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, 2017
Commission File Number: 001-34139
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Federally chartered
corporation
(State or other jurisdiction of
incorporation or organization)
52-0904874
(I.R.S. Employer
Identification No.)
8200 Jones Branch Drive
McLean, Virginia
22102-3110
(703) 903-2000
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Voting Common Stock, no par value per share (OTCQB: FMCC)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCI)
5% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCKK)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCG)
5.1% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCH)
5.79% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCK)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCL)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCM)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCN)
5.81% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCO)
6% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCP)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCJ)
5.7% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCKP)
Variable Rate, Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCCS)
6.42% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCCT)
5.9% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKO)
5.57% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKM)
5.66% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKN)
6.02% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKL)
6.55% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKI)
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKJ)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
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
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
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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
Emerging growth company
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
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,
2017 (the last business day of the registrant’s most recently completed second fiscal quarter) was $1.4 billion.
As of February 1, 2018, there were 650,054,731 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
2017 Compensation Information for NEOs
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRINCIPAL ACCOUNTING FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
GLOSSARY
EXHIBIT INDEX
SIGNATURES
FORM 10-K INDEX
1
1
8
12
14
15
15
20
37
38
103
106
153
156
163
177
183
190
192
194
197
225
226
229
358
362
362
371
381
384
384
401
402
410
413
416
418
419
431
437
439
FREDDIE MAC | 2017 Form 10-K
i
Introduction
Introduction
About Freddie Mac
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 mortgage 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. 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 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 also affect our business activities. 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. We believe that the support provided by Treasury pursuant
to the Purchase Agreement currently enables us to have adequate liquidity to conduct normal business
activities.
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
FREDDIE MAC | 2017 Form 10-K
1
Introduction
About Freddie Mac
warrant to purchase common stock. The senior preferred stock and warrant were issued as an initial
commitment fee in consideration of Treasury's commitment to provide funding to us under the Purchase
Agreement. 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. Under the August 2012
amendment to the Purchase Agreement, our cash dividend requirement 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. The applicable Capital Reserve Amount was $600
million in 2017.
On December 21, 2017, the Conservator, acting on our behalf, entered into a Letter Agreement with
Treasury. The principal changes pursuant to the Letter Agreement are as follows:
The senior preferred stock dividend for the dividend period from October 1, 2017 through and
including December 31, 2017 was reduced to $2.25 billion.
The applicable Capital Reserve Amount from January 1, 2018 and thereafter will be $3.0 billion,
rather than zero as previously provided. If for any reason we were not to pay our dividend
requirement on the senior preferred stock in full in any future period, the applicable Capital Reserve
Amount would thereafter be zero.
The liquidation preference of the senior preferred stock increased by $3.0 billion, to $75.3 billion, on
December 31, 2017.
The graph below shows our cumulative draws from Treasury and cumulative dividend payments to
Treasury. The Treasury draw amounts shown are the total draws requested based on our quarterly net
deficits for the periods presented. Draw requests are funded in the quarter subsequent to any net deficit.
Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation
preference of the senior preferred stock. The amount of available funding remaining under the Purchase
Agreement is $140.5 billion, and will be reduced by any future draws, including the $312 million draw we
will take based on our negative net worth at December 31, 2017. For more information on the
conservatorship and government support for our business, see MD&A - Conservatorship and
Related Matters and Note 2.
FREDDIE MAC | 2017 Form 10-K
2
Introduction
About Freddie Mac
Draw Requests from and Dividend Payments to Treasury
FREDDIE MAC | 2017 Form 10-K
3
Introduction
Business Results
Portfolio Balances
Guarantee Portfolios
Investments Portfolios
About Freddie Mac
Commentary
Total Guarantee Portfolio
2017 vs. 2016 and 2016 vs. 2015 - In 2017, the total guarantee portfolio grew $119 billion, or 6%,
driven by a 4% increase in our single-family credit guarantee portfolio and a 28% increase in our
multifamily guarantee portfolio. The total guarantee portfolio grew $91 billion, or 5%, in 2016, driven
by a 3% increase in our single-family credit guarantee portfolio and a 32% increase in our
multifamily guarantee portfolio.
The growth in our single-family credit guarantee portfolio in 2017 and 2016 was driven in part by
an increase in U.S. single-family mortgage debt outstanding as a result of continued home price
FREDDIE MAC | 2017 Form 10-K
4
Introduction
About Freddie Mac
appreciation, combined with our share of U.S. single-family origination volume remaining stable.
In addition, new business acquisitions had a higher average loan size compared to older vintages
that continued to run off.
The considerable growth in our multifamily guarantee portfolio in both 2017 and 2016 was
primarily driven by an increase in U.S. multifamily mortgage debt outstanding that can be
attributed to strong multifamily market fundamentals and low interest rates, coupled with the
growth in our share of market new business volume due to our strategic pricing efforts,
expansion of our new product offerings and purchase activity associated with certain targeted
loans in underserved markets.
Total Investments Portfolio
2017 vs. 2016 and 2016 vs. 2015 - Declined $52 billion, or 13%, and $55 billion, or 12%, in 2017
and 2016, respectively, primarily due to repayments and the active disposition of less liquid assets.
We continue to reduce the mortgage-related investments portfolio as required by the Purchase
Agreement and FHFA.
FREDDIE MAC | 2017 Form 10-K
5
Introduction
About Freddie Mac
Consolidated Financial Results
Comprehensive Income
Commentary
Key Drivers:
2017 vs. 2016
Continued growth in our single-family credit guarantee portfolio and higher average contractual
guarantee fee rates, offset by the continued reduction in the balance of our mortgage-related
investments portfolio, resulted in lower net interest income.
Decline in benefit for credit losses in 2017 primarily driven by estimated losses related to the
hurricanes.
Increased spread-related fair value gains driven by market spread tightening primarily on non-
agency mortgage-related securities, partially offset by increased interest rate-related fair value
losses driven by lower levels of volatility.
Gains on sales of reperforming loans in 2017, compared to losses on sales of seriously
delinquent loans in 2016.
Proceeds received in 2017 from the Royal Bank of Scotland plc (or RBS) related to litigation
involving certain of our non-agency mortgage-related securities.
Higher income tax expense due to a reduction in our net deferred tax asset driven by the impact
of the Tax Cuts and Jobs Act enacted in December 2017, which reduced the statutory corporate
income tax rate from 35% to 21%.
FREDDIE MAC | 2017 Form 10-K
6
Introduction
2016 vs. 2015
About Freddie Mac
Continued growth in our single-family credit guarantee portfolio and higher average contractual
guarantee fee rates, as well as higher amortization of upfront fees due to increased loan
prepayments, offset by the continued reduction in the balance of our mortgage-related
investments portfolio, resulted in lower net interest income.
Decline in benefit for credit losses in 2016 due to a decrease in the number of seriously
delinquent loans reclassified from held-for-investment to held-for-sale.
Higher fair value gains in 2016 due to an increase in long-term interest rates compared to 2015
when long-term interest rates declined slightly.
Higher fair value gains in 2016 driven by tightening K Certificate benchmark spreads, coupled
with improved pricing on K Certificates and SB Certificates and higher new business volume,
compared to losses during 2015 as market spreads widened.
FREDDIE MAC | 2017 Form 10-K
7
Introduction
OUR BUSINESS
Primary Business Strategies
Our Business
Our primary business strategies describe how we plan to pursue our Charter Mission through at least
2020. Our core assumption is that the conservatorship will continue with no material changes during
that period.
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 constraints of our Charter Mission.
Our Twin Goals
We have 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 affordable housing; 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 | 2017 Form 10-K
8
Introduction
Our Charter
Our Business
Our Charter forms the framework for our business activities. Our Charter Mission is to:
Provide stability in the secondary mortgage market for residential loans;
Respond appropriately to the private capital market;
Provide ongoing assistance to the secondary mortgage market for residential loans (including
activities relating to loans for low- and moderate-income families, involving a reasonable economic
return that may be less than the return earned on other activities) by increasing the liquidity of
mortgage investments and improving the distribution of investment capital available for residential
mortgage financing; and
Promote access to mortgage loan credit throughout the United States (including central cities, rural
areas and other underserved areas) by increasing the liquidity of mortgage investments and
improving the distribution of investment capital available for residential mortgage financing.
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 from a qualified insurer 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 United States or any of its agencies or instrumentalities
(e.g., the FHA, VA or USDA Rural Development). Additionally, as part of HARP, we purchase single-
family refinanced 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 mortgage 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. In most of the United States, the maximum conforming loan limit
for a one-family residence has been set at $453,100 for 2018, an increase from $424,100 for 2017 and
$417,000 from 2006 to 2016. Higher limits have been established in certain "high-cost" areas (for 2018,
up to $679,650 for a one-family residence). Higher limits also apply to two- to four-family residences and
to one- to four-family residences in Alaska, Guam, Hawaii and the U.S. Virgin Islands.
FREDDIE MAC | 2017 Form 10-K
9
Introduction
Business Segments
Our Business
We have three reportable segments: Single-family Guarantee, Multifamily and Capital Markets. 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 13.
Employees
At February 1, 2018, we had 6,144 full-time and 41 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 those offerings that are filed with the SEC.
Freddie Mac’s securities offerings are exempted from SEC registration requirements. As a result, we do
FREDDIE MAC | 2017 Form 10-K
10
Introduction
Our Business
not file registration statements or prospectuses with the SEC with respect to our securities offerings. To
comply with the disclosure requirements of Form 8-K relating to the incurrence of material financial
obligations, we report these types of obligations either in offering circulars or offering circular
supplements 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 or offering circular supplement, 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 and SB 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 offering circular supplements.
We provide additional information, including product descriptions, investor presentations, securities
issuance calendars, transaction volumes and details, redemption notices, and Freddie Mac research, in
each case as applicable, on the websites for our business segments, which can be found at
www.freddiemac.com/singlefamily, www.freddiemac.com/multifamily, and www.freddiemac.com/
capital-markets.
FREDDIE MAC | 2017 Form 10-K
11
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 Capital Markets 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 "could," "may," "will," "believe," "expect,"
"anticipate," "forecast" 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 requirement 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 the balance sheet
normalization program announced in October 2017 to reduce the Federal Reserve's holdings of
mortgage-related securities;
Changes in tax laws, including those made by the Tax Cuts and Jobs Act enacted in December
2017;
Changes in accounting policies, practices or guidance (e.g., FASB's accounting standards update
related to the measurement of credit losses of financial instruments);
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 vs. purchase, and fixed-rate vs. ARM);
The success of our efforts to mitigate our losses on our Legacy and relief refinance single-family loan
portfolio;
The success of our strategy to transfer mortgage credit risk through STACR debt note, ACIS, K
Certificate, SB Certificate and other credit risk transfer transactions;
Our ability to maintain adequate liquidity to fund our operations;
FREDDIE MAC | 2017 Form 10-K
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Introduction
Forward-Looking Statements
Our ability to maintain the security and resiliency of our operational 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 risk, 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
volatility and spread volatility, including the availability of derivative financial instruments needed for
interest-rate risk management purposes;
Our operational ability to issue new securities, make timely and correct payments on securities and
provide initial and ongoing disclosures;
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;
Changes in the practices of loan originators, servicers, investors and other participants in the
secondary mortgage market;
The occurrence of a major natural or other disaster in areas in which our offices or significant
portions of our total mortgage portfolio are located; and
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 | 2017 Form 10-K
13
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)
2017
2016
2015
2014
2013
As of 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
Mortgage-related investments portfolio
Total Freddie Mac mortgage-related securities
Total mortgage portfolio
TDRs on accrual status
Non-accrual loans
Ratios
Return on average assets
Allowance for loan losses as percentage of loans, held-for-
investment
Equity to assets
FREDDIE MAC | 2017 Form 10-K
$14,164
$14,379
$14,946
$14,263
$16,468
84
6,869
(4,283)
(11,209)
5,625
5,558
(3,244)
(1.00)
—
3,234
803
500
(4,043)
(3,824)
7,815
7,118
97
0.03
—
3,234
2,665
(3,599)
(4,738)
(2,898)
6,376
5,799
(23)
(0.01)
—
3,235
(58)
(113)
(3,090)
(3,312)
7,690
9,426
(2,336)
(0.72)
—
3,236
2,465
8,519
(2,089)
23,305
48,668
51,600
(3,531)
(1.09)
—
3,238
$1,774,286
$1,690,218
$1,625,184
$1,558,094
$1,529,905
892
2,049,776
1,720,996
313,634
15,458
(312)
$253,455
1,962,372
2,097,630
51,720
17,817
1,198
2,023,376
1,648,683
353,321
16,297
5,075
$298,426
1,832,810
2,011,414
77,399
16,272
1,725
1,985,892
1,556,121
414,148
12,683
2,940
$346,911
1,729,493
1,941,587
82,347
22,649
2,558
1,945,360
1,479,473
449,890
13,346
2,651
$408,414
1,637,086
1,910,106
82,908
33,130
4,551
1,965,831
1,433,984
506,537
12,475
12,835
$461,024
1,592,511
1,914,661
78,708
43,457
0.3%
0.5
0.1
0.4%
0.7
0.2
0.3%
0.9
0.1
0.4%
1.3
0.4
2.5%
1.4
0.5
14
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
Effects 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.
Commentary
Home prices continued to appreciate during 2017, increasing 7.1%, compared to an increase of
6.4% during 2016, based on our own non-seasonally adjusted price index of single-family homes
funded by loans owned or guaranteed by us or Fannie Mae.
We expect near-term home price growth will moderate driven by a gradual increase in housing
supply and modestly higher mortgage interest rates.
FREDDIE MAC | 2017 Form 10-K
15
Management's Discussion and Analysis
Key Economic Indicators | Single-Family Home Prices
We do not expect national home prices to be substantially affected by the Tax Cuts and Jobs Act,
but home price growth in housing markets with higher state and local taxes (e.g., New Jersey and
New York) could be affected.
FREDDIE MAC | 2017 Form 10-K
16
Management's Discussion and Analysis
Key Economic Indicators | Interest Rates
Interest Rates
Key Market Interest Rates
Effects 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 or refinance mortgage
with an LTV of 80%. Increases in the PMMS rate typically result in decreases in refinancing activity
and originations. Decreases in the PMMS rate typically result in increases in refinancing activity and
originations.
Changes in the 10-year and 2-year LIBOR interest rates affect the fair value of certain of our assets
and liabilities, including derivatives, measured at fair value. A smaller interest rate fluctuation from
period to period generally results in smaller fair value gains and losses, while a larger fluctuation
generally results in larger fair value gains and losses.
FREDDIE MAC | 2017 Form 10-K
17
Management's Discussion and Analysis
Key Economic Indicators | Interest Rates
Changes in the 3-month LIBOR rate affect the interest earned on our short-term investments and
interest expense on our short-term funding.
For additional information on the effect of LIBOR rates on our financial results, see Our Business
Segments - Capital Markets - Market Conditions.
Commentary
Mortgage interest rates for 30-year fixed-rate loans are closely related to other long-term interest
rates such as the 10-year LIBOR rate. When the 10-year LIBOR rate increases, mortgage interest
rates for 30-year fixed-rate loans usually also increase. When the 10-year LIBOR rate declines,
mortgage interest rates for 30-year fixed-rate loans usually also decline.
Mortgage interest rates, as indicated by the PMMS rate, were lower at the end of 2017 than the end
of 2016, while long-term interest rates, as indicated by the 10-year LIBOR rate, were higher. The
PMMS rate and 10-year LIBOR rate were both higher at the end of 2016 than the end of 2015.
The quarterly ending and quarterly average short-term interest rates, as indicated by the 3-month
LIBOR rate, were higher at the end of 2017 than the end of 2016 and higher at the end of 2016 than
the end of 2015.
The Federal Reserve raised short-term interest rates five times over the last three years, most
recently in December 2017.
FREDDIE MAC | 2017 Form 10-K
18
Management's Discussion and Analysis
Key Economic Indicators | Unemployment Rate
Unemployment Rate
Unemployment Rate and Job
Creation(1)
Effect on Financial Results
Changes in the national unemployment rate
can affect several market factors, including
the demand for both single-family and
multifamily housing and the level of loan
delinquencies.
Decreases in the national unemployment
rate typically result in lower levels of
delinquencies, which often result in a
decrease in expected credit losses on our
total mortgage portfolio.
Increases in the national unemployment rate
typically result in higher levels of
delinquencies, which often result in an
increase in expected credit losses on our
total mortgage portfolio.
Source: U.S. Bureau of Labor Statistics
(1) Excludes Puerto Rico and the U.S. Virgin Islands.
Commentary
During 2017, average monthly net new jobs (non-farm) decreased, while the national unemployment
rate declined to the lowest level since December 2000.
FREDDIE MAC | 2017 Form 10-K
19
Management's Discussion and Analysis
Consolidated Results of Operations
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.
Year Ended December 31,
2017 vs. 2016
2016 vs. 2015
Year Over Year Change
(Dollars in millions)
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)
Total non-interest income (loss)
Non-interest expense:
Administrative expense
REO operations expense
Temporary Payroll Tax Cut Continuation Act of
2011 expense
Other expense
Total non-interest expense
Income before income tax expense
Income tax expense
Net income (loss)
2017
2016
2015
$
%
$14,164
$14,379
$14,946
84
803
2,665
14,248
15,182
17,611
($215)
(719)
(934)
(1)%
(90)%
$
($567)
(1,862)
(6)%
(2,429)
341
(1,988)
(18)
1,054
7,480
6,869
(211)
(274)
(191)
(240)
(2,696)
(292)
552
(1,714)
262 %
(626)%
173
91 %
29
2,422
101
(78)
508
1,132
1,451 %
(586)
(115)%
1,254
500
6,226
6,369
496 %
1,274 %
2,133
4,099
(879)
(3,599)
(1,927)
(338)
(967)
(1,506)
(4,738)
9,274
(2,898)
6,376
(2,106)
(189)
(2,005)
(287)
(1,340)
(1,152)
(648)
(599)
(4,283)
(4,043)
16,834
11,639
(11,209)
5,625
(3,824)
7,815
(185)
(19)%
(101)
98
(188)
(49)
(240)
5,195
(7,385)
(2,190)
(5)%
34 %
(16)%
(8)%
(6)%
45 %
(193)%
(28)%
(78)
51
907
695
2,365
(926)
1,439
(120)
%
(4)%
(70)%
(14)%
12 %
90 %
35 %
243 %
114 %
(4)%
15 %
60 %
15 %
26 %
(32)%
23 %
(21)%
23 %
Total other comprehensive income (loss), net of
taxes and reclassification adjustments
(67)
(697)
(577)
630
90 %
Comprehensive income (loss)
$5,558
$7,118
$5,799
($1,560)
(22)%
$1,319
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 | 2017 Form 10-K
20
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 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 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, which includes amortization of the upfront fees we receive when we acquire a loan.
Amortization related to investment securities, other debt and other assets and liabilities makes up a
smaller portion.
The net amortization of loans and debt securities of consolidated trusts is primarily driven by actual
prepayments on the underlying loans. 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.
Hedge accounting impact - consists of deferred gains and losses on closed cash flow hedges
related to forecasted debt issuances that are reclassified from AOCI to net interest income when the
related forecasted transaction affects net interest income. Upon adoption of amended hedge
accounting guidance in 4Q 2017, for qualifying fair value hedges, we began recording both the
change in the fair value of the hedging instrument, including the accrual of periodic cash
settlements, and the change in the fair value of the hedged item attributable to the risk being
hedged, within net interest income. See Note 9 for additional detail on this change.
FREDDIE MAC | 2017 Form 10-K
21
Management's Discussion and Analysis
Consolidated Results of Operations | Net Interest Income
Components of Net Interest Income
The table below presents the components of net interest income.
Year Ended December 31,
2017 vs. 2016
2017
2016
2015
$
%
2016 vs. 2015
$
%
Year Over Year Change
$3,270
$2,997
$2,722
1,314
1,142
957
6,400
10,984
6,896
11,035
8,106
11,785
3,258
3,333
2,883
(85)
7
202
(191)
506
(228)
$273
172
(496)
(51)
(75)
(287)
198
$14,164
$14,379
$14,946
($215)
9 %
15 %
(7)%
— %
(2)%
(142)%
104 %
(1)%
$275
185
(1,210)
(750)
450
(304)
37
($567)
10 %
19 %
(15)%
(6)%
16 %
(60)%
16 %
(4)%
(Dollars in millions)
Contractual net interest income:
Guarantee fee income
Guarantee fee income related to the Temporary
Payroll Tax Cut Continuation Act of 2011
Other contractual net interest income
Total contractual net interest income
Net amortization - loans and debt securities of
consolidated trusts
Net amortization - other assets and debt
Hedge accounting impact
Net interest income
Key Drivers:
Guarantee fee income
2017 vs. 2016 and 2016 vs. 2015 - increased during both comparative periods as a result of
higher average contractual guarantee fee rates, as well as the continued growth in the size of the
Core single-family loan portfolio. Average contractual guarantee fees are generally higher on
mortgage loans in our Core single-family loan portfolio compared to those in our Legacy and
relief refinance single-family loan portfolio.
Other contractual net interest income
2017 vs. 2016 and 2016 vs. 2015 - decreased during both comparative periods primarily due to
the continued reduction in the balance of our mortgage-related investments portfolio, pursuant
to the portfolio limits established by the Purchase Agreement and FHFA. See Conservatorship
and Related Matters - Limits on Our Mortgage-Related Investments Portfolio and
Indebtedness for additional discussion of the limits on the mortgage-related investments
portfolio.
Net amortization of loans and debt securities of consolidated trusts
2016 vs. 2015 - increased primarily due to higher amortization of mortgage loan upfront fees and
basis adjustments on debt securities of consolidated trusts. The increase in amortization was
primarily driven by higher prepayment rates on single-family loans during 2016 compared to
2015.
FREDDIE MAC | 2017 Form 10-K
22
Management's Discussion and Analysis
Consolidated Results of Operations | Net Interest Income
Net amortization of other assets and debt
2017 vs. 2016 and 2016 vs. 2015 - decreased during both comparative periods primarily due to
less accretion of previously recognized other-than-temporary impairments on non-agency
mortgage-related securities. The decrease in accretion is due to a decline in the population of
impaired securities as a result of our active disposition of these securities and a decline in new
other-than-temporary impairments recognized.
Hedge accounting impact
2017 vs. 2016 - increased primarily due to the inclusion of fair value hedge accounting results
within net interest income beginning in 4Q 2017, due to the adoption of amended hedge
accounting guidance. In prior periods, this activity was included in other income and derivative
gains (losses).
FREDDIE MAC | 2017 Form 10-K
23
Management's Discussion and Analysis
Consolidated Results of Operations | Net Interest Income
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,
2017
Interest
Income
(Expense)
Average
Balance
Average
Rate
Average
Balance
2016
Interest
Income
(Expense)
Average
Rate
Average
Balance
2015
Interest
Income
(Expense)
Average
Rate
$10,965
57,883
$48
588
0.44 %
$16,932
1.02
59,639
$42
217
0.25 %
$12,482
0.36
51,219
$8
58
0.06 %
0.11
859
21
2.42
484
11
2.28
161
4
2.48
164,663
6,402
3.89
189,982
7,262
3.82
226,162
8,706
3.85
(87,665)
(3,264)
(3.72)
(94,624)
(3,509)
(3.71)
(107,986)
(3,929)
(3.64)
76,998
17,558
1,730,000
117,043
3,138
4.08
277
58,746
4,989
1.58
3.40
4.26
95,358
15,734
1,649,727
135,882
3,753
3.94
118,176
4,777
4.04
102
55,417
5,623
0.65
3.36
4.14
10,699
1,590,768
157,261
17
55,867
6,359
0.16
3.51
4.04
$2,011,306
$67,807
3.37 % $1,973,756
$65,165
3.30 % $1,940,766
$67,090
3.46 %
$1,753,983
($50,920)
(2.90)% $1,674,474
($48,108)
(2.87)% $1,611,388
($49,465)
(3.07)%
(87,665)
3,264
3.72
(94,624)
3,509
3.71
(107,986)
3,929
3.64
1,666,318
(47,656)
(2.86)
1,579,850
(44,599)
(2.82)
1,503,402
(45,536)
(3.03)
72,071
264,354
336,425
(615)
(5,372)
(5,987)
(0.85)
(2.03)
(1.78)
86,284
298,040
384,324
(350)
(5,837)
(6,187)
(0.41)
(1.96)
(1.61)
108,096
313,502
421,598
(173)
(6,435)
(6,608)
(0.16)
(2.05)
(1.57)
2,002,743
(53,643)
(2.68)
1,964,174
(50,786)
(2.58)
1,925,000
(52,144)
(2.71)
8,563
— 0.01
9,582
— 0.01
15,766
— 0.02
$2,011,306
($53,643)
(2.67)% $1,973,756
($50,786)
(2.57)% $1,940,766
($52,144)
(2.69)%
$14,164
0.70 %
$14,379
0.73 %
$14,946
0.77 %
(Dollars in millions)
Interest-earning assets:
Cash and cash equivalents
Securities purchased under
agreements to resell
Advances to lenders and other
secured lending
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
Impact of net non-interest-bearing
funding
Total funding of interest-
earning assets
Net interest income/yield
(1) Loan fees, primarily consisting of amortization of upfront fees, included in interest income were $2.4 billion, $2.6 billion and $2.0 billion for loans
held by consolidated trusts and $162 million, $215 million and $383 million for loans held by Freddie Mac during 2017, 2016 and 2015, respectively.
FREDDIE MAC | 2017 Form 10-K
24
Management's Discussion and Analysis
Consolidated Results of Operations | Net Interest Income
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 and other secured lending
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
Loans held by Freddie Mac
Variance Analysis
2017 vs. 2016
2016 vs. 2015
Rate
Volume
Total
Change
Rate
Volume
Total
Change
$8
380
1
123
(14)
109
161
609
165
($2)
(9)
9
(983)
259
(724)
14
2,720
(799)
$6
371
10
(860)
245
(615)
175
3,329
(634)
$34
147
—
(61)
(74)
(135)
74
(2,479)
146
$—
12
7
(1,383)
494
(889)
11
2,029
(882)
$288
$34
159
7
(1,444)
420
(1,024)
85
(450)
(736)
($1,925)
Total interest-earning assets
$1,433
$1,209
$2,642
($2,213)
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
($508)
($2,304)
($2,812)
$3,246
($1,889)
$1,357
14
(259)
(245)
74
(494)
(494)
(2,563)
(3,057)
3,320
(2,383)
(331)
(214)
(545)
66
679
745
(265)
465
200
(218)
299
81
41
299
340
(420)
937
(177)
598
421
Total interest-bearing liabilities
Net interest income
($1,039)
($1,818)
($2,857)
$394
($609)
($215)
$3,401
$1,188
($2,043)
($1,755)
$1,358
($567)
FREDDIE MAC | 2017 Form 10-K
25
Management's Discussion and Analysis
Consolidated Results of Operations | Benefit (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 impaired loans and changes in estimated probabilities of default and estimated loss
severities for these loans. Estimated probabilities of default and estimated loss severities are based
on current conditions and historical data and are heavily influenced by changes in home prices.
These estimates are also affected by a number of other factors, such as local and regional economic
conditions, changes in reperformance and default rates and the success of our borrower assistance
programs.
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.
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 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 benefit (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:
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, such as
loans with an LTV ratio greater than 100%, or obtain modifications;
Changes in property values;
FREDDIE MAC | 2017 Form 10-K
26
Management's Discussion and Analysis
Consolidated Results of Operations | Benefit (Provision) for Credit Losses
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 reflected in the factors used to derive the
outputs of the models used in our provisioning process. 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.
Components of Benefit (Provision) for Credit Losses
The table below presents the components of our benefit (provision) for credit losses.
(Dollars in billions)
Benefit (provision) for newly impaired loans
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
Key Drivers:
Year Ended December 31,
2017 vs. 2016
2016 vs. 2015
2017
2016
2015
$
%
$
%
Year Over Year Change
($0.7)
($0.8)
($0.9)
0.7
0.5
(0.4)
$0.1
0.9
0.8
(0.1)
$0.8
1.2
2.3
0.1
$0.1
(0.2)
(0.3)
13 %
(22)%
(38)%
$0.1
(0.3)
(1.5)
11 %
(25)%
(65)%
(0.3)
(300)%
(0.2)
(200)%
$2.7
($0.7)
(88)%
($1.9)
(70)%
2017 vs. 2016 - Benefit for credit losses declined in 2017 compared to 2016 primarily driven by:
Estimated losses related to hurricanes in 2017;
A decrease in the accretion of TDR concessions due to a significant increase in the
reclassification of reperforming loans from held-for-investment to held-for-sale; and
A change in accounting policy that was elected on January 1, 2017 for loan reclassification from
held-for-investment to held-for-sale. See Item Affecting Multiple Lines - Single-Family
Loan Reclassifications for further information about this change.
This decrease was partially offset by:
Improvement in our estimated loss severity.
2016 vs. 2015 - Benefit for credit losses declined in 2016 compared to 2015 primarily due to a
decrease in the number of seasoned single-family loans reclassified from held-for-investment to
held-for sale in 2016.
FREDDIE MAC | 2017 Form 10-K
27
Management's Discussion and Analysis
Consolidated Results of Operations | Derivative Gains (Losses)
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 assets and liabilities so as
to economically hedge them. We manage our exposure to interest-rate risk on an economic basis to a
low level as measured by our models. 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.
During 2017, we started applying hedge accounting to certain single-family mortgage loans and long-
term debt to reduce our GAAP earnings volatility. For the first three quarters of 2017, we included gains
and losses on derivatives designated in qualifying hedge relationships in other income. Beginning in 4Q
2017, due to the adoption of amended hedge accounting guidance, we included gains and losses on
derivatives designated in qualifying hedge relationships in the same line used to present the earnings
effect of the hedged item. See Note 9 for more information on hedge accounting and the changes
made during 2017.
In addition to fair value changes, derivative gains (losses) include accrual of periodic cash settlements
for derivatives while not designated in qualifying hedge relationships. For the first three quarters of 2017,
we included the accrual of periodic cash settlements on derivatives in qualifying hedge relationships in
derivatives gains (losses). Beginning in 4Q 2017, we included the accrual of periodic cash settlements
on derivatives in qualifying hedge relationships in the same line used to present the earnings effect of
the hedged item.
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
FREDDIE MAC | 2017 Form 10-K
28
Management's Discussion and Analysis
Consolidated Results of Operations | Derivative Gains (Losses)
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
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,
2017 vs. 2016
2016 vs. 2015
Year Over Year Change
(Dollars in millions)
Fair value change in interest-rate swaps
Fair value change in option-based derivatives
Fair value change in other derivatives
Accrual of periodic cash settlements
2017
2016
2015
$626
(1,041)
17
$178
421
887
($778)
258
22
(1,590)
(1,760)
(2,198)
$
$448
(1,462)
(870)
170
%
$
252 %
(347)%
(98)%
10 %
$956
163
865
438
Derivative gains (losses)
($1,988)
($274)
($2,696)
($1,714)
(626)%
$2,422
%
123%
63%
3,932%
20%
90%
Key Drivers:
2017 vs. 2016 - Losses increased, driven by lower levels of volatility during 2017, resulting in larger
losses in our options portfolio, coupled with lower fair value gains in our pay-fixed interest rate
swaps as long-term interest rates increased less. This was partially offset by reduced fair value
losses in our receive-fixed interest rate swaps.
2016 vs. 2015 - Derivative losses declined during 2016 primarily due to an increase in longer-term
interest rates during the fourth quarter of 2016 resulting in an improvement in the fair value of our
FREDDIE MAC | 2017 Form 10-K
29
Management's Discussion and Analysis
Consolidated Results of Operations | Derivative Gains (Losses)
pay-fixed interest-rate swaps and forward commitments to issue debt securities of consolidated
trusts. 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.
FREDDIE MAC | 2017 Form 10-K
30
Management's Discussion and Analysis
Consolidated Results of Operations | Other Income (Loss)
Other Income (Loss)
Explanation of Key Drivers of Other Income (Loss)
The table below presents the components of other income (loss).
(Dollars in millions)
Other income (loss)
Non-agency mortgage-related
securities settlements
Gains (losses) on loans
Gains (losses) on held-for-sale loan
purchase commitments
All other
Fair value hedge accounting
Change in fair value of derivatives in
qualifying hedge relationships
Change in fair value of hedged items
in qualifying hedge relationships
Year Ended December 31,
2017 vs. 2016
2017
2016
2015
$
%
2016 vs. 2015
$
%
Year Over Year Change
$4,532
$—
$65
$4,532
N/A
($65)
$928
1,098
786
(215)
351
($463)
($2,094)
$1,391
300 %
$1,631
663
1,054
N/A
N/A
—
1,150
N/A
N/A
435
(268)
(215)
351
66 %
(25)%
N/A
N/A
663
(96)
N/A
N/A
N/A
78 %
N/A
(8)%
N/A
N/A
Total other income (loss)
$7,480
$1,254
($879)
$6,226
496 %
$2,133
243 %
Key Drivers:
2017 vs. 2016 - Other income (loss) increased reflecting:
Increased income from our litigation settlement related to our non-agency mortgage-related
securities. While we had one large settlement with RBS during 2017, we did not have any
significant settlements during 2016; and
Greater gains recognized on a higher volume of reperforming loans reclassified from held-for-
investment to held-for-sale and subsequently sold, coupled with less loss recognized in 2017 on
the reclassification of seriously delinquent loans from held-for-investment to held-for-sale as a
result of an accounting policy change in 2017. See Item Affecting Multiple Lines - Single-
Family Loan Reclassifications for more information.
2016 vs. 2015 - Other income (loss) increased 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 | 2017 Form 10-K
31
Management's Discussion and Analysis
Consolidated Results of Operations | Other Comprehensive Income (Loss)
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)
Year Ended December 31,
2017 vs. 2016
2017
2016
2015
$
%
2016 vs. 2015
$
%
Year Over Year Change
Other comprehensive income, excluding certain items
$1,084
($29)
$374
$1,113
3,838 %
($403)
(108)%
Excluded items
Accretion due to significant increases in expected
cash flows on previously impaired available-for-sale
securities
Realized (gains) losses reclassified from AOCI
Total excluded items
Total other comprehensive income (loss)
Key Drivers:
(164)
(299)
(449)
135
45 %
(987)
(1,151)
($67)
(369)
(668)
(502)
(951)
($697)
($577)
(618)
(483)
$630
(167)%
(72)%
90 %
150
133
283
($120)
33 %
26 %
30 %
(21)%
Other comprehensive income, excluding certain items
2017 vs. 2016 - increased primarily due to market spread related gains as market spreads on
non-agency and agency mortgage-related securities tightened more during 2017, coupled with
smaller interest rate-related losses due to smaller increases in long-term interest rates during
2017.
2016 vs. 2015 - decreased primarily due to unrealized losses resulting from an increase in
longer-term interest rates, coupled with a decrease in unrealized gains as our non-agency
mortgage-related securities portfolio continued to decline consistent with the reduction of our
mortgage-related investments portfolio pursuant to the limits established by the Purchase
Agreement and FHFA.
FREDDIE MAC | 2017 Form 10-K
32
Management's Discussion and Analysis
Consolidated Results of Operations | Other Comprehensive Income (Loss)
Excluded items include:
Accretion due to significant increases in expected cash flows on previously impaired
available-for-sale securities
2017 vs. 2016 and 2016 vs. 2015 - decreased during both comparative periods primarily due to
a decline in the population of impaired securities as a result of our active dispositions of these
securities, coupled with a decline in new other-than-temporary impairments.
Realized (gains) losses reclassified from AOCI
2017 vs. 2016 - reflected larger amounts of reclassified gains during 2017 due to higher realized
gains on our non-agency and agency mortgage-related securities sold, as a result of additional
spread tightening and an increase in sales of non-agency mortgage-related securities.
2016 vs. 2015 - reflected smaller amounts of reclassified gains during 2016 primarily due to a
decline in sales of non-agency mortgage-related securities in an unrealized gain position.
FREDDIE MAC | 2017 Form 10-K
33
Management's Discussion and Analysis
Consolidated Results of Operations | Other Key Drivers
Other Key Drivers
Explanation of Other Key Drivers
Key drivers for other line items for 2017 vs. 2016 and 2016 vs. 2015 include:
Gains (losses) on extinguishment of debt
2017 vs. 2016 - improved primarily due to an increase in the amount of gains recognized from
the extinguishment of certain fixed-rate debt securities of consolidated trusts (i.e., PCs), as
market interest rates increased between the time of issuance and repurchase. The amount of
extinguishment gains or losses may vary, as the type and amount of PCs selected for repurchase
are based on our investment and funding strategies, including our efforts to support the liquidity
and price performance of our PCs.
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.
Other gains (losses) on investment securities recognized in earnings
2017 vs. 2016 - improved primarily due to the recognition of smaller fair value losses on our
mortgage and non-mortgage-related securities classified as trading as long-term interest rates
increased less during 2017, coupled with larger gains due to additional spread tightening during
2017 on our sales of agency and non-agency mortgage-related securities.
2016 vs. 2015 - worsened as we recognized net losses during 2016 compared to net gains
during 2015, primarily due to losses on our mortgage-related and non-mortgage-related
securities as a result of increasing longer-term interest rates, coupled with less realized gains
from our available-for-sale securities, as we sold fewer non-agency securities in an unrealized
gain position.
Net impairment of available-for-sale securities recognized in earnings
2017 vs. 2016 and 2016 vs. 2015 - decreased primarily due to a decline in the population of
non-agency mortgage-related securities, including those non-agency mortgage-related
securities we intend to sell, as we continue to reduce the less liquid assets in our mortgage-
related investments portfolio.
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 Item Affecting
Multiple Lines - Single-Family Loan Reclassifications for more information.
Income tax expense
2017 vs. 2016 - increased primarily as a result of the impact of the Tax Cuts and Jobs Act
enacted in December 2017, which reduced the statutory corporate income tax rate from 35% to
21%. We measured our net deferred tax asset using the reduced rate and recognized a charge to
FREDDIE MAC | 2017 Form 10-K
34
Management's Discussion and Analysis
Consolidated Results of Operations | Other Key Drivers
income tax expense of $5.4 billion.
2016 vs. 2015 - increased primarily due to an increase in pre-tax income.
FREDDIE MAC | 2017 Form 10-K
35
Management's Discussion and Analysis
Consolidated Results of Operations | Item Affecting Multiple Lines
Item Affecting Multiple Lines
Single-Family Loan Reclassifications
During 2017, 2016 and 2015, we reclassified $26.2 billion, $4.7 billion and $13.6 billion, respectively, in
UPB of seasoned single-family mortgage loans from held-for-investment to held-for-sale, as we
continue to focus on reducing the balance of our less liquid assets.
On January 1, 2017, we elected a new accounting policy for reclassifications from held-for-investment
to held-for-sale. Under the new policy, when we reclassify (transfer) a loan from held-for-investment to
held-for-sale, we charge off the entire difference between the loan’s recorded investment and its fair
value if the loan has a history of credit-related issues. Expenses related to property taxes and insurance
are included as part of the charge-off. If the charge-off amount exceeds the existing loan loss reserve
amount, an additional provision for credit losses is recorded. If the charge-off amount is less than the
existing loan loss reserve amount, a benefit for credit losses is recorded. Any declines in loan fair value
after the date of transfer will be recognized as a valuation allowance, with an offset recorded to other
income (loss).
This new policy election was applied prospectively, as it was not practical to apply it retrospectively.
The table below presents the effect of single-family loan reclassifications on income before income tax
expense. Beginning in 2017, benefit (provision) for credit losses is the only line item affected by the loan
reclassifications from held-for-investment to held-for-sale. Prior to this change (including 2016 and 2015
as presented below), the reclassifications from held-for-investment to held-for-sale affected several line
items on our consolidated results of operations.
(Dollars in millions)
Benefit (provision) 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
Key Drivers:
Year Over Year Change
Year Ended December 31,
2017 vs. 2016
2016 vs. 2015
2017
2016
2015
$
%
$
%
$546
$812
$2,314
—
—
(1,005)
(2,193)
(195)
(1,178)
$546
($388)
($1,057)
($266)
1,005
195
$934
(33)%
100 %
100 %
241 %
($1,502)
1,188
983
$669
(65)%
54 %
83 %
63 %
2017 vs. 2016 - Effect on income before income tax expense changed to a gain due to a higher
volume primarily of reperforming loans reclassified from held-for-investment to held-for-sale during
2017 compared to a loss recognized primarily on seriously delinquent loans reclassified from held-
for-investment to held-for-sale during 2016.
2016 vs. 2015 - Effect on income before income tax expense decreased due to a decline in the
number of seasoned single-family loans reclassified from held-for-investment to held-for-sale.
FREDDIE MAC | 2017 Form 10-K
36
Management's Discussion and Analysis
Consolidated Balance Sheet Analysis
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:
As of December 31,
Year Over Year Change
2017
2016
$
%
$6,848
2,963
55,903
65,714
84,318
1,871,217
6,355
375
8,107
13,690
$2,049,776
$6,221
2,034,630
269
8,968
2,050,088
(312)
$2,049,776
$12,369
9,851
51,548
73,768
111,547
1,803,003
6,135
747
15,818
12,358
$2,023,376
$6,015
2,002,004
795
9,487
2,018,301
5,075
$2,023,376
($5,521)
(6,888)
4,355
(8,054)
(27,229)
68,214
220
(372)
(7,711)
1,332
$26,400
$206
32,626
(526)
(519)
31,787
(5,387)
$26,400
(45)%
(70)%
8 %
(11)%
(24)%
4 %
4 %
(50)%
(49)%
11 %
1 %
3 %
2 %
(66)%
(5)%
2 %
(106)%
1 %
As of December 31, 2017 compared to December 31, 2016:
Cash and cash equivalents, restricted cash and cash equivalents and securities purchased
under agreements to resell affect one another and changes in the balances should be viewed
together (e.g., cash and cash equivalents can be invested in securities purchased under agreements
to resell or other investments). The decrease in the combined balance was primarily due to lower
near term cash needs for fewer upcoming maturities and anticipated calls of other debt, and a
decrease in prepayment proceeds received by the custodial account driven by increased interest
rates, at the end of 2017 compared to the end of 2016.
Investments in securities, at fair value decreased as we continued to reduce the mortgage-related
investments portfolio during 2017 as required by the Purchase Agreement and FHFA.
Deferred tax assets, net decreased primarily due to a reduction in the statutory corporate income
tax rate as a result of the Tax Cuts and Jobs Act enacted in December 2017.
Other assets increased primarily due to the recognition of receivables on sales of securities which
had traded but not settled at year end.
Total equity decreased primarily as a result of higher income tax expense due to the reduction of
our net deferred tax asset as a result of the Tax Cuts and Jobs Act.
FREDDIE MAC | 2017 Form 10-K
37
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.
Description
Primary Income Drivers
Primary Expense Drivers
Segment/
Category
Single-family
Guarantee
Multifamily
Reflects results from our purchase, securitization and
guarantee of single-family loans and the management
of single-family mortgage credit risk
Reflects results from our purchase, sale, securitization
and guarantee of multifamily loans and securities, our
investments in those loans and securities and the
management of multifamily mortgage credit risk and
market spread risk
Capital Markets
Reflects results from managing our mortgage-related
investments portfolio (excluding Multifamily segment
investments, single-family seriously delinquent loans
and the credit risk of single-family performing and
reperforming loans), treasury function, single-family
securitization activities and interest-rate risk
All Other
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
• Guarantee fee income
• Credit-related expenses
• Administrative expenses
• Credit risk transfer expenses
• Net interest income
• Losses on loans
• Guarantee fee income
• Investment losses
• Gains on loans
• Investment gains
• Derivative gains
• Net interest income
• Investment gains
• Derivative gains
• Derivative losses
• Administrative expenses
• Credit-related expenses
• Investment losses
• Derivative losses
• Administrative expenses
N/A
N/A
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). Likewise, the sum of comprehensive income (loss) for each segment and the All Other
category equals GAAP comprehensive income (loss).
During 1Q 2017 and 4Q 2017, we changed how we calculate certain components of our Segment
Earnings for our Capital Markets segment. Prior period results have been revised to conform to the
current period presentation for the 1Q 2017 change. No prior period results required updates for the 4Q
2017 change. For more information on these changes and our segment reclassifications, see Note 13.
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
FREDDIE MAC | 2017 Form 10-K
38
Management's Discussion and Analysis
Our Business Segments | Segment Earnings
13 for additional details on Segment Earnings, including additional financial information for our
segments.
Segment Comprehensive Income
The graph below shows our comprehensive income by segment.
FREDDIE MAC | 2017 Form 10-K
39
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Single-Family Guarantee
Business Overview
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;
Establishing effective risk management activities, including credit risk transfer transactions, that are
appropriate for the level of risk; and
Developing innovative technology platforms to provide sellers and servicers and Freddie Mac with
better methods of assessing and managing single-family mortgage credit risk.
A Better Housing Finance System:
Developing and implementing initiatives to cost-effectively reduce taxpayer exposure and offer third-
party investors new and innovative ways to share in the credit risk of the single-family credit
guarantee portfolio;
Expanding access to affordable housing 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.
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. 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.
In accordance with our Charter, we participate in the secondary mortgage market. The Single-family
Guarantee segment provides liquidity and support to the single-family market through a variety of
activities that include the purchase, securitization and guarantee of single-family loans originated by
sellers and servicers. The mix of loan products available for us to purchase is 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.
FREDDIE MAC | 2017 Form 10-K
40
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Our primary business model is to acquire loans that lenders originate and then pool those loans into
mortgage-related securities that can be sold in the capital markets. The returns we generate from these
activities are primarily derived from the ongoing guarantee fee we receive in exchange for providing our
guarantee of the issued mortgage-related securities.
In order to issue mortgage-related securities, we establish trusts pursuant to our Master Trust
Agreements and serve as the trustee of those trusts. The lender or servicer administers the collection of
borrowers' payments on their loans and remits the collected funds to us. We administer the distribution
of payments to the investors in the mortgage-related securities, net of any applicable guarantee fees. To
reduce our exposure under our guarantee, we transfer credit risk on a portion of our single-family credit
guarantee portfolio to the private market when it is cost-effective to do so.
The diagram below illustrates our primary business model.
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. If borrowers become delinquent, we work with the borrowers through our servicers 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 will pursue foreclosure of the
underlying property, which will result in a third party sale or an acquisition of the property as REO. The
purchase and sale of delinquent loans are done in conjunction with the Capital Markets segment.
Guarantee Fees
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 most 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 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 aggregate 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 also provide a return on the capital that would be
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
needed to support the related credit risk. The guarantee fees charged on new acquisitions generally
consist of:
A contractual monthly fee paid as a percentage of the UPB of the underlying loan;
Upfront fees, which primarily include delivery fees that are calculated based on credit risk factors
such as the loan product type, loan purpose, LTV ratio and credit score. These delivery fees are
charged to compensate us for higher levels of risk in some loan products;
Upfront payments made or received to buy up or buy down, respectively, the monthly contractual
guarantee fee ("buy-up fees" or "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 monthly contractual guarantee fee are not considered compensation
for the credit risk assumed for purposes of our financial statements. Consequently, these amounts
are allocated to the Capital Markets segment; and
Market adjusted pricing costs based on the price performance of our PCs relative to comparable
Fannie Mae securities.
We operate in a competitive market by varying our pricing for different customers, loan products and
underwriting characteristics. We seek to maintain a broad-ranging mix of loan quality for the loans we
purchase. However, sellers may elect to retain loans with better credit characteristics. A seller's decision
to retain these loans could result in our purchases having a more adverse credit profile.
We must obtain FHFA's approval to implement across-the-board changes to 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 risk we are taking. This directive puts some constraints on certain aspects
of our guarantee fees, such as our ability to reduce the contractual guarantee fee. In December 2017
and February 2018, FHFA issued additional guidance that requires the GSEs to meet certain profitability
levels on new fundings beginning in 2018.
Products and Activities
Securitization and Guarantee Products
We offer various types of guarantee and securitization products, primarily single-class securitizations
and resecuritizations. In these securitization products, Freddie Mac functions in its capacity as
depositor, guarantor, administrator and trustee. We retain the credit risk and transfer the interest-rate
and prepayment risks to the investors. While the Single-family Guarantee segment is responsible for the
guarantee of our securities, the Capital Markets segment manages the securitization and resecuritization
processes.
Single-class Securitization Products
We offer a variety of single-class securitization products to our customers. Our single-class
securitization products 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
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
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. In exchange for our guarantee, we receive an ongoing fee as
described in the Guarantee Fees section above.
We issue the following types of single-class securitization products:
Guarantor Swap PCs - We offer transactions in which our customers, primarily large mortgage
banking companies and commercial banks, provide us with loans in exchange for PCs, as shown in
the diagram below:
Cash PCs - We offer cash products to our customers, primarily community and regional banks. In
these transactions, we purchase performing loans for cash and securitize them for retention in our
mortgage-related investments portfolio or for sale to third parties. For the period of time between
loan purchase and securitization, we refer to the loan as being in our securitization pipeline. The
purchase of loans and sale of PCs are managed by the Capital Markets segment. The diagram
below illustrates a cash PC transaction. We securitize reperforming loans using a similar process.
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Resecuritization Products
We offer resecuritization products to our customers. Our resecuritization products represent beneficial
interests in pools of PCs and certain other types of mortgage assets. We create these securities by
using PCs or our previously issued resecuritization products as the underlying collateral. We leverage
the issuance of these securities to expand 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 transfer our own mortgage assets in exchange
for the resecuritization product. The resecuritization activities are managed by the Capital Markets
segment. The following diagram provides a general example of how we create resecuritization products:
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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 - Resecuritizations of previously issued PCs or Giant PCs. Giant PCs are single-class
securities that involve the straight pass through of all cash flows of the underlying collateral to
holders of the beneficial interests.
Stripped Giant PCs - Multiclass securities that are formed by resecuritizing previously issued PCs
or Giant PCs and issuing stripped securities, including principal-only and interest-only securities or
floating rate and inverse interest-only securities, backed by the cash flows from the underlying
collateral.
REMICs - Resecuritizations of previously issued PCs, Giant PCs, Stripped Giant PCs or REMICs.
REMICs are multiclass securities that divide all cash flows of the underlying collateral into two or
more classes with varying maturities, payment priorities and coupons.
Other securitization products - 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.
Sale of Mortgage Loans
We continually manage the balance of our less liquid assets. We offer to sell select mortgage loans
through a variety of methods that include whole loan sales or certain securitization transactions. In these
transactions, we reduce or eliminate our credit risk, in addition to our interest-rate and prepayment risk,
associated with the underlying mortgage loans. The sale of mortgage loans is managed by the Capital
Markets segment.
Our mortgage loans are sold through the following transactions:
Whole loan sales - Sales of seriously delinquent or reperforming loans for cash.
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Senior subordinate securitization structures (non-consolidated) - Transactions where we issue
guaranteed senior securities and unguaranteed subordinated securities. The collateral for these
structures primarily consists of reperforming loans. The unguaranteed subordinated securities
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.
Long-term Standby Commitments
We also offer to provide a guarantee on mortgage assets held by third parties, in exchange for
guarantee fees, without securitizing those assets. These 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.
The primary impacts of the aforementioned products and transactions to Segment Earnings are:
• Guarantee fee income earned on our guarantee of principal and interest payments on these mortgage-related securities;
• Benefit (provision) for credit losses, which is affected by changes in estimated probabilities of default and estimated loss severities,
the actual level of loan defaults, the effect of loss mitigation efforts and payment performance of our individually impaired mortgage
portfolio; and
• Gains and losses recognized on the reclassification of loans held-for-investment to held-for-sale and subsequent sale of these loans.
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.
In March 2017, FHFA published "An Update on Implementation of the Single Security and the Common
Securitization Platform," which included the timeframe for implementation of Release 2 of the common
securitization platform, planned for the second quarter of 2019. Release 2 will allow Freddie Mac and
Fannie Mae to issue a single (common) mortgage-related security, to be called the Uniform Mortgage-
Backed Security or UMBS. Release 2 will add to the functionality of the platform by, among other
things, enabling commingling of Freddie Mac and Fannie Mae UMBS in securitization transactions.
Freddie Mac intends to offer an optional exchange program to enable holders to exchange existing 45-
day delay fixed-rate Gold PCs for 55-day delay Freddie Mac securities.
On December 4, 2017, FHFA published the "December 2017 FHFA Update on the Single Security
Initiative and the Common Securitization Platform." The report emphasized the importance of
stakeholder readiness by the end of 2018 and provided updates on key initiative areas such as market
outreach activities, continued work with regulatory and industry bodies to resolve open issues and
questions and FHFA and Enterprise efforts concerning prepayment speed alignment for TBA securities.
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
The target implementation date for Release 2 of the single security initiative remains the second quarter
of 2019.
Credit Risk Transfer Transactions
We offer credit risk transfer transactions to third-party investors. Most of our credit risk transfer
transactions are designed to transfer a small 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 often 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.
Our primary credit risk transfer transactions include:
STACR debt notes - Transactions in which we create a reference pool of loans from our single-
family loan portfolio and an associated securitization-like structure with notional credit risk positions
(e.g., first loss, mezzanine and senior positions). We issue STACR debt notes related to certain
notional credit risk positions to third-party investors and retain the remaining credit risk. 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 position.
We make payments of principal and interest on the issued STACR debt 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.
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. The notional amounts
are also reduced by losses from loans in the reference pool when certain specified credit events
occur. Losses may be allocated to the notional amounts of the credit risk positions based on
calculated losses using a predefined formula or based on the actual losses on the loans in the
reference pool. For loans that are covered by credit risk transfer transactions based on calculated
losses, we may write down STACR debt notes or receive reimbursement of losses when the loans
experience a credit event, which predominantly includes a loan becoming 180 days delinquent. For
loans that are covered by credit risk transfer transactions based on actual losses, we may write
down STACR debt notes or receive reimbursement of losses once an actual loss event (e.g., short
sale, third-party sale or REO disposition) occurs.
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
The following diagram illustrates a typical STACR debt note transaction:
ACIS insurance policies - Transactions in which 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 typically 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 of these
insurance policies, 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 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 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.
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
The primary impacts of our credit risk transfer transactions to Segment Earnings are:
• Interest expense on our STACR debt notes;
• Fair value gains and losses recognized on certain of our STACR debt notes;
• Premium expense for insurance coverage under the ACIS contracts; and
• Benefits recognized from recoveries under the CRT transactions. Benefits from certain of our STACR debt notes are recognized as
gains on extinguishment of debt, whereas benefits from other CRT transactions are recognized as other income.
We also use other types of credit risk transfer transactions and credit enhancements, such as senior
subordinate securitization transactions and primary mortgage insurance, to mitigate our credit risk
exposure. See Risk Management - Single-Family Mortgage Credit Risk 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, regional banks, community
banks, credit unions, HFAs, savings institutions and other non-depository financial institutions. Many of
these companies are both sellers and servicers for us. In addition, we also maintain relationships with
investors and dealers in our guaranteed mortgage-related securities.
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 2017
and our loan servicing as of December 31, 2017 among our top five customers.
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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(1)
(1) Percentage of servicing volume is based on the total single-family
credit guarantee portfolio, excluding loans where we do not
exercise control over the associated servicing.
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
For additional information about seller and servicer concentration risk and our relationships with our
seller and servicer customers, see Risk Management - Counterparty Credit Risk - Sellers and
Servicers and Note 14.
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.
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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 26, 2018.
Commentary
Source: National Association of Realtors news release dated January
24, 2018 and U.S. Census Bureau news release dated January 25,
2018.
U.S. single-family loan origination volumes decreased in 2017 compared to 2016, driven by lower
refinance volume as a result of higher average mortgage interest rates.
U.S. single-family home sales volume increased in 2017 compared to 2016, driven by favorable
economic conditions, such as historically low mortgage interest rates, continued home price
appreciation and a declining unemployment rate.
In 2018, we expect continued growth in U.S. single-family home purchase volume due to a gradual
increase in housing supply, and lower refinance volume driven by a moderate increase in mortgage
interest rates. Freddie Mac's single-family loan purchase volumes typically follow similar trends.
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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 7, 2017. For 2017, the amount is as of
September 30, 2017 (latest available information).
Source: National Delinquency Survey from the Mortgage Bankers
Association. For 2017, the rates (excluding Freddie Mac) are as of
September 30, 2017 (latest available information).
Commentary
U.S. single-family mortgage debt outstanding increased in 2017 compared to 2016, primarily driven
by house price appreciation. An increase in U.S. single-family mortgage debt outstanding, combined
with our sustained market share, typically results in growth of our single-family credit guarantee
portfolio.
The U.S. single-family serious delinquency rate decreased slightly in 2017 compared to 2016 due to
macroeconomic factors, such as a low unemployment rate and continued home price appreciation,
offset by the impacts of the hurricanes in 2017. Our single-family serious delinquency rate typically
follows a similar trend. See Risk Management - Single-Family Mortgage Credit Risk -
Single-Family Credit Guarantee Portfolio for additional information on our serious delinquency
rate.
As reported by the U.S. Census Bureau, the U.S. homeownership rate was 64.2% in the fourth
quarter of 2017 compared to a high point of 69.2% in the fourth quarter of 2004, and the average of
66.1% from 1990 to the present.
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Business Results
The following graphs and related discussion present the business results of our Single-family Guarantee
segment.
New Business Activity
UPB of Single-Family Loan Purchases and Guarantees
by Loan Purpose
Number of Families Helped to Own a Home
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Commentary
We maintain a consistent market presence by providing lenders with a constant source of liquidity
for conforming loan products. We have funded approximately 15.7 million single-family homes since
January 1, 2009 and purchased approximately 1.4 million HARP loans since the initiative began in
2009, including over 13,000 during 2017.
Our loan purchase and guarantee activity decreased in 2017 compared to 2016 due to lower
refinance volume driven by higher average mortgage interest rates, partially offset by an increase in
home purchase loan volume due to favorable macroeconomic conditions, such as historically low
mortgage interest rates and a declining unemployment rate.
We continued working to improve access to affordable housing, including through our Home
Possible® loan initiatives. Our Home Possible® loan initiatives offer down payment options as low as
3% and are designed to help qualified borrowers with limited savings buy a home. We purchased
over 95,000 loans under these initiatives in 2017. We also continue to implement programs that
support responsibly broadening access to affordable housing by:
Improving the effectiveness of pre-purchase and early delinquency counseling for borrowers;
Expanding our ability to support borrowers who do not have a credit score;
Implementing the Duty To Serve Underserved Markets plan; 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 housing will continue to be a top priority in 2018. See Regulation
and Supervision - Legislative and Regulatory Developments - Duty to Serve
Underserved Markets Plan for more information.
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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 increased during 2017 by approximately 4%, driven in
part by an increase in U.S. single-family mortgage debt outstanding as a result of continued home
price appreciation, combined with our share of U.S. single-family origination volume remaining
stable.
The Core single-family loan portfolio grew to 78% of the single-family credit guarantee portfolio at
December 31, 2017 compared to 73% at December 31, 2016.
The Legacy and relief refinance single-family loan portfolio declined to 22% of the single-family
credit guarantee portfolio at December 31, 2017 compared to 27% at December 31, 2016, primarily
driven by liquidations.
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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 fee income over the
contractual life of the related loans (usually 30 years). If the related loans prepay, the remaining upfront
fee income is recognized immediately. In contrast, the average guarantee fee rate charged on new
acquisitions recognizes upfront fee income over the estimated life of the related loans using our
expectations of prepayments and other liquidations. See Single-family Guarantee - Business
Overview - Guarantee Fees for more information on our guarantee fees.
Average Portfolio Segment Earnings Guarantee Fee
Rate(1)(2) 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.
(2) Reflects an average rate for our total single-family credit guarantee portfolio and is not limited to purchases in the applicable period.
Commentary
Average portfolio Segment Earnings guarantee fees decreased slightly in 2017 compared to 2016
due to a decline in the recognition of amortized fees driven by lower prepayments as a result of
higher average mortgage interest rates. This decrease was partially offset by an increase in
contractual guarantee fees as older vintages were replaced by acquisitions of new loans with higher
contractual guarantee fees.
Guarantee fees charged on new acquisitions decreased in 2017 compared to 2016 due to
competitive pricing, partially offset by lower market-adjusted pricing costs based on the improved
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 (CRT) Activities
We transfer credit risk on a portion of our single-family credit guarantee portfolio to the private market,
which reduces the risk of future losses to us and taxpayers when borrowers go into default. In our
STACR debt note and ACIS transactions, we pay interest to investors or premiums to insurers or
reinsurers in exchange for their taking on a portion of the credit risk on the mortgage loans in the related
reference pool. These payments effectively reduce our guarantee fee income from the PCs backed by
the mortgage loans in the related reference pools. See Single-Family Guarantee - Business
Overview - Credit Risk Transfer Transactions for more information on our CRT transactions.
The following charts present the issuance amounts for the STACR debt note, ACIS and Deep MI CRT
transactions that occurred during 2017 and the cumulative issuance amount of all STACR debt note,
ACIS and Deep MI CRT transactions as of December 31, 2017 by loss position and the party holding
each loss position.
New STACR Debt Note, ACIS and Deep MI CRT
Transactions for the Year Ended December 31, 2017(1)
Cumulative STACR Debt Note, ACIS and Deep MI CRT
Transactions as of December 31, 2017(1)(2)
(In billions)
Freddie Mac
$258.3
Senior
(In billions)
Freddie Mac
$826.8
Senior
Freddie
Mac
ACIS
STACR
Debt
Notes
Deep MI
CRT
Mezzanine
Reference
Pool
$268.3
Freddie
Mac
ACIS
STACR
Debt
Notes
Deep MI
CRT
Mezzanine
Reference
Pool
$866.1
$0.7
$1.9
$4.7
$0.1
$2.1
$7.5
$22.0
$0.2
First
Loss
Freddie
Mac
$1.4
ACIS
$0.3
STACR
Debt Notes
$0.9
First
Loss
Freddie
Mac
$4.7
ACIS
$0.9
STACR
Debt Notes
$1.9
(1) The amounts represent the UPB upon issuance of STACR debt notes and execution of ACIS and Deep MI CRT transactions.
(2) For the current outstanding coverage provided by our STACR debt note and ACIS transactions, see Risk Management - Single-Family
Mortgage Credit Risk - Offering Private Investors New and Innovative Ways to Share in the Credit Risk of
the Single-Family Loan Portfolio.
Commentary
In 2017, we transferred a portion of credit risk associated with $280.1 billion in UPB of loans in our
single-family credit guarantee portfolio through STACR debt note, ACIS, senior subordinate
securitization structure, seller indemnification and Deep MI CRT transactions. Significant recent
developments include the following:
We executed a new senior subordinate securitization structure transaction, which allows for
issuance of guaranteed PCs and unguaranteed subordinated certificates backed by participation
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
interests in recently originated mortgage loans acquired by Freddie Mac through our cash loan
purchase program.
We developed a new ACIS transaction, which unlike prior ACIS transactions, allows for coverage
to begin at the time Freddie Mac purchases the mortgage loans. The reference pool associated
with this transaction will aggregate over a period of time and will be based on a pre-negotiated
forward contract with one or more reinsurers.
We executed a new STACR debt note transaction backed by HARP fixed-rate mortgages issued
after 2008.
Since we began transferring credit risk in 2013, we have completed 84 credit risk transfer
transactions that, upon execution, covered $881.9 billion in principal of loans in our single-family
credit guarantee portfolio.
Our expected guarantee fee income on the loans within the STACR debt note and ACIS reference
pools has been effectively reduced by approximately 30%, on average, for transactions executed as
of December 31, 2017.
Due to differences in accounting, there could be a significant time lag between when we recognize a
provision for credit losses on the mortgage loans in the reference pools and when we recognize the
related recovery for the majority of our STACR debt note transactions. A credit expense on a loan in
a reference pool related to these transactions is recorded when it is probable that we have incurred a
loss, while a benefit is recorded when an actual loss event occurs.
As of December 31, 2017 there has not been a significant number of loans in our STACR debt note
and ACIS reference pools that have experienced a credit event. As a result, we experienced minimal
write-downs on our STACR debt notes and filed minimal claims for reimbursement of losses under
our ACIS transactions. We expect losses may increase on loans in the reference pools in our existing
CRT transactions from Hurricanes Harvey and Irma.
The 2018 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 fixed-rate loans with terms greater than 20 years and LTV ratios above 60%.
We continue to evaluate our credit risk transfer strategy and to make changes depending on market
conditions and our business strategy. The aggregate cost of our credit risk transfer activity will continue
to increase as we continue to transfer risk on new originations.
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Management's Discussion and Analysis
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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. Our loan workout activity increased slightly in 2017 compared to 2016, consistent
with the increase in the number of delinquent loans in the single-family credit guarantee portfolio due
to the hurricane events in the third quarter of 2017.
As part of our strategy to mitigate losses and reduce our holdings of less liquid assets, we sold
seriously delinquent loans totaling $0.5 billion in UPB during 2017. Of the $17.0 billion in UPB of
single-family loans classified as held-for-sale at December 31, 2017, $2.1 billion related to loans that
were seriously delinquent. We believe selling these loans provides better economic returns than
continuing to hold them.
The relief refinance program is being replaced with the high LTV relief refinance (Enhanced Relief
RefinanceSM) program, which will be available in January 2019 for loans originated on or after
October 1, 2017. This program provides liquidity for borrowers who are current on their mortgages
but are unable to refinance because their LTV ratios exceed our standard refinance limits. In addition,
the HARP program has been extended for applications through December 31, 2018 to ensure that
borrowers who have a high LTV ratio and are eligible for HARP will continue to have a refinance
option. See Risk Management for additional information on our loan workout activities.
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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,
2017 vs. 2016
2017
2016
2015
$
%
2016 vs. 2015
$
%
Year Over Year Change
$6,094
(816)
1,505
(1,381)
(203)
(1,382)
3,817
(1,316)
2,501
40
$2,541
$6,091
(517)
447
(1,323)
(298)
(1,169)
3,231
(1,061)
2,170
(9)
$2,161
$5,152
(283)
136
(1,285)
(341)
(794)
2,585
(807)
1,778
12
$1,790
$3
(299)
1,058
(58)
95
(213)
586
(255)
331
49
$380
— %
(58)%
237 %
(4)%
32 %
(18)%
18 %
(24)%
15 %
544 %
18 %
$939
(234)
311
(38)
43
(375)
646
(254)
392
(21)
$371
18 %
(83)%
229 %
(3)%
13 %
(47)%
25 %
(31)%
22 %
(175)%
21 %
(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
Total comprehensive income
Key Drivers:
2017 vs. 2016
Continued growth in our single-family credit guarantee portfolio and higher average contractual
guarantee fee rates, offset by lower upfront fee amortization due to lower prepayments, resulted
in guarantee fee income remaining relatively unchanged.
Increased provision for credit losses due to estimated losses related to the hurricanes in 2017,
offset by improvements in loss severity.
Higher volume of reperforming loans reclassified from held-for-investment to held-for-sale and
subsequently sold resulted in gains in 2017 compared to losses recognized on seriously
delinquent loans in 2016.
Higher outstanding cumulative volumes of credit risk transfer transactions resulted in increased
credit risk transfer expense (interest expense on STACR debt notes and premiums paid to ACIS
counterparties) in 2017.
2016 vs. 2015
Continued growth in our single-family credit guarantee portfolio and higher average contractual
guarantee fee rates, as well as higher amortization of upfront fees due to increased loan
prepayments, resulted in increased guarantee fee income.
Increased provision for credit losses 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 4Q 2016.
Lower volume of seriously delinquent single-family loans reclassified from held-for-investment to
held-for-sale in 2016.
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Increased fair value losses on STACR debt notes, as market spreads between STACR yields and
LIBOR tightened more in 2016.
Higher outstanding cumulative volumes of credit risk transfer transactions resulted in increased
credit risk transfer expense (interest expense on STACR debt notes and premiums paid to ACIS
counterparties) in 2016.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Multifamily
Business Overview
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;
Identifying new opportunities beyond our existing K Certificate and SB Certificate transactions to
cost-effectively transfer credit risk to third parties and reduce taxpayer exposure; 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; and
Fostering innovation through the development of products that expand the availability of workforce
housing in the marketplace.
The Multifamily segment provides liquidity and support to the multifamily mortgage market through a
variety of activities that include the purchase, guarantee, sale and/or securitization of multifamily
mortgage loans and mortgage-related securities. The overall market demand for multifamily loans is
generally affected by local and regional economic factors, such as unemployment rates, construction
cycles, property prices, preferences for homeownership versus renting and the relative affordability of
single-family homes, as well as certain macroeconomic factors, such as interest rates.
Our primary business model is to acquire multifamily loans for aggregation and then securitization
through the issuance and guarantee of debt securities. The returns we generate from these activities are
primarily derived from (i) the net interest income we earn on the loans prior to their securitization, (ii) the
price received upon securitization of the loans versus the price we paid to acquire the loans and (iii) the
ongoing guarantee fee we receive in exchange for providing our guarantee of the issued debt securities.
We evaluate these factors collectively in order to maximize our returns and to assess the profitability of
any given transaction.
Our securitization activities generally provide us with a mechanism to finance our loan product offerings
and to transfer a large majority of expected and stress credit losses of the loans that we purchase to
third parties. For multifamily loans that we do not intend to securitize, we may pursue other strategies,
including structured sales or the execution of other credit risk transfer products designed to transfer all
or a portion of the loans' credit risk to third parties, therefore reducing taxpayer exposure.
Our support of the multifamily market generally begins with our underwriting of the mortgage loans that
we commit to purchase from our approved lenders and typically ends with the disposition of those
loans, generally through a borrower payoff. Through our support of the multifamily mortgage market,
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Management's Discussion and Analysis
Our Business Segments | Multifamily
borrowers can obtain lower financing costs, which can benefit renters through lower rental rates and/or
improved services or amenities.
Products and Activities
Loan Products
Through our network of approved lenders, we offer borrowers a variety of loan products for the
acquisition, construction, refinance and/or rehabilitation of multifamily properties. While our approved
lenders originate the loans that we purchase, we use a prior-approval underwriting approach, 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, credit review and legal
review for each loan, including review of third-party appraisals and cash flow analysis, prior to issuing a
loan purchase commitment. We also price every loan or transaction based on the specific terms,
structure and type of execution.
Multifamily loans are typically originated by our lenders without recourse to the borrower, making
repayment dependent on the 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.
Our primary multifamily loan products include the following:
Conventional loans - Financing that includes fixed-rate and floating-rate loans, loans in lease-up
and with moderate property upgrades, manufactured housing community loans, student housing
loans, supplemental loans and certain Green Advantage loans.
Senior housing loans - Financing for independent living properties, assisted living properties and
properties with skilled nursing or memory care.
Small balance loans - Financing provided to small rental property borrowers for the acquisition or
refinance of multifamily properties. Financing ranges from $1 million to $7.5 million and is focused on
properties from 5 to 50 units.
Targeted affordable housing - Financing provided to borrowers in underserved areas that have
restricted units affordable to households with low income (earning up to 80% of the area median
income) and very-low income (earning up to 50% of the area median income) and that typically
receive government subsidies.
The amount and type of multifamily loans that we purchase is significantly influenced by the production
cap that is established by the annual Conservatorship Scorecard, which limits the aggregate UPB of
multifamily loans we may purchase in a year. While purchases of certain multifamily loans are subject to
the cap, purchases of multifamily loans that support workforce housing in affordable and underserved
markets and that support improvements to energy or water efficiency are generally not subject to the
cap. Examples of multifamily loans that are either not subject to the cap or only partially subject to the
cap include certain small balance loans, senior housing loans, manufactured housing loans, targeted
affordable housing loans and Green Advantage loans.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
In addition, the amount and type of multifamily loans that we purchase is influenced by our current
business strategy (e.g., whether to maintain or grow our share of the multifamily mortgage market) and
overall market demand for multifamily loan products.
Loan Purchase Commitments
Prior to issuing an unconditional commitment to purchase a multifamily loan, we negotiate with the
lender and borrower to determine the specific economic terms and conditions of our commitment,
including the loan's purchase price or mortgage spread. During periods when we seek to increase our
share of the total multifamily mortgage debt outstanding, we strategically bid more competitively,
generally resulting in a higher commitment price or lower mortgage spread, and potentially reduced
profitability.
At the time we commit to purchase a multifamily loan, we preliminarily determine our intent with respect
to that loan. For commitments to purchase loans that we intend to sell or securitize (i.e., held-for-sale
commitments), we elect the fair value option and therefore recognize and measure these commitments
at fair value in our consolidated financial statements. No such election is made for commitments to
purchase loans that we intend to hold for the foreseeable future (i.e., held-for-investment commitments),
and therefore these commitments are not recognized in our consolidated financial statements.
The primary impacts to Segment Earnings are:
• For each of our held-for-sale commitments, at commitment date, we recognize the estimated fair value of the commitment into
earnings, which represents the gain we expect to realize on the sale of the loan. This unrealized gain, which results from our ability to
purchase loans in the whole loan market while exiting through the securitization market effectively represents the incremental benefit
that can be realized by accessing the securitization market; and
• After commitment date, but prior to settlement, we recognize changes in the fair value of the commitment into earnings. These fair
value adjustments result from changes in the pricing of our securitizations due to changes in interest rates and securitization market
spreads.
Loan Purchase
When we purchase a loan, we finalize our intent with respect to that loan. Multifamily loans that we
intend to hold for the foreseeable future are classified as held-for-investment and measured at
amortized cost, while multifamily loans that we intend to sell or securitize are classified as held-for-sale
and typically measured at fair value through a separate fair value option election.
The vast majority of all new multifamily loan purchases are initially classified as held-for-sale and
included in our securitization pipeline. The holding period for loans in our securitization pipeline
generally ranges between two and five months, as we aggregate sufficient loan products with similar
terms and risk characteristics to securitize. For example, loans purchased during the first quarter will
generally be used as collateral for securitizations that occur in the second and third quarters of that
same year.
Our multifamily held-for-sale commitments and held-for-sale loans are subject to changes in fair value
due to two main risks: (i) interest-rate risk and (ii) spread risk. While we use derivatives to economically
hedge the interest rate-related fair value changes of most of our multifamily commitments and loans
measured at fair value, we continue to be exposed to spread-related fair value changes. We partially
reduce our spread-related fair value exposure by purchasing certain spread-related derivatives, thereby
obtaining protection against adverse movements in market spreads. We refer to the fair value
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Management's Discussion and Analysis
Our Business Segments | Multifamily
adjustments resulting from changes in these risks, net of any offsetting fair value adjustments from our
derivatives, as our holding period fair value gains and losses.
The primary impacts to Segment Earnings are:
• During the holding period, we recognize changes in the fair value of loans classified as held-for-sale into earnings. These fair value
adjustments result from changes in the pricing of our securitizations due to changes in interest rates and securitization market
spreads;
• Fair value gains or losses recognized on interest-rate and spread-related derivatives. These changes generally offset fair value
changes on the loans; and
• Interest income on loans while held in our Mortgage Investments Portfolio.
Securitization, Guarantee and Credit Risk Transfer Products
In our Multifamily segment, we issue or enter into various types of securitization, guarantee and credit
risk transfer products or transactions. These products, except for our other credit risk transfer products
(i.e., loan sales and SCR debt notes), make up our guarantee portfolio.
The collateral used in our securitization products can vary and may include loans underwritten and
purchased by us at loan origination or loans we do not own prior to securitization and that we
underwrite after (rather than at) origination. In our typical securitizations, we guarantee some or all of the
securities issued as part of the transaction. In exchange for providing this guarantee, we receive an
ongoing guarantee fee that is commensurate with the risks assumed and that will, over the long-term,
provide us with guarantee fee income that is expected to exceed the credit-related and administrative
expenses of the underlying loans. Structural deal features, such as term, type of underlying loan product
and subordination levels generally influence the deal's risk profile, which ultimately affects the guarantee
fee rate we set at the time of securitization.
For securitizations using collateral that we own, we select a securitization structure and level of
subordination to optimize the combination of gains we earn when we sell the loans for securitization and
the ongoing guarantee fees we will receive over time. For example, depending on the securitization
product and subordination levels selected, we may realize a higher (lower) gain on sale, but recognize
lower (higher) ongoing guarantee fee income.
While most of our securitizations result in the transfer of credit risk through the issuance of multi-class
securities, typically through the issuance of K Certificates and SB Certificates, we also issue and
guarantee a smaller number of other types of single-class and multi-class securities that do not result in
the transfer of credit risk. We continue to seek new and innovative credit risk transfer opportunities
beyond our current product offerings so that we can provide further liquidity to the multifamily market
and reduce taxpayer exposure to credit risk.
Credit Risk Transfer Securitizations
Our credit risk transfer securitizations typically involve the issuance of senior, mezzanine and
subordinated securities that represent undivided beneficial interests in trusts that hold pools of
multifamily loans that we previously purchased. The volume of our credit risk transfer securitizations is
generally influenced by the size of our securitization pipeline, along with market demand for multifamily
securities. Our principal credit risk transfer securitization products are K Certificates and SB Certificates.
As shown in the diagram below, in a typical K Certificate transaction, we sell multifamily loans to a non-
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Freddie Mac securitization trust that issues senior, mezzanine 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, but do not
issue or guarantee the mezzanine or subordinated securities. As a result, a large majority of expected
and stress credit risk is sold to third-party investors through the mezzanine and subordinated securities,
thereby reducing our credit risk exposure.
K Certificates - Regularly issued structured pass-through securities backed by recently originated
multifamily loans. This product provides investors with a wide-range of structural and collateral
options that provide for stable cash flows and a structured credit enhancement. While the amount of
guarantee fee we receive may vary by collateral type, it is generally fixed for those K Certificate
series that we issue with regular frequency (e.g., 5, 7 and 10-year fixed-rate K Certificates and our
Floating Rate K Certificates). The guarantee fee received on these standard K Certificates currently
ranges between 20 basis points and 50 basis points.
The guarantee fee on K Certificates that we do not issue on a regular basis, such as our single-
sponsor K Certificates, is determined based on the specific risks associated with the underlying
collateral and the structure of the securitization, including tranche sizes and risk distribution.
SB Certificates - Regularly issued securities typically backed by multifamily small balance loans
that we underwrite at loan origination and purchase prior to securitization. Similar to our K Certificate
transactions, a non-Freddie Mac trust will issue the senior classes of securities, which we guarantee,
as well as the unguaranteed subordinated securities. However, unlike our K Certificate transactions,
we do not purchase the senior classes of securities, nor do we place those securities into a Freddie
Mac Trust. The guarantee fee we receive in these transactions is generally 35 basis points.
From time to time, we may undertake certain activities to support the liquidity of K Certificates and SB
Certificates. For more information, see Risk Factors - Other Risks - The profitability of our
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Management's Discussion and Analysis
Our Business Segments | Multifamily
multifamily business could be adversely affected by a significant decrease in demand for our K
Certificates and SB Certificates.
In addition to our K Certificate and SB Certificate transactions, we also issue the following credit risk
transfer securitization products:
ML Certificates - We securitize pools of tax-exempt or taxable loans that we underwrite and own
prior to securitization and issue both guaranteed senior ML Certificates and unguaranteed
subordinated ML Certificates. The guarantee fee received on our ML Certificates is negotiated.
Multifamily Aggregation Risk Transfer Certificates (KT Certificates) - These securities are
backed by a revolving pool of multifamily loans that are awaiting sale into a K Certificate transaction.
Using this structure, we issue guaranteed senior securities and unguaranteed mezzanine and
subordinated securities to third parties. During the revolving period of this product, we will purchase
loans from the KT trust for sale into a K Certificate transaction and replace those purchased loans
with additional eligible loans. Through this product we are able to transfer a portion of the front-end
credit risk associated with our securitization pipeline prior to final securitization. Given our right to
purchase loans from the KT trust, we consolidate this structure and the loans in the revolving pool
remain in our securitization pipeline until securitization.
Other Securitization Products
Our other securitization products involve the issuance of single-class or multiclass pass-through
securities that represent beneficial interests in trusts that hold pools of multifamily loans. We guarantee
the single-class securities and may guarantee some or all of the multi-class securities. The collateral for
these securitizations may include loans underwritten and purchased by us at loan origination or loans
we do not own prior to securitization and that we underwrite after (rather than at) origination.
Our other securitization products generally do not transfer credit risk away from Freddie Mac, as we
guarantee all of the issued securities, or there is no credit risk to transfer through securitization as we
were not previously exposed to the underlying collateral’s credit risk prior to securitization (the collateral
is contributed to the securitization by third parties). However, certain of these other securitization
products transfer a portion or all of the interest rate risk associated with the underlying collateral to third
parties. The guarantee fee received for our other securitization products will vary and is typically
negotiated with the loan seller or established by us, based on the specific risks of the underlying
collateral and the structure of the securitization.
Our principal other securitization products include the following:
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. In these securitizations, we
guarantee the full payment of principal and timely payment of interest.
K Certificates without subordination - We securitize multifamily loans that we own and issue K
Certificates without subordination using a transaction structure similar to our K Certificates.
However, unlike K Certificates, these transactions are fully guaranteed by Freddie Mac and no
mezzanine or subordinated securities are issued.
Q Certificates - We issue Q Certificates using a securitization structure that is similar to our K
Certificates and that provides for structural credit enhancements that may include either
subordination or other loss sharing features. However, unlike K Certificates, the loans backing the Q
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Certificates are contributed by third parties and are underwritten by us after (rather than at)
origination.
M Certificates - We securitize pools of tax-exempt or taxable multifamily housing revenue bonds
contributed by third parties and issue guaranteed senior M Certificates and unguaranteed
subordinated M Certificates.
Summary of our Primary Business Model and Its Impacts to Segment Earnings
The following diagram summarizes the activities included in our primary business model and the
corresponding impacts to our Segment Earnings.
Other Credit Risk Transfer Products
For the credit risk of multifamily assets that we have not transferred through securitizations, we may
pursue other strategies to reduce our credit risk exposure. Our principal other credit risk transfer
products include the following:
SCR debt notes - Unsecured and unguaranteed corporate debt obligations. We began issuing our
SCR debt notes in 2016 in order to transfer a portion of the credit risk of the loans underlying certain
of our other mortgage-related guarantees to third parties. 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 our Single-Family Guarantee
segment's STACR debt notes.
Loan sales - To reduce our credit risk exposure related to certain loans, we engage in non-
securitization related transactions, including whole loan sales. These loan sales are to third parties
and may include sales to funds that invest in loans where we may also provide secured financing.
Other Guarantees
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
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Management's Discussion and Analysis
Our Business Segments | Multifamily
moderate-income multifamily loans. The guarantee fees we receive on these transactions are
negotiated.
Investing Activities
Mortgage loans - We hold a portfolio of multifamily mortgage loans as part of a buy-and-hold
investment strategy. Although we continue to purchase new multifamily mortgage loans for this
portfolio, our new purchase activity has leveled off as this buy-and-hold strategy is not part of our
primary business model.
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
mezzanine and subordinated securities related to our securitization transactions, depending on
market conditions. However, to date, we have not purchased any of the unguaranteed subordinated
securities that are in the first loss position.
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 primarily due to runoff.
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 charts show the concentration of
our 2017 multifamily new business volume by our largest sellers and loan servicing by our largest
servicers as of December 31, 2017. Any seller or servicer with a 10% or greater share is listed
separately.
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Management's Discussion and Analysis
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Percentage of Multifamily New Business Volume
Percentage of Multifamily Servicing Volume(1)
Competition
(1) Excludes loans underlying securitizations where we are not in a
first loss position, primarily K Certificates and SB Certificates.
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, savings institutions and life insurance companies.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Market Conditions
The graphs and related discussion below present certain multifamily market indicators that can
significantly affect the business and financial results of our Multifamily segment.
Change in Effective Rents for the Year Ended
December 31,
Apartment Vacancy Rates as of December 31,
Source: REIS, Inc.
Source: REIS, Inc.
Apartment Completions and Net Absorption for the Year Ended December 31,
Source: REIS, Inc.
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Management's Discussion and Analysis
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Commentary
Apartment completions are an indication of the supply of rental housing. Net absorption, which is a
measurement of the rate at which available apartments are occupied, is an indication of demand for
rental housing.
While vacancy rates increased during 2017 as apartment completions outpaced net absorption,
these rates remain well below the long-term average. Due to the introduction of a significant amount
of new supply in the latter half of the year, net absorptions significantly lagged behind new
apartment completions in 2017. Although we expect continued strong demand, it may take longer to
absorb these new units compared to prior years.
Effective rent (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) growth for 2017 remained strong relative
to the long-term average, primarily due to an increase in potential renters from healthy employment,
higher single family home prices and a growing household preference for rental housing due to
changes in lifestyle preferences and demographic trends.
Our financial results for 2017 were not significantly affected by these market conditions.
Multifamily property prices continued to grow with 11% annualized growth in 2017, indicating a
healthy multifamily market, though prices were tempered by moderating effective rent growth, higher
vacancy rates and rising interest rates.
While the impacts of Hurricanes Irma and Maria on the multifamily markets located in the affected
areas are still being evaluated, we have seen effective rents increase and vacancy rates decrease in
the areas affected by Hurricane Harvey, as displaced single-family homeowners require temporary
housing, resulting in increased demand for rental housing.
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Management's Discussion and Analysis
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K Certificate Benchmark Spreads as of December 31,
Source: Independent Dealers
Commentary
The valuation of our securitization pipeline and the profitability of our primary credit risk transfer
securitization product, the K Certificate, are affected by changes in K Certificate benchmark spreads
as well as deal-specific attributes, such as tranche size, risk distribution and collateral characteristics
(loan term, coupon type, prepayment restrictions and underlying property type). These market
spread movements and deal-specific attributes contribute to our earnings volatility, which we
manage by controlling the size of our securitization pipeline and by entering into certain spread-
related derivatives.
K Certificate benchmark spreads are market-quoted spreads over the U.S. swap curve. The 10-year
fixed-rate spread represents the spread for the largest guaranteed class of a typical fixed-rate K
Certificate, while the 7-year ARM spread represents the spread for the largest guaranteed class of a
typical floating-rate K Certificate.
K Certificate benchmark spreads tightened throughout 2017, due to a reduction in macroeconomic
market volatility. By comparison, K Certificate benchmark spreads were more volatile during the first
half of 2016, prior to tightening sharply in the second half of 2016. Overall, this tightening had a
positive effect in 2016 and 2017 on the valuation of our securitization pipeline and K Certificate
profitability.
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Management's Discussion and Analysis
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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 2017, the amount is as of September 30, 2017 (latest
available information).
Commentary
Source: Freddie Mac, FDIC Quarterly Banking Profile, Trepp, LLC.
(Multifamily CMBS market, excluding REOs), American Council of Life
Insurers (ACLI). For 2017, the amounts for Multifamily CMBS market
and FDIC insured institutions are as of September 30, 2017 and the
amount for ACLI investment bulletin is as of December 31, 2017 (latest
available information).
During 2017, the multifamily mortgage market grew significantly because of stronger demand for
multifamily loan products due to an elevated number of new apartment completions, strong
multifamily market fundamentals and low interest rates. Multifamily market fundamentals were
primarily driven by a healthy job market, population growth, high propensity to rent among young
adults and rising single-family home prices. We expect continued growth in the multifamily mortgage
market during 2018 due to these same drivers.
Our share of multifamily mortgage debt outstanding grew slightly during 2017, primarily due to our
strategic pricing efforts and the expansion of our new product offerings, which were generally
excluded from the Conservatorship Scorecard production cap.
Our multifamily delinquency rates during 2017 remained low compared to other industry participants,
ending the year at 2 bps, primarily due to our prior-approval underwriting approach, strong
multifamily market fundamentals and low interest rates. See Risk Management - Multifamily
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Management's Discussion and Analysis
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Mortgage Credit Risk - Managing Our Portfolio, Including Loss Mitigation Activities for
additional information on our delinquency rates.
We expect the credit losses and delinquency rates for the multifamily mortgage portfolio to remain
low in the near term.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Business Results
The graphs, tables and related discussion below present the business results of our Multifamily
segment.
New Business Volume
New Business Volume for the Year Ended
December 31,
Acquisition of Units by Area Median Income (AMI) for
the Year Ended December 31,
Commentary
The 2017 Conservatorship Scorecard production cap remained at $36.5 billion and will decrease to
$35.0 billion in 2018. The production cap is subject to reassessment throughout the year by FHFA to
determine whether an increase in the cap is appropriate based on a stronger than expected overall
market. We do not expect that the decrease in the cap will have a material impact on our 2018 new
business volume.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Outstanding loan purchase commitments were $14.5 billion and $12.4 billion as of December 31,
2017 and December 31, 2016, respectively. Both period-end balances include loan purchase
commitments where we have elected the fair value option.
Our new business volume and outstanding loan purchase commitments were higher during 2017
compared to 2016 due to the overall growth of the multifamily mortgage market resulting from
stronger demand for multifamily loan products and our strategic pricing efforts. Despite the
unchanged production cap, we had a record volume in 2017 primarily due to a focus on purchase
activity associated with targeted loan types that were considered uncapped.
Approximately 46% of our new business volume for 2017 counted towards the 2017
Conservatorship Scorecard production cap, while the remaining 54% was considered uncapped.
The increase in uncapped new business volume was primarily driven by the growth in purchases of
loans originated pursuant to our Green Advantage initiative, which we expanded during 2017, along
with our effort to support the growth of the overall multifamily market.
While our share of multifamily mortgage debt outstanding increased slightly during 2017, we expect
increased competition from other market participants to continue in the future.
Approximately 88% of our 2017 new business volume was designated for securitization and
included in our securitization pipeline. Combined with market demand for our securities, our new
business volumes from the second half of 2017 will be the primary driver of and collateral for our
credit risk transfer securitizations, primarily our K Certificate and SB Certificate issuances, for the
first half of 2018.
Approximately 83% of the eligible units we financed during 2017 were affordable to households
earning at or below the median income in their area (eligible units are multifamily units that qualify
towards our affordable housing goal). Furthermore, during 2017, we continued our support of
workforce housing through our continued purchases of manufactured housing community loans and
small balance loans.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Multifamily Portfolio and Market Support
Total Multifamily Portfolio as of December 31,
Multifamily Mortgage Investments Portfolio as of
December 31,
Multifamily Market Support
The following table summarizes our support of the multifamily market.
(UPB in millions)
Unsecuritized mortgage loans held-for-sale
Unsecuritized mortgage loans held-for-investment
Unsecuritized non-mortgage loans(1)
Mortgage-related securities
Guarantee portfolio
Total multifamily portfolio
Add: Unguaranteed securities(2)
Less: Acquired mortgage-related securities(3)
Total multifamily market support
December 31, 2017
December 31, 2016
$20,537
17,702
473
7,451
203,074
249,237
30,772
(7,109)
$272,900
$16,544
25,873
—
12,517
157,993
212,927
24,573
(5,793)
$231,707
(1) Reflects the UPB of loans sold to a whole loan investment fund that was financed by Freddie Mac.
(2) Reflects the UPB of unguaranteed securities issued as part of our securitization products.
(3) Reflects the UPB of mortgage-related securities that were both issued and acquired by us. This UPB must be removed to avoid a double-count, as
it is already reflected within the guarantee portfolio and/or unguaranteed securities.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Commentary
Our total multifamily portfolio increased during 2017, primarily due to a 29% growth in new business
volume, coupled with an increase in our issuance of certain other securitization products (e.g., Q
Certificates and M Certificates). The vast majority of the growth in our guarantee portfolio was
associated with ongoing credit risk transfer securitizations, primarily K Certificate and SB Certificate
transactions.
At December 31, 2017, the UPB of our unsecuritized held-for-sale loans and mortgage-related
securities, which are measured at fair value or lower-of-cost-or-fair-value, declined slightly from
December 31, 2016. The overall decline, which was attributable to the runoff of our CMBS portfolio,
was largely offset by an increase in the balance of our securitization pipeline due to the growth of our
new business volume and the reclassification of certain loans from held-for-investment to held-for-
sale during 4Q 2017.
At December 31, 2017, approximately 68% of our held-for-sale loans and held-for-sale loan
commitments were fixed-rate, while the remaining 32% were floating rate.
We expect our guarantee portfolio to continue to grow as a result of ongoing credit risk transfer
securitizations, primarily K Certificate and SB Certificate transactions, which we expect to be driven
by continued strong new business volume. We also expect a continued reduction in our CMBS
portfolio due to ongoing principal repayments and maturities, which will serve to reduce our less
liquid assets.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Net Interest Yield Earned for the Year Ended December 31,
Commentary
Net interest yield increased significantly during 2017 compared to 2016 primarily due to higher
prepayment income received from interest-only securities that we hold in certain of our more
seasoned K Certificate transactions and from loans.
The weighted average portfolio balance of interest-earning assets decreased due to the run-off of
our held-for investment loans and non-agency CMBS.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Credit Risk Transfer Activity
Credit Risk Transfer Activity for the
Quarter Ended
Credit Risk Transfer Activity for the Year Ended
December 31,(1)
(1) The amounts disclosed in the bar graph above represent the net
credit risk transferred to third parties.
Commentary
The UPB of assets subject to credit risk transfer transactions was higher during 2017 compared to
2016, primarily due to a larger average balance in our securitization pipeline, which was driven by
our strong 2017 new business volume. Through these transactions, we transferred a large majority of
the expected and stress credit losses of these assets to third parties, primarily by issuing
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Management's Discussion and Analysis
Our Business Segments | Multifamily
unguaranteed subordinated securities as part of our K Certificate and SB Certificate transactions.
We began selling certain of our loans to investment funds in 2017, resulting in the full transfer of the
associated credit risk on the loans to third parties.
In 2017, we have transferred a large majority of the expected and stress credit losses related to a
record $65 billion in UPB of loans, and since 2009, $249 billion in UPB of loans through our credit
risk transfer products, primarily K Certificates and SB Certificates.
Based on the strength of our new business volume for the second half of 2017, we expect our credit
risk transfer activity for 1Q 2018 to exceed our 1Q 2017 activity.
While our K Certificate and SB Certificate issuances continue to be our primary mechanism to
transfer multifamily mortgage credit risk, we introduced new initiatives to transfer credit risk during
2017 and expect to continue to develop new credit risk transfer initiatives in 2018.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Guarantee Activities
Guarantee Assets for Year Ended December 31,
Unearned Guarantee Fees as of December 31,
Commentary
We generally recognize a guarantee asset on our consolidated balance sheets each time we enter
into a financial guarantee contract. This asset represents the present value of guarantee fees we
expect to receive in the future from those guarantee transactions. We recognize these fees in
segment earnings over the expected remaining guarantee term. While we expect to collect these
future fees based on historical performance, the actual amount collected will depend on the
performance of the underlying collateral subject to our financial guarantee.
The amount of new guarantee assets recognized in 2017 exceeded the new guarantee assets
recognized in 2016, primarily due to an increase in the UPB of our credit risk transfer securitizations,
primarily K Certificate and SB Certificate issuances, coupled with longer average guarantee terms.
This increase was partially offset by slightly lower average guarantee fee rates on these same
securitizations due to underlying loan products that, by their nature and design, have less risk.
The balance of unearned guarantee fees increased during 2017 due to the continued growth of our
multifamily guarantee business, as our credit risk transfer securitization volume continued to be
strong, significantly outpacing runoff.
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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. As we use derivatives to economically hedge interest-rate related fair value
changes of most of our assets measured at fair value, interest rates have a minimal impact on our total
comprehensive income.
(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
Year Ended December 31,
2017 vs. 2016
2017
2016
2015
$
%
2016 vs. 2015
$
%
Year Over Year Change
$1,206
676
(13)
1,485
181
(395)
(66)
3,074
(1,060)
2,014
(77)
$1,022
511
22
1,166
407
(362)
(58)
2,708
(890)
1,818
(236)
$1,049
339
26
(198)
372
(325)
(60)
1,203
(376)
827
(261)
$566
$184
165
(35)
319
(226)
(33)
(8)
366
(170)
196
159
$355
18 %
32 %
(159)%
27 %
(56)%
(9)%
(14)%
14 %
(19)%
11 %
67 %
22 %
($27)
172
(4)
1,364
35
(37)
2
1,505
(514)
991
25
$1,016
(3)%
51 %
(15)%
689 %
9 %
(11)%
3 %
125 %
(137)%
120 %
10 %
180 %
Total comprehensive income (loss)
$1,937
$1,582
While certain multifamily properties underlying our loans and financial guarantees were damaged by the
hurricane events of 3Q 2017, such events did not significantly affect our 2017 segment financial results.
Key Drivers:
2017 vs. 2016
Higher net interest yields, partially offset by a decline in our weighted average portfolio balance
of interest-earning assets, resulted in increased net interest income;
Continued growth in our multifamily guarantee portfolio, partially offset by slightly lower average
guarantee fee rates on new guarantee business volume, resulted in increased guarantee fee
income;
Larger average balances of held-for-sale commitments and securitization pipeline loans due to
greater new business volume, partially offset by less tightening of K Certificate benchmark
spreads and the effects of strategic pricing, resulted in larger fair value gains; and
Disposition of certain non-agency CMBS, coupled with spread tightening, resulted in larger gains
on non-agency CMBS.
2016 vs. 2015
Lower weighted average portfolio balance of interest-earning assets, partially offset by a higher
net interest yield, resulted in decreased net interest income;
Continued growth in our multifamily guarantee portfolio and higher average guarantee fee rates
on new guarantee business volume resulted in increased guarantee fee income; and
Tightening of K Certificate benchmark spreads, coupled with improved pricing of K Certificates
and SB Certificates, as well as greater new business volume, resulted in fair value gains during
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Management's Discussion and Analysis
Our Business Segments | Multifamily
2016, while widening of K Certificate benchmark spreads resulted in fair value losses during
2015.
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
Capital Markets
Business Overview
The Capital Markets segment supports our primary business strategies by creating:
A Better Freddie Mac:
Engaging in economically sensible transactions to reduce our less liquid assets;
Managing the mortgage-related investments portfolio’s risk-versus-return profile based on our
internal economic capital framework, which is aligned with the Conservatorship Capital Framework;
Enhancing the liquidity of our issued securities in the secondary mortgage market to support our
business needs;
Responding to market opportunities in funding our business activities;
Managing our economic interest-rate risk through the use of derivatives and various debt
instruments; and
Attempting to align prepayment and pooling profiles for Freddie Mac TBA programs to match Fannie
Mae's TBA characteristics.
A Better Housing Finance System:
Delivering mortgage capital markets services including 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.
The Capital Markets segment is responsible for managing the majority of our mortgage-related
investments portfolio, and providing company-wide treasury and interest-rate risk management
functions. In addition, we are responsible for managing our securitization and resecuritization activities
related to single-family loans.
Our mortgage portfolio management activities primarily include single-family unsecuritized loans, a
diminishing portfolio of non-agency mortgage-related securities, and purchases and sales of agency
mortgage-related securities. In addition, we actively engage in the structuring of our agency mortgage-
related securities. Our portfolio management activities also include responsibility for maintaining the
other investments and cash portfolio for purposes of short-term liquidity management. However,
certain portions of the mortgage-related investments portfolio are not managed by us, including the
portions of the portfolio related to multifamily assets, single-family seriously delinquent loans and the
credit risk on single-family performing loans.
We provide a company-wide treasury function, primarily managing our funding and liquidity needs on
both a short- and long-term basis. The primary activities of the treasury function include issuing, calling
and repurchasing debt, and maintaining a portfolio of non-mortgage investments.
Our interest-rate risk management function consolidates and manages the overall interest-rate risk of
the company. To reduce our exposure to changes in the cash flows of interest-rate sensitive assets and
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
liabilities due to interest rate changes, we actively monitor and economically hedge this risk, primarily
through the use of derivative instruments. In addition, we further reduce these interest-rate exposures
through active management of our debt funding mix and through the structuring of our investments in
mortgage-related securities.
Finally, our segment is responsible for management of our securitization and resecuritization activities
related to single-family loans, which are discussed in more detail in Our Business Segments -
Single-Family Guarantee.
Although we manage our business on an economic basis, we have executed certain transactions in an
effort to reduce the probability of our having a negative net worth due to changes in interest rates and
thus being required to draw from Treasury. In 2017, we implemented hedge accounting, which may
reduce the need for these types of transactions. 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 variability 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, Liquidity Management and Related Activities
In our Capital Markets segment, our objectives are to make appropriate risk and capital management
decisions, effectively execute our strategy and be responsive to market conditions. We manage the
following types of products:
Agency mortgage-related securities - We primarily invest in Freddie Mac mortgage-related
securities, but may also invest in Fannie Mae and Ginnie Mae mortgage-related securities from time
to time. Our activities with respect to this product may include purchases and sales, dollar roll
transactions and structuring activities (e.g., resecuritizing existing agency securities into REMICs and
selling some or all of the resulting REMIC tranches).
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
portfolio of such securities that we acquired in prior years. Our activities with respect to this product
are primarily sales. In recent years, we and FHFA reached settlements with a number of institutions
to mitigate or recover losses we recognized in prior years.
Single-family unsecuritized loans - We acquire single-family unsecuritized loans in two primary
ways:
Loans acquired through our cash loan purchase program that are awaiting
securitization - 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; and
Seriously delinquent or modified loans that we have removed from PC pools:
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
Certain of these loans may re-perform, either on their own or through modification.
Reperforming loans are managed by both the Capital Markets and Single-family Guarantee
segments, but are included in the Capital Markets segment's financial results.
We continue to reduce the balance of our reperforming 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; and
Sales and securitization using a senior subordinate securitization structure, where we
guarantee the resulting senior securities.
Loans that remain seriously delinquent are also managed by both the Capital Markets and
Single-family Guarantee segments, but are included in the Single-family Guarantee
segment's financial results.
We continue to reduce the balance of our seriously delinquent loans through loss
mitigation and foreclosure activities, which are managed by the Single-family Guarantee
segment; and
We also continue to reduce the balance of our seriously delinquent loans through direct
loan sales.
Other investments and cash portfolio - We invest in other investments, including: (i) the Liquidity
and Contingency Operating Portfolio, primarily used for short-term liquidity management, (ii) cash
and other investments held by consolidated trusts, (iii) collateral pledged by derivative and other
counterparties, (iv) investments used to pledge as collateral, (v) advances to lenders and (vi) other
secured lending activities. In our advances to lenders program, we provide funds to lenders for
mortgage loans that they will subsequently either sell through our cash purchase program or
securitize into PCs that they will deliver to us. In our other secured lending activities, we invest in
securities purchased under agreements to resell as a mechanism to provide financing to investors in
Freddie Mac securities to increase liquidity and expand the investor base for those securities. We
may do other types of secured lending transactions in the future.
The primary impacts to Segment Earnings are:
• Interest income on agency and non-agency mortgage-related securities, unsecuritized loans and our other investments and cash
portfolio;
• Fair value gains and losses due to changes in interest rate and market spreads on our agency and non-agency mortgage-related
securities and on certain securities held within our other investments and cash portfolio that are accounted for as investment
securities. These amounts are recognized in Segment Earnings or Total other comprehensive income(loss) depending upon their
classification (trading or available-for-sale, respectively); and
• Gains and losses on the sale of unsecuritized loans.
We evaluate the liquidity of our mortgage-related assets based on three categories (in order of liquidity):
Liquid - single-class and multi-class agency securities, excluding certain structured agency
securities collateralized by non-agency mortgage-related securities. Also includes certain non-
agency mortgage-related securities guaranteed by a GSE;
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
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 and non-agency mortgage-related securities not guaranteed by a
GSE).
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.
The purchase or sale of agency securities could, at times, 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 Capital Markets
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 meet our ongoing cash needs and to comply with our
Liquidity Management Framework. This Framework provides a mechanism for us to sustain 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:
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.
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.
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Management's Discussion and Analysis
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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 STACR debt notes, see Our Business Segments -
Single-Family Guarantee - Business Overview - Products and Activities, and for a description
of SCR debt notes, see Our Business Segments - Multifamily - Business Overview - Products
and Activities.
The average life of our assets is longer than the average life of our liabilities, which creates liquidity risk.
To manage short-term liquidity risk, 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 or mature in the short term. 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.
The primary impacts to Segment Earnings are:
• Interest expense on our various funding products; and
• Gains and losses on the early termination (call or repurchase) of our funding products.
Interest-Rate Risk Management Activities
We manage the economic interest-rate risk for the company and have management-approved limits for
interest-rate risk, 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.
There is a cash flow mismatch between our financial assets and the other debt that we use to fund
those assets. This mismatch in cash flows not only leads to liquidity risk, but also results in interest-rate
risk. 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. 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 credit risk and our overall risk management strategy.
While our interest-rate risk management activities are primarily focused on reducing our economic
interest-rate risk, during 2017, we adopted hedge accounting strategies to reduce our GAAP earnings
variability. The adoption of hedge accounting was a business decision intended to better align earnings
with the economics of our business, but it is not intended to change the investment and portfolio
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
management decisions that our segment would otherwise make. For more information on our use of
hedge accounting see Risk Management - Market Risk - GAAP Earnings Variability and Note
9.
The primary impacts to Segment Earnings are:
• Fair value gains and losses on derivatives not designated in qualifying hedge relationships;
• Interest income/expense on derivatives; and
• Differences between the change in fair value of the hedged item attributable to the risk being hedged and changes in the fair value of
the hedging instrument for derivatives designated in qualifying fair value hedge accounting relationships.
Summary of our Primary Business Model and Its Impacts to Segment Earnings
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 customers include banks and other depository institutions, insurance companies, money managers,
central banks, pension funds, state and local governments, REITs, brokers and dealers, and a variety of
lenders as discussed in Our Business Segments - Single-Family Guarantee - Business
Overview - Customers. Our unsecured other debt securities and structured mortgage-related
securities are initially purchased by dealers and redistributed to their customers.
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
Competition
Our competitors in the Capital Markets 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.
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
Market Conditions
The following graph and related discussion present 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 Capital Markets segment.
Par Swap Rates as of December 31,
Source: BlackRock
Commentary
We primarily use LIBOR-based derivatives and fixed-rate debt to hedge our interest rate risk. The
mortgage-related investments portfolio's exposure to interest rate risk is calculated by our models
that project loan and security cash flows over a variety of scenarios. For additional information on
our exposure to interest rate risk, see Risk Management - Market Risk.
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
2017 vs. 2016 and 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 2017 and 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.
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
Business Results
The graphs and related discussion below present the business results of our Capital Markets segment.
Investing Activity
The following graphs present the Capital Markets 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 14.9% between December 31, 2016 and December 31, 2017.
The balance of our other investments and cash portfolio decreased 7.2% primarily due to lower
near-term cash needs for upcoming maturities and anticipated calls of other debt at the end of 2017
compared to the end of 2016.
The percentage of less liquid assets relative to our total mortgage investments portfolio declined to
28.4% at December 31, 2017 from 34.4% at December 31, 2016, primarily due to repayments, sales
and securitizations of our less liquid assets.
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
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.
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Management's Discussion and Analysis
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Reduction in Less Liquid Assets
Securitizations of Reperforming 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 non-agency mortgage-
related securities. Our disposition strategies for our less liquid assets include securitizations and
sales.
During 2017, our sales of less liquid assets included $9.2 billion in UPB of non-agency mortgage-
related securities and $8.2 billion of reperforming loans. Our sales of reperforming loans involved
securitization of the loans using senior subordinate securitization structures, 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.
One of our principal strategies related to the securitization of reperforming 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 2017, we securitized $1.2 billion of single-
family reperforming loans through PC securitization.
FREDDIE MAC | 2017 Form 10-K
98
Management's Discussion and Analysis
Our Business Segments | Capital Markets
Net Interest Yield and Average Balances
Net Interest Yield & Average Investments Portfolio Balance
Commentary
Net Interest Yield
2017 vs. 2016 - remained relatively flat.
2016 vs. 2015 - decreased 17 basis points, primarily due to the reduction in the balance of our
higher yielding mortgage investments portfolio, pursuant to the portfolio limits established by the
Purchase Agreement and FHFA.
FREDDIE MAC | 2017 Form 10-K
99
Management's Discussion and Analysis
Our Business Segments | Capital Markets
Financial Results
The table below presents the components of the Segment Earnings and comprehensive income for our
Capital Markets segment.
(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
Income tax expense
Segment Earnings, net of taxes
Total other comprehensive income (loss), net of tax
Total comprehensive income (loss)
Year Over Year Change
Year Ended December 31,
2017 vs. 2016
2017
2016
2015
$3,381
$3,812
$4,665
236
269
420
(587)
(570)
7,813
(330)
9,943
(3,428)
6,515
(30)
$6,485
1,151
(1,077)
1,865
(320)
5,700
(1,873)
3,827
(452)
$3,375
(833)
(737)
2,288
(317)
5,486
(1,715)
3,771
(356)
$3,415
$
($431)
(33)
(1,738)
507
5,948
(10)
4,243
(1,555)
2,688
422
$3,110
%
(11)%
(12)%
(151)%
47 %
319 %
(3)%
74 %
(83)%
70 %
93 %
92 %
2016 vs. 2015
$
%
($853)
(151)
1,984
(340)
(423)
(3)
214
(158)
56
(96)
($40)
(18)%
(36)%
238 %
(46)%
(18)%
(1)%
4 %
(9)%
1 %
(27)%
(1)%
The portion of total comprehensive income (loss) driven by interest rate-related and market spread-
related fair value changes, after-tax, is presented in the table below. These amounts affect various line
items in the table above, including derivative gains (losses), gains (losses) on trading securities, other
non-interest income, income tax expense and total other comprehensive income (loss), net of tax.
Year Over Year Change
Year Ended December 31,
2017 vs. 2016
2017
2016
2015
$
%
2016 vs. 2015
$
%
($0.3)
0.8
$0.2
0.3
($0.5)
0.2
($0.5)
0.5
(250)%
167 %
$0.7
0.1
140%
50%
(Dollars in millions)
Interest rate-related
Market spread-related
Key Drivers:
2017 vs. 2016
The continued reduction in the balance of our mortgage-related investments portfolio resulted in
a decrease in net interest income.
Interest rate-related fair value changes during 2017. Losses increased, driven by lower levels of
volatility during 2017, resulting in larger losses in our options portfolio, coupled with lower fair
value gains in our pay-fixed interest rate swaps as long-term interest rates increased less. This
was partially offset by reduced fair value losses in our receive-fixed interest rate swaps and the
majority of our investments in securities.
Increased spread-related fair value gains driven by market spread tightening during 2017 on our
non-agency mortgage-related securities.
The volume of PCs we repurchased during 2017 increased only slightly, but we recognized
increased gains on the extinguishment of debt as long-term interest rates increased between the
FREDDIE MAC | 2017 Form 10-K
100
Management's Discussion and Analysis
Our Business Segments | Capital Markets
time of issuance and repurchase, as compared to 2016 when long-term interest rates generally
decreased between the time of issuance and repurchase.
Proceeds of $4.5 billion received from the RBS settlement during 2017 related to certain of our
non-agency mortgage-related securities. For more information on this settlement, see Note 14.
2016 vs. 2015
The continued reduction in the balance of our mortgage-related investments portfolio resulted in
a decrease in net interest income.
Interest rate-related fair value changes during 2016. Long-term interest rates increased during the
fourth quarter of 2016 but decreased during 2015. This resulted in gains in our pay-fixed interest
rate swaps and losses in our receive-fixed interest-rate swaps, certain of our option contracts
and the vast majority of our investments in securities.
Increased spread-related fair value gains driven by market spread tightening during 2016 on our
agency mortgage-related securities.
Decreased sales of available-for-sale agency and non-agency mortgage-related securities in
unrealized gain positions resulted in lower gains.
FREDDIE MAC | 2017 Form 10-K
101
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)
Year Ended December 31,
2016
2015
2017
Year Over Year Change
2017 vs. 2016
%
$
2016 vs. 2015
%
$
Comprehensive income (loss) - All Other
($5,405)
$—
$28
($5,405)
N/A
($28)
(100)%
Key Drivers:
2017 vs. 2016 - Comprehensive loss in 2017 was driven by:
Higher income tax expense due to the revaluation of our net deferred tax asset driven by the Tax
Cuts and Jobs Act, which reduced the statutory corporate income tax rate from 35% to 21%. For
more information on the statutory tax rate change, see Note 12.
FREDDIE MAC | 2017 Form 10-K
102
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, operational risk, market risk and liquidity risk. We discuss credit risk, operational risk and market
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.
Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes,
people, or systems or from external events.
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 financial obligations as they come due or
meet the needs of customers in a timely and cost-efficient manner.
For more discussion of these and other risks facing our business, see Risk Factors.
Enterprise Risk Framework and Governance Structure
We manage risk using a three-lines-of-defense risk management model 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 information and diagram below present the responsibilities associated with our three-lines-of-
defense risk management model and our governance structure.
We have made considerable enhancements to our enterprise risk framework in recent years, including:
Revising our integrated enterprise risk framework to enable us to place more focus on high risk
business processes and activities;
Utilizing our three-lines-of-defense risk management model both to strengthen risk ownership in our
business units and to assign specific responsibilities and accountabilities for risk management;
Implementing variable compensation programs that do not encourage excessive risk taking and
balance risk and rewards; and
Continuing to emphasize from the tone at the top the importance of a strong risk culture.
Our framework focuses on balancing ownership of risk by our business units with independent risk
management 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 - Corporate Governance - Board and Committee
Information.
FREDDIE MAC | 2017 Form 10-K
103
Management's Discussion and Analysis
Risk Management | Overview
FREDDIE MAC | 2017 Form 10-K
104
Management's Discussion and Analysis
Risk Management | Overview
Capital Framework
During 2017, we and Fannie Mae worked with FHFA to develop an overall risk measurement framework
for evaluating our risk management and business decisions during conservatorship, known as the
Conservatorship Capital Framework (CCF). We use both CCF and our internal capital methodologies,
which are aligned, to measure risk for making economically effective decisions. We are required to
submit quarterly reports to FHFA related to CCF requirements. In addition, we are subject to the annual
Dodd-Frank Act Stress Test as required by FHFA.
FREDDIE MAC | 2017 Form 10-K
105
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. We are exposed to three types of mortgage credit risk:
Single-family mortgage credit risk, through our ownership or guarantee of loans in the single-
family credit guarantee portfolio;
Multifamily mortgage credit risk, through our ownership or guarantee of loans in the multifamily
mortgage portfolio; and
Mortgage-related securities credit risk, through our ownership of non-Freddie Mac mortgage-
related securities in the mortgage-related investments portfolio.
Counterparty credit risk is the risk associated with the inability or failure of a counterparty to meet its
contractual obligations.
In the sections below, we provide a general discussion of our enterprise risk framework and current risk
environment for the three types of mortgage credit risk, as well as for counterparty credit risk.
FREDDIE MAC | 2017 Form 10-K
106
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage 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 single-family
credit guarantee portfolio;
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 2016 originations are largely complete, while our reviews of 2017 originations are
ongoing. The average aggregate ineligible loan rate across all sellers for loans funded during 2016, 2015
and 2014, excluding HARP and other relief refinance loans, was approximately 0.7%, 0.8% and 1.1%,
respectively. The most common underwriting defect found in our review of loans funded during 2016
related to the delivery of insufficient income documentation.
We have made changes in recent periods to standardize our quality control process and facilitate more
timely reviews. These changes are designed to identify breaches of representations and warranties early
FREDDIE MAC | 2017 Form 10-K
107
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
in the life of the loan. We also implemented new tools, such as our proprietary Quality Control Advisor,
to provide greater transparency into our customer quality control reviews.
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. In 2017, we
enhanced our Loan Advisor Suite to offer limited relief of representations and warranties for certain loans
that satisfy new automated controls related to appraisal quality, collateral valuation, borrower assets and
borrower income. In general, limited representation and warranty relief is offered when information
provided by lenders is validated against independent data sources. Further enhancements to the Loan
Advisor Suite are expected in 2018. These evolving technologies are designed to establish the loan
manufacturing quality required for greater purchase certainty.
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 or
servicer to repurchase the loan at its current UPB, reimburse us for losses realized with respect to the
loan after consideration of any other recoveries, and/or indemnify us. At the direction of FHFA, we
implemented a new remedies framework for the categorization of loan origination defects for loans with
settlement dates on or after January 1, 2016. Among other items, the framework provides that
"significant defects" will result in a repurchase request or a repurchase alternative, such as recourse or
indemnification.
At the direction of FHFA, we made a number of changes to our 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, we relieve sellers of repurchase obligations for breaches of
certain selling representations and warranties for certain types of loans, including:
Loans that have established an acceptable payment history for 36 months (12 months for relief
refinance loans) of consecutive, on-time payments after purchase, subject to certain exclusions; 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.
The credit quality of our single-family loan purchases remained strong during the past several years. The
graphs below show the credit profile of the single-family loans we purchased or guaranteed in the last
three years.
FREDDIE MAC | 2017 Form 10-K
108
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage 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)
Amount
% of Total
Amount
% of Total
Amount
% of Total
30-year or more amortizing fixed-rate
$275,677
80%
$307,572
78%
$262,209
75%
Year Ended December 31,
2017
2016
2015
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 | 2017 Form 10-K
12,338
45,597
9,841
113
4
13
3
—
17,011
61,223
6,555
146
4
16
2
—
16,470
58,958
12,760
163
5
17
3
—
$343,566
100%
$392,507
100%
$350,560
100%
30%
91%
89%
58%
22%
20%
26%
92%
90%
45%
22%
33%
23%
92%
90%
44%
21%
35%
109
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The table below contains additional detail on the relief refinance loans we purchased.
Year Ended December 31,
2017
2016
(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
Loan Count
$141
589
1,760
5,900
$8,390
936
3,197
9,737
40,941
54,811
UPB
Loan Count
Average
Loan Size
$151,000
184,000
181,000
144,000
$271
1,107
3,034
8,562
$153,000
$12,974
Average
Loan Size
$151,000
178,000
176,000
142,000
$151,000
1,799
6,220
17,277
60,353
85,649
Offering Private Investors New and Innovative Ways to Share in the Credit Risk of the
Single-Family Credit Guarantee Portfolio
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.
The table below contains a description of the credit enhancements we use to transfer a portion of the
credit risk on our single-family loans.
FREDDIE MAC | 2017 Form 10-K
110
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Credit
Enhancement
Description
Primary
mortgage
insurance
STACR debt
notes
ACIS
insurance
policies
• 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.
• 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 STACR debt 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.
• 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. In exchange for our payment of premiums, we receive compensation
for certain losses under the insurance policy up to an aggregate limit when specified credit events
occur.
Senior
subordinate
securitization
structures
• Structures in which we issue guaranteed senior securities or PCs and unguaranteed subordinated
securities backed by certain single-family loans that were previously purchased or participation
interests in recently originated single-family loans. The unguaranteed subordinated securities
absorb first losses on the related loans. In certain of these transactions, the loans are not serviced
in accordance with our Guide and we do not control the servicing.
When
Coverage is
Effective
At the time we
acquire the loan
Subsequent to
our purchase or
guarantee of
loans
At both the time
we acquire the
loan and
subsequent to
our purchase or
guarantee of
loans
Subsequent to
our purchase or
guarantee of
loans
Other
• Seller indemnification agreement - Requires the seller to absorb a portion of the losses on the
related single-family loans in exchange for Freddie Mac's payment of a fee or a guarantee fee
reduction. The indemnification amount may be fully or partially collateralized.
At the time we
acquire the loan
• Deep MI CRT - Provides additional coverage beyond primary mortgage insurance. Deep MI CRT is
a credit enhancement we purchase from affiliates of mortgage insurance companies. Deep MI CRT
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 partially collateralize their
exposure to reduce the risk that we will not be reimbursed for our claims under the policies, and
also to adhere to other terms beyond what is contained in primary mortgage insurance.
At the time we
acquire the loan
• 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.
At the time we
acquire the loan
• 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 three years.
At the time we
acquire the loan
See Our Business Segments - Single-Family Guarantee, Note 3 and Note 6 for additional
information on these transactions.
FREDDIE MAC | 2017 Form 10-K
111
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The table below provides information on the total current and protected UPB and maximum coverage
associated with credit enhanced loans in our single-family credit guarantee portfolio as of December 31,
2017 and 2016, respectively. The table includes all types of single-family credit enhancements.
(In millions)
Primary mortgage insurance
STACR debt note(3)
ACIS transactions(4)
Senior subordinate securitization structures
Other(5)
Less: UPB with more than one type of credit enhancement
Single-family credit guarantee portfolio with credit enhancement
Single-family credit guarantee portfolio without credit enhancement
Total
As of December 31,
2017
2016
Total Current
and Protected
UPB(1)
Maximum
Coverage(2)
Total Current
and Protected
UPB(1)
Maximum
Coverage(2)
$334,189
604,356
617,730
12,283
15,975
(775,751)
808,782
1,020,098
$1,828,880
$85,429
17,788
6,736
1,913
6,479
—
118,345
$291,217
427,978
453,670
3,988
12,827
(559,400)
630,280
—
1,124,446
$74,345
14,507
5,355
605
7,373
—
102,185
—
$118,345
$1,754,726
$102,185
(1) Except for the majority of our STACR debt notes and ACIS transactions, our credit enhancements generally provide protection for the first, or initial,
credit losses associated with the related loans. For subordination, total current and protected UPB represents the UPB of the guaranteed
securities. For STACR debt notes and ACIS transactions, total current and protected UPB represents the UPB of the assets included in the
reference pool.
(2) Except for subordination, this represents the remaining amount of loss recovery that is available subject to the terms of counterparty agreements.
For subordination, this represents the UPB of the securities that are subordinate to our guarantee and held by third parties, which could provide
protection by absorbing first losses.
(3) Maximum coverage amounts presented represent the outstanding balance of STACR debt notes held by third parties.
(4) Maximum coverage amounts presented represent the remaining aggregate limit of insurance purchased from third parties in ACIS transactions.
(5)
Includes seller indemnification, Deep MI CRT, lender recourse and indemnification, pool insurance, HFA indemnification and other credit
enhancements.
We had coverage remaining of $118.3 billion and $102.2 billion on our single-family credit guarantee
portfolio as of December 31, 2017 and 2016, respectively. Credit risk transfer transactions provided
22.4% and 19.9% of the coverage remaining at those dates.
The table below provides information on the non-credit-enhanced and 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.
2017
As of December 31,
2016
2015
(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
56%
18%
37%
N/A
1.16%
1.43%
0.53%
1.08%
64 %
17 %
27 %
N/A
1.02 %
1.46 %
0.43 %
1.00 %
70 %
15 %
20 %
N/A
1.30 %
2.06 %
0.58 %
1.32 %
The table below provides information on estimated recoveries we could receive over the risk transfer
coverage period from our most significant credit risk transfer transactions (i.e., STACR debt notes and
ACIS insurance policies) under various home price scenarios.
FREDDIE MAC | 2017 Form 10-K
112
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The timing of our recognition of the recoveries in our statements of comprehensive income will depend
on the type of credit risk transfer transaction and whether we are reimbursed based on calculated losses
or actual losses, which may result in timing differences between the recognition of recoveries and the
related credit event. 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 generally
recognized in the financial statements 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.
In the table below, 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 two of
the more significant observed credit sensitive mortgage loan attributes, LTV ratios and origination FICO
scores. Our recoveries under these scenarios were estimated based on loan losses, net of mortgage
insurance claim amounts.
These are only estimated projections and are designed to illustrate the potential for significant
differences in losses and recoveries depending on the economic environment and other factors. Our
actual losses and recoveries under these scenarios could differ materially from these estimates. For
example, significant improvements to underwriting standards, as well as origination practices, since the
financial crisis may result in lower loan losses and loss coverage ratio than the projections in the table
below. 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.
(In millions)
UPB of loans covered by STACR debt notes and ACIS
insurance policies
As of December 31, 2017
$607,019
Performance Under Home Price Scenarios at December 31, 2017
Above Average Home Price
Appreciation (47%)(1)
Moderate Home Price
Appreciation (7%)(1)
Severe Home Price
Depreciation (-24%)(1)
(Dollars in millions)
Amount
bps
Estimated credit losses
Estimated recoveries from STACR debt notes and ACIS
insurance policies
Loss coverage ratio
$157
$56
15%
6
1
N/A
Amount
$1,007
bps
$654
27%
Amount
$16,741
$10,438
62%
bps
276
172
N/A
40
11
N/A
(1) Home price change is over a four-year period.
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
FREDDIE MAC | 2017 Form 10-K
113
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
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
Our single-family serious delinquency rate increased in 2017 compared to 2016 due to impacts of the
hurricane events in 2017. As a result, we expect an increase in our loan workout activities as well as our
expected credit losses.
Outside of the areas affected by the hurricanes, our single-family serious delinquency rate decreased to
0.83% in 2017 from 0.97% in 2016 due to our continued loss mitigation efforts and sales of certain
seriously delinquent loans, as well as home price appreciation and a low unemployment rate. This
improvement was also driven by the continued shift in the single-family credit guarantee portfolio mix, as
the Legacy and relief refinance loan portfolio runs off and we add high credit quality loans to our Core
single-family loan portfolio.
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 loan
portfolios. Our Core single-family loan portfolio continues to perform well and account for a small
percentage of our credit losses, as shown below. Our Legacy and relief refinance single-family loan
portfolio continues to decline as a percentage of our overall portfolio, but continues to account for the
majority of our credit losses.
FREDDIE MAC | 2017 Form 10-K
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Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Portfolio Composition and Credit Losses
Serious Delinquency Rates as of December 31,
FREDDIE MAC | 2017 Form 10-K
115
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The chart below shows the delinquency rates for mortgage loans in our single-family credit guarantee
portfolio that are one month and two months past due.
Total Delinquency Rates for Loans One Month and Two Months Past Due
The tables below provide credit quality information about our single-family loan portfolios.
(Dollars in billions)
Core single-family loan portfolio
Legacy and relief refinance single-family loan portfolio
Total
(Dollars in billions)
Core single-family loan portfolio
Legacy and relief refinance single-family loan portfolio
Total
As of December 31, 2017
Average
Credit
Score
Original
LTV Ratio
Current
LTV
Ratio
Current
LTV Ratio
>100%
Foreclosure
Sale
and Short
Sale Rate(1)
751
707
743
73%
77%
75%
59%
47%
59%
—%
3%
1%
0.16%
3.98%
N/A
Alt-A %
—%
7%
1%
As of December 31, 2016
Average
Credit
Score
Original
LTV Ratio
Current
LTV
Ratio
Current
LTV Ratio
>100%
Foreclosure
Sale and
Short
Sale Rate(1)
752
708
743
72%
77%
75%
60%
51%
61%
—%
5%
2%
0.15%
3.91%
N/A
Alt-A %
—%
7%
2%
UPB
$1,424
405
$1,829
UPB
$1,275
480
$1,755
(1) The foreclosure sale and short sale rate presented for the Legacy and relief refinance single-family loan portfolio represents the rate associated
with loans originated in 2000 through 2008, as well as other relief refinance loans, including HARP loans.
FREDDIE MAC | 2017 Form 10-K
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Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The table below contains a description of some of the loan characteristics we monitor in our single-
family credit guarantee portfolio.
Characteristic
Description
Impact on Credit Quality
LTV Ratio
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
Credit Score
Statistically-derived number used by lenders to
assess a borrower’s likelihood to repay debt. We use
FICO scores, which are currently the most
commonly used credit scores for mortgages
• 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
• Lower LTV ratios indicate borrowers are more likely to
repay
• 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
Loan Purpose
Indicates how the borrower intends to use the
proceeds from a loan (i.e., purchase, cash-out
refinance or other refinance)
• Cash-out refinancings, which increase the LTV ratios,
generally have had a higher risk of default than loans
originated in purchase or other refinance transactions
Property Type
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
Occupancy Type
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
Product Type
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
Second Liens
Indicates whether the underlying property is
covered by more than one loan at the time of
origination
• 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
FREDDIE MAC | 2017 Form 10-K
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Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The table below contains details on characteristics of the loans in our single-family credit guarantee
portfolio.
(Percentage of portfolio based on UPB)
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
As of December 31,
2017
2016
2015
20%
52%
24%
4%
75%
49%
37%
13%
1%
59%
60%
21%
12%
5%
2%
20%
53%
23%
4%
75%
45%
38%
15%
2%
61%
60%
21%
12%
5%
2%
20%
53%
22%
5%
75%
43%
37%
16%
4%
63%
59%
21%
13%
5%
2%
743
743
741
39%
21%
40%
35%
21%
44%
32%
21%
47%
In addition, at December 31, 2017, 2016 and 2015:
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, 2017, approximately 9% of our loans had second-lien financing by the originator or
other third party at origination, and these loans comprised approximately 15% 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. For example, loans with
original LTV ratios over 90% and/or credit scores below 620 at origination may be higher risk. The tables
below provide information on loans in our portfolio with these characteristics. The tables include a
presentation of each higher risk category in isolation. A single loan may fall within more than one
category.
FREDDIE MAC | 2017 Form 10-K
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Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
(Dollars in billions)
Original LTV ratio greater than 90%, HARP loans
Original LTV ratio greater than 90%, all other loans
Loans with credit scores below 620 at origination
(Dollars in billions)
Original LTV ratio greater than 90%, HARP loans
Original LTV ratio greater than 90%, all other loans
Loans with credit scores below 620 at origination
As of December 31, 2017
UPB
CLTV
% Modified
SDQ Rate
$98.9
$205.5
$35.2
76%
80%
65%
2.3%
5.6%
21.4%
1.37%
1.88%
6.34%
As of December 31, 2016
UPB
CLTV
% Modified
SDQ Rate
$115.1
$169.4
$37.5
83%
82%
69%
1.8%
7.2%
21.7%
1.07%
1.92%
5.73%
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.
(Credit score)
Core single-family loan portfolio:
< 620
620 to 659
Not available
Total
Legacy and relief refinance single-
family loan portfolio:
< 620
620 to 659
Not available
Total
As of December 31, 2017
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)
0.3%
1.8
65.9
0.1
68.1%
1.2%
2.0
14.9
0.1
18.2%
2.89%
1.63%
0.27%
2.48%
0.32%
5.61%
4.17%
1.47%
5.60%
2.11%
—%
0.3
9.5
—
9.8%
NM
1.92%
0.46%
NM
0.55%
—%
—
—
—
—%
NM
NM
NM
NM
NM
0.3% 10.17%
8.05%
0.4
4.11%
2.2
NM
—
5.39%
2.9%
0.1% 16.24%
13.75%
0.2
6.67%
0.7
NM
—
9.14%
1.0%
0.3%
2.1
75.4
0.1
77.9%
1.6%
2.6
17.8
0.1
22.1%
3.18%
1.67%
0.29%
4.47%
0.35%
6.71%
5.04%
1.81%
6.07%
2.59%
3.3%
1.4%
0.2%
3.6%
0.3%
23.5%
20.3%
7.3%
17.8%
10.1%
FREDDIE MAC | 2017 Form 10-K
119
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
(Credit score)
Core single-family loan portfolio:
< 620
620 to 659
Not available
Total
Legacy and relief refinance
single-family loan portfolio:
< 620
620 to 659
Not available
Total
As of 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
—
62.7%
1.3%
2.1
17.1
0.1
20.6%
2.18%
1.02%
0.15%
NM
0.18%
4.76%
3.48%
1.18%
4.87%
1.70%
—%
0.3
9.7
—
10.0%
0.4%
0.6
3.6
—
4.6%
NM
1.30%
0.22%
NM
0.27%
8.53%
6.61%
3.24%
NM
4.25%
—%
—
0.1
—
0.1%
NM
NM
1.88%
NM
3.29%
0.2% 13.93%
11.41%
0.4
5.68%
1.4
NM
—
7.57%
2.0%
0.2%
1.9
70.7
—
72.8%
1.9%
3.1
22.1
0.1
27.2%
2.45%
1.07%
0.16%
NM
0.20%
6.03%
4.51%
1.60%
5.54%
2.28%
3.0%
1.3%
0.2%
NM
0.2%
23.4%
20.0%
7.2%
15.7%
9.9%
(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 and relief refinance single-family loan portfolio. Only a small percentage of our Core single-family
loan portfolio consists of ARM loans.
The balance of our interest-only and option ARM loans has continued to decline in recent years as many
of these borrowers have repaid or refinanced their loans, received loan modifications or completed
foreclosure alternatives or foreclosure sales.
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 | 2017 Form 10-K
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Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The tables below provide 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
UPB
$56.0
$13.0
$22.2
UPB
$60.5
$16.6
$32.0
As of December 31, 2017
% Modified
CLTV
SDQ Rate
52%
68%
70%
1.7%
0.1%
100%
1.13%
4.97%
8.03%
As of December 31, 2016
% Modified
CLTV
SDQ Rate
53%
73%
78%
1.7%
0.1%
100%
1.20%
4.34%
6.37%
(1) Includes $3.6 billion and $4.1 billion in UPB of option ARM loans as of December 31, 2017 and 2016, respectively. As of December 31, 2017 and
2016, the option ARM loans had: (a) current LTV ratios of 58% and 64%, (b) loan modification percentages of 15.6% and 14.6%; and (c) serious
delinquency rates of 4.58% and 5.24%, 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 2017 or prior have
already had one or more payment changes as of December 31, 2017; loans where the year of first
payment change is 2018 or later have not had a payment change as of December 31, 2017 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, 2017.
(In millions)
ARM/amortizing
ARM/interest-only
Fixed/interest-only
Step-rate modified
Total
As of December 31, 2017
2017
and Prior
$12,409
8,456
813
16,657
$38,335
2018
2019
2020
2021
2022
Thereafter
Total(1)
$2,461
1,185
184
10,254
$14,084
$5,027
70
3
4,071
$9,171
$6,314
149
2
3,171
$9,636
$5,881
—
12
2,382
$8,275
$6,744
—
45
537
$7,326
$13,244
—
2
175
$13,421
$52,080
9,860
1,061
22,169
$85,170
(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 affected by prior adverse
macroeconomic conditions, such as unemployment rates and home price declines in many geographic
areas in addition to 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 2018 or thereafter, 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 2018.
FREDDIE MAC | 2017 Form 10-K
121
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage 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. 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 have characterized single-family loans based upon their overall
credit quality at the time of origination, including as 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 $1.1 billion and $1.3 billion of security collateral
underlying our other securitization products at December 31, 2017 and 2016, respectively, were
identified as subprime based on information provided to us when we entered into these transactions.
Mortgage market participants have classified single-family loans as Alt-A if these loans have credit
characteristics that range between their prime and subprime categories, if they are 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 continue 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 or 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, 2017, we have purchased
approximately $35.9 billion of relief refinance loans that were previously categorized as Alt-A loans in our
portfolio, including $1.5 billion in 2017.
The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
As of December 31, 2017
As of December 31, 2016
(Dollars in billions)
Alt-A
UPB
CLTV
% Modified
SDQ Rate
UPB
CLTV
% Modified
SDQ Rate
$27.1
67%
24.1%
5.62%
$32.6
72%
25.9%
5.21%
The UPB of Alt-A loans in our single-family credit guarantee portfolio declined during 2017 primarily due
to borrowers refinancing into other mortgage products, foreclosure sales and other liquidation events.
Significant portions of the Alt-A loans in our portfolio are concentrated in Arizona, California, Florida and
Nevada.
Geographic Concentrations
We purchase mortgage loans from across the U.S. and maintain a geographically diverse portfolio.
However, local economic conditions can affect borrowers’ ability to repay and the value of the
underlying collateral, leading to concentrations of credit risk in certain geographic areas.
FREDDIE MAC | 2017 Form 10-K
122
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
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, 2017. See Note 14 for additional information on the concentration of credit risk in our
single-family credit guarantee portfolio.
(Dollars in millions)
Florida
Texas
New York
Illinois
New Jersey
All Others
Total
As of December 31, 2017
As of December 31, 2016
As of December 31, 2015
% of SDQ
Loans
SDQ Rate
Full Year
2017
Credit
Losses
% of SDQ
Loans
SDQ Rate
Full Year
2016
Credit
Losses
% of SDQ
Loans
SDQ Rate
Full Year
2015
Credit
Losses
SDQ
Loan
Count
22,253
8,908
8,117
6,228
5,539
19%
3.33%
$614
8
7
5
5
1.36%
1.74%
1.13%
1.78%
44
415
445
432
SDQ
Loan
Count
9,355
4,357
9,574
7,291
6,913
9%
1.42%
$157
4
9
7
7
0.70%
2.05%
1.34%
2.26%
15
163
170
204
SDQ
Loan
Count
14,070
4,888
13,981
8,841
11,978
64,644
56
0.79%
2,865
68,444
64
0.85%
1,019
85,963
10%
2.16%
$850
3
10
6
9
62
0.80%
2.94%
1.62%
3.90%
25
557
381
689
1.06%
2,186
115,689
100%
1.08% $4,815
105,934
100%
1.00% $1,728
139,721
100%
1.32% $4,688
The following table presents our single-family charge-offs and recoveries in each geographic region. See
Single-Family Credit Guarantee Portfolio in Note 14 for a description of these regions.
2017
Recoveries
Year Ended December 31,
2016
Charge-
offs,
net
Charge-
offs,
gross (1)
Recoveries
Charge-
offs,
net
Charge-
offs,
gross (1)
2015
Recoveries
($155)
(62)
(95)
(81)
(32)
($425)
$1,535
1,320
906
693
172
$4,626
$752
247
401
425
113
$1,938
($188)
(58)
(121)
(94)
(36)
($497)
$564
189
280
331
77
$1,441
$2,056
688
1,270
854
203
$5,071
($207)
(105)
(204)
(149)
(52)
($717)
Charge-
offs,
gross (1)
$1,690
1,382
1,001
774
204
$5,051
Charge-
offs,
net
$1,849
583
1,066
705
151
$4,354
(In millions)
Northeast
West
Southeast
North Central
Southwest
Total
(1) 2016 and 2015 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, respectively. 2017 includes charge-
offs of $3.8 billion related to the transfer of loans from held-for-investment to held-for-sale.
FREDDIE MAC | 2017 Form 10-K
123
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage 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
As of December 31, 2017
North Central
Northeast
Southeast
Southwest
West
Total
North Central
Northeast
Southeast
Southwest
West
Total
% of Portfolio SDQ Rate % of Portfolio SDQ Rate % of Portfolio SDQ Rate % of Portfolio SDQ Rate
0.81%
1.24%
1.95%
0.98%
0.47%
1.08%
6.77%
11.17%
10.58%
6.73%
5.36%
8.95%
0.65%
0.96%
1.67%
0.94%
0.40%
0.89%
1.29%
2.13%
3.34%
1.23%
1.14%
1.87%
16%
25
16
13
30
100%
—%
—
—
—
1
1%
3%
4
2
2
2
13%
13%
21
14
11
27
86%
CLTV <= 80%
CLTV > 80% to 100%
CLTV > 100%
All Loans
As of December 31, 2016
% of Portfolio SDQ Rate % of Portfolio SDQ Rate % of Portfolio SDQ Rate % of Portfolio SDQ Rate
0.93%
1.45%
1.19%
0.78%
0.57%
1.00%
6.36%
10.92%
6.35%
6.75%
5.00%
7.43%
0.67%
1.04%
0.92%
0.71%
0.43%
0.74%
1.53%
2.35%
1.95%
1.13%
1.38%
1.75%
16%
25
16
13
30
100%
3%
4
3
2
3
15%
13%
20
12
11
27
83%
—%
1
1
—
—
2%
Credit Losses and Recoveries
On January 1, 2017, we elected a new accounting policy for loan reclassifications from held-for-
investment to held-for-sale that increased the amount of charge-offs recognized during 2017. Under the
new policy, when we reclassify (transfer) a loan from held-for-investment to held-for-sale, we charge off
the entire difference between the loan's recorded investment and its fair value if the loan has a history of
credit-related issues. Expenses related to property taxes and insurance are included as part of the
charge-off. See Note 4 for further information about this change.
We expect the level of charge-offs in 2018 to be lower than in 2017 as we continue our loss mitigation
activities and our efforts to sell certain seriously delinquent single-family loans.
The table below contains 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(1)(2) (in bps)
Year Ended December 31,
2016
2015
2017
$5,051
(425)
4,626
189
$4,815
27.0
$1,938
(497)
1,441
287
$1,728
$5,071
(717)
4,354
334
$4,688
9.9
27.6
(1) For 2015, includes $1.9 billion due to the adoption of FHFA 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. See Note 1 for additional information.
(2) 2016 and 2015 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, respectively. 2017 includes charge-
offs of $3.8 billion related to the transfer of loans from held-for-investment to held-for-sale.
FREDDIE MAC | 2017 Form 10-K
124
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Credit loss recoveries during 2017, 2016 and 2015 included $5 million, $14 million and $17 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, $0.3 billion and $0.5 billion that reduced our charge-
offs of single-family loans during 2017, 2016 and 2015, respectively. We also recognized recoveries from
primary mortgage insurance of $50 million, $47 million and $76 million during 2017, 2016 and 2015,
respectively, as part of REO operations (expense) income.
Our credit losses and seriously delinquent loan population are concentrated in the Legacy and relief
refinance single-family loan portfolio. 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 below.
2017
2016
As of December 31
Year Ended
December 31
As of December 31
% of
Portfolio
SDQ Rate
% of Credit
Losses
% of
Portfolio
SDQ Rate
Year Ended
December 31
% of Credit
Losses
1%
1%
38%
8.95%
5.62%
1.56%
28%
22%
53%
2%
2%
38%
7.43%
5.21%
1.36%
34%
15%
62%
CLTV > 100%
Alt-A loans
Judicial foreclosure states
Loan Loss Reserves
Our loan loss reserves continued to decline in 2017, primarily driven by an increase in charge-offs due to
the accounting policy change effective January 1, 2017 related to the reclassification of loans from held-
for-investment to held-for-sale. See Note 4 for more information on this accounting policy change.
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
Other(2)
Ending balance
2017
$13,463
(97)
(5,051)
425
—
239
$8,979
Year Ended December 31,
2015
$21,793
(2,639)
(5,071)
717
—
548
$15,348
2016
$15,348
(781)
(1,938)
497
—
337
$13,463
2014
$24,578
113
(4,892)
1,258
—
736
$21,793
As a percentage of our single-family credit guarantee portfolio
0.49%
0.77%
0.90%
1.31%
2013
$30,508
(2,247)
(8,995)
4,313
—
999
$24,578
1.49%
(1) 2016, 2015, 2014 and 2013 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, $3.4 billion, $0.3 billion and $0.0 billion,
respectively. 2017 includes charge-offs of $3.8 billion related to the transfer of loans from held-for-investment to held-for-sale.
(2) Primarily includes capitalization of past due interest on modified loans.
FREDDIE MAC | 2017 Form 10-K
125
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
TDRs and Individually Impaired Loans
Single-family loans that have been individually evaluated for impairment, such as modified loans,
generally have a higher associated loan loss reserve than loans that have been collectively evaluated for
impairment. Due to the large number of loan modifications completed in recent years, a significant
portion of our loan loss reserves is attributable to individually impaired single-family loans. As of
December 31, 2017, 48% of the loan loss reserves for single-family loans related to interest rate
concessions provided to borrowers as part of loan modifications. Most of our modified single-family
loans, including TDRs, were current and performing at December 31, 2017. We expect our loan loss
reserve associated with existing single-family TDRs to decline over time as we continue to sell
reperforming loans. In addition, these loan loss reserves will decline as borrowers continue to make
monthly payments under the modified terms and interest rate concessions are amortized into earnings.
The table below summarizes the carrying value for individually impaired single-family loans on our
consolidated balance sheets for which we have recorded a specific reserve.
(Dollars in millions)
TDRs, at January 1
New additions
Repayments and reclassifications to held-for-sale
Foreclosure sales 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,
2017
2016
Loan Count
Amount
Loan Count
Amount
485,709
41,343
(151,941)
(10,407)
364,704
5,040
369,744
$78,869
5,714
(28,737)
(1,431)
54,415
340
54,755
(6,630)
$48,125
512,253
43,153
(58,153)
(11,544)
485,709
7,977
493,686
$85,960
5,956
(11,405)
(1,642)
78,869
542
79,411
(11,980)
$67,431
The tables below present information about the UPB of single-family TDRs and non-accrual loans on our
consolidated balance sheets.
(In millions)
TDRs on accrual status
Non-accrual loans
Total TDRs and non-accrual loans
Loan loss reserves associated with:
TDRs on accrual status
Non-accrual loans
Total
2017
2016
2015
2014
2013
As of December 31,
$51,644
17,748
$69,392
$5,257
1,883
$7,140
$77,122
16,164
$93,286
$10,295
2,290
$12,585
$82,026
22,460
$82,373
32,745
$78,033
42,829
$104,486
$115,118
$120,862
$12,105
2,677
$14,782
$13,728
6,935
$20,663
$14,239
8,805
$23,044
Year Ended December 31,
(In millions)
2017
2016
2015
2014
2013
Foregone interest income on TDRs and non-accrual loans(1)
$1,604
$2,109
$2,690
$3,235
$3,552
(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 | 2017 Form 10-K
126
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage 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 product)
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 is being replaced with the high LTV relief refinance (Enhanced Relief
RefinanceSM) program, which will be available in January 2019 for loans originated on or after October 1,
2017. This program provides liquidity for borrowers who are current on their mortgages but are unable to
refinance because their LTV ratios exceed our standard refinance limits. In addition, the HARP program
has been extended for applications through December 31, 2018 to ensure that borrowers who have a
high LTV ratio and are eligible for HARP will continue to have a refinance option.
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
Total
Loan Workout Activities
2017
Loan Count
131,045
256,189
455,451
835,381
1,678,066
UPB
$21,814
43,177
71,559
95,700
$232,250
As of December 31,
SDQ Rate
UPB
2016
Loan Count
SDQ Rate
1.76%
1.34%
1.05%
0.58%
0.92%
$25,027
50,618
82,987
106,350
$264,982
144,719
288,697
506,932
892,471
1,832,819
1.24%
1.10%
0.84%
0.38%
0.69%
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:
FREDDIE MAC | 2017 Form 10-K
127
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
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
mortgage terms or to implement another loan workout. For agreements completed in 2017, the
average time period for reduced or suspended payments was between three and four months.
Repayment plans - Contractual plans designed to repay past due amounts to allow borrowers to
return to compliance with the original mortgage terms. For plans completed in 2017, the average
time period to repay past due amounts was between three and four months. Servicers are paid
incentive fees for repayment plans that are paid in full and loans brought to current status.
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 increased during 2017 compared to 2016, consistent with the increase in
the number of delinquent loans in the single-family credit guarantee portfolio due to the hurricane events
in 2017.
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 pay servicers incentive fees for each completed foreclosure alternative. In some
cases, we provide cash relocation assistance to the borrower, while allowing the borrower to exit the
home in an orderly manner. 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. 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 in the Servicing Transfers and Sales of Certain
Seriously Delinquent Loans section below.
The volume of foreclosures moderated in recent periods, primarily due to generally 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 2017 compared to 2016,
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 foreclosure sales.
FREDDIE MAC | 2017 Form 10-K
128
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Home Retention Actions
Foreclosure Alternatives and Foreclosure Sales
The tables below contain credit characteristic data on our single-family modified loans.
(Dollars in billions)
HAMP
Non-HAMP
Total
(Dollars in billions)
HAMP
Non-HAMP
Total
As of December 31, 2017
UPB
% of Portfolio
CLTV Ratio
SDQ Rate
$23.6
41.0
$64.6
2%
2
4%
70%
75%
73%
8.08%
12.99%
11.34%
As of 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%
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:
4Q 2016
3Q 2016
2Q 2016
1Q 2016
4Q 2015
3Q 2015
2Q 2015
1Q 2015
Quarter of Loan Modification Completion
57%
62%
63%
67%
64%
66%
66%
69%
N/A
N/A
N/A
N/A
60%
63%
64%
67%
FREDDIE MAC | 2017 Form 10-K
129
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage 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 for additional information on these activities.
We pursue sales of seriously delinquent loans when we believe the sale of these loans provides better
economic returns than continuing to hold them. During 2017 and 2016, we completed sales of $0.5
billion and $3.1 billion, respectively, in UPB of seriously delinquent single-family loans. Of the $17.0
billion in UPB of single-family loans classified as held-for-sale at December 31, 2017, $2.1 billion related
to loans that were seriously delinquent. 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, 2017 and 2016, the percentage of seriously
delinquent loans that have been delinquent for more than six months was 44% and 57%, 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, 2017, loans in states with a judicial foreclosure process comprised
38% of our single-family credit guarantee portfolio.
FREDDIE MAC | 2017 Form 10-K
130
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The table below presents the length of time our loans have been seriously delinquent, by jurisdiction
type.
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
As of December 31,
2017
2016
2015
Loan Count
Percent
Loan Count
Percent
Loan Count
Percent
50,554
10,649
10,863
34,850
5,406
3,367
85,404
16,055
14,230
44%
9
9
30
5
3
74
14
12
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
Total
115,689
100%
105,934
100%
139,721
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 19% during 2017.
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 | 2017 Form 10-K
131
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The table below 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
2017
1,069
1,497
1,658
704
907
545
751
1,205
1,767
1,599
742
1,030
562
827
1,332
1,602
1,553
828
1,076
637
892
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 2017 primarily due to a decrease in REO acquisitions driven by 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
Ending balance - REO
Beginning balance, valuation allowance
Change in valuation allowance
Ending balance, valuation allowance
Ending balance - REO
Severity Ratios
Year Ended December 31,
2017
2016
2015
Number of
Properties
11,418
12,240
Amount
$1,215
1,191
(15,359)
(1,506)
8,299
900
(17)
3
(14)
$886
Number of
Properties
Amount
Number of
Properties
Amount
17,004
16,161
(21,747)
11,418
$1,774
1,562
(2,121)
1,215
(52)
35
(17)
$1,198
25,768
23,171
(31,935)
17,004
$2,684
2,235
(3,145)
1,774
(126)
73
(53)
$1,721
Severity ratios are the percentages of our realized losses when loans are resolved by the completion of
REO dispositions and third-party foreclosure sales or short sales. Severity ratios are calculated as the
amount of our recognized losses divided by the aggregate UPB of the related loans. The amount of
recognized losses is equal to the amount by which the UPB of the loans exceeds the amount of sales
proceeds from disposition of the properties, net of capitalized repair and selling expenses, if applicable.
FREDDIE MAC | 2017 Form 10-K
132
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The table below presents single-family severity ratios.
Year Ended December 31,
2016
2015
2017
REO dispositions and third-party foreclosure sales
Short sales
27.2%
27.7%
32.8%
29.0%
34.3%
30.1%
Our severity ratios remained relatively stable during 2017 compared to 2016. 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 is 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, 2017,
approximately 47% 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,
2017, approximately 26% of our REO properties were listed and available for sale, and 13% of our
inventory was pending the settlement of sales. Though it varied significantly in different states, the
average holding period of our single-family REO properties, excluding any redemption period, was 265
days and 275 days for our REO dispositions during 2017 and 2016, respectively.
FREDDIE MAC | 2017 Form 10-K
133
Management's Discussion and Analysis
Risk Management | Multifamily Mortgage 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 our credit
risk transfer products, primarily K Certificates and SB Certificates; 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, location of the property 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 issuance of a loan commitment.
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, increasing the likelihood of borrower default.
We may take on additional credit risk through the issuance of certain other securitization products (e.g.,
Q Certificates and M Certificates). In these transactions, the loans or bonds underlying the issued
securities are contributed by third parties and are underwritten by us after (rather than at) origination.
Prior to securitization, we are not exposed to the credit risk of these loans or bonds. However, as we
may guarantee some or all of the securities issued by the trusts used in these transactions, we
effectively assume credit risk equal to the guaranteed UPB. Similar to our K Certificates and SB
Certificates, these other securitization products generally provide for structural credit enhancements
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Management's Discussion and Analysis
Risk Management | Multifamily Mortgage Credit Risk
(e.g., subordination or other loss sharing features) that allocate first loss exposure to bonds held by third
parties.
The table below presents our new business activity related to loan purchases and guarantees by
product term.
(Dollars in millions)
10-year loans, fixed or adjustable
7-year loans, fixed or adjustable
Other
Total
Year Ended December 31,
2017
2016
2015
Amount
% of Total
Amount
% of Total
Amount
% of Total
$31,338
23,844
18,019
$73,201
43%
$24,378
43%
$20,603
33
24
19,367
13,085
34
23
16,875
9,786
100%
$56,830
100%
$47,264
43%
36
21
100%
Transferring a Large Majority of Expected and Stress Credit Losses to Third Parties
Through Our Credit Risk Transfer Products, Primarily K Certificates and SB
Certificates
In connection with the acquisition of a loan or group of loans, we may obtain various forms of credit
protection that reduce our credit risk exposure to the underlying mortgage borrower. Examples of this
credit protection may include obtaining recourse and/or indemnification protection from our lenders or
sellers.
In addition to obtaining credit protection at the time of loan acquisition, we may also reduce our credit
risk exposure to the underlying borrower by using one or more of our credit risk transfer products. Our
principal credit risk transfer mechanism continues to be our credit risk transfer securitizations, primarily
K Certificates and SB Certificates. In these transactions, we sell loans to a securitization trust that issues
senior, mezzanine and subordinated classes of securities. While we guarantee the senior classes of
securities and therefore retain the associated credit risk of those securities, we transfer a large majority
of the expected and stress credit losses of the underlying loans through the sale of the unguaranteed
mezzanine and subordinate classes of securities to third-party investors, thereby reducing our overall
credit risk exposure. These unguaranteed mezzanine and subordinate classes of securities will absorb
any credit losses prior to our guarantee.
Since 2009, we have transferred a portion of the credit risk related to $249 billion in UPB of multifamily
loans through our credit risk transfer products, primarily K Certificates and SB Certificates. The average
remaining level of subordination on all outstanding K Certificates and SB Certificates was 14% at both
December 31, 2017 and 2016. Since we began issuing K Certificates and SB Certificates, we have not
experienced credit losses associated with our guarantees on these securities.
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Management's Discussion and Analysis
Risk Management | Multifamily Mortgage Credit Risk
We may also transfer credit risk through a variety of other credit risk transfer products, including loan
sales and SCR debt notes. A SCR debt note is an unsecured and unguaranteed corporate debt
obligation where the amount of principal and interest payments due to investors is linked to the credit
performance of a reference pool of mortgage assets where we currently have credit risk exposure. The
reference pool is structured to include multiple notional credit risk positions (e.g., first loss, mezzanine
and senior positions) with the issued SCR debt notes being linked to one or more of these notional
positions. To the extent that the notional credit risk position of the reference pool is reduced because of
a specified credit event, the associated SCR debt note will be written down, reducing the amount of
principal and interest payments that the investor will ultimately receive.
We continue to develop other strategies to reduce our credit risk exposure to multifamily loans and
securities. See Our Business Segments - Multifamily for additional information on our existing
credit risk transfer products.
See Our Business Segments - Multifamily - Credit Risk Transfer Activity for additional
information on our 2017 credit risk transfer activity.
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. We typically transfer the role of master servicer in our K Certificate transactions to third
parties, while retaining that role in our SB Certificate transactions. Servicers for unsecuritized loans over
$1 million must generally provide us with an assessment of the mortgaged property at least annually
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 our credit risk transfer
securitizations (e.g., 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 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.
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 credit risk transfer
securitizations to assess our potential exposure to losses. Due to the subordination protection provided
by our credit risk transfer securitizations, 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.
FREDDIE MAC | 2017 Form 10-K
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Management's Discussion and Analysis
Risk Management | Multifamily Mortgage Credit Risk
In addition to subordination, the Multifamily segment has various other credit enhancements, primarily
related to our mortgage loans, other securitization products and other mortgage-related guarantees, in
the form of collateral posting requirements, bond insurance, loss sharing agreements and other similar
arrangements. These credit enhancements, along with the proceeds received from the sale of the
underlying mortgage collateral are designed to enable us to recover all or a portion of our losses on our
mortgage loans or the amounts paid under our financial guarantee contracts. Our historical losses paid
under our guarantee contracts and related recoveries pursuant to these agreements have not been
significant.
The table below presents the total current and protected UPB of our multifamily mortgage portfolio that
is credit-enhanced and the associated maximum coverage provided by subordination and SCR debt
notes:
(In millions)
Subordination
SCR debt notes
Other(3)
Total credit enhancements
As of December 31, 2017
As of December 31, 2016
Total Current and
Protected UPB(1)
Maximum
Coverage(2)
Total Current and
Protected UPB(1)
Maximum
Coverage(2)
$189,099
$30,869
$143,802
$24,522
2,732
1,833
137
726
$31,732
1,898
1,159
95
701
$25,318
(1) For subordination and other, total current and protected UPB represents the UPB of the guaranteed securities. For SCR debt notes, total current
and protected UPB represents the UPB of the assets included in the reference pool.
(2) For subordination, maximum coverage represents the UPB of the securities that are subordinate to our guarantee and held by third parties. For
SCR debt notes, maximum coverage represents the outstanding balance of SCR debt notes held by third parties. For other credit enhancements,
maximum coverage represents the remaining amount of loss recovery that is available subject to terms of the counterparty agreements.
(3) Consists of multifamily HFA indemnification and loss reimbursement agreements with third parties obtained in certain of our Q Certificate
transactions.
We report multifamily delinquency rates based on the 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 (or are subject to forbearance agreements) are not counted as
delinquent as long as the borrower is less than two monthly payments past due under the modified (or
forbearance) terms. The vast majority of our forbearance agreements are short-term (3 months) and
resulted from the 3Q 2017 hurricane impacts. At December 31, 2017, the total loan UPB subject to
forbearance agreements was $673 million, which consisted of $489 million of loans underlying off-
balance sheet securitizations and $184 million of on-balance sheet loans held in our retained portfolio.
We expect the majority of these loans will be current at the expiration of the forbearance period,
resulting in no significant impact to our financial results.
The table below shows the delinquency rates for both credit-enhanced and non-credit-enhanced loans
in our multifamily mortgage portfolio.
2017
As of December 31,
2016
2015
% of Portfolio
Delinquency
Rate
% of Portfolio
Delinquency
Rate
% of Portfolio
Delinquency
Rate
Non-credit-enhanced
Credit-enhanced
Total
18%
82
100%
0.06%
0.01%
0.02%
24%
76
100%
0.04%
0.02%
0.03%
32%
68
100%
FREDDIE MAC | 2017 Form 10-K
0.03%
0.02%
0.02%
137
Management's Discussion and Analysis
Risk Management | Multifamily Mortgage Credit Risk
The table below presents information about the composition and delinquency rates of the multifamily
mortgage portfolio.
(Dollars in billions)
Unsecuritized loans
Securitization-related 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
2017
2018
2019
2020
2021
Thereafter
Total
Year of acquisition
2010 and prior
2011 and after
Total
K Certificates, SB Certificates and other securitization
products:
Year of issuance
2012 and prior
2013
2014
2015
2016
2017
Total
Subordination level at issuance
No subordination
Less than 10%
10% to 15%
Greater than 15%
Total
FREDDIE MAC | 2017 Form 10-K
As of December 31,
2017
2016
UPB
Delinquency Rate
UPB
Delinquency Rate
$38.2
192.5
10.0
$240.7
0.01%
0.02%
—%
0.02%
$42.4
147.6
9.7
$199.7
$10.0
6.1
1.6
$17.7
69%
N/A
$2.4
3.9
2.2
3.0
6.2
$17.7
$6.7
11.0
$17.7
$39.2
20.7
13.8
26.7
37.7
54.4
$192.5
$9.0
3.9
116.0
63.6
$192.5
—%
—%
—%
—%
N/A
—%
—%
—%
—%
—%
—%
—%
—%
—%
0.09%
—%
—%
0.01%
—%
—%
0.02%
0.22%
—%
0.01%
—%
0.02%
$16.8
7.0
2.1
$25.9
68%
$1.9
6.7
6.1
2.2
3.3
5.7
$25.9
$14.5
11.4
$25.9
$35.5
21.6
15.4
30.0
45.1
N/A
$147.6
$3.3
4.5
75.6
64.2
$147.6
0.04%
0.03%
—%
0.03%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
0.10%
—%
—%
—%
0.01%
N/A
0.03%
—%
0.71%
0.01%
—%
0.03%
138
Management's Discussion and Analysis
Risk Management | Multifamily Mortgage Credit Risk
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, 2017, we had two REO
properties.
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,
2017
2016
2015
$4
—
4
—
$4
0.2
5
$2
—
2
—
$2
0.1
6
$9
—
9
4
$13
0.8
4
(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
Year Ended December 31,
2017
2016
2015
2014
2013
$35
13
(4)
—
—
$44
$59
(22)
(2)
—
—
$35
$94
(26)
(9)
—
—
$59
$151
(55)
(3)
1
—
$94
$382
(218)
(7)
1
(7)
$151
As a percentage of non-credit-enhanced multifamily mortgage portfolio
0.10%
0.07%
0.11%
0.16%
0.24%
TDRs and Non-accrual Loans
The tables below provide information about the UPB of multifamily TDRs and non-accrual loans on our
consolidated balance sheets.
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Management's Discussion and Analysis
Risk Management | Multifamily Mortgage 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
2017
As of December 31,
2015
2014
2016
$76
69
$145
$—
7
$7
$277
108
$385
$3
7
$10
$321
189
$510
$9
12
$21
$535
385
$920
$21
31
$52
(In millions)
2017
Year Ended December 31,
2015
2014
2016
2013
$675
628
$1,303
$15
65
$80
2013
Foregone interest income on TDRs and non-accrual loans (1)
$2
$3
$3
$4
$8
(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.
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140
Management's Discussion and Analysis
Risk Management | Mortgage-Related Securities 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. Substantially all of our recent mortgage-related
securities purchases have consisted of agency securities.
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 14.
While we continue to have a 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.
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 RMBS or non-agency CMBS.
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 have resulted from non-agency RMBS backed by subprime, option ARM
and Alt-A loans. As of December 31, 2017, approximately 94% of the total $5.3 billion (by UPB) of our
non-agency RMBS backed by subprime, option ARM and Alt-A loans were below investment grade. Our
non-agency RMBS credit risk exposure is expected to continue to decline over time as we reduce the
less liquid assets held in our investments portfolio, primarily through sales. See Note 7 for information
concerning our investments in non-agency RMBS.
Non-Agency CMBS
We have investments in certain non-agency CMBS 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
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Management's Discussion and Analysis
Risk Management | Mortgage-Related Securities Credit Risk
December 31, 2017, approximately 99% of the total $2.7 billion of our non-agency CMBS (by UPB) were
investment grade or above or guaranteed by us. As a result, while we monitor these securities for credit
losses, we believe our exposure to credit risk is limited. See Note 7 for information concerning our
investments in non-agency CMBS.
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142
Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
Counterparty Credit Risk
We are exposed to counterparty credit risk, which is a type of institutional credit risk, as a result of our
contracts with sellers and servicers, mortgage insurers, bond insurers, credit insurers, derivative
counterparties, including clearing members and clearinghouses, 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 sellers and 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,
capital, liquidity and funding sources.
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Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
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 credit 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 or 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 large 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. The table below summarizes the concentration of non-
depository servicers of our single-family credit guarantee portfolio.
Top five non-depository servicers
Other non-depository servicers
Total
As of December 31,
2017
% of Serious
Delinquent Single-
Family Loans
% of Portfolio(1)
2016
% of Serious
Delinquent Single-
Family Loans
% of Portfolio(1)
15%
20%
35%
23%
30%
53%
13%
18%
31%
24%
27%
51%
(1) Excludes loans where we do not exercise control over the associated servicing.
Working with Underperforming Counterparties and Limiting our Losses from Their
Nonperformance of Obligations, when Possible
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:
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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.
The UPB of loans subject to repurchase obligations from single-family loan sellers was $0.2
billion at both December 31, 2017 and 2016. See Note 14 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 transactions and to mortgage insurer affiliates through our
Deep MI CRT 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:
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 and timeliness of 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
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Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
ACIS insurers and reinsurers generally participate in multiple types of insurance businesses, which
helps to diversify their risk exposure.
For our Deep MI CRT transactions, we obtain insurance coverage from insurers and reinsurers that are
currently limited to affiliates of primary mortgage insurers, some of whom also participate in our ACIS
transactions. Deep MI CRT transactions include partially collateralized obligations.
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. Our 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.
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 mortgage insurers as of December 31, 2017.
In the event a mortgage insurer fails to perform, the coverage amounts represent our maximum
exposure to credit losses resulting from such a failure.
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Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
(In millions)
Arch Mortgage Insurance Company
Radian Guaranty Inc. (Radian)
Mortgage Guaranty Insurance Corporation (MGIC)
Genworth Mortgage Insurance Corporation
Essent Guaranty, Inc.
National Mortgage Insurance (NMI)
PMI Mortgage Insurance Co. (PMI)
Republic Mortgage Insurance Company (RMIC)
Triad Guaranty Insurance Corporation (Triad)
Others
Total
Credit
Rating(1)
A-
BBB-
BBB
BB+
BBB+
BB+
Not Rated
Not Rated
Not Rated
N/A
Credit
Rating
Outlook(1)
Stable
Positive
Stable
Watch
Negative
Stable
Positive
N/A
N/A
N/A
N/A
As of December 31, 2017
UPB
Coverage
Primary
MI
Pool
Insurance
Primary
MI
Pool
Insurance
$78,981
69,436
65,119
49,424
41,164
18,193
5,440
4,160
2,225
47
$334,189
$12
15
1
12
—
—
49
17
6
—
$112
$20,370
17,803
16,721
12,692
10,422
4,447
1,363
1,041
560
10
$85,429
$7
20
—
13
—
—
36
11
3
—
$90
(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, 2017. Represents the lower of S&P and
Moody’s credit ratings and outlooks stated in terms of the S&P equivalent.
The majority of our mortgage insurance exposure is concentrated with five mortgage insurers. Although
the financial condition of our mortgage insurers 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 credit risk associated with mortgage insurers, see Note 14.
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, 2017, 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.
We have exposure to bond insurers in the event that a bond insurer fails to perform. As of December 31,
2017, our maximum exposure to losses related to such a failure was $3.5 billion.
We expect to receive substantially less than full payment of our claims from certain of our bond insurers
because we believe these bond insurers lack sufficient ability to fully meet all of their expected lifetime
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Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
claims-paying obligations to us as such claims emerge. See Note 14 for additional information on our
exposure to these bond insurers.
Bond insurance is included as a feature at issuance of some of our non-agency mortgage-related
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 Capital Markets 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 - Cleared derivatives expose us to counterparty credit risk of central clearing
houses and our clearing members. Our exposure to the clearinghouses we use to clear interest-rate
derivatives has increased and may become more concentrated over time. The use of cleared
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
contracts are settled daily via payments. We are required to post initial and variation margin to the
clearing houses. 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 - Exchange-traded derivatives expose us to counterparty risk of the
central clearing houses and our clearing members. We are required to post initial and variation
margin with our clearing members in connection with exchange-traded derivatives. 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, if any, 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, if any, when we are in a derivative liability
position. OTC derivatives transactions executed prior to March 1, 2017 are subject to collateral
posting thresholds. 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
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Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
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. Based upon regulations that took effect March 1, 2017, OTC derivative
transactions executed after that date require posting of variation margin without the application of
any thresholds.
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
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 other 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, primarily agency and
U.S.Treasury securities, to manage our exposure to loss. We conduct additional reviews of our exposure
when market conditions dictate or certain events affecting an individual counterparty occur. When non-
cash collateral is posted to us, we require collateral in excess of our exposure to satisfy the net
obligation to us in accordance with the counterparty agreement.
The table below 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, 2017
Number of
Counterparties
Fair Value -
Gain positions
Fair Value -
Gain positions,
net of collateral
4
13
3
20
2
22
$115
1,827
207
2,149
279
$2,428
$29
12
—
41
17
$58
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, 2017. 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, if any. The concentration of our derivative exposure among our
primary OTC derivative counterparties remains high and could further increase.
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Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
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:
Mortgage related-security issuers and servicers - We are exposed to the non-performance of
issuers and servicers 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 Credit
Risk - 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.
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
sellers and 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 or 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 or 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 or servicer were to
become insolvent. To manage these risks, we establish qualifying standards for our document
custodians and maintain legal and contractual arrangements that identify our ownership interest in
the loans. We also monitor the financial strength of our document custodians on an ongoing basis in
accordance with our counterparty credit risk management framework, and we require transfer of
documents 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 sellers and
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, Inc.
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.
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 equivalents) transactions, including those entered into on behalf of our securitization trusts. Our
policies require that the counterparty be evaluated using our internal counterparty rating model prior
to our entering into such transactions. We monitor the financial strength of our counterparties to
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.
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Management's Discussion and Analysis
Risk Management | Counterparty Credit 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, the Government Securities Division of Fixed Income Clearing
Corporation (GSD/FICC), highly-rated supranational institutions and government money market
funds.
Beginning in 2017, we began to utilize the GSD/FICC as a clearinghouse to transact many of our
trades involving securities purchased under agreements to resell, securities sold under agreements
to repurchase, and other non-mortgage related securities. As a clearing member of GSD/FICC, we
are required to post initial and variation margin payments and are exposed to the counterparty credit
risk of GSD/FICC (including its clearing members). In the event a clearing member fails and causes
losses to the GSD/FICC clearing system, we could be subject to the loss of any or the entire margin
that we have posted to the GSD/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 GSD/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 GSD/FICC’s financial safeguards and
our ability to terminate our membership in the clearinghouse (which would limit our loss).
As of December 31, 2017, 2016 and 2015, the fair value of the securities in our cash and other
investment portfolio was $22.8 billion, $21.1 billion and $17.2 billion, respectively, and primarily
consisted of investments in U.S. Treasury securities.
We enter into secured lending arrangements to provide financing for certain Freddie Mac securities
and other assets related to our guarantee businesses in an attempt to improve the market for these
assets. Additionally, these transactions differ from those we use for liquidity purposes, as the
counterparties we face may not be major financial institutions, and we are therefore exposed to the
counterparty credit risk of these institutions. For additional information, see Note 14.
Forward settlement counterparties - We are exposed to the non-performance (settlement risk) of
counterparties relating to the forward settlement of loans and securities (including agency debt,
agency RMBS, and cash loan purchase program loans). Our policies require that the counterparty be
evaluated using our internal counterparty rating model prior to our entering into such transactions.
We monitor the financial strength of these counterparties and may use collateral maintenance
requirements to manage our exposure to individual counterparties.
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
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Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
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, 2017, the gross fair value of such forward purchase and
sale commitments that were in derivative asset positions was $37 million.
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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, financial reporting or operational errors, business
interruptions, non-compliance with legal or regulatory requirements, fraudulent acts, inappropriate acts
by employees, information security incidents or third parties 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,
monitoring, 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,
people and/or processes to mitigate the risk of future events.
During 2017, 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 periodically 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 action
is required to manage the risk to an acceptable level.
In addition to the RCSA process, we employ several tools to identify, measure and monitor operational
risks, including loss event data, key risk indicators, root cause analysis and testing. Our operational risk
framework requires that the primary responsibility for managing both the day-to-day risk and longer-
term or emerging risks lies with the business units, with oversight performed by the second line of
defense.
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; external events such as
cybersecurity threats; 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 by building out our operational risk resources within Enterprise Risk Management
and within the first line of defense.
We continue to make improvements to reduce technology risk, including the enhancement of our
business resiliency capabilities for mission critical systems and processes. We also continue to invest in
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Management's Discussion and Analysis
Risk Management | Operational Risk
the information risk and security area to strengthen our capabilities to prevent, detect, respond to and
mitigate risk and protect our critical assets.
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
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 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. We will continue working with FHFA, CSS and Fannie Mae to develop processes and
procedures related to the risks associated with Release 2, which has a target implementation date of the
second quarter of 2019.
Model Risk
Model risk is defined as the potential for adverse consequences from model errors or 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.
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
significant time 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 implement
these enhancements. We will continue to refine these processes to increase effectiveness and
efficiency. Additionally, we will continue to refine our model risk rating methodology and its use as an
input into overarching model risk appetite.
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Management's Discussion and Analysis
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.
Cybersecurity Risk Management
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 risks for companies like ours
have increased significantly in recent years. Like many companies and government entities, from time to
time we have been, and likely will continue to be, the target of attempted cyberattacks and other
information security threats. In addition, one of our major vendors has recently reported that it has been
the subject of significant cyberattacks.
We have developed and continue to enhance our cybersecurity risk management program to protect the
security of our computer systems, software, networks and other technology assets against unauthorized
attempts to access confidential information or to disrupt or degrade our business operations. We have
obtained insurance coverage relating to cybersecurity risks. However, this insurance may not be
sufficient to provide adequate loss coverage. Although to date we have not experienced any
cyberattacks resulting in significant impact to the company, there is no assurance that our cybersecurity
risk management program will prevent cyberattacks from having significant impacts in the future.
For additional information, see Risk Factors - Operational Risks - Potential cybersecurity
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.
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, 2017. As of December 31, 2017, 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
Overview
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 Capital Markets 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 single-family 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 worth 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.
Management of Market Risk
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 swaps, swaptions, and futures.
Our use of derivatives is 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 credit 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.
Although we have limited ability to manage spread risk, we do employ the following strategies:
Limiting the size of our assets that are exposed to spread risk; and
Entering into certain spread-related derivatives to offset our spread exposures.
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Management's Discussion and Analysis
Risk Management | Market Risk
Governance
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.
Measurement of Market Risk
The principal types of market risks to which we are exposed are described below.
Risk
Description
Risk Exposure
Interest-rate Risk
Interest-rate risk is the economic risk
related to adverse changes in the level or
volatility of interest rates.
Spread Risk
Spread risk is the risk that yields in different
asset classes may not move together and
may adversely affect our economic value.
• 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) expose 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.
Interest-Rate Risk
We calculate our exposure to changes in interest rates for our interest rate sensitive assets and liabilities
using effective duration and effective convexity, based on our models.
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Management's Discussion and Analysis
Risk Management | Market Risk
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.
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, effective duration and effective convexity provide a measure of an instrument’s overall price
sensitivity to changes in interest rates. We utilize the concepts of effective duration and effective
convexity in calculating our primary interest-rate risk measures: duration gap and PMVS.
Duration gap - The net effective duration of our overall portfolio of interest-rate sensitive assets and
liabilities is expressed in months as our duration gap. 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.
The table below shows various duration gap measurements and the effects that changes in interest
rates would generally have on portfolio value.
Negative Duration Gap
Zero Duration Gap
Positive Duration Gap
Asset Duration < Liability Duration
Asset Duration = Liability Duration
Asset Duration > Liability Duration
Net portfolio will increase in value when
interest rates rise and decrease in value
when interest rates fall.
Net portfolio economic value will be
unchanged. 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.
Net portfolio will increase in value when
interest rates fall and decrease in value
when interest rates rise.
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 exposure to interest rate changes for a wide range of interest rate
yield curve scenarios.
PMVS - PMVS is our estimate of the change in the market value of our financial assets and liabilities
from an instantaneous shock to interest rates, assuming spreads are held constant and no
rebalancing actions are undertaken. PMVS is measured in two ways, one measuring the estimated
sensitivity of our portfolio’s market value to a 50 basis point parallel movement in interest rates
(PMVS-L) and the other to a nonparallel movement (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.
FREDDIE MAC | 2017 Form 10-K
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Management's Discussion and Analysis
Risk Management | Market Risk
To calculate PMVS, the interest rate shock is applied to the duration (and convexity for PMVS-L) 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 whichever produces
the more adverse outcome is the PMVS. In cases where both the up rate and down rate shocks
result in a positive effect, the PMVS is zero. PMVS results are shown on a pre-tax basis.
Economic Market Risk Results
Interest-Rate Risk
The tables below provide our 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, 2017 and 2016. The tables below also provide PMVS-L estimates assuming an immediate
100 basis point shift in the LIBOR yield curve. The interest-rate sensitivity of our mortgage portfolio
varies across a wide range of interest rates.
(In millions)
Assuming shifts of the LIBOR yield curve,
(gains) losses on:(1)
Assets
Liabilities
Derivatives
Total
PMVS
As of December 31,
2017
PMVS-L
50 bps
100 bps
PMVS-YC
25 bps
PMVS-YC
25 bps
2016
PMVS-L
50 bps
100 bps
$463
185
(646)
$2
$2
$5,587
(2,377)
(3,200)
$10
$11,446
(4,968)
(6,477)
$1
$10
$1
$573
155
(721)
$7
$7
$6,397
(2,747)
(3,662)
($12)
$12,950
(5,715)
(7,317)
($82)
$—
$—
(1) The categorization of the PMVS impact between assets, liabilities, and derivatives on this table is based upon the economic characteristics of those
assets and liabilities, not their accounting classification. For example, purchase and sale commitments of mortgage-related securities and debt
securities of consolidated trusts held by the mortgage-related investments portfolio are both categorized as assets on this table.
(Duration gap in months, dollars in millions)
Average
Minimum
Maximum
Standard deviation
Duration
Gap
2017
PMVS-YC
25 bps
Year Ended December 31,
PMVS-L
50 bps
Duration
Gap
2016
PMVS-YC
25 bps
PMVS-L
50 bps
0.1
(0.4)
0.8
0.2
$7
$—
$26
$5
$16
$—
$78
$19
0.1
(0.4)
0.7
0.2
$6
$—
$31
$5
$20
$—
$92
$21
The disclosure in our Monthly Volume Summary reports, which are available on our website
www.freddiemac.com/investors/financials/monthly-volume-summaries, reflects the average of the
daily PMVS-L, PMVS-YC and duration gap estimates for a given reporting period (a month, a quarter, or
a year).
Derivatives enable us to reduce our economic interest-rate risk exposure as we continue to align our
derivative portfolio with the changing duration of our economically hedged assets and liabilities. 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.
FREDDIE MAC | 2017 Form 10-K
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Management's Discussion and Analysis
Risk Management | Market Risk
(In millions)
December 31, 2017
December 31, 2016
Limitations of Market Risk Measures
PMVS-L (50 bps)
Before
Derivatives
After
Derivatives
Effect of
Derivatives
$3,210
$3,651
$10
$—
($3,200)
($3,651)
While we believe that PMVS and duration gap are useful risk management tools, they should be
understood as estimates rather than as precise measurements. Mis-estimation of economic market risk
could result in over or under hedging of interest-rate risk, significant economic losses and an adverse
impact on earnings. The limitations of our economic market risk measures include the following:
Our PMVS and duration gap estimates are determined using models that involve our judgment of
interest-rate and prepayment assumptions.
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.
PMVS and duration gap 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.
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.
In recent years it has been more difficult 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.
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 relatively short 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.
FREDDIE MAC | 2017 Form 10-K
160
Management's Discussion and Analysis
Risk Management | Market Risk
Our measurements do not include the sensitivity to interest-rate changes of the following assets and
liabilities:
Credit guarantee activities - 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.
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.
GAAP Earnings Variability
The GAAP accounting treatment for our financial assets and liabilities (i.e., some are measured at
amortized cost, while others are measured at fair value) creates variability in our GAAP earnings when
interest rates and spreads change. This variability of GAAP earnings, which may not reflect the
economics of our business, increases the risk of our having a negative net worth and thus being
required to draw from Treasury.
Interest-rate Volatility
While we manage our interest-rate risk exposure on an economic basis to a low level as measured by
our models, our GAAP financial results are still subject to significant earnings variability from period to
period. Based upon the composition of our financial assets and liabilities, including derivatives, at
December 31, 2017, we generally recognize fair value losses in GAAP earnings when interest rates
decline.
In an effort to reduce our GAAP earnings variability and better align our GAAP results with the
economics of our business, we began using hedge accounting during 2017. See Note 9 for additional
information on hedge accounting.
The table below presents the effect of derivatives used in our interest-rate risk management activities on
our comprehensive income, after considering any offsetting interest rate effects related to financial
instruments measured at fair value and the effects of fair value hedge accounting.
(In billions)
Interest rate effect on derivative fair values
Estimate of offsetting interest rate effect related to financial instruments measured at fair value(1)
Gains (losses) on mortgage loans and debt in fair value hedge relationships
Income tax (expense) benefit
Estimated net interest rate effect on comprehensive income (loss)
Year Ended December 31,
2017
2016
$—
(0.7)
0.3
0.1
($0.3)
$1.6
(1.2)
—
(0.1)
$0.3
(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.
FREDDIE MAC | 2017 Form 10-K
161
Management's Discussion and Analysis
Risk Management | Market Risk
We evaluate the potential benefits of fair value hedge accounting by evaluating a range of interest rate
scenarios and identifying which of those scenarios produces the most adverse GAAP earnings outcome.
The interest rate scenarios evaluated include parallel shifts in the yield curve of plus and minus 100
basis points, non-parallel yield curve shifts in which long-term interest rates increase or decrease by 100
basis points and non-parallel yield curve shifts in which short-term and medium-term interest rates
increase or decrease by 100 basis points.
At December 31, 2017, the GAAP adverse scenario both before and after fair value hedge accounting
was a non-parallel shift in which long-term rates decrease by 100 basis points. The results of this
evaluation are shown in the table below.
(Dollars in billions)
December 31, 2017
GAAP Adverse Scenario (Before-Tax)
Before Hedge Accounting After Hedge Accounting
% Change
($3.1)
($0.5)
84%
For further discussion of financial results related to interest-rate risk, see Our Business Segments -
Capital Markets.
Spread Volatility
We have limited ability to manage our spread risk exposure and therefore the volatility of market spreads
may contribute to significant GAAP earnings variability. 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 table below shows the estimated effect of spreads on our comprehensive income (loss), after tax,
by segment.
(In billions)
Capital Markets
Multifamily
Single-family Guarantee(1)
Spread effect on comprehensive income (loss)
Year Ended December 31,
2017
2016
$0.8
0.3
(0.2)
$0.9
$0.3
—
(0.2)
$0.1
(1) Represents spread exposure on certain STACR debt securities for which we have elected the fair value option.
For further discussion of significant financial results related to spread risk, see Our Business
Segments - Multifamily and Our Business Segments - Capital Markets.
FREDDIE MAC | 2017 Form 10-K
162
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 requirements 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 - Capital Markets.
FREDDIE MAC | 2017 Form 10-K
163
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 | 2017 Form 10-K
164
Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
Liquidity Profile
During 2017, 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 2017, 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, was 45.4% and 46.1% as of December
31, 2017 and 2016, respectively.
Our debt cap under the Purchase Agreement was $407.2 billion in 2017 and declined to $346.1 billion
on January 1, 2018. As of December 31, 2017, our aggregate indebtedness, calculated as the par value
of other debt, was $316.7 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/financials/monthly-
volume-summaries.
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 in 2018 as the mortgage-related investments portfolio
shrinks to the required Purchase Agreement limit. 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 call, exchange or repurchase our outstanding debt securities from time to time for a
FREDDIE MAC | 2017 Form 10-K
165
Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
variety of reasons, including managing our funding composition and supporting the liquidity of our debt
securities.
FREDDIE MAC | 2017 Form 10-K
166
Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
(Dollars in millions)
Discount notes and Reference Bills
Beginning balance
Issuances
Repurchases
Maturities
Ending Balance
Securities sold under agreements to repurchase
Beginning balance
Additions
Repayments
Ending Balance
Callable debt
Beginning balance
Issuances
Repurchases
Calls
Maturities
Ending Balance
Non-callable debt(2)
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
Additions
Repayments
Ending Balance
Callable debt
Beginning balance
Issuances
Calls
Maturities
Ending Balance
Non-callable debt(2)
Beginning balance
Issuances
Repurchases
Maturities
Ending Balance
Total other debt
(1) Average rate is weighted based on par value.
FREDDIE MAC | 2017 Form 10-K
Short-term
Year Ended December 31, 2017
Average Rate(1)
Long-term
Average Rate(1)
$61,042
376,685
(57)
(391,953)
45,717
3,040
133,223
(126,582)
9,681
—
—
—
—
—
—
7,435
21,504
(500)
(10,647)
17,792
$73,190
0.47%
0.85%
0.91%
0.76%
1.19%
0.42%
0.72%
0.67%
1.06%
—%
—%
—%
—%
—%
—%
0.41%
0.99%
0.82%
0.52%
1.03%
1.14%
$—
—
—
—
—
—
—
—
—
98,420
56,894
(335)
(27,414)
(13,743)
113,822
186,806
25,510
(1,211)
(82,011)
129,094
$242,916
—%
—%
—%
—%
—%
—%
—%
—%
—%
1.44%
1.92%
1.83%
1.75%
0.87%
1.58%
2.10%
2.11%
1.40%
1.59%
2.52%
2.08%
Short-term
Year Ended December 31, 2016
Average Rate(1)
Long-term
Average Rate(1)
$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%
167
Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
(2)
Includes STACR and SCR debt notes and certain multifamily other debt. STACR and SCR debt notes are subject to prepayment risk as their
payments are based upon the performance of a reference pool of mortgage assets that may be prepaid by the related mortgage borrower at any
time without penalty.
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, payoffs and
maturities of other debt, excluding securities sold under agreements to repurchase, decreased in 2017
compared to 2016.
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. This increased demand continued in 2017.
During 2017, we replaced a portion of called or matured medium-term and long-term debt with callable
debt. 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, 2017, $75 billion of the outstanding $114
billion of callable debt may be called within one year, not including callable debt due to contractually
mature within one year.
Other Short-term Debt
The tables below contain details on the characteristics of our other short-term debt.
FREDDIE MAC | 2017 Form 10-K
168
Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
(Dollars in millions)
Discount notes and Reference Bills
Medium-term notes
Securities sold under agreements to repurchase
Total
(Dollars in millions)
Discount notes and Reference Bills
Medium-term notes
Securities sold under agreements to repurchase
Total
(Dollars in millions)
As of December 31, 2017
Ending Balance
Yearly Average
Carrying
Value
Weighted
Average
Effective Rate(1)
Carrying
Value
Weighted
Average
Effective Rate(1)
Maximum Carrying
Value Outstanding
at Any Month End
$45,596
17,792
9,681
$73,069
1.19%
1.03
1.06
1.14%
$50,867
12,172
8,092
0.85%
0.78
0.65
$60,967
17,967
11,491
As of December 31, 2016
Ending Balance
Yearly Average
Carrying
Value
Weighted
Average
Effective Rate(1)
Carrying
Value
Weighted
Average
Effective Rate(1)
Maximum Carrying
Value Outstanding
at Any Month End
$60,976
7,435
3,040
$71,451
0.47%
$73,169
0.41
0.42
0.47%
7,035
3,112
0.41%
0.23
0.10
$96,767
9,545
8,294
As of December 31, 2015
Ending Balance
Yearly Average
Carrying
Value
Weighted
Average
Effective Rate(1)
Carrying
Value
Weighted
Average
Effective Rate(1)
Maximum Carrying
Value Outstanding
at Any Month End
Discount notes and Reference Bills
$104,027
0.28%
$102,540
Medium-term notes
Securities sold under agreements to repurchase
Total
9,545
—
$113,572
0.20
—
0.27%
3,173
15
0.16%
0.09
0.21
$123,248
9,454
—
(1) Average rate is weighted based on carrying value.
The following graphs present our other debt by contractual maturity date and earliest redemption date.
The earliest redemption date refers to the earliest call date for callable debt and the contractual maturity
date for all other debt.
FREDDIE MAC | 2017 Form 10-K
169
Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
Contractual Maturity Date as of December 31, 2017
Earliest Redemption Date as of December 31, 2017
FREDDIE MAC | 2017 Form 10-K
170
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,
2017
$1,602,162
2016
$1,513,089
256,931
150,651
407,582
(42,797)
(34,560)
(259,782)
(337,139)
1,672,605
48,391
$1,720,996
309,021
162,386
471,407
(42,716)
(29,292)
(310,326)
(382,334)
1,602,162
46,521
$1,648,683
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, 2017, 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 UPB of debt securities issued by our consolidated trusts.
FREDDIE MAC | 2017 Form 10-K
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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
Credit risk transfer securitizations
Other securitization products
Total multifamily
Total Freddie Mac mortgage-related securities
Freddie Mac mortgage-related securities repurchased or retained at issuance
Debt securities of consolidated trusts held by third parties
Credit Ratings
As of December 31,
2016
2017
$1,331,463
81,889
274,561
52,870
9,867
2,157
1,752,807
3,650
1,756,457
2,000
3,747
5,747
1,762,204
(89,599)
$1,235,862
82,118
282,520
57,038
15,043
2,421
1,675,002
4,531
1,679,533
—
3,048
3,048
1,682,581
(80,419)
$1,672,605
$1,602,162
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 1,
2018.
Nationally Recognized Statistical Rating
Organization
Moody's
Fitch
S&P
Senior long-term debt
Short-term debt
Subordinated debt
Preferred stock(1)
Outlook
AA+
A-1+
AA-
D
Stable
Aaa
P-1
Aa2
Ca
Stable
AAA
F1+
AA-
C/RR6
Stable
(1) Does not include senior preferred stock issued to Treasury.
Our credit ratings and outlooks are primarily based on the support we receive from Treasury, and
therefore, are affected by changes in the credit ratings and outlooks of the U.S. government.
A security rating is not a recommendation to buy, sell or hold securities. It may be subject to revision or
withdrawal at any time by the assigning rating organization. Each rating should be evaluated
independently of any other rating.
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
FREDDIE MAC | 2017 Form 10-K
172
Management's Discussion and Analysis
Liquidity and Capital Resources | Liquidity Profile
mortgage market. The table below summarizes the balances in our other investments and cash
portfolio, which includes the Liquidity and Contingency Operating Portfolio.
(In billions)
Cash and cash equivalents
Restricted cash and cash equivalents
Securities purchased under
agreements to resell
Non-mortgage related securities
Advances to lenders
Total
As of December 31, 2017
As of December 31, 2016
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
$6.8
—
38.9
22.2
—
$—
0.5
16.8
—
—
$—
2.5
0.2
0.6
0.8
$6.8
3.0
55.9
22.8
0.8
$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
$67.9
$17.3
$4.1
$89.3
$69.5
$23.1
$3.6
$96.2
(1) Consists of amounts related to collateral held by us from derivative and other counterparties, investments in unsecured agency debt in which we
may not otherwise invest, other than to pledge as collateral to our counterparties when our derivatives are in a liability position, advances to
lenders and other secured lending transactions.
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, 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 | 2017 Form 10-K
173
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, 2015, 2016 and 2017.
Operating Cash Flows Investing Cash Flows Financing Cash Flows
Commentary
2017 vs. 2016
Cash provided by operating activities increased $0.6 billion primarily due to the following:
Increase in other income due to settlement proceeds received from RBS related to litigation
involving certain of our non-agency mortgage-related securities.
This increase was partially offset by:
Increase in net purchases of mortgage loans acquired as held-for-sale due to the overall growth
of the multifamily mortgage market.
Cash provided by investing activities decreased $17.8 billion primarily due to the following:
Increase in securities purchased under agreements to resell, as excess cash was invested in
securities to earn a yield; and
Decrease in net repayments of mortgage loans acquired as held-for-investment primarily due to
lower prepayments as a result of higher average mortgage interest rates.
This decrease was partially offset by:
Increase in net proceeds received from sales of investment securities driven by the continued
reduction in the balance of our mortgage investment portfolio as required by the Purchase
Agreement and FHFA.
Cash used in financing activities decreased $4.9 billion primarily due to the following:
Increase in net repayments and redemptions of debt securities of consolidated trusts held by
third parties due to a decline in the volume of single-family PC issuance for cash; and
Decrease in net repayments of other debt, as we reduced our indebtedness along with the
decline in our mortgage-related investments portfolio.
FREDDIE MAC | 2017 Form 10-K
174
Management's Discussion and Analysis
Liquidity and Capital Resources I Cash Flows
2016 vs. 2015
Cash used 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.
This increase was 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.
This decrease was 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.
This decrease was 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 | 2017 Form 10-K
175
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. Under the Purchase Agreement, Treasury made a commitment to
provide us with equity funding, under certain conditions, to eliminate deficits in our net worth. Obtaining
equity funding from Treasury pursuant to its commitment under the Purchase Agreement enables us to
avoid being placed into receivership by FHFA and maintain the confidence of the debt markets as a very
high quality credit, upon which our business model is dependent.
At December 31, 2017, we had a net worth deficit of $312 million. As a result, FHFA, as Conservator, will
submit a draw request, on our behalf, to Treasury under the Purchase Agreement in the amount of $312
million. Upon the funding of this draw request, the aggregate liquidation preference of the senior
preferred stock will increase to $75.6 billion and the amount of available funding remaining under the
Purchase Agreement will decrease to $140.2 billion. To the extent we draw additional funds in the future,
the aggregate liquidation preference will increase and the amount of available funding will decrease by
the amount of those draws. 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. 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 draws received from Treasury
Senior preferred stock dividends declared
Total equity / net worth
Aggregate draws requested under Purchase Agreement
Aggregate cash dividends paid to Treasury
Year Ended December 31,
2017
2016
2015
$5,075
5,558
—
(10,945)
($312)
$2,940
7,118
—
(4,983)
$5,075
$71,336
$112,393
$71,336
$101,448
$2,651
5,799
—
(5,510)
$2,940
$71,336
$96,465
FREDDIE MAC | 2017 Form 10-K
176
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, and owe their fiduciary duties of care and loyalty to, 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 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. Given our public mission and the important
role our Conservator has 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
FREDDIE MAC | 2017 Form 10-K
177
Management's Discussion and Analysis
Conservatorship and Related Matters
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 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. 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. The amount of any draw will be
added to the aggregate liquidation preference of the senior preferred stock and will reduce the amount
of available funding remaining. Deficits in our net worth have made it necessary for us to make
substantial draws on Treasury's funding commitment under the Purchase Agreement. In addition, the
Letter Agreement increased the aggregate liquidation preference of the senior preferred stock by $3.0
billion on December 31, 2017. As of December 31, 2017, the aggregate liquidation preference of the
senior preferred stock was $75.3 billion, and the amount of available funding remaining under the
Purchase Agreement was $140.5 billion.
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 cash dividend requirement 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. The applicable Capital Reserve Amount was $0.6
billion in 2017. Under the Letter Agreement, the dividend for the dividend period from October 1, 2017
through and including December 31, 2017 was reduced to $2.25 billion. The applicable Capital Reserve
Amount from January 1, 2018 and thereafter will be $3.0 billion. As a result of the net worth sweep
dividend, our future profits in excess of the applicable Capital Reserve Amount 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 such future profits. If for any reason we were not to pay the amount of
our dividend requirement on the senior preferred stock in full, the unpaid amount would be added to the
liquidation preference and our applicable Capital Reserve Amount would thereafter be zero, 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
FREDDIE MAC | 2017 Form 10-K
178
Management's Discussion and Analysis
Conservatorship and Related Matters
liquidation. We are not permitted to redeem the senior preferred stock prior to the termination of
Treasury’s funding commitment under the Purchase Agreement.
The Purchase Agreement and warrant contain covenants that significantly restrict our business and
capital activities. For example, the Purchase Agreement provides that, until the senior preferred stock is
repaid or redeemed in full, we may not, without the prior written consent of Treasury:
Pay dividends on our equity securities, other than the senior preferred stock or warrant, or
repurchase our equity securities;
Issue any additional equity securities, except in limited instances;
Sell, transfer, lease or otherwise dispose of any assets, other than dispositions for fair market value
in the ordinary course of business, consistent with past practices, and in other limited
circumstances; and
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 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 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 for the year ended December 31, 2017 are shown below.
FREDDIE MAC | 2017 Form 10-K
179
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.
FREDDIE MAC | 2017 Form 10-K
180
Management's Discussion and Analysis
Conservatorship and Related Matters
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;
Securitization Pipeline - primarily includes 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, 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 $250 billion at December 31, 2018.
As of December 31, 2017
As of December 31, 2016
Securitiz-
ation
Pipeline
Less
Liquid
Liquid
Total
Liquid
Securitiz-
ation
Pipeline
Less
Liquid
Total
(Dollars in millions)
Capital Markets segment - Mortgage
investments portfolio
Single-family unsecuritized loans
Performing loans
Reperforming loans
Total single-family unsecuritized loans
Freddie Mac mortgage-related securities
123,905
Non-agency mortgage-related securities
Other Non-Freddie Mac agency mortgage-
related securities
749
5,211
—
—
—
$—
—
—
$9,999
—
9,999
$—
46,666
46,666
3,817
5,152
—
$9,999
46,666
56,665
$— $13,113
—
—
13,113
—
127,722
125,652
5,901
5,211
113
11,759
—
—
—
$— $13,113
58,326
71,439
58,326
58,326
4,776
130,428
16,059
16,172
—
11,759
Total Capital Markets segment -
Mortgage investments portfolio
Single-family Guarantee segment - Single-
family unsecuritized seriously delinquent
loans
Multifamily segment
Unsecuritized mortgage loans
Mortgage-related securities
Total Multifamily segment
Total mortgage-related investments
portfolio
Percentage of total mortgage-related
investments portfolio
Mortgage-related investments portfolio cap
at December 31, 2017 and 2016
90% of mortgage-related investments
portfolio cap at December 31, 2017 and
2016(1)
129,865
9,999
55,635
195,499
137,524
13,113
79,161
229,798
—
—
12,267
12,267
—
—
13,692
13,692
—
6,181
6,181
19,653
—
19,653
18,585
1,270
19,855
38,238
7,451
45,689
—
7,447
7,447
16,372
—
16,372
26,047
5,070
31,117
42,419
12,517
54,936
$136,046
$29,652
$87,757
$253,455
$144,971
$29,485
$123,970
$298,426
54%
12%
34%
100%
49%
10%
41%
100%
$288,408
$259,567
$339,304
$305,374
(1) Represents the amount to which we manage 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
FREDDIE MAC | 2017 Form 10-K
181
Management's Discussion and Analysis
Conservatorship and Related Matters
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 2017. Our active dispositions of less liquid assets included the following:
Sales of $18.4 billion of less liquid assets, including $9.2 billion in UPB of single-family non-agency
mortgage-related securities, $0.5 billion in UPB of seriously delinquent unsecuritized single-family
loans, $8.2 billion in UPB of single-family reperforming loans and $0.5 billion in UPB of multifamily
non-agency CMBS;
Securitizations of $1.8 billion in UPB of less liquid multifamily loans;
Transfers of $1.6 billion in UPB of less liquid multifamily loans to the securitization pipeline; and
Securitization of $1.2 billion in UPB of single-family reperforming loans into Freddie Mac PCs,
thereby enhancing their liquidity.
FHFA’s Strategic Plan and Scorecards for Freddie
Mac and Fannie Mae Conservatorships
In May 2014, FHFA issued its 2014 Strategic Plan. The 2014 Strategic Plan updated FHFA's vision for
implementing its obligations as Conservator of Freddie Mac and Fannie Mae.
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.
FHFA also published annual Conservatorship Scorecards for Freddie Mac and Fannie Mae, which
establish annual objectives as well as performance targets and measures related to the strategic goals
set forth in the 2014 Strategic Plan for each year from 2014 to 2018. FHFA issued the 2017 and 2018
Conservatorship Scorecards in December 2016 and December 2017, respectively. We continue to align
our resources and internal business plans to meet the goals and objectives provided by FHFA.
For information about the 2017 Conservatorship Scorecard, and our performance with respect to it, see
Executive Compensation - Compensation Discussion and Analysis. For information about the
2018 Conservatorship Scorecard, see our current report on Form 8-K filed on December 22, 2017.
For more information on the conservatorship and related matters, see Regulation and Supervision,
Risk Factors - Conservatorship and Related Matters, Note 2, Note 11 and Directors,
Corporate Governance, and Executive Officers - Authority of the Board and Board
Committees.
FREDDIE MAC | 2017 Form 10-K
182
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 purchase or servicing of mortgages can affect us.
Federal Housing Finance Agency
FHFA is an independent agency of the federal government responsible for oversight of the operations of
Freddie Mac, Fannie Mae and the FHLBs.
Under the GSE Act, FHFA has safety and soundness authority that is comparable to, and in some
respects broader than, that of the federal banking agencies. FHFA is responsible for implementing the
various provisions of the GSE Act that were added by the Reform Act.
Receivership
Under the GSE Act, FHFA must place us into receivership if FHFA determines in writing that our assets
are less than our obligations for a period of 60 days. FHFA notified us that the measurement period for
any mandatory receivership determination with respect to our assets and obligations would commence
no earlier than the SEC public filing deadline for our quarterly or annual financial statements and would
continue for 60 calendar days after that date. FHFA also advised us that, if, during that 60-day period,
we receive funds from Treasury in an amount at least equal to the deficiency amount under the Purchase
Agreement, the Director of FHFA will not make a mandatory receivership determination. In addition, we
could be put into receivership at the discretion of the Director of FHFA at any time for other reasons set
forth in the GSE Act.
Certain aspects of conservatorship and receivership operations of Freddie Mac, Fannie Mae and the
FHLBs are addressed in an FHFA rule. Among other provisions, the rule indicates that FHFA generally
will not permit payment of securities litigation claims during conservatorship and that claims by current
or former shareholders arising as a result of their status as shareholders would receive the lowest
priority of claim in receivership. In addition, the rule indicates that administrative expenses of the
conservatorship will also be deemed to be administrative expenses of receivership and that capital
distributions may not be made during conservatorship, except as specified in the rule.
Capital Standards
FHFA suspended capital classification of us during conservatorship in light of the Purchase Agreement.
The existing statutory and FHFA regulatory capital requirements are not binding during the
conservatorship. These capital standards are described in Note 17. 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
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determine whether such companies have sufficient capital to absorb losses as a result of adverse
economic conditions. Under the rule, Freddie Mac is required to 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
2017, 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 August 2016.
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 the affordable housing 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 duty to serve
requirements, 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
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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 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 2017 and 2018 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)
2017
2018
24%
6%
18%
14%
21%
24%
6%
TBD
14%
21%
300,000
60,000
10,000
315,000
60,000
10,000
We expect to report our performance with respect to the 2017 affordable housing goals in March 2018.
At this time, based on preliminary information, we believe we met all five of our single-family goals and
our three multifamily goals for 2017. FHFA will not be able to make a final determination on our
performance until market data is released in October 2018.
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 instructed us to begin setting aside amounts and paying amounts
into those funds in accordance with the following terms and conditions, subject to any subsequent
guidance or instruction from FHFA:
The amount we set aside each fiscal year based on our total new business purchases during such
fiscal year; and
Within 60 days after the end of each fiscal year, we 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.
During 2017, we completed $416.2 billion of new business purchases subject to this requirement and
accrued $174.8 million of related expense. On February 7, 2018, FHFA directed us to pay the funds
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allocated for 2017 in light of FHFA's determination that any draw we are required to make under the
Purchase Agreement to eliminate our fourth quarter net worth deficit is triggered by a one-time re-
measurement of our net deferred asset under the provisions of the Tax Cuts and Job Act of 2017 and
does not relate to any financial instability at Freddie Mac. We expect to pay this amount in February
2018 through the following payments: $113.6 million to the Housing Trust Fund administered by HUD
and $61.2 million to the Capital Magnet Fund administered by Treasury. We are prohibited from passing
through the costs of these allocations to the originators of the loans that we purchase.
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
2017 and 2016, 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
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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. In February 2018,
Treasury released its Strategic Plan 2018-2022, which includes a goal of promoting financial stability
through housing finance reform, including resolution of the conservatorships of Freddie Mac and Fannie
Mae.
Consumer Financial Protection Bureau
The CFPB regulates consumer financial products and services. The CFPB adopted a number of final
rules relating to loan origination, finance and servicing practices that generally went into effect in
January 2014. The rules include an ability-to-repay rule, which requires loan originators to make a
reasonable and good faith determination that a borrower has a reasonable ability to repay the loan
according to its terms. This rule provides certain protection from liability for originators making loans that
satisfy the definition of a qualified 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, Congress and potentially FHFA,
and it is possible, and perhaps likely, that there will be significant changes beyond the near-term.
Several bills were introduced in recent sessions of Congress concerning the future status of Freddie
Mac, Fannie Mae and the mortgage finance system, including bills that provided for the wind down of
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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 current or future sessions of Congress. We cannot predict whether
any of such bills will be enacted.
2016 Affordable Housing Goals and Housing Plan
In December 2017, FHFA determined that we achieved all five single-family housing goals and all three
multifamily goals for 2016. We may achieve a single-family housing goal by meeting or exceeding either:
the FHFA benchmark for the goal (Goals); or
the actual share of the market that meets the criteria for that goal (Market Level).
Due to our failure to meet two of the five single-family housing goals for 2014 and 2015, we will remain
under an FHFA-required Housing Plan through 2018. Our performance compared to our goals, as
determined by FHFA for 2016 and 2015, is set forth below.
Affordable Housing Goals
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
Market
Level
Goals
Results
Goals
2015
Market
Level
Results
24%
6%
17%
14%
21%
300,000
60,000
8,000
22.9%
5.4%
19.7%
15.9%
19.8%
N/A
N/A
N/A
23.8%
5.7%
19.9%
15.6%
21.0%
24%
6%
19%
14%
21%
23.6%
5.8%
19.8%
15.2%
22.5%
22.3%
5.4%
19.0%
14.5%
22.8%
406,958
300,000
73,030
22,101
60,000
6,000
N/A
N/A
N/A
379,042
76,935
12,801
Duty to Serve Underserved Markets Plan
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. In April 2017, as required by the rule, Freddie Mac and Fannie Mae
each submitted to FHFA an underserved markets plan covering a three-year period that describes the
activities and objectives it will undertake to meet its duty to serve. The 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. FHFA released
the draft plans for public comment in May 2017, and the public comment period on the plans ended in
July 2017. In December 2017, FHFA provided Freddie Mac with a notice of non-objection, and the
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company released its final underserved markets plan for 2018-2020. The plan became effective January
1, 2018.
Common Securitization Platform and the Single (Common)
Security Update
On December 4, 2017, FHFA published the "December 2017 FHFA Update on the Single Security
Initiative and the Common Securitization Platform." The report emphasizes the importance of
stakeholder readiness by the end of 2018 and provides updates on key initiative areas such as market
outreach activities, continued work with regulatory and industry bodies to resolve open issues and
questions and FHFA and Enterprise efforts concerning prepayment speed alignment for TBA securities.
The target implementation date for the Single Security initiative is the second quarter of 2019.
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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, 2017. 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 and STACR and SCR debt notes). 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, 2017 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, 2017 until maturity and callable debt continues to accrue
interest until its contractual maturity. 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 debt securities of consolidated trusts;
Future payments of principal and interest related to STACR and SCR debt notes because the amount
and timing of such payments are contingent upon the occurrence of future events on the reference
pool of mortgage loans and are therefore uncertain;
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; and
The guarantee payments and commitments to advance funds pertaining to off-balance sheet
arrangements.
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—
960
5
—
238
1
—
5,493
205
—
1,139
—
Management's Discussion and Analysis
Contractual Obligations
(In millions)
Other long-term debt(1)
Other short-term debt(1)
Interest payable(2)
Total
2018
2019
2020
2021
2022
Thereafter
$224,991
$70,557
$57,689
$38,117
$22,809
$18,538
$17,281
73,190
22,863
73,190
10,150
—
2,706
—
2,013
—
1,541
Other contractual liabilities reflected on our
consolidated balance sheets(3)
4,689
4,463
Purchase obligations:
Purchase commitments(4)
Other purchase obligations(5)
Lease obligations
29,780
29,780
2,487
36
361
13
5
—
258
11
6
—
248
7
5
—
243
4
Total specified contractual obligations
$358,036
$188,514
$60,669
$40,391
$24,602
$19,742
$24,118
(1) Represents par value. Callable debt is included in this table at its contractual maturity. For additional information about our debt, see Note 8.
(2)
(3)
Includes estimated future interest payments on our short-term and long-term debt securities as well as the accrual of periodic cash settlements of
derivatives, netted by counterparty. Also includes accrued interest payable recorded on our consolidated balance sheet.
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.
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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 and Note 5 for more information on our off-balance sheet
securitization and guarantee activities.
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 $215.7 billion and $166.7 billion at December 31, 2017 and 2016, 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 $7.4 billion and $8.5 billion at December 31,
2017 and 2016, 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, 2017 and 2016, 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 9. We also enter into purchase
commitments primarily related to future guarantor swap transactions for single-family loans, and, to a
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Management's Discussion and Analysis
Off-Balance Sheet Arrangements
lesser extent, commitments to purchase or guarantee multifamily loans. These non-derivative
commitments totaled $296.4 billion and $267.4 billion in notional value at December 31, 2017 and 2016,
respectively.
In connection with the execution of the Purchase Agreement, we, through FHFA, in its capacity as
Conservator, issued a warrant to Treasury to purchase 79.9% of our common stock outstanding on a
fully diluted basis on the date of exercise. See Note 11 for further information.
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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
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Critical Accounting Policies and Estimates
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.
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; and
Certain debt securities of consolidated trusts held by third parties and certain other debt.
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 15
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Critical Accounting Policies and Estimates
for additional information regarding fair value hierarchy and measurements, valuation risk and controls
over fair value measurement.
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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 in
the mortgage industry, 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 have been introduced in recent sessions of Congress 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 were enacted. It is likely that similar or
new bills will be introduced and considered in future sessions of Congress. In addition, in February 2018,
Treasury released its Strategic Plan 2018-2022, which includes a goal of promoting financial stability
through housing finance reform, including resolution of the conservatorships of Freddie Mac and Fannie
Mae.
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 ends and the voting rights of common stockholders are restored. If Treasury exercises
the warrant, the ownership interest 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 16.
We cannot retain capital from the earnings generated by our business operations in excess
of the applicable Capital Reserve Amount under the Purchase Agreement (which is $3.0
billion as of January 1, 2018 but will be reduced to zero if we do not pay any future dividend
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Conservatorship and Related Matters
requirements in full), which could result in our having to request additional draws from
Treasury under the Purchase Agreement in future periods.
We cannot retain capital from the earnings generated by our business operations in excess of the
applicable Capital Reserve Amount of $3.0 billion as of January 1, 2018, as a result of the net worth
sweep dividend requirement. If we were not to pay our full dividend requirement in any future period, the
applicable Capital Reserve Amount would thereafter be zero so that we would not be able to retain any
capital from the earnings generated by our business. While in conservatorship, dividends we pay to
Treasury are declared by, and paid at the direction of, the Conservator, acting as successor to the rights,
titles, powers and privileges of the Board. Our inability to build and retain capital in excess of the
applicable Capital Reserve Amount could cause us to require draws in future periods. 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 success of any transactions or other steps we may take intended to help reduce earnings
variability 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;
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;
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;
The effects of our foreclosure prevention and loss mitigation efforts;
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 occurrence of a major natural or other disaster in areas in which our offices or significant
portions of our total mortgage portfolio are located; 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
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Risk Factors
Conservatorship and Related Matters
Agreement, may add to the uncertainty regarding our long-term financial sustainability.
FHFA as our Conservator controls our business activities. In addition, 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 Scorecard). It may be difficult for us to devote sufficient resources and
management attention to these multiple priorities. Some of the activities FHFA has required us to
undertake are costly and difficult to implement, such as building the common securitization platform.
FHFA has required us to make changes to our business that have adversely affected our financial
results. FHFA could require us to make additional changes at any time. For example, FHFA may require
us to undertake activities that:
Reduce our profitability;
Expose us to additional credit, market, funding, operational and other risks; or
Provide additional support for the mortgage market that serves our public mission, but adversely
affects 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 sweep
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
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Conservatorship and Related Matters
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 as a result of their status as stockholders or creditors, other than possible payment
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
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.
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Risk Factors
Credit Risk
CREDIT RISK
We are subject to mortgage credit risk, including mortgage credit risk relating to off-balance
sheet arrangements; credit costs related to this risk 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, SB Certificates and senior subordinate
securitization structures. 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 may 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.
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Risk Factors
Credit Risk
We face significant risks related to our delegated underwriting process for single-family
loans, including risks related to data accuracy and mortgage fraud. 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.
In 2017, we enhanced our Loan Advisor Suite to offer limited representation and warranty relief for
certain loans that satisfy new automated controls related to appraisal quality, collateral valuation,
borrower assets and borrower income. In general, limited representation and warranty relief is offered
when information provided by the lender is validated against independent data sources. Further
enhancements to the Loan Advisor Suite are expected in 2018. These continued changes 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.
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;
Negatively affect loan pricing, which could cause us to change our disposition strategies for our
single-family unsecuritized loans; or
Increase our losses on foreclosure alternatives, third-party sales and dispositions of REO properties.
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Risk Factors
Credit Risk
For more information regarding these risks, see MD&A - Risk Management - 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 2.2% in
the first nine months of 2017 (the most recent data available) and approximately 2.3% in 2016.
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 likely to moderate from 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 the multifamily market 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 contractual 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 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
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 risk 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
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Risk Factors
Credit Risk
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 also are 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. In addition, 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 large 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 some of 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.
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Risk Factors
Credit Risk
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
- Derivative Counterparties, Other Counterparties.
Credit risk related to mortgage 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 that we purchased prior to 2009, as these insurers are insolvent or are paying only a
portion of our claims under our mortgage insurance policies. For more information, see Note 14.
If a mortgage insurer fails to meet its obligations to reimburse us for claims, our credit losses could
increase. In addition, if a regulator determines that a mortgage insurer lacks sufficient capital to pay all
claims when due, the regulator could take action that might affect the timing and amount of claim
payments made to us. We face similar risks with respect to our counterparties on ACIS and Deep MI
CRT 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. In addition, 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. As a result, we could acquire a concentration of risk to certain insurance providers. We
continue to acquire new loans with mortgage insurance from mortgage insurers that have credit ratings
below investment grade.
For more information, see MD&A - Risk Management - Credit Risk - Counterparty Credit Risk
- Mortgage, Bond and Credit Insurers.
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Risk Factors
Credit Risk
Our loss mitigation activities may be costly and may adversely affect our financial results.
Our loss mitigation activities 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. However, for
certain CRT transactions we share the cost of modifications with the investors.
We could elect or be required 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 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
Capital Markets 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 unwilling to purchase securities backed by modified single-family loans).
The effect of refinance initiatives of the GSEs, such as HARP, 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 compete with 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.
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Risk Factors
Credit Risk
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; 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 or engaging in certain asset structuring activities that result in the write-off of
premiums.
We are exposed to increased credit losses and credit related expenses in the event of a
major natural disaster or other catastrophic event.
The occurrence of a major natural or environmental disaster or similar catastrophic event in an area
where we own or guarantee mortgage loans or REO properties, especially in densely populated
geographic areas, could increase our credit losses and credit related expenses. A natural disaster or
catastrophic event that either damages or destroys residential or multifamily real estate underlying
mortgage loans or REO properties we own or guarantee, or negatively affects the ability of the borrower
to continue to make payments on mortgage loans we own or guarantee, could increase our serious
delinquency rates and average loan loss severity in the affected areas. Such events could have a
material adverse effect on our business and financial results. We may lack or not have adequate
insurance coverage for some of these catastrophic events.
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Risk Factors
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 also can 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, which may not be successful. 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; and
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.
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 variability 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 variability generally is not indicative of the underlying economics of our
business.
During 2017, we began using hedge accounting for certain single-family mortgage loans and long-term
debt, 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 single-family mortgage hedge accounting program is complex and
unique in the industry. We 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 expose us to significant
earnings variability in that period and increase the risk that we will need a draw from Treasury.
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Risk Factors
Market Risk
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 and other securities. 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. If 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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Risk Factors
Operational Risks
OPERATIONAL RISKS
A failure in our operational systems or infrastructure, or those of third parties, could impair
our liquidity, disrupt our business, damage our reputation and cause losses.
We face significant levels of operational risk due to a variety of factors, including the size and 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, as well as the ever changing cybersecurity
landscape and increasing digitization of our business.
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), incorrect
payments to investors in our securities, liability to customers or investors, 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, including our ability to compile and process legally required information. 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, counterparties,
service providers and other financial institutions continues to increase, which increases our risk
exposure with respect to an operational failure of their infrastructure 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-
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Risk Factors
Operational Risks
family securitization activities, particularly after Release 2 is implemented. 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 December 2017, FHFA announced that the target implementation
date for Release 2 remains the second quarter of 2019, noting that certain testing schedules have been
extended. 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 or allow us to resume normal business operations
in a timely manner.
Potential cybersecurity 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 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. There have been
several recent, highly publicized cases involving financial services companies, consumer-based
companies and other organizations reporting the unauthorized disclosure of client, customer or other
confidential information, as well as cyberattacks involving the dissemination, theft and destruction of
corporate information, intellectual property, cash or other valuable assets. There have also been several
highly publicized cases where hackers have requested "ransom" payments in exchange for not
disclosing customer information or for not making the targets' computer systems unavailable.
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.
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Risk Factors
Operational Risks
Because we are interconnected with and dependent on third-party vendors, exchanges, clearing
houses , fiscal and paying agents and other financial institutions, we could be adversely affected if any
of them is subject to a successful cyberattack or other information security event. Third parties with
which we do business may also be sources of cybersecurity or other technology risks. We routinely
transmit and receive personal, confidential and proprietary information by electronic means. This
information could be subject to interception, misuse or mishandling.
Although we devote significant resources to protecting our critical assets and provide employee
awareness training around phishing, malware and other cyber risks, 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. We
routinely identify cyber threats as well as vulnerabilities in our systems and work to address them, but
these efforts may be insufficient. Breaches of our security measures may result from employee error or
misconduct. Outside parties may attempt to induce employees, customers, counterparties, service
providers, financial institution 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 frequently or are not recognized until
launched.
A cyberattack could occur and persist for an extended period of time without detection. We expect that
any investigation of a cyberattack would take time, during which we would not necessarily know the
extent of the harm or how best to remediate it. In addition, announcing that a cyberattack has occurred
could increase the risk of additional attacks. Although we have obtained insurance coverage relating to
cybersecurity risks, this insurance may not be sufficient to provide adequate loss coverage. Although to
date we have not experienced any cyberattacks resulting in significant impact to the company, there is
no assurance that our cybersecurity risk management program will prevent cyberattacks from having
significant impacts in the future.
The occurrence of one or more cyberattacks 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.
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Risk Factors
Operational Risks
We rely on third parties for certain important functions. Any failures by those vendors and
service providers (or other third parties that work for the vendors/service providers), could
disrupt our business operations or expose us to loss of confidential information or
intellectual property.
Our use of vendors and service providers 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 use of hedge accounting), valuations, our mortgage-
related investment activity, loan underwriting, loan servicing and PC issuance and administration (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 a cybersecurity 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
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 insufficient, inaccurate or incorrectly formatted.
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
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Risk Factors
Operational Risks
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 increases 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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Risk Factors
Liquidity Risks
LIQUIDITY RISKS
Our activities may be adversely affected by limited availability of financing and increased
funding costs.
The amount, type and cost of our unsecured funding, including financing from other financial institutions
and the capital markets, directly affects our interest expense and results of operations. A number of
factors could make such financing more difficult to obtain, more expensive or unavailable on any terms,
both domestically and internationally, including:
Market and other factors;
Changes in U.S. government support for us;
Reduced demand for our debt securities; and
Competition for debt funding from other debt issuers.
Market and Other Factors
Our ability to obtain funding in the public unsecured debt markets or by selling or pledging mortgage-
related and other securities as collateral to other institutions could change rapidly or cease. 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 inadequate
or difficult 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 significantly impaired or eliminated, 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 variability 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.
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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;
Any concerns by debt investors 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 reduce their
purchases of our debt securities or divest their holdings, 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 -
Capital Markets 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.
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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.
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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; or
Prevents us from using the MERS System or disrupts foreclosures of loans registered in the MERS
System.
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 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 new laws and regulations could have a negative
effect on the volume of loan originations or could modify or remove incentives for financial institutions to
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Risk Factors
Legal and Regulatory Risks
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 that are applicable to banking organizations. In addition, the Basel
Committee has recently announced 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
duty to serve requirements, 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 expanding the 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 the goals or requirements were feasible, 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 and 2015, we have been operating under an FHFA-required Housing Plan that addresses
achievement of the missed goals through 2018. Even though we met our housing goals for 2016, we
continue to operate under the Housing Plan. If we fail to comply with the plan, FHFA could take
additional action against us.
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Risk Factors
Legal and Regulatory Risks
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 16 for information about these various pending legal proceedings.
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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 are placing
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
14.
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 | 2017 Form 10-K
221
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, 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 FHFA 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 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 also may
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
FREDDIE MAC | 2017 Form 10-K
222
Risk Factors
Other Risks
PCs and our single-family market share. A significant reduction in our market share, and thus in the
volume of loans that we securitize, or a reduction in the trading volume of our PCs could further reduce
the liquidity of our PCs. While we may employ various strategies to support the liquidity and price
performance of our PCs, and may consider additional strategies, those strategies may fail or adversely
affect our business. We may cease such activities at any time, or FHFA could require us to do so, which
could adversely affect the liquidity and price performance of our PCs.
The liquidity-related price differences between our PCs and comparable Fannie Mae securities could be
influenced by factors that are largely outside of our control. For example, the level of the Federal
Reserve’s purchases and sales of agency mortgage-related securities, including the balance sheet
normalization program announced in October 2017 to reduce the Federal Reserve's holdings of
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 - Capital
Markets 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
requires 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. We may be required by FHFA to modify our mortgage
purchase offerings, servicing and securitization practices to more closely align with Fannie Mae to
achieve market acceptance of the single (common) security. Further, there can be no assurance that a
single (common) security will reduce the pricing disparities discussed above. Uncertainty concerning the
timing of implementation of the single (common) security or the extent of the alignment between Freddie
Mac's and Fannie Mae's mortgage purchase, servicing and securitization practices may affect the
degree to which the single (common) security receives widespread market acceptance.
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
Treasury (pursuant to 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.
FREDDIE MAC | 2017 Form 10-K
223
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.
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 or receive reduced proceeds from
securitization. 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 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.
The intention of the United Kingdom’s Financial Conduct Authority (FCA) to cease sustaining
LIBOR after 2021 could negatively affect the fair value of our financial assets and liabilities,
results of operations and net worth.
In July 2017, the Chief Executive of the United Kingdom’s Financial Conduct Authority (FCA) announced
the FCA’s intention to cease sustaining LIBOR after 2021. The Federal Reserve Board convened the
Alternative Reference Rates Committee (ARRC) to identify a set of alternative reference interest rates for
possible use as market benchmarks. The ARRC identified such a rate in June 2017, and in August 2017,
the Federal Reserve Board requested public comment on a proposal to begin publishing that and two
other alternative rates beginning in 2018.
We are not able to predict whether LIBOR will cease to be available after 2021, whether the alternative
rates the Federal Reserve Board proposes to publish will become market benchmarks in place of LIBOR,
or what the impact of such a transition may be on our business, results of operations and financial
condition.
FREDDIE MAC | 2017 Form 10-K
224
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 16 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, numerous 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 Western District of Michigan and the U.S. District Court for the District of Minnesota. In addition,
plaintiffs are appealing a March 2017 order by the U.S. District Court for the Northern District of Iowa to
dismiss the case in that Court, and plaintiffs are appealing a May 2017 order by the U.S. District Court
for the Southern District of Texas to dismiss the case in that Court. Plaintiffs filed a petition for certiorari
with the U.S. Supreme Court to appeal the June 2017 affirmance by the U.S. Court of Appeals for the
Fifth Circuit of the March 2017 order by the U.S. District Court for the Western District of Texas to
dismiss the Case in that Court. Plaintiffs also appealed a September 2016 order by the U.S. District
Court for the Eastern District of Kentucky to dismiss the case in that Court. On November 22, 2017, the
U.S. Court of Appeals for the Sixth Circuit affirmed the dismissal. 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
16 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 | 2017 Form 10-K
225
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 1, 2018, there were
650,054,731 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.
2017 Quarter Ended
December 31
September 30
June 30
March 31
2016 Quarter Ended
December 31
September 30
June 30
March 31
Holders
High
High
$3.24
2.98
2.94
4.27
$4.84
1.90
2.20
1.75
Low
Low
$2.50
2.13
2.10
2.30
$1.52
1.46
1.21
0.97
As of February 1, 2018, we had 1,659 common stockholders of record.
Dividends and Dividend Restrictions
We did not pay any cash dividends on our common stock during 2017 or 2016. 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.
FREDDIE MAC | 2017 Form 10-K
226
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Restrictions Under the Purchase Agreement - The Purchase Agreement prohibits us and any of
our subsidiaries from declaring or paying any dividends on Freddie Mac equity securities (other than
with respect to the senior preferred stock or warrant) without the prior written consent of Treasury.
Restrictions Under the GSE Act - Under the GSE Act, FHFA has authority to prohibit capital
distributions, including payment of dividends, if we fail to meet applicable capital requirements.
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, 2017. 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 2017 at the
direction of the Conservator, as discussed in MD&A - Liquidity and Capital Resources and
Note 11. We did not declare or pay dividends on any other series of preferred stock outstanding in
2017.
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, 2017. See Note 11 for more information.
FREDDIE MAC | 2017 Form 10-K
227
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
ISSUER PURCHASES OF EQUITY SECURITIES
We did not repurchase any of our common or preferred stock during 2017. Additionally, we do not
currently have any outstanding authorizations to repurchase common or preferred stock. Under the
Purchase Agreement, we cannot repurchase our common or preferred stock without Treasury’s prior
consent, and we may only purchase or redeem the senior preferred stock in certain limited
circumstances set forth in the certificate of designation of the senior preferred stock.
TRANSFER AGENT AND REGISTRAR
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, KY 40233-5000
Telephone: 877-373-6374
https://www-us.computershare.com/investor
FREDDIE MAC | 2017 Form 10-K
228
Financial Statements
Financial Statements and
Supplementary Data
FREDDIE MAC | 2017 Form 10-K
229
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
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Freddie Mac, a stockholder-owned
government sponsored enterprise, and its subsidiaries (the "Company") as of December 31, 2017 and
2016, and the related consolidated statements of comprehensive income, of equity and of cash flows for
each of the three years in the period ended December 31, 2017, including the related notes (collectively
referred to as the "consolidated financial statements"). We also have audited the Company's internal
control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2017
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, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO because a material weakness in internal control over financial
reporting related to disclosure controls and procedures that do not provide adequate mechanisms for
information known to the Federal Housing Finance Agency ("FHFA") that may have financial statement
disclosure ramifications to be communicated to management of Freddie Mac existed as of that date.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely basis. The material weakness referred
to above is described in Management’s Report on Internal Control over Financial Reporting, appearing
under Item 9A. We considered this material weakness in determining the nature, timing, and extent of
audit tests applied in our audit of the 2017 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.
Basis for Opinions
The Company's management is responsible for these consolidated 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 the Company’s consolidated financial statements and on the Company's internal
control over financial reporting based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
FREDDIE MAC | 2017 Form 10-K
230
Financial Statements
Report of Independent Registered Public Accounting Firm
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks
of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our
audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
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.
Emphasis of Matter - Conservatorship
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 the delegated authorities from FHFA during conservatorship. The Company is
dependent upon the continued support of Treasury and FHFA.
Definition and Limitations of Internal Control over Financial Reporting
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 15, 2018
We have served as the Company’s auditor since 2002.
FREDDIE MAC | 2017 Form 10-K
231
Financial Statements
Consolidated Statements of Comprehensive Income
FREDDIE MAC
Consolidated Statements of Comprehensive Income
(In millions, except share-related amounts)
Interest income
Mortgage loans
Investments in securities
Other
Total interest income
Interest expense
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
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
The accompanying notes are an integral part of these consolidated financial statements.
Year Ended December 31,
2016
2015
2017
$63,735
3,415
657
67,807
(53,643)
14,164
84
14,248
341
(1,988)
(18)
1,054
7,480
6,869
(1,098)
(452)
(556)
(2,106)
(189)
(1,340)
(648)
(4,283)
16,834
(11,209)
5,625
(253)
124
62
(67)
$5,558
$5,625
(8,869)
($3,244)
($1.00)
3,234
$61,040
3,855
270
65,165
(50,786)
14,379
803
15,182
(211)
(274)
(191)
(78)
1,254
500
(989)
(489)
(527)
(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
(52,144)
14,946
2,665
17,611
(240)
(2,696)
(292)
508
(879)
(3,599)
(975)
(497)
(455)
(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
FREDDIE MAC | 2017 Form 10-K
232
Financial Statements
Consolidated Balance Sheets
FREDDIE MAC
Consolidated Balance Sheets
(In millions, except share-related amounts)
Assets
Cash and cash equivalents (Notes 3, 14)
Restricted cash and cash equivalents (Notes 3, 14)
Securities purchased under agreements to resell (Notes 3, 10)
Investments in securities, at fair value (Note 7)
Mortgage loans held-for-sale (Notes 3, 4) (includes $20,054 and $16,255 at fair value)
Mortgage loans held-for-investment (Notes 3, 4) (net of allowance for loan losses of $8,966 and $13,431)
Accrued interest receivable (Note 3)
Derivative assets, net (Notes 9, 10)
Deferred tax assets, net (Note 12)
Other assets (Notes 3, 18) (includes $3,353 and $2,408 at fair value)
Total assets
Liabilities and equity
Liabilities
Accrued interest payable (Note 3)
Debt, net (Notes 3, 8) (includes $5,799 and $6,010 at fair value)
Derivative liabilities, net (Notes 9, 10)
Other liabilities (Notes 3, 18)
Total liabilities
Commitments and contingencies (Notes 5, 9 and 16)
Equity (Note 11)
Senior preferred stock (redemption value of $75,336 and $72,336)
Preferred stock, at redemption value
Common stock, $0.00 par value, 4,000,000,000 shares authorized, 725,863,886 shares issued and
650,054,731 shares and 650,046,828 shares outstanding
Additional paid-in capital
Retained earnings (accumulated deficit)
AOCI, net of taxes, related to:
Available-for-sale securities (includes $593 and $782, 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, 75,809,155 shares and 75,817,058 shares
Total equity (See Note 11 for information on our dividend obligation to Treasury)
Total liabilities and equity
As of December 31,
2017
2016
$6,848
2,963
55,903
84,318
34,763
1,836,454
6,355
375
8,107
13,690
$2,049,776
$6,221
2,034,630
269
8,968
2,050,088
72,336
14,109
—
—
(83,261)
662
(356)
83
389
(3,885)
(312)
$2,049,776
$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
$2,023,376
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 | 2017 Form 10-K
As of December 31,
2017
2016
$—
1,774,286
25,753
$1,800,039
$1,720,996
5,030
$1,726,026
$—
1,690,218
32,262
$1,722,480
$1,648,683
4,846
$1,653,529
233
Financial Statements
Consolidated Statements of Equity
FREDDIE MAC
Consolidated Statements of Equity
(In millions)
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
Balance at December 31, 2016
Comprehensive income:
Net income
Other comprehensive income, net of taxes
Comprehensive income
Senior preferred stock dividends declared
Ending balance at December 31, 2017
Shares Outstanding
Senior
Preferred
Stock
Preferred
Stock
Common
Stock
Senior
Preferred
Stock
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
$—
$—
($81,639)
$1,730
($3,885)
$2,651
—
—
—
—
464
464
—
—
—
—
464
464
—
—
—
—
—
—
—
—
650
650
—
—
—
—
650
650
—
—
—
—
—
—
—
—
—
—
—
—
$72,336
$72,336
$14,109
$14,109
—
—
—
—
—
—
—
—
$72,336
$72,336
$14,109
$14,109
—
—
—
—
—
—
—
—
—
—
—
—
$—
$—
—
—
—
—
$—
$—
—
—
—
—
—
—
—
—
$—
$—
—
—
—
—
$—
$—
—
—
—
—
6,376
—
6,376
(5,510)
—
(577)
(577)
—
— 6,376
(577)
—
— 5,799
— (5,510)
($80,773)
$1,153
($3,885)
$2,940
($80,773)
$1,153
($3,885)
$2,940
7,815
—
7,815
(4,983)
($77,941)
($77,941)
5,625
—
5,625
(10,945)
—
(697)
(697)
—
$456
$456
—
(67)
(67)
—
— 7,815
(697)
—
— 7,118
— (4,983)
($3,885)
$5,075
($3,885)
$5,075
— 5,625
(67)
—
— 5,558
— (10,945)
464
650
$72,336
$14,109
$—
$—
($83,261)
$389
($3,885)
($312)
The accompanying notes are an integral part of these consolidated financial statements.
FREDDIE MAC | 2017 Form 10-K
234
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 and basis adjustments
Losses (gains) on extinguishment of debt
(Benefit) provision for credit losses
Losses (gains) on investment activity
Deferred income tax expense (benefit)
Purchases of mortgage loans acquired as held-for-sale
Sales of mortgage loans acquired as held-for-sale
Repayments of mortgage loans acquired as held-for-sale
Payments to servicers for pre-foreclosure expense and servicer incentive fees
Change in:
Accrued interest receivable
Accrued interest payable
Income taxes receivable
Other, net
Net cash provided by (used in) operating activities
Cash flows from investing activities
Purchases of trading securities
Proceeds from sales of trading securities
Proceeds from maturities and repayments of trading securities
Purchases of available-for-sale securities
Proceeds from sales of available-for-sale securities
Proceeds from maturities and repayments 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, swap collateral, and exchange settlement payments, net
Changes in other assets
Net cash provided by investing activities
Cash flows from financing activities
Proceeds from issuance of debt securities of consolidated trusts held by third parties
Repayments and redemptions of debt securities of consolidated trusts held by third parties
Proceeds from issuance of other debt
Repayments of other debt
Payment of cash dividends on senior preferred stock
Changes in other liabilities
Net cash used in financing activities
Net 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 7)
Year Ended December 31,
2017
2016
2015
$5,625
$7,815
$6,376
370
6,038
(8,653)
(341)
(84)
(3,403)
7,773
(64,827)
61,744
306
(377)
(220)
273
1,912
(674)
5,462
(160,333)
150,448
8,570
(10,549)
23,034
11,758
(126,162)
8,883
277,819
6,888
(35,452)
1,861
(4,355)
(538)
(428)
151,444
191,638
(303,142)
613,280
(653,255)
(10,945)
(3)
(162,427)
(5,521)
12,369
$6,848
(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
$63,574
1,872
$60,862
2,324
$61,120
1,095
The accompanying notes are an integral part of these consolidated financial statements.
FREDDIE MAC | 2017 Form 10-K
235
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.
FREDDIE MAC | 2017 Form 10-K
236
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
Change in Estimate
Adoption of Regulatory Guidance on Determining when a Loan is Uncollectible
On January 1, 2015, we adopted regulatory guidance issued by FHFA that establishes guidelines for
adverse classification and identification of specified single-family and multifamily assets, including
guidelines for recognizing charge-offs on certain single-family loans. We analyze loans for collectability
based on several factors, including, but not limited to:
Servicing actions that indicate the potential for near-term loss mitigation, such as whether we have
achieved quality borrower contact;
Credit risk factors, such as whether the loan is in a state with foreclosure practices that prevent
timely resolution of delinquencies; and
Loan characteristics that indicate whether repayment is likely to occur, such as the borrower's
payment history, loan status and historical performance of loans with similar characteristics.
Upon adoption, we changed the timing of when we deem certain single-family loans to be uncollectible,
and we began to charge-off the amount of recorded investment in excess of the fair value of the
underlying collateral for loans that have been deemed uncollectible prior to foreclosure, based on the
factors identified above.
This adoption resulted in a reduction to both the recorded investment of loans, held-for-investment and
our allowance for loan losses of $1.9 billion on January 1, 2015. However, these additional charge-offs
did not have a material impact on our comprehensive income for 2015, as we had already reserved for
these losses in our allowance for loan losses in prior periods.
Consolidation and Equity Method Accounting
For each entity with which we are involved, we determine whether the entity should be consolidated in
our financial statements. We generally consolidate entities in which we have a controlling financial
interest. The method for determining whether a controlling financial interest exists varies depending on
whether the entity is a VIE. For entities that are not VIEs, we hold a controlling financial interest in entities
where we hold a majority of the voting rights or where we are able to exercise control through
substantive participating rights or as a general partner. We do not currently consolidate any entities
which are not VIEs. We use the equity method to account for our interests in entities in which we do not
have a controlling financial interest, but over which we have significant influence.
Cash and Cash Equivalents
Highly liquid investment securities that have an original maturity of three months or less are accounted
for as cash equivalents.
FREDDIE MAC | 2017 Form 10-K
237
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
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 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.
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.
Note
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 10
Note 11
Note 11
Note 12
Note 13
Note 15
Accounting Policy
Variable Interest Entities
Mortgage Loans and Allowance for Loan Losses
Financial Guarantees
Credit Enhancements
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
FREDDIE MAC | 2017 Form 10-K
238
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
Recently Issued Accounting Guidance
Recently Adopted Accounting Guidance
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.
ASU 2016-17,
Consolidation (Topic 810):
Interests Held through
Related Parties That Are
under Common Control
The Board issued 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.
Date of
Adoption
January 1,
2017
Effect on Consolidated Financial
Statements
The adoption of this amendment did
not have a material effect on our
consolidated financial statements.
January 1,
2017
The adoption of this amendment did
not have a material effect on our
consolidated financial statements.
ASU 2017-12, Derivatives
and Hedging (Topic 815)
The amendments in this Update made targeted
improvements to accounting for hedging activities.
The Update changes the recognition and
presentation requirements of hedge accounting
and provides new alternatives on how to measure
and account for certain aspects of hedging
activities.
October 1,
2017
The adoption of the amendments did
not affect the application of hedge
accounting for our existing hedge
strategies; however, we modified the
presentation of hedge results on our
consolidated statements of
comprehensive income and in the
financial statement notes upon
adoption.
Recently Issued Accounting Guidance, Not Yet Adopted Within Our Consolidated Financial Statements
Standard
Description
ASU 2014-09, Revenue
from Contracts with
Customers (Topic 606) and
ASU 2015-14
The amendment requires entities to recognize
revenue to depict the transfer of promised goods
or services to customers in amounts that reflect
the consideration to which the entity expects to be
entitled in exchange for those goods or services.
ASU 2015-14 defers the effective date of ASU
2014-09 for all entities by one year.
Date of
Planned
Adoption
January 1,
2018
Effect on Consolidated Financial
Statements
The adoption of the guidance in Topic
606 will be applied retrospectively. The
adoption of the amendments will not
have a material effect on our
consolidated financial statements or
on our disclosures.
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)
The amendment addresses certain aspects of
recognition, measurement, presentation and
disclosure of financial instruments.
January 1,
2018
The adoption of the amendments will
not 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. The
amendments clarify the implementation guidance
on principal versus agent considerations.
January 1,
2018
The adoption of the guidance in Topic
606 will be applied retrospectively. The
adoption of the amendments will not
have a material effect on our
consolidated financial statements or
on our disclosures.
FREDDIE MAC | 2017 Form 10-K
239
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
Recently Issued Accounting Guidance, Not Yet Adopted Within Our Consolidated Financial Statements
Standard
Description
ASU 2016-10, 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
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.
Date of
Planned
Adoption
January 1,
2018
Effect on Consolidated Financial
Statements
The adoption of the guidance in Topic
606 will be applied retrospectively. The
adoption of the amendments will not
have a material effect on our
consolidated financial statements or
on our disclosures.
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
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)
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.
January 1,
2018
The adoption of the guidance in Topic
606 will be applied retrospectively. The
adoption of the amendments will not
have a material effect on our
consolidated financial statements or
on our disclosures.
Upon adoption, the portion of the cash
payment attributable to the accreted
interest related to zero-coupon debt
will be presented in the operating
activities section, a classification
change from the financing activities
section where this item is currently
presented. As a result, we estimate
that we will reclassify approximately
$1.2 billion and $0.5 billion of cash
payments from financing activities to
operating activities on our consolidated
statements of cash flows for the years
ended December 31, 2017 and 2016,
respectively, upon adoption.
ASU 2016-18, Statement of
Cash Flows (Topic 230):
Restricted Cash (a
consensus of the FASB
Emerging Issues Task
Force)
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.
January 1,
2018
The adoption of the amendments will
not have a material effect on our
consolidated financial statements.
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.
The amendments in this Update allow a
reclassification from accumulated other
comprehensive income to retained earnings for
stranded tax effects resulting from the Tax Cuts
and Jobs Act.
January 1,
2018
The adoption of the guidance in Topic
606 will be applied retrospectively. The
adoption of the amendments will not
have a material effect on our
consolidated financial statements or
on our disclosures.
1Q 2018
The adoption of the amendments will
not have a material effect on our
consolidated financial statements.
ASU 2016-20, Technical
Corrections and
Improvements to Topic 606,
Revenue from Contracts
with Customers
ASU 2018-02, Income
Statement—Reporting
Comprehensive Income
(Topic 220):
Reclassification of Certain
Tax Effects from
Accumulated Other
Comprehensive Income
FREDDIE MAC | 2017 Form 10-K
240
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
Recently Issued Accounting Guidance, Not Yet Adopted Within Our Consolidated Financial Statements
Standard
Description
ASU 2016-02, Leases
(Topic 842)
The amendment addresses the accounting for
lease arrangements.
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.
Date of
Planned
Adoption
January 1,
2019
January 1,
2020
Effect on Consolidated Financial
Statements
We do not expect that the adoption of
this amendment will have a material
effect on our consolidated financial
statements.
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 | 2017 Form 10-K
241
Financial Statements
NOTE 2
Notes to the Consolidated Financial Statements | 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 currently enables us to
maintain our access to the debt markets and to have adequate liquidity to conduct our normal business
activities, although the costs of our debt funding could vary. Our ability to access funds from Treasury
under the Purchase Agreement is critical to keeping us solvent.
Our current business objectives reflect direction we have received from the Conservator (including the
Conservatorship Scorecards). At the direction of the Conservator, we have made changes to certain
business practices that are designed to provide support for the mortgage market in a manner that
serves our public mission and other non-financial objectives but may not contribute to our profitability.
Certain of these objectives are intended to help homeowners and the mortgage market and may help to
mitigate future credit losses. Some of these initiatives 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 has issued annual Conservatorship Scorecards each year between 2014 and 2018.
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;
FREDDIE MAC | 2017 Form 10-K
242
Financial Statements
Notes to the Consolidated Financial Statements | Note 2
Reduce taxpayer risk through increasing the role of private capital in the mortgage market; and
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
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, 2017 and 2018 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 in excess of the applicable Capital
Reserve Amount under the Purchase Agreement (which is $3.0 billion as of January 1, 2018 but will be
reduced to zero if for any reason we do not pay the full dividend requirement in a future period) 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, August 17, 2012, and
December 21, 2017. The amount of available funding remaining under the Purchase Agreement was
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$140.5 billion as of December 31, 2017 and will be reduced to $140.2 billion once the draw request
related to our net worth deficit as of December 31, 2017 is funded. This amount will be further 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 consolidated balance sheet). In addition, the Purchase Agreement requires
Treasury, upon the request of the Conservator, to provide funds to us if the Conservator determines, at
any time, that it will be mandated by law to appoint a receiver for us unless we receive these funds from
Treasury. In exchange for Treasury's funding commitment, we issued to Treasury, as an aggregate initial
commitment fee, 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 cash proceeds or 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.
Under the August 2012 amendment to the Purchase Agreement and the December 2017 Letter
Agreement, for each quarter from January 1, 2013 and thereafter, 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 $0.6 billion for 2017 and, pursuant to the Letter Agreement,
will be $3.0 billion for 2018 and thereafter rather than zero as previously provided. If for any reason we
do not pay the net worth sweep dividend in full for any period, the applicable Capital Reserve Amount
will thereafter be 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.
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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. On December 31,
2017, the aggregate liquidation preference of the senior preferred stock increased by $3.0 billion, or the
amount of dividends we would have paid but for the Letter Agreement, to $75.3 billion. The liquidation
preference will increase to $75.6 billion once the draw request related to our net worth deficit as of
December 31, 2017 is funded and 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.
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:
Pursuant to the Purchase Agreement, the senior preferred stock or the warrant;
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Upon arm's length terms; or
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 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.
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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.
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.
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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 $288.4 billion at December 31, 2017 and was
$253.5 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
immediately preceding calendar year. Our ability to acquire and sell mortgage assets is significantly
constrained by limitations of the Purchase Agreement and those imposed by FHFA.
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, 2017, 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, 2017. Since conservatorship began through
December 31, 2017, we have paid cash dividends of $112.4 billion to Treasury at the direction of the
Conservator.
At December 31, 2017, our liabilities exceeded our assets under GAAP by $312 million. As a result,
FHFA, as Conservator, will submit a draw request, on our behalf, to Treasury under the Purchase
Agreement to eliminate our net worth deficit. Upon the funding of this draw request, the aggregate
liquidation preference of the senior preferred stock will increase to $75.6 billion. Because we had a net
worth deficit at December 31, 2017, no dividend will be paid to Treasury in March 2018.
Additionally, in recent years, the Federal Reserve purchased significant amounts of mortgage-related
securities issued by us, Fannie Mae and Ginnie Mae.
See Note 8 and Note 11 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
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deemed a related party to the U.S. government. During the years ended December 31, 2017, 2016 and
2015, 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 8 and Note 11; 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, 2017, we contributed $102 million of capital to CSS.
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Securitization Activities and Consolidation
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. See Note 5 for additional information on our guarantee activities.
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.
Securitization Activities
PCs
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 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
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 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 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
PC trusts and, therefore, consolidate those trusts.
Loans held by our PC trusts are recognized on our consolidated balance sheets as mortgage loans held-
for-investment. The corresponding 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 PCs as investments in our mortgage-related investments
portfolio. Sales of PCs previously held as investments in our mortgage-related investments portfolio are
accounted for as debt issuances. See Note 4 and Note 8 for additional information on loans and debt
securities of consolidated trusts.
At December 31, 2017 and 2016, we were the primary beneficiary of, and therefore consolidated, PC
trusts with assets totaling $1.8 trillion and $1.7 trillion, respectively. Substantially all of these
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consolidated trusts were single-family PC trusts. During the years ended December 31, 2017 and 2016,
we issued approximately $347.7 billion and $391.5 billion, respectively, of guaranteed 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 multiclass resecuritization trusts is typically the initial design and structuring of
the trust. Substantially all multiclass 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 multiclass 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 multiclass resecuritization trusts and, therefore, do not consolidate those trusts.
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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 multiclass
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 generally record the security as an investment in debt securities rather than
extinguishment of debt since we are generally investing in the debt securities of a non-consolidated
entity. We do not consolidate REMIC or Stripped Giant PC trusts in which we hold variable interests,
as we are not deemed to be the primary beneficiary of the trusts, unless we have the unilateral ability
to collapse the trust. Similarly, sales of REMICs or Stripped Giant PCs previously held as
investments in our mortgage-related investments portfolio are accounted for as sales of investments
in debt securities. See Note 7 for additional information on accounting for investments in debt
securities.
Senior Subordinate Securitization Structures
We are the primary beneficiary of and, therefore, consolidate certain of our single-family senior
subordinate securitization structures because we have both the ability to direct the loss mitigation
activities of the underlying loans and have the obligation to absorb credit losses through our guarantee
of the issued senior securities. As a result, we consolidated certain of the trusts used in these senior
subordinate securitization structures with underlying assets totaling $3.6 billion and $1.5 billion, at
December 31, 2017 and 2016, respectively.
We do not consolidate the other single-family senior subordinate securitization structures as we do not
have the ability to direct the loss mitigation activities of the underlying loans, which is the most
significant activity affecting the economic performance of the VIE. For those securitizations where we
sell loans to the VIE, we derecognize the transferred loans and account for our guarantee to the non-
consolidated VIE. We account for our investments in the beneficial interests issued by the non-
consolidated VIE as investments in debt securities. During 2017 and 2016, we issued approximately
$6.8 billion and $0.8 billion, respectively, of guaranteed securities in these senior subordinate
securitization structures for which a guarantee asset and guarantee obligation were generally
recognized.
K Certificates
In a K Certificate transaction, we sell multifamily loans to a non-Freddie Mac securitization trust that
issues senior, mezzanine and subordinate 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 mezzanine or subordinate 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
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delinquent loans from the securitization trust are held by the investor in the most subordinate remaining
securities issued by the non-Freddie Mac trust, and therefore 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 2017 and 2016, we issued approximately $48.5 billion and $40.6 billion, respectively, of K
Certificates for which a guarantee asset and guarantee obligation were recognized.
SB Certificates
In SB Certificate transactions, we securitize multifamily small balance loans using a non-Freddie Mac SB
Certificate trust that issues senior classes of securities that we guarantee, as well as subordinated
classes of securities that we do not guarantee. Similar to our K Certificate transactions, we are not the
primary beneficiary of and, therefore, do not consolidate our SB Certificate trusts, as we do not have the
ability to direct loss mitigation activities of the underlying loans, which is the most significantly activity
affecting the economic performance of the VIE.
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 2017 and 2016, we issued approximately $4.9 billion and $3.5 billion, respectively, of SB
Certificates for which a guarantee asset and guarantee obligation were recognized.
Other Securitization Products
We are the primary beneficiary of and, therefore, consolidate the trusts used to issue certain of our other
securitization products, including trusts that issue multifamily K Certificates without subordination and
KT Certificates, as well as certain other single-family securitization products, because we have the
ability to direct the activities that most significantly affect the economic performance of the trusts and
we have the obligation to absorb credit losses through our guarantee of some or all of the issued
securities. As a result, we consolidated trusts used to issue certain of our other securitization products
with underlying assets totaling $8.5 billion and $7.5 billion at December 31, 2017 and 2016, respectively.
We do not consolidate the trusts used to issue other securitization products that do not meet these
conditions, including those trusts that issue multifamily M Certificates, ML Certificates and Q
Certificates. For those products, we account for our guarantee to the non-consolidated VIE. During 2017
and 2016, we issued approximately $5.6 billion and $0.5 billion, respectively, of these securities for
which a guarantee asset and guarantee obligation were generally recognized.
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Consolidated VIEs
We determined we are the primary beneficiary of the VIEs used to issue our PCs, certain senior
subordinate securitization structures, and certain other securitization products as previously discussed
and, therefore, consolidate these VIEs. Our exposure on debt securities of consolidated trusts
represents our liability to third parties that hold beneficial interests in our consolidated securitization
trusts.
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.
The table below presents 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:
Cash and cash equivalents
Restricted cash and cash equivalents
Securities purchased under agreements to resell
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
As of December 31, 2017 As of December 31, 2016
$—
518
16,750
1,774,286
5,747
2,738
$1,800,039
$5,028
1,720,996
2
$1,726,026
$—
9,431
13,550
1,690,218
5,454
3,827
$1,722,480
$4,846
1,648,683
—
$1,653,529
FREDDIE MAC | 2017 Form 10-K
254
Financial Statements
Notes to the Consolidated Financial Statements | Note 3
Non-Consolidated VIEs
Our involvement with VIEs for which we are not the primary beneficiary may take the form of purchasing
an investment in these entities or providing a guarantee to these entities. Our maximum exposure to loss
for those VIEs where 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 where 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. See Note 6
for additional information on 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 non-consolidated VIEs
with which we were involved in the design and creation and have a significant continuing involvement,
as well as our maximum exposure to loss.
(In millions)
Assets and Liabilities Recorded on our Consolidated Balance Sheets(1)
As of December 31, 2017
As of December 31, 2016
Assets:
Investments in securities
Accrued interest receivable
Derivative assets, net
Other assets
Liabilities:
Other liabilities
Maximum Exposure to Loss(2)(3)
Total Assets of Non-Consolidated VIEs(3)
$51,494
233
7
2,591
2,489
$200,196
$232,762
$58,995
254
—
1,708
1,604
$150,227
$175,713
(1)
Includes our variable interests in REMICs and Stripped Giant PCs, K Certificates, SB Certificates, certain senior subordinate securitization
structures and certain other securitization products.
(2) Our maximum exposure to loss includes the guaranteed UPB of assets held by the non-consolidated VIEs as well as the UPB of unguaranteed
securities that we acquired from these securitization transactions.
(3) Our maximum exposure to loss and total assets of non-consolidated VIEs exclude our investments in and obligations to REMICs and Stripped Giant
PCs, because we already consolidate the underlying 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 certain non-Freddie Mac mortgage-related securities,
purchases of multifamily loans, guarantees of multifamily housing revenue bonds, as a derivative
counterparty or through other activities. To the extent that we were not involved in the design or creation
of these VIEs, they are excluded from the table above. Our interests in these VIEs are generally passive
in nature and are not expected to result in us obtaining a controlling financial interest in these VIEs in the
future. As a result, we do not consolidate these VIEs and we account for our interests in these VIEs in
the same manner that we account for our interests in other third-party transactions. See Note 7 for
additional information regarding our investments in non-Freddie Mac mortgage-related securities. See
Note 4 for more information regarding multifamily loans.
FREDDIE MAC | 2017 Form 10-K
255
Financial Statements
NOTE 4
Notes to the Consolidated Financial Statements | 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,
2017 and 2016.
(In millions)
Held-for sale:
Single-family
Multifamily
Total UPB
Cost basis and fair value adjustments, net
Total held-for-sale loans, net
Held-for-investment:
Single-family
Multifamily
Total UPB
Cost basis adjustments
Allowance for loan losses
Total held-for-investment loans, net
December 31, 2017
December 31, 2016
Held by
Freddie Mac
Held by
consolidated
trusts
Total
Held by
Freddie Mac
Held by
consolidated
trusts
Total
$17,039
20,537
37,576
(2,813)
34,763
51,893
17,702
69,595
(2,148)
(5,279)
62,168
$—
$17,039
—
—
—
—
20,537
37,576
(2,813)
34,763
1,742,736
1,794,629
3,747
21,449
$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
1,746,483
1,816,078
108,913
1,662,639
1,771,552
31,490
(3,687)
29,342
(8,966)
1,774,286
1,836,454
(3,755)
(10,461)
94,697
30,549
(2,970)
26,794
(13,431)
1,690,218
1,784,915
Total loans, net
$96,931
$1,774,286
$1,871,217
$112,785
$1,690,218
$1,803,003
On February 2, 2017, we started applying fair value hedge accounting to certain single-family mortgage
loans. The fair value hedge accounting related loan basis adjustments are included in the table above.
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, upfront
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
FREDDIE MAC | 2017 Form 10-K
256
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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.
During 2017 and 2016, we purchased $343.0 billion and $388.9 billion, respectively, in UPB of single-
family loans, and $5.3 billion and $6.1 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 2017 and 2016, we sold $61.9 billion and $49.9 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 $8.7 billion and $4.2 billion in UPB of seasoned single-family loans during 2017 and 2016,
respectively.
In connection with our efforts to sell certain of our single-family loans, we reclassified $26.2 billion and
$4.7 billion in UPB of seasoned single-family loans from held-for-investment to held-for-sale in 2017 and
2016, respectively. In addition, we reclassified $1.6 billion in UPB of multifamily mortgage loans from
held-for-investment to held-for-sale in 2017. We did not reclassify any multifamily mortgage loans in
2016. For additional information regarding the fair value of our loans classified as held-for-sale, see
Note 15.
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 | 2017 Form 10-K
257
Financial Statements
Credit Quality
Notes to the Consolidated Financial Statements | Note 4
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 may
negatively affect the borrower’s ability to refinance (outside of HARP) or to sell the property for an
amount at or above the balance of the outstanding 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, 2017 and 2016, based on data collected by us at loan delivery, approximately 9% and
11%, 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 14.
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, 2017
Current LTV Ratio
> 80 to 100
> 100(1)
Total
As of December 31, 2016
Current LTV Ratio
> 80 to 100
> 100(1)
Total
$1,240,224
$214,177
$13,303 $1,467,704
$1,120,722
$236,111
$30,063
$1,386,896
270,266
48,596
21,013
7,351
2,963
4,256
381
28
1,429
277,998
274,967
11,016
51,587
26,698
52,319
26,293
2,955
9,392
887
85
4,634
286,870
55,359
40,319
$1,769,444
Total single-family loans
$1,580,099
$228,747
$15,141 $1,823,987
$1,474,301
$259,474
$35,669
(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
8.43% and 6.80% as of December 31, 2017 and 2016, respectively.
(2) The majority of our loan modifications result in new terms that include fixed interest rates after modification. As of December 31, 2017 and 2016,
we have categorized UPB of approximately $22.2 billion and $32.0 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 | 2017 Form 10-K
258
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, 2017 and 2016. 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)
As of December 31, 2017 As of December 31, 2016
Pass
Special mention
Substandard
Doubtful
Total
$20,963
301
169
—
$21,433
$27,830
502
570
—
$28,902
(1) A loan categorized as: "Pass" is current and adequately protected by the current financial strength and debt service capacity of the borrower; In
2017, "Special mention" has administrative issues that may affect future repayment prospects but do not have current credit weaknesses, while
in 2016, "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 | 2017 Form 10-K
259
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
Mortgage Loan Performance
The following tables present the recorded investment of our single-family and multifamily loans, held-for-
investment, by payment status.
(In millions)
Single-family:
As of December 31, 2017
One
Month
Past Due
Two
Months
Past Due
Three Months or
More Past Due,
or in Foreclosure(1)
Current
Total
Non-accrual
20 and 30-year or more, amortizing fixed-rate
$1,431,342
$18,297
$5,660
$12,405
$1,467,704
$12,401
15-year amortizing fixed-rate
Adjustable-rate
Alt-A, interest-only and option ARM
Total single-family
Total multifamily
275,864
50,915
23,235
1,288
383
1,297
1,781,356
21,265
21,414
—
290
84
509
6,543
—
556
205
1,657
277,998
51,587
26,698
14,823
1,823,987
19
21,433
556
205
1,656
14,818
64
Total single-family and multifamily
$1,802,770
$21,265
$6,543
$14,842
$1,845,420
$14,882
(In millions)
Single-family:
As of December 31, 2016
One
Month
Past Due
Two
Months
Past Due
Three Months or
More Past Due,
or in Foreclosure(1)
Current
Total
Non-accrual
20 and 30-year or more, amortizing fixed-rate
$1,354,511
$16,645
$4,865
$10,875
$1,386,896
$10,868
15-year amortizing fixed-rate
Adjustable-rate
Alt-A, interest-only and option ARM
Total single-family
Total multifamily
285,373
54,738
35,994
1,010
354
1,748
1,730,616
19,757
28,902
—
178
77
650
5,770
—
309
190
1,927
286,870
55,359
40,319
13,301
1,769,444
—
28,902
309
190
1,927
13,294
89
Total single-family and multifamily
$1,759,518
$19,757
$5,770
$13,301
$1,798,346
$13,383
(1)
Includes $4.1 billion and $5.3 billion of loans that were in the process of foreclosure as of December 31, 2017 and 2016, 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
$6.3 billion and $6.8 billion in UPB of loans from PC trusts (or purchased delinquent loans associated
with other mortgage-related guarantees) during the years ended December 31, 2017 and 2016,
respectively.
FREDDIE MAC | 2017 Form 10-K
260
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, 2017
December 31, 2016
1.16%
81,668
1.43%
23,275
0.53%
16,259
1.08%
116,662
0.06%
$24
0.01%
$16
0.02%
$40
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) 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 Note 6 for additional information on our credit enhancements.
(4) Multifamily delinquency performance is based on the 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 is being replaced with the high LTV relief refinance (Enhanced Relief
RefinanceSM) program, which will be available in January 2019 for loans originated on or after October 1,
2017. This program provides liquidity for borrowers who are current on their mortgages but are unable to
refinance because their LTV ratios exceed our standard refinance limits. In addition, the HARP program
has been extended for applications through December 31, 2018 to ensure that borrowers who have a
high LTV ratio and are eligible for HARP will continue to have a refinance option.
FREDDIE MAC | 2017 Form 10-K
261
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, senior subordinate securitization structures, other
securitization products and other mortgage-related guarantees.
A significant portion of the unsecuritized single-family loans on our consolidated balance sheets include
seriously delinquent and TDR loans that we previously removed from our PC pools. These seriously
delinquent and TDR loans typically have a higher associated allowance for loan loss than loans that
remain in consolidated trusts.
FREDDIE MAC | 2017 Form 10-K
262
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
The table below presents our loan loss reserves activity.
Year Ended December 31,
2017
2016
Allowance for Loan Losses
Held by
Freddie Mac
Held By
Consolidated
Trusts
Reserve
for
Guarantee
Losses
Allowance for Loan Losses
Total
Held by
Freddie Mac
Held By
Consolidated
Trusts
Reserve
for
Guarantee
Losses
Total
$10,443
(1,447)
(4,939)
419
540
235
$2,968
1,350
(108)
6
(540)
4
$52
$13,463
$12,517
$2,775
$56
$15,348
—
(4)
—
—
—
(97)
(5,051)
425
—
239
(1,384)
(1,757)
487
248
332
599
(173)
10
(248)
5
4
(8)
—
—
—
(781)
(1,938)
497
—
337
$5,251
$3,680
$48
$8,979
$10,443
$2,968
$52
$13,463
$18
15
(4)
—
(1)
—
$28
$2
4
—
—
1
—
$7
$15
$35
(6)
—
—
—
—
$9
13
(4)
—
—
—
$44
$38
(17)
(2)
—
(1)
—
$18
$1
—
—
—
1
—
$2
$20
(5)
—
—
—
—
$15
$59
(22)
(2)
—
—
—
$35
$10,461
$2,970
$67
$13,498
$12,555
$2,776
$76
$15,407
(1,432)
(4,943)
419
539
235
1,354
(108)
6
(539)
4
(6)
(4)
—
—
—
(84)
(5,055)
425
—
239
(1,401)
(1,759)
487
247
332
599
(173)
10
(247)
5
(1)
(8)
—
—
—
(803)
(1,940)
497
—
337
$5,279
$3,687
$57
$9,023
$10,461
$2,970
$67
$13,498
(In millions)
Single-family:
Beginning balance
Provision (benefit) for credit
losses
Charge-offs(1)
Recoveries
Transfers, net(2)
Other(3)
Ending balance
Multifamily:
Beginning balance
Provision (benefit) for credit
losses
Charge-offs(1)
Recoveries
Transfers, net(2)
Other(3)
Ending balance
Total:
Beginning balance
Provision (benefit) for credit
losses
Charge-offs(1)
Recoveries
Transfers, net(2)
Other(3)
Ending balance
(1) The year ended December 31, 2016 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. The year ended December 31,
2017 includes charge-offs of $3.8 billion related to the transfer of loans from held-for-investment to held-for-sale.
(2) Relates to removal of delinquent single-family loans from consolidated trusts and resecuritization after such removal.
(3) Primarily includes capitalization of past due interest on modified loans.
FREDDIE MAC | 2017 Form 10-K
263
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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:
Twelve months of sales experience realized on our distressed property dispositions; and
Twelve months of pre-foreclosure expenses on our distressed properties, including REO, short sales
and third-party sales.
Our single-family loan loss severity estimate also captures expectations about recoveries from primary
mortgage insurance or from seller/servicers due to repurchases. We use historical trends in home prices
in our single-family loan loss reserve process, primarily through the use of current LTV ratios in our
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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
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 certain senior subordinate securitization structures) 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
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amortizing payments of three months or less to be insignificant. A concession typically includes one or
more of the following being granted to the borrower:
A trial period where the expected permanent modification will change our expectation of collecting
all amounts due at the original contract rate;
A delay in payment that is more than insignificant;
A reduction in the contractual interest rate;
Interest forbearance for a period of time that is more than insignificant or forgiveness of accrued but
uncollected interest amounts;
Principal forbearance that is more than insignificant; and
Discharge of the borrower’s obligation in Chapter 7 bankruptcy.
The table below presents the volume of single-family and multifamily loans that were newly classified as
TDRs during the years ended December 31, 2017 and 2016, 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,
2017
2016
Number of
Loans
Post-TDR
Recorded
Investment
Number of
Loans
Post-TDR
Recorded
Investment
33,745
4,569
892
2,784
41,990
1
41,991
$4,818
356
128
495
5,797
—
$5,797
35,503
4,623
969
3,115
44,210
2
44,212
$5,092
338
140
548
6,118
8
$6,126
(1) The pre-TDR recorded investment for single-family loans initially classified as TDR during the years ended December 31, 2017 and 2016 was $5.8
billion and $6.2 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.
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(Dollars in millions)
Single-family
Year Ended December 31,
2017
2016
Number of
Loans
Post-TDR
Recorded
Investment(1)
Number of
Loans
Post-TDR
Recorded
Investment(1)
20 and 30-year or more, amortizing fixed-rate
13,973
$2,231
16,139
$2,520
15-year amortizing fixed-rate
Adjustable-rate
Alt-A, interest-only and option ARM
Total single-family
Multifamily(2)
720
225
1,254
16,172
—
57
33
253
$2,574
$—
813
277
1,535
18,764
—
66
41
305
$2,932
$—
(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.
(2) The post-TDR recorded investment is not meaningful.
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, 2017 and 2016, 7,090 and 8,083, respectively, of such loans (with a post-TDR
recorded investment of $0.9 billion and $1.0 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, 2017 and 2016, 867 and 1,154, respectively, of such loans (with a post-TDR
recorded investment of $0.1 billion in both periods) 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.
Approximately 37% and 43% of single-family loan modifications completed during 2017 and 2016,
respectively, that were classified as TDRs involved interest rate reductions and, in certain cases, term
extensions. Approximately 14% and 16% of single-family loan modifications completed during 2017 and
2016, respectively, that were classified as TDRs involved principal forbearance in addition to interest rate
reductions and, in certain cases, term extensions. During 2017 and 2016, the average term extension
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was 176 months and 177 months, respectively, and the average interest rate reduction was 0.6% and
0.8%, respectively, on completed single-family loan modifications classified as TDRs.
Substantially all of our completed single-family loan modifications classified as a TDR during 2017
resulted in a modified loan with a fixed interest rate. However, many of these fixed-rate loans include
provisions for the reduced interest rates to remain fixed for the first five years of the modification and
then increase at a rate of up to one percent per year until the interest rate has been adjusted to the
market rate that was in effect at the time of the modification.
Multifamily Loans
Multifamily impaired loans include TDRs, loans three monthly payments or more past due and loans that
are deemed impaired based on management judgment. Factors considered by management in
determining whether a loan is impaired include the underlying property’s operating performance as
represented by its current DSCR, available credit enhancements, current LTV ratio, management of the
underlying property and the property’s geographic location.
Multifamily loans are generally measured individually for impairment based on the fair value of the
underlying collateral, as reduced by estimated disposition costs, as the repayment of these loans is
generally provided from the cash flows of the underlying collateral and any associated credit
enhancement. Except for cases of fraud and certain other types of borrower defaults, most multifamily
loans are non-recourse to the borrower. As a result, the cash flows of the underlying property (including
any associated credit enhancements) serve as the source of funds for repayment of the loan. Interest
income recognition on multifamily impaired loans is subject to our non-accrual policy as discussed in
Interest Income above.
The assessment as to whether a multifamily loan restructuring is considered a TDR contemplates the
unique facts and circumstances of each loan. This assessment considers qualitative factors such as
whether the borrower’s modified interest rate is consistent with that of a non-troubled 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.
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Financial Statements
Impaired Loans
Notes to the Consolidated Financial Statements | Note 4
The tables below present the UPB, recorded investment, the related allowance for loan losses, average
recorded investment and interest income recognized for individually impaired loans.
(In millions)
Single-family —
With no specific allowance recorded:(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 with no specific allowance recorded
With 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 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
With specific allowance recorded
Total multifamily
Balance at December 31, 2017
Balance at December 31, 2016
UPB
Recorded
Investment
Associated
Allowance
UPB
Recorded
Investment
Associated
Allowance
$3,768
24
259
1,558
5,609
47,897
752
232
7,407
56,288
51,665
776
491
8,965
61,897
106
35
141
$2,908
21
256
1,297
4,482
46,783
757
228
6,987
54,755
49,691
778
484
8,284
59,237
97
35
132
N/A
N/A
N/A
N/A
N/A
($5,505)
(24)
(14)
(1,087)
(6,630)
(5,505)
(24)
(14)
(1,087)
(6,630)
N/A
(7)
(7)
$4,963
31
292
1,935
7,221
67,853
847
319
12,699
81,718
72,816
878
611
14,634
88,939
321
44
365
$3,746
26
289
1,561
5,622
66,143
851
312
12,105
79,411
69,889
877
601
13,666
85,033
308
42
350
N/A
N/A
N/A
N/A
N/A
($9,678)
(25)
(19)
(2,258)
(11,980)
(9,678)
(25)
(19)
(2,258)
(11,980)
N/A
(9)
(9)
Total single-family and multifamily
$62,038
$59,369
($6,637)
$89,304
$85,383
($11,989)
Referenced footnotes are included after the next table.
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Notes to the Consolidated Financial Statements | Note 4
(In millions)
Single-family —
With no specific allowance recorded:(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 with no specific allowance recorded
With 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 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
With specific allowance recorded
Total multifamily
Year Ended December 31,
2017
2016
Average
Recorded
Investment
Interest
Income
Recognized
Interest
Income
Recognized On
Cash Basis(3)
Average
Recorded
Investment
Interest
Income
Recognized
Interest
Income
Recognized On
Cash Basis(3)
$3,556
25
292
1,471
5,344
44,057
599
261
7,366
52,283
47,613
624
553
8,837
57,627
286
45
331
$399
1
11
110
521
2,513
32
9
378
2,932
2,912
33
20
488
3,453
9
1
10
$16
—
—
5
21
248
6
3
33
290
264
6
3
38
311
3
1
4
$4,033
33
259
1,417
5,742
68,402
884
384
12,916
82,586
72,435
917
643
14,333
88,328
356
63
419
$447
5
9
117
578
2,668
39
14
437
3,158
3,115
44
23
554
3,736
15
3
18
$14
—
—
3
17
251
7
3
34
295
265
7
3
37
312
4
2
6
Total single-family and multifamily
$57,958
$3,463
$315
$88,747
$3,754
$318
(1)
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.
(2) Consists primarily of loans classified as TDRs.
(3) Consists of income recognized during the period related to loans on non-accrual status.
The table below presents our allowance for loan losses and our recorded investment in loans, held-for-
investment, by impairment evaluation methodology.
(In millions)
Recorded investment:
Collectively evaluated
Individually evaluated
Total recorded investment
Ending balance of the allowance for loan losses:
Collectively evaluated
Individually evaluated
Total ending balance of the allowance
December 31, 2017
December 31, 2016
Single-family Multifamily
Total
Single-family Multifamily
Total
$1,764,750
59,237
1,823,987
$21,301
132
$1,786,051
59,369
$1,684,411
85,033
$28,552
350
$1,712,963
85,383
21,433
1,845,420
1,769,444
28,902
1,798,346
(2,301)
(6,630)
(8,931)
(28)
(7)
(35)
(2,329)
(6,637)
(8,966)
(1,431)
(11,980)
(13,411)
(11)
(9)
(20)
(1,442)
(11,989)
(13,431)
Net investment in loans
$1,815,056
$21,398
$1,836,454
$1,756,033
$28,882
$1,784,915
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
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Notes to the Consolidated Financial Statements | Note 4
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 7.8% and 9.9%
of the recorded investment in such loans at December 31, 2017 and 2016, 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, 2017 and 2016.
Loan Reclassifications
On January 1, 2017, we elected a new accounting policy for loan reclassifications from held-for-
investment to held-for-sale. Under the new policy, when we reclassify (transfer) a loan from held-for-
investment to held-for-sale, we charge off the entire difference between the loan’s recorded investment
and its fair value if the loan has a history of credit-related issues. Expenses related to property taxes and
insurance are included as part of the charge-off. If the charge-off amount exceeds the existing loan loss
reserve amount, an additional provision for credit losses is recorded. Any declines in loan fair value after
the date of transfer will be recognized as a valuation allowance, with an offset recorded to other income
(loss). This new policy election was applied prospectively, as it was not practical to apply it
retrospectively.
The new policy election did not affect our net income; however, it affected where the loan
reclassifications from held-for-investment to held-for-sale were recorded in our consolidated statements
of comprehensive income. Prior to the policy change, upon a loan reclassification from held-for-
investment to held-for-sale, we reversed the related allowance for loan losses to the benefit (provision)
for credit losses, recorded a valuation allowance for any difference between the loan's recorded
investment and its fair value to other income (loss), and recorded property taxes and insurance
expenses related to the transferred loans in other expense. Under the new policy, benefit (provision) for
credit losses is the only line item affected when a transfer occurs.
Non-Cash Investing and Financing Activities
During the years ended December 31, 2017, 2016 and 2015, we acquired $229.2 billion, $234.6 billion
and $237.5 billion, respectively, of loans held-for-investment in exchange for the issuance of debt
securities of consolidated trusts in guarantor swap transactions. We received approximately $35.9
billion, $30.3 billion and $11.6 billion of loans from sellers during the years ended December 31, 2017,
2016 and 2015, respectively, to satisfy advances to lenders that were recorded in other assets on our
consolidated balance sheets. These loans were primarily included in the guarantor swap transactions.
In addition, we acquire REO properties through foreclosure sales or by deed in lieu of foreclosure. These
acquisitions represent non-cash transfers. During the years ended December 31, 2017, 2016 and 2015,
we had transfers of $1.1 billion, $1.5 billion and $2.0 billion, respectively, from loans to REO.
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Financial Statements
NOTE 5
Notes to the Consolidated Financial Statements | Note 5
Guarantee Activities
We generate revenue through our guarantee activities by agreeing to absorb the credit risk associated
with certain financial instruments that are owned or held by third parties. In exchange for providing this
guarantee, we receive an ongoing guarantee fee that is commensurate with the risks assumed and that
will, over the long-term, provide us with cash flows that are expected to exceed the credit-related and
administrative expenses of the underlying financial instruments. The profitability of our guarantee
activities may vary and will be dependent on our guarantee fee and the actual credit performance of the
underlying financial instruments that we have guaranteed.
Guarantees to consolidated entities are eliminated in consolidation and therefore are not separately
recognized on our consolidated balance sheets. The accounting treatment for guarantees provided to
non-consolidated entities or other third parties will depend on whether the guarantee contract qualifies
as a financial guarantee.
If the guarantee contract qualifies as a financial guarantee and exposes us to incremental credit risk, we
will 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.
If the guarantee contract provided to non-consolidated entities does not qualify as a financial guarantee,
that contract will generally be accounted for as a credit derivative and measured at fair value on our
consolidated financial statements.
Guarantee Activities
Our principal guarantee activities include the following:
Securitization Activity Guarantees
For substantially all of our securitization transactions, we guarantee the principal and interest payments
on some or all of the issued beneficial interests. Typically, these guarantees will cover the senior classes
of beneficial interests issued by the securitization trust(s). Securitization activity guarantees provided to
non-consolidated trusts will generally be accounted for, and qualify as, financial guarantees. Our
maximum exposure on these guarantees is generally limited to the UPB of the beneficial interests that
we have guaranteed.
Other Mortgage-related Guarantees
In certain circumstances, we provide a guarantee of mortgage-related assets held by third parties, in
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Notes to the Consolidated Financial Statements | Note 5
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 2017 and 2016, we
guaranteed $0.5 billion and $3.6 billion, respectively, of loans under new long-term standby
commitments; and
Guarantees of multifamily bonds, including guarantees that require us to advance funds to enable
others to repurchase any tendered tax-exempt and related taxable bonds that are unable to be sold.
The vast majority of these guarantees were guarantees of multifamily housing revenue bonds that
were issued by HFAs. No advances under these guarantees were outstanding at both December 31,
2017 and 2016. During 2017 and 2016, we guaranteed $1.1 billion and $1.7 billion, respectively, of
multifamily bonds.
Our other mortgage-related guarantees will generally be accounted for, and qualify as, financial
guarantees. Our maximum exposure on these guarantees is limited to the UPB of the mortgage-related
assets that we have guaranteed.
Other Guarantees Measured at Fair Value
Other guarantees that do not qualify as financial guarantees are generally accounted for as derivative
instruments and measured at fair value. These guarantees primarily include:
Certain guarantees related to our securitization activities and other mortgage-related guarantees.
Certain market value guarantees, including written options and written swaptions.
Guarantees of third party derivative instruments.
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 16 for
information on ongoing litigation. These indemnification guarantees will generally be accounted for and
qualify as financial guarantees. The recognized liabilities on our consolidated balance sheets related to
indemnifications were not significant at both December 31, 2017 and 2016.
The table below shows our maximum exposure, recognized liability and maximum remaining term of our
recognized guarantees to non-consolidated VIEs and other third parties. This table does not include our
unrecognized 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, including possible recoveries under credit
enhancement arrangements. See Note 6 for additional information on our credit enhancement
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Financial Statements
arrangements.
(Dollars in millions, terms in years)
Single-Family:
Securitization activity guarantees
Other mortgage-related guarantees
Total single-family
Multifamily:
Securitization activity guarantees
Other mortgage-related guarantees
Total multifamily
Other guarantees measured at fair value
Notes to the Consolidated Financial Statements | Note 5
As of December 31, 2017
As of December 31, 2016
Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term
Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term
$10,817
6,264
$17,081
$188,768
9,888
$198,656
$9,661
$120
190
$310
$2,305
466
$2,771
$141
40
31
40
36
28
$5,016
6,713
$11,729
$145,211
9,732
$154,943
$6,396
$22
206
$228
$1,510
473
$1,983
$127
40
32
39
34
29
(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 other guarantees measured at fair value, this amount represents the notional value if it relates to our market value guarantees or
guarantees of third party derivative instruments; or the UPB if it relates to a guarantee of a mortgage-related asset. For certain of our other
guarantees measured at fair value, our exposure may be unlimited. We generally reduce our exposure to these guarantees with unlimited exposure
through separate contracts with third parties.
(2) For securitization activity guarantees 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 $57 million and $67 million as of December 31, 2017 and
2016, respectively, and is included within other liabilities on our consolidated balance sheets. For other guarantees measured at fair value, this
amount represents the fair value of the contract.
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Financial Statements
NOTE 6
Notes to the Consolidated Financial Statements | Note 6
Credit Enhancements
In connection with many of our mortgage loans, securitization activity guarantees, other mortgage-
related guarantees and other credit risk transfer transactions, we obtain various forms of credit
enhancements that reduce our exposure to credit losses. These credit enhancements may be attached
to the underlying mortgage loans, freestanding or embedded in debt instruments.
Attached Credit Enhancements
Attached credit enhancements are obtained contemporaneously with, and in contemplation of, the
origination of the underlying mortgage loans. These credit enhancements are considered attached, as
they effectively travel with the loan upon sale. Attached credit enhancements include primary mortgage
insurance that provides us with loan-level protection up to a specified amount.
Expected recoveries from attached credit enhancements are considered in determining the allowance
for loan losses, resulting in a reduction in the recognized provision for credit losses by the amount of the
expected credit enhancement recoveries. See Note 4 for additional information concerning the
determination of our loan loss reserves.
The table below presents the total current and protected UPB and maximum coverage provided by our
attached credit enhancements. For information about counterparty credit risk associated with mortgage
insurers, see Note 14.
(In millions)
Single-family:
As of December 31, 2017
As of December 31, 2016
Total Current
and Protected
UPB(1)
Maximum
Coverage(2)
Total Current
and Protected
UPB(1)
Maximum
Coverage(2)
Primary mortgage insurance
$334,189
$85,429
$291,217
$74,345
(1) Underlying loans may be covered by more than one form of credit enhancement, including freestanding credit enhancements and debt with
embedded credit enhancements.
(2) Represents the remaining amount of loss recovery that is available subject to the terms of counterparty agreements.
Freestanding Credit Enhancements
Freestanding credit enhancements are contracts that are entered into separately from the origination of
the mortgage loans or entered into in conjunction with some other transaction and are legally detachable
and separately exercisable. Freestanding credit enhancements are accounted for separately from the
underlying mortgage loans.
In connection with our securitization activity guarantees, we obtain freestanding credit enhancement
through the creation of unguaranteed subordinated securities. In these transactions, the securities that
are subordinate to our guarantee provide protection by absorbing first losses prior to us having to
perform on our guarantee of the senior securities. We recognize a reserve for guarantee losses when it is
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probable that a loss has been incurred under our guarantee, which occurs only when losses exceed
subordination.
ACIS transactions are insurance policies we purchase, generally underwritten by a group of insurers and
reinsurers, that provide credit protection for certain specified credit events that occur on a reference
pool of single-family mortgage loans. When specific credit events occur, we receive compensation from
the insurance policy up to an aggregate limit 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. As of December 31, 2017 and 2016, our counterparties posted collateral on our ACIS
transactions of $1.1 billion and $877 million, respectively.
Under the ACIS contracts, we pay insurers and reinsurers direct premiums for insurance coverage. Each
month, we accrue for our obligation to make such payments for all tranches covered by the ACIS
contracts. Expected recoveries for credit losses covered under the ACIS contracts are recognized
separately in other assets on our consolidated balance sheets, with an offset to other income when
realization of our claims for recovery is deemed probable.
We also have various other credit enhancements that provide credit protection on our single-family
loans, where we recognize a separate credit enhancement asset in other assets on our consolidated
balance sheets upon acquisition of coverage. If the coverage is acquired as part of a transaction in
which we also acquire mortgage loans, the credit enhancement asset is recognized based on the
relative fair values of the consideration paid for the mortgage loan and the credit enhancement. If the
coverage is acquired as a standalone transaction, the credit enhancement asset is recognized at cost.
Subsequent accounting for credit enhancement assets and expected recoveries assets are the same as
for ACIS transactions.
The Multifamily segment also has various other credit enhancements, primarily related to our mortgage
loans, certain other securitization products and other mortgage-related guarantees, in the form of
collateral posting requirements, indemnification, bond insurance, recourse and other similar
arrangements. These credit enhancements, along with the proceeds received from the sale of the
underlying mortgage collateral, are designed to recover all or a portion of our losses on our mortgage
loans or the amounts paid under our financial guarantee contracts. Our historical losses paid under our
guarantee contracts and related recoveries pursuant to these agreements have not been significant and
therefore these other types of credit enhancements are excluded from the table below.
The table below presents the total current and protected UPB and maximum amounts of potential loss
recovery related to our single-family and multifamily freestanding credit enhancements.
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(In millions)
Single-family:
Subordination (non-consolidated VIEs)
ACIS
Other(3)
Total Single-family
Multifamily:
Subordination (non-consolidated VIEs)
Other(4)
Total Multifamily
Total Single-family and Multifamily freestanding credit enhancements
As of December 31, 2017
As of December 31, 2016
Total Current
and Protected
UPB(1)
Maximum
Coverage(2)
Total Current
and Protected
UPB(1)
Maximum
Coverage(2)
$8,953
617,730
15,975
187,299
1,833
$1,734
6,736
6,479
14,949
30,689
726
31,415
$46,364
$2,701
453,670
12,827
143,802
1,159
$522
5,355
7,373
13,250
24,522
701
25,223
$38,473
(1) Underlying loans may be covered by more than one form of credit enhancement, including attached credit enhancements and debt with embedded
credit enhancements. For subordination, total current and protected UPB represents the UPB of the guaranteed securities.
(2) For subordination, maximum coverage represents the UPB of the securities that are subordinate to our guarantee and held by third parties. For all
other freestanding credit enhancements, maximum coverage represents the remaining amount of loss recovery that is available subject to the
terms of counterparty agreements.
(3)
Includes seller indemnification, Deep MI CRT, lender recourse and indemnification agreements, pool insurance, HFA indemnification, and other
credit enhancements.
(4) Consists of multifamily HFA indemnification and loss reimbursement agreements with third parties obtained in certain of our Q Certificate
transactions.
Debt with Embedded Credit Enhancements
In addition to our attached and freestanding credit enhancements, we also transfer credit risk after
acquisition or guarantee of mortgage assets by either issuing unsecured debt with embedded credit
enhancements or recognizing debt of consolidated VIEs that include structural credit enhancements.
Unsecured Debt with Embedded Credit Enhancements
For certain of our unsecured debt issuances, we create a reference pool of mortgage assets (generally
loans) to which we currently have credit risk exposure and an associated securitization-like structure
with notional credit risk positions. To the extent a specified credit event occurs on the mortgage assets
in the reference pool, the outstanding balance of our debt obligations is written down, thereby reducing
our future principal and interest payment obligations. The principal types of unsecured debt with
embedded credit enhancements are single-family STACR debt notes and multifamily SCR debt notes.
Most of our STACR debt notes are recorded as other debt on our consolidated balance sheets and
accounted for at amortized cost. When the realized loss events (e.g., third-party foreclosure sale, short
sale, or REO disposition) occur on the underlying loans in the reference pool, the STACR debt notes are
written down and the benefits are recognized as gains on extinguishment of debt on our consolidated
statements of comprehensive income.
The structure of Multifamily SCR debt notes is similar to STACR debt notes, although the mortgage
assets within the reference pool may be loans or bonds to which we have credit exposure. While our
SCR debt notes are recorded as other debt on our consolidated balance sheets, these debt obligations
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are measured at fair value, as we elected the fair value option for them. Fair value changes are recorded
in other income in our consolidated statement of comprehensive income.
Consolidated Debt with Structural Credit Enhancements
Similar to our non-consolidated VIEs, we obtain credit enhancement in certain of our consolidated
senior subordinate and other securitization products through the creation of unguaranteed subordinated
securities. These unguaranteed subordinated securities will absorb first losses on the underlying loans
prior to us performing pursuant to our guarantee obligation. The unguaranteed subordinated debt
securities held by third parties are recorded as debt of consolidated trusts on our consolidated balance
sheets and accounted for at amortized cost. When losses are realized on the loans underlying the
securities, the subordinated debt is written down and the benefits are recognized as gains on
extinguishment of debt on our consolidated statements of comprehensive income.
The table below presents the total current and protected UPB and maximum amounts of potential loss
recovery related to debt with embedded credit enhancements.
(In millions)
Single-family:
STACR debt notes
Subordination (consolidated VIEs)
Total Single-family
Multifamily:
SCR debt notes
Subordination (consolidated VIEs)
Total Multifamily
Total Single-family and Multifamily debt with embedded credit
enhancements
As of December 31, 2017
As of December 31, 2016
Total Current
and Protected
UPB(1)
Maximum
Coverage(2)
Total Current
and Protected
UPB(1)
Maximum
Coverage(2)
$604,356
3,330
2,732
1,800
$17,788
179
17,967
137
180
317
$427,978
1,287
1,898
—
$14,507
83
14,590
95
—
95
$18,284
$14,685
(1) Underlying loans may be covered by more than one form of credit enhancement, including attached credit enhancements and freestanding credit
enhancements. For STACR debt notes and SCR debt notes, total current and protected UPB represents the UPB of the assets included in the
reference pool. For subordination, total current and protected UPB represents the UPB of the guaranteed securities.
(2) For STACR debt notes and SCR debt notes, maximum coverage amount represents the outstanding balance of the STACR debt notes and SCR debt
notes held by third parties. For subordination, maximum coverage amount represents the UPB of the securities that are subordinate to our
guarantee and held by third parties.
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NOTE 7
Notes to the Consolidated Financial Statements | Note 7
Investments in Securities
The table below summarizes the fair values of our investments in debt securities by classification.
(In millions)
Trading securities
Available-for-sale securities
Total
As of December 31, 2017 As of December 31, 2016
$40,721
43,597
$84,318
$44,790
66,757
$111,547
We currently classify and account for our securities as either available-for-sale or trading. As of
December 31, 2017 and 2016, 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 15 for more information on how
we determine the fair value of securities.
We generally record purchases and sales of securities on the trade date when the related forward
commitments are exempt from the accounting guidance for derivatives. 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.
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.
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Notes to the Consolidated Financial Statements | Note 7
Trading Securities
The table below presents the estimated fair values by major security type for our securities classified as
trading. Our non-mortgage-related securities primarily consist of investments in U.S. Treasury securities.
(In millions)
Mortgage-related securities:
Freddie Mac
Other agency
Non-agency RMBS
Non-agency CMBS
Total mortgage-related securities
Non-mortgage-related securities
Total fair value of trading securities
As of December 31, 2017 As of December 31, 2016
$12,235
3,574
750
1,343
17,902
22,819
$40,721
$15,343
8,161
113
36
23,653
21,137
$44,790
For trading securities held at December 31, 2017, 2016 and 2015, we recorded net unrealized gains
(losses) of ($365) million, ($791) million and ($856) million during 2017, 2016 and 2015, respectively.
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Notes to the Consolidated Financial Statements | Note 7
Available-for-Sale Securities
At December 31, 2017 and 2016, 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.
Total available-for-sale securities
$42,578
$1,509
(In millions)
Available-for-sale securities:
Freddie Mac
Other agency
Non-agency RMBS
Non-agency CMBS
Obligations of states and political subdivisions
(In millions)
Available-for-sale securities:
Freddie Mac
Other agency
Non-agency RMBS
Non-agency CMBS
Obligations of states and political subdivisions
As of December 31, 2017
Gross Unrealized Losses
Amortized
Cost
Gross
Unrealized
Gains
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Fair
Value
$35,433
2,008
3,012
1,773
352
$499
56
927
22
5
$—
—
(5)
(9)
—
($14)
($462)
$35,470
(11)
(1)
(2)
—
2,053
3,933
1,784
357
($476)
$43,597
As of 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
$563
119
1,271
160
8
$—
—
(62)
(3)
—
($65)
($582)
$43,652
(25)
(18)
(23)
—
4,221
11,797
6,422
665
($648)
$66,757
Total available-for-sale securities
$65,349
$2,121
(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.
The fair value of our available-for-sale securities held at December 31, 2017 scheduled to contractually
mature after ten years was $41.1 billion, with an additional $1.9 billion scheduled to contractually mature
after five years through ten years.
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Notes to the Consolidated Financial Statements | Note 7
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 a gross 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
As of December 31, 2017
Less than 12 Months
12 Months or Greater
Fair
Value
Gross Unrealized
Losses
Fair
Value
Gross Unrealized
Losses
$10,337
40
5
1,026
12
$11,420
($107)
—
—
(2)
—
($109)
$9,251
1,079
105
52
21
$10,508
($355)
(11)
(6)
(9)
—
($381)
As of 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
$21,103
($559)
(6)
(1)
(2)
—
($568)
$1,732
2,040
2,188
204
—
$6,164
($23)
(19)
(79)
(24)
—
($145)
At December 31, 2017, total gross unrealized losses on available-for-sale securities were $0.5 billion.
The gross unrealized losses relate to 290 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 a gross unrealized gain position, while other lots for that
security may be in a gross 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
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Notes to the Consolidated Financial Statements | Note 7
our consolidated statements of comprehensive income as net impairment of available-for-sale securities
recognized in earnings.
If we do not intend to sell the security and we believe it is not more likely than not that we will be
required to sell prior to recovery of the security’s amortized cost basis, we recognize only the credit
component of other-than-temporary impairment in earnings and the amounts attributable to all other
factors are recorded in AOCI. The credit component represents the amount by which the present value
of cash flows expected to be collected from the security is less than its amortized cost basis. The
present value of cash flows expected to be collected represents our estimate of future contractual cash
flows that we expect to collect, discounted at the security’s original effective interest rate or, if
applicable, the effective interest rate determined based on significantly improved cash flows subsequent
to a prior other-than-temporary impairment.
The evaluation of whether unrealized losses on available-for-sale securities are other-than-temporary
requires significant management judgments, assumptions and consideration of numerous factors. We
perform an evaluation on a security lot basis considering all available information. The relative
importance of this information varies based on the facts and circumstances surrounding each security,
as well as the economic environment at the time of assessment.
Freddie Mac and Other Agency Securities
The principal and interest on these securities are guaranteed. We generally hold these securities that are
in an unrealized loss position to recovery. 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, 2017.
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 14.
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Notes to the Consolidated Financial Statements | Note 7
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, 2017.
Obligations of States and Political Subdivisions
These investments consist of housing revenue bonds. We believe the unrealized losses on obligations of
states and political subdivisions are primarily a result of movements in interest rates and liquidity and
risk premiums. We believe that any credit risk related to these securities is minimal because of the issuer
guarantees provided on these securities.
Other-than-temporary Impairments
We recognized $18 million, $191 million and $292 million in net impairment of available-for-sale
securities in earnings during 2017, 2016 and 2015, respectively. For our available-for-sale securities in
an unrealized loss position at December 31, 2017, we have asserted that we have no intent to sell and
believe it is not more likely than not that we will be required to sell the security before recovery of its
amortized cost basis.
The ending balance of remaining credit losses on available-for-sale securities where a portion of other-
than-temporary impairment was recognized in other comprehensive income was $1.1 billion, $4.1 billion
and $5.3 billion as of 4Q 2017, 4Q 2016 and 4Q 2015, respectively.
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.
(In millions)
Gross realized gains
Gross realized losses
Net realized gains
Year Ended December 31,
2017
2016
2015
$1,792
(66)
$1,726
$1,062
(91)
$971
$1,371
(33)
$1,338
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, 2017 and 2015, we received
investment securities as consideration for the issuance of debt securities of consolidated trusts of $0.9
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Notes to the Consolidated Financial Statements | Note 7
billion and $0.3 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
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 years ended December 31, 2017 and 2015, we extinguished debt securities of consolidated
trusts as consideration for the transfer of investment securities of $0.2 billion and $0.5 billion as a result
of these transactions. We did not have such activity during the year ended December 31, 2016.
During the fourth quarter of 2017, the following non-cash investing activities occurred:
We purchased $2.8 billion and sold $2.9 billion of non-mortgage-related securities that were traded,
but not settled. We settled our purchase obligation during the first quarter of 2018.
We transferred unguaranteed multifamily CMBS securities to a non-consolidated resecuritization
trust in exchange for guaranteed multifamily CMBS securities in the amount of $2.9 billion, of which
$1.3 billion was reclassified from available-for-sale to trading.
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Financial Statements
NOTE 8
Notes to the Consolidated Financial Statements | Note 8
Debt Securities and Subordinated Borrowings
The table below summarizes the interest expense per our consolidated statements of comprehensive
income and the balances of total debt, net per our consolidated balance sheets.
(In millions)
Debt securities of consolidated trusts held by third parties
Other debt:
Short-term debt
Long-term debt
Total other debt
Total debt, net
Balance, Net
Interest Expense
As of December 31,
2016
2017
$1,648,683
$1,720,996
For The Year Ended December 31,
2015
2016
2017
$47,656
$44,599
$45,536
73,069
240,565
313,634
71,451
281,870
353,321
615
5,372
5,987
350
5,837
6,187
173
6,435
6,608
$2,034,630
$2,002,004
$53,643
$50,786
$52,144
On November 30, 2017, we started applying fair value hedge accounting to certain debt issuances. The
fair value hedge accounting related basis adjustments are included in the table above.
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 or designated in a qualifying
fair value hedge relationship, 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
and SCR debt notes. For additional information on STACR and SCR debt notes, see Note 6. 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 15.
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 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
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Notes to the Consolidated Financial Statements | Note 8
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" generally 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 $407.2 billion in 2017 and declined to $346.1 billion
on January 1, 2018. As of December 31, 2017, our aggregate indebtedness for purposes of the debt cap
was $316.7 billion. Our aggregate indebtedness primarily includes 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 subject to prepayment risk as their payments are based upon the performance
of the underlying mortgage loans that may be prepaid by the related mortgage borrower at any time
without penalty.
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Notes to the Consolidated Financial Statements | Note 8
The table below summarizes the debt securities of consolidated trusts held by third parties based on
underlying loan product type.
(Dollars in millions)
Single-family:
30-year or more, fixed-rate
20-year fixed-rate
15-year fixed-rate
Adjustable-rate
Interest-only
FHA/VA
Total Single-family
Multifamily
As of December 31, 2017
As of December 31, 2016
Contractual
Maturity
UPB
Carrying
Amount(1)
Weighted
Average
Coupon(2)
Contractual
Maturity
UPB
Carrying
Amount(1)
Weighted
Average
Coupon(2)
2018 - 2055 $1,278,911 $1,318,350
76,022
2018 - 2038
266,241
2018 - 2033
48,220
2018 - 2048
7,379
2026 - 2041
866
2018 - 2046
1,717,078
3,918
73,866
260,633
47,169
7,303
847
1,668,729
3,876
2019-2047
3.68% 2017 - 2055 $1,193,329 $1,229,849
76,331
3.43% 2017 - 2037
273,978
2.86% 2017 - 2032
54,205
2.85% 2017 - 2047
10,057
3.74% 2026 - 2041
1,038
4.85% 2017 - 2046
1,645,458
3,225
74,033
267,739
52,991
10,007
1,015
1,599,114
3,048
3.99% 2019 - 2033
3.71%
3.49%
2.90%
2.69%
3.47%
4.92%
4.63%
Total debt securities of consolidated
trusts held by third parties
$1,672,605 $1,720,996
$1,602,162 $1,648,683
(1)
Includes $639 million and $144 million at December 31, 2017 and 2016, respectively, of debt of consolidated trusts that represents the fair value
of debt securities with the fair value option elected.
(2) The effective rate for debt securities of consolidated trusts held by third parties was 2.84% and 2.63% as of December 31, 2017 and 2016,
respectively.
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)
Other short-term debt:
Discount notes and Reference Bills®
Medium-term notes
Securities sold under agreements to repurchase
Total other short-term debt
As of December 31, 2017
As of December 31, 2016
Par Value
Carrying
Amount
Weighted
Average
Effective Rate
Par Value
Carrying
Amount
Weighted
Average
Effective Rate
$45,717
$45,596
17,792
9,681
17,792
9,681
$73,190
$73,069
1.19%
1.03%
1.06%
1.14%
$61,042
$60,976
7,435
3,040
7,435
3,040
$71,517
$71,451
0.47%
0.41%
0.42%
0.47%
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Notes to the Consolidated Financial Statements | Note 8
Other Long-Term Debt
The table below summarizes our other long-term debt.
(Dollars in millions)
Other long-term debt:
Other senior debt:
Fixed-rate:
Medium-term notes — callable
Medium-term notes — non-callable
Reference Notes securities — non-callable
STACR and SCR
Variable-rate:
Medium-term notes — callable
Medium-term notes — non-callable
STACR
Zero-coupon:
Medium-term notes — callable
Medium-term notes — non-callable
Other
Hedging-related basis adjustments
Total other senior debt
Other subordinated debt:
Fixed-rate
Zero-coupon
Total other subordinated debt
Total other long-term debt
As of December 31, 2017
As of December 31, 2016
Contractual
Maturity
Par Value
Carrying
Amount(1)
Weighted
Average
Effective
Rate(2)
Par Value
Carrying
Amount
Weighted
Average
Effective
Rate(2)
2018 - 2037
2018 - 2028
2018 - 2032
2031 - 2042
2018 - 2032
2018 - 2026
2023 - 2042
2018 - 2039
—
$86,311
10,839
79,991
137
27,510
14,746
17,788
—
5,141
—
N/A
$86,284
10,973
80,019
140
27,475
14,746
18,198
—
2,415
—
(79)
1.47%
1.40%
2.17%
12.77%
1.95%
0.68%
5.00%
—%
5.94%
—%
$76,412
13,742
118,702
95
$76,383
13,987
118,727
95
21,008
33,077
14,507
1,000
5,792
438
N/A
20,972
33,076
14,745
296
2,925
281
15
242,463
240,171
284,773
281,502
1.24%
1.08%
2.17%
13.00%
1.94%
0.48%
4.34%
6.17%
5.01%
5.93%
2018
2019
121
332
453
7.83%
10.51%
121
273
394
121
332
453
7.84%
10.51%
120
248
368
$242,916
$240,565
2.04% $285,226
$281,870
1.81%
(1) Represents par value, net of associated discounts or premiums and issuance costs. Includes $5.2 billion and $5.9 billion at December 31, 2017
and 2016, respectively, of other long term-debt that represents the fair value of debt securities with the fair value option elected.
(2) Based on carrying amount.
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.
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Notes to the Consolidated Financial Statements | Note 8
The table below summarizes the contractual maturities of other long-term debt securities at
December 31, 2017.
(In millions)
Annual Maturities
Other long-term debt (excluding STACR and SCR):
2018
2019
2020
2021
2022
Thereafter
Debt securities of consolidated trusts held by third parties, STACR and SCR(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, STACR, SCR and other long-term debt
Par Value
$70,557
57,689
38,117
22,809
18,538
17,281
1,690,530
1,915,521
46,040
$1,961,561
(1) Contractual maturities of these debt securities are not presented because they are subject to prepayment risk, as their payments are based upon
the performance of a pool of mortgage assets that may be prepaid by the related mortgage borrower at any time without penalty.
(2) Other basis adjustments primarily represent changes in fair value attributable to instrument-specific credit risk.
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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Financial Statements
NOTE 9
Notes to the Consolidated Financial Statements | Note 9
Derivatives
On October 1, 2017, we adopted accounting guidance that modifies the presentation of hedge
accounting results disclosed in our consolidated statements of comprehensive income and in the notes
to the consolidated financial statements. For qualifying fair value hedge relationships, the modifications
include presenting all changes in the fair value of the derivative hedging instrument in the same
consolidated statements of comprehensive income line used to present the earnings effect of the
hedged item. For qualifying fair value hedge relationships, the modifications also include separate
disclosures of cumulative basis adjustments and their impact to the hedged item’s carrying value.
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 not in qualifying fair value hedge relationships 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.
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 credit risk and our overall risk management strategy.
We classify derivatives into three categories:
Exchange-traded derivatives;
Cleared derivatives; and
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Financial Statements
OTC derivatives.
Notes to the Consolidated Financial Statements | Note 9
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 purchased 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
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Financial Statements
Notes to the Consolidated Financial Statements | Note 9
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.
Hedge Accounting
Fair Value Hedges
On February 2, 2017, we started applying fair value hedge accounting to certain single-family mortgage
loans where we hedge the changes in fair value of these loans attributable to the designated benchmark
interest rate (i.e., LIBOR), using LIBOR-based interest-rate swaps. The hedge period is one day, and we
re-balance our hedge relationships on a daily basis. In addition, on November 30, 2017, we started
applying fair value hedge accounting to certain issuances of debt where we hedge the changes in fair
value of the debt attributable to the designated benchmark interest rate (i.e., LIBOR), using LIBOR-
based interest-rate swaps.
We apply hedge accounting to qualifying hedge relationships. A qualifying hedge relationship exists
when changes in the fair value of a derivative hedging instrument are expected to be highly effective in
offsetting changes in the fair value of the hedged item attributable to the risk being hedged during the
term of the hedge relationship. No amounts have been excluded from the assessment of hedge
effectiveness. To assess hedge effectiveness, we use a statistical regression analysis.
At inception of the hedge relationship, we prepare formal contemporaneous documentation of our risk
management objective and strategies for undertaking the hedge.
Beginning on October 1, 2017, due to the adoption of amended hedge accounting guidance, if a hedge
relationship qualifies for fair value hedge accounting, all changes in fair value of the derivative hedging
instrument, including interest accruals, are recognized in the same consolidated statements of
comprehensive income line item used to present the earnings effect of the hedged item. Therefore,
changes in the fair value of the hedged item, mortgage loans and debt, attributable to the risk being
hedged are recognized in interest income - mortgage loans and interest expense, respectively, along
with the changes in the fair value of the respective derivative hedging instruments. Prior to October 1,
2017, if the hedge relationship qualified for hedge accounting, changes in fair value of the derivative
hedging instrument and changes in the fair value of the hedged item attributable to the risk being
hedged were recognized in other income (loss) and interest accruals on the derivative hedging
instrument were included in derivative gains (losses).
Changes in the fair value of the hedged item attributable to the risk being hedged are recognized as a
cumulative basis adjustment against the mortgage loans and debt. The cumulative basis adjustments
are amortized to the same consolidated statements of comprehensive income line item used to present
the changes in fair value of the hedged item using the effective interest method considering the
contractual terms of the hedged item, with amortization beginning no later than the period in which
hedge accounting was discontinued.
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Financial Statements
Cash Flow Hedges
Notes to the Consolidated Financial Statements | Note 9
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 are recorded in interest expense. In the years
ended December 31, 2017 and 2016, we reclassified from AOCI into earnings, losses of $164 million
and $192 million, respectively, related to closed cash flow hedges. See Note 11 for information about
future reclassifications of deferred net losses related to closed cash flow hedges to net income.
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.
(In millions)
Not designated as hedges
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
Designated as fair value hedges
Interest-rate swaps:
Receive-fixed
Pay-fixed
Total derivatives designated as fair value hedges
Derivative interest receivable (payable)
Netting adjustments(3)
Total derivative portfolio, net
As of December 31, 2017
As of December 31, 2016
Notional or
Contractual
Amount
Derivatives at Fair Value
Assets
Liabilities
Notional or
Contractual
Amount
Derivatives at Fair Value
Assets
Liabilities
$213,717
185,400
5,244
404,361
$2,121
751
—
2,872
($1,224)
(5,008)
(2)
(6,234)
$313,106
271,477
1,450
586,033
$4,337
2,586
1
6,924
($2,703)
(9,684)
—
(12,387)
58,975
4,650
47,810
3,000
10,683
125,118
267,385
54,207
3,569
2,906
857,546
83,352
69,402
152,754
$1,010,300
2,709
—
1,058
—
757
4,524
—
44
7
1
7,448
2
1,388
1,390
1,407
(9,870)
$375
—
(101)
—
(20)
—
(121)
—
(64)
(46)
(19)
(6,484)
(714)
(291)
(1,005)
(1,596)
8,816
($269)
60,730
1,350
48,080
3,200
11,032
124,392
138,294
45,353
2,951
2,879
899,902
—
—
—
$899,902
2,817
—
1,442
—
795
5,054
—
289
1
—
—
(78)
—
(28)
—
(106)
—
(151)
(27)
(21)
12,268
(12,692)
—
—
—
1,442
(12,963)
$747
—
—
—
(1,770)
13,667
($795)
(1)
Includes swaptions on credit indices with a notional or contractual amount of $13.4 billion and $10.9 billion at December 31, 2017 and December
31, 2016, respectively, and a fair value of $5 million at both December 31, 2017 and December 31, 2016.
(2) Primarily consists of purchased interest-rate caps and floors and options on Treasury futures.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 9
(3) Represents counterparty netting and cash collateral netting.
See Note 10 for information related to our derivative counterparties and collateral held and posted.
Gains and Losses on Derivatives
The table below presents the gains and losses on derivatives, including the accrual of periodic cash
settlements, while not designated in qualifying hedge relationships and reported on our consolidated
statements of comprehensive income as derivative gains (losses). In addition, for the first three quarters
of 2017, the table includes the accrual of periodic cash settlements on derivatives in qualifying hedge
relationships.
(In millions)
Not designated as hedges
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,
2017
2016
2015
($1,343)
1,972
(3)
626
(404)
24
(673)
50
(38)
(1,041)
144
(91)
(29)
(7)
17
1,511
(3,101)
—
(1,590)
($1,988)
($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)
(1) Primarily consists of purchased interest-rate caps and floors and options on Treasury futures.
The table below presents the gains and losses on derivatives and hedged items while designated in
qualifying fair value hedge relationships. During 2016, there were no derivatives designated in qualifying
fair value hedge relationships.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 9
(In millions)
Total amounts of income and expense line items presented in
our consolidated statements of comprehensive income in
which the effects of fair value hedges are recorded:
Gain or (loss) on fair value hedging relationships:
Interest contracts on mortgage loans held-for-investment:(1)
Hedged items
Derivatives designated as hedging instruments(2)
Interest contracts on debt:
Hedged items
Derivatives designated as hedging instruments(3)
Year Ended December 31, 2017
Interest Income -
Mortgage Loans
Interest Expense
Other Income (Loss)
$63,735
($53,643)
$7,480
($107)
$313
$—
$—
$—
$—
$93
($53)
$351
($215)
$—
$—
(1) For the first three quarters of 2017, the gains or losses on derivatives and hedged items were recorded in other income (loss). Beginning in 4Q
2017, gains or losses are recorded in interest income - mortgage loans in our consolidated statements of comprehensive income due to adoption
of amended hedge accounting guidance.
(2) The gain or (loss) on fair value hedging relationships excludes $(83) million of interest accruals which were recorded in interest income -
mortgage loans in our consolidated statements of comprehensive income.
(3) The gain or (loss) on fair value hedging relationships excludes $8 million of interest accruals which were recorded in interest expense in our
consolidated statements of comprehensive income.
Cumulative Basis Adjustments due to Fair Value Hedging
The table below presents the hedged item cumulative basis adjustments due to qualifying fair value
hedging and the related hedged item carrying amounts by their respective balance sheet line item.
(In millions)
Mortgage loans held-for-investment
Debt
(In millions)
Mortgage loans held-for-investment
Debt
As of December 31, 2017
Cumulative Amount of Fair Value Hedging Basis
Adjustment Included in the Carrying Amount
Carrying Amount
Assets / (Liabilities)
Total
Discontinued - Hedge
Related
$128,140
($92,277)
$198
$79
$198
($14)
As of December 31, 2016
Cumulative Amount of Fair Value Hedging Basis
Adjustment Included in the Carrying Amount
Carrying Amount
Assets / (Liabilities)
Total
Discontinued - Hedge
Related
$—
($8,546)
$—
($15)
$—
($15)
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Financial Statements
NOTE 10
Notes to the Consolidated Financial Statements | Note 10
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 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 by either the counterparty or us, depending on which party is in a
liability position. 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. 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 sell the collateral. 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 that all of our counterparties for OTC interest-rate swaps and option-based derivatives were
to have defaulted simultaneously on December 31, 2017, our maximum loss for accounting purposes
after applying netting agreements and collateral on an individual counterparty basis would have been
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Financial Statements
Notes to the Consolidated Financial Statements | Note 10
approximately $41 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
December 31, 2017. 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.
Regulations adopted by certain financial institution regulators (including FHFA) that became effective
March 1, 2017 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 are
no longer used in determining the amount of collateral to be posted in connection with these
transactions.
However, for OTC derivative transactions executed before March 1, 2017 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, 2017 was
$0.8 billion for which we posted cash and non-cash collateral of $0.7 billion in the normal course of
business. A reduction in our credit ratings may trigger additional collateral requirements related to these
OTC derivative instruments. If a reduction in our credit ratings had triggered additional collateral
requirements related to these OTC derivative instruments on December 31, 2017, we would have been
required to post an additional $99 million of collateral to our counterparties.
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.
In October 2017, the CFTC issued an interpretation letter clarifying that variation margin payments for
cleared swaps constitute daily settlement of exposure and not the posting of margin collateral. For
certain of our cleared swaps transacted with the Chicago Mercantile Exchange (CME), during 1Q 2017
we changed the characterization of variation margin payments from posting of margin collateral to
settlements, as a result of certain rule amendments made by the CME. Consistent with the CFTC
interpretation letter, the LCH Group updated its rulebook during 1Q 2018 to change the characterization
of variation margin payments on cleared swaps to constitute settlements. However, we do not expect
this change to materially affect our financial condition or result of operations.
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 $44 million and $289 million at
December 31, 2017 and 2016, respectively.
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298
Financial Statements
Notes to the Consolidated Financial Statements | Note 10
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.
Beginning in 2017, we began to utilize the GSD/FICC as a clearinghouse to transact many of our trades
involving securities purchased under agreements to resell, securities sold under agreements to
repurchase, and other non-mortgage related securities. As a clearing member of GSD/FICC, we are
required to post initial and variation margin payments and are exposed to the counterparty credit risk of
GSD/FICC (including its clearing members). Although our membership provides us with the right to
offset certain of our open receivable and payable positions by collateral type, we have elected not to
offset these positions within our condensed consolidated balance sheets. In the event a clearing
member fails and causes losses to the GSD/FICC clearing system, we could be subject to the loss of
any or the entire margin that we have posted to the GSD/FICC. Moreover, our exposure could exceed
that amount, as members are generally require 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 GSD/FICC may execute in the
future.
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
FREDDIE MAC | 2017 Form 10-K
299
Financial Statements
Notes to the Consolidated Financial Statements | Note 10
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. Beginning in 2017, certain of our trades involving securities sold under
agreements to repurchase utilized GSD/FICC as a clearinghouse.
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 9 for
additional information on our consolidated balance sheets presentation of collateral related to
derivatives transactions. At December 31, 2017 and 2016, 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 | 2017 Form 10-K
300
Financial Statements
Notes to the Consolidated Financial Statements | Note 10
As of December 31, 2017
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
(In millions)
Assets:
Derivatives:
OTC derivatives
Cleared and exchange-traded derivatives
Other
Total derivatives
Securities purchased under agreements to resell(3)
Total
Liabilities:
Derivatives:
$7,648
2,545
52
10,245
55,903
($5,499)
(2,266)
—
(7,765)
—
($1,903)
(202)
—
(2,105)
—
$66,148
($7,765)
($2,105)
OTC interest-rate swaps and option-based
derivatives
Cleared and exchange-traded derivatives
Other
Total derivatives
Securities sold under agreements to repurchase
($6,285)
$5,499
(2,671)
(129)
(9,085)
(9,681)
2,266
—
7,765
—
$688
363
—
1,051
—
Total
($18,766)
$7,765
$1,051
$246
77
52
375
55,903
$56,278
($98)
(42)
(129)
(269)
(9,681)
($9,950)
($205)
—
—
(205)
(55,903)
$41
77
52
170
—
($56,108)
$170
$—
—
—
—
9,681
$9,681
($98)
(42)
(129)
(269)
—
($269)
As of 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
(In millions)
Assets:
Derivatives:
OTC derivatives
Cleared and exchange-traded derivatives
Other
Total derivatives
Securities purchased under agreements to resell(3)
Total
Liabilities:
Derivatives:
$8,531
4,889
290
13,710
51,548
($6,367)
(4,674)
—
(11,041)
—
($1,760)
(162)
—
(1,922)
—
$65,258
($11,041)
($1,922)
OTC interest-rate swaps and option-based
derivatives
Cleared and exchange-traded derivatives
Other
Total derivatives
Securities sold under agreements to repurchase
Total
($7,298)
$6,367
$469
(6,965)
(199)
(14,462)
(3,040)
($17,502)
4,705
—
11,072
—
$11,072
2,126
—
2,595
—
$2,595
$404
53
290
747
51,548
$52,295
($462)
(134)
(199)
(795)
(3,040)
($3,835)
($353)
—
—
(353)
(51,548)
$51
53
290
394
—
($51,901)
$394
$274
($188)
—
(134)
—
274
3,040
$3,314
(199)
(521)
—
($521)
(1) Excess cash collateral held is presented as a derivative liability, while excess cash collateral posted is presented as a derivative asset.
(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 $3.1 billion and $3.4 billion as of December 31, 2017 and 2016, respectively.
(3) At December 31, 2017 and 2016, we had $3.4 billion and $4.0 billion, respectively, of securities pledged to us for transactions involving securities
purchased under agreements to resell that we had the right to repledge.
FREDDIE MAC | 2017 Form 10-K
301
Financial Statements
Notes to the Consolidated Financial Statements | Note 10
Collateral Pledged
Collateral Pledged to Freddie Mac
We have cash pledged to us as collateral primarily related to OTC derivative transactions. At December
31, 2017, we had $2.4 billion pledged to us as collateral that was classified as restricted cash on our
consolidated balance sheets.
Collateral Pledged by Freddie Mac
The table below summarizes the fair value of the securities pledged as collateral by us for derivatives
and collateralized borrowing transactions, including securities that the secured party may repledge.
(In millions)
Debt securities of consolidated trusts(1)
Trading securities
Total securities pledged
As of December 31, 2017
Derivatives
Securities sold under
agreements to
repurchase
Other(2)
Total
$375
2,766
$3,141
$—
9,705
$9,705
$111
362
$473
$486
12,833
$13,319
(1) Represents PCs held by us in our Capital Markets segment mortgage investments portfolio which are recorded as a reduction to debt securities of
consolidated trusts held by third parties on our consolidated balance sheets.
(2)
Includes other collateralized borrowings and collateral related to transactions with certain clearinghouses.
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)
U.S. Treasury securities
As of December 31, 2017
Overnight and
continuous
30 days or less
After 30 days
through 90 days
Greater than
90 days
Total
$—
$9,705
$—
$—
$9,705
FREDDIE MAC | 2017 Form 10-K
302
Financial Statements
NOTE 11
Notes to the Consolidated Financial Statements | Note 11
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, 2017
AOCI Related
to Available-
For-Sale
Securities
AOCI Related
to Cash Flow
Hedge
Relationships
AOCI Related
to Defined
Benefit Plans
Total
$915
857
(1,110)
(253)
$662
($480)
—
124
124
($356)
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
($621)
(318)
(507)
(825)
$915
—
141
141
($480)
$21
63
(1)
62
$83
$34
(10)
(3)
(13)
$21
Total
Year Ended December 31, 2015
AOCI Related
to Available-
For-Sale
Securities
AOCI Related
to Cash Flow
Hedge
Relationships
AOCI Related
to Defined
Benefit Plans
Total
$2,546
(123)
(683)
(806)
$1,740
($803)
—
182
182
($621)
($13)
48
(1)
47
$34
$456
920
(987)
(67)
$389
$1,153
(328)
(369)
(697)
$456
$1,730
(75)
(502)
(577)
$1,153
(1) For the years ended December 31, 2017, 2016 and 2015, net of tax expense of $0.5 billion, ($0.2) billion and $0.1 billion, respectively, for AOCI
related to available-for-sale securities.
FREDDIE MAC | 2017 Form 10-K
303
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
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.
(In millions)
AOCI related to available-for-sale securities
Affected line items 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
Total before tax
Income tax (expense) or benefit
Net of tax
AOCI related to cash flow hedge relationships
Affected line items in the consolidated statements of comprehensive income:
Interest expense
Income tax (expense) or benefit
Net of tax
AOCI related to defined benefit plans
Affected line items in the consolidated statements of comprehensive income:
Salaries and employee benefits
Income tax (expense) or benefit
Net of tax
Year Ended December 31,
2017
2016
2015
$1,726
(18)
1,708
(598)
1,110
(164)
40
(124)
2
(1)
1
$971
(191)
780
(273)
507
(192)
51
(141)
4
(1)
3
Total reclassifications in the period net of tax
$987
$369
Future Reclassifications from AOCI to Net Income Related to
Closed Cash Flow Hedges
$1,343
(292)
1,051
(368)
683
(230)
48
(182)
1
—
1
$502
The total AOCI related to derivatives designated as cash flow hedges was a loss of $0.4 billion and $0.5
billion at December 31, 2017 and 2016, 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 $111 million, net of taxes, of the $0.4 billion of cash
flow hedge losses in AOCI at December 31, 2017 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 16 years.
FREDDIE MAC | 2017 Form 10-K
304
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
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. The liquidation preference also was increased by $3.0 billion on
December 31, 2017 pursuant to the Letter Agreement. 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 2017, 2016 and 2015 at the direction of the Conservator were $10.9
billion, $5.0 billion and $5.5 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, 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.
FREDDIE MAC | 2017 Form 10-K
305
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
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 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, 2017.
(In millions, except initial liquidation
preference price per share)
Non-draw Adjustment Dates:
September 8, 2008
December 31, 2017
Draw Dates:
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
Total, senior preferred stock
Shares
Authorized
Shares
Outstanding
Total
Par Value
Initial
Liquidation
Preference
Price per Share
Total
Liquidation
Preference
1.00
—
—
—
—
—
—
—
—
—
—
—
—
1.00
1.00
—
—
—
—
—
—
—
—
—
—
—
—
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
N/A
$1,000
3,000
13,800
30,800
6,100
10,600
1,800
100
500
1,479
5,992
146
19
$75,336
No cash was received from Treasury under the Purchase Agreement in 2017, because we had positive
net worth at December 31, 2016, March 31, 2017, June 30, 2017, and September 30, 2017 and,
consequently, FHFA did not request a draw on our behalf. Pursuant to the Letter Agreement, the
aggregate liquidation preference of the senior preferred stock increased by $3.0 billion to $75.3 billion on
December 31, 2017.
Because we had a net worth deficit at December 31, 2017, FHFA, as Conservator, will submit a draw
request, on our behalf, to Treasury under the Purchase Agreement. Upon the funding of this draw
request, the aggregate liquidation preference of the senior preferred stock will increase to $75.6 billion.
Since we had a net worth deficit at December 31, 2017, no dividend will be paid to Treasury in March
2018.
FREDDIE MAC | 2017 Form 10-K
306
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
Our quarterly senior preferred stock dividend requirement 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 $3.0 billion for 2013; gradually declined to $600 million for 2017; and
will be $3.0 billion in 2018 and thereafter (unless we were not to pay a dividend requirement in full in a
future period, which would cause the applicable Capital Reserve Amount to thereafter be zero). See
Note 2 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.
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, 2017, 2016 and 2015 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 | 2017 Form 10-K
307
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
The table below provides a summary of our preferred stock outstanding at their redemption values at
December 31, 2017.
(In millions, except
redemption price per share)
Issue Date
Shares
Authorized
Shares
Outstanding
Total
Par Value
Redemption
Price per
Share
Total
Outstanding
Balance
Redeemable
On or After
OTCQB
Symbol
Preferred stock:
1996 Variable-rate(1)
5.81%
5%
April 26, 1996
October 27, 1997
March 23, 1998
1998 Variable-rate(3)
September 23 and 29, 1998
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%
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
2007 Fixed-to-floating rate(9)
December 4, 2007
Total, preferred stock
5.00
3.00
8.00
4.40
8.00
4.00
3.00
5.00
5.75
6.50
4.60
3.45
3.45
4.02
6.00
6.00
15.00
5.00
20.00
44.00
20.00
20.00
20.00
240.00
464.17
$5.00
$50.00
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
3.00
8.00
4.40
8.00
4.00
3.00
5.00
5.75
6.50
4.60
3.45
3.45
4.02
6.00
6.00
15.00
5.00
20.00
44.00
20.00
20.00
20.00
240.00
464.17
240.00
$464.17
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
50.00
25.00
25.00
25.00
25.00
25.00
25.00
$250
150
400
June 30, 2001
FMCCI
October 27, 1998
(2)
March 31, 2003
FMCKK
220
September 30, 2003
FMCCG
400
September 30, 2003
FMCCH
200
150
250
287
325
230
173
173
201
300
300
750
250
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
500
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
$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%.
(2)
Issued through private placement.
(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 | 2017 Form 10-K
308
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
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
2017 and 2016, 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 2017, the deferral period lapsed on 8,107 RSUs. At
December 31, 2017, 1,403 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, 2017 and 2016. At December 31, 2017, 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 | 2017 Form 10-K
309
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
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 0, 22,684 and 146,474 at December 31,
2017, 2016, and 2015, respectively.
Dividends Declared
No common dividends were declared in 2017. During the three months ended March 31, 2017, June 30,
2017, September 30, 2017, and December 31, 2017, we paid dividends of $4.5 billion, $2.2 billion $2.0
billion, and $2.2 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 2017.
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 | 2017 Form 10-K
310
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
NOTE 12: INCOME TAXES
Income Tax Expense
Total income tax expense includes:
Current income tax expense, which represents the amount of federal tax currently payable to or
receivable from the Internal Revenue Service, including interest and penalties and amounts accrued
for unrecognized tax benefits, if any, and;
Deferred income tax expense, which represents the net change in the deferred tax asset or liability
balance during the year, including any change in the valuation allowance.
Income tax expense excludes the tax effects related to adjustments recorded to other comprehensive
income, such as unrealized gains and losses on available-for-sale securities.
The Tax Cuts and Jobs Act enacted in December 2017 reduced the statutory corporate income tax rate
from 35% to 21%. Although not effective until January 1, 2018, accounting rules require that we
measure our net deferred tax asset using the reduced rate in the period in which the legislation was
enacted. Therefore, we reduced our net deferred tax asset by $5.4 billion, with a corresponding charge
to deferred income tax expense.
The table below presents the components of our federal income tax expense for 2017, 2016 and 2015.
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,
2017
2016
2015
($3,436)
(7,773)
($11,209)
($1,037)
(2,787)
($3,824)
($1,243)
(1,655)
($2,898)
The increase in income tax expense from 2016 to 2017 is primarily due to the reduction of our net
deferred tax asset as a result of the enactment of the Tax Cuts and Jobs Act. The increase in income tax
expense from 2015 to 2016 is primarily due to an increase in pre-tax income.
FREDDIE MAC | 2017 Form 10-K
311
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
The table below presents the reconciliation between our federal statutory income tax rate and our
effective tax rate for 2017, 2016 and 2015.
(Dollars in millions)
Statutory corporate tax rate
Tax-exempt interest
Tax credits
Valuation allowance
Revaluation of deferred tax asset to enacted
rate
Other
Effective tax rate
Year Ended December 31,
2017
2016
2015
Amount
Percent
Amount
Percent
Amount
Percent
($5,892)
39
135
(54)
(5,405)
(32)
($11,209)
35.0 %
(0.2)%
(0.8)%
0.3 %
32.1 %
0.2 %
66.6 %
($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 %
Deferred Tax Assets, Net
We use the asset and liability method of accounting for income taxes for financial reporting purposes.
Under this method, deferred tax assets and liabilities are recognized based upon the expected future tax
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, if any. 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 our net deferred tax assets is
dependent upon the generation of sufficient taxable income.
The table below presents the balance of significant deferred tax assets and liabilities at December 31,
2017 and 2016. The valuation allowance relates to capital loss carryforwards included in Other Items,
net that we expect to expire unused.
(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
Other items, net
Total deferred tax assets
Deferred tax liabilities:
Unrealized gains related to available-for-sale securities
Total deferred tax liabilities
Valuation Allowance
Deferred tax assets, net
FREDDIE MAC | 2017 Form 10-K
Year Ended December 31,
2016
2017
$4,679
2,041
291
1,288
—
55
8,354
(214)
(214)
(33)
$8,107
$6,662
4,006
1,045
2,310
2,156
131
16,310
(492)
(492)
—
$15,818
312
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
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.
Based on all positive and negative evidence available at December 31, 2017, we determined that it is
more likely than not that our net deferred tax assets, except for a portion of the deferred tax asset
related to our capital loss carryforwards, will be realized.
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, 2017.
FREDDIE MAC | 2017 Form 10-K
313
Financial Statements
NOTE 13
Notes to the Consolidated Financial Statements | Note 13
Segment Reporting
We have three reportable segments, which are based on the type of business activities each performs -
Single-family Guarantee, Multifamily and Capital Markets. The chart below provides a summary of our
three reportable segments and the All Other category.
Segment/
Category
Single-
family
Guarantee
Description
Activities/Items
Financial
Performance
Measurement
Basis
• Purchase and guarantee of single-family
• Contribution to
mortgage loans
• Credit risk transfer transactions
• Loss mitigation activities
• Managing foreclosure and REO activities
• Tax expense/benefit
• Allocated debt costs and administrative expenses
GAAP net
income (loss)
The Single-family Guarantee segment reflects
results from our purchase, securitization and
guarantee of single-family loans and the
management of single-family mortgage credit
risk. In most instances, we securitize the loans
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.
FREDDIE MAC | 2017 Form 10-K
314
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
Segment/
Category
Description
Activities/Items
Financial
Performance
Measurement
The Multifamily segment reflects results from
our purchase, sale, securitization and guarantee
of multifamily loans and securities, our
investments in those loans and securities and
the management of multifamily mortgage credit
risk and market spread risk. 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.
The Capital Markets 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 and reperforming
loans), treasury function, single-family
securitization activities 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.
Multifamily
Capital
Markets
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.
All Other
• Multifamily loans held-for-sale and associated
• Contribution to
securitization activities (i.e., K Certificates and SB
Certificates)
• Investments in CMBS and multifamily loans held-
GAAP
comprehensive
income (loss)
for-investment
• Other mortgage-related guarantees
• Other securitization products
• Other credit risk transfer products
• Tax expense/benefit
• Allocated debt costs and administrative expenses
• Investments in single-family mortgage-related
• Contribution to
GAAP
comprehensive
income (loss)
securities and single-family performing loans and
reperforming loans
• All other traded non-mortgage related
instruments and securities
• 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
• Allocated administrative expenses
• Tax settlements, as applicable
• Legal settlements, as applicable
• Tax expense/benefit associated with changes in
the deferred tax asset valuation allowance or
revaluation associated with a statutory tax rate
change
• FHFA-mandated termination of our pension plan
N/A
FREDDIE MAC | 2017 Form 10-K
315
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
Segment Earnings
We present Segment Earnings by reclassifying certain credit guarantee-related activities and
investment-related activities between various line items on our GAAP consolidated statements of
comprehensive income and allocating certain revenues and expenses, including funding costs and
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 1Q 2017, we changed how we calculate certain components of our Segment Earnings for our
Capital Markets segment. The purpose of this change is to more closely align Segment Earnings results
relative to GAAP results and to better reflect how management evaluates the Capital Markets segment.
Prior period results have been revised to conform to the current period presentation. The change
includes:
No longer reclassifying the amortization of upfront cash associated with the acquisition or issuance
of swaptions and options from derivative gains (losses) to net interest income. This change resulted
in an increase to net interest income and a corresponding decrease to derivative gains (losses) for
the Capital Markets segment of $1.3 billion and $763 million for 2016 and 2015, respectively.
During 4Q 2017, we changed our GAAP accounting for qualifying hedges due to the adoption of
amended hedge accounting guidance. As a result, we modified our investment activity-related
reclassifications beginning in 4Q 2017 in order to continue to reflect Segment Earnings for our Capital
Markets segment consistently with prior periods. No prior period results required updates.
The sum of Segment Earnings for each segment and the All Other category equals GAAP net income
(loss). Likewise, the sum of comprehensive income (loss) for each segment and the All Other category
equals GAAP comprehensive income (loss). However, the accounting principles we apply to present
certain financial statement line items in Segment Earnings for our reportable segments differ significantly
from those applied in preparing the comparable line items in our consolidated financial statements
prepared in accordance with GAAP in order to reflect the business activities each segment performs.
The significant reclassifications are discussed below. Many of the reclassifications 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.
FREDDIE MAC | 2017 Form 10-K
316
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
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 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 derivatives recorded within derivative gains (losses) is
reclassified in Segment Earnings from derivatives gains (losses) into net interest income to fully
reflect the periodic cost associated with the protection provided by these contracts. Beginning in 4Q
2017, the accrual of periodic cash settlements of derivatives in qualifying hedge relationships is
recorded directly to net interest income due to the adoption of amended hedge accounting
guidance. As a result, only the accrual of periodic cash settlements of derivatives while not in
qualifying hedge relationships is reclassified for Segment Earnings.
For Segment Earnings, changes in the fair value of the hedging instrument and changes in the fair
value of the hedged item attributable to the risk being hedged are recorded in other income.
Beginning in 4Q 2017, for qualifying hedge relationships, changes in the fair value of the derivative
hedging instrument and changes in fair value of the hedged item attributable to the risk being
hedged are reclassified in Segment Earnings from net interest income to other income. For periods
prior to the adoption of amended hedge accounting guidance in 4Q 2017, these amounts were
recorded directly to other income. As a result, no reclassification for Segment Earnings was
necessary.
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
FREDDIE MAC | 2017 Form 10-K
317
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
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.
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.
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:
Costs associated with STACR debt note expenses are reclassified from net interest income to other
non-interest expense.
Internally allocated costs associated with the refinancing of debt related to Multifamily segment held-
for-investment loans which we securitized are reclassified from net interest income to other non-
interest income.
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 Capital Markets segment for
all other business segments. In connection with this activity, the Capital Markets segment transfers a
cost to the other segments. The actual costs may vary relative to these intra-company transfers. In
addition, the financial statement variability associated with the use of derivatives to hedge certain assets
outside the Capital Markets 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 | 2017 Form 10-K
318
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
The table below presents Segment Earnings by segment.
(In millions)
Segment Earnings (loss), net of taxes:
Single-family Guarantee
Multifamily
Capital Markets
All Other
Total Segment Earnings, net of taxes
Net income
Comprehensive income (loss) of segments:
Single-family Guarantee
Multifamily
Capital Markets
All Other
Comprehensive income of segments
Comprehensive income
Year Ended December 31,
2017
2016
2015
$2,501
2,014
6,515
(5,405)
5,625
$5,625
$2,541
1,937
6,485
(5,405)
5,558
$5,558
$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
The table below presents detailed reconciliations between our GAAP financial statements and Segment
Earnings for our reportable segments and All Other.
Year Ended December 31, 2017
(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
Capital
Markets
All
Other
$1,206
$3,381
$—
676
(13)
(5)
181
(102)
(2)
1,594
(395)
—
(66)
(1,060)
2,014
Total
Segment
Earnings
(Loss)
$4,587
6,770
(829)
231
(443)
(672)
(2)
11,031
(2,106)
(203)
(1,530)
—
—
236
(587)
(570)
—
7,895
(330)
—
(82)
—
—
—
—
—
—
—
—
—
—
(3,428)
(5,405)
(11,209)
6,515
(5,405)
5,625
(86)
(167)
—
9
(77)
124
13
(30)
—
—
—
—
(253)
124
62
(67)
Total per
Consolidated
Statements of
Comprehensive
Income
$14,164
662
84
(18)
(1,988)
(672)
928
7,957
(2,106)
(189)
(1,988)
(11,209)
5,625
(253)
124
62
(67)
Reclassifications
$9,577
(6,108)
913
(249)
(1,545)
—
930
(3,074)
—
14
(458)
—
—
—
—
—
—
$—
6,094
(816)
—
(37)
—
—
1,542
(1,381)
(203)
(1,382)
(1,316)
2,501
—
—
40
40
Comprehensive income (loss)
$2,541
$1,937
$6,485 ($5,405)
$5,558
$—
$5,558
Referenced footnote is included after the next table.
FREDDIE MAC | 2017 Form 10-K
319
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
(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
Year Ended December 31, 2016
Single-
family
Guarantee Multifamily
Capital
Markets
All
Other
Total
Segment
Earnings
(Loss)
Reclassifications
$—
6,091
(517)
—
(69)
—
—
516
(1,323)
(298)
(1,169)
(1,061)
2,170
—
—
(9)
(9)
$1,022
511
22
—
407
28
309
829
(362)
—
(58)
(890)
1,818
(234)
—
(2)
(236)
$3,812
—
—
$— $4,834
6,602
—
(495)
—
269
—
269
1,151
(1,077)
—
1,846
(320)
—
19
(1,873)
3,827
(591)
141
(2)
(452)
—
1,489
— (1,049)
309
—
—
3,191
— (2,005)
(298)
—
— (1,208)
— (3,824)
—
—
—
—
—
7,815
(825)
141
(13)
(697)
$9,545
(6,089)
1,298
(460)
(1,763)
—
(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)
Comprehensive income (loss)
$2,161
$1,582
$3,375
$— $7,118
$—
$7,118
Referenced footnote is included after the next table.
Year Ended December 31, 2015
Single-
family
Guarantee Multifamily
Capital
Markets
All
Other
Total
Segment
Earnings
(Loss)
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
$1,049
339
26
(22)
372
(98)
(93)
15
(325)
(4)
(56)
(376)
827
(264)
—
3
$4,665
—
—
$— $5,714
5,491
—
(257)
—
420
—
398
(833)
(737)
—
2,292
(317)
—
(4)
(1,715)
3,771
(542)
182
4
(498)
—
(835)
—
(93)
—
—
2,480
— (1,927)
(345)
—
—
(854)
— (2,898)
—
—
—
28
28
6,376
(806)
182
47
(577)
(261)
(356)
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)
$9,232
(5,122)
2,922
(690)
(2,198)
—
(2,001)
(531)
—
7
(1,619)
—
—
—
—
—
—
Comprehensive income (loss)
$1,790
$566
$3,415
$28
$5,799
$—
$5,799
(1) Guarantee fee income is included in other income (loss) on our GAAP consolidated statements of comprehensive income.
FREDDIE MAC | 2017 Form 10-K
320
Financial Statements
NOTE 14
Notes to the Consolidated Financial Statements | Note 14
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 10.
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 | 2017 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 14
The table below summarizes the concentration by loan portfolio and geographic area of approximately
$1.8 trillion UPB of our single-family credit guarantee portfolio at both December 31, 2017 and 2016,
respectively. See Note 4 and Note 7 for more information about credit risk associated with loans and
mortgage-related securities that we hold or guarantee.
Core single-family loan portfolio
Legacy and relief refinance single-family loan
portfolio
Total
Region(1)
West
Northeast
North Central
Southeast
Southwest
Total
State(2)(3)
California
Florida
Illinois
New Jersey
New York
All other
Total
December 31, 2017
December 31, 2016
Percent of Credit Losses
Percentage of
Portfolio
Serious
Delinquency
Rate
Percentage of
Portfolio
Serious
Delinquency
Rate
78%
22
100%
30%
25
16
16
13
100%
18%
6
5
3
5
63
100%
0.35%
2.59%
1.08%
0.47%
1.24%
0.81%
1.95%
0.98%
1.08%
0.41%
3.33%
1.13%
1.78%
1.74%
0.91%
1.08%
73%
27
100%
30%
25
16
16
13
100%
18%
6
5
3
5
63
100%
0.20%
2.28%
1.00%
0.57%
1.45%
0.93%
1.19%
0.78%
1.00%
0.46%
1.42%
1.34%
2.26%
2.05%
0.90%
1.00%
2017
2016
3%
97
6%
94
100%
100%
27%
34
15
20
4
100%
18%
13
9
9
9
42
100%
11%
41
24
19
5
100%
5%
9
10
12
9
55
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, 2017.
(3) On January 1, 2017, we elected a new accounting policy for reclassifications of loans from held-for-investment to held-for-sale. The charge-offs
taken under the new policy affected some states more than others. See Note 4 for further information about this change.
The REO balance, net at December 31, 2017 and 2016 associated with single-family properties was
$0.9 billion and $1.2 billion, respectively, and the balance associated with multifamily properties was $6
million and $0 million, respectively. Our single-family REO inventory consisted of 8,299 properties and
11,418 properties at December 31, 2017 and 2016, 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 | 2017 Form 10-K
322
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
Credit Performance of Certain Higher-Risk Single-Family Loan
Categories
Participants in the mortgage market have characterized single-family loans based upon their overall
credit quality at the time of origination, including as prime or subprime. Mortgage market participants
have classified single-family loans as Alt-A if these loans have credit characteristics that range between
their prime and subprime categories, if they are underwritten with lower or alternative income or asset
documentation requirements compared to a full documentation loan, or both. Although we discontinued
new purchases of loans with lower documentation standards beginning March 1, 2009, we have
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.
FREDDIE MAC | 2017 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 14
Interest-only
Alt-A
Original LTV ratio greater than 90%(2)
Lower credit scores at origination (less than 620)
Percentage of Portfolio(1)
As of December 31,
Serious Delinquency Rate(1)
As of December 31,
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
1%
1%
17%
2%
1%
2%
16%
2%
4.97%
5.62%
1.70%
6.34%
4.34%
5.21%
1.58%
5.73%
(1) Excludes loans underlying certain other securitization products for which data was not available.
(2)
Includes HARP loans, which we purchase as part of our participation in the MHA Program.
We categorize our investments in non-agency mortgage-related securities as subprime, option ARM, or
Alt-A if the securities were identified as such based on information provided to us when we entered into
these transactions. We have not identified option ARM, CMBS, obligations of states and political
subdivisions and manufactured housing securities as either subprime or Alt-A securities. See Note 7 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
Securitization-related products
Other mortgage-related guarantees
Total
As of December 31, 2017
As of December 31, 2016
UPB
$38.2
192.5
10.0
$240.7
Delinquency
Rate(1)
0.01%
0.02%
—%
0.02%
UPB
$42.4
147.6
9.7
$199.7
Delinquency
Rate(1)
0.04%
0.03%
—%
0.03%
(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 mortgage credit risk is primarily related to loans that have
not been securitized.
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324
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
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.
Single-family Sellers
Wells Fargo Bank, N.A.
Other top 10 sellers
Top 10 single-family sellers
Multifamily Sellers
CBRE Capital Markets, Inc.
Berkadia Commercial Mortgage LLC
Walker & Dunlop, LLC
Other top 10 sellers
Top 10 multifamily sellers
2017
15%
38
53%
2017
18%
11
10
39
78%
2016
15%
34
49%
2016
19%
17
10
33
79%
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
five non-depository sellers provided approximately 20% and 17% of our single-family purchase volume
during 2017 and 2016, respectively.
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, 2017 and 2016, the UPB of loans subject to our repurchase requests
issued to our single-family sellers and servicers was approximately $0.2 billion and $0.3 billion,
respectively (these figures include repurchase requests for which appeals were pending). During 2017
and 2016, we recovered amounts that covered losses with respect to $0.3 billion and $0.6 billion,
respectively, in UPB of loans subject to our repurchase requests.
At the direction of FHFA, we and Fannie Mae revised our representation and warranty framework for
conventional loans purchased by the GSEs on or after January 1, 2013. 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.
FREDDIE MAC | 2017 Form 10-K
325
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
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, 2017, approximately 69% in UPB of loans in our
single-family credit guarantee portfolio were purchased since January 1, 2013 and are subject to our
revised representation and warranty framework.
At the direction of FHFA, we implemented a new remedies framework for the categorization of loan
origination defects for loans with settlement dates on or after January 1, 2016. Among other items, the
framework provides that "significant defects" will result in a repurchase request or a repurchase
alternative, such as recourse or indemnification. We may require the seller to pay us additional fees or
provide us with additional data on the loan.
The ultimate amounts of recovery payments we receive from seller/servicers related to their repurchase
obligations may be significantly less than the amount of our estimates of potential exposure to losses.
Our estimate of probable incurred losses for exposure to seller/servicers for their repurchase obligations
is considered in our allowance for loan losses. See Note 4 for further information.
We are also exposed to the risk that servicers might fail to service loans in accordance with our
contractual requirements, resulting in increased credit losses. For example, our servicers have an active
role in our loss mitigation efforts and we therefore 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.
Single-family Servicers
Wells Fargo Bank, N.A.
Other top 10 servicers
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
December 31, 2017(1) December 31, 2016(1)
19%
18%
40
58%
41
60%
December 31, 2017
December 31, 2016
16%
12
11
36
75%
15%
14
11
39
79%
(1) Percentage of servicing volume is based on the total single-family credit guarantee portfolio, excluding loans where we do not exercise control
over the associated servicing.
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
FREDDIE MAC | 2017 Form 10-K
326
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
now service a large share of our loans. As of December 31, 2017 and 2016, approximately 15% and
13% of our single-family credit guarantee portfolio, respectively, excluding loans where we do not
exercise control over the associated servicing, was serviced by our five largest non-depository servicers,
on a combined basis. One of our non-depository servicers also services a large share of the loans
underlying 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, 2017, mortgage insurers provided coverage with
maximum loss limits of $85.5 billion, for $334.3 billion of UPB, in connection with our single-family credit
guarantee portfolio. These amounts are based on gross coverage without regard to netting of coverage
that may exist to the extent an affected loan is covered under both primary and pool insurance.
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. Regulatory
approvals of the acquisition are still pending. Genworth Mortgage Insurance Corporation is a subsidiary
of Genworth Financial, Inc.
Mortgage Insurer
Arch Mortgage Insurance Company
Radian Guaranty Inc.
Mortgage Guaranty Insurance Corporation
Genworth Mortgage Insurance Corporation
Essent Guaranty, Inc.
Total
Credit Rating(1)
A-
BBB-
BBB
BB+
BBB+
Mortgage Insurance Coverage
December 31, 2017
December 31, 2016
24%
21
19
15
12
91%
25%
21
20
15
10
91%
(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, 2017. Represents the lower of S&P and Moody’s credit ratings stated
in terms of the S&P equivalent.
We received proceeds of $0.4 billion and $0.5 billion during 2017 and 2016, respectively, from our
primary and pool mortgage insurance policies for recovery of losses on our single-family loans. We had
FREDDIE MAC | 2017 Form 10-K
327
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
outstanding receivables from mortgage insurers of $0.1 billion (excluding deferred payment obligations
associated with unpaid claim amounts) as of both December 31, 2017 and 2016. The balance of these
receivables, net of associated reserves, was approximately $0.1 billion at both December 31, 2017 and
2016.
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, 2017 and
2016, 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
that we hold or guarantee. Some policies were acquired by the securitization trust that issued the
securities we purchased, while others were acquired by us. At December 31, 2017, the maximum
principal exposure to credit losses related to such policies was $3.5 billion. At December 31, 2017, our
top three bond insurers, Ambac Assurance Corporation (Ambac), National Public Finance Guarantee
Corp., and MBIA Insurance Corp., each accounted for more than 10% of our overall bond insurance
coverage and collectively represented approximately 95% of our coverage. Of our total outstanding
bond insurance coverage, approximately 77% relates to non-agency commercial mortgage-backed
securities.
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 ("rehabilitation court") put the segregated account into
rehabilitation (i.e., a state insolvency proceeding). Since its entry into rehabilitation and the subsequent
approval of an amended rehabilitation plan, Ambac has made one-time and periodic cash payments for
certain specified securities and policy claims but has deferred a portion of its payment obligations. On
January 22, 2018, the rehabilitation court approved the second amended rehabilitation exit plan. Under
this exit plan, Freddie Mac expects to receive a combination of cash and notes issued by Ambac as
consideration for a substantial portion of our outstanding insurance claims.
FREDDIE MAC | 2017 Form 10-K
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Financial Statements
Notes to the Consolidated Financial Statements | Note 14
We believe that we will likely receive substantially less than full payment of our claims from some of our
other bond insurers, because we believe they 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 and the
evaluation of our reserve for guarantee losses. 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 7 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 counterparties are primarily major financial institutions, including other
GSEs, Treasury, the Federal Reserve Bank of New York, GSD/FICC, highly-rated supranational
institutions and government money market funds. As of December 31, 2017 and December 31, 2016,
$239 million and $0 million of our securities purchased under agreements to resell were used to provide
financing to investors in Freddie Mac securities to increase liquidity and expand the investor base for
those securities. These transactions differ from the securities purchased under agreements to resell that
we use for liquidity purposes as the counterparties we face may not be major financial institutions and
we are exposed to the counterparty credit risk of these institutions. As of December 31, 2017 and 2016,
including amounts related to our consolidated VIEs, there were $89.3 billion and $96.2 billion,
respectively, primarily of cash and securities purchased under agreements to resell invested with
counterparties, U.S.Treasury securities, cash deposited with the Federal Reserve Bank of New York, or
cash advanced to lenders. As of December 31, 2017, 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. On July 12, 2017, FHFA reached a settlement with the Royal Bank of Scotland
Group plc, related companies and specifically named individuals (collectively RBS). The settlement
resolves all claims in the lawsuit filed by FHFA against RBS in the U.S. District Court for the District of
Connecticut. Under the terms of the agreement, RBS paid Freddie Mac $4.5 billion. We recognized this
amount within non-interest income on our consolidated statements of comprehensive income during the
third quarter of 2017. The separate lawsuit filed by FHFA against Nomura Holding America, Inc.
(Nomura) and RBS in the U.S. District Court for the Southern District of New York went to trial in March
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2015. 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). On September 28, 2017, the Second Circuit affirmed the
District Court's decision in full and, on December 11, 2017, denied the defendants' request for rehearing
or a rehearing en banc.
We worked with an investor consortium to enforce certain claims with JPMorgan Chase & Co. relating to
a number of non-agency mortgage-related securities. A settlement agreement was entered into with
respect to these claims. The settlement is subject to certain conditions, which have not yet been
satisfied. Our expected benefit from the settlement, which currently totals approximately $29 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.
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NOTE 15
Notes to the Consolidated Financial Statements | Note 15
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 techniques 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.
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Groups within our Finance Division, independent of our business functions, execute and validate the
valuation processes and are responsible for determining the fair values of the majority of our financial
assets and liabilities. In determining fair value, we consider the credit risk of our counterparties in
estimating the fair values of our assets and our own credit risk in estimating the fair values of our
liabilities. The fair values determined by our Finance Division are further verified by an independent
group within our ERM Division.
The independent validation procedures performed by the 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. 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, the ERM Division provides independent
risk governance over all valuation processes by establishing and maintaining a corporate-wide valuation
risk policy. The 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 lines, the ERM Division and the 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 material changes reviewed at the Valuation Committee. Inputs used by
models are regularly updated for changes in the underlying data, assumptions, valuation inputs and
market conditions, and are subject to the valuation controls noted above.
Use of Third-Party Pricing Data in Fair Value Measurement
Many of our valuation techniques use, either directly or indirectly, data provided by third-party pricing
services or dealers. The techniques used by these pricing services and dealers to develop the prices
generally are either:
A comparison to transactions involving instruments with similar collateral and risk profiles, adjusted
as necessary based on specific characteristics of the asset or liability being valued; or
Industry-standard modeling, such as a discounted cash flow model.
The prices provided by the pricing services and dealers reflect their observations and assumptions
related to market activity, including risk premiums and liquidity adjustments. The models and related
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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.
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Classification in the
Fair Value Hierarchy
Level 1
Level 2
Predominantly Level 2
Levels 2 and 3
Level 3
Instrument
Valuation Technique
Securities
U.S. Treasury Securities
Agency mortgage-
related securities
Fixed-rate single-class
Adjustable-rate single-class and
majority of multi-class securities
Quoted prices in active markets
Median of external sources
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.
Significant inputs used in the discounted cash flow
technique include OAS. Significant increases
(decreases) in the OAS in isolation would result in a
significantly lower (higher) fair value measurement.
Significant inputs used in the risk metric pricing
technique include key risk metrics, such as key rate
durations. 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.
Under risk metric pricing, securities are valued by
starting with a prior period price and adjusting that
price for market changes in the key risk metric input
used.
Commercial mortgage-related securities
Single external source or, in limited circumstances, a
median of external sources
Predominantly Level 3
Other non-agency mortgage-related securities
Median of external sources
Derivatives
Exchange-traded futures
Interest-rate swaps
Option-based derivatives
Quoted prices in active markets
Discounted cash flows. Significant inputs include
market-based interest rates.
Option-pricing models. Significant inputs include
interest-rate volatility matrices.
Purchase and sale commitments
See Agency mortgage-related securities
Level 3
Level 1
Level 2
Level 2
Level 2
Debt
Debt securities of consolidated trusts
held by third parties
Other debt
See Agency mortgage-related securities
Level 2 or 3
Median of external sources
Single external source
Published yield matrices
Predominantly Level 2
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Instrument
Valuation Technique
Mortgage Loans
Single-family loans GSE securitization market
Whole loan market
Impaired held-for-investment
Multifamily loans
Held-for-sale
Held-for-investment
Other Assets
Guarantee asset
Single-family
Multifamily
Mortgage servicing rights
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).
Median of external sources, referencing market activity
for deeply delinquent and modified loans, where
available
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.
Market prices from a third-party pricing service, using
discounted cash flows based on K Certificate and SB
Certificate market spreads
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
Median of external sources with adjustments for
specific loan characteristics
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.
Market prices from a third party or internally developed
prices using discounted cash flows. Significant inputs
include:
Estimated prepayment rates,
Estimated costs to service both performing and non-
accrual loans, and
Estimated servicing income per loan (including
ancillary income).
Classification in the
Fair Value Hierarchy
Level 2 or 3
Level 3
Level 3
Level 2
Level 3
Level 3
Level 3
Level 3
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Instrument
Valuation Technique
Classification in the
Fair Value Hierarchy
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.
Delivery and guarantee fees that we charge under our
current market pricing
Internal credit models. Significant inputs include loan
characteristics, loan performance and status
information.
Discounted cash flows. Significant inputs are similar to
those used in the valuation technique for the Multifamily
guarantee asset.
Level 2
Level 3
Level 3
Other Liabilities
Guarantee
obligation
Single-family
Multifamily
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 December 2018, 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 $2.1 billion and $5.3 billion as of December 31, 2017 and 2016, respectively. The total fair
value of the loans in our portfolio that reflect the pricing afforded to HARP loans as of December 31,
2017 and 2016 was $30.2 billion and $52.8 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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(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
Total assets carried at fair value on a recurring basis
Liabilities:
Debt securities of consolidated trusts held by third parties, at fair
value
Other debt, at fair value
Derivative liabilities, net:
Interest-rate swaps
Option-based derivatives
Other
Subtotal, before netting adjustments
Netting adjustments(1)
Total derivative liabilities, net
Other liabilities:
December 31, 2017
Level 1
Level 2
Level 3
Netting
Adjustment(1)
Total
$—
—
—
—
—
—
—
—
—
—
20,159
20,159
20,159
—
—
—
—
—
—
—
—
—
—
—
$20,159
$—
—
—
—
—
—
—
—
$30,415
2,007
—
87
—
32,509
11,393
3,565
27
14,985
2,660
17,645
50,154
20,054
4,262
4,524
44
8,830
—
8,830
—
137
—
137
$79,175
$9
5,023
7,239
121
64
7,424
—
7,424
$5,055
46
3,933
1,697
357
11,088
842
9
2,066
2,917
—
2,917
14,005
—
—
—
8
8
—
8
3,171
—
45
3,216
$17,229
$630
137
—
—
65
65
—
65
$—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8,463)
(8,463)
—
—
—
—
($8,463)
$—
—
—
—
—
—
(7,220)
(7,220)
$35,470
2,053
3,933
1,784
357
43,597
12,235
3,574
2,093
17,902
22,819
40,721
84,318
20,054
4,262
4,524
52
8,838
(8,463)
375
3,171
137
45
3,353
$108,100
$639
5,160
7,239
121
129
7,489
(7,220)
269
Non-derivative held-for-sale purchase commitments, at fair value
Total liabilities carried at fair value on a recurring basis
—
$—
4
$12,460
—
$832
—
($7,220)
4
$6,072
Referenced footnotes are included after the next table.
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Notes to the Consolidated Financial Statements | Note 15
(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:
December 31, 2016
Level 1
Level 2
Level 3
Netting
Adjustment(1)
Total
$—
—
—
—
—
—
—
—
—
—
19,402
19,402
19,402
—
—
—
—
—
—
—
$33,805
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
$9,847
66
11,797
3,366
665
25,741
1,095
12
113
1,220
—
1,220
26,961
—
—
—
3
3
—
3
$—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(11,521)
(11,521)
$43,652
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
Guarantee asset, at fair value
Non-derivative held-for-sale purchase commitments, at fair value
All other, at fair value
Total other assets
Total assets carried at fair value on a recurring basis
—
—
—
—
$19,402
—
108
—
108
$93,812
2,298
—
2
2,300
$29,264
—
—
—
—
($11,521)
2,298
108
2
2,408
$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:
$—
—
—
—
—
—
—
—
$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
Non-derivative held-for-sale purchase commitments, at fair value
Total liabilities carried at fair value on a recurring basis
—
$—
37
$18,592
—
$147
—
($11,897)
37
$6,842
(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 15
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.
December 31,
2017
2016
(In millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Assets measured at fair value on a
non-recurring basis:
Mortgage loans(1)
$—
$494
$6,199
$6,693
$—
$199
$2,483
$2,682
(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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Realized and unrealized gains (losses)
Year Ended December 31, 2017
Balance,
January 1,
2017
Included in
earnings
Included in
other
comprehensive
income
Total
Purchases
Issues
Sales
Settlements,
net
Transfers
into
Level 3(1)
Transfers
out of
Level 3(1)
Balance,
December 31,
2017
Unrealized
gains
(losses)
still held(3)
(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
mortgage-related securities
Trading, at fair value:
Mortgage-related
securities:
Freddie Mac
Other agency
All other
Total trading mortgage-
related securities
Other assets:
Guarantee asset
All other, at fair value
Total other assets
Liabilities
Debt securities of
consolidated trusts held by
third parties, at fair value
Other debt, at fair value
Net derivatives(2)
$81
$73
$494
$—
($932)
($1,349)
$17
($3,095)
$5,055
$9,847
66
11,797
3,366
($8)
—
1,564
343
(1)
(1)
(270)
1,294
—
—
(98)
245
1,681
665
1
(3)
(2)
—
—
—
—
—
—
(7,688)
(3,556)
(11)
(1,470)
(39)
—
(306)
25,741
1,900
(291)
1,609
2,175
— (12,176)
(3,175)
1,095
12
113
(171)
(3)
35
— (171)
—
—
(3)
35
709
—
1,946
1,220
(139)
— (139)
2,655
—
—
—
—
2,298
2
$2,300
(27)
(10)
($37)
—
—
(27)
(10)
— 1,387
33
31
$— ($37)
$33
$1,418
($11)
($487)
(592)
—
—
(592)
—
(11)
(8)
—
(28)
(36)
(487)
—
(8)
—
—
—
46
3,933
1,697
357
(3,103)
11,088
(205)
—
—
842
9
2,066
($18)
—
124
(2)
—
104
(155)
(3)
30
(205)
2,917
(128)
—
—
$—
3,171
45
$3,216
(26)
(10)
($36)
—
—
—
—
17
14
—
—
14
—
—
$—
Realized and unrealized (gains) losses
Balance,
January 1,
2017
Included in
earnings
Included in
other
comprehensive
income
Total
Purchases
Issues
Sales
Settlements,
net
Transfers
into
Level 3(1)
Transfers
out of
Level 3(1)
Balance,
December 31,
2017
Unrealized
(gains)
losses
still held(3)
$—
95
$52
$—
—
$40
$—
—
$—
$—
—
$40
$—
—
$—
$630
50
($10)
$—
—
$—
$—
(8)
($25)
$—
—
$—
$—
—
$—
$630
137
$57
$—
—
$20
Referenced footnotes are included after the next table.
FREDDIE MAC | 2017 Form 10-K
340
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
Realized and unrealized gains (losses)
Year Ended December 31, 2016
Balance,
January 1,
2016
Included in
earnings
Included in
other
comprehensive
income
Total
Purchases
Issues
Sales
Settlements,
net
Transfers
into
Level 3(1)
Transfers
out of
Level 3(1)
Balance,
December 31,
2016
Unrealized
gains
(losses)
still held(3)
$2,608
91
20,333
3,530
1,205
$10
—
877
2
1
($71)
($61)
$8,894
$— ($605)
—
—
($703)
(17)
(2)
(2)
55
932
(132)
(130)
(10)
(9)
—
—
—
—
— (6,286)
(3,182)
—
—
—
—
(34)
(531)
27,767
890
(160)
730
8,894
— (6,891)
(4,467)
331
41
2
374
1,753
—
$1,753
(21)
—
—
(21)
53
(2)
$51
—
—
—
—
—
—
(21)
—
—
(21)
53
(2)
869
—
114
983
—
14
—
—
—
—
850
—
(142)
(22)
—
(164)
—
—
(3)
(7)
(3)
(13)
(358)
—
$—
$51
$14
$850
$—
($358)
($10)
$29
—
—
—
—
29
190
—
—
190
—
(10)
($315)
(6)
—
—
—
$9,847
66
11,797
3,366
665
(321)
25,741
(129)
—
—
(129)
—
—
$—
1,095
12
113
1,220
2,298
2
$2,300
($9)
—
236
2
—
229
(20)
(1)
—
(21)
54
(2)
$52
(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
mortgage-related securities
Trading, at fair value:
Mortgage-related securities:
Freddie Mac
Other agency
All other
Total trading mortgage-related
securities
Other assets:
Guarantee asset
All other, at fair value
Total other assets
Realized and unrealized (gains) losses
Balance,
January 1,
2016
Included in
earnings
Included in
other
comprehensive
income
Total
Purchases
Issues
Sales
Settlements,
net
Transfers
into
Level 3(1)
Transfers
out of
Level 3(1)
Balance,
December 31,
2016
Unrealized
(gains)
losses
still held(3)
Liabilities
Other debt, at fair value
Net derivatives(2)
Other liabilities:
All other, at fair value
$—
8
$10
$—
68
$—
$—
$—
$—
$95
$—
—
68
—
2
—
$—
(26)
$—
—
$—
—
$—
$—
$—
$—
$—
$—
$—
($10)
$95
52
$—
$—
40
$—
(1)
(2)
(3)
Transfers out of Level 3 during 2017 and 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 2017 and 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.
Amounts are the net of derivative assets and liabilities prior to counterparty netting, cash collateral netting, net trade/settle receivable or payable and net derivative
interest receivable or payable.
Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in unrealized gains and losses related to assets and
liabilities classified as Level 3 that were still held at December 31, 2017 and December 31, 2016, respectively. Included in these amounts are other-than temporary
impairments recorded on available-for-sale securities.
FREDDIE MAC | 2017 Form 10-K
341
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
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).
(Dollars in millions, except for certain unobservable
inputs as shown)
Level 3
Fair
Value
Predominant
Valuation
Technique(s)
Unobservable Inputs
Type
Range
Weighted
Average
December 31, 2017
Recurring fair value measurements
Assets
Investments in securities
Available-for-sale, at fair value
Mortgage-related securities
Freddie Mac
Total Freddie Mac
Other agency
Non-agency RMBS
Total non-agency RMBS
$4,873
Discounted cash flows
OAS
27 - 501 bps
68 bps
182
5,055
46
3,665
268
3,933
Other
Other
Median of external
sources
Other
External pricing
sources
External pricing
sources
$75.6 - $80.8
$77.7
$108.4 - $108.9
$108.7
Non-agency CMBS
1,696
Single external source
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
Total all other
Total trading mortgage-related securities
Total investments in securities
Other assets:
Guarantee asset, at fair value
All other at fair value
Total other assets
Liabilities
Debt securities of consolidated trusts held by third
parties, at fair value
Other debt, at fair value
Net derivatives
1
1,697
334
23
357
11,088
582
243
17
842
9
Other
Median of external
sources
External pricing
sources
$101.2 - $101.6
$101.4
Other
Discounted cash flows
OAS
(8,905) - 27,202 bps
(88) bps
Risk metrics
Effective duration
0.00 - 55.93 years
11.76 years
Other
Other
2,065
Single external source
External pricing
sources
$6.4 - $113.2
$98.0
Other
1
2,066
2,917
$14,005
$3,171
Discounted cash flows
OAS
17 - 198 bps
45 bps
45
3,216
630
137
57
Other
Single External Source
External Pricing
Sources
$99.2 - $100.2
$100.1
Other
Other
FREDDIE MAC | 2017 Form 10-K
342
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
(Dollars in millions, except for certain unobservable inputs
as shown)
Level 3
Fair
Value
Predominant
Valuation
Technique(s)
Unobservable Inputs
Type
Range
Weighted
Average
December 31, 2016
Recurring fair value measurements
Assets
Investments in securities
Available-for-sale, at fair value
Mortgage-related securities
Freddie Mac
Total Freddie Mac
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
Total trading mortgage-related securities
$7,619
Discounted cash flows
OAS
(146) - 500 bps
External pricing
sources
$100.8 - $103.3
Median of external
sources
Other
Other
91 bps
$101.8
Median of external
sources
External pricing
sources
$74.0 - $78.8
$76.0
Other
Risk metrics
Other
Median of external
sources
Other
Effective duration
2.15 - 10.02 years
8.57 years
External pricing
sources
$100.9 - $101.5
$101.2
Risk metrics
Effective duration
(5.07) - 46.37 years
6.94 years
Discounted cash flows
OAS
(3,346) - 2,460 bps
(224) bps
Other
Other
Risk metrics
Effective duration
0.14 - 4.08 years
2.52 years
129
2,099
9,847
66
9,974
1,823
11,797
3,365
1
3,366
619
46
665
25,741
452
311
332
1,095
12
113
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
Discounted cash flows
OAS
17 - 198 bps
50 bps
207
2,298
2
2,300
95
49
Other
Other
Other
Other
FREDDIE MAC | 2017 Form 10-K
343
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
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)
Non-recurring fair value
measurements
Mortgage loans
Level 3
Fair
Value
Predominant
Valuation
Technique(s)
$6,199
Internal model
Internal model
December 31, 2017
Unobservable Inputs
Type
Range
Weighted
Average
Historical sales proceeds
$3,000 - $899,000
$176,558
Housing sales index
43 - 394 bps
Median of external sources
External pricing sources
$36.5 - $94.9
December 31, 2016
Unobservable Inputs
Type
Range
(Dollars in millions, except
for certain unobservable
inputs as shown)
Non-recurring fair value
measurements
Mortgage loans
Level 3
Fair
Value
Predominant
Valuation
Technique(s)
$2,483
Internal model
Internal model
Historical sales proceeds
$3,000 - $770,000
$167,137
Housing sales index
42 - 374 bps
Median of external sources
External pricing sources
$37.0 - $94.3
102 bps
$80.9
Weighted
Average
96 bps
$75.0
FREDDIE MAC | 2017 Form 10-K
344
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
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
Advances to lenders and other secured lending
Total financial assets
Financial Liabilities
Debt, net:
Debt securities of consolidated trusts
held by third parties
Other debt
Total debt, net
Derivative liabilities, net
Guarantee obligation
Non-derivative purchase commitments
December 31, 2017
Fair Value
Level 1
Level 2
Level 3
Netting
Adjustments(1)
Total
$6,848
2,963
—
—
20,159
20,159
—
—
—
—
—
—
—
$—
—
55,903
32,509
17,645
50,154
1,635,137
32,169
1,667,306
8,830
—
137
473
$—
—
—
11,088
2,917
14,005
145,911
67,932
213,843
8
3,359
55
796
$—
—
—
—
—
—
—
—
—
(8,463)
—
—
—
$6,848
2,963
55,903
43,597
40,721
84,318
1,781,048
100,101
1,881,149
375
3,359
192
1,269
GAAP
Carrying
Amount
$6,848
2,963
55,903
43,597
40,721
84,318
1,774,286
96,931
1,871,217
375
3,171
137
1,269
$2,026,201
$29,970
$1,782,803
$232,066
($8,463)
$2,036,376
$1,720,996
313,634
2,034,630
269
3,081
4
$— $1,721,091
$2,679
—
—
—
—
—
313,688
2,034,779
7,424
—
4
3,892
6,571
65
3,742
15
$— $1,723,770
—
—
317,580
2,041,350
(7,220)
—
—
269
3,742
19
Total financial liabilities
$2,037,984
$— $2,042,207
$10,393
($7,220)
$2,045,380
Referenced footnotes are included after the next table.
FREDDIE MAC | 2017 Form 10-K
345
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
(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
Advances to lenders and other secured lending
Total financial assets
Financial Liabilities
Debt, net:
Debt securities of consolidated trusts
held by third parties
Other debt
Total debt, net
Derivative liabilities, net
Guarantee obligation
Non-derivative purchase commitments
December 31, 2016
Fair Value
Level 1
Level 2
Level 3
Netting
Adjustments(1)
Total
$12,369
9,851
—
—
19,402
19,402
—
—
—
—
—
—
$—
—
51,548
41,016
24,168
65,184
1,554,143
31,004
1,585,147
12,265
—
108
—
$—
—
—
25,741
1,220
26,961
142,121
84,227
226,348
3
2,490
18
1,278
$—
—
—
—
—
—
—
—
—
(11,521)
—
—
—
$12,369
9,851
51,548
66,757
44,790
111,547
1,696,264
115,231
1,811,495
747
2,490
126
1,278
GAAP
Carrying
Amount
$12,369
9,851
51,548
66,757
44,790
111,547
1,690,218
112,785
1,803,003
747
2,298
108
1,278
$1,992,749
$41,622
$1,714,252
$257,098
($11,521)
$2,001,451
$1,648,683
353,321
2,002,004
795
2,208
37
$— $1,651,313
—
—
—
—
—
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
(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 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
FREDDIE MAC | 2017 Form 10-K
346
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
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 13.
Multifamily Held-For-Sale Loans
We elected the fair value option for multifamily loan purchase commitments and the related loans that
were acquired for securitization. We use derivatives to economically hedge the interest rate-related fair
value changes of the multifamily commitments and loans for which we have elected the fair value
option. 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.
2017
December 31,
Multifamily
Held-For-Sale
Loans
Other Debt -
Long Term
Debt securities of
consolidated
trusts held by
third parties (1)
Multifamily
Held-For-Sale
Loans
2016
Other Debt -
Long Term
Debt securities of
consolidated
trusts held by
third parties (1)
$20,054
19,762
$292
$5,160
4,666
$494
$630
630
$—
$16,255
16,231
$24
$5,866
5,584
$282
$—
—
$—
(In millions)
Fair value
Unpaid principal
balance
Difference
(1) Does not include interest-only securities with fair value of $9 million and $144 million as of December 31, 2017 and December 31, 2016, respectively.
FREDDIE MAC | 2017 Form 10-K
347
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
Changes in Fair Value Under the Fair Value Option Election
We recorded gains (losses) of $2 million, $250 million and ($38) million for the years ended
December 31, 2017, 2016 and 2015, 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 $1.1 billion and $663 million for the year ended December 31, 2017 and 2016,
respectively, 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 ($190) million, $63 million and
($9) million for the years ended December 31, 2017, 2016 and 2015, 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, 2017, 2016 or 2015 for any assets or liabilities for which we elected the fair value option.
FREDDIE MAC | 2017 Form 10-K
348
Financial Statements
NOTE 16
Notes to the Consolidated Financial Statements | Note 16
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's or servicer’s eligibility to sell
loans to, and/or service loans for, us. In these cases, the former seller or 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 sellers and servicers. Our contracts with our sellers and servicers
generally provide for indemnification of Freddie Mac against liability arising from sellers' and 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,
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Financial Statements
Notes to the Consolidated Financial Statements | Note 16
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.
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. Then, in an order issued February 2, 2017, the District Court
effectively dismissed Freddie Mac's remaining antitrust claim against HSBC USA, N.A. At present,
Freddie Mac's breach of contract actions against Bank of America, N.A., Barclays Bank, Citibank, N.A.,
Credit Suisse, Deutsche Bank, Royal Bank of Scotland and UBS AG are its only claims remaining in the
District Court.
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
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Financial Statements
Notes to the Consolidated Financial Statements | Note 16
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.
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. All plaintiffs appealed that decision, and on
February 21, 2017, the U.S. Court of Appeals for the District of Columbia Circuit affirmed in part and
remanded in part the decision granting the motions to dismiss. The Court of Appeals affirmed dismissal
of all claims except certain claims seeking monetary damages for breach of contract and breach of
implied duty of good faith and fair dealing. In March 2017, certain institutional and class plaintiffs filed
petitions for panel rehearing with respect to certain claims. On July 17, 2017, the Court of Appeals
granted the petitions for rehearing and issued a modified decision, which permitted the institutional
plaintiffs to pursue the breach of contract and breach of implied duty of good faith and fair dealing
claims that had been remanded. The Court of Appeals also removed language related to the standard to
be applied to the implied duty claims, leaving that issue for the District Court to determine on remand.
On October 16, 2017, certain institutional and class plaintiffs filed petitions for writ of certiorari in the
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Financial Statements
Notes to the Consolidated Financial Statements | Note 16
U.S. Supreme Court challenging whether HERA's prohibition on injunctive relief against FHFA bars
judicial review of the net worth sweep dividend provisions of the August 2012 amendment to the
Purchase Agreement, as well as whether HERA bars shareholders from pursuing derivative litigation
where they allege the conservator faces a conflict of interest. The Solicitor General has opposed the
petitions. On November 1, 2017, certain institutional and class plaintiffs and plaintiffs in another case in
which Freddie Mac was not originally a defendant, Fairholme Funds, Inc. v. FHFA, Treasury, and Federal
National Mortgage Association, filed proposed amended complaints in the District Court. Each of the
proposed amended complaints names Freddie Mac as a defendant for breach of contract and breach of
the covenant of good faith and fair dealing claims as well as for new claims alleging breach of fiduciary
duty and breach of Virginia corporate law. On January 10, 2018, FHFA, Freddie Mac, and Fannie Mae
moved to dismiss the amended complaints.
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. On November 27, 2017, the Court dismissed the case with prejudice after
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352
Financial Statements
Notes to the Consolidated Financial Statements | Note 16
defendants filed a motion to dismiss. On December 21, 2017, plaintiffs filed a notice of appeal to the
U.S. Court of Appeals for the Third Circuit.
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 | 2017 Form 10-K
353
Financial Statements
NOTE 17
Notes to the Consolidated Financial Statements | Note 17
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 regulatory capital requirements are not binding during conservatorship.
We continue to provide quarterly submissions to FHFA on minimum capital.
During 2017, we and Fannie Mae worked with FHFA to develop an overall risk measurement framework
for evaluating our risk management and business decisions during conservatorship, known as the
Conservatorship Capital Framework ("CCF"). We use both CCF and our internal capital methodologies,
which are aligned, to measure risk for making economically effective decisions. We are required to
submit quarterly reports to FHFA related to CCF requirements.
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.
FREDDIE MAC | 2017 Form 10-K
354
Financial Statements
Notes to the Consolidated Financial Statements | Note 17
Performance Against Regulatory Capital Standards
The table below summarizes our minimum capital requirements and deficits and net worth.
(In millions)
GAAP net worth (deficit)
Core capital (deficit)(1)(2)
Less: Minimum capital requirement(1)
Minimum capital surplus (deficit)(1)
December 31, 2017
December 31, 2016
($312)
(73,037)
18,431
($91,468)
$5,075
(67,717)
18,933
($86,650)
(1)
(2)
Core capital and minimum capital figures are estimates and represent amounts submitted to FHFA. FHFA is the authoritative source for our regulatory capital.
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, 2017, our liabilities exceeded our assets under GAAP by $312 million. As a result,
FHFA, as Conservator, will submit a draw request, on our behalf, to Treasury under the Purchase
Agreement to eliminate our net worth deficit. As of December 31, 2017, our aggregate funding received
from Treasury under the Purchase Agreement was $71.3 billion. This aggregate funding amount does not
include the initial $1.0 billion liquidation preference of senior preferred stock that we issued to Treasury
in September 2008 as an initial commitment fee and for which no cash was received, nor does it include
the additional $3.0 billion increase in the liquidation preference pursuant to the Letter Agreement.
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, 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 instructed otherwise.
FREDDIE MAC | 2017 Form 10-K
355
Financial Statements
NOTE 18
Notes to the Consolidated Financial Statements | Note 18
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
Gains (losses) on held-for-sale loan purchase commitments
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,
2017
2016
2015
$4,532
1,098
928
922
$7,480
$45
(693)
($648)
$—
663
(463)
1,054
$1,254
($90)
(509)
($599)
$65
—
(2,094)
1,150
($879)
($1,094)
(412)
($1,506)
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
Fixed assets
Advances to lenders
All other
Total other assets
Other liabilities
Servicer liabilities
Guarantee obligation
Accounts payable and accrued expenses
Payables related to securities
Income taxes payable
All other
Total other liabilities
(1) Primarily consists of servicer receivables and other non-interest receivables.
END OF CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES
FREDDIE MAC | 2017 Form 10-K
As of December 31,
2017
2016
$892
7,397
3,171
798
796
636
$1,198
5,083
2,298
630
1,278
1,871
$13,690
$12,358
$628
3,081
754
2,813
656
1,036
$8,968
$730
2,208
957
4,510
—
1,082
$9,487
356
Financial Statements
Quarterly Selected Financial Data
QUARTERLY SELECTED FINANCIAL DATA
(UNAUDITED)
(In millions, except share-related amounts)
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)
(In millions, except share-related amounts)
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)
1Q
$3,795
116
2Q
$3,379
422
(302)
(13)
689
374
(511)
(56)
(321)
(76)
(964)
(1,110)
2,211
23
$2,234
($23)
($0.01)
(1,096)
(3)
805
(294)
(513)
(37)
(330)
(126)
(1,006)
(837)
1,664
322
$1,986
($322)
($0.10)
2017
3Q
$3,489
(716)
(678)
(1)
6,153
5,474
(524)
(35)
(339)
(159)
(1,057)
(2,519)
4,671
(21)
$4,650
$21
$0.01
1Q
$3,405
467
2Q
$3,443
775
2016
3Q
$3,646
(113)
(4,561)
(57)
1,195
(3,423)
(448)
(84)
(272)
(153)
(957)
154
(354)
154
($200)
($354)
($0.11)
(2,058)
(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
4Q
Full-Year
$3,501
262
$14,164
84
88
(1)
1,228
1,315
(558)
(61)
(350)
(287)
(1,256)
(6,743)
(2,921)
(391)
($3,312)
($2,920)
($0.90)
(1,988)
(18)
8,875
6,869
(2,106)
(189)
(1,340)
(648)
(4,283)
(11,209)
5,625
(67)
$5,558
($3,244)
($1.00)
4Q
Full-Year
$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
(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 | 2017 Form 10-K
357
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, 2017.
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
FREDDIE MAC | 2017 Form 10-K
358
Controls and Procedures
procedures for which FHFA is responsible. For example, FHFA may formulate certain intentions with
respect to the conduct of our business that, if known to management, would require consideration for
disclosure or reflection in our financial statements, but that FHFA, for regulatory reasons, may 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, 2017 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, 2017 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, 2017. 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, 2017, 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 | 2017 Form 10-K
359
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, 2017 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 certain 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, 2017 have been prepared in conformity with
GAAP.
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Controls and Procedures
CHANGES IN INTERNAL CONTROL OVER
FINANCIAL REPORTING DURING THE
QUARTER ENDED DECEMBER 31, 2017
We evaluated the changes in our internal control over financial reporting that occurred during the quarter
ended December 31, 2017 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 | 2017 Form 10-K
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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 11 Board members.
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 2018. 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, 2018, the Conservator executed a written consent, effective as of that date, re-electing
each of the 11 incumbent directors submitted by the company for re-election as a member of our Board.
The individuals elected as directors by the Conservator are listed below.
Carolyn H. Byrd
Lance F. Drummond
Thomas M. Goldstein
Grace A. Huebscher
Steven W. Kohlhagen
Donald H. Layton
Christopher S. Lynch
Sara Mathew
Saiyid T. Naqvi
Eugene B. Shanks, Jr.
Anthony A. Williams
Richard C. Hartnack and Nicolas P. Retsinas were not eligible for re-election to the Board based on the
age and term limits set forth in our Corporate Governance Guidelines, or the "Guidelines". Raphael W.
Bostic resigned from the Board in May 2017, and Ms. Huebscher was elected to the Board in December
2017.
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 | 2017 Form 10-K
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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 or 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 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's rule regarding minority and women inclusion 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.
FREDDIE MAC | 2017 Form 10-K
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Directors, Corporate Governance, and Executive Officers
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 15, 2018:
Carolyn H. Byrd
Director Since
Age
69
December 2008
Freddie Mac Committees
• Compensation
• Risk
Public Company Directorships
• Regions Financial Corporation
Ms. Byrd is an experienced finance executive who has held a variety of leadership positions and has
significant public company board experience.
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 and Chair of the Audit Committee and former member of the Risk Committee
of Regions Financial Corporation (2010-present)
Member of the Board, Audit Committee and Executive Committee and Chair of the Corporate
Governance and Nominating Committee of Popeyes Louisiana Kitchen, Inc. (2001-2017)
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)
Lance F. Drummond
Age
63
Director Since
July 2015
Freddie Mac Committees
• Audit
• Nominating & Governance
Public Company Directorships
None
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)
FREDDIE MAC | 2017 Form 10-K
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Directors, Corporate Governance, and Executive Officers
Directors
Thomas M. Goldstein
Age
Director Since
58
October 2014
Freddie Mac Committees
• Audit
• Executive
• Nominating & Governance, Chair
Public Company Directorships
• Kemper Corporation
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)
Grace A. Huebscher
Age
58
Director Since
December 2017
Freddie Mac Committees
• Nominating & Governance
• Risk
Public Company Directorships
None
Ms. Huebscher is an executive with extensive experience in capital markets and real estate. She brings
to the Board deep multifamily industry knowledge, entrepreneurship and savvy.
Experience and Qualifications
Advisor to Capital One Commercial Bank (2017)
President of Capital One Multifamily Finance, LLC (2013-2017)
Co-Founder and Chief Executive Officer of Beech Street Capital, LLC (2009-2013)
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Directors, Corporate Governance, and Executive Officers
Directors
Various positions with Fannie Mae, including Vice President, Capital Markets (1997-2009)
Member of the Board of The Kenyon Review (1998-present)
Member of the Commercial Board of Governors of the Mortgage Bankers Association (2014-2017)
Steven W. Kohlhagen
Age
Director Since
70
February 2013
Freddie Mac Committees
• Compensation, Chair
• Executive
• Risk
Public Company Directorships
• AMETEK, 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)
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.
(2013-2017)
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)
FREDDIE MAC | 2017 Form 10-K
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Directors, Corporate Governance, and Executive Officers
Directors
Donald H. Layton
Age
67
Director Since
May 2012
Freddie Mac Committees
• Executive
Public Company 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)
Christopher S. Lynch
Age
60
Director Since
December 2008
Freddie Mac Committees
• Executive, Chair
Public Company Directorships
• American International Group Inc.
Mr. Lynch is an experienced senior 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 operating,
strategic, governance, financial reporting, troubled-asset management and risk management issues. He
has served as Non-Executive Chairman of the company since December 2011.
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)
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Directors, Corporate Governance, and Executive Officers
Directors
Various positions with KPMG LLP, including National Partner in Charge - Financial Services;
Chairman of KPMG’s Americas Financial Services; Member of the Global Financial Services and
U.S. Industries Leadership teams; 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, Chair of the Nominating and Corporate Governance Committee, member of
the Risk and Capital, 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
Director Since
62
December 2013
Freddie Mac Committees
• Audit, Chair
• Executive
• Nominating & Governance
Public Company Directorships
• Campbell Soup Company
• Shire plc
Ms. Mathew is an executive with global financial and general management experience. Ms. Mathew’s
extensive business, financial, and management experience, and her public company board and audit
committee experience, enable her to contribute to the Board’s oversight of our internal control over
financial reporting and compliance matters.
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)
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, Chair of the Audit, Compliance and Risk Committee, member of the
Nomination and Governance Committee, and former member of the Remuneration Committee 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 of Dun & Bradstreet Corporation (2008-2013)
Member of the International Advisory Council of Zurich Financial Services Group (2012-2017)
FREDDIE MAC | 2017 Form 10-K
368
Directors, Corporate Governance, and Executive Officers
Directors
Saiyid T. Naqvi
Age
Director Since
68
August 2013
Freddie Mac Committees
• Compensation
• Executive
• Risk, Chair
Public Company Directorships
None
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)
Eugene B. Shanks, Jr.
Director Since
Age
70
December 2008
Freddie Mac Committees
• Audit
• Compensation
Public Company 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 | 2017 Form 10-K
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Directors, Corporate Governance, and Executive Officers
Directors
Anthony A. Williams
Age
66
Director Since
December 2008
Freddie Mac Committees
• Nominating & Governance
• Risk
Public Company Directorships
None
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 (2012-2016)
Member of the Board and Audit Committee of Calvert Funds (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 | 2017 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 2017. 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 11 directors, 10 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 http://www.freddiemac.com/governance/board-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 have 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 non-
employee Board members and determined that all current members of our Board (other than Mr. Layton,
our CEO) are, and that Messrs. Bostic, Hartnack and Retsinas were, independent directors. Mr. Layton
is not considered an independent director because he is our CEO.
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Directors, Corporate Governance, and Executive Officers
Corporate Governance
Our non-employee Board members concluded that all current members of our Audit Committee,
Compensation Committee, and Nominating and Governance Committee are independent within the
meaning of Sections 4 and 5 of 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 2017 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.
Employment Affiliations with Competitors - During 2017, an immediate family member of Ms.
Huebscher served as an employee of a company that is a competitor of Freddie Mac. After
considering the nature and extent of the specific relationship between the company and the
immediate family member and between the company and Freddie Mac, our non-employee Board
members concluded that those business relationships do not constitute material relationships that
would impair Ms. Huebscher’s independence as our director.
Board Memberships with Charitable Organizations to Which We Have Made Payments -
During 2017, Mr. Bostic, who served as a director until May 31, 2017, 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 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. During 2017, Mr. Retsinas, who served as a director until February 13,
2018, 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 was required under
the Guidelines; moreover, since Mr. Retsinas was neither a board member nor a trustee of the
charitable organization, the payments would not have required an independence determination in
any event. The non-employee members of the Board considered the payments and the nature of the
organizations and concluded that the relationships with the charitable organizations did not
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Directors, Corporate Governance, and Executive Officers
Corporate Governance
constitute a material relationship between Mr. Bostic or Mr. Retsinas and us that impaired their
independence as our directors.
Board Memberships with Business Partners - During 2017, Ms. Byrd and Messrs. Bostic, Lynch,
Retsinas, Shanks, and Williams, and currently, Ms. Byrd and Messrs. Lynch, 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.
Financial Relationships with Business Partners - Mr. Hartnack, who served as a director until
February 13, 2018, owns stock of US Bancorp. In the aggregate, this stock represented a material
portion of his net worth. US Bancorp conducts significant business with us, including as a single-
family seller/servicer and as trustee of some of our securitization transactions. In order to eliminate
any potential conflict of interest that might have arisen as a result of this stock ownership, Mr.
Hartnack recused himself from discussing and acting upon any matters considered by the full Board
or any of the committees of which he was a member, and that related directly to US Bancorp. The
Audit Committee Chair, in consultation with the Non-Executive Chairman, addressed any questions
regarding whether recusal from a particular discussion or action was 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 our business relationship with US
Bancorp and any potential impact that his stock ownership might have had on his independent
judgment as our director, taking into account the recusal arrangement. Our non-employee Board
members concluded that Mr. Hartnack’s recusal arrangement concerning US Bancorp addressed
any actual or potential conflicts of interest that might have arisen 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 did not constitute a material relationship between him and Freddie
Mac that would impair his independence as a Freddie Mac director.
During 2017, Mr. Naqvi owned stock of PNC Financial Services Group, Inc. (“PNC”). In the
aggregate, this stock represented 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 have arisen as a result of this stock ownership, Mr. Naqvi agreed to recuse himself from
discussing and acting upon any matters that were to be considered by the full Board or any of the
committees of which he is a member, and that related directly to PNC. The Audit Committee Chair,
in consultation with the Non-Executive Chairman, addressed any questions regarding whether
recusal from a particular discussion or action was appropriate. In July 2017, Mr. Naqvi reported that
he substantially reduced his holdings of PNC stock such that it no longer constituted a material
portion of his net worth and, as a result, the Board determined that his recusal arrangement was no
longer necessary.
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
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Directors, Corporate Governance, and Executive Officers
Corporate Governance
and any potential impact that his stock ownership might have on his independent judgment as our
director, taking into account the recusal arrangement. Our non-employee Board members concluded
that Mr. Naqvi’s recusal arrangement concerning PNC addressed any actual or potential conflicts of
interest that might have arisen with respect to his ownership of PNC stock. Accordingly, our non-
employee Board members concluded that Mr. Naqvi’s ownership of PNC stock did not constitute a
material relationship between him and Freddie Mac that would impair his independence as a Freddie
Mac director.
Board and Committee Information
Authority of the Board and Board Committees
The directors serve on behalf of, and exercise authority as directed by, the Conservator and owe their
fiduciary duties of care and loyalty to the Conservator. Although 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, the Conservator has reserved certain powers of approval to itself. The Conservator provided
instructions to the Board in 2008 and 2012 to consult with and obtain the Conservator’s decision before
taking certain actions. In December 2017, the Conservator further revised these instructions, which will
become effective on March 31, 2018. Until the revised instructions are effective, we remain subject to
the Conservator’s prior instructions from 2012, which are described in Directors, Corporate
Governance, and Executive Officers - Corporate Governance - Board and Committee
Information in our Annual Report on Form 10-K filed on February 16, 2017.
The Conservator’s revised instructions require that we obtain the Conservator’s decision before taking
action on any matters that require the consent of or consultation with Treasury under the Purchase
Agreement. See Note 2: Conservatorship and Related Matters for a list of matters that require
the approval of Treasury under the Purchase Agreement.
The Conservator’s revised instructions also require us to obtain the Conservator’s decision before taking
action in the areas identified in the table below. For some matters, the Conservator’s revised instructions
specify that our Board must review and approve the matter before we request the Conservator's
decision, and for other matters the Board is expected to determine the appropriate level of its
engagement.
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Directors, Corporate Governance, and Executive Officers
Corporate Governance
Matters Requiring Prior Board Review and Approval
Other Matters
• redemptions or repurchases of our subordinated debt, except as
may be necessary to comply with the Purchase Agreement;
• creation of any subsidiary or affiliate, or entering into a
substantial transaction with a subsidiary or affiliate, except for
routine, ongoing transactions with CSS or the creation of, or a
transaction with, a subsidiary or affiliate undertaken in the
ordinary course of business;
• changes to, or removal of, Board risk limits that would result in
an increase in the amount of risk that may be taken by us;
• retention and termination of external auditors to perform an
integrated audit of our financial statements and internal
controls over financial reporting and termination of law firms
serving as consultants to the Board;
• proposed amendments to our bylaws or Board committee
charters;
• setting or increasing the compensation or benefits payable to
members of the Board; and
• establishing the annual operating budget.
• material changes in accounting policy;
• proposed changes in our business operations, activities, and
transactions that, in the reasonable business judgment of our
management, are more likely than not to result in a significant
increase in credit, market, reputational, operational or other key
risks;
• matters, including our initiation or substantive response to
litigation, that impact or question the Conservator’s powers, our
status in conservatorship, the legal effect of the
conservatorship, interpretations of the Purchase Agreement or
terms and conditions of the Financial Agency Agreement with
Treasury or our performance under the Financial Agency
Agreement;
• agreements with respect to any securities litigation claim; and
agreements under which we settle, resolve, or compromise
demands, claims, litigation, lawsuits, prosecutions, regulatory
proceedings, or tax matters when the amount in dispute is more
than $50 million, including each separate agreement with the
same counterparty involving the same dispute or common facts
when the aggregate amount in dispute totals more than
$50 million (excluding loan workouts);
• mergers, acquisitions and changes in control of a Key
Counterparty where we have a direct contractual right to cease
doing business with such Key Counterparty or object to the
merger or acquisition;
• changes to requirements, policies, frameworks, standards or
products that are aligned with Fannie Mae’s, pursuant to FHFA’s
direction;
• credit risk transfers that are new transaction types, recurring
transactions with any material change in terms, and
transactions that involve collateral types not previously included
in a risk transfer transaction;
• mortgage servicing rights sales and transfers involving:
100,000 or more loans to a non-bank transferee; or
25,000 or more loans to any transferee servicer when 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; and
• changes in employee compensation that could significantly
impact our employees, including retention awards, special
incentive plans, and merit increase pool funding.
In addition, FHFA requires us to provide it with timely notice of (i) activities that represent a significant
change in current business practices, operations, policies, or strategies not otherwise addressed in the
Conservator decision items referenced above; (ii) exceptions and waivers to aligned requirements,
policies, frameworks, standards or products if not otherwise submitted to FHFA for Conservator
approval as required above; and (iii) accounting error corrections to previously issued financial
statements that are not de minimis. FHFA will then determine whether any such items require
Conservator approval. For more information on the conservatorship, see MD&A - Conservatorship
and Related Matters.
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Directors, Corporate Governance, and Executive Officers
Corporate Governance
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 http://www.freddiemac.com/governance/board-committees.html. The membership of
each committee as of February 15, 2018 is set forth below, together with a description of the primary
responsibilities of each committee.
Committee
Meetings in 2017
Chair
Members
Audit Committee
9 Committee meetings;
3 joint meetings with the
Risk Committee
Sara Mathew
Executive Committee
None
Christopher S. Lynch
Compensation Committee
8 Committee meetings
Steven W. Kohlhagen
Nominating and Governance
Committee
5 Committee meetings
Thomas M. Goldstein
5 Committee meetings;
3 joint meetings with the
Audit Committee
Saiyid T. Naqvi
Risk Committee
Audit Committee
• Lance F. Drummond
• Thomas M. Goldstein
• Nicolas P. Retsinas
• Eugene B. Shanks. Jr.
• Thomas M. Goldstein
• Donald H. Layton
• Steven W. Kohlhagen
• Sara Mathew
• Saiyid T. Naqvi
• Carolyn H. Byrd
• Saiyid T. Naqvi
• Eugene B. Shanks, Jr.
• Lance F. Drummond
• Grace A. Huebscher
• Sara Mathew
• Anthony A. Williams
• Carolyn H. Byrd
• Grace A. Huebscher
• Steven W. Kohlhagen
• Anthony A. Williams
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
FREDDIE MAC | 2017 Form 10-K
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Directors, Corporate Governance, and Executive Officers
Corporate Governance
reports related to processes established by management to provide compliance with legal and
regulatory requirements. The Audit Committee’s activities during 2017 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 reports independently to the Audit Committee.
Our Audit Committee satisfies the definition of “audit committee” in Exchange Act Section 3(a)(58)(A)
and the requirements of Exchange Act Rule 10A-3. Although our stock has been delisted from the
NYSE, certain of the corporate governance requirements of the NYSE Listed Company Manual,
including those relating to audit committees, continue to apply to us because they are incorporated by
reference in the Corporate Governance Rule. Our Audit Committee satisfies the “audit committee”
requirements in Sections 303A.06 and 303A.07 of the NYSE Listed Company Manual. The Board has
determined that all members of our Audit Committee are independent and that Ms. Mathew, a member
of the Audit Committee since December 2013 and its current chair, meets the definition of an “audit
committee financial expert” under SEC regulations.
Executive Committee
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.
Compensation Committee
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 2017 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.
Nominating and Governance Committee
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.
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Directors, Corporate Governance, and Executive Officers
Corporate Governance
Risk Committee
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 or 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.
Board Leadership Structure
The positions of CEO and Non-Executive Chairman of the Board are held by different individuals. This
leadership structure was established by the Conservator. FHFA’s Corporate Governance Rule requires
that the position of chairperson of the Board be filled by an independent director as defined under the
rules of the NYSE. See MD&A — Risk Management — Overview for more information on the
Board’s role in risk oversight.
For a discussion of the Compensation Committee’s conclusion that our compensation policies and
practices do not create risks that are reasonably likely to have a material adverse effect on us, see
Executive Compensation — Compensation and Risk.
Communications with Directors
Interested parties wishing to communicate any concerns or questions about Freddie Mac to the Board
or its directors may do so by U.S. mail, addressed to the Corporate Secretary, Freddie Mac, 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.
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. 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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Directors, Corporate Governance, and Executive Officers
Corporate Governance
Director Compensation
Non-employee Board members receive compensation in the form of cash retainers, 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.
2017 Non-Employee Director Compensation Levels
Board compensation levels during conservatorship are shown in the table below.
Board Service
Annual Retainer for Non-Executive Chairman
Annual Retainer for Directors (other than the Non-Executive Chairman)
Committee Service
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
Cash Compensation
$290,000
160,000
Cash Compensation
$25,000
15,000
10,000
10,000
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Directors, Corporate Governance, and Executive Officers
Corporate Governance
2017 Director Compensation
The following table summarizes the 2017 compensation earned by all persons who served as non-
employee directors during 2017.
Non-Employee Director
Christopher S. Lynch
Raphael W. Bostic(2)
Carolyn H. Byrd(3)
Lance F. Drummond
Thomas M. Goldstein
Richard C. Hartnack
Grace A. Huebscher(4)
Steven W. Kohlhagen
Sara Mathew(3)
Saiyid T. Naqvi
Nicolas P. Retsinas
Eugene B. Shanks, Jr.
Anthony A. Williams
Fees Earned or
Paid in Cash(1)
$290,000
66,374
164,097
170,000
170,000
170,000
13,478
160,000
182,542
175,000
180,000
170,000
160,000
All Other
Compensation
Total
—
—
—
—
—
—
—
—
—
—
654(5)
—
—
$290,000
66,374
164,097
170,000
170,000
170,000
13,478
160,000
182,542
175,000
180,654
170,000
160,000
(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) Mr. Bostic resigned from the Board in May 2017.
(3)
In addition to the annual Board service and appropriate Committee Chair retainers, the amount reflects partial annual compensation for service as a
member of the Audit Committee or as a Committee Chair during 2017. In March 2017, the Chair of the Audit Committee transitioned from Ms. Byrd
to Ms. Mathew.
(4) Ms. Huebscher joined the Board in December 2017.
(5) Represents the fair market value of accrued dividend equivalents of vested restricted stock units granted to Mr. Retsinas on June 8, 2007 and June
5, 2008 which were released on January 2, 2017, the date the restrictions on the units lapsed.
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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Directors, Corporate Governance, and Executive Officers
Executive Officers
EXECUTIVE OFFICERS
As of February 15, 2018, our executive officers are as follows:
Donald H. Layton
Year of Affiliation
2012
Age
67
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
Year of Affiliation
2013
Age
50
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
52
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 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 and led the development of 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.
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Directors, Corporate Governance, and Executive Officers
Executive Officers
Stacey Goodman
Year of Affiliation
2017
Age
55
Position
Executive Vice President - Chief Information Officer
Ms. Goodman has served as our EVP - Chief Information Officer since September 2017. In this role, she
leads the Information Technology division and provides enterprise-wide leadership for the company’s
technology activities. Previously, Ms. Goodman spent four years at CIT where she was the EVP and
Chief Information and Operations Officer. Prior to working at CIT, she worked at Bank of America from
2005 to 2011 in roles of increasing responsibility, last serving as managing director and divisional Chief
Information Officer of global technology and operations.
Anil D. Hinduja
Age
54
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, 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
62
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.
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Directors, Corporate Governance, and Executive Officers
Executive Officers
David B. Lowman
Year of Affiliation
2013
Age
60
Position
Executive Vice President - Single-Family Business
Mr. Lowman has served as our EVP - Single-Family Business since May 2013. In addition, he served as
a member of the Board of Managers of CSS from November 2014 through April 2017. Previously, Mr.
Lowman served as a Senior Advisor to The Boston Consulting Group. Prior to that, he was the Chief
Executive Officer of Chase Home Lending from 2006 to 2011. Before Chase Home Lending, he spent a
decade in senior leadership roles in various lending businesses of Citigroup, including head of
CitiMortgage and Citicorp Trust Bank, FSB. Before joining Citigroup, Mr. Lowman spent 11 years at The
Prudential Home Mortgage Company, Inc. in progressively senior leadership roles. He started his career
at KPMG where his clients included banks, thrifts, and mortgage bankers.
William H. McDavid
Age
71
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
59
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; Making Home Affordable - Compliance; Conservatorship and Regulatory Affairs; and
Economic and Housing Research organizations. In addition, since November 2014 he has served as a
member of the Board of Managers of CSS and currently serves as its Chair. 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.
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Executive Compensation
Compensation Discussion and Analysis
Executive Compensation
COMPENSATION DISCUSSION AND ANALYSIS
This section contains information regarding our compensation programs and policies (all of which have
been approved by FHFA) and the compensation of the following individuals who we determined to be
our Named Executive Officers, or NEOs, for the year ended December 31, 2017.
Donald H. Layton
James G. Mackey
Michael T. Hutchins
David B. Lowman
William H. McDavid
Named Executive Officers
Chief Executive Officer
Executive Vice President - Chief Financial Officer
Executive Vice President - Investments and Capital Markets
Executive Vice President - Single-Family Business
Executive Vice President - General Counsel & Corporate Secretary
For information on our primary business objectives and the progress we made during 2017 toward
accomplishing those objectives, see Introduction — About Freddie Mac.
Overview of Executive Management Compensation
Program
Compensation in 2017 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
filed on August 4, 2015.
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Executive Compensation
2017 Compensation Information for NEOs
Elements of Target TDC
Compensation under the EMCP in 2017 consisted of the following elements:
Deferred Salary
The amount earned in each quarter, including interest, is paid on the last pay date of the corresponding quarter in the following year.
Base Salary
At-Risk Deferred Salary
Fixed Deferred Salary
To encourage achievement of conservatorship, corporate, and individual performance goals
Conservatorship Scorecard
Corporate Scorecard/
Individual
$500,000 or less with
limited exceptions and
requires FHFA approval
Earned and paid bi-weekly
To encourage executive retention
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 objectives against which 2017 corporate performance was measured, together with the assessment
of actual performance against those objectives, are described in Determination of 2017 At-Risk
Deferred Salary — At-Risk Deferred Salary Based on Conservatorship Scorecard
Performance and Determination of 2017 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 2017 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
What We Don't Do
Clawback provisions with a significant portion of
compensation subject to recapture and/or forfeiture
Use of an independent compensation consultant by the
Board’s Compensation Committee
Annual compensation risk review
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)
No agreements that guarantee a specific amount of
compensation for a specified term of employment
No golden parachute payments or other similar change
in control provisions
No tax “gross-ups”
No hedging or pledging of company securities permitted
Evaluation of company performance against multiple
measures, including non-financial measures
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Executive Compensation
2017 Compensation Information for NEOs
CEO Compensation
Mr. Layton’s compensation in 2017 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 2017, 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 2018 is unchanged from 2017.
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 2017 Target TDC for Eligible NEOs
Role of Compensation Consultant
As part of the annual process to determine the Target TDC for each of the eligible 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 2017, 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.
2017 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.
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Executive Compensation
2017 Compensation Information for NEOs
The Comparator Group used in determining compensation for 2017 consisted of the following
companies, which include no changes from the 2016 Comparator Group:
Allstate
Ally Financial
AIG
Bank of America*
Bank of New York Mellon
BB&T
Capital One
Citigroup*
Fannie Mae
Fifth Third Bancorp
The Hartford
JPMorgan Chase*
MetLife
Northern Trust
PNC
Prudential
Regions Financial
State Street
SunTrust
U.S. Bancorp
Wells Fargo*
* Only mortgage or real estate division-level compensation data from these diversified banking firms may be utilized where
available and appropriate for the position being benchmarked.
The Compensation Committee has determined that, in addition to the companies above, the following
companies will be included in the 2018 Comparator Group. These additional companies reflect our
growing technology focus and provide the Compensation Committee with additional data to use when
making executive compensation decisions.
American Express
Citizens Financial Group
Discover Financial Services
KeyCorp
Mastercard
Synchrony Financial
Visa
Voya Financial
Establishing Target TDC
The Compensation Committee developed its 2017 Target TDC recommendations for the eligible NEOs,
other than Mr. Hutchins, by reviewing data from the Comparator Group. For Mr. Hutchins, the
Compensation Committee reviewed data from a broader financial services survey reflecting companies
with significant assets under management. The Compensation Committee’s 2017 Target TDC
recommendation for each of the eligible NEOs was reviewed and approved by FHFA.
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
Michael T. Hutchins
David B. Lowman
William H. McDavid
2017 Target TDC
Base
Salary
Fixed
Deferred Salary
At-Risk
Deferred Salary
Target TDC
500,000
500,000
500,000
500,000
1,775,000
1,425,000
1,775,000
1,460,000
975,000
825,000
975,000
840,000
3,250,000
2,750,000
3,250,000
2,800,000
(1) Mr. Layton did 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.
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Executive Compensation
2017 Compensation Information for NEOs
The 2017 Target TDC amounts reflected modest increases effective in late January 2017 from 2016
levels for each eligible NEO after taking into account their individual performance and to move their
compensation closer to the 50th percentile of competitive market compensation levels. For additional
information, see 2017 Target TDC in our Annual Report on Form 10-K filed on February 16, 2017.
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Executive Compensation
2017 Compensation Information for NEOs
Determination of 2017 At-Risk Deferred Salary
The Compensation Committee and FHFA considered our achievements in pursuing our primary
business objectives, as well as other factors, in determining the funding level for At-Risk Deferred Salary
in 2017. 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 2017 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
2017 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 2017 Conservatorship Scorecard. FHFA noted the following considerations in
assessing our performance against the 2017 Conservatorship Scorecard:
Our contribution to maintaining the national housing finance markets through our efforts to simplify
and standardize forms and approaches and refine aspects of loss mitigation, as well as continuing to
advance the Neighborhood Stabilization Initiative;
Our continuing efforts to reduce taxpayer risk by pursuing new and innovative approaches to single-
family and multifamily credit risk transfer transactions;
Our effective collaboration with CSS and Fannie Mae in moving the single security initiative and the
common securitization platform forward, and our contribution to the successful implementation of
the Uniform Closing Disclosure Dataset;
Our creativity, collaboration, and speed in evaluating and delivering solutions for those affected by
Hurricanes Irma, Harvey, and Maria, which allowed homeowners to stay in their homes and move
forward to focus on recovery; and
The important steps we took in the diversity and inclusion (“D&I”) area, including transactions with
minority- and women-owned businesses. FHFA noted, however, that although we failed to establish
certain quantifiable goals for D&I, substantial efforts made in 2017 position us to achieve this goal in
early 2018.
In making its assessment, FHFA also considered 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 consideration for D&I 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.
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Executive Compensation
2017 Compensation Information for NEOs
The table below presents the Conservatorship Scorecard objectives and FHFA’s assessment of our
achievement against those objectives.
Performance Goals
FHFA’s Summary of Performance
Maintain, in a safe and sound manner, credit availability and foreclosure prevention activities for new and
refinanced mortgages to foster liquid, efficient, competitive, and resilient national housing finance markets. (40%)
Work to increase access to single-family mortgage credit for creditworthy
borrowers, including underserved segments of the market:
• Continue to assess opportunities to address credit access and develop
recommendations for improvements where appropriate:
Conduct research to assess opportunities for responsibly supporting
access to credit for underserved borrower groups.
Leveraging research and analysis, develop pilots and initiatives that take
into account the changing circumstances and needs of the borrower
population.
Support access to credit for borrowers with limited English proficiency by
assessing the impact of language barriers throughout the mortgage life
cycle and developing a plan to improve access to credit that is
appropriate for the company.
• Continue to improve the effectiveness of pre-purchase counseling and
homeownership education through technology, data analysis, and other
opportunities as appropriate.
• Conclude assessment of updated credit score models for underwriting,
pricing, and investor disclosures, and, as appropriate, plan for
implementation.
Finalize post-crisis loss mitigation activities:
• Implement the post-crisis permanent modification for borrowers with long-
term hardships and finalize related activities, including updates to the
Uniform Borrower Assistance Form.
• Develop other post-crisis loss mitigation options for borrowers, including
solutions for borrowers with short-term hardships and guidelines for
foreclosure alternatives such as short sale and deed-in-lieu. Develop an
implementation plan and timeline for these offerings.
Continue to responsibly reduce the number of severely-aged delinquent
loans and real estate owned properties:
• Continue to implement strategies to responsibly reduce the number of
severely-aged delinquent loans held by the company with a focus on
providing home retention options for borrowers when possible, including
through non-performing loan sales.
• Continue to responsibly reduce the number of real estate owned properties
held by the company, including through the Neighborhood Stabilization
Initiative.
Assess the current mortgage servicing business model:
• With the objective of ensuring ongoing liquidity in the mortgage servicing
market and ensuring counterparty strength, initiate a multiyear assessment
of both the challenges facing the mortgage servicing market and potential
solutions for identified issues.
• Work collaboratively with industry stakeholders and seek stakeholder
feedback in assessing these challenges and potential solutions.
Explore opportunities to further support liquidity in multifamily affordable
housing:
• Explore opportunities to further support liquidity in multifamily affordable
housing, including through pilots and initiatives. Research and analysis are
encouraged in the following areas: workforce housing, affordability in high-
cost and very-high cost areas, targeted affordable housing, small multifamily
properties, manufactured housing rental community blanket loans, senior
housing, rural housing, energy efficiency, and other areas as identified by the
company.
All goals were achieved with the creation of a
multiyear plan to support access to credit for
underserved segments in 2018 and beyond; the
launch of policies and products to support future
borrowers; and the implementation of Loan
Prospector Advisor, a tool for counselors to assess
consumers' readiness for homeownership.
All goals were achieved with the implementation of
the Flex Modification program; the Mortgage
Assistance Application program, which replaces the
Uniform Borrower Assistance Form; and Imminent
Default determination.
All goals were achieved with the company
demonstrating diligence and collaboration in the
Neighborhood Stabilization Initiative ("NSI")
program resulting in responsible disposition of Real
Estate Owned properties in hardest-hit
communities, the implementation of a donation and
demolition plan that supports neighborhood
stabilization and the expansion of the NSI into ten
additional markets.
All goals were achieved.
Goal was achieved.
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Performance Goals
FHFA’s Summary of Performance
Manage the dollar volume of new multifamily business to remain at or
below $36.5 billion:
Goal was achieved.
• Loans in affordable and underserved market segments, as defined by FHFA,
are to be excluded from the $36.5 billion cap for the company.
Reduce taxpayer risk through increasing the role of private capital in the mortgage market (30%)
Single-Family Credit Risk Transfers:
• Transfer a meaningful portion of credit risk on at least 90 percent of the UPB
of newly acquired single-family mortgages in loan categories targeted for
risk transfer. For 2017, targeted single-family loan categories include: non-
HARP and non-high LTV refinance, fixed-rate mortgages with terms greater
than 20 years and loan to value ratios above 60 percent.
• Continue efforts to evaluate and implement 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.
• Identify, evaluate, and address significant issues from the 2016 Request for
Input on advancing the company's and Fannie Mae's credit risk transfer
programs, including through consideration of front-end credit risk transfers.
Multifamily Credit Risk Transfers:
• Transfer a meaningful portion of credit risk on at least 80 percent of the UPB
of newly acquired multifamily mortgages.
• Continue efforts to evaluate, and implement if economically feasible, further
ways to transfer additional credit risk.
All goals were achieved through the company's
innovative approaches to transferring credit risk on
single-family mortgages.
All goals were achieved through the company’s
innovative approaches to transfer risk on
multifamily mortgages.
Retained Portfolio:
Goal was achieved.
• Execute FHFA-approved retained portfolio plans that 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.
Private Mortgage Insurer Eligibility Requirements (PMIERs 2.0):
Goal was achieved.
• Evaluate existing PMIERs and whether changes or updates are appropriate.
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%)
All goals were achieved with focus on activities to
support the implementation of Single Security in 2Q
2019.
Common Securitization Platform and Single Security:
• Continue working with FHFA, each other, and CSS 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.
• Continue to work with each other and CSS to obtain and utilize input from
the Single Security/CSP Industry Advisory Group.
Provide Active Support for Mortgage Data Standardization Initiatives:
Goal was achieved.
• Continue the development and implementation of the Uniform Closing
Disclosure Dataset.
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Executive Compensation
2017 Compensation Information for NEOs
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 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.
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, no reduction should be applied due to
company performance for this portion of At-Risk Deferred Salary.
The Board has adopted Corporate Scorecard goals for 2018 that are substantially similar to the 2017
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
Customer
Compete for business by being a
customer-centric organization
The company achieved or exceeded all elements of this goal. The multifamily business exceeded
its target for customer satisfaction while the single-family business achieved its target for
customer satisfaction, remaining in line with top performing financial institutions.
People and Culture
Hire and retain talented people in a
winning culture
The company achieved or exceeded all elements of this goal. The company continued to improve
leadership diversity, and the retention of high-performing employees remained strong resulting
in above-plan results for both. Focused efforts to build the company's desired culture continue to
yield positive results, including strong scores on the company's People Survey and
improvements in the practice of filling management roles with internal candidates.
Operating Performance
Operate as well as the best-run
financial institutions
The company achieved or exceeded all but three elements of this goal. Comprehensive income
was above-plan, except for one single-family element, which was below-plan. The corporate
G&A expenses were above-plan, as were both the multifamily new business volume and the
company focus on reducing less liquid assets in the retained portfolio. The company failed to
achieve two other elements, related to single-family GSE market share and single-family current
year returns.
Risk and Capital Management
Manage risk and capital as well as
the largest financial institutions
Community Mission
Responsibly increase access to
housing finance
The company achieved or exceeded all elements of this goal. The company continued to mitigate
its risk through the transfer of credit risk on single-family new business. The multifamily
business exceeded its risk transfer target.
Based on preliminary information, the company believes it met all five single-family affordable
housing goals. The company also believes it achieved all three multifamily affordable housing
goals and exceeded the target for uncapped new multifamily volume (including Green Advantage
offerings).
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Executive Compensation
2017 Compensation Information for NEOs
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.
James G. Mackey, Executive Vice President - Chief Financial Officer
Performance Highlights
Implemented hedge accounting successfully to better align economic and GAAP earnings.
Continued operational efficiency improvements, which included enhanced financial planning and analysis capabilities,
increased use of reporting tools to simplify operations, and either streamlined or automated redundant manual processes.
Implemented a new framework to manage G&A costs, which included identification of operational efficiencies, developing
new approaches to reinvest in the business and generally better discipline, along with effective intra-year resource
redeployment.
Strong leadership in the ongoing development of management in the Finance Division, including the continued build-out
of the leadership team and 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.
Michael T. Hutchins, Executive Vice President - Investments and Capital Markets
Performance Highlights
Strong leadership of the company’s market activities, with continuing innovation of new ways to support the guarantee
businesses and reduce legacy and on-going risk exposures.
Continued to execute multi-year Retained Portfolio Plan, which included reduction in the overall size of the retained
portfolio.
Partnered with other divisions, especially the Single-Family Business, to expand the suite of mortgage capital market
services offered to Freddie Mac customers.
Continued to enhance the liquidity and efficiency of the company’s mortgage-related securities.
Managed successful execution of risk management objectives, including credit risk transfer of legacy mortgage credit
risk, maintaining economic interest-rate risk at modeled low levels and efficiently meeting the company’s liquidity and
funding needs.
Demonstrated strong expense discipline while supporting investments to strengthen operational, technology and model
risk management.
Partnered with the Finance Division to successfully implement hedge accounting to better align economic and GAAP
earnings.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision
The Compensation Committee determined that Mr. Hutchins should receive 100% of his At-Risk Deferred Salary that was
subject to reduction based on the company’s performance against the Corporate Scorecard and his individual performance.
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Executive Compensation
2017 Compensation Information for NEOs
David B. Lowman, Executive Vice President - Single-Family Business
Performance Highlights
Strong leadership of the Single-Family Business, with continued focus on increasing competitiveness, managing risks,
improving operations, and enhancing technology.
Achieved higher Single-Family earnings in 2017 versus 2016.
Expanded the utilization and capabilities of the Loan Advisor Suite.
Continued to innovate and execute credit risk transfer transactions. Further expanded offerings to include HARP collateral
and enhanced loss layer structuring to optimize coverage and deepen investor market.
FHFA declared that all Single-Family affordable housing goals were achieved.
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 terms; helped effectively navigate a
variety of regulatory initiatives.
Advised the Board and senior management on a wide variety of significant legal and governance issues.
Effectively supported the increased volumes and complexity of mortgage purchases and securitizations, the increased
volume and new designs for credit risk transfer transactions, and the new types of loan sales and securitizations in the
retained portfolio.
Provided effective legal support for the evolving needs of the company, and 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.
2017 Deferred Salary
The following chart reports the actual amounts of 2017 Deferred Salary for each eligible NEO, which
reflect proration of the target amounts of deferred salary, as such targets were increased in late January
2017. The actual amount earned in each calendar quarter is scheduled to be paid on the last pay date of
the corresponding calendar quarter in 2018.
2017 Actual Deferred Salary(2)
At-Risk
Named Executive
Officer(1)
Mr. Mackey
Mr. Hutchins
Mr. Lowman
Mr. McDavid
Fixed
1,763,818
1,394,575
1,763,818
1,451,054
Conservatorship
Scorecard
% of
Target
475,402
396,432
475,402
409,721
98%
98%
98%
98%
Corporate
Scorecard/
Individual
485,104
404,522
485,104
397,179
% of
Target
100%
100%
100%
95%
(1) Mr. Layton was not eligible for deferred salary in 2017 and therefore is not included in this table.
Total Actual
Deferred
Salary
2,724,324
2,195,529
2,724,324
2,257,954
% of
Target
99.6%
99.6%
99.6%
98.7%
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2017 Compensation Information for NEOs
(2) The amounts of actual deferred salary differ from the amounts presented in the 2017 Target TDC table because the slight increase to NEO target
TDC amounts only became effective in late January 2017.
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
originally provided 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. Mackey’s letter agreement and restrictive covenant and confidentiality agreement were filed as
Exhibits 10.1 and 10.2, respectively, to our Current Report on Form 8-K filed on September 30, 2013.
Mr. Hutchins
We entered into a letter agreement and a restrictive covenant and confidentiality agreement with Mr.
Hutchins in connection with his employment as our EVP - Investments and Capital Markets (SVP -
Investments and Capital Markets at the time he began his service). The terms of Mr. Hutchins’ letter
agreement originally provided him with an annual Target TDC opportunity of $2,000,000, consisting of
Base Salary of $500,000 and Deferred Salary of $1,500,000, and the opportunity to participate in all
employee benefit plans offered to Freddie Mac’s executive officers pursuant to the terms of these plans.
The company has also agreed that Mr. Hutchins may, subject to Mr. Layton’s approval, take additional
days off from time to time as unpaid leave. Copies of Mr. Hutchins’ letter agreement and restrictive
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2017 Compensation Information for NEOs
covenant and confidentiality agreement were filed as Exhibits 10.32 and 10.33, respectively, to our
Annual Report on Form 10-K filed on February 18, 2016.
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 originally provided 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 were filed as Exhibits 10.48 and 10.49, respectively, to our Annual Report
on Form 10-K 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 originally provided him with an annual Target TDC
opportunity of $2,600,000, which consists of Base Salary of $500,000 and Deferred Salary of
$2,100,000, and the opportunity to participate in all employee benefit plans offered to Freddie Mac’s
executive officers pursuant to the terms of these plans. Copies of Mr. McDavid’s letter agreement and
restrictive covenant and confidentiality agreement were filed as Exhibits 10.1 and 10.2, respectively, to
our Current Report on Form 8-K filed on July 9, 2012.
Restrictive Covenant and Confidentiality Agreements
Each of our NEOs is subject to a restrictive covenant and confidentiality agreement with us. Each
agreement provides that the NEO will not seek employment with designated competitors that involves
performing similar duties for a specified period immediately following termination of employment,
regardless of whether the executive’s employment is terminated by the executive, by us, or by mutual
agreement. The specified period is twenty-four months for Mr. Layton and twelve months for the other
NEOs. During the twelve-month period immediately following termination, each NEO agrees not
to solicit or recruit any of our managerial employees. The agreements also provide for the confidentiality
of information that constitutes trade secrets or proprietary or other confidential information.
Recapture and Forfeiture Agreement
Freddie Mac has adopted, with the approval of FHFA, the Recapture and Forfeiture Agreement (the
“Recapture Agreement”). In order to participate in the EMCP, each of our NEOs has entered into a
Recapture Agreement.
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
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forfeiture are described below. Mr. Layton’s Recapture Agreement applies only to the Deferred Salary he
earned from July 1, 2015 through November 24, 2015.
Materially Inaccurate Information
Forfeiture Event: The NEO has earned or obtained the legally binding right to a payment of Deferred
Salary based on materially inaccurate financial statements or any other materially inaccurate
performance measure.
Compensation Subject to Recapture and/or Forfeiture: Any Deferred Salary in excess of the
amount that the Board determines would likely have been otherwise earned using accurate
measures during the two years prior to the Forfeiture Event.
Termination for Felony Conviction or Willful Misconduct
Forfeiture Event: The NEO’s employment is terminated in any of the following circumstances:
Termination of employment because the NEO is convicted of, or pleads guilty or nolo contendere
to, a felony;
Subsequent to termination of employment, the NEO is convicted of, or pleads guilty or nolo
contendere to, a felony, based on conduct occurring prior to termination, and within one year of
such conviction or plea, the Board determines that such conduct is materially harmful to Freddie
Mac.
Termination of employment because, or within two years of termination, the Board determines
that, the NEO engaged in willful misconduct in the performance of his or her duties that was
materially harmful to Freddie Mac.
Compensation Subject to Recapture and/or Forfeiture: Any Deferred Salary earned during the
two years prior to the date that the NEO is terminated, any Deferred Salary scheduled to be paid
within two years after termination, and any cash payment made or to be made as consideration for
any release of claims agreement.
Gross Neglect or Gross Misconduct
Forfeiture Event: The NEO’s employment is terminated because, in carrying out his or her duties,
the NEO engages in conduct that constitutes gross neglect or gross misconduct that is materially
harmful to Freddie Mac, or within two years after the NEO’s termination of employment, the Board
determines that the NEO, prior to his or her termination, engaged in such conduct.
Compensation Subject to Recapture and/or Forfeiture: Any Deferred Salary paid at the time of
termination or subsequent to the date of termination, including any cash payment made as
consideration for any release of claims agreement.
Violation of a Post-Termination Non-Competition Covenant
Forfeiture Event: The NEO violates a post-termination non-competition covenant set forth in the
restrictive covenant and confidentiality agreement in effect when a payment of Deferred Salary is
scheduled to be made.
Compensation Subject to Recapture and/or Forfeiture: 50% of the Deferred Salary paid during
the twelve months immediately preceding the violation and 100% of any unpaid Deferred Salary.
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2017 Compensation Information for NEOs
Under the Recapture Agreement, the Board has discretion to determine the appropriate dollar amount, if
any, to be recaptured from and/or forfeited by the NEO, which is intended to be the gross amount of
compensation in excess of what Freddie Mac would have paid the NEO had Freddie Mac taken the
Forfeiture Event into consideration at the time such compensation decision was made.
A copy of the form of the Recapture Agreement was filed as Exhibit 10.18 to our Annual Report on Form
10-K filed on February 16, 2017.
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
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.
FREDDIE MAC | 2017 Form 10-K
398
Executive Compensation
2017 Compensation Information for NEOs
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
2017 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.” As of 2012, for participants in the EMCP (or prior executive compensation programs), no SERP
Benefit is accrued with respect to annual pay in excess of two times a participant’s Base Salary.
For additional information regarding these benefits, see 2017 Compensation Information for
NEOs and Nonqualified Deferred Compensation.
Stock Ownership, Hedging, and Pledging Policies
Our stock ownership guidelines were suspended when conservatorship began because we ceased
paying our executives stock-based compensation. The Purchase Agreement prohibits us from issuing
any shares of our equity securities without the prior written consent of Treasury. The suspension of stock
ownership requirements is expected to continue through 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.
FREDDIE MAC | 2017 Form 10-K
399
Executive Compensation
2017 Compensation Information for NEOs
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 in its role as our
Conservator and as our regulator. The Compensation Committee’s authority and flexibility is, therefore,
subject to certain limitations, including:
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 the Conservator and exercise their authority as directed by the
Conservator. 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 requires us to submit to it proposed new compensation arrangements or increased amounts or
benefits payable under existing compensation arrangements for certain senior 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. Prior to the enactment of the
Tax Cuts and Jobs Act, this limit did not apply if the compensation was “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 has not been structured to qualify as performance-based
compensation under section 162(m).
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and
Analysis with management and, based on such review and discussion, has recommended to the Board
that the Compensation Discussion and Analysis be included in this Form 10-K.
This report is respectfully submitted by the members of the Compensation Committee.
Steven W. Kohlhagen, Chair
Carolyn H. Byrd
Saiyid T. Naqvi
Eugene B. Shanks, Jr.
FREDDIE MAC | 2017 Form 10-K
400
Executive Compensation
Compensation and Risk
COMPENSATION AND RISK
Our management conducted an assessment of our compensation policies and practices that apply 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 2018. 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.
CEO PAY RATIO
SEC rules require annual disclosure of the ratio of a company's CEO’s total annual compensation to that
of its median employee. For 2017, we identified our median employee as of October 29, 2017, using
payroll data as reported on Form W-2, Box 1 and annualized the compensation for individuals that had
not worked the full year. After identifying the median employee, we calculated that employee’s total
annual compensation for 2017 using the same method required for calculating the CEO's (and other
NEOs') total annual compensation for purposes of the Summary Compensation Table. The table
below sets forth the total annual compensation for our CEO and median employee and the ratio
between the two.
Employee
Donald H. Layton (CEO)
Median Employee
CEO Pay Ratio
Total Compensation
$651,000
$123,027
Ratio
5.29 to 1
Per the Equity in Government Compensation Act of 2015, the CEO’s compensation is limited to a base
salary of $600,000. See CEO Compensation for further discussion of Mr. Layton’s compensation.
Given the different methodologies that companies may use to determine their CEO pay ratio, the ratio
reported above should not be used as a basis for comparison between companies.
FREDDIE MAC | 2017 Form 10-K
401
Executive Compensation
2017 Compensation Information for NEOs
2017 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, 2017.
Summary Compensation Table
Salary
Named Executive
Officer
Donald H. Layton
Chief Executive Officer
James G. Mackey
EVP — Chief Financial
Officer
Michael T. Hutchins(6)
EVP — Investments and
Capital Markets
David B. Lowman
EVP — Single-Family
Business
William H. McDavid
EVP — General Counsel
& Corporate Secretary
Year
2017
2016
2015(5)
2017
2016
2015
2017
2016(7)
2015
2017
2016
2015
2017
2016
2015
Earned
During Year(1) Deferred(2)
$—
$600,000
600,000
660,345
—
818,886
500,000
1,763,818
500,000
1,600,000
500,000
1,600,000
490,447
482,759
461,810
1,394,575
1,219,178
1,181,728
500,000
1,763,818
500,000
1,600,000
500,000
1,600,000
500,000
1,451,054
500,000
1,320,000
500,000
1,320,000
Bonus
$—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Non-Equity
Incentive Plan
Compensation(3)
All Other
Compensation(4)
Total
$—
—
472,748
964,588
893,896
887,608
804,358
726,545
699,274
964,588
893,896
887,608
810,330
755,146
769,260
$51,000
101,609
$651,000
701,609
56,958
2,008,937
92,496
89,874
86,674
89,305
85,897
79,659
92,496
89,874
86,674
91,167
88,964
86,324
3,320,902
3,083,770
3,074,282
2,778,685
2,514,379
2,422,471
3,320,902
3,083,770
3,074,282
2,852,551
2,664,110
2,675,584
(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 2017, 2016, and
2015 was 0.425%, 0.325%, and 0.125%, 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 2017,
2016, and 2015 is included in All Other Compensation.
(3) 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 2017, 2016, and 2015 was the same as noted for the interest rate for the Fixed Deferred Salary. 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
2017 At-Risk Deferred Salary.
FREDDIE MAC | 2017 Form 10-K
402
Executive Compensation
2017 Compensation Information for NEOs
(4) Amounts for 2017 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 2017 are as follows:
Named Executive Officer
Thrift/401(k) Plan
Contributions
SERP Benefit
Accruals
Interest on Fixed
Deferred Salary
Perquisites
Mr. Layton
Mr. Mackey
Mr. Hutchins
Mr. Lowman
Mr. McDavid
$22,950
22,950
22,950
22,950
22,950
$28,050
62,050
60,428
62,050
62,050
$—
7,496
5,927
7,496
6,167
$—
—
—
—
—
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.
(5) 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 filed on February 18, 2016 in
Executive Compensation — Compensation Discussion and Analysis — Determination of 2015 Target TDC for NEOs — 2015 Target
TDC.
(6) Amounts reported for Mr. Hutchins in the Salary-Earned During Year, Salary-Deferred and Non-Equity Incentive Plan Compensation columns are less
than the corresponding annual target amounts because he took additional vacation as leave without pay during 2015, 2016 and 2017.
(7) Pursuant to SEC reporting requirements, we are reporting amounts earned by Mr. Hutchins in 2016 even though he was not an NEO for that fiscal
year.
Grants of Plan-Based Awards
The following table contains information concerning grants of plan-based awards to each of the NEOs
during 2017. The Purchase Agreement prohibits us from issuing equity securities without Treasury’s
consent. No stock awards were granted during 2017. For a description of the performance and other
measures used to determine payouts, see Elements of Target Total Direct Compensation,
Determination of 2017 Target TDC for NEOs, Determination of At-Risk Deferred Salary,
and 2017 Deferred Salary.
FREDDIE MAC | 2017 Form 10-K
403
Executive Compensation
2017 Compensation Information for NEOs
Named Executive Officer(1)
At-Risk Deferred Salary Award
Threshold
Target/Maximum
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards(2)
Mr. Mackey
Mr. Hutchins
Mr. Lowman
Mr. McDavid
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
—
—
—
—
—
—
—
—
—
—
—
—
485,104
485,104
970,208
404,522
404,522
809,044
485,104
485,104
970,208
418,083
418,083
836,166
(1) Mr. Layton was not eligible to receive Deferred Salary in 2017 and therefore is not included in this table.
(2) The amounts reported reflect At-Risk Deferred Salary granted in 2017 which is subject to reduction based on: (i) corporate performance against the
Conservatorship Scorecard; and (ii) the company’s performance against the Corporate Scorecard goals and an officer’s individual performance. 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 2017 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, 2017.
Option Exercises and Stock Vested
None of the NEOs exercised options or had RSUs vest during 2017.
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
FREDDIE MAC | 2017 Form 10-K
404
Executive Compensation
2017 Compensation Information for NEOs
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 made to the Thrift/
401(k) Plan during the year, but does not take into account pay that exceeds 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 4 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 either a pre- or post-tax basis.
SERP Benefits are generally distributed in a lump sum 90 days after the end of the calendar year in
which a separation from service occurs. A six-month delay in the commencement of distributions on
account of a separation from service applies to key employees, in accordance with Internal Revenue
Code Section 409A. If the NEO dies, the vested SERP Benefit is paid in the form of a lump sum within
90 days of death.
The following table shows the contributions, earnings, withdrawals and distributions, and accumulated
balances under the SERP Benefit for each NEO.
SERP Benefit
Named
Executive
Officer
Executive
Contribution in
Last FY ($)(1)
Freddie Mac
Accruals in
Last FY ($)(2)
Aggregate
Earnings in
Last FY ($)(3)
Aggregate
Withdrawals/
Distributions ($)
Balance at
Last FYE ($)(4)
Mr. Layton
Mr. Mackey
Mr. Hutchins
Mr. Lowman
Mr. McDavid
$—
—
—
—
—
$28,050
62,050
60,428
62,050
62,050
$39,810
1,837
2,045
26,944
2,869
$—
—
—
—
—
$250,723
202,376
223,280
262,260
300,765
(1) The SERP does not allow for employee contributions.
(2) Amounts reported reflect accruals under the SERP Benefit during 2017, including the 2.5% contribution accruals which will be allocated to NEO
accounts in 2018. 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 2017 2.5% contribution which
will be allocated to NEO accounts in 2018. All NEOs are fully vested in their SERP Benefit account balances.
The following 2016 SERP Benefit accrual amounts were reported in the “All Other Compensation” column in the 2016 Summary Compensation Table
as compensation for each NEO for whom accruals were made during 2016: Mr. Layton: $79,084, Mr. Mackey: $62,149, Mr. Hutchins: $59,218, Mr.
Lowman: $62,149, and Mr. McDavid: $62,149. See our Annual Report on Form 10-K filed on February 16, 2017. The following 2015 SERP Benefit
FREDDIE MAC | 2017 Form 10-K
405
Executive Compensation
2017 Compensation Information for NEOs
accrual amounts were made 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. Hutchins: $55,657, Mr. Lowman: $62,149,
and Mr. McDavid: $62,149. See our Annual Report on Form 10-K filed on February 18, 2016.
Potential Payments Upon Termination of Employment
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. The actual payment of any level of termination benefits that is not otherwise provided
for in the EMCP is subject to FHFA review and approval.
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, 2017. 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
FREDDIE MAC | 2017 Form 10-K
406
Executive Compensation
2017 Compensation Information for NEOs
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, 2017.
FREDDIE MAC | 2017 Form 10-K
407
Executive Compensation
2017 Compensation Information for NEOs
Named Executive Officer(1)
Death
Disability
Retirement(2)
All Other Not
For Cause
Terminations(3)
James G. Mackey
Deferred Salary:
Fixed
At Risk-Conservatorship Scorecard(4)
At Risk-Corporate Scorecard/Individual(5)
Interest on Deferred Salary(6)
Total
Michael T. Hutchins
Deferred Salary:
Fixed
At Risk-Conservatorship Scorecard(4)
At Risk-Corporate Scorecard/Individual(5)
Interest on Deferred Salary(6)
Total
David B. Lowman
Deferred Salary:
Fixed
At Risk-Conservatorship Scorecard(4)
At Risk-Corporate Scorecard/Individual(5)
Interest on Deferred Salary(6)
Total
William H. McDavid
Deferred Salary:
Fixed
At Risk-Conservatorship Scorecard(4)
At Risk-Corporate Scorecard/Individual(5)
Interest on Deferred Salary(6)
Total
$1,763,818
485,104
485,104
7,225
$2,741,251
$1,394,575
404,522
404,522
5,844
$2,209,463
$1,763,818
485,104
485,104
7,225
$2,741,251
$1,451,054
418,083
418,083
6,045
$2,293,265
$1,763,818
485,104
485,104
11,620
$2,745,646
$1,394,575
404,522
404,522
9,365
$2,212,984
$1,763,818
485,104
485,104
11,620
$2,745,646
$1,451,054
418,083
418,083
9,721
$2,296,941
$—
—
—
—
$—
$1,305,225
475,402
485,104
9,629
$2,275,360
$1,394,575
396,432
404,522
9,331
$2,204,860
$—
—
—
—
$—
$—
—
—
—
$—
$1,305,225
475,402
485,104
9,629
$2,275,360
$1,451,054
409,721
397,179
9,596
$2,267,550
$—
—
—
—
$—
(1) Mr. Layton is excluded from this table because he is not entitled to receive any payments in connection with a termination of employment.
(2) Messrs. Hutchins and McDavid are the only retirement-eligible NEOs under the EMCP.
(3) 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 Messrs. Hutchins and McDavid because each 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, 2017 termination
event.
(4) 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 2017 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, 2017 and, as a result, no reduction has been applied to these amounts.
FREDDIE MAC | 2017 Form 10-K
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Executive Compensation
2017 Compensation Information for NEOs
(5) 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 2017 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.
(6)
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, 2017.
FREDDIE MAC | 2017 Form 10-K
409
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 13, 2018 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 13, 2018, 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
Common Stock
Beneficially Owned
Excluding
Stock Options(1)
Stock Options
Exercisable
Within 60 Days of
Feb. 13, 2018
Total Common
Stock
Beneficially Owned
Directors and
Named Executive
Officers
Position
Carolyn H. Byrd
Lance F. Drummond
Director
Director
Thomas M. Goldstein
Director
Grace A. Huebscher
Director
Steven W. Kohlhagen
Director
Christopher S. Lynch
Director
Sara Mathew
Saiyid T. Naqvi
Director
Director
Eugene B. Shanks, Jr.
Director
Anthony A. Williams
Director
Donald H. Layton
Chief Executive Officer
James G. Mackey
EVP - Chief Financial Officer
Michael T. Hutchins
EVP - Investments and Capital
Markets
David B. Lowman
EVP - Single-Family Business
William H. McDavid
EVP - General Counsel & Corp. Sec.
All directors and executive officers as a group (20 persons)
19,774
FREDDIE MAC | 2017 Form 10-K
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19,774
410
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(1)
Includes shares of stock beneficially owned as of February 13, 2018.
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 Annual Report on Form 10-K filed on February 27,
2014, 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.
(2)
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.
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 2017 all of our directors and executive officers complied with such reporting
obligations, except for one sale transaction by David Brickman, our EVP - Multifamily, as a result of an
oversight. A Form 5 disclosing the transaction was filed on January 18, 2018.
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, 2017.
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.
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411
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))
42,563
None
N/A
N/A
35,871,377(1)
None
(1)
Includes 28,352,481 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 | 2017 Form 10-K
412
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;
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413
Certain Relationships and Related Transactions
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;
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 have been a number of transactions between us and Treasury since the
beginning of 2017, as discussed in MD&A — Consolidated Results of Operations, MD&A —
Liquidity and Capital Resources, MD&A — Conservatorship and Related Matters, MD&A —
Regulation and Supervision, Note 2, Note 8, and Note 11.
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.
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.
TRANSACTIONS WITH INSTITUTIONS
RELATED TO DIRECTORS
In the ordinary course of business, we were a party during 2017, and expect to continue to be a party
during 2018, 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. Mr. Layton receives a
pension from JPMorgan Chase and 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. Mr. Layton’s deferred compensation balance is less than 10% of his total net
worth on an after-tax basis. The payment amounts of Mr. Layton’s pension and deferred compensation
do not depend on JPMorgan Chase’s performance.
FREDDIE MAC | 2017 Form 10-K
414
Certain Relationships and Related Transactions
Freddie Mac has an extensive business relationship with JPMorgan Chase (through its subsidiaries) as it
is one of our largest seller/servicers and a significant counterparty in capital markets, derivatives and
multifamily transactions. The Board has reviewed Mr. Layton’s and the company’s relationship with
JPMorgan Chase and determined that Mr. Layton does not have a material interest in our relationship
with JPMorgan Chase. Nevertheless, to eliminate any potential conflicts of interest, Mr. Layton has
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.
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 | 2017 Form 10-K
415
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 2017 and 2016.
Auditor Fees(1)
(In thousands)
Audit Fees(2)
Audit-Related Fees(3)
Tax Fees(4)
All Other Fees(5)
Total
2017
2016
$22,582
5,580
23
243
$28,428
$23,175
5,122
55
218
$28,570
(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.
(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
FREDDIE MAC | 2017 Form 10-K
416
Principal Accounting Fees and Services
any non-audit services permitted under applicable law, to be performed by our independent auditors (or
to designate one or more members of the Audit Committee to pre-approve such services and report
such pre-approval to the Audit Committee).
Audit services that are within the scope of an auditor’s engagement approved by the Audit Committee
prior to the performance of those services are deemed pre-approved and do not require separate pre-
approval. Audit services not within the 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 2017 and 2016.
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
capability and expertise 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 | 2017 Form 10-K
417
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 431.
FREDDIE MAC | 2017 Form 10-K
418
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 have classified single-family loans as Alt-A if these loans have credit characteristics that
range between their prime and subprime categories, if these loans are 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
CFO - Chief Financial Officer
CFPB - Consumer Financial Protection Bureau
FREDDIE MAC | 2017 Form 10-K
419
Glossary
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/Super conforming 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 $453,100 for 2018, and was set at $424,100 for 2017 and $417,000
from 2006 to 2016. Higher limits have been established in certain "high-cost" areas (for 2018, up to
$679,650 for a one-family residence). Higher limits also apply to two- to four-family residences and
to one- to four-family residences 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., $453,100 for 2018) as super
conforming 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 loan portfolio - Consists of loans in our single-family credit guarantee portfolio
that were originated after 2008. We do not include relief refinance loans, including HARP loans, in
this loan portfolio 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.
Credit losses - Consists of charge-offs and REO operations (income) expense, which are both net
of recoveries.
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
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420
Glossary
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
CSP - Common Securitization Platform
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. 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.
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
FREDDIE MAC | 2017 Form 10-K
421
Glossary
the value of our interest rate sensitive liabilities, thus leaving economic value unchanged.
EMCP - Executive Management Compensation Program
ER Policy - Enterprise Risk Policy - The ER Policy sets forth the core components of the enterprise
risk framework that defines how we identify, access, manage, control and report on risks.
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 sale - 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
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.
Green Advantage loan - A multifamily loan that we offer under our Green Advantage initiative,
whereby borrowers finance the installation of green technologies that reduce energy and water
consumption.
GSE Act - The Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as
amended by the Reform Act.
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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 HARP program has
been extended for applications through December 31, 2018 to ensure that borrowers who have a
high LTV ratio and are eligible for HARP will continue to have a refinance option.
HFA - State or local Housing Finance Agency
HUD - U.S. Department of Housing and Urban Development - HUD has authority over Freddie Mac
with respect to fair lending.
Implied volatility - A measurement of how the value of a financial instrument changes due to
changes in the market’s expectation of potential changes in future interest rates. A decrease in
implied volatility generally increases the estimated fair value of our mortgage-related assets and
decreases the estimated fair value of our callable debt and option-based derivatives, while an
increase in implied volatility generally has the opposite effect.
Initial margin - The collateral that we post with a derivatives clearinghouse in order to do business
with such clearinghouse. The amount of initial margin varies over time.
Interest-only loan - A loan that allows the borrower to pay only interest (either fixed-rate or
adjustable-rate) for a fixed period of time before payments of principal begin. After the interest-only
period, the borrower may choose to refinance the loan, pay off the principal balance in total, or pay
the scheduled principal and interest 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 and relief refinance single-family loan portfolio - Consists of loans in our single-family
credit guarantee portfolio that were originated in 2008 and prior, as well as relief refinance loans,
including HARP loans.
Letter Agreement - An agreement the Conservator, acting on our behalf, entered into with Treasury
on December 21, 2017 to amend the 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.
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LIBOR - London Interbank Offered Rate
LIHTC partnerships - Low-income housing tax credit partnerships - 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, as well as $3.0 billion added pursuant to the Letter 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.
Loan liquidations - Loans removed from the pools underlying Freddie Mac mortgage-related
securities and other mortgage-related guarantees due to prepayment, maturity, repurchase or
charge-off, foreclosure alternatives, third-party sales and loans going into REO. Loans are also
terminated through reperforming and seriously delinquent loan sales. In addition, periodic paydown
of loan principal is also included in loan liquidations.
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, STACR debt notes and SCR debt notes.
LTV ratio - Loan-to-value ratio - The ratio of the unpaid principal amount of a loan to the value of the
property that serves as collateral for the loan, expressed as a percentage. We report LTV ratios
based solely on the amount of the loan purchased or guaranteed by us, generally excluding any
second-lien loans (unless we own or guarantee the second lien).
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 - 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 mortgage 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
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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 securitization products, primarily K
Certificates, SB Certificates, and other mortgage-related guarantees that are held by third parties. It
excludes loans 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 and thereafter, the dividend payment on the senior preferred stock will be the
amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal
quarter, less the applicable Capital Reserve Amount, exceeds zero. The term Net Worth Amount is
defined as the total assets of Freddie Mac (excluding Treasury's commitment and any unfunded
amounts thereof), less our total liabilities (excluding any obligation in respect of capital stock), in
each case as reflected on our consolidated balance sheets prepared in conformity with GAAP. If the
calculation of the dividend payment for a quarter does not exceed zero, then no dividend shall
accrue or be payable for that quarter. The applicable Capital Reserve Amount was $1.2 billion for
2016 and $600 million for 2017, and will be $3.0 billion in 2018 and thereafter (unless we were not to
pay our full dividend requirement in a future period, which would cause the applicable Capital
Reserve Amount to thereafter be 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.
Non-performing loan - a loan where the borrower is three months or more past due or is in the
process of foreclosure.
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
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than the interest accrued for the period. The unpaid interest is added to the principal balance of the
loan, known as negative amortization. For our non-agency mortgage-related securities that are
backed by option ARM loans, we categorize securities as option ARM if the securities were identified
as such based on information provided to us when we entered into these transactions. We have not
identified option ARM securities as either subprime or Alt-A securities.
Original LTV ratio - A credit measure for loans, calculated as the UPB of the loan divided by the
lesser of the appraised value of the property at the time of loan origination or the borrower’s
purchase price. Second liens not owned or guaranteed by us are excluded from the LTV ratio
calculation. The existence of a second-lien loan reduces the borrower’s equity in the home and,
therefore, can increase the risk of default and the amount of the gross loss if a default occurs.
OTC - Over-the-counter
OTCQB - A marketplace, operated by the OTC Markets Group Inc., for OTC-traded U.S. companies
that are registered and current in their reporting with the SEC or a U.S. banking or insurance
regulator.
PCs - Participation Certificates - Single-class pass-through securities that we issue and guarantee
as part of a securitization transaction. Typically we purchase loans from sellers, place a pool of loans
into a PC trust and issue PCs from that trust. The PCs are generally transferred to the seller of the
loans as consideration for 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
Performing loan - A loan where the borrower is less than three months past due and is not in the
process of foreclosure.
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, August 17, 2012,
and December 21, 2017.
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 generally occur after loans go into
foreclosure alternatives or foreclosure sales and where a share of default risk is assumed by
mortgage insurers or a reimbursement of our losses from a seller or servicer associated with a
repurchase request is received by us on such loans.
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
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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 a foreclosure sale or
through a deed in lieu of foreclosure.
Reperforming loan - A loan that was previously three months or more past due or in the process of
foreclosure, but the borrower subsequently made payments such that the loan returns to less than
three months past due, or a performing modified loan, which is a loan that was modified and is less
than three months past due and is not in the process of foreclosure.
Risk appetite - The risk appetite is the aggregate level and types of risk that the Board and
management are willing to assume to achieve the company's strategic objectives.
RMBS - Residential mortgage-backed security - A security backed by loans on one-to-four family
residential real estate.
RSU - Restricted stock unit
2014 Strategic Plan - The 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie
Mac, published by FHFA on May 13, 2014.
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
Seasoned single-family mortgage loans - Includes seriously delinquent and reperforming loans.
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.
Segment Earnings - Segment Earnings are presented for each segment by reclassifying certain
credit guarantee-related activities and investment-related activities between various line items on our
GAAP consolidated statements of comprehensive income and allocating certain revenues and
expenses, including funding costs and administrative expenses, to our three reportable segments -
Single-family Guarantee, Multifamily and Capital Markets. Certain activities that are not part of a
reportable segment are included in the All Other category.
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.
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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 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.
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Target TDC - Target total direct compensation
TBA - To be announced
The Tax Cuts and Jobs Act - The tax reform bill ("An Act to Provide for Reconciliation Pursuant to
Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, Pub. Law No.
115-97") enacted on December 22, 2017, which included a reduction of the statutory corporate
income tax rate from 35% to 21%.
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 sale, deed in lieu of
foreclosure, or short sale transaction.
Upfront fee - A fee charged to sellers that primarily includes delivery fees that are calculated based
on credit risk factors such as the loan product type, loan purpose, LTV ratio and credit score. These
delivery fees are charged to compensate us for higher levels of risk in some loan products.
USDA - U.S. Department of Agriculture
VA - U.S. Department of Veterans Affairs
Variation margin - Payments we make to or receive from a derivatives clearinghouse or
counterparty 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.
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XBRL - eXtensible Business Reporting Language
Yield curve - A graphical display of the relationship between yields and maturity dates for bonds of
the same credit quality. The slope of the yield curve is an important factor in determining the level of
net interest yield on a new mortgage asset, both initially and over time. For example, if a mortgage
asset is purchased when the yield curve is inverted (i.e., short-term interest rates higher than long-
term interest rates), our net interest yield on the asset will tend to be lower initially and then increase
over time. Likewise, if a mortgage asset is purchased when the yield curve is steep (i.e., short-term
interest rates lower than long-term interest rates), our net interest yield on the asset will tend to be
higher initially and then decrease over time.
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Exhibit Index
Exhibit Index
Exhibit
Description*
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
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 filed on August 9, 2010)
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 filed on July 8, 2016)
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 filed on September 11, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00 per share), dated April 23, 1996
(incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of 5.81% Non-Cumulative Preferred Stock (par value $1.00 per share), dated October 27, 1997 (incorporated
by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of 5% Non-Cumulative Preferred Stock (par value $1.00 per share), dated March 23, 1998 (incorporated by
reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of 5.1% Non-Cumulative Preferred Stock (par value $1.00 per share), dated September 23, 1998
(incorporated by reference to Exhibit 4.5 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Amended and Restated Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications,
Limitations, Restrictions, Terms and Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00 per share),
dated September 29, 1998 (incorporated by reference to Exhibit 4.6 to the Registrant’s Registration Statement on Form 10
filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of 5.3% Non-Cumulative Preferred Stock (par value $1.00 per share), dated October 28, 1998 (incorporated
by reference to Exhibit 4.7 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of 5.1% Non-Cumulative Preferred Stock (par value $1.00 per share), dated March 19, 1999 (incorporated by
reference to Exhibit 4.8 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of 5.79% Non-Cumulative Preferred Stock (par value $1.00 per share), dated July 21, 1999 (incorporated by
reference to Exhibit 4.9 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
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 filed on July 18, 2008)
* 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.
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Exhibit Index
Exhibit
Description*
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
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 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00 per share), dated March 23, 2001
(incorporated by reference to Exhibit 4.12 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of 5.81% Non-Cumulative Preferred Stock (par value $1.00 per share), dated March 23, 2001 (incorporated
by reference to Exhibit 4.13 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00 per share), dated May 30, 2001
(incorporated by reference to Exhibit 4.14 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
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 filed on July 18, 2008)
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 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of 5.81% Non-Cumulative Preferred Stock (par value $1.00 per share), dated January 29, 2002 (incorporated
by reference to Exhibit 4.17 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of Variable Rate, Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated July 17, 2006
(incorporated by reference to Exhibit 4.18 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of 6.42% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated July 17, 2006
(incorporated by reference to Exhibit 4.19 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of 5.9% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated October 16, 2006
(incorporated by reference to Exhibit 4.20 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of 5.57% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated January 16, 2007
(incorporated by reference to Exhibit 4.21 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of 5.66% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated April 16, 2007
(incorporated by reference to Exhibit 4.22 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of 6.02% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated July 24, 2007
(incorporated by reference to Exhibit 4.23 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
* 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.
FREDDIE MAC | 2017 Form 10-K
432
Exhibit Index
Exhibit
Description*
4.24
4.25
4.26
4.27
4.28
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
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 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms
and Conditions of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated
December 4, 2007 (incorporated by reference to Exhibit 4.25 to the Registrant’s Registration Statement on Form 10 filed on
July 18, 2008)
Amended and Restated Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications,
Limitations, Restrictions, Terms and Conditions of Variable Liquidation Preference Senior Preferred Stock (par value $1.00 per
share), dated September 27, 2012 (incorporated by reference to Exhibit 4.26 to Freddie Mac’s Annual Report on Form 10-K
filed on February 28, 2013)
Second 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 January 1, 2018
Federal Home Loan Mortgage Corporation Global Debt Facility Agreement, dated February 16, 2017 (incorporated by
reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 2, 2017)
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 filed on July 18, 2008)†
First Amendment to the Federal Home Loan Mortgage Corporation Directors’ Deferred Compensation Plan (as amended and
restated April 3, 1998) (incorporated by reference to Exhibit 10.27 to the Registrant’s Annual Report on Form 10-K filed on
March 11, 2009)†
Federal Home Loan Mortgage Corporation Executive Deferred Compensation Plan (as amended and restated effective
January 1, 2008) (incorporated by reference to Exhibit 10.28 to the Registrant’s Registration Statement on Form 10 as filed
on July 18, 2008)†
First Amendment to the Federal Home Loan Mortgage Corporation Executive Deferred Compensation Plan (as amended and
restated effective January 1, 2008) (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form
10-Q 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 filed on
July 18, 2008)†
First Amendment to the Federal Home Loan Mortgage Corporation Supplemental Executive Retirement Plan (As Amended and
Restated January 1, 2008) (incorporated by reference to Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K filed
on February 24, 2010)†
Second Amendment to the Federal Home Loan Mortgage Corporation Supplemental Executive Retirement Plan (as Amended
and Restated January 1, 2008) (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed
on June 28, 2011)†
Third Amendment to the Federal Home Loan Mortgage Corporation Supplemental Executive Retirement Plan (as Amended
and Restated January 1, 2008) (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q
filed on November 6, 2012)†
* 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 | 2017 Form 10-K
433
Exhibit Index
Exhibit
10.9
10.10
Description*
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
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 filed on
October 25, 2013) †
10.11
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 filed on February 19, 2015) †
10.12
10.13
10.14
10.15
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 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 filed on July 18, 2008)†
First Amendment to the Federal Home Loan Mortgage Corporation Long-Term Disability Plan (incorporated by reference to
Exhibit 10.35 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)†
Second Amendment to the Federal Home Loan Mortgage Corporation Long-Term Disability Plan (incorporated by reference to
Exhibit 10.36 to the Registrant’s Registration Statement on Form 10 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 filed on February 18, 2016)†
10.17
Fourth Amendment to the Federal Home Loan Mortgage Corporation Long-Term Disability Plan (incorporated by reference to
Exhibit 10.17 to Registrant's Annual Report on Form 10-K filed on February 16, 2017)†
10.18
Executive Management Compensation Program Recapture and Forfeiture Agreement (incorporated by reference to Exhibit
10.18 to Registrant's Annual Report on Form 10-K filed on February 16, 2017)†
10.19
10.20
10.21
10.22
10.23
10.24
2015 Executive Management Compensation Program (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly
Report on Form 10-Q filed on August 4, 2015)†
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 filed on May 10, 2012)†
Restrictive Covenant and Confidentiality Agreement, dated May 7, 2012, between Freddie Mac and Donald H. Layton
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 10, 2012)†
Memorandum Agreement, dated September 24, 2013, between Freddie Mac and James Mackey (incorporated by reference
to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 30, 2013)†
Restrictive Covenant and Confidentiality Agreement, dated September 25, 2013, between Freddie Mac and James Mackey
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on September 30, 2013)†
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 filed on July 9, 2012)†
* 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 | 2017 Form 10-K
434
Exhibit Index
Exhibit
Description*
10.25
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 filed on July 9, 2012)†
10.26
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 filed on February 27, 2014)†
10.27
10.28
10.29
10.30
10.31
10.32
10.33
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 filed on February 27, 2014)†
Memorandum Agreement, dated June 24, 2013, between Freddie Mac and Michael Hutchins (incorporated by reference to
Exhibit 10.32 to Freddie Mac’s Annual Report on Form 10-K filed on February 18, 2016)†
Restrictive Covenant and Confidentiality Agreement, dated June 25, 2013, between Freddie Mac and Michael Hutchins
(incorporated by reference to Exhibit 10.33 to Freddie Mac’s Annual Report on Form 10-K filed on February 18, 2016)†
Description of non-employee director compensation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed on December 23, 2008)†
PC Master Trust Agreement dated February 2, 2017 (incorporated by reference to Exhibit 10.31 to Registrant's Annual Report
on Form 10-K filed on February 16, 2017)
Form of Indemnification Agreement between the Federal Home Loan Mortgage Corporation and executive officers (for
agreements with officers entered into prior to August 2011) (incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K 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 filed on March 9, 2012)†
10.34
Form of Indemnification Agreement between the Federal Home Loan Mortgage Corporation and Outside Directors
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 27, 2017)†
10.35
10.36
10.37
10.38
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 filed on November 14, 2008)
Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of May 6, 2009, between the
United States Department of the Treasury and Federal Home Loan Mortgage Corporation, acting through the Federal Housing
Finance Agency as its duly appointed Conservator (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly
Report on Form 10-Q filed on May 12, 2009)
Second Amendment dated as of December 24, 2009, to the Amended and Restated Senior Preferred Stock Purchase
Agreement dated as of September 26, 2008, between the United States Department of the Treasury and Federal Home Loan
Mortgage Corporation, acting through the Federal Housing Finance Agency as its duly appointed Conservator (incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 29, 2009)
Third Amendment dated as of August 17, 2012, to the Amended and Restated Senior Preferred Stock Purchase Agreement
dated as of September 26, 2008, between the United States Department of the Treasury and Federal Home Loan Mortgage
Corporation, acting through the Federal Housing Finance Agency as its duly appointed Conservator (incorporated by
reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 17, 2012)
* 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 | 2017 Form 10-K
435
Exhibit Index
Exhibit
10.39
Letter Agreement dated December 21, 2017 between the United States Department of the Treasury and Federal Home Loan
Mortgage Corporation, acting through the Federal Housing Finance Agency as its Conservator (incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on December 21, 2017)
Description*
10.40
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 filed on September 11, 2008)
12.10
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.
FREDDIE MAC | 2017 Form 10-K
436
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 15, 2018
FREDDIE MAC | 2017 Form 10-K
437
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
Non-Executive Chairman of the Board
February 15, 2018
Chief Executive Officer and Director
(Principal Executive Officer)
February 15, 2018
Executive Vice President — Chief Financial Officer
February 15, 2018
(Principal Financial Officer)
Senior Vice President — Corporate Controller and
Principal Accounting Officer (Principal Accounting Officer)
February 15, 2018
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
February 15, 2018
/s/ Christopher S. Lynch*
Christopher S. Lynch
/s/ Donald H. Layton
Donald H. Layton
/s/ James G. Mackey
James G. Mackey
/s/ Robert D. Mailloux
Robert D. Mailloux
/s/ Carolyn H. Byrd*
Carolyn H. Byrd
/s/ Lance F. Drummond*
Lance F. Drummond
/s/ Thomas M. Goldstein*
Thomas M. Goldstein
/s/ Grace A. Huebscher*
Grace A. Huebscher
/s/ Steven W. Kohlhagen*
Steven W. Kohlhagen
/s/ Sara Mathew*
Sara Mathew
/s/ Saiyid T. Naqvi*
Saiyid T. Naqvi
/s/ Eugene B. Shanks, Jr.*
Eugene B. Shanks, Jr.
/s/ Anthony A. Williams*
Anthony A. Williams
*By:
/s/ Alicia S. Myara
Alicia S. Myara
Attorney-in-Fact
FREDDIE MAC | 2017 Form 10-K
438
Index
Form 10-K Index
Item Number
PART I
Item 1
Business
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
Page(s)
1-2, 8-11, 38-51,
63-71, 87-93, 177-189
197-224
Not Applicable
10
225
Not Applicable
226-228
14
1-7, 12-13, 15-37, 39,
52-62, 72-86, 94-155,
164-177, 190-196
156-162
229-357
Not Applicable
230-231, 358-361
362
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
103-104, 362-383, 411
377, 379-380, 384-409
410-412
371-374, 413-415
416-417
Exhibits and Financial Statement Schedules
Form 10-K Summary
418, 431-436
Not Applicable
437-438
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
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Item 16
Signatures
FREDDIE MAC | 2017 Form 10-K
439
Exhibit 4.27
EXECUTION VERSION
FREDDIE MAC
SECOND 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)
The Federal Housing Finance Agency, as Conservator of the Federal Home Loan Mortgage
Corporation, a government-sponsored enterprise of the United States of America (the “Company”),
does hereby certify that, pursuant to authority vested in the Board of Directors of the Company by
Section 306(f) of the Federal Home Loan Mortgage Corporation Act, and pursuant to the authority
vested in the Conservator of the Company by Section 1367(b) of the Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (12 U.S.C. §4617), as amended, the Conservator adopted
Resolution FHLMC 2008-24 on September 7, 2008, which resolution is now, and at all times since such
date has been, in full force and effect, and that the Conservator approved the final terms of the issuance
and sale of the preferred stock of the Company designated above.
As amended and restated, effective January 1, 2018, in accordance with the Letter Agreement
dated December 21, 2017 and the Third Amendment dated as of August 17, 2012, to the Amended and
Restated Senior Preferred Stock Purchase Agreement dated as of September 26, 2008, the Senior
Preferred Stock shall have the following designation, powers, preferences, rights, privileges,
qualifications, limitations, restrictions, terms and conditions:
1. Designation, Par Value, Number of Shares and Seniority
The class of preferred stock of the Company created hereby (the “Senior Preferred Stock”) shall be
designated “Variable Liquidation Preference Senior Preferred Stock,” shall have a par value of $1.00 per
share and shall consist of 1,000,000 shares. The Senior Preferred Stock shall rank prior to the common
stock of the Company as provided in this Certificate and shall rank, as to both dividends and
distributions upon liquidation, prior to (a) the Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred
Stock issued on December 4, 2007, (b) the 6.55% Non-Cumulative Preferred Stock issued on
September 28, 2007, (c) the 6.02% Non-Cumulative Preferred Stock issued on July 24, 2007, (d) the
5.66% Non-Cumulative Preferred Stock issued on April 16, 2007, (e) the 5.57% Non-Cumulative
Preferred Stock issued on January 16, 2007, (f) the 5.9% Non-Cumulative Preferred Stock issued on
October 16, 2006, (g) the 6.42% Non-Cumulative Preferred Stock issued on July 17, 2006, (h) the
Variable Rate, Non-Cumulative Preferred Stock issued on July 17, 2006, (i) the 5.81% Non-Cumulative
Preferred Stock issued on January 29, 2002, (j) the 5.7% Non-Cumulative Preferred Stock issued on
October 30, 2001, (k) the 6% Non-Cumulative Preferred Stock issued on May 30, 2001, (l) the Variable
Rate, Non-Cumulative Preferred Stock issued on May 30, 2001 and June 1, 2001, (m) the 5.81% Non-
Cumulative Preferred Stock issued on March 23, 2001, (n) the Variable Rate, Non-Cumulative Preferred
Stock issued on March 23, 2001, (o) the Variable Rate, Non-Cumulative Preferred Stock issued on
January 26, 2001, (p) the Variable Rate, Non-Cumulative Preferred Stock issued on November 5, 1999,
(q) the 5.79% Non-Cumulative Preferred Stock issued on July 21, 1999, (r) the 5.1% Non-Cumulative
Preferred Stock issued on March 19, 1999, (s) the 5.3% Non-Cumulative Preferred Stock issued on
October 28, 1998, (t) the 5.1% Non-Cumulative Preferred Stock issued on September 23, 1998, (u) the
Variable Rate, Non-Cumulative Preferred Stock issued on September 23, 1998 and September 29, 1998,
(v) the 5% Non-Cumulative Preferred Stock issued on March 23, 1998, (w) the 5.81% Non-Cumulative
Preferred Stock issued on October 27, 1997, (x) the Variable Rate, Non-Cumulative Preferred Stock
issued on April 26, 1996, (y) any other capital stock of the Company outstanding on the date of the
initial issuance of the Senior Preferred Stock, and (z) any capital stock of the Company that may be
issued after the date of initial issuance of the Senior Preferred Stock.
2. Dividends
(a) For each Dividend Period from the date of the initial issuance of the Senior Preferred Stock
through and including December 31, 2012, holders of outstanding shares of Senior Preferred Stock shall
be entitled to receive, ratably, when, as and if declared by the Board of Directors, in its sole discretion,
out of funds legally available therefor, cumulative cash dividends at the annual rate per share equal to
the then-current Dividend Rate on the then-current Liquidation Preference. For each Dividend Period
from January 1, 2013, holders of outstanding shares of Senior Preferred Stock shall be entitled to
receive, ratably, when, as and if declared by the Board of Directors, in its sole discretion, out of funds
legally available therefor, cumulative cash dividends in an amount equal to the then-current Dividend
Amount. Dividends on the Senior Preferred Stock shall accrue from but not including the date of the
initial issuance of the Senior Preferred Stock and will be payable in arrears when, as and if declared by
the Board of Directors quarterly on March 31, June 30, September 30 and December 31 of each year
(each, a “Dividend Payment Date”), commencing on December 31, 2008. If a Dividend Payment Date is
not a “Business Day,” the related dividend will be paid not later than the next Business Day with the
same force and effect as though paid on the Dividend Payment Date, without any increase to account
for the period from such Dividend Payment Date through the date of actual payment. “Business Day”
means a day other than (i) a Saturday or Sunday, (ii) a day on which New York City banks are closed, or
(iii) a day on which the offices of the Company are closed.
If declared, the initial dividend will be for the period from but not including the date of the initial
issuance of the Senior Preferred Stock through and including December 31, 2008. Except for the initial
Dividend Payment Date, the “Dividend Period” relating to a Dividend Payment Date will be the period
from but not including the preceding Dividend Payment Date through and including the related Dividend
Payment Date. For each Dividend Period from the date of the initial issuance of the Senior Preferred
Stock through and including December 31, 2012, the amount of dividends payable on the initial
Dividend Payment Date or for any Dividend Period through and including December 31, 2012, that is not
a full calendar quarter shall be computed on the basis of 30-day months, a 360-day year and the actual
number of days elapsed in any period of less than one month. For the avoidance of doubt, for each
Dividend Period from the date of the initial issuance of the Senior Preferred Stock through and including
December 31, 2012, in the event that the Liquidation Preference changes in the middle of a Dividend
Period, the amount of dividends payable on the Dividend Payment Date at the end of such Dividend
Period shall take into account such change in Liquidation Preference and shall be computed at the
Dividend Rate on each Liquidation Preference based on the portion of the Dividend Period that each
Liquidation Preference was in effect.
(b) To the extent not paid pursuant to Section 2(a) above, dividends on the Senior Preferred Stock
shall accrue and shall be added to the Liquidation Preference pursuant to Section 8, whether or not
there are funds legally available for the payment of such dividends and whether or not dividends are
declared.
(c) For each Dividend Period from the date of the initial issuance of the Senior Preferred Stock
through and including December 31, 2012, “Dividend Rate” means 10.0 percent; provided, however,
that if at any time the Company shall have for any reason failed to pay dividends in cash in a timely
manner as required by this Certificate, then immediately following such failure and for all Dividend
Periods thereafter until the Dividend Period following the date on which the Company shall have paid in
cash full cumulative dividends (including any unpaid dividends added to the Liquidation Preference
pursuant to Section 8), the “Dividend Rate” shall mean 12.0 percent.
For each Dividend Period from January 1, 2013, and thereafter, the “Dividend Amount” for a
Dividend Period means the amount, if any, by which the Net Worth Amount at the end of the
immediately preceding fiscal quarter, less the Applicable Capital Reserve Amount for such Dividend
Period, exceeds zero. In each case, “Net Worth Amount” means (i) the total assets of the Company
(such assets excluding the Commitment and any unfunded amounts thereof) as reflected on the balance
sheet of the Company as of the applicable date set forth in this Certificate, prepared in accordance with
GAAP, less (ii) the total liabilities of the Company (such liabilities excluding any obligation in respect of
any capital stock of the Company, including this Certificate), as reflected on the balance sheet of the
Company as of the applicable date set forth in this Certificate, prepared in accordance with GAAP.
“Applicable Capital Reserve Amount” means, as of any date of determination, (A) for each Dividend
Period from January 1, 2013, through and including December 31, 2013, $3,000,000,000; (B) for each
Dividend Period occurring within each 12-month period thereafter, through and including December 31,
2017, $3,000,000,000 reduced by $600,000,000 for each such 12-month period, so that for each
Dividend Period from January 1, 2017, through and including December 31, 2017, the Applicable Capital
Reserve Amount shall be $600,000,000; and (C) for each Dividend Period from January 1, 2018, and
thereafter, $3,000,000,000. Notwithstanding the foregoing, for each Dividend Period from January 1,
2018, and thereafter, following any Dividend Payment Date with respect to which the Board of Directors
does not declare and pay a dividend or declares and pays a dividend in an amount less than the
Dividend Amount, the Applicable Capital Reserve Amount shall thereafter be zero. For the avoidance of
doubt, if the calculation of the Dividend Amount for a Dividend Period does not exceed zero, then no
Dividend Amount shall accrue or be payable for such Dividend Period.
(d) Each such dividend shall be paid to the holders of record of outstanding shares of the Senior
Preferred Stock as they appear in the books and records of the Company on such record date as shall
be fixed in advance by the Board of Directors, not to be earlier than 45 days nor later than 10 days
preceding the applicable Dividend Payment Date. The Company 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 (i) full cumulative dividends on the outstanding Senior Preferred Stock in respect of the
then-current Dividend Period and all past Dividend Periods (including any unpaid dividends added to the
Liquidation Preference pursuant to Section 8) have been declared and paid in cash (including through
any pay down of Liquidation Preference pursuant to Section 3) and (ii) all amounts required to be paid
pursuant to Section 4 (without giving effect to any prohibition on such payment under any applicable
law) have been paid in cash.
(e) Notwithstanding any other provision of this Certificate, the Board of Directors, in its discretion,
may choose to pay dividends on the Senior Preferred Stock without the payment of any dividends on
the common stock, preferred stock or any other class or series of stock from time to time outstanding
ranking junior to the Senior Preferred Stock with respect to the payment of dividends.
(f) If and whenever dividends, having been declared, shall not have been paid in full, as aforesaid,
on shares of the Senior Preferred Stock, all such dividends that have been declared on shares of the
Senior Preferred Stock shall be paid to the holders pro rata based on the aggregate Liquidation
Preference of the shares of Senior Preferred Stock held by each holder, and any amounts due but not
paid in cash shall be added to the Liquidation Preference pursuant to Section 8.
3. Optional Pay Down of Liquidation Preference
(a) Following termination of the Commitment (as defined in the Preferred Stock Purchase
Agreement referred to in Section 8 below), and subject to any limitations which may be imposed by law
and the provisions below, the Company may pay down the Liquidation Preference of all outstanding
shares of the Senior Preferred Stock pro rata, at any time, in whole or in part, out of funds legally
available therefor, with such payment first being used to reduce any accrued and unpaid dividends
previously added to the Liquidation Preference pursuant to Section 8 below and, to the extent all such
accrued and unpaid dividends have been paid, next being used to reduce any Periodic Commitment
Fees (as defined in the Preferred Stock Purchase Agreement referred to in Section 8 below) previously
added to the Liquidation Preference pursuant to Section 8 below. Prior to termination of the
Commitment, and subject to any limitations which may be imposed by law and the provisions below,
the Company may pay down the Liquidation Preference of all outstanding shares of the Senior Preferred
Stock pro rata, at any time, out of funds legally available therefor, but only to the extent of (i) accrued
and unpaid dividends previously added to the Liquidation Preference pursuant to Section 8 below and
not repaid by any prior pay down of Liquidation Preference and (ii) Periodic Commitment Fees
previously added to the Liquidation Preference pursuant to Section 8 below and not repaid by any prior
pay down of Liquidation Preference. Any pay down of Liquidation Preference permitted by this Section 3
shall be paid by making a payment in cash to the holders of record of outstanding shares of the Senior
Preferred Stock as they appear in the books and records of the Company on such record date as shall
be fixed in advance by the Board of Directors, not to be earlier than 45 days nor later than 10 days
preceding the date fixed for the payment.
(b) In the event the Company shall pay down of the Liquidation Preference of the Senior Preferred
Stock as aforesaid, notice of such pay down shall be given by the Company by first class mail, postage
prepaid, mailed neither less than 10 nor more than 45 days preceding the date fixed for the payment, to
each holder of record of the shares of the Senior Preferred Stock, at such holder’s address as the same
appears in the books and records of the Company. Each such notice shall state the amount by which
the Liquidation Preference of each share shall be reduced and the pay down date.
(c) If after termination of the Commitment the Company pays down the Liquidation Preference of
each outstanding share of Senior Preferred Stock in full, such shares shall be deemed to have been
redeemed as of the date of such payment, and the dividend that would otherwise be payable for the
Dividend Period ending on the pay down date will be paid on such date. Following such deemed
redemption, the shares of the Senior Preferred Stock shall no longer be deemed to be outstanding, and
all rights of the holders thereof as holders of the Senior Preferred Stock shall cease, with respect to
shares so redeemed, other than the right to receive the pay down amount (which shall include the final
dividend for such shares). Any shares of the Senior Preferred Stock which shall have been so redeemed,
after such redemption, shall no longer have the status of authorized, issued or outstanding shares.
4. Mandatory Pay Down of Liquidation Preference Upon Issuance of Capital Stock
(a) If the Company shall issue any shares of capital stock (including without limitation common
stock or any series of preferred stock) in exchange for cash at any time while the Senior Preferred Stock
is outstanding, then the Company shall, within 10 Business Days, use the proceeds of such issuance
net of the direct costs relating to the issuance of such securities (including, without limitation, legal,
accounting and investment banking fees) to pay down the Liquidation Preference of all outstanding
shares of Senior Preferred Stock pro rata, out of funds legally available therefor, by making a payment in
cash to the holders of record of outstanding shares of the Senior Preferred Stock as they appear in the
books and records of the Company on such record date as shall be fixed in advance by the Board of
Directors, not to be earlier than 45 days nor later than 10 days preceding the date fixed for the payment,
with such payment first being used to reduce any accrued and unpaid dividends previously added to
the Liquidation Preference pursuant to Section 8 below and, to the extent all such accrued and unpaid
dividends have been paid, next being used to reduce any Periodic Commitment Fees (as defined in the
Preferred Stock Purchase Agreement referred to in Section 8 below) previously added to the Liquidation
Preference pursuant to Section 8 below; provided that, prior to the termination of the Commitment (as
defined in the Preferred Stock Purchase Agreement referred to in Section 8 below), the Liquidation
Preference of each share of Senior Preferred Stock shall not be paid down below $1,000 per share.
(b) If the Company shall not have sufficient assets legally available for the pay down of the
Liquidation Preference of the shares of Senior Preferred Stock required under Section 4(a), the Company
shall pay down the Liquidation Preference per share to the extent permitted by law, and shall pay down
any Liquidation Preference not so paid down because of the unavailability of legally available assets or
other prohibition as soon as practicable to the extent it is thereafter able to make such pay down legally.
The inability of the Company to make such payment for any reason shall not relieve the Company from
its obligation to effect any required pay down of the Liquidation Preference when, as and if permitted by
law.
(c) If after the termination of the Commitment the Company pays down the Liquidation Preference
of each outstanding share of Senior Preferred Stock in full, such shares shall be deemed to have been
redeemed as of the date of such payment, and the dividend that would otherwise be payable for the
Dividend Period ending on the pay down date will be paid on such date. Following such deemed
redemption, the shares of the Senior Preferred Stock shall no longer be deemed to be outstanding, and
all rights of the holders thereof as holders of the Senior Preferred Stock shall cease, with respect to
shares so redeemed, other than the right to receive the pay down amount (which shall include the final
dividend for such redeemed shares). Any shares of the Senior Preferred Stock which shall have been so
redeemed, after such redemption, shall no longer have the status of authorized, issued or outstanding
shares.
5. No Voting Rights
Except as set forth in this Certificate or otherwise required by law, the shares of the Senior
Preferred Stock shall not have any voting powers, either general or special.
6. No Conversion or Exchange Rights
The holders of shares of the Senior Preferred Stock shall not have any right to convert such shares
into or exchange such shares for any other class or series of stock or obligations of the Company.
7. No Preemptive Rights
No holder of the Senior Preferred Stock shall as such holder have any preemptive right to purchase
or subscribe for any other shares, rights, options or other securities of any class of the Company which
at any time may be sold or offered for sale by the Company.
8. Liquidation Rights and Preference
(a) Except as otherwise set forth herein, upon the voluntary or involuntary dissolution, liquidation or
winding up of the Company, the holders of the outstanding shares of the Senior Preferred Stock shall be
entitled to receive out of the assets of the Company available for distribution to stockholders, before any
payment or distribution shall be made on the common stock or any other class or series of stock of the
Company ranking junior to the Senior Preferred Stock upon liquidation, the amount per share equal to
the Liquidation Preference plus an amount, determined in accordance with Section 2(a) above, equal
to the dividend otherwise payable for the then-current Dividend Period accrued through and including
the date of payment in respect of such dissolution, liquidation or winding up; provided, however, that if
the assets of the Company available for distribution to stockholders shall be insufficient for the payment
of the amount which the holders of the outstanding shares of the Senior Preferred Stock shall be
entitled to receive upon such dissolution, liquidation or winding up of the Company as aforesaid, then,
all of the assets of the Company available for distribution to stockholders shall be distributed to the
holders of outstanding shares of the Senior Preferred Stock pro rata based on the aggregate Liquidation
Preference of the shares of Senior Preferred Stock held by each holder.
(b) “Liquidation Preference” shall initially mean $1,000 per share and shall be:
(i) increased each time a Deficiency Amount (as defined in the Preferred Stock Purchase
Agreement) is paid to the Company by an amount per share equal to the aggregate amount so paid
to the Company divided by the number of shares of Senior Preferred Stock outstanding at the time
of such payment;
(ii) increased each time the Company does not pay the full Periodic Commitment Fee (as
defined in the Preferred Stock Purchase Agreement) in cash by an amount per share equal to the
amount of the Periodic Commitment Fee that is not paid in cash divided by the number of shares of
Senior Preferred Stock outstanding at the time such payment is due;
(iii) increased on the Dividend Payment Date if the Company fails to pay in full the dividend
payable for the Dividend Period ending on such date by an amount per share equal to the
aggregate amount of unpaid dividends divided by the number of shares of Senior Preferred Stock
outstanding on such date; and
(iv) decreased each time the Company pays down the Liquidation Preference pursuant to
Section 3 or Section 4 of this Certificate by an amount per share equal to the aggregate amount of
the pay down divided by the number of shares of Senior Preferred Stock outstanding at the time of
such pay down.
(c) “Preferred Stock Purchase Agreement” means the Preferred Stock Purchase Agreement, dated
September 7, 2008, between the Company and the United States Department of the Treasury.
(d) Neither the sale of all or substantially all of the property or business of the Company, nor the
merger, consolidation or combination of the Company into or with any other corporation or entity, shall
be deemed to be a dissolution, liquidation or winding up for the purpose of this Section 8.
9. Additional Classes or Series of Stock
The Board of Directors shall have the right at any time in the future to authorize, create and issue,
by resolution or resolutions, one or more additional classes or series of stock of the Company, and to
determine and fix the distinguishing characteristics and the relative rights, preferences, privileges and
other terms of the shares thereof; provided that, any such class or series of stock may not rank prior to
or on parity with the Senior Preferred Stock without the prior written consent of the holders of at least
two-thirds of all the shares of Senior Preferred Stock at the time outstanding.
10. Miscellaneous
(a) The Company and any agent of the Company may deem and treat the holder of a share or
shares of Senior Preferred Stock, as shown in the Company’s books and records, as the absolute owner
of such share or shares of Senior Preferred Stock for the purpose of receiving payment of dividends in
respect of such share or shares of Senior Preferred Stock and for all other purposes whatsoever, and
neither the Company nor any agent of the Company shall be affected by any notice to the contrary. All
payments made to or upon the order of any such person shall be valid and, to the extent of the sum or
sums so paid, effectual to satisfy and discharge liabilities for moneys payable by the Company on or
with respect to any such share or shares of Senior Preferred Stock.
(b) The shares of the Senior Preferred Stock, when duly issued, shall be fully paid and non-
assessable.
(c) The Senior Preferred Stock may be issued, and shall be transferable on the books of the
Company, only in whole shares.
(d) For purposes of this Certificate, the term “the Company” means the Federal Home Loan
Mortgage Corporation and any successor thereto by operation of law or by reason of a merger,
consolidation, combination or similar transaction.
(e) This Certificate and the respective rights and obligations of the Company and the holders of the
Senior Preferred Stock with respect to such Senior Preferred Stock shall be construed in accordance
with and governed by the laws of the United States, provided that the law of the Commonwealth of
Virginia shall serve as the federal rule of decision in all instances except where such law is inconsistent
with the Company’s enabling legislation, its public purposes or any provision of this Certificate.
(f) Any notice, demand or other communication which by any provision of this Certificate is
required or permitted to be given or served to or upon the Company shall be given or served in writing
addressed (unless and until another address shall be published by the Company) to Freddie Mac, 8200
Jones Branch Drive, McLean, Virginia 22102, Attn: Executive Vice President and General Counsel. Such
notice, demand or other communication to or upon the Company shall be deemed to have been
sufficiently given or made only upon actual receipt of a writing by the Company. Any notice, demand or
other communication which by any provision of this Certificate is required or permitted to be given or
served by the Company hereunder may be given or served by being deposited first class, postage
prepaid, in the United States mail addressed (i) to the holder as such holder’s name and address may
appear at such time in the books and records of the Company or (ii) if to a person or entity other than a
holder of record of the Senior Preferred Stock, to such person or entity at such address as reasonably
appears to the Company to be appropriate at such time. Such notice, demand or other communication
shall be deemed to have been sufficiently given or made, for all purposes, upon mailing.
(g) The Company, by or under the authority of the Board of Directors, may amend, alter,
supplement or repeal any provision of this Certificate pursuant to the following terms and conditions:
(i) Without the consent of the holders of the Senior Preferred Stock, the Company may
amend, alter, supplement or repeal any provision of this Certificate to cure any ambiguity, to
correct or supplement any provision herein which may be defective or inconsistent with any other
provision herein, or to make any other provisions with respect to matters or questions arising under
this Certificate, provided that such action shall not adversely affect the interests of the holders of
the Senior Preferred Stock.
(ii) The consent of the holders of at least two-thirds of all of the shares of the Senior Preferred
Stock at the time outstanding, given in person or by proxy, either in writing or by a vote at a
meeting called for the purpose at which the holders of shares of the Senior Preferred Stock shall
vote together as a class, shall be necessary for authorizing, effecting or validating the amendment,
alteration, supplementation or repeal (whether by merger, consolidation or otherwise) of the
provisions of this Certificate other than as set forth in subparagraph (i) of this paragraph (g). The
creation and issuance of any other class or series of stock, or the issuance of
additional shares of any existing class or series of stock, of the Company ranking junior to the
Senior Preferred Stock shall not be deemed to constitute such an amendment, alteration,
supplementation or repeal.
(iii) Holders of the Senior Preferred Stock shall be entitled to one vote per share on matters on
which their consent is required pursuant to subparagraph (ii) of this paragraph (g). In connection
with any meeting of such holders, the Board of Directors shall fix a record date, neither earlier than
60 days nor later than 10 days prior to the date of such meeting, and holders of record of shares of
the Senior Preferred Stock on such record date shall be entitled to notice of and to vote at any
such meeting and any adjournment. The Board of Directors, or such person or persons as it may
designate, may establish reasonable rules and procedures as to the solicitation of the consent of
holders of the Senior Preferred Stock at any such meeting or otherwise, which rules and
procedures shall conform to the requirements of any national securities exchange on which the
Senior Preferred Stock may be listed at such time.
(h) RECEIPT AND ACCEPTANCE OF A SHARE OR SHARES OF THE SENIOR PREFERRED
STOCK BY OR ON BEHALF OF A HOLDER SHALL CONSTITUTE THE UNCONDITIONAL
ACCEPTANCE BY THE HOLDER (AND ALL OTHERS HAVING BENEFICIAL OWNERSHIP OF SUCH
SHARE OR SHARES) OF ALL OF THE TERMS AND PROVISIONS OF THIS CERTIFICATE. NO
SIGNATURE OR OTHER FURTHER MANIFESTATION OF ASSENT TO THE TERMS AND
PROVISIONS OF THIS CERTIFICATE SHALL BE NECESSARY FOR ITS OPERATION OR EFFECT AS
BETWEEN THE COMPANY AND THE HOLDER (AND ALL SUCH OTHERS).
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the Company this 1st day of
January, 2018.
[Seal]
FEDERAL HOME LOAN MORTGAGE CORPORATION,
by
The Federal Housing Finance Agency, its
Conservator
By:
/s/ Melvin L. Watt
Melvin L. Watt
Director
Signature Page to January 2018 Second Amended and Restated Certificate of Designation of Senior
Preferred Stock
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(1)
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(2)
Total fixed charges including preferred stock dividends
Ratio of earnings to fixed charges(3)
Ratio of earnings to combined fixed charges and preferred stock dividends(4)
Year Ended December 31,
2017
2016
2015
(Dollars in millions)
2014
2013
$ 16,834
$ 11,639
$
9,274
$ 11,002
$ 25,363
53,643
3
$ 70,480
50,786
3
$ 62,428
52,144
2
$ 61,420
55,217
5
$ 66,224
56,234
4
$ 81,601
$ 53,643
3
$ 53,646
33,167
$ 86,813
1.31
—
50,786
3
$ 50,789
7,437
$ 58,226
1.23
1.07
52,144
2
$ 52,146
5,510
$ 57,656
1.18
1.07
55,217
5
$ 55,222
19,610
$ 74,832
1.20
—
56,234
4
$ 56,238
47,591
$ 103,829
1.45
—
(1)
(2)
(3)
(4)
Prior periods data have been revised to conform to the current presentation
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.
Ratio of earnings to fixed charges is computed by dividing earnings, as adjusted by total fixed charges.
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 $16.3 billion, $8.6 billion and $22.2 billion for the years ended December 31,
2017, 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, 2017 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 6, 2017.
/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, 2017 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 6, 2017.
/s/ Launcelot F. Drummond
Launcelot 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, 2017 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 6, 2017.
/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, 2017 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 7, 2017.
/s/ Grace A. Huebscher
Grace A. Huebscher
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, 2017 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 6, 2017.
/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, 2017 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 6, 2017.
/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, 2017 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 6, 2017.
/s/ S. Sara Mathew
S. 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, 2017 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 6, 2017.
/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, 2017 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 6, 2017.
/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, 2017 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 6, 2017.
/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, 2017 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 15, 2018
/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:
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2017 of the Federal Home Loan Mortgage Corporation;
Exhibit 31.2
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: February 15, 2018
/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, 2017 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 15, 2018
/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, 2017 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 15, 2018
/s/ James G. Mackey
James G. Mackey
Executive Vice President — Chief Financial Officer