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, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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:
Title of each class
None
Trading Symbol(s)
N/A
Name of each exchange on which registered
N/A
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).
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.
Yes
No
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 stock was last sold on June 28,
2019 (the last business day of the registrant's most recently completed second fiscal quarter) was $1.7 billion.
As of January 31, 2020, there were 650,059,033 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
Market Conditions and 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
OTHER INFORMATION
DIRECTORS, CORPORATE GOVERNANCE, AND EXECUTIVE OFFICERS
Directors
Corporate Governance
Executive Officers
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Compensation and Risk
CEO Pay Ratio
Environmental, Social, and Governance Practices
2019 Compensation Information for NEOs
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRINCIPAL ACCOUNTING FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
GLOSSARY
EXHIBIT INDEX
SIGNATURES
FORM 10-K INDEX
1
1
7
10
11
12
12
17
27
28
66
69
101
104
112
123
128
133
134
135
137
157
158
159
258
259
261
262
262
267
274
276
276
290
291
292
295
302
304
306
308
309
318
324
326
FREDDIE MAC | 2019 Form 10-K
i
Table of Contents
MD&A Table Index
MD&A TABLE INDEX
Table Description
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
Selected Financial Data
Summary of Consolidated Statements of Comprehensive Income (Loss)
Components of Net Interest Income
Analysis of Net Interest Yield
Net Interest Income Rate / Volume Analysis
Components of Guarantee Fee Income
Components of Investment Gains (Losses), Net
Components of Mortgage Loans Gains (Losses)
Components of Debt Gains (Losses)
Components of Derivative Gains (Losses)
Summarized Consolidated Balance Sheets
Single-Family Credit Guarantee Portfolio CRT Issuance
Single-Family Guarantee Segment Financial Results
Multifamily Portfolio and Market Support
Multifamily Segment Financial Results
Capital Markets Segment Financial Results
Capital Markets Segment Interest Rate-Related and Market Spread-Related Fair Value Changes, Net of Tax
All Other Category Comprehensive Income
Single-Family New Business Activity
Details of Credit Enhanced Loans in Our Single-Family Credit Guarantee Portfolio
Credit-Enhanced and Non-Credit-Enhanced Loans in Our Single-Family Credit Guarantee Portfolio
Details of Single-Family Credit Enhancement Expense
Reduction in Conservatorship Credit Capital as a Result of Certain CRT Transactions
Credit Quality Characteristics of Our Single-Family Credit Guarantee Portfolio
Characteristics of the Loans in Our Single-Family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfolio Higher Risk Loan Data
Single-Family Credit Guarantee Portfolio Attribute Combinations for Higher Risk Loans
Higher Risk Single-Family Loan Credit Characteristics
Timing of Scheduled Payment Changes for Certain Single-Family Loan Types
Alt-A Loans in Our Single-Family Credit Guarantee Portfolio
Geographic Concentration in Our Single-Family Credit Guarantee Portfolio
Single-Family Charge-Offs and Recoveries by Region
Concentration of Single-Family Loans in Each Region by CLTV Ratio
Single-Family Credit Guarantee Portfolio Credit Performance Metrics
Credit Characteristics of Certain Single-Family Loan Categories
Single-Family Allowance for Credit Losses Activity
Single-Family Individually Impaired Loans with an Allowance Recorded
Single-Family TDR and Non-Accrual Loans
Single-Family Relief Refinance Loans
Credit Characteristics of Single-Family Modified Loans
Payment Performance of Single-Family Modified Loans
Seriously Delinquent Single-Family Loans By Jurisdiction
Average Length of Foreclosure Process for Single-Family Loans
Single-Family REO Activity
Single-Family Severity Ratios
Multifamily Segment New Business Activity Key Risk Characteristics
Page
11
17
18
20
21
22
22
23
24
25
27
42
43
52
55
63
63
65
71
72
73
73
74
77
78
79
79
80
81
81
82
82
83
83
84
84
85
85
86
87
87
88
89
89
90
91
FREDDIE MAC | 2019 Form 10-K
ii
Table of Contents
MD&A Table Index
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
Credit-Enhanced and Non-Credit-Enhanced Loans Underlying Our Multifamily Mortgage Portfolio
Level of Subordination on Our Securitizations
Multifamily Mortgage Portfolio Attributes
Single-Family Credit Guarantee Portfolio Non-Depository Servicers
Single-Family Mortgage Insurers
Derivative Counterparty Credit Exposure
PVS-YC and PVS-L Results Assuming Shifts of the LIBOR Yield Curve
Duration Gap and PVS Results
PVS-L Results Before Derivatives and After Derivatives
PVS-L Average, Minimum, and Maximum
GAAP Adverse Scenario Before and After Hedge Accounting
GAAP Adverse Scenario Average, Minimum, and Maximum
Estimated Net Interest Rate Effect on Comprehensive Income (Loss)
Estimated Spread Effect on Comprehensive Income (Loss)
Sources of Liquidity
Other Investments Portfolio
Funding Sources
Other Debt Activity
Other Short-Term Debt
Activity for Debt Securities of Consolidated Trusts Held by Third Parties
Debt Securities of Consolidated Trusts Held by Third Parties
Freddie Mac Credit Ratings
Net Worth Activity
Returns on Conservatorship Capital
Mortgage-Related Investments Portfolio Details
2018 and 2017 Affordable Housing Goal Results
2019-2020 Affordable Housing Goals
Contractual Obligations
Quarterly Selected Financial Data
Board Compensation Levels
Director Compensation
2019 Target TDC
2019 Deferred Salary
CEO Pay Ratio
Compensation Summary
Grants of Plan-Based Awards
SERP and SERP II Benefits
Compensation and Benefits if NEO Terminated Employment as of December 31, 2019
Stock Ownership by Directors and Executive Officers
Stock Ownership by Greater Than 5% Holders
Auditor Fees
92
92
94
96
97
99
106
106
106
107
108
109
109
110
113
113
114
115
117
119
120
120
121
122
126
129
130
133
258
272
272
277
285
291
295
296
298
299
302
302
306
FREDDIE MAC | 2019 Form 10-K
iii
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, 2020, the three months ended December 31, 2019, the three
months ended September 30, 2019, the three months ended June 30, 2019, the three months ended March 31, 2019, 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, and the three months ended December 31, 2017 as "4Q 2020," "4Q 2019," "3Q 2019,"
"2Q 2019," "1Q 2019," "4Q 2018," "3Q 2018," "2Q 2018," "1Q 2018," and "4Q 2017," 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 guaranteed mortgage-related securities, which are sold in the global capital markets and transfer
interest-rate and liquidity risks to third-party investors. In addition, we transfer mortgage credit risk exposure to third-party
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.
Business Results
Consolidated Financial Results
Net Revenues, Net Income, and Comprehensive Income
Total Equity as of December 31,
FREDDIE MAC | 2019 Form 10-K
1
Introduction
Key Drivers:
2019 vs. 2018
About Freddie Mac
Comprehensive income was $7.8 billion for 2019, driven by strong business performance in a declining interest rate
environment. The decline of $0.8 billion, or 10%, from 2018, was primarily due to higher costs related to transferring
credit risk and investments to improve the efficiency of our business operations.
Net revenues declined $1.5 billion compared to 2018, primarily due to lower investment gains (losses), net, partially
offset by higher contractual net interest income on the single-family guarantee portfolio and higher income on the
multifamily guarantee portfolio. The decline in net revenues was also partially offset by a $1.2 billion increase in other
comprehensive income.
Total equity was $9.1 billion as of December 31, 2019, up from $4.5 billion as of December 31, 2018, as a result of our
ability to retain earnings pursuant to the September 2019 Letter Agreement.
We expect to recognize a decrease to retained earnings of $0.2 billion upon our adoption of CECL on January 1, 2020.
See Note 1 for additional information about our adoption of CECL.
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 we no longer invest.
Total equity was $4.5 billion as of December 31, 2018, compared to ($0.3) billion as of December 31, 2017. The
increase primarily reflects our ability to retain earnings pursuant to the December 2017 Letter Agreement.
Housing Market Support
Housing Market Support
We support the U.S. housing market by executing our Charter Mission to ensure credit availability for new and refinanced
single-family mortgages as well as for rental housing. We provided $558 billion in liquidity to the mortgage market in 2019,
which enabled the financing of 2.6 million home purchases, refinancings, or rental units.
FREDDIE MAC | 2019 Form 10-K
2
Introduction
Portfolio Balances
About Freddie Mac
Guarantee Portfolio as of December 31,
Investments Portfolio as of December 31,
The total guarantee portfolio grew $132 billion, or 6%, in 2019, driven by a 5% increase in our single-family credit
guarantee portfolio and a 14% increase in our multifamily guarantee portfolio. 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 growth in our single-family credit guarantee portfolio outpaced increases in U.S. single-family mortgage debt
outstanding of 2% in 2019 and 3% in 2018. Continued home price appreciation contributed to new business
acquisitions having a higher average loan size compared to older vintages that continued to run off.
The growth in our multifamily guarantee portfolio also outpaced increases in U.S. multifamily mortgage debt
outstanding of 6% in 2019 and 9% in 2018, primarily driven by strong loan purchase and securitization activity,
attributable to healthy multifamily market fundamentals and strong demand for multifamily loan products.
Our total investments portfolio increased $35 billion, or 12%, in 2019 primarily due to an increase in our other investments
portfolio driven by higher loan prepayments, higher near-term cash needs for upcoming debt maturities and anticipated
calls of other debt, and a higher expected loan purchase forecast. Our total investments portfolio decreased $62 billion, or
18%, in 2018, primarily due to a reduction in the balance of our mortgage-related investments portfolio pursuant to the
portfolio limits established by the Purchase Agreement and FHFA. In February 2019, FHFA directed us to maintain the
mortgage-related investments portfolio at or below $225 billion at all times.
FREDDIE MAC | 2019 Form 10-K
3
Introduction
Credit Risk Transfer
About Freddie Mac
Single-Family Credit Guarantee Portfolio with Credit Enhancement
as of December 31,
Multifamily Mortgage Portfolio with Credit Enhancement
as of December 31,
In addition to transferring interest-rate and liquidity risk to third-party investors through our securitization activities, we have
developed innovative CRT programs that distribute mortgage credit risk to third-party investors and have transformed our
business model from one where we buy and hold credit risk to one where we buy and transfer a portion of such credit risk. Our
programmatic offerings regularly transfer a portion of the credit risk primarily on recently acquired loans, with the percentage of
our single-family credit guarantee portfolio and the percentage of our multifamily mortgage portfolio covered by credit
enhancements increasing to 56% and 89%, respectively, as of December 31, 2019.
See MD&A - Our Business Segments - Single-Family Guarantee - Products and Activities and MD&A - Our
Business Segments - Multifamily - Products and Activities for additional information on our credit enhancements.
Common Securitization Platform and UMBS
On June 3, 2019, we, Fannie Mae, and FHFA announced the implementation of Release 2 of the CSP and the Single Security
Initiative for Freddie Mac and Fannie Mae, under which we and Fannie Mae began issuing a single (common) security called the
UMBS. The objective of the Single Security Initiative is to enhance the overall liquidity of Freddie Mac and Fannie Mae securities
in the TBA market by supporting their fungibility without regard to which company is the issuer.
Release 2 added to the functionality of the CSP by, among other things, enabling commingling of Freddie Mac and Fannie Mae
UMBS and other TBA-eligible mortgage securities in resecuritization transactions. SIFMA also revised its good-delivery
guidelines to permit UMBS TBA contracts to be settled by delivery of UMBS issued by either Freddie Mac or Fannie Mae.
As part of the June 3, 2019 implementation of Release 2, we entered into an agreement with Fannie Mae regarding the
commingling of certain of our mortgage securities under the Single Security Initiative. This agreement provides that Freddie
Mac and Fannie Mae will indemnify each other for materially inaccurate or misleading disclosure and for certain adverse events,
such as failures to perform obligations as issuer, master servicer, trustee, and guarantor related to the mortgage securities. In
May 2019, we entered into an amended customer services agreement with Fannie Mae and CSS, which sets forth the terms
and conditions of the mortgage securitization services provided by CSS.
In January 2020, FHFA directed Freddie Mac and Fannie Mae to amend the limited liability company (LLC) agreement for CSS
to change the structure of the CSS Board of Managers (CSS Board). The revised LLC agreement also removed the requirement
that any CSS Board decision must be approved by at least one of the CSS Board members appointed by Freddie Mac and one
appointed by Fannie Mae. These amendments reduce Freddie Mac’s and Fannie Mae’s ability to control CSS Board decisions,
even after conservatorship, including decisions about strategy, business operations, and funding.
FREDDIE MAC | 2019 Form 10-K
4
Introduction
About Freddie Mac
Under the revised CSS LLC agreement, the CSS Board will continue to include two Freddie Mac representatives and two Fannie
Mae representatives, and it will also include two new members: the Chief Executive Officer of CSS and an independent, non-
Executive Chair. During conservatorship, the CSS Board Chair will be designated by FHFA, and all CSS Board decisions will
require the affirmative vote of the Board Chair. During conservatorship, FHFA also may appoint up to three additional
independent members to the CSS Board, who along with the Board Chair and the Chief Executive Officer of CSS may continue
to serve on the CSS Board after conservatorship. FHFA appointed a new CSS Board member to serve as Chair in January
2020. If FHFA appoints three additional CSS Board members, the CSS Board members we and Fannie Mae appoint could be
outvoted by non-GSE designated Board members on any matter during conservatorship and on a number of significant
matters, including approval of the annual budget and strategic plan for CSS, if either we or Fannie Mae exits from
conservatorship. Certain material post-conservatorship decisions, however, would require the approval of at least one Board
member designated by us and one designated by Fannie Mae, including those decisions involving a material change in CSS’s
functionality, such as the addition of a new business line or reduction in CSS’s support of the UMBS, capital contributions
beyond those necessary to support CSS’s ordinary business operations, appointment or removal of the CSS Chief Executive
Officer, and admission of new members.
We are still evaluating how these changes to the CSS governance structure will affect Freddie Mac, and it is possible that FHFA
may require us to make additional changes to the CSS LLC agreement, or may otherwise impose restrictions or provisions
relating to CSS or the UMBS, that may adversely affect us. For additional information on CSS-related risks, see Risk Factors -
Conservatorship and Related Matters - 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.
Implementation of Release 2 of the CSP and the Single Security Initiative represents a significant change for the single-family
mortgage market and for our business. For additional information, see MD&A - Our Business Segments - Single-Family
Guarantee and Risk Factors in this Form 10-K.
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 affect our business
activities and are critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory
receivership provisions. We believe that the support provided by Treasury pursuant to the Purchase Agreement currently
enables us to have adequate liquidity to conduct normal business activities.
Under the Purchase Agreement, we issued 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 September 2019 Letter Agreement, the applicable Capital Reserve Amount is $20.0
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. This would not affect our ability to draw funds from Treasury under the Purchase Agreement.
The September 2019 Letter Agreement also provides that the liquidation preference of the senior preferred stock will be
increased, at the end of each fiscal quarter, beginning on September 30, 2019, by an amount equal to the increase in the Net
Worth Amount, if any, during the immediately prior fiscal quarter, until the liquidation preference has increased by $17.0 billion.
See Note 2 for more information about our Purchase Agreement with Treasury.
Under the September 2019 Letter Agreement, Freddie Mac and Treasury also agreed to negotiate and execute an amendment
to the Purchase Agreement that further enhances taxpayer protections by adopting covenants broadly consistent with
recommendations for administrative reform contained in the Treasury's September 2019 Housing Reform Plan. For more
information regarding Treasury's Plan, see Regulation and Supervision - Legislative and Regulatory Developments -
Treasury Housing Reform Plan.
FREDDIE MAC | 2019 Form 10-K
5
Introduction
About Freddie Mac
Draw Requests From and Dividend Payments To Treasury
At December 31, 2019, our assets exceeded our liabilities under GAAP; therefore, no draw is being requested from Treasury
under the Purchase Agreement. In addition, as a result of the increase in the applicable Capital Reserve Amount pursuant to the
September 2019 Letter Agreement, we did not declare or pay a dividend to Treasury on the senior preferred stock during the
three months ended September 30, 2019 and December 31, 2019. The amount of available funding remaining under the
Purchase Agreement was $140.2 billion at December 31, 2019, and will be reduced by any future draws.
The graph below shows our cumulative draw requests from Treasury and cumulative dividend payments to Treasury. The
Treasury draw request amounts reflect 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. The dividend payment amounts reflect the total dividend
payments made to Treasury as required by the Purchase Agreement for the periods presented. Dividend payments are based
on the prior quarter's Net Worth Amount. Under the Purchase Agreement, the payment of dividends does not reduce the
outstanding liquidation preference of the senior preferred stock. 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 | 2019 Form 10-K
6
Introduction
OUR BUSINESS
Our Business
Primary Business Strategies
Freddie Mac's overall strategic direction is established by management and affirmed by the Board through its approval of a
strategic plan, which sets forth our primary business strategies and generally covers a three-year timeframe. FHFA, the
Administration, or Congress could take actions that cause us to alter our strategic plan.
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 the U.S. housing market 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 Strategic Goals
Our primary business strategies are currently focused on three strategic goals: exit conservatorship, create a world class
operating platform, and become the leader in housing.
Exit Conservatorship
We seek to exit from conservatorship with an attractive, sustainable business model. We are focused on meeting or
exceeding milestones set by FHFA and Treasury, including those relating to capital, remediation of deficiencies, and risk
management, as well as our own internal metrics designed to facilitate our exit from conservatorship.
Create a World-Class Operating Platform
We seek to create and operate a modern, resilient, flexible, and efficient platform that allows us to better assess and manage
risk, while also enabling us to best meet the needs and demands of our company, customers, business partners, and the
market in a safe, sound, and efficient manner by focusing on activities such as:
Enhancing our capability to effectively manage risk and capital through our underwriting, purchase, servicing, and credit
risk distribution activities;
Increasing the resiliency of our infrastructure and operations; and
Reducing costs for us and our customers in order to pass through savings to borrowers and renters.
Become the Leader in Housing
We seek to emerge from conservatorship as the nation's leader in housing by continuing to provide leadership through
innovation and collaboration to enhance liquidity, stability, and affordability. We seek to help the housing industry better
serve the needs of homebuyers and renters, particularly in the context of the current affordability challenges, including from
fundamental problems related to housing supply. We intend to do so by identifying and implementing new and innovative
ways to expand fair and responsible access to credit, including achieving the single-family and multifamily housing goals
and Duty to Serve plan, continuing to create innovative CRT structures that attract new and varied investors and additional
private capital to the housing market, and engaging in activities to support the UMBS.
For further information on our goals and detailed strategies for each of our business segments, see MD&A — Our Business
Segments.
FREDDIE MAC | 2019 Form 10-K
7
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 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 $510,400 for 2020, an increase from
$484,350 for 2019, $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 2020, up to $765,600 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.
Employees
At January 31, 2020, we had 6,871 full-time and 41 part-time employees. In 4Q 2019, we offered a Voluntary Early Retirement
Program (VERP) to employees meeting certain age and service requirements. As of January 31, 2020, 700 employees had
accepted the VERP, with a separation date of March 31, 2020 generally expected.
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.
FREDDIE MAC | 2019 Form 10-K
8
Introduction
Our Business
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 | 2019 Form 10-K
9
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 CRT 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 the recommendations in the Treasury Housing Reform Plan or 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;
Changes in our Charter or in applicable legislative or regulatory requirements (including changes pursuant to the Treasury
Housing Reform Plan or pursuant to 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., our adoption of CECL);
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 note, ACIS ®, K
Certificate, SB Certificate, and other CRT 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 efficiency;
The adequacy of our risk management framework, including the adequacy of the CCF 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, our reduced
influence over CSS Board decisions as a result of recent FHFA-required changes to the CSS LLC agreement, and any
additional changes FHFA may require in our relationship with, or support of, CSS;
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, as well as market acceptance of the UMBS;
Changes in the practices of loan originators, servicers, investors, and other participants in the secondary mortgage market;
The discontinuance of or transition from LIBOR and the adverse consequences it could have on our business and
operations;
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 | 2019 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)
2019
2018
2017
2016
2015
As of or For the Year Ended December 31,
Statements of Comprehensive Income Data
Net interest income
Non-interest income (loss)
Benefit (provision) for credit losses
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
Mortgage-related investments portfolio
Other investments portfolio
TDRs on accrual status
Non-accrual
Ratios
Return on average assets
Allowance for loan losses as percentage of loans, held-for-
investment
$11,848
$12,021
$14,164
$14,379
$14,946
2,230
746
(5,775)
(1,835)
7,214
7,787
(573)
(0.18)
—
3,549
736
(4,832)
(2,239)
9,235
8,622
3,612
1.12
—
6,893
84
(4,307)
(11,209)
5,625
5,558
(3,244)
(1.00)
—
454
803
(3,997)
(3,824)
7,815
7,118
97
0.03
—
(3,731)
2,665
(4,606)
(2,898)
6,376
5,799
(23)
(0.01)
—
$1,940,523
$1,842,850
$1,774,286
$1,690,218
$1,625,184
2,203,623
1,898,355
281,173
14,973
9,122
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
$2,265,301
$2,133,510
$2,031,955
$1,912,717
$1,821,896
212,673
103,421
32,262
11,197
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
0.3%
0.2
0.4%
0.3
0.3%
0.5
0.4%
0.7
0.3%
0.9
FREDDIE MAC | 2019 Form 10-K
11
Management's Discussion and Analysis
Market Conditions and Economic Indicators
Management's Discussion and Analysis of
Financial Condition and Results of Operations
MARKET CONDITIONS AND ECONOMIC INDICATORS
The following graphs and related discussions present certain market and macroeconomic indicators that can significantly affect
our business and financial results.
Interest Rates(1)
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 mortgage with an LTV of
80%. Increases (decreases) in the PMMS rate typically
result in decreases (increases) in refinancing activity
and originations.
Changes in the 10-year and 2-year LIBOR interest
rates can significantly affect the fair value of our debt,
derivatives, mortgage loans, 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.
Changes in the 3-month LIBOR rate affect the interest
earned on our short-term investments and interest
expense on our short-term funding and derivatives.
Long-term rates continued to decline throughout most
of 2019, resulting in an inverted yield curve, before
trending up near year end as a result of the Federal
Reserve's decision to cut rates in the second half of
the year.
(1) 30-year PMMS interest rates are as of the last week in each quarter.
Unemployment Rate and Monthly Net New Jobs
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
supported strong credit performance.
Source: U.S. Bureau of Labor Statistics.
FREDDIE MAC | 2019 Form 10-K
12
Management's Discussion and Analysis
Market Conditions and Economic Indicators
Single-Family Housing and Mortgage Market Conditions
In 2020, we expect modest growth in U.S. single-
family home purchase volume, while steady mortgage
interest rates are expected to result in a lower
refinance volume. Freddie Mac's single-family loan
purchase volumes typically follow a similar trend.
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.
Single-family home prices grew 3.8% in 2019
compared to 5.1% during 2018. We expect home
price growth will continue in 2020, although at a
slower pace than in 2019, due to increased supply.
Sources: National Association of Realtors, U.S. Census Bureau, and Freddie Mac
House Price Index.
U.S. Single-Family Mortgage Originations
U.S. single-family loan origination volumes increased
in 2019 compared to 2018, driven by higher refinance
volume as a result of lower average mortgage interest
rates.
Source: Inside Mortgage Finance.
FREDDIE MAC | 2019 Form 10-K
13
Management's Discussion and Analysis
Market Conditions and Economic Indicators
Multifamily Housing and Mortgage Market Conditions
Completions slightly outpaced net absorption in 2019,
but vacancy rates remained relatively flat and below
the long-term average of 5.4% from 2000 to 2019.
Effective rent growth (i.e., the average rent paid by the
tenant over the term of the lease, adjusted for
concessions by the landlord and costs borne by the
tenant) declined from prior years, but was higher than
the long-term average of 3.1% from 2000 to 2019.
Multifamily property prices continued to grow, with
9.6% annualized growth in 2019, indicating a healthy
multifamily market.
Source: Reis.
Apartment Completions and Net Absorption
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.
Demand growth was in line with supply growth, as
completions slightly outpaced net absorption.
Although we expect continued strong demand,
construction of multifamily units remains elevated and
could outpace absorptions in 2020.
Source: Reis.
FREDDIE MAC | 2019 Form 10-K
14
Management's Discussion and Analysis
Market Conditions and Economic Indicators
Mortgage Debt Outstanding
Single-Family Mortgage Debt Outstanding as of December 31,
U.S. single-family mortgage debt outstanding
increased in 2019 compared to 2018, primarily driven
by house price appreciation. An increase in U.S.
single-family mortgage debt outstanding typically
results in growth of our single-family credit guarantee
portfolio.
Source: Federal Reserve Financial Accounts of the United States of America. For
2019, the amount is as of September 30, 2019 (latest available information).
Multifamily Mortgage Debt Outstanding as of December 31,
During 2019, the multifamily mortgage market grew
because of continued strong demand for multifamily
loan products due to solid 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 2020 due to these same drivers.
While the multifamily mortgage market grew, our share
of multifamily mortgage debt outstanding remained flat
during 2019 due to ongoing competition from other
market participants, which we expect to continue.
Growth was also limited due to a revised loan
purchase cap structure for the multifamily business
announced by FHFA in 3Q 2019. The loan purchase
cap will be $100.0 billion for the five-quarter period
from 4Q 2019 through 4Q 2020 and applies to all
multifamily business activity, with no exclusions. At
least 37.5% of new multifamily business must be
mission-driven, affordable housing over the same five-
quarter period.
Source: Federal Reserve Financial Accounts of the United States of America. For
2019, the amount is as of September 30, 2019 (latest available information).
FREDDIE MAC | 2019 Form 10-K
15
Management's Discussion and Analysis
Market Conditions and Economic Indicators
Delinquency Rates
Source: National Delinquency Survey from the Mortgage Bankers Association.
For 2019, the rates (excluding Freddie Mac) are as of September 30, 2019
(latest available information).
The U.S. single-family serious delinquency rate
decreased in 2019 compared to 2018 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. See Risk Management - Single-
Family Mortgage Credit Risk - Monitoring Loan
Performance and Characteristics - Delinquency
Rates for additional information on our serious
delinquency rate.
Our multifamily delinquency rates during 2019
remained low compared to other industry participants,
ending the year at 8 basis points, 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.
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 2019, the amounts for FDIC insured
institutions and ACLI investment bulletin are as of September 30, 2019 and the
amount for the Multifamily CMBS market is as of December 31, 2019 (latest
available information).
FREDDIE MAC | 2019 Form 10-K
16
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.
We have two primary sources of revenue:
Net interest income - primarily consists of the guarantee fees from our single-family credit guarantee portfolio and the net
interest income from our investments portfolio.
Guarantee fee income - primarily consists of the guarantee fees from our multifamily guarantee portfolio.
We also earn revenue from (a) realized and unrealized gains (losses) on mortgage loans and investment securities and the debt
and derivatives we use to fund and hedge them, which are primarily recognized in investment gains (losses), net, and may
fluctuate significantly from period-to-period based on the volume and nature of our investment, funding, and hedging activities
and changes in market conditions, such as interest rates and market spreads; and (b) fees that we charge to our single-family
and multifamily sellers and servicers, which are recognized in other income.
Our primary expense items consist of credit-related expenses and operating expenses. Credit-related expenses consist of (a)
provision for credit losses, which primarily represents probable incurred losses on our mortgage loans held-for-investment; (b)
REO operations expense, which represents expenses related to foreclosed properties; and (c) credit enhancement expense,
which represents the costs we incur to transfer credit risk to third-party investors under freestanding credit enhancements.
Operating expenses consist of administrative expenses, the 10 basis point fee related to the Temporary Payroll Tax Cut
Continuation Act of 2011, and other expenses we incur to run the business.
The table below compares our consolidated results of operations for the past three years. Certain amounts in prior periods have
been reclassified to conform to the current presentation. See Note 1 for additional information about the prior period
reclassifications.
Table 2 - Summary of Consolidated Statements of Comprehensive Income (Loss)
Year Over Year Change
Year Ended December 31,
2019 vs. 2018
(Dollars in millions)
Net interest income
Guarantee fee income
Investment gains (losses), net
Other income (loss)
Net revenues
Benefit (provision) for credit losses
Credit enhancement expense
REO operations expense
Credit-related expense
Administrative expense
Temporary Payroll Tax Cut
Continuation Act of 2011 expense
Other expense
Operating 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
2019
2018
2017
$11,848
$12,021
$14,164
1,089
818
323
866
1,921
762
749
1,160
4,984
14,078
15,570
21,057
746
(708)
(229)
(191)
736
(417)
(169)
150
84
(280)
(189)
(385)
(2,564)
(2,293)
(2,106)
(1,617)
(1,484)
(1,340)
(657)
(4,838)
9,049
(1,835)
7,214
(469)
(4,246)
11,474
(2,239)
9,235
(392)
(3,838)
16,834
(11,209)
5,625
$
($173)
223
(1,103)
(439)
(1,492)
10
(291)
(60)
(341)
(271)
(133)
(188)
(592)
(2,425)
404
(2,021)
%
2018 vs. 2017
$
%
(1)%
($2,143)
(15)%
26
(57)
(58)
(10)
1
(70)
(36)
(227)
(12)
(9)
(40)
(14)
(21)
18
(22)
117
761
(4,222)
(5,487)
652
(137)
20
535
(187)
(144)
(77)
(408)
(5,360)
8,970
3,610
16
66
(85)
(26)
776
(49)
11
139
(9)
(11)
(20)
(11)
(32)
80
64
573
(613)
(67)
1,186
193
(546)
(815)
Comprehensive income (loss)
$7,787
$8,622
$5,558
($835)
(10)%
$3,064
55 %
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 | 2019 Form 10-K
17
Management's Discussion and Analysis
Consolidated Results of Operations
Net Revenues
Net Interest Income
Net interest income consists of guarantee portfolio net interest income, investments portfolio net interest income, and income
(expense) from hedge accounting.
Guarantee portfolio net interest income - consists of two components:
Guarantee fees we receive for managing the credit risk associated with the mortgage loans held by consolidated
trusts, which primarily consist of the loans in our single-family credit guarantee portfolio. We record interest income on
loans held by consolidated trusts and interest expense on the debt securities issued by the trusts. The difference
between these amounts 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.
Amortization of cost basis adjustments, such as premiums and discounts on securitized mortgage loans, including
upfront fees we receive when we acquire a loan, and debt securities of consolidated trusts. These cost basis
adjustments are amortized into interest income or interest expense based on the effective yield over the contractual life
of the associated financial instrument. The amortization of loans and debt securities of consolidated trusts may vary
significantly from period to period and is primarily driven by actual prepayments on the underlying loans. Increases in
actual prepayments result in a higher rate of amortization, while decreases in actual prepayments result in a lower rate
of 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.
Investments portfolio net interest income - consists of two components:
The difference between the interest income earned on the assets in our investments portfolio and the interest expense
incurred on the liabilities used to fund those assets, including interest expense related to CRT debt (STACR debt notes
and SCR debt notes).
Amortization of cost basis adjustments, such as premiums and discounts on unsecuritized mortgage loans,
investments securities, other assets, and other debt, which are amortized into interest income or interest expense
based on the effective yield over the contractual life of the associated financial instrument.
Income (expense) from hedge accounting - consists of two components:
Upon adoption of amended hedge accounting guidance in 4Q 2017, fair value changes for the hedging instrument,
including the accrual of periodic cash settlements, fair value changes for the hedged item attributable to the risk being
hedged for qualifying fair value hedge relationships, and amortization of hedge accounting related basis adjustments.
See Note 9 for additional detail on hedge accounting.
Deferred gains and losses on closed cash flow hedges related to forecasted debt issuances that are reclassified from
AOCI to net interest income when the related forecasted transaction affects net interest income.
FREDDIE MAC | 2019 Form 10-K
18
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
(Dollars in millions)
Guarantee portfolio net interest income:
Year Ended December 31,
2019 vs. 2018
2019
2018
2017
$
%
2018 vs. 2017
$
%
Year Over Year Change
Contractual net interest income
$3,767
$3,457
$3,270
$310
9%
$187
6%
Net interest income related to the Temporary
Payroll Tax Cut Continuation Act of 2011
Amortization
Total guarantee portfolio net interest income
Investments portfolio net interest income:
Contractual net interest income
Amortization
Interest expense related to CRT debt
Total investments portfolio net interest income
Income (expense) from hedge accounting
Net interest income
Key Drivers:
1,590
2,436
7,793
6,004
(593)
(1,104)
4,307
(252)
1,438
2,900
7,795
6,556
(305)
(1,094)
5,157
(931)
1,314
3,258
7,842
7,227
(78)
(834)
6,315
7
152
(464)
(2)
(552)
(288)
(10)
(850)
679
11
(16)
—
(8)
(94)
(1)
(16)
73
124
(358)
(47)
(671)
(227)
(260)
(1,158)
9
(11)
(1)
(9)
(291)
(31)
(18)
(938)
(13,400)
$11,848
$12,021
$14,164
($173)
(1%)
($2,143)
(15%)
Guarantee portfolio contractual net interest income
2019 vs. 2018 and 2018 vs. 2017 - Increased primarily due to the continued growth of the core single-family loan
portfolio.
Guarantee portfolio amortization
2019 vs. 2018 and 2018 vs. 2017 - Decreased primarily due to the timing differences in amortization related to
prepayments between debt of consolidated trusts and the underlying mortgage loans, partially offset by increases in
amortization of upfront fees.
Investments portfolio contractual net interest income
2019 vs. 2018 - Decreased primarily due to the lower and flatter interest rate environment, coupled with a change in
our investment mix as the other investments portfolio represented a larger percentage of our total investments
portfolio.
2018 vs. 2017 - Decreased 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.
Investments portfolio amortization
2019 vs. 2018 and 2018 vs. 2017 - Decreased primarily due to lower amortization related to unsecuritized mortgage
loans, as certain of those loans were reclassified from held-for-investment to held-for-sale and ceased amortizing, and
lower accretion of previously recognized other-than-temporary impairments, due to a decline in the population of
impaired securities.
Interest expense related to CRT debt
2019 vs. 2018 - Remained relatively flat as higher short-term interest rates were offset by a decline in volume as we no
longer issue STACR debt notes on a regular basis.
2018 vs. 2017 - Increased primarily due to higher STACR debt yield as short-term interest rates increased combined
with a higher average balance.
Income (expense) from hedge accounting
2019 vs. 2018 - Increased primarily due to a positive earnings mismatch and lower expense related to accruals of
periodic cash settlements on derivatives in hedging relationships, partially offset by amortization of hedge accounting-
related basis adjustments. The earnings mismatch is the amount by which the gain or loss on the designated
derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the hedged risk.
2018 vs. 2017 - Affected primarily by 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 | 2019 Form 10-K
19
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,
2019
Interest
Income
(Expense)
Average
Balance
Average
Rate
Average
Balance
2018
Interest
Income
(Expense)
Average
Rate
Average
Balance
2017
Interest
Income
(Expense)
Average
Rate
$8,925
56,465
2,933
$187
2.10 %
1,284
2.27
104
3.55
$7,189
45,360
1,350
$67
880
0.93 %
$10,965
1.94
57,883
$48
588
0.44 %
1.02
35
2.58
859
21
2.42
(Dollars in millions)
Interest-earning assets:
Cash and cash equivalents
Securities purchased under
agreements to resell
Secured lending
Mortgage-related securities:
Mortgage-related securities
132,735
5,761
4.34
143,424
6,026
4.20
164,663
6,402
3.89
Extinguishment of debt securities
of consolidated trusts 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 those held by
Freddie Mac
Extinguishment of debt securities
of consolidated trusts 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
(85,407)
(3,524)
(4.13)
(88,757)
(3,437)
(3.87)
(87,665)
(3,264)
(3.72)
47,328
22,776
1,882,802
86,973
2,237
4.73
500
64,927
3,656
2.19
3.45
4.20
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
2,108,202
72,895
3.46
2,024,648
70,054
3.46
2,011,306
67,807
3.37
1,907,818
(57,504)
(3.01)
1,826,429
(54,966)
(3.01)
1,753,983
(50,920)
(2.90)
(85,407)
3,524
4.13
(88,757)
3,437
3.87
(87,665)
3,264
3.72
1,822,411
(53,980)
(2.96)
1,737,672
(51,529)
(2.97)
1,666,318
(47,656)
(2.86)
85,492
192,100
277,592
(1,910)
(5,157)
(7,067)
(2.23)
(2.68)
(2.55)
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)
2,100,003
(61,047)
(2.91)
2,017,049
(58,033)
(2.88)
2,002,743
(53,643)
(2.68)
8,199
— 0.01
7,599
— 0.01
8,563
— 0.01
$2,108,202
($61,047)
(2.90)% $2,024,648
($58,033)
(2.87)% $2,011,306
($53,643)
(2.67)%
$11,848
0.56 %
$12,021
0.59 %
$14,164
0.70 %
(1)
Loan fees, primarily consisting of amortization of upfront fees, included in interest income were $3.2 billion, $2.6 billion, and $2.4 billion for loans held by
consolidated trusts and $112 million, $104 million, and $162 million for loans held by Freddie Mac during 2019, 2018, and 2017, respectively.
FREDDIE MAC | 2019 Form 10-K
20
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
Extinguishment of debt securities of consolidated trusts
held by Freddie Mac
Total mortgage-related securities, net
Non-mortgage-related securities
Loans held by consolidated trusts
Loans held by Freddie Mac
Total interest-earning assets
Interest-bearing liabilities:
Debt securities of consolidated trusts including those held by
Freddie Mac
Extinguishment of debt securities of consolidated trusts 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
Net interest income
Guarantee Fee Income
Variance Analysis
2019 vs. 2018
2018 vs. 2017
Rate
Volume
Total
Change
Rate
Volume
Total
Change
$101
170
17
194
(220)
(26)
(31)
159
(34)
356
$19
234
52
(459)
133
(326)
85
2,885
(464)
2,485
$120
404
69
(265)
(87)
(352)
54
3,044
(498)
2,841
$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
(85)
(2,453)
(2,538)
(1,902)
(2,144)
(4,046)
220
135
(237)
(476)
(713)
(578)
($222)
(133)
87
132
41
173
(2,586)
(2,451)
(1,770)
(2,103)
(3,873)
(480)
630
150
(2,436)
$49
(717)
154
(563)
(3,014)
($173)
(665)
(1,005)
(1,670)
(3,440)
87
1,066
1,153
(578)
61
(517)
(950)
(4,390)
($1,707)
($436)
($2,143)
Guarantee fee income relates primarily to multifamily securitizations. For additional details on our multifamily securitizations, see
Our Business Segments - Multifamily - Products and Activities - Securitization and Guarantee Products.
Guarantee fee income consists of the following:
Contractual guarantee fee - consists of the fees earned from guarantees issued to third parties and securitization trusts
that we do not consolidate.
Guarantee obligation amortization - represents the amortization of our obligation to perform over the term of the
guarantee.
Guarantee asset fair value changes - represents the change in fair value of our right to receive contractual guarantee
fees. Because our multifamily loans contain prepayment protection, decreasing interest rates generally result in a higher
guarantee asset fair value, with the opposite effect occurring when interest rates increase.
FREDDIE MAC | 2019 Form 10-K
21
Management's Discussion and Analysis
Consolidated Results of Operations
The table below presents the components of guarantee fee income.
Table 6 - Components of Guarantee Fee Income
(Dollars in millions)
Contractual guarantee fee
Guarantee obligation amortization
Guarantee asset fair value changes
Guarantee fee income
Key Drivers:
Year Over Year Change
Year Ended December 31,
2019 vs. 2018
2019
2018
2017
$
%
2018 vs. 2017
$
%
$910
813
(634)
$1,089
$810
711
(655)
$866
$661
601
(513)
$749
$100
102
21
$223
12%
14
3
26%
$149
110
(142)
$117
23%
18
(28)
16%
2019 vs. 2018 - Increased primarily due to the continued growth in our multifamily guarantee portfolio, coupled with lower
fair value losses on our guarantee asset due to declining interest rates.
2018 vs. 2017 - Increased primarily due to the continued growth in our multifamily guarantee portfolio, partially offset by
increased fair value losses on our guarantee asset due to rising interest rates.
Investment Gains (Losses), Net
The table below presents the components of investment gains (losses), net.
Table 7 - Components of Investment Gains (Losses), Net
(Dollars in millions)
Mortgage loans gains (losses)
Investment securities gains (losses)
Debt gains (losses)
Derivative gains (losses)
Investment gains (losses), net
Year Ended December 31,
2019 vs. 2018
2019
2018
2017
$
%
2018 vs. 2017
$
%
Year Over Year Change
$4,744
389
201
(4,516)
$818
$746
(815)
720
1,270
$1,921
$2,062
935
151
(1,988)
$1,160
$3,998
1,204
(519)
(5,786)
148
(72)
(456)
($1,103)
(57%)
(1,750)
(187)
569
3,258
$761
377
164
66%
536%
($1,316)
(64%)
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 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, including loans for which we
have elected the fair value option, 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.
FREDDIE MAC | 2019 Form 10-K
22
Management's Discussion and Analysis
Consolidated Results of Operations
The table below presents the components of mortgage loans gains (losses).
Table 8 - Components of Mortgage Loans Gains (Losses)
Year Over Year Change
Year Ended December 31,
2019 vs. 2018
(Dollars in millions)
Gains (losses) on certain loan purchase commitments
Gains (losses) on mortgage loans
Mortgage loans gains (losses)
Key Drivers:
2019
2018
2017
$1,913
2,831
$4,744
$777
$1,098
(31)
964
$746
$2,062
$
$1,136
2,862
$3,998
%
146%
9,232
2018 vs. 2017
$
%
($321)
(995)
(29)%
(103)
536%
($1,316)
(64)%
2019 vs. 2018 - Increased due to fair value gains on multifamily held-for-sale mortgage loans and commitments driven by a
decrease in long-term interest rates and targeted price increases related to changing market conditions, coupled with a
higher volume of sales of single-family seasoned loans.
2018 vs. 2017 - Decreased due to fair value losses on multifamily mortgage loans and commitments as a result of spread
widening and an increase in interest rates, coupled with higher fair value losses on single-family seasoned loans.
Investment Securities Gains (Losses)
Investment securities gains (losses) primarily consists of fair value gains and losses recognized on trading securities and
realized gains and losses on the sale of available-for-sale securities.
Investment securities gains (losses) are affected by a number of factors, including changes in interest rates and market spreads
and volume of sales of available-for-sale securities.
Key Drivers:
2019 vs. 2018 - Shifted to gains during 2019 primarily driven by higher gains on trading securities due to decreasing
interest rates, partially offset by lower volume of sales at gains of non-agency mortgage-related securities.
2018 vs. 2017 - Shifted to losses during 2018 primarily driven by higher losses on trading securities due to increasing
interest rates and spread widening, combined with lower volume of sales at gains 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 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 mortgage-related securities.
FREDDIE MAC | 2019 Form 10-K
23
Management's Discussion and Analysis
Consolidated Results of Operations
The table below presents the components of debt gains (losses).
Table 9 - Components of Debt Gains (Losses)
(Dollars in millions)
Fair value changes:
CRT-related debt
Non-CRT-related debt
Total fair value changes
Gains (losses) on extinguishment of debt
Debt gains (losses)
Key Drivers:
Year Ended December 31,
2019 vs. 2018
2019
2018
2017
$
%
2018 vs. 2017
$
%
Year Over Year Change
$105
$140
27
132
69
2
142
578
$201
$720
($212)
22
(190)
341
$151
($35)
25
(10)
(509)
(25)%
$352
166%
1,250
(7)
(88)
(20)
332
237
(91)
175
70
($519)
(72)%
$569
377%
2019 vs. 2018 - Decreased primarily due to losses from the extinguishment of fixed-rate debt securities of consolidated
trusts, as market interest rates declined between the time of issuance and repurchase, partially offset by an increase in
gains on callable debt due to an increase in call volume.
2018 vs. 2017 - Improved primarily due to higher gains from the extinguishment of fixed-rate debt securities of consolidated
trusts, 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.
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 PVS 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 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
FREDDIE MAC | 2019 Form 10-K
24
Management's Discussion and Analysis
Consolidated Results of Operations
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.
The table below presents the components of derivative gains (losses).
Table 10 - Components of Derivative Gains (Losses)
(Dollars in millions)
Fair value changes:
Interest-rate swaps
Option-based derivatives
Futures
Commitments
CRT-related derivatives
Other
Total fair value changes
Accrual of periodic cash settlements
Derivative gains (losses)
Key Drivers:
Year Ended December 31,
2019 vs. 2018
2019
2018
2017
$
%
2018 vs. 2017
$
%
Year Over Year Change
($3,085)
$1,422
$626
($4,507)
(317)%
$796
127%
188
(946)
(452)
(1)
52
(4,244)
(272)
(630)
(1,041)
818
130
57
606
(38)
(6)
1,411
(141)
144
(91)
(30)
(6)
(398)
(1,590)
(1,003)
(1,760)
(1,058)
(175)
37
58
(5,655)
(131)
97
967
(401)
(93)
411
(87)
697
(8)
—
1,809
1,449
39
(60)
766
(27)
—
455
91
($4,516)
$1,270
($1,988)
($5,786)
(456)%
$3,258
164%
2019 vs. 2018 - Decreases in long-term rates during 2019 resulted in derivative fair value losses compared to derivative fair
value gains during 2018. The interest rate decreases during 2019 resulted in fair value losses on our pay-fixed interest rate
swaps, forward commitments to issue mortgage-related securities, and futures, partially offset by fair value gains on our
receive-fixed swaps and certain of our option-based derivatives.
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 mortgage-related securities, 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.
Other Income
Key Drivers:
2019 vs. 2018 and 2018 vs. 2017 - 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. See Note 14 for additional information on the Nomura judgment and RBS settlement.
FREDDIE MAC | 2019 Form 10-K
25
Management's Discussion and Analysis
Consolidated Results of Operations
Credit-Related Expense
Benefit (Provision) for Credit Losses
Key Drivers:
2019 vs. 2018 - Remained relatively flat due to the strong credit performance of both our single-family and multifamily
portfolios.
2018 vs. 2017 - Increased benefit for credit losses during 2018, primarily driven by estimated hurricane-related losses
recognized in 2017.
Credit Enhancement Expense
Credit enhancement expense includes the premiums paid to transfer credit risk to third parties under freestanding credit
enhancements and transaction and other costs incurred to enter into freestanding credit enhancements. Credit enhancement
expense does not include costs associated with CRT-related debt, which are primarily recognized in interest expense, or the
costs associated with CRT-related derivatives, which are recognized in investment gains (losses), net.
Key Drivers:
2019 vs. 2018 and 2018 vs. 2017 - Increased primarily due to higher volumes of CRT transactions.
See MD&A - Our Business Segments - Single-Family Guarantee - Products and Activities and MD&A - Our
Business Segments - Multifamily - Products and Activities for additional information on our credit enhancements.
Operating Expense
Key Drivers:
2019 vs. 2018 - Increased primarily due to higher salaries and employee benefits driven by the VERP and higher
technology costs.
2018 vs. 2017 - Increased primarily due to higher administrative expense.
Income Tax Expense
Key Drivers:
2019 vs. 2018 - Decreased primarily due to lower pre-tax income.
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.
Other Comprehensive Income (Loss)
Our investments in securities classified as available-for-sale are measured at fair value on our consolidated balance sheets. The
fair value of these securities is primarily affected by changes in interest rates, market spreads, and the movement of these
securities towards maturity. All unrealized gains and losses on these securities are excluded from earnings and reported in other
comprehensive income until realized. We reclassify our unrealized gains and losses from AOCI to earnings upon the sale of the
securities or if the securities are determined to be other-than-temporarily impaired.
If, subsequent to the recognition of other-than-temporary impairment, our expectation of the cash flows we will receive on a
previously impaired security has significantly increased, we will accrete that increase in cash flows into earnings. The accretion
into earnings will generally reduce the amount of unrealized gains that we would have otherwise recognized if not for the
accretion.
Key Drivers:
2019 vs. 2018 - Increased primarily due to fair value gains as long-term interest rates declined, partially offset by fair value
losses due to spread widening on our agency mortgage-related securities.
2018 vs. 2017 - Decreased primarily due to higher fair value losses due to increasing long-term interest rates, coupled with
smaller spread-related fair value gains driven by lower balances of non-agency mortgage-related securities.
FREDDIE MAC | 2019 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)
2019
2018
$
%
As of December 31,
Year Over Year Change
Assets:
Cash and cash equivalents
Securities purchased under agreements to resell
Subtotal
Investments in securities, at fair value
Mortgage loans, net
Accrued interest receivable
Derivative assets, net
Deferred tax assets, net
Other assets
Total assets
Liabilities and Equity:
Liabilities:
Accrued interest payable
Debt, net
Derivative liabilities, net
Other liabilities
Total liabilities
Total equity
Total liabilities and equity
Key Drivers:
$5,189
66,114
71,303
75,711
2,020,200
6,848
844
5,918
22,799
$2,203,623
$6,559
2,179,528
372
8,042
2,194,501
9,122
$2,203,623
$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
($2,084)
31,343
29,259
6,600
93,222
120
509
(970)
11,823
$140,563
($93)
134,578
(211)
1,644
135,918
4,645
$140,563
(29)%
90
70
10
5
2
152
(14)
108
7 %
(1)%
7
(36)
26
7
104
7 %
As of December 31, 2019 compared to December 31, 2018:
Cash and cash equivalents and securities purchased under agreements to resell increased on a combined basis
primarily due to higher loan prepayments, coupled with higher near-term cash needs for upcoming debt maturities and
anticipated calls of other debt and a higher expected loan purchase forecast.
Other assets increased primarily due to higher servicer receivables driven by an increase in mortgage loan payoffs
reported but not yet remitted at the end of 4Q 2019 and a change in our servicing cycle in 2Q 2019 related to the
implementation of Release 2 of the CSP and the Single Security Initiative.
Total equity increased primarily as a result of our ability to retain earnings as a result of an increase in the applicable
Capital Reserve Amount from $3.0 billion to $20.0 billion pursuant to the September 2019 Letter Agreement.
FREDDIE MAC | 2019 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.
Segment/Category
Description
Single-family Guarantee
Reflects results from our purchase, securitization, and guarantee of single-family loans and the management of
single-family mortgage credit risk
Multifamily
Capital Markets
All Other
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
risk
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), single-family securitization activities, and treasury function, which includes interest-rate
risk management for the company
Consists of material corporate-level activities that are infrequent in nature and based on decisions outside the
control of the management of our reportable segments
Segment Earnings
We evaluate segment performance and allocate resources based on a Segment Earnings approach:
We make significant reclassifications among certain line items in our GAAP financial statements to reflect measures of
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).
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 segments.
FREDDIE MAC | 2019 Form 10-K
28
Management's Discussion and Analysis
Our Business Segments | Segment Earnings
Segment Comprehensive Income
The graph below shows our comprehensive income by segment.
FREDDIE MAC | 2019 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 strategic goals to exit conservatorship, create a world-class operating
platform, and become the leader in housing by:
Maintaining strong financial and capital management and identifying growth opportunities;
Positioning our business model to produce attractive, sustainable returns while preserving strong risk management
discipline;
Utilizing efficient and resilient operations to run our business, serve our clients, and fulfill our mission;
Continuing to create innovative structures to cost-effectively transfer credit risk to third-party investors;
Leveraging technology, processes, policies, and data to ensure we have a stable, flexible ecosystem that can evolve as we
evolve;
Identifying and implementing new and creative ways to support fair access to credit in a safe, sound, and responsible
manner; and
Maintaining a high performing, inclusive, and diverse workforce striving to achieve our mission and realize our vision of
becoming the leader in housing.
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.
Our primary business model is to acquire loans that lenders originate and then pool those loans into mortgage-related
securities that transfer interest rate, prepayment, and liquidity risk to investors and can be sold in the capital markets. To reduce
our exposure under our guarantees, 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 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.
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 consolidated
FREDDIE MAC | 2019 Form 10-K
30
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
trust. We have the option to purchase specified loans, including certain delinquent loans, from consolidated trusts at a
purchase price equal to the current UPB of the loan, less any outstanding advances of principal that have been previously
distributed. However, in order to maintain alignment with Fannie Mae under the Single Security Initiative, FHFA requires us to
purchase loans out of consolidated trusts if they are delinquent for 120 days, and we have the option to purchase sooner under
certain circumstances (e.g., imminent default and seller breaches of representations and warranties). 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 our 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 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 security to provide for a uniform
coupon rate for the mortgage pool underlying the security. The payments made to buy-up the monthly contractual
guarantee fee are allocated to the Capital Markets segment;
Market adjusted pricing costs based on the market pricing of our securities relative to the market pricing of comparable
Fannie Mae securities primarily for loans acquired prior to implementation of the Single Security Initiative in June 2019. We
have not employed market adjusted pricing for new acquisitions following implementation, as the Single Security Initiative
is designed to enhance the overall liquidity of Freddie Mac and Fannie Mae securities in the TBA market by supporting their
fungibility without regard to which company is the issuer; 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.
Common Securitization Platform and the UMBS
We continue to work with FHFA, Fannie Mae, and CSS to support the CSP and the UMBS market. We have been using the
CSP for data acceptance, issuance support, and bond administration activities related to Freddie Mac single-class fixed-rate
mortgage-related securities since 2016. In June 2019, Freddie Mac, Fannie Mae, and FHFA announced the implementation of
Release 2 of the CSP and the Single Security Initiative for Freddie Mac and Fannie Mae, under which we and Fannie Mae began
issuing UMBS. Upon implementation of Release 2, we transitioned additional securities administration activities to the CSP.
Release 2 also added to the functionality of the CSP by, among other things, enabling commingling of Freddie Mac and Fannie
Mae UMBS and other TBA-eligible mortgage securities in resecuritization transactions. As a result, implementation of Release 2
of the CSP and the Single Security Initiative increased our counterparty risk exposure to Fannie Mae and our operational risk
exposure to CSS. For additional information, see Risk Management - Counterparty Credit Risk and Risk
Management - Operational Risk.
In connection with these developments, we extended the payment delay for newly issued fixed-rate mortgage securities from
45 days to 55 days, and in June 2019, we ceased issuing Gold PCs (which have a 45-day payment delay). We also updated our
servicer reporting cycle to align with an industry standard monthly calendar cycle and adopted a single common remittance
due date for principal and interest payments, excluding payoffs.
FREDDIE MAC | 2019 Form 10-K
31
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
We are offering an optional exchange program for security holders to exchange certain existing 45-day payment delay fixed-
rate Gold PCs and Giant PCs for the corresponding new UMBS and other applicable 55-day payment delay Freddie Mac
mortgage securities. As part of this program, we make a one-time payment to exchanging security holders for the value of the
10 additional days of payment delay, based on "float compensation" rates we calculate. We do not expect the return from this
additional float to fully offset our payments to the security holders. During 2019, we exchanged $282.6 billion in UPB of 45-day
payment delay securities, including securities owned by Freddie Mac, for 55-day payment delay securities, and paid $0.1 billion
in float compensation in connection with these exchanges.
Products and Activities
Securitization and Guarantee Products
We offer various types of guarantee and securitization products, primarily Level 1 Securitization Products and Resecuritization
Products. 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, prepayment, and liquidity 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.
Level 1 Securitization Products
We offer a variety of Level 1 Securitization Products to our customers. Our Level 1 Securitization Products are pass-through
securities that represent undivided beneficial interests in trusts that hold pools of loans. For our fixed-rate Level 1 Securitization
Products, 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 Level 1 Securitization Products:
UMBS - Single-class pass-through securities with a 55-day payment delay for TBA-eligible fixed-rate mortgage loans. We
began issuing UMBS for all TBA-eligible fixed-rate mortgage loans on June 3, 2019.
55-day MBS - Single-class pass-through securities with a 55-day payment delay for non-TBA-eligible fixed-rate mortgage
loans. We began issuing 55-day MBS for all non-TBA-eligible fixed-rate mortgage loans on June 3, 2019.
PCs
Gold PCs - Single-class pass-through securities with a 45-day payment delay that we issued for fixed-rate mortgage
loans prior to June 3, 2019. With the implementation of Release 2 of the CSP and the Single Security Initiative, we no
longer issue Gold PCs. Existing Gold PCs that are not entirely resecuritized are eligible for exchange into UMBS (for
TBA-eligible securities) or 55-day MBS (for non-TBA-eligible securities).
ARM PCs - Single-class pass-through securities with a 75-day payment delay for ARM products. Implementation of
Release 2 of the CSP and the Single Security Initiative did not affect our ARM PC offerings.
All Level 1 Securitization Products are backed only by mortgage loans that we have acquired. We offer (or previously offered) all
of the above products through both guarantor swap and cash loan purchase programs.
In a guarantor swap execution, we offer transactions in which our customers, primarily large mortgage banking companies and
commercial banks, provide us with loans in exchange for a security backed by those same loans, as shown in the diagram
below:
FREDDIE MAC | 2019 Form 10-K
32
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
In a cash loan purchase execution, we offer to pay cash to our customers, primarily community and regional banks. In these
transactions, we purchase 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 securities are managed by the Capital Markets segment. The diagram
below illustrates a cash loan purchase execution.
FREDDIE MAC | 2019 Form 10-K
33
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
Level 1 Securitization Products and certain other types of mortgage assets. We create these securities by using Level 1
Securitization Products 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 Level 1 Securitization Products, 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.
Upon implementation of Release 2 of the CSP and the Single Security Initiative, we have the ability to commingle TBA-eligible
Fannie Mae collateral in certain of our resecuritization products. When we resecuritize Fannie Mae securities, which are
separately guaranteed by Fannie Mae, in our commingled resecuritization products, our guarantee covers timely payment of
principal and interest on such products from underlying Fannie Mae securities. If Fannie Mae were to fail to make a payment on
a Fannie Mae security that we resecuritized, we would be responsible for making the payment. We do not charge an
incremental guarantee fee to commingle Fannie Mae collateral in resecuritization transactions.
All 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:
We offer the following types of resecuritization products:
Single-class resecuritization products - Involve the direct pass-through of all cash flows of the underlying collateral to
the beneficial interest holders and include:
Supers - Resecuritizations of UMBS and certain other mortgage securities. This structure allows commingling of
Freddie Mac and Fannie Mae collateral, where newly issued or exchanged UMBS and Supers issued by us or Fannie
Mae may be commingled to back Supers issued by us or Fannie Mae. Supers can be backed by:
– UMBS and/or other Supers issued by us or Fannie Mae;
–
Existing TBA-eligible Fannie Mae "MBS" and/or "Megas"; and/or
– UMBS and Supers that we have issued in exchange for TBA-eligible PCs and Giant PCs that have been delivered
to us in response to our exchange offer.
FREDDIE MAC | 2019 Form 10-K
34
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Giant MBS - Resecuritizations of:
– Newly issued 55-day MBS and/or Giant MBS; and/or
–
55-day MBS and/or Giant MBS that we have issued in exchange for non-TBA-eligible PCs and non-TBA-eligible
Giant PCs that have been delivered to us in response to our exchange offer.
Giant PCs - Resecuritizations of previously issued PCs or Giant PCs. Although we no longer issue Gold PCs, existing
Gold PCs may continue to be resecuritized into Giant PCs. In addition, ARM PCs may continue to be resecuritized into
ARM Giant PCs. Fixed-rate Giant PCs are eligible for exchange into Supers (for TBA-eligible securities) or Giant MBS
(for non-TBA-eligible securities).
Multiclass resecuritization products
REMICs - Resecuritizations of previously issued mortgage securities that divide all cash flows of the underlying
collateral into two or more classes of varying maturities, payment priorities, and coupons. This structure allows
commingling of TBA-eligible Freddie Mac and Fannie Mae collateral.
Strips - Resecuritizations of previously issued Level 1 Securitization Products or single-class resecuritization products
and issuance of stripped securities, including principal-only and interest-only securities or floating rate and inverse
floating rate securities, backed by the cash flows from the underlying collateral. This structure allows commingling of
TBA-eligible Freddie Mac and Fannie Mae collateral.
Other Securitization Products
Senior subordinate securitization structures backed by recently originated loans (consolidated) - In prior years, we
created senior subordinate securitization structures in which we issued guaranteed senior securities and unguaranteed
subordinated securities backed by recently originated single-family loans. The unguaranteed subordinated securities
absorb first losses on the related loans and the loans are serviced in accordance with our Guide. We discontinued regular
offerings of these transactions in 2019.
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.
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 securities 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 our mortgage-related securities and
• 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.
CRT Transactions
To reduce our credit risk exposure, we engage in various types of credit enhancements, including 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 | 2019 Form 10-K
35
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Each CRT transaction is designed to transfer a certain portion of the credit risk that we assume for loans with certain targeted
characteristics. Risk positions may be transferred to third-party investors through one or more CRT transactions where
economically sensible. The risk transfer could occur prior to, or simultaneously with, our purchase of the loan (i.e., front-end
coverage) or after the purchase of the loan (i.e., back-end coverage). As CRT has become part of our normal business
activities, we have established the following programs to regularly transfer portions of credit risk to diversified investors:
STACR and ACIS Offerings
Our two primary CRT programs are STACR and ACIS.
STACR - Our primary single-family securities-based credit risk sharing vehicle. STACR Trust note transactions transfer risk
to the private capital markets through the issuance of unguaranteed notes using a third-party trust. In a STACR transaction,
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). The trust issues notes linked to certain of the
notional credit risk positions to third-party investors and makes periodic payments of principal and interest on the notes,
but is not required to repay principal to the extent that the notional credit risk position is reduced as a result of specified
credit events. We make payments to the trust to support payment of the interest due on the notes. The amount of risk
transferred in each transaction affects the amounts we are required to pay. 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, thereby transferring the
related credit risk of the loans in the reference pool to the note investors. Generally, the notional amounts of the credit risk
positions are also reduced based on principal payments that occur on the loans in the reference pool. We enhanced the
STACR Trust note structure in 4Q 2019 to qualify the notes issued as interests in a REMIC that allow favorable tax
treatment for certain types of investors. The following diagram illustrates a typical STACR transaction:
ACIS - Our primary insurance-based credit risk sharing vehicle. ACIS transactions are insurance policies we enter into with
global insurance and reinsurance companies to cover a portion of credit risk on the STACR or standalone reference pools.
We pay monthly premiums to the insurers or reinsurers in exchange for claim coverage on their portion of the reference
pool. 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.
We have established programmatic offerings of STACR and ACIS transactions to regularly transfer credit risk on a targeted
population of recently acquired mortgage loans (“on-the-run transactions”). STACR and ACIS are complementary programs
issued from the same reference pool for on-the-run transactions. The targeted loan population for on-the-run transactions is
recently acquired 30-year fixed-rate mortgage loans with LTV ratios between 60% and 97%, excluding loans acquired under
our relief refinance programs, government guaranteed loans, and loans that do not meet certain eligibility criteria. Our typical
on-the-run transactions are issued on a quarterly basis and provide back-end coverage for loans that we guaranteed 2 to 3
quarters prior to issuance (e.g., a transaction in 4Q 2019 would typically cover loans acquired in 1Q or 2Q 2019). Starting with
our issuances in 3Q 2018, in a typical on-the-run transaction, we transfer to third-party investors a portion of the credit risk
between an initial first loss position and a specified detachment point which may vary based on numerous factors, such as the
type of collateral and market conditions. We retain the initial first loss position and at least 5% of the credit risk of all the
positions sold to align our interests with those of the investors. We also retain all of the senior credit risk position. On-the-run
STACR transactions typically have a 30-year maturity and on-the-run ACIS transactions typically have a 12.5-year maturity. The
diagram below illustrates a typical on-the-run STACR and ACIS structure:
FREDDIE MAC | 2019 Form 10-K
36
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
In addition to our regularly issued on-the-run transactions, we also periodically execute “off-the-run” STACR and ACIS
transactions that provide back-end coverage on certain loans that are not in the on-the-run transaction targeted loan
population. For example, we offer STACR and ACIS transactions that provide coverage on HARP and other relief refinance
loans, STACR and ACIS transactions that provide coverage on unissued portions of the reference pools related to previous
STACR and ACIS transactions, and ACIS transactions that provide coverage on loans with 15-year maturities not related to any
STACR offering.
Prior to 2018, the majority of our STACR transactions were structured as unsecured debt issued directly by us (STACR debt
notes) rather than as debt issued by a trust. These transactions operate similarly to STACR Trust notes, except that we make
payments of principal and interest on the issued STACR debt notes and are not required to repay principal to the extent that the
notional credit risk position is reduced as a result of a specified credit event on a loan in the reference pool. In certain of these
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. For certain STACR debt notes issued in prior years (generally
STACR debt notes issued prior to 2015), losses are allocated to the notional amounts of the credit risk positions based on
calculated losses using a predefined formula when the loans experience a credit event, which predominantly occurs when a
loan becomes 180 days delinquent. As a result, in these transactions, we receive reimbursement of losses based on these
calculated loss amounts rather than based on actual losses. While we may issue STACR debt notes in the future, we expect to
predominantly issue STACR Trust notes.
Additional Offerings
In addition to our primary offerings, we also offer the following CRT products:
ACIS Forward Risk Mitigation (AFRM) - An additional offering in the ACIS program that 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.
Integrated Mortgage Insurance (IMAGINSM) - An insurance-based offering that provides loan-level front-end 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. Mortgage insurance provided to each loan is generally underwritten by a group of insurers and reinsurers. IMAGIN is
offered to a broad range of Freddie Mac sellers, who can choose IMAGIN or traditional primary mortgage insurance at their
discretion.
Lender risk-sharing - We offer a variety of transactions in which lenders may retain a portion of the credit risk on loans
they originate and/or service. These transactions are generally collateralized so that our exposure to counterparty credit
risk is not increased.
FREDDIE MAC | 2019 Form 10-K
37
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
For additional information on single-family mortgage loan credit enhancements, see Risk Management - Single-Family
Mortgage Credit Risk - Transferring Credit Risk to Third-Party Investors.
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 CRT transactions;
• Expenses to transfer credit risk for certain CRT transactions; and
• Benefits recognized from recoveries under certain CRT transactions.
Securitization and Sales of Seasoned Loans
We continually manage the balance of our less liquid single-family mortgage loans, many of which we acquired by purchasing
delinquent or modified loans from guaranteed securities. We offer to sell select seasoned single-family mortgage loans through
a variety of methods. 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 seasoned loan transactions include the following:
Senior subordinate securitization structures backed by seasoned loans (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
senior subordinate securitization transactions backed by recently originated mortgage loans, in these transactions the
loans are not serviced in accordance with our Guide and we do not control the servicing.
Level 1 Securitization Products - We securitize reperforming loans using Level 1 Securitization Products through a similar
process to that discussed above. We may subsequently resecuritize a portion of the guaranteed securities, with some of
the resulting interests being sold to third parties. Our use of this strategy has declined over time, with our primary strategy
now utilizing our senior subordinate securitization structures.
Whole loan sales - Sales of seriously delinquent loans for cash.
The primary impacts of the aforementioned products and transactions to Segment Earnings are:
• Gains and losses recognized on the reclassification of loans held-for-investment to held-for-sale and subsequent sale of these loans.
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 2019 single-family purchase volume by our largest sellers and our loan servicing by our largest servicers
as of December 31, 2019. Any seller or servicer with a 10% or greater share is listed separately.
FREDDIE MAC | 2019 Form 10-K
38
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
Percentage of Single-Family Purchase Volume
Percentage of Single-Family Servicing Volume(1)
(1) Percentage of servicing volume is based on the total single-family credit
guarantee portfolio, which includes loans where we do not exercise
servicing control. However, loans where we do not exercise servicing
control are not included for purposes of determining the concentration of
servicers who serviced more than 10% of our single-family credit
guarantee portfolio because we do not know which entity serves as the
primary servicer for such loans.
For additional information about seller and servicer concentration risk and our relationships with our seller and servicer
customers, see Risk Management - Counterparty Credit Risk - Sellers and Servicers and Note 14.
Competition
Our principal competitors in the Single-family Guarantee segment are Fannie Mae, FHA/VA (with Ginnie Mae securitization), and
other financial institutions that retain or securitize loans, such as commercial and investment banks, dealers, and savings
institutions. We compete on the basis of price, products, securities structure, and service. Competition to acquire single-family
loans can also be significantly affected by changes in our credit standards. The conservatorship, including direction provided to
us by our Conservator, may affect our ability to compete. 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. In February 2019,
FHFA issued a final rule that limits 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 | 2019 Form 10-K
39
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 and Average Guarantee Fee Rate(1) Charged on New
Acquisitions
Number of Families Helped to Own a Home
(1) Guarantee fee excludes legislated 10 basis point increase.
We maintain a consistent market presence by providing lenders with a constant source of liquidity for conforming loan
products. We have funded approximately 18.8 million single-family homes since January 1, 2009 and purchased
approximately 1.4 million HARP loans since the initiative began in 2009. HARP was replaced by the Enhanced Relief
Refinance program in 2019. Our loan purchase and guarantee activity increased in 2019 compared to 2018 primarily due to
an increase in refinance activity as a result of lower average mortgage interest rates.
The average guarantee fee rate charged on new acquisitions recognizes upfront fee income, including the expected gains
(losses) from buy-up fees, 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. The average guarantee fee rate charged on new acquisitions increased in 2019 compared to 2018 primarily
due to an enhancement in our estimation methodology related to recognition of buy-up fees in 2Q 2019.
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 157,000 loans under these initiatives in 2019. 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.
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
FREDDIE MAC | 2019 Form 10-K
40
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
will continue to be a top priority in 2020. 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 2019 by approximately 5%, 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 85% of the single-family credit guarantee portfolio at December 31, 2019
compared to 82% at December 31, 2018.
The legacy and relief refinance single-family loan portfolio declined to 15% of the single-family credit guarantee portfolio at
December 31, 2019 compared to 18% at December 31, 2018.
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 is recognized immediately. The effect
of prepayments may be offset by our upfront fee hedging activities. See Single-Family Guarantee - Business
Overview - Guarantee Fees for more information on our guarantee fees and Note 13 for more information on the effect
of our upfront fee hedging activities on Segment Earnings.
The average portfolio Segment Earnings guarantee fee rate was 40 bps, 35 bps, and 36 bps at December 31, 2019,
December 31, 2018, and December 31, 2017, respectively, excluding the legislated 10 basis point increase in guarantee
fees. The rate increased in 2019 compared to 2018 due to an increase in the recognition of upfront fees, net of hedging,
driven by a higher prepayment rate and an increase in contractual guarantee fees as older vintages were replaced by
acquisitions of new loans with higher contractual guarantee fees.
FREDDIE MAC | 2019 Form 10-K
41
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
CRT Activities
The table below provides the issuance amounts during 2019 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, 2019
Issuance for the Year Ended
December 31, 2018
Protected
UPB(1)
Maximum Coverage(2)
Protected
UPB(1)
Maximum Coverage(2)
Total
First Loss(3) Mezzanine
Total
Total
First Loss(3) Mezzanine
Total
$203,239
$2,106
210,650
11,197
19,328
(181,738)
$262,676
$4,565
1,823
947
580
—
$6,671
$243,007
$1,893
$5,042
$6,935
2,687
1,666
1,491
270,084
30,911
10,940
—
(219,072)
834
746
—
—
2,306
1,238
345
—
3,140
1,984
345
—
864
719
911
—
$4,600
$7,915
$12,515
$335,870
$3,473
$8,931
$12,404
(In millions)
STACR
Insurance/reinsurance
Subordination
Lender risk-sharing
Less: UPB with more than
one type of CRT activity
Total CRT Activities
(1)
(2)
For STACR and certain insurance/reinsurance transactions (e.g., ACIS), represents the UPB of the assets included in the reference pool. For other insurance/
reinsurance transactions, represents the UPB of the assets covered by the insurance policy. For subordination, represents the UPB of the guaranteed securities,
which represents the UPB of the assets included in the trust net of the protection provided by the subordinated securities.
For STACR transactions, represents the balance held by third parties at issuance. For insurance/reinsurance transactions, represents the aggregate limit of
insurance purchased from third parties at issuance. For subordination, represents the UPB of the securities that are subordinate to Freddie Mac guaranteed
securities and held by third parties.
(3)
First loss includes the most subordinate securities (i.e., B tranches) in our STACR Trust notes and their equivalent in ACIS and other CRT transactions.
We obtained maximum coverage of $12.5 billion on protected UPB of $262.7 billion through CRT transactions during 2019.
We are continually evaluating our CRT strategy and make changes depending on market conditions and our business strategy.
The aggregate cost of our CRT activity, as well as the amount of risk transferred, will continue to increase as we continue to do
new transactions. See Risk Management - Single-Family Mortgage Credit Risk - Transferring Credit Risk to Third-
Party Investors for more information on CRT transactions and credit enhancements on our single-family guarantee portfolio.
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. The
reduced level of loan workout activity in 2019 compared to 2018 was primarily driven by elevated loan workout activity in
2018 as a result of the hurricanes that occurred in late 2017.
FREDDIE MAC | 2019 Form 10-K
42
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee
As part of our strategy to mitigate losses and reduce our holdings of less liquid assets, we pursue sales of seriously
delinquent and reperforming loans when we believe the sale of these loans provides better economic returns than
continuing to hold them. See Risk Management - Single-Family Mortgage Credit Risk - Engaging in Loss
Mitigation Activities for more information on our loss mitigation activities.
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 continued 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.
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 Ended December 31,
2019 vs. 2018
2018 vs. 2017
Year Over Year Change
(Dollars in millions)
2019
2018
2017
Guarantee fee income
Investment gains (losses), net
Other income (loss)
Net revenues
Benefit (provision) for credit losses
Credit enhancement expense
REO operations expense
Credit-related expense
Administrative expense
Other expense
Operating expense
Segment Earnings before income tax expense
Income tax expense
Segment Earnings, net of taxes
Total other comprehensive income (loss), net of tax
Total comprehensive income (loss)
Key Drivers:
2019 vs. 2018
$7,773
964
391
9,128
418
(1,393)
(245)
(1,220)
(1,647)
(786)
(2,433)
5,475
(1,110)
4,365
(22)
$4,343
$6,581
307
841
7,729
448
(1,077)
(189)
(818)
(1,491)
(568)
(2,059)
4,852
(944)
3,908
(3)
$3,905
$6,363
116
896
7,375
(177)
(891)
(203)
(1,271)
(1,381)
(516)
(1,897)
4,207
(1,448)
2,759
40
$2,799
$
$1,192
657
(450)
1,399
(30)
(316)
(56)
(402)
(156)
(218)
(374)
623
(166)
457
(19)
$438
%
18%
214
(54)
18
(7)
(29)
(30)
(49)
(10)
(38)
(18)
13
(18)
12
(633)
11%
$
$218
191
(55)
354
625
(186)
14
453
(110)
(52)
(162)
645
504
1,149
(43)
$1,106
%
3%
165
(6)
5
353
(21)
7
36
(8)
(10)
(9)
15
35
42
(108)
40%
Higher guarantee fee income primarily due to increased upfront fee amortization income driven by higher prepayments
and continued growth in our single-family credit guarantee portfolio.
Higher investment gains primarily due to higher realized gains on a higher volume of sales of, and lower unrealized
lower-of-cost-or-fair-value losses related to, single-family held-for-sale loans.
Lower other income primarily due to higher non-cash premium/discount amortization expense driven by timing
differences between liquidations of the loans and liquidations of the securities backed by these loans.
Higher credit enhancement expense primarily due to higher outstanding cumulative volumes of CRT transactions.
2018 vs. 2017
Higher guarantee fee income due to continued growth in our single-family credit guarantee portfolio and increased
credit fee/buy-down short-term returns.
Higher investment gains primarily driven by fair value gains on STACR debt notes as a result of spread widening.
Increased benefit for credit losses primarily driven by estimated losses from the hurricanes in 2017.
Higher credit enhancement expense primarily due to higher outstanding cumulative volumes of CRT transactions.
FREDDIE MAC | 2019 Form 10-K
43
Management's Discussion and Analysis
Our Business Segments | Multifamily
Multifamily
Business Overview
The Multifamily segment supports our strategic goals to exit conservatorship, create a world-class operating platform, and
become the leader in housing by:
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;
Maintaining strong credit and capital management discipline;
Operating in a customer focused manner to build business value and support the creation of a strong, long-lasting rental
housing system;
Leveraging technology to make the multifamily loan process more efficient industry-wide;
Fostering innovation through the development of products that expand the availability of workforce housing in the
marketplace; and
Continuing to provide financing to the multifamily mortgage market and expanding our market presence for workforce
housing in line with our mission.
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 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. 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 assess the profitability of any given transaction and to maximize our returns.
Our securitization activities generally (i) provide us with a mechanism to finance our loan product offerings, (ii) reduce our credit
risk, interest-rate risk, and liquidity risk exposure on the loans that we purchase, and (iii) reduce our conservatorship capital
required under CCF. For multifamily loans that we do not intend to securitize, we may pursue other strategies, including the
execution of other CRT products designed to transfer to third parties all or a portion of the loans' credit risk, thereby reducing
taxpayer exposure.
Our support of the multifamily market generally begins with our underwriting of the loans that we commit to purchase from our
Optigo® network of approved lenders and typically ends with the disposition of those loans, generally through a borrower
payoff. Through our support of the multifamily mortgage market, 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 Optigo network of approved lenders, we offer borrowers a variety of loan products for the acquisition, refinance,
and/or rehabilitation of multifamily properties. While our Optigo 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 and Fannie Mae's Delegated Underwriting and Servicing (DUS) program. Under this approach, we maintain credit
discipline by completing our own underwriting, credit review, and legal review for each loan prior to issuing a loan purchase
commitment, including reviewing third-party appraisals and performing cash flow analysis. We also price every loan or
transaction based on the specific terms, structure, and type of execution.
Multifamily loans are typically originated by our Optigo 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.
FREDDIE MAC | 2019 Form 10-K
44
Management's Discussion and Analysis
Our Business Segments | Multifamily
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 AMI) and very-low income (earning up to 50% of AMI) and that
typically receive government subsidies.
The amount and type of multifamily loans that we purchase is significantly influenced by the multifamily loan purchase cap that
is established by FHFA. In 3Q 2019, FHFA announced a revised multifamily loan purchase cap of $100.0 billion for the five-
quarter period from 4Q 2019 through 4Q 2020. This cap applies to all multifamily business activity, with no exclusions. To
ensure a strong focus on affordable housing and traditionally underserved markets, at least 37.5% of the multifamily business
must be mission-driven, affordable housing over the same five-quarter period. Examples of multifamily loans that qualify as
mission-driven, affordable housing include certain senior housing loans, small balance loans, manufactured housing loans, and
targeted affordable housing loans.
In addition, the amount and type of multifamily loans that we purchase is influenced by our current business strategy and
overall market demand for multifamily loan products.
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 Optigo 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
45 days and is generally followed by a loan purchase commitment. We economically hedge our interest-rate exposure from
these commitments primarily by entering into pay-fixed, receive-float interest rate swaps. These commitments do not qualify for
accounting recognition and therefore temporarily introduce volatility through our hedges in our financial results until they
proceed to a loan purchase commitment.
The primary impact to Segment Earnings is:
• Fair value gains or losses recognized on interest-rate derivatives. These gains or losses are generally 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 the
specific economic terms and conditions of our commitment, including the loan's purchase price, index, and mortgage spread.
Targeted pricing decisions related to the commitment price and/or mortgage spread may affect our profitability and are
generally influenced by our current business strategy, the type of loan that we acquire (i.e., whether it qualifies as mission-
driven, affordable housing), the amount available under the loan purchase cap, and changing market conditions.
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 may 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.
Our multifamily held-for-sale commitments and held-for-sale loans that are measured at fair value 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 hedge the interest rate-related
fair value changes of these assets 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.
FREDDIE MAC | 2019 Form 10-K
45
Management's Discussion and Analysis
Our Business Segments | Multifamily
The primary impacts to Segment Earnings are:
• At the commitment date, we recognize the estimated fair value of the held-for-sale commitments where we elected the fair value option;
• After the commitment date, but prior to purchase, we recognize changes in the fair value of commitments where we elected the fair value option.
These fair value adjustments result from changes in the expected 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 loan
purchase commitments; and
• Fair value gains or losses recognized on spread-related derivatives. These changes may offset spread-related fair value changes on the loan
purchase commitments.
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.
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 settle in the second and third quarters of that same year.
The primary impacts to Segment Earnings are:
• During the holding period, we generally recognize changes in the fair value of loans classified as held-for-sale. These fair value adjustments result
from changes in the expected 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 and Guarantee Products
We enter into various types of securitizations that generally result in the transfer of all or a portion of the underlying collateral's
interest-rate risk, liquidity risk, and/or credit risk to third parties. These products make up substantially all of our guarantee
portfolio.
The collateral used in our securitization activities can vary and generally includes loans underwritten and purchased by us at
loan 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 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.
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.
Primary Securitization Products
Our primary securitization products are K Certificates and SB Certificates, which transfer substantially all of the interest-rate
risk, liquidity risk, and credit risk of the underlying 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 securitizations is generally influenced by the product
mix and 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
FREDDIE MAC | 2019 Form 10-K
46
Management's Discussion and Analysis
Our Business Segments | Multifamily
issue or guarantee the mezzanine or subordinated securities. As a result, the interest-rate risk, liquidity risk, and a large majority
of expected and stress credit risk is sold to third-party investors through securitization, thereby reducing our risk exposure.
K Certificates - Regularly issued structured pass-through securities backed by recently originated multifamily loans. This
product offers investors 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.
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 generally 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 Securitization Products
Our other securitization products involve the issuance of pass-through securities that represent beneficial interests in trusts that
hold pools of multifamily loans. The collateral for these securitizations may include loans underwritten and purchased by us at
loan origination and loans we do not own prior to securitization and that we underwrite after (rather than at) origination.
FREDDIE MAC | 2019 Form 10-K
47
Management's Discussion and Analysis
Our Business Segments | Multifamily
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 Guarantee Products
Other mortgage-related guarantees - We guarantee mortgage-related assets held by third parties in exchange for
guarantee fee income, without securitizing those assets. For example, we provide guarantees on certain tax-exempt
multifamily housing revenue bonds secured by low- and moderate-income multifamily loans.
Other CRT Products
For the multifamily assets for which we have not transferred credit risk through securitization, we may pursue other strategies to
reduce our risk exposure. Our other CRT products include the following:
MCIP - We purchase insurance coverage underwritten by a group of insurers and/or reinsurers that generally provide first
loss and/or mezzanine loss credit protection. 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.
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
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.
In addition to our other CRT products, we engage in whole loan sales, including sales of loans to funds to which we may also
provide secured financing, to eliminate our interest-rate risk, liquidity risk, and credit risk exposure to certain loans.
For additional information on multifamily credit enhancements, see Risk Management - Multifamily Mortgage Credit
Risk - Transferring Credit Risk to Third-Party Investors.
Investing Activities
Mortgage loans - We hold a portfolio of multifamily loans as part of a buy-and-hold investment strategy. However, this
strategy is not part of our primary business model.
Mortgage-related securities - Depending on market conditions and our business strategy, we may purchase or sell
guaranteed K Certificates or SB Certificates at issuance or 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.
FREDDIE MAC | 2019 Form 10-K
48
Management's Discussion and Analysis
Our Business Segments | Multifamily
Customers
Our multifamily loan activity is generally sourced through our Optigo network of 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 2019 multifamily new business activity by
our largest sellers and loan servicing by our largest servicers as of December 31, 2019. Any seller or servicer with a 10% or
greater share is listed separately.
Percentage of New Business Activity(1)
Percentage of Servicing Volume(2)
(1) Excludes LIHTC new business activity.
Competition
(2) Percentage of servicing volume is based on the total multifamily mortgage
portfolio, which includes loans where we do not exercise servicing control.
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 | 2019 Form 10-K
49
Management's Discussion and Analysis
Our Business Segments | Multifamily
Business Results
The graphs, tables, and related discussion below present the business results of our Multifamily segment.
New Business Activity
New Business Activity for the Year Ended December 31,
Acquisition of Units by AMI for the Year Ended December 31,
In 3Q 2019, FHFA announced a revised loan purchase cap structure for the multifamily business. The loan purchase cap
will be $100.0 billion for the five-quarter period from 4Q 2019 through 4Q 2020 and applies to all multifamily business
activity, with no exclusions. To ensure a strong focus on affordable housing and traditionally underserved markets, at least
37.5% of the new multifamily business must be mission-driven, affordable housing over the same five-quarter period.
During 4Q 2019, our total new business activity subject to the new cap was $17.5 billion. Approximately 36% of this
activity was mission-driven, affordable housing. Furthermore, during 2019, we continued our support of workforce housing
through our continued purchases of manufactured housing community loans and small balance loans.
Outstanding commitments, including index lock commitments and commitments to purchase or guarantee multifamily
assets, were $14.6 billion and $18.7 billion as of December 31, 2019 and December 31, 2018, respectively.
Our new business activity was slightly higher for 2019 than 2018 due to continued strong demand for multifamily financing
and healthy multifamily market fundamentals driving continued growth in overall multifamily mortgage debt outstanding.
The portion of our new mortgage loan purchase activity that was classified as held-for-sale and intended for our
securitization pipeline decreased to 87% in 2019 from 93% in 2018 due to an increase in the issuance of fully guaranteed
and consolidated other securitizations as we continued to refine the disposition path for certain loan products. The
purchase activity that remained in our securitization pipeline as of December 31, 2019, combined with market demand for
our securities, will be a driver for our primary securitizations in the first two quarters of 2020.
FREDDIE MAC | 2019 Form 10-K
50
Management's Discussion and Analysis
Our Business Segments | Multifamily
Securitization, Guarantee, and Risk Transfer Activity
Securitization and Guarantee Activities for the Year Ended December 31,
Total securitization UPB increased during 2019 compared to 2018, primarily due to a higher volume of fully guaranteed
other securitizations.
Approximately 90% and 91% of total securitization UPB related to our primary securitizations during 2019 and 2018,
respectively.
The average guarantee fee rate on new guarantee contracts increased slightly during 2019 compared to 2018, primarily
driven by a higher volume of fully guaranteed other securitizations that have higher negotiated guarantee fee rates due to
the lack of structural subordination.
In addition to the credit risk we transferred to third parties through our securitizations, we obtained credit protection up to
$0.2 billion and $0.1 billion on $3.0 billion and $1.8 billion of UPB through our other CRT products and loss sharing
arrangements during 2019 and 2018, respectively.
We further reduced our risk exposure through loan sales to whole loan funds of $2.6 billion and $1.3 billion in UPB during
2019 and 2018, respectively.
FREDDIE MAC | 2019 Form 10-K
51
Management's Discussion and Analysis
Our Business Segments | Multifamily
Multifamily Portfolio and Market Support
The following table summarizes our multifamily portfolio and our support of the multifamily market.
Table 14 - Multifamily Portfolio and Market Support
(In millions)
Guarantee portfolio:
Primary securitizations
Other securitizations
Other mortgage-related guarantees
Total 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, 2019
December 31, 2018
$240,134
20,205
10,514
270,853
18,954
10,831
5,889
35,674
2,945
309,472
40,666
(5,709)
$344,429
$210,419
16,499
10,405
237,323
23,959
10,828
7,385
42,172
708
280,203
35,835
(7,160)
$308,878
(1)
(2)
(3)
(4)
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.
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.
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 from the
mortgage-related securities balance to avoid double-counting the exposure, as it is already reflected within the guarantee portfolio or unguaranteed securities.
Our total multifamily portfolio increased during 2019, primarily due to our strong loan purchase and securitization activity.
We expect continued growth in our total portfolio in 2020 as purchase and securitization activities should outpace run off.
At December 31, 2019, approximately 75% of our held-for-sale loans were fixed-rate, while the remaining 25% were
floating-rate.
As of December 31, 2019, we had cumulatively transferred the large majority of expected and stress credit risk on the
multifamily guarantee portfolio primarily through subordination in our securitizations. In addition, nearly all of our
securitization activities shifted substantially all of the interest-rate and liquidity risk associated with the underlying collateral
away from Freddie Mac to third-party investors.
We earn guarantee fees in exchange for providing our guarantee of some or all of the securities we issue as part of our
securitizations. The average guarantee fee rate that we earn on our guarantee portfolio was 37 bps, and the average
remaining guarantee term was eight years, as of both December 31, 2019 and December 31, 2018. While we expect to
earn future guarantee fees at the average guarantee fee rate over the average remaining guarantee term, the actual amount
earned will depend on the performance of the underlying collateral subject to our financial guarantee.
FREDDIE MAC | 2019 Form 10-K
52
Management's Discussion and Analysis
Our Business Segments | Multifamily
Net Interest Yield
Net Interest Yield & Average Investment Portfolio Balance
2019 vs. 2018
Net interest yield increased primarily due to a higher yield and higher prepayment income received from mortgage-
related securities, coupled with lower funding costs on our held-for-sale mortgage loans driven by lower interest rates.
The weighted average investment portfolio balance of interest-earning assets decreased due to a reduction of our
unsecuritized held-for-investment loans as we securitized more of these loans into fully guaranteed and consolidated
other securitizations.
2018 vs. 2017
Net interest yield increased primarily due to higher prepayment income received from mortgage-related 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.
FREDDIE MAC | 2019 Form 10-K
53
Management's Discussion and Analysis
Our Business Segments | Multifamily
K Certificate Benchmark Spreads
K Certificate Benchmark Spreads as of December 31,
Source: Independent Dealers
The valuation of our securitization pipeline and held-for-sale commitments for which we have elected the fair value option,
along with the profitability of our primary 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 generally tightened during 2019, primarily resulting in spread-related fair value gains on
our held-for-sale mortgage loans and commitments.
FREDDIE MAC | 2019 Form 10-K
54
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
(Dollars in millions)
Net interest income
Guarantee fee income
Investment gains (losses), net
Other income (loss)
Net revenues
Credit-related expense
Administrative expense
Other expense
Operating 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,
2019 vs. 2018
2018 vs. 2017
Year Over Year Change
2019
2018
2017
$
$1,069
1,101
576
108
2,854
(18)
(503)
(41)
(544)
2,292
(465)
1,827
101
$1,096
861
16
129
2,102
9
(437)
(36)
(473)
1,638
(319)
1,319
(83)
$1,206
750
1,516
75
3,547
(30)
(395)
(48)
(443)
3,074
(1,060)
2,014
(77)
%
(2)%
28
3,500
(16)
36
(300)
(15)
(14)
(15)
40
(46)
39
222
($27)
240
560
(21)
752
(27)
(66)
(5)
(71)
654
(146)
508
184
$
($110)
111
(1,500)
54
(1,445)
39
(42)
12
(30)
(1,436)
741
(695)
(6)
%
(9)%
15
(99)
72
(41)
130
(11)
25
(7)
(47)
70
(35)
(8)
Total comprehensive income (loss)
$1,928
$1,236
$1,937
$692
56 %
($701)
(36)%
Key Drivers:
2019 vs. 2018
Net interest income remained relatively flat.
Increase in guarantee fee income primarily driven by continued growth in our multifamily guarantee portfolio, coupled
with lower fair value losses on our guarantee asset due to declining interest rates.
Higher investment gains (net of other comprehensive income) primarily driven by higher fair value gains on held-for-
sale commitments due to targeted price increases related to changing market conditions and spread tightening.
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 and increased fair value losses on our guarantee asset
due to rising interest rates.
Shift to investment losses (net of other comprehensive income) due to spread widening on mortgage loans and
commitments and mortgage-related securities, coupled with lower fair value gains on held-for-sale commitments due
to targeted price decreases related to our business strategy.
FREDDIE MAC | 2019 Form 10-K
55
Management's Discussion and Analysis
Our Business Segments | Capital Markets
Capital Markets
Business Overview
The Capital Markets segment supports our strategic goals to exit conservatorship, create a world-class operating platform, and
become the leader in housing by:
Managing the mortgage-related investments portfolio's risk-versus-return profile using our internal economic framework;
Distributing a portion of securitized loans from our cash purchase program through the investment portfolio;
Engaging in economically sensible transactions to reduce our less liquid assets;
Responding to market opportunities in funding our business activities;
Managing our economic interest-rate risk through the use of derivatives and various debt instruments;
Attempting to align prepayment profiles for Freddie Mac TBA programs with Fannie Mae's TBA characteristics; and
Delivering mortgage capital markets services, including our cash loan purchase program, in conjunction with the Single-
family Guarantee segment.
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 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 other 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. We actively
monitor and economically hedge this risk, primarily through the use of derivative instruments. In addition, we further reduce
these interest-rate exposures through active management of our debt funding mix and through the structuring of our
investments in mortgage-related securities. We use fair value hedge accounting to reduce the variability in our GAAP earnings
due to changes in interest rates.
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.
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. 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 and may also
invest in Fannie Mae and Ginnie Mae mortgage-related securities from time to time. 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,
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 our consolidated trusts - 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
FREDDIE MAC | 2019 Form 10-K
56
Management's Discussion and Analysis
Our Business Segments | Capital Markets
results. 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 and reperforming loans through a variety of methods, including loss
mitigation and foreclosure activities and securitizations and sales. For more information on securitization and sales of
seasoned loans, see Our Business Segments - Single-Family Guarantee - Business Overview - Products
and Activities - Securitization and Sales of Seasoned Loans.
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: (i) we provide funds to lenders for mortgage loans that they will subsequently either sell
through our cash purchase program or securitize into securities that they will deliver to us, (ii) we enter into 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, and (iii) we provide secured term financing through
revolving lines of credit collateralized by the value of contractual mortgage servicing rights on certain mortgages that we
own. However, we no longer extend such lines of credit to new customers.
Non-agency mortgage-related securities - We generally no longer purchase non-agency mortgage-related securities,
and have minimal investments in such securities from our acquisitions in prior years. Our activities with respect to this
product are primarily sales. However, we may acquire such securities in connection with our senior subordinate
securitization structures backed by seasoned loans. 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);
• Amortization of cost basis adjustments, such as net amortization of loans from our cash purchase program and related debt securities in consolidated
trusts and hedge accounting related basis adjustments; 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
securities, including their price performance relative to comparable Fannie Mae securities. These activities may include the
purchase and sale of agency securities, dollar roll transactions, and structuring activities, such as resecuritization of existing
agency securities and the sale of some or all of the resulting securities. Depending upon market conditions, there may be
substantial variability in any period in the total amount of securities we purchase or sell. The purchase or sale of agency
securities could, at times, adversely affect the price performance of our securities relative to comparable Fannie Mae securities.
We may incur costs to support our presence in the agency securities market and to support the liquidity and price performance
of our securities. For more information, see Risk Factors - Other Risks - A significant decline in the price performance
of or demand for our UMBS could have an adverse effect on the volume and/or profitability of our new single-family
guarantee business.
FREDDIE MAC | 2019 Form 10-K
57
Management's Discussion and Analysis
Our Business Segments | Capital Markets
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 generally 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 STACR debt notes, SCR debt notes, upfront fees and net worth are used to meet the funding needs
of the company. We expect the volume of our STACR debt issuance to continue to decline as STACR debt note transactions
will be replaced with STACR Trust note transactions. 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.
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, we also
use hedge accounting strategies to reduce our GAAP earnings variability. We use hedge accounting to better align our earnings
with the economics of our business, but hedge accounting is not intended to change the investment and portfolio management
FREDDIE MAC | 2019 Form 10-K
58
Management's Discussion and Analysis
Our Business Segments | Capital Markets
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.
We have participated in transactions that support the development of the Secured Overnight Financing Rate (SOFR) as an
alternative rate to LIBOR and expect to continue to do so for the foreseeable future. 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 - Market Risk - 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 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.
FREDDIE MAC | 2019 Form 10-K
59
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, the FHLBs, and non-bank loan aggregators, who are both our customers and competitors.
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 as of December 31,
Mortgage Investments Portfolio as of December 31,
The balance of our mortgage investments portfolio remained relatively flat from December 31, 2018 to December 31, 2019.
See Conservatorship and Related Matters - Managing Our Mortgage-Related Investments Portfolio Over Time
for additional details.
The balance of our other investments portfolio increased 61.5% primarily due to a higher consolidated trusts account
balance driven by higher loan prepayments, coupled with higher near-term cash needs for upcoming maturities and
anticipated calls of other debt, and a higher expected loan purchase forecast.
The overall liquidity of our mortgage investments portfolio continued to improve as our less liquid assets decreased during
2019. The percentage of less liquid assets relative to our total mortgage investments portfolio declined from 26.6% at
December 31, 2018 to 17.9% at December 31, 2019, primarily due to repayments, securitizations, and sales.
We continue to participate in transactions that support the development of SOFR as an alternate rate to LIBOR. These
transactions include investment in and issuance of SOFR indexed floating-rate debt securities and execution of SOFR
indexed derivatives.
FREDDIE MAC | 2019 Form 10-K
60
Management's Discussion and Analysis
Our Business Segments | Capital Markets
Reduction in Less Liquid Assets
Less Liquid Assets as of December 31,
Sales of Less Liquid Assets for the Year Ended December 31,
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 2019, our sales of less liquid assets included $12.9 billion in UPB of reperforming loans using our senior
subordinate securitization structures. As part of these transactions, we retained certain of the guaranteed senior securities
for our mortgage-related investments portfolio. We also sold $0.5 billion of non-agency mortgage-related securities.
In 2018 and 2017, we securitized $1.6 billion and $1.2 billion, respectively, of reperforming loans into Level 1 Securitization
Products. We did not execute any such transactions in 2019, as our use of this strategy has declined over time with our
primary strategy now utilizing senior subordinate securitization structures.
FREDDIE MAC | 2019 Form 10-K
61
Management's Discussion and Analysis
Our Business Segments | Capital Markets
Net Interest Yield and Average Balances
Net Interest Yield & Average Investments Portfolio Balances
(Weighted average balance in billions)
2019 vs. 2018 - Net interest yield decreased by 28 basis points primarily due to the lower and flatter interest rate
environment, coupled with a change in our investment mix, as the other investments portfolio represented a larger
percentage of our total investments portfolio, and an increase in amortization expense resulting from higher loan liquidation
rates.
2018 vs. 2017 - Net interest yield increased by 15 basis points primarily due to higher yields on our newly acquired
mortgage-related assets and other investments as a result of increases in interest rates, coupled with a change 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.
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.
FREDDIE MAC | 2019 Form 10-K
62
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
(Dollars in millions)
Net interest income
Investment gains (losses), net
Other income (loss)
Net revenues
Administrative expense
Other expense
Operating expense
Segment Earnings before income tax expense
Income tax expense
Segment Earnings, net of taxes
Total other comprehensive income (loss), net of tax
Total comprehensive income (loss)
Year Over Year Change
Year Ended December 31,
2019 vs. 2018
2019
2018
2017
$
%
2018 vs. 2017
$
%
$2,486
(36)
(700)
1,750
(414)
(54)
(468)
1,282
(260)
1,022
494
$1,516
$3,217
1,803
340
5,360
(365)
(11)
(376)
4,984
(976)
4,008
(527)
$3,481
$3,279
1,772
4,913
9,964
(330)
(81)
(411)
9,553
(3,296)
6,257
(30)
$6,227
($731)
(1,839)
(1,040)
(3,610)
(49)
(43)
(92)
(3,702)
716
(2,986)
1,021
($1,965)
(23)%
(102)
(306)
(67)
(13)
(391)
(24)
(74)
73
(75)
194
(56)%
($62)
31
(4,573)
(4,604)
(35)
70
35
(4,569)
2,320
(2,249)
(497)
($2,746)
(2)%
2
(93)
(46)
(11)
86
9
(48)
70
(36)
(1,657)
(44)%
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 gains
(losses), net, 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,
2019 vs. 2018
2019
2018
2017
$
%
2018 vs. 2017
$
%
($0.4)
0.2
($0.3)
0.4
($0.3)
0.8
($0.1)
(0.2)
(33)%
(50)
$—
(0.4)
—%
(50)
(Dollars in millions)
Interest rate-related
Market spread-related
Key Drivers:
2019 vs. 2018
Net interest income decreased primarily due to the lower and flatter interest rate environment, which also resulted in an
increase in amortization expense due to higher loan liquidation rates and a change in our investment mix, as the other
investments portfolio represented a larger percentage of our total investments portfolio.
Decrease in investment gains (losses), net of $1.8 billion, partially offset by an increase of $1.0 billion in other
comprehensive income. The remaining decline in investment gains (losses) was primarily due to a decline of
approximately $0.5 billion in gains from debt repurchase activity and the $0.3 billion increase in interest rate-related
and market spread-related fair value losses shown in the table above. Both of these declines were primarily
attributable to the decrease in long-term interest rates. Our derivative volume increased beginning in 2Q 2019 as we
updated our interest-rate risk measures to include upfront fees (including buy-downs) related to single-family credit
guarantee activity recorded in the single-family segment. This increase in derivative volume introduced additional
volatility in our financial results that primarily drove our interest rate-related fair value losses. See Risk Management
- Market Risk for additional information on the effect of market-related items on our comprehensive income.
Decrease in other income primarily due to lower net amortization income driven by the timing differences in
amortization related to prepayment between debt of consolidated trusts and the underlying loans from our cash
purchase program. For further discussion on timing differences in amortization, see MD&A - Consolidated Results
of Operations.
2018 vs. 2017
Net interest income decreased primarily due to the continued reduction in the balance of our mortgage-related
investments portfolio. This decrease was partially offset by higher yields on our newly acquired mortgage-related
assets and other investments as interest rates increased, coupled with changes in our investment mix due to
FREDDIE MAC | 2019 Form 10-K
63
Management's Discussion and Analysis
Our Business Segments | Capital Markets
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.
Decrease in investment gains (losses), net (net of other comprehensive income (loss)) primarily due to lower spread-
related gains driven by lower non-agency mortgage-related securities balances and relatively flat interest rate-related
fair value losses. These interest rate-related fair value losses were mostly offset by the change in fair value of the
hedged items attributable to interest-rate risk in our hedge accounting programs. See Risk Management - Market
Risk for additional information on the effect of market-related items on our comprehensive income.
Decrease in other income primarily due to 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, coupled with lower amortization of debt securities of consolidated trusts
during 2018 driven by a decrease in prepayments as a result of higher interest rates. For more information on these
settlements, see Note 14.
FREDDIE MAC | 2019 Form 10-K
64
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,
2018
2017
2019
Year Over Year Change
2019 vs. 2018
%
$
2018 vs. 2017
%
$
Comprehensive income (loss) - All Other
$—
$—
($5,405)
$—
—%
$5,405
100%
Key Drivers:
2018 vs. 2017 - 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 | 2019 Form 10-K
65
Management's Discussion and Analysis
Risk Management | Overview
RISK MANAGEMENT
Overview
To achieve our mission of providing liquidity, stability, and affordability to the U.S. housing market, 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 and the responsibility for risk management resides at all levels
of the company. 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. Our goal is to maintain a strong risk culture where employees
are risk aware, collaborative, and transparent, individually accountable for their decisions, and conduct business in an effective,
legal, and ethical manner.
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 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 managing risk in a consistent manner and across a range of stressful conditions;
Defines risk roles and responsibilities across the three lines of defense;
Provides for independent risk assessment and oversight; and
Promotes accountability and transparency in risk management decisions and execution.
The framework includes the following components:
Three Lines of Defense - The business lines, with support from the enterprise divisions, ERM, and internal audit, make up
the three lines of defense.
Risk Culture - The Board and all levels of management support an effective risk culture by establishing and exercising
accountability, promoting risk awareness, 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.
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 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. The CEO delegates authority to members of executive
management. Authority delegated from the CEO is subject to limitations set forth in corporate risk policies or standards
approved by the CRO or his/her delegate.
Corporate Risk Policies and Standards - Corporate risk policies provide clarity on roles and responsibilities, establish
approval requirements for risk decisions, and define escalation and reporting requirements. Corporate risk standards
provide the minimum requirements to implement corporate risk policies and may also establish approval requirements for
risk decisions.
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.
FREDDIE MAC | 2019 Form 10-K
66
Management's Discussion and Analysis
Risk Management | Overview
Risk-Adjusted Return - We use risk-adjusted return, based on the CCF, to measure ROCC 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 and measurement of inherent and/or residual risk for a specific
risk type, measured at a divisional or enterprise level for the relevant risk types. The risk profile considers risk trends, the
impact of emerging, escalated, and top risks, control performance, and risk indicators. The risk profile also incorporates
results from stress testing or scenario analysis, judgmental evaluation of external and internal factors, 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 CRO, 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 division risk committees 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 | 2019 Form 10-K
67
Management's Discussion and Analysis
Risk Management | Overview
FREDDIE MAC | 2019 Form 10-K
68
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 prudent underwriting standards and quality control practices and managing seller/servicer performance;
Transferring credit risk to third-party investors;
Monitoring loan performance and characteristics;
Engaging in loss mitigation activities; and
Managing foreclosure and REO activities.
Maintaining Prudent Underwriting Standards and Quality Control Practices and
Managing Seller/Servicer Performance
We employ multiple strategies to maintain loan quality and data transparency:
Underwriting standards, as published in our Guide and incorporated in Freddie Mac Loan AdvisorSM, establish the
requirements for eligibility, documentation, and representations and warranties;
Loan quality control practices, including post-close credit review and the underwriting defects repurchase process, help to
ensure that the loan origination process is in compliance with our Guide and that loans perform at or above expected
levels; and
Robust seller/servicer management, including in-house quality control and performance monitoring, provides that quality
control is maintained for loans sold and/or serviced by third-parties.
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 are used to assess 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 97% for creditworthy first-time homebuyers and for a targeted segment of creditworthy
borrowers meeting certain AMI requirements under our affordable housing initiatives, a maximum original LTV ratio of 95% for
all other home purchase and no cash out refinance loans, a maximum original 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. In July 2019, we
lowered the AMI requirements under our Home Possible loan initiative which will reduce the amount of 97% LTV loans we buy
under the initiative.
Loan Advisor is our main tool for assessing loan eligibility and documentation. Loan Advisor is a set of integrated software
applications and services designed to give lenders access to our view of risk, loan quality, and eligibility during the origination
process, which promotes efficient commerce between lenders and Freddie Mac. As a key component of Loan Advisor, Loan
Product Advisor® takes advantage of proprietary data models and intelligent automation to ensure all loans meet our
FREDDIE MAC | 2019 Form 10-K
69
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
underwriting standards. Loan Product Advisor features innovative tools and offerings leveraging algorithms to enhance the
origination process and generates an assessment of a loan’s credit risk and overall quality.
Historically, the majority of our purchase volume was assessed using either Loan Product Advisor, Fannie Mae's comparable
software Desktop Underwriter (DU), or the seller's proprietary automated underwriting system. During 2019, we initiated steps
to require the loans we purchase to be assessed by one of Freddie Mac's proprietary underwriting software tools, Loan Product
Advisor or Loan Quality Advisor®, prior to purchase. We have made significant progress in this initiative such that by the end of
2019, the majority of loans we purchase are now assessed by Freddie Mac proprietary software ensuring their compatibility
with our risk appetite and reducing the volume of loans we acquire with layered risk.
With Loan Advisor, lenders can actively monitor representation and warranty relief earlier in the mortgage loan production
process. Loan Advisor offers limited representation and warranty relief for certain loan components that satisfy automated data
analytics related to appraisal quality, valuation, borrower assets, and borrower income. In general, limited representation and
warranty relief is only offered when information provided by lenders is validated through the use of 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.
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.
Quality Control Practices
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.
Managing Seller/Servicer Performance
We actively monitor seller and servicer performance, including compliance with our standards. We maintain approval standards
for our seller/servicers, which include requiring our sellers to maintain an in-house quality control program with written
procedures that operates independently of the seller’s underwriting and origination functions. We monitor servicer performance
using our Servicer Success Scorecard and periodically review our seller/servicers’ operational processes. We also periodically
change seller/servicer guidelines based on the results of our mortgage portfolio monitoring, if warranted.
Loan Purchase Credit Characteristics
The credit quality of our single-family loan purchases remains strong by historical standards. Risk decreased during 2019 as our
refinance volume increased due to declining interest rates and the reduction in the volume of higher risk loans we acquire,
including loans with layered risk. The graphs below show the credit profile of the single-family loans we purchased or
guaranteed in each of the last three years.
FREDDIE MAC | 2019 Form 10-K
70
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Weighted Average Original LTV Ratio
Weighted Average Original Credit Score (1)
(1) Original credit score is based on three credit bureaus (Equifax, Experian, and
TransUnion).
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
$389,515
86%
$266,995
87%
$275,677
80%
Year Ended December 31,
2019
2018
2017
20-year amortizing fixed-rate
15-year amortizing fixed-rate
Adjustable-rate
FHA/VA and other governmental
Total
Percentage of purchases
DTI ratio > 45%
Detached/townhome property type
Primary residence
Loan purpose
Purchase
Cash-out refinance
Other refinance
15,381
43,164
5,257
164
3
10
1
—
8,373
28,878
3,848
103
$453,481
100%
$308,197
14%
92
90
55
18
27
3
9
1
—
100%
18%
92
90
69
19
12
FREDDIE MAC | 2019 Form 10-K
12,338
45,597
9,841
113
4
13
3
—
$343,566
100%
13%
91
89
58
22
20
71
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Transferring Credit Risk to Third-Party Investors
Types of Credit Enhancements
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. Most of our loans with LTV ratios above 80% are protected by primary mortgage insurance,
which 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.
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 summary of the types of credit enhancements we use
to transfer credit risk on our single-family loans. See Single-Family Guarantee - Business Overview - Products and
Activities for more information on our CRT transactions.
Category
Products
Primary mortgage insurance
Primary mortgage insurance
STACR
Insurance/reinsurance
Subordination
STACR Trust notes
STACR debt notes
ACIS
AFRM
IMAGIN
Senior subordinate securitization structures backed by
seasoned loans (non-consolidated)
Senior subordinate securitization structures backed by
recently originated loans (consolidated)
Lender risk-sharing
Lender risk sharing
CRT
Coverage type
Accounting treatment
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Front-end
Back-end
Back-end
Back-end
Front-end
Front-End
Back-end
Back-end
Front-end
Attached
Freestanding
Debt
Freestanding
Freestanding
Freestanding
Attached
Debt
Freestanding
Credit Enhancement Coverage for Single-Family Credit Guarantee Portfolio
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, 2019 and December 31, 2018, respectively.
Table 20 - Details of Credit Enhanced Loans in Our Single-Family Credit Guarantee Portfolio
(Dollars in millions)
Primary mortgage insurance
STACR
Insurance/reinsurance
Subordination
Lender risk-sharing
Other
Less: UPB with multiple CRT and/or other credit
enhancements
Single-family credit guarantee portfolio with
credit enhancement
Single-family credit guarantee portfolio without
credit enhancement
Total
Protected
UPB(1)
Total
$421,870
824,359
863,149
44,941
24,078
1,056
(1,058,402)
1,121,051
873,398
$1,994,449
Outstanding as of December 31, 2019
Percentage of
Single-Family Credit
Guarantee Portfolio
Maximum Coverage(2)
Total
First Loss(3)
Mezzanine
Total
21%
$107,690
5,874
2,483
2,608
5,077
1,051
—
$—
19,238
7,674
2,791
580
—
—
$107,690
25,112
10,157
5,399
5,657
1,051
—
124,783
30,283
155,066
—
—
—
100%
$124,783
$30,283
$155,066
41
43
2
1
—
(52)
56
44
FREDDIE MAC | 2019 Form 10-K
72
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
(Dollars in millions)
Primary mortgage insurance
STACR
Insurance/reinsurance
Subordination
Lender risk-sharing
Other
Less: UPB with multiple CRT and/or other credit
enhancements
Single-family credit guarantee portfolio with
credit enhancement
Single-family credit guarantee portfolio without
credit enhancement
Total
Protected
UPB(1)
Total
$378,594
766,415
808,484
41,277
17,458
1,305
(991,109)
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
20%
$96,996
3,777
1,706
1,923
4,830
1,290
—
$—
18,845
7,572
2,046
340
—
—
$96,996
22,622
9,278
3,969
5,170
1,290
—
110,522
28,803
139,325
—
—
—
100%
$110,522
$28,803
$139,325
40
43
2
1
—
(52)
54
46
(1)
(2)
For STACR and certain insurance/reinsurance transactions (e.g., ACIS), represents the UPB of the assets included in the reference pool. For other insurance/
reinsurance transactions, represents the UPB of the assets covered by the insurance policy. For subordination, represents the UPB of the guaranteed securities,
which represents the UPB of the assets included in the trust net of the protection provided by the subordinated securities.
For STACR transactions, represents the outstanding balance held by third parties. For insurance/reinsurance transactions, represents the remaining aggregate limit
of insurance purchased from third parties. For subordination, represents the outstanding UPB of the securities that are subordinate to Freddie Mac guaranteed
securities and held by third parties.
(3)
First loss includes the most subordinate securities (i.e., B tranches) in our STACR transactions and their equivalent in ACIS and other CRT transactions.
We had coverage remaining of $155.1 billion and $139.3 billion on our single-family credit guarantee portfolio as of December
31, 2019 and December 31, 2018, respectively. CRT transactions provided 29.8% and 29.4% of the coverage remaining at
those dates.
The table below provides information on the credit-enhanced and non-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 21 - Credit-Enhanced and Non-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
2019
As of December 31,
2018
2017
Credit-enhanced
Primary mortgage insurance
Other
Non-credit-enhanced
Total
21%
55
45
N/A
0.79%
0.40
0.70
0.63%
20%
48
47
N/A
0.86%
0.31
0.83
0.69%
18%
37
56
N/A
1.43%
0.53
1.16
1.08%
Credit Enhancement Expenses and Recoveries
The recognition of expenses and estimated probable recoveries associated with credit enhancements in our consolidated
financial statements depends on the type of credit enhancement as follows:
Attached credit enhancements - Attached credit enhancements are obtained contemporaneously with, and in
contemplation of, the origination of a financial instrument, and effectively travel with the financial instrument upon sale.
Attached credit enhancements are accounted for on a net basis with the associated financial instrument. As a result, we do
not explicitly recognize a separate expense in our consolidated statements of comprehensive income for attached credit
enhancements. Rather, the cost of attached credit enhancements is reflected as lower revenue. For example, we charge a
lower guarantee fee for a loan with primary mortgage insurance than we otherwise would for the same loan without primary
mortgage insurance. Similarly, credit losses on loans with attached credit enhancements are accounted for on a net basis.
We do not recognize a provision for credit losses on loans with attached credit enhancements unless the estimated
incurred loss exceeds the amount of credit protection provided by the attached credit enhancement and do not separately
recognize a recovery asset. For additional information on the effect of attached credit enhancements on our credit losses,
see the Monitoring Loan Performance and Characteristics - Credit Losses and Recoveries section below.
FREDDIE MAC | 2019 Form 10-K
73
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Freestanding credit enhancements - Freestanding credit enhancements are contracts that are entered into separately
and apart from any other financial instruments or entered into in conjunction with some other transaction and are legally
detachable and separately exercisable. Freestanding credit enhancements are accounted for on a gross basis separately
from the associated financial instrument. We recognize the payments we make to transfer credit risk under freestanding
credit enhancements as credit enhancement expense. We recognize expected recoveries from freestanding credit
enhancements as separate assets when the claim for recovery is deemed probable, which typically occurs at the same
time we recognize a provision for credit losses on the associated loan.
Debt with embedded credit enhancements - Credit enhancements that are structured as debt issuances are accounted
for on a gross basis separately from the associated mortgage loan. We primarily recognize expenses associated with debt
with embedded credit enhancements as interest expense. We recognize recoveries from debt with embedded credit
enhancements as debt extinguishment gains within investment gains (losses) when the loss confirming event occurs and
we are legally released from our debt obligation, which typically occurs after we recognize a provision for credit losses on
the associated loan. Such recoveries have not been significant. We no longer issue debt with embedded credit
enhancements as part of our primary CRT strategy and therefore expect the effect of these transactions on our financial
results to become less significant over time.
Certain of our credit enhancements are accounted for at fair value, with changes in fair value recognized in earnings as a
component of investment gains (losses), net. See Note 6 for additional information on our credit enhancements.
The table below contains details on the costs associated with our single-family credit enhancements.
Table 22 - Details of Single-Family Credit Enhancement Expense
(In millions)
Credit enhancement costs: (1)
Credit enhancement expense
Interest expense related to CRT debt
Total costs
Estimated reinvestment income from proceeds of CRT debt issuance
Single-family credit enhancement expense
2019
Year Ended December 31,
2018
2017
($693)
(1,060)
(1,753)
360
($1,393)
($402)
(1,047)
(1,449)
372
($1,077)
($263)
(808)
(1,071)
180
($891)
(1)
Excludes fair value gains and losses on CRT derivatives and CRT debt recorded at fair value. See MD&A - Consolidated Results of Operations for
additional information on these items.
Impact of CRT Transactions on Conservatorship Capital
We use FHFA's risk-based CCF guidelines to determine the amount of total conservatorship capital needed for our single-
family credit guarantee portfolio. We reduce the amount of conservatorship capital needed for credit risk by shifting the risk of
credit losses from Freddie Mac to third-party investors through our CRT transactions, primarily our STACR and ACIS
transactions. The table below presents information on the impact of certain CRT transactions on the amount of capital needed
for credit risk (conservatorship credit capital) pursuant to the CCF. For more information on the CCF, see Liquidity and
Capital Resources - Capital Resources - Conservatorship Capital Framework.
Table 23 - Reduction in Conservatorship Credit Capital (1) as a Result of Certain CRT Transactions
Single-Family
Credit
Guarantee
Portfolio -
Other
Single-
Family
Credit
Guarantee
Portfolio
Single-
Family
Credit
Guarantee
Portfolio
As of December 31, 2019
Single-Family
Credit
Guarantee
Portfolio -
covered by
certain CRT
transactions
$16.1
(11.8)
$4.3
73.3%
$945
$31.9
(11.8)
$20.1
37.0%
$1,994
100%
47%
$15.8
—
$15.8
—%
$1,049
53%
As of December 31, 2018
Single-Family
Credit
Guarantee
Portfolio -
covered by
certain CRT
transactions
$14.6
(9.3)
$5.3
63.7%
$875
$29.8
(9.3)
$20.5
31.2%
$1,896
100%
46%
Single-Family
Credit
Guarantee
Portfolio -
Other
$15.2
—
$15.2
—%
$1,021
54%
(Dollars in billions)
Conservatorship credit capital prior to CRT (2)
Conservatorship credit capital reduced by CRT (3)
Conservatorship credit capital needed after CRT
Reduction in conservatorship credit capital (%) (4)
UPB
% of portfolio
(1)
Conservatorship credit capital figures for each period are based on the CCF in effect during the period. The CCF in effect as of December 31, 2019 was largely
unchanged from the CCF as of December 31, 2018. The conservatorship credit capital figures for 2019 are preliminary and subject to change until official
submission to FHFA.
FREDDIE MAC | 2019 Form 10-K
74
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
(2)
(3)
Represents the total conservatorship credit capital prior to CRT on the outstanding balance of our single-family credit guarantee portfolio as of December 31, 2019
and December 31, 2018 based on prescribed CCF guidelines.
Represents the amount of conservatorship credit capital released from certain CRT transactions, including STACR, ACIS/AFRM, certain senior subordination
securitization structures, and certain lender risk-sharing transactions, based on prescribed CCF guidelines.
(4)
Calculated as conservatorship credit capital reduced by CRT divided by conservatorship credit capital prior to CRT.
Monitoring Loan Performance and Characteristics
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.
Delinquency Rates
Our single-family serious delinquency rate declined in 2019 compared to 2018 due to the continued shift in the single-family
credit guarantee portfolio mix, as the legacy and relief refinance loan portfolio runs off and we add higher credit quality loans to
our core single-family loan portfolio. 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.
The charts below show the credit losses and serious delinquency rates for each of our single-family loan portfolios. Our core
single-family loan portfolio continues to perform well and account for a small percentage of our credit losses, as shown below.
Our legacy and relief refinance single-family loan portfolio continues to decline as a percentage of our overall portfolio, but
continues to account for the majority of our credit losses.
Portfolio Composition and Credit Losses
Serious Delinquency Rates as of December 31,
FREDDIE MAC | 2019 Form 10-K
75
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
Credit score
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
• 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
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. Original credit score represents
each borrower's FICO score at the time of origination or
our purchase, while current credit score represents each
borrower's most recent FICO score, which is obtained by
Freddie Mac as of the first month of the most recent
quarter
• Borrowers with higher credit scores are generally more likely to
repay or have the ability to refinance their loans than those with
lower scores
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 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 | 2019 Form 10-K
76
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, 2019
Original
Credit
Score (1)
Current
Credit
Score (1)
Original
LTV Ratio
Current
LTV
Ratio
Current
LTV Ratio
>100%
Alt-A %
750
712
745
752
692
749
75%
83
76%
60%
52
59%
—%
2
—%
—%
7
1%
As of December 31, 2018
Original
Credit
Score (1)
Current
Credit
Score (1)
Original
LTV Ratio
Current
LTV
Ratio
Current
LTV Ratio
>100%
Alt-A %
750
705
743
753
690
748
74%
78
76%
59%
45
58%
—%
2
1%
—%
7
1%
UPB
$1,701
293
$1,994
UPB
$1,550
346
$1,896
(1) Original credit score is based on three credit bureaus (Equifax, Experian, and TransUnion). Current credit score is based on Experian only.
FREDDIE MAC | 2019 Form 10-K
77
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
Original credit score (1)
740 and above
700 to 739
660 to 699
620 to 659
Less than 620
Portfolio weighted average original credit score
Current credit score (1)
740 and above
700 to 739
660 to 699
620 to 659
Less than 620
As of December 31,
2019
2018
2017
18%
52%
28%
2%
76%
51%
35%
14%
—%
59%
61%
21%
12%
4%
2%
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%
745
743
743
66%
16%
9%
4%
5%
66%
16%
9%
4%
5%
65%
16%
10%
4%
5%
Portfolio weighted average current credit score
749
748
747
Loan purpose
Purchase
Cash-out refinance
Other refinance
46%
20%
34%
45%
20%
35%
39%
21%
40%
(1) Original credit score is based on three credit bureaus (Equifax, Experian, and TransUnion). Current credit score is based on Experian only.
In addition, at December 31, 2019, December 31, 2018, and December 31, 2017:
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, 2019, approximately 7% of our loans had second-lien financing by the originator or other third party at
origination, and these loans comprised approximately 13% of our seriously delinquent loan population. It is likely that additional
borrowers have post-origination second-lien financing.
Higher Risk Loan Attributes and Attribute Combinations
Certain of the loan attributes shown above may indicate a higher risk of default. For example, loans with original LTV ratios over
90% and/or credit scores below 620 at origination may be higher risk. The tables below provide information on loans in our
portfolio with these characteristics. The tables include a presentation of each higher risk category in isolation. A single loan may
fall within more than one category.
FREDDIE MAC | 2019 Form 10-K
78
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
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, 2019
UPB
CLTV
% Modified
SDQ Rate
$71.5
286.0
33.1
65%
79
60
2.7%
3.2
15.4
0.89%
0.98
4.52
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
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
(Original 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, 2019
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%
2.1
69.8
0.1
72.3%
1.1%
1.5
10.5
0.1
13.2%
2.68%
1.26
0.20
1.23
0.24%
4.16%
3.01
1.06
4.39
1.58%
—%
0.4
12.6
—
13.0%
0.2%
0.2
0.7
—
1.1%
NM
1.59%
0.26
NM
0.33%
9.33%
7.91
3.91
NM
5.39%
—%
—
—
—
—%
NM
NM
NM
NM
NM
0.1% 15.03%
0.1
0.2
—
0.4%
12.84
6.32
NM
8.96%
0.3%
2.5
82.4
0.1
85.3%
1.4%
1.8
11.4
0.1
14.7%
2.87%
1.30
0.20
1.96
0.26%
4.83%
3.52
1.23
4.68
1.84%
3.5%
1.9
0.3
3.6
0.4%
17.7%
16.3
5.9
19.6
8.3%
FREDDIE MAC | 2019 Form 10-K
79
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
(Original 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, 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%
(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.
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
$40.1
10.9
8.7
UPB
$47.7
11.0
14.5
As of December 31, 2019
% Modified
CLTV
SDQ Rate
49%
64
59
2.2%
—
100
0.84%
2.72
6.27
As of December 31, 2018
% Modified
CLTV
SDQ Rate
50%
64
64
1.9%
0.1
100
0.88%
3.43
6.12
(1)
Includes $2.5 billion and $3.0 billion in UPB of option ARM loans as of December 31, 2019 and December 31, 2018, respectively. As of December 31, 2019 and
December 31, 2018, the option ARM loans had: (a) current LTV ratios of 51% and 54%, (b) loan modification percentages of 20.4% and 17.9%, and (c) serious
delinquency rates of 2.94% and 3.40%, 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 2019
FREDDIE MAC | 2019 Form 10-K
80
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
or prior have already had one or more payment changes as of December 31, 2019; loans where the year of first payment
change is 2020 or later have not had a payment change as of December 31, 2019 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, 2019.
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, 2019
2019
and Prior
$9,097
4,692
513
8,179
$22,481
2020
2021
2022
2023
2024
Thereafter
Total(1)
$3,860
80
1
1,225
$5,166
$3,647
—
10
900
$4,557
$4,967
—
28
201
$5,196
$3,930
—
2
52
$3,984
$4,552
—
—
26
$4,578
$7,281
—
—
—
$7,281
$37,334
4,772
554
8,657
$51,317
(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 2020 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 2020.
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 $0.8 billion and $0.9 billion of security
collateral underlying our other securitization products at December 31, 2019 and December 31, 2018, 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, 2019, we have purchased approximately $36.4 billion of relief refinance loans that were previously
categorized as Alt-A loans in our portfolio.
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, 2019
As of December 31, 2018
UPB
CLTV
%
Modified
SDQ Rate
UPB
CLTV
%
Modified
SDQ Rate
$21.1
61%
18.4%
3.75%
$23.9
63%
23.2%
4.13%
The UPB of Alt-A loans in our single-family credit guarantee portfolio is continuing to decline due to borrowers refinancing into
other mortgage products, foreclosure sales, and other liquidation events.
FREDDIE MAC | 2019 Form 10-K
81
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, 2019. 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
(Dollars in millions)
New York
Florida
Illinois
California
Texas
All Others
Total
SDQ
Loan
Count
5,741
5,430
4,747
4,584
3,950
45,269
69,721
As of December 31, 2019
As of December 31, 2018
% of SDQ
Loans
SDQ Rate
Full Year
2019
Credit
Losses
8%
1.21%
$109
8
7
7
6
64
0.77
0.85
0.34
0.54
0.61
208
151
116
49
881
SDQ
Loan
Count
6,312
6,888
4,750
4,610
4,081
% of SDQ
Loans
SDQ Rate
Full Year
2018
Credit
Losses
As of December 31, 2017
SDQ
Loan
Count
% of SDQ
Loans
SDQ Rate
Full Year
2017
Credit
Losses
8%
1.37%
$289
8,117
7%
1.74%
$415
9
6
6
5
1.01
0.86
0.35
0.59
0.67
263
244
275
55
22,253
19
6,228
5,514
8,908
5
5
8
1,454
64,669
56
3.33
1.13
0.41
1.36
0.90
614
445
884
44
2,413
48,499
66
100%
0.63% $1,514
75,140
100%
0.69% $2,580
115,689
100%
1.08% $4,815
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
2019
Recoveries
Year Ended December 31,
2018
Charge-
offs,
net
Charge-
offs,
gross (1)
Recoveries
Charge-
offs,
net
Charge-
offs,
gross (1)
2017
Recoveries
($157)
(105)
(76)
(73)
(41)
($452)
$462
309
231
179
104
$1,285
$1,105
515
544
522
199
$2,885
($175)
(98)
(88)
(72)
(42)
($475)
$930
417
456
450
157
$2,410
$1,690
1,001
774
1,382
204
$5,051
($155)
(95)
(81)
(62)
(32)
($425)
Charge-
offs,
gross (1)
$619
414
307
252
145
$1,737
Charge-
offs,
net
$1,535
906
693
1,320
172
$4,626
(In millions)
Northeast
Southeast
North Central
West
Southwest
Total
(1) 2019, 2018, and 2017 include charge-offs of $1.3 billion, $2.1 billion and $3.8 billion, respectively, related to the transfer of loans from held-for-investment to held-
for-sale.
FREDDIE MAC | 2019 Form 10-K
82
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, 2019
North Central
Northeast
Southeast
Southwest
West
Total
North Central
Northeast
Southeast
Southwest
West
Total
% of Portfolio SDQ Rate % of Portfolio SDQ Rate
0.80%
1.28
0.91
0.46
0.54
0.83%
0.55%
0.75
0.68
0.54
0.34
0.57%
3%
4
2
2
3
14%
13%
20
14
12
27
86%
% of
—%
—
—
—
—
—%
SDQ Rate(1) % of Portfolio SDQ Rate
0.61%
0.87
0.73
0.54
0.36
0.63%
16%
24
16
14
30
100%
NM
NM
NM
NM
NM
NM
CLTV <= 80%
CLTV > 80% to 100%
CLTV > 100%
All Loans
As of December 31, 2018
% of Portfolio SDQ Rate % of Portfolio SDQ Rate
0.93%
1.62
1.37
0.58
0.76
1.09%
0.55%
0.79
0.79
0.56
0.35
0.60%
2%
3
2
2
2
11%
14%
21
14
12
27
88%
% of
—%
—
—
—
1
1%
SDQ Rate(1) % of Portfolio SDQ Rate
0.63%
0.96
0.90
0.57
0.38
0.69%
NM
NM
NM
NM
3.81
7.98%
16%
24
16
14
30
100%
(1) NM - not meaningful due to the percentage of the portfolio rounding to zero.
Credit Losses and Recoveries
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,
2018
2017
2019
$1,737
(452)
1,285
229
$1,514
$2,885
(475)
2,410
170
$2,580
$5,051
(425)
4,626
189
$4,815
7.7
13.7
27.0
(1) 2019, 2018, and 2017 include charge-offs of $1.3 billion, $2.1 billion, and $3.8 billion, respectively, related to the transfer of loans from held-for-investment to held-
for-sale.
We recognized recoveries from primary mortgage insurance (excluding recoveries that represent reimbursements for our
expenses, such as REO operations expenses) of $117 million, $151 million, and $263 million that reduced our charge-offs of
single-family loans during 2019, 2018, and 2017, respectively. We also recognized recoveries from primary mortgage insurance
of $52 million, $47 million, and $50 million during 2019, 2018, and 2017, 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.
FREDDIE MAC | 2019 Form 10-K
83
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Table 35 - Credit Characteristics of Certain Single-Family Loan Categories
2019
2018
As of December 31
% of
Portfolio
SDQ Rate
Year Ended
December 31
% of Credit
Losses
As of December 31
% of
Portfolio
SDQ Rate
Year Ended
December 31
% of Credit
Losses
0.4%
8.22%
1
38
3.75
0.81
16%
12
61
1%
7.98%
1
38
4.13
0.92
16%
16
59
CLTV > 100%
Alt-A loans
Judicial foreclosure states
Allowance for Credit Losses
Our allowance for credit losses continued to decline in 2019, primarily driven by charge-offs as a result of our transfer of loans
from held-for-investment to held-for-sale.
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. See Note
4 for further information about this change.
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
Other(2)
Ending balance
2019
$6,176
(749)
(1,737)
452
126
$4,268
Year Ended December 31,
2017
$13,463
(97)
(5,051)
425
239
$8,979
2018
$8,979
(712)
(2,885)
475
319
$6,176
2016
$15,348
(781)
(1,938)
497
337
$13,463
2015
$21,793
(2,639)
(5,071)
717
548
$15,348
As a percentage of our single-family credit guarantee portfolio
0.21%
0.33%
0.49%
0.77%
0.90%
(1) 2016 and 2015 do not include lower-of-cost-or-fair-value adjustments recognized when we transfer loans from held-for-investment to held-for-sale, which totaled
$1.2 billion and $3.4 billion, respectively. 2019, 2018, and 2017 include charge-offs of $1.3 billion, $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.
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, 2019, 43% 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, 2019. 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.
FREDDIE MAC | 2019 Form 10-K
84
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
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
2019
2018
Loan Count
Amount
Loan Count
Amount
290,255
30,568
(85,181)
(4,502)
231,140
1,600
232,740
$42,254
4,871
(14,016)
(605)
32,504
102
32,606
(2,872)
$29,734
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
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
2019
2018
2017
2016
As of December 31,
$32,188
11,183
$43,371
$2,452
597
$3,049
$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
Year Ended December 31,
2015
$82,026
22,460
$104,486
$12,105
2,677
$14,782
(In millions)
2019
2018
2017
2016
2015
Foregone interest income on TDRs and non-accrual loans(1)
$790
$1,122
$1,604
$2,109
$2,690
(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 and reperforming loans.
Relief Refinance Program
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 continued to purchase HARP loans with application received dates on or prior to December 31, 2018
through September 30, 2019.
FREDDIE MAC | 2019 Form 10-K
85
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
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.
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
As of December 31,
2019
2018
UPB
Loan Count
SDQ Rate
UPB
Loan Count
SDQ Rate
$15,906
31,072
52,020
70,752
$169,750
103,401
200,227
362,647
681,232
1,347,507
0.93%
0.96
0.76
0.43
0.64%
$18,847
37,084
61,843
83,647
$201,421
117,410
228,419
410,027
762,477
1,518,333
0.97%
0.93
0.77
0.42
0.64%
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 2019, 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 2019, 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 reduced level of loan workout activity in 2019 compared to 2018 was primarily driven by elevated loan workout activity in
2018 as a result of the hurricanes that occurred in late 2017.
When a seriously delinquent single-family loan cannot be resolved through an economically sensible home retention option, we
typically seek to pursue a foreclosure alternative or sale of the seriously delinquent loan. We pay servicers incentive fees for
each completed foreclosure alternative. In some cases, we provide cash relocation assistance to the borrower, while allowing
the borrower to exit the home in an orderly manner. We offer the following types of foreclosure alternatives:
Short sale - The borrower sells the property for less than the total amount owed under the terms of the loan. A short sale
is preferable to a borrower because we provide limited relief to the borrower from repaying the entire amount owed on the
loan. A short sale allows Freddie Mac to avoid the costs we would otherwise incur to complete the foreclosure and
subsequently sell the property.
Deed in lieu of foreclosure - The borrower voluntarily agrees to transfer title of the property to us without going through
formal foreclosure proceedings.
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 2019 compared to 2018, 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.
FREDDIE MAC | 2019 Form 10-K
86
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Home Retention Actions
Foreclosure Alternatives and Foreclosure Sales
The tables below contain credit characteristic data on our single-family modified loans.
Table 40 - Credit Characteristics of Single-Family Modified Loans
(Dollars in billions)
Loan Modifications
(Dollars in billions)
Loan Modifications
As of December 31, 2019
UPB
% of Portfolio
CLTV Ratio
SDQ Rate
$40.8
2%
64%
10.59%
As of December 31, 2018
UPB
% of Portfolio
CLTV Ratio
SDQ Rate
$55.4
3%
68%
9.16%
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:
Quarter of Loan Modification Completion
4Q 2018
3Q 2018
2Q 2018
1Q 2018
4Q 2017
3Q 2017
2Q 2017
1Q 2017
68%
76%
75%
66%
63%
60%
62%
62%
N/A
N/A
N/A
N/A
68
67
64
64
Servicing Transfers and Sales and Securitization of Certain Seasoned 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.
FREDDIE MAC | 2019 Form 10-K
87
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
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 2019 and 2018, we completed sales of $0.2 billion and $0.7 billion, respectively, in UPB of
seriously delinquent single-family loans. Of the $18.5 billion in UPB of single-family loans classified as held-for-sale at
December 31, 2019, $4.1 billion related to loans that were seriously delinquent. The FHFA requirements guiding these
transactions, including bidder qualifications, loan modifications, and performance reporting, are designed to improve borrower
outcomes.
Certain seriously delinquent loans may reperform, either on their own or through modification. In addition to sales of seriously
delinquent loans, we sell certain reperforming loans. Our sales of reperforming loans typically involve securitization of the loans
using our senior subordinate securitization structures. During 2019 and 2018, we sold $12.9 billion and $9.5 billion,
respectively, in UPB of reperforming loans through these structures. In prior years, we have securitized reperforming loans
using Level 1 Securitization Products, which may be resecuritized and sold to third parties subsequently. During 2018, we
securitized $1.6 billion in UPB of reperforming loans using this strategy. We did not execute any such transactions in 2019. Our
use of this strategy has declined over time with our primary strategy now utilizing senior subordinate securitization structures.
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, determine if repairs will be performed,
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 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) may not be as 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 below. At December 31, 2019, 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,
2019
2018
2017
Loan Count
Percent
Loan Count
Percent
Loan Count
Percent
26,063
7,416
5,336
24,997
3,928
1,981
51,060
11,344
7,317
69,721
37%
11
8
36
5
3
73
16
11
100%
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
100%
115,689
100%
FREDDIE MAC | 2019 Form 10-K
88
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
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 14%
during 2019.
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.
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,
2018
2017
2019
1,143
1,089
1,765
692
872
520
730
1,173
1,343
1,790
710
926
530
766
1,069
1,497
1,658
704
907
545
751
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 2019 primarily due to a decrease in REO acquisitions driven by the improved credit
quality of our portfolio, effective loss mitigation strategies, effective and innovative REO disposition 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
FREDDIE MAC | 2019 Form 10-K
Year Ended December 31,
2019
2018
2017
Number of
Properties
Amount
Number of
Properties
Amount
Number of
Properties
7,100
7,910
$780
786
8,299
10,442
$900
1,012
11,418
12,240
Amount
$1,215
1,191
(10,021)
(1,001)
(11,641)
(1,132)
(15,359)
(1,506)
4,989
565
(11)
1
(10)
$555
7,100
780
(14)
3
(11)
$769
8,299
900
(17)
3
(14)
$886
89
Management's Discussion and Analysis
Risk Management | Single-Family Mortgage Credit Risk
Severity Ratios
Severity ratios are the percentages of our realized losses when loans are resolved by the completion of REO dispositions and
third-party foreclosure sales or short sales. Severity ratios are calculated as the amount of our recognized losses divided by the
aggregate UPB of the related loans. The amount of recognized losses is equal to the amount by which the UPB of the loans
exceeds the amount of sales proceeds from disposition of the properties, net of capitalized repair and selling expenses, if
applicable. Loss severity excludes the cost of funding the loans after they are repurchased from the associated security pool.
The table below presents single-family severity ratios.
Table 45 - Single-Family Severity Ratios
REO dispositions and third-party foreclosure sales
Short sales
Year Ended December 31,
2018
2017
2019
21.7%
24.5
24.2%
26.6
27.2%
27.7
Our severity ratios declined during 2019 compared to 2018, primarily driven by home price appreciation as well as effective
cost control and disposition strategies.
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, 2019, approximately 27% 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 23% of the properties were being prepared for sale (i.e., valued, marketing strategies determined, and repaired). As of
December 31, 2019, approximately 30% of our REO properties were listed and available for sale, and 20% 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 234 days and 244 days for our REO dispositions during 2019 and 2018,
respectively.
FREDDIE MAC | 2019 Form 10-K
90
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 credit risk to third-party investors; 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 and Fannie Mae's DUS program. Under this approach, we maintain credit discipline by completing our
own underwriting and credit review for each new loan prior to issuing a loan purchase commitment, including reviewing third-
party appraisals and performing cash flow analysis. Our underwriting standards focus on the LTV ratio and DSCR, which
estimates a borrower's ability to repay the loan using the secured property's cash flows, 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.
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 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 purchase
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 amortize over a thirty-year period, but have shorter contractual maturity terms than single-
family loans, typically ranging from five to ten years. As a result, most multifamily loans require a balloon payment at maturity,
making a borrower's 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.
Occasionally, we may take on additional credit risk through the issuance of certain other securitizations when 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 underlying 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 primary securitizations, these other securitizations generally provide for structural
credit enhancements (e.g., subordination or other loss sharing arrangements) that allocate first loss exposure to third parties.
The table below presents the key risk characteristics of our multifamily new business activity.
Table 46 - Multifamily New Business Activity Key Risk Characteristics
Weighted average original LTV ratio
Original LTV ratio greater than 80%(1)
Original DSCR less than or equal to 1.10(1)
(1) Shown as a percentage of multifamily new business activity.
Year Ended December 31,
2019
2018
2017
68%
67%
68%
2
1
1
1
2
1
FREDDIE MAC | 2019 Form 10-K
91
Management's Discussion and Analysis
Risk Management | Multifamily Mortgage Credit Risk
Transferring Credit Risk to Third-Party Investors
Types of Credit Enhancements
In connection with the acquisition or securitization 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 and reduce our required conservatorship capital. For
example, at the time of loan acquisition, we may obtain recourse and/or indemnification protection from our lenders or sellers.
After acquisition, we primarily reduce our credit risk exposure to the underlying borrower by using one or more of our
securitization products.
The following table summarizes our principal types of credit enhancements. See Our Business Segments - Multifamily -
Business Overview - Products and Activities for additional information on our securitization and credit risk transfer products.
Category
Products
Subordination
Primary securitization products
Other securitization products:
• Securitizations of purchased collateral
• Securitizations of collateral contributed by third parties
Lender risk-sharing
Securitizations in which we issue fully guaranteed securities and
simultaneously enter into a separate loss sharing agreement.
Insurance/reinsurance MCIP
SCR
SCR notes
Credit Enhancement Coverage for Multifamily Mortgage Portfolio
CRT
Yes
Yes
No
Yes
Yes
Yes
Coverage Type
Back-end
Back-end
Front-end
Front-end
Back-end
Back-end
Accounting
Treatment
Attached
Attached/Debt
Attached
Freestanding
Freestanding
Debt
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 - Credit-Enhanced and Non-Credit-Enhanced Loans Underlying Our Multifamily Mortgage Portfolio
2019
% of
Portfolio
Delinquency
Rate
89%
11
100%
0.09%
—
0.08%
UPB
$267.0
33.1
$300.1
As of December 31,
2018
% of
Portfolio
Delinquency
Rate
87%
13
100%
0.01%
—
0.01%
UPB
$234.9
36.6
$271.5
2017
% of
Portfolio
Delinquency
Rate
82%
18
100%
0.01%
0.06
0.02%
UPB
$198.1
42.6
$240.7
(Dollars in billions)
Credit-enhanced
Non-credit-enhanced
Total
Our securitizations remain our principal risk transfer mechanism. Through securitizations, we have transferred a large majority of
the expected and stress credit risk on the multifamily guarantee portfolio, thereby reducing our overall credit risk exposure and
required conservatorship capital. Since 2009, we have transferred a portion of the credit risk related to $389.6 billion in UPB of
multifamily loans through our securitizations, primarily K Certificates and SB Certificates, and other credit risk transfer products.
The following table provides information on the level of subordination on our securitizations.
Table 48 - Level of Subordination on Our Securitizations
(Dollars in billions)
Subordination level at issuance
No subordination
Less than 10%
Greater than 10%
Total
FREDDIE MAC | 2019 Form 10-K
As of December 31,
2019
2018
UPB
Delinquency Rate
UPB
Delinquency Rate
$9.3
1.2
249.8
$260.3
— %
—
0.09
0.09 %
$7.7
3.1
216.1
$226.9
— %
—
0.01
0.01 %
92
Management's Discussion and Analysis
Risk Management | Multifamily Mortgage Credit Risk
The average remaining level of subordination on our outstanding primary securitizations was 14% at both December 31, 2019
and December 31, 2018, respectively. Since we began issuing our primary securitizations, we have not experienced credit
losses associated with our guarantees on these securities.
In addition to the credit enhancements listed above, we have various other credit enhancements related to our multifamily
unsecuritized loans, securitizations, and other mortgage-related guarantees, in the form of collateral posting requirements, pool
insurance, bond insurance, loss sharing agreements, and other similar arrangements, that along with the proceeds received
from the sale of the underlying mortgage collateral, are designed to enable us to recover all or a portion of our losses on our
mortgage loans or the amounts paid under our financial guarantee contracts. Our historical losses paid under our guarantee
contracts and related recoveries pursuant to these agreements have not been significant. 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 continue to develop other strategies to reduce our credit risk exposure to multifamily loans and securities. See Our
Business Segments - Multifamily - Business Overview - Products and Activities - Securitization and Guarantee
Products for additional information.
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.
Our primary credit risk exposure 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 than loans we hold for investment and are generally covered by
general seller representations and warranties. For unsecuritized loans, we may offer a workout option to give the borrower an
opportunity to bring the loan current and retain ownership of the property, such as providing a short-term extension of up to 12
months. These arrangements are entered into with the expectation that we will recover our initial investment or minimize our
losses. We do not enter into these arrangements in situations where we believe we would experience a loss in the future that is
greater than or equal to the loss we would experience if we foreclosed on the property at the time of the agreement. Our
multifamily loan modification and other workout activities have been minimal in the last three years.
FREDDIE MAC | 2019 Form 10-K
93
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 49 - Multifamily Mortgage Portfolio Attributes
(Dollars in billions)
Unsecuritized loans
Securitization-related products
Other mortgage-related guarantees
Total
Unsecuritized HFI loans
Original LTV ratio
Below 75%
75% to 80%
Above 80%
Total
Weighted average LTV ratio at origination
Maturity dates
2019
2020
2021
2022
2023
Thereafter
Total
REO Activity
As of December 31,
2019
2018
UPB
Delinquency Rate
UPB
Delinquency Rate
$29.8
260.3
10.0
$300.1
$7.7
2.5
0.6
$10.8
68%
N/A
$1.2
1.1
1.0
0.8
6.7
$10.8
0.01%
0.09
0.09
0.08%
—%
—
—
—%
N/A
—%
—
—
—
—
$34.8
226.9
9.8
$271.5
$7.1
3.0
0.7
$10.8
69%
$1.7
1.5
1.8
1.4
1.1
3.3
—%
$10.8
0.01%
0.01
—
0.01%
—%
—
—
—%
—%
—
—
—
—
—
—%
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, 2019, 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.
FREDDIE MAC | 2019 Form 10-K
94
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 the Financial
Intermediaries, Clearinghouses, and Other Counterparties - Other Counterparties - Forward Settlement Counterparties
section below.
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
FREDDIE MAC | 2019 Form 10-K
95
Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
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 50 - Single-Family Credit Guarantee Portfolio Non-Depository Servicers
Top five non-depository servicers
Other non-depository servicers
Total
As of December 31,
2019
% of Serious
Delinquent Single-
Family Loans
% of Portfolio(1)
2018
% of Serious
Delinquent Single-
Family Loans
% of Portfolio(1)
18%
20
38%
13%
55
68%
16%
20
36%
17%
40
57%
(1) Excludes loans where we do not exercise control over the associated servicing.
Working with Underperforming Counterparties and Limiting Our Losses from Their Nonperformance of
Obligations, When Possible
We actively manage the current quality of loan originations of our largest single-family sellers by performing loan quality control
sampling reviews and communicating loan defect rates and the causes of those defects to such sellers on a monthly basis. If
necessary, we work with these sellers to develop an appropriate plan of corrective action.
We use a variety of tools and techniques to engage our single-family sellers and servicers and limit our losses, including the
following:
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 $0.3 billion and $0.4 billion at December 31, 2019
and December 31, 2018, 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. 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 enhancements.
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 insurance/reinsurance CRT 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 transaction, we require the individual insurers and reinsurers to post collateral to cover portions of their exposure,
which helps to promote certainty and timeliness of claim payment and
FREDDIE MAC | 2019 Form 10-K
96
Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
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 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 the Private Mortgage Insurer Eligibility 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, 2019. 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 51 - 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)
Credit Rating
Outlook(1)
As of December 31, 2019
UPB
Coverage
A-
BBB+
BBB+
BB+
BBB+
BBB
Not Rated
Not Rated
Not Rated
N/A
Stable
Stable
Stable
Watch Dev
Stable
Stable
N/A
N/A
N/A
N/A
$93,440
84,434
73,371
63,071
63,865
37,147
2,889
2,156
1,241
256
$421,870
$23,956
21,397
18,845
16,139
16,260
9,476
723
536
312
46
$107,690
(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, 2019. 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 evaluated the planned acquisition and approved China Oceanwide Holdings
Group's control of Genworth Mortgage Insurance Corporation. In January 2020, Freddie Mac reapproved the acquisition.
Regulatory and other approvals of the acquisition are still 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, 2019, 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.
FREDDIE MAC | 2019 Form 10-K
97
Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
Single Security Initiative
The Single Security Initiative has increased our counterparty credit risk exposure to Fannie Mae. With the implementation of the
Single Security Initiative, we now have the ability to commingle TBA-eligible Fannie Mae collateral in certain of our
resecuritization products. When we resecuritize Fannie Mae securities in our commingled resecuritization products, our
guarantee covers timely payments of principal and interest on such securities. If Fannie Mae were to fail to make a payment on
a Fannie Mae security that we resecuritized, we would be responsible for making the payment to the securities holders. Our
pricing does not currently reflect any incremental credit, liquidity, or operational risk associated with our guarantee of
resecuritized Fannie Mae securities. 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.
For additional information on the Single Security Initiative and the associated risks, see MD&A - Our Business Segments -
Single-Family Guarantee and Risk Factors.
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, 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 or our counterparty's credit rating by S&P or Moody's may increase our or our counterparty's
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 or materially
amended after that date require posting of variation margin without the application of any thresholds. Our OTC derivative
transactions will become subject to new initial margin requirements on September 1, 2020.
FREDDIE MAC | 2019 Form 10-K
98
Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
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.
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 52 - 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, 2019
Number of
Counterparties
Fair Value -
Gain positions
Fair Value -
Gain positions,
net of collateral
2
12
—
14
2
16
$17
2,563
—
2,580
139
$2,719
$9
11
—
20
262
$282
Approximately 99% 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, 2019. 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, 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 maximum exposure under these transactions, as this
FREDDIE MAC | 2019 Form 10-K
99
Management's Discussion and Analysis
Risk Management | Counterparty Credit Risk
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, 2019, the
gross fair value of such forward purchase and sale commitments that were in derivative asset positions was $50 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 securities that they will deliver to us. 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 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.
FREDDIE MAC | 2019 Form 10-K
100
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 methodology includes risk identification, measurement, monitoring, controlling, 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 the risks associated with business processes, each business line periodically completes an
assessment using the RCSA methodology. The methodology 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 methodology 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 and models; volume and complexity of business initiatives, including the UMBS and new
initiatives 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. We also continue to manage other operational risks, such as compliance risk.
While our operational risk profile remains elevated, we are continuing to strengthen our operational control environment by
building out our operational risk resources within the first line of defense and ERM.
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, expanded use of a third-party
cloud platform for our business applications, as well as continuous technological transformation to achieve recovery of critical
business functions and supporting assets in the event of a business disruption.
Internal Processes and New Initiatives
We periodically make improvements to the design of our processes 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 and support 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. Regarding 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.
In January 2020, FHFA directed Freddie Mac and Fannie Mae to amend the CSS LLC agreement to change the structure of the
CSS Board. These changes reduce Freddie Mac’s and Fannie Mae’s ability to control CSS Board decisions, even after
conservatorship, including decisions about strategy, business operations, and funding. During conservatorship, FHFA will
designate a CSS Board Chair that must affirmatively vote for all decisions of the CSS Board in order for the decisions to
become effective, and FHFA also may appoint up to three additional independent members to the CSS Board, who along with
FREDDIE MAC | 2019 Form 10-K
101
Management's Discussion and Analysis
Risk Management | Operational Risk
the Board Chair and the Chief Executive Officer of CSS may continue to serve on the CSS Board after conservatorship. FHFA
appointed a new CSS Board member to serve as Chair in January 2020. If FHFA appoints three additional CSS Board
members, the four members appointed by Freddie Mac and Fannie Mae will constitute a minority of the CSS Board. During
conservatorship, the CSS Board members we and Fannie Mae appoint could be outvoted by non-GSE designated Board
members on any matter, and if either we or Fannie Mae exits conservatorship, the GSE-appointed members could be outvoted
on a number of significant actions, including approval of the annual budget and strategic plan for CSS, so long as it does not
involve material decisions, such as a material change in CSS’s functionality or capital contributions beyond those necessary to
support CSS’s ordinary business operations. For additional information on the changes in the structure of CSS and CSS-related
risks, see Introduction - About Freddie Mac - Common Securitization Platform and UMBS and Risk Factors -
Conservatorship and Related Matters - 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.
Following the implementation of CSP Release 2 in June 2019, Freddie Mac, Fannie Mae, FHFA, and CSS continue to work
together to monitor the operational effectiveness of the platform.
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 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 systems, networks, and other technology assets against unauthorized attempts to access
confidential information or to disrupt or degrade our business operations. We have obtained insurance coverage relating to
cybersecurity risks. However, this insurance may not be sufficient to provide adequate loss coverage. Although to date we have
not experienced any cyberattacks resulting in significant impact to the company, there is no assurance that our cybersecurity
risk management program will prevent cyberattacks from having significant impacts in the future.
For additional information, see Risk Factors - Operational Risks - Potential cybersecurity threats are changing rapidly
and growing in sophistication. We may not be able to protect our systems or the confidentiality of our information from
cyberattack and other unauthorized access, disclosure, and disruption.
Third-Party Risk
We continue to enhance our third-party risk management program in order to effectively manage risks that could manifest with
the use of third parties to support business processes. Third parties overseen within the program include suppliers, seller/
servicers, and other counterparties. The third-party risk management program provides oversight and governance throughout
the third party life cycle including risk assessment, due diligence, contract negotiations, on-going monitoring, and termination
of third parties.
Model Risk
Model risk is 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. ERM 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 2019, we concluded work on the following items:
FREDDIE MAC | 2019 Form 10-K
102
Management's Discussion and Analysis
Risk Management | Operational Risk
New Model Risk Standard with enhanced governance protocols;
Formalized model key risk indicators with an associated model risk appetite; and
Design completion of a peer review process serving as a secondary control within the model risk function.
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.
Compliance Risk
We have established and continue to enhance our legal and compliance risk management program in order to effectively
manage the risk of non-compliance with legal and regulatory requirements. This program leverages the three lines of defense
enterprise risk framework for managing operational risks. It entails, among other things, identifying applicable legal and
regulatory requirements as well as any changes to these requirements, educating employees on new and existing legal and
regulatory requirements applicable to their areas of responsibility, and evaluating business processes and controls in light of
applicable legal obligations and related compliance risks.
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, 2019. As of December 31, 2019, we had one material weakness related to conservatorship,
which remained unremediated, causing us to conclude that our disclosure controls and procedures were not effective at a
reasonable level of assurance. For additional information, see Controls and Procedures.
FREDDIE MAC | 2019 Form 10-K
103
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), the debt we
issue to fund our assets, and upfront fees (including buy-downs) related to our single-family credit guarantee activity. 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.
Another source of interest-rate risk comes from upfront fees (including buy-downs) related to our single-family credit guarantee
activity. These fees are cash we receive at loan acquisition as compensation for our guarantee, which also typically includes a
contractual monthly fee paid as a percentage of the UPB of the underlying loan. Determining the amount of the upfront fees we
charge requires us to estimate loan prepayment activity, which varies based on estimates of future interest rates. From an
interest-rate risk standpoint, receiving upfront fees increases risk as the actual prepayment rate of the loans we purchase may
be different than our original estimates and may vary based on changes in interest rates. As interest rates decrease, loans
typically prepay more quickly, resulting in accelerated recognition of upfront fees in earnings and a higher annualized rate of
income. The opposite occurs as interest rates increase, resulting in slower recognition of upfront fees in earnings and a lower
annualized rate of income. We incorporate upfront fees in our interest-rate risk metrics by assuming upfront fees are equivalent
to the sale of an interest-only security, allowing for modeling and aggregation of the interest-rate exposure of upfront fees with
the rest of our interest-rate exposures.
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.
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 certain assets, 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.
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,
FREDDIE MAC | 2019 Form 10-K
104
Management's Discussion and Analysis
Risk Management | Market Risk
potentially affecting expected future cash flows and their present values. This is reflected in our PVS-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 PVS-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.
In 1Q 2019, we changed the name of the Portfolio Market Value Sensitivity (PMVS) metrics to Portfolio Value Sensitivity (PVS).
We removed "market" from these metrics as we economically hedge the present value of cash flows, which may not
necessarily be the fair value of an instrument. In the case of upfront fees, we assume upfront fees are equivalent to the sale of
an interest-only security, allowing for modeling and aggregation of the interest-rate exposure of upfront fees with the rest of our
interest-rate exposures.
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 PVS.
Duration gap - The net effective duration of our overall portfolio of interest-rate sensitive assets and liabilities is expressed
in months as our duration gap. Duration gap measures the difference in price sensitivity to interest rate changes between
our financial assets and liabilities and is expressed in months relative to the 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.
PVS - PVS is our estimate of the change in the 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. PVS is measured in two
ways, one measuring the estimated sensitivity of our portfolio's value to a 50 basis point parallel movement in interest rates
(PVS-L) and the other to a nonparallel movement (PVS-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 PVS
measures reflect reasonably possible near-term changes that we believe provide a meaningful measure of our interest-rate
risk sensitivity.
To calculate PVS, the interest rate shock is applied to the duration (and convexity for PVS-L) of all interest-rate sensitive
financial instruments. The resulting change in value for the aggregate portfolio is computed for both the up rate and down
FREDDIE MAC | 2019 Form 10-K
105
Management's Discussion and Analysis
Risk Management | Market Risk
rate shock, and whichever produces the more adverse outcome is the PVS. In cases where both the up rate and down rate
shocks result in a positive effect, the PVS is zero. PVS results are shown on a pre-tax basis.
Interest-Rate Risk Results
The following tables provide our duration gap, estimated point-in-time and minimum and maximum PVS-L and PVS-YC results,
and an average of the daily values and standard deviation. The tables below also provide PVS-L estimates assuming an
immediate 100 basis point shift in the LIBOR yield curve. The interest-rate sensitivity of a mortgage portfolio varies across a
wide range of interest rates.
We began to include upfront fees (including buy-downs) in our interest-rate metrics in 2Q 2019 as described above. Including
upfront fees and related derivative activities significantly increased the Derivatives PVS-L and PVS-YC results for December 31,
2019 in the table below, with an offsetting impact in the Guarantees PVS-L and PVS-YC results. As of December 31, 2019, the
inclusion of upfront fees interest rate risk added a PVS-L (50 basis points), PVS-L (100 basis points) and PVS-YC (25 basis
points) equivalent of $1.4 billion, $2.7 billion and $0.4 billion, respectively.
Table 53 - PVS-YC and PVS-L Results Assuming Shifts of the LIBOR Yield Curve
(In millions)
Assuming shifts of the LIBOR yield curve,
(gains) losses on:(1)
Assets:
Investments
Guarantees(2)
Total Assets
Liabilities
Derivatives
Total
PVS
(1)
December 31, 2019
PVS-L
50 bps
100 bps
PVS-YC
25 bps
December 31, 2018
PVS-L
50 bps
100 bps
PVS-YC
25 bps
($307)
(224)
(531)
20
513
$2
$2
$4,840
351
5,191
(1,563)
(3,646)
($18)
$—
$10,011
706
10,717
(3,413)
(7,409)
($105)
$—
($536)
89
(447)
(109)
560
$4
$4
$5,792
$11,761
(425)
5,367
(1,889)
(3,446)
$32
$32
(773)
10,988
(3,948)
(6,917)
$123
$123
The categorization of the PVS 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.
(2)
Represents the interest-rate risk from our single-family guarantee portfolio, which includes buy-ups, float, and, beginning in 2Q 2019, upfront fees (including buy-
downs).
Table 54 - Duration Gap and PVS Results
(Duration gap in months, dollars in millions)
Average
Minimum
Maximum
Standard deviation
Duration
Gap
2019
PVS-YC
25 bps
Year Ended December 31,
PVS-L
50 bps
Duration
Gap
2018
PVS-YC
25 bps
PVS-L
50 bps
0.8
(0.8)
8.6
1.6
$34
—
345
72
$96
—
950
189
—
(0.4)
0.3
0.1
$11
—
31
6
$15
—
77
16
The disclosure in our Monthly Volume Summary reports, which are available on our website www.freddiemac.com/investors/
financials/monthly-volume-summaries.html, reflects the average of the daily PVS-L, PVS-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 PVS-L risk levels,
assuming a 50 basis point shift in the LIBOR yield curve for the periods presented, would have been higher if we had not used
derivatives.
FREDDIE MAC | 2019 Form 10-K
106
Management's Discussion and Analysis
Risk Management | Market Risk
Table 55 - PVS-L Results Before Derivatives and After Derivatives
(In millions)
December 31, 2019
December 31, 2018
PVS-L (50 bps)
Before
Derivatives
After
Derivatives
Effect of
Derivatives
$3,628
3,478
$—
32
($3,628)
(3,446)
In April 2019, we updated our interest-rate risk measures and began incorporating upfront fees (including buy-downs) related to
single-family credit guarantee activity into our asset and liability interest-rate risk management strategy and definition. As a
result, the PVS-L before derivatives is significantly higher as of December 31, 2019 than it would have been if we had not
updated our interest-rate risk management strategy and definition to include upfront fees.
The inclusion of upfront fees increased the volume of derivatives we used to hedge interest-rate risk, and this higher volume of
derivatives, coupled with the volatility of market interest rates during the period, created variability in our PVS-L during 2019.
The table below shows the average, minimum, and maximum PVS-L before derivatives and after derivatives during 2019.
Table 56 - PVS-L Average, Minimum, and Maximum
(In millions)
Average
Minimum
Maximum
Year Ended December 31, 2019
PVS-L (50bps)
Before Derivatives
After Derivatives
$3,739
3,155
4,384
$96
—
950
Limitations of Interest-Rate Risk Measures
While we believe that PVS 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 PVS 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.
PVS 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 PVS 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 modeled 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 net worth and 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 upfront fees (including buy-downs), buy-ups, float, and STACR debt notes. Float,
which arises from timing differences between the borrower's principal payments on the loan and the reduction of the
FREDDIE MAC | 2019 Form 10-K
107
Management's Discussion and Analysis
Risk Management | Market Risk
security balance, can lead to significant interest expense if the interest rate paid to a security 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.
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 mortgage-related investments, including loans and securities, and certain non-mortgage
investments;
Market spread risk arising from our use of SOFR- 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 mortgage loan through our
pipeline path and when we either securitize the loan or hedge it by using forward TBA securities or derivatives. During this
time, market spreads can widen, causing losses due to changes in fair value.
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. We manage this
variability of GAAP earnings, which may not reflect the economics of our business, using fair value hedge accounting.
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 subject to significant earnings variability from period to period based on changes in market conditions.
Based upon the composition of our financial assets and liabilities, including derivatives, at December 31, 2019, 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
elect hedge accounting for certain single-family mortgage loans and certain debt instruments. Beginning in September 2019,
we implemented a new fair value hedge accounting strategy using single-family mortgage loans that applies certain hedge
accounting elections allowable under amended hedge accounting guidance we adopted during 4Q 2017. See Note 9 for
additional information on hedge accounting.
GAAP Adverse Scenario
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, 2019, the GAAP adverse scenario (for both before and after fair value hedge accounting) was a parallel
shift in which rates 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.
The results of this evaluation are shown in the table below.
Table 57 - GAAP Adverse Scenario Before and After Hedge Accounting
(Dollars in billions)
December 31, 2019
December 31, 2018
FREDDIE MAC | 2019 Form 10-K
GAAP Adverse Scenario (Before-Tax)
Before Hedge Accounting After Hedge Accounting
% Change
($4.3)
(2.7)
($0.1)
(0.2)
98%
93
108
Management's Discussion and Analysis
Risk Management | Market Risk
The additional volume of derivatives from updating our interest-rate risk measures to include upfront fees (including buy-downs)
related to single-family credit guarantee activity, and the volatility in market interest rates during 2019 created variability in our
GAAP adverse scenarios. While the December 31, 2019 GAAP adverse scenario shows a 98% reduction after hedge
accounting, this result includes the effect of the new hedge accounting strategy implemented in September 2019, which was
not in effect for the entire year. As a result, the average GAAP adverse scenario after hedge accounting was higher during 2019
than it was as of December 31, 2019. With the implementation of the new hedge accounting strategy in September 2019, we
expect the GAAP adverse scenario after hedge accounting in future periods to be similar to the result as of December 31, 2019.
The table below shows the average, minimum, and maximum GAAP adverse scenario before hedge accounting and after hedge
accounting during 2019.
Table 58 - GAAP Adverse Scenario Average, Minimum, and Maximum
(In billions)
Average
Minimum
Maximum
Year Ended December 31, 2019
GAAP Adverse Scenario (Before-Tax)
Before Hedge Accounting
After Hedge Accounting
($3.6)
(2.1)
(5.2)
($0.4)
—
(1.8)
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.
Net Interest Rate Effect on Comprehensive Income (Loss)
The table below presents the effect of derivatives used in our interest-rate risk management activities on our comprehensive
income (loss), 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.
Table 59 - 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,
2019
2018
($7.3)
3.6
3.6
(0.3)
0.1
($0.3)
$2.5
(1.9)
(1.6)
0.3
0.1
($0.6)
(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.
The effect from the change in interest rates on derivative fair values is mostly offset by the effect from the change in interest
rates related to financial instruments measured at fair value and gains and losses on mortgage loans and debt in fair value
hedging relationships. However, the estimated net interest rate effect on comprehensive income (loss) in 2019 was higher than
it otherwise would have been as a result of the additional volume of derivatives and volatility in market interest rates during
2019. The remaining net interest-rate effect on comprehensive income is largely attributable to the following:
The reversal of previously recognized derivative gains and losses;
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, which are recognized in GAAP earnings over time as a component of
derivative gains and losses as the instruments approach maturity; and
The amortization of previously deferred hedge accounting gains and losses, which we recognize in interest income over the
contractual life of the hedged item.
FREDDIE MAC | 2019 Form 10-K
109
Management's Discussion and Analysis
Risk Management | Market Risk
Spread Volatility
We have limited ability to manage our spread risk exposure and therefore the volatility of market spreads may contribute to
significant GAAP earnings variability. For financial assets measured at fair value, we generally recognize fair value losses when
market spreads widen. Conversely, for financial liabilities measured at fair value, we generally recognize fair value gains when
market spreads widen. Certain accounting elections we make, such as election of the fair value option, may affect the amount
of spread volatility recognized in our results of operations.
The table below shows the estimated effect of spreads on our comprehensive income (loss), after tax, by segment.
Table 60 - Estimated Spread Effect on Comprehensive Income (Loss)
(In billions)
Capital Markets
Multifamily(1)
Single-family Guarantee
Spread effect on comprehensive income (loss)
Year Ended December 31,
2019
2018
$0.2
(0.3)
—
($0.1)
$0.4
(0.4)
0.1
$0.1
(1)
Represents the net spread-related fair value impacts due to changes in spreads on loans and commitments where we have elected the fair value option, mortgage-
related securities, and spread-related derivatives.
For further discussion of significant financial results related to spread risk, see Our Business Segments - Multifamily and
Our Business Segments - Capital Markets.
Transition from LIBOR
In 2017, the Chief Executive of the United Kingdom's Financial Conduct Authority (FCA) announced that the FCA will no longer
persuade or compel member panel banks to make LIBOR submissions after 2021. He has also indicated that market
participants should expect LIBOR to be subsequently discontinued, or at least to no longer be deemed representative of market
interest rates, and should proceed expeditiously with preparations for transitioning to an alternative reference interest rate. U.S.
regulators have made similar statements. As a result, it is likely that LIBOR will be discontinued as a benchmark interest rate
after 2021.
Freddie Mac has exposure to LIBOR, including in financial instruments that mature after 2021. Our exposure arises from floating
rate securities we issue, loans and securities we acquire (including loans we subsequently resecuritize), and derivatives we
enter into that reference LIBOR.
Senior management is actively evaluating and managing risks related to the LIBOR transition. To help prepare for an orderly
transition from LIBOR, we established a LIBOR Working Group in 2018 that consists of members from the different business
areas as well as the Legal and ERM divisions. We also have formed LIBOR transition committees across our businesses,
functions, and products. Senior management and the LIBOR Working Group provide periodic updates to the Board and are
working with FHFA on our transition implementation.
The Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee
(ARRC) to recommend a set of alternative reference interest rates for possible use as market-accepted benchmarks. Based on
the ARRC's recommendation, the Federal Reserve Bank of New York began publishing SOFR 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-accepted benchmark. We
have been a member of the ARRC since 2017 and have participated in many of its working groups.
We support the ARRC’s recommendation to replace LIBOR with SOFR. We have issued SOFR-based unsecured debt, and we
have executed SOFR-based interest-rate swaps and futures transactions. In December 2019, we conducted an offering of
multifamily K certificates that included a class of floating rate certificates indexed to SOFR. The transition from LIBOR will affect
our new purchases of single-family hybrid ARMs. For example, in July 2019, we announced that we will work with our
customers, investors, and servicers to transition existing LIBOR-based ARM products to SOFR-based ARM products by the
end of 2021. In November 2019, we announced that, in coordination with FHFA and Fannie Mae, we intend to offer our lenders
the opportunity to deliver a suite of SOFR-based ARM products that will be based on eligibility, underwriting, pricing, and
delivery requirements which we intend to announce in an update to our Seller/Servicer Guide in 2020.
On February 5, 2020, we announced that we will no longer purchase single-family ARMs and multifamily floating-rate loans tied
to LIBOR with an application date on or after October 1, 2020. In addition, we will no longer purchase single-family ARMs and
multifamily floating-rate loans tied to LIBOR after December 31, 2020, regardless of the application date or mortgage date. We
FREDDIE MAC | 2019 Form 10-K
110
Management's Discussion and Analysis
Risk Management | Market Risk
will begin purchasing multifamily floating-rate loans tied to SOFR by November 1, 2020. We also announced our plans to
purchase single-family ARMs tied to SOFR in the second half of 2020. Finally, we announced our intention to develop plans to
cease purchasing single-family ARMs tied to constant maturity Treasury indices, which we anticipate will be implemented in
2021 upon guidance from FHFA. Our purchases of single-family ARMs and multifamily floating-rate loans may decrease after
these changes are implemented as affected market participants may need more time to develop the systems and processes
necessary to originate and sell ARMs and floating-rate loans tied to SOFR or any other new indices that may be developed.
For a discussion of the risks related to the LIBOR transition, see Risk Factors - Market Risk - The discontinuance of
LIBOR after 2021, or before the end of 2021 if LIBOR is deemed unreliable, 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, subject us to increased litigation risk, and result in market disruption. We may be
unable to take a consistent approach across our financial products.
FREDDIE MAC | 2019 Form 10-K
111
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;
Interest income on securities and loans that we own;
Guarantee fees (inclusive of initial upfront fees);
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;
Payments of interest on our other debt and other expenses;
Purchases of mortgage loans, including purchases of seriously delinquent or modified loans underlying our securities,
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.
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.
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
FREDDIE MAC | 2019 Form 10-K
112
Management's Discussion and Analysis
Liquidity and Capital Resources
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.
Liquidity Profile
Primary Sources of Liquidity
The following table lists the sources of our liquidity, the balances as of December 31, 2019 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 61 - Sources of Liquidity
Source
Balance(1)
(In billions)
Description
Liquidity
•
•
Other Investments Portfolio -
Liquidity and Contingency
Operating Portfolio
Liquid Portion of the Mortgage-
Related Investments Portfolio
$68.0 •
The Liquidity and Contingency Operating Portfolio, included within our other
investments portfolio, is primarily used for short-term liquidity management.
$124.4 •
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 is 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.
Table 62 - Other Investments Portfolio
As of December 31, 2019
As of December 31, 2018
Liquidity and
Contingency
Operating
Portfolio
Custodial
Account
$4.2
40.6
23.2
—
$0.9
23.1
—
—
Other
$0.1
2.4
3.9
5.2
Total Other
Investments
Portfolio(1)
Liquidity and
Contingency
Operating
Portfolio
Custodial
Account
Other
Total Other
Investments
Portfolio(1)
$5.2
66.1
27.1
5.2
$6.7
20.2
16.8
—
$0.6
12.1
—
—
$—
2.5
2.4
1.8
$7.3
34.8
19.2
1.8
$68.0
$24.0
$11.6
$103.6
$43.7
$12.7
$6.7
$63.1
(In billions)
Cash and cash equivalents
Securities purchased under
agreements to resell
Non-mortgage related securities
Secured lending and other
Total
(1) Represents carrying value.
Our non-mortgage-related investments in the Liquidity and Contingency Operating Portfolio consist of U.S. Treasury securities
and other investments that we could sell to provide us with an additional source of liquidity to fund our business operations. We
also maintain non-interest-bearing deposits at the Federal Reserve Bank of New York and interest-bearing deposits at
commercial banks. Our interest-bearing deposits at commercial banks totaled $3.7 billion and $1.5 billion as of December 31,
2019 and December 31, 2018, respectively.
FREDDIE MAC | 2019 Form 10-K
113
Management's Discussion and Analysis
Liquidity and Capital Resources
The Liquidity and Contingency Operating Portfolio also included collateral posted to us in the form of cash primarily by
derivatives counterparties of $2.6 billion and $3.0 billion as of December 31, 2019 and December 31, 2018, 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, 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.
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, 2019 and a brief description of their
importance to Freddie Mac.
Table 63 - Funding Sources
Source
Other Debt
Debt Securities of Consolidated
Trusts
Funding
•
•
Balance(1)
(In billions)
$281.2
$1,898.4
•
•
(1) Represents carrying value of debt balances.
Other Debt Activities
Description
Other debt is used to fund our business activities, including single-family
guarantee activities not funded by debt securities of consolidated trusts.
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.
We issue other debt to fund our operations. Competition for funding can vary with economic, financial market, and regulatory
environments.
During 2019, 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
55.2% and 42.7% as of December 31, 2019 and December 31, 2018, respectively.
Beginning January 1, 2019, our debt cap under the Purchase Agreement is $300.0 billion. As of December 31, 2019, our
aggregate indebtedness, calculated as the par value of other debt, was $283.2 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.html.
FREDDIE MAC | 2019 Form 10-K
114
Management's Discussion and Analysis
Liquidity and Capital Resources
To fund our business activities, we depend on the continuing willingness of investors to purchase our debt securities. 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.
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 64 - 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 Debt and SCR Debt Notes(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, 2019
Long-term
Average Rate(1)
Average Rate(1)
$28,787
369,992
—
(337,949)
60,830
6,019
325,512
(321,689)
9,842
2,000
13,590
—
(14,590)
—
1,000
14,440
48,984
(345)
(23,671)
39,408
—
—
—
—
—
2.36%
2.05
—
2.20
1.67
2.40
2.04
2.07
1.46
2.53
2.48
—
2.52
—
2.36
2.04
2.34
1.87
2.19
2.31
—
—
—
—
—
$—
—
—
—
—
—
—
—
—
105,206
107,544
—
(95,172)
(23,426)
94,152
80,789
15,774
(869)
(33,465)
62,229
17,729
723
—
(2,956)
15,496
—%
—
—
—
—
—
—
—
—
2.09
2.38
—
2.65
1.35
2.03
2.56
2.43
1.87
1.68
2.86
6.02
2.09
—
4.49
5.55
$111,080
1.89%
$171,877
2.65%
FREDDIE MAC | 2019 Form 10-K
115
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 Debt and SCR Debt(2)
Beginning balance
Issuances
Repurchases
Maturities
Ending Balance
Total other debt
Short-term
Year Ended December 31, 2018
Long-term
Average Rate(1)
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%
(1)
(2)
Average rate is weighted based on par value.
STACR debt notes 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.
FREDDIE MAC | 2019 Form 10-K
116
Management's Discussion and Analysis
Liquidity and Capital Resources
Our outstanding other debt balance increased during 2019, driven by an increase in the issuance of short-term SOFR debt
primarily due to a higher mortgage loan pipeline forecast, coupled with near-term cash needs for upcoming debt maturities and
anticipated calls. Our STACR debt balances should continue to decline as run off will primarily be replaced with STACR Trust
note transactions.
During 2019, 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, 2019, $72 billion of the outstanding $95 billion of callable debt may be called within one year, not including
callable debt due to contractually mature within one year.
Other Short-Term Debt
The tables below contain details on the characteristics of our other short-term debt.
Table 65 - Other Short-Term Debt
(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.
As of December 31, 2019
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
$60,629
40,405
9,843
$110,877
1.67%
2.31
1.46
1.89%
$44,675
29,781
9,928
2.16%
2.36
2.16
$60,629
43,096
14,114
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
FREDDIE MAC | 2019 Form 10-K
117
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, 2019(1)
Earliest Redemption Date as of December 31, 2019(1)
(1)
STACR Debt Notes 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 $1,940.5 billion and
$1,842.9 billion of mortgage loans, which represented 88.1% and 89.3% of our total assets, as of December 31, 2019 and
December 31, 2018, respectively.
The debt securities issued by the securitization trusts, the majority of which 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 securities. We
recognized $1,898.4 billion and $1,792.7 billion of debt securities of consolidated trusts, which represented 87.1% and
87.7% of our total debt, as of December 31, 2019 and December 31, 2018, respectively.
Debt securities of our consolidated trusts represent our liability to third parties that hold beneficial interests in our consolidated
securitization trusts. 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. At December 31, 2019, 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.
FREDDIE MAC | 2019 Form 10-K
118
Management's Discussion and Analysis
Liquidity and Capital Resources
The table below shows the issuance and extinguishment activity for the debt securities of our consolidated trusts.
Table 66 - 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,
2019
$1,748,738
2018
$1,672,605
323,860
178,971
502,831
(30,306)
(46,670)
(319,791)
(396,767)
1,854,802
43,553
$1,898,355
185,877
190,207
376,084
(41,453)
(25,220)
(233,278)
(299,951)
1,748,738
43,939
$1,792,677
The table below provides information on the UPB of debt securities issued by our consolidated trusts.
Table 67 - Debt Securities of Consolidated Trusts Held by Third Parties
(In millions)
Single-family
Level 1 Securitization Products:
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 Level 1 Securitization Products
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
As of December 31,
2019
2018
$1,563,211
80,340
241,835
38,271
4,828
1,718
1,930,203
2,397
1,932,600
8,642
1,941,242
(86,440)
$1,854,802
$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
FREDDIE MAC | 2019 Form 10-K
119
Management's Discussion and Analysis
Liquidity and Capital Resources
Credit Ratings
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 January 31, 2020.
Table 68 - Freddie Mac Credit Ratings
Senior long-term debt
Short-term debt
Subordinated debt
Preferred stock(1)
Outlook
Nationally Recognized Statistical Rating
Organization
Moody's
Aaa
P-1
Aa2
Ca
Stable
S&P
AA+
A-1+
AA
D
Stable
Fitch
AAA
F1+
AA-
C
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.
Cash Flows
2019 vs. 2018 - Cash and cash equivalents (including restricted cash and cash equivalents) decreased by $2.1 billion from
$7.3 billion as of December 31, 2018 to $5.2 billion as of December 31, 2019, as we invested the proceeds from issuances
of other debt in securities purchased under agreements to resell due to higher near-term cash needs for upcoming debt
maturities and anticipated calls of other debt and a higher expected loan purchase forecast.
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.
Capital Resources
Primary Sources of Capital
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, 2019, 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 $9.1 billion as of December 31, 2019 and the applicable
Capital Reserve Amount of $20.0 billion, we will not have a dividend requirement to Treasury for the quarter ending December
31, 2019. Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference on
the senior preferred stock. See Introduction - About Freddie Mac - Conservatorship and Government Support for Our
Business for more information.
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 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 $119.7 billion as of December 31, 2019.
The aggregate liquidation preference of the senior preferred stock owned by Treasury was $79.3 billion and the amount of
available funding remaining under the Purchase Agreement was $140.2 billion as of December 31, 2019. To the extent we draw
FREDDIE MAC | 2019 Form 10-K
120
Management's Discussion and Analysis
Liquidity and Capital Resources
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.
The CECL accounting standard relating to the measurement of credit losses on financial instruments became effective as of
January 1, 2020. CECL replaces the incurred loss impairment methodology with a methodology that reflects lifetime expected
credit losses. We expect to recognize a decrease to retained earnings of $0.2 billion from our adoption of CECL on January 1,
2020. See Note 1 for additional information about our adoption of CECL.
The table below presents activity related to our net worth.
Table 69 - 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
Year Ended December 31,
2019
2018
2017
$4,477
7,787
—
(3,142)
$9,122
$71,648
119,680
($312)
8,622
312
(4,145)
$4,477
$71,648
116,538
$5,075
5,558
—
(10,945)
($312)
$71,336
112,393
Conservatorship Capital Framework
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, a 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.
We use the CCF to evaluate business decisions and ensure the company makes such decisions prudently when pricing
transactions and managing its businesses. This framework focuses on return on conservatorship capital versus an estimated
cost of equity capital needed to support the risk assumed to generate those returns.
The CCF has been and may be further revised by FHFA from time to time, including 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,
and, thus, our returns on conservatorship capital. In November 2019, FHFA announced that it plans to re-propose the
Enterprise Capital Rule in 2020.
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 and the September 2019 Letter Agreement, we are not able to retain equity, as calculated
under GAAP, in excess of the $20.0 billion Capital Reserve Amount. As a result, we do not have capital sufficient to support our
aggregate risk-taking activities.
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.
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 net worth limit imposed since 2012 under the Purchase
Agreement.
FREDDIE MAC | 2019 Form 10-K
121
Management's Discussion and Analysis
Liquidity and Capital Resources
Table 70 - Returns on Conservatorship Capital(1)
(Dollars in billions)
GAAP comprehensive income
Significant items:
Non-agency mortgage-related securities judgment(2)
Tax effect related to judgment(2)
Total significant items(3)
Comprehensive income, excluding significant items(3)
Conservatorship capital (average during the period)(4)
ROCC, based on GAAP comprehensive income(4)
Adjusted ROCC, based on comprehensive income excluding significant items(3)(4)
Year Ended December 31,
2019
2018
$7.8
$8.6
—
—
—
$7.8
$51.8
15.0%
15.0%
(0.3)
0.1
(0.2)
$8.4
$56.6
15.2%
14.8%
(1)
(2)
Average conservatorship capital and ROCC for 2019 are preliminary and subject to change until official submission to FHFA.
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) No significant items were identified for 2019. Numbers for 2019 are included for comparison purposes only.
(4)
Average conservatorship capital for each period is based on the CCF in effect during the period. The CCF in effect as of December 31, 2019, was largely unchanged
from the CCF as of December 31, 2018.
ROCC and Adjusted ROCC for 2019 were relatively flat compared to the returns for 2018, primarily driven by the decrease in
comprehensive income, partially offset by the lower level of conservatorship capital needed, resulting from an increase in CRT
activity in both the Single-family Guarantee and Multifamily segments, home price appreciation, the efficient disposition of
legacy assets, and a decrease in our deferred tax assets.
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 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.
FREDDIE MAC | 2019 Form 10-K
122
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.
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. The 2017 Letter Agreement increased the aggregate liquidation
preference of the senior preferred stock by $3.0 billion on December 31, 2017. In addition, pursuant to the September 2019
Letter Agreement, the liquidation preference of the senior preferred stock will be increased, at the end of each fiscal quarter,
beginning September 30, 2019, by an amount equal to the increase in the Net Worth Amount, if any, during the immediately
prior fiscal quarter, until the liquidation preference has increased by $17.0 billion. As of December 31, 2019, the aggregate
liquidation preference of the senior preferred stock was $79.3 billion, and the amount of available funding remaining under the
Purchase Agreement was $140.2 billion.
FREDDIE MAC | 2019 Form 10-K
123
Management's Discussion and Analysis
Conservatorship and Related Matters
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 2017 Letter Agreement, the dividend for the dividend period from October 1, 2017 through
and including December 31, 2017 was reduced to $2.25 billion, and the applicable Capital Reserve Amount from January 1,
2018 through June 30, 2019 was $3.0 billion. Pursuant to the September 2019 Letter Agreement, from July 1, 2019 and
thereafter, the applicable Capital Reserve Amount is $20.0 billion. As a result of the net worth sweep dividend, our future profits
in excess of the applicable Capital Reserve Amount will be distributed to Treasury, and the holders of our common stock and
non-senior preferred stock will not receive benefits that could otherwise flow from such future profits. If for any reason we were
not to pay the amount of our dividend requirement on the senior preferred stock in full, the unpaid amount would be added to
the liquidation preference and our applicable Capital Reserve Amount would thereafter be zero, but this would not affect our
ability to draw funds from Treasury under the Purchase Agreement.
The senior preferred stock is senior to our common stock and all other outstanding series of our preferred stock, as well as any
capital stock we issue in the future, as to both dividends and rights upon 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:
Since 2014, we have been managing the mortgage-related investments portfolio so that it does not exceed 90% of the
cap, which reached $250 billion as of December 31, 2018. In February 2019, FHFA directed us to maintain the mortgage-
related investments portfolio at or below $225 billion at all times.
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, 2019, our aggregate indebtedness for purposes of the debt cap
was $283.2 billion.
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, 2019 are shown below.
FREDDIE MAC | 2019 Form 10-K
124
Management's Discussion and Analysis
Conservatorship and Related Matters
Mortgage Assets as of December 31,
Indebtedness as of December 31,
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.
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 | 2019 Form 10-K
125
Management's Discussion and Analysis
Conservatorship and Related Matters
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. In February 2019, FHFA directed us to maintain this portfolio at or below $225 billion
at all times. In November 2019, FHFA directed us, by January 31, 2020, to include 10% of the notional value of certain interest-
only securities owned by Freddie Mac in the calculation of this portfolio, while continuing to maintain the portfolio below the
limit imposed by FHFA.
Table 71 - Mortgage-Related Investments Portfolio Details
(Dollars in millions)
Liquid
As of December 31, 2019
Securitiz-
ation
Pipeline
Less
Liquid
As of December 31, 2018
Securitiz-
ation
Pipeline
Less
Liquid
Total
Total
Liquid
Capital Markets segment - Mortgage
investments portfolio
Single-family unsecuritized loans
Performing loans
Reperforming loans
Total single-family unsecuritized loans
Agency securities
Non-agency mortgage-related securities
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
$— $19,144
—
—
19,144
—
$— $19,144
26,134
45,278
26,134
26,134
$—
—
—
119,156
—
—
—
2,518
1,458
121,674
113,848
1,458
—
$8,955
—
8,955
—
—
$—
39,402
39,402
3,108
2,122
$8,955
39,402
48,357
116,956
2,122
119,156
19,144
30,110
168,410
113,848
8,955
44,632
167,435
—
—
8,589
8,589
—
—
8,473
8,473
—
5,209
5,209
18,531
—
18,531
11,254
680
11,934
29,785
5,889
35,674
—
6,570
6,570
23,203
—
23,203
11,584
815
12,399
34,787
7,385
42,172
$124,365
$37,675
$50,633
$212,673
$120,418
$32,158
$65,504
$218,080
58%
18%
24%
100%
55%
15%
30%
100%
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 2019. Our active
dispositions of less liquid assets included the following:
Sales of $13.6 billion of less liquid assets, including $0.5 billion in UPB of single-family non-agency mortgage-related
securities, $0.2 billion in UPB of seriously delinquent unsecuritized single-family loans, and $12.9 billion in UPB of single-
family reperforming loans, which use our senior subordinate securitization structures;
Securitizations of $3.9 billion in UPB of less liquid multifamily loans; and
Transfers of $1.9 billion in UPB of less liquid multifamily loans to the securitization pipeline.
FHFA's Strategic Plan and Scorecards for Freddie Mac and Fannie
Mae Conservatorships
In October 2019, FHFA issued its 2019 Strategic Plan. The 2019 Strategic Plan described FHFA's new direction to reform the
housing finance system and Freddie Mac and Fannie Mae.
The 2019 Strategic Plan established three reformulated strategic goals for the conservatorships of Freddie Mac and Fannie
Mae:
Focus on their core mission responsibilities to foster competitive liquid, efficient, and resilient (CLEAR) national housing
finance markets that support sustainable homeownership and affordable rental housing;
FREDDIE MAC | 2019 Form 10-K
126
Management's Discussion and Analysis
Conservatorship and Related Matters
Operate in a safe and sound manner appropriate for entities in conservatorship; and
Prepare for their eventual exits from the conservatorship.
FHFA has also published annual Conservatorship Scorecards for Freddie Mac and Fannie Mae, which establish annual
objectives as well as performance targets and measures since 2014. FHFA issued the 2019 Conservatorship Scorecard in
December 2018. FHFA issued the 2020 Conservatorship Scorecard in October 2019, which aligns with the reformulated
strategic goals of the 2019 Strategic Plan. We continue to align our resources and internal business plans to meet the goals and
objectives provided by FHFA.
For information about how the Conservatorship Scorecard affects executive compensation, 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 information about the 2020 Conservatorship Scorecard, see our Current
Report on Form 8-K filed on October 29, 2019.
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 - Board and Committee Information - Authority of the Board and Board Committees.
FREDDIE MAC | 2019 Form 10-K
127
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 scenarios specified by FHFA that reflect certain economic and financial conditions
and publicly disclose the results of the stress test under the "severely adverse" scenario. In August 2019, 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 2018.
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
FREDDIE MAC | 2019 Form 10-K
128
Management's Discussion and Analysis
Regulation and Supervision
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.
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 mortgage 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.
We may achieve a single-family or multifamily housing goal by meeting or exceeding the FHFA benchmark for that goal (Goal).
We also may achieve a single-family goal by meeting or exceeding the actual share of the market that meets the criteria for that
goal (Market Level).
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.
2018 Affordable Housing Goal Results and Housing Plan
In December 2019, FHFA informed us that, for 2018, we achieved all five of our single-family affordable housing goals and all
three of our multifamily goals. Our performance compared to our goals, as determined by FHFA for 2018 and 2017, is set forth
below.
Table 72 - 2018 and 2017 Affordable Housing Goals Results
Affordable Housing Goals
Single-family purchase money goals
Low-income
Very low-income
Low-income areas
Low-income areas subgoal
Single-family refinance low-income goal
Multifamily low-income goal (In units)
Multifamily very low-income subgoal (In units)
Multifamily small property low-income subgoal (In units)
Goals
2018
Market
Level
Results
Goals
24%
6%
18%
14%
21%
315,000
60,000
10,000
25.5%
6.5%
22.6%
18.0%
30.7%
N/A
N/A
N/A
25.8%
6.3%
22.6%
17.3%
27.3%
24%
6%
18%
14%
21%
474,062
105,612
39,353
300,000
60,000
10,000
2017
Market
Level
24.3%
5.9%
21.5%
17.1%
25.4%
N/A
N/A
N/A
Results
23.2%
5.7%
20.9%
16.4%
24.8%
408,096
92,274
39,473
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. FHFA has not required us to extend our housing plan beyond 2018. Although FHFA has determined
that we met our affordable housing goals in 2018, FHFA will continue to closely monitor and evaluate our 2019 housing goals
performance.
FREDDIE MAC | 2019 Form 10-K
129
Management's Discussion and Analysis
Regulation and Supervision
2019-2020 Affordable Housing Goals
Our affordable housing goals for 2019 and 2020 are set forth below.
Table 73 - 2019-2020 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)
2019
2020
24%
6%
19%
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 2019 affordable housing goals in March 2020. At this time, based on
preliminary information, we believe we met all five of our single-family goals and our three multifamily goals for 2019. We expect
that FHFA will make a final determination on our 2019 performance following the release of market data in 2020.
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 20, 2019, FHFA published Freddie Mac's modified underserved markets plan for 2018-2020. FHFA
evaluated Freddie Mac's performance under the plan for 2018 and determined it was satisfactory.
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 2019, we completed $529.1 billion of new business purchases subject to this requirement and accrued $222.2 million of
related expense, of which $144.4 million is related to the Housing Trust Fund administered by HUD and $77.8 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.
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.
FREDDIE MAC | 2019 Form 10-K
130
Management's Discussion and Analysis
Regulation and Supervision
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 2019 and 2018, 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 October 2019, Treasury released its 2019 Strategic Plan, which includes a goal of
reforming the housing finance system and ending the conservatorships of Freddie Mac and Fannie Mae.
Consumer Financial Protection Bureau
The CFPB regulates consumer financial products and services. The CFPB adopted a number of final rules relating to loan
origination, finance, and servicing practices that generally went into effect in January 2014. The rules include an ability-to-repay
rule, which requires loan originators to make a reasonable and good faith determination that a borrower has a reasonable ability
to repay the loan according to its terms. This rule provides certain protection from liability for originators making loans that
satisfy the definition of a qualified mortgage. The ability-to-repay rule applies to most loans acquired by Freddie Mac, and for
loans covered by the rule, FHFA has directed us to limit our single-family acquisitions to loans that generally would constitute
qualified mortgages under applicable CFPB regulations. The directive generally restricts us from acquiring loans that are not
fully amortizing, have a term greater than 30 years, or have points and fees in excess of 3% of the total loan amount. Under
CFPB rules, one category of qualified mortgages consists of loans that are eligible for purchase or guarantee by either Freddie
Mac or Fannie Mae. This category of qualified mortgages is scheduled to expire in January 2021, although the CFPB has
indicated that it may permit an extension of this category of qualified mortgages. The CFPB also has indicated that it intends to
amend the ability-to-repay rule, including by making revisions to the definition of qualified mortgage.
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.
FREDDIE MAC | 2019 Form 10-K
131
Management's Discussion and Analysis
Regulation and Supervision
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 FHFA, and it is possible, and perhaps
likely, that there will be significant changes beyond the near-term.
Several bills have been introduced in past 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 CRT transactions. None of these bills have been enacted. It is likely that
similar or new bills will be introduced and considered in the future. We cannot predict whether any of such bills will be enacted.
Treasury Housing Reform Plan
On September 5, 2019, Treasury released its plan to reform the housing finance system pursuant to the goals specified in the
presidential memorandum issued on March 27, 2019. The Treasury Housing Reform Plan (the Plan) includes 49 recommended
legislative and administrative reforms that would advance the reform goals outlined in the presidential memorandum: ending the
conservatorships of the GSEs, facilitating competition in the housing finance system, establishing regulation of the GSEs that
safeguards their safety and soundness and minimizes the risks they pose to the financial stability of the United States, and
providing that the federal government is properly compensated for any explicit or implicit support it provides to the GSEs or the
secondary housing finance market.
Among other things, Treasury states that its preference and recommendation is for Congress to enact comprehensive housing
finance reform legislation. Specifically, the Plan indicates that legislative reforms should replace the existing Purchase
Agreements with an explicit, paid-for guarantee backed by the full faith and credit of the federal government that is limited to
the timely payment of principal and interest on qualifying MBS. The explicit government guarantee should be available to re-
chartered GSEs and to any other FHFA-approved guarantors of MBS collateralized by eligible conventional mortgage loans or
eligible multifamily mortgage loans. Further, the government’s guarantee would stand behind significant first-loss private capital
and would be triggered only in exigent circumstances.
To ensure stability in the housing finance system pending comprehensive housing finance reform legislation, the Plan indicates
that it will be necessary to maintain limited and tailored government support for the GSEs by leaving the Purchase Agreement
commitments in place after the GSE conservatorships. The Plan notes that the government should be compensated for its
continued support through a periodic commitment fee.
The Plan also indicates that FHFA should begin the process of ending the GSE conservatorships. It recommends that the
Purchase Agreements be amended to enhance Treasury’s ability to mitigate the risk of a draw on the commitments after the
conservatorships have ended. It also indicates that other Purchase Agreement amendments should ensure that each GSE
continues to be subject to appropriate mission and safety and soundness regulation after conservatorship and that future GSE
activities are limited to those that have a close nexus to the underlying rationale for government support.
Treasury has indicated that it will continue to support FHFA’s administrative actions to enhance regulation of the GSEs, promote
private sector competition, and satisfy preconditions for ending the GSEs’ conservatorships. We cannot predict whether
Congress will enact legislation or FHFA will take administrative action that is consistent with these recommendations.
FREDDIE MAC | 2019 Form 10-K
132
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, 2019. 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, 2019 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, 2019 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 securities 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 and payments to support the interest due on STACR Trust notes, because the amount and
timing of such payments are contingent upon the occurrence of future events on the reference pool of mortgage loans and
are therefore uncertain;
Future cash payments associated with the liquidation preference of the senior preferred stock, the quarterly commitment
fee (which has been suspended), and dividends on the senior preferred stock;
Future cash settlements on derivative agreements not yet accrued, because the amount and timing of such payments are
dependent upon items such as changes in interest rates;
Future dividends on outstanding preferred stock (other than the senior preferred stock), because dividends on these
securities are non-cumulative and because we are currently prohibited from paying dividends on these securities; and
The guarantee payments and commitments to advance funds pertaining to off-balance sheet arrangements.
Table 74 - Contractual Obligations
(In millions)
Other long-term debt(1)
Other short-term debt(1)
Interest payable(2)
Other contractual liabilities reflected on our
consolidated balance sheets(3)
Purchase obligations:
Purchase commitments(4)
Other purchase obligations(5)
Lease obligations
Total specified contractual obligations
Total
$156,381
111,080
20,933
2020
$45,133
111,080
10,066
2021
$30,069
—
2,345
2022
$23,185
—
1,828
2023
$13,413
—
1,461
2024
$26,966
—
1,159
Thereafter
$17,615
—
4,074
3,243
2,550
386
94
8
9
196
47,381
380
93
$339,491
44,559
170
17
$213,575
1,128
96
13
$34,037
1,315
56
10
$26,488
379
29
8
$15,298
—
20
8
$28,162
—
9
37
$21,931
(1)
(2)
(3)
(4)
Represents par value. Callable debt is included in this table at its contractual maturity. For additional information about our debt, see Note 8.
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.
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. Future cash payments for certain purchase commitments are based on the
contractual maturity date.
(5)
Primarily includes unconditional purchase obligations that are legally binding and that are subject to a cancellation penalty.
FREDDIE MAC | 2019 Form 10-K
133
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 $296.5 billion and $254.9 billion at
December 31, 2019 and December 31, 2018, respectively. The amount as of December 31, 2019 excludes Fannie Mae
securities backing Freddie Mac resecuritization products discussed below.
With the implementation of the Single Security Initiative, we now have the ability to commingle TBA-eligible Fannie Mae
collateral in certain of our resecuritization products. When we resecuritize Fannie Mae securities in our commingled
resecuritization products, our guarantee covers timely payments of principal and interest on such securities. Accordingly,
commingling Fannie Mae collateral in our resecuritization transactions increases our off-balance sheet exposure as we do not
have control over the Fannie Mae collateral.
As of December 31, 2019, the total amount of our off-balance sheet exposure related to Fannie Mae securities backing Freddie
Mac resecuritization products was approximately $27.4 billion. We expect this exposure to increase over time.
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 $5.5 billion and $6.7 billion at December 31, 2019 and December 31, 2018, 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, 2019 and December 31, 2018, 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 commitments totaled $450.1 billion and $382.1 billion in notional value at
December 31, 2019 and December 31, 2018, 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.
FREDDIE MAC | 2019 Form 10-K
134
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 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.
FREDDIE MAC | 2019 Form 10-K
135
Management's Discussion and Analysis
Critical Accounting Policies and Estimates
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.
FREDDIE MAC | 2019 Form 10-K
136
Risk Factors
Risk Factors
Conservatorship and Related Matters
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 past 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 CRT 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 September 2019, Treasury released a plan
to reform the housing finance system, which includes recommended legislative and administrative reforms that would advance
the reform goals outlined in the presidential memorandum issued in March 2019, including ending the conservatorships of
Freddie Mac and Fannie Mae, facilitating competition in the housing finance system, establishing regulation of the GSEs that
safeguards their safety and soundness and minimizes the risks they pose to financial stability, and providing that the federal
government is properly compensated for any explicit or implicit support it provides to the GSEs or the secondary housing
finance market. 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.
FHFA and the Administration have announced that ending the conservatorships of Freddie Mac and Fannie Mae
is one of their goals for housing finance reform. It remains uncertain whether or when, and the terms under
which, we may exit from conservatorship.
We continue to take steps to help prepare Freddie Mac for a potential exit from conservatorship. We continue to increase our
capital level as a result of the increase in the applicable Capital Reserve Amount under the Purchase Agreement to $20.0 billion.
However, the increases in our capital level since September 30, 2019 pursuant to the September 2019 Letter Agreement have
been or will be added to the aggregate liquidation preference of the senior preferred stock. In addition, in order to raise a
sufficient level of capital, the applicable Capital Reserve Amount will need to be further increased or the terms of the senior
preferred stock will need to be otherwise amended to allow us to retain and/or raise capital through equity offerings. It is
uncertain whether or when we will be able to retain or raise sufficient capital for FHFA to end our conservatorship, and this may
not happen for several years or at all. It is also uncertain whether our level of capital will be the only factor FHFA considers in
deciding whether or when to end our conservatorship.
If we were to exit from conservatorship, our post-conservatorship capital, legal, and governance structure and the terms of our
exit are unclear. In order to build sufficient capital, we may need to raise private capital through the issuance of new equity
securities. The terms of any new securities offered, such as any new classes of preferred stock, could be onerous and could
adversely affect long-term profitability. It may not be possible for us to raise private capital on acceptable terms, if at all, and
may be particularly challenging so long as the senior preferred stock and warrant held by Treasury remain outstanding. In
addition, actions taken by Treasury with respect to the senior preferred stock or exercise of the warrant could adversely affect
FREDDIE MAC | 2019 Form 10-K
137
Risk Factors
Conservatorship and Related Matters
our ability to raise capital. Treasury’s imposition of a commitment fee for its ongoing support of our business could adversely
affect our profitability and ability to raise private capital.
Further, actions taken by FHFA, the Administration, or Congress, pursuant to the Treasury Housing Reform Plan or otherwise,
could change or limit our business activities, operations, or competitive landscape, which could adversely affect our business
or financial results and render us a less attractive investment opportunity.
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, which is currently $20.0 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 activities;
Restrictions on the volume of multifamily business we may conduct or other limits on multifamily business activities that
could reduce our income from these activities;
Adverse changes in our liquidity, 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 loss mitigation efforts and foreclosure and REO activities;
Changes in accounting policies, practices, or guidance (e.g., our adoption of CECL);
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 have been costly and difficult to implement, such as our support of 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.
FREDDIE MAC | 2019 Form 10-K
138
Risk Factors
Conservatorship and Related Matters
FHFA also has required us to take other actions that may adversely affect our business or financial results, such as directing us
to amend the CSS LLC agreement in January 2020. These amendments, which expanded the size of the CSS Board and
removed the requirement that any CSS Board decision must be approved by at least one of the CSS Board members
appointed by Freddie Mac, reduce our ability to control CSS Board decisions, even after conservatorship, including decisions
about strategy, business operations, and funding. Under the revised CSS LLC agreement, the CSS Board will continue to
include two Freddie Mac representatives and two Fannie Mae representatives, and it will also include two new members: the
Chief Executive Officer of CSS and an independent, non-Executive Chair. During conservatorship, the CSS Board Chair will be
designated by FHFA, and all CSS Board decisions will require the affirmative vote of the Board Chair. During conservatorship,
FHFA also may appoint up to three additional independent members to the CSS Board, who along with the Board Chair and the
Chief Executive Officer of CSS may continue to serve on the CSS Board after conservatorship. If FHFA appoints three
additional CSS Board members, the CSS Board members we and Fannie Mae appoint could be outvoted by non-GSE
designated Board members on any matter during conservatorship and on a number of significant matters, including approval of
the annual budget and strategic plan for CSS (so long as they do not involve a material business change or involve capital
contributions beyond those necessary to support CSS's ordinary business operations), if either we or Fannie Mae exits from
conservatorship. It is possible that FHFA may require us to make additional changes to the CSS LLC agreement, or may
otherwise impose restrictions or provisions relating to CSS or the UMBS, that may adversely affect us.
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,
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. The cap on our mortgage-related investments
portfolio may, at times, force us to sell mortgage assets at unattractive prices. There can be no assurance 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
FREDDIE MAC | 2019 Form 10-K
139
Risk Factors
Conservatorship and Related Matters
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.
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.
Our business and results of operations may be materially adversely affected if we are unable to attract and retain
well-qualified, talented employees across the company. The conservatorship, the uncertainty of our future, and
limitations on our compensation structure may put us at a disadvantage compared to other companies in
attracting and retaining employees.
Our business is highly dependent on the talents and efforts of our employees. We face competition, particularly from the
financial services and technology industries, for qualified talent. If we are unable to attract and retain talent, we increase our risk
of operational failures.
Restrictions on employee compensation have been and may be imposed on us, while we remain in conservatorship, by
Congress, FHFA, or Treasury. For example, FHFA as Conservator has the authority to approve the terms and amount of our
executive compensation and may require us to make changes to our executive compensation program. In August 2019, FHFA
directed us to limit base salaries for all of our employees to $600,000, and in September 2019, FHFA directed us to obtain
conservator approval for any compensation arrangements for newly hired employees where the proposed target total direct
compensation is $600,000 or above, or any increase in target total direct compensation for existing employees where the
proposed target total direct compensation is $600,000 or above. These limitations on our employee compensation structure, as
well as the ongoing conservatorship and uncertainty about our future, could have an adverse effect on our ability to attract and
retain talent.
High-level departures, or a combination of such departures at approximately the same time, could materially adversely affect
our business, results of operations, and financial condition. For example, turnover in key management positions and challenges
in integrating new management could harm our ability to manage our business effectively and successfully implement our and
FHFA’s current strategic initiatives and could adversely affect our financial performance.
FREDDIE MAC | 2019 Form 10-K
140
Risk Factors
Credit Risk
CREDIT RISK
We are subject to mortgage credit risk. Credit losses and 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. We
also expect to continue 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 eligible borrowers'
access to single-family mortgage credit, including our 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, 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 suite of tools, collectively referred to as Loan Advisor, offers limited representation and warranty relief for certain loan
components that satisfy automated data analytics 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 Loan
Advisor 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 Prudent Underwriting Standards and Quality Control Practices
and Managing Seller/Servicer Performance.
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;
Negatively affect loan pricing, which could cause us to change our disposition strategies for our single-family seasoned
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
FREDDIE MAC | 2019 Form 10-K
141
Risk Factors
Credit Risk
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,
credit enhancement providers, and counterparties to derivatives, short-term lending, and other funding transactions (e.g., 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. It is possible that our counterparties could
experience challenging market conditions that could adversely affect their liquidity and financial condition and cause some of
them to fail. Many of our counterparties are subject to increasingly complex regulatory requirements and oversight, which place
additional stress on their resources and may affect their ability or willingness to do business with us.
Credit risk related to 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, in a highly adverse economic environment, there could be a scarce capacity in the marketplace and 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. There is also a
possibility that the performance of some loans may degrade during the transition to new servicers. During a period of
heightened delinquencies, we may incur costs and potential increases in servicing fees if we replace a servicer with a high
concentration of loans in default which are more costly to service. 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 is acquired from and serviced by non-depository and smaller financial institutions. Some of 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. These institutions also service portfolios for other investors and guarantors and
operational issues related to those portfolios could affect the performance of our portfolio. 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 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
FREDDIE MAC | 2019 Form 10-K
142
Risk Factors
Credit Risk
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, securities, 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, securities, 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 credit enhancement providers
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 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 the
prepayment behavior of our and Fannie Mae's respective 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 costs.
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
FREDDIE MAC | 2019 Form 10-K
143
Risk Factors
Credit Risk
borrowers' payments may increase the risk that these borrowers will default.
The type of loss mitigation activities we pursue could affect prepayments on our UMBS, 55-day MBS, 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 -
- Business Results - 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
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,
other catastrophic event, or significant climate change effects.
The occurrence of a major natural or environmental disaster or similar catastrophic event, as well as significant climate change
effects such as rising sea levels or wildfires, 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 or other significant climate change effect 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 natural, catastrophic, or climate
change-related events.
Our CRT transactions may not be available to us in adverse economic conditions. These transactions also lower
our profitability.
We are increasingly using CRT 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 CRT transactions at acceptable prices during a housing downturn. Some of our CRT
transactions are new, and it is uncertain if there will be adequate demand for them over the long term. Some of these
transactions use 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.
FREDDIE MAC | 2019 Form 10-K
144
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 reduce the
interest-rate volatility in our GAAP earnings. 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. Even if
implemented properly, our hedge accounting programs may not be effective in reducing earnings volatility, and our hedges may
fail in any given future period, which could expose us to significant earnings variability in that period. In addition, changes in fair
value of the hedged item related to discontinued fair value hedges that we have recognized on our consolidated balance sheet
are amortized into earnings over the contractual life of the associated asset or liability and may adversely affect our earnings in
future periods.
Changes in market spreads could negatively affect the fair value of financial assets and liabilities, our results of
operations, and net worth.
Changes in market conditions, including changes in interest rates, liquidity, prepayment, and/or default expectations and the
level of uncertainty in the market for a particular asset class, may cause fluctuations in market spreads (also referred to as
OAS). Our financial results and net worth can be significantly affected by changes in market spreads, especially results driven
by financial instruments that are measured at fair value. These instruments include trading securities, available-for-sale
securities, 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 UMBS 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.
FREDDIE MAC | 2019 Form 10-K
145
Risk Factors
Market Risk
The discontinuance of LIBOR after 2021, or before the end of 2021 if LIBOR is deemed unreliable, 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, subject us to increased
litigation risk, and result in market disruption. We may be unable to take a consistent approach across our
financial products.
We are not able to predict whether LIBOR will actually cease to exist after 2021, whether SOFR will become the market-
accepted benchmark in its place, or what impact such a transition may have on our business, results of operations, and
financial condition. The transition from LIBOR could affect the financial performance of instruments we hold, require changes to
hedging strategies, and adversely affect our financial performance. 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 many of these products that will mature after 2021. While the documentation for certain of these
products provides us with discretion to select an alternative reference rate if LIBOR is discontinued, there is a possibility of
disputes arising with investors and counterparties concerning our exercise of this discretion. In certain cases, the
documentation may not provide us with discretion to select an alternative reference rate if LIBOR is discontinued or our
discretion may be limited, creating uncertainty and the risk of legal disputes. These potential challenges in implementing
alternative reference rates could result in investors and counterparties acquiring fewer products and entering into fewer
transactions, which could adversely affect our business. The large volume of products and transactions that may require
changes to documentation or remediation could present substantial operational and legal challenges and result in significant
costs. We may be unable to have a consistent approach to a LIBOR transition, including within a particular class of products,
which could disrupt the market for that product. It is possible that actions we take in connection with the discontinuance of
LIBOR, including the adoption of an alternative reference rate for certain products, could subject us to basis risk, monetary
losses, and possible litigation.
The use of SOFR as the alternative reference rate for LIBOR-based products currently presents certain market concerns.
Among the concerns, a term structure for SOFR has not yet been developed and there is not yet a generally accepted
methodology for adjusting SOFR so that it will be substantially comparable to LIBOR. SOFR represents an overnight, risk-free
rate, whereas LIBOR has various tenors and reflects a credit risk component. There is no guarantee that a market-accepted
term structure for SOFR will exist prior to any discontinuance of LIBOR. In addition, recent volatility in the SOFR index has
raised concerns among certain market participants about the transition to SOFR as an alternative reference rate. It is uncertain
what other rates might be appropriate to use and how soon widespread market adoption of SOFR will occur. Although the
majority of the single-family ARMs and multifamily floating-rate loans that we currently purchase is tied to LIBOR, we also
currently purchase single-family ARMs tied to constant maturity Treasury indices published by the Federal Reserve Board. On
February 5, 2020, we announced that we will cease purchasing single-family ARMs and multifamily floating-rate loans tied to
LIBOR in 4Q 2020, and we announced our intention to develop a plan to cease purchasing single-family ARMs tied to constant
maturity Treasury indices, which we anticipate will be implemented in 2021 upon guidance from FHFA. It is uncertain how long
it will take affected market participants to develop the systems and processes necessary to originate and sell ARMs and
floating-rate loans tied to SOFR or any other new indices that may be developed, which may cause a reduction in our purchase
of single-family ARMs and multifamily floating-rate loans after these changes are implemented. 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 adversely affect us, including by exposing us to increased basis risk
and resulting in increased costs in connection with our hedging and other business activities.
As described above, we have identified material exposures to LIBOR but cannot reasonably estimate the expected impact of
such exposure. For additional information regarding the actions we have taken to prepare for an orderly transition from LIBOR,
see MD&A - Risk Management - Market Risk - Transition from LIBOR.
FREDDIE MAC | 2019 Form 10-K
146
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 these new initiatives. Internal corporate reorganizations, such as the VERP, may also increase our
operational risk, particularly during the period of implementation.
We also face significant risks related to CSS and the operation and continued development of the CSP. We rely on CSS and the
CSP (which is owned and operated by CSS) for the operation of our single-family securitization activities. 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.
We update our internal systems and processes on a regular basis, including to improve existing processes and respond to
market and regulatory developments. We could be adversely affected if CSS and/or the CSP are unable to make any necessary
corresponding changes to their systems and processes in a timely manner.
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, these processes may not 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 or around our offices or affecting the power grid, such as
from a terrorist event, active shooter, 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.
FREDDIE MAC | 2019 Form 10-K
147
Risk Factors
Operational Risks
Potential cybersecurity threats are changing rapidly and growing in sophistication. We may not be able to protect
our systems or the confidentiality of our information from cyberattack and other unauthorized access, disclosure,
and disruption.
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.
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 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, these measures may not 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, our cybersecurity
risk management program may not 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, 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, customers,
counterparties, financial intermediaries, and governmental organizations may not be 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.
FREDDIE MAC | 2019 Form 10-K
148
Risk Factors
Operational Risks
We rely on third parties for certain important functions. Any failures by those vendors and service providers (or
other third parties that work for the vendors/service providers) could disrupt our business operations or expose
us to loss of confidential information or intellectual property.
Our use of third-party 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 UMBS issuance and
administration (i.e., CSS). We may enter into other key outsourcing relationships in the future and continue to expand our
existing reliance on 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 third-party service providers 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
third-party 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 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.
FREDDIE MAC | 2019 Form 10-K
149
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. Our practices and procedures
may not 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.
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.
At such time as our Net Worth Amount exceeds the applicable Capital Reserve Amount of $20.0 billion, 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
FREDDIE MAC | 2019 Form 10-K
150
Risk Factors
demand for, debt issued by Treasury.
Liquidity Risks
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 three nationally
recognized statistical rating organizations (S&P, Moody's, and Fitch). These ratings are primarily based on the support we
receive from Treasury, and therefore are affected by changes in the credit ratings of the U.S. government. Any downgrade in the
credit ratings of the U.S. government would be expected to be followed or accompanied by a downgrade in our credit ratings.
In addition to a downgrade in the credit ratings of or outlook on the U.S. government, 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.
FREDDIE MAC | 2019 Form 10-K
151
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.
In particular, changes to our capital requirements could adversely affect our business and risk management strategies,
including our risk appetite, our risk-adjusted returns such as ROCC, and the impact of our CRT transactions on our capital
needs. Changes to our capital requirements could also negatively affect our ability to build capital to a level which FHFA would
deem sufficient to end our conservatorship, such as by extending the time it will take for us to retain or raise such level of
capital. Our existing regulatory capital requirements have been suspended by FHFA during conservatorship, but we have
adopted FHFA’s risk-based CCF guidelines to evaluate and manage our financial risk and to make economic business
decisions while in conservatorship. The CCF has been and may be further revised by FHFA from time to time, including in
connection with FHFA’s consideration and adoption of a final Enterprise Capital Rule, which could result in material changes in
the capital needed under the CCF during conservatorship as well as the capital requirements which will be applicable to us
after conservatorship. In November 2019, FHFA announced that it plans to re-propose the Enterprise Capital Rule in 2020. We
do not know what changes to the Enterprise Capital Rule FHFA may propose or eventually adopt.
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 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 securities and/or affect competition in the market for
loan originations and servicing, with possible adverse consequences for our business and financial results. 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 modifying 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.
FREDDIE MAC | 2019 Form 10-K
152
Risk Factors
Legal and Regulatory Risks
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 determined
that we met our affordable housing goals in 2018. However, FHFA will continue to closely monitor and evaluate our 2019
housing goal performance 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 | 2019 Form 10-K
153
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.
A significant decline in the price performance of or demand for our UMBS could have an adverse effect on the
volume and/or profitability of our new single-family guarantee business.
Historically, the price performance of our Gold PCs (the predecessor to the UMBS) relative to comparable Fannie Mae-issued
securities was one of Freddie Mac’s more significant risks and competitive issues. On June 3, 2019, in connection with the
implementation of the Single Security Initiative, we ceased issuing Gold PCs and commenced issuing UMBS and non-TBA-
eligible 55-day MBS. While the Single Security Initiative and the UMBS (which may be issued by Freddie Mac or Fannie Mae)
are intended to reduce the pricing disparity between our securities and Fannie Mae’s securities, we cannot ensure they will do
so. For example, in certain cases, pricing disparities can exist due to differences in pool composition.
Our UMBS 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 UMBS issued by us relative to comparable Fannie Mae-issued UMBS. If our UMBS were to trade at a discount
relative to comparable Fannie Mae securities, such a difference in relative pricing could create an economic incentive for sellers
to conduct a disproportionate share of their single-family business with Fannie Mae.
It is possible that a liquid market for our UMBS may not be sustained over the short- or long-term, 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 UMBS could reduce the liquidity of our UMBS. While we
may decide to employ various strategies to support the liquidity and price performance of our UMBS, any such strategies may
fail or adversely affect our business and financial results. We may cease any such activities at any time, or FHFA could require
us to do so, which could adversely affect the liquidity and price performance of our UMBS. We may incur costs to support our
presence in the agency securities market and to support the liquidity and price performance of our securities.
Liquidity-related price differences could occur between UMBS issued by us and comparable Fannie Mae-issued UMBS due to
factors that are largely outside of our control. For example, the level of the Federal Reserve’s purchases and sales of agency
FREDDIE MAC | 2019 Form 10-K
154
Risk Factors
Other Risks
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 UMBS. Therefore, any strategies we employ to
reduce any liquidity-related price differences may not reduce or eliminate any such price differences over the long term.
We may experience price differences with Fannie Mae on individual new production pools of TBA-eligible mortgages,
particularly with respect to specified pools and our multilender securities. From time to time, we may need to adjust our pricing
for a particular new production pool category to maintain competitiveness with Fannie Mae with respect to the acquisition of
such pools. Depending on the amount of pricing adjustments in any period, it is possible they could adversely affect the
profitability of our single-family guarantee business for that period. For more information, see MD&A - Our Business
Segments - Capital Markets Segment - Business Overview - Products and Activities.
Implementation of the Single Security Initiative presents increased operational and counterparty risk. If the
UMBS does not continue to 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.
As part of the new combined UMBS market, we have been required by FHFA to align certain of our single-family mortgage
purchase offerings, servicing, and securitization programs, policies and practices with Fannie Mae to achieve market
acceptance of the UMBS and other aspects of the Single Security Initiative, but we cannot provide any assurance that these
efforts will reduce the pricing disparities discussed above over the long-term. 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 extent of the alignment between Freddie Mac's and Fannie Mae's mortgage
purchase, servicing, and securitization programs, policies, and practices may affect the degree to which the UMBS and other
aspects of the Single Security Initiative receive widespread market acceptance.
If investors do not continue to accept the fungibility of Freddie Mac and Fannie Mae UMBS and instead 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.
We are offering an optional exchange program for 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, we make a one-
time payment to exchanging security holders for the value of the 10 additional days of payment delay, based on float
compensation rates we calculate. We do not expect the return from this additional float to fully offset our payments to the
security holders.
The Single Security Initiative has caused us to have counterparty credit exposure to Fannie Mae due to investors' ability to
commingle certain Freddie Mac and Fannie Mae securities in resecuritizations. When we resecuritize Fannie Mae securities, our
guarantee of timely principal and interest extends 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 do not control or limit the amount of resecuritized Fannie Mae securities that we could be required to guarantee. We are
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 have not modified our liquidity strategies to address the possibility of non-
timely payment by Fannie Mae.
We and Fannie Mae both rely on the Federal Reserve Banks to make payments on our respective mortgage-backed securities.
As noted above, 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 providing the Federal Reserve Banks with the funds to make the payment. If we failed to
provide the Federal Reserve Banks with all funds to make such payment on such resecuritized Fannie Mae securities, the
Federal Reserve Banks would not make any payment on any of our outstanding Freddie Mac-issued UMBS, Supers, REMICs,
or other securities to be paid on that payment date, regardless of whether such Freddie Mac-issued securities were backed by
Fannie Mae-issued securities.
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.
FREDDIE MAC | 2019 Form 10-K
155
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.
FREDDIE MAC | 2019 Form 10-K
156
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. One such case, filed in the U.S. District Court for the Southern District of Texas, was appealed to the
U.S. Court of Appeals for the Fifth Circuit. On September 6, 2019, the Fifth Circuit, en banc, held that the plaintiffs plausibly
alleged that FHFA exceeded its conservator powers by transferring Freddie Mac's future value (i.e., profits via the net worth
sweep) to a single shareholder, Treasury, and remanded that cause of action to the District Court. The Fifth Circuit also held that
the "for cause" removal provision for the director of FHFA was unconstitutional, and that the provision should be struck from
the statute. On September 25, 2019, the plaintiffs filed a petition for writ of certiorari to the U.S. Supreme Court seeking review
of the Fifth Circuit’s decision. On October 25, 2019, the defendants also filed a petition for writ of certiorari seeking review of
the Fifth Circuit's decision. 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.
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 | 2019 Form 10-K
157
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
Common Stock
Our common stock is traded in the over-the-counter market and quoted on the OTCQB, operated by OTC Markets Group Inc.,
under the ticker symbol "FMCC." Over-the-counter market quotations for our common stock reflect inter-dealer prices, without
retail mark-up, mark-down, or commission, and may not necessarily represent actual transactions.
Holders
As of January 31, 2020, we had 1,610 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, 2019, 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 2019. 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 | 2019 Form 10-K
158
Financial Statements
Financial Statements and Supplementary Data
FREDDIE MAC | 2019 Form 10-K
159
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, 2019 and 2018, and the related consolidated statements of
comprehensive income (loss), of equity and of cash flows for each of the three years in the period ended December 31, 2019,
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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2019 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, 2019, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the COSO because a material weakness in internal control over financial reporting existed as of that date 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.
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 2019 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.
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, 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.
FREDDIE MAC | 2019 Form 10-K
160
Financial Statements
Report of Independent Registered Public Accounting Firm
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial
statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Single-Family Allowance for Loan Losses
As described in Note 4 to the consolidated financial statements, as of December 31, 2019, the single-family allowance for loan
losses was $4.2 billion. As disclosed by management, the single-family allowance for loan losses represents an estimate of
probable incurred credit losses, which pertains to all single-family loans classified as held-for-investment, and 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 statistically based models that utilize recent historical experience, considers current business practices, and
requires management to make judgments about matters that are difficult to predict, the most significant of which are probability
of default, prepayment, and loss severity.
The principal considerations for our determination that performing procedures relating to the single-family allowance for loan
losses is a critical audit matter are that the matter involved application of significant judgment and estimation on the part of
management when determining the probability of default, prepayment, and loss severity assumptions. This led to a high degree
of auditor judgment, subjectivity, and effort in performing our audit procedures and evaluating audit evidence. The audit effort
involved the use of professionals with specialized skill and knowledge to assist with the evaluation of audit evidence related to
the assumptions.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the
determination of the allowance for loan losses, including controls over the models, data, and significant assumptions. These
procedures also included, among others, (i) testing management’s process for determining the allowance for loan loss estimate,
(ii) testing the completeness, accuracy, and relevance of data used by management, including underlying loan portfolio data,
historical loan data, macroeconomic data, and industry data, (iii) evaluating the reasonableness of significant assumptions,
including probability of default, prepayment, and loss severity through comparison to historical loan data, macroeconomic data,
and industry data, as applicable, and (iv) involving professionals with specialized skill and knowledge to assist in evaluating the
appropriateness of the models used in the allowance for loan losses and evaluating the reasonableness of significant
assumptions including probability of default, prepayment, and loss severity.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
February 13, 2020
We have served as the Company's auditor since 2002.
FREDDIE MAC | 2019 Form 10-K
161
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
Non-interest income (loss)
Guarantee fee income
Investment gains (losses), net
Other income (loss)
Non-interest income (loss)
Net revenues
Year Ended December 31,
2018
2017
2019
$68,583
$66,037
$63,735
2,737
1,575
72,895
(61,047)
11,848
1,089
818
323
2,230
14,078
3,035
982
70,054
(58,033)
12,021
866
1,921
762
3,549
3,415
657
67,807
(53,643)
14,164
749
1,160
4,984
6,893
15,570
21,057
Benefit (provision) for credit losses
746
736
84
Non-interest expense
Salaries and employee benefits
Professional services
Other administrative expense
Total administrative expense
Credit enhancement expense
REO 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, senior preferred stock dividends, or future increase in senior
preferred stock liquidation preference
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.
FREDDIE MAC | 2019 Form 10-K
(1,434)
(445)
(685)
(2,564)
(708)
(229)
(1,617)
(657)
(5,775)
9,049
(1,835)
7,214
535
71
(33)
573
(1,227)
(486)
(580)
(2,293)
(417)
(169)
(1,484)
(469)
(4,832)
11,474
(2,239)
9,235
(722)
114
(5)
(613)
(1,098)
(452)
(556)
(2,106)
(280)
(189)
(1,340)
(392)
(4,307)
16,834
(11,209)
5,625
(253)
124
62
(67)
$7,787
$8,622
$5,558
$7,214
(7,787)
($573)
($0.18)
3,234
$9,235
(5,623)
$3,612
$1.12
3,234
$5,625
(8,869)
($3,244)
($1.00)
3,234
162
Financial Statements
FREDDIE MAC
Consolidated Balance Sheets
(In millions, except share-related amounts)
Assets
Cash and cash equivalents (Notes 1, 3, 14) (includes $991 and $596 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 $15,035 and $23,106 at fair value)
Mortgage loans held-for-investment (Notes 3, 4) (net of allowance for loan losses of $4,234 and $6,139)
Accrued interest receivable (Note 3)
Derivative assets, net (Notes 9, 10)
Deferred tax assets, net (Note 12)
Other assets (Notes 3, 18) (includes $4,627 and $3,929 at fair value)
Total assets
Liabilities and equity
Liabilities
Accrued interest payable (Note 3)
Debt, net (Notes 3, 8) (includes $3,938 and $5,112 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 $79,322 and $75,648)
Preferred stock, at redemption value
Common stock, $0.00 par value, 4,000,000,000 shares authorized, 725,863,886 shares issued and
650,059,033 shares and 650,058,775 shares outstanding
Additional paid-in capital
Retained earnings (accumulated deficit)
AOCI, net of taxes, related to:
Available-for-sale securities (includes $222 and $221, 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, 75,804,853 shares and 75,805,111 shares
Total equity (See Note 11 for information on our dividend requirement to Treasury)
Total liabilities and equity
Consolidated Balance Sheets
As of December 31,
2019
2018
$5,189
66,114
75,711
35,288
1,984,912
6,848
844
5,918
22,799
$2,203,623
$6,559
2,179,528
372
8,042
2,194,501
72,648
14,109
—
—
(74,188)
618
(244)
64
438
(3,885)
9,122
$2,203,623
$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
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 | 2019 Form 10-K
As of December 31,
2019
2018
$1,940,523
40,598
$1,981,121
$1,898,355
5,537
$1,903,892
$1,842,850
20,237
$1,863,087
$1,792,677
5,335
$1,798,012
163
Financial Statements
FREDDIE MAC
Consolidated Statements of Equity
Consolidated Statements of Equity
(In millions)
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 paid
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 paid
Ending balance at December 31, 2018
Balance at December 31, 2018
Comprehensive income (loss):
Net income (loss)
Other comprehensive income (loss), net of
taxes
Comprehensive income (loss)
Senior preferred stock dividends paid
Ending balance at December 31, 2019
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
$—
$—
($77,941)
$456
($3,885)
$5,075
—
—
—
—
464
464
—
—
—
—
—
—
464
464
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
650
$72,336
$14,109
650
$72,336
$14,109
—
—
—
—
—
—
—
—
—
—
312
—
—
—
—
—
—
—
650
$72,648
$14,109
650
$72,648
$14,109
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$—
$—
—
—
—
—
—
—
$—
$—
—
—
—
—
—
—
—
—
5,625
—
5,625
(10,945)
—
(67)
(67)
—
— 5,625
—
(67)
— 5,558
— (10,945)
$—
($83,261)
$389
($3,885)
($312)
$—
($83,261)
$389
($3,885)
($312)
—
—
—
—
—
—
9,235
—
— 9,235
—
9,235
(89)
—
(4,145)
(613)
(613)
89
—
—
—
(613)
— 8,622
—
—
—
312
— (4,145)
$—
($78,260)
($135)
($3,885)
$4,477
$—
($78,260)
($135)
($3,885)
$4,477
—
—
—
—
7,214
—
7,214
(3,142)
—
573
573
—
— 7,214
—
573
— 7,787
— (3,142)
464
650
$72,648
$14,109
$—
$—
($74,188)
$438
($3,885)
$9,122
(1)
Includes the effect of adopting the accounting guidance on reclassification of stranded tax effects of the Tax Cuts and Jobs Act. See Note 11 for additional
information.
The accompanying notes are an integral part of these consolidated financial statements.
FREDDIE MAC | 2019 Form 10-K
164
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,
2018
2017
2019
Net income (loss)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
$7,214
$9,235
$5,625
Amortization of cost basis adjustments
(Benefit) provision for credit losses
Investment (gains) losses, net
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
Other, net
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
Other, net
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, 7, and 8)
The accompanying notes are an integral part of these consolidated financial statements.
(466)
(746)
(1,100)
(288)
817
(65,516)
71,557
517
(282)
(120)
177
712
(279)
12,197
(102,169)
84,296
14,528
(8,967)
12,978
4,258
(228,628)
15,218
348,387
(54,176)
1,275
1,150
(31,343)
(8,163)
(492)
48,152
264,373
(351,099)
880,249
(852,684)
—
(3,142)
(130)
(62,433)
(2,084)
7,273
$5,189
(2,117)
(736)
(2,084)
658
1,391
(70,482)
66,889
494
(282)
(373)
440
(1,269)
(1,090)
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
(2,615)
(84)
(2,764)
(357)
7,773
(64,827)
61,744
306
(377)
(220)
273
1,912
(2,165)
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
$70,918
306
$65,721
2,125
$63,574
1,872
FREDDIE MAC | 2019 Form 10-K
165
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.
We have reclassified certain amounts in our prior periods' consolidated financial statements to conform to the current
presentation as follows:
Credit enhancement expense, which represents expenses incurred from freestanding credit enhancements, has been
presented as a separate line item within non-interest expense, as the volume of freestanding credit enhancements has
increased and become a more significant driver of our results of operations. In prior periods, freestanding credit
enhancement expenses were recorded in other expenses;
Mortgage loans gains (losses), investment securities gains (losses), debt gains (losses), and derivative gains (losses) have
been aggregated and presented as a single amount, investment gains (losses), net, to more clearly show the net effect of
these activities on our results of operations, as certain gains and losses on our assets and debt are generally offset by
certain gains and losses on the derivatives we use to hedge them. In prior periods, these amounts were shown separately
as individual line items, and we continue to present the detail of each individual line item in Note 18; and
Certain other immaterial amounts have been reclassified between other income and guarantee fee income and other
income and investment gains (losses), net to better align these amounts with the business drivers of the activity.
These reclassifications did not have a material impact on our financial condition or results of operations.
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. The financial statements
include 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 | 2019 Form 10-K
166
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.
Original maturity means the original maturity to us when we acquire the investment, not the original maturity of the instrument
itself. Cash collateral accepted from counterparties that we do not have the right to use for general corporate purposes is
classified as restricted cash and cash equivalents on our consolidated balance sheets. Restricted cash and cash equivalents
include 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.
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
Stockholders' Equity
Earnings Per Share
Income Taxes
Segment Reporting
Fair Value Measurements
FREDDIE MAC | 2019 Form 10-K
167
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
Recently Issued Accounting Guidance
Recently Adopted Accounting Guidance
Standard
Description
ASU 2016-02, Leases (Topic
842)
The amendment in this Update addresses the
accounting for lease arrangements.
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.
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
Purpose
ASU 2018-20, Leases (Topic
842): Narrow-Scope
Improvements for Lessors
Date of
Adoption
January 1,
2019
January 1,
2019
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.
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 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.
January 1,
2019
The adoption of the amendments did not
have a material effect on our consolidated
financial statements or on our disclosures.
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
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. We
used these models to execute our process
for estimating the allowance for credit
losses under the new standard in parallel
with our existing process for estimating the
allowance for credit losses based on
incurred losses and have developed an
appropriate governance process for our
estimate of expected credit losses under
the new standard. The amendments will be
applied through a cumulative effect
adjustment to retained earnings as of
January 1, 2020.
Based on the composition of our portfolio
as of January 1, 2020 and the economic
conditions and forecasts at that time, we
expect the transition impact to result in a
decrease in retained earnings of $0.2
billion. The increase in the allowance for
credit losses from incorporating lifetime
losses is generally offset by recoveries and
a positive impact from including forecasts
of economic conditions.
FREDDIE MAC | 2019 Form 10-K
168
Financial Statements
Notes to the Consolidated Financial Statements | Note 1
Recently Issued Accounting Guidance, Not Yet Adopted Within Our Consolidated Financial Statements
Date of
Planned
Adoption
January 1,
2020
Effect on Consolidated Financial
Statements
On October 1, 2018, we early adopted the
amendments to remove or modify certain
disclosures, which did not have a material
effect on our consolidated financial
statements. We are delaying adoption of
the amendments to add certain disclosures
until their effective date. We do not expect
that the adoption of the additional
disclosures will have a material effect on
our consolidated financial statements.
January 1,
2020
We do not expect that the adoption of these
amendments will have a material effect on
our consolidated financial statements.
January 1,
2020
We do not expect that the adoption of these
amendments will have a material effect on
our consolidated financial statements.
January 1,
2020
We do not expect that the adoption of these
amendments will have a material effect on
our consolidated financial statements.
January 1,
2020
The impact of adopting the Topic 326
amendments is included with the impact of
adoption of ASU 2016-13. We do not
expect that the adoption of these
amendments will have a material effect on
our consolidated financial statements.
January 1,
2020
We do not expect to elect the fair value
option for any financial instruments upon
adoption of ASU 2016-13.
Standard
Description
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.
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).
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 provide guidance for
the: (1) lessor's fair value determination of the lease's
underlying asset; (2) lessor's statement of cash flows
presentation of cash received from sales-type and direct
financing leases; and (3) removal of interim transition
disclosure requirements related to changes in
accounting principles.
The amendments in this Update clarify certain aspects
of Topic 326 guidance issued in ASU 2016-13 including
the scope of the credit losses standard and issues
related to accrued interest receivable balances,
recoveries, variable interest rates and prepayments. The
other amendments in this update clarify certain aspects
of Topic 815 and Topic 825.
The amendments in this Update provide entities with
transition relief upon the adoption of ASU 2016-13 by
providing an option to elect the fair value option on
certain financial instruments measured at amortized
cost.
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 2018-17, Consolidation
(Topic 810): Targeted
Improvements to Related Party
Guidance for Variable Interest
Entities
ASU 2019-01, Leases (Topic
842): Narrow-Scope
Improvements for Lessors
ASU 2019-04, Codification
Improvements to Financial
Instruments - Credit Losses
(Topic 326), Derivatives and
Hedging (Topic 815), and
Financial Instruments (Topic
825
ASU 2019-05, Financial
Instruments - Credit Losses
(Topic 326): Measurement of
Credit Losses on Financial
Instrument
ASU 2019-11, Codification
Improvements to Financial
Instruments - Credit Losses
(Topic 326)
ASU 2019-12, Income Taxes
(Topic 740): Simplifying the
Accounting for Income Taxes
The amendments in this Update clarify certain aspects
of Topic 326 guidance issued in ASU 2016-13 including
guidance providing transition relief for TDRs.
January 1,
2020
The impact of adopting these amendments
is included with the impact of adoption of
ASU 2016-13.
The amendments in this Update simplify the accounting
for income taxes by removing certain exceptions for
investments, intraperiod allocations, and interim
calculations, and add guidance to reduce the complexity
of applying Topic 740.
January 1,
2021
We do not expect that the adoption of these
amendments will have a material effect on
our consolidated financial statements.
FREDDIE MAC | 2019 Form 10-K
169
Financial Statements
NOTE 2
Notes to the Consolidated Financial Statements | Note 2
Conservatorship and Related Matters
Business Objectives
We operate under the conservatorship that commenced on September 6, 2008, conducting our business under the direction of
FHFA, as our Conservator. The conservatorship and related matters significantly affect our management, business activities,
financial condition, and results of operations. Upon its appointment, FHFA, as Conservator, immediately succeeded to all rights,
titles, powers, and privileges of Freddie Mac, and of any stockholder, officer, or director thereof, with respect to the company
and its assets. The Conservator also succeeded to the title to all books, records, and assets of Freddie Mac held by any other
legal custodian or third party. The Conservator 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 October 2019, FHFA issued a new Strategic Plan for the Conservatorships of Freddie Mac and Fannie Mae (the Enterprises)
and a new annual Conservatorship Scorecard for Freddie Mac, Fannie Mae, and CSS. The 2019 Strategic Plan provides a
framework for how FHFA will guide the Enterprises to fulfill their statutory missions, focus on safety and soundness, and
prepare for a responsible end to the Conservatorships.
The three objectives of the 2019 Strategic Plan are to ensure that the Enterprises:
Focus on their core mission responsibilities to foster competitive liquid, efficient, and resilient (CLEAR) national housing
finance markets that support sustainable homeownership and affordable rental housing;
Operate in a safe and sound manner appropriate for entities in conservatorship; and
Prepare for their eventual exits from the conservatorships.
FHFA has issued annual Conservatorship Scorecards since 2014. The annual Conservatorship Scorecards establish objectives
and performance targets and measures for Freddie Mac and Fannie Mae related to the objectives set forth in the Strategic Plan.
The 2020 Conservatorship Scorecard aligns tactical priorities and execution at the Enterprises to the 2019 Strategic Plan and
serves as a tool in holding the Enterprises accountable for its effective implementation. For more information on the 2020
Conservatorship Scorecard and how it affects executive compensation, see Executive Compensation - Compensation
Discussion and Analysis.
The first objective of the 2019 Strategic Plan includes the continuing duty of the Enterprises to fulfill the statutory housing goal
and duty-to-serve requirements, the continued effectiveness of the UMBS, the implementation of the Credit Score Rule,
finalized in August 2019, developing a more competitive mortgage market through leveling the playing field and greater
transparency. The first objective includes a number of other on-going initiatives, including operating the multifamily business
under the new caps announced in September 2019, continuing preparations for the transition from LIBOR to an alternative
reference rate such as SOFR, supporting the needs of lenders and borrowers dealing with challenges of limited English
proficiency, implementing a new, modernized Uniform Residential Loan Application, and supporting state and local
governments in reducing barriers to building and financing housing.
The second objective focuses on the heightened need for safety and soundness, taking into account both the reality of the
inadequate capital cushions currently in place and the importance of building a robust capital foundation to successfully exit
conservatorship, and directs the Enterprises to conduct comprehensive assessments of all major business activities in order to
evaluate and reduce risk and complexity. CRT will continue to be a component of the Enterprises' approach to risk
management. Given the growth and total size of the CRT program, the Enterprises will complete a comprehensive review of the
FREDDIE MAC | 2019 Form 10-K
170
Financial Statements
Notes to the Consolidated Financial Statements | Note 2
program, including costs and benefits, to better inform future direction. The second objective also directs the Enterprises to
strengthen their implementation of the CCF to support risk management initiatives and business decisions, addresses
mortgage servicing by seeking to promote stability and ensure readiness for more challenging market conditions, and focuses
on enhancing the resiliency of operations and systems and modernizing legacy systems.
The third objective instructs the Enterprises to support FHFA in the development and implementation of responsible, milestone-
based plans to transition out of conservatorship, including capital restoration strategies and roadmaps. The third objective
emphasizes the need for the Enterprises to carefully scrutinize and optimize their balance sheet exposures to focus on serving
their core guaranty business with maximum capital efficiency. The third objective also focuses on enhancing the Enterprises'
ability to assess the returns on the capital necessary to support their assets and risks, the development of a post-
conservatorship strategy and governance structure for CSS/CSP, remediation of deficiencies identified through FHFA's
supervisory oversight and by the Enterprises' own examinations and audits, and the critical role of fair-lending risk assessment,
monitoring, and oversight at the Enterprises.
We continue to align our resources and internal business plans to meet the objectives provided to us by FHFA.
As a result of the net worth sweep dividend provisions of the senior preferred stock, we cannot retain capital from the earnings
generated by our business operations in excess of the applicable Capital Reserve Amount under the Purchase Agreement
(which is $20.0 billion 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, Congress, and FHFA, 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, December 21, 2017, and September 27, 2019. The amount of available funding
remaining under the Purchase Agreement was $140.2 billion as of December 31, 2019. This amount will be reduced by any
future draws.
The Purchase Agreement requires Treasury, upon the request of the Conservator, to provide funds to us after any quarter in
which we have a negative net worth (that is, our total liabilities exceed our total assets, as reflected on our 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, 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 September 2019 Letter Agreement, the applicable Capital Reserve Amount is $20.0
billion. As a result, we will not be required to pay a dividend on the senior preferred stock to Treasury until our Net Worth
Amount exceeds $20.0 billion. If for any reason we were not to pay a future net worth sweep dividend in full for any period, the
applicable Capital Reserve Amount would thereafter be zero.
FREDDIE MAC | 2019 Form 10-K
171
Financial Statements
Notes to the Consolidated Financial Statements | Note 2
In addition, pursuant to the September 2019 Letter Agreement, the liquidation preference of the senior preferred stock will be
increased, at the end of each fiscal quarter, beginning on September 30, 2019, by an amount equal to the increase in the Net
Worth Amount, if any, during the immediately prior fiscal quarter, until the liquidation preference has increased by $17.0 billion.
As a result, the liquidation preference of the senior preferred stock increased from $77.5 billion on September 30, 2019 to $79.3
billion on December 31, 2019 based on the $1.8 billion increase in our Net Worth Amount during 3Q 2019, and will increase to
$81.8 billion on March 31, 2020 based on the $2.4 billion increase in our Net Worth Amount during 4Q 2019. 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.
Under the September 2019 Letter Agreement, Freddie Mac and Treasury also agreed to negotiate and execute an amendment
to the Purchase Agreement that further enhances taxpayer protections by adopting covenants broadly consistent with
recommendations for administrative reform contained in the Treasury's September 2019 Housing Reform Plan.
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, 2019, the aggregate liquidation preference of the
senior preferred stock was $79.3 billion. In addition to increases based on quarterly increases in our Net Worth Amount, as
discussed above, the liquidation 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
FREDDIE MAC | 2019 Form 10-K
172
Financial Statements
Notes to the Consolidated Financial Statements | Note 2
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 UPB of our mortgage assets to a limit of $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 $300 billion. 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 certain VIEs in our financial statements as of January 1, 2010.
In addition, the Purchase Agreement provides that we may not enter into any new compensation arrangements or increase
amounts or benefits payable under existing compensation arrangements of any named executive officer or other executive
officer (as such terms are defined by SEC rules) without the consent of the Director of FHFA, in consultation with the Secretary
of the Treasury.
The Purchase Agreement also provides that, on an annual basis, we are required to deliver a risk management plan to Treasury
setting out our strategy for reducing our enterprise-wide risk profile and the actions we will take to reduce the financial and
operational risk associated with each of our reportable business segments.
Warrant Covenants
The warrant we issued to Treasury includes, among others, the following covenants:
Our SEC filings under the Exchange Act will comply in all material respects as to form with the Exchange Act and the rules
and regulations thereunder;
Without the prior written consent of Treasury, we may not permit any of our significant subsidiaries to issue capital stock or
equity securities, or securities convertible into or exchangeable for such securities, or any stock appreciation rights or other
profit participation rights to any person other than Freddie Mac or its wholly-owned subsidiaries;
We may not take any action that will result in an increase in the par value of our common stock;
Unless waived or consented to in writing by Treasury, we may not take any action to avoid the observance or performance
of the terms of the warrant and we must take all actions necessary or appropriate to protect Treasury's rights against
impairment or dilution; and
We must provide Treasury with prior notice of specified actions relating to our common stock, such as setting a record date
for a dividend payment, granting subscription or purchase rights, authorizing a recapitalization, reclassification, merger or
similar transaction, commencing a liquidation of the company, or any other action that would trigger an adjustment in the
exercise price or number or amount of shares subject to the warrant.
Termination Provisions
The Purchase Agreement provides that the Treasury's funding commitment will terminate under any of the following
circumstances:
The completion of our liquidation and fulfillment of Treasury's obligations under its funding commitment at that time;
The payment in full of, or reasonable provision for, all of our liabilities (whether or not contingent, including mortgage
guarantee obligations); and
The funding by Treasury of the maximum amount of the commitment under the Purchase Agreement.
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:
FREDDIE MAC | 2019 Form 10-K
173
Financial Statements
Notes to the Consolidated Financial Statements | Note 2
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
In February 2019, FHFA directed us to maintain the mortgage-related investments portfolio at or below $225 billion at all times.
The UPB of this portfolio was $212.7 billion at December 31, 2019. Our ability to acquire and sell mortgage assets continues to
be significantly constrained by limitations of the Purchase Agreement and those imposed by FHFA.
Government Support for Our Business
We receive substantial support from Treasury and are dependent upon its continued support in order to continue operating our
business. Our ability to access funds from Treasury under the Purchase Agreement is critical to:
Keeping us solvent;
Allowing us to focus on our primary business objectives under conservatorship; and
Avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions.
At September 30, 2019, 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, 2019. Since conservatorship began through December 31, 2019, we have paid cash dividends of $119.7 billion
to Treasury at the direction of the Conservator.
At December 31, 2019, 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, 2019 and the Capital Reserve Amount of $20.0
billion, we will not have a dividend requirement to Treasury in March 2020.
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, 2019, 2018, and 2017, 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 a related party 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 a limited liability company equally-owned by Freddie Mac and
Fannie Mae, and CSS is also deemed a related party. In connection with the formation of CSS, we entered into a limited liability
company (LLC) agreement with Fannie Mae. Additionally, we and Fannie Mae each appointed two executives to the CSS Board
of Managers and signed governance and operating agreements for CSS, including an updated customer services agreement
with Fannie Mae and CSS in May 2019. In June 2019, we entered into an agreement with Fannie Mae regarding the
commingling of certain of our mortgage securities under the Single Security Initiative and related indemnification obligations.
FREDDIE MAC | 2019 Form 10-K
174
Financial Statements
Notes to the Consolidated Financial Statements | Note 2
During the year ended December 31, 2019, we contributed $105 million of capital to CSS, and we have contributed $569 million
since the fourth quarter of 2014.
In January 2020, FHFA directed Freddie Mac and Fannie Mae to amend the LLC agreement for CSS to change the structure of
the Board of Managers (CSS Board). The revised LLC agreement also removed the requirement that any CSS Board decision
must be approved by at least one of the CSS Board members appointed by Freddie Mac and one appointed by Fannie Mae.
These amendments reduce Freddie Mac’s and Fannie Mae’s ability to control CSS Board decisions, even after conservatorship,
including decisions about strategy, business operations, and funding.
Under the revised CSS LLC agreement, the CSS Board will continue to include two Freddie Mac and two Fannie Mae
representatives, and it will also include two new members: the Chief Executive Officer of CSS and an independent, non-
Executive Chair. During conservatorship, the CSS Board Chair shall be designated by FHFA, and all CSS Board decisions will
require the affirmative vote of the Board Chair. During conservatorship, FHFA also may appoint up to three additional
independent members to the CSS Board, who along with the Board Chair and the Chief Executive Officer of CSS may continue
to serve on the CSS Board after conservatorship. FHFA appointed a new CSS Board member to serve as Chair in January
2020. If FHFA appoints three additional CSS Board members, the CSS Board members we and Fannie Mae appoint could be
outvoted by non-GSE designated Board members on any matter during conservatorship and on a number of significant
matters, including approval of the annual budget and strategic plan for CSS, if either we or Fannie Mae exits from
conservatorship. Certain material post-conservatorship decisions, however, would require approval of at least one Board
member designated by us and one designated by Fannie Mae, including those decisions involving a material change in CSS’s
functionality, such as the addition of a new business line or reduction in CSS’s support of the UMBS, capital contributions
beyond those necessary to support CSS’s ordinary business operations, appointment or removal of the CSS Chief Executive
Officer, and admission of new members.
FREDDIE MAC | 2019 Form 10-K
175
Financial Statements
NOTE 3
Notes to the Consolidated Financial Statements | 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
Single-family Guarantee
Level 1 Securitization Products
Level 1 Securitization Products consist of UMBS, 55-day MBS, and PCs, which are all pass-through debt securities that
represent undivided beneficial interests in a pool of loans held by a securitization trust. All Level 1 Securitization Products are
backed only by mortgage loans we have acquired. We serve as both administrator and guarantor for these trusts. As
administrator, we have the right to establish servicing terms and direct loss mitigation activities for the loans held by these
trusts. As guarantor, we guarantee the payment of principal and interest on these securities in exchange for a guarantee fee,
and we have the right to purchase delinquent loans from the trust to help improve the economic performance of the trust. We
absorb all credit losses of these trusts through our guarantee of the principal and interest payments.
The economic performance of these 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 these trusts that could potentially be significant through
our guarantee of principal and interest payments. Accordingly, we concluded that we are the primary beneficiary of, and
therefore, consolidate these trusts.
Loans held by these trusts are recognized on our consolidated balance sheets as mortgage loans held-for-investment. The
corresponding securities 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 these securities as investments in our
mortgage-related investments portfolio. Sales of these securities that were previously held as investments in our mortgage-
related investments portfolio are accounted for as debt issuances.
Upon implementation of the Single Security Initiative in June 2019, we began offering an optional exchange program for
security holders to exchange certain existing 45-day payment delay PCs for corresponding UMBS and other applicable 55-day
payment delay Freddie Mac securities. We make a one-time payment to exchanging security holders for the value of the 10
additional days of payment delay based on float compensation rates we calculate. When existing PCs are exchanged for UMBS
or 55-day MBS under our exchange program, we account for the exchange as a debt modification, as the terms of the
securities are not substantially different and the exchange does not result in a change in the creditor. The float compensation
we pay in conjunction with the exchange is deferred as a basis adjustment to the debt and amortized into interest expense over
the remaining life of the debt. See Note 4 and Note 8 for additional information on loans and debt securities of consolidated
trusts.
At December 31, 2019 and December 31, 2018, we were the primary beneficiary of, and therefore consolidated, Level 1
securitization trusts with assets totaling $1.9 trillion and $1.8 trillion, respectively. During 2019 and 2018, we issued
approximately $440.2 billion and $309.9 billion, respectively, of guaranteed Level 1 Securitization Products. 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 Level 1 Securitization Products or our previously issued resecuritization
products (or similar TBA-eligible products issued and guaranteed by Fannie Mae) as the underlying collateral. In a typical
resecuritization transaction, previously issued Level 1 Securitization Products or resecuritization products are transferred to a
resecuritization trust that issues beneficial interests in the underlying collateral. We establish parameters that define eligibility
FREDDIE MAC | 2019 Form 10-K
176
Financial Statements
Notes to the Consolidated Financial Statements | Note 3
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 Level 1 Securitization Products, we guarantee
the full payment of principal and interest to the investors in our resecuritization products. However, because we (or Fannie Mae)
have already guaranteed the underlying assets, we do not assume any incremental credit risk by issuing these securities.
Upon implementation of Release 2 of the CSP and the Singe Security Initiative, we have the ability to commingle TBA-eligible
Fannie Mae collateral in certain of our resecuritization products. When we resecuritize Fannie Mae securities in our commingled
resecuritization products, our guarantee covers timely payment of principal and interest on such products from underlying
Fannie Mae securities. If Fannie Mae were to fail to make a payment on a Fannie Mae security that we resecuritized, we would
be responsible for making the payment. We do not charge an incremental guarantee fee to commingle Fannie Mae collateral in
resecuritization transactions.
The main types of resecuritization products we create are single-class resecuritization products (Supers, Giant MBS, and Giant
PCs) and multiclass resecuritization products (REMICs and Strips).
Single-class resecuritization products - These securities are direct pass-throughs of the cash flows of the underlying
collateral, which may be previously issued Level 1 Securitization Products or single-class resecuritization products (or
similar TBA-eligible products issued and guaranteed by Fannie Mae). We do not consolidate these securities 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.
We account for purchases of single-class resecuritization products that we issue that are substantially the same as the
underlying collateral as debt extinguishment of a pro-rata portion of the underlying Level 1 Securitization Product. We
account for purchases of single-class resecuritization products that we issue that are not considered substantially the
same as the underlying collateral as investments in debt securities. Single-class resecuritization products that we issue that
are backed entirely by Freddie Mac collateral are considered substantially the same as the underlying collateral, while
commingled single-class resecuritization products that we issue are not considered substantially the same as the
underlying collateral.
Multiclass resecuritization products - These securities are multiclass resecuritizations of the cash flows of the underlying
collateral, which may be previously issued Level 1 Securitization Products, single-class resecuritization products, or
multiclass resecuritization products (or similar TBA-eligible products issued and guaranteed by Fannie Mae). 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, unless we retain a portion of the issued
multiclass resecuritization products, 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 (or Fannie Mae) have already guaranteed the underlying assets, we do not receive any incremental guarantee
fees in exchange for our guarantee, and, accordingly, we do not recognize any additional guarantee assets, guarantee
obligations or reserves for guarantee losses related to multiclass resecuritization trusts. Instead, we receive a one-time
transaction fee which represents compensation for both the structuring and creation of the securities and for our ongoing
administrative responsibilities to service the securities. We recognize the portion of the transaction fee related to creation of
the securities immediately in earnings. We defer the portion of the fee related to ongoing administrative responsibilities and
amortize it over the life of the associated trust.
When we purchase a multiclass resecuritization product 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 multiclass resecuritization
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 multiclass resecuritization products 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 our single-family senior subordinate securitization structures
backed by recently originated loans 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 the trusts used in these senior subordinate securitization structures with underlying assets totaling $19.9 billion
and $26.1 billion, at December 31, 2019 and December 31, 2018, respectively.
FREDDIE MAC | 2019 Form 10-K
177
Financial Statements
Notes to the Consolidated Financial Statements | Note 3
We do not consolidate our single-family senior subordinate securitization structures backed by seasoned loans because 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 2019 and 2018, we
issued approximately $11.2 billion and $8.4 billion, respectively, of guaranteed securities in these senior subordinate
securitization structures for which a guarantee asset and guarantee obligation were generally recognized.
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 $2.8 billion and $3.4 billion at December 31,
2019 and December 31, 2018, 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.
Multifamily
K Certificates
In a K Certificate transaction, we sell multifamily loans to a non-Freddie Mac securitization trust that issues senior, mezzanine,
and subordinate securities, and simultaneously purchase and place the senior securities into a Freddie Mac securitization trust
that issues guaranteed K Certificates. In these transactions, we guarantee the senior securities issued by the Freddie Mac
securitization trust and do not issue or guarantee the mezzanine or subordinate securities issued by the non-Freddie Mac
securitization trust. We receive a guarantee fee in exchange for our guarantee. We serve as guarantor of our K Certificate trusts
and, from time to time, as master servicer. However, in contrast to single-family transactions, 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 2019 and 2018, we issued approximately $53.6 billion and $52.2 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 2019 and 2018, we issued approximately $6.2 billion and $6.3 billion, respectively, of SB Certificates for which a
guarantee asset and guarantee obligation were recognized.
Other Securitization Products
We are the primary beneficiary of and, therefore, consolidate the trusts used to issue certain of our other securitization products
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 in these other securitization products with underlying assets totaling $8.7 billion and $7.2 billion at
December 31, 2019 and December 31, 2018, respectively.
FREDDIE MAC | 2019 Form 10-K
178
Financial Statements
Notes to the Consolidated Financial Statements | Note 3
We do not consolidate the trusts used to issue our other securitization products when we do not meet the above conditions.
For those products, we account for our guarantee to the non-consolidated VIE. During 2019 and 2018, we issued approximately
$3.1 billion and $3.4 billion, respectively, of these securities for which a guarantee asset and guarantee obligation were
generally recognized.
CRT Activities
STACR Trust Notes
In a STACR Trust note transaction, a trust issues credit-linked notes whose repayments are based on the credit performance of
a reference pool of mortgage loans. The trust makes periodic payments of principal and interest on the notes to investors. We
make payments to the trust to support payment of the interest due on the notes, 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
risk transfer 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 note 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.
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 $869 and $566 of restricted cash and cash
equivalent)
Securities purchased under agreements to resell
Investments in securities, at fair value
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
FREDDIE MAC | 2019 Form 10-K
As of December 31, 2019
As of December 31, 2018
$870
23,137
597
1,940,523
6,170
9,824
$1,981,121
$5,536
1,898,355
1
$1,903,892
$567
12,125
—
1,842,850
5,914
1,631
$1,863,087
$5,335
1,792,677
—
$1,798,012
179
Financial Statements
Notes to the Consolidated Financial Statements | Note 3
Non-Consolidated VIEs
Our involvement with VIEs for which we are not the primary beneficiary takes one or both of two forms - purchasing an
investment in these entities or providing a guarantee to these entities. As part of the Single Security Initiative, we have the
ability to commingle TBA-eligible Fannie Mae collateral in certain of our resecuritization products that we do not consolidate.
We extend our guarantee of these products to cover principal and interest that are payable from the underlying Fannie Mae
collateral. See Note 5 for additional information on our guarantee of Fannie Mae securities.
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 and total assets of the VIEs. 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. Our maximum exposure to loss and total assets of non-consolidated VIEs excludes our investments in and
obligations to non-consolidated Freddie Mac resecuritization trusts primarily because we already consolidate the underlying
Freddie Mac collateral of these trusts on our consolidated balance sheets and for commingled resecuritization trusts, we view
the likelihood of being required to perform on our guarantee of the underlying Fannie Mae collateral as remote. Our maximum
exposure to loss also excludes our interest rate exposure on certain securitization activity and other mortgage-related
guarantees measured at fair value where our interest rate exposure may be unlimited. We generally reduce our exposure to
these guarantees with unlimited interest rate exposure through separate contracts with third parties.
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 enhancements. See Note 6 for additional information on credit enhancements.
Table 3.2 - Non-Consolidated VIEs
(In millions)
Assets and Liabilities Recorded on our Consolidated Balance Sheets(1)
As of December 31, 2019
As of December 31, 2018
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
Total Assets of Non-Consolidated VIEs
$37,918
212
14
3,951
108
3,761
281,007
335,562
$44,020
235
1
3,119
88
3,049
241,055
284,724
(1)
Includes our variable interests in REMICs and Strips, K Certificates, SB Certificates, certain senior subordinate securitization structures, and other securitization
products that we do not consolidate.
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 | 2019 Form 10-K
180
Financial Statements
NOTE 4
Notes to the Consolidated Financial Statements | 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, 2019 and December 31,
2018.
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, 2019
December 31, 2018
Held by
Freddie Mac
Held by
consolidated
trusts
Total
Held by
Freddie Mac
Held by
consolidated
trusts
Total
$18,543
18,954
37,497
(2,209)
35,288
35,324
10,831
46,155
(183)
(1,583)
44,389
$79,677
$—
—
—
—
—
$18,543
18,954
37,497
(2,209)
35,288
1,902,958
6,642
1,909,600
33,574
(2,651)
1,940,523
$1,940,523
1,938,282
17,473
1,955,755
33,391
(4,234)
1,984,912
$2,020,200
$20,946
23,959
44,905
(3,283)
41,622
35,885
10,828
46,713
(1,198)
(3,009)
42,506
$84,128
$—
—
—
—
—
1,814,008
4,220
1,818,228
27,752
(3,130)
1,842,850
$1,842,850
$20,946
23,959
44,905
(3,283)
41,622
1,849,893
15,048
1,864,941
26,554
(6,139)
1,885,356
$1,926,978
We apply 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,
commitment-related derivative basis adjustments, 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 investment gains (losses), net on our consolidated statements of
comprehensive income, with changes in this valuation allowance also being recorded in investment gains (losses), net.
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 investment gains (losses), net on 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.
FREDDIE MAC | 2019 Form 10-K
181
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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)
2019
2018
2017
$451.2
$307.7
$343.0
13.6
13.1
9.5
65.3
1.9
71.3
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 generally when the loan has become
current. For multifamily loans, the collectability of principal and interest is considered reasonably assured based on an analysis
of the factors specific to the loan being assessed. Upon a loan's return to accrual status, all previously reversed interest income
is recognized and amortization of any basis adjustments into interest income is resumed.
Credit Quality
Single-Family
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.
FREDDIE MAC | 2019 Form 10-K
182
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
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, 2019
Current LTV Ratio
> 80 to 100
> 100(1)
Total
As of December 31, 2018
Current LTV Ratio
> 80 to 100
> 100(1)
Total
$1,405,562
$267,752
$3,954 $1,677,268
$1,336,310
$214,703
$6,654
$1,557,667
236,837
35,478
12,668
$1,690,545
6,797
1,425
901
$276,875
89
6
188
243,723
36,909
13,757
$4,237 $1,971,657
251,152
42,117
16,498
$1,646,077
4,522
1,883
1,903
$223,011
157
7
559
$7,377
255,831
44,007
18,960
$1,876,465
(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 4.51% and 7.24% as of
December 31, 2019 and December 31, 2018, 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.
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, 2019
As of December 31, 2018
Pass
Special mention
Substandard
Doubtful
Total
$17,227
141
121
—
$17,489
$14,648
201
181
—
$15,030
(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.
FREDDIE MAC | 2019 Form 10-K
183
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
Mortgage Loan Performance
The following tables present the recorded investment of our single-family and multifamily loans, held-for-investment, by
payment status.
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, 2019
One
Month
Past Due
Two
Months
Past Due
Three Months or
More Past Due,
or in Foreclosure(1)
Total
Non-accrual
$15,481
1,131
238
489
17,339
—
$17,339
$3,326
175
45
161
3,707
—
$3,707
$5,348
$1,677,268
240
89
417
6,094
—
$6,094
243,723
36,909
13,757
1,971,657
17,489
$1,989,146
$5,822
252
104
205
6,383
13
$6,396
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
Current
$1,653,113
242,177
36,537
12,690
1,944,517
17,489
$1,962,006
Current
$1,532,499
254,376
43,549
16,975
1,847,399
15,030
$1,862,429
(1)
Includes $1.8 billion and $2.9 billion of loans that were in the process of foreclosure as of December 31, 2019 and December 31, 2018, respectively.
We have the option to purchase specified loans, including certain delinquent loans, from consolidated trusts at a purchase
price equal to the current UPB of the loan, less any outstanding advances of principal that have been previously distributed.
However, in order to maintain alignment with Fannie Mae under the Single Security Initiative, FHFA requires us to purchase
loans out of consolidated trusts if they are delinquent for 120 days, and we have the option to purchase sooner under certain
circumstances (e.g. imminent default and seller breaches of representations and warranties). Our practice generally has been to
purchase loans from consolidated trusts when the loans have been delinquent for 120 days or more.
When we purchase loans from consolidated 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 purchased $5.6 billion and $7.8 billion in UPB of loans from
consolidated trusts (or purchased delinquent loans associated with other mortgage-related guarantees) during the years ended
December 31, 2019 and December 31, 2018, respectively.
FREDDIE MAC | 2019 Form 10-K
184
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
The table below summarizes the delinquency rates of loans within our single-family credit guarantee and multifamily mortgage
portfolios.
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, 2019
December 31, 2018
0.70%
42,485
0.79%
15,261
0.40%
18,143
0.63%
70,162
—%
$2
0.09%
$244
0.08%
$246
0.83%
51,197
0.86%
15,287
0.31%
12,920
0.69%
75,649
—%
$2
0.01%
$28
0.01%
$30
(1)
(2)
The credit-enhanced categories are not mutually exclusive, as a single loan may be covered by both primary mortgage insurance and other credit protection.
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.
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 our guarantees to unconsolidated securitization trusts 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 purchased from consolidated trusts. These seriously delinquent and TDR loans historically have a
higher associated allowance for loan losses than loans that remain in consolidated trusts.
FREDDIE MAC | 2019 Form 10-K
185
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
The table below summarizes changes in our allowance for credit losses.
Table 4.7 - Details of Allowance for Credit Losses
2019
Allowance for Loan
Losses
Year Ended December 31,
2018
Allowance for Loan
Losses
2017
Allowance for Loan
Losses
Held by
Freddie
Mac
Held By
Consolidated
Trusts
Total
Reserve
for
Guarantee
Losses
Held by
Freddie
Mac
Held By
Consolidated
Trusts
Total
Reserve
for
Guarantee
Losses
Held by
Freddie
Mac
Held By
Consolidated
Trusts
Total
Reserve
for
Guarantee
Losses
$3,003
$3,127
$46 $6,176
$5,251
$3,680
$48
$8,979
$10,443
$2,968
$52
$13,463
(684)
(1,676)
439
372
122
(70)
(56)
13
(372)
4
5
(749)
(861)
(5)
(1,737)
(2,823)
—
—
—
452
—
126
467
676
293
145
(56)
8
(676)
26
4
(6)
—
—
—
(712)
(2,885)
(1,447)
(4,939)
475
—
319
419
540
235
1,350
(108)
6
(540)
4
—
(4)
—
—
—
(97)
(5,051)
425
—
239
$1,576
$2,646
$46 $4,268
$3,003
$3,127
$46
$6,176
$5,251
$3,680
$48
$8,979
$6
2
—
—
(1)
—
$7
$3
1
—
—
1
—
$5
$6
$15
$28
$7
$9
$44
$18
$2
$15
$35
—
—
—
—
—
$6
3
—
—
—
—
$18
(23)
(6)
3
4
—
$6
—
—
—
(4)
—
$3
(1)
(2)
—
—
—
$6
(24)
(8)
3
—
—
15
(4)
—
(1)
—
$15
$28
4
—
—
1
—
$7
(6)
—
—
—
—
$9
13
(4)
—
—
—
$44
$3,009
$3,130
$52 $6,191
$5,279
$3,687
$57
$9,023
$10,461
$2,970
$67
$13,498
(682)
(1,676)
439
371
122
(69)
(56)
13
(371)
4
5
(746)
(884)
(5)
(1,737)
(2,829)
—
—
—
452
—
126
470
680
293
145
(56)
8
(680)
26
3
(8)
—
—
—
(736)
(2,893)
(1,432)
(4,943)
478
—
319
419
539
235
1,354
(108)
6
(539)
4
(6)
(4)
—
—
—
(84)
(5,055)
425
—
239
$1,583
$2,651
$52 $4,286
$3,009
$3,130
$52
$6,191
$5,279
$3,687
$57
$9,023
(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)
(2)
Relates to removal of delinquent loans from consolidated trusts and resecuritization after such removal.
Primarily includes capitalization of past due interest on modified loans.
A significant number of unsecuritized single-family loans on our consolidated balance sheets are individually evaluated for
impairment while substantially all single-family loans held by our consolidated trusts are collectively evaluated for impairment.
The ending balance of the allowance for loan losses associated with our held-for-investment unsecuritized loans represented
approximately 3.4%, 6.6%, and 7.8%of the recorded investment in such loans at December 31, 2019, 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 0.1%, 0.2%, and 0.2% of the recorded
investment in such loans as of December 31, 2019, December 31, 2018, and December 31, 2017, respectively.
FREDDIE MAC | 2019 Form 10-K
186
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
The table below presents our allowance for loan losses and our recorded investment in loans, held-for-investment, by
impairment evaluation methodology.
Table 4.8 - 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, 2019
December 31, 2018
Single-family Multifamily
Total
Single-family Multifamily
Total
$1,936,208
35,449
1,971,657
$17,408
81
$1,953,616
35,530
$1,830,044
46,421
$14,945
85
$1,844,989
46,506
17,489
1,989,146
1,876,465
15,030
1,891,495
(1,350)
(2,872)
(4,222)
(12)
—
(12)
(1,362)
(2,872)
(4,234)
(1,761)
(4,369)
(6,130)
(9)
—
(9)
(1,770)
(4,369)
(6,139)
Net investment in loans
$1,967,435
$17,477
$1,984,912
$1,870,335
$15,021
$1,885,356
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 when a loss is incurred, 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 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 from the collateral
and attached credit enhancements, 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 of historical home price changes on borrower
behavior.
FREDDIE MAC | 2019 Form 10-K
187
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
We apply proceeds from attached credit enhancements (e.g., primary mortgage insurance) 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. See Note 6 for additional
information on credit enhancements.
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.
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 4.9 - 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, 2019
Balance at December 31, 2018
UPB
Recorded
Investment
Associated
Allowance
UPB
Recorded
Investment
Associated
Allowance
$2,431
21
169
847
3,468
28,824
616
131
3,315
32,886
31,255
637
300
4,162
36,354
86
—
86
$1,927
20
169
727
2,843
28,667
625
130
3,184
32,606
30,594
645
299
3,911
35,449
81
—
81
N/A
N/A
N/A
N/A
N/A
(2,416)
(13)
(7)
(436)
(2,872)
(2,416)
(13)
(7)
(436)
(2,872)
N/A
—
—
$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
—
—
Total single-family and multifamily
$36,440
$35,530
($2,872)
$48,276
$46,506
($4,369)
Referenced footnotes are included after the next table.
FREDDIE MAC | 2019 Form 10-K
188
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
2019
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)
Average
Recorded
Investment
Interest
Income
Recognized
Interest
Income
Recognized
on Cash
Basis(3)
$2,450
$262
20
200
891
1
11
66
3,561
340
$7
—
—
1
8
$3,236
$346
$16
$3,556
$399
$16
21
248
1,264
4,769
3
12
88
449
—
1
4
21
25
292
1,471
5,344
1
11
110
521
—
—
5
21
32,960
1,805
156
44,055
2,156
274
44,057
2,513
248
653
135
3,917
22
6
226
4
2
20
798
197
5,953
28
6
273
9
3
30
599
261
7,366
32
9
378
6
3
33
37,665
2,059
182
51,003
2,463
316
52,283
2,932
290
35,410
2,067
163
47,291
2,502
290
47,613
2,912
264
673
335
4,808
41,226
83
—
83
23
17
292
2,399
5
—
5
4
2
21
190
1
—
1
819
445
7,217
55,772
131
3
134
31
18
361
2,912
6
—
6
9
4
34
337
2
—
2
624
553
8,837
57,627
286
45
331
33
20
488
3,453
9
1
10
6
3
38
311
3
1
4
$41,309
$2,404
$191
$55,906
$2,918
$339
$57,958
$3,463
$315
(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
Total single-family and
multifamily
(1)
(2)
(3)
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.
Consists primarily of loans classified as TDRs.
Consists of income recognized during the period related to loans on non-accrual status.
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:
FREDDIE MAC | 2019 Form 10-K
189
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
A trial period where the expected permanent modification will change our expectation of collecting all amounts due at the
original contract rate;
A delay in payment that is more than insignificant;
A reduction in the contractual interest rate;
Interest forbearance for a period of time that is more than insignificant or forgiveness of accrued but uncollected interest
amounts;
Principal forbearance that is more than insignificant; and
Discharge of the borrower's obligation in Chapter 7 bankruptcy.
The table below presents the volume of single-family and multifamily loans that were newly classified as TDRs during the years
ended December 31, 2019, 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 4.10 - 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,
2019
2018
2017
Number of
Loans
Post-TDR
Recorded
Investment
Number of
Loans
Post-TDR
Recorded
Investment
Number of
Loans
Post-TDR
Recorded
Investment
25,924
3,018
529
1,523
30,994
—
$4,331
296
86
219
4,932
$—
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, 2019, December 31, 2018, and December
31, 2017 was $4.9 billion, $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 and
includes loans that were reclassified from held-for-investment to held-for-sale after TDR modifications.
Table 4.11 - Payment Defaults of Completed TDR Modifications
(Dollars in millions)
Single-family:
Year Ended December 31,
2019
2018
2017
Number of
Loans
Post-TDR
Recorded
Investment
Number of
Loans
Post-TDR
Recorded
Investment
Number of
Loans
Post-TDR
Recorded
Investment
20- and 30-year or more, amortizing fixed-rate
13,428
$1,702
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
451
132
871
14,882
—
36
15
129
1,882
$—
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, 2019, December 31, 2018, and
December 31, 2017, 5,158, 8,488, and 7,090, respectively, of such loans (with a post-TDR recorded investment of $0.6 billion,
$1.0 billion, and $0.9 billion, respectively) experienced a payment default within a year after the loss mitigation activity
occurred.
FREDDIE MAC | 2019 Form 10-K
190
Financial Statements
Single-Family Loans
Notes to the Consolidated Financial Statements | Note 4
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 primary mortgage insurance and similar sources.
Of the single-family loan modifications that were classified as TDRs during 2019, 2018, and 2017 respectively:
9%, 12%, and 37% involved interest rate reductions and, in certain cases, term extensions;
23%, 24%, and 14% involved principal forbearance in addition to interest rate reductions and, in certain cases, term
extensions;
The average term extension was 180, 132, and 176 months; and
The average interest rate reduction was 0.1%, 0.2%, and 0.6%.
Substantially all of our completed single-family loan modifications classified as a TDR during 2019 resulted in a modified loan
with a fixed interest rate. However, many of these fixed-rate loans include provisions for the reduced interest rates to remain
fixed for the first five years of the modification and then increase at a rate of up to one percent per year until the interest rate
has been adjusted to the market rate that was in effect at the time of the modification.
Multifamily Loans
Multifamily impaired loans include TDRs, loans three monthly payments or more past due, and loans that are deemed impaired
based on management judgment. Factors considered by management in determining whether a loan is impaired include the
underlying property's operating performance as represented by its current DSCR, available credit enhancements, current LTV
ratio, management of the underlying property, and the property's geographic location.
Multifamily loans are generally measured individually for impairment based on the fair value of the underlying collateral, as
reduced by estimated disposition costs, as the repayment of these loans is generally provided from the cash flows of the
underlying collateral and any associated credit enhancement. Except for cases of fraud and certain other types of borrower
defaults, most multifamily loans are non-recourse to the borrower. As a result, the cash flows of the underlying property
(including any associated credit enhancements) serve as the source of funds for repayment of the loan. Interest income
recognition on multifamily impaired loans is subject to our non-accrual policy as discussed in Interest Income above.
The assessment as to whether a multifamily loan restructuring is considered a TDR contemplates the unique facts and
circumstances of each loan. This assessment considers qualitative factors such as whether the borrower's modified interest
rate is consistent with that of a non-troubled borrower having a similar credit profile at the time of modification. In certain cases,
for maturing loans we may provide short-term loan extensions of up to one year with no changes to the effective borrowing
rate. In other cases, we may make more significant modifications of terms for borrowers experiencing financial difficulty, such
as reducing the interest rate, extending the maturity for longer than one year, providing principal forbearance, or some
combination of these terms.
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. 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
investment gains (losses), net. 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 investment gains (losses). Under the new policy, benefit (provision) for credit losses is the only
line item affected when a transfer occurs.
FREDDIE MAC | 2019 Form 10-K
191
Financial Statements
Notes to the Consolidated Financial Statements | Note 4
Non-Cash Investing and Financing Activities
During the years ended December 31, 2019, December 31, 2018, and December 31, 2017, we acquired $238.4 billion, $164.0
billion, and $229.2 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 $47.4 billion, $25.6 billion, and $35.9 billion of
loans from sellers in guarantor swap transactions during the years ended December 31, 2019, December 31, 2018, and
December 31, 2017, respectively, and $2.6 billion and $0.2 billion of loans from sellers in cash execution transactions during the
years ended December 31, 2019 and December 31, 2018, respectively, to satisfy advances to lenders that were recorded in
other assets on our consolidated balance sheets.
In addition, we acquired REO properties through foreclosure sales or by deed in lieu of foreclosure. These acquisitions
represent non-cash transfers. During the years ended December 31, 2019, December 31, 2018, and December 31, 2017, we
had transfers of $0.8 billion, $1.0 billion, and $1.1 billion, respectively, from loans to REO.
FREDDIE MAC | 2019 Form 10-K
192
Financial Statements
NOTE 5
Notes to the Consolidated Financial Statements | Note 5
Guarantee Activities
We generate revenue through our guarantee activities by agreeing to absorb the credit risk associated with certain financial
instruments that are owned or held by third parties. In exchange for providing this guarantee, we receive an ongoing guarantee
fee that is commensurate with the risks assumed and that will, over the long-term, provide us with cash flows that are expected
to exceed the credit-related and administrative expenses of the underlying financial instruments. The profitability of our
guarantee activities may vary and will be dependent on our guarantee fee and the actual credit performance of the underlying
financial instruments that we have guaranteed.
Guarantees to consolidated entities are eliminated in consolidation and therefore are not separately recognized on our
consolidated balance sheets. The accounting treatment for guarantees provided to non-consolidated entities or other third
parties will depend on whether the guarantee contract qualifies as a financial guarantee.
If the guarantee contract qualifies as a financial guarantee and exposes us to incremental credit risk, we will recognize both a
guarantee obligation at fair value and the consideration we receive for providing the guarantee, which typically consists of a
guarantee asset that represents the fair value of future guarantee fees. As a practical expedient, the measurement of the fair
value of the guarantee obligation is set equal to the consideration we receive to provide the guarantee, and no gain or loss is
recognized upon issuance of the guarantee. Subsequently, we recognize changes in the fair value of the guarantee asset in
current period earnings and amortize the guarantee obligation into earnings as we are released from risk under the guarantee.
We also recognize a reserve for guarantee losses when it is probable that a loss has been incurred under the guarantee.
If the guarantee contract provided to non-consolidated entities does not qualify as a financial guarantee, that contract will
generally be accounted for as a 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.
Guarantees of Fannie Mae Securities Under the Single Security Initiative
As part of the Single Security Initiative, we have the ability to commingle TBA-eligible Fannie Mae collateral in certain of our
resecuritization products. We extend our guarantee of these products to cover principal and interest that are payable from the
underlying Fannie Mae collateral. Because both Freddie Mac and Fannie Mae are under the common control of FHFA, and due
to Fannie Mae’s status as a GSE and the funding commitment available to it through its senior preferred stock purchase
agreement with Treasury, we view the likelihood of being required to perform on our guarantee of Fannie Mae collateral as
remote and do not charge an incremental guarantee fee to include Fannie Mae securities in our resecuritization products. Thus,
we do not record a guarantee obligation with respect to Fannie Mae securities backing Freddie Mac resecuritization products.
We guaranteed approximately $27.4 billion of Fannie Mae securities backing Freddie Mac resecuritization products as of
December 31, 2019.
Other Mortgage-Related Guarantees
In certain circumstances, we provide a guarantee of mortgage-related assets held by third parties, in exchange for a guarantee
fee, without securitizing those assets. These guarantees consist of the following:
Long-term standby commitments of single-family loans which obligate us to purchase the covered loans when they
become seriously delinquent. Periodically, certain of our customers seek to terminate long-term standby commitments and
simultaneously enter into guarantor swap transactions to obtain our securities backed by many of the same loans. During
2019 and 2018, we guaranteed $2.3 billion and $0.5 billion, respectively, of loans under new long-term standby
commitments and
Guarantees of multifamily bonds, including guarantees that require us to advance funds to enable others to repurchase any
tendered tax-exempt and related taxable bonds that are unable to be sold. The vast majority of these guarantees were
guarantees of multifamily housing revenue bonds that were issued by HFAs. No advances under these guarantees were
outstanding at both December 31, 2019 and December 31, 2018. During 2019 and 2018, we guaranteed $0.9 billion and
$0.6 billion, respectively, of multifamily bonds.
FREDDIE MAC | 2019 Form 10-K
193
Financial Statements
Notes to the Consolidated Financial Statements | Note 5
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,
2019 and December 31, 2018.
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
enhancements. See Note 6 for additional information on our credit enhancements. Our guarantees of Fannie Mae securities
backing Freddie Mac resecuritization products are excluded from the table below.
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, 2019
As of December 31, 2018
Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term
Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term
$26,818
7,492
$34,310
$252,167
9,989
$262,156
$24,965
$361
182
$543
$3,333
416
$3,749
$253
40
30
39
34
30
$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
(1)
(2)
The maximum exposure represents the contractual amounts that could be lost if counterparties or borrowers defaulted, without consideration of possible recoveries
under credit enhancements, such as recourse provisions, third-party insurance contracts or from collateral held or pledged. For other guarantees measured at fair
value, this amount primarily 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 and, as a result, the
notional value is included. We generally reduce our exposure to these guarantees with unlimited exposure through separate contracts with third parties.
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 as of both December 31, 2019 and December 31, 2018, 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.
FREDDIE MAC | 2019 Form 10-K
194
Financial Statements
NOTE 6
Notes to the Consolidated Financial Statements | Note 6
Credit Enhancements
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.
Accounting for Credit Enhancements
Attached Credit Enhancements
Attached credit enhancements are obtained contemporaneously with, and in contemplation of, the origination of a financial
instrument, and effectively travel with the financial instrument upon sale. Attached credit enhancements include primary
mortgage insurance, which provides us with loan-level protection up to a specified percentage, and, in connection with our
securitization activity guarantees, subordination that we obtain through the creation of unguaranteed subordinated securities
issued by unconsolidated securitization trusts that absorb first losses prior to us having to perform on our guarantee of the
senior securities.
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 recoveries. With respect to
guarantees protected by subordination, we recognize a reserve for guarantee losses only when incurred losses exceed the
amount of subordination. See Note 4 for additional information concerning the determination of our allowance for credit losses
or reserve for guarantee losses.
Freestanding Credit Enhancements
Freestanding credit enhancements are contracts that are entered into separately and apart from any other financial instruments
or entered into in conjunction with some other transaction and are legally detachable and separately exercisable. Freestanding
credit enhancements include insurance/reinsurance transactions, STACR Trust notes, and lender risk-sharing transactions and
are accounted for separately from the underlying mortgage loans or guarantees.
Our primary insurance/reinsurance transactions are single-family ACIS transactions. 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 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. In addition to ACIS, our single-family insurance/reinsurance
credit enhancements include AFRM, which is similar to ACIS but provides credit protection immediately upon acquisition of the
loan, and IMAGIN, which provides loan level protection in lieu of traditional primary mortgage insurance. Our multifamily
insurance/reinsurance credit enhancements include MCIP transactions, which are similar to ACIS transactions and provide
credit protection for certain specified credit events that occur on a reference pool of multifamily mortgage assets.
STACR Trust notes transfer credit risk on a reference pool of mortgage loans to investors through the issuance of notes linked
to notional credit risk positions of the reference pool by a third-party trust. The trust issues the notes and makes periodic
payments of principal and interest on the notes to investors. Under this structure, we make payments to the trust to support
payment of the interest due on the notes, and we receive payments from the trust that otherwise would have been made to the
noteholders 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 note balances are reduced by the amount of the payments to us. This structure has been recently
enhanced so that the notes issued qualify as interests in a REMIC.
Lender risk-sharing transactions are agreements that require a lender to repurchase a loan upon default or to reimburse us for
realized credit losses. These transactions are entered into as an alternative to requiring primary mortgage insurance or in
exchange for a lower guarantee fee. The loss sharing amount may be fully or partially collateralized.
We recognize the payments we make to transfer credit risk under freestanding credit enhancements in credit enhancement
expense in our consolidated statements of comprehensive income when they are incurred. Expected recoveries for credit
losses covered under freestanding credit enhancements are recognized separately in other assets on our consolidated balance
sheets when realization of our claim for recovery is deemed probable, which typically occurs at the same time we recognize a
provision for credit losses on the associated loan (or guarantee).
For information about counterparty credit risk associated with mortgage insurers and other credit enhancement providers, see
Note 14.
FREDDIE MAC | 2019 Form 10-K
195
Financial Statements
Notes to the Consolidated Financial Statements | Note 6
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 subordination.
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 written down and the benefits are recognized as investment gains
(losses), net 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 investment gains (losses), net on our consolidated statement of
comprehensive income.
Similar to our non-consolidated VIEs, we obtain credit enhancement on certain of our consolidated 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
generally 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 investment gains (losses), net on our consolidated statements of
comprehensive income.
FREDDIE MAC | 2019 Form 10-K
196
Financial Statements
Notes to the Consolidated Financial Statements | Note 6
Single-Family Credit Enhancements
The table below presents the total current and protected UPB and maximum amounts of potential loss recovery related to our
single-family credit enhancements.
Table 6.1 - Single-Family Credit Enhancements
(In millions)
Primary mortgage insurance
STACR: (2)
Trust notes
Debt notes
Insurance/reinsurance (3)
Subordination:
Non-consolidated VIEs (4)
Consolidated VIEs (5)
Lender risk-sharing
Other
Credit Enhancement
Accounting Treatment
Attached
December 31, 2019
December 31, 2018
Total Current
and
Protected
UPB(1)
$421,870
Maximum
Coverage
$107,690
Total Current
and
Protected
UPB(1)
$378,594
Maximum
Coverage
$96,996
Freestanding
Debt
Freestanding
Attached
Debt
Freestanding
Primarily attached
288,323
536,036
863,149
25,443
19,498
24,078
1,056
9,739
15,373
10,157
4,545
854
5,657
1,051
161,152
605,263
808,484
16,271
25,006
17,458
1,305
5,026
17,596
9,278
2,933
1,036
5,170
1,290
Total single-family credit enhancements
$155,066
$139,325
(1)
(2)
(3)
(4)
(5)
Underlying loans may be covered by more than one form of credit enhancement.
Total current and protected UPB represents the UPB of the assets included in the reference pool. Maximum coverage amount represents the outstanding balance
held by third parties.
As of December 31, 2019 and December 31, 2018, our counterparties posted sufficient collateral on our ACIS transactions to meet the minimum collateral
requirements of the ACIS program. Minimum collateral requirements are assessed on each deal based on a combination of factors, including counterparty credit risk
of the reinsurer, as well as the structure and risk profile of the transaction. Other insurance/reinsurance transactions have similar collateral requirements.
Total current and protected UPB includes the UPB of the guaranteed securities, which represents the UPB of the assets included in the trust net of the protection
provided by the subordinated securities, and the UPB of guarantor advances made to the holders of the guaranteed securities. Maximum coverage represents the
outstanding UPB of the securities that are subordinate to Freddie Mac guaranteed securities and held by third parties.
Total current and protected UPB represents the UPB of the guaranteed securities, which represents the UPB of the assets included in the trust net of the protection
provided by the subordinated securities. Maximum coverage amount represents the outstanding UPB of the securities that are subordinate to Freddie Mac
guaranteed securities and held by third parties.
FREDDIE MAC | 2019 Form 10-K
197
Financial Statements
Notes to the Consolidated Financial Statements | Note 6
Multifamily Credit Enhancements
The table below presents the total current and protected UPB and maximum amounts of potential loss recovery related to our
multifamily credit enhancements.
Table 6.2 - Multifamily Credit Enhancements
(In millions)
Subordination:
Non-consolidated VIEs (2)
Consolidated VIEs (3)
Insurance/reinsurance(4)
SCR debt notes (5)
Other (6)
Total multifamily credit enhancements
Credit Enhancement
Accounting Treatment
Attached
Debt
Freestanding
Debt
Primarily freestanding
December 31, 2019
December 31, 2018
Total Current
and
Protected
UPB(1)
Maximum
Coverage
Total Current
and
Protected
UPB(1)
Maximum
Coverage
$251,008
$40,262
$220,733
$35,661
1,800
2,769
2,470
2,996
200
127
123
848
2,700
915
2,667
2,349
280
43
133
815
$41,560
$36,932
(1)
(2)
(3)
(4)
(5)
Underlying loans may be covered by more than one form of credit enhancement.
Total current and protected UPB includes the UPB of the guaranteed securities, which represents the UPB of the assets included in the trust net of the protection
provided by the subordinated securities, and the UPB of guarantor advances made to the holders of the guaranteed securities. Maximum coverage represents the
outstanding UPB of the securities that are subordinate to Freddie Mac guaranteed securities and held by third parties.
Total current and protected UPB represents the UPB of the guaranteed securities, which represents the UPB of the assets included in the trust net of the protection
provided by the subordinated securities. Maximum coverage amount represents the outstanding UPB of the securities that are subordinate to Freddie Mac
guaranteed securities and held by third parties.
As of December 31, 2019 and December 31, 2018, the counterparties to our insurance/reinsurance transactions have complied with the minimum collateral
requirements. Minimum collateral requirements are assessed on each deal based on a combination of factors, including counterparty credit risk of the reinsurer, as
well as the structure and risk profile of the transaction.
Total current and protected UPB represents the UPB of the assets included in the reference pool. Maximum coverage amount represents the outstanding balance of
the SCR notes held by third parties.
(6) 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.
FREDDIE MAC | 2019 Form 10-K
198
Financial Statements
NOTE 7
Notes to the Consolidated Financial Statements | Note 7
Investments in Securities
The table below summarizes the fair values of our investments in debt securities by classification.
Table 7.1 - Investments in Securities
(In millions)
Trading securities
Available-for-sale securities
Total
As of December 31, 2019
As of December 31, 2018
$49,537
26,174
$75,711
$35,548
33,563
$69,111
We currently classify and account for our securities as either available-for-sale or trading. As of December 31, 2019 and
December 31, 2018, 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 gains (losses), net, 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 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.
FREDDIE MAC | 2019 Form 10-K
199
Financial Statements
Notes to the Consolidated Financial Statements | Note 7
Table 7.2 - Trading Securities
(In millions)
Mortgage-related securities:
Agency
Non-agency
Total mortgage-related securities
Non-mortgage-related securities
Total fair value of trading securities
As of December 31, 2019
As of December 31, 2018
$22,481
1
22,482
27,055
$49,537
$16,372
1
16,373
19,175
$35,548
For trading securities held at December 31, 2019, 2018, and 2017, we recorded net unrealized losses of $8 million, $479 million,
and $365 million during 2019, 2018 and 2017, respectively.
Available-for-Sale Securities
At both December 31, 2019 and December 31, 2018, 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.
Table 7.3 - Available-for-Sale Securities
(In millions)
Available-for-sale securities:
Agency
Non-agency and other
Total available-for-sale securities
(In millions)
Available-for-sale securities:
Agency
Non-agency and other
Total available-for-sale securities
As of December 31, 2019
Gross Unrealized Losses
Amortized
Cost
Gross
Unrealized
Gains
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Fair
Value
$24,390
1,004
$25,394
$571
283
$854
$—
—
$—
($74)
—
($74)
$24,887
1,287
$26,174
As of December 31, 2018
Gross Unrealized Losses
Amortized
Cost
Gross
Unrealized
Gains
Other-Than-
Temporary
Impairment(1)
Temporary
Impairment(2)
Fair
Value
$32,082
1,378
$33,460
$358
282
$640
$—
—
$—
($535)
(2)
($537)
$31,905
1,658
$33,563
(1)
(2)
Represents the gross unrealized losses for securities for which we have previously recognized other-than-temporary impairment in earnings.
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, 2019 scheduled to contractually mature after ten years
was $21.4 billion, with an additional $4.4 billion scheduled to contractually mature after five years through ten years.
FREDDIE MAC | 2019 Form 10-K
200
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:
Agency
Non-agency and other
Total available-for-sale securities in a gross unrealized loss
position
(In millions)
Available-for-sale securities:
Agency
Non-agency and other
Total available-for-sale securities in a gross unrealized loss
position
As of December 31, 2019
Less than 12 Months
12 Months or Greater
Fair
Value
Gross Unrealized
Losses
Fair
Value
Gross Unrealized
Losses
$5,778
1
$5,779
($27)
—
($27)
$2,934
—
$2,934
($47)
—
($47)
As of December 31, 2018
Less than 12 Months
12 Months or Greater
Fair
Value
Gross Unrealized
Losses
Fair
Value
Gross Unrealized
Losses
$4,610
43
$4,653
($39)
(1)
($40)
$15,389
6
$15,395
($496)
(1)
($497)
At December 31, 2019, the gross unrealized losses relate to 179 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 lot 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 lot's entire decline in fair value is deemed to be
other-than-temporary and is recorded within our consolidated statements of comprehensive income as investment gains
(losses), net.
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.
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.
FREDDIE MAC | 2019 Form 10-K
201
Financial Statements
Notes to the Consolidated Financial Statements | Note 7
Non-Agency Residential Mortgage-Backed Securities
The unrealized losses on the non-agency RMBS we hold are minimal and mainly attributable to poor underlying collateral
performance, limited liquidity, and risk premiums. In evaluating securities for impairment, we use an internal model that
considers the credit performance of the underlying collateral, including delinquencies and prepayments, and incorporates
assumptions about the economic environment.
Other-than-Temporary Impairments
For our available-for-sale securities in an unrealized loss position at December 31, 2019, we have asserted that we have no
intent to sell or believe it is not more than 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 $0.6 billion, $0.8 billion, and $1.1 billion as of
December 31, 2019, December 31, 2018, and December 31, 2017, respectively.
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,
2019
2018
2017
$219
(49)
$170
$627
(303)
$324
$1,792
(66)
$1,726
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, 2019.
In addition, during the year ended December 31, 2019, we recognized $10.9 billion of investments in securities in exchange for
the issuance of debt securities of consolidated trusts through partial sales of commingled single-class securities that were
previously consolidated.
FREDDIE MAC | 2019 Form 10-K
202
Financial Statements
NOTE 8
Notes to the Consolidated Financial Statements | Note 8
Debt Securities and Subordinated Borrowings
The table below summarizes the interest expense per our consolidated statements of comprehensive income and the balances
of total debt, net per our consolidated balance sheets.
Table 8.1 - Total Debt, Net
(In millions)
Balance, Net
Interest Expense
As of December 31,
For The Year Ended December 31,
2019
2018
2019
2018
2017
Debt securities of consolidated trusts held by third parties
$1,898,355
$1,792,677
$53,980
$51,529
$47,656
Other debt:
Short-term debt
Long-term debt
Total other debt
Total debt, net
110,877
170,296
281,173
51,080
201,193
252,273
1,910
5,157
7,067
1,193
5,311
6,504
615
5,372
5,987
$2,179,528
$2,044,950
$61,047
$58,033
$53,643
We apply 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 hedge
accounting-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 hedge accounting-related
basis adjustments begins upon the discontinuation of the related hedge relationship.
We elected the fair value option on debt that contains embedded derivatives, including certain STACR debt notes and SCR
debt notes. For additional information on STACR debt notes and SCR debt notes, see Note 6. Changes in the fair value of
these debt obligations are recorded in investment gains (losses), net, 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 investment gains (losses), net. Contemporaneous transfers
of cash between us and a creditor in connection with the issuance of a new debt security and satisfaction of an existing debt
security are accounted for as either an extinguishment or a modification of an existing debt security. If the debt securities have
substantially different terms, the transaction is accounted for as an extinguishment of the existing debt security. The issuance of
a new debt security is recorded at fair value, fees paid to the creditor are expensed as incurred, and fees paid to third parties
are deferred and amortized into interest expense over the life of the new debt security using the effective interest method. If the
terms of the existing debt security and the new debt security are not substantially different, the transaction is accounted for as
a modification of the existing debt. Fees paid to the creditor are deferred and amortized into interest expense over the life of the
modified debt security using the effective interest method and fees paid to third parties are expensed as incurred.
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.
FREDDIE MAC | 2019 Form 10-K
203
Financial Statements
Notes to the Consolidated Financial Statements | Note 8
Beginning January 1, 2019, our debt cap under the Purchase Agreement is $300 billion. As of December 31, 2019, our
aggregate indebtedness for purposes of the debt cap was $283.2 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.
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, 2019
As of December 31, 2018
Contractual
Maturity
UPB
Carrying
Amount(1)
Weighted
Average
Coupon(2)
Contractual
Maturity
UPB
Carrying
Amount(1)
Weighted
Average
Coupon(2)
2020 - 2057 $1,516,550 $1,554,095
72,558
2020 - 2040
229,133
2020 - 2035
30,756
2020 - 2050
4,307
2026 - 2041
647
2020 - 2049
1,891,496
6,859
70,901
225,501
30,183
4,244
633
1,848,012
6,790
2021 - 2049
3.63% 2019 - 2057 $1,389,113 $1,426,060
72,354
3.37% 2019 - 2039
244,587
2.87% 2019 - 2034
39,153
3.25% 2019 - 2049
5,386
4.55% 2026 - 2048
736
4.68% 2019 - 2046
1,788,276
4,401
70,547
240,310
38,361
5,322
720
1,744,373
4,365
3.29% 2019 - 2047
3.72%
3.43%
2.89%
3.12%
4.41%
4.78%
4.02%
Total debt securities of consolidated
trusts held by third parties
$1,854,802 $1,898,355
$1,748,738 $1,792,677
(1)
(2)
Includes $209 million and $755 million at December 31, 2019 and December 31, 2018, respectively, of debt of consolidated trusts that represents the fair value of
debt securities with the fair value option elected.
The effective rate for debt securities of consolidated trusts held by third parties was 2.79% and 3.07% as of December 31, 2019 and December 31, 2018,
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, 2019
As of December 31, 2018
Par Value
Carrying
Amount
Weighted
Average
Effective Rate
Par Value
Carrying
Amount
Weighted
Average
Effective Rate
Discount notes and Reference Bills
$60,830
$60,629
1.67%
$28,787
$28,621
Medium-term notes
Securities sold under agreements to repurchase
40,407
9,843
40,405
9,843
2.31
1.46
16,440
6,019
16,440
6,019
Total other short-term debt
$111,080
$110,877
1.89%
$51,246
$51,080
FREDDIE MAC | 2019 Form 10-K
2.36%
2.10
2.40
2.28%
204
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:
Zero-coupon
Total other subordinated debt
Total other long-term debt
As of December 31, 2019
As of December 31, 2018
Contractual
Maturity
Par Value
Carrying
Amount(1)
Weighted
Average
Effective
Rate(2)
Par Value
Carrying
Amount(1)
Weighted
Average
Effective
Rate(2)
2020 - 2037
2020 - 2028
2020 - 2032
2031 - 2042
2020 - 2034
2020 - 2026
2023 - 2042
2020 - 2039
2047 - 2049
$83,470
2,498
39,124
123
$83,433
2,519
39,176
126
10,682
15,727
15,373
4,880
—
N/A
10,668
15,724
15,526
2,450
6
668
2.01%
2.14%
2.71%
12.74%
2.18%
2.45%
5.58%
5.94%
0.63%
$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%
171,877
170,296
203,392
200,890
—
—
—
—
—%
332
332
303
303
10.51%
$171,877
$170,296
2.61% $203,724
$201,193
2.58%
(1)
Represents par value, net of associated discounts or premiums and issuance costs. Includes $3.7 billion and $4.4 billion at December 31, 2019 and December 31,
2018, 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.
The table below summarizes the contractual maturities of other long-term debt securities at December 31, 2019.
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):
2020
2021
2022
2023
2024
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
$45,133
30,069
23,185
13,413
26,966
17,615
1,870,298
2,026,679
41,972
$2,068,651
(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.
FREDDIE MAC | 2019 Form 10-K
205
Financial Statements
Notes to the Consolidated Financial Statements | Note 8
Non-Cash Investing and Financing Activities
During the year ended December 31, 2019, we issued $0.7 billion of other debt in exchange for cash collateral that was
previously pledged by sellers. These debt issuances represent non-cash transactions.
FREDDIE MAC | 2019 Form 10-K
206
Financial Statements
NOTE 9
Notes to the Consolidated Financial Statements | Note 9
Derivatives
Derivatives are reported at their fair value on our consolidated balance sheets. Changes in fair value and interest accruals on
derivatives not in qualifying fair value hedge relationships are recorded as investment gains (losses), net, on our consolidated
statements of comprehensive income. 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. 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 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.
On our 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.
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- and SOFR-based interest-rate swaps;
LIBOR- and Treasury-based purchased options (including swaptions); and
LIBOR-, Treasury-, and SOFR-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 and
commitments.
FREDDIE MAC | 2019 Form 10-K
207
Financial Statements
Notes to the Consolidated Financial Statements | Note 9
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.
Hedge Accounting
Fair Value Hedges
We apply 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. We also apply 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. Beginning in September 2019, we implemented a
new fair value hedge accounting strategy for single-family mortgage loans that applies certain hedge accounting elections,
including the last-of-layer method, allowable under amended hedge accounting guidance we adopted during 4Q 2017. Under
the last-of-layer method, we hedge the changes in fair value of a portion of a closed pool of single-family mortgage loans that is
not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. As part
of this new strategy, we have also elected to measure the change in fair value of the hedged item on the basis of the
benchmark rate component of the contractual coupon cash flows determined at the hedge inception and by assuming the
hedged item has a term that reflects only the designated cash flows being hedged.
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.
FREDDIE MAC | 2019 Form 10-K
208
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, 2019 and December 31, 2018, we reclassified from AOCI into
earnings, losses of $90 million and $133 million, respectively, related to closed cash flow hedges. See Note 11 for information
about future reclassifications of deferred net losses related to closed cash flow hedges to net income.
Derivative Assets and Liabilities at Fair Value
The table below presents the notional value and fair value of derivatives reported on our consolidated balance sheets.
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
CRT-related 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, 2019
As of December 31, 2018
Notional or
Contractual
Amount
Derivatives at Fair Value
Assets
Liabilities
Notional or
Contractual
Amount
Derivatives at Fair Value
Assets
Liabilities
$230,926
251,392
5,924
488,242
75,325
3,375
67,155
7,275
10,334
163,464
210,305
93,960
12,362
5,984
974,317
104,459
87,907
192,366
$1,166,683
$1,990
10
—
2,000
2,717
—
835
—
646
4,198
—
61
15
1
6,275
104
—
104
887
(6,422)
$844
($6)
(4,162)
—
(4,168)
—
(42)
—
(88)
—
(130)
—
(126)
(116)
(28)
(4,568)
(75)
(639)
(714)
(724)
5,634
($372)
$145,386
170,899
5,404
321,689
43,625
4,400
88,075
1,750
10,481
148,331
161,185
36,044
7,514
6,728
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)
(74)
(64)
(2,922)
(935)
(571)
(1,506)
(1,096)
4,941
($583)
(1)
(2)
(3)
(4)
Includes swaptions on credit indices with a notional or contractual amount of $11.4 billion and $45.9 billion at December 31, 2019 and December 31, 2018,
respectively, and a fair value of $3.0 million and $113.0 million at December 31, 2019 and December 31, 2018, respectively.
Primarily consists of purchased interest-rate caps and floors.
Includes other derivative receivables and payables.
Represents counterparty netting and cash collateral netting.
See Note 10 for information related to our derivative counterparties and collateral held and posted.
FREDDIE MAC | 2019 Form 10-K
209
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
investment gains (losses), net. 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
CRT-related derivatives
Other
Total other
Accrual of periodic cash settlements:
Receive-fixed interest-rate swaps
Pay-fixed interest-rate swaps
Other(2)
Total accrual of periodic cash settlements
Total
(1)
(2)
Primarily consists of purchased interest-rate caps and floors.
Includes interest on variation margin on cleared interest-rate swaps.
Year Ended December 31,
2019
2018
2017
$4,444
(7,543)
14
(3,085)
1,663
(296)
(1,258)
61
18
188
(946)
(452)
(1)
52
(1,347)
90
(525)
163
(272)
($2,457)
3,880
(1)
1,422
(791)
20
272
(2)
(129)
(630)
57
606
(38)
(6)
619
364
(584)
79
(141)
($4,516)
$1,270
($1,343)
1,972
(3)
626
(404)
24
(673)
50
(38)
(1,041)
144
(91)
(30)
(6)
17
1,511
(3,101)
—
(1,590)
($1,988)
FREDDIE MAC | 2019 Form 10-K
210
Financial Statements
Notes to the Consolidated Financial Statements | Note 9
Fair Value Hedges
The tables below present the effects of fair value hedge accounting by consolidated statements of comprehensive income line,
including the gains and losses on derivatives and hedged items designated in qualifying hedge relationships and other
components due to the application of hedge accounting.
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:
Year Ended December 31, 2019
Interest Income -
Mortgage Loans
Interest Expense
Other Income
(Loss)
$68,583
($61,047)
$323
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
4,569
(4,309)
(48)
(446)
—
—
—
—
—
—
—
—
(1,038)
1,231
(184)
63
—
—
—
—
—
—
—
—
(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:
Year Ended December 31, 2018
Interest Income -
Mortgage Loans
Interest Expense
Other Income
(Loss)
$66,037
($58,033)
$762
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
(1,776)
1,091
(439)
133
—
—
—
—
—
—
—
—
145
155
(313)
(3)
—
—
—
—
—
—
—
—
FREDDIE MAC | 2019 Form 10-K
211
Financial Statements
Notes to the Consolidated Financial Statements | Note 9
(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:
Year Ended December 31, 2017
Interest Income -
Mortgage Loans
Interest Expense
Other Income
(Loss)
$63,735
($53,643)
$4,984
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
(107)
313
(83)
(16)
—
—
—
—
—
—
—
—
93
(53)
8
—
351
(215)
—
—
—
—
—
—
(1)
(2)
For the first three quarters of 2017, the gains or losses on derivatives and hedged items were recorded in other income (loss). Beginning in 4Q 2017, gains or losses
are recorded in interest income - mortgage loans on our consolidated statements of comprehensive income due to adoption of amended hedge accounting
guidance.
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.
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
December 31, 2019
Cumulative Amount of Fair Value Hedging Basis
Adjustment Included in the Carrying Amount
Closed Portfolio Under the Last-
of-Layer Method
Under the
Last-of-Layer
Method
Discontinued -
Hedge Related
Total Amount
by Amortized
Cost Basis
Designated
Amount by
UPB
($943)
—
$3,829
$273,346
$22,747
(93)
—
—
Total
$2,886
(668)
December 31, 2018
Cumulative Amount of Fair Value Hedging Basis
Adjustment Included in the Carrying Amount
Closed Portfolio Under the Last-
of-Layer Method
Under the
Last-of-Layer
Method
Discontinued -
Hedge Related
Total Amount
by Amortized
Cost Basis
Designated
Amount by
UPB
$—
—
($1,237)
(8)
$—
—
$—
—
Total
($1,237)
216
Carrying
Amount
Assets /
(Liabilities)
$470,889
(122,746)
Carrying
Amount
Assets /
(Liabilities)
$193,547
(127,215)
(In millions)
Mortgage loans held-for-investment
Debt
(In millions)
Mortgage loans held-for-investment
Debt
FREDDIE MAC | 2019 Form 10-K
212
Financial Statements
NOTE 10
Notes to the Consolidated Financial Statements | Note 10
Collateralized Agreements and Offsetting Arrangements
Derivative Portfolio
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, 2019, our maximum loss for accounting purposes after applying netting agreements and
collateral on an individual counterparty basis would have been approximately $20 million. A significant majority of our net
uncollateralized exposure to OTC derivative counterparties is concentrated with two counterparties, all of which were
investment grade as of December 31, 2019. 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.
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, 2019 was $1.7 billion for which we posted cash and non-cash collateral of $1.7 billion in the normal
course of business. A reduction in our credit ratings may trigger additional collateral requirements related to these OTC
derivative instruments. If a reduction in our credit ratings had triggered additional collateral requirements related to these OTC
derivative instruments on December 31, 2019, the maximum additional collateral we would have been required to post to our
counterparties would be $0.1 billion. Our OTC derivative transactions will become subject to new initial margin requirements on
September 1, 2020.
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 daily via payments made through the clearinghouse. We net our exposure
to cleared derivatives by clearinghouse and clearing member. 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.
FREDDIE MAC | 2019 Form 10-K
213
Financial Statements
Other Derivatives
Notes to the Consolidated Financial Statements | Note 10
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 $61 million and $90 million at December 31, 2019 and December 31, 2018, 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/
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. These agreements may allow us to repledge all or a portion of the collateral
pledged to us, and we may repledge such collateral periodically, although it is not typically our practice to repledge collateral
that has been pledged to us.
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 the transferor does not relinquish effective control over the securities transferred.
These agreements may allow our counterparties to repledge all or a portion of the collateral. Beginning in 2017, certain of our
trades involving securities sold under agreements to repurchase utilized GSD/FICC as a clearinghouse.
Offsetting of Financial Assets and Liabilities
When we receive cash collateral, we recognize the amount received along with a corresponding obligation to return the
collateral. When we post cash collateral, we derecognize the amount posted along with a corresponding asset for our right to
receive the return of the collateral. We generally do not recognize or derecognize collateral received or pledged in the form of
securities as the transferor in such arrangements does not relinquish effective control over the securities transferred. See Note
9 for additional information on our consolidated balance sheets presentation of collateral related to derivatives transactions. At
December 31, 2019 and December 31, 2018, 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.
FREDDIE MAC | 2019 Form 10-K
214
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
As of December 31, 2019
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
$7,045
144
77
7,266
66,114
($4,465)
(5)
—
(4,470)
($2,075)
123
—
(1,952)
—
—
$73,380
($4,470)
($1,952)
($5,731)
$4,465
$1,164
(5)
(270)
(6,006)
(9,843)
5
—
4,470
—
—
—
1,164
—
$505
262
77
844
66,114
$66,958
($102)
—
(270)
(372)
(9,843)
($485)
—
—
(485)
(66,114)
$20
262
77
359
—
($66,599)
$359
$— ($102)
—
—
—
9,843
—
(270)
(372)
—
(In millions)
Assets:
Derivatives:
OTC derivatives
Cleared and exchange-traded derivatives
Other
Total derivatives
Securities purchased under agreements to resell(3)
Total
Liabilities:
Derivatives:
OTC derivatives
Cleared and exchange-traded derivatives
Other
Total derivatives
Securities sold under agreements to repurchase(3)
Total
($15,849)
$4,470
$1,164
($10,215)
$9,843
($372)
(In millions)
Assets:
Derivatives:
OTC derivatives
Cleared and exchange-traded derivatives
Other
Total derivatives
Securities purchased under agreements to resell(3)
Total
Liabilities:
Derivatives:
OTC derivatives
Cleared and exchange-traded derivatives
Other
Total derivatives
Securities sold under agreements to repurchase(3)
Total
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)
(244)
(317)
(5,524)
(6,019)
($11,543)
$4,544
—
—
4,544
—
$4,544
$296
101
—
397
—
$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)
—
(143)
—
—
6,019
$6,019
(317)
(583)
—
($583)
(1)
Excess cash collateral held is presented as a derivative liability, while excess cash collateral posted is presented as a derivative asset.
(2) Does not include the fair value amount of non-cash collateral posted or held that exceeds the associated net asset or liability, netted by counterparty, presented on
the consolidated balance sheets. For cleared and exchange-traded derivatives, does not include non-cash collateral posted by us as initial margin with an
aggregate fair value of $3.5 billion and $2.5 billion as of December 31, 2019 and December 31, 2018, respectively.
(3) Does not include the impacts of netting by central clearing organizations.
FREDDIE MAC | 2019 Form 10-K
215
Financial Statements
Notes to the Consolidated Financial Statements | Note 10
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, 2019 and December 31, 2018, we had $52.4 billion and $20.1 billion, respectively, of
securities pledged to us in these transactions. In addition, at December 31, 2019 and December 31, 2018, we had $2.4 billion
and $2.5 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.
Collateral Pledged
Collateral Pledged to Freddie Mac
We have cash pledged to us as collateral primarily related to OTC derivative transactions. We had $2.6 billion and $3.0 billion
pledged to us as collateral that was invested as part of our Liquidity and Contingency Operating Portfolio as of December 31,
2019 and December 31, 2018, 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)
Debt securities of consolidated trusts(2)
Trading securities
Total securities pledged
(In millions)
Cash equivalents(1)
Debt securities of consolidated trusts(2)
Available-for-sale securities
Trading securities
Total securities pledged
As of December 31, 2019
Derivatives
Securities sold under
agreements to
repurchase
Other(3)
Total
$562
2,894
$3,456
$—
9,346
$9,346
$280
49
$329
$842
12,289
$13,131
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
(1)
(2)
Represents U.S. Treasury securities accounted for as cash equivalents.
Represents Freddie Mac mortgage-related securities 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.
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, 2019
Overnight and
continuous
30 days or less
After 30 days
through 90 days
Greater than
90 days
Total
$—
$9,081
$265
$—
$9,346
FREDDIE MAC | 2019 Form 10-K
216
Financial Statements
NOTE 11
Notes to the Consolidated Financial Statements | 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% for both 2019 and 2018,
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
Amounts reclassified from accumulated other
comprehensive income
Changes in AOCI by component
Ending balance
(In millions)
Beginning balance
Other comprehensive income before
reclassifications
Amounts reclassified from accumulated other
comprehensive income
Changes in AOCI by component
Cumulative effect of change in accounting
principle (1)
Ending balance
(In millions)
Beginning balance
Other comprehensive income before
reclassifications
Amounts reclassified from accumulated other
comprehensive income
Changes in AOCI by component
Ending balance
Year Ended December 31, 2019
AOCI Related
to Available-
For-Sale
Securities
AOCI Related
to Cash Flow
Hedge
Relationships
AOCI Related
to Defined
Benefit Plans
Total
$83
668
(133)
535
$618
($315)
—
71
71
($244)
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
$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)
$97
(17)
(16)
(33)
$64
$83
11
(16)
(5)
19
$97
$21
63
(1)
62
$83
($135)
651
(78)
573
$438
$389
(465)
(148)
(613)
89
($135)
$456
920
(987)
(67)
$389
Total
Total
(1)
Includes the effect of adopting the accounting guidance on reclassification of stranded tax effects of the Tax Cuts and Jobs Act in 1Q 2018.
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.
FREDDIE MAC | 2019 Form 10-K
217
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
Reclassifications from AOCI to Net Income
The table below presents reclassifications from AOCI to net income, including the affected line item 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)
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,
2019
2018
2017
$168
(35)
133
(90)
19
(71)
20
(4)
16
$78
$312
(66)
246
(133)
19
(114)
20
(4)
16
$148
$1,708
(598)
1,110
(164)
40
(124)
2
(1)
1
$987
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 $0.2 billion and $0.3 billion at December 31,
2019 and December 31, 2018, 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 $43 million, net of taxes, of
the $0.2 billion of cash flow hedge losses in AOCI at December 31, 2019 will be reclassified into earnings. The maximum
remaining length of time over which we have hedged the exposure related to the variability in future cash flows on forecasted
transactions, primarily forecasted debt issuances, is 14 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 December 2017 Letter Agreement. Pursuant to the September 2019 Letter Agreement, the liquidation
preference of the senior preferred stock will be increased, at the end of each fiscal quarter, beginning on September 30, 2019,
by an amount equal to the increase in the Net Worth Amount, if any, during the immediately prior fiscal quarter, until the
liquidation preference has increased by $17.0 billion. During 3Q 2019, our Net Worth Amount increased by $1.8 billion. As a
FREDDIE MAC | 2019 Form 10-K
218
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
result, the liquidation preference of the senior preferred stock increased to $79.3 billion on December 31, 2019 and will increase
to $81.8 billion on March 31, 2020 based on the $2.4 billion increase in our Net Worth Amount during 4Q 2019. 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 2019, 2018, and 2017 at the
direction of the Conservator were $3.1 billion, $4.1 billion, and $10.9 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.
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.
FREDDIE MAC | 2019 Form 10-K
219
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
The table below provides a summary of our senior preferred stock outstanding at December 31, 2019.
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
September 30, 2019
December 31, 2019
Total non-draw adjustments
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 draw adjustments
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
N/A
N/A
$1,000
3,000
1,826
1,848
7,674
13,800
30,800
6,100
10,600
1,800
100
500
1,479
5,992
146
19
312
71,648
1.00
1.00
$1.00
$79,322
No cash was received from Treasury under the Purchase Agreement in 2019, because we had positive net worth at December
31, 2018, March 31, 2019, June 30, 2019, and September 30, 2019 and, consequently, FHFA did not request a draw on our
behalf in 2019. At December 31, 2019, our assets exceeded our liabilities under GAAP; therefore, no draw is being requested
from Treasury under the Purchase Agreement. The aggregate liquidation preference of the senior preferred stock owned by
Treasury was $79.3 billion as of December 31, 2019 and $75.6 billion as of December 31, 2018.
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 $20.0 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. 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
FREDDIE MAC | 2019 Form 10-K
220
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
December 31, 2019, 2018, and 2017 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.
The table below provides a summary of our preferred stock outstanding at their redemption values at December 31, 2019.
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.
FREDDIE MAC | 2019 Form 10-K
221
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
(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.
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 2019 and 2018, 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 2019, the deferral period lapsed on 351
RSUs. At December 31, 2019, 702 RSUs remained outstanding. In addition, there were 41,160 shares of restricted stock
outstanding at both December 31, 2019 and December 31, 2018. At December 31, 2019, 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 at December 31, 2019, December 31, 2018, and December 31, 2017.
Dividends and Dividend Restrictions
No common dividends were declared in 2019 or 2018. During the three months ended March 31, 2019 and June 30, 2019, we
paid dividends of $1.5 billion and $1.7 billion, respectively, in cash on the senior preferred stock at the direction of our
Conservator. As a result of the increase in the applicable Capital Reserve Amount pursuant to the September 2019 Letter
Agreement, we did not declare or pay a dividend on the senior preferred stock during the three months ended September 30,
2019 and December 31, 2019. We also did not declare or pay dividends on any other series of Freddie Mac preferred stock
outstanding during 2019.
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
FREDDIE MAC | 2019 Form 10-K
222
Financial Statements
Notes to the Consolidated Financial Statements | Note 11
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 outstanding, respectively, as of December 31, 2019. 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.
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 | 2019 Form 10-K
223
Notes to the Consolidated Financial Statements | Note 12
Financial Statements
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 the past three years. 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,
2019
2018
2017
($1,018)
(817)
($1,835)
($848)
(1,391)
($2,239)
($3,436)
(7,773)
($11,209)
Income tax expense decreased from 2018 to 2019 primarily due to a decrease in pre-tax book income, and decreased from
2017 to 2018, 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.
The table below presents the reconciliation between our federal statutory income tax rate and our effective tax rate for the past
three years.
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,
2019
2018
2017
Amount
Percent
Amount
Percent
Amount
Percent
($1,900)
21.0%
($2,410)
21.0%
($5,892)
35.0%
18
48
9
—
(10)
(0.2)
(0.5)
(0.1)
—
0.1
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%
Effective tax rate
($1,835)
20.3%
($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.
FREDDIE MAC | 2019 Form 10-K
224
Financial Statements
Notes to the Consolidated Financial Statements | Note 12
The table below presents the balance of significant deferred tax assets and liabilities at December 31, 2019 and December 31,
2018. 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
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
Year Ended December 31,
2019
2018
$3,529
1,398
79
921
56
5,983
(28)
(28)
(37)
$5,918
$4,424
1,767
177
569
20
6,957
(23)
(23)
(46)
$6,888
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, 2019, 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 $37 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, 2019.
We are under IRS examination for tax years 2013 through 2016 related to the carryback of 2016 capital losses to the prior three
years.
FREDDIE MAC | 2019 Form 10-K
225
Financial Statements
NOTE 13
Notes to the Consolidated Financial Statements | Note 13
Segment Reporting
We have three reportable segments, which are based on the type of business activities each performs - Single-family
Guarantee, Multifamily, and Capital Markets. The chart below provides a summary of our three reportable segments and the All
Other category.
Segment/
Category
Description
Single-family
Guarantee
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.
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 risk. Our primary business model is to purchase multifamily loans for
aggregation and then securitization through issuance of multifamily K Certificates and SB Certificates. We also
issue and guarantee other securitization products, issue other credit risk transfer products, and provide other
guarantee activities.
• Contribution to
GAAP
comprehensive
income (loss)
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), single-family securitization activities, and treasury function,
which includes interest-rate risk management for the company.
• Contribution to
GAAP
comprehensive
income (loss)
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
Multifamily
Capital
Markets
All Other
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 2019, we changed how we calculate certain components of our Segment Earnings for our Single-family Guarantee
and Capital Markets segments. The purpose of these changes 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:
No longer reclassify the impacts related to single-family mortgage loans held-for-sale in Segment Earnings. This change
resulted in reclassifications between line items for our Single-family Guarantee and Capital Markets segments but did not
result in a change between the segments.
Reclassify the earnings mismatch related to fair value hedge accounting to investment gains (losses), net for our Capital
Markets segment. This change resulted in a reclassification between line items for the Capital Markets segment but did not
result in a change between 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).
However, the accounting principles we apply to present certain financial statement line items in Segment Earnings for our
FREDDIE MAC | 2019 Form 10-K
226
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
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.
Credit Activity-Related Reclassifications
Certain credit activity-related income and costs are included in Segment Earnings guarantee fee income or benefit (provision)
for credit losses.
Net guarantee fees, including upfront fee amortization and implied guarantee fee income related to single-family
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.
A portion of the amount reversed for accrued but uncollected interest upon placing loans on non-accrual status and related
recoveries (if any) is reclassified in Segment Earnings from net interest income to benefit (provision) for credit losses.
We began hedging cash flows related to upfront fees (including buy-downs) in 2019. Amortization of the hedge gains
(losses) is reclassified in Segment Earnings from net interest income to guarantee fee income.
Property tax and insurance expenses associated with held-for-sale loans accrued after the reclassification of loans from
held-for-investment to held-for-sale is reclassified in Segment Earnings from other expense to benefit (provision) for credit
losses.
Investment Activity-Related Reclassifications
We move certain items into or out of net interest income so that, on a Segment Earnings basis, net interest income reflects how
we measure the effective yield earned on securities held in our mortgage investments portfolio and our 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 investment gains (losses) is reclassified in Segment
Earnings from investment 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 reclassified to investment gains (losses), net from net interest income beginning in
4Q 2017 and from other income for periods prior to 4Q 2017.
Amortization related to certain items is not relevant to how we measure the effective yield earned on the securities held in our
investments portfolio. Therefore, as described below, we reclassify the following items in Segment Earnings from net interest
income to non-interest income:
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 securities.
Amortization related to premiums and discounts associated with securities 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 credit enhancement
expense.
FREDDIE MAC | 2019 Form 10-K
227
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
Internally allocated costs associated with the securitization of multifamily held-for-investment loans into a consolidated
securitization structure are reclassified from net interest income to other income.
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.
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,
2019
2018
2017
$4,365
1,827
1,022
—
7,214
$7,214
$4,343
1,928
1,516
—
7,787
$7,787
$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
FREDDIE MAC | 2019 Form 10-K
228
Financial Statements
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 Consolidated Statements of Comprehensive Income
Year Ended December 31, 2019
Single-
family
Guarantee Multifamily
Capital
Markets
All
Other
Total
Segment
Earnings
(Loss)
Reclassifications
$—
7,773
964
391
418
(1,647)
(1,393)
(245)
(786)
(1,110)
4,365
—
—
(22)
(22)
$1,069
1,101
576
108
(3)
(503)
(15)
—
(41)
(465)
1,827
105
—
(4)
101
$2,486
$—
$3,555
—
(36)
(700)
—
(414)
—
—
(54)
(260)
1,022
430
71
(7)
494
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,874
1,504
(201)
415
(2,564)
(1,408)
(245)
(881)
(1,835)
7,214
535
71
(33)
573
$8,293
(7,785)
(686)
524
331
—
700
16
(1,393)
—
—
—
—
—
—
Total per
Consolidated
Statements of
Comprehensive
Income
$11,848
1,089
818
323
746
(2,564)
(708)
(229)
(2,274)
(1,835)
7,214
535
71
(33)
573
(In millions)
Net interest income
Guarantee fee income
Investment gains (losses), net
Other income (loss)
Benefit (provision) for credit losses
Administrative expense
Credit enhancement expense
REO operations expense
Other expense
Income tax (expense) benefit
Net income (loss)
Changes in unrealized gains (losses)
related to available-for-sale securities
Changes in unrealized gains (losses)
related to cash flow hedge relationships
Changes in defined benefit plans
Total other comprehensive income
(loss), net of taxes
Comprehensive income (loss)
$4,343
$1,928
$1,516
$—
$7,787
$—
$7,787
FREDDIE MAC | 2019 Form 10-K
229
Financial Statements
Notes to the Consolidated Financial Statements | Note 13
(In millions)
Net interest income
Guarantee fee income
Investment gains (losses), net
Other income (loss)
Benefit (provision) for credit losses
Administrative expense
Credit enhancement expense
REO operations expense
Other expense
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
Year Ended December 31, 2018
Single-
family
Guarantee Multifamily
Capital
Markets
All
Other
Total
Segment
Earnings
(Loss)
Reclassifications
$1,096
$3,217
$— $4,313
$—
6,581
307
841
448
(1,491)
(1,077)
(189)
(568)
(944)
861
16
129
24
(437)
(16)
1
(36)
(319)
3,908
1,319
—
—
(3)
(3)
(82)
—
(1)
(83)
—
1,803
340
—
(365)
—
—
(11)
(976)
4,008
(640)
114
(1)
(527)
—
—
—
—
7,442
2,126
1,310
472
— (2,293)
— (1,093)
—
—
(188)
(615)
— (2,239)
—
—
—
—
—
9,235
(722)
114
(5)
(613)
Total per
Consolidated
Statements of
Comprehensive
Income
$12,021
866
1,921
762
736
(2,293)
(417)
(169)
(1,953)
(2,239)
9,235
(722)
114
(5)
(613)
$7,708
(6,576)
(205)
(548)
264
—
676
19
(1,338)
—
—
—
—
—
—
Comprehensive income (loss)
$3,905
$1,236
$3,481
$— $8,622
$—
$8,622
(In millions)
Net interest income
Guarantee fee income
Investment gains (losses), net
Other income (loss)
Benefit (provision) for credit losses
Administrative expense
Credit enhancement expense
REO operations expense
Other expense
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
Year Ended December 31, 2017
Single-
family
Guarantee Multifamily
Capital
Markets
All
Other
Total
Segment
Earnings
(Loss)
Reclassifications
$—
6,363
116
896
(177)
(1,381)
(891)
(203)
(516)
(1,448)
2,759
—
—
40
40
$1,206
$3,279
$— $4,485
750
1,516
75
(13)
(395)
(17)
—
(48)
(1,060)
2,014
—
1,772
4,913
—
(330)
—
—
(81)
—
—
—
—
7,113
3,404
5,884
(190)
— (2,106)
—
—
—
(908)
(203)
(645)
(3,296)
(5,405)
(11,209)
6,257
(5,405)
5,625
(86)
(167)
—
9
(77)
124
13
(30)
—
—
—
—
(253)
124
62
(67)
$9,679
(6,364)
(2,244)
(900)
274
—
628
14
(1,087)
—
—
—
—
—
—
Total per
Consolidated
Statements of
Comprehensive
Income
$14,164
749
1,160
4,984
84
(2,106)
(280)
(189)
(1,732)
(11,209)
5,625
(253)
124
62
(67)
Comprehensive income (loss)
$2,799
$1,937
$6,227 ($5,405)
$5,558
$—
$5,558
FREDDIE MAC | 2019 Form 10-K
230
Financial Statements
NOTE 14
Notes to the Consolidated Financial Statements | Note 14
Concentration of Credit and Other Risks
Concentrations of credit risk may arise when we do business with a number of customers or counterparties that engage in
similar activities or have similar economic characteristics that make them vulnerable in similar ways to changes in industry
conditions, which could affect their ability to meet their contractual obligations. Concentrations of credit risk may also arise
when there are a limited number of counterparties in a certain industry. Based on our assessment of business conditions that
could affect our financial results, we have determined that concentrations of credit risk exist among certain borrowers (including
geographic concentrations and loans with certain higher risk characteristics), loan sellers and servicers, credit enhancement
providers, and other investment counterparties. 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 $2.0 trillion and $1.9
trillion UPB of our single-family credit guarantee portfolio at December 31, 2019 and December 31, 2018, 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.
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)
Florida
Illinois
New Jersey
California
New York
All other
Total
December 31, 2019
December 31, 2018
Percent of Credit Losses
Percentage
of
Portfolio
Serious
Delinquency
Rate
Percentage
of
Portfolio
Serious
Delinquency
Rate
2019
2018
85%
15
100%
30%
24
16
16
14
100%
6%
4
3
17
5
65
100%
0.26%
1.84
0.63
0.36
0.87
0.61
0.73
0.54
0.63
0.77
0.85
1.08
0.34
1.21
0.59
0.63%
82%
18
100%
30%
24
16
16
14
100%
6%
5
3
18
5
63
100%
0.22%
1.93
0.69
0.38
0.96
0.63
0.90
0.57
0.69
1.01
0.86
1.24
0.35
1.37
0.64
0.69%
18%
82
100%
12%
36
20
24
8
100%
14%
10
9
8
7
52
100%
10%
90
100%
17%
39
19
18
7
100%
10%
9
9
11
11
50
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, 2019.
The REO balance, net at December 31, 2019 and December 31, 2018 associated with single-family properties was $0.6 billion
and $0.8 billion, respectively, and the balance associated with multifamily properties was $0 million at both periods. Our single-
family REO inventory consisted of 4,989 properties and 7,100 properties at December 31, 2019 and December 31, 2018,
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
FREDDIE MAC | 2019 Form 10-K
231
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
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, we continued to purchase certain amounts of these
loans in cases where the loan was either:
Purchased pursuant to a previously issued other mortgage-related guarantee;
Part of our relief refinance initiative; or
In another refinance loan initiative and the pre-existing loan (including Alt-A loans) was originated under less than full
documentation standards.
In the event we purchase a refinance loan and the original loan had been previously identified as Alt-A, such refinance loan may
no longer be categorized or reported as Alt-A in the table below because the new refinance loan replacing the original loan
would not be identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would
otherwise be the case had such refinancing not occurred.
Although we do not categorize single-family loans we purchase or guarantee as prime or subprime, we recognize that there are
a number of loan types with certain characteristics that indicate a higher degree of credit risk.
For example, a borrower's credit score is a useful measure for assessing the credit quality of the borrower. Statistically,
borrowers with higher credit scores are more likely to repay or have the ability to refinance than those with lower scores.
Presented below is a summary of the serious delinquency rates of certain higher-risk categories (based on characteristics of the
loan at origination) of 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, 2019
December 31, 2018
December 31, 2019
December 31, 2018
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
18
2
2.72%
3.75
0.96
4.52
3.43%
4.13
1.04
4.59
(1)
(2)
Excludes loans underlying certain other securitization products for which data was not available.
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.
FREDDIE MAC | 2019 Form 10-K
232
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
The table below summarizes the concentration of multifamily loans in our multifamily mortgage portfolio classified by legal
structure, based on UPB.
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, 2019
As of December 31, 2018
UPB
$29.8
260.3
10.0
$300.1
Delinquency
Rate(1)
0.01%
0.09
0.09
0.08%
UPB
$34.8
226.9
9.8
$271.5
Delinquency
Rate(1)
0.01%
0.01
—
0.01%
(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 our securitization-related products is minimal, as the expected credit risk is generally
absorbed by the subordinate tranches, which are typically sold to third-party 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(1)
JPMorgan Chase Bank, N.A.
Wells Fargo Bank, N.A.
Other top 10 sellers
Top 10 single-family sellers
Multifamily Sellers(1)
CBRE Capital Markets, Inc.
Berkadia Commercial Mortgage LLC
Other top 10 sellers
Top 10 multifamily sellers
2019
14%
8
34
56%
2019
15%
15
47
77%
2018
7%
12
31
50%
2018
18%
13
48
79%
(1)
Sellers presented based on those with the highest percentage of purchase volume during 2019.
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 26% and 22%
of our single-family purchase volume during 2019 and 2018, 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, 2019 and December 31, 2018, the UPB of loans subject to our repurchase requests issued to our
single-family sellers and servicers was approximately $0.3 billion and $0.4 billion, respectively (these figures include repurchase
requests for which appeals were pending). During 2019 and 2018, we recovered amounts that covered losses with respect to
$0.4 billion and $0.3 billion, respectively, in UPB of loans subject to our repurchase requests.
At the direction of FHFA, we and Fannie Mae revised our representation and warranty framework for conventional loans
purchased by the GSEs on or after January 1, 2013. The objective of the revised framework is to clarify lenders' repurchase
exposures and liability on future sales of loans to Freddie Mac and Fannie Mae. This framework does not affect seller/servicers'
obligations under their contracts with us with respect to loans sold to us prior to January 1, 2013. This framework also does not
affect their obligation to service these loans in accordance with our servicing standards. Under this framework, sellers are
FREDDIE MAC | 2019 Form 10-K
233
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
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, 2019, approximately
80% 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 the 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 the 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 multifamily mortgage portfolio.
Table 14.5 - Servicer Concentration
Single-family Servicers(1)
Wells Fargo Bank, N.A.
JPMorgan Chase Bank, N.A.
Other top 10 servicers
Top 10 single-family servicers
Multifamily Servicers(1)
CBRE Capital Markets, Inc.
Berkadia Commercial Mortgage LLC
Walker & Dunlop, LLC
Other top 10 servicers
Top 10 multifamily servicers
December 31, 2019(2)
December 31, 2018(2)
15%
10
32
57%
17%
8
31
56%
December 31, 2019
December 31, 2018
17%
13
9
37
76%
17%
13
10
37
77%
(1)
(2)
Servicers presented based on those with the highest percentage of servicing volume as of December 31, 2019.
Percentage of servicing volume is based on the total single-family credit guarantee portfolio, which includes loans where we do not exercise servicing control.
However, loans where we do not exercise servicing control are not included for purposes of determining the concentration of servicers who serviced more than 10%
of our single-family credit guarantee portfolio because we do not know which entity serves as the primary servicer for such loans.
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, 2019 and December 31, 2018, approximately 18% and 16% 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, 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.
FREDDIE MAC | 2019 Form 10-K
234
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
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 and
other insurance 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, 2019, mortgage insurers provided coverage with maximum loss
limits of $107.7 billion, for $421.9 billion of UPB, in connection with our single-family credit guarantee portfolio. These amounts
are based on gross coverage without regard to netting of coverage that may exist to the extent an affected loan is covered
under other types of 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. 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 evaluated the planned acquisition and
approved China Oceanwide Holdings Group's control of Genworth Mortgage Insurance Corporation. In January 2020, Freddie
Mac reapproved the acquisition. 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, 2019
December 31, 2018
Mortgage Insurance Coverage(2)
A-
BBB+
BBB+
BB+
BBB+
22%
20
17
15
15
89%
24%
20
19
14
14
91%
(1)
Ratings are for the corporate entity to which we have the greatest exposure. Latest rating available as of December 31, 2019. 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 as of both 2019 and 2018 from our 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, 2019 and December 31, 2018. The balance of
these receivables, net of associated reserves, was approximately $0.1 billion at both December 31, 2019 and December 31,
2018.
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, 2019 and 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. 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 insurance/reinsurance CRT 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 transaction, we require the individual insurers and reinsurers to post collateral to cover portions of their exposure,
which helps to promote certainty and timeliness of claim payment and
FREDDIE MAC | 2019 Form 10-K
235
Financial Statements
Notes to the Consolidated Financial Statements | Note 14
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 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, 2019 and December 31, 2018, including amounts related to our consolidated VIEs, the balance of
our other investments portfolio was $103.6 billion and $63.1 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, 2019, all of our securities purchased
under agreements to resell were fully collateralized. As of December 31, 2019 and December 31, 2018, $2.4 billion, and $2.5
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.
FREDDIE MAC | 2019 Form 10-K
236
Financial Statements
NOTE 15
Notes to the Consolidated Financial Statements | Note 15
Fair Value Disclosures
The accounting guidance for fair value measurements and disclosures defines fair value, establishes a framework for measuring
fair value and sets forth disclosure requirements regarding fair value measurements. This guidance applies whenever other
accounting guidance requires or permits assets or liabilities to be measured at fair value. Fair value represents the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place
either in the principal market for the asset or liability, or, in the absence of a principal market, in the most advantageous market
for the asset or liability.
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain
assets and liabilities on a recurring or non-recurring basis.
Fair Value Measurements
The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy that
prioritizes the inputs into the valuation techniques used to measure fair value. The levels of the fair value hierarchy are defined
as follows in priority order:
Level 1 - inputs to the valuation techniques are based on quoted prices in active markets for identical assets or liabilities.
Level 2 - inputs to the valuation techniques are based on observable inputs other than quoted prices in active markets for
identical assets or liabilities.
Level 3 - one or more inputs to the valuation technique are unobservable and significant to the fair value measurement.
We use quoted market prices and valuation techniques that seek to maximize the use of observable inputs, where available,
and minimize the use of unobservable inputs. Our inputs are based on the assumptions a market participant would use in
valuing the asset or liability. Assets and liabilities are classified in their entirety within the fair value hierarchy based on the
lowest level input that is significant to the fair value measurement.
Valuation Risk and Controls Over Fair Value Measurements
Valuation risk is the risk that fair values used for financial disclosures, risk metrics, and performance measures do not
reasonably reflect market conditions and prices.
We designed our control processes so that our fair value measurements are appropriate and reliable, that they are based on
observable inputs where possible, and that our valuation approaches are consistently applied and the assumptions and inputs
are reasonable. Our control processes provide a framework for segregation of duties and oversight of our fair value
methodologies, techniques, validation procedures, and results.
Groups within our Finance Division, independent of our business functions, execute and validate the valuation processes and
are responsible for determining the fair values of the majority of our financial assets and liabilities. In determining fair value, we
consider the credit risk of our counterparties in 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
FREDDIE MAC | 2019 Form 10-K
237
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
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, 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.
FREDDIE MAC | 2019 Form 10-K
238
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
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
Mortgage Loans
Single-family loans
GSE securitization market
See Agency mortgage-related securities
Level 2 or 3
Predominantly Level 2
Level 2 or 3
Median of external sources
Single external source
Published yield matrices
Benchmark security pricing for actively traded mortgage-
related securities with similar characteristics, adjusting for the
value of our guarantee fee and our credit obligation related to
performing our guarantee (see Guarantee obligation). The
credit obligation is based on: delivery and guarantee fees we
charge under current market pricing for loans that qualify
under our current underwriting standards (Level 2) and
internal credit models for loans that do not qualify under our
current underwriting standards (Level 3).
Whole loan market
Median of external sources, referencing market activity for
deeply delinquent and modified loans, where available
Level 3
FREDDIE MAC | 2019 Form 10-K
239
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
Instrument
Valuation Technique
Impaired held-for-investment
Internal models that estimate the fair value of the underlying
collateral for impaired loans. Significant inputs used by our
internal models include REO disposition, short sale, and third-
party sale values, combined with mortgage loan level
characteristics using the repeat housing sales index to
estimate the current fair value of the mortgage loan.
Significant increases (decreases) in the historical average
sales proceeds per mortgage loan in isolation would result in
significantly higher (lower) fair value measurements.
Classification in the
Fair Value Hierarchy
Level 3
Multifamily loans
Held-for-sale
Held-for-investment
Non-derivative Purchase Commitments
Discounted cash flows based on observable K Certificate and
SB Certificate market spreads
Level 2
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
Predominantly Level 3
Multifamily loan purchase commitments
See Multifamily loans
Level 2 or 3
Other Assets
Guarantee asset
Single-family
Multifamily
Mortgage servicing rights
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.
Level 3
Level 3
Market prices from a third party or internally developed prices
using discounted cash flows. Significant inputs include:
Level 3
Estimated prepayment rates,
Estimated costs to service both performing and non-accrual
loans, and
Estimated servicing income per loan (including ancillary
income).
Significant increases (decreases) in cost to service per loan
and prepayment rate in isolation would result in a significantly
lower (higher) fair value measurement. Significant increases
(decreases) in servicing income per loan in isolation would
result in a significantly higher (lower) fair value measurement.
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.
Other Liabilities
Guarantee obligation
Single-family
Multifamily
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
FREDDIE MAC | 2019 Form 10-K
240
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
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.
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:
Agency
Non-agency and other
Total available-for-sale securities, at fair value
Trading, at fair value:
Mortgage-related securities:
Agency
Non-agency
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
All other, at fair value
Total other liabilities
Total liabilities carried at fair value on a recurring basis
Referenced footnote is included after the next table.
FREDDIE MAC | 2019 Form 10-K
December 31, 2019
Level 1
Level 2
Level 3
Netting
Adjustment(1)
Total
$—
—
—
$22,927
20
22,947
$1,960
1,267
3,227
$—
—
—
$24,887
1,287
26,174
—
—
—
25,108
25,108
25,108
—
—
—
—
—
—
—
—
—
—
—
$25,108
$—
—
—
—
—
—
—
—
—
—
—
$—
19,772
—
19,772
1,947
21,719
44,666
15,035
2,104
4,198
61
6,363
—
6,363
—
81
—
81
$66,145
$6
3,600
4,882
130
233
5,245
—
5,245
7
—
7
$8,858
2,709
1
2,710
—
2,710
5,937
—
—
—
16
16
—
16
4,426
—
120
4,546
$10,499
$203
129
—
—
37
37
—
37
—
1
1
$370
—
—
—
—
—
—
—
—
—
—
—
(5,535)
(5,535)
—
—
—
—
($5,535)
$—
—
—
—
—
—
(4,910)
(4,910)
—
—
—
($4,910)
22,481
1
22,482
27,055
49,537
75,711
15,035
2,104
4,198
77
6,379
(5,535)
844
4,426
81
120
4,627
$96,217
$209
3,729
4,882
130
270
5,282
(4,910)
372
7
1
8
$4,318
241
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
(In millions)
Assets:
Investments in securities:
Available-for-sale, at fair value:
Mortgage-related securities:
Agency
Non-agency and other
Total available-for-sale securities, at fair value
Trading, at fair value:
Mortgage-related securities:
Agency
Non-agency
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
December 31, 2018
Level 1
Level 2
Level 3
Netting
Adjustment(1)
Total
$—
—
—
$27,770
18
27,788
$4,135
1,640
5,775
$—
—
—
$31,905
1,658
33,563
—
—
—
15,885
15,885
15,885
—
—
—
—
—
—
—
—
—
—
—
$15,885
$—
—
—
—
—
—
—
—
—
$—
13,079
—
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
3,293
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)
16,372
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
(1) Represents counterparty netting, cash collateral netting, and net derivative interest receivable or payable.
FREDDIE MAC | 2019 Form 10-K
242
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
Year Ended December 31, 2019
Realized and unrealized gains (losses)
Balance,
January 1,
2019
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,
2019
$4,135
1,640
5,775
$23
82
105
$108
$131
(1)
81
107
212
3,293
1
(280)
—
— (280)
—
—
3,294
(280)
— (280)
$—
—
—
596
—
596
$— ($1,883)
—
(238)
($367)
(216)
— (2,121)
(583)
—
—
—
(616)
—
(104)
—
(616)
(104)
3,633
137
$3,770
33
(38)
($5)
—
—
$—
33
(38)
($5)
— 1,427
85
36
—
(85)
(667)
(15)
$85
$1,463
($85)
($682)
$2
—
2
—
—
—
—
—
$—
($58)
—
$1,960
1,267
(58)
3,227
(180)
—
2,709
1
(180)
2,710
—
—
$—
4,426
120
$4,546
(In millions)
Assets
Investments in securities:
Available-for-sale, at fair
value:
Mortgage-related
securities:
Agency
Non-agency and other
Total available-for-sale
mortgage-related securities
Trading, at fair value:
Mortgage-related
securities:
Agency
Non-agency
Total trading mortgage-
related securities
Other assets:
Guarantee asset
All other, at fair value
Total other assets
Realized and unrealized (gains) losses
Balance,
January 1,
2019
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,
2019
Liabilities
Debt securities of
consolidated trusts held by
third parties, at fair value
Other debt, at fair value
Net derivatives(2)
Other liabilities:
All other, at fair value
$728
134
91
—
$5
—
(51)
(3)
$—
—
—
$5
—
(51)
$—
—
—
$—
4
—
$—
—
—
($530)
(9)
(19)
$—
—
—
$—
—
—
$203
129
21
—
(3)
6
—
(2)
—
—
—
1
Referenced footnotes are included after the prior period tables.
Change in
Unrealized
Gains(Losses)
Included in
Net Income
Related to
Assets and
Liabilities Still
Held as of
December 31,
2019 (3)
$2
14
16
(248)
—
(248)
33
(70)
($37)
Change in
Unrealized
Gains(Losses)
Included in
Net Income
Related to
Assets and
Liabilities Still
Held as of
December 31,
2019 (3)
$5
—
(68)
(5)
FREDDIE MAC | 2019 Form 10-K
243
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
Year Ended December 31, 2018
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
Change in
Unrealized
Gains(Losses)
Included in
Net Income
Related to
Assets and
Liabilities Still
Held as of
December 31,
2018 (3)
$6,797
4,291
($31)
948
($214)
($245)
(644)
304
11,088
917
(858)
59
$56
—
56
$— ($1,546)
—
(2,481)
($926)
(474)
— (4,027)
(1,400)
2,916
1
(517)
—
— (517)
—
—
1,484
—
—
—
(1,058)
—
2,917
(517)
— (517)
1,484
— (1,058)
3,171
45
(80)
28
—
—
(80)
28
— 1,118
102
31
—
(57)
(79)
—
(79)
(576)
(12)
$—
—
—
579
—
579
—
—
($1)
—
$4,135
1,640
(1)
5,775
(32)
—
(32)
—
—
3,293
1
3,294
3,633
137
($7)
23
16
(449)
—
(449)
(80)
25
(In millions)
Assets
Investments in securities:
Available-for-sale, at fair
value:
Mortgage-related
securities:
Agency
Non-agency and other
Total available-for-sale
mortgage-related securities
Trading, at fair value:
Mortgage-related
securities:
Agency
Non-agency
Total trading mortgage-
related securities
Other assets:
Guarantee asset
All other, at fair value
Total other assets
$3,216
($52)
$— ($52)
$102
$1,149
($57)
($588)
$—
$—
$3,770
($55)
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
Change in
Unrealized
Gains(Losses)
Included in
Net Income
Related to
Assets and
Liabilities Still
Held as of
December 31,
2018 (3)
Liabilities
Debt securities of
consolidated trusts held by
third parties, at fair value
Other debt, at fair value
Net derivatives(2)
$630
137
57
($2)
—
37
$—
—
—
($2)
—
37
$—
$100
—
—
2
15
$—
—
—
$—
(5)
(18)
$—
—
—
$—
—
—
$728
134
91
($2)
—
20
(1)
(2)
(3)
Transfers out of Level 3 during 2019 and 2018 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 Agency securities are classified as Level 3 at issuance and generally are
classified as Level 2 when they begin trading. Transfers into Level 3 during 2019 and 2018 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.
Amounts are the net of derivative assets and liabilities prior to counterparty netting, cash collateral netting, net trade/settle receivable or payable, and net derivative
interest receivable or payable.
Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in unrealized gains and losses related to assets and
liabilities classified as Level 3 that were still held at December 31, 2019 and December 31, 2018, respectively. This amount includes other-than temporary
impairments recorded on available-for-sale securities and amortization of basis adjustment.
FREDDIE MAC | 2019 Form 10-K
244
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, 2019
Assets
Available-for-sale, at fair value
Mortgage-related securities
Agency
Non-agency and other
Trading, at fair value
Mortgage-related securities
Agency
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.
886
381
1,948
761
4,141
285
137
$10,499
$203
167
$1,960
Discounted cash flows
OAS
Median of external
sources
External pricing
sources
Other
30 - 261 bps
$71.9 - $78.2
80 bps
$75.0
Single external source
Discounted cash flows
Discounted cash flows
Other
External pricing
sources
OAS
OAS
$0.0 - $100.7
(1,201) - 8,095 bps
17 - 186 bps
$36.6
611 bps
40 bps
Single External Source
External Pricing
Sources
$99.4 - $103.6
$101.4
FREDDIE MAC | 2019 Form 10-K
245
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, 2018
Assets
Available-for-sale, at fair value
Mortgage-related securities
Agency
Non-agency and other
Trading, at fair value
Mortgage-related securities
Agency
Guarantee asset, at fair value
Insignificant Level 3 assets(1)
Total level 3 assets
Liabilities
$2,876
Discounted cash flows
OAS
30 - 325 bps
1,259
Single external source
1,403
237
Median of external
sources
Single external source
Single external source
Discounted cash flows
Other
Discounted cash flows
Other
1,594
1,178
521
3,391
242
139
$12,840
External pricing
sources
External pricing
sources
External pricing
sources
External pricing
sources
OAS
OAS
$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
Debt securities of consolidated trusts held by third parties,
at fair value
$728
Single External Source
External Pricing
Sources
$97.4 - $101.1
$99.6
Insignificant Level 3 liabilities(1)
226
(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 | 2019 Form 10-K
246
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. 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, 2019
December 31, 2018
Assets measured at fair value on a
non-recurring basis:
Mortgage loans(1)
$—
$22
$4,059
$4,081
$—
$24
$7,519
$7,543
(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
(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)
$4,059
Internal model
Internal model
(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)
$7,519
Internal model
Internal model
December 31, 2019
Unobservable Inputs
Type
Range
Weighted
Average
Historical sales proceeds
$3,000 - $765,000
$186,234
Housing sales index
46 - 420 bps
112 bps
$95.0
December 31, 2018
Unobservable Inputs
Type
Range
Weighted
Average
Historical sales proceeds
$3,000 - $750,500
$177,725
Housing sales index
44 - 480 bps
108 bps
$82.5
Median of external sources
External pricing sources
$66.5 - $105.4
Median of external sources
External pricing sources
$36.2 - $94.6
FREDDIE MAC | 2019 Form 10-K
247
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, 2019
Fair Value
Level 1
Level 2
Level 3
Netting
Adjustments(2)
Total
(In millions)
Financial Assets
Cash and cash equivalents
Amortized cost
$5,189
$5,189
$—
Securities purchased under agreements
to resell
Amortized cost
FV - OCI
FV - NI
66,114
26,174
49,537
75,711
1,940,523
79,677
Various(3)
2,020,200
FV - NI
FV - NI
FV - NI
Amortized cost
844
4,426
81
4,186
—
—
25,108
25,108
66,114
22,947
21,719
44,666
— 1,732,434
—
38,100
— 1,770,534
—
—
—
—
6,363
—
90
1,874
$—
—
3,227
2,710
5,937
244,500
45,588
290,088
16
4,433
72
2,131
$—
$5,189
—
—
—
—
66,114
26,174
49,537
75,711
— 1,976,934
—
83,688
— 2,060,622
(5,535)
—
—
—
844
4,433
162
4,005
$2,176,751
$30,297
$1,889,641
$302,677
($5,535)
$2,217,080
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
$1,898,355
281,173
Various(4)
2,179,528
FV - NI
Amortized cost
FV - NI
372
4,292
7
$— $1,931,473
$1,277
—
282,431
— 2,213,904
—
—
—
5,245
—
7
3,619
4,896
37
4,527
67
$— $1,932,750
—
286,050
— 2,218,800
(4,910)
—
—
372
4,527
74
Total financial liabilities
$2,184,199
$— $2,219,156
$9,527
($4,910)
$2,223,773
(1)
(2)
(3)
FV - NI denotes fair value through net income. FV - OCI denotes fair value through other comprehensive income.
Represents counterparty netting, cash collateral netting, and net derivative interest receivable or payable.
As of December 31, 2019, the GAAP carrying amounts measured at amortized cost, lower-of-cost-or-fair-value and FV - NI were $2.0 trillion, $20.3 billion and
$15.0 billion, respectively.
(4)
As of December 31, 2019, the GAAP carrying amounts measured at amortized cost and FV - NI were $2.2 trillion and $3.9 billion, respectively.
FREDDIE MAC | 2019 Form 10-K
248
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
GAAP
Measurement
Category(1)
GAAP
Carrying
Amount
December 31, 2018
Fair Value
Level 1
Level 2
Level 3
Netting
Adjustments(2)
Total
(In millions)
Financial Assets
Cash and cash equivalents
Amortized cost
$7,273
$7,273
$—
Securities purchased under agreements
to resell
Amortized cost
FV - OCI
FV - NI
FV - NI
FV - NI
FV - NI
34,771
33,563
35,548
69,111
1,842,850
84,128
335
3,633
159
1,805
Various(3)
1,926,978
—
—
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
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
$1,792,677
252,273
Various(4)
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)
(2)
(3)
FV - NI denotes fair value through net income. FV - OCI denotes fair value through other comprehensive income.
Represents counterparty netting, cash collateral netting, and net derivative interest receivable or payable.
As of December 31, 2018, the GAAP carrying amounts measured at amortized cost, lower-of-cost-or-fair-value and FV - NI were $1.9 trillion, $18.5 billion and
$23.1 billion, respectively.
(4)
As of December 31, 2018, the GAAP carrying amounts measured at amortized cost and FV - NI were $2.0 trillion and $5.1 billion, respectively.
Fair Value Option
We elected the fair value option for certain multifamily held-for-sale loans, multifamily held-for-sale loan purchase
commitments, and long-term debt.
Multifamily Held-for-Sale Loans and Held-for-Sale Commitments
We elected the fair value option for certain 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 investment 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.
FREDDIE MAC | 2019 Form 10-K
249
Financial Statements
Notes to the Consolidated Financial Statements | Note 15
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 investment 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 and other debt
held by third parties with a fair value of $146 million and $26 million and multifamily held-for-sale loan purchase commitments
with a fair value of $74 million and $142 million, as of December 31, 2019 and December 31, 2018, respectively.
Table 15.7 - Difference between Fair Value and Unpaid Principal Balance for Certain Financial Instruments with Fair
Value Option Elected
December 31, 2019
December 31, 2018
Multifamily
Held-For-Sale
Loans
Other Debt -
Long Term
$15,035
$3,589
14,444
$591
3,329
$260
Debt Securities of
Consolidated
Trusts Held by
Third Parties
$203
200
$3
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
$728
730
($2)
(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, 2019
December 31, 2018
December 31, 2017
Gains (Losses)
$853
1,913
136
(4)
($745)
777
138
5
$2
1,098
(212)
22
Changes in fair value attributable to instrument-specific credit risk were not material for the years ended December 31, 2019,
2018 or 2017 for any assets or liabilities for which we elected the fair value option.
FREDDIE MAC | 2019 Form 10-K
250
Financial Statements
NOTE 16
Notes to the Consolidated Financial Statements | Note 16
Legal Contingencies
We are involved as a party in a variety of legal and regulatory proceedings arising from time to time in the ordinary course of
business including, among other things, contractual disputes, personal injury claims, employment-related litigation, and other
legal proceedings incidental to our business. We are frequently involved, directly or indirectly, in litigation involving mortgage
foreclosures. From time to time, we are also involved in proceedings arising from our termination of a seller's or servicer's
eligibility to sell loans to, and/or service loans for, us. In these cases, the former seller or servicer sometimes seeks damages
against us for wrongful termination under a variety of legal theories. In addition, we are sometimes sued in connection with the
origination or servicing of loans. These suits typically involve claims alleging wrongful actions of sellers and servicers. Our
contracts with our sellers and servicers generally provide for indemnification of Freddie Mac against liability arising from sellers'
and servicers' wrongful actions with respect to loans sold to or serviced for Freddie Mac.
Litigation and claims resolution are subject to many uncertainties and are not susceptible to accurate prediction. In accordance
with the accounting guidance for contingencies, we reserve for litigation claims and assessments asserted or threatened
against us when a loss is probable (as defined in such guidance) and the amount of the loss can be reasonably estimated.
Putative Securities Class Action Lawsuit: Ohio Public Employees
Retirement System vs. Freddie Mac, Syron, Et Al.
This putative securities class action lawsuit was filed against Freddie Mac and certain former officers on January 18, 2008 in the
U.S. District Court for the Northern District of Ohio purportedly on behalf of a class of purchasers of Freddie Mac stock from
August 1, 2006 through November 20, 2007. FHFA later intervened as Conservator, and the plaintiff amended its complaint on
several occasions. The plaintiff alleged, among other things, that the defendants violated federal securities laws by making false
and misleading statements concerning our business, risk management, and the procedures we put into place to protect the
company from problems in the mortgage industry. The plaintiff seeks unspecified damages and interest, and reasonable costs
and expenses, including attorney and expert fees.
In October 2013, defendants filed motions to dismiss the complaint. In October 2014, the District Court granted defendants'
motions and dismissed the case in its entirety against all defendants, with prejudice. In November 2014, plaintiff filed a notice of
appeal in the U.S. Court of Appeals for the Sixth Circuit. On July 20, 2016, the Court of Appeals reversed the District Court's
dismissal and remanded the case to the District Court for further proceedings. 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 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.
FREDDIE MAC | 2019 Form 10-K
251
Financial Statements
Notes to the Consolidated Financial Statements | Note 16
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. The District Court subsequently granted in part Freddie Mac's motion for leave to amend its complaint,
and Freddie Mac amended its complaint on April 16, 2019.
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.
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
FREDDIE MAC | 2019 Form 10-K
252
Financial Statements
Notes to the Consolidated Financial Statements | Note 16
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 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. 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 original 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 March
6, 2019, the U.S. District Court for the District of Columbia granted the defendants' motion to dismiss the case. On March 18,
2019, Mr. Angel filed a motion seeking to alter or amend the judgment and for leave to file an amended complaint. On May 24,
2019, the District Court denied Mr. Angel's motion, and on June 19, 2019, Mr. Angel filed a notice of appeal to the U.S. Court of
Appeals for the District of Columbia Circuit.
Litigation in the U.S. Court of Federal Claims
Reid and Fisher vs. the United States of America and Federal Home Loan Mortgage Corporation. This case was filed
as a derivative lawsuit, purportedly on behalf of Freddie Mac as a "nominal" defendant, on February 26, 2014. The complaint
alleges, among other items, that the net worth sweep dividend provisions of the senior preferred stock constitute an unlawful
taking of private property for public use without just compensation. The plaintiffs ask that Freddie Mac be awarded just
compensation for the U.S. government's alleged taking of its property, attorneys' fees, costs, and other expenses. On March 8,
2018, the plaintiffs filed an amended complaint under seal, with a redacted copy filed on November 14, 2018. Defendants filed
a motion to dismiss on August 1, 2018 and an amended motion to dismiss on October 1, 2018.
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. On December 6, 2019, the Court dismissed the claims plaintiffs labeled as
direct claims and denied defendants' motion to dismiss with respect to the claims plaintiffs labeled as derivative. Accordingly,
derivative takings, exaction, breach of fiduciary duty, and breach of implied-in-fact contract claims remain.
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 | 2019 Form 10-K
253
Financial Statements
Notes to the Consolidated Financial Statements | Note 16
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 | 2019 Form 10-K
254
Financial Statements
NOTE 17
Notes to the Consolidated Financial Statements | Note 17
Regulatory Capital
In October 2008, FHFA announced that it was suspending capital classification of us during conservatorship in light of the
Purchase Agreement. FHFA continues to monitor our capital levels, but the existing statutory and FHFA regulatory capital
requirements are not binding during conservatorship. We continue to provide quarterly submissions to FHFA on minimum
capital.
During 2017, we and Fannie Mae worked with FHFA to develop an overall risk measurement framework for evaluating our risk
management and business decisions during conservatorship, known as the 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 or stated 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 guaranteed securities 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 guaranteed securities
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 guaranteed securities held by third parties and
other aggregate off-balance sheet obligations.
Performance Against Regulatory Capital Standards
The table below summarizes our minimum capital requirements and deficits and net worth.
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, 2019
December 31, 2018
$9,122
(63,964)
19,123
($83,087)
$4,477
(68,036)
17,553
($85,589)
(1)
(2)
Core capital and minimum capital figures are estimates and represent amounts submitted to FHFA. FHFA is the authoritative source for our regulatory capital.
Core capital excludes certain components of GAAP total equity (i.e., AOCI and the liquidation preference of the senior preferred stock) as these items do not meet the
statutory definition of core capital.
The Purchase Agreement provides that, if FHFA determines as of quarter end that our liabilities have exceeded our assets under
GAAP, Treasury will contribute funds to us in an amount at least equal to the difference between such liabilities and assets.
Under the GSE Act, FHFA must place us into receivership if FHFA determines that our assets are and have been less than our
obligations for a period of 60 days. FHFA has notified us that the measurement period for any mandatory receivership
determination with respect to our assets and obligations would commence no earlier than the SEC public filing deadline for our
quarterly or annual financial statements and would continue for 60 calendar days after that date. FHFA has advised us that, if,
during that 60-day period, we receive funds from Treasury in an amount at least equal to the deficiency amount under the
FREDDIE MAC | 2019 Form 10-K
255
Financial Statements
Notes to the Consolidated Financial Statements | Note 17
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, 2019, our assets exceeded our liabilities under GAAP; therefore, no draw is being requested from Treasury
under the Purchase Agreement. As of December 31, 2019, 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, the additional $3.0 billion increase in the liquidation preference pursuant to the December 2017 Letter Agreement, nor
the increases in liquidation preference pursuant to the September 2019 Letter Agreement that are not draw-related.
FREDDIE MAC | 2019 Form 10-K
256
Financial Statements
NOTE 18
Notes to the Consolidated Financial Statements | Note 18
Selected Financial Statement Line Items
The table below presents the significant components of other income (loss) on our consolidated statements of comprehensive
income (loss).
Table 18.1 - Significant Components of Other Income (Loss)
(In millions)
Other income (loss):
Year Ended December 31,
2019
2018
2017
Non-agency mortgage-related securities settlement and judgment
All other
Total other income (loss)
$26
297
$323
$338
424
$762
$4,532
452
$4,984
The table below presents the significant components of investment gains (losses), net on our consolidated statements of
comprehensive income (loss).
Table 18.2 - Significant Components of Investment Gains (Losses), Net
(In millions)
Investment gains (losses), net:
Mortgage loans gains (losses)
Investment securities gains (losses)
Debt gains (losses)
Derivative gains (losses)
Investment gains (losses), net
Year Ended December 31,
2019
2018
2017
$4,744
389
201
(4,516)
$818
$746
(815)
720
1,270
$1,921
$2,062
935
151
(1,988)
$1,160
The table below presents the significant components of other assets and other liabilities on our consolidated balance sheets.
Table 18.3 - Significant Components of Other Assets and Other Liabilities
(In millions)
Other assets:
Real estate owned, net
Accounts and other receivables(1)
Guarantee asset
Secured lending and other
All other
Total other assets
Other liabilities:
Guarantee obligation
All other
Total other liabilities
As of December 31,
2019
2018
$555
10,780
4,426
5,158
1,880
$769
2,447
3,633
1,805
2,322
$22,799
$10,976
$4,292
3,750
$8,042
$3,561
2,837
$6,398
(1)
Primarily consists of servicer receivables and other non-interest receivables.
END OF CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES
FREDDIE MAC | 2019 Form 10-K
257
Quarterly Selected Financial Data
Quarterly Selected Financial Data (Unaudited)
Table 75 - Quarterly Selected Financial Data
(In millions, except share-related amounts)
1Q
2Q
2019
3Q
4Q
Full-Year
Net interest income
Non-interest income (loss):
Guarantee fee income
Investment gains (losses), net
Other income (loss)
Non-interest income (loss)
Net revenues
Benefit (provision) for credit losses
Non-interest expense:
Administrative expense
Credit enhancement expense
REO operations expense
Temporary Payroll Tax Cut Continuation Act of 2011 expense
Other 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)
$3,153
$2,927
$2,410
$3,358
$11,848
290
(513)
(17)
(240)
2,913
135
(578)
(158)
(33)
(390)
(124)
(1,283)
(358)
1,407
258
$1,665
($258)
($0.08)
280
(138)
143
285
3,212
160
(619)
(139)
(81)
(399)
(236)
(1,474)
(392)
1,506
320
$1,826
($320)
($0.10)
280
568
122
970
3,380
179
(620)
(197)
(58)
(408)
(140)
(1,423)
(427)
1,709
139
$1,848
($139)
($0.04)
239
901
75
1,215
4,573
272
(747)
(214)
(57)
(420)
(157)
(1,595)
(658)
2,592
(144)
$2,448
$144
$0.04
1,089
818
323
2,230
14,078
746
(2,564)
(708)
(229)
(1,617)
(657)
(5,775)
(1,835)
7,214
573
$7,787
($573)
($0.18)
(In millions, except share-related amounts)
1Q
2Q
2018
3Q
4Q
Full-Year
Net interest income
Non-interest income (loss):
Guarantee fee income
Investment gains (losses), net
Other income (loss)
Non-interest income (loss)
Net revenues
Benefit (provision) for credit losses
Non-interest expense:
Administrative expense
Credit enhancement expense
REO operations expense
Temporary Payroll Tax Cut Continuation Act of 2011 expense
Other 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)
$3,018
$3,003
$3,257
$2,743
$12,021
244
1,476
99
1,819
4,837
(63)
(520)
(60)
(34)
(359)
(127)
(1,100)
(748)
2,926
(776)
$2,150
$2,926
$0.90
199
562
460
1,221
4,224
60
(558)
(86)
(15)
(366)
(114)
(1,139)
(642)
2,503
(68)
$2,435
$918
$0.28
210
510
84
804
4,061
380
(569)
(89)
(38)
(375)
(108)
(1,179)
(556)
2,706
(147)
$2,559
$147
$0.05
213
(627)
119
(295)
2,448
359
(646)
(182)
(82)
(384)
(120)
(1,414)
(293)
1,100
378
$1,478
($379)
($0.12)
866
1,921
762
3,549
15,570
736
(2,293)
(417)
(169)
(1,484)
(469)
(4,832)
(2,239)
9,235
(613)
$8,622
$3,612
$1.12
(1) Net income (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. Net income (loss) per common share amounts may not
recalculate using the amounts shown in this table due to rounding.
FREDDIE MAC | 2019 Form 10-K
258
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, 2019. In making our
assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or
COSO, in Internal Control — Integrated Framework (2013 Framework). A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of the company's annual or interim financial statements will not be prevented or detected on a timely basis by a company's
internal controls. Based on our assessment, we identified a material weakness related to our inability to update our disclosure
controls and procedures in a manner that adequately ensures the accumulation and communication to management of
information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws, including
disclosures affecting our consolidated financial statements.
We have been under conservatorship of FHFA since September 6, 2008. FHFA is an independent agency that currently
functions as both our Conservator and our regulator with respect to our safety, soundness, and mission. Because we are in
conservatorship, some of the information that we may need to meet our disclosure obligations may be solely within the
knowledge of FHFA. As our Conservator, FHFA has the power to take actions without our knowledge that could be material to
investors and could significantly affect our financial performance. Although we and FHFA have attempted to design and
implement disclosure policies and procedures to account for the conservatorship and accomplish the same objectives as
disclosure controls and procedures for a typical reporting company, there are inherent structural limitations on our ability to
design, implement, test, or operate effective disclosure controls and procedures under the circumstances of conservatorship.
As our Conservator and regulator, FHFA is limited in its ability to design and implement a complete set of disclosure controls
and procedures relating to us, particularly with respect to current reporting pursuant to Form 8-K. Similarly, as a regulated
entity, we are limited in our ability to design, implement, operate, and test the controls and procedures for which FHFA is
responsible. For example, FHFA may formulate certain intentions with respect to the conduct of 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, 2019 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, 2019 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.
FREDDIE MAC | 2019 Form 10-K
259
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, 2019. 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, 2019, 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.
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, 2019 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 certain external press releases and statements 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, 2019 have been prepared in conformity with GAAP.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL
REPORTING DURING THE QUARTER ENDED
DECEMBER 31, 2019
We evaluated the changes in our internal control over financial reporting that occurred during the quarter ended December 31,
2019 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 | 2019 Form 10-K
260
Other Information
Other Information
DIRECTOR ELECTION
On February 10, 2020, Mark B. Grier was elected to the Board, effective February 18, 2020. Mr. Grier brings decades of
financial services and capital markets experience and expertise to the Board and will serve on the Nominating and Governance
and Risk Committees.
Mr. Grier, 67, served as the Vice Chairman of Prudential Financial, Inc. until his retirement in 2019. He joined Prudential in 1995
as Chief Financial Officer and held several positions before being named to the Office of the Chairman in 2002 and as Vice
Chairman in 2007. Mr. Grier previously held various positions at Chase Manhattan Corporation and its predecessors from 1978
to 1995, including Executive Vice President, Global Risk Management and Executive Vice President, Co-Head of Global
Markets. Mr. Grier is Chair of Achieve and the Global Impact Investing Network and is a Trustee of Eisenhower Fellow and the
Tragedy Assistance Program for Survivors. He also served as a member of the board of Prudential Financial, Inc. from 2008 to
2019.
Mr. Grier will receive compensation as a non-executive director of Freddie Mac as described in Directors, Corporate
Governance, and Executive Officers - Corporate Governance - Director Compensation.
Freddie Mac will enter into an indemnification agreement with Mr. Grier, effective as of February 18, 2020. A copy of the form of
indemnification agreement is filed as Exhibit 10.37. For a description of this indemnification agreement, see Directors,
Corporate Governance, and Executive Officers - Corporate Governance - Indemnification.
FREDDIE MAC | 2019 Form 10-K
261
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 Board and the scope of its authority. At the start of the 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 nine 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 to elect directors in 2020. 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 10, 2020, the Conservator executed a written consent, effective as of February 10, 2020, re-electing the nine
directors submitted by the company for election as a member of our Board. In addition, on February 10, 2020, the Conservator
elected Mark Grier as a member of our Board effective February 18, 2020. See Other Information for additional information.
The individuals re-elected as directors by the Conservator are listed below:
Mark H. Bloom
David M. Brickman
Kathleen L. Casey
Lance F. Drummond
Grace A. Huebscher
Aleem Gillani
Christopher E. Herbert
Sara Mathew
Saiyid T. Naqvi
The company did not submit for re-election, and FHFA did not re-elect, Steven W. Kohlhagen to the Board as the term of his
service on the Board had reached the limit set forth in our Corporate Governance Guidelines, or the Guidelines. The company
also did not submit for election, and FHFA did not elect, Eugene B. Shanks, Jr., who left the Board on December 31, 2019 when
his term on the Board expired.
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.
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
FREDDIE MAC | 2019 Form 10-K
262
Directors, Corporate Governance, and Executive Officers
Directors
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.
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 11, 2020. For Mr. Grier's biographical
information, see Other Information.
Mark H. Bloom
Age
55
Director Since
Freddie Mac Committees
Public Company Directorships
November 2019
• Compensation and Human Capital
None
• Risk
Mr. Bloom is an experienced executive who has held a variety of leadership positions at the intersection of finance, technology,
and risk management. He brings to the Board technological expertise to drive efficiency and enhance the customer experience.
Experience and Qualifications
Global Chief Technology Officer and a member of the Management Board of Aegon N.V. (2016-present)
Various positions at Citigroup, Inc., including Managing Director, Head of Global Consumer Technology Delivery Services
(2007-2016)
Various positions at JPMorgan Chase & Company, including Senior Vice President, Chase Home Financial Technology
(2001-2007)
Senior Vice President, eBusiness Solutions at CACI International, Inc. (1999-2001)
David M. Brickman
Age
54
Director Since
Freddie Mac Committees
Public Company Directorships
July 2019
• Executive
None
Mr. Brickman is an experienced financial institution executive who has held leadership positions at Freddie Mac for over a
decade. His deep understanding of the capital markets and Freddie Mac's business provides valuable insights for the Board.
Experience and Qualifications
Various positions at Freddie Mac, including Chief Executive Officer (2019-present), President (2018-2019), Head of
Multifamily (2011-2018), Vice President - Multifamily Capital Markets (2004-2011), and other positions during which he 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
(1999-2004)
Kathleen L. Casey
Age
53
Director Since
Freddie Mac Committees
Public Company Directorships
October 2019
• Nominating and Governance
• HSBC Holdings plc
Ms. Casey is an experienced leader with extensive financial regulatory policy experience. She brings high-level regulatory and
financial oversight experience as well as a deep understanding of financial markets and governance to the Board.
Experience and Qualifications
Senior Advisor with Patomak Global Partners, a financial services consulting firm (2012-present)
Member of the Board and Group Audit, Nomination & Corporate Governance, and Group Risk Committees of HSBC
Holdings plc (2014-present)
Commissioner of the SEC (2006-2011)
FREDDIE MAC | 2019 Form 10-K
263
Directors, Corporate Governance, and Executive Officers
Directors
Various roles with the U.S. Senate, including Staff Director and Counsel of the Senate Banking, Housing, and Urban Affairs
Committee and Staff Director of the Senate Banking Committee's Subcommittee on Financial Institutions and Regulatory
Relief (1993-2006)
Member of the Financial Accounting Foundation Board of Trustees (2018-present); Chair (2020-present)
Member of the International Valuation Standards Council Board of Trustees (2016-present)
Member of the Library of Congress Trust Fund Board (2011-present)
Member of the Alternative Investment Management Association Council (2012-2016)
Lance F. Drummond
Age
65
Director Since
Freddie Mac Committees
Public Company Directorships
• Audit
• CurAegis Technologies, Inc.
July 2015
• Compensation and Human Capital, Chair
• United Community Banks, Inc.
• Executive
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)
Member of the Board and Executive, Nominating and Governance, Risk, and Talent & Compensation 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
57
Director Since
Freddie Mac Committees
Public Company Directorships
• Audit, Chair
None
January 2019
• Compensation and Human Capital
• Executive
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)
FREDDIE MAC | 2019 Form 10-K
264
Directors, Corporate Governance, and Executive Officers
Directors
Christopher E. Herbert
Age
59
Director Since
Freddie Mac Committees
Public Company Directorships
March 2018
• Compensation and Human Capital
None
• Risk
Mr. Herbert is an experienced leader in the governmental and educational sectors, with in-depth knowledge of housing policy,
including low-income housing, 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 (2011-2019)
Member of the Research Advisory Council for the Center for Responsible Lending (2006-2019)
Member of the Board of GreenPath Financial Wellness (2017-2019)
Member of the Federal Reserve Bank of Boston's Community Development Research Advisory Council (2014-2016)
Grace A. Huebscher
Age
60
Director Since
Freddie Mac Committees
Public Company Directorships
• Audit
None
December 2017
• Executive
• Nominating and Governance, Chair
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)
Sara Mathew
Age
64
Director Since
Freddie Mac Committees
Public Company Directorships
December 2013
• Executive, Chair
• Reckitt Benckiser Group plc
• 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.
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 Committee of Reckitt Benckiser Group plc (2019-present)
FREDDIE MAC | 2019 Form 10-K
265
Directors, Corporate Governance, and Executive Officers
Directors
Member of the Board and Nominating and Corporate Governance and Risk Committees of State Street Corporation (2018-
present)
Member of the Board and Audit and Finance and Corporate Development Committees of Campbell Soup Company
(2005-2019)
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)
Member of the International Advisory Council of Zurich Financial Services Group (2012-2017)
Saiyid T. Naqvi
Age
70
Director Since
Freddie Mac Committees
Public Company Directorships
• Executive
None
August 2013
• Nominating and Governance
• Risk, Chair
Mr. Naqvi is a seasoned financial executive with proven leadership experience and detailed knowledge of mortgage and
consumer financial operations, as well as a deep background in risk and operational management.
Experience and Qualifications
President and Chief Executive Officer of PNC Mortgage, a division of PNC Bank, National Association, which is a
subsidiary of PNC Financial Services Group (2009-2013)
President of Harley-Davidson Financial Services, Inc. (2007-2009)
Chief Executive Officer of DeepGreen Financial, Inc. (2005-2006)
President and Chief Financial Officer of Setara Corporation (2002-2005)
President and Chief Executive Officer of PNC Mortgage Corporation of America (1995-2001)
Member of the Board of Genworth Financial (2005-2009)
Member of the Board of Hanover Mortgage Capital Holdings, Inc. (1998-2006)
Member of the Housing Council of the Financial Services Roundtable (2009-2013)
FREDDIE MAC | 2019 Form 10-K
266
Directors, Corporate Governance, and Executive Officers
Corporate Governance
CORPORATE GOVERNANCE
Our Corporate Governance Practices
The company is committed to best practices in corporate governance. The Board regularly reviews our governance practices,
assesses the regulatory and legislative environment, and adopts governance practices that are in the best interests of the
company.
Our Board has adopted the company's Corporate Governance Guidelines. The Guidelines are available on our website at
www.freddiemac.com/governance/pdf/gov_guidelines.pdf. The Guidelines are reviewed annually by our Board and were
last updated in June 2019. 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.
Of the Board's nine directors, eight are independent, including the Non-Executive Chair.
Our directors are elected annually.
Each of the Audit, CHC, 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, CHC, 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. Brickman, our CEO) are, and that former members of our Board, Ms. Carolyn H.
Byrd and Messrs. Steven W. Kohlhagen, Christopher S. Lynch, Eugene B. Shanks, Jr., and Anthony A. Williams were,
independent directors. Mr. Brickman is not considered, and Mr. Donald H. Layton, our former CEO, was not considered, to be
an independent director due to their service as our CEO.
Our non-employee Board members concluded that all current members of our Audit, CHC, Nominating and Governance and
Risk Committees 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 CHC 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. Bloom and Herbert and former director Mr. Williams are
employed by organizations that engage or have engaged in business with us resulting in payments between us and such
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 these organizations and us,
our non-employee Board members concluded that the business relationships do not constitute material relationships
FREDDIE MAC | 2019 Form 10-K
267
Directors, Corporate Governance, and Executive Officers
Corporate Governance
between either Mr. Bloom or Mr. Herbert and us and, with respect to Mr. Williams, did not constitute a material relationship
between him and us, that would, or did, impair their respective independence as our directors.
Employment Affiliations with Competitors - During 2019, an immediate family member of Ms. Huebscher was employed
by 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 Business Partners - Ms. Casey and Messrs. Drummond and Herbert and former directors Ms.
Byrd and Messrs. Lynch and Williams serve or have served as directors of other organizations that engage or have
engaged 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, and with respect to former
directors did not, constitute material relationships that would, or did, impair their independence as our directors.
Financial Relationships with Business Partners - Messrs. Bloom and Gillani, and former director Mr. 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 or were 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. Bloom, Gillani, 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 with respect to the stock ownership. Accordingly,
our non-employee Board members concluded that the stock ownership of our business partners of Mr. Bloom and Mr.
Gillani do not, and of Mr. Kohlhagen did not, constitute material relationships that would, or did, impair their independence
as our 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, 2012, and 2017 to consult with and obtain the Conservator's decision before taking certain
actions.
The Conservator's instructions as currently revised require that we obtain the Conservator's decision before taking action on
any matters that require the consent of or consultation with Treasury under the Purchase Agreement. See Note 2:
Conservatorship and Related Matters for a list of matters that require the approval of Treasury under the Purchase
Agreement.
The Conservator's revised instructions also require us to obtain the Conservator's decision before taking action in the areas
identified in the table below. For some matters, the Conservator's revised instructions specify that our Board must review and
approve the matter before we request the Conservator's decision, and for other matters the Board is expected to determine the
appropriate level of its engagement.
FREDDIE MAC | 2019 Form 10-K
268
Directors, Corporate Governance, and Executive Officers
Corporate Governance
Matters Requiring Prior Board Review and Approval
Other Matters
• Redemptions or repurchases of our subordinated debt, except
as may be necessary to comply with the Purchase Agreement;
• Creation of any subsidiary or affiliate, or entering into a
substantial transaction with a subsidiary or affiliate, except for
routine, ongoing transactions with CSS or the creation of, or a
transaction with, a subsidiary or affiliate undertaken in the
ordinary course of business;
• Changes to, or removal of, Board risk limits that would result in
an increase in the amount of risk that may be taken by us;
• Retention and termination of external auditors to perform an
integrated audit of our financial statements and internal
controls over financial reporting and termination of law firms
serving as consultants to the Board;
• Proposed amendments to our bylaws or Board committee
charters;
• Setting or increasing the compensation or benefits payable to
members of the Board; and
• Establishing the annual operating budget.
• Material changes in accounting policy;
• Proposed changes in our business operations, activities, and
transactions that, in the reasonable business judgment of our
management, are more likely than not to result in a significant
increase in credit, market, reputational, operational, or other key
risks;
• Matters, including our initiation or substantive response to
litigation, that impact or question the Conservator's powers, our
status in conservatorship, the legal effect of the
conservatorship, interpretations of the Purchase Agreement or
terms and conditions of the Financial Agency Agreement with
Treasury or our performance under the Financial Agency
Agreement;
• Agreements with respect to any securities litigation claim and
agreements under which we settle, resolve, or compromise
demands, claims, litigation, lawsuits, prosecutions, regulatory
proceedings, or tax matters when the amount in dispute is more
than $50 million, including each separate agreement with the
same counterparty involving the same dispute or common facts
when the aggregate amount in dispute totals more than
$50 million (excluding loan workouts);
• Mergers, acquisitions and changes in control of a Key
Counterparty where we have a direct contractual right to cease
doing business with such Key Counterparty or object to the
merger or acquisition;
• Changes to requirements, policies, frameworks, standards, or
products that are aligned with Fannie Mae's, pursuant to FHFA's
direction;
• Credit risk transfers that are new transaction types, recurring
transactions with any material change in terms, and
transactions that involve collateral types not previously included
in a risk transfer transaction;
• Mortgage servicing rights sales and transfers involving:
100,000 or more loans to a non-bank transferee; or
25,000 or more loans to any transferee servicer when the
transfer would increase the number of the transferee's
Freddie Mac- and Fannie Mae-owned seriously delinquent
loans by at least 25 percent and the servicing transfer has
a minimum of 500 seriously delinquent loans; and
• Changes in employee compensation that could significantly
impact our employees, including retention awards, special
incentive plans, and merit increase pool funding.
In addition, FHFA requires us to provide it with timely notice of: (i) activities that represent a significant change in current
business practices, operations, policies, or strategies not otherwise addressed in the Conservator decision items referenced
above; (ii) exceptions and waivers to aligned requirements, policies, frameworks, standards, or products if not otherwise
submitted to FHFA for Conservator approval as required above; and (iii) accounting error corrections to previously issued
financial statements that are not de minimis. FHFA will then determine whether any such items require Conservator approval.
For more information on the conservatorship, see MD&A - Conservatorship and Related Matters.
FREDDIE MAC | 2019 Form 10-K
269
Directors, Corporate Governance, and Executive Officers
Corporate Governance
Board Committees
The Board has five standing committees: Audit, CHC, 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 10, 2020 is set forth below, together with a description of the primary responsibilities of each committee.
Committee
Meetings in 2019
Chair
Members
Audit Committee
9 Committee meetings
Aleem Gillani
• Lance F. Drummond
• Grace A. Huebscher
• Mark H. Bloom
Compensation and Human
Capital Committee
8 Committee meetings
Lance F. Drummond
• Aleem Gillani
Executive Committee
None
Sara Mathew
Nominating and Governance
Committee
5 Committee meetings
Grace A. Huebscher
Risk Committee
7 Committee meetings
Saiyid T. Naqvi
• Christopher E. Herbert
• David M. Brickman
• Lance F. Drummond
• Aleem Gillani
• Grace A. Huebscher
• Saiyid T. Naqvi
• Kathleen L. Casey
• Saiyid T. Naqvi
• Mark H. Bloom
• Christopher E. Herbert
Effective February 18, 2020, Mr. Grier will serve as a member of the Nominating and Governance and Risk Committees.
Audit Committee
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 2019 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, as well as the annual incentive
funding level for our Internal Audit division.
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 members of our Audit Committee are independent and that Mr. Gillani, a member of the Audit Committee since January
2019 and its current chair, meets the definition of an "audit committee financial expert" under SEC regulations.
FREDDIE MAC | 2019 Form 10-K
270
Directors, Corporate Governance, and Executive Officers
Corporate Governance
Compensation and Human Capital Committee
The CHC Committee oversees the company's compensation and benefits policies and programs, including: (i) an annual review
of talent development programs and initiatives, including succession planning, (ii) oversight of our diversity and inclusion
programs and policies, and related management strategies, and (iii) the design and execution of initiatives to strengthen our
culture. The company's processes for consideration and determination of executive compensation, and the role of the CHC
Committee in those processes, are further described in Executive Compensation — CD&A. The CHC Committee Report is
included in Executive Compensation — CD&A — Compensation and Human Capital Committee Report.
For a discussion of the CHC 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.
The CHC Committee consists entirely of independent directors. None of the members of the CHC Committee during 2019 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.
Brickman. Other than Mr. Brickman, 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 Charter
and 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;
reviews Board member independence and qualifications and recommends membership of the Board committees; and reviews
potential conflicts of interest for members of senior management as well as certain related person transactions.
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 CRO, and the CRO reports independently to the Risk Committee, in
addition to the CEO.
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 manage 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 and cybersecurity experts, and
evaluate the company's information security program. See MD&A — Risk Management — Overview for more information
on the Board's role in risk oversight.
FREDDIE MAC | 2019 Form 10-K
271
Directors, Corporate Governance, and Executive Officers
Corporate Governance
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.
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.
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.
2019 Non-Employee Director Compensation Levels
Board compensation levels during conservatorship are shown in the table below.
Table 76 - Board Compensation Levels
Board Service
Annual Retainer for Non-Executive Chair
Annual Retainer for Non-Employee 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
FREDDIE MAC | 2019 Form 10-K
272
Directors, Corporate Governance, and Executive Officers
Corporate Governance
2019 Director Compensation
The following table summarizes the 2019 compensation earned by all persons who served as non-employee directors during
2019.
Table 77 - Director Compensation
Non-Employee Director
Sara Mathew(2)
Mark H. Bloom(3)
Carolyn H. Byrd(4)
Kathleen L. Casey(3)
Lance F. Drummond
Aleem Gillani(2)(3)
Thomas M. Goldstein(4)
Christopher E. Herbert
Grace A. Huebscher(2)
Steven W. Kohlhagen
Christopher S. Lynch(4)
Saiyid T. Naqvi
Eugene B. Shanks, Jr.(4)
Anthony A. Williams(4)
Fees Earned or
Paid in Cash(1)
Total
$277,292
$277,292
16,087
20,000
40,000
170,000
181,458
45,000
160,000
173,583
170,000
36,250
175,000
174,538
20,000
16,087
20,000
40,000
170,000
181,458
45,000
160,000
173,583
170,000
36,250
175,000
174,538
20,000
(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 2019. In February 2019, Ms. Mathew became the Non-Executive Chair, Mr. Gillani became the Chair of the Audit
Committee, and Ms. Huebscher became a member of the Audit Committee. In July 2019, Ms. Huebscher became the Chair of the Nominating and Governance
Committee.
(3) Mr. Gillani joined the Board in January 2019; Ms. Casey joined the Board in October 2019; and Mr. Bloom joined the Board in November 2019.
(4) Mr. Goldstein left the Board in January 2019; Messrs. Lynch and Williams and Ms. Byrd left the Board in February 2019; and Mr. Shanks left the Board in December
2019.
Indemnification
We have made arrangements to indemnify our directors against certain liabilities which are similar to the terms on which our
executive officers are indemnified. For a description of such terms, see Executive Compensation — CD&A — Written
Agreements Relating to NEO Employment — Indemnification Agreements.
FREDDIE MAC | 2019 Form 10-K
273
Directors, Corporate Governance, and Executive Officers
Executive Officers
EXECUTIVE OFFICERS
As of February 11, 2020, our executive officers are as follows:
David M. Brickman
Age
54
Year of Affiliation
Position
1999
Chief Executive Officer
Mr. Brickman has served as our CEO and a member of our Board since July 2019. See Director Biographical Information for a
brief biographical description for Mr. Brickman.
Ricardo A. Anzaldua
Age
66
Year of Affiliation
Position
2018
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.
Donna M. Corley
Age
46
Year of Affiliation
Position
1995
Senior Vice President & Interim Head of Single-Family Business
Ms. Corley has served as our SVP & Interim Head of Single-Family Business since November 2019. In this role, she is
responsible for managing our relationships with our Seller/Servicers, the performance of our guarantee book of business, and
all sourcing, servicing, risk management, and business operations. Previously, she served as SVP & Chief Risk Officer of
Single-Family Business, where she led the team responsible for analyzing and managing the risks that affect Freddie Mac's
Single-Family business of financing more than 1.5 million homes annually. She joined Freddie Mac in 1995 as a research analyst
and since then has held various portfolio manager positions within the Investment and Capital Markets division and has also
led Freddie Mac’s credit pricing, risk transfer, and securitization teams.
Anil D. Hinduja
Age
56
Year of Affiliation
Position
2015
Executive Vice President - Chief Risk Officer
Mr. Hinduja has served as our EVP - Chief 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
64
Year of Affiliation
Position
2013
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
FREDDIE MAC | 2019 Form 10-K
274
Directors, Corporate Governance, and Executive Officers
Executive Officers
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
52
Year of Affiliation
Position
2008
Executive Vice President - Multifamily
Ms. Jenkins has served as our EVP - Multifamily since November 2018. In this role, she leads a team of more than 900 people
tasked with providing liquidity and stability to multifamily mortgage markets while supporting affordable rental housing
throughout the country. She previously served as SVP - Multifamily Underwriting and Credit — the principal manager of
underwriting and 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 K- and SB-Deals. She was a Senior Vice President with Wells Fargo National Bank in
Michigan before joining Freddie Mac in March 2008.
Donald F. Kish
Age
51
Year of Affiliation
Position
2002
Senior Vice President - Corporate Controller, Principal Accounting Officer & Interim Chief Financial Officer
Mr. Kish has served as our SVP - Corporate Controller, Principal Accounting Officer & Interim Chief Financial Officer since
December 2019. He has served as our Corporate Controller and Principal Accounting Officer since May 2018. Previously, he
served as Vice President, Single-Family Controller, from 2014 to 2018 and as Vice President with responsibility for various
accounting and control matters, in support of both the Single-Family Business division and the Investments and Capital
Markets division, from 2004 to 2014.
Frank Nazzaro
Age
58
Year of Affiliation
Position
2018
Executive Vice President - Chief Information Officer
Mr. Nazzaro has served as our EVP - Chief Information Officer since October 2019 after serving as Acting Chief Information
Officer from May 2019 to October 2019. He leads the Information Technology (IT) division and provides corporate-wide
leadership for the company’s technology strategy. Mr. Nazzaro is an accomplished senior technology executive with over 20
years’ experience in the financial services industry. With an in-depth knowledge in infrastructure and applications, he brings a
wealth of experience in transformational IT activities and strong leadership capabilities essential to IT’s strategic initiatives,
including Cloud migration, Modern Delivery, and Employee Technology Experience. He joined Freddie Mac in 2018 as Senior
Vice President and Chief Technology Officer leading Enterprise Technology Solutions. From 2016 to 2018, he served as Group
Vice President and CTO for Travelport LLC, where he led cloud architecture, infrastructure, and operations globally. Before that,
from 2012 to 2016, he worked as CTO at CIT Group where he was responsible for Transformation, Architecture, Technology
Strategy, and IT Infrastructure. He has held several senior technology and management roles at RBC Capital Markets,
Bridgewater, and UBS.
Jerry Weiss
Age
61
Year of Affiliation
Position
2003
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.
FREDDIE MAC | 2019 Form 10-K
275
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, 2019.
David M. Brickman
Ricardo A. Anzaldua
Anil D. Hinduja
Named Executive Officers
Chief Executive Officer
Executive Vice President - General Counsel & Corporate Secretary
Executive Vice President - Chief Risk Officer
Michael T. Hutchins
Executive Vice President - Investments and Capital Markets
Donald F. Kish
Donald H. Layton
David B. Lowman
James G. Mackey
Senior Vice President - Corporate Controller, Principal Accounting Officer & Interim Chief Financial Officer
Former Chief Executive Officer
Former Executive Vice President - Single-Family Business
Executive Vice President - Senior Advisor; former Chief Financial Officer
For information on our primary business objectives and the progress we made during 2019 toward accomplishing those
objectives, see Introduction — About Freddie Mac.
Overview of Executive Management Compensation Program
Compensation in 2019 for each NEO, other than Mr. Layton, whose compensation is discussed below, was governed by the
Executive Management Compensation Program, or EMCP. Compensation in 2019 for Mr. Brickman was governed by the EMCP
prior to his appointment as CEO in July 2019. 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.
Elements of Target TDC
Compensation under the EMCP in 2019 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 and
Assessment Criteria
Corporate Scorecard / Individual
Cannot exceed $600,000
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 and the Assessment
Criteria
Subject to reduction based on
performance against both the
Corporate Scorecard and individual
objectives
The objectives against which 2019 corporate performance was measured, together with the assessment of actual performance
against those objectives and the Assessment Criteria used by FHFA, are described in Determination of 2019 At-Risk
Deferred Salary — At-Risk Deferred Salary Based on Conservatorship Scorecard Performance and
FREDDIE MAC | 2019 Form 10-K
276
Executive Compensation
Compensation Discussion and Analysis
Determination of 2019 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 2019 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 Compensation
and Human Capital 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
Prior to his appointment as CEO in July 2019, Mr. Brickman participated in the EMCP and his compensation was subject to
corporate and individual performance. Since his appointment as CEO, Mr. Brickman's compensation has consisted solely of an
annual Base Salary of $600,000, a level set by FHFA pursuant to the Equity in Government Compensation Act of 2015.
Mr. Layton's compensation in 2019 consisted solely of an annual Base Salary of $600,000. In 2019, he did not participate in the
EMCP and therefore did not receive any compensation subject to either corporate or individual performance.
Messrs. Brickman and Layton were eligible to participate in all employee benefit plans offered to Freddie Mac's other senior
executives under the terms of those plans.
Determination of 2019 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 CHC 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 CHC Committee throughout the year on other
executive compensation matters.
Meridian has not provided the CHC Committee with any non-executive compensation services, nor has the firm provided any
consulting or other services to our management. During 2019, the CHC 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.
2019 Comparator Group Companies
The CHC 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 CHC 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.
FREDDIE MAC | 2019 Form 10-K
277
Executive Compensation
Compensation Discussion and Analysis
The Comparator Group used in determining compensation for 2019 consisted of the following companies:
Discover Financial Services
Prudential
Allstate
Ally Financial
AIG
American Express
Bank of America*
Fannie Mae
Fifth Third Bancorp
The Hartford
JPMorgan Chase*
Bank of New York Mellon
KeyCorp
BB&T**
Capital One
Citigroup*
Mastercard
MetLife
Northern Trust
Citizens Financial Group
PNC
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.
** Effective December 6, 2019, BB&T and SunTrust merged to form Truist Financial Corporation.
The CHC Committee has determined that these same companies will comprise the 2020 Comparator Group.
Establishing Target TDC
The CHC Committee developed its 2019 Target TDC recommendations for the eligible NEOs, other than Messrs. Hutchins and
Brickman (in his role as President), by reviewing data from the Comparator Group. For Mr. Hutchins, the CHC Committee
reviewed data from a broader financial services survey reflecting companies with significant assets under management. For Mr.
Brickman in his role as President, the CHC Committee reviewed data from a broader set of financial services companies with
non-CEO presidents. The CHC Committee's 2019 Target TDC recommendation for each of the eligible NEOs was reviewed and
approved by FHFA.
2019 Target TDC
The following table sets forth the components of 2019 Target TDC for each of our eligible NEOs.
Table 78 - 2019 Target TDC
Named Executive Officer(1)
David M. Brickman(2)
as CEO
Jul - Dec
as President
Jan - Jun
Total
Ricardo A. Anzaldua
Anil D. Hinduja
Michael T. Hutchins
Donald F. Kish(3)
David B. Lowman
James G. Mackey
2019 Target TDC
Base
Salary
Fixed
Deferred Salary
At-Risk
Deferred Salary
Target TDC
$300,000
300,000
600,000
500,000
600,000
600,000
414,712
505,385
600,000
$—
837,500
837,500
1,250,000
1,220,000
1,675,000
235,865
1,401,902
1,675,000
$—
487,500
487,500
750,000
780,000
975,000
278,076
816,032
975,000
$300,000
1,625,000
1,925,000
2,500,000
2,600,000
3,250,000
928,653
2,723,319
3,250,000
(1) Mr. Layton did not participate in the EMCP in 2019 and therefore is not included in this table. For a discussion of Mr. Layton's compensation, see CEO
Compensation.
(2)
(3)
Prior to being appointed as CEO in July 2019, Mr. Brickman served as President and participated in the EMCP. Amounts in this table reflect his prorated Target TDC
for the period during which he served as President. For a discussion of Mr. Brickman's compensation earned during his service as CEO, see CEO Compensation.
Amounts in the table reflect the prorated impact of Mr. Kish's increase in 2019 Target TDC from $875,000 to $975,000 effective June 24, 2019, consisting of a base
salary increase from $400,000 to $425,000 and a Deferred Salary increase from $475,000 to $550,000.
FREDDIE MAC | 2019 Form 10-K
278
Executive Compensation
Compensation Discussion and Analysis
Determination of 2019 At-Risk Deferred Salary
The CHC 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 2019. FHFA determined the funding level for the portion
of At-Risk Deferred Salary based on Conservatorship Scorecard performance and Assessment Criteria, and the CHC
Committee determined, with FHFA's review and approval, the amounts payable to each eligible NEO for the portion of At-Risk
Deferred Salary based on Corporate Scorecard goals and individual performance.
At-Risk Deferred Salary Based on Conservatorship Scorecard
Performance
Half of each eligible NEO's 2019 At-Risk Deferred Salary, or 15% of Target TDC, was subject to reduction based on FHFA's
assessment of (i) the company's performance against the objectives in the 2019 Conservatorship Scorecard and (ii) the
Assessment Criteria described below. FHFA independently assessed our performance against 2019 Conservatorship Scorecard
and the Assessment Criteria and determined that an 85% funding level was justified for the portion of the eligible NEOs' At-Risk
Deferred Salary. In assessing our performance against the 2019 Conservatorship Scorecard, the factors considered by FHFA
included our completion of all of the Conservatorship Scorecard objectives and our performance against the Assessment
Criteria.
In making its assessment, FHFA used the following criteria (Assessment Criteria):
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 meets FHFA’s expectations under the CCF, including FHFA’s expectations on meeting
appropriate ROCC targets;
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.
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 support access to single-family mortgage credit for
creditworthy borrowers, including underserved segments of the market:
All goals were achieved.
• Continue to identify opportunities to support access to credit in a safe and sound
manner that take into consideration changing borrower needs and enabling
technology to document income, assets, and employment.
• Continue to support access to credit for borrowers with limited English proficiency
and make progress on multi-year language access plans.
• Continue efforts supporting appraisal process modernization, including revised
appraisal forms and data requirements.
Continue to responsibly support the Neighborhood Stabilization Initiative.
Goal was achieved.
Continue efforts related to mortgage servicing that promote mortgage market
stability by furthering opportunities to improve the borrower experience, expand
liquidity, and increase efficiency.
Goal was achieved.
FREDDIE MAC | 2019 Form 10-K
279
Executive Compensation
Compensation Discussion and Analysis
Performance Goals
FHFA's Summary of Performance
Prepare for transition from LIBOR. Assess impact and perform industry outreach to
inform policy and implementation plans.
Goal was achieved through our efforts to prepare the
marketplace to transition from LIBOR to a new index
based on SOFR by remaining engaged in the SOFR
derivatives market by taking on SOFR-based futures and
swaps when appropriate; with our K Certificates, which
include a class of floating rate bonds indexed to SOFR;
and our active participation in the ARCC, which is a group
of private-market participants convened by the Federal
Reserve Board and the Federal Reserve Bank of New York
to help ensure a successful transition from LIBOR to its
recommended alternative, SOFR.
Explore opportunities to further affordability through multifamily energy and water
efficiency programs:
Goal was achieved.
• Conduct research and outreach on loans that finance energy and water efficiency
improvements.
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 2019, 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.
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.
All goals were achieved through the company's
thoughtful approaches to transferring credit risk on
single-family mortgages.
All goals were achieved through the company's
thoughtful approaches to transferring credit risk on
multifamily mortgages.
Retained Portfolio:
Goal was achieved.
• Execute FHFA-approved retained portfolio plans that maintain, even under adverse
conditions, the annual Purchase Agreement requirements and the $250 billion
Purchase Agreement cap. Any sales should be commercially reasonable transactions
that consider impacts to the market, borrowers, and neighborhood stability.
Servicer Eligibility Requirements 2.0:
Goal was achieved.
• Evaluate the current liquidity requirements for non-depository Seller/Servicer
company counterparties to determine whether changes are appropriate.
Build a new single-family infrastructure for use by the Enterprises and adaptable for use by other participants in the secondary market in the
future (30%)
FREDDIE MAC | 2019 Form 10-K
280
Executive Compensation
Compensation Discussion and Analysis
Performance Goals
FHFA's Summary of Performance
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.
• 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 industry
stakeholders.
• Work proactively with the industry to help market participants prepare for the
implementation of the Single Security Initiative.
Continue to Provide Active Support for Mortgage Data Standardization Initiatives:
• Continue implementation of the redesigned Uniform Residential Loan Application
(URLA), the Uniform Loan Application Dataset (ULAD), and the company's Automated
Underwriting System (AUS) specifications.
• Assess and, as appropriate, continue implementation of strategies to redesign the
Uniform Appraisal Dataset and forms.
All goals were achieved with the successful launch of
UMBS.
All goals were achieved with the publication of the mock-
ups of URLA forms, updated AUS specifications, and
revised URLA-ULAD implementation timeline.
FREDDIE MAC | 2019 Form 10-K
281
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 CHC Committee to use its
judgment in determining the overall level of performance. In making its determination, the CHC Committee primarily considered
the fact that the vast majority of the Corporate Scorecard goals were achieved or exceeded. The CHC 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 2020 that align with our Strategic Plan.
The table below presents the Corporate Scorecard goals and the CHC 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
People and Culture
Hire and retain talented people in a
winning culture
Operating Performance
Operate as well as the best-run
financial institutions
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 all elements of this goal. Both the Single-Family and Multifamily businesses
continued to make significant progress in customer satisfaction.
The company achieved or exceeded all but one element of this goal. The company received solid scores on
the employee engagement survey indicating the ongoing commitment to drive a culture of
engagement. The company also continues to focus on diversity and inclusion efforts related to hiring
practices and usage and engagement of minority-, women- and disabled-owned businesses in our
transactions and met or exceeded these elements. The company narrowly missed achieving the element
related to corporate payments to diverse suppliers.
The company achieved or exceeded all but one element of this goal. We exceeded this goal in both
Multifamily volume and Single-Family portfolio growth. Financial results continued to be strong, and we
met or exceeded comprehensive income goals at the corporate, Single-Family business, and Multifamily
business levels. The company failed to achieve the element related to Investments and Capital Markets
comprehensive income. We exceeded plan in the execution of our major programs and infrastructure
transformation, highlighting our continued efforts to become more efficient. We also exceeded our plan
related to the adoption and conversion to Single Security.
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 were above plan. Efforts
to achieve major remediation program milestones were achieved or exceeded and the timely remediation of
issues target was met indicating our continued focus on risk reduction efforts.
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 2019. We also exceeded or expect
to exceed our goals for other single-family and multifamily mission-related offerings.
The CHC Committee also assessed the individual performance of each eligible NEO. In making its assessments, the CHC
Committee took into consideration input from Mr. Brickman (except with respect to his performance for the period during which
he was eligible to participate in the EMCP) as well as the company's Corporate Scorecard performance. In each case, the CHC
Committee's determination was consistent with Mr. Brickman's recommendation. FHFA reviewed and approved the
compensation associated with these determinations.
Each NEO's individual performance is discussed below.
FREDDIE MAC | 2019 Form 10-K
282
Executive Compensation
Compensation Discussion and Analysis
David M. Brickman, Chief Executive Officer & Former President
Performance Highlights(1)
Effectively assumed leadership of all three of the business lines in February 2019 — Single-Family, Multifamily, Investments & Capital Markets —
and the Information Technology division. This was in addition to his existing oversight of the Enterprise Operations and Internal Audit divisions.
Demonstrated exceptional leadership, including gaining a deeper understanding of all aspects of the company, driving progress, and advancing the
company’s leadership role in the housing industry.
Made significant contributions to many strategic priorities, including the implementation of UMBS, Reimagine Servicing, infrastructure
transformation, and company-wide Modern Delivery implementation.
Achieved strong business results across all categories - from operating performance to customer relationship indices, to credit risk capital reduction
and remediation efforts.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision
The CHC 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.
(1)
Performance highlights reflect the CHC Committee's evaluation of Mr. Brickman's service as President, prior to being appointed CEO in July 2019.
Ricardo A. Anzaldua, Executive Vice President, General Counsel & Corporate Secretary
Performance Highlights
Advised the Board, senior management, and FHFA on a wide variety of legal and governance issues associated with potential conservatorship exit.
Effectively supported a variety of business initiatives and transformations, including the implementation of the UMBS initiative, requirements for the
CSP, implementation of initiatives to align with direction provided by FHFA, Multifamily’s digital transformation, and Freddie Mac’s Modern Delivery
methodology.
Helped lead company-wide efforts to navigate a variety of complex regulatory and legal initiatives.
Provided effective legal support for Board and FHFA leadership transitions to ensure a high level of client satisfaction.
Strong leadership in the ongoing development of Legal division staff with an increased focus on continuous learning and professional development.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision
The CHC Committee determined that Mr. Anzaldua should receive 100% of his At-Risk Deferred Salary that was subject to reduction based on the
company's performance against the Corporate Scorecard and his individual performance.
Anil D. Hinduja, Executive Vice President - Chief Risk Officer
Performance Highlights
Advanced the company’s risk framework through corporate policies and standards and commenced development of the compliance obligation
library to set the foundation for an integrated risk and control approach.
Enhanced risk appetite methodology for both Financial and Operational Risks and worked actively with the Conservator on the Enterprise Capital
Rule.
Provided leadership to address remediation of supervisory issues and developed a program for third-party risk management.
Strengthened capabilities within the independent risk function through learning initiatives, ongoing job rotation and recruitment of seasoned
executives.
Continued focus on firm-wide risk management.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision
The CHC Committee determined that Mr. Hinduja should receive 100% of his At-Risk Deferred Salary that was subject to reduction based on the
company's performance against the Corporate Scorecard and his individual performance.
FREDDIE MAC | 2019 Form 10-K
283
Executive Compensation
Compensation Discussion and Analysis
Michael T. Hutchins, Executive Vice President - Investments and Capital Markets
Performance Highlights
Provided strong leadership of the company’s market activities, including successfully decreasing less liquid assets in an economically efficient
manner.
Led efforts to successfully transition to the UMBS, including market readiness and exchange of legacy Freddie Mac mortgage securities for UMBS.
Partnered with the Single-Family business to expand cash window activities, and continued to enhance the liquidity of Freddie Mac’s traded Single-
Family bonds in the secondary mortgage market.
Continued to meet 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.
Continued to improve operational capabilities, including reducing reliance on third-party vendors, strengthening resiliency and data infrastructure,
and enhancing model risk management.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision
The CHC 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.
Donald F. Kish, Senior Vice President, Corporate Controller, Principal Accounting Officer & Interim Chief Financial Officer
Performance Highlights
Provided strong leadership to accounting department, including implementing several opportunities for efficiency in structure and process.
Supported the implementation of UMBS and CECL from a tax, accounting, and reporting perspective.
Continued focus on enhancing overall control framework, including successful resolution of several key outstanding identified issues.
Provided renewed direction for the Finance division’s data and reporting strategy initiative.
Provided guidance and structure to the company on the control framework to be used in its Modern Delivery development methodology.
Partnered with other leaders to ensure operational readiness for new initiatives, including the first STACR REMIC issuance.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision
The CHC Committee determined that Mr. Kish should receive 100% of his At-Risk Deferred Salary that was subject to reduction based on the
company's performance against the Corporate Scorecard and his individual performance.
David B. Lowman, Former Executive Vice President - Single-Family Business
Performance Highlights
Continued strong performance of the Single-Family business, with focus on increasing competitiveness, driving innovation, and managing risks.
Achieved higher Single-Family earnings in 2019 versus 2018.
Developed and implemented initiatives that create operational efficiencies and enhance the customer experience, including increasing the
capabilities of the Loan Advisor Suite.
Successfully supported the launch of the UMBS on the CSP in collaboration with Fannie Mae and CSS.
Continued to innovate and execute CRT transactions, including issuing the first STACR REMIC transaction that is expected to deepen and broaden
participation in the STACR program.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision
The CHC 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.
FREDDIE MAC | 2019 Form 10-K
284
Executive Compensation
Compensation Discussion and Analysis
James G. Mackey, Executive Vice President - Senior Advisor; former Chief Financial Officer
Performance Highlights
Led the completion of several large financial transformation projects including a new capital markets accounting system, additional hedge
accounting capabilities, and preparation for the implementation of the new CECL accounting standard.
Continued focus on enhanced analytical and reporting capabilities for both internal management reporting and external disclosures.
Led the transformation of the enterprise supply chain organization and processes to achieve substantial cost savings and improved efficiencies.
Led efforts to implement several operational improvements, which included processes to support the UMBS and CCF, and the simplification of G&A
and project reporting to reduce costs and increase efficiencies.
Continued the successful development of management and staff in the Finance division to expand skill sets needed for future organizational
success.
At-Risk Deferred Salary (Corporate Scorecard/Individual) Funding Decision
The CHC 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.
2019 Deferred Salary
The following chart reports the actual amounts of 2019 Deferred Salary for each eligible NEO. The target amount of deferred
salary for Mr. Brickman reflects prorated targets based on his participation in the EMCP prior to his appointment as CEO in July
2019. The actual amount earned in each calendar quarter is scheduled to be paid on the last pay date of the corresponding
calendar quarter in 2020.
Table 79 - 2019 Deferred Salary
2019 Actual Deferred Salary(2)
At-Risk
Named Executive
Officer(1)
Mr. Brickman(2)
Mr. Anzaldua
Mr. Hinduja
Mr. Hutchins
Mr. Kish
Mr. Lowman
Mr. Mackey
Fixed
$837,500
1,250,000
1,220,000
1,675,000
235,865
1,401,902
1,675,000
Conservatorship
Scorecard
% of
Target
Corporate
Scorecard/
Individual
$207,188
318,750
331,500
414,375
118,183
346,814
414,375
85%
85%
85%
85%
85%
85%
85%
$243,750
375,000
390,000
487,500
139,038
408,016
487,500
Total Actual
Deferred
Salary
% of
Target
$1,288,438
1,943,750
1,941,500
2,576,875
493,086
2,156,732
2,576,875
97%
97%
97%
97%
96%
97%
97%
% of
Target
100%
100%
100%
100%
100%
100%
100%
(1) Mr. Layton was not eligible for deferred salary in 2019 and therefore is not included in this table.
(2)
Amounts represent actual deferred salary earned by Mr. Brickman during his service as President prior to his appointment as CEO in July 2019.
FREDDIE MAC | 2019 Form 10-K
285
Executive Compensation
Compensation Discussion and Analysis
Written Agreements Relating to NEO Employment
We entered into letter agreements with each of our NEOs, other than Mr. Brickman and Mr. Kish, 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 2019 Target TDC for 2019 Target
TDC including Base Salary amounts for the NEOs. There are no remaining material provisions of any of the letter agreements as
they have either been superseded by the EMCP, as described above, or the provisions are no longer effective, such as sign-on
bonuses that have been paid and are no longer subject to repayment. A copy of the letter agreement for each of our NEOs is
filed as an exhibit, as reflected in the Exhibit Index.
In connection with his separation from the company, we entered into a Separation Agreement and General Release with Mr.
Mackey. Pursuant to the terms of this agreement, Mr. Mackey will remain with the company, serving as EVP-Senior Advisor and
assisting with the transition to the new CFO. During this period, his compensation will remain at the levels described in
Determination of 2019 Target TDC. A copy of the Separation Agreement and General Release is filed as Exhibit 10.31.
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.
Restrictive Covenant and Confidentiality Agreements
Each of our NEOs is subject to a restrictive covenant and confidentiality agreement with us. Each agreement provides that the
NEO will not seek employment with designated competitors that involves performing similar duties for a specified period
immediately following termination of employment, regardless of whether the executive's employment is terminated by the
executive, by us, or by mutual agreement. The specified period is 24 months for Mr. Layton and 12 months for the other NEOs.
During the 12-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. A copy of the restrictive covenant and confidentiality agreement for each of our NEOs is filed as
an exhibit, as reflected in the Exhibit Index.
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 compensation
subject to recapture and/or forfeiture are described below.
Materially Inaccurate Information
Forfeiture Event - The NEO has earned or obtained the legally binding right to a payment of Deferred Salary based on
materially inaccurate financial statements or any other materially inaccurate performance measure.
Compensation Subject to Recapture and/or Forfeiture - Any Deferred Salary in excess of the amount that the Board
determines would likely have been otherwise earned using accurate measures during the two years prior to the Forfeiture
Event.
Termination for Felony Conviction or Willful Misconduct
Forfeiture Event - The NEO's employment is terminated in any of the following circumstances:
Termination of employment because the NEO is convicted of, or pleads guilty or nolo contendere to, a felony;
Subsequent to termination of employment, the NEO is convicted of, or pleads guilty or nolo contendere to, a felony,
based on conduct occurring prior to termination, and within one year of such conviction or plea, the Board determines
that such conduct is materially harmful to Freddie Mac; or
FREDDIE MAC | 2019 Form 10-K
286
Executive Compensation
Compensation Discussion and Analysis
Termination of employment because, or within two years of termination, the Board determines that, the NEO engaged
in willful misconduct in the performance of his or her duties that was materially harmful to Freddie Mac.
Compensation Subject to Recapture and/or Forfeiture - Any Deferred Salary earned during the two years prior to the
date that the NEO is terminated, any Deferred Salary scheduled to be paid within two years after termination, and any cash
payment made or to be made as consideration for any release of claims agreement.
Gross Neglect or Gross Misconduct
Forfeiture Event - The NEO's employment is terminated because, in carrying out his or her duties, the NEO engages in
conduct that constitutes gross neglect or gross misconduct that is materially harmful to Freddie Mac, or within two years
after the NEO's termination of employment, the Board determines that the NEO, prior to his or her termination, engaged in
such conduct.
Compensation Subject to Recapture and/or Forfeiture - Any Deferred Salary paid at the time of termination or
subsequent to the date of termination, including any cash payment made as consideration for any release of claims
agreement.
Violation of a Post-Termination Non-Competition Covenant
Forfeiture Event - The NEO violates a post-termination non-competition covenant set forth in the restrictive covenant and
confidentiality agreement in effect when a payment of Deferred Salary is scheduled to be made.
Compensation Subject to Recapture and/or Forfeiture - 50% of the Deferred Salary paid during the twelve months
immediately preceding the violation and 100% of any unpaid Deferred Salary.
Under the Recapture Agreement, the Board has discretion to determine the appropriate dollar amount, if any, to be recaptured
from and/or forfeited by the NEO, which is intended to be the gross amount of compensation in excess of what Freddie Mac
would have paid the NEO had Freddie Mac taken the Forfeiture Event into consideration at the time such compensation
decision was made.
A copy of the form of the Recapture Agreement was filed as Exhibit 10.18 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 executive officers (including each of our NEOs) and
directors, each an indemnitee. For indemnification agreements entered into with executive officers after August 2011, the form
of agreement has been revised to provide that indemnification rights under the agreement would terminate if and when the
executive officer remained with Freddie Mac after ceasing to report directly to the CEO with respect to any claims arising from
matters occurring after the officer no longer reported directly to the CEO. Similar indemnification rights would continue to be
available to such executive officers under the Bylaws going forward. The indemnification agreements provide that we will
indemnify the indemnitee to the fullest extent permitted by our Bylaws and Virginia law. This obligation includes, subject to
certain terms and conditions, indemnification against all liabilities and expenses (including attorneys' fees) actually and
reasonably incurred by the indemnitee in connection with any threatened or pending action, suit, or proceeding, except such
liabilities and expenses as are incurred because of the indemnitee's willful misconduct or knowing violation of criminal law. The
indemnification agreements provide that if requested by the indemnitee, we will advance expenses, subject to repayment by the
indemnitee of any funds advanced if it is ultimately determined that the indemnitee is not entitled to indemnification. The rights
to indemnification under the indemnification agreements are not exclusive of any other right the indemnitee may have under any
statute, agreement, or otherwise. Our obligations under the indemnification agreements will continue after the indemnitee is no
longer a director or officer of the company with respect to any possible claims based on the fact that the indemnitee was a
director or officer, and the indemnification agreements will remain in effect in the event the conservatorship is terminated. The
indemnification agreements also provide that indemnification for actions instituted by FHFA will be governed by the standards
set forth in FHFA's Notice of Proposed Rulemaking, published in the Federal Register on November 14, 2008.
FREDDIE MAC | 2019 Form 10-K
287
Executive Compensation
Compensation Discussion and Analysis
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 2019 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.
The SERP II was available to employees who were participants in the company’s Pension Plan as of the date the Pension Plan
was terminated. It was intended to provide participants with the full amount of the benefits to which they would have been
entitled under the tax-qualified Transitional Plan (see our Annual Report on Form 10-K filed on February 19, 2015 for additional
information) if that plan was not subject to certain dollar limits under the Internal Revenue Code. This was referred to as the
"SERP II Benefit." Messrs. Brickman and Kish were the only NEOs who were eligible for the SERP II Benefit.
For additional information regarding these benefits, see 2019 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, and our directors 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 CHC 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 CHC 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.
FREDDIE MAC | 2019 Form 10-K
288
Executive Compensation
Compensation Discussion and Analysis
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.
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.
Changes to EMCP in 2020
On August 23, 2019, FHFA, acting as Conservator, directed us to make specified changes to the EMCP for so long as we are in
conservatorship. As described in Executive Compensation—Elements of Target TDC and Determination of 2019
Target TDC for Eligible NEOs, 30% of target TDC for each NEO (other than our CEO) is at-risk deferred salary that is
subject to reduction based on corporate and individual performance. This at-risk deferred salary is currently paid in end-of-
quarter installments in the year following the performance year. FHFA has directed us to increase the mandatory deferral period
for at-risk deferred salary received by certain executives (including our NEOs) from one year to two years. For executives hired
before January 1, 2020, this change will be effective for at-risk deferred salary earned beginning January 1, 2022. For
executives hired on or after January 1, 2020, the change will be effective immediately. Accordingly, at-risk deferred salary
earned by our current NEOs (other than our CEO) beginning January 1, 2022 will be paid in quarterly installments in the second
year following the performance year. For example, at-risk deferred salary earned in 2022 will be paid in quarterly installments in
2024. Because our CEO does not receive deferred salary, his compensation will not be affected by this change.
FHFA also has directed us to limit base salaries for all of our employees to $600,000 for so long as we are in conservatorship.
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 and Human Capital Committee Report
The Compensation and Human Capital 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 and Human Capital Committee.
Lance F. Drummond, Chair
Mark H. Bloom
Aleem Gillani
Christopher E. Herbert
FREDDIE MAC | 2019 Form 10-K
289
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 CHC Committee in January 2020. Management's conclusion, with which the CHC
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.
FREDDIE MAC | 2019 Form 10-K
290
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 2019, we used the 2018 median employee who we identified 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. In October
2019, after internal review and analysis and pursuant to SEC rules, we determined to use the same median employee for the
calculation of the 2019 CEO Pay Ratio as we did for the calculation of the 2018 CEO Pay Ratio because we have not made
significant recent changes to our compensation programs and the median employee identified in 2018 remains representative
of our employee population. We calculated that employee's total annual compensation for 2019 using the same method
required for calculating the CEO's (and other NEOs') total annual compensation for purposes of Table 81 - Summary
Compensation Table.
The table below sets forth the total annual compensation for our CEO and median employee and the ratio between the two.
Table 80 - CEO Pay Ratio
Employee
David M. Brickman (CEO)
Median Employee
CEO Pay Ratio
Total Compensation
$651,000(1)
150,065
Ratio
4.34 to 1
(1)
Represents the annualized compensation for Mr. Brickman because he was serving as CEO on the date we determined our median employee for 2019.
Per the Equity in Government Compensation Act of 2015, our CEO's compensation is limited to a base salary of $600,000
along certain benefits, including contributions made under our tax-qualified Thrift/401(k) Plan and accruals earned pursuant to
the SERP Benefit. See CEO Compensation for further discussion. Given the different methodologies that companies may use
to determine their CEO pay ratio, the ratio reported above should not be used as a basis for comparison between companies.
FREDDIE MAC | 2019 Form 10-K
291
Executive Compensation
Environmental, Social, and Governance Practices
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE
PRACTICES
Freddie Mac's mission is to provide liquidity, stability, and affordability to the U.S. housing market. We are committed to
managing the risks and opportunities that arise from Environmental, Social, and Governance (ESG) issues in connection with
executing our mission. We have a responsibility to operate in a sustainable way and to be a leader in environmental
sustainability, both in the way we conduct our business and the products we offer. We are dedicated to maintaining an inclusive
workplace where employees feel valued and engaged. We evaluate and enhance our practices each year with a focus on three
key elements: our environmental footprint, our community, and our people. Here are highlights of our programs, initiatives, and
accomplishments for 2019.
FREDDIE MAC | 2019 Form 10-K
292
Executive Compensation
Environmental, Social, and Governance Practices
FREDDIE MAC | 2019 Form 10-K
293
Executive Compensation
Environmental, Social, and Governance Practices
FREDDIE MAC | 2019 Form 10-K
294
Executive Compensation
2019 Compensation Information for NEOs
2019 COMPENSATION INFORMATION FOR NEOs
The following sections set forth compensation information for our NEOs: our CEO, interim CFO, the three other most highly
compensated executive officers who were serving as executive officers as of December 31, 2019, anyone who served as our
CEO or CFO in 2019, and any executive officer who was not serving as an executive officer as of December 31, 2019, who
otherwise would have been one of the three most highly compensated executive officers in 2019.
Summary Compensation Table
Table 81 - Compensation Summary
Named Executive Officer
David M. Brickman(5)
Chief Executive Officer
Ricardo A. Anzaldua(5)
EVP - General Counsel &
Corporate Secretary
Anil D. Hinduja(5)
EVP - Chief Risk Officer
Michael T. Hutchins(6)
EVP - Investments & Capital
Markets
Donald F. Kish(5)
SVP - Corporate Controller,
Principal Accounting Officer &
Interim Chief Financial Officer
Donald H. Layton
Former Chief Executive Officer
David B. Lowman
Former EVP - Single-family
Business
James G. Mackey
EVP - Senior Advisor, former
Chief Financial Officer
Salary
Earned During
Year(1)
Deferred(2)
Bonus
Non-Equity
Incentive Plan
Compensation(3)
All Other
Compensation(4)
Total
$600,000
$837,500
500,000
1,507,478
500,000
1,250,000
$—
—
—
$456,867
867,919
702,873
$112,621
$2,006,988
163,266
3,038,663
68,745
2,521,618
Year
2019
2018
2019
2019
600,000
1,220,000
—
730,988
117,651
2,668,639
2019
2018
2017
2019
2019
2018
2017
2019
2018
2017
2019
2018
2017
600,000
500,000
490,447
1,675,000
1,575,208
1,394,575
414,712
235,865
297,692
600,000
600,000
505,385
500,000
500,000
600,000
500,000
500,000
—
—
—
1,401,902
1,775,000
1,763,818
1,675,000
1,775,000
1,763,818
—
—
—
—
—
—
—
—
—
—
—
—
—
913,735
897,202
804,358
260,603
—
—
—
764,756
983,580
964,588
913,735
983,580
964,588
123,634
3,312,369
98,862
3,071,272
89,305
2,778,685
73,227
984,407
26,142
51,000
51,000
323,834
651,000
651,000
106,312
2,778,355
100,620
3,359,200
92,496
3,320,902
123,634
3,312,369
100,620
3,359,200
92,496
3,320,902
(1)
(2)
(3)
Amounts shown reflect Base Salary earned during the year.
Amounts shown reflect Fixed Deferred Salary earned during the year. The interest rate for Fixed Deferred Salary earned during 2019, 2018, and 2017 was 1.315%,
0.880%, and 0.425%, 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 2019, 2018, and 2017 is included in All Other Compensation.
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 2019, 2018, and 2017 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 2019 At-Risk Deferred Salary.
FREDDIE MAC | 2019 Form 10-K
295
Executive Compensation
2019 Compensation Information for NEOs
(4)
Amounts for 2019 reflect: (i) contributions made under our tax-qualified Thrift/401(k) Plan for plan year 2019; (ii) accruals earned pursuant to the SERP Benefit for
plan year 2019; and (iii) interest on Fixed Deferred Salary earned during 2019. The amounts for 2019 are as follows:
Named Executive Officer
Thrift/401(k) Plan
Contributions
SERP Benefit
Accruals
Interest on Fixed Deferred
Salary
Mr. Brickman
Mr. Anzaldua
Mr. Hinduja
Mr. Hutchins
Mr. Kish
Mr. Layton
Mr. Lowman
Mr. Mackey
$23,800
12,262
23,800
23,800
23,800
23,461
22,108
23,800
$77,808
40,046
77,808
77,808
46,325
2,681
65,769
77,808
$11,013
16,437
16,043
22,026
3,102
—
18,435
22,026
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. For additional information regarding the
SERP Benefit, see Nonqualified Deferred Compensation.
Perquisites are valued at their aggregate incremental cost to us. During the years reported, the aggregate value of perquisites received by all NEOs was less than
$10,000. Therefore, in accordance with SEC rules, amounts shown under "All Other Compensation" do not include perquisites.
Pursuant to SEC reporting requirements, because Messrs. Anzaldua, Hinduja, and Kish were not NEOs in 2017 or 2018, and Mr. Brickman was not an NEO in 2017,
prior year information is not required to be disclosed.
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 2017 because he took additional vacation as leave without pay during that year.
(5)
(6)
Grants of Plan-Based Awards
The following table contains information concerning grants of plan-based awards to each of the NEOs during 2019. The
Purchase Agreement prohibits us from issuing equity securities without Treasury's consent. No stock awards were granted
during 2019. For a description of the performance and other measures used to determine payouts, see Elements of Target
Total Direct Compensation, Determination of 2019 Target TDC for NEOs, Determination of 2019 At-Risk Deferred
Salary, and 2019 Deferred Salary.
FREDDIE MAC | 2019 Form 10-K
296
Executive Compensation
2019 Compensation Information for NEOs
Table 82 - 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(3)
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Mr. Anzaldua
Conservatorship Scorecard
Mr. Hinduja
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Mr. Hutchins
Conservatorship Scorecard
Mr. Kish
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
Mr. Lowman
Conservatorship Scorecard
Mr. Mackey
Corporate Scorecard/Individual
Total
Conservatorship Scorecard
Corporate Scorecard/Individual
Total
$—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$243,750
243,750
487,500
375,000
375,000
750,000
390,000
390,000
780,000
487,500
487,500
975,000
139,038
139,038
278,076
408,016
408,016
816,032
487,500
487,500
975,000
(1) Mr. Layton was not eligible to receive Deferred Salary in 2019 and therefore is not included in this table.
(2)
The amounts reported reflect At-Risk Deferred Salary granted in 2019 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 2019 are reported in the Non-Equity Incentive Plan Compensation column of Table 81 - Summary
Compensation Table.
(3)
Represents amounts Mr. Brickman was eligible to earn in 2019 while serving as President prior to being appointed CEO.
Outstanding Equity Awards at Fiscal Year-End
None of the NEOs had unexercised options or unvested RSUs as of December 31, 2019.
Option Exercises and Stock Vested
None of the NEOs exercised options or had RSUs vest during 2019.
Pension Benefits
No Pension Benefits table is presented here as the Pension Plan termination was completed in 2015. For additional information,
see Other Executive Compensation Considerations.
FREDDIE MAC | 2019 Form 10-K
297
Executive Compensation
2019 Compensation Information for NEOs
Nonqualified Deferred Compensation
Non-qualified deferred compensation for the NEOs consists of the SERP Benefit and, for those NEOs who were 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 81 - 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 provided an accrual for each year an NEO participated 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.
FREDDIE MAC | 2019 Form 10-K
298
Executive Compensation
2019 Compensation Information for NEOs
Table 83 - 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. Brickman
SERP Benefit
SERP II Benefit
Mr. Anzaldua
SERP Benefit
Mr. Hinduja
SERP Benefit
Mr. Hutchins
SERP Benefit
Mr. Kish
SERP Benefit
SERP II Benefit
Mr. Layton
SERP Benefit
Mr. Lowman
SERP Benefit
Mr. Mackey
SERP Benefit
$—
—
—
—
—
—
—
—
—
—
$77,808
—
$160,852
66,630
40,046
203
77,808
45,994
77,808
20,472
46,325
—
53,848
18,799
2,681
56,674
65,769
55,600
77,808
32,494
$—
—
—
—
—
—
—
—
—
—
$895,708
369,019
40,250
281,224
388,300
328,719
119,412
325,175
432,538
376,834
(1)
(2)
(3)
(4)
The SERP and SERP II do not allow for employee contributions.
Amounts reported reflect accruals under the SERP during 2019, including the 2.5% contribution accruals which will be allocated to NEO accounts in 2020. These
amounts are also reported in the "All Other Compensation" column in Table 81 - Summary Compensation Table.
Amounts reported represent the total interest and other earnings credited to each NEO under the SERP and SERP II Benefits.
Amounts reported reflect the accumulated balances under the SERP and SERP II Benefits for each NEO and include the plan year 2019 accruals noted in footnote 2
above. All NEOs are fully vested in their SERP and, for Messrs. Brickman and Kish, their SERP II, Benefit account balances.
The following 2018 SERP Benefit accrual amounts were reported in the "All Other Compensation" column in the 2018 Summary Compensation Table as
compensation for each NEO for whom accruals were made during 2018: Mr. Layton: $27,625, Mr. Mackey: $61,625, Mr. Hutchins: $61,625, Mr. Lowman: $61,625,
and Mr. Brickman: $108,750. See our Annual Report on Form 10-K filed on February 14, 2019.
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.
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.
FREDDIE MAC | 2019 Form 10-K
299
Executive Compensation
2019 Compensation Information for NEOs
Death — All earned but unpaid Fixed and At-Risk Deferred Salary (including related interest) is paid in full as soon as
administratively possible, but not later than 90 calendar days after the date of death. Any earned but unpaid At-Risk
Deferred Salary is not subject to reduction based on corporate and individual performance if the reduction has not been
determined as of the date of death.
Long-Term Disability — All earned but unpaid Fixed and At-Risk Deferred Salary (including related interest) is paid in full in
accordance with the Approved Payment Schedule. Any earned but unpaid At-Risk Deferred Salary is not subject to
reduction based on corporate and individual performance if the reduction has not been determined as of the termination
date.
Any Other Reason (including, but not limited to, voluntary termination, retirement, and involuntary termination for
any reason other than a Forfeiture Event) — All earned but unpaid Deferred Salary (including related interest) is paid in
accordance with the Approved Payment Schedule, and earned but unpaid At-Risk Deferred Salary remains subject to the
performance assessment and reduction process. Except in the case of retirement, the amount of earned but unpaid Fixed
Deferred Salary will be reduced by 2% for each full or partial month by which the NEO's termination precedes January 31
of the second calendar year following the calendar year in which the Fixed Deferred Salary is earned. No such reduction is
applicable if an NEO retires, which is deemed to have occurred upon a voluntary termination of employment after attaining
or exceeding 62 years of age, without regard to length of service, or attaining or exceeding 55 years of age with 10 or more
years of service.
The table below describes the compensation and benefits that would have been payable to each NEO had the officer
terminated his employment under various circumstances as of December 31, 2019. Messrs. Layton and Lowman are excluded
from this table because they were not employed by the company as of December 31, 2019.
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, 2019.
Table 84 - Compensation and Benefits if NEO Terminated Employment as of December 31, 2019
Named Executive Officer
Death
Disability
Retirement(1)
David M. Brickman(3)
Deferred Salary:
Fixed
At Risk-Conservatorship Scorecard(4)
At Risk-Corporate Scorecard/Individual(5)
Interest on Deferred Salary(6)
Total
Ricardo A. Anzaldua
Deferred Salary:
Fixed
At Risk-Conservatorship Scorecard(4)
At Risk-Corporate Scorecard/Individual(5)
Interest on Deferred Salary(6)
$837,500
243,750
243,750
15,252
$837,500
243,750
243,750
17,424
$1,340,252
$1,342,424
$1,250,000
$1,250,000
$1,250,000
375,000
375,000
16,410
375,000
375,000
26,300
318,750
375,000
25,560
All Other Not
For Cause
Terminations(2)
$619,750
207,188
243,750
14,080
$1,084,768
Total
$2,016,410
$2,026,300
$1,969,310
FREDDIE MAC | 2019 Form 10-K
300
Executive Compensation
2019 Compensation Information for NEOs
Anil D. Hinduja
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
Donald F. Kish
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:
Fixed
At Risk-Conservatorship Scorecard(4)
At Risk-Corporate Scorecard/Individual(5)
Interest on Deferred Salary(6)
$1,220,000
$1,220,000
390,000
390,000
16,410
390,000
390,000
26,300
$2,016,410
$2,026,300
$1,675,000
$1,675,000
$1,675,000
487,500
487,500
21,744
487,500
487,500
34,848
414,375
487,500
33,886
$2,671,744
$2,684,848
$2,610,761
$235,865
139,038
139,038
4,095
$518,036
$235,865
139,038
139,038
6,758
$520,699
$1,675,000
$1,675,000
487,500
487,500
21,744
487,500
487,500
34,848
Total
$2,671,744
$2,684,848
$902,800
331,500
390,000
21,360
$1,645,660
$174,540
118,183
139,038
5,678
$437,439
$1,239,500
414,375
487,500
28,159
$2,169,534
(1) Messrs. Anzaldua and Hutchins are the only retirement-eligible NEOs under the EMCP.
(2)
(3)
(4)
(5)
(6)
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 Messrs. Anzaldua and Hutchins because they are 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, 2019 termination event.
Amounts reported for Mr. Brickman include deferred compensation payable to him earned while he served as President prior to becoming CEO. As CEO, he is not
eligible for any additional compensation in connection with a termination of employment.
The amounts reported for Deferred Salary: At Risk-Conservatorship Scorecard reflect the funding level determined by FHFA with respect to performance against the
2019 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.
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 2019 performance approved by the CHC 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, 2019.
FREDDIE MAC | 2019 Form 10-K
301
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 11, 2020 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 11,
2020, 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.
Stock Ownership By Directors and Executive Officers
Table 85 - Stock Ownership by Directors and Executive Officers
Common Stock
Beneficially Owned
Excluding
Stock Options(1)
Stock Options
Exercisable
Within 60 Days of
Feb. 11, 2020
Total Common Stock
Beneficially Owned
Directors and Named
Executive Officers
Position
Mark H. Bloom
Kathleen L. Casey
Lance F. Drummond
Aleem Gillani
Director
Director
Director
Director
Christopher E. Herbert
Director
Grace A. Huebscher
Sara Mathew
Saiyid T. Naqvi
Director
Director
Director
David M. Brickman
Director & Chief Executive Officer
3,395
Ricardo A. Anzaldua
Anil D. Hinduja
EVP - General Counsel & Corporate
Secretary
EVP - Chief Enterprise Officer
Michael T. Hutchins
EVP - Investments and Capital Markets
Donald F. Kish
SVP, Corporate Controller, Principal
Accounting Officer & Interim Chief
Financial Officer
Donald H. Layton
Former Chief Executive Officer
David B. Lowman
Former EVP - Single-family Business
James G. Mackey
EVP - Senior Advisor; former Chief
Financial Officer
—
—
—
—
—
—
—
All directors and executive officers as a group (20 persons)
9,932
FREDDIE MAC | 2019 Form 10-K
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,395(2)
—
—
—
—
—
—
—
9,932
302
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(1)
(2)
Includes shares of stock beneficially owned as of February 11, 2020.
Represents shares of stock beneficially owned prior to the company's entry into conservatorship.
Stock Ownership by Greater-Than 5% Holders
Table 86 - Stock Ownership by Greater Than 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.
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, 2019. 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.
FREDDIE MAC | 2019 Form 10-K
303
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
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 2019, 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.
FREDDIE MAC | 2019 Form 10-K
304
Certain Relationships and Related Transactions
TRANSACTIONS WITH INSTITUTIONS RELATED TO
DIRECTORS
In the ordinary course of business, we were a party during 2019, and expect to continue to be a party during 2020, 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
There were no transactions with institutions related to executive officers in 2019 that were required to be disclosed under SEC
rules.
CONSERVATORSHIP AGREEMENTS
Treasury, FHFA, and the Federal Reserve have taken a number of actions to support us during conservatorship, including
entering into the Purchase Agreement, described in this Form 10-K. See MD&A — Conservatorship and Related Matters
and Note 2.
FREDDIE MAC | 2019 Form 10-K
305
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 2019 and 2018.
Auditor Fees(1)
Table 87 - Auditor Fees
(In thousands)
Audit Fees(2)
Audit-Related Fees(3)
Tax Fees(4)
All Other Fees(5)
Total
2019
2018
$19,861
7,220
128
49
$21,420
8,325
105
278
$27,258
$30,128
(1)
(2)
(3)
(4)
(5)
These fees represent amounts billed (including reimbursable expenses within the designated year).
Audit fees include fees in connection with quarterly reviews of our interim financial information and the audit of our annual consolidated financial statements.
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.
The tax fees billed relate to non-audit tax consulting services to provide advice and recommendations related to tax planning or reporting matters.
All other fees include: (i) our subscription to a web-based suite of human resources benchmark data; (ii) our subscription to accounting research and disclosure
software; and (iii) 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 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.
FREDDIE MAC | 2019 Form 10-K
306
Principal Accounting Fees and Services
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 2019 and 2018.
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 | 2019 Form 10-K
307
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 318.
FREDDIE MAC | 2019 Form 10-K
308
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.
AMI - Area Median Income.
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.
ASC - Accounting Standards Codification.
ASU - Accounting Standards Update.
Back-end coverage type - Applies to transactions in which the credit risk transfer occurs after our purchase of the loan.
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 note 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.
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.
CECL - The Current Expected Credit Losses impairment model as defined by FASB ASC Topic 326, Financial Instruments -
Credit Losses, pursuant to ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments; ASU 2019-04, Codification Improvements to Financial Instruments - Credit Losses (Topic 326);
ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument;
and ASU 2019-11, Codification Improvements to Financial Instruments - Credit Losses (Topic 326).
CEO - Chief Executive 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.
FREDDIE MAC | 2019 Form 10-K
309
Glossary
CHC Committee - The Compensation and Human Capital Committee of the Board.
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 house price index.
Conservator - The FHFA, acting in its capacity as Conservator of Freddie Mac.
Conservatorship Capital - The capital needed under the CCF for analysis of transactions and business.
Conservatorship Scorecard - FHFA's mechanism for outlining specific conservatorship priorities for Freddie Mac, Fannie
Mae (the Enterprises), and their joint venture, Common Securitization Solutions, LLCSM.
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, CRT transactions, overcollateralization, indemnification agreements, and government guarantees.
Credit losses - Consists of charge-offs and REO operations (income) expense, which are both net of recoveries.
Credit-related expense - Consists of our benefit (provision) for credit losses, credit enhancement expense, and REO
operations expense.
Credit risk transfer (CRT) transactions - Arrangements where we actively transfer the credit risk exposure on mortgages
that we own or guarantee.
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.
Original credit score - The credit score of the borrower at the time of loan origination or our purchase.
Current credit score - The credit score of the borrower as of the first month of the most recent quarter.
CRO - Chief Risk Officer.
CSS - Common Securitization Solutions, LLC.
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.
December 2017 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.
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
FREDDIE MAC | 2019 Form 10-K
310
Glossary
of risk in some loan products.
Derivative - A financial instrument whose value depends upon the characteristics and value of an underlying such as a
financial asset or index. Examples of an underlying include a security or commodity price, interest or currency rates, and
other financial indices.
Dodd-Frank Act - Dodd-Frank Wall Street Reform and Consumer Protection Act.
Dollar roll transactions - Transactions whereby we enter into an agreement to sell and subsequently repurchase (or
purchase and subsequently resell) agency securities.
DSCR - Debt Service Coverage Ratio - An indicator of future credit performance for multifamily loans. The DSCR estimates
a multifamily borrower's ability to service its mortgage obligation using the secured property's cash flow, after deducting
non-mortgage expenses from income. The higher the DSCR, the more likely a multifamily borrower will be able to continue
servicing its loan obligation.
Duration - Duration is a measure of a financial instrument's price sensitivity to changes in interest rates.
Duration gap - One of our primary interest-rate risk measures. Duration gap is a measure of the difference between the
estimated durations of our interest rate sensitive assets and liabilities. We present the duration gap of our financial
instruments in units expressed as months. A duration gap of zero implies that the change in value of our interest rate
sensitive assets from an instantaneous change in interest rates would be expected to be accompanied by an equal and
offsetting change in 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.
ERC - Enterprise Risk Committee.
ERM - Enterprise Risk Management.
ERP - Enterprise Risk Policy - The ERP sets forth the core components of the enterprise risk framework that defines how
we identify, assess, manage, control, and report on risks.
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.
55-day MBS - A single-class pass-through security with a 55-day payment delay for non-TBA-eligible fixed-rate mortgage
loans. Freddie Mac began issuing 55-day MBS on and after June 3, 2019.
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.
Front-end coverage type - Applies to transactions in which the credit risk transfer occurs prior to, or simultaneously with,
our purchase of the loan.
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 holders of the beneficial interests.
Giant MBS - Resecuritizations of newly issued 55-day MBS (and/or Giant MBS), and/or 55-day MBS (and/or Giant MBS)
that Freddie Mac has issued in exchange for non-TBA-eligible PCs and non-TBA-eligible Giant PCs that have been
FREDDIE MAC | 2019 Form 10-K
311
Glossary
delivered to Freddie Mac in response to the exchange offer. Giant MBS are single-class securities that involve the direct
pass-through of all cash flows of the underlying collateral to holders of the beneficial interests.
Ginnie Mae - Government National Mortgage Association, which guarantees the timely payment of principal and interest
on mortgage-related securities backed by federally insured or guaranteed loans, primarily those insured by FHA or
guaranteed by the VA.
Green Advantage loan - A multifamily loan that we offer under our Green Advantage initiative, whereby borrowers finance
the installation of green technologies that reduce energy and water consumption.
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) - An 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.
Mortgage insurance provided for each loan is generally underwritten by a group of insurers and reinsurers. 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 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.
Investment gains (losses), net - Consists of gains and losses from mortgage loans, investment securities, debt, and
derivatives.
IRS - Internal Revenue Service.
K Certificates - Structured pass-through certificates backed primarily by recently originated multifamily loans purchased
by Freddie Mac.
Legacy and relief refinance single-family loan portfolio - Consists of loans in our single-family credit guarantee portfolio
that were originated in 2008 and prior, as well as relief refinance loans, including HARP loans that were originated after
2008.
Level 1 Securitization Products - Single-class pass-through securities that represent undivided beneficial interests in
trusts that hold pools of loans. These products include UMBS, 55-day MBS, and PCs.
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.
LLC - Limited liability company.
FREDDIE MAC | 2019 Form 10-K
312
Glossary
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 December
2017 Letter Agreement. Pursuant to the September 2019 Letter Agreement, the liquidation preference will be increased, at
the end of each fiscal quarter, beginning on September 30, 2019, by an amount equal to the increase in the Net Worth
Amount, if any, during the immediately prior fiscal quarter, until the liquidation preference has increased by $17.0 billion. 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 reperforming loans. In addition,
periodic paydown of loan principal is also included in loan liquidations.
Long-term debt - Other debt due after one year based on the original contractual maturity of the debt instrument. Our
long-term debt issuances include medium-term notes, Reference Notes securities, STACR debt notes, and SCR 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.
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.
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.
Multifamily loan - A loan secured by a property with five or more residential rental units or by a manufactured housing
community.
Multifamily mortgage portfolio - Consists of multifamily mortgage loans held by us on our consolidated balance sheets
as well as our guarantee of securitization products, primarily K Certificates, SB Certificates, and other mortgage-related
guarantees that are held by third parties. It excludes loans underlying our guarantees of HFA bonds.
Multifamily new business activity - Represents loan purchases, issuances of other mortgage-related guarantees, and
issuances of other securitization products for which we have not previously purchased the underlying loans.
Net worth (deficit) - The amount by which our total assets exceed (or are less than) our total liabilities as reflected on our
consolidated balance sheets prepared in conformity with GAAP.
Net worth sweep dividend, Net Worth Amount, and Capital Reserve Amount - For each quarter from January 1, 2013
and thereafter, the dividend payment on the senior preferred stock will be the amount, if any, by which our Net Worth
Amount at the end of the immediately preceding fiscal quarter, less the applicable Capital Reserve Amount, exceeds zero.
The term Net Worth Amount is defined as the total assets of Freddie Mac (excluding Treasury's commitment and any
unfunded amounts thereof), less our total liabilities (excluding any obligation in respect of capital stock), in each case as
reflected on our consolidated balance sheets prepared in conformity with GAAP. If the calculation of the dividend payment
for a quarter does not exceed zero, then no dividend shall accrue or be payable for that quarter. The applicable Capital
Reserve Amount was $600 million for 2017, $3.0 billion for 2018, and increased to $20.0 billion pursuant to the September
2019 Letter Agreement (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.
FREDDIE MAC | 2019 Form 10-K
313
Glossary
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.
Optigo® - Freddie Mac's Multifamily lender network and loan offerings.
Option ARM loan - Loans that permit a variety of repayment options, including minimum, interest-only, fully amortizing 30-
year, and fully amortizing 15-year payments. The minimum payment alternative for option ARM loans allows the borrower
to make monthly payments that may be less than the interest accrued for the period. The unpaid interest is added to the
principal balance of the loan, known as negative amortization. For our non-agency mortgage-related securities that are
backed by option ARM loans, we categorize securities as option ARM if the securities were identified as such based on
information provided to us when we entered into these transactions. We have not identified option ARM securities as either
subprime or Alt-A securities.
Original LTV ratio - A credit measure for loans, calculated as the UPB of the loan divided by the lesser of the appraised
value of the property at the time of loan origination or the borrower's purchase price. Second liens not owned or
guaranteed by us are excluded from the LTV ratio calculation. The existence of a second-lien loan reduces the borrower's
equity in the home and, therefore, can increase the risk of default and the amount of the gross loss if a default occurs.
OTC - Over-the-counter.
OTCQB - A marketplace, operated by the OTC Markets Group Inc., for OTC-traded U.S. companies that are registered and
current in their reporting with the SEC or a U.S. banking or insurance regulator.
PCs - Participation Certificates - Single-class pass-through securities that we issue and guarantee as part of a
securitization transaction. Typically we purchase loans from sellers, place a pool of loans into a PC trust, and issue PCs
from that trust. The PCs are generally transferred to the seller of the loans as consideration for the loans or are sold to
third-party investors or retained by us if we purchased the loans for cash.
Gold PCs - Single-class pass-through securities with a 45-day payment delay that Freddie Mac issued for fixed-rate
mortgage loans prior to June 3, 2019. Freddie Mac no longer issues Gold PCs with the implementation of Release 2 of
the CSP and the Single Security Initiative. Existing Gold PCs are eligible for exchange into UMBS (for TBA-eligible
securities) or 55-day MBS (for non-TBA-eligible securities).
ARM PCs - Single-class pass-through securities with a 75-day payment delay for ARM products. The implementation
of Release 2 of the CSP and the Single Security Initiative did not affect Freddie Mac’s ARM PC offerings.
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.
PVS - Portfolio Value Sensitivity - One of our primary interest-rate risk measures. PVS measures are estimates of the
amount of average potential pre-tax loss in the value of our financial assets and liabilities due to parallel (PVS-L) and non-
parallel (PVS-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, December 21, 2017, and September 27, 2019.
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.
FREDDIE MAC | 2019 Form 10-K
314
Glossary
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. This structure allows commingling of TBA-eligible Freddie Mac and Fannie
Mae collateral.
REO - Real estate owned - Real estate which we have acquired through a foreclosure sale or through a deed in lieu of
foreclosure.
Reperforming loan - A loan that was previously three months or more past due or in the process of foreclosure, but the
borrower subsequently made payments such that the loan returns to less than three months past due, or a performing
modified loan, which is a loan that was modified and is less than three months past due and is not in the process of
foreclosure.
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.
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.
2019 Strategic Plan - The 2019 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac, published by
FHFA on October 28, 2019.
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.
SIFMA - Securities Industry and Financial Markets Association.
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 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.
Seller/Servicer Guide (Guide) - The Guide consists of Freddie Mac's requirements relating to the purchase, sale, and
servicing of single-family mortgages. The Guide reflects how and when sellers and servicers interact with Freddie Mac.
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 and
unguaranteed subordinated securities backed by reperforming single-family loans or recently originated single-family loans.
September 2019 Letter Agreement - An agreement the Conservator, acting on our behalf, entered into with Treasury on
September 27, 2019 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.
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 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
FREDDIE MAC | 2019 Form 10-K
315
Glossary
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 implemented in 2019 that provided for Freddie Mac and Fannie Mae to issue a
single (common) mortgage-related security, the UMBS.
SOFR - Secured Overnight Financing Rate.
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 note - Structured Agency Credit Risk Trust note - 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. We make payments to the trust to support payment of the interest due on the notes, and we receive
payments from the trust as a result of defined credit events on the reference pool.
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.
Strips - Multiclass securities that are formed by resecuritizing previously issued Level 1 Securitization Products or single-
class resecuritization products and issuing principal-only and interest-only securities backed by the cash flows from the
underlying collateral. This structure allows commingling of TBA-eligible Freddie Mac and Fannie Mae collateral.
Subprime - Participants in the mortgage market may characterize single-family loans, based upon their overall credit
quality at the time of origination, generally considering them to be prime or subprime. Subprime generally refers to the
credit risk classification of a loan. There is no universally accepted definition of subprime. The subprime segment of the
mortgage market primarily serves borrowers with poorer credit payment histories and such loans typically have a mix of
credit characteristics that indicate a higher likelihood of default and higher loss severities than prime loans. Such
characteristics might include, among other factors, a combination of high LTV ratios, low credit scores, or originations
using lower underwriting standards, such as limited or no documentation of a borrower's income. While we have not
historically characterized the loans in our single-family credit guarantee portfolio as either prime or subprime, we monitor
the amount of loans we have guaranteed with characteristics that indicate a higher degree of credit risk. Certain security
collateral underlying our other securitization products has been identified as subprime based on information provided to
Freddie Mac when the transactions were entered into. We also categorize our investments in non-agency mortgage-related
securities as subprime if they were identified as such based on information provided to us when we entered into these
transactions.
Supers - Resecuritizations of UMBS and certain other mortgage securities. Supers are single-class securities that involve
the direct pass-through of all cash flows of the underlying collateral to holders of the beneficial interests. This structure
allows commingling of TBA-eligible Freddie Mac and Fannie Mae collateral.
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.
Top risk - Enterprise-wide elevated risk or emerging risk that could significantly affect the organization's ability to achieve
its strategic objectives, has the potential to create significant financial, operational, or reputational risk, and requires an
appropriate risk response by senior management and reporting to the Risk Committee of the Board.
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.
FREDDIE MAC | 2019 Form 10-K
316
Glossary
Treasury - U.S. Department of the Treasury.
UMBS - Uniform mortgage-backed security - A single (common) mortgage-related security with a 55-day payment delay
for TBA-eligible fixed-rate mortgage loans. Freddie Mac and Fannie Mae began issuing UMBS on and after June 3, 2019.
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.
VERP - Voluntary Early Retirement Program.
VIE - Variable Interest Entity - A VIE is an entity that has a total equity investment at risk that is not sufficient to finance its
activities without additional subordinated financial support provided by another party, or where the group of equity holders
does not have: (i) the ability to make significant decisions about the entity's activities; (ii) the obligation to absorb the
entity's expected losses; or (iii) the right to receive the entity's expected residual returns.
Warrant - Refers to the warrant we issued to Treasury on September 7, 2008 pursuant to the Purchase Agreement. The
warrant provides Treasury the ability to purchase, for a nominal price, shares of our common stock equal to 79.9% of the
total number of shares of Freddie Mac common stock outstanding on a fully diluted basis on the date of exercise.
Workforce housing - Multifamily housing that is affordable to the majority of low to middle income households.
Workout, or loan workout - A workout is either a home retention action, which is either a loan modification, repayment
plan, or forbearance agreement, or a foreclosure alternative, which is either a short sale or a deed in lieu of foreclosure.
XBRL - eXtensible Business Reporting Language.
Yield curve - A graphical display of the relationship between yields and maturity dates for bonds of the same credit quality.
The slope of the yield curve is an important factor in determining the level of net interest yield on a new mortgage asset,
both initially and over time. For example, if a mortgage asset is purchased when the yield curve is inverted (i.e., short-term
interest rates higher than long-term interest rates), our net interest yield on the asset will tend to be lower initially and then
increase over time. Likewise, if a mortgage asset is purchased when the yield curve is steep (i.e., short-term interest rates
lower than long-term interest rates), our net interest yield on the asset will tend to be higher initially and then decrease over
time.
FREDDIE MAC | 2019 Form 10-K
317
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.
FREDDIE MAC | 2019 Form 10-K
318
Exhibit Index
Exhibit
Description*
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions
of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00 per share), dated January 26, 2001 (incorporated by reference to
Exhibit 4.11 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions
of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00 per share), dated March 23, 2001 (incorporated by reference to Exhibit
4.12 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions
of 5.81% Non-Cumulative Preferred Stock (par value $1.00 per share), dated March 23, 2001 (incorporated by reference to Exhibit 4.13 to
the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions
of Variable Rate, Non-Cumulative Preferred Stock (par value $1.00 per share), dated May 30, 2001 (incorporated by reference to Exhibit
4.14 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions
of 6% Non-Cumulative Preferred Stock (par value $1.00 per share), dated May 30, 2001 (incorporated by reference to Exhibit 4.15 to the
Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions
of 5.7% Non-Cumulative Preferred Stock (par value $1.00 per share), dated October 30, 2001 (incorporated by reference to Exhibit 4.16 to
the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions
of 5.81% Non-Cumulative Preferred Stock (par value $1.00 per share), dated January 29, 2002 (incorporated by reference to Exhibit 4.17
to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions
of Variable Rate, Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated July 17, 2006 (incorporated by reference to
Exhibit 4.18 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions
of 6.42% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated July 17, 2006 (incorporated by reference to Exhibit
4.19 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions
of 5.9% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated October 16, 2006 (incorporated by reference to
Exhibit 4.20 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions
of 5.57% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated January 16, 2007 (incorporated by reference to
Exhibit 4.21 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions
of 5.66% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated April 16, 2007 (incorporated by reference to Exhibit
4.22 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions
of 6.02% Non-Cumulative Perpetual Preferred Stock (par value $1.00 per share), dated July 24, 2007 (incorporated by reference to Exhibit
4.23 to the Registrant’s Registration Statement on Form 10 filed on July 18, 2008)
* The SEC file numbers for the Registrant's Registration Statement on Form 10, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and
Current Reports on Form 8-K are 000-53330 and 001-34139.
FREDDIE MAC | 2019 Form 10-K
319
Exhibit Index
Exhibit
Description*
4.24
4.25
4.26
4.27
4.28
4.29
4.30
10.1
10.2
10.3
10.4
10.5
10.6
10.7
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)
Third 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
30, 2019 (incorporated by reference to Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q filed on October 30, 2019)
Description of Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
Federal Home Loan Mortgage Corporation Global Debt Facility Agreement, dated February 14, 2019 (incorporated by reference to Exhibit
4.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 1, 2019)
Federal Home Loan Mortgage Corporation Executive Deferred Compensation Plan (as amended and restated effective January 1, 2008)
(incorporated by reference to Exhibit 10.28 the Registrant’s Registration Statement on Form 10 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)†
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)†
* 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 | 2019 Form 10-K
320
Exhibit Index
Exhibit
10.8
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)†
Description*
10.9
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)†
10.10
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)†
10.11
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)†
10.12
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)†
10.13
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)†
10.14
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)†
10.15
Fourth Amendment to the Federal Home Loan Mortgage Corporation Long-Term Disability Plan (incorporated by reference to Exhibit 10.17
to the Registrant's Annual Report on Form 10-K filed on February 16, 2017)†
10.16
Executive Management Compensation Program Recapture and Forfeiture Agreement (incorporated by reference to Exhibit 10.18 to the
Registrant's Annual Report on Form 10-K filed on February 16, 2017)†
10.17
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)†
10.18
2020 Executive Management Compensation Program (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
10-Q filed on October 30, 2019)†
10.19
10.20
10.21
10.22
10.23
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)†
Restrictive Covenant and Confidentiality Agreement dated May 22, 2018, between Freddie Mac and Donald Kish (incorporated by reference
to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on May 23, 2018)†
Memorandum Agreement, dated April 20, 2018, between Freddie Mac and Ricardo A. Anzaldua†
Restrictive Covenant and Confidentiality Agreement, dated April 23, 2018 between Freddie Mac and Ricardo A. Anzaldua†
Memorandum Agreement, dated April 6, 2015, between Freddie Mac and Anil Hinduja (incorporated by reference to Exhibit 10.28 to the
Registrant's Annual Report on Form 10-K filed on February 16, 2017)†
10.24
Restrictive Covenant and Confidentiality Agreement, dated April 7, 2015, between Freddie Mac and Anil Hinduja (incorporated by reference
to Exhibit 10.29 to the Registrant's Annual Report on Form 10-K filed on February 16, 2017)†
* 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 | 2019 Form 10-K
321
Exhibit Index
Exhibit
10.25
10.26
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)†
Description*
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)†
10.27
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)†
10.28
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)†
10.29
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)†
10.30
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)†
Confidential Separation Agreement and Release, dated December 31, 2019, between Freddie Mac and James Mackey†
10.31
10.32
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)†
10.33
Restrictive Covenant and Confidentiality Agreement, dated April 9, 2013, between Freddie Mac and David B. Lowman (incorporated by
reference to Exhibit 10.49 to the Registrant's Annual Report on Form 10-K filed on February 27, 2014)†
10.34
Description of non-employee director compensation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed on December 23, 2008)†
10.35
10.36
Form of Indemnification Agreement between the Federal Home Loan Mortgage Corporation and executive officers (for agreements with
officers entered into prior to August 2011) (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)†
10.37
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)†
PC Master Trust Agreement, dated May 16, 2019 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q filed July 31, 2019)
10.38
10.39
UMBS and MBS Master Trust Agreement, dated April 30, 2019 (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q filed on July 31, 2019)
* 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 | 2019 Form 10-K
322
Exhibit Index
Exhibit
10.40
10.41
10.42
10.43
10.44
10.45
Description*
Amended and Restated Senior Preferred Stock Purchase Agreement dated as of September 26, 2008, between the United States
Department of the Treasury and Federal Home Loan Mortgage Corporation, acting through the Federal Housing Finance Agency as its duly
appointed Conservator (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14,
2008)
Amendment to Amended and Restated Senior Preferred Stock Purchase Agreement, dated as of May 6, 2009, between the United States
Department of the Treasury and Federal Home Loan Mortgage Corporation, acting through the Federal Housing Finance Agency as its duly
appointed Conservator (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed on May 12, 2009)
Second Amendment dated as of December 24, 2009, to the Amended and Restated Senior Preferred Stock Purchase Agreement dated as
of September 26, 2008, between the United States Department of the Treasury and Federal Home Loan Mortgage Corporation, acting
through the Federal Housing Finance Agency as its duly appointed Conservator (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on December 29, 2009)
Third Amendment dated as of August 17, 2012, to the Amended and Restated Senior Preferred Stock Purchase Agreement dated as of
September 26, 2008, between the United States Department of the Treasury and Federal Home Loan Mortgage Corporation, acting through
the Federal Housing Finance Agency as its duly appointed Conservator (incorporated by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form 8-K filed on August 17, 2012)
Letter Agreement dated December 21, 2017 between the United States Department of the Treasury and the 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)
Letter Agreement dated September 27, 2019 between the United States Department of the Treasury and the 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 October 1, 2019)
10.46
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 Senior Vice President — Interim 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 Senior Vice President — Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350
99.1
Third Amended and Restated Limited Liability Company Agreement of Common Securitization Solutions, LLC, dated as of January 9, 2020
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within
the Inline XBRL document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.DEF
XBRL Taxonomy Extension Definition
101.LAB
XBRL Taxonomy Extension Label
101.PRE
XBRL Taxonomy Extension Presentation
104
Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are
embedded within the Inline XBRL document
* The SEC file numbers for the Registrant's Registration Statement on Form 10, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and
Current Reports on Form 8-K are 000-53330 and 001-34139.
FREDDIE MAC | 2019 Form 10-K
323
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/ David M. Brickman
David M. Brickman
Chief Executive Officer
Date: February 13, 2020
FREDDIE MAC | 2019 Form 10-K
324
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
/s/ Sara Mathew*
Sara Mathew
Non-Executive Chairman of the Board
February 13, 2020
/s/ David M. Brickman
David M. Brickman
Chief Executive Officer and Director
(Principal Executive Officer)
Senior Vice President — Corporate Controller, Principal
Accounting Officer, & Interim Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
Director
Director
Director
Director
Director
Director
Director
/s/ Donald F. Kish
Donald F. Kish
/s/ Mark H. Bloom*
Mark H. Bloom
/s/ Kathleen L. Casey*
Kathleen L. Casey
/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/ Saiyid T. Naqvi*
Saiyid T. Naqvi
*By:
/s/ Alicia S. Myara
Alicia S. Myara
Attorney-in-Fact
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
February 13, 2020
FREDDIE MAC | 2019 Form 10-K
325
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, 4-9, 30-39, 44-49,
56-60, 123-132
137-156
Not Applicable
8
157
Not Applicable
158
11
1-4, 10, 12-29, 40-43,
50-55, 60-122,
133-136
104-111
159-258
Not Applicable
103, 160-161, 259-260
261-262
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
66-68, 262-275
271-273, 276-301
302-303
267-268, 304-305
306-307
Exhibits and Financial Statement Schedules
Form 10-K Summary
308, 318-323
Not Applicable
324-325
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 | 2019 Form 10-K
326
Description of Registrant’s Securities
Registered Pursuant to Section 12 of
The Securities Exchange Act of 1934
Exhibit 4.29
As of December 31, 2019, Federal Home Loan Mortgage Corporation (Freddie Mac) had 21 classes of securities registered
under Section 12 of the Securities Exchange Act of 1934, as amended: (1) our voting common stock, no par value per share
(Common Stock) and (2) twenty series of perpetual, non-cumulative preferred stock, par value of $1.00 per share (Preferred
Stock). We also have four classes of perpetual, non-cumulative preferred stock outstanding that were issued through private
placement and are not registered under Section 12.
Since September 2008, we have been operating in conservatorship, with the Federal Housing Finance Agency (FHFA) as our
Conservator. In connection with our entry into conservatorship, we, through FHFA, in its capacity as Conservator, entered into
the Senior Preferred Stock Purchase Agreement with the U.S. Department of the Treasury (Treasury). Under this Purchase
Agreement, we issued Treasury one million shares of Variable Liquidation Preference Senior Preferred Stock (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 (Warrant). The
conservatorship, Purchase Agreement as amended and restated (Purchase Agreement), Senior Preferred Stock, and Warrant
have a significant impact on the rights, preferences, and privileges of the holders of our Common Stock and Preferred Stock.
The following description is a summary and does not purport to be complete. It is subject to and qualified in its entirety by
reference to the Certificate of Designation for the Common Stock or class of Preferred Stock (as applicable, each a Certificate
of Designation), Federal Home Loan Mortgage Corporation Act, as amended (our Charter), and our Amended and Restated
Bylaws (Bylaws), each of which are incorporated by reference as an exhibit to this Annual Report on Form 10-K. We encourage
you to read the Certificates of Designation, Charter, Bylaws, Purchase Agreement, and applicable provisions of Virginia law for
additional information.
I.
Description of Common Stock
General
Under Section 304 of our Charter, we are authorized to issue an unlimited number of shares of Common Stock. The Common
Stock has the terms set forth in the Certificate of Designation. Computershare Trust Company, N.A., is the transfer agent,
dividend disbursing agent, and registrar for the Common Stock.
Authorized Issuance
Our Common Stock was created by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. Under
Section 731(d) of this Act, shares of our then-outstanding senior participating preferred stock were automatically converted into
an equivalent number of shares of Common Stock.
There are currently 4,000,000,000 shares of Common Stock issued or authorized for issuance by our Board of Directors. As of
December 31, 2019, there were 725,863,886 shares of Common Stock issued and 650,059,033 shares outstanding. The
outstanding shares of our Common Stock are fully paid and non-assessable. Any additional shares of Common Stock that we
issue will be fully paid and non-assessable. Our Board of Directors may increase the authorized number of shares of Common
Stock at any time, without the consent of the holders of Common Stock.
Under the Purchase Agreement, we cannot repurchase our Common Stock without Treasury’s consent.
Dividends
Dividends on shares of our Common Stock are not mandatory. Holders of our Common Stock are entitled to receive dividends
when, as, and if declared by our Board of Directors out of assets legally available therefor. The Board of Directors fixes both the
amount of dividends, if any, to be paid to holders of our outstanding Common Stock and the dates of payment. We will pay
each dividend on shares of Common Stock to the holders of record of outstanding shares as they appear in our books and
records on the record date fixed by our Board of Directors. The record date must not be earlier than 45 days or later than ten
days before a dividend payment date.
Our payment of dividends is subject to the following restrictions:
• Restrictions Relating to the Conservatorship - During conservatorship, any dividends will be declared by, and paid
at the direction of, the Conservator, acting as successor to the rights, titles, powers, and privileges of the Board of
Directors. The Conservator has prohibited us from paying any dividends on our Common 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 the Common Stock without the prior written consent of the Treasury.
• Restrictions Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended
(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 outstanding,
representing an aggregate of 464,170,000 shares and 1,000,000 shares, respectively, as of December 31, 2019.
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.
Voting Rights
During conservatorship, the holders of our Common Stock have no voting rights. Upon its appointment as Conservator, FHFA
immediately succeeded to the voting rights of holders of our Common Stock, including the right to elect members of our Board
of Directors.
If the company was not in conservatorship, holders of our Common Stock would have the right to vote:
•
For the election of members of our Board of Directors, to the extent prescribed by applicable federal law;
• With respect to amendment, alteration, supplementation, or repeal of the provisions of the Certificate of Designation
(described below);
• With respect to such other matters, if any, as may be prescribed by our Board of Directors, in its sole discretion, or by
applicable federal law.
Holders of our Common Stock are not granted any right under our Charter or the Certificate of Designation to vote on specified
matters in which stockholders in business corporations under state law are typically entitled to vote, such as amendments to
our Charter or changes in our capital structure.
Holders of our Common Stock entitled to vote are entitled to one vote per share on all matters presented to them for their vote.
Holders may cast votes in person or by proxy at a meeting of the holders of our Common Stock or, if so determined by our
Board of Directors, by written consent of the holders of the requisite number of shares of our Common Stock. In connection
with any meeting of the holders of shares of our Common Stock, our Board of Directors will fix a record date, which must not
be earlier than 60 days or later than 10 days before the date of such meeting. The holders of record of shares of our Common
Stock on the record date are entitled to notice of, and to vote at, any such meeting and any adjournment. We may establish
reasonable rules and procedures regarding the solicitation of the vote of holders of our Common Stock at any such meeting or
otherwise, the conduct of such vote, quorum requirements and the requisite number or percentage of affirmative votes required
for the approval of any matter and as to all related questions. Such rules and procedures shall conform to the requirements of
any national securities exchange on which our Common Stock may be listed.
Ownership Reports
The Certificate of Designation includes provisions that require certain persons to report to us their beneficial ownership of our
Common Stock. Except as otherwise provided in the Certificate of Designation, any “beneficial owner” (as that term is defined
in Rule 13d-3 under the Exchange Act) of the outstanding Common Stock must report such ownership to us and the NYSE
(and to any other exchange on which our Common Stock is then listed). The required reports of beneficial ownership and any
amendments must be submitted in writing to us and each exchange where the Common Stock is listed on the forms, in the
time periods, and in the manner as would be required by Sections 13(d) and 13(g) of the Exchange Act and the rules and
regulations thereunder if the Common Stock were registered under Section 12 of the Exchange Act.
To ensure compliance with the beneficial ownership reporting requirements relating to our Common Stock, we may refuse to
permit the voting of any shares of Common Stock in excess of 5% beneficially owned by any person who fails to comply with
those requirements. Any beneficial owner of our Common Stock that we believe to be in violation of the beneficial ownership
reporting requirements must respond to our inquiries for the purpose of determining the existence, nature, or extent of any such
violation. If a response satisfactory to us has not been received within five business days after the date on which the inquiry
was mailed, the shares of our Common Stock to which the inquiry relates will be considered for all purposes to be beneficially
owned in violation of the reporting requirements, and we are authorized to take appropriate remedial actions, including the
refusal to permit the voting of those excess shares.
No Preemptive Rights and No Conversion
No holder of our Common Stock has any preemptive right to purchase or subscribe for any of our other shares, rights, options,
or other securities. The holders of shares of our Common Stock do not have any right to convert their shares into or exchange
their shares for any of our other classes or series of stock or other securities or other obligations of Freddie Mac.
No Redemption
We do not have the right to redeem any shares of our Common Stock, and no holders of our Common Stock have the right to
require us to redeem their shares.
No Sinking Fund
Our Common Stock is not subject to any sinking fund, which is a separate capital reserve maintained to pay stockholders with
preferred rights for their investment in the event of liquidation or redemption.
Liquidation Rights
Upon our dissolution, liquidation, or winding up, after payment of or provision for our liabilities and the expenses of our
dissolution, liquidation, or winding up, and after any payment or distribution has been made on any of our other classes or
series of stock ranking prior to our Common Stock upon liquidation, the holders of the outstanding shares of our Common
Stock will be entitled to receive out of our assets available for distribution to stockholders, before any payment or distribution is
made on any of our other classes or series of stock ranking junior to Common Stock upon liquidation, the amount of $0.21 per
share, plus a sum equal to all dividends declared but unpaid on their shares to the date of final distribution. The holders of the
outstanding shares of any class or series of our stock ranking prior to, on a parity with, or junior to our Common Stock upon
liquidation will also receive out of those assets payment of any corresponding preferential amount to which the holders of that
stock may, by the terms thereof, be entitled. No stock with that corresponding right currently exists. The remaining balance of
any of our assets available for distribution to stockholders upon a dissolution, liquidation or winding up will be distributed to the
holders of our outstanding Common Stock in the aggregate. As of December 31, 2019, the Senior Preferred Stock had an
aggregate liquidation preference of $79.3 billion, and the 24 outstanding classes of our preferred stock, other than the Senior
Preferred Stock, had an aggregate liquidation preference of $14.1 billion plus any then-current dividends, which would have
priority over our Common Stock upon liquidation. We are authorized to issue an unlimited amount of preferred stock.
Neither the sale of all or substantially all of our property or business, nor our merger, consolidation, or combination into or with
any other corporation or entity, will be deemed to be a dissolution, liquidation, or winding up for the purpose of these
provisions on liquidation rights.
Additional Classes or Series of Stock
We have the right to create and issue additional classes or series of stock ranking prior to, on a parity with, or junior to our
Common Stock, as to dividends, liquidation, or otherwise, without the consent of holders of our Common Stock.
Amendments
Without the consent of the holders of our Common Stock, we have the right to amend, alter, supplement, or repeal any terms of
our Common Stock in the Certificate of Designation to cure any ambiguity, to correct or supplement any term that may be
defective or inconsistent with any other term, or to make any other provisions so long as such action does not materially and
adversely affect the interests of the holders of our Common Stock. Otherwise, the Certificate of Designation may be amended,
altered, supplemented, or repealed only with the consent of the holders of at least two-thirds of the outstanding shares of our
Common Stock. The creation of additional classes and series of stock whether ranking prior to, on a parity with, or junior to our
Common Stock, or a split or reverse split of our Common Stock (including an attendant adjustment to its par value), does not
require any consent. As a consequence, the rights of holders of our Common Stock could be adversely affected by the creation
of additional classes or series of stock. The Conservator currently holds voting rights on any such matters requiring consent of
the holders of our Common Stock.
Listing
On July 8, 2010, we delisted our Common Stock from the NYSE pursuant to a directive by our Conservator. Our Common
Stock is traded exclusively in the OTCQB Marketplace under the ticker symbol FMCC. We expect that our Common Stock will
continue to trade in the OTCQB Marketplace so long as market makers demonstrate an interest in trading the Common Stock.
II.
Description of Preferred Stock
Summary of Key Terms and Listing
Under Section 306(f) of our Charter, we are authorized to issue an unlimited number of shares of preferred stock, on such terms
and conditions as the Board of Directors shall prescribe. Each class of the Preferred Stock has the terms set forth in its
Certificate of Designation. Computershare Trust Company, N.A., is the transfer agent, dividend disbursing agent, and registrar
for the Preferred Stock.
On July 8, 2010, we delisted our Preferred Stock from the NYSE pursuant to a directive by our Conservator. Our Preferred
Stock is traded exclusively in the OTCQB Marketplace. We expect that our Preferred Stock will continue to trade in the OTCQB
Marketplace so long as market makers demonstrate an interest in trading the Preferred Stock.
The table below provides a summary of the Preferred Stock outstanding as of December 31, 2019, including dividend rates,
issue dates, shares authorized and outstanding, redemption prices per share, total outstanding balances, earliest redemption
dates, and ticker symbols.
Issue Date
Shares
Authorized
Shares
Outstanding
(In millions, except
redemption price per share)
1996 Variable-rate(1)
5%
Apr 26, 1996
Mar 23, 1998
1998 Variable-rate(2)
Sept 23/29, 1998
5.10%
5.79%
1999 Variable-rate(3)
2001 Variable-rate(4)
2001 Variable-rate(5)
5.81%
6%
2001 Variable-rate(6)
5.70%
2006 Variable-rate(7)
6.42%
5.90%
5.57%
5.66%
6.02%
6.55%
Sept 23, 1998
July 21, 1999
Nov 5, 1999
Jan 26, 2001
Mar 23, 2001
Mar 23, 2001
May 30, 2001
May 30, 2001
Oct 30, 2001
July 17, 2006
July 17, 2006
Oct 16, 2006
Jan 16, 2007
Apr 16, 2007
July 24, 2007
Sept 28, 2007
5.00
8.00
4.40
8.00
5.00
5.75
6.50
4.60
3.45
3.45
4.02
6.00
15.00
5.00
20.00
44.00
20.00
20.00
20.00
5.00
8.00
4.40
8.00
5.00
5.75
6.50
4.60
3.45
3.45
4.02
6.00
15.00
5.00
20.00
44.00
20.00
20.00
20.00
Redemption
Price per
Share
Total
Outstanding
Balance
Redeemable
On or After
OTCQB
Symbol
$50.00
$250
Jun 30, 2001
FMCCI
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
400
220
400
250
287
325
230
173
173
201
300
750
250
500
Mar 31, 2003
FMCKK
Sept 30, 2003
FMCCG
Sept 30, 2003
FMCCH
Jun 30, 2009
FMCCK
Dec 31, 2004
FMCCL
Mar 31, 2003
FMCCM
Mar 31, 2003
FMCCN
Mar 31, 2011
FMCCO
Jun 30, 2006
FMCCP
Jun 30, 2003
FMCCJ
Dec 31, 2006
FMCKP
Jun 30, 2011
FMCCS
Jun 30, 2011
FMCCT
Sept 30, 2011
FMCKO
1,100
Dec 31, 2011
FMCKM
500
500
500
Mar 31, 2012
FMCKN
Jun 30, 2012
FMCKL
Sept 30, 2017
FMCKI
6,000
Dec 31, 2012
FMCKJ
2007 Fixed-to-floating rate(8)
Dec 4, 2007
240.00
240.00
(1) Dividend rate resets quarterly and is equal to the sum of three-month LIBOR plus 1% divided by 1.377. The dividend rate is capped at 9.00%.
(2) Dividend rate resets quarterly and is equal to the sum of three-month LIBOR plus 1% divided by 1.377. The dividend rate is capped at 7.50%.
(3) Dividend rate resets on January 1 every five years after January 1, 2005 based on a five-year Constant Maturity Treasury (CMT) rate. The dividend rate is capped at
11.00%. Optional redemption on December 31, 2004 and on December 31 every five years thereafter.
(4) Dividend rate resets on April 1 every two years after April 1, 2003 based on the two-year CMT rate plus 0.10%. The dividend rate is capped at 11.00%. Optional
redemption on March 31, 2003 and on March 31 every two years thereafter.
(5) Dividend rate resets on April 1 every year based on 12-month LIBOR minus 0.20%. The dividend rate is capped at 11.00%. Optional redemption on March 31, 2003
and on March 31 every year thereafter.
(6) Dividend rate resets on July 1 every two years after July 1, 2003 based on the two-year CMT rate plus 0.20%. The dividend rate is capped at 11.00%. Optional
redemption on June 30, 2003 and on June 30 every two years thereafter.
(7) Dividend rate resets quarterly and is equal to the sum of three-month LIBOR plus 0.50% but not less than 4.00%.
(8) 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.
The outstanding shares of our Preferred Stock are fully paid and non-assessable. Any additional shares of Preferred Stock that
we issue will be fully paid and non-assessable. Our Board of Directors may increase the authorized number of shares of any
class of our Preferred Stock at any time, without the consent of the holders of any class of our Preferred Stock.
The Preferred Stock shall rank prior to the Common Stock to the extent provided in the Certificate of Designation; shall rank, as
to both dividends and distributions upon liquidation, on a parity with the other classes of Preferred Stock as well as the four
classes of perpetual, non-cumulative preferred stock that we issued through private placements; and shall rank junior to the
Senior Preferred Stock.
Dividends and Dividend Restrictions
Dividends on shares of our Preferred Stock are not mandatory and are non-cumulative. Holders of our Preferred Stock are
entitled to receive dividends when, as, and if declared by our Board of Directors out of assets legally available therefor on the
payment dates as prescribed in the applicable Certificate of Designation. The Preferred Stock has the dividend rates as
described in the table above. We will pay each dividend on shares of Preferred Stock to the holders of record of outstanding
shares as they appear in our books and records on the record date fixed by our Board of Directors. The record date must not
be earlier than 45 days or later than 10 days before a dividend payment date.
Our payment of dividends is subject to the following restrictions:
• Restrictions Relating to the Conservatorship - During conservatorship, any dividends will be declared by, and paid
at the direction of, the Conservator, acting as successor to the rights, titles, powers, and privileges of the Board of
Directors. The Conservator has prohibited us from paying any dividends on our 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 our Preferred Stock 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 Senior Preferred Stock - Payment of dividends on our Preferred Stock is subject to the
prior payment of dividends on our Senior Preferred Stock.
Optional Redemption
Freddie Mac has the option to redeem the Preferred Stock, in whole or in part, out of funds legally available therefor, at the
redemption price prescribed in the applicable Certificate of Designation plus the amount of any dividend that would otherwise
be payable for the dividend period that ends on the date of redemption, whether or not declared. The Preferred Stock has the
redemption prices and timing limitations as described in the table above. The dividend that would otherwise be payable will be
included in the redemption price of the shares and will not be separately payable.
If less than all of the outstanding shares are to be redeemed, Freddie Mac will select shares to be redeemed from the
outstanding shares by lot or pro rata or by any other method which Freddie Mac in its sole discretion decides equitable.
During conservatorship and pursuant to the Purchase Agreement, we cannot redeem the Preferred Stock without FHFA and
Treasury consent.
No Voting Rights
The shares of Preferred Stock shall not have any voting rights, general or special, other than with respect to amendment,
alteration, supplementation, or repeal of the provisions of the applicable Certificate of Designation (described below).
During conservatorship, the holders of Preferred Stock have no voting rights. Upon its appointment as Conservator, FHFA
immediately succeeded to the voting rights of holders of our Preferred Stock.
No Preemptive Rights and No Conversion
No holder of our Preferred Stock has any preemptive right to purchase or subscribe for any other shares, rights, options, or
other securities. The holders of shares of our Preferred Stock do not have any right to convert their shares into or exchange
their shares for any of our other classes or series of stock or other securities or other obligations of Freddie Mac.
Liquidation Rights and Preference
Upon our dissolution, liquidation, or winding up, after payment of or provision for our liabilities and the expenses of our
dissolution, liquidation, or winding up, and after any payment or distribution has been made on any of our other classes or
series of stock ranking prior to our Preferred Stock upon liquidation, the holders of the outstanding shares of our Preferred
Stock will be entitled to receive out of our assets available for distribution to stockholders, before any payment or distribution is
made on the Common Stock or any of our other classes or series of stock ranking junior to the Preferred Stock upon
liquidation, the amount of the liquidation preference in the applicable Certificate of Designation (which amount equals the
redemption price per share summarized in the table above), plus a sum equal to any dividend that would otherwise be payable
for the dividend period through and including the date of final distribution. The holders of the outstanding shares of any class or
series of our stock ranking on parity with the Preferred Stock upon liquidation shall be entitled to receive out of our assets
available for distribution to shareholders, before any such payment or distribution shall be made on the Common Stock or any
other class or series of stock of Freddie Mac ranking junior to the Preferred Stock and to such parity stock upon liquidation, any
corresponding preferential amount to which the holders of that stock may, by the terms thereof, be entitled. The remaining
balance of any of our assets available for distribution to stockholders upon a dissolution, liquidation, or winding up will be
distributed to the holders of our outstanding Common Stock in the aggregate. If our assets available for distribution to
stockholders shall be insufficient for the payment of the amount which the holders of the outstanding Preferred Stock shall be
entitled to receive upon such dissolution, liquidation, or winding up, all of our assets available for distribution to stockholders
shall be distributed to the holders of outstanding shares of Preferred Stock pro rata, so that the amounts so distributed shall
bear to each other the same ratio that the respective distributive amounts to which they are so entitled bear to each other, and
the holders of outstanding shares of Preferred Stock shall not be entitled to any further participation in any distribution of our
assets. As of December 31, 2019, the Senior Preferred Stock had an aggregate liquidation preference of $79.3 billion, which
would have priority over our Preferred Stock upon liquidation, and the 24 outstanding classes of our preferred stock, other than
the Senior Preferred Stock, had an aggregate liquidation preference of $14.1 billion plus any then-current dividends. We are
authorized to issue an unlimited amount of preferred stock.
Neither the sale of all or substantially all of our property or business, nor our merger, consolidation, or combination into or with
any other corporation or entity, will be deemed to be a dissolution, liquidation, or winding up for the purpose of these
provisions on liquidation rights.
Additional Classes or Series of Stock
We have the right to authorize, create, and issue additional classes or series of stock ranking prior to, on a parity with, or junior
to our Preferred Stock, as to dividends, liquidation, or otherwise, without the consent of holders of our Preferred Stock.
Amendments
Without the consent of the holders of the Preferred Stock, we have the right to amend, alter, supplement, or repeal the terms of
any series of our Preferred Stock to cure any ambiguity, to correct or supplement any provision that may be defective or
inconsistent with any other provision, or to make any other provisions with respect to matters or questions arising under the
applicable Certificate of Designation so long as such action does not materially and adversely affect the interests of the holders
of the applicable series of Preferred Stock. Otherwise, the terms of any series of our Preferred Stock may be amended, altered,
supplemented, or repealed only with the consent of the holders of at least two-thirds of the outstanding shares of the
applicable series of our Preferred Stock. The creation and issuance of additional classes and series of stock, or the issuance of
additional shares of any existing class or series of our stock, whether ranking prior to, on a parity with, or junior to our Preferred
Stock does not require any consent. As a consequence, the rights of holders of our Preferred Stock could be adversely
affected by the creation of additional classes or series of stock. The Conservator currently holds voting rights on any such
matters requiring consent of the holders of our Preferred Stock.
Exhibit 10.21
April 20, 2018
Ricardo A. Anzaldua
*Address Redacted*
*Address Redacted*
Dear Ricardo:
On behalf of Freddie Mac’s Board of Directors (the “Board”), this memorandum sets forth Freddie Mac’s agreement to
employ you as its Executive Vice President and Senior Legal Advisor, effective on a mutually agreed upon start date,
reporting to me, Freddie Mac’s Chief Executive Officer.
The following outlines the terms of your employment with us, including your compensation and benefits, which have
been approved by the Compensation Committee of the Board of Directors and the Federal Housing Finance Agency
(the “FHFA”).
Congratulations and we look forward to you joining the Freddie Mac team!
I. Compensation
Your compensation is governed by the Executive Management Compensation Program (“EMCP”). To participate in
the EMCP, you must agree to the terms of the EMCP Document and the Recapture and Forfeiture Agreement, both of
which are enclosed. The EMCP Program Document outlines the terms and conditions of our compensation program
for senior officers, while the Recapture and Forfeiture Agreement describes the circumstances under which certain
compensation is subject to repayment and/or forfeiture.
Your target total direct compensation (“Target TDC”) will be $2,500,000, which will be pro-rated in the first calendar
year of employment based on your date of hire.
Your Target TDC will consist of two components - Base Salary and Deferred Salary - that are both paid in cash and
which are summarized below.
Base Salary -The annualized amount of your Base Salary will be $500,000.
Deferred Salary - The annualized amount of your Deferred Salary will be $2,000,000 and is comprised of the two
components noted below. Deferred Salary earned in each quarter is paid in cash in the last pay period of the
corresponding quarter of the following calendar year.
• At-Risk Deferred Salary - This portion of your Deferred Salary is equal to thirty percent (30%) of your Target TDC,
or $750,000, up to half of which may be reduced based on the company’s performance against objectives
established by FHFA and up to half of which may be reduced based on both the company’s performance against
corporate objectives and your performance against individual objectives.
•
Fixed Deferred Salary - This portion of your Deferred Salary is equal to your Target TDC less your Base Salary and
At-Risk Deferred Salary, and is equal to $1,250,000.
Cash Award - In consideration of your acceptance of this offer and beginning employment with Freddie Mac, you will
receive a $100,000 cash award that will be paid within thirty (30) days of your date of hire.
The cash award is not considered “compensation” for purposes of our tax qualified Thrift/401(k) Savings Plan or our
non-qualified Supplemental Executive Retirement Plan (“SERP”).
During the first year of your employment, the cash award shall remain subject to repayment if your employment
terminates due to a “Termination Event” which shall mean:
• You voluntarily resign employment; or
• We terminate your employment due to the occurrence of any of the Forfeiture Events described in the Recapture
and Forfeiture Agreement.
In the event the cash award is subject to repayment, you agree to repay to Freddie Mac the gross amount within 30
calendar days following your termination date. You further agree and authorize Freddie Mac to withhold any unpaid
repayment amount from any outstanding Deferred Salary. You understand and agree that you will pay any and all of
Freddie Mac’s reasonable expenses, including attorney’s fees and other costs, incurred in its obtaining repayment and
collection of any unpaid repayment amount.
II. Benefits
We offer a highly competitive benefits package that you can customize to meet your family’s needs. You will also be
eligible to participate in certain benefits available only to officers, including a financial counseling reimbursement
program and the SERP. You are immediately eligible for the financial counseling reimbursement program and will
become eligible for the SERP after completing one year of service. A benefits representative will contact you to
provide an overview of our offerings. The medical, dental, and vision benefits you elect will become effective on the
first day of the month after your first day of employment. Additionally, you will begin accruing vacation and sick time
and will be entitled to paid holidays.
III. Restrictive Covenant and Confidentiality Agreement
The terms of your compensation provided in this letter are also contingent upon your agreement to be bound by the
terms of the enclosed Restrictive Covenant and Confidentiality Agreement.
IV. FHFA’s Review and Approval Authority
The terms and conditions of your compensation has been approved by FHFA. Notwithstanding such approval and any
provision of this letter, you acknowledge and understand that any compensation paid or to be paid during or after your
employment remains subject to any withholding, escrow or prohibition consistent with FHFA’s authority pursuant to
the Federal Home Loan Corporation Act, as amended, or the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended.
V. Outside Activities and Family Member Activities
During your employment with us, you agree to devote substantially all of your time, attention and energies to our
business, and to not be engaged in any other business activity unless permitted under our Outside Activities and
Family Member Activities policy. This restriction will not prevent you from devoting a reasonable amount of time to
charitable or public interest activities or from making passive investments of your assets in such form or manner as
you desire, consistent with Freddie Mac’s Employee Trading policy, and except as provided herein.
VI. Reservations of Rights:
This letter is not intended, nor shall it be interpreted, to constitute a contract of employment for a specified duration.
Your employment is at-will and both you and Freddie Mac retain the discretion to terminate the employment
relationship at any time for any lawful reason with or without notice.
This offer of employment is contingent upon Freddie Mac’s satisfaction in its sole discretion with your references and
the results of your background checks and drug test.
=====================
During the course of your review of this memorandum, Freddie Mac expects that you have had the opportunity to
consult and receive assistance from appropriate advisors, including legal, tax, and financial advisors.
This memorandum shall be construed, and the rights and obligations herein determined, exclusively in accordance
with the substantive law of the Commonwealth of Virginia, excluding provisions of Virginia law concerning choice-of-
law that would result in the law of any state other than Virginia being applied.
Return of Signed Documents:
Please confirm that the terms and conditions in this letter conform to your understanding by returning a signed copy of
this letter as well as signed copies of the EMCP, the Recapture and Forfeiture Agreement and the Restrictive Covenant
and Confidentiality Agreement.
__/s/ Don Layton____________________
Don Layton
Chief Executive Officer
I agree to the terms of this Agreement.
_4/25/18_______
Date
__/s/ Ricardo Anzaldua_______________
Ricardo Anzaldua
_23 April 2018___
Date
Exhibit 10.22
RESTRICTIVE COVENANT AND CONFIDENTIALITY AGREEMENT
In exchange for the mutual promises and consideration set forth below, this Restrictive Covenant and Confidentiality
Agreement (“Agreement”) is entered into by and between the Federal Home Loan Mortgage Corporation (“Freddie Mac” or
“Company”) and Ricardo Anzaldua (“Executive” or “you”), effective on the date the Executive assigns a personal signature to
page 5 of this Agreement.
I.
Definitions
The following terms shall have the meanings indicated when used in this Agreement.
Competitor: The following entities, and their respective parents, successors, subsidiaries, and affiliates are
A.
competitors: (i) Fannie Mae (ii) all Federal Home Loan Banks (including the Office of Finance); and (iii) such other entities to
which Executive and the Company may agree in writing from time-to-time.
Confidential Information: Information or materials in written, oral, magnetic, digital, computer, photographic, optical,
B.
electronic, or other form, whether now existing or developed or created during the period of Executive’s employment with
Freddie Mac, that constitutes trade secrets and/or proprietary or confidential information. This information includes, but is not
limited to: (i) all information marked Proprietary or Confidential; (ii) information concerning the components, capabilities, and
attributes of Freddie Mac’s business plans, methods, and strategies; (iii) information relating to tactics, plans, or strategies
concerning shareholders, investors, pricing, investment, marketing, sales, trading, funding, hedging, modeling, sales and risk
management; (iv) financial or tax information and analyses, including but not limited to, information concerning Freddie Mac’s
capital structure and tax or financial planning; (v) confidential information about Freddie Mac’s customers, borrowers,
employees, or others; (vi) pricing and quoting information, policies, procedures, and practices; (vii) confidential customer lists;
(viii) proprietary algorithms; (ix) confidential contract terms; (x) confidential information concerning Freddie Mac’s policies,
procedures, and practices or the way in which Freddie Mac does business; (xi) proprietary or confidential data bases, including
their structure and content; (xii) proprietary Freddie Mac business software, including its design, specifications and
documentation; (xiii) information about Freddie Mac products, programs, and services which has not yet been made public;
(xiv) confidential information about Freddie Mac’s dealings with third parties, including dealers, customers, vendors, and
regulators; and/or (xv) confidential information belonging to third parties to which Executive received access in connection with
Executive’s employment with Freddie Mac. Confidential Information does not include general skills, experience, or knowledge
acquired in connection with Executive’s employment with Freddie Mac that otherwise are generally known to the public or
within the industry or trade in which Freddie Mac operates.
II.
Non-Competition
Executive recognizes that as a result of Executive’s employment with Freddie Mac, Executive has access to and knowledge of
critically sensitive Confidential Information, the improper disclosure or use of which would result in grave competitive harm to
Freddie Mac. Therefore, Executive agrees that neither during Executive’s employment with Freddie Mac, nor for the twelve (12)
months immediately following termination of Executive’s employment for any reason, will Executive consider offers of
employment from, seek or accept employment with, or otherwise directly or indirectly provide professional services to any
Competitor, if the Executive will be rendering duties, responsibilities or services for the Competitor that are of the type and
nature rendered or performed by you during the past two years of your employment with Freddie Mac. Executive
acknowledges and agrees that this covenant has unique, substantial and immeasurable value to Freddie Mac, that Executive
has sufficient skills to provide a livelihood for Executive while this covenant remains in force, and that this covenant will not
interfere with Executive’s ability to work consistent with Executive’s experience, training and education. This non-competition
covenant applies regardless of whether Executive’s employment is terminated by Executive, by Freddie Mac, or by a joint
decision.
If Executive is a licensed lawyer, this non-competition covenant shall be interpreted in a manner consistent with any rule
applicable to a licensed legal professional in the jurisdiction(s) of the Executive’s licensure or registration that concerns the
Executive’s employment as counsel with, or provision of legal services to, a Competitor.
III.
Non-Solicitation and Non-Recruitment
During Executive’s employment with Freddie Mac and for a period of twelve (12) months after Executive’s termination date,
Executive will not solicit or recruit, attempt to solicit or recruit or assist another in soliciting or recruiting any Freddie Mac
managerial employee (including manager-level, Executive-level, or officer-level employee) with whom Executive worked, or any
employee whom Executive directly or indirectly supervised at Freddie Mac, to leave the employee’s employment with Freddie
Mac for purposes of employment or for the rendering of professional services. This prohibition against solicitation does not
apply if Freddie Mac has notified the employee being solicited or recruited that his/her employment with the Company will be
terminated pursuant to a corporate reorganization or reduction-in-force.
If Employee is a licensed lawyer, this non-solicitation covenant shall be interpreted in a manner consistent with any rule
applicable to a licensed legal professional in the jurisdiction(s) of Employee’s licensure or registration.
IV.
Treatment of Confidential Information
Non-Disclosure. Executive recognizes that Freddie Mac is engaged in an extremely competitive business and that, in
A.
the course of performing Executive’s job duties, Executive will have access to and gain knowledge about Confidential
Information. Executive further recognizes the importance of carefully protecting this Confidential Information in order for
Freddie Mac to compete successfully. Therefore, Executive agrees that Executive will neither divulge Confidential Information
to any persons, including to other Freddie Mac employees who do not have a Freddie Mac business-related need to know, nor
make use of the Confidential Information for the Executive’s own benefit or for the benefit of anyone else other than Freddie
Mac. Executive further agrees to take all reasonable precautions to prevent the disclosure of Confidential Information to
unauthorized persons or entities, and to comply with all Company policies, procedures, and instructions regarding the
treatment of such information.
Return of Materials. Executive agrees that upon termination of Executive’s employment with Freddie Mac for any
B.
reason whatsoever, Executive will deliver to Executive’s immediate supervisor all tangible materials embodying Confidential
Information, including, but not limited to, any documentation, records, listings, notes, files, data, sketches, memoranda,
models, accounts, reference materials, samples, machine-readable media, computer disks, tapes, and equipment which in any
way relate to Confidential Information, whether developed by Executive or not. Executive further agrees not to retain any
copies of any materials embodying Confidential Information.
C.
Post-Termination Obligations. Executive agrees that after the termination of Executive’s employment for any reason,
Executive will not use in any way whatsoever, nor disclose any Confidential Information learned or obtained in connection with
Executive’s employment with Freddie Mac without first obtaining the written permission of the Senior Vice President of Human
Resources of Freddie Mac. Executive further agrees that, in order to assure the continued confidentiality of the Confidential
Information, Freddie Mac may correspond with Executive’s future employers to advise them generally of Executive’s exposure
to and knowledge of Confidential Information, and Executive’s obligations and responsibilities regarding the Confidential
Information. Executive understands and agrees that any such contact may include a request for assurance and confirmation
from such employer(s) that Executive will not disclose Confidential Information to such employer(s), nor will such employer(s)
permit any use whatsoever of the Confidential Information. To enable Freddie Mac to monitor compliance with the obligations
imposed by this Agreement, Executive further agrees, in the event Executive voluntary resigns employment, to inform in writing
Freddie Mac’s Senior Vice President of Human Resources of the identity of Executive’s subsequent employer(s) and Executive’s
prospective job title and responsibilities prior to beginning employment. Executive agrees that this notice requirement shall
remain in effect for twelve (12) months following the Executive’s voluntary resignation of Freddie Mac employment.
Ability to Enforce Agreement and Assist Government Investigations. Nothing in this Agreement prohibits or otherwise
D.
restricts you from: (1) making any disclosure of information required by law; (2) assisting any regulatory or law enforcement
agency or legislative body to the extent you maintain a legal right to do so notwithstanding this Agreement; (3) filing, testifying,
participating in or otherwise assisting in a proceeding relating to the alleged violation of any federal, state, or local law,
regulation, or rule, to the extent you maintain a legal right to do so notwithstanding this Agreement; or (4) filing, testifying,
participating in or otherwise assisting the Securities and Exchange Commission or any other proper authority in a proceeding
relating to allegations of fraud.
V.
Consideration Given to Executive
In exchange for agreeing to be bound by the terms, conditions, and restrictions stated in this Agreement, Freddie Mac will
provide the Executive with employment as Executive Vice President and Senior Legal Advisor, which itself is adequate
consideration for Executive’s agreement to be bound by the provisions of this Agreement.
VI.
Reservation of Rights
Executive agrees that nothing in this Agreement constitutes a contract or commitment by Freddie Mac to continue Executive’s
employment in any job position for any period of time, nor does anything in this Agreement limit in any way Freddie Mac’s right
to terminate Executive’s employment at any time for any reason.
VII.
Investments Policy
Compliance with the Code of Conduct and Corporate Policies & Procedures, Including Personal Securities
As a Freddie Mac employee, Executive will be subject to Freddie Mac’s Code of Conduct (“Code”) and to Corporate Policy
3-206, Personal Securities Investments Policy (“Policy”) that, among other things, limit the investment activities of Freddie Mac
employees. Executive agrees to fully comply with the Code and the Policy, copies of which are enclosed for Executive’s review.
Executive agrees to consult with Freddie Mac’s Chief Compliance Officer as soon as practical prior to beginning employment
about any investments that Executive or a “covered household member,” as that term is defined in the Policy, may have that
may be prohibited by the Policy. Executive also agrees to disclose prior to beginning employment any other matter or situation
that may create a conflict of interest as such term is defined in the Code.
In addition, prior to beginning employment, Executive agrees to disclose to Freddie Mac's Human Resources Division the terms
of any employment, confidentiality or stock grant agreements to which Executive may currently be subject that may affect
Executive’s future employment or recruiting activities so that Freddie Mac may ensure that Executive’s employment by Freddie
Mac and conduct as a Freddie Mac employee are not inconsistent with any of their terms.
VIII.
Absence of Any Conflict of Interest
Executive represents that Executive does not have any confidential information, trade secrets or other proprietary information
that Executive obtained as the result of Executive’s employment with another employer that Executive will be using in
Executive’s position at Freddie Mac. Executive also represents that Executive is not subject to any employment, confidentiality
or stock grant agreements, or any other restrictions or limitations imposed by a prior employer, which would affect Executive’s
ability to perform the duties and responsibilities for Freddie Mac in the job position offered, and further represents that
Executive has provided Freddie Mac with copies of any non-competition, non-solicitation or similar agreements or limitations
that have not expired, so that Freddie Mac can make an independent judgment that Executive’s employment with Freddie Mac
is not inconsistent with any of its terms.
IX.
Enforcement
A.
for Executive’s breach or threat of breach of any provision of this Agreement.
Executive acknowledges that Executive may be subject to discipline, up to and including termination of employment,
Executive agrees that irreparable injury will result to Freddie Mac’s business interests in the event of breach or
B.
threatened breach of this Agreement, the full extent of Freddie Mac’s damages will be impossible to ascertain, and monetary
damages will not be an adequate remedy for Freddie Mac. Therefore, Executive agrees that in the event of a breach or threat
of breach of any provision(s) of this Agreement, Freddie Mac, in addition to any other relief available, shall be entitled to
temporary, preliminary, and permanent equitable relief to restrain any such breach or threat of breach by Executive and all
persons acting for and/or in concert with Executive, without the necessity of posting bond or security, which Executive
expressly waives.
Executive agrees that each of Executive’s obligations specified in this Agreement is a separate and independent
C.
covenant, and that all of Executive’s obligations set forth herein shall survive any termination, for any reason, of Executive’s
Freddie Mac employment. To the extent that any provision of this Agreement is determined by a court of competent jurisdiction
to be unenforceable because it is overbroad, that provision shall be limited and enforced to the extent permitted by applicable
law. Should any provision of this Agreement be declared or determined by any court of competent jurisdiction to be
unenforceable or invalid under applicable law, the validity of the remaining obligations will not be affected thereby and only the
unenforceable or invalid obligation will be deemed not to be a part of this Agreement.
D.
This Agreement is governed by, and will be construed in accordance with, the laws of the Commonwealth of Virginia,
without regard to its or any other jurisdiction’s conflict-of-law provisions. Executive agrees that any action related to or arising
out of this Agreement shall be brought exclusively in the United States District Court for the Eastern District of Virginia, and
Executive hereby irrevocably consents to personal jurisdiction and venue in such court and to service of process by United
States Mail or express courier service in any such action.
If any dispute(s) arise(s) between Freddie Mac and Executive with respect to any matter which is the subject of this
E.
Agreement, the prevailing party in such dispute(s) shall be entitled to recover from the other party all of its costs and expenses,
including its reasonable attorneys’ fees.
Executive has been advised to discuss all aspects of this Agreement with Executive’s private attorney. Executive
acknowledges that Executive has carefully read and understands the terms and provisions of this Agreement and that
they are reasonable. Executive signs this Agreement voluntarily and accepts all obligations contained in this
Agreement in exchange for the consideration to be given to Executive as outlined above, which Executive
acknowledges is adequate and satisfactory, and which Executive further acknowledges Freddie Mac is not otherwise
obligated to provide to Executive. Neither Freddie Mac nor its agents, representatives, directors, officers or employees
have made any representations to Executive concerning the terms or effects of this Agreement, other than those
contained in this Agreement.
By: _/s/ Ricardo Anzaldua_________
Ricardo Anzaldua
Date:
23 April 2018
Employee ID: *Redacted*
Employee Name: James Mackey
Exhibit 10.31
CONFIDENTIAL SEPARATION AGREEMENT AND GENERAL RELEASE
Freddie Mac is offering you valuable consideration in exchange for your agreement to be bound by the terms of this
Confidential Separation Agreement and General Release (the “Agreement”). Please be advised that, subject to
applicable law, by signing this Agreement, you will be releasing Freddie Mac of all legal claims you have, regardless of
whether you currently are aware of them. Therefore, Freddie Mac advises you to consult with an attorney before you
sign this document.
A. Announcement, Transition and Resignation
1. Parties. This is an Agreement between the Federal Home Loan Mortgage Corporation (“Freddie Mac” or the
“Company”) and James Mackey, currently Executive Vice President (“EVP”) and Chief Financial Officer, hereinafter
referred to as “you”.
2. Successors.
(a) You will continue to be employed in your position as EVP and CFO through December 18, 2019. During this time,
you agree to provide your full cooperation in support of the transition of your duties as described below.
(b) Freddie Mac will appoint one or more other Freddie Mac employees (the "Interim Successor"), effective December
19, 2019, as your interim successor or successors as EVP and CFO. In the event that Freddie Mac appoints any
person to be your definitive successor as EVP and CFO with an effective date prior to June 30, 2020, then from
such effective date through June 30, 2020 all references in this Agreement to the Interim Successor shall apply to
that definitive successor.
3. Transition Period. The period from December 19, 2019 through the earlier of (i) June 30, 2020 or (ii) the date of your
resignation from the Company is herein referred to as the “Transition Period”. During this period:
(a) You will continue to be employed by Freddie Mac with the title of Executive Vice President-Senior Advisor at your
current compensation including deferred salary and employee benefits (subject to the terms of the applicable
plans and agreements), reporting to the Chief Executive Officer (the “CEO”), but you will no longer be EVP/ CFO
or have the authority or responsibilities of the same.
(b) Your responsibilities will be to assist in any way reasonably requested by the CEO or the Interim Successor with
the Interim Successor’s assumption of the EVP/CFO role and to be available for consultation with the Interim
Successor (or anyone designated by the Interim Successor) in order to assure a smooth transition to the Interim
Successor.
(c) You will generally be available by telephone to perform the above responsibilities, and will come to the McLean
campus as requested. Your McLean office will be changed to a location designated by Freddie Mac, and you will
be provided the support of an Administrative Assistant.
(d) You will provide your full cooperation and support in the transition of your duties to the Interim Successor, and will
transition to the Interim Successor or the Interim Successor’s designee(s) i) communications to the employees of
the Finance Division, ii) regulatory and other financial matters, and iv) day-to-day management of the Finance
Division.
(e)
If you fail to meet the expectations set forth in this Section, or otherwise breach this Agreement, your June 30,
2020 separation date will be accelerated to an earlier date.
(f) You may resign before June 30, 2020. If you resign on or before June 30, 2020, then on your resignation date you
will execute and deliver to the Company the Confidential Second Separation Agreement and General Release (the
“Second Release”) in the form attached hereto as Exhibit A. You understand and agree that the Second Release
will provide for no additional payments or consideration beyond any payments or consideration you are to receive
pursuant to the terms of this Agreement and that such payments or consideration constitute adequate
consideration for your execution of and adherence to the terms of the Second Release.
B. Obligations and Restrictions Imposed Upon You By This Agreement
By signing below, you agree to be bound legally to the following terms:
1. Full Release. You, for yourself, your heirs, executors, administrators and assigns, hereby release and forever discharge
Freddie Mac and its successors, assigns, divisions, affiliates, parents, subsidiaries, directors, officers, shareholders,
partners, heirs, and executors (collectively, the “Released Parties”) from any and all actions, causes of action, claims,
demands, damages, costs, loss of service, expenses, compensation and any damages of any kind whatsoever
(including claims for attorneys’ fees and costs) which you have or may have arising up to and including the date of
your execution of this release, whether presently known or unknown, including, but not limited to, those arising from or
related to any federal or state statute or local ordinance, tort, contract or common law claim, or any other claims,
whether or not asserted, relating to any facts or issues pertaining to any aspect of your employment relationship with
Freddie Mac, any compensation plan, program or arrangement, your decision to terminate your employment, the
termination of such employment relationship and the negotiation of and entering into this Agreement. This Release
does not apply to Freddie Mac’s obligations under this Agreement or any claims that Freddie Mac may not lawfully
request that you release.
2. Non-Participation. You acknowledge that in the absence of this Agreement, you have the right voluntarily to assist
others in bringing claims against the Released Parties. By signing below, you agree to waive this right. Therefore,
except as otherwise provided in this Agreement, you agree that you will not encourage, counsel or assist any
attorneys, their clients, or any other persons (including current or former Freddie Mac employees) in bringing or
prosecuting any claims, charges, or complaints against any of the Released Parties, unless pursuant to a valid
subpoena or court order to produce documents or testify, or unless you have been requested by an agency of the
United States government or state or local government (collectively, “government agency”) to assist in a government
agency investigation or proceeding.
To the extent that you are requested by any government agency to participate or assist in a government agency
investigation or proceeding, or to the extent that any law may prohibit you from waiving your right to bring or
participate in the investigation of a claim, you nevertheless waive any right you otherwise might have to seek or accept
any damages or relief in any proceeding. Furthermore, to the extent that you file any claim against Freddie Mac, or any
claim is filed on your behalf against Freddie Mac, you agree not to seek or accept any damages or other relief as a
result of such claim.
With respect to any private party, you agree that: (a) you will not voluntarily provide any testimony or information
unless required by law or permitted by Freddie Mac; (b) you will permit Freddie Mac to be represented by an attorney
of Freddie Mac’s choosing at any such testimony or with respect to any such information to be provided; and (c) you
will follow the instructions of the attorney designated by Freddie Mac with respect to what testimony or information is
privileged by the attorney-client and/or work product privileges of Freddie Mac. For purposes of this paragraph
“Freddie Mac” shall mean Freddie Mac or its conservator, FHFA.
3. Compliance with Subpoenas or Other Requests. If you receive a court subpoena, deposition notice, request by a
government agency, or similar request to disclose information concerning your employment or termination of
employment with Freddie Mac, or concerning the terms of this Agreement, you agree that you will provide Freddie Mac
with notice of such subpoena, notice, or request not later than forty-eight (48) hours following your receipt by
telephone call and email to Freddie Mac’s General Counsel. In the event that Freddie Mac determines to provide you
with legal representation at Company expense in connection with a subpoena, notice, request or other matter arising
out of your employment with Freddie Mac, and you accept Freddie Mac’s offer to pay for such representation, you
agree that such representation will be provided by counsel chosen by Freddie Mac.
4. Confidential Information. During your employment with Freddie Mac, you may have worked with or otherwise gained
knowledge about information that Freddie Mac deems trade secrets or otherwise confidential and proprietary
information belonging to Freddie Mac or otherwise used in connection with Freddie Mac’s business. This information
may include, but not be limited to: (a) the components, capabilities or attributes of Freddie Mac's business methods or
systems; (b) tax and financial matters, including capital structure and tax and financial planning strategies; (c)
shareholder and investor strategies, tactics or plans; (d) pricing or investment strategies; (e) past, current, and/or future
business strategies, tactics or plans; (f) marketing or sales strategies, tactics or plans; (g) compensation and employee
benefits strategies and practices, and other confidential personnel matters; (h) trading strategies, tactics and plans; (i)
Freddie Mac’s development of and applications for patents, trademarks, and copyrights, to the extent such
information is non-public; and (j) any other information of a proprietary nature. By signing below, you agree that to the
extent you have knowledge about such information, and you gained your knowledge through your employment with
Freddie Mac, you agree to treat the information as strictly confidential. You agree that you will not use any such
information directly or indirectly for any purpose, nor disclose it to anyone outside Freddie Mac.
You also acknowledge that, in light of your employment with Freddie Mac, you have been in possession of confidential
information and documents that may be privileged under the attorney-client and/or work product privileges. You agree
to maintain the confidences and privileges of Freddie Mac and acknowledge that any such confidences and privileges
belong solely to Freddie Mac and can only be waived by Freddie Mac, not you.
5. Confidentiality of Agreement. Subject to the terms of Section F1. below, you and Freddie Mac agree to keep the fact
of this Agreement and the Second Release and all their terms completely confidential except as otherwise permitted
by the terms of this Agreement or applicable law. You may disclose the terms of this Agreement only to your attorney,
accountant, tax advisor, outplacement counselor hired by Freddie Mac, or members of your immediate family,
provided that they agree to keep the terms confidential. Freddie Mac may disclose the terms of this Agreement
internally only on a need-to-know basis and externally to its conservator, and other third parties where required by law,
such as the IRS.
6. Return of Freddie Mac Property. You affirm that you will return all property and documents belonging to Freddie Mac
that are in your possession or within your control by June 30, 2020 unless an authorized representative of Freddie
Mac’s Human Resources Division informs you of an earlier date.
7. Non-Competition. You agree that:
(a) You will not commence other employment while you are still an employee of Freddie Mac; and
(b)
for the twelve (12) months following the earlier of i) your resignation date or ii) June 30, 2020, you will not seek or
accept employment with, or otherwise directly or indirectly provide professional services to, Fannie Mae or any
Federal Home Loan Bank.
8. Non-Solicitation. You agree that, during the Transition Period defined in Section A of this Agreement, and the twelve
(12) months following the end of the Transition Period, you will not (a) provide any job-related assistance to any Freddie
Mac employee who seeks to leave his or her employment with Freddie Mac, or (b) directly or indirectly recruit any
Freddie Mac employee or solicit or assist another in recruiting or soliciting any Freddie Mac employee for employment
purposes or for the provision of professional services. This prohibition against assisting or soliciting Freddie Mac
employees does not apply if Freddie Mac has provided written notice to the employee that it has decided to terminate
his or her employment or if Freddie Mac has consented in writing to such solicitation.
9. Notice of Future Employment. In order to allow Freddie Mac to monitor your compliance with the post-employment
restrictions imposed by this Agreement, you agree to provide written notice to Freddie Mac's General Counsel of the
identity of each new employer with whom you accept employment together with your job title and brief description of
job duties during the twelve (12) months following the end of the Transition Period.
10. Assistance to Freddie Mac. Freddie Mac agrees that it will indemnify you in accordance with the terms of Article 8 of
the By-Laws of Freddie Mac. You agree, in response to reasonable requests, to cooperate fully and assist Freddie
Mac in any matter in which you have been involved during the course of your employment or in which Freddie Mac
needs your cooperation. Such assistance shall include providing information, preparing documents, preparing for and
submitting to interviews and depositions, providing testimony and general cooperation to assist the Company. Freddie
Mac agrees that such assistance shall be provided at times and in a manner so as not to interfere unreasonably with
or jeopardize your subsequent employment. In the event you incur reasonable expenses associated with providing
such assistance, Freddie Mac shall reimburse such reasonable expenses in accordance with Company policy
generally applicable to employees of the Company. In the event that Freddie Mac determines to provide you with legal
representation at Company expense in connection with such assistance, you agree that such representation will be
provided by counsel chosen by Freddie Mac.
11. Non-Disparagement. You agree not to make or publish any disparaging comment about Freddie Mac or any Released
Party.
12. Offset for Employee Debts. You agree that Freddie Mac may deduct any debts you owe to the Company from the
amounts set forth in Section C, such as non-reimbursable expenses.
C. Benefits to be Provided to You in Exchange for Signing this Agreement
In consideration for your agreeing to be bound by the restrictions and obligations imposed upon you by this Agreement,
Freddie Mac will provide you with the following consideration:
1. Continued Employment. Freddie Mac will continue to employ you through June 30, 2020, unless you resign at an
earlier date.
2. Compensation and Benefits. Freddie Mac will comply with all its obligations with respect to your compensation and
benefits in accordance with the relevant plans and agreements, including payment on a timely basis of all deferred
salary that will be owing to you in accordance with such plans and agreements after your resignation.
3. Outplacement and Coaching Services. Freddie Mac will provide you with outplacement and executive coaching
services at no expense to you. These services will be available to you beginning January 1, 2020 through December
31, 2020.
D.
Interpretation and Enforcement of Agreement
1. Virginia Law Applies. This Agreement will be construed, and the rights and obligations of the parties determined,
exclusively in accordance with the substantive law of the Commonwealth of Virginia, excluding provisions of Virginia
law concerning choice-of-law that would result in the law of any state other than Virginia being applied.
2. Venue. Any claims, actions or proceedings arising out of or related to this Agreement will be brought in the United
States District Court for the Eastern District of Virginia, Alexandria Division. You and Freddie Mac hereby submit to the
personal jurisdiction of said Court and consent to the dismissal of any action related to this Agreement that is brought
in any other forum.
3. Severability. You agree that if a court of competent jurisdiction declares that Section B.1 of this Agreement is invalid,
then Freddie Mac shall be relieved of its obligations under this Agreement, including without limitation its obligation to
make any payments thereunder. All other provisions of this Agreement are separate and independent. Therefore, in the
event a court of competent jurisdiction declares any other provision of this Agreement to be illegal or invalid, such
declaration will not invalidate or otherwise affect the enforceability of the remaining provisions of this Agreement. In
addition, if a court of competent jurisdiction declares that any provision is unenforceable because it is overbroad,
including the provisions specifically referenced in this paragraph, then the provision will be limited as required by
applicable law, enforced as so limited, and will not affect the enforceability of the remaining provisions of this
Agreement.
4. No Admission of Liability. You and Freddie Mac agree that this Agreement does not constitute, nor should it be
construed to constitute, an admission by you, Freddie Mac, or any Released Party of any violation of federal, state, or
local law, regulation, or ordinance, nor as an admission of liability under the common law or for any breach of duty any
Released Party owed or owes to you.
5. Return of Consideration in the Event of Breach. To the extent permitted by law, you agree that if you commit a material
violation of any provision of this Agreement, then you will promptly return to Freddie Mac all of the consideration that
you have received under this Agreement, including all cash payments and monetary equivalents of all benefits you
received, and that you will not be eligible to receive any further consideration under such Section C.
6. Additional Damages Available for Breach. You agree that Freddie Mac will maintain all rights and remedies available to
it at law and in equity in the event you breach any provision of this Agreement. These rights and remedies may
include, but not be limited to, the right to bring a court action to recover all consideration paid to you pursuant to this
Agreement and any additional damages Freddie Mac may suffer as a result of such a breach. You also specifically
recognize and agree that Freddie Mac will suffer irreparable injury in the event you breach or threaten to breach
Sections B.4, B.7. or B.8. of this Agreement. Therefore, you agree that in addition to any other remedies Freddie Mac
may be entitled to receive for such breach, Freddie Mac also will be entitled to temporary, preliminary and/or
permanent injunctive relief to restrain any such breach or threat of breach by you, and by any persons acting for and/
or in concert with you. If Freddie Mac seeks injunctive relief pursuant to this paragraph, then you expressly waive any
requirement that Freddie Mac post bond.
7. Attorneys’ Fees. You agree that if Freddie Mac prevails in any action arising out of this Agreement, other than any
action that you may bring under the federal Age Discrimination in Employment Act, you will pay Freddie Mac the
reasonable attorneys’ fees and court costs Freddie Mac incurs in connection with such action.
8. Construction. You have the right and have had the opportunity to seek the independent legal advice of an attorney of
your choosing regarding the meaning and advisability of signing this Agreement. Therefore, the common-law
principles of construing ambiguities against the drafter that otherwise may apply have no application to this
Agreement.
9. Older Worker Benefits Protection Act (“OWBPA”) - Material Changes. If you are age 40 or older at the time this
Agreement is provided to you, you acknowledge that pursuant to the OWBPA, a material change made to this
Agreement restarts the period for you to consider whether to agree to the terms of the Agreement. Nevertheless, you
and Freddie Mac agree that any modification made to this Agreement, regardless of whether such modification is
material, shall not restart the running of that period.
E. Re-Employment by Freddie Mac
You will not be eligible for reemployment with Freddie Mac.
F. Employee Rights
1. Ability to Enforce Agreement and Assist Government Investigations. Nothing in this Agreement (including Sections B.2,
B.4, B.5 or B.11 above) prohibits or otherwise restricts you from: (a) instituting any legal action for the sole purpose of
enforcing this Agreement; (b) making any disclosure of information required by law; (c) assisting any federal regulatory
or law enforcement agency or legislative body to the extent you maintain a legal right to do so notwithstanding this
Agreement; (d) filing or testifying in a proceeding relating to the alleged violation of any federal, state, or local law,
regulation, or rule, to the extent you maintain a legal right to do so notwithstanding this Agreement; or (e) filing,
testifying, participating in or otherwise assisting the Securities and Exchange Commission or any other proper
authority in a proceeding relating to allegations of fraud.
2. Retention of Vested Benefits. Nothing in this Agreement affects your right to receive any vested employee benefits,
including retirement benefits or 401(k) employer contributions, pursuant to the terms and provisions of the benefit
plans and programs governing such employee benefits.
G. No Knowledge of Fraudulent or Unlawful Conduct
You affirm that:
1. You have not filed or caused to be filed on your behalf any claim for relief against Freddie Mac or any of the other
Released Parties, and, to the best of your knowledge and belief, no outstanding claim has been filed or asserted on
your behalf against Freddie Mac or any of the other Released Parties;
2. You have no knowledge of and have not reported any alleged fraudulent or unlawful conduct or activities to any
supervisor, manager, officer, department head, Human Resources representative, or any other agent of Freddie Mac;
and
3. You have no knowledge of and have not reported any fact or circumstance or actual or alleged error, misstatement,
misleading statement, act, omission, neglect or breach of duty that you have reason to believe might result in a current
or future claim under Freddie Mac’s Directors & Officers Liability Insurance policy, except to the extent that you have
followed Freddie Mac’s process and procedure for filing complaints anonymously.
H. Decision & Revocation Periods
1. Consideration Period. As provided by Older Workers Benefit Protection Act of 1990, you must sign this Agreement by
January 9, 2020.
2. Revocation Period. You agree that pursuant to the Older Workers Benefit Protection Act of 1990, this Agreement
will not become effective until seven (7) calendar days after you execute it and deliver it to Freddie Mac.
Therefore, you have seven (7) calendar days after you execute and deliver this Agreement to revoke your
acceptance of its terms. You may revoke your acceptance by providing written notification of your intention to revoke
to Freddie Mac's Senior Vice President - Human Resources Division. To be effective, Freddie Mac's Senior Vice
President - Human Resources must actually receive the written notification by no later than the close of business on
the seventh calendar day after you have executed and delivered the Agreement to Freddie Mac.
* * *
By signing below, you acknowledge, warrant, and agree that:
1.
You have been advised to discuss all aspects of this Agreement with your private attorney and/or other
individuals of your choice who are not associated with Freddie Mac to the extent that you desire (but subject to the
confidentiality obligations set forth in this Agreement);
2.
You have read this Agreement carefully and fully understand the significance of all of its provisions;
You sign this Agreement voluntarily and accept all obligations contained in it in exchange for the consideration
3.
you will receive pursuant to this Agreement, which you acknowledge is adequate and satisfactory, and which you
further acknowledge Freddie Mac is not otherwise obligated to provide to you;
Neither Freddie Mac, nor its agents, representatives, directors, officers or employees have made any
4.
representations to you concerning the terms or effects of this Agreement, other than those explicitly contained in this
Agreement; and
This Agreement shall not become effective until after the seven (7) day revocation period referred to in
5.
Paragraph H.2. above has elapsed.
I have executed this Agreement this __31__ day of _December, 2019.
_/s/ James Mackey_____________________
James Mackey
Address:
__* Redacted *________________________
__* Redacted *________________________
_____________________________________
FOR FREDDIE MAC:
Signature & Title: _/s/ Jacqueline M. Welch, CHRO and CDHO_
Date: _01/08/2020___________
Employee ID: *Redacted*
Employee Name: James Mackey
Exhibit A
CONFIDENTIAL SECOND SEPARATION AGREEMENT AND GENERAL RELEASE
Freddie Mac is offering you valuable consideration in exchange for your agreement to be bound by the terms of this
Second Separation Agreement and General Release (“Second Release”). Please be advised that, subject to applicable
law, by signing this Second Release, you will be releasing Freddie Mac of all legal claims you have, regardless of
whether you currently are aware of them. Therefore, Freddie Mac advises you to consult with an attorney before you
sign this document.
A.
Obligations and Restrictions Imposed upon You by this Second Agreement
By signing below, you agree to be bound legally to the following terms:
Full Release. You, for yourself, your heirs, executors, administrators and assigns, hereby release and forever discharge
1.
Freddie Mac and its successors, assigns, divisions, affiliates, parents, subsidiaries, directors, officers, shareholders, partners,
heirs, and executors (collectively, the “Released Parties”) from any and all actions, causes of action, claims, demands,
damages, costs, loss of service, expenses, compensation and any damages of any kind whatsoever (including claims for
attorneys’ fees and costs) which you have and may have arising up to and including the date of your execution of this release,
whether presently known or unknown, including, but not limited to, those arising from or related to any federal or state statute
or local ordinance, tort, contract or common law claim, or any other claims, whether or not asserted, relating to any facts or
issues pertaining to any aspect of your employment relationship with Freddie Mac, any compensation plan, program or
arrangement, the decision to terminate your employment, the termination of such employment relationship and the negotiation
of and entering into this Agreement. This Release does not apply to Freddie Mac’s obligations under this Second Release or the
Confidential Separation Agreement and General Release or any claims that Freddie Mac may not lawfully request that you
release.
B.
Benefits to be Provided to You in Exchange for Signing this Second Agreement
By signing below and thereby evidencing your acceptance of the restrictions and obligations imposed upon you by this Second
Release, you acknowledge that (1) Freddie Mac has agreed to provide to you the payments and other consideration pursuant to
the terms of the Confidential Separation Agreement and General Release (the "First Agreement") executed by you previously in
2019, (2) this Second Release provides no additional payments or consideration beyond any payments and consideration you
are entitled to receive under the terms of that First Agreement, and (3) such payments and such consideration constitute
adequate consideration for your execution of and adherence to the terms of this Second Release.
C.
Incorporation by Reference of Terms and Conditions Set Forth in the First Agreement
You and Freddie Mac acknowledge and agree that all of the terms and conditions set forth in the First Agreement are
incorporated herein by reference as terms and conditions of this Second Release, as modified to the extent necessary to make
the provisions of such First Agreement fully applicable to this Second Release.
D.
Decision & Revocation Periods
1.
Consideration Period. By signing below, you acknowledge that pursuant to the Older Workers Benefit Protection
Act of 1990, you have had 21 calendar days from the date you first received a copy of this Agreement to decide whether
to accept its terms. In order to receive the benefits described in the First Agreement, you must execute and deliver this
Second Agreement to Freddie Mac at the close of business on June 30, 2020 (or, if you shall resign before that date, then on
the date of your resignation).
Revocation Period. You agree that pursuant to the Older Workers Benefit Protection Act of 1990, this Second
2.
Agreement will not become effective until seven (7) calendar days after you sign it. Therefore, you have seven (7)
calendar days after you sign this Second Agreement to revoke your acceptance of its terms. You may revoke your
acceptance by providing written notification of your intention to revoke to Freddie Mac's Senior Vice President - Human
Resources. To be effective, Freddie Mac's Senior Vice President - Human Resources must actually receive the written
notification by no later than the close of business on the seventh calendar day after you have signed the Second Agreement.
* * * * *
By signing below, you acknowledge, warrant, and agree that:
1.
You have been advised to discuss all aspects of this Second Release with your private attorney and/or other
individuals of your choice who are not associated with Freddie Mac to the extent that you desire (but subject to the
confidentiality obligations set forth in the First Agreement);
2.
You have read this Second Release carefully and fully understand the significance of all of its provisions;
You sign this Second Release voluntarily and accept all obligations contained in it in exchange for the
3.
consideration you will receive pursuant to the First Agreement, which you acknowledge is adequate and satisfactory,
and which you further acknowledge Freddie Mac is not otherwise obligated to provide to you;
Neither Freddie Mac, nor its agents, representatives, directors, officers or employees have made any
4.
representations to you concerning the terms or effects of this Second Release, other than those explicitly contained
in this Agreement; and
This Second Release shall not become effective until after the seven (7) day revocation period referenced in
5.
Paragraph D.2 above has elapsed.
I have executed this Second Release this ______ day of ______________, 2020.
____________________________________
James Mackey
FREDDIE MAC:
Signature & Title: _________________________________
Date: ______________________
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 David M.
Brickman, James G. Mackey, Ricardo A. Anzaldua, and Alicia S. Myara, 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, 2019 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 3, 2019.
/s/ Mark H. Bloom
Mark H. Bloom
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 David M.
Brickman, James G. Mackey, Ricardo A. Anzaldua, and Alicia S. Myara, 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, 2019 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 12, 2019.
/s/ Kathleen L. Casey
Kathleen L. Casey
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 David M.
Brickman, James G. Mackey, Ricardo A. Anzaldua, and Alicia S. Myara, 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, 2019 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 4, 2019.
/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 David M.
Brickman, James G. Mackey, Ricardo A. Anzaldua, and Alicia S. Myara, 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, 2019 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 3, 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 David M.
Brickman, James G. Mackey, Ricardo A. Anzaldua, and Alicia S. Myara, 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, 2019 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 4, 2019.
/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 David M.
Brickman, James G. Mackey, Ricardo A. Anzaldua, and Alicia S. Myara, 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, 2019 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 4, 2019.
/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 David M.
Brickman, James G. Mackey, Ricardo A. Anzaldua, and Alicia S. Myara, 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, 2019 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 3, 2019.
/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 David M.
Brickman, James G. Mackey, Ricardo A. Anzaldua, and Alicia S. Myara, 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, 2019 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 3, 2019.
/s/ Saiyid T. Naqvi
Saiyid T. Naqvi
PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a)
CERTIFICATION
I, David M. Brickman, certify that:
Exhibit 31.1
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2019 of the Federal Home Loan Mortgage Corporation;
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. 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 13, 2020
/s/ David M. Brickman
David M. Brickman
Chief Executive Officer
PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a)
CERTIFICATION
I, Donald F. Kish, certify that:
Exhibit 31.2
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2019 of the Federal Home Loan Mortgage Corporation;
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 13, 2020
/s/ Donald F. Kish
Donald F. Kish
Senior Vice President — Corporate Controller, Principal
Accounting Officer, & Interim 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, 2019 of the Federal Home Loan
Mortgage Corporation (the "Company"), as filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, David M. Brickman, 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 13, 2020
/s/ David M. Brickman
David M. Brickman
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, 2019 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 F. Kish, Senior Vice President - Corporate Controller, Principal Accounting Officer, and Interim 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 13, 2020
/s/ Donald F. Kish
Donald F. Kish
Senior Vice President — Corporate Controller, Principal
Accounting Officer, & Interim Chief Financial Officer
Exhibit 99.1
THIRD AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
COMMON SECURITIZATION SOLUTIONS, LLC
Dated as of January 9, 2020
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS...........................................................................................................................2
ARTICLE II OFFICES AND PURPOSES...................................................................................................13
ARTICLE III MEMBERS AND FINANCIAL MATTERS ........................................................................14
ARTICLE IV ALLOCATIONS ...................................................................................................................15
ARTICLE V DISTRIBUTIONS ..................................................................................................................20
ARTICLE VI MANAGEMENT ..................................................................................................................21
ARTICLE VII ACTIONS BY MEMBERS .................................................................................................31
ARTICLE VIII OPERATIONS OF THE COMPANY ................................................................................31
ARTICLE IX EMPLOYEES .......................................................................................................................32
ARTICLE X COVENANTS OF THE PARTIES ........................................................................................34
ARTICLE XI CONFIDENTIALITY ..........................................................................................................35
ARTICLE XII INTELLECTUAL PROPERTY ..........................................................................................37
ARTICLE XIII TRANSFER OF LLC UNITS ............................................................................................40
ARTICLE XIV INDEMNIFICATION ........................................................................................................40
ARTICLE XV DISPUTE RESOLUTION ..................................................................................................44
ARTICLE XVI NOTICES ...........................................................................................................................45
ARTICLE XVII MISCELLANEOUS .........................................................................................................47
i
LIST OF SCHEDULES
Schedule 3.2
Enterprise LLC Units and Percentage Interests
ii
Exhibit A
Company Charter
LIST OF EXHIBITS
Exhibit B
Bylaws of Corporate Functions and Administrative Services Oversight Committee
Exhibit C
Charter of the Platform Steering Committee
Exhibit D
Assigned Employee Terms and Conditions
iii
THIRD AMENDED AND RESTATED LIMITED LIABILITY COMPANY
AGREEMENT OF COMMON SECURITIZATION SOLUTIONS, LLC
This THIRD AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
(this “Agreement”) is made and entered into as of January 9, 2020, by and among the Federal National
Mortgage Association, a government-sponsored enterprise chartered by Congress having its principal place
of business at 1100 15th Street, NW, Washington, DC 20005 (“Fannie Mae”), the Federal Home Loan
Mortgage Corporation, a government-sponsored enterprise chartered by Congress having its principal place
of business at 8200 Jones Branch Drive, McLean, Virginia 22102 (“Freddie Mac”), and Common
Securitization Solutions, LLC, a Delaware limited liability company having its principal place of business
at 7501 Wisconsin Avenue, Suite 300, Bethesda, Maryland 20814 (the “Company” or “CSS”). (Fannie Mae
and Freddie Mac each may be referred to herein individually as an “Enterprise” or a “GSE” and, collectively,
as the “Enterprises or the “GSEs.”)
WITNESSETH:
WHEREAS, each of the Enterprises is currently engaged in various aspects of the mortgage
securitization business, including purchasing certain residential mortgage loans, transferring loans to
securitized loan pools, acting as a trustee of securitized pools of loans, and engaging in practices intended
to manage and mitigate risks associated with owning and/or guaranteeing mortgage loans, such as working
out and foreclosing on defaulted loans, negotiating modifications to existing loans, and owning and managing
real-estate-owned assets resulting from realizing on defaulted loans;
WHEREAS, the Federal Housing Finance Agency (“FHFA”) has been appointed as the conservator
of the Enterprises pursuant to Section 1367(a) of the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992, as amended (the “Safety and Soundness Act”);
WHEREAS, in its capacity as conservator, FHFA succeeds to all rights, titles, powers, and privileges
of each Enterprise and of its stockholders, officers, or directors with respect to the Enterprise and its assets;
WHEREAS, by directive dated March 12, 2013 (the “Initial Directive”), FHFA, in its capacity as
conservator, directed Fannie Mae and Freddie Mac to begin meeting jointly under FHFA’s oversight to address
issues relating to the establishment of a new securitization platform as described in the February 2012 Strategic
Plan for Enterprise Conservatorships (together with any successor strategic plans, the “Strategic Plan”);
WHEREAS, by directive dated April 12, 2013 (the “Second Directive”), FHFA, in its capacity as
conservator, directed Fannie Mae and Freddie Mac to begin the process and the work necessary to consummate
a joint venture agreement between the Enterprises, under FHFA’s oversight;
WHEREAS, in furtherance of the Initial Directive, the Second Directive and the Strategic Plan, the
Enterprises filed a Certificate of Formation on October 7, 2013 with the Delaware Secretary of State (the
“Certificate”) to form the Company to design, build, develop, test, operate, support, maintain, update and
enhance the Platform and to provide certain services related thereto;
WHEREAS, the Enterprises have previously entered into a Limited Liability Company Agreement
with an effective date of October 7, 2013 (the “Original LLC Agreement”), setting forth certain rights,
obligations and understandings with respect to the Company;
WHEREAS, by directive dated October 10, 2013 (the “Third Directive” and together with the Initial
Directive and Second Directive, the “Directives”), FHFA directed the Enterprises to complete the formation
of the Company as a limited liability company by executing the necessary documents containing the terms
of their agreements;
WHEREAS, in furtherance of the Directives and the Strategic Plan, the Enterprises amended and
restated the Original LLC Agreement pursuant to that certain Amended and Restated Limited Liability
Company Agreement with an effective date of November 3, 2014 (as amended, the “A&R LLC Agreement”);
WHEREAS, as of the date hereof, FHFA exercises authority over the Company in FHFA’s capacity
as regulator and supervisor of the Company, and as conservator of the Enterprises; and
WHEREAS, the Enterprises now desire to amend and restate the A&R LLC Agreement in its entirety
as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises herein contained and other valuable
consideration, the parties, intending to be legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. For purposes of this Agreement, the following capitalized terms have the
meanings ascribed to them in this Section 1.1:
“A&R LLC Agreement” has the meaning set forth in the recitals to this Agreement.
“Act” means the Delaware Limited Liability Company Act, codified in Title 6 of the Delaware Code,
Section 18 101 et seq., as amended from time to time.
“Additional Members” has the meaning set forth in Section 3.1(a) of this Agreement.
“Administrative Services Agreement” means each of the administrative services agreements executed
concurrently with the A&R LLC Agreement by and between the respective Enterprise and the Company
pursuant to which the respective Enterprise provides specified services to the Company.
“Adjusted Capital Account Deficit” means, with respect to any Member, the deficit balance, if any,
in such Member’s Capital Account as of the end of the relevant fiscal year, after giving effect to the following
adjustments:
(a)
Credit to such Capital Account any amounts which such Member is obligated to restore
or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5); and
2
(b)
Debit to such Capital Account the items described in Regulations Sections 1.704-1(b)
(2)(ii)(d)(4), (5) and (6).
The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of
Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
“Advancement of Expenses” has the meaning set forth in Section 6.18(a)(iii) of this Agreement.
“Affiliate” means, when used with respect to a Person, any other Person directly or indirectly
Controlling, Controlled by, or under direct or indirect common Control with such Person; provided, however,
that for purposes of this definition FHFA shall not be deemed to be an Affiliate of the Enterprises, and neither
Enterprise shall be deemed to be an Affiliate of the other Enterprise.
“Agreement” has the meaning set forth in the preamble to this Agreement.
“Ancillary Agreements” means the Contribution Agreement and the Administrative Services
Agreements.
“Annual Plan and Budget” has the meaning set forth in Section 8.1(a).
“Annual Report” has the meaning set forth in Section 4.7(c) of this Agreement.
“Assert” means to bring an action of any nature before any legal, judicial, arbitration, administrative,
executive, or other type of body or tribunal that has authority to adjudicate that action in whole or in part.
“Assigned Employee” has the meaning set forth in Section 9.1(a) of this Agreement.
“Assigned Employees IP” has the meaning set forth in Section 9.1(f) of this Agreement.
“Bankruptcy Code” means the United States Bankruptcy Code, codified in Title 11 of the United
States Code, as amended.
“Board” has the meaning set forth in Section 6.1(a) of this Agreement.
“Board Chair” has the meaning set forth in Section 6.1(a)(ii).
“Business” means the design, development, build, testing, operation, support, maintenance, updating
and enhancement of the Platform subject to the provisions of the Charter and the provisions of this Agreement,
and such other activities as may be approved from time to time in accordance with the terms and conditions
of this Agreement.
“Business Day” means any day that is not a Saturday, Sunday, U.S. federal government holiday, or
a day on which national banks with their principal place of business in the District of Columbia are authorized
or obligated by law or executive order to be closed.
3
“Business Plan” has the meaning set forth in Section 8.1(a) of this Agreement.
“Capital Account” means, with respect to any Member, the Capital Account maintained for such
Member in accordance with the following provisions:
(a)
To each Member’s Capital Account there shall be credited the initial Gross Asset Value
of such Member’s Capital Contributions, such Member’s distributive share of Profits and any items in the
nature of income or gain which are specially allocated pursuant to Section 4.3 hereof, and the amount of any
Company liabilities assumed by such Member or which are secured by any Company Property distributed
to such Member.
(b)
To each Member’s Capital Account there shall be debited the amount of cash and the
Gross Asset Value (at the time of distribution) of any Company Property distributed to such Member pursuant
to any provision of this Agreement, such Member’s distributive share of Losses and any items in the nature
of expenses or losses that are specially allocated pursuant to Section 4.3 hereof, and the amount of any
liabilities of such Member assumed by the Company or which are secured by any property contributed by
such Member to the Company.
(c)
In the event any LLC Unit is transferred in accordance with the terms of this Agreement,
the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred
LLC Unit.
In determining the amount of any liability for purposes of this definition, there shall
be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations.
(d)
The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital
Accounts are intended to comply with Regulations Section 1.704 1(b), and shall be interpreted and applied
in a manner consistent with such Regulations.
“Capital Contribution” means, with respect to any Member, the amount of money and the initial Gross
Asset Value of any property contributed to the Company with respect to the interest in the Company held by
such Member. The principal amount of a promissory note which is not readily traded on an established
securities market and which is contributed to the Company by the maker of the note shall not be included in
the Capital Account of any Person until the Company makes a taxable disposition of the note or until (and
to the extent) principal payments are made on the note, all in accordance with Regulations Section 1.704-1(b)
(2)(iv)(d)(2).
“Certificate” has the meaning set forth in the recitals to this Agreement.
“CEO” has the meaning set forth in Section 6.16(a).
“Charter” means the First Amended and Restated Charter of Common Securitization Solutions, LLC,
attached as Exhibit A hereto.
“Claim” has the meaning set forth in Section 14.4 of this Agreement.
“CNTS” has the meaning set forth in Section 12.6(a) of this Agreement.
4
“Code” means the Internal Revenue Code of 1986, as amended from time to time (or any corresponding
provisions of succeeding law).
“Company” has the meaning set forth in the preamble to this Agreement.
“Company Indemnified Parties” means the Company and its officers, directors, employees and agents.
“Company Minimum Gain” means “partnership minimum gain” as described in Regulations Sections
1.704-2(b)(2) and (d).
“Company Property” means all real and personal property acquired by the Company and any
improvements thereto, and includes both tangible and intangible property.
“Confidential Information” means all data or information of a Member or the Company (such party,
the “Disclosing Party”) of a confidential or proprietary nature and disclosed to another Member or the
Company, as the case may be (such party, the “Recipient Party”), in connection with this Agreement, any
Ancillary Agreement or the Customer Services Agreement, either in writing, orally or any other medium,
whether or not identified as being confidential at the time of disclosure by such Disclosing Party to the
Recipient Party, whether of a technical, technological, financial, commercial, operational, economic nature
or otherwise, or regarding such Disclosing Party’s executives or employees, business or prospects, and
including but not limited to originals and copies of and memoranda, notes, reports, analyses, compilations,
studies or other documents or records to the extent they contain, or otherwise reflect or are generated from
such information, whether or not prepared by or on behalf of a Party. Confidential Information also includes
any information described above which a Disclosing Party obtains from a third party and treats as proprietary
or confidential, whether or not owned or developed by such Disclosing Party, and the terms and conditions
of this Agreement. “Confidential Information” shall not include information which the Recipient Party can
prove that: (i) prior to the disclosure was already in such Recipient Party’s possession without a breach of
any confidentiality or non-disclosure obligation owing to another Person; (ii) prior to or subsequent to the
disclosure was obtained by such Recipient Party from a third party who is not in violation of any obligation
of confidentiality or non-disclosure in making such disclosure; (iii) prior to the disclosure was in the public
domain; (iv) subsequent to the disclosure was in the public domain other than by or through a breach of this
Agreement by such Recipient Party or its directors, officers, employees, agents, representatives, or others
receiving such information by virtue of this Agreement; or (v) was independently developed by such Recipient
Party without reference to a Disclosing Party’s Confidential Information.
“Conservator” means FHFA in its role as conservator of one or both of the Enterprises or as supervisor
of any corresponding LLRE, which role shall continue for purposes of this definition until LLRE Termination.
“Conservatorship” means the period of time during which FHFA is the Conservator or Receiver of
both of the Enterprises.
“Contribution Agreement” means the agreement executed concurrently with the A&R LLC
Agreement between the Enterprises and the Company pursuant to which the Enterprises made contributions
and assignments to the Company.
5
“Control” (and its correlative terms) means the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person, whether through the ownership of
voting securities, by contract or otherwise.
“Covered Person” means with respect to a Party: (i) its Affiliates; (ii) customers of such Party or
its Affiliates (but only in connection with their otherwise authorized receipt of goods or services from or
provision of goods or services to a Party or its Affiliates); (iii) third party contractors retained by such
Party or its Affiliates (but only with respect to their performance of services for or on behalf of such Party
or its Affiliates in connection with the designing, building, developing, testing, operating, supporting,
maintaining, updating, and enhancing of the Platform); and (iv) each of the employees, officers and
directors of each of such Party and the foregoing Persons (but only to the extent they are acting in their
capacity as employees, officers or directors (as applicable) of such Party or the foregoing Persons).
“Customer Services Agreement” means that certain Customer Services Agreement among Fannie
Mae, Freddie Mac and the Company, dated November 21, 2016.
“Damages” has the meaning set forth in Section 14.1(a) of this Agreement.
“Deadlock” has the meaning set forth in Section 6.2(d).
“Deadlock Notice” has the meaning set forth in Section 6.2(d).
“Defense Election” has the meaning set forth in Section 14.4(a) of this Agreement.
“Depreciation” means, for each fiscal year or other period, an amount equal to the depreciation,
amortization or other cost recovery deduction allowable with respect to an asset for such year or other period,
except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes
at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to
such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery
deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that
if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero,
Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable
method selected by the Board.
“Directives” has the meaning set forth in the recitals to this Agreement.
“Disclosing Party” has the meaning set forth in the definition of “Confidential Information” in this
Section 1.1.
“Dispute” has the meaning set forth in Section 15.1 of this Agreement.
“Downstream Systems” means the Software, hardware, systems and processes (including updates to
and replacements of any such items) of each of the Enterprises that interface or interoperate directly or through
one or more intermediary systems with the Platform and that receive data or services from the Platform.
6
“Enterprise” and “Enterprises” have the meanings set forth in the preamble to this Agreement.
“Exploit” means, with respect to any Intellectual Property Rights or Materials, to access, display,
execute, reproduce, perform, maintain, support, modify, improve, create derivative works, license, sub-
license, distribute, enhance and otherwise use such item or intangible.
“Fannie Mae” has the meaning set forth in the preamble to this Agreement.
“Fannie Mae Indemnified Parties” means Fannie Mae and its officers, directors, employees and agents.
“Fannie Mae Managers” has the meaning set forth in Section 6.1(a)(i) of this Agreement.
“FHFA” has the meaning set forth in the recitals to this Agreement.
“Financial Governance Forum” has the meaning set forth in Section 6.11 of this Agreement.
“Freddie Mac” has the meaning set forth in the preamble to this Agreement.
“Freddie Mac Indemnified Parties” means Freddie Mac and its officers, directors, employees and
agents.
“Freddie Mac Managers” has the meaning set forth in Section 6.1(a)(i) of this Agreement.
“Governmental Approvals” means all licenses, consents, permits, decrees, orders, authorizations or
other approvals from, all filings and registrations with, and all notices and reports to, any Governmental
Authority, including pursuant to or in connection with any contract or agreement between any Member and
any Governmental Authority.
“Governmental Authority” means any national, federal, state, regional or local administrative, judicial,
legislative, executive, regulatory, police or taxing government or governmental or quasi-governmental
authority of any nature, including any agency, branch, bureau, department, official or entity or any court or
other tribunal.
“Gross Asset Value” means, with respect to any asset, the asset’s adjusted basis for federal income
tax purposes, except as follows:
(a)
The initial Gross Asset Value of any asset contributed by a Member to the Company
shall be the gross fair market value of such asset, as determined pursuant to the Significant Matter approval
process provided for in Section 6.4 (except in the case of money in which case the initial Gross Asset Value
shall be the amount of such money), provided that the fair market value of assets contributed under the
Contribution Agreement shall be as set forth in the Contribution Agreement;
(b)
The Gross Asset Values of all Company assets shall be adjusted to equal their respective
gross fair market values, as determined by the Board, as of the following times:
7
(i) the acquisition of an additional interest in the Company by any new or existing Member in exchange for
more than a de minimis Capital Contribution; (ii) the distribution by the Company to a Member of more than
a de minimis amount of Company Property as consideration for an interest in the Company; and (iii) the
liquidation of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided,
however, that the adjustments pursuant to sub-clauses (i) and (ii) above shall be made only if the Board
reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic
interests of the Members in the Company;
(c)
The Gross Asset Value of any Company asset distributed to any Member shall be the
gross fair market value of such asset on the date of distribution; and
(d)
The Gross Asset Values of Company assets shall be increased (or decreased) to reflect
any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or 743(b), but only to
the extent that such adjustments are taken into account in determining Capital Accounts pursuant to
Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted
pursuant to this clause (d) to the extent the Board determines that an adjustment pursuant to clause (b) of this
definition is necessary or appropriate in connection with a transaction that would otherwise result in an
adjustment pursuant to this clause (d).
If the Gross Asset Value of an asset has been determined or adjusted pursuant to clause (a), (b) or (d)
of this definition, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account
with respect to such asset for purposes of computing Profits and Losses.
“Indemnified Party” means any Company Indemnified Party, Fannie Mae Indemnified Party or
Freddie Mac Indemnified Party, as applicable.
“Indemnifying Party” has the meaning set forth in Section 14.4(a) of this Agreement.
“Indemnitee” has the meaning set forth in Section 6.18(a)(i) of this Agreement.
“Initial Directive” has the meaning set forth in the recitals to this Agreement.
“Intellectual Property Rights” means any and all intellectual property rights existing from time to
time under any law, statute, rule or regulation of any jurisdiction, including patent law, copyright law, trade
secret law, trademark law (together with all of the goodwill associated therewith) and any and all other
proprietary rights, and any and all applications, renewals, extensions and registrations of any of the foregoing,
now or hereafter in force and effect worldwide. For purposes of this definition, rights under patent law shall
include rights under any and all patent applications and patents (including letters patent and inventor’s
certificates) anywhere in the world, and including without limitation any and all past, present and future
substitutions, extensions, supplementary protection certificates, reissues, renewals, divisions, continuations,
continuations
in part, continued prosecution applications, requests for continued examination,
reexaminations, inter partes review proceedings, and post grant review proceedings thereof and other similar
filings or stages thereof, and all patents and certificates issuing on the foregoing, provided for under the laws
of the United States, or of any other country. For purposes of this definition, rights under copyright law shall
include moral rights, where applicable.
8
“LLC Unit” means a limited liability company unit representing membership interests in the Company.
“LLRE” means a limited-life regulated entity established by FHFA pursuant to the Safety and
Soundness Act with respect to an Enterprise.
“LLRE Termination” means the termination of the status as a limited-life regulated entity of any
LLRE, as applicable.
“LLRE Transfer” has the meaning set forth in Section 3.1(b) of this Agreement.
“Manager” has the meaning set forth in Section 6.1(a) of this Agreement.
“Material Decision” means, for purposes of Section 6.2(b)(ii) of this Agreement, a decision of the
Board that has a material effect on the Company, including:
(a) A material change in the functionality of the Company, such as the addition of a new business
line, including multifamily securities or private label securities, or a reduction in the Company’s
support of the uniform mortgage-backed security;
(b) Capital Contributions beyond those necessary to support the ordinary business operations of
the Company;
(c) Appointment or removal of the CEO;
(d) Admission of Additional Members;
(e) Sale or dissolution of the Company or its business.
“Materials” means Software, Technology, reports and drawings, as well as user manuals, charts,
graphs and other written documentation, and all other works of authorship.
“Member Minimum Gain” means an amount, with respect to each Member Nonrecourse Debt, equal
to the Company Minimum Gain that would result if such Member Nonrecourse Debt were treated as a
Nonrecourse Liability, determined in accordance with Regulations Section 1.704 2(i).
“Member Nonrecourse Debt” means “partner nonrecourse debt” as described in Regulations Section
1.704-2(b)(4).
“Member Nonrecourse Deductions” means “partner nonrecourse deductions” as described in
Regulations Section 1.704 2(i). The amount of Member Nonrecourse Deductions with respect to a Member
Nonrecourse Debt for a fiscal year equals the excess, if any, of the net increase, if any, in the amount of
Member Minimum Gain attributable to such Member Nonrecourse Debt during that fiscal year over the
aggregate amount of any distributions during that fiscal year to the Member that bears the economic risk of
loss for such Member Nonrecourse Debt to the extent such distributions are from the proceeds of such Member
Nonrecourse Debt and are allocable to an increase in Member Minimum Gain attributable to such Member
Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(2).
“Members” has the meaning set forth in Section 3.1(a) of this Agreement.
“Multi-Year Plan” has the meaning set forth in Section 8.1(a) of this Agreement.
9
“Nonpublic Member Data” means Personally Identifiable Information and nonpublic data about any
Member or the loans, pools of loans or other financial assets owned or guaranteed by that Member, which
Personally Identifiable Information and other data is contributed or provided by the Member, that Member’s
servicers or an agent or consultant on behalf of the Member or its servicers.
“Nonrecourse Deductions” has the meaning set forth in Regulations Sections 1.704-2(b)(1) and (c).
The amount of Nonrecourse Deductions for a fiscal year equals the excess, if any, of the net increase, if any,
in the amount of Company Minimum Gain during that fiscal year over the aggregate amount of any
distributions during that fiscal year of proceeds of a Nonrecourse Liability that are allocable to an increase
in Company Minimum Gain, determined according to the provisions of Regulations Section 1.704 2(c).
“Nonrecourse Liability” has the meaning set forth in Regulations Section 1.752-1(a)(2).
“Notice of Indemnification” has the meaning set forth in Section 14.4(a) of this Agreement.
“Officer” or “Officers” has the meaning set forth in Section 6.16(b) of this Agreement.
“Original LLC Agreement” has the meaning set forth in the recitals to this Agreement.
“Other Permitted Persons” has the meaning set forth in Section 11.1(d) of this Agreement.
“Party” means each Member and the Company, individually, and “Parties” means the Members and
the Company, collectively.
“Patent Rights” means all rights under patent law, as described in the definition of Intellectual Property
Rights.
“Percentage Interest” means, with respect to any Member of the Company as of any date, the ratio
(expressed as a percentage) of the aggregate number of LLC Units held by such Member on such date to the
aggregate number of LLC Units outstanding on such date. The combined Percentage Interests of all Members
shall at all times equal one hundred percent (100%).
“Permitted Internal Purposes” means (i) in the case of the Enterprises, the right to use Confidential
Information of the other Enterprise and the Company, other than Nonpublic Member Data and subject to the
limitation set forth in Section 11.1(f), (A) for purposes of designing, developing, building, testing, operating,
supporting, maintaining, updating and enhancing the Platform and their respective Upstream Systems and
Downstream Systems, (B) in connection with the performance of this Agreement or any Ancillary Agreement,
or (C) to exercise and enforce their respective rights under this Agreement or any Ancillary Agreement, and
(ii) in the case of the Company, the right to use Confidential Information of any Enterprise (A) for purposes
of designing, developing, building, testing, operating, supporting, maintaining, updating and enhancing the
Platform, or (B) to exercise and enforce its rights under this Agreement, subject in the case of each of (i) and
(ii) to the requirements of Article XI of this Agreement.
“Permitted Recipient Parties” means directors, officers, employees, third party service providers,
attorneys and other professional advisors of a Recipient Party whose duties or services to a Party reasonably
10
require them to have access to Confidential Information and who are in each case bound by confidentiality
obligations that are at least as protective of such Confidential Information as the terms of Article XI.
“Person” means any individual, corporation, limited liability company, partnership, joint venture,
association, joint-stock company, trust, estate, unincorporated organization or Governmental Authority or
any other entity whatsoever.
“Personally Identifiable Information” means information that can be used to distinguish or trace an
individual’s identity, such as name, home address, telephone number, social security number, or biometric
records, alone, or when combined with other personal or identifying information that is linked or linkable to
a specific individual, such as date of birth or mother’s maiden name.
“Platform” means the systems, software, processes and infrastructure, referred to in the Charter and
to be developed by the Company in furtherance of the Business.
“Pre-Deadlock Notice” has the meaning set forth in Section 6.2(d).
“Proceeding” has the meaning set forth in Section 6.18(a)(i) of this Agreement.
“Profits” and “Losses” means, for each fiscal year or other period, an amount equal to the Company’s
taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this
purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section
703(a)(1) shall be included in taxable income or loss), with the following adjustments:
(a) Any income of the Company that is exempt from federal income tax and not otherwise
taken into account in computing Profits or Losses pursuant to this definition shall be added to such taxable
income or loss;
(b)
Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated
as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not
otherwise taken into account in computing Profits or Losses pursuant to this definition, shall be subtracted
from such taxable income or loss;
(c)
In the event the Gross Asset Value of any Company asset is adjusted pursuant to clause
(b) or (c) of the definition of Gross Asset Value, the amount of such adjustment shall be taken into account
as gain or loss from the disposition of such asset for purposes of computing Profits or Losses;
(d)
Gain or loss resulting from any disposition of Company Property with respect to which
gain or loss is recognized for federal income purposes shall be computed by reference to the Gross Asset
Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from
its Gross Asset Value;
(e)
In lieu of the depreciation, amortization and other cost recovery deductions taken into
account in computing such taxable income or loss, there shall be taken into account Depreciation for such
11
fiscal year or other period, computed in accordance with the definition of Depreciation; and
Notwithstanding any other provisions of this definition, any items which are specially allocated
pursuant to Section 4.3 hereof shall not be taken into account in computing Profits or Losses.
“Receiver” means FHFA in its role as receiver of one or both of the Enterprises or their assets in the
event either of the Enterprises is placed into receivership, which role may continue for purposes of this
definition past LLRE Termination.
“Recipient Party” has the meaning set forth in the definition of “Confidential Information” in this
Section 1.1.
“Regulations” means the Income Tax Regulations, including Temporary Regulations, promulgated
under the Code, as such regulations may be amended from time to time (including corresponding provisions
of succeeding regulations).
“Regulatory Allocations” has the meaning set forth in Section 4.3(h) of this Agreement.
“Residual Knowledge” means generalized skills, knowledge and experience, including ideas,
concepts, know-how and techniques developed or learned as a result of or in connection with a Recipient
Party’s exposure to Confidential Information and retained in the unaided memories of the individual(s)
exposed to the Confidential Information in question.
“Safety and Soundness Act” has the meaning set forth in the recitals of this Agreement.
“Second Directive” has the meaning set forth in the recitals to this Agreement.
“Senior Stock Purchase Agreement” has the meaning set forth in Section 5.3 of this Agreement.
“Significant Matter” has the meaning set forth in Section 6.4 of this Agreement.
“Software” or “software” means any computer programming code consisting of instructions or
statements in a form readable by individuals (source code) or machines (object code), and related
documentation and supporting materials therefor, in any form or medium, including electronic media. For
clarification, Software includes all applications software (i.e. software providing business functionality),
systems software (i.e. software designed to operate the computer hardware and provide a platform for running
applications software, including operating systems, utilities, and middleware), and software development
tools.
“Source Code” or “source code” means the human readable version of Software, and from which the
object code is compiled or otherwise derived, including all comments and procedural code, and all related
development documents (e.g., flow charts, schematics, statements of principles of operations, end-user
manuals, architecture standards, and any other specifications that are used to create or that comprise the
program code of the Software).
12
“Strategic Plan” has the meaning set forth in the recitals of this Agreement.
“Tax Distribution” has the meaning set forth in Section 5.2(a) of this Agreement.
“Tax Matters Member” has the meaning set forth in Section 4.10 of this Agreement.
“Tax Percentage” has the meaning set forth in Section 5.2(a) of this Agreement.
“Technology” means any and all (i) technology, (ii) technical and engineering materials, (iii)
specifications, designs, architectures, and schematics, (iv) Software, documentation, development platforms
and development tools, and test environments and testing tools, (v) mask works, layouts, topographies and
other design features with respect to integrated circuits, (vi) test scripts, test logs, models, devices, tools,
simulators, and design environments, and (vii) prototypes and other tangible embodiments of any of the
above, in each case, in any form or media.
“Technology Advisory Subcommittee” has the meaning set forth in 6.12(b) of this Agreement.
“Third Directive” has the meaning set forth in the recitals to this Agreement.
“Transfer” means to directly or indirectly sell, transfer, pledge, assign or other dispose of (or to divest
voting control by contract, irrevocable proxy, voting trust or other arrangement) or to become subject to any
mortgage, pledge, hypothecation, lien, charge or other encumbrance.
“Transition Period” has the meaning set forth in Section 4.7(a) of this Agreement.
“Upstream Systems” means the Software, hardware, systems and processes (including updates to and
replacements of any such items) of each of the Enterprises that interface or interoperate directly or through
one or more intermediary systems with the Platform and that provide data or services to the Platform.
1.2 Other Definitional Provisions. All references in this Agreement to a Section, Article, Schedule
or Exhibit are to a Section, Article, Schedule or Exhibit, respectively, of or to this Agreement, unless otherwise
indicated. The headings of Articles and Sections in this Agreement are provided for convenience only and
shall not affect the construction or interpretation of this Agreement. All words used in this Agreement shall
be construed to be of such gender or number as the circumstances require. Unless otherwise expressly
provided, the words “include,” “includes” and “including” shall be construed as if followed by the phrase
“without being limited to.” Words such as “herein,” “hereof,” “hereby,” “hereunder” and words of similar
import refer to this Agreement as a whole and not to any particular Section of this Agreement, unless the
context clearly indicates otherwise.
ARTICLE II
OFFICES AND PURPOSES
2.1 Principal Office. The principal office of the Company shall be at 7501 Wisconsin Avenue, Suite
300, Bethesda, Maryland 20814. The principal office of the Company may be changed by the Board in
accordance with the terms of this Agreement. The Company may have such other offices, either within or
13
without the State of Delaware, as the Board may designate in accordance with the terms of this Agreement.
2.2 Registered Office and Agent. The registered office of the Company, as required by the Act to be
maintained in the State of Delaware, shall be located at 2711 Centerville Road, Suite 400, Wilmington,
Delaware 19808 and the original registered agent at such address shall be Corporation Service Company.
The registered office and registered agent may be changed from time to time by action by the Board and by
the filing of the prescribed forms with and the payment of any prescribed fees to the Delaware Secretary of
State.
2.3 Purposes. The purposes of the Company shall be the following:
(a)
To conduct the Business in accordance with the Charter, and to take such actions as
may be incidental thereto; and
(b)
To fulfill such other purposes consistent with the Charter as may be determined from
time to time by the Board in accordance with the terms and conditions of this Agreement; provided that, in
all cases, all required Government Approvals are obtained from the appropriate Government Authority.
2.4 Fiscal Year. The fiscal year of the Company shall be the calendar year.
ARTICLE III
MEMBERS AND FINANCIAL MATTERS
3.1 Identity of Members.
The members of the Company (the “Members”) shall consist of the Enterprises and
any additional members (“Additional Members”) admitted in accordance with the terms of this Agreement.
(a)
(b)
Notwithstanding anything to the contrary in this Agreement, in the event any
Enterprise is placed into receivership and the LLC Units held by such Enterprise are transferred to a
corresponding LLRE (“LLRE Transfer”), effective upon the consummation of the LLRE Transfer, without
any further action by any party, such LLRE shall be a Member as the successor-in-interest to the Enterprise
and shall be bound by all the rights and obligations of the Enterprise under this Agreement, the Enterprise
shall cease to be a Member, and the Company shall continue without dissolution.
3.2 LLC Units; Percentage Interests. The LLC Units and Percentage Interests of the Enterprises are
set forth on Schedule 3.2 hereto. Schedule 3.2 shall be amended by the Board, as necessary, upon the
admission of Additional Members in accordance with the terms of this Agreement, and to reflect changes in
the number of LLC Units issued to, or the Percentage Interests of, any Member.
3.3 Limitation of Liability of Members and Managers. Except as otherwise provided in the Act, the
debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely
the debts, obligations and liabilities of the Company, and no Member or Manager shall be obligated personally
14
for any such debt, obligation or liability of the Company solely by reason of being a Member or Manager.
3.4 Capital Contributions.
(a)
Initial Contributions. The Enterprises have made initial capital contributions to the
Company pursuant to the Contribution Agreement. The respective initial contributions of the Enterprises to
the Company were of equal value.
(b)
Subsequent Contributions. The Members shall make subsequent capital contributions
of cash from time to time as set forth in the then current Annual Plan and Budget or as otherwise approved
pursuant to the Significant Matters Approval process pursuant to Section 6.4.
3.5 Withdrawals of Capital. Except as otherwise provided in this Agreement, no Member shall have
the right to withdraw any part of its Capital Contribution without the unanimous consent of the Board.
3.6 Interest. No interest shall be paid on or on account of any Capital Contributions to the Company
or on or on account of any undrawn profit of any Member credited to its account.
3.7 Taxation. It is the intention of the Members that the Company be taxed as a partnership for
purposes of the Code and any state income tax law, if allowable under state law. Accordingly, the Company
shall file such forms as may be required to elect to classify the Company as a partnership for federal and
state income tax purposes.
ARTICLE IV
ALLOCATIONS
4.1 Profits. After giving effect to the special allocations set forth in Section 4.3 hereof, Profits for
any fiscal year shall be allocated in the following order of priority:
(a)
First, to the Members, in proportion to and to the extent of the excess, if any, of (i) the
cumulative Losses allocated to each Member pursuant to Section 4.2(a)(ii) hereof for all prior fiscal years,
over (ii) the cumulative Profits allocated to each Member pursuant to this Section 4.1(a) for all prior fiscal
years; and
(b)
The balance, if any, to the Members in accordance with their Percentage Interests.
4.2 Losses. After giving effect to the special allocations set forth in Section 4.3 hereof, Losses for
any fiscal year shall be allocated as follows:
(a)
Losses for any fiscal year shall be allocated in the following order of priority:
First, to the Members in proportion to and to the extent of the excess, if any,
of (1) the cumulative Profits allocated to each such Member pursuant to Section 4.1(b) hereof for all prior
(i)
15
fiscal years, over (2) the cumulative Losses allocated to such Member pursuant to this Section 4.2(a) for all
prior fiscal years; and
(ii)
The balance, if any, to the Members in accordance with their Percentage
Interests.
(b)
The Losses allocated pursuant to Section 4.2(a) hereof shall not exceed the maximum
amount of Losses that can be so allocated without causing any Member to have an Adjusted Capital Account
Deficit at the end of any fiscal year. In the event some but not all of the Members would have Adjusted
Capital Account Deficits as a consequence of an allocation of Losses pursuant to Section 4.2(a) hereof but
for this Section 4.2(b), the limitation set forth in this Section 4.2(b) shall be applied on a Member by Member
basis so as to allocate the maximum permissible Losses to each Member under Regulations Section 1.704-1(b)
(2)(ii)(d).
4.3 Special Allocations. The following special allocations shall be made in the following order:
(a) Minimum Gain Chargeback. Notwithstanding any other provision of this Article IV,
if there is a net decrease in Company Minimum Gain during any fiscal year, then, to the extent required by
Regulations Section 1.704-2(f), each Member shall be specially allocated items of Company income and
gain for such year (and, if necessary, subsequent years) in an amount equal to such Member’s share of the
net decrease in Company Minimum Gain, determined in accordance with Regulations Section 1.704-2(g)
(2). The items to be so allocated shall be determined in accordance with Regulations Sections 1.704-2(f)(6)
and 1.704-2(j). This Section 4.3(a) is intended to comply with the minimum gain chargeback requirement
in Regulations Section 1.704 2(f) and shall be interpreted consistently therewith.
(b) Member Minimum Gain Chargeback. Notwithstanding any other provision of this
Article IV except Section 4.3(a), if there is a net decrease in Member Minimum Gain attributable to a Member
Nonrecourse Debt during any fiscal year, then, to the extent required by Regulations Section 1.704-2(i)(4),
each Member who has a share of the Member Minimum Gain attributable to such Member Nonrecourse
Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of
Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to such
Member’s share of the net decrease in Member Minimum Gain attributable to such Member Nonrecourse
Debt, determined in accordance with Regulations Section 1.704-2(i)(4). The items to be so allocated shall
be determined in accordance with Regulations Sections 1.704-2(i)(4) and 1.704 2(j). This Section 4.3(b) is
intended to comply with the minimum gain chargeback requirement in Regulations Section 1.704-2(i)(4)
and shall be interpreted consistently therewith.
(c)
Qualified Income Offset. In the event any Member unexpectedly receives any
adjustments, allocations or distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6),
items of Company income and gain (consisting of a pro rata portion of each item of Company income,
including gross income, and gain for such year) shall be specially allocated to such Member in an amount
and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account
Deficit of such Member as quickly as possible, provided that an allocation pursuant to this Section 4.3(c)
16
shall be made if and only to the extent that such Member would have an Adjusted Capital Account Deficit
after all other allocations provided for in this Article IV have been tentatively made as if this Section 4.3(c)
were not in this Agreement.
(d)
Gross Income Allocation. In the event any Member has a deficit Capital Account at
the end of any fiscal year that is in excess of the sum of (i) the amount such Member is obligated to restore,
and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences
of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), such Member shall be specially allocated items of
Company income and gain (consisting of a pro rata portion of each item of Company income, including gross
income, and gain for such year) in the amount of such excess as quickly as possible, provided that an allocation
pursuant to this Section 4.3(d) shall be made if and only to the extent that such Member would have a deficit
Capital Account in excess of such sum after all other allocations provided for in this Article IV have been
tentatively made as if Section 4.3(c) hereof and this Section 4.3(d) were not in the Agreement.
(e)
Nonrecourse Deductions. Nonrecourse Deductions for any fiscal year or other period
shall be allocated to the Members in accordance with their Percentage Interests.
(f) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for any
fiscal year or other period shall be specially allocated to the Member who bears the economic risk of loss
with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable
in accordance with Regulations Section 1.704-2(i)(1).
(g)
Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any
Company asset pursuant to Code Section 734(b) or 743(b) is required, pursuant to Regulations Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment
to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset)
or loss (if the adjustment decreases such basis), and such gain or loss shall be specially allocated to the
Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted
pursuant to such Regulations Section.
(h)
Regulatory Allocations. The allocations set forth in Sections 4.3(a)-(g) (the
“Regulatory Allocations”) are intended to comply with certain requirements of the Regulations under Code
Section 704. Notwithstanding any other provisions in this Article IV (other than the Regulatory Allocations),
the Regulatory Allocations shall be taken into account in allocating Profits and Losses among Members so
that, to the extent possible, the net amount of such allocations of Profits and Losses and other items and the
Regulatory Allocations (including Regulatory Allocations that, although not yet made, are expected to be
made in the future) to each Member shall be equal to the net amount that would have been allocated to such
Member if the Regulatory Allocations had not occurred.
4.4 Other Allocation Rules.
(a)
For purposes of determining the Profits, Losses or any other items allocable to any
period, Profits, Losses and any such other items shall be determined on a daily, monthly or other basis, as
17
determined by the Board using any permissible method under Code Section 706 and the Regulations
thereunder.
(b)
Except as otherwise provided in this Agreement, all items of Company income, gain,
loss, deduction and any other allocations not otherwise provided for shall be divided among the Members
in the same proportions as they share Profits and Losses, as the case may be, for the year.
(c)
The Members are aware of the income tax consequences of the allocations made by
this Article IV and hereby agree to be bound by the provisions of this Article IV in reporting their shares of
Company income and loss for income tax purposes.
(d)
Solely for purposes of determining a Member’s proportionate share of the “excess
nonrecourse liabilities” of the Company within the meaning of Regulations Section 1.752-3(a)(3), the
Members’ interests in Company profits shall be their Percentage Interests.
4.5 Tax Allocations: Code Section 704(c).
(a)
In accordance with Code Section 704(c) and the Regulations thereunder, income, gain,
loss and deduction with respect to any property contributed to the capital of the Company, solely for tax
purposes, shall be allocated among the Members so as to take account of any variation between the adjusted
basis of such property to the Company for federal income tax purposes and its initial Gross Asset Value
(computed in accordance with the definition thereof) and using the traditional method as set forth in Regulation
Section 1.704-3(b).
(b)
In the event the Gross Asset Value of any Company asset is adjusted pursuant to clause
(b) of the definition of Gross Asset Value in Article I hereof, subsequent allocations of income, gain, loss
and deduction with respect to such asset shall take account of any variation between the adjusted basis of
such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code
Section 704(c) and the Regulations thereunder.
(c)
Any elections or other decisions relating to such allocations shall be made by the Board
in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to
this Section 4.5 are solely for purposes of federal, state and local taxes and shall not affect, or in any way be
taken into account in computing, any Member’s Capital Account or share of Profits, Losses, other items or
distributions pursuant to any provision of this Agreement.
4.6 Foreign Partner. Each Member represents that it is not a “foreign partner” within the meaning
of Section 1446(e) of the Code.
4.7 Accounting and Books of Account.
(a)
The accounts, books and records of the Company shall be maintained at the principal
office of the Company and shall be open for inspection, copying and audit upon reasonable notice by any of
the Members or their duly authorized representatives (at the expense of any such Member) during reasonable
business hours. Notwithstanding the foregoing, it is anticipated that during an initial transition period one
or both of the Members will provide certain financial and accounting services to the Company (the “Transition
Period”). During such period, the books and records of the Company may be located at the offices of one
18
or more of the Members, and, in any event, shall be open to inspection, copying and audit upon reasonable
notice by either Member or their duly authorized representatives as described in this Section 4.7(a).
(b)
The Company’s books shall be closed and balanced at the end of each fiscal year.
(c)
The Company shall prepare and deliver to each Manager on the Board (which delivery
shall constitute delivery to the Members as well) an annual report within ninety (90) days after the end of
each fiscal year (the “Annual Report”) and such other periodic reports as requested by the Board. Each
Annual Report shall be prepared in accordance with generally accepted accounting principles applied on a
consistent basis and, if determined by the Board, each Annual Report may be audited by an independent
public accounting firm selected by the Board. The fees and expenses related to any such audit shall be borne
by the Company.
4.8 Tax Returns. The Board shall designate an Officer of the Company to have the responsibility
for preparing all required federal and state income tax returns, franchise tax reports, sales and use tax returns,
property tax reports, transfer taxes and state and local licenses for the Company. The designated Officer
shall have the authority to engage an outside accounting firm to prepare federal, state and local filings for a
fee. Subject to Section 4.10, such officer shall provide to each Member copies of such income tax returns
and related Forms K 1 for their review prior to filing such returns and shall provide final copies of such
returns as soon as reasonably practicable, but in no event later than May 31 of the year following the year
such income tax return and related Form K 1 cover. During the Transition Period, the Board may designate
one of the Members to perform the functions of the designated Officer specified in this Section 4.8. The fees
and expenses related to the preparation and filing of federal, state, and local tax returns shall be borne by the
Company. Upon the Company's request, each Member shall provide to the Company any information that
the Officer believes may be necessary or appropriate to comply with all of the Company's tax compliance
obligations.
4.9 Banking. All funds of the Company shall be deposited in its name in one or more separate
accounts with such banks, savings and loan associations, or trust companies as shall be designated by the
Board. Funds of Members or other Persons shall not be deposited in such Company accounts. The funds in
such accounts shall be used solely for the business of the Company. Withdrawals from, or checks drawn
upon, such accounts shall require the signatures of the persons designated by the Board.
4.10 Tax Matters Member. The Board shall designate, and may change the designation of, a tax
matters partner (within the meaning of, and solely for purposes of, Section 6231(a)(7) of the Code and Section
301.6231(a)(7)-1 of the Regulations) of the Company (the “Tax Matters Member”). The Tax Matters Member
shall not take any action on behalf of the Company without authorization by the Board in accordance with
this Agreement, including making any tax election or filing any tax return. Any Member that is not the Tax
Matters Member shall have the right to review and approve any tax election or tax return filed on behalf of
the Company, and no other written or oral communication other than routine matters shall be sent or made
to any governmental authority by the Tax Matters Member unless approved in advance by such other Members.
19
The Tax Matters Member shall provide the other Members with prompt notice of any meeting or conference
involving the Tax Matters Member or any representative of the Company with any Governmental Authority
involving any tax issue relating to the Company, or any other administrative or judicial proceeding relating
to any determination of any tax issue relating to the Company, and such other Members shall have the right
to attend and participate in any such meeting, conference, or administrative or judicial proceeding. Upon
the Company's request, each Member shall provide to the Company any information that the Tax Matters
Member believes may be necessary or appropriate to resolve any tax issue relating to the Company.
ARTICLE V
DISTRIBUTIONS
5.1 Distributions Generally. Subject to any required Governmental Approval, the Company shall
make distributions to the Members from time to time in such amount as shall be determined pursuant to the
Significant Matter approval process provided for in Section 6.4. All distributions shall be made to the
Members in accordance with their Percentage Interests.
5.2 Tax Distributions.
(a)
General. Notwithstanding Section 5.1 or Section 6.4, to the extent funds of the
Company may be available for distributions, at least five (5) days prior to the due date of quarterly federal
estimated tax payments, the Board shall cause the Company to distribute to the Members with respect to
each such quarter of the Company an amount of cash (a “Tax Distribution”) that, in the good faith judgment
of the Board, equals the Tax Percentage of the taxable income of the Company for such quarter, with such
Tax Distributions to be made to the Members in the same proportions that Profits of the Company are or
would be allocated to the Members during such quarter. The “Tax Percentage” shall be the highest combined
marginal federal and state income tax rates applicable to any Member as of the time of a Tax Distribution.
The Tax Percentage shall apply to all Members.
(b)
Limitations. Any distributions required to be made to a Member under Section 5.2(a)
with respect to any quarter shall be reduced by the amount of any distributions the Company shall have made
or shall be making to such Member in accordance with Section 5.1 or otherwise during the calendar year in
which such quarter falls. The Board shall not cause the Company to make any Tax Distribution under Section
5.2(a) if the making of such Tax Distribution would constitute a violation of the Act or any contract under
which the Company or a subsidiary of the Company is bound relating to or entered in connection with
indebtedness of the Company. Any Tax Distributions that are not made by reason of the preceding sentence
shall be made as soon as reasonably practicable after the conditions set forth in the previous sentence are no
longer applicable.
(c)
Offset. Tax Distributions made to a Member under Section 5.2(a) shall be credited
against amounts such Member would otherwise be entitled to receive pursuant to Section 5.1.
5.3 Dissolution. If the Company is dissolved, upon the winding up of the affairs of the Company,
the assets of the Company shall be distributed in accordance with the Act, except to the extent that U.S.
federal law or the Senior Preferred Stock Purchase Agreements entered into by the Enterprises and the U.S.
20
Department of the Treasury dated as of September 26, 2008, applies, in each case, as the same may be amended
from time to time (each a “Senior Stock Purchase Agreement”). For the avoidance of doubt, any distributions
to Members in connection with a dissolution of the Company shall be made in accordance with the positive
Capital Account balances of such Members in a manner consistent with Treasury Regulation Section
1.704-1(b)(2)(ii)(b)(2).
ARTICLE VI
MANAGEMENT
6.1 Composition of the Board.
(a)
Composition. The Board of Managers (the “Board”) shall consist of at least six
managers (each a “Manager”), who shall be designated as provided in this Section 6.1(a) and who shall have
the voting rights specified in Section 6.2(c):
At all times Fannie Mae shall designate two managers to serve on the Board
(the “Fannie Mae Managers”) and Freddie Mac shall designate two managers to serve on the Board (the
“Freddie Mac Managers”).
(i)
(ii)
The Chief Executive Officer, designated in accordance with Section 6.16(a),
shall be a Manager.
(iii)
The Company shall have a Chairman of the Board (“Board Chair”), who shall
be a Manager and preside at all meetings of the Board. The Board Chair shall not be a director, officer, or
employee of Fannie Mae or Freddie Mac, or an officer or employee of the Company. During the
Conservatorship, the Board Chair shall be designated and may be removed by FHFA in its sole discretion.
Following the Conservatorship, the Board Chair shall be designated and may be removed by the Board;
provided that the Board Chair shall not vote with respect to his or her removal. The Board Chair shall perform
such duties as are commonly incident to his or her office and shall also perform such other duties and have
such other powers as the Board, and during the Conservatorship, FHFA, shall designate. During the
Conservatorship, the Board Chair’s compensation shall be determined by FHFA, and unless otherwise directed
by FHFA, the Company shall include the expense for such compensation in the Company’s Annual Plan and
Budget.
(iv) During the Conservatorship, FHFA may appoint up to four additional
Managers, who shall not be directors, officers, or employees of Fannie Mae or Freddie Mac, or officers or
employees of the Company, one of whom shall be designated as Board Chair as described in Section 6.1(a)
(iii) above. Following the Conservatorship, any such Manager may be appointed or removed by the Board,
provided that such Manager shall not vote with respect to his or her removal. During the Conservatorship,
any such Manager’s compensation shall be determined by FHFA, and unless otherwise directed by FHFA,
the Company shall include the expense for such compensation in the Company’s Annual Plan and Budget.
(b)
Removal. Each Manager may be removed only by the person that has authority to
designate such Manager, provided that FHFA may remove any Manager in the exercise of FHFA’s authority
as Conservator.
21
(c)
Upon termination of the Conservatorship, and for as long as FHFA is acting as Receiver
of an Enterprise, FHFA shall have the right to appoint one Manager (the “FHFA Manager”), who shall not
be a director, officer, or employee of Fannie Mae or Freddie Mac, or an officer or employee of the Company.
For clarification, the FHFA Manager will be a new Manager added to the Board and not a replacement for
any of the then current Managers. The Manager appointed by FHFA hereunder shall cease to be a Manager
at such time as FHFA ceases to act as Receiver of an Enterprise
6.2 Authority of the Board of Managers; Voting.
(a)
Authority. Subject to delegation in accordance with Section 6.17 the business and
affairs of the Company shall be managed by the Board. Subject to the provisions of Section 6.2(d) and
Section 6.4, the Board shall have full and complete discretion to manage and control the business and affairs
of the Company, to make all decisions affecting the business and affairs of the Company, and to take all such
actions as it deems necessary or appropriate to accomplish the purposes of the Company set forth in the
Charter; provided, that the Board shall manage the Company in accordance with the Annual Plan and Budget,
and, to the extent that it does not conflict with the Annual Plan and Budget, the current Multi-Year Plan
adopted by the Board.
(b)
Required Vote.
(i)
Subject to paragraph (ii) below, all decisions of the Board shall require the
affirmative vote of a majority of the voting power represented at the meeting, during the Conservatorship,
and the affirmative vote of the Board Chair, and, upon termination of the Conservatorship and for as long as
FHFA is acting as Receiver of an Enterprise, of the FHFA Manager, if any.
(ii)
After termination of the Conservatorship, a Material Decision requires the
affirmative vote of a majority of the voting power represented at the meeting and of at least one Fannie Mae
Manager and at least one Freddie Mac Manager, and for as long as FHFA is acting as Receiver of an Enterprise,
of the FHFA Manager, if any.
(c)
Voting Rights. The voting power of the Board shall be allocated as follows:
(i)
(ii)
Each of the Fannie Mae Managers shall cast one vote; and
Each of the Freddie Mac Managers shall cast one vote; and
(iii)
Each other Manager shall cast one vote.
(d)
Deadlock. If a decision is not reached on any matter before the Board in accordance
with Section 6.2(b) (a “Deadlock”), then the Company shall maintain the status quo until such time a decision
by the Board is reached agree on such matter in accordance with Section 6.2(b). Any Manager may deliver
written notice to the other Managers setting forth in reasonable detail the matter giving rise to the disagreement
(the “Pre-Deadlock Notice”), and upon receipt of the Pre-Deadlock Notice the Managers will attempt to
reach a decision within 10 Business Days. If the Managers are unable to reach a decision within such time
period, then during the Conservatorship, each Manager shall have the right to deliver written notice to FHFA
22
that a Deadlock exists (a “Deadlock Notice”). Subject to the provisions of Section 6.4, upon receipt of a
Deadlock Notice, FHFA shall have the right, during the Conservatorship, to resolve the Deadlock in its sole
and absolute discretion, and the Company shall implement such resolution to the same extent as if approved
by the Board. All resolutions of Deadlock by FHFA shall be set forth in a written document signed by an
authorized officer of FHFA or pursuant to such other procedures as may be agreed to by the Board and FHFA.
(e) Manager Interests. The fact that one or more Managers may have an interest in any
decision, including the fact that one or more Managers has an employment relationship with or an economic
interest in an entity that is the subject of the decision, shall not invalidate such decision, which shall be
binding upon the Company provided that the interest of any such Manager in the decision, other than through
his or her employment relationship with or economic interest in a Member, is disclosed to each other Manager.
6.3 Duties of Managers.
(a)
Each Member recognizes and agrees that each Manager who is appointed by a Member
and who is not also an officer of the Company is acting exclusively on behalf of the Member he or she
represents, that each such Manager may act in his or her sole and absolute discretion in the manner he or she
determines is in the best interests of the Member he or she represents without taking into account the interests
of the other Members, that any such acts shall not be deemed “bad faith” for any purposes, and that such
Managers shall have no personal liability by reason of serving as a Manager.
(b)
Notwithstanding any other provision of this Agreement or any duty otherwise existing
at law or in equity, to the fullest extent permitted by law, no Manager shall owe any duties (including fiduciary
duties) to the Members.
6.4 Significant Matters. Notwithstanding the foregoing and any other provision contained in this
Agreement to the contrary, no action shall be taken with respect to any of the matters enumerated below
(each, a “Significant Matter”) without the approval of (i) the Board in accordance with Section 6.2 and (ii)
during the Conservatorship, and during any period during which FHFA is acting as Receiver of one or both
of the Enterprises, FHFA; provided, however, that the approval of the Board in accordance with Section 6.2
alone shall be sufficient to approve Significant Matter in the event that FHFA does not approve or deny the
applicable Significant Matter in 10 Business Days from the date written notice is received by FHFA of the
Significant Matter to be considered by it. All approvals and denials of Significant Matters by FHFA pursuant
to this Section 6.4 shall be set forth in a written document signed by an authorized officer of FHFA or pursuant
to such other procedures as may be agreed to by each Enterprise and FHFA:
(a)
(b)
(c)
Any amendments to or actions inconsistent with the Charter;
[Reserved];
Amendment of this Agreement;
23
(d)
The determination of the initial Gross Asset Value of any contributions made by either
Member to the Company (excluding for this purpose the initial Gross Asset Value of assets contributed to
the Company under the Contribution Agreement, which the Parties agree have the initial Gross Asset Value
set forth in the Contribution Agreement);
(e)
The declaration or amount of any dividend or distribution (other than Tax Distributions
pursuant to Section 5.2(a));
(f)
The purchase or other acquisition of a business or entity or the merger or consolidation
of the Company with or into another entity;
(g)
The sale, lease, exchange, transfer or disposal of all or substantially all of the business
or assets of the Company, in any one transaction or a series of related transactions;
(h)
A conversion of the Company from a limited liability company into a corporation or
other form of entity;
(i)
(j)
The dissolution of the Company;
The admission of Additional Members, the Transfer of LLC Units by either Enterprise
and the issuance of additional LLC Units or membership interests in the Company;
(k)
(l)
The withdrawal of capital by any Member;
The initiation or settlement of any significant litigation by the Company against a third
party where such litigation could impact the interests, relationships or reputation of the Company;
(m)
The granting of any exclusive license to, or the assignment of, any Intellectual Property
Rights of the Company;
(n)
Adoption of the Company’s Annual Plan and Budget or the Board approved Multi-
Year Plan, any material amendments to the Annual Plan and Budget or approved Multi-Year Plan, aggregate
expenditures that exceed the amounts set forth in the Annual Plan and Budget by more than five percent
(5%), expenditures that are materially inconsistent with the allocations of expenditures set forth in the Annual
Plan and Budget, or incurrence of indebtedness in excess of amounts reflected in the Annual Plan and Budget;
(o)
Any matter requiring approval or consultation with the U.S. Department of the
Treasury under the Senior Stock Purchase Agreement between an Enterprise and the U.S. Department of the
Treasury;
(p)
Any action that in the reasonable business judgment of the management of the
Company, at the time that the action is to be taken, is likely to cause significant reputational risk to the
Company or either Enterprise or result in substantial negative publicity;
(q)
The appointment or removal of any Officer of the Company;
24
(r)
Entering into new compensation arrangements with any Officer of the Company or
increasing amounts or benefits payable to any Officer of the Company under existing compensation
arrangements;
(s)
Entry into any contract, agreement or transaction between the Company, on the one
hand, and any Enterprise or any Affiliate of any Enterprise, on the other hand, and any material amendment
or waiver, or any termination or assignment, thereof, but excluding (i) certain categories of change orders
(or portions thereof), statements of work (or portions thereof), amendments and waivers of such contracts,
agreements or transactions solely to the extent specifically approved to not be subject to this Section 6.4(s)
in accordance with the Significant Matters approval process, and (ii) any contract, agreement or transaction
(and any material amendment or waiver thereof) between the Company and a third party to which an Enterprise
(or an Affiliate of an Enterprise) is included as a party solely for the purpose of guaranteeing, securing or
providing further assurance to the third party of the Company’s performance of, or compliance with the terms
of, such contract, agreement or transaction; and
(t)
for in the Budget).
Any capital contributions from either of the Enterprises (except as otherwise provided
For the avoidance of doubt, the Deadlock resolution mechanism set forth in Section 6.2(d) shall apply
with respect to the failure of the Board to be able to make a decision upon any Significant Matter in accordance
with this Section 6.4; provided, however, that prior to FHFA resolving any Deadlock with respect to a
Significant Matter an in-person meeting to discuss the Deadlock shall have occurred among the Chief
Executive Officers of each of the Enterprises and the director of FHFA.
6.5 Meetings of the Board of Managers.
(a) Meetings of the Board shall be held at least once every two months at the principal
office of the Company or at any other place within or without the State of Delaware which may be designated
by the written consent of all Managers. Any Manager may call a meeting of the Board by providing notice
of such meeting to each other Manager in the following manner: Notice of the date, time and place of such
meeting shall be mailed by regular mail to each other Manager at his or her designated address at least six
(6) days before the meeting, or sent by overnight courier to each other Manager at his or her designated
address at least two (2) days before the meeting (with delivery scheduled to occur no later than the day before
the meeting), or given orally by telephone or other means, or by e-mail, facsimile or telecopy, or by any other
means comparable to any of the foregoing, to each other Manager at his or her designated address at least
twenty-four (24) hours before the meeting. The notice of the meeting shall state the general purpose of the
meeting, but other routine business may be conducted at the meeting without such matter being stated in the
notice.
(b) Meeting materials shall be distributed by the Company to each Manager of the Board
by: (i) for regular bi-monthly meetings, at least five (5) days in advance of the meeting (unless a shorter
advance period is approved in advance by the Board Chair); and (ii) for other meetings, as early as practicable
in advance of the meeting. Such materials shall be well organized and provide reasonably detailed (but
25
concise) information concerning items on the agenda for the meeting.
(c)
During the Conservatorship, the Board shall provide, or shall cause to be provided, to
FHFA, written notice of all meetings of the Board, including regular bi monthly and other meetings, by no
later than the later of (i) two (2) weeks prior to the date of the meeting and (ii) the date on which notice is
provided to the Managers in accordance with Section 6.5(a) hereof. During the Conservatorship, FHFA shall
have the right to have one or more representatives of FHFA attend any meeting of the Board as an observer.
Any such FHFA representative shall have no voting rights.
(d)
During the Conservatorship, FHFA shall receive a copy of all materials distributed to
the entire Board at the same time as such materials are distributed to the Board.
6.6 Quorum. As used herein, the term “Required Quorum Attendee” shall mean one Fannie Mae
Manager, one Freddie Mac Manager, the Board Chair, the CEO and, upon termination of the Conservatorship
and for as long as FHFA is acting as Receiver of an Enterprise, the FHFA Manager (if any). The presence
in person or by proxy of a majority of the Managers, including each Required Quorum Attendee Member
shall constitute a quorum for the transaction of business at a meeting of the Board. No action of the Board
shall be valid in the absence of a quorum, except as provided in Section 6.7 hereof. Notwithstanding the
foregoing, in the event a Required Quorum Attendee does not attend a meeting of the Board following the
delivery of two notices of such meeting in accordance with Section 6.5(a) hereof, the Board Chair may
determine, in his or her discretion, to proceed with the meeting following the delivery of the second notice
and the meeting shall be deemed to have a quorum irrespective of the absence of such Required Quorum
Attendee and any action taken by the Board at such meeting that otherwise complies with the requirements
of this Agreement shall be deemed to be a valid action of the Board. After Conservatorship, the Manager
who called the meeting may determine to proceed with the meeting on the conditions described in the
preceding sentence, in the event that a purpose of the meeting is to consider removal of the Board Chair
pursuant to Section 6.1(a)(iii).
6.7 Consent of Absentees and Waiver of Notice. The transactions of any meeting of the Board shall
be as valid as though had at a meeting duly held after proper notice and with a quorum if, either before or
after the meeting, each Manager not present in person or by proxy signs a written waiver of notice or a consent
to the holding of such meeting, or approves the minutes thereof. All such waivers, consents or approvals
shall be filed with the books and records of the Company and made a part of the minutes of the meeting.
Attendance of a Manager at any meeting of the Board shall constitute a waiver of notice of such meeting,
except when a Manager attends for the express purpose of objecting to the transaction of any business because
such meeting has not been (or allegedly has not been) duly noticed.
6.8 Written Action Without a Meeting; Telephone Meetings.
(a)
Any action required or permitted to be taken at any meeting of the Board may be taken
without a meeting, if (a) consent in writing to such action is provided by all Managers, and, in the case of
Significant Matters, FHFA (provided, however, that the approval of the Board in accordance with Section
6.2 alone shall be sufficient to approve a Significant Matter in the event that FHFA does not approve or deny
26
the applicable Significant Matter in 10 Business Days from the date written notice is received by FHFA of
the Significant Matter to be considered by it), and (b) notice to FHFA in writing of the proposed written
action is provided to FHFA simultaneously with the Board. The Company shall use commercially reasonable
efforts to provide the Board and FHFA with not less than two (2) Business Days advance written notice of
the proposed written action, provided that the failure by the Company to provide such two (2) Business Day
advance written notice shall not invalidate any written consent that otherwise complies with the provisions
of this Section 6.8(a). Such written consent or consents shall be filed with the minutes of the proceedings
of the Board. Action by written consent shall have the same force and effect as a vote of the Managers of
the Board.
(b) Managers may participate in any meeting of the Board by means of a conference
telephone or similar communications equipment by means of which all persons participating in the meeting
can hear each other at the same time and participation by such means shall constitute presence in person at
a meeting.
6.9 Proxies. Each Manager may appear and vote at any meeting of the Board, and may execute
waivers of notice, consents, or approvals, through the agency of one or more persons, provided such agents
are authorized to so act on behalf of the Manager by the terms of a written proxy which has been executed
by such Manager and delivered to the each Manager. The Board Chair shall cause such written proxies to
be filed with the books and records of the Company. If a written proxy authorizes an agent to appear and/
or to vote at any meeting of the Board, such written proxy must be delivered to the Board Chair, and all
Managers shall be notified of such proxy, at least one day in advance of the meeting.
6.10 Protection of Competitively Sensitive Information. The Board shall adopt and comply with
policies and procedures to prevent the disclosure of competitively sensitive information of any Member to
other Members. The policies and procedures will be consistent with the provisions of Articles XI and XII
herein and, for the avoidance of doubt, shall not limit the scope of or otherwise restrict the licenses granted
to the Members under Article XII.
6.11 Financial Governance Forum. A Financial Governance Forum (“Financial Governance Forum”)
has been established by the Company to advise the Board and the CEO with respect to matters relating to
the Annual Plan and Budget, the Multi-Year Plan adopted by the Board, and funding requirements of the
Company. The Financial Governance Forum will remain in place until such time as the Board determines
that the Company has sufficient internal or other resources and does not require the services of the Financial
Governance Forum. The Financial Governance Forum shall have no voting or decision-making authority.
(a)
Composition and Meetings. The composition of the Financial Governance Forum
shall be determined by the Board; provided, however, that Fannie Mae and Freddie Mac shall at all times
have the right to designate the same number of representatives to the Financial Governance Forum. Meetings
of the Financial Governance Forum shall be held no less than once per month in person or by telephone. The
date, time and place of meetings shall be determined by the Company with notice to representatives to the
Financial Governance Forum given at least five (5) days in advance of the meeting. The Company shall
circulate an agenda for each meeting (which may be contained in the meeting materials) and meeting materials,
at least three (3) business days in advance of the meeting, and a summary of the meeting within ten (10)
27
business days after the meeting. The agenda shall contain matters as each representative to the Financial
Governance Forum may request be addressed during the meeting within the scope of the Financial Governance
Forum’s duties. Meeting materials shall be well organized and provide reasonably detailed (but concise)
information concerning items on the agenda for the meeting. Either Enterprise, any Manager, or the Company
may call an additional meeting of the Financial Governance Forum by request to the Company. The
Committee’s Chair shall be the Company’s CEO.
(b)
Duties and Responsibilities. The Financial Governance Forum shall be responsible
for monitoring and providing periodic reports to the Board and the CEO regarding the financial condition
and overall operational performance of the Company, including:
expenditures incurred under the Administrative Services Agreement;
(i)
Monitoring Company expenditures relative to the approved Budget, including
(ii)
Reviewing reports submitted by the Enterprises pursuant to the Administrative
Services Agreement;
periodic reports prior to submission to the Board;
(iii) Reviewing the Company’s Annual Plan and Budget, Annual Report and other
(iv)
Providing recommendations to the Board and the CEO with respect to the
funding needs of the Company;
(v)
Reporting to the Board and the CEO other material financial issues and risks
relating to the Company; and
(vi)
Performing such other duties as the Board may determine.
6.12 [Reserved]
6.13 Corporate Functions and Administrative Services Oversight Committee. Until such time as
the Board determines otherwise, the Company shall have a Corporate Functions and Administrative Services
Oversight Committee, whose purpose shall be to oversee the corporate functions of the Company (as defined
in the bylaws of the Corporate Functions and Administrative Services Oversight Committee), to allocate and
coordinate the Enterprises' services under their respective Administrative Services Agreements, and to
facilitate information sharing and input related to those services. Additionally, this Committee shall work
to establish and coordinate corporate services and internal controls that may need to be developed for the
effective operation of the Company. This Committee shall operate in accordance with the bylaws attached
hereto as Exhibit B as such bylaws may be amended, modified or replaced by the Board.
6.14 Platform Steering Committee. Until such time as the Board determines otherwise, the Company
shall have a Platform Steering Committee. This Committee shall operate in accordance with the charter
28
attached hereto as Exhibit C as such charter may be amended, modified, or replaced by the Board.
6.15 Additional Advisory Committees. For the avoidance of doubt, the Board shall have the authority
to create additional advisory boards or committees to provide advice and guidance to the Company, the
Board and the Officers of the Company.
6.16 Officers.
(a)
CEO. The Company shall have a Chief Executive Officer or senior most executive
with such other title as the Board determines (“CEO”) appointed by the Board to be responsible for the day-
to-day operations of the Company and to serve in such capacity until he or she dies, resigns or is removed
from office by the Board, with or without cause, provided that the CEO shall not vote with respect to his or
her removal. The CEO shall report to the Board. The authority of the CEO shall be limited to matters
expressly authorized herein or by the Board pursuant to a duly adopted resolution. The CEO is hereby
expressly authorized to (A) implement matters approved by the Board in accordance with Section 6.2, (B)
implement Significant Matters approved pursuant to the Significant Matter approval process contained in
Section 6.4 and (C) once the initial Business Plan and Budget are in effect in accordance with Section 8.1,
operate the Company in accordance with the Charter, Business Plan and Budget in effect from time to time
in accordance with Section 8.1.
(b)
Additional Officers. The Board shall have the authority to appoint and remove such
additional officers of the Company (each, together with the CEO, an “Officer”) as it deems appropriate to
carry out the business of the Company.
6.17 Delegation of Authority to Officers. The Board shall have the authority to adopt resolutions
providing for delegations of authority to the Officers of the Company.
6.18 Indemnification of Officers and Managers.
(a)
Right To Indemnification.
(i)
To the fullest extent permitted by law, as the same now exists or may hereafter
be amended, each Person (including a Fannie Mae Manager or Freddie Mac Manager, as applicable) who
was, is or is threatened to be made a party to or is otherwise involved (including as a witness) in any threatened,
pending or completed action, suit, claim or proceeding, whether civil, criminal, administrative or investigative
and whether formal or informal (hereafter a “Proceeding”), by reason of the fact that he or she is or was a
Manager or Officer or an employee of the Company or he or she is or was serving at the request of the
Company (with approval of the Board) as a manager, officer, member, partner, trustee, employee or agent
of another limited liability company, corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise (hereafter an “Indemnitee”), whether the basis of a Proceeding is an alleged action in an
official capacity or in any other capacity while serving as such a manager, officer, member, partner, trustee,
employee or agent shall be indemnified and held harmless by the Company against all Damages incurred or
suffered by such Indemnitee in connection therewith unless the Indemnitee engaged in willful misconduct,
fraud, or knowingly violated a criminal law. The Company shall indemnify any such Indemnitee in connection
29
with a Proceeding (or part thereof) initiated by such Indemnitee only if a proceeding (or part thereof) was
authorized or ratified by the Board. The right to indemnification conferred in this Section 6.18(a) shall be
a contract right.
(ii)
Any indemnification under Section 6.18(a) (unless ordered by a court) shall
be made by the Company only as authorized in the specific case upon a determination that the Indemnitee
has met the applicable standard of conduct set forth in Section 6.18(a). Such determination shall be made
by the Board.
(iii)
The right to indemnification conferred in Section 6.18(a) shall include the right
to be paid by the Company for the reasonable and documented expenses incurred in defending any Proceeding
in advance of its final disposition (hereinafter an “Advancement of Expenses”). An Advancement of Expenses
shall be made upon delivery to the Company of an undertaking, by or on behalf of such Indemnitee, to repay
all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no
further right to appeal that such Indemnitee is not entitled to be indemnified.
(b)
Nonexclusivity Of Rights. The right to indemnification and the Advancement of
Expenses conferred in this Section 6.18 shall not be exclusive of any other right that any Person may have
or hereafter acquire under any statute, this Agreement, general or specific action of the Board, contract or
otherwise.
(c)
Indemnitor of First Resort. The Company hereby acknowledges that the Indemnitees
may have certain rights to indemnification, advancement of expenses and/or insurance provided by the
Enterprises. The Company hereby agrees (i) that it is the indemnitor of first resort (i.e., its obligations to
Indemnitee are primary and any obligation of the Enterprises to provide any Advancement of Expenses or
other indemnification are secondary), and (ii) that it irrevocably waives, relinquishes and releases the
Enterprises from any and all claims against the Enterprises for contribution, subrogation or any other recovery
of any kind in respect thereof. The Company further agrees that no Advancement of Expenses or other
indemnification on behalf of Indemnitee with respect to any claim for which Indemnitee has sought
indemnification from the Company shall affect the foregoing and the Enterprises shall have a right of
contribution and/or be subrogated to the extent of such Advancement of Expenses or payment to all of the
rights of recovery of Indemnitee against the Company.
(d)
Statutory and Regulatory Limitations. The right to indemnification and the
Advancement of Expenses conferred in this Section 6.18 is subject to the provisions set forth in 12 U.S.C.
4518(e) and any rules or orders that are promulgated or issued thereunder from time to time.
6.19 Audit. The Board may direct the Company to conduct an audit, which may be conducted by
an independent third party, of any service provider retained by the Company, including, without limitation,
any Member of the Company in its capacity as a service provider to the Company pursuant to the
Administrative Services Agreement or otherwise, with the results of such audit to be provided to the Board.
30
ARTICLE VII
ACTIONS BY MEMBERS
7.1 No Voting Rights. The Members shall not participate in the management of the Company, and
shall have no voting rights under this Agreement or the Act, other than the right to designate their respective
representatives, if any, on the Board. The Board shall have the authority to exercise all powers of the Members
and Managers under the Act. Notwithstanding the foregoing or any other provision of this Agreement, the
rights reserved to FHFA under this Agreement, any Ancillary Agreement or any other agreement entered into
by the Company or by the Enterprises in connection with the Company or the Platform shall be exercised
by FHFA in its capacity as, and for so long as FHFA is, Conservator of either of the Enterprises. For the
avoidance of doubt, nothing in this Section 7.1 is intended to preclude the Enterprises from providing services
to the Company pursuant to the Administrative Services Agreement or such other written agreements as may
be entered into by the Enterprises and the Company, or pursuant to written delegation by the Board.
ARTICLE VIII
OPERATIONS OF THE COMPANY
8.1 Business Plans; Budget.
(a)
The Board shall adopt and approve an annual business plan and budget for the Company
(the “Annual Plan and Budget”), which shall be subject to the Significant Matters approval requirements
contained in Section 6.4. In addition, the Board shall adopt a business plan and budget for the Company
covering three years, which will consist of general milestones and/or additional details, and shall include a
financial plan (the “Multi-Year Plan”). At all times, the Annual Plan and Budget, and the Multi-Year Plan
approved by the Board, and any proposed modifications thereto, shall be subject to approval, review,
amendment and modification by the Board (subject to the Significant Matters approval requirements
contained in Section 6.4).
(b)
The Board shall manage, and the Officers shall operate, the Company in accordance
with the Annual Plan and the Budget, and, to the extent that it does not conflict with the Annual Plan and
Budget, the Multi-Year Plan approved by the Board, as these may be modified from time to time in accordance
with the terms and conditions of this Agreement.
(c)
At least sixty (60) days prior to the beginning of each fiscal year of the Company or
at such other time as may be established by the Board, the CEO shall prepare and submit to the Board proposed
revisions (including any extensions thereof) to the Annual Plan and Budget and (if applicable) the Multi-
Year Plan. The Board shall continue to manage, and the Officers shall continue to operate, the Company
consistent with the existing Annual Plan and Budget and, to the extent that it does not conflict with the Annual
Plan and Budget, the existing Multi-Year Plan approved by the Board until a revised Annual Plan and Budget
and (if applicable) a revised Multi-Year Plan is approved by the Board (subject to the Significant Matters
approval requirements contained in Section 6.4).
8.2 Platform. With the continued assistance and support of the Enterprises, the Company shall design,
develop, build, test, operate, support, maintain, update and enhance the Platform in accordance with the
31
Charter, the Annual Plan and Budget, the Multi-Year Plan approved by the Board, and the Customer Services
Agreement, and shall use commercially reasonable efforts to commence operation of the Platform as soon
as practicable.
8.3 Commitment of Business. The Customer Services Agreement sets forth the terms of each
Enterprise’s commitment of business to the Company.
8.4 Service Agreements. Each Enterprise shall provide certain services to the Company in accordance
with the Administrative Services Agreement between such Enterprise and the Company.
8.5 Insurance. The Company shall obtain insurance from insurance companies of recognized standing
in such forms and amounts and against such risks as the Board shall determine, naming as a beneficiary
thereunder the Company and each Member in proportion to its respective ownership interests in the Company.
Without limiting the generality of the foregoing, the Company shall obtain insurance from one or more
insurance companies of recognized standing against indemnification obligations the Company may have to
any Manager or Officer, and may maintain insurance, at its expense, to protect itself and any Manager,
advisory board member, Officer, employee or agent of the Company or another enterprise against any expense,
liability or loss. Further, upon the recommendation of the insurance broker engaged by the Enterprises to
review the Company’s insurance needs, the Company shall obtain insurance protecting against cyber-security
risks that is consistent with insurance coverage maintained by large financial institutions and leading
technology service providers handling information and data of similar sensitivity to the types of information
and data to be handled by the Company; provided that such coverage is available to the Company at
commercially reasonable rates.
8.6 Termination of Conservatorship. In the event FHFA is appointed as Receiver of either Enterprise
and the LLC Units held by the Enterprise are transferred to a corresponding LLRE, the Company shall enter
into an agreement with FHFA to grant to FHFA, as Receiver for the remaining assets in the Receivership
estate, such access to and use of the Platform and the right to obtain from the Company such services, in
each case, as are reasonably necessary to permit FHFA to carry out its responsibilities with regard to any
assets or obligations remaining in the Receivership pursuant to the Safety and Soundness Act and the
regulations of FHFA or any successor agency or entity.
ARTICLE IX
EMPLOYEES
9.1 Assigned Employees.
(a)
Specified employees of each Enterprise, as agreed to by the Company (with approval
of the Board) and the relevant Enterprise, may be assigned to work on behalf of the Company under the direct
or indirect supervision of the respective Enterprise or Company officer or officers, as the case may be, charged
with such management responsibilities (each, an “Assigned Employee”). The Financial Governance Forum
shall maintain an up-to-date schedule of Assigned Employees which includes (i) the name of each Assigned
Employee, (ii) the period in which the Assigned Employee will serve as an Assigned Employee, and (iii) a
32
high level description of the type of work to be performed by the Assigned Employee.
(b)
Each Assigned Employee shall be employed by the relevant Enterprise, and shall
continue to be eligible to participate in the compensation and benefit plans and programs maintained by that
Enterprise for which the employee qualifies under the terms and conditions of such plans and programs.
(c)
Each Enterprise shall, on a monthly basis, invoice and bill the Company for those
categories of costs and expenses incurred in the preceding calendar month as are agreed between the Enterprise
and the Company (subject to Board approval and the Significant Matters approval requirements contained
in Section 6.4 to the extent applicable), in connection with the employment of each Assigned Employee
employed by the Enterprise. Invoices submitted to the Company by each Enterprise shall reflect expenditures
reported in the Enterprise’s financial systems of record utilizing project codes specifically assigned to the
development of the Platform or other reasonable supporting detail. Invoices shall be submitted to the Company
with supporting documentation detailing monthly project hours, work descriptions, and out-of-pocket
expenses. The Company’s payment of such invoices shall be in accordance with the policies and procedures
of the Financial Governance Forum.
(d)
Each Assigned Employee shall be dedicated to working 100% of his or her time to
perform services for the benefit of the Company and shall be subject to supervision by individuals who may
or may not be employees of the Enterprise that employs the Assigned Employee. Performance assessments
of each Assigned Employee, including compensation decisions within the framework of the applicable
Enterprise’s compensation and benefit plans, shall be conducted by the individual who supervises such
Assigned Employee or the Board (which individual shall either be another Assigned Employee or an Officer
or other employee of the Company), regardless of which Enterprise employs the supervising individual.
Assigned Employees remain employed at-will. The Company shall have the right at any time and for any
lawful reason to provide notice to the Enterprise that employs an Assigned Employee that the Company
desires that the Assigned Employee no longer work on behalf of the Company as an Assigned Employee, in
which case, the Assigned Employee’s status as an Assigned Employee shall be terminated immediately or
at such later time as may be agreed to by the Company and the Enterprise.
(e)
Acts or omissions of Assigned Employees, in their capacity as Assigned Employees
performing services on behalf of the Company, shall be deemed to be acts or omissions of the Company
(rather than acts or omissions of the Enterprise that employs the Assigned Employee) and, for purposes of
the indemnification provisions in Article 14, Assigned Employees shall be treated as Company Indemnified
Parties (rather than Fannie Mae Indemnified Parties or Freddie Mac Indemnified Parties) with respect to
indemnification claims that relate to their service as Assigned Employees.
(f)
All Materials and intellectual property created or conceived by Assigned Employees
while performing services on behalf of the Company in their capacity as Assigned Employees (“Assigned
Employees IP”) shall be deemed to be "works made for hire" in which the Company owns all Intellectual
Property Rights. To the extent that any Assigned Employees IP is not deemed to be a "work made for hire"
33
and the property of the Company by operation of law, each Enterprise hereby irrevocably assigns, transfers
and conveys to the Company all Intellectual Property Rights in and to the Assigned Employees IP created
or conceived by each Assigned Employee that the Enterprise assigned to the Company, and each Enterprise
agrees to promptly execute such documents and take such actions as the Company may reasonably request
to perfect the Company’s ownership of such Assigned Employees IP. Each of the Assigned Employees shall
be required to execute a confidentiality and invention assignment agreement in favor of the Company with
such terms and conditions as shall be approved by the Board.
(g)
Certain additional terms and conditions related to the Assigned Employees, including
(i) the process for the Enterprises to assign individuals as Assigned Employees, (ii) the personnel policies
and practices that will apply to Assigned Employees, (iii) restrictions on the solicitation or transfer to other
positions of Assigned Employees, and (iv) indemnification obligations with respect to employment-related
claims are attached hereto as Exhibit D and made a part hereof.
9.2 Offers of Employment to Assigned Employees. If approved by the Board, the Company may at
any time, in consultation with the Enterprise that employs an Assigned Employee, make an offer of
employment with the Company to such Assigned Employee. In any event, following his or her appointment,
the CEO shall discuss the status of each Assigned Employee with the Enterprise that employs the Assigned
Employee and determine whether the Assigned Employee will be given an offer of employment by the
Company, will continue to work as an Assigned Employee devoting all or a portion of his or her time to work
on behalf of the Company, or whether the Assigned Employee will otherwise cease to work on matters relating
to the Company.
ARTICLE X
COVENANTS OF THE PARTIES
10.1 Non-Competition. The Customer Services Agreement sets forth the terms of each Enterprise’s
commitment not to compete with the Platform.
10.2 Business Opportunity. The Customer Services Agreement sets forth the terms under which the
Enterprises will make available certain business opportunities to the Company.
10.3 Non-Solicitation of Employees. The Enterprises and the Company shall comply with the policies
and procedures set forth in Exhibit D (and Section 9.2) relating to the solicitation for employment of Assigned
Employees, employees of the Company and employees of the Enterprises who perform services on behalf
of the Company pursuant to the Administrative Services Agreements.
ARTICLE XI
CONFIDENTIALITY
11.1 Protection of Confidential Information.
Each Recipient Party covenants and agrees to keep confidential any and all
Confidential Information of any Disclosing Party, in accordance with a standard of care that shall be no less
(a)
34
than the standard employed to protect its own information of like importance or that of others, but in no event
with less than reasonable care consistent with industry practice;
(b)
Each Recipient Party covenants and agrees not to print or copy, in whole or in part,
any documents or other media containing any Confidential Information without the prior written consent of
the Disclosing Party other than (i) copies for its Permitted Recipient Parties, and (ii) for its Permitted Internal
Purposes;
(c)
Each Recipient Party covenants and agrees not to use any Confidential Information it
receives from a Disclosing Party for any purpose other than (i) in connection with or in furtherance of the
Business, and (ii) for its Permitted Internal Purposes;
(d)
Each Recipient Party covenants and agrees not to disclose, or permit the disclosure
of, Confidential Information of a Disclosing Party to any third party except (i) to a Party or the Permitted
Recipients of a Party, or (ii) to other persons, on a need to know basis, for the Permitted Internal Purposes,
provided that such other persons are bound by confidentiality obligations that are at least as protective of the
Confidential Information as the terms of this Article XI (“Other Permitted Persons”). In the case of disclosures
pursuant to clause (ii) of this Section 11.1(d), such disclosure shall be subject to the internal controls that the
Recipient Party exercises with respect to its own Confidential Information of like importance;
(e) With respect to Confidential Information obtained by the Disclosing Party from a third
party, each Recipient Party covenants and agrees to abide by any use and non-disclosure restrictions imposed
by the third party on such Confidential Information to which the Disclosing Party is subject, provided that
the Disclosing Party has informed the Recipient Party of such restrictions in writing in advance;
(f)
To the extent that any Confidential Information disclosed by an Enterprise to the
Company (and to which the other Enterprise has access) is never used to a material degree by the Company,
the Enterprise that did not disclose such Confidential Information shall not have any use rights thereto;
(g)
The Enterprises shall not use for any purpose whatsoever each other’s Confidential
Information that is Nonpublic Member Data. For the avoidance of doubt, the term “use” in this Section
11.1(g) shall be construed broadly to include any productive use, including the testing or verification purposes
of the Enterprises. Notwithstanding the foregoing, but subject to Section 11.1(h) below, the prohibition in
this Section 11.1(g) shall not apply to the testing and verification processes conducted by employees of the
Enterprises directly involved in the build, design, development, testing, operation, support or maintenance
of the Platform under the direct or indirect supervision of the respective Enterprise or Company officer or
officers, as the case may be, charged with such management responsibilities;
(h)
The Company shall maintain and comply with the written information security
program (including the administrative, technical and physical safeguards set forth therein) approved by the
Board. Any changes to the Company's information security program will be subject to Board approval. Any
use, access or disclosure of Confidential Information by the Company (including Nonpublic Member Data)
35
shall comply with (i) the terms of this Agreement, (ii) the terms set forth in any other agreement between the
Parties and (iii) appropriate policies and controls adopted by the Company, consistent with the approved
information security program; and
(i)
The provisions of this Article XI shall not apply to Intellectual Property Rights
solely to the extent such Intellectual Property Rights are subject to the license rights set forth in Article XII;
provided, however, that each Recipient Party shall keep confidential all trade secrets and other Intellectual
Property Rights of a Disclosing Party that are of a confidential nature (which shall not include issued patents,
registered copyrights of non-confidential works of authorship, and trademarks) with the standard of care
specified in Section 11.1(a) and shall disclose such information to third parties only on a need to know basis,
provided that such third parties are bound by confidentiality obligations that are at least as protective of the
Confidential Information as the Recipient Party would require in similar circumstances with respect to its
own information of like importance.
11.2 Permitted Recipient Parties and Other Permitted Persons. Each Recipient Party shall advise
any Permitted Recipient Party and Other Permitted Persons to which it discloses Confidential Information
of the confidential nature of the Confidential Information and shall require such Permitted Recipient Party
and Other Permitted Person to protect the confidentiality of such Confidential Information in accordance
with the provisions of this Article XI, provided, that, with respect to each Recipient Party’s use of such
Confidential Information for its Permitted Internal Purposes, it shall only be required to adhere to its own
internal controls, policies and procedures for the confidential treatment of information that is similar in nature
and of comparable important to the Confidential Information at issue, which controls shall be consistent with
industry practice. Each Recipient Party shall be liable for any breach of any obligation hereunder by any of
its Permitted Recipient Parties or Other Permitted Persons and agrees to take all reasonable measures
(including but not limited to court proceedings for injunctive relief, if reasonable under the circumstances)
to restrain its respective Permitted Recipient Parties or Other Permitted Persons from prohibited or
unauthorized disclosure or use of such Confidential Information. Nothing in this Agreement shall prohibit
the disclosure by any Recipient Party of Confidential Information to FHFA, in its role as Conservator of the
Enterprises or as regulator and supervisor of the Company, or to FHFA’s Office of Inspector General, in its
oversight capacity of FHFA, and FHFA’s employees, agents, attorneys or other professional advisors.
11.3 Disclosure. In the event a Recipient Party receives a court order or other governmental or
administrative decree requiring disclosure of Confidential Information of a Disclosing Party, or if a Recipient
Party is otherwise legally obligated to disclose the Confidential Information of a Disclosing Party (other than
as a result of any directive or other instruction from FHFA), such Recipient Party shall, if it is legally permitted
to do so, give the Disclosing Party reasonable written notice prior to such disclosure in order to permit such
Disclosing Party, at such Disclosing Party’s expense, to seek a protective order or otherwise take steps to
prevent the disclosure of such Confidential Information. The Recipient Party shall cooperate with the
Disclosing Party in seeking a protective order or other measure to limit the required disclosure of the
Disclosing Party’s Confidential Information, and release only so much of such Confidential Information as
is required by any resulting order, decree or legal obligation.
11.4 Breach. Each Party agrees that in the event of a breach or threatened breach by any Party,
including its Permitted Recipient Parties and Other Permitted Persons, of the provisions of this
36
Article XI, the non-breaching Party may not have an adequate remedy in money damages and, accordingly,
shall be entitled to seek an injunction against such breach, in addition to any other legal or equitable remedies
available to it.
11.5 Residual Knowledge. Each Disclosing Party acknowledges that the Recipient Parties may
currently or in the future be developing information internally, or receiving information from other parties,
that is similar to the Disclosing Party’s Confidential Information. The Parties agree that they also may acquire
Residual Knowledge as a result of this Agreement. Any use or disclosure by any Party of Residual Knowledge
shall not constitute a breach of this Agreement, provided that such use or disclosure does not violate the
patents or copyrights of any other Party hereto. Subject to the foregoing proviso, nothing in this Agreement
will prohibit a Recipient Party from using Residual Knowledge to develop or have developed for itself, or
otherwise use or disclose, products, concepts, systems or techniques that are similar to or compete with the
products, concepts, systems or techniques contemplated by or embodied in such Confidential Information.
The Parties shall have no obligation to limit or restrict the work assignments of their Permitted Recipient
Parties as a result of their having had access to any other Party’s Confidential Information.
11.6 Breach Notification. The Recipient Party shall promptly notify the Disclosing Party in writing
of any unauthorized use or disclosure of, or access to, the Disclosing Party’s Confidential Information by or
arising through the Recipient Party of which it becomes aware, and take all reasonable steps requested by
the Disclosing Party to limit, stop or otherwise prevent such loss or unauthorized use, disclosure or access.
ARTICLE XII
INTELLECTUAL PROPERTY
12.1 Licenses to Enterprises of Intellectual Property Rights.
(a)
Except as otherwise agreed to in a written contract approved in accordance with Section
6.4(s), the Company hereby grants to each Enterprise a non-exclusive, non-transferable (except as set forth
in Section 17.9), fully-paid, royalty free, perpetual (both during and following the respective Enterprise’s
Membership in the Company), irrevocable and worldwide license to Exploit all Materials and all Intellectual
Property Rights (other than trademarks) that are owned or licensed by the Company while the respective
Enterprise is a Member of the Company, which may be used by each Enterprise for any purpose, subject to
any restrictions that may be set forth in the Customer Services Agreement. The foregoing license excludes
any use rights with respect to third party licensed Materials to the extent the third party licenses do not permit
such use rights to be granted; provided, however, that upon written request from an Enterprise, the Company
shall use commercially reasonable efforts to obtain a separate license in the name of the Enterprise, which
license shall be at that Enterprise’s expense (as approved in advance by such Enterprise).
(b)
The rights to sublicense and distribute such Materials and Intellectual Property Rights
pursuant to Section 12.1(a) shall apply to the extent reasonably necessary or appropriate for each Enterprise
to Exploit such Materials and Intellectual Property Rights for the operation of its business; provided, however,
37
that such sublicense or distribution shall not be solely for the purpose of receiving royalties or other licensing
revenue from the sublicense or such Materials and Intellectual Property Rights themselves (as opposed to in
combination with other aspects of the Enterprise’s business) and shall contain confidentiality obligations that
are at least as protective of the Company’s Confidential Information as the terms of Article XI. Without
limiting the generality of the foregoing, the Enterprises may permit third parties providing services to the
Enterprises to access such Materials and the Technology embodying such Intellectual Property Rights,
provided that such third parties are bound by confidentiality obligations that are at least as protective of the
Company’s Confidential Information as the terms of Article XI.
(c)
In the event of the bankruptcy of the Company pursuant to the Bankruptcy Code and
an attendant rejection of this Agreement or any license granted hereunder, the Parties intend that the provisions
of Section 365 of the Bankruptcy Code shall apply and the Enterprises shall be entitled to retain all license
rights granted in this Agreement and possession of all Materials and Intellectual Property Rights licensed
under this Agreement, and to exercise all rights to obtain possession of Materials and embodiments of
Intellectual Property Rights in accordance with this Agreement and any other agreement supplementary
hereto, and the Enterprises shall have no obligation to pay any additional fees or payments in connection
with the exercise of the license rights granted under this Agreement and use of any such licensed Materials
or Intellectual Property Rights.
12.2 Third Party Intellectual Property Rights. As soon as practicable following the date hereof, the
management of the Company shall adopt policies and procedures governing the use by the Company of
Software and Materials owned by third parties (including open source software), including in connection
with the design and development of the Platform.
12.3 Disclosure and Delivery of Intellectual Property Rights and Materials. This Article XII
establishes the Enterprises’ right to Exploit the Materials and Intellectual Property rights owned or licensed
by the Company. To facilitate the exercise of those rights in a manner that does not create unreasonable
burdens for the Company, the Members and the Company will agree on a schedule for delivery of Materials
and Intellectual Property by the Company to the Enterprises, which schedule may be updated by written
agreement of both Members and the Company from time to time. The remaining provisions of this Article
XII will apply until a schedule is agreed upon by the parties and will serve as default requirements in case
any schedule agreed upon by the parties expires without a replacement having been agreed upon. Within
thirty (30) days after the end of each calendar quarter, the Company will provide to each Enterprise (unless
such Enterprise notifies the Company that it elects to defer such delivery) a then current (i.e. as of the end
of the applicable calendar quarter) listing of all Materials and Intellectual Property Rights owned or licensed
by the Company, including a complete listing of all Software and other Materials incorporated in or reasonably
necessary to enable the Enterprises to Exploit the Platform. Following receipt of such listing, an Enterprise
may request in writing no more than one time per calendar quarter that the Company provide to the Enterprise,
and the Company shall provide to such Enterprise within five business days after receipt of the request,
current copies of any Materials or Intellectual Property Rights listed therein (or such portion thereof as was
requested by such Enterprise) including current copies of object code and Source Code for Software included
in the Materials. At the request of an Enterprise, the Company shall also provide a reasonable amount of
basic knowledge transfer as is reasonably necessary to permit the Enterprise to Exploit the Platform using
appropriately skilled and knowledgeable resources; provided, however, that such obligation of the Company
38
shall not interfere with the priority of the Company’s day to day operations and objectives and shall not
otherwise create an unreasonable burden on the Company or its employees. If an Enterprise ceases to be a
Member of the Company, the Company shall provide a then current (i.e. as of the date it ceases to be a
Member of the Company) listing and copies of the foregoing Materials and Intellectual Property Rights to
such Enterprise within thirty (30) days after it ceases to be a Member; thereafter, the Company’s obligations
under this Section 12.3 shall terminate.
12.4 Prosecution of Intellectual Property Rights. The Company shall have the sole authority to
prosecute any patents on inventions developed by or for the Company and assigned to it using patent counsel
selected by the Board.
12.5 Protection of Company Intellectual Property Rights. The Company shall use commercially
reasonable efforts to protect and enforce its Intellectual Property Rights in and to the Platform, and any
underlying Software owned by the Company, including by bringing infringement suits against infringers in
its reasonable discretion. Should the Company fail to do so, in the reasonable judgment of an Enterprise,
the Enterprise shall have the right to bring such matter before the Board. If, after consideration of the Board,
the Company declines to bring an infringement action against an infringer, such decision shall be final, and
neither Enterprise shall have any further right to raise such matter before the Board or to otherwise object to
such decision.
12.6 Covenant Not to Sue.
(a)
Each Party covenants that it shall not Assert any Patent Rights owned or controlled
by it against (i) the Company or its Covered Persons with respect to their designing, building, developing,
testing, operating, supporting, maintaining, updating, enhancing and using the Platform in accordance with
this Agreement and the Customer Services Agreement, or (ii) an Enterprise or its Covered Persons with
respect to such Enterprise’s Exploitation of the Materials and Intellectual Property Rights pursuant to Section
12.1 in accordance with the terms of this Agreement. Each covenant in this Section 12.6 is referred to as a
“CNTS.” For clarification, a Patent Right is subject to the CNTS only to the extent that it would be infringed
in the absence of a license thereunder as a result of the activities described in subparagraphs (i) and (ii) above.
The Parties acknowledge and agree that no CNTS in any way narrows the scope of, restricts the application
of, or otherwise limits or adversely affects, the licenses granted to the Parties pursuant to Section 12.1 and
the Contribution Agreement.
(b)
Each CNTS runs with title to any Patent Rights to the extent they are subject to the
CNTS and binds any assignee, exclusive licensee, or other individual or entity that acquires any interest in
any Patent Rights that are subject to the CNTS, whether or not that individual or entity has actual or
constructive knowledge of the CNTS.
(c)
The CNTS granted by each Enterprise in favor of the other Enterprise and its Covered
Persons shall be effective for so long as both Enterprises remain Members and both CNTS shall terminate
when either Enterprise ceases to be a Member, provided, that each CNTS shall continue in perpetuity with
respect to all Patent Rights owned or controlled by each grantor Enterprise on or prior to the date on which
an Enterprise ceased to be a Member (and including without limitation future patents and patent applications
claiming priority to the foregoing). The CNTS granted by each Enterprise in favor of the Company and its
39
Covered Persons shall be effective for so long as such Enterprise remains a Member and shall terminate when
it ceases to be a Member, provided, that such CNTS shall continue in perpetuity with respect to all Patent
Rights owned or controlled by such grantor Enterprise on or prior to the date on which it ceased to be a
Member (and including without limitation future patents and patent applications claiming priority to the
foregoing). The CNTS granted by the Company in favor of each Enterprise shall be effective for so long as
such Enterprise remains a Member and shall terminate when its ceases to be a Member, provided, that such
CNTS shall continue in perpetuity with respect to all Patent Rights owned or controlled by the Company on
or prior to the date on which such Enterprise ceased to be a Member (and including without limitation future
patents and patent applications claiming priority to the foregoing).
(d)
To effectuate the purpose of Section 12.6 (b) above, if either of the Enterprises intends
(x) to transfer or assign (directly, by operation of law, or in connection with a merger, acquisition, or sale of
all or substantially all of an Enterprise’s assets) ownership of a Patent Right to any third party, or (y) to grant
an exclusive license to, or other proprietary interest in, any Patent Right, which Patent Right, the Enterprise
knew or reasonably should have known, is subject to the CNTS at the time of the transfer, assignment, or
grant, then prior to any such transfer, assignment, or grant, such Enterprise shall secure in writing from the
third party (i) the CNTS with respect to such Patent Right to the same extent as it applies at such time to such
Enterprise and (ii) a covenant to secure a similar CNTS from any subsequent owner or exclusive licensee
of such Patent Right. If for any reason any transferee, assignee, or grantee does not so agree in writing, then,
effective immediately prior to that transfer, assignment, or grant, the Enterprise shall be deemed to have
granted to the Company an automatically-vested, nonexclusive, irrevocable, perpetual, fully-paid-up, royalty-
free, worldwide, transferable, assignable license under such Patent Right to design, build, develop, test,
operate, support, maintain, update, enhance and use the Platform in accordance with this Agreement and the
Customer Services Agreement.
ARTICLE XIII
TRANSFER OF LLC UNITS
13.1 Prohibition on Transfers by Enterprises. Neither Fannie Mae nor Freddie Mac may Transfer
their respective LLC Units, or any portion thereof, without (i) approval as a Significant Matter pursuant to
Section 6.4, and (ii) proper receipt of such other Governmental Approvals as may be necessary.
ARTICLE XIV
INDEMNIFICATION
14.1 Indemnification by Fannie Mae.
(a)
Subject to the limitations set forth in this Article XIV and to all applicable regulatory
requirements and restrictions, Fannie Mae shall defend, indemnify and hold harmless each of the Freddie
Mac Indemnified Parties and the Company Indemnified Parties from and against any costs, damages, losses,
expenses (including, without limitation, settlements, judgments and reasonable attorneys’ fees and costs
relating thereto), claims, obligations or liabilities (“Damages”) suffered or incurred by any Freddie Mac
40
Indemnified Party or Company Indemnified Party, as the case may be, to the extent such Damages result or
arise from:
(i)
a breach or inaccuracy of any of the representations or warranties made by
Fannie Mae in this Agreement; or
(ii)
a breach of any of the covenants or agreements made or to be performed by
Fannie Mae pursuant to this Agreement.
(b)
Notwithstanding the foregoing, Fannie Mae shall not be required to indemnify or hold
any Freddie Mac Indemnified Party or Company Indemnified Party harmless from or against any Damages
to the extent that such Damages arise out of or relate to the negligence, willful misconduct or breach of any
of its representations, warranties, covenants or agreements herein, in any Ancillary Agreement or in any
certificate, agreement, document or instrument delivered pursuant hereto or thereto, by any Freddie Mac
Indemnified Party or Company Indemnified Party, as applicable.
14.2 Indemnification by Freddie Mac.
(a)
Subject to the limitations set forth in this Article XIV and to all applicable regulatory
requirements and restrictions, Freddie Mac shall defend, indemnify and hold harmless each of the Fannie
Mae Indemnified Parties and the Company Indemnified Parties from and against any Damages suffered or
incurred by any Fannie Mae Indemnified Party or Company Indemnified Party, as the case may be, to the
extent such Damages result or arise from:
(i)
a breach or inaccuracy of any of the representations or warranties made by
Freddie Mac in this Agreement; or
(ii)
a breach of any of the covenants or agreements made or to be performed by
Freddie Mac pursuant to this Agreement.
(b)
Notwithstanding the foregoing, Freddie Mac shall not be required to indemnify or
hold any Fannie Mae Indemnified Party or Company Indemnified Party harmless from or against any Damages
to the extent that such Damages arise out of or relate to the negligence, willful misconduct or breach of any
of its representations, warranties, covenants or agreements herein, in any Ancillary Agreement or in any
certificate, agreement, document or instrument delivered pursuant hereto or thereto, by any Fannie Mae
Indemnified Party or Company Indemnified Party, as applicable.
14.3 Indemnification by the Company.
(a)
Subject to the limitations set forth in this Article XIV and to all applicable regulatory
requirements and restrictions, the Company shall defend, indemnify and hold harmless each of the Fannie
Mae Indemnified Parties and the Freddie Mac Indemnified Parties from and against any Damages suffered
or incurred by any Fannie Mae Indemnified Party or Freddie Mac Indemnified Party, as the case may be, to
the extent such Damages result or arise from:
41
a breach by the Company of any Fannie Mae Assigned Contract (as such term
is defined in the Contribution Agreement) or Freddie Mac Assigned Contract (as such term is defined in the
Contribution Agreement); or
(i)
(ii)
a breach by the Company of any contract or other agreement pursuant to which
either or both Enterprises agrees to serve as a co-party, guarantor or otherwise for purposes of providing
assurance or security to the third-party to such contract or agreement of the Company’s performance, provided
that the indemnity under this Subparagraph (ii) shall be limited to the Damages suffered by the applicable
Enterprise in its capacity as a co-party, guarantor or otherwise for purposes of providing assurance or security
to such third-party.
(b)
Notwithstanding the foregoing, the Company shall not be required to indemnify or
hold any Freddie Mac Indemnified Party or Fannie Mae Indemnified Party harmless from or against any
Damages to the extent that such Damages arise out of or relate to the negligence, willful misconduct or breach
of any of its representations, warranties, covenants or agreements herein, in any Ancillary Agreement or in
any certificate, agreement, document or instrument delivered pursuant hereto or thereto, by any Freddie Mac
Indemnified Party or Fannie Mae Indemnified Party, as applicable.
14.4 Indemnification Procedures. In any case where an Indemnified Party shall seek indemnification
under this Agreement for a third party claim, suit or proceeding (a “Claim”), such indemnification shall be
conditioned on such Indemnified Party's compliance with the following procedures:
(a)
The Indemnified Party will give prompt written notice to the party from whom such
indemnification is sought (the “Indemnifying Party”) of each Claim for indemnification under this Agreement,
specifying to the extent then known the amount and nature of the Claim (a “Notice of Indemnification”). No
failure to so notify the Indemnifying Party shall relieve the Indemnifying Party of its obligations under this
Agreement except to the extent that Damages are attributable to such failure. Within fifteen (15) days
following receipt of a Notice of Indemnification from the Indemnified Party relating to any Claim, the
Indemnifying Party will notify the Indemnified Party in writing if the Indemnifying Party elects to assume
control of the defense and settlement of that Claim (a “Defense Election”).
(b)
If the Indemnifying Party delivers a Defense Election relating to any Claim within the
required notice period, the Indemnifying Party will be entitled to have sole control over the defense and
settlement of such Claim; provided, however, that
(i)
the Indemnified Party will be entitled to participate in the defense of such
Claim and to employ counsel at its own expense to assist in the handling of such Claim, provided, however,
that, if the Indemnified Party cooperates and provides assistance at the request of the Indemnifying Party in
connection with the Indemnifying Party’s defense, the Indemnified Party shall be entitled to recover from
the Indemnifying Party the reasonable costs of providing such assistance;
such Claim, the Indemnifying Party will obtain the prior written approval of the Indemnified Party in
(ii)
before entering into any settlement of such Claim or ceasing to defend against
42
respect of any compromise or settlement that would impose any penalty, limitation, disclosure obligation,
or injunction or other equitable relief upon the Indemnified Party or that does not include the third party’s
release of the Indemnified Party from all liability relating to such Claim for which the Indemnified Party is
entitled to be indemnified; and
of the status of such Claim and the Indemnifying Party’s defense thereof.
(iii)
the Indemnifying Party shall inform the Indemnified Party on a regular basis
(c)
Subject to Section 14.4(b), after the Indemnifying Party has delivered a Defense
Election relating to any claim in accordance with Section 14.4(a), the Indemnifying Party will not be liable
to the Indemnified Party for any legal expenses incurred by such Indemnified Party in connection with the
defense of that Claim. In addition, the Indemnifying Party will not be required to indemnify the Indemnified
Party for any amount paid or payable by such Indemnified Party in the settlement of any claim for which the
Indemnifying Party has delivered a timely Defense Election if such amount was agreed to without the written
consent of the Indemnifying Party.
(d)
Provided that the Notice of Indemnification is given (unless the failure to provide such
Notice of Indemnification does not actually and materially prejudice the interests of the Indemnifying Party),
and the Indemnifying Party (i) has not delivered a Defense Election relating to any Claim within the required
notice period, or (ii) has delivered a Defense Election relating to a Claim but has not retained counsel within
30 days following the delivery of the Defense Election, then the Indemnified Party shall have the right to
defend, contest or otherwise protect against the same, and make any compromise or settlement thereof and
recover any related Damages, including any Damages incurred in securing the Indemnified Party’s rights
under this Agreement, from the Indemnifying Party.
(e)
In the event that the counsel retained by the Indemnifying Party determines that it
cannot represent the Indemnifying Party and the Indemnified Party in connection with the defense of any
Claim consistent with the applicable rules of professional conduct, the Indemnified Party shall have the right
to employ separate counsel and to control its own defense in connection therewith, and the reasonable fees
and expenses of such separate counsel shall be paid by the Indemnifying Party.
(f)
An Indemnified Party shall, to the extent practicable and reasonably within its control
and at the expense of the Indemnifying Party, make commercially reasonable efforts to mitigate any Damages
of which it has adequate notice, provided that the Indemnified Party shall not be obligated to act in
contravention of applicable law or in contravention of reasonable and customary practices of a prudent person
in similar circumstances.
(g)
The obligation to indemnify a party’s officers, directors, employees and agents in
accordance with this Article XIV may be enforced exclusively by such party and nothing herein shall be
construed to grant such officers, directors, employees and agents any individual rights, remedies, obligations
or liabilities with respect to the parties to this Agreement.
43
14.5 Limits on Indemnification.
(a)
The parties hereto waive as against each other any claim to consequential, special,
exemplary or punitive damages except to the extent consequential, special, exemplary or punitive damages
are awarded to a third party against an Indemnified Party in circumstances in which such Indemnified Party
is entitled to indemnification hereunder.
(b)
Each Indemnified Party shall maintain such insurance coverage with respect to its
business as is customary for an entity of the size and nature of such Indemnified Party. Each Indemnified
Party shall be obligated in connection with any claim for indemnification under this Article XIV to use
commercially reasonable efforts to obtain any insurance proceeds and indemnification payments payable to
such Indemnified Party by any third party available with regard to the applicable claim. The amount which
the Indemnifying Party is or may be required to pay to any Indemnified Party pursuant to this Article XIV
shall be reduced (retroactively, if necessary) by any insurance proceeds, indemnification payments or other
amounts actually recovered by or on behalf of the indemnified party in reduction of the related damages. If
the Indemnified Party receives the payment required by this Agreement from the Indemnifying Party in
respect of Damages and subsequently receives insurance proceeds, indemnification payments or other
amounts in respect of such Damages, then such Indemnified Party shall promptly repay to the Indemnifying
Party a sum equal to the amount of such insurance proceeds, indemnification payments or other amounts
actually received.
14.6 Exclusive Remedy.
(a)
The remedies provided in this Article XIV shall be the exclusive remedies of the Parties
hereto in connection with any claim or action arising out of any breach by, or inaccuracy of, another Party’s
(i) representations, (ii) warranties or (iii) covenants and agreements. The provisions of this Article XIV shall
apply to claims for indemnification asserted as between the Parties as well as to third-party claims.
(b)
Nothing in this Section 14.6 is intended to limit or expand the remedies provided under
any Ancillary Agreement for claims arising under those Ancillary Agreements.
ARTICLE XV
DISPUTE RESOLUTION
15.1 Disputes. The Members and the Company shall attempt in good faith to resolve any dispute,
controversy or claim between or among them arising out of or relating to this Agreement, including without
limitation any dispute over the breach, interpretation or validity thereof (a “Dispute”). Any Member or the
Company, as applicable, may request through written notice to all of the other Members and the Company
that the Dispute be referred to senior executives of the Members and the Company, as applicable, that are
parties to the Dispute who have authority to resolve the Dispute. The senior executives shall attempt to
resolve the Dispute by agreement within sixty (60) days of such notice. The senior executives shall take
such actions as may be necessary in connection with any discussions relating to any Dispute to prevent the
disclosure of competitively sensitive information of one Member or the Company, as applicable, to other
Members or the Company, as applicable.
44
15.2 Legal Proceedings. If any Dispute is not resolved by the senior executives of the Members or
the Company, as applicable, that are party to the Dispute within the sixty (60) day period prescribed by
Section 15.1, any such Member or the Company may institute legal proceedings in a federal court in the
State of Maryland, which shall be the exclusive forum for such Dispute to the fullest extent permitted by
applicable law.
15.3 Resolution by Conservator. Notwithstanding the foregoing, at any time during which FHFA is
Conservator of both (but not just one) Enterprises, FHFA shall have the authority to resolve any Dispute
between the Enterprises and between either or both Enterprises and the Company. While FHFA is Conservator
of both (but not just one) Enterprises, FHFA may direct that the Enterprises take such actions and engage in
such processes as FHFA shall determine to resolve any Dispute, and the Enterprises shall comply with FHFA’s
direction.
ARTICLE XVI
NOTICES
Any notice or other communication required or permitted to be given hereunder shall be in writing
and shall be (i) personally delivered, (ii) transmitted by an internationally recognized overnight courier
service, or (iii) transmitted by electronic mail (with a confirmation copy sent by one of the other methods
authorized in this Section or by mailing, postage prepaid), addressed as follows (or such other address as the
Parties may designate from time to time in writing):
If to Fannie Mae:
Federal National Mortgage Association
1100 15th Street, NW
Washington, DC 20005
Attn: Executive Vice President, General Counsel & Corporate Secretary
E-Mail: terry_theologides@fanniemae.com
Copies to:
Federal Housing Finance Agency
400 7th Street, SW
Washington, DC 20024
Attn: Deputy Director, Division of Conservatorship
E-Mail: CSS@fhfa.gov
and
Federal National Mortgage Association
1100 15th Street, NW
Washington, DC 20005
Attn: Vice President, Deputy General Counsel & Deputy Corporate Secretary
Email: christine_e_reddy@fanniemae.com
45
If to Freddie Mac:
Federal Home Loan Mortgage Corporation
8200 Jones Branch Drive
McLean, Virginia 22102
Attn: Ricardo A. Anzaldua
Executive Vice President, General Counsel and Corporate Secretary
E-Mail: ricardo_anzaldua@freddiemac.com
Copies to:
Federal Housing Finance Agency
400 7th Street, SW
Washington, DC 20024
Attn: Deputy Director, Division of Conservatorship
E-Mail: CSS@fhfa.gov
and
Federal Home Loan Mortgage Corporation
8200 Jones Branch Drive
McLean, Virginia 22102
Attn: Melinda L. Reingold
Vice President & Deputy General Counsel - Mortgage Securities
E-Mail: melinda_reingold@freddiemac.com
If to the Company:
Common Securitization Solutions, LLC
7501 Wisconsin Avenue, Suite 300
Bethesda, Maryland 20814
Attn: Chief Executive Officer
Email: tony.renzi@commonsecuritization.com
Copies to:
Common Securitization Solutions, LLC
7501 Wisconsin Avenue, Suite 300
Bethesda, Maryland 20814
Attn: Senior Vice President, Chief Legal and Compliance Officer
Email: carol.rakatansky@commonsecuritization.com
Federal Housing Finance Agency
400 7th Street, SW
Washington, DC 20024
Attn: Deputy Director, Division of Conservatorship
E-Mail: CSS@fhfa.gov
46
All notices and other communications required or permitted to be given hereunder shall be deemed
to have been duly given on the first to occur of: (i) the date of receipt if delivered personally, (ii) the first
Business Day following the day the same is deposited with an internationally recognized courier service if
sent by overnight delivery service, or (iii) the date sent (without notice of non-delivery) if sent by electronic
mail transmission.
ARTICLE XVII
MISCELLANEOUS
17.1 FHFA Authority.
(a)
FHFA’s actions pursuant to this Agreement shall be performed in its capacities as
Conservator of the Enterprises and as regulator and supervisor of the Company, and any approval, designation,
direction or other rights reserved to FHFA under this Agreement shall be exercised by FHFA in those roles.
(b)
Notwithstanding the foregoing, nothing in this Agreement is intended to, nor shall,
limit in any manner FHFA’s authority with respect to the Enterprises and their respective assets (including
their LLC Units) as Conservator or Receiver, nor as regulator and supervisor of the Enterprises and the
Company.
(c)
Notwithstanding any other provision of this Agreement to the contrary, if FHFA is no
longer Conservator of either Enterprise, all rights of FHFA in its capacity as Conservator arising exclusively
under this Agreement shall cease, but its rights as regulator and supervisor of the Enterprises and the Company
shall persist.
17.2 Scope of the Parties’ Authority. Unless otherwise provided in this Agreement, no Party shall,
without the prior written consent of the other Party, in any manner use the name of, or commit or act or
purport to act for or as a representative of, or assume any obligations or responsibilities on behalf of, such
other Party, whether before or after the formation of the Company.
17.3 Force Majeure. Should any circumstance beyond the reasonable control of any Member occur
which delays or renders impossible the performance of any of its obligations under this Agreement, such
obligation shall be postponed for such time as such performance necessarily has had to be suspended or
delayed on account thereof; provided such Member shall notify the other Members and the Company in
writing within fourteen (14) days after the occurrence of such force majeure. In such event, representatives
of each Member, the Company and FHFA shall promptly meet to determine an equitable solution to the effect
of any such event, provided that any Member who fails because of force majeure to perform its obligations
hereunder or thereunder will upon the cessation of the force majeure take all reasonable steps within its power
to resume with the least possible delay compliance with its obligations. Events of force majeure shall include,
without limitation, war, revolution, invasion, insurrection, riots, mob violence, sabotage or other civil
disorders, acts of God, strikes or other labor disputes, acts, laws, regulations or rules of any government or
governmental agency and any other circumstances beyond the reasonable control of the Member, the
obligations of which are affected thereby.
47
17.4 Severability. If any term or provision of this Agreement shall be held or deemed to be, or shall
in fact be, invalid, inoperative, illegal or unenforceable as applied to any particular case in any jurisdiction
or jurisdictions, or in all jurisdictions or in all cases, because of the conflicting of any provision with any
constitution or statute or rule of public policy or for any other reason, such circumstance shall not have the
effect of rendering the provision or provisions in question invalid, inoperative, illegal or unenforceable in
any other jurisdiction or in any other case or circumstance or of rendering any other provision or provisions
herein contained invalid, inoperative, illegal or unenforceable to the extent that such other provisions are not
themselves actually in conflict with such constitution, statute or rule of public policy, but this Agreement
shall be narrowly reformed and construed in any such jurisdiction or case as if such invalid, inoperative,
illegal or unenforceable provision had never been contained herein and such provision narrowly reformed
so that it would be valid, operative and enforceable to the maximum extent permitted in such jurisdiction or
in such case.
17.5 Entire Agreement. The terms and conditions herein contained together with the terms and
conditions of the Ancillary Agreements, the Customer Services Agreement and the other documents attached
as Schedules and Exhibits hereto constitute the entire agreement between the Parties relating to the subject
matter of this Agreement and shall supersede all previous communications between the Parties with respect
to the subject matter of this Agreement. No Party has entered into this Agreement in reliance upon a
representation, warranty or undertaking of the other Party which is not set out or referred to in this Agreement.
17.6 Further Assurances. The Parties hereto shall at any time, and from time to time execute and
deliver such additional instruments and other documents and shall at any time, and from time to time take
such further actions as may be reasonably necessary or appropriate to effectuate, carry out and comply with
all of the terms of this Agreement and the transactions contemplated hereby
17.7 No Third Party Rights. This Agreement shall not be deemed or construed in any way to result
in the creation of any rights or obligations in any Person not a party to this Agreement (including, but not
limited to, employees or contractors of any Enterprise or the Company), other than FHFA and the third parties
entitled to indemnification pursuant to Article XIV.
17.8 Applicable Law. This Agreement and the rights and liabilities of the parties hereto shall be
governed by and construed in accordance with applicable U.S. federal laws and the laws of the State of New
York applicable to contracts made and to be performed within such jurisdiction and without regard to any
conflicts of laws principle that would result in the application of the laws of any other jurisdiction.
17.9 Assignment of Agreement. This Agreement shall be binding upon and inure to the benefit of
each Party hereto and its permitted successors and assigns, including with respect to each Enterprise, the
corresponding LLRE as contemplated by Section 3.1(b). Subject to Section 3.1(b), no Party hereto shall
assign, transfer, or otherwise dispose of (by operation of law or otherwise) any of its rights or obligations
under this Agreement in whole or in part to any Person without the prior written consent of the other Parties;
provided, however, that in the event any Enterprise is placed into receivership and the LLC Units held by
48
the Enterprise are transferred to a corresponding LLRE, such LLRE shall become a party to this Agreement
as successor-in-interest to the Enterprise.
17.10 Waivers. No waiver, forbearance, or failure by any Party of its right to enforce any provision
of this Agreement shall constitute a waiver or estoppel of such Party’s right to enforce such provision thereafter
or to enforce any other provision of this Agreement. No single or partial exercise of any right or power
hereunder shall operate as a waiver of such right or of any other right or power. The waiver by any Party of
a breach of any provision of this Agreement shall not operate or be construed as a waiver of any other or
subsequent breach hereunder. All rights and remedies existing under this Agreement are cumulative with,
and not exclusive of, any rights or remedies otherwise available.
17.11 Amendments. No amendment or supplement to this Agreement shall be effective for any
purpose unless in writing and signed by an authorized officer of each Party hereto.
17.12 Survival. The provisions of Articles XI, XII, XIV, XV, and XVI of this Agreement shall survive
indefinitely.
17.13 Expenses. Each Party shall bear its own costs and expenses incurred in connection with the
negotiation, execution and performance of this Agreement and all related agreements referred to herein,
except to the extent specifically provided otherwise in this Agreement or in any of those related agreements
or as otherwise agreed by the Enterprises.
17.14 Construction. The Enterprises agree that they have been represented by counsel during the
negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation,
holding or rule of construction providing that ambiguities in an agreement or other document will be construed
against the party drafting such agreement or document.
17.15 Counterparts. This Agreement may be executed simultaneously in any number of counterparts
and each such counterpart shall be deemed to be an original instrument, but all such counterparts together
shall constitute one and the same instrument, binding on all of the Parties. Signatures provided by facsimile
or electronic copy shall have the same effect as originals.
[Signatures appear on the following page]
49
IN WITNESS WHEREOF, the parties to this Agreement have executed this Agreement as of the date
first above written.
FEDERAL NATIONAL MORTGAGE ASSOCIATION
By: _/s/ David C. Benson_____________
Name: David C. Benson
Title: President
FEDERAL HOME LOAN MORTGAGE
CORPORATION
By: _/s/ Jerry Weiss________________
Name: Jerry Weiss
Title: Executive Vice President and
Chief Administrative Officer
COMMON SECURITIZATION SOLUTIONS,
LLC
By: _/s/ Anthony N. Renzi_____________
Name: Anthony N. Renzi
Title: Chief Executive Officer
Schedule 3.2
LLC UNITS AND PERCENTAGE INTERESTS OF THE MEMBERS
Member
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
LLC Units
1000 Units
1000 Units
Percentage Interest
50%
50%
EXHIBIT A
FIRST AMENDED AND RESTATED
CHARTER OF COMMON SECURITIZATION SOLUTIONS, LLC,
a Delaware limited liability company
as of November 3, 2014
Reference is hereby made to Common Securitization Solutions, LLC, a Delaware limited liability company
(the “Company”), formed on the 7th day of October, 2013, by the filing of a Certificate of Formation of the
same date in the Office of the Secretary of State of the State of Delaware, by the Federal National Mortgage
Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”)
(collectively, the “Enterprises”).
WHEREAS, the Company shall be jointly and equally owned by the Enterprises, and has been formed by
them and shall have the following purposes:
To develop, operate, update and maintain the systems, software, processes, infrastructure and
business activities necessary or appropriate to facilitate the efficient, large-scale issuance of
single-family, residential, mortgage-related securities by both Enterprises and, potentially,
other users (including a Single Security, as described in the Request for Input: Single Security
published by FHFA on August 12, 2014 (including different types of Single Security as
described in that document), with any modifications of such Single Security as may be agreed
upon between the Enterprises), and the related sale and administration of such securities.
Exh A - 1
EXHIBIT B
BYLAWS
CORPORATE FUNCTIONS AND
ADMINISTRATIVE SERVICES OVERSIGHT COMMITTEE
COMMON SECURITIZATION SOLUTIONS, LLC
Reference is hereby made to that certain Third Amended and Restated Limited Liability Company Agreement
of Common Securitization Solutions, LLC (the “Company”) between the Federal Home Loan Mortgage
Corporation (“¨Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”), and the
Company, dated January 9, 2020 (the “LLC Agreement”). Capitalized terms used herein, not defined herein
and defined in the LLC Agreement shall have the definitions given to them in the LLC Agreement.
1. Purpose
The Corporate Functions and Administrative Services Oversight Committee’s (the “Committee”) purpose
shall be to (i) oversee the corporate functions of the Company (i.e., operations that are not directly related
to the operations of the Common Securitization Platform such as human resources, internal audit, compliance,
legal, information security, enterprise risk management, procurement, finance as well as treasury operations,
and technology services that support these corporate functions), and (ii) allocate and coordinate the
Enterprise’s respective services for the Company under the applicable Administrative Services Agreements
and facilitate information sharing and input with respect to those services. The Committee may make
recommendations concerning corporate functions, including controls that should be established for effective
Company operations to the extent applicable, and will serve as an information resource for the Company and
the Board of Managers.
2. Composition.
(a)
The Committee shall consist of up to fifteen members, with up to five members appointed by
each Enterprise and the Company, respectively, provided, however, that each Enterprise and the Company
shall be obligated to have appointed no less than two regular members to the Committee at all times. In
addition to the membership positions allocated to the Company and each Enterprise, each entity shall be
permitted to appoint or include on the Committee a reasonable number of subject area experts to assist its
Committee members in discussing, evaluating and reviewing specialized topics or issues. In the event that
the Board determines any party has not appointed members of the Committee with sufficient seniority and
knowledge, the Board may request that such party appoint additional or different members and the applicable
party shall comply. FHFA shall be permitted to designate a representative to participate in meetings of the
Committee as an observer.
(b)
Each member of the Committee may be removed, with or without cause, by the party that has
authority to appoint the member.
Exh B - 1
(c)
The size of the Committee may be modified from time to time at the discretion of the Board.
The Committee shall remain in effect until discontinued by the Board.
(d)
The Committee Chair shall be the Company’s Chief Executive Officer.
3. Meetings of the Committee.
(a)
The Committee shall meet no less often than six times per year. The date, time and place of
Committee meetings shall be determined by the Committee Chair, which shall be a Company Committee
member designated by the Company. At least five (5) days advance notice shall be given of any regularly
scheduled meeting of the Committee. The Committee Chair shall publish an agenda for each meeting, which
may be contained in the meeting materials, at least three (3) business days in advance of the meeting. The
agenda shall contain matters as each Enterprise may request be addressed during the meeting within the scope
of the Committee’s duties. Meeting materials shall be well organized and provide reasonably detailed (but
concise) information concerning items on the agenda for the meeting. The Committee Chair or his/her
delegate will circulate a summary of each meeting within ten (10) business days after the meeting.
(b)
The Committee Chair may call additional meetings of the Committee by providing notice of
the date, time and location of such meeting to each member of the Committee at the address provided by
such member to the Committee Chair, as far in advance of the meeting as practicable. FHFA shall be provided
notice of all committee meetings simultaneously with the notices sent to the Committee members.
4. Committee Role.
(a)
The Committee shall function primarily as an information sharing forum and an advisory
body. The Committee’s authority shall be limited to providing advice, including advice in the form of
recommendations, to the Company, an Enterprise performing services under its Administrative Services
Agreement and/or the Board. The Committee need not reach consensus on the issues on which it provides
advice, and may choose to provide the Company, an Enterprise and/or the Board with differing views or a
range of views. The members of the Committee shall have no voting rights whatsoever (outside the context
of the Committee) solely by virtue of their membership on the Committee. Notwithstanding the foregoing,
any member of the Committee may request that any agreement negotiated by an Enterprise on behalf of the
Company be approved by the Board before execution and the Enterprise shall not enter into any agreement
negotiated by an Enterprise on behalf of the Company until notice of the existence of such agreement has
been provided to the Committee pursuant to Section 4(b) below.
(b)
In addition to the foregoing, the Committee may also carry out certain tasks related to
transitioning administrative services to the Company and overseeing the functioning of corporate functions
of the Company (e.g., human resources, internal audit, compliance, legal, enterprise risk management,
information security, procurement, finance and treasury operations and technology services that support these
corporate functions), including developing, managing, and implementing plans for the transition of
administrative services to the Company, or the development of corporate functions at the Company;
researching recommending third party vendors to take over certain administrative and corporate services;
and recommending prioritization and scheduling for the transition of administrative services from the
Exh B - 2
Enterprises to the Company. Prior to the transition of the administrative services to the Company for
management, the Committee will be responsible for reviewing and discussing issues handled by the
Enterprises under their respective Administrative Services Agreements or through joint "work streams" -
such as Business/Operations, Human Resources, and Legal - and will make recommendations to the Board
for decisions. The Committee may continue to oversee issues related to administrative services until such
time as the Company has assumed a specified administrative function or contracted out the function to a
vendor through an approved contract.
(c)
Each Enterprise’s Committee members shall promptly supply the Committee with such
information as may be reasonably requested by the Committee or the other Enterprise’s Committee members
regarding the services provided by such Enterprise pursuant to the Administrative Services Agreement,
including without limitation a regularly updated list of all contracts or agreements being negotiated on behalf
of the Company with third parties by each Enterprise. Such information may also include information with
respect to agreements being negotiated on behalf of the Company with third parties, including the substantive
positions proposed to be taken on behalf of the Company and copies of draft agreements, and shall be provided
sufficiently in advance for the Committee or the other Enterprise to provide advice regarding such positions
and drafts.
(d)
The Company shall provide to the Committee a regularly updated list of contracts or
agreements of the Company currently in effect or being negotiated by the Company, together with such other
information regarding current or pending contracts as may be requested by any Committee member.
(e)
The Company shall promptly supply to the Committee information regarding all amendments
and changes to the Company’s confidentiality and information security standards. Such standards are currently
contained in the Company’s corporate policies on Acceptable Use and Information Classification as well as
the Company’s Code of Conduct and Contractor Service Requirements.
(f)
The Committee shall provide its advice to the Board and the Company through the Committee
Chair. The Committee Chair shall make presentations at meetings of the Board and shall provide written
reports to the Board, as requested by the Board. Such presentations and reports shall include the view of any
one or more members as may wish to contribute. The Committee Chair shall be accompanied at Board
meetings by any one or more members of the Committee as wish to attend, and such Committee members
may discuss with the Board Committee matters as desired.
5. FHFA.
While FHFA is acting in its role as Conservator of both (but not just one) Enterprises, FHFA shall
receive a copy of all materials distributed to the entire Committee, as well as any materials provided by the
Committee to the Enterprises, the Board or the Company, in each case, at the same time such materials are
distributed to the Committee, Board or Company, as applicable.
Exh B - 3
EXHIBIT C
CHARTER OF THE PLATFORM STEERING COMMITTEE
OF THE BOARD OF MANAGERS
OF COMMON SECURITIZATION SOLUTIONS, LLC
Overview:
• The PSC holds primary ownership of CSS and Tri-Party Readiness, reporting a unified view across
the topic areas highlighted in ‘Key Activities’ to the Board and CSS CEO and providing advisory
support.
• These areas span the Common Securitization Platform functions, including Technology, Operations,
overall CSS/GSE-adoption production readiness, and the CSP service catalog and interface
specifications.
• The PSC meeting schedule will be set up so that PSC meetings are held two weeks prior to each
Board meeting or monthly. At least five (5) days advance notice shall be given of any regularly
scheduled meeting of the Committee. The agenda will be created by the Chair and the appointed
Enterprise lead and will include items requested by either Enterprise. The agenda and associated
meeting materials will be provided to PSC members at least three (3) business days in advance of the
meeting. Meeting materials shall be well organized and provide reasonably detailed (but concise)
information concerning items on the agenda for the meeting. The Committee Chair or his/her delegate
will circulate a summary of each meeting within ten (10) business days after the meeting.
•
If/as needed, the CSS CEO, PSC Chair, leads for each Enterprise, and FHFA will meet in smaller
sessions as a sub-committee of the PSC to resolve matters.
• This sub-committee may fulfill the responsibilities and functions of the larger PSC, to the extent
desired.
• Additional sub-committees may be formed as needed to address major topics.
Chair:
The Company’s Chief Executive Officer or the Company’s Chief Operating Officer.
Key Topic Areas:
Joint Solutioning and Escalation:
• Primary forum for resolution of platform production readiness activities (i.e. technology decisions,
operations needs, scheduling compliance), including but not limited to those affecting the Enterprises
Exh C - 1
• Prioritize and drive open CSP scope, process and technology questions through joint analysis
• Escalation point to resolve CSS/GSE decisions, decision and other delays, performance and other
issues, and risks
Enterprise Alignment:
• Forum for multi-party alignment of divergent approaches or requests made to CSS
• Review and plan for joint production readiness activities and assessments
Change Management:
• Review and approval of significant proposed changes related to Operations or Technology, including
those that impact budget, scope and/or timeline or would have an impact on Enterprise operations
• Review and approve requests to modify interim integrated project milestones, deliverables, or budgets,
within delegated authority
• Primary change management forum for items impacting two or more of CSS, Fannie Mae and/or
Freddie Mac
Joint Planning and Execution Governance:
• Monitoring of status of joint CSS/GSE activities (e.g. integration testing, conversion, parallel
processing)
• Detailed, quarterly review of CSS activities and the progress of various Enterprise projects that link
to CSP implementation
• Forum for CSS/ Freddie Mac, CSS/Fannie Mae adoption governance, including Scope, Operational
Readiness, Testing and Conversion activities
• Monitoring the achievement of the Service Levels contained in the Customer Services Agreement
between the Enterprises and CSS
Exh C - 2
EXHIBIT D
ASSIGNED EMPLOYEE TERMS AND CONDITIONS
This Exhibit D is to be read in conjunction with Article 9 of the LLC Agreement. Except as otherwise stated
herein, all capitalized terms set forth herein shall have the meanings set forth in the LLC Agreement.
1. Assignment of Assigned Employees. Individuals shall be assigned to work on behalf of the
Company as Assigned Employees either by: (i) application by an individual through an Enterprise’s
posting process, which may be open to both internal (for both Enterprises) and external candidates; or
(ii) an Enterprise identifying and assigning qualified persons to work on the Platform. The Enterprises
will jointly determine the process for candidate selection; however, the Enterprise which employs (or
will employ) the individual will determine, in its sole discretion, (A) the conditions for employment
and (B) whether the individual has the skills needed for the assignment and is available to be assigned
to work on behalf of the Company.
2. Applicable Policies. Assigned Employees will be subject to the personnel policies and practices of
the Enterprise which employs them, including but not limited to the compensation and benefits
policies and practices of the employing Enterprise. Assigned Employees shall not be subject to any
personnel policies or practices of any other entity, with the exception of Company policies and
practices that are specifically related to: (i) the operation of the facility in which they will perform
their duties, including security procedures, hours in which the facility is open, and badge systems; (ii)
performance management; (iii) training; (iv) on-the-job conduct and behavior; and (v) compliance
with respect to safety, legal requirements and codes of conduct. In the event of any conflict or
inconsistency between the policies and practices of the Company specifically related to the matters
described in the preceding sentence and the policies and practices of an Enterprise specifically related
to such matters, the policies and practices of the Company specifically related to such matters will be
controlling.
3. Restricted Period. All Assigned Employees shall remain at-will employees of their respective
Enterprise during the course of the assignment. However, subject to the Enterprises’ rights to
terminate the employment relationship with or without cause or notice, the Enterprises agree that each
Assigned Employee will not be transferred from working on behalf of the Company as an Assigned
Employee to another Enterprise position or assignment for a period of one year following the start of
the individual’s assignment as an Assigned Employee (“Restricted Period”).
i.
During the Restricted Period, an Assigned Employee may be transferred from the assignment
with the Company to another Enterprise position or assignment only by agreement of both the
Company and the Enterprise employing the Assigned Employee.
Exh D - 1
ii.
If an Assigned Employee becomes employed by the Company during the Restricted Period, the
Enterprises agree that they will not solicit the Company employee during the Restricted Period,
except by agreement of both the Company and the Enterprise seeking to employ the Company
employee.
iii.
Following the Restricted Period, there shall be no restriction on the Assigned Employee
moving to another position or assignment within his or her employing Enterprise.
For clarification, the Restricted Period shall not be shortened or extended by the Assigned Employee’s
hire by the Company; the Restricted Period shall be one year from the start of the assignment
regardless of whether the Assigned Employee becomes employed by the Company during the course
of the Restricted Period.
4. Indemnification - Assigned Employees. The Company shall defend, indemnify, and hold harmless
each of the Fannie Mae Indemnified Parties and Freddie Mac Indemnified Parties from and against
any Damages suffered or incurred by any Fannie Mae Indemnified Party or Freddie Mac Indemnified
Party, as the case may be, to the extent such Damages result or arise from any employment-related
Claim (whether such Claim is based on contract, statute or common law) asserted by any Assigned
Employee related to the Assigned Employee’s work or assignment to work on the Platform or any
other work on behalf of the Company, including but not limited to any claim of discrimination and
harassment, failure to comply with laws pertaining to wages and hours (including the payment of
overtime wages), alleged violations of right to privacy, alleged violation of health or safety laws, the
failure to provide legally required leaves of absence or other alleged violations of law. The
indemnification procedures set forth in Section 14.4 of the LLC Agreement shall apply to any
indemnification under this Section 4.
5. Indemnification - Company Employees. The Company shall defend, indemnify, and hold harmless
each of the Fannie Mae Indemnified Parties and Freddie Mac Indemnified Parties from and against
any Damages suffered or incurred by any Fannie Mae Indemnified Party or Freddie Mac Indemnified
Party, as the case may be, to the extent such Damages result or arise from any employment-related
Claim (whether such Claim is based on contract, statute, or common law) asserted by any Company
employee or as a result of any acts or omissions by a Company employee which gives rise to an
employment-related Claim, including but not limited to any claim of discrimination and harassment,
failure to comply with laws pertaining to wages and hours (including the payment of overtime wages),
alleged violations of right to privacy, alleged violation of health or safety laws, the failure to provide
legally required leaves of absence or other alleged violations of law. The indemnification procedures
set forth in Section 14.4 of the LLC Agreement shall apply to any indemnification under this Section
5.
Exh D - 2