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, 2016
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, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter) was $1.2 billion.
As of February 2, 2017, there were 650,053,863 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
Table of Contents
TABLE OF CONTENTS
INTRODUCTION
ABOUT FREDDIE MAC
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
CREDIT RISK
OPERATIONAL RISK
MARKET 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
2016 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 2016 Form 10-K
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Introduction
About Freddie Mac
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 “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 borrowers.
We support the U.S. housing market and the overall economy by enabling America’s families to access
mortgage loan funding with better terms and by providing consistent liquidity to the multifamily mortgage
market, 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 better housing finance system for the nation.
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, the support provided by Treasury pursuant to the Purchase
Agreement also enables us to have adequate liquidity to conduct our normal business activities. The
Purchase Agreement requires our future profits to 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 “MD&A -
Conservatorship and Related Matters” and Note 2.
The tables and graphs 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
Freddie Mac 2016 Form 10-K
1
Introduction
About Freddie Mac
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 12/31/16
Scheduled Q1 2017 Dividend Obligation
Total Dividend Payments
Total
$101.4
4.5
$105.9
Freddie Mac 2016 Form 10-K
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Introduction
About Freddie Mac
CONSOLIDATED FINANCIAL RESULTS
Comprehensive Income
Our comprehensive income for 2016 increased compared to 2015, primarily as a result of the following
items:
•
Lower derivative fair value losses due to an increase in longer-term interest rates during 2016
compared to 2015 when longer-term interest rates declined slightly;
• Higher other income primarily as a result of improved pricing on K Certificates and SB Certificates,
coupled with increased fair value gains on multifamily mortgage loans for which we have elected the
fair value option and multifamily mortgage loan purchase commitments for which we newly elected
the fair value option beginning in 2016, due to market spread tightening in 2016 compared to
widening in 2015; partially offset by the following:
Lower net interest income due primarily to continued reduction in the balance of our mortgage-related
investments portfolio; and
Increased losses on investment securities primarily as a result of an increase in interest rates during
2016 compared to 2015 when longer-term interest rates declined slightly, coupled with a decrease in
realized gains in 2016 as we sold fewer non-agency securities in an unrealized gain position.
•
•
Our comprehensive income for 2015 declined compared to 2014, primarily as a result of the following
items:
Freddie Mac 2016 Form 10-K
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Introduction
About Freddie Mac
•
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
favorable 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 market spread widening, while in 2014 we recorded gains due to
market 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.
•
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 GAAP earnings when interest rates fluctuate. Based upon the
composition of our financial assets and liabilities, including derivatives, at December 31, 2016, 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. For information about our interest-rate
risk management activities and the sensitivity of our financial results to interest-rate volatility, see
"MD&A - Consolidated Results of Operations - Derivative Gains (Losses) - Explanation of Key Drivers
of Derivative Gains (Losses)", "MD&A - Consolidated Results of Operations - Other Key Drivers -
Items Affecting Multiple Lines - Debt Funding Strategies and Interest-Rate Risk Management
Activities," and "MD&A - Risk Management - Market Risk."
• Spread Volatility — The volatility of market spreads (i.e., credit spreads, liquidity spreads, risk
premiums, etc.), or OAS, is the risk associated with changes in the excess of market interest rates
over benchmark rates. We hold assets and liabilities that expose us to spread volatility, which may
contribute to significant GAAP earnings volatility. For financial assets measured at fair value, we
generally recognize fair value losses when market spreads widen. Conversely, for financial liabilities
measured at fair value, we generally recognize fair value gains when market spreads widen.
The variability of GAAP earnings and the declining capital reserve required under the terms of the
Purchase Agreement (ultimately reaching zero in 2018) increase the risk of our having a negative net
worth and thus being required to draw from Treasury. We could face a risk of a draw for a variety of
reasons, including if we were to experience a large decrease in interest rates, which would result in GAAP
losses due to measurement differences, coupled with a large widening of market spreads.
In an effort to reduce the probability of a draw due to changes in interest rates, we entered into certain
transactions, including structured transactions, during 2016 that have resulted in additional financial
assets being recognized and measured at fair value, which will help to reduce the measurement
differences. In addition, in the first quarter of 2017, we began using hedge accounting for certain single-
family mortgage loans, which is intended to partially reduce the interest-rate volatility in our GAAP
earnings by eliminating a portion of the measurement differences between our GAAP financial results and
the underlying economics of our business.
Freddie Mac 2016 Form 10-K
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Introduction
Our Business
OUR BUSINESS
PRIMARY BUSINESS STRATEGIES
Our primary business strategies describe how we plan to pursue our Charter Mission over a timeframe of
two to four 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 GSE 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 2016 Form 10-K
5
Introduction
OUR CHARTER
Our Business
Our Charter forms the framework for our business activities. Our Charter Mission 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 borrowers 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. The base conforming loan limit for a one-family residence has been set at
$424,100 for 2017, and was set at $417,000 from 2006 to 2016. Higher limits have been established in
certain “high-cost” areas (for 2017, up to $636,150 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 2016 Form 10-K
6
Introduction
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 11.
EMPLOYEES
At February 2, 2017, we had 5,959 full-time and 45 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 2016 Form 10-K
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Introduction
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, the document will
be posted on our website within the same time period that a prospectus for a non-exempt securities
offering would be required to be filed with the SEC.
The website address for disclosure about our debt securities is www.freddiemac.com/debt. From this
address, investors can access the offering circular and related supplements for debt securities offerings
under Freddie Mac’s global debt facility, including pricing supplements for individual issuances of debt
securities. Similar information about our STACR and SCR debt notes is available at
www.freddiemac.com/creditriskofferings and www.freddiemac.com/multifamily/investors/structured-credit-
risk, respectively.
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.
Freddie Mac 2016 Form 10-K
8
Introduction
Forward-Looking Statements
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, the costs and benefits of our credit
risk transfer transactions, 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;
• 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;
• 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);
• 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 adequate liquidity to fund our operations;
• Our ability to maintain the security of our operating systems and infrastructure (e.g., against
cyberattacks);
• 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 economic exposure and GAAP earnings exposure to interest-rate
Freddie Mac 2016 Form 10-K
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Introduction
Forward-Looking Statements
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 2016 Form 10-K
10
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)
2016
2015
2014
2013
2012
At or For the Year Ended December 31,
Statements of Comprehensive Income Data
Net interest income
Benefit (provision) for credit losses
Non-interest income (loss)
Non-interest expense
Income tax (expense) benefit
Net income
Comprehensive income
Net income (loss) attributable to common
stockholders
Net income (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)
Real estate owned, net
Total assets
Debt securities of consolidated trusts held by third
parties
Other Debt
All other liabilities
Total stockholders' equity
Portfolio Balances - UPB
$14,379
$14,946
$14,263
$16,468
$17,611
803
500
(4,043)
(3,824)
7,815
7,118
97
0.03
—
2,665
(3,599)
(4,738)
(2,898)
6,376
5,799
(58)
(113)
(3,090)
(3,312)
7,690
9,426
2,465
8,519
(2,089)
23,305
48,668
51,600
(1,890)
(4,083)
(2,193)
1,537
10,982
16,039
(23)
(2,336)
(3,531)
(2,074)
(0.01)
—
(0.72)
—
(1.09)
—
(0.64)
—
3,234
3,235
3,236
3,238
3,240
$1,690,218
$1,625,184
$1,558,094
$1,529,905
$1,495,932
1,198
1,725
2,558
4,551
4,378
2,023,376
1,985,892
1,945,360
1,965,831
1,989,557
1,648,683
1,556,121
1,479,473
1,433,984
1,419,524
353,321
414,148
449,890
506,537
547,219
16,297
5,075
12,683
2,940
13,346
2,651
12,475
12,835
13,987
8,827
Mortgage-related investments portfolio
$298,426
$346,911
$408,414
Total Freddie Mac mortgage-related securities
1,832,810
1,729,493
1,637,086
2,011,414
1,941,587
1,910,106
77,399
16,272
82,347
22,649
82,908
33,130
$461,024
1,592,511
1,914,661
78,708
43,457
$557,544
1,562,040
1,956,276
66,590
63,005
Total mortgage portfolio
TDRs on accrual status
Non-accrual loans
Ratios
Return on average assets
0.4%
0.3%
0.4%
2.5%
0.5%
Allowance for loan losses as percentage of loans,
held-for-investment
Equity to assets
0.7
0.2
0.9
0.1
1.3
0.4
1.4
0.5
1.8
0.2
Freddie Mac 2016 Form 10-K
11
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. Increases in
home prices lower the losses we incur on
defaulted loans.
• 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 2016, increasing 6.5%, compared to an increase of 6.2%
during 2015, 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 2016 surpassed their pre-financial crisis peak reached in June
2006, 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 2016 Form 10-K
12
Management's Discussion and Analysis
Key Economic Indicators | Interest Rates
INTEREST RATES
KEY MARKET INTEREST RATES
EFFECT ON FINANCIAL RESULTS
• The 30-year Primary Mortgage Market Survey ("PMMS") interest rate is indicative of what a
consumer could expect to be offered on a first-lien, prime, home purchase mortgage with an LTV of
80%. Increases in the PMMS rate typically result in decreases in refinance activity and originations.
Decreases 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, measured at fair value on a recurring basis on our consolidated balance sheets.
• For additional information on the effect of LIBOR swap rates on our financial results, see "Our
Business Segments - Investments - Market Conditions."
Freddie Mac 2016 Form 10-K
13
Management's Discussion and Analysis
Key Economic Indicators | Interest Rates
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
increase, mortgage interest rates for 30-year fixed-rate loans usually also increase. When these rates
decline, mortgage interest rates for 30-year fixed-rate loans usually also decline.
•
Longer-term interest rates, as indicated by the 10-year LIBOR rate and the 10-year Treasury rate,
and mortgage interest rates, as indicated by the 30-year PMMS rate, both increased significantly
during the fourth quarter of 2016, which caused rates to be higher at the end of 2016 than the end of
2015. However, average interest rates were lower in 2016 compared to 2015 and lower in 2015
compared to 2014.
• The Federal Reserve raised short-term interest rates in December 2015 and again in December
2016.
Freddie Mac 2016 Form 10-K
14
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.
• 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.
•
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.
Source: U.S. Bureau of Labor Statistics
COMMENTARY
• Monthly net new job growth decreased during 2016.
• The unemployment rate declined slightly in 2016.
Freddie Mac 2016 Form 10-K
15
Management's Discussion and Analysis
Consolidated Results of Operations
CONSOLIDATED RESULTS OF OPERATIONS
You should read this discussion of our consolidated results of operations in conjunction with our
consolidated financial statements and accompanying notes.
The table below compares our consolidated results of operations for the past three years.
(Dollars in millions)
Net interest income
2016
2015
2014
$
$14,379
$14,946
$14,263
($567)
Benefit (provision) for credit losses
803
2,665
(58)
(1,862)
%
(4)%
(70)%
$
$683
%
5 %
2,723
4,695 %
Year Ended December 31,
Change 2016-2015
Change 2015-2014
15,182
17,611
14,205
(2,429)
(14)%
3,406
24 %
(211)
(274)
(191)
(240)
(422)
29
(2,696)
(8,291)
2,422
(292)
(938)
101
12 %
90 %
35 %
182
5,595
646
43 %
67 %
69 %
(78)
508
1,494
(586)
(115)%
(986)
(66)%
1,254
(879)
8,044
500
(3,599)
(113)
2,133
4,099
243 %
114 %
(8,923)
(111)%
(3,486)
(3,085)%
Net interest income after benefit (provision) for
credit losses
Non-interest income (loss):
Gains (losses) on extinguishment of debt
Derivative gains (losses)
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
Temporary Payroll Tax Cut Continuation Act of
2011 expense
Other expense
(2,005)
(1,927)
(1,881)
(287)
(1,152)
(338)
(967)
(599)
(1,506)
(196)
(775)
(238)
(78)
51
(4)%
15 %
(46)
(142)
(2)%
(72)%
(185)
(19)%
(192)
(25)%
907
695
(1,268)
(533)%
60 %
15 %
26 %
(1,648)
(1,728)
(53)%
(16)%
13 %
(17)%
Total non-interest expense
(4,043)
(4,738)
(3,090)
Income before income tax expense
11,639
9,274
11,002
2,365
Income tax expense
Net income
(3,824)
(2,898)
(3,312)
(926)
(32)%
414
7,815
6,376
7,690
1,439
23 %
(1,314)
Total other comprehensive income (loss), net of
taxes and reclassification adjustments
(697)
(577)
1,736
(120)
(21)%
(2,313)
(133)%
Comprehensive income
$7,118
$5,799
$9,426
$1,319
23 % ($3,627)
(38)%
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 and a summary of other significant accounting policies and the related notes in
which information about them can be found.
Freddie Mac 2016 Form 10-K
16
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:
Guarantee fees on debt securities issued by consolidated trusts. We record interest income on
loans held by consolidated trusts and interest expense on the debt securities issued by the trusts.
The difference between the interest income on the loans and the interest expense on the debt
represents the guarantee fee income we receive as compensation for our guarantee of the
principal and interest payments of the issued debt securities. This difference includes the
legislated 10 basis point increase in guarantee fees that is remitted to Treasury as part of the
Temporary Payroll Tax Cut Continuation Act of 2011; and
The difference between the interest income earned on all other interest-earning assets, excluding
loans held by consolidated trusts, and the interest expense incurred on the liabilities used to fund
those assets.
Contractual net interest income is primarily driven by the volume of assets in the mortgage-related
investments portfolio 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 largest portion of our total net amortization relates to loans and debt securities of consolidated
trusts. Amortization related to investment securities, other debt, and other assets and liabilities makes
up a smaller portion. 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.
The net amortization of loans and debt securities of consolidated trusts is primarily driven by actual
prepayments on the underlying loans. 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 from the loans backing these securities are remitted to the security holders at a date
subsequent to the date these proceeds are received by us.
• 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 2016 Form 10-K
17
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. To
calculate the average balances, we generally use a daily weighted average of amortized cost. When daily
average balance information is not available, such as for mortgage loans, we use monthly averages.
Mortgage loans on non-accrual status, where interest income is generally recognized when collected, are
included in the average balances.
Year Ended December 31,
2016
Interest
Income
(Expense)
Average
Balance
Average
Rate
Average
Balance
2015
Interest
Income
(Expense)
Average
Rate
Average
Balance
2014
Interest
Income
(Expense)
Average
Rate
$16,932
$42
0.25%
$12,482
$8
0.06%
$13,889
$4
0.03%
59,639
484
217
11
0.36
2.28
51,219
161
58
4
0.11
2.48
42,905
—
28
—
0.06
—
189,982
7,262
3.82
226,162
8,706
3.85
256,548
10,027
3.91
(94,624)
(3,509)
(3.71)
(107,986)
(3,929)
(3.64)
(111,545)
(4,190)
(3.76)
95,358
3,753
3.94
118,176
4,777
4.04
145,003
5,837
4.03
15,734
102
0.65
10,699
17
0.16
9,983
6
0.06
1,649,727
55,417
3.36
1,590,768
55,867
3.51
1,540,570
57,036
3.70
135,882
5,623
4.14
157,261
6,359
4.04
170,017
6,569
3.86
$1,973,756
$65,165
3.30
$1,940,766
$67,090
3.46
$1,922,367
$69,480
3.61
$1,674,474
($48,108)
(2.87)
$1,611,388
($49,465)
(3.07)
$1,557,895
($52,193)
(3.35)
(94,624)
3,509
3.71
(107,986)
3,929
3.64
(111,545)
4,190
3.76
1,579,850
(44,599)
(2.82)
1,503,402
(45,536)
(3.03)
1,446,350
(48,003)
(3.32)
86,284
298,040
384,324
(350)
(5,646)
(5,996)
(0.41)
(1.89)
(1.56)
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)
1,964,174
(50,595)
(2.57)
1,925,000
(51,916)
(2.70)
1,896,448
(54,916)
(2.89)
—
(191)
(0.01)
—
(228)
(0.01)
—
(301)
(0.02)
9,582
—
0.01
15,766
—
0.02
25,919
—
0.04
$1,973,756
($50,786)
(2.57)
$1,940,766
($52,144)
(2.69)
$1,922,367
($55,217)
(2.87)
$14,379
0.73%
$14,946
0.77%
$14,263
0.74%
(Dollars in millions)
Interest-earning assets:
Cash and cash
equivalents
Securities purchased
under agreements to
resell
Advances to lenders
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
Freddie Mac 2016 Form 10-K
18
Management's Discussion and Analysis
Consolidated Results of Operations | Net Interest Income
(1) Loan fees, primarily consisting of amortization of delivery fees, included in interest income were $2.6 billion, $2.0 billion, and $1.4 billion for
loans held by consolidated trusts and $215 million, $383 million, and $373 million for loans held by Freddie Mac during 2016, 2015, and 2014,
respectively.
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.
(Dollars in millions)
Interest-earning assets:
Cash and cash equivalents
Securities purchased under agreements to
resell
Advances to lenders
Mortgage-related securities:
2016 vs. 2015 Variance Due to
2015 vs. 2014 Variance Due to
Rate
Volume
Total
Change
Rate
Volume
Total
Change
$34
147
—
$—
12
7
$34
159
7
$6
24
—
($2)
6
4
$4
30
4
Mortgage-related securities
(61)
(1,383)
(1,444)
(149)
(1,172)
(1,321)
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
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
(74)
(135)
74
494
(889)
11
(2,479)
2,029
146
($2,213)
(882)
$288
420
(1,024)
85
(450)
(736)
129
(20)
11
132
261
(1,040)
(1,060)
—
11
(2,991)
1,822
(1,169)
($1,925)
($2,673)
297
(507)
$283
(210)
($2,390)
$3,246
($1,889)
$1,357
$4,476
($1,748)
$2,728
74
(494)
($420)
(129)
(132)
($261)
3,320
(2,383)
$937
4,347
(1,880)
2,467
(218)
262
44
41
299
340
(177)
561
384
(41)
193
152
13
368
381
(28)
561
533
Total interest-bearing liabilities
3,364
(2,043)
1,321
4,499
(1,499)
3,000
Expense related to derivatives
37
—
37
73
—
73
Total funding of interest-earning
assets
Net interest income
$3,401
$1,188
($2,043)
$1,358
($1,755)
($567)
$4,572
$1,899
($1,499)
$3,073
($1,216)
$683
Freddie Mac 2016 Form 10-K
19
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.
(Dollars in millions)
2016
2015
2014
$
%
$
%
Year Ended December 31,
Change 2016-2015
Change 2015-2014
Contractual net interest income:
Guarantee fee income
$2,997
$2,722
$2,399
$275
10 %
$323
13 %
Guarantee fee income related to the
Temporary Payroll Tax Cut Continuation Act of
2011
Other contractual net interest income
1,142
6,896
957
759
185
19 %
8,106
9,070
(1,210)
(15)%
Total contractual net interest income
11,035
11,785
12,228
(750)
(6)%
Net amortization - loans and debt securities of
consolidated trusts
3,333
2,883
1,913
450
16 %
Net amortization - other assets and debt
Expense related to derivatives
202
(191)
506
(228)
423
(301)
Net interest income
$14,379
$14,946
$14,263
($567)
Key Drivers:
• Guarantee fee income (contractual)
(304)
(60)%
37
16 %
(4)%
198
(964)
(443)
970
83
73
$683
26 %
(11)%
(4)%
51 %
20 %
24 %
5 %
2016 vs. 2015 and 2015 vs. 2014 - increased during both comparative periods as a result of
higher average contractual guarantee fee rates, reflecting continued growth in the size of the
Core single-family book, and a larger overall single-family credit guarantee portfolio. Average
contractual guarantee fees are generally higher on mortgage loans in our Core single-family book
compared to those in our Legacy single-family guarantee book. See "Our Business Segments -
Single-Family Guarantee" for additional discussion.
• Other contractual net interest income
2016 vs. 2015 and 2015 vs. 2014 - decreased during both comparative periods primarily due to
the continued 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 FHFA. We expect this trend to continue in the 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
2016 vs. 2015 and 2015 vs. 2014 - increased during both comparative periods primarily due to
an increase in the amortization of upfront delivery fees and basis adjustments on debt securities
of consolidated trusts. The increase in amortization was primarily driven by higher prepayment
rates on single-family loans during 2016 compared to 2015 and 2015 compared to 2014.
• Net amortization of other assets and debt
2016 vs. 2015 - decreased primarily due to less accretion of previously recognized other-than-
temporary impairments. The decrease in accretion is due to a decline in the population of
impaired securities as a result of our active disposition of these securities and a decline in new
other-than-temporary impairments recognized.
Freddie Mac 2016 Form 10-K
20
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 future cash flows resulting from the change in the modified loan’s contractual
interest rate, which increases the provision for credit losses in that period. An increase in mortgage
interest rates lengthens the expected life of individually impaired loans, which increases the impairment
on these loans and results in an increase in the provision for credit losses. 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. Management adjustments may be necessary to take into
consideration external factors and current economic events that have occurred but that are not yet
Freddie Mac 2016 Form 10-K
21
Management's Discussion and Analysis
Consolidated Results of Operations | Provision for Credit Losses
reflected in the factors used to derive the model outputs. Significant judgment is exercised in making
these adjustments.
The amount of our benefit (provision) for credit losses may also vary from period to period based on
additional factors such as reclassification of loans from held-for-investment to held-for-sale.
BENEFIT (PROVISION) FOR CREDIT LOSSES
The table below presents the components of our benefit (provision) for credit losses.
(Dollars in billions)
2016
2015
2014
$
%
$
%
Year Ended December 31,
Change 2016-2015
Change 2015-2014
Provision for newly impaired loans
($0.8)
($0.9)
($1.7)
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
0.9
0.8
(0.1)
$0.8
Key Drivers:
1.2
2.3
0.1
1.4
0.1
0.1
$0.1
(0.3)
11 %
(25)%
$0.8
(0.2)
47 %
(14)%
(1.5)
(65)%
2.2
2,200 %
(0.2)
(200)%
—
—
$2.7
($0.1)
($1.9)
(70)%
$2.8
2,800 %
•
2016 vs. 2015 - benefit for credit losses declined in 2016 compared to 2015 primarily due to a
decrease in the number of seasoned single-family loans reclassified from held-for-investment to held-
for sale in 2016. During 2016, $4.7 billion in UPB of single-family loans was reclassified to held-for-
sale, compared to $13.6 billion during 2015. See "Effect of Loan Reclassifications" for the effect of
these loan reclassifications on pre-tax net income.
•
2015 vs. 2014 - changed to a benefit in 2015 from a (provision) in 2014 primarily due to:
An increase in the number of seasoned single-family loans reclassified from held-for-investment
to held-for-sale in 2015. During 2014, $0.7 billion in UPB of seasoned single-family loans were
reclassified to held-for-sale.
A decrease in the provision for newly impaired loans in 2015 compared to 2014 due to a decline
in the volume of newly delinquent single-family loans.
Freddie Mac 2016 Form 10-K
22
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, 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.
We continue to align our derivative portfolio with the changing duration of our hedged assets and
liabilities. Although our use of derivatives creates volatility in our GAAP earnings, we manage our
exposure to interest-rate risk on an economic basis to a low level as measured by our models. Therefore,
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 GAAP earnings to those
activities, see “Risk Management - Market Risk.”
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). 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
Freddie Mac 2016 Form 10-K
23
Management's Discussion and Analysis
Consolidated Results of Operations | Derivative Gains (Losses)
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).
• 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.
COMPONENTS OF DERIVATIVE GAINS (LOSSES)
The table below presents the components of derivative gains (losses).
Year Ended December 31,
Change 2016-2015
Change 2015-2014
(Dollars in millions)
2016
2015
2014
$
%
$
%
Fair value change in interest-rate swaps
$178
($778)
($7,294)
$956
123%
$6,516
89 %
Fair value change in option-based
derivatives
Fair value change in other derivatives
421
887
258
22
1,437
191
Accrual of periodic cash settlements
(1,760)
(2,198)
(2,625)
163
865
438
Derivative gains (losses)
($274)
($2,696)
($8,291)
$2,422
63%
(1,179)
3,932%
20%
90%
(169)
427
$5,595
(82)%
(88)%
16 %
67 %
Key Drivers:
•
•
2016 vs. 2015 - derivative losses declined during 2016 primarily due to an increase in longer-term
interest rates during the fourth quarter of 2016 resulting in an improvement in the fair value of our
pay-fixed interest-rate swaps and forward commitments to issue PC debt. This improvement in fair
value was partially offset by losses in our receive-fixed-interest-rate swaps. The 10-year par swap
rate increased 13 basis points during 2016, while the 10-year par swap rate declined 10 basis points
during 2015.
2015 vs. 2014 - derivative losses declined during 2015 primarily due to a smaller decline in interest
rates in 2015 than in 2014. We recognized larger derivative losses during 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. The 10-year par swap rate declined 78 basis points during 2014.
• See "Our Business Segments - Investments - Market Conditions" for more information about par
swap rates.
Freddie Mac 2016 Form 10-K
24
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, market 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 earnings. The accretion into earnings 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.
(Dollars in millions)
2016
2015
2014
$
%
$
%
Year Ended December 31,
Change 2016 - 2015
Change 2015 - 2014
Other comprehensive income, excluding
reclassifications
Reclassifications from AOCI:
Accretion due to significant increases in
expected cash flows on previously-
impaired available-for-sale securities
Realized gains (losses) reclassified from
AOCI
Total reclassifications from AOCI
Total other comprehensive income
(loss)
Key Drivers:
($29)
$374
$2,563
($403)
(108)% ($2,189)
(85)%
(299)
(449)
(519)
(369)
(668)
(502)
(951)
(308)
(827)
150
133
283
33 %
26 %
30 %
70
13 %
(194)
(124)
(63)%
(15)%
($697)
($577)
$1,736
($120)
(21)% ($2,313)
(133)%
• Other comprehensive income, excluding reclassifications
2016 vs. 2015 - was a loss in 2016 compared to income in 2015, primarily due to unrealized
losses resulting from an increase in longer-term interest rates, coupled with a decrease in
unrealized gains as our non-agency securities portfolio continues to decline consistent with the
reduction of our mortgage-related investments portfolio pursuant to the limits established by the
Purchase Agreement and FHFA.
2015 vs. 2014 - decreased primarily due to less market spread tightening for our non-agency
securities.
Reclassifications from AOCI
• Accretion due to significant increases in expected cash flows on previously impaired
available-for-sale securities
2016 vs. 2015 and 2015 vs. 2014 - decreased during both comparative periods primarily due to a
decline in the population of impaired securities as a result of our active dispositions of these
securities, coupled with a decline in new other-than-temporary impairments.
Freddie Mac 2016 Form 10-K
25
Management's Discussion and Analysis
Consolidated Results of Operations | Other Comprehensive Income
• Realized gains (losses) reclassified from AOCI
2016 vs. 2015 - decreased primarily due to a decline in sales of non-agency securities in an
unrealized gain position. Our sales of non-agency securities will continue to vary as the portion of
our portfolio that we are able to sell, based on a variety of criteria, has decreased.
2015 vs. 2014 - increased primarily due to greater sales of agency and non-agency securities in
an unrealized gain position. The increase in sales was a result of improved pricing due to
declining longer-term interest rates and stabilized collateral performance.
Freddie Mac 2016 Form 10-K
26
Management's Discussion and Analysis
Consolidated Results of Operations
OTHER KEY DRIVERS
Key drivers for other line items for 2016 vs. 2015 and 2015 vs. 2014 include:
• Gains (losses) on extinguishment of debt
2016 vs. 2015 - losses decreased primarily due to an increase in longer-term interest rates during
the fourth quarter of 2016, coupled with a decline in our repurchase of single-family PCs. The
increase in longer-term interest rates resulted in net extinguishment gains for PCs repurchased
during the fourth quarter, which partially offset the net extinguishment losses recognized for PCs
repurchased during the nine months ended September 30, 2016. The amount of extinguishment
gains or losses may vary, as the type and amount of PCs selected for repurchase are based on
our investment and funding strategies, including our efforts to support the liquidity and price
performance of our PCs.
2015 vs. 2014 - losses decreased primarily due to a significant decline in our repurchase of
single-family PCs, coupled with a smaller decline in longer-term interest rates in 2015 compared
to 2014.
• Net impairments of available-for-sale securities recognized in earnings
2016 vs. 2015 - decreased primarily due to a decline in the population of non-agency securities,
including those non-agency securities that we intend to sell. Our intent to sell population declined,
as the portion of our non-agency securities that we are able to sell, based on a variety of criteria,
has decreased.
2015 vs. 2014 - decreased as the unrealized losses associated with securities we intend to sell
were lower due to improvements in forecasted home prices, a smaller decline in market interest
rates in 2015 compared to 2014, and continued tightening of market spreads for our non-agency
securities. Furthermore, the portion of the net impairment related to additional credit losses
declined as a result of improved security pricing, stabilized collateral performance, and our efforts
to sell certain of the previously impaired non-agency 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
2016 vs. 2015 - decreased as we recognized net losses during 2016 compared to net gains
during 2015, primarily due to losses on our mortgage-related and non-mortgage-related securities
as a result of increasing longer-term interest rates, coupled with less realized gains from our
available-for-sale securities, as we sold fewer non-agency securities in an unrealized gain
position.
2015 vs. 2014 - decreased primarily due to a decline in sales of our agency mortgage-related
securities.
• Other income (loss)
2016 vs. 2015 - other income (loss) improved reflecting:
Decreased lower-of-cost-or-fair-value adjustments as we reclassified fewer seasoned single-
family loans from held-for-investment to held-for-sale during 2016; and
Increased gains on multifamily mortgage loans and commitments for which we have elected
the fair value option, due to increased market spread-related fair value gains. K Certificate
benchmark spreads tightened during 2016 compared to these spreads widening during 2015.
Freddie Mac 2016 Form 10-K
27
Management's Discussion and Analysis
Consolidated Results of Operations
2015 vs. 2014 - other income (loss) declined reflecting:
Decreased income from non-agency mortgage-related securities litigation settlements;
Increased write-downs due to lower-of-cost-or-fair-value adjustments for seasoned single-
family loans reclassified from held-for-investment to held-for-sale; and
Decreased fair value of multifamily mortgage loans for which we have elected the fair value
option, due to the widening of K Certificate benchmark spreads observed in the market.
• REO operations expense
2016 vs. 2015 - decreased resulting from a decline in REO inventory due to a decline in the
number of seriously delinquent loans as the housing market and economy continued to improve.
2015 vs. 2014 - increased due to a decrease in gains on the disposition of REO properties and
recoveries from mortgage insurance.
• Temporary Payroll Tax Cut Continuation Act of 2011 expense
2016 vs. 2015 and 2015 vs. 2014 - continued to increase as a result of the increase in the
population of loans subject to this expense. As of December 31, 2016 and 2015, respectively,
$1.3 trillion and $1.1 trillion of UPB of loans (or 72% and 63% of the single-family credit
guarantee portfolio) were subject to these fees. We expect the amount of these fees will continue
to increase as we add new business and the population of loans subject to these fees increases.
• Other expense
2016 vs. 2015 - decreased primarily driven by property taxes and insurance costs associated
with seasoned single-family loans reclassified from held-for-investment to held-for-sale as we
reclassified fewer loans in 2016 compared to 2015. These costs are considered part of the loan
loss reserves while the loans are classified as held-for-investment. See "Single-Family Loan
Reclassifications" for more information.
2015 vs. 2014 - increased primarily driven by property taxes and insurance costs associated with
seasoned single-family loans reclassified from held-for-investment to held-for-sale as we
reclassified more loans in 2015 compared to 2014. These costs are considered part of the loan
loss reserves while the loans are classified as held-for-investment. In addition, beginning January
1, 2015, FHFA directed us to set aside 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 requirement and accrued $165 million of related expense. See "MD&A - Regulation
and Supervision - Affordable Housing Fund Allocations" for more information.
•
Income tax expense
2016 vs. 2015 - increased in 2016 compared to 2015 primarily due to an increase in pre-tax
income.
2015 vs. 2014 - decreased in 2015 compared to 2014 primarily due to a decrease in pre-tax
income.
Freddie Mac 2016 Form 10-K
28
Management's Discussion and Analysis
Consolidated Results of Operations
ITEMS AFFECTING MULTIPLE LINES
The following items affected multiple lines on our consolidated results of operations.
Single-Family Loan Reclassifications
During 2016, 2015, and 2014, we reclassified $4.7 billion, $13.6 billion, and $0.7 billion, respectively, in
UPB of seasoned seriously delinquent as well as reperforming 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.
(Dollars in millions)
Benefit for credit losses
Other income (loss) - lower-of-cost-or-fair-value adjustment
Other (expense) - property taxes and insurance associated with
these loans
Effect on income before income tax (expense) benefit
Year Ended December 31,
2016
2015
2014
$812
(1,005)
(195)
($388)
$2,314
(2,193)
(1,178)
($1,057)
$147
(195)
(62)
($110)
Debt Funding Strategies and Interest-Rate Risk Management Activities
We issue debt 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.
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 GAAP 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 GAAP earnings that
generally is not indicative of the underlying economics of our business. In order to help reduce the
measurement differences, we entered into certain transactions, including structured transactions, during
2016 that have resulted in additional financial assets being recognized and measured at fair value. In
addition, in the first quarter of 2017, we began using hedge accounting for certain single-family mortgage
loans, which is intended to partially reduce the interest-rate volatility in our GAAP earnings by eliminating
a portion of the measurement differences between our GAAP financial results and the underlying
economics of our business.
Freddie Mac 2016 Form 10-K
29
Management's Discussion and Analysis
Consolidated Results of Operations
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), the non-interest rate effect (e.g., market spread effect) on
derivative fair values, and any offsetting interest rate effect related to financial instruments measured at
fair value. The estimated net interest rate effect on comprehensive income is essentially the derivative
gains (losses) attributable to financial instruments that are not measured at fair value on a recurring
basis .
(Dollars in billions)
Derivative gains (losses)
Less:
Accrual of periodic cash settlements
Non-interest rate effect on derivative fair values
Interest rate effect on derivative fair values
Add:
Estimate of offsetting interest rate effect related to financial instruments
measured at fair value(1)
Income tax benefit (expense)
Estimated Net Interest Rate Effect on Comprehensive income
Year Ended December 31,
2016
2015
2014
($0.3)
($2.7)
($8.3)
(1.8)
(0.1)
1.6
(1.2)
(0.1)
$0.3
(2.2)
—
(0.5)
0.2
0.1
($0.2)
(2.6)
(0.2)
(5.5)
2.0
1.2
($2.3)
(1) Includes the interest-rate effect on our trading securities, available-for-sale securities, mortgage loans held-for-sale, and
other assets and debt for which we elected the fair value option, which is reflected in other non-interest income (loss) and
total other comprehensive income (loss) on our consolidated statements of comprehensive income.
As this table demonstrates, the estimated net effect of derivatives on our comprehensive income is
volatile, and can be significant. For more information about our interest-rate risk management activities
and the sensitivity of reported GAAP earnings to these activities, see “Risk Management - Market Risk.”
Changes in Market Spreads
Our financial results and net worth can be significantly affected by changes in market spreads, especially
results driven by financial instruments that are measured at fair value. We have limited ability to mitigate
exposure to such changes. These instruments include trading securities, available-for-sale securities,
mortgage loans held-for-sale, and other assets and debt for which we elected the fair value option.
During the fourth quarter of 2016, we began purchasing certain swaptions on credit indices that provide
protection against adverse movements in multifamily market spreads. While these swaptions mitigate a
portion of our exposure to changes in multifamily market spreads, they do not mitigate our exposure to
changes in other market spreads.
Comprehensive income (loss) was affected by changes in market spreads in amounts estimated to be
$0.1 billion, $(0.3) billion, and $1.9 billion (after-tax) during 2016, 2015, and 2014, respectively. During
2016, market spread tightening on our agency and non-agency mortgage-related securities and
multifamily mortgage loans and commitments measured at fair value resulted in an increase in
comprehensive income. During 2015, market spread widening on our agency mortgage-related securities
and multifamily mortgage loans measured at fair value resulted in a decrease in comprehensive income.
During 2014, the impact of market spread tightening on mortgage-related securities and mortgage loans
Freddie Mac 2016 Form 10-K
30
Management's Discussion and Analysis
Consolidated Results of Operations
measured at fair value resulted in an increase in comprehensive income. In the fourth quarter of 2016, we
separated the market spread related gains (losses) on held-for-sale multifamily mortgage loans and
commitments from the effect of improved pricing on K Certificates and SB Certificates. The effect of this
improved pricing is now excluded from the estimated spread change effect.
Freddie Mac 2016 Form 10-K
31
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:
Cash and cash equivalents
Restricted cash and cash equivalents
Securities purchased under agreements
to resell
Subtotal
Investments in securities, at fair value
Mortgage loans, net
Accrued interest receivable
Derivative assets, 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
Total liabilities and equity
Key Drivers:
December 31,
2016
2015
$ Change
% Change
$12,369
9,851
51,548
73,768
111,547
1,803,003
6,135
747
15,818
12,358
$5,595
14,533
63,644
83,772
114,215
1,754,193
6,074
395
18,205
9,038
$2,023,376
$1,985,892
$6,015
2,002,004
795
9,487
2,018,301
5,075
$2,023,376
$6,183
1,970,269
1,254
5,246
1,982,952
2,940
$1,985,892
$6,774
(4,682)
(12,096)
(10,004)
(2,668)
48,810
61
352
(2,387)
3,320
$37,484
($168)
31,735
(459)
4,241
35,349
2,135
$37,484
121 %
(32)%
(19)%
(12)%
(2)%
3 %
1 %
89 %
(13)%
37 %
2 %
(3)%
2 %
(37)%
81 %
2 %
73 %
2 %
As of December 31, 2016 compared to December 31, 2015:
• 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 decrease in the combined balance was due to lower near-term
cash needs for upcoming maturities and anticipated calls of other debt at the end of 2016 compared
to the end of 2015.
• Deferred tax assets, net decreased primarily due to an increase in longer-term interest rates during
2016, which caused the difference between the GAAP and tax basis of derivative instruments to
decline.
• Other assets increased primarily because of higher receivables from servicers and an increase in
current income tax receivable. Lower average mortgage interest rates during 2016 caused an
increase in prepayments, and thus, an increase in receivables from servicers. The increase in the
current income tax receivable is primarily due to an increase in estimated tax payments on account
with the IRS.
Freddie Mac 2016 Form 10-K
32
Management's Discussion and Analysis
Consolidated Balance Sheets Analysis
• Other liabilities increased primarily due to purchases of non-mortgage-related securities that were
traded prior to December 31, 2016 and recognized on the consolidated balance sheets, but settled
after December 31, 2016.
• Total equity increased as a result of higher comprehensive income in the fourth quarter of 2016
compared to the fourth quarter of 2015 and was partially offset by dividends paid related to the $600
million decline in the Capital Reserve Amount in 2016.
Freddie Mac 2016 Form 10-K
33
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 credit risk
• Guarantee fee income
• Credit-related expenses
• Administrative expenses
• Credit risk transfer expenses
Multifamily Reflects results from our
• Net interest income
• Losses on loans
• Guarantee fee income
•
Investment losses
• Gains on loans
• Derivative losses
•
Investment gains
• Administrative expenses
• Derivative gains
• Credit-related expenses
• Net interest income
•
Investment gains
• Derivative gains
•
Investment losses
• Derivative losses
• Other-than-temporary
impairments on non-agency
mortgage-related securities
• Administrative expenses
N/A
N/A
purchase, securitization, and
guarantee of multifamily loans
and securities, our investments in
those loans and securities, and
the management of multifamily
mortgage credit risk and
mortgage market spread risk
Investments Reflects results from managing
the company’s mortgage-related
investments portfolio (excluding
Multifamily segment investments,
single-family seriously delinquent
loans, and the credit risk of
single-family performing 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
All Other
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 guarantee fee income on guarantees, net interest income on investments, and
benefit (provision) for credit losses on loans 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).
Freddie Mac 2016 Form 10-K
34
Management's Discussion and Analysis
Our Business Segments | Segment Earnings
During the first and third quarters of 2016, we changed how we calculate certain components of our
Segment Earnings for our Single-family Guarantee, Multifamily, and Investments segments. Prior period
results have been revised to conform to the current period presentation. See Note 11 for more information
on these changes.
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 11
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 2016 Form 10-K
35
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 seller/servicers and we manage our single-family credit risk. 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.
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 effective 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 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 increase the liquidity of the TBA market and to reduce the disparities in trading value
between our PCs and Fannie Mae's single-class mortgage-related securities.
Products and Activities
Securitization and Guarantee Products
In a typical loan securitization, we purchase loans that lenders originate and then pool those loans into
mortgage-related securities that can be sold in the capital markets. In order to issue the mortgage-related
securities, we establish trusts pursuant to our Master Trust Agreements and serve as the trustee of those
trusts. 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 any applicable guarantee fees. We
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
typically guarantee the payment of principal and interest on these mortgage-related securities and
generally retain the guarantee fee 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 until we purchase the loan out of the trust. We have the option 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. After a loan is
purchased, we work with the borrowers 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 either sell the loan to a third party or pursue foreclosure of the underlying property. The
purchase of delinquent loans and the sale of loans are done in conjunction with the Investments segment.
The guarantee fee we charge on new acquisitions generally consists of a combination of upfront delivery
fees and a base contractual monthly fee paid as a percentage of the UPB of the underlying loan. We may
also make upfront payments to buy up the monthly guarantee fee rate ("buy-up fees"), or receive upfront
payments to buy down the monthly 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 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 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 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 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. To compensate us for higher levels of risk in some loan products, we charge upfront
delivery fees above our contractual 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.
We must obtain FHFA's approval to implement across-the-board increases in our guarantee fees. In
addition, from time to time, FHFA issues directives or guidance to us affecting the levels of guarantee fees
that we may charge for various types of loans. In July 2016, FHFA issued a directive that addressed the
safety and soundness risk that could arise if our guarantee fees were not sufficient to compensate us
adequately for the credit risks we are taking. This directive allows us to continue to charge guarantee fees
generally in line with the levels we had been charging at the time it was issued, but for many types of
loans it prohibits reductions significantly below those levels.
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
In 2012, at FHFA's direction, we increased 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 guarantee fees.
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. While
the Single-family Guarantee segment is responsible for the guarantee of our securities, the Investments
segment manages the securitization and resecuritization processes.
• 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) for cash 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. The purchase of loans and sale of PCs are
managed by the Investments segment.
Freddie Mac 2016 Form 10-K
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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 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 resecuritization activities are managed by the Investments segment. The
following diagram provides a general example of how we create resecuritization products:
Freddie Mac 2016 Form 10-K
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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 may 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.
Long-term standby commitments - we provide a guarantee on mortgage assets held by third parties, in
exchange for 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 2016 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Common Securitization Platform and the Single (Common) Security
In accordance with FHFA’s 2014 Strategic Plan and the Conservatorship Scorecards, we continue to work
with FHFA, Fannie Mae, and CSS on the development of a new common securitization platform and the
implementation of the single (common) security initiative for Freddie Mac and Fannie Mae.
In December 2016, we and FHFA announced the implementation of Release 1 of the common
securitization platform. Under Release 1, we began using the common securitization platform for data
acceptance, issuance support, and bond administration activities related to certain Freddie Mac single-
family fixed-rate mortgage-related securities.
FHFA expects to announce a timeframe for implementation of Release 2 of the common securitization
platform in the first quarter of 2017. Release 2 involves the issuance by Freddie Mac and Fannie Mae of a
single (common) mortgage-related security, to be called the Uniform Mortgage-Backed Security
("UMBS"). Release 2 will add to the functionality of Release 1, including commingling of Freddie Mac and
Fannie Mae UMBS and UMBS disclosures.
Credit Risk Transfer Transactions
Most of our credit risk transfer transactions are designed to transfer a portion of the expected credit
losses and a significant portion of credit losses in a stressed economic environment on groups of
previously acquired loans to third-party investors. These transactions have termination dates that are
earlier than the maturities of the related loans, and losses on the loans occurring beyond the terms of the
transactions are not covered. 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. Our 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). In certain of our STACR debt note transactions to date, we
transferred risk in both first loss and mezzanine notional credit risk positions while in other
transactions we only transferred risk in the mezzanine notional credit risk positions. The notional
amounts of the credit risk positions are reduced when certain specified credit events occur on the
loans in the reference pool. Generally, the notional amounts of the credit risk positions will 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
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
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 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
amount of risk transferred in each transaction affects the interest rate we pay on the notes. The
following diagram illustrates a typical STACR debt note transaction:
• ACIS insurance policies - In a typical ACIS transaction, we purchase insurance policies, generally
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 reference
pool. We may also enter into ACIS transactions that provide credit protection for certain specified
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
credit events on loans not included in a reference pool created for a STACR debt note transaction.
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 our
counterparties to partially collateralize their exposure to reduce the risk that we will not be reimbursed
for our claims under the policies.
• Deep mortgage insurance credit risk transfer, or Deep MI - In this transaction, we purchase a
credit enhancement from affiliates of mortgage insurance companies that takes effect immediately
upon the sale of the mortgage loan to Freddie Mac. Deep MI provides additional coverage beyond
primary mortgage insurance. We require our counterparties to collateralize their exposure to reduce
the risk that we will not be reimbursed for our claims under the policies.
• 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. In these transactions, the loans are serviced in accordance
with our Guide and we control the servicing.
• Senior subordinate securitization structures - In this structure, we issue guaranteed senior
securities and unguaranteed subordinated securities backed by single-family loans. The collateral for
these structures consists of seasoned performing modified and reperforming loans. The
unguaranteed subordinated securities will absorb first losses on the related loans. In these
transactions, the loans are not serviced in accordance with our Guide and we do not control the
servicing.
• 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 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.
Customers
Our customers in the Single-family Guarantee segment are predominantly financial institutions that
originate, sell and perform the ongoing servicing of loans for new or existing homeowners. These
companies include mortgage banking companies, commercial banks, community banks, credit unions,
other non-depository financial institutions, HFAs, and savings 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 2016 and our loan
servicing as of December 31, 2016 among our top five customers.
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Percentage of Single-Family Purchase
Volume
Percentage of Single-Family Servicing
Volume
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
For additional information about seller/servicer concentration risk and our relationships with our seller/
servicer customers, see “Risk Management - Credit Risk - Counterparty Credit Risk - Sellers and
Servicers.”
Competition
Our principal competitors in the Single-family Guarantee segment are Fannie Mae, FHA/VA (with Ginnie
Mae securitization), and other financial institutions that retain or securitize loans, such as commercial and
investment banks, dealers, and savings 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 and FHA/VA with Ginnie
Mae securitization) may harm our business. FHFA’s actions as Conservator of both companies could
affect competition between us and Fannie Mae."
Our Segment Earnings 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.”
Freddie Mac 2016 Form 10-K
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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 27, 2017.
Source: National Association of Realtors news release dated
January 24, 2017 and U.S. Census Bureau news release
dated January 26, 2017.
Commentary
• Single-family loan origination volumes in the U.S. increased in 2016, driven by an increase in
refinancing activity as a result of lower average mortgage interest rates.
•
If average mortgage interest rates continue to move higher in 2017, we would anticipate lower
origination activity compared to 2016 as refinance activity and home sales would likely decline.
Freddie Mac 2016 Form 10-K
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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 8, 2016. For 2016, the
amount is as of September 30, 2016 (latest available
information).
Commentary
Source: National Delinquency Survey from the Mortgage
Bankers Association. For 2016, the rates (excluding Freddie
Mac) are as of September 30, 2016 (latest available
information).
• The U.S. single-family mortgage debt outstanding increased in 2016 compared to 2015, which
resulted in an increase in the supply of loans available for us to purchase.
• 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. We expect
our single-family serious delinquency rate to decline below 1.00% in 2017.
• As reported by the U.S. Census Bureau, the U.S. homeownership rate was 63.7% in the fourth
quarter of 2016, compared to a high point of 69.2% in the fourth quarter of 2004, and the average of
66.2% since 1990.
Freddie Mac 2016 Form 10-K
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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.
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 have funded approximately 14.2 million single-family homes since
2009 and purchased approximately 1.4 million HARP loans since the initiative began in 2009,
including over 25,000 during 2016.
• Our overall loan purchase activity increased in 2016 compared to 2015, due to higher refinance loan
purchase volume as average mortgage interest rates were lower in 2016 compared to 2015. Our
overall loan purchase activity increased significantly in 2015 compared to 2014, due to higher
volumes of home sales and home price appreciation.
• We continued working to improve access to affordable mortgage credit, including through our Home
Possible® loan initiatives. Our Home Possible® loan initiatives offer down payment options as low as
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
3% and are designed to help qualified borrowers with limited savings buy a home. We purchased
nearly 34,000 loans under these initiatives in 2016. 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.
While we are responsibly expanding our programs and outreach capabilities to better serve low- and
moderate-income borrowers and underserved markets, these loans result in increased credit risk.
Expanding access to affordable mortgage credit will continue to be a top priority in 2017. See
"Regulation and Supervision - Legislative and Regulatory Developments - Final Rule on Duty to
Serve Underserved Market" for more information.
•
If average mortgage interest rates continue to move higher in 2017, we would anticipate lower
purchase volume compared to 2016 as refinance activity and home sales would likely decline.
Freddie Mac 2016 Form 10-K
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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,
Single-Family Loans as of December 31,
Commentary
• The single-family credit guarantee portfolio grew to $1,755 billion in 2016 from $1,702 billion in 2015,
an increase of approximately 3%.
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
• The Core single-family book grew to 73% of the single-family credit guarantee portfolio at
December 31, 2016. 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).
• The HARP and other relief refinance book represented an additional 15% of the single-family credit
guarantee portfolio at December 31, 2016.
• The Legacy single-family book declined to 12% of the single-family credit guarantee portfolio at
December 31, 2016.
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Guarantee Fees
The average portfolio Segment Earnings guarantee fee rate recognizes upfront delivery fee income over
the contractual life of the related loans (usually 30 years). If the related loans prepay, the remaining
upfront delivery fee income is recognized immediately. In addition, the average portfolio Segment
Earnings guarantee fee rate reflects an average of our total mortgage portfolio and is not limited to
purchases in the applicable year.
The average 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.
Loans acquired prior to 2012 have lower contractual guarantee fee rates than loans we have acquired
since that time.
Average Portfolio Segment Earnings
Guarantee Fee Rate(1) for the Year Ended
December 31,
Average Guarantee Fee Rate(1) Charged on
New Acquisitions for the Year Ended
December 31,
(1) Excludes the legislated 10 basis point increase in guarantee fees.
Commentary
• Average portfolio Segment Earnings guarantee fees
2016 vs. 2015 and 2015 vs. 2014 - increased due to higher amortization of upfront delivery fees,
driven by higher loan liquidations resulting from a lower average interest rate environment, as
well as the acquisition of new loans with higher guarantee fee rates.
• Guarantee fees charged on new acquisitions
2016 vs. 2015 - increased primarily due to changes in the product mix of our single-family new
business purchases as new acquisitions have included a relatively higher proportion of 30-year
fixed-rate mortgages, which generally have higher guarantee fee rates than most other mortgage
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
products, combined with decreased market-adjusted pricing costs based on the price
performance of our PCs relative to Fannie Mae securities.
2015 vs. 2014 - decreased 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.
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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 expected credit losses and a significant portion of credit losses in a stressed economic
environment subsequent to loan acquisition in our Core single-family book. The following charts present
amounts for the STACR and ACIS transactions that occurred in 2016 and the cumulative amount of such
transactions at December 31, 2016.
New STACR Debt Note and ACIS
Transactions for the Year Ended December
31, 2016(1)
Cumulative STACR Debt Note and ACIS
Transactions as of December 31, 2016(1)(2)
(In billions)
Freddie Mac
$200.0
(In billions)
Freddie Mac
$565.6
Senior
Senior
Freddie
Mac
ACIS
STACR Debt
Notes
Reference
Pool
$210.1
Mezzanine
$0.4
$2.4
$5.3
Freddie
Mac
ACIS
STACR Debt
Notes
Mezzanine
$1.4
$5.6
$17.3
Reference
Pool
$594.8
First
Loss
Freddie Mac
$1.4
ACIS
$0.2
STACR
Debt
Notes
$0.2
First
Loss
Freddie Mac
$3.3
ACIS
$0.6
STACR
Debt
Notes
$1.0
(1) The amounts represent the UPB upon issuance of STACR debt notes and execution of ACIS transactions.
(2) For the current outstanding coverage provided by our STACR debt note and ACIS transactions, see "Risk Management - SF
Credit Risk - Offering Private Investors New and Innovative Ways to Share in the Credit Risk of the Core Single-Family Book."
Commentary
• We continued to transfer a portion of the expected credit losses and a significant portion of credit
losses in a stressed economic environment to third-party investors, insurers, and selected sellers
through credit risk transfer transactions. In 2016, we transferred credit losses associated with $215.2
billion in UPB of loans in our Core single-family book through STACR debt note, ACIS, seller
indemnification, whole loan security, senior subordinate securitization structures, and Deep MI
transactions. Significant developments in 2016 include the following:
We developed a new ACIS transaction using collateral other than 30-year fixed-rate mortgages.
Also, unlike prior ACIS transactions, this transaction does not involve loans in a reference pool
created for a STACR debt note transaction.
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
We executed our first Deep MI transaction. The pilot transaction provided additional coverage
beyond primary mortgage insurance on 30-year fixed-rate mortgages with LTV ratios between
80% and 95%.
• Since 2013, we have completed 57 credit risk transfer transactions that, upon execution of the
transaction, covered $601.9 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 guarantee fee income we earn on the PCs within the respective
pools. Our expected guarantee fee income on the loans within the STACR and ACIS reference pools
has been effectively reduced by approximately 34%, on average, for transactions executed as of
December 31, 2016. The amount of effective reduction to our overall guarantee fee 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 affect the cost of executing these transactions. We expect
that the aggregate cost of our credit risk transfer activity will continue to increase as we enter into
additional transactions.
• As of December 31, 2016 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 2017 Conservatorship Scorecard sets a goal for us to transfer a meaningful portion of credit risk
on at least 90% of the UPB of certain categories of newly acquired single-family loans, such as non-
HARP and non-high LTV refinance fixed-rate loans with terms greater than 20 years and LTV ratios
above 60%.
Freddie Mac 2016 Form 10-K
55
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.
• 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 $3.1 billion in UPB during 2016. Of the $2.1 billion in UPB of
single-family loans classified as held-for-sale at December 31, 2016, $1.6 billion related to loans that
were seriously delinquent. We believe selling these loans provides better economic returns than
continuing to hold them.
Freddie Mac 2016 Form 10-K
56
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
• HAMP ended in December 2016. The relief refinance program (including HARP) will end in
September 2017 and is expected to be replaced by a new program. See “Risk Management” for
additional information on our loan workout activities.
Freddie Mac 2016 Form 10-K
57
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 2016-2015
Change 2015-2014
(Dollars in millions)
Guarantee fee income
Provision for credit losses
Other non-interest income
Administrative expense
REO operations expense
Other 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
2016
2015
2014
$
$6,091
$5,152
$4,094
(517)
447
(283)
136
(1,129)
952
(1,323)
(1,285)
(1,170)
(298)
(1,169)
3,231
(1,061)
2,170
(341)
(794)
2,585
(807)
1,778
(213)
(387)
2,147
(600)
1,547
$939
(234)
311
(38)
43
(375)
646
(254)
392
%
18 %
(83)%
229 %
(3)%
13 %
(47)%
25 %
(31)%
22 %
(9)
12
(10)
(21)
(175)%
Total comprehensive income
$2,161
$1,790
$1,537
$371
21 %
$
$1,058
846
(816)
(115)
(128)
(407)
438
(207)
231
22
$253
%
26 %
75 %
(86)%
(10)%
(60)%
(105)%
20 %
(35)%
15 %
220 %
16 %
Key Drivers:
• Guarantee fee income
2016 vs. 2015 and 2015 vs. 2014 - increased primarily due to higher amortization of upfront
delivery fees resulting from increased loan liquidations. Higher average contractual guarantee fee
rates, reflecting the growth in the Core single-family book, also contributed.
• Provision for credit losses
2016 vs. 2015 - increased primarily due to higher total interest rate concessions resulting from
the longer expected life of certain modified loans driven by rising mortgage interest rates in the
fourth quarter of 2016.
2015 vs. 2014 - decreased primarily due to a lower volume of newly impaired loans as the
housing market and economy continued to improve.
• Other non-interest income
2016 vs. 2015 - increased due to fewer seasoned single-family loans reclassified from held-for-
investment to held-for-sale in 2016 compared to 2015 due to a smaller inventory of certain
seasoned single-family loans available for reclassification, partially offset by increased fair value
losses on STACR debt notes, as market spreads between STACR yields and LIBOR tightened
more in 2016 than in 2015.
2015 vs. 2014 - decreased primarily due to more seasoned single-family loans reclassified from
held-for-investment to held-for-sale in 2015 compared to 2014; as we accelerated our program to
sell certain seasoned single-family loans, fair value losses on STACR debt notes, as market
spreads between STACR yields and LIBOR tightened in 2015, compared to fair value gains on
STACR debt notes in 2014 when market spreads widened, and higher expenses related to CSS.
Freddie Mac 2016 Form 10-K
58
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
• Other non-interest expense
2016 vs. 2015 and 2015 vs. 2014 - increased primarily due to higher credit risk transfer expense
(interest expense on STACR debt notes and premiums paid to ACIS counterparties) reflecting
higher outstanding cumulative volumes of credit risk transfer transactions in the respective
comparable periods.
Freddie Mac 2016 Form 10-K
59
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 purchase, securitization, and guarantee of multifamily loans
and securities, our investments in those loans and securities, and the management of multifamily
mortgage credit risk and mortgage market spread 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 and SB 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, Guarantee, and Credit Risk Transfer Products
In our Multifamily segment, we issue various types of securitization, guarantee, and credit risk transfer
products. These products, with the exception of other credit risk transfer products (i.e., SCR debt notes),
make up our guarantee portfolio.
Freddie Mac 2016 Form 10-K
60
Management's Discussion and Analysis
Our Business Segments | Multifamily
• Primary Securitization and Credit Risk Transfer Products - Our primary business model is to
acquire loans for aggregation and then to securitize the loans through the issuance of K Certificates
or SB Certificates, as discussed below.
K Certificates - We purchase multifamily loans for aggregation and securitization through the
issuance of multifamily K Certificates, which allows us to transfer a large majority of expected and
stress credit losses of the loans to third-party investors. As shown in the diagram below, in a 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 these
transactions, we guarantee the senior securities and do not issue or guarantee the subordinated
securities. As a result, a large majority of expected and stress credit risk is sold to the third-party
investors in the subordinated securities, thereby reducing our credit risk exposure. We receive a
guarantee fee in exchange for guaranteeing the K Certificates. Profitability on our K Certificates is
evaluated in terms of 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 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 - The profitability of our
multifamily business could be adversely affected by a significant decrease in demand for our K
Certificates and SB Certificates."
SB Certificates - We also purchase small balance multifamily loans for aggregation and
securitization through the issuance of multifamily SB Certificates. Occasionally, we also issue SB
Certificates backed by small balance multifamily loans which were underwritten by Freddie Mac
after (rather than at) origination and were not purchased by Freddie Mac prior to securitization.
Small balance loans typically are between $1.0 million and $6.0 million in size. SB Certificate
transactions are structured in a manner generally similar to our K Certificate transactions, and this
Freddie Mac 2016 Form 10-K
61
Management's Discussion and Analysis
Our Business Segments | Multifamily
allows us to transfer a large majority of expected and stress credit losses of the small balance
loans to third-party investors.
Similar to our K Certificates, we may purchase or retain a portion of the SB Certificates or the
unguaranteed subordinated securities, and, from time to time, we may undertake other activities
to support the liquidity of SB Certificates.
• Other securitization products - We also issue other securitization products including:
PCs - We securitize multifamily loans into fixed-rate pass-through securities that are similar in
structure to our Single-family Guarantee segment fixed-rate PCs. We guarantee the timely
payment of the principal and interest on our multifamily fixed-rate PCs.
K Certificates without subordination - We securitize multifamily loans and issue K Certificates
without subordination using a transaction structure that is similar to our K Certificates. However,
unlike K Certificates, K Certificates without subordination are fully guaranteed and no
subordinate or mezzanine securities are issued.
Q Certificates - We securitize multifamily loans, excluding small balance multifamily loans, and
issue Q Certificates using a transaction structure that is similar to our K Certificates. However,
unlike K Certificates, the multifamily loans backing the Q Certificate trusts are underwritten by
Freddie Mac after (rather than at) origination and are not purchased by Freddie Mac prior to
securitization.
M Certificates - We securitize pools of tax-exempt or taxable multifamily housing revenue
bonds and loans and issue both guaranteed senior M Certificates and unguaranteed
subordinated M Certificates.
• Other mortgage-related guarantees - We guarantee mortgage-related assets held by third parties
in exchange for 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.
• Other credit risk transfer products (i.e., SCR debt notes) - We began issuing our SCR debt notes
in 2016 in order to transfer a portion of credit risk on the loans underlying certain of our other
mortgage-related guarantees. The interest we pay on our SCR debt notes effectively reduces the
guarantee fee income we would otherwise earn on the other mortgage-related guarantees. SCR debt
notes are generally similar in structure to STACR debt notes.
Investing and Risk Management 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 or SB Certificates. However, we also hold a
portfolio of multifamily mortgage loans as part of a buy-and-hold investment strategy. Although we
continue to purchase small amounts of new multifamily mortgage loans for this portfolio, the size of
the portfolio is declining over time.
• Agency mortgage-related securities - We may purchase or retain a portion of the K Certificates or
SB 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. To
Freddie Mac 2016 Form 10-K
62
Management's Discussion and Analysis
Our Business Segments | Multifamily
date, we have not purchased any of the unguaranteed securities that are in the first loss position nor
do we currently hold any in our portfolio.
• 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 a prior buy-and-hold
investment strategy. This portfolio is declining over time.
• Swaptions on credit indices - We purchase swaptions on credit indices in order to obtain protection
against adverse movements in market spreads which may affect the profitability of our K Certificate or
SB Certificate transactions.
Customers
Our multifamily loan volume is sourced through our approved lenders, who are primarily non-bank real
estate finance companies and banks. We generally provide post-construction financing to apartment
project operators with established performance records. The following graphs show the concentration of
our 2016 multifamily new business volume by our largest sellers and loan servicing by our largest
servicers as of December 31, 2016. Any seller or servicer with a 10% or greater share is listed separately.
Freddie Mac 2016 Form 10-K
63
Management's Discussion and Analysis
Our Business Segments | Multifamily
Percentage of Multifamily New Business
Volume
Percentage of Multifamily Servicing Volume
Note: Excludes loans underlying securitizations where we
are not in first loss position, primarily K Certificates and SB
Certificates.
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, savings institutions, and life insurance companies.
Freddie Mac 2016 Form 10-K
64
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
• The increase in 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) declined in 2016 but remains
strong relative to long-term averages. In 2017, we expect the increase in effective rents to remain in
line with the 2016 increase.
• Vacancy rates decreased slightly in 2016, remaining well below long-term averages, but are expected
to increase during 2017 at a moderate pace.
• Multifamily property prices have been especially strong, with 12% annualized growth through
November 2016. Multifamily property price growth may slow with the expected leveling-off in the rate
of effective rent growth, an environment of increasing vacancy rates and interest rates, as well as
improving returns for other investment types.
Freddie Mac 2016 Form 10-K
65
Management's Discussion and Analysis
Our Business Segments | Multifamily
Apartment Completions and Net Absorption
K Certificate Benchmark Spreads as of
December 31,
Source: REIS, Inc.
Commentary
Source: Independent Dealers
• 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.
• Completions and net absorption were roughly equal during 2016. We expect them to remain in
balance in 2017.
• The K Certificate benchmark spread represents the market spread of a typical 10-year senior K
Certificate over the U.S. swap curve.
• The profitability of our K Certificate transactions (as measured by gains and losses on sales of
mortgage loans) is affected by the change in the K Certificate benchmark spreads during the period
between loan purchase and execution of the K Certificate transaction. These market spread impacts
contribute to our earnings volatility, which we try to manage through the size of our securitization
pipeline of held-for-sale mortgage loans and through our purchase of swaptions on credit indices.
• During 2016, K Certificate benchmark spreads tightened due to a reduction in macroeconomic market
volatility compared to 2015. This tightening had a positive effect on K Certificate profitability.
Freddie Mac 2016 Form 10-K
66
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. For 2016, the amount is as of September
30, 2016 (latest available information).
Source: Freddie Mac, FDIC Quarterly Banking Profile,
Trepp, LLC. (MF CMBS market, excluding REOs), American
Council of Life Insurers (ACLI). For 2016, the amounts for
FDIC insured institutions and ACLI investment bulletin are as
of September 30, 2016 (latest available information).
Commentary
• There was significant growth in the multifamily market during 2016, driven by increasing property
prices, a continued elevated construction pipeline, and low interest rates. As reported by the Federal
Reserve, total multifamily mortgage debt outstanding was approximately $1.2 trillion at September 30,
2016 (the latest available information), representing an increase of $63.5 billion (or 6%) since
December 31, 2015.
• Our share of multifamily mortgage debt outstanding has remained relatively stable over the past
several years in the 13-15% range.
• Our multifamily delinquency rates during 2016 remained among the lowest in the industry, ending the
year at 3 bps, 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. We also expect to maintain our
share of multifamily mortgage debt outstanding in 2017.
• We expect the credit losses and delinquency rates for the multifamily mortgage portfolio to remain low
in the near term.
Freddie Mac 2016 Form 10-K
67
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.
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
• The dollar volume of capped multifamily new business activity transacted during 2016 was $36.5
billion. The 2016 scorecard production cap was increased to $36.5 billion by FHFA during 2016 from
an original amount of $31 billion. Business activity associated with certain targeted loan types is
excluded and is considered uncapped for purposes of determining the dollar volume of multifamily
new business.
Freddie Mac 2016 Form 10-K
68
Management's Discussion and Analysis
Our Business Segments | Multifamily
• Approximately two-thirds of our multifamily new business activity during 2016 counted towards the
2016 scorecard production cap, and the remaining one-third was uncapped.
• Nearly 90% of the eligible units we financed during 2016 were affordable to families earning at or
below the median income in their area (eligible units are multifamily units that qualify towards our
affordable housing goal). We continued our support of workforce housing in the multifamily mortgage
market during 2016 through our purchases of manufactured housing community loans and small
balance loans.
• Our multifamily new business activity outstanding commitments were $12.4 billion and $15.0 billion,
as of December 31, 2016 and December 31, 2015, respectively. The December 31, 2016 amount
includes loan purchase commitments for which we have elected the fair value option.
• The growth in our new business activity during 2016 was driven by the overall increase in multifamily
mortgage debt outstanding.
• We expect our overall new business volume to increase in 2017; however, we expect our volume in
the capped categories to be at or below the 2017 Conservatorship Scorecard cap, which is currently
set at $36.5 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 2016 Form 10-K
69
Management's Discussion and Analysis
Our Business Segments | Multifamily
Multifamily Portfolio
Multifamily Portfolio as of December 31,
Multifamily Investments Portfolio as of
December 31,
Commentary
• Our multifamily portfolio grew in 2016 due to an increase in the guarantee portfolio, which was
primarily attributable to our securitization of loans in K Certificate and SB Certificate transactions. This
growth was driven by the overall increase in multifamily new business activity in 2016.
• The decline in less liquid assets in our multifamily investments portfolio during 2016 was primarily due
to continued runoff of our held-for-investment mortgage loan and CMBS portfolios.
• We expect a continued increase in the size of our guarantee portfolio as a result of ongoing K
Certificate and SB Certificate transactions. We also expect a continued reduction in our held-for-
investment mortgage loan and CMBS portfolios due to ongoing principal repayments and maturities,
which will serve to reduce our less liquid assets.
Freddie Mac 2016 Form 10-K
70
Management's Discussion and Analysis
Our Business Segments | Multifamily
Net Interest Yield Earned For the Year Ended December 31,
Commentary
• Our portfolio of interest-earning assets continued to decline in 2016 primarily as a result of reductions
in our held-for-investment loan and CMBS 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 2016.
Freddie Mac 2016 Form 10-K
71
Management's Discussion and Analysis
Our Business Segments | Multifamily
Guarantee Fees
Average Guarantee Fee Rate Charged on
New K Certificates, K Certificates without
Subordination, and SB Certificates for the
Year Ended December 31,
Average Portfolio Guarantee Fee Rate as of
December 31,
Freddie Mac 2016 Form 10-K
72
Management's Discussion and Analysis
Our Business Segments | Multifamily
Commentary
• The guarantee portfolio increased in 2016 primarily as a result of our ongoing issuance of K
Certificates and SB Certificates.
• The average guarantee fee rate on both the overall guarantee portfolio and on newly issued K
Certificates, K Certificates without subordination, and SB Certificates increased in 2016, primarily as
a result of increased securitizations of products for which we charge higher fees, such as those with
lower subordination rates.
• The average guarantee fee rate charged on K Certificates and SB Certificates is generally lower than
the average guarantee fee rate charged on our other multifamily securitization products and other
mortgage-related guarantees. The lower guarantee fee rate on K Certificates and SB Certificates is
driven by higher levels of subordination that absorb the large majority of the expected and stress
credit losses.
Freddie Mac 2016 Form 10-K
73
Management's Discussion and Analysis
Our Business Segments | Multifamily
Credit Risk Transfer Activity
New K Certificate and SB Certificate
Issuances for the Year Ended December 31,
Cumulative K Certificate and SB Certificate
Issuances as of December 31,
Note: The charts above do not include certain SB Certificates where the underlying loans were underwritten by Freddie Mac after (rather than at)
origination and were not purchased by Freddie Mac prior to securitization.
Commentary
• The number and dollar volume of our K Certificate and SB Certificate issuances increased during
2016 as a result of our strong new business volume during the year. We expect these issuances to
continue at similar levels during 2017.
• Nearly 90% of the loans we purchased in 2016 were designated for securitization.
• While we expect to use K Certificates and SB Certificates as the primary methods to transfer
multifamily credit risk in 2017, we also expect to introduce new initiatives to transfer credit risk.
Freddie Mac 2016 Form 10-K
74
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.
Year Ended December 31,
Change 2016 - 2015
Change 2015 - 2014
(Dollars in millions)
Net interest income
Guarantee fee income
Benefit (provision) for credit losses
Gains (losses) on loans and other non-
interest income
Derivative gains (losses)
Administrative expense
Other 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
Total comprehensive income (loss)
Key Drivers:
• Net interest income
2016
2015
2014
$
%
$1,022
$1,049
511
22
1,166
407
(362)
(58)
2,708
(890)
1,818
(236)
$1,582
339
26
(198)
372
(325)
(60)
1,203
(376)
827
(261)
$566
$948
254
55
($27)
172
(4)
(3)%
51 %
(15)%
$
$101
85
(29)
%
11 %
33 %
(53)%
1,104
1,364
689 %
(1,302)
(118)%
335
(274)
(14)
2,408
(772)
1,636
35
(37)
2
9 %
(11)%
3 %
37
(51)
(46)
1,505
125 %
(1,205)
(514)
991
(137)%
120 %
(177)
25
$1,459
$1,016
10 %
180 %
396
(809)
(84)
($893)
11 %
(19)%
(329)%
(50)%
51 %
(49)%
(47)%
(61)%
2016 vs. 2015 - declined primarily due to lower balances of interest earning assets, as we reduce
our less liquid assets, and lower net prepayment fee income in 2016.
2015 vs. 2014 - increased primarily due to changes in the composition of our multifamily portfolio,
as lower yielding legacy loans and securities were replaced during 2015 with purchases of
higher-yielding loans to support future securitizations.
• Guarantee fee income
2016 vs. 2015 and 2015 vs. 2014 - increased primarily due to higher average multifamily
guarantee portfolio balances as a result of ongoing issuances of K Certificates and SB
Certificates.
• Gains (losses) on loans and other non-interest income, derivative gains (losses), and total
other comprehensive income (loss) are evaluated together as they are collectively driven by a
combination of market spread-related and interest rate-related fair value changes. We use derivatives
in the Multifamily segment to economically offset interest rate-related fair value changes of certain
assets. The fair value changes of these economically hedged assets are included in gains (losses)
on loans and other non-interest income and total other comprehensive income (loss). The
interest rate-related portion of these changes and the interest rate-related derivative fair value
changes that are included in derivative gains (losses) largely offset each other and, as a result,
there is minimal net impact on total comprehensive income for the Multifamily segment from interest
rate-related derivatives. We also recently began using derivatives in the Multifamily segment to
economically offset a portion of the market spread-related fair value changes of certain assets.
2016 vs. 2015 - gains in these items increased, in the aggregate, primarily due to improved
pricing on K Certificates and SB Certificates, as well as improved market spread-related fair value
Freddie Mac 2016 Form 10-K
75
Management's Discussion and Analysis
Our Business Segments | Multifamily
changes. K Certificate benchmark spreads tightened during 2016, resulting in gains, compared to
spread widening during 2015, which resulted in losses.
2015 vs. 2014 - gains in these items decreased, in the aggregate, due to market spread-related
fair value changes. The widening of K Certificate benchmark spreads during 2015 resulted in
losses while the spread tightening during 2014 resulted in gains.
Freddie Mac 2016 Form 10-K
76
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, single-family seriously delinquent loans, and the credit risk of single-family performing
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, effectively execute our strategy and be responsive to market conditions. 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; and
•
Implementing the single (common) security initiative for Freddie Mac and Fannie Mae, which is
intended to increase the liquidity of the TBA market and to reduce the disparities in trading value
between our PCs and Fannie Mae's single-class mortgage-related securities.
Although we manage our business on an economic basis, we have executed certain transactions in an
effort to reduce the probability of a draw due to changes in interest rates. Also, 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:
Freddie Mac 2016 Form 10-K
77
Management's Discussion and Analysis
Our Business Segments | Investments
• 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).
• Non-agency mortgage-related securities - We generally no longer purchase non-agency
mortgage-related securities that have not been guaranteed by a GSE, 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 loans
and performing modified loans through a variety of methods, including the following:
Securitization into Freddie Mac PCs, with all of the resulting mortgage-related securities initially
being retained. We may resecuritize a portion of the retained mortgage-related securities, with
some of the resulting interests being sold to third parties;
Direct loan sales; and
Sales and securitization using a senior subordinate securitization structure, in which we
guarantee the resulting senior securities.
In the future, we may 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.
• Other investments and cash portfolio - This portfolio is principally used for short-term liquidity
management and consists of: (i) the Liquidity and Contingency Operating Portfolio, (ii) cash and other
investments held by consolidated trusts, (iii) collateral pledged by derivative and other counterparties;
(iv) investments in unsecured agency debt, and (v) advances to lenders. In our advances to lenders
program, we provide funds to lenders in exchange for Freddie Mac PCs that are created through the
securitization of mortgage loans that have been pledged as collateral for the secured lending. In the
future, we may execute certain secured financing transactions using various types of collateral.
We evaluate the liquidity of our mortgage-related assets based on three categories (in order of liquidity):
Freddie Mac 2016 Form 10-K
78
Management's Discussion and Analysis
Our Business Segments | Investments
• Liquid: single-class and multi-class agency securities, excluding certain structured agency
securities collateralized by non-agency mortgage-related securities. Also includes certain non-
agency mortgage-related securities guaranteed by a GSE;
• 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 both agency securities and loans in the securitization
pipeline (e.g., reperforming loans, performing modified loans, and non-agency mortgage-related
securities not guaranteed by a GSE).
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 repayments, sales and
securitizations.
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 their 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.”
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
our obligations. See "Liquidity and Capital Resources - Liquidity Management Framework" for additional
discussion of our Liquidity Management Framework.
We primarily use the following types of products as part of our funding and liquidity management
activities:
• Securities sold under agreements to repurchase - Collateralized short-term borrowings where we
sell securities to a counterparty with an agreement to repurchase those securities at a future date.
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
• 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 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 or equal to two years.
In addition, proceeds from the issuance of STACR and SCR debt notes are used to meet the funding
needs of the company. We consider the issuance of these debt notes when managing the treasury
function for the company. For a description of the STACR debt notes, see “Our Business Segments -
Single-Family Guarantee - Business Overview - Products and Activities,” and for a description of the SCR
debt notes, see “Our Business Segments - Multifamily - Business Overview - Products and Activities.”
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.
See "Liquidity and Capital Resources" for a further discussion of our funding and liquidity management
activities.
Interest-Rate 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 - Market Risk” 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. We typically use interest-rate derivatives to reduce the economic risk exposure
due to this mismatch. Using our risk management practices described in the "Risk Management - Market
Risk" 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 market spreads on future debt issuances may affect 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 market 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.
Freddie Mac 2016 Form 10-K
80
Management's Discussion and Analysis
Our Business Segments | Investments
Securitization Activities
We manage the company's securitization and resecuritization activities related to single-family loans. See
"Our Business Segments - Single-Family Guarantee" for a discussion of our single-family securitization
and guarantee products.
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 “Our Business Segments - 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,
savings institutions, insurance companies, the Federal Farm Credit Banks, and the FHLBs.
Freddie Mac 2016 Form 10-K
81
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. Changes in par swap rates can significantly affect the fair value of our debt, derivatives, and
mortgage and non-mortgage-related securities. As a result, changes in par swap rates will affect the
business and financial results of our Investments segment.
Par Swap Rates as of December 31,
Sources: Bloomberg, ICAP
Commentary
• We primarily, but not exclusively, 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 - Market Risk."
Freddie Mac 2016 Form 10-K
82
Management's Discussion and Analysis
Our Business Segments | Investments
•
2016 vs. 2015
The 2-year and 10-year swap rates increased, resulting in gains for our pay-fixed interest rate
swaps and losses for our receive-fixed interest rate swaps, certain of our option contracts, and
the vast majority of our investments in securities.
3-month LIBOR increased during the fourth quarter of 2016, resulting in higher yields for our
short-term interest-earning assets, higher costs for our short-term interest-bearing liabilities, and
interest-rate related losses for certain of our shorter duration trading securities.
•
2015 vs. 2014
The 10-year and 30-year swap rates declined during both periods, resulting in losses for our pay-
fixed interest rate swaps and gains for our receive-fixed interest rate swaps, certain of our option
contracts, and the vast majority of our investments in securities.
As the 10-year and 30-year swap rates declined less in 2015 than in 2014 and the yield curve did
not flatten as much, the impact of interest rates on our financial instruments and financial results
was less significant during 2015 as compared to 2014.
In December 2015, the Federal Reserve raised short-term interest rates. As a result, shorter-term
interest rates, including the 3-month LIBOR rate, increased in December 2015. The increase in 3-
month LIBOR resulted in higher yields for our short-term interest-earning assets, higher costs for
our short-term interest-bearing liabilities, and interest-rate related losses for certain of our shorter
duration trading securities.
Freddie Mac 2016 Form 10-K
83
Management's Discussion and Analysis
Our Business Segments | Investments
BUSINESS RESULTS
The graphs and related discussion below present the business results of our Investments segment.
Investing Activity
The following graphs presents the Investments segment's total investments portfolio and the composition
of its mortgage investments portfolio by liquidity category.
Investments Portfolio
Mortgage Investments Portfolio
Commentary
• We continue to reduce the size of our mortgage investments portfolio in order to comply with the
mortgage-related investments portfolio's year-end limits. The balance of our mortgage investments
portfolio declined 11.5% between December 31, 2015 and December 31, 2016.
• The balance of our other investments and cash portfolio decreased 5.4% primarily due to lower near-
term cash needs for upcoming maturities and anticipated calls of other debt at the end of 2016
compared to the end of 2015.
• The percentage of less liquid assets relative to our total mortgage investments portfolio declined to
34.4% at December 31, 2016 from 38.8% at December 31, 2015, primarily due to repayments, sales
and securitizations of our less liquid assets.
• The overall liquidity of our mortgage investments portfolio continued to improve as our less liquid
assets decreased at a faster pace than the overall decline of our mortgage investments portfolio.
Freddie Mac 2016 Form 10-K
84
Management's Discussion and Analysis
Our Business Segments | Investments
Reduction In Less Liquid Assets
Securitizations of Reperforming Loans and
Performing Modified Loans into Freddie Mac
PCs
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 single-family reperforming loans and performing modified loans
and non-agency mortgage-related securities. Our disposition strategies for our less liquid assets
include securitizations and sales.
• Our principal strategy related to the securitization of reperforming loans and performing modified
loans is to create Freddie Mac PCs and initially retain all of the resulting mortgage-related securities.
This strategy also includes the resecuritization of a portion of the retained mortgage-related
securities, with some of the resulting interests being sold to third parties.
• During 2016, our sales of less liquid assets included $8.1 billion in UPB of non-agency mortgage-
related securities and $1.1 billion of reperforming loans and performing modified loans. Our sales of
reperforming loans and performing modified loans involved securitization of the loans using a senior
subordinate securitization structure, in which we guaranteed the resulting senior securities. As part of
these transactions, we retained certain of the guaranteed senior securities for our mortgage-related
investments portfolio.
Freddie Mac 2016 Form 10-K
85
Management's Discussion and Analysis
Our Business Segments | Investments
Net Interest Yield and Average Balances
Net Interest Yield & Average Investments Portfolio Balance
Commentary
• Net Interest Yield
2016 vs. 2015 - declined 37 basis points, primarily due to a reduction in the balance of our higher
yielding mortgage-related assets due to repayments, coupled with higher hedging costs from an
increase in amortization of upfront cash paid for swaptions. The upfront cash paid for swaptions is
amortized on a straight-line basis and reclassified from derivative gains (losses) into net
interest income for purposes of segment earnings. The increase in amortization is due to an
increase in upfront cash paid for swaptions to hedge our increased exposure to mortgage
prepayment risk due to the continued low interest rate environment in 2016.
2015 vs. 2014 - declined 5 basis points, 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
repayment of certain higher-yielding agency securities. Although we acquired additional agency
securities to replace certain of those securities that were repaid, the new securities had lower
yields due to an overall lower interest rate environment.
• Average Investments Portfolio Balance
2016 vs. 2015 and 2015 vs. 2014 - declined in each period primarily due to the repayment and
sale of non-agency mortgage-related securities and certain reperforming loans and performing
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
modified loans. This decline was partially offset by an increase in our purchase of single-family
loans for our securitization pipeline, and in our purchase of U.S. Treasury securities, which are
included in the other investments and cash portfolio. The overall decline in our average
investments portfolio balance is consistent with our efforts to comply with the year-end limits on
the mortgage-related investments portfolio established by the Purchase Agreement and FHFA.
• We expect our average investments portfolio balance to continue to decline in 2017 as we manage
the size of our mortgage-related investments portfolio pursuant to the portfolio limit.
Freddie Mac 2016 Form 10-K
87
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 2016 - 2015 Change 2015 - 2014
2016
2015
2014
$
%
$
%
$2,464
$3,902
$4,381
($1,438)
(37)% ($479)
(11)%
(140)
(151)
(36)%
560
(5,158)
2,569
3,670 %
5,088
400 %
99 %
(Dollars in millions)
Net interest income
Net impairment of available-for-sale securities
recognized in earnings
Derivative gains (losses)
Gains (losses) on trading securities
Other non-interest income
Administrative expense
Segment Earnings before income tax
(expense) benefit
Income tax (expense) benefit
Segment Earnings, net of taxes
269
2,499
(1,077)
420
(70)
(737)
(276)
1,865
2,288
8,095
(320)
(317)
(437)
5,700
5,486
6,465
(1,873)
(1,715)
(1,945)
3,827
3,771
4,520
Total other comprehensive income (loss), net of
tax
(452)
(356)
1,951
Total comprehensive income (loss)
$3,375
$3,415
$6,471
(340)
(423)
(3)
214
(158)
56
(96)
($40)
(46)%
(461)
(167)%
(18)% (5,807)
(1)%
120
4 %
(9)%
1 %
(979)
230
(749)
(72)%
27 %
(15)%
12 %
(17)%
(27)% (2,307)
(1)% ($3,056)
(118)%
(47)%
The Investments segment manages the interest-rate risk for the company. As a result, substantially all of
the net interest rate effect of the company's interest-rate risk management activities is recognized in our
Segment Earnings. The volatility in our Segment Earnings created by our interest-rate risk management
activities is generally not indicative of the underlying economics of our business. See "Consolidated
Results of Operations - Other Key Drivers - Items Affecting Multiple Lines - Debt Funding Strategies and
Interest-Rate Risk Management Activities" for additional information on our interest-rate risk management
activities and their impact on consolidated financial results.
Key Drivers:
• Net interest income
2016 vs. 2015 - decreased primarily due to a reduction in the balance of our higher yielding
mortgage-related assets due to repayments, coupled with higher hedging costs from an increase
in amortization of upfront cash paid for swaptions used to hedge our increased exposure to
mortgage prepayment risk due to the continued low interest rate environment in 2016.
2015 vs. 2014 - decreased 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 repayments, sales, and other active dispositions.
• Net impairment of available-for-sale securities recognized in earnings
2016 vs. 2015 - was in a net recovery position, as accretion of previously recognized other-than-
temporary impairments exceeded new other-than-temporary impairments. The decrease in net
recovery position was primarily due to less accretion of previously recognized other-than-
temporary impairments, as the population of impaired securities continued to decline. The
decrease in the population of impaired securities is due to our active disposition of these
securities and a decrease in new other-than-temporary impairments due to improved security
pricing and stabilized collateral performance.
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
2015 vs. 2014 - was in a net recovery position during 2015 compared to a net impairment
position in 2014, primarily due to the accretion of previously recognized other-than-temporary
impairments exceeding new other-than-temporary impairments. New other-than-temporary
impairments significantly declined during 2015 as a result of improved security pricing, stabilized
collateral performance, and our efforts to sell certain of the previously impaired non-agency
mortgage-related securities in prior periods.
• Derivative gains (losses)
2016 vs. 2015 - improved as we recognized derivative gains during 2016 due to an increase in
long-term interest rates during the fourth quarter of 2016, compared to recognizing derivative
losses during 2015 due to decreasing long-term interest rates. See "Consolidated Results of
Operations - Derivative Gains (Losses)" for additional information.
2015 vs. 2014 - improved as we recognized less derivative losses as a result of a smaller decline
in longer-term interest rates during 2015 compared to 2014. See "Consolidated Results of
Operations - Derivative Gains (Losses)" for additional information.
• Gains (losses) on trading securities
2016 vs. 2015 - losses increased primarily due to interest-rate related losses from an increase in
longer-term interest rates in the fourth quarter of 2016.
2015 vs. 2014 - losses increased primarily due to interest-rate related losses. While longer-term
interest rates decreased, we recognized interest-rate losses due to our purchase of certain
securities during the year when rates were lower than rates at December 31, 2015. In addition,
we recognized losses due to an increase in short-term interest rates as our trading portfolio
contained shorter duration investments, coupled with agency spread widening.
• Other non-interest income
2016 vs. 2015 - decreased primarily due to a decline in sales of available-for-sale agency and
non-agency mortgage-related securities in an unrealized gain position.
2015 vs. 2014 - decreased primarily due to a decline in proceeds received from the settlement of
non-agency mortgage-related securities litigation, as most of this litigation settled during prior
periods, including 2014. In 2015, we entered into one small settlement to resolve a claim with
respect to certain non-agency mortgage-related securities that we held, while we reached
settlements with 10 institutions during 2014. We continue to have ongoing litigation with respect
to certain other non-agency mortgage-related securities.
• Other comprehensive income
2016 vs. 2015 - was a loss during both periods. The increase in the loss position was primarily
due to unrealized losses on agency securities resulting from an increase in longer-term interest
rates, coupled with a decrease in unrealized gains as our non-agency securities portfolio
continued to decline consistent with the reduction of our mortgage-related investments portfolio.
These changes were partially offset by larger unrealized gains due to greater market spread
tightening for our agency securities and a decline in sales of available-for-sale non-agency
mortgage-related securities in an unrealized gain position, which resulted in less unrealized gains
being reclassified from AOCI to other non-interest income.
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Investments
2015 vs. 2014 - was a loss during 2015 compared to income during 2014, primarily due to less
market spread tightening for our non-agency mortgage-related securities and less impairment-
related reclassifications from AOCI to earnings. Other comprehensive income in both 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 2016 Form 10-K
90
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.
(Dollars in millions)
2016
2015
2014
$
%
$
%
Year Ended December 31,
Change 2016-2015
Change 2015-2014
Comprehensive income
(loss) - All Other
$—
$28
($41)
($28)
(100)%
$69
168%
Freddie Mac 2016 Form 10-K
91
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 main categories of risk: credit
risk, market risk, liquidity risk, and operational risk. We primarily discuss credit risk, market risk, and
operational risk in this section. See "Liquidity and Capital Resources" for a discussion of liquidity risk.
Credit risk is the risk associated with the inability or failure of a borrower, issuer or counterparty to meet its
financial and/or contractual obligations.
Market risk is the economic risk associated with adverse changes in interest rates, volatility, and spreads.
Liquidity risk is the risk associated with the inability to meet the liquidity needs of the company.
Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes,
people, or systems or from external events.
For more discussion of these and other risks facing our business, see “Risk Factors.”
RISK MANAGEMENT FRAMEWORK AND GOVERNANCE STRUCTURE
We manage risk using a three-lines-of-defense risk management framework and governance structure
that includes enterprise-wide oversight by the Board and its committees, CERO, CCO, and our corporate
ERC. These roles and responsibilities continue to evolve.
The discussion and diagram below present the responsibilities associated with 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 implement a redesigned and enhanced
three-lines-of-defense methodology.
We use our 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 2016 Form 10-K
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Management's Discussion and Analysis
Risk Management | Overview
Freddie Mac 2016 Form 10-K
93
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 and Fannie Mae are working with FHFA to develop an overall risk
measurement framework for evaluating Freddie Mac's and Fannie Mae's risk management and business
decisions during conservatorship, known as the Conservator Capital Framework ("CCF"). FHFA is
finalizing key inputs to the CCF, and we expect to begin making risk management and business decisions
using the CCF in 2017. We currently expect this will result in limited change to our decision making.
Freddie Mac 2016 Form 10-K
94
Management's Discussion and Analysis
Risk Management | Credit Risk
CREDIT RISK
OVERVIEW
We are exposed to both mortgage credit risk and counterparty 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. Counterparty credit
risk is the risk that a counterparty (other than a mortgage borrower) 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, 2016, 2015,
and 2014, the fair value of our investments in these securities was $21.1 billion, $17.2 billion and $6.7
billion, respectively, and primarily consisted of investments in U.S. Treasury securities. As U.S. 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. Our investment in other non-mortgage-related securities exposes us to counterparty
credit risk. However, we believe such risk exposure is minimal, as the issuers of these securities are
primarily major financial institutions, including other GSEs, highly-rated supranational institutions, and
government money market funds.
In the sections below, we provide a general discussion of our risk management framework and current
risk environment for each of the three types of mortgage credit risk and for counterparty credit risk.
Freddie Mac 2016 Form 10-K
95
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, which is a type of consumer 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 of 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.
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%, 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
Product Advisor (“LPA”)), the seller’s software, or Fannie Mae’s comparable software. The performance of
non-LPA 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 using both random and targeted samples. We also perform quality control reviews of many
delinquent loans and review all loans that have resulted in credit losses before the representations and
warranties are relieved. Sellers may appeal ineligible loan determinations prior to repurchase of the loan.
Our reviews of 2015 originations are largely complete, while our reviews of 2016 originations are ongoing.
The average aggregate ineligible loan rate across all sellers for loans funded during 2015, 2014, and
2013, excluding HARP and other relief refinance loans, was approximately 0.8%, 1.1%, and 1.4%,
respectively. The most common underwriting defect found in our review of loans funded during 2015
related to the delivery of insufficient income documentation.
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 2016 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. 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. In July 2016, we launched our 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 to this suite of tools are expected in 2017.
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 have made a number of changes to our selling and servicing representation
and warranty framework for our mortgage loans. FHFA may require further changes to the framework in
the future. Under the revised selling framework, sellers are relieved of repurchase obligations for
breaches of certain selling 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 for breaches of certain selling representations and
warranties. These changes are designed to provide sellers with a higher degree of certainty regarding
their repurchase exposure and liability on loans sold to us.
In February 2016, at the direction of FHFA, we published guidelines for a new independent dispute
resolution process for alleged breaches of selling or servicing representations and warranties on our
loans. Under the new process, a neutral third party renders a decision on demands that remain
unresolved after the existing appeal and escalation processes have been exhausted.
We recently announced that we expect to offer representation and warranty relief for certain mortgage
loans in early 2017 through our Loan Advisor Suite technology solution. Customer adoption of our
technology solution is critical to our ability to expand mortgage access responsibly.
The credit quality of our single-family loan purchases remained strong during the past several years. The
tables below show the credit profile of the single-family loans we purchased or guaranteed in the last
three years.
Freddie Mac 2016 Form 10-K
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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,
2016
2015
2014
Amount
% of
Total
Amount
% of
Total
Amount
% of
Total
30-year or more amortizing fixed-rate
$307,572
78%
$262,209
75%
$192,458
75%
20-year amortizing fixed-rate
15-year amortizing fixed-rate
Adjustable-rate
FHA/VA and other governmental
Total
Percentage of purchases:
With credit enhancements
Detached/townhome property type
Primary residence
Loan purpose:
Purchase
Cash-out refinance
Other refinance
Freddie Mac 2016 Form 10-K
17,011
61,223
6,555
146
4
16
2
—
16,470
58,958
12,760
163
5
17
3
—
8,677
38,200
15,711
207
4
15
6
—
$392,507
100%
$350,560
100%
$255,253
100%
26%
92%
90%
45%
22%
33%
23%
92%
90%
44%
21%
35%
25%
92%
88%
52%
17%
31%
98
Management's Discussion and Analysis
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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
$271
1,107
3,034
8,562
$12,974
Year Ended December 31,
2016
Loan
Count
1,799
6,220
17,277
60,353
85,649
Average
Loan Size
$151,000
178,000
176,000
142,000
$151,000
2015
Loan
Count
3,766
11,784
28,999
85,677
Average
Loan Size
$151,000
173,000
170,000
140,000
130,226
$150,000
UPB
$569
2,043
4,938
11,980
$19,530
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 - Primary mortgage insurance provides loan-level protection against
loss up to a specified amount and the premium is typically paid 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 sale, 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. Most of our loans with LTV
ratios above 80% are protected by primary mortgage insurance.
• Seller indemnification agreement - Requires the seller to 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.
• Deep MI - Provides additional coverage beyond primary mortgage insurance. Deep MI is a credit
enhancement we purchase from affiliates of mortgage insurance companies. Deep MI covers a pool
of loans and takes effect immediately upon sale of the mortgage loans to us over a pre-defined loan
aggregation period. We require our counterparties to collateralize their exposure to reduce the risk
that we will not be reimbursed for our claims under the policies.
• 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 guarantee fee. We have not used lender recourse or lender indemnification
agreements on a broad 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 four years.
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Risk Management | SF Credit Risk
We also enter into the following types of credit risk transfer transactions subsequent to our purchase or
guarantee of loans.
• STACR debt notes - Unsecured debt obligations that we issue to third-party investors related to
certain notional credit risk positions. 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 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 - Policies that provide credit protection on a portion of the non-issued
notional credit risk positions we retain in a STACR debt note transaction. We also enter into ACIS
transactions that provide credit protection for certain specified credit events on loans not included in a
reference pool created for a STACR debt note transaction. We receive compensation from the
insurance policy up to an aggregate limit when specified credit events occur.
• Whole loan securities - Guaranteed senior securities and unguaranteed subordinated securities that
we issue which are 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. In these transactions, the loans are serviced in accordance with our
servicing guide and we control the servicing.
• Senior subordinate securitization structures - Guaranteed senior securities and unguaranteed
subordinated securities that we issue which are backed by seasoned performing modified and
reperforming 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. In these transactions, the loans are not serviced in accordance with our servicing guide
and we do not control the servicing.
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. 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,
2016
2015
2014
(Percentage of portfolio based on
UPB)
% of
Portfolio
SDQ Rate
% of
Portfolio
SDQ Rate
% of
Portfolio
SDQ Rate
Non-credit-enhanced
Credit-enhanced:
Primary mortgage insurance
Other
Total
64%
1.02%
70%
1.30%
77%
1.74%
17%
27%
N/A
1.46%
0.43%
1.00%
15%
20%
N/A
2.06%
0.58%
1.32%
14%
12%
N/A
3.10%
1.21%
1.88%
Freddie Mac 2016 Form 10-K
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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 as of December 31, 2016 and 2015, respectively. The table includes all types of single-family
credit enhancements.
As of December 31,
2016
2015
Total
Current and
Protected
UPB
Coverage
Remaining
Collateralized
Coverage
Remaining (1)
Total
Current and
Protected
UPB
Coverage
Remaining
Collateralized
Coverage
Remaining (1)
$291,217
$74,345
$—
$257,063
$65,760
$—
1,030
3,067
5,247
1,719
1,747
1,874
17
427,978
453,670
2,494
(559,400)
10
81
4,911
618
1,747
230
6
10
—
—
—
—
—
—
1,095
—
5,902
2,140
2,599
2,127
23
11
—
5,385
753
2,599
278
10
7
—
—
—
—
—
—
14,507
5,355
14,507
877
328,872
328,872
11,551
3,365
11,551
311
375
—
375
893
—
(417,393)
58
—
58
—
630,660
102,185
15,769
512,193
89,770
11,927
1,124,066
—
—
1,189,694
—
—
(Dollars in millions)
Credit enhancements at
the time we acquire the
loan:
Primary mortgage
insurance
Seller indemnification(2)
Deep MI(2)
Lender recourse and
indemnification
Pool insurance
Other
HFA Indemnifications
Subordination
Other credit
enhancements
Credit enhancements
subsequent to our
purchase or guarantee of
the loan:
STACR debt note(2)
ACIS transactions(2)
Whole loan security and
senior subordinate
securitization structures(2)
Less: UPB with more than
one type of credit
enhancement
Single-family book with
credit enhancement
Single-family book without
credit enhancement
Total
$1,754,726
$102,185
$15,769
$1,701,887
$89,770
$11,927
(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 primarily related to ACIS transactions.
(2) Credit risk transfer transactions. The substantial majority of single-family loans covered by these transactions were acquired
after 2012.
We had coverage remaining of $102.2 billion and $89.8 billion on our single-family credit guarantee
portfolio as of December 31, 2016 and 2015, respectively. Credit risk transfer transactions provided
19.9% and 16.7% of the coverage remaining at those dates.
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
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Risk Management | SF Credit Risk
on calculated losses or actual losses, which may result in timing differences between the recognition of
recoveries and the related credit event. We recognize losses on the loans in the reference pool when
losses are incurred. Recoveries from credit risk transfer transactions based on actual losses are
recognized when the loss confirming event occurs (i.e., foreclosure, deed in lieu of foreclosure, short sale,
etc.), which may be several years after the related losses are incurred. Credit risk transfer transactions
based on calculated losses are measured at fair value through earnings, so the change in fair value may
be recognized prior to the incurrence of the loss.
We estimate the potential recoveries from our STACR debt note and ACIS transactions using a sensitivity
analysis that utilizes our historical loss and prepayment experience related to loans originated during
periods that experienced above average home price appreciation, moderate home price appreciation, and
severe home price depreciation. We match these loans to similar groups within the reference pools
(related to our STACR debt note and ACIS transactions) using LTV ratios and FICO scores. Our
recoveries were estimated based on loan losses, net of mortgage insurance claim amounts. These are
estimated projections. Our actual losses under the chosen scenarios could differ materially from these
estimates. In 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, 2016
UPB of loans covered by STACR debt
notes and ACIS insurance policies
$427,978
Performance Under Home Price Scenarios at December 31, 2016
Above Average Home
Price Appreciation (47%)(1)
Moderate Home Price
Appreciation (7%)(1)
Severe Home Price
Depreciation (-24%)(1)
Amount
bps
Amount
bps
Amount
bps
Estimated credit losses
Estimated recoveries from STACR debt
notes and ACIS insurance policies
Loss coverage ratio
$273
$77
28%
6
2
N/A
$1,845
43
$11,003
$609
33%
14
N/A
$7,423
68%
257
173
N/A
(1) Home price change is over a four-year period.
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Risk Management | SF Credit Risk
Monitoring Loan Performance and Characteristics of the Single-Family Credit Guarantee Portfolio
and Individual Sellers and Servicers
We review loan performance, including delinquency statistics and related 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.
Single-Family Credit Guarantee Portfolio
Serious delinquency rates continued to decline across our total single-family credit guarantee portfolio in
2016 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 2016 generally led to improved current LTV ratios of the loans in
our single-family credit guarantee portfolio as of December 31, 2016, which contributed to lower credit
losses.
The improvement in our serious delinquency rate in 2016 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 seriously delinquent loans. The
performance of our Core single-family book has benefited from significant home price increases since
2009. As these home price increases moderate and return to long-term historical averages, we expect the
performance of our Core single-family book will also moderate. The gradual reduction of our Legacy
single-family book also contributed to the improvement in the serious delinquency rate.
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.
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Risk Management | SF Credit Risk
Portfolio Composition and Credit Losses
Serious Delinquency Rates as of December
31,
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Risk Management | SF Credit Risk
The tables below provide 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
(Dollars in billions)
Core single-family book
HARP and other relief refinance
book
Legacy single-family book
Total
December 31, 2016
Average
Credit
Score
Original
LTV Ratio
Current
LTV
Ratio
Current
LTV Ratio
>100%
Foreclosure
and Short
Sale Rate(1)
Alt-A %
752
729
700
743
72%
88%
75%
75%
60%
65%
62%
61%
—%
0.15%
7%
8%
2%
1.14%
4.26%
N/A
—%
—%
15%
2%
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%
UPB
$1,275
265
215
$1,755
UPB
$1,129
303
270
$1,702
(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 2016 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 measured at loan origination;
while current LTV (CLTV) ratio is
defined as the ratio of the current loan
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
loan
• Higher LTV ratios indicate higher risk, as
proceeds from sale of the property may
not cover our exposure on the loan
• Borrowers with higher credit scores are
generally more likely to repay or have the
ability to refinance their loans 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 is covered by more than one
loan
Freddie Mac 2016 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, 2016, 2015, and 2014.
(Percentage of portfolio based on UPB)
2016
December 31,
2015
2014
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%
23%
4%
75%
45%
38%
15%
2%
61%
60%
21%
12%
5%
2%
743
35%
21%
44%
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%
In addition, at December 31, 2016, 2015, and 2014:
• 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 at origination; and
• More than 90% of our loans were fixed-rate.
At December 31, 2016, approximately 11% 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 2016 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
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
$115.1
$169.4
$37.5
83%
82%
69%
1.8%
7.2%
21.7%
1.07%
1.92%
5.73%
December 31, 2016
(Dollars in billions)
UPB
CLTV
% Modified
SDQ Rate
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, 2015
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 CLTV ratio attributes of loans in our single-family credit guarantee portfolio.
December 31, 2016
CLTV > 80 to 100
CLTV > 100
All Loans
%
Portfolio
SDQ
Rate(1)
%
Portfolio
SDQ
Rate(1)
%
Portfolio
SDQ
Rate(1)
%
Portfolio
SDQ
Rate(1)
%
Modified(1)
0.2%
1.6
60.9
—
2.18%
1.02%
0.15%
NM
—%
NM
—%
0.3
9.7
—
1.30%
0.22%
NM
—
0.1
—
NM
NM
1.88%
NM
0.2%
1.9
70.7
—
2.45%
1.07%
0.16%
NM
62.7%
0.18%
10.0%
0.27%
0.1%
3.29%
72.8%
0.20%
0.5%
0.8
10.1
—
1.72%
1.11%
0.32%
NM
0.2%
0.3
2.2
—
3.44%
2.25%
1.08%
NM
0.1%
0.1
0.8
—
4.50%
3.54%
1.92%
NM
0.8%
1.2
13.1
—
2.30%
1.55%
0.52%
NM
11.4%
0.44%
2.7%
1.37%
1.0%
2.31%
15.1%
0.69%
0.8%
1.3
7.0
0.1
9.2%
6.23%
4.41%
1.92%
4.90%
2.65%
0.2% 12.70%
0.1% 20.28%
1.1%
0.3
1.4
—
9.75%
6.65%
NM
0.3
0.6
—
16.40%
11.79%
NM
1.9
9.0
0.1
1.9%
8.04%
1.0% 14.14%
12.1%
8.05%
5.83%
2.63%
5.58%
3.59%
3.0%
1.3%
0.2%
NM
0.2%
4.5%
2.6%
0.8%
NM
1.1%
33.7%
27.8%
13.3%
15.8%
17.1%
(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 2016 Form 10-K
108
Management's Discussion and Analysis
Risk Management | SF Credit Risk
December 31, 2015
CLTV > 80 to 100
CLTV > 100
All Loans
%
Portfolio
SDQ
Rate(1)
%
Portfolio
SDQ
Rate(1)
%
Portfolio
SDQ
Rate(1)
%
Portfolio
SDQ
Rate(1)
%
Modified(1)
—%
NM
—%
0.2%
1.3
55.8
—
2.32%
1.05%
0.15%
NM
0.2
8.7
0.1
57.3%
0.18%
9.0%
0.6%
0.7
10.7
—
1.65%
1.03%
0.29%
NM
0.2%
0.4
3.4
—
1.49%
0.28%
4.41%
0.34%
3.06%
2.12%
1.02%
NM
NM
NM
1.85%
NM
0.2%
1.5
64.6
0.1
—
0.1
—
0.1%
3.49%
66.4%
0.1%
0.2
1.5
—
4.65%
3.31%
1.85%
NM
0.9%
1.3
15.6
—
2.74%
1.13%
0.17%
3.41%
0.21%
2.38%
1.60%
0.56%
NM
12.0%
0.40%
4.0%
1.25%
1.8%
2.20%
17.8%
0.72%
0.8%
1.5
8.5
0.2
11.0%
6.57%
4.73%
1.99%
5.12%
2.74%
0.3% 13.74%
0.2% 21.39%
1.3%
0.5
2.2
—
10.85%
7.26%
NM
0.4
1.2
—
17.73%
12.84%
NM
2.4
11.9
0.2
3.0%
8.66%
1.8% 15.03%
15.8%
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%
NM
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
(1) NM - not meaningful due to the percentage of the portfolio rounding to zero.
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 may 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 sometimes
referred to as subprime or Alt-A by market participants. 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 2016 Form 10-K
109
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, 2016
UPB
CLTV
% Modified
SDQ Rate
$60.5
$16.6
$32.0
53%
73%
78%
1.7%
0.1%
100%
1.20%
4.34%
6.37%
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%
(1) Includes $4.1 billion and $5.0 billion in UPB of option ARM loans as of December 31, 2016 and 2015, respectively. As of
December 31, 2016 and 2015, the option ARM loans had: (a) current LTV ratios of 64% and 71%, (b) loan modification
percentages of 14.6% and 14.0%; and (c) serious delinquency rates of 5.24% and 8.01%, 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 2016 or prior have already
had one or more payment changes as of December 31, 2016; loans where the year of first payment
change is 2017 or later have not had a payment change as of December 31, 2016 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, 2016.
December 31, 2016
(Dollars in
millions)
2016 and
Prior
2017
2018
2019
2020
2021
Thereafter
Total(1)
ARM/amortizing
ARM/interest-only
Fixed/interest-only
Step-rate modified
Total
$15,024
$2,652
$3,443
$6,282
$7,704
$7,122
$13,861
$56,088
9,013
270
3,888
1,201
1,572
269
89
4
200
2
—
17
20,071
21,347
14,855
5,517
4,124
2,937
—
72
435
14,762
1,835
32,035
$44,378
$29,088
$20,139
$11,892
$12,030
$10,076
$14,368
$104,720
(1) Excludes 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 2017 or 2018, 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 2017.
Freddie Mac 2016 Form 10-K
110
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 $1.3 billion and $1.5 billion of security
collateral underlying our other securitization products at December 31, 2016 and 2015, 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, 2016, we have purchased approximately $34.4 billion of relief refinance loans that were
previously categorized as Alt-A loans in our portfolio, including $1.6 billion in 2016.
The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
December 31, 2016
December 31, 2015
(Dollars in billions)
UPB
CLTV
%
Modified
SDQ Rate
UPB
CLTV
%
Modified
SDQ Rate
Alt-A
$32.6
72%
25.9%
5.21%
$40.2
77%
23.1%
6.32%
The UPB of Alt-A loans in our single-family credit guarantee portfolio declined during 2016 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.
Freddie Mac 2016 Form 10-K
111
Management's Discussion and Analysis
Risk Management | SF Credit Risk
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
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, 2016. See Note 12 for additional information on the concentration of credit risk in our
single-family credit guarantee portfolio.
As of December 31, 2016
SDQ
Loan
Count
% of SDQ
Loans
SDQ
Rate
Full Year
2016
Credit
Losses
As of December 31, 2015
SDQ
Loan
Count
% 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
(Dollars in
millions)
New York
Florida
Illinois
New Jersey
California
9,574
9,355
7,291
6,913
5,992
9%
2.05%
$163
13,981
10%
2.94%
$557
19,462
10%
4.06%
$167
9
7
7
6
1.42%
1.34%
2.26%
0.46%
157
170
204
83
951
14,070
10
2.16%
8,841
11,978
7,669
6
9
5
1.62%
3.90%
0.60%
850
381
689
215
25,656
11,902
16,960
11,386
13
3.92%
1,057
6
8
6
2.17%
5.49%
0.92%
395
239
197
83,182
60
1.12%
1,996
112,700
57
1.52%
1,784
All Others
66,809
62
0.90%
Total
105,934
100%
1.00%
$1,728
139,721
100%
1.32%
$4,688
198,066
100%
1.88%
$3,839
The following table presents our single-family charge-offs and recoveries in each geographic region. See
"Single-Family Credit Guarantee Portfolio" in Note 12 for a description of these regions.
2016
2015
2014
Year Ended December 31,
(Dollars in
millions)
Northeast
North Central
Southeast
West
Southwest
Total
Charge-
offs,
gross (1)
Recoveries
Charge-
offs,
net
Charge-
offs,
gross(1)
Recoveries
Charge-
offs,
net
Charge-
offs,
gross(1)
Recoveries
Charge-
offs,
net
$752
($188)
$564
$2,056
($207)
$1,849
$1,120
($238)
425
401
247
113
(94)
(121)
(58)
(36)
331
280
189
77
854
1,270
688
203
(149)
(204)
(105)
(52)
705
1,066
583
151
1,001
1,676
861
234
(259)
(393)
(284)
(84)
$882
742
1,283
577
150
$1,938
($497)
$1,441
$5,071
($717)
$4,354
$4,892
($1,258)
$3,634
(1) Does not include lower-of-cost-or-fair value adjustments and other expenses related to property taxes and insurance
recognized when we transfer loans from held-for-investment to held-for-sale, which totaled $1.2 billion, $3.4 billion, and $0.3
billion during 2016, 2015, and 2014, respectively.
Freddie Mac 2016 Form 10-K
112
Management's Discussion and Analysis
Risk Management | SF Credit Risk
The tables below present the concentration of loans in each geographic region by CLTV ratio.
CLTV <= 80%
CLTV > 80% to 100%
CLTV > 100%
All Loans
% of Portfolio
SDQ Rate
% of Portfolio
SDQ Rate
% of Portfolio
SDQ Rate
% of Portfolio
SDQ Rate
December 31, 2016
North
Central
Northeast
Southeast
Southwest
West
Total
North
Central
Northeast
Southeast
Southwest
West
Total
13%
20
12
11
27
83%
0.67%
1.04%
0.92%
0.71%
0.43%
0.74%
3%
4
3
2
3
15%
1.53%
2.35%
1.95%
1.13%
1.38%
1.75%
—%
1
1
—
—
2%
6.36%
10.92%
6.35%
6.75%
5.00%
7.43%
16%
25
16
13
30
100%
0.93%
1.45%
1.19%
0.78%
0.57%
1.00%
CLTV <= 80%
CLTV > 80% to 100%
CLTV > 100%
All Loans
% of Portfolio
SDQ Rate
% of Portfolio
SDQ Rate
% of Portfolio
SDQ Rate
% of Portfolio
SDQ Rate
December 31, 2015
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%
Credit Losses and Recoveries
Charge-offs were higher in 2015 than in 2016 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 2017 to be lower than in 2016 as we continue our loss mitigation activities and our efforts to
sell certain 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.
Freddie Mac 2016 Form 10-K
113
Management's Discussion and Analysis
Risk Management | SF Credit Risk
The tables below contain certain credit performance metrics of our single-family credit guarantee portfolio.
(Dollars in millions)
Charge-offs, gross(1)(2)
Recoveries
Charge-offs, net
REO operations expense
Total credit losses
Total credit losses (in bps)
Ratio of total loan loss reserves (excluding reserves for TDR concessions) to net charge-
offs for single-family loans(3)
Ratio of total loan loss reserves to net charge-offs for single-family loans(3)
Payment Status:
One month past due
Two months past due
Seriously delinquent
Year Ended December 31,
2016
$1,938
(497)
1,441
287
2015
$5,071
(717)
4,354
334
2014
$4,892
(1,258)
3,634
205
$1,728
$4,688
$3,839
9.9
3.9
10.5
27.6
22.9
3.0
9.2
2.5
5.2
As of December 31,
2016
2015
2014
1.37%
0.40%
1.00%
1.37%
0.42%
1.32%
1.52%
0.49%
1.88%
(1) For 2015, includes $1.9 billion due to the adoption of Advisory Bulletin 2012-02 ("AB 2012-02") Framework for Adversely
Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention.
(2) Does not include lower-of-cost-or-fair value adjustments and other expenses related to property taxes and insurance
recognized when we transfer loans from held-for-investment to held-for-sale, which totaled $1.2 billion, $3.4 billion, and $0.3
billion during 2016, 2015, and 2014, respectively.
(3) Calculated using annualized net charge-offs from the fourth quarter of each respective year.
Credit loss recoveries during 2016, 2015, and 2014 included $14 million, $17 million, and $349 million,
respectively, related to settlement agreements with certain sellers that released specified loans from
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 $0.3 billion, $0.5 billion, and $0.7 billion that reduced our charge-offs of
single-family loans during 2016, 2015, and 2014, respectively. We also recognized recoveries from
primary mortgage insurance of $47 million, $76 million, and $180 million during 2016, 2015, and 2014,
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 CLTV ratio of greater than 100%. Additional detail on loans in judicial foreclosure
states is presented in the “Managing Foreclosure and REO Activities” section.
Freddie Mac 2016 Form 10-K
114
Management's Discussion and Analysis
Risk Management | SF Credit Risk
December 31, 2016
% of
Portfolio
SDQ Rate
Year Ended
December
31, 2016
% of Credit
Losses
December 31, 2015
% of
Portfolio
SDQ Rate
Year Ended
December
31, 2015
% of Credit
Losses
CLTV > 100%
Alt-A loans
Judicial foreclosure states
2%
2%
38%
7.43%
5.21%
1.36%
34%
15%
62%
4%
2%
39%
8.08%
6.32%
1.84%
49%
23%
70%
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 2016,
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.
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(1)
Recoveries
Transfers, net
Ending balance
Year Ended December 31,
2016
2015
2014
2013
$15,348
$21,793
$24,578
$30,508
(781)
(1,938)
497
337
(2,639)
(5,071)
717
548
113
(4,892)
1,258
736
(2,247)
(8,995)
4,313
999
2012
$38,916
2,013
(13,520)
2,262
837
$13,463
$15,348
$21,793
$24,578
$30,508
As a percentage of our single-family credit
guarantee portfolio
0.77%
0.90%
1.31%
1.49%
1.86%
(1) Does not include lower-of-cost-or-fair value adjustments and other expenses related to property taxes and insurance
recognized when we transfer loans from held-for-investment to held-for-sale, which totaled $1.2 billion, $3.4 billion, $0.3
billion, $0 billion, and $0 billion during 2016, 2015, 2014, 2013, and 2012, respectively.
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 63% of the loan loss reserves
for single-family loans as of December 31, 2016, largely reflect interest rate concessions for the borrower.
Most of our modified single-family loans, including TDRs, were current and performing at December 31,
2016. We expect our loan loss reserve associated with existing single-family TDRs 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.
Freddie Mac 2016 Form 10-K
115
Management's Discussion and Analysis
Risk Management | SF Credit Risk
(Dollars in millions)
TDRs, at January 1
New additions
Repayments and reclassifications to held-for-sale
Foreclosure transfers and foreclosure alternatives
TDRs, at December 31,
Loans impaired upon purchase
Total impaired loans with specific reserve
Allowance for loan losses
Net investment, at December 31,
2016
2015
Loan Count
Amount
Loan Count
Amount
512,253
43,153
(58,153)
(11,544)
485,709
7,977
493,686
539,590
59,887
(69,720)
(17,871)
511,886
9,535
521,421
$85,960
5,956
(11,405)
(1,642)
78,869
542
79,411
(11,980)
$67,431
$94,401
8,227
(13,975)
(2,789)
85,864
678
86,542
(14,019)
$72,523
The table below presents information about the UPB of single-family TDRs and non-accrual loans on our
consolidated balance sheets.
(Dollars 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
2016
2015
2014
2013
2012
December 31,
$77,122
16,164
$93,286
$10,295
2,290
$12,585
$82,026
22,460
$104,486
$82,373
32,745
$78,033
42,829
$65,784
61,517
$115,118
$120,862
$127,301
$12,105
2,677
$14,782
$13,728
6,935
$20,663
$14,239
8,805
$23,044
$12,430
14,602
$27,032
Year Ended December 31,
(Dollars in millions)
2016
2015
2014
2013
2012
Foregone interest income on TDRs
and non-accrual loans(1)
$2,109
$2,690
$3,235
$3,552
$4,126
(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 2016 Form 10-K
116
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.
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 for and sales of certain
seriously delinquent loans.
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 relief refinance program (including HARP) will end in September 2017. In August 2016, FHFA
announced that we and Fannie Mae, at FHFA's direction, will implement a new high LTV streamlined
refinance offering. This offering will not be available to borrowers until October 2017.
The following table includes information about the performance of our relief refinance mortgage portfolio.
(Dollars in millions)
Above 125% Original LTV
Above 100% to 125% Original LTV
Above 80% to 100% Original LTV
80% and below Original LTV
As of December 31,
2016
2015
UPB
Loan Count
SDQ Rate
UPB
Loan Count
SDQ Rate
$25,027
50,618
82,987
106,350
144,719
288,697
506,932
892,471
1.24%
1.10%
0.84%
0.38%
0.69%
$28,241
59,305
97,375
117,677
157,035
323,795
567,201
942,183
$302,598
1,990,214
1.38%
1.20%
0.86%
0.36%
0.72%
Total
$264,982
1,832,819
These loans have continued to perform well relative to loans with similar characteristics in the Legacy
single-family book.
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 or no payments during a defined
period, generally less than one year, to allow borrowers to return to compliance with the original
Freddie Mac 2016 Form 10-K
117
Management's Discussion and Analysis
Risk Management | SF Credit Risk
mortgage terms or to implement another loan workout. For agreements completed in 2016, the
average time period for reduced payments was between two and three 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 2016, the average time
period to repay past due amounts was approximately three 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. Our modification programs generally require 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. These modification programs
offer eligible borrowers extension of the loan’s term up to 480 months and a fixed interest rate.
Servicers are paid incentive fees for each completed modification, and there are limits on the number
of times a loan may be modified.
The volume of these activities declined during 2016 compared to 2015, primarily due to lower volumes of
seriously delinquent loans.
When a seriously delinquent single-family loan cannot be resolved through an economically sensible
home retention option, we typically seek to pursue a foreclosure alternative or sale of the seriously
delinquent 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 seriously delinquent loans below in "Servicing Transfers and Sales of Certain
Seriously Delinquent Loans."
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 certain seriously
delinquent loans. The volume of our short sale transactions declined in 2016 compared to 2015,
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 2016 Form 10-K
118
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, 2016
UPB
% of
Portfolio
CLTV Ratio
SDQ Rate
$33.8
43.1
$76.9
2%
2
4%
78%
82%
80%
6.49%
11.76%
9.64%
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%
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:
Current or paid off
two years after modification:
Freddie Mac 2016 Form 10-K
Quarter of Loan Modification Completion
4Q 2015
3Q 2015
2Q 2015
1Q 2015
4Q 2014
3Q 2014
2Q 2014
1Q 2014
64%
66%
66%
69%
67%
69%
70%
74%
N/A
N/A
N/A
N/A
65%
66%
69%
71%
119
Management's Discussion and Analysis
Risk Management | SF Credit Risk
Servicing Transfers and Sales of Certain Seriously Delinquent 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 Counterparty Credit
Risk below for additional information on these activities.
During 2016 and 2015, we completed sales of $3.1 billion and $2.9 billion, respectively, in UPB of
seriously delinquent single-family loans. Of the $2.1 billion in UPB of single-family loans classified as
held-for-sale at December 31, 2016, $1.6 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
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, 2016 and 2015, the percentage of seriously
delinquent loans that have been delinquent for more than six months was 57% and 64%, 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, 2016, loans in states with a judicial foreclosure process comprised 38% of
our single-family credit guarantee portfolio.
Freddie Mac 2016 Form 10-K
120
Management's Discussion and Analysis
Risk Management | SF Credit Risk
The table below presents the length of time our loans have been seriously delinquent, by jurisdiction type.
As of December 31,
2016
2015
2014
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
35,599
12,257
14,318
32,949
6,075
4,736
68,548
18,332
19,054
34%
11
14
31
6
4
65
17
18
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
105,934
100%
139,721
100%
198,066
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 as loans awaiting court proceedings in those
states transition to REO or other loss events. The number of our single-family loans delinquent for more
than one year declined 39% during 2016.
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
the timeliness of foreclosure completion by our servicers based on the state where the property is
located. 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.
Freddie Mac 2016 Form 10-K
121
Management's Discussion and Analysis
Risk Management | SF Credit Risk
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,
2016
2015
2014
1,205
1,767
1,599
742
1,030
562
827
1,332
1,602
1,553
828
1,076
637
892
1,311
1,372
1,325
796
1,031
636
867
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.
Our REO inventory declined in 2016 primarily due to REO dispositions exceeding our acquisitions. REO
acquisitions continue to decline due to a declining number of seriously delinquent loans and a large
proportion of property sales to third parties at foreclosure. 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.
We expect the rate of decline in our REO inventory will slow as a large 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.
(Dollars in millions)
Beginning balance - REO
Acquisitions
Dispositions
Year Ended December 31,
2016
2015
2014
Number of
Properties
Amount
Number of
Properties
Amount
Number of
Properties
Amount
17,004
$1,774
25,768
$2,684
47,307
$4,592
16,161
1,562
23,171
2,235
42,265
4,094
(21,747)
(2,121)
(31,935)
(3,145)
(63,804)
(6,002)
Ending balance - REO
11,418
1,215
17,004
1,774
25,768
2,684
Beginning balance, valuation allowance
Change in valuation allowance
Ending balance, valuation allowance
Ending balance - REO
Severity Ratios
(52)
35
(17)
$1,198
(126)
73
(53)
$1,721
(51)
(75)
(126)
$2,558
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
Freddie Mac 2016 Form 10-K
122
Management's Discussion and Analysis
Risk Management | SF Credit Risk
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,
2016
2015
2014
32.8%
29.0%
34.3%
30.1%
34.2%
31.6%
Our severity ratios remained relatively stable during 2016 compared to 2015. 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, 2016,
approximately 51% 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 14% of the properties were
being evaluated for listing and determination of our sales or disposition strategy. As of December 31,
2016, approximately 23% of our REO properties were listed and available for sale, and 12% 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 275
days and 255 days for our REO dispositions during 2016 and 2015, respectively.
Freddie Mac 2016 Form 10-K
123
Management's Discussion and Analysis
Risk Management | MF Credit Risk
MULTIFAMILY MORTGAGE CREDIT RISK
We manage our exposure to multifamily mortgage credit risk, which is a type of commercial real estate
credit risk, using the following principal strategies:
• Maintaining policies and procedures for new business activity, including prudent underwriting
standards;
• Transferring a large majority of expected and stress credit losses to third parties through K
Certificates, SB Certificates, and other transactions; 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)
10-year loans, fixed or adjustable
7-year loans, fixed or adjustable
Other
Total
2016
Amount
$24,378
19,367
13,085
December 31,
2015
2014
% of
Total
Amount
% of
Total
Amount
% of
Total
43%
$20,603
43%
$11,069
34
23
16,875
9,786
36
21
11,773
5,494
39%
42
19
$56,830
100%
$47,264
100%
$28,336
100%
Freddie Mac 2016 Form 10-K
124
Management's Discussion and Analysis
Risk Management | MF Credit Risk
Transferring a Large Majority of Expected and Stress Credit Losses to Third Parties Through K
Certificates, SB Certificates, and Other Transactions
We seek to transfer multifamily mortgage credit risk primarily through K Certificate and SB Certificate
transactions in which we transfer a 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 and
SB Certificate transactions is set at a level that we believe is sufficient to cover a large majority of the
expected and stress 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 $178.4 billion in UPB of multifamily loans in K Certificate and SB Certificate transactions
between 2009 and 2016. Excluding transactions without subordination, the average level of subordination
on all outstanding K Certificates and SB Certificates was 14% and 15% as of December 31, 2016 and
2015, respectively. Since we began issuing K Certificates and SB 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 and SB Certificates.
The table below shows the delinquency rates for both credit-enhanced and non-credit-enhanced loans in
our multifamily mortgage portfolio.
2016
December 31,
2015
2014
% of Portfolio
Delinquency
Rate
% of Portfolio
Delinquency
Rate
% of Portfolio
Delinquency
Rate
24%
0.04%
32%
0.03%
40%
0.02%
70
6
100%
0.02%
0.02%
0.03%
61
7
100%
0.02%
—%
0.02%
53
7
100%
0.01%
0.35%
0.04%
Non-credit-enhanced
Credit-enhanced:
K Certificates and SB
Certificates
Other
Total
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 and SB
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
Freddie Mac 2016 Form 10-K
125
Management's Discussion and Analysis
Risk Management | MF Credit Risk
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.
In addition, after the loans have been securitized and the large majority of the expected and stress credit
losses has been transferred to third-party investors, we monitor the performance of our K Certificates, SB
Certificates, and other similar types of transactions to assess our potential exposure to losses. Due to the
subordination protection associated with our K Certificates, SB 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 2016 Form 10-K
126
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 and SB 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:
2016
2017
2018
2019
2020
Thereafter
Total
Year of acquisition:
2010 and prior
2011 and after
Total
K Certificates, SB Certificates and other
securitization products:
Year of issuance:
2011 and prior
2012
2013
2014
2015
2016
Total
Subordination level at issuance:
No subordination
Less than 10%
10% to 15%
Greater than 15%
Total
December 31,
2016
2015
UPB
Delinquency
Rate
UPB
Delinquency
Rate
$42.4
139.4
8.2
9.7
$199.7
$16.8
7.0
2.1
$25.9
68%
N/A
$1.9
6.7
6.1
2.2
9.0
$25.9
$14.5
11.4
$25.9
$20.9
14.6
21.6
15.4
30.0
45.1
$147.6
$3.3
4.5
75.6
64.2
$147.6
0.04%
0.02%
0.03%
—%
0.03%
—%
—%
—%
—%
N/A
—%
—%
—%
—%
—%
—%
—%
—%
—%
0.16%
—%
—%
—%
—%
0.01%
0.03%
—%
0.71%
0.01%
—%
0.03%
$49.1
103.1
6.7
9.5
$168.4
$21.2
7.1
1.2
$29.5
68%
$1.9
4.6
7.8
6.9
1.9
6.4
$29.5
$23.1
6.4
$29.5
$21.2
15.8
22.9
17.5
32.4
N/A
$109.8
$2.0
5.1
44.0
58.7
$109.8
0.04%
0.02%
—%
—%
0.02%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
0.10%
—%
—%
—%
—%
N/A
0.02%
0.01%
—%
0.05%
—%
0.02%
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, 2016, we had no REO properties.
Freddie Mac 2016 Form 10-K
127
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,
2016
2015
2014
$2
—
2
—
$2
0.1
6
$9
—
9
4
$13
0.8
4
$3
(1)
2
(9)
($7)
(0.5)
8
(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 (benefit) for credit losses
Charge-offs, gross
Recoveries
Transfers, net
Ending balance
As a percentage of non-credit-enhanced
multifamily mortgage portfolio
TDRs and Non-accrual Loans
Year Ended December 31,
2016
2015
$59
(22)
(2)
—
—
$35
$94
(26)
(9)
—
—
$59
2014
$151
(55)
(3)
1
—
$94
2013
2012
$382
(218)
(7)
1
(7)
$545
(123)
(36)
2
(6)
$151
$382
0.07%
0.11%
0.16%
0.24%
0.48%
The table below provides information about the UPB of multifamily TDRs and non-accrual loans on our
consolidated balance sheets.
Freddie Mac 2016 Form 10-K
128
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
2016
2015
2014
2013
2012
December 31,
$277
108
$385
$3
7
$10
$321
189
$510
$9
12
$21
$535
385
$920
$21
31
$52
$675
628
$806
1,488
$1,303
$2,294
$15
65
$80
$48
157
$205
(In millions)
2016
2015
2014
2013
2012
Foregone interest income on TDRs and non-accrual
loans (1)
$3
$3
$4
$8
$11
Year Ended December 31,
(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.
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 2016 Form 10-K
129
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 securities.
Agency 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. Because non-agency
securities generally do not include a guarantee from a GSE or governmental agency, we have credit risk
exposure to the underlying collateral of these securities. This credit risk exposure, which principally arises
from securities purchased prior to conservatorship, has declined in recent years as we have reduced our
positions in non-agency securities and substantially all of our recent mortgage-related securities
purchases have consisted of agency securities.
See Note 5 for information concerning our investments in mortgage-related securities, including the
amortized cost and fair value balances of these investments by major security type.
Risk Management Activities - Non-Agency Mortgage-Related Securities
As the non-agency mortgage-related securities pay down, our credit risk exposure is reduced. In addition,
we further reduce our credit risk exposure by selling or securitizing certain assets and pursuing litigation
and other loss recovery efforts. For information on our remaining litigation related to certain of our non-
agency mortgage-related securities, see Note 12.
While we continue to have a significant portfolio of non-agency mortgage-related securities, our
investments in these securities have declined in recent years, as we continue our efforts to dispose of
certain of these securities in an economically sensible manner. See "Reducing Our Mortgage-Related
Investments Portfolio Over Time" for information concerning our disposition of these securities.
Freddie Mac 2016 Form 10-K
130
Management's Discussion and Analysis
Risk Management | MRS Credit Risk
Our Investments in Non-Agency Mortgage-Related Securities
Our investments in non-agency mortgage-related securities are classified according to the nature of the
underlying collateral, as either non-agency CMBS or non-agency RMBS.
Non-Agency CMBS
Our non-agency CMBS are backed by multifamily real estate loans. While we have credit risk exposure to
the underlying collateral of these securities and therefore exposure to the stresses of the multifamily real
estate market, we believe such exposure is mitigated by the presence of structural subordination, as we
principally invest in the most senior tranches of the CMBS deals. As of December 31, 2016,
approximately 76% of our non-agency CMBS (by UPB) were investment grade or above. As a result,
while we monitor these securities for credit losses, we believe our exposure to credit risk is limited.
Non-Agency RMBS
Our non-agency RMBS are backed by single-family real estate loans, including subprime, option ARM,
Alt-A and other loans. We categorize our non-agency RMBS as subprime, option ARM, or Alt-A if the
securities were identified as such based on information provided to us when we acquired these securities.
Since the beginning of 2007, most of the actual principal shortfalls on our non-agency mortgage-related
securities resulted from non-agency RMBS backed by subprime, option ARM, and Alt-A loans.
Furthermore, as of December 31, 2016, approximately 95% of our non-agency RMBS backed by
subprime, option ARM, and Alt-A loans were below investment grade. As a result, compared to our other
mortgage-related securities, we believe these securities represent our greatest credit risk exposure.
However, we expect this exposure to decline over time as we reduce the less liquid assets, including non-
agency RMBS, held in our investments portfolio.
Freddie Mac 2016 Form 10-K
131
Management's Discussion and Analysis
Risk Management | MRS Credit Risk
Higher Risk Components of Our Investments in Non-Agency RMBS
The following table presents certain credit-related statistics concerning our investments in non-agency
RMBS backed by subprime, option ARM, and Alt-A loans.
(Dollars in millions)
UPB
Gross unrealized losses, pre-tax
Present value of expected future credit
losses
Principal repayments
Principal cash shortfalls(1)
Collateral delinquency rate
Average credit enhancements(2)
Cumulative collateral loss
As of
12/31/2016
9/30/2016
6/30/2016
3/31/2016
12/31/2015
$14,343
$15,330
$19,248
$23,760
$25,300
78
2,552
595
14
23 %
(1)%
32 %
157
2,330
658
17
23%
1%
32%
352
2,641
1,005
(82)
24%
4%
31%
469
3,018
731
20
25%
3%
31%
425
3,576
920
26
25%
4%
30%
(1) Negative value reflects the recovery of previous principal cash shortfalls through the settlement of non-agency RMBS
representation and warranty claims. See Note 12 for more information concerning our litigation related to non-agency
mortgage-related securities.
(2) Positive value reflects 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 value is 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.
While the credit performance of the loans underlying our non-agency RMBS has improved in recent
periods, it remains weak and is susceptible to changes in macroeconomic 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 and Note 5 for information concerning
our evaluation of our non-agency mortgage-related securities portfolio for credit-related impairment.
Freddie Mac 2016 Form 10-K
132
Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
COUNTERPARTY CREDIT RISK
We are exposed to counterparty credit risk as a result of our contracts with seller/servicers, mortgage
insurers, bond insurers, credit 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 counterparty 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 counterparty 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 financial pressure, 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.
Freddie Mac 2016 Form 10-K
133
Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
In 2015, at the direction of FHFA, we and Fannie Mae implemented changes to our single-family seller
and servicer eligibility requirements. These changes included revisions to net worth requirements,
adoption of new capital and liquidity requirements and enhancements to certain servicer operational
requirements.
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,
which are mostly depository institutions.
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 as of December 31, 2016, the percentage of
our single-family credit guarantee portfolio that was serviced by non-depository servicers was 33%. Of
that amount, approximately 31% was serviced by our three largest non-depository servicers, on a
combined basis. Certain of our non-depository servicers have been the subject of scrutiny from
regulators.
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
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:
Freddie Mac 2016 Form 10-K
134
Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
• 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 was $0.2 billion at
both December 31, 2016 and 2015. See Note 12 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 may facilitate the transfer of servicing as a result of poor
servicer performance, or 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. We may also facilitate the transfer of servicing on loans
at the request of the servicer.
Mortgage, Bond, and Credit Insurers
Overview
We have exposure to mortgage and bond insurers through credit enhancements we obtain on single-
family loans and certain investments in non-agency mortgage-related securities. We also have exposure
to insurers and reinsurers through our ACIS and Deep MI transactions (we sometimes refer to these
insurers as credit insurers). 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.
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, because 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. In recent years, new entrants emerged that have helped diversify
our concentrated primary mortgage insurer exposure among more market participants. However,
mortgage insurers have recently become attractive candidates for acquisition as legacy risks abate and
profitability increases, which could lead to increased concentration among mortgage insurers.
As part of our ACIS credit risk transfer transactions, we regularly obtain insurance coverage from global
insurers and reinsurers. These transactions incorporate several features designed to increase the
likelihood that we will recover on the claims we file with the insurers, including the following:
Freddie Mac 2016 Form 10-K
135
Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
•
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 generally 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 and Fannie
Mae implemented revised eligibility requirements for all Freddie Mac- and Fannie Mae-approved
mortgage insurers. 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 requirements on an
annual basis.
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,
2016. 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 2016 Form 10-K
136
Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
(In millions)
Arch Mortgage Insurance Company(2)
Radian Guaranty Inc. (Radian)
Mortgage Guaranty Insurance
Corporation (MGIC)
Genworth Mortgage Insurance
Corporation
Essent Guaranty, Inc.
Credit
Rating(1)
BBB+
BBB-
Credit
Rating
Outlook(1)
Stable
Stable
BBB-
Stable
BB+
BBB
Watch Dev
Stable
PMI Mortgage Insurance Co. (PMI)
Not Rated
N/A
Republic Mortgage Insurance Company
(RMIC)
Triad Guaranty Insurance Corporation
(Triad)
Others
Total
Not Rated
N/A
Not Rated
N/A
N/A
N/A
December 31, 2016
UPB
Coverage
Primary
MI
Pool
Insurance
Primary
MI
Pool
Insurance
$70,618
60,634
$14
1,470
$18,131
15,510
59,339
43,323
29,225
7,355
5,591
2,871
12,261
113
15,227
15
—
65
32
10
—
11,106
7,459
1,840
1,397
723
2,952
$9
523
1
17
—
44
20
4
—
$291,217
$1,719
$74,345
$618
(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 December 31,
2016. Represents the lower of S&P and Moody’s credit ratings and outlooks stated in terms of the S&P equivalent.
(2) On January 3, 2017, Arch Capital Group Ltd. announced that it had completed its purchase of United Guaranty Corporation
at the end of 2016. The table reflects this transaction.
The majority of our mortgage insurance exposure is concentrated with five mortgage insurers. 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 October 23, 2016, Genworth Financial, Inc. announced that it had entered into an agreement to be
acquired by China Oceanwide Holdings Group Co., Ltd. Because Genworth Mortgage Insurance
Corporation, a subsidiary of Genworth Financial, Inc., is an approved mortgage insurer, Freddie Mac will
evaluate the financial strength of China Oceanwide Holdings Group Co., Ltd. when considering whether
to approve the planned acquisition. The transaction is also subject to other required approvals. For more
information about counterparty risk associated with mortgage insurers, see Note 12.
PMI and Triad are both under the control of their state regulators 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, 2016, we had cumulative unpaid deferred payment obligations of $0.5 billion from these
insurers. We have fully reserved for all of these unpaid amounts as collectability is uncertain.
Except for those insurers 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,
some of which have credit ratings below investment grade.
Freddie Mac 2016 Form 10-K
137
Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
The table below summarizes our exposure to bond insurers as of December 31, 2016. 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.
(Dollars in millions)
Ambac Assurance Corporation (Ambac)
Credit
Rating(1)
Not Rated
National Public Finance Guarantee Corp.
A-
MBIA Insurance Corp.
CCC
N/A
Negative
Negative
Financial Guaranty Insurance Company
(FGIC)
Not Rated
N/A
Assured Guaranty Municipal Corp.
A
Syncora Guarantee Inc.
CIFG Assurance North America, Inc.
Not Rated
Not Rated
Stable
N/A
N/A
December 31, 2016
UPB
Credit
Rating
Outlook(1)
Gross
Unrealized
Losses
Coverage
Outstanding
% of Total
Coverage
Outstanding
$14
7
—
—
—
—
—
$2,713
1,035
601
559
253
22
29
52%
20%
12%
10%
5%
—%
1%
Total
$21
$5,212
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 December 31,
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 under the control of their state regulators. 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.
Bond insurance is included as a feature at issuance of some of our non-agency mortgage-backed
securities. The expected benefits from bond insurers, or the inability of bond insurers to perform on their
obligations, is captured in the fair value of these securities.
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 - We are required to post initial and variation margin with our clearing members
in connection with interest-rate swaps that are subject to the central clearing requirement of the
Dodd-Frank Act. 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 counterparty
credit risk exposure to individual counterparties because a central counterparty is substituted for
Freddie Mac 2016 Form 10-K
138
Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
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
members in connection with exchange-traded derivatives. The posting of this margin exposes us to
counterparty credit risk in the event that our clearing members or the exchanges' clearinghouses fail
to meet their obligations. However, the use of exchange-traded derivatives mitigates our counterparty
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 counterparty 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. Regulations
that take effect March 1, 2017 will require posting of variation margin without the application of any
thresholds for OTC derivative transactions executed after that date. As a result, our and the
counterparties' credit ratings will no longer be used in determining the amount of collateral to be
posted in connection with these 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
Freddie Mac 2016 Form 10-K
139
Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
of our exposure to satisfy the net obligation to us in accordance with the counterparty agreement.
The table below compares the gross fair value of our derivative asset positions after counterparty netting
with our net exposure to these positions after considering cash and non-cash collateral held.
(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, 2016
Number of
Counter-
parties
Fair Value -
Gain positions
Fair Value - Gain
positions, net of
collateral
5
11
3
19
2
21
$266
1,856
42
2,164
215
$2,379
$14
31
6
51
21
$72
Approximately 98% 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, 2016. 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 then applicable counterparty collateral posting
threshold. The concentration of our derivative exposure among our primary OTC derivative counterparties
remains high and could further increase.
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
counterparty 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). As of December 31, 2016, the gross fair
value of such forward purchase and sale commitments that were in derivative asset positions was $270
million.
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 securities 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
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Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
to our entering into such transactions. We monitor the financial strength of our counterparties to 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
securities 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, 2016 and 2015 were primarily 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, 2016 and 2015, approximately $8.4
billion and $13.0 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 Financial Corp.
• 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. In 2016, Intercontinental Exchange, Inc. acquired a majority equity position in MERSCORP
Holdings, Inc. Freddie Mac and Fannie Mae also have equity positions in MERSCORP Holdings. 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.
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Management's Discussion and Analysis
Risk Management | Operational Risk
OPERATIONAL RISK
We define operational risk as the risk of direct or indirect loss resulting from inadequate or failed internal
processes, people or systems, or from 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 2016, 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.
In order to evaluate and monitor operational risk, each business unit completes an 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 face heightened operational risk and expect the risk to remain elevated for the near term.
This elevated risk profile is due to the layering impact of several factors including: legacy systems
requiring upgrade for operational resiliency; reliance on manual processes; volume and complexity of new
business initiatives, including those we are pursuing under the Conservatorship Scorecards; and issues
requiring remediation. Other factors contributing to our heightened operational risk are discussed in “Risk
Factors - Operational Risks.”
While our operational risk profile remains elevated, we are continuing to strengthen our operational
control environment.
We continued to invest in technology risk management activities, including the enhancement of 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.
We continue to make various multi-year investments to build the infrastructure for a better housing
finance system, including the development of the common securitization platform by CSS (jointly owned
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Risk Management | Operational Risk
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 representation on the CSS
Board of Managers, we do not control its day-to-day operations. CSS' day-to-day operations are
managed by CSS management, which is overseen by the CSS Board of Managers. The Board of
Managers consists of two Freddie Mac and two Fannie Mae representatives. We may not realize the
benefits of our investments if the common securitization platform and single (common) security do not
operate successfully, or if the market does not accept the single (common) security. In addition, the
transition to the common securitization platform, which began in late 2016, presents significant
operational and technological challenges. Freddie Mac began its transition to the common securitization
platform in late 2016 through Release 1. We are employing various processes and procedures to mitigate
the operational risks related to Release 1, including leveraging redundant operational processes and the
ability to execute specific failback procedures. We will continue working with FHFA, CSS and Fannie Mae
to develop processes and procedures related to the risks associated with Release 2.
We continue to invest in the information risk and security area to strengthen our capabilities to prevent,
detect, respond to and mitigate risk, and protect our critical assets. In 2014, we launched a multi-year
information protection initiative designed to mitigate information risk. In 2016, we updated our information
security roadmap and launched an end-to-end information risk program.
Model Risk
Model Risk is defined as the potential for adverse consequences from decisions based on incorrect or
misused model outputs. Our business activities significantly 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 review process. Each business periodically reviews model performance, embedded
assumptions and limitations, and modeling techniques, and updates its models as it deems appropriate.
The ERM Division, the second line of defense, develops corporate model risk policies and standards and
independently validates the work done by the first line of defense (i.e., the business units). 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.
In 2016, we improved our model governance processes by strengthening model policies, standards and
procedures. We face heightened exposure to risk in our model governance processes as we
operationalize these enhancements. We will continue to refine these processes to increase effectiveness
and efficiency.
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Risk Management | Operational Risk
A corporate Model Risk Committee serves as a coordination forum for any issues arising from models that
are used across divisions. Issues that remain unresolved at the Model Risk 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."
OPERATIONAL RISK UPDATE RELATING TO MASTER TRUST AGREEMENTS
The company identified that some of its operational procedures were not sufficiently detailed to comply
with certain obligations under its Master Trust Agreements, as they are amended from time to time.
During 2016, we made significant progress to correct the deficiencies in these operational procedures,
and we are continuing our efforts to improve our procedures. Past practices led to a build-up in the
custodial account of funds that were due to the company. We withdrew $22.6 billion of company funds
from the custodial account during 2016 and established processes to withdraw company funds on a
regular basis.
The funds that were withdrawn were reclassified from restricted cash and cash equivalents to cash and
cash equivalents on our consolidated balance sheets. However, cash and cash equivalents, restricted
cash and cash equivalents, and securities purchased under agreements to resell are managed together.
Therefore, the reclassification did not affect how we manage these funds.
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, 2016. As of December 31, 2016, 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.”
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Management's Discussion and Analysis
Risk Management | Market Risk
MARKET RISK
Our business segments have embedded exposure to market risk, including interest-rate and spread risks.
Interest-rate risk is consolidated and primarily managed by the Investments segment, while spread risk is
owned and managed by each individual business segment. Market risk 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 investments in 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 flows of our assets and liabilities over those scenarios.
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. We have certain assets that have a much shorter holding period. As a result, we may manage
the risk of these assets based on their disposition, while our risk measures use long-term cash
flows. 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.
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
market spread between the benchmark rate and the instrument. As the market 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.
We employ risk management practices that seek 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.
To maintain our interest-rate risk exposure within our risk limits across a range of interest-rate scenarios,
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Management's Discussion and Analysis
Risk Management | Market Risk
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 models and market information, which may be updated
daily, weekly, or monthly. The fair values of our assets and liabilities, including derivatives, are primarily
based on either third-party prices or observable market-based inputs. See "Valuation Risk and Controls
Over Fair Value Measurements" in Note 13 for discussion on valuation risk.
The Risk Committee of our Board of Directors establishes Board limits for certain interest-rate and spread
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. The Board limits also include a spread volatility limit on certain Multifamily assets. 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 the interest-rate exposure of our credit guarantees except for the interest-rate
exposure related to buy-ups, float, and STACR debt notes. 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 market 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 - Counterparty Credit Risk”
and “Risk Factors” for more discussion of our market risk exposures, including those related to
derivatives, institutional counterparties, and other market risks.
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Management's Discussion and Analysis
Risk Management | Market Risk
MEASUREMENT OF MARKET RISK
The principal types of market risks to which we are exposed are described below.
Risk
Interest-rate
Risk
Description
Interest-rate 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.
Spread Risk Spread risk is the risk that yields in different
asset classes may not move together and may
adversely affect our economic value.
Risk Exposure
• 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 expected
future cash flows and their present values. This
is reflected in our PMVS-L and Duration Gap
disclosures.
• 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. This is reflected in our
PMVS-YC disclosure.
• 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.
• 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 market
spread risk, also referred to as mortgage-to-
debt OAS risk, arising from funding mortgage-
related investments with debt securities.
• We also incur market spread risk when we use
LIBOR- or Treasury-based instruments in our
risk management activities.
• We are exposed to market 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, market spreads can widen, causing losses
due to changes in fair value. We also have
market spread risk on the K Certificates and SB
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
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Management's Discussion and Analysis
Risk Management | Market Risk
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.
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
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Risk Management | Market Risk
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
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 market 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
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Risk Management | Market Risk
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
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.
Our PMVS and duration gap measures do not fully reflect the potential effect of negative index values
across all of our floating rate assets and liabilities. See “Risk Factors - Market Risk - Negative values for
certain interest rate indices could have an adverse effect on our operational and interest-rate risk
management processes.” We incorporated the effect of negative interest rate index values for the majority
of our floating rate assets and liabilities in 2016. For the small population of these assets and liabilities for
which we have not incorporated the effect of negative interest rate index values, we do not believe the
impacts to the duration gap and PMVS levels would be material to the company's financial condition or
results of operations.
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, 2016 and 2015. The table below also provides PMVS-L estimates assuming an immediate
100 basis point shift in the LIBOR yield curve. The interest-rate sensitivity of a mortgage portfolio varies
across a wide range of interest rates. 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, 2016
December 31, 2015
PMVS-YC
25 bps
PMVS-L
50 bps
100 bps
$7
$12
$—
$50
$—
$186
Year Ended December 31,
2016
2015
(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
0.1
(0.4)
0.7
0.2
$6
$—
$31
$5
$20
$—
$92
$21
0.2
(0.4)
1.0
0.3
$17
$—
$47
$12
$90
$23
$249
$40
Derivatives enable 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.
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(In millions)
December 31, 2016
December 31, 2015
PMVS-L (50 bps)
Before
Derivatives
After
Derivatives
Effect of
Derivatives
$3,651
$3,373
$—
$50
($3,651)
($3,323)
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
GAAP earnings when interest rates fluctuate. Based upon the composition of our financial assets and
liabilities, including derivatives, at December 31, 2016, we generally recognize fair value losses in GAAP
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 represent the derivative gains
(losses) attributable to financial instruments that are not measured at fair value on a recurring basis. The
methodology used to calculate these figures is consistent with the methodology used to calculate our
PMVS-YC and PMVS-L metrics above.
(In millions)
December 31, 2016
December 31, 2015
GAAP FV-YC
GAAP FV-L
25 bps
50 bps
100 bps
$526
$635
$1,328
$1,630
$2,615
$3,573
Our adverse exposures under these interest-rate scenarios as of December 31, 2016 declined compared
to December 31, 2015 as we entered into certain transactions, including structured transactions, during
2016 that have resulted in additional financial assets being recognized and measured at fair value which
helped to offset the fair value changes of our derivatives.
In the first quarter of 2017, we began using hedge accounting for certain single-family mortgage
loans, which is intended to partially reduce the interest-rate volatility in our GAAP earnings by
eliminating a portion of the measurement differences between our GAAP financial results and the
underlying economics of our business.
The disclosure in our Monthly Volume Summary reports, which are available on our web site
www.freddiemac.com/investors/volsum, 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 2016 Form 10-K
151
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 other debt;
•
Interest payments on our other debt;
• 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;
• Payments to affordable housing funds under the GSE Act;
• Payments to Treasury associated with the legislated 10 basis point increase under the Temporary
Payroll Tax Cut Continuation Act;
• 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 other 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;
• 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 2016 Form 10-K
152
Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Management Framework
LIQUIDITY MANAGEMENT FRAMEWORK
The support provided by Treasury pursuant to the Purchase Agreement enables us 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 our account at the Federal Reserve Bank of
New York being overdrawn. We maintain daily cash reserves to manage this risk.
Freddie Mac 2016 Form 10-K
153
Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
LIQUIDITY PROFILE
During 2016, 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 2016, 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 effective short-term debt percentage, which represents the percentage of
our total other debt that is expected to mature within one year, increased to 46.1% as of December 31,
2016 compared to 41.3% as of December 31, 2015 as a larger percentage of our callable debt and non-
callable debt is expected to mature during 2017 compared to 2016.
Our debt cap under the Purchase Agreement was $479.0 billion in 2016 and declined to $407.2 billion on
January 1, 2017. As of December 31, 2016, our aggregate indebtedness, calculated as the par value of
other debt, was $356.7 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/investors/volsum/.
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
Debt securities that we issue are classified either as debt securities of consolidated trusts held by third
parties or other debt. We issue other debt to fund our operations. Competition for funding can vary with
economic, financial market, and regulatory environments.
The tables below summarize the par value and the average rate of other debt securities we issued or paid
off, 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.
Freddie Mac 2016 Form 10-K
154
Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
(Dollars in millions)
Discount notes and Reference Bills:
Beginning balance
Issuances
Maturities
Ending Balance
Securities sold under agreements to repurchase:
Beginning balance
Issuances
Maturities
Ending Balance
Callable debt:
Beginning balance
Issuances
Calls
Maturities
Ending Balance
Non-callable debt:(1)
Beginning balance
Issuances
Repurchases
Maturities
Ending Balance
Total other debt
(Dollars in millions)
Discount notes and Reference Bills:
Beginning balance
Issuances
Maturities
Ending Balance
Securities sold under agreements to repurchase:
Beginning balance
Issuances
Maturities
Ending Balance
Callable debt:
Beginning balance
Issuances
Calls
Maturities
Ending Balance
Non-callable debt:(1)
Beginning balance
Issuances
Repurchases
Maturities
Ending Balance
Total other debt
Year Ended December 31, 2016
Short-term
Average Rate
Long-term
Average Rate
$104,088
424,256
(467,302)
61,042
—
61,284
(58,244)
3,040
—
—
—
—
—
9,545
7,435
—
(9,545)
7,435
$71,517
0.28%
0.30%
0.27%
0.47%
—
0.07%
0.05%
0.42%
—
—
—
—
—
0.20%
0.41%
—
0.20%
0.41%
0.47%
$—
—
—
—
—
—
—
—
107,675
115,930
(123,475)
(1,710)
98,420
196,713
49,383
(53)
(59,237)
186,806
$285,226
—
—
—
—
—
—
—
—
1.61%
1.47%
1.46%
0.65%
1.44%
2.34%
1.17%
11.78%
2.26%
2.10%
1.87%
Year Ended December 31, 2015
Short-term
Average Rate
Long-term
Average Rate
$134,670
427,964
(458,546)
104,088
—
2,987
(2,987)
—
—
—
—
—
—
—
9,545
—
—
9,545
$113,633
0.12%
0.11%
0.07%
0.28%
—
0.23%
0.23%
—
—
—
—
—
—
—
0.20%
—
—
0.20%
0.28%
$—
—
—
—
—
—
—
—
107,070
128,612
(124,435)
(3,572)
107,675
212,289
39,969
(397)
(55,148)
196,713
$304,388
—
—
—
—
—
—
—
—
1.44%
1.53%
1.34%
1.17%
1.61%
2.40%
1.10%
3.97%
1.68%
2.34%
2.08%
155
(1)
Includes STACR debt notes and certain multifamily other debt.
Freddie Mac 2016 Form 10-K
Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
Our outstanding other debt balance continues to decline as we reduce our indebtedness along with the
decline in our mortgage-related investments portfolio. As a result, our total issuances of other debt,
excluding securities sold under agreements to repurchase, decreased while total payoffs and maturities
increased in 2016 compared to 2015. We continued to utilize overnight discount notes as a more cost
effective tool to manage intra-day liquidity needs.
Our short term debt issuances provide us with overall lower funding costs relative to medium and longer
term debt. In October 2016, amendments to the SEC's rules that govern money market mutual funds
became effective. These amendments make certain structural and operational reforms to address the
risks of investor withdrawals from money market funds. These amendments do not apply to mutual funds
that invest solely in debt issued or guaranteed by the U.S. government or its agencies and
instrumentalities, including GSEs. As a result, the demand for short-term government and agency debt
has increased, which contributed to the improvement in our short-term and non-callable debt spreads
during 2016.
We replaced a portion of called and matured medium-term and longer-term debt with a combination of
new callable and non-callable debt. Issuing a combination of callable and non-callable debt assists in
managing our liquidity metrics. Our callable debt provides us with the option to repay the outstanding
principal balance of the debt prior to its contractual maturity date. As of December 31, 2016, $76 billion of
the outstanding $98 billion of callable debt may be called within one year.
The following graphs present our other debt by contractual maturity date and earliest redemption date.
For the purposes of this presentation, the earliest redemption date is the earliest call date for callable debt
and the contractual maturity date for all other debt.
Contractual Maturity Date as of December
31, 2016
Earliest Redemption Date as of December 31,
2016
Freddie Mac 2016 Form 10-K
156
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
Issuances:
New issuances to third parties
Additional issuances of securities
Total issuances
Extinguishments:
Purchases of debt securities from third parties
Debt securities received in settlement of advances to lenders
Repayments of debt securities
Total extinguishments
Ending balance
Unamortized premiums and discounts
Debt securities of consolidated trusts held by third parties
Year Ended December 31,
2016
2015
$1,513,089
$1,440,325
309,021
162,386
471,407
(42,716)
(29,292)
(310,326)
(382,334)
1,602,162
46,521
$1,648,683
259,890
137,676
397,566
(43,341)
(11,225)
(270,236)
(324,802)
1,513,089
43,032
$1,556,121
Debt securities of our consolidated trusts represent our liability to third parties that hold beneficial
interests in our consolidated securitization trusts. Our exposure on debt securities of consolidated trusts is
limited to the guarantee we provide on the payment of principal and interest on these securities, as the
primary source of repayment of these debt securities comes from the cash flows of the mortgage loans
held by the trusts which back the securities. At December 31, 2016, our estimated exposure (including the
amounts that are due to Freddie Mac for debt securities of consolidated trusts that we purchased) to
these debt securities is recognized as the allowance for credit losses on mortgage loans held by
consolidated trusts. See Note 4 for details on our allowance for loan losses.
The table below provides information on the debt securities issued by our consolidated trusts.
Freddie Mac 2016 Form 10-K
157
Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
(In millions)
Single-family
PCs:
30-year or more amortizing fixed-rate
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
Other securitization products
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
CREDIT RATINGS
December 31,
2016
2015
$1,235,862
$1,156,220
82,118
282,520
57,038
15,043
2,421
1,675,002
4,531
1,679,533
3,048
1,682,581
81,255
281,165
66,807
19,573
2,745
1,607,765
5,824
1,613,589
1,711
1,615,300
(80,419)
$1,602,162
(102,211)
$1,513,089
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 2,
2017.
Senior long-term debt
Short-term debt
Subordinated debt
Preferred stock(1)
Outlook
Nationally Recognized Statistical Rating
Organization
S&P
AA+
A-1+
AA-
D
Moody's
Aaa
P-1
Aa2
Ca
Stable
Stable
Fitch
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.
OTHER INVESTMENTS AND CASH PORTFOLIO
The investments in our other investments and cash portfolio are important to our cash flow, collateral
management, asset and liability management, and our ability to provide liquidity and stability to the
mortgage market. The table below summarizes the balances in our other investments and cash portfolio,
Freddie Mac 2016 Form 10-K
158
Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
which includes the Liquidity and Contingency Operating Portfolio.
December 31, 2016
December 31, 2015
Liquidity and
Contingency
Operating
Portfolio
Custodial
Account
Other(1)
Total Other
Investments
and Cash
Portfolio
Liquidity and
Contingency
Operating
Portfolio
Custodial
Account
Other(1)
Total Other
Investments
and Cash
Portfolio
$12.4
—
37.5
19.6
—
$—
9.5
13.6
—
—
$—
0.4
0.4
1.5
1.3
$12.4
9.9
51.5
21.1
1.3
$5.4
$—
$0.2
—
14.5
48.4
16.2
—
14.8
—
—
—
0.4
1.0
0.9
$5.6
14.5
63.6
17.2
0.9
(In billions)
Cash and cash
equivalents
Restricted cash and
cash equivalents
Securities
purchased under
agreements to resell
Non-mortgage
related securities
Other assets(2)
Total
$69.5
$23.1
$3.6
$96.2
$70.0
$29.3
$2.5
$101.8
(1) Consists of amounts related to collateral held by us from OTC derivative counterparties, investments in unsecured agency
debt that we may not otherwise invest in, other than to pledge as collateral to our counterparties when our derivatives are in
a liability position, and advances to lenders.
(2) Consists of advances to lenders.
Our non-mortgage-related securities in the Liquidity and Contingency Operating Portfolio consist of U.S.
Treasury securities and other investments that we could sell to provide us with an additional source of
liquidity to fund our business operations. We also maintain non-interest-bearing deposits at the Federal
Reserve Bank of New York.
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 may be
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 for use as collateral for repurchase agreements. These assets consist of certain structured agency
securities collateralized by non-agency mortgage-related securities, non-agency CMBS, non-agency
RMBS 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.
Freddie Mac 2016 Form 10-K
159
Management's Discussion and Analysis
Liquidity and Capital Resources I Cash Flows
CASH FLOWS
We evaluate our cash flow performance by comparing the net cash flows from operating and investing
activities to the net cash flows required to finance those activities. The following graphs present the
results of these activities for the years ended December 31, 2016, 2015 and 2014.
Operating Cash Flows Investing Cash Flows Financing Cash Flows
2014 2015 2016 2014 2015 2016 2014 2015 2016
Commentary
2016 vs. 2015
Cash provided by operating activities increased $5.8 billion primarily due to the following:
•
Increase in net sales of mortgage loans acquired as held-for-sale, primarily due to an increase in
the volume of our multifamily securitizations; partially offset by
• Decrease in our net interest income.
Cash provided by investing activities decreased $9.7 billion primarily due to the following:
•
•
Increase in advances to lenders;
Increase in net purchases of investment securities, primarily due to more investment securities
being retained from our agency resecuritizations; partially offset by
• Decrease in securities purchased under agreements to resell due to lower near-term cash needs
for upcoming maturities and anticipated calls of other debt at the end of 2016 compared to the
end of 2015; and
• Decrease in restricted cash due to the withdrawal of company funds from the custodial account.
Cash used in financing activities decreased $16.0 billion primarily due to the following:
• Decrease in net repayments and redemptions of debt securities of consolidated trusts held by
third parties due to an increase in the volume of our single-family PC issuances for cash; partially
offset by
•
Increase in net repayments of other debt, as we reduced our indebtedness along with the decline
in our mortgage-related investments portfolio.
Freddie Mac 2016 Form 10-K
160
Management's Discussion and Analysis
Liquidity and Capital Resources I Cash Flows
2015 vs. 2014
Cash used by operating activities increased $9.8 billion primarily due to the following:
•
Increase in net purchases of multifamily held-for-sale mortgage loans, as we increased our support of
workforce housing in the multifamily mortgage market; and
• Decrease in cash proceeds received from settlements of our non-agency mortgage-related securities
litigation.
Cash provided by investing activities decreased $26.4 billion primarily due to the following:
•
Increase in our securities purchased under agreements to resell as a result of higher near-term cash
needs for upcoming maturities and anticipated calls of other debt; and
•
Increase in advances to lenders.
Cash used in financing activities decreased $31.2 billion primarily due to the following:
• Decrease in net repayments of other debt, as we increased our use of medium-term other debt to
fund our business operation; and
• Decrease in cash dividend payments on the senior preferred stock, as a result of lower
comprehensive income.
Freddie Mac 2016 Form 10-K
161
Management's Discussion and Analysis
Liquidity and Capital Resources I Capital Resources
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
available funding remaining under the Purchase Agreement is $140.5 billion. This amount will be reduced
by any future draws. We may need to make additional draws in future periods due to a variety of factors
that could adversely affect our net worth.
At December 31, 2016, 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, 2016 and the 2017 Capital Reserve Amount of $600 million, our scheduled dividend
obligation to Treasury in March 2017 will be $4.5 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 be distributed to
Treasury, and we cannot retain capital from the earnings generated by our business operations (other
than a limited capital reserve 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.
In June 2016, FASB issued a new Accounting Standards Update (ASU 2016-13, Financial Instruments—
Credit Losses) related to the measurement of credit losses on financial instruments that will be effective
as of January 1, 2020, with early adoption permitted as of January 1, 2019. This Update replaces the
incurred loss impairment methodology in current GAAP with a methodology that reflects lifetime expected
credit losses. While we are still evaluating the effect that the adoption of this Update will have on our
financial results, it will increase (perhaps substantially) our provision for credit losses in the period of
adoption. As our capital reserve will decline to zero in 2018, this Update increases the risk that we will
need to request a draw from Treasury for the period of adoption.
The table below presents activity related to our net worth.
(In millions)
Beginning balance
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
Year Ended December 31,
2016
2015
2014
$2,940
7,118
—
(4,983)
$5,075
$71,336
$101,448
$2,651
5,799
—
(5,510)
$2,940
$71,336
$96,465
$12,835
9,426
—
(19,610)
$2,651
$71,336
$90,955
Freddie Mac 2016 Form 10-K
162
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 could 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.
PURCHASE AGREEMENT, WARRANT 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. The Purchase Agreement, the warrant and the senior preferred stock do not
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Management's Discussion and Analysis
Conservatorship and Related Matters
contain any provisions causing them to terminate or cease to exist upon the termination of
conservatorship. The conservatorship, the Purchase Agreement, the warrant and the senior preferred
stock materially limit the rights of our common and 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, 2016, 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 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. If for any reason we were not to pay the amount of
our dividend obligation on the senior preferred stock in full, the unpaid amount would be added to the
liquidation preference, but this would not affect our ability to draw funds from Treasury under the
Purchase Agreement.
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
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Management's Discussion and Analysis
Conservatorship and Related Matters
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
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 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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Management's Discussion and Analysis
Conservatorship and Related Matters
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. Also includes certain non-agency
mortgage-related securities guaranteed by a GSE;
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Management's Discussion and Analysis
Conservatorship and Related Matters
• 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
• Less Liquid: assets that are less liquid than both agency securities and loans in the securitization
pipeline (e.g., reperforming loans and performing modified loans, single-family seriously delinquent
loans, and non-agency mortgage-related securities not guaranteed by a GSE).
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. The cap for this portfolio will decrease to
approximately $288 billion at December 31, 2017.
December 31, 2016
Securitiz-
ation
Pipeline
Less
Liquid
Total
Liquid
December 31, 2015
Securitiz-
ation
Pipeline
Less
Liquid
Total
(Dollars in millions)
Liquid
Investments segment - Mortgage
investments portfolio:
Single-family unsecuritized loans
Performing loans
$—
$13,113
$—
$13,113
$—
$10,041
$—
$10,041
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, 2016
and 2015, respectively
90% of mortgage-related
investments portfolio cap at
December 31, 2016 and 2015,
respectively(1)
—
—
125,652
113
11,759
—
58,326
58,326
13,113
58,326
71,439
—
—
—
67,036
67,036
10,041
67,036
77,077
—
—
—
4,776
130,428
135,869
16,059
16,172
—
—
11,759
12,958
—
—
—
6,076
141,945
27,754
27,754
—
12,958
137,524
13,113
79,161
229,798
148,827
10,041
100,866
259,734
—
—
13,692
13,692
—
—
19,501
19,501
7,447
16,372
31,117
54,936
7,304
19,563
40,809
67,676
$144,971
$29,485
$123,970
$298,426
$156,131
$29,604
$161,176
$346,911
49%
10%
41%
100%
45%
9%
46%
100%
$339,304
$305,374
$399,181
$359,263
(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 the less
liquid assets that we hold in our mortgage-related investments 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, which included repayments and active dispositions,
accounted for the majority of the decline in our mortgage-related investments portfolio during 2016. Our
active dispositions of less liquid assets included the following:
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Management's Discussion and Analysis
Conservatorship and Related Matters
• Sales of $12.4 billion of less liquid assets, including $8.1 billion in UPB of non-agency mortgage-
related securities, $3.1 billion in UPB of seriously delinquent unsecuritized single-family loans, and
$1.1 billion in UPB of single-family reperforming loans and performing modified loans. Our sales of
reperforming loans and performing modified loans involved securitization of the loans using a senior
subordinate securitization structure, in which we guaranteed the resulting senior securities. As part of
these transactions, we retained certain of the guaranteed senior securities for our mortgage-related
investments portfolio;
• Securitizations of $1.5 billion in UPB of less liquid multifamily loans; and
• Securitizations of $5.7 billion in UPB of single-family reperforming loans and performing modified
loans into Freddie Mac PCs, thereby enhancing their liquidity. Our strategy related to these
securitizations is to initially retain all of the resulting mortgage-related securities and then resecuritize
a portion of these securities with some of the resulting interests being sold to third parties.
FHFA’S STRATEGIC PLAN FOR FREDDIE MAC AND FANNIE
MAE CONSERVATORSHIPS
In May 2014, FHFA issued its 2014 Strategic Plan. FHFA issued the 2016 and 2017 Conservatorship
Scorecards in December 2015 and December 2016, 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 2016 Conservatorship Scorecard, and our performance with respect to it, see
“Executive Compensation - Compensation Discussion and Analysis.” For information about the 2017
Conservatorship Scorecard, see our current report on Form 8-K filed on December 15, 2016.
For more information on the conservatorship and related matters, see "Regulation and Supervision," “Risk
Factors - Conservatorship and Related Matters,” Note 2, Note 9, and “Directors, Corporate Governance,
and Executive Officers - Authority of the Board and Board Committees.”
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Management's Discussion and Analysis
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 origination 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 15. 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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Management's Discussion and Analysis
Regulation and Supervision
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 August 2016,
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 2015.
NEW PRODUCTS
The GSE Act requires Freddie Mac and Fannie Mae to obtain the approval of FHFA before initially offering
any product (as defined in the statute), 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. We are currently operating under an FHFA-
required housing plan. 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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Management's Discussion and Analysis
Regulation and Supervision
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.
Our goals for 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)
2016
2017
24%
6%
17%
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 2016 affordable housing goals in March 2017. At
this time, based on preliminary information, we believe we met three of our single-family goals and our
three multifamily goals for 2016, 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 2017.
AFFORDABLE HOUSING FUND 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 pay such amount to certain housing funds. FHFA suspended
this requirement 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
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 2016, we completed $445.7 billion of new business purchases subject to this
requirement and accrued $187 million of related expense. We expect to pay this amount in February 2017
through the following payments: $91.2 million to the Housing Trust Fund administered by HUD; $49.1
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Management's Discussion and Analysis
Regulation and Supervision
million to the Capital Magnet Fund administered by Treasury; and $46.8 million to the HOPE Reserve
Account administered by Treasury.
PORTFOLIO ACTIVITIES
The GSE Act provides FHFA with the 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 - Limits 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.
Under the Purchase Agreement, we may not issue subordinated debt without Treasury's consent. During
2016 and 2015, we did not call, repurchase or issue any Freddie SUBS® securities.
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. 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. Our Charter also authorizes Treasury to purchase Freddie Mac debt
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
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Management's Discussion and Analysis
Regulation and Supervision
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 mortgage. 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 mortgages 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 of 1933;
• 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.
Several bills were introduced in the 114th Congress, which adjourned in January 2017, 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, modification of the terms of the Purchase
Agreement or an increase in credit risk transfer transactions. None of these bills was enacted. It is likely
that similar or new bills will be introduced and considered in the 115th Congress that began in January
2017. We cannot predict whether any of such bills will be enacted.
2015 AFFORDABLE HOUSING GOALS AND HOUSING PLAN
In December 2016, FHFA determined that we achieved three of our five single-family affordable housing
goals and all three of our multifamily goals for 2015. Due to our failure to meet two single-family housing
goals for 2014, we have been operating under an FHFA-required housing plan that addresses how we
intend to achieve the missed goals in 2016 and 2017. Due to our failure to meet two single-family housing
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Management's Discussion and Analysis
Regulation and Supervision
goals for 2015, FHFA has extended our housing plan through 2018. Our performance compared to our
goals, as determined by FHFA for 2015 and 2014, is set forth below.
Goals for
2015
Market
Level for
2015
Results
for 2015
Goals for
2014
Market
Level for
2014
Results
for 2014
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)
24%
6%
19%
14%
21%
23.6%
5.8%
19.8%
15.2%
22.3%
5.4%
19.0%
14.5%
22.5%
22.8%
23%
7%
18%
11%
20%
Multifamily low-income goal (In units)
300,000
Multifamily very low-income subgoal (In units)
60,000
N/A
N/A
379,042
200,000
76,935
40,000
Multifamily small property low-income subgoal
(In units)
6,000
N/A
12,801
N/A
FINAL RULE ON DUTY TO SERVE UNDERSERVED MARKETS
22.8%
5.7%
22.1%
15.0%
21.0%
4.9%
20.1%
13.6%
25.0%
26.4%
N/A
N/A
N/A
273,434
48,689
N/A
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 2016, FHFA published a final rule regarding the duty of Freddie Mac and Fannie Mae to
serve these underserved markets. Under the rule, Freddie Mac and Fannie Mae are each 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. We anticipate that the plans will become
effective in January 2018, after FHFA provides notice of non-objection with respect to our plan for each
underserved market. The rule provides duty to serve credit for eligible activities that facilitate a secondary
market for mortgages on residential properties in the specified underserved markets. It also establishes a
method for evaluating and rating Freddie Mac’s and Fannie Mae’s performance each year, on which
FHFA will report annually to Congress.
We cannot predict the impact that the rule will have on our business, operations, profitability or credit risk.
It is possible that the rule could have an adverse effect on us.
Freddie Mac 2016 Form 10-K
174
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, 2016. 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, 2016 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, 2016 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, 2016,
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 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 set aside and pay to certain housing funds, because the
amount of such payments is dependent on the volume of our new business purchases and the timing
of such payments is dependent, in part, on whether we have made, or could be required to make, a
draw under the Purchase Agreement; and
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Contractual Obligations
• The guarantee payments and commitments to advance funds pertaining to off-balance sheet
arrangements.
(In millions)
Total
2017
2018
2019
2020
2021
Thereafter
Other long-term debt(1)
Other short-term debt(1)
Interest payable(2)
Other contractual liabilities
reflected on our
consolidated balance
sheets(3)
Purchase obligations:
Purchase
commitments(4)
Other purchase
obligations(5)
Lease obligations
Total specified contractual
obligations
$285,226
$92,831
$71,392
$46,436
$13,274
$20,372
$40,921
71,517
30,328
71,517
11,115
—
3,274
—
2,525
—
1,996
—
1,864
—
9,554
6,747
5,961
7
6
8
7
758
27,727
27,727
2,624
39
299
11
—
217
9
—
216
9
—
209
6
—
207
3
—
1,476
1
$424,208
$209,461
$74,899
$49,192
$15,493
$22,453
$52,710
(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 6.
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 (i) obligations related to our qualified and non-qualified defined contribution plans, retiree medical plan and other
benefit plans; (ii) future cash payments due under our contractual obligations to make delayed equity contributions to LIHTC
partnerships; and (iii) payables to the consolidated trusts established for the administration of cash remittances received
related to the underlying assets of Freddie Mac mortgage-related securities.
(4) 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.
(5) Primarily includes unconditional purchase obligations that are legally binding and that are subject to a cancellation penalty.
Freddie Mac 2016 Form 10-K
176
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 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 and SB 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 $166.7 billion and $127.3 billion at December 31, 2016 and 2015, 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 $8.5 billion and $8.9 billion at December 31,
2016 and 2015, 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,
2016 and 2015, there were no liquidity guarantee advances outstanding.
Our exposure to losses on the transactions described above would be partially mitigated by the recovery
we would receive through exercising our rights to the collateral backing the underlying loans and the
available credit enhancements, which may include recourse and primary 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
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 - Counterparty
Credit Risk - Derivative Counterparties” and Note 7. 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 $267.4 billion and
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Off-Balance Sheet Arrangements
$258.4 billion in notional value at December 31, 2016 and 2015, 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 9 for further information.
Freddie Mac 2016 Form 10-K
178
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. 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, prepayment, 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
collectively using a statistically based model that evaluates a variety of factors affecting collectability,
including but not limited to current LTV ratios, trends in home prices, 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 review the output of this model
by considering qualitative factors such as macroeconomic and other factors to see whether the model
outputs are consistent with our expectations. Management adjustments may be necessary to take into
consideration external factors and current economic events that have occurred but that are not yet
reflected in the factors used to derive the model outputs. Significant judgment is exercised in making
Freddie Mac 2016 Form 10-K
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Management's Discussion and Analysis
Critical Accounting Policies and Estimates
these adjustments.
Some examples of the qualitative factors considered include:
• Regional housing trends;
• Applicable home price indices;
• Unemployment and employment dislocation trends;
• The effects of changes in government policies and programs;
•
Industry trends;
• Consumer credit statistics; and
• Third-party credit enhancements.
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 13 for additional information
regarding fair value hierarchy and measurements, valuation risk and controls over fair value
measurement.
Freddie Mac 2016 Form 10-K
180
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, reputation, 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 the 114th Congress, which adjourned in January 2017, 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, modification of the terms of the Purchase
Agreement, or an increase in credit risk transfer transactions. None of these bills was enacted. It is likely
that similar or new bills will be introduced and considered in the 115th Congress that began in January
2017.
The conservatorship is indefinite in duration. The timing, likelihood, and circumstances under which we
might emerge from conservatorship are uncertain. Under the Purchase Agreement, 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 nearly 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 14.
We cannot retain capital from the earnings generated by our business operations (other than a
limited amount that will decrease from $600 million in 2017 to zero in 2018 and thereafter), which
increases the likelihood that we may request additional draws from Treasury 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,
Freddie Mac 2016 Form 10-K
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Risk Factors
Conservatorship and Related Matters
particularly as the required Capital Reserve Amount declines from $600 million in 2017 to zero in 2018. A
variety of factors could influence whether we could require a draw, including the following:
• 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 market 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 intended to help reduce earnings
volatility and address some of the measurement differences between our GAAP financial results and
the underlying economics of our business, including the adoption of hedge accounting;
• 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 (for example, FASB’s new accounting
standards update related to the measurement of credit losses on financial instruments will increase
(perhaps substantially) our provision for credit losses in the period of adoption);
• The effects of our foreclosure prevention and loss mitigation efforts;
• Changes in housing or economic conditions, legislation, or other factors that affect our assessment of
our ability to realize our net deferred tax asset. If a valuation allowance on our net deferred tax asset
were established, it could significantly increase our tax provision for that period;
• A reduction in corporate tax rates would require us to measure our net deferred tax asset using the
new rate in the period in which the rate change is enacted. This would result in a one-time charge
through the tax provision; 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.
Freddie Mac 2016 Form 10-K
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Risk Factors
Conservatorship and Related Matters
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.
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 or the amount of new multifamily business we may obtain.
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 placed us into receivership, our assets would be liquidated. The liquidation proceeds
might 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. Several bills considered by Congress in the past several years provided
for Freddie Mac to be placed into receivership. In addition, FHFA could be required to place us into
receivership if Treasury were 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 might 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.
If our assets were liquidated, the liquidation proceeds might not be sufficient to pay the secured and
unsecured claims against us (including claims on our guarantees), repay the liquidation preference on
any series of our preferred stock, or make any distribution to our common stockholders. The GSE Act
Freddie Mac 2016 Form 10-K
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Risk Factors
Conservatorship and Related Matters
provides that, if we were placed into receivership, the receiver would hold the mortgages underlying our
mortgage-related securities (and the payments thereon) for the benefit of the holders of those securities.
However, payments on the mortgages underlying our mortgage-related securities might not be sufficient
to make full payments of principal and interest on the securities. In that event, if we were unable to fulfill
our guarantee, the holders of our mortgage-related securities would experience delays in receiving
payments on the securities because the relevant systems are not designed to make partial payments.
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. 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 2016 Form 10-K
184
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 reflected as assets on our consolidated balance sheets that
we own or guarantee. We are also exposed to mortgage credit risk with respect to guaranteed securities
and guarantee arrangements that are not reflected as assets on our consolidated balance sheets. This
exposure primarily relates to K Certificates and SB Certificates. We also have off-balance sheet
arrangements related to certain other securitization products and other mortgage-related guarantees.
We continue to have a 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 of 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 and our duty to serve underserved markets, expose us to increased mortgage credit
risk.
Our credit risk transfer transactions may not be available to us in adverse economic conditions.
These transactions also lower our profitability.
We are increasingly using credit risk transfer transactions to mitigate some of our potential credit losses.
Our ability to transfer credit risk (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 credit risk
transfer transactions during a housing downturn. Some of our credit risk transfer transactions are new,
and it is uncertain if there will be adequate demand for them over the long term. Some of these
transactions use novel structures that have not yet been tested in adverse market conditions; it is
possible that, under such conditions, they will provide less protection than we expect. These transactions
may not prevent us from incurring substantial losses in adverse market conditions. These transactions
have termination dates that are earlier than the maturities of the related loans, and losses on the loans
occurring beyond the terms of the transactions are not covered. The costs associated with these
transactions are significant and are expected to increase. There could be a significant difference in time
between when we recognize a credit loss 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. Some of these transactions are complex, which
may increase our exposure to operational risk.
Freddie Mac 2016 Form 10-K
185
Risk Factors
Credit Risks
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 to our sellers the underwriting for the single-family loans we purchase or securitize. Our
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.
We can exercise certain contractual remedies, including requiring repurchase of the loan, for loans that
do not meet our standards. However, in recent years, at the direction of FHFA, we have significantly
revised our representation and warranty framework (including changes to remedies for certain defects) to
relieve sellers of certain repurchase obligations in specific cases with respect to single-family loans. As a
result, we may face greater exposure to credit and other losses because our ability to seek recovery or
repurchase from sellers 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 recently
announced that we expect to offer representation and warranty relief for certain mortgage loans in early
2017 through our Loan Advisor Suite technology solution. 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.
For more information regarding these risks, see “MD&A - Risk Management - Credit Risk - Mortgage-
Related Securities Credit Risk,” "Single-Family Mortgage Credit Risk," and "Counterparty Credit Risk -
Other Counterparties - Mortgage related-security issuers and servicers."
Freddie Mac 2016 Form 10-K
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Risk Factors
Credit Risks
Declines in national or regional home prices or other adverse changes in the housing market
could negatively affect 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:
• Reduce our actual return or result in losses on new single-family guarantee business, as actual
default rates could be higher than we expected when we issued the guarantee;
• Cause us to hedge prepayment risk incorrectly;
• Result in declines in net worth due to fair value declines on our investments in non-agency mortgage-
related securities;
• Negatively affect loan pricing, which could cause us to change our disposition strategies for our
single-family unsecuritized loans; or
•
Increase our losses on dispositions of REO properties.
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 1.7% in the
first nine months of 2016 (the most recent data available) and approximately 1.0% in 2015.
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 "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
counterparty 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 counterparty 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 counterparties may fail to meet their contractual obligations to us. Our
important counterparties include seller/servicers, mortgage, bond, and credit insurers, and counterparties
to derivatives and short-term lending and 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
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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 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. A 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 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 our loans; 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 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
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(which are mostly 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 - Counterparty 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 risk 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 - Counterparty Credit Risk - Other
Counterparties - Cash and Other Investments Counterparties” and “- Derivative Counterparties.”
Credit risk related to mortgage, bond, and credit insurers
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 that we
purchased prior to 2009, 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 12.
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
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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 our counterparties in our ACIS and Deep MI
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 mortgage
insurance provider on a specific loan, because the selection is made by the lender at the time the loan is
originated. We continue to acquire new loans with mortgage insurance from 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 - Counterparty Credit Risk -
Mortgage, Bond, and Credit Insurers.”
Our loss mitigation activities may be costly and may adversely affect our financial results.
Our loss mitigation strategies 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 on a broad
basis 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 broad 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.
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
borrowers will default.
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 become
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unwilling to purchase securities 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 devote significant resources to our 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.
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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Market Risk
MARKET RISK
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 market risk, 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 rates 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. For example,
• 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:
• 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;
• 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; 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.
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
measured by our models. However, the accounting treatment for those assets and liabilities, including
derivatives, 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.
In the first quarter of 2017, we began using hedge accounting for certain single-family mortgage loans,
which is intended to partially reduce the interest-rate volatility in our GAAP earnings by eliminating a
portion of the measurement differences between our GAAP financial results and the underlying
economics of our business. Our hedge accounting program is complex and unique in the industry. We
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Market Risk
may fail to properly implement this program and related changes to systems and processes. Our hedges
may fail in any given future period, which could leave us exposed to significant earnings volatility in that
period and increase the risk that we will need a draw from Treasury.
Changes in market 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 market spreads (also referred to as OAS). Our financial results and net worth can be
significantly affected by changes in market spreads, especially results driven by financial instruments that
are measured at fair value. 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 market 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 market
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 market spreads on a given asset is typically associated with an increase
in the fair value of that asset. Narrowing market 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 market spreads
on our assets may adversely affect our future financial results and net worth.
Changes in market spreads also affect the fair value of our debt with the fair value option elected. A
narrowing or tightening of the market spreads on a given liability is typically associated with an increase in
the fair value of that liability, which is recognized as a loss by us.
Negative values for certain interest rate indices could have an adverse effect on our operational
and interest-rate risk management processes.
Freddie Mac purchases and securitizes various types of ARMs, and issues, invests in, and hedges with
various types of adjustable rate financial instruments. Interest rates have been at historically low levels for
a considerable period of time, and in certain countries have been negative. If the interest rate indices
used to adjust our ARMs and other financial instruments (primarily LIBOR and Constant Maturity Treasury
indices of various durations) were to become negative, our operational and interest-rate risk management
processes could be adversely affected. We are evaluating the capability of our existing systems, and
those of our customers and counterparties, to process negative interest rates. If these systems cannot
process such rates appropriately, we may experience disruptions of our business operations, which could
result in adverse effects on our relationships with customers, counterparties, and investors, damage to
our reputation, and legal or regulatory actions. In addition, in the event the relevant index has a negative
value, the terms of the adjustable-rate loans (originated prior to our October 2016 implementation of a
new uniform ARM note) underlying certain of our outstanding ARM securities products may result in our
having to pay a greater amount of interest to securities investors than we are entitled to receive on the
underlying mortgages. See “MD&A - Risk Management - Market Risk” for a discussion of the implications
of this issue for our measurement and management of interest-rate risk.
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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 and business initiatives.
Shortcomings or failures in our internal processes, people or systems, or those of third parties with which
we interact, could lead to impairment of our liquidity, financial and economic loss, errors in our financial
statements, disruption of our business (e.g., issuing mortgage and/or debt securities), 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. Our
connectivity with our customers and counterparties continues to increase, which increases our risk
exposure with respect to an operational failure of our customers' or counterparties' systems.
We have developed, and expect to continue to develop, software tools for use by our customers in the
customers’ loan production and other processes. These tools may fail to operate properly, which could
disrupt our or our customers’ business and adversely affect our relationships with our customers.
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 better housing finance system. Some of these initiatives
require significant changes to our operational systems. In some cases, the changes must be implemented
within a short period of time. Our legacy systems may also create increased operational risk for these
new initiatives. Internal corporate reorganizations may also increase our operational risk, particularly
during the period of implementation.
We also face significant risks related to the FHFA-directed development of the single (common) security
with Fannie Mae and CSS and the development and operation of the common securitization platform. The
transition to the common securitization platform, which began in November 2016, presents significant
operational and technological challenges. In addition, we will increasingly rely on CSS and the common
securitization platform (which is owned and operated by CSS) for the operation of our single-family
securitization activities, particularly after Release 2 is implemented, as described below. We currently use
the common securitization platform to perform certain data acceptance, issuance support and bond
administration activities for us (i.e., Release 1). In the first quarter of 2017, FHFA is expected to announce
a timeframe for when we will begin to use the common securitization platform to issue and administer our
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single (common) securities (i.e., Release 2). Our business activities could be adversely affected and the
market for Freddie Mac securities could be disrupted if the common securitization platform were to fail or
otherwise become unavailable to us, or if CSS were unable to perform its obligations to us. Any measures
we could take to mitigate these risks might not be sufficient to prevent our business from being harmed.
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 near 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.
For information on an operational risk issue relating to our Master Trust Agreements, see "MD&A - Risk
Management - Operational Risk."
Potential cyber security threats are changing rapidly and growing in sophistication. We may not
be able to protect our systems or the confidentiality of our information from cyberattack and other
unauthorized access, disclosure, and disruption.
Our operations rely on the secure, accurate and timely receipt, processing, storage, and transmission of
confidential and other information in our computer systems and networks and with customers,
counterparties, service providers, and financial institutions.
Information security risks for companies like ours have significantly increased in recent years, in part
because of the proliferation of new technologies, the use of the internet and telecommunications
technologies to conduct financial transactions, and the increased sophistication and activities of
organized crime, hackers, terrorists and other external parties, including foreign state-sponsored actors.
Like many companies and government entities, from time to time we have been, and likely will continue to
be, the target of attempted cyberattacks, including malware and denial-of-service, as part of an effort to
disrupt operations, potentially test cybersecurity capabilities, or obtain confidential, proprietary or other
information. We could also be adversely affected by cyberattacks that target the infrastructure of the
internet, as such attacks could cause widespread unavailability of websites and degrade website
performance. Our risk and exposure to these matters remain heightened because of, among other things,
the evolving nature of these threats, our role in the financial services industry, the outsourcing of some of
our business operations, and the current global economic and political environment.
Although we devote significant resources to protecting our critical assets, there is no assurance that these
measures will provide effective security. Our computer systems, software, end point devices, 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. Breaches
of our security measures may result from employee error or misconduct. Outside parties may attempt to
induce employees, customers, counterparties, service providers or other users of our systems to disclose
sensitive information in order to gain access to our systems and the information they contain. We may not
be able to anticipate, detect or recognize threats to our systems and assets, or implement effective
preventative measures against security breaches, especially because the techniques used change
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Operational Risks
frequently or are not recognized until launched.
The occurrence of one or more of such events could result in thefts of important assets (such as cash or
source code), or the unauthorized disclosure, misuse or corruption of confidential and other information
(including information about our borrowers, our customers or our counterparties), or could 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 customers, counterparties, financial
intermediaries, 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.
We are increasing our use of vendors and service providers, which increases our risk exposure to
possible failures in their risk and control environments. We outsource certain key functions to external
parties, including some that are critical to financial reporting (including our adoption of hedge accounting),
valuations, our mortgage-related investment activity, loan underwriting, loan servicing, and PC issuance
(i.e., CSS). 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, including an internet security breach, 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.
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 project significant factors in
our businesses including, but not limited to, interest rates, house prices, and mortgage rates under a
variety of scenarios. We also use models to project borrower prepayment, default behavior, and loss
severity over long periods of time. There is inherent uncertainty associated with model projections of
economic variables and the downstream projections of prepayment and default behavior dependent on
these variables.
Uncertainty and risks related to models may arise from a number of sources, including the following:
• 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 or insufficient data inputs or fail to fully understand the data
inputs, or model implementation software could malfunction. The complexity and interconnectivity of
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Operational Risks
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.
• The data we use as inputs into our models, much of which we receive from third-party data providers,
may be inaccurate.
• When market conditions change in unforeseen ways, our model projections may not accurately reflect
these conditions or we may not fully understand the model outputs. For example, models may not
fully reflect the effect of certain government policy changes or new industry trends. 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.
• 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 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.
Our adoption of hedge accounting will increase our reliance on models for financial reporting. See “MD&A
- Risk Management - Market Risk” and “Critical Accounting Policies and Estimates” for more information
on our use of models.
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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 market 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 or increase our credit exposure to our counterparties.
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 2016 Form 10-K
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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.”
Reduced Demand for Debt Securities
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 2016 Form 10-K
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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 and other counterparties.
For more information, see “MD&A - Liquidity and Capital Resources - Liquidity Profile - Credit Ratings.”
Freddie Mac 2016 Form 10-K
200
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 or through
initiatives that provide a lien priority in connection with loans to finance energy efficiency or similar
improvements);
• 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 mortgage loan interest payments or changes to other mortgage-related tax
benefits.
We are subject to complex and evolving laws and regulations governing privacy and the protection of
personal information of individuals. Our business could be adversely affected if we fail to protect the
confidentiality of such information or if it is mishandled or misused.
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
Freddie Mac 2016 Form 10-K
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Risk Factors
Legal and Regulatory Risks
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 actions 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
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. In
addition, the Basel Committee is considering further revisions to the Basel III standards.
There is significant uncertainty as to when, and the extent to which, U.S. banking regulators will adopt
any new 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.
It is possible that we could also make changes to our business in the future in response to our duty to
serve underserved markets 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, we are operating under an FHFA-required housing plan that addresses how we intend to
achieve the missed goals in 2016 and 2017. Due to our failure to meet two single-family housing goals for
2015, FHFA has extended our housing plan through 2018. If we fail to comply with the plan, FHFA could
Freddie Mac 2016 Form 10-K
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Risk Factors
Legal and Regulatory Risks
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
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 14 for
information about these various pending legal proceedings.
Freddie Mac 2016 Form 10-K
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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 existing requirement under the GSE Act 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 12.
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 2016 Form 10-K
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Risk Factors
Other Risks
Competition from banking and non-banking institutions (including Fannie Mae and FHA/VA with
Ginnie Mae securitization) 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 and FHA/VA (with
Ginnie Mae securitization), 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, savings 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. 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 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 are 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.
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
Freddie Mac 2016 Form 10-K
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Risk Factors
Other Risks
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. It is possible that
we could experience a disruption in the liquidity of Freddie Mac securities during the period in which we
transition to the single (common) security. Further, there can be no assurance that a single (common)
security will reduce the pricing disparities discussed above.
The single (common) security initiative will also cause us to have counterparty credit exposure to Fannie
Mae. Once the initiative is implemented, investors will be able to commingle Freddie Mac and Fannie Mae
securities in resecuritizations. When we resecuritize Fannie Mae securities, our guarantee of principal
and interest would extend to the underlying Fannie Mae securities. In the event Fannie Mae were to fail to
make a payment on a Fannie Mae security that we resecuritized, Freddie Mac would be responsible for
making the payment. We will not control or limit the amount of resecuritized Fannie Mae securities that we
could be required to guarantee. We will be dependent on FHFA, Fannie Mae and Fannie Mae’s and our
Purchase Agreements with Treasury to avoid a liquidity event or default. We are not planning to modify
our liquidity strategies to address the possibility of non-timely payment by Fannie Mae.
The profitability of our multifamily business could be adversely affected by a significant decrease
in demand for our K Certificates and SB Certificates.
Our current Multifamily business model is highly dependent on our ability to finance purchased multifamily
loans through securitization into K Certificates and SB Certificates. A significant decrease in demand for K
Certificates and SB 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 SB Certificates, and may consider additional strategies. From time to
time, we purchase and sell guaranteed K Certificates and SB Certificates and related unguaranteed
securities associated with K Certificates and SB Certificates as well as our other securitization products
Freddie Mac 2016 Form 10-K
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Risk Factors
Other Risks
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 2016 Form 10-K
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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 14 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 Northern
District of Iowa, the U.S. District Court for the Northern District of Illinois, and the U.S. District Court for
the Southern District of Texas. 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 and a September
2016 order by the U.S. District Court for the Eastern District of Kentucky to dismiss the case 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 14
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 2016 Form 10-K
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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 2, 2017, there were
650,053,863 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.
2016 Quarter Ended
December 31
September 30
June 30
March 31
2015 Quarter Ended
December 31
September 30
June 30
March 31
HOLDERS
High
Low
$4.84
1.90
2.20
1.75
$2.67
2.61
2.84
3.32
$1.52
1.46
1.21
0.97
$1.57
1.90
2.18
2.04
As of February 2, 2017, we had 1,740 common stockholders of record.
DIVIDENDS AND DIVIDEND RESTRICTIONS
We did not pay any cash dividends on our common stock during 2016 or 2015. 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
with respect to the senior preferred stock or warrant) without the prior written consent of Treasury.
Freddie Mac 2016 Form 10-K
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Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
• 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, 2016. 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 2016 at the
direction of the Conservator, as discussed in “MD&A - Liquidity and Capital Resources” and Note 9.
We did not declare or pay dividends on any other series of preferred stock outstanding in 2016.
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, 2016.
See Note 9 for more information.
ISSUER PURCHASES OF EQUITY SECURITIES
We did not repurchase any of our common or preferred stock during 2016. Additionally, we do not
currently have any outstanding authorizations to repurchase common or preferred stock. Under the
Purchase Agreement, we cannot repurchase our common or preferred stock without Treasury’s prior
Freddie Mac 2016 Form 10-K
210
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
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 2016 Form 10-K
211
Financial Statements
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
Freddie Mac 2016 Form 10-K
212
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, 2016 and 2015, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2016 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, 2016, 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 2016 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 FHFA. The U.S. Department of the Treasury (“Treasury”) has committed
financial support to the Company and management continues to conduct business operations pursuant to
Freddie Mac 2016 Form 10-K
213
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 16, 2017
Freddie Mac 2016 Form 10-K
214
Financial Statements
Consolidated Statements of Comprehensive Income
FREDDIE MAC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
Year Ended December 31,
2016
2015
2014
(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)
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
Temporary Payroll Tax Cut Continuation Act of 2011 expense
Other expense
Non-interest expense
Income before income tax expense
Income tax expense
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
$61,040
3,855
270
65,165
(50,595)
(191)
14,379
803
15,182
(211)
(274)
(191)
(78)
1,254
500
(989)
(489)
(66)
(461)
(2,005)
(287)
(1,152)
(599)
(4,043)
11,639
(3,824)
7,815
(825)
141
(13)
(697)
$7,118
$7,815
(7,718)
$97
$0.03
3,234
$62,226
4,794
70
67,090
(51,916)
(228)
14,946
2,665
17,611
(240)
(2,696)
(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)
($23)
($0.01)
3,235
$63,605
5,843
32
69,480
(54,916)
(301)
14,263
(58)
14,205
(422)
(8,291)
(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
(10,026)
($2,336)
($0.72)
3,236
215
The accompanying notes are an integral part of these consolidated financial statements.
Freddie Mac 2016 Form 10-K
Financial Statements
Consolidated Balance Sheets
FREDDIE MAC
CONSOLIDATED BALANCE SHEETS
(In millions, except share-related amounts)
Assets
Cash and cash equivalents (Notes 3, 12)
Restricted cash and cash equivalents (Notes 3, 12)
Securities purchased under agreements to resell (Notes 3, 8)
Investments in securities, at fair value (Note 5)
Mortgage loans held-for-sale (Notes 3, 4) (includes $16,255 and $17,660 at fair value)
Mortgage loans held-for-investment (Notes 3, 4) (net of allowance for loan losses of
$13,431 and $15,331)
Accrued interest receivable (Note 3)
Derivative assets, net (Notes 7, 8)
Deferred tax assets, net (Note 10)
Other assets (Notes 3, 16) (includes $2,408 and $1,753 at fair value)
Total assets
Liabilities and equity
Liabilities
Accrued interest payable (Note 3)
Debt, net (Notes 3, 6) (includes $6,010 and $7,184 at fair value)
Derivative liabilities, net (Notes 7, 8)
Other liabilities (Notes 3, 16)
Total liabilities
Commitments and contingencies (Notes 3, 7, and 14)
Equity (Note 9)
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 650,046,828 shares and 650,045,962 shares outstanding
Additional paid-in capital
Retained earnings (accumulated deficit)
AOCI, net of taxes, related to:
Available-for-sale securities (includes $782 and $778, 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, 75,817,058 shares and 75,817,924 shares
Total equity (See Note 9 for information on our dividend obligation to Treasury)
At December 31,
2016
2015
$12,369
9,851
51,548
111,547
18,088
1,784,915
6,135
747
15,818
12,358
$2,023,376
$6,015
2,002,004
795
9,487
2,018,301
72,336
14,109
—
—
(77,941)
915
(480)
21
456
(3,885)
5,075
$5,595
14,533
63,644
114,215
24,992
1,729,201
6,074
395
18,205
9,038
$1,985,892
$6,183
1,970,269
1,254
5,246
1,982,952
72,336
14,109
—
—
(80,773)
1,740
(621)
34
1,153
(3,885)
2,940
Total liabilities and equity
$2,023,376
$1,985,892
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 2016 Form 10-K
At December 31,
2016
2015
$—
1,690,218
32,262
$1,722,480
$1,648,683
4,846
$1,653,529
$1,403
1,625,184
37,305
$1,663,892
$1,556,121
4,769
$1,560,890
216
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
$—
$—
($69,719)
($6)
($3,885)
$12,835
—
—
—
—
464
464
—
—
—
—
—
—
—
—
650
650
—
—
—
—
—
—
—
—
—
—
—
—
$72,336
$14,109
$72,336
$14,109
—
—
—
—
—
—
—
—
464
650
$72,336
$14,109
464
650
$72,336
$14,109
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$—
$—
—
—
—
—
$—
$—
—
—
—
—
—
—
—
—
$—
$—
—
—
—
—
$—
$—
—
—
—
—
7,690
—
—
7,690
—
1,736
7,690
1,736
—
—
1,736
9,426
(19,610)
—
—
(19,610)
($81,639)
$1,730
($3,885)
$2,651
($81,639)
$1,730
($3,885)
$2,651
6,376
—
—
6,376
—
(577)
6,376
(577)
—
—
(577)
5,799
(5,510)
—
—
(5,510)
($80,773)
$1,153
($3,885)
$2,940
($80,773)
$1,153
($3,885)
$2,940
7,815
—
—
7,815
—
(697)
7,815
(697)
—
—
(697)
7,118
(4,983)
—
—
(4,983)
464
650
$72,336
$14,109
$—
$—
($77,941)
$456
($3,885)
$5,075
(In millions)
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
Balance at
December 31,
2015
Comprehensive
income:
Net income
Other
comprehensive
income, net of
taxes
Comprehensive
income
Senior preferred
stock dividends
declared
Ending balance at
December 31,
2016
The accompanying notes are an integral part of these consolidated financial statements.
Freddie Mac 2016 Form 10-K
217
Financial Statements
Consolidated Statements of Cash Flows
FREDDIE MAC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Derivative (gains) losses
Asset related amortization — premiums, discounts, and basis adjustments
Debt related amortization — premiums and discounts on certain debt securities
Losses on extinguishment of debt
(Benefit) provision for credit losses
Losses (gains) on investment activity
Deferred income tax expense
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 provided by (used in) 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
Advances to lenders
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
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 increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow information
Cash paid for:
Debt interest
Income taxes
Non-cash investing and financing activities (Notes 4 and 5)
Year Ended December 31,
2015
2014
2016
$7,815
$6,376
$7,690
(1,516)
7,089
(10,151)
211
(803)
69
2,787
(48,379)
49,350
1,259
(585)
(61)
(52)
(1,230)
(944)
4,859
(104,045)
79,095
22,244
(28,306)
20,699
15,869
(169,948)
4,507
340,348
4,682
(30,730)
2,519
12,096
555
(357)
169,228
254,236
(355,020)
659,108
(720,648)
(4,983)
(6)
(167,313)
6,774
5,595
$12,369
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)
(12,527)
3,650
(11,741)
(749)
(197)
178,946
174,561
(316,306)
610,091
(646,176)
(5,510)
(5)
(183,345)
(5,333)
10,928
$5,595
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
(90)
7,712
10,480
(3,888)
(44)
205,268
124,887
(262,920)
451,854
(508,710)
(19,610)
(7)
(214,506)
(353)
11,281
$10,928
$60,862
2,324
$61,120
1,095
$62,257
760
The accompanying notes are an integral part of these consolidated financial statements.
Freddie Mac 2016 Form 10-K
218
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.
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.
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
Freddie Mac 2016 Form 10-K
219
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
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
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.
Freddie Mac 2016 Form 10-K
220
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
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
information about them can be found.
Accounting Policy
Variable Interest Entities
Financial Guarantees
Loans and Allowance for Loan Losses
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 8
Note 9
Note 9
Note 10
Note 11
Note 13
Freddie Mac 2016 Form 10-K
221
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
RECENTLY ISSUED ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
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.
Date of
Adoption
January 1,
2016
January 1,
2016
Effect on Consolidated
Financial Statements
The adoption of this
amendment did not have
a material effect on our
consolidated financial
statements.
Previously reported
amounts have been
conformed to the current
presentation (see Notes
6 and 16). The effect of
adoption as of January
1, 2016 was a reduction
to Other Assets and
Debt, net of $158 million.
There were no effects on
earnings resulting from
this change.
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Recently Issued Accounting Guidance, Not Yet Adopted Within Our Consolidated Financial
Statements
Standard
Description
ASU 2016-06, Derivatives
and Hedging (Topic 815)
The amendment clarifies the requirements for
assessing whether contingent call (put) options
that can accelerate the payment of principal on
debt instruments are clearly and closely related
to their debt hosts. An entity performing the
assessment under the amendment is required
to assess the embedded call (put) options
solely in accordance with the four-step decision
sequence.
Date of
Adoption
January 1,
2017
Effect on Consolidated
Financial Statements
The adoption of this
amendment will not have
a material effect on our
consolidated financial
statements.
ASU 2016-17 -
Consolidation (Topic
810): Interests Held
through Related Parties
That Are under Common
Control
The Board is issuing this Update to amend the
consolidation guidance on how a reporting
entity that is the single decision maker of a VIE
should treat indirect interests in the entity held
through related parties that are under common
control with the reporting entity when
determining whether it is the primary
beneficiary of that VIE.
January 1,
2017
The adoption of this
amendment will not have
a material effect on our
consolidated financial
statements.
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.
January 1,
2018
We do not expect that
the adoption of this
amendment will have a
material effect on our
consolidated financial
statements.
ASU 2016-01,
Recognition and
Measurement of Financial
Assets and Financial
Liabilities (Subtopic
825-10)
ASU 2016-08 - Revenue
from Contracts with
Customers (Topic 606):
Principal versus Agent
Considerations
(Reporting Revenue
Gross versus Net)
ASU 2016-10, Revenue
from Contracts with
Customers (Topic 606)
The amendment addresses certain aspects of
recognition, measurement, presentation, and
disclosure of financial instruments.
January 1,
2018
The amendments in this Update do not change
the core principle of the guidance. The
amendments clarify the implementation
guidance on principal versus agent
considerations.
January 1,
2018
We do not expect that
the adoption of this
amendment will have a
material effect on our
consolidated financial
statements.
We do not expect that
the adoption of this
amendment will have a
material effect on our
consolidated financial
statements.
The amendments in this Update do not change
the core principle of the guidance in Topic 606,
but clarify two issues: i) identifying
performance obligations; and ii) licensing.
These clarifications are intended to reduce
diversity in practice and to reduce the cost and
complexity of Topic 606 at transition and on an
ongoing basis.
January 1,
2018
We do not expect that
the adoption of this
amendment will have a
material effect on our
consolidated financial
statements.
ASU 2016-12, Revenue
from Contracts with
Customers (Topic 606)
The amendments in this Update do not change
the core principle of the guidance in Topic 606,
but affect aspects of the guidance and
technical corrections.
January 1,
2018
We do not expect that
the adoption of this
amendment will have a
material effect on our
consolidated financial
statements.
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Notes to the Consolidated Financial Statements | Note 1
Standard
Description
ASU 2016-15, Statement
of Cash Flows (Topic
230): Classification of
Certain Cash Receipts
and Cash Payments (a
consensus of the
Emerging Issues Task
Force)
ASU 2016-18, Statement
of Cash Flows (Topic
230): Restricted Cash (a
consensus of the FASB
Emerging Issues Task
Force)
ASU 2016-20, Technical
Corrections and
Improvements to Topic
606, Revenue from
Contracts with Customers
The main objective of this Update is to address
the diversity in practice that currently exists in
regards to how certain cash receipts and cash
payments are presented and classified in the
statement of cash flows under Topic 230,
Statement of Cash Flows, and other Topics.
This Update addresses eight specific cash flow
issues with the objective of reducing the
existing diversity in practice.
The amendments in this Update address the
diversity in the classification and presentation
of changes in restricted cash on the statement
of cash flows under Topic 230, Statement of
Cash Flows. Specifically, this amendment
dictates that the statement of cash flows
should explain the change in the period of the
total of cash, cash equivalents, and restricted
cash balances.
The amendments in this Update are of a
similar nature to the items typically addressed
in the Technical Corrections and Improvements
project. However, the Board decided to issue a
separate Update for technical corrections and
improvements to Topic 606 and other Topics
amended by Update 2014-09 to increase
stakeholders’ awareness of the proposals and
to expedite improvements to Update 2014-09.
Date of
Adoption
Effect on Consolidated
Financial Statements
January 1,
2018
We are evaluating the
effect that the adoption
of this amendment will
have 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.
January 1,
2018
We do not expect that
the adoption of this
amendment will have a
material effect on our
consolidated financial
statements.
ASU 2016-02, Leases
(Topic 842)
The amendment addresses the accounting for
lease arrangements.
January 1,
2019
ASU 2016-13, Financial
Instruments—Credit
Losses (Topic 326):
Measurement of Credit
Losses on Financial
Instruments
The amendments in this Update replace the
incurred loss impairment methodology in
current GAAP with a methodology that reflects
lifetime expected credit losses and requires
consideration of a broader range of reasonable
and supportable information to inform credit
loss estimates.
January 1,
2020
We do not expect that
the adoption of this
amendment will have a
material effect on our
consolidated financial
statements.
While we are evaluating
the effect that the
adoption of this
amendment will have on
our consolidated
financial statements, it
will increase (perhaps
substantially) our
provision for credit
losses in the period of
adoption.
Freddie Mac 2016 Form 10-K
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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 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 subject to certain constraints on our business activities under the Purchase Agreement. However,
the support provided by Treasury pursuant to the Purchase Agreement also enables us to have adequate
liquidity to conduct our normal business activities. 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 affect 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 also issued annual Conservatorship Scorecards for 2014, 2015, 2016, and 2017. The annual
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.
As part of the first goal, the 2014 Strategic Plan describes various steps related to increasing access to
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Financial Statements
Notes to the Consolidated Financial Statements | Note 2
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 and 2017 Conservatorship Scorecards 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 affect 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, 2016. This amount will be reduced by any future draws.
The Purchase Agreement requires Treasury, upon the request of the Conservator, to provide funds to us
after any quarter in which we have a negative net worth (that is, our total liabilities exceed our total
assets, as reflected on our GAAP balance sheet). In addition, the Purchase Agreement requires Treasury,
upon the request of the Conservator, to provide funds to us if the Conservator determines, at any time,
that it will be mandated by law to appoint a receiver for us unless we receive these funds from Treasury.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 2
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 $1.2 billion for 2016, will be $0.6 billion for 2017,
and will decline to 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.
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.
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.
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Notes to the Consolidated Financial Statements | Note 2
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
Agreement, we also may not, without the prior written consent of Treasury, 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
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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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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 $339.3 billion at December 31, 2016 and was
$298.4 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). Our mortgage-related
investments portfolio cap is reduced by 15% annually until it reaches $250 billion. This amount 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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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, 2016, 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, 2016. Since conservatorship began through
December 31, 2016, we have paid cash dividends of $101.4 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 6 and Note 9 for more information on the conservatorship and the Purchase Agreement.
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, 2016, 2015, and
2014, 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 with Treasury discussed above in “Purchase Agreement and Warrant” and
“Government Support for our Business;”
• The transactions entered into whereby we and Fannie Mae, in conjunction with Treasury, provided
assistance to state and local HFAs. Treasury will reimburse Freddie Mac for initial guarantee losses
on these transactions;
• The transactions discussed in Note 4, Note 6, and Note 9; 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 had 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. Therefore, CSS is also deemed a related party. During the year ended
December 31, 2016, we contributed $118 million of capital to CSS.
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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 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 presents 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
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, 2016
December 31, 2015
$—
9,431
13,550
—
$—
14,529
14,840
1,403
1,690,218
1,625,184
5,454
3,827
5,305
2,631
$1,722,480
$1,663,892
$4,846
1,648,683
—
$1,653,529
$4,763
1,556,121
6
$1,560,890
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 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 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.
See Note 4 and Note 6 for additional information on loans and debt securities of consolidated trusts.
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 3
At December 31, 2016 and 2015, we were the primary beneficiary of, and therefore consolidated, single-
family PC trusts with assets totaling $1.7 trillion and $1.6 trillion, respectively. During the years ended
December 31, 2016 and 2015, we issued approximately $391.0 billion and $352.6 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 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 3
Because we have already guaranteed the underlying assets, we do not receive any incremental
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 6 for additional information on accounting for
investments in debt securities.
K Certificates
In a 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 these transactions, we
guarantee 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
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 in a K Certificate transaction 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 2016 and 2015, we issued approximately $40.6 billion and $29.4 billion, respectively, of K
Certificates for which a guarantee asset and guarantee obligation were recognized.
SB Certificates
In SB Certificate transactions, we securitize small balance multifamily loans in transactions which are
structured in a manner generally similar to our K Certificate transactions. We are not the primary
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 3
beneficiary and we do not consolidate SB Certificate trusts as our rights do not provide us with the power
to direct the activities that most significantly affect the performance of the underlying loans.
In a typical SB Certificate transaction, we sell loans to a SB Certificate trust, derecognize the transferred
loans, and account for our guarantee to the non-consolidated SB Certificate trust. We account for our
investments in the beneficial interests issued by non-consolidated SB Certificate trusts as investments in
debt securities.
During 2016 and 2015, we issued approximately $3.5 billion and $1.6 billion, respectively, of SB
Certificates for which a guarantee asset and guarantee obligation were recognized.
Whole Loan Securities
We consolidate our whole loan securities 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.
Senior Subordinate Securitization Structures
We do not consolidate our senior subordinate securitization structures as we do not have the ability to
direct the activities that most significantly affect the performance of the underlying loans. For these
products, we account for our guarantee to the unconsolidated VIE.
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 and
multifamily other securitization trusts with underlying assets totaling $7.5 billion at both December 31,
2016 and 2015. 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 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 2016 and 2015, we guaranteed $3.6
billion and $4.0 billion, respectively, of loans under new long-term standby commitments; and
• 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
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 3
taxable bonds that are unable to be marketed. No advances under these guarantees were
outstanding at December 31, 2016 and 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.
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 14 for
information on ongoing litigation. The recognized liabilities on our consolidated balance sheets related to
indemnifications were not significant at December 31, 2016 and 2015.
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.
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 3
(In millions)
December 31, 2016
December 31, 2015
Assets and Liabilities Recorded on our Consolidated
Balance Sheets(1)
Assets:
Investments in securities
Accrued interest receivable
Other assets
Liabilities:
Other liabilities
Maximum Exposure to Loss
Total Assets of Non-Consolidated VIEs
$58,995
254
1,708
(1,604)
$150,227
$175,713
$49,040
200
1,232
(1,230)
$114,193
$134,900
(1)
Includes our variable interests in REMICs and Stripped Giant PCs, K Certificates, SB Certificates, senior subordinate
securitization structures, 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, SB Certificates, senior
subordinate securitization structures, 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
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 5 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)
K Certificates, SB Certificates, senior
subordinate securitization structures, and other
securitization products
Other mortgage-related guarantees
Derivative instruments
December 31, 2016
December 31, 2015
Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term
Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term
$150,227
$1,532
16,445
6,396
679
127
40
34
29
$114,193
$1,136
13,067
17,894
596
151
40
38
30
(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. For derivative instruments, this amount represents the notional
value.
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 3
(2) For K Certificates, SB Certificates, senior subordinate securitization structures, 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 $67 million and $76 million as of December 31, 2016 and
2015, 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.
In connection with the securitization activities of the Multifamily segment, we have various forms of credit
protection. The most prevalent type is subordination, primarily through our K Certificates and SB
Certificates. Through subordination, we mitigate our credit risk exposure by structuring our securities to
transfer a large majority of expected and stress credit losses to private investors who purchase the
subordinate tranches, as shown in the table below.
(In millions)
K Certificates and SB
Certificates
Other securitization products
Total
UPB at
Maximum Coverage(1) at
December 31, 2016
December 31, 2015
December 31, 2016
December 31, 2015
$139,416
5,545
$144,961
$103,061
5,438
$108,499
$23,864
1,359
$25,223
$18,571
1,359
$19,930
(1) For K Certificates and SB 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 the securities that are subordinate to our guarantee.
In addition to subordination, the Multifamily segment also has various other credit enhancements,
primarily related to our mortgage loans and other mortgage-related guarantees, in the form of collateral
posting requirements, loss sharing agreements, and other similar arrangements. These credit
enhancements will enable us to recover all or a portion of our losses or the amounts paid under our
guarantee. Our historical losses and related recoveries pursuant to these agreements have not been
significant.
Freddie Mac 2016 Form 10-K
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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,
2016 and 2015.
(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, 2016
December 31, 2015
Held by
Freddie Mac
Held by
consolidated
trusts
Total
Held by
Freddie Mac
Held by
consolidated
trusts
Total
$2,092
16,544
18,636
(548)
18,088
83,040
25,873
$—
—
—
—
—
$2,092
16,544
18,636
(548)
18,088
1,659,591
1,742,631
3,048
28,921
108,913
1,662,639
1,771,552
(3,755)
(10,461)
94,697
30,549
(2,970)
26,794
(13,431)
1,690,218
1,784,915
$6,045
19,582
25,627
(2,038)
23,589
90,532
29,505
120,037
(3,465)
(12,555)
104,017
$1,702
—
1,702
(299)
1,403
$7,747
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
Total loans, net
$112,785
$1,690,218
$1,803,003
$127,606
$1,626,587
$1,754,193
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 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 4
During 2016 and 2015, we purchased $388.9 billion and $346.5 billion, respectively, in UPB of single-
family loans, and $6.1 billion and $4.4 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 and SB
Certificates. During 2016 and 2015, we sold $49.9 billion and $36.1 billion, respectively, of held-for-sale
multifamily loans. See Note 3 for more information on our issuances of K Certificates and SB Certificates.
As part of our strategy to mitigate losses and reduce our holdings of less liquid assets, we completed
sales of $3.1 billion and $2.9 billion in UPB of seriously delinquent single-family loans during 2016 and
2015, respectively.
In connection with our efforts to sell certain of our single-family loans, we reclassified $4.7 billion and
$13.6 billion in UPB of seasoned single-family loans from held-for-investment to held-for-sale in 2016 and
2015, respectively. We also reclassified $2.1 billion of multifamily loans from held-for-investment to held-
for-sale in 2015. We did not have this multifamily loan reclassification activity in 2016. For additional
information regarding the fair value of our loans classified as held-for-sale, see Note 13.
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.
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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, 2016 and 2015, based on data collected by us at loan delivery, approximately 11% and
13%, 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 12.
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.
(In millions)
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
As of December 31, 2016
As of December 31, 2015
Current LTV Ratio
Current LTV Ratio
> 80 to 100
> 100(1)
Total
> 80 to 100
> 100(1)
Total
$1,120,722
$236,111
$30,063
$1,386,896
$1,020,227
$242,948
$50,893
$1,314,068
274,967
52,319
11,016
2,955
887
85
286,870
55,359
271,456
59,724
12,400
5,055
1,754
249
285,610
65,028
26,293
9,392
4,634
40,319
27,014
13,124
8,485
48,623
Total single-family loans
$1,474,301
$259,474
$35,669
$1,769,444
$1,378,421
$273,527
$61,381
$1,713,329
(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 6.80% and 6.03% as of December 31, 2016 and 2015, respectively.
(2) The majority of our loan modifications result in new terms that include fixed interest rates after modification. As of
December 31, 2016 and 2015, we have categorized UPB of approximately $32.0 billion and $38.3 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.
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 4
The following table presents the recorded investment in our multifamily held-for-investment loans, by
credit quality indicator as of December 31, 2016 and 2015. 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)
December 31, 2016
December 31, 2015
Pass
Special mention
Substandard
Doubtful
Total
$27,830
502
570
—
$28,902
$29,660
1,135
408
—
$31,203
(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 2016 Form 10-K
243
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.
Total single-family and multifamily
$1,759,518
$19,757
(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
(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
December 31, 2016
Current
One
Month
Past Due
Two
Months
Past Due
Three
Months or
More Past
Due,
or in
Foreclosure(1)
Total
Non-accrual
$1,354,511
$16,645
$4,865
$10,875
$1,386,896
$10,868
285,373
54,738
35,994
1,730,616
28,902
1,010
354
1,748
19,757
—
178
77
650
5,770
—
$5,770
309
190
1,927
13,301
—
286,870
55,359
40,319
1,769,444
28,902
309
190
1,927
13,294
89
$13,301
$1,798,346
$13,383
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
—
$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
$15,620
$1,744,532
$15,786
Total single-family and multifamily
$1,703,456
$19,434
(1) Includes $5.3 billion and $7.0 billion of loans that were in the process of foreclosure as of December 31, 2016 and 2015,
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
$6.8 billion and $8.4 billion in UPB of loans from PC trusts (or purchased delinquent loans associated with
other mortgage-related guarantees) during the years ended December 31, 2016 and 2015, respectively.
Freddie Mac 2016 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, 2016
December 31, 2015
1.02%
77,662
1.46%
21,460
0.43%
9,455
1.00%
107,170
0.04%
$19
0.02%
$37
0.03%
$56
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) 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. As part of
these initiatives, we pay various incentives to servicers and borrowers. HAMP ended in December 2016.
The relief refinance program (including HARP) will end in September 2017 and is expected to be replaced
by a new program.
Freddie Mac 2016 Form 10-K
245
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 and SB 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.
The table below presents our loan loss reserves activity.
Year Ended December 31,
2016
2015
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
$12,517
$2,775
$56
$15,348
$18,800
$2,884
$109
$21,793
Provision (benefit) for credit
losses
Charge-offs(1)(2)
Recoveries
Transfers, net(3)
Ending balance
Multifamily:
Beginning balance
Provision (benefit) for credit
losses
Charge-offs(2)
Recoveries
Transfers, net(3)
Ending balance
Total:
(1,384)
(1,757)
487
580
599
(173)
10
(243)
4
(8)
—
—
(781)
(1,938)
497
337
(2,763)
(4,696)
703
473
169
(367)
14
75
(45)
(8)
—
—
(2,639)
(5,071)
717
548
$10,443
$2,968
$52
$13,463
$12,517
$2,775
$56
$15,348
$38
(17)
(2)
—
(1)
$18
$1
—
—
—
1
$2
$20
(5)
—
—
—
$15
$59
(22)
(2)
—
—
$35
$77
(29)
(9)
—
(1)
$38
$—
$17
—
—
—
1
$1
3
—
—
—
$20
$94
(26)
(9)
—
—
$59
Beginning balance
$12,555
$2,776
$76
$15,407
$18,877
$2,884
$126
$21,887
Provision (benefit) for credit
losses
Charge-offs(2)
Recoveries
Transfers, net(3)
Ending balance
(1,401)
(1,759)
487
579
599
(173)
10
(242)
(1)
(8)
—
—
(803)
(1,940)
497
337
(2,792)
(4,705)
703
472
169
(367)
14
76
(42)
(8)
—
—
(2,665)
(5,080)
717
548
$10,461
$2,970
$67
$13,498
$12,555
$2,776
$76
$15,407
Includes charge-offs of $1.9 billion associated with our initial adoption of FHFA Advisory Bulletin 2012-02 on January 1, 2015.
(1)
(2) Total charge-offs do not include lower-of-cost-or-fair-value adjustments and other expenses related to property taxes and
insurance recognized when we transfer loans from held-for-investment to held-for-sale, which totaled $1.2 billion and $3.4
billion during 2016 and 2015 respectively.
Freddie Mac 2016 Form 10-K
246
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
(3) For the years ended December 31, 2016 and 2015, consists of approximately $0.3 billion and $0.5 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. We review the outputs of this model by considering
qualitative factors such as macroeconomic and other factors to see whether the model outputs are
consistent with our expectations. Management adjustments may be necessary to take into consideration
external factors and current economic events that have occurred but that are not yet reflected in the
factors used to derive the model outputs. Significant judgment is exercised in making these adjustments.
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
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; 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.
Freddie Mac 2016 Form 10-K
247
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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
recoveries.
Multifamily Loans
Multifamily loans evaluated collectively for impairment are aggregated into book year vintage portfolios.
Potential impairment related to these portfolios is measured by benchmarking published historical
commercial loan performance 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
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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.
The table below presents the volume of single-family and multifamily loans that were newly classified as
TDRs during the years ended December 31, 2016 and 2015, 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,
2016
2015
Number of Loans
Post-TDR
Recorded
Investment
Number of Loans
Post-TDR
Recorded
Investment
35,503
4,623
969
3,115
44,210
2
44,212
$5,092
338
140
548
6,118
8
$6,126
46,641
5,806
1,335
7,143
60,925
1
60,926
$6,627
419
195
1,146
8,387
30
$8,417
(1) The pre-TDR recorded investment for single-family loans initially classified as TDR during the years ended December 31,
2016 and 2015 was $6.2 billion and $8.4 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.
Freddie Mac 2016 Form 10-K
249
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
(Dollars 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
Multifamily
Year Ended December 31,
2016
2015
Number of Loans
Post-TDR
Recorded
Investment(1)
Number of Loans
Post-TDR
Recorded
Investment(1)
16,139
813
277
1,535
18,764
—
$2,520
66
41
305
$2,932
$—
18,478
900
335
1,955
21,668
—
$3,036
72
55
435
$3,598
$—
(1) Represents the recorded investment at the end of the period in which the loan was modified and does not represent the
recorded investment as of December 31.
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, 2016 and 2015, 8,083 and 9,492, respectively, of such loans (with a post-TDR
recorded investment of $1.0 billion and $1.2 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, 2016 and 2015, 1,154 and 2,196, respectively, of such loans (with a post-TDR
recorded investment of $0.1 billion and $0.3 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 2016, 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 2016, the average term extension was 177 months, and the average interest rate
reduction was 0.8% on completed single-family loan modifications classified as TDRs.
Substantially all of our completed single-family loan modifications classified as a TDR during 2016
resulted in a modified loan with a fixed interest rate. However, many of these fixed-rate loans include
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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
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.
Freddie Mac 2016 Form 10-K
251
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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, 2016
For the Year Ended December 31, 2016
UPB
Recorded
Investment
Associated
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
Interest Income
Recognized
On Cash Basis(1)
$4,963
$3,746
31
292
1,935
7,221
26
289
1,561
5,622
N/A
N/A
N/A
N/A
N/A
$4,033
$447
33
259
1,417
5,742
5
9
117
578
67,853
66,143
($9,678)
68,402
2,668
847
319
12,699
81,718
851
312
12,105
79,411
(25)
(19)
884
384
(2,258)
12,916
39
14
437
(11,980)
82,586
3,158
72,816
69,889
(9,678)
72,435
3,115
878
611
14,634
$88,939
$321
44
$365
877
601
13,666
$85,033
$308
42
$350
(25)
(19)
917
643
(2,258)
($11,980)
14,333
$88,328
N/A
(9)
($9)
$356
63
$419
44
23
554
$3,736
$15
3
$18
$89,304
$85,383
($11,989)
$88,747
$3,754
$14
—
—
3
17
251
7
3
34
295
265
7
3
37
$312
$4
2
$6
$318
Freddie Mac 2016 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, 2015
For the Year Ended December 31, 2015
UPB
Recorded
Investment
Associated
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
Interest Income
Recognized
On Cash Basis(1)
$4,957
$3,724
45
194
1,370
6,566
38
191
1,033
4,986
N/A
N/A
N/A
N/A
N/A
$3,381
$387
41
112
844
4,378
8
4
83
482
72,886
71,215
($11,245)
73,530
2,558
975
518
14,409
88,788
77,843
1,020
712
15,779
$95,354
$341
149
$490
978
510
13,839
86,542
(21)
(28)
1,033
632
(2,725)
14,958
47
19
422
(14,019)
90,153
3,046
74,939
(11,245)
76,911
2,945
1,016
701
14,872
$91,528
$333
142
$475
(21)
(28)
(2,725)
($14,019)
N/A
($21)
($21)
1,074
744
15,802
$94,531
$660
235
$895
55
23
505
$3,528
$25
8
$33
$95,844
$92,003
($14,040)
$95,426
$3,561
$11
—
—
2
13
308
11
4
55
378
319
11
4
57
$391
$9
5
$14
$405
(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 2016 Form 10-K
253
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, 2016
December 31, 2015
Single-
family
Multifamily
Total
Single-
family
Multifamily
Total
(In millions)
Recorded investment:
Collectively evaluated
Individually evaluated
Total recorded investment
1,769,444
$1,684,411
$28,552
$1,712,963
$1,621,801
85,033
350
28,902
85,383
91,528
1,798,346
1,713,329
$30,728
475
31,203
$1,652,529
92,003
1,744,532
Ending balance of the
allowance for loan losses:
Collectively evaluated
Individually evaluated
Total ending balance of the
allowance
(1,431)
(11,980)
(13,411)
(11)
(9)
(20)
(1,442)
(11,989)
(1,273)
(14,019)
(13,431)
(15,292)
(18)
(21)
(39)
(1,291)
(14,040)
(15,331)
Net investment in loans
$1,756,033
$28,882
$1,784,915
$1,698,037
$31,164
$1,729,201
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 9.9% and 10.8%
of the recorded investment in such loans at December 31, 2016 and 2015, 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, 2016 and 2015.
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.
Freddie Mac 2016 Form 10-K
254
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
(In millions)
Credit enhancements at the time we
acquire the loan:
Primary mortgage insurance
Seller indemnification
Deep MI(3)
Lender recourse and indemnification
agreements(4)
Pool insurance(4)
Other:
HFA indemnification
Subordination
Other credit enhancements(4)
Credit enhancements subsequent to our
purchase or guarantee of the loan:
STACR debt note(5)
ACIS transactions(6)
Whole loan securities and senior
subordinate securitization structures
Less: UPB with more than one type of
credit enhancement
UPB(1) at
Maximum Coverage(1)(2) at
December 31,
2016
December 31,
2015
December 31,
2016
December 31,
2015
$291,217
1,030
$257,063
1,095
3,067
5,247
1,719
1,747
1,874
17
427,978
453,670
2,494
—
5,902
2,140
2,599
2,127
22
328,872
328,872
894
(559,400)
(417,393)
$74,345
$65,760
10
81
4,911
618
1,747
230
6
14,507
5,355
375
—
11
—
5,385
753
2,599
278
10
11,551
3,365
58
—
Total
$630,660
$512,193
$102,185
$89,770
(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) credit protection associated with $6.7 billion and $8.3 billion in UPB of single-family loans underlying other
structured transactions where data was not available as of December 31, 2016 and 2015, 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 $2.8
billion and $3.2 billion as of December 31, 2016, and 2015, respectively.
(3)
(4)
(2) Except for subordination and whole loan security, this represents the remaining amount of loss recovery that is available
subject to terms of counterparty agreements. For subordination and whole loan security, this represents the UPB of the
securities that are subordinate to our guarantee, which could provide protection by absorbing first losses.
Includes approximately $3.1 billion in UPB at December 31, 2016, where the related loans are also covered by primary
mortgage insurance. Deep MI credit risk transfer, or Deep MI, began in the third quarter of 2016.
In aggregate, includes approximately $1.0 billion and $1.1 billion in UPB at December 31, 2016 and 2015, respectively,
where the related loans are also covered by primary mortgage insurance.
Includes approximately $123.5 billion and $87.4 billion in UPB at December 31, 2016 and 2015, 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.
Includes $127.4 billion and $87.4 billion in UPB at December 31, 2016 and 2015, respectively, where the related loans are
also covered by primary mortgage insurance. Maximum coverage amounts presented represent the remaining aggregate
limit of insurance purchased from third parties in ACIS transactions.
(6)
(5)
Primary mortgage insurance and credit risk transfer transactions 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 12.
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.
Freddie Mac 2016 Form 10-K
255
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
NON-CASH INVESTING AND FINANCING ACTIVITIES
During the years ended December 31, 2016, 2015, and 2014, we acquired $234.6 billion, $237.5 billion,
and $187.1 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
during the years ended December 31, 2016 and 2015 included approximately $30.3 billion and $11.6
billion, respectively, of loans received from sellers to satisfy advances that were recorded in other assets
on our consolidated balance sheets.
We acquire REO properties 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. These acquisitions
represent non-cash transfers. During the years ended December 31, 2016, 2015, and 2014, we had
transfers of $1.5 billion, $2.0 billion, and $3.8 billion, respectively, from loans to REO.
Freddie Mac 2016 Form 10-K
256
Financial Statements
Notes to the Consolidated Financial Statements | Note 5
NOTE 5: INVESTMENTS IN SECURITIES
The table below summarizes the fair values of our investments in securities by classification as of
December 31, 2016 and 2015.
(In millions)
Trading securities
Available-for-sale securities
Total
December 31, 2016
December 31, 2015
$44,790
66,757
$111,547
$39,278
74,937
$114,215
We currently classify and account for our securities as either available-for-sale or trading. As of
December 31, 2016 and 2015, 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 13 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 securities, interest income is recognized using the effective interest method, which considers the
contractual terms of the security. Deferred items, including premiums, discounts, and other basis
adjustments, are amortized into interest income over the contractual lives of the securities.
For certain 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 2016 Form 10-K
257
Financial Statements
Notes to the Consolidated Financial Statements | Note 5
TRADING SECURITIES
The table below presents the estimated fair values of our trading securities by major security type. Our
non-mortgage-related securities primarily consist of investments in U.S. Treasury securities.
(In millions)
Mortgage-related securities:
Freddie Mac
Other agency
All other
Total mortgage-related securities
Non-mortgage-related securities
Total fair value of trading securities
December 31, 2016
December 31, 2015
$15,343
8,161
149
23,653
21,137
$44,790
$15,513
6,468
146
22,127
17,151
$39,278
For the years ended December 31, 2016, 2015, and 2014, we recorded net unrealized gains (losses) on
trading securities held at those dates of ($791) million, ($856) million, and ($88) million, respectively.
Freddie Mac 2016 Form 10-K
258
Financial Statements
Notes to the Consolidated Financial Statements | Note 5
AVAILABLE-FOR-SALE SECURITIES
At December 31, 2016 and 2015, all available-for-sale securities were mortgage-related securities.
The table below presents the amortized cost, gross unrealized gains and losses, and fair value by major
security type for our securities classified as available-for-sale.
(In millions)
Available-for-sale securities:
Freddie Mac
Other agency
Non-agency RMBS
Non-agency CMBS
Obligations of states and political
subdivisions
Total available-for-sale securities
(In millions)
Available-for-sale securities:
Freddie Mac
Other agency
Non-agency RMBS
Non-agency CMBS
Obligations of states and political
subdivisions
Total available-for-sale securities
December 31, 2016
Gross Unrealized Losses
Amortized
Cost
Gross
Unrealized
Gains
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Fair
Value
$43,671
4,127
10,606
6,288
657
$65,349
$563
119
1,271
160
8
$2,121
$—
—
(62)
(3)
—
($65)
($582)
(25)
(18)
(23)
—
($648)
$43,652
4,221
11,797
6,422
665
$66,757
December 31, 2015
Gross Unrealized Losses
Amortized
Cost
Gross
Unrealized
Gains
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Fair
Value
$32,684
7,183
19,198
12,009
1,187
$72,261
$942
277
1,563
450
19
$3,251
$—
—
(362)
(2)
—
($364)
($99)
(36)
(66)
(9)
(1)
($211)
$33,527
7,424
20,333
12,448
1,205
$74,937
(1) Represents the gross unrealized losses for securities for which we have previously recognized other-than-temporary
impairment in earnings.
(2) Represents the gross unrealized losses for securities for which we have not previously recognized other-than-temporary
impairment in earnings.
Freddie Mac 2016 Form 10-K
259
Financial Statements
Notes to the Consolidated Financial Statements | Note 5
Available-For-Sale Securities in a Gross Unrealized Loss Position
The table below presents available-for-sale securities in a gross unrealized loss position, and whether
such securities have been in an unrealized loss position for less than 12 months, or 12 months or greater.
(In millions)
Available-for-sale securities:
Freddie Mac
Other agency
Non-agency RMBS
Non-agency CMBS
Obligations of states and political subdivisions
Total available-for-sale securities in a gross
unrealized loss position
(In millions)
Available-for-sale securities:
Freddie Mac
Other agency
Non-agency RMBS
Non-agency CMBS
Obligations of states and political subdivisions
Total available-for-sale securities in a gross
unrealized loss position
December 31, 2016
Less than 12 Months
12 Months or Greater
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
$19,786
542
309
383
83
($559)
(6)
(1)
(2)
—
$21,103
($568)
$1,732
2,040
2,188
204
—
$6,164
($23)
(19)
(79)
(24)
—
($145)
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
1,176
396
18
($64)
(24)
(30)
(9)
—
$12,163
($127)
$1,224
1,392
4,781
160
8
$7,565
($35)
(12)
(398)
(2)
(1)
($448)
At December 31, 2016, total gross unrealized losses on available-for-sale securities were $0.7 billion. The
gross unrealized losses relate to 436 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.
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
Freddie Mac 2016 Form 10-K
260
Financial Statements
Notes to the Consolidated Financial Statements | Note 5
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 2016 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, 2016, 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 Other Agency Securities
We generally 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, we generally 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. As a result, unless we intend to sell the security, we
consider unrealized losses on these securities to be temporary.
Non-Agency Commercial Mortgage-Backed Securities
Non-agency 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 non-agency 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, 2016.
Freddie Mac 2016 Form 10-K
261
Financial Statements
Notes to the Consolidated Financial Statements | Note 5
Non-Agency Residential Mortgage-Backed Securities Backed by Subprime, Option ARM, Alt-A and
Other Loans
We believe the unrealized losses on the non-agency RMBS we hold are mainly attributable to poor
underlying collateral performance, limited liquidity, and risk premiums. In evaluating securities for
impairment, we use an internal 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 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 12.
The table below presents the modeled attributes for the related collateral that are used to determine
whether our interests in certain available-for-sale non-agency RMBS backed by subprime, option ARM,
and Alt-A loans will experience a cash shortfall.
(Dollars in millions)
UPB
Weighted average collateral cumulative loss
Weighted average voluntary prepayment rates
Average security credit enhancements(1)
December 31, 2016
$14,343
23 %
6 %
(1)%
(1) Positive value reflects 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 value is 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
analysis provides 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, 2016.
Freddie Mac 2016 Form 10-K
262
Financial Statements
Notes to the Consolidated Financial Statements | Note 5
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 Impairment on Available-For-Sale Securities
The table below summarizes other-than-temporary impairment on available-for-sale securities recognized
in earnings.
(In millions)
Impairment of available-for-sale securities:
Year Ended December 31,
2016
2015
2014
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(1)
$72
119
$191
$241
51
$292
$860
78
$938
(1)
Includes $70 million, $240 million, and $817 million during 2016, 2015, and 2014, respectively, of impairment recognized in
earnings due to change in status from intent to hold to intent to sell.
The table below is a rollforward of the amount of credit-related other-than-temporary impairment that has
been recognized in earnings for available-for-sale securities that we continue to hold.
(In millions)
Credit-related other-than-temporary impairment on available-for-sale securities recognized in
earnings:
Year Ended December 31,
2016
2015
Beginning balance — remaining credit losses on available-for-sale securities where other-than-
temporary impairment was recognized in earnings
$5,306
$6,798
Additions:
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
Ending balance — remaining credit losses on available-for-sale securities where other-than-
temporary impairments were recognized in earnings
121
(167)
(856)
52
(107)
(1,116)
(268)
(321)
$4,136
$5,306
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 table below summarizes the gross realized gains and gross realized losses from the sale of
available-for-sale securities.
Freddie Mac 2016 Form 10-K
263
Financial Statements
Notes to the Consolidated Financial Statements | Note 5
(In millions)
Gross realized gains
Gross realized losses
Net realized gains (losses)
Maturities of Available-For-Sale Securities
Year Ended December 31,
2016
2015
2014
$1,062
(91)
$971
$1,371
(33)
$1,338
$1,897
(185)
$1,712
The table below presents the remaining contractual maturities of available-for-sale securities by security
type.
As of December 31, 2016
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:
$—
1
—
98
6
$—
1
—
98
6
$68
$67
$3,079
$3,069
$40,524
$40,516
5
7
—
13
$93
7
7
—
13
76
23
—
63
85
29
—
65
4,045
4,128
10,576
11,761
6,190
6,324
575
581
$94
$3,241
$3,248
$61,910
$63,310
$65,349
$66,757
$105
$105
Freddie Mac
$43,671
$43,652
Other agency
4,127
4,221
10,606
11,797
6,288
6,422
657
665
Non-agency
RMBS
Non-agency
CMBS
Obligations of
states and
political
subdivisions
Total available-for-
sale securities
Weighted Average
Yield(1)
2.70%
5.61%
2.67%
1.80%
2.71%
(1) The weighted average yield is calculated based on a yield for each individual lot held at December 31, 2016 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 annualized
amortization income or expense calculated for December 2016 (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.
NON-CASH INVESTING AND FINANCING ACTIVITIES
From time to time, we contribute PCs and Giant PCs held in our mortgage-related 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 the years ended December 31, 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. We did not have such activity during
the year ended December 31, 2016.
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
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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
the year ended December 31, 2015, we extinguished debt securities of consolidated trusts as
consideration for the transfer of investment securities of $0.5 billion as a result of these transactions. We
did not have such activity during the years ended December 31, 2016 and 2014.
Furthermore, during the fourth quarter of 2016, we purchased $4.5 billion of non-mortgage-related
securities that were traded, but not settled. We settled our purchase obligation during the first quarter of
2017.
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NOTE 6: DEBT SECURITIES AND SUBORDINATED
BORROWINGS
On January 1, 2016, we adopted the accounting guidance that requires debt issuance costs related to a
recognized debt liability to be presented in the consolidated balance sheets as a direct deduction (or
basis adjustment) from the debt liability rather than as a separate asset. Previously reported amounts
have been revised to conform to the current presentation.
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)
2016
2015
2016
2015
2014
Debt securities of consolidated trusts held by
third parties
$1,648,683
$1,556,121
$44,599
$45,536
$48,003
Balance, Net
Year Ended December 31,
Interest Expense for the
Other debt:
Short-term debt
Long-term debt
Total other debt
Total debt, net
71,451
281,870
353,321
113,569
300,579
414,148
350
5,646
5,996
173
6,207
6,380
145
6,768
6,913
$2,002,004
$1,970,269
$50,595
$51,916
$54,916
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.
With the exception of certain debt for which we elected the fair value option, our debt is reported at
amortized cost. Deferred items, including premiums, discounts, issuance costs, and hedging-related basis
adjustments, are reported as a component of total debt, net. 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 debt that contains embedded derivatives, including certain STACR
debt notes. Changes in the fair value of these debt obligations are recorded in other income, with any
upfront costs and fees incurred or received in exchange for the issuance of the debt being 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. For additional information on our election of the
fair value option, see Note 13.
When we repurchase or call outstanding debt securities, we recognize 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
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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.
We also engage in dollar roll transactions whereby we enter into an agreement to sell and subsequently
repurchase (or purchase and subsequently resell) agency securities. When these transactions involve
securities issued by consolidated entities, they are treated as issuances and extinguishments of debt.
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 $479.0 billion in 2016 and declined to $407.2 billion on
January 1, 2017. As of December 31, 2016, our aggregate indebtedness for purposes of the debt cap
was $356.7 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.
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The table below summarizes the debt securities of consolidated trusts held by third parties based on
underlying loan product type.
December 31, 2016
December 31, 2015
Contractual
Maturity
UPB
Carrying
Amount
Weighted
Average
Coupon(1)
Contractual
Maturity
UPB
Carrying
Amount
Weighted
Average
Coupon(1)
(Dollars in millions)
Single-family:
30-year or more, fixed-rate(2)
2017 - 2055
$1,193,329
$1,229,849
3.71% 2016 - 2053
$1,090,584
$1,123,290
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
2017 - 2037
74,033
76,331
3.49% 2016 - 2036
73,018
75,221
2017 - 2032
267,739
273,978
2.90% 2016 - 2031
270,036
276,531
2017 - 2047
2026 - 2041
2017 - 2046
52,991
10,007
1,015
54,205
10,057
1,038
2.69% 2016 - 2047
3.47% 2026 - 2041
4.92% 2016 - 2044
62,496
14,252
986
63,899
14,317
1,005
1,599,114
1,645,458
1,511,372
1,554,263
2019 - 2033
3,048
3,225
4.63% 2017 - 2028
1,717
1,858
4.90%
$1,602,162
$1,648,683
$1,513,089
$1,556,121
3.88%
3.61%
3.01%
2.61%
3.16%
5.37%
(1) The effective rate for debt securities of consolidated trusts held by third parties was 2.63% and 3.06% as of December 31,
2016 and 2015, 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. Securities sold under agreements
to repurchase are effectively collateralized borrowings where we sell securities with an agreement to
repurchase such securities at a future date. 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, 2016
December 31, 2015
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
Securities sold under
agreements to repurchase
$61,042
$60,976
7,435
3,040
7,435
3,040
Total other short-term debt
$71,517
$71,451
0.47%
0.41%
0.42%
0.47%
$104,088
$104,024
9,545
9,545
—
—
$113,633
$113,569
0.28%
0.20%
—
0.28%
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OTHER LONG-TERM DEBT
The table below summarizes our other long-term debt.
December 31, 2016
December 31, 2015
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
2017 - 2037
Medium-term notes — non-callable
2017 - 2028
$76,412
13,742
$76,383
13,987
1.24%
1.08%
$90,744
16,033
$90,690
16,348
1.47%
0.92%
Reference Notes securities — non-
callable
Variable-rate:
2017 - 2032
118,702
118,727
2.17%
137,201
137,215
2.60%
Medium-term notes — callable
2017 - 2031
Medium-term notes — non-callable
2017 - 2026
STACR
Zero-coupon:
2023 - 2029
Medium-term notes — callable
2037
Medium-term notes — non-callable
2017 - 2039
Other
2031 - 2055
Hedging-related basis adjustments
21,008
33,077
14,507
1,000
5,792
533
N/A
20,972
33,076
14,745
296
2,925
376
15
1.94%
0.48%
4.34%
6.17%
5.01%
7.72%
15,931
23,697
11,551
1,000
7,343
335
N/A
15,904
23,694
11,503
279
4,288
198
17
2.11%
0.21%
3.60%
6.17%
3.57%
5.93%
Total other senior debt
Other subordinated debt:
Fixed-rate
Zero-coupon
Total other subordinated debt
Total other long-term debt
284,773
281,502
303,835
300,136
2018
2019
121
332
453
120
248
368
7.84%
10.51%
221
332
553
219
224
443
6.61%
10.51%
$285,226
$281,870
1.81%
$304,388
$300,579
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,
2016.
(In millions)
Annual Maturities
Other long-term debt:
2017
2018
2019
2020
2021
Thereafter
Debt securities of consolidated trusts held by third parties(1)
Total
Net discounts, premiums, debt issuance costs, hedge-related and other basis adjustments(2)
Total debt securities of consolidated trusts held by third parties and other long-term debt
Par Value
$92,831
71,392
46,436
13,274
20,372
40,921
1,602,162
1,887,388
43,165
$1,930,553
(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.
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SUBORDINATED DEBT INTEREST AND PRINCIPAL PAYMENTS
The terms of certain of our subordinated debt securities provide for us to defer payments of interest in the
event we fail to maintain specified capital levels. However, in a September 23, 2008 statement concerning
the conservatorship, the Director of FHFA stated that we would continue to make interest and principal
payments on our subordinated debt, even if we fail to maintain required capital levels.
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Notes to the Consolidated Financial Statements | Note 7
NOTE 7: 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
generally 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, 2016 and 2015, 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, 2016 and 2015, we
reclassified from AOCI into earnings, losses of $192 million and $230 million, respectively, related to
closed cash flow hedges. See Note 9 for information about future reclassifications of deferred net losses
related to closed cash flow hedges to net income.
In addition, in the first quarter of 2017, we began using hedge accounting for certain single-family
mortgage loans.
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:
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• Exchange-traded derivatives;
• Cleared derivatives; and
• OTC derivatives.
Exchange-traded derivatives include standardized interest-rate futures contracts and options on futures
contracts. Cleared derivatives include 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.
We also purchase swaptions on credit indices in order to obtain protection against adverse movements in
multifamily spreads which may affect the profitability of our K Certificate or SB Certificate transactions.
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-
fixed 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 and sell 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.
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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, 2016
December 31, 2015
Notional or
Contractual
Amount
Derivatives at Fair Value
Assets
Liabilities
Notional or
Contractual
Amount
Derivatives at Fair Value
Assets
Liabilities
$313,106
$4,337
271,477
1,450
586,033
60,730
1,350
48,080
3,200
11,032
124,392
138,294
45,353
2,951
2,879
2,586
1
6,924
2,817
—
1,442
—
795
5,054
—
289
1
—
($2,703)
(9,684)
—
(12,387)
$209,988
218,599
1,125
429,712
—
(78)
—
(28)
—
(106)
—
(151)
(27)
(21)
57,925
4,375
24,050
11,025
12,088
109,463
56,332
29,114
3,899
3,033
$4,591
319
1
4,911
3,450
—
580
—
791
4,821
—
34
25
—
($486)
(11,736)
—
(12,222)
—
(100)
—
(28)
—
(128)
—
(28)
(10)
(23)
899,902
12,268
(12,692)
631,553
9,791
(12,411)
(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(1)
Written
Other option-based derivatives(2)
Total option-based
Futures
Commitments
Credit derivatives
Other
Total derivatives not designated
as hedging instruments
Derivative interest receivable
(payable)
Netting adjustments(3)
Total derivative portfolio, net
$899,902
1,442
(12,963)
$747
(1,770)
13,667
($795)
$631,553
814
(10,210)
$395
(1,393)
12,550
($1,254)
(1)
Includes multifamily swaptions on credit indices with a notional or contractual amount of $10.9 billion and a fair value of $5
million at December 31, 2016.
(2) Primarily consists of purchased interest-rate caps and floors and options on Treasury futures.
(3) Represents counterparty netting and cash collateral netting.
See Note 8 for information related to our derivative counterparties and collateral held and posted.
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Notes to the Consolidated Financial Statements | Note 7
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
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
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,
2016
2015
2014
($3,539)
3,717
—
178
234
(45)
210
35
(13)
421
334
631
(75)
(3)
887
2,316
(4,077)
1
(1,760)
($274)
$35
(811)
(2)
(778)
371
(9)
(249)
77
68
258
(5)
63
(37)
1
22
2,568
(4,768)
2
(2,198)
($2,696)
$4,073
(11,366)
(1)
(7,294)
2,355
(168)
(1,006)
8
248
1,437
(54)
239
8
(2)
191
3,033
(5,660)
2
(2,625)
($8,291)
(1) Primarily consists of purchased interest-rate caps and floors and options on Treasury futures.
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Notes to the Consolidated Financial Statements | Note 8
NOTE 8: COLLATERALIZED AGREEMENTS AND
OFFSETTING ARRANGEMENTS
DERIVATIVE PORTFOLIO
Derivative Counterparties
Our use of cleared derivatives, exchange-traded derivatives, and OTC derivatives exposes us to
counterparty credit risk. We are required to post margin in connection with our derivatives transactions.
This requirement exposes us to counterparty credit risk in the event that our counterparties 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. 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.
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.
Over the Counter Derivatives
We use master netting and collateral agreements to reduce our credit risk exposure to our OTC 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, as well as posting of
collateral in the form of cash, Treasury securities or agency mortgage-related or debt securities, or a
combination of both when the counterparty's net obligation to us is above an agreed upon threshold.
Conversely, we are also required to post collateral to our counterparties when our obligation to them is
above a specified threshold. Although it is our practice not to repledge assets held as collateral, these
agreements may allow us or our counterparties to repledge all or a portion of the collateral.
We have master netting agreements in place with all of our OTC derivative counterparties. 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 the market value of derivatives in a net gain position
by counterparty after giving consideration to collateral posted. As a result, our use of master netting and
collateral agreements reduces our exposure to our counterparties in the event of default.
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.
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, 2016, our maximum loss for accounting purposes
after applying netting agreements and collateral on an individual counterparty basis would have been
approximately $51 million. A significant majority of our net uncollateralized exposure to OTC derivative
counterparties is concentrated among four counterparties, all of which were investment grade as of
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Notes to the Consolidated Financial Statements | Note 8
December 31, 2016. We regularly review the market value of securities pledged as collateral and
derivative counterparty collateral posting thresholds, where applicable, in an effort to manage our
exposure to losses.
The amount of collateral we pledge to counterparties related to our derivative instruments is determined
after giving consideration to our credit rating. The aggregate fair value of our OTC derivative instruments
containing credit-risk related contingent features, netted by counterparty, that were in a liability position on
December 31, 2016 was $0.9 billion for which we posted cash and non-cash collateral of $0.8 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, 2016, we
would have been required to post an additional $188 million of collateral to our counterparties.
Regulations that take effect March 1, 2017 will require posting of variation margin without the application
of any thresholds for OTC derivative transactions executed after that date. As a result, our and the
counterparties’ credit ratings will no longer be used in determining the amount of collateral to be posted in
connection with these transactions.
Cleared and Exchange-Traded Derivatives
The majority of our interest-rate swaps are subject to the central clearing requirement. Changes in the
value of open exchange-traded contracts and cleared derivatives are settled or collateralized daily via
payments made through the clearinghouse. 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. A reduction in our credit ratings could cause the clearinghouses or clearing members we
use for our cleared and exchange-traded derivatives to demand additional collateral.
During 2016, the Chicago Mercantile Exchange made certain amendments to its rule books, which
resulted in the legal characterization of variation margin payments for cleared swaps being altered to
constitute a settlement rather than a posting of margin collateral. These rule amendments, which are
effective January 2017, will require that cleared trades be settled on a daily basis through the payment of
variation margin. While we do not expect the Chicago Mercantile Exchange’s rule amendments to
materially affect our 2017 financial statements and accompanying notes, such amendments will result in
certain presentation and disclosure changes, including the reclassification of the portion of the variation
margin held as Restricted Cash and Cash Equivalents to Cash and Cash Equivalents in our consolidated
balance sheets. As of December 31, 2016, we held approximately $62 million and posted approximately
$1.2 billion of variation margin related to trades cleared through the Chicago Mercantile Exchange.
While other clearinghouses have made or plan to make similar amendments to their rule books, the
amendments that have been implemented to date have not resulted in a change in the legal
characterization of variation margin payments for Freddie Mac.
Other Derivatives
We also execute forward purchase and sale commitments of loans and mortgage-related securities,
including dollar roll transactions, that are treated as derivatives for accounting purposes. The total
exposure on our forward purchase and sale commitments was $289 million and $34 million at
December 31, 2016 and 2015, respectively.
Freddie Mac 2016 Form 10-K
276
Financial Statements
Notes to the Consolidated Financial Statements | Note 8
Many of our transactions involving forward purchase and sale commitments of mortgage-related
securities 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 counterparty 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.
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 securities to our counterparty. Our counterparties to these
transactions are required to pledge the purchased securities as collateral for their obligation to
repurchase those securities at a later date. 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. Although it is our practice not to repledge assets held as collateral, these
agreements may allow us to repledge all or a portion of the collateral.
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 in an effort to manage our
exposure to losses.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are effectively collateralized borrowings where we sell
securities with an agreement to repurchase such securities at a future date. We are required to pledge the
sold securities to the counterparties to these transactions as collateral for our obligation to repurchase
these securities at a later date. Similar to the securities purchased under agreements to resell
transactions, these transactions involve the legal transfer of securities. However, they are accounted for
as secured financings because they require the identical or substantially the same securities to be
subsequently repurchased. These agreements may allow our counterparties to repledge all or a portion of
the collateral.
Freddie Mac 2016 Form 10-K
277
Financial Statements
Notes to the Consolidated Financial Statements | Note 8
OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES
When we receive cash collateral, we recognize the amount received along with a corresponding
obligation to return the collateral. When we post cash collateral, we derecognize the amount posted along
with a corresponding asset for our right to receive the return of the collateral. We generally do not
recognize or derecognize collateral received or pledged in the form of securities as the transferor in such
arrangements does not relinquish effective control over the securities transferred. See Note 7 for
additional information on our consolidated balance sheets presentation of collateral related to derivatives
transactions. At December 31, 2016 and 2015, 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.
The table below displays offsetting and collateral information related to derivatives, securities purchased
under agreements to resell, and securities sold under agreements to repurchase. Securities sold under
agreements to repurchase are included in debt, net on our consolidated balance sheets.
Freddie Mac 2016 Form 10-K
278
Financial Statements
Notes to the Consolidated Financial Statements | Note 8
December 31, 2016
Amount
Offset in the
Consolidated
Balance Sheets
Gross
Amount
Recognized
Counterparty
Netting
Cash
Collateral
Netting(1)
Net Amount
Presented in
the
Consolidated
Balance
Sheets
Gross
Amount
Not Offset in
the
Consolidated
Balance
Sheets(2)
Net
Amount
$8,531
4,889
290
13,710
51,548
$65,258
($7,298)
(6,965)
(199)
(14,462)
($6,367)
($1,760)
(4,674)
—
(11,041)
(162)
—
(1,922)
$404
53
290
747
($353)
—
—
(353)
—
—
($11,041)
($1,922)
51,548
$52,295
(51,548)
($51,901)
$51
53
290
394
—
$394
$6,367
4,705
—
11,072
$469
2,126
—
2,595
(3,040)
($17,502)
—
—
$11,072
$2,595
($462)
$274
($188)
(134)
(199)
(795)
(3,040)
($3,835)
—
—
274
3,040
$3,314
(134)
(199)
(521)
—
($521)
December 31, 2015
Amount
Offset in the
Consolidated
Balance Sheets
Gross
Amount
Recognized
Counterparty
Netting
Cash
Collateral
Netting(1)
Net Amount
Presented in
the
Consolidated
Balance
Sheets
Gross
Amount
Not Offset in
the
Consolidated
Balance
Sheets(2)
Net
Amount
$8,763
1,783
59
10,605
63,644
$74,249
($6,924)
($1,509)
(1,776)
—
(1)
—
(8,700)
(1,510)
$330
6
59
395
($269)
—
—
(269)
—
—
($8,700)
($1,510)
63,644
$64,039
(63,644)
($63,913)
($8,886)
$6,925
$876
($1,085)
(4,857)
(61)
($13,804)
1,776
—
$8,701
2,973
—
$3,849
(108)
(61)
($1,254)
$948
—
—
$948
$61
6
59
126
—
$126
($137)
(108)
(61)
($306)
279
(1) Excess cash collateral held is presented as a derivative liability, while excess cash collateral posted is presented as a
derivative asset.
Freddie Mac 2016 Form 10-K
(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(3)
Total
Liabilities:
Derivatives:
OTC interest-rate swaps and
option-based derivatives
Cleared and exchange-traded
derivatives
Other
Total derivatives
Securities sold under
agreements to repurchase
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(3)
Total
Liabilities:
Derivatives:
OTC interest-rate swaps and
option-based derivatives
Cleared and exchange-traded
derivatives
Other
Total
Financial Statements
Notes to the Consolidated Financial Statements | Note 8
(2) Does not include the fair value amount of non-cash collateral posted or held that exceeds the associated net asset or liability,
netted by counterparty, presented on the consolidated balance sheets. For cleared and exchange-traded derivatives, does
not include non-cash collateral posted by us as initial margin with an aggregate fair value of $3.4 billion and $2.8 billion as of
December 31, 2016 and 2015, respectively.
(3) At December 31, 2016 and 2015, we had $4.0 billion and $0.7 billion, respectively, of securities pledged to us for
transactions involving securities purchased under agreements to resell that we had the right to repledge.
COLLATERAL
Collateral Pledged to Freddie Mac
We have cash pledged to us as collateral related to OTC derivative transactions. The table below shows
the line item presentation of the collateral recognized on our consolidated balance sheets. A portion of the
cash collateral recognized has been re-invested by us in securities purchased under agreements to resell
and non-mortgage-related securities.
(In millions)
Restricted cash and cash equivalents
Securities purchased under agreements to resell
Investments in securities - Trading securities
Total(1)
(1) Includes cash collateral held in excess of exposure.
Collateral Pledged by Freddie Mac
December 31, 2016
December 31, 2015
$399
426
1,000
$1,825
$175
905
447
$1,527
The table below summarizes the fair value of the securities pledged as collateral by us for derivatives and
collateralized borrowing transactions where the secured party may repledge.
(In millions)
Derivatives
Debt securities of consolidated trusts held
by third parties(1)
Available-for-sale securities
Trading securities
Total securities pledged that may be
repledged by the secured party
$686
—
3,014
$3,700
December 31, 2016
Securities sold
under agreements
to repurchase
Other
collateralized
borrowing
$—
—
3,070
$3,070
$—
260
—
$260
Total
$686
260
6,084
$7,030
(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.
The table below summarizes the underlying collateral pledged and the remaining contractual maturity of
our gross obligations under securities sold under agreements to repurchase.
(In millions)
Overnight and
continuous
30 days or less
After 30 days
through 90 days
Greater than 90
days
Total
U.S. Treasury securities
$—
$2,072
$998
$—
$3,070
December 31, 2016
Freddie Mac 2016 Form 10-K
280
Financial Statements
Notes to the Consolidated Financial Statements | Note 9
NOTE 9: 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
(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, 2016
AOCI Related
to Available-
For-Sale
Securities
AOCI Related
to Cash Flow
Hedge
Relationships
AOCI Related
to Defined
Benefit Plans
$1,740
(318)
(507)
(825)
$915
($621)
—
141
141
($480)
$34
(10)
(3)
(13)
$21
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
$2,546
(123)
(683)
(806)
$1,740
($803)
—
182
182
($621)
($13)
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
2,087
(503)
1,584
$2,546
($1,000)
—
197
197
($803)
$32
(43)
(2)
(45)
($13)
Total
$1,153
(328)
(369)
(697)
$456
Total
$1,730
(75)
(502)
(577)
$1,153
Total
($6)
2,044
(308)
1,736
$1,730
(1) For the years ended December 31, 2016, 2015, and 2014, net of tax expense of ($0.2) billion, $0.1 billion, and $1.1 billion,
respectively, for AOCI related to available-for-sale securities.
Freddie Mac 2016 Form 10-K
281
Financial Statements
Notes to the Consolidated Financial Statements | Note 9
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
(In millions)
AOCI related to
available-for-sale securities
Year Ended December 31,
2016
2015
2014
$971
$1,343
$1,712
AOCI related to cash flow hedge
relationships
AOCI related to defined benefit plans
(191)
780
(273)
507
(1)
(191)
(192)
51
(141)
4
(1)
3
(292)
1,051
(368)
683
(2)
(228)
(230)
48
(182)
1
—
1
Affected Line Item in the
Consolidated
Statements of Comprehensive
Income
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)
503 Net of tax
Income tax (expense) or benefit
(2)
Interest expense
(301) Expense related to derivatives
(303) Total before tax
106
(197) Net of tax
Income tax (expense) or benefit
4 Salaries and employee benefits
(2)
Income tax (expense) or benefit
2 Net of tax
Total reclassifications in the period
$369
$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 $0.5 billion and $0.6
billion at December 31, 2016 and 2015, 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 $124 million, net of taxes, of the $0.5 billion of cash flow
hedge losses in AOCI at December 31, 2016 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 17 years.
Freddie Mac 2016 Form 10-K
282
Financial Statements
Notes to the Consolidated Financial Statements | Note 9
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
2016, 2015, and 2014 at the direction of the Conservator were $5.0 billion, $5.5 billion, and $19.6 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 below) 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 2016 Form 10-K
283
Financial Statements
Notes to the Consolidated Financial Statements | Note 9
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, 2016.
(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 2016, because we had positive
net worth at December 31, 2015, March 31, 2016, June 30, 2016, and September 30, 2016 and,
consequently, FHFA did not request a draw on our behalf. At December 31, 2016, 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, 2016 and the Capital Reserve Amount of $0.6 billion in 2017, our
dividend obligation to Treasury in March 2017 will be $4.5 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, 2016 and 2015. See Note 15 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 2016 Form 10-K
284
Financial Statements
Notes to the Consolidated Financial Statements | Note 9
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,
2016, 2015, and 2014 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 2016 Form 10-K
285
Financial Statements
Notes to the Consolidated Financial Statements | Note 9
The table below provides a summary of our preferred stock outstanding at their redemption values at
December 31, 2016.
(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
Issue Date
Shares
Authorized
Shares
Outstanding
Total
Par Value
Redemption
Price per
Share
Total
Outstanding
Balance
Redeemable
On or After
OTCQB
Symbol
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
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
$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
December 4, 2007
240.00
240.00
240.00
$50.00
50.00
50.00
$250
150
400
June 30, 2001
FMCCI
October 27, 1998
(2)
March 31, 2003 FMCKK
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
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
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 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 9
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 2016
and 2015, 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 2016, the deferral period lapsed on 1,240 RSUs. At
December 31, 2016, 9,510 RSUs remained outstanding. There are no remaining restrictions on
outstanding RSUs. In addition, there were 41,160 shares of restricted stock outstanding at both
December 31, 2016 and 2015. No stock options were exercised and 46,416 stock options were forfeited
or expired during 2016. At December 31, 2016, no stock options were outstanding.
EARNINGS PER SHARE
Under our prior stock-based compensation plans we issued participating securities related to options and
RSUs 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 RSUs 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 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 9
exceeds the exercise price; and
• The weighted-average of RSUs.
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 22,684, 146,474, and 494,227 at
December 31, 2016, 2015, and 2014, respectively.
DIVIDENDS DECLARED
No common dividends were declared in 2016. During the three months ended March 31, 2016, June 30,
2016, September 30, 2016, and December 31, 2016, we paid dividends of $1.7 billion, $0 billion, $0.9
billion, and $2.3 billion, respectively, in cash on the senior preferred stock at the direction of our
Conservator. We did not declare or pay dividends on any other series of Freddie Mac preferred stock
outstanding during 2016.
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 2016 Form 10-K
288
Financial Statements
Notes to the Consolidated Financial Statements | Note 10
NOTE 10: 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 for 2016, 2015, and 2014.
We are exempt from state and local income taxes.
(In millions)
Current income tax expense
Deferred income tax expense
Total income tax expense
Year Ended December 31,
2015
2014
2016
($1,037)
(2,787)
($3,824)
($1,243)
(1,655)
($2,898)
($1,028)
(2,284)
($3,312)
The increase in income tax expense from 2015 to 2016 is primarily due to an increase in pre-tax income.
The decrease in income tax expense from 2014 to 2015 is primarily due to a decrease in pre-tax income.
The table below presents reconciliation between our federal statutory income tax rate and our effective
tax rate for 2016, 2015 and 2014.
(Dollars in millions)
Statutory corporate tax rate
Tax-exempt interest
Tax credits
Other
Effective tax rate
DEFERRED TAX ASSETS, NET
2016
Year Ended December 31,
2015
2014
Amount
Percent
Amount
Percent
Amount
Percent
($4,074)
36
243
(29)
($3,824)
35.0%
(0.3)
(2.1)
0.3
32.9%
($3,246)
52
346
(50)
($2,898)
35.0%
(0.6)
(3.7)
0.5
31.2%
($3,851)
73
438
28
($3,312)
35.0%
(0.7)
(4.0)
(0.2)
30.1%
We use the asset and liability method of accounting for income taxes for financial reporting purposes.
Under this method, deferred tax assets and liabilities are recognized based upon the expected future tax
consequences of existing temporary differences between the financial reporting and the tax reporting
basis of assets and liabilities using enacted statutory tax rates as well as tax net operating loss and tax
credit carryforwards. To the extent tax laws change, deferred tax assets and liabilities are adjusted 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.
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 10
The table below presents the balance of significant deferred tax assets and liabilities at December 31,
2016 and 2015.
(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 partnerships and AMT credit carryforward
Basis differences related to debt
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
2016
2015
$6,662
4,006
1,045
2,310
2,156
48
83
16,310
(492)
—
(492)
$15,818
$7,008
5,912
170
3,303
2,764
—
81
19,238
(937)
(96)
(1,033)
$18,205
As of December 31, 2016, we had a LIHTC partnership carryforward of $1.7 billion that will expire over
multiple years beginning in 2032. Our AMT credit carryforward of $433 million will not expire.
Valuation Allowance
A valuation allowance is recorded to reduce the net deferred tax asset 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. 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 net deferred
tax asset will be realized.
We are not permitted to consider in our analysis the impacts proposed legislation may have on our
business because the timing and certainty of those actions are unknown and beyond our control.
At December 31, 2016, 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 four 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 2016 taxable income and forecasts of future book income.
Accordingly, we concluded that it is more likely than not that our net deferred tax asset will be realized
and that a valuation allowance against our net deferred tax asset was not necessary at December 31,
2016.
Freddie Mac 2016 Form 10-K
290
Financial Statements
Notes to the Consolidated Financial Statements | Note 10
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, 2016.
We have accrued gross interest receivable of $32 million and $65 million as of December 31, 2016 and
2015, respectively, related to payments on account with the IRS.
Freddie Mac 2016 Form 10-K
291
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
NOTE 11: 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)
Single-family
Guarantee
Multifamily
The Single-family Guarantee segment
reflects results from our purchase,
securitization, and guarantee of single-
family loans and the management of
single-family credit risk. In most
instances, we securitize the loan and
guarantee the payment of principal and
interest on the mortgage-related
securities in exchange for guarantee
fees.
Segment Earnings for this segment
consist primarily of guarantee fee
income, less credit-related expenses,
credit risk transfer expenses,
administrative expenses, allocated
funding costs, and amounts related to
net float income or expenses.
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 guarantee fees for the price
performance of our PCs relative to comparable
Fannie Mae securities
Costs and recoveries of credit 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 (i.e., K Certificates and SB
Certificates)
Investments in CMBS and multifamily loans held-
for-investment
Contribution to
GAAP
comprehensive
income (loss)
Other mortgage-related guarantees
Other securitization products
Other credit risk transfer products
Tax expense/benefit and changes in the deferred
tax asset valuation allowance (if any)
Allocated debt costs and administrative expenses
The Multifamily segment reflects results
from our purchase, securitization, and
guarantee of multifamily loans and
securities, our investments in those
loans and securities, and the
management of multifamily mortgage
credit risk and mortgage market spread
risk. Our primary business model is to
purchase multifamily loans for
aggregation and then securitization
through issuance of multifamily K
Certificates and SB Certificates. We
also issue and guarantee other
securitization products, issue other
credit risk transfer products, and provide
other mortgage-related guarantees.
Segment Earnings for this segment
consist primarily of returns on assets
related to multifamily investment
activities and guarantee fee income,
less credit-related expenses,
administrative expenses, and allocated
funding costs.
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 11
Investments
The Investments segment reflects
results from managing the company’s
mortgage-related investments portfolio
(excluding Multifamily segment
investments, single-family seriously
delinquent loans, and the credit risk of
single-family performing loans), treasury
function, 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 single-family mortgage-related
securities and single-family performing loans
All other traded non-mortgage related instruments
and securities
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)
FHFA-mandated termination of our pension plan
Segment Earnings
We present Segment Earnings by reclassifying certain credit-related activities, investment-related
activities, and mortgage-loan reclassification 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 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.
During the first quarter of 2016, we changed how we calculate certain components of our Segment
Earnings for our Single-family Guarantee and Investments segments. The purpose of these changes is to
simplify Segment Earnings results relative to GAAP results. Prior period results have been revised to
conform to the current period presentation. Changes include:
• The discontinuation of adjustments to net interest income and guarantee fee income which reflected
the amortization of cash premiums and discounts on the consolidated Freddie Mac mortgage-related
securities we purchased as investments, as well as the amortization of certain guarantee buy-up and
buy-down fees and credit delivery fees on mortgage loans we purchased. The discontinuation of the
adjustments resulted in an increase to net interest income for the Investments segment of $781
million and $635 million and a decrease to guarantee fee income for the Single-family Guarantee
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 11
segment of $254 million and $303 million for the years ended December 31, 2015 and 2014,
respectively, to align with the current presentation.
• Adjustments to record amortization of premiums and discounts on loans that were securitized in other
non-interest income. Previously when we securitized loans into PCs, the premiums and discounts on
the loans were amortized in net interest income. We reclassified $1.4 billion and $780 million of
expense from net interest income into other non-interest income (loss) for the Investments segment
for the years ended December 31, 2015 and 2014, respectively, to align with the current presentation.
• Adjustments to reflect the impacts from the reclassification of mortgage loans from held-for-
investment to held-for-sale as other non-interest income. We reclassified $2.3 billion and $147 million
of benefit from (provision) benefit for credit losses and $1.1 billion and $62 million of expense from
other non-interest expense into other non-interest income (loss) for the Single-family Guarantee
segment for the years ended December 31, 2015 and 2014, respectively, to align with the current
presentation.
In addition, during the third quarter of 2016, we changed how we calculate certain components of our
Segment Earnings for our Single-family Guarantee and Multifamily segments. The purpose of these
changes is to better reflect how management evaluates the Single-family Guarantee and Multifamily
segments. Prior period results have been revised to conform to the current period presentation. Changes
include:
• Adjustments to record amortization of non-cash premiums and discounts on single-family loans in
trusts and on the associated consolidated PCs and amortization of discounts on loans purchased with
deteriorated credit quality that are on accrual status into other non-interest income (loss). Previously
this activity was included in net interest income. We reclassified $338 million and $156 million of
income from net interest income into other non-interest income (loss) for the Single-family Guarantee
segment for the years ended December 31, 2015 and 2014, respectively, to align with the current
presentation.
• Adjustments to record STACR debt note expense and net float income or expense into other non-
interest expense. Previously this activity was included in net interest income. We reclassified $443
million and $258 million of expense from net interest income into other non-interest expense for the
Single-family Guarantee segment for the years ended December 31, 2015 and 2014, respectively, to
align with the current presentation.
• Multifamily segment net interest income previously reflected the internally allocated costs associated
with the refinancing of debt related to held-for-investment loans which we securitized. These costs
are now reflected in other non-interest income (loss). We reclassified $122 million and $0 million of
expense from net interest income into other non-interest income (loss) for the Multifamily segment for
the years ended December 31, 2015 and 2014, respectively, to align with the current presentation.
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
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 11
significant reclassifications are discussed below. Many of the reclassifications 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 Activity-Related Reclassifications
Certain credit activity-related income and costs are included in Segment Earnings guarantee fee income
or provision for credit losses.
• Net guarantee fees are reclassified in Segment Earnings from net interest income to guarantee fee
•
income.
Implied guarantee fee income related to unsecuritized loans held in the mortgage investments
portfolio is reclassified in Segment Earnings from net interest income to guarantee fee income.
• A portion of the amount reversed for accrued but uncollected interest upon placing loans on a non-
accrual status is reclassified in Segment Earnings from net interest income to provision for credit
losses.
• The revenue and expense related to the 10 basis point increase which was legislated in the
Temporary Payroll Tax Cut Continuation Act of 2011 are netted within guarantee fee income.
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 other investments and cash portfolio.
We use derivatives extensively in our investment activity. The reclassifications described below allow us
to reflect, in Segment Earnings net interest income, the costs associated with this use of derivatives.
• The accrual of periodic cash settlements of all derivatives is reclassified in Segment Earnings from
derivative gains (losses) into net interest income to fully reflect the periodic cost associated with the
protection provided by these contracts.
• Up-front cash paid or received upon the purchase or writing of swaptions and other option contracts is
reclassified in Segment Earnings prospectively on a straight-line basis from derivative gains (losses)
into net interest income over the contractual life of the instrument to fully reflect the periodic cost
associated with the protection provided by these contracts.
Amortization related to certain items is not relevant to how we measure the effective yield earned on the
securities held in our investments portfolios. Therefore, as described below, we reclassify 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, including non-cash premiums and discounts, on
single-family loans in trusts and on the associated consolidated PCs.
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 11
• Amortization of discounts on loans purchased with deteriorated credit quality that are on accrual
status.
• 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.
Certain debt-related costs are not relevant to how we measure the effective yield earned on the securities
held in our investments portfolio. Therefore, as described below, we reclassify the following items in
Segment Earnings from net interest income to non-interest income:
• Costs associated with STACR debt note expense.
•
Internally allocated costs associated with the refinancing of debt related to Multifamily segment held-
for-investment loans which we securitized.
Mortgage Loan Classification-Related Reclassifications
The GAAP impacts of our reclassification of mortgage loans from held-for-investment to held-for-sale
affect various financial statement line items. In order to better reflect how we manage our Single-family
Guarantee segment, we reclassify the impacts of these mortgage loan reclassifications from benefit
(provision) for credit losses and other non-interest expense into other non-interest income (loss).
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.
Funding and interest rate risk is consolidated and primarily managed by the Investments segment for all
other 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 senior preferred stock.
Freddie Mac 2016 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 11
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,
2016
2015
2014
$2,170
1,818
3,827
—
7,815
$7,815
$2,161
1,582
3,375
—
7,118
$7,118
$1,778
827
3,771
—
6,376
$6,376
$1,790
566
3,415
28
5,799
$5,799
$1,547
1,636
4,520
(13)
7,690
$7,690
$1,537
1,459
6,471
(41)
9,426
$9,426
The table below presents detailed reconciliations between our GAAP financial statements and Segment
Earnings for our reportable segments and All Other.
(In millions)
Net interest income
Guarantee fee income(1)
Benefit (Provision) for credit losses
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
Administrative expense
REO operations (expense) income
Other non-interest (expense) income
Income tax expense
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
Single-
family
Guarantee Multifamily
$1,022
$—
6,091
(517)
—
(69)
—
—
516
(1,323)
(298)
(1,169)
(1,061)
2,170
—
—
(9)
(9)
511
22
—
407
28
309
829
(362)
—
(58)
(890)
1,818
(234)
—
(2)
(236)
Comprehensive income (loss)
$2,161
$1,582
Year Ended December 31, 2016
Investments
All
Other
Total
Segment
Earnings
(Loss)
$2,464
$—
$3,486
—
—
269
2,499
(1,077)
—
1,846
(320)
—
19
(1,873)
3,827
(591)
141
(2)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,602
(495)
269
2,837
(1,049)
309
3,191
(2,005)
(298)
(1,208)
(3,824)
7,815
(825)
141
(13)
(452)
$3,375
—
$—
(697)
$7,118
Reclassifications
$10,893
(6,089)
1,298
(460)
(3,111)
—
(772)
(1,227)
—
11
(543)
—
—
—
—
—
—
$—
Total per
Consolidated
Statements of
Comprehensive
Income
$14,379
513
803
(191)
(274)
(1,049)
(463)
1,964
(2,005)
(287)
(1,751)
(3,824)
7,815
(825)
141
(13)
(697)
$7,118
Freddie Mac 2016 Form 10-K
297
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
Year Ended December 31, 2015
Single-
family
Guarantee Multifamily
$1,049
$—
Investments
All
Other
Total
Segment
Earnings
(Loss)
$3,902
$—
$4,951
Reclassifications
(In millions)
Net interest income
Guarantee fee income(1)
Benefit (Provision) for credit losses
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
Administrative expense
REO operations (expense) income
Other non-interest (expense) income
Income tax expense
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
5,152
(283)
—
(37)
—
—
173
(1,285)
(341)
(794)
(807)
1,778
—
—
12
12
Comprehensive income (loss)
$1,790
339
26
(22)
372
(98)
(93)
15
(325)
(4)
(56)
(376)
827
(264)
—
3
(261)
$566
—
—
420
(70)
(737)
—
2,292
(317)
—
(4)
(1,715)
3,771
(542)
182
4
(356)
$3,415
—
—
—
—
—
—
—
—
—
—
—
—
—
—
28
28
$28
5,491
(257)
398
265
(835)
(93)
2,480
(1,927)
(345)
(854)
(2,898)
6,376
(806)
182
47
(577)
$5,799
Year Ended December 31, 2014
Total per
Consolidated
Statements of
Comprehensive
Income
$14,946
369
2,665
(292)
(2,696)
(835)
(2,094)
1,949
(1,927)
(338)
(2,473)
(2,898)
6,376
(806)
182
47
(577)
$5,799
$9,995
(5,122)
2,922
(690)
(2,961)
—
(2,001)
(531)
—
7
(1,619)
—
—
—
—
—
—
$—
(In millions)
Net interest income
Guarantee fee income(1)
Benefit (Provision) for credit losses
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
Administrative expense
REO operations (expense) income
Other non-interest (expense) income
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
Single-
family
Guarantee Multifamily
$948
$—
Investments
All
Other
Total
Segment
Earnings
(Loss)
$4,381
$—
$5,329
4,094
(1,129)
—
7
—
—
945
(1,170)
(213)
(387)
(600)
254
55
—
335
58
870
176
(274)
9
(23)
(772)
1,547
1,636
—
—
(140)
(5,158)
(276)
—
8,101
(437)
—
(6)
(1,945)
4,520
—
—
(10)
(10)
(175)
1,759
197
(5)
—
(2)
(177)
—
—
—
—
—
—
—
—
—
(18)
5
(13)
—
—
(28)
4,348
(1,074)
(140)
(4,816)
(218)
870
9,222
(1,881)
(204)
(434)
(3,312)
7,690
1,584
197
(45)
Comprehensive income (loss)
$1,537
$1,459
1,951
$6,471
(28)
($41)
1,736
$9,426
Total per
Consolidated
Statements of
Comprehensive
Income
Reclassifications
$8,934
(4,019)
1,016
(798)
(3,475)
—
(139)
(948)
—
8
(579)
—
—
—
—
—
—
$—
$14,263
329
(58)
(938)
(8,291)
(218)
731
8,274
(1,881)
(196)
(1,013)
(3,312)
7,690
1,584
197
(45)
1,736
$9,426
(1) Guarantee fee income is included in other income (loss) on our GAAP consolidated statements of comprehensive income.
Freddie Mac 2016 Form 10-K
298
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
NOTE 12: 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 affect 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 8.
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 2016 Form 10-K
299
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
The table below summarizes the concentration by book and geographic area of approximately $1.8 trillion
and $1.7 trillion UPB of our single-family credit guarantee portfolio at December 31, 2016 and 2015,
respectively. See Note 4 and Note 5 for more information about credit risk associated with loans and
mortgage-related securities that we hold or guarantee.
December 31, 2016
December 31, 2015
Percent of Credit Losses
Percentage
of
Portfolio
Serious
Delinquency
Rate
Percentage
of
Portfolio
Serious
Delinquency
Rate
YTD 2016
YTD 2015
Core single-family book
HARP and other relief
refinance book
Legacy single-family book
Total
Region(1)
West
Northeast
North Central
Southeast
Southwest
Total
State(2)
New Jersey
Illinois
New York
Florida
Maryland
All other
Total
73%
15
12
100%
30%
25
16
16
13
100%
3%
5
5
6
3
78
100%
0.20%
0.69%
3.59%
1.00%
0.57%
1.45%
0.93%
1.19%
0.78%
1.00%
2.26%
1.34%
2.05%
1.42%
1.29%
0.82%
1.00%
66%
18
16
100%
29%
26
17
16
12
100%
4%
5
5
5
3
78
100%
0.21%
0.72%
4.12%
1.32%
0.79%
2.04%
1.13%
1.57%
0.88%
1.32%
3.90%
1.62%
2.94%
2.16%
1.64%
1.03%
1.32%
6%
16
78
100%
11%
41
24
19
5
100%
12%
10
9
9
6
54
100%
3%
8
89
100%
13%
41
17
25
4
100%
15%
8
12
18
4
43
100%
(1) 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).
(2) States presented based on those with the highest percentage of credit losses during the year ended December 31, 2016.
The REO balance, net at December 31, 2016 and 2015 associated with single-family properties was $1.2
billion and $1.7 billion, respectively, and the balance associated with multifamily properties was $0 million
and $4 million, respectively. Our single-family REO inventory consisted of 11,418 properties and 17,004
properties at December 31, 2016 and 2015, respectively. In recent years, the foreclosure process has
been 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 2016 Form 10-K
300
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
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
Alt-A
Original LTV ratio greater than 90%(2)
Lower credit scores at origination (less than 620)
Percentage of Portfolio(1)
Serious Delinquency Rate(1)
December 31,
2016
December 31,
2015
December 31,
2016
December 31,
2015
1%
2%
16%
2%
1%
2%
16%
2%
4.34%
5.21%
1.58%
5.73%
6.02%
6.32%
2.01%
6.67%
(1) Excludes loans underlying certain other securitization products for which data was not available.
Includes HARP loans, which we purchase as part of our participation in the MHA Program.
(2)
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
Freddie Mac 2016 Form 10-K
301
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
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 5 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 legal structure, based on UPB.
(Dollars in billions)
Unsecuritized loans
K Certificates and SB Certificates
Other securitization products
Other mortgage-related guarantees
Total
December 31, 2016
December 31, 2015
UPB
Delinquency
Rate(1)
UPB
Delinquency
Rate(1)
$42.4
139.4
8.2
9.7
$199.7
0.04%
0.02%
0.03%
—%
0.03%
$49.1
103.1
6.7
9.5
$168.4
0.04%
0.02%
—%
—%
0.02%
(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 and SB 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 and multifamily loan purchase volume from several
large sellers. The table below summarizes the concentration of single-family and multifamily sellers who
provided 10% or more of our purchase volume.
Freddie Mac 2016 Form 10-K
302
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
Single-family Sellers
Wells Fargo Bank, N.A.
Bank of America, N.A.
Other top 10 sellers
Top 10 single-family sellers
Multifamily Sellers
CBRE Capital Markets, Inc.
Berkadia Commercial Mortgage LLC
Walker & Dunlop, LLC
Holliday Fenoglio Fowler, L.P.
Other top 10 sellers
Top 10 multifamily sellers
2016
2015
15%
4
30
49%
19%
17
10
8
25
79%
12%
11
27
50%
15%
13
11
11
28
78%
In recent years, there has been a shift in our single-family 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, and we purchase a significant share of our loans from them. Our top three
non-depository sellers provided approximately 12% of our single-family purchase volume during 2016.
We are exposed to counterparty 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, 2016 and 2015, the UPB of loans subject to our repurchase requests issued
to our single-family sellers and servicers was approximately $0.3 billion and $0.4 billion, respectively
(these figures include repurchase requests for which appeals were pending). During 2016 and 2015, we
recovered amounts that covered losses with respect to $0.6 billion and $0.8 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, 2016, approximately 61% in UPB of loans in our single-
Freddie Mac 2016 Form 10-K
303
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
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 and therefore we have exposure to them to the extent a decline in their
performance results in a failure to realize the anticipated benefits of our loss mitigation plans. Since we do
not have our own servicing operation, if our servicers lack appropriate 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.
Significant portions of our single-family and multifamily loans are serviced by several large servicers. The
table below summarizes the concentration of single-family and multifamily servicers who serviced 10% or
more of our single-family credit guarantee portfolio and our multifamily mortgage portfolio, excluding loans
underlying multifamily securitizations where we are not in first loss position, primarily K Certificates and
SB Certificates.
December 31, 2016
December 31, 2015
Single-family Servicers
Wells Fargo Bank, N.A.
JPMorgan Chase Bank, N.A.
Other top 10 sellers
Top 10 single-family servicers
Multifamily Servicers
Wells Fargo Bank, N.A.
CBRE Capital Markets, Inc.
Berkadia Commercial Mortgage LLC
Other top 10 servicers
Top 10 multifamily servicers
19%
9
32
60%
15%
14
11
39
79%
20%
10
35
65%
16%
13
15
35
79%
In recent years, there has been a shift in our single-family 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, 2016 and 2015, approximately 10% of our
single-family credit guarantee portfolio was serviced by our three largest non-depository servicers, on a
combined basis. One of our non-depository servicers also services a large share of the loans underlying
Freddie Mac 2016 Form 10-K
304
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
our investments in non-agency mortgage-related securities. We routinely monitor the performance of our
largest non-depository servicers.
In our multifamily business, we are exposed to the risk that multifamily seller/servicers could come under
financial pressure, which could potentially cause degradation in the quality of the servicing they provide
us, including their monitoring of each property’s financial performance and physical condition. This could
also, in certain cases, reduce the likelihood that we could recover losses through lender repurchases,
recourse agreements, or other credit enhancements, where applicable. This risk primarily relates to
multifamily loans that we hold on our consolidated balance sheets where we retain all of the related credit
risk. We monitor the status of all our multifamily seller/servicers in accordance with our counterparty credit
risk management framework.
MORTGAGE INSURERS
We have counterparty 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, 2016, mortgage insurers provided coverage with maximum
loss limits of $75.0 billion, for $292.9 billion of UPB, in connection with our single-family credit guarantee
portfolio. These amounts are based on gross coverage without regard to netting of coverage that may
exist to the extent an affected loan is covered under both primary and pool insurance.
The table below summarizes the concentration of mortgage insurer counterparties who provided 10% or
more of our overall mortgage insurance coverage. On January 3, 2017, Arch Capital Group Ltd.
announced that it had completed its purchase of United Guaranty Corporation at the end of 2016. The
table below reflects this transaction. On October 23, 2016, Genworth Financial, Inc. announced that it had
entered into an agreement to be acquired by China Oceanwide Holdings Group Co., Ltd. Genworth
Mortgage Insurance Corporation is a subsidiary of Genworth Financial, Inc.
Credit Rating(1)
December 31, 2016
December 31, 2015
Mortgage Insurance Coverage
Arch Mortgage Insurance Company
Radian Guaranty Inc.
Mortgage Guaranty Insurance Corporation
Genworth Mortgage Insurance Corporation
Essent Guaranty, Inc.
Total
BBB+
BBB-
BBB-
BB+
BBB
25%
21
20
15
10
91%
23%
22
21
14
9
89%
(1) Ratings are for the corporate entity to which we have the greatest exposure. Coverage amounts may include coverage
provided by affiliates and subsidiaries of the counterparty. Latest rating available as of December 31, 2016. Represents the
lower of S&P and Moody’s credit ratings stated in terms of the S&P equivalent.
We received proceeds of $0.5 billion and $0.7 billion during 2016 and 2015, 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 $0.1 billion and $0.3 billion (excluding deferred
payment obligations associated with unpaid claim amounts) as of December 31, 2016 and 2015,
respectively. The balance of these receivables, net of associated reserves, was approximately $0.1 billion
and $0.2 billion at December 31, 2016 and 2015, respectively.
Freddie Mac 2016 Form 10-K
305
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
PMI Mortgage Insurance Co. and Triad Guaranty Insurance Corp. are both under the control of their state
regulators and are in run-off. 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 both December 31, 2016 and 2015, we had
cumulative unpaid deferred payment obligations of $0.5 billion from these insurers. We reserved for all of
these unpaid amounts as collectability is uncertain. 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.
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.
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 purchased,
while others were acquired by us. At December 31, 2016, the maximum principal exposure to credit
losses related to such policies was $5.2 billion. At December 31, 2016, 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.
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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. Bond insurance is included as a feature at issuance
of some of our non-agency mortgage-backed securities. The expected benefits from bond insurers, or the
inability of bond insurers to perform on their obligations, is captured in the fair value of these securities.
See Note 5 for further information on our investments in securities covered by bond insurance.
CASH AND OTHER INVESTMENT COUNTERPARTIES
We are exposed to counterparty credit risk relating to the potential insolvency of, or the non-performance
by, counterparties relating to cash and other investments (including non-mortgage-related securities 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 securities and cash equivalents)
counterparties are primarily major financial institutions, including other GSEs, Treasury, the Federal
Reserve Bank of New York, highly-rated supranational institutions, and government money market funds.
As of December 31, 2016 and 2015, including amounts related to our consolidated VIEs, there were
$73.8 billion and $83.8 billion, respectively, of cash and securities purchased under agreements to resell
invested with counterparties, U.S.Treasury securities classified as cash equivalents, or cash deposited
with the Federal Reserve Bank of New York. As of December 31, 2016, all of our securities purchased
under agreements to resell were fully collateralized.
NON-AGENCY MORTGAGE-RELATED SECURITY ISSUERS
We are engaged in various loss mitigation efforts concerning certain investments in non-agency
mortgage-related securities, including the matters described below.
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. The lawsuits against Nomura Holding America, Inc. (or Nomura) and The Royal Bank
of Scotland Group PLC remain outstanding. In March 2015, FHFA’s case against Nomura went to trial in
the U.S. District Court for the Southern District of New York. In May 2015, the judge ruled against the
defendants and ordered them 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.
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We worked with three investor consortia to enforce certain claims with Countrywide, Citigroup and J.P.
Morgan Chase & Co., respectively, relating to a number of non-agency mortgage-related securities.
Settlement agreements were entered into with respect to these claims. Our benefit from the related
settlements, which totaled approximately $418 million, will be recognized in earnings over the expected
remaining life of the securities, unless the securities are sold, at which time the benefit would be
considered in the sales price of the securities.
The majority of the single-family loans underlying our investments in non-agency mortgage-related
securities is serviced by non-depository servicers. As of December 31, 2016 and 2015, approximately
$8.4 billion and $13.0 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 Financial
Corp.
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Notes to the Consolidated Financial Statements | Note 13
NOTE 13: 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 RISK AND CONTROLS OVER FAIR VALUE MEASUREMENTS
Valuation risk is the risk that fair values used for financial disclosures, risk metrics and performance
measures do not reasonably reflect market conditions and prices.
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
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Notes to the Consolidated Financial Statements | Note 13
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 ERM Division.
The independent validation procedures performed by ERM Division 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 daily price review
and 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 Division 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 Division provides independent risk
governance over all valuation processes by establishing and maintaining a corporate-wide valuation
framework and control policy. ERM Division 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 Division, and Finance Division, 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.
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Notes to the Consolidated Financial Statements | Note 13
The prices provided by the pricing services and dealers reflect their observations and assumptions
related to market activity, including risk premiums and liquidity adjustments. The models and related
assumptions used by the pricing services and dealers are owned and managed by them and, in many
cases, the significant inputs used in the valuation techniques are not reasonably available to us. However,
we have an understanding of the processes and assumptions used to develop the prices based on our
ongoing due diligence, which includes discussions with our vendors at least annually and often more
frequently. We believe that the procedures executed by the pricing services and dealers, combined with
our internal verification and analytical procedures, provide assurance that the prices used in our financial
statements comply with the accounting guidance for fair value measurements and disclosures and reflect
the assumptions that a market participant would use in pricing our assets and liabilities. The price quotes
we receive are non-binding both to us and to our counterparties.
In many cases, we receive 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 affects 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.
Valuation Technique
Classification in
the Fair Value
Hierarchy
Valuations are based on quoted prices in active markets.
Level 1
Instrument
Securities
U.S. Treasury
Securities
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Notes to the Consolidated Financial Statements | Note 13
Instrument
Agency mortgage-
related securities
Valuations are based on:
Valuation Technique
Classification in
the Fair Value
Hierarchy
Fixed-rate single-class: Observable prices for similar TBA securities
adjusted for specific collateral characteristics
Level 2
Predominantly
Level 2
Levels 2 and 3
Level 3
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
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 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.
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Notes to the Consolidated Financial Statements | Note 13
Instrument
Multifamily loans
Valuations are based on:
Valuation Technique
Held-for-sale: Market prices from a third-party pricing service, using
discounted cash flows based on K Certificate and SB Certificates
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
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.
Classification in
the Fair Value
Hierarchy
Level 2
Level 3
Level 1
Level 2
Level 2
Level 2
Level 3
Level 3
Mortgage servicing
rights
Valuations are based on market prices from a 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.
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.
Level 3
Single-family REO
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Notes to the Consolidated Financial Statements | Note 13
Instrument
Valuation Technique
Guarantee obligation Valuations are based on:
Single-family
Classification in
the Fair Value
Hierarchy
The delivery 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 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. The majority of our HARP loans are classified as
Level 2. 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 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 September 2017, the beneficial pricing
afforded to HARP loans may no longer be reflected in the pricing structure of our guarantee fees. If these
benefits were not reflected in the pricing for these loans, the fair value of our loans would have decreased
by $5.3 billion and $12.9 billion as of December 31, 2016 and 2015, respectively. The total fair value of
the loans in our portfolio that reflect the pricing afforded to HARP loans as of December 31, 2016 and
2015 was $52.8 billion and $82.8 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.
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Notes to the Consolidated Financial Statements | Note 13
(In millions)
Assets:
Investments in securities:
Available-for-sale, at fair value:
Mortgage-related securities:
Freddie Mac
Other agency
Non-agency RMBS
Non-agency CMBS
Obligations of states and political subdivisions
Total available-for-sale securities, at fair value
Trading, at fair value:
Mortgage-related securities:
Freddie Mac
Other agency
All 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
Non-derivative held-for-sale purchase commitments, at fair
value
All other, at fair value
Total other assets
Level 1
Level 2
Level 3
Netting Adjustment(1)
Total
December 31, 2016
$—
$33,805
—
—
—
—
—
—
—
—
—
19,402
19,402
19,402
—
—
—
—
—
—
—
—
—
—
—
4,155
—
3,056
—
41,016
14,248
8,149
36
22,433
1,735
24,168
65,184
16,255
6,924
5,054
287
12,265
—
12,265
—
108
—
108
$9,847
66
11,797
3,366
665
25,741
1,095
12
113
1,220
—
1,220
26,961
—
—
—
3
3
—
3
2,298
—
2
2,300
$—
$43,652
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(11,521)
(11,521)
—
—
—
—
4,221
11,797
6,422
665
66,757
15,343
8,161
149
23,653
21,137
44,790
111,547
16,255
6,924
5,054
290
12,268
(11,521)
747
2,298
108
2
2,408
Total assets carried at fair value on a recurring basis
$19,402
$93,812
$29,264
($11,521)
$130,957
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:
Non-derivative held-for-sale purchase commitments, at fair
value
Total liabilities carried at fair value on a recurring basis
$—
—
—
—
—
—
—
—
—
$—
$144
5,771
12,387
106
147
12,640
—
12,640
$—
95
—
—
52
52
—
52
$—
—
—
—
—
—
(11,897)
(11,897)
$144
5,866
12,387
106
199
12,692
(11,897)
795
37
$18,592
—
$147
—
37
($11,897)
$6,842
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Notes to the Consolidated Financial Statements | Note 13
(In millions)
Assets:
Investments in securities:
Available-for-sale, at fair value:
Mortgage-related securities:
Freddie Mac
Other agency
Non-agency RMBS
Non-agency CMBS
Obligations of states and political subdivisions
Total available-for-sale securities, at fair value
Trading, at fair value:
Mortgage-related securities:
Freddie Mac
Other agency
All 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
Level 1
Level 2
Level 3
Netting Adjustment(1)
Total
December 31, 2015
$—
$30,919
7,333
—
8,918
—
47,170
15,182
6,427
144
21,753
—
21,753
68,923
17,660
4,911
4,821
34
9,766
—
9,766
$2,608
91
20,333
3,530
1,205
27,767
331
41
2
374
—
374
28,141
—
—
—
25
25
—
25
$—
$33,527
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(9,396)
(9,396)
7,424
20,333
12,448
1,205
74,937
15,513
6,468
146
22,127
17,151
39,278
114,215
17,660
4,911
4,821
59
9,791
(9,396)
395
—
—
—
—
—
—
—
—
—
17,151
17,151
17,151
—
—
—
—
—
—
—
—
—
1,753
—
1,753
Total assets carried at fair value on a recurring basis
$17,151
$96,349
$29,919
($9,396)
$134,023
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
$—
—
—
—
—
—
—
—
—
$—
$139
7,045
12,222
128
28
12,378
—
12,378
—
$19,562
$—
—
—
—
33
33
—
33
10
$43
$—
—
—
—
—
—
(11,157)
(11,157)
$139
7,045
12,222
128
61
12,411
(11,157)
1,254
—
10
($11,157)
$8,448
(1) Represents counterparty netting, cash collateral netting, and net derivative interest receivable or payable.
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Notes to the Consolidated Financial Statements | Note 13
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.
(In millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
2016
2015
December 31,
Assets measured at fair
value on a non-recurring
basis:
Mortgage loans(1)
$—
$199
$2,483
$2,682
$—
$1,130
$5,851
$6,981
(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.
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), 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. When assets and
liabilities are transferred between levels, we recognize the transfer as of the beginning of the period.
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317
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
Realized and unrealized gains (losses)
Year Ended December 31, 2016
Balance,
January 1,
2016
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,
2016
Unrealized
gains
(losses)
still held
Assets
Investments in
securities:
Available-for-sale,
at fair value:
Mortgage-
related
securities:
Freddie Mac
$2,608
Other agency
91
Non-agency
RMBS
Non-agency
CMBS
Obligations of
states and
political
subdivisions
Total
available-
for-sale
mortgage-
related
securities
Trading, at fair
value:
Mortgage-
related
securities:
Freddie Mac
Other agency
All other
Total
trading
mortgage-
related
securities
$10
—
877
2
1
20,333
3,530
1,205
($71)
($61)
$8,894
$—
($605)
($703)
$29
($315)
$9,847
(2)
55
(2)
932
(132)
(130)
(10)
(9)
—
—
—
—
—
—
(17)
— (6,286)
(3,182)
—
—
(34)
—
—
(531)
—
—
—
—
(6)
—
—
—
66
11,797
3,366
($9)
—
236
2
665
—
27,767
890
(160)
730
8,894
— (6,891)
(4,467)
29
(321)
25,741
229
331
41
2
(21)
—
—
—
—
—
(21)
—
—
869
—
114
—
—
—
(142)
(22)
—
(3)
(7)
(3)
190
(129)
1,095
—
—
—
—
12
113
(20)
(1)
—
374
(21)
—
(21)
983
—
(164)
(13)
190
(129)
1,220
(21)
Other assets:
Guarantee asset(3)
1,753
All other, at fair
value
Total other
assets
—
1,753
53
(2)
51
—
—
—
53
(2)
51
—
14
14
850
—
850
—
—
—
(358)
—
(358)
—
(10)
(10)
—
—
—
2,298
2
2,300
54
(2)
52
Realized and unrealized (gains) losses
Balance,
January 1,
2016
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,
2016
Unrealized
(gains)
losses
still held
Liabilities
Other debt, at fair
value
Net derivatives(4)
Other liabilities:
All other, at fair
value
$—
8
$—
68
$—
—
$—
68
$—
—
$95
2
$—
—
$—
(26)
$—
—
$—
—
$95
52
$—
40
10
—
—
—
—
—
—
—
—
(10)
—
—
Freddie Mac 2016 Form 10-K
318
Non-agency
RMBS
Non-agency
CMBS
Obligations of
states and
political
subdivisions
Total
available-
for-sale
mortgage-
related
securities
Trading, at fair
value:
Mortgage-
related
securities:
Freddie Mac
Other agency
All other
Total
trading
mortgage-
related
securities
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
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
Other agency
89
$28
—
$3
3
$31
3
31,903
1,313
(54)
1,259
3,474
(20)
109
89
2,198
2
(15)
(13)
$671
$—
($665)
$—
($1,753)
$2,608
—
—
—
—
—
—
—
—
$93
(29)
—
(8,840)
(4,003)
—
—
(33)
(981)
37
14
—
1
(9)
—
—
—
91
20,333
3,530
($3)
—
417
(20)
1,205
—
41,895
1,323
46
1,369
671
—
(9,505)
(4,953)
52
(1,762)
27,767
394
927
233
4
(42)
3
3
—
—
—
(42)
3
3
36
—
—
—
—
—
(10)
(95)
(4)
(11)
(2)
(1)
91
—
—
(660)
(98)
—
331
41
2
(41)
(12)
—
1,164
(36)
—
(36)
36
—
(109)
(14)
91
(758)
374
(53)
Other assets:
Guarantee asset(3)
1,626
All other, at fair
value
Total other
assets
5
1,631
(47)
(5)
(52)
—
—
—
(47)
(5)
(52)
—
—
—
688
—
688
—
—
—
(514)
—
(514)
—
—
—
—
—
—
1,753
—
1,753
(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
Liabilities
Net derivatives(4)
Other liabilities:
All other, at fair
value
$10
($5)
$—
($5)
$—
$—
$—
$3
$—
$—
$8
—
10
—
10
—
—
—
—
—
—
$10
$2
15
(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, 2016 consisted primarily of certain mortgage-related securities due to an increased volume
and level of activity in the market and availability of price quotes from dealers and third-party pricing services. Certain Freddie Mac securities are
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, 2016 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 2016 Form 10-K
319
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
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).
Level 3
Fair
Value
Predominant
Valuation
Technique(s)
Unobservable Inputs
Type
Range
Weighted
Average
December 31, 2016
(Dollars in millions, except for certain unobservable
inputs as shown)
Recurring fair value measurements
Assets
Investments in securities
Available-for-sale, at fair value
Mortgage-related securities
Freddie Mac
Total Freddie Mac
Other agency
Total other agency
Non-agency RMBS
Total non-agency RMBS
Non-agency CMBS
Total non-agency CMBS
Obligations of states and political subdivisions
Total obligations of states and political
subdivisions
Total available-for-sale mortgage-related
securities
Trading, at fair value
Mortgage-related securities
Freddie Mac
Total Freddie Mac
Other agency
All other
129
66
60
1,973
9,847
32
23
11
66
9,974
1,823
11,797
3,365
1
3,366
619
46
665
25,741
452
311
5
4
323
1,095
12
113
Total trading mortgage-related securities
1,220
Total investments in securities
$26,961
Other assets:
Guarantee asset, at fair value
Total guarantee asset, at fair value
All other at fair value
Total other assets
Liabilities
Other debt, at fair value
Net derivatives
$2,091
207
2,298
2
2,300
95
49
$7,619
Discounted cash flows
OAS
(146) - 500 bps
91 bps
$101.8
Median of external sources
External pricing sources
$100.8 - $103.3
Single external source
Risk Metrics
Other
Median of external sources
Single external source
Other
Median of external sources
External pricing sources
$74.0 - $78.8
$76.0
Other
Risk Metrics
Other
Effective duration
2.15 - 10.02 years
8.57 years
Median of external sources
External pricing sources
$100.9 - $101.5
$101.2
Other
Risk metrics
Effective duration
(5.07) - 46.37 years
OAS
(3,346) - 2,460 bps
Discounted cash flows
Single external source
Median of external sources
Other
Discounted cash flows
6.94 years
(224) bps
Risk metrics
Effective duration
0.14 - 4.08 years
2.52 years
Discounted cash flows
OAS
17 - 198 bps
50 bps
Other
Other
Other
Other
Freddie Mac 2016 Form 10-K
320
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
(Dollars in millions, except for certain unobservable
inputs as shown)
Recurring fair value measurements
Level 3
Fair
Value
Predominant
Valuation
Technique(s)
Unobservable Inputs
Type
Range
Weighted
Average
December 31, 2015
Assets
Investments in securities
Available-for-sale, at fair value
Mortgage-related securities
Freddie Mac
Total Freddie Mac
Other agency
Total other agency
Non-agency RMBS
Total non-agency RMBS
Non-agency CMBS
Obligations of states and political subdivisions
Total obligations of states and political
subdivisions
Total available-for-sale mortgage-related
securities
Trading, at fair value
Mortgage-related securities
Freddie Mac
Total Freddie Mac
Other agency
All other
Total all other
Total trading mortgage-related securities
Total investments in securities
Other assets:
Guarantee asset, at fair value
Total guarantee asset, at fair value
Liabilities
Net derivatives
Other liabilities:
All other, at fair value
$2,145
463
2,608
37
36
18
91
Discounted cash flows
OAS
(46) - 503 bps
86 bps
Other
Median of external sources
Single external source
Other
17,948
Median of external sources
External pricing sources
$74.1 - $78.3
$76.0
2,385
20,333
3,530
1,099
106
1,205
27,767
249
19
63
331
41
1
1
2
374
$28,141
$1,623
130
1,753
8
10
Other
Risk Metrics
Effective duration
3.15 - 11.02 years
9.57 years
Median of external sources
External pricing sources
$101.4 - $101.8
$101.6
Other
Discounted cash flows
OAS
(1,315) - 1,959 bps
129 bps
Risk Metrics
Other
Discounted cash flows
Discounted cash flows
Median of external sources
Discounted cash flows
OAS
17 - 198 bps
57 bps
Other
Other
Other
Freddie Mac 2016 Form 10-K
321
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
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). Certain of the fair values in the table below
were not obtained as of the period end, but were obtained during the period.
(Dollars in millions, except
for certain unobservable
inputs as shown)
Level 3
Fair
Value
Predominant
Valuation
Technique(s)
Type
Range
Weighted
Average
December 31, 2016
Unobservable Inputs
Non-recurring fair value
measurements
Mortgage loans
$2,483
Internal model
Historical sales
proceeds
$3,000 -
$770,000
Internal model
Income capitalization(1)
Housing sales index
42 - 374 bps
Capitalization rates
7% - 10%
Median of external sources
External pricing sources
$37.0 - $94.3
$167,137
96 bps
7%
$75.0
(Dollars in millions, except
for certain unobservable
inputs as shown)
Level 3
Fair
Value
Predominant
Valuation
Technique(s)
Type
Range
Weighted
Average
December 31, 2015
Unobservable Inputs
Non-recurring fair value
measurements
Mortgage loans
$5,851
Internal model
Historical sales
proceeds
$3,000 -
$788,699
$191,957
Internal model
Housing sales index
44 - 428 bps
90 bps
Third-party appraisal
Property value
$1 million -
$30 million
$28 million
Income capitalization(1)
Capitalization rates
6% - 9%
Median of external sources
External pricing sources
$39.0 - $94.6
7%
$70.0
(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 2016 Form 10-K
322
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below presents the carrying value and estimated fair value of our financial instruments. For
certain types of financial instruments, such as cash and cash equivalents, restricted cash and cash
equivalents, securities purchased under agreements to resell, advances to lenders and certain other debt,
the carrying value on our GAAP balance sheets approximates fair value, as 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
Non-derivative purchase
commitments, at fair value
Advances to lenders
December 31, 2016
Fair Value
GAAP Carrying
Amount
Level 1
Level 2
Level 3
Netting
Adjustments(1)
Total
$12,369
$12,369
9,851
9,851
51,548
66,757
44,790
—
—
19,402
$—
—
51,548
$—
—
—
41,016
24,168
25,741
1,220
111,547
19,402
65,184
26,961
1,690,218
112,785
1,803,003
747
2,298
108
1,278
—
—
—
—
—
—
—
1,554,143
142,121
31,004
84,227
1,585,147
226,348
12,265
—
108
—
3
2,490
18
1,278
$—
$12,369
—
—
—
—
—
—
—
—
(11,521)
—
—
—
9,851
51,548
66,757
44,790
111,547
1,696,264
115,231
1,811,495
747
2,490
126
1,278
Total financial assets
$1,992,749
$41,622
$1,714,252
$257,098
($11,521)
$2,001,451
Financial Liabilities
Debt, net:
Debt securities of
consolidated trusts held
by third parties
Other debt
Total debt, net
Derivative liabilities, net
Guarantee obligation
Non-derivative purchase
commitments, at fair value
$1,648,683
$— $1,651,313
353,321
2,002,004
795
2,208
37
—
—
—
—
—
352,837
2,004,150
12,640
—
37
$605
4,809
5,414
52
3,399
45
$— $1,651,918
—
—
357,646
2,009,564
(11,897)
—
—
795
3,399
82
Total financial liabilities
$2,005,044
$— $2,016,827
$8,910
($11,897)
$2,013,840
Freddie Mac 2016 Form 10-K
323
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
(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
December 31, 2015
Fair Value
GAAP Carrying
Amount
Level 1
Level 2
Level 3
Netting
Adjustments(1)
Total
$5,595
$5,595
14,533
14,533
63,644
74,937
39,278
—
—
17,151
$—
—
63,644
47,170
21,753
$—
—
—
27,767
374
114,215
17,151
68,923
28,141
1,625,184
129,009
1,754,193
395
1,753
910
—
—
—
—
—
—
1,477,251
162,947
31,831
97,133
1,509,082
260,080
9,766
—
910
25
1,958
—
$—
$5,595
—
—
—
—
—
—
—
—
(9,396)
—
—
14,533
63,644
74,937
39,278
114,215
1,640,198
128,964
1,769,162
395
1,958
910
Total financial assets
$1,955,238
$37,279
$1,652,325
$290,204
($9,396)
$1,970,412
Financial Liabilities
Debt, net:
Debt securities of
consolidated trusts held
by third parties
Other debt
Total debt, net
Derivative liabilities, net
Guarantee obligation
$1,556,121
$— $1,624,019
414,306
1,970,427
1,254
1,729
—
—
—
—
412,752
2,036,771
12,378
—
$805
6,586
7,391
33
3,129
$— $1,624,824
—
—
419,338
2,044,162
(11,157)
—
1,254
3,129
Total financial liabilities
$1,973,410
$— $2,049,149
$10,553
($11,157)
$2,048,545
(1) Represents counterparty netting, cash collateral netting, and net derivative interest receivable or payable.
FAIR VALUE OPTION
We elected the fair value option for certain types of investments in securities, multifamily held-for-sale
loans, certain multifamily held-for-sale loan purchase commitments, 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
Freddie Mac 2016 Form 10-K
324
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
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
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 11.
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 certain 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.
(In millions)
Fair value
Unpaid principal balance
Difference
Freddie Mac 2016 Form 10-K
December 31,
2016
2015
Multifamily
Held-For-Sale
Loans
Other Debt -
Long Term
Multifamily
Held-For-Sale
Loans
Other Debt -
Long Term
$16,255
16,231
$24
$5,866
5,584
$282
$17,660
17,673
($13)
$7,045
7,093
($48)
325
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
Changes in Fair Value under the Fair Value Option Election
We recorded gains (losses) of $250 million, ($38) million, and $0.9 billion for the years ended
December 31, 2016, 2015, and 2014, 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.
We recorded gains of $663 million for the year ended December 31, 2016 from the change in fair value of
multifamily held-for-sale loan purchase commitments recorded at fair value in other income in our
consolidated statements of comprehensive income. We elected the fair value option for these
commitments in 2016.
Gains (losses) on debt securities with the fair value option elected were $63 million, ($9) million, and $144
million for the years ended December 31, 2016, 2015, and 2014, 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, 2016, 2015, or 2014 for any assets or liabilities for which we elected the fair value option.
Freddie Mac 2016 Form 10-K
326
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
NOTE 14: 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 seeks 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 District 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. On
July 20, 2016, the Court of Appeals reversed the District Court's dismissal and remanded the case to the
District Court for further proceedings.
At present, it is not possible for us to predict the probable outcome of this lawsuit or any potential effect
on our business, financial condition, liquidity, or results of operations. In addition, we are unable to
reasonably estimate the possible loss or range of possible loss in the event of an adverse judgment in the
foregoing matter due to the following factors, among others: the inherent uncertainty of pre-trial litigation
and the fact that the District Court has not yet ruled upon motions for class certification or summary
judgment. In particular, absent the certification of a class, the identification of a class period, and the
identification of the alleged statement or statements that survive dispositive motions, we cannot
reasonably estimate any possible loss or range of possible loss.
Freddie Mac 2016 Form 10-K
327
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
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
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 filed a proof of loss under
the bonds. In March 2016, a settlement agreement among the parties was submitted to the Bankruptcy
Court for approval. On April 25, 2016, the Bankruptcy Court approved the settlement. On May 6, 2016,
Sovereign Bank, which was not a party to the settlement agreement, appealed the order approving the
settlement agreement and various other prior Bankruptcy Court orders to the U.S. District Court for the
Middle District of Florida. Sovereign's appeal and related motions are pending.
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,
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. In August 2015, the District Court dismissed the portion of our claim related to antitrust violations
and fraud and we filed a motion for reconsideration. On March 31, 2016, the District Court granted a
portion of our motion, finding personal jurisdiction over certain defendants, and denied the portion of our
motion with respect to statutes of limitation for our fraud claims. Subsequently, in a related case, the U.S.
Court of Appeals for the Second Circuit reversed the District Court’s dismissal of certain plaintiffs’ antitrust
claims and remanded the case to the District Court for consideration of whether, among other things, the
plaintiffs are “efficient enforcers” of the antitrust laws.
On December 20, 2016, after briefing and argument on the defendants' renewed motions to dismiss on
personal jurisdiction and efficient enforcer grounds, the District Court denied defendants' motions in part
and granted them in part. The District Court held that Freddie Mac is an efficient enforcer of the antitrust
laws, but dismissed on personal jurisdiction grounds Freddie Mac's antitrust claims against all defendants
except HSBC USA, N.A. Freddie Mac and other plaintiffs requested clarification of the District Court's
ruling to determine whether it intended to dismiss defendants located in the United States for lack of
personal jurisdiction, which request the District Court denied on February 2, 2017. Freddie Mac also filed
a motion for reconsideration of the District Court's opinion dismissing Freddie Mac's (and other plaintiffs')
antitrust claims on personal jurisdiction grounds.
Freddie Mac 2016 Form 10-K
328
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
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.
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.
Freddie Mac 2016 Form 10-K
329
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
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. Defendants have opposed the appeals.
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
Mae to Treasury under the net worth sweep dividend), compensatory damages, attorneys’ fees, costs and
expenses. The case was stayed pending resolution of FHFA's motion to the U.S. Judicial Panel on
Multidistrict Litigation to transfer this case to the U.S. District Court for the District of Columbia. This
motion was denied on June 2, 2016, and the stay was lifted on July 13, 2016. Plaintiffs filed an application
for certification of a question to the Delaware and Virginia Supreme Courts, which was denied on
September 12, 2016. On September 7, 2016, plaintiffs filed a motion to amend the complaint, which
Treasury opposed in part.
Freddie Mac 2016 Form 10-K
330
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
Litigation in the U.S. District Court for the Eastern District of Virginia
Pagliara vs. Federal Home Loan Mortgage Corporation. This case was filed on March 14, 2016 in the
Circuit Court of Fairfax County, Virginia, and subsequently removed to the U.S. District Court for the
Eastern District of Virginia. The plaintiff seeks an order to permit inspection and copying of corporate
records under Virginia law, primarily for the purpose of investigating potential claims arising from the net
worth sweep. The case was stayed pending resolution of FHFA's request to the U.S. Judicial Panel on
Multidistrict Litigation to transfer this case to the U.S. District Court for the District of Columbia, which was
denied on June 2, 2016. On June 17, 2016, Freddie Mac and FHFA filed a motion to dismiss or, in the
alternative, substitute FHFA as plaintiff in the case. On August 23, 2016, the U.S. District Court for the
Eastern District of Virginia dismissed the case. The plaintiff filed a notice of appeal on September 21,
2016, which was dismissed at plaintiff's request on January 30, 2017.
At present, it is not possible for us to predict the probable outcome of the lawsuits discussed above in the
U.S. District Courts 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.
Freddie Mac 2016 Form 10-K
331
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
NOTE 15: 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, 2016
December 31, 2015
$5,075
($67,717)
18,933
($86,650)
$2,940
($70,549)
19,687
($90,236)
(1) Core capital and minimum capital figures are estimates and represent amounts submitted to FHFA. FHFA is the authoritative
source for our regulatory capital.
Freddie Mac 2016 Form 10-K
332
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
(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, 2016, our assets exceeded our liabilities under GAAP; therefore, no draw is being
requested from Treasury under the Purchase Agreement. As of December 31, 2016, 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 2016 Form 10-K
333
Financial Statements
Notes to the Consolidated Financial Statements | Note 16
NOTE 16: 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
All other
Total other income (loss)
Other expense:
Property tax and insurance expense on held-for-sale loans
All other
Total other expense
Year Ended December 31,
2016
2015
2014
$—
(463)
1,717
$1,254
($90)
(509)
($599)
$65
(2,094)
1,150
($879)
($1,094)
(412)
($1,506)
$6,084
731
1,229
$8,044
($62)
(176)
($238)
(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.
The table below presents the significant components of other assets and other liabilities on our
consolidated balance sheets.
(In millions)
Other assets:
Real estate owned, net
Accounts and other receivables(1)
Guarantee asset
Advances to lenders
All other
Total other assets
Other liabilities:
Servicer liabilities
Guarantee obligation
Accounts payable and accrued expenses
Payables related to securities
All other
Total other liabilities
December 31, 2016
December 31, 2015
$1,198
5,083
2,298
1,278
2,501
$12,358
$730
2,208
957
4,510
1,082
$9,487
$1,725
3,625
1,753
910
1,025
$9,038
$1,191
1,729
1,286
72
968
$5,246
(1) Primarily consists of servicer receivables and other non-interest receivables.
END OF CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES
Freddie Mac 2016 Form 10-K
334
Quarterly Selected Financial Data
QUARTERLY SELECTED FINANCIAL DATA
(UNAUDITED)
(In millions, except share-related amounts)
1Q
2Q
2016
3Q
4Q
Full-Year
Net interest income
Benefit (provision) for credit losses
Non-interest income (loss):
Derivative gains (losses)
Net impairments of available-for-sale
securities recognized in earnings
Other non-interest income (loss)
Non-interest income (loss)
Non-interest expense:
Administrative 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)
$3,405
467
$3,443
775
$3,646
(113)
(4,561)
(2,058)
(57)
1,195
(3,423)
(448)
(84)
(272)
(153)
(957)
154
($354)
$154
($200)
($354)
($0.11)
(72)
306
(1,824)
(475)
(29)
(280)
(151)
(935)
(466)
$993
$140
$1,133
$60
$0.02
(36)
(9)
822
777
(498)
(56)
(293)
(138)
(985)
(996)
$2,329
($19)
$2,310
$19
$0.01
$3,885
(326)
6,381
(53)
(1,358)
4,970
(584)
(118)
(307)
(157)
(1,166)
(2,516)
$4,847
($972)
$3,875
$372
$0.11
$14,379
803
(274)
(191)
965
500
(2,005)
(287)
(1,152)
(599)
(4,043)
(3,824)
$7,815
($697)
$7,118
$97
$0.03
Freddie Mac 2016 Form 10-K
335
Quarterly Selected Financial Data
(In millions, except share-related amounts)
1Q
2Q
Net interest income
Benefit (provision) for credit losses
Non-interest income (loss):
Derivative gains (losses)
Net impairments of available-for-sale
securities recognized in earnings
Other non-interest income (loss)
Non-interest income (loss)
Non-interest expense:
Administrative expenses
REO operations income (expense)
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)
$3,647
499
(2,403)
(93)
349
(2,147)
(451)
(75)
(222)
(463)
(1,211)
(264)
$524
$222
$746
($222)
($0.07)
$3,969
857
3,135
(98)
(496)
2,541
(501)
(52)
(235)
(501)
(1,289)
(1,909)
$4,169
($256)
$3,913
$256
$0.08
2015
3Q
$3,743
528
4Q
Full-Year
$3,587
781
$14,946
2,665
(4,172)
(54)
385
(3,841)
(465)
(116)
(248)
(270)
(1,099)
194
($475)
($26)
($501)
($475)
($0.15)
744
(47)
(849)
(152)
(510)
(95)
(262)
(272)
(1,139)
(919)
$2,158
($517)
$1,641
$418
$0.13
(2,696)
(292)
(611)
(3,599)
(1,927)
(338)
(967)
(1,506)
(4,738)
(2,898)
$6,376
($577)
$5,799
($23)
($0.01)
(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 2016 Form 10-K
336
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, 2016. 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 2016 Form 10-K
337
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, 2016 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, 2016 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, 2016. 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, 2016, 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 2016 Form 10-K
338
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, 2016 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, 2016 have been prepared in conformity with GAAP.
Freddie Mac 2016 Form 10-K
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Controls and Procedures
CHANGES IN INTERNAL CONTROL OVER
FINANCIAL REPORTING DURING THE QUARTER
ENDED DECEMBER 31, 2016
We evaluated the changes in our internal control over financial reporting that occurred during the quarter
ended December 31, 2016 and concluded that there were no changes that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Freddie Mac 2016 Form 10-K
340
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 CEO 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 stockholders 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 2017. Instead, the Conservator
has elected directors by written consent in lieu of an annual meeting. Annually, the Board identifies
director nominees 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 13, 2017, 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
Lance 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 2016 Form 10-K
341
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 rule regarding the Responsibilities of
Boards of Directors, Corporate Practices and Corporate Governance Matters (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 each of 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 the
“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, expertise,
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 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 16, 2017:
Freddie Mac 2016 Form 10-K
342
Directors, Corporate Governance, and Executive Officers
Directors
Raphael W. Bostic
Age: 50
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: 68
Director Since: December 2008
Freddie Mac Committees:
Audit, Chair
Public Directorships:
Popeyes Louisiana
Compensation
Executive
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 Chair of the Audit Committee and former member of the Risk 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 2016 Form 10-K
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Directors, Corporate Governance, and Executive Officers
Directors
Lance F. Drummond
Age: 62
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: 57
Director Since: October 2014
Freddie Mac Committees:
Audit
Public Directorships:
Kemper Corporation
Nominating & Governance
Mr. Goldstein is an executive with extensive financial services, insurance, mortgage banking, and risk
management experience.
Experience and Qualifications
• Founder of Jamlerpartners LLC (2014-present)
• 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, Audit, Compensation and Investment Committees of Kemper Corporation
(2016-present)
• Member of the Board of Trustees, Chair of the Audit Committee, and member of the Performance and
Compliance Committees of Columbia Acorn Trust and Wanger Advisors Trust (2014-present)
• Member of the Board of the FHLB of Chicago (2009-2014)
• Member of the Board of various Allstate subsidiaries (2011-2014)
Freddie Mac 2016 Form 10-K
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Directors, Corporate Governance, and Executive Officers
Directors
Richard C. Hartnack
Age: 71
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 the Management Development and Compensation
Committee, and Former Chair of the 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: 69
Director Since: February 2013
Freddie Mac Committees:
Compensation
Public Directorships:
AMETEK, Inc.
Risk
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)
Freddie Mac 2016 Form 10-K
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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. (2007-2016)
• 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: 66
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 JPMorgan 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 2016 Form 10-K
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Directors, Corporate Governance, and Executive Officers
Directors
Christopher S. Lynch
Age: 59
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, Nominating and Corporate Governance, and Technology
Committees 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: 61
Director Since: December 2013
Freddie Mac Committees:
Audit
Public Directorships:
Campbell Soup Company
Nominating & Governance
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 and Chief
Executive Officer (2010-2013); President and Chief Operating Officer (2007-2010); and Senior Vice
President and CFO (2002-2006)
• Various finance and management positions with The Procter & Gamble Company, including Vice
President of Finance for Australia, Asia, and India (1983-2001)
Freddie Mac 2016 Form 10-K
347
Directors, Corporate Governance, and Executive Officers
Directors
• Member of the Board and Finance and Corporate Development Committee and Chair of the Audit
Committee of Campbell Soup Company (2005-present)
• Member of the Board and Audit, Compliance and Risk, and Remuneration Committees of Shire plc
(2015-present)
• Member of the Board and Finance and Nominating and Corporate Governance Committees of Avon
Products, Inc. (2014-2016)
• 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: 67
Director Since: August 2013
Freddie Mac Committees:
Compensation
Public Directorships:
None
Executive
Risk, Chair
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: 70
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)
Freddie Mac 2016 Form 10-K
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Directors, Corporate Governance, and Executive Officers
Directors
• Member of the Board of the Center for Responsible Lending (2006-present)
• 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: 69
Director Since: December 2008
Freddie Mac Committees:
Audit
Compensation
Public Directorships:
Chubb (formerly ACE
Limited)
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
• 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 Chubb (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)
Freddie Mac 2016 Form 10-K
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Directors, Corporate Governance, and Executive Officers
Directors
Anthony A. Williams
Age: 65
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)
• Senior Advisor at King & Spalding (2016-present)
• Senior Advisor at Dentons (2015-2016)
• 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)
Freddie Mac 2016 Form 10-K
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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 regularly 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. The 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 2016. The 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 regularly 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 elected annually.
Each of the Audit, Compensation, Nominating and Governance, and Risk Committees consists
entirely of independent directors.
Each committee 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 of the Audit, Compensation, Nominating and Governance, and Risk
Committees 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 planning at least annually.
DIRECTOR INDEPENDENCE AND RELEVANT
CONSIDERATIONS
Our non-employee Board members evaluated the independence, as defined in Sections 4 and 5 of the
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 in 2016. Our non-employee Board
Freddie Mac 2016 Form 10-K
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Directors, Corporate Governance, and Executive Officers
Corporate Governance
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.
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 the 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 the 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:
• Employment Affiliations with Business Partners - During 2016 and currently, Mr. Williams has
served as an employee of a firm that engages or has engaged in business with us resulting in
payments between us and the firm. 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 firm’s consolidated gross revenues for each of the last three fiscal years. After considering the
nature and extent of the specific relationship between the firm and us, our non-employee Board
members concluded that the business relationship does not constitute a material relationship
between Mr. Williams and us that would impair his independence as our director.
• Board Memberships with Business Partners - During 2016 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
2016 and currently, Mr. Bostic has served as a board member of a charitable organization 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 2016
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 the 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
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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 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,
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.
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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 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 — Purchase Agreement, Warrant
and Senior Preferred Stock” and Note 2);
• 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 involving:
100,000 or more loans to a non-bank transferee; or
25,000 or more loans to any transferee if the transfer would increase the number of the
transferee's Freddie Mac- and Fannie Mae-owned seriously delinquent loans by at least 25
percent and the servicing transfer has a minimum of 500 seriously delinquent loans;
• 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;
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• Any establishment or modification by us of performance management processes for such officers,
including the establishment or modification of a Conservatorship 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
February 16, 2017 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: (i) appoints the independent auditor and evaluates its independence and performance; (ii)
reviews the audit plans for and results of the independent audit and internal audits; and (iii) reviews
reports related to processes established by management to provide compliance with legal and regulatory
requirements. The Audit Committee’s activities during 2016 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 Audit Committee also approves all decisions regarding the appointment,
removal, and compensation of the General Auditor and the appointment or removal of the CCO. The
General Auditor and the CCO report independently to the Audit 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
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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, and Ms. Mathew, a member of the Audit Committee since
December 2013 and its chair effective March 1, 2017, meet the definition of an “audit committee financial
expert” under SEC regulations.
In 2016, the Audit Committee met separately nine times and jointly with the Risk Committee four times.
Executive Committee
Chair:
Christopher S. Lynch
Members:
Carolyn H. Byrd
Richard C. Hartnack
Donald H. Layton
Saiyid T. Naqvi
Nicolas P. Retsinas
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 2016.
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 2016 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 eight times in 2016.
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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. It
also assists the Board and its committees in conducting annual self-evaluations and identifying qualified
individuals to become members of the Board. The Nominating and Governance Committee also reviews
Board member independence and qualifications and recommends membership of the Board committees.
The Nominating and Governance Committee met six times in 2016.
Risk Committee
Chair:
Saiyid T. Naqvi
Members:
Raphael W. Bostic
Richard C. Hartnack
Steven W. Kohlhagen
Anthony A. Williams
The Risk Committee, which consists entirely of independent directors, oversees on an enterprise-wide
basis the company’s risk management framework, including credit risk, market risk, liquidity risk,
operational risk, and enterprise-wide strategic risk. The Risk Committee reviews and approves the
company’s Enterprise Risk Policy and Board-level risk limits and metrics, and reviews significant: (i)
enterprise risk exposures; (ii) risk management strategies; (iii) results of risk management reviews and
assessments; and (iv) emerging risks, among other responsibilities. The Risk Committee also approves
all decisions regarding the appointment or removal of the CERO, and the CERO reports independently to
the Risk Committee, in addition to the CEO.
In 2016, the Risk Committee met separately five times, and jointly with the Audit Committee four 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.”
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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, 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
Non-employee Board members receive compensation in the form of cash retainers only, paid on a
quarterly basis. Non-employee directors are also 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.
2016 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
$290,000
160,000
$25,000
15,000
10,000
10,000
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2016 DIRECTOR COMPENSATION
The following table summarizes the 2016 compensation earned by all persons who served as non-
employee directors during 2016.
Name
C. Lynch
R. Bostic
C. Byrd
L. Drummond
T. Goldstein
R. Hartnack(2)
S. Kohlhagen(2)
S. Mathew
S. Naqvi(2)
N. Retsinas(2)
E. Shanks, Jr.(2)
A. Williams(2)
Fees Earned or
Paid in Cash(1)
Total
$290,000
$290,000
160,000
185,000
170,000
170,000
170,000
166,593
170,000
168,407
177,418
171,291
161,291
160,000
185,000
170,000
170,000
170,000
166,593
170,000
168,407
177,418
171,291
161,291
(1) 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.
(2)
In addition to the annual Board service and appropriate Committee Chair retainers, the amount represents partial annual
compensation for service as a member of the Audit Committee or as a Committee Chair during 2016. In February 2016, Mr.
Hartnack left, and Mr. Retsinas joined, the Audit Committee, the Chair of the Nominating and Governance Committee
transitioned from Mr. Shanks to Mr. Hartnack, and the Chair of the Compensation Committee transitioned from Mr. Williams to
Mr. Retsinas. In June 2016, the Chair of the Risk Committee transitioned from Mr. Kohlhagen to Mr. Naqvi.
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.”
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Executive Officers
EXECUTIVE OFFICERS
As of February 16, 2017, our executive officers are as follows:
Donald H. Layton
Age: 66
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: 49
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: 51
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 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
securitization, pricing, costing, portfolio management, 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 loan and securitization
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: 53
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,
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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: 61
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: 59
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 CSS. 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: 53
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.
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Executive Officers
William H. McDavid
Age: 70
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: 58
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 and Public Policy; Public Relations and Corporate Marketing; Internal
Communications; Conservatorship and Corporate Strategic Initiatives; Enterprise Program 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 CSS. He also served as our CCO from August 2010 until June
2011. Prior to August 2010, Mr. Weiss served as our SVP and CCO 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 director 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.
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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, 2016.
Donald H. Layton
James G. Mackey
Anil D. Hinduja
David B. Lowman
Named Executive Officers
Chief Executive Officer
Executive Vice President - Chief Financial Officer
Executive Vice President - Chief Enterprise Risk Officer
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 2016 toward
accomplishing those objectives, see “Introduction — About Freddie Mac.”
OVERVIEW OF EXECUTIVE MANAGEMENT COMPENSATION
PROGRAM
Compensation in 2016 for each NEO, other than Mr. Layton, whose compensation is discussed below,
was governed by the Executive Management Compensation Program, or EMCP. The 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 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.
Additional information about the 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.
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363
Executive Compensation
Compensation Discussion and Analysis
ELEMENTS OF TARGET TOTAL DIRECT COMPENSATION
Compensation under the EMCP in 2016 consisted 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 2016 corporate performance was measured, together with the assessment
of actual performance against those objectives, are described in “Determination of 2016 At-Risk Deferred
Salary — At-Risk Deferred Salary Based on Conservatorship Scorecard Performance” and
“Determination of 2016 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 2016 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
What We Don't Do
No agreements that guarantee a specific
amount of compensation for a specified term of
employment
Use of an independent compensation consultant
by the Board’s Compensation Committee
No golden parachute payments or other similar
change in control provisions
Annual compensation risk review
No tax “gross-ups”
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 eligibility)
Evaluation of company performance against
multiple measures, including non-financial
measures
No hedging or pledging of company securities
permitted
Freddie Mac 2016 Form 10-K
364
Executive Compensation
Compensation Discussion and Analysis
CEO COMPENSATION
Mr. Layton’s compensation in 2016 consisted solely of an annual Base Salary of $600,000, a level
established by FHFA pursuant to the Equity in Government Compensation Act of 2015. In 2016, he did
not, and currently does not, participate in the EMCP and therefore has no compensation subject to either
corporate or individual performance. Mr. Layton's compensation in 2017 is unchanged from 2016.
Mr. Layton is eligible to participate in all employee benefit plans offered to Freddie Mac’s other senior
executives under the terms of those plans.
DETERMINATION OF 2016 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 throughout 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 2016, 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.
2016 COMPARATOR GROUP COMPANIES
The Compensation Committee annually evaluates each eligible 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.
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 2016 consisted of the following companies,
which include no changes from the 2015 Comparator Group:
Citigroup*
Fannie Mae
Fifth Third Bancorp
The Hartford
Allstate
Ally Financial
AIG
Bank of America*
Bank of New York Mellon JPMorgan Chase*
BB&T
Capital One
*
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.
Freddie Mac 2016 Form 10-K
365
Executive Compensation
Compensation Discussion and Analysis
The Compensation Committee has determined that these same companies will comprise the 2017
Comparator Group.
ESTABLISHING TARGET TDC
The Compensation Committee developed its 2016 Target TDC recommendations for the eligible NEOs by
reviewing data from the Comparator Group. The Compensation Committee’s 2016 Target TDC
recommendation for each of the eligible NEOs was reviewed and approved by FHFA.
2016 TARGET TDC
The following table sets forth the components of 2016 Target TDC for each of our eligible NEOs.
Named Executive Officer(1)
James G. Mackey
Anil D. Hinduja
David B. Lowman
William H. McDavid
Base
Salary
500,000
500,000
500,000
500,000
2016 Target TDC
Fixed
Deferred
Salary
At-Risk
Deferred
Salary
1,600,000
1,075,000
1,600,000
1,320,000
900,000
675,000
900,000
780,000
Target TDC
3,000,000
2,250,000
3,000,000
2,600,000
(1) Mr. Layton did not participate in the EMCP in 2016 and therefore is not included in this table. For a discussion of Mr. Layton’s
compensation, see “CEO Compensation” above.
The 2016 Target TDC amounts shown above for eligible NEOs were the same as in 2015.
2017 TARGET TDC
The following table sets forth the components of 2017 Target TDC for each of our eligible NEOs.
Named Executive Officer(1)
James G. Mackey
Anil D. Hinduja
David B. Lowman
William H. McDavid
Base
Salary
500,000
500,000
500,000
500,000
2017 Target TDC
Fixed
Deferred
Salary
At-Risk
Deferred
Salary
1,775,000
1,180,000
1,775,000
1,460,000
975,000
720,000
975,000
840,000
Target TDC
3,250,000
2,400,000
3,250,000
2,800,000
(1) Mr. Layton will not participate in the EMCP in 2017 and therefore is not included in this table. For a discussion of Mr. Layton’s
compensation, see “CEO Compensation” above.
The Compensation Committee developed its 2017 Target TDC recommendations for the eligible NEOs by
reviewing data from the Comparator Group, their current compensation positioning relative to the
competitive market data, and their individual performance. The Compensation Committee recommended
increases to 2017 Target TDCs for each of the NEOs after taking into account their individual
performance and to move their compensation closer to the 50th percentile of the Comparator Group. The
Compensation Committee's 2017 Target TDC recommendation for each of the eligible NEOs was
reviewed and approved by FHFA.
DETERMINATION OF 2016 AT-RISK DEFERRED SALARY
Freddie Mac 2016 Form 10-K
366
Executive Compensation
Compensation Discussion and Analysis
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 2016.
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 eligible 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 2016 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 2016
Conservatorship Scorecard. FHFA independently assessed the company’s performance and determined
that a 98% funding level was justified for the portion of the eligible NEOs’ At-Risk Deferred Salary based
on the 2016 Conservatorship Scorecard. FHFA noted the following considerations in assessing our
performance against the 2016 Conservatorship Scorecard:
• Our contribution to maintaining the national housing finance markets through rolling out a program
which provides lenders an alternative for resolving loan-level disputes on repurchase demands for
selling and servicing breaches as well as our diligence and collaboration on the Neighborhood
Stabilization Initiative;
• Our continuing efforts to reduce taxpayer risk by pursuing new and innovative approaches to single-
family and multifamily risk transfer transactions and advancing the Risk Management framework; and
• Our collaboration with CSS to complete Release 1 of the common securitization platform.
In making its assessment, FHFA also took into consideration the following:
• The extent to which the company conducts initiatives in a safe and sound manner consistent with
FHFA’s expectations for all activities;
• The extent to which the outcomes of the company’s activities support a competitive and resilient
secondary mortgage market to support homeowners and renters;
• The extent to which the company conducts initiatives with the consideration for diversity and inclusion
consistent with FHFA’s expectations for all activities;
• Cooperation and collaboration with FHFA, Fannie Mae, CSS, the industry, and other stakeholders;
and
• The quality, thoroughness, creativity, effectiveness, and timeliness of the company’s work products.
The table below presents the Conservatorship Scorecard objectives and FHFA’s assessment of our
achievement against those objectives.
Freddie Mac 2016 Form 10-K
367
Executive Compensation
Compensation Discussion and Analysis
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%)
All goals were achieved with important progress made
with the rollout of the Independent Resolution program
which provides lenders an alternative for resolving
loan-level disputes on repurchase demands for selling
and servicing breaches. Significant progress has also
been made with updating the mortgage insurer master
policy rescission relief principles which is expected to
be completed in 2017.
Work to increase access to single-family mortgage credit for
creditworthy borrowers, consistent with the full extent of
applicable credit requirements and risk management practices:
• Continue to assess impediments to credit access and develop
recommendations to address barriers, including work to:
• Continue to evaluate practices, including underwriting criteria, to
improve access to single-family credit in a manner consistent with
safety and soundness and implement improvements as
appropriate.
• Consider options to use automated underwriting systems for
loans that are currently manually underwritten.
• Evaluate options that would enable greater liquidity for Freddie
Mac financing of energy or water efficiency investments in single-
family and multifamily properties.
• Complete work to enhance the Representation and Warranty
Framework and continue work on related efforts to:
• Complete the independent dispute resolution process in support
of the Representation and Warranty Framework.
• Work with lenders to improve the quality and efficiency of the loan
origination process, including providing lenders with feedback
soon after delivery.
• Continue to assess policies and tools to review collateral
valuations in the Representation and Warranty Framework
context.
• Update mortgage insurer master policy rescission relief principles to
address early rescission relief offerings.
• Assess improvements identified in 2015 to increase the
effectiveness of pre-purchase and early delinquency counseling as
well as homeownership education and begin implementation of
initiatives as appropriate.
•
Informed by the analysis conducted in 2015, conclude assessment
of leveraging alternate or updated credit scores for underwriting,
pricing, and investor disclosures and, as appropriate, plan for
implementation.
Develop Post-Crisis Loss Mitigation Activities and Prepare for the
Expiration of HAMP and HARP:
All goals were achieved.
• Complete assessment and, as appropriate, begin development of a
high loan-to-value ratio refinance program to ensure a January 2017
implementation.
• Develop and implement final strategy to promote HARP prior to
expiration.
• Finalize post-crisis loss mitigation options for borrowers, including
loan modifications, and develop an implementation plan and
timeline.
• Enhance the Uniform Borrower Assistance Form.
• Update and enhance Freddie Mac’s servicer scorecard methodology.
Continue to Responsibly Reduce the Number of Severely-Aged
Delinquent Loans and Real Estate Owned Properties:
• Provide a plan for continuing non-performing loan (NPL) sales to
FHFA for approval. The plan should address: 1) Freddie Mac’s broad
NPL sales strategy; 2) potential expansion to multi-servicer pools; 3)
efforts to continue offering small pools and strengthening nonprofit
access and purchase opportunities; 4) consideration for improving
borrower outcomes and, where appropriate, impacts on
neighborhood stabilization; and 5) public reporting of loan
performance post sale.
• Continue to responsibly reduce the number of severely-aged
delinquent loans held by Freddie Mac at the national and local level.
• Continue to responsibly reduce the number of real estate owned
properties held by Freddie Mac, including through the Neighborhood
Stabilization Initiative.
All goals were achieved with the company
demonstrating diligence and collaboration in the
Neighborhood Stabilization initiative program resulting
in responsible disposition of Real Estate Owned
properties in hardest-hit communities.
Freddie Mac 2016 Form 10-K
368
Executive Compensation
Compensation Discussion and Analysis
Maintain the dollar volume of new multifamily business at $36.5
billion or below:
• Loans in affordable and underserved market segments, as defined
by FHFA, are to be excluded from the $36.5 billion cap.
Goal was achieved.
2 Reduce taxpayer risk through increasing the role of private capital in the mortgage market (30%)
All goals were achieved through the company's
innovative approaches to transfer risk on single-family
mortgages.
Single-Family Credit Risk Transfers
Because Freddie Mac’s single-family credit risk transfers have evolved
into a core business practice, it is FHFA’s current expectation that
single-family credit risk transfers will continue to be an ongoing
conservatorship requirement. FHFA will adjust targets as necessary to
reflect market conditions and economic considerations.
• Meet the following credit risk transfer objectives:
• Transfer credit risk on at least 90 percent of the unpaid principal
balance of newly acquired single-family mortgages in loan
categories targeted for risk transfer.
• For 2016, target single-family loan categories include: non-
HARP, fixed-rate terms greater than 20 years, and loan-to-
value ratios above 60%.
• Transfer a substantial portion of the credit risk on the targeted
loan categories covering most of the credit losses projected to
occur during stressful economic scenarios.
• Continue efforts to evaluate, and implement if economically
feasible, ways to transfer credit risk on other types of newly
acquired single-family mortgages that are not included in the
targeted loan categories.
• Continue to evaluate obstacles to expanding the investor base,
propose ways to overcome these challenges, and work with
FHFA to address them where possible.
• Work with FHFA to conduct an analysis and assessment of front-end
credit risk transfer transactions, including work to support a
forthcoming FHFA Request for Input.
• Work with FHFA to engage key stakeholders and solicit their
feedback.
• After conducting the necessary analysis and assessment, work
with FHFA to take appropriate steps to continue front-end credit
risk transfer transactions.
Multifamily Credit Risk Transfers
• Continue current multifamily credit risk transfer initiatives and
explore additional risk transfer opportunities.
Goal was achieved through expediting new multi-
family transactions to transfer credit risk to third-party
investors for loans not efficient for K-Deal execution.
Retained Portfolio
Goal was achieved.
• Execute FHFA-approved retained portfolio plans to meet, even
under adverse conditions, the annual PSPA requirements and the
$250 billion PSPA cap by December 31, 2018:
• Any sales should be commercially reasonable transactions that
consider impacts to the market, borrowers, and neighborhood
stability.
Risk Measurement Framework
Goal was achieved with demonstrated leadership.
• Support FHFA’s development of its risk measurement framework for
evaluating Freddie Mac business decisions during conservatorship.
3 Build a new single-family infrastructure for use by the Enterprises and adaptable for use by other
participants in the secondary market in the future (30%)
Freddie Mac 2016 Form 10-K
369
Executive Compensation
Compensation Discussion and Analysis
Common Securitization Platform and Single Security
The Common Securitization Platform (CSP) and Single Security are
significant, multiyear initiatives, and FHFA expects these inter-related
projects to remain ongoing conservatorship priorities. FHFA expects the
Enterprises and Common Securitization Solutions, LLC (CSS) to
implement these initiatives on the following timeline:
i. Release 1: In 2016, implement the CSP for Freddie Mac’s existing
single-class securities; and
ii. Release 2: In 2018, implement the Single Security on the CSP for
both Fannie Mae and Freddie Mac.
• Continue working with FHFA, Fannie Mae, and CSS to meet the
Release 1 and Release 2 timelines, which includes work to: 1) build
and test the CSP; 2) implement the changes necessary to integrate
the Enterprises’ related systems and operations with the CSP; and
3) implement the Single Security on the CSP for both Enterprises.
•
Incorporate the following design principles in developing the CSP:
• Focus on the functions necessary for current Enterprise single-
family securitization activities.
•
Include the development of operational and system capabilities
necessary for CSP to facilitate the issuance and administration of
a Single Security for the Enterprises.
• Allow for the integration of additional market participants in the
future.
•
In 2016, publish an aligned timeline for implementing the Single
Security on the CSP for both Enterprises in 2018. The timeline must
provide stakeholders with at least 12 months notice prior to
implementing the Single Security.
• Work with FHFA to develop and implement a process at each
Enterprise to:
• Assess new or revised Enterprise programs, policies, and
practices for their effects on the cash flows of TBA mortgage-
backed securities (e.g., prepayments and loan buy-outs).
• Provide on-going monitoring of purchases, security issuances,
and prepayments.
• Provide all relevant information on a timely basis to support
FHFA’s review process.
• Continue to work with CSS to obtain and utilize input from the Single
Security/CSP Industry Advisory Group.
Provide active support for mortgage data standardization
initiatives.
• Continue the development and implementation of the Uniform
Closing Disclosure Dataset.
• Continue the development and implementation of the Uniform Loan
Application Dataset.
• Assess and, as appropriate, implement strategies to improve the
lending industry’s ability to originate and deliver e-mortgages to the
Enterprises.
All goals were achieved, except for the publication of
timeline for the Single Security implementation.
Although the publication of the timeline was not met,
significant work was done and many objectives were
achieved.
All goals were achieved.
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 five 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
eligible NEOs were either Conservatorship Scorecard objectives or Corporate Scorecard goals, or directly
supported their achievement.
Freddie Mac 2016 Form 10-K
370
Executive Compensation
Compensation Discussion and Analysis
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.
The Board has adopted Corporate Scorecard goals for 2017 that are substantially similar to the 2016
goals.
The table below presents the Corporate Scorecard goals and the Compensation Committee’s
assessment of our achievement against those goals.
Corporate Scorecard Goal
Assessment of Performance
Our Customers
Compete for business by being a customer-
centric organization
People and Culture
Hire and retain talented people in a winning
culture
Operating Performance
Operate as well as the best-run financial
institutions
The company achieved or exceeded almost all elements of this goal.
Significant improvements were made in the quality of customer service with
a strong increase in customer satisfaction survey scores for the multifamily
business. In addition, the single-family customer satisfaction survey results
remained in line with top performing financial institutions.
Most elements of this goal were achieved or exceeded. Focused efforts to
build the company's desired culture have yielded positive results, including
improved scores on the company's People Survey. The company also
increased the retention of high-performing employees and continued to
improve leadership diversity. Although the company improved its practice of
filling management roles with internal candidates, it did not do so to the full
extent desired.
All elements of this goal were achieved or exceeded. Single-family core new
book earnings and multifamily comprehensive income were above plan, and
the company had lower core G&A expenses. Multifamily new business
volume was also above plan, and the company achieved its single-family
GSE market share target.
Risk and Capital Management
Manage risk and capital as well as the largest
financial institutions
All elements of this goal were achieved or exceeded. The company continued
to mitigate the its risk through the transfer of credit risk on single-family new
business, developed additional types of multifamily risk transfer transactions,
and pro-actively and efficiently reduced legacy assets.
Community Mission
Responsibly increase access to housing finance
Based on preliminary information, the company believes it met three of the
single-family affordable housing goals, but believes that it fell short of meeting
the FHFA benchmark level for the other two single-family goals. The company
believes it achieved all three multifamily affordable housing goals and
exceeded the target for new multifamily affordable lending. The company
continued to close the gap on its single-family affordable housing goals,
which were missed by the smallest margin in the past three years. The
single-family business continued to broaden access to credit with outreach
and training and with the Home Possible Advantage and Housing Finance
Agency Advantage mortgage products. The multifamily business continued its
focus on workforce and affordable housing by rolling out the company's
Green Advantage suite of offerings and investing in the Targeted Affordable
business and the moderate rehabilitation lending program.
The Compensation Committee also assessed the individual performance of each eligible NEO. In making
its assessments, the Committee took into consideration input from Mr. Layton as well as the company’s
Corporate Scorecard performance. In each case, the Compensation Committee’s determination was
consistent with Mr. Layton’s recommendation. FHFA reviewed and approved the compensation
associated with these determinations.
Each NEO’s individual performance is discussed below.
Freddie Mac 2016 Form 10-K
371
Executive Compensation
Compensation Discussion and Analysis
James G. Mackey
Executive Vice President — Chief Financial Officer
Performance Highlights:
Near-complete development and implementation of hedge accounting with full safety and soundness.
Improved budgeting process, with more timely budget development, greater transparency, and improved internal cost
allocation capabilities.
Further financial planning and analysis improvement, including training, tools, and productivity metrics.
Continued operation efficiency improvements, which included streamlining records management, SEC reporting and
disclosures, redefined segment earnings and press release design, and Dodd-Frank Stress Testing (“DFAST”) process
submissions.
Continued strengthening of legacy controls, including the successful remediation of the Master Trust Agreement cash process.
Strong leadership in the development of management in the Finance Division, including ongoing job rotation programs 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.
Anil D. Hinduja
Executive Vice President — Chief Enterprise Risk Officer
Performance Highlights:
Significantly upgraded the company’s Enterprise Risk Framework, Policies, and Standards, addressing accountabilities, risk
types, and governance.
Successfully aided development of the FHFA Conservator Capital Framework and prepared for 2017 implementation.
Defined the strategy and roadmap for a major strengthening of operational risk management in the company, including
personal leadership across the entire enterprise.
Developed risk appetite methodology for Credit, Market and Liquidity Risks.
Increased the capabilities of the Enterprise Risk Management Division by hiring experienced officers in several key areas.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision:
The Compensation Committee determined that Mr. Hinduja 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.
David B. Lowman
Executive Vice President — Single-Family Business
Performance Highlights:
Achieved higher Single-Family earnings (excluding the legacy portfolio) in 2016 over the prior year.
Led the successful launch of the Loan Advisor Suite.
Expanded credit risk transfer offerings, including STACR Collateral, ACIS Stand Alone and Deep MI.
Improved the performance of meeting all of the company’s single-family affordable housing goals.
Continued ongoing improvement in customer service; 2016 results were consistent with customer satisfaction at the best
financial institutions.
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 & Corporate Secretary
Performance Highlights:
Supervised the successful resolution of a variety of lawsuits resulting in favorable settlements and helped effectively navigate
a number of new regulatory initiatives.
Provided sound legal advice to the Board and senior management on a wide variety of significant issues.
Successfully supported the increased volume and complexity of Single-Family transactions and securitizations.
Successfully supported the substantially increased volume of Multifamily transactions.
Continued to maintain a high level of internal client satisfaction.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision:
The Compensation Committee determined that Mr. McDavid should receive 95% 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.
Freddie Mac 2016 Form 10-K
372
Executive Compensation
Compensation Discussion and Analysis
2016 DEFERRED SALARY
The following chart reports the actual amounts of 2016 Deferred Salary for each eligible NEO. The actual
amount earned in each calendar quarter is scheduled to be paid on the last pay date of the corresponding
calendar quarter in 2017.
2016 Actual Deferred Salary
At-Risk
Named
Executive
Officer(1)
Mr. Mackey
Mr. Hinduja
Mr. Lowman
Mr. McDavid
Fixed
1,600,000
1,075,000
1,600,000
1,320,000
Conservatorship
Scorecard
% of
Target
441,000
330,750
441,000
382,200
98%
98%
98%
98%
Corporate
Scorecard/
Individual
450,000
337,500
450,000
370,500
% of
Target
100%
100%
100%
95%
Total Actual
Deferred
Salary
2,491,000
1,743,250
2,491,000
2,072,700
% of
Target
99.6%
99.6%
99.6%
98.7%
(1) Mr. Layton was not eligible for deferred salary in 2016 and therefore is not included in this table.
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 EMCP.
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.
Freddie Mac 2016 Form 10-K
373
Executive Compensation
Compensation Discussion and Analysis
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. 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. HINDUJA
We entered into a letter agreement and a restrictive covenant and confidentiality agreement with Mr.
Hinduja in connection with his employment as our EVP - Chief Enterprise Risk Officer. The terms of Mr.
Hinduja’s letter agreement provide him with an annual Target TDC opportunity of $2,250,000, consisting
of Base Salary of $500,000 and Deferred Salary of $1,750,000, 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. Hinduja’s letter agreement also provided for a cash sign-on award of $1,200,000 in recognition of the
forfeited compensation at his prior employer. This award is paid in installments as follows: (i) first
installment: $350,000 on the same date on which Mr. Hinduja received his first payment of Base Salary;
(ii) second installment: $400,000 in March 2016; (iii) third installment: $300,000 in March 2017; and (iv)
fourth installment: $150,000 in March 2018. As required by the terms of Mr. Hinduja’s letter agreement
and as a result of the imposition of a waiting period by his prior employer during which he was not
permitted to begin his employment with us, the amount of the second installment was increased by
$262,500. Each installment is subject to repayment in the event that, prior to the first anniversary of an
installment payment date, Mr. Hinduja terminates his employment with Freddie Mac for any reason or
Freddie Mac terminates his employment due to the occurrence of any of the Forfeiture Events described
in his Recapture and Forfeiture Agreement. Copies of Mr. Hinduja’s letter agreement and restrictive
covenant and confidentiality agreement are filed as Exhibits 10.28 and 10.29, 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
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Compensation Discussion and Analysis
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 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 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.
• 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.
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Executive Compensation
Compensation Discussion and Analysis
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 is filed as Exhibit 10.18 to this Form 10-K.
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.
• 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 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 no longer reported directly to the CEO. 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
Freddie Mac 2016 Form 10-K
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Executive Compensation
Compensation Discussion and Analysis
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, and FHFA published a revised Proposed Rule on Indemnification Payments in the Federal
Register on September 20, 2016. The revised Proposed Rule specifies restrictions on indemnification for
actions instituted by FHFA, but indicates that the rule would not apply to regulated entities that are
operating in conservatorship.
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
2016 was reimbursement for assistance with personal financial planning, tax planning, and/or estate
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 becomes eligible for 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 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 “2016 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
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Executive Compensation
Compensation Discussion and Analysis
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
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).
Freddie Mac 2016 Form 10-K
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Executive Compensation
Compensation Discussion and Analysis
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.
Nicolas P. Retsinas, Chair
Raphael W. Bostic
Carolyn H. Byrd
Steven W. Kohlhagen
Saiyid T. Naqvi
Eugene B. Shanks, Jr.
Freddie Mac 2016 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 2016 and that were applicable to employees at all levels, including those participating in the
EMCP. The purpose of the assessment was to determine whether any elements of the overall
compensation program encourage unnecessary 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;
• Compensation program design and governance;
• The process for establishing performance objectives; and
• Processes and program approvals for our compensation programs.
The assessment was discussed with the Compensation Committee in January 2017. Management’s
conclusion, with which the Compensation Committee concurred, is that the company’s compensation
programs and practices do not encourage unnecessary or excessive risk behaviors in pursuit of
Corporate or Conservatorship Scorecard objectives or otherwise, and the programs and practices would
not be reasonably likely to have a material adverse effect on Freddie Mac.
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Executive Compensation
2016 Compensation Information for NEOs
2016 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, 2016.
SUMMARY COMPENSATION TABLE
Salary
Donald H. Layton
Chief Executive
Officer
James G. Mackey
EVP — Chief
Financial Officer
Anil D. Hinduja
EVP — Chief
Enterprise Risk
Officer
David B. Lowman
EVP — Single-
Family Business
William H. McDavid
EVP — General
Counsel & Corporate
Secretary
Year
2016
2015(6)
2014
2016
2015
2014
2016
2016
2015
2014
2016
2015
2014
Earned
During Year(1) Deferred(2) Bonus(3)
$—
$600,000
$—
660,345
600,000
818,886
—
500,000
1,600,000
500,000
1,600,000
—
—
—
—
500,000
1,600,000
450,000
500,000
1,075,000
662,500
500,000
1,600,000
500,000
1,600,000
500,000
1,600,000
500,000
1,320,000
500,000
1,320,000
500,000
1,320,000
—
—
—
—
—
—
Non-Equity
Incentive Plan
Compensation(4)
$—
472,748
893,896
887,608
900,585
670,422
893,896
887,608
900,585
755,146
769,260
780,507
All Other
Compensation(5)
$101,609
56,958
60,586
89,874
86,674
21,099
Total
$701,609
2,008,937
660,586
3,083,770
3,074,282
3,471,684
39,318
2,947,240
89,874
86,674
65,045
88,964
86,324
110,168
3,083,770
3,074,282
3,065,630
2,664,110
2,675,584
2,710,675
(1) Amounts shown reflect Base Salary earned during the year.
(2) Amounts shown reflect Fixed Deferred Salary earned during the year. The interest rate for Fixed Deferred Salary earned during
2016, 2015, and 2014 was 0.325%, 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. Fixed Deferred Salary earned during each quarter is paid in cash on the last
pay date of the corresponding quarter in the following year, along with accrued interest. 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 2016, 2015, and 2014 is
included in All Other Compensation.
(3) Amounts shown reflect cash sign-on payments made to Messrs. Mackey and Hinduja in connection with their hiring. See
“Written Agreements Relating to NEO Employment” for additional information.
(4) Amounts shown reflect At-Risk Deferred Salary earned during each year as well as interest on that At-Risk Deferred Salary.
The interest rate for At-Risk Deferred Salary earned during 2016, 2015, and 2014 was 0.325%, 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 in cash on the last pay date of the corresponding quarter in the following
year. See “Determination of 2016 At-Risk Deferred Salary.”
(5) Amounts for 2016 reflect (i) employer 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 (as described in footnote 2) on Fixed Deferred Salary earned
during the year; and (vi) perquisites. These amounts for 2016 are as follows:
Freddie Mac 2016 Form 10-K
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Executive Compensation
2016 Compensation Information for NEOs
Mr. Layton
Mr. Mackey
Mr. Hinduja
Mr. Lowman
Mr. McDavid
Thrift/401(k)
Plan
Contributions
SERP Benefit
Accruals
Interest on
Fixed Deferred
Salary
Perquisites
$22,525
22,525
6,625
22,525
22,525
$79,084
62,149
29,199
62,149
62,149
$—
5,200
3,494
5,200
4,290
$—
—
—
—
—
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. After their first year of employment, 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) On June 29, 2015, FHFA approved Mr. Layton’s participation in the EMCP, effective July 1, 2015. On December 1, 2015, FHFA
subsequently directed Freddie Mac to suspend, pursuant to the Equity in Government Compensation Act of 2015, his
participation as of November 24, 2015. The components of Mr. Layton’s Target TDC under the EMCP are described in the
company’s Annual Report on Form 10-K for the year ended December 31, 2015 in “Executive Compensation — Compensation
Discussion and Analysis — Determination of 2015 Target TDC for NEOs — 2015 Target TDC.”
GRANTS OF PLAN-BASED AWARDS
The following table contains information concerning grants of plan-based awards to each of the NEOs
during 2016. The Purchase Agreement prohibits us from issuing equity securities without Treasury’s
consent. No stock awards were granted during 2016. For a description of the performance and other
measures used to determine payouts, see “Elements of Target Total Direct Compensation,”
“Determination of 2016 Target TDC for NEOs,” “Determination of At-Risk Deferred Salary,” and “2016
Deferred Salary.”
Name(1)
Mr. Mackey
Mr. Hinduja
Mr. Lowman
Mr. McDavid
At-Risk Deferred Salary Award
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards(2)
Target/Maximum
Threshold
—
—
—
—
—
—
—
—
—
—
—
—
450,000
450,000
900,000
337,500
337,500
675,000
450,000
450,000
900,000
390,000
390,000
780,000
(1) Mr. Layton was not eligible to receive Deferred Salary in 2016 and therefore is not included in this table.
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Executive Compensation
2016 Compensation Information for NEOs
(2) The amounts reported reflect At-Risk Deferred Salary granted in 2016 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 2016 are reported in the “Non-Equity Incentive Plan Compensation”
column of the “Summary Compensation Table.”
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
None of the NEOs had unexercised options or unvested RSUs as of December 31, 2016.
OPTION EXERCISES AND STOCK VESTED
None of the NEOs exercised options or had RSUs vest during 2016.
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 for the NEOs consists of the SERP Benefit. The SERP is an
unfunded, non-qualified 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 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
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
Freddie Mac 2016 Form 10-K
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Executive Compensation
2016 Compensation Information for NEOs
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.
SERP BENEFIT
Name
Mr. Layton
Mr. Mackey
Mr. Hinduja
Mr. Lowman
Mr. McDavid
Executive
Contribution in
Last FY ($)(1)
Freddie Mac
Accruals in
Last FY ($)(2)
Aggregate
Earnings in
Last FY ($)(3)
Aggregate
Withdrawals/
Distrib. ($)
$—
$79,084
$13,178
$—
Balance at
Last FYE ($)(4)
$182,863
—
—
—
—
62,149
29,199
62,149
62,149
579
960
6,979
1,102
—
—
—
—
138,489
30,159
173,266
235,846
(1) The SERP does not allow for employee contributions.
(2) Amounts reported reflect accruals under the SERP Benefit during 2016, including accruals for the plan year 2016 2.5%
contribution which will be allocated to NEO accounts in 2017. 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 2016
2.5% contribution which will be allocated to NEO accounts in 2017. All NEOs are fully vested in their SERP Benefit account
balances.
The following 2015 SERP Benefit accrual amounts were reported in the “All Other Compensation” column in the 2015
Summary Compensation Table as compensation for each NEO for whom accruals were made and reported during 2015: Mr.
Layton: $33,409, Mr. Mackey: $62,149, Mr. Lowman: $62,149, and Mr. McDavid: $62,149. See our Form 10-K for the fiscal
year ended December 31, 2015 filed on February 18, 2016. 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.
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 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.
Freddie Mac 2016 Form 10-K
384
Executive Compensation
2016 Compensation Information for NEOs
• 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, 2016. Mr.
Layton is excluded from this table because he is not entitled to receive any payments in connection with a
termination of employment.
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
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, 2016.
Freddie Mac 2016 Form 10-K
385
Executive Compensation
2016 Compensation Information for NEOs
James G. Mackey
Deferred Salary:
Fixed
At Risk-Conservatorship Scorecard(3)
At Risk-Corporate Scorecard/Individual(4)
Interest on Deferred Salary(5)
Total
Anil D. Hinduja
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)
$1,600,000
$1,600,000
450,000
450,000
5,070
450,000
450,000
8,125
$
-
-
-
$1,184,000
441,000
450,000
6,744
$2,505,070
$2,508,125
$—
$2,081,744
$1,075,000
$1,075,000
337,500
337,500
3,549
337,500
337,500
5,688
$—
—
—
—
$795,500
330,750
337,500
4,757
$1,753,549
$1,755,688
$—
$1,468,507
$1,600,000
$1,600,000
450,000
450,000
5,070
450,000
450,000
8,125
$
-
-
-
$1,184,000
441,000
450,000
6,744
$2,505,070
$2,508,125
$—
$2,081,744
Fixed
At Risk-Conservatorship Scorecard(3)
At Risk-Corporate Scorecard/Individual(4)
Interest on Deferred Salary(5)
Total
$1,320,000
$1,320,000
$1,320,000
390,000
390,000
4,259
390,000
390,000
6,825
382,200
370,500
6,736
$2,104,259
$2,106,825
$2,079,436
$—
—
—
—
$—
(1) Mr. McDavid is the only retirement-eligible NEO under the EMCP.
(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 shown for Mr. McDavid because he is retirement eligible. In accordance with early
termination provisions in the EMCP, the amounts disclosed for Deferred Salary: Fixed for all other NEOs have been reduced by
26% to reflect a December 31, 2016 termination event.
(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 2016
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 31, 2016
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 2016 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 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, 2016.
(5)
Freddie Mac 2016 Form 10-K
386
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 14, 2017 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 14, 2017, 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. 14, 2017
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
Anil D. Hinduja
EVP - Chief Enterprise Risk Officer
David B. Lowman
EVP - Single-Family Business
William H. McDavid
EVP - General Counsel & Corp. Sec.
—
—
—
—
—
—
—
—
—
10,824
—
—
—
—
—
—
—
All directors and executive officers as a group (22 persons)
38,292
(1)
Includes shares of stock beneficially owned as of February 14, 2017.
Freddie Mac 2016 Form 10-K
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,824
—
—
—
—
—
—
—
38,292
387
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 2016 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, 2016.
Prior to conservatorship, stockholders 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 2016 Form 10-K
388
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))
50,670
None
N/A
N/A
35,871,004(1)
None
(1)
Includes 28,352,108 shares, 5,845,739 shares, and 1,673,157 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 2016 Form 10-K
389
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 2016 Form 10-K
390
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
2016, 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 6, Note 9, Note 10, and Note 11.
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 $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.
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.
TRANSACTIONS WITH INSTITUTIONS RELATED
TO DIRECTORS
In the ordinary course of business, we were a party during 2016, and expect to continue to be a party
during 2017, 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, 2016, JPMorgan Chase was one of Freddie Mac’s largest servicers, and serviced
approximately 1 million loans for Freddie Mac. JPMorgan Chase had an aggregate UPB of loans of
approximately $150.7 billion as of December 31, 2016 and continues to have a substantial aggregate
UPB of loans with the company. JPMorgan Chase sold approximately $19 billion in single-family loans to
Freddie Mac in 2016.
Freddie Mac 2016 Form 10-K
391
Certain Relationships and Related Transactions
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, 2017, JPMorgan Chase and its
subsidiaries had an aggregate notional balance of $19.9 billion of derivatives and $11.5 billion of reverse
repurchase agreements with Freddie Mac. From January 1, 2016 through January 31, 2017, JPMorgan
Chase served as underwriter for $82.5 billion of Freddie Mac’s debt securities and $20.6 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 thirteen annual
installments remaining. Mr. Layton also had deferred compensation (less than 10% of the total deferred
compensation balance) in the form of “private equity balance,” which was 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. For the reasons described above, the Board has determined that
Mr. Layton does not have a material interest in our relationship with JPMorgan Chase. 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 2016 Form 10-K
392
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 2016 and 2015.
AUDITOR FEES(1)
Audit Fees(2)
Audit-Related Fees(3)
Tax Fees(4)
All Other Fees(5)
Total
2016
2015
(In thousands)
$23,175
5,122
55
218
$23,321
3,888
64
264
$28,570
$27,537
(1) These fees represent amounts billed (including reimbursable expenses within the designated year).
(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) 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; (iii) transaction validation and attestation related to certain of
Freddie Mac’s risk transfer and structured transactions; (iv) fees for pre-implementation assistance for hedge accounting; and
(v) fees related to accounting policy consultations.
(4) The tax fees billed relate 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 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
advice and recommendations related to technology implementation in the governance process.
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
Freddie Mac 2016 Form 10-K
393
Principal Accounting Fees and Services
services permitted under applicable law, to be performed by our independent auditors (or to designate
one or more members of the Audit Committee to pre-approve such services and report such pre-approval
to the Audit Committee).
Audit services that are within the scope of an auditor’s engagement approved by the Audit Committee
prior to the performance of those services are deemed pre-approved and do not require separate pre-
approval. Audit services not within the 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 totaling 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 by our independent public accounting firm in 2016 and 2015.
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 2016 Form 10-K
394
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 2016 Form 10-K
395
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 16, 2017
Freddie Mac 2016 Form 10-K
396
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 16, 2017
/s/ Donald H. Layton
Donald H. Layton
Chief Executive Officer and Director
(Principal Executive Officer)
February 16, 2017
/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 16, 2017
Senior Vice President — Corporate Controller and
February 16, 2017
Principal Accounting Officer (Principal Accounting
Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
February 16, 2017
Freddie Mac 2016 Form 10-K
397
Signatures
/s/ Anthony A. Williams*
Anthony A. Williams
Director
*By:
/s/ Alicia S. Myara
Alicia S. Myara
Attorney-in-Fact
February 16, 2017
Freddie Mac 2016 Form 10-K
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Glossary
GLOSSARY
This Glossary includes acronyms and defined terms that are used throughout this report.
ACIS - Agency Credit Insurance Structure - In a typical ACIS credit risk transfer transaction, 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. We also enter into ACIS transactions that provide credit protection for certain
specified credit events on loans not included in a reference pool created for a STACR debt note
transaction.
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.
CCO - Chief Compliance Officer
CD&A - Compensation Discussion and Analysis
CEO - Chief Executive Officer
CERO - Chief Enterprise Risk Officer
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Glossary
CFO - Chief Financial Officer
CFPB - Consumer Financial Protection Bureau
Charge-offs, gross - Represent the amount of a loan that has been discharged in order to remove the
loan from our consolidated balance sheets when the loan is deemed uncollectible, regardless of when the
impact of the credit loss was recorded on our consolidated statements of comprehensive income.
Generally the amount of a charge-off is the recorded investment in excess of the fair value of the loan's
collateral.
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.
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. The base conforming loan limit for a one-family residence has been set at
$424,100 for 2017, and was set at $417,000 from 2006 to 2016. Higher limits have been established in
certain “high-cost” areas (for 2017, up to $636,150 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., $424,000 for 2017) 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.
Examples of credit enhancements include insurance, credit risk transfer transactions,
overcollateralization, indemnification agreements, and government guarantees.
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Glossary
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.
Delivery fee - An upfront fee charged to sellers above base contractual guarantee fees to compensate us
for higher levels of risk in some loan products.
Derivative - A financial instrument whose value depends upon the characteristics and value of an
underlying such as a financial asset or index. Examples of an underlying 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.
EMCP - Executive Management Compensation Program
ERC - Enterprise Risk Committee
ERM - Enterprise Risk Management
EVP - Executive Vice President
Exchange Act - Securities Exchange Act of 1934, as amended
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.
Giant PCs - Resecuritizations of previously issued PCs or Giant PCs. Giant PCs are single-class
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Glossary
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.
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 base contractual guarantee fees
paid on a monthly basis, as a percentage of the UPB of the underlying loans, and initial upfront payments,
such as delivery fees.
Guidelines - Corporate Governance Guidelines, as revised
HAMP - Home Affordable Modification Program - Refers to the effort under the MHA Program whereby
the U.S. government, Freddie Mac and Fannie Mae committed funds to help eligible homeowners avoid
foreclosure and keep their homes through loan modifications. HAMP ended in December 2016.
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 program, under which we also allow
borrowers with LTV ratios of 80% and below to participate, is our implementation of HARP for our loans.
The relief refinance program (including HARP) will end in September 2017 and will be replaced by a new
program.
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 New
Issue Bond Program (NIBP) and the Temporary Credit and Liquidity Facility Program (TCLFP). Pursuant
to the NIBP, 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 NIBP provided financing for HFAs to issue
new housing bonds. Treasury is obligated to absorb losses under the NIBP up to a certain level before we
are exposed to any losses. Pursuant to the TCLFP, 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 TCLFP up to a certain level before we are exposed to
any losses. The TCLFP 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.
HUD - U.S. Department of Housing and Urban Development - HUD has authority over Freddie Mac with
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Glossary
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.
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 other investments and cash portfolio.
Consists of cash and cash equivalents, certain securities purchased under agreements to resell, and
certain 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
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Glossary
loans (unless we own or guarantee the second lien).
Market 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. We measure market spreads primarily
using our models.
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.
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, SB 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, issuances of other mortgage-related
guarantees, and issuances of other securitization products for which we have not previously purchased
the underlying loans.
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
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Glossary
quarter. The applicable Capital Reserve Amount was $1.2 billion for 2016, is $600 million for 2017, and
declines to 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.
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
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.
Other Investments and Cash Portfolio - Consists of: (i) the Liquidity and Contingency Operating
Portfolio; (ii) cash and other investments held by consolidated trusts; (iii) collateral pledged by derivative
and other counterparties; (iv) investments in unsecured agency debt; and (v) advances to lenders.
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 - The Federal Home Loan Mortgage Corporation Employees’ Pension Plan
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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
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.
RMBS - Residential mortgage-backed security - A security backed by loans on one-to-four family
residential real estate.
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RSU - Restricted stock unit
S&P - Standard & Poor’s
SB Certificates - Structured pass-through certificates backed primarily by recently originated small
balance multifamily loans purchased by Freddie Mac.
SCR debt note - Structured Credit Risk debt notes - A debt security where the principal balance is subject
to the performance of a reference pool of multifamily loans guaranteed by Freddie Mac.
SEC - U.S. 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 - The Federal Home Loan Mortgage Corporation Supplemental Executive Retirement Plan
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, single-family loans covered by long-term standby commitments, and certain mortgage-related
securities not issued by us that we guarantee that are collateralized by single-family loans. Excludes our
resecuritizations of Ginnie Mae Certificates 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.
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 single-family 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
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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
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
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 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.
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.
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
Freddie Mac 2016 Form 10-K
409
Glossary
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
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 2016 Form 10-K
410
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.
Executive Compensation
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Signatures
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
Form 10-K Summary
Page(s)
1, 5-8, 34-45,
58-64, 75-81,
88-91, 163-174
181-207
Not Applicable
7
208
Not Applicable
209-211
11
1-4, 9, 10, 12-33,
35, 46-59, 65-76,
82-144, 152-162,
175-180
145-151
212-336
Not Applicable
213, 214, 337-340
341
92-93, 341-362,
391
356, 358-359,
363-386
387-389
351-353, 390-392
393-394
395
Not Applicable
396-398
Freddie Mac 2016 Form 10-K
411
Exhibit Index
EXHIBIT INDEX
Exhibit No.
3.1
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)
Description*
3.2
Bylaws of the Federal Home Loan Mortgage Corporation, as amended and restated July 7, 2016 (incorporated by
reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K as filed on July 8, 2016)
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 2016 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 2016 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 18, 2016
(incorporated by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2016, as filed on May 3, 2016)
10.1
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)†
10.2
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)†
10.3
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)†
10.4
10.5
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)†
Freddie Mac 2016 Form 10-K
E-3
Exhibit Index
Exhibit No.
10.6
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)†
Description*
10.7
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)†
10.8
10.9
10.10
10.11
10.12
10.13
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)†
10.14
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)†
10.15
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)†
10.16
Third Amendment to the Federal Home Loan Mortgage Corporation Long-Term Disability Plan (incorporated by
reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2015,
as filed on February 18, 2016)†
10.17
Fourth Amendment to the Federal Home Loan Mortgage Corporation Long-Term Disability Plan†
10.18
Executive Management Compensation Program Recapture and Forfeiture Agreement †
10.19
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)†
Freddie Mac 2016 Form 10-K
E-4
Exhibit Index
Exhibit No.
Description*
10.20
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)†
10.21
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)†
10.22
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)†
10.23
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)†
10.24
10.25
10.26
10.27
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)†
10.28
Memorandum Agreement, dated April 6, 2015, between Freddie Mac and Anil Hinduja†
10.29
Restrictive Covenant and Confidentiality Agreement, dated April 7, 2015, between Freddie Mac and Anil Hinduja†
10.30
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)†
10.31
PC Master Trust Agreement dated February 2, 2017
10.32
10.33
10.34
Form of Indemnification Agreement between the Federal Home Loan Mortgage Corporation and executive officers
(for agreements with officers entered into prior to August 2011) and outside Directors (incorporated by reference to
Exhibit 10.2 to the Registrant’s Current Report on Form 8-K as filed on December 23, 2008)†
Form of Indemnification Agreement between the Federal Home Loan Mortgage Corporation and executive officers
(for agreements with officers entered into beginning in August 2011) (incorporated by reference to Exhibit 10.54 to
the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed on March 9, 2012)†
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)
Freddie Mac 2016 Form 10-K
E-5
Exhibit Index
Exhibit No.
10.35
Description*
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)
10.36
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)
10.37
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)
10.38
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)
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
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.LAB
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation
101.DEF
XBRL Taxonomy Extension Definition
*
†
The SEC file numbers for the Registrant’s Registration Statement on Form 10, Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K are 000-53330 and 001-34139.
This exhibit is a management contract or compensatory plan or arrangement.
Freddie Mac 2016 Form 10-K
E-6
Exhibit 10.17
FOURTH AMENDMENT
TO THE
FEDERAL HOME LOAN MORTGAGE CORPORATION
LONG TERM DISABILITY PLAN
(As Restated and Amended January 1, 1997)
FOURTH 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.
W I T N E S S E T H:
WHEREAS, the Plan was restated effective January 1, 1997;
WHEREAS, the Corporation desires to amend the Plan;
WHEREAS, Section 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 this
plan and execute this document.
NOW THEREFORE, the Plan is amended as set forth below effective January 1, 2017.
The first Whereas paragraph of the Plan is amended to replace “(the Prudential Insurance
1.
Company of America (“Prudential”) or any successor thereto)” with “(Liberty Life Assurance
Company of Boston (“Liberty”) or any successor thereto)”.
2.
Section 1.1 (Purpose) is amended to replace the first sentence thereof with the following:
This document, together with those portions of Corporate Policy No. 3-235 as
concerns long-term disability and the group insurance contract issued by Liberty
to the Corporation for long-term disability coverage (“Policy”), as the same from
time to time may be amended, renewed or substituted, incorporated herein by
reference, constitutes the Federal Home Loan Mortgage Corporation Long-Term
Disability Plan (“Plan”).
Section 2.1 (Plan Administration) is amended to replace “Prudential” in the first sentence
3.
of the second paragraph with “Liberty”.
4.
Section 3.1 (Nonassignability) is amended in its entirety to read as follows:
3.1. Nonassignability. The right of any Participant or Beneficiary to any benefit or to
any payment hereunder, to the fullest extent permitted by law, shall not be subject
to alienation, anticipation, assignment, garnishment, attachment, execution or levy
of any kind. Any such attempted assignment or transfer shall be disregarded, and
shall not operate in any way to assign or confer upon any third party any rights
under the Plan or Employee Retirement Income Security Act of 1974, as
amended.
IN WITNESS WHEREOF, the Federal Home Loan Mortgage Corporation has caused this
FOURTH AMENDMENT to the FEDERAL HOME LOAN MORTGAGE
CORPORATION LONG TERM DISABILITY PLAN to be executed by its duly authorized
officer this 27 day of December, 2016.
FEDERAL HOME LOAN MORTGAGE
CORPORATION
By:
/s/ Daniel Scheinkman_______________
Daniel Scheinkman
Vice President - Compensation and Benefits
ATTEST
/s/ Mark Schoenfelder____
Assistant Secretary
2
EXECUTIVE MANAGEMENT COMPENSATION PROGRAM
Recapture and Forfeiture Agreement
Exhibit 10.18
Purpose
A Covered Officer’s agreement to this Recapture and Forfeiture Agreement
(“Recapture Agreement” or “Agreement”) is a condition of their participation in
the Executive Management Compensation and any successor compensation
programs for Covered Officers (collectively, the “EMCP”).
Effective Date
Forfeiture Events
and Compensation
Subject to
Recapture or
Forfeiture
This Agreement sets forth terms and conditions pursuant to which the Covered
Officer’s compensation under the EMCP and any successors thereto may be
recaptured and/or forfeited.
This Agreement applies to Deferred Salary (as defined in the EMCP) earned,
paid or to be paid pursuant to the terms of the EMCP and any determination of
a Forfeiture Event (as defined herein) that occurs on or after the date of your
promotion or hire into a Covered Officer position.
After providing the requisite Notice, the Freddie Mac Board of Directors, in the
good faith exercise of its sole discretion, determines that any of the following
events (each a “Forfeiture Event”) have occurred:
1.
Forfeiture Event: The Covered Officer has earned or obtained the
legally binding right to a payment of Deferred Salary based on
materially inaccurate financial statements (including without limitation,
statements of earnings, revenues, or gains) or any other materially
inaccurate performance measure.
Compensation Subject to Recapture and/or Forfeiture: Any Deferred
Salary in excess of the amounts that the Board determines would
likely have been otherwise earned by the Covered Officer using
accurate measures during the two years prior to the Forfeiture Event.
2. Forfeiture Events:
(i) The Covered Officer’s employment with Freddie Mac is terminated
because the Covered Officer is either convicted of, or pleads guilty or
nolo contendere to, a felony;
(ii) Subsequent to termination of employment:
a. the Covered Officer is convicted of, or pleads guilty or nolo
contendere to, a felony, based on conduct occurring prior to
termination; and,
b. within one year of such conviction or plea, the Board
determines in good faith that such conduct is materially
harmful to the business or reputation of Freddie Mac.
(iii) The Covered Officer‘s employment is terminated because, or within
two years of the Covered Officer’s termination of employment, the
Board determines in good faith that, the Covered Officer engaged in
any willful misconduct in the performance of his or her duties with
Freddie Mac that is materially harmful to the business or reputation of
Freddie Mac (for such purposes, “willful” shall mean any act or
omission by the Covered Officer that was done in bad faith or in the
absence of a reasonable belief that the same was in the best interests
of Freddie Mac).
Page 1 of 4
EXECUTIVE MANAGEMENT COMPENSATION PROGRAM
Recapture and Forfeiture Agreement
Compensation Subject to Recapture and/of Forfeiture: Any Deferred
Salary earned by the Covered Officer during the two years prior to the
date that the Covered Officer is terminated, any Deferred Salary that
is scheduled to be paid to the Covered Officer within two years after
termination of employment and any other cash payment made or to
be made to the Covered Officer as consideration for any release of
claims agreement between the Covered Officer and Freddie Mac.
3.
Forfeiture Event: The Covered Officer’s employment with Freddie Mac
is terminated because, in carrying out his or her duties, the Covered
Officer engages in conduct that constitutes gross neglect or gross
misconduct that is materially harmful to Freddie Mac, or within two
years after the Covered Officer’s termination of employment the Board
determines in good faith that the Covered Officer, prior to his or her
termination of employment, engaged in conduct that constitutes gross
neglect or gross misconduct and that such actions resulted in
material harm to Freddie Mac.
Compensation Subject to Recapture and/or Forfeiture: Any Deferred
Salary paid to the Covered Officer at the time of termination or
subsequent to the date of termination, including any cash payment
made to the Covered Officer as consideration for any release of
claims agreement between the Covered Officer and Freddie Mac.
4. Forfeiture Event: The Covered Officer has violated a post-termination
non-competition covenant set forth in the Restrictive Covenant and
Confidentiality Agreement between the Covered Officer and Freddie
Mac 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 to the Covered Officer during the twelve months
immediately preceding the violation and 100% of all Deferred Salary
unpaid at the time of such violation.
The recapture of compensation constitutes a forfeiture of such compensation
and the Covered Officer’s immediate repayment of the same to Freddie Mac
shall occur notwithstanding the terms of any applicable plan, agreement or
award to the contrary.
After providing the requisite Notice, the Board of Directors in the good faith
exercise of its sole discretion shall determine the appropriate dollar amount of
compensation to be recaptured from and/or forfeited by the Covered Officer, if
any, which is intended to be the gross amount of compensation in excess of
what Freddie Mac would have paid the Covered Officer had Freddie Mac taken
the Forfeiture Event into consideration at the time such compensation decision
was made.
Neither the Covered Officer’s Base Salary nor the Covered Officer’s assets
acquired either prior to employment by Freddie Mac or directly from sources
other than Freddie Mac shall be subject to recapture or forfeiture pursuant to
the terms of this Agreement.
Page 2 of 4
Dollar Amount to
be Recaptured
and/or Forfeited
EXECUTIVE MANAGEMENT COMPENSATION PROGRAM
Recapture and Forfeiture Agreement
Notice
Requirements
A determination as to the occurrence of a Forfeiture Event and the dollar
amount of compensation, if any, to be recaptured and/or forfeited pursuant to
this Agreement shall be made only after first providing to the Covered Officer:
(i) reasonable advance notice setting forth Freddie Mac’s intention to
make such a determination;
(ii) where remedial action is appropriate and feasible, a reasonable
opportunity for the Covered Officer to take such action;
(iii) an opportunity for the Covered Officer, together with his or her
counsel, to be heard before the Board; and
(iv) a copy of a resolution duly adopted by a majority of the entire Board
at a meeting of the Board called and held for such purpose, making
the requisite determination.
Reservation of
Rights
Nothing in this Recapture Agreement is intended or shall be construed to
abrogate the “at will” employment relationship between the Covered Officer and
Freddie Mac, and both the Covered Officer and Freddie Mac retain the right to
terminate the employment relationship at any time for any lawful reason with or
without notice.
Any dispute between the Covered Officer and Freddie Mac concerning the
occurrence of a Forfeiture Event or the dollar amount of compensation subject
to recapture and/or forfeiture shall be determined exclusively in accordance with
the substantive law of the state in which the Covered Officer’s primary place of
employment with Freddie Mac is located, excluding the provisions of the laws of
such state concerning choice-of-law that would result in the application of the
laws of any state other than such state being applied. The Covered Officer
agrees that the federal courts with jurisdiction for the state in which his or her
primary place of employment is located shall be the venue for and have
exclusive jurisdiction over any such dispute.
The terms and conditions of this Recapture Agreement and any
successors thereto are not intended to negate and do not supersede the
provisions of any applicable law, regulation or regulatory guidance,
including the authority of the Federal Housing Finance Agency (or any
federal agency acting as Freddie Mac’s regulator or Conservator),
pertaining to the payment or non-payment of any form of compensation
paid or to be paid to the Covered Officer. The Federal Housing Finance
Agency retains its authority to modify or terminate any of Freddie Mac’s
compensation plans or programs (including the EMCP and any
successors thereto), and with respect to any compensation paid or to be
paid to you during or after your employment pursuant to the EMCP and
any successors thereto, to withhold, escrow or prohibit such
compensation, without giving rise to liability on the part of Freddie Mac.
Page 3 of 4
EXECUTIVE MANAGEMENT COMPENSATION PROGRAM
Recapture and Forfeiture Agreement
Your Review of
This Agreement
During your review of and prior to your agreement to this Recapture Agreement,
Freddie Mac expects that you have had the opportunity to consult and receive
assistance from appropriate advisors, including legal, tax, and financial
advisors.
By signing below, I acknowledge that I understand and voluntarily agree to the terms of this Recapture
Agreement.
_______________________________________________ __________________________________
Signature
Date
_______________________________________________
Printed Name
_______________________________________________
Officer Title
Page 4 of 4
Exhibit 10.28
Date
April 6, 2015
From
Donald H. Layton
To
Anil Hinduja
Subject
Your Compensation as Executive Vice President and Chief Enterprise Risk Officer
On behalf of Freddie Mac’s Board of Directors (the “Board”), this memorandum sets forth
Freddie Mac’s agreement to employ you as its Executive Vice President and Chief Enterprise
Risk Officer, effective no later than 180 days from the day you resign your current position,
pursuant to the terms and conditions set forth herein. The terms and conditions set forth herein
have been approved by the Board and the Federal Housing Finance Agency (“FHFA”) and
supersede any previous communications you may have had with Freddie Mac or FHFA.
As Freddie Mac’s Executive Vice President and Chief Enterprise Risk Officer, you shall report to
me, Freddie Mac’s Chief Executive Officer. During your employment, you agree to devote
substantially all of your time, attention, and energies to Freddie Mac’s business, and to not be
engaged in any other business activity unless permitted under our Outside Activities and Family
Member 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.
The following outlines the terms of your employment with us, including your compensation and
benefits. Congratulations and we look forward to you joining the Freddie Mac team!
I. Compensation
Your compensation is governed by the Executive Management Compensation Program
(“EMCP”), which was designed by FHFA to reflect the principles established for companies
receiving federal assistance. To participate in the EMCP, you must agree to the terms of the
EMCP Program Document and a Recapture and Forfeiture Agreement, both of which are
enclosed. The 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 - Anil Hinduja - April 6, 2015
Page 2 of 5
Your target total direct compensation (“Target TDC”) will be $2,250,000, 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 earned in each quarter is paid in cash in the last pay period
of the corresponding quarter of the following calendar year. The annualized amount of your
Deferred Salary is $1,750,000 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 $675,000, up to half of which may be reduced based on the
company’s performance against objectives established by FHFA and up to half of which
may be reduced based on performance against objectives established by Freddie Mac and
your individual performance.
• Fixed Deferred Salary - This portion of your Deferred Salary is equal to your Target TDC
less your Base Salary and At-Risk Deferred Salary, and is equal to $1,075,000.
Cash Award - In consideration of your accepting this offer and beginning employment with
Freddie Mac, you will receive a cash award in the amount of $1,200,000. The cash award is not
considered “compensation” for purposes of our tax qualified Thrift/401(k) Savings Plan and our
non-qualified Supplemental Executive Retirement Plan and will be earned and paid as follows:
• First Installment:
$350,000 on the same date on which you receive your first
payment of Base Salary
• Second Installment: $400,000 in the first pay period of March 2016
$300,000 in the first pay period of March 2017
• Third Installment:
$150,000 in the first pay period of March 2018
• Fourth Installment:
The amount of the Second Installment will be increased if your current employer imposes a
period of “garden leave.” The amount of the increase will be based on the duration of the
garden leave, as follows.
• 90 Days of Garden Leave: $150,000
• 120 Days of Garden Leave: $262,500
• 150 Days of Garden Leave: $375,000
• 180 Days of Garden Leave: $450,000
In the event your employment terminates, any unpaid installments of the Cash Award will be
paid unless your employment terminates due to a “Termination Event,” which shall mean:
• You voluntarily resign employment; or,
• We terminate your employment due to the occurrence of any of the Forfeiture Events
described in the Recapture and Forfeiture Agreement.
Compensation Terms - Anil Hinduja - April 6, 2015
Page 3 of 5
If your employment terminates due to a Termination event, unpaid installments will be forfeited
and any installment paid within one year of the Termination Event shall be subject to
repayment.
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 from
which to choose.
•
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. 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 contribution. This contribution is in addition to the matching
contribution.
• 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.
Compensation Terms - Anil Hinduja - April 6, 2015
Page 4 of 5
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,
which you must sign and return together with a signed copy of this letter.
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.
=====================
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.
Compensation Terms - Anil Hinduja - April 6, 2015
Page 5 of 5
VI. Return of Signed Documents:
Please confirm that the terms and conditions in this letter conform to your understanding by
returning a signed copy of this letter as well as signed copies of the EMCP, the Recapture and
Forfeiture Agreement and the Restrictive Covenant and Confidentiality Agreement.
/s/ Donald H. Layton__________________
Donald H. Layton
Chief Executive Officer
April 6, 2015____
Date
I agree to the terms of this Agreement.
/s/ Anil Hinduja______________________
Anil Hinduja
April 7, 2015____
Date
Exhibit 10.29
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 Anil Hinduja (“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 Executive Vice President and Chief
Enterprise Risk Officer, 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.
If any dispute(s) arise(s) between Freddie Mac and Executive with respect to any matter which is
E.
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/ Anil Hinduja_______________________
Date: April 7, 2015
Anil Hinduja
Exhibit 10.31
Freddie Mac
PC MASTER TRUST AGREEMENT
THIS PC MASTER TRUST AGREEMENT is entered into as of February 2, 2017, by and among
Freddie Mac in its corporate capacity as Depositor, Administrator and Guarantor, Freddie Mac in its
capacity as Trustee, and the Holders of the PCs offered from time to time pursuant to Freddie Mac’s
Offering Circular referred to herein.
WHEREAS:
(a) Freddie Mac is a corporation duly organized and existing under and by virtue of the Freddie Mac
Act and has full corporate power and authority to enter into this Agreement and to undertake the
obligations undertaken by it herein; and
(b) Freddie Mac may from time to time (i) purchase Mortgages, in accordance with the applicable
provisions of the Freddie Mac Act, (ii) as Depositor, transfer and deposit such Mortgages into various trust
funds that are established pursuant to this Agreement and that are referred to herein as “PC Pools,” (iii) as
Administrator, on behalf of the Trustee, create and issue hereunder, on behalf of the related PC Pool, PCs
representing undivided beneficial ownership interests in the assets of that PC Pool, (iv) as Trustee, act as
trustee for each such PC Pool, (v) as Guarantor, guarantee the payment of interest and principal for the
benefit of the Holders of such PCs and (vi) as Administrator, administer the affairs of each such PC Pool.
NOW, THEREFORE, in consideration of the premises and mutual covenants contained in this
Agreement, the parties to this Agreement, do hereby declare and establish this Agreement and do hereby
undertake and otherwise agree as follows with respect to the transfer of the Mortgages to various PC Pools,
the issuance of the PCs and the establishment of the rights and obligations of the parties.
Definitions
The following terms used in this Agreement have the respective meanings set forth below.
Accrual Period: As to any PC and any Payment Date, (i) the calendar month preceding the month of
the Payment Date for Gold PCs or (ii) the second calendar month preceding the month of the Payment Date
for ARM PCs.
Administrator: Freddie Mac, in its corporate capacity, as administrator of the PC Pools created under
this Agreement.
Agreement: This PC Master Trust Agreement, dated as of February 2, 2017, by and among Freddie
Mac in its corporate capacity as Depositor, Administrator and Guarantor, Freddie Mac in its capacity as
Trustee, and the Holders of the various PCs, as originally executed, or as modified, amended or
supplemented in accordance with the provisions set forth herein. Unless the context requires otherwise, the
term “Agreement” shall be deemed to include any applicable Pool Supplement entered into pursuant to
Section 1.01 of this Agreement.
ARM: An adjustable rate Mortgage.
ARM PC: A PC with a Payment Delay of 75 days and which is backed by ARMs. ARM PCs include
Deferred Interest PCs.
Book-Entry Rules: The provisions from time to time in effect, currently contained in Title 12, Part
1249 of the Code of Federal Regulations, setting forth the terms and conditions under which Freddie Mac
may issue securities on the book-entry system of the Federal Reserve Banks and authorizing a Federal
Reserve Bank to act as its agent in connection with such securities.
Business Day: A day other than (i) a Saturday or Sunday and (ii) a day when the Federal Reserve
Bank of New York (or other agent acting as Freddie Mac’s fiscal agent) is closed or, as to any Holder, a
day when the Federal Reserve Bank that maintains the Holder’s account is closed.
Conventional Mortgage: A Mortgage that is not guaranteed or insured by the United States or any
agency or instrumentality of the United States.
Custodial Account: As defined in Section 3.05(e) of this Agreement.
Deferred Interest: The amount by which the interest due on a Mortgage exceeds the borrower’s
monthly payment, which amount is added to the unpaid principal balance of the Mortgage.
Deferred Interest PC: A PC representing an undivided beneficial ownership interest in a PC Pool that
includes Mortgages providing for negative amortization.
Depositor: Freddie Mac, in its corporate capacity, as depositor of Mortgages into the PC Pools
created under this Agreement.
Eligible Investments: Any one or more of the following obligations, securities or holdings maturing
on or before the Payment Date applicable to the funds so invested:
(i) obligations of, or obligations guaranteed as to the full and timely payment of principal and
interest by, the United States;
(ii) obligations of any agency or instrumentality of the United States (other than Freddie Mac,
except as provided in subsection (ix) below) or taxable debt obligations of any state or local
government (or political subdivision thereof) that have a long-term rating or a short-term rating, as
applicable, from S&P, Moody’s or Fitch in any case in one of its two highest rating categories for
long-term securities or in its highest ratings category for short-term securities;
(iii) time deposits of any depository institution or trust company domiciled in the Cayman Islands
or Nassau and affiliated with a financial institution that is a member of the Federal Reserve System,
provided that the short-term securities of the depository institution or trust company are rated by S&P,
Moody’s or Fitch in the highest applicable ratings category for short-term securities;
(iv) federal funds, certificates of deposit, time deposits and bankers’ acceptances with a fixed
maturity of no more than 365 days of any depository institution or trust company, provided that the
short-term securities of the depository institution or trust company are rated by S&P, Moody’s or Fitch
in the highest applicable ratings category for short-term securities;
(v) commercial paper with a fixed maturity of no more than 270 days, of any corporation that is
rated by S&P, Moody’s or Fitch in its highest short-term ratings category;
(vi) debt securities that have a long-term rating or a short-term rating, as applicable, from S&P,
Moody’s or Fitch, in any case in one of its two highest ratings categories for long-term securities or in
its highest ratings category for short-term securities;
(vii) money market funds that are registered under the Investment Company Act of 1940, as
amended, are entitled, pursuant to Rule 2a-7 of the Securities and Exchange Commission, or any
successor to that rule, to hold themselves out to investors as money market funds, and are rated by
S&P, Moody’s or Fitch in one of its two highest ratings categories for money market funds;
(viii) asset-backed commercial paper that is rated by S&P, Moody’s or Fitch in its highest short-
term ratings category;
(ix) in the case of funds with respect to PCs issued on or after March 1, 2017, discount notes and
other short-term debt obligations (in each case, with a stated final maturity, as of the related issue date,
of one year or less) issued by Freddie Mac;
(x) repurchase agreements on obligations that are either specified in any of clauses (i), (ii), (iv),
(v), (vi), (viii) or (ix) above or are mortgage-backed securities insured or guaranteed by an entity that is
an agency or instrumentality of the United States; provided that the counterparty to the repurchase
agreement is an entity whose short-term debt securities are rated by S&P, Moody’s or Fitch in its
highest ratings category for short-term securities; and
(xi) any other investment without options that is approved by Freddie Mac and is within the two
highest ratings categories of the applicable rating agency for long-term securities or the highest ratings
category of the applicable rating agency for short-term securities.
The rating requirement will be satisfied if the relevant security, issue or fund at the time of purchase
receives at least the minimum stated rating from at least one of S&P, Moody’s or Fitch. The rating
requirement will not be satisfied by a rating that is the minimum rating followed by a minus sign or by
a rating lower than Aa2 from Moody’s.
Event of Default: As defined in Section 5.01 of this Agreement.
FHA/VA Mortgage: A Mortgage insured by the Federal Housing Administration or by the
Department of Agriculture Rural Development (formerly the Rural Housing Service) or guaranteed by the
Department of Veterans Affairs or the Department of Housing and Urban Development.
Final Payment Date: As to any PC, the first day of the latest month in which the related Pool Factor
will be reduced to zero. The Administrator publishes the Final Payment Date upon formation of the related
PC Pool.
Fitch: Fitch, Inc., also known as Fitch Ratings, or any successor thereto.
Freddie Mac: The Federal Home Loan Mortgage Corporation, a corporation created pursuant to the
Freddie Mac Act for the purpose of establishing and supporting a secondary market in residential
mortgages. Unless the context requires otherwise, the term “Freddie Mac” shall be deemed to refer to
Freddie Mac acting in one or more of its corporate capacities, as specified or as provided in context, and
not in its capacity as Trustee.
Freddie Mac Act: Title III of the Emergency Home Finance Act of 1970, as amended, 12 U.S.C.
§§1451-1459.
Gold PC: A PC with a Payment Delay of 45 days and which is backed by fixed-rate Mortgages.
Guarantor: Freddie Mac, in its corporate capacity, as guarantor of the PCs issued by each PC Pool.
Guide: Freddie Mac’s Single-Family Seller/Servicer Guide, as supplemented and amended from time
to time, in which Freddie Mac sets forth its mortgage purchase standards, credit, appraisal and underwriting
guidelines and servicing policies.
Holder: With respect to any PC Pool, any entity that appears on the records of a Federal Reserve
Bank as a holder of the related PCs.
Monthly Reporting Period: The period, which period the Administrator has the right to change as
provided in Section 3.05(d) of this Agreement, during which servicers report Mortgage payments to the
Administrator, generally consisting of:
(i) in the case of all payments other than full prepayments on the Mortgages, the one-month period
(A) ending on the 15th of the month preceding the related Payment Date for Gold PCs and (B) ending on
the 15th of the second month preceding the related Payment Date for ARM PCs; and
(ii) in the case of full prepayments on the Mortgages (including repurchases of the Mortgages
pursuant to Section 1.02(c) of this Agreement), the calendar month preceding the related Payment Date for
Gold PCs and the second calendar month preceding the related Payment Date for ARM PCs; provided,
however, that with respect to full prepayments on PCs issued before September 1, 1995, the Monthly
Reporting Period generally is from the 16th of a month through the 15th of the next month.
Moody’s: Moody’s Investors Service, Inc., or any successor thereto.
Mortgage: A mortgage loan or a participation interest in a mortgage loan that is secured by a first or
second lien on a one-to-four family dwelling and that has been purchased by the Depositor and transferred
by the Depositor to the Trustee for inclusion in the related PC Pool. With respect to each PC Pool, the
Mortgages to be included therein shall be identified on the books and records of the Depositor and the
Administrator.
Mortgage Coupon: The per annum fixed or adjustable interest rate of a Mortgage.
MultiLender Swap Program: A program under which Freddie Mac purchases Mortgages from one or
more sellers in exchange for PCs representing undivided beneficial ownership interests in a PC Pool
consisting of Mortgages that may or may not be those delivered by the seller(s).
Negative Amortization Factor: With respect to PCs backed by Mortgages providing for negative
amortization, a rounded (or, prior to the Negative Amortization Factors for the month of August 2016,
truncated rather than rounded) eight-digit decimal number that reflects the amount of Deferred Interest
added to the principal balances of the related Mortgages in the preceding month.
Offering Circular: Freddie Mac’s Mortgage Participation Certificates Offering Circular dated July
19, 2016, as amended and supplemented by any Supplements issued from time to time, or any successor
thereto, as it may be amended and supplemented from time to time.
Payment Date: The 15th of each month or, if the 15th is not a Business Day, the next Business Day.
Payment Delay: The delay between the first day of the Accrual Period for a PC and the related
Payment Date.
PC: With respect to each PC Pool, a Mortgage Participation Certificate issued pursuant to this
Agreement, representing a beneficial ownership interest in such PC Pool. The term “PC’’ includes a Gold
PC or an ARM PC unless the context requires otherwise.
PC Coupon: The per annum fixed or adjustable rate of a PC calculated as described in the Offering
Circular or the applicable Pool Supplement, computed on the basis of a 360-day year of twelve 30-day
months.
PC Issue Date: With respect to each PC Pool, the date specified in the related Pool Supplement or, if
not specified therein, the date on which Freddie Mac issues a PC in exchange for the Mortgages delivered
by a dealer or other customer.
PC Pool: With respect to each PC, the corpus of the related trust fund created by this Agreement,
consisting of (i) the related Mortgages and all proceeds thereof, (ii) amounts on deposit in the Custodial
Account, to the extent allocable to such PC Pool, (iii) the right to receive payments under the related
guarantee and (iv) any other assets specified in the related Pool Supplement, excluding any investment
earnings on any of the assets of that PC Pool. With respect to each PC Pool, and unless expressly stated
otherwise, the provisions of this Agreement will be interpreted as referring only to the Mortgages included
in that PC Pool, the PCs issued by that PC Pool and the Holders of those PCs.
Person: Any legal person, including any individual, corporation, partnership, limited liability
company, financial institution, joint venture, association, joint stock company, trust, unincorporated
organization or governmental unit or political subdivision of any governmental unit.
Pool Factor: With respect to each PC Pool, a rounded (or, prior to the Pool Factors for the month of
August 2016, truncated rather than rounded) eight-digit decimal calculated for each month by the
Administrator which, when multiplied by the original principal balance of the related PCs, will equal their
remaining principal amount. The Pool Factor for any month reflects the remaining principal amount after
the payment to be made on the Payment Date in the same month for Gold PCs or in the following month
for ARM PCs.
Pool Supplement: Any physical or electronic document or record (which may be a supplement to the
Offering Circular or any other supplemental document prepared by Freddie Mac for the related PCs),
which, together herewith, evidences the establishment of a PC Pool and modifies, amends or supplements
the provisions hereof in any respect whatsoever. The Pool Supplement for a particular PC Pool shall be
binding and effective upon formation of the related PC Pool and issuance of the related PCs, whether or not
such Pool Supplement is executed, delivered or published by Freddie Mac.
Purchase Documents: The mortgage purchase agreements between Freddie Mac and its Mortgage
sellers and servicers, which are the contracts that govern the purchase and servicing of Mortgages and
which include, among other things, the Guide and any negotiated modifications, amendments or
supplements to the Guide.
Record Date: As to any Payment Date, the close of business on the last day of (i) the preceding
month for Gold PCs or (ii) the second preceding month for ARM PCs.
S&P: S&P Global Ratings, or any successor thereto.
Trustee: Freddie Mac, in its capacity as trustee of each PC Pool formed under this Agreement, and its
successors and assigns, which will have the trustee responsibilities specified in this Agreement, as amended
or supplemented from time to time.
Trustee Event of Default: As defined in Section 6.06 of this Agreement.
ARTICLE I
Conveyance of Mortgages; Creation of PC Pools
Section 1.01. Declaration of Trust; Transfer of Mortgages. The Depositor, by delivering any
Mortgages pursuant to this Agreement, unconditionally, absolutely and irrevocably hereby transfers,
assigns, sets over and otherwise conveys to the Trustee, on behalf of the related Holders, all of the
Depositor’s right, title and interest in and to such Mortgages, including all payments of principal and
interest thereon received after the month in which the PC Issue Date occurs. Once Mortgages have been
identified as being part of a related PC Pool for which at least one PC has been issued, they shall remain in
that PC Pool unless removed in a manner consistent with this Agreement. Concurrently with the
Depositor’s transferring, assigning, setting over and otherwise conveying the Mortgages to the Trustee for a
PC Pool, the Trustee hereby accepts the Mortgages so conveyed and acknowledges that it holds the entire
corpus of each PC Pool in trust for the exclusive benefit of the related Holders and shall deliver to, or on
the order of, the Depositor, the PCs issued by such PC Pool. The Administrator agrees to administer the
related PC Pool and such PCs in accordance with the terms of this Agreement. On the related PC Issue
Date and upon payment to the Depositor for any such PC by a Holder, such Holder shall, by virtue thereof,
acknowledge, accept and agree to be bound by all of the terms and conditions of this Agreement.
A Pool Supplement shall evidence the establishment of a particular PC Pool and shall relate to
specific PCs representing the entire beneficial ownership interests in such PC Pool. If for any reason the
creation of a Pool Supplement is delayed, Freddie Mac shall create one as soon as practicable, and such
delay shall not affect the validity and existence of the PC Pool or the related PCs. With respect to each PC
Pool, the collective terms hereof and of the related Pool Supplement shall govern the issuance and
administration of the PCs related to such PC Pool, and all matters related thereto, and shall have no
applicability to any other PC Pool or PCs. As applied to each PC Pool, the collective terms hereof and of
the related Pool Supplement shall constitute an agreement as if the collective terms of those instruments
were set forth in a single instrument. In the event of a conflict between the terms hereof and the terms of a
Pool Supplement for a PC Pool, the terms of the Pool Supplement shall control with respect to that PC
Pool. A Pool Supplement is not considered an amendment to this Agreement requiring approval pursuant
to Section 7.05.
Section 1.02. Identity of the Mortgages; Substitution and Repurchase.
(a) In consideration for the transfer of the related Mortgages by the Depositor to a PC Pool, the
Depositor (i) shall receive the PCs issued by such PC Pool and (ii) may retain such PCs or transfer them to
the related Mortgage seller or otherwise, as the Depositor deems appropriate.
(b) After the PC Issue Date but prior to the first Payment Date, the Depositor may, in accordance with
its customary mortgage purchase and pooling procedures, adjust the amount and identity of the Mortgages
to be transferred to a PC Pool, the PC Coupon and/or the original unpaid principal balance of the PCs and
the Mortgages in the PC Pool, provided that any changes to the characteristics of the PCs shall be
evidenced by an amendment or supplement to the related Pool Supplement.
(c) Except as provided in this Section 1.02 or in Section 1.03, once the Depositor has transferred a
Mortgage to a particular PC Pool, such Mortgage may not be transferred out of such PC Pool, except (x) if
a mortgage insurer exercises an option under an insurance contract to purchase such Mortgage or (y) in the
case of repurchase by the Guarantor, the Administrator or the related Mortgage seller or servicer, under the
following circumstances:
(i) The Guarantor may repurchase from the related PC Pool a Mortgage in connection with a
guarantee payment under Section 3.09(a)(ii).
(ii) The Administrator may repurchase from the related PC Pool, or require or permit a
Mortgage seller or servicer to repurchase, any Mortgage if a repurchase is necessary or advisable (A)
to maintain servicing of the Mortgage in accordance with the provisions of the Guide, or (B) to
maintain the status of the PC Pool as a grantor trust for federal income tax purposes.
(iii) The Guarantor may repurchase from the related PC Pool, or require or permit a Mortgage
seller or servicer to repurchase, any Mortgage if (A) such Mortgage is 120 or more days delinquent,
or (B) the Guarantor determines, on the basis of information from the related borrower or servicer,
that loss of ownership of the property securing a Mortgage is likely or default is imminent due to
borrower incapacity, death or hardship or other extraordinary circumstances that make future
payments on such Mortgage unlikely or impossible.
(iv) The Guarantor may repurchase from the related PC Pool a Mortgage if a bankruptcy court
approves a plan that materially affects the terms of the Mortgage or authorizes a transfer or
substitution of the underlying property.
(v) The Administrator may require or permit a Mortgage seller or servicer to repurchase from
the related PC Pool any Mortgage or (within six months of the issuance of the related PCs) substitute
for any Mortgage a Mortgage of comparable type, unpaid principal balance, remaining term and
yield, if there is (A) a material breach of warranty by the Mortgage seller or servicer, (B) a material
defect in documentation as to such Mortgage or (C) a failure by a seller or servicer to comply with
any requirements or terms set forth in the Guide and, if applicable, other Purchase Documents.
(vi) The Administrator shall repurchase from the related PC Pool any Mortgage or (within two
years of the issuance of the related PCs) substitute for any Mortgage a Mortgage of comparable type,
unpaid principal balance, remaining term and yield, if (A) a court of competent jurisdiction or a
federal government agency duly authorized to oversee or regulate Freddie Mac’s mortgage purchase
business determines that Freddie Mac’s purchase of such Mortgage was unauthorized and Freddie
Mac determines that a cure is not practicable without unreasonable effort or expense or (B) such court
or government agency requires repurchase of such Mortgage.
(vii) To the extent a PC Pool includes convertible ARMs or Balloon/Reset Mortgages (each, as
defined in the Offering Circular), the Administrator shall repurchase from the related PC Pool or
require or allow the Mortgage seller or servicer to repurchase such Mortgages (a) when the borrower
exercises its option to convert the related interest rate from an adjustable rate to a fixed rate, in the
case of a convertible ARM; and (b) shortly before such Mortgage reaches its scheduled balloon
repayment date, in the case of a Balloon/Reset Mortgage.
(d) The purchase price of a Mortgage repurchased by a Mortgage seller or servicer shall be equal to
the then unpaid principal balance of such Mortgage, less any principal on such Mortgage that the Mortgage
seller or servicer advanced to the Depositor or the Administrator. The purchase price of a Mortgage
repurchased by the Administrator or the Guarantor under this Agreement shall be equal to the then unpaid
principal balance of such Mortgage, less any outstanding advances of principal on such Mortgage that the
Administrator, on behalf of the Trustee, distributed to Holders. The Administrator, on behalf of the
Trustee, agrees to release any Mortgage from the PC Pool upon payment of the applicable purchase price.
(e) In determining whether a Mortgage shall be repurchased from the related PC Pool as described in
this Section 1.02, the Guarantor and the Administrator may consider such factors as they deem appropriate,
including the reduction of administrative costs (in the case of the Administrator) or possible exposure as
Guarantor under its guarantee (in the case of the Guarantor).
Section 1.03. Post-Settlement Purchase Adjustments
(a) The Administrator shall make any post-settlement purchase adjustments necessary to reflect the
actual aggregate unpaid principal balance of the related Mortgages or other Mortgage characteristics as of
the date of their purchase by the Depositor or their delivery to the Administrator, on behalf of the Trustee,
in exchange for PCs, as the case may be.
(b) Post-settlement adjustments may be made in such manner as the Administrator deems appropriate,
but shall not adversely affect any Holder’s rights to monthly payments of interest at the PC Coupon, any
Holder’s pro rata share of principal or any Holder’s rights under the Guarantor’s guarantees. Any reduction
in the principal balance of the Mortgages held by a PC Pool shall be reflected by the Administrator as a
corresponding reduction in the principal balance of the related PCs with a corresponding principal payment
to the related Holders, on a pro rata basis.
Section 1.04. Custody of Mortgage Documents. With respect to each PC Pool, the Administrator, a
custodian acting as its agent (which may be a third party or a trust or custody department of the related
seller or servicer), or the originator or seller of the Mortgage may hold the related Mortgage documents,
including Mortgage notes and participation certificates evidencing the Trustee’s legal ownership interest in
the Mortgages. The Administrator may adopt and modify its policies and procedures for the custody of
Mortgage documents at any time, provided such modifications are prudent and do not materially and
adversely affect the Holders’ interests.
Section 1.05. Interests Held or Acquired by Freddie Mac. Freddie Mac shall have the right to
purchase and hold for its own account any PCs. Subject to Section 7.06, PCs held or acquired by Freddie
Mac from time to time and PCs held by other Holders shall have equal and proportionate benefits, without
preference, priority or distinction. In the event that Freddie Mac retains any interest in a Mortgage, the
remaining interest in which is part of a PC Pool, Freddie Mac’s interest in such Mortgage shall rank equally
with that of the related PC Pool, without preference, priority or distinction. No Holder shall have any
priority over any other Holder.
Section 1.06. Intended Characterization. It is intended that the conveyance, transfer, assignment
and setting over of the Mortgages by the Depositor to the Trustee pursuant to this Agreement be a true,
absolute and unconditional sale of the related Mortgages by the Depositor to the Trustee, and not a pledge
of the Mortgages to secure a debt or other obligation of the Depositor, and that the Holders of the related
PCs shall be the beneficial owners of such Mortgages. Notwithstanding this express intention, however, if
the Mortgages are determined by a court of competent jurisdiction or other competent authority to be the
property of the Depositor, then it is intended that: (a) this Agreement be deemed to be a security agreement
within the meaning of Articles 8 and 9 of the Uniform Commercial Code; (b) the conveyances provided for
in Section 1.01 shall be deemed to be (1) a grant by the Depositor to the Trustee on behalf of the related
Holders of a security interest in all of the Depositor’s right (including the power to convey title thereto),
title and interest, whether now owned or hereafter acquired, in and to the related Mortgages, any and all
general intangibles consisting of, arising from or relating to any of the foregoing, and all proceeds of the
conversion, voluntary or involuntary, of the foregoing into cash, instruments, securities or other property,
including without limitation all amounts from time to time held or invested in the Custodial Account and
allocable to such Mortgages, whether in the form of cash, instruments, securities or other property and (2)
an assignment by the Depositor to the Trustee on behalf of the related Holders of any security interest in
any and all of the Depositor’s right (including the power to convey title thereto), title and interest, whether
now owned or hereafter acquired, in and to the property described in the foregoing clause (1); and (c)
notifications to Persons holding such property, and acknowledgments, receipts or confirmations from
Persons holding such property, shall be deemed notifications to, or acknowledgments, receipts or
confirmations from, financial intermediaries, bailees or agents (as applicable) of the Administrator, on
behalf of the Trustee of the related Holders, for the purpose of perfecting such security interest under
applicable law.
Section 1.07. Encumbrances. Except as may otherwise be provided expressly in this Agreement,
neither Freddie Mac nor the Trustee, shall directly or indirectly, assign, sell, dispose of or transfer all or any
portion of or interest in any PC Pool, or permit all or any portion of any PC Pool to be subject to any lien,
claim, mortgage, security interest, pledge or other encumbrance of any other Person. This Section shall not
be construed as a limitation on Freddie Mac’s rights with respect to PCs held by it in its corporate capacity.
ARTICLE II
Administration and Servicing of the Mortgages
Section 2.01. The Administrator as Primary Servicer. With respect to each PC Pool, the
Administrator shall service or supervise servicing of the related Mortgages and administer, on behalf of the
Trustee, in accordance with the provisions of the Guide and this Agreement, including management of any
property acquired through foreclosure or otherwise, all for the benefit of the related Holders. The
Administrator shall have full power and authority to do or cause to be done any and all things in connection
with such servicing and administration that the Administrator deems necessary or desirable. The
Administrator shall seek from the Trustee, as representative of the related Holders any consents or
approvals relating to the control, management and servicing of the Mortgages included in any PC Pool and
that are required hereunder.
Section 2.02. Servicing Responsibilities. With respect to each PC Pool, the Administrator shall
service or supervise servicing of the related Mortgages in a manner consistent with prudent servicing
standards and in substantially the same manner as the Administrator services or supervises the servicing of
unsold mortgages of the same type in its portfolio. In performing its servicing responsibilities hereunder,
the Administrator may engage servicers, subservicers and other independent contractors or agents. The
Administrator may discharge its responsibility to supervise servicing of the Mortgages by monitoring
servicers’ performance on a reporting and exception basis. Except as provided in Articles V and VI and
Sections 7.05 and 7.06 of this Agreement, Freddie Mac, as Administrator shall not be subject to the control
of the Holders in the discharge of its responsibilities pursuant to this Article. Except with regard to its
guarantee obligations pursuant to Section 3.09 with respect to a PC Pool, the Administrator shall have no
liability to any related Holder for the Administrator’s actions or omissions in discharging its responsibilities
under this Article II other than for any direct damage resulting from its failure to exercise that degree of
ordinary care it exercises in the conduct and management of its own affairs. In no event shall the
Administrator have any liability for consequential damages.
Section 2.03. Realization Upon Defaulted Mortgages. With respect to each PC Pool, unless the
Administrator deems that another course of action (e.g., charge-off) would be in the best economic interest
of the Holders, the Administrator (or its authorized designee or representative) shall, as soon as practicable,
foreclose upon (or otherwise comparably convert the ownership of) any real property securing a Mortgage
which comes into and continues in default and as to which no satisfactory arrangements can be made for
collection of delinquent payments. In connection with such foreclosure or conversion, the Administrator
(or its authorized designee or representative) shall follow such practices or procedures as it deems
necessary or advisable and consistent with general mortgage servicing standards.
Section 2.04. Automatic Acceleration and Assumptions.
(a) With respect to each PC Pool, to the extent provided in the Guide, the Administrator shall enforce
the terms of each applicable Mortgage that gives the mortgagee the right to demand full payment of the
unpaid principal balance of the Mortgage upon sale or transfer of the property securing the Mortgage
regardless of the creditworthiness of the transferee (a right of “automatic acceleration’’), subject to
applicable state and federal law and the Administrator’s then-current servicing policies.
(b) With respect to each PC Pool, the Administrator shall permit the assumption by a new mortgagor
of an FHA/VA Mortgage upon the sale or transfer of the underlying property, as required by applicable
regulations. Any such assumption shall be in accordance with applicable regulations, policies, procedures
and credit requirements and shall not result in loss or impairment of any insurance or guaranty.
Section 2.05. Prepayment Penalties. Unless otherwise provided in the Pool Supplement for a PC
Pool, the related Holders shall not be entitled to receive any prepayment penalties, assumption fees or other
fees charged on the Mortgages included in such PC Pool, and either the related servicer or the
Administrator shall retain such amounts.
Section 2.06. Mortgage Insurance and Guarantees.
(a) With respect to each PC Pool, if a Conventional Mortgage is insured by a mortgage insurer and
the mortgage insurance policy is an asset of such PC Pool, the related Holders acknowledge that the insurer
shall have no obligation to recognize or deal with any Person other than the Administrator, the Trustee, or
their respective authorized designees or representatives regarding the mortgagee’s rights, benefits and
obligations under the related insurance contract.
(b) With respect to each PC Pool, each FHA/VA Mortgage shall have in full force and effect a
certificate or other satisfactory evidence of insurance or guaranty, as the case may be, as may be issued by
the applicable government agency from time to time. None of these agencies has any obligation to
recognize or deal with any Person other than the Administrator, the Trustee, or their respective authorized
designees or representatives with regard to the rights, benefits and obligations of the mortgagee under the
contract of insurance or guaranty relating to each FHA/VA Mortgage included in such PC Pool.
ARTICLE III
Distributions to Holders; Guarantees
Section 3.01. Monthly Reporting Period. For purposes of this Agreement with respect to any PC
Pool, any payment or any event with respect to any Mortgage included in such PC Pool that is reported to
the Administrator by the related servicer as having been made or having occurred within a Monthly
Reporting Period shall be deemed to have been received by the Administrator or to have in fact occurred
within such Monthly Reporting Period used by the Administrator for such purposes. Payments reported by
servicers include all principal and interest payments made by a borrower, insurance proceeds, liquidation
proceeds and repurchase proceeds. Events reported by servicers include foreclosure sales, payments of
insurance claims and payments of guarantee claims.
Section 3.02. Holder’s Undivided Beneficial Ownership Interest. With respect to each PC Pool,
the Holder of a PC on the Record Date shall be the owner of record of a pro rata undivided beneficial
ownership interest in the remaining principal balance of the Mortgages in the related PC Pool as of such
date and shall be entitled to interest at the PC Coupon on such pro rata undivided beneficial ownership
interest, in each case on the related Payment Date. Such pro rata undivided beneficial ownership interest
shall change accordingly if any Mortgage is added to or removed from such PC Pool in accordance with
this Agreement. A Holder’s pro rata undivided beneficial ownership interest in the Mortgages included in a
PC Pool is calculated by dividing the original unpaid principal balance of the Holder’s PC by the original
unpaid principal balance of all the Mortgages in the related PC Pool.
Section 3.03. Distributions of Principal. With respect to each PC Pool, the Administrator, on
behalf of the Trustee, shall withdraw from the Custodial Account and shall distribute to each related Holder
its pro rata share of principal collections with respect to the Mortgages in such PC Pool, including, if
applicable, each Holder’s pro rata share of the aggregate amount of any Deferred Interest that has been
added to the principal balance of the related Mortgages; provided, however, that with respect to guarantee
payments, the Guarantor’s obligations herein shall be subject to its subrogation rights pursuant to Section
3.10. The Administrator may retain from any prepayment or delinquent principal payment on any
Mortgage, for reimbursement to the Guarantor, any amount not previously received with respect to such
Mortgage but paid by the Guarantor to the related Holders under its guarantee. For Mortgages purchased
by the Depositor in exchange for PCs under its MultiLender Swap Program, the Depositor shall retain
principal payments made on such Mortgages in the amount of any difference between the aggregate unpaid
principal balance of the Mortgages as of delivery by the seller and the aggregate unpaid principal balance
as of the PC Issue Date, and the Depositor shall purchase additional Mortgages with such principal
payments; such additional Mortgages may or may not be included in the related PC Pool represented by the
PCs received by the seller.
Section 3.04. Distributions of Interest. With respect to each PC Pool, the Administrator, on behalf
of the Trustee, shall withdraw from the Custodial Account and shall distribute to each related Holder its pro
rata share of interest collections with respect to the Mortgages included in such PC Pool, at a rate equal to
the PC Coupon (excluding, if applicable, each Holder’s pro rata share of any Deferred Interest that has been
added to the principal balance of the related Mortgages). Interest shall accrue during the applicable
Accrual Periods. The Administrator may retain from any delinquent interest payment on any Mortgage, for
reimbursement to the Guarantor, any amount not previously received with respect to such Mortgage but
paid by the Guarantor to the related Holders under its guarantee. With respect to each PC Pool, a partial
month’s interest retained by Freddie Mac or remitted to the related Holders with respect to prepayments
shall constitute an adjustment to the fee payable to the Administrator and the Guarantor pursuant to Section
3.08(a) for such PC Pool.
Section 3.05. Payments.
(a) With respect to each PC Pool, distributions of principal and interest on the related PCs shall begin
in the month after issuance for Gold PCs and in the second month after issuance for ARM PCs. The
Administrator, on behalf of the Trustee, shall calculate, or cause to be calculated, for each PC the
distribution amount for the current calendar month.
(b) On or before each Payment Date, the Administrator, on behalf of the Trustee, shall instruct the
Federal Reserve Banks to credit payments on PCs from the Custodial Account to the appropriate Holders’
accounts. The related PC Pool’s payment obligations shall be met upon transmittal of the Administrator’s
payment order to the Federal Reserve Banks provided sufficient funds are then on deposit in the Custodial
Account. A Holder shall receive the payment of principal, if applicable, and interest on each Payment Date
on each PC held by such Holder as of the related Record Date.
(c) The Administrator relies on servicers’ reports of mortgage activity to prepare the Pool Factors.
There may be delays or errors in processing mortgage information, such as a servicer’s failure to file an
accurate or timely report of its collections of principal or its having filed a report that cannot be processed.
In these situations the Administrator’s calculation of scheduled principal to be made on Gold PCs may not
reflect actual payments on the related Mortgages. The Administrator shall account for and reconcile any
differences as soon as practicable.
(d) The Administrator reserves the right to change the period during which a servicer may hold funds
prior to payment to the Administrator, as well as the period for which servicers report payments to the
Administrator, including adjustments to the Monthly Reporting Period. Either change may change the time
at which prepayments are distributed to Holders. Any such change, however, shall not impair Holders’
rights to payments as otherwise provided in this Section.
(e) The Administrator shall maintain one or more accounts (together, the “Custodial Account”),
segregated from the general funds of Freddie Mac, in its corporate capacity, for the deposit of collections of
principal (including full and partial principal prepayments) and interest received from or advanced by the
servicers in respect of the Mortgages. Mortgage collections in respect of the PC Pools established by
Freddie Mac under this Agreement or trust funds established by Freddie Mac pursuant to any other trust
agreements may be commingled in the Custodial Account, provided that the Administrator keeps, or causes
to be kept, separate records of funds with respect to each such PC Pool and other trust fund. Collections due
to Freddie Mac, in its corporate capacity as owner of mortgages held in its portfolio, may also be
commingled in the Custodial Account, provided that the Administrator may withdraw such amounts for
remittance to Freddie Mac from time to time. Funds on deposit in the Custodial Account may be invested
by the Administrator in Eligible Investments. Investment earnings on deposits in the Custodial Account
shall be for the benefit of the Administrator, and any losses on such investments shall be paid by the
Administrator. On each Payment Date, amounts on deposit in the Custodial Account shall be withdrawn
upon the order of the Administrator, on behalf of the Trustee, for the purpose of making distributions to the
related Holders, in accordance with this Agreement.
Section 3.06. Pool Factors.
(a) The Administrator, on behalf of the Trustee, shall calculate and make payments to Holders on
each Payment Date based on the monthly Pool Factors (including Negative Amortization Factors) until
such time as the Administrator determines that a more accurate and practicable method for calculating such
payments is available and implements that method. Pursuant to Section 7.05(e), the Administrator may
modify the Pool Factor methodology from time to time, without the consent of Holders. With respect to
each PC Pool, the Administrator, on behalf of the Trustee, shall do the following:
(i) The Administrator shall publish or cause to be published for each month a Pool Factor with
respect to each PC Pool. Beginning in the month after formation of a PC Pool, Pool Factors shall be
published on or about the fifth Business Day of the month, which Pool Factors may reflect
prepayments reported to the Administrator after the end of the related Monthly Reporting Period and
before the publication of the applicable Pool Factors. However, the Administrator may, in its own
discretion, publish Pool Factors on any other Business Day. The Pool Factor for the month in which
the PC Pool is established is 1.00000000 and need not be published.
(ii) The Administrator shall distribute principal each month to a Holder of a Gold PC in an
amount equal to such Holder’s pro rata share of such principal, calculated by multiplying the original
principal balance of the Gold PC by the difference between its Pool Factors for the preceding and
current months.
(iii) The Administrator shall distribute principal each month to a Holder of an ARM PC in an
amount equal to such Holder’s pro rata share of such principal, calculated by multiplying the original
principal balance of the ARM PC by the difference between its Pool Factors for the two preceding
months.
(iv) The Administrator shall distribute interest each month in arrears to a Holder (assuming no
Deferred Interest) in an amount equal to 1/12th of the applicable PC Coupon multiplied by such
Holder’s pro rata share of principal, calculated by multiplying the original principal balance of such
Holder’s PC by the preceding month’s Pool Factor for Gold PCs or by the second preceding month’s
Pool Factor for ARM PCs.
(v) For any month that Deferred Interest has accrued on a Deferred Interest PC, the
Administrator shall distribute principal (if any is due) to a Holder in an amount equal to such Holder’s
pro rata share of principal, calculated by (A) subtracting the preceding month’s Pool Factor from the
second preceding month’s Pool Factor, (B) adding to the difference the Negative Amortization Factor
for the preceding month and (C) multiplying the resulting sum by the original PC principal balance.
The interest payment on the Deferred Interest PC in that month shall be (i) 1/12th of the PC Coupon
multiplied by (ii) the original principal balance of the Holder’s PC multiplied by (iii) the preceding
month’s Pool Factor minus the preceding month’s Negative Amortization Factor.
(b) With respect to each PC Pool, a Pool Factor shall reflect prepayments reported for the applicable
Monthly Reporting Period. The Administrator, on behalf of the Trustee, may also, in its discretion, reflect
in a Pool Factor any prepayments reported after the end of the applicable Monthly Reporting Period. To the
extent a given Pool Factor (adjusted as necessary for payments made pursuant to the Guarantor’s guarantee
of timely payment of scheduled principal on Gold PCs) does not reflect the actual unpaid principal balance
of the related Mortgages, the Administrator shall account for any difference by adjusting subsequent Pool
Factors as soon as practicable.
(c) In the case of a PC Pool that is comprised of ARMs, a Pool Factor shall be based upon the unpaid
principal balance of the related Mortgages that servicers report to the Administrator for the Monthly
Reporting Period that ended in the second month preceding the month in which the Pool Factor is
published. The Administrator, on behalf of the Trustee, may also, in its discretion, include as part of the
aggregate principal payment in any month any prepayments received after the Monthly Reporting Period
that ended in the second month preceding the month in which the Pool Factor is published. To the extent a
given Pool Factor does not reflect the actual aggregate unpaid principal balance of the Mortgages, the
Administrator shall account for any difference by adjusting subsequent Pool Factors as soon as practicable.
(d) The Pool Factor method for a PC Pool may affect the timing of receipt of payments by related
Holders but shall not affect the Guarantor’s guarantee with respect to such PC Pool, as set forth in Section
3.09. The Guarantor’s guarantee shall not be affected by the implementation of any different method for
calculating and paying principal and interest for any PC Pool, as permitted by this Section 3.06.
Section 3.07. Servicing Fees; Retained Interest.
(a) To the extent provided by contractual arrangement with the Administrator, with respect to each PC
Pool, the related servicer of each Mortgage included in such PC Pool shall be entitled to retain each month,
as a servicing fee, any interest payable by the borrower on a Mortgage that exceeds the servicer’s required
remittance with respect to such Mortgage. Each servicer is required to pay all expenses incurred by it in
connection with its servicing activities and shall not be entitled to reimbursement for those expenses,
except as provided in Section 3.08(c). If a servicer advances any principal and/or interest on a Mortgage to
the Administrator prior to the receipt of such funds from the borrower, the servicer may retain (i) from
prepayments or collections of delinquent principal on such Mortgage any payments of principal so
advanced, or (ii) from collections of delinquent interest on such Mortgage any payments of interest so
advanced. To the extent permitted by its servicing agreement, the servicer is entitled to retain as additional
compensation certain incidental fees related to Mortgages it services.
(b) With respect to a PC Pool, pursuant to the related Purchase Documents, a seller may retain each
month as extra compensation a fixed amount of interest on a Mortgage included in such PC Pool. In such
event, the related servicer shall retain each month as a servicing fee the excess of any interest payable by
the borrower on such Mortgage (less the seller’s retained interest amount) over the servicer’s required
remittance with respect to such Mortgage.
Section 3.08. Administration Fee; Guarantee Fee.
(a) Subject to any adjustments required by Section 3.04, with respect to any PC Pool, the
Administrator and the Guarantor shall be entitled to receive from monthly interest payments on each related
Mortgage a fee (to be allocated between the Administrator and the Guarantor as they may agree) equal to
the excess of any interest received by the Administrator from the servicer over the amount of interest
payable to the related Holders; provided, however, that the aggregate fee amount shall be automatically
adjusted with respect to each PC Pool to the extent a Pool Factor does not reflect the unpaid principal
balance of the Mortgages. Any such adjustment shall equal the difference between (i) interest at the
applicable PC Coupon computed on the aggregate unpaid principal balance of the Mortgages for such
month based on monthly principal payments actually received by the Administrator and (ii) interest at the
applicable PC Coupon computed on the remaining balance of the Mortgages included in the PC Pool
derived from the Pool Factor. The Administrator shall (i) withdraw the aggregate fee amount from the
Custodial Account prior to distributions to the related Holders, (ii) retain its portion of the fee for the
Administrator’s own account and (iii) remit the remaining portion of the fee to the Guarantor as the
guarantee fee. In addition, the Administrator is entitled to retain as additional compensation certain
incidental fees on the Mortgages as provided in Section 2.05 and certain investment earnings as provided in
Section 3.05(e).
(b) The Depositor shall pay all expenses incurred in connection with the transfer of the Mortgages,
the establishment and administration of each PC Pool and the issuance of the PCs. Any amounts (including
attorney’s fees) expended by the Trustee or the Administrator (or the servicers on the Administrator’s
behalf) for the protection, preservation or maintenance of the Mortgages, or of the real property securing
the Mortgages, or of property received in liquidation of or realization upon the Mortgages, shall be
expenses to be borne pro rata by the Administrator and the Holders in accordance with their interests in
each Mortgage. The Administrator, on behalf of the Trustee, may retain an amount sufficient to pay the
portion of such expenses borne pro rata by the Depositor and the Holders from payments otherwise due to
Holders, which may affect the timing of receipt of payments by Holders but shall not affect the Guarantor’s
obligations under Section 3.09.
(c) The Administrator shall reimburse a servicer for any amount (including attorney’s fees) it expends
(on the Administrator’s behalf and with its approval) for the protection, preservation or maintenance of the
Mortgages, or of the real property securing the Mortgages, or of property received in liquidation of or
realization upon the Mortgages. Such expenses shall be reimbursable to the servicer from the assets of the
related PC Pool, to the extent provided in the Guide.
(d) Any fees and expenses described above shall not affect the Guarantor’s guarantee with respect to
any PC Pool, as set forth in Section 3.09.
Section 3.09. Guarantees.
(a) With respect to each PC Pool, the Guarantor guarantees to the Trustee and to each Holder of a PC:
(i) the timely payment of interest at the applicable PC Coupon;
(ii) the full and final payment of principal on the underlying Mortgages on or before the
Payment Date that falls (A) in the month of its Final Payment Date, for Gold PCs, or (B) in the month
after its Final Payment Date, for ARM PCs; and
(iii) for Gold PCs only, the timely payment of scheduled principal on the underlying Mortgages.
In the case of Deferred Interest PCs, the Guarantor’s guarantee of principal includes, and its guarantee of
interest excludes, any Deferred Interest added to the principal balances of the related Mortgages. The
Guarantor shall make payments of any guaranteed amounts by transfer to the Custodial Account for
distribution to the related Holders, in accordance with Sections 3.03 and 3.04. The guarantees pursuant to
this Section will inure to the benefit of each PC Pool and its related Holders, and shall be enforceable by
the Trustee of that PC Pool and by such Holders, as provided in Article V of this Agreement.
(b) The Guarantor shall compute guaranteed scheduled monthly principal payments on any Gold PC,
subject to any applicable adjustments, in accordance with procedures adopted by the Guarantor from time
to time. With respect to each PC Pool, any payment the Guarantor makes to the Administrator, on behalf
of the Trustee, on account of the Guarantor’s guarantee of scheduled principal payments shall be
considered to be a payment of principal for purposes of calculating the Pool Factor for such PC Pool and
the Holder’s pro rata share of the remaining unpaid principal balance of the related Mortgages.
(c) The Guarantor’s guarantees shall continue to be effective or shall be reinstated (i) in the event that
any principal or interest payment made to a Holder is for any reason returned by the Holder pursuant to an
order, decree or judgment of any court of competent jurisdiction that the Holder was not entitled to retain
such payment pursuant to this Agreement and (ii) notwithstanding any provision hereof permitting fees,
expenses, indemnities or other amounts to be paid from the assets of any PC Pool.
Section 3.10. Subrogation. With respect to each PC Pool, the Guarantor shall be subrogated to all
the rights, interests, remedies, powers and privileges of each related Holder in respect of any Mortgage
included in such PC Pool on which it has made guarantee payments of principal and/or interest to the extent
of such payments. Nothing in this Section shall impair the Guarantor’s right to receive distributions in its
capacity as Holder, if it is a Holder of any PCs.
Section 3.11. Termination Upon Final Payment. Each PC Pool is irrevocable and will terminate
only in accordance with the terms of this Agreement. Except as provided in Sections 3.05(e), 6.06 and
7.01, with respect to each PC Pool, Freddie Mac’s and the Trustee’s obligations and responsibilities under
this Agreement shall terminate as to a PC Pool and its Holders upon (i) the full payment to such Holders of
all principal and interest due to the Holders based on the Pool Factors or by reason of the Guarantor’s
guarantees or (ii) the payment to the Holder of all amounts held by Freddie Mac and the Trustee,
respectively, and required to be paid hereunder; provided, however, that in no event shall any PC Pool
created hereby continue beyond the expiration of 21 years from the death of the survivor of the descendants
of Joseph P. Kennedy, the late ambassador of the United States to the Court of St. James’s, living on the
date hereof.
Section 3.12. Effect of Final Payment Date. The actual final payment on a PC may occur prior to
the Payment Date specified in Section 3.09(a)(ii) due to prepayments of principal, including prepayments
made in connection with the repurchase of any Mortgage from the related PC Pool.
Section 3.13. Payment Error Corrections. In the event of a principal or interest payment error, the
Administrator, in its sole discretion, may effect corrections by the adjustment of payments to be made on
future Payment Dates or in such other manner as it deems appropriate.
ARTICLE IV
PCs
Section 4.01. Form and Denominations. With respect to each PC Pool, the principal balances, PC
Coupons and other characteristics of the PCs to be issued shall be specified in the related Pool Supplement.
Delivery of the PCs of a PC Pool shall constitute the issuance of the PCs for that PC Pool. PCs shall be
issued, held and transferable only on the book-entry system of the Federal Reserve Banks in minimum
original principal amounts of $1,000 and additional increments of $1. PCs shall at all times remain on
deposit with a Federal Reserve Bank in accordance with the provisions of the Book-Entry Rules. A Federal
Reserve Bank will maintain a book-entry recordkeeping system for all transactions in PCs with respect to
Holders.
Section 4.02. Transfer of PCs. PCs may be transferred only in minimum original principal amounts
of $1,000 and additional increments of $1. PCs may not be transferred if, as a result of the transfer, the
transferor or the new Holder would have on deposit in its account PCs of the same issue with an original
principal amount of less than $1,000. The transfer, exchange or pledge of PCs shall be governed by the
fiscal agency agreement between Freddie Mac and a Federal Reserve Bank, the Book-Entry Rules and such
other procedures as shall be agreed upon from time to time by Freddie Mac and a Federal Reserve Bank. A
Federal Reserve Bank shall act only upon the instructions of the Holder in recording transfers of a PC. A
charge may be made for any transfer of a PC and shall be made for any tax or other governmental charge
imposed in connection with a transfer of a PC. Freddie Mac hereby assigns to the Administrator, on behalf
of the Trustee, Freddie Mac’s rights under each fiscal agency agreement with respect to PCs issued by any
PC Pool.
Section 4.03. Record Date. The Record Date for each Payment Date shall be the close of business
on the last day of the preceding month for Gold PCs and the second preceding month for ARM PCs. A
Holder of a PC on the books and records of a Federal Reserve Bank on the Record Date shall be entitled to
payment of principal and interest on the related Payment Date. A transfer of a PC made on or before the
Record Date in a month shall be recognized as effective as of the first day of such month.
ARTICLE V
Remedies
Section 5.01. Events of Default. With respect to each PC Pool, an “Event of Default’’ means any
one of the following events:
(a) Default by the Guarantor or the Administrator in the payment of interest or principal to the related
Holders as and when the same shall become due and payable as provided in this Agreement, and the
continuance of such default for a period of 30 days.
(b) Failure by the Guarantor or the Administrator to observe or perform any other covenants of this
Agreement relating to their respective obligations, and the continuance of such failure for a period of 60
days after the date of receipt by such party of written notice of such failure and a demand for remedy by the
affected Holders representing not less than 65 percent of the remaining principal balance of any affected
PC Pool.
(c) The entry by any court having jurisdiction over the Guarantor or the Administrator of a decree or
order for relief in an involuntary case under any applicable bankruptcy, insolvency or other similar law now
or hereafter in effect, or for the appointment of a receiver, liquidator, assignee, custodian or sequestrator (or
other similar official) of the Guarantor or the Administrator or for any substantial part of its property, or for
the winding up or liquidation of its affairs, if such decree or order remains unstayed and in effect for a
period of 60 consecutive days.
(d) Commencement by the Guarantor or the Administrator of a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or consent by the Guarantor or the
Administrator to the entry of an order for relief in an involuntary case under any such law, or its consent to
the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian or
sequestrator (or other similar official) of the Guarantor or the Administrator or for any substantial part of
their respective properties, or any general assignment made by the Guarantor or the Administrator for the
benefit of creditors, or failure by the Guarantor or the Administrator generally to pay their debts as they
become due.
The appointment of a conservator (or other similar official) by a regulator having jurisdiction over the
Guarantor or the Administrator, whether or not such party consents to such appointment, shall not
constitute an Event of Default.
Section 5.02. Remedies.
(a) If an Event of Default occurs and is continuing with respect to a PC Pool, the Holders of PCs
representing a majority of the remaining principal balance of such PC Pool may, by written notice to
Freddie Mac, remove Freddie Mac as Administrator and nominate its successor under this Agreement with
respect to such PC Pool. The nominee shall be deemed appointed as Freddie Mac’s successor as
Administrator unless Freddie Mac objects within 10 days after such nomination. Upon such objection:
(i) The Administrator may petition any court of competent jurisdiction for the appointment of its
successor; or
(ii) Any bona fide Holder that has been a Holder for at least six months may, on behalf of such
Holder and all others similarly situated, petition any such court for appointment of the
Administrator’s successor.
(b) If a successor Administrator is appointed, the Administrator shall submit to its successor a
complete written report and accounting of the Mortgages in the affected PC Pool and shall take all other
steps necessary or desirable to transfer its interest in and administration of such PC Pool to its successor.
(c) Subject to the Freddie Mac Act, a successor may take any action with respect to the Mortgages as
may be reasonable and appropriate in the circumstances. Prior to the designation of a successor, the
Holders of PCs representing a majority of the remaining principal balance of any affected PC Pool may
waive any past or current Event of Default.
(d) Appointment of a successor shall not relieve Freddie Mac, in its capacity as Guarantor, of its
guarantee obligations as set forth in this Agreement.
Section 5.03. Limitation on Suits by Holders.
(a) With respect to any PC Pool, except as provided in Section 5.02, no Holder shall have any right to
institute any action or proceeding at law or in equity or in bankruptcy or otherwise or seek any other
remedy whatsoever against Freddie Mac or the Trustee with respect to this Agreement or the related PCs or
Mortgages, unless:
(i) Such Holder previously has given the Trustee written notice of an Event of Default and the
continuance thereof;
(ii) The Holders of PCs representing a majority of the remaining principal balance of any
affected PC Pool have made a written request to the Trustee to institute an action or proceeding in its
own name and have offered the Trustee reasonable indemnity against the costs, expenses and
liabilities to be incurred;
(iii) The Trustee has failed to institute any such action or proceeding for 60 days after its receipt
of the written notice, request and offer of indemnity described above; and
(iv) The Trustee has not received from such Holders any direction inconsistent with the written
request described above during the 60-day period.
(b) No Holder shall have any right under this Agreement to prejudice the rights of any other Holder,
to obtain or seek preference or priority over any other Holder or to enforce any right under this Agreement,
except for the ratable and common benefit of all Holders of PCs representing interests in any affected PC
Pool.
(c) For the protection and enforcement of the provisions of this Section, Freddie Mac, the Trustee and
each and every Holder shall be entitled to such relief as can be given either at law or in equity.
Notwithstanding the foregoing, no Holder’s right to receive payment (or to institute suit to enforce
payment) of principal and interest as provided herein on or after the due date of such payment shall be
impaired or affected without the consent of the Holder.
ARTICLE VI
Trustee
Section 6.01. Duties of Trustee.
(a) If an Event of Default has occurred and is continuing with respect to a PC Pool, the Trustee
shall exercise the rights and powers vested in it by this Agreement and use the same degree of care and skill
in its exercise as a prudent person would exercise or use under the circumstances in the conduct of such
person’s own affairs.
(b) Except during the continuance of an Event of Default, the Trustee undertakes to perform such
duties and only such duties as are specifically set forth in this Agreement and shall not be liable except for
the performance of such duties and obligations as are specifically set forth in this Agreement and no
implied covenants or obligations shall be read into this Agreement against the Trustee.
(c) The Trustee and its directors, officers, employees and agents may not be protected from
liability which would otherwise be imposed by reason of willful misfeasance, bad faith or gross negligence
in the performance of their respective duties or by reason of reckless disregard of obligations and duties
under this Agreement, except that:
(i) this paragraph does not limit the effect of paragraph (b) of this Section;
(ii) the Trustee shall not be liable for any action taken, or not taken, by the Trustee in good
faith pursuant to this Agreement or for errors in judgment; and
(iii) the Trustee shall not be required to take notice or be deemed to have notice or knowledge
of any default or Event of Default, unless the Trustee obtains actual knowledge or written notice
of such default or Event of Default. In the absence of such actual knowledge or notice, the Trustee
may conclusively assume that there is no default or Event of Default.
(d) Every provision of this Agreement shall be subject to the provisions of this Section and
Section 6.02.
(e) The Trustee shall not be liable for indebtedness evidenced by or arising under this Agreement,
including principal of or interest on the PCs, or interest on any money received by it except as the Trustee
may agree in writing.
(f) Money held in trust by the Trustee need not be segregated from other funds except to the extent
required by law or the terms of this Agreement.
(g) No provision of this Agreement shall require the Trustee to expend, advance or risk its own
funds or otherwise incur financial liability in the performance of any of its duties hereunder or in the
exercise of any of its rights or powers, if it shall have reasonable grounds to believe that repayment of such
funds or adequate indemnity against such risk or liability is not reasonably assured to it.
(h) The Trustee, or the Administrator on its behalf, may, but shall not be obligated to, undertake
any legal action that it deems necessary or desirable in the interest of Holders. The Trustee, or the
Administrator on its behalf, may be reimbursed for the legal expenses and costs of such action from the
assets of the related PC Pool.
Section 6.02. Certain Matters Affecting the Trustee.
(a) The Trustee, and any director, officer, employee or agent of the Trustee may rely in good faith
on any certificate, opinion or other document of any kind which, prima facie, is properly executed and
submitted by any appropriate Person respecting any matters arising hereunder. The Trustee may rely on
any such documents believed by it to be genuine and to have been signed or presented by the proper Person
and on their face conforming to the requirements of this Agreement. The Trustee need not investigate any
fact or matter stated in such documents.
(b) Before the Trustee acts or refrains from acting, it may require an officer’s certificate or an
opinion of counsel, which shall not be at the expense of the Trustee. The Trustee shall not be liable for any
action it takes or omits to take in good faith in reliance on an officer’s certificate or opinion of counsel.
The right of the Trustee to perform any discretionary act enumerated in this Agreement shall not be
construed as a duty and the Trustee shall not be answerable for other than its willful misfeasance, bad faith
or gross negligence in the performance of such act.
(c) The Trustee may execute any of the trusts or powers hereunder or perform any duties
hereunder either directly or by or through agents or attorneys or a custodian or nominee.
(d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it
believes to be authorized or within its rights or powers; provided, that the Trustee’s conduct does not
constitute willful misfeasance, bad faith or gross negligence. In no event shall the Trustee have any
liability for consequential damages.
(e) The Trustee may consult with and rely on the advice of counsel, accountants and other advisors
and shall not be liable for errors in judgment or for anything it does or does not do in good faith if it so
relies. Any opinion of counsel with respect to legal matters relating to this Agreement and the PCs shall be
full and complete authorization and protection from liability in respect to any action taken, omitted or
suffered by it hereunder in good faith and in accordance with any opinion of such counsel.
(f) Any fees, expenses and indemnities payable from the assets of any PC Pool to Freddie Mac, in
its capacity as Trustee, in the performance of its duties and obligations hereunder shall not affect Freddie
Mac’s guarantee with respect to that PC Pool, as set forth in Section 3.09.
Section 6.03. Trustee’s Disclaimer. The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Agreement, the assets of the PC Pool or the PCs.
Section 6.04. Trustee May Own PCs. Subject to Section 7.06, the Trustee in its individual or any
other capacity may become the owner or pledgee of PCs with the same rights as it would have if it were not
the Trustee.
Section 6.05. Indemnity. Each PC Pool shall indemnify the Trustee and the Trustee’s employees,
directors, officers and agents, as provided in this Agreement, against any and all claims, losses, liabilities or
expenses (including attorneys’ fees) incurred by it in connection with the administration of this trust and
the performance of its duties under this Agreement (to the extent not previously reimbursed above),
including, without limitation, the execution and filing of any federal or state tax returns and information
returns and being the mortgagee of record with respect to the related Mortgages. The Trustee shall notify
the Administrator promptly of any claim for which it may seek indemnity. Failure by the Trustee to so
notify the Administrator shall not relieve the related PC Pool of its obligations hereunder. A PC Pool shall
not be required to reimburse any expense or indemnify against any loss, liability or expense incurred by the
Trustee through the Trustee’s own willful misfeasance, bad faith or gross negligence.
The Trustee’s rights pursuant to this Section shall survive the discharge of this Agreement.
Section 6.06. Replacement of Trustee. The Trustee may resign at any time. Any successor Trustee
shall resign if it ceases to be eligible in accordance with the provisions of Section 6.09. In either case, the
resignation of the Trustee shall become effective, and the resigning Trustee shall be discharged from its
obligations with respect to the PC Pools created under this Agreement by giving 90 days’ written notice of
the resignation to the Depositor, the Guarantor and the Administrator and upon the effectiveness of an
appointment of a successor Trustee, which may be as of a date prior to the end of the 90-day period. Upon
receiving such notice of resignation, the Depositor shall promptly appoint one or more successor Trustees
by written instrument, one copy of which is delivered to the resigning Trustee and one copy of which is
delivered to the successor Trustee. The successor Trustee need not be the same Person for all PC Pools. If
no successor Trustee has been appointed for a PC Pool, or one that has been appointed has not accepted the
appointment within 90 days after giving such notice of resignation, the resigning Trustee may petition any
court of competent jurisdiction for the appointment of a successor Trustee.
Prior to an Event of Default, or if an Event of Default has occurred and has been cured with
respect to a PC Pool, Freddie Mac cannot be removed as Trustee with respect to that PC Pool. If an Event
of Default has occurred and is continuing while Freddie Mac is the Trustee, at the direction of Holders of
PCs representing a majority of the remaining principal balance of such PC Pool, Freddie Mac shall resign
or be removed as Trustee, and to the extent permitted by law, all of the rights and obligations of the Trustee
with respect to the related PC Pool only, will be terminated by notifying the Trustee in writing. Holders of
PCs representing a majority of the remaining principal balance of the PC Pool will then be authorized to
name and appoint one or more successor Trustees. Notwithstanding the termination of the Trustee, its
liability under this Agreement and arising prior to such termination shall survive such termination.
If a successor Trustee is serving as the Trustee, the following events are “Trustee Events of
Default” with respect to a PC Pool:
(i) the Trustee fails to comply with Section 6.09;
(ii) the Trustee is adjudged bankrupt or insolvent;
(iii) a receiver or other public officer takes charge of the Trustee or its property; or
(iv) the Trustee otherwise becomes incapable of acting.
If at any time a Trustee Event of Default has occurred and is continuing, the Guarantor (or if an
Event of Default has occurred and is continuing, the Depositor) may, and if directed by Holders of PCs
representing a majority of the remaining principal balance of such PC Pool, shall, remove the Trustee as to
such PC pool and appoint a successor Trustee by written instrument, one copy of which shall be delivered
to the Trustee so removed and one copy of which shall be delivered to the successor Trustee, and the
Guarantor (or if an Event of Default has occurred and is continuing, the Depositor) shall give written notice
of the successor Trustee to the Holders affected by the succession. Notwithstanding the termination of the
Trustee, its liability under this Agreement arising prior to such termination will survive such termination.
If the Trustee resigns or is removed or if a vacancy exists in the office of the Trustee for any
reason (the Trustee in such event being referred to herein as the retiring Trustee), the Depositor shall
promptly appoint a successor Trustee that satisfies the eligibility requirements of Section 6.09.
The retiring Trustee agrees to cooperate with the Depositor and any successor Trustee in effecting
the termination of the retiring Trustee’s responsibilities and rights hereunder and shall promptly provide
such successor Trustee all documents and records reasonably requested by it to enable it to assume the
Trustee’s functions hereunder.
A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee
and to the Depositor, the Guarantor and the Administrator. Thereupon the resignation or removal of the
retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and
duties of the Trustee under this Agreement with respect to such PC Pool. The successor Trustee shall mail
a notice of its succession to the related Holders. The retiring Trustee shall promptly transfer all property
held by it as Trustee to the successor Trustee.
If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is
removed, the retiring Trustee or the Depositor may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
Section 6.07. Successor Trustee By Merger. If a successor Trustee consolidates with, merges or
converts into, or transfers all or substantially all its corporate trust business or assets to, another corporation
or banking association, the resulting, surviving or transferee corporation without any further act shall be the
successor Trustee; provided, that such corporation or banking association shall be otherwise qualified and
eligible under Section 6.09.
Section 6.08. Appointment of Co-Trustee or Separate Trustee.
(a) Notwithstanding any other provisions of this Agreement, at any time, for the purpose of
meeting any legal requirement of any jurisdiction in which any part of a PC Pool may at the time be
located, the Trustee shall have the power and may execute and deliver all instruments to appoint one or
or separate trustee or separate trustees, of all or any part
more Persons to act as a
of such PC Pool and to vest in such Person or Persons, in such capacity and for the benefit of the related
Holders, such title to such PC Pool, or any part thereof, and, subject to the other provisions of this Section,
such powers, duties, obligations, rights and trusts as the Trustee may consider necessary or desirable. No
or
or separate trustee hereunder shall be required to meet the terms of eligibility as a successor
trustee under Section 6.09 and no notice to the related Holders of the appointment of any
separate trustee shall be required under Section 6.06 hereof.
or
(b) With respect to each PC Pool, every separate trustee and
shall, to the extent
permitted by law, be appointed and act subject to the following provisions and conditions:
jointly (it being understood that such separate trustee or
(i) all rights, powers, duties and obligations conferred or imposed upon the Trustee shall be
conferred or imposed upon and exercised or performed by the Trustee and such separate trustee or
is not authorized to
act separately without the Trustee joining in such act), except to the extent that under any law of
any jurisdiction in which any particular act or acts are to be performed the Trustee shall be
incompetent or unqualified to perform such act or acts, in which event such rights, powers, duties
and obligations (including the holding of title to the related PC Pool or any portion thereof in any
such jurisdiction) shall be exercised and performed singly by such separate trustee or
but solely at the direction of the Trustee;
(ii) no trustee hereunder shall be personally liable by reason of any act or omission of any
other trustee hereunder; and
(iii) the Trustee may at any time accept the resignation of or remove any separate trustee or
(c) Any notice, request or other writing given to the Trustee shall be deemed to have been given to
as effectively as if given to each of them. Every
each of the then separate trustees and
instrument appointing any separate trustee or
shall refer to this Agreement and the conditions of
this Article VI. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be
vested with the estates or property specified in its instrument of appointment, either jointly with the Trustee
or separately, as may be provided therein, subject to all the provisions of this Agreement, specifically
including every provision of this Agreement relating to the conduct of, affecting the liability of, or
affording protection to, the Trustee. Every such instrument shall be filed with the Trustee.
(d) Any separate trustee or
may at any time constitute the Trustee, its agent or
with full power and authority, to the extent not prohibited by law, to do any lawful act
under or in respect of this Agreement on its behalf and in its name. If any separate trustee or
shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies
and trusts shall vest in and be exercised by the Trustee, to the extent permitted by law, without the
appointment of a new or successor trustee.
Section 6.09. Eligibility; Disqualification. Freddie Mac is eligible to act as the Trustee and is
initially the Trustee for the PC Pools created under this Agreement. Any successor to Freddie Mac (i) at
the time of its appointment as Trustee, must be reasonably acceptable to Freddie Mac and (ii) must be
organized as a corporation or association doing business under the laws of the United States or any State
thereof, be authorized under such laws to exercise corporate trust powers, have combined capital and
surplus of at least $50,000,000 and be subject to supervision or examination by federal or state financial
regulatory authorities. If any successor Trustee shall cease to satisfy the eligibility requirements set forth in
(ii) above, that successor Trustee shall resign immediately in the manner and with the effect specified in
Section 6.06.
ARTICLE VII
Miscellaneous Provisions
Section 7.01. Annual Statements. Within a reasonable time after the end of each calendar year, the
Administrator (or its agent) shall furnish to each Holder on any Record Date during such year information
that the Administrator deems necessary or desirable to enable Holders and beneficial owners of PCs to
prepare their United States federal income tax returns, if applicable.
Section 7.02. Limitations on Liability. Neither Freddie Mac, in its corporate capacity, nor any of its
directors, officers, employees, authorized designees, representatives or agents (“related persons’’) shall be
liable to Holders for any action taken, or not taken, by them or by a servicer in good faith pursuant to this
Agreement or for errors in judgment. This provision shall not protect Freddie Mac or any related person
against any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of obligations and duties under
this Agreement. In no event shall Freddie Mac or any related person be liable for any consequential
damages. Freddie Mac and any related person may rely in good faith on any document or other
communication of any kind properly executed and submitted by any Person with respect to any matter
arising under this Agreement. Freddie Mac has no obligation to appear in, prosecute or defend any legal
action which is not incidental to its duties to service or supervise the servicing of the Mortgages in
accordance with this Agreement and which in its opinion may involve any expense or liability for Freddie
Mac. Freddie Mac may, in its discretion, undertake or participate in any action it deems necessary or
desirable with respect to any Mortgage, this Agreement, the PCs or the rights and duties of the parties
hereto and the interests of the Holders hereunder. In such event, the legal expenses and costs of such action
and any resulting liability shall be expenses for the protection, preservation and maintenance of the
Mortgages borne pro rata by Freddie Mac and Holders as provided in Section 3.08(b).
Section 7.03. Limitation on Rights of Holders. The death or incapacity of any Person having an
interest in a PC shall not terminate this Agreement or any PC Pool. Such death or incapacity shall not
entitle the legal representatives or heirs of such Person, or any Holder for such Person, to claim an
accounting, take any action or bring any proceeding in any court for a partition or winding up of the related
PC Pool, nor otherwise affect the rights, obligations and liabilities of the parties hereto or any of them.
Section 7.04. Control by Holders. With respect to any PC Pool, except as otherwise provided in
Articles V and VI and Sections 7.05 and 7.06, no Holder shall have any right to vote or to otherwise control
in any manner the operation and management of the Mortgages included in such PC Pool, or the
obligations of the parties hereto. This Agreement shall not be construed so as to make the Holders from
time to time partners or members of an association. Holders shall not be liable to any third person by reason
of any action taken by the parties to this Agreement pursuant to any provision hereof.
Section 7.05. Amendment.
(a) Freddie Mac and the Trustee may amend this Agreement (including any related Pool Supplement)
from time to time without the consent of any Holders to (i) cure any ambiguity or correct or supplement
any provision in this Agreement, provided, however, that any such amendment shall not have a material
adverse effect on any Holder; (ii) maintain the classification of any PC Pool as a grantor trust for federal
income tax purposes; or (iii) avoid the imposition of any state or federal tax on a PC Pool; it being
understood that any amendment permitting the repurchase of a Mortgage by Freddie Mac due to a
delinquency of less than 120 days, other than in the circumstances described in Section 1.02(c)(iii), may not
be adopted under this clause (a).
(b) Except as provided in Section 7.05(c), Freddie Mac and the Trustee may amend this Agreement as
to any PC Pool, with the consent of Holders representing not less than a majority of the remaining principal
balance of the affected PC Pool.
(c) Freddie Mac and the Trustee may not amend this Agreement, without the consent of a Holder, if
such amendment would impair or affect the right of such Holder to receive payment of principal and
interest on or after the due date of such payment or to institute suit for the enforcement of any such
payment on or after such date.
(d) To the extent that any provisions of this Agreement differ from the provisions of any Freddie Mac
Mortgage Participation Certificates Agreement or PC Master Trust Agreement dated prior to the date of
this Agreement, this Agreement shall be deemed to amend such provisions of the prior agreement, but only
to the extent that Freddie Mac, under the terms of such prior agreement, could have effected such change as
an amendment of such prior agreement without the consent of Holders of PCs thereunder; provided,
however, that the trust declarations and related provisions set forth in Section 7.05(d) of the PC Master
Trust Agreement dated as of December 31, 2007 are hereby reaffirmed with respect to each PC Pool
created before December 31, 2007.
(e) Notwithstanding any other provision of this Section, (i) the Administrator (in its own discretion
and in its own interest) and the Trustee (at the Administrator’s direction) may amend this Agreement to
reflect any modification in the Administrator’s methodology of calculating payments to Holders, including
any modifications described in Section 3.05(d) and Section 3.06(a) and the manner in which it distributes
prepayments to Holders, (ii) the Administrator (in its own discretion and in its own interest) and the Trustee
(at the Administrator’s direction) may amend this Agreement to cure any inconsistency between this
Agreement and the provisions of the Guide and (iii) the Depositor (in its own discretion and in its own
interest) and the Trustee (at the Administrator’s direction) may amend any Pool Supplement to make the
adjustments described in Section 1.02(b) to the characteristics of the Mortgages to be transferred to a PC
Pool or to the related PCs.
Section 7.06. Voting Rights.
If Freddie Mac is acting as Administrator or Trustee and an Event of Default has occurred and is
continuing, any PCs held by Freddie Mac for its own account shall be disregarded and deemed not to be
outstanding for purposes of exercising the remedies set forth in Section 5.02 and the second paragraph of
Section 6.06.
Section 7.07. Persons Deemed Owners. With respect to each PC Pool, Freddie Mac, the Trustee,
the Administrator and a Federal Reserve Bank (or any agent of any of them) may deem and treat the related
Holder(s) as the absolute owner(s) of a PC and the undivided beneficial ownership interests in the
Mortgages included in the related PC Pool for the purpose of receiving payments and for all other purposes,
and none of Freddie Mac, the Trustee, the Administrator or a Federal Reserve Bank (nor any agent of any
of them) shall be affected by any notice to the contrary. All payments made to a Holder, or upon such
Holder’s order, shall be valid, and, to the extent of the payment, shall satisfy and discharge the related PC
Pool’s payment obligations with respect to the Holder’s PC. None of Freddie Mac, the Trustee, the
Administrator or any Federal Reserve Bank shall have any direct obligation to any beneficial owner unless
it is also the Holder of a PC.
Section 7.08. Governing Law. THIS AGREEMENT AND THE PARTIES' RIGHTS AND
OBLIGATIONS WITH RESPECT TO PCs, SHALL BE GOVERNED BY THE LAWS OF THE UNITED
STATES. INSOFAR AS THERE MAY BE NO APPLICABLE PRECEDENT, AND INSOFAR AS TO
DO SO WOULD NOT FRUSTRATE THE PURPOSES OF THE FREDDIE MAC ACT OR ANY
PROVISION OF THIS AGREEMENT OR THE TRANSACTIONS GOVERNED HEREBY, THE
LOCAL LAWS OF THE STATE OF NEW YORK SHALL BE DEEMED REFLECTIVE OF THE LAWS
OF THE UNITED STATES.
Section 7.09. Grantor Trust Status. No provision in this Agreement shall be construed to grant
Freddie Mac, the Trustee or any other Person authority to act in any manner which would cause a PC Pool
not to be treated as a grantor trust for federal income tax purposes.
Section 7.10. Payments Due on Non-Business Days. If the date fixed for any payment on any PC is
a day that is not a Business Day, then such payment shall be made on the next succeeding Business Day,
with the same force and effect as though made on the date fixed for such payment, and no interest shall
accrue for the period after such date.
Section 7.11. Successors. This Agreement shall be binding upon and inure to the benefit of the
parties and their respective successors, including any successor by operation of law, and permitted assigns.
Section 7.12. Headings. The headings in this Agreement are for convenience only and shall not
affect the construction of this Agreement.
Section 7.13. Notice and Demand.
(a) Any notice, demand or other communication required or permitted under this Agreement to be
given to or served upon any Holder may be given or served (i) in writing by deposit in the United States
mail, postage prepaid, and addressed to such Holder as such Holder’s name and address may appear on the
books and records of a Federal Reserve Bank or (ii) by transmission to such Holder through the
communication system of the Federal Reserve Banks. Any notice, demand or other communication to or
upon a Holder shall be deemed to have been sufficiently given or made, for all purposes, upon mailing or
transmission.
(b) Any notice, demand or other communication which is required or permitted to be given to or
served under this Agreement may be given in writing addressed as follows (i) in the case of Freddie Mac in
its corporate capacity, to Freddie Mac, 8200 Jones Branch Drive, McLean, Virginia 22102, Attention:
Executive Vice President - General Counsel and Secretary and (ii) in the case of the Trustee, to: Freddie
Mac (as Trustee), 8200 Jones Branch Drive, McLean, Virginia 22102, Attention: Executive Vice President
- General Counsel and Secretary.
(c) Any notice, demand or other communication to or upon Freddie Mac or the Trustee shall be
deemed to have been sufficiently given or made only upon its actual receipt of the writing.
THE SALE OF A PC AND RECEIPT AND ACCEPTANCE OF A PC BY OR ON BEHALF OF A
HOLDER, WITHOUT ANY SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL
CONSTITUTE THE UNCONDITIONAL ACCEPTANCE BY THE HOLDER AND ALL OTHERS
HAVING A BENEFICIAL INTEREST IN SUCH PC OF ALL THE TERMS AND PROVISIONS OF
THIS AGREEMENT (INCLUDING THE RELATED POOL SUPPLEMENT) AND THE AGREEMENT
OF FREDDIE MAC, SUCH HOLDER AND SUCH OTHERS THAT THOSE TERMS AND
PROVISIONS SHALL BE BINDING, OPERATIVE AND EFFECTIVE.
FEDERAL HOME LOAN MORTGAGE CORPORATION,
as Trustee
/s/ Carol Wambeke
Authorized Signatory
FEDERAL HOME LOAN MORTGAGE CORPORATION,
in its corporate capacity as Depositor, Administrator
and Guarantor
/s/ Mark Hanson
Authorized Signatory
RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Exhibit 12.1
Net income before income tax expense and cumulative effect of changes in
accounting principles
Add:
Total interest expense
Interest factor in rental expenses
Earnings, 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,
2016
2015
2014
2013
2012
(Dollars in millions)
$ 11,639
$ 9,274
$ 11,002
$ 25,363
$
9,445
50,595
51,916
54,916
55,779
66,502
3
2
5
4
4
$ 62,237
$ 61,192
$ 65,923
$ 81,146
$ 75,951
$ 50,595
$ 51,916
$ 54,916
$ 55,779
$ 66,502
3
2
5
4
4
$ 50,598
$ 51,918
$ 54,921
$ 55,783
$ 66,506
7,437
5,510
19,610
47,591
7,229
$ 58,035
$ 57,428
$ 74,531
$ 103,374
$ 73,735
1.23
1.07
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.
(2) Ratio of earnings to fixed charges is computed by dividing earnings, as adjusted by total fixed charges.
(3) Ratio of earnings to combined fixed charges and preferred stock dividends is computed by dividing earnings, as adjusted by total fixed
charges including preferred stock dividends. For the ratio to equal 1.00, earnings, as adjusted must increase by $8.6 billion, $22.2 billion
for the years ended December 31, 2014, and 2013, 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, 2016
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
1, 2016.
/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, 2016
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
1, 2016.
/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, 2016
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
1, 2016.
/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, 2016
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
8, 2016.
/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, 2016
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
1, 2016.
/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, 2016
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
1, 2016.
/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, 2016
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
1, 2016.
/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, 2016
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
1, 2016.
/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, 2016
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
1, 2016.
/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, 2016
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
1, 2016.
/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, 2016
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
1, 2016.
/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, 2016
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
1, 2016.
/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, 2016 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 16, 2017
/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, 2016 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.
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 16, 2017
/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, 2016 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 16, 2017
/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, 2016 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 16, 2017
/s/ James G. Mackey
James G. Mackey
Executive Vice President — Chief Financial Officer