; and
• Manage the maturity of our unsecured debt based on our asset profile.
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 the timing of our cash flows. Differences
between actual and forecasted cash flows have resulted in higher costs from issuing a higher amount of
debt than needed or unexpectedly needing to issue debt, and may do so in the future. Differences
between actual and forecasted cash flows also could result in an overdraw of our account at the Federal
Reserve Bank of New York. We maintain daily cash reserves to manage this risk.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
LIQUIDITY PROFILE
During 2015, the majority of the funds in our liquidity and contingency operating portfolio were deposited
with the Federal Reserve Bank of New York, invested in U.S. Treasury securities, or invested in securities
purchased under agreements to resell. 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.
During 2015, we had sufficient access to the debt markets due largely to support from the U.S.
government. We rely significantly on our ability to issue debt on an on-going basis to refinance our
effective short-term debt.
Our debt cap under the Purchase Agreement was $563.6 billion in 2015 and declined to $479.0 billion on
January 1, 2016. As of December 31, 2015, our aggregate indebtedness, calculated as the par value of
other debt, was $418.0 billion. We disclose the amount of our 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.
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.
To fund our business activities, we depend on the continuing willingness of investors to purchase our debt
securities. The 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
“Regulation and Supervision,” could adversely affect our access to some debt investors, thereby
potentially increasing our debt funding costs. For more information on our short- and long-term liquidity
needs, see “Contractual Obligations.”
OTHER DEBT ACTIVITIES
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. In recent years,
we have witnessed a significant increase in FHLB short-term debt issuances and outstanding balances.
Increased competition from the FHLBs with respect to short-term debt issuances may have caused our
short-term debt spreads to increase during the last quarter of 2015.
The table below summarizes the par value of other debt securities we issued or paid off during 2015 and
2014, including regularly scheduled principal payments, payments resulting from calls, and payments for
repurchases. We repurchase, call, or exchange our outstanding debt securities from time to time for a
variety of reasons, including managing our funding composition and supporting the liquidity of our debt
securities.
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Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
(dollars in millions)
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:
Short-term:
Amount
Weighted-average effective interest rate
Long-term:
Amount
Weighted-average effective interest rate
Total paid off:
Amount
Weighted-average effective interest rate
Ending balance
Unamortized premiums and discounts
Hedging-related and other basis adjustments
Other
Total other debt
Year Ended December 31,
2015
2014
454,029
$
511,345
437,509
$
0.11%
168,581
$
1.43%
606,090
$
0.48%
(458,546)
$
0.07%
(183,552)
$
1.44%
(642,098)
0.47%
418,021
(3,684)
17
(48)
414,306
$
$
$
217,716
0.11%
92,641
1.16%
310,357
0.42%
(224,814)
0.12%
(142,859)
1.61%
(367,673)
0.70%
454,029
(3,918)
(42)
—
450,069
$
$
$
$
$
$
$
$
$
Issuances and pay-offs of short-term debt increased during 2015 compared to 2014 as we began utilizing
overnight discount notes as a more cost efficient tool to manage our intra-day liquidity needs. In addition,
issuances and pay-offs of long-term debt increased during 2015 compared to 2014 as we issued more
long-term callable debt to replace debt that was called for economic reasons.
Freddie Mac 2015 Form 10-K
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Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
OTHER SHORT-TERM DEBT
The table below contains details on the characteristics of our other short-term debt.
(dollars in millions)
Ending Balance
Yearly Average
December 31, 2015
Carrying
Value
Weighted
Average
Effective
Rate
Carrying
Value
Weighted
Average
Effective
Rate
Maximum
Carrying Value
Outstanding at
Any Month End
Discount notes and Reference Bills
$
104,027
0.28% $
102,540
0.16% $
123,248
Medium-term notes
Securities sold under agreements to
repurchase
Total
9,545
—
$
113,572
0.20
—
0.27
3,173
15
0.09
0.21
9,454
—
(dollars in millions)
Ending Balance
Yearly Average
December 31, 2014
Carrying
Value
Weighted
Average
Effective
Rate
Carrying
Value
Weighted
Average
Effective
Rate
Maximum
Carrying Value
Outstanding at
Any Month End
Discount notes and Reference Bills
$
134,619
0.12% $
116,388
0.12% $
134,619
Medium-term notes
Securities sold under agreements to
repurchase
—
—
Total
$
134,619
—
—
0.12
750
15
0.16
0.11
4,000
—
(dollars in millions)
Ending Balance
Yearly Average
December 31, 2013
Carrying
Value
Weighted
Average
Effective
Rate
Carrying
Value
Weighted
Average
Effective
Rate
Maximum
Carrying Value
Outstanding at
Any Month End
Discount notes and Reference Bills
$
137,712
0.13% $
130,919
0.13% $
140,082
Medium-term notes
Securities sold under agreements to
repurchase
Total
4,000
—
$
141,712
0.16
—
0.13
2,291
15
0.16
0.16
4,000
—
For information about our other long-term debt, see Note 7.
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Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
DEBT SECURITIES OF CONSOLIDATED TRUSTS
The table below shows the issuance and extinguishment activity for the debt securities of our
consolidated trusts.
(in millions)
Beginning balance
New issuances
Newly-issued debt securities retained at issuance
Net new issuances to third parties
Additional issuances of securities
Total issuances
Extinguishments, net
Ending balance
Unamortized premiums and discounts
Year Ended December 31,
2015
2014
$
1,440,325
$
1,399,456
353,882
(93,992)
259,890
137,676
397,566
(324,802)
1,513,089
43,032
257,293
(47,792)
209,501
92,053
301,554
(260,685)
1,440,325
39,148
1,479,473
Debt securities of consolidated trusts held by third parties
$
1,556,121
$
The table below provides information on the debt securities issued by our consolidated trusts as of the
dates set forth below.
(in millions)
Single-family
PCs:
December 31,
2015
2014
30-year or more amortizing fixed-rate
$
1,156,220
$
1,088,340
20-year amortizing fixed-rate
15-year amortizing fixed-rate
Adjustable-rate
Interest-only
FHA/VA and other governmental
Total single-family PCs
Other single-family
Total single-family
Multifamily
K Certificates
Other securitization products
Total multifamily
Total Freddie Mac mortgage-related securities
Repurchased or retained at issuance Freddie Mac mortgage-
related securities
Debt securities of consolidated trusts held by third parties
$
81,255
281,165
66,807
19,573
2,745
1,607,765
5,824
1,613,589
1,629
82
1,711
1,615,300
(102,211)
1,513,089
$
78,603
278,282
69,683
23,941
3,154
1,542,003
7,030
1,549,033
440
84
524
1,549,557
(109,232)
1,440,325
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Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
SUBORDINATED DEBT
During 2015 and 2014, we did not call or issue any Freddie SUBS® securities. At both December 31,
2015 and 2014, the balance of our subordinated debt outstanding was $0.4 billion. 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 4,
2016.
Senior long-term debt
Short-term debt
Subordinated debt
Preferred stock(1)
Outlook
Nationally Recognized Statistical Rating
Organization
S&P
Moody's
Fitch
AA+
A-1+
AA-
D
Stable
Aaa
P-1
Aa2
Ca
Stable
AAA
F1+
AA-
C/RR6
Stable
(1) Does not include senior preferred stock issued to Treasury.
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.
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.
LIQUIDITY AND CONTINGENCY OPERATING PORTFOLIO
Excluding amounts related to our consolidated VIEs and collateral held by us from OTC derivative
counterparties, we held $70.0 billion and $53.9 billion in the aggregate of cash and cash equivalents,
securities purchased under agreements to resell, and non-mortgage-related securities at December 31,
2015 and 2014, respectively. These investments are important to our cash flow, collateral management,
and asset and liability management, and our ability to provide liquidity and stability to the mortgage
market. At December 31, 2015, our non-mortgage-related securities consisted of U.S. Treasury securities
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.
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Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
MORTGAGE LOANS AND MORTGAGE-RELATED SECURITIES
We invest principally in mortgage loans and mortgage-related securities, certain categories of which are
largely unencumbered and liquid. Our primary source of liquidity among these mortgage assets is our
holdings of single-class and multiclass agency securities, excluding certain structured agency securities
collateralized by non-agency mortgage-related securities.
In addition, we hold unsecuritized single-family loans and multifamily held-for-sale loans that could be
securitized and would then be available for sale or use as collateral for repurchase agreements. Due to
the large size of our portfolio of liquid assets, the amount of mortgage-related assets that we may
successfully sell or borrow against in the event of a liquidity crisis or significant market disruption is
substantially less than the amount of mortgage-related assets we hold. There would likely be insufficient
market demand for large amounts of these assets over a prolonged period of time, which would limit our
ability to sell or borrow against these assets.
We hold other mortgage assets, but given their characteristics, they may not be available for immediate
sale or able to be used as collateral for repurchase agreements. These assets consist of certain
structured agency securities collateralized by non-agency mortgage-related securities, 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 loans.
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.
CASH FLOWS
Cash and cash equivalents decreased $5.3 billion to $5.6 billion during 2015, as compared to a decrease
of $0.4 billion to $10.9 billion during 2014 and an increase of $2.8 billion to $11.3 billion during 2013.
Cash flows used in operating activities during 2015 were primarily driven by increased net purchases of
held-for-sale mortgage loans. Cash flows used in operating activities during 2015 were $0.9 billion. Cash
flows provided by operating activities during 2014 and 2013 were $8.9 billion and $16.6 billion,
respectively, primarily driven by cash proceeds from net interest income and non-agency mortgage-
related securities settlements. Cash flows provided by investing activities during 2015, 2014, and 2013
were $179.0 billion, $205.3 billion, and $391.3 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 2015, 2014, and 2013 were $183.3 billion, $214.5 billion, and $405.0 billion,
respectively, primarily driven by net funds used to repay or redeem debt securities of consolidated trusts
held by third parties and other debt.
CAPITAL RESOURCES
Our entry into conservatorship resulted in significant changes to the assessment of our capital adequacy
and our management of capital. Since our entry into conservatorship, Treasury and FHFA have taken a
number of actions that affect our cash requirements and our ability to fund those requirements. Under the
Purchase Agreement, Treasury made a commitment to provide us with funding, under certain conditions,
to eliminate deficits in our net worth. Obtaining funding from Treasury pursuant to its commitment under
the Purchase Agreement enables us to avoid being placed into receivership by FHFA. The amount of
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Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
available funding remaining under the Purchase Agreement is $140.5 billion. This amount will be reduced
by any future draws.
At December 31, 2015, our assets exceeded our liabilities under GAAP; therefore no draw is being
requested from Treasury under the Purchase Agreement. Based on our Net Worth Amount at
December 31, 2015 and the 2016 Capital Reserve Amount of $1.2 billion, our dividend obligation to
Treasury in March 2016 will be $1.7 billion. Under the Purchase Agreement, the payment of dividends
does not reduce the outstanding liquidation preference of the senior preferred stock. As a result of the net
worth sweep dividend on the senior preferred stock, our future profits will effectively be distributed to
Treasury, and we cannot retain capital from the earnings generated by our business operations (other
than a limited amount that will decrease to zero in 2018) or return capital to stockholders other than
Treasury. See “Conservatorship and Related Matters” and “Regulation and Supervision” for more
information.
The table below presents activity related to our equity capital during the last five quarters.
Three Months Ended
Year
Ended
(in millions)
12/31/2015
9/30/2015
6/30/2015
3/31/2015
12/31/2014
12/31/2015
Beginning balance
$
1,299
$
5,713
$
2,546
$
2,651
$
5,186
$
Comprehensive income
Capital draw from Treasury
Senior preferred stock
dividends declared
Total equity / net worth
Aggregate draws under
Purchase Agreement
Aggregate cash dividends
paid to Treasury
$
$
$
1,641
—
—
2,940
71,336
96,465
$
$
$
(501)
—
(3,913)
1,299
71,336
96,465
$
$
$
3,913
—
(746)
5,713
71,336
92,552
$
$
$
746
—
(851)
2,546
71,336
91,806
$
$
$
251
—
(2,786)
2,651
71,336
90,955
$
$
$
2,651
5,799
—
(5,510)
2,940
71,336
96,465
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Management's Discussion and Analysis
Conservatorship and Related Matters
CONSERVATORSHIP AND RELATED MATTERS
SUPERVISION OF OUR COMPANY DURING CONSERVATORSHIP
FHFA has broad powers when acting as our 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. However, the GSE Act provides that 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 conduct our business subject to the direction of FHFA as our Conservator. The Conservator has
delegated certain authority to the Board of Directors to oversee, and to management to conduct, business
operations so we can 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 revise its
delegations of authority at any time. The Conservator also retains certain significant authorities for itself,
and has not delegated them to the Board. The Conservator continues to provide strategic direction for the
company and directs the efforts of the Board and management to implement its strategy. Despite the
delegations of authority to management, many management decisions are subject to review and/or
approval by FHFA and management frequently receives direction from FHFA on various matters involving
day-to-day operations.
Our current business objectives reflect direction we 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. Given our public mission and the important role the
Administration and our Conservator have placed on Freddie Mac in addressing housing and mortgage
market conditions, we sometimes take actions that could have a negative impact on our business,
operating results or financial condition, and thus contribute to a need for additional draws under the
Purchase Agreement. Certain of these actions are intended to help homeowners and the mortgage
market.
TREASURY AGREEMENTS AND SENIOR PREFERRED STOCK
In connection with our entry into conservatorship, we entered into the Purchase Agreement with Treasury.
Under the Purchase Agreement, 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." The Treasury Agreements and the senior preferred stock do not contain any provisions
causing them to terminate or cease to exist upon the termination of conservatorship. The conservatorship,
the Treasury Agreements and the senior preferred stock materially limit the rights of our common and
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preferred stockholders (other than Treasury).
Pursuant to the Purchase Agreement, which we entered into through FHFA, in its capacity as
Conservator, on September 7, 2008, we issued to Treasury one million shares of Variable Liquidation
Preference Senior Preferred Stock with an initial liquidation preference of $1 billion and a warrant to
purchase, for a nominal price, shares of our common stock equal to 79.9% of the total number of shares
outstanding. The senior preferred stock and warrant were issued to Treasury as an initial commitment fee
in consideration of Treasury's commitment to provide funding to us under the Purchase Agreement. 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. 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 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
consolidated balance sheet for the applicable fiscal quarter, provided that the aggregate amount funded
under the Purchase Agreement may not exceed Treasury's commitment. As of December 31, 2015, the
aggregate liquidation preference of the senior preferred stock was $72.3 billion, and the amount of
available funding remaining under the Purchase Agreement was $140.5 billion. To the extent we draw
additional funds in the future, the aggregate liquidation preference will increase and the amount of
available funding remaining will decrease.
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. The dividends we have paid to Treasury on
the senior preferred stock have been declared by, and paid at the direction of, the Conservator, acting as
successor to the rights, titles, powers and privileges of the Board. Under the August 2012 amendment to
the Purchase Agreement, 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. As a result of the net worth sweep dividend, our future profits will effectively be
distributed to Treasury, and the holders of our common stock and non-senior preferred stock will not
receive benefits that could otherwise flow from any such future profits.
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.
We are not permitted to redeem the senior preferred stock prior to the termination of Treasury’s funding
commitment under the Purchase Agreement.
The Purchase Agreement and warrant contain covenants that significantly restrict our business and
capital activities. For example, 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:
• Pay dividends on our equity securities, other than the senior preferred stock or warrant, or repurchase
our equity securities;
Issue any additional equity securities, except in limited instances;
•
• Sell, transfer, lease or otherwise dispose of any assets, other than dispositions for fair market value in
the ordinary course of business, consistent with past practices, and in other limited circumstances;
and
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•
Issue any subordinated debt.
LIMITS ON OUR MORTGAGE-RELATED INVESTMENTS PORTFOLIO AND
INDEBTEDNESS
Our ability to acquire and sell mortgage assets is significantly constrained by limitations under the
Purchase Agreement and other limitations 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 cap reaches $250 billion.
• 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.
• Our Retained Portfolio Plan, which we adopted in 2014, provides for us to manage the mortgage-
related investments portfolio so that it does not exceed 90% of the annual cap established by the
Purchase Agreement, subject to certain exceptions. Under the plan, we may seek permission from
FHFA to increase the plan's limit on the mortgage-related investments portfolio to 95% of the
Purchase Agreement annual cap.
• FHFA indicated that any portfolio sales should be commercially reasonable transactions that consider
impacts to the market, borrowers and neighborhood stability.
Our decisions with respect to managing the decline of the mortgage-related investments portfolio affect all
three business segments. In order to achieve all of our portfolio reduction goals, it is possible that we may
forgo economic opportunities in one business segment in order to pursue opportunities in another
business segment. The reduction in the mortgage-related investments portfolio will result in a decline in
income from this portfolio over time.
Our results against the limits imposed on our mortgage-related investments portfolio and aggregate
indebtedness are shown below.
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Mortgage Assets
Indebtedness
Reducing Our Mortgage-Related Investments Portfolio Over Time
Our mortgage-related investments portfolio includes assets held by all three business segments and
consists of:
• Agency securities, which include both single-family and multifamily Freddie Mac mortgage-related
securities and non-Freddie Mac agency mortgage-related securities;
• Non-agency mortgage-related securities, which include single-family non-agency mortgage-related
securities, CMBS, housing revenue bonds, and other multifamily securities; and
• Single-family and multifamily unsecuritized loans.
We evaluate the liquidity of the assets in our mortgage-related investments portfolio based on three
categories (in order of liquidity):
• Liquid: single-class and multi-class agency securities, excluding certain structured agency securities
collateralized by non-agency mortgage-related securities;
• Securitization Pipeline: performing multifamily and single-family loans purchased for cash and
primarily held for a short period until securitized, with the resulting Freddie Mac issued securities
being sold or retained; and
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• Less Liquid: assets that are less liquid than agency securities and loans in the securitization pipeline
(e.g., reperforming loans and performing modified loans and non-agency mortgage-related
securities).
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.
December 31, 2015
Securitiz-
ation
Pipeline
Less
Liquid
December 31, 2014
Securitiz-
ation
Pipeline
Less
Liquid
Total
Total
Liquid
(dollars in millions)
Liquid
Investments segment - Mortgage
investments portfolio:
Single-family unsecuritized loans
Performing loans
$
— $ 10,041
$
— $ 10,041
$
— $ 7,497
$
— $ 7,497
Reperforming loans and performing
modified loans
Total single-family unsecuritized loans
Freddie Mac mortgage-related
securities
Non-agency mortgage-related
securities
Non-Freddie Mac agency mortgage-
related securities
Total Investment segment - Mortgage
investments portfolio
Single-family Guarantee segment -
Single-family unsecuritized seriously
delinquent loans
Multifamily segment - unsecuritized
loans and mortgage-related securities
Total mortgage-related investments
portfolio
Percentage of total mortgage-related
investments portfolio
Mortgage-related investments portfolio
cap at December 31, 2015 and 2014,
respectively
90% of mortgage-related investments
portfolio cap at December 31, 2015(1)
—
—
—
10,041
67,036
67,036
67,036
77,077
—
—
—
7,497
75,281
75,281
75,281
82,778
135,869
—
12,958
—
—
—
6,076
141,945
150,852
27,754
27,754
—
—
12,958
16,341
—
—
—
7,363
158,215
44,230
44,230
—
16,341
148,827
10,041
100,866
259,734
167,193
7,497
126,874
301,564
—
—
19,501
19,501
—
—
28,738
28,738
7,304
19,563
40,809
67,676
1,911
12,111
64,090
78,112
$156,131
$ 29,604
$161,176
$346,911
$169,104
$ 19,608
$219,702
$408,414
45%
9%
46%
100%
41%
5%
54%
100%
$399,181
$359,263
$469,625
(1) Represents the amount that we manage to under our Retained Portfolio Plan, subject to certain exceptions.
We are particularly focused on reducing, in an economically sensible manner, the balance of less liquid
assets that we hold in our portfolio. Our efforts to reduce our holdings of these assets help satisfy several
objectives, including to improve the overall liquidity of our mortgage-related investments portfolio and
comply with the mortgage-related investments portfolio limits. The decline in our holdings of less liquid
assets included pay-downs and active dispositions and accounted for the majority of the decline in our
mortgage-related investments portfolio during 2015. Our active dispositions of less liquid assets included
the following:
• Sales of $14.7 billion of less liquid assets, including $11.4 billion in UPB of non-agency mortgage-
related securities and $2.9 billion in UPB of seriously delinquent unsecuritized single-family loans;
• Securitization of $8.2 billion of single-family reperforming loans and performing modified loans, which
included HAMP loans; and
• Enhanced the liquidity of $2.9 billion of multifamily non-agency mortgage-related securities through
resecuritization. We retained these more liquid securities in our mortgage-related investments
portfolio.
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FHFA’S STRATEGIC PLAN FOR FREDDIE MAC AND FANNIE MAE
CONSERVATORSHIPS
In May 2014, FHFA issued its 2014 Strategic Plan. In January and December 2015, FHFA issued the
2015 and 2016 Conservatorship Scorecards, respectively. The 2014 Strategic Plan updated FHFA's
vision for implementing its obligations as Conservator of Freddie Mac and Fannie Mae. The
Conservatorship Scorecards established annual objectives and performance targets and measures for
Freddie Mac and Fannie Mae related to the strategic goals set forth in the 2014 Strategic Plan.
The 2014 Strategic Plan established three reformulated strategic goals for the conservatorships of
Freddie Mac and Fannie Mae:
• Maintain, in a safe and sound manner, foreclosure prevention activities and credit availability for new
and refinanced loans to foster liquid, efficient, competitive, and resilient national housing finance
markets.
• Reduce taxpayer risk through increasing the role of private capital in the mortgage market.
• Build a new single-family securitization infrastructure for use by Freddie Mac and Fannie Mae and
adaptable for use by other participants in the secondary market in the future.
We continue to align our resources and internal business plans to meet the goals and objectives provided
by FHFA.
For information about the 2015 Conservatorship Scorecard, and our performance with respect to it, see
“Executive Compensation - Compensation Discussion and Analysis.” For information about the 2016
Conservatorship Scorecard, see our current report on Form 8-K filed on December 18, 2015.
For more information on the conservatorship and related matters, see "Regulation and Supervision," “Risk
Factors - Conservatorship and Related Matters,” Note 2, Note 10, and “Directors, Corporate Governance,
and Executive Officers - Authority of the Board and Board Committees.”
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Regulation and Supervision
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 and to certain regulation by other government agencies.
Furthermore, regulatory activities by other government agencies can affect us indirectly, even if we are
not directly subject to such agencies’ regulation or oversight. For example, regulations that modify
requirements applicable to the purchase or servicing of mortgages can affect us.
FEDERAL HOUSING FINANCE AGENCY
FHFA is an independent agency of the federal government responsible for oversight of the operations of
Freddie Mac, Fannie Mae, and the FHLBs.
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.
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 set
forth in the GSE Act.
Certain aspects of conservatorship and receivership operations of Freddie Mac, Fannie Mae and the
FHLBs are addressed in an FHFA rule. Among other provisions, the rule indicates that FHFA generally 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 rule indicates that administrative expenses of the conservatorship
will also be deemed to be administrative expenses of receivership and that capital distributions may not
be made during conservatorship, except as specified in the 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. These capital standards are described in Note 16. Under the GSE Act, FHFA has the
authority to increase our minimum capital levels temporarily or to establish additional capital and reserve
requirements for particular purposes.
Pursuant to an FHFA rule, FHFA-regulated entities are required to conduct annual stress tests to
determine whether such companies have sufficient capital to absorb losses as a result of adverse
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economic conditions. Under the rule, Freddie Mac is required to conduct annual stress tests using
scenarios specified by FHFA that reflect a minimum of three sets of economic and financial conditions
and publicly disclose the results of the stress test under the “severely adverse” scenario. In April 2015, we
disclosed the results of our most recent "severely adverse" scenario stress test which projected an
improvement in the amount of available funding remaining under the Purchase Agreement compared to
the test results disclosed in April 2014.
For additional information, see “Liquidity And Capital Resources - Capital Resources.”
New Products
The GSE Act requires Freddie Mac and Fannie Mae to obtain the approval of FHFA before initially offering
any product, 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 published an interim final rule
on prior approval of new products, it 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.
Affordable Housing Goals
We are subject to annual affordable housing goals. We view the purchase of 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 very low-, low-, and moderate-income
families. In light of these goals, we may make adjustments to our strategies for purchasing loans, which
could potentially increase our credit losses. These strategies could include entering into purchase and
securitization transactions with lower expected economic returns than our typical transactions. In
February 2010, FHFA stated that it 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 (or there is a substantial probability that we will fail) to meet a
housing goal and that achievement of the housing goal was or is feasible, the Director may require the
submission of a housing plan that describes the actions we will take to achieve the unmet goal. FHFA has
the authority to take actions against us if we fail to submit a required housing plan, submit an
unacceptable plan, fail to comply with a plan approved by FHFA, or fail to submit certain mortgage
purchase data, 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,
which may cause us to forgo other more profitable opportunities.”
Current FHFA housing goals applicable to our purchases consist of four goals and one subgoal for single-
family owner-occupied housing, one multifamily affordable housing goal, and two multifamily affordable
housing subgoals. Single-family goals are expressed as a percentage of the total number of eligible loans
underlying our total single-family loan purchases, while the multifamily goals are expressed in terms of
minimum numbers of units financed.
Three of the single-family housing goals and the subgoal target purchase money loans for low-income
families, very low-income families, and/or families that reside in low-income areas. The single-family
housing goals also include one goal that targets refinancing loans for low-income families. The multifamily
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affordable housing goal targets multifamily rental housing affordable to low-income families. The
multifamily affordable housing subgoals target multifamily rental housing affordable to very low-income
families and small (5- to 50-unit) multifamily properties affordable to low-income families.
The single-family goals are measured by comparing our performance with the actual share of the market
that meets the criteria for each goal and a benchmark level established by FHFA. If our performance on a
single-family goal falls short of the benchmark, 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.
In August 2015, FHFA issued the final rule establishing affordable housing goals for Freddie Mac and
Fannie Mae for 2015 through 2017. The rule applies retroactively to the beginning of 2015. Under FHFA’s
final rule:
• The benchmark levels for three of our single-family goals increased;
• Both of our multifamily goals increased; and
• FHFA established a new subgoal related to small (5- to 50-unit) multifamily properties affordable
to low-income families.
Our goals for 2015, 2016, and 2017 are set forth below.
Single-family purchase money goals (benchmark levels):
Low-income
Very low-income
Low-income areas
Low-income areas subgoal
Single-family refinance low-income goal (benchmark level)
Multifamily low-income goal (in units)
Multifamily very low-income subgoal (in units)
Multifamily small property low-income subgoal (in units)
2015
2016
2017
24%
6%
19%
14%
21%
300,000
60,000
6,000
24%
6%
TBD
14%
21%
300,000
60,000
8,000
24%
6%
TBD
14%
21%
300,000
60,000
10,000
We expect to report our performance with respect to the 2015 affordable housing goals in March 2016. At
this time, based on preliminary information, we believe we met three of our single-family goals and our
three multifamily goals for 2015, but believe we failed to meet the FHFA benchmark level for the other
single-family goals. FHFA will not be able to make a final determination on our performance until market
data is released in October 2016.
Affordable Housing Allocations
The GSE Act requires us to set aside in each fiscal year an amount equal to 4.2 basis points of each
dollar of total new business purchases, and allocate or transfer such amount to certain housing funds.
FHFA suspended the requirement to set aside or allocate funds when we were placed into
conservatorship. However, in December 2014, FHFA terminated the suspension and directed us to begin
setting aside amounts, in accordance with the following terms and conditions:
• The amount we will set aside each fiscal year, commencing with fiscal year 2015, will be based on
our total new business purchases during such fiscal year; and
• Within 60 days after the end of each fiscal year commencing with fiscal year 2015, we will transfer the
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amount set aside. However, if we have made a draw under the Purchase Agreement during that fiscal
year or if such transfer will cause us to have to make a draw, then we will not make a transfer and the
amount set aside for that fiscal year will be reversed.
We are prohibited from passing through the costs of these allocations to the originators of the loans that
we purchase. During 2015, we completed $393.8 billion of new business purchases subject to these
allocations and accrued $165 million of related expense. In accordance with the GSE Act and as directed
by FHFA, we expect to pay this total amount in February 2016 through the following payments: $80.6
million to the Housing Trust Fund administered by HUD; $43.4 million to the Capital Magnet Fund
administered by Treasury; and $41.3 million to the HOPE Reserve Account administered by Treasury.
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 our mission and safe
and sound operations. FHFA adopted 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 - Limitations On Our Mortgage-Related
Investments Portfolio And Indebtedness" for more information.
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.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
HUD has regulatory authority over Freddie Mac with respect to fair lending. Our loan purchase activities
are subject to federal anti-discrimination laws. In addition, the GSE Act prohibits discriminatory practices
in our loan 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 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
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obligations not exceeding $2.25 billion in aggregate principal amount at any time.
CONSUMER FINANCIAL PROTECTION BUREAU
The CFPB regulates consumer financial products and services. The CFPB adopted a number of final
rules relating to loan origination, finance, and servicing practices that generally went into effect in January
2014. The rules include an ability-to-repay rule, which requires loan 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 loan. The ability-to-repay rule applies to most loans acquired by Freddie Mac, and for loans
covered by the rule, FHFA has directed us to limit our single-family acquisitions to loans that generally
would constitute qualified loans under applicable CFPB regulations. The directive generally restricts us
from acquiring loans that are not fully amortizing, have a term greater than 30 years, or have points and
fees in excess of 3% of the total loan amount.
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” 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
Legislation Related to Freddie Mac and its Future Status
Our future structure and role will be determined by the Administration and Congress, and it is possible,
and perhaps likely, that there will be significant changes beyond the near-term.
Congress held hearings and considered legislation on the future state of Freddie Mac, Fannie Mae, and
the housing finance system during 2015. A number of bills were introduced in Congress in 2015 relating
to the future status of Freddie Mac, Fannie Mae, and the secondary mortgage market. Several of the bills
considered by Congress would have placed us into receivership and materially affected our business prior
to our eventual liquidation. It is likely that additional bills related to Freddie Mac, Fannie Mae, and the
future of the mortgage finance system will be introduced in and considered by Congress. We cannot
predict whether any of such bills will be enacted.
The Equity in Government Compensation Act of 2015 was enacted in November 2015. On December 1,
2015, pursuant to the Act, FHFA directed us to suspend the current compensation package for our CEO
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effective as of November 25, 2015, and replace it with the CEO compensation package that was in place
on January 1, 2015. For more information, see “Executive Compensation - Compensation Discussion and
Analysis.”
On December 18, 2015, the President signed into law the Consolidated Appropriations Act, 2016 which
includes a provision that prohibits the sale, transfer, liquidation, relinquishment, or divestiture by Treasury
of the government’s stake in Freddie Mac and Fannie Mae until 2018 without future legislation. The Act
also terminates the MHA Program as of December 31, 2016.
2014 Affordable Housing Goals and Housing Plan
In December 2015, FHFA determined that we achieved three of our five single-family affordable housing
goals and both of our multifamily goals for 2014. In 2014, we purchased approximately 108,900 and
25,200 loans that contributed to our single-family low-income and very low-income purchase money
goals. However, we missed these goals by approximately 9,600 loans and 4,400 loans, respectively.
Because we failed to meet these two goals for 2014, FHFA required us to submit a housing plan that
indicates how we plan to meet the missed goals in 2016 and 2017. We submitted our housing plan in
February 2016. Our performance compared to our goals, as determined by FHFA for 2014 and 2013, is
set forth below.
Goals for
2014
Market
Level for
2014
Results
for 2014
Goals for
2013
Market
Level for
2013
Results
for 2013
Single-family purchase money goals
(benchmark levels):
Low-income
Very low-income
Low-income areas
Low-income areas subgoal
Single-family refinance low-income goal
(benchmark level)
23%
7%
18%
11%
20%
22.8%
5.7%
22.1%
15.0%
21.0%
4.9%
20.1%
13.6%
25.0%
26.4%
23%
7%
21%
11%
20%
Multifamily low-income goal (in units)
200,000
Multifamily very low-income subgoal (in units)
40,000
N/A
N/A
273,434
215,000
48,689
50,000
Proposed Rule on Duty to Serve Underserved Markets
24.0%
6.3%
22.1%
14.2%
21.8%
5.5%
20.0%
12.3%
24.3%
24.1%
N/A
N/A
254,628
56,752
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.
In December 2015, FHFA published a proposed rule regarding the duty of Freddie Mac and Fannie Mae
to serve these underserved markets. Under the proposed rule, Freddie Mac and Fannie Mae would each
be required to submit to FHFA an underserved markets plan covering a three-year period that describes
the activities and objectives it will undertake to meet its duty to serve. The proposed rule would provide
duty to serve credit for eligible activities that facilitate a secondary market for mortgages on residential
properties in the specified underserved markets. It would also establish a method for evaluating and
Freddie Mac 2015 Form 10-K
168
Management's Discussion and Analysis
Regulation and Supervision
rating Freddie Mac’s and Fannie Mae’s performance each year, on which FHFA would report annually to
Congress.
We cannot predict the content of any final rule that FHFA may adopt, or the impact that such final rule will
have on our business or operations. If the December 2015 rule proposal is adopted, it is possible that it
could have an adverse effect on our profitability.
Final Rule on Margin and Capital Requirements for Covered Swap Entities
In October 2015, FHFA and several other agencies jointly issued a final rule governing margin and capital
requirements for covered swap entities pursuant to authority under the Dodd-Frank Act. The final rule
imposes initial and variation margin requirements for swaps that are not cleared through central
clearinghouses, including: obligations to post and collect initial and variation margin; eligibility, valuation
and segregation of collateral; margin model methodologies; documentation; and other requirements.
While an increasing number of our interest rate swap transactions are cleared, we continue to execute
uncleared swap transactions, which will be affected by these rules.
Final Rule on Risk Retention
In October 2014, six agencies, including FHFA, issued a rule that generally requires a securitizer of asset-
backed securities to retain no less than five percent of the credit risk of the assets underlying such
securities. The risk retention requirements became applicable to new single-family loan securitizations
issued beginning in December 2015 and will apply to new multifamily securitizations issued beginning in
December 2016. A provision in the rule indicates that our fully guaranteed securitizations generally satisfy
the risk retention requirements for so long as we are in conservatorship or receivership and receiving
federal financial support. However, this provision does not apply to our securitization structures that are
not fully guaranteed. In December 2015, FHFA indicated that it will exercise its authority under the rule to
direct Freddie Mac to sell or otherwise hedge credit risk in certain securitizations that are not fully
guaranteed that we would otherwise be required to retain under the rule.
Industry Letter on Integrated Mortgage Disclosure Rule
On October 6, 2015, at the direction of FHFA, we issued an industry letter concerning the CFPB’s Know
Before You Owe Truth-in-Lending Act - Real Estate Settlement Procedures Act Integrated Mortgage
Disclosure Rule (the “TRID rule”), which went into effect on October 3, 2015. In the letter, we noted,
among other items, that:
• We expect seller/servicers to make good faith efforts to comply with the TRID rule, and failure to
use a TRID Rule-required form will be deemed a violation of the good faith efforts standard and
will render the mortgage subject to all contractual remedies, including repurchase;
• We will not conduct routine post-purchase loan file reviews for technical compliance with the
TRID rule, until further notice; and
• After a transitional period, we will consider whether to begin such reviews for technical
compliance.
Freddie Mac 2015 Form 10-K
169
Management's Discussion and Analysis
Contractual Obligations
CONTRACTUAL OBLIGATIONS
Our contractual obligations affect our short- and long-term liquidity and capital resource needs. The table
below provides aggregated information about the listed categories of our contractual obligations as of
December 31, 2015. 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.
The amounts of future interest payments on debt securities outstanding at December 31, 2015 are based
on the contractual terms of our debt securities at that date. These amounts were determined using certain
assumptions, including that variable-rate debt continues to accrue interest at the contractual rates in
effect at December 31, 2015 until maturity and callable debt continues to accrue interest until its
contractual maturity. The amounts of future interest payments on debt securities do not reflect certain
factors that will change the amounts of interest payments on our debt securities after December 31, 2015,
such as changes in interest rates, the call or retirement of any debt securities, and 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.
Our contractual obligations include purchase obligations that are enforceable and legally binding, and
exclude contracts that we may cancel without penalty. We include our purchase obligations through the
termination date specified in the respective agreement, even if the contract is renewable.
The table 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 of principal and interest 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 remove loans from pools underlying our
PCs in certain circumstances, including when loans are 120 days or more delinquent, and retire the
associated PC debt;
• Future cash payments associated with the liquidation preference of the senior preferred stock, the
quarterly commitment fee (which has been suspended), and the dividends on the senior preferred
stock;
• Future cash settlements on derivative agreements not yet accrued, because the amount and timing of
such payments are dependent upon items such as changes in interest rates;
• Future dividends on outstanding preferred stock (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;
• Future cash payments related to the 4.2 basis points of each dollar of total new business purchases
that we are required by the GSE Act to allocate or transfer to certain housing funds, because the
amount and timing of such allocations or transfers is dependent on the volume of our new business
purchases; and
Freddie Mac 2015 Form 10-K
170
Management's Discussion and Analysis
Contractual Obligations
• The guarantee arrangements pertaining to multifamily housing revenue bonds, where we provided
commitments to advance funds.
The table below presents our contractual obligations, by year, at December 31, 2015.
(in millions)
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)
Lease obligations
Total specified contractual
obligations
Total
2016
2017
2018
2019
2020
Thereafter
$
304,388
$
58,765
$
91,543
$
48,189
$
31,352
$
26,697
$
47,842
113,633
113,633
32,646
11,042
—
4,271
—
3,024
—
2,404
—
2,019
—
9,886
2,464
1,751
8
7
6
7
685
25,692
25,692
1,371
35
194
11
—
149
8
—
137
6
—
128
5
—
104
3
—
659
2
$
480,229
$
211,088
$
95,979
$
51,363
$
33,895
$
28,830
$
59,074
(1) Represents par value. Callable debt is included in this table at its contractual maturity. For additional information about our
(2)
(3)
debt, see Note 7.
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.
Includes obligations related to our 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 loans and mortgage-related securities from third parties, most
of which 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.
Freddie Mac 2015 Form 10-K
171
Management's Discussion and Analysis
Off-Balance Sheet Arrangements
OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain business arrangements that are not recorded on our consolidated balance sheets or
that 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. See Note 2 and Note 3 for more information on our off-balance sheet securitization
activities and other guarantees.
SECURITIZATION ACTIVITIES AND OTHER GUARANTEES
We have certain off-balance sheet arrangements related to our securitization activities involving
guaranteed loans 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 K Certificates. We also have off-balance sheet arrangements related to certain other
securitization products and other mortgage-related guarantees.
Our maximum potential off-balance sheet exposure to credit losses relating to these securitization
activities and guarantees is primarily represented by the UPB of the underlying loans and securities,
which was $127.3 billion and $113.7 billion at December 31, 2015 and 2014, 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 $8.9 billion and $9.6 billion at December 31,
2015 and 2014, 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. At both December 31,
2015 and 2014, there were no liquidity guarantee advances outstanding.
In addition, as part of the HFA initiative, we, together with Fannie Mae, provided liquidity guarantees for
certain variable-rate multifamily housing revenue bonds, under which Freddie Mac generally was
obligated to purchase 50% of any tendered bonds that could not be remarketed within five business days.
At December 31, 2014, there were no bonds purchased under the liquidity guarantees. As of July 2015,
all of the HFAs had exited the HFA initiative and the liquidity guarantees expired.
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 mortgage insurance with third
parties. In addition, we provide for incurred losses each period on these guarantees within our provision
for credit losses.
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.
Our consolidated balance sheets reflect only our investment in the VIEs, rather than the full amount of the
VIEs’ assets and liabilities.
As part of our credit guarantee business, we routinely enter into forward purchase and sale commitments
Freddie Mac 2015 Form 10-K
172
Management's Discussion and Analysis
Off-Balance Sheet Arrangements
for 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, see “Risk Management - Credit Risk - Institutional
Credit Risk - Derivative Counterparties” and Note 9. 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 loans. These non-derivative commitments totaled $258.4 billion and
$271.2 billion in notional value at December 31, 2015 and 2014, 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 10 for further information.
Freddie Mac 2015 Form 10-K
173
Management's Discussion and Analysis
Critical Accounting Policies and Estimates
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 the single-family allowance for loan losses and fair
value measurements.
In the first quarter of 2015, we adopted regulatory guidance issued by FHFA that establishes guidelines
for adverse classification and identification of specified single-family and multifamily assets and off-
balance sheet credit exposures, including guidelines for recognizing charge-offs on certain single-family
loans. Consequently, as of January 1, 2015, we changed when we deem a loan to be uncollectible, and
we began to charge-off the amount of recorded investment in excess of the fair value of the underlying
collateral for loans that have been deemed uncollectible prior to foreclosure. 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.
SINGLE-FAMILY ALLOWANCE FOR LOAN LOSSES
The single-family allowance for loan losses represents an estimate of probable incurred credit losses. The
single-family allowance for loan losses pertains to all single-family loans classified as held-for-investment
on our consolidated balance sheets.
Determining the appropriateness of the single-family allowance for loan losses 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. We regularly evaluate the underlying estimates and models we
use when determining the single-family allowance for loan losses 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 models that we use to inform business and risk
management decisions and for financial accounting and reporting purposes.”
We believe the level of our single-family allowance for loan losses is appropriate based on internal
reviews of the factors and methodologies used. No single statistic or measurement determines the
appropriateness of the allowance for loan losses. Changes in one or more of the estimates or
assumptions used to calculate the single-family allowance for loan losses could have a material impact on
the loan loss reserves and provision for credit losses.
Most single-family loans are aggregated into pools based on similar risk characteristics and measured
Freddie Mac 2015 Form 10-K
174
Management's Discussion and Analysis
Critical Accounting Policies and Estimates
collectively using a statistically based model that evaluates a variety of factors affecting collectability,
including but not limited to current LTV ratios, loan product type, delinquency/default status and history,
and 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:
• Future levels of loan modifications;
• Future loan repurchases by seller/servicers;
• The adequacy of third-party credit enhancements;
• The effects of changes in government policies and programs;
• The effects of macroeconomic variables such as rates of unemployment; and
• 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 insurers, 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.
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:
• Mortgage-related and non-mortgage related securities;
• Certain loans held-for-sale;
• Derivative instruments;
• Certain debt securities of consolidated trusts held by third parties and certain other debt; and
• Certain REO assets.
The accounting guidance for fair value measurements establishes a framework for measuring fair value,
and 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 14 for additional information
regarding fair value hierarchy and measurements.
Freddie Mac 2015 Form 10-K
175
Risk Factors
Conservatorship and Related Matters
RISK FACTORS
The following section discusses material risks and uncertainties that could adversely affect our business,
financial condition, results of operations, cash flows, strategies and/or prospects.
CONSERVATORSHIP AND RELATED MATTERS
Freddie Mac’s future is uncertain.
It is possible and perhaps likely that future legislative or regulatory action will materially affect our role,
business model, structure, and 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 occur, our shares could further diminish in value, or cease to have any value. Our stockholders
may not receive any compensation for such loss in value.
Several bills were introduced in Congress in 2014 and 2015 concerning the future status of Freddie Mac,
Fannie Mae, and the mortgage finance system, including bills which provided for the wind down of
Freddie Mac and Fannie Mae or modification of the terms of the Purchase Agreement. The Administration
has recommended reducing the role of Freddie Mac and Fannie Mae and ultimately winding down both
companies.
The conservatorship is indefinite in duration. The timing, likelihood, and circumstances under which we
might emerge from conservatorship are uncertain. Treasury would be required to consent to the
termination of the conservatorship, other than in connection with receivership, and there can be no
assurance it would do so. Even if the conservatorship is terminated, we would remain subject to the
Purchase Agreement and the terms of the senior preferred stock. It is possible that the conservatorship
could end with our being placed into receivership.
Because Treasury holds a warrant to acquire almost 80% of our common stock for nominal consideration,
we could effectively remain under the control of the U.S. government even if the conservatorship is ended
and the voting rights of common stockholders are restored. If Treasury exercises the warrant, the
ownership interest in the company of our existing common stockholders will be substantially diluted.
In the past several years, a number of lawsuits were filed against the U.S. government, Freddie Mac and
Fannie Mae challenging certain government actions related to the conservatorship and the Purchase
Agreement. This may add to the uncertainty surrounding our future.
For more information, see “MD&A - Regulation and Supervision - Legislative and Regulatory
Developments,” “Legal Proceedings,” and Note 15.
We cannot retain capital from the earnings generated by our business operations (other than a
limited amount that will decrease to zero in 2018), which increases the likelihood that we may
request additional draws under the Purchase Agreement in future periods.
We cannot retain capital from the earnings generated by our business operations, as a result of the net
worth sweep dividend. This increases the likelihood that we will require draws in future periods,
particularly as the required Capital Reserve Amount (which is $1.2 billion for 2016) declines over time. A
variety of factors could influence whether we could require a draw, including the following:
Freddie Mac 2015 Form 10-K
176
Risk Factors
Conservatorship and Related Matters
• Deterioration of economic conditions, including increased levels of unemployment and declines in
home prices or family incomes;
• Adverse changes in interest rates, yield curves, implied volatility or spreads, which could affect our
financial assets and liabilities, including derivatives, and increase realized and unrealized losses
recorded in earnings or AOCI;
• The required reductions in the size of our mortgage-related investments portfolio, reductions of higher
yielding assets, or other limitations on our investment activities that reduce our earnings capacity;
• The success of any transactions or other steps we may take in an effort to mitigate the risk of needing
additional draws from Treasury;
• 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 on our access to public debt markets;
• A failure of one or more of our major counterparties to meet their obligations to us;
• Changes in accounting policies, practices, or guidance;
• The effects of our foreclosure prevention and loss mitigation efforts;
• Changes in housing or economic conditions, legislation, including reductions in corporate tax rates, 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.
Additional draws, which will increase the already substantial liquidation preference of our senior preferred
stock and decrease the amount of Treasury's remaining commitment under the Purchase Agreement,
may add to the uncertainty regarding our long-term financial sustainability.
FHFA controls our business activities. The terms of the Purchase Agreement and the senior
preferred stock significantly limit our business activities. We may be required to take actions that
reduce our profitability, are difficult to implement, or expose us to additional risk.
We are under the control of FHFA, as our Conservator, and are not managed to maximize stockholder
returns. FHFA determines our strategic direction. We face a variety of different, and sometimes
competing, business objectives and FHFA-mandated activities (e.g., the initiatives we are pursuing under
the Conservatorship Scorecards). It may be difficult for us to devote sufficient resources and management
attention to these multiple priorities. Some of the activities FHFA has required us to undertake are costly
and difficult to implement, such as building the common securitization platform.
FHFA has required us to make changes to our business that have adversely affected our financial results.
FHFA could require us to make additional changes at any time. For example, FHFA may require us to
undertake activities that:
• Reduce our profitability;
• Expose us to additional credit, market, funding, operational, and other risks; or
• Provide additional support for the mortgage market to serve our public mission, but adversely affect
our financial results.
Freddie Mac 2015 Form 10-K
177
Risk Factors
Conservatorship and Related Matters
From time to time, FHFA and Treasury have prevented us from engaging in business activities or
transactions that we believe would be profitable, and they may do so again in the future. For example,
FHFA could limit the amount of securities we could sell or further limit the size of our mortgage-related
investments portfolio.
The Purchase Agreement and the terms of the senior preferred stock also place significant restrictions on
our ability to manage our business, including limiting:
• The amount of indebtedness we may incur;
• The size of our mortgage-related investments portfolio; and
• Our ability to pay dividends, transfer certain assets, raise capital, and pay down the liquidation
preference of the senior preferred stock.
The Purchase Agreement prohibits us from taking a variety of actions without Treasury's consent.
Treasury has the right to withhold its consent for any reason. The warrant held by Treasury, the
restrictions on our business under the Purchase Agreement, and the senior status and net worth dividend
provisions of the senior preferred stock could adversely affect our ability to attract capital from the private
sector in the future, should we be in a position to do so.
If FHFA places us into receivership, our assets would be liquidated. The liquidation proceeds may
not be sufficient to pay claims outstanding against Freddie Mac, repay the liquidation preference
of our preferred stock, or make any distribution to our common stockholders.
We can be put into receivership at the discretion of the Director of FHFA at any time for a number of
reasons set forth in the GSE Act. In addition, FHFA could be required to place us into 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 not fully operational because Congress had failed to approve funding or the
government had reached its borrowing limit. For more information, see "MD&A - Regulation and
Supervision - Federal Housing Finance Agency - Receivership."
Being placed into receivership would terminate the conservatorship. The purpose of receivership is to
liquidate our assets and resolve claims against us. 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. Bills considered by Congress in 2014 and 2015 provided for Freddie Mac to
eventually be placed into receivership.
If our assets were liquidated, the liquidation proceeds may not be sufficient to pay the secured and
unsecured claims against us, repay the liquidation preference of any series of our preferred stock, or
make any distribution to our common stockholders. If 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 with respect to claims made under our guarantee.
Proceeds would be available to repay the liquidation preference of other series of preferred stock 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. Finally, only after the liquidation
preference of all series of preferred stock is repaid would any proceeds be available for distribution to the
holders of our common stock.
Freddie Mac 2015 Form 10-K
178
Risk Factors
Credit Risks
CREDIT RISKS
We 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
results.
Mortgage credit risk is the risk that a borrower will fail to make timely payments on a loan we own or
guarantee. This exposes us to the risk of credit losses and credit-related expenses, which could adversely
affect our financial results. We are primarily exposed to mortgage credit risk with respect to the single-
family and multifamily loans and securities that we own or guarantee. 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 K Certificates. We also have off-balance sheet
arrangements related to certain other securitization products and other mortgage-related guarantees.
We continue to have a significant number of 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 to borrowers with credit scores less than 620 at the time of origination,
that expose us to greater credit risk than other types of loans. See “MD&A - Risk Management - Credit
Risk - Single-Family Mortgage Credit Risk - Monitoring Loan Performance and Characteristics for the
Single-family Credit Guarantee Portfolio and Individual Sellers and Servicers."
Our efforts to increase access to single-family mortgage credit, including our expanded affordable
housing program, may expose us to increased mortgage credit risk.
Our new credit risk transfer transactions may not be available to us in adverse economic
conditions or may provide us with less protection than we expect. These transactions may also
adversely affect our profitability.
We are increasingly using new credit risk transfer transactions to mitigate some of our potential credit
losses. Our ability to use certain types of credit risk transfer transactions (and the cost to us of doing so)
could change rapidly, depending on market conditions. In particular, it is possible that there will not be
sufficient investor demand for certain of our credit risk transfer transactions during a housing downturn.
Some of our credit risk transfer transactions are very new, and it is uncertain if there will be adequate
demand for them over the long term. It is also uncertain how these transactions will ultimately perform
under adverse market conditions, and it is possible that, under such conditions, they will provide us with
less protection than we expect. It is also possible that the costs we incur on our credit risk transfer
transactions could adversely affect the profitability of the loans in our Core single-family book that are
covered by these transactions. Some of the new transactions are complex, which may increase our
exposure to operational risk. There could be a significant difference in time between when we recognize
an expense in earnings and when we recognize the related recovery in earnings, and this lag could
adversely affect our financial results in the earlier period. For more information regarding these
transactions, see Note 4.
We face significant risks related to our delegated underwriting process for single-family loans,
including risks related to data accuracy and mortgage fraud. Recent changes to the process could
increase our risks.
We delegate underwriting for the single-family loans we purchase or securitize to our sellers. Our
Freddie Mac 2015 Form 10-K
179
Risk Factors
Credit Risks
contracts with sellers describe mortgage eligibility and underwriting standards, and the sellers represent
and warrant to us that the loans they deliver to us meet these standards. We do not independently verify
most of the information provided to us before we purchase or securitize a 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, or lender) misrepresented the facts about the underlying property,
borrower, or loan, or engaged in fraud.
We review a sample of these loans after we purchase them to determine if they are in compliance with
our contractual standards. However, our review may not detect any misrepresentations by the parties
involved in the transaction, deter loan fraud, or reduce our exposure to these risks.
In recent years, at the direction of FHFA, we significantly revised our representation and warranty
framework (including changes to remedies for certain defects) to relieve sellers of certain repurchase
obligations in specific cases. As a result, we may face greater exposure to credit and other losses
because our ability to seek recovery or repurchase from the seller under this revised framework is more
limited. Under the revised framework, it is critical that we identify breaches of representations and
warranties early in the life of the loan. We are enhancing our tools and processes designed to do this.
This change in practice may present operational and systems challenges. Once fully implemented, there
is a risk that the enhanced tools and processes will not enable us to identify all breaches in a timely
manner. For more information, see “MD&A - Risk Management - Credit Risk - Single-Family Mortgage
Credit Risk - Maintaining policies and procedures for new business activity, including prudent underwriting
standards.”
We are exposed to significant credit risk related to loans with lower credit quality 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, option ARM, and manufactured housing loans, and home equity lines of credit. The credit
performance of these loans remains weak. Over time, we will likely add additional securities to the
population of non-agency mortgage-related securities that we intend to sell. As we do so, we will be
required to immediately recognize any unrealized losses on such securities in earnings. Our net worth
has at times been adversely affected by declines in the fair value of these securities. We may experience
additional fair value declines in the future due to a number of factors, such as increased default rates, and
loss severities on the loans underlying these securities. The quality of the servicing performed on the
underlying loans can significantly affect the timing and amount of losses we recognize on these securities.
We also have exposure to loss on these securities as a result of:
• Our limited ability to influence servicing performance, including the volume and type of loan
modifications;
• The lack of transparency in the market for the non-agency mortgage-related securities we hold.
Information disclosed by the trustees of the trusts that issued the securities is often insufficient for us
to adequately analyze the servicers’ decisions and how these decisions affect the cash flows on the
securities;
• Concentration of loan servicing among several non-depository financial institutions. These servicers
may not have the same financial strength, or operational capacity, or be subject to the same level of
regulatory oversight, as depository servicers; and
•
Inadequate protection from credit enhancements on these securities.
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Risk Factors
Credit Risks
For more information regarding these risks, see “MD&A - Risk Management - Credit Risk - Mortgage-
Related Securities Credit Risk,” "Single-Family Mortgage Credit Risk," and "Institutional Credit Risk -
Other Counterparties - Mortgage related-security issuers and servicers."
Declines in U.S. home prices or other adverse changes in the U.S. housing market could
negatively impact our business and financial results.
Our financial results and business volumes can be negatively affected by declines in home prices and
other adverse changes in the housing market. This could:
Increase our losses on dispositions of REO properties;
•
• Cause us to incorrectly hedge prepayment risk;
• Reduce our actual return on new single-family guarantee business, as actual default rates could be
higher than we expected when we issued the guarantee;
• Result in declines in net worth due to fair value declines on our investments in non-agency mortgage-
related securities; or
• Negatively affect loan pricing, which could cause us to change our disposition strategies for our
single-family unsecuritized loans.
For more information regarding these risks, see “MD&A - Risk Management - Credit Risk - Mortgage-
Related Securities Credit Risk.”
Our loan purchases and guarantee issuances are closely tied to the rate of growth in total outstanding
U.S. residential mortgage loan debt, the size of the U.S. residential mortgage market, and the amount of
new mortgage loan originations. Total residential mortgage loan debt increased approximately 0.7% in the
first nine months of 2015 (the most recent data available) and less than 0.1% in 2014.
The proportion of our refinance loan purchases to total loan purchases could decrease if mortgage
interest rates increase. This could increase our exposure to mortgage credit risk, as refinance loans
(particularly those that do not involve a "cash-out") generally present less credit risk than purchase loans.
Some of our seller/servicer counterparties are highly dependent on refinance loan volumes. A decrease in
refinance loan volumes could adversely affect these counterparties, which could increase our exposure to
institutional credit risk.
While the multifamily market has experienced strong rent growth and occupancy trends in the past
several years, these trends are not likely to continue at their current pace. 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 are exposed to institutional credit risk with respect to our business counterparties. Our
financial results may be adversely affected if one or more of our counterparties fail to meet their
obligations to us.
We depend on our institutional counterparties to provide services that are critical to our business. We face
the risk that one or more of our institutional counterparties may fail to meet their contractual obligations to
us. Our important institutional counterparties include seller/servicers, mortgage and bond insurers,
insurers and reinsurers in ACIS transactions, and counterparties to derivatives and short-term lending and
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Risk Factors
Credit Risks
other funding transactions (i.e., cash and other investments transactions).
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 weak counterparties
could concentrate our exposure to other 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. Many of our counterparties are subject to increasingly complex regulatory
requirements and oversight, which place additional stress on their resources and may affect their ability or
willingness to do business with us.
Credit risk related to loan seller/servicers
We are exposed to credit risks from the seller/servicers of our single-family loans, as described below.
• A decline in servicing performance - A decline in a servicer’s performance, such as delayed
foreclosures or missed opportunities for loan modifications, could significantly affect our ability to
mitigate credit losses and could affect the overall credit performance of our single-family credit
guarantee portfolio. The large volume of seriously delinquent loans and the complexity of the
servicing function are significant factors contributing to the risk of a decline in performance by
servicers. We could be adversely affected if our servicers lack appropriate controls, experience a
failure in their controls, or experience a disruption in their ability to service loans, including as a result
of legal or regulatory actions or ratings downgrades. We are also exposed to fraud by third parties in
the loan servicing function, particularly with respect to sales of REO properties, short sales, and other
dispositions of non-performing assets.
We could attempt to mitigate our exposure to a poorly performing servicer by terminating its right to
service; however, we may not be able to find successor servicers who have the capacity to service
the affected loans and who are also willing to assume the representations and warranties of the
terminated servicer. Terminating a large servicer may not be feasible because of the operational and
capacity challenges related to transfers of large servicing portfolios. If we replace a servicer, we
would likely incur costs and potential increases in servicing fees.
• A failure by seller/servicers to fulfill their obligations to repurchase loans or indemnify us as a result of
breaches of representations and warranties - While we may have the contractual right to require a
seller or servicer to repurchase loans from us, it may be difficult, expensive, and time-consuming to
enforce such repurchase obligations. We could enter into settlements to resolve repurchase
obligations; however, the amounts we receive under any such settlements may be less than the
losses we ultimately incur on the underlying loans.
Under our revised representation and warranty framework, as directed by FHFA, we are required in
some cases to utilize an alternative remedy, such as indemnification, in lieu of repurchase. The
amount we recover under an alternative remedy may be less than the amount we could have
recovered in a repurchase.
•
Increased exposure to non-depository and smaller financial institutions - Over the last several years,
we have acquired a greater portion of our single-family business volume from non-depository and
smaller financial institutions. In addition, a large and increasing volume of our single-family loans are
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Risk Factors
Credit Risks
serviced by non-depository financial institutions. These non-depository and smaller financial
institutions may not have the same financial strength or operational capacity, or be subject to the
same level of regulatory oversight, as our large single-family loan seller and servicer counterparties
(which are depository institutions). As a result, we face increased risk that these counterparties could
fail to perform their obligations to us. In particular, non-depository servicers rapidly grew their
servicing portfolios in the last several years. This appears to have resulted in operational strains that
have subjected these servicers to regulatory scrutiny. This rapid growth could expose us to increased
risks if any operational strain adversely affects these servicers’ servicing performance or their
financial strength. In addition, if these servicers reduce their servicing portfolios, there may be a
constraint in overall servicing capacity.
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 a decline in their servicing performance.
For more information, see “MD&A - Risk Management - Credit Risk - Institutional Credit Risk - Sellers and
Servicers.”
Credit risk related to counterparties to derivatives, short-term lending and other transactions
We have significant exposure to institutions in the financial services industry relating to derivatives,
funding, short-term lending, securities and other transactions (e.g., cash and other investments
transactions). These transactions are critical to our business, including our ability to:
• Manage interest rate and other risks related to our investments in mortgage-related assets;
• Fund our business operations; and
• Service our customers.
We face the risk of operational failure of the clearing members, exchanges, clearinghouses, or other
financial intermediaries we use to facilitate derivatives, short-term lending and other transactions. If a
clearing member or clearinghouse were to fail, we could lose some or all of the collateral or margin
posted with the clearing member or clearinghouse.
We are a clearing member of the clearinghouse through which we execute mortgage-related securities
transactions; as a result, we could be subject to losses because we are required to participate in the
coverage of losses incurred by other clearing members if they fail to meet their obligations to the
clearinghouse.
If our counterparties to short-term lending transactions fail, we are exposed to losses to the extent the
transaction is unsecured or the collateral posted to us is insufficient.
For more information, see “MD&A - Risk Management - Credit Risk - Institutional Credit Risk - Other
Counterparties - Cash and Other Investments Counterparties” and “- Derivative Counterparties.”
Credit risk related to mortgage and bond insurers, and insurers and reinsurers in ACIS transactions
It is unlikely that we will receive full payment of our claims from several of the mortgage insurers of our
single-family loans and bond insurers of certain of our non-agency mortgage-related securities, as these
insurers are insolvent or are paying only a portion of our claims under our mortgage and bond insurance
policies. For more information, see Note 13.
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Risk Factors
Credit Risks
If a mortgage insurer fails to meet its obligations to reimburse us for claims, our credit losses could
increase. In addition, if a regulator determines that a mortgage insurer lacks 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. We face similar risks with respect to the insurers and reinsurers in our ACIS credit
risk transfer transactions.
We cannot differentiate pricing based on the strength of a mortgage insurer or revoke a mortgage
insurer's status as an eligible insurer without FHFA approval. Further, we do not select the insurance
provider on a specific loan, since the selection is made by the lender at the time the loan is originated.
We continue to acquire new loans with mortgage insurance from the mortgage insurers that have credit
ratings below investment grade.
If a bond insurer were to become insolvent, it is likely that we would not fully collect our claims from the
insurer and that any such claims payments could be delayed significantly. This would affect our ability to
recover certain unrealized losses on our investments in non-agency mortgage-related securities. We
evaluate the expected recovery from bond insurance policies as part of our impairment analysis for our
investments in securities. If a bond insurer is not expected to meet its obligations, we could recognize
additional impairment of those securities.
For more information, see “MD&A - Risk Management - Credit Risk - Institutional Credit Risk - Mortgage
and Bond Insurers.”
Our loss mitigation activities may be costly and may adversely affect our financial results.
Our loss mitigation strategies (including HAMP and HARP) may not be successful. The costs we incur
related to loan modifications and other loss mitigation activities have been, and could continue to be,
significant. For example, we bear the full cost of the monthly payment reductions related to modifications
of loans we own or guarantee, as well as all applicable servicer incentive fees for our mortgage
modifications.
We could be required or elect to make changes to our loss mitigation activities that could make these
activities more costly to us. For example, we could be required to use principal forgiveness to reduce
payments for borrowers and to bear some or all of the costs of such reductions.
Loan modification initiatives, particularly any future focus on principal forgiveness on a widespread basis,
could have the potential to change borrower behavior and loan underwriting. Principal reductions may
create an incentive for borrowers who are current on their loans to become delinquent in order to receive
a principal reduction. This incentive could significantly affect borrower attitudes toward homeownership,
borrower commitment to making their loan payments, the values of residential mortgage assets, and the
way in which we conduct business.
We have loans on trial period plans as required under certain loan modification programs. Some of these
loans will fail to complete the trial period or fail to qualify for our other borrower assistance programs. For
these loans, the trial period will have effectively delayed the foreclosure process and could increase our
losses.
Many of our HAMP loans, which initially were set at a below-market interest rate, have provisions for the
interest rates to increase gradually until they reach the market rate that was in effect at the time of the
modification. The resulting increase in the borrowers' payments may increase the risk that these
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Risk Factors
borrowers will default.
Credit Risks
The type of loss mitigation activities we pursue could affect prepayments on our PCs and REMICs, which
could affect the value of these securities or the earnings from mortgage-related assets in our Investments
segment mortgage investments portfolio. In addition, loss mitigation activities may adversely affect our
ability to securitize, resecuritize and sell the loans subject to those activities (e.g., investors may not be
willing to purchase PCs backed by modified single-family loans).
The effect of HARP and other refinance initiatives of the GSEs on prepayment expectations is difficult to
estimate, and we could experience declines in the fair values of certain agency security investments and
lower net interest yields over time on other mortgage-related investments. The difficulty in estimating the
effect of prepayments could also adversely affect our ability to hedge our mortgage-related investments.
We have devoted significant resources to the MHA Program and other borrower assistance initiatives.
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 - Our Business Segments - Single-
Family Guarantee - Loss Mitigation Activities” and “MD&A - Risk Management - Credit Risk - Single-
Family Mortgage Credit Risk - Engaging in Loss Mitigation Activities.”
We have been, and will continue to be, adversely affected by delays and deficiencies in the single-
family foreclosure process.
The average length of time for foreclosure of a Freddie Mac loan has significantly increased since 2008,
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 example, properties awaiting foreclosure could deteriorate until
we acquire them, resulting in increased expenses to repair and maintain the properties;
• Adversely affect the values of, and our losses on, the non-agency mortgage-related securities we
hold; and
• Adversely affect trends in home prices regionally or nationally, which could adversely affect our
financial results.
It is possible that mortgage insurance claims could be reduced or denied if servicers do not follow proper
procedures in addressing seriously delinquent borrowers, such as not completing foreclosures within
required timelines.
We may experience further losses relating to our assets that could materially adversely affect our
financial results, liquidity and net worth.
We may experience additional 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 that could result in the immediate recognition of losses, such as paying a premium to
repurchase debt, increasing the amount of non-agency mortgage-related securities we intend to sell, or
engaging in certain asset structuring activities that result in the write-off of premiums.
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Risk Factors
Interest Rate and Other Market Risks
INTEREST RATE AND OTHER MARKET RISKS
Changes in interest rates could negatively affect the fair value of financial assets and liabilities,
our results of operations and our net worth.
Our investment and credit guarantee activities in single family and multifamily mortgage assets expose us
to interest rate and other market risks, including prepayment risk.
Interest rates can fluctuate for a number of reasons, including changes in the fiscal and monetary policies
of the federal government and its agencies. Federal Reserve policies directly and indirectly influence the
yield on our interest-earning assets and the cost of our interest-bearing liabilities. Interest rates can also
fluctuate as a result of geopolitical events or changes in general economic conditions, including events or
conditions that alter investor demand for Treasury or other fixed-income securities.
Changes in interest rates could adversely affect the cash flows and prepayment rate on assets that we
own and related debt and derivatives. We incur costs in connection with our efforts to manage these risks.
In addition, changes in interest-rates could adversely affect the prepayment rate on the loans that we
guarantee.
Our financial results can be significantly affected by changes in interest rates and changes in yield curves,
as certain of our assets and liabilities are recorded at fair value. Our interest rate risk management
activities are designed to reduce our economic exposure to changes in interest rates to a low level as per
our models. The accounting treatment for those assets and liabilities, including derivatives, however,
creates volatility in our earnings when interest rates fluctuate as some assets and liabilities are measured
at amortized cost and some are measured at fair value, while all derivatives are measured at fair value.
This volatility generally is not indicative of the underlying economics of our business.
When interest rates decrease, borrowers are more likely to prepay their loans by refinancing them at a
lower rate. An increased likelihood of prepayment on the loans 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 may increase as borrower payments
increase at their reset dates, which increases the borrower’s risk of default;
• Borrowers with higher risk adjustable-rate loans may have fewer opportunities to refinance into fixed-
rate loans;
• A borrower's payment on additional debt obligations (such as home equity lines of credit and second
liens) that have adjustable payment terms may increase, which in turn increases the risk that the
borrower may default on a loan we own or guarantee; and
• Other-than-temporary impairments on our investments in non-agency mortgage-related securities
could increase due to a reduction in the benefit expected from structural credit enhancements on
these securities.
Changes in spreads could materially affect our results of operations and net worth.
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 spreads (also referred to as OAS). Our financial results and net worth can be significantly
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Risk Factors
Interest Rate and Other Market Risks
affected by changes in spreads, especially results driven by financial instruments that are measured at
fair value, since we have limited ability to mitigate exposure to changes in spreads. These instruments
include trading securities, available-for-sale securities, loans held-for-sale, and loans and debt with the
fair value option elected.
A widening of the spreads on a given asset is typically associated with a decline in the fair value of that
asset, which may adversely affect our near-term financial results and net worth. While wider spreads may
create favorable investment opportunities, our ability to take advantage of any such opportunities is
limited due to various restrictions on our mortgage-related investments portfolio activities. See “MD&A -
Conservatorship and Related Matters - Limits on Our Mortgage-Related Investments Portfolio and
Indebtedness.”
A narrowing or tightening of the spreads on a given asset is typically associated with an increase in the
fair value of that asset. Narrowing spreads may reduce the number of attractive investment opportunities
in loans and mortgage-related securities, and could increase the cost of our activities to support the
liquidity and price performance of our PCs. Consequently, a tightening of the spreads on our assets may
adversely affect our future financial results and net worth.
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Risk Factors
Operational Risks
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.
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 regulatory intervention, or reputational damage. We have certain
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 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 efforts to help build a new housing finance system, such as the development of
the single (common) security and common securitization platform. 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. The transition to the common securitization platform, which is currently scheduled
to begin in late 2016, presents significant operational and technological challenges. Our legacy systems
may also create increased operational risk for these new initiatives. Internal corporate reorganizations
(e.g., relating to our implementation of an enhanced three-lines-of-defense risk management framework)
may also increase our operational risk, particularly during the period of implementation.
Our employees could act improperly for their own or third-party 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, an infrastructure disruption in the area of our offices
or affecting the power grid could significantly adversely affect our ability to conduct normal business
operations. A terrorist event or natural disaster in the area near our offices or affecting the power grid
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.
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Risk Factors
Operational Risks
For information on an operational risk issue relating to the PC master trust agreement, see "MD&A - Risk
Management - Operational Risk."
The threat landscape in cyber security is changing rapidly and growing in sophistication. We may
not be able to protect our systems with complete assurance or fully protect the confidentiality of
our information from cyberattack and other unauthorized access, disclosure, and disruption.
Our operations rely on the secure and accurate 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 cyberattacks. Although we devote significant resources to protecting our
various systems and processes, there is no assurance that our security measures will provide effective
security. Our computer systems, software, and networks may be vulnerable to cyberattack, unauthorized
access, supply chain disruptions, computer viruses or other malicious code, or other attempts to harm
them or misuse or steal information. The occurrence of one or more of such events could jeopardize or
result in the unauthorized disclosure, misuse or corruption of confidential and other information (including
information about our 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 affect our competitive position, and otherwise harm our business. We could
also face regulatory and other legal 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 business partners, counterparties and governmental organizations are
adequately protecting the information that we share with them. As a result, a cyberattack 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 and service
providers could disrupt our business operations or expose us to loss of confidential information
or intellectual property.
At times, we outsource certain key functions to external parties, including some that are critical to
financial reporting, our mortgage-related investment activity, and 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, perform them at an acceptable service level, or handle
increased volumes, or if one of them experiences a disruption in its own business or technology from any
cause, our business operations could be constrained, disrupted, or otherwise negatively affected. Our use
of vendors also exposes us to the risk of losing intellectual property or confidential information and to
other harm, including to our reputation. Our ability to monitor the activities or performance of vendors may
be constrained, which may make it difficult for us to assess and manage the risks associated with these
relationships.
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Risk Factors
Operational Risks
We face risks and uncertainties associated with the models that we use to inform business and
risk management decisions and for financial accounting and reporting purposes.
Models are inherently imperfect predictors of actual results. We use models to forecast significant factors
in our businesses including, but not limited to, interest rates, house prices, and mortgage rates. We also
use models to project borrower prepayment and default behavior over long periods of time. There is
inherent uncertainty associated with model projections of economic variables and the downstream
forecasts of prepayment and default behavior dependent on these variables.
Uncertainty and risks related to models may arise from a number of sources. First, we could fail to
implement, operate, adjust, or use our models as intended. We may fail to code a model correctly, we
could use incorrect data inputs, or model implementation software could malfunction. The complexity and
interconnectivity of our models create additional risk regarding the accuracy of model output. We may not
be able to deploy or update models in a timely manner. Second, the data we use to train or feed our
models, much of which we receive from third-party data providers, may be inaccurate. Third, when market
conditions change in unforeseen ways, our model projections may not accurately reflect these conditions.
For example, models may not fully reflect the effect of certain government policy changes. In such cases,
it is often necessary to make assumptions and judgments to accommodate the effect of scenarios that are
not sufficiently well represented in the historical data. While we may adjust our models in response to new
events, considerable residual uncertainty remains. Finally, we also use select third-party vendor models.
While the use of such models may reduce our risk where no internal model is available, it exposes us to
additional risk, as third parties typically do not provide us with proprietary information regarding their
models. We have little control over the process by which vendor models are adjusted or changed. As a
result, we may be unable to fully evaluate the risks associated with the use of such models.
We risk making poor business decisions in situations where we rely on models to provide key information.
Our use of models could affect decisions concerning the purchase, sale and securitization of loans, the
purchase and sale of securities, funding, the setting of management and guarantee fee prices, and the
management of interest-rate, market, or credit risk. Our use of models also affects our quality-control
sampling strategies for loans in our single-family credit guarantee portfolio and potential settlements with
our counterparties. See “MD&A - Critical Accounting Policies and Estimates” and “Interest-Rate Risk and
Other Market Risks” for more information on our use of models.
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Risk Factors
Liquidity Risks
LIQUIDITY RISKS
Our 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:
• Market and other factors;
• Changes in U.S. government support for us;
• Reduced demand for our debt securities; and
• Competition for debt funding from other debt issuers
Market and Other Factors
Our ability to obtain funding in the public unsecured debt markets or by selling or pledging mortgage-
related and other securities as collateral to other institutions could cease or change rapidly. The cost of
available funding could increase significantly due to changes in market interest rates, market confidence,
operational risks, regulatory requirements and other factors. We may incur higher funding costs due to
our liquidity management practices and procedures. 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.
We make extensive use of the Federal Reserve's payment system in our business activities. The Federal
Reserve requires that we fully fund accounts at the Federal Reserve Bank of New York 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. Although we
seek to maintain sufficient intraday liquidity to fund our activities through the Federal Reserve's payment
system, we have limited access to cash once the debt markets are closed for the day. Insufficient cash
may cause our account to be overdrawn, potentially resulting in penalties and reputational harm.
Prolonged wide spreads on long-term debt could cause us to reduce our long-term debt issuances and
further increase our reliance on short-term and callable debt issuances. This increased reliance could
increase the risk that we may be unable to refinance our debt when it becomes due and result in a
greater use of derivatives. This greater use of derivatives could increase the volatility of our
comprehensive income.
Our mortgage-related investments portfolio has contracted significantly since we entered into
conservatorship, but continues to contain assets that are less liquid than agency securities. Our ability to
use these less liquid assets as a significant source of liquidity (for example, through sales or use as
collateral in secured lending transactions) is limited.
Freddie Mac 2015 Form 10-K
191
Risk Factors
Liquidity Risks
We pay net worth sweep dividends 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, such as increases in the fair value of our securities or a reduction in our loan loss
reserves, 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 U.S. 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 or emergency credit facilities. Changes
or perceived changes in the U.S. government’s support for us could have a severe negative effect on our
access to the unsecured debt markets and our debt funding costs. Our access to the unsecured debt
markets and the costs of our debt funding could be adversely affected by a number of factors relating to
U.S. government support, including:
• Uncertainty about the future of the GSEs;
•
If debt investors become concerned that the risk of us being placed in receivership is increasing; and
• Future draws that significantly reduce the amount of available funding remaining under the Purchase
Agreement.
For more information, see “MD&A - Liquidity and Capital Resources - Capital Resources.”
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 investor 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 the size of our mortgage-related
investments portfolio declines, as we will be issuing fewer debt securities. This could lead to a decrease
in demand for our debt securities and an increase in our funding costs.
Competition for Debt Funding
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. See “MD&A - Our Business Segments - Investments”
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.
Freddie Mac 2015 Form 10-K
192
Risk Factors
Liquidity 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.
Our credit ratings are important to our liquidity. We currently receive ratings for our unsecured debt from
three nationally recognized statistical rating organizations (S&P, Moody’s, and Fitch). 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. 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, 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 downgrade in our credit ratings could
require us to post additional collateral to certain of our derivative counterparties.
For more information, see “MD&A - Liquidity and Capital Resources - Liquidity Profile - Credit Ratings.”
Freddie Mac 2015 Form 10-K
193
Risk Factors
Legal and Regulatory Risks
LEGAL AND REGULATORY RISKS
Legislative or regulatory actions could adversely affect our business activities and financial
results.
We operate in a highly regulated industry and are subject to heightened supervision from FHFA, as our
Conservator. Our compliance systems and programs may not be adequate to ensure that we are in
compliance with all legal and other requirements. We could incur fines or other negative consequences
for inadvertent violations.
Our business may be directly adversely affected by future legislative and regulatory actions at the federal,
state, and local levels, including actions by FHFA as Conservator. Judicial actions at the federal, state, or
local level could also adversely affect us. Legislative, regulatory or judicial actions could affect us in a
number of ways, including by imposing significant additional legal, compliance and other costs on us,
limiting our business activities and diverting management attention or other resources.
For example, our ability to recruit and retain executives and other employees with the necessary skills to
conduct our business may be adversely affected by legislative or regulatory actions (e.g., significant
restrictions on compensation). We could also be negatively affected by legislative, regulatory or judicial
action that:
• Changes the foreclosure process of any individual state;
•
Limits or otherwise adversely affects the rights of a holder of a first lien on a mortgage (such as
through granting priority rights in foreclosure proceedings for homeowner associations);
• Expands the responsibilities of (and costs to) servicers for maintaining vacant properties prior to
foreclosure;
• Permits or requires principal reductions, such as allowing local governments to use eminent domain
to seize mortgage loans and forgive principal on the loans; or
• Prevents us from using the MERS System or disrupts foreclosures of loans registered in the MERS
System.
Our business could also be adversely affected by any modification, reduction, or repeal of the federal
income tax deductibility of loan interest payments.
The Dodd-Frank Act significantly changed the regulation of loans and the financial services industry and
could continue to affect us in substantial ways. For example, the Dodd-Frank Act and related regulatory
changes could cause or require us to make further changes to our business practices, such as practices
related to mortgage underwriting and servicing.
Legislation or regulatory actions could indirectly adversely affect us to the extent they affect the activities
of banks, savings institutions, insurance companies, derivative counterparties, clearinghouses, securities
dealers, and other regulated entities that constitute a significant portion of our customers or
counterparties, or to the extent that they modify industry practices. Legislative or regulatory provisions
that remove incentives for these entities to purchase our securities or enter into derivatives or other
transactions with us could have a material adverse effect on our business and financial results. For
example, changes in business practices resulting from the Dodd-Frank Act and related regulatory
changes could have a negative effect on the volume of loan originations or could modify or remove
incentives for financial institutions to sell loans to us, either of which could adversely affect the number of
Freddie Mac 2015 Form 10-K
194
Risk Factors
Legal and Regulatory Risks
loans available for us to purchase or guarantee.
The Basel III standards could affect demand for our debt and mortgage-related securities.
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 will take several years. The new
requirements do not directly apply to us 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 decrease demand for our debt and mortgage-related securities and/
or affect competition in the market for loan originations and servicing, with possible adverse
consequences for our business and financial results. In addition, the phase-in of enhanced capital and
liquidity requirements for banking organizations may reduce the level of participation of such
organizations in (and thus the liquidity of) trading markets for various types of financial instruments,
including asset-backed securities. In turn, this could decrease the liquidity of the markets for our debt and
mortgage-related securities, which could increase our funding and other costs and adversely affect our
business.
In January 2016, the Basel Committee on Banking Supervision issued revised standards for minimum
capital requirements for market risk. These standards are also applicable to banking organizations. There
is significant uncertainty as to when, and the extent to which, U.S. banking regulators will adopt the new
market risk standards, and the effect any such standards may have on us.
We may make certain changes to our business in an attempt to meet our housing goals and
subgoals, which may cause us to forgo other more profitable opportunities.
We may make adjustments to our loan sourcing and purchase strategies in an effort to meet our housing
goals and subgoals, including relaxing some of 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.
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 that
could adversely affect our profitability. If we do not meet our housing goals or duty to serve requirements,
and FHFA finds that we could have met the goals or satisfied the requirements, we may become subject
to a housing plan that could require us to take additional steps that could potentially adversely affect our
profitability. Due to our failure to meet two single-family housing goals for 2014, FHFA required us to
submit a housing plan addressing how we intend to achieve the missed goals in 2016 and 2017. We
submitted a housing plan for FHFA approval on February 1, 2016. If we fail to comply with the plan, FHFA
could take additional action against us.
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 governmental investigations and regulatory proceedings 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
Freddie Mac 2015 Form 10-K
195
Risk Factors
Legal and Regulatory Risks
reserves and to make substantial payments in the event of adverse judgments or settlements of any such
claims, proceedings, investigations 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. Furthermore, the costs (including settlement costs) 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. 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 15 for
information about these various pending legal proceedings.
Freddie Mac 2015 Form 10-K
196
Risk Factors
Other Risks
OTHER RISKS
Our investment activity is significantly limited under the Purchase Agreement and by FHFA, which
will reduce our earnings from investment activities over time and result in greater reliance on our
guarantee activities to generate revenue.
Declines in the size of our mortgage-related investments portfolio, as required by the Purchase
Agreement and FHFA, will reduce our earnings over the long term. We are also subject to other
limitations on our investment activity, including significant constraints on our ability to purchase or sell
mortgage assets. These limitations will reduce the earnings capacity of our mortgage-related investments
portfolio. 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 “MD&A -
Conservatorship and Related Matters - Limits on Our Mortgage-Related Investments Portfolio and
Indebtedness.”
Due to the reduced earnings capacity of our mortgage-related investments portfolio, we will have to place
greater emphasis on our guarantee activities to generate revenue. However, our ability to generate
revenue through guarantee activities may be limited for a number of reasons. We may be required to
adopt business practices that help serve our public mission and other non-financial objectives, but that
may negatively affect our future financial results. We must obtain FHFA’s approval to implement across-
the-board increases in our guarantee fees, and there can be no assurance FHFA will approve any such
increase requests in the future. Congress or FHFA may require us to set aside or otherwise pay monies to
fund third party initiatives, such as the requirement that we allocate amounts for certain housing funds.
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.
The loss of business from a key customer or a decrease in the availability of mortgage insurance
could result in a decline in our market share and revenues.
Our business depends on our ability to acquire a steady flow of loans. We purchase a significant
percentage of our single-family loans from several large loan originators. Similarly, we acquire a
significant portion of our multifamily loans from several large lenders. For more information, see Note 13.
We enter into loan purchase commitments with many of our single-family customers that are typically less
than one year in duration. Lenders may fail to deliver loans to us in accordance with their commitments.
The loss of business from any of our major lenders could adversely affect our market share and our
revenues.
Our charter requires that single-family loans with LTV ratios above 80% at the time of purchase be
covered by mortgage insurance or other credit enhancements. 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.
Freddie Mac 2015 Form 10-K
197
Risk Factors
Other Risks
Competition from banking and non-banking institutions (including Fannie Mae, Ginnie Mae, and
FHA/VA) may harm our business. FHFA’s actions as Conservator of both companies could affect
competition between us and Fannie Mae.
Competition in the secondary mortgage market may make it more difficult for us to purchase mortgage
loans. 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.
We also compete with other financial institutions that retain or securitize loans, such as commercial and
investment banks, dealers, thrift institutions, and insurance companies. In recent years, FHFA took a
number of actions designed to encourage these other financial institutions to increase their activities in
the mortgage market (e.g., increasing our guarantee fees in 2012), and could take additional actions in
the future. Because of these actions and because our base management and guarantee fees do not vary
based on LTV ratios or credit scores, there is a risk that financial institutions may retain loans with better
credit characteristics rather than sell them to us, or otherwise seek to structure financial transactions that
result in our loan purchases having a higher proportion of loans with lower credit scores and higher LTV
ratios. While we compensate ourselves for higher levels of credit risk through charging upfront delivery
fees, sellers' retention of loans with better credit characteristics could result in us having lower overall
purchase volumes, revenues, and returns (as a result of us having loans with a more adverse credit risk
profile).
FHFA is also Conservator of Fannie Mae, our primary competitor. 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 give us a competitive advantage.
We have faced increased competition in the multifamily market in recent years from life insurers, banks,
CMBS conduits, and other market participants as multifamily market fundamentals have improved. FHFA
may take actions that could encourage further competition.
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 our K Certificates.
The price performance of our PCs relative to comparable Fannie Mae securities 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 loan purchase program. Our competitiveness in purchasing single-family loans from
our sellers and the volume and/or profitability of our new single-family guarantee business is directly
affected by the price performance of our PCs relative to comparable Fannie Mae securities.
Freddie Mac fixed-rate PCs provide for faster scheduled monthly remittance of loan principal and interest
payments to investors than Fannie Mae fixed-rate securities. Despite the faster remittance cycle of our
PCs, our PCs have typically traded at a discount relative to comparable Fannie Mae securities. This
difference in relative pricing creates an economic incentive for sellers to conduct a disproportionate share
of their single-family business with Fannie Mae.
Freddie Mac 2015 Form 10-K
198
Risk Factors
Other Risks
There may not be 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
loans that we securitize, or a reduction in the trading volume of our PCs, could further reduce the liquidity
of our PCs. While we may employ various strategies to support the liquidity and price performance of our
PCs, and may consider additional strategies, those strategies may fail or adversely affect our business.
We may cease such activities at any time, or FHFA could require us to do so, which could adversely affect
the liquidity and price performance of our PCs.
The liquidity-related price differences between our PCs and comparable Fannie Mae securities could be
influenced by factors that are largely outside of our control. For example, the level of the Federal
Reserve’s purchases of agency mortgage-related securities could affect the demand for and values of our
PCs. Therefore, any strategies we employ to reduce the liquidity-related price differences may not reduce
or eliminate these price differences over the long-term.
In certain circumstances, we compensate sellers for the difference in price between our PCs and
comparable Fannie Mae securities by reducing our guarantee fees, which adversely affects the
profitability of our single-family guarantee business. We also incur costs in connection with our efforts to
support the liquidity and price performance of our PCs, including by engaging in transactions that yield
less than our target rate of return. For more information, see “MD&A - Our Business Segments - Single-
Family Guarantee - Business Overview - Products and Activities” and “- Investments Segment - Business
Overview - Products and Activities.”
In accordance with FHFA’s 2014 Strategic Plan and the Conservatorship Scorecards, we are developing
a single (common) security, which is designed to reduce the price performance disparities between the
mortgage-related securities of Freddie Mac and Fannie Mae. This initiative is complex and costly, and
may require us to align our business processes more closely with those of Fannie Mae. There can be no
assurance that a single (common) security will reduce the trading value disparities.
Our current Multifamily business model is highly dependent on our ability to finance purchased multifamily
loans through securitization into K Certificates. A significant decrease in demand for K Certificates could
have an adverse impact on the profitability of the Multifamily business to the extent that our holding period
for the loans increases and we are exposed to credit, spread and other market risks for a longer period of
time. We employ various strategies to support the liquidity of our K Certificates, and may consider
additional strategies. From time to time, we purchase and sell guaranteed K Certificates and related
unguaranteed securities associated with K Certificates as well as our other securitization products
through our mortgage-related investments portfolio.
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, which could make it
difficult for investors to execute transactions in our securities and could cause declines or volatility in the
prices of our equity securities.
Freddie Mac 2015 Form 10-K
199
Legal Proceedings
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 15 for more information regarding our involvement as a party to various
legal proceedings. We discuss below certain litigation against the U.S. government concerning
conservatorship and the Purchase Agreement.
Over the last several years, a number of lawsuits have been filed against the U.S. government and, in
some cases, the Secretary of the Treasury and the Director of FHFA. These lawsuits challenge 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. A number of cases have been dismissed.
Cases are currently pending in the U.S. Court of Federal Claims, the U.S. District Court for the Eastern
District of Kentucky, the U.S. District Court for the Northern District of Iowa, and the U.S. District Court for
the Northern District of Illinois. In addition, plaintiffs are appealing a September 2014 order by the U.S.
District Court for the District of Columbia to dismiss such parties’ cases in that Court. 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 15
for information on the lawsuits filed against Freddie Mac. Pershing Square Capital Management, L.P.
(“Pershing”) is a plaintiff in one of the lawsuits filed against Freddie Mac. Pershing has filed reports with
the SEC, most recently in March 2014, indicating that it beneficially owned more than 5% of our common
stock. We do not know Pershing's current beneficial ownership of our common stock. For more
information, see “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters."
It is not possible for us to predict the outcome of these lawsuits (including the outcome of any appeal), 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.
Freddie Mac 2015 Form 10-K
200
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
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 4, 2016, there were
650,045,962 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.
2015 Quarter Ended
December 31
September 30
June 30
March 31
2014 Quarter Ended
December 31
September 30
June 30
March 31
HOLDERS
$
$
High
Low
$
$
2.67
2.61
2.84
3.32
2.50
4.58
4.78
6.00
1.57
1.90
2.18
2.04
1.44
2.56
3.63
2.63
As of February 4, 2016, we had 1,803 common stockholders of record.
DIVIDENDS AND DIVIDEND RESTRICTIONS
We did not pay any cash dividends on our common stock during 2015 or 2014. Our payment of dividends
is subject to the following restrictions:
• Restrictions Relating to the Conservatorship - The Conservator has prohibited us from paying any
dividends on our common stock or on any series of our 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
Freddie Mac 2015 Form 10-K
201
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
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.
However, 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 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 our core capital is below 125%
of our critical capital requirement or 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.
• 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, 2015. 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 2015 at the
direction of the Conservator, as discussed in “MD&A - LIQUIDITY AND CAPITAL RESOURCES” and
Note 10. We did not declare or pay dividends on any other series of preferred stock outstanding in
2015.
RECENT SALES OF UNREGISTERED SECURITIES
The securities we issue are “exempted securities” under the Securities Act of 1933. 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, 2015.
See Note 10 for more information.
ISSUER PURCHASES OF EQUITY SECURITIES
We did not repurchase any of our common or preferred stock during 2015. Additionally, we do not
currently have any outstanding authorizations to repurchase common or preferred stock. Under the
Freddie Mac 2015 Form 10-K
202
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
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 30170
College Station, TX 77842
Telephone: 877-373-6374
https://www-us.computershare.com/investor
Freddie Mac 2015 Form 10-K
203
Financial Statements
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Freddie Mac 2015 Form 10-K
204
Financial Statements
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders of Freddie Mac
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of
comprehensive income, of equity, 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, 2015 and 2014, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2015 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, 2015, based on
criteria established in Internal Control - Integrated Framework (2013) 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 "Controls and Procedures." We considered this material weakness in
determining the nature, timing, and extent of audit tests applied in our audit of the 2015 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
Freddie Mac 2015 Form 10-K
205
Financial Statements
Report of Independent Registered Public Accounting Firm
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 18, 2016
Freddie Mac 2015 Form 10-K
206
Financial Statements
Consolidated Statements of Comprehensive Income
FREDDIE MAC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(in millions, except share-related amounts)
Interest income
Mortgage loans
Investments in securities
Other
Total interest income
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
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 (loss)
Non-interest income (loss)
Non-interest expense
Salaries and employee benefits
Professional services
Occupancy expense
Other administrative expense
Total administrative expense
Real estate owned operations (expense) income
Temporary Payroll Tax Cut Continuation Act of 2011 expense
Other (expense) income
Non-interest expense
Income before income tax (expense) benefit
Income tax (expense) benefit
Net income
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
Net income
Undistributed net worth sweep and senior preferred stock dividends
Net income (loss) attributable to common stockholders
Net income (loss) per common share — basic and diluted
Weighted average common shares outstanding (in millions) — basic and diluted
$
$
$
$
Year Ended December 31,
2015
2014
2013
$
62,226
$
63,605
$
64,883
4,794
70
67,090
(51,916)
(228)
14,946
2,665
17,611
(240)
(2,696)
(241)
(51)
(292)
508
(879)
(3,599)
(975)
(497)
(56)
(399)
(1,927)
(338)
(967)
(1,506)
(4,738)
9,274
(2,898)
6,376
(806)
182
47
(577)
5,799
6,376
(6,399)
$
$
5,843
32
69,480
(54,916)
(301)
14,263
(58)
14,205
(422)
(8,291)
(860)
(78)
(938)
1,494
8,044
(113)
(914)
(527)
(58)
(382)
(1,881)
(196)
(775)
(238)
(3,090)
11,002
(3,312)
7,690
1,584
197
(45)
1,736
9,426
7,690
$
$
7,768
51
72,702
(55,779)
(455)
16,468
2,465
18,933
446
2,632
(763)
(747)
(1,510)
301
6,650
8,519
(833)
(543)
(54)
(375)
(1,805)
140
(533)
109
(2,089)
25,363
23,305
48,668
2,406
316
210
2,932
51,600
48,668
(10,026)
(52,199)
(23) $
(2,336) $
(3,531)
(0.01) $
3,235
(0.72) $
3,236
(1.09)
3,238
The accompanying notes are an integral part of these consolidated financial statements.
Freddie Mac 2015 Form 10-K
207
Financial Statements
Consolidated Balance Sheets
FREDDIE MAC
CONSOLIDATED BALANCE SHEETS
(in millions, except share-related amounts)
Assets
Cash and cash equivalents (Notes 3, 13)
Restricted cash and cash equivalents (Notes 3, 13)
Securities purchased under agreements to resell (Notes 3, 9)
Investments in securities, at fair value (Note 6)
Mortgage loans held-for-sale (Notes 3, 4) (includes $17,660 and $12,130 at fair value)
Mortgage loans held-for-investment (Notes 3, 4) (net of allowance for loan losses of
$15,331 and $21,761)
Accrued interest receivable (Note 3)
Derivative assets, net (Notes 8, 9)
Real estate owned, net (Notes 3, 5)
Deferred tax assets, net (Note 11)
Other assets (Notes 3, 17)
Total assets
Liabilities and equity
Liabilities
Accrued interest payable (Note 3)
Debt, net (Notes 3, 7) (includes $7,184 and $5,862 at fair value)
Derivative liabilities, net (Notes 8, 9)
Other liabilities (Notes 3, 17)
Total liabilities
Commitments and contingencies (Notes 3, 8, and 15)
Equity (Note 10)
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 650,045,962 shares and 650,043,899 shares outstanding
Additional paid-in capital
Retained earnings (accumulated deficit)
AOCI, net of taxes, related to:
Available-for-sale securities (includes $778 and $839, related to net unrealized gains
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, 75,817,924 shares and 75,819,987 shares
Total equity (See Note 10 for information on our dividend obligation to Treasury)
$
$
$
At December 31,
2015
2014
$
$
$
5,595
14,533
63,644
114,215
24,992
1,729,201
6,074
395
1,725
18,205
7,471
1,986,050
6,183
1,970,427
1,254
5,246
1,983,110
72,336
14,109
—
—
(80,773)
1,740
(621)
34
1,153
(3,885)
2,940
10,928
8,535
51,903
136,987
12,368
1,688,212
6,034
822
2,558
19,498
7,694
1,945,539
6,325
1,929,542
1,963
5,058
1,942,888
72,336
14,109
—
—
(81,639)
2,546
(803)
(13)
1,730
(3,885)
2,651
Total liabilities and equity
$
1,986,050
$
1,945,539
The table below represents the carrying value and classification of the assets and liabilities of consolidated VIEs on
our consolidated balance sheets.
(in millions)
Consolidated Balance Sheet Line Item
Assets: (Note 3)
Mortgage loans held-for-sale
Mortgage loans held-for-investment
All other assets
Total assets of consolidated VIEs
Liabilities: (Note 3)
Debt, net
All other liabilities
Total liabilities of consolidated VIEs
The accompanying notes are an integral part of these consolidated financial statements.
Freddie Mac 2015 Form 10-K
At December 31,
2015
2014
$
$
$
$
1,403
1,625,184
37,305
1,663,892
1,556,121
4,769
1,560,890
$
$
$
$
—
1,558,094
29,798
1,587,892
1,479,473
4,703
1,484,176
208
Financial Statements
Consolidated Statements of Equity
FREDDIE MAC
CONSOLIDATED STATEMENTS OF EQUITY
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
1
—
—
—
—
—
1
1
—
—
—
—
1
1
—
—
—
—
1
464
650
$
72,336
$
14,109
$
— $
1
$
(70,796)
$ (2,938)
$ (3,885)
$ 8,827
—
—
—
—
—
464
464
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1)
—
48,668
—
—
48,668
—
2,932
48,668
2,932
—
(47,591)
—
—
—
—
—
2,932
51,600
(1)
—
(47,591)
650
650
$
$
72,336
72,336
$
$
14,109
14,109
$
$
— $
— $
(69,719)
$
(6)
$ (3,885)
$ 12,835
— $
— $
(69,719)
$
(6)
$ (3,885)
$ 12,835
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
7,690
—
—
7,690
—
1,736
7,690
1,736
—
—
1,736
9,426
(19,610)
—
—
(19,610)
464
650
$
72,336
$
14,109
$
— $
— $
(81,639)
$ 1,730
$ (3,885)
$ 2,651
464
650
$
72,336
$
14,109
$
— $
— $
(81,639)
$ 1,730
$ (3,885)
$ 2,651
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,376
—
—
6,376
—
(577)
6,376
(577)
—
—
(577)
5,799
(5,510)
—
—
(5,510)
464
650
$
72,336
$
14,109
$
— $
— $
(80,773)
$ 1,153
$ (3,885)
$ 2,940
(in millions)
Balance at
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
Balance at
December 31,
2013
Comprehensive
income:
Net income
Other
comprehensive
income, net of
taxes
Comprehensive
income
Senior preferred
stock dividends
declared
Ending balance at
December 31,
2014
Balance at
December 31,
2014
Comprehensive
income:
Net income
Other
comprehensive
income, net of
taxes
Comprehensive
income
Senior preferred
stock dividends
declared
Ending balance at
December 31,
2015
The accompanying notes are an integral part of these consolidated financial statements.
Freddie Mac 2015 Form 10-K
209
Financial Statements
Consolidated Statements of Cash Flows
FREDDIE MAC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Cash flows from operating activities
Year Ended December 31,
2014
2013
2015
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
6,376
$
7,690
$
48,668
Derivative losses (gains)
Asset related amortization — premiums, discounts, and basis adjustments
Debt related amortization — premiums and discounts on certain debt securities
and basis adjustments
Losses (gains) on extinguishment of debt
(Benefit) provision for credit losses
Losses (gains) on investment activity
Deferred income tax expense (benefit)
Purchases of mortgage loans acquired as held-for-sale
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
Other, net
Net cash (used in) 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
Proceeds from sales of mortgage loans held-for-investment
Repayments of mortgage loans held-for-investment
(Increase) decrease in restricted cash
Net proceeds from dispositions of real estate owned and other recoveries
Net (increase) decrease in securities purchased under agreements to resell
Derivative premiums and terminations and swap collateral, net
Changes in other assets
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 and redemptions of debt securities of consolidated trusts held by third
parties
Proceeds from issuance of other debt
Repayments of other debt
Payment of cash dividends on senior preferred stock
Changes in other liabilities
Net cash used in financing activities
Net (decrease) increase 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 for:
Debt interest
Income taxes
Non-cash investing and financing activities (Notes 4, 5 and 6)
456
5,321
(8,295)
240
(2,665)
1,878
1,655
(41,728)
36,034
150
(867)
(40)
(43)
1,022
(428)
(934)
(40,614)
14,847
16,377
(6,818)
18,900
20,807
(122,082)
2,727
302,364
(5,998)
3,650
(11,741)
(749)
(12,724)
178,946
5,652
3,518
(5,368)
422
58
(1,287)
2,284
(24,593)
21,995
67
(932)
116
(440)
268
(565)
8,885
(42,477)
18,513
17,118
(25,290)
32,062
20,734
(75,298)
454
241,552
3,730
7,712
10,480
(3,888)
(134)
205,268
(6,097)
4,627
(6,779)
(446)
(2,465)
1,545
(23,422)
(23,103)
28,123
167
(1,302)
725
(849)
117
(2,957)
16,552
(53,753)
57,380
12,542
(9,681)
24,675
33,630
(79,028)
196
410,455
2,327
11,274
(24,820)
6,062
—
391,259
174,561
124,887
113,841
(316,306)
610,091
(646,176)
(5,510)
(5)
(183,345)
(5,333)
10,928
5,595
61,120
1,095
$
$
(262,920)
451,854
(508,710)
(19,610)
(7)
(214,506)
(353)
11,281
10,928
62,257
760
$
$
(430,118)
701,342
(742,510)
(47,591)
(7)
(405,043)
2,768
8,513
11,281
65,614
—
$
$
The accompanying notes are an integral part of these consolidated financial statements.
Freddie Mac 2015 Form 10-K
210
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability,
and affordability to the U.S. housing market. We are 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. 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.
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 includes certain adjustments to correct immaterial errors related to
previously reported periods.
Beginning in the first quarter of 2014, we reclassified net discounts paid on retirements of other debt and
net premiums received from issuance of debt securities of consolidated trusts and other debt from cash
flows from operating activities to cash flows from financing activities on our consolidated statements of
cash flows. This reclassification resulted in a decrease of $2.0 billion to net cash provided by operating
activities, and an increase of $2.0 billion to net cash used in financing activities for 2013.
USE OF ESTIMATES
The preparation of financial statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and 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 for establishing the allowance for loan losses and reserve for guarantee losses, valuing
financial instruments and other assets and liabilities, and assessing impairments on investments. Actual
results could be different from these estimates.
Freddie Mac 2015 Form 10-K
211
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
CHANGE IN ESTIMATE
Adoption of Regulatory Guidance on Determining when a Loan is Uncollectible
On January 1, 2015, we adopted regulatory guidance issued by FHFA that establishes guidelines for
adverse classification and identification of specified single-family and multifamily assets, including
guidelines for recognizing charge-offs on certain single-family loans. We analyze loans for collectability
based on several factors, including, but not limited to:
• Servicing actions that indicate the potential for near-term loss mitigation, such as whether we have
achieved quality borrower contact;
• Credit risk factors, such as whether the loan is in a state with foreclosure practices that prevent timely
resolution of delinquencies; and
•
Loan characteristics that indicate whether repayment is likely to occur, such as the borrower's
payment history, loan status, and historical performance of loans with similar characteristics.
Upon adoption, we changed the timing of when we deem certain single-family loans to be uncollectible,
and we began to charge-off the amount of recorded investment in excess of the fair value of the
underlying collateral for loans that have been deemed uncollectible prior to foreclosure, based on the
factors identified above.
This adoption resulted in a reduction to both the recorded investment of loans, held-for-investment, and
our allowance for loan losses of $1.9 billion on January 1, 2015. However, these additional charge-offs did
not have a material impact on our comprehensive income for 2015, as we had already reserved for these
losses in our allowance for loan losses in prior periods.
CONSOLIDATION AND EQUITY METHOD ACCOUNTING
For each entity with which we are involved, we determine whether the entity should be consolidated in our
financial statements. We generally consolidate entities in which we have a controlling financial interest.
The method for determining whether a controlling financial interest exists varies depending on whether
the entity is a VIE. For entities that are not VIEs, we hold a controlling financial interest in entities where
we hold a majority of the voting rights or where we are able to exercise control through substantive
participating rights or as a general partner. We do not currently consolidate any entities which are not
VIEs. We use the equity method to account for our interests in entities in which we do not have a
controlling financial interest, but over which we have significant influence.
CASH AND CASH EQUIVALENTS
Highly liquid investment securities that have an original maturity of three months or less are accounted for
as 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 from servicers of the underlying assets of our consolidated trusts, as well as
cash remittances received on mortgage loans we own, which are deposited into a separate custodial
Freddie Mac 2015 Form 10-K
212
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
account. We invest the cash held in the custodial account 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.
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:
• The unrealized gains and losses on available-for-sale securities;
• The effective portion of derivatives accounted for as cash flow hedge relationships; and
• Defined benefit plans.
OTHER SIGNIFICANT ACCOUNTING POLICIES
The table below identifies our other significant accounting policies and the related note in which they can
be found.
Accounting Policy
Variable Interest Entities
Financial Guarantees
Loans and Allowance for Loan Losses
Real Estate Owned
Investments in Securities
Debt
Derivatives
Collateralized Agreements and Offsetting Arrangements
Repurchase and Resale Agreements and Dollar Roll Transactions
Earnings Per Share
Stockholders’ Equity
Income Taxes
Segment Reporting
Fair Value Measurements
Note
Note 3
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 9
Note 10
Note 10
Note 11
Note 12
Note 14
Freddie Mac 2015 Form 10-K
213
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
RECENTLY ISSUED ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
Standard
Description
ASU 2014-01, Accounting
for Investments in
Qualified Affordable
Housing Projects (Topic
323)
The 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.
ASU 2014-04,
Reclassification of
Residential Real Estate
Collateralized Consumer
Loans upon Foreclosure
(Topic 310)
ASU 2014-11,
Repurchase-to-Maturity
Transactions,
Repurchase Financings,
and Disclosures (Topic
860)
ASU 2014-14,
Classification of Certain
Government-Guaranteed
Loans upon Foreclosure
(Topic 310)
The amendment clarifies that a creditor is
considered to have received physical
possession of residential real estate property
collateralizing a consumer mortgage loan,
upon either the creditor obtaining legal title to
the residential real estate property upon
completion of a foreclosure or 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.
The amendment requires repurchase-to-
maturity transactions to be accounted for as
secured borrowings and requires separate
accounting for a transfer of a financial asset
completed contemporaneously with a
repurchase agreement with the same
counterparty.
The amendment requires that a loan be de-
recognized and a separate receivable be
recognized upon foreclosure if certain
conditions are met. If those conditions are met
and such a receivable is recognized, the
receivable should be measured based on the
amount of principal and interest related to the
loan expected to be recovered from the
guarantor.
Date of
Adoption
January 1,
2014
Effect on Consolidated
Financial Statements
The adoption of this
amendment did not have
a material effect on our
consolidated financial
statements.
January 1,
2015
The adoption of this
amendment did not have
a material effect on our
consolidated financial
statements.
January 1,
2015
The adoption of this
amendment did not have
a material effect on our
consolidated financial
statements.
January 1,
2015
The adoption of this
amendment did not have
a material effect on our
consolidated financial
statements.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 1
Recently Issued Accounting Guidance, Not Yet Adopted Within Our Consolidated Financial
Statements
Standard
Description
ASU 2015-02,
Amendments to the
Consolidation Analysis
(Topic 810)
The amendment affects reporting entities that
are required to evaluate whether they should
consolidate certain legal entities.
ASU 2015-03, Simplifying
the Presentation of Debt
Issuance Costs (Subtopic
835-30)
The amendment requires that debt issuance
costs related to a recognized debt liability be
presented in the balance sheet as a direct
deduction from the carrying amount of that
debt liability, consistent with debt discounts.
ASU 2014-09, Revenue
from Contracts with
Customers (Topic 606)
and ASU 2015-14
The amendment requires entities to recognize
revenue to depict the transfer of promised
goods or services to customers in amounts that
reflect the consideration to which the entity
expects to be entitled in exchange for those
goods or services. ASU 2015-14 defers the
effective date of ASU 2014-09 for all entities by
one year.
Date of
Adoption
January 1,
2016
Effect on Consolidated
Financial Statements
We do not expect that
the adoption of this
amendment will have a
material effect on our
consolidated financial
statements.
January 1,
2016
We do not expect that
the adoption of this
amendment will have a
material effect on our
consolidated financial
statements.
January 1,
2018
We are evaluating the
effect that the adoption
of this amendment will
have on our
consolidated financial
statements
ASU 2016-01,
Recognition and
Measurement of Financial
Assets and Financial
Liabilities (Subtopic
825-10)
The amendment addresses certain aspects of
recognition, measurement, presentation, and
disclosure of financial instruments.
January 1,
2018
We do not expect that
the adoption of this
amendment will have a
material effect on our
consolidated financial
statements.
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 2
NOTE 2: CONSERVATORSHIP AND RELATED MATTERS
BUSINESS OBJECTIVES
We operate under the conservatorship that commenced on September 6, 2008, conducting our business
under the direction of FHFA, as our Conservator. The conservatorship and related matters significantly
affect our management, business activities, 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. 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 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.
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. Some of these initiatives impact our near- and long-term financial results. Given our
public mission and the important role the Administration and our Conservator have placed on Freddie
Mac in addressing housing and mortgage market conditions, we may be required to take actions that
could have a negative impact on our business, operating results or financial condition, and thus contribute
to a need for additional draws under the Purchase Agreement.
In May 2014, FHFA issued its 2014 Strategic Plan, which updated FHFA's vision for implementing its
obligations as Conservator of Freddie Mac and Fannie Mae and established three reformulated strategic
goals. FHFA has also issued its Conservatorship Scorecards for 2014, 2015, and 2016. The
Conservatorship Scorecards establish objectives and performance targets and measures for Freddie Mac
and Fannie Mae (the “Enterprises”) related to the strategic goals set forth in the Strategic Plan.
The 2014 Strategic Plan established three reformulated strategic goals for the conservatorships of
Freddie Mac and Fannie Mae:
• Maintain, in a safe and sound manner, foreclosure prevention activities and credit availability for new
and refinanced loans to foster liquid, efficient, competitive and resilient national housing finance
markets.
• Reduce taxpayer risk through increasing the role of private capital in the mortgage market.
• Build a new single-family securitization infrastructure for use by the Enterprises and adaptable for
use by other participants in the secondary market in the future.
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Notes to the Consolidated Financial Statements | Note 2
As part of the first goal, the 2014 Strategic Plan describes various steps related to increasing access to
mortgage credit for credit-worthy borrowers. The 2014 Strategic Plan provides for the Enterprises to
continue to play an ongoing role in supporting multifamily housing needs, particularly for low-income
households. The plan states that FHFA will continue to impose a production cap on Freddie Mac’s and
Fannie Mae’s multifamily businesses. However, in 2015 FHFA allowed loans in certain affordable and
underserved market segments to be excluded from the production cap. This allowance was maintained in
the 2016 Conservatorship Scorecard with slight modification.
The second goal focuses on ways to transfer risk to private market participants and away from the
Enterprises in a responsible way that does not reduce liquidity or adversely impact the availability of
mortgage credit. The second goal provides for us to increase the use of single-family credit risk transfer
transactions, continue using credit risk transfer transactions in the multifamily business and continue
shrinking our mortgage-related investments portfolio consistent with the requirements in the Purchase
Agreement, with a focus on selling less liquid assets.
The third goal includes the continued development of the Common Securitization Platform. FHFA refined
the scope of this project to focus on making the new shared system operational for Freddie Mac’s and
Fannie Mae’s existing single-family securitization activities. The third goal also provides for the
Enterprises to work towards the development of a single (common) security.
We continue to align our resources and internal business plans to meet the goals and objectives provided
to us by FHFA.
As a result of the net worth sweep dividend provisions of the senior preferred stock, we cannot retain
capital from the earnings generated by our business operations (other than a limited amount that will
decrease to zero in 2018) or return capital to stockholders other than Treasury, the holder of our senior
preferred stock. Our future is uncertain, and the conservatorship has no specified termination date. We do
not know what changes may occur to our business model during or following conservatorship, including
whether we will continue to exist. 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 it is possible and perhaps likely that there will
be significant changes beyond the near term. We have no ability to predict the outcome of these
deliberations.
PURCHASE AGREEMENT AND WARRANT
Overview
On September 7, 2008, we, through FHFA, in its capacity as Conservator, entered into the Purchase
Agreement with Treasury. 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.
The amount of available funding remaining under the Purchase Agreement was $140.5 billion as of
December 31, 2015. 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,
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 2
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 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 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. The dividends we have paid to Treasury on the senior
preferred stock have been declared by, and paid at the direction of, the Conservator, acting as successor
to the rights, titles, powers and privileges of the Board. 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 the total assets of Freddie Mac (excluding Treasury’s commitment and any unfunded amounts
thereof), less 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 $1.8 billion for 2015, will be $1.2 billion for 2016,
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. The senior preferred stock is senior in liquidation preference to our
common stock and all other series of preferred stock.
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. We may need to make additional draws in future periods due
to a variety of factors that could adversely affect our net worth.
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Notes to the Consolidated Financial Statements | Note 2
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.
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. However, Treasury's consent is required for a termination of conservatorship other
than in connection with receivership. 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:
To a limited life regulated entity (in the context of a receivership);
Of assets and properties in the ordinary course of business, consistent with past practice;
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;
In connection with our liquidation by a receiver;
Of cash or cash equivalents for cash or cash equivalents; or
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 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
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Financial Statements
Notes to the Consolidated Financial Statements | Note 2
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 other VIEs 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:
• 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;
• 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;
• We may not take any action that will result in an increase in the par value of our common stock;
• 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
• 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:
• The completion of our liquidation and fulfillment of Treasury’s obligations under its funding
commitment at that time;
• The payment in full of, or reasonable provision for, all of our liabilities (whether or not contingent,
including mortgage guarantee obligations); and
• The funding by Treasury of the maximum amount of the commitment under the Purchase Agreement.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 2
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 mortgage guarantee obligations.
Third-party Enforcement Rights
In the event of our default on payments with respect to our debt securities or 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 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:
• The amount necessary to cure the payment defaults on our debt and mortgage guarantee obligations;
and
• The lesser of:
The deficiency amount; and
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
For purposes of the limit imposed by the Purchase Agreement and FHFA regulation, the UPB of our
mortgage-related investments portfolio could not exceed $399.2 billion at December 31, 2015 and was
$346.9 billion at that date. Our Retained Portfolio Plan, which we adopted in 2014, provides for us to
manage the UPB of the mortgage-related investments portfolio so that it does not exceed 90% of the
annual cap established by the Purchase Agreement (subject to certain exceptions). The annual 15%
reduction in our mortgage-related investments portfolio cap 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 mortgage assets is significantly constrained by limitations of the Purchase
Agreement and those imposed by FHFA.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 2
GOVERNMENT SUPPORT FOR OUR BUSINESS
We receive substantial support from Treasury and are dependent upon its continued support in order to
continue operating our business. Our ability to access funds from Treasury under the Purchase
Agreement, is critical to:
• Keeping us solvent;
• Allowing us to focus on our primary business objectives under conservatorship; and
• Avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions.
At September 30, 2015, 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, 2015. Since conservatorship began through
December 31, 2015, we have paid cash dividends of $96.5 billion to Treasury at the direction of the
Conservator.
Additionally, in recent years, the Federal Reserve purchased significant amounts of mortgage-related
securities issued by us, Fannie Mae, and Ginnie Mae.
See Note 7 and Note 10 for more information on 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 and certain participants
elected to do so. No outstanding guarantees existed as of December 31, 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.
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Notes to the Consolidated Financial Statements | Note 2
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. During the years ended December 31, 2015, 2014, and
2013, no transactions outside of normal business activities have occurred between us and the U.S.
government (or any of its related parties), except for the following:
• The transactions discussed with Treasury above in “Purchase Agreement and Warrant,” “Government
Support for our Business” and “Housing Finance Agency Initiative”;
• The transactions discussed in Note 4, Note 7, and Note 10; and
• The allocation or transfer of 4.2 basis points of each dollar of new business purchases to certain
housing funds as required under the GSE Act.
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. In October 2013, FHFA announced the formation 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. In November 2014, we and Fannie
Mae announced that a chief executive officer has been named for CSS. Additionally, we and Fannie Mae
each appointed two executives to the CSS Board of Managers and signed governance and operating
agreements for CSS. During the year ended December 31, 2015, we contributed $66 million of capital to
CSS.
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Notes to the Consolidated Financial Statements | Note 3
NOTE 3: SECURITIZATION AND GUARANTEE ACTIVITIES
Our primary business activities in our Single-family Guarantee and Multifamily segments involve the
securitization of loans or other mortgage-related assets using trusts that are VIEs. These trusts issue
beneficial interests in the loans or other mortgage-related assets that they own. We guarantee the
principal and interest payments on some or all of the issued beneficial interests in substantially all of our
securitization transactions.
CONSOLIDATION OF VIEs AND ACCOUNTING FOR GUARANTEES
We consolidate VIEs when we have a controlling financial interest in the VIE and are therefore considered
the primary beneficiary of the VIE. We are the primary beneficiary of a VIE when we have both the power
to direct the activities of the VIE that most significantly impact its economic performance and exposure to
losses or benefits of the VIE that could potentially be significant to the VIE. We evaluate whether we are
the primary beneficiary of VIEs in which we have interests on an ongoing basis, and our primary
beneficiary determination may change over time as our interest in the VIE changes.
When we consolidate a VIE, we recognize the assets and liabilities of the VIE on our consolidated
balance sheets and account for those assets and liabilities based on the applicable GAAP for each
specific type of asset or liability. Assets and liabilities that we transfer to a VIE at, after, or shortly before
the date we become the primary beneficiary of the VIE are initially measured at the same amounts that
they would have been measured 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:
• The sum of the fair value of the consideration paid, the fair value of any noncontrolling interests, and
the reported amount of any previously held interests; and
• The net fair value of the assets and liabilities recognized. Guarantees to consolidated VIEs are
eliminated in consolidation and are therefore not separately recognized on our consolidated balance
sheets.
When we provide, either to an unconsolidated VIE or to another third party, a guarantee that exposes us
to incremental credit risk, we recognize both a guarantee obligation at fair value and the consideration we
receive for providing the guarantee, which typically consists of a guarantee asset that represents the fair
value of future management and guarantee fees. As a practical expedient, the measurement of the fair
value of the guarantee obligation is set equal to the consideration we receive to provide the guarantee,
and no gain or loss is recognized upon issuance of the guarantee. Subsequently, we recognize changes
in the fair value of the guarantee asset in current period earnings and amortize the guarantee obligation
into earnings as we are released from risk under the guarantee. We also recognize a reserve for
guarantee losses when it is probable that a loss has been incurred under the guarantee.
The table below represents the carrying value and classification of the assets and liabilities of
consolidated VIEs on our consolidated balance sheets.
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(in millions)
Consolidated Balance Sheet Line Item
Assets:
Cash and cash equivalents
Restricted cash and cash equivalents
Securities purchased under agreements to resell
Mortgage loans held-for-sale
Mortgage loans held-for-investment
Accrued interest receivable
Real estate owned, net
Other assets
Total assets of consolidated VIEs
Liabilities:
Accrued interest payable
Debt, net
Other liabilities
Total liabilities of consolidated VIEs
SECURITIZATION ACTIVITIES
PCs
December 31, 2015
December 31, 2014
$
$
$
$
— $
14,529
14,840
1,403
2
8,532
13,500
—
1,625,184
1,558,094
5,305
40
2,591
5,124
44
2,596
1,663,892
$
1,587,892
4,763
$
1,556,121
6
4,702
1,479,473
1
1,560,890
$
1,484,176
Single-family PCs are pass-through debt securities that represent undivided beneficial interests in a pool
of loans held by a securitization trust. We serve as both administrator and guarantor for all of our single-
family PC trusts. As administrator, we have the right to establish servicing terms and direct loss mitigation
activities for the loans held by the PC trusts. As guarantor, we guarantee the payment of principal and
interest on our single-family PCs in exchange for a management and guarantee fee, and we have the
right to purchase delinquent loans from the PC trust to help improve the economic performance of the
trust. We absorb all credit losses of the PC trusts through our guarantee of the principal and interest
payments.
The economic performance of our single-family PC trusts is most significantly affected by the
performance of the underlying loans. Our rights as administrator and guarantor provide us with the power
to direct the activities that most significantly affect the performance of the underlying loans. We also have
the obligation to absorb losses of our single-family PC trusts that could potentially be significant through
our guarantee of principal and interest payments. Accordingly, we concluded that we are the primary
beneficiary of our single-family PC trusts and, therefore, consolidate those trusts.
Loans held by our single-family PC trusts are recognized on our consolidated balance sheets as
mortgage loans held-for-investment. The corresponding single-family PCs held by third parties are
recognized on our consolidated balance sheets as debt, net. We extinguish the outstanding debt
securities of the related consolidated trust and recognize gains or losses on debt extinguishment for the
difference between the consideration paid and the debt carrying value when we purchase single-family
PCs as investments in our mortgage-related investments portfolio. Sales of single-family PCs previously
held as investments in our mortgage-related investments portfolio are accounted for as debt issuances.
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Notes to the Consolidated Financial Statements | Note 3
See Note 4 and Note 7 for additional information on loans and debt securities of consolidated trusts.
At December 31, 2015 and 2014, we were the primary beneficiary of, and therefore consolidated, single-
family PC trusts with assets totaling $1.6 trillion and $1.5 trillion, respectively. During the years ended
December 31, 2015 and 2014, we issued approximately $352.6 billion and $257.2 billion, respectively, of
guaranteed single-family PCs. Our exposure for guarantees to consolidated securitization trusts is
generally equal to the UPB of the loans recorded on our consolidated balance sheets.
Resecuritization Products
We create resecuritization products primarily by using PCs or our previously issued resecuritization
products as the underlying collateral. In a typical resecuritization transaction, previously issued PCs or
resecuritization products are transferred to a resecuritization trust that issues beneficial interests in the
underlying collateral. We establish parameters that define eligibility standards for assets that may be used
as collateral for each of our resecuritization programs. Resecuritization products can then be created
based on the parameters that we have established. Similar to our PCs, we guarantee the payment of
principal and interest to the investors in our resecuritization products. However, because we have already
guaranteed the underlying assets, we do not assume any incremental credit risk by issuing these
securities. The main types of resecuritization products we create are Giant PCs, REMICs, and Stripped
Giant PCs.
Giant PCs
Giant PCs are direct pass-throughs of the cash flows of the underlying collateral, which may be previously
issued PCs or Giant PCs. We do not consolidate Giant PCs as their resecuritization does not result in any
new or incremental risk to the holders of the securities issued by the resecuritization trust and because
we are not exposed to any incremental rights to receive benefits or obligations to absorb losses that could
be significant to the resecuritization trust.
Purchases of Giant PCs as investments in our mortgage-related investments portfolio are accounted for
as debt extinguishments of a pro-rata portion of the underlying single-family PCs because Giant PCs are
considered substantially the same as the underlying single-family PCs. Similarly, sales of Giant PCs
previously held as investments in our mortgage-related investments portfolio are accounted for as debt
issuances of a pro-rata portion of the underlying single-family PCs.
REMICs and Stripped Giant PCs
REMICs and Stripped Giant PCs are multiclass resecuritizations of the cash flows of the underlying
collateral, which may be previously issued PCs, Giant PCs, or other REMICs and Stripped Giant PCs.
The activity that most significantly impacts the economic performance of our resecuritization trusts is
typically the initial design and structuring of the trust. Substantially all resecuritization trusts are created
as part of customer-driven transactions in which an investor or dealer participates in the decisions made
during the design and establishment of the trust. As a result, we do not have the unilateral ability to direct
the activities of our resecuritization trusts that most significantly impact the economic performance of
those trusts. In addition, we do not have the right to receive benefits or the obligation to absorb losses
that could potentially be significant to the trusts because we have already provided a guarantee on the
underlying assets. As a result, we have concluded that we are not the primary beneficiary of our
resecuritization trusts and, therefore, do not consolidate those trusts.
Freddie Mac 2015 Form 10-K
226
Financial Statements
Notes to the Consolidated Financial Statements | Note 3
Because we have already guaranteed the underlying assets, we do not receive any incremental
management and guarantee fees in exchange for our guarantee, and, accordingly, we do not recognize
any additional guarantee assets, guarantee obligations, or reserves for guarantee losses related to
resecuritization trusts. Instead, we receive a one-time transaction fee which represents compensation for
both the structuring and creation of the securities and for our ongoing administrative responsibilities to
service the securities. We recognize the portion of the transaction fee related to creation of the securities
immediately in earnings. We defer the portion of the fee related to ongoing administrative responsibilities
and amortize it over the life of the associated trust.
When we purchase a REMIC or Stripped Giant PC as an investment in our mortgage-related investments
portfolio, we record the security as an investment in debt securities rather than extinguishment of debt
since we are investing in the debt securities of a non-consolidated entity. We do not consolidate REMIC
or Stripped Giant PC trusts that we hold as we are not deemed to be the primary beneficiary of the trusts,
unless we have the unilateral ability to collapse the trust. Similarly, sales of REMICs or Stripped Giant
PCs previously held as investments in our mortgage-related investments portfolio are accounted for as
sales of investments in debt securities. See Note 7 for additional information on accounting for
investments in debt securities.
K Certificates
In a typical K Certificate transaction, we sell multifamily loans to a non-Freddie Mac securitization trust
that issues senior and subordinated securities, and simultaneously purchase and place the senior
securities into a Freddie Mac securitization trust that issues guaranteed K Certificates. In substantially all
of these transactions, we guarantee only the senior securities issued by the Freddie Mac securitization
trust and do not issue or guarantee the subordinated securities issued by the non-Freddie Mac
securitization trust. We receive a management and guarantee fee in exchange for our guarantee. We
serve as guarantor of our K Certificate trusts and, from time to time, as master servicer. However, in
contrast to single-family PC trusts, the rights to direct loss mitigation activities of the underlying loans and
to purchase delinquent loans from the securitization trust are held by the investor in the most subordinate
remaining securities issued by the trust, and we do not have any power to direct those activities unless
we are the investor in the most subordinate remaining securities.
The economic performance of our K Certificate trusts is most significantly affected by the performance of
the underlying loans. Because our rights do not provide us with the power to direct the activities that most
significantly affect the performance of the underlying loans, we are not the primary beneficiary of our K
Certificate trusts and, therefore, do not consolidate those trusts.
When we sell loans to a K Certificate trust, we derecognize the transferred loans and account for our
guarantee to the non-consolidated K Certificate trust. We account for our investments in the beneficial
interests issued by non-consolidated K Certificate trusts as investments in debt securities.
During 2015 and 2014, we issued approximately $29.4 billion and $18.3 billion, respectively, of K
Certificates for which a guarantee asset and guarantee obligation were recognized.
Freddie Mac 2015 Form 10-K
227
Financial Statements
Notes to the Consolidated Financial Statements | Note 3
Other Securitization Products
We consolidate certain of our other securitization trusts because we have the ability to direct the loss
mitigation activities of the underlying loans and we have the obligation to absorb credit losses through our
guarantee of the issued securities. As a result, we are the primary beneficiary of single-family other
securitization trusts with underlying assets totaling $5.8 billion and $7.4 billion at December 31, 2015 and
2014, respectively. We do not consolidate the other securitization trusts that do not meet these conditions.
For those products, we account for our guarantee to the unconsolidated VIE.
OTHER GUARANTEE ACTIVITIES
Other Mortgage-related Guarantees
In certain circumstances, we provide a guarantee of mortgage-related assets held by third parties, in
exchange for a management and guarantee fee, without securitizing those assets. These guarantees
consist of the following:
•
Long-term standby commitments of single-family loans which obligate us to purchase the covered
loans when they become seriously delinquent. Periodically, certain of our customers seek to
terminate long-term standby commitments and simultaneously enter into guarantor swap transactions
to obtain our PCs backed by many of the same loans. During 2015 and 2014, we guaranteed $4.0
billion and $2.6 billion, respectively, of loans under long-term standby commitments;
• Guarantees of multifamily housing revenue bonds that were issued by HFAs, including guarantees
that require us to advance funds to enable others to repurchase any tendered tax-exempt and related
taxable bonds that are unable to be marketed. No advances under these guarantees were
outstanding at December 31, 2015 and 2014.
• Guarantees under the TCLFP on securities backed by HFA bonds; however, we no longer had any of
these issued guarantees outstanding at December 31, 2015.
Under these arrangements, we account for our guarantee to the counterparty to the transaction but do not
recognize the underlying assets on our consolidated balance sheets.
Derivative Instruments
Derivative instruments include written options and written swaptions, and other instruments accounted for
as credit derivatives.
We also issued certain REMICs with stated final maturities that are shorter than the stated maturity of the
underlying loans. If the underlying 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, we are obligated to fund such principal. Our maximum exposure on
these derivative guarantees represents the outstanding UPB of the issued securities.
Freddie Mac 2015 Form 10-K
228
Financial Statements
Notes to the Consolidated Financial Statements | Note 3
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 15 for
information on ongoing litigation. The recognized liabilities on our consolidated balance sheets related to
indemnifications were not significant at December 31, 2015 and 2014.
VIEs FOR WHICH WE ARE NOT THE PRIMARY BENEFICIARY
Our involvement with VIEs for which we are not the primary beneficiary takes one or both of two forms -
purchasing an investment in these entities or 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. 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.
The following table presents the carrying amounts and classification of the assets and liabilities recorded
on our consolidated balance sheets related to our variable interests in unconsolidated VIEs with which we
were involved in the design and creation and have a significant continuing involvement, as well as our
maximum exposure to loss.
(in millions)
Assets and Liabilities Recorded on our Consolidated
Balance Sheets
Assets:
Investments in securities
Accrued interest receivable
Other assets
Liabilities:
Other liabilities
Maximum Exposure to Loss
Total Assets of Non-Consolidated VIEs
$
$
$
December 31, 2015
December 31, 2014
Freddie Mac Securities(1)
49,040
200
1,232
(1,230)
114,193
134,900
$
$
$
56,568
236
914
(1,005)
87,529
103,253
(1) Freddie Mac securities include our variable interests in REMICs and Stripped Giant PCs, K Certificates, and other
securitization products that we do not consolidate. Our maximum exposure to loss includes the guaranteed UPB of assets
held by the non-consolidated VIEs related to K Certificates and other securitization products. Our maximum exposure to loss
excludes investments in REMICs and Stripped Giant PCs, because we already consolidate the collateral of these trusts on
our consolidated balance sheets.
We also obtain interests in various other VIEs created by third parties through the normal course of
business, such as through our investments in non-Freddie Mac mortgage-related securities, purchases of
multifamily loans, guarantees of multifamily housing revenue bonds, as a derivative counterparty, or
Freddie Mac 2015 Form 10-K
229
Financial Statements
Notes to the Consolidated Financial Statements | Note 3
through other activities. We were not involved in the design or creation of these entities and our
continuing involvement is typically passive in nature and does not provide us with the power to direct the
activities that most significantly impact the economic performance of these entities. As a result, we do not
consolidate these VIEs and we account for our interests in the VIEs in the same manner that we account
for our interests in other third-party transactions. See Note 6 for additional information regarding our
investments in non-Freddie Mac mortgage-related securities. See Note 4 for more information regarding
multifamily loans.
FINANCIAL GUARANTEES
The table below shows our maximum potential exposure, recognized liability, and maximum remaining
term of our recognized financial guarantees to unconsolidated VIEs and other third parties. This table
does not include our unrecognized financial guarantees, such as guarantees to consolidated VIEs or to
resecuritization trusts that do not expose us to incremental credit risk. The maximum exposure disclosed
in the table 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.
(dollars in millions, terms in years)
December 31, 2015
December 31, 2014
Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term
Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term
K Certificates and other securitization products
$
114,193
$
1,136
Other mortgage-related guarantees
Derivative instruments
13,067
17,894
596
151
40
38
30
$
87,529
$
26,147
21,336
861
772
154
39
39
31
(1) The maximum exposure represents the contractual amounts that could be lost 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.
(2) For K Certificates, other securitization products, and other mortgage-related guarantees, this amount represents the
guarantee obligation on our consolidated balance sheets. This amount excludes our reserve for guarantee losses, which
totaled $76 million and $126 million as of December 31, 2015 and 2014, respectively, and is included within other liabilities
on our consolidated balance sheets.
CREDIT ENHANCEMENTS
For many of the loans underlying our single-family PCs, other securitization products, and other mortgage
related guarantees, we obtained credit enhancements from third parties covering a portion of our credit
risk exposure. See Note 4 for information about credit enhancements on loans.
Freddie Mac 2015 Form 10-K
230
Financial Statements
Notes to the Consolidated Financial Statements | Note 3
In connection with the securitization activities of the Multifamily segment, we have various forms of credit
protection. The most prevalent type is subordination, primary through our K Certificates. Through
subordination, we mitigate our credit risk exposure by structuring our securities to sell the vast majority of
expected credit losses to private investors who purchase the subordinate tranches, as shown in the table
below.
UPB at
Maximum Coverage(1) at
(in millions)
K Certificates
Other securitization products
Total
December 31, 2015
December 31, 2014
December 31, 2015
December 31, 2014
$
$
101,473
$
7,026
75,541
$
5,496
108,499
$
81,037
$
18,453
$
1,477
19,930
$
13,576
1,495
15,071
(1) For K Certificates, this represents the UPB of the securities that are subordinate to our guarantee. For other securitization
products, this represents the remaining amount of loss recovery that is available subject to the terms of the counterparty
agreement or the UPB of securities that are subordinate to our guarantee.
Freddie Mac 2015 Form 10-K
231
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES
The table below provides details of the loans on our consolidated balance sheets as of December 31,
2015 and 2014.
(in millions)
Held-for sale:
Single-family
Multifamily
Total UPB
Cost basis and fair value
adjustments, net
Total held-for-sale loans
Held-for-investment:
Single-family
Multifamily
Total UPB
Cost basis adjustments
Allowance for loan losses
Total held-for-investment loans
December 31, 2015
December 31, 2014
Held by
Freddie Mac
Held by
consolidated
trusts
Total
Held by
Freddie Mac
Held by
consolidated
trusts
Total
$
6,045
$
1,702
$
7,747
$
— $
— $
19,582
25,627
(2,038)
23,589
90,532
29,505
120,037
(3,465)
(12,555)
104,017
—
1,702
(299)
1,403
19,582
27,329
(2,337)
24,992
1,597,590
1,688,122
1,711
31,216
1,599,301
1,719,338
28,659
(2,776)
25,194
(15,331)
1,625,184
1,729,201
12,111
12,111
257
12,368
111,516
40,845
152,361
(3,366)
(18,877)
130,118
—
—
—
—
—
12,111
12,111
257
12,368
1,534,356
1,645,872
524
41,369
1,534,880
1,687,241
26,098
(2,884)
22,732
(21,761)
1,558,094
1,688,212
Total loans, net
$
127,606
$
1,626,587
$
1,754,193
$
142,486
$
1,558,094
$
1,700,580
We own both single-family loans, which are secured by one to four unit residential properties, and
multifamily loans, which are secured by properties with five or more residential rental units. Our single-
family loans are predominantly first lien, fixed-rate loans secured by the borrower’s primary residence.
Upon acquisition, we classify a loan as either held-for-sale or held-for-investment. Loans that we have the
ability and intent to hold for the foreseeable future are classified as held-for-investment. Loans that we
intend to securitize using an entity we will consolidate are classified as held-for-investment both prior to
and subsequent to their securitization. Otherwise, they will be classified as held-for-sale. Held-for-
investment 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).
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 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 (including lower-of-cost-or-fair
value adjustments) on single-family loans classified as held-for-sale are deferred and not amortized. We
elected the fair value option for certain multifamily loans that we intend to securitize and sell to investors.
Therefore, these multifamily 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.
Cash flows related to loans originally classified as held-for-investment 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)). Cash flows related to loans originally classified as held-for-
sale are classified as operating activities.
Freddie Mac 2015 Form 10-K
232
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
During 2015 and 2014, we purchased $346.5 billion and $252.7 billion, respectively, in UPB of single-
family loans, and $4.4 billion and $2.4 billion, respectively, in UPB of multifamily loans that were classified
as held-for-investment.
Our sales of multifamily loans occur primarily through the issuance of multifamily K Certificates. During
2015 and 2014, we sold $36.1 billion and $21.3 billion, respectively, of held-for-sale multifamily loans. See
Note 3 for more information on our issuances of K Certificates.
In connection with our efforts to sell certain of our single-family loans, we reclassified $13.6 billion and
$0.7 billion in UPB of loans from held-for-investment to held-for-sale in 2015 and 2014, respectively. We
also reclassified $2.1 billion and $0.2 billion of multifamily loans from held-for-investment to held-for-sale
in 2015 and 2014, respectively. For additional information regarding the fair value of our loans classified
as held-for-sale, see Note 14.
INTEREST INCOME
We recognize interest income on an accrual basis except when we believe the collection 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.
Cost basis adjustments on held-for-investment loans are amortized into interest income over the
contractual lives of the loans using the effective interest method.
A non-accrual 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 an 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.
CREDIT QUALITY
The current LTV ratio is one key factor we consider when estimating our loan loss reserves for single-
family loans. As 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 loan. A second-lien loan 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 loans. As of
December 31, 2015 and 2014, based on data collected by us at loan delivery, approximately 13% and
14%, respectively, of loans in our single-family credit guarantee portfolio had second-lien financing by
third parties at origination of the first loan. However, borrowers are free to obtain second-lien financing
after origination, and we are not entitled to receive notification when a borrower does so. For further
information about concentrations of risk associated with our single-family and multifamily loans, see
Note 13.
Freddie Mac 2015 Form 10-K
233
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
We discontinued our purchases of Alt-A, interest-only, and option ARM loans a number of years ago. For
reporting purposes:
•
•
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
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.
The table below presents the recorded investment of single-family held-for-investment loans by current
LTV ratios. Our current LTV ratios are estimates based on available data through the end of each
respective period presented.
As of December 31, 2015
As of December 31, 2014
Current LTV Ratio
Current LTV Ratio
(in millions)
> 80 to 100
> 100(1)
Total
> 80 to 100
> 100(1)
Total
20 and 30-year or more, amortizing
fixed-rate(2)
15-year amortizing fixed-rate(2)
Adjustable-rate
Alt-A, interest-only, and option ARM
$1,020,227
$ 242,948
$
50,893
$1,314,068
$ 911,071
$ 258,126
$
85,398
$1,254,595
271,456
59,724
27,014
12,400
5,055
13,124
1,754
285,610
265,098
249
8,485
65,028
48,623
60,463
28,935
14,101
6,701
18,232
3,338
282,537
709
16,448
67,873
63,615
Total single-family loans
$1,378,421
$ 273,527
$
61,381
$1,713,329
$1,265,567
$ 297,160
$ 105,893
$1,668,620
(1) The serious delinquency rate for the total of single-family held-for-investment mortgage loans with current LTV ratios in
excess of 100% was 6.03% and 9.01% as of December 31, 2015 and 2014, respectively.
(2) The majority of our loan modifications result in new terms that include fixed interest rates after modification. As of
December 31, 2015 and 2014, we have categorized UPB of approximately $38.3 billion and $42.3 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.
The following table presents the recorded investment in our multifamily held-for-investment loans, by
credit quality indicator as of December 31, 2015 and 2014. The multifamily credit quality indicator is
based on available data through the end of each period presented. These indicators involve significant
management judgment.
(in millions)
Credit risk profile by internally assigned grade:(1)
Pass
Special mention
Substandard
Doubtful
Total
December 31, 2015
December 31, 2014
$
$
$
29,660
1,135
408
—
31,203
$
38,518
1,805
1,030
—
41,353
(1) A loan categorized as: "Pass" is current and adequately protected by the current financial strength and debt service capacity
of the borrower; "Special mention" has signs of potential financial weakness; "Substandard" has a well-defined weakness
that jeopardizes the timely full repayment; and "Doubtful" has a weakness that makes collection or liquidation in full highly
questionable and improbable based on existing conditions.
Freddie Mac 2015 Form 10-K
234
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
MORTGAGE LOAN PERFORMANCE
The following table presents the recorded investment of our single-family and multifamily loans, held-for-
investment, by payment status.
December 31, 2015
Current
One
Month
Past Due
Two
Months
Past Due
Three
Months or
More Past
Due,
or in
Foreclosure(1)
Total
Non-accrual
$ 1,280,247
$
16,178
$
5,037
$
12,606
$
1,314,068
$
12,603
284,137
64,326
43,543
1,672,253
31,203
935
359
1,962
19,434
—
183
88
714
6,022
—
355
255
2,404
15,620
—
285,610
65,028
48,623
1,713,329
31,203
355
255
2,403
15,616
170
(in millions)
Single-family:
20 and 30-year or more, amortizing
fixed-rate
15-year amortizing fixed-rate
Adjustable-rate
Alt-A, interest-only, and option
ARM
Total single-family
Total multifamily
Total single-family and multifamily
$ 1,703,456
$
19,434
$
6,022
$
15,620
$
1,744,532
$
15,786
December 31, 2014
Current
One
Month
Past Due
Two
Months
Past Due
Three
Months or
More Past
Due,
or in
Foreclosure(1)
Total
Non-accrual
$ 1,207,826
$
17,516
$
5,817
$
23,436
$
1,254,595
$
23,433
280,629
66,737
53,251
1,608,443
41,335
1,010
406
2,368
21,300
7
216
118
948
7,099
11
682
612
7,048
31,778
—
282,537
67,873
63,615
1,668,620
41,353
682
612
7,045
31,772
385
(in millions)
Single-family:
20 and 30-year or more, amortizing
fixed-rate
15-year amortizing fixed-rate
Adjustable-rate
Alt-A, interest-only, and option
ARM
Total single-family
Total multifamily
Total single-family and multifamily
$ 1,649,778
$
21,307
$
7,110
$
31,778
$
1,709,973
$
32,157
(1) Includes $7.0 billion and $17.9 billion of loans that were in the process of foreclosure as of December 31, 2015 and 2014,
respectively.
We have the option under our PC master trust agreement to remove 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.
When we remove loans from PC trusts, we record an extinguishment of the corresponding portion of the
debt securities of the consolidated trusts and we reclassify the loans from mortgage loans held-for-
investment by consolidated trusts to mortgage loans held-for-investment by Freddie Mac. We removed
$8.4 billion and $11.2 billion in UPB of loans from PC trusts (or purchased delinquent loans associated
with other mortgage-related guarantees) during the years ended December 31, 2015 and 2014,
respectively.
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 4
The table below summarizes the delinquency rates of loans within our single-family credit guarantee and
multifamily mortgage portfolios.
(dollars in millions)
Single-family:(1)
Non-credit-enhanced portfolio
Serious delinquency rate
Total number of seriously delinquent loans
Credit-enhanced portfolio:(2)
Primary mortgage insurance:
Serious delinquency rate
Total number of seriously delinquent loans
Other credit protection:(3)
Serious delinquency rate
Total number of seriously delinquent loans
Total single-family:
Serious delinquency rate
Total number of seriously delinquent loans
Multifamily:(4)
Non-credit-enhanced portfolio:
Delinquency rate
UPB of delinquent loans
Credit-enhanced portfolio:
Delinquency rate
UPB of delinquent loans
Total Multifamily:
Delinquency rate
UPB of delinquent loans
December 31, 2015
December 31, 2014
1.30%
105,071
2.06%
27,813
0.58%
9,422
1.32%
141,255
0.03%
19
0.02%
20
0.02%
39
$
$
$
1.74%
150,300
3.10%
38,595
1.21%
12,175
1.88%
200,069
0.02%
11
0.05%
44
0.04%
55
$
$
$
(1) Serious delinquencies on single-family loans underlying certain REMICs, other securitization products, and other mortgage-
related guarantees may be reported on a different schedule due to variances in industry practice.
(2) The credit enhanced categories are not mutually exclusive as a single loan may be covered by both primary mortgage
insurance and other credit protection.
(3) Consists of single-family loans covered by financial arrangements (other than primary mortgage insurance) that are designed
to reduce our credit risk exposure. See "Credit Protection and Other Forms of Credit Enhancement" for more information.
(4) Multifamily delinquency performance is based on UPB of loans that are two monthly payments or more past due or those in
the process of foreclosure.
We continue to implement a number of initiatives to refinance and modify single-family loans, including
the MHA Program. Our implementation of the MHA Program includes HAMP. As part of these initiatives,
we pay various incentives to servicers and borrowers. Except as described below, we bear the full costs
associated with these loan workout and foreclosure alternatives on loans that we own or guarantee,
including the cost of any monthly payment reductions. In January 2015, FHFA instructed us to implement
a new $5,000 incentive for eligible borrowers who remain in good standing on their HAMP modified
mortgage loans through the sixth anniversary of their modification. Treasury will pay the $5,000 incentive
for certain of our eligible HAMP modified mortgage loans, and we will bear the cost of the $5,000
incentive on our other eligible HAMP modified mortgage loans. The MHA Program also includes an
initiative to allow loans 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 initiative, which is
our implementation of HARP). HAMP and HARP will end in December 2016.
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 4
LOAN LOSS RESERVES
The loan loss reserves represent estimates of probable incurred credit losses. We recognize probable
incurred losses by recording a charge to the provision for credit losses in our consolidated statements of
comprehensive income. The loan loss reserves include:
• Our allowance for loan losses, which pertains to all single-family and multifamily loans classified as
held-for-investment on our consolidated balance sheets; and
• Our reserve for guarantee losses, which pertains to single-family and multifamily loans underlying our
K Certificates, other securitization products, and other mortgage-related guarantees.
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.
Freddie Mac 2015 Form 10-K
237
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
The table below presents our loan loss reserves activity.
Year Ended December 31,
2015
2014
Allowance for Loan Losses
Allowance for Loan Losses
Held by
Freddie Mac
Held By
Consolidated
Trusts
Reserve
for
Guarantee
Losses
Total
Held by
Freddie Mac
Held By
Consolidated
Trusts
Reserve
for
Guarantee
Losses
Total
(in millions)
Single-family:
Beginning balance
$
18,800
$
2,884
$
109
$ 21,793
$
21,487
$
3,006
$
85
$ 24,578
Provision (benefit) for credit
losses
Charge-offs
Recoveries
Transfers, net(1)
Ending balance
Multifamily:
Beginning balance
Provision (benefit) for credit
losses
Charge-offs
Recoveries
Transfers, net(1)
Ending balance
Total:
Beginning balance
Provision (benefit) for credit
losses
Charge-offs
Recoveries
Transfers, net(1)
Ending balance
(2,763)
(4,696)
703
473
169
(367)
14
75
12,517
$
2,775
$
(45)
(8)
—
—
56
(2,639)
(5,071)
717
548
(864)
(4,510)
998
1,689
947
(376)
260
(953)
30
(6)
—
—
113
(4,892)
1,258
736
$ 15,348
$
18,800
$
2,884
$
109
$ 21,793
77
$
— $
17
$
94
$
125
$
— $
26
$
151
(29)
(9)
—
(1)
38
$
—
—
—
1
1
3
—
—
—
$
20
$
(26)
(9)
—
—
59
$
(46)
(3)
1
—
77
—
—
—
—
(9)
—
—
—
$
— $
17
$
(55)
(3)
1
—
94
18,877
$
2,884
$
126
$ 21,887
$
21,612
$
3,006
$
111
$ 24,729
$
$
$
$
(2,792)
(4,705)
703
472
169
(367)
14
76
$
12,555
$
2,776
$
(42)
(8)
—
—
76
(2,665)
(5,080)
717
548
(910)
(4,513)
999
1,689
947
(376)
260
(953)
21
(6)
—
—
58
(4,895)
1,259
736
$ 15,407
$
18,877
$
2,884
$
126
$ 21,887
Ratio of total loan loss reserves (excluding reserves for TDR concessions) to net
charge-offs for single-family loans
Ratio of total loan loss reserves to net charge-offs for single-family loans
3.0
9.2
2.5
5.2
(1) For the years ended December 31, 2015 and 2014, consists of approximately $0.5 billion and $0.7 billion, respectively,
attributable to capitalization of past due interest on modified loans. Also includes amounts associated with reclassified single-
family reserves related to our removal of loans previously held by consolidated trusts, net of reclassifications for single-family
loans subsequently resecuritized after such removal.
Loan Loss Reserves Determined on a Collective Basis
Single-Family Loans
We estimate loan loss reserves on homogeneous pools of single-family loans using a model that
evaluates a variety of factors affecting collectability. The homogeneous pools of single-family loans are
determined based on common underlying characteristics, including current LTV ratios, trends in home
prices, loan product type, and geographic region.
We rely upon third-parties to service our loans. At loan delivery, the seller provides us with loan data,
which includes characteristics and underwriting information. Each subsequent month, the servicers
provide us with monthly loan level servicing data, including delinquency and loss information.
Our single-family loan loss reserve default models produce estimates based on 12 months of loan level
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 4
performance data, which includes a history of delinquency, foreclosures, foreclosure alternatives and
modifications. Our loan loss reserve estimate includes projections of:
•
Loss mitigation activities, including loan modifications for troubled borrowers and the incidence of
redefault we have experienced on similar loans that have completed a loan modification;
• Recoveries through repurchases by seller/servicers of defaulted loans due to failure to follow
contractual underwriting requirements at the time of loan origination; and
• Defaults we believe are likely to occur as a result of loss events that have occurred through the
respective balance sheet date.
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. 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. In determining our loan loss reserves, we also consider
macroeconomic and other factors that affect 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.
Our single-family loan loss reserve severity is based on the repeat housing sales index and actual REO
dispositions, short sales and third-party sales that incorporate the most recent:
• Six months of sales experience realized on our distressed property dispositions; and
• Twelve months of pre-foreclosure expenses on our distressed properties, including REO, short sales,
and third-party sales.
Our single-family loan loss severity estimate also captures expectations about recoveries from primary
mortgage insurance or from seller/servicers due to repurchases. We use historical trends in home prices
in our single-family loan loss reserve process, primarily through the use of current 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.
For loans where foreclosure is probable, we measure impairment based upon an estimate of the fair
value of the underlying collateral less estimated disposition costs. Our estimate also considers the effect
of historical home price changes on borrower behavior.
We apply proceeds from primary mortgage insurance and from 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 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. We record benefits related to most of our credit enhancements (e.g., primary
mortgage insurance and certain ACIS insurance policies) when realization of our claims is deemed
probable. We record benefits for certain of our other credit enhancements (e.g., certain STACR debt
notes and whole loan securities) when the realized loss event occurs. We generally record repurchase
recoveries on a cash basis due to the uncertainty of the timing and amount of collections of such
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 4
recoveries.
Multifamily Loans
Multifamily loans evaluated collectively for impairment are aggregated into book year vintages and
measured by benchmarking published historical commercial loan data to those vintages based upon
available economic data related to multifamily real estate, including apartment vacancy and rental rates.
Loan Loss Reserves Determined on an Individual Basis
We consider a loan to be impaired when, based on current information, it is probable that we will not
receive all amounts due (including both principal and interest) in accordance with the contractual terms of
the original loan agreement.
Single-family loans individually evaluated for impairment include TDRs, as well as loans acquired under
our financial guarantees with deteriorated credit quality prior to 2010. Multifamily loans individually
evaluated for impairment include TDRs, loans three monthly payments or more past due, and loans that
are impaired based on management judgment.
Troubled Debt Restructurings
A modification to the contractual terms of a loan that results in granting a concession to a borrower
experiencing financial difficulties is considered a TDR. 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 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 an insignificant delay
in payment to be a concession. We generally consider a delay in monthly amortizing payments of three
months or less to be insignificant. A concession typically includes one or more of the following being
granted to the borrower:
• A trial period where the expected permanent modification will change our expectation of collecting all
amounts due at the original contract rate;
• A delay in payment that is more than insignificant;
• A reduction in the contractual interest rate;
•
Interest forbearance for a period of time that is more than insignificant or forgiveness of accrued but
uncollected interest amounts;
• Principal forbearance that is more than insignificant; and
• Discharge of the borrower’s obligation in Chapter 7 bankruptcy.
Freddie Mac 2015 Form 10-K
240
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
The table below presents the volume of single-family and multifamily loans that were newly classified as
TDRs during the years ended December 31, 2015 and 2014, 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.
(dollars in millions)
Single-family:(1)
20 and 30-year or more, amortizing
fixed-rate
15-year amortizing fixed-rate
Adjustable-rate
Alt-A, interest-only, and option ARM
Total single-family
Multifamily
Total
Year Ended December 31,
2015
2014
Number of
Mortgage Loans
Post-TDR
Recorded
Investment
Number of
Mortgage Loans
Post-TDR
Recorded
Investment
46,641
$
5,806
1,335
7,143
60,925
1
60,926
$
6,627
419
195
1,146
8,387
30
8,417
68,186
$
7,189
1,849
9,112
86,336
2
86,338
$
10,172
528
285
1,865
12,850
15
12,865
(1) The pre-TDR recorded investment for single-family loans initially classified as TDR during the years ended December 31,
2015 and 2014 was $8.4 billion and $12.8 billion, respectively.
The table below presents the volume of our TDR modifications that experienced payment defaults (i.e.,
loans that became two months delinquent or completed a loss event) during the applicable periods and
had completed a modification during the year preceding the payment default. The table presents loans
based on their original product category before modification.
(dollars in millions)
Single-family:
Year Ended December 31,
2015
2014
Number of
Mortgage Loans
Post-TDR
Recorded
Investment(1)
Number of
Mortgage Loans
Post-TDR
Recorded
Investment(1)
20 and 30-year or more, amortizing fixed-rate
18,478
$
15-year amortizing fixed-rate
Adjustable-rate
Alt-A, interest-only, and option ARM
Total single-family
Multifamily
900
335
1,955
21,668
$
— $
3,036
72
55
435
3,598
—
19,101
$
645
332
2,357
22,435
$
— $
3,384
62
61
564
4,071
—
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, 2015 and 2014, 9,492 and 9,538, respectively, of such loans (with a post-TDR
recorded investment of $1.2 billion and $1.4 billion, respectively) experienced a payment default within a
year after the loss mitigation activity occurred.
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, 2015 and 2014, 2,196 and 4,206, respectively, of such loans (with a post-TDR
Freddie Mac 2015 Form 10-K
241
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
recorded investment of $0.3 billion and $0.6 billion, respectively) experienced a payment default within a
year after the borrowers' Chapter 7 bankruptcy.
Single-Family Loans
Impairment of a single-family 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 “Interest
Income” 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. 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.
During 2015, approximately 43% of completed single-family loan modifications that were classified as
TDRs involved interest rate reductions and, in certain cases, term extensions and approximately 16%
involved principal forbearance in addition to interest rate reductions and, in certain cases, term
extensions. During 2015, the average term extension was 189 months and the average interest rate
reduction was 0.9% on completed single-family loan modifications classified as TDRs.
Substantially all of our completed single-family loan modifications classified as a TDR during 2015
resulted in a modified loan with a fixed interest rate. However, many of these fixed-rate loans include
provisions for the reduced interest rates to 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.
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 the underlying property’s operating performance as
represented by its current DSCR, available credit enhancements, 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
“Interest Income” above.
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
Freddie Mac 2015 Form 10-K
242
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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, extending the maturity for longer than one year, providing principal
forbearance, or some combination of these terms.
Impaired Loans
The tables below present our recorded investment in individually impaired loans and the related
allowance for loan losses.
(in millions)
Single-family —
With no specific allowance
recorded:(2)
20 and 30-year or more,
amortizing fixed-rate
15-year amortizing fixed-
rate
Adjustable-rate
Alt-A, interest-only, and
option ARM
Total with no specific
allowance recorded
With specific allowance
recorded:(3)
20 and 30-year or more,
amortizing fixed-rate
15-year amortizing fixed-
rate
Adjustable-rate
Alt-A, interest-only, and
option ARM
Total with specific allowance
recorded
Combined single-family:
20 and 30-year or more,
amortizing fixed-rate
15-year amortizing fixed-
rate
Adjustable-rate
Alt-A, interest-only, and
option ARM
Total single-family
Multifamily —
With no specific allowance
recorded(2)
With specific allowance
recorded
Total multifamily
Total single-family and
multifamily
Balance at December 31, 2015
For the Year Ended December 31, 2015
UPB
Recorded
Investment
Associated
Allowance
Net
Investment
Average
Recorded
Investment
Interest
Income
Recognized
Interest Income
Recognized
On Cash Basis(1)
$
4,957
$
3,724
N/A
$
3,724
$
3,381
$
387
$
45
194
1,370
6,566
38
191
1,033
4,986
N/A
N/A
N/A
N/A
38
191
1,033
4,986
41
112
844
4,378
8
4
83
482
72,886
71,215
$
(11,245)
59,970
73,530
2,558
975
518
978
510
(21)
(28)
957
482
14,409
13,839
(2,725)
11,114
88,788
86,542
(14,019)
72,523
1,033
632
14,958
90,153
47
19
422
3,046
77,843
74,939
(11,245)
63,694
76,911
2,945
1,020
712
1,016
701
(21)
(28)
995
673
1,074
744
15,779
14,872
(2,725)
12,147
15,802
55
23
505
95,354
$
91,528
$
(14,019) $
77,509
$
94,531
$
3,528
$
341
$
149
490
95,844
$
$
333
142
475
92,003
$
$
$
N/A
$
333
$
660
$
25
$
(21)
(21) $
121
454
(14,040) $
77,963
235
895
95,426
$
$
$
$
8
33
3,561
$
$
$
$
$
$
11
—
—
2
13
308
11
4
55
378
319
11
4
57
391
9
5
14
405
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 4
(in millions)
Single-family —
With no specific allowance
recorded:(2)
20 and 30-year or more,
amortizing fixed-rate
15-year amortizing fixed-
rate
Adjustable rate
Alt-A, interest-only, and
option ARM
Total with no specific
allowance recorded
With specific allowance
recorded:(3)
20 and 30-year or more,
amortizing fixed-rate
15-year amortizing fixed-
rate
Adjustable rate
Alt-A, interest-only, and
option ARM
Total with specific allowance
recorded
Combined single-family:
20 and 30-year or more,
amortizing fixed-rate
15-year amortizing fixed-
rate
Adjustable rate
Alt-A, interest-only, and
option ARM
Total single-family
Multifamily —
With no specific allowance
recorded(2)
With specific allowance
recorded
Total multifamily
Total single-family and
multifamily
Balance at December 31, 2014
For the Year Ended December 31, 2014
UPB
Recorded
Investment
Associated
Allowance
Net
Investment
Average
Recorded
Investment
Interest
Income
Recognized
Interest Income
Recognized
On Cash Basis(1)
$
6,041
$
4,007
N/A
$
4,007
$
3,727
$
376
$
63
27
1,717
7,848
44
22
1,168
5,241
N/A
N/A
N/A
N/A
44
22
1,168
5,241
39
17
1,133
4,916
10
1
81
468
77,798
76,708
$
(14,051)
62,657
75,773
2,357
1,226
868
1,233
866
(40)
(65)
1,193
801
16,734
16,335
(3,681)
12,654
96,626
95,142
(17,837)
77,305
1,242
881
16,476
94,372
54
23
380
2,814
83,839
80,715
(14,051)
66,664
79,500
2,733
1,289
895
1,277
888
(40)
(65)
1,237
823
1,281
898
18,451
17,503
(3,681)
13,822
17,609
64
24
461
$
104,474
$
100,383
$
(17,837) $
82,546
$
99,288
$
3,282
$
$
$
$
440
$
480
920
105,394
$
$
431
471
902
101,285
$
$
$
N/A
$
431
$
659
$
29
$
(52)
(52) $
419
850
(17,889) $
83,396
535
1,194
100,482
$
$
$
$
26
55
3,337
$
$
33
1
—
6
40
279
10
6
58
353
312
11
6
64
393
9
16
25
418
(1) Consists of income recognized during the period related to loans on non-accrual status.
(2)
Individually impaired 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.
(3) Consists primarily of loans classified as TDRs.
Freddie Mac 2015 Form 10-K
244
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
The table below presents our allowance for loan losses and our recorded investment in loans, held-for-
investment, by impairment evaluation methodology.
December 31, 2015
December 31, 2014
Single-
family
Multifamily
Total
Single-
family
Multifamily
Total
(in millions)
Recorded investment:
Collectively evaluated
Individually evaluated
Total recorded investment
1,713,329
$ 1,621,801
$
91,528
30,728
475
31,203
$ 1,652,529
92,003
1,744,532
$ 1,568,237
100,383
1,668,620
$
40,451
902
$ 1,608,688
101,285
41,353
1,709,973
Ending balance of the
allowance for loan losses:
Collectively evaluated
Individually evaluated
Total ending balance of the
allowance
(1,273)
(14,019)
(15,292)
(18)
(21)
(39)
(1,291)
(14,040)
(3,847)
(17,837)
(15,331)
(21,684)
(25)
(52)
(77)
(3,872)
(17,889)
(21,761)
Net investment in loans
$ 1,698,037
$
31,164
$ 1,729,201
$ 1,646,936
$
41,276
$ 1,688,212
A significant number of unsecuritized single-family loans on our consolidated balance sheets are
individually evaluated for impairment while substantially all single-family 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 loans represented approximately 10.8% and 12.7%
of the recorded investment in such loans at December 31, 2015 and 2014, respectively, and a substantial
portion of the allowance associated with these loans represented interest rate concessions provided to
borrowers as part of loan modifications. The ending balance of the allowance for loan losses associated
with loans held by our consolidated trusts represented approximately 0.2% of the recorded investment in
such loans as of both December 31, 2015 and 2014.
CREDIT PROTECTION AND OTHER FORMS OF CREDIT ENHANCEMENT
In connection with many of our single-family loans and other mortgage-related guarantees, we have
various forms of credit protection.
The table below presents the UPB of single-family loans on our consolidated balance sheets or
underlying certain of our financial guarantees with credit protection and the maximum amounts of
potential loss recovery by type of credit protection.
(in millions)
UPB(1) at
Maximum Coverage(1)(2) at
December 31,
2015
December 31,
2014
December 31,
2015
December 31,
2014
Primary mortgage insurance
$
257,063
$
227,495
$
65,760
$
57,938
Other credit protection:
STACR debt note and ACIS
transactions(3)
Lender recourse and
indemnifications
Pool insurance(4)
HFA indemnification
Subordination
Other credit enhancements
241,450
144,272
6,339
1,706
2,599
3,021
15
6,527
2,284
3,357
2,377
20
Total
$
512,193
$
386,332
$
Freddie Mac 2015 Form 10-K
14,916
5,396
753
2,599
336
10
89,770
$
6,657
6,092
947
3,324
339
18
75,315
245
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
(1) Except for the majority of our single-family credit risk transfer transactions, our credit enhancements generally provide
protection for the first, or initial, credit losses associated with the related loans. Excludes: (a) FHA/VA and other governmental
loans; (b) purchased credit protection associated with $8.3 billion and $9.8 billion in UPB of single-family loans underlying
other securitization products as of December 31, 2015 and 2014, respectively; and (c) 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. The UPB of single-family loans covered by insurance
or partial guarantees issued by federal agencies (such as FHA, VA and USDA) was $3.2 billion and $3.6 billion as of
December 31, 2015, and December 31, 2014, respectively.
(2) Except for subordination, this represents the remaining amount of loss recovery that is available subject to terms of
counterparty agreements. For subordination, this represents the UPB of the securities that are subordinate to our guarantee,
which could provide protection by absorbing first losses.
(3) Excludes $87.4 billion and $48.3 billion in UPB at December 31, 2015 and 2014, respectively, where the related loans are
also covered by primary mortgage insurance. Maximum coverage amounts presented represent the outstanding balance of
STACR debt notes held by third parties as well as the remaining aggregate limit of insurance purchased from third parties in
ACIS transactions.
(4) Excludes approximately $0.6 billion and $0.9 billion in UPB at December 31, 2015 and 2014, respectively, where the related
loans are also covered by primary mortgage insurance.
Primary mortgage insurance and credit risk transfers are the most prevalent types of credit enhancement
protecting our single-family credit guarantee portfolio. 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 mortgage loans since March 2008. For information about counterparty risk associated with
mortgage insurers, see Note 13.
Our credit risk transfer transactions provide credit enhancement by transferring a portion of credit losses
on single-family mortgage loans to third-party investors and insurers. The value of these transactions to
us is dependent on various economic scenarios, and we will primarily benefit from these transactions if
we experience significant mortgage loan defaults.
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the years ended December 31, 2015, 2014, and 2013, we acquired $237.5 billion, $187.1 billion,
and $340.9 billion, respectively, of loans held-for-investment in exchange for the issuance of debt
securities of consolidated trusts in guarantor swap transactions. These guarantor swap transactions in
2015 included approximately $11.6 billion of loans received from sellers to satisfy advances that were
recorded in other assets on our consolidated balance sheets.
Freddie Mac 2015 Form 10-K
246
Financial Statements
Notes to the Consolidated Financial Statements | Note 5
NOTE 5: REAL ESTATE OWNED
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.
(in millions)
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,
2015
2014
2013
2,684
$
4,602
$
2,243
(3,145)
1,782
(126)
69
(57)
1,725
$
4,110
(6,028)
2,684
(51)
(75)
(126)
2,558
$
4,407
6,498
(6,303)
4,602
(29)
(22)
(51)
4,551
$
$
We obtain REO properties when we are the highest bidder at foreclosure sales of properties that secure
single-family and multifamily loans owned by us or 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 evaluate their marketability, including
determining an estimated market value, and then select an appropriate disposition path (e.g., listing for
sale with a real estate broker, or auction). 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. Upon acquiring multifamily properties,
we may operate them using third-party property management firms for a period of time to stabilize value
and then sell the properties through commercial real estate brokers.
REO is initially recorded at fair value less estimated costs to sell and is subsequently carried at the lower
of cost or fair value less estimated costs to sell. When we acquire REO, losses arise when the recorded
investment in 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 estimated costs to sell plus
expected recoveries through credit enhancements exceeds the recorded investment in the loan (including
all amounts due from the borrower).
Benefits we expect to receive from most of our credit enhancements (e.g., primary mortgage insurance
and certain ACIS insurance policies) are recorded when realization of our claims is deemed probable.
Benefits we expect to receive from certain of our other credit enhancements (e.g., certain STACR debt
notes and whole loan securities) are recorded when the realized loss event occurs. We record benefits
related to repurchase recoveries 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 (expense) income 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
Freddie Mac 2015 Form 10-K
247
Financial Statements
Notes to the Consolidated Financial Statements | Note 5
value of REO are provided for and charged to REO operations (expense) income. Any gains and losses
from REO dispositions are included in REO operations (expense) income.
Our REO operations (expense) income includes:
• REO property expenses;
• Net gains or losses incurred on disposition of REO properties;
• 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
• Recoveries from insurance and other credit enhancements.
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 of $20 million, $461 million, and $761 million on REO dispositions during 2015, 2014,
and 2013, respectively.
NON-CASH INVESTING AND FINANCING ACTIVITIES
REO property acquisitions as a result of the derecognition of loans held on our consolidated balance
sheets upon foreclosure of the underlying collateral or deed in lieu of foreclosure represent non-cash
transfers. During the years ended December 31, 2015, 2014, and 2013, we had transfers of $2.0 billion,
$3.8 billion, and $6.1 billion, respectively, from loans to REO.
Freddie Mac 2015 Form 10-K
248
Financial Statements
Notes to the Consolidated Financial Statements | Note 6
NOTE 6: INVESTMENTS IN SECURITIES
The following table summarizes the carrying value of our investments in securities by classification as of
December 31, 2015 and 2014.
(in millions)
Trading securities
Available-for-sale securities
Total
December 31, 2015
December 31, 2014
$
$
39,278
$
74,937
114,215
$
30,437
106,550
136,987
We currently classify and account for our securities as either available-for-sale or trading. As of
December 31, 2015 and 2014, we did 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, net of income taxes and other gains (losses) on investment
securities recognized in earnings, respectively. See Note 14 for more information on how we determine
the fair value of securities.
We record purchases and sales of securities on the trade date when the related forward commitments are
exempt from the accounting guidance for derivatives and hedge accounting. Alternatively, we record
purchases and sales of securities on the expected settlement date, with a corresponding derivative
recorded on the trade date, when the related forward commitments are not exempt from the accounting
guidance for derivatives and hedge accounting.
We include interest on securities in our consolidated statements of comprehensive income. 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 apply this method to securities that:
• Can contractually be prepaid or otherwise settled in such a way that we may not recover substantially
all of our recorded investment;
• Are not of high credit quality at acquisition; or
• Have been determined to be other-than-temporarily impaired.
Under this method, we recognize as interest income, over the life of the securities, the excess of the cash
flows expected to be collected over the securities' carrying value. We update our estimates of expected
cash flows periodically and recognize changes in the calculated effective interest rate on a prospective
basis.
For securities classified as trading or available-for-sale, we classify the cash flows as investing activities
because we hold these securities for investment purposes. In cases where the transfer of a security
represents a secured borrowing, we classify the related cash flows as financing activities.
Freddie Mac 2015 Form 10-K
249
Financial Statements
Notes to the Consolidated Financial Statements | Note 6
TRADING SECURITIES
The following table presents the estimated fair values of our trading securities by major security type. Our
non-mortgage-related securities consisted solely of Treasury securities.
(in millions)
Mortgage-related securities:
Freddie Mac
Fannie Mae
Ginnie Mae
Other
Total mortgage-related securities
Non-mortgage-related securities
Total fair value of trading securities
December 31, 2015
December 31, 2014
$
$
$
15,513
6,438
30
146
22,127
17,151
39,278
$
17,469
6,099
16
171
23,755
6,682
30,437
For the years ended December 31, 2015, 2014, and 2013, we recorded net unrealized gains (losses) on
trading securities held at those dates of $(856) million, $(88) million, and $(1.6) billion, respectively.
Freddie Mac 2015 Form 10-K
250
Financial Statements
Notes to the Consolidated Financial Statements | Note 6
AVAILABLE-FOR-SALE SECURITIES
At December 31, 2015 and 2014, all available-for-sale securities were mortgage-related securities.
The following table presents, by major security type, the amortized cost, estimated fair values, and
corresponding gross unrealized gains and losses for our securities classified as available-for-sale.
December 31, 2015
Gross Unrealized Losses
Amortized
Cost
Gross
Unrealized
Gains
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Fair
Value
(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
$
$
32,684
7,033
150
12,009
12,499
3,423
2,788
1,187
488
Total available-for-sale securities
$
72,261
$
942
265
12
450
653
317
506
19
$
— $
—
—
(2)
(295)
(56)
(11)
—
(99) $
(36)
—
(9)
(55)
(6)
(5)
(1)
87
3,251
$
—
(364) $
—
(211) $
December 31, 2014
Gross Unrealized Losses
33,527
7,262
162
12,448
12,802
3,678
3,278
1,205
575
74,937
(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
Amortized
Cost
Gross
Unrealized
Gains
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Fair
Value
$
37,710
$
1,435
$
— $
463
16
890
989
372
578
34
—
—
(2)
(518)
(179)
(29)
—
(46) $
(10)
—
(54)
(92)
(4)
(6)
(2)
39,099
11,313
199
21,822
20,589
5,649
5,043
2,198
10,860
183
20,988
20,210
5,460
4,500
2,166
556
Total available-for-sale securities
$
102,633
$
84
4,861
$
(2)
(730) $
—
(214) $
638
106,550
(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.
Freddie Mac 2015 Form 10-K
251
Financial Statements
Notes to the Consolidated Financial Statements | Note 6
Available-For-Sale Securities in a Gross Unrealized Loss Position
The following table presents the fair values of available-for-sale securities in a gross unrealized loss
position, and whether they have been in that position for less than 12 months, or 12 months or greater.
(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 in a gross
unrealized loss position
(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 in a gross
unrealized loss position
December 31, 2015
Less than 12 Months
12 Months or Greater
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
8,171
$
2,402
—
396
719
349
108
18
—
(64) $
(24)
—
(9)
(21)
(8)
(1)
—
—
1,224
$
1,337
55
160
3,923
579
265
8
14
$
12,163
$
(127) $
7,565
$
(35)
(12)
—
(2)
(329)
(54)
(15)
(1)
—
(448)
December 31, 2014
Less than 12 Months
12 Months or Greater
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$
2,531
$
2,693
66
184
286
77
185
48
42
(14) $
(9)
—
(5)
(3)
—
(5)
—
—
936
$
5
—
1,149
6,533
1,490
499
28
15
$
6,112
$
(36) $
10,655
$
(32)
(1)
—
(51)
(607)
(183)
(30)
(2)
(2)
(908)
At December 31, 2015, total gross unrealized losses on available-for-sale securities were $0.6 billion. The
gross unrealized losses relate to 415 individual lots representing 368 separate securities. 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 an individual security may be in an unrealized gain position
while other lots for that security may be in an unrealized loss position.
Impairment Recognition on Investments in Securities
We evaluate available-for-sale securities in an unrealized loss position as of the end of each quarter to
determine whether the decline in value is other-than-temporary. An unrealized loss exists when the fair
value of an individual lot is less than its amortized cost basis. As discussed further below, certain other-
than-temporary impairment losses are recognized in earnings.
Freddie Mac 2015 Form 10-K
252
Financial Statements
Notes to the Consolidated Financial Statements | Note 6
Other-than-temporary impairment is considered to have occurred if the fair value of the security lot is less
than its amortized cost basis and we either intend to sell the security or more likely than not will be
required to sell the security lot prior to recovery of its amortized cost basis. Under these circumstances,
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 amortized cost basis, 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 its amortized cost basis. The present value of cash
flows expected to be collected represents our estimate of future contractual cash flows that we expect to
collect, discounted at the security’s original effective interest rate or, if applicable, the effective interest
rate determined based on significantly improved cash flows subsequent to a prior other-than-temporary
impairment.
The evaluation of whether unrealized losses on available-for-sale securities are other-than-temporary
requires significant management judgments, assumptions, and consideration of numerous factors. We
perform an evaluation on a security lot 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.
Our net impairment on available-for-sale securities during 2015 includes certain securities that we have
the intent to sell prior to the recovery of the security's amortized cost basis. For the remaining available-
for-sale securities in an unrealized loss position at December 31, 2015, 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 hold these 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.
Commercial Mortgage-Backed Securities
CMBS are exposed to stresses in the commercial real estate market. We use an external model that
utilizes underlying collateral performance, current and expected credit enhancements, and assumptions
about the underlying collateral cash flows to identify securities that may have an increased risk of failing
to make their contractual payments. 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, 2015.
Freddie Mac 2015 Form 10-K
253
Financial Statements
Notes to the Consolidated Financial Statements | Note 6
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 mainly
attributable to poor underlying collateral performance, limited liquidity, and risk premiums. In evaluating
securities for impairment, we use an external model that considers the credit performance of the
underlying collateral, including current LTV ratio, delinquency status, servicer performance, loan
modification terms and status, borrower credit information, and the collectability of amounts from bond
insurers. The model also incorporates assumptions about the economic environment, including future
home prices, unemployment, and interest rates to project underlying collateral prepayment speeds,
delinquency and default rates, and loss severities. Circumstances in which it is expected that a principal
and interest shortfall will occur and 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 in earnings. For
additional information regarding bond insurers, see Note 13.
The following table 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.
(dollars in millions)
UPB
Weighted average collateral defaults(1)
Weighted average collateral severities(2)
Weighted average voluntary prepayment rates(3)
Average credit enhancements(4)
December 31, 2015
Subprime
17,295
$
Option ARM
$
5,309
Alt-A
$
2,696
43%
65%
3%
6%
27 %
63 %
10 %
(1)%
23%
48%
11%
1%
(1) The expected cumulative default rate is expressed as a percentage of the current collateral UPB.
(2) The expected average loss given default is calculated as the ratio of cumulative loss over cumulative default for each
security.
(3) The security’s voluntary prepayment rate represents the average of the monthly voluntary prepayment rate weighted by the
security’s outstanding UPB.
(4) 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 the total UPB of securities subordinate to the securities we own, divided by 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-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, 2015.
Freddie Mac 2015 Form 10-K
254
Financial Statements
Notes to the Consolidated Financial Statements | Note 6
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.
Other-Than-Temporary Impairments on Available-for-Sale Securities
The following table presents our net impairment of available-for-sale securities recognized in earnings by
security type.
(in millions)
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,
2015
2014
2013
$
$
(29) $
— $
(146)
(101)
(16)
—
(794)
(101)
(42)
(1)
(292) $
(938) $
(14)
(1,258)
(58)
(179)
(1)
(1,510)
(1)
Includes $240 million, $817 million, and $568 million of other-than-temporary impairments recognized in earnings for the
years ended December 31, 2015, 2014, and 2013, respectively, as we had the intent to sell the related securities before
recovery of their amortized cost basis.
The following table presents the changes in the unrealized credit losses related to available-for-sale
securities that we have written down for other-than-temporary impairment and for which only a portion of
the other-than-temporary impairment was recognized in other comprehensive income.
(in millions)
Credit-related other-than-temporary impairments on available-for-sale securities recognized in
earnings:
Year Ended December 31,
2015
2014
Beginning balance — remaining credit losses on available-for-sale securities where other-than-
temporary impairments were recognized in earnings
$
6,798
$
14,463
Additions:
Amounts related to credit losses on securities for which an other-than-temporary impairment
was not previously recognized
Amounts related to credit losses on securities for which an other-than-temporary impairment
was previously recognized
Reductions:
Amounts related to securities which were sold, written off, or matured
Amounts related to securities which we intend to sell or it is more likely than not that we will be
required to sell before recovery of 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
—
52
—
121
(107)
(1,188)
(1,116)
(6,113)
(321)
(485)
Ending balance — remaining credit losses on available-for-sale securities where other-than-
temporary impairments were recognized in earnings(1)
$
5,306
$
6,798
(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 amortized cost basis.
Freddie Mac 2015 Form 10-K
255
Financial Statements
Notes to the Consolidated Financial Statements | Note 6
Realized Gains and Losses on Sales of Available-For-Sale 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.
The following table presents the gross realized gains and gross realized losses from the sale of available-
for-sale securities.
(in millions)
Gross realized gains
Gross realized losses
Net realized gains (losses)
Maturities of Available-For-Sale Securities
Year Ended December 31,
2015
2014
2013
$
$
1,371
(33)
1,338
$
$
1,897
(185)
1,712
$
$
1,950
(51)
1,899
The following table presents the remaining contractual maturities of available-for-sale securities.
As of December 31, 2015
One Year or Less
After One Year Through
Five Years
After Five Years
Through Ten Years
After Ten Years
Total Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Total
Amortized
Cost
(dollars in millions)
Available-for-sale
securities:
Freddie Mac
$
32,684
$
33,527
$
29
$
29
$
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
Weighted Average
Yield(1)
7,033
150
12,009
12,499
3,423
2,788
7,262
162
12,448
12,802
3,678
3,278
1,187
1,205
488
575
3
—
—
—
—
1
10
—
3
—
—
—
—
1
10
—
1
15
2
315
—
—
14
25
—
$
1
$
1,757
$
1,756
$
30,897
$
31,741
16
2
320
—
—
14
26
—
76
22
—
—
—
8
87
7
85
25
—
—
—
9
91
9
6,939
126
11,694
12,499
3,423
2,765
7,158
135
12,128
12,802
3,678
3,254
1,065
1,078
481
566
$
72,261
$
74,937
$
43
$
43
$
372
$
379
$
1,957
$
1,975
$
69,889
$
72,540
2.74%
2.74%
5.58%
1.33%
2.76%
(1) The weighted average yield is calculated based on a yield for each individual lot held at December 31, 2015 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 rate multiplied by the year-end UPB; and (b) the amortization income or
expense calculated for December 2015 (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.
Freddie Mac 2015 Form 10-K
256
Financial Statements
Notes to the Consolidated Financial Statements | Note 6
NON-CASH INVESTING AND FINANCING ACTIVITIES
From time to time, we contribute PCs and Giant PCs held in our investments portfolio to non-consolidated
REMIC trusts in exchange for beneficial interests in those same REMIC trusts. We account for this type of
transaction as the acquisition of investment securities and the issuance of debt securities of consolidated
trusts. During 2015 and 2014, we received investment securities as consideration for the issuance of debt
securities of consolidated trusts of $0.3 billion and $1.8 billion, respectively, as a result of these
transactions.
In addition, from time to time, we may recombine all of the outstanding beneficial interests in a REMIC
trust to effectively recreate the original Giant PC trust. In certain cases, we may receive only beneficial
interests in the Giant PC trust as proceeds for our contribution of the collateral. Because the beneficial
interest issued by the Giant PC is substantially the same as the PCs that ultimately collateralized the
trust, we account for our interest in the Giant PC as an extinguishment of the outstanding debt securities
of the underlying PC trusts. As a result, we account for this type of transaction as the transfer of
investment securities in exchange for the extinguishment of debt securities of consolidated trusts. During
2015 and 2014, we extinguished debt securities of consolidated trusts as consideration for the transfer of
investment securities of $0.5 billion and $0 billion, respectively, as a result of these transactions.
Freddie Mac 2015 Form 10-K
257
Financial Statements
Notes to the Consolidated Financial Statements | Note 7
NOTE 7: DEBT SECURITIES AND SUBORDINATED
BORROWINGS
The table below summarizes the interest expense per our consolidated statements of comprehensive
income and the balances of total debt, net per our consolidated balance sheets.
(in millions)
2015
2014
2015
2014
2013
Debt securities of consolidated trusts held by
third parties
$
1,556,121
$
1,479,473
$
45,536
$
48,003
$
47,350
Balance, Net
Interest Expense for the
Year Ended December 31,
Other debt:
Short-term debt
Long-term debt
Total other debt
Total debt, net
113,572
300,734
414,306
134,619
315,450
450,069
173
6,207
6,380
145
6,768
6,913
178
8,251
8,429
$
1,970,427
$
1,929,542
$
51,916
$
54,916
$
55,779
Debt securities that we issue are classified as either debt securities of consolidated trusts held by third
parties or other debt. We issue other debt to fund our operations.
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 14.
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 extinguishment of 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 as incurred 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
into interest expense over the life of the modified debt security using the effective interest method and
fees paid to third parties are expensed as incurred.
Freddie Mac 2015 Form 10-K
258
Financial Statements
Notes to the Consolidated Financial Statements | Note 7
We 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.
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.
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 for information regarding restrictions on
the amount of mortgage-related securities that we may own.
Our debt cap under the Purchase Agreement was $563.6 billion in 2015 and declined to $479.0 billion on
January 1, 2016. As of December 31, 2015, our aggregate indebtedness was $418.0 billion. Our
aggregate indebtedness is calculated as the par value of other short- and long-term debt.
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. Debt securities of consolidated trusts held by
third parties are generally prepayable as the loans that collateralize the debt may prepay without penalty
at any time.
Freddie Mac 2015 Form 10-K
259
Financial Statements
Notes to the Consolidated Financial Statements | Note 7
The table below summarizes the debt securities of consolidated trusts held by third parties based on
underlying loan product type.
December 31, 2015
December 31, 2014
Contractual
Maturity
UPB
Carrying
Amount
Weighted
Average
Coupon(1)
Contractual
Maturity
UPB
Carrying
Amount
Weighted
Average
Coupon(1)
(dollars in million)
Single-family:
30-year or more, fixed-rate(2)
2016 - 2053
$1,090,584
$1,123,290
3.88% 2015 - 2053
$1,018,357
$1,047,302
4.04%
20-year fixed-rate
15-year fixed-rate
Adjustable-rate
Interest-only
FHA/VA
Total single-family
Multifamily(2)
Total debt securities of
consolidated trusts held by third
parties
2016 - 2036
73,018
75,221
2016 - 2031
270,036
276,531
2016 - 2047
2026 - 2041
2016 - 2044
62,496
14,252
986
63,899
14,317
1,005
1,511,372
1,554,263
3.61
3.01
2.61
3.16
5.37
2015 - 2035
71,545
73,764
2015 - 2030
266,117
272,538
2015 - 2047
2026 - 2041
2015 - 2044
65,082
17,474
1,226
66,518
17,524
1,250
1,439,801
1,478,896
3.74
3.13
2.62
3.29
5.42
2017 - 2028
1,717
1,858
4.90
2017 - 2019
524
577
4.93
$1,513,089
$1,556,121
$1,440,325
$1,479,473
(1) The effective rate for debt securities of consolidated trusts held by third parties was 3.06% and 3.19% as of December 31,
2015 and 2014, respectively.
(2) Carrying amount includes securities recorded at fair value.
OTHER SHORT-TERM DEBT
As indicated in the table below, a majority of other short-term debt consisted of discount notes and
Reference Bills® securities, paying only principal at maturity. Discount notes, Reference Bills® securities,
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.
(dollars in millions)
Par Value
December 31, 2015
December 31, 2014
Carrying
Amount
Weighted
Average
Effective Rate
Par Value
Carrying
Amount
Weighted
Average
Effective Rate
Other short-term debt:
Discount notes and
Reference Bills®
Medium-term notes
Total other short-term
debt
$
$
104,088
$
104,027
0.28% $
134,670
$
134,619
9,545
9,545
0.20
—
—
113,633
$
113,572
0.27
$
134,670
$
134,619
0.12%
—
0.12
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
We had no balances of securities sold under agreements to repurchase at either December 31, 2015 or
2014.
Freddie Mac 2015 Form 10-K
260
Financial Statements
Notes to the Consolidated Financial Statements | Note 7
OTHER LONG-TERM DEBT
The table below summarizes our other long-term debt.
December 31, 2015
December 31, 2014
Contractual
Maturity
Par Value
Carrying
Amount
Weighted
Average
Effective
Rate
Par Value
Carrying
Amount
Weighted
Average
Effective
Rate
(dollars in millions)
Other long-term debt:
Other senior debt:
Fixed-rate:
Medium-term notes — callable
2016 - 2037
$
90,744
$
90,754
1.47% $
98,860
$
98,856
Medium-term notes — non-callable
2016 - 2028
16,033
16,351
Reference Notes securities — non-
callable
2016 - 2032
137,201
137,267
Variable-rate:
Medium-term notes — callable
2017 - 2030
Medium-term notes — non-callable
2016 - 2026
STACR
Zero-coupon:
2023 - 2028
Medium-term notes — callable
2037
Medium-term notes — non-callable
2016 - 2039
Other
2052 - 2055
Hedging-related basis adjustments
15,931
23,697
11,551
1,000
7,343
335
N/A
15,931
23,697
11,503
280
4,293
198
17
0.92
2.60
2.11
0.21
3.60
6.17
3.58
5.93
20,059
20,383
1.35%
0.86
151,701
151,751
2.80
7,210
23,971
5,896
1,000
10,109
—
N/A
7,210
23,971
5,820
264
6,739
—
34
2.00
0.19
3.16
6.17
2.53
Total other senior debt
Other subordinated debt:
Fixed-rate
Zero-coupon
Total other subordinated debt
303,835
300,291
318,806
315,028
2016 - 2018
2019
221
332
553
219
224
443
6.61
10.51
221
332
553
219
203
422
6.60
10.51
Total other long-term debt
$
304,388
$
300,734
2.02% $
319,359
$
315,450
2.02%
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.
The table below summarizes the contractual maturities of other long-term debt securities at December 31,
2015.
(in millions)
Annual Maturities
Other long-term debt:
2016
2017
2018
2019
2020
Thereafter
Debt securities of consolidated trusts held by third parties(1)
Total
Net discounts, premiums, hedge-related and other basis adjustments(2)
Total debt securities of consolidated trusts held by third parties and other long-term debt
Par Value
58,765
91,543
48,189
31,352
26,697
47,842
1,513,089
1,817,477
39,378
1,856,855
$
$
(1) Contractual maturities of debt securities of consolidated trusts held by third parties are not presented because they are
prepayable at any time without penalty.
(2) Other basis adjustments primarily represent changes in fair value attributable to instrument-specific credit risk.
Freddie Mac 2015 Form 10-K
261
Financial Statements
Notes to the Consolidated Financial Statements | Note 7
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.
Freddie Mac 2015 Form 10-K
262
Financial Statements
Notes to the Consolidated Financial Statements | Note 8
NOTE 8: 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. 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.
We evaluate whether financial instruments that we purchase or issue contain embedded derivatives. We
elect to measure newly acquired or issued financial instruments that contain embedded derivatives at fair
value, with changes in fair value recorded in earnings.
At December 31, 2015 and 2014, 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. Amounts reclassified from AOCI linked to interest payments on other
debt are recorded in other debt interest expense and amounts not linked to interest payments on other
debt are recorded in expense related to derivatives. In the years ended December 31, 2015 and 2014, we
reclassified from AOCI into earnings, losses of $230 million and $303 million, respectively, related to
closed cash flow hedges. See Note 10 for information about future reclassifications of deferred net losses
related to closed cash flow hedges to net income.
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.
USE OF DERIVATIVES
We use derivatives primarily to hedge interest-rate sensitivity mismatches between our financial assets
and 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, models and economics. 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:
• Exchange-traded derivatives;
• Cleared derivatives; and
• OTC derivatives.
Freddie Mac 2015 Form 10-K
263
Financial Statements
Notes to the Consolidated Financial Statements | Note 8
Exchange-traded derivatives include standardized interest-rate futures contracts and options on futures
contracts. 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-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, 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 commitments to:
• Purchase and sell investments in securities;
• Purchase loans; and
• 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.
Credit Derivatives
We have purchased 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.
Freddie Mac 2015 Form 10-K
264
Financial Statements
Notes to the Consolidated Financial Statements | Note 8
DERIVATIVE ASSETS AND LIABILITIES AT FAIR VALUE
The table below presents the notional value and fair value of derivatives reported on our consolidated
balance sheets.
December 31, 2015
December 31, 2014
Notional or
Contractual
Amount
Derivatives at Fair Value
Assets
Liabilities
Notional or
Contractual
Amount
Derivatives at Fair Value
Assets
Liabilities
$
209,988
$
4,591
$
(486) $
205,219
$
5,243
$
218,599
1,125
429,712
57,925
4,375
24,050
11,025
12,088
109,463
56,332
29,114
3,899
3,033
319
1
4,911
3,450
—
580
—
791
4,821
—
34
25
—
(11,736)
—
(12,222)
—
(100)
—
(28)
—
(128)
—
(28)
(10)
(23)
213,325
300
418,844
56,390
10,660
22,125
3,560
19,733
112,468
40,263
27,054
5,207
3,204
408
2
5,653
3,315
—
179
—
730
4,224
—
40
27
—
(487)
(12,829)
—
(13,316)
—
(90)
—
(9)
(28)
(127)
—
(79)
(11)
(27)
631,553
9,791
(12,411)
607,040
9,944
(13,560)
(in millions)
Total derivative portfolio
Interest-rate swaps:
Receive-fixed
Pay-fixed
Basis (floating to floating)
Total interest-rate swaps
Option-based:
Call swaptions
Purchased
Written
Put Swaptions
Purchased
Written
Other option-based derivatives(1)
Total option-based
Futures
Commitments
Credit derivatives
Other
Total derivatives not designated
as hedging instruments
Derivative interest receivable
(payable)
Netting adjustments(2)
Total derivative portfolio, net
$
631,553
$
814
(10,210)
395
(1,393)
12,550
$
(1,254) $
607,040
$
817
(9,939)
822
$
(1,500)
13,097
(1,963)
(1) Primarily includes purchased interest-rate caps and floors and options on Treasury futures.
(2) Represents counterparty netting and cash collateral netting. Cash collateral amounts were a net was $2.3 billion and $3.2
billion at December 31, 2015 and 2014, respectively.
See Note 9 for information related to our derivative counterparties and collateral held and posted.
Freddie Mac 2015 Form 10-K
265
Financial Statements
Notes to the Consolidated Financial Statements | Note 8
GAINS AND LOSSES ON DERIVATIVES
The table below presents the gains and losses on derivatives, including the accrual of periodic cash
settlements, reported in our consolidated statements of comprehensive income as derivative gains
(losses).
(in millions)
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(1)
Total option-based
Other:
Futures
Foreign-currency swaps
Commitments
Credit derivatives
Other
Total other
Accrual of periodic cash settlements:
Receive-fixed interest-rate swaps
Pay-fixed interest-rate swaps
Other
Total accrual of periodic cash settlements
Total
Year Ended December 31,
2015
2014
2013
$
— $
(1) $
35
35
(811)
(2)
(778)
371
(9)
(249)
77
68
258
(5)
—
63
(37)
1
22
4,074
4,073
(11,366)
(1)
(7,294)
2,355
(168)
(1,006)
8
248
1,437
(54)
(7)
239
8
5
191
2,568
(4,768)
2
(2,198)
(2,696) $
3,033
(5,660)
2
(2,625)
(8,291) $
$
(21)
(10,400)
(10,421)
19,021
(2)
8,598
(2,547)
546
(8)
—
(413)
(2,422)
21
30
(131)
(3)
6
(77)
3,764
(7,233)
2
(3,467)
2,632
(1) Primarily includes purchased interest-rate caps and floors and options on Treasury futures.
Freddie Mac 2015 Form 10-K
266
Financial Statements
Notes to the Consolidated Financial Statements | Note 9
NOTE 9: COLLATERALIZED AGREEMENTS AND
OFFSETTING ARRANGEMENTS
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. However, the use of cleared and exchange-traded derivatives decreases our credit
risk exposure to individual counterparties because a central counterparty is substituted for individual
counterparties. 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 the credit risk of 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. We have master netting agreements in place with all of our OTC swap counterparties and we
require counterparties to deliver collateral in the form of cash, securities, or a combination of both when
their net obligation to us is above an agreed upon threshold.
Our use of interest rate swaps and option-based derivatives 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 and option-based derivatives. Master netting agreements provide for
the netting of amounts receivable and payable from an individual counterparty, which reduces our
exposure to the 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.
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, 2015 and 2014, all amounts of cash collateral related to derivatives with master netting
and collateral agreements were offset against derivative assets, net or derivative liabilities, net, as
applicable.
In the event that all of our counterparties for OTC interest-rate swaps and option-based derivatives were
to have defaulted simultaneously on December 31, 2015, our maximum loss for accounting purposes
after applying netting agreements and collateral on an individual counterparty basis would have been
Freddie Mac 2015 Form 10-K
267
Financial Statements
Notes to the Consolidated Financial Statements | Note 9
approximately $61 million. A significant majority of our net uncollateralized exposure to OTC derivative
counterparties is concentrated among three counterparties, all of which were rated "A-" or higher as of
December 31, 2015.
Exposure to Certain Counterparties
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. 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. For information about margin we have posted in
connection with cleared and exchange-traded derivatives, see “- Collateral Pledged.”
The total exposure on our forward purchase and sale commitments, which are treated as derivatives,
was $34 million and $40 million at December 31, 2015 and 2014, 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 (including its clearing
members).
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
As an investor, we enter into arrangements to purchase securities under agreements to subsequently
resell the identical or substantially the same security to our counterparty. While such transactions involve
the legal transfer of securities, they are accounted for as secured financings because the transferor does
not relinquish effective control over the securities transferred.
Freddie Mac 2015 Form 10-K
268
Financial Statements
Notes to the Consolidated Financial Statements | Note 9
OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES
The table below displays information related to derivatives and securities purchased under agreements to
resell on our consolidated balance sheets.
December 31, 2015
Amount
Offset in the
Consolidated
Balance
Sheets
Net Amount
Presented in
the
Consolidated
Balance
Sheets(1)
Gross
Amount
Not Offset in
the
Consolidated
Balance
Sheets(2)
Gross
Amount
Recognized
Net
Amount
$
8,763
$
(8,433) $
330
$
(269) $
1,783
59
10,605
63,644
(1,777)
—
(10,210)
6
59
395
—
—
(269)
—
63,644
(63,644)
74,249
$
(10,210) $
64,039
$
(63,913) $
(8,886) $
7,801
$
(1,085) $
948
$
(4,857)
(61)
(13,804) $
4,749
—
12,550
$
(108)
(61)
(1,254) $
—
—
948
$
$
$
$
61
6
59
126
—
126
(137)
(108)
(61)
(306)
December 31, 2014
Amount
Offset in the
Consolidated
Balance
Sheets
Net Amount
Presented in
the
Consolidated
Balance
Sheets(1)
Gross
Amount
Not Offset in
the
Consolidated
Balance
Sheets(2)
Gross
Amount
Recognized
Net
Amount
$
10,315
$
(9,688) $
627
$
(453) $
379
67
10,761
51,903
(251)
—
(9,939)
128
67
822
—
—
(453)
—
51,903
(51,903)
62,664
$
(9,939) $
52,725
$
(52,356) $
(10,666) $
8,845
$
(1,821) $
1,743
$
(4,277)
(117)
(15,060) $
4,252
—
13,097
$
(25)
(117)
(1,963) $
—
—
1,743
$
$
$
$
174
128
67
369
—
369
(78)
(25)
(117)
(220)
269
(in millions)
Assets:
Derivatives:
OTC interest-rate swaps and option-
based derivatives
Cleared and exchange-traded
derivatives
Other
Total derivatives
Securities purchased under agreements
to resell
Total
Liabilities:
Derivatives:
OTC interest-rate swaps and option-
based derivatives
Cleared and exchange-traded
derivatives
Other
Total
(in millions)
Assets:
Derivatives:
OTC interest-rate swaps and option-
based derivatives
Cleared and exchange-traded
derivatives
Other
Total derivatives
Securities purchased under agreements
to resell
Total
Liabilities:
Derivatives:
OTC interest-rate swaps and option-
based derivatives
Cleared and exchange-traded
derivatives
Other
Total
Freddie Mac 2015 Form 10-K
Financial Statements
Notes to the Consolidated Financial Statements | Note 9
(1) For derivatives, includes cash collateral posted or held in excess of exposure.
(2) Does not include the fair value amount of non-cash collateral posted or held that exceeds the associated net asset or liability
presented on the consolidated balance sheets. For cleared and exchange-traded derivatives, does not include non-cash
collateral posted by us with an aggregate fair value of $2.8 billion and $2.3 billion as of December 31, 2015 and 2014,
respectively.
COLLATERAL PLEDGED
Collateral Pledged to Freddie Mac
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 $1.5 billion and
$2.1 billion at December 31, 2015 and 2014, respectively. Certain of these amounts have been invested
in non-mortgage-related assets. At December 31, 2015 and 2014, we had $269 million and $453 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 $22 million and $0 million of cash pledged to us related to cleared derivatives at December 31,
2015 and 2014, respectively.
Also, at December 31, 2015 and 2014, we had $0.7 billion and $0.0 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 loans 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.
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.
The aggregate fair value of all OTC derivative instruments that were in a liability position on
December 31, 2015, was $1.9 billion for which we posted cash and non-cash collateral of $1.8 billion in
the normal course of business. A reduction in our credit ratings may trigger additional collateral
requirements related to our OTC derivative instruments. If a reduction in our credit ratings had triggered
additional collateral requirements related to our OTC derivative instruments on December 31, 2015, we
would have been required to post an additional $0.1 billion of collateral to our counterparties. A reduction
Freddie Mac 2015 Form 10-K
270
Financial Statements
Notes to the Consolidated Financial Statements | Note 9
in our credit ratings could also cause the clearinghouses or clearing members we use for our cleared and
exchange-traded derivatives to demand additional collateral.
We also execute forward purchase and sale commitments of mortgage-related securities, including dollar
roll transactions that are treated as derivatives for accounting purposes and 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 (including its clearing members). In the event a clearing member
fails and causes losses to the MBSD/FICC clearing system, we could be subject to the loss of any or the
entire margin that we have posted to the MBSD/FICC. Moreover, our exposure could exceed that amount,
as members are generally required to cover losses caused by defaulting members on a pro rata basis. It
is difficult to estimate our maximum exposure under these transactions, as this would require an
assessment of transactions that we and other members of the MBSD/FICC may execute in the future.
The table below summarizes all securities pledged as collateral by us for derivatives and securities
transactions where the secured party may repledge.
(in millions)
December 31, 2015
December 31, 2014
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
Total securities pledged
$
$
1,293
$
—
2,487
3,780
$
2,539
9
1,884
4,432
(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.
Cash Pledged
At December 31, 2015, we pledged $4.0 billion of collateral in the form of cash and cash equivalents, of
which $0.9 billion related to our OTC derivative agreements as we had $1.9 billion of such derivatives in a
net loss position. The remaining $3.1 billion was posted at clearing members or clearinghouses in
connection with derivatives and securities transactions at December 31, 2015.
At December 31, 2014, we pledged $5.4 billion of collateral in the form of cash and cash equivalents, of
which $1.2 billion related to our OTC derivative agreements as we had $3.0 billion of such derivatives in a
net loss position. The remaining $4.2 billion was posted at clearing members or clearinghouses in
connection with derivatives and securities transactions at December 31, 2014.
Freddie Mac 2015 Form 10-K
271
Financial Statements
Notes to the Consolidated Financial Statements | Note 10
NOTE 10: STOCKHOLDERS’ EQUITY AND EARNINGS PER
SHARE
ACCUMULATED OTHER COMPREHENSIVE INCOME
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.
(in millions)
Beginning balance
Other comprehensive income before
reclassifications(1)
Amounts reclassified from accumulated
other comprehensive income
Changes in AOCI by component
Ending balance
(in millions)
Beginning balance
Other comprehensive income before
reclassifications(1)
Amounts reclassified from accumulated
other comprehensive income
Changes in AOCI by component
Ending balance
$
$
$
$
Year Ended December 31, 2015
AOCI Related
to Available-
For-Sale
Securities
AOCI Related
to Cash Flow
Hedge
Relationships
AOCI Related
to Defined
Benefit Plans
Total
2,546
$
(803) $
(13) $
1,730
(123)
(683)
(806)
1,740
$
—
182
182
(621) $
48
(1)
47
34
$
Year Ended December 31, 2014
AOCI Related
to Available-
For-Sale
Securities
AOCI Related
to Cash Flow
Hedge
Relationships
AOCI Related
to Defined
Benefit Plans
962
$
(1,000) $
32
$
Total
2,087
(503)
1,584
2,546
$
—
197
197
(803) $
(43)
(2)
(45)
(13) $
(75)
(502)
(577)
1,153
(6)
2,044
(308)
1,736
1,730
(1) For the years ended December 31, 2015 and 2014, net of tax expense of $0.1 billion and $1.1 billion, respectively, for AOCI
related to available-for-sale securities.
Freddie Mac 2015 Form 10-K
272
Financial Statements
Notes to the Consolidated Financial Statements | Note 10
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.
Details about
Accumulated Other
Comprehensive
Income Components
Three Months Ended
December 31,
Year Ended December 31,
Affected Line Item in the
Consolidated
Statements of Comprehensive
Income
(in millions)
2015
2014
2015
2014
AOCI related to
available-for-sale
securities
AOCI related to cash
flow hedge relationships
AOCI related to defined
benefit plans
$
188
$
500
$
1,343
$
1,712
(48)
140
(49)
91
—
(52)
(52)
1
(51)
—
—
—
(251)
249
(87)
162
—
(71)
(71)
25
(46)
1
(1)
—
(292)
1,051
(368)
683
(2)
(228)
(230)
48
(182)
1
—
1
Other gains (losses) on investment
securities recognized in earnings
Net impairment of available-for-sale
securities recognized in earnings
(938)
774 Total before tax
(271) Tax (expense) or benefit
503 Net of tax
(2)
Interest expense — Other debt
(301) Expense related to derivatives
(303) Total before tax
106 Tax (expense) or benefit
(197) Net of tax
4 Salaries and employee benefits
(2) Tax (expense) or benefit
2 Net of tax
Total reclassifications in
the period
$
40
$
116
$
502
$
308 Net of tax
Future Reclassifications from AOCI to Net Income Related to Closed Cash Flow Hedges
The total AOCI related to derivatives designated as cash flow hedges was a loss of $0.6 billion and $0.8
billion at December 31, 2015 and 2014, 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, unless it is deemed probable that the forecasted transactions will not occur. Over the next
12 months, we estimate that approximately $141 million, net of taxes, of the $0.6 billion of cash flow
hedge losses in AOCI at December 31, 2015 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 18 years.
Freddie Mac 2015 Form 10-K
273
Financial Statements
Notes to the Consolidated Financial Statements | Note 10
SENIOR PREFERRED STOCK
Pursuant to the Purchase Agreement described in Note 2, we issued one million shares of senior
preferred stock to Treasury on September 8, 2008, in partial consideration of Treasury’s commitment to
provide funds to us.
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, 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. The dividends we have paid to Treasury on the senior
preferred stock have been declared by, and paid at the direction of, the Conservator, acting as successor
to the rights, titles, powers and privileges of the Board. 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. Total dividends paid in cash during
2015, 2014, and 2013 at the direction of the Conservator were $5.5 billion, $19.6 billion, and $47.6 billion,
respectively. See Note 2 for a discussion of our net worth sweep dividend.
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:
• 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
• 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 accrued and unpaid
dividends previously added to the liquidation preference and not previously paid down and quarterly
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 10
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, 2015.
(in millions, except initial
liquidation preference price
per share)
Draw Date:
September 8, 2008
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
Shares
Authorized
Shares
Outstanding
Total
Par Value
Initial
Liquidation
Preference
Price per Share
Total
Liquidation
Preference
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
No cash was received from Treasury under the Purchase Agreement in 2015, because we had positive
net worth at December 31, 2014, March 31, 2015, June 30, 2015, and September 30, 2015 and,
consequently, FHFA did not request a draw on our behalf. At December 31, 2015, 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, 2015 and the Capital Reserve Amount of $1.2 billion in 2016, our
dividend obligation to Treasury in March 2016 will be $1.7 billion. See Note 2 for additional information.
The aggregate liquidation preference on the senior preferred stock owned by Treasury was $72.3 billion
as of both December 31, 2015 and 2014. See Note 16 for additional information.
COMMON STOCK WARRANT
Pursuant to the Purchase Agreement described in Note 2, on September 7, 2008, we issued a warrant to
purchase common stock to Treasury, in partial consideration of Treasury’s commitment to provide funds
to us.
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 10
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 notice of exercise, payment of the exercise price of $0.00001 per share, and 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 shares
associated with the warrant are 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,
2015, 2014, and 2013, respectively, included shares of common stock that would be issuable upon full
exercise of the warrant issued to Treasury.
PREFERRED STOCK
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. 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.
Freddie Mac 2015 Form 10-K
276
Financial Statements
Notes to the Consolidated Financial Statements | Note 10
The table below provides a summary of our preferred stock outstanding at their redemption values at
December 31, 2015.
Issue Date
Shares
Authorized
Shares
Outstanding
Total
Par Value
Redemption
Price per
Share
Total
Outstanding
Balance
Redeemable
On or After
OTCQB
Symbol
5.00 $
5.00 $
50.00 $
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
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
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
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
June 30, 2001
FMCCI
October 27, 1998
(2)
March 31, 2003 FMCKK
220 September 30, 2003 FMCCG
400 September 30, 2003 FMCCH
200
150
250
287
325
230
173
173
201
300
300
750
250
500
October 30, 2000
March 31, 2004
(2)
(2)
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
(2)
June 30, 2011 FMCCS
June 30, 2011 FMCCT
September 30, 2011 FMCKO
1,100
December 31, 2011 FMCKM
500
500
March 31, 2012 FMCKN
June 30, 2012
FMCKL
500 September 30, 2017
FMCKI
6,000
December 31, 2012
FMCKJ
(in millions, except
redemption price per
share)
Preferred stock:
1996 Variable-rate(1)
5.81%
5%
1998 Variable-rate(3)
5.10%
5.30%
5.10%
5.79%
1999 Variable-rate(4)
2001 Variable-rate(5)
2001 Variable-rate(6)
5.81%
6%
2001 Variable-rate(7)
5.70%
5.81%
2006 Variable-rate(8)
6.42%
5.90%
5.57%
5.66%
6.02%
6.55%
2007 Fixed-to-
floating rate(9)
Total, preferred
stock
December 4, 2007
240.00
240.00
240.00
464.17
464.17 $
464.17
$
14,109
(1) 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%.
Issued through private placement.
(2)
(3) 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%.
(4) 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%. Optional redemption on December 31, 2004 and on December 31 every five years thereafter.
(5) 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.
(6) 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.
(7) 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.
(8) Dividend rate resets quarterly and is equal to the sum of three-month LIBOR plus 0.50% but not less than 4.00%.
(9) 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.
Freddie Mac 2015 Form 10-K
277
Financial Statements
Notes to the Consolidated Financial Statements | Note 10
STOCK-BASED COMPENSATION
Following the implementation of the conservatorship in September 2008, we suspended the operation of
and/or ceased making grants under our stock-based compensation 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 2015
and 2014, except for issuances of treasury stock as reported on our consolidated statements of equity
relating to stock-based 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 2015, the deferral period lapsed on 2,981 RSUs. At
December 31, 2015, 10,750 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, 2015 and 2014. No stock options were exercised and 312,589 stock
options were forfeited or expired during 2015. At December 31, 2015, 46,416 stock options were
outstanding.
EARNINGS PER SHARE
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:
• Vested options to purchase common stock; and
• 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. These shares are included since the warrant is unconditionally exercisable by the holder at a
minimal cost.
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 stock equivalent shares
outstanding:
• Weighted average shares related to stock options if the average market price during the period
Freddie Mac 2015 Form 10-K
278
Financial Statements
Notes to the Consolidated Financial Statements | Note 10
exceeds the exercise price; and
• 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.
For purposes of the earnings-per-share calculation, antidilutive potential common shares excluded from
the computation of dilutive potential common shares were 146,474, 494,227, and 998,707 at
December 31, 2015, 2014, and 2013, respectively.
DIVIDENDS DECLARED
No common dividends were declared in 2015. During the three months ended March 31, 2015, June 30,
2015, September 30, 2015, and December 31, 2015 we paid dividends of $0.9 billion, $0.7 billion, $3.9
billion, and $0, 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
2015.
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.
Freddie Mac 2015 Form 10-K
279
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
NOTE 11: INCOME TAXES
INCOME TAX (EXPENSE) BENEFIT
The total income tax (expense) benefit includes:
• Deferred tax (expense) benefit, which represents the net change in the deferred tax asset or liability
balance during the year and any change in the valuation allowance, if any; and
• Current tax (expense) benefit, which represents the amount of tax currently payable to or receivable
from a tax authority, including related interest and penalties, and amounts accrued for unrecognized
tax benefits, if any.
Income tax (expense) benefit excludes the tax effects related to adjustments recorded to other
comprehensive income, such as unrealized gains and losses on available-for-sale securities.
The table below presents the components of our federal income tax (expense) benefit for 2015, 2014,
and 2013. We are exempt from state and local income taxes.
(in millions)
Current income tax (expense) benefit
Deferred income tax (expense) benefit
Total income tax (expense) benefit
Year Ended December 31,
2014
2013
2015
$
$
(1,243) $
(1,028) $
(1,655)
(2,284)
(2,898) $
(3,312) $
(117)
23,422
23,305
The decrease in income tax expense from 2014 to 2015 is primarily due to a decrease in pre-tax income.
The income tax benefit for 2013 primarily relates to the release of the valuation allowance against our net
deferred tax assets.
The table below presents reconciliation between our federal statutory income tax rate and our effective
tax rate for 2015, 2014 and 2013.
(dollars in millions)
Amount
Percent
Amount
Percent
Amount
Percent
2015
Year Ended December 31,
2014
2013
Statutory corporate tax rate
$
(3,246)
35.0% $
(0.6)
(3.7)
(3,851)
73
438
35.0% $
(0.7)
(4.0)
(8,877)
101
495
35.0 %
(0.4)
(2.0)
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
52
346
—
—
—
—
—
(50)
—
—
—
—
—
0.5
—
—
—
—
—
28
—
—
—
—
—
(0.2)
30.1% $
5,156
26,369
—
138
31,663
(77)
23,305
(20.3)
(104.0)
—
(0.5)
(124.8)
0.3
(91.9)%
$
(2,898)
31.2% $
(3,312)
DEFERRED TAX ASSETS, NET
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
Freddie Mac 2015 Form 10-K
280
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
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 in the
period that the tax change is enacted. The realization of these net deferred tax assets is dependent upon
the generation of sufficient taxable income.
The table below presents the balance of significant deferred tax assets and liabilities at December 31,
2015 and 2014.
(in millions)
Deferred tax assets:
Deferred fees
Basis differences related to derivative instruments
Credit related items and allowance for loan losses
Basis differences related to assets held for investment
LIHTC and AMT credit carryforward
Other items, net
Total deferred tax assets
Deferred tax liabilities:
Unrealized gains related to available-for-sale securities
Basis differences related to debt
Total deferred tax liabilities
Deferred tax assets, net
2015
2014
$
7,008
$
5,912
170
3,303
2,764
81
19,238
(937)
(96)
(1,033)
$
18,205
$
6,245
7,059
2,311
1,902
3,465
10
20,992
(1,371)
(123)
(1,494)
19,498
As of December 31, 2015, we had a LIHTC carryforward of $2.3 billion that will expire over multiple years
beginning in 2030. Our AMT credit carryforward of $433 million will not expire.
Valuation Allowance
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.
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.
At December 31, 2015, we determined that the positive evidence, particularly the evidence that was
objectively verifiable, outweighed the negative evidence.
The positive evidence included the following:
• Our three-year cumulative income position and taxable income for the past three years;
• Our current loss carryback capacity and the length of the carryforward period available to utilize our
tax credit carryforward under current tax law;
• Our access to capital under the agreements associated with conservatorship; and
• Our expected 2015 taxable income and forecasts of future book income.
Freddie Mac 2015 Form 10-K
281
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
Accordingly, we concluded that it is more likely than not that our net deferred tax assets will be realized
and that a valuation allowance against our net deferred tax asset was not necessary at December 31,
2015.
UNRECOGNIZED TAX BENEFITS AND IRS EXAMINATIONS
We recognize a tax position taken or expected to be taken (and any associated interest and penalties) if 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.
We evaluated all income tax positions and determined that there were no uncertain tax positions that
required reserves as of December 31, 2015.
We finalized the stipulation of settled issues and closing agreement with the IRS for years 1998-2010
related to our tax accounting method for certain hedging transactions. A final decision was entered in U.S.
Tax Court in June 2015. We have accrued gross interest receivable of $65 million and $535 million as of
December 31, 2015 and 2014, respectively, related to payments on account with the IRS.
Freddie Mac 2015 Form 10-K
282
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
NOTE 12: SEGMENT REPORTING
We have three reportable segments, which are based on the type of business activities each performs -
Single-family Guarantee, Multifamily, and Investments. The chart below provides a summary of our three
reportable segments and the All Other category.
Segment
Description
Activities/Items
Financial
Performance
Measurement
Basis
Contribution to
GAAP net income
(loss)
Management and guarantee fees on PCs,
including those retained by us, and certain single-
family loans in the mortgage-related investments
portfolio, inclusive of upfront credit delivery and
buy-down fees
Adjustments to management and guarantee fees
for the price performance of our PCs relative to
comparable Fannie Mae securities
Costs and recoveries of risk transfer transactions
Credit losses on all single-family assets
Net float income or expense on the single-family
credit guarantee portfolio
Settlements, including legal settlements related to
representation and warranty claims
Gains (losses) on sale of non-performing loans
Tax expense/benefit and changes in the deferred
tax asset valuation allowance (if any)
Allocated debt costs and administrative expenses
Multifamily loans held-for-sale and associated
securitization activities.
Investments in CMBS and multifamily loans held-
for-investment
Contribution to
GAAP
comprehensive
income (loss)
Other mortgage-related guarantees
Other securitization products
Tax expense/benefit and changes in the deferred
tax asset valuation allowance (if any)
Allocated debt costs and administrative expenses
Single-family
Guarantee
Multifamily
The Single-family Guarantee segment
reflects results from our single-family
credit guarantee activities. In our
Single-family Guarantee segment, we
purchase, securitize, and guarantee
single-family loans originated by our
seller/servicers and manage our
seriously delinquent loans. In most
instances, we securitize the loan and
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 income, less credit-
related expenses, administrative
expenses, allocated funding costs, and
amounts related to net float income or
expenses.
The Multifamily segment reflects results
from our investment, securitization, and
guarantee activities in multifamily loans
and securities. Our primary business
model is to purchase multifamily loans
for aggregation and then securitization
through issuance of multifamily K
Certificates. We also issue and
guarantee other securitization products
as well as provide other mortgage-
related guarantees.
Segment Earnings for this segment
consist primarily of returns on assets
related to multifamily investment
activities and management and
guarantee fee income, less credit-
related expenses, administrative
expenses, and allocated funding costs.
Freddie Mac 2015 Form 10-K
283
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
Investments
The Investments segment reflects
results from managing our mortgage-
related investments portfolio (excluding
Multifamily segment investments and
single-family seriously delinquent
loans), our treasury function (including
funding and liquidity) and interest rate
risk.
Segment Earnings for this segment
consist primarily of the returns on these
investments, less the related funding,
hedging, and administrative expenses.
Investments in mortgage-related securities and
single-family performing loans
All other traded instruments and securities,
excluding CMBS and multifamily housing revenue
bonds
Contribution to
GAAP
comprehensive
income (loss)
Debt issuances
Interest rate risk management
Guarantee buy-ups, net of execution gains / losses
Cash and liquidity management
Settlements, including legal settlements, relating to
non-agency mortgage-related securities
Tax expense/benefit and changes in the deferred
tax asset valuation allowance (if any)
Allocated administrative expenses
All Other
The All Other category consists of
material corporate-level activities that are
infrequent in nature and based on
decisions outside the control of the
management of our reportable
segments.
Tax settlements, as applicable
N/A
Legal settlements, as applicable
Tax expense/benefit and changes in the deferred
tax asset valuation allowance (if any), including the
release of the deferred tax asset valuation
allowance
FHFA-mandated termination of our pension plan
Segment Earnings
We present Segment Earnings by reclassifying certain credit guarantee-related activities and investment-
related activities between various line items on our GAAP consolidated statements of comprehensive
income and allocating certain revenues and expenses, including certain returns on assets and funding
costs, and all administrative expenses to our three reportable segments. We also make certain
adjustments to our segment results to better reflect how management assesses segment and company
performance. The reclassifications, adjustments, and allocations are described below.
We do not consider our assets by segment when evaluating segment performance or allocating
resources. We operate our business 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
other than the United States and its territories.
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 for information
about the conservatorship.
In the second quarter of 2015, we changed our Segment Earnings definition associated with the revenue
and expense related to the Temporary Payroll Tax Cut Continuation Act of 2011. As a result of this
change, the revenue and expense related to the legislated 10 basis point increase are now netted within
management and guarantee fee income. The purpose of this change is to better reflect how management
evaluates the Single-family Guarantee segment. Prior period results have been revised to conform to the
current period presentation. We reclassified $775 million and $533 million of Temporary Payroll Tax Cut
Freddie Mac 2015 Form 10-K
284
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
Continuation Act of 2011 expense into management and guarantee fee income for 2014 and 2013,
respectively.
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 differ significantly
from those applied in preparing the comparable line items in our consolidated financial statements
prepared in accordance with GAAP in order to reflect the business activities each segment performs. The
significant reclassifications are discussed below. 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 VIEs. Due to the adoption of this
guidance, the results of our operating segments from a GAAP perspective do not reflect how the
Segments are managed.
Credit Guarantee Activity-Related Reclassifications
All credit guarantee-related income and costs are included in Segment Earnings management and
guarantee fee income.
• Net guarantee fees are reclassified in Segment Earnings from net interest income to management
•
and guarantee fee income.
Implied management and guarantee fee income related to unsecuritized loans held in the mortgage
investments portfolio is reclassified in Segment Earnings from net interest income to management
and guarantee fee income.
• The portion of the amount reversed for accrued but uncollected interest upon placing loans on a non-
accrual status that relates to management and guarantee fees is reclassified in Segment Earnings
from net interest income to management and guarantee fee 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
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.
Freddie Mac 2015 Form 10-K
285
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
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 the following
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.
• Amortization related to premiums and discounts associated with PCs 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 fee 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. The following segment 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:
• Adjustments to management and guarantee fee 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 transfers of financial assets and the
consolidation of VIEs. As of December 31, 2015, the unamortized balance of buy-down fees was $0.2
billion and the unamortized balance of credit delivery fees was $0.5 billion. We consider such fees to
be part of the effective rate of the management and guarantee fee income on guaranteed loans.
These adjustments are necessary to better reflect the realization of revenue associated with
guarantee contracts over the life of the underlying loans.
• Adjustments to 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, 2015, the unamortized balance of such
premiums and discounts, net was $3.9 billion and the unamortized balance of buy-up fees was $0.3
billion.
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. Net interest income for each
segment includes allocated debt funding and hedging costs related to certain assets of each segment.
The Investments segment manages the funding and interest rate risk for all business segments. In
connection with this activity, the Investments segment transfers a cost to the other segments. The actual
costs may vary relative to these intra-company transfers. In addition, the financial statement volatility
associated with the use of derivatives to hedge certain assets outside the Investments segment is not
fully allocated to other segments. These allocations do not include the effects of dividends paid on our
Freddie Mac 2015 Form 10-K
286
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
senior preferred stock.
The table below presents Segment Earnings by segment.
(in millions)
Segment Earnings (loss), net of taxes:
Single-family Guarantee
Multifamily
Investments
All Other
Total Segment Earnings, net of taxes
Net income
Comprehensive income (loss) of segments:
Single-family Guarantee
Multifamily
Investments
All Other
Comprehensive income of segments
Comprehensive income
Year Ended December 31,
2015
2014
2013
$
$
$
$
1,778
$
1,547
$
827
3,771
—
6,376
6,376
1,790
566
3,415
28
5,799
$
$
1,636
4,520
(13)
7,690
7,690
1,537
1,459
6,471
(41)
9,426
$
$
5,799
$
9,426
$
5,796
3,050
15,930
23,892
48,668
48,668
5,845
1,455
20,287
24,013
51,600
51,600
Freddie Mac 2015 Form 10-K
287
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
The table below presents detailed reconciliations between our GAAP financial statements and Segment
Earnings for our reportable segments and All Other.
Single-
family
Guarantee
Multifamily
Investments
All
Other
Year Ended December 31, 2015
Total
Segment
Earnings
(Loss),
Net of Tax
Reconciliation to Consolidated Statements of
Comprehensive Income
Reclassifications
Segment
Adjustments
Total
Reconciling
Items
Total per
Consolidated
Statements of
Comprehensive
Income
$
(111)
$
927
$
1,734
$
— $
2,550
$
11,615
$
781
$
12,396
$
14,946
2,030
26
—
—
2,056
609
—
609
2,665
5,406
339
—
—
5,745
(5,122)
(254)
(5,376)
369
—
(37)
—
(2,001)
616
(22)
372
(98)
(93)
137
420
(70)
(737)
—
3,679
(1,285)
(325)
(317)
(334)
(1,445)
(4)
(56)
—
(376)
827
—
(4)
781
(1,715)
3,771
—
—
—
—
—
—
—
—
—
—
—
398
265
(835)
(2,094)
4,432
(1,927)
(338)
(1,505)
527
(2,898)
6,376
—
—
12
12
(264)
(542)
—
(806)
—
3
182
4
—
28
182
47
(261)
(356)
28
(577)
(690)
(2,961)
—
—
(2,483)
—
—
(968)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(527)
—
—
—
—
—
—
(690)
(2,961)
—
—
(2,483)
—
—
(968)
(527)
—
—
—
—
—
—
(292)
(2,696)
(835)
(2,094)
1,949
(1,927)
(338)
(2,473)
—
(2,898)
6,376
(806)
182
47
(577)
$
1,790
$
566
$
3,415
$
28
$
5,799
$
— $
— $
— $
5,799
(in millions)
Net interest income
(expense)
Benefit (Provision) for
credit losses
Non-interest income
(loss):
Management and
guarantee income(1)
Net impairment of
available-for-sale
securities recognized
in earnings
Derivative gains
(losses)
Gains (losses) on
trading securities
Gains (losses) on
loans
Other non-interest
income
Non-interest expense:
Administrative
expense
REO operations
(expense) income
Other non-interest
(expense) income
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
Comprehensive income
(loss)
Segment adjustments
(254)
Income tax (expense)
benefit
Net income (loss)
(807)
1,778
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 12
Single-
family
Guarantee
Multifamily
Investments
All
Other
Year Ended December 31, 2014
Total
Segment
Earnings
(Loss),
Net of Tax
Reconciliation to Consolidated Statements of
Comprehensive Income
Reclassifications
Segment
Adjustments
Total
Reconciling
Items
Total per
Consolidated
Statements of
Comprehensive
Income
$
(111)
$
948
$
2,966
$
— $
3,803
$
9,825
$
635
$
10,460
$
14,263
(982)
55
—
—
(927)
869
—
869
(58)
4,651
(4,019)
(303)
(4,322)
329
4,397
254
—
—
7
—
(139)
844
—
335
58
870
176
(140)
(5,158)
(276)
—
8,881
(1,170)
(274)
(437)
9
(23)
—
(772)
1,636
—
(6)
635
(1,945)
4,520
(175)
1,759
(205)
(191)
(303)
(600)
1,547
—
—
(10)
—
—
—
—
—
—
—
—
(18)
—
5
(13)
—
—
—
(2)
197
(5)
(28)
(10)
(177)
1,951
(28)
1,736
(1,881)
(196)
(238)
332
(3,312)
7,690
1,584
197
(45)
(140)
(4,816)
(218)
731
(798)
(3,475)
—
—
9,901
(1,627)
—
—
—
—
—
—
—
—
(332)
—
—
—
—
—
—
(798)
(3,475)
—
—
(1,627)
—
—
(775)
(332)
—
—
—
—
—
—
—
—
(775)
—
—
—
—
—
—
—
$
1,537
$
1,459
$
6,471
$
(41)
$
9,426
$
— $
— $
— $
(938)
(8,291)
(218)
731
8,274
(1,881)
(196)
(1,013)
—
(3,312)
7,690
1,584
197
(45)
1,736
9,426
(in millions)
Net interest income
(expense)
Benefit (Provision) for
credit losses
Non-interest income
(loss):
Management and
guarantee income(1)
Net impairment of
available-for-sale
securities recognized
in earnings
Derivative gains
(losses)
Gains (losses) on
trading securities
Gains (losses) on
loans
Other non-interest
income
Non-interest expense:
Administrative
expense
REO operations
(expense) income
Other non-interest
(expense) income
Segment adjustments
Income tax (expense)
benefit
Net income (loss)
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
Comprehensive income
(loss)
Freddie Mac 2015 Form 10-K
289
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
Single-
family
Guarantee
Multifamily
Investments
All
Other
Year Ended December 31, 2013
Total
Segment
Earnings
(Loss),
Net of Tax
Reconciliation to Consolidated Statements of
Comprehensive Income
Reclassifications
Segment
Adjustments
Total
Reconciling
Items
Total per
Consolidated
Statements of
Comprehensive
Income
$
320
$
1,186
$
3,525
$
— $
5,031
$
10,400
$
1,037
$
11,437
$
16,468
1,409
218
—
—
1,627
838
—
838
2,465
4,603
(3,638)
(694)
(4,332)
271
(989)
6,821
(1,598)
(336)
(521)
(4,189)
—
—
11,417
(2,357)
4,397
206
—
—
(3)
—
—
(15)
(974)
1,281
5,543
(132)
(336)
(1,466)
—
1,165
1,350
8,902
(1,025)
(257)
(523)
—
—
—
—
—
—
—
—
(37)
—
(1,805)
140
109
343
—
349
1,037
16
(24)
—
(443)
3,050
(463)
23,929
15,930
23,892
23,305
48,668
(1,604)
4,010
—
2,406
—
9
316
31
—
121
316
210
(1,595)
4,357
121
2,932
124
(179)
(694)
282
5,796
—
—
49
49
—
—
(533)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(343)
—
—
—
—
—
—
(521)
(4,189)
—
—
(2,357)
—
—
(533)
(343)
—
—
—
—
—
—
(1,510)
2,632
(1,598)
(336)
9,060
(1,805)
140
(424)
—
23,305
48,668
2,406
316
210
2,932
(in millions)
Net interest income
(expense)
Benefit (Provision) for
credit losses
Non-interest income
(loss):
Management and
guarantee income(1)
Net impairment of
available-for-sale
securities recognized
in earnings
Derivative gains
(losses)
Gains (losses) on
trading securities
Gains (losses) on
loans
Other non-interest
income
Non-interest expense:
Administrative
expense
REO operations
(expense) income
Other non-interest
(expense) income
Segment adjustments
Income tax (expense)
benefit
Net income (loss)
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
Comprehensive income
(loss)
$
5,845
$
1,455
$
20,287
$ 24,013
$
51,600
$
— $
— $
— $
51,600
(1) Management and guarantee income is included in other income (loss) on our GAAP consolidated statements of comprehensive
income.
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 13
NOTE 13: CONCENTRATION OF CREDIT AND OTHER RISKS
Concentrations of credit risk may arise when we do business with a number of customers or
counterparties that engage in similar activities or have similar economic characteristics that make them
vulnerable in similar ways to changes in industry conditions, which could affect their ability to meet their
contractual obligations. Concentrations of credit risk may also arise when there are a limited number of
counterparties in a certain industry. Based on our assessment of business conditions that could impact
our financial results, we have determined that concentrations of credit risk exist among certain borrowers
(including geographic concentrations and loans with certain higher risk characteristics), loan sellers and
servicers, mortgage insurers, bond insurers, cash, derivative and other investment counterparties, and
non-agency mortgage-related security issuers. In the sections below, we discuss our concentration of
credit risk for each of the groups to which we are exposed. For a discussion of our derivative
counterparties as well as related master netting and collateral agreements, see Note 9.
SINGLE-FAMILY CREDIT GUARANTEE PORTFOLIO
Regional economic conditions may affect a borrower’s ability to repay his or her loan and the property
value underlying the loan. Geographic concentrations increase the exposure of our portfolio to changes in
credit risk. Single-family borrowers are primarily affected by home prices, unemployment rates and
interest rates.
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 13
The table below summarizes the concentration by year of origination and geographic area of the
approximately $1.7 trillion UPB of our single-family credit guarantee portfolio at both December 31, 2015
and 2014. See Note 4 and Note 6 for more information about credit risk associated with loans and
mortgage-related securities that we hold or guarantee.
December 31, 2015
December 31, 2014
Percentage
of
Portfolio
Serious
Delinquency
Rate
Percentage
of
Portfolio
Serious
Delinquency
Rate
Percent of Credit Losses
Year Ended
December 31,
2015
December 31,
2014
Year of Origination
2015
2014
2013
2012
2011
2010
2009
Subtotal - Core single-
family book
HARP and other relief
refinance book(1)
Legacy single-family book
Total
Region(2)
West
Northeast
North Central
Southeast
Southwest
Total
State(3)
Florida
New Jersey
New York
Illinois
California
All other
Total
17%
11
13
12
5
4
4
66
18
16
100%
29%
26
17
16
12
100%
5%
4
5
5
18
63
100%
0.01%
0.11%
0.12%
0.11%
0.28%
0.47%
0.88%
0.21%
0.72%
4.12%
1.32%
0.79%
2.04%
1.13%
1.57%
0.88%
1.32%
2.16%
3.90%
2.94%
1.62%
0.60%
1.12%
1.32%
N/A
12%
16
14
6
6
6
60
20
20
100%
29%
26
17
16
12
100%
6%
4
5
5
17
63
100%
N/A
0.02%
0.06%
0.09%
0.26%
0.46%
0.92%
0.24%
0.75%
5.13%
1.88%
1.23%
2.81%
1.48%
2.40%
1.16%
1.88%
3.92%
5.49%
4.06%
2.17%
0.92%
1.52%
1.88%
—%
—
—
—
—
1
2
3
8
89
100%
13%
41
17
25
4
100%
18%
15
12
8
5
42
100%
N/A
—%
—
—
—
1
2
3
8
89
100%
13%
26
22
35
4
100%
28%
6
4
10
5
47
100%
(1) HARP and other relief refinance loans are presented separately rather than in the year that the refinancing occurred (from
2009 to 2015). All other refinance loans are presented in the year that the refinancing occurred.
(2) 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).
(3) States presented based on those with the highest percentage of credit losses during the year ended December 31, 2015.
The REO balance, net at December 31, 2015 and 2014 associated with single-family properties was $1.7
billion and $2.6 billion, respectively, and the balance associated with multifamily properties was $4 million
and $0, respectively. Our single-family REO inventory consisted of 17,004 properties and 25,768
properties at December 31, 2015 and 2014, respectively. In recent years, the foreclosure process has
been significantly slowed in many geographic 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.
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 13
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. Although we discontinued new purchases of loans with lower
documentation standards beginning March 1, 2009, we continued to purchase certain amounts of these
loans in cases where the loan was either:
• Purchased pursuant to a previously issued other mortgage-related guarantee;
• Part of our relief refinance initiative; or
•
In another refinance loan initiative and the pre-existing loan (including Alt-A loans) was originated
under less than full documentation standards.
In the event we purchase a refinance loan 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 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 loans we purchase or guarantee as prime or subprime, we
recognize that there are a number of 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 based on UPB. 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.
Interest-only
Option ARM(2)
Alt-A
Original LTV ratio greater than 90%(3)
Lower credit scores at origination (less than 620)
Percentage of Portfolio(1)
Serious Delinquency Rate(1)
December 31,
2015
December 31,
2014
December 31,
2015
December 31,
2014
1%
—%
2%
16%
2%
2%
—%
3%
16%
3%
6.02%
8.01%
6.32%
2.01%
6.67%
9.36%
9.87%
8.53%
2.58%
8.57%
(1) Excludes loans underlying certain other securitization products for which data was not available.
(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.
Includes HARP loans, which we purchase as part of our participation in the MHA Program.
(3)
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 13
Loans in our Legacy single-family book have been more affected by declines in home prices that have
occurred since 2006 than loans originated in other years. Our Legacy single-family book comprised
approximately 16% of our single-family credit guarantee portfolio, based on UPB at December 31, 2015,
and these loans accounted for approximately 89% of our credit losses during 2015.
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 6 for
further information on these categories and other concentrations in our investments in securities.
MULTIFAMILY MORTGAGE PORTFOLIO
Numerous factors affect a multifamily borrower’s ability to repay the loan and the value of the property
underlying the loan. The most significant factors affecting credit risk are rental rates and capitalization
rates for the mortgaged property. Rental rates vary among geographic regions of the United States. The
average UPB for multifamily loans is significantly larger than for single-family loans and, therefore,
individual defaults for multifamily borrowers can result in more significant losses.
The table below summarizes the concentration of multifamily loans in our multifamily mortgage portfolio
classified by the legal structure of the investments we hold, based on UPB.
(dollars in billions)
Unsecuritized loans
K Certificates
Other securitization products
Other mortgage-related guarantees
Total
December 31, 2015
December 31, 2014
UPB
Delinquency
Rate(1)
UPB
Delinquency
Rate(1)
$
$
49.1
103.1
6.7
9.5
168.4
0.04% $
0.02%
—%
—%
0.02% $
53.0
76.0
5.0
9.3
143.3
0.02%
0.01%
0.64%
—%
0.04%
(1) Based on loans two monthly payments or more delinquent or in foreclosure.
In the multifamily mortgage portfolio, the primary concentration of credit risk is based on the legal
structure of the investments we hold. Our exposure to credit risk in K Certificates is minimal, as the
expected credit risk is absorbed by the subordinate tranches, which are generally sold to private
investors. As a result, our multifamily credit risk is primarily related to loans that have not been
securitized.
SELLERS AND SERVICERS
We acquire a significant portion of our single-family loan purchase volume from several large sellers. Our
top 10 single-family sellers provided approximately 50% of our single-family purchase volume during
2015. Our top two single-family sellers, Wells Fargo Bank, N.A. and Bank of America, N.A., accounted for
12% and 11%, respectively, of our single-family mortgage purchase volume and were the only single-
family sellers that comprised 10% or more of our purchase volume during 2015. In recent years, there
has been a shift in our purchase volume from depository institutions to non-depository and smaller
depository financial institutions. Some of these non-depository sellers have grown rapidly in recent years
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 13
and we purchase a significant share of our loans from them. Our top three non-depository sellers
provided approximately 10% of our single-family purchase volume during 2015.
We are exposed to institutional credit risk arising from the potential insolvency or non-performance by our
sellers and servicers of their obligations to repurchase loans or (at our option) indemnify us in the event
of breaches of the representations and warranties they made when they sold the loans to us or failure to
comply with our servicing requirements. Our contracts require that a seller/servicer repurchase a loan
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, 2015 and 2014, the UPB of loans subject to our repurchase requests issued
to our single-family sellers and servicers was approximately $0.4 billion and $0.7 billion, respectively
(these figures include repurchase requests for which appeals were pending). During 2015 and 2014 we
recovered amounts that covered losses with respect to $0.8 billion and $2.0 billion, respectively, in UPB of
loans subject to our repurchase requests.
At the direction of FHFA, Freddie Mac and Fannie Mae have revised their representation and warranty
framework for conventional loans purchased by the GSEs on or after January 1, 2013. The objective of
the revised framework is to clarify lenders’ repurchase exposures and liability on future sales of loans to
Freddie Mac and Fannie Mae. This framework does not affect seller/servicers’ obligations under their
contracts with us with respect to loans sold to us prior to January 1, 2013. This framework also does not
affect their obligation to service these loans in accordance with our servicing standards. Under this
framework, sellers are 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 loans) of consecutive, on-time payments after we purchase them.
In May 2014, we announced changes to our representation and warranty framework for loans acquired on
and after July 1, 2014. These changes relieve sellers of additional representations and warranties for
these loans and provide relief for loans we have fully reviewed in our quality control process and
determined to be acceptable. As of December 31, 2015, approximately 50% in UPB of loans in our single-
family credit guarantee portfolio were purchased since January 1, 2013 and are subject to our revised
representation and warranty framework.
At the direction of FHFA, we implemented a new remedies framework for the categorization of loan
origination defects for loans with settlement dates on or after January 1, 2016. Among other items, the
framework provides that "significant defects" will result in a repurchase request or a repurchase
alternative, such as recourse or indemnification. We may require the seller to pay us additional fees or
provide us with additional data on the loan.
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 4 for further information.
We are also exposed to the risk that servicers might fail to service loans in accordance with our
contractual requirements, resulting in increased credit losses. For example, our servicers have an active
role in our loss mitigation efforts, including under 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
Freddie Mac 2015 Form 10-K
295
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
appropriate controls, experience a failure in their controls, or experience an operating disruption in their
ability to service loans, our business and financial results could be adversely affected.
A significant portion of our single-family loans is serviced by several large servicers. Our top two single-
family loan servicers, Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A., serviced approximately
20% and 10%, respectively, of our single-family loans, and were the only servicers that serviced more
than 10% of our loans, as of December 31, 2015. In recent years, there has been a shift in our servicing
from depository institutions to non-depository servicers. Some of these non-depository servicers have
grown rapidly in recent years and now service a large share of our loans. As of both December 31, 2015
and 2014, approximately 10% of our single-family credit guarantee portfolio was serviced by our three
largest non-depository servicers, on a combined basis. Several of these non-depository servicers also
service a large share of the loans underlying our investments in non-agency mortgage-related securities.
Ocwen Financial Corp. (Ocwen) is one of our significant non-depository servicers. Ocwen and its
subsidiaries and/or affiliates have recently been the subject of significant adverse regulatory scrutiny, and
we have taken steps to reduce our exposure to them. We reduced the UPB of Freddie Mac loans
serviced by Ocwen to $26.4 billion as of December 31, 2015 from $50.9 billion as of December 31, 2014,
a decrease of approximately 48%. We continue to closely monitor Ocwen’s performance.
We acquire our multifamily loans from a network of approved sellers. Our top four multifamily sellers,
CBRE Capital Markets, Inc., Berkadia Commercial Mortgage LLC, Holiday Fenoglio Fowler L.P., and
Walker & Dunlop, LLC, provided approximately 15%, 13%, 11%, and 11%, respectively, of our multifamily
new business volume for 2015. Our top ten multifamily sellers represented an aggregate of approximately
78% of our multifamily new business volume for 2015.
A significant portion of our multifamily loans is serviced by several of our large customers. As of
December 31, 2015 our top three multifamily servicers, Wells Fargo Bank, N.A., Berkadia Commercial
Mortgage LLC, and CBRE Capital Markets, Inc., each serviced more than 10% of our multifamily
mortgage portfolio, excluding loans underlying K Certificates, and together serviced approximately 40% 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.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 13
MORTGAGE INSURERS
We have institutional credit risk relating to the potential insolvency of, or non-performance by, mortgage
insurers that insure single-family loans we purchase or guarantee. We evaluate the recovery and
collectability from mortgage insurers as part of the estimate of our loan loss reserves. See Note 4 for
additional information. As of December 31, 2015, mortgage insurers provided coverage with maximum
loss limits of $66.5 billion, for $259.3 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 loan is covered under both primary and pool insurance. Our top four
mortgage insurer counterparties, United Guaranty Residential Insurance Company, Radian Guaranty Inc.,
Mortgage Guaranty Insurance Corporation, and Genworth Mortgage Insurance Corporation, each
accounted for more than 10% and collectively represented approximately 80% of our overall mortgage
insurance coverage at December 31, 2015. Each of our four largest counterparties had a credit rating of
BB+ or greater, as of December 31, 2015, based on the lower of the S&P or Moody’s rating scales and
stated in terms of the S&P equivalent. PMI Mortgage Insurance Co. (PMI), Republic Mortgage Insurance
Co. (RMIC), and Triad Guaranty Insurance Corp. (Triad) are no longer rated by either S&P or Moody’s
because they are in rehabilitation or under regulatory supervision.
We received proceeds of $0.7 billion and $1.1 billion during 2015 and 2014, respectively, 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 $0.3 billion and $0.4 billion (excluding deferred
payment obligations associated with unpaid claim amounts) as of December 31, 2015 and 2014,
respectively. The balance of these receivables, net of associated reserves, was approximately $0.2 billion
and $0.3 billion at December 31, 2015 and 2014, respectively.
PMI and Triad are both in rehabilitation, and a substantial portion of their claims is recorded by us as
deferred payment obligations. These insurers no longer issue new insurance but continue to pay a portion
of their respective claims in cash. In 2014, PMI began paying valid claims 67% in cash and 33% in
deferred payment obligations and made a one-time cash payment to us for claims that were previously
settled for 55% in cash. In 2015, PMI began paying valid claims 70% in cash and 30% in deferred
payment obligations and made a one-time cash payment to us for claims that were previously settled for
67% in cash. In 2013, Triad began paying valid claims 75% in cash and 25% in deferred payment
obligations and made a one-time cash payment to us for claims that were previously settled for 60% in
cash. If, as we currently expect, these insurers do not pay the full amount of their deferred payment
obligations in cash, we would lose a portion of the coverage from these insurers. As of December 31,
2015 and 2014, we had cumulative unpaid deferred payment obligations of $0.5 billion and $0.4 billion,
respectively, from these insurers. We reserved for all of these unpaid amounts as collectability is
uncertain.
RMIC is under regulatory supervision and is no longer issuing new insurance. In 2014, RMIC resumed
paying valid claims at 100% of the claim amount. Previously, RMIC had been paying all valid claims 60%
in cash and 40% in deferred payment obligations.
It is not clear how the regulators of these companies will administer their respective deferred payment
plans in the future, nor when or if those obligations will be paid.
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Notes to the Consolidated Financial Statements | Note 13
BOND INSURERS
Bond insurance is a credit enhancement covering certain of the non-agency mortgage-related securities
we hold. Some policies were acquired by the securitization trust that issued the securities we purchase,
while others were acquired by us. At December 31, 2015, the maximum principal exposure to credit
losses related to such policies was $5.7 billion. At December 31, 2015, our top four bond insurers, Ambac
Assurance Corporation (Ambac), National Public Finance Guarantee Corp., Financial Guaranty Insurance
Company (FGIC), and MBIA Insurance Corp., each accounted for more than 10% of our overall bond
insurance coverage and collectively represented approximately 94% of our coverage.
In 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 2013, FGIC’s plan of rehabilitation was approved, under which permitted claims are
paid 17% in cash and the remainder in deferred payment obligations.
In 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. In 2012, Ambac began making partial cash payments of 25% of the permitted amount of each
policy claim. In 2013, Ambac began making supplemental payments, equal to all or a portion of the
permitted policy claim, with respect to certain specified securities. In 2014, an amended plan was
approved by the court. The amended plan provided for Ambac to increase the amount of cash payments
to 45% of the permitted amount of each policy claim, with the remainder to be paid in deferred payment
obligations. Ambac made a one-time cash payment to us for claims that were previously settled for 25%
in cash.
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 bond insurance policies as part of our
impairment analysis for our investments in securities. See Note 6 for further information on our
investments in securities covered by bond insurance.
CASH AND OTHER INVESTMENT COUNTERPARTIES
We are exposed to institutional credit risk relating to the potential insolvency of, or the non-performance
by, counterparties relating to cash and other investments (including non-mortgage-related investments
and cash equivalents) 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 investments (including non-mortgage-related investments and cash equivalents)
counterparties are primarily major financial institutions, Treasury, and the Federal Reserve Bank of New
York. As of December 31, 2015 and 2014, including amounts related to our consolidated VIEs, there were
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$83.8 billion and $71.4 billion, respectively, of cash and securities purchased under agreements to resell
invested with institutional counterparties, Treasury securities classified as cash equivalents, or cash
deposited with the Federal Reserve Bank of New York. As of December 31, 2015 these included:
•
•
•
•
•
$42.7 billion of securities purchased under agreements to resell with 13 counterparties that had short-
term S&P ratings of A-1 or above;
$9.7 billion of securities purchased under agreements to resell with four counterparties that had
short-term S&P ratings of A-2;
$11.1 billion of securities purchased under agreements to resell with three counterparties that do not
have short-term S&P or other third-party credit ratings, but were evaluated under the company's
counterparty credit risk system and were determined to be eligible for these transactions (by providing
more than 100% in approved collateral);
$0.4 billion of cash equivalents invested in Treasury securities; and
$19.7 billion of cash deposited with the Federal Reserve Bank of New York (as a non-interest bearing
deposit).
NON-AGENCY MORTGAGE-RELATED SECURITY ISSUERS
We are engaged in various loss mitigation efforts concerning certain investments in non-agency
mortgage-related securities.
In 2011, FHFA, as Conservator for Freddie Mac and Fannie Mae, filed lawsuits against a number of
corporate families of financial institutions and related defendants alleging securities laws violations and, in
some cases, fraud. In March 2015, FHFA’s case against Nomura Holding America, Inc. (or Nomura) went
to trial in the U.S. District Court for the Southern District of New York. The trial was completed in April
2015. In May 2015, the judge ruled against Nomura and co-defendant RBS Securities Inc. and ordered
the defendants to pay an aggregate of $806 million, of which $779 million will be paid to Freddie Mac. The
order also provides for Freddie Mac to transfer the mortgage-related securities at issue in this trial to the
defendants. The defendants have agreed to pay for certain costs, legal fees and expenses if FHFA
prevails in the litigation. This expense reimbursement payment is subject to various conditions, and is
capped at $33 million (half of any such payment would be made to Freddie Mac). The defendants have
filed a notice of appeal and the Court has stayed enforcement of the judgment during the pendency of the
appeal.
We have been working with an investor consortium that seeks to enforce certain claims relating to certain
Countrywide non-agency mortgage-related securities. 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 mortgage securitization trusts. In January 2014, a New
York state court approved a significant portion of the settlement. In March 2015, a New York intermediate
appellate court upheld the settlement in full. The conditions to the settlement have been satisfied. On
February 5, 2016, the trustee filed a petition in New York state court seeking the court's resolution of a
dispute among the investors over the proper allocation of the settlement proceeds through certain trusts
covered by the agreement. As a result of this action, it is uncertain when the trustee will distribute the
settlement funds to the trusts.
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We have also been working with an investor consortium that seeks to enforce certain claims relating to
certain Citigroup non-agency mortgage-related securities. In April 2014, Citigroup Inc. entered into a
settlement agreement with the trustees of the securities covered by the settlement. In December 2015, a
New York state court entered a judgment approving the settlement in all respects. The order became final
in January 2016. It is likely that the conditions of the settlement will be fully satisfied in the near term. As a
result, we expect to receive a benefit for those securitizations that we hold at the time of such
distributions. This benefit, which is expected to be approximately $0.1 billion, will be reflected in earnings
through higher net income recognized over the expected life of the securities.
We also entered into a settlement agreement with Sand Canyon Corporation (formerly known as Option
One Mortgage Corporation) in December 2015 to resolve contractual claims with respect to certain non-
agency mortgage-related securities that we hold.
A significant portion of the single-family loans underlying our investments in non-agency mortgage-related
securities is serviced by non-depository servicers. As of December 31, 2015 and 2014, approximately
$13.0 billion and $17.9 billion, respectively, in UPB of loans underlying our investments in single-family
non-agency mortgage-related securities were serviced by subsidiaries and/or affiliates of Ocwen.
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Notes to the Consolidated Financial Statements | Note 14
NOTE 14: 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 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 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.
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 levels of
the fair value hierarchy are defined as follows in priority order:
•
•
•
Level 1 - inputs to the valuation techniques are based on quoted prices in active markets for identical
assets or liabilities.
Level 2 - inputs to the valuation techniques are based on observable inputs other than quoted prices
in active markets for identical assets or liabilities.
Level 3 - one or more inputs to the valuation technique are unobservable and significant to the fair
value measurement
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.
VALUATION PROCESSES AND CONTROLS OVER FAIR VALUE MEASUREMENTS
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.
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.
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Notes to the Consolidated Financial Statements | Note 14
The independent 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 transaction 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 verification 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 procedures are risk-based 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
framework and control policy. ERM also independently reviews significant 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 reviewed 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
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 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
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
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Notes to the Consolidated Financial Statements | Note 14
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 quotes from third-party pricing services or dealers and use those prices
without adjustment. For a large majority of the assets and liabilities we value using pricing services and
dealers, we obtain quotes 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 quotes. Significant increases (decreases) in any of the third-party
quotes 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.”
VALUATION TECHNIQUES
The following table contains a description of the valuation techniques we use for fair value measurement
and disclosure; the significant inputs used in those techniques (if applicable); the classification within the
fair value hierarchy; and, for those measurements that we report on our consolidated balance sheets and
are classified as Level 3 of the hierarchy, a narrative description of the sensitivity of the fair value
measurement to changes in significant unobservable inputs. Although the sensitivities of the
unobservable inputs are discussed below in isolation, interrelationships exist among the inputs such that
a change in one unobservable input can result 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.
Instrument
Securities
U.S. Treasury
Securities
Agency mortgage-
related securities
Valuation Technique
Classification in
the Fair Value
Hierarchy
Valuations are based on quoted prices in active markets.
Level 1
Valuations are based on:
Fixed-rate single-class: Observable prices for similar TBA securities
adjusted for specific collateral characteristics
Level 2
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Notes to the Consolidated Financial Statements | Note 14
Classification in
the Fair Value
Hierarchy
Predominantly
Level 2
Levels 2 and 3
Level 3
Instrument
Valuation Technique
Adjustable-rate single-class and majority of multi-class securities:
Median of external sources
Certain multi-class securities: Single external source
Certain multi-class securities with limited market activity: Discounted
cash flows or risk metric pricing. Under risk metric pricing, 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. Significant inputs used in the discounted cash flow
technique include OAS. Significant inputs used in the risk metric pricing
technique include key risk metrics, such as key rate durations.
Significant increases (decreases) in the OAS in isolation would result
in a significantly lower (higher) fair value. Significant increases
(decreases) in key rate durations in isolation would result in a
significant increase (decrease) in the magnitude of change of fair value
measurement in response to key rate movements
Valuations are based on the median of external sources or, in limited
circumstances, a single external source
Predominantly
Level 2
Valuations are based on the median of external sources
Level 3
Agency mortgage-
related securities
(continued)
Commercial
mortgage-related
securities
Other non-agency
mortgage-related
securities
Mortgage Loans
Single-family loans
Valuations are based on:
Level 2 or 3
Level 3
Level 3
GSE Securitization Market: Benchmark security pricing for actively
traded mortgage-related securities with similar characteristics,
adjusting for the value of our management and guarantee fee and our
credit obligation related to performing our guarantee (see Guarantee
Obligation). The credit obligation is based on: delivery and guarantee
fees we charge under current market pricing for loans that qualify
under our current underwriting standards (Level 2) and internal credit
models for loans that do not qualify under our current underwriting
standards (Level 3)
Whole Loan Market: Median of external sources, referencing market
activity for deeply delinquent and modified loans, where available
Impaired held-for-investment: Internal models that estimate the fair
value of the underlying collateral for impaired loans. Significant inputs
used by our internal models include REO disposition, short sale and
third-party sale values, combined with mortgage loan level
characteristics using the repeat housing sales index to estimate the
current fair value of the mortgage loan. Significant increases
(decreases) in the historical average sales proceeds per mortgage loan
in isolation would result in significantly higher (lower) fair value
measurements
Multifamily loans
Valuations are based on:
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Notes to the Consolidated Financial Statements | Note 14
Instrument
Valuation Technique
Classification in
the Fair Value
Hierarchy
Held-for-sale: Market prices from a third-party pricing service, using
discounted cash flows based on K Certificate market spreads
Held-for-investment: Market prices from a third-party pricing service
using discounted cash flows incorporating credit spreads for similar
loans based on the loan's LTV and DSCR
Impaired held-for-investment: Income capitalization or third-party
appraisals. Significant inputs in the income capitalization technique
include capitalization rates. Significant increases (decreases) in the
capitalization rate in isolation would result in a significantly lower
(higher) fair value measurement
Derivative Assets, Net and Derivative Liabilities, Net
Derivatives
Valuations are based on:
Exchange-traded futures: Quoted prices in active markets
Interest-rate swaps: Discounted cash flows. Significant inputs include
market-based interest rates
Option-based derivatives: Option-pricing models. Significant inputs
include Interest-rate volatility matrices
Purchase and Sale Commitments: see Agency Mortgage-Related
Securities
Other Assets and Other Liabilities
Guarantee asset
Valuations are based on:
Single-family: Median of external sources with adjustments for specific
loan characteristics
Multifamily: Discounted cash flows. Significant inputs include current
OAS-to-benchmark interest rates for new guarantees. Significant
increases (decreases) in the OAS in isolation would result in a
significantly lower (higher) fair value measurement
Level 2
Level 3
Level 3
Level 1
Level 2
Level 2
Level 2
Level 3
Level 3
Mortgage servicing
rights
Valuations are based on market prices from third party using discounted
cash flows. Significant inputs include:
Level 3
Estimated prepayment rates,
Estimated costs to service both performing and non-accrual loans, and
Estimated servicing income per loan (including ancillary income).
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.
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Notes to the Consolidated Financial Statements | Note 14
Classification in
the Fair Value
Hierarchy
Level 3
Instrument
Single-family REO
Valuation Technique
Valuations are based on an internal model, which uses REO
disposition prices combined with loan level characteristics, using the
repeat housing sales index. Significant inputs include the historical
sales proceeds per property and the repeat housing sales index.
Significant increases (decreases) in the historical sales proceeds per
property in isolation would result in significantly higher (lower) fair value
measurement.
Guarantee obligation Valuations are based on:
Single-family
The delivery and management and guarantee fees that we charge
under our current market pricing
Level 2
Internal credit models. Significant inputs include loan
characteristics, loan performance, and status information.
Multifamily: Discounted cash flows. Significant inputs are similar to
those used in the valuation technique for the Multifamily Guarantee
Asset.
Level 3
Level 3
Valuations are based on the valuation techniques we use to value our
investments in agency securities.
Level 2 or 3
Valuations are based on:
Median of external sources
Single external source
Published yield matrices
Predominantly
Level 2
Debt
Debt securities of
consolidated trusts
held by third parties
Other debt
HARP Loans
For loans that have been refinanced under HARP, we value our guarantee obligation using the
management 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 our internal credit models or 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.
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Notes to the Consolidated Financial Statements | Note 14
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 in December 2016, the beneficial pricing
afforded to HARP loans will no longer be reflected in the pricing structure of our management and
guarantee fees. If these benefits were not reflected in the pricing for these loans, the fair value of our
loans would have decreased by $12.9 billion and $19.1 billion as of December 31, 2015 and 2014,
respectively. The total fair value of the loans in our portfolio that reflect the pricing afforded to HARP loans
as of December 31, 2015 and 2014 is $82.8 billion and $119.8 billion, respectively.
ASSETS AND LIABILITIES ON OUR CONSOLIDATED BALANCE SHEETS
MEASURED AT FAIR VALUE ON A RECURRING BASIS
The following tables present our assets and liabilities measured on 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, 2015 and 2014.
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Notes to the Consolidated Financial Statements | Note 14
(in millions)
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
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
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
Other liabilities:
All other, at fair value
Total liabilities carried at fair value on a
recurring basis
Level 1
Level 2
Level 3
Netting
Adjustment(1)
Total
December 31, 2015
$
$
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
17,151
17,151
17,151
—
—
—
—
—
—
—
—
$
30,919
7,172
161
8,918
—
—
—
—
—
$
2,608
90
1
3,530
12,802
3,678
3,278
1,205
575
47,170
27,767
15,182
6,397
30
144
21,753
—
21,753
68,923
17,660
4,911
4,821
34
9,766
—
9,766
331
41
—
2
374
—
374
28,141
—
—
—
25
25
—
25
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(9,396)
(9,396)
33,527
7,262
162
12,448
12,802
3,678
3,278
1,205
575
74,937
15,513
6,438
30
146
22,127
17,151
39,278
114,215
17,660
4,911
4,821
59
9,791
(9,396)
395
—
1,753
—
1,753
17,151
$
96,349
$
29,919
$
(9,396) $
134,023
— $
139
$
— $
—
—
—
—
—
—
—
—
7,045
12,222
128
28
12,378
—
12,378
—
—
—
—
33
33
—
33
10
— $
—
139
7,045
—
—
—
—
(11,157)
(11,157)
12,222
128
61
12,411
(11,157)
1,254
—
10
$
— $
19,562
$
43
$
(11,157) $
8,448
Freddie Mac 2015 Form 10-K
308
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
(in millions)
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
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
Level 1
Level 2
Level 3
Netting
Adjustment(1)
Total
December 31, 2014
$
$
$
— $
—
—
—
—
—
—
—
—
—
$
34,868
11,228
195
18,348
—
—
16
—
—
$
4,231
85
4
3,474
20,589
5,649
5,027
2,198
638
64,655
41,895
—
—
—
—
—
6,682
6,682
6,682
—
—
5
—
5
—
5
—
—
—
16,542
5,867
15
167
22,591
—
22,591
87,246
12,130
5,653
4,219
40
9,912
—
9,912
—
—
—
927
232
1
4
1,164
—
1,164
43,059
—
—
—
27
27
—
27
1,626
5
1,631
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(9,122)
(9,122)
—
—
—
39,099
11,313
199
21,822
20,589
5,649
5,043
2,198
638
106,550
17,469
6,099
16
171
23,755
6,682
30,437
136,987
12,130
5,653
4,224
67
9,944
(9,122)
822
1,626
5
1,631
6,687
$
109,288
$
44,717
$
(9,122) $
151,570
— $
42
$
— $
—
—
28
—
28
—
28
5,820
13,316
99
80
13,495
—
13,495
—
—
—
37
37
—
37
— $
—
42
5,820
—
—
—
—
(11,597)
(11,597)
13,316
127
117
13,560
(11,597)
1,963
$
28
$
19,357
$
37
$
(11,597) $
7,825
(1) Represents counterparty netting, cash collateral netting and net derivative interest receivable or payable. The net cash
collateral posted was $2.3 billion and $3.2 billion, respectively, at December 31, 2015 and 2014. The net interest receivable
(payable) of derivative assets and derivative liabilities was $(0.6) billion and $(0.7) billion at December 31, 2015 and 2014,
respectively, which was mainly related to interest rate swaps.
Freddie Mac 2015 Form 10-K
309
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
ASSETS ON OUR CONSOLIDATED BALANCE SHEETS 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 the application of lower-of-cost-or-fair-
value accounting or measurement of impairment based on the fair value of the underlying collateral.
The table below presents assets measured on our consolidated balance sheets at fair value on a non-
recurring basis at December 31, 2015 and 2014, respectively.
(in millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
2015
2014
December 31,
Assets measured at fair
value on a non-recurring
basis:
Mortgage loans(1)
REO, net(2)
Total assets measured at fair
value on a non-recurring
basis
$
$
— $
9,314
$
—
—
5,851
1,046
$ 15,165
1,046
$
— $
—
80
—
$
8,962
$
1,665
9,042
1,665
— $
9,314
$
6,897
$ 16,211
$
— $
80
$ 10,627
$ 10,707
(1)
Includes loans that are classified as held-for-investment and have been measured for impairment based on the fair value of
the underlying collateral and held-for-sale loans where the fair value is below cost.
(2) Represents the fair value of foreclosed properties that were measured at fair value subsequent to their initial classification as
REO, net. The carrying amount of REO, net was adjusted to fair value of $1.0 billion, less estimated costs to sell of $68
million (or approximately $0.9 billion) at December 31, 2015. The carrying amount of REO, net was adjusted to fair value of
$1.7 billion, less estimated costs to sell of $109 million (or approximately $1.6 billion) at December 31, 2014.
LEVEL 3 FAIR VALUE MEASUREMENTS
The table below presents a reconciliation of all assets and liabilities measured on our consolidated
balance sheets at fair value on a recurring basis using significant unobservable inputs (Level 3) for the
years ended December 31, 2015 and 2014, 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, 2015 and 2014. When assets and
liabilities are transferred between levels, we recognize the transfer as of the beginning of the period.
Freddie Mac 2015 Form 10-K
310
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
Realized and unrealized gains (losses)
Year Ended December 31, 2015
Balance,
January 1,
2015
Included in
earnings(1)
Included in
other
comprehensive
income(1)
Total
Purchases
Issues
Sales
in millions
Settlements,
net
Transfers
into
Level 3(2)
Transfers
out of
Level 3(2)
Balance,
December
31,
2015
Unrealized
gains
(losses)
still held
Assets
Investments in
securities:
Available-for-sale,
at fair value:
Mortgage-
related
securities:
Freddie Mac
$
4,231
$
28
$
Fannie Mae
Ginnie Mae
CMBS
85
4
3,474
Subprime
20,589
Option ARM
5,649
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
5,027
2,198
638
927
232
1
4
1,164
Other assets:
Guarantee asset(3)
1,626
All other, at fair
value
Total other
assets
5
1,631
$
31
$
671
$ — $ (665)
$
93
$
— $
(1,753)
$
2,608
$
(3)
—
—
(20)
817
233
263
2
—
3
3
—
109
3
—
89
(76)
741
67
300
(50)
213
(15)
(13)
5
5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(26)
(3)
(33)
— (6,067)
(2,461)
— (1,627)
— (1,145)
—
—
—
(1)
(646)
(823)
(981)
(73)
37
—
—
—
2
6
1
6
(9)
—
—
—
—
—
—
—
90
1
3,530
12,802
3,678
3,278
1,205
575
—
—
(20)
168
137
—
—
112
41,895
1,323
46
1,369
671
— (9,505)
(4,953)
52
(1,762)
27,767
394
(42)
3
—
3
(36)
(47)
(5)
(52)
—
—
—
—
—
—
—
—
(42)
3
—
3
(36)
(47)
(5)
(52)
36
—
—
—
36
—
—
—
—
—
—
—
(10)
(94)
(1)
(4)
(11)
(2)
—
(1)
—
(109)
(14)
688
—
688
—
—
—
(514)
—
(514)
91
—
—
—
91
—
—
—
(660)
(98)
—
—
331
41
—
2
(758)
374
—
—
—
1,753
—
1,753
(41)
(12)
—
—
(53)
(33)
—
(33)
Realized and unrealized (gains) losses
Balance,
January 1,
2015
Included in
earnings(1)
Included in
other
comprehensive
income(1)
Total
Purchases
Issues
Sales
(in millions)
Settlements,
net
Transfers
into
Level 3(2)
Transfers
out of
Level 3(2)
Balance,
December
31,
2015
Unrealized
(gains)
losses
still held
$
10
$
(5)
$
— $
(5)
$
— $ — $ — $
3
$
— $
— $
8
$
2
—
10
—
10
—
—
—
—
—
—
10
15
Liabilities
Net derivatives(4)
Other liabilities:
All other, at fair
value
Freddie Mac 2015 Form 10-K
311
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
Realized and unrealized gains (losses)
Year Ended December 31, 2014
Balance,
January 1,
2014
Included in
earnings(1)
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,
2014
Unrealized
gains
(losses)
still held
Assets
Investments in
securities:
Available-for-sale,
at fair value:
Mortgage-
related
securities:
Freddie Mac
$
1,939
$
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
131
12
3,109
27,499
6,574
8,706
3,495
684
2
—
—
—
(524)
(71)
111
1
—
$
71
$
73
$
5,742
$ — $(3,346)
$
(138)
$
(2)
—
(2)
—
397
397
2,778
2,254
232
161
158
269
71
28
72
28
48
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
(59)
(6)
(1)
(7,469)
(791)
(29)
(3)
(31)
(1,695)
(295)
(3,659)
(272)
(13)
—
(1,357)
(74)
3
45
1
—
—
—
—
—
—
$
(42)
$
4,231
$
(49)
—
—
—
—
85
4
3,474
20,589
5,649
(17)
5,027
—
—
2,198
638
—
—
—
—
(794)
(102)
(42)
—
—
52,149
(481)
3,733
3,252
5,791
— (15,344)
(3,894)
49
(108)
41,895
(938)
343
221
74
8
8
(45)
—
(1)
646
(38)
Other assets:
Guarantee asset(3)
1,611
(184)
All other, at fair
value
Total other
assets
9
(4)
1,620
(188)
—
—
—
—
—
—
—
—
8
(45)
—
(1)
2,282
79
1
—
95
—
—
—
(1,690)
—
(70)
—
(43)
(14)
(4)
(3)
(38)
2,362
95
(1,760)
(64)
(184)
(4)
(188)
—
—
—
427
—
427
—
—
—
(228)
—
(228)
—
21
—
—
21
—
—
—
(68)
(30)
—
—
927
232
1
4
11
(45)
(2)
(1)
(98)
1,164
(37)
—
—
—
1,626
(263)
5
(4)
1,631
(267)
Realized and unrealized (gains) losses
Balance,
January 1,
2014
Included in
earnings(1)
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,
2014
Unrealized
(gains)
losses
still held
Liabilities
Other debt, at fair
value
Net derivatives(4)
$
1,528
$
(7)
$
— $
(7)
$
— $ — $ — $
(1,521)
$
— $
— $
— $
325
(94)
—
(94)
—
—
—
60
—
(281)
$
10
—
(30)
(2)
(1) Changes in fair value for available-for-sale 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.
Transfers out of Level 3 during the year ended December 31, 2015 consisted primarily of certain mortgage-related securities and certain derivatives due
to an increased volume and level of activity in the market and availability of price quotes from dealers and third-party pricing services. Freddie Mac
securities are generally classified as Level 3 at issuance and generally are classified as Level 2 when they begin trading. Transfers into Level 3 during the
year ended December 31, 2015 consisted primarily of certain mortgage-related securities due to a lack of market activity and relevant price quotes from
dealers and third-party pricing services.
(3) Changes in fair value of the guarantee asset are recorded in other income on our consolidated statements of comprehensive income.
(4) Amounts are prior to counterparty netting, cash collateral netting, net trade/settle receivable or payable and net derivative interest receivable or payable.
Freddie Mac 2015 Form 10-K
312
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
The table below provides valuation techniques, the range, and the weighted average of significant
unobservable inputs for assets and liabilities measured on our consolidated balance sheets at fair value
on a recurring basis using unobservable inputs (Level 3) as of December 31, 2015 and 2014.
Freddie Mac 2015 Form 10-K
313
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
Total
Fair
Value
Level 3
Fair
Value
Predominant
Valuation
Technique(s)
Unobservable Inputs
Type
Range
Weighted
Average
December 31, 2015
(dollars in millions)
Recurring fair value measurements
Assets
Investments in securities
Available-for-sale, at fair value
Mortgage-related securities
Freddie Mac
Total Freddie Mac
$
33,527
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
7,262
162
12,448
12,802
3,678
Total Alt-A and other
3,278
Obligations of states and political
subdivisions
Total obligations of states and
political subdivisions
1,205
Manufactured housing
Total manufactured housing
575
$
2,145
463
2,608
37
36
17
90
1
1
3,530
3,530
Discounted cash flows
OAS
(46) - 503 bps
86 bps
Other
Median of external sources
Single external source
Other
Discounted cash flows
Risk Metrics
Effective duration
3.15 - 11.02 years
9.57 years
11,652
Median of external sources
External pricing sources
$73.2 - $77.3
1,150
12,802
3,190
488
3,678
2,601
506
171
3,278
Other
Median of external sources
External pricing sources
$67.8 - $72.4
Other
Median of external sources
External pricing sources
Single external source
External pricing source
$85.8 - $89.3
$84.7 - $84.7
Other
1,099
Median of external sources
External pricing sources
$101.4 - $101.8
Other
Median of external sources
External pricing sources
$90.4 - $93.7
Other
106
1,205
505
70
575
$
$
$
$
$
$
75.0
69.9
87.6
84.7
101.6
92.1
Total available-for-sale
mortgage-related securities
74,937
27,767
Trading, at fair value
Mortgage-related securities
Freddie Mac
Total Freddie Mac
Fannie Mae
Total Fannie Mae
Ginnie Mae
Other
Total other
Total trading mortgage-
related securities
Total investments in
securities
Other assets:
Guarantee asset, at fair value
15,513
6,438
30
146
22,127
$
97,064
Total guarantee asset, at fair value
$
1,753
Liabilities
Net derivatives
Total net derivatives
Other liabilities
All other, at fair value
Total all other, at fair value
859
10
249
19
63
331
41
41
—
1
1
2
374
$
$
28,141
1,623
130
1,753
8
8
10
10
Discounted cash flows
OAS
(1,315) - 1,959 bps
129 bps
Risk Metrics
Other
Discounted cash flows
Median of external sources
Discounted cash flows
Discounted cash flows
OAS
17 - 198 bps
57 bps
Other
Other
Other
Freddie Mac 2015 Form 10-K
314
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
Total
Fair
Value
Level 3
Fair
Value
Predominant
Valuation
Technique(s)
Unobservable Inputs
Type
Range
Weighted
Average
December 31, 2014
(dollars in millions)
Recurring fair value measurements
Assets
Investments in securities
Available-for-sale, at fair value
Mortgage-related securities
Freddie Mac
Total Freddie Mac
$
39,099
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
11,313
199
21,822
20,589
5,649
Total Alt-A and other
5,043
Obligations of states and political
subdivisions
Total obligations of states and
political subdivisions
2,198
Manufactured housing
Total manufactured housing
638
$
2,980
Discounted cash flows
OAS
(146) - 144 bps
83 bps
Risk metric
Effective duration
0.18 - 7.54 years
3.82 years
Median of external sources
External pricing sources
$103.2 - $104.4
$
103.8
Other
Median of external sources
Discounted cash flows
Other
Discounted cash flows
Risk Metrics
Effective duration
5.84 - 10.65 years
9.59 years
Discounted cash flows
OAS
181 -766 bps
421 bps
375
143
733
4,231
47
29
9
85
4
4
2,726
748
3,474
18,789
Median of external sources
External pricing sources
$71.0 - $76.1
1,800
20,589
Other
5,205
Median of external sources
External pricing sources
$65.3 - $70.9
Other
Median of external sources
External pricing sources
$83.0 - $86.2
Other
444
5,649
4,116
911
5,027
$
$
$
73.5
67.9
84.5
1,992
Median of external sources
External pricing sources
$101.3 - $101.9
$
101.6
Other
Median of external sources
External pricing sources
Single external source
External pricing source
$89.3 - $92.4
$89.8 - $89.8
$
$
91.0
89.8
206
2,198
515
123
638
Total available-for-sale
mortgage-related securities
106,550
41,895
Trading, at fair value
Mortgage-related securities
Freddie Mac
Total Freddie Mac
Fannie Mae
Total Fannie Mae
Ginnie Mae
Other
Total other
Total trading mortgage-
related securities
Total investments in
securities
Other assets:
Guarantee asset, at fair value
478
320
129
927
207
25
232
1
3
1
4
17,469
6,099
16
171
23,755
1,164
Discounted cash flows
OAS
(219) - 9,748 bps
169 bps
Risk Metrics
Other
Effective duration
1.78 - 2.30 years
2.27 years
Discounted cash flows
OAS
(173) - 2,027 bps
204 bps
Other
Median of external sources
Discounted cash flows
$
130,305
$
$
43,059
1,285
Discounted cash flows
OAS
17 - 202 bps
341
Median of external sources
External pricing sources
$10.0 - $21.2
$
53 bps
16.6
Total guarantee asset, at fair value
$
1,626
1,626
All other, at fair value
Total all other, at fair value
Total other assets
Liabilities
Net derivatives
Total net derivatives
5
1,631
1,141
5
5
1,631
10
10
Other
Other
Freddie Mac 2015 Form 10-K
315
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
The table below provides valuation techniques, the range, and the weighted average of significant
unobservable inputs for assets and liabilities measured on our consolidated balance sheets at fair value
on a non-recurring basis using unobservable inputs (Level 3) as of December 31, 2015 and 2014. Certain
of the fair values in the table below were not obtained as of the period end, but were obtained during the
period.
Total
Fair
Value
Level 3
Fair
Value
Predominant
Valuation
Technique(s)
Unobservable Inputs
Type
Range
Weighted
Average
December 31, 2015
(dollars in millions)
Non-recurring fair
value measurements
Mortgage loans
$ 15,165
$ 5,851
REO, net
$ 1,046
$ 1,046
Internal model
Internal model
Historical sales
proceeds
$3,000 -
$788,699
$191,957
Housing sales index
44 - 428 bps
90 bps
Third-party appraisal
Property value
$1 million -
$30 million
$28 million
Income capitalization(1)
Median of external
sources
Capitalization rates
6% - 9%
7%
External pricing
sources
$39.0 - $94.6
$70.0
Internal model
Internal model
Other
Historical sales
proceeds
$3,000 -
$581,751
$155,885
Housing sales index
44 - 428 bps
87 bps
Total
Fair
Value
Level 3
Fair
Value
Predominant
Valuation
Technique(s)
Unobservable Inputs
Type
Range
Weighted
Average
December 31, 2014
(dollars in millions)
Non-recurring fair
value measurements
Mortgage loans
$ 8,962
$ 8,962
REO, net
$ 1,665
$ 1,665
Internal model
Internal model
Third-party appraisal
Income capitalization(1)
Historical sales
proceeds
$3,000 -
$896,519
$162,556
Housing sales index
38 - 294 bps
82 bps
Property value
$11 million -
$44 million
$31 million
Capitalization rates
6%- 9%
7%
Internal model
Internal model
Historical sales
proceeds
$3,008 -
$896,519
$154,165
Housing sales index
38 - 294 bps
82 bps
(1) The predominant valuation technique used for multifamily loans. 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.
Freddie Mac 2015 Form 10-K
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Notes to the Consolidated Financial Statements | Note 14
FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below presents the carrying value and estimated fair value of our financial instruments as of
December 31, 2015 and 2014. For certain types of financial instruments, such as cash and cash
equivalents, restricted cash and cash equivalents, securities purchased under agreements to resell, and
advances to lenders, the carrying value on our GAAP balance sheets approximates fair value, and these
assets are short-term in nature and have limited market value volatility.
(in millions)
Financial Assets
Cash and cash
equivalents
Restricted cash and cash
equivalents
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:
Loans held by
consolidated trusts
Loans held by Freddie
Mac
Total mortgage loans
Derivative assets, net
Guarantee asset
Advances to lenders
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
$
GAAP Carrying
Amount
Level 1
Level 2
Level 3
Netting
Adjustments
Total
December 31, 2015
Fair Value
$
5,595
$
5,595
$
— $
— $
— $
5,595
14,533
14,533
—
63,644
74,937
39,278
114,215
1,625,184
129,009
1,754,193
395
1,753
910
1,955,238
$
—
—
17,151
17,151
—
—
—
—
—
—
37,279
—
—
27,767
374
28,141
63,644
47,170
21,753
68,923
1,477,251
162,947
31,831
1,509,082
9,766
—
910
$ 1,652,325
$
97,133
260,080
25
1,958
—
290,204
$
—
—
—
—
—
—
—
14,533
63,644
74,937
39,278
114,215
1,640,198
128,964
—
(9,396)
—
—
1,769,162
395
1,958
910
(9,396) $ 1,970,412
1,556,121
$
— $ 1,624,019
$
805
$
— $ 1,624,824
414,306
1,970,427
1,254
1,729
1,973,410
$
412,752
—
2,036,771
—
12,378
—
—
—
— $ 2,049,149
$
6,586
7,391
33
3,129
10,553
$
—
—
(11,157)
—
419,338
2,044,162
1,254
3,129
(11,157) $ 2,048,545
Freddie Mac 2015 Form 10-K
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Notes to the Consolidated Financial Statements | Note 14
(in millions)
Financial Assets
Cash and cash
equivalents
Restricted cash and cash
equivalents
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:
Loans held by
consolidated trusts
Loans held by Freddie
Mac
Total mortgage loans
Derivative assets, net
Guarantee asset
Financial Liabilities
Debt, net:
Debt securities of
consolidated trusts held
by third parties
Other debt
Total debt, net
Derivative liabilities, net
Guarantee obligation
December 31, 2014
Fair Value
GAAP Carrying
Amount
Level 1
Level 2
Level 3
Netting
Adjustments
Total
$
10,928
$
10,928
$
— $
— $
— $
10,928
8,535
8,535
—
51,903
106,550
30,437
136,987
1,558,094
142,486
1,700,580
822
1,626
—
—
6,682
6,682
—
—
—
5
—
—
—
41,895
1,164
51,903
64,655
22,591
87,246
43,059
1,387,412
197,896
22,305
119,157
1,409,717
317,053
9,912
—
27
1,837
—
—
—
—
—
—
—
—
(9,122)
—
8,535
51,903
106,550
30,437
136,987
1,585,308
141,462
1,726,770
822
1,837
Total financial assets
$
1,911,381
$
26,150
$ 1,558,778
$
361,976
$
(9,122) $ 1,937,782
$
1,479,473
$
— $ 1,521,508
$
1,364
$
450,069
1,929,542
1,963
1,623
444,748
1,966,256
13,495
—
13,371
14,735
37
3,127
—
—
28
—
28
— $ 1,522,872
—
—
458,119
1,980,991
(11,597)
—
1,963
3,127
$ 1,979,751
$
17,899
$
(11,597) $ 1,986,081
Total financial liabilities
$
1,933,128
$
FAIR VALUE OPTION
We elected the fair value option for certain types of investments in securities, multifamily held-for-sale
loans, and certain debt.
Investments in Securities
We elected the fair value option for certain mortgage-related securities that contained embedded
derivatives, including investments in securities that can contractually be prepaid or otherwise settled in
such a way that we may not recover substantially all of our initial recorded investment, or 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. In addition, upon
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 14
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.
Interest income is recognized using the prospective effective interest method. 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. 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 (losses) on trading
securities within the reconciliation of Segment Earnings to GAAP results in Note 12.
Multifamily Held-For-Sale Loans
We elected the fair value option for multifamily loans that were purchased for securitization. These loans
are classified as held-for-sale loans on our consolidated balance sheets to reflect our intent to sell in the
future and are measured at fair value on a recurring basis, with subsequent gains or losses related to
changes in fair value (net of accrued interest income) reported in other income in our consolidated
statements of comprehensive income. We elected to report separately the portion of the changes in fair
value of the loans related to accrued interest from the remaining changes in fair value. Related interest
income continues to be reported based on the stated terms of the loans, as interest income in our
consolidated statements of comprehensive income.
Debt Securities of Consolidated Trusts Held by Third Parties and Other Debt
We elected the fair value option on debt that contains embedded derivatives, primarily STACR debt notes.
Fair value changes are recorded in 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. Related interest expense continues to be reported as interest
expense based on the stated terms of the debt securities.
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, 2015 and 2014.
(in millions)
Fair value
Unpaid principal balance
Difference
December 31,
2015
2014
Multifamily
Held-For-Sale
Loans
Other Debt -
Long Term
Multifamily
Held-For-Sale
Loans
Other Debt -
Long Term
$
$
17,660
$
17,673
(13) $
7,045
$
7,093
(48) $
12,130
11,872
258
$
$
5,820
5,896
(76)
Freddie Mac 2015 Form 10-K
319
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
Changes in Fair Value under the Fair Value Option Election
We recorded gains (losses) of $(38) million, $0.9 billion, and $(0.3) billion for the years ended
December 31, 2015, 2014, and 2013, respectively, from the change in fair value on multifamily held-for-
sale 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 $(9) million, $144 million, and
$(37) million for the years ended December 31, 2015, 2014, and 2013, 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, 2015, 2014, or 2013 for any assets or liabilities for which we elected the fair value option.
Freddie Mac 2015 Form 10-K
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Notes to the Consolidated Financial Statements | Note 15
NOTE 15: 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 loans to, and/or
service loans 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 loans. These suits typically involve claims alleging wrongful actions of
seller/servicers. Our contracts with our seller/servicers generally provide for indemnification of Freddie
Mac against liability arising from seller/servicers' wrongful actions with respect to loans 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.
PUTATIVE SECURITIES CLASS ACTION LAWSUIT: OHIO PUBLIC EMPLOYEES
RETIREMENT SYSTEM 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, and the plaintiff amended its complaint on several occasions. The plaintiff
alleged, among other things, 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 sought unspecified damages
and interest, and reasonable costs and expenses, including attorney and expert fees.
In October 2013, defendants filed motions to dismiss the complaint. In October 2014, the Court granted
defendants’ motions and dismissed the case in its entirety against all defendants, with prejudice. In
November 2014, plaintiff filed a notice of appeal in the U.S. Court of Appeals for the Sixth Circuit.
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; 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 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.
Freddie Mac 2015 Form 10-K
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Notes to the Consolidated Financial Statements | Note 15
LITIGATION RELATED TO THE TAYLOR, BEAN & WHITAKER (TBW)
BANKRUPTCY
In August 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 with TBW and the
TBW creditors' committee regarding the TBW bankruptcy in 2011. However, we continue to be involved in
litigation with other parties relating to the TBW bankruptcy, as described below.
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. The Court denied this motion in March 2014, and the underwriters subsequently appealed the
denial of the motion to the U.S. District Court. Numerous additional motions for summary judgment filed
by the parties, including by Freddie Mac, are pending. In February 2015, the Court granted summary
judgment against TBW on its claims. Freddie Mac has moved for a clarification that the Court’s judgment
does not apply to Freddie Mac’s separate claims against Lloyds. In September 2015, TBW advised the
Court that a settlement had been reached. Documentation of the settlement agreement in a form
satisfactory to the parties, including Freddie Mac, is proceeding, and must be submitted to the Court for
approval.
On December 29, 2014, Freddie Mac filed an action in the U.S. District Court for the Southern District of
New York against certain underwriters at Lloyds, London and several other insurance carriers seeking
coverage for $111 million in losses under Freddie Mac’s primary and excess financial institution bonds.
The losses resulted from fraud perpetrated by senior officers and employees of TBW. At present, it is not
possible for us to predict the probable outcome of this lawsuit.
On September 15, 2014, Freddie Mac filed a lawsuit in the Circuit Court of the 11th Judicial Circuit in
Miami-Dade County, Florida against Deloitte & Touche LLP (Deloitte) for negligent misrepresentation /
false information negligently supplied for the guidance of others. The complaint alleges, among other
items, that Deloitte, as TBW’s independent auditor, made and supplied false information during the course
of its professional audits of TBW, as a result of which Freddie Mac incurred damages in excess of $1.3
billion. Freddie Mac seeks damages and interest, as well as costs. In October 2014, Deloitte removed the
case from state court to the U.S. District Court for the Southern District of Florida. In January 2016, the
parties entered into a settlement on mutually agreeable terms and, as a result, filed a stipulation of
dismissal of the action on January 20, 2016. We do not expect the settlement to have a material effect on
our financial results for 2016.
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 depressed LIBOR, a benchmark interest rate indexed to trillions of dollars of financial products,
Freddie Mac 2015 Form 10-K
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Notes to the Consolidated Financial Statements | Note 15
and asserts claims for antitrust violations, breach of contract, tortious interference with contract and fraud.
Freddie Mac filed an amended complaint in July 2013, and a second amended complaint in October
2014. The defendants have moved to dismiss the second amended complaint; Freddie Mac has opposed
this motion. In August 2015, the Court dismissed the portion of our claim related to antitrust violations and
fraud and we filed a motion for reconsideration.
LITIGATION CONCERNING THE PURCHASE AGREEMENT
Since July 2013, a number of lawsuits have been filed against us concerning the August 2012
amendment to the Purchase Agreement, which created the net worth sweep dividend provisions of the
senior preferred stock. The plaintiffs in the lawsuits allege that they are holders of common stock and/or
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.) It is possible that similar lawsuits will be filed in the future.
The lawsuits against us are described below.
Litigation in the U.S. District Court for the District of Columbia
In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations. This
case is the result of the consolidation of three putative class action lawsuits: Cacciapelle and Bareiss vs.
Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and FHFA, filed on
July 29, 2013; American European Insurance Company vs. Federal National Mortgage Association,
Federal Home Loan Mortgage Corporation and FHFA, filed on July 30, 2013; and Marneu Holdings, Co.
vs. FHFA, Treasury, Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation, filed on September 18, 2013. (The Marneu case was also filed as a shareholder derivative
lawsuit.) A consolidated amended complaint was filed in December 2013. In the consolidated amended
complaint, plaintiffs allege, among other items, that the August 2012 amendment to the Purchase
Agreement 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 sought unspecified damages, equitable and injunctive relief, and costs and expenses,
including attorney and expert fees.
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.
Arrowood Indemnity Company vs. Federal National Mortgage Association, Federal Home Loan Mortgage
Corporation, FHFA and Treasury. This case was filed on September 20, 2013. The allegations and
demands made by plaintiffs in this case were generally similar to those made by the plaintiffs in the In re
Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case
described above. Plaintiffs in the Arrowood lawsuit also requested that, if injunctive relief were 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 stated to be approximately $42 million.
Freddie Mac 2015 Form 10-K
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Notes to the Consolidated Financial Statements | Note 15
American European Insurance Company, Cacciapalle and Miller vs. Treasury and FHFA. This case was
filed as a shareholder derivative lawsuit, purportedly on behalf of Freddie Mac as a “nominal” defendant,
on July 30, 2014. The complaint alleged that, through the August 2012 amendment to the Purchase
Agreement, Treasury and FHFA breached their respective fiduciary duties to Freddie Mac, causing
Freddie Mac to suffer damages. The plaintiffs asked that Freddie Mac be awarded compensatory
damages and disgorgement, as well as attorneys’ fees, costs and other expenses.
FHFA, joined by Freddie Mac and Fannie Mae, moved to dismiss the In re Fannie Mae/Freddie Mac
Senior Preferred Stock Purchase Agreement Class Action Litigations case and the other related cases in
January 2014. Treasury filed a motion to dismiss the same day. In September 2014, the District Court
granted the motions and dismissed the plaintiffs’ claims. In October 2014, plaintiffs in the In re Fannie
Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case filed a notice
of appeal of the District Court’s decision. The scope of this appeal includes the American European
Insurance Company shareholder derivative lawsuit. In October 2014, Arrowood filed a notice of appeal of
the District Court’s decision.
Litigation in the U.S. Court of Federal Claims
Reid and Fisher vs. the United States of America and Federal Home Loan Mortgage Corporation. This
case was filed as a derivative lawsuit, purportedly on behalf of Freddie Mac as a “nominal” defendant, on
February 26, 2014. The complaint alleges, among other items, that the net worth sweep dividend
provisions of the senior preferred stock constitute an unlawful taking of private property for public use
without just compensation. The plaintiffs ask that Freddie Mac be awarded just compensation for the U.S.
government’s alleged taking of its property, attorneys’ fees, costs and other expenses.
Rafter, Rattien and Pershing Square Capital Management vs. the United States of America et al. This
case was filed as a shareholder derivative lawsuit, purportedly on behalf of Freddie Mac as a “nominal”
defendant, on August 14, 2014. The complaint alleges that the net worth sweep dividend provisions of the
senior preferred stock constitute an unlawful taking of private property for public use without just
compensation, and the U.S government breached an implied-in-fact contract with Freddie Mac. In
September 2015, plaintiffs filed an amended complaint, which contains one claim involving Freddie Mac.
The amended complaint alleges that Freddie Mac’s charter is a contract with its common stockholders,
and that, through the August 2012 amendment to the Purchase Agreement, the U.S. government
breached the implied covenant of good faith and fair dealing inherent in such contract. Plaintiffs ask that
they be awarded damages or other appropriate relief for the alleged breach of contract as well as
attorneys’ fees, costs and expenses.
Litigation in the U.S. District Court for the District of Delaware
Jacobs and Hindes vs. FHFA and Treasury. This case was filed on August 17, 2015 as a putative class
action lawsuit purportedly on behalf of a class of holders of preferred stock or common stock issued by
Freddie Mac or Fannie Mae. The case was also filed as a shareholder derivative lawsuit, purportedly on
behalf of Freddie Mac and Fannie Mae as “nominal” defendants. The complaint alleges, among other
items, that the August 2012 amendment to the Purchase Agreement violated applicable state law and
constituted a breach of contract, as well as a breach of covenants of good faith and fair dealing. Plaintiffs
seek equitable and injunctive relief (including restitution of the monies paid by Freddie Mac and Fannie
Freddie Mac 2015 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 15
Mae to Treasury under the net worth sweep dividend), compensatory damages, attorneys’ fees, costs and
expenses.
At present, it is not possible for us to predict the probable outcome of the lawsuits discussed above in the
U.S. District Courts for the District of Columbia and the District of Delaware and the U.S. Court of Federal
Claims (including the outcome of any appeal) 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 In re Fannie
Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case, the plaintiffs
have not demanded a stated amount of damages they believe are due, and the Court has not certified a
class.
Stockholder Letters
We have received two letters dated January 19, 2016 addressed to the Board of Directors. Each letter is
purportedly on behalf of the same holder of stock of Freddie Mac. The first letter urges the members of
the Board to take various steps under Virginia law including, among others, causing Freddie Mac to
immediately stop paying dividends to Treasury on account of the senior preferred stock. The second letter
is a demand to inspect various books and records of Freddie Mac, including Board materials and
accounting records. On January 28, 2016, FHFA (as Conservator) informed the purported stockholder’s
representative that the state law principles asserted in the first letter are not applicable to the Board and
that the stockholder has no basis upon which to demand inspection of Freddie Mac’s records.
Freddie Mac 2015 Form 10-K
325
Financial Statements
Notes to the Consolidated Financial Statements | Note 16
NOTE 16: REGULATORY CAPITAL
In October 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 quarterly submissions to FHFA on minimum capital.
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.
Pursuant to regulatory guidance from FHFA, our minimum capital requirement was not affected by
adoption of amendments to the accounting guidance for transfers of financial assets and consolidation of
VIEs effective January 1, 2010. Specifically, upon adoption of these amendments, FHFA directed us, for
purposes of minimum capital, to continue reporting single-family PCs and certain other securitization
products 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.
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.
(in millions)
GAAP net worth
Core capital (deficit)(1)(2)
Less: Minimum capital requirement(1)
Minimum capital surplus (deficit)(1)
December 31, 2015
December 31, 2014
$
$
$
2,940
$
(70,549) $
19,687
(90,236) $
2,651
(71,415)
20,090
(91,505)
(1) Core capital and minimum capital figures for December 31, 2015 are estimates. FHFA is the authoritative source for our
regulatory capital.
Freddie Mac 2015 Form 10-K
326
Financial Statements
Notes to the Consolidated Financial Statements | Note 16
(2) Core capital excludes certain components of GAAP total equity (i.e., AOCI and the liquidation preference of the senior
preferred stock) as these items do not meet the statutory definition of core capital.
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 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, 2015, our assets exceeded our liabilities under GAAP; therefore, no draw is being
requested from Treasury under the Purchase Agreement. As of December 31, 2015, 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.
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.
Freddie Mac 2015 Form 10-K
327
Financial Statements
Notes to the Consolidated Financial Statements | Note 17
NOTE 17: SELECTED FINANCIAL STATEMENT LINE ITEMS
The table below presents the significant components of other income (loss) and other expense on our
consolidated statements of comprehensive income.
(in millions)
Other income (loss):
Non-agency mortgage-related securities settlements(1)
Gains (losses) on loans
Other
Total other income (loss)
Other (expense) income:
Property tax and insurance expense on held-for-sale loans
Other (expense) income
Total other (expense) income
Year Ended December 31,
2015
2014
2013
$
$
$
$
65
$
(2,094)
1,150
(879) $
(1,094) $
(412)
(1,506) $
6,084
$
731
1,229
8,044
$
(62) $
(176)
(238) $
5,501
(336)
1,485
6,650
—
109
109
(1) Settlement agreements primarily related to lawsuits regarding our investments in certain non-agency mortgage-related
securities and were a significant component of other income in 2014 and 2013.
The table below presents the significant components of other assets and other liabilities on our
consolidated balance sheets.
(in millions)
Other assets:
Accounts and other receivables(1)
Current income tax receivable
Guarantee asset
Advances to lenders
All other
Total other assets
Other liabilities:
Servicer liabilities
Guarantee obligation
Accounts payable and accrued expenses
All other
Total other liabilities
December 31, 2015
December 31, 2014
$
$
$
$
3,625
$
26
1,753
910
1,157
7,471
1,191
1,729
1,286
1,040
$
$
5,246
$
3,899
1,048
1,626
—
1,121
7,694
1,847
1,623
803
785
5,058
(1) Primarily consists of servicer receivables and other non-interest receivables.
END OF CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES
Freddie Mac 2015 Form 10-K
328
Quarterly Selected Financial Data
QUARTERLY SELECTED FINANCIAL DATA
(UNAUDITED)
(in millions, except share-related amounts)
1Q
2Q
2015
3Q
4Q
Full-Year
Net interest income
$
3,647
$
3,969
$
3,743
$
3,587
$
Benefit (provision) for credit losses
499
857
528
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 expense
REO operations income (expense)
Temporary Payroll Tax Cut Continuation Act
of 2011 expense
Other non-interest expense
Non-interest expense
Income tax (expense) benefit
Net income (loss)
Total other comprehensive income (loss), net
of taxes
Comprehensive income (loss)
Income (loss) attributable to common
stockholders
Income (loss) per common share – basic and
diluted(1)
$
$
$
$
$
(2,403)
(93)
349
(2,147)
(451)
(75)
(222)
(463)
(1,211)
(264)
524
222
746
$
$
$
(222) $
(0.07) $
3,135
(98)
(496)
2,541
(501)
(52)
(235)
(501)
(1,289)
(1,909)
(4,172)
(54)
385
(3,841)
(465)
(116)
(248)
(270)
(1,099)
194
781
744
(47)
(849)
(152)
(510)
(95)
(262)
(272)
(1,139)
(919)
4,169
$
(475) $
2,158
$
(256) $
3,913
256
0.08
$
$
$
(26) $
(501) $
(475) $
(0.15) $
(517) $
1,641
418
0.13
$
$
$
14,946
2,665
(2,696)
(292)
(611)
(3,599)
(1,927)
(338)
(967)
(1,506)
(4,738)
(2,898)
6,376
(577)
5,799
(23)
(0.01)
Freddie Mac 2015 Form 10-K
329
Quarterly Selected Financial Data
(in millions, except share-related amounts)
1Q
2Q
2014
3Q
4Q
Full-Year
Net interest income
$
3,510
$
3,503
$
3,663
$
3,587
$
14,263
Benefit (provision) for credit losses
(85)
618
(574)
(17)
(58)
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)
Temporary Payroll Tax Cut Continuation Act
of 2011 expense
Other non-interest expense
Non-interest expense
Income tax (expense) benefit
Net income
Total other comprehensive income, net of
taxes
Comprehensive income
Income (loss) attributable to common
stockholders
Income (loss) per common share – basic and
diluted(1)
$
$
$
$
$
(2,351)
(1,926)
(617)
(3,397)
(8,291)
(364)
5,826
3,111
(468)
(59)
(178)
(66)
(771)
(1,745)
4,020
479
4,499
$
$
$
(157)
677
(1,406)
(453)
50
(187)
(90)
(680)
(673)
(166)
1,547
764
(472)
(103)
(198)
(43)
(816)
(956)
1,362
528
1,890
$
$
$
2,081
705
2,786
$
$
$
(251)
1,066
(2,582)
(488)
(84)
(212)
(39)
(823)
62
227
24
251
$
$
$
(938)
9,116
(113)
(1,881)
(196)
(775)
(238)
(3,090)
(3,312)
7,690
1,736
9,426
(479) $
(528) $
(705) $
(624) $
(2,336)
(0.15) $
(0.16) $
(0.22) $
(0.19) $
(0.72)
(1) 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.
Freddie Mac 2015 Form 10-K
330
Controls and Procedures
CONTROLS AND PROCEDURES
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, 2015. 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 (2013 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 to 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 circumstances of conservatorship. 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
Freddie Mac 2015 Form 10-K
331
Controls and Procedures
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 be constrained from communicating to
management. As a result of these considerations, 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, 2015 based on the COSO criteria (2013 Framework).
PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited the
effectiveness of our internal control over financial reporting as of December 31, 2015 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.”
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, 2015. 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, 2015, 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 above, 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.
Freddie Mac 2015 Form 10-K
332
Controls and Procedures
Mitigating Actions Related to the Material
Weakness in Internal Control Over Financial
Reporting
As described above 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, 2015 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 Division of Conservatorship, 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 with us regarding issues associated with the information
contained in those filings. Prior to filing this Form 10-K, FHFA provided us with a written
acknowledgment 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 attend meetings frequently 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, 2015 have been prepared in conformity with GAAP.
Freddie Mac 2015 Form 10-K
333
Controls and Procedures
Changes in Internal Control Over Financial
Reporting During the Quarter Ended
December 31, 2015
We evaluated the changes in our internal control over financial reporting that occurred during the quarter
ended December 31, 2015 and concluded that the following matter has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
We continue to make considerable enhancements to our risk management framework. During 2015, we
continued to enhance and refine our three-lines-of-defense risk management framework. As part of this
effort, during 2015 we moved several key functions within the organization. As we continue to transition to
our enhanced three-lines-of-defense framework, we may experience elevated operational risks, which we
are managing. For more information, see "MD&A — Risk Management — Operational Risk —
Operational Risk Management and Risk Profile."
Freddie Mac 2015 Form 10-K
334
Directors, Corporate Governance, and Executive Officers
Directors
DIRECTORS, CORPORATE
GOVERNANCE, AND EXECUTIVE
OFFICERS
DIRECTORS
ELECTION OF DIRECTORS
As Conservator, FHFA determines the size of the company’s Board and the scope of its authority. At the
start of Conservatorship, FHFA determined that the Board is to have a Non-Executive Chairman, and is to
consist of a minimum of 9 and not more than 13 directors, with the Chief Executive Officer being the only
corporate officer serving as a member of the Board. The company currently has 13 Board members and
expects to maintain the current Board size.
In addition, because FHFA as Conservator has succeeded to the rights of all shareholders of the
company, the Conservator elects the directors. Accordingly, we will not solicit proxies, distribute a proxy
statement to stockholders, or hold an annual meeting of stockholders in 2016. Instead, the Conservator
has elected directors by written consent in lieu of an annual meeting. Annually, the Board identifies
director nominees or candidates for the Conservator to consider for election by written consent. When
there is a vacancy on the Board, the Board may exercise the authority delegated to it by the Conservator
to fill such vacancy, subject to review by the Conservator.
On February 12, 2016, the Conservator executed a written consent, effective as of that date, re-electing
each of the 13 then-current directors as a member of our Board. The individuals elected as directors by
the Conservator are listed below.
Raphael W. Bostic
Carolyn H. Byrd
Launcelot F. Drummond
Thomas M. Goldstein
Richard C. Hartnack
Steven W. Kohlhagen
Donald H. Layton
Christopher S. Lynch
Sara Mathew
Saiyid T. Naqvi
Nicolas P. Retsinas
Eugene B. Shanks, Jr.
Anthony A. Williams
See “Director Biographical Information” for information about each of our re-elected directors. The terms
of those directors will end on the date of the next annual meeting of our stockholders or when the
Conservator next elects directors by written consent, whichever occurs first.
Freddie Mac 2015 Form 10-K
335
Directors, Corporate Governance, and Executive Officers
Directors
DIRECTOR CRITERIA, DIVERSITY, QUALIFICATIONS,
EXPERIENCE, AND TENURE
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. Consistent with our Charter and FHFA’s recent rule regarding the
Responsibilities of Boards of Directors, Corporate Practices and Corporate Governance Matters, which
became effective on December 21, 2015 (the “Corporate Governance Rule”), the factors considered
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. We also 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. 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 Board has adopted a policy (articulated in our Corporate Governance Guidelines, or our
“Guidelines”) with regard to the consideration of diversity in identifying director nominees and candidates.
As articulated in the Guidelines, 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 identification and nomination processes. The Guidelines also
state 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 Guidelines explain 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 has promulgated a rule regarding minority and women inclusion. This rule implements section 1116
of the Reform Act and generally requires us to encourage the consideration of diversity and the inclusion
of women, minorities, and individuals with disabilities in all activities, including considering diversity in the
process of nominating directors.
DIRECTOR BIOGRAPHICAL INFORMATION
The following summarizes each director’s Board service, experience, qualifications, attributes, and/or
skills that led to his or her selection as a director, and provides other biographical information, as of
February 18, 2016:
Freddie Mac 2015 Form 10-K
336
Directors, Corporate Governance, and Executive Officers
Directors
Raphael W. Bostic
Age: 49
Director Since: January 2015
Freddie Mac Committees:
Compensation
Public Directorships:
None
Risk
Mr. Bostic is a leading real estate economist with extensive public policy, academic, and research
expertise.
Experience and Qualifications
• Chair, Department on Governance, Management, and the Policy Process at the Sol Price School of
Public Policy at the University of Southern California (2015-present); Bedrosian Chair in Governance
and Public Enterprise at the Sol Price School of Public Policy at the University of Southern California
(2012-2015)
• Assistant Secretary for Policy Development and Research at HUD (2009-2012)
• Various positions at the University of Southern California, including Professor at the School of Policy,
Planning and Development (2001-2009)
• Trustee of Enterprise Community Partners (2012-present)
• Member of the Board of the Lincoln Institute of Land Policy (2013-present)
• Advisory Board member of the National Community Stabilization Trust (2012-2015)
Carolyn H. Byrd
Age: 67
Director Since: December 2008
Freddie Mac Committees:
Audit, Chair
Compensation
Executive
Public Directorships:
Popeyes Louisiana
Kitchen, Inc.
Regions Financial
Corporation
Ms. Byrd 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.
Experience and Qualifications
• Founder, Chairman, and Chief Executive Officer of GlobalTech Financial, LLC (2000-present)
• President of Coca-Cola Financial Corporation (1997-2000)
• Various domestic and international positions with The Coca-Cola Company, including Chief of Internal
Audits and Director of the Corporate Auditing Department (1977-1997)
• Member of the Board, Audit Committee and Executive Committee and Chair of the Corporate
Governance and Nominating Committee of Popeyes Louisiana Kitchen, Inc. (2001-present)
• Member of the Board and Risk Committee and Chair of the Audit Committee of Regions Financial
Corporation (2010-present)
• Member of the Board and Audit Committee of Circuit City Stores, Inc. (2000-2009)
• Member of the Board and Audit Committee of RARE Hospitality International, Inc. (2000-2007)
Freddie Mac 2015 Form 10-K
337
Directors, Corporate Governance, and Executive Officers
Directors
Lance F. Drummond
Age: 61
Director Since: July 2015
Freddie Mac Committees:
Audit
Public Directorships:
None
Nominating & Governance
Mr. Drummond is a senior business leader with extensive experience specializing in business
transforming strategy development and execution, operations, technology, and process re-engineering.
Experience and Qualifications
• Executive Vice President of Operations and Technology of TD Canada Trust (2011-2014)
• Executive Vice President of Human Resources and Shared Services of Fiserv Inc. (2009-2011)
• Senior Vice President and Supply Chain Executive, Service and Fulfillment Executive for Global
Technology and Operations, and eCommerce and ATM Executive of Bank of America (2002-2008)
• Various positions with Eastman Kodak Company, including Chief Operating Officer and Corporate
Vice President of Kodak Professional Division (1976-2002)
Thomas M. Goldstein
Age: 56
Director Since: October 2014
Freddie Mac Committees:
Audit
Public Directorships:
None
Nominating & Governance
Mr. Goldstein is an executive with extensive financial services, insurance, mortgage banking, and risk
management experience.
Experience and Qualifications
• Senior Vice President and Chief Financial Officer of the Protection Division of Allstate Insurance
Company (2011-2014)
• Consultant to the financial services industry, pursuing community bank acquisitions with The GRG
Group LLC (2009-2011)
• Managing Director and Chief Financial Officer of Madison Dearborn Partners (2007-2009)
• Various executive and finance positions for LaSalle Bank Corporation, including Chairman, Chief
Executive Officer, and President of ABN AMRO Mortgage Group and Chief Financial Officer of
LaSalle Bank Corporation (1998-2007)
• Various positions with Morgan Stanley Dean Witter, including Senior Vice President and Head of Risk
Management and Financial Planning and Analysis of Novus Financial as well as Vice President and
Head of Finance, Risk Management, Model Development, and Investor Relations of SPS Transaction
Services (1988-1998)
• Member of the Board of the FHLB of Chicago (2009-2014)
• Member of the Board of various Allstate subsidiaries (2011-2014)
Freddie Mac 2015 Form 10-K
338
Directors, Corporate Governance, and Executive Officers
Directors
Richard C. Hartnack
Age: 70
Director Since: May 2013
Freddie Mac Committees:
Executive
Public Directorships:
Synchrony Financial
Nominating & Governance,
Chair
Risk
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.
Experience and Qualifications
• Vice Chairman and Head of Consumer and Small Business Banking of U.S. Bancorp (2005-2013)
• Vice Chairman, Director, and Head of the Community Banking Group of Union Bank of California
(1991-2005)
• Various positions with First Chicago Corporation, including Executive Vice President and Head of
Community Banking (1982-1991)
• Various positions with First Interstate Bank of Oregon, including Head of Corporate Banking
(1971-1982)
• Non-Executive Chairman of the Board, Chair of Management Development and Compensation
Committee, and Former Chair of Audit Committee of Synchrony Financial (2014-present)
• Non-Executive Chairman of the Board of Synchrony Bank, a wholly owned subsidiary of Synchrony
Financial (2014-present)
• Member of the Board of U.S. Bank, a wholly owned subsidiary of U.S. Bancorp (2005-2013)
• Member of the Board of the Federal Reserve Bank of San Francisco (2001-2005)
• Member of the Board of MasterCard International (U.S. Region) (1994-2005)
• Member of the Board of UnionBanCal Corporation (1991-2005)
• Chairman of the California Bankers Association (2002-2003)
• Chairman of the Bank Administration Institute (1998-1999)
Steven W. Kohlhagen
Age: 68
Director Since: February 2013
Freddie Mac Committees:
Compensation
Public Directorships:
AMETEK, Inc.
Executive
Risk, Chair
GulfMark Offshore, Inc.
Mr. Kohlhagen 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.
Experience and Qualifications
• Various positions with First Union National Bank (predecessor to Wachovia National Bank and Wells
Fargo), last serving as Managing Director of the Fixed Income Division (1992-2003)
• Various positions with AIG Financial Products (1990-1992); Stamford Capital Group (1987-1990);
Bankers Trust Corporation (1985-1987); and Lehman Brothers, Inc. (1983-1985)
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Directors, Corporate Governance, and Executive Officers
Directors
• Consulting work for the Organization for Economic Cooperation and Development (1980-1981),
Treasury (1976-1977), and the Federal Reserve Board (1976)
• Senior Staff Economist for the Council of Economic Advisors, White House Staff (1978-1979)
• Professor of International Economics and Finance at the University of California, Berkeley
(1973-1983)
• Member of the Board and Audit Committee of AMETEK, Inc. (2006-present)
• Member of the Board, Audit Committee, and Compensation Committee of GulfMark Offshore, Inc.
(2013-present)
• Member of the Board and Compensation Committee and Chair of the Governance and Nominating
Committee of Reval, Inc. (2007-present)
• Member of the Board and Audit Committee of Abtech Holdings, Inc. (2013-2014)
• Advisory Board member of the Stanford Institute for Economic Policy Research (2001-present)
• Advisory Board member of the Roper St. Francis Cancer Center (2011-present)
• Member of the Board of IQ Mutual Funds, a family of Merrill Lynch registered, closed end investment
companies (2005-2010)
Donald H. Layton
Age: 65
Director Since: May 2012
Freddie Mac Committees:
Executive
Public Directorships:
None
Mr. Layton is an experienced financial institution executive and leader of finance and investment
organizations. Mr. Layton provides valuable insight to the Board as a result of his leadership of Freddie
Mac and his knowledge of our business and industry, as well as his extensive financial services industry
experience.
Experience and Qualifications
• Chief Executive Officer of Freddie Mac (2012-present)
• Chairman of E*TRADE Financial (2007-2009); Chief Executive Officer (2008-2009)
• Senior Advisor to the Securities Industry and Financial Markets Association (2006-2008)
• Various positions with JP Morgan Chase and its predecessors, beginning as a trainee and rising to
Vice Chairman and a member of the company’s three-person Office of the Chairman (1975-2004);
positions included Head of Chase Financial Services (2002-2004); Co-Chief Executive Officer of J.P.
Morgan, the investment bank of the company (2000-2002); Head of Treasury and Securities Services
(1999-2004); and Head of Chase Manhattan’s worldwide capital markets and trading activities,
including foreign exchange, risk management products, emerging markets, fixed income, and the
bank’s investment portfolio and funding department (1996 to 2000; prior to Chase’s merger with J.P.
Morgan)
• Chairman Emeritus of the Partnership for the Homeless (2015-present); Chairman of the Board
(2005-2015)
• Member of the Board of Assured Guaranty Ltd. (2006-2012)
• Member of the Board of American International Group (2010-2012)
Freddie Mac 2015 Form 10-K
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Directors, Corporate Governance, and Executive Officers
Directors
Christopher S. Lynch
Age: 58
Director Since: December 2008
Freddie Mac Committees:
Executive, Chair
Public Directorships:
American International
Group Inc.
Mr. Lynch is an experienced senior accounting executive who was responsible for one of the Big Four’s
Financial Services practice and 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 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.
Experience and Qualifications
•
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 (2007-present)
• Various positions with KPMG LLP, including National Partner in Charge - Financial Services, the U.S.
firm’s largest industry division; Chairman of KPMG’s Americas Financial Services Leadership team;
Member of the Global Financial Services Leadership and the U.S. Industries Leadership teams; Head
of the Banking & Finance practice; and Department of Professional Practice partner (1979-2007)
• Practice Fellow at the FASB (1987-1989)
• Non-Executive Chairman of the Board of Freddie Mac (2011-present)
• Member of the Board and Risk and Capital Committee and current member and former Chair of the
Audit Committee of American International Group (2009-present)
• Advisory Board member of the Stanford Institute for Economic Policy Research (2014-present)
• Member of the National Audit Committee Chair Advisory Council of the National Association of
Corporate Directors (2014-present)
Sara Mathew
Age: 60
Director Since: December 2013
Freddie Mac Committees:
Audit
Public Directorships:
Avon Products, Inc.
Nominating & Governance
Campbell Soup Company
Shire plc
Ms. Mathew 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.
Experience and Qualifications
• Various positions with Dun & Bradstreet Corporation (2001-2013), including Chairman, President, and
Chief Executive Officer (2010-2013) and President and Chief Operating Officer (2007-2010)
• Various finance and management positions with The Procter & Gamble Company, including Vice
President of Finance for Australia, Asia, and India (1983-2001)
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Directors, Corporate Governance, and Executive Officers
Directors
• Member of the Board, Finance Committee, and Nominating and Corporate Governance Committee of
Avon Products, Inc. (2014-present)
• Member of the Board and Governance Committee and Chair of the Audit Committee of Campbell
Soup Company (2005-present)
• Member of the Board, Audit Committee and Remuneration Committee of Shire plc (2015-present)
• Member of the Board and Audit Committee of Dun & Bradstreet Corporation (2008-2013)
• Member of the International Advisory Council of Zurich Financial Services Group (2012-present)
Saiyid T. Naqvi
Age: 66
Director Since: August 2013
Freddie Mac Committees:
Compensation
Public Directorships:
None
Risk
Mr. Naqvi 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.
Experience and Qualifications
• President and Chief Executive Officer of PNC Mortgage, a division of PNC Bank, National
Association, which is a subsidiary of PNC Financial Services Group (2009-2013)
• President of Harley-Davidson Financial Services, Inc. (2007-2009)
• Chief Executive Officer of DeepGreen Financial, Inc. (2005-2006)
• President and Chief Financial Officer of Setara Corporation (2002-2005)
• President and Chief Executive Officer of PNC Mortgage Corporation of America (1995-2001)
• Member of the Board of Genworth Financial (2005-2009)
• Member of the Board of Hanover Mortgage Capital Holdings, Inc. (1998-2006)
Nicolas P. Retsinas
Age: 69
Director Since: June 2007
Freddie Mac Committees:
Audit
Public Directorships:
None
Compensation, Chair
Executive
Mr. Retsinas 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.
Experience and Qualifications
• Senior Lecturer in Real Estate at the Harvard Business School (2006-2015)
•
Lecturer in Housing Studies at the Harvard Graduate School of Design (1998-2015)
• Assistant Secretary for Housing - Federal Housing Commissioner at HUD (1993-1998)
• Director of the Office of Thrift Supervision (1996-1997)
• Member of the Board of the Center for Responsible Lending (2006-present)
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Directors, Corporate Governance, and Executive Officers
Directors
• Chair of Community Development Trust (2014-present); Member of the Board (1999-present)
• Director Emeritus of Harvard University’s Joint Center for Housing Studies (2010-present); Director
(1998-2010)
• Chair of Providence Housing Authority (2013-present)
• Trustee of Enterprise Community Partners (1999-2013)
• Member of the Board of the Federal Deposit Insurance Corporation (1996-1997)
• Member of the Board of the Federal Housing Finance Board (1993-1998)
• Trustee of the National Housing Endowment (1998-2012)
• Member of the Board of the Neighborhood Reinvestment Corporation (1993-1998)
• Chair of Rhode Island Housing and Mortgage Finance Corporation (2015-present)
Eugene B. Shanks, Jr.
Age: 68
Director Since: December 2008
Freddie Mac Committees:
Audit
Public Directorships:
ACE Limited
Compensation
Mr. Shanks 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.
Experience and Qualifications
• Senior consultant to Trinsum Group, Incorporated (2007-2008)
• Founder, President, and Chief Executive Officer of NetRisk, Inc. (1997-2002)
• Various positions with Bankers Trust New York Corporation, including Head of Global Markets and
President and Director (1973-1978 and 1980-1995)
• Treasurer of Commerce Union Bank in Nashville, Tennessee (1978-1980)
• Member of the Board and Risk and Finance Committee of ACE Limited (2011-present)
• Advisory Board member of the Stanford Institute for Economic Policy Research (2010-present)
• Senior Advisor of Bain and Company (2008-2011)
• Founding Director of The Posse Foundation (1992-present)
• Trustee Emeritus of Vanderbilt University (2015-present), Trustee (1992-2015)
Anthony A. Williams
Age: 64
Director Since: December 2008
Freddie Mac Committees:
Nominating & Governance
Public Directorships:
None
Risk
Mr. Williams 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.
Experience and Qualifications
• Chief Executive Officer and Executive Director of Federal City Council (2012-present)
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Directors, Corporate Governance, and Executive Officers
Directors
• Senior Advisor at Dentons (2015-present)
• Senior Advisor at McKenna, Long & Aldridge, LLP (2013-2015)
• Senior Fellow (2012) and Executive Director of Global Government Practice (2010-2012) of the
Corporate Executive Board Company
• Bloomberg Lecturer in Public Management at Harvard’s Kennedy School of Government (2009-2012)
• Senior Advisor, Intergovernmental Practice at Arent Fox LLP (2009-2010)
• CEO of Primum Public Realty Trust (2007-2008)
• Mayor of Washington, DC (1999-2007)
• Chief Financial Officer of Washington, DC (1995-1998)
• President of the National League of Cities (2005)
• Vice-Chair of the Metropolitan Washington Council of Governments (2005-2006)
• Chief Financial Officer for the U.S. Department of Agriculture (1993-1995)
• Deputy State Comptroller of Connecticut (1991-1993)
• Executive Director of the Community Development Agency of St. Louis, Missouri (1989-1991)
• Assistant Director of the Boston Redevelopment Agency and Head of the Department of
Neighborhood Housing and Development (1988-1989)
• Member of the Board of the Bank of Georgetown (2012-present)
• Member of the Board and Audit Committee of Calvert Sage Fund (2010-present)
• Member of the Board and Audit Committee of Weston Solutions (2008-2015)
• Member of the Board and Audit Committee of Meruelo Maddox Properties, Inc. (2007-2009)
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Directors, Corporate Governance, and Executive Officers
Corporate Governance
CORPORATE GOVERNANCE
OUR CORPORATE GOVERNANCE PRACTICES
The company is committed to best practices in corporate governance. The Board continuously reviews
our governance practices, assesses the regulatory and legislative environment, and adopts governance
practices that are in the best interests of the company.
Our Board has adopted the company's Corporate Governance Guidelines. Our Guidelines are available
on our website at www.freddiemac.com/governance/pdf/gov_guidelines.pdf. The Guidelines are reviewed
annually by our Board and were last updated in June 2015. These Guidelines establish corporate
governance practices, and include: qualifications for directors, a limitation on the number of boards on
which a director may serve, term limits, director orientation and continuing education, and a requirement
that the Board and each of its committees perform an annual self-evaluation.
We continuously review our practices to ensure effective collaboration of management and the Board. We
have instituted the following specific corporate governance practices:
Our Board has an independent Non-Executive Chairman, whose responsibilities include
presiding over meetings of the Board and executive sessions of the non-employee or
independent directors. Mr. Lynch has served as Non-Executive Chairman since December 2011.
Of the Board’s 13 directors, 12 are independent, including the Non-Executive Chairman.
Our directors are re-elected annually by FHFA.
Each of the Audit, Compensation, Nominating and Governance, and Risk Committees consists
entirely of independent directors.
Each of the committees operates pursuant to a written charter that has been approved by the
Board (these charters are available at www.freddiemac.com/governance/bd_committees.html).
Independent directors meet regularly without management.
The Board and each committee conduct an annual self-evaluation.
New directors receive a full orientation regarding the company and issues specific to the
committees to which they have been appointed.
All directors are provided with access to, and are encouraged to utilize, third party continuing
education.
Management provides the Board and committees with in-depth technical briefings on substantive
issues affecting the company.
The Board reviews management talent and succession at least annually.
DIRECTOR INDEPENDENCE AND RELEVANT
CONSIDERATIONS
Our non-employee Board members evaluated the independence, as defined in Sections 4 and 5 of our
Guidelines and in Section 303A.02 of the NYSE Listed Company Manual, of each of our current non-
employee Board members, all of whom also served on our Board for all or part of 2015. Our non-
employee Board members determined that all current members of our Board (other than Mr. Layton, our
CEO) are independent. Mr. Layton is not considered an independent director because he is our CEO.
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Corporate Governance
Our non-employee Board members concluded that all current members of our Audit Committee,
Compensation Committee, and Nominating and Governance Committee are independent within the
meaning of Sections 4 and 5 of our Guidelines and Section 303A.02 of the NYSE Listed Company
Manual. Our Board also determined that: i) all current members of our Audit Committee are independent
within the meaning of Exchange Act Rule 10A-3 and Section 303A.06 of the NYSE Listed Company
Manual; and ii) all current members of our Compensation Committee are independent within the meaning
of Exchange Act Rule 10C-1 and Section 303A.02(a)(ii) of the NYSE Listed Company Manual.
In determining the independence of each Board member, our non-employee Board members 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 in aggregate, 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 Business Partners. During 2015 and currently, Ms. Byrd and
Messrs. Bostic, Lynch, Retsinas, Shanks, and Williams have served 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, our non-employee Board members
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 Payments. During 2015
and currently, Mr. Bostic has served as a board member of two charitable organizations that received
payments from us. Under the Guidelines, no specific independence determination is required with
respect to these payments because they do not exceed the greater of $1 million or 2% of the
organization’s consolidated gross revenues for each of the last three fiscal years. During 2015 and
currently, Mr. Retsinas has served as Director Emeritus of a charitable organization that received
payments from us. Because the total annual amount paid to the charitable organization did not
exceed the greater of $1 million or 2% of the organization’s consolidated gross revenues for each of
the last three fiscal years, no specific independence determination with respect to these payments is
required under our Guidelines; moreover, since Mr. Retsinas is neither a board member nor a trustee
of the charitable organization, the payments would not require an independence determination in any
event. The non-employee members of the Board considered the payments and the nature of the
organizations and concluded that the relationships with the charitable organizations do not constitute
a material relationship between Mr. Bostic or Mr. Retsinas and us that would impair their
independence as our directors.
• 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
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Corporate Governance
Committee Chair, 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, our non-
employee Board members 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. Our non-employee
Board members 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, our non-employee Board 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 Risk Committee), and that relate directly to PNC. The Audit Committee Chair, 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, our non-employee
Board members 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. Our non-employee Board
members 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, our non-employee Board 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.
BOARD AND COMMITTEE INFORMATION
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, while reserving certain powers of approval to itself. The Conservator has
instructed 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 “MD&A — Conservatorship and Related Matters — Treasury Agreements and Senior
Preferred Stock” and Note 2);
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Corporate Governance
• Redemptions or repurchases of subordinated debt, except as necessary to comply with the debt 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;
• 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);
• Servicing transfers of 25,000 loans or more;
• 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; and
• Establishing the annual operating budget.
Other than for large servicing transfers, FHFA requires prior Board approval for anything requiring
Conservator approval. In addition, FHFA requires us to provide FHFA with timely notice of any significant
changes in business processes or operations, including changes to single-family or multifamily credit
policies and loss mitigation strategies, other than changes made at the direction or request of FHFA.
FHFA will then determine whether any such items require Conservator and/or Board review or approval.
BOARD COMMITTEES
The Board has five standing committees: Audit, Compensation, Executive, Nominating and Governance,
and Risk. All standing committees, other than the Executive Committee, meet regularly and are chaired
by, and consist entirely of, independent directors. The Committees perform essential functions on behalf
of the Board. The Committee Chairs review and approve agendas for all meetings of their respective
Committees. Charters for the standing committees have been adopted by the Board and approved by the
Conservator, and describe each committee’s responsibilities. These charters are available on our website
at www.freddiemac.com/governance/bd_committees.html. The membership of each committee as of
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Corporate Governance
February 18, 2016 is set forth below, together with a description of the primary responsibilities of each
committee.
Audit Committee
Chair:
Carolyn H. Byrd
Members:
Lance F. Drummond
Thomas M. Goldstein
Sara Mathew
Nicolas P. Retsinas
Eugene B. Shanks, Jr.
The Audit Committee provides oversight of the company’s accounting and financial reporting and
disclosure processes, the adequacy of the systems of disclosure and internal control established by
management, and the audit of the company’s financial statements. Among other things, the Audit
Committee: (1) appoints the independent auditor and evaluates its independence and performance; (2)
reviews the audit plans for and results of the independent audit and internal audits; and (3) reviews
reports related to processes established by management to provide compliance with legal and regulatory
requirements. The Audit Committee’s activities during 2015 with respect to the oversight of the
independent auditor are described in more detail in “Principal Accounting Fees and Services — Approval
of Independent Auditor Services and Fees.” The Audit Committee also periodically reviews the company’s
guidelines and policies governing the processes for assessing and managing the company’s risks and
generally reviews the company’s major financial risk exposures and the steps taken to monitor and
control such exposures. The Committee also approves all decisions regarding the appointment or
removal of the General Auditor and the CCO. The General Auditor and the CCO report independently to
the Committee, in addition to the CEO.
Our Audit Committee satisfies the definition of “audit committee” in Exchange Act Section 3(a)(58)(A) and
the requirements of Exchange Act Rule 10A-3. Although our stock has been delisted from the NYSE,
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
Corporate Governance Rule. Our Audit Committee satisfies the “audit committee” requirements in
Sections 303A.06 and 303A.07 of the NYSE Listed Company Manual. The Board has determined that all
members of our Audit Committee are independent and that Ms. Byrd, a member of the Audit Committee
since December 2008 and its current chair, meets the definition of an “audit committee financial expert”
under SEC regulations.
In 2015, the Audit Committee met separately 9 times and jointly with the Risk Committee 2 times.
Executive Committee
Chair:
Christopher S. Lynch
Members:
Carolyn H. Byrd
Richard C. Hartnack
Steven W. Kohlhagen
Donald H. Layton
Nicolas P. Retsinas
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Corporate Governance
The Executive Committee, which, with the exception of our CEO, Mr. Layton, consists of independent
directors, is authorized to exercise the corporate powers of the Board between meetings of the Board,
except for those powers reserved to the Board by our Bylaws or otherwise.
The Executive Committee did not meet in 2015.
Compensation
Committee
Chair:
Members:
Nicolas P. Retsinas
Raphael W. Bostic
Carolyn H. Byrd
Steven W. Kohlhagen
Saiyid T. Naqvi
Eugene B. Shanks, Jr.
The Compensation Committee oversees the company’s compensation and benefits policies and
programs. The company’s processes for consideration and determination of executive compensation, and
the role of the Compensation Committee in those processes, are further described in “Executive
Compensation — CD&A.” The Compensation Committee Report is included in “Executive Compensation
— CD&A — Compensation Committee Report.”
The Compensation Committee consists entirely of independent directors. None of the members of the
Compensation Committee during fiscal year 2015 were officers or employees of Freddie Mac or had any
relationship with us that would be required to be disclosed by us under Item 407(e)(4) of Regulation S-K.
The Compensation Committee met 7 times in 2015.
Nominating and
Governance Committee
Chair:
Members:
Richard C. Hartnack
Lance F. Drummond
Thomas M. Goldstein
Sara Mathew
Anthony A. Williams
The Nominating and Governance Committee, which consists entirely of independent directors, oversees
the company’s corporate governance, including reviewing the company’s Bylaws and the Guidelines. The
Committee also assists the Board and its committees in conducting annual self-evaluations and
identifying qualified individuals to become members of the Board. The Committee also reviews Board
member independence and qualifications, and recommends membership of the Board committees.
The Nominating and Governance Committee met 7 times in 2015.
Risk Committee
Chair:
Steven W. Kohlhagen
Members:
Raphael W. Bostic
Richard C. Hartnack
Saiyid T. Naqvi
Anthony A. Williams
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The Risk Committee, which consists entirely of independent directors, oversees the company’s risk
management framework, including credit risk, market risk, and operational risk. The Committee reviews
and approves the company’s ERM policy and reviews significant: (i) enterprise risk exposures; (ii)
management risk strategies; (iii) results of risk management reviews and assessments; and (iv) emerging
risks, among other responsibilities. The Committee also approves all decisions regarding the appointment
or removal of the CERO, and the CERO reports independently to the Committee, in addition to the CEO.
In 2015, the Risk Committee met separately 6 times, and jointly with the Audit Committee 2 times.
BOARD LEADERSHIP STRUCTURE
The positions of CEO and Non-Executive Chairman of the Board are held by different individuals. This
leadership structure was established by the Conservator. FHFA’s Corporate Governance Rule requires
that the position of chairperson of the Board be filled by an independent director as defined under the
rules of the NYSE. See “MD&A — Risk Management — Overview” for more information on the Board’s
role in risk oversight.
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.”
COMMUNICATIONS WITH DIRECTORS
Interested parties wishing to communicate any concerns or questions about Freddie Mac to the Board or
its directors may do so by U.S. mail, addressed to the Corporate Secretary, Freddie Mac, Mail Stop 200,
8200 Jones Branch Drive, McLean, VA 22102-3110. Communications may be directed to the Non-
Executive Chairman, to any other director or directors, or to groups of directors, such as the independent
or non-employee directors.
DIRECTOR COMPENSATION
Board members receive compensation in the form of cash retainers only, paid on a quarterly basis. 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.
Our directors are compensated entirely in cash because the Purchase Agreement prohibits us from
issuing any shares of our equity securities without the prior written consent of Treasury. See “Executive
Compensation —CD&A — Overview of Executive Management Compensation Program.” Unlike
compensation for our executives, 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 as inconsistent with the oversight role of directors.
Freddie Mac 2015 Form 10-K
351
Directors, Corporate Governance, and Executive Officers
Corporate Governance
2015 NON-EMPLOYEE DIRECTOR COMPENSATION LEVELS
Board compensation levels during conservatorship are shown in the table below.
Board Service (Cash)
Annual Retainer for Non-Executive Chairman
Annual Retainer for Directors (other than the Non-Executive Chairman)
Committee Service (Cash)
Annual Retainer for Audit Committee Chair
Annual Retainer for Risk Committee Chair
Annual Retainer for Committee Chairs (other than Audit or Risk)
Annual Retainer for Audit Committee Members
2015 DIRECTOR COMPENSATION
$
$
290,000
160,000
25,000
15,000
10,000
10,000
The following table summarizes the 2015 compensation provided to all persons who served as non-
employee directors during 2015.
Name
C. Lynch(1)
R. Bostic(2)
C. Byrd
L. Drummond(2)
T. Goldstein
R. Hartnack
S. Kohlhagen
S. Mathew
S. Naqvi
N. Retsinas
E. Shanks, Jr.(1)
A. Williams(1)
Fees Earned or
Paid in Cash(3)
Total
$
292,167
$
157,778
185,000
79,375
170,000
170,000
175,000
170,000
160,000
160,000
177,833
172,167
292,167
157,778
185,000
79,375
170,000
170,000
175,000
170,000
160,000
160,000
177,833
172,167
(1)
In addition to the annual Board service and appropriate Committee Chair retainers, the amount represents partial annual
compensation for the period served on the Audit Committee during 2015. In March 2015, Mr. Lynch and Mr. Williams left, and
Mr. Shanks joined, the Audit Committee.
(2) The amount represents partial annual compensation for the period served during 2015. Mr. Bostic joined the Board in January
2015. Mr. Drummond joined the Board in July 2015. The amount of Mr. Drummond's compensation includes partial annual
compensation for the period he served on the Audit Committee during 2015.
(3) Because we do not have pension or retirement plans for our non-employee directors and all compensation is paid in cash,
“Change in Pension Value and Non-qualified Deferred Compensation Earnings” and “All Other Compensation” columns have
been omitted.
Indemnification. We have 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 “Executive Compensation — CD&A — Written Agreements Relating to NEO Employment —
Indemnification Agreements.”
Freddie Mac 2015 Form 10-K
352
Directors, Corporate Governance, and Executive Officers
Executive Officers
EXECUTIVE OFFICERS
As of February 18, 2016, our executive officers are as follows:
Donald H. Layton
Age: 65
Year of Affiliation: 2012
Position:
Chief Executive Officer
Mr. Layton has served as our CEO and a member of our Board since May 2012. See “Director
Biographical Information” for a brief biographical description for Mr. Layton.
James G. Mackey
Age: 48
Year of Affiliation: 2013
Position:
Executive Vice President - Chief Financial Officer
Mr. Mackey has served as our EVP - Chief Financial Officer since November 2013. He 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, he 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
Age: 50
Year of Affiliation: 1999
Position:
Executive Vice President - Multifamily
Mr. Brickman has served as our EVP - Multifamily since February 2014 and prior to that served as our
SVP - Multifamily since 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 SVP - Multifamily Commercial
Mortgage-Backed Security Capital Markets, and from March 2004 to 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 our 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.
Anil D. Hinduja
Age: 52
Year of Affiliation: 2015
Position:
Executive Vice President - Chief Enterprise Risk
Officer
Mr. Hinduja has served as our EVP - Chief Enterprise Risk Officer since July 2015. In this role, he
provides overall direction and leadership for the Risk function and is responsible for leading an integrated
risk management framework for all aspects of risk across the entire company. He joined Freddie Mac
from Barclays PLC, where he served in increasingly broader risk management roles beginning in 2009,
Freddie Mac 2015 Form 10-K
353
Directors, Corporate Governance, and Executive Officers
Executive Officers
including Chief Risk Officer for Barclays Africa Group Limited, Group Credit Director for Retail Credit Risk,
and Chief Risk Officer for Barclays’ retail bank in the U.K. Prior to joining Barclays, Mr. Hinduja spent 19
years at Citigroup in diverse roles with increasing responsibility across finance, operations, sales and
distribution, business, and risk management in global consumer businesses. In risk, he was Director for
Global Consumer Credit Risk and then Chief Risk Officer for the Consumer Lending Group, where he was
responsible for managing risk in the mortgage, auto, and student loan businesses. His tenure at Citigroup
culminated in his term as President and CEO of Citi Home Equity.
Michael T. Hutchins
Age: 60
Year of Affiliation: 2013
Position:
Executive Vice President - Investments and
Capital Markets
Mr. Hutchins has served as our EVP - Investments and Capital Markets since January 2015 and prior to
that served as SVP - Investments and Capital Markets from July 2013. Previously, Mr. Hutchins was Co-
Founder and Chief Executive Officer of PrinceRidge, a financial services firm. Prior to PrinceRidge, he
was with UBS from 1996 to 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 to
1996, where he held a number of management positions, including Co-Head of Fixed Income Capital
Markets.
David B. Lowman
Age: 58
Year of Affiliation: 2013
Position:
Executive Vice President - Single-Family Business
Mr. Lowman has served as our EVP - Single-Family Business since May 2013. In addition, since
November 2014 he has served as a member of the Board of Managers of Common Securitization
Solutions, LLC. 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.
Robert Lux
Age: 52
Year of Affiliation: 2010
Position:
Executive Vice President - Chief Information Officer
Mr. Lux has served as our EVP - Chief Information Officer since January 2015 and prior to that served as
SVP - Chief Information Officer from 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.
Freddie Mac 2015 Form 10-K
354
Directors, Corporate Governance, and Executive Officers
Executive Officers
William H. McDavid
Age: 69
Year of Affiliation: 2012
Position:
Executive Vice President - General Counsel &
Corporate Secretary
Mr. McDavid has served as our EVP - General Counsel & Corporate Secretary since July 2012.
Previously, he 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 Chemical Banking Corporation from 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
Age: 57
Year of Affiliation: 2003
Position:
Executive Vice President - Chief Administrative
Officer
Mr. Weiss has served as our EVP - Chief Administrative Officer since August 2010. In this role, he
manages the services and operations of Freddie Mac’s External Relations, including Government and
Industry Relations; Public Relations and Corporate Marketing; Internal Communications; Conservatorship
and Corporate Strategic Initiatives; Enterprise Project Management; Making Home Affordable -
Compliance; Economic and Housing Research; Corporate Services; and Strategic Sourcing and
Procurement organizations. In addition, since November 2014 he has served as a member of the Board
of Managers of Common Securitization Solutions, LLC., and since May 2015 has served as its Chairman.
He also served as our Chief Compliance Officer from August 2010 until June 2011. Prior to August 2010,
Mr. Weiss served as our SVP 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.
CODES OF CONDUCT
We have separate codes of conduct for our employees and Board members. The employee code also
serves as the code of ethics for senior executives and financial officers required by the Sarbanes-Oxley
Act of 2002 and SEC regulations. All employees, including senior executives and financial officers, are
required to sign an annual acknowledgment that they have read the employee code and agree to abide
by it, and will report suspected deviations from the employee code. When joining our Board, our directors
acknowledge that they have reviewed and understand the director code and agree to be bound by its
provisions, and each executes a related confirmation annually.
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.
Freddie Mac 2015 Form 10-K
355
Executive Compensation
Compensation Discussion and Analysis
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
This section contains information regarding our compensation programs and policies (all of which have
been approved by FHFA) and the compensation of the following individuals who we determined to be our
Named Executive Officers, or NEOs, for the year ended December 31, 2015.
Donald H. Layton
James G. Mackey
Named Executive Officers
Chief Executive Officer
Executive Vice President - Chief Financial Officer
Michael T. Hutchins
Executive Vice President - Investments and Capital Markets
David B. Lowman
Executive Vice President - Single-Family Business
William H. McDavid
Executive Vice President - General Counsel & Corporate Secretary
For information on our primary business objectives and the progress we made during 2015 toward
accomplishing those objectives, see “Introduction — Executive Summary.”
OVERVIEW OF EXECUTIVE MANAGEMENT COMPENSATION
PROGRAM
The 2015 Executive Management Compensation Program, or 2015 EMCP, balances our need to retain
and attract executive talent with promoting the conservatorship objectives included in FHFA’s
Conservatorship Scorecard, as well as goals separately established by management related to the
commercial aspects of our business, which are included in our Corporate Scorecard. All compensation
under the 2015 EMCP is delivered in cash because the Purchase Agreement does not permit us to
provide equity-based compensation to our employees unless approved by Treasury. Compensation in
2015 for each NEO, other than as noted for Mr. Layton, was governed by the 2015 EMCP.
The only change between the 2015 EMCP and the 2014 EMCP that potentially affects the compensation
of our NEOs is the definition of retirement eligibility. For purposes of the 2015 EMCP, retirement is defined
as voluntarily terminating employment after attaining or exceeding 62 years of age, regardless of length of
service, or after attaining or exceeding 55 years of age with 10 or more years of service. Previously,
retirement eligibility was achieved only upon attaining age 65, without regard to length of service.
Additional information about the 2015 EMCP is provided below and in our Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 2015 filed on August 4, 2015.
Freddie Mac 2015 Form 10-K
356
Executive Compensation
Compensation Discussion and Analysis
ELEMENTS OF TARGET TOTAL DIRECT COMPENSATION
Compensation under the 2015 EMCP consists of the following elements:
Deferred Salary
Base Salary
Fixed Deferred
Salary
At-Risk Deferred Salary
Conservatorship
Scorecard
Corporate Scorecard/
Individual
Cannot exceed $500,000
without FHFA approval
To encourage executive
retention
To encourage achievement of conservatorship, corporate,
and individual performance goals
Earned and paid bi-weekly
Equal to total Deferred
Salary less the At-Risk
portion
Subject to reduction based
on Conservatorship
Scorecard performance
Subject to reduction based
on performance against both
the Corporate Scorecard
and individual objectives
The amount earned in each quarter is paid on the last pay date of the corresponding quarter in
the following year, referred to as the Approved Payment Schedule
Interest accrues on Deferred Salary at one-half of the one-year Treasury Bill rate in effect on
the last business day immediately preceding the year in which the Deferred Salary is earned
and is paid at the same time as the Deferred Salary to which it relates.
The objectives against which 2015 corporate performance was measured, together with the assessment
of actual performance against those objectives, are described in “— Determination of 2015 At-Risk
Deferred Salary — At-Risk Deferred Salary Based on Conservatorship Scorecard Performance” and “—
Determination of 2015 At-Risk Deferred Salary — At-Risk Deferred Salary Based on Corporate Scorecard
Goals and Individual Performance.” These performance measures were chosen because they reflected
our 2015 priorities during conservatorship.
See “— Other Executive Compensation Considerations — Effect of Termination of Employment” for
information on the effect of a termination of employment, including the timing and payment of any unpaid
portion of Deferred Salary and related interest.
EXECUTIVE COMPENSATION BEST PRACTICES
What We Do
Clawback provisions with a significant
portion of compensation subject to
recapture and/or forfeiture
Use of an independent compensation
consultant by the Board’s Compensation
Committee
Annual compensation risk review
Provide a single executive perquisite,
reimbursement of tax, estate, and/or
personal financial planning expenses (up
to $4,500 annually, with an additional
$2,500 in the first year of use)
Evaluation of company performance
against multiple measures, including non-
financial measures
What We Don't Do
No tax “gross-ups”
No agreements that guarantee a specific
amount of compensation for a specified
term of employment
No golden parachute payments or other
similar change in control provisions
No hedging or pledging of company
securities
Freddie Mac 2015 Form 10-K
357
Executive Compensation
Compensation Discussion and Analysis
CHIEF EXECUTIVE OFFICER COMPENSATION
Prior to July 1, 2015, Mr. Layton’s compensation consisted solely of an annual Base Salary of $600,000, a
level established by FHFA. The Board of Directors received a communication from the Director of FHFA
on CEO compensation, authorizing the company to submit a proposal for FHFA review and consideration
on compensation for the position of CEO to address the Board’s obligation, and FHFA’s conservatorship
and supervisory objectives, of providing for: CEO retention; effective succession planning for the CEO
position; and continuity, efficiency, and stability of operations. For additional information, see our Form 10-
Q filed on May 5, 2015. In response to our subsequent proposal to FHFA, on June 29, 2015, FHFA
approved Mr. Layton’s participation in the 2015 EMCP, effective July 1, 2015. The components of Mr.
Layton’s Target TDC under the 2015 EMCP are described in “— Determination of 2015 Target TDC for
NEOs — 2015 Target TDC.” In order to participate in the 2015 EMCP, Mr. Layton entered into a
Recapture and Forfeiture Agreement as described in “— Written Agreements Relating to NEO
Employment — Recapture and Forfeiture Agreement.”
On December 1, 2015, FHFA directed Freddie Mac, pursuant to the Equity in Government Compensation
Act of 2015, to suspend Mr. Layton’s compensation package that became effective July 1, 2015 and
replace it with the compensation package that was previously in place. This change was effective as of
November 25, 2015.
Mr. Layton was previously, and continues to be, eligible to participate in all employee benefit plans offered
to Freddie Mac’s other senior executives pursuant to the terms of those plans.
DETERMINATION OF 2015 TARGET TDC FOR NEOs
ROLE OF COMPENSATION CONSULTANT
As part of the annual process to determine the Target TDC for each of the NEOs, 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. During 2015, the Compensation
Committee reviewed Meridian’s independence based on the factors outlined in Exchange Act Rule 10C-1
(b)(4) and determined that Meridian continues to be independent.
2015 COMPARATOR GROUP COMPANIES
The Compensation Committee annually evaluates each NEO’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
necessary 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.
Freddie Mac 2015 Form 10-K
358
Executive Compensation
Compensation Discussion and Analysis
At FHFA’s recommendation, Freddie Mac and Fannie Mae have aligned their Comparator Groups so that
consistent compensation data is used by both companies for the same or similar senior officer positions.
The Comparator Group used to determine compensation for 2015 consisted of the following companies:
Allstate
Ally Financial
AIG
Bank of America*
Bank of New York Mellon
BB&T
Capital One
Citigroup*
Fannie Mae
Fifth Third Bancorp
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 that these same companies will comprise the 2016
Comparator Group.
ESTABLISHING TARGET TDC
The Compensation Committee developed its 2015 Target TDC recommendations for the eligible NEOs by
reviewing data from the Comparator Group and, as appropriate, alternative survey sources. The
Compensation Committee reviewed market data from the Comparator Group for all NEOs except Mr.
Hutchins. For Mr. Hutchins, the Compensation Committee reviewed survey data covering similar
investment professionals at companies with greater than $100 billion in assets under management
because there was no reasonable match from the Comparator Group.
The Compensation Committee’s 2015 Target TDC recommendation for each of the NEOs was reviewed
and approved by FHFA.
2015 TARGET TDC
The following table sets forth the components of 2015 Target TDC for each of our NEOs. For Mr. Layton,
the amounts represent annualized targets that were in effect for the periods indicated.
Named Executive Officer
Donald H. Layton
Base
Salary
2015 Target TDC
Fixed
Deferred
Salary
At-Risk
Deferred
Salary
From January 1 to June 30, 2015
$
600,000
$
— $
— $
From July 1 to November 24, 2015
From November 25, 2015
James G. Mackey
Michael T. Hutchins
David B. Lowman
William H. McDavid
750,000
600,000
500,000
500,000
500,000
500,000
2,050,000
—
1,600,000
1,250,000
1,600,000
1,320,000
1,200,000
—
900,000
750,000
900,000
780,000
Target TDC
600,000
4,000,000
600,000
3,000,000
2,500,000
3,000,000
2,600,000
With the exception of Messrs. Hutchins and Layton, the 2015 Target TDC amounts shown above were the
same as in 2014. Mr. Hutchins’s 2015 Target TDC increased 25% compared to 2014 to bring his
compensation closer to the 25th percentile of the market. As discussed in “— Chief Executive Officer
Freddie Mac 2015 Form 10-K
359
Executive Compensation
Compensation Discussion and Analysis
Compensation,” FHFA approved Mr. Layton’s participation in the 2015 EMCP from July 1, 2015 to
November 24, 2015.
The Compensation Committee’s 2016 Target TDC recommendation for our executive officers, including
each of our NEOs, was approved by FHFA on February 17, 2016. For each of the NEOs identified in this
Form 10-K as well as each of the NEOs identified in our Form 10-K for the fiscal year ended December
31, 2014 filed on February 19, 2015, 2016 Target TDC will be unchanged from 2015 Target TDC.
DETERMINATION OF 2015 AT-RISK DEFERRED SALARY
The Compensation Committee and FHFA considered our achievements in pursuing our primary business
objectives, as well as other factors, in determining the funding level for At-Risk Deferred Salary in 2015.
FHFA determined the funding level for the portion of At-Risk Deferred Salary based on Conservatorship
Scorecard performance, and the Compensation Committee determined, with FHFA’s review and approval,
the amounts payable to each NEO for the portion of At-Risk Deferred Salary based on Corporate
Scorecard goals and individual performance.
AT-RISK DEFERRED SALARY BASED ON CONSERVATORSHIP SCORECARD
PERFORMANCE
Half of each eligible NEO’s 2015 At-Risk Deferred Salary, or 15% of Target TDC, was subject to reduction
based on FHFA’s assessment of the company’s performance against the objectives in the 2015
Conservatorship Scorecard. FHFA independently assessed the company’s performance and determined
that a 97% funding level was justified for the portion of At-Risk Deferred Salary based on the 2015
Conservatorship Scorecard. FHFA noted the following considerations in assessing our performance
against the Conservatorship Scorecard:
• Our thought leadership in the areas of non-performing loan sales, multifamily risk transfers and the
Common Securitization Platform (CSP);
• Our continuing efforts to reduce taxpayer risk through credit risk transfers of more than $196 billion in
unpaid principal balance and by reducing the retained portfolio through sales of less liquid assets;
• The execution of four different types of single-family credit risk transfer transactions and the
implementation of two pilot multifamily risk transfer structures, including $3.4 billion of multifamily
military housing bonds; and
• Our support of the development and testing of the CSP, our support of certain corporate functions
related to Common Securitization Solutions (CSS) and our active and engaged role on the CSS
Board of Managers.
In making its assessment, FHFA also took into consideration the following:
• The extent to which the initiatives were undertaken in a safe and sound manner;
• The extent to which the outcomes of our activities supported a competitive and resilient secondary
mortgage market to the benefit of homeowners and renters;
• The extent to which initiatives were conducted with appropriate consideration for diversity and
inclusion;
• Cooperation and collaboration with FHFA, Fannie Mae, CSS, and the industry; and
• The quality, thoroughness, creativity, effectiveness, and timeliness of our work products.
Freddie Mac 2015 Form 10-K
360
Executive Compensation
Compensation Discussion and Analysis
The table below presents the Conservatorship Scorecard objectives and FHFA’s assessment of our
achievement against those objectives.
Performance Goals
FHFA's Summary of Performance
1 Maintain in a safe and sound manner, credit availability and foreclosure prevention activities for new and
refinanced mortgages to foster liquid, efficient, competitive and resilient national housing finance
markets (40%)
Work to increase access to mortgage credit for creditworthy
borrowers, consistent with the full extent of applicable credit
requirements and risk management practices:
• Finalize improvements to the Representations and Warranties
Framework for originations;
• Continue to provide clarity regarding expectations for servicer
performance and remedies, where appropriate;
• Enhance servicer eligibility standards for our counterparties;
• Continue to encourage greater participation by small lenders, rural
lenders, and state and local Housing Finance Agencies;
• Continue to assess impediments to access to credit. Explore the
feasibility of:
• Greater purchases of loans on manufactured housing secured by
real estate;
•
Improving the effectiveness of pre-purchase and early
delinquency counseling through existing or new partnerships with
housing counseling networks.
• Assess the feasibility of alternate credit score models and credit
history in loan-decision models, including the operational and system
implications;
• Prepare to implement Duty to Serve requirements upon publication
of a final rule.
Effectively implement key loss mitigation activities, which include
enabling borrowers to stay in their homes and avoid foreclosure
where possible:
• Pursue opportunities to encourage current HARP-eligible borrowers
to take advantage of beneficial refinance opportunities;
• Develop and execute additional strategies to reduce the number of
severely aged delinquent loans held, considering tools such as loan
modifications, short sales, deeds in lieu of foreclosure, and non-
performing loan sales. These strategies should be informed by the
Neighborhood Stabilization Initiative and have an emphasis on
improving outcomes in hardest hit markets.
• Develop and execute additional strategies to reduce the number of
vacant real estate owned (REO) properties, considering tools such
as sales to non-profit organizations, repairs to REO properties
before third-party sale, and demolition or possible donation of
uninhabitable properties. These strategies should be informed by the
Neighborhood Stabilization Initiative and have an emphasis on
improving outcomes in hardest hit markets.
• Propose and implement solutions for HAMP borrowers facing rate
resets.
• Continue to engage in efforts to reduce costs for Lender Force
Placed Insurance.
Maintain the dollar volume of new multifamily business at $30
billion or below, excluding:
• Affordable housing loans, loans to small multifamily properties and
loans to manufactured housing rental communities.
All goals were achieved except for a year-end
deliverable for a portion of the sub-goal related to
improvements to the Representations and Warranties
Framework for originations.
All goals were achieved, except for a year-end
deliverable for a portion of the sub-goal related to the
pursuit of opportunities to encourage HARP-eligible
borrowers to take advantage of beneficial refinance
opportunities.
While the goal was achieved, adjustments to the loan
caps during the year could have been avoided by
employing a different approach.
2 Reduce taxpayer risk through increasing the role of private capital in the mortgage market (30%)
Single-Family
All goals were achieved
• Transact credit risk transfers on reference pools of single-family
mortgages with a UPB of at least $120 billion;
•
In meeting the above target, utilize at least two types of risk transfer
structures;
Freddie Mac 2015 Form 10-K
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Executive Compensation
Compensation Discussion and Analysis
Multifamily
The goal was achieved
• Determine the feasibility of transacting additional approved types of
risk transfer structures to determine their: (a) market acceptance; (b)
effectiveness at transferring risk; and (c) ability to expand the scale
of the transfer initiatives. Based on the feasibility assessment,
execute additional risk transfers.
Retained Portfolio
• Continue to implement the approved retained portfolio plan so that it
meets, even under adverse conditions, the annual Purchase
Agreement requirements and the $250 billion Purchase Agreement
cap by December 31, 2018.
• Any sales should be commercially reasonable transactions that
consider impacts to the market, borrowers, and neighborhood
stability.
The goal was achieved and we received partial extra
credit for reducing the retained portfolio by more than
the amount called for in the annual Purchase
Agreement requirements.
Implement private mortgage insurance eligibility requirements for
counterparties when finalized
The goal was achieved
3 Build a new single-family securitization infrastructure for use by the Enterprises and adaptable for use by
other participants in the secondary market in the future (30%)
All goals were achieved
Continue working with FHFA, Fannie Mae and CSS to build and
test the CSP and to implement the changes necessary to integrate
the Enterprises' related systems and operations with the CSP.
The Enterprises’ work on CSP should incorporate the following design
principles:
• Focus on the functions necessary for current Enterprise single-family
securitization activities;
•
Include the development of the operational and system capabilities
necessary to issue a single (common) security; and
• Allow for the integration of additional market participants in a future
system.
Finalize the single (common) security structure, including security
features, disclosure standards, and related requirements. Develop
a plan to implement the single security in the market.
The goal was achieved
Provide active support for mortgage data standardization
initiatives:
All goals were achieved
• Develop a plan for collecting the Uniform Closing Disclosure Dataset
(UCD).
• Develop the Uniform Loan Application Dataset (ULAD):
AT-RISK DEFERRED SALARY BASED ON CORPORATE SCORECARD GOALS
AND INDIVIDUAL PERFORMANCE
The other half of each eligible 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 Corporate
Scorecard goals and the NEO’s individual performance. The seven Corporate Scorecard goals 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 Corporate Scorecard goals, or directly
supported their achievement.
No weightings were assigned to the Corporate Scorecard goals. As a result, it was necessary for the
Compensation Committee to use its judgment in determining the overall level of performance. In making
its determination, the Committee primarily considered the fact that the vast majority of the Corporate
Scorecard goals were achieved or exceeded. The Compensation Committee determined that, based on
the company’s performance against the Corporate Scorecard, a 100% funding level was justified for this
portion of At-Risk Deferred Salary.
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Executive Compensation
Compensation Discussion and Analysis
The Board has adopted Corporate Scorecard goals for 2016 that are substantially similar to the 2015
goals.
The table below presents the Corporate Scorecard goals and the Compensation Committee’s
assessment of our achievement against those goals.
Corporate Scorecard Goal
People
Maximize the contributions of our people
Our Customers
Strive to achieve industry-leading customer
experience levels
Mission
Help people own, rent and stay in their homes
Financial Performance
Improve our capital and expense efficiency as
well as our core financial performance
Risk Management
Risk management will be at best-practice levels
Assessment of Performance
All elements of this goal were achieved or exceeded. We continued to build
our desired culture, as indicated by employee survey results. We exceeded
the target for retention of high-performing employees and continued to take
steps to improve leadership diversity.
All elements of this goal were achieved or exceeded. In our single-family
business, we increased our share of the GSE market, with a large share of
new business being provided by a more diversified customer base. In our
multifamily business, we exceeded the targeted increase in the number of
small balance loan sellers. In addition, the quality of our service has
improved, as indicated by both our single-family and multifamily customer
satisfaction scores.
At this time, based on preliminary information, we believe we met three of our
single-family goals and our three multifamily goals for 2015, but believe we
failed to meet the FHFA benchmark level for the other single-family goals.
We also achieved or exceeded the elements of this goal that included
establishing a new function focused on single-family affordable housing and
access to credit, developing one or more new offerings to better serve the
multifamily renovation, rehabilitation and repositioning markets, and achieving
a measure of the efficiency of our single-family loan modifications and
repayment plans.
We exceeded the objectives for the elements of this goal related to single-
family new book earnings, single-family credit risk transfer, developing
additional types of multifamily risk transfer transactions, and actively
managing the assets in the retained portfolio. However, for two elements of
this goal - multifamily operating earnings and core operating expenses - we
fell short of our objectives. Widening K-Deal spreads caused multifamily
operating earnings to be less than planned and increased investments in
business technology caused operating expenses to be higher than
anticipated.
We achieved or exceeded the elements of this goal related to establishing
and reinforcing ownership for various risks, making informed risk-reward
decisions and reducing exposure to legacy assets. With respect to the
element related to maintaining an effective control environment, we achieved
one of the two goals, but did not achieve the desired increase in internal audit
findings identified by management.
Technology & Infrastructure
We achieved or exceeded all elements of this goal by:
Utilize technology and infrastructure to prepare
for a future competitive market
Execution
Do everything better, faster, and more efficiently
Delivering most key technology initiatives on or ahead of schedule and
on or below budget and realizing the intended quantitative benefits from
most discretionary projects;
Continuing to improve our information security as measured by an
industry rating standard and by completing the encryption, retirement, or
removal of protected personal information in 23 legacy systems; and
Ensuring the availability of key applications.
While we exceeded the desired improvement in managerial spans of control
and stakeholder feedback on the company’s level of innovation, we fell short
of achieving two elements of this goal; one related to reducing the number of
senior staff without managerial responsibilities and another on employee
survey feedback on the company’s efforts to be more efficient.
The Compensation Committee also assessed the individual performance of each NEO. In making its
assessments, the Committee received input from the full Board on Mr. Layton’s performance, and took
into consideration the company’s performance against the Corporate Scorecard. For the other NEOs, the
Committee received input from Mr. Layton. 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 is discussed below.
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Compensation Discussion and Analysis
Donald H. Layton
Chief Executive Officer
Performance Highlights:
Continued increasing the strength and capability of the management team through internal promotions and external hires,
resulting in a total of 17 new officers in 2015, including his personal recruitment of a new Chief Enterprise Risk Officer.
Continued leadership by the company in credit risk transfer through increased volumes and new transaction structures is
transforming how a significant portion of U.S. mortgages are funded. This reduces taxpayer exposure to mortgage risk in both
the single-family and multifamily businesses.
Supervised the continuing, rapid and efficient reduction in the risk of legacy assets. Most noteworthy in 2015 was the 30%
decline in the single-family seriously delinquent rate to 1.32% from 1.88%, plus $2.9 billion of non-performing loan sales.
Guided the company to strengthened competitiveness, which is reflected in increased market share in both the single-family
and multifamily businesses. Multifamily, in particular, had a record volume year.
The company exceeded or achieved the vast majority of the objectives in the Corporate Scorecard.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision:
The Compensation Committee determined that Mr. Layton should receive 100% of his At-Risk Deferred Salary that was subject
to reduction based on the company’s performance against the Corporate Scorecard and his individual performance.
James G. Mackey
Executive Vice President and Chief Financial Officer
Performance Highlights:
Substantial modifications to the internal financial management information systems resulting in improved internal management
reporting and analysis to support better decision-making.
Engineered significant process simplification programs in the Finance Division throughout the year, including a full three lines
of defense risk management assessment and implementation.
Updated external reporting, including a redesigned earnings release and a simpler 10-K, which has been condensed by over
20%, providing improved investor usability.
Major reorganization of the Finance Division to reduce expenses and improve communication timeliness and efficiency, with a
reduction in organizational layers by 25% and an increased span of control by 38%.
Strong leadership in the development of management talent in the Finance Division, including the implementation of a job
rotation program for key personnel.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision:
The Compensation Committee determined that Mr. Mackey should receive 100% of his At-Risk Deferred Salary that was subject
to reduction based on the company’s performance against the Corporate Scorecard and his individual performance.
Michael T. Hutchins
Executive Vice President Investments and Capital Markets
Performance Highlights:
Strong leadership of the Investments and Capital Markets Division led to the achievement of several critical milestones,
including the reduction of legacy assets in value-accretive transactions, including sales of $2.9 billion of non-performing loans
and $11.4 billion of private-label securities, as well as the securitization of $8.2 billion of reperforming loans.
Partnered with the Single-Family Business to improve the market penetration of cash purchases of single-family mortgages,
which accounted for 35% of single-family volume in 2015, an increase from 29% in 2014.
Continued to enhance the liquidity of the company’s Agency residential mortgage-related securities in the secondary market.
Continued to focus on risk management, maintaining economic interest-rate risk at modeled low levels, efficiently managing
the company’s liquidity and funding needs as well as strengthening capital markets operational processes.
Exceeded the 2015 reduction targets specified in the Purchase Agreement and the FHFA-approved Retained Portfolio Plan for
decreasing the size of the retained portfolio.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision:
The Compensation Committee determined that Mr. Hutchins should receive 100% of his At-Risk Deferred Salary that was subject
to reduction based on the company’s performance against the Corporate Scorecard and his individual performance.
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Executive Compensation
Compensation Discussion and Analysis
David B. Lowman
Executive Vice President Single-Family Business
Performance Highlights:
Further improved customer service and engagement levels in 2015, with a 15% increase in the company’s internal
measurement of “relationship health.”
Achieved higher market share in 2015 as compared to the prior two years.
Successfully executed substantial systems development projects designed to provide Seller/Servicers with greater purchase
certainty that the loans they sell us meet our requirements.
Continued personal industry leadership to improve standards related to foreclosure alternatives, representation and warranty
terms and loan manufacturing quality.
Established an integrated “first line of defense” risk management organization within the Single-Family Business.
Strong leadership led to improvement in all employee engagement and operating culture categories in the annual employee
survey.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision:
The Compensation Committee determined that Mr. Lowman should receive 100% of his At-Risk Deferred Salary that was subject
to reduction based on the company’s performance against the Corporate Scorecard and his individual performance.
William H. McDavid
Executive Vice President General Counsel and Corporate Secretary
Performance Highlights:
Supervised the successful resolution of a variety of lawsuits, which included substantial negotiated settlements.
Continued the ongoing improvement in the productivity of the Legal Division, resulting in a significant increase in transaction
volumes and only a minimal increase in expenses.
Provided sound legal advice to the Board and senior management on a wide variety of significant issues.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision:
The Compensation Committee determined that Mr. McDavid should receive 100% of his At-Risk Deferred Salary that was subject
to reduction based on the company’s performance against the Corporate Scorecard and his individual performance.
2015 DEFERRED SALARY
The following chart reports the actual amounts of 2015 Deferred Salary for each NEO, including for
Mr. Layton for the portion of the year he was eligible to receive Deferred Salary. The actual amount
earned in each calendar quarter is scheduled to be paid on the last pay date of the corresponding
calendar quarter in 2016.
2015 Actual Deferred Salary
At-Risk
Named
Executive
Officer
Mr. Layton
Mr. Mackey
Mr. Hutchins(1)
Mr. Lowman
Mr. McDavid
$
Fixed
818,886
1,600,000
1,181,728
1,600,000
1,320,000
Conservatorship
Scorecard
% of
Target
Corporate
Scorecard/
Individual
$
$
232,484
436,500
343,883
436,500
378,300
97%
97%
97%
97%
97%
239,674
450,000
354,518
450,000
390,000
% of
Target
100%
100%
100%
100%
100%
Total Actual
Deferred
Salary
$ 1,291,044
2,486,500
1,880,129
2,486,500
2,088,300
% of
Target
99%
99%
99%
99%
99%
(1) Amounts reported for Mr. Hutchins are less than the corresponding target amounts because he took additional vacation as
leave without pay during 2015. The percentages reported are based on adjusted target amounts that reflect the impact of the
leave without pay.
WRITTEN AGREEMENTS RELATING TO NEO EMPLOYMENT
We entered into letter agreements with each of our NEOs in connection with their hiring. 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 to the terms of the 2015 EMCP.
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Compensation Discussion and Analysis
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 “Restrictive Covenant and Confidentiality
Agreements.”
The NEOs 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.”
MR. LAYTON
We entered into a letter agreement and a restrictive covenant and confidentiality agreement with
Mr. Layton in connection with his employment as our CEO. 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 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 letter agreement and 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 an annual Target TDC opportunity of $3,000,000, consisting of 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 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
his employment. This award was 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. Each installment was
subject to repayment in the event that, prior to the first anniversary of an installment payment date, Mr.
Mackey terminated his employment with Freddie Mac for any reason or Freddie Mac terminated 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.
MR. HUTCHINS
We entered into a letter agreement and a restrictive covenant and confidentiality agreement with Mr.
Hutchins in connection with his employment as our EVP - Investments and Capital Markets (SVP -
Investments and Capital Markets at the time he began his service). The terms of Mr. Hutchins’ letter
agreement provided him with an annual Target TDC opportunity of $2,000,000, consisting of Base Salary
of $500,000 and Deferred Salary of $1,500,000; and the opportunity to participate in all employee benefit
plans offered to Freddie Mac’s executive officers pursuant to the terms of these plans. Mr. Hutchins’
Target TDC opportunity was subsequently increased to $2,500,000 for 2015, as discussed above. The
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Executive Compensation
Compensation Discussion and Analysis
company has also agreed that Mr. Hutchins may, subject to Mr. Layton’s approval, take additional days off
from time to time as unpaid leave. Copies of Mr. Hutchins’ letter agreement and restrictive covenant and
confidentiality agreement are filed as Exhibits 10.32 and 10.33, respectively, to this Form 10-K.
MR. LOWMAN
We entered into a letter agreement and a restrictive covenant and confidentiality agreement with Mr.
Lowman in connection with his employment as our EVP - Single-Family Business. The terms of Mr.
Lowman’s letter agreement provide him with an annual Target TDC opportunity of $3,000,000, consisting
of 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 executive officers pursuant to the terms of these plans.
Copies of Mr. Lowman’s letter agreement and restrictive covenant and confidentiality agreement are filed
as Exhibits 10.48 and 10.49, respectively, to our Form 10-K for the fiscal year ended December 31, 2013
filed on February 27, 2014.
MR. MCDAVID
We entered into a letter agreement and a restrictive covenant and confidentiality agreement with Mr.
McDavid in connection with his employment as our EVP - General Counsel and Corporate Secretary. The
terms of Mr. McDavid’s letter agreement provide him with an annual Target TDC opportunity of
$2,600,000, which consists of 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 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.
RESTRICTIVE COVENANT AND CONFIDENTIALITY AGREEMENTS
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 Mr. Layton and twelve months for the other
NEOs. During the twelve-month period immediately following termination, each NEO agrees not to solicit
or recruit any of our managerial employees. The agreements also provide for the confidentiality of
information that constitutes trade secrets or proprietary or other confidential information.
RECAPTURE AND FORFEITURE AGREEMENT
Freddie Mac has adopted, with the approval of FHFA, the Recapture and Forfeiture Agreement (the
“Recapture Agreement”). In order to participate in the 2015 EMCP, each of our NEOs has entered into a
Recapture Agreement. Mr. Layton’s Recapture Agreement applies only to the Deferred Salary he earned
from July 1, 2015 through November 24, 2015.
The Recapture Agreement provides for the recapture and/or forfeiture of Deferred Salary (including
related interest) earned, paid, or to be paid pursuant to the terms of the 2015 EMCP 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.
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Compensation Discussion and Analysis
• 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 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 determines that such conduct is materially harmful to
Freddie Mac.
Termination of employment because, or within two years of termination, the Board determines
that, the NEO engaged in willful misconduct in the performance of his or her duties that was
materially harmful to Freddie Mac.
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
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 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 June 12, 2013.
The following additional event is applicable only to the CEO and CFO, to the extent they have
compensation subject to reimbursement in accordance with Section 304 of the Sarbanes-Oxley Act.
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Compensation Discussion and Analysis
• Accounting Restatement Resulting from Misconduct - If, as a result of misconduct, we are required to
prepare an accounting restatement due to material non-compliance with financial reporting
requirements, the CEO and CFO are required to reimburse us for amounts determined in accordance
with Section 304.
INDEMNIFICATION AGREEMENTS
We have also entered into indemnification agreements with each of our current executive officers
(including each of our NEOs) and directors, each an indemnitee. For 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, published in the Federal
Register on November 14, 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
The timing and payment of any unpaid portion of Deferred Salary and related interest is based upon the
reason for termination, as discussed in “— Potential Payments Upon Termination of Employment.”
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
2015 was reimbursement for assistance with personal financial planning, tax planning, and/or estate
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Compensation Discussion and Analysis
planning, up to an annual maximum benefit of $4,500, with an additional $2,500 allowance provided in the
first year in which an NEO utilizes the benefit.
SERP
Our NEOs are eligible to participate in our SERP. The SERP is designed to provide participants with the
full amount of benefits to which they would have been entitled under our Thrift/401(k) Plan if that plan was
not subject to certain dollar limits under the Internal Revenue Code. This is referred to as the “SERP
Benefit.” For participants in the 2015 EMCP (or prior executive compensation programs), benefits under
the SERP Benefit are limited in any calendar year to two times a participant’s Base Salary.
For additional information regarding these benefits, see “— 2015 Compensation Information for NEOs”
and “— Nonqualified Deferred Compensation.”
STOCK OWNERSHIP, HEDGING, AND PLEDGING POLICIES
Our stock ownership guidelines were suspended when conservatorship began because we ceased
paying our executives stock-based compensation. 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.
Pursuant to our company policy, all employees, including our NEOs, are prohibited from:
• Engaging in all transactions (including purchasing and selling equity and non-equity securities)
involving our securities (except selling company securities owned prior to the implementation of the
policy and then only with pre-clearance);
• Purchasing or selling derivative securities related to our equity securities or dealing in any derivative
securities related to our equity securities;
• Transacting in options (other than options granted by us, and then only with pre-clearance) or other
hedging instruments related to our securities; and
• Holding our securities in a margin account or pledging our securities as collateral for a loan.
FHFA’S ROLE IN SETTING COMPENSATION
Although the Compensation Committee plays a significant role in considering and recommending
executive compensation, FHFA is actively involved in determining such compensation. During
conservatorship, the Compensation Committee’s authority and flexibility have been subject to the
following limitations:
• The powers of FHFA as our Conservator include 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, Corporate Governance,
and Executive Officers — Board and Committee Information — Authority of the Board and Board
Committees.”
• FHFA has directed us to obtain its approval before we: (i) enter into new compensation arrangements
or increase amounts or benefits payable under existing compensation arrangements for officers at the
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Compensation Discussion and Analysis
SVP level and above and for other officers as FHFA may deem necessary to successfully carry out its
role as Conservator; or (ii) establish or modify performance management processes for such officers.
• 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.
SECTION 162(m) LIMITS ON THE TAX DEDUCTIBILITY OF 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 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 Form 10-K.
This report is respectfully submitted by the members of the Compensation Committee.(1)
Anthony A. Williams, Chair
Raphael W. Bostic
Steven W. Kohlhagen
Sara Mathew
Saiyid T. Naqvi
Nicolas P. Retsinas
(1) Reflects Compensation Committee membership as of the time that the Compensation Disclosure and Analysis was reviewed
and discussed with management and recommended to the Board for inclusion in this Form 10-K.
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Executive Compensation
Compensation and Risk
COMPENSATION AND RISK
Our management conducted an assessment of our compensation policies and practices that were in
place during 2015 and that were applicable to employees at all levels, including those participating in the
2015 EMCP. The purpose of the assessment was to determine whether any elements of the overall
compensation program encourage inappropriate or excessive risk taking by employees in the
achievement of stated corporate objectives or pursuit of individual compensation targets. The assessment
was conducted by members of our ERM and human resources teams.
The review included an evaluation of:
• The types of compensation offered (including fixed, variable, and deferred);
• Eligibility for participation in compensation programs;
• Minimum and maximum payout levels;
• Corporate performance objectives;
• The process for establishing corporate performance objectives and for evaluating performance
against those objectives; and
• Processes and program approvals for our compensation programs.
The assessment was discussed with the Compensation Committee in December 2015. Management’s
conclusion, with which the Compensation Committee concurred, is that Freddie Mac has taken
appropriate and reasonable efforts to help ensure that our compensation policies and practices do not
encourage employees to take unnecessary and excessive risks to meet our corporate objectives, and our
current compensation policies and practices are not reasonably likely to have a material adverse effect on
us.
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Executive Compensation
2015 Compensation Information for NEOs
2015 COMPENSATION INFORMATION FOR NEOs
The following sections set forth compensation information for our NEOs: our CEO, CFO, and the three
other most highly compensated executive officers who were serving as executive officers as of
December 31, 2015.
SUMMARY COMPENSATION TABLE
Salary
Year
Earned
During Year (1) Deferred (2)
Bonus (3)
Non-Equity
Incentive Plan
Compensation (4)
All Other
Compensation (5)
Total
Donald H. Layton
2015 $
660,345 $
818,886 $
— $
472,748 $
56,958 $ 2,008,937
Chief Executive Officer 2014
James G. Mackey
EVP — Chief Financial
Officer
2013
2015
2014
2013
Michael T. Hutchins(6) 2015
EVP — Investments &
Capital Markets
David B. Lowman
EVP — Single-Family
Business
William H. McDavid
EVP — General
Counsel and
Corporate Secretary
2015
2014
2013
2015
2014
2013
600,000
600,000
500,000
500,000
70,881
—
—
1,600,000
1,600,000
230,303
461,810
1,181,728
500,000
500,000
329,502
500,000
500,000
500,000
1,600,000
1,600,000
1,048,485
1,320,000
1,320,000
1,320,000
—
—
—
450,000
510,000
—
—
—
150,000
—
—
—
60,586
23,827
86,674
21,099
660,586
623,827
3,074,282
3,471,684
—
938,786
79,659
2,422,471
86,674
65,045
3,074,282
3,065,630
—
2,108,913
86,324
2,675,584
110,168
29,713
2,710,675
2,618,013
887,608
900,585
127,602
699,274
887,608
900,585
580,926
769,260
780,507
768,300
(1) Amounts shown reflect Base Salary earned during the year.
(2) Amounts shown reflect Fixed Deferred Salary earned during the year. Fixed Deferred Salary earned during each quarter is paid
in cash on the last pay date 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
on corporate and individual performance. Interest on Fixed Deferred Salary earned during 2015 and 2014 is included in All
Other Compensation.
(3) Amounts shown reflect cash sign-on payments made to Messrs. Mackey and Lowman in connection with their hiring in 2013.
See “— Written Agreements Relating to NEO Employment” for additional information.
(4) Amounts shown reflect At-Risk Deferred Salary earned during each year and, for 2015 and 2014, interest on that At-Risk
Deferred Salary. No interest accrued on Deferred Salary earned during 2013 under the terms of the executive compensation
program in effect for that year. The interest rate for At-Risk Deferred Salary earned during 2015 and 2014 was 0.125% and
0.065%, respectively, which is equal to 50% of the one-year Treasury Bill rate as of December 31 of the applicable prior year.
At-Risk Deferred Salary earned during each quarter is paid on the last pay date of the corresponding quarter in the following
year. See “— Determination of 2015 At-Risk Deferred Salary.”
(5) Amounts for 2015 reflect (i) contributions earned under our tax-qualified Thrift/401(k) Plan for the year; (ii) accruals earned
pursuant to the SERP Benefit for the year; (iii) interest on Fixed Deferred Salary earned during the year; and (vi) perquisites.
These amounts for 2015 are as follows:
Freddie Mac 2015 Form 10-K
373
Executive Compensation
2015 Compensation Information for NEOs
Mr. Layton
Mr. Mackey
Mr. Hutchins
Mr. Lowman
Mr. McDavid
Thrift/401(k)
Plan
Contributions
SERP Benefit
Accruals
Interest on
Fixed Deferred
Salary
Perquisites
$
22,525
$
33,409
$
1,024
$
22,525
22,525
22,525
22,525
62,149
55,657
62,149
62,149
2,000
1,477
2,000
1,650
—
—
—
—
—
Employer contributions to the Thrift/401(k) Plan are generally 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. Employees receive an additional employer contribution to our Thrift/401(k) Plan equal to 2.5% of
compensation earned in the prior year and are automatically vested in that contribution. For additional information regarding
the SERP Benefit, see “— Nonqualified Deferred Compensation.”
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 for an NEO that, in the aggregate, amount to less than $10,000.
(6) Amounts reported for Mr. Hutchins in the Salary-Earned During Year, Salary-Deferred and Non-Equity Incentive Plan
Compensation columns are less than the corresponding annual target amounts because he took additional vacation as leave
without pay during 2015.
GRANTS OF PLAN-BASED AWARDS
The following table contains information concerning grants of plan-based awards to each of the NEOs
during 2015. The Purchase Agreement prohibits us from issuing equity securities without Treasury’s
consent. No stock awards were granted during 2015. For a description of the performance and other
measures used to determine payouts, see “— Elements of Target Total Direct Compensation,” “—
Determination of 2015 Target TDC for NEOs,” “— Determination of At-Risk Deferred Salary,” and “— 2015
Deferred Salary.”
Freddie Mac 2015 Form 10-K
374
Executive Compensation
2015 Compensation Information for NEOs
Name
Mr. Layton(2)
Mr. Mackey
Mr. Hutchins
Mr. Lowman
Mr. McDavid
At-Risk Deferred Salary Award
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards(1)
Target/Maximum
Threshold
Conservatorship Scorecard
$ — $
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
—
—
—
—
—
—
—
—
—
—
—
—
—
—
239,674
239,674
479,348
450,000
450,000
900,000
375,000
375,000
750,000
450,000
450,000
900,000
390,000
390,000
780,000
(1) The amounts reported reflect At-Risk Deferred Salary granted in 2015 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 Corporate Scorecard goals. The amount of At-Risk Deferred Salary actually earned can range from
0% of target (reported in the Threshold column) to a maximum of 100% of target (reported in the Target/Maximum column).
Actual At-Risk Deferred Salary amounts earned during 2015 are reported in the “Non-Equity Incentive Plan Compensation”
column of “Summary Compensation Table.”
(2) Mr. Layton was only eligible to receive Deferred Salary between July 1, 2015 and November 24, 2015.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
None of the NEOs had unexercised options or unvested RSUs as of December 31, 2015.
OPTION EXERCISES AND STOCK VESTED
None of the NEOs exercised options or had RSUs vest during 2015.
PENSION BENEFITS
Freddie Mac previously offered a Pension Plan, which was a tax-qualified, defined benefit pension plan,
covering substantially all employees hired before 2012 who had attained age 21 and completed one year
of service with us. In October, 2013, FHFA directed us to cease accruals under the Pension Plan effective
December 31, 2013 and to commence terminating the Pension Plan. None of the NEOs was pension-
eligible prior to the termination of the Pension Plan. Accordingly, a Pension Benefits table is not
presented.
NONQUALIFIED DEFERRED COMPENSATION
Non-qualified deferred compensation consists of the SERP Benefit. The SERP is an unfunded,
nonqualified defined contribution plan designed to provide participants with the full amount of benefits to
which they would have been entitled under the Thrift/401(k) Plan if that plan was not subject to certain
dollar limits under the Internal Revenue Code. The SERP Benefit equals the amount of the employer
matching contributions and 2.5% contributions for each NEO that would have been made to the Thrift/401
(k) Plan during the year, based upon the participant's eligible compensation, without application of those
limits, less the amount of the matching contributions and 2.5% contributions annually made to the
Freddie Mac 2015 Form 10-K
375
Executive Compensation
2015 Compensation Information for NEOs
Thrift/401(k) Plan during the year, but not to exceed two times the NEO's Base Salary. We believe the
SERP Benefit is an appropriate benefit because offering such a benefit helps us remain competitive with
the companies in our Comparator Group. Participants are credited with earnings or losses in their 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, which are the same as the
investment options available under the Thrift/401(k) Plan.
To be eligible for the SERP Benefit, the NEO must be eligible for matching contributions and the 2.5%
contribution under the Thrift/401(k) Plan for part of the year, as discussed in Footnote 5 to the Summary
Compensation Table. In addition, to be eligible for the portion of the SERP Benefit attributable to employer
matching contributions, the NEO must contribute the maximum amount permitted under the terms of the
Thrift/401(k) Plan on a pre- or post-tax basis.
SERP Benefits are generally distributed in a lump sum 90 days after the end of the calendar year in which
a separation from service occurs. A six-month delay in the commencement of distributions on account of
a separation from service applies to key employees, in accordance with Internal Revenue Code
Section 409A. If the NEO dies, the vested SERP Benefit is paid in the form of a lump sum within 90 days
of death.
The following table shows the contributions, earnings, withdrawals and distributions, and accumulated
balances under the SERP Benefit for each NEO.
Name
Mr. Layton
SERP Benefit
Mr. Mackey
SERP Benefit
Mr. Hutchins
SERP Benefit
Mr. Lowman
SERP Benefit
Mr. McDavid
SERP Benefit
Executive
Contribution in
Last FY ($)(1)
Freddie Mac
Accruals in
Last FY ($)(2)
Aggregate
Earnings in
Last FY ($)(3)
Aggregate
Withdrawals/
Distrib. ($)
Aggregate
Balance at
Last FYE ($)(4)
$
— $
33,409
$
855
$
— $
90,601
—
—
—
—
62,149
55,657
53
79
62,149
(2,276)
62,149
154
—
—
—
—
75,761
100,889
104,138
172,595
(1) The SERP does not allow for employee contributions.
(2) Amounts reported reflect accruals under the SERP Benefit during 2015, including accruals for the plan year 2015 2.5%
contribution which will be allocated to NEO accounts in 2016. 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 SERP Benefit.
(4) Amounts reported reflect the accumulated balances under the SERP Benefit for each NEO and include the plan year 2015
2.5% contribution which will be allocated to NEO accounts in 2016. All NEOs are fully vested in their SERP Benefit account
balances.
The following 2014 SERP Benefit accrual amounts were reported in the “All Other Compensation” column in the 2014
Summary Compensation Table as compensation for each NEO for whom accruals were made and reported during 2014: Mr.
Layton: $32,111, Mr. Mackey: $13,559, Mr. Lowman: $52,275, and Mr. McDavid: $80,835. See our Form 10-K for the fiscal year
ended December 31, 2014 filed on February 19, 2015. The following 2013 SERP Benefit accrual amounts were reported in the
“All Other Compensation” column in the 2013 Summary Compensation Table as compensation for each NEO for whom
accruals were made and reported during 2013: Mr. Layton: $20,527 and Mr. McDavid: $29,413. See our Form 10-K for the
fiscal year ended December 31, 2013 filed on February 27, 2014.
Freddie Mac 2015 Form 10-K
376
Executive Compensation
2015 Compensation Information for NEOs
POTENTIAL PAYMENTS UPON TERMINATION OF
EMPLOYMENT
We have entered into various agreements in connection with the employment of the NEOs that call for us
to pay compensation to our NEOs in the event of a termination of employment. The actual payment of any
level of termination benefits is subject to FHFA review and approval. For more information, see “— Written
Agreements Relating to NEO Employment.”
In addition, the 2015 EMCP 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 (including related interest) that are unpaid at the time of termination
of employment. The following table describes the effect of various termination events upon unpaid
Deferred Salary.
• Forfeiture Event — All earned but unpaid Fixed and At-Risk Deferred Salary (including related
interest) is subject to forfeiture upon the occurrence of a Forfeiture Event, as described above under
“— Written Agreements Relating to NEO Employment — Recapture and Forfeiture Agreement.”
• Death — All earned but unpaid Fixed and At-Risk Deferred Salary (including related interest) is paid
•
in full as soon as administratively possible, but not later than 90 calendar days after the date of death.
Any earned but unpaid At-Risk Deferred Salary is not subject to reduction based on corporate and
individual performance if the reduction has not been determined as of the date of death.
Long-Term Disability — All earned but unpaid Fixed and At-Risk Deferred Salary (including related
interest) is paid in full in accordance with the Approved Payment Schedule. Any earned but unpaid At-
Risk Deferred Salary is not subject to reduction based on corporate and individual performance if the
reduction has not been determined as of the termination date.
• 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
(including related interest) 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 62 years of age, without regard to length of
service, or attaining or exceeding 55 years of age with 10 or more years of service.
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, 2015.
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. The table also does not 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
Freddie Mac 2015 Form 10-K
377
Executive Compensation
2015 Compensation Information for NEOs
following the occurrence of a for cause termination. See “— Written Agreements Relating to NEO
Employment — Recapture and Forfeiture Agreement.”
The table below also does not include vested balances in the SERP. All NEOs are fully vested in their
account balances. Amounts shown in the table also do not include certain items available to all
employees generally upon a termination event.
The table below also does not include stock options or RSUs, as there were no outstanding stock options
or RSUs held by NEOs as of December 31, 2015.
Donald H. Layton
Deferred Salary:
Fixed
At Risk-Conservatorship Scorecard(3)
At Risk-Corporate Scorecard/Individual(4)
Interest on Deferred Salary(5)
Total
James G. Mackey
Deferred Salary:
Fixed
At Risk-Conservatorship Scorecard(3)
At Risk-Corporate Scorecard/Individual(4)
Interest on Deferred Salary(5)
Total
Michael T. Hutchins
Deferred Salary:
Fixed
At Risk-Conservatorship Scorecard(3)
At Risk-Corporate Scorecard/Individual(4)
Interest on Deferred Salary(5)
Total
David B. Lowman
Deferred Salary:
Fixed
At Risk-Conservatorship Scorecard(3)
At Risk-Corporate Scorecard/Individual(4)
Interest on Deferred Salary(5)
Total
William H. McDavid
Deferred Salary:
Death
Disability
Retirement(1)
All Other Not
For Cause
Terminations(2)
$
818,886
$
818,886
$
818,886
$
239,674
239,674
654
239,674
239,674
1,623
232,484
239,674
1,614
$
1,298,888
$
1,299,857
$
1,292,658
$
—
—
—
—
—
$
1,600,000
$
1,600,000
$
— $
1,184,000
450,000
450,000
1,945
450,000
450,000
3,125
—
—
—
436,500
450,000
2,588
$
2,501,945
$
2,503,125
$
— $
2,073,088
$
1,181,728
$
1,181,728
$
— $
354,518
354,518
1,471
354,518
354,518
2,363
—
—
—
874,479
343,883
354,518
1,966
$
1,892,235
$
1,893,127
$
— $
1,574,846
$
1,600,000
$
1,600,000
$
— $
1,184,000
450,000
450,000
1,945
450,000
450,000
3,125
—
—
—
436,500
450,000
2,588
$
2,501,945
$
2,503,125
$
— $
2,073,088
Fixed
At Risk-Conservatorship Scorecard(3)
At Risk-Corporate Scorecard/Individual(4)
Interest on Deferred Salary(5)
$
1,320,000
$
1,320,000
$
1,320,000
$
390,000
390,000
1,633
390,000
390,000
2,625
378,300
390,000
2,610
Total
$
2,101,633
$
2,102,625
$
2,090,910
$
(1) Messrs. Layton and McDavid are the only retirement-eligible NEOs under the 2015 EMCP.
Freddie Mac 2015 Form 10-K
—
—
—
—
—
378
Executive Compensation
2015 Compensation Information for NEOs
(2) 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 Messrs. Layton and McDavid because they are retirement eligible. In
accordance with early termination provisions in the 2015 EMCP, the amounts disclosed for Deferred Salary: Fixed for all other
NEOs have been reduced by 26% to reflect a December 31, 2015 termination scenario.
(3) 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 2015
Conservatorship Scorecard. In cases of death or disability, the process for determining the funding level is waived if the funding
level has not been determined at the date of termination. The funding level had not been determined as of December 31st and,
as a result, no reduction has been applied to these amounts.
(4) The amounts reported for Deferred Salary: At Risk-Corporate Scorecard/Individual in the Retirement and All Other Not For
Cause Terminations columns reflect the assessment of 2015 performance approved by the Compensation Committee and
FHFA. For death or disability, the provisions are the same as for the amounts reported for Deferred Salary: At Risk-
Conservatorship Scorecard.
Interest on Deferred Salary is accrued and paid in accordance with the terms of the 2015 EMCP. The amount of interest in the
Death column assumes that payment occurs on the 90th day following the date of death, which is assumed to be December
31, 2015.
(5)
Freddie Mac 2015 Form 10-K
379
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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 16, 2016 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 16, 2016, 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.
STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE
OFFICERS
Name
Position
Common Stock
Beneficially Owned
Excluding
Stock Options(1)
Stock Options
Exercisable
Within 60 Days of
Feb. 16, 2016
Total Common
Stock
Beneficially Owned
Raphael W. Bostic
Carolyn H. Byrd
Lance F. Drummond
Director
Director
Director
Thomas M. Goldstein
Director
Richard C. Hartnack
Director
Steven W. Kohlhagen
Director
Christopher S. Lynch
Sara Mathew
Saiyid T. Naqvi
Nicolas P. Retsinas
Director
Director
Director
Director
Eugene B. Shanks, Jr. Director
Anthony A. Williams
Director
Donald H. Layton
Chief Executive Officer
James G. Mackey
EVP - Chief Financial Officer
Michael T. Hutchins
EVP - Invest. & Cap. Markets
David B. Lowman
EVP - Single-Family Business
—
—
—
—
—
—
—
—
—
10,824(2)
—
—
—
—
—
—
William H. McDavid
EVP - General Counsel & Corp. Sec.
All directors and executive officers as a group (22 persons)
—
38,292(2)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,824
—
—
—
—
—
—
—
5,980
44,272
(1)
(2)
Includes shares of stock beneficially owned as of February 16, 2016.
Includes distribution of 6,866 shares and 169 dividend equivalents on RSUs previously deferred and which have no remaining
restrictions.
Freddie Mac 2015 Form 10-K
380
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
STOCK OWNERSHIP BY GREATER-THAN 5% HOLDERS
5% Holder(1)
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
Common Stock
Beneficially Owned
Percent of Class
Variable(2)
79.9%
(1) Pershing Square Capital Management, L.P., PS Management GP, LLC, and William A. Ackerman (“Pershing”) have filed certain
reports on Schedule 13D, the latest of which was filed on March 31, 2014. In that report, Pershing reported a beneficial
ownership percentage calculation of 9.78%, based solely on the 650,039,533 shares of our common stock outstanding as
reported in our Form 10-K for the fiscal year ended December 31, 2013, and excluding the shares issuable to Treasury
pursuant to the warrant. The Schedule 13D indicated that Pershing also had additional economic exposure to approximately
8,434,958 notional shares of common stock, bringing the total aggregate economic exposure on the date of that filing to
72,010,523 shares of common stock (approximately 11.08% of the outstanding common stock). In that filing, Pershing
indicated that because it believes our common stock is not a voting security, it had determined not to file future reports on
Schedule 13D. We do not know Pershing’s current beneficial ownership of our common stock.
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.
(2)
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 2015 all of our directors and executive officers complied with such reporting
obligations.
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, 2015. Our
stockholders have approved the Employee Stock Purchase Plan, the 2004 Stock Compensation Plan,
and the 1995 Stock Compensation Plan (together, the “Employee Plans”), and the 1995 Directors’ Stock
Compensation Plan (the “Directors’ Plan”). We suspended the operation of these plans following our entry
into conservatorship and are no longer granting awards under such plans.
Freddie Mac 2015 Form 10-K
381
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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))
98,326(1)
$28.68(2)
35,824,214(3)
None
N/A
None
(1)
Includes 51,190 RSUs and shares of restricted stock issued under the Directors’ Plan and the Employee Plans.
(2) For the purpose of calculating this amount, the RSUs and shares of restricted stock are assigned a value of zero.
(3)
Includes 28,310,784 shares, 5,845,739 shares, and 1,667,691 shares available for issuance under the 2004 Stock
Compensation Plan, the Employee Stock Purchase Plan, and the Directors’ Plan, respectively. No shares are available for
issuance under the 1995 Stock Compensation Plan.
Freddie Mac 2015 Form 10-K
382
Certain Relationships and Related Transactions
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
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.
Under the policy, “related person” means 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:
• The aggregate amount involved exceeded or is expected to exceed $120,000;
• We were or are expected to be a participant; and
• 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 such transactions are 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:
• The nature of the related person’s interest in the transaction;
• The approximate total dollar value of, and extent of the related person’s interest in, the transaction;
• Whether the transaction was or would be undertaken in the ordinary course of our business;
Freddie Mac 2015 Form 10-K
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Certain Relationships and Related Transactions
• 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
• The purpose, and potential benefits to us, of the transaction.
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
2015, as discussed in “MD&A — Consolidated Results of Operations,” “MD&A — Risk Management —
Credit Risk — Single-Family Mortgage Credit Risk,” “MD&A — Conservatorship and Related Matters,”
“MD&A — Regulation and Supervision,” Note 2, Note 4, Note 7, Note 10, Note 11, and Note 12.
FHFA, as conservator, approved the Purchase Agreement and our role as compliance agent in the MHA
Program and the Memorandum of Understanding with Treasury, FHFA, and Fannie Mae under the HFA
Initiative. FHFA also instructed us to implement a new $5,000 principal reduction incentive under HAMP in
which Treasury will pay the incentive for borrowers with certain of our HAMP modified loans. 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 2015, and expect to continue to be a party
during 2016, 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. 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, 2015, JPMorgan Chase was one of Freddie Mac’s largest servicers, and serviced
approximately 1.05 million loans for Freddie Mac. JPMorgan Chase had an aggregate UPB of loans of
approximately $165.36 billion as of December 31, 2015 and approximately $164.16 billion as of
January 31, 2016. JPMorgan Chase sold approximately $11.2 billion in single-family loans to Freddie Mac
in 2015.
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, 2016, JPMorgan Chase and its
Freddie Mac 2015 Form 10-K
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Certain Relationships and Related Transactions
subsidiaries had an aggregate notional balance of $22.73 billion of derivatives and $0.85 billion of reverse
repurchase agreements with Freddie Mac. From January 1, 2015 through January 31, 2016, JPMorgan
Chase served as underwriter for $82.76 billion of Freddie Mac’s debt securities and $15.19 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 which earns a return based upon a defined list of mutual funds that Mr. Layton
designates. Payments on the deferred compensation balance began in January 2016, with the balance
payable in fourteen annual installments. Mr. Layton also has deferred compensation (less than 10% of the
total deferred compensation balance) in the form of “private equity balance,” which is expected to be paid
in full in 2016. Mr. Layton’s deferred compensation balance is less than 10% of his total net worth on an
after-tax basis. Mr. Layton also has brokerage and deposit accounts with JPMorgan Chase.
The amounts 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, or presented to him in his
capacity as CEO and a member of the Board, if such matter has the potential to affect 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
“MD&A — Conservatorship and Related Matters” and Note 2.
Freddie Mac 2015 Form 10-K
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Principal Accounting Fees and Services
PRINCIPAL ACCOUNTING FEES AND
SERVICES
DESCRIPTION OF FEES
PricewaterhouseCoopers LLP has served as our independent public accountants since 2002. The
following is a description of fees billed to us by PricewaterhouseCoopers LLP during 2015 and 2014.
AUDITOR FEES(1)
Audit Fees(2)
Audit-Related Fees(3)
Tax Fees(4)
All Other Fees(5)
Total
2015
2014
(in thousands)
23,321
$
3,888
64
264
27,537
$
27,997
2,461
27
357
30,842
$
$
(1) These fees represent amounts billed within the designated year and include reimbursable expenses for 2015 and 2014.
(2) Audit fees include fees in connection with quarterly reviews of our interim financial information and the audit of our annual
consolidated financial statements.
(3) The 2015 and 2014 audit-related fees include: (i) fees for the performance of certain agreed-upon procedures regarding
aspects of compliance with the Purchase Agreement covenants; (ii) compliance evaluation of the minimum servicing standards
as set forth in the Uniform Single Attestation Program for Mortgage Bankers; and (iii) transaction validation and attestation
related to certain of Freddie Mac’s risk transfer and structured transactions.
(4) The tax fees billed in 2015 and 2014 related to non-audit tax consulting services to provide advice and recommendations
related to tax planning or reporting matters, as well as non-audit tax services to provide assistance with the IRS tax audit
matters and ongoing examinations, including information requests and associated responses.
(5) All other fees for 2015 and 2014 include: (i) our subscription to a web-based suite of human resources benchmark data; (ii)
advice and recommendations related to retention strategies; (iii) our subscription to accounting research software; and (iv) non-
audit services in connection with certain of our project deployments as part of implementing regulatory initiatives.
APPROVAL OF INDEPENDENT AUDITOR
SERVICES AND FEES
Under its charter, the Audit Committee is responsible for the following:
• Appointing our independent public accounting firm (subject to FHFA approval as required);
• Approving all audit and non-audit services permitted under applicable law to be performed by the
independent public accounting firm (subject to FHFA approval as required); and
• Approving the scope of the annual audit.
The Sarbanes-Oxley Act of 2002 and related SEC rules 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
Freddie Mac 2015 Form 10-K
386
Principal Accounting Fees and Services
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 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, it typically sets a dollar limit for such service.
Management endeavors to obtain pre-approval of the Audit Committee, or of the Chair of the Audit
Committee (when the Chair of the Audit Committee has been delegated such authority), before it incurs
fees exceeding the dollar limit. If the Chair of the Audit Committee approves the increase, the Chair will
report such approval at the Audit Committee’s next scheduled meeting. The Audit Committee has
delegated to the Chair the authority to address requests to pre-approve certain additional audit and non-
audit services to be performed by the company’s independent auditor with fees up to a maximum of
$250,000 per quarter, with reporting of any such approval decisions to the Audit Committee at its 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 2015 and 2014.
The Audit Committee appoints the independent public accounting firm on an annual basis. In evaluating
the performance of the independent public accounting firm, the Audit Committee considers a number of
factors, including the following:
• The firm’s status as a registered public accounting firm with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) as required by the Sarbanes-Oxley Act of 2002 and the
Rules of the PCAOB;
Its independence and processes for maintaining its independence;
Its approach to resolving significant accounting and auditing matters;
Its capability and expertise in handling the complexity of the company’s business, including the
expertise and capability of the lead audit partner and of the key members of the engagement team;
•
•
•
• Historical and recent performance, including the extent and quality of the independent public
accounting firm’s communications with the Audit Committee, and the results of a management survey
of the independent public accounting firm’s overall performance;
• Data related to audit quality and performance, including recent PCAOB inspection reports on the firm;
and
• The appropriateness of its fees, both on an absolute basis and as compared with peers.
The Audit Committee has determined that the non-audit services rendered by PricewaterhouseCoopers
during its most recent fiscal year are compatible with maintaining PricewaterhouseCoopers’
independence.
Freddie Mac 2015 Form 10-K
387
Exhibits and Financial Statement Schedules
EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(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 "Financial Statements and Supplementary Data."
(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.
Freddie Mac 2015 Form 10-K
388
Signatures
SIGNATURES
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.
Federal Home Loan Mortgage Corporation
By:
/s/ Donald H. Layton
Donald H. Layton
Chief Executive Officer
Date: February 18, 2016
Freddie Mac 2015 Form 10-K
389
Signatures
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
Non-Executive Chairman of the Board
February 18, 2016
/s/ Donald H. Layton
Donald H. Layton
Chief Executive Officer and Director
(Principal Executive Officer)
February 18, 2016
/s/ James G. Mackey
James G. Mackey
/s/ Robert D. Mailloux
Robert D. Mailloux
/s/ Raphael W. Bostic*
Raphael W. Bostic
/s/ Carolyn H. Byrd*
Carolyn H. Byrd
/s/ Lance F. Drummond*
Lance F. Drummond
/s/ Thomas M. Goldstein*
Thomas M. Goldstein
/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.
Executive Vice President — Chief Financial
Officer
(Principal Financial Officer)
February 18, 2016
Senior Vice President — Corporate Controller and
February 18, 2016
Principal Accounting Officer (Principal Accounting
Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 18, 2016
February 18, 2016
February 18, 2016
February 18, 2016
February 18, 2016
February 18, 2016
February 18, 2016
February 18, 2016
February 18, 2016
February 18, 2016
Freddie Mac 2015 Form 10-K
390
Signatures
/s/ Anthony A. Williams*
Anthony A. Williams
Director
*By:
/s/ Alicia S. Myara
Alicia S. Myara
Attorney-in-Fact
February 18, 2016
Freddie Mac 2015 Form 10-K
391
Glossary
GLOSSARY
This Glossary includes acronyms and defined terms that are used throughout this report.
ACIS - Agency Credit Insurance Structure - A risk transfer transaction through which we purchase
insurance policies (typically underwritten by a group of insurers and reinsurers) that obligate the
counterparties to reimburse us for specified credit events (based on either actual losses or losses
calculated using a predefined formula) up to an aggregate limit that occur on our first loss and/or
mezzanine loss positions associated with STACR debt note transactions in exchange for our payment of
periodic premiums.
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 loan, or both. We categorize loans in our single-family credit guarantee portfolio 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 loan
and the original loan had been previously identified as Alt-A, such refinance loan may no longer be
categorized as an Alt-A loan because the refinance loan is not identified by the servicer as an Alt-A loan.
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 loan based on changes in a benchmark index.
Board - Board of Directors
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 - Consists of the liquidity and contingency operating portfolio and
restricted cash.
CCO - Chief Compliance Officer
CD&A - Compensation Discussion and Analysis
CEO - Chief Executive Officer
Freddie Mac 2015 Form 10-K
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Glossary
CERO - Chief Enterprise Risk Officer
CFO - Chief Financial Officer
CFPB - Consumer Financial Protection Bureau
Charge-Offs, gross - 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 proceeds received in a short sale.
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 loans on commercial property
(often including multifamily rental properties) as opposed to one-to-four family residential real estate.
Although the loan pools underlying CMBS can include loans 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. We have not identified CMBS as
either subprime or Alt-A securities.
Comprehensive income (loss) - Consists of net income (loss) plus other comprehensive income (loss).
Conforming loan/Conforming jumbo loan/Conforming loan limit - A conventional single-family 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 original principal balance of single-family 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. 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
loans 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 a UPB exceeding the base conforming loan limit (i.e., $417,000) as conforming jumbo
loans.
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 single-family book - Consists of loans in our single-family credit guarantee portfolio that were
originated since 2008. We do not include relief refinance loans, including HARP loans, in this book as
underwriting procedures for relief refinance loans are limited, and, in many cases, do not include all of the
changes in underwriting standards we have implemented since 2008.
Credit enhancement - A financial arrangement that is designed to reduce credit risk by partially or fully
compensating an investor in a mortgage or security (e.g., Freddie Mac) in the event of specified losses.
Freddie Mac 2015 Form 10-K
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Glossary
Examples of credit enhancements include insurance, credit risk transfer transactions,
overcollateralization, indemnification agreements, and government guarantees.
Credit losses - Consists of charge-offs, net and REO operations (income) expense.
Credit-related (benefit) expenses (or credit-related expenses) - Consists of our provision (benefit) for
credit losses and REO operations (income) expense.
Credit score - Credit score data is based on FICO scores, a credit scoring system developed by Fair,
Isaac and Co. FICO scores are currently the most commonly used credit scores. FICO scores are ranked
on a scale of approximately 300 to 850 points with a higher value indicating a lower likelihood of credit
default. Although we obtain updated credit information on certain borrowers after the origination of a loan,
such as those borrowers seeking a modification, the scores presented in our reports represent the credit
score of the borrower at either the time of loan origination or our purchase and may not be indicative of
the current credit worthiness of the borrower.
CSS - Common Securitization Solutions, LLCSM
Current LTV Ratio or CLTV - 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 geographic area since that time. 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 loan
acquisitions, including foreclosure sales. Estimates of the current LTV ratio exclude any secondary
financing by third parties.
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 and/or interest on a loan. For single-family
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. Loans that have been
modified are not counted as delinquent as long as the borrower is not delinquent under the modified
terms.
Derivative - A financial instrument whose value depends upon the characteristics and value of an
underlying entity such as a financial asset or index. Examples include a security or commodity price,
interest or currency rates, and other financial indices.
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 loan obligation.
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Glossary
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 instantaneous change in interest
rates would be expected to be accompanied by an equal and offsetting change in the value of our interest
rate sensitive liabilities, thus leaving economic value unchanged.
ERC - Enterprise Risk Committee
ERM - Enterprise Risk Management
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
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
Fixed-rate loan - Refers to a loan originated at a specific rate of interest that remains constant over the
life of the loan. For purposes of presentation in this report, we have categorized a number of modified
loans as fixed-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 or 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. When we,
as loan 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 that are backed by
mortgages.
GAAP - Generally accepted accounting principles in the United States of America.
Freddie Mac 2015 Form 10-K
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Glossary
Giant PCs - Resecuritizations of previously issued PCs or Giant PCs. Giant PCs are single-class
securities that involve the straight pass through of all of the cash flows of the underlying collateral to
holders of the beneficial interests.
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.
Guidelines - Corporate Governance Guidelines, as revised
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 loan 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 the insurance coverage, if any, that was already in place. HARP is targeted at
borrowers with current LTV ratios above 80%. 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 - Refers to the effort whereby we and Fannie Mae, in conjunction with Treasury, provided
assistance to state and local HFAs so that the HFAs could continue to meet their mission of providing
affordable financing for both single-family and multifamily housing. The HFA initiative included 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-related assets and decreases the estimated
fair value of our callable debt and option-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 loan that allows the borrower to pay only interest (either fixed-rate or adjustable-
rate) for a fixed period of time before payments of principal begin. After the interest-only period, the
borrower may choose to refinance the loan, pay the principal balance in total, or begin paying the
scheduled principal payment due on the loan.
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Glossary
IRS - Internal Revenue Service
K Certificates - Structured pass-through certificates backed primarily by recently originated multifamily
loans purchased by Freddie Mac.
Legacy single-family book - Consists of loans in our single-family credit guarantee portfolio that were
originated in 2008 and prior.
LIBOR - London Interbank Offered Rate
LIHTC partnerships - Low-income housing tax credit partnerships - Prior to 2008, we invested in LIHTC
partnerships as a limited partner. These LIHTC partnerships invest directly in limited partnerships that
own and operate affordable 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 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.
Liquidity and contingency operating portfolio - Subset of our cash and other investments portfolio.
Consists of non-mortgage-related assets, including cash and cash equivalents, securities purchased
under agreements to resell, and non-mortgage-related securities.
Long-term debt - Other debt due after one year based on the original contractual maturity of the debt
instrument. Our long-term debt issuances include medium-term notes, Reference Notes® securities, and
STACR debt notes.
LTV ratio - Loan-to-value ratio - The ratio of the unpaid principal amount of a loan to the value of the
property that serves as collateral for the loan, expressed as a percentage. We report LTV ratios based
solely on the amount of the loan purchased or guaranteed by us, generally excluding any second-lien
loans (unless we own or guarantee the second lien).
Management and 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.
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 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 loans and the mortgage-related securities we hold in our mortgage-
related investments portfolio.
Freddie Mac 2015 Form 10-K
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Glossary
Mortgage-related investments portfolio - Our investment portfolio, which consists of mortgage-related
securities and unsecuritized single-family and multifamily 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.
Mortgage-to-debt OAS - The net OAS between the mortgage asset 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 loan - A loan secured by a property with five or more residential rental units or by a
manufactured housing community.
Multifamily mortgage portfolio - Consists of multifamily mortgage loans held by us on our consolidated
balance sheets as well as our guarantee of K Certificates, other securitization products, and other
mortgage-related guarantees, but excluding those underlying our guarantees of HFA bonds.
Multifamily new business activity - Represents loan purchases and issuances of other mortgage-
related guarantees.
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 the total assets of Freddie Mac (excluding Treasury’s commitment and any unfunded amounts
thereof), less our total liabilities (excluding any obligation in respect of capital stock), in each case as
reflected on our consolidated balance sheets prepared in conformity 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 $1.8 billion for 2015, is $1.2 billion for 2016, 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.
NIBP - New Issue Bond Program - 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 provided financing for HFAs to issue new housing bonds. Treasury is
obligated to absorb losses under the program up to a certain level before we are exposed to any losses.
Non-accrual loan - A loan for which we are not accruing interest income. We place 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.
NYSE - New York Stock Exchange
Freddie Mac 2015 Form 10-K
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Glossary
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. When
the OAS on a given asset widens, the fair value of that asset will typically decline, all other market factors
being equal. The opposite is true when the OAS on a given asset tightens.
Option ARM loan - 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 borrower to make monthly payments that may be less than the interest
accrued for the period. The unpaid interest is added to the principal balance of the loan, known as
negative amortization. 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 loans, calculated as the UPB of the loan divided by the lesser
of the appraised value of the property at the time of loan origination or the 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 loan 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.
PCs - Participation Certificates - Single-class pass-through securities that we issue and guarantee as part
of a securitization transaction. Typically we purchase loans from sellers, 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 loans in
consideration of the loans or are sold to third-party investors or retained by us if we purchased the loans
for cash.
Pension plan - Employees’ Pension Plan
Performing loan - A loan where the borrower is less than three monthly payments past due, and not in
the process of foreclosure. Conversely, a non-performing loan is one where the borrower is three months
or more past due or is in the process of foreclosure. A reperforming loan is a loan that was previously
classified as non-performing, but the borrower subsequently made payments such that the loan returns to
less than three months past due.
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.
Primary mortgage market - The market where lenders originate loans by lending 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, relating to Treasury's purchase of
Freddie Mac 2015 Form 10-K
399
Glossary
senior preferred stock, 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 allowance, such as the allowance for loan losses, but including direct write-downs of the
investment. Recorded investment excludes accrued interest income.
Recoveries of charge-offs - Recoveries of charge-offs primarily result from foreclosure alternatives and
REO acquisitions on loans where a share of default risk has been assumed by mortgage insurers,
servicers, or third parties through certain credit enhancements, or 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.
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 loan - A single-family loan delivered to us for purchase or guarantee that meets the
criteria of the Freddie Mac Relief Refinance Mortgage sm 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.
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 loans in
the form of whole loans (i.e., loans that have not been securitized) and mortgage-related securities. We
participate in the secondary mortgage market by issuing guaranteed mortgage-related securities,
principally PCs, and by purchasing loans and mortgage-related securities for investment.
Senior preferred stock - The shares of Variable Liquidation Preference Senior Preferred Stock issued to
Treasury under the Purchase Agreement.
Seriously delinquent or SDQ - Single-family 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
Freddie Mac 2015 Form 10-K
400
Glossary
Short sale - 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 loan
indebtedness in full satisfaction of the loan.
Short-term debt - Other debt due within one year based on the original contractual maturity of the debt
instrument. Our short-term debt issuances include discount notes and Reference Bills® securities.
Single-family credit guarantee portfolio - Consists of unsecuritized single-family loans, single-family
loans held by consolidated trusts, single-family loans underlying non-consolidated resecuritization
products, and single-family loans covered by long-term standby commitments. Excludes our
resecuritizations of Ginnie Mae Certificates and our guarantees under the HFA initiative 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.
Single-family loan - A 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 debt note - Structured Agency Credit Risk debt note - A debt security where the principal balance
is subject to the performance of a reference pool of loans owned or guaranteed by Freddie Mac.
Step-rate modified loan - A term that we generally use to refer to our HAMP loans that have provisions
for reduced interest rates that remain fixed for the first five years and then increase over a period of time
to a market rate.
Stripped Giant PCs - Multiclass securities that are formed by resecuritizing previously issued PCs or
Giant PCs and issuing principal-only and interest-only securities backed by the cash flows from the
underlying collateral.
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. Certain security collateral underlying our other securitization products 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.
SVP - Senior Vice President
Swaption - An option contract to enter into an interest-rate swap. In exchange for an option premium, a
Freddie Mac 2015 Form 10-K
401
Glossary
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 - 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 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. No outstanding guarantees existed as of December 31, 2015.
TDR - Troubled debt restructuring - A restructuring of a debt constitutes a TDR if the creditor for economic
or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would
not otherwise consider.
Thrift/401(k) Plan - The Federal Home Loan Mortgage Corporation Thrift/401(k) Savings Plan
Total other comprehensive income (loss) (or other comprehensive income (loss)) - Consists of the
after-tax changes in the unrealized gains and losses on available-for-sale securities, the effective portion
of derivatives accounted for as cash flow hedge relationships, and defined benefit plans.
Total mortgage portfolio - Includes loans and mortgage-related securities held on our consolidated
balance sheets as well as our non-consolidated issued and guaranteed single-class and multiclass
securities, and other mortgage-related guarantees issued to third parties.
Treasury - U.S. Department of the Treasury
UPB - Unpaid principal balance - Loan UPB amounts in this report have not been reduced by charge-offs
recognized prior to the loan being subject to a foreclosure transfer, deed in lieu of foreclosure, or short
sale transaction.
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 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 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
Freddie Mac 2015 Form 10-K
402
Glossary
on a fully diluted basis on the date of exercise.
Workforce housing - Multifamily housing that is affordable to the majority of low to middle income
households.
Workout, or loan workout - A workout is either a home retention action, which is either a loan
modification, repayment plan, or forbearance agreement, or 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.
Freddie Mac 2015 Form 10-K
403
Index
FORM 10-K INDEX
Item Number
PART I
Item 1.
Business
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
Controls and Procedures
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Signatures
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director
Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Page(s)
1, 5-8, 30-41,
52-57, 67-72,
81-83, 157-169
176-199
Not Applicable
7
200
Not Applicable
201-203
10
2-4, 8, 9, 11-29,
42-53, 58-68,
73-140, 148-156,
170-175
141-147
204-330
Not Applicable
205, 206, 331-334
335, 360
84-88, 335-355,
381
350-352, 356-379
380-382
345-347, 383-385
386-387
388
389-391
Freddie Mac 2015 Form 10-K
404
Exhibit Index
Exhibit No.
3.1
EXHIBIT INDEX
Description*
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)
3.2
Bylaws of the Federal Home Loan Mortgage Corporation, as amended and restated July 13, 2015 (incorporated
by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K as filed on July 15, 2015)
4.1
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)
4.2
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)
4.3
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)
4.4
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)
4.5
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)
4.6
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)
4.7
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)
4.8
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)
4.9
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)
Freddie Mac 2015 Form 10-K
E-1
Exhibit Index
Exhibit No.
Description*
4.10
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)
4.11
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)
4.12
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)
4.13
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)
4.14
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)
4.15
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)
4.16
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)
4.17
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)
4.18
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)
4.19
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)
4.20
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)
Freddie Mac 2015 Form 10-K
E-2
Exhibit Index
Exhibit No.
Description*
4.21
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)
4.22
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)
4.23
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)
4.24
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)
4.25
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)
4.26
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 for the year ended December 31, 2012, as filed on February 28, 2013)
4.27
Federal Home Loan Mortgage Corporation Global Debt Facility Agreement, dated February 19, 2015
(incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2015, as filed on May 5, 2015)
10.1
10.2
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)†
10.3
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)†
10.4
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)†
10.5
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)†
10.6
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)†
Freddie Mac 2015 Form 10-K
E-3
Exhibit Index
Exhibit No.
Description*
10.7
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 year ended December 31, 2008, as filed on March 11, 2009)†
10.8
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)†
10.9
10.10
10.11
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 year ended December 31, 2009, as filed on February 24, 2010)†
10.12
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)†
10.13
10.14
10.15
10.16
10.17
10.18
10.19
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 for the quarterly period ended September 30, 2012, 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 for the quarterly period ended June 30, 2013, as filed on August 7, 2013)†
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) †
Federal Home Loan Mortgage Corporation Supplemental Executive Retirement Plan II (effective January 1, 2014)
(incorporated by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2014, as filed on February 19, 2015) †
First Amendment to the Federal Home Loan Mortgage Corporation Supplemental Executive Retirement Plan II
(effective January 1, 2014) (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2015, as filed on August 4, 2015) †
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)†
10.20
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)†
10.21
Third Amendment to the Federal Home Loan Mortgage Corporation Long-Term Disability Plan†
Freddie Mac 2015 Form 10-K
E-4
Exhibit Index
Exhibit No.
Description*
10.22
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) †
10.23
2015 Executive Management Compensation Program (incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2015, as filed on August 4,
2015) †
10.24
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)†
10.25
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)†
10.26
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) †
10.27
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) †
10.28
10.29
10.30
10.31
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 (incorporated by
reference to Exhibit 10.48 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2013,
as filed on February 27, 2014)†
Restrictive Covenant and Confidentiality Agreement, dated April 9, 2013, between Freddie Mac and David B.
Lowman (incorporated by reference to Exhibit 10.49 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2013, as filed on February 27, 2014)†
10.32
Memorandum Agreement, dated June 24, 2013, between Freddie Mac and Michael Hutchins †
10.33
Restrictive Covenant and Confidentiality Agreement, dated June 25, 2013, between Freddie Mac and Michael
Hutchins †
10.34
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)†
10.35
PC Master Trust Agreement dated April 23, 2015 (incorporated by reference to Exhibit 10.2 to the Registrant’s
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015, as filed on May 5, 2015)
10.36
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)†
Freddie Mac 2015 Form 10-K
E-5
Exhibit Index
Exhibit No.
10.37
10.38
10.39
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)†
Description*
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 quarterly period ended March 31, 2009, as
filed on May 12, 2009)
10.40
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)
10.41
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)
10.42
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)
10.43
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)
10.44
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)
12.1
Statement re: computation of ratio of earnings to fixed charges and computation of ratio of earnings to combined
fixed charges and preferred stock dividends
24.1
Powers of Attorney
31.1
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)
31.2
Certification of Executive Vice President —Chief Financial Officer pursuant to Securities Exchange Act Rule
13a-14(a)
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2
Certification of Executive Vice President —Chief Financial Officer pursuant to 18 U.S.C. Section 1350
Freddie Mac 2015 Form 10-K
E-6
Exhibit Index
Exhibit No.
101.INS
XBRL Instance Document
Description*
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.
Freddie Mac 2015 Form 10-K
E-7
Exhibit 10.21
THIRD AMENDMENT
TO THE
FEDERAL HOME LOAN MORTGAGE CORPORATION
LONG TERM DISABILITY PLAN
(As Restated and Amended January 1, 1997)
THIRD AMENDMENT TO THE FEDERAL HOME LOAN MORTGAGE CORPORATION
LONG TERM DISABILITY PLAN (the “Plan”) by the FEDERAL HOME LOAN
MORTGAGE CORPORATION (the “Corporation”), a corporation organized and existing under
the laws of the United States of America.
WHEREAS, the Plan was restated effective January 1, 1997;
W I T N E S S E T H:
WHEREAS, the Corporation desires to amend the Plan;
WHEREAS, Article 3.6 of the Plan permits the Corporation to amend the Plan; and
WHEREAS, the appropriate officer of the Corporation has been duly authorized to
amend the Plan and to execute this amendment.
NOW, THEREFORE, the Plan is hereby amended as follows, effective January 1, 2016:
1.
Section 1.1 (Purpose) is amended to replace the second sentence thereof with the
following:
The Plan is intended to provide such long-term disability benefits as are specified
in the Policy to certain employees of the Federal Home Loan Mortgage
Corporation and participating Employers (as defined in Section 2.6) on an insured
basis.
2.
Section 2.3 (Eligibility and Benefits) is amended to read as follows:
2.3. Eligibility and Benefits. The employees or classes of employees eligible for
coverage under the Plan, the effective dates upon which they become eligible, the
conditions which they must satisfy to become eligible to receive disability
benefits, the benefits payable, and other provisions affecting the Plan are those set
forth in the Policy. The term “employee” as used in the Plan shall mean a
Regular Full-time or Regular Part-time employee as defined in Freddie Mac
Corporate Policy No. 3-231, Hours of Work, Worker Classifications, Pay and
Overtime, as such policy may be amended, replaced or renumbered (“Worker
Classification Policy”), who is regularly scheduled to work at least 20 hours per
week, is on the payroll of an Employer and not paid by accounts payable, whose
wages from the Employer are subject to withholding for purposes of Federal
income taxes and the Federal Insurance Contributions Act.
The term “employee” as used herein shall not include:
(a) individuals whom the Corporation classifies, pursuant to the Worker
Classification Policy, as
(i)
(ii)
(iii)
(iv)
Temporary employees
Interns
Contingent Workers, or
Independent Contractors
(or similar classification), each as defined and classified by the Employer and
regardless of the individual’s employment status under applicable law;
(b) Individuals who are retroactively classified as Regular Full-Time or Part-
Time employees with respect to such period of retroactive classification; and
(c) Leased Employees (as defined in the Worker Classification Policy, and
determined, for this purpose, without regard to the year of service
requirement).
For an Employer pursuant to Sections 2.6(b) or 2.6(c), the Plan Administrator
shall apply the Worker Classification Policy and the other provisions of this
section to that entity for purposes of determining whether an individual is an
Employee.
3.
Section 2.4 (Claims Procedure) is amended to add the following new sentence at the end
thereof:
No legal action can be brought to recover under any benefit after three years from
the deadline for filing claims. If the time limitations in this section have not been
exceeded by the Plan Administrator (or delegate), no person may bring an action
in a court of law unless the claims review procedure is exhausted and final
determination has been made. If the claimant or another interested party
challenges the decision, a review by a court of law will be limited to the facts,
evidence and issues presented by the claimant during the claims review procedure
described in this section. Issues not raised with the Plan Administrator during the
appeal provided for in this section will be deemed waived.
4.
The Plan is amended to add the following new definition designated as Section 2.6:
2.6. Employer. For purposes of this Plan, an Employer is:
(a)
(b)
the Corporation;
a wholly-owned subsidiary of the Corporation that adopts the Plan with
the approval of the Corporation, subject to such terms and conditions as
the Corporation may prescribe, and which is identified on Appendix 1
hereto; and
any successor entity which assumes the obligations of this Plan.
(c)
5.
The Plan is amended to add the following new Section 2.7:
2.7. ERISA. The Employee Retirement Income Security Act of 1974, as amended,
and associated regulations.
6. The Plan is amended to add the following new Section 3.10:
3.10.
Vesting of Benefits. No person shall have any right, title or interest in or to the
assets of the Corporation as a participant in the Plan. There is no vesting in, or accrual
of, benefits under the Plan.
7. The Plan is amended to add the following new Section 3.11:
Indemnification. The Corporation will indemnify and defend to the fullest extent
3.11
permitted by law any director, officer or employee of the Employer against all liabilities,
damages, costs and expenses (including attorneys’ fees and amounts paid in settlement of
any claims approved by the Corporation) reasonably incurred in connection with any and
all claims, demands, suits or proceedings in connection with the Plan that may be brought
by any person, corporation, entity, government or agency thereof, except such liabilities
and expenses as are incurred because of the indemnified individual’s willful misconduct
or knowing violation of criminal law.
IN WITNESS WHEREOF, the Corporation has caused this THIRD AMENDMENT TO THE
FEDERAL HOME LOAN MORTGAGE CORPORATION LONG TERM DISABILITY
PLAN to be executed by its duly authorized officer, this 22nd day of December, 2015.
FEDERAL HOME LOAN
MORTGAGE CORPORATION
Signature: /s/ Daniel E. Scheinkman____________
Daniel E. Scheinkman
Vice President - Compensation and Benefits
Attest: /s/ Alicia Myara__________
Assistant Secretary
Federal Home Loan Mortgage Long Term Disability Plan
APPENDIX 1 - WHOLLY OWNED SUBSIDIARIES DESIGNATED BY FREDDIE
MAC AS ‘EMPLOYERS’ UNDER THE PLAN
None.
Exhibit 10.32
Date
June 24, 2013
From
Donald H. Layton
To
Michael Hutchins
Subject
Your Compensation as Senior Vice President-Investments and Capital Markets
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 Senior Vice President-Investments and Capital Markets (“I&CM”), effective July 9, 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 Senior Vice President-I&CM, 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.
Our Compliance Division has approved your continued participation in the development and
publication of a series of academic articles and a book. Beyond this, your agree to not be
engaged in any other business activity unless permitted under 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.
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 are
enclosed. The 2013 EMCP Program Document outlines the terms and conditions of our
compensation program for senior executives, while the Recapture and Forfeiture Agreement
describes 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.
Compensation Terms - Michael Hutchins - June 24, 2013
Page 2 of 4
Your target total direct compensation (“Target TDC”) will be $2,000,000, 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 $1,500,000 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 $600,000, 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 $900,000.
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.
Compensation Terms - Michael Hutchins - June 24, 2013
Page 3 of 4
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.
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. 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.
IV. 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.
V. 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 - Michael Hutchins - June 24, 2013
Page 4 of 4
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.
VI. Return of Signed Documents
Please confirm that the terms and conditions in this letter conform to your understanding by
returning to Scott Coolidge, Freddie Mac’s Senior Vice President - Human Resources, a signed
copy of this letter as well as signed copies of the 2013 EMCP, the Recapture and Forfeiture
Agreement and the Restrictive Covenant and Confidentiality Agreement.
/s/ Donald H. Layton_____________
Donald H. Layton
Chief Executive Officer
June 25, 2013
Date
I agree to the terms of this Agreement.
/s/ Michael Hutchins_____________
Michael Hutchins
June 25, 2013
Date
Exhibit 10.33
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 Michael Hutchins (“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
2
that are of the type and nature rendered or performed by you during the past two years of your
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
3
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.
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 Senior Vice President-Investments and
Capital Markets, 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
4
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.
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 and
C.
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
5
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.
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/ Michael Hutchins
Michael Hutchins
Date: June 25, 2013
RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Exhibit 12.1
Net income (loss) before income tax (expense) benefit and cumulative effect of
changes in accounting principles
Add:
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)
Year Ended December 31,
2015
2014
2013
2012
2011
(dollars in millions)
$
9,274
$ 11,002
$ 25,363
$
9,445
$ (5,666)
51,916
54,916
55,779
66,502
79,988
2
5
4
4
4
$ 61,192
$ 65,923
$ 81,146
$ 75,951
$ 74,326
$ 51,916
$ 54,916
$ 55,779
$ 66,502
$ 79,988
2
5
4
4
4
$ 51,918
$ 54,921
$ 55,783
$ 66,506
$ 79,992
5,510
19,610
47,591
7,229
6,498
$ 57,428
$ 74,531
$ 103,374
$ 73,735
$ 86,490
1.18
1.07
1.20
—
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 for the year ended December 31, 2011, 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 $8.6 billion,
$22.2 billion, and $12.2 billion for the years ended December 31, 2014, 2013, and 2011, 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, William H. McDavid, Alicia S. Myara and Kevin I.
MacKenzie, 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, 2015
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 December
2, 2015.
/s/ Raphael W. Bostic___
Raphael W. Bostic
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, William H. McDavid, Alicia S. Myara and Kevin I.
MacKenzie, 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, 2015
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 December
2, 2015.
/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, William H. McDavid, Alicia S. Myara and Kevin I.
MacKenzie, 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, 2015
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 December
2, 2015.
/s/ Lance F. Drummond
Lance F. Drummond
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, William H. McDavid, Alicia S. Myara and Kevin I.
MacKenzie, 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, 2015
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 December
2, 2015.
/s/ Thomas M. Goldstein
Thomas M. Goldstein
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, William H. McDavid, Alicia S. Myara and Kevin I.
MacKenzie, 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, 2015
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 December
2, 2015.
/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, William H. McDavid, Alicia S. Myara and Kevin I.
MacKenzie, 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, 2015
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 December
2, 2015.
/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, William H. McDavid, Alicia S. Myara and Kevin I.
MacKenzie, 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, 2015
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 December
2, 2015.
/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, William H. McDavid, Alicia S. Myara and Kevin I.
MacKenzie, 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, 2015
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 December
2, 2015.
/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, William H. McDavid, Alicia S. Myara and Kevin I.
MacKenzie, 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, 2015
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 December
2, 2015.
/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, William H. McDavid, Alicia S. Myara and Kevin I.
MacKenzie, 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, 2015
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 December
2, 2015.
/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, William H. McDavid, Alicia S. Myara and Kevin I.
MacKenzie, 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, 2015
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 December
2, 2015.
/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, William H. McDavid, Alicia S. Myara and Kevin I.
MacKenzie, 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, 2015
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 December
2, 2015.
/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, 2015 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 18, 2016
/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, 2015 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 18, 2016
/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, 2015 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 18, 2016
/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, 2015 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 18, 2016
/s/ James G. Mackey
James G. Mackey
Executive Vice President — Chief Financial Officer