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, 2018
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 every Interactive Data File required to be submitted 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 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
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 29,
2018 (the last business day of the registrant's most recently completed second fiscal quarter) was $1.0 billion.
As of February 1, 2019, there were 650,058,775 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
QUARTERLY SELECTED FINANCIAL DATA
CONTROLS AND PROCEDURES
DIRECTORS, CORPORATE GOVERNANCE, AND EXECUTIVE OFFICERS
Directors
Corporate Governance
Executive Officers
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Compensation and Risk
CEO Pay Ratio
2018 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
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FREDDIE MAC | 2018 Form 10-K
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Table of Contents
MD&A Table Index
MD&A TABLE INDEX
Table Description
1 Selected Financial Data
2 Summary of Consolidated Statements of Comprehensive Income (Loss)
3 Components of Net Interest Income
4 Analysis of Net Interest Yield
5 Net Interest Income Rate / Volume Analysis
6 Components of Mortgage Loans Gains (Losses)
7 Components of Investment Securities Gains (Losses)
8 Components of Debt Gains (Losses)
9 Components of Derivative Gains (Losses)
10 Other Comprehensive Income (Loss)
11 Summarized Consolidated Balance Sheets
12 Single-Family Credit Guarantee Portfolio CRT Issuance
13 Single-Family Guarantee Segment Financial Results
14 Multifamily Market Support
15 Multifamily Segment Financial Results
16 Capital Markets Segment Financial Results
17 Capital Markets Segment Interest Rate-Related and Market Spread-Related Fair Value Changes, Net of Tax
18 All Other Category Comprehensive Income
19 Single-Family New Business Activity
20 Relief Refinance Loan Purchases
21 Details of Credit Enhanced Loans in Our Single-Family Credit Guarantee Portfolio
22 Non-Credit-Enhanced and Credit-Enhanced Loans in Our Single-Family Credit Guarantee Portfolio
23 Single-Family Guarantee Portfolio Credit Risk Transfer Sensitivity Analysis
24 Credit Quality Characteristics of Our Single-Family Credit Guarantee Portfolio
25 Characteristics of the Loans in Our Single-Family Credit Guarantee Portfolio
26 Single-Family Credit Guarantee Portfolio Higher Risk Loan Data
27 Single-Family Credit Guarantee Portfolio Attribute Combinations for Higher Risk Loans
28 Higher Risk Single-Family Loan Credit Characteristics
29 Timing of Scheduled Payment Changes for Certain Single-Family Loan Types
30 Alt-A Loans in Our Single-Family Credit Guarantee Portfolio
31 Geographic Concentration in Our Single-Family Credit Guarantee Portfolio
32 Single-Family Charge-Offs and Recoveries by Region
33 Concentration of Single-Family Loans in Each Region by CLTV Ratio
34 Single-Family Credit Guarantee Portfolio Credit Performance Metrics
35 Credit Characteristics of Certain Single-Family Loan Categories
36 Single-Family Allowance for Credit Losses Activity
37 Single-Family Individually Impaired Loans with an Allowance Recorded
38 Single-Family TDR and Non-Accrual Loans
39 Single-Family Relief Refinance Loans
40 Credit Characteristics of Single-Family Modified Loans
41 Payment Performance of Single-Family Modified Loans
42 Seriously Delinquent Single-Family Loans By Jurisdiction
43 Average Length of Foreclosure Process for Single-Family Loans
44 Single-Family REO Activity
45 Single-Family Severity Ratios
46 Multifamily Segment New Business Activity by Product Term
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FREDDIE MAC | 2018 Form 10-K
ii
Table of Contents
MD&A Table Index
47 Non-Credit-Enhanced and Credit-Enhanced Loans Underlying Our Multifamily Mortgage Portfolio
48 Multifamily Mortgage Portfolio Attributes
49 Single-Family Credit Guarantee Portfolio Non-Depository Servicers
50 Single-Family Mortgage Insurers
51 Derivative Counterparty Credit Exposure
52 PMVS-YC and PMVS-L Results Assuming Shifts of the LIBOR Yield Curve
53 Duration Gap and PMVS Results
54 PMVS-L Results Before Derivatives and After Derivatives
55 Estimated Net Interest Rate Effect on Comprehensive Income (Loss)
56 GAAP Adverse Scenario Before and After Hedge Accounting
57 Estimated Spread Effect on Comprehensive Income (Loss)
58 Sources of Liquidity
59 Other Investments Portfolio
60 Funding Sources
61 Other Debt Activity
62 Other Short-Term Debt
63 Activity for Debt Securities of Consolidated Trusts Held by Third Parties
64 Debt Securities of Consolidated Trusts Held by Third Parties
65 Freddie Mac Credit Ratings
66 Sources of Capital
67 Net Worth Activity
68 Returns on Conservatorship Capital
69 Mortgage-Related Investments Portfolio Details
70 2017 and 2016 Affordable Housing Goals Results
71 2018-2020 Affordable Housing Goals
72 Contractual Obligations
73 Quarterly Selected Financial Data
74 Board Compensation Levels
75 Director Compensation
76 2018 Target TDC
77 2018 Deferred Salary
78 CEO Pay Ratio
79 Compensation Summary
80 Grants of Plan-Based Awards
81 SERP and SERP II Benefits
82 Compensation and Benefits if NEO Terminated Employment as of December 31, 2018
83 Stock Ownership
84 5% Holders
85 Auditor Fees
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FREDDIE MAC | 2018 Form 10-K
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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. In
addition, throughout this Form 10-K, we refer to the three months ended December 31, 2018, the three
months ended September 30, 2018, the three months ended June 30, 2018, the three months ended
March 31, 2018, the three months ended December 31, 2017, the three months ended September 30,
2017, the three months ended June 30, 2017, the three months ended March 31, 2017, and the three
months ended December 31, 2016 as "4Q 2018," "3Q 2018," "2Q 2018," "1Q 2018," "4Q 2017," "3Q
2017," "2Q 2017," "1Q 2017," and "4Q 2016," respectively.
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. In addition, we transfer mortgage
credit risk exposure to private investors through our credit risk transfer programs, which include
securities- and insurance-based offerings. 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
FREDDIE MAC | 2018 Form 10-K
1
Introduction
About Freddie Mac
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
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 the Conservator, acting as successor to the
rights, titles, powers, and privileges of 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.
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. Pursuant to the December
2017 Letter Agreement, the applicable Capital Reserve Amount is $3.0 billion. If for any reason we were
not to pay our dividend requirement on the senior preferred stock in full in any future period, the unpaid
amount would be added to the liquidation preference and the 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 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 was $140.2 billion at December 31, 2018, and will be reduced by any future draws. For more
information on the conservatorship and government support for our business, see MD&A -
Conservatorship and Related Matters and Note 2.
Draw Requests From and Dividend Payments To Treasury
FREDDIE MAC | 2018 Form 10-K
2
Introduction
Business Results
Portfolio Balances
About Freddie Mac
Guarantee Portfolios
Investments Portfolios
Total Guarantee Portfolio
2018 vs. 2017 and 2017 vs. 2016 - The total guarantee portfolio grew $101 billion, or 5%, in 2018,
driven by a 4% increase in our single-family credit guarantee portfolio and a 17% increase in our
multifamily guarantee portfolio. The total guarantee portfolio grew $119 billion, or 6%, in 2017, driven
by a 4% increase in our single-family credit guarantee portfolio and a 28% increase in our
multifamily guarantee portfolio.
The growth in our single-family credit guarantee portfolio in both 2018 and 2017 was driven by
increases in U.S. single-family mortgage debt outstanding as a result of continued home price
appreciation. New business acquisitions had a higher average loan size compared to older
vintages that continued to run off.
FREDDIE MAC | 2018 Form 10-K
3
Introduction
About Freddie Mac
The growth in our multifamily guarantee portfolio in both 2018 and 2017 was primarily driven by
strong loan purchase and securitization activity, which was attributable to healthy multifamily
market fundamentals and strong demand for certain of our securitization products.
Total Investments Portfolio
2018 vs. 2017 and 2017 vs. 2016 - The total investments portfolio declined $62 billion, or 18%, and
$51 billion, or 13%, in 2018 and 2017, respectively, primarily due to repayments and the active
disposition of less liquid assets. We have reduced the mortgage-related investments portfolio as
required by the Purchase Agreement and FHFA.
Consolidated Financial Results
Comprehensive Income
Key Drivers:
2018 vs. 2017
Comprehensive income was $8.6 billion for 2018, an increase of 55% compared to
comprehensive income of $5.6 billion for 2017. The increase in comprehensive income primarily
reflects two significant items in 2017: a non-cash charge of $5.4 billion due to the enactment of
tax reform legislation and a $4.5 billion, or $2.9 billion after-tax, benefit from a litigation
settlement related to non-agency mortgage-related securities in which the company no longer
invests.
Other key drivers of comprehensive income for 2018 include:
FREDDIE MAC | 2018 Form 10-K
4
Introduction
About Freddie Mac
— Solid business revenues driven by continued growth in our guarantee portfolios, partially
offset by lower net interest income driven by a reduction in the balance of our mortgage-
related investments portfolio;
— Strong credit quality resulting in a higher benefit for credit losses in 2018, primarily driven by
estimated losses from the hurricanes in 2017;
— Ongoing modest impacts from market-related items, despite significant volatility in the
financial markets, especially in 4Q 2018; and
— Lower income tax expense due to the reduction in the statutory corporate income tax rate in
2018.
2017 vs. 2016
Comprehensive income was $5.6 billion for 2017, a decrease of 22% compared to
comprehensive income of $7.1 billion for 2016, primarily due to the two significant items that
occurred in 2017.
Other key drivers of comprehensive income for 2017 include:
— Solid business revenues driven by continued growth in our guarantee portfolios, partially
offset by lower net interest income driven by a reduction in the balance of our mortgage-
related investments portfolio;
— Ongoing modest impacts from market-related items, driven by gains from spread tightening
and single-family legacy asset dispositions; and
— Lower benefit for credit losses, as 2017 was negatively affected by the hurricanes.
FREDDIE MAC | 2018 Form 10-K
5
Introduction
Our Business
OUR BUSINESS
Primary Business Strategies
Our primary business strategies describe how we plan to pursue our Charter Mission through at least
2021. The underlying assumption for these strategies is that the conservatorship will continue with no
material changes during that period. FHFA or Congress could take actions that alter this assumption.
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 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:
Achieving superior economic value of the company through strong risk, capital, and financial
management;
Being an effective operating organization; and
Being a market leader through customer focus and innovation.
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 efficiency of the mortgage markets, including reducing costs to
lenders and borrowers;
Developing greater responsible access to mortgage credit; and
Reducing taxpayer exposure to our risks and subsidy to our returns.
For further information on our goals and detailed strategies for each of our business segments, see
MD&A — Our Business Segments.
FREDDIE MAC | 2018 Form 10-K
6
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 and our Enhanced Relief
RefinanceSM program, 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 $484,350 for 2019, an increase from $453,100 for 2018,
$424,100 for 2017, and $417,000 from 2006 to 2016. Higher limits have been established in certain
"high-cost" areas (for 2019, up to $726,525 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.
Business Segments
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.
FREDDIE MAC | 2018 Form 10-K
7
Introduction
Employees
Our Business
At February 1, 2019, we had 6,600 full-time and 42 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. 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.
We provide disclosure about our debt securities on our website at 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® transactions and SCR notes is available at
crt.freddiemac.com and mf.freddiemac.com/investors, respectively.
We provide disclosure about our mortgage-related securities, some of which are off-balance sheet
obligations (e.g., K Certificates and SB Certificates), on our website at www.freddiemac.com/mbs.
From this address, investors can access information and documents, including offering circulars and
offering circular supplements, for mortgage-related securities offerings.
We provide additional information, including product descriptions, investor presentations, securities
issuance calendars, transaction volumes and details, redemption notices, Freddie Mac research, and
material developments or other events that may be important to investors, in each case as applicable,
on the websites for our business segments, which can be found at www.freddiemac.com/
singlefamily, mf.freddiemac.com, and www.freddiemac.com/capital-markets.
FREDDIE MAC | 2018 Form 10-K
8
Introduction
Forward-Looking Statements
FORWARD-LOOKING STATEMENTS
We regularly communicate information concerning our business activities to investors, the news media,
securities analysts, and others as part of our normal operations. Some of these communications,
including this Form 10-K, contain "forward-looking statements." Examples of forward-looking
statements include, but are not limited to, statements pertaining to the conservatorship, our current
expectations and objectives for the Single-family Guarantee, Multifamily, and 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 to reduce the Federal Reserve's holdings of mortgage-related securities;
Changes in tax laws;
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, STACR Trust,
ACIS®, K Certificate, SB Certificate, and other credit risk transfer transactions;
Our ability to maintain adequate liquidity to fund our operations;
Our ability to maintain the security and resiliency of our operational systems and infrastructure,
including against cyberattacks;
Our ability to effectively execute our business strategies, implement new initiatives, and improve
FREDDIE MAC | 2018 Form 10-K
9
Introduction
efficiency;
Forward-Looking Statements
The adequacy of our risk management framework, including the adequacy of the CCF and our
internal capital methodologies for measuring risk;
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;
Our reliance on CSS and the CSP for the operation of the majority of our single-family securitization
activities;
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 | 2018 Form 10-K
10
Selected Financial Data
Selected Financial Data
The selected financial data presented below should be reviewed in conjunction with MD&A and our
consolidated financial statements and accompanying notes.
Table 1 - Selected Financial Data
(Dollars in millions, except share-related amounts)
2018
2017
2016
2015
2014
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
Balance Sheets Data
Loans held-for-investment, at amortized cost by consolidated
trusts (net of allowances for loan losses)
Total assets
Debt securities of consolidated trusts held by third parties
Other debt
All other liabilities
Total stockholders' equity
Portfolio Balances - UPB
Total guarantee portfolio
$12,021
$14,164
$14,379
$14,946
$14,263
736
3,544
(4,827)
(2,239)
9,235
8,622
3,612
1.12
—
84
6,869
(4,283)
(11,209)
5,625
5,558
(3,244)
(1.00)
—
803
500
(4,043)
(3,824)
7,815
7,118
97
0.03
—
2,665
(3,599)
(4,738)
(2,898)
6,376
5,799
(23)
(0.01)
—
(58)
(113)
(3,090)
(3,312)
7,690
9,426
(2,336)
(0.72)
—
$1,842,850
$1,774,286
$1,690,218
$1,625,184
$1,558,094
2,063,060
1,792,677
252,273
13,633
4,477
2,049,776
1,720,996
313,634
15,458
(312)
2,023,376
1,648,683
353,321
16,297
5,075
1,985,892
1,556,121
414,148
12,683
2,940
1,945,360
1,479,473
449,890
13,346
2,651
$2,133,510
$2,031,955
$1,912,717
$1,821,896
$1,756,283
Mortgage-related investments portfolio
218,080
253,455
298,426
62,917
41,914
11,217
89,955
51,720
17,817
95,041
77,399
16,272
346,911
100,913
82,347
22,649
408,414
78,037
82,908
33,130
Other investments portfolio
TDRs on accrual status
Non-accrual loans
Ratios
Return on average assets
Allowance for loan losses as percentage of loans, held-for-
investment
0.4%
0.3
0.3%
0.5
0.4%
0.7
0.3%
0.9
0.4%
1.3
FREDDIE MAC | 2018 Form 10-K
11
Management's Discussion and Analysis
Key Economic Indicators
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
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.
Home prices continued to appreciate during 2018, increasing 4.7%, compared to an increase of
7.2% during 2017. We expect home price growth will continue in 2019, although at a slower pace
than in 2018, due to increased supply and higher mortgage interest rates.
Home price appreciation continued to drive growth in mortgage debt outstanding and declines in
single-family serious delinquency rates in the U.S. mortgage markets during 2018.
FREDDIE MAC | 2018 Form 10-K
12
Management's Discussion and Analysis
Key Economic Indicators
Interest Rates
Key Market Interest Rates
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 conventional conforming home purchase or refinance
mortgage with an LTV of 80%. Increases (decreases) in the PMMS rate typically result in decreases
(increases) in refinancing activity and originations.
Higher average mortgage interest rates drove a decline in origination volumes, especially refinance
volume, during 2018.
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. 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.
FREDDIE MAC | 2018 Form 10-K
13
Management's Discussion and Analysis
Key Economic Indicators
Unemployment Rate
Unemployment Rate and Job Creation(1)
(1) Excludes Puerto Rico and the U.S. Virgin Islands.
Source: U.S. Bureau of Labor Statistics
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.
Continued job growth, a declining unemployment rate, and generally favorable economic conditions
resulted in strong credit quality and declining serious delinquency rates in 2018.
FREDDIE MAC | 2018 Form 10-K
14
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.
Table 2 - Summary of Consolidated Statements of Comprehensive Income (Loss)
Year Ended December 31,
2018 vs. 2017
2018
2017
2016
$
%
2017 vs. 2016
$
%
Year Over Year Change
$12,021
$14,164
$14,379
($2,143)
(15)%
(Dollars in millions)
Net interest income
Benefit (provision) for credit losses
736
84
803
652
Net interest income after benefit (provision) for
credit losses
12,757
14,248
15,182
(1,491)
Non-interest income (loss):
Guarantee fee income
Mortgage loans gains (losses)
Investment securities gains (losses)
Debt gains (losses)
Derivative gains (losses)
Other income (loss)
Total non-interest income (loss)
Non-interest expense:
Administrative expense
Real estate owned operations expense
Temporary Payroll Tax Cut Continuation Act of
2011 expense
Other expense
Total non-interest expense
Income before income tax (expense) benefit
Income tax (expense) benefit
Net income (loss)
Total other comprehensive income (loss), net of
taxes and reclassification adjustments
811
724
(695)
720
1,270
714
3,544
(2,293)
(169)
662
2,026
1,036
151
(1,988)
4,982
6,869
(2,106)
(189)
513
200
(269)
(473)
(274)
803
500
(2,005)
(287)
(1,484)
(1,340)
(1,152)
(881)
(4,827)
11,474
(2,239)
9,235
(648)
(4,283)
16,834
(11,209)
5,625
(599)
(4,043)
11,639
(3,824)
7,815
149
(1,302)
(1,731)
569
3,258
(4,268)
(3,325)
(187)
20
(144)
(233)
(544)
(5,360)
8,970
3,610
776
(10)
23
(64)
(167)
377
164
(86)
(48)
(9)
11
(11)
(36)
(13)
(32)
80
64
($215)
(719)
(934)
149
1,826
1,305
624
(1,714)
4,179
6,369
(101)
98
(188)
(49)
(240)
5,195
(7,385)
(2,190)
630
(1)%
(90)
(6)
29
913
485
132
(626)
520
1,274
(5)
34
(16)
(8)
(6)
45
(193)
(28)
90
(613)
(67)
(697)
(546)
(815)
Comprehensive income (loss)
$8,622
$5,558
$7,118
$3,064
55 %
($1,560)
(22)%
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 | 2018 Form 10-K
15
Management's Discussion and Analysis
Consolidated Results of Operations
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 and includes amortization of the upfront fees we receive when we acquire a loan. Amortization
related to other assets, including investment securities and unsecuritized mortgage loans, and other
debt 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 two components:
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 and
Fair value changes for the hedging instrument, including the accrual of periodic cash
settlements, and fair value changes for the hedged item attributable to the risk being hedged for
qualifying fair value hedge relationships, due to the adoption of amended hedge accounting
guidance in 4Q 2017. See Note 9 for additional detail on this change.
FREDDIE MAC | 2018 Form 10-K
16
Management's Discussion and Analysis
Consolidated Results of Operations
The table below presents the components of net interest income.
Table 3 - Components of Net Interest Income
Year Ended December 31,
2018 vs. 2017
2018
2017
2016
$
%
2017 vs. 2016
$
%
Year Over Year Change
$3,457
$3,270
$2,997
1,438
1,314
1,142
5,472
10,367
6,400
10,984
6,896
11,035
2,900
3,258
3,333
(315)
(931)
(85)
7
202
(191)
$187
124
(928)
(617)
(358)
(230)
(938)
6 %
9
(15)
(6)
(11)
(271)
(13,400)
$273
172
(496)
(51)
(75)
(287)
198
9 %
15
(7)
—
(2)
(142)
104
$12,021
$14,164
$14,379
($2,143)
(15)%
($215)
(1)%
(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 other debt
Hedge accounting impact
Net interest income
Key Drivers:
Guarantee fee income
2018 vs. 2017 - Increased primarily due to the continued growth of the core single-family loan
portfolio.
2017 vs. 2016 - Increased 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
2018 vs. 2017 and 2017 vs. 2016 - 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
2018 vs. 2017 - Decreased primarily driven by lower prepayments as a result of higher interest
rates, partially offset by an increase in amortization from higher upfront fees on mortgage loans.
Net amortization of other assets and other debt
2018 vs. 2017 - Increased primarily due to lower accretion related to unsecuritized mortgage
loans, as certain of those loans were reclassified from held-for-investment to held-for-sale and
ceased amortizing, and previously recognized other-than-temporary impairments, due to a
decline in the population of impaired securities.
FREDDIE MAC | 2018 Form 10-K
17
Management's Discussion and Analysis
Consolidated Results of Operations
2017 vs. 2016 - decreased due to lower accretion related to previously recognized other-than-
temporary impairments due to a decline in the population of impaired securities.
Hedge accounting impact
2018 vs. 2017 and 2017 vs. 2016 - affected both comparative periods 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 | 2018 Form 10-K
18
Management's Discussion and Analysis
Consolidated Results of Operations
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.
Table 4 - Analysis of Net Interest Yield
Year Ended December 31,
2018
Interest
Income
(Expense)
Average
Balance
Average
Rate
Average
Balance
2017
Interest
Income
(Expense)
Average
Rate
Average
Balance
2016
Interest
Income
(Expense)
Average
Rate
$7,189
45,360
1,350
$67
880
0.93 %
$10,965
1.94
57,883
$48
588
0.44 %
$16,932
1.02
59,639
$42
217
0.25 %
0.36
35
2.58
859
21
2.42
484
11
2.28
143,424
6,026
4.20
164,663
6,402
3.89
189,982
7,262
3.82
(88,757)
(3,437)
(3.87)
(87,665)
(3,264)
(3.72)
(94,624)
(3,509)
(3.71)
54,667
18,955
1,799,122
98,005
2,589
4.74
446
61,883
4,154
2.35
3.44
4.24
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
102
55,417
5,623
0.65
3.36
4.14
2,024,648
70,054
3.46
2,011,306
67,807
3.37
1,973,756
65,165
3.30
1,826,429
(54,966)
(3.01)
1,753,983
(50,920)
(2.90)
1,674,474
(48,108)
(2.87)
(88,757)
3,437
3.87
(87,665)
3,264
3.72
(94,624)
3,509
3.71
1,737,672
(51,529)
(2.97)
1,666,318
(47,656)
(2.86)
1,579,850
(44,599)
(2.82)
62,893
216,484
279,377
(1,193)
(5,311)
(6,504)
(1.90)
(2.45)
(2.33)
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)
2,017,049
(58,033)
(2.88)
2,002,743
(53,643)
(2.68)
1,964,174
(50,786)
(2.58)
7,599
— 0.01
8,563
— 0.01
9,582
— 0.01
$2,024,648
($58,033)
(2.87)% $2,011,306
($53,643)
(2.67)% $1,973,756
($50,786)
(2.57)%
$12,021
0.59 %
$14,164
0.70 %
$14,379
0.73 %
(Dollars in millions)
Interest-earning assets:
Cash and cash equivalents
Securities purchased under
agreements to resell
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 $2.6 billion, $2.4 billion, and $2.6 billion for loans
held by consolidated trusts and $104 million, $162 million, and $215 million for loans held by Freddie Mac during 2018, 2017, and 2016,
respectively.
FREDDIE MAC | 2018 Form 10-K
19
Management's Discussion and Analysis
Consolidated Results of Operations
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.
Table 5 - Net Interest Income Rate / Volume Analysis
(Dollars in millions)
Interest-earning assets:
Cash and cash equivalents
Securities purchased under agreements to resell
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
Total interest-earning assets
Interest-bearing liabilities:
Variance Analysis
2018 vs. 2017
2017 vs. 2016
Rate
Volume
Total
Change
Rate
Volume
Total
Change
$45
443
1
491
(132)
359
146
767
(28)
1,733
($26)
(151)
13
(867)
(41)
(908)
23
2,370
(807)
514
$19
292
14
(376)
(173)
(549)
169
3,137
(835)
2,247
$8
380
1
123
(14)
109
161
609
165
1,433
($2)
(9)
9
(983)
259
(724)
14
2,720
(799)
1,209
$6
371
10
(860)
245
(615)
175
3,329
(634)
2,642
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
(1,902)
(2,144)
(4,046)
(508)
(2,304)
(2,812)
132
41
173
14
(259)
(245)
(1,770)
(2,103)
(3,873)
(494)
(2,563)
(3,057)
Other debt:
Short-term debt
Long-term debt
Total other debt
Total interest-bearing liabilities
Net interest income
(665)
(1,005)
(1,670)
(3,440)
87
1,066
1,153
(578)
61
(517)
(950)
(4,390)
($1,707)
($436)
($2,143)
(331)
(214)
(545)
(1,039)
$394
66
679
745
(1,818)
($609)
(265)
465
200
(2,857)
($215)
Benefit (Provision) for Credit Losses
2018 vs. 2017 - Increased benefit for credit losses during 2018, primarily driven by estimated losses
from the hurricanes in 2017.
2017 vs. 2016 - Decline in benefit for credit losses in 2017 compared to 2016 primarily driven by:
The negative effects of the hurricanes in 2017;
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
Change in accounting policy that was elected on January 1, 2017 for loan reclassification from
held-for-investment to held-for-sale. See Note 4 for further information about this change.
The decline was partially offset by improvement in our estimated loss severity.
FREDDIE MAC | 2018 Form 10-K
20
Management's Discussion and Analysis
Consolidated Results of Operations
Guarantee Fee Income
Guarantee fee income consists of guarantee fees earned from guarantees to third parties and
securitization trusts that we do not consolidate, and relates primarily to multifamily securitizations. For
additional details, see Our Business Segments - Multifamily - Securitization, Guarantee, and
Other Risk Transfer Products.
2018 vs. 2017 and 2017 vs. 2016 - Increased due to the continued growth in the multifamily
guarantee portfolio.
Mortgage Loans Gains (Losses)
Mortgage loans gains (losses) consists of the following:
Gains (losses) on certain mortgage loan purchase commitments - represents the change in fair
value between the commitment date and settlement date for certain multifamily loan purchase
commitments for which we have elected the fair value option.
Gains (losses) on mortgage loans - includes changes in fair value on held-for-sale loans, and loans
for which we have elected the fair value option while held in our mortgage-related investments
portfolio, as well as any gains and losses on the sales of these loans.
Mortgage loans gains (losses) are affected by a number of factors, including:
Volume of held-for-sale single-family seasoned mortgage loans;
Volume of multifamily loan purchase commitments and mortgage loans for which we have elected
the fair value option; and
Changes in interest rates and market spreads.
The table below presents the components of mortgage loans gains (losses).
Table 6 - Components of Mortgage Loans Gains (Losses)
Year Ended December 31,
2018 vs. 2017
2017 vs. 2016
Year Over Year Change
(Dollars in millions)
2018
2017
2016
$
%
Gains (losses) on certain loan purchase commitments
$777
$1,098
Gains (losses) on mortgage loans
Mortgage loans gains (losses)
Key Drivers:
(53)
928
$724
$2,026
$663
(463)
$200
($321)
(981)
(29)%
(106)
($1,302)
(64)%
$1,826
$
$435
1,391
%
66%
300
913%
2018 vs. 2017 - Gains decreased due to fair value losses on multifamily mortgage loans and
commitments as a result of spread widening, coupled with higher fair value losses on single-family
seasoned loans.
2017 vs. 2016 - Gains increased due to:
Higher average balances of multifamily held-for-sale commitments driven by strong demand for
multifamily loan products;
Higher volume of single-family reperforming loan sales; and
Lower losses recognized on the reclassification of seriously delinquent loans from held-for-
investment to held-for-sale as a result of an accounting policy change. See Note 4 for more
information.
FREDDIE MAC | 2018 Form 10-K
21
Management's Discussion and Analysis
Consolidated Results of Operations
Investment Securities Gains (Losses)
Investment securities gains (losses) consists of the following:
Net impairment of available-for-sale-securities recognized in earnings - includes the portion of
other-than-temporary impairment on available-for-sale securities recognized in earnings.
Other gains (losses) on investment securities recognized in earnings - includes fair value gains
and losses recognized on trading securities and the realized gains and losses on the sale of
available-for-sale securities.
Investment securities gains (losses) are affected by a number of factors, including:
Volume of sales of our available-for-sale securities;
Volume of available-for-sale securities deemed to be other-than-temporarily impaired and the
amount of the impairment; and
Changes in interest rates and market spreads.
The table below presents the components of investment securities gains (losses).
Table 7 - Components of Investment Securities Gains (Losses)
Year Ended December 31,
2018 vs. 2017
2018
2017
2016
$
%
2017 vs. 2016
$
%
Year Over Year Change
($12)
($18)
($191)
$6
33 %
$173
91%
(Dollars in millions)
Net impairment of available-for-sale securities
recognized in earnings
Other gains (losses) on investment securities
recognized in earnings
Investment securities gains (losses)
($695)
$1,036
($269)
($1,731)
(167)%
(683)
1,054
(78)
(1,737)
(165)
1,132
$1,305
1,451
485%
Key Drivers:
2018 vs. 2017 - Shifted to losses during 2018 from gains during 2017 primarily driven by higher
losses on trading securities due to increasing interest rates and spread widening during 2018,
combined with lower volume of sales at gains of non-agency mortgage-related securities.
2017 vs. 2016 - Improved primarily due to:
Lower losses on trading securities as long-term interest rates increased less during 2017 than
during 2016;
Larger gains on sales of available-for-sale securities due to additional spread tightening during
2017; and
Lower losses on impaired securities primarily due to a decline in the population of non-agency
mortgage-related securities.
Debt Gains (Losses)
Debt gains (losses) consists of the following:
Fair value changes - includes the gains and losses on debt for which we have elected the fair value
option, primarily certain STACR debt notes.
Gains (losses) on extinguishment of debt - represents the difference between the consideration
paid and the debt carrying value when we purchase debt securities of consolidated trusts (i.e., PCs)
FREDDIE MAC | 2018 Form 10-K
22
Management's Discussion and Analysis
Consolidated Results of Operations
as investments in our mortgage-related investments portfolio and when we repurchase or call other
debt.
Debt gains (losses) are affected by a number of factors, including:
Changes in the market spreads between debt yields and benchmark interest rates and
Amount and type of debt selected for repurchase based on our investment and funding strategies,
including our efforts to support the liquidity and price performance of our PCs.
The table below presents the components of debt gains (losses).
Table 8 - Components of Debt Gains (Losses)
(Dollars in millions)
Fair value changes
Gains (losses) on extinguishment of debt
Debt gains (losses)
Key Drivers:
Year Over Year Change
Year Ended December 31,
2018 vs. 2017
2018
2017
2016
$
%
2017 vs. 2016
$
%
$142
578
$720
($190)
341
$151
($262)
(211)
($473)
$332
237
$569
175%
70
377%
$72
552
$624
27%
262
132%
2018 vs. 2017 - Improved primarily due to an increase in gains from the extinguishment of fixed-rate
PCs, as market interest rates increased between the time of issuance and repurchase, coupled with
fair value gains on STACR debt notes as a result of spread widening during 2018.
2017 vs. 2016 - Improved primarily due to an increase in gains from the extinguishment of fixed-rate
PCs, as market interest rates increased between the time of issuance and repurchase, coupled with
smaller fair value losses on STACR debt notes, as spreads tightened less during 2017 than during
2016.
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,
futures, and option-based derivatives, such as swaptions, 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.
Derivative gains (losses) consists of the following:
Fair value changes - represents changes in the fair value of our derivatives while not designated in
hedging relationships based on market conditions at the end of the period or at the time the
FREDDIE MAC | 2018 Form 10-K
23
Management's Discussion and Analysis
Consolidated Results of Operations
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 for derivatives while not designated in
hedging relationships. This accrual represents the ongoing cost of our hedging activities, and is
economically equivalent to interest expense.
We apply fair value 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 and the accrual of periodic cash
settlements on derivatives in qualifying hedge relationships in derivatives gains (losses). Beginning in 4Q
2017, due to the adoption of amended hedge accounting guidance, we include gains and losses and the
accrual of periodic cash settlements 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 adoption of amended hedge accounting guidance during 2017.
Derivative gains (losses) are affected by a number of factors, including:
Changes in interest rates - Our primary derivative instruments are interest-rate swaps, including
pay-fixed and receive-fixed interest-rate swaps. With a pay-fixed interest-rate swap, we pay a fixed
rate of interest and receive a variable rate of interest based on a specified notional balance (the
notional balance is for calculation purposes only). As interest rates decline, we recognize derivative
losses, as the amount of interest we pay remains fixed, and the amount of interest we receive
declines. As rates rise, we recognize derivative gains, as the amount of interest we pay remains
fixed, but the amount of interest we receive increases. With a receive-fixed interest-rate swap, the
opposite results occur.
Implied volatility - Many of our assets and liabilities have embedded prepayment options. We use
option-based derivatives, including swaptions, to economically hedge the prepayment options
embedded in our mortgage assets and callable debt. Fair value gains and losses on swaptions are
sensitive to changes in both interest rates and implied volatility, which reflects the market's
expectation of future changes in interest rates. Assuming all other factors are unchanged, including
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.
FREDDIE MAC | 2018 Form 10-K
24
Management's Discussion and Analysis
Consolidated Results of Operations
The table below presents the components of derivative gains (losses).
Table 9 - Components of Derivative Gains (Losses)
(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
Derivative gains (losses)
$1,270
($1,988)
Key Drivers:
Year Ended December 31,
2018 vs. 2017
2018
2017
2016
$
%
2017 vs. 2016
$
%
Year Over Year Change
$1,422
(630)
619
(141)
$626
(1,041)
17
(1,590)
$178
421
887
(1,760)
($274)
$796
411
602
1,449
$3,258
127%
$448
252 %
39
3,541
91
(1,462)
(347)
(870)
170
(98)
10
164%
($1,714)
(626)%
2018 vs. 2017 - Increases in long-term rates during 2018 resulted in derivative fair value gains
compared to derivative fair value losses during 2017. The interest rate increases during 2018
resulted in fair value gains on our pay-fixed interest rate swaps, forward commitments to issue PCs,
and futures, partially offset by fair value losses on our receive-fixed swaps and certain of our option-
based derivatives. As a result of the adoption of amended hedge accounting guidance in 4Q 2017,
fair value changes on derivatives in qualifying hedge relationships have been recorded within net
interest income.
2017 vs. 2016 - Increased losses driven by lower levels of volatility during 2017, resulting in larger
losses in our options portfolio, coupled with lower fair value gains on our pay-fixed interest rate
swaps as long-term interest rates increased less during 2017 than during 2016. This was partially
offset by reduced fair value losses on our receive-fixed interest rate swaps.
Other Income
2018 vs. 2017 and 2017 vs. 2016 - Primarily reflected the recognition of a $0.3 billion gain during
2018 from a judgment in litigation against Nomura Holding America, Inc. (Nomura) and $4.5 billion in
proceeds received during 2017 from a litigation settlement with the Royal Bank of Scotland Group
plc (RBS) related to certain of our non-agency mortgage related securities. We did not have any
significant judgments or settlements during 2016. See Note 14 for additional information on the
Nomura judgment and RBS settlement.
Income Tax Expense
2018 vs. 2017 - Decreased due to the impact of the Tax Cuts and Jobs Act enacted in December
2017, which lowered the statutory corporate income tax rate from 35% in 2017 to 21% in 2018 and
required us to measure our net deferred tax asset using the reduced rate and recognize a charge to
income tax expense of $5.4 billion in 2017.
2017 vs. 2016 - Increased primarily due to the $5.4 billion charge to income tax expense resulting
from the enactment of the Tax Cuts and Jobs Act.
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
FREDDIE MAC | 2018 Form 10-K
25
Management's Discussion and Analysis
Consolidated Results of Operations
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 on our
consolidated statements of comprehensive income.
Table 10 - Other Comprehensive Income (Loss)
(Dollars in millions)
Other comprehensive income (loss), excluding
certain items
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:
Year Ended December 31,
2018 vs. 2017
2018
2017
2016
$
%
2017 vs. 2016
$
%
Year Over Year Change
($345)
$1,084
($29)
($1,429)
(132)%
$1,113
3,838%
(120)
(164)
(299)
(148)
(268)
($613)
(987)
(1,151)
($67)
(369)
(668)
($697)
44
839
883
27
85
77
($546)
(815)%
135
45
(618)
(483)
$630
(167)
(72)
90%
Other comprehensive income (loss), excluding certain items
2018 vs. 2017 - Shifted to losses in 2018 from income in 2017 primarily due to higher fair value
losses due to increasing long-term interest rates during 2018, coupled with smaller spread-
related fair value gains driven by lower balances of non-agency mortgage-related securities.
2017 vs. 2016 - Increased primarily due to market spread related gains as market spreads
tightened more during 2017, coupled with smaller interest rate-related losses due to smaller
increases in long-term interest rates during 2017.
Excluded items:
Accretion due to significant increases in expected cash flows on previously impaired
available-for-sale securities
2018 vs. 2017 and 2017 vs. 2016 - Decreased during both comparative periods primarily due to
a decline in the population of impaired securities.
Realized (gains) losses reclassified from AOCI
2018 vs. 2017 - Reflected smaller amounts of reclassified gains during 2018 due to lower sales
of non-agency mortgage-related securities.
2017 vs. 2016 - Reflected larger amounts of reclassified gains during 2017 due to additional
spread tightening and an increase in sales of non-agency mortgage-related securities.
FREDDIE MAC | 2018 Form 10-K
26
Management's Discussion and Analysis
Consolidated Balance Sheets Analysis
CONSOLIDATED BALANCE SHEETS
ANALYSIS
The table below compares our summarized consolidated balance sheets.
Table 11 - Summarized Consolidated Balance Sheets
(Dollars in millions)
Assets:
Cash and cash equivalents(1)
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
As of December 31,
Year Over Year Change
2018
2017
$
%
$7,273
34,771
42,044
69,111
1,926,978
6,728
335
6,888
10,976
$2,063,060
$6,652
2,044,950
583
6,398
2,058,583
4,477
$2,063,060
$9,811
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
($2,538)
(21,132)
(23,670)
(15,207)
55,761
373
(40)
(1,219)
(2,714)
$13,284
$431
10,320
314
(2,570)
8,495
4,789
$13,284
(26)%
(38)
(36)
(18)
3
6
(11)
(15)
(20)
1 %
7 %
1
117
(29)
—
1,535
1 %
(1) The current and prior period presentation has been modified to include restricted cash and cash equivalents in this line item due to recently
adopted accounting guidance.
Key Drivers:
As of December 31, 2018 compared to December 31, 2017:
Cash and cash equivalents and securities purchased under agreements to resell declined on a
combined basis primarily due to lower near-term cash needs for fewer upcoming maturities and
anticipated calls of other debt.
Investments in securities, at fair value decreased as we continued to reduce the mortgage-related
investments portfolio during 2018 as required by the Purchase Agreement and FHFA.
Deferred tax assets, net decreased primarily due to an increase in long-term interest rates during
2018, which caused the difference between the GAAP and tax basis of assets held for investment
and derivative instruments to decline.
Total equity increased primarily as a result of higher comprehensive income, combined with our
ability to retain equity as a result of an increase in the applicable Capital Reserve Amount, which was
$3.0 billion as of January 1, 2018.
FREDDIE MAC | 2018 Form 10-K
27
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 Revenue 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, funding and
hedging 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 4Q 2018, we changed how we calculate certain components of our Segment Earnings for our
Single-family Guarantee and Capital Markets segments. Prior period results have been revised to
conform to the current period presentation. 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
13 for additional details on Segment Earnings, including additional financial information for our
FREDDIE MAC | 2018 Form 10-K
28
Management's Discussion and Analysis
Our Business Segments | Segment Earnings
segments.
Segment Comprehensive Income
The graph below shows our comprehensive income by segment.
FREDDIE MAC | 2018 Form 10-K
29
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;
Developing innovative technology platforms to provide sellers and servicers and Freddie Mac with
better methods of assessing and managing single-family mortgage credit risk;
Providing quality risk-adjusted returns; and
Offering third-party investors new and innovative ways to share in the credit risk of the single-family
credit guarantee portfolio.
A Better Housing Finance System:
Developing and implementing initiatives to cost-effectively reduce taxpayer exposure to our risks;
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 Security initiative for Freddie Mac and Fannie Mae. The Single
Security initiative 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; and
Leveraging technology and big data to improve the mortgage process for all stakeholders, including
reducing costs for lenders and borrowers and making the loan process more efficient and effective.
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 | 2018 Form 10-K
30
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 principal and interest payments 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
FREDDIE MAC | 2018 Form 10-K
31
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;
Market adjusted pricing costs based on the market pricing of our PCs relative to the market pricing
of comparable Fannie Mae securities; and
The legislated 10 basis point increase in guarantee fees under the Temporary Payroll Tax Cut
Continuation Act of 2011.
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.
Common Securitization Platform and the UMBS
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
(CSP) and the implementation of the Single Security initiative for Freddie Mac and Fannie Mae. The
Single Security initiative provides for Freddie Mac and Fannie Mae to issue a single (common)
mortgage-related security, to be called the Uniform Mortgage-Backed Security, or UMBS.
In December 2016, we and FHFA announced the implementation of Release 1 of the CSP. Under
Release 1, we began using the CSP for data acceptance, issuance support, and bond administration
activities related to Freddie Mac single-class fixed-rate mortgage-related securities.
FHFA has announced that Release 2 of the CSP will be implemented in June 2019. Release 2 will allow
Freddie Mac and Fannie Mae to each issue the UMBS. Release 2 will also add to the functionality of the
platform by, among other things, enabling commingling of Freddie Mac and Fannie Mae UMBS and
other TBA-eligible MBS in resecuritization transactions. Freddie Mac intends to offer an optional
FREDDIE MAC | 2018 Form 10-K
32
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
exchange program to enable security holders to exchange certain existing 45-day payment delay fixed-
rate Gold PCs and Giant PCs for new 55-day payment delay Freddie Mac securities. As part of this
program, Freddie Mac will pay exchanging security holders for the 10 additional days of payment delay,
based on float compensation rates calculated by Freddie Mac. We do not expect to earn enough of a
return from this additional float that it will be sufficient to offset our payments to the security holders.
In November 2018, FHFA reported that Freddie Mac and CSS completed system-to-system, bilateral
end-to-end, and data conversion testing for Release 2. Tri-party end-to-end testing, with both Fannie
Mae and Freddie Mac conducting daily processing and testing in a single CSP environment, is also
complete. In addition, FHFA reported that in September 2018, Freddie Mac and CSS migrated Freddie
Mac's production processing for single-class MBS from Release 1 to the relevant Release 2 code,
confirming that the relevant Release 2 modules are production-ready. Production processing on the
Release 2 code continues to perform as expected.
Freddie Mac, Fannie Mae, and CSS completed production data conversion and began parallel
processing for Release 2 on schedule in November 2018.
With the implementation of Release 2 in June 2019, Freddie Mac will use the CSP for issuance and
monthly processing of single-class UMBS backed by fixed-rate loans, single-class resecuritizations of
UMBS, multiclass securities such as REMICs, and the related disclosures and tax reporting.
The successful implementation of Release 2 and a smooth transition of the market to trading the UMBS
require planning, investment, and preparation on the part of a wide variety of market participants.
Freddie Mac has engaged in extensive industry outreach to facilitate the transition, including
participating in industry forums and conferences, webinars, conference calls, meetings with individual
firms, and consultations with advisory and industry-sponsored working groups. As the implementation
date for Release 2 approaches, Freddie Mac has accelerated and intensified our engagement with
market participants.
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
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 fees as described in the
Guarantee Fees section above.
We issue the following types of single-class securitization products:
FREDDIE MAC | 2018 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
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 certain reperforming loans into PCs using a
similar process. We may subsequently resecuritize a portion of the PCs backed by reperforming
loans, with some of the resulting interests being sold to third parties. For additional information, see
Our Business Segments - Capital Markets - Business Overview.
FREDDIE MAC | 2018 Form 10-K
34
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:
FREDDIE MAC | 2018 Form 10-K
35
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
We issue the following types of resecuritization products:
Giant PCs - 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.
Sales 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 sales of these mortgage loans are managed by the
Capital Markets segment.
Our mortgage loans are sold through the following transactions:
Whole loan sales - Sales of seriously delinquent loans for cash.
FREDDIE MAC | 2018 Form 10-K
36
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. Unlike other senior subordinate securitization structures, in
these transactions the loans are not serviced in accordance with our Guide and we do not control
the servicing. See Risk Management - Single-Family Mortgage Credit Risk - Transferring
Credit Risk of the Single-Family Credit Guarantee Portfolio to Investors in New and
Innovative Ways for a description of various forms of credit enhancements we use to transfer a
portion of the credit risk on our single-family loans, including senior subordinate securitization
structures.
Long-Term Standby Commitments
We also offer 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.
Credit Risk Transfer (CRT) Transactions
To reduce our credit risk exposure, we engage in various credit enhancement arrangements, which
include CRT transactions and other credit enhancements. We define CRT transactions as those
arrangements where we actively transfer the credit risk exposure on mortgages that we own or
guarantee. We define other credit enhancements as those arrangements, such as traditional primary
mortgage insurance, where we do not actively take part in the transfer of the credit risk exposure. Our
CRT transactions are designed to reduce the amount of conservatorship capital needed under the CCF,
to transfer portions of credit losses on groups of previously acquired loans to third-party investors, and
to reduce the risk of future losses to us and taxpayers if borrowers go into default. The payments we
make in exchange for this credit protection effectively reduce our guarantee fee income from the
associated mortgages. The following strategic considerations were incorporated into the design of our
CRT transactions:
Offer repeatable and scalable execution with a broad appeal to diversified investors;
Execute at a cost that is economically sensible;
Result in no or 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 very substantially mitigate the risk that our losses are not reimbursed timely and in full.
FREDDIE MAC | 2018 Form 10-K
37
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
A detailed list of our CRT transactions, along with other credit enhancement arrangements, is included
in Risk Management - Single-Family Mortgage Credit Risk - Transferring Credit Risk of
the Single-Family Credit Guarantee Portfolio to Investors in New and Innovative Ways.
Our primary CRT 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 linked to certain of the
notional credit risk positions to third-party investors. In certain of our STACR debt note transactions,
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 specified
credit events. 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 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. Depending on the
particular transaction, and as specified in the offering documents, losses are 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 CRT
transactions based on calculated losses (generally STACR debt notes issued prior to 2015), we write
down the 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 CRT transactions based on actual losses, we write down the STACR debt notes or
receive reimbursement of losses once an actual loss event (e.g., short sale, third-party sale or REO
disposition) occurs.
The following diagram illustrates a typical STACR debt note transaction:
FREDDIE MAC | 2018 Form 10-K
38
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
While STACR debt notes have been one of our primary CRT transactions in recent years, we expect that
going forward we will instead primarily utilize STACR Trust transactions.
STACR Trust - We introduced STACR Trust transactions in 2Q 2018 as an enhancement to STACR
debt note transactions. The key difference between STACR Trust and STACR debt note transactions
is that the notes in STACR Trust transactions are issued by a third-party bankruptcy-remote trust.
Under this structure, we pay a credit premium and certain shortfalls to the trust and receive
payments from the trust as a result of defined credit events on the reference pool. The trust issues
the notes and makes periodic payments of principal and interest on the notes to investors, and
Freddie Mac receives payments from the trust that otherwise would have been made to the
noteholders to the extent there are certain defined credit events on the mortgages in the related
reference pool. The note balances are reduced by the amount of the payments to us.
STACR Trust results in an accounting treatment that better aligns the timing of financial reporting and
underlying economics. With STACR Trust transactions, the income derived from the credit protection
is recognized in the same period as the allowance for credit losses, thus reducing the volatility of
GAAP earnings and equity. With STACR debt notes, the recognition of the allowance for credit
losses typically precedes the reporting of associated credit benefits.
FREDDIE MAC | 2018 Form 10-K
39
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
The following diagram illustrates a typical STACR Trust 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 transaction (i.e., the risk positions that Freddie Mac retains). 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 transaction, such as 15- and 20-year fixed-rate loans. An
additional offering in the ACIS program is the ACIS Forward Risk Mitigation (AFRMSM) transaction,
which provides front-end credit risk transfer as loans come into the portfolio. Under each of these
insurance policies, we pay monthly premiums that are determined based on the outstanding balance
of the reference pool. When specific credit events occur, we generally receive compensation from
the insurance policy up to an aggregate limit based on actual losses. We require our ACIS
counterparties to partially collateralize their exposure to reduce the risk that we will not be
reimbursed for our claims under the policies.
FREDDIE MAC | 2018 Form 10-K
40
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, net of reinvestment income;
• Fair value gains and losses recognized on certain of our STACR debt notes, net of the costs of hedging interest rate risk;
• Premium expense for ACIS and STACR Trust contracts; and
• Benefits recognized from recoveries under the CRT transactions. Benefits from certain of our STACR transactions are recognized as
debt gains, whereas benefits from other CRT transactions are recognized as other income.
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 non-depository financial institutions. Many of these
companies are both sellers and servicers for us. In addition, we 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 following charts show the concentration of our 2018 single-family purchase volume by
our largest sellers and our loan servicing by our largest servicers as of December 31, 2018. Any seller or
servicer with a 10% or greater share is listed separately.
FREDDIE MAC | 2018 Form 10-K
41
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Percentage of Single-Family Purchase Volume
Percentage of Single-Family Servicing Volume(1)
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.
(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.
FREDDIE MAC | 2018 Form 10-K
42
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
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. The areas in which we and Fannie Mae compete
have been limited by the Single Security initiative as we have been required by FHFA to align certain of
our single-family mortgage purchase offerings, servicing, and securitization practices with Fannie Mae to
achieve market acceptance of the UMBS. A proposed rule published by FHFA in September 2018 may
limit our and Fannie Mae's ability to compete with each other in areas that affect prepayment speeds of
single-family mortgage-related securities. 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.
FREDDIE MAC | 2018 Form 10-K
43
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 25, 2019.
Source: National Association of Realtors news release dated January
22, 2019.
U.S. single-family loan origination volumes decreased in 2018 compared to 2017, driven by lower
refinance volume as a result of higher average mortgage interest rates.
U.S. single-family existing home sales volume decreased in 2018 compared to 2017, primarily driven
by higher mortgage interest rates and low levels of for-sale inventory in many markets across the
country. U.S. single-family new home sales volume is reported by the U.S. Census Bureau; 2018
data is not currently available.
In 2019, we expect U.S. single-family home purchase volume to remain relatively flat, while a
moderate increase in mortgage interest rates is expected to result in a lower refinance volume.
Freddie Mac's single-family loan purchase volumes typically follow a similar trend.
FREDDIE MAC | 2018 Form 10-K
44
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 6, 2018. For 2018, the amount is as of
September 30, 2018 (latest available information).
Source: National Delinquency Survey from the Mortgage Bankers
Association. For 2018, the rates (excluding Freddie Mac) are as of
September 30, 2018 (latest available information).
U.S. single-family mortgage debt outstanding increased in 2018 compared to 2017, 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 in 2018 compared to 2017 due to
macroeconomic factors, such as a low unemployment rate and continued home price appreciation.
Our single-family serious delinquency rate typically follows a similar trend. Additionally, the 2017
serious delinquency rate was elevated due to the greater impact of the hurricanes in 2017 than
subsequent hurricanes in 2018. See Risk Management - Single-Family Mortgage Credit
Risk - Monitoring Loan Performance and Characteristics of the Single-Family Credit
Guarantee Portfolio and Individual Sellers and Servicers - 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 64.4% in the third quarter
of 2018 (latest available information) 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.
FREDDIE MAC | 2018 Form 10-K
45
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
We maintain a consistent market presence by providing lenders with a constant source of liquidity
for conforming loan products. We have funded approximately 17.0 million single-family homes since
January 1, 2009 and purchased approximately 1.4 million HARP loans since the initiative began in
2009, which includes just over 3,000 during 2018 as the program is winding down and is being
replaced by the Enhanced Relief Refinance program.
Our loan purchase and guarantee activity decreased in 2018 compared to 2017 primarily due to a
decline in refinance activity as a result of higher average mortgage interest rates, partially offset by
higher home purchase volume.
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 149,000 loans under these initiatives in 2018. 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 and mortgage industry professionals.
FREDDIE MAC | 2018 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
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 2019. See Regulation
and Supervision - Federal Housing Finance Agency - Duty to Serve Underserved
Markets Plan for more information.
Single-Family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfolio as of
December 31,
Single-Family Loans as of December 31,
The single-family credit guarantee portfolio increased during 2018 by approximately 4%, driven by
an increase in U.S. single-family mortgage debt outstanding as a result of continued home price
appreciation. New business acquisitions had a higher average loan size compared to older vintages
that continued to run off.
The core single-family loan portfolio grew to 82% of the single-family credit guarantee portfolio at
December 31, 2018 compared to 78% at December 31, 2017, as new loan purchases exceeded
liquidations.
The legacy and relief refinance single-family loan portfolio declined to 18% of the single-family credit
guarantee portfolio at December 31, 2018 compared to 22% at December 31, 2017, driven primarily
by loan liquidations.
FREDDIE MAC | 2018 Form 10-K
47
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Guarantee Fees
We receive fees for guaranteeing the payment of principal and interest to investors in our mortgage-
related securities. These fees consist primarily of a combination of base contractual guarantee fees paid
on a monthly basis and initial upfront payments. 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.
The average portfolio Segment Earnings guarantee fee rate declined slightly in 2018 compared to
2017 due to a decrease in the recognition of upfront fees driven by a lower prepayment rate. 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.
The average guarantee fee rate charged on new acquisitions remained consistent in 2018 compared
to 2017.
FREDDIE MAC | 2018 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
CRT Activities
The table below provides the issuance amounts during 2018 and the cumulative issuance amounts as of
December 31, 2018 on the protected UPB and maximum coverage by loss position associated with CRT
transactions for loans in our single-family credit guarantee portfolio.
Table 12 - Single-Family Credit Guarantee Portfolio CRT Issuance
Issuance for the Year Ended December 31, 2018
Cumulative Issuance as of December 31, 2018
Protected
UPB(1)
Maximum Coverage(2)
Protected
UPB(1)
Total
First
Loss(3)
Mezzanine
Total
Total
Maximum Coverage(2)
First
Loss(3)
Mezzanine
Total
$243,007
269,483
30,911
11,541
(219,072)
$1,893
679
746
155
—
$5,042
2,306
1,238
345
—
$6,935
$1,059,528
2,985
1,102,504
$3,789
1,561
$27,054
10,010
$30,843
11,571
1,984
500
42,489
20,602
— (1,017,618)
1,823
6,415
—
2,121
345
—
3,944
6,760
—
(In millions)
CRT Activities:
STACR transactions
ACIS transactions
Senior subordinate
securitization structures
Other
Less: UPB with more than one
type of CRT activity
Total CRT Activities
$335,870
$3,473
$8,931
$12,404
$1,207,505
$13,588
$39,530
$53,118
(1) For STACR and ACIS transactions, represents the UPB of the assets included in the reference pool. For senior subordinate securitization structure
transactions, represents the UPB of the guaranteed securities.
(2) For STACR transactions, represents the outstanding balance held by third parties. For ACIS transactions, represents the remaining aggregate limit
of insurance purchased from third parties. For senior subordinate securitization structures, represents the UPB of the securities that are
subordinate to our guarantee and held by third parties.
(3) First loss includes all B tranches in our STACR transactions and their equivalent in ACIS and Other CRT transactions.
We retained exposure to $323.5 billion and $1,154.4 billion of the protected UPB for the CRT
issuances during 2018 and the cumulative issuances as of December 31, 2018, respectively,
including first loss and mezzanine positions.
As of December 31, 2018, we had cumulatively transferred a portion of credit risk on nearly $1.2
trillion of our single-family mortgages, based upon the UPB at issuance of the CRT transactions.
FHFA's conservatorship capital needed for credit risk was reduced by approximately 60%
through CRT transactions on new business activity in the twelve months ended December 31,
2017.
The reduction in the amount of conservatorship capital needed for credit risk on new business
activity is calculated as conservatorship credit capital released from CRT transactions (primarily
through STACR and ACIS) divided by total conservatorship credit capital on new business
activity at the time of purchase. For more information on the CCF and the calculation of
conservatorship capital, see Liquidity and Capital Resources - Capital Resources -
Conservatorship Capital Framework - Return on Conservatorship Capital.
In September 2018, we modified our primary CRT structure to reduce conservatorship capital
needed for credit risk by approximately 80% on related new business activity. This modified
structure sells more of the first loss position and extends the maturity from 12.5 to 30 years.
In 2018, we paid $728 million in interest expense, net of reinvestment income, on our outstanding
STACR transactions and $317 million in ACIS premiums, compared to $621 million in interest
FREDDIE MAC | 2018 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
expense, net of reinvestment income, on our outstanding STACR transactions and $234 million in
ACIS premiums in 2017.
As of December 31, 2018, we had experienced minimal write-downs on our STACR transactions and
filed minimal claims for reimbursement of losses under our ACIS transactions.
We are continually evaluating our credit risk transfer strategy and make changes depending on market
conditions and our business strategy. The aggregate cost of our credit risk transfer activity, as well as
the amount of risk transferred, will continue to increase as we continue to do new transactions.
Loss Mitigation Activities
Number of Families Helped to Avoid Foreclosure
Loan Workout Activity
We continue to help struggling families retain their homes or otherwise avoid foreclosure through
loan workouts. Our loan workout activity increased in 2018 compared to 2017, primarily driven by
the hurricanes in 2017.
As part of our strategy to mitigate losses and reduce our holdings of less liquid assets, we sold
seriously delinquent loans totaling $0.7 billion in UPB during 2018. Of the $20.9 billion in UPB of
single-family loans classified as held-for-sale at December 31, 2018, $2.6 billion related to loans that
were seriously delinquent. We believe selling certain of these loans provides better economic returns
than continuing to hold them.
The relief refinance program has been replaced with the Enhanced Relief Refinance program, which
became 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. While the HARP program ended in
December 2018, we will continue to purchase HARP loans with application received dates on or
prior to December 31, 2018 through September 30, 2019.
See Risk Management for additional information on our loan workout activities.
FREDDIE MAC | 2018 Form 10-K
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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.
Table 13 - Single-Family Guarantee Segment Financial Results
Year Over Year Change
Year Ended December 31,
2018 vs. 2017
(Dollars in millions)
2018
2017
2016
Guarantee fee income
Benefit (provision) for credit losses
Financial instrument gains (losses)(1)
Other non-interest income (loss)
Administrative expense
REO operations income (expense)
Other non-interest expense
Segment Earnings before income tax expense
Income tax expense
Segment Earnings, net of taxes
Total other comprehensive income (loss), net of tax
Total comprehensive income (loss)
$6,570
522
174
905
(1,491)
(189)
(1,639)
4,852
(944)
3,908
(3)
$3,905
$6,350
(770)
(245)
1,838
(1,381)
(203)
(1,382)
4,207
(1,448)
2,759
40
$2,799
$6,356
(481)
(391)
928
(1,323)
(298)
(1,169)
3,622
(1,185)
2,437
(9)
$2,428
$
$220
1,292
419
(933)
(110)
14
(257)
645
504
1,149
(43)
$1,106
%
3 %
168 %
171 %
(51)%
(8)%
7 %
(19)%
15 %
35 %
42 %
(108)%
40 %
2017 vs. 2016
$
%
($6)
(289)
146
910
(58)
95
(213)
585
(263)
322
49
$371
— %
(60)%
37 %
98 %
(4)%
32 %
(18)%
16 %
(22)%
13 %
544 %
15 %
(1) Consists of fair value gains and losses on debt for which we have elected the fair value option and derivatives.
Key Drivers:
2018 vs. 2017
Continued growth in our single-family credit guarantee portfolio and increased credit fee/buy-
down short-term returns, resulting in increased guarantee fee income.
Increased benefit for credit losses during 2018 primarily driven by estimated losses from the
hurricanes in 2017.
Lower gains during 2018 compared to 2017 on single-family seasoned loan reclassifications
between held-for-investment and held-for-sale.
Fair value gains on STACR debt notes during 2018 compared to fair value losses during 2017 as
a result of market spreads between STACR yields and LIBOR widening during 2018, while
spreads tightened during 2017.
Higher outstanding cumulative volumes of CRT transactions that resulted in increased CRT
expense (interest expense on STACR transactions and premiums paid to ACIS counterparties) in
2018.
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, resulting
in guarantee fee income remaining relatively unchanged.
Decline in benefit for credit losses primarily driven by estimated losses related to the hurricanes
in 2017, offset by improvements in loss severity.
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Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
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 CRT transactions that resulted in increased credit risk
transfer expense (interest expense on STACR debt notes and premiums paid to ACIS
counterparties).
FREDDIE MAC | 2018 Form 10-K
52
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 risk transfer transactions;
Identifying new opportunities beyond our existing K Certificate and SB Certificate transactions to
cost-effectively transfer 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 to build business value and support the creation of a
strong, long-lasting rental housing system;
Fostering innovation through the development of products that expand the availability of workforce
housing in the marketplace; and
Leveraging technology to make the multifamily loan process more efficient industry-wide.
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 primarily on the issued senior
securities. We evaluate these factors collectively to maximize our returns and to assess the profitability
of any given transaction.
Our securitization activities generally (i) provide us with a mechanism to finance our loan product
offerings, (ii) transfer to third parties a large majority of expected and stress credit risk on the loans that
we purchase, (iii) reduce our interest-rate risk exposure, and (iv) reduce our conservatorship capital
under CCF. For multifamily loans that we do not intend to securitize, we may pursue other strategies,
including structured sales or the execution of other risk transfer products designed to transfer to third
parties all or a portion of the loans' interest-rate risk and credit risk, thereby 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,
FREDDIE MAC | 2018 Form 10-K
53
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, 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, senior housing
loans, student housing loans, supplemental loans, and certain Green Advantage loans.
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
affordable or workforce housing 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 senior housing loans, small balance loans, manufactured housing loans, targeted
affordable housing loans, and Green Advantage loans.
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.
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54
Management's Discussion and Analysis
Our Business Segments | Multifamily
Index Lock Commitments
We offer borrowers an option to lock the Treasury index component of their fixed interest-rate loans at
any time after the loan is under application with an approved lender. This option enables borrowers to
lock the most volatile part of their coupon, thereby providing an enhanced level of risk mitigation against
interest-rate volatility. The index lock commitment period for most loans is 60 days and is generally
followed by a loan purchase commitment. These commitments do not qualify for accounting recognition
and therefore temporarily introduce volatility in our financial results until they proceed to a loan purchase
commitment.
We economically hedge our interest-rate exposure resulting from these commitments primarily by
entering into pay-fixed, receive-float interest rate swaps.
The primary impact to Segment Earnings is:
• Fair value gains or losses recognized on interest-rate derivatives. These gains or losses are offset once an index lock commitment
becomes a loan purchase commitment and is accounted for at fair value.
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, index, 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 on 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 on our consolidated financial statements.
The primary impacts to Segment Earnings are:
• For each of our held-for-sale commitments, at the commitment date, we recognize the estimated fair value of the commitment, 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;
• After the commitment date, but prior to settlement, we recognize changes in the fair value of the commitment. These fair value
adjustments result from changes in the pricing of our securitizations due to changes in interest rates and securitization market
spreads; and
• Fair value gains or losses recognized on interest-rate derivatives.
Loan Purchases
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.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
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 loans 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 or entering into certain spread-related
derivatives, thereby obtaining some protection against significant adverse movements in market
spreads. We refer to the fair value 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. 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 derivatives. These changes generally offset interest-rate related fair value
changes on the loans;
•
Fair value gains or losses recognized on spread-related derivatives. These changes may offset spread-related fair value changes on
the loans; and
• Interest income on loans while held in our mortgage-related investments portfolio.
Securitization, Guarantee, and Other Risk Transfer Products
In our Multifamily segment, we enter into various types of securitizations and other risk transfer products
that generally result in the transfer of all or a portion of the underlying collateral's interest-rate risk and/or
credit risk to third parties. These activities, except for our other risk transfer products (e.g., loan sales
and SCR notes), make up our guarantee portfolio.
The collateral used in our securitization activities 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 the issued senior
securities. 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.
Our typical securitization structure and level of subordination are designed to obtain a AAA credit rating
on the guaranteed securities to maximize the return we earn when we sell loans for securitization.
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.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
We continue to seek new and innovative risk transfer opportunities beyond our current product offerings
so that we can provide further liquidity to the multifamily market and reduce taxpayer exposure to
interest-rate risk and credit risk.
Primary Risk Transfer Securitization Activities
Our primary risk transfer securitization products are K Certificates and SB Certificates, which transfer
substantially all of the interest-rate risk and credit risk of the associated collateral. The structures of
these transactions 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 primary risk transfer securitizations is generally influenced by the size of
our securitization pipeline, along with market demand for multifamily securities. As shown in the diagram
below, in a typical K Certificate transaction, we sell multifamily loans to a non-Freddie Mac securitization
trust that issues senior, 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, the interest-rate risk and a large majority of expected and stress
credit risk is sold to third-party investors through the mezzanine and subordinated securities, thereby
reducing our 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 45 basis points.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
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,
while we may purchase a portion of the senior securities, we do not 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
multifamily business could be adversely affected by a significant decrease in demand for our K
Certificates and SB Certificates.
Other Risk Transfer Securitizations
Our other risk transfer securitizations involve the issuance of single-class or multi-class 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 risk transfer securitizations 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 and direct loss mitigation
activities. As a result, we consolidate this structure.
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. In addition, we direct loss mitigation activities and,
as a result, we consolidate this structure.
ML Certificates - We securitize pools of tax-exempt or taxable loans that we underwrite and own
prior to securitization and the trust issues both guaranteed senior ML Certificates and unguaranteed
subordinated ML Certificates.
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 certificates generally purchased by Freddie Mac
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 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 along with our guarantee of
the senior certificates, we consolidate this structure and the loans in the revolving pool remain in our
securitization pipeline until securitization.
KI Certificates - We issue KI Certificates using a securitization structure that is similar to our K
FREDDIE MAC | 2018 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Certificates and that provides for structural credit enhancements through subordination. However,
unlike K Certificates, the loans backing the KI Certificates are contributed by third-party whole loan
funds.
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
Certificates are contributed by third parties (i.e., we do not own them prior to securitization) and are
underwritten by us after (rather than at) origination.
M Certificates - We securitize pools of tax-exempt or taxable multifamily housing revenue bonds
typically 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 Risk Transfer Products
For the multifamily assets for which we have not transferred interest-rate risk or credit risk through
securitizations, we may pursue other strategies to reduce our risk exposure. Our other risk transfer
products include the following:
SCR notes - Through the issuance of our SCR notes, which are unsecured and unguaranteed
corporate debt obligations, we transfer to third parties a portion of the credit risk of the loans
underlying certain of our consolidated other risk transfer securitizations and certain of our other
mortgage-related guarantees. The interest we pay on our SCR notes effectively reduces the
guarantee fee income we would otherwise earn on the other mortgage-related guarantees. SCR
notes are generally similar in structure to our Single-family Guarantee segment's STACR debt notes.
Loan sales - To reduce our interest-rate risk and credit risk exposure related to certain loans, we
engage in non-securitization related transactions, including whole loan sales. These may include
FREDDIE MAC | 2018 Form 10-K
59
Management's Discussion and Analysis
Our Business Segments | Multifamily
sales to funds to which we may also provide secured financing.
Multifamily Credit Insurance Pool (MCIP) - Beginning in 4Q 2018, we purchased insurance
policies, generally underwritten by a group of insurers and reinsurers, that provide first loss credit
protection for certain specified credit events. These transactions are similar in structure to the ACIS
contracts purchased by the Single-family Guarantee segment, except the reference pool, in addition
to loans, may include bonds underlying our other mortgage-related guarantees. 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.
Other Guarantee Activities
Other mortgage-related guarantees - We guarantee mortgage-related assets held by third parties
in exchange for guarantee fee income, without securitizing those assets. For example, we provide
guarantees on certain tax-exempt multifamily housing revenue bonds secured by low- and
moderate-income multifamily loans. 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 generally purchase or retain a portion of the K
Certificates and SB Certificates, depending on market conditions, and we may also buy or sell these
securities in the secondary market.
Other investments - We invest in certain non-mortgage investments, including LIHTC partnerships
and other secured lending activities. 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.
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.
Customers
Our multifamily loan activity 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 2018 multifamily new business activity by our largest sellers and loan servicing by our largest
servicers as of December 31, 2018. Any seller or servicer with a 10% or greater share is listed
separately.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Percentage of Multifamily New Business Activity(1)
Percentage of Multifamily Servicing Volume(2)
(1) Excludes LIHTC new business activity.
Competition
(2) 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 market are Fannie Mae, FHA, commercial and
investment banks, CMBS conduits, savings institutions, and life insurance companies.
FREDDIE MAC | 2018 Form 10-K
61
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.
Apartment Vacancy Rates as of December 31 and
Change in Effective Rents for the Year Ended
December 31,
Apartment Completions and Net Absorption for the
Year Ended December 31,
Source: REIS, Inc.
Source: REIS, Inc.
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 2018, as apartment completions outpaced net absorption,
rates remain below the long-term average of 5.4% from 2000 to 2018. Although we expect
continued strong demand, it may take longer to absorb new units, resulting in renters possibly
receiving additional concessions in 2019 compared to prior years.
Growth in 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) for 2018 remained strong relative to
the long-term average of 3.1% from 2000 to 2018. The strong effective rent is primarily due to an
increase in potential renters driven by healthy employment levels, higher wages, higher single-family
home prices, rising mortgage interest rates, and a growing demand for rental housing due to lifestyle
changes and demographic trends.
Multifamily property prices continued to grow, with 9% annualized growth in 2018, indicating a
healthy multifamily market, though prices were tempered by higher vacancy rates and rising interest
rates.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Multifamily Mortgage Debt Outstanding as of
December 31,
Multifamily Delinquency Rates as of December 31,
Source: Federal Reserve Financial Accounts of the United States of
America. For 2018, the amount is as of September 30, 2018 (latest
available information).
Source: Freddie Mac, FDIC Quarterly Banking Profile, Trepp, LLC, Intex
Solutions, Inc., and Wells Fargo Securities (Multifamily CMBS market,
excluding REOs), American Council of Life Insurers (ACLI). For 2018, the
amounts for FDIC insured institutions and ACLI investment bulletin are
as of September 30, 2018 and the amount for Multifamily CMBS
market is as of December 31, 2018 (latest available information).
During 2018, the multifamily mortgage market grew because of continued strong demand for
multifamily loan products due to an elevated number of new apartment completions and strong
multifamily market fundamentals. 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 2019 due to
these same drivers.
While the multifamily mortgage market grew, our share of multifamily mortgage debt outstanding
remained flat during 2018 due to ongoing competition from other market participants, which we
expect to continue in the future.
Our multifamily delinquency rates during 2018 remained low compared to other industry participants,
ending the year at 1 basis point, primarily due to our prior-approval underwriting approach and
strong multifamily market fundamentals. See Risk Management - Multifamily Mortgage
Credit Risk - Managing Our Portfolio, Including Loss Mitigation Activities for additional
information on our delinquency rates.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
We expect the credit losses and delinquency rates for the multifamily mortgage portfolio to remain
low in the near term.
K Certificate Benchmark Spreads as of December 31,
Source: Independent Dealers
The valuation of our securitization pipeline and the profitability of our primary risk transfer
securitization product, the K Certificate, are affected by both changes in K Certificate benchmark
spreads and 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. Spread tightening generally results in fair value gains, while spread
widening generally results in fair value losses.
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 floating-rate spread represents the spread for the largest guaranteed
class of a typical floating-rate K Certificate.
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Management's Discussion and Analysis
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Business Results
The graphs, tables and related discussion below present the business results of our Multifamily
segment.
New Business Activity
Multifamily New Business Activity for the Year Ended
December 31,
Acquisition of Units by Area Median Income (AMI) for
the Year Ended December 31,
The 2018 Conservatorship Scorecard annual production cap was $35.0 billion and will remain
unchanged in 2019. 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.
In 3Q 2018, we began to invest in LIHTC fund partnerships. The reported LIHTC new business
activity reflects our total new capital commitments to these fund partnerships, of which we have
funded $71 million as of December 31, 2018.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Outstanding commitments, including index lock commitments, and commitments to purchase or
guarantee multifamily assets were $18.7 billion and $14.5 billion as of December 31, 2018 and
December 31, 2017, respectively. Both period-end balances include loan purchase commitments
where we have elected the fair value option.
The combination of our new business activity and outstanding commitments was higher for 2018
than 2017 due to continued strong demand for multifamily loan products, our continued competitive
pricing efforts, and new LIHTC investment activity.
Excluding our LIHTC new business activity, approximately 42% of our multifamily new business
activity for 2018 counted towards the 2018 Conservatorship Scorecard production cap, while the
remaining 58% was considered uncapped.
Our uncapped new business activity increased during 2018 compared to 2017 as we continued our
efforts to support borrowers in certain property types and communities that meet the criteria for
affordability and Green Advantage loans.
Approximately 90% of our 2018 new business activity compared to 88% of our 2017 new business
activity was intended for our securitization pipeline. Combined with market demand for our
securities, our 2018 new business activity will be a driver for securitizations in the first two quarters
of 2019.
Approximately 93% of the eligible units we financed during 2018 were affordable to households
earning at or below 120% of the median income in their area. Furthermore, during 2018, we
continued our support of workforce housing through our continued purchases of manufactured
housing community loans and small balance loans.
Multifamily Portfolio and Market Support
Multifamily Market Support
The following table summarizes our support of the multifamily market.
Table 14 - Multifamily Market Support
(In millions)
Guarantee portfolio
Mortgage-related investments portfolio:
Unsecuritized mortgage loans held-for-sale
Unsecuritized mortgage loans held-for-investment
Mortgage-related securities(1)
Total mortgage-related investments portfolio
Other investments(2)
Total multifamily portfolio
Add: Unguaranteed securities(3)
Less: Acquired mortgage-related securities(4)
Total multifamily market support
December 31, 2018 December 31, 2017
$237,323
$203,074
23,959
10,828
7,385
42,172
708
280,203
35,835
(7,160)
$308,878
20,537
17,702
7,451
45,690
473
249,237
30,890
(7,109)
$273,018
(1)
(2)
Includes mortgage-related securities acquired by us from our securitizations.
Includes the carrying value of LIHTC investments and the UPB of non-mortgage loans, including financing provided to whole loan funds.
(3) Reflects the UPB of unguaranteed securities issued as part of our securitizations and amounts related to loans sold to whole loan funds that were
not financed by Freddie Mac.
(4) Reflects the UPB of mortgage-related securities that were both issued as part of our securitizations and acquired by us. This UPB must be
removed to avoid double-counting the exposure, as it is already reflected within the guarantee portfolio or unguaranteed securities.
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Management's Discussion and Analysis
Our Business Segments | Multifamily
Our total multifamily portfolio increased during 2018, primarily due to our strong loan purchase and
securitization activity, which is attributable to healthy multifamily market fundamentals and a strong
demand for certain of our securitization products. We expect continued portfolio growth in 2019 as
purchase and securitization activities should outpace run off.
At December 31, 2018, approximately 74% of our held-for-sale loans and held-for-sale loan
commitments, both of which are measured at fair value, were fixed-rate, while the remaining 26%
were floating-rate.
We expect our guarantee portfolio to continue to grow as a result of ongoing securitizations, which
we expect to be driven by continued strong new business activity.
Net Interest Yield and Average Balance
Net Interest Yield Earned & Average Investment Portfolio Balance
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67
Management's Discussion and Analysis
Our Business Segments | Multifamily
Net interest yield increased during 2018 compared to 2017 primarily due to higher prepayment
income received from interest-only securities, coupled with an increase in our interest-only security
holdings which generally have higher yields relative to our non-interest-only securities and loans,
partially offset by higher average funding costs on our held-for-sale mortgage loans driven by higher
interest rates.
The weighted average portfolio balance of interest-earning assets decreased during 2018 due to the
run off of our held-for-investment loans.
Risk Transfer Activity
UPB of Assets Subject to Risk Transfer Activity for the
Year Ended December 31,
Credit Risk Transfer Activity for the Year Ended
December 31,(1)
(1) The amounts disclosed in the graph above represent the net credit
risk transferred to third parties.
The UPB of our primary risk transfer securitization transactions was higher in 2018 compared to
2017, primarily due to a larger average balance in our securitization pipeline, which was driven by
strong loan purchase activity and demand for our securities during 2018.
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68
Management's Discussion and Analysis
Our Business Segments | Multifamily
In addition to transferring a large majority of the expected and stress credit risk, nearly all of our risk
transfer securitization activities also shifted substantially all the interest-rate and liquidity risk
associated with the underlying collateral away from Freddie Mac to third-party investors.
As of December 31, 2018, we had cumulatively transferred the large majority of credit risk on the
multifamily guarantee portfolio.
Conservatorship capital needed for credit risk was reduced by approximately 90% through CRT
transactions on new business activity in the twelve months ended December 31, 2017; we plan
similar risk reduction transactions for this year's new business activity.
The reduction in the amount of conservatorship capital needed for credit risk on new business
activity is calculated as conservatorship credit capital released from CRT transactions (primarily
through K Certificates and SB Certificates) divided by total conservatorship credit capital on new
business activity. For more information on the CCF and the calculation of conservatorship
capital, see Liquidity and Capital Resources - Capital Resources - Conservatorship
Capital Framework - Return on Conservatorship Capital.
While our K Certificate and SB Certificate issuances continue to be our primary mechanism to
transfer multifamily mortgage credit risk and interest-rate risk, we employ other methods as well and
expect to continue to develop new risk transfer initiatives.
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69
Management's Discussion and Analysis
Our Business Segments | Multifamily
Guarantee Activities
Unearned Guarantee Fee Assets on New Guarantee
Contracts for Year Ended December 31,
Remaining Unearned Guarantee Fees as of
December 31,
We earn guarantee fees in exchange for providing our guarantee of some or all of the securities we
issue as part of our risk transfer securitization activities. Each time we enter into a financial
guarantee contract, we initially recognize unearned guarantee fees on our balance sheet, which
represent the present value of future guarantee fees we expect to receive in cash. We recognize
these fees in Segment Earnings over the remaining average guarantee term, which was eight years
as of December 31, 2018. 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.
New unearned guarantee fee assets decreased during 2018 compared to 2017 primarily due to a
change in the product mix of our securitizations, resulting in a lower average guarantee fee rate due
to underlying loan products that, by their nature and design, have less risk.
The balance of unearned guarantee fees increased during 2018 due to the continued growth of our
multifamily guarantee business, as our risk transfer securitization volume continued to be strong,
outpacing run off.
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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.
Table 15 - Multifamily Segment Financial Results
Year Over Year Change
(Dollars in millions)
Net interest income
Guarantee fee income
Benefit (provision) for credit losses
Financial instrument gains (losses)(1)
Administrative expense
Other non-interest income (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,
2018 vs. 2017
2018
2017
2016
$1,096
817
24
(1)
(437)
139
1,638
(319)
1,319
(83)
$1,206
676
(13)
1,504
(395)
96
3,074
(1,060)
2,014
(77)
$1,022
511
22
1,354
(362)
161
2,708
(890)
1,818
(236)
$
($110)
141
37
(1,505)
(42)
43
(1,436)
741
(695)
(6)
%
(9)%
21
285
(100)
(11)
45
(47)
70
(35)
(8)
Total comprehensive income (loss)
$1,236
$1,937
$1,582
($701)
(36)%
2017 vs. 2016
$
%
$184
165
(35)
150
(33)
(65)
366
(170)
196
159
$355
18%
32
(159)
11
(9)
(40)
14
(19)
11
67
22%
(1) Consists of fair value gains and losses on loan purchase commitments, mortgage loans and debt for which we have elected the fair value option,
investment securities, and derivatives.
Key Drivers:
2018 vs. 2017
Lower net interest income due to a decline in our weighted average portfolio balance of interest-
earning assets, partially offset by higher net interest yields on an increased balance of interest-
only securities.
Higher guarantee fee income due to continued growth in our multifamily guarantee portfolio,
partially offset by lower average guarantee fee rates on new guarantee business volume.
Spread widening during 2018, coupled with the effects of greater competitive pricing on new
business activity, resulted in fair value losses on mortgage loans and commitments and
mortgage-related securities.
2017 vs. 2016
Higher net interest income due to higher net interest yields, partially offset by a decline in our
weighted average portfolio balance of interest-earning assets.
Higher guarantee fee income due to continued growth in our multifamily guarantee portfolio,
partially offset by slightly lower average guarantee fee rates on new guarantee business volume.
Larger fair value gains due to larger average balances of held-for-sale commitments and
securitization pipeline loans, partially offset by less tightening of K Certificate benchmark spreads
and the effects of competitive pricing.
Larger gains on non-agency CMBS due to the disposition of certain non-agency CMBS, coupled
with spread tightening.
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71
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 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, and supporting multifamily securitizations.
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 portfolio, which is primarily used for 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 and reperforming 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
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
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72
Management's Discussion and Analysis
Our Business Segments | Capital Markets
through active management of our debt funding mix and through the structuring of our investments in
mortgage-related securities.
Finally, the Capital Markets 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 previously executed certain
transactions 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 fair value hedge accounting,
which has reduced 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 an 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. In the future, we will also invest in UMBS with the implementation of the Single Security
initiative. Our activities with respect to these products 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).
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 most 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:
– Certain of these loans may reperform, 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:
Sales and securitization using a senior subordinate securitization structure, where we
guarantee the resulting senior securities. We may retain some senior securities at the time
of issuance. For more information on senior subordinate securitization structures, see
Our Business Segments - Single-Family Guarantee - Business Overview -
Products and Activities - Sales of Mortgage Loans and
FREDDIE MAC | 2018 Form 10-K
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
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.
– 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 through direct loan sales, when possible.
Other investments 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) investments used to pledge as collateral, and (iv)
secured lending activities.
In our secured lending activities, we provide funds to lenders for: (i) mortgage loans that they will
subsequently either sell through our cash purchase program or securitize into PCs that they will
deliver to us, (ii) secured term financing through revolving lines of credit collateralized by the value of
contractual mortgage servicing rights on certain mortgages we own, and (iii) 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 execute
other types of secured lending transactions in the future.
Non-agency mortgage-related securities - We generally no longer purchase non-agency
mortgage-related securities, but continue to have minimal investments in 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.
The primary impacts to Segment Earnings are:
• Interest income on agency and non-agency mortgage-related securities, unsecuritized loans, and our other investments 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 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;
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).
We may undertake various activities 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, dollar roll
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
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 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.
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 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.
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
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 the company's assets and liabilities 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, assets that are likely to be sold prior to their final
maturity may have a different debt and derivative mix than 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
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.
In 2018, we began to participate in transactions that support the development of the Secured Overnight
Financing Rate (SOFR) as an alternative rate to LIBOR. These transactions include investment in and
issuance of SOFR indexed floating-rate debt securities and execution of SOFR indexed derivatives. For
additional details on SOFR see Risk Factors - Other Risks - The discontinuance of LIBOR
after 2021 could negatively affect the fair value of our financial assets and liabilities,
results of operations, and net worth. A transition to an alternative reference interest
rate could present operational problems and result in market disruption, including
inconsistent approaches for different financial products, as well as disagreements with
counterparties.
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
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 changes in the 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.
FREDDIE MAC | 2018 Form 10-K
78
Management's Discussion and Analysis
Our Business Segments | Capital Markets
Market Conditions
The following graph and related discussion presents the par swap rate curve for the most recent three
years. Changes in the par swap rate can significantly affect the business and financial results of our
Capital Markets segment.
Par Swap Rates as of December 31,
Source: BlackRock
Par swap rate changes can significantly affect the fair value of our debt, derivatives, and mortgage
and non-mortgage-related securities. In addition, the GAAP accounting treatment for our financial
assets and liabilities, including derivatives (i.e., some are measured at amortized cost, while others
are measured at fair value) creates variability in our GAAP earnings when interest rates change. We
have elected hedge accounting for certain assets and liabilities in an effort to reduce GAAP earnings
variability and better align GAAP results with the economics of our business.
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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79
Management's Discussion and Analysis
Our Business Segments | Capital Markets
2018 vs. 2017
The par swap curve flattened during 2018 as short-term interest rates increased more than long-
term interest rates. Long-term interest rates increased during 2018, while they remained relatively
flat during 2017. The increases during 2018 resulted in fair value gains for our pay-fixed interest
rate swaps, forward commitments to issue PCs, and futures, partially offset by fair value losses
for our receive-fixed interest rate swaps, certain of our option-based derivatives, and the vast
majority of our investments in securities. The net amount of these changes in fair value was
mostly offset by the change in fair value of the hedged items attributable to interest-rate risk in
our hedge accounting programs.
2017 vs. 2016
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.
As the Capital Markets segment is responsible for managing interest-rate risk for the company, its
Segment Earnings may include gains and losses on certain economic hedges on financial assets
and liabilities primarily reported in the Single-family Guarantee segment.
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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
We have reduced the size of our mortgage investments portfolio to comply with the mortgage-
related investments portfolio's year-end limits. The balance of our mortgage investments portfolio
declined 14.4% between December 31, 2017 and December 31, 2018.
The balance of our other investments portfolio decreased 30.5% primarily due to lower near-term
cash needs for upcoming maturities and anticipated calls of other debt at the end of 2018 compared
to the end of 2017.
The percentage of less liquid assets relative to our total mortgage investments portfolio declined to
26.6% at December 31, 2018 from 28.4% at December 31, 2017, primarily due to repayments,
sales, and securitizations of our less liquid assets.
The overall liquidity of our mortgage investments portfolio continued to improve as our less liquid
assets decreased at a faster pace than the overall decline of our mortgage investments portfolio.
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Management's Discussion and Analysis
Our Business Segments | Capital Markets
Reduction in Less Liquid Assets
Securitizations of Reperforming Loans into Freddie
Mac PCs
Sales of Less Liquid Assets
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 2018, our sales of less liquid assets included $2.6 billion in UPB of non-agency mortgage-
related securities and $9.5 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 strategies related to reperforming loans is to create Freddie Mac PCs and initially retain all
of the resulting mortgage-related securities, which may be resecuritized and sold to third parties.
During 2018, we securitized $1.6 billion of single-family reperforming loans through PC
securitization. The use of this strategy has declined over time with our principal strategy now being
the securitization of the loans using senior subordinate securitization structures.
FREDDIE MAC | 2018 Form 10-K
82
Management's Discussion and Analysis
Our Business Segments | Capital Markets
Net Interest Yield and Average Balances
Net Interest Yield Earned & Average Investment Portfolio Balance
2018 vs. 2017 - Net interest yield increased 15 basis points during 2018 compared to 2017,
primarily due to:
Higher yields on our newly acquired mortgage-related assets and other investments as a result
of increases in interest rates;
Changes in our investment mix due to reductions in both our less liquid assets and the
percentage of our other investments portfolio relative to our total investments portfolio; and
Larger benefit provided by non-interest bearing funding due to increases in both short-term
interest rates and the percentage of non-interest bearing funding relative to our total liabilities.
2017 vs. 2016 - Net interest yield remained relatively flat.
Net interest yield for the Capital Markets segment is not affected by our hedge accounting programs
due to reclassifications made for Segment Earnings. See Note 13 for more information.
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83
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.
Table 16 - Capital Markets Segment Financial Results
Year Ended December 31,
2018 vs. 2017
2017 vs. 2016
Year Over Year Change
(Dollars in millions)
2018
2017
2016
$
%
Net interest income
Investment securities gains (losses)
Debt gains (losses)
Derivative gains (losses)
Other non-interest income (expense)
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)
$3,217
(102)
531
1,314
389
(365)
4,984
(976)
4,008
(527)
$3,481
$3,279
1,048
437
(587)
5,706
(330)
9,553
(3,296)
6,257
(30)
$6,227
$3,736
165
77
1,151
500
(320)
5,309
(1,749)
3,560
(452)
$3,108
($62)
(1,150)
94
1,901
(5,317)
(35)
(4,569)
2,320
(2,249)
(497)
($2,746)
(2)%
(110)%
22 %
324 %
(93)%
(11)%
(48)%
70 %
(36)%
(1,657)%
(44)%
$
($457)
883
360
(1,738)
5,206
(10)
4,244
(1,547)
2,697
422
$3,119
%
(12)%
535 %
468 %
(151)%
1,041 %
(3)%
80 %
(88)%
76 %
93 %
100 %
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 investment securities gains (losses), debt gains (losses), derivative
gains (losses), income tax expense, and total other comprehensive income (loss), net of tax.
Table 17 - Capital Markets Segment Interest Rate-Related and Market Spread-Related Fair Value
Changes, Net of Tax
Year Over Year Change
Year Ended December 31,
2018 vs. 2017
2018
2017
2016
$
%
2017 vs. 2016
$
%
($0.3)
0.4
($0.3)
0.8
$0.2
0.3
$—
(0.4)
—%
(50)
($0.5)
(250)%
0.5
167
(Dollars in millions)
Interest rate-related
Market spread-related
Key Drivers:
2018 vs. 2017
Lower net interest income during 2018 primarily due to the continued reduction in the balance of
our mortgage-related investments portfolio, partially offset by:
– Higher yields on our newly acquired mortgage-related assets and other investments as a
result of increases in interest rates;
– Changes in our investment mix due to reductions in both our less liquid assets and the
percentage of our other investments portfolio relative to our total investments portfolio; and
– Larger benefit provided by non-interest bearing funding due to increases in both short-term
interest rates and the percentage of non-interest bearing funding relative to our total liabilities.
Relatively flat interest rate-related fair value losses during 2018.
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84
Management's Discussion and Analysis
Our Business Segments | Capital Markets
– Long-term interest rates increased during the 2018 periods, while rates remained relatively
flat during 2017, resulting in higher fair value losses for the vast majority of our investments in
securities (some of which are recorded in other comprehensive income), our receive-fixed
interest rate swaps, and certain of our option-based derivatives, offset by higher fair value
gains for our pay-fixed interest rate swaps, forward commitments to issue PCs, and futures.
– The net amount of these changes in fair value was mostly offset by the change in fair value of
the hedged items attributable to interest-rate risk in our hedge accounting programs.
– The remaining amount of interest rate-related fair value changes was primarily attributable to
the implied net cost on instruments such as swaptions, futures, and forward purchase and
sale commitments from our hedging and interest-rate risk management activities. See Risk
Management - Market Risk for additional information on the effect of market-related
items on our comprehensive income.
Lower spread-related gains during 2018 driven by lower non-agency mortgage-related securities
balances.
Recognition of $4.5 billion in proceeds received during 2017 from the RBS settlement compared
to a $0.3 billion gain recognized from the Nomura judgment during 2018 related to certain of our
non-agency mortgage related securities. For more information, see Note 14.
Lower amortization of debt securities of consolidated trusts during 2018 driven by a decrease in
prepayments as a result of higher interest rates.
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.
Higher spread-related fair value gains driven by market spread tightening during 2017 on our
non-agency mortgage-related securities.
Higher gains on the extinguishment of debt as long-term interest rates increased between the
time of issuance and repurchase during 2017.
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.
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Management's Discussion and Analysis
Our Business Segments | All Other
All Other
Comprehensive Income
The table below shows our comprehensive income (loss) for the All Other category.
Table 18 - All Other Category Comprehensive Income
(Dollars in millions)
Year Ended December 31,
2017
2016
2018
Year Over Year Change
2018 vs. 2017
%
$
2017 vs. 2016
%
$
Comprehensive income (loss) - All Other
$—
($5,405)
$—
$5,405
100%
($5,405)
N/A
Key Drivers:
2018 vs. 2017 and 2017 vs. 2016 - Changes in comprehensive income (loss) driven by:
Higher income tax expense in 2017 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 tax years after 2017. For more information on the statutory tax rate change, see Note
12.
FREDDIE MAC | 2018 Form 10-K
86
Management's Discussion and Analysis
Risk Management | Overview
RISK MANAGEMENT
Overview
We take risks as an integral part of our business activities. Risk is the possibility that events will
adversely affect the achievement of our mission, strategy, and business objectives. Risk can manifest
itself in many ways. We seek to take risks in a safe and sound, well-controlled manner to earn
acceptable risk-adjusted returns on both a corporate-wide and, where applicable, transaction basis.
We utilize a risk taxonomy to define and classify risks that we face in operating our business. These risks
have the potential to adversely affect our current or projected financial results and condition and
operational resilience. The risk taxonomy is also the basis for aligning corporate risk policies and
standards. The key types of risks are:
Credit risk;
Operational Risk;
Market Risk;
Liquidity Risk;
Strategic Risk; and
Reputation Risk.
Strategic and reputation risks are factored into business decisions and are a shared responsibility of
senior management. For more discussion of these and other risks facing our business, see Risk
Factors. See Liquidity and Capital Resources for a discussion of liquidity risk.
Enterprise Risk Framework
The enterprise risk framework establishes the foundation for how we manage risk to achieve our
objectives and strategies. The enterprise risk framework:
Serves as the basis for performing risk functions across a range of stress scenarios;
Allows the company to manage risk in a consistent manner;
Defines risk roles, accountabilities, and authority across the three lines of defense; and
Promotes risk ownership and provides for independent risk assessment and transparency in risk
management decisions and execution.
The framework includes the following components:
Three Lines of Defense - The business lines, independent risk management, and internal audit
make up the three lines of defense.
Risk Culture - The board and senior management support an effective risk culture by setting the
"tone at the top" and by encouraging proactive risk discussions. A strong risk culture reinforces the
importance of our risk management strategy, and promotes collaboration and transparency among
the three lines of defense and a supportive environment for all employees where business is
conducted in a lawful and ethical manner.
Risk Governance - Risk governance comprises the risk responsibilities of the three lines of defense,
the risk committee structure at the division, enterprise, and Board levels, and reporting and
FREDDIE MAC | 2018 Form 10-K
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Management's Discussion and Analysis
Risk Management | Overview
escalation requirements.
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. The risk appetite
is integrated and aligned with the strategic plans for the company and each business segment.
Risk Authority - The Board delegates authority to the CEO, and the CEO delegates authority to
members of executive management.
Corporate Risk Policies and Standards - Corporate risk policies provide clarity on roles and
responsibilities, establish risk approval requirements, and define escalation and reporting
requirements. Corporate risk standards provide the minimum requirements to implement corporate
risk policies and may also establish risk approval requirements.
Capital Framework - We use both FHFA's CCF and internal capital methodologies to measure risk
for making economically effective decisions. See Liquidity and Capital Resources - Capital
Resources - Conservatorship Capital Framework.
Risk-Adjusted Return - We use risk-adjusted return, based on the CCF, to measure returns of
business lines, transactions, and initiatives. We seek to achieve acceptable risk-adjusted returns
consistent with pre-set targets.
Risk Profile - The risk profile is a point-in-time assessment of inherent and/or residual risk for a
specific risk type, measured at a divisional or enterprise level for the relevant risk types. The
assessment incorporates results from stress testing or scenario analysis, judgmental evaluation of
external and internal factors, effectiveness of controls, or any development that may affect
performance relative to the strategy and business objectives.
Enterprise Risk 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, the CERO, the CCO, and our
corporate ERC.
The information and diagram below present the responsibilities associated with our three-lines-of-
defense risk management model and our risk governance structure. The risk governance structure also
includes management risk committees for each business line to actively discuss and monitor business-
specific risk profiles, risk decisions, and risk appetite metrics, limits and thresholds, and risk type
committees to oversee specific risk types that are present in and span across business lines.
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 | 2018 Form 10-K
88
Management's Discussion and Analysis
Risk Management | Overview
FREDDIE MAC | 2018 Form 10-K
89
Management's Discussion and Analysis
Risk Management | Credit Risk
Credit Risk
Overview
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. We are exposed to both mortgage credit risk and
counterparty credit risk.
Mortgage credit risk is the risk associated with the inability or failure of a borrower to meet its financial
and/or contractual obligations. We are exposed to two types of mortgage credit risk:
Single-family mortgage credit risk, through our ownership or guarantee of loans in the single-
family credit guarantee portfolio and
Multifamily mortgage credit risk, through our ownership or guarantee of loans in the multifamily
mortgage 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 mortgage credit risk, and for counterparty 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;
Transferring credit risk of the single-family credit guarantee portfolio to investors in new and
innovative ways;
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 while supporting affordable housing in a responsible
manner. Our purchase guidelines generally provide for a maximum original LTV ratio of 95%, a maximum
FREDDIE MAC | 2018 Form 10-K
90
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
LTV ratio of 80% for cash-out refinance loans, and no maximum LTV ratio for fixed-rate HARP loans and
fixed-rate Enhanced Relief Refinance program loans. We purchase certain loans with LTV ratios up to
97% under an initiative designed to serve a targeted segment of creditworthy borrowers meeting certain
Area Median Income requirements. In 2Q 2018, we launched the HomeOneSM offering which expanded
the 97% program to a broader segment of creditworthy first-time home buyers.
The majority of our purchase volume is evaluated using either Freddie Mac's proprietary underwriting
software Loan Product Advisor®, Fannie Mae's comparable software Desktop Underwriter (DU) or the
seller's proprietary automated underwriting system. The performance of all loans is monitored to assess
compliance with our risk appetite. Fannie Mae announced changes to its DU in July 2017, which led to
an increase in eligibility for purchase of new loans with DTI ratios between 45% and 50% (high DTI).
These loans have minimal impact on our single-family credit guarantee portfolio, but we are monitoring
the overall credit quality and performance of these loans. During 2018, we initiated steps to limit the
volume of these loans that we purchase with high DTI ratios that have other high-risk characteristics.
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 our ineligible loan determinations prior to repurchase of the
loan.
We use a standard quality control process that facilitates more timely reviews and is designed to identify
breaches of representations and warranties early in the life of the loan. Proprietary tools, such as Quality
Control Advisor, provide greater transparency into our customer quality control reviews.
Our Loan Advisor Suite, a set of integrated software applications, is 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. Loan Advisor Suite offers limited relief of
representations and warranties for certain loans that satisfy automated controls related to appraisal
quality, collateral valuation, borrower assets, and borrower income. In general, limited representation
and warranty relief is only offered when we have validated the information provided by lenders against
independent data sources.
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. Our current remedies framework
provides 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.
Under our current selling and servicing representation and warranty framework for our mortgage loans,
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.
FREDDIE MAC | 2018 Form 10-K
91
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
An independent dispute resolution process for alleged breaches of selling or servicing representations
and warranties on our loans allows for a neutral third party to render 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 is strong by historical standards. However, risk
increased during 2018 as our refinance volume declined due to rising interest rates and our purchase of
loans under affordable housing initiatives increased. The graphs below show the credit profile of the
single-family loans we purchased or guaranteed in each of the last three years.
Weighted Average Original LTV Ratio
Weighted Average Credit Score
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Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The table below contains additional information about the single-family loans we purchased or
guaranteed in the last three years.
Table 19 - Single-Family New Business Activity
(Dollars in millions)
Amount
% of Total
Amount
% of Total
Amount
% of Total
30-year or more amortizing fixed-rate
$266,995
87%
$275,677
80%
$307,572
78%
Year Ended December 31,
2018
2017
2016
12,338
45,597
9,841
113
4
13
3
—
17,011
61,223
6,555
146
4
16
2
—
$343,566
100%
$392,507
100%
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
8,373
28,878
3,848
103
$308,197
3
9
1
—
100%
40%
92
90
69
19
12
30%
91
89
58
22
20
The table below contains additional details on the relief refinance loans we purchased.
Table 20 - Relief Refinance Loan Purchases
Year Ended December 31,
2018
2017
(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
$28
119
438
1,775
$2,360
217
685
2,495
12,294
15,691
Average
Loan Size
$131,000
174,000
176,000
144,000
UPB
Loan Count
$141
589
1,760
5,900
936
3,197
9,737
40,941
54,811
$150,000
$8,390
Transferring Credit Risk of the Single-Family Credit Guarantee Portfolio to Investors in
New and Innovative Ways
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 CRT transactions in which we transfer
mortgage credit risk to third parties.
The table below contains a description of credit enhancements which transfer a portion of the credit risk
on our single-family loans.
FREDDIE MAC | 2018 Form 10-K
93
26%
92
90
45
22
33
Average
Loan Size
$151,000
184,000
181,000
144,000
$153,000
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Credit
Enhancement
Description
Primary
mortgage
insurance
STACR
transactions
ACIS
transactions
• Provides loan-level protection against loss up to a specified amount, the premium for which 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.
• STACR debt notes - Obligations we issue to third-party investors related to certain notional
credit risk positions. Freddie Mac makes payments of principal and interest on the issued
STACR debt notes. The amount of principal that is required to be paid to the STACR debt note
investors is linked to the credit performance of a reference pool of mortgage loans. As a result,
Freddie Mac is not required to repay principal to the extent that the notional credit risk
position is reduced as a result of a specified credit event.
• STACR Trust - Similar to STACR debt note transactions, except that the notes are issued by a
third-party bankruptcy-remote trust. Under this structure, we pay a credit premium and
certain shortfalls on the investment collateral account to the trust and receive payments from
the trust as a result of defined credit events on the reference pool.
• ACIS - Policies that provide credit protection on a portion of the non-issued notional credit risk
positions we retain in a STACR 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 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.
• ACIS Forward Risk Mitigation (AFRM) transactions - Transfer risks on a representative
sample of loans from our single-family loan portfolio, locking in committed sources of
institution based capital with stable pricing. When specific credit events occur, we receive
compensation from the insurance policy up to an aggregate limit based on actual losses.
AFRM includes Deep MI CRT which provides additional coverage beyond primary mortgage
insurance.
CRT
When
Coverage is
Effective
No
At the time we
acquire the loan
Yes
Yes
Yes
Subsequent to
our purchase or
guarantee of
loans
Subsequent to
our purchase or
guarantee of
loans
Subsequent to
our purchase or
guarantee of
loans
Yes
At the time we
acquire the loan
Senior
subordinate
securitization
structures
• Senior subordinate securitization structures (non-consolidated) - Structures in which we
issue guaranteed senior securities and unguaranteed subordinated securities backed by
certain reperforming single-family loans. The unguaranteed subordinated securities absorb
first losses on the related loans. The loans are not serviced in accordance with our Guide and
we do not control the servicing.
Yes
Subsequent to
our purchase or
guarantee of
loans
• Senior subordinate securitization structures (consolidated) - Structures in which we issue
guaranteed senior securities or PCs and unguaranteed subordinated securities backed by
recently originated single-family loans. The unguaranteed subordinated securities absorb first
losses on the related loans. The loans are serviced in accordance with our Guide.
Yes
Subsequent to
our purchase or
guarantee of
loans
Other
• Integrated Mortgage Insurance (IMAGINSM) - A new insurance based offering that provides
loan-level protection for loans with 80% and higher LTV ratios. IMAGIN is designed to expand
and diversify sources of private capital supporting low down payment lending, while enabling
better management of taxpayer exposure to our mortgage and counterparty risks. Each loan is
first provided Charter-compliant primary mortgage insurance and is then reinsured by a panel
of reinsurers that are reviewed and approved by Freddie Mac. IMAGIN is offered to a broad
range of Freddie Mac sellers, who can choose IMAGIN or traditional primary mortgage
insurance at their discretion.
• 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.
Yes
At the time we
acquire the loan
Yes
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 two years.
Yes
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 | 2018 Form 10-K
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Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The tables below provide information on the total protected UPB and maximum coverage associated
with credit enhanced loans in our single-family credit guarantee portfolio as of December 31, 2018 and
December 31, 2017, respectively. These tables include all types of single-family credit enhancements.
Table 21 - Details of Credit Enhanced Loans in Our Single-Family Credit Guarantee Portfolio
(In millions)
CRT Activities:
STACR transactions
ACIS transactions
Senior subordinate securitization structures
Other
Less: UPB with more than one type of
CRT Activity
Total CRT Activities
Other Credit Enhancements:
Primary Mortgage Insurance
Other
Less: UPB with both CRT and other credit
enhancements
Single-family credit guarantee portfolio with
credit enhancement
Single-family credit guarantee portfolio without
credit enhancement
Total
Protected
UPB(1)
Total
$766,415
807,885
39,860
18,136
(736,334)
$895,962
378,594
2,642
(254,774)
1,022,424
873,762
$1,896,186
Outstanding as of December 31, 2018
Percentage of
Single-Family Credit
Guarantee Portfolio
Maximum Coverage(2)
Total
First Loss(3)
Mezzanine
Total
40%
43
2
1
(39)
47%
20%
—
(13)
54
46
$3,777
1,552
1,807
5,049
—
$12,185
96,996
1,341
—
$18,845
$22,622
7,571
2,046
340
—
9,123
3,853
5,389
—
$28,802
$40,987
—
—
—
96,996
1,341
—
110,522
28,802
139,324
—
—
—
100%
$110,522
$28,802
$139,324
FREDDIE MAC | 2018 Form 10-K
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Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
(In millions)
CRT Activities:
STACR transactions
ACIS transactions
Senior subordinate securitization structures
Other
Less: UPB with more than one type of
CRT Activity
Total CRT Activities
Other Credit Enhancements:
Primary Mortgage Insurance
Other
Less: UPB with both CRT and other credit
enhancements
Single-family credit guarantee portfolio with
credit enhancement
Single-family credit guarantee portfolio without
credit enhancement
Total
Protected
UPB(1)
Total
$604,356
625,082
10,688
7,233
(581,529)
$665,830
334,189
2,985
(194,222)
808,782
1,020,098
$1,828,880
Outstanding as of December 31, 2017
Percentage of
Single-Family Credit
Guarantee Portfolio
Maximum Coverage(2)
Total
First Loss(3)
Mezzanine
Total
33%
34
1
—
(32)
36%
18
—
(11)
44%
56
100%
$1,888
881
1,070
4,892
—
$8,731
85,429
1,550
—
95,710
—
$95,710
$15,900
6,052
683
—
—
$22,635
—
—
—
$17,788
6,933
1,753
4,892
—
$31,366
85,429
1,550
—
22,635
118,345
—
—
$22,635
$118,345
(1) For STACR and ACIS transactions, represents the UPB of the assets included in the reference pool. For senior subordinate securitization structure
transactions, represents the UPB of the guaranteed securities.
(2) For STACR transactions, represents the outstanding balance held by third parties. For ACIS transactions, represents the remaining aggregate limit
of insurance purchased from third parties. For senior subordinate securitization structures, represents the UPB of the securities that are
subordinate to our guarantee and held by third parties.
(3) First loss includes all B tranches in our STACR transactions and their equivalent in ACIS and Other CRT transactions.
We had coverage remaining of $139.3 billion and $118.3 billion on our single-family credit guarantee
portfolio as of December 31, 2018 and December 31, 2017, respectively. Credit risk transfer transactions
provided 29.4% and 26.5% of the coverage remaining at those dates.
Since the launch of the IMAGIN offering in March 2018, we have obtained coverage of $155 million on
$607 million in UPB with approximately 20 lenders participating in this offering.
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.
Table 22 - Non-Credit-Enhanced and Credit-Enhanced Loans in Our Single-Family Credit
Guarantee Portfolio
(Percentage of portfolio based on UPB)
% of Portfolio
SDQ Rate
% of Portfolio
SDQ Rate
% of Portfolio
SDQ Rate
2018
As of December 31,
2017
2016
Non-credit-enhanced
Credit-enhanced
Primary mortgage insurance
Other
Total
FREDDIE MAC | 2018 Form 10-K
47%
0.83%
56%
1.16%
64 %
1.02 %
20
48
N/A
0.86
0.31
0.69%
18
37
N/A
1.43
0.53
1.08%
17
27
N/A
1.46
0.43
1.00 %
96
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
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,
STACR Trusts, and ACIS insurance policies) under various home price scenarios.
The timing of our recognition of the recoveries in our statements of comprehensive income will depend
on the type of CRT transaction and whether we are reimbursed based on calculated losses or actual
losses, which may result in timing differences between the recognition of CRT recoveries and the related
provisions for losses in the financial statements. We recognize losses on the loans in the reference pool
when losses are incurred as defined by GAAP. For certain CRT transactions based on actual losses,
including STACR Trust and ACIS transactions, recoveries are recognized at the same time as we
recognize the losses on the loans in the reference pool. However, for our STACR debt notes based on
actual losses, recoveries are recognized in the financial statements when the loss confirming event
occurs (i.e., third-party foreclosure sale or REO disposition, 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 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 CRT transactions with collateral that is reasonably similar to the historical
time periods being compared; for example, HARP loans, which did not exist prior to 2009, are excluded
from this analysis) 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 and origination practices since the
financial crisis may result in lower loan losses and loss coverage ratio than the scenario-based
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 and STACR
Trust transactions.
FREDDIE MAC | 2018 Form 10-K
97
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Table 23 - Single-Family Guarantee Portfolio Credit Risk Transfer Sensitivity Analysis
(In millions)
UPB of loans covered by STACR transactions and ACIS
insurance policies
As of December 31, 2018
$806,114
Performance Under Home Price Scenarios at December 31, 2018
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 transactions and ACIS
insurance policies
Loss coverage ratio
$515
$112
22%
6
1
N/A
Amount
$3,064
bps
$1,227
40%
Amount
$19,047
$12,568
66%
bps
236
156
N/A
38
15
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
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.
Delinquency Rates
Our single-family serious delinquency rate declined in 2018 compared to 2017 due to the greater impact
of the hurricane activity in 2017 than subsequent hurricanes in 2018. This decline is also attributable to
our continued loss mitigation efforts and sales of certain seriously delinquent loans, as well as home
price appreciation and a low unemployment rate. In addition, this improvement was 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
FREDDIE MAC | 2018 Form 10-K
98
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
portfolio continues to decline as a percentage of our overall portfolio, but continues to account for the
majority of our credit losses.
Portfolio Composition and Credit Losses
Serious Delinquency Rates as of December 31,
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
FREDDIE MAC | 2018 Form 10-K
99
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Loan Characteristics
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
DTI Ratio
Ratio of the borrower's total monthly debt payments
to gross monthly income. One indicator of the
creditworthiness of borrowers, as it measures
borrowers' ability to manage monthly payments and
repay debts.
• 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
• Borrowers with lower DTI ratios are generally more likely
to repay their loans than those with higher DTI ratios,
holding all other factors equal
• DTI ratios are at the time of origination and may not be
indicative of the borrowers' current credit worthiness.
FREDDIE MAC | 2018 Form 10-K
100
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The tables below contain details on characteristics of the loans in our single-family credit guarantee
portfolio.
Table 24 - Credit Quality Characteristics of Our Single-Family Credit Guarantee Portfolio
(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, 2018
Average
Credit
Score
Original
LTV Ratio
Current
LTV
Ratio
Current
LTV Ratio
>100%
Alt-A %
750
705
743
74%
78
76%
59%
45
58%
—%
2
1%
—%
7
1%
As of December 31, 2017
Average
Credit
Score
Original
LTV Ratio
Current
LTV
Ratio
Current
LTV Ratio
>100%
Alt-A %
751
707
743
73%
77
75%
59%
47
59%
—%
3
1%
—%
7
1%
UPB
$1,550
346
$1,896
UPB
$1,424
405
$1,829
FREDDIE MAC | 2018 Form 10-K
101
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Table 25 - 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,
2018
2017
2016
19%
52%
26%
3%
76%
51%
36%
12%
1%
58%
60%
22%
12%
4%
2%
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%
743
743
743
45%
20%
35%
39%
21%
40%
35%
21%
44%
In addition, at December 31, 2018, December 31, 2017, and December 31, 2016:
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, 2018, approximately 8% of our loans had second-lien financing by the originator or
other third party at origination, and these loans comprised approximately 14% of our seriously
delinquent loan population. It is likely that additional borrowers have post-origination second-lien
financing.
FREDDIE MAC | 2018 Form 10-K
102
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
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.
Table 26 - Single-Family Credit Guarantee Portfolio Higher Risk Loan Data
(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, 2018
UPB
CLTV
% Modified
SDQ Rate
$85.1
248.3
33.6
70%
79
62
2.9%
4.4
20.0
0.90%
1.10
4.59
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
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.
Table 27 - Single-Family Credit Guarantee Portfolio Attribute Combinations for Higher Risk Loans
(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
FREDDIE MAC | 2018 Form 10-K
As of December 31, 2018
CLTV > 80 to 100
CLTV > 100
All Loans
%
Portfolio
SDQ
Rate
%
Portfolio
SDQ
Rate(1)
%
Portfolio
SDQ
Rate(1)
%
Portfolio
SDQ
Rate
%
Modified
0.3%
2.0
69.0
0.1
71.4%
1.2%
1.7
13.0
0.1
16.0%
2.18%
1.13
0.17
1.52
0.21%
4.16%
3.13
1.12
4.62
1.62%
—%
0.3
10.0
—
10.3%
0.2%
0.3
1.2
—
1.7%
NM
1.27%
0.25
NM
0.30%
8.76%
6.78
3.60
NM
4.78%
—%
—
—
—
—%
NM
NM
NM
NM
NM
0.1% 14.34%
0.1
0.4
—
0.6%
11.69
5.81
NM
8.18%
0.3%
2.3
79.0
0.1
81.7%
1.5%
2.1
14.6
0.1
18.3%
2.34%
1.15
0.18
2.60
0.22%
4.94%
3.68
1.33
4.98
1.93%
3.7%
1.9
0.3
3.6
0.4%
22.6%
19.8
7.1
19.5
10.0%
103
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, 2017
CLTV > 80 to 100
CLTV > 100
All Loans
%
Portfolio
SDQ
Rate
%
Portfolio
SDQ
Rate(1)
%
Portfolio
SDQ
Rate(1)
%
Portfolio
SDQ
Rate
%
Modified
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%
0.4
2.2
—
2.9%
8.05
4.11
NM
5.39%
0.1% 16.24%
0.2
0.7
—
1.0%
13.75
6.67
NM
9.14%
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%
(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. We fully discontinued purchases of option ARM loans in 2007, Alt-
A loans in 2009, and interest-only loans in 2010.
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 | 2018 Form 10-K
104
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.
Table 28 - Higher Risk Single-Family Loan Credit Characteristics
(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
$47.7
11.0
14.5
UPB
$56.0
13.0
22.2
As of December 31, 2018
% Modified
CLTV
SDQ Rate
50%
64
64
1.9%
0.1
100
0.88%
3.43
6.12
As of December 31, 2017
% Modified
CLTV
SDQ Rate
52%
68
70
1.7%
0.1
100
1.13%
4.97
8.03
(1) Includes $3.0 billion and $3.6 billion in UPB of option ARM loans as of December 31, 2018 and December 31, 2017, respectively. As of
December 31, 2018 and December 31, 2017, the option ARM loans had: (a) current LTV ratios of 54% and 58%, (b) loan modification percentages
of 17.9% and 15.6%, and (c) serious delinquency rates of 3.40% and 4.58%, 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 2018 or prior have
already had one or more payment changes as of December 31, 2018; loans where the year of first
payment change is 2019 or later have not had a payment change as of December 31, 2018 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, 2018.
Table 29 - Timing of Scheduled Payment Changes for Certain Single-Family Loan Types
(In millions)
ARM/amortizing
ARM/interest-only
Fixed/interest-only
Step-rate modified
Total
As of December 31, 2018
2018
and Prior
$10,342
6,500
669
12,519
$30,030
2019
2020
2021
2022
2023
Thereafter
Total(1)
$3,707
51
2
2,652
$6,412
$5,048
120
2
2,092
$7,262
$4,625
—
11
1,600
$6,236
$5,672
—
34
396
$6,102
$4,556
—
2
93
$4,651
$10,487
—
—
47
$10,534
$44,437
6,671
720
14,485
$66,313
(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 2019 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 2019.
FREDDIE MAC | 2018 Form 10-K
105
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 $0.9 billion and $1.1 billion of security collateral
underlying our other securitization products at December 31, 2018 and December 31, 2017,
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, 2018, we have purchased
approximately $36.3 billion of relief refinance loans that were previously categorized as Alt-A loans in our
portfolio, including $0.4 billion in 2018.
The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
Table 30 - Alt-A Loans in Our Single-Family Credit Guarantee Portfolio
(Dollars in billions)
Alt-A
As of December 31, 2018
As of December 31, 2017
UPB
CLTV
%
Modified
SDQ Rate
UPB
CLTV
%
Modified
SDQ Rate
$23.9
63%
23.2%
4.13%
$27.1
67%
24.1%
5.62%
The UPB of Alt-A loans in our single-family credit guarantee portfolio declined during 2018 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.
FREDDIE MAC | 2018 Form 10-K
106
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Geographic Concentrations
We purchase mortgage loans from across the U.S. and maintain a geographically diverse portfolio.
However, local economic conditions can affect borrowers' ability to repay and the value of the
underlying collateral, leading to concentrations of credit risk in certain geographic areas.
The following table presents certain geographic concentrations in our single-family credit guarantee
portfolio. The states presented below had the largest number of seriously delinquent loans as of
December 31, 2018. See Note 14 for additional information on the concentration of credit risk in our
single-family credit guarantee portfolio.
Table 31 - Geographic Concentration in Our Single-Family Credit Guarantee Portfolio
As of December 31, 2018
As of December 31, 2017
As of December 31, 2016
% of SDQ
Loans
SDQ Rate
Full Year
2018
Credit
Losses
% of SDQ
Loans
SDQ Rate
Full Year
2017
Credit
Losses
% of SDQ
Loans
SDQ Rate
Full Year
2016
Credit
Losses
9%
1.01%
$263
19%
3.33%
$614
9%
1.42%
$157
(Dollars in millions)
Florida
New York
Illinois
California
Texas
All Others
Total
SDQ
Loan
Count
6,888
6,312
4,750
4,610
4,081
48,499
75,140
8
6
6
5
66
1.37
0.86
0.35
0.59
0.67
SDQ
Loan
Count
22,253
8,117
6,228
5,514
8,908
289
244
275
55
SDQ
Loan
Count
9,355
9,574
7,291
5,992
4,357
415
445
884
44
7
5
5
8
1.74
1.13
0.41
1.36
0.90
1,454
64,669
56
2,413
69,365
65
100%
0.69% $2,580
115,689
100%
1.08% $4,815
105,934
100%
1.00% $1,728
9
7
6
4
2.05
1.34
0.46
0.70
0.98
163
170
83
15
1,140
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.
Table 32 - Single-Family Charge-Offs and Recoveries by Region
2018
Recoveries
Year Ended December 31,
2017
Charge-
offs,
net
Charge-
offs,
gross (1)
Recoveries
Charge-
offs,
net
Charge-
offs,
gross (1)
2016
Recoveries
($175)
(88)
(72)
(98)
(42)
($475)
$930
456
450
417
157
$2,410
$1,690
774
1,382
1,001
204
$5,051
($155)
(81)
(62)
(95)
(32)
($425)
$1,535
693
1,320
906
172
$4,626
$752
425
247
401
113
$1,938
($188)
(94)
(58)
(121)
(36)
($497)
Charge-
offs,
gross (1)
$1,105
544
522
515
199
$2,885
Charge-
offs,
net
$564
331
189
280
77
$1,441
(In millions)
Northeast
North Central
West
Southeast
Southwest
Total
(1) 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. 2018 and 2017 include charge-offs of $2.1 billion and $3.8
billion, respectively, related to the transfer of loans from held-for-investment to held-for-sale.
FREDDIE MAC | 2018 Form 10-K
107
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.
Table 33 - Concentration of Single-Family Loans in Each Region by CLTV Ratio
CLTV <= 80%
CLTV > 80% to 100%
CLTV > 100%
All Loans
As of December 31, 2018
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
0.63%
0.96
0.90
0.57
0.38
0.69%
6.23%
10.57
7.75
5.80
3.81
7.98%
0.55%
0.79
0.79
0.56
0.35
0.60%
0.93%
1.62
1.37
0.58
0.76
1.09%
16%
24
16
14
30
100%
—%
—
—
—
1
1%
2%
3
2
2
2
11%
14%
21
14
12
27
88%
CLTV <= 80%
CLTV > 80% to 100%
CLTV > 100%
All Loans
As of December 31, 2017
% 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%
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.
The table below contains certain credit performance metrics of our single-family credit guarantee
portfolio.
Table 34 - Single-Family Credit Guarantee Portfolio Credit Performance Metrics
(Dollars in millions)
Charge-offs, gross(1)
Recoveries
Charge-offs, net
REO operations expense
Total credit losses
Total credit losses(1) (in bps)
Year Ended December 31,
2017
2016
2018
$2,885
(475)
2,410
170
$2,580
$5,051
(425)
4,626
189
$4,815
$1,938
(497)
1,441
287
$1,728
13.7
27.0
9.9
(1) 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. 2018 and 2017 include charge-offs of $2.1 billion and $3.8
billion, respectively, related to the transfer of loans from held-for-investment to held-for-sale.
FREDDIE MAC | 2018 Form 10-K
108
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
We recognized recoveries from primary mortgage insurance (excluding recoveries that represent
reimbursements for our expenses, such as REO operations expenses) of $151 million, $263 million, and
$329 million that reduced our charge-offs of single-family loans during 2018, 2017, and 2016,
respectively. We also recognized recoveries from primary mortgage insurance of $47 million, $50 million,
and $47 million during 2018, 2017, and 2016, 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.
Table 35 - Credit Characteristics of Certain Single-Family Loan Categories
2018
2017
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%
7.98%
1
38
4.13
0.92
16%
16
59
1%
8.95%
1
38
5.62
1.56
28%
22
53
CLTV > 100%
Alt-A loans
Judicial foreclosure states
Allowance for Credit Losses
Our allowance for credit losses continued to decline in 2018, primarily driven by charge-offs as a result
of our transfer of loans from held-for-investment to held-for-sale.
The table below summarizes our single-family allowance for credit losses activity.
Table 36 - Single-Family Allowance for Credit Losses Activity
(Dollars in millions)
Beginning balance
Provision (benefit) for credit losses
Charge-offs, gross(1)
Recoveries
Transfers, net
Other(2)
Ending balance
2018
$8,979
(712)
(2,885)
475
—
319
$6,176
Year Ended December 31,
2016
$15,348
(781)
(1,938)
497
—
337
$13,463
2017
$13,463
(97)
(5,051)
425
—
239
$8,979
2015
$21,793
(2,639)
(5,071)
717
—
548
$15,348
As a percentage of our single-family credit guarantee portfolio
0.33%
0.49%
0.77%
0.90%
2014
$24,578
113
(4,892)
1,258
—
736
$21,793
1.31%
(1) 2016, 2015, and 2014 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, and $0.3 billion, respectively.
2018 and 2017 include charge-offs of $2.1 billion and $3.8 billion, respectively, 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 | 2018 Form 10-K
109
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 allowance for loan losses 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 allowance for loan losses is attributable to individually impaired single-family
loans. As of December 31, 2018, 45% of the allowance for loan losses 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, 2018. We expect our
allowance for loan losses associated with existing single-family TDRs to decline over time as we
continue to sell reperforming loans. In addition, these allowances for loan losses 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 on our consolidated balance sheets for individually
impaired single-family loans for which we have recorded an allowance determined on an individual
basis.
Table 37 - Single-Family Individually Impaired Loans with an Allowance Recorded
(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 an allowance recorded
Allowance for loan losses
Net investment, at December 31
2018
2017
Loan Count
Amount
Loan Count
Amount
364,704
52,300
(119,366)
(7,383)
290,255
2,555
292,810
$54,415
8,115
(19,285)
(991)
42,254
170
42,424
(4,369)
$38,055
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
FREDDIE MAC | 2018 Form 10-K
110
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The tables below present information about the UPB of single-family TDRs and non-accrual loans on our
consolidated balance sheets.
Table 38 - Single-Family TDR and Non-Accrual Loans
(In millions)
TDRs on accrual status
Non-accrual loans
Total TDRs and non-accrual loans
Allowance for loan losses associated with:
TDRs on accrual status
Non-accrual loans
Total
2018
2017
2016
2015
2014
As of December 31,
$41,839
11,197
$53,036
$3,612
1,003
$4,615
$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
$104,486
$82,373
32,745
$115,118
$12,105
2,677
$14,782
$13,728
6,935
$20,663
Year Ended December 31,
(In millions)
2018
2017
2016
2015
2014
Foregone interest income on TDRs and non-accrual loans(1)
$1,122
$1,604
$2,109
$2,690
$3,235
(1) Represents the amount of interest income that we did not recognize but would have recognized during the period for loans outstanding at the end
of each period, had the loans performed according to their original contractual terms.
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. 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 or movement to a more stable loan product) and without the need to obtain additional mortgage
insurance. Prior to January 2019, our relief refinance program included HARP, the portion of our relief
refinance initiative for loans with LTV ratios above 80%. The HARP program ended on December 31,
2018, although we will continue to purchase HARP loans with application received dates on or prior to
December 31, 2018 through September 30, 2019.
The relief refinance program has been replaced with the Enhanced Relief Refinance program, which
became 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.
FREDDIE MAC | 2018 Form 10-K
111
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The following table includes information about the performance of our relief refinance mortgage
portfolio.
Table 39 - Single-Family Relief Refinance Loans
(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
2018
Loan Count
117,410
228,419
410,027
762,477
1,518,333
UPB
$18,847
37,084
61,843
83,647
$201,421
As of December 31,
SDQ Rate
UPB
2017
Loan Count
SDQ Rate
0.97%
0.93
0.77
0.42
0.64%
$21,814
43,177
71,559
95,700
$232,250
131,045
256,189
455,451
835,381
1,678,066
1.76%
1.34
1.05
0.58
0.92%
When refinancing is not practicable, we require our servicers first to evaluate the loan for a forbearance
agreement, repayment plan or loan modification, because our level of recovery on a loan that reperforms
is often much higher than for a loan that proceeds to a foreclosure alternative or foreclosure. We offer
the following types of home retention options:
Forbearance agreements - Arrangements that require reduced or no payments during a defined
period, generally less than one year, to allow borrowers to return to compliance with the original
mortgage terms or to implement another loan workout. For agreements completed in 2018, the
average time period for reduced or suspended payments was between four and five 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 2018, the average
time period to repay past due amounts was approximately 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 2018 compared to 2017 primarily driven by the
hurricanes 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.
FREDDIE MAC | 2018 Form 10-K
112
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
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 2018 compared to 2017,
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 details about our single-family loan workout activities and foreclosure
sales.
Home Retention Actions
Foreclosure Alternatives and Foreclosure
Sales
The tables below contain credit characteristic data on our single-family modified loans.
Table 40 - Credit Characteristics of Single-Family Modified Loans
(Dollars in billions)
Loan Modifications
(Dollars in billions)
Loan Modifications
As of December 31, 2018
UPB
% of Portfolio
CLTV Ratio
SDQ Rate
$55.4
3%
68%
9.16%
As of December 31, 2017
UPB
% of Portfolio
CLTV Ratio
SDQ Rate
$64.6
4%
73%
11.34%
FREDDIE MAC | 2018 Form 10-K
113
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
The table below contains information about the payment performance of modified loans in our single-
family credit guarantee portfolio, based on the number of loans that were current or paid off one year
and, if applicable, two years after modification.
Table 41 - Payment Performance of Single-Family Modified Loans
Current or paid off
one year after modification:
Current or paid off
two years after modification:
4Q 2017
3Q 2017
2Q 2017
1Q 2017
4Q 2016
3Q 2016
2Q 2016
1Q 2016
Quarter of Loan Modification Completion
63%
60%
62%
62%
57%
62%
63%
67%
N/A
N/A
N/A
N/A
63
62
63
63
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 2018 and 2017, we completed sales of $0.7
billion and $0.5 billion, respectively, in UPB of seriously delinquent single-family loans. Of the $20.9
billion in UPB of single-family loans classified as held-for-sale at December 31, 2018, $2.6 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 REO properties,
we typically provide an initial period where we consider offers by owner occupants and entities engaged
in community stabilization activities before offers by investors. We also consider alternative disposition
strategies, such as auctions, as appropriate to improve collateral recoveries and/or when traditional
sales strategies (i.e., marketing via Multiple Listing Service and a real estate agent) are not effective.
The pace and volume of REO acquisitions are 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.
Delays in Foreclosure Process and Average Length of Foreclosure Process
Our serious delinquency rates and credit losses may 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
FREDDIE MAC | 2018 Form 10-K
114
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
below. At December 31, 2018, loans in states with a judicial foreclosure process comprised 38% of our
single-family credit guarantee portfolio.
The table below presents the length of time our loans have been seriously delinquent, by jurisdiction
type.
Table 42 - Seriously Delinquent Single-Family Loans by Jurisdiction
Aging, by locality
Judicial states
<= 1 year
> 1 year and <= 2 years
> 2 years
Non-judicial states
<= 1 year
> 1 year and <= 2 years
> 2 years
Combined
<= 1 year
> 1 year and <= 2 years
> 2 years
Total
As of December 31,
2018
2017
2016
Loan Count
Percent
Loan Count
Percent
Loan Count
Percent
27,811
8,268
6,871
25,675
4,133
2,382
53,486
12,401
9,253
75,140
37%
11
9
34
6
3
71
17
12
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
100%
115,689
100%
105,934
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 28% during 2018.
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 | 2018 Form 10-K
115
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.
Table 43 - Average Length of Foreclosure Process for 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,
2017
2016
2018
1,173
1,343
1,790
710
926
530
766
1,069
1,497
1,658
704
907
545
751
1,205
1,767
1,599
742
1,030
562
827
As indicated in the table above, the average length of the foreclosure process for our single-family loans
has been trending downward in recent years for some jurisdictions, particularly in states with a non-
judicial foreclosure process, but it has remained elevated in others, particularly in states with a judicial
foreclosure process, such as Florida and New York.
Our REO inventory continued to decline in 2018 primarily due to a decrease in REO acquisitions driven
by the improved credit quality of our portfolio, effective loss mitigation strategies, and a large proportion
of property sales to third parties at foreclosure. Third-party sales at foreclosure auction allow us to avoid
the REO property expenses that we would have otherwise incurred if we held the property in our REO
inventory until disposition.
We expect the rate of decline in our REO inventory may slow as a large portion of newly acquired REO
properties are older, lower value, and more geographically disbursed, thus creating additional challenges
in marketing and selling them. In addition, legal-related delays (i.e., redemption periods, litigations, and
eviction procedures) continue to result in extended holding periods.
The table below shows our single-family REO activity.
Table 44 - Single-Family REO Activity
(Dollars in millions)
Beginning balance - REO
Additions
Dispositions
Ending balance - REO
Beginning balance, valuation allowance
Change in valuation allowance
Ending balance, valuation allowance
Ending balance - REO, net
Severity Ratios
Year Ended December 31,
2018
2017
2016
Number of
Properties
Amount
Number of
Properties
8,299
10,442
$900
1,012
11,418
12,240
Amount
$1,215
1,191
(11,641)
(1,132)
(15,359)
(1,506)
7,100
780
(14)
3
(11)
$769
8,299
900
(17)
3
(14)
$886
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
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
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Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
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.
Loss severity excludes the cost of funding the loans after they are repurchased from the associated PC
pool.
The table below presents single-family severity ratios.
Table 45 - Single-Family Severity Ratios
Year Ended December 31,
2017
2016
2018
REO dispositions and third-party foreclosure sales
Short sales
24.2%
26.6
27.2%
27.7
32.8%
29.0
Our severity ratios remained relatively stable during 2018 compared to 2017. 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 portfolio is unable to be marketed at any given time because the
properties are occupied, involved in legal matters (e.g., bankruptcy, litigation, etc.) or subject to a
redemption period, which is a post-foreclosure period during which borrowers may reclaim a foreclosed
property. Redemption periods increase the average holding period of our inventory by as much as 10%
or more. As of December 31, 2018, approximately 37% of our REO properties were unable to be
marketed because the properties were occupied, located in states with a redemption period or subject
to other legal matters. Another 31% of the properties were being prepared for sale (i.e., valued,
marketing strategies determined and repaired). As of December 31, 2018, approximately 22% of our
REO properties were listed and available for sale, and 10% 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 244 days and 265 days for our REO dispositions
during 2018 and 2017, respectively.
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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 credit risk to third parties through our risk transfer securitization
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, the type of loan,
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
rare due to our underwriting approach, which is completed 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 risk transfer 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 risk transfer securitization products generally provide for structural
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Management's Discussion and Analysis
Risk Management | Multifamily Mortgage Credit Risk
credit enhancements (e.g., subordination or other loss sharing features) that allocate first loss exposure
to securities held by third parties.
The table below presents our new business activity related to loan purchases and guarantees by
product term.
Table 46 - Multifamily Segment New Business Activity by Product Term
(Dollars in millions)
10-year loans, fixed or adjustable
7-year loans, fixed or adjustable
Other
Total
Year Ended December 31,
2018
2017
2016
Amount
% of Total
Amount
% of Total
Amount
% of Total
$36,527
21,158
19,786
$77,471
47%
$31,338
43%
$24,378
27
26
23,844
18,019
33
24
19,367
13,085
100%
$73,201
100%
$56,830
43%
34
23
100%
Transferring a Large Majority of Credit Risk Through Our Risk Transfer Securitizations
and Other Risk Transfer Products
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 risk transfer securitization
products. Our principal credit risk transfer mechanism continues to be our K Certificates and SB
Certificates. In these transactions, we sell loans to a securitization trust that issues senior, mezzanine,
and subordinated securities. While we guarantee the senior securities and therefore retain the
associated credit risk of those securities, we transfer a large majority of credit risk of the underlying
loans through the trusts' issuances of the unguaranteed mezzanine and subordinate securities to third-
party investors, thereby reducing our overall credit risk exposure. These unguaranteed mezzanine and
subordinate securities will absorb any credit losses prior to our guarantee.
We may also transfer credit risk through a variety of other risk transfer products, including loan sales and
SCR notes. A SCR 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 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 note will be written down, reducing the amount of principal and interest payments that the investor
will ultimately receive.
Since 2009, we have transferred a portion of the credit risk related to $318.6 billion in UPB of multifamily
loans through our risk transfer securitizations, primarily K Certificates and SB Certificates, and other risk
transfer products. The average remaining level of subordination on all outstanding K Certificates and SB
Certificates was 14% at both December 31, 2018 and December 31, 2017. Since we began issuing K
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Management's Discussion and Analysis
Risk Management | Multifamily Mortgage Credit Risk
Certificates and SB Certificates, we have not experienced credit losses associated with our guarantees
on these securities.
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 risk
transfer products.
See Our Business Segments - Multifamily - Business Overview - Products and Activities -
Securitization, Guarantee, and Other Risk Transfer Products for additional information on our
2018 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 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 credit risk has been transferred to third-
party investors, we monitor the performance of our risk transfer securitizations to assess our potential
exposure to losses. Due to the subordination protection typically provided by our 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. However, during the
holding period, we transfer a portion of the front-end credit risk of our securitization pipeline through the
issuance of KT Certificates.
In addition to subordination, the Multifamily segment has various other credit enhancements, primarily
related to our mortgage loans, other risk transfer securitization products, and other mortgage-related
guarantees, in the form of collateral posting requirements, pool insurance, 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
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Management's Discussion and Analysis
Risk Management | Multifamily Mortgage Credit Risk
these agreements have not been significant. See Note 6 for more information on the total current and
protected UPB of our multifamily mortgage portfolio that is credit-enhanced and the associated
maximum coverage.
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 table below shows the delinquency rates for both credit-enhanced and non-credit-enhanced loans
in our multifamily mortgage portfolio.
Table 47 - Non-Credit-Enhanced and Credit-Enhanced Loans Underlying Our Multifamily
Mortgage Portfolio
Non-credit-enhanced
Credit-enhanced
Total
2018
As of December 31,
2017
2016
% of Portfolio
Delinquency
Rate
% of Portfolio
Delinquency
Rate
% of Portfolio
Delinquency
Rate
13%
87
100%
—%
0.01
0.01%
18%
82
100%
0.06%
0.01
0.02%
24%
76
100%
0.04%
0.02
0.03%
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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.
Table 48 - Multifamily Mortgage Portfolio Attributes
(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
2018
2019
2020
2021
2022
Thereafter
Total
Year of acquisition
2010 and prior
2011 and after
Total
K Certificates, SB Certificates and other risk transfer
securitization products:
Year of issuance
2013 and prior
2014
2015
2016
2017
2018
Total
Subordination level at issuance
No subordination
Less than 10%
10% to 15%
Greater than 15%
Total
FREDDIE MAC | 2018 Form 10-K
As of December 31,
2018
2017
UPB
Delinquency Rate
UPB
Delinquency Rate
$34.8
226.9
9.8
$271.5
$7.1
3.0
0.7
$10.8
68%
N/A
$1.7
1.5
1.8
1.4
4.4
$10.8
$2.9
7.9
$10.8
$51.5
12.1
22.9
30.7
49.8
59.9
$226.9
$12.0
3.2
155.0
56.7
$226.9
0.01%
0.01
—
0.01%
$38.2
192.5
10.0
$240.7
—%
—
—
—%
N/A
—%
—
—
—
—
—%
—%
—
—%
—%
0.05
—
0.02
0.01
0.01
0.01%
—%
—
0.01
0.01
0.01%
$10.0
6.1
1.6
$17.7
69%
$2.4
3.9
2.2
3.0
1.6
4.6
$17.7
$6.7
11.0
$17.7
$59.9
13.8
26.7
37.7
54.4
N/A
$192.5
$9.0
3.9
116.0
63.6
$192.5
0.01%
0.02
—
0.02%
—%
—
—
—%
—%
—
—
—
—
—
—%
—%
—
—%
0.06%
—
0.01
—
—
N/A
0.02%
0.22%
—
0.01
—
0.02%
122
Management's Discussion and Analysis
Risk Management | Multifamily Mortgage Credit Risk
REO Activity
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, 2018, we had no REO
properties.
Credit Losses and Allowance for Credit Losses
Our multifamily credit losses remain low due to the strong property performance of our multifamily
mortgage portfolio. See Note 4 for additional information regarding multifamily credit losses and
allowance for credit losses.
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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, credit enhancement providers (mortgage insurers, investors, etc.),
financial intermediaries, clearinghouses, and other counterparties. We manage our exposure to
counterparty credit risk using the following principal strategies:
Maintaining eligibility standards;
Evaluating creditworthiness and monitoring performance; 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 underwriting and servicing 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.
In addition, our single-family guarantee and multifamily businesses are exposed to settlement risk on the
non-performance of sellers and servicers as a result of our forward settlement loan purchase programs.
For additional details, see Counterparty Credit Risk - Financial Intermediaries,
Clearinghouses, and Other Counterparties - Other Counterparties - Forward Settlement
Counterparties.
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Management's Discussion and Analysis
Risk Management | Counterparty 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.
Evaluating Counterparty Creditworthiness and Monitoring Performance
We perform ongoing monitoring and review of our exposure to individual sellers or servicers in
accordance with our institutional 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 generally 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.
Since the financial crisis, 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.
Table 49 - Single-Family Credit Guarantee Portfolio Non-Depository Servicers
Top five non-depository servicers
Other non-depository servicers
Total
As of December 31,
2018
% of Serious
Delinquent Single-
Family Loans
2017
% of Serious
Delinquent Single-
Family Loans
% of Portfolio(1)
% of Portfolio(1)
16%
20
36%
17%
40
57%
15%
20
35%
23%
30
53%
(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
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Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
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:
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, and/or suspend or terminate the selling and
servicing relationship. 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 requests
issued to our single-family sellers and servicers was $0.4 billion and $0.2 billion at December 31,
2018 and December 31, 2017, respectively. See Note 14 for additional information about loans
subject to repurchase requests.
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.
Credit Enhancement Providers
Overview
We have exposure to credit enhancement providers through credit enhancements we obtain on single-
family loans. We also have exposure to insurers and reinsurers through our ACIS transactions. If any of
our credit enhancement providers 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 generally 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.
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 and reinsurers, 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.
Maintaining Eligibility Standards
We maintain eligibility standards for mortgage insurers and other insurers and reinsurers. 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 Creditworthiness 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. Monitoring performance and potentially
identifying underperformance allows us to plan for loss mitigation.
The table below summarizes our exposure to single-family mortgage insurers as of December 31, 2018.
In the event a mortgage insurer fails to perform, the coverage amounts represent our maximum
exposure to credit losses resulting from such a failure.
Table 50 - Single-Family Mortgage Insurers
(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+
BBB-
Not Rated
Not Rated
Not Rated
N/A
Credit
Rating
Outlook(1)
Stable
Stable
Stable
Watch Dev
Stable
Stable
N/A
N/A
N/A
N/A
As of December 31, 2018
UPB
Coverage
Primary
MI
Pool
Insurance
Primary
MI
Pool
Insurance
$89,381
77,282
70,253
54,106
52,981
25,769
4,015
3,023
1,653
131
$378,594
$2
4
—
9
—
—
35
12
6
—
$68
$23,093
19,846
18,061
13,943
13,429
6,425
1,006
756
415
22
$96,996
$2
3
—
9
—
—
29
8
2
—
$53
(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, 2018. 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 has
evaluated the planned acquisition and approved China Oceanwide Holdings Group's control of
Genworth Mortgage Insurance Corporation. Regulatory and other approvals of the acquisition are still
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Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
pending. 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, 2018, we had cumulative unpaid deferred payment obligations of $0.5 billion
from these insurers. We have reserved substantially 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.
Financial Intermediaries, Clearinghouses, and Other Counterparties
Derivative Counterparties
We use cleared derivatives, exchange-traded derivatives, OTC derivatives, and forward sales and
purchase commitments to mitigate risk, and are exposed to the non-performance of each of the related
financial intermediaries and clearinghouses. The Capital Markets segment manages this risk for the
company. Our financial intermediaries and clearinghouse 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
clearinghouses 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 made through the clearinghouse. We are required to
post initial and variation margin to the clearinghouses. 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. Our obligation to post margin may increase as a
result of the lowering or withdrawal of our credit rating by S&P or Moody's or by changes in the
potential future exposure generated by the derivative transactions.
Exchange-traded derivatives - Exchange-traded derivatives expose us to counterparty credit risk
of the central clearinghouses 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 derivatives are settled daily via payments made
through the financial clearinghouse.
OTC derivatives - OTC derivatives expose us to counterparty credit risk of individual counterparties,
because these transactions are executed and settled directly between us and each counterparty,
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Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
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. The collateral posting thresholds we assign to our OTC counterparties, as well as the ones
they assign to us, are generally based on S&P or Moody's credit rating. The lowering or withdrawal
of our credit rating by S&P or Moody's may increase our obligation to post collateral, depending on
the amount of the counterparty's exposure to Freddie Mac with respect to the derivative
transactions. Only OTC derivatives transactions executed prior to March 1, 2017 are subject to
collateral posting thresholds. 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.
Evaluating Counterparty Creditworthiness and Monitoring Performance
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.
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.
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Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
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.
Table 51 - Derivative Counterparty Credit Exposure
(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, 2018
Number of
Counterparties
Fair Value -
Gain positions
Fair Value -
Gain positions,
net of collateral
3
15
3
21
2
23
$178
2,449
42
2,669
3
$2,672
$16
32
—
48
23
$71
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, 2018. 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.
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:
Other investments - We are exposed to the non-performance of institutions relating to other
investments (including non-mortgage-related securities and cash and cash equivalents) transactions,
including those entered into on behalf of our securitization trusts. Our policies require that the
institution be evaluated using our internal rating model prior to our entering into such transactions.
We monitor the financial strength of these institutions and may use collateral maintenance
requirements to manage our exposure to individual counterparties.
The major financial institutions with which we transact regarding our other investments (including
non-mortgage-related securities and cash and cash equivalents) include 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, depository and non-depository
institutions, brokers and dealers, and government money market funds. For more information on our
other investments portfolio, see Liquidity and Capital Resources.
We 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 the 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
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Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
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).
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
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, 2018, the gross fair value of such forward purchase and
sale commitments that were in derivative asset positions was $65 million.
Secured lending activities - As part of our other investments portfolio, 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. These
transactions differ from those we use for liquidity purposes, as the borrowers may not be major
financial institutions, potentially exposing us to the institutional credit risk of these institutions. We
also provide advances 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, and secured term
financing through revolving lines of credit collateralized by the value of contractual mortgage
servicing rights on certain mortgages we own. In addition, we may invest in other secured lending
activities. For additional information, see Note 14.
Other Market Participants
We have exposure to other market participant counterparties for transactions that we enter into in the
ordinary course of business, including the following:
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
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Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
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 mortgage loans. A significant portion of the loans we own or guarantee are
registered in the MERS System. Our business could be adversely affected if we were prevented from
using the MERS System, or if our use of the MERS System adversely affects our ability to enforce
our rights with respect to our loans registered in the MERS System.
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Management's Discussion and Analysis
Risk Management | Operational Risk
Operational Risk
Operational risk is 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 our activities. Operational
risk events include accounting, financial reporting or operational errors, technology failures, 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 operational risk 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.
In order to evaluate and monitor operational risk, each business line periodically completes an
assessment using the RCSA framework. The framework is designed to identify and assess the business
line'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 lines, with independent 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; volume and complexity of
new business initiatives, including those we are pursuing as required by the Conservatorship
Scorecards; external events such as cybersecurity threats and third-party failures; 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.
Business Resiliency Risk
We continue to enhance our business resiliency capabilities for mission critical systems and processes.
Freddie Mac has established business resiliency policies and standards to strengthen enterprise-wide
risk reduction activities, program execution, and program maturity. Program enhancements include
geographical redundancies as well as continuous technological transformation to achieve recovery of
critical business functions and supporting assets in the event of a business disruption.
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Management's Discussion and Analysis
Risk Management | Operational Risk
Internal Processes and New Initiatives
We periodically make improvements to the design of our process for business lines with increased
business volumes and complexity of transactions to achieve effectiveness and efficiency in our
operations. New initiatives that pose significant risks to the company are subject to additional
evaluation, documentation, reporting, review, and approvals (including by the second line), prior to
execution.
Common Securitization Platform
We continue to make various multi-year investments to build the infrastructure for a better housing
finance system, including the development of the CSP by CSS (jointly owned by Freddie Mac and
Fannie Mae) and the UMBS. With regard to the CSP, 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.
The transition to the CSP presents significant operational and technological challenges. Freddie Mac
began its transition to the CSP in late 2016 through CSP Release 1. Freddie Mac and CSS have
performed activities as expected with no major issues to date. In addition, 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 CSP Release 2, which is targeted for June 2019.
For additional information see Risk Factors - Operational Risks - A failure in our operational
systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our
business, damage our reputation, and cause losses.
Cybersecurity Risk
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.
We continue to invest in the information risk and security area to strengthen our capabilities to prevent,
detect, respond to and mitigate risk, and protect our 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
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Management's Discussion and Analysis
Risk Management | Operational Risk
protect our systems or the confidentiality of our information from cyberattack and other
unauthorized access, disclosure, and disruption.
Third-Party Risk
We continue to enhance our third-party risk management program through established policies and
formulation of standards. The third-party policies and standards focus on key areas such as due
diligence, contract negotiations, on-going monitoring and termination of third parties, identifying the
risks created by the use of third parties, and oversight, reporting, and analytics of third parties.
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 business line
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 independently validates the work done by the business lines (e.g., conducting
independent assessments of ongoing monitoring results, model risk ratings, performance monitoring,
and reporting against thresholds and alerts).
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 2018, we improved our model governance processes by strengthening model policies, standards, and
procedures. We will continue to refine our model risk rating methodology and its use as an input into
overarching model risk appetite.
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.
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, 2018. As of December 31, 2018, 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, which is the economic risk associated
with adverse changes in interest rates, volatility, and spreads. 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 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 Risk Management -
Counterparty Credit Risk and Risk Factors for more discussion of our market risk exposures,
including those related to derivatives, institutional counterparties, and other market risks.
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Management's Discussion and Analysis
Risk Management | Market Risk
Although we have limited ability to manage spread risk, we employ the following strategies:
Limiting the size of our assets that are exposed to spread risk;
Using short-TBA positions to hedge primarily loans acquired through our cash loan purchase
program that are awaiting securitization and portions of our agency mortgage-related securities
portfolio; 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
Spread Risk
Spread risk is the risk that yields in different asset classes may not move together and may adversely
affect our economic value. This risk arises principally because interest rates on our mortgage-related
investments may not move in tandem with interest rates on our financial liabilities and derivatives,
potentially affecting the effectiveness of our hedges. We are exposed to the following types of market
spread risk:
Market spread risk arising from funding mortgage-related investments with debt securities;
Market spread risk arising from our use of LIBOR- or Treasury-based instruments in our risk
management activities;
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; and
Market spread risk on the K Certificates and SB Certificates we hold in our mortgage-related
investments portfolio.
Interest-Rate Risk
Interest-rate risk is the economic risk related to adverse changes in the level or volatility of interest rates.
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.
Measurement of 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.
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
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Management's Discussion and Analysis
Risk Management | Market Risk
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.
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.
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Management's Discussion and Analysis
Risk Management | Market Risk
Interest-Rate Risk Results
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, 2018 and December 31, 2017. 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.
Table 52 - PMVS-YC and PMVS-L Results Assuming Shifts of the LIBOR Yield Curve
(In millions)
Assuming shifts of the LIBOR yield curve,
(gains) losses on:(1)
Assets
Liabilities
Derivatives
Total
PMVS
As of December 31,
PMVS-YC
25 bps
2018
PMVS-L
50 bps
100 bps
PMVS-YC
25 bps
2017
PMVS-L
50 bps
100 bps
($447)
(109)
560
$4
$4
$5,367
(1,889)
(3,446)
$32
$32
$10,988
(3,948)
(6,917)
$123
$123
$463
185
(646)
$2
$2
$5,587
(2,377)
(3,200)
$10
$10
$11,446
(4,968)
(6,477)
$1
$1
(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.
Table 53 - Duration Gap and PMVS Results
(Duration gap in months, dollars in millions)
Average
Minimum
Maximum
Standard deviation
Year Ended December 31,
Duration
Gap
2018
PMVS-YC
25 bps
PMVS-L
50 bps
Duration
Gap
2017
PMVS-YC
25 bps
PMVS-L
50 bps
—
(0.4)
0.3
0.1
$11
—
31
6
$15
—
77
16
0.1
(0.4)
0.8
0.2
$7
—
26
5
$16
—
78
19
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.
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Management's Discussion and Analysis
Risk Management | Market Risk
Table 54 - PMVS-L Results Before Derivatives and After Derivatives
(In millions)
December 31, 2018
December 31, 2017
PMVS-L (50 bps)
Before
Derivatives
After
Derivatives
Effect of
Derivatives
$3,478
3,210
$32
10
($3,446)
(3,200)
Limitations of Interest-Rate Risk Measures
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.
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.
Our reported measurements do not include the sensitivity to interest-rate changes of the following
assets and liabilities:
Credit guarantee activities - We currently 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
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Management's Discussion and Analysis
Risk Management | Market Risk
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 and other liabilities - We do not include other miscellaneous assets and liabilities,
primarily deferred tax assets, accounts payable and receivable, and non-cash basis adjustments.
We are considering updating our interest-rate risk measures to include two additional items that are not
currently incorporated in our asset and liability interest-rate risk management strategy and definition: (i)
upfront fees (including buy-downs) related to single-family credit guarantee activity and (ii) net worth. If
these updates were included, they would reflect, respectively, (i) that the present value of upfront fees
related to single-family credit guarantee activity decreases (increases) when interest rates increase
(decrease), and (ii) that we view net worth as having long-term duration rather than short-term duration,
and that the present value of net worth therefore increases (decreases) when interest rates increase
(decrease).
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, 2018, 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, net of tax, after considering any offsetting interest rate effects related to
financial instruments measured at fair value and the effects of fair value hedge accounting.
FREDDIE MAC | 2018 Form 10-K
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Management's Discussion and Analysis
Risk Management | Market Risk
Table 55 - Estimated Net Interest Rate Effect on Comprehensive Income (Loss)
(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
Amortization of deferred hedge accounting gains and losses
Income tax (expense) benefit
Estimated net interest rate effect on comprehensive income (loss)
Year Ended December 31,
2018
2017
$2.5
(1.9)
(1.6)
0.3
0.1
($0.6)
$—
(0.7)
0.3
—
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.
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, 2018, the GAAP adverse scenario before fair value hedge accounting was a non-
parallel shift in which long-term rates decrease by 100 basis points, while the adverse scenario after
fair value hedge accounting was a non-parallel shift in which short and medium-term rates 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.
Table 56 - GAAP Adverse Scenario Before and After Hedge Accounting
(Dollars in billions)
December 31, 2018
December 31, 2017
GAAP Adverse Scenario (Before-Tax)
Before Hedge Accounting After Hedge Accounting
% Change
($2.7)
(3.1)
($0.2)
(0.5)
93%
84
Hedge accounting is designed to reduce the impact to GAAP earnings in the adverse scenario
described above. However, the after hedge accounting impact may not always result in an improvement
over the before hedge accounting impact. For example, there are certain interest-rate scenarios in which
the after hedge accounting impact would result in a lower gain or a larger loss than the before hedge
accounting impact.
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
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Management's Discussion and Analysis
Risk Management | Market Risk
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.
Table 57 - Estimated Spread Effect on Comprehensive Income (Loss)
(In billions)
Capital Markets
Multifamily
Single-family Guarantee(1)
Spread effect on comprehensive income (loss)
Year Ended December 31,
2018
2017
$0.4
(0.4)
0.1
$0.1
$0.8
0.3
(0.2)
$0.9
(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.
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Management's Discussion and Analysis
Liquidity and Capital Resources
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our business activities require that we maintain adequate liquidity to meet our financial obligations as
they come due and meet the needs of customers in a timely and cost-efficient manner. We also must
maintain adequate capital resources to avoid being placed into receivership by FHFA.
Sources and Uses of Funds
Our primary source of funding for the assets on our balance sheet is the issuance of debt. In addition to
the funding provided by issuing debt, our other sources of funds include:
Principal payments on and sales of securities and loans that we own;
Repurchase transactions;
Net worth, which represents funding available to us prior to our dividend requirement on our senior
preferred stock; and
Draws from Treasury under the Purchase Agreement, which are only made if we have a quarterly
deficit in our net worth.
We use these sources to fund the assets on our balance sheet. Our primary uses of funds include:
Principal payments upon the maturity, redemption, or repurchase of our other debt;
Purchases of mortgage loans, including purchases of seriously delinquent or modified loans from PC
trusts, mortgage-related securities, and other investments;
Payments related to derivative contracts and posting or pledging of collateral to third parties in
connection with secured financing and daily trade activities; and
Dividend requirements on our senior preferred stock.
We receive cash from our revenue-generating activities, primarily interest income on securities and loans
that we own, guarantee fees (inclusive of initial upfront fees) and other fee income. We use cash to pay
interest expense on our debt and our other expenses.
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.
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Management's Discussion and Analysis
Liquidity and Capital Resources
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.
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Management's Discussion and Analysis
Liquidity and Capital Resources
Liquidity Profile
Primary Sources of Liquidity
The following table lists the sources of our liquidity, the balances as of December 31, 2018 and a brief
description of their importance to Freddie Mac. 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.
Table 58 - Sources of Liquidity
Source
Balance(1)
(In billions)
Liquidity
• Other Investments
$43.7 •
Portfolio - Liquidity and
Contingency Operating
Portfolio
Liquid Portion of the
Mortgage-Related
Investments Portfolio
•
Description
The Liquidity and Contingency Operating Portfolio, included within
our other investments portfolio, is primarily used for short-term
liquidity management.
$120.4 •
The liquid portion of our mortgage-related investments portfolio
can be pledged or sold for liquidity purposes. The amount of cash
we may be able to successfully raise may be substantially less
than the balance.
(1) Represents carrying value for the Liquidity and Contingency Operating Portfolio, included within our other investments portfolio, and UPB for the
liquid portion of the mortgage-related investments portfolio.
Other Investments Portfolio
The table below summarizes the balances in our other investments portfolio, which includes the
Liquidity and Contingency Operating Portfolio. The investments in our other investments portfolio are
important to our cash flow, collateral management, asset and liability management, and ability to
provide liquidity and stability to the mortgage market. The other investments portfolio consists of the
Liquidity and Contingency Operating Portfolio, primarily used for short-term liquidity management, cash
and other investments held by consolidated trusts, and other investments, which include investments in
debt securities used to pledge as collateral, LIHTC partnerships and secured lending activities.
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Management's Discussion and Analysis
Liquidity and Capital Resources
Table 59 - Other Investments Portfolio
(In billions)
Cash and cash equivalents (1)
Securities purchased under
agreements to resell
Non-mortgage related securities
Secured lending and other
Total
As of December 31, 2018
As of December 31, 2017
Liquidity and
Contingency
Operating
Portfolio
Custodial
Account
Other
Total Other
Investments
Portfolio
Liquidity and
Contingency
Operating
Portfolio
Custodial
Account
Other
Total Other
Investments
Portfolio
$6.7
20.2
16.8
—
$0.6
12.1
—
—
$—
2.5
2.4
1.8
$7.3
34.8
19.2
1.8
$9.3
38.9
22.2
—
$0.5
16.8
—
—
$—
0.2
0.6
1.3
$9.8
55.9
22.8
1.3
$43.7
$12.7
$6.7
$63.1
$70.4
$17.3
$2.1
$89.8
(1) The current and prior period presentation has been modified to include restricted cash and cash equivalents due to recently adopted accounting
guidance and re-designation of cash collateral posted to us as part of the Liquidity and Contingency Operating Portfolio.
The Liquidity and Contingency Operating Portfolio consist of funds deposited at the Federal Reserve
Bank of New York, non-mortgage-related securities which primarily 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. In 2018, we began to maintain interest-bearing deposits at commercial banks.
In addition, the Liquidity and Contingency Operating Portfolio includes collateral posted to us in the form
of cash primarily by derivatives counterparties of $3.0 billion and $2.4 billion as of December 31, 2018
and December 31, 2017, respectively. We have invested this collateral in securities purchased under
agreements to resell and non-mortgage-related securities as part of our Liquidity and Contingency
Operating Portfolio, although the collateral may be subject to return to our counterparties based on the
terms of our master netting and collateral agreements.
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 for 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 | 2018 Form 10-K
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Management's Discussion and Analysis
Liquidity and Capital Resources
Primary Sources of Funding
Debt securities that we issue are classified either as debt securities of consolidated trusts held by third
parties or other debt. The following table lists the sources and balances of our funding as of December
31, 2018 and a brief description of their importance to Freddie Mac.
Table 60 - Funding Sources
Source
Balance(1)
(In billions)
Funding
Description
• Other Debt
$255.0
• Other debt is used to fund our business activities, including
single-family guarantee activities not funded by debt securities of
consolidated trusts.
$1,792.7 • Debt securities of consolidated trusts are used primarily to fund
our single-family guarantee activities. This type of debt is
principally repaid by the cash flows of the associated mortgage
loans. As a result, our repayment obligation is limited to amounts
paid pursuant to our guarantee of principal and interest and to
purchase modified or seriously delinquent loans from the trusts.
• Debt Securities of
Consolidated Trusts
(1) Represents UPB of debt balances.
Other Debt Activities
We issue other debt to fund our operations. Competition for funding can vary with economic, financial
market, and regulatory environments.
During 2018, 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 42.7% and 45.4% as of December
31, 2018 and December 31, 2017, respectively.
Our debt cap under the Purchase Agreement was $346.1 billion in 2018 and declined to $300.0 billion
on January 1, 2019. As of December 31, 2018, our aggregate indebtedness, calculated as the par value
of other debt, was $255.7 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 website at www.freddiemac.com/investors/financials/monthly-
volume-summaries.
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. 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.
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Management's Discussion and Analysis
Liquidity and Capital Resources
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 variety of reasons, including managing our funding composition and supporting the liquidity of our
debt securities.
Table 61 - Other Debt Activity
(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
Beginning balance
Issuances
Repurchases
Maturities
Ending Balance
STACR and SCR Debt(2)
Beginning balance
Issuances
Repurchases
Maturities
Ending Balance
Total other debt
Referenced footnotes are included after the next table.
Short-term
Year Ended December 31, 2018
Average Rate(1)
Long-term
Average Rate(1)
$45,717
356,129
—
(373,059)
28,787
9,681
162,524
(166,186)
6,019
—
2,000
—
—
—
2,000
17,792
14,965
—
(18,317)
14,440
—
—
—
—
—
1.19%
1.40
—
1.29
2.36
1.06
1.82
1.75
2.40
—
2.28
—
—
—
2.53
1.03
2.02
—
1.06
2.04
—
—
—
—
—
$—
—
—
—
—
—
—
—
—
113,822
26,191
(1,396)
(3,580)
(29,831)
105,206
111,169
11,514
(1,340)
(40,554)
80,789
17,925
1,885
—
(2,081)
17,729
—%
—
—
—
—
—
—
—
—
1.58
3.13
2.64
2.23
1.06
2.09
2.11
2.21
2.11
1.35
2.56
5.04
3.67
—
4.14
6.02
$51,246
2.28%
$203,724
2.62%
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Management's Discussion and Analysis
Liquidity and Capital Resources
(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
Beginning balance
Issuances
Repurchases
Maturities
Ending Balance
STACR and SCR Debt(2)
Beginning balance
Issuances
Repurchases
Maturities
Ending Balance
Total other debt
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
—
—
—
—
—
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
—
—
—
—
—
$—
—
—
—
—
—
—
—
—
98,420
56,894
(335)
(27,414)
(13,743)
113,822
172,204
19,798
(1,211)
(79,621)
111,170
14,602
5,712
—
(2,390)
17,924
—%
—
—
—
—
—
—
—
—
1.44
1.92
1.83
1.75
0.87
1.58
1.90
1.63
1.40
1.55
2.11
4.38
3.80
—
3.01
5.04
$73,190
1.14%
$242,916
2.08%
(1) Average rate is weighted based on par value.
(2) 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 generally without penalty and are therefore included as a separate
category in the table.
Our outstanding other debt balance has continued to decline as we reduced 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
2018 compared to 2017. In addition, STACR debt should continue to decline as run off will primarily be
replaced with STACR Trust transactions.
During 2018, 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, 2018, $71 billion of the outstanding $107
billion of callable debt may be called within one year, not including callable debt due to contractually
mature within one year.
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Management's Discussion and Analysis
Liquidity and Capital Resources
Other Short-Term Debt
The tables below contain details on the characteristics of our other short-term debt.
Table 62 - Other Short-Term Debt
As of December 31, 2018
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
$28,621
16,440
6,019
$51,080
2.36%
2.10
2.40
2.28%
$35,126
15,403
9,411
1.79%
1.37
1.79
$46,892
18,200
11,719
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
(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)
Discount notes and Reference Bills
Medium-term notes
Securities sold under agreements to repurchase
Total
(1) Average rate is weighted based on carrying value.
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Management's Discussion and Analysis
Liquidity and Capital Resources
Maturity and Redemption Dates
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.
Contractual Maturity Date as of December 31, 2018(1)
Earliest Redemption Date as of December 31, 2018(1)
(1) 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 generally without penalty and are therefore included as a separate
category in the graphs.
Debt Securities of Consolidated Trusts
The largest component of debt on our consolidated balance sheets is debt securities of consolidated
trusts, which relates to securitization transactions that we consolidated for accounting purposes. We
issue this type of debt by securitizing mortgage loans primarily to fund the majority of our single-family
guarantee activities. When we consolidate securitization trusts, we recognize the following on our
consolidated balance sheets:
The assets held by the securitization trusts, the majority of which are mortgage loans. We
recognized $1,842.9 billion and $1,774.3 billion of mortgage loans, which represented 89.3% and
86.6% of our total assets, as of December 31, 2018 and December 31, 2017, respectively.
The debt securities issued by the securitization trusts, the majority of which are PCs. PCs are pass-
through securities, where the cash flows of the mortgage loans held by the securitization trust are
passed through to the holders of the PCs. We recognized $1,792.7 billion and $1,721.0 billion of
debt securities of consolidated trusts, which represented 87.7% and 84.6% of our total debt, as of
December 31, 2018 and December 31, 2017, respectively.
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Management's Discussion and Analysis
Liquidity and Capital Resources
Debt securities of consolidated trusts are principally repaid from the cash flows of the mortgage loans
held by the securitization trusts that issued the debt securities. In circumstances when the cash flows of
the mortgage loans are not sufficient to repay the debt, we make up the shortfall because we have
guaranteed the payment of principal and interest on the debt. In certain circumstances, we have the
right and/or obligation to purchase the loan from the trust prior to its contractual maturity.
The table below shows the issuance and extinguishment activity for the debt securities of our
consolidated trusts.
Table 63 - Activity for Debt Securities of Consolidated Trusts Held by Third Parties
(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 secured lending
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,
2018
$1,672,605
2017
$1,602,162
185,877
190,207
376,084
(41,453)
(25,220)
(233,278)
(299,951)
1,748,738
43,939
$1,792,677
256,931
150,651
407,582
(42,797)
(34,560)
(259,782)
(337,139)
1,672,605
48,391
$1,720,996
Debt securities of our consolidated trusts represent our liability to third parties that hold beneficial
interests on 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, 2018, 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 loan losses on mortgage loans
held by consolidated trusts. See Note 4 for details on our allowance for loan losses.
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Management's Discussion and Analysis
Liquidity and Capital Resources
The table below provides information on the UPB of debt securities issued by our consolidated trusts.
Table 64 - Debt Securities of Consolidated Trusts Held by Third Parties
(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
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,
2017
2018
$1,434,879
79,079
253,245
45,051
6,697
1,939
1,820,890
2,961
1,823,851
7,220
1,831,071
(82,333)
$1,748,738
$1,331,463
81,889
274,561
52,870
9,867
2,157
1,752,807
3,650
1,756,457
5,747
1,762,204
(89,599)
$1,672,605
Our ability to access the capital markets and other sources of funding, as well as our cost of funds, may
be affected by our credit ratings. The table below indicates our credit ratings as of February 1, 2019.
Table 65 - Freddie Mac Credit Ratings
Senior long-term debt
Short-term debt
Subordinated debt
Preferred stock(1)
Outlook
Nationally Recognized Statistical Rating
Organization
S&P
AA+
A-1+
AA-
D
Stable
Moody's
Aaa
P-1
Aa2
Ca
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.
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Management's Discussion and Analysis
Liquidity and Capital Resources
Cash Flows
2018 vs. 2017 - Cash and cash equivalents (including restricted cash and cash equivalents)
decreased by $2.5 billion from $9.8 billion as of December 31, 2017 to $7.3 billion as of December
31, 2018, primarily driven by fewer proceeds from debt issuances as we continued to reduce our
indebtedness along with the decline in our mortgage-related investments portfolio. The decrease in
cash and cash equivalents (including restricted cash and cash equivalents) was partially offset by a
decrease in securities purchased under agreements to resell due to lower near-term cash needs for
fewer upcoming maturities and anticipated calls of other debt.
2017 vs. 2016 - Cash and cash equivalents (including restricted cash and cash equivalents)
decreased by $12.4 billion from $22.2 billion as of December 31, 2016 to $9.8 billion as of December
31, 2017, primarily driven by an increase in securities purchased under agreements to resell, as
excess cash was invested in securities to earn a yield. The decrease in cash and cash equivalents
(including restricted cash and cash equivalents) was partially offset by a decrease in net repayments
of other debt, as we reduced our indebtedness along with the decline in our mortgage-related
investments portfolio.
Capital Resources
Primary Sources of Capital
The following table lists the sources and balances of our capital as of December 31, 2018 and a brief
description of their importance to Freddie Mac.
Table 66 - Sources of Capital
Source
Balance(1)
(In billions)
Description
Capital
• Net Worth
•
Available Funding under
Purchase Agreement
(1) Represents carrying value of net worth.
$4.5
$140.2
•
•
GAAP net worth represents capital available prior to our dividend
requirement to Treasury under the Purchase Agreement.
FHFA may request that available funding under the Purchase
Agreement be drawn on our behalf from Treasury.
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 to maintain the confidence of the debt markets as a
very high-quality credit, upon which our business model is dependent.
At December 31, 2018, our assets exceeded our liabilities under GAAP; therefore, no draw is being
requested from Treasury under the Purchase Agreement. Based on our Net Worth Amount of $4.5 billion
as of December 31, 2018 and the applicable Capital Reserve Amount of $3.0 billion, our dividend
requirement to Treasury in March 2019 will be $1.5 billion. Under the Purchase Agreement, the payment
of dividends does not reduce the outstanding liquidation preference on the senior preferred stock.
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Management's Discussion and Analysis
Liquidity and Capital Resources
Upon the Conservator, acting as successor to the rights, titles, powers, and privileges of the Board of
Directors, declaring a senior preferred stock dividend equal to our dividend requirement and directing us
to pay it, we would pay a dividend of $1.5 billion by March 31, 2019. If for any reason we were not to
pay 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. Our cumulative
senior preferred stock dividend payments totaled $116.5 billion as of December 31, 2018.
The aggregate liquidation preference of the senior preferred stock owned by Treasury was $75.6 billion
and the amount of available funding remaining under the Purchase Agreement was $140.2 billion as of
December 31, 2018. 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.
Table 67 - Net Worth Activity
(In millions)
Beginning balance
Comprehensive income (loss)
Capital draws from Treasury
Senior preferred stock dividends declared
Total equity / net worth
Aggregate draws under Purchase Agreement
Aggregate cash dividends paid to Treasury
Conservatorship Capital Framework
Year Ended December 31,
2018
2017
2016
($312)
8,622
312
(4,145)
$4,477
$71,648
116,538
$5,075
5,558
—
(10,945)
($312)
$71,336
112,393
$2,940
7,118
—
(4,983)
$5,075
$71,336
101,448
In May 2017, FHFA, as Conservator, issued guidance to us to evaluate and manage our financial risk
and to make economic business decisions, while in conservatorship, utilizing a newly-developed risk-
based CCF, an economic capital system with detailed formulae provided by FHFA. The CCF also
provides the foundation for the risk-based component of the proposed Enterprise Capital Rule
published by FHFA in the Federal Register in July 2018.
The CCF is used to establish the modeled capital needed to evaluate business decisions and ensure the
company makes such decisions prudently when pricing transactions and managing its businesses. This
framework focuses on the profits earned versus an estimated cost of equity capital needed to support
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Management's Discussion and Analysis
Liquidity and Capital Resources
the risk assumed to generate those profits. Management relies upon this framework in its decision-
making.
The existing regulatory capital requirements have been suspended by FHFA during conservatorship.
Consequently, we refer to the capital needed under the CCF for analysis of transactions and businesses
as "conservatorship capital."
Under the Purchase Agreement, we are not able to permanently retain total equity, as calculated under
GAAP, in excess of the $3.0 billion Capital Reserve Amount. As a result, we do not have capital sufficient
to support our aggregate risk-taking activities. Instead, we rely upon the Purchase Agreement to
maintain market confidence.
Return on Conservatorship Capital
The table below provides the ROCC, calculated as (1) annualized comprehensive income for the period
divided by (2) average conservatorship capital during the period. Each quarter, we consider whether
certain "significant items" occurred that should be excluded from comprehensive income and our
calculation of ROCC. If we have identified significant items in any of the periods presented, we also
include comprehensive income excluding significant items as well as an adjusted ROCC based on
comprehensive income excluding significant items, both non-GAAP measures. We believe that these
non-GAAP financial measures are useful to investors as they better reflect our on-going financial results.
All conservatorship capital figures presented below are based on the CCF as of December 31, 2018. The
CCF has been and may be further revised by FHFA from time to time, and may be revised specifically in
connection with FHFA's consideration and adoption of a final Enterprise Capital Rule, which could
possibly result in material changes in our conservatorship capital. For example, beginning in 4Q 2018,
our conservatorship capital includes capital for deferred tax assets. Prior period conservatorship capital
results have been revised to conform to the current period presentation.
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Management's Discussion and Analysis
Liquidity and Capital Resources
The ROCC shown in the table below is not based on our total equity and does not reflect actual returns
on total equity. We do not believe that returns on total equity are meaningful because of the current $3.0
billion limitation on the amount of total equity that we are able to permanently retain under the Purchase
Agreement.
Table 68 - Returns on Conservatorship Capital
Year Ended December 31,
(Dollars in billions)
GAAP comprehensive income
Significant items:
Non-agency mortgage-related securities settlement and judgment (1) (2)
Tax effect related to settlement and judgment (1) (2)
Write-down of net deferred tax asset
Total significant items
Comprehensive income, excluding significant items
Conservatorship capital (average during the period) (3)
ROCC, based on GAAP comprehensive income (3)
Adjusted ROCC, based on comprehensive income excluding significant
items (3)
2018
$8.6
(0.3)
0.1
—
(0.2)
$8.4
$56.6
15.2%
14.8%
2017
$5.6
(4.5)
1.6
5.4
2.5
$8.1
$67.6
8.2%
11.9%
(1) 2017 GAAP comprehensive income included settlement proceeds of $4,525 million (pre-tax) from RBS related to litigation involving certain of our
non-agency mortgage-related securities. The tax effect related to this settlement was ($1,584) million.
(2) 2018 GAAP comprehensive income included a benefit of $334 million (pre-tax) from a final judgment against Nomura Holding America, Inc. in
litigation involving certain of our non-agency mortgage-related securities. The tax effect related to this judgment was ($70) million.
(3) Prior period conservatorship capital results have been revised to include capital for deferred tax assets.
Our 2018 ROCC, based on GAAP comprehensive income, increased compared to the 2017 return,
partially driven by the increase in GAAP comprehensive income in 2018. The increase in comprehensive
income primarily reflected the two significant items in 2017 in the table above. In addition, both 2018
ROCC and 2018 Adjusted ROCC increased compared to our 2017 returns due to the lower level of
conservatorship capital needed in 2018, resulting from home price appreciation, the efficient disposition
of legacy assets, and the increasing credit risk transfer activity in both our Single-family Guarantee and
Multifamily segments.
Our three business segments have different capital requirements, returns, and profitability. The ROCC
for our Single-family Guarantee segment, which has FHFA-prescribed guidance on guarantee fee levels,
is generally lower than the company's overall return, while the returns in our Multifamily and Capital
Markets segments are generally higher.
We find the returns calculated above, as well as the returns calculated on specific transactions and
individual business lines, to be a reasonable measure of return-versus-risk to support our decision-
making while we remain in conservatorship. These returns may not be indicative of the returns that
would be generated if we were to exit conservatorship, especially as the terms and timing of any such
exit are not currently known and will depend upon future actions by the U.S. government. Our belief,
should we leave conservatorship, is that returns at that time would most likely be below the levels
calculated above, assuming the same portfolio of risk assets, as we expect that we would hold capital
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Management's Discussion and Analysis
Liquidity and Capital Resources
post-conservatorship above the minimum required regulatory capital. It is also likely that we would be
required to pay fees for federal government support, thereby reducing our total comprehensive income.
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Management's Discussion and Analysis
Conservatorship and Related Matters
CONSERVATORSHIP AND RELATED
MATTERS
Supervision of Our Company During Conservatorship
FHFA has broad powers when acting as our Conservator. Upon its appointment, the Conservator
immediately succeeded to all rights, titles, powers, and privileges of Freddie Mac and of any
stockholder, officer, or director of Freddie Mac with respect to Freddie Mac and its assets. The
Conservator also succeeded to the title to all books, records, and assets of Freddie Mac held by any
other legal custodian or third party.
Under the GSE Act, the Conservator may take any actions it determines are necessary to put us in a
safe and solvent condition and appropriate to carry on our business and preserve and conserve our
assets and property. The Conservator's powers include the ability to transfer or sell any of our assets or
liabilities, subject to certain limitations and post-transfer notice provisions, without any approval,
assignment of rights or consent of any party. However, the GSE Act provides that loans and mortgage-
related assets that have been transferred to a Freddie Mac securitization trust must be held by the
Conservator for the beneficial owners of the trust and cannot be used to satisfy our general creditors.
We conduct our business subject to the direction of FHFA as our Conservator. The Conservator has
provided authority to the Board of Directors to oversee management's conduct of our business
operations so we can operate in the ordinary course. The directors serve on behalf of, exercise authority
as provided by, and owe their fiduciary duties of care and loyalty to the Conservator. The Conservator
retains the authority to withdraw or revise the authority it has provided at any time. The Conservator also
retains certain significant authorities for itself, and has not provided 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. 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.
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Management's Discussion and Analysis
Conservatorship and Related Matters
Purchase Agreement, Warrant, and Senior Preferred
Stock
In connection with our entry into conservatorship, we entered into the Purchase Agreement with
Treasury. Under the Purchase Agreement, we issued to Treasury both senior preferred stock and a
warrant to purchase common stock. The Purchase Agreement, the warrant, and the senior preferred
stock do not 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, 2018, the aggregate liquidation preference of the
senior preferred stock was $75.6 billion, and the amount of available funding remaining under the
Purchase Agreement was $140.2 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. 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 is $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
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Management's Discussion and Analysis
Conservatorship and Related Matters
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
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 reached $250 billion at December 31, 2018.
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 debt cap under the Purchase
Agreement was $346.1 billion in 2018 and declined to $300.0 billion on January 1, 2019. As of
December 31, 2018, our aggregate indebtedness for purposes of the debt cap was $255.7 billion.
Since 2014, we have been managing the mortgage-related investments portfolio so that it does not
exceed 90% of the cap established by the Purchase Agreement. In February 2019, FHFA directed us
to maintain the mortgage-related investments portfolio at or below $225 billion at all times.
FHFA has 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 mortgage-related investments portfolio affect all three
business segments. In order to achieve all of our portfolio goals, it is possible that we may forgo
economic opportunities in one business segment in order to pursue opportunities in another business
segment.
Our results against the limits imposed on our mortgage-related investments portfolio and aggregate
indebtedness for the year ended December 31, 2018 are shown below.
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Management's Discussion and Analysis
Conservatorship and Related Matters
Mortgage Assets
Indebtedness
Managing 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.
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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;
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).
Freddie Mac mortgage-related securities include mortgage-related securities issued or guaranteed by
Freddie Mac. In prior periods, certain of these securities that were issued by third-party trusts but
guaranteed by Freddie Mac were classified as non-agency mortgage-related securities. Prior periods
have been revised to conform to the current period presentation.
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 Purchase Agreement cap for this
portfolio decreased to $250 billion at December 31, 2018.
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Management's Discussion and Analysis
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Table 69 - Mortgage-Related Investments Portfolio Details
As of December 31, 2018
As of December 31, 2017
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
109,880
Non-agency mortgage-related securities
Other Non-Freddie Mac agency mortgage-
related securities
—
3,968
—
—
—
$—
—
—
$8,955
—
8,955
$—
39,402
39,402
3,108
2,122
—
$8,955
39,402
48,357
$—
—
—
$9,999
—
9,999
112,988
124,654
2,122
3,968
—
5,211
—
—
—
$—
46,666
46,666
3,817
5,152
—
$9,999
46,666
56,665
128,471
5,152
5,211
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, 2018 and December 31,
2017
90% of mortgage-related investments
portfolio cap at December 31, 2018 and
December 31, 2017
113,848
8,955
44,632
167,435
129,865
9,999
55,635
195,499
—
—
8,473
8,473
—
—
12,267
12,267
—
6,570
6,570
23,203
—
23,203
11,584
815
12,399
34,787
7,385
42,172
—
6,181
6,181
19,653
—
19,653
18,585
1,270
19,855
38,238
7,451
45,689
$120,418
$32,158
$65,504
$218,080
$136,046
$29,652
$87,757
$253,455
55%
15%
30%
100%
54%
12%
34%
100%
$250,000
$225,000
$288,408
$259,567
We are particularly focused on reducing, in an economically sensible manner, the balance of the less
liquid assets that we hold in our mortgage-related investments portfolio. Our efforts to reduce our
holdings of these assets help satisfy several objectives, including to improve the overall liquidity of our
mortgage-related investments portfolio and comply with the mortgage-related investments portfolio
limits. The decline in our holdings of less liquid assets, which included repayments and active
dispositions, accounted for the majority of the decline in our mortgage-related investments portfolio
during 2018. Our active dispositions of less liquid assets included the following:
Sales of $12.8 billion of less liquid assets, including $2.6 billion in UPB of single-family non-agency
mortgage-related securities, $0.7 billion in UPB of seriously delinquent unsecuritized single-family
loans, and $9.5 billion in UPB of single-family reperforming loans;
Securitizations of $1.7 billion in UPB of less liquid multifamily loans;
Transfers of $1.8 billion in UPB of less liquid multifamily loans to the securitization pipeline; and
Securitization of $1.6 billion in UPB of single-family reperforming loans into Freddie Mac PCs,
thereby enhancing their liquidity.
FREDDIE MAC | 2018 Form 10-K
166
Management's Discussion and Analysis
Conservatorship and Related Matters
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 has 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. FHFA issued the 2018 and 2019 Conservatorship Scorecards in
December 2017 and December 2018, respectively. We continue to align our resources and internal
business plans to meet the goals and objectives provided by FHFA.
For information about the 2018 Conservatorship Scorecard, and our performance with respect to it, see
Executive Compensation - Compensation Discussion and Analysis. For information about the
2019 Conservatorship Scorecard, see our current report on Form 8-K filed on December 20, 2018.
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 | 2018 Form 10-K
167
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
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
FREDDIE MAC | 2018 Form 10-K
168
Management's Discussion and Analysis
Regulation and Supervision
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
2018, 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 2017.
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. 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 adversely affect our profitability.
2017 Affordable Housing Goals and Housing Plan
In December 2018, FHFA informed us that, for 2017, we achieved three of our five single-family housing
goals and all three of our multifamily goals. 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).
FREDDIE MAC | 2018 Form 10-K
169
Management's Discussion and Analysis
Regulation and Supervision
Due to our failure to meet two of the five single-family housing goals for 2014 and 2015, we operated
under an FHFA-required housing plan through 2018. Although FHFA determined that we did not meet
two of our single-family housing goals in 2017 and that achievement of those goals was feasible, FHFA
did not require us to extend our housing plan beyond 2018. FHFA will continue to closely monitor and
evaluate our housing goals performance in 2018 and 2019. Our performance compared to our goals, as
determined by FHFA for 2017 and 2016, is set forth below.
Table 70 - 2017 and 2016 Affordable Housing Goals Results
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)
2018-2020 Affordable Housing Goals
2017
Market
Level
Goals
Results
Goals
2016
Market
Level
Results
24%
6%
18%
14%
21%
300,000
60,000
10,000
24.3%
5.9%
21.5%
17.1%
25.4%
N/A
N/A
N/A
23.2%
5.7%
20.9%
16.4%
24.8%
24%
6%
17%
14%
21%
22.9%
5.4%
19.7%
15.9%
19.8%
23.8%
5.7%
19.9%
15.6%
21.0%
408,096
300,000
92,274
39,473
60,000
8,000
N/A
N/A
N/A
406,958
73,030
22,101
Current FHFA housing goals applicable to our purchases consist of four goals and one subgoal for
single-family owner-occupied housing, one multifamily affordable housing goal, and two multifamily
affordable housing subgoals. Single-family goals are expressed as a percentage of the total number of
eligible loans underlying our total single-family loan purchases, while the multifamily goals are expressed
in terms of minimum numbers of units financed.
Three of the single-family housing goals and the subgoal target purchase money loans for low-income
families, very low-income families, and/or families that reside in low-income areas. The single-family
housing goals also include one goal that targets refinancing loans for low-income families. The
multifamily 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, for that particular year.
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 2018 through 2020 are set forth below.
FREDDIE MAC | 2018 Form 10-K
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Management's Discussion and Analysis
Regulation and Supervision
Table 71 - 2018-2020 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)
2018
2019 - 2020
24%
6%
18%
14%
21%
315,000
60,000
10,000
24%
6%
TBD
14%
21%
315,000
60,000
10,000
We expect to report our performance with respect to the 2018 affordable housing goals in March 2019.
At this time, based on preliminary information, we believe we met all five of our single-family goals and
our three multifamily goals for 2018. FHFA may not make a final determination on our 2018 performance
until the release of market data in late 2019.
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 providing leadership in
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 2017, FHFA released Freddie Mac's underserved markets plan for 2018-2020. The plan
became effective January 1, 2018. On December 19, 2018, FHFA published Freddie Mac's modified
underserved markets plan for 2018-2020. FHFA will evaluate Freddie Mac's performance under the plan
after receiving the company's annual report containing information on all activities and objectives
undertaken during the year.
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 and paying amounts into those
funds, subject to any subsequent guidance or instruction from FHFA.
During 2018, we completed $385.2 billion of new business purchases subject to this requirement and
accrued $161.7 million of related expense, of which $105.1 million is related to the Housing Trust Fund
administered by HUD and $56.6 million is related 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.
FREDDIE MAC | 2018 Form 10-K
171
Management's Discussion and Analysis
Regulation and Supervision
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
2018 and 2017, we did not call, repurchase, or issue any Freddie SUBS® securities. The last
outstanding issue of Freddie SUBS securities matured in December 2018.
Department of Housing and Urban Development
HUD has regulatory authority over Freddie Mac with respect to fair lending. Our loan purchase activities
are subject to federal anti-discrimination laws. In addition, the GSE Act prohibits discriminatory practices
in our loan purchase activities, requires us to submit data to HUD to assist in its fair lending
investigations of primary market lenders with which we do business, and requires us to undertake
remedial actions against such lenders found to have engaged in discriminatory lending practices. HUD
periodically reviews and comments on our underwriting and appraisal guidelines for consistency with
the Fair Housing Act and the anti-discrimination provisions of the GSE Act.
Department of the Treasury
Treasury has significant rights and powers as a result of the Purchase Agreement. In addition, under our
Charter, the Secretary of the Treasury has approval authority over our issuances of notes, debentures,
and substantially identical types of unsecured debt obligations (including the interest rates and
maturities of these securities), as well as new types of mortgage-related securities issued subsequent to
the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The
Secretary of the Treasury has performed this debt securities approval function by coordinating GSE debt
offerings with Treasury funding activities. Our Charter also authorizes Treasury to purchase Freddie Mac
debt obligations not exceeding $2.25 billion in aggregate principal amount at any time. 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.
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172
Management's Discussion and Analysis
Regulation and Supervision
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
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.
The Trump Administration indicated in January that it expects to announce a framework for the
development of a policy for comprehensive housing finance reform, and that it will work with Congress
to formulate a reform plan.
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173
Management's Discussion and Analysis
Regulation and Supervision
Common Securitization Platform and the UMBS Update
On September 17, 2018, FHFA published in the Federal Register a proposed rule on the new UMBS. The
proposed rule is intended to improve the liquidity of Freddie Mac and Fannie Mae TBA-eligible MBS by
requiring Freddie Mac and Fannie Mae to maintain policies that promote aligned investor cash flows
both on current TBA-eligible MBS, and, upon implementation, on the UMBS. Implementation of
requirements established by a final rule could affect our business practices in the future.
On October 23, 2018, FHFA determined in connection with the Single Security initiative that the market
would benefit from aligned timing for the repurchase of delinquent mortgages from Fannie Mae
Mortgage Backed Securities and Freddie Mac PCs based on similar approaches.
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174
Management's Discussion and Analysis
Contractual Obligations
CONTRACTUAL OBLIGATIONS
Our contractual obligations affect our short- and long-term liquidity and capital resource needs. The
table below provides aggregated information about the listed categories of our contractual obligations
as of December 31, 2018. 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, STACR transactions, and SCR 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, 2018 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, 2018 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 transactions and SCR notes, as well as
payment of premiums related to ACIS transactions, 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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Management's Discussion and Analysis
Contractual Obligations
—
5,013
202
—
4
3
Table 72 - Contractual Obligations
(In millions)
Other long-term debt(1)
Other short-term debt(1)
Interest payable(2)
Total
2019
2020
2021
2022
2023
Thereafter
$185,995
$58,002
$42,296
$30,898
$20,802
$15,929
$18,068
51,246
23,401
51,246
10,607
—
2,902
—
2,303
—
1,550
—
1,026
Other contractual liabilities reflected on our
consolidated balance sheets(3)
2,443
1,866
187
173
Purchase obligations:
Purchase commitments(4)
Other purchase obligations(5)
Lease obligations
27,583
27,583
317
35
268
14
—
22
10
—
14
5
10
—
6
2
5
—
3
1
Total specified contractual obligations
$291,020
$149,586
$45,417
$33,393
$22,370
$16,964
$23,290
(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.
FREDDIE MAC | 2018 Form 10-K
176
Management's Discussion and Analysis
Off-Balance Sheet Arrangements
OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain business arrangements that are not recorded on our consolidated balance sheets
or that may be recorded in amounts that differ from the full contract or notional amount of the
transaction and that may expose us to potential losses in excess of the amounts recorded on our
consolidated balance sheets. See Note 3 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 $254.9 billion and $215.7 billion at December 31, 2018 and December 31, 2017, 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 $6.7 billion and $7.4 billion at December 31,
2018 and December 31, 2017, 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, 2018 and December 31, 2017, 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. 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 - Counterparty
Credit Risk - Financial Intermediaries, Clearinghouses, and Other Counterparties -
Derivative Counterparties and Note 9. We also enter into purchase commitments primarily related
to future guarantor swap transactions for single-family loans, and, to a lesser extent, index lock
commitments and commitments to purchase or guarantee multifamily loans. These non-derivative
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Management's Discussion and Analysis
Off-Balance Sheet Arrangements
commitments totaled $382.1 billion and $296.4 billion in notional value at December 31, 2018 and
December 31, 2017, 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 allowance for loan losses and provision for credit losses.
Most single-family loans are aggregated into pools based on similar risk characteristics and measured
collectively using a statistically based model that evaluates a variety of factors affecting collectability,
including but not limited to current LTV ratios, trends in home prices, loan product type, delinquency/
default status and history, and geographic location. Inputs used by the model are regularly updated for
changes in the underlying data, assumptions, and market conditions. We review the output of this model
by considering qualitative factors such as macroeconomic and other factors to see whether the model
outputs are consistent with our expectations. Management adjustments may be necessary to take into
consideration external factors and current economic events that have occurred but that are not yet
reflected in the factors used to derive the model outputs. Significant judgment is exercised in making
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Management's Discussion and Analysis
Critical Accounting Policies and Estimates
these adjustments.
Some examples of the qualitative factors considered include:
Regional housing trends;
Applicable home price indices;
Unemployment and employment dislocation trends;
The effects of changes in government policies and programs;
Industry trends;
Consumer credit statistics;
Third-party credit enhancements; and
Natural disasters (such as hurricanes and wildfires).
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
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. While none of these bills has been enacted, it is likely that
similar or new bills will be introduced and considered in the future. In addition, in June 2018, the Office
of Management and Budget released a plan that proposed changes in the government's role in housing
finance, including ending the conservatorships of Freddie Mac and Fannie Mae, reducing their role in the
housing market, and providing an explicit, limited federal backstop separate from the support for low-
and moderate-income homebuyers. It is possible that the Administration could take steps, even in the
absence of legislative action, to implement certain aspects of such a plan.
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, except 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, numerous lawsuits have been filed against the U.S. government, Freddie Mac
and Fannie Mae challenging certain government actions related to the conservatorship and the
Purchase Agreement. These lawsuits 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.
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Risk Factors
Conservatorship and Related Matters
We are experiencing significant changes in key external and internal positions during 2019,
including the Director of FHFA, the Chair and other members of our Board of Directors, and
our CEO. These changes may result in significant changes in our priorities and strategy,
which could in turn affect our business and results of operations.
We are under the control of FHFA, as our Conservator, and FHFA determines our strategic direction. An
interim FHFA Director was appointed in January 2019 to replace the previous Director, and a candidate
for a full term as Director is awaiting Senate confirmation. Either the interim or the full term Director
could decide to change our priorities and strategy in various ways, and could direct us to undertake new
business activities and limit or cease existing activities. These changes could adversely affect our results
of operations.
FHFA has provided authority to the Board of Directors to oversee management's conduct of our
business operations. During 2019, five of our independent directors, including the Chair, have left or will
leave the Board, one for health and family reasons and four because their terms of Board service have
reached the limit set forth in the Guidelines. Since March 2018, two new directors have been elected,
and the Board is continuing to recruit for additional members. This turnover could affect the manner in
which the Board is able to fulfill its oversight functions. In addition, our CEO has announced that he will
retire in the second half of 2019, and the Board is conducting a search for his replacement. The
transition to a new CEO, including any related organizational changes, may demand significant
management attention and affect, at least during the transition period, the efficiency with which we are
able to conduct our ongoing business operations.
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 could
result in our having to request additional draws from Treasury in future periods.
As a result of the net worth sweep dividend requirement, we cannot retain capital from the earnings
generated by our business operations in excess of the applicable Capital Reserve Amount of $3.0 billion.
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, and 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;
Limitations on 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
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Risk Factors
activities;
Conservatorship and Related Matters
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, funding, or hedging 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, such as FASB's accounting standards
update related to the measurement of credit losses on financial instruments, which may 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
Agreement, may add to the uncertainty regarding our long-term financial sustainability.
FHFA, as our Conservator, controls 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, such as the initiatives we are pursuing
under the Conservatorship Scorecards. Some of the activities FHFA has required us to undertake are
costly and difficult to implement, such as building the CSP.
FHFA has required us to make changes to our business that have adversely affected our financial results
and 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 has prevented us from engaging in business activities or transactions that we
believe would be profitable, and it may do so again in the future. For example, FHFA could further limit
the size of our mortgage-related investments portfolio or the amount of new multifamily business we
may obtain, or it could establish limits on our single-family business.
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 do so may be
limited for several 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.
Congress or FHFA may require us to set aside or otherwise pay monies to fund third-party initiatives,
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Risk Factors
Conservatorship and Related Matters
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 Purchase Agreement and the terms of the senior preferred stock significantly limit our
business activities.
The Purchase Agreement and the terms of the senior preferred stock 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 limitation on the size of our mortgage-related investments portfolio, as required by the Purchase
Agreement and FHFA, and other limitations on our investment activity, including significant constraints
on our ability to purchase or sell mortgage assets, 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.
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
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.
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Risk Factors
Conservatorship and Related Matters
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.
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. Proceeds
would first be applied to the secured and unsecured claims against the company, the administrative
expenses of the receiver, and the liquidation preference of the senior preferred stock. Any remaining
proceeds would then be available to repay the liquidation preference of other series of 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. 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. 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, including K
Certificates, SB Certificates, and certain senior subordinate securitization structures.
We continue to have 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 - Single-Family
Mortgage Credit Risk - Monitoring Loan Performance and Characteristics of the Single-
family Credit Guarantee Portfolio and Individual Sellers and Servicers. We also have
recently begun acquiring loans with higher LTV ratios through our Home Possible initiatives, as well as
loans with higher DTI ratios, generally up to 50%, which will increase our exposure to credit risk. Our
efforts to increase access to single-family mortgage credit, including our expanded affordable housing
program and our plan for fulfilling our duty to serve underserved markets, expose us to increased
mortgage 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, property seller,
broker, appraiser, title agent, loan officer, or lender) misrepresented facts about the borrower, underlying
property, or loan, or otherwise engaged in fraud.
We review a sample of loans after we purchase them to determine if they comply 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 under this revised framework,
because our ability to seek recovery or repurchase from sellers is more limited and we must identify
breaches of representations and warranties early in the life of the loan.
Our Loan Advisor Suite offers limited representation and warranty relief for certain loans that satisfy
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Risk Factors
Credit Risk
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. However, there is a risk that the enhanced tools
and processes provided by the Loan Advisor Suite will not enable us to identify all breaches in a timely
manner. For more information, see MD&A - Risk Management - 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 return or result in losses on our single-family guarantee business, as default rates could
be higher than we expected when we issued the guarantees;
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.
For more information regarding these risks, see MD&A - Risk Management - Credit Risk.
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 such volumes could adversely affect these counterparties, which could increase our exposure to
counterparty credit risk.
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 major counterparties include seller/servicers, mortgage and credit insurers, and counterparties to
derivatives, 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. Efforts we take to reduce exposure to financially weak
counterparties could concentrate our exposure to other counterparties, 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.
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Risk Factors
Credit Risk
Credit risk related to single-family 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, the complexity of the servicing
function, and heightened liquidity requirements 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 transferring large servicing portfolios. If we replace a
servicer, we would likely incur costs and potential increases in servicing fees. We may also be
exposed to concentrations of credit risk among certain servicers.
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 representation and warranty framework, revised 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 - A large and increasing
volume of our single-family loans are acquired from and serviced by non-depository and smaller
financial institutions. 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. 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, these
servicers may not always have ready access to appropriate sources of liquidity to finance their
operations, particularly during periods when the mortgage market is experiencing a downturn. If
these servicers reduce their servicing portfolios, overall servicing capacity may be constrained.
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
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Risk Factors
Credit Risk
could potentially cause a decline in their servicing performance.
We are also exposed to settlement risk on the non-performance of sellers and servicers as a result of
our forward settlement loan purchase programs in our single-family and multifamily businesses.
For more information, see MD&A - Risk Management - Counterparty Credit Risk - Sellers and
Servicers.
Credit risk related to counterparties to derivatives, funding, 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 the collateral or margin posted with the
clearing member or clearinghouse.
We are a clearing member of the clearinghouses through which we execute mortgage-related and
Treasury 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.
Certain of our derivatives counterparties and a major derivatives clearinghouse are based in the United
Kingdom. If these entities are adversely affected by Brexit, this could affect their ability to do business
with us, potentially resulting in further concentration of our exposure to other derivative counterparties,
as well as reduced liquidity and increased costs in the derivatives market.
For more information, see MD&A - Risk Management - Counterparty Credit Risk - Financial
Intermediaries, Clearinghouses, and Other Counterparties - Other Counterparties.
Credit risk related to mortgage and credit insurers
It is unlikely that we will receive full payment of our claims from a few of the mortgage insurers of 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 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 generally do not select the
mortgage insurance provider on a specific loan because the selection is usually made by the lender at
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Risk Factors
Credit Risk
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 - Counterparty Credit Risk - Credit
Enhancement Providers.
Our loss mitigation activities may be unsuccessful or 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
generally bear the full cost of the monthly payment reductions related to modifications of loans we own
or guarantee, as well as all applicable servicer incentive fees for our mortgage modifications.
We could be required to make changes to our loss mitigation activities that could make these activities
more costly to us. FHFA, as Conservator, may continue to issue directives and Advisory Bulletins to
assist borrowers and align servicing practices for the GSEs. These directives could make these activities
more costly to us, especially with regard to loan modification initiatives. FHFA may continue to issue
these directives for a variety of reasons, including consumer relief and alignment of security prepayment
behavior as the GSEs transition to the UMBS.
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.
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 -
Single-Family Mortgage Credit Risk - Engaging in Loss Mitigation Activities.
We have been, and will continue to be, adversely affected by delays and deficiencies in the
single-family foreclosure process.
The average length of time for foreclosure of a Freddie Mac loan has significantly increased since 2008,
particularly in states that require a judicial foreclosure process, and may further increase. Delays in the
foreclosure process could:
Cause our expenses to increase. For example, properties awaiting foreclosure could deteriorate until
we acquire them, resulting in increased expenses to repair and maintain the properties and
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Risk Factors
Credit Risk
Adversely affect trends in home prices regionally or nationally, which could adversely affect our
financial results.
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 borrowers 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 not have adequate insurance
coverage for some of these catastrophic events.
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 at acceptable prices 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,
and they may not prevent us from incurring substantial losses. Most of 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. For many of these transactions, 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.
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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 financial results can be significantly affected by changes in interest rates.
Interest rates can fluctuate for many reasons, including changes in the fiscal and monetary policies of
the federal government and its agencies as well as geopolitical events or changes in general economic
conditions.
Changes in interest rates could adversely affect the cash flows and prepayment rates on assets that we
own and related debt and derivatives. In addition, changes in interest rates could adversely affect the
prepayment rate or default 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 and
A borrower's payments on loans with adjustable payment terms, including any additional debt
obligations (such as home equity lines of credit and second liens) with such terms, may increase,
which in turn increases the risk that the borrower may default on a loan we own or guarantee.
Additionally, we issue callable debt instruments to manage the duration and prepayment risk of
expected cash flows of the mortgage assets we own. We may exercise the option to repay the
outstanding principal balance when interest rates decrease. However, we may replace the called debt
at a higher spread rate due to the market conditions at that time. In the event we decide not to call our
debt, we may incur higher hedging costs.
We incur costs to manage these risks, which may not be successful. 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 certain of our 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.
We use 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.
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
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Risk Factors
Market Risk
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, derivatives, 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 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.
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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, the amount of change to our core systems required to keep pace with
regulatory and other requirements and business initiatives, and the ever-changing cybersecurity
landscape. 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, disruption of our business (e.g.,
issuing mortgage and/or debt securities), incorrect payments to investors in our securities, errors in our
financial statements, liability to customers or investors, further legislative or regulatory intervention,
reputational damage, and financial and economic loss.
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. This information may be incorrect, or we may fail to properly manage or analyze it.
The transactions we process are complex and are subject to various legal, accounting, and regulatory
standards, which 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 contain design flaws or may fail to operate
properly, adversely affecting our ability to process these transactions, including our ability to compile
and process legally required information. We have certain systems that require manual support and
intervention, which may lead to heightened risk of system failures. 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 technological connections with our customers, counterparties, service providers, and other financial
institutions continue 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 are in the process of migrating a number of our core information technology and other systems and
customer-facing applications to a third-party cloud infrastructure platform. If we do not execute the
transition to these new environments in a well-managed, secure, and effective manner, we may
experience unplanned service disruption or unforeseen costs which may harm our business and
operating results. In addition, our cloud infrastructure providers, or other service providers, could
experience system breakdowns or failures, outages, downtime, cyber-attacks, adverse changes to
financial condition, bankruptcy, or other adverse conditions, which could have a material adverse effect
on our business and reputation. Thus, our plans to increase the amount of our infrastructure that we
outsource to "the cloud" or to other third parties may increase our risk exposure.
We 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 create increased operational risk for
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Risk Factors
Operational Risks
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 UMBS with Fannie Mae
and CSS and the development and operation of the CSP. The transition to the CSP presents significant
operational and technological challenges. In addition, we will increasingly rely on CSS and the CSP
(which is owned and operated by CSS) for the operation of our single-family securitization activities,
particularly after implementation of the UMBS and other aspects of the Single Security initiative, which
are currently scheduled for June 3, 2019. Our business activities would be adversely affected and the
market for Freddie Mac securities would be disrupted if the CSP were to fail or otherwise become
unavailable to us or if CSS were unable to perform its obligations to us, including as a result of an
operational failure by Fannie Mae. In the event of a CSS operational failure, we may be unable to issue
certain new single-family mortgage-related securities, and investors in mortgage-related securities
hosted on the CSS platform may experience payment delays. 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, such as from a terrorist event or natural disaster, could significantly
adversely affect our ability to conduct normal business operations. 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 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, or 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. In addition, there
have been cases where hackers have misled company personnel into making unauthorized transfers of
funds to the hackers' accounts.
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Risk Factors
Operational Risks
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, denial-of-service, and phishing, 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.
Because we are interconnected with and dependent on third-party vendors, exchanges, clearinghouses,
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. Our exposure to these risks could increase as a
result of our proposed migration of core systems and applications to a third-party cloud environment.
Although we devote significant resources to protecting our critical assets and provide employee
awareness training about 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 institutions, 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. Although to date we have not experienced any
cyberattacks resulting in significant impacts to the company, there is no assurance that our
cybersecurity risk management program will prevent cyberattacks from having significant impacts in the
future. We have obtained insurance coverage relating to cybersecurity risks, but this insurance may not
be sufficient to provide adequate loss coverage.
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, or
otherwise harm our business. We could also face regulatory and other legal action, including for any
failure to provide timely disclosure concerning, or appropriately to limit trading in our securities following,
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Risk Factors
Operational Risks
an attack. We might be required to expend significant additional resources to modify our internal
controls and other 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 a breach of their security measures, may result
in harm to our business and business relationships.
We rely on third parties for certain important functions. Any failures by those vendors and
service providers (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 exposes us to the risk of 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, including in connection with a proposal to expand
our use of public cloud services. If one or more of these key external parties were not able to perform
their functions for a period of time, perform them at an acceptable service level or handle increased
volumes, or if one of them experiences a disruption in its own business or technology from any cause,
our business operations could be constrained, disrupted, or otherwise negatively affected. Our use of
vendors also exposes us to the risk of losing intellectual property or confidential information and to other
harm, including to our reputation. Our ability to monitor the activities or performance of vendors and
service providers 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.
We use models to project significant factors in our businesses, including, but not limited to, interest
rates and house prices under a variety of scenarios. We also use models to project borrower
prepayment and default behavior and loss severity over long periods of time. Models are inherently
imperfect predictors of actual results. 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 design, 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.
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
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Risk Factors
Operational Risks
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 selected third-party 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 processes by
which these 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, securitization, and
credit risk transfer of loans; the purchase and sale of securities; funding; the setting of guarantee fee
prices; and the management of interest-rate, market, and 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 use 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 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, including:
Market and other factors;
Changes in U.S. government support for us; and
Reduced demand for our debt securities.
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.
Prolonged wide market spreads on long-term debt could cause us to reduce our long-term debt
issuances and increase our reliance on short-term and callable debt issuances. Such increased reliance
on short-term and callable debt 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. Greater derivatives use could increase
the variability of our comprehensive income or increase our credit exposure to our counterparties.
Additionally, we may incur higher hedging costs in the event we decide not to call our debt.
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 have limited ability to use the less liquid assets in our mortgage-related investments
portfolio as a significant source of liquidity (e.g., through sales or as collateral in secured borrowing
transactions).
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. Unlike
certain of our competitors, we do not have access to the Federal Reserve's discount window or
emergency credit facilities.
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Risk Factors
Liquidity Risks
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. 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 several factors relating to U.S. government
support, including:
Uncertainty about the future of the GSEs;
Any concerns by debt investors that we face increasing risk of being placed in receivership; and
Future draws that significantly reduce the amount of available funding remaining under the Purchase
Agreement.
The amount of the net worth sweep dividends we pay to Treasury 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.
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 investors to purchase and hold our
debt securities can be influenced by many factors, including changes in the world economy, changes in
exchange rates, and regulatory and political factors, as well as the availability of and investor
preferences for other investments. We compete for debt funding with Fannie Mae, the FHLBs, and other
institutions. Our funding costs and liquidity contingency plans may also be affected by changes in the
amount of, and demand for, debt issued by Treasury.
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 a result of our having reached the Purchase Agreement limits on the size of
our mortgage-related investments portfolio and the amount of our unsecured debt. This could lead to a
decrease in demand for our debt securities and an increase in our funding costs.
See MD&A - Our Business Segments - Capital Markets for a description of our debt issuance
programs.
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
two nationally recognized statistical rating organizations (S&P and Moody's). 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.
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Risk Factors
Liquidity Risks
In addition to a downgrade in the credit ratings of or outlook on the U.S. government, several 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.
For more information, see MD&A - Liquidity and Capital Resources - Liquidity Profile -
Primary Sources of Funding - 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, regulatory or judicial actions at the
federal, state, and local levels. Such 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.
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;
Limits or otherwise adversely affects the rights of a holder of a first lien on a mortgage (such as by
granting priority rights in foreclosure proceedings for homeowner associations or providing 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 as well as the protection of material, non-public information. Our
business could be adversely affected if we fail to protect the confidentiality of such information or if it is
mishandled or misused.
Regulatory changes related to the Dodd-Frank Act, including expiration or modification of the temporary
exemption for GSE-eligible mortgages included in the CFPB's Qualified Mortgage Rule, could cause or
require us to make 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. 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 sell loans to
us, either of which could adversely affect the number of loans available for us to purchase or guarantee.
In addition, the emerging regulatory framework based on the Basel III standards developed by the Basel
Committee on Banking Supervision could decrease demand for our debt and mortgage-related
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202
Risk Factors
Legal and Regulatory Risks
securities and/or affect competition in the market for loan originations and servicing, with possible
adverse consequences for our business and financial results. The phase-in of enhanced capital and
liquidity requirements for banking organizations may also 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.
We may make certain changes to our business in an attempt to meet our housing goals and
duty to serve requirements, which may adversely affect our profitability.
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. We
may also make changes to our business 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 operated under an FHFA-approved housing plan that
addressed achievement of the missed goals through 2018. FHFA has not required us to extend the
housing plan beyond 2018, but it will continue to closely monitor and evaluate our housing goals
performance in 2018 and 2019, and could require us to take additional steps or operate under a housing
plan again in the future.
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 related costs and expenses. 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 related 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 our reserves 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, numerous 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.
FREDDIE MAC | 2018 Form 10-K
203
Risk Factors
Other Risks
OTHER RISKS
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 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.
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. 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. 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 charge upfront fees for higher levels of
credit risk, sellers' retention of loans with better credit characteristics could result in us having lower
overall purchase volumes and a more adverse credit risk profile, reducing our revenues and returns.
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 or limit our ability to meet such
competition.
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Risk Factors
Other Risks
A significant decline in the price performance of or demand for our PCs could have an
adverse effect on the volume and/or profitability of our new single-family guarantee
business.
The price performance of our PCs relative to comparable Fannie Mae securities is one of Freddie Mac's
more significant risks and competitive issues. 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
profitability of our new single-family guarantee business are directly affected by the price performance of
our PCs relative to comparable Fannie Mae securities.
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 their price performance 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, 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 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.
The Single Security initiative is intended to reduce the pricing disparity between UMBS (the successor to
the Gold PC) issued by us and UMBS issued by Fannie Mae. There can be no assurance that the UMBS
will be successful or that the pricing disparity will be eliminated or reduced. Freddie Mac is currently
expected to cease issuing Gold PCs on June 3, 2019.
The initiative to develop the UMBS presents increased operational and counterparty risk. If
this initiative is not successfully implemented or if the UMBS does not receive widespread
market acceptance, the liquidity and price performance of our single-family mortgage-
related securities and our market share and profitability could be adversely affected.
In accordance with FHFA's 2014 Strategic Plan and the Conservatorship Scorecards, we are developing
a single (common) security, the UMBS, 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
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Risk Factors
Other Risks
requires significant changes to trading processes and systems of key market participants. It is possible
that we could experience a disruption in the liquidity of Freddie Mac mortgage-related securities during
the period in which we transition to the UMBS and other aspects of the Single Security initiative.
Although we expect to employ various strategies as needed to support the transition to and liquidity of
the UMBS, these strategies may fail or adversely affect our business, and they may be discontinued at
any time. We have been required by FHFA to align certain of our single-family mortgage purchase
offerings, servicing, and securitization practices with Fannie Mae to achieve market acceptance of the
UMBS and other aspects of the Single Security initiative, but there can be no assurance that the UMBS
will reduce the pricing disparities discussed above. These alignment activities may adversely affect our
business and our ability to compete with Fannie Mae. We may be required to further align our business
processes with those of Fannie Mae. Uncertainty concerning the timing of implementation of the UMBS
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 UMBS and other aspects of the Single
Security initiative receive widespread market acceptance.
It is possible that uncertainty surrounding the implementation and overall impact of the UMBS could
contribute to declines in the liquidity or market value of our single-family mortgage-related securities.
The industry has expressed concerns that Freddie Mac and Fannie Mae UMBS may not be truly
fungible. If investors do not accept the fungibility of Freddie Mac and Fannie Mae UMBS or if investors
prefer Fannie Mae UMBS over Freddie Mac UMBS, it could have a significant adverse impact on our
business, liquidity, financial condition, net worth, and results of operations, and could adversely affect
the liquidity or market value of our single-family mortgage-related securities.
The Single 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 certain 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 respective Purchase Agreements with Treasury) to avoid a
liquidity event or default. We are not planning to modify our liquidity strategies to address the possibility
of non-timely payment by Fannie Mae.
The profitability of our multifamily business could be adversely affected by a significant
decrease in demand for our K Certificates and SB Certificates.
Our current multifamily business model is highly dependent on our ability to finance purchased
multifamily loans through securitization into K Certificates and SB Certificates. A significant decrease in
demand for K Certificates and SB Certificates could have an adverse impact on the profitability of the
multifamily business to the extent that our holding period for the loans increases and we are exposed to
credit, spread, and other market risks for a longer period of time or receive reduced proceeds from
securitization. We employ various strategies to support the liquidity of our K Certificates and SB
Certificates, but 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 K Certificates and SB Certificates.
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Risk Factors
Other Risks
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 discontinuance of LIBOR after 2021 could negatively affect the fair value of our financial
assets and liabilities, results of operations, and net worth. A transition to an alternative
reference interest rate could present operational problems and result in market disruption,
including inconsistent approaches for different financial products, as well as disagreements
with counterparties.
The Chief Executive of the United Kingdom's Financial Conduct Authority (FCA) has announced the
FCA's intention to cease sustaining LIBOR after 2021. He has also indicated that market participants
should expect LIBOR to be subsequently discontinued and should proceed expeditiously with
preparations for transitioning to an alternative reference interest rate. U.S. regulators have made similar
statements.
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. Based on the ARRC's
recommendation, the Federal Reserve Bank of New York began publishing the Secured Overnight
Financing Rate (SOFR) and two other alternative rates beginning in April 2018. Since then, certain
derivative products and debt securities tied to SOFR have been introduced, and various industry groups
have continued working to develop plans and documentation to facilitate a transition to SOFR as the
new market benchmark.
We are not able to predict whether LIBOR will actually cease to be available after 2021, whether SOFR
will become the market benchmark in its place, or what impact such a transition may have on our
business, results of operations, and financial condition. We have various financial products, including
mortgage loans, mortgage-related securities, other debt securities, and derivatives, that are tied to
LIBOR, and we continue to enter into transactions involving such products that will mature after 2021.
While the documentation for many of these products provides us with discretion to select an alternative
reference rate if LIBOR is discontinued, there is a possibility of disagreement with counterparties
concerning our exercise of this discretion.
The selection of SOFR as the alternative reference rate for these products currently presents certain
market concerns, because a term structure for SOFR has not yet developed, and there is not yet a
generally accepted methodology for adjusting SOFR, which represents an overnight, risk-free rate, so
that it will be comparable to LIBOR, which has various tenors and reflects a risk component. In addition,
SOFR may not be a suitable alternative to LIBOR for all of our financial products, and it is uncertain what
other rates might be appropriate for that purpose. Although the majority of the ARMs we currently
purchase are tied to LIBOR, we also currently purchase ARMs tied to other indices, including constant
maturity Treasury indices published by the Federal Reserve Board. It is uncertain whether these other
indices will remain acceptable alternatives for such products, or how long it will take us to develop the
systems and processes necessary to purchase ARMs tied to SOFR or other new indices. Inconsistent
approaches to a transition from LIBOR to an alternative rate among different market participants and for
different financial products may cause market disruption and operational problems, which could
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207
Risk Factors
Other Risks
adversely affect us, including by exposing us to increased basis risk and resulting costs in connection
with our hedging and other business activities.
FREDDIE MAC | 2018 Form 10-K
208
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. Some of these cases also have
challenged the constitutionality of the structure of FHFA. 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 Eastern District of Pennsylvania. In addition,
plaintiffs are appealing a July 2018 order by the U.S. District Court for the District of Minnesota to
dismiss the case in that Court. Plaintiffs also 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; the U.S. Court of Appeals for the
Fifth Circuit is considering the appeal en banc. 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 | 2018 Form 10-K
209
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
Holders
As of February 1, 2019, we had 1,632 common stockholders of record.
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. At December 31, 2018, no stock options were outstanding. See Note 11
for more information.
ISSUER PURCHASES OF EQUITY SECURITIES
We did not repurchase any of our common or preferred stock during 2018. 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 | 2018 Form 10-K
210
Financial Statements
Financial Statements and
Supplementary Data
FREDDIE MAC | 2018 Form 10-K
211
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, 2018 and
2017, 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, 2018, 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, 2018, 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, 2018 and 2017, and the results of
its operations and its cash flows for each of the three years in the period ended December 31, 2018 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, 2018, 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 2018 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 | 2018 Form 10-K
212
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 FHFA, as Conservator, provided for the Board of
Directors to perform certain functions and to oversee management and the Board delegated to
management authority to conduct business operations 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 14, 2019
We have served as the Company's auditor since 2002.
FREDDIE MAC | 2018 Form 10-K
213
Financial Statements
Consolidated Statements of Comprehensive Income
FREDDIE MAC
Consolidated Statements of Comprehensive Income
(Loss)
(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)
Guarantee fee income
Mortgage loans gains (losses)
Investment securities gains (losses)
Debt gains (losses)
Derivative gains (losses)
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 (loss) before income tax (expense) benefit
Income tax (expense) benefit
Net income (loss)
Other comprehensive income (loss), net of taxes and reclassification adjustments:
Changes in unrealized gains (losses) related to available-for-sale securities
Changes in unrealized gains (losses) related to cash flow hedge relationships
Changes in defined benefit plans
Total other comprehensive income (loss), net of taxes and reclassification adjustments
Comprehensive income (loss)
Net income (loss)
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,
2017
2016
2018
$66,037
3,035
982
70,054
(58,033)
12,021
736
12,757
811
724
(695)
720
1,270
714
3,544
(1,227)
(486)
(580)
(2,293)
(169)
(1,484)
(881)
(4,827)
11,474
(2,239)
9,235
(722)
114
(5)
(613)
$8,622
$9,235
(5,623)
$3,612
$1.12
3,234
$63,735
3,415
657
67,807
(53,643)
14,164
84
14,248
662
2,026
1,036
151
(1,988)
4,982
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
513
200
(269)
(473)
(274)
803
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
FREDDIE MAC | 2018 Form 10-K
214
Financial Statements
Consolidated Balance Sheets
FREDDIE MAC
Consolidated Balance Sheets
(In millions, except share-related amounts)
Assets
Cash and cash equivalents (Notes 1, 3, 14) (includes $596 and $2,963 of restricted cash and cash
equivalents)
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 $23,106 and $20,054 at fair value)
Mortgage loans held-for-investment (Notes 3, 4) (net of allowance for loan losses of $6,139 and $8,966)
Accrued interest receivable (Note 3)
Derivative assets, net (Notes 9, 10)
Deferred tax assets, net (Note 12)
Other assets (Notes 3, 18) (includes $3,929 and $3,353 at fair value)
Total assets
Liabilities and equity
Liabilities
Accrued interest payable (Note 3)
Debt, net (Notes 3, 8) (includes $5,112 and $5,799 at fair value)
Derivative liabilities, net (Notes 9, 10)
Other liabilities (Notes 3, 18)
Total liabilities
Commitments and contingencies (Notes 5, 9, 16)
Equity (Note 11)
Senior preferred stock (redemption value of $75,648 and $75,336)
Preferred stock, at redemption value
Common stock, $0.00 par value, 4,000,000,000 shares authorized, 725,863,886 shares issued and
650,058,775 shares and 650,054,731 shares outstanding
Additional paid-in capital
Retained earnings (accumulated deficit)
AOCI, net of taxes, related to:
Available-for-sale securities (includes $221 and $593, 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, 75,805,111 shares and 75,809,155 shares
Total equity (See Note 11 for information on our dividend requirement to Treasury)
Total liabilities and equity
As of December 31,
2018
2017
$7,273
34,771
69,111
41,622
1,885,356
6,728
335
6,888
10,976
$2,063,060
$6,652
2,044,950
583
6,398
2,058,583
72,648
14,109
—
—
(78,260)
83
(315)
97
(135)
(3,885)
4,477
$2,063,060
$9,811
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
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: (Note 3)
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 | 2018 Form 10-K
As of December 31,
2018
2017
$1,842,850
20,237
$1,863,087
$1,792,677
5,335
$1,798,012
$1,774,286
25,753
$1,800,039
$1,720,996
5,030
$1,726,026
215
Financial Statements
Consolidated Statements of Equity
FREDDIE MAC
Consolidated Statements of Equity
(In millions)
Balance at December 31, 2015
Comprehensive income (loss):
Net income (loss)
Other comprehensive income (loss), net of
taxes
Comprehensive income (loss)
Senior preferred stock dividends declared
Ending balance at December 31, 2016
Balance at December 31, 2016
Comprehensive income (loss):
Net income (loss)
Other comprehensive income (loss), net of
taxes
Comprehensive income (loss)
Senior preferred stock dividends declared
Ending balance at December 31, 2017
Balance at December 31, 2017
Comprehensive income (loss):
Net income (loss)
Other comprehensive income (loss), net of
taxes
Comprehensive income (loss)
Cumulative effect of change in accounting
principle(1)
Increase in liquidation preference
Senior preferred stock dividends declared
Ending balance at December 31, 2018
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
$—
$—
($80,773)
$1,153
($3,885)
$2,940
—
—
—
—
464
464
—
—
—
—
464
464
—
—
—
—
—
—
—
—
—
—
650
650
—
—
—
—
650
650
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$72,336
$72,336
$14,109
$14,109
—
—
—
—
—
—
—
—
$72,336
$72,336
$14,109
$14,109
—
—
—
—
312
—
—
—
—
—
—
—
—
—
—
—
$—
$—
—
—
—
—
$—
$—
—
—
—
—
—
—
—
—
—
—
$—
$—
—
—
—
—
$—
$—
—
—
—
—
—
—
7,815
—
— 7,815
—
7,815
(4,983)
($77,941)
($77,941)
(697)
(697)
—
$456
$456
—
(697)
— 7,118
— (4,983)
($3,885)
$5,075
($3,885)
$5,075
5,625
—
— 5,625
—
5,625
(10,945)
($83,261)
($83,261)
(67)
(67)
—
$389
$389
—
(67)
— 5,558
— (10,945)
($3,885)
($312)
($3,885)
($312)
9,235
—
9,235
(89)
—
(4,145)
—
— 9,235
(613)
(613)
89
—
—
—
(613)
— 8,622
—
—
—
312
— (4,145)
464
650
$72,648
$14,109
$—
$—
($78,260)
($135)
($3,885)
$4,477
(1)
Includes the effect of adopting the accounting guidance on reclassification of stranded tax effects of the Tax Cuts and Jobs Act. See Note 1 and
Note 11 for additional information.
The accompanying notes are an integral part of these consolidated financial statements.
FREDDIE MAC | 2018 Form 10-K
216
Financial Statements
Consolidated Statements of Cash Flows
FREDDIE MAC
Consolidated Statements of Cash Flows
(In millions)
Cash flows from operating activities
Year Ended December 31,
2017
2016
2018
Net income (loss)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
$9,235
$5,625
$7,815
Derivative (gains) losses
Asset-related amortization — premiums, discounts, and basis adjustments
Debt-related amortization — premiums and discounts on certain debt securities and basis adjustments
Debt (gains) losses
(Benefit) provision for credit losses
Mortgage loans (gains) losses
Investment securities (gains) losses
Hedge accounting earnings mismatch
Deferred income tax expense (benefit)
Purchases of mortgage loans acquired as held-for-sale
Proceeds from 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
Change in Interest payable
Change in 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
Advances under secured lending arrangements
Repayments of secured lending arrangements
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 (used in) 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
Increase in liquidation preference of senior preferred stock
Payment of cash dividends on senior preferred stock
Changes in other liabilities
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents (includes restricted cash and cash equivalents)
Cash and cash equivalents (includes restricted cash and cash equivalents) at the beginning of year
Cash and cash equivalents (includes restricted cash and cash equivalents) at end of period
Supplemental cash flow information
Cash paid for:
Debt interest
Income taxes
Non-cash investing and financing activities (Notes 4 and 7)
The accompanying notes are an integral part of these consolidated financial statements.
(1,450)
5,282
(7,399)
(720)
(736)
(724)
695
658
1,391
(70,482)
66,889
494
(282)
(373)
440
(1,269)
(975)
674
(131,977)
126,012
11,375
(19,701)
21,952
6,002
(151,836)
10,661
248,115
(27,463)
1,592
1,336
21,132
3,020
(572)
119,648
217,574
(275,402)
574,472
(635,669)
312
(4,145)
(2)
(122,860)
(2,538)
9,811
$7,273
370
6,038
(8,653)
(151)
(84)
(2,026)
(1,036)
(357)
7,773
(64,827)
61,744
306
(377)
(220)
273
1,912
(2,086)
4,224
(160,333)
150,448
8,570
(10,549)
23,034
11,758
(126,162)
8,883
277,819
(35,452)
—
1,861
(4,355)
(538)
(428)
144,556
191,638
(303,142)
613,280
(652,017)
—
(10,945)
(3)
(161,189)
(12,409)
22,220
$9,811
(1,516)
7,089
(10,151)
473
(803)
(200)
269
—
2,787
(48,379)
49,350
1,259
(585)
(61)
(52)
(1,230)
(1,670)
4,395
(104,045)
79,095
22,244
(28,306)
20,699
15,869
(169,948)
4,507
340,348
(30,730)
—
2,519
12,096
555
(357)
164,546
254,236
(355,020)
659,108
(720,184)
—
(4,983)
(6)
(166,849)
2,092
20,128
$22,220
$65,721
2,125
$63,574
1,872
$60,862
2,324
FREDDIE MAC | 2018 Form 10-K
217
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 authority provided by FHFA to our Board of
Directors to oversee management's conduct of our business operations. 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, expenses, gains, and losses during
the reporting period. Management has made significant estimates in preparing the financial statements
for establishing the allowance for credit losses and valuing financial instruments and other assets and
liabilities. Actual results could be different from these estimates.
FREDDIE MAC | 2018 Form 10-K
218
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
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 a majority of a limited partnership's kick-out rights
through voting interests. 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. Cash collateral accepted from counterparties that we do not have the right to
use for general corporate purposes is classified as restricted cash on 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:
Unrealized gains and losses on available-for-sale securities;
Unrealized gains and losses related to 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.
FREDDIE MAC | 2018 Form 10-K
219
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
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 | 2018 Form 10-K
220
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
Recently Issued Accounting Guidance
Recently Adopted Accounting Guidance
Standard
Description
ASU 2014-09, Revenue
from Contracts with
Customers (Topic 606) and
ASU 2015-14, Topic 606:
Deferral of the Effective
Date
The amendment requires entities to recognize
revenue to depict the transfer of promised goods
or services to customers in amounts that reflect
the consideration to which the entity expects to be
entitled in exchange for those goods or services.
ASU 2015-14 defers the effective date of ASU
2014-09 for all entities by one year.
Date of
Adoption
January 1,
2018
Effect on Consolidated Financial
Statements
The adoption of the amendment did
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, Topic 606:
Principal versus Agent
Considerations (Reporting
Revenue Gross versus Net)
ASU 2016-10, Topic 606:
Identifying Performance
Obligations and Licensing
The amendment addresses certain aspects of
recognition, measurement, presentation, and
disclosure of financial instruments.
January 1,
2018
The adoption of the amendment did
not have a material effect on our
consolidated financial statements or
on our disclosures.
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 amendments did
not have a material effect on our
consolidated financial statements or
on our disclosures.
The amendments in this Update do not change the
core principle of the guidance in Topic 606, but
they clarify two issues: i) identifying performance
obligations and ii) licensing. These clarifications
are intended to reduce diversity in practice and to
reduce the cost and complexity of Topic 606 at
transition and on an ongoing basis.
January 1,
2018
The adoption of the amendments did
not have a material effect on our
consolidated financial statements or
on our disclosures.
ASU 2016-12, Topic 606:
Narrow-Scope
Improvements and Practical
Expedients
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
The adoption of the amendments did
not have a material effect on our
consolidated financial statements or
on our disclosures.
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 amendments in this Update primarily address
the diversity in practice that currently exists in
regard 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
Upon adoption of the amendments, the
portion of the cash payment
attributable to the accreted interest
related to zero-coupon debt is
presented in the operating activities
section, a classification change from
the financing activities section where
this item was previously presented. As
a result, we reclassified 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
December 31, 2016.
FREDDIE MAC | 2018 Form 10-K
221
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
Recently Adopted Accounting Guidance
Standard
Description
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.
Date of
Adoption
January 1,
2018
Effect on Consolidated Financial
Statements
The adoption of the amendments did
not have a material effect on our
consolidated financial statements;
however, we modified the presentation
of restricted cash and cash equivalent
balances on our consolidated balance
sheets. The presentation of our
consolidated statements of cash flows
has also been revised to reflect the
change of total cash and cash
equivalents and restricted cash and
cash equivalents balances.
ASU 2016-20, Technical
Corrections and
Improvements to Topic 606
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.
January 1,
2018
The adoption of the amendments did
not have a material effect on our
consolidated financial statements or
on our disclosures.
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 amendments did
not have a material effect on our
consolidated financial statements or
on our disclosures.
The amendments clarify certain aspects of the
guidance issued in Update 2016-01 and address
six specific issues.
January 1,
2018
The adoption of the amendments did
not have a material effect on our
consolidated financial statements or
on our disclosures.
ASU 2018-02, Income
Statement—Reporting
Comprehensive Income
(Topic 220):
Reclassification of Certain
Tax Effects from
Accumulated Other
Comprehensive Income
ASU 2018-03, Technical
Corrections and
Improvements to Financial
Instruments—Overall
(Subtopic 825-10)
Recognition and
Measurement of Financial
Assets and Financial
Liabilities
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.
Date of
Planned
Adoption
January 1,
2019
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.
FREDDIE MAC | 2018 Form 10-K
222
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 2016-13, 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,
2020
ASU 2018-13, Fair Value
Measurement (Topic 820):
Disclosure Framework -
Changes to the Disclosure
Requirements for Fair Value
Measurement
The amendments in this Update modify the
disclosure requirements on fair value
measurements in Topic 820, Fair Value
Measurements, based on the concepts in the
Concepts Statement, including the consideration of
costs and benefits. Certain disclosure
requirements were either removed, modified, or
added.
January 1,
2020
Effect on Consolidated Financial
Statements
We have developed our models to
estimate lifetime expected credit
losses on our financial instruments
measured at amortized cost primarily
using a discounted cash flow
methodology. These models are
currently undergoing testing and
validation. The amendments will be
applied through a cumulative effect
adjustment to retained earnings as of
the beginning of the year of adoption.
While we are not able to reasonably
estimate the effect that the adoption of
these amendments will have on our
consolidated financial statements, it
may increase (perhaps substantially)
our allowance for credit losses in the
period of adoption.
On October 1, 2018, we adopted the
amendments to remove or modify
certain disclosures, which did not have
a material effect on the notes to our
consolidated financial statements. We
are delaying adoption of the
amendments to add certain
disclosures until their effective date.
We are evaluating the effect that the
adoption of the additional disclosures
will have on the notes to our
consolidated financial statements.
The amendments in this Update align the
requirements for capitalizing implementation costs
incurred in a hosting arrangement that is a service
contract with the requirements for capitalizing
implementation costs incurred to develop or obtain
internal-use software (and hosting arrangements
that include an internal-use software license).
January 1,
2020
We do not expect that the adoption of
these amendments will have a
material effect on our consolidated
financial statements.
The amendments in this Update permit the OIS
rate based on SOFR, as an eligible U.S. benchmark
interest rate for purposes of applying hedge
accounting under Topic 815.
January 1,
2019
We do not expect that the adoption of
these amendments will have a
material effect on our consolidated
financial statements.
ASU 2018-15, Intangibles -
Goodwill and Other -
Internal-Use Software
(Subtopic 350-40):
Customer's Accounting for
Implementation Costs
Incurred in a Cloud
Computing Arrangement
That Is a Service Contract
ASU 2018-16, Derivatives
and Hedging (Topic 815):
Inclusion of the Secured
Overnight Financing Rate
(SOFR) Overnight Index
Swap (OIS) Rate as a
Benchmark Interest Rate for
Hedge Accounting Purposes
FREDDIE MAC | 2018 Form 10-K
223
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 2018-17,
Consolidation (Topic 810):
Targeted Improvements to
Related Party Guidance for
Variable Interest Entities
ASU 2018-20, Leases
(Topic 842): Narrow-Scope
Improvements for Lessors
The amendments in this Update require that
indirect interests held through related parties
under common control be considered on a
proportional basis when determining whether fees
paid to decision makers or service providers are
variable interests. These amendments align with
the determination of whether a reporting entity
within a related party group is the primary
beneficiary of a VIE.
The amendments in this Update address certain
ASU 2016-02 implementation issues including the
recognition of taxes collected from lessees, lessor
costs paid directly by a lessee and recognition of
variable payments for contracts with lease, and
non-lease components.
Date of
Planned
Adoption
January 1,
2020
Effect on Consolidated Financial
Statements
We are evaluating the effect that the
adoption of these amendments will
have on our consolidated financial
statements.
January 1,
2019
We do not expect that the adoption of
these amendments will have a
material effect on our consolidated
financial statements.
FREDDIE MAC | 2018 Form 10-K
224
Financial Statements
Notes to the Consolidated Financial Statements | Note 2
NOTE 2
Conservatorship and Related Matters
Business Objectives
We operate under the conservatorship that commenced on September 6, 2008, conducting our
business under the direction of FHFA, as our Conservator. The conservatorship and related matters
significantly affect our management, business activities, financial condition, and results of operations.
Upon its appointment, FHFA, as Conservator, immediately succeeded to all rights, titles, powers, and
privileges of Freddie Mac, and of any stockholder, officer, or director thereof, with respect to the
company and its assets. The Conservator also succeeded to the title to all books, records, and assets of
Freddie Mac held by any other legal custodian or third party. The Conservator provided for the Board of
Directors to perform certain functions and to oversee management, and the Board delegated to
management authority to conduct business operations so that the company can continue to operate in
the ordinary course. The directors serve on behalf of, and perform such functions as provided 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 since 2014. The annual
Conservatorship Scorecards establish objectives and performance targets and measures for Freddie
Mac and Fannie Mae (the Enterprises) related to the strategic goals set forth in the Strategic Plan.
The 2014 Strategic Plan established three reformulated strategic goals for the conservatorships of
Freddie Mac and Fannie Mae:
Maintain, in a safe and sound manner, foreclosure prevention activities and credit availability for new
and refinanced loans to foster liquid, efficient, competitive, and resilient national housing finance
markets;
Reduce taxpayer risk through increasing the role of private capital in the mortgage market; and
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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 all of the subsequent 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 risk transfer transactions in the multifamily business, and limit 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 UMBS and other aspects of the Single Security
initative.
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 was $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. Our Conservator has not made us aware of any plans to make any significant change
to 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
$140.2 billion as of December 31, 2018. This amount will be reduced by any future draws.
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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 sheets). 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.
Pursuant to the Letter Agreement, the applicable Capital Reserve Amount is $3.0 billion. 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.
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,
2018, the aggregate liquidation preference of the senior preferred stock was $75.6 billion. The liquidation
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preference will increase 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 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;
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 required 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
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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. The Purchase Agreement limit reached $250 billion at December 31, 2018. 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.
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
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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 securities and mortgage guarantee
obligations and
The lesser of:
The deficiency amount and
The maximum amount of the commitment less the aggregate amount of funding previously
provided under the commitment.
Any payment that Treasury makes under those circumstances will be treated for all purposes as a draw
under the Purchase Agreement that will increase the liquidation preference of the senior preferred stock.
Impact of Conservatorship and Related Developments on the
Mortgage-Related Investments Portfolio
For purposes of the limit imposed by the Purchase Agreement and FHFA regulation, the UPB of our
mortgage-related investments portfolio could not exceed $250.0 billion at December 31, 2018 and was
$218.1 billion at that date.
Since 2014, we have been managing the UPB of the mortgage-related investments portfolio so that it
does not exceed 90% of the annual cap established by the Purchase Agreement. In February 2019,
FHFA directed us to maintain the mortgage-related investments portfolio at or below $225 billion at all
times. Our ability to acquire and sell mortgage assets continues to be significantly constrained by
limitations of the Purchase Agreement and those imposed by FHFA.
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Government Support for Our Business
We receive substantial support from Treasury and are dependent upon its continued support in order to
continue operating our business. Our ability to access funds from Treasury under the Purchase
Agreement is critical to:
Keeping us solvent;
Allowing us to focus on our primary business objectives under conservatorship; and
Avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions.
At September 30, 2018, 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, 2018. Since conservatorship began through
December 31, 2018, we have paid cash dividends of $116.5 billion to Treasury at the direction of the
Conservator.
At December 31, 2018, our assets exceeded our liabilities under GAAP. As a result, FHFA will not submit
a draw request from Treasury on our behalf. Based on our Net Worth Amount at December 31, 2018 and
the Capital Reserve Amount of $3.0 billion, our dividend requirement to Treasury in March 2019 will be
$1.5 billion.
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
deemed a related party to the U.S. government. During the years ended December 31, 2018, 2017, and
2016, 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
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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, 2018, we contributed $135 million of capital to CSS, and we have contributed $464
million since the fourth quarter of 2014.
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NOTE 3
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 also
use trusts that are VIEs in certain single-family credit risk transfer products.
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 both December 31, 2018 and December 31, 2017, we were the primary beneficiary of, and therefore
consolidated, PC trusts with assets totaling $1.8 trillion. Substantially all of these consolidated trusts
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were single-family PC trusts. During the years ended December 31, 2018 and December 31, 2017, we
issued approximately $310.9 billion and $347.7 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 full
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.
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
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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 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 $26.1 billion and $3.6 billion, at
December 31, 2018 and December 31, 2017, respectively.
We do not consolidate single-family senior subordinate securitization structures when 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 that we do not
consolidate 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 2018 and 2017, we issued
approximately $8.4 billion and $6.8 billion, respectively, of guaranteed securities in these senior
subordinate securitization structures for which a guarantee asset and guarantee obligation were
generally recognized.
Single-Family Other Securitization Products
We are the primary beneficiary of and, therefore, consolidate the trusts used to issue our single-family
other securitization products when 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 these products with underlying assets totaling $3.4 billion and $4.1 billion at December 31, 2018
and December 31, 2017, respectively. We do not consolidate the trusts used to issue our single-family
other securitization products that do not meet these conditions. We have not entered into single-family
other securitization products in several years.
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
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securitization trust. We receive a guarantee fee in exchange for our guarantee. We serve as guarantor of
our K Certificate trusts and, from time to time, as master servicer. However, in contrast to single-family
PC trusts, the rights to direct loss mitigation activities of the underlying loans and to purchase
delinquent loans from the securitization trust are generally 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 and
we do not hold the most subordinate remaining securities, 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 2018 and 2017, we issued approximately $52.2 billion and $48.5 billion, respectively, of K
Certificates for which a guarantee asset and guarantee obligation were generally 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 significant 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 2018 and 2017, we issued approximately $6.3 billion and $4.9 billion, respectively, of SB
Certificates for which a guarantee asset and guarantee obligation were recognized.
Multifamily Other Risk Transfer Securitizations
We are the primary beneficiary of and, therefore, consolidate the trusts used to issue our KT Certificates
and K Certificates without subordination 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 these products with underlying assets totaling $5.0 billion and $4.4 billion at December 31,
2018 and December 31, 2017, respectively. Our multifamily PCs are included in Note 3 -
Securitization Activities - PCs.
We do not consolidate the trusts used to issue our other risk transfer securitization products that do not
meet these conditions, including those trusts that issue ML Certificates, KI Certificates, Q Certificates,
and M Certificates. For those products, we account for our guarantee to the non-consolidated VIE.
During 2018 and 2017, we issued approximately $3.4 billion and $5.6 billion, respectively, of these
securities for which a guarantee asset and guarantee obligation were generally recognized.
FREDDIE MAC | 2018 Form 10-K
236
Financial Statements
CRT Activities
STACR Trust
Notes to the Consolidated Financial Statements | Note 3
In a STACR Trust transaction, we pay a credit premium payment to a trust that issues credit-linked notes
whose repayments are based on the credit performance of a reference pool of mortgage loans. The trust
issues the notes and makes periodic payments of principal and interest on the notes to investors, and
we receive payments from the trust that otherwise would have been made to the noteholders to the
extent there are credit events on the mortgages in the reference pool. The note balances are reduced by
the amount of the payments to us. STACR Trust was designed to create and pass along to its interest
holders the variability related to the credit risk of the mortgages in the reference pool. Because our credit
protection arrangement is a creator rather than an absorber of that variability, we do not have a variable
interest in the risk that the STACR Trust was designed to create and pass along to its interest holders
and do not consolidate the trusts used in the STACR Trust transactions.
Consolidated VIEs
We consolidated the VIEs for which we are the primary beneficiary as discussed above. 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.
FREDDIE MAC | 2018 Form 10-K
237
Financial Statements
Notes to the Consolidated Financial Statements | Note 3
The table below presents the carrying value and classification of the assets and liabilities of
consolidated VIEs on our consolidated balance sheets.
Table 3.1 - Consolidated VIEs
(In millions)
Consolidated Balance Sheet Line Item
Assets:
Cash and cash equivalents (includes $566 and $518 of restricted cash and cash
equivalent)
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
Non-Consolidated VIEs
As of December 31, 2018 As of December 31, 2017
$567
12,125
1,842,850
5,914
1,631
$1,863,087
$5,335
1,792,677
—
$1,798,012
$518
16,750
1,774,286
5,747
2,738
$1,800,039
$5,028
1,720,996
2
$1,726,026
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 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.
FREDDIE MAC | 2018 Form 10-K
238
Financial Statements
Notes to the Consolidated Financial Statements | Note 3
Table 3.2 - Non-Consolidated VIEs
(In millions)
Assets and Liabilities Recorded on our Consolidated Balance Sheets(1)
As of December 31, 2018
As of December 31, 2017
Assets:
Investments in securities, at fair value
Accrued interest receivable
Derivative assets, net
Other assets
Liabilities:
Derivative liabilities, net
Other liabilities
Maximum Exposure to Loss(2)(3)
Total Assets of Non-Consolidated VIEs(3)
$44,020
235
1
3,119
88
3,049
$241,055
$284,724
$51,494
233
7
2,591
—
2,489
$200,196
$232,762
(1)
Includes our variable interests in REMICs and Stripped Giant PCs, K Certificates, SB Certificates, certain senior subordinate securitization
structures, other securitization products, and other risk transfer securitizations that we do not consolidate.
(2) Our maximum exposure to loss includes the guaranteed UPB of assets held by the non-consolidated VIEs, the UPB of unguaranteed securities that
we acquired from these securitization transactions, and the UPB of guarantor advances made to the holders of the guaranteed securities.
(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. In addition, our maximum
exposure to loss excludes certain securitization activity and other mortgage-related guarantees measured at fair value where our exposure may be
unlimited. We generally reduce our exposure to these guarantees with unlimited exposure through separate contracts with third parties.
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 | 2018 Form 10-K
239
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
NOTE 4
Mortgage Loans and Allowance for Credit Losses
The table below provides details of the loans on our consolidated balance sheets as of December 31,
2018 and December 31, 2017.
Table 4.1 - Mortgage Loans
(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
Total loans, net
December 31, 2018
December 31, 2017
Held by
Freddie Mac
Held by
consolidated
trusts
Total
Held by
Freddie Mac
Held by
consolidated
trusts
Total
$20,946
23,959
44,905
(3,283)
41,622
35,885
10,828
46,713
(1,198)
(3,009)
42,506
$84,128
$—
—
—
—
—
$20,946
23,959
44,905
(3,283)
41,622
1,814,008
4,220
1,818,228
27,752
(3,130)
1,842,850
$1,842,850
1,849,893
15,048
1,864,941
26,554
(6,139)
1,885,356
$1,926,978
$17,039
20,537
37,576
(2,813)
34,763
51,893
17,702
69,595
(2,148)
(5,279)
62,168
$96,931
$—
—
—
—
—
1,742,736
3,747
1,746,483
31,490
(3,687)
1,774,286
$1,774,286
$17,039
20,537
37,576
(2,813)
34,763
1,794,629
21,449
1,816,078
29,342
(8,966)
1,836,454
$1,871,217
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-investment or held-for-sale. 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 on 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, unless the fair value option
is elected. Any excess of a held-for-sale loan's cost over its fair value is recognized as a valuation
allowance in mortgage loans gains (losses) on our consolidated statements of comprehensive income,
with changes in this valuation allowance also being recorded in mortgage loans gains (losses).
Premiums, discounts, and other cost basis adjustments (including lower-of-cost-or-fair-value
adjustments) on single-family loans classified as held-for-sale are deferred and not amortized. We
elected the fair value option for certain multifamily loans that we intend to securitize and sell to
investors. Therefore, these multifamily loans are measured at fair value on a recurring basis, with
subsequent gains or losses related to changes in fair value reported in mortgage loans gains (losses) on
FREDDIE MAC | 2018 Form 10-K
240
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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.
The table below provides details of the UPB of loans we purchased, reclassified from held-for-
investment to held-for-sale, and sold.
Table 4.2 - Loans Purchased, Reclassified from Held-for-Investment to Held-for-Sale, and Sold
(In billions)
Single-family:
Purchases
Held-for-investment loans
Reclassified from held-for-investment to held-for-sale(1)
Sale of held-for-sale loans(2)
Multifamily:
Purchases
Held-for-investment loans
Held-for-sale loans
Reclassified from held-for-investment to held-for-sale(1)
Sale of held-for-sale loans(3)
2018
2017
$307.7
$343.0
21.7
10.2
5.0
70.3
1.8
68.1
26.2
8.7
5.3
64.6
1.6
61.9
(1) We reclassify loans from held-for-investment to held-for-sale when we no longer have the intent or ability to hold for the foreseeable future. For
additional information regarding the fair value of our loans classified as held-for-sale, see Note 15.
(2) Our sales of single-family loans reflect the sale of seasoned single-family loans. The sale of seasoned single-family mortgage loans is part of our
strategy to mitigate and reduce our holdings of less liquid assets.
(3) Our sales of multifamily loans occur primarily through the issuance of multifamily K Certificates and SB Certificates. See Note 3 for more
information on our K Certificates and SB Certificates.
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
or more 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 | 2018 Form 10-K
241
Financial Statements
Credit Quality
Single-Family
Notes to the Consolidated Financial Statements | Note 4
The current LTV ratio is one key factor we consider when estimating our allowance for credit losses 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 the Enhanced Relief Refinance
program) 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. 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.
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.
Table 4.3 - Recorded Investment of Single-Family Held-for-Investment Loans by Current LTV
Ratios
(In millions)
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 loans
As of December 31, 2018
Current LTV Ratio
> 80 to 100
> 100(1)
Total
As of December 31, 2017
Current LTV Ratio
> 80 to 100
> 100(1)
Total
$1,336,310
$214,703
$6,654 $1,557,667
$1,240,224
$214,177
$13,303
$1,467,704
251,152
42,117
16,498
$1,646,077
4,522
1,883
1,903
$223,011
157
7
559
255,831
44,007
18,960
$7,377 $1,876,465
270,266
48,596
21,013
$1,580,099
7,351
2,963
4,256
$228,747
381
28
1,429
$15,141
277,998
51,587
26,698
$1,823,987
(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
7.24% and 8.43% as of December 31, 2018 and December 31, 2017, respectively.
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.
Multifamily
The table below presents the recorded investment in our multifamily held-for-investment loans, by credit
quality indicator based on available data through the end of each period presented. These indicators
involve significant management judgment.
FREDDIE MAC | 2018 Form 10-K
242
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
Table 4.4 - Recorded Investment of Multifamily Held-for-Investment Loans by Credit Quality
Indicator
(In millions)
Credit risk profile by internally assigned grade:(1)
As of December 31, 2018 As of December 31, 2017
Pass
Special mention
Substandard
Doubtful
Totals
$14,648
201
181
—
$15,030
$20,963
301
169
—
$21,433
(1) A loan categorized as: "Pass" is current and adequately protected by the current financial strength and debt service capacity of the borrower;
"Special mention" has administrative issues that may affect future repayment prospects but does not have current credit weaknesses;
"Substandard" has a 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.
Mortgage Loan Performance
The following tables present the recorded investment of our single-family and multifamily loans, held-
for-investment, by payment status.
Table 4.5 - Recorded Investment of Held-for-Investment Loans by Payment Status
(In millions)
Single-family:
20 and 30-year or more, amortizing fixed-rate
15-year amortizing fixed-rate
Adjustable-rate
Alt-A, interest-only, and option ARM
Total single-family
Total multifamily
Total single-family and multifamily
(In millions)
Single-family:
20 and 30-year or more, amortizing fixed-rate
15-year amortizing fixed-rate
Adjustable-rate
Alt-A, interest-only, and option ARM
Total single-family
Total multifamily
Total single-family and multifamily
As of December 31, 2018
One
Month
Past Due
Two
Months
Past Due
Three Months or
More Past Due,
or in Foreclosure(1)
Total
Non-accrual
$14,683
1,021
287
793
16,784
—
$16,784
$3,602
171
58
327
4,158
—
$4,158
$6,883
$1,557,667
263
113
865
8,124
—
$8,124
255,831
44,007
18,960
1,876,465
15,030
$1,891,495
$6,881
263
113
864
8,121
17
$8,138
As of December 31, 2017
One
Month
Past Due
Two
Months
Past Due
Three Months or
More Past Due,
or in Foreclosure(1)
Total
Non-accrual
$18,297
1,288
383
1,297
21,265
—
$21,265
$5,660
290
84
509
6,543
—
$6,543
$12,405
$1,467,704
556
205
1,657
14,823
19
$14,842
277,998
51,587
26,698
1,823,987
21,433
$1,845,420
$12,401
556
205
1,656
14,818
64
$14,882
Current
$1,532,499
254,376
43,549
16,975
1,847,399
15,030
$1,862,429
Current
$1,431,342
275,864
50,915
23,235
1,781,356
21,414
$1,802,770
(1)
Includes $2.9 billion and $4.1 billion of loans that were in the process of foreclosure as of December 31, 2018 and December 31, 2017,
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.
FREDDIE MAC | 2018 Form 10-K
243
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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
$7.8 billion and $6.3 billion in UPB of loans from PC trusts (or purchased delinquent loans associated
with other mortgage-related guarantees) during the years ended December 31, 2018 and December 31,
2017, respectively.
The table below summarizes the delinquency rates of loans within our single-family credit guarantee and
multifamily mortgage portfolios.
Table 4.6 - Delinquency Rates
(Dollars in millions)
Single-family:
Non-credit-enhanced portfolio:
Serious delinquency rate
Total number of seriously delinquent loans
Credit-enhanced portfolio:(1)
Primary mortgage insurance:
Serious delinquency rate
Total number of seriously delinquent loans
Other credit protection:(2)
Serious delinquency rate
Total number of seriously delinquent loans
Total Single-family
Serious delinquency rate
Total number of seriously delinquent loans
Multifamily(3)
Non-credit-enhanced portfolio:
Delinquency rate
UPB of delinquent loans
Credit-enhanced portfolio:
Delinquency rate
UPB of delinquent loans
Total Multifamily
Delinquency rate
UPB of delinquent loans
December 31, 2018 December 31, 2017
0.83%
51,197
0.86%
15,287
0.31%
12,920
0.69%
75,649
—%
$2
0.01%
$28
0.01%
$30
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) The credit-enhanced categories are not mutually exclusive, as a single loan may be covered by both primary mortgage insurance and other credit
protection.
(2) 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.
(3) 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
and HARP ended in December 2018. The relief refinance program has been replaced with the Enhanced
Relief Refinance program, which became 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.
FREDDIE MAC | 2018 Form 10-K
244
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
Allowance for Credit Losses
The allowance for credit losses represents estimates of probable incurred credit losses which we
recognize by recording a charge to the provision for credit losses on our consolidated statements of
comprehensive income. The allowance for credit losses includes:
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, SB Certificates, senior subordinate securitization structures (non-consolidated),
other securitization products, and other mortgage-related guarantees.
A significant number of 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 historically have a higher associated allowance for loan losses than loans that
remain in consolidated trusts.
The table below summarizes changes in our allowance for credit losses.
Table 4.7 - Details of Allowance for Credit Losses
Year Ended December 31,
2018
Allowance for Loan Losses
Held by
Freddie
Mac
Held By
Consolidated
Trusts
Reserve
for
Guarantee
Losses
$5,251
(861)
(2,823)
467
676
293
$3,003
$28
(23)
(6)
3
4
—
$6
$5,279
(884)
(2,829)
470
680
293
$3,009
$3,680
145
(56)
8
(676)
26
$3,127
$7
—
—
—
(4)
—
$3
$3,687
145
(56)
8
(680)
26
$3,130
$48
4
(6)
—
—
—
$46
$9
(1)
(2)
—
—
—
$6
$57
3
(8)
—
—
—
$52
Total
$8,979
(712)
(2,885)
475
—
319
$6,176
$44
(24)
(8)
3
—
—
$15
$9,023
(736)
(2,893)
478
—
319
$6,191
2017
Allowance for Loan Losses
Held by
Freddie
Mac
Held By
Consolidated
Trusts
Reserve
for
Guarantee
Losses
$10,443
(1,447)
(4,939)
419
540
235
$5,251
$18
15
(4)
—
(1)
—
$28
$10,461
(1,432)
(4,943)
419
539
235
$5,279
$2,968
1,350
(108)
6
(540)
4
$3,680
$2
4
—
—
1
—
$7
$2,970
1,354
(108)
6
(539)
4
$3,687
$52
—
(4)
—
—
—
$48
$15
(6)
—
—
—
—
$9
$67
(6)
(4)
—
—
—
$57
(In millions)
Single-family:
Beginning balance
Provision (benefit) for credit losses
Charge-offs
Recoveries
Transfers, net(1)
Other(2)
Ending balance
Multifamily:
Beginning balance
Provision (benefit) for credit losses
Charge-offs
Recoveries
Transfers, net(1)
Other(2)
Ending balance
Total:
Beginning balance
Provision (benefit) for credit losses
Charge-offs
Recoveries
Transfers, net(1)
Other(2)
Ending balance
(1) Relates to removal of delinquent loans from consolidated trusts and resecuritization after such removal.
(2) Primarily includes capitalization of past due interest on modified loans.
FREDDIE MAC | 2018 Form 10-K
Total
$13,463
(97)
(5,051)
425
—
239
$8,979
$35
13
(4)
—
—
—
$44
$13,498
(84)
(5,055)
425
—
239
$9,023
245
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
Allowance for Loan Losses Determined on a Collective Basis
Single-Family Loans
We estimate allowance for loan losses 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 allowance for loan losses 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 allowance for loan losses 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 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 allowance for loan losses, 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 allowance for loan losses 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 allowance for loan losses severity estimate also captures expectations about
recoveries, such as primary mortgage insurance. We use historical trends in home prices in our single-
family allowance for loan losses process, primarily through the use of current LTV ratios in our default
models and through the use of recent home price sales experience in our severity estimate. However,
we do not use a forecast of trends in home prices in our single-family allowance for loan losses 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
FREDDIE MAC | 2018 Form 10-K
246
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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 on our consolidated statements of
comprehensive income. We record benefits related to freestanding credit enhancements based on
actual losses (e.g., ACIS insurance policies) when realization of our claims is deemed probable and a
loss has been recognized on the covered loans. We record benefits for our debt with embedded credit
enhancements for which we have not elected the fair value option (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.
Allowance for Loan Losses Determined on an Individual Basis
We consider a loan to be impaired when, based on current information, it is probable that we will not
receive all amounts due (including both principal and interest) in accordance with the contractual terms
of the original loan agreement.
Single-family loans individually evaluated for impairment include TDRs, as well as loans acquired under
our financial guarantees with deteriorated credit quality prior to 2010. Multifamily loans individually
evaluated for impairment include TDRs, loans three monthly payments or more past due, and loans that
are impaired based on management judgment.
Troubled Debt Restructurings
A modification to the contractual terms of a loan that results in granting a concession to a borrower
experiencing financial difficulties is considered a TDR. A concession is deemed granted when, as a
result of the restructuring, we do not expect to collect all amounts due, including interest accrued, at the
original contractual interest rate. As appropriate, we also consider other qualitative factors in
determining whether a concession is deemed granted, including whether the borrower's modified
interest rate is consistent with that of a non-troubled borrower. We do not consider restructurings that
result in an insignificant delay in payment to be a concession. We generally consider a delay in monthly
amortizing payments of three months or less to be insignificant. A concession typically includes one or
more of the following being granted to the borrower:
A trial period where the expected permanent modification will change our expectation of collecting
all amounts due at the original contract rate;
A delay in payment that is more than insignificant;
A reduction in the contractual interest rate;
FREDDIE MAC | 2018 Form 10-K
247
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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, 2018 and December 31, 2017, based on the original
product 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.
Table 4.8 - TDR Activity
(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
Year Ended December 31,
2018
2017
Number of
Loans
Post-TDR
Recorded
Investment
Number of
Loans
Post-TDR
Recorded
Investment
43,742
5,944
902
2,602
53,190
1
$7,084
584
140
432
8,240
$15
33,745
4,569
892
2,784
41,990
1
$4,818
356
128
495
5,797
$—
(1) The pre-TDR recorded investment for single-family loans initially classified as TDR during the years ended December 31, 2018 and December 31,
2017 was $8.3 billion and $5.8 billion, respectively.
The table below presents the volume of our TDR modifications that experienced payment defaults (i.e.,
loans that became two months delinquent or completed a loss event) during the applicable periods and
had completed a modification during the year preceding the payment default. The table presents loans
based on their original product category before modification.
Table 4.9 - Payment Defaults of Completed TDR Modifications
(Dollars in millions)
Single-family:
Year Ended December 31,
2018
2017
Number of
Loans
Post-TDR
Recorded
Investment
Number of
Loans
Post-TDR
Recorded
Investment
20 and 30-year or more, amortizing fixed-rate
13,548
$1,847
13,973
$2,231
15-year amortizing fixed-rate
Adjustable-rate
Alt-A, interest-only, and option ARM
Total single-family
Multifamily
565
176
1,178
15,467
—
44
25
199
2,115
$—
720
225
1,254
16,172
—
57
33
253
2,574
$—
In addition to modifications, loans may be 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, 2018 and December 31, 2017, 8,488 and 7,090, respectively, of such loans (with a
FREDDIE MAC | 2018 Form 10-K
248
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
post-TDR recorded investment of $1.0 billion and $0.9 billion, respectively) experienced a payment
default within a year after the loss mitigation activity occurred.
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 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 on 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.
Of the single-family loan modifications that were classified as TDRs during 2018 and 2017 respectively:
12% and 37% involved interest rate reductions and, in certain cases, term extensions;
24% and 14% involved principal forbearance in addition to interest rate reductions and, in certain
cases, term extensions;
The average term extension was 132 and 176 months; and
The average interest rate reduction was 0.2% and 0.6%.
Substantially all of our completed single-family loan modifications classified as a TDR during 2018
resulted in a modified loan with a fixed interest rate. However, many of these fixed-rate loans include
provisions for the reduced interest rates to remain fixed for the first five years of the modification and
then increase at a rate of up to one percent per year until the interest rate has been adjusted to the
market rate that was in effect at the time of the modification.
Multifamily Loans
Multifamily impaired loans include TDRs, loans three monthly payments or more past due, and loans
that are deemed impaired based on management judgment. Factors considered by management in
determining whether a loan is impaired include the underlying property's operating performance as
represented by its current DSCR, available credit enhancements, current LTV ratio, management of the
underlying property, and the property's geographic location.
Multifamily loans are generally measured individually for impairment based on the fair value of the
underlying collateral, as reduced by estimated disposition costs, as the repayment of these loans is
generally provided from the cash flows of the underlying collateral and any associated credit
enhancement. Except for cases of fraud and certain other types of borrower defaults, most multifamily
loans are non-recourse to the borrower. As a result, the cash flows of the underlying property (including
any associated credit enhancements) serve as the source of funds for repayment of the loan. Interest
income recognition on multifamily impaired loans is subject to our non-accrual policy as discussed in
Interest Income above.
The assessment as to whether a multifamily loan restructuring is considered a TDR contemplates the
unique facts and circumstances of each loan. This assessment considers qualitative factors such as
FREDDIE MAC | 2018 Form 10-K
249
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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.
Impaired Loans
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.
Table 4.10 - Individually Impaired Loans
(In millions)
Single-family:
With no 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 allowance recorded
With an 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 an 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 allowance recorded:(1)
With an allowance recorded
Total multifamily
Balance at December 31, 2018
Balance at December 31, 2017
UPB
Recorded
Investment
Associated
Allowance
UPB
Recorded
Investment
Associated
Allowance
$3,335
23
227
1,286
4,871
37,579
703
164
4,867
43,313
40,914
726
391
6,153
48,184
89
3
92
$2,666
22
226
1,083
3,997
36,959
713
162
4,590
42,424
39,625
735
388
5,673
46,421
82
3
85
N/A
N/A
N/A
N/A
N/A
(3,660)
(19)
(8)
(682)
(4,369)
(3,660)
(19)
(8)
(682)
(4,369)
N/A
—
—
$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)
Total single-family and multifamily
$48,276
$46,506
($4,369)
$62,038
$59,369
($6,637)
Referenced footnotes are included after the next table.
FREDDIE MAC | 2018 Form 10-K
250
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
(In millions)
Single-family:
With no 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 allowance recorded
With an 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 an 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 allowance recorded:(1)
With an allowance recorded
Total multifamily
Year Ended December 31,
2018
2017
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)
$3,236
21
248
1,264
4,769
44,055
798
197
5,953
51,003
47,291
819
445
7,217
55,772
131
3
134
$346
3
12
88
449
2,156
28
6
273
2,463
2,502
31
18
361
2,912
6
—
6
$16
—
1
4
21
274
9
3
30
316
290
9
4
34
337
2
—
2
$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
Total single-family and multifamily
$55,906
$2,918
$339
$57,958
$3,463
$315
(1)
Individually impaired loans with no 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.
Table 4.11 - Net Investment in Loans
(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, 2018
December 31, 2017
Single-family Multifamily
Total
Single-family Multifamily
Total
$1,830,044
46,421
1,876,465
$14,945
85
$1,844,989
46,506
$1,764,750
59,237
$21,301
132
$1,786,051
59,369
15,030
1,891,495
1,823,987
21,433
1,845,420
(1,761)
(4,369)
(6,130)
(9)
—
(9)
(1,770)
(4,369)
(6,139)
(2,301)
(6,630)
(8,931)
(28)
(7)
(35)
(2,329)
(6,637)
(8,966)
Net investment in loans
$1,870,335
$15,021
$1,885,356
$1,815,056
$21,398
$1,836,454
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
FREDDIE MAC | 2018 Form 10-K
251
Financial Statements
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 6.6% and 7.8%
of the recorded investment in such loans at December 31, 2018 and December 31, 2017, 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, 2018 and December 31, 2017.
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
allowance for loan losses 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 mortgage loans gains (losses). 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 on 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, 2018, December 31, 2017 and December 31, 2016, we acquired
$164.0 billion, $229.2 billion, and $234.6 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 $25.8 billion, $35.9 billion, and $30.3 billion of loans from sellers during the years ended
December 31, 2018, December 31, 2017, and December 31, 2016, 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, 2018, December 31,
2017, and December 31, 2016, we had transfers of $1.0 billion, $1.1 billion, and $1.5 billion,
respectively, from loans to REO.
FREDDIE MAC | 2018 Form 10-K
252
Financial Statements
Notes to the Consolidated Financial Statements | Note 5
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 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
exchange for a guarantee fee, without securitizing those assets. These guarantees consist of the
following:
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Financial Statements
Notes to the Consolidated Financial Statements | Note 5
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 both 2018 and 2017, we
guaranteed $0.5 billion 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,
2018 and December 31, 2017. During 2018 and 2017, we guaranteed $0.6 billion and $1.1 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 and guarantee activities that do not qualify as
financial guarantees;
Certain market value guarantees, including written options and written swaptions; and
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 obligations 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, 2018 and December 31, 2017.
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
arrangements.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 5
Table 5.1 - Financial Guarantees
(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
As of December 31, 2018
As of December 31, 2017
Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term
Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term
$17,783
6,139
$23,922
$221,245
9,779
$231,024
$16,251
$220
167
$387
$2,746
428
$3,174
$242
40
30
40
35
30
$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
(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 $52 million and $57 million as of December 31, 2018 and
December 31, 2017, 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
associated with mortgage loans or guarantees recognized on our consolidated balance sheets or
embedded in debt instruments recognized on our consolidated balance sheets.
Mortgage Loan Credit Enhancements
Attached mortgage loan credit enhancements are obtained contemporaneously with, and in
contemplation of, the origination of the underlying mortgage loans, and effectively travel with the loan
upon sale. Attached credit enhancements include primary mortgage insurance, which provides us with
loan-level protection up to a specified percentage.
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 allowance for credit losses.
Freestanding mortgage loan 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 include ACIS and
STACR Trust transactions, which are accounted for separately from the underlying mortgage loans.
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. Under the ACIS contracts, we pay insurers and reinsurers
premiums for insurance coverage. Each month, we accrue for our obligation to make such payments for
all tranches covered by the ACIS contracts. When specific credit events occur, we generally 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.
STACR Trust transactions are similar to STACR debt notes as discussed in Debt with Embedded
Credit Enhancements below. The key difference between STACR Trust and STACR debt note
transactions is that the notes in STACR Trust transactions are issued by a third-party bankruptcy-remote
trust. Under this structure, we pay a credit premium and certain shortfalls on the investment collateral
account to the trust and receive payments from the trust as a result of defined credit events on the
reference pool. Each month, we accrue for our obligation to make such payments to the trust. The trust
issues the notes and makes periodic payments of principal and interest on the notes to investors, and
we receive payments from the trust that otherwise would have been made to the noteholders to the
extent there are certain defined credit events on the mortgages in the related reference pool. The note
balances are reduced by the amount of the payments to us.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 6
Expected recoveries for credit losses covered under ACIS contracts based on actual losses and STACR
Trust transactions are recognized separately in other assets on our consolidated balance sheets, with an
offset to other income when realization of our claim for recovery is deemed probable.
We also have various other freestanding 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. The credit enhancement assets are amortized over the life of the contract. Expected recoveries for
these other types of freestanding credit enhancements are recognized separately in other assets on our
consolidated balance sheets, with an offset to other income when realization of our claim for recovery is
deemed probable.
The table below presents the total current and protected UPB and maximum amounts of potential loss
recovery related to our mortgage loan credit enhancements. For information about counterparty credit
risk associated with mortgage insurers, see Note 14.
Table 6.1 - Mortgage Loan Credit Enhancements
(In millions)
Single-family:
Primary mortgage insurance
ACIS transactions(2)
STACR Trust transactions
Other
Total mortgage loan credit enhancements
December 31, 2018
December 31, 2017
Total Current
and Protected
UPB(1)
Maximum
Coverage
Total Current
and Protected
UPB(1)
Maximum
Coverage
$378,594
$96,996
807,885
161,152
18,136
9,123
5,026
5,389
$116,534
$334,189
625,082
—
7,233
$85,429
6,933
—
4,892
$97,254
(1) Underlying loans may be covered by more than one form of credit enhancement.
(2) As of December 31, 2018 and December 31, 2017, our counterparties posted collateral on our ACIS transactions of $1.5 billion and $1.1 billion,
respectively.
Guarantee Credit Enhancements
In connection with our securitization activity guarantees, we obtain 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
probable that a loss has been incurred under our guarantee, which occurs only when losses exceed
subordination.
Our other guarantee credit enhancements are primarily freestanding contracts that are accounted for
separately from the associated guarantee. For these types of credit enhancements, we recognize a
separate credit enhancement asset in other assets on our consolidated balance sheets upon acquisition
of coverage and subsequently amortize the asset over the life of the contract. Expected recoveries
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Financial Statements
Notes to the Consolidated Financial Statements | Note 6
under these contracts are recognized separately in other assets on our consolidated balance sheets,
with an offset to other income when realization of our claim for recovery is deemed probable.
Table 6.2 - Guarantee Credit Enhancements
(In millions)
Single-family:
Subordination (non-consolidated VIEs)
Other
Total single-family
Multifamily:
Subordination (non-consolidated VIEs)
Other
Total multifamily
Total guarantee credit enhancements
December 31, 2018
December 31, 2017
Total Current
and Protected
UPB(1)
Maximum
Coverage(2)
Total Current
and Protected
UPB(1)
Maximum
Coverage(2)
$16,271
1,226
220,733
2,349
$2,933
1,226
4,159
35,661
815
36,476
$40,635
$8,953
1,390
187,299
1,833
$1,734
1,390
3,124
30,689
726
31,415
$34,539
(1) Underlying loans may be covered by more than one form of credit enhancement. For subordination, total current and protected UPB includes the
UPB of the guaranteed securities and the UPB of guarantor advances made to the holders 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 credit enhancements, maximum coverage represents the remaining amount of loss recovery that is available subject to the terms of
counterparty agreements.
The Multifamily segment also has other credit enhancements in the form of collateral posting
requirements, indemnification, pool insurance, 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 and related
recoveries pursuant to these agreements have not been significant and therefore these other types of
credit enhancements are excluded from the table above.
Debt with Embedded Credit Enhancements
We also transfer credit risk after our acquisition or guarantee of mortgage assets by either issuing
unsecured debt with embedded credit enhancements or recognizing debt of consolidated VIEs that
includes 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 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
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Financial Statements
Notes to the Consolidated Financial Statements | Note 6
written down and the benefits are recognized as debt gains on our consolidated statements of
comprehensive income.
The structure of multifamily SCR notes is similar to STACR debt notes, although the mortgage assets
within the reference pool may be loans or multifamily housing revenue bonds to which we have credit
exposure. While our SCR notes are recorded as other debt on our consolidated balance sheets, these
debt obligations are measured at fair value, as we elected the fair value option for them. Fair value
changes are recorded in debt gains (losses) on our consolidated statement of comprehensive income.
Consolidated Debt with Structural Credit Enhancements
Similar to our non-consolidated VIEs, we obtain credit enhancement in our KT Certificates and certain of
our consolidated senior subordinate securitization structures 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 debt gains 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.
Table 6.3 - Debt with Embedded Credit Enhancements
(In millions)
Single-family:
STACR debt notes
Subordination (consolidated VIEs)
Total single-family
Multifamily:
SCR notes
Subordination (consolidated VIEs)
Total multifamily
Total debt with embedded credit enhancements
December 31, 2018
December 31, 2017
Total Current
and Protected
UPB(1)
Maximum
Coverage(2)
Total Current
and Protected
UPB(1)
Maximum
Coverage(2)
$605,263
25,006
2,667
2,700
$17,596
1,036
18,632
133
280
413
$19,045
$604,356
3,330
2,732
1,800
$17,788
179
17,967
137
180
317
$18,284
(1) Underlying loans may be covered by more than one form of credit enhancement. For STACR debt notes and SCR 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 notes, maximum coverage amount represents the outstanding balance of the STACR debt notes and SCR 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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Financial Statements
Notes to the Consolidated Financial Statements | Note 7
NOTE 7
Investments in Securities
The table below summarizes the fair values of our investments in debt securities by classification.
Table 7.1 - Investments in Securities
(In millions)
Trading securities
Available-for-sale securities
Total
As of December 31, 2018 As of December 31, 2017
$35,548
33,563
$69,111
$40,721
43,597
$84,318
We currently classify and account for our securities as either available-for-sale or trading. As of
December 31, 2018 and December 31, 2017, 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 investment
securities gains (losses), 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 on 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 expected life of the securities, the excess
of the cash flows expected to be collected over the securities' carrying value. We update our estimates
of expected cash flows periodically and recognize changes in the calculated effective interest rate on a
prospective basis.
For securities classified as trading or available-for-sale, we classify the cash flows as investing activities
because we hold these securities for investment purposes. In cases where the transfer of a security
represents a secured borrowing, we classify the related cash flows as financing activities.
Freddie Mac mortgage-related securities include mortgage-related securities issued or guaranteed by
Freddie Mac. In prior periods, certain of these securities that were issued by third-party trusts but
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Financial Statements
Notes to the Consolidated Financial Statements | Note 7
guaranteed by Freddie Mac were classified as non-agency mortgage-related securities. Prior periods
have been revised to conform to the current period presentation.
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.
Table 7.2 - Trading 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, 2018 As of December 31, 2017
$13,821
2,551
1
—
16,373
19,175
$35,548
$14,300
3,574
1
27
17,902
22,819
$40,721
For trading securities held at December 31, 2018, 2017, and 2016, we recorded net unrealized gains
(losses) of ($479) million, ($365) million, and ($791) million during 2018, 2017 and 2016, respectively.
Available-for-Sale Securities
At both December 31, 2018 and December 31, 2017, all available-for-sale securities were mortgage-
related securities.
The tables below present the amortized cost, gross unrealized gains and losses, and fair value by major
security type for our securities classified as available-for-sale.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 7
Table 7.3 - Available-for-Sale Securities
(In millions)
Available-for-sale securities:
Freddie Mac
Other agency
Non-agency RMBS
Non-agency CMBS
Obligations of states and political subdivisions
Total available-for-sale securities
(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, 2018
Gross Unrealized Losses
Amortized
Cost
Gross
Unrealized
Gains
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Fair
Value
$30,407
1,675
1,124
18
236
$33,460
$320
38
280
—
2
$640
$—
—
—
—
—
$—
($528)
$30,199
(7)
(1)
—
(1)
1,706
1,403
18
237
($537)
$33,563
As of December 31, 2017
Gross Unrealized Losses
Amortized
Cost
Gross
Unrealized
Gains
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Fair
Value
$37,109
2,008
3,012
97
352
$521
56
927
—
5
$—
—
(5)
(9)
—
($14)
($464)
$37,166
(11)
(1)
—
—
2,053
3,933
88
357
($476)
$43,597
Total available-for-sale securities
$42,578
$1,509
(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, 2018 scheduled to contractually
mature after ten years was $29.1 billion, with an additional $3.8 billion scheduled to contractually mature
after five years through ten years.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 7
Available-for-Sale Securities in a Gross Unrealized Loss Position
The tables below present 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.
Table 7.4 - 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
(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, 2018
Less than 12 Months
12 Months or Greater
Fair
Value
Gross Unrealized
Losses
Fair
Value
Gross Unrealized
Losses
$4,259
351
—
—
43
$4,653
($38)
(1)
—
—
(1)
($40)
$14,751
638
5
—
1
$15,395
($490)
(6)
(1)
—
—
($497)
As of December 31, 2017
Less than 12 Months
12 Months or Greater
Fair
Value
Gross Unrealized
Losses
Fair
Value
Gross Unrealized
Losses
$11,329
40
5
34
12
$11,420
($109)
—
—
—
—
($109)
$9,251
1,079
105
52
21
$10,508
($355)
(11)
(6)
(9)
—
($381)
At December 31, 2018, total gross unrealized losses on available-for-sale securities were $0.5 billion.
The gross unrealized losses relate to 350 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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Financial Statements
Notes to the Consolidated Financial Statements | Note 7
our consolidated statements of comprehensive income as investment securities gains (losses).
If we do not intend to sell the security or 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 Residential Mortgage-Backed Securities
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
and incorporates assumptions about the economic environment.
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, 2018.
Other-than-Temporary Impairments
We recognized $12 million, $18 million, and $191 million in net impairment of available-for-sale
securities in earnings during 2018, 2017, and 2016, respectively. For our available-for-sale securities in
an unrealized loss position at December 31, 2018, we have asserted that we have no intent to sell or
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 $0.8 billion, $1.1 billion,
and $4.1 billion as of 4Q 2018, 4Q 2017, and 4Q 2016, respectively.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 7
Realized Gains and Losses on Sales of Available-for-Sale Securities
Gains and losses on the sale of securities are included in investment securities gains (losses), 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.
Table 7.5 - Gross Realized Gains and Gross Realized Losses from Sales of Available-for-Sale
Securities
(In millions)
Gross realized gains
Gross realized losses
Net realized gains
Year Ended December 31,
2018
2017
2016
$627
(303)
$324
$1,792
(66)
$1,726
$1,062
(91)
$971
Non-Cash Investing and Financing Activities
We account for transactions where we obtain beneficial interests as consideration for transfers of
securities to non-consolidated trusts as non-cash transactions when these transactions do not involve
exchanges of gross cash flows. During the years ended December 31, 2018 and December 31, 2017,
we obtained beneficial interests of $0.1 billion and $3.8 billion, respectively, related to such transactions.
We did not have such activity during the year ended December 31, 2016.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 8
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.
Table 8.1 - Total Debt, Net
(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,
2017
2018
$1,720,996
$1,792,677
For The Year Ended December 31,
2016
2017
2018
$51,529
$47,656
$44,599
51,080
201,193
252,273
73,069
240,565
313,634
1,193
5,311
6,504
615
5,372
5,987
350
5,837
6,187
$2,044,950
$2,034,630
$58,033
$53,643
$50,786
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 debt gains (losses), 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 debt
gains (losses). Contemporaneous transfers of cash between us and a creditor in connection with the
issuance of a new debt security and satisfaction of an existing debt security are accounted for as either
an extinguishment or a modification of an existing debt security. If the debt securities have substantially
different terms, the transaction is accounted for as an extinguishment of the existing debt security. The
issuance of a new debt security is recorded at fair value, fees paid to the creditor are expensed as
incurred, and fees paid to third parties are deferred and amortized into interest expense over the life of
the new debt security using the effective interest method. If the terms of the existing debt security and
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Financial Statements
Notes to the Consolidated Financial Statements | Note 8
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 $346.1 billion in 2018 and declined to $300.0 billion
on January 1, 2019. As of December 31, 2018, our aggregate indebtedness for purposes of the debt cap
was $255.7 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.
Table 8.2 - Debt Securities of Consolidated Trusts Held by Third Parties
(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, 2018
As of December 31, 2017
Contractual
Maturity
UPB
Carrying
Amount(1)
Weighted
Average
Coupon(2)
Contractual
Maturity
UPB
Carrying
Amount(1)
Weighted
Average
Coupon(2)
2019-2057 $1,389,113 $1,426,060
72,354
2019-2039
244,587
2019-2034
39,153
2019-2049
5,386
2026-2048
736
2019-2046
1,788,276
4,401
70,547
240,310
38,361
5,322
720
1,744,373
4,365
2019-2047
3.72% 2018 - 2055 $1,278,911 $1,318,350
76,022
3.43% 2018 - 2038
266,241
2.89% 2018 - 2033
48,220
3.12% 2018 - 2048
7,379
4.41% 2026 - 2041
866
4.78% 2018 - 2046
1,717,078
3,918
73,866
260,633
47,169
7,303
847
1,668,729
3,876
4.02% 2019 - 2047
3.68%
3.43%
2.86%
2.85%
3.74%
4.85%
3.99%
Total debt securities of consolidated
trusts held by third parties
$1,748,738 $1,792,677
$1,672,605 $1,720,996
(1)
Includes $755 million and $639 million at December 31, 2018 and December 31, 2017, 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 3.07% and 2.84% as of December 31, 2018 and December
31, 2017, 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.
Table 8.3 - Other Short-Term Debt
(Dollars in millions)
Other short-term debt:
As of December 31, 2018
As of December 31, 2017
Par Value
Carrying
Amount
Weighted
Average
Effective Rate
Par Value
Carrying
Amount
Weighted
Average
Effective Rate
Discount notes and Reference Bills
$28,787
$28,621
2.36%
$45,717
$45,596
Medium-term notes
Securities sold under agreements to repurchase
16,440
6,019
16,440
6,019
2.10
2.40
17,792
9,681
17,792
9,681
Total other short-term debt
$51,246
$51,080
2.28%
$73,190
$73,069
FREDDIE MAC | 2018 Form 10-K
1.19%
1.03
1.06
1.14%
268
Financial Statements
Notes to the Consolidated Financial Statements | Note 8
Other Long-Term Debt
The table below summarizes our other long-term debt.
Table 8.4 - 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 — 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, 2018
As of December 31, 2017
Contractual
Maturity
Par Value
Carrying
Amount(1)
Weighted
Average
Effective
Rate(2)
Par Value
Carrying
Amount
Weighted
Average
Effective
Rate(2)
2019-2037
2019-2028
2019-2032
2031-2042
2019-2033
2019-2026
2023-2042
2019-2039
2047-2048
$78,810
4,761
65,362
133
26,396
5,325
17,596
5,009
—
N/A
$78,786
4,811
65,385
136
26,364
5,325
17,868
2,428
2
(215)
2.01%
1.83%
2.39%
12.76%
2.33%
1.47%
5.99%
6.29%
0.63%
$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)
203,392
200,890
242,463
240,171
1.47%
1.40%
2.17%
12.77%
1.95%
0.68%
5.00%
5.94%
—%
2019
—
332
332
—%
10.51%
—
303
303
121
332
453
7.83%
10.51%
121
273
394
$203,724
$201,193
2.58% $242,916
$240,565
2.04%
(1) Represents par value, net of associated discounts or premiums and issuance costs. Includes $4.4 billion and $5.2 billion at December 31, 2018
and December 31, 2017, 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, excluding hedge-related basis adjustments.
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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Financial Statements
Notes to the Consolidated Financial Statements | Note 8
The table below summarizes the contractual maturities of other long-term debt securities at
December 31, 2018.
Table 8.5 - Contractual Maturities of Other Long-Term Debt and Debt Securities
(In millions)
Annual Maturities
Other long-term debt (excluding STACR and SCR):
2019
2020
2021
2022
2023
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
$58,002
42,296
30,898
20,802
15,929
18,068
1,766,467
1,952,462
41,408
$1,993,870
(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 on debt where we have elected the fair value option.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 9
NOTE 9
Derivatives
On October 1, 2017, we adopted accounting guidance that modifies the presentation of hedge
accounting results disclosed on 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) on 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.
On 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
OTC derivatives.
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Financial Statements
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
covered event. The rights and obligations under these agreements have been assigned to the servicers.
However, in the event the servicer does not perform as required by contract, we would be obligated
under our guarantee to make the required contractual payments.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 9
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, 2018 and December 31, 2017, we reclassified from AOCI into earnings, losses of
$133 million and $164 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.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 9
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.
Table 9.1 - Derivative Assets and Liabilities at Fair Value
(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 hedges
Designated as fair value hedges
Interest-rate swaps:
Receive-fixed
Pay-fixed
Total derivatives designated as fair value hedges
Derivative interest receivable (payable)(3)
Netting adjustments(4)
Total derivative portfolio, net
As of December 31, 2018
As of December 31, 2017
Notional or
Contractual
Amount
Derivatives at Fair Value
Assets
Liabilities
Notional or
Contractual
Amount
Derivatives at Fair Value
Assets
Liabilities
$145,386
170,899
5,404
321,689
43,625
4,400
88,075
1,750
10,481
148,331
161,185
36,044
2,030
12,212
681,491
117,038
77,513
194,551
$876,042
$1,380
476
1
1,857
2,007
—
1,565
—
628
4,200
—
90
—
1
6,148
23
247
270
889
(6,972)
$335
($181)
(2,287)
—
(2,468)
—
(133)
—
(4)
—
(137)
—
(179)
(35)
(103)
(2,922)
(935)
(571)
(1,506)
(1,096)
4,941
($583)
$213,717
185,400
5,244
404,361
$2,121
751
—
2,872
($1,224)
(5,008)
(2)
(6,234)
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)
(1)
Includes swaptions on credit indices with a notional or contractual amount of $45.9 billion and $13.4 billion at December 31, 2018 and December
31, 2017, respectively, and a fair value of $113.0 million and $5.0 million at December 31, 2018 and December 31, 2017, respectively.
(2) Primarily consists of purchased interest-rate caps and floors.
(3)
Includes other derivative receivables and payables.
(4) Represents counterparty netting and cash collateral netting.
See Note 10 for information related to our derivative counterparties and collateral held and posted.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 9
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.
Table 9.2 - Gains and Losses on Derivatives
(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
(1) Primarily consists of purchased interest-rate caps and floors.
Year Ended December 31,
2018
2017
2016
($2,457)
3,880
(1)
1,422
(791)
20
272
(2)
(129)
(630)
57
606
(5)
(39)
619
364
(584)
79
(141)
$1,270
($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)
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Financial Statements
Notes to the Consolidated Financial Statements | Note 9
Fair Value Hedges
The tables below present the gains and losses on derivatives and hedged items while designated in
qualifying fair value hedge relationships.
Table 9.3 - Gains and Losses on Fair Value Hedges
(In millions)
Total amounts of income and expense line items presented
on our consolidated statements of comprehensive income in
which the effects of fair value hedges are recorded:
Interest contracts on mortgage loans held-for-investment:
Gain or (loss) on fair value hedging relationships:
Hedged items
Derivatives designated as hedging instruments
Interest accruals on hedging instruments
Discontinued hedge related basis adjustment amortization
Interest contracts on debt:
Gain or (loss) on fair value hedging relationships:
Hedged Items
Derivatives designated as hedging instruments
Interest accruals on hedging instruments
Discontinued hedge related basis adjustment amortization
(In millions)
Total amounts of income and expense line items presented
on our consolidated statements of comprehensive income in
which the effects of fair value hedges are recorded:
Interest contracts on mortgage loans held-for-investment:
Gain or (loss) on fair value hedging relationships: (1)
Hedged items
Derivatives designated as hedging instruments(2)
Interest accruals on hedging instruments
Discontinued hedge related basis adjustment amortization
Interest contracts on debt:
Gain or (loss) on fair value hedging relationships:
Hedged Items
Derivatives designated as hedging instruments
Interest accruals on hedging instruments
Discontinued hedge related basis adjustment amortization
Year Ended December 31, 2018
Interest Income -
Mortgage Loans
Interest Expense
Other Income (Loss)
$66,037
($58,033)
$714
(1,776)
1,091
(439)
133
—
—
—
—
—
—
—
—
145
155
(313)
(3)
—
—
—
—
—
—
—
—
Year Ended December 31, 2017
Interest Income -
Mortgage Loans
Interest Expense
Other Income (Loss)
$63,735
($53,643)
$4,982
(107)
313
(83)
(16)
—
—
—
—
—
—
—
—
93
(53)
8
—
351
(215)
—
—
—
—
—
—
(1) For the first three quarters of 2017, the gains or losses on derivatives and hedged items were recorded on other income (loss). Beginning in 4Q
2017, gains or losses are recorded in interest income - mortgage loans on our consolidated statements of comprehensive income due to adoption
of amended hedge accounting guidance.
(2) The gain or (loss) on fair value hedging relationships in 2017 excludes ($277) million of interest accruals which were recorded in derivatives gains
(losses) on our consolidated statements of comprehensive income.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 9
Cumulative Basis Adjustments due to Fair Value Hedging
The tables below present the carrying amounts of the hedged items that have been in a qualifying fair
value hedge by their respective balance sheet line item, as well as the hedged item's cumulative basis
adjustments. The hedged item carrying amounts include both designated and discontinued hedges.
Table 9.4 - Cumulative Basis Adjustments due to Fair Value Hedging
(In millions)
Mortgage loans held-for-investment
Debt
(In millions)
Mortgage loans held-for-investment
Debt
As of December 31, 2018
Cumulative Amount of Fair Value Hedging Basis
Adjustment Included in the Carrying Amount
Carrying Amount
Assets / (Liabilities)
Total
Discontinued - Hedge
Related
$193,547
(127,215)
($1,237)
216
($1,237)
(8)
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)
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278
Financial Statements
Notes to the Consolidated Financial Statements | Note 10
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, 2018, our maximum loss for accounting purposes
after applying netting agreements and collateral on an individual counterparty basis would have been
approximately $48 million. A significant majority of our net uncollateralized exposure to OTC derivative
counterparties is concentrated among five counterparties, all of which were investment grade as of
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Financial Statements
Notes to the Consolidated Financial Statements | Note 10
December 31, 2018. 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, 2018 was
$0.4 billion for which we posted cash and non-cash collateral of $0.3 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, 2018, we would have been
required to post an additional $123 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. We
changed the characterization of variation margin payments from posting of margin collateral to
settlements in 1Q 2017 for cleared swaps transacted with the Chicago Mercantile Exchange (CME) and
in 1Q 2018 for cleared swaps transacted with LCH Group, as a result of certain rule amendments made
by those organizations.
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 $90 million and $44 million at
December 31, 2018 and December 31, 2017, respectively.
Many of our transactions involving forward purchase and sale commitments of mortgage-related
securities utilize the 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 the margin that we have posted to the MBSD/
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Financial Statements
Notes to the Consolidated Financial Statements | Note 10
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 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 the 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.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are effectively collateralized borrowings where we sell
securities with an agreement to repurchase such securities at a future date. We are required to pledge
the sold securities to the counterparties to these transactions as collateral for our obligation to
repurchase these securities at a later date. Similar to the securities purchased under agreements to
resell transactions, these transactions involve the legal transfer of securities. However, they are
accounted for as secured financings because they require the identical or substantially the same
securities to be subsequently repurchased. These agreements may allow our counterparties to repledge
all or a portion of the collateral. Beginning in 2017, certain of our trades involving securities sold under
agreements to repurchase utilized GSD/FICC as a clearinghouse.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 10
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, 2018 and December 31, 2017, 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.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 10
The tables below present 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.
Table 10.1 - Offsetting and Collateral Information of Financial Assets and Liabilities
(In millions)
Assets:
Derivatives:
OTC derivatives
Cleared and exchange-traded derivatives
Other
Total derivatives
Securities purchased under agreements to resell(3)(4)
Total
Liabilities:
Derivatives:
OTC derivatives
Cleared and exchange-traded derivatives
Other
Total derivatives
Securities sold under agreements to repurchase(4)
As of December 31, 2018
Amount Offset in the
Consolidated
Balance Sheets
Gross
Amount
Recognized
Counterparty
Netting
Cash
Collateral
Netting(1)
Net Amount
Presented on
the Consolidated
Balance Sheets
Gross Amount
Not Offset on
the Consolidated
Balance Sheets(2)
Net
Amount
$7,213
3
91
7,307
34,771
($4,544)
—
—
(4,544)
($2,448)
20
—
(2,428)
—
—
$42,078
($4,544)
($2,428)
($4,963)
$4,544
$296
(244)
(317)
(5,524)
(6,019)
—
—
4,544
—
101
—
397
—
$221
23
91
335
34,771
$35,106
($123)
(143)
(317)
(583)
(6,019)
($6,602)
($173)
—
—
(173)
(34,771)
$48
23
91
162
—
($34,944)
$162
$— ($123)
—
—
—
6,019
(143)
(317)
(583)
—
$6,019
($583)
Total
($11,543)
$4,544
$397
(In millions)
Assets:
Derivatives:
OTC derivatives
Cleared and exchange-traded derivatives
Other
Total derivatives
Securities purchased under agreements to resell(3)(4)
Total
Liabilities:
Derivatives:
OTC derivatives
Cleared and exchange-traded derivatives
Other
Total derivatives
Securities sold under agreements to repurchase(4)
Total
As of December 31, 2017
Amount Offset in the
Consolidated
Balance Sheets
Gross
Amount
Recognized
Counterparty
Netting
Cash
Collateral
Netting(1)
Net Amount
Presented on
the Consolidated
Balance Sheets
Gross Amount
Not Offset on
the Consolidated
Balance Sheets(2)
Net
Amount
$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)
($6,285)
(2,671)
(129)
(9,085)
(9,681)
($18,766)
$5,499
2,266
—
7,765
—
$7,765
$688
363
—
1,051
—
$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)
(1) Excess cash collateral held is presented as a derivative liability, while excess cash collateral posted is presented as a derivative asset.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 10
(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 $2.5 billion and $3.1 billion as of December 31, 2018 and December 31, 2017,
respectively.
(3) We primarily execute securities purchased under agreements to resell transactions with central clearing organizations where we have the right
to repledge the collateral that has been pledged to us, either with the central clearing organization or with other counterparties. At December 31,
2018 and December 31, 2017, we had $20.1 billion and $34.8 billion, respectively, of securities pledged to us in these transactions. In addition,
at December 31, 2018 and December 31, 2017, we had $2.5 billion and $3.4 billion, respectively, of securities pledged to us for transactions
involving securities purchased under agreements to resell not executed with central clearing organizations that we had the right to repledge.
(4) Does not include the impacts of netting by central clearing organizations.
Collateral Pledged
Collateral Pledged to Freddie Mac
We have cash pledged to us as collateral primarily related to OTC derivative transactions. We had $3.0
billion and $2.4 billion pledged to us as collateral that was invested as part of our Liquidity and
Contingency Operating Portfolio as of December 31, 2018 and December 31, 2017, respectively.
Collateral Pledged by Freddie Mac
The tables below summarize 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.
Table 10.2 - Collateral in the Form of Securities Pledged
(In millions)
Cash equivalents(1)
Debt securities of consolidated trusts(2)
Available-for-sale securities
Trading securities
Total securities pledged
(In millions)
Debt securities of consolidated trusts(2)
Trading securities
Total securities pledged
As of December 31, 2018
Derivatives
Securities sold under
agreements to
repurchase
Other(3)
Total
$—
362
—
2,160
$2,522
$2,595
—
—
3,432
$6,027
$—
179
1
73
$253
$2,595
541
1
5,665
$8,802
December 31, 2017
Derivatives
Securities sold under
agreements to
repurchase
Other(3)
Total
$375
2,766
$3,141
$—
9,705
$9,705
$111
362
$473
$486
12,833
$13,319
(1) Represents U.S. Treasury securities accounted for as cash equivalents.
(2) 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.
(3)
Includes other collateralized borrowings and collateral related to transactions with certain clearinghouses.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 10
The table below summarizes the underlying collateral pledged and the remaining contractual maturity of
our gross obligations under securities sold under agreements to repurchase.
Table 10.3 - Underlying Collateral Pledged
(In millions)
U.S. Treasury securities
As of December 31, 2018
Overnight and
continuous
30 days or less
After 30 days
through 90 days
Greater than
90 days
Total
$—
$2,103
$3,924
$—
$6,027
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285
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
NOTE 11
Stockholders' Equity and Earnings Per Share
Accumulated Other Comprehensive Income
The tables below present changes in AOCI after the effects of our federal statutory tax rates of 21% and
35% for 2018 and 2017, respectively, related to available-for-sale securities, closed cash flow hedges,
and our defined benefit plans.
Table 11.1 - Changes in AOCI by Component, Net of Taxes
(In millions)
Beginning balance
Other comprehensive income before
reclassifications(1)
Amounts reclassified from accumulated other
comprehensive income
Changes in AOCI by component
Cumulative effect of change in accounting
principle (2)
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, 2018
AOCI Related
to Available-
For-Sale
Securities
AOCI Related
to Cash Flow
Hedge
Relationships
AOCI Related
to Defined
Benefit Plans
Total
$662
(476)
(246)
(722)
$143
$83
($356)
—
114
114
($73)
($315)
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
$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)
$83
11
(16)
(5)
$19
$97
$21
63
(1)
62
$83
$34
(10)
(3)
(13)
$21
$389
(465)
(148)
(613)
$89
($135)
$456
920
(987)
(67)
$389
Total
Total
$1,153
(328)
(369)
(697)
$456
(1) For the years ended December 31, 2018, 2017, and 2016, net of tax expense (benefit) of $(0.1) billion, $0.5 billion, and ($0.2) billion, respectively,
for AOCI related to available-for-sale securities.
(2)
Includes the effect of adopting the accounting guidance on reclassification of stranded tax effects of the Tax Cuts and Jobs Act.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 11
In 1Q 2018, we adopted the accounting guidance related to the reclassification of stranded tax effects
resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained
earnings. The reclassification includes stranded tax effects related to unrealized gains and losses on
available-for-sale securities, deferred net losses on closed cash flow hedges, and our defined benefit
plans.
Reclassifications from AOCI to Net Income
The table below presents reclassifications from AOCI to net income, including the affected line item on
our consolidated statements of comprehensive income.
Table 11.2 - Reclassifications from AOCI to Net Income
(In millions)
AOCI related to available-for-sale securities
Affected line items on the consolidated statements of comprehensive income:
Investment securities gains (losses)
Total before tax
Income tax (expense) or benefit
Net of tax
AOCI related to cash flow hedge relationships
Affected line items on 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 on the consolidated statements of comprehensive income:
Salaries and employee benefits
Income tax (expense) or benefit
Net of tax
Total reclassifications in the period net of tax
Year Ended December 31,
2018
2017
2016
$312
312
(66)
246
(133)
19
(114)
20
(4)
16
$148
$1,708
1,708
(598)
1,110
(164)
40
(124)
2
(1)
1
$780
780
(273)
507
(192)
51
(141)
4
(1)
3
$987
$369
Future Reclassifications from AOCI to Net Income Related to
Closed Cash Flow Hedges
The total AOCI related to derivatives designated as cash flow hedges was a loss of $0.3 billion and $0.4
billion at December 31, 2018 and December 31, 2017, 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 $75 million, net of taxes, of the $0.3 billion of cash flow
hedge losses in AOCI at December 31, 2018 will be reclassified into earnings. The maximum remaining
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Financial Statements
Notes to the Consolidated Financial Statements | Note 11
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 15 years.
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 of $1 billion, or $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
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 2018, 2017, and 2016 at the direction of the Conservator were $4.1 billion,
$10.9 billion, and $5.0 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.
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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, 2018.
Table 11.3 - Senior Preferred Stock
(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
March 30, 2018
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
N/A
$1,000
3,000
13,800
30,800
6,100
10,600
1,800
100
500
1,479
5,992
146
19
312
$75,648
Because we had a net worth deficit at December 31, 2017, FHFA, as Conservator, submitted a draw
request for $312 million on our behalf to Treasury under the Purchase Agreement. We received this
funding during 2018. We had positive net worth at March 31, 2018, June 30, 2018, September 30, 2018,
and December 31, 2018; consequently, FHFA did not request a draw on our behalf in 2018. The
aggregate liquidation preference of the senior preferred stock owned by Treasury was $75.6 billion and
$75.3 billion as of December 31, 2018 and December 31, 2017, respectively.
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 of $3.0 billion. If, for any reason, we were not to pay our dividend requirement on the senior
FREDDIE MAC | 2018 Form 10-K
289
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
preferred stock in full in any future period, the applicable Capital Reserve Amount would 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 on 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, 2018, 2017, and 2016 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 | 2018 Form 10-K
290
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, 2018.
Table 11.4 - Preferred Stock
(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 | 2018 Form 10-K
291
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
2018 and 2017, 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 2018, the deferral period lapsed on 350 RSUs. At
December 31, 2018, 1,053 RSUs remained outstanding. In addition, there were 41,160 shares of
restricted stock outstanding at both December 31, 2018 and December 31, 2017. At December 31,
2018, no stock options were outstanding.
Earnings Per Share
We have participating securities related to 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 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 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, 0, and 22,684 at December 31, 2018,
December 31, 2017, and December 31, 2016, respectively.
FREDDIE MAC | 2018 Form 10-K
292
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
Dividends and Dividend Restrictions
No common dividends were declared in 2018 or 2017. During the three months ended March 31, 2018
and June 30, 2018, we did not pay dividends, and during the three months ended September 30, 2018
and December 31, 2018, we paid dividends of $1.6 billion and $2.6 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 2018.
Our payment of dividends is subject to the following restrictions:
Restrictions Relating to the Conservatorship - The Conservator has prohibited us from paying
any dividends on our common stock or on any series of our preferred stock (other than the senior
preferred stock). FHFA has instructed our Board of Directors that it should consult with and obtain
the approval of FHFA before taking actions involving dividends. In addition, FHFA has adopted a
regulation prohibiting us from making capital distributions during conservatorship, except as
authorized by the Director of FHFA.
Restrictions Under the Purchase Agreement - The Purchase Agreement prohibits us and any of
our subsidiaries from declaring or paying any dividends on Freddie Mac equity securities (other than
with respect to the senior preferred stock or warrant) without the prior written consent of Treasury.
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 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, 2018. 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 2018 at the
direction of the Conservator, as discussed in the Senior Preferred Stock section above. We did
not declare or pay dividends on any other series of preferred stock outstanding in 2018.
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 | 2018 Form 10-K
293
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 table below presents the components of our federal income tax expense for 2018, 2017, and 2016.
We are exempt from state and local income taxes.
Table 12.1 - Federal Income Tax Expense
(In millions)
Current income tax expense
Deferred income tax expense
Total income tax expense
Year Ended December 31,
2018
2017
2016
($848)
(1,391)
($2,239)
($3,436)
(7,773)
($11,209)
($1,037)
(2,787)
($3,824)
Income tax expense decreased from 2017 to 2018 and increased from 2016 to 2017, primarily due to
higher income tax expense in 2017 driven by the revaluation of the net deferred tax asset. The
revaluation was required due to the enactment of the Tax Cuts and Jobs Act in 2017, which reduced the
corporate income tax rate from 35% to 21% for tax years after 2017. Accounting rules required that we
measure our net deferred tax asset using the reduced rate in the period in which the legislation was
enacted. Therefore, income tax expense in 2017 reflected a $5.4 billion charge associated with the
reduction in the net deferred tax asset.
FREDDIE MAC | 2018 Form 10-K
294
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 2018, 2017, and 2016.
Table 12.2 - Reconciliation of Federal Statutory Income Tax Rate to Effective Tax Rate
(Dollars in millions)
Statutory corporate tax rate
Tax-exempt interest
Tax credits
Valuation allowance
Revaluation of deferred tax asset to enacted
rate
Other
Year Ended December 31,
2018
2017
2016
Amount
Percent
Amount
Percent
Amount
Percent
($2,410)
21.0%
($5,892)
35.0%
($4,074)
35.0%
19
56
(13)
184
(75)
(0.2)
(0.5)
0.1
(1.6)
0.7
39
135
(54)
(5,405)
(32)
(0.2)
(0.8)
0.3
32.1
0.2
66.6%
36
243
—
—
(29)
($3,824)
(0.3)
(2.1)
—
—
0.3
32.9%
Effective tax rate
($2,239)
19.5%
($11,209)
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,
2018 and December 31, 2017. The valuation allowance relates to capital loss carryforwards included in
Other Items, net that we expect to expire unused.
Table 12.3 - Deferred Tax Assets and Liabilities
(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
Valuation Allowance
FREDDIE MAC | 2018 Form 10-K
Year Ended December 31,
2017
2018
$4,424
1,767
177
569
—
20
6,957
(23)
(23)
(46)
$6,888
$4,679
2,041
291
1,288
—
55
8,354
(214)
(214)
(33)
$8,107
295
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
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, 2018, we determined that it is
more likely than not that our net deferred tax assets, except for the deferred tax asset related to our
capital loss carryforwards, will be realized. A valuation allowance of $46 million has been recorded
against our capital loss carryforward deferred tax asset.
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, 2018.
FREDDIE MAC | 2018 Form 10-K
296
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
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
The Single-family Guarantee segment reflects results from our purchase of single-family loans, our
guarantee of principal and interest payments on securitized mortgage loans in exchange for
guarantee fees, and the management of single-family mortgage credit risk. The Single-family
Guarantee segment manages single-family mortgage credit risk through risk transfer transactions,
performing loss mitigation activities, and managing foreclosure and REO activities.
Segment Earnings for this segment consist primarily of guarantee fee income, less credit-related
expenses, credit risk transfer expenses, administrative expenses, allocated funding and hedging
costs, and allocated reinvestment income.
Financial
Performance
Measurement
Basis
• Contribution to
GAAP net
income (loss)
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 risk transfer securitization
products, issue other risk transfer products, and provide other guarantee activities.
• Contribution to
GAAP
comprehensive
income (loss)
Multifamily
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 for the company.
• Contribution to
GAAP
comprehensive
income (loss)
Capital
Markets
Segment Earnings for this segment consist primarily of the returns on these investments, less the
related funding, hedging, and administrative expenses.
All Other
The All Other category consists of material corporate-level activities that are infrequent in nature and
based on decisions outside the control of the management of our reportable segments.
N/A
FREDDIE MAC | 2018 Form 10-K
297
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 certain returns on
assets, funding and hedging 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 4Q 2018, we changed how we calculate certain components of our Segment Earnings for our
Single-family Guarantee and Capital Markets segments. The purpose of this change is to more closely
align Segment Earnings results relative to the business operations and to better reflect how
management evaluates the Single-family Guarantee and Capital Markets segments. Prior period results
have been revised to conform to the current period presentation. Changes were made to:
Share the economic return on loans acquired through our cash loan purchase program between the
Capital Markets segment and the Single-family Guarantee segment. Previously, the Capital Markets
segment recognized the full benefit from the cash loan purchase program. This change resulted in a
decrease to other non-interest income for our Capital Markets segment and an increase to other
non-interest income for our Single-family Guarantee segment of $87 million and $89 million for 2017
and 2016, respectively.
Transfer the short-term interest earned on cash received related to delivery fees and buy-down fees
on single-family loans from the Capital Markets segment to the Single-family Guarantee segment.
This change resulted in a decrease to net interest income for our Capital Markets segment and an
increase to guarantee fee income for our Single-family Guarantee segment of $110 million and $38
million for 2017 and 2016, respectively.
Recognize buy-up/buy-down fees on securitized loans acquired through our cash loan purchase
program similar to the way we recognize buy-up/buy-down fees on loans purchased via our
guarantor swap transactions. Buy-up fees and associated amortization are recognized in the Capital
Markets segment, rather than the Single-family Guarantee segment, and buy-down fees and
associated amortization are recognized in the Single-family Guarantee segment, rather than the
Capital Markets segment. This change resulted in:
An increase to guarantee fee income for our Single-family Guarantee segment of $146 million, a
decrease to other non-interest income for our Capital Markets segment of $201 million and an
increase to net interest income for our Capital Markets segment of $55 million for 2017 and
An increase to guarantee fee income for our Single-family Guarantee segment of $227 million, a
decrease to other non-interest income for our Capital Markets segment of $225 million and a
decrease to net interest income for our Capital Markets segment of $2 million for 2016.
FREDDIE MAC | 2018 Form 10-K
298
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
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 on 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.
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, including upfront fee amortization and implied guarantee fee income related to
unsecuritized loans held in the mortgage-related investments portfolio, are reclassified in Segment
Earnings from net interest income to guarantee fee income.
Short-term returns on cash received related to certain upfront fees on single-family loans are
reclassified in Segment Earnings from net interest income to guarantee fee income.
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 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
FREDDIE MAC | 2018 Form 10-K
299
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
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
and non-mortgage-related securities.
Amortization related to accretion of other-than-temporary impairments on available-for-sale
securities.
Amortization of discounts on loans purchased with deteriorated credit quality that are on accrual
status.
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 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
In order to better reflect how we manage our Single-family Guarantee segment, we reclassify the
impacts related to single-family mortgage loans held-for-sale from benefit (provision) for credit losses,
mortgage loans gains (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
costs or income to the other segments. The actual costs or income 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.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 13
The table below presents Segment Earnings by segment.
Table 13.1 - Segment Earnings
(In millions)
Segment Earnings (loss), net of taxes:
Single-family Guarantee
Multifamily
Capital Markets
All Other
Total Segment Earnings, net of taxes
Net income (loss)
Comprehensive income (loss) of segments:
Single-family Guarantee
Multifamily
Capital Markets
All Other
Comprehensive income (loss) of segments
Comprehensive income (loss)
Year Ended December 31,
2018
2017
2016
$3,908
1,319
4,008
—
9,235
$9,235
$3,905
1,236
3,481
—
8,622
$8,622
$2,759
2,014
6,257
(5,405)
5,625
$5,625
$2,799
1,937
6,227
(5,405)
5,558
$5,558
$2,437
1,818
3,560
—
7,815
$7,815
$2,428
1,582
3,108
—
7,118
$7,118
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Notes to the Consolidated Financial Statements | Note 13
The table below presents detailed reconciliations between our GAAP financial statements and Segment
Earnings for our reportable segments and All Other.
Table 13.2 - Segment Earnings and Reconciliations to GAAP Financial Statements
Year Ended December 31, 2018
(In millions)
Net interest income
Guarantee fee income
Benefit (provision) for credit losses
Mortgage loans gains (losses)
Investment securities gains (losses)
Debt gains (losses)
Derivative gains (losses)
Other non-interest income
Administrative expense
REO operations (expense) income
Other non-interest (expense) income
Income tax (expense) benefit
Net income (loss)
Changes in unrealized gains (losses)
related to available-for-sale securities
Changes in unrealized gains (losses)
related to cash flow hedge relationships
Changes in defined benefit plans
Total other comprehensive income
(loss), net of taxes
Single-
family
Guarantee Multifamily
Capital
Markets
All
Other
$—
6,570
522
—
—
165
9
905
(1,491)
(189)
(1,639)
(944)
3,908
—
—
(3)
(3)
$1,096
$3,217
$—
817
24
33
(441)
54
353
191
(437)
1
(53)
(319)
1,319
(82)
—
(1)
(83)
—
—
—
(102)
531
1,314
400
(365)
—
(11)
(976)
4,008
(640)
114
(1)
(527)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total
Segment
Earnings
(Loss)
$4,313
7,387
Reclassifications
$7,708
(6,576)
546
33
(543)
750
1,676
1,496
(2,293)
(188)
(1,703)
(2,239)
9,235
(722)
114
(5)
(613)
190
691
(152)
(30)
(406)
(782)
—
19
(662)
—
—
—
—
—
—
Total per
Consolidated
Statements of
Comprehensive
Income
$12,021
811
736
724
(695)
720
1,270
714
(2,293)
(169)
(2,365)
(2,239)
9,235
(722)
114
(5)
(613)
Comprehensive income (loss)
$3,905
$1,236
$3,481
$—
$8,622
$—
$8,622
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Notes to the Consolidated Financial Statements | Note 13
(In millions)
Net interest income
Guarantee fee income
Benefit (provision) for credit losses
Mortgage loans gains (losses)
Investment securities gains (losses)
Debt gains (losses)
Derivative gains (losses)
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, 2017
Single-
family
Guarantee Multifamily
Capital
Markets
All
Other
Total
Segment
Earnings
(Loss)
Reclassifications
Total per
Consolidated
Statements of
Comprehensive
Income
$—
6,350
(770)
—
—
(208)
(37)
1,838
(1,381)
(203)
(1,382)
(1,448)
2,759
—
—
40
40
$1,206
676
(13)
1,096
237
(10)
181
162
(395)
—
(66)
(1,060)
2,014
(86)
—
9
(77)
$3,279
—
—
—
1,048
437
(587)
5,788
(330)
—
(82)
(3,296)
$— $4,485
7,026
—
(783)
—
1,096
—
1,285
—
219
—
(443)
—
—
7,788
— (2,106)
(203)
—
— (1,530)
(11,209)
(5,405)
6,257
(5,405)
5,625
(167)
124
13
(30)
—
—
—
—
(253)
124
62
(67)
$9,679
(6,364)
867
930
(249)
(68)
(1,545)
(2,806)
—
14
(458)
—
—
—
—
—
—
$14,164
662
84
2,026
1,036
151
(1,988)
4,982
(2,106)
(189)
(1,988)
(11,209)
5,625
(253)
124
62
(67)
Comprehensive income (loss)
$2,799
$1,937
$6,227 ($5,405)
$5,558
$—
$5,558
(In millions)
Net interest income
Guarantee fee income
Benefit (provision) for credit losses
Mortgage loans gains (losses)
Investment securities gains (losses)
Debt gains (losses)
Derivative gains (losses)
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
Total per
Consolidated
Statements of
Comprehensive
Income
$—
6,356
(481)
—
—
(322)
(69)
928
(1,323)
(298)
(1,169)
(1,185)
2,437
—
—
(9)
(9)
$1,022
511
22
972
28
(53)
407
219
(362)
—
(58)
(890)
1,818
(234)
—
(2)
(236)
$3,736
—
—
—
165
77
1,151
481
(320)
—
19
(1,749)
3,560
(591)
141
(2)
(452)
$— $4,758
6,867
—
(459)
—
972
—
193
—
(298)
—
1,489
—
—
1,628
— (2,005)
—
(298)
— (1,208)
— (3,824)
—
—
—
—
—
7,815
(825)
141
(13)
(697)
$9,621
(6,354)
1,262
(772)
(462)
(175)
(1,763)
(825)
—
11
(543)
—
—
—
—
—
—
$14,379
513
803
200
(269)
(473)
(274)
803
(2,005)
(287)
(1,751)
(3,824)
7,815
(825)
141
(13)
(697)
Comprehensive income (loss)
$2,428
$1,582
$3,108
$— $7,118
$—
$7,118
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Financial Statements
Notes to the Consolidated Financial Statements | Note 14
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, cash 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/or 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.
The table below summarizes the concentration by loan portfolio and geographic area of the
approximately $1.9 trillion and $1.8 trillion UPB of our single-family credit guarantee portfolio at
December 31, 2018 and December 31, 2017, 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.
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Notes to the Consolidated Financial Statements | Note 14
Table 14.1 - Concentration of Credit Risk of Our Single-Family Credit Guarantee Portfolio
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)
California
New York
Florida
New Jersey
Illinois
All other
Total
December 31, 2018
December 31, 2017
Percentage
of
Portfolio
Serious
Delinquency
Rate
Percentage
of
Portfolio
Serious
Delinquency
Rate
Percent of Credit
Losses
2018
2017
82%
18
100%
30%
24
16
16
14
100%
18%
5
6
3
5
63
100%
0.22%
1.93
0.69
0.38
0.96
0.63
0.90
0.57
0.69
0.35
1.37
1.01
1.24
0.86
0.64
0.69%
78%
22
100%
30%
25
16
16
13
100%
18%
5
6
3
5
63
100%
0.35%
2.59
1.08
0.47
1.24
0.81
1.95
0.98
1.08
0.41
1.74
3.33
1.78
1.13
0.91
1.08%
10%
90
100%
17%
39
19
18
7
100%
11%
11
10
9
9
50
100%
3%
97
100%
27%
34
15
20
4
100%
18%
9
13
9
9
42
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, 2018.
The REO balance, net at December 31, 2018 and December 31, 2017 associated with single-family
properties was $0.8 billion and $0.9 billion, respectively, and the balance associated with multifamily
properties was $0 million and $6 million, respectively. Our single-family REO inventory consisted of
7,100 properties and 8,299 properties at December 31, 2018 and December 31, 2017, respectively.
Although the average length of the foreclosure process has been trending downward in recent years for
some jurisdictions, it remained elevated in others, particularly states with a judicial foreclosure process,
which extends the time it takes for loans to be foreclosed upon and the underlying property to transition
to REO.
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 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
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Notes to the Consolidated Financial Statements | Note 14
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 loans in our single-family credit guarantee portfolio. The
table includes a presentation of each higher-risk category in isolation. A single loan may fall within more
than one category (for example, an interest-only loan may also have an original LTV ratio greater than
90%). Loans with a combination of these attributes may have an even higher risk of delinquency than
those with an individual attribute.
Table 14.2 - Certain Higher Risk Categories in Our Single-Family Credit Guarantee Portfolio
Percentage of Portfolio(1)
Serious Delinquency Rate(1)
(Percentage of portfolio based on UPB)
December 31, 2018 December 31, 2017
December 31, 2018 December 31, 2017
Interest-only
Alt-A
Original LTV ratio greater than 90%(2)
Lower credit scores at origination (less than 620)
1%
1
18
2
1%
1
17
2
3.43%
4.13
1.04
4.59
4.97%
5.62
1.70
6.34
(1) Excludes loans underlying certain other securitization products for which data was not available.
(2)
Includes HARP loans, which we purchased 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 do not consider 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.
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Notes to the Consolidated Financial Statements | Note 14
Table 14.3 - Concentration of Credit Risk of Our Multifamily Mortgage Portfolio
(Dollars in billions)
Unsecuritized loans
Securitization-related products
Other mortgage-related guarantees
Total
As of December 31, 2018
As of December 31, 2017
UPB
$34.8
226.9
9.8
$271.5
Delinquency
Rate(1)
0.01%
0.01
—
0.01%
UPB
$38.2
192.5
10.0
$240.7
Delinquency
Rate(1)
0.01%
0.02
—
0.02%
(1) Based on loans two monthly payments or more delinquent or in foreclosure.
In the multifamily mortgage portfolio, the primary concentration of credit risk is based on the legal
structure of the investments we hold. Our exposure to credit risk in K Certificates and SB Certificates is
minimal, as the expected credit risk is absorbed by the subordinate tranches, which are generally sold to
private investors. As a result, our multifamily mortgage credit risk is primarily related to loans that have
not been securitized.
Sellers and Servicers
We acquire a significant portion of our single-family and multifamily loan purchase volume from several
large sellers. The tables below summarize the concentration of single-family and multifamily sellers who
provided 10% or more of our purchase volume.
Table 14.4 - Seller Concentration
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
2018
12%
38
50%
2018
18%
13
9
39
79%
2017
15%
38
53%
2017
18%
11
10
39
78%
In recent years, there has been a shift in our single-family purchase volume from depository institutions
to non-depository and smaller depository financial institutions. Some of these non-depository sellers
have grown rapidly in recent years, and we purchase a significant share of our loans from them. Our top
five non-depository sellers provided approximately 22% and 20% of our single-family purchase volume
during 2018 and 2017, 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, 2018 and December 31, 2017, the UPB of loans subject to our
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Financial Statements
Notes to the Consolidated Financial Statements | Note 14
repurchase requests issued to our single-family sellers and servicers was approximately $0.4 billion and
$0.2 billion, respectively (these figures include repurchase requests for which appeals were pending).
During both 2018 and 2017, we recovered amounts that covered losses with respect to $0.3 billion 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.
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, 2018, approximately 75% 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
tables below summarize 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.
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Financial Statements
Notes to the Consolidated Financial Statements | Note 14
Table 14.5 - Servicer Concentration
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, 2018(1) December 31, 2017(1)
18%
17%
39
56%
40
58%
December 31, 2018
December 31, 2017
14%
14
11
36
75%
16%
12
11
36
75%
(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
now service a large share of our loans. As of December 31, 2018 and December 31, 2017,
approximately 16% and 15% 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. 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.
Credit Enhancement Providers
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 also have similar
exposure to insurers and reinsurers through our ACIS transactions where we purchase insurance
policies as part of our CRT activities.
We evaluate the recovery and collectability from mortgage insurers as part of the estimate of our
allowance for credit losses. See Note 4 for additional information. As of December 31, 2018, mortgage
insurers provided coverage with maximum loss limits of $97.0 billion, for $378.7 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 October 23, 2016, Genworth Financial, Inc.
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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 has evaluated the planned acquisition and approved
China Oceanwide Holdings Group's control of Genworth Mortgage Insurance Corporation. Regulatory
and other approvals of the acquisition are still pending.
Table 14.6 - Mortgage Insurer Concentration
Mortgage Insurer
Arch Mortgage Insurance Company
Radian Guaranty Inc.
Mortgage Guaranty Insurance Corporation
Genworth Mortgage Insurance Corporation
Essent Guaranty, Inc.
Total
Credit Rating(1)
December 31, 2018
December 31, 2017
Mortgage Insurance Coverage(2)
A-
BBB
BBB
BB+
BBB+
24%
20
19
14
14
91%
24%
21
19
15
12
91%
(1) Ratings are for the corporate entity to which we have the greatest exposure. Latest rating available as of December 31, 2018. Represents the
lower of S&P and Moody's credit ratings stated in terms of the S&P equivalent.
(2) Coverage amounts may include coverage provided by affiliates and subsidiaries of the counterparty.
We received proceeds of $0.2 billion and $0.4 billion during 2018 and 2017, respectively, from our
primary and pool mortgage insurance policies for recovery of losses on our single-family loans. We had
outstanding receivables from mortgage insurers of $0.1 billion (excluding deferred payment obligations
associated with unpaid claim amounts) as of both December 31, 2018 and December 31, 2017. The
balance of these receivables, net of associated reserves, was approximately $0.1 billion at both
December 31, 2018 and December 31, 2017.
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, 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, 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, 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, 2018 and
December 31, 2017, we had cumulative unpaid deferred payment obligations of $0.5 billion from these
insurers. We have reserved substantially 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.
As part of our ACIS 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 and reinsurers, including the following:
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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
ACIS insurers and reinsurers generally participate in multiple types of insurance businesses, which
helps diversify their risk exposure.
Other Investment Counterparties
We are exposed to the non-performance of counterparties relating to 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 such transactions. We monitor the financial strength of
our counterparties to these transactions and may use collateral maintenance requirements to manage
our exposure to individual counterparties. The permitted term and dollar limits for each of these
transactions are also based on the counterparty's financial strength.
Our 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, GSD/FICC, highly-rated supranational institutions, depository and non-depository institutions,
brokers and dealers, and government money market funds. As of December 31, 2018 and December
31, 2017, including amounts related to our consolidated VIEs, the balance of our other investments
portfolio was $63.1 billion and $89.8 billion, respectively. The balance consists primarily of cash,
securities purchased under agreements to resell invested with counterparties, U.S. Treasury securities,
cash deposited with the Federal Reserve Bank of New York, and secured lending activities. As of
December 31, 2018, all of our securities purchased under agreements to resell were fully collateralized.
As of December 31, 2018 and December 31, 2017, $2.5 billion, and $0.2 billion 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.
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
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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
2015. In May 2015, the judge ruled against the defendants and ordered them to pay an aggregate of
$806 million, of which $779 million was to be paid to Freddie Mac, adjusted by any principal and interest
collected by Freddie Mac between the date of the judgment and the date on which the judgment was
executed. The judgment also provided for Freddie Mac to transfer to defendants the six mortgage-
related securities at issue in the case and ordered the defendants to reimburse Freddie Mac for certain
costs, legal fees and expenses. In September 2017, the U.S. Court of Appeals for the Second Circuit
affirmed the District Court's decision. Nomura and RBS filed a petition for writ of certiorari in the U.S.
Supreme Court, and on June 25, 2018, the U.S. Supreme Court denied certiorari. On July 20, 2018,
Freddie Mac received approximately $652 million, which included post-judgment interest, and tendered
to Nomura the six certificates at issue. In addition, Freddie Mac received $16.5 million from Nomura as
reimbursement of attorneys' fees and costs. We recognized the benefit of the judgment during 2Q 2018
and recorded a gain of $334 million within non-interest income on our consolidated statements of
comprehensive income.
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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 technique are unobservable and significant to the fair
value measurement.
We use quoted market prices and valuation techniques that seek to maximize the use of observable
inputs, where available, and minimize the use of unobservable inputs. Our inputs are based on the
assumptions a market participant would use in valuing the asset or liability. Assets and liabilities are
classified in their entirety within the fair value hierarchy based on the lowest level input that is significant
to the fair value measurement.
Valuation Risk and Controls Over Fair Value Measurements
Valuation risk is the risk that fair values used for financial disclosures, risk metrics, and performance
measures do not reasonably reflect market conditions and prices.
We designed our control processes so that our fair value measurements are appropriate and reliable,
that they are based on observable inputs where possible, and that our valuation approaches are
consistently applied and the assumptions and inputs are reasonable. Our control processes provide a
framework for segregation of duties and oversight of our fair value methodologies, techniques, validation
procedures, and results.
Groups within our Finance Division, independent of our business functions, execute and validate the
valuation processes and are responsible for determining the fair values of the majority of our financial
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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 on 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 Risk 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
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,
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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 uncertainty of the fair value
measurement to changes in significant unobservable inputs. Although the uncertainties 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
Other Liabilities
Guarantee
obligation
Single-family
Multifamily
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
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below 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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Table 15.1 - Assets and Liabilities Measured at Fair Value on a Recurring Basis
(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:
Non-derivative held-for-sale purchase commitments, at fair value
Total liabilities carried at fair value on a recurring basis
Referenced footnote is included after the next table.
December 31, 2018
Level 1
Level 2
Level 3
Netting
Adjustment(1)
Total
$—
—
—
—
—
—
—
—
—
—
15,885
15,885
15,885
—
—
—
—
—
—
—
—
—
—
—
$15,885
$—
—
—
—
—
—
—
—
—
$—
$26,102
1,668
—
18
—
27,788
10,535
2,544
—
13,079
3,290
16,369
44,157
23,106
2,127
4,200
90
6,417
—
6,417
—
159
—
159
$73,839
$27
4,223
3,974
137
225
4,336
—
4,336
$4,097
38
1,403
—
237
5,775
3,286
7
1
3,294
—
3,294
9,069
—
—
—
1
1
—
1
3,633
—
137
3,770
$12,840
$728
134
—
—
92
92
—
92
$—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(6,083)
(6,083)
—
—
—
—
($6,083)
$—
—
—
—
—
—
(3,845)
(3,845)
$30,199
1,706
1,403
18
237
33,563
13,821
2,551
1
16,373
19,175
35,548
69,111
23,106
2,127
4,200
91
6,418
(6,083)
335
3,633
159
137
3,929
$96,481
$755
4,357
3,974
137
317
4,428
(3,845)
583
17
$8,603
—
$954
—
($3,845)
17
$5,712
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December 31, 2017
Level 1
Level 2
Level 3
Netting
Adjustment(1)
Total
(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:
$—
—
—
—
—
—
—
—
—
—
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
$6,751
46
3,933
1
357
11,088
2,907
9
1
2,917
—
2,917
14,005
—
—
—
8
8
—
8
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
—
—
—
—
$20,159
—
137
—
137
$79,175
3,171
—
45
3,216
$17,229
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:
$—
—
—
—
—
—
—
—
$9
5,023
7,239
121
64
7,424
—
7,424
$630
137
—
—
65
65
—
65
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
$6,072
(1) Represents counterparty netting, cash collateral netting, and net derivative interest receivable or payable.
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$—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8,463)
(8,463)
—
—
—
—
($8,463)
$—
—
—
—
—
—
(7,220)
(7,220)
$37,166
2,053
3,933
88
357
43,597
14,300
3,574
28
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
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
Level 3 Fair Value Measurements
The tables below present 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. The tables also present gains and losses due to changes in
fair value, including both realized and unrealized gains and losses, recognized on our consolidated
statements of comprehensive income for Level 3 assets and liabilities.
Table 15.2 - Fair Value Measurements of Assets and Liabilities Using Significant Unobservable
Inputs
Realized and unrealized gains (losses)
Year Ended December 31, 2018
Balance,
January 1,
2018
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,
2018
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)
$6,751
46
3,933
1
357
11,088
2,907
9
1
($31)
—
948
—
—
917
(515)
(2)
—
($213)
($244)
$56
$— ($1,546)
($920)
$—
$—
$4,097
($7)
(1)
(641)
—
(1)
307
—
(3)
(3)
(858)
59
—
—
—
—
56
—
—
—
—
—
(2,481)
—
—
(6)
(356)
(1)
(117)
— (4,027)
(1,400)
—
—
—
—
—
579
—
—
579
—
—
$—
(1)
—
—
—
(1)
(32)
—
—
(32)
—
—
$—
38
1,403
—
237
5,775
3,286
7
1
—
23
—
—
16
(448)
(1)
—
3,294
(449)
3,633
137
$3,770
(80)
25
($55)
(79)
—
—
(79)
(576)
(12)
— (515)
1,484
—
—
(2)
—
—
—
—
—
—
(1,058)
—
—
2,917
(517)
— (517)
1,484
— (1,058)
3,171
45
$3,216
(80)
28
($52)
—
—
(80)
28
— 1,118
102
31
—
(57)
$— ($52)
$102
$1,149
($57)
($588)
Realized and unrealized (gains) losses
Balance,
January 1,
2018
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,
2018
Unrealized
(gains)
losses
still held(3)
$630
137
$57
($2)
—
$37
$—
—
$—
($2)
—
$37
$—
—
$—
$100
2
$15
$—
—
$—
$—
(5)
($18)
$—
—
$—
$—
—
$—
$728
134
$91
($2)
—
$20
Referenced footnotes are included after the prior period tables.
FREDDIE MAC | 2018 Form 10-K
321
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
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)
$103
$91
$2,175
$—
($932)
($1,352)
$17
($3,095)
$9,847
66
11,797
3,366
($12)
—
1,564
347
(1)
(1)
(270)
1,294
(120)
227
665
1
(3)
(2)
—
—
—
—
—
—
—
—
—
(7,688)
(3,556)
(11)
(1,470)
(36)
—
(306)
25,741
1,900
(291)
1,609
2,175
— (12,176)
(3,175)
1,207
12
1
(136)
(3)
—
— (136)
2,655
—
—
(3)
—
—
—
1,220
(139)
— (139)
2,655
—
—
—
—
2,298
2
(27)
(10)
—
—
(27)
(10)
— 1,387
33
31
(592)
—
—
(592)
—
(11)
(36)
—
—
(36)
(487)
—
$6,751
46
3,933
1
357
(8)
—
—
—
(3,103)
11,088
(205)
2,907
—
—
9
1
($22)
—
124
2
—
104
(125)
(3)
—
(205)
2,917
(128)
—
—
3,171
45
(26)
(10)
—
—
—
—
17
14
—
—
14
—
—
(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
$2,300
($37)
$— ($37)
$33
$1,418
($11)
($487)
$—
$—
$3,216
($36)
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)
Liabilities
Debt securities of consolidated
trusts held by third parties, at
fair value
Other debt, at fair value
Net derivatives(2)
$—
95
$52
$—
—
$40
$—
—
$—
$—
—
$40
$—
—
$—
$630
50
($10)
$—
—
$—
$—
(8)
($25)
$—
—
$—
$—
—
$—
$630
137
$57
$—
—
$20
(1) Transfers out of Level 3 during 2018 and 2017 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 2018 and 2017 consisted
primarily of certain mortgage-related securities due to a decrease in market activity and the availability of relevant price quotes from dealers and
third-party pricing services.
(2) 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.
(3) 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, 2018 and December 31, 2017, respectively. Included in
these amounts are other-than temporary impairments recorded on available-for-sale securities.
FREDDIE MAC | 2018 Form 10-K
322
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
The tables below provide valuation techniques, the range, and the weighted average of significant
unobservable inputs for Level 3 assets and liabilities measured on our consolidated balance sheets at
fair value on a recurring basis.
Table 15.3 - Quantitative Information about Recurring Level 3 Fair Value Measurements
(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, 2018
Assets
Available-for-sale, at fair value
Mortgage-related securities
Freddie Mac
Non-agency RMBS
$2,838
Discounted cash flows
OAS
1,259
Single external source
1,403
Median of external
sources
External pricing
sources
External pricing
sources
External pricing
sources
External pricing
sources
OAS
OAS
30 - 325 bps
$96.1 - $104.1
$64.3 - $71.1
$93.1 - $110.7
81 bps
$102.3
$67.3
$100.7
$0.0 - $99.2
$56.6
(21,945) - 6,639 bps
90 bps
17-198 bps
49 bps
Single External Source
External Pricing
Sources
$97.4 - $101.1
$99.6
Obligations of states and political subdivisions
237
Single external source
Trading, at fair value
Mortgage-related securities
Freddie Mac
Guarantee asset, at fair value
Insignificant Level 3 assets(1)
Total level 3 assets
Liabilities
Debt securities of consolidated trusts held by third
parties, at fair value
Insignificant Level 3 liabilities(1)
Referenced footnotes are included after the next table.
1,587
1,178
521
3,391
242
184
12,840
728
226
Single external source
Discounted cash flows
Other
Discounted cash flows
Other
FREDDIE MAC | 2018 Form 10-K
323
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, 2017
Assets
Available-for-sale, at fair value
Mortgage-related securities
Freddie Mac
Non-agency RMBS
Obligations of states and political subdivisions
Trading, at fair value
Mortgage-related securities
$5,020
Discounted cash flows
OAS
27 - 501 bps
1,731
Single external source
3,933
357
Median of external
sources
Median of external
sources
External pricing
sources
External pricing
sources
External pricing
sources
External pricing
sources
$97.1 - $108.9
$75.6 - $80.8
68 bps
$108.5
$77.7
$101.2 - $101.6
$101.4
$1.2 - $101.3
$97.9
(8,905) - 27,202 bps
(88) bps
17 - 198 bps
45 bps
Freddie Mac
$2,068
Single external source
Discounted cash flows
Other
Discounted cash flows
OAS
OAS
Guarantee asset, at fair value
Insignificant Level 3 assets(1)
Total level 3 assets
Liabilities
Debt securities of consolidated trusts held by third parties,
at fair value
Insignificant Level 3 liabilities(1)
582
257
3,171
110
$17,229
630
202
Single external source
External pricing
sources
$99.2 - $100.2
$100.1
(1) Represents the aggregate amount of Level 3 assets or liabilities measured at fair value on a recurring basis that are individually and in the aggregate
insignificant.
FREDDIE MAC | 2018 Form 10-K
324
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
Assets Measured at Fair Value on a Non-Recurring Basis
We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis
after our initial recognition. These adjustments usually result from the application of lower-of-cost-or-
fair-value accounting or measurement of impairment based on the fair value of the underlying collateral.
Certain of the fair values in the tables below were not obtained as of the period end, but were obtained
during the period.
The table below presents assets measured on our consolidated balance sheets at fair value on a non-
recurring basis.
Table 15.4 - Assets Measured at Fair Value on a Non-Recurring Basis
(In millions)
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
December 31, 2018
December 31, 2017
Assets measured at fair value on a
non-recurring basis:
Mortgage loans(1)
$—
$24
$7,519
$7,543
$—
$494
$6,199
$6,693
(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.
The tables below provide valuation techniques, the range, and the weighted average of significant
unobservable inputs for Level 3 assets and liabilities measured on our consolidated balance sheets at
fair value on a non-recurring basis.
Table 15.5 - Quantitative Information about Non-Recurring Level 3 Fair Value Measurements
December 31, 2018
Unobservable Inputs
Level 3
Fair
Value
Predominant
Valuation
Technique(s)
Type
Range
Weighted
Average
(Dollars in millions, except
for certain unobservable
inputs as shown)
Non-recurring fair value
measurements
Mortgage loans
$7,519
Internal model
Internal model
Historical sales proceeds
$3,000 - $750,500
$177,725
Housing sales index
44 - 480 bps
Median of external sources
External pricing sources
$36.2 - $94.6
December 31, 2017
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)
$6,199
Internal model
Internal model
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
108 bps
$82.5
Weighted
Average
102 bps
$80.9
FREDDIE MAC | 2018 Form 10-K
325
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
Fair Value of Financial Instruments
The tables below present the carrying value and estimated fair value of our financial instruments. For
certain types of financial instruments, such as cash and cash equivalents, securities purchased under
agreements to resell, secured lending and other, and certain debt, the carrying value on our GAAP
balance sheets approximates fair value, as these assets and liabilities are short-term in nature and have
limited fair value volatility.
Table 15.6 - Fair Value of Financial Instruments
GAAP
Measurement
Category(1)
GAAP
Carrying
Amount
December 31, 2018
Fair Value
Level 1
Level 2
Level 3
Netting
Adjustments(2)
Total
Amortized cost
$7,273
$7,273
$—
FV - OCI
FV - NI
34,771
33,563
35,548
69,111
1,842,850
84,128
Various(4)
1,926,978
FV - NI
FV - NI
FV - NI
Amortized cost
335
3,633
159
1,805
—
—
15,885
15,885
34,771
27,788
16,369
44,157
— 1,605,874
—
33,946
— 1,639,820
—
—
—
—
6,417
—
159
195
$—
—
5,775
3,294
9,069
209,542
52,212
261,754
1
3,642
2
873
$—
$7,273
—
—
—
—
34,771
33,563
35,548
69,111
— 1,815,416
—
86,158
— 1,901,574
(6,083)
—
—
—
335
3,642
161
1,068
$2,044,065
$23,158
$1,725,519
$275,341
($6,083)
$2,017,935
(In millions)
Financial Assets
Cash and cash equivalents(3)
Securities purchased under agreements
to resell
Amortized cost
Investments in securities:
Available-for-sale, at fair value
Trading, at fair value
Total investments in securities
Mortgage loans:
Loans held by consolidated trusts
Loans held by Freddie Mac
Total mortgage loans
Derivative assets, net
Guarantee asset
Non-derivative purchase commitments,
at fair value
Secured lending and other
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,
at fair value
$1,792,677
252,273
Various(5)
2,044,950
FV - NI
Amortized cost
FV - NI
583
3,561
17
$— $1,759,911
$2,698
—
251,543
— 2,011,454
—
—
—
4,336
—
17
3,629
6,327
92
4,146
11
$— $1,762,609
—
255,172
— 2,017,781
(3,845)
—
—
583
4,146
28
Total financial liabilities
$2,049,111
$— $2,015,807
$10,576
($3,845)
$2,022,538
(1) FV - NI denotes fair value through net income. FV - OCI denotes fair value through other comprehensive income.
(2) Represents counterparty netting, cash collateral netting, and net derivative interest receivable or payable.
(3) The current and prior period presentation has been modified to include restricted cash and cash equivalents due to recently adopted accounting
guidance.
(4) As of December 31, 2018, the GAAP carrying amounts measured at amortized cost, lower-of-cost-or-fair-value and FV - NII were $1.9 trillion,
$18.5 billion and $23.1 billion, respectively.
(5) As of December 31, 2018, the GAAP carrying amounts measured at amortized cost and FV - NII were $2.0 trillion and $5.1 billion, respectively.
FREDDIE MAC | 2018 Form 10-K
326
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
GAAP
Measurement
Category(1)
GAAP
Carrying
Amount
December 31, 2017
Fair Value
Level 1
Level 2
Level 3
Netting
Adjustments(2)
Total
Amortized cost
$9,811
$9,811
$—
FV - OCI
FV - NI
FV - NI
FV - NI
FV - NI
55,903
43,597
40,721
84,318
1,774,286
96,931
375
3,171
137
1,269
Various(4)
1,871,217
—
—
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
$—
$9,811
—
—
—
—
55,903
43,597
40,721
84,318
— 1,781,048
—
100,101
— 1,881,149
(8,463)
—
—
—
375
3,359
192
1,269
$2,026,201
$29,970
$1,782,803
$232,066
($8,463)
$2,036,376
(In millions)
Financial Assets
Cash and cash equivalents(3)
Securities purchased under agreements
to resell
Amortized cost
Investments in securities:
Available-for-sale, at fair value
Trading, at fair value
Total investments in securities
Mortgage loans:
Loans held by consolidated trusts
Loans held by Freddie Mac
Total mortgage loans
Derivative assets, net
Guarantee asset
Non-derivative purchase commitments,
at fair value
Secured lending and other
Amortized cost
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,
at fair value
$1,720,996
313,634
Various(5)
2,034,630
FV - NI
Amortized cost
FV - NI
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
(1) FV - NI denotes fair value through net income. FV - OCI denotes fair value through other comprehensive income.
(2) Represents counterparty netting, cash collateral netting and net derivative interest receivable or payable.
(3) The current and prior period presentation has been modified to include restricted cash and cash equivalents due to recently adopted accounting
guidance.
(4) As of December 31, 2017, the GAAP carrying amounts measured at amortized cost, lower-of-cost-or-fair-value and FV - NII were $1.8 trillion,
$14.7 billion and $20.1 billion, respectively.
(5) As of December 31, 2017, the GAAP carrying amounts measured at amortized cost and FV - NII were $2.0 trillion and $5.8 billion, respectively.
FREDDIE MAC | 2018 Form 10-K
327
Financial Statements
HARP Loans
Notes to the Consolidated Financial Statements | Note 15
The fair value of mortgage loans includes loans refinanced under HARP of $30.2 billion as of
December 31, 2017, where the beneficial pricing afforded to HARP is reflected in the estimated loan fair
value. The fair value of HARP loans reflected the total compensation that we received for the delivery of
the HARP loans, based on the pricing that we were willing to offer because HARP was a part of a
broader government program intended to provide assistance to homeowners and prevent foreclosures.
HARP ended on December 31, 2018, so the beneficial pricing afforded to HARP loans is no longer
reflected in the pricing structure of our guarantee fees or the fair value of the HARP loans as of
December 31, 2018. If these benefits were not reflected in the pricing for these loans as of December
31, 2017, the fair value of our loans would have decreased by $2.1 billion.
Fair Value Option
We elected the fair value option for multifamily held-for-sale loans, certain multifamily held-for-sale loan
purchase commitments, and certain long-term debt.
Multifamily Held-for-Sale Loans and Held-for-Sale Commitments
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 mortgage loans
gains (losses) on 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 on 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 debt gains (losses) on 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 loans and long-term debt for which
we have elected the fair value option. This table does not include interest-only securities related to debt
securities of consolidated trusts held by third parties with a fair value of $26 million and $9 million and
multifamily held-for-sale loan purchase commitments with a fair value of $142 million and $133 million,
as of December 31, 2018 and December 31, 2017, respectively.
FREDDIE MAC | 2018 Form 10-K
328
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
Table 15.7 - Difference between Fair Value and Unpaid Principal Balance for Certain Financial
Instruments with Fair Value Option Elected
December 31, 2018
December 31, 2017
Multifamily
Held-For-Sale
Loans
Other Debt -
Long Term
$23,106
$4,357
22,693
$413
3,998
$359
Debt Securities of
Consolidated
Trusts Held by
Third Parties (1)
$728
730
($2)
Multifamily
Held-For-Sale
Loans
Other Debt -
Long Term
$20,054
$5,160
19,762
$292
4,666
$494
Debt Securities of
Consolidated
Trusts Held by
Third Parties (1)
$630
630
$—
(In millions)
Fair value
Unpaid principal
balance
Difference
Changes in Fair Value Under the Fair Value Option Election
The table below presents the changes in fair value included in non-interest income (loss) on our
consolidated statements of comprehensive income, related to items for which we have elected the fair
value option.
Table 15.8 - Changes in Fair Value under the Fair Value Option Election
(In millions)
Multifamily held-for-sale loans
Multifamily held-for-sale loan purchase commitments
Other debt - long term
Debt securities of consolidated trusts held by third parties
December 31, 2018
December 31, 2017
December 31, 2016
Gains (Losses)
2
1,098
(212)
22
(745)
777
138
5
250
663
—
63
Changes in fair value attributable to instrument-specific credit risk were not material for the years ended
December 31, 2018, 2017 or 2016 for any assets or liabilities for which we elected the fair value option.
FREDDIE MAC | 2018 Form 10-K
329
Financial Statements
Notes to the Consolidated Financial Statements | Note 16
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. On August 14, 2018, the District Court denied the
plaintiff's motion for class certification. On January 23, 2019, the Court of Appeals denied plaintiff's
petition for leave to appeal that decision.
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: pre-trial litigation is inherently uncertain;
while the District Court denied plaintiff's motion for class certification, this denial may be appealed upon
the entry of final judgment; and the District Court has not yet ruled upon motions for summary
FREDDIE MAC | 2018 Form 10-K
330
Financial Statements
Notes to the Consolidated Financial Statements | Note 16
judgment. In particular, absent a final resolution of whether a class will be certified, the identification of a
class if one is certified, 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.
On February 23, 2018, the Second Circuit reversed the District Court's dismissal of certain plaintiffs'
state law fraud and unjust enrichment claims on statutes of limitations grounds. While Freddie Mac was
not a party to the appeal, this decision could have the effect of reinstating Freddie Mac's fraud claims
against the above-named defendants. The Second Circuit also reversed certain aspects of the District
Court's personal jurisdiction rulings and remanded with instructions to allow the named appellant to
amend its complaint. On June 15, 2018, Freddie Mac filed a motion for leave to file an amended
complaint, along with a proposed amended complaint.
FREDDIE MAC | 2018 Form 10-K
331
Financial Statements
Notes to the Consolidated Financial Statements | Note 16
Litigation Concerning the Purchase Agreement
Since July 2013, a number of lawsuits have been filed against us concerning the August 2012
amendment to the Purchase Agreement, which created the net worth sweep dividend provisions of the
senior preferred stock. The plaintiffs in the lawsuits allege that they are holders of common stock and/or
junior preferred stock issued by Freddie Mac and Fannie Mae. (For purposes of this discussion, junior
preferred stock refers to the various series of preferred stock of Freddie Mac and Fannie Mae other than
the senior preferred stock issued to Treasury.) It is possible that similar lawsuits will be filed in the future.
The lawsuits against us are described below.
Litigation in the U.S. District Court for the District of Columbia
In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action
Litigations. This case is the result of the consolidation of three putative class action lawsuits:
Cacciapelle and Bareiss vs. Federal National Mortgage Association, Federal Home Loan Mortgage
Corporation and FHFA, filed on July 29, 2013; American European Insurance Company vs. Federal
National Mortgage Association, Federal Home Loan Mortgage Corporation and FHFA, filed on July 30,
2013; and Marneu Holdings, Co. vs. FHFA, Treasury, Federal National Mortgage Association and Federal
Home Loan Mortgage Corporation, filed on September 18, 2013. (The Marneu case was also filed as a
shareholder derivative lawsuit.) A consolidated amended complaint was filed in December 2013. In the
consolidated amended complaint, plaintiffs allege, among other items, that the August 2012 amendment
to the Purchase Agreement breached Freddie Mac's and Fannie Mae's respective contracts with the
holders of junior preferred stock and common stock and the covenant of good faith and fair dealing
inherent in such contracts. Plaintiffs sought unspecified damages, equitable and injunctive relief, and
costs and expenses, including attorney and expert fees.
The Cacciapelle and American European Insurance Company lawsuits were filed purportedly on behalf
of a class of purchasers of junior preferred stock issued by Freddie Mac or Fannie Mae who held stock
prior to, and as of, August 17, 2012. The Marneu lawsuit was filed purportedly on behalf of a class of
purchasers of junior preferred stock and purchasers of common stock issued by Freddie Mac or Fannie
Mae over a not-yet-defined period of time.
Arrowood Indemnity Company vs. Federal National Mortgage Association, Federal Home
Loan Mortgage Corporation, FHFA, and Treasury. This case was filed on September 20, 2013. The
allegations and demands made by plaintiffs in this case were generally similar to those made by the
plaintiffs in the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action
Litigations case described above. Plaintiffs in the Arrowood lawsuit also requested that, if injunctive
relief were not granted, the Arrowood plaintiffs be awarded damages against the defendants in an
amount to be determined including, but not limited to, the aggregate par value of their junior preferred
stock, the total of which they stated to be approximately $42 million.
American European Insurance Company, Cacciapelle, and Miller vs. Treasury and FHFA. This
case was filed as a shareholder derivative lawsuit, purportedly on behalf of Freddie Mac as a "nominal"
defendant, on July 30, 2014. The complaint alleged that, through the August 2012 amendment to the
Purchase Agreement, Treasury and FHFA breached their respective fiduciary duties to Freddie Mac,
causing Freddie Mac to suffer damages. The plaintiffs asked that Freddie Mac be awarded
compensatory damages and disgorgement, as well as attorneys' fees, costs, and other expenses.
FREDDIE MAC | 2018 Form 10-K
332
Financial Statements
Notes to the Consolidated Financial Statements | Note 16
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 a writ of certiorari in the
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 Supreme Court denied the petitions
on February 20, 2018. 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. On August 16, 2018, plaintiffs
in the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action
Litigations case filed a motion for class certification in the District Court. On September 28, 2018, the
District Court dismissed all of the claims except those alleging breach of the implied covenant of good
faith and fair dealing. On October 15, 2018, defendants filed a motion seeking reconsideration of the
denial of the motion to dismiss as to the implied covenant claims. Discovery is ongoing.
Angel vs. The Federal Home Loan Mortgage Corporation et al. This case was filed pro se on May 21,
2018 against Freddie Mac, Fannie Mae, certain current and former directors of Freddie Mac and Fannie
Mae, and FHFA as a nominal defendant. The complaint alleges, among other things, breach of contract,
breach of the implied covenant of good faith and fair dealing, and that defendants aided and abetted the
government's "avoidance" of plaintiff's dividend rights. On July 12, 2018, the defendants filed a motion
to dismiss the complaint.
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
FREDDIE MAC | 2018 Form 10-K
333
Financial Statements
Notes to the Consolidated Financial Statements | Note 16
expenses. On March 8, 2018, the plaintiffs filed an amended complaint under seal, with a redacted copy
filed in November 14, 2018. Defendants filed a motion to dismiss on August 1, 2018 and an amended
motion to dismiss on October 1, 2018.
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. Plaintiffs filed a further amended complaint under seal
on March 8, 2018, and a redacted public version on April 20, 2018. The amended complaint no longer
lists Freddie Mac as a nominal defendant.
Fairholme Funds, Inc., et al. vs. the United States of America, Federal National Mortgage
Association, and Federal Home Loan Mortgage Corporation. This case was originally filed on July 9,
2013 against the United States of America. On March 8, 2018, plaintiffs filed an amended complaint
under seal. A redacted public version was filed on May 11, 2018 and adds Freddie Mac and Fannie Mae
as nominal defendants. The amended complaint alleges, among other items, that the net worth sweep
dividend provisions of the senior preferred stock constitute an unlawful taking or exaction of private
property for public use without just compensation, and that by enacting the net worth sweep, the
government breached the fiduciary duty it owed to Freddie Mac and Fannie Mae, and implied-in-fact
contracts between the United States on the one hand and Freddie Mac and Fannie Mae on the other.
The plaintiffs ask that plaintiffs, Freddie Mac, and Fannie Mae be awarded (1) just compensation for the
government's alleged taking or exaction of their property, (2) damages for the government's breach of
fiduciary duties, and (3) damages for the government's breach of the alleged implied-in-fact contracts.
In addition, plaintiffs seek pre- and post-judgment interest, attorneys' fees, costs, and other expenses.
Defendants filed a motion to dismiss on August 1, 2018 and an amended motion to dismiss on October
1, 2018.
Perry Capital LLC vs. the United States of America, Federal National Mortgage Association, and
Federal Home Loan Mortgage Corporation. This case was filed as a derivative lawsuit, purportedly on
behalf of Freddie Mac and Fannie Mae as "nominal" defendants, on August 15, 2018. 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 or an illegal
exaction in violation of the Fifth Amendment, and that by enacting the net worth sweep, the government
breached the fiduciary duty it owed to Freddie Mac and Fannie Mae, and implied-in-fact contracts
between the United States on the one hand and Freddie Mac and Fannie Mae on the other. The plaintiffs
ask that plaintiffs, Freddie Mac, and Fannie Mae be awarded just compensation for the government's
alleged taking of their property or damages for the illegal exaction; damages for the government's
breach of fiduciary duties; and damages for the government's breach of the alleged implied-in-fact
contracts. The proceedings have been stayed pending a ruling on defendants' motion to dismiss in the
Fairholme Funds, Inc. litigation.
FREDDIE MAC | 2018 Form 10-K
334
Financial Statements
Notes to the Consolidated Financial Statements | Note 16
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
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, and on November 14, 2018, the Court of Appeals affirmed
the dismissal.
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 | 2018 Form 10-K
335
Financial Statements
Notes to the Consolidated Financial Statements | Note 17
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 CCF.
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 | 2018 Form 10-K
336
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.
Table 17.1 - Net Worth and Minimum Capital
(In millions)
GAAP net worth (deficit)
Core capital (deficit)(1)(2)
Less: Minimum capital requirement(1)
Minimum capital surplus (deficit)(1)
December 31, 2018
December 31, 2017
$4,477
(68,036)
17,553
($85,589)
($312)
(73,037)
18,431
($91,468)
(1) Core capital and minimum capital figures are estimates and represent amounts submitted to FHFA. FHFA is the authoritative source for our
regulatory capital.
(2) Core capital excludes certain components of GAAP total equity (i.e., AOCI and the liquidation preference of the senior preferred stock) as these
items do not meet the statutory definition of core capital.
The Purchase Agreement provides that, if FHFA determines as of quarter end that our liabilities have
exceeded our assets under GAAP, Treasury will contribute funds to us in an amount at least equal to the
difference between such liabilities and assets.
Under the GSE Act, FHFA must place us into receivership if FHFA determines that our assets are and
have been less than our obligations for a period of 60 days. FHFA has notified us that the measurement
period for any mandatory receivership determination with respect to our assets and obligations would
commence no earlier than the SEC public filing deadline for our quarterly or annual financial statements
and would continue for 60 calendar days after that date. FHFA has advised us that, if, during that 60-day
period, we receive funds from Treasury in an amount at least equal to the deficiency amount under the
Purchase Agreement, the Director of FHFA will not make a mandatory receivership determination. If
funding has been requested under the Purchase Agreement to address a deficit in our net worth, and
Treasury is unable to provide us with such funding within the 60-day period specified by FHFA, FHFA
would be required to place us into receivership if our assets remain less than our obligations during that
60-day period.
At December 31, 2018, our assets exceeded our liabilities under GAAP; therefore, no draw is being
requested from Treasury under the Purchase Agreement. As of December 31, 2018, our aggregate
funding received from Treasury under the Purchase Agreement was $71.6 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 | 2018 Form 10-K
337
Financial Statements
Notes to the Consolidated Financial Statements | Note 18
NOTE 18
Selected Financial Statement Line Items
The table below presents the significant components of other income (loss) on our consolidated
statements of comprehensive income (loss).
Table 18.1 - Significant Components of Other Income (Loss)
(In millions)
Other income (loss)
Non-agency mortgage-related securities settlement and judgment
Income on guarantee obligation
All other
Total other income (loss)
Year Ended December 31,
2018
2017
2016
$338
711
(335)
$714
$4,532
601
(151)
$4,982
$—
449
354
$803
The table below presents the significant components of other assets and other liabilities on our
consolidated balance sheets.
Table 18.2 - Significant Components of Other Assets and Other Liabilities
(In millions)
Other assets:
Real estate owned, net
Accounts and other receivables(1)(2)
Guarantee asset
Fixed assets
Secured lending and other(2)
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
As of December 31,
2018
2017
$769
2,447
3,633
959
1,805
1,363
$892
6,924
3,171
798
1,269
636
$10,976
$13,690
$289
3,561
1,014
—
—
1,534
$6,398
$628
3,081
754
2,813
656
1,036
$8,968
(1) Primarily consists of servicer receivables and other non-interest receivables.
(2) Current and prior period presentation has been modified to reflect certain secured lending activity. Previously this activity was included in
accounts and other receivables.
END OF CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES
FREDDIE MAC | 2018 Form 10-K
338
Quarterly Selected Financial Data
Quarterly Selected Financial Data
(Unaudited)
Table 73 - Quarterly Selected Financial Data
(In millions, except share-related amounts)
Net interest income
Benefit (provision) for credit losses
Non-interest income (loss):
Guarantee fee income
Mortgage loans gains (losses)
Investment securities gains (losses)
Debt gains (losses)
Derivative gains (losses)
Other non-interest income (loss)
Non-interest income (loss)
Non-interest expense:
Administrative expense
Real estate owned operations 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 and
reclassification adjustments
Comprehensive income (loss)
Net income (loss) attributable to common stockholders
Net income (loss) per common share – basic and diluted(1)
1Q
$3,018
(63)
2Q
$3,003
60
2018
3Q
$3,257
380
4Q
Full-Year
$2,743
359
$12,021
736
194
(215)
(232)
121
1,830
131
1,829
(520)
(34)
(359)
(197)
(1,110)
(748)
2,926
(776)
$2,150
$2,926
$0.90
200
354
(349)
166
416
438
1,225
(558)
(15)
(366)
(204)
(1,143)
(642)
2,503
(68)
$2,435
$918
$0.28
209
94
(443)
158
728
79
825
(569)
(38)
(375)
(218)
(1,200)
(556)
2,706
(147)
$2,559
$147
$0.05
208
491
329
275
(1,704)
66
(335)
(646)
(82)
(384)
(262)
(1,374)
(293)
1,100
378
$1,478
($379)
($0.12)
811
724
(695)
720
1,270
714
3,544
(2,293)
(169)
(1,484)
(881)
(4,827)
(2,239)
9,235
(613)
$8,622
$3,612
$1.12
FREDDIE MAC | 2018 Form 10-K
339
Quarterly Selected Financial Data
(In millions, except share-related amounts)
Net interest income
Benefit (provision) for credit losses
Non-interest income (loss):
Guarantee fee income
Mortgage loans gains (losses)
Investment securities gains (losses)
Debt gains (losses)
Derivative gains (losses)
Other non-interest income (loss)
Non-interest income (loss)
Non-interest expense:
Administrative expenses
Real estate owned operations 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 and
reclassification adjustments
Comprehensive income (loss)
Net income (loss) attributable to common stockholders
Net income (loss) per common share – basic and diluted(1)
1Q
$3,795
116
2Q
$3,379
422
2017
3Q
$3,489
(716)
4Q
Full-Year
$3,501
262
$14,164
84
149
238
43
129
(302)
117
374
(511)
(56)
(321)
(76)
(964)
(1,110)
2,211
23
$2,234
($23)
($0.01)
158
524
58
(52)
(1,096)
114
(294)
(513)
(37)
(330)
(126)
(1,006)
(837)
1,664
322
$1,986
($322)
($0.10)
169
474
722
90
(678)
4,697
5,474
(524)
(35)
(339)
(159)
(1,057)
(2,519)
4,671
(21)
$4,650
$21
$0.01
186
790
213
(16)
88
54
1,315
(558)
(61)
(350)
(287)
(1,256)
(6,743)
(2,921)
(391)
($3,312)
($2,920)
($0.90)
662
2,026
1,036
151
(1,988)
4,982
6,869
(2,106)
(189)
(1,340)
(648)
(4,283)
(11,209)
5,625
(67)
$5,558
($3,244)
($1.00)
(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 | 2018 Form 10-K
340
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, 2018.
In making our assessment, we used the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission, or COSO, in Internal Control — Integrated Framework (2013 Framework).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material misstatement of the company's
annual or interim financial statements will not be prevented or detected on a timely basis by a
company's internal controls. Based on our assessment, we identified a material weakness related to our
inability to update our disclosure controls and procedures in a manner that adequately ensures the
accumulation and communication to management of information known to FHFA that is needed to meet
our disclosure obligations under the federal securities laws, including disclosures affecting our
consolidated financial statements.
We have been under conservatorship of FHFA since September 6, 2008. FHFA is an independent
agency that currently functions as both our Conservator and our regulator with respect to our safety,
soundness and mission. Because we are in conservatorship, some of the information that we may need
to meet our disclosure obligations may be solely within the knowledge of FHFA. As our Conservator,
FHFA has the power to take actions without our knowledge that could be material to investors and could
significantly affect our financial performance. Although we and FHFA have attempted to design and
implement disclosure policies and procedures to account for the conservatorship and accomplish the
same objectives as disclosure controls and procedures for a typical reporting company, there are
inherent structural limitations on our ability to design, implement, test, or operate effective disclosure
controls and procedures under the circumstances of conservatorship. As our Conservator and regulator,
FHFA is limited in its ability to design and implement a complete set of disclosure controls and
procedures relating to us, particularly with respect to current reporting pursuant to Form 8-K. Similarly,
as a regulated entity, we are limited in our ability to design, implement, operate, and test the controls
and procedures for which FHFA is responsible. For example, FHFA may formulate certain intentions with
FREDDIE MAC | 2018 Form 10-K
341
Controls and Procedures
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, 2018 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, 2018 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, 2018. 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, 2018, 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 | 2018 Form 10-K
342
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, 2018 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, 2018 have been prepared in conformity with
GAAP.
FREDDIE MAC | 2018 Form 10-K
343
Controls and Procedures
CHANGES IN INTERNAL CONTROL OVER
FINANCIAL REPORTING DURING THE
QUARTER ENDED DECEMBER 31, 2018
We evaluated the changes in our internal control over financial reporting that occurred during the quarter
ended December 31, 2018 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 | 2018 Form 10-K
344
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 Chair, 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 Board currently has 12 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 2019. 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 provided to it by the Conservator to fill such
vacancy, subject to review by the Conservator.
On February 11, 2019, the Conservator executed a written consent, effective as of February 15, 2019,
re-electing the nine directors submitted by the company for election as a member of our Board. The
individuals re-elected as directors by the Conservator are listed below:
Lance F. Drummond
Aleem Gillani
Christopher E. Herbert
Grace A. Huebscher
Steven W. Kohlhagen
Donald H. Layton
Sara Mathew
Saiyid T. Naqvi
Eugene B. Shanks, Jr.
The company did not submit for re-election, and FHFA did not re-elect, current directors Carolyn H.
Byrd, Christopher S. Lynch, or Anthony A. Williams to the Board as the terms of their service on the
Board had reached the limit set forth in our Corporate Governance Guidelines, or the Guidelines. Ms.
Byrd and Messrs. Lynch and Williams will depart the Board on February 15, 2019. Although Mr. Shanks'
term of service on the Board has reached the limit set forth in the Guidelines, FHFA re-elected Mr.
Shanks for a term expiring June 30, 2019 to allow him to continue ongoing director recruitment efforts
with which he has been involved. Messrs. Herbert and Gillani were first elected to the Board in March
2018 and January 2019, respectively.
See Director Biographical Information for information about each of our current directors. The
terms of the directors re-elected by FHFA will end on the date of the next annual meeting of our
stockholders or the effective date of the Conservator's next election of directors by written consent,
whichever occurs first, except for Mr. Shanks, whose term will expire on June 30, 2019.
FREDDIE MAC | 2018 Form 10-K
345
Directors, Corporate Governance, and Executive Officers
Directors
Director Criteria, Diversity, Qualifications, Experience,
and Tenure
Our Board seeks candidates for directorship 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, technology (including cybersecurity), 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 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.
FHFA's rule regarding minority and women inclusion generally requires us to consider diversity and the
inclusion of women, minorities, and individuals with disabilities in all activities, including considering
diversity in the process of nominating directors. 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.
FREDDIE MAC | 2018 Form 10-K
346
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 13, 2019. For a list of committee assignments effective as of February 21, 2019, see
Corporate Governance - Board and Committee Information.
Carolyn H. Byrd
Director Since
Age
70
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. Ms. Byrd will depart the Board on February 15, 2019.
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
64
Director Since
July 2015
Freddie Mac Committees
• Audit
• Nominating & Governance
Public Company Directorships
• CurAegis Technologies, Inc.
• United Community Banks, Inc.
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 in Residence, Christopher Newport University (2015-2017)
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 | 2018 Form 10-K
347
Directors, Corporate Governance, and Executive Officers
Directors
Member of the Board and Risk, Compensation, and Nominating and Governance Committees of
United Community Banks, Inc. (2018-present)
Member of the Board of the Financial Industry Regulatory Authority (2018-present)
Member of the Board and Audit Committee of CurAegis Technologies, Inc. (2018-present)
Aleem Gillani
Age
56
Director Since
January 2019
Freddie Mac Committees
• Audit
• Compensation
Public Company Directorships
None
Mr. Gillani is an executive with extensive experience at sophisticated financial institutions. He brings a
blend of industry, financial, and risk management experience to the Board.
Experience and Qualifications
Chief Financial Officer and Corporate Executive Vice President of SunTrust Banks, Inc. (2011-2018)
Executive Vice President and Corporate Treasurer of SunTrust Banks, Inc. (2010-2011)
Senior Vice President and Chief Market Risk Officer of SunTrust Banks, Inc. (2007-2010)
Senior Vice President and Chief Market Risk Officer of PNC Financial Services Group, Inc.
(2004-2007)
Chief Market Risk Officer of BankBoston and FleetBoston Corp. (1996-2004)
Member of the Board of SunTrust Robinson Humphrey (2011-2018)
Founding Chair of the Market Risk Council for the Risk Management Association (1998)
Christopher E. Herbert
Director Since
Public Company Directorships
Age
58
March 2018
Freddie Mac Committees
• Compensation
• Risk
None
Mr. Herbert is an experienced leader in the governmental and educational sectors, with in-depth
knowledge of housing policy and urban development, including the financial and demographic
dimensions of home ownership.
Experience and Qualifications
Managing Director for Harvard University's Joint Center for Housing Studies and Lecturer in Urban
Planning and Design at the Harvard Graduate School of Design (2015-present)
Research Director for Harvard University's Joint Center for Housing Studies (2010-2014)
Senior Associate at Abt Associates, Inc. (1997-2010)
Member of the Board of the Homeownership Preservation Foundation (2011-present)
Member of the Research Advisory Council for the Center for Responsible Lending (2006-present)
Member of the Board of GreenPath Financial Wellness (2017-present)
Member of the Federal Reserve Bank of Boston's Community Development Research Advisory
Council (2014-2016)
FREDDIE MAC | 2018 Form 10-K
348
Directors, Corporate Governance, and Executive Officers
Directors
Grace A. Huebscher
Age
59
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)
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
71
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 and Corporate Governance/Nominating Committees of AMETEK,
Inc. (2006-present)
Member of the Board and Audit and Compensation Committees 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)
FREDDIE MAC | 2018 Form 10-K
349
Directors, Corporate Governance, and Executive Officers
Directors
Member of the Board and Audit Committee of Abtech Holdings, Inc. (2013-2014)
Advisory Board member of the Stanford Institute for Economic Policy Research (2001-present)
Advisory Board member of the Roper St. Francis Cancer Center (2011-present)
Member of the Board of IQ Mutual Funds, a family of Merrill Lynch registered, closed-end investment
companies (2005-2010)
Donald H. Layton
Age
68
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
61
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 Chair of the Board since December 2011. Mr. Lynch will depart the Board
on February 15, 2019.
FREDDIE MAC | 2018 Form 10-K
350
Directors, Corporate Governance, and Executive Officers
Directors
Experience and Qualifications
Independent consultant providing a variety of services to financial intermediaries, including
corporate restructuring, risk management, strategy, governance, financial and regulatory reporting,
and troubled-asset management (2007-present)
Various positions with KPMG LLP, including National Partner in Charge - Financial Services;
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)
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
63
Director Since
December 2013
Freddie Mac Committees
• Audit, Chair
• Executive
• Nominating & Governance
Public Company Directorships
• Campbell Soup Company
• State Street Corporation
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. She will become Non-Executive Chair of the Board on
February 15, 2019.
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 (2001-2006)
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 Audit and Finance and Corporate Development Committees of Campbell
Soup Company (2005-present)
Member of the Board and Nominating and Corporate Governance and Risk Committees of State
Street Corporation (2018-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 (2015-2019)
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)
FREDDIE MAC | 2018 Form 10-K
351
Directors, Corporate Governance, and Executive Officers
Directors
Member of the International Advisory Council of Zurich Financial Services Group (2012-2017)
Saiyid T. Naqvi
Age
Director Since
69
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)
Member of the Housing Council of the Financial Services Roundtable (2009-2013)
Eugene B. Shanks, Jr.
Director Since
Age
Freddie Mac Committees
• Audit
Public Company Directorships
• Chubb Limited (formerly ACE Limited)
71
December 2008
• Executive
• Nominating & Governance, Chair
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 Limited (2011-present)
Advisory Board member of the Stanford Institute for Economic Policy Research (2010-present)
Senior Advisor of Bain and Company (2008-2011)
Founding Director of The Posse Foundation (1992-present)
Trustee Emeritus of Vanderbilt University (2015-present), Trustee (1992-2015)
FREDDIE MAC | 2018 Form 10-K
352
Directors, Corporate Governance, and Executive Officers
Directors
Anthony A. Williams
Age
67
Director Since
December 2008
Freddie Mac Committees
• Nominating & Governance
Public Company Directorships
• None
• Risk
Mr. Williams is an experienced leader in national, state, and local governments, with extensive
knowledge concerning real estate and housing for low-income individuals. He also has significant
experience in financial matters and is an experienced academic focusing on public management issues.
Mr. Williams’ leadership and operating experience in the public sector allows him to provide a unique
perspective on state and local housing issues. Mr. Williams will depart the Board on February 15, 2019.
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 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)
Chief Executive Officer 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)
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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 Chair, 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 Chair since December 2011. Ms. Mathew will become Non-
Executive Chair on February 15, 2019.
Of the Board's 12 directors, 11 are independent, including the Non-Executive Chair.
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 past members of our Board, Messrs. Thomas M. Goldstein, Richard C. Hartnack,
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and Nicolas P. Retsinas, were, independent directors. Mr. Layton is not considered an independent
director because he is our CEO.
Our non-employee Board members concluded that all current members of our Audit Committee,
Compensation Committee, and Nominating and Governance Committee are independent within the
meaning of Sections 4 and 5 of the Guidelines and Section 303A.02 of the NYSE Listed Company
Manual. Our Board also determined that: (i) all current members of our Audit Committee are
independent within the meaning of Exchange Act Rule 10A-3 and Section 303A.06 of the NYSE Listed
Company Manual; and (ii) all current members of our Compensation Committee are independent within
the meaning of Exchange Act Rule 10C-1 and Section 303A.02(a)(ii) of the NYSE Listed Company
Manual.
In determining the independence of each Board member, our non-employee Board members reviewed
the following categories or types of relationships, in addition to those specifically addressed by the
standards contained in Section 5 of the Guidelines, to determine whether those relationships, either
individually or in aggregate, would constitute a material relationship between the director and us that
would impair a director's judgment as a member of the Board or create the perception or appearance of
such an impairment:
Employment Affiliations with Business Partners - Messrs. Herbert and Williams are employed by
organizations that engage or have engaged in business with us resulting in payments between us
and the organizations. 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 relationships between the organizations and us, our non-employee Board
members concluded that the business relationships do not constitute material relationships between
either Mr. Herbert or Mr. Williams and us that would impair their respective independence as our
directors.
Employment Affiliations with Competitors - During 2018, 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 competitor and the
immediate family member and between the competitor and Freddie Mac, our non-employee Board
members concluded that the business relationship does not constitute a material relationship that
would impair Ms. Huebscher's independence as our director.
Board Memberships with Charitable Organizations to Which We Have Made Payments - During
2018, 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 organization and concluded that the
relationship with the charitable organization did not constitute a material relationship between Mr.
Retsinas and us that impaired his independence as our director.
Board Memberships with Business Partners - Ms. Byrd and Messrs. Drummond, Herbert, Lynch,
and Williams serve or have served as directors of other organizations that engage or have engaged
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in business with us resulting in payments between us and such organizations during the past three
fiscal years. After considering the nature and extent of the specific relationship between each of
those organizations and us, and the fact that these current or past Board members are or were
directors of these other organizations 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 - Messrs. Gillani, Hartnack (who served as a
director until February 13, 2018), and Kohlhagen each own stock in companies with which we
conduct significant business, and such ownership represents a material portion of their respective
net worth. To eliminate any potential conflict of interest that might arise as a result of their respective
stock ownership, we have established mechanisms pursuant to which they will be recused from
discussing and acting upon any matters considered by the Board or any of the committees of which
they are a member and that directly relate to the company in which they have such stock ownership.
In situations where matters are frequently presented to the Board regarding these companies, we
have established formal recusal arrangements. The Audit Committee Chair, in consultation with the
Non-Executive Chair, addresses any questions regarding whether recusal from a particular
discussion or action is appropriate.
In evaluating the independence of Messrs. Gillani, Hartnack, and Kohlhagen in light of their stock
ownership of our business partners, our non-employee Board members considered the nature and
extent of our business relationships with such business partners and any potential impact that their
respective stock ownership may have on their independent judgment as our directors, taking into
account the relevant recusal mechanisms. Our non-employee Board members concluded that these
mechanisms addressed any actual or potential conflicts of interest that may have arisen with respect
to the stock ownership. Accordingly, our non-employee Board members concluded that the stock
ownership of our business partners of each of Messrs. Gillani, Hartnack, and Kohlhagen did not
constitute material relationships between them and Freddie Mac that would impair their
independence as Freddie Mac directors.
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 provided authority
for the Board and its committees 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
became effective on March 31, 2018.
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.
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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.
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
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Conservator approval. For more information on the conservatorship, see MD&A - Conservatorship
and Related Matters.
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 describe each committee's responsibilities and have
been adopted by the Board and approved by the Conservator. These charters are available on our
website at http://www.freddiemac.com/governance/board-committees.html. The membership of
each committee as of February 13, 2019 is set forth below, together with a description of the primary
responsibilities of each committee.
Committee
Meetings in 2018
Chair
Members
Audit Committee
11 Committee meetings;
1 joint meeting with the Risk
Committee
Sara Mathew
• Aleem Gillani
• Lance F. Drummond
Compensation Committee
9 Committee meetings
Steven W. Kohlhagen
Executive Committee
None
Christopher S. Lynch(1)
Nominating and Governance
Committee
6 Committee meetings
Eugene B. Shanks, Jr.
Risk Committee
5 Committee meetings;
1 joint meeting with the Audit
Committee
Saiyid T. Naqvi
• Eugene B. Shanks. Jr.
• Carolyn H. Byrd(1)
• Aleem Gillani
• Christopher E. Herbert
• Saiyid T. Naqvi
• Steven W. Kohlhagen
• Donald H. Layton
• Sara Mathew(1)
• Saiyid T. Naqvi
• Eugene B. Shanks, Jr.
• Lance F. Drummond
• Grace A. Huebscher
• Sara Mathew
• Anthony A. Williams(1)
• Carolyn H. Byrd(1)
• Christopher E. Herbert
• Grace A. Huebscher
• Steven W. Kohlhagen
• Anthony A. Williams(1)
(1) Ms. Byrd and Messrs. Lynch and Williams will depart from the Board on February 15, 2019. In addition, Ms. Mathew will replace Mr. Lynch as
Chair of the Executive Committee on that date.
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Effective as of February 21, 2019, the membership of each committee will be as follows:
Committee
Chair
Members
Audit Committee
Aleem Gillani
• Lance F. Drummond
• Grace A. Huebscher
• Eugene B. Shanks. Jr.
• Lance F. Drummond
Compensation Committee
Steven W. Kohlhagen
• Aleem Gillani
Executive Committee
Sara Mathew
Nominating and Governance
Committee
Eugene B. Shanks, Jr.
Risk Committee
Saiyid T. Naqvi
Audit Committee
• Christopher E. Herbert
• Aleem Gillani
• Steven W. Kohlhagen
• Donald H. Layton
• Saiyid T. Naqvi
• Eugene B. Shanks, Jr.
• Grace A. Huebscher
• Saiyid T. Naqvi
• Christopher E. Herbert
• Steven W. Kohlhagen
The Audit Committee provides oversight of the company's accounting and financial reporting and
disclosure processes, the adequacy of the systems of disclosure and internal control established by
management, and the audit of the company's financial statements. Among other things, the Audit
Committee: (i) appoints the independent auditor and evaluates its independence and performance; (ii)
reviews the audit plans for and results of the independent audit and internal audits; and (iii) reviews
reports related to processes established by management to provide compliance with legal and
regulatory requirements. The Audit Committee's activities during 2018 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, who 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 is no longer listed on 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
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members of our Audit Committee are independent and that Ms. Mathew, a member of the Audit
Committee since December 2013 and its current chair, and Mr. Gillani, a member of the Audit
Committee since January 2019 and its chair effective February 21, 2019, both meet the definition of an
"audit committee financial expert" under SEC regulations.
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 2018 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.
Executive Committee
The Executive Committee consists of the Non-Executive Chair, the chair of each other standing
committee and our CEO, Mr. Layton. Other than Mr. Layton, each member is independent. The
Executive Committee 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.
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.
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 appetite metrics, limits and thresholds, 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.
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Additional Board Oversight
The Board and Risk Committee provide oversight of the company's information and cybersecurity
operations by receiving periodic reports from the Chief Information Officer and other senior officers.
These updates include information regarding management's ongoing efforts to improve information
security and decrease cybersecurity risk, and the steps management has taken to address and mitigate
the evolving cybersecurity threat environment. In addition, the Risk Committee receives updates
regarding any assessments by external parties about the company's cybersecurity program. Senior
management discusses cybersecurity developments with the Chair of the Risk Committee and other
Board members between Board and committee meetings, as necessary. The company has procedures
to escalate information regarding certain cybersecurity incidents to the appropriate members of the
Board in a timely fashion. The Board and its committees also have authority, as they deem appropriate
to fulfill Board or committee responsibilities, to engage outside consultants or advisors, including
technology consultants and cybersecurity experts, and to evaluate the company's information security
program.
Board Leadership Structure
The positions of CEO and Non-Executive Chair 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 Chair,
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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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.
2018 Non-Employee Director Compensation Levels
Board compensation levels during conservatorship are shown in the table below.
Table 74 - Board Compensation Levels
Board Service
Annual Retainer for Non-Executive Chair
Annual Retainer for Directors (other than the Non-Executive Chair)
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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2018 Director Compensation
The following table summarizes the 2018 compensation earned by all persons who served as non-
employee directors during 2018.
Table 75 - Director Compensation
Non-Employee Director
Christopher S. Lynch
Carolyn H. Byrd
Lance F. Drummond
Thomas M. Goldstein(2)
Richard C. Hartnack(3)
Christopher E. Herbert(4)
Grace A. Huebscher
Steven W. Kohlhagen(2)
Sara Mathew
Saiyid T. Naqvi
Nicolas P. Retsinas(3)
Eugene B. Shanks, Jr.(2)
Anthony A. Williams
Fees Earned or
Paid in Cash(1)
Total
$290,000
$290,000
160,000
170,000
178,806
20,306
121,333
160,000
168,806
185,000
175,000
21,500
173,207
160,000
160,000
170,000
178,806
20,306
121,333
160,000
168,806
185,000
175,000
21,500
173,207
160,000
(1) We do not have pension or retirement plans for our non-employee directors, and all compensation is paid in cash with no additional compensation
paid. Therefore, the "Change in Pension Value and Non-qualified Deferred Compensation Earnings" and "All Other Compensation" columns have
been omitted.
(2)
In addition to the annual Board service and appropriate Committee Chair retainers, the amount reflects partial annual compensation for service as
a member of the Audit Committee or as a Committee Chair during 2018. Mr. Goldstein (who resigned in January 2019) became Chair of the
Nominating and Governance Committee and Mr. Kohlhagen became Chair of the Compensation Committee in February 2018. Mr. Shanks began
serving as acting Chair of the Nominating and Governance Committee in September 2018.
(3) Messrs. Hartnack and Retsinas left the Board in February 2018.
(4) Mr. Herbert joined the Board in March 2018.
Indemnification
We have made arrangements to indemnify our directors against certain liabilities which are similar to the
terms on which our executive officers are indemnified. For a description of such terms, see Executive
Compensation — CD&A — Written Agreements Relating to NEO Employment —
Indemnification Agreements.
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EXECUTIVE OFFICERS
As of February 13, 2019, our executive officers are as follows:
Donald H. Layton
Year of Affiliation
2012
Age
68
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.
David M. Brickman
Age
53
Year of Affiliation
1999
Position
President
Mr. Brickman has served as our President since September 2018 where he contributes to the strategic
leadership of the company. After a brief transition period, as of February 2019, he is responsible for the
Single-family, Multifamily, Investments and Capital Markets, Information Technology and Internal Audit
divisions as well as the Enterprise Operations department. Before becoming President, he served as our
EVP - Multifamily since February 2014 and prior to that as our SVP - Multifamily since July 2011. In
these roles, he was responsible for overall management of our Multifamily division. 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 our multifamily securitization
program, 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
offerings, 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.
Ricardo A. Anzaldua
Age
65
Year of Affiliation
2018
Position
Executive Vice President - General Counsel & Corporate Secretary
Mr. Anzaldua has served as our EVP - General Counsel & Corporate Secretary since January 2019. He
joined us in May 2018 as EVP - Senior Legal Advisor. Previously, he was Executive Vice President and
General Counsel of MetLife, Inc., from 2012 until 2017. From 2007 to 2012, he held senior positions in
the legal department of the Hartford Financial Services Group. He began his legal career at the law firm
of Cleary, Gottlieb, Steen & Hamilton LLP, where he became a partner in 1999.
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Executive Officers
Stacey Goodman
Year of Affiliation
2017
Age
56
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, from 2012 to 2016, Ms. Goodman was 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
55
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 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
63
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.
Deborah L. Jenkins
Age
51
Year of Affiliation
2008
Position
Executive Vice President - Multifamily
Ms. Jenkins has served as our EVP - Multifamily since November 2018 and, prior to that, served as SVP
- Multifamily Underwriting and Credit. In this role, she was the principal manager of underwriting and
FREDDIE MAC | 2018 Form 10-K
365
Directors, Corporate Governance, and Executive Officers
Executive Officers
credit approvals for all Multifamily debt investments, credit policy governance, and asset level
securitization activities. Ms. Jenkins spearheaded enhancements in the Multifamily division’s
underwriting process specifically to stand up its securitization program, including its signature K- and
SB-Deals. Ms. Jenkins was a Senior Vice President with Wells Fargo National Bank in Michigan before
joining Freddie Mac in March 2008.
David B. Lowman
Year of Affiliation
2013
Age
61
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.
James G. Mackey
Year of Affiliation
2013
Age
51
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.
Jerry Weiss
Age
60
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. 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, including 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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366
Executive Compensation
Compensation Discussion and Analysis
Executive Compensation
COMPENSATION DISCUSSION AND ANALYSIS
This section contains information regarding our compensation programs (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, 2018.
Donald H. Layton
David M. Brickman
Michael T. Hutchins
David B. Lowman
James G. Mackey
Named Executive Officers
Chief Executive Officer
President
Executive Vice President - Investments and Capital Markets
Executive Vice President - Single-Family Business
Executive Vice President - Chief Financial Officer
For information on our primary business objectives and the progress we made during 2018 toward
accomplishing those objectives, see Introduction — About Freddie Mac.
Overview of Executive Management Compensation
Program
Compensation in 2018 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.
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Executive Compensation
Compensation Discussion and Analysis
Elements of Target TDC
Compensation under the EMCP in 2018 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 unless
exception approved by FHFA
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 2018 corporate performance was measured, together with the assessment
of actual performance against those objectives, are described in Determination of 2018 At-Risk
Deferred Salary — At-Risk Deferred Salary Based on Conservatorship Scorecard
Performance and Determination of 2018 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 2018 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
No agreements that guarantee a specific amount of
compensation for a specified term of employment
Use of an independent compensation consultant by the
Board's Compensation Committee
No golden parachute payments or other similar change in
control provisions
Annual compensation risk review
No tax "gross-ups"
Single executive perquisite, reimbursement of tax, estate, and/
or personal financial planning expenses (up to $4,500
annually, with an additional $2,500 in the first year of
eligibility)
Evaluation of company performance against multiple
measures, including non-financial measures
No hedging or pledging of company securities permitted
CEO Compensation
Mr. Layton's compensation in 2018 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 2018, 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 2019 is unchanged from 2018.
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Executive Compensation
Compensation Discussion and Analysis
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 2018 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, or 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 or other services to our management. During 2018,
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.
2018 Comparator Group Companies
The Compensation Committee annually evaluates each eligible NEO's Target TDC in relation to the
compensation of executives in comparable positions at companies that are either in a similar line of
business or are otherwise comparable for purposes of recruiting and retaining individuals with the
necessary skills and capabilities. We refer to this group of companies as the Comparator Group.
When there is either no reasonable match or insufficient data from the Comparator Group for a position,
or if Meridian believes that additional data sources would strengthen the analysis of competitive market
compensation levels, the Compensation Committee may use alternative survey sources.
At FHFA's recommendation, Freddie Mac and Fannie Mae have aligned their Comparator Groups so that
consistent compensation data is used by both companies for the same or similar senior officer
positions.
The Comparator Group used in determining compensation for 2018 consisted of the following
companies:
Allstate
Ally Financial
AIG
American Express
Bank of America*
Bank of New York Mellon
BB&T
Capital One
Citigroup*
Citizens Financial Group
Discover Financial Services
Fannie Mae
Fifth Third Bancorp
The Hartford
JPMorgan Chase*
KeyCorp
Mastercard
MetLife
Northern Trust
PNC
Prudential
Regions Financial
State Street
SunTrust
Synchrony Financial
U.S. Bancorp
Visa
Voya Financial
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.
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369
Executive Compensation
Compensation Discussion and Analysis
The Compensation Committee has determined that these same companies will comprise the 2019
Comparator Group.
Establishing Target TDC
The Compensation Committee developed its 2018 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 2018 Target TDC
recommendation for each of the eligible NEOs was reviewed and approved by FHFA.
2018 Target TDC
The following table sets forth the components of 2018 Target TDC for each of our eligible NEOs.
Table 76 - 2018 Target TDC
Named Executive Officer(1)
David M. Brickman
Michael T. Hutchins
David B. Lowman
James G. Mackey
2018 Target TDC
Base
Salary
Fixed
Deferred Salary
At-Risk
Deferred Salary
Target TDC
500,000
500,000
500,000
500,000
1,775,000
1,600,000
1,775,000
1,775,000
975,000
900,000
975,000
975,000
3,250,000
3,000,000
3,250,000
3,250,000
(1) Mr. Layton did not participate in the EMCP in 2018 and therefore is not included in this table. For a discussion of Mr. Layton's compensation, see
CEO Compensation.
The 2018 Target TDC amount for Mr. Hutchins reflects a modest increase from the 2017 level effective in
late February 2018 which took into account his individual performance and moved his compensation
closer to the 50th percentile of the competitive market compensation level. The 2018 Target TDC for Mr.
Brickman reflects an increase effective in early September 2018 in connection with his promotion to
President and moved his compensation closer to the 50th percentile of the competitive market
compensation level.
Determination of 2018 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 2018. 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.
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Executive Compensation
Compensation Discussion and Analysis
At-Risk Deferred Salary Based on Conservatorship Scorecard
Performance
Half of each eligible NEO's 2018 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
2018 Conservatorship Scorecard. FHFA independently assessed the company's performance and
determined that a 100% funding level was justified for the portion of the eligible NEOs' At-Risk Deferred
Salary based on the 2018 Conservatorship Scorecard. FHFA noted the following considerations in
assessing our performance against the 2018 Conservatorship Scorecard:
Our dedication to finalizing the post-crisis loss mitigation, which resulted in the publication of
guidance on foreclosure alternatives, servicing, forbearance, and standardized timeline calculations;
Our continuing efforts to reduce taxpayer risk by pursuing new and innovative approaches through
single-family and multifamily credit risk transfer transactions;
Our continued effective collaboration and coordination with CSS and Fannie Mae in moving the
Single Security initiative and the CSP forward; and
Our contribution to the progress that was made on the Language Access Project, resulting in the
launch of the Mortgage Translations website ahead of schedule.
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 diversity and inclusion
consistent with FHFA's expectations for all activities;
Cooperation and collaboration with FHFA, Fannie Mae, CSS, the industry, and other stakeholders;
and
The quality, thoroughness, creativity, effectiveness, and timeliness of the company's work products.
The table below presents the Conservatorship Scorecard objectives and FHFA's assessment of our
achievement against those objectives.
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371
Executive Compensation
Compensation Discussion and Analysis
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%)
Continue efforts to increase access to single-family mortgage credit for
creditworthy borrowers, including underserved segments of the market:
• Continue to identify opportunities to improve access to credit in a safe and
sound manner, taking into consideration the changing circumstances and
needs facing prospective borrower segments.
• Assess the availability of low-balance loan financing and develop
recommendations as appropriate.
• Continue to support access to credit for borrowers with limited English
proficiency, including by finalizing multiyear language access plans and
beginning plan implementation.
• Informed by request for input feedback, conclude the assessment of updated
credit score models and, as appropriate, plan for implementation.
• Research, assess, and begin planning for appraisal process modernization,
which could include revised appraisal forms and data requirements.
• Research and assess opportunities to further partnerships with housing
finance agencies.
Finalize post-crisis loss mitigation activities:
• Complete the post-crisis loss mitigation toolkit, including foreclosure
alternatives and short-term hardships.
All goals were achieved with the introduction of the
HomeOne mortgage, improvements to Home
Possible; and launch of the Mortgage Translations
website.
All goals were achieved with the issuance of
guidance on foreclosure alternatives, standardized
foreclosure timeline calculations and updates to the
short-term hardship offerings.
Continue to responsibly support the Neighborhood Stabilization Initiative.
Goal was achieved.
Assess the current mortgage servicing business model and develop plans
to support ongoing liquidity in the mortgage servicing market:
All goals were achieved.
• Informed by the 2017 Joint Servicing Market Survey, assess the challenges
and potential solutions for improving the borrower experience, expanding
liquidity, and increasing efficiency of the servicing market.
• Work collaboratively with industry and other stakeholders.
Single-Family Rental Strategies:
• Continue to gather and report to FHFA information needed to inform policy
decisions regarding single-family rentals, and assist FHFA in assessing
single-family rental strategies.
Goal was achieved.
Develop plans to further support liquidity in the multifamily workforce
housing market and consider market cost differences:
• Explore opportunities to further support liquidity in multifamily workforce
housing, including through pilots and initiatives.
Goal was achieved.
Manage the dollar volume of new multifamily business to remain at or
below $35 billion:
Goal was achieved.
• Loans in affordable and underserved market segments, as defined by FHFA,
are to be excluded from the $35 billion cap.
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
credit risk transfer, subject to FHFA target adjustments as may be necessary
to reflect market conditions and economic considerations.
• For 2018, targeted single-family loan categories include: non-HARP, fixed-
rate mortgages with terms greater than 20 years and LTV ratios above
60 percent.
• Report to FHFA the actual amount of underlying mortgage credit risk
transferred.
All goals were achieved through the company's
innovative approaches to transferring credit risk on
single-family mortgages.
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Executive Compensation
Compensation Discussion and Analysis
Performance Goals
FHFA's Summary of Performance
Multifamily Credit Risk Transfers:
• Transfer a meaningful portion of the credit risk on newly acquired
mortgages, subject to FHFA target adjustments as may be necessary to
reflect market conditions and economic considerations.
• Report to FHFA the actual amount of underlying mortgage credit risk
transferred.
Retained Portfolio:
• Execute FHFA-approved retained portfolio plans that meet, even under
adverse conditions, the annual Purchase Agreement requirements and the
$250 billion Purchase Agreement cap by December 31, 2018. Any sales
should be commercially reasonable transactions that consider impacts to the
market, borrowers, and neighborhood stability.
All goals were achieved through the company’s
innovative approaches to transferring credit risk on
multifamily mortgages.
Goal was achieved.
Private Mortgage Insurer Eligibility Requirements (PMIERs 2.0):
• Evaluate existing PMIERs and whether changes or updates are appropriate.
Goal was achieved with the publication of updated
eligibility requirements for mortgage insurers.
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%)
Common Securitization Platform and Single Security Initiative:
• Continue working with FHFA, Fannie Mae and CSS to implement the Single
Security Initiative on the CSP for both Enterprises.
All goals were achieved with focus on activities to
support the implementation of the Single Security
in the second quarter of 2019.
• 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 common single
security for the Enterprises.
Allow for the integration of additional market participants in the future.
• Continue to work with Fannie Mae and CSS to obtain and use input from the
Single Security Initiative/CSP Industry Advisory Group.
• Work proactively with the industry to help market participants prepare for the
implementation of the Single Security Initiative
Provide Active Support for Mortgage Data Standardization Initiatives:
All goals were achieved.
• Continue the development and implementation of the Uniform Closing
Dataset.
• Continue implementation of the redesigned Uniform Residential Loan
Application and the Uniform Loan Application Dataset/Automated
Underwriting System specifications.
• Assess and, as appropriate, begin implementation of strategies to redesign
the Uniform Appraisal Dataset.
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Executive Compensation
Compensation Discussion and Analysis
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 2019 that are similar to the 2018 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 all elements of this goal. Both the single-family and multifamily
businesses made significant progress in customer satisfaction.
People and Culture
Hire and retain talented people in a
winning culture
The company achieved or exceeded all elements of this goal. The company exceeded its goal for
the retention of high-performing employees. It received strong scores on the company's people
survey, including in the leadership diversity and overall employee engagement levels,
highlighting that efforts to build the company's desired culture continue to yield positive results.
Operating Performance
Operate as well as the best-run
financial institutions
The company achieved or exceeded most elements of this goal. We exceeded plan in multifamily
new business volume, capital markets comprehensive income and the percentage of corporate
spend that goes to diverse suppliers. The company failed to achieve elements related to
multifamily comprehensive income, project performance and corporate general and
administrative expenses.
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's efforts to mitigate
its risk through the transfer of credit risk on single-family and multifamily new business was
above-plan. It also successfully improved results related to the timely closure of significant
issues and the decline in capital for all assets. The company met its planned goals relating to
financial risk appetite measures for each of the three business lines.
Based on preliminary information, the company believes it met all five of its single-family
affordable housing goals and all three of its multifamily affordable housing goals for 2018. The
company also expects to receive a high satisfactory or better score for Duty to Serve, which
includes specific objectives for both single-family and multifamily. It also exceeded its goal for
uncapped new multifamily volume, excluding Green Advantage offerings.
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
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Executive Compensation
Compensation Discussion and Analysis
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.
David M. Brickman, President
Performance Highlights
Achieved strong business results and customer satisfaction ratings with continued focus on risk-adjusted returns, innovation, market
presence, research and industry thought leadership.
Further expanded offerings that create and preserve affordable rental housing in communities across the nation including through a
new mezzanine loan offering and a new platform for LIHTC.
Implemented enhanced risk management capabilities associated with continued focus on operational improvements.
Strong leadership in the ongoing development of management in the Multifamily division, including the continued build-out of the
leadership team and effective transition of responsibilities to Ms. Jenkins as head of the multifamily business.
Successfully transitioning to the role of President, including gaining a deeper understanding of all aspects of the company and
providing leadership in developing the company’s 2019 business plan, financial budget, and key priorities.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision
The Compensation Committee determined that Mr. Brickman 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
Completed the execution of the FHFA-approved 2013 - 2018 multi-year retained portfolio plan, which included reduction in the overall
size of the retained portfolio and decrease of less liquid assets in an economically efficient manner.
Provided strong leadership to support the Single Security initiative, including plans and strategies to promote market readiness to
trade the new UMBS.
Continued to support efforts to improve the liquidity of Freddie Mac's traded bonds in the secondary mortgage market.
Continued to support the guarantee businesses, including improving the market penetration of the single-family "cash window" as
well as successful efforts to finance certain mortgage-backed securities and mortgage servicing rights.
Managed successful execution of risk management objectives, including conducting market responsive transactions in debt funding
and interest-rate hedging, and efficiently meeting the company's liquidity and funding needs.
Demonstrated strong expense discipline while assembling a talented and motivated team and supporting investments to strengthen
operational, technology and model risk management.
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.
FREDDIE MAC | 2018 Form 10-K
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Executive Compensation
Compensation Discussion and Analysis
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 (with particular
emphasis on credit risk), improving operations, and enhancing technology.
Continued focus on operational and technology improvements to transform the client experience through innovative and creative
solutions.
Executed credit risk transfer transactions, including achieving a milestone by transferring a portion of credit risk on over $1 trillion of
single-family mortgages.
Successfully reimagined our Home Possible suite of products to better serve low- to moderate-income families, including the
introduction of the new HomeOne mortgage to serve the needs of more first-time homebuyers.
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.
James G. Mackey, Executive Vice President - Chief Financial Officer
Performance Highlights
Formalized a new framework for Dodd-Frank Act stress tests and created new disclosures for the CCF.
Implemented enhanced analytical and reporting capabilities for internal management and improved external disclosures.
Improved control of corporate-wide general and administrative expenses.
Continued the focus on operational improvements, which included the implementation of shared organizational resources between
the Finance and Enterprise Risk Management divisions, simplification of general and administrative expense and project reporting to
reduce costs and increase efficiencies, and deployment of financial management technology to improve processes and the employee
experience.
Successfully completed major campus infrastructure and office modernization projects.
Strong leadership in the ongoing development of management in the Finance division, including the continued build-out of the
leadership team.
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.
FREDDIE MAC | 2018 Form 10-K
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Executive Compensation
Compensation Discussion and Analysis
2018 Deferred Salary
The following chart reports the actual amounts of 2018 Deferred Salary for each eligible NEO. The target
amounts of deferred salary for Messrs. Hutchins and Brickman reflect prorated targets based on their
compensation increases in 2018. The actual amount earned in each calendar quarter is scheduled to be
paid on the last pay date of the corresponding calendar quarter in 2019.
Table 77 - 2018 Deferred Salary
2018 Actual Deferred Salary(2)
At-Risk
Named Executive
Officer(1)
Mr. Brickman
Mr. Hutchins
Mr. Lowman
Mr. Mackey
Fixed
1,507,478
1,575,208
1,775,000
1,775,000
Conservatorship
Scorecard
% of
Target
430,174
444,688
487,500
487,500
100%
100%
100%
100%
Corporate
Scorecard/
Individual
430,174
444,688
487,500
487,500
% of
Target
100%
100%
100%
100%
Total Actual
Deferred
Salary
2,367,826
2,464,583
2,750,000
2,750,000
% of
Target
100%
100%
100%
100%
(1) Mr. Layton was not eligible for deferred salary in 2018 and therefore is not included in this table.
(2) For Messrs. Hutchins and Brickman, the amounts of actual deferred salary differ from the amounts presented in Table 76 - 2018 Target TDC
because the increase to Target TDC amounts became effective in late February 2018 and early September 2018, respectively.
Written Agreements Relating to NEO Employment
We entered into letter agreements with each of our NEOs, other than Mr. Brickman, in connection with
their hiring. 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 the terms of the EMCP.
See Determination of 2018 Target TDC for 2018 Target TDC amounts for the NEOs. The amounts
reflected below were effective as of the date of the respective letter agreement.
We also entered into restrictive covenant and confidentiality agreements with each of our NEOs. 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 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.
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Executive Compensation
Mr. Brickman
Compensation Discussion and Analysis
We entered into a new restrictive covenant and confidentiality agreement with Mr. Brickman in
connection with his promotion to President. A copy of Mr. Brickman's restrictive covenant and
confidentiality agreement was filed as Exhibit 10.2 to our Current Report on Form 8-K filed on
September 6, 2018.
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
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. 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.
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
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Executive Compensation
Compensation Discussion and Analysis
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, or 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
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; or
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.
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Executive Compensation
Compensation Discussion and Analysis
Gross Neglect or Gross Misconduct
Forfeiture Event - The NEO's employment is terminated because, in carrying out his or her duties,
the NEO engages in conduct that constitutes gross neglect or gross misconduct that is materially
harmful to Freddie Mac, or within two years after the NEO's termination of employment, the Board
determines that the NEO, prior to his or her termination, engaged in such conduct.
Compensation Subject to Recapture and/or Forfeiture - Any Deferred Salary paid at the time of
termination or subsequent to the date of termination, including any cash payment made as
consideration for any release of claims agreement.
Violation of a Post-Termination Non-Competition Covenant
Forfeiture Event - The NEO violates a post-termination non-competition covenant set forth in the
restrictive covenant and confidentiality agreement in effect when a payment of Deferred Salary is
scheduled to be made.
Compensation Subject to Recapture and/or Forfeiture - 50% of the Deferred Salary paid during
the twelve months immediately preceding the violation and 100% of any unpaid Deferred Salary.
Under the Recapture Agreement, the Board has discretion to determine the appropriate dollar amount, if
any, to be recaptured from and/or forfeited by the NEO, which is intended to be the gross amount of
compensation in excess of what Freddie Mac would have paid the NEO had Freddie Mac taken the
Forfeiture Event into consideration at the time such compensation decision was made.
A copy of the form of the Recapture Agreement was filed as Exhibit 10.18 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,
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Executive Compensation
Compensation Discussion and Analysis
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.
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
2018 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 and SERP II
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.
On February 18, 2015, FHFA approved, effective January 1, 2014, a new nonqualified retirement plan,
referred to as the SERP II. We 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. The
Transitional Plan, a tax-qualified defined contribution plan established in January 2014, was available to
employees who were participants in the company's Pension Plan as of the date it was terminated. For
each eligible employee, the company contributed a percentage of each participant's compensation
ranging from 0.5% to 6.5%, depending on a participant's age, referred to as the age-based contribution.
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Executive Compensation
Compensation Discussion and Analysis
The age-based contribution was available for plan years 2014-2018. The SERP II is intended to provide
participants with the full amount of the benefits to which they would have been entitled to under the
Transitional Plan if that plan was not subject to certain dollar limits under the Internal Revenue Code.
This is referred to as the "SERP II Benefit." Mr. Brickman was the only NEO who accrued a SERP II
Benefit in 2018.
For additional information regarding the Transitional Plan, see our Annual Report on Form 10-K filed on
February 19, 2015. For additional information regarding these benefits, see 2018 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.
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 provided 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 executive officers.
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Executive Compensation
Compensation Discussion and Analysis
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 we may
annually deduct for compensation to anyone serving as CEO or CFO at any time during the year, certain
other NEOs employed by us at any time during the year and any individual who was a CEO, CFO, or
NEO after 2016 and who is receiving Freddie Mac compensation (unless pursuant to a binding contract
in effect on November 2, 2017 that is eligible for grandfathering). For calendar years after 2017 (pursuant
to the Tax Cuts and Jobs Act), this limit applies even if the compensation is "performance-based."
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
Aleem Gillani
Christopher E. Herbert
Saiyid T. Naqvi
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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 assessment was conducted by
members of our ERM and human resources teams, and 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 2019. Management's
conclusion, with which the Compensation Committee concurred, is that the company's compensation
programs and practices do not encourage unnecessary or excessive risk behaviors in pursuit of
Corporate or Conservatorship Scorecard objectives or otherwise, and the programs and practices would
not be reasonably likely to have a material adverse effect on Freddie Mac.
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Executive Compensation
CEO Pay Ratio
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 2018, we identified our median employee as of November 25, 2018, using
payroll data as reported on Form W-2, Box 5 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 2018 using the same method required for calculating the CEO's (and other
NEOs') total annual compensation for purposes of Table 79 - Summary Compensation Table.
We changed our methodology for identifying the 2018 median employee from using Box 1 to using Box
5 on Form W-2. We believe that Box 5 represents a more comprehensive view of our employees' total
compensation during the year because it includes elements of compensation that Box 1 does not
capture, such as pre-tax contributions an employee makes to the Thrift/401(k) Plan. In addition, we
determined it was appropriate to identify a new median employee due to the expansion of non-officer
level employees who are eligible to participate in our annual incentive program.
The table below sets forth the total annual compensation for our CEO and median employee and the
ratio between the two.
Table 78 - CEO Pay Ratio
Employee
Donald H. Layton (CEO)
Median Employee
CEO Pay Ratio
Total Compensation
651,000
139,941
Ratio
4.65 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.
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Executive Compensation
2018 Compensation Information for NEOs
2018 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, 2018.
Summary Compensation Table
Table 79 - Compensation Summary
Named Executive Officer
Donald H. Layton
Chief Executive Officer
David M. Brickman(5)
President
Michael T. Hutchins(5)(6)
EVP — Investments &
Capital Markets
David B. Lowman
EVP — Single-family
Business
James G. Mackey
EVP — Chief Financial
Officer
Year
2018
2017
2016
2018
2018
2017
2016
2018
2017
2016
2018
2017
2016
Salary
Earned During
Year(1)
Deferred(2)
Bonus
Non-Equity
Incentive Plan
Compensation(3)
All Other
Compensation(4)
Total
$600,000
600,000
600,000
$—
—
—
$—
—
—
$—
—
—
$51,000
$651,000
51,000
101,609
651,000
701,609
500,000
1,507,478
867,919
163,266
3,038,663
500,000
1,575,208
490,447
1,394,575
482,759
1,219,178
500,000
500,000
500,000
1,775,000
1,763,818
1,600,000
500,000
1,775,000
500,000
500,000
1,763,818
1,600,000
—
—
—
—
—
—
897,202
804,358
726,545
983,580
964,588
893,896
983,580
964,588
893,896
98,862
3,071,272
89,305
2,778,685
85,897
2,514,379
100,620
3,359,200
92,496
89,874
3,320,902
3,083,770
100,620
3,359,200
92,496
89,874
3,320,902
3,083,770
(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 2018, 2017, and
2016 was 0.880%, 0.425%, and 0.325%, 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 2018, 2017, and 2016 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 2018, 2017, and 2016 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 2018 At-Risk Deferred Salary.
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Executive Compensation
2018 Compensation Information for NEOs
(4) Amounts for 2018 reflect (i) contributions made under our tax-qualified Thrift/401(k) Plan and Transitional Plan for plan year 2018; (ii) accruals
earned pursuant to the SERP Benefit for plan year 2018; (iii) accruals earned pursuant to the SERP II Benefit for plan year 2018; (iv) interest on
Fixed Deferred Salary earned during 2018; and (v) perquisites. The amounts for 2018 are as follows:
Named
Executive
Officer
Mr. Layton
Mr. Brickman
Mr. Hutchins
Mr. Lowman
Mr. Mackey
Thrift/401(k)
Plan
Contributions
SERP Benefit
Accruals
SERP II Benefit
Accruals
Interest on
Fixed Deferred
Salary
Perquisites
$23,375
$27,625
41,250
23,375
23,375
23,375
43,500
61,625
61,625
61,625
$—
65,250
—
—
—
$—
13,266
13,862
15,620
15,620
$—
—
—
—
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. Also, 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. Employee
contributions, our matching contributions, and the 2.5% employer contribution are invested in accordance with the employee's investment
elections and are immediately vested. Mr. Brickman was the only NEO eligible for the age-based contributions pursuant to the Transitional Plan.
His plan year 2018 age-based contribution is reflected in his Thrift/401(k) Savings Plan Contribution amount. For additional information regarding
the SERP Benefit and SERP II 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) 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 because he was an NEO for fiscal years 2015 and 2017. Because Mr. Brickman has not previously been an NEO, prior year information is not
required to be disclosed.
(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 for 2016 and 2017 because he took additional vacation as leave without pay during those
years.
Grants of Plan-Based Awards
The following table contains information concerning grants of plan-based awards to each of the NEOs
during 2018. The Purchase Agreement prohibits us from issuing equity securities without Treasury's
consent. No stock awards were granted during 2018. For a description of the performance and other
measures used to determine payouts, see Elements of Target Total Direct Compensation,
Determination of 2018 Target TDC for NEOs, Determination of 2018 At-Risk Deferred
Salary, and 2018 Deferred Salary.
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Executive Compensation
2018 Compensation Information for NEOs
Table 80 - Grants of Plan-Based Awards
Named Executive Officer(1)
At-Risk Deferred Salary Award
Threshold
Target/Maximum
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards(2)
Mr. Brickman
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Mr. Hutchins
Conservatorship Scorecard
Mr. Lowman
Mr. Mackey
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
—
—
—
—
—
—
—
—
—
—
—
—
$430,174
430,174
860,348
444,688
444,688
889,375
487,500
487,500
975,000
487,500
487,500
975,000
(1) Mr. Layton was not eligible to receive Deferred Salary in 2018 and therefore is not included in this table.
(2) The amounts reported reflect At-Risk Deferred Salary granted in 2018 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 2018 are reported
in the Non-Equity Incentive Plan Compensation column of Table 79 - Summary Compensation Table.
Outstanding Equity Awards at Fiscal Year-End
None of the NEOs had unexercised options or unvested RSUs as of December 31, 2018.
Option Exercises and Stock Vested
None of the NEOs exercised options or had RSUs vest during 2018.
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. A Pension Benefits table
is not presented here as the Pension Plan termination was completed in 2015. For additional
information, see Other Executive Compensation Considerations.
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Executive Compensation
2018 Compensation Information for NEOs
Nonqualified Deferred Compensation
Non-qualified deferred compensation for the NEOs consists of the SERP Benefit and, for those NEOs
eligible for the Transitional Plan (or those NEOs who may have deferred Roth contributions into their
Thrift/401(k) Plan account), the SERP II Benefit. The SERP and SERP II are unfunded, non-qualified
defined contribution plans designed to provide participants with the full amount of benefits to which
they would have been entitled under the Thrift/401(k) Plan and Transitional Plan (for those NEOs eligible)
if these plans were 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.
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 Table 79 -
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.
The SERP II Benefit provides an accrual for each year an NEO participates in the Transitional Plan equal
to the amount of the employer contribution that would have been made to the Transitional Plan for the
year, without application of the Internal Revenue Code limits, less the amount of the contribution
actually made to the Transitional Plan, but does not take into account pay that exceeds two times the
NEO's Base Salary. The SERP II also provides participants with the flexibility to make Roth contributions
to the Thrift/401(k) Plan and still receive employer matching contributions as noted above.
Participants are credited with earnings or losses in their SERP and SERP II 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 and SERP II, which are the same as the investment options
available under the Thrift/401(k) Plan. SERP and SERP II 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, and the SERP II Benefit is paid by
March 31st following the year the NEO dies.
The following table shows the contributions, earnings, withdrawals and distributions, and accumulated
balances under the SERP and SERP II Benefits for each NEO.
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389
Executive Compensation
2018 Compensation Information for NEOs
Table 81 - SERP and SERP II Benefits
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
SERP Benefit
Mr. Brickman
SERP Benefit
SERP II Benefit
Mr. Hutchins
SERP Benefit
Mr. Lowman
SERP Benefit
Mr. Mackey
SERP Benefit
$—
—
—
—
—
$27,625
($12,528)
43,500
65,250
(83,980)
(19,575)
61,625
5,115
61,625
(12,716)
61,625
2,531
$—
—
—
—
—
$265,820
657,048
302,389
290,020
311,169
266,532
(1) The SERP and SERP II do not allow for employee contributions.
(2) Amounts reported reflect accruals under the SERP and SERP II Benefits during 2018, including the 2.5% contribution accruals and, for Mr.
Brickman, the age-based contribution accrual which will be allocated to NEO accounts in 2019. These amounts are also reported in the "All Other
Compensation" column in Table 79 - Summary Compensation Table.
(3) Amounts reported represent the total interest and other earnings credited to each NEO under the SERP and SERP II Benefits.
(4) Amounts reported reflect the accumulated balances under the SERP and SERP II Benefits for each NEO and include the plan year 2018 accruals
noted in footnote 2 above. All NEOs are fully vested in their SERP and, for Mr. Brickman, his SERP II, Benefit account balances.
The following 2017 SERP Benefit accrual amounts were reported in the "All Other Compensation" column in the 2017 Summary Compensation
Table as compensation for each NEO for whom accruals were made during 2017: Mr. Layton: $28,050, Mr. Mackey: $62,050, Mr. Hutchins:
$60,428, and Mr. Lowman: $62,050. See our Annual Report on Form 10-K filed on February 15, 2018.
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 and Mr. Lowman:
$62,149. See our Annual Report on Form 10-K filed on February 16, 2017. The 2016 SERP Benefit accrual amount for Mr. Hutchins, whose
information was not reported in our Annual Report on Form 10-K filed on February 16, 2017 because he was not an NEO in 2016, was $59,218.
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
FREDDIE MAC | 2018 Form 10-K
390
Executive Compensation
2018 Compensation Information for NEOs
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, 2018. Mr.
Layton is excluded from this table because he is not entitled to receive any payments in connection with
a termination of employment.
The table below does not address changes in control, as we are not obligated to provide any additional
compensation to our NEOs in connection with a change in control. The table also does not address
potential payments upon a termination for cause, which is a termination resulting from the occurrence of
an event or conduct described in the Recapture Agreement. All earned but unpaid Deferred Salary is
subject to forfeiture upon the occurrence of such a termination. However, the amount of compensation,
if any, to be recaptured and/or forfeited is determined by the Board of Directors, which can only occur
following the occurrence of a for cause termination. See Written Agreements Relating to NEO
Employment — Recapture and Forfeiture Agreement.
The table below also does not include vested balances in the SERP and SERP II. 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, 2018.
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391
Executive Compensation
2018 Compensation Information for NEOs
Table 82 - Compensation and Benefits if NEO Terminated Employment as of December 31, 2018
Named Executive Officer(1)
Death
Disability
Retirement(2)
David M. Brickman
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
James G. Mackey
Deferred Salary:
$1,507,478
$1,507,478
430,174
430,174
12,407
430,174
430,174
20,837
$2,380,233
$2,388,663
$1,575,208
$1,575,208
$1,575,208
444,688
444,688
13,416
444,688
444,688
21,688
444,688
444,688
21,688
$2,478,000
$2,486,272
$2,486,272
$1,775,000
$1,775,000
487,500
487,500
15,100
487,500
487,500
24,200
$2,765,100
$2,774,200
Fixed
At Risk-Conservatorship Scorecard(4)
At Risk-Corporate Scorecard/Individual(5)
Interest on Deferred Salary(6)
Total
$1,775,000
$1,775,000
487,500
487,500
15,100
487,500
487,500
24,200
$2,765,100
$2,774,200
All Other Not
For Cause
Terminations(3)
$1,115,534
430,174
430,174
17,388
$1,993,270
$1,313,500
487,500
487,500
20,139
$2,308,639
$1,313,500
487,500
487,500
20,139
$2,308,639
(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) Mr. Hutchins is the only retirement-eligible NEO 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 amount is shown for Mr. Hutchins because he is retirement eligible. In accordance with early termination provisions in the EMCP, the amounts
disclosed for Deferred Salary: Fixed for all other NEOs have been reduced by 26% to reflect a December 31, 2018 termination event.
(4) The amounts reported for Deferred Salary: At Risk-Conservatorship Scorecard reflect the funding level determined by FHFA with respect to
performance against the 2018 Conservatorship Scorecard. In cases of death or disability, the process for determining funding level is waived if
the funding level has not been determined at the date of termination.
(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 2018 performance approved by the Compensation Committee and FHFA. For death or disability, the provisions
are the same as for the amounts reported for Deferred Salary: At Risk-Conservatorship Scorecard.
Interest on Deferred Salary is accrued and paid in accordance with the terms of the EMCP. The amount of interest in the Death column assumes
that payment occurs on the 90th day following the date of death, which is assumed to be December 31, 2018.
(6)
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392
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, 2019 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, 2019, each director and NEO, and all of our directors and executive
officers as a group, owned less than 1% of our outstanding common stock. We ceased paying our
executives and directors stock-based compensation when we entered conservatorship. In addition, the
Purchase Agreement prohibits us from issuing any of our equity securities, including as compensation to
our directors and executive officers, without the prior written consent of Treasury, and no equity
securities, other than the senior preferred stock issued to Treasury, have been issued since we entered
conservatorship. In addition, company policy prohibits directors and executive officers from engaging in
transactions involving our equity securities, except selling company securities owned prior to the
implementation of the policy. See Executive Compensation - Other Executive Compensation
Considerations - Stock Ownership, Hedging and Pledging Policies for additional information. Unless
otherwise noted, the information presented below is based on information provided to us by the
individuals or entities specified in the table.
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393
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Stock Ownership By Directors and Executive Officers
Table 83 - Stock Ownership
Directors and
Named Executive
Officers
Position
Carolyn H. Byrd
Lance F. Drummond
Aleem Gillani
Director
Director
Director
Christopher E. Herbert
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
David M. Brickman
President
Michael T. Hutchins
EVP - Investments and Capital
Markets
David B. Lowman
EVP - Single-family Business
James G. Mackey
EVP - Chief Financial Officer
All directors and executive officers as a group (21
persons)
Common Stock
Beneficially Owned
Excluding
Stock Options(1)
Stock Options
Exercisable
Within 60 Days of
Feb. 13, 2019
Total Common
Stock
Beneficially Owned
—
—
—
—
—
—
—
—
—
—
—
—
3,395
—
—
—
3,934
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,395(2)
—
—
—
3,934(2)
(1)
Includes shares of stock beneficially owned as of February 13, 2019.
(2) Represents shares of stock beneficially owned prior to the company's entry into conservatorship.
Stock Ownership by Greater-Than 5% Holders
Table 84 - 5% Holders
5% Holders(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. Ackman ("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.
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394
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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 2018 all of our directors and executive officers complied with such reporting
obligations.
SECURITIES AUTHORIZED FOR ISSUANCE
UNDER EQUITY COMPENSATION PLANS
We have no shares of common stock available for issuance upon the exercise of options, warrants, and
rights under our existing equity compensation plans at December 31, 2018. 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). The authorizations to issue shares of common stock under the
Employee Plans and Directors' Plan have expired pursuant to their respective terms. Therefore, we are
not providing an Equity Compensation Table.
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395
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, the Nominating and Governance Committee, or its Chair or
other designated member under certain circumstances, each an Authorized Approver, is 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 (or our Compliance Department in certain limited circumstances) 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.
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 Authorized
Approver is not feasible or is otherwise not obtained, then the transaction is considered promptly by the
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 Authorized Approver reviews and considers all relevant information, which may
include:
The nature of the related person's interest in the transaction;
The approximate total dollar value of, and extent of the related person's interest in, the transaction;
Whether the transaction was or would be undertaken in the ordinary course of our business;
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
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396
Certain Relationships and Related Transactions
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 2018, 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 2018, and expect to continue to be a party
during 2019, 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 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
FREDDIE MAC | 2018 Form 10-K
397
Certain Relationships and Related Transactions
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.
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398
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 2018 and 2017.
Auditor Fees(1)
Table 85 - Auditor Fees
(In thousands)
Audit Fees(2)
Audit-Related Fees(3)
Tax Fees(4)
All Other Fees(5)
Total
2018
2017
$21,420
8,325
105
278
$22,582
5,580
59
243
$30,128
$28,464
(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) fees for pre-implementation assistance for lease accounting and current expected credit losses accounting; (iv) fees
related to accounting policy consultations; and (v) fees for the performance of certain agreed-upon procedures related to our risk transfer and
structured transactions, pursuant to engagement letters with the company, including where the fees are billed to and paid by unconsolidated
trusts created in connection with such transactions.
(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 the
procurement process and 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 | 2018 Form 10-K
399
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 2018 and 2017.
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), or 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 | 2018 Form 10-K
400
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 415.
FREDDIE MAC | 2018 Form 10-K
401
Glossary
Glossary
This Glossary includes acronyms and defined terms that are used throughout this report.
ACIS - Agency Credit Insurance Structure - Transactions in which we purchase insurance policies
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 transaction. We also enter into other ACIS
transactions that provide credit protection for certain specified credit events on loans not included in
a reference pool created for a STACR transaction, or provide front-end credit risk transfer as loans
come into the portfolio. Under each of these insurance policies, we pay monthly premiums that are
determined based on the outstanding balance of the reference pool. When specific credit events
occur, we generally receive compensation from the insurance policy up to an aggregate limit based
on actual losses.
Administration - Executive branch of the U.S. government.
Agency securities - Generally refers to mortgage-related securities issued or guaranteed 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.
B tranches - The most junior tranches in a typical STACR debt note, STACR Trust transaction
structure or ACIS transaction. B tranches provide credit support to the tranches that have
higher seniority. Any losses on mortgage loans in the reference pool due to certain credit events are
allocated in reverse sequential order, beginning with the most subordinate B tranche outstanding,
until the balances of all of the B tranches reach zero. Freddie Mac may retain all or a portion of the B
tranches.
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CCF - Conservatorship Capital Framework - An economic capital system with detailed formulae
provided by FHFA that is used to evaluate and manage our financial risk and to make economic
business decisions while in conservatorship.
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.
Charge-offs, gross - Represent the amount of a loan that has been discharged in order to remove
the loan from our consolidated balance sheets when the loan is deemed uncollectible, regardless of
when the impact of the credit loss was recorded on our consolidated statements of comprehensive
income. Generally the amount of a charge-off is the recorded investment in excess of the fair value
of the loan's collateral.
Charter - The Federal Home Loan Mortgage Corporation Act, as amended, 12 U.S.C. § 1451 et seq.
CMBS - Commercial mortgage-backed security - A security backed by loans on commercial
property (often including multifamily rental properties) as opposed to one-to-four family residential
real estate. Although the loan pools underlying CMBS can include loans financing multifamily
properties and commercial properties, such as office buildings and hotels, the classes of CMBS that
we hold receive distributions of scheduled cash flows only from multifamily properties.
Comprehensive income (loss) - Consists of net income (loss) plus other comprehensive income
(loss).
Conforming loan/Conforming 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.
Conservator - The Federal Housing Finance Agency, acting in its capacity as Conservator of Freddie
Mac.
Conservatorship Capital - The capital needed under the CCF for analysis of transactions and
business.
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
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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
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.
DTI - Debt-to-income.
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. Unless stated otherwise, multifamily delinquency rates presented in this Form
10-K refer to gross delinquency rates before consideration of risk transfers.
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
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rates.
Duration gap - One of our primary interest-rate risk measures. Duration gap is a measure of the
difference between the estimated durations of our interest rate sensitive assets and liabilities. We
present the duration gap of our financial instruments in units expressed as months. A duration gap of
zero implies that the change in value of our interest rate sensitive assets from an instantaneous
change in interest rates would be expected to be accompanied by an equal and offsetting change in
the value of our interest rate sensitive liabilities, thus leaving economic value unchanged.
EMCP - Executive Management Compensation Program.
Enhanced Relief Refinance - Provides liquidity for borrowers who are current on their mortgages
but unable to refinance because their LTV ratios exceed standard refinance limits. This program
became available in January 2019 for loans originated on or after October 1, 2017.
ER Policy - Enterprise Risk Policy - The ER Policy sets forth the core components of the enterprise
risk framework that defines how we identify, assess, 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 cash flows of the underlying collateral to
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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.
GSD/FICC - Government Securities Division of Fixed Income Clearing Corporation.
GSE Act - The Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as
amended by the Reform Act.
GSEs - Government sponsored enterprises - Refers to certain legal entities created by the
U.S. government, including Freddie Mac, Fannie Mae, and the FHLBs.
Guarantee fee - The fee that we receive for guaranteeing the payment of principal and interest to
mortgage security investors, which consists primarily of a combination of a monthly guarantee fee
paid 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
sought 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 was targeted at borrowers with current LTV ratios above 80%. The HARP program
ended in December 2018 and has been replaced by Freddie Mac's Enhanced Relief Refinance
program.
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.
Integrated Mortgage Insurance (IMAGIN) - A new insurance based offering that provides loan-
level protection for loans with 80% and higher LTV ratios. IMAGIN is designed to expand and
diversify sources of private capital supporting low down payment lending, while enabling better
management of taxpayer exposure to our mortgage and counterparty risks. Each loan is first
provided Charter-compliant primary mortgage insurance and is then reinsured by a panel of
reinsurers that are reviewed and approved by Freddie Mac. IMAGIN is offered to a broad range of
Freddie Mac sellers, who can choose IMAGIN or traditional primary mortgage insurance at their
discretion.
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
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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.
KI Certificates - Structured pass-through certificates, similar to K Certificates, except these
certificates are backed by loans that are contributed by third-party whole loan funds.
KT Certificates - Structured pass-through certificates backed by a revolving pool of multifamily
loans awaiting securitization into a K Certificate.
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 that were originated after 2008.
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.
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 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 sales of seriously delinquent loans and non-consolidated senior subordinate
securitization structure transactions collateralized by reporforming loans. In addition, periodic
paydown of loan principal is also included in loan liquidations.
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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 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.
MBS - Mortgage-backed security.
MBSD/FICC - Mortgage Backed Securities Division of the Fixed Income Clearing Corporation.
M Certificates - Structured pass-through certificates backed by pools of tax-exempt or taxable
multifamily housing revenue bonds.
MD&A - Management's Discussion and Analysis of Financial Condition and Results of Operations.
MHA Program - Making Home Affordable Program - The MHA Program was designed to help in the
housing recovery, promote liquidity and housing affordability, expand foreclosure prevention efforts,
and set market standards. The MHA Program included HARP and HAMP.
ML Certificates - Structured pass-through certificates backed by tax-exempt or taxable loans.
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
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.
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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 has been $3.0 billion since 2018 (if 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).
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, agency, or U.S. Treasury securities). This includes consideration of potential variability in the
instrument's cash flows resulting from any options embedded in the instrument, such as prepayment
options. When the OAS on a given asset widens, the fair value of that asset will typically decline, all
other market factors being equal. The opposite is true when the OAS on a given asset tightens.
Option ARM loan - Loans that permit a variety of repayment options, including minimum, interest-
only, fully amortizing 30-year, and fully amortizing 15-year payments. The minimum payment
alternative for option ARM loans allows the borrower to make monthly payments that may be less
than the interest accrued for the period. The unpaid interest is added to the principal balance of the
loan, known as negative amortization. For our non-agency mortgage-related securities that are
backed by option ARM loans, we categorize securities as option ARM if the securities were identified
as such based on information provided to us when we entered into these transactions. We have not
identified option ARM securities as either subprime or Alt-A securities.
Original LTV ratio - A credit measure for loans, calculated as the UPB of the loan divided by the
lesser of the appraised value of the property at the time of loan origination or the borrower's
purchase price. Second liens not owned or guaranteed by us are excluded from the LTV ratio
calculation. The existence of a second-lien loan reduces the borrower's equity in the home and,
therefore, can increase the risk of default and the amount of the gross loss if a default occurs.
OTC - Over-the-counter.
OTCQB - A marketplace, operated by the OTC Markets Group Inc., for OTC-traded U.S. companies
that are registered and current in their reporting with the SEC or a U.S. banking or insurance
regulator.
PCs - Participation Certificates - Single-class pass-through securities that we issue and guarantee
as part of a securitization transaction. Typically we purchase loans from sellers, place a pool of loans
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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.
Q Certificates - Structured pass-through certificates, similar to K Certificates, except these
certificates are backed by loans that are contributed by a third party.
RCSA - Risk and Control Self-Assessment.
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.
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 was our
implementation of HARP for our loans, and relief refinance options are also available for certain non-
HARP loans. Although HARP was 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
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than three months past due and is not in the process of foreclosure.
Reputation risk - The risk of damage to the Freddie Mac brand and reputation from any action,
inaction, or association that is perceived to be inappropriate, unethical, or inconsistent with our
mission.
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.
ROCC - Return on conservatorship capital.
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 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 certain returns on assets, funding and hedging 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.
Senior subordinate securitization structures - Structures in which we issue guaranteed senior
securities or PCs and unguaranteed subordinated securities backed by reperforming single-family
loans or recently originated single-family loans.
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. Unless stated otherwise,
SDQ rates presented in this Form 10-K refer to gross SDQ rates before consideration of credit
enhancements.
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
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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 primarily 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.
Single-family new business activity - Single-family loans we purchased or guaranteed.
Single Security initiative - An initiative that provides for Freddie Mac and Fannie Mae to issue a
single (common) mortgage-related security, to be called the UMBS.
STACR debt note - Structured Agency Credit Risk debt note - A Freddie Mac issued debt security
where the principal balance is linked to the credit performance of a reference pool of single-family
loans owned or guaranteed by Freddie Mac.
STACR Trust - Structured Agency Credit Risk Trust - A debt security issued by an unconsolidated
trust where the principal balance is linked to the credit performance of a reference pool of single-
family loans owned or guaranteed by Freddie Mac. When actual losses on the reference pool of
single-family loans occur, Freddie Mac receives a loss protection payment from the trust in exchange
for paying monthly credit premiums.
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.
Strategic risk - The risk to earnings, capital, profitability, mission, or reputation arising from adverse
business decisions, or the improper implementation of those decisions, that may negatively affect
the company's strategy.
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.
SOFR - Secured Overnight Financing Rate.
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
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Glossary
borrower's income. While we have not historically characterized the loans in our single-family credit
guarantee portfolio as either prime or subprime, we monitor the amount of loans we have
guaranteed with characteristics that indicate a higher degree of credit risk. Certain security collateral
underlying our other securitization products has been identified as subprime based on information
provided to Freddie Mac when the transactions were entered into. We also categorize our
investments in non-agency mortgage-related securities as subprime if they were identified as such
based on information provided to us when we entered into these transactions.
SVP - Senior Vice President.
Swaption - An option contract to enter into an interest-rate swap. In exchange for an option
premium, a buyer obtains the right but not the obligation to enter into a specified swap agreement
with the issuer on a specified future date.
Target TDC - Target total direct compensation.
TBA - To be announced.
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.
UMBS - Uniform mortgage-backed security - A single (common) mortgage-related security currently
expected to be issued on and after June 3, 2019 by Freddie Mac and Fannie Mae. The UMBS
represents undivided beneficial ownership interest in, and the right to receive payments from, pools
of one- to four- family residential mortgages that are held in trust for investors.
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.
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.
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Glossary
VIE - Variable Interest Entity - A VIE is an entity that has a total equity investment at risk that is not
sufficient to finance its activities without additional subordinated financial support provided by
another party, or where the group of equity holders does not have: (i) the ability to make significant
decisions about the entity's activities; (ii) the obligation to absorb the entity's expected losses; or
(iii) the right to receive the entity's expected residual returns.
Warrant - Refers to the warrant we issued to Treasury on September 7, 2008 pursuant to the
Purchase Agreement. The warrant provides Treasury the ability to purchase, for a nominal price,
shares of our common stock equal to 79.9% of the total number of shares of Freddie Mac common
stock outstanding on a fully diluted basis on the date of exercise.
Workforce housing - Multifamily housing that is affordable to the majority of low to middle income
households.
Workout, or loan workout - A workout is either a home retention action, which is either a loan
modification, repayment plan, or forbearance agreement, or a foreclosure alternative, which is either
a short sale or a deed in lieu of foreclosure.
XBRL - eXtensible Business Reporting Language.
Yield curve - A graphical display of the relationship between yields and maturity dates for bonds of
the same credit quality. The slope of the yield curve is an important factor in determining the level of
net interest yield on a new mortgage asset, both initially and over time. For example, if a mortgage
asset is purchased when the yield curve is inverted (i.e., short-term interest rates higher than long-
term interest rates), our net interest yield on the asset will tend to be lower initially and then increase
over time. Likewise, if a mortgage asset is purchased when the yield curve is steep (i.e., short-term
interest rates lower than long-term interest rates), our net interest yield on the asset will tend to be
higher initially and then decrease over time.
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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 by the Economic Growth, Regulatory
Relief, and Consumer Protection Act (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form
10-Q filed on July 31, 2018)
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.
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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 the Registrant'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 (incorporated by reference to Exhibit 4.27 to the Registrant's Annual Report on Form 10-K
filed on February 15, 2018)
Federal Home Loan Mortgage Corporation Global Debt Facility Agreement, dated February 15, 2018 (incorporated by
reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 1, 2018)
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, contract, or arrangement.
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417
Exhibit Index
Exhibit
10.9
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)†
Description*
10.10
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
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)†
10.20
Memorandum Agreement, dated May 7, 2012, between Freddie Mac and Donald H. Layton (incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 10, 2012)†
10.21
Restrictive Covenant and Confidentiality Agreement, dated May 7, 2012, between Freddie Mac and Donald H. Layton
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 10, 2012)†
10.22
Memorandum Agreement, dated September 24, 2013, between Freddie Mac and James Mackey (incorporated by reference
to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 30, 2013)†
10.23
Restrictive Covenant and Confidentiality Agreement, dated September 25, 2013, between Freddie Mac and James Mackey
(incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on September 30, 2013)†
* 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, contract, or arrangement.
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418
Exhibit Index
Exhibit
Description*
10.24
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)†
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
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 the Registrant'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 the Registrant's Annual Report on Form 10-K filed on February 18, 2016)†
Restrictive Covenant and Confidentiality Agreement, dated September 6, 2018, between Freddie Mac and David Brickman
(incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on September 5, 2018)†
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)†
10.33
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)†
10.34
10.35
10.36
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)
* 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, contract, or arrangement.
FREDDIE MAC | 2018 Form 10-K
419
Exhibit Index
Exhibit
Description*
10.37
10.38
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)
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)
10.39
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)
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.
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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 14, 2019
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421
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 14, 2019
Chief Executive Officer and Director
(Principal Executive Officer)
Executive Vice President — Chief Financial Officer
(Principal Financial Officer)
February 14, 2019
February 14, 2019
Senior Vice President — Corporate Controller and
Principal Accounting Officer (Principal Accounting Officer)
February 14, 2019
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
February 14, 2019
/s/ Christopher S. Lynch*
Christopher S. Lynch
/s/ Donald H. Layton
Donald H. Layton
/s/ James G. Mackey
James G. Mackey
/s/ Donald Kish
Donald Kish
/s/ Carolyn H. Byrd*
Carolyn H. Byrd
/s/ Lance F. Drummond*
Lance F. Drummond
/s/ Aleem Gillani*
Aleem Gillani
/s/ Christopher E. Herbert*
Christopher E. Herbert
/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 | 2018 Form 10-K
422
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, 6-8, 30-43, 53-61,
72-78, 161-174
181-208
Not Applicable
8
209
Not Applicable
210
11
1-5, 9-10, 12-29,
44-52, 62-71, 79-135,
145-160, 175-180
136-144
211-340
Not Applicable
212-213, 341-344
345
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
87-89, 345-366, 395
360, 362-363, 367-392
393-395
354-356, 396-398
399-400
Exhibits and Financial Statement Schedules
Form 10-K Summary
401, 415-420
Not Applicable
421-422
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 | 2018 Form 10-K
423
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, Ricardo A. Anzaldua, 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, 2018 and any and all amendments thereto, as fully for all intents and
purposes as I might or could do in person, and hereby ratify and confirm all said attorneys-in-fact, each
acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of February 7, 2019.
/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, Ricardo A. Anzaldua, 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, 2018 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 14, 2018.
/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, Ricardo A. Anzaldua, 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, 2018 and any and all amendments thereto, as fully for all intents and
purposes as I might or could do in person, and hereby ratify and confirm all said attorneys-in-fact, each
acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of January 28, 2019.
/s/ Aleem Gillani
Aleem Gillani
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, Ricardo A. Anzaldua, 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, 2018 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 14, 2018.
/s/ Christopher E. Herbert
Christopher E. Herbert
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, Ricardo A. Anzaldua, 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, 2018 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 14, 2018.
/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, Ricardo A. Anzaldua, 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, 2018 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 14, 2018.
/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, Ricardo A. Anzaldua, 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, 2018 and any and all amendments thereto, as fully for all intents and
purposes as I might or could do in person, and hereby ratify and confirm all said attorneys-in-fact, each
acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of February 13, 2019.
/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, Ricardo A. Anzaldua, 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, 2018 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 14, 2018.
/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, Ricardo A. Anzaldua, 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, 2018 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 14, 2018.
/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, Ricardo A. Anzaldua, 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, 2018 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 14, 2018.
/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, Ricardo A. Anzaldua, 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, 2018 and any and all amendments thereto, as fully for all intents and
purposes as I might or could do in person, and hereby ratify and confirm all said attorneys-in-fact, each
acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney as of February 8, 2019.
/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, 2018 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 14, 2019
/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, 2018 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 14, 2019
/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, 2018 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 14, 2019
/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, 2018 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 14, 2019
/s/ James G. Mackey
James G. Mackey
Executive Vice President — Chief Financial Officer