10-K 1 a201510k.htm 10-K 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
Commission File Number: 001-34139
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Freddie Mac
Federally chartered
 
8200 Jones Branch Drive
 
52-0904874
 
(703) 903-2000
corporation
 
McLean, Virginia 22102-3110
 
(I.R.S. Employer
 
(Registrant’s telephone number,
(State or other jurisdiction of incorporation or organization)
 
(Address of principal executive offices, including zip code)
 
Identification No.)
 
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Voting Common Stock, no par value per share (OTCQB: FMCC)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCI)
5% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCKK)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCG)
5.1% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCH)
5.79% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCK)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCL)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCM)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCN)
5.81% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCO)
6% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCP)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCJ)
5.7% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCKP)
Variable Rate, Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCCS)
6.42% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCCT)
5.9% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKO)
5.57% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKM)
5.66% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKN)
6.02% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKL)
6.55% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKI)
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKJ)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer  [ X ]
 
 
 
Accelerated filer  [ ]
 
 
Non-accelerated filer (Do not check if a smaller reporting company)  [  ]
 
Smaller reporting company  [  ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the common stock held by non-affiliates computed by reference to the price at which the common equity was last sold on June 30, 2015 (the last business day of the registrant’s most recently completed second fiscal quarter) was $1.4 billion.
As of February 4, 2016, there were 650,045,962 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None




Table of Contents
 
 

TABLE OF CONTENTS
 
Page
INTRODUCTION
ABOUT FREDDIE MAC
EXECUTIVE SUMMARY
OUR BUSINESS
FORWARD-LOOKING STATEMENTS
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
KEY ECONOMIC INDICATORS
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED BALANCE SHEETS ANALYSIS
OUR BUSINESS SEGMENTS
RISK MANAGEMENT
   SINGLE-FAMILY MORTGAGE CREDIT RISK
   MULTIFAMILY MORTGAGE CREDIT RISK
   MORTGAGE-RELATED SECURITIES CREDIT RISK
LIQUIDITY AND CAPITAL RESOURCES
CONSERVATORSHIP AND RELATED MATTERS
REGULATION AND SUPERVISION
CONTRACTUAL OBLIGATIONS
OFF-BALANCE SHEET ARRANGEMENTS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
RISK FACTORS
LEGAL PROCEEDINGS
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONTROLS AND PROCEDURES
DIRECTORS, CORPORATE GOVERNANCE, AND EXECUTIVE OFFICERS
DIRECTORS
CORPORATE GOVERNANCE
EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
COMPENSATION AND RISK
2015 COMPENSATION INFORMATION FOR NEOs
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRINCIPAL ACCOUNTING FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
GLOSSARY
FORM 10-K INDEX
EXHIBIT INDEX

Freddie Mac 2015 Form 10-K
 
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Introduction
 
About Freddie Mac | Executive Summary

INTRODUCTION
This Annual Report on Form 10-K includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-K. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-K. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in the “ABOUT FREDDIE MAC - Forward-Looking Statements” and “RISK FACTORS” sections of this Form 10-K.
Throughout this Form 10-K, we use certain acronyms and terms that are defined in the “GLOSSARY.”
ABOUT FREDDIE MAC
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability, and affordability to the U.S. housing market. We do this primarily by purchasing residential mortgage loans originated by lenders. In most instances, we package these loans into mortgage-related securities, which are guaranteed by us and sold in the global capital markets. We also invest in mortgage loans and mortgage-related securities. We do not originate loans or lend money directly to consumers.
We support the U.S. housing market and the overall economy by enabling America’s families to access mortgage loan funding at lower rates and by providing consistent liquidity to the multifamily mortgage market, which we do primarily by providing financing for workforce housing. We have helped many distressed borrowers keep their homes or avoid foreclosure. We are working with FHFA, our customers and the industry to build a stronger housing finance system for the nation.
EXECUTIVE SUMMARY
CONSERVATORSHIP AND GOVERNMENT SUPPORT FOR OUR BUSINESS
Since September 2008, we have been operating in conservatorship, with FHFA acting as our Conservator. The conservatorship and related matters significantly affect our management, business activities, financial condition, and results of operations. Our future is uncertain, and the conservatorship has no specified termination date. We do not know what changes may occur to our business model during or following conservatorship, including whether we will continue to exist.
Our Purchase Agreement with Treasury and the terms of the senior preferred stock we issued to Treasury constrain our business activities. However, we believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to have adequate liquidity to conduct our normal business activities. The Purchase Agreement also requires our future profits to effectively be distributed to Treasury, and we cannot retain capital from the earnings generated by our business operations (other than a limited amount that will decrease to zero in 2018) or return capital to stockholders other than Treasury. Consequently, our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions.
For more information on the conservatorship and government support for our business, see “Conservatorship and Related Matters” and Note 2.

Freddie Mac 2015 Form 10-K
 
1



Introduction
 
About Freddie Mac | Executive Summary

The tables below show our cumulative draws from Treasury and cumulative dividend payments to Treasury under the Purchase Agreement. The Treasury draw amounts shown are the total draws requested based on our quarterly net deficits for the periods presented. Draw requests are funded in the quarter subsequent to any net deficit. Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock, which remains $72.3 billion. The amount of available funding remaining under the Purchase Agreement is $140.5 billion, and would be reduced by any future draws.
Draws From Treasury
(in billions)
Total

Total Senior Preferred Stock Outstanding
$
72.3

Less: Initial Liquidation Preference
$
1.0

Treasury Draws
$
71.3

 
Dividend Payments to Treasury
(in billions)
Total

Dividend Payments as of 12/31/15
$
96.5

Q1 2016 Dividend Obligation
$
1.7

Total Dividend Payments
$
98.2



Freddie Mac 2015 Form 10-K
 
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Introduction
 
About Freddie Mac | Executive Summary

CONSOLIDATED FINANCIAL RESULTS
Comprehensive Income
Our comprehensive income for 2015 declined compared to 2014, primarily as a result of the following items:
Lower other income, as we did not have any significant litigation settlements in 2015 related to our investments in non-agency mortgage-related securities. By comparison, we had a number of significant litigation settlements in 2014;
We recorded fair value losses in 2015 on certain mortgage loans and mortgage-related securities that are measured at fair value due to spread widening, while in 2014 we recorded gains due to spread tightening; partially offset by
Lower derivative fair value losses in 2015 than in 2014. Longer-term interest rates declined less in 2015 than in 2014, when the yield curve also flattened, leading to lower losses.
Our comprehensive income for 2014 declined compared to 2013, primarily as a result of events that occurred in 2013 but which did not occur in 2014, including:
The release of the valuation allowance on our deferred tax asset; and
Representation and warranty settlements related to our pre-conservatorship single-family loan purchases.


Freddie Mac 2015 Form 10-K
 
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Introduction
 
About Freddie Mac | Executive Summary

Variability of Earnings
Our financial results are subject to significant earnings variability from period to period. This variability is primarily driven by:
Interest-Rate Volatility — We hold assets and liabilities that expose us to interest-rate risk. Through our use of derivatives, we manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models. However, the way we account for our financial assets and liabilities (i.e., some are measured at amortized cost, while others are measured at fair value), including derivatives, creates volatility in our earnings when interest rates fluctuate. Based upon the composition of our financial assets and liabilities, including derivatives, at December 31, 2015, we generally recognize fair value losses in earnings when interest rates decline. This volatility generally is not indicative of the underlying economics of our business. This volatility and the declining capital reserve required under the terms of the Purchase Agreement (ultimately reaching zero in 2018) will increase the risk of our having a negative net worth and being required to draw from Treasury. We are exploring ways in which we can limit or manage our exposure to this volatility. For information about the sensitivity of our financial results to interest-rate volatility, see "MD&A - Risk Management - Interest-Rate Risk and Other Market Risks."
Spread Volatility — Spread volatility (i.e., credit spreads, liquidity spreads, risk premiums, etc.), or OAS, is the risk associated with changes in interest rates in excess of benchmark rates. We hold assets and liabilities that expose us to spread volatility, which may contribute to significant earnings volatility. For financial assets and liabilities measured at fair value, we generally recognize fair value losses when spreads widen. However, we may enter into transactions or take other steps to limit or manage our exposure to spread volatility.
Non-Recurring Events — From time to time, we have experienced and will likely continue to experience significant earnings volatility from non-recurring events, including events such as settlements with counterparties and changes in certain valuation allowances.


Freddie Mac 2015 Form 10-K
 
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Introduction
 
About Freddie Mac | Our Business

OUR BUSINESS
PRIMARY BUSINESS STRATEGIES
Our primary business strategies describe how we plan to pursue our Charter Mission over a timeframe of three to five years, or approximately through 2018 to 2020. Our core assumption is that the conservatorship will continue with no material changes during that period. These strategies complement FHFA's annual Conservatorship Scorecards.
Charter Mission
We are a government-sponsored enterprise with a specific and limited corporate purpose (i.e., “Charter Mission”) to support the liquidity, stability and affordability of U.S. housing mortgage markets as a participant in the secondary mortgage market, while operating as a commercial enterprise earning an appropriate return. Everything we do must be done within the specific constraints of our Charter Mission.
Our Twin Goals
We established overarching twin goals to enable us to reach our Charter Mission:
A Better Freddie Mac; and
A Better Housing Finance System
Our Key Strategies
A Better Freddie Mac
We are focused on operating as a very well-run large financial institution, by:
Being a very effective operating organization;
Being a market leader through customer focus and innovation; and
Managing risk and economic capital for quality risk-adjusted returns.
A Better Housing Finance System
We are focused on providing leadership, through innovation and constructive forward-looking engagement with FHFA to improve the liquidity, stability, and affordability of the U.S. housing markets, by:
Modernizing and improving the functioning of the mortgage markets;
Developing greater responsible access to housing finance; and
Reducing taxpayer exposure to mortgage risks.
For further information on our goals and detailed strategies for each of our business segments, see "MD&A — Our Business Segments."

Freddie Mac 2015 Form 10-K
 
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Introduction
 
About Freddie Mac | Our Business

OUR CHARTER
Our Charter forms the framework for our business activities. Our statutory mission as defined in our Charter is to:
Provide stability in the secondary market for residential loans;
Respond appropriately to the private capital market;
Provide ongoing assistance to the secondary market for residential loans (including activities relating to loans for low- and moderate-income families, involving a reasonable economic return that may be less than the return earned on other activities) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing; and
Promote access to mortgage loan credit throughout the U.S. (including central cities, rural areas, and other underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing.
Our Charter permits us to purchase first-lien single-family loans with LTV ratios at the time of our purchase of less than or equal to 80%. Our Charter also permits us to purchase first-lien single-family loans that do not meet this criterion if we have certain specified credit protections, which include mortgage insurance on the portion of the UPB of the loan that exceeds an 80% LTV ratio, a seller's agreement to repurchase or replace a defaulted loan, or the retention by the seller of at least a 10% participation interest in the loan.
This Charter requirement does not apply to multifamily loans or to loans that have the benefit of any guarantee, insurance or other obligation by the U.S. or any of its agencies or instrumentalities (e.g., the FHA, the VA, or the USDA Rural Development). Additionally, as part of HARP, we purchase single-family loans that refinance loans we currently own or guarantee without obtaining additional credit enhancement in excess of that already in place for any such loan, even when the LTV ratio of the new loan is above 80%.
Our Charter does not permit us to originate loans or lend money directly to consumers in the primary mortgage market. Our Charter limits our purchase of single-family loans to the conforming loan market, which consists of loans originated with UPBs at or below limits determined annually based on changes in FHFA’s housing price index. Since 2006, the base conforming loan limit for a one-family residence has been set at $417,000, and higher limits have been established in certain “high-cost” areas (currently, up to $625,500 for a one-family residence). Higher limits also apply to two- to four-family residences and to loans secured by properties in Alaska, Guam, Hawaii, and the U.S. Virgin Islands.

Freddie Mac 2015 Form 10-K
 
6



Introduction
 
About Freddie Mac | Our Business

BUSINESS SEGMENTS
We have three reportable segments: Single-family Guarantee, Multifamily, and Investments. Certain activities that are not part of a reportable segment are included in the All Other category. For more information on our segments, see “MD&A - Our Business Segments" and Note 12.
EMPLOYEES
At February 4, 2016, we had 5,416 full-time and 46 part-time employees.
PROPERTIES
Our principal offices consist of four office buildings we own in McLean, Virginia, comprising approximately 1.3 million square feet. We operate our business in the United States and its territories, and accordingly, we generate no revenue from and have no long-lived assets, other than financial instruments, in geographic locations other than the United States and its territories.
AVAILABLE INFORMATION
We file reports and other information with the SEC. In view of the Conservator’s succession to all of the voting power of our stockholders, we have not prepared or provided proxy statements for the solicitation of proxies from stockholders since we entered into conservatorship, and do not expect to do so while we remain in conservatorship. Pursuant to SEC rules, our annual reports on Form 10-K contain certain information typically provided in an annual proxy statement.
We make available, free of charge through our website at www.freddiemac.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all other SEC reports and amendments to those reports as soon as reasonably practicable after we electronically file the material with the SEC. In addition, materials that we file with the SEC are available for review and copying at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding companies that file electronically with the SEC.
We are providing our website addresses and the website address of the SEC here and elsewhere in this Form 10-K solely for your information. Information appearing on our website or on the SEC’s website is not incorporated into this Form 10-K.
Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a material direct financial obligation or become directly or contingently liable for a material obligation under an off-balance sheet arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03 or, if the obligation is incurred in connection with certain types of securities offerings, in prospectuses for that offering that are filed with the SEC.
Freddie Mac’s securities offerings are exempted from SEC registration requirements. As a result, we do not file registration statements or prospectuses with the SEC with respect to our securities offerings. To comply with the disclosure requirements of Form 8-K relating to the incurrence of material financial

Freddie Mac 2015 Form 10-K
 
7



Introduction
 
About Freddie Mac | Our Business

obligations, we report these types of obligations either in offering circulars or supplements thereto that we post on our website or in a current report on Form 8-K, in accordance with a “no-action” letter we received from the SEC staff. In cases where the information is disclosed in an offering circular posted on our website, the document will be posted within the same time period that a prospectus for a non-exempt securities offering would be required to be filed with the SEC.
The website address for disclosure about our debt securities is www.freddiemac.com/debt. From this address, investors can access the offering circular and related supplements for debt securities offerings under Freddie Mac’s global debt facility, including pricing supplements for individual issuances of debt securities. Similar information about our STACR debt notes is available at www.freddiemac.com/creditriskofferings.
Disclosure about the mortgage-related securities we issue, some of which are off-balance sheet obligations (e.g., K Certificates), can be found at www.freddiemac.com/mbs. From this address, investors can access information and documents about our mortgage-related securities, including offering circulars and related offering circular supplements.
FORWARD-LOOKING STATEMENTS
We regularly communicate information concerning our business activities to investors, the news media, securities analysts, and others as part of our normal operations. Some of these communications, including this Form 10-K, contain “forward-looking statements.” Examples of forward-looking statements include, but are not limited to, statements pertaining to the conservatorship, our current expectations and objectives for the Single-family Guarantee, Multifamily, and Investments segments of our business, our efforts to assist the housing market, our liquidity and capital management, economic and market conditions and trends, our market share, the effect of legislative and regulatory developments and new accounting guidance, the credit quality of loans we own or guarantee, and our results of operations and financial condition on a GAAP, Segment Earnings and fair value basis. Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. Forward-looking statements are often accompanied by, and identified with, terms such as “objective,” “expect,” “possible,” “trend,” “forecast,” “anticipate,” “believe,” “intend,” “could,” “future,” “may,” “will,” and similar phrases. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates, and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties, including those described in the “RISK FACTORS” section of this Form 10-K, and:
The actions the U.S. government (including FHFA, Treasury, and Congress) may take, or require us to take, including to support the housing markets or to implement FHFA’s Conservatorship Scorecards and other objectives for us;
The effect of the restrictions on our business due to the conservatorship and the Purchase Agreement, including our dividend obligation on the senior preferred stock;
Our ability to maintain adequate liquidity to fund our operations;
Changes in our Charter or in applicable legislative or regulatory requirements (including any legislation affecting the future status of our company);
Changes in the fiscal and monetary policies of the Federal Reserve, including any changes to its policy of maintaining sizable holdings of mortgage-related securities and any future sales of such securities;

Freddie Mac 2015 Form 10-K
 
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Introduction
About Freddie Mac | Forward-Looking Statements


The success of our efforts to mitigate our losses on our Legacy single-family book and our investments in non-agency mortgage-related securities;
The success of our strategy to transfer mortgage credit risk through STACR debt note, ACIS, K Certificate and other credit risk transfer transactions;
Our ability to maintain the security of our operating systems and infrastructure (e.g., against cyberattacks);
Changes in economic and market conditions, including changes in employment rates, interest rates, spreads, and home prices;
Changes in the U.S. residential mortgage market, including changes in the supply and type of loan products (e.g., refinance versus purchase, and fixed-rate versus ARM);
Our ability to effectively execute our business strategies, implement new initiatives, and improve efficiency;
The adequacy of our risk management framework;
Our ability to manage mortgage credit risks, including the effect of changes in underwriting and servicing practices;
Our ability to limit or manage our exposure to interest-rate volatility and spread volatility, including the availability of derivative financial instruments needed for interest-rate risk management purposes;
Changes or errors in the methodologies, models, assumptions, and estimates we use to prepare our financial statements, make business decisions, and manage risks;
Changes in investor demand for our debt or mortgage-related securities (e.g., single-family PCs and multifamily K Certificates);
Changes in the practices of loan originators, investors and other participants in the secondary mortgage market; and
Other factors and assumptions described in this Form 10-K, including in the “MD&A” section.
Forward-looking statements are made only as of the date of this Form 10-K, and we undertake no obligation to update any forward-looking statements we make to reflect events or circumstances occurring after the date of this Form 10-K.

Freddie Mac 2015 Form 10-K
 
9



Selected Financial Data
 
 

SELECTED FINANCIAL DATA
The selected financial data presented below should be reviewed in conjunction with MD&A and our consolidated financial statements and accompanying notes.
 
At or For the Year Ended December 31,
(dollars in millions, except share-related amounts)
2015
2014
2013
2012
2011
Statements of Comprehensive Income Data
 
 
 
 
 
Net interest income
$
14,946

$
14,263

$
16,468

$
17,611

$
18,397

(Provision) benefit for credit losses
2,665

(58
)
2,465

(1,890
)
(10,702
)
Non-interest income (loss)
(3,599
)
(113
)
8,519

(4,083
)
(10,878
)
Non-interest expense
(4,738
)
(3,090
)
(2,089
)
(2,193
)
(2,483
)
Income tax (expense) benefit
(2,898
)
(3,312
)
23,305

1,537

400

Net income (loss)
6,376

7,690

48,668

10,982

(5,266
)
Comprehensive income (loss)
5,799

9,426

51,600

16,039

(1,230
)
Net loss attributable to common stockholders
(23
)
(2,336
)
(3,531
)
(2,074
)
(11,764
)
Net loss per common share - basic and diluted
(0.01
)
(0.72
)
(1.09
)
(0.64
)
(3.63
)
Cash dividends per common share





Weighted average common shares outstanding - basic and diluted (in millions)
3,235

3,236

3,238

3,240

3,245

 
 
 
 
 
 
Balance Sheets Data
 
 
 
 
 
Loans held-for-investment, at amortized cost by consolidated trusts (net of allowances for loan losses)
$
1,625,184

$
1,558,094

$
1,529,905

$
1,495,932

$
1,564,131

Total assets
1,986,050

1,945,539

1,966,061

1,989,856

2,147,216

Debt securities of consolidated trusts held by third parties
1,556,121

1,479,473

1,433,984

1,419,524

1,471,437

Other Debt
414,306

450,069

506,767

547,518

660,546

All other liabilities
12,683

13,346

12,475

13,987

15,379

Total stockholders' equity (deficit)
2,940

2,651

12,835

8,827

(146
)
 
 
 
 
 
 
Portfolio Balances - UPB
 
 
 
 
 
Mortgage-related investments portfolio
$
346,911

$
408,414

$
461,024

$
557,544

$
653,313

Total Freddie Mac mortgage-related securities
1,729,493

1,637,086

1,592,511

1,562,040

1,624,684

Total mortgage portfolio
1,941,587

1,910,106

1,914,661

1,956,276

2,075,394

TDRs on accrual status
82,347

82,908

78,708

66,590

45,254

Non-accrual loans
22,649

33,130

43,457

63,005

76,575

 
 
 
 
 
 
Ratios
 
 
 
 
 
Return on average assets
0.3
%
0.4
%
2.5
%
0.5
%
(0.2
)%
Allowance for loan losses as percentage of loans, held-for-investment
0.9

1.3

1.4

1.8

2.2

Equity to assets
0.1

0.4

0.5

0.2




Freddie Mac 2015 Form 10-K
 
10


Management's Discussion and Analysis
 
Key Economic Indicators | Single-family Home Prices


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
KEY ECONOMIC INDICATORS
The following graphs and related discussion present certain macroeconomic indicators that can significantly affect our business and financial results.
SINGLE-FAMILY HOME PRICES
NATIONAL HOME PRICES
(December 2000 = 100)
 
EFFECT ON FINANCIAL RESULTS
Changes in home prices affect the amount of equity that borrowers have in their homes. Borrowers with less equity typically have higher delinquency rates.
As home prices decline, the severity of losses we incur on defaulted loans that we hold or guarantee increases because the amount we can recover from the property securing the loan decreases.
Declines in home prices typically result in increases in expected credit losses on the mortgage-related securities we hold.
Declines in home prices may result in declines in the value of our non-agency mortgage-related securities as lower home values may increase default rates and affect the prepayment activities of the borrowers.

COMMENTARY
Home prices continued to appreciate during 2015, increasing 6.2%, compared to an increase of 5.2% during 2014, based on our own non-seasonally adjusted price index of single-family homes funded by loans owned or guaranteed by us or Fannie Mae.
National home prices at the end of 2015 remained approximately 6% below their June 2006 peak levels, based on our index.
We expect near-term home price growth rates to moderate gradually and return to growth rates consistent with long-term historical averages of approximately 2% to 5% per year.

Freddie Mac 2015 Form 10-K
 
11



Management's Discussion and Analysis
 
Key Economic Indicators | Interest Rates

INTEREST RATES
KEY MARKET INTEREST RATES AT QUARTER END
 

EFFECT ON FINANCIAL RESULTS
The 30-year Primary Mortgage Market Survey ("PMMS") interest rate represents the national average of mortgage rates on new 30-year fixed-rate mortgages. Declines in the PMMS rate typically result in increases in refinancing activity and originations.
Changes in interest rates affect the fair value of certain of our assets and liabilities, including derivatives, on our consolidated balance sheets measured at fair value on a recurring basis.
For additional information on the effect of LIBOR swap rates on our financial results, see "Our Business Segments - Investments - Market Conditions."

COMMENTARY
Mortgage interest rates for 30-year fixed-rate loans are typically closely related to other long-term interest rates such as the 10-year Treasury rate and the 10-year LIBOR rate. When these rates decline, mortgage interest rates for 30-year fixed-rate loans usually also decline.
Mortgage interest rates, as indicated by the 30-year PMMS rate, increased at the end of 2015. However, the average 30-year PMMS rate was 3.85% in 2015 compared to 4.17% in 2014, resulting in higher refinancing activity and higher overall origination activity during 2015.
Longer-term interest rates, as indicated by the 10-year LIBOR rate and the 10-year Treasury rate, declined sharply in 2014 but moderated in 2015.
The Federal Reserve decided in December 2015 to begin raising short-term interest rates but committed to a measured pace of monetary tightening. However, the magnitude and timing of the impact of the Federal Reserve’s action on mortgage and other longer-term rates is uncertain.

Freddie Mac 2015 Form 10-K
 
12



Management's Discussion and Analysis
 
Key Economic Indicators | Unemployment Rate

UNEMPLOYMENT RATE
UNEMPLOYMENT RATE AND JOB CREATION
Source: U.S. Bureau of Labor Statistics
 

EFFECT ON FINANCIAL RESULTS
Changes in the unemployment rate can affect several market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies.
Increases in the unemployment rate typically result in higher levels of delinquencies, which often result in an increase in expected credit losses on our total mortgage portfolio.
Decreases in the unemployment rate typically result in lower levels of delinquencies, which often result in a decrease in expected credit losses on our total mortgage portfolio.

COMMENTARY
Monthly net new job growth decreased during 2015, but remained above 200,000 per month on average.
The unemployment rate continued to decline from the peak of 10.0% reached in October 2009.
We expect the unemployment rate to decline slightly throughout 2016 and 2017.


Freddie Mac 2015 Form 10-K
 
13



Management's Discussion and Analysis
 
Consolidated Results of Operations | Comparison

CONSOLIDATED RESULTS OF OPERATIONS
You should read this discussion of our consolidated results of operations in conjunction with our consolidated financial statements and accompanying notes. See “Critical Accounting Policies and Estimates” for information concerning certain significant accounting policies and estimates applied in determining our reported results of operations and Note 1 for information on our accounting policies.
The table below compares our consolidated results of operations for the past three years.
 
 
Year Ended December 31,
 
Change 2015-2014
 
Change 2014-2013
(dollars in millions)
 
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
Net interest income
 
$
14,946

 
$
14,263

 
$
16,468

 
$
683

 
5
 %
 
$
(2,205
)
 
(13
)%
Benefit (provision) for credit losses
 
2,665

 
(58
)
 
2,465

 
2,723

 
(4,695
)%
 
(2,523
)
 
(102
)%
Net interest income after benefit (provision) for credit losses
 
17,611

 
14,205

 
18,933

 
3,406

 
24
 %
 
(4,728
)
 
(25
)%
Non-interest income (loss):
 
 
 
 
 
 
 


 


 


 


Gains (losses) on extinguishment of debt
 
(240
)
 
(422
)
 
446

 
182

 
(43
)%
 
(868
)
 
(195
)%
Derivative gains (losses)
 
(2,696
)
 
(8,291
)
 
2,632

 
5,595

 
(67
)%
 
(10,923
)
 
(415
)%
Net impairment of available-for-sale securities recognized in earnings
 
(292
)
 
(938
)
 
(1,510
)
 
646

 
(69
)%
 
572

 
(38
)%
Other gains (losses) on investment securities recognized in earnings
 
508

 
1,494

 
301

 
(986
)
 
(66
)%
 
1,193

 
396
 %
Other income (loss)
 
(879
)
 
8,044

 
6,650

 
(8,923
)
 
(111
)%
 
1,394

 
21
 %
Total non-interest income (loss)
 
(3,599
)
 
(113
)
 
8,519

 
(3,486
)
 
3,085
 %
 
(8,632
)
 
(101
)%
Non-interest expense:
 
 
 
 
 
 
 


 


 


 


Administrative expense
 
(1,927
)
 
(1,881
)
 
(1,805
)
 
(46
)
 
2
 %
 
(76
)
 
4
 %
REO operations (expense) income
 
(338
)
 
(196
)
 
140

 
(142
)
 
72
 %
 
(336
)
 
(240
)%
Temporary Payroll Tax Cut Continuation Act of 2011 expense
 
(967
)
 
(775
)
 
(533
)
 
(192
)
 
25
 %
 
(242
)
 
45
 %
Other (expense) income
 
(1,506
)
 
(238
)
 
109

 
(1,268
)
 
533
 %
 
(347
)
 
(318
)%
Total non-interest expense
 
(4,738
)
 
(3,090
)
 
(2,089
)
 
(1,648
)
 
53
 %
 
(1,001
)
 
48
 %
Income before income tax (expense) benefit
 
9,274

 
11,002

 
25,363

 
(1,728
)
 
(16
)%
 
(14,361
)
 
(57
)%
Income tax (expense) benefit
 
(2,898
)
 
(3,312
)
 
23,305

 
414

 
(13
)%
 
(26,617
)
 
(114
)%
Net income
 
6,376

 
7,690

 
48,668

 
(1,314
)
 
(17
)%
 
(40,978
)
 
(84
)%
Total other comprehensive income (loss), net of taxes and reclassification adjustments
 
(577
)
 
1,736

 
2,932

 
(2,313
)
 
(133
)%
 
(1,196
)
 
(41
)%
Comprehensive income
 
$
5,799

 
$
9,426

 
$
51,600

 
$
(3,627
)
 
(38
)%
 
$
(42,174
)
 
(82
)%
Key Drivers:
Net interest income increased in 2015 compared to 2014, primarily due to an increase in management and guarantee fee income and amortization of upfront fees and basis adjustments as a result of higher prepayment rates. This increase was partially offset by a reduction in the amount of contractual net interest income derived from our mortgage-related investments portfolio, as this portfolio has continued to decline pursuant to the portfolio limits established by the Purchase Agreement and by FHFA. Net interest income decreased in 2014 compared to 2013, primarily due to a reduction in our mortgage-related investments portfolio and less amortization of upfront fees and basis adjustments as a result of lower prepayment rates. See “Net Interest Income” for more information.
Benefit (provision) for credit losses was a benefit in 2015 and was driven by the reclassification of loans from held-for-investment to held-for-sale. Excluding the effect of the reclassification of loans,

Freddie Mac 2015 Form 10-K
 
14



Management's Discussion and Analysis
 
Consolidated Results of Operations | Comparison

the amount of our benefit was not significant. The (provision) for credit losses in 2014 reflects a decline in the volume of newly impaired loans and a smaller benefit from settlement agreements with certain sellers to release specified loans from certain repurchase obligations in 2014 compared to 2013. See "Benefit (Provision) For Credit Losses" for more information.
Gains (losses) on extinguishment of debt in 2015, 2014, and 2013 primarily resulted from purchases of single-family PCs (which are accounted for as the extinguishment of debt). We extinguished debt securities of consolidated trusts with a UPB of $54.6 billion, $49.2 billion, and $44.4 billion in 2015, 2014, and 2013, respectively. Losses in 2015 and 2014 were driven by interest rate declines between the time of issuance and the time of repurchase of these debt securities.
Changes in derivative gains (losses) primarily resulted from changes in interest rates. In 2015, longer-term interest rates declined less than they did in 2014, and resulted in lower fair value losses. Derivative losses also include the accrual of periodic cash settlements, which is the net amount we accrued during the period for interest-rate swap payments that we will make. In 2014, derivative losses primarily resulted from the effect of a flattening of the yield curve on the fair value of our interest-rate swaps. See "Derivative Gains (Losses)" for more information.
Net impairments of available-for-sale securities recognized in earnings declined in 2015 compared to 2014 because the unrealized losses associated with securities we intend to sell were lower due to improvements in forecasted home prices, declines in market interest rates, and continued tightening of credit spreads for our non-agency mortgage-related securities. Net impairments of available-for-sale securities recognized in earnings declined in 2014 compared to 2013 primarily as a result of increased impairments in 2013 due to the availability of more detailed information which enhanced the assumptions used to estimate the contractual loan terms for certain modified loans collateralizing our non-agency mortgage-related securities. See "Conservatorship And Related Matters - Limits On Our Mortgage-Related Investments Portfolio And Indebtedness" for additional information concerning our efforts to reduce our less liquid assets.
Other gains (losses) on investment securities recognized in earnings. The decrease in gains in 2015 compared to 2014 was primarily due to a decrease in sales of agency mortgage-related securities. The increase in gains in 2014 compared to 2013 was primarily the result of the effect of a decline in longer-term interest rates on the fair values of our trading securities.
Changes in other income (loss) were primarily driven by non-agency mortgage-related securities settlements, lower-of-cost-or-fair-value adjustments for mortgage loans transferred to held-for-sale, and changes in fair value of multifamily mortgage loans for which we have elected the fair value option, as discussed below.
The change between 2015 and 2014 was primarily driven by:
$6.0 billion decline in income from non-agency mortgage-related securities litigation settlements, as there was only one settlement in 2015;
$2.0 billion increase in write-downs due to lower-of-cost-or-fair-value adjustments for mortgage loans transferred from held-for-investment to held-for-sale (see "Effect of Loan Reclassifications" for more information); and
$0.7 billion decline in the fair value of these multifamily mortgage loans, due to the widening of K Certificate benchmark spreads observed in the market.
The change between 2014 and 2013 was primarily driven by:

Freddie Mac 2015 Form 10-K
 
15



Management's Discussion and Analysis
 
Consolidated Results of Operations | Comparison

$0.6 billion increase in income from non-agency mortgage-related securities settlements, as the majority of such settlements occurred in 2014;
$1.6 billion increase in the fair value of these multifamily mortgage loans, due to the tightening of K Certificate benchmark spreads observed in the market; and
$0.2 billion increase in write-downs due to lower-of-cost-or-fair-value adjustments for mortgage loans transferred from held-for-investment to held-for-sale.
Administrative expense increased in 2015 and 2014 primarily because of costs associated with the FHFA-mandated termination of our pension plans. This increase was partially offset by lower professional services expense driven by lower expenses associated with FHFA-led lawsuits regarding our investments in certain non-agency mortgage-related securities.
REO operations expense increased in 2015 and 2014 compared to the respective prior year. REO property expenses declined in 2015 and 2014, consistent with a decline in REO inventory in each year. However, the REO property expenses were offset to a lesser extent by gains on the disposition of REO properties and recoveries from mortgage insurance, compared to the respective prior year.
Temporary Payroll Tax Cut Continuation Act of 2011 expense continued to increase as a result of the increase in the population of loans subject to this expense. As of December 31, 2015, $1.1 trillion of loans (or 63% of the single-family credit guarantee portfolio) were subject to these fees. We expect the amount of these fees will continue to increase in the future as we add new business and the population of loans subject to these fees increases.
Other expense increased during 2015 compared to 2014, primarily driven by property taxes and insurance costs associated with loans reclassified from held-for-investment to held-for-sale. These costs are considered part of the loan loss reserves while the loans are classified as held-for-investment. See "Effect of Loan Reclassifications" for more information. In addition, beginning January 1, 2015, FHFA directed us to allocate funds that will be distributed to certain housing funds pursuant to the GSE Act. During 2015, we completed $393.8 billion of new business purchases subject to this allocation and accrued $165 million of related expense. We expect to pay these amounts in February 2016. Other expense increased during 2014 compared to 2013, due to a settlement with Lehman Brothers Holdings Inc. to resolve our claims related to Lehman’s bankruptcy which reduced other expenses in 2013.
Income tax expense decreased in 2015 due to a decrease in pre-tax income. Income tax expense in 2014 reflects our return to a normal income tax recognition environment after the release of the valuation allowance against our net deferred tax asset in 2013.
Other comprehensive income was a loss in 2015 compared to income in 2014, primarily due to less spread tightening for our non-agency mortgage-related securities and less impairment reclassifications from AOCI into earnings. These factors were partially offset by a lower amount of accretion being recognized during 2015 compared to 2014. Other comprehensive income decreased during 2014 compared to 2013, primarily due to less spread tightening for our non-agency mortgage-related securities, partially offset by a flattening of the yield curve during 2014.
The three items discussed below affected multiple line items on our consolidated results of operations.
Effect of Loan Reclassifications
In 2014, management, with the approval of FHFA, decided to pursue sales of certain seriously delinquent single-family mortgage loans. During 2015, we expanded this program to include sales of certain

Freddie Mac 2015 Form 10-K
 
16



Management's Discussion and Analysis
 
Consolidated Results of Operations | Comparison

performing loans that are held by consolidated trusts in which we own all of the trusts' outstanding beneficial interests.
During 2015 and 2014, we reclassified $13.6 billion and $0.7 billion, respectively, in UPB of single-family mortgage loans from held-for-investment to held-for-sale. The initial reclassifications of these loans affected several line items on our consolidated results of operations, as shown in the table below.
 
 
Year Ended December 31,
(in millions)
 
2015
 
2014
Benefit for credit losses
 
$
2,314

 
$
147

Other income (loss) - lower-of-cost-or-fair-value adjustment
 
(2,193
)
 
(195
)
Other (expense) income - property taxes and insurance associated with these loans
 
(1,178
)
 
(62
)
Effect on income before income tax (expense) benefit
 
$
(1,057
)
 
$
(110
)
Interest-Rate Risk Management Activities
We fund our business activities primarily through the issuance of unsecured short- and long-term debt. The type of debt we issue is based on a variety of factors including market conditions and our liquidity requirements.
We use derivatives to economically hedge interest-rate sensitivity mismatches between our assets and liabilities. For example, depending on our strategic objectives and the duration of our mortgage-related assets, we may fund our business using longer-term debt or using a mix of derivatives and shorter- and medium-term debt. Through our use of derivatives, we manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models. For more information about our interest-rate risk management and the sensitivity of reported earnings to our interest-rate risk management activities, see “Risk Management - Interest Rate Risk and Other Market Risk.”
We currently favor a mix of derivatives and shorter- and medium-term debt to fund our business and manage interest-rate risk. This funding mix is a less expensive method than relying more extensively on long-term debt, and it provides greater flexibility and opportunity to match the duration of our assets and liabilities in the future as we reduce the mortgage-related investments portfolio in accordance with the requirements of the Purchase Agreement and FHFA.
While our interest-rate risk management activities reduce our economic exposure to interest-rate risk to a low level, as measured by our models, the accounting treatment for our assets and liabilities, including derivatives, creates volatility in our earnings when interest rates fluctuate. Some assets and liabilities are measured at amortized cost and some are measured at fair value, while all derivatives are measured at fair value. These measurement differences create volatility in our earnings that generally is not indicative of the underlying economics of our business.
The table below presents the effect of derivatives used in our interest-rate risk management activities on our comprehensive income, after considering the accrual of periodic cash settlements (which is the economic equivalent of interest expense), and the extent to which the effect of interest rate changes on our derivatives was offset by their effect on other financial instruments. The estimated net effect on comprehensive income is essentially the derivative gains (losses) attributable to financial instruments that are not measured at fair value.

Freddie Mac 2015 Form 10-K
 
17



Management's Discussion and Analysis
 
Consolidated Results of Operations | Comparison

 
Year Ended December 31,
(in billions)
2015
 
2014
 
2013
Components of derivative gains (losses)
 
 
 
 
 
Derivative gains (losses)
$
(2.7
)
 
$
(8.3
)
 
$
2.6

Less: Accrual of periodic cash settlements
(2.2
)
 
(2.6
)
 
(3.5
)
Derivative fair value changes
$
(0.5
)
 
$
(5.7
)
 
$
6.1

Estimated Net Interest Rate Effect
 
 
 
 
 
Interest rate effect on derivative fair values
$
(0.5
)
 
$
(5.5
)
 
$
5.9

Estimate of offsetting interest rate effect related to financial instruments measured at fair value
0.2

 
2.0

 
(4.0
)
Income tax benefit (expense)
0.1

 
1.2

 
(0.7
)
Estimated Net Interest Rate Effect on Comprehensive income
$
(0.2
)
 
$
(2.3
)
 
$
1.2

As this table demonstrates, the estimated net effect of derivatives used in our interest-rate risk management activities on our comprehensive income is volatile, and can be significant. For information about the sensitivity of our financial results to interest-rate volatility, see "Risk Management - Interest-Rate Risk and Other Market Risks."
Effects of Changes in Asset Spreads
Comprehensive income was impacted by an estimated $(0.1) billion, $2.0 billion, and $2.5 billion (after-tax) for 2015, 2014, and 2013, respectively, due to the impact of credit spread tightening (widening) on certain mortgage loans and mortgage-related securities measured at fair value.


Freddie Mac 2015 Form 10-K
 
18



Management's Discussion and Analysis
 
Consolidated Results of Operations | Net Interest Income


NET INTEREST INCOME
EXPLANATION OF KEY DRIVERS OF NET INTEREST INCOME
Net interest income consists of several primary components:
Contractual net interest income - consists of two primary components:
The difference between the interest income earned on the assets in our investments portfolio and the interest expense incurred on the liabilities used to fund those assets; and
Management and guarantee fees on loans held by consolidated trusts. We record interest income on loans held by consolidated trusts and interest expense on the debt securities issued by the trusts. The difference between the interest income on the loans and the interest expense on the debt represents the management and guarantee fee income we receive as compensation for our guarantee of the principal and interest payments of the issued debt securities. This difference includes the legislated 10 basis point increase in management and guarantee fees that is remitted to Treasury as part of the Temporary Payroll Tax Cut Continuation Act of 2011.
Contractual net interest income is primarily driven by the volume of assets in the mortgage-related investments and guarantee portfolios and the interest rate differential between those interest-earning assets and the related interest-bearing liabilities.
Amortization of cost basis adjustments - consists of cost basis adjustments, such as premiums and discounts on loans, investment securities, and debt that are amortized into interest income or interest expense based on the effective yield over the contractual life of the associated financial instrument.
The majority of our total net amortization relates to loans and debt securities of consolidated trusts, while amortization related to investment securities, other debt, and other assets and liabilities makes up a smaller portion. The net amortization of loans and debt securities of consolidated trusts is primarily driven by actual prepayments on the underlying loans.
Net amortization of loans and debt securities of consolidated trusts generally increases net interest income as it includes amortization of the upfront delivery fees we receive when we acquire a loan. Increases in actual prepayments result in higher net amortization, while decreases in actual prepayments result in lower net amortization. The timing of amortization of loans may differ from the timing of amortization of the securities backed by the loans, as the proceeds received from the loans backing these securities are remitted to the security holders at a date subsequent to the date proceeds from the loans are received.
Expense related to derivatives - consists of deferred gains and losses on closed cash flow hedges related to forecasted debt issuances that are reclassified from AOCI to net interest income when the related forecasted transaction affects net interest income.


Freddie Mac 2015 Form 10-K
 
19



Management's Discussion and Analysis
 
Consolidated Results of Operations | Net Interest Income


NET INTEREST YIELD ANALYSIS
The table below presents an analysis of interest-earning assets and interest-bearing liabilities. Mortgage loans on non-accrual status, where interest income is generally recognized when collected, are included in the average balances.
 
Year Ended December 31,
 
2015
 
2014
 
2013
(dollars in millions)
Average
Balance
 
Interest
Income
(Expense)
 
Average
Rate
 
Average
Balance
 
Interest
Income
(Expense)
 
Average
Rate
 
Average
Balance
 
Interest
Income
(Expense)
 
Average
Rate
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
12,482

 
$
8

 
0.06
 %
 
$
13,889

 
$
4

 
0.03
%
 
$
31,087

 
$
15

 
0.05
%
Securities purchased under agreements to resell
51,380

 
62

 
0.12

 
42,905

 
28

 
0.06

 
44,897

 
36

 
0.08

Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
226,162

 
8,706

 
3.85

 
256,548

 
10,027

 
3.91

 
313,707

 
12,787

 
4.08

Extinguishment of PCs held by Freddie Mac
(107,986
)
 
(3,929
)
 
(3.64
)
 
(111,545
)
 
(4,190
)
 
(3.76
)
 
(127,999
)
 
(5,045
)
 
(3.94
)
Total mortgage-related securities, net
118,176

 
4,777

 
4.04

 
145,003

 
5,837

 
4.03

 
185,708

 
7,742

 
4.17

Non-mortgage-related securities
10,699

 
17

 
0.16

 
9,983

 
6

 
0.06

 
21,385

 
26

 
0.12

Loans held by consolidated trusts(1)
1,590,768

 
55,867

 
3.51

 
1,540,570

 
57,036

 
3.70

 
1,511,128

 
57,189

 
3.78

Loans held by Freddie Mac(1)
157,261

 
6,359

 
4.04

 
170,017

 
6,569

 
3.86

 
203,760

 
7,694

 
3.78

Total interest-earning assets
$
1,940,766

 
$
67,090

 
3.46

 
$
1,922,367

 
$
69,480

 
3.61

 
$
1,997,965

 
$
72,702

 
3.63

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
$
1,611,388

 
$
(49,465
)
 
(3.07
)
 
$
1,557,895

 
$
(52,193
)
 
(3.35
)
 
$
1,532,032

 
$
(52,395
)
 
(3.42
)
Extinguishment of PCs held by Freddie Mac
(107,986
)
 
3,929

 
3.64

 
(111,545
)
 
4,190

 
3.76

 
(127,999
)
 
5,045

 
3.94

Total debt securities of consolidated trusts held by third parties
1,503,402

 
(45,536
)
 
(3.03
)
 
1,446,350

 
(48,003
)
 
(3.32
)
 
1,404,033

 
(47,350
)
 
(3.37
)
Other debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
108,096

 
(173
)
 
(0.16
)
 
118,211

 
(145
)
 
(0.12
)
 
132,674

 
(178
)
 
(0.13
)
Long-term debt
313,502

 
(6,207
)
 
(1.98
)
 
331,887

 
(6,768
)
 
(2.04
)
 
393,094

 
(8,251
)
 
(2.10
)
Total other debt
421,598

 
(6,380
)
 
(1.51
)
 
450,098

 
(6,913
)
 
(1.54
)
 
525,768

 
(8,429
)
 
(1.60
)
Total interest-bearing liabilities
1,925,000

 
(51,916
)
 
(2.70
)
 
1,896,448

 
(54,916
)
 
(2.89
)
 
1,929,801

 
(55,779
)
 
(2.89
)
Expense related to derivatives

 
(228
)
 
(0.01
)
 

 
(301
)
 
(0.02
)
 

 
(455
)
 
(0.02
)
Impact of net non-interest-bearing funding
15,766

 

 
0.02

 
25,919

 

 
0.04

 
68,164

 

 
0.10

Total funding of interest-earning assets
$
1,940,766

 
$
(52,144
)
 
(2.69
)
 
$
1,922,367

 
$
(55,217
)
 
(2.87
)
 
$
1,997,965

 
$
(56,234
)
 
(2.81
)
Net interest income/yield
 
 
$
14,946

 
0.77
 %
 
 
 
$
14,263

 
0.74
%
 
 
 
$
16,468

 
0.82
%

(1)
Loan fees, primarily consisting of amortization of delivery fees, included in interest income for loans held by consolidated trusts were $2.0 billion, $1.4 billion, and $1.2 billion, respectively, and were $383 million, $373 million, and $294 million in 2015, 2014, and 2013, respectively, for loans held by Freddie Mac.

Freddie Mac 2015 Form 10-K
 
20



Management's Discussion and Analysis
 
Consolidated Results of Operations | Net Interest Income


NET INTEREST INCOME RATE / VOLUME ANALYSIS
The table below presents a rate and volume analysis of our net interest income. Our net interest income reflects the reversal of interest income accrued, net of interest received on a cash basis, related to mortgage loans that are on non-accrual status.
 
 
2015 vs. 2014 Variance Due to
 
2014 vs. 2013 Variance Due to
(in millions)
 
Rate
 
Volume
 
Total Change
 
Rate
 
Volume
 
Total Change
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
6

 
$
(2
)
 
$
4

 
$
(5
)
 
$
(6
)
 
$
(11
)
Securities purchased under agreements to resell
 
24

 
10

 
34

 
(7
)
 
(1
)
 
(8
)
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
(149
)
 
(1,172
)
 
(1,321
)
 
(508
)
 
(2,252
)
 
(2,760
)
Extinguishment of PCs held by Freddie Mac
 
129

 
132

 
261

 
229

 
626

 
855

Total mortgage-related securities, net
 
(20
)
 
(1,040
)
 
(1,060
)
 
(279
)
 
(1,626
)
 
(1,905
)
Non-mortgage-related securities
 
11

 

 
11

 
(10
)
 
(10
)
 
(20
)
Loans held by consolidated
trusts
 
(2,991
)
 
1,822

 
(1,169
)
 
(1,256
)
 
1,103

 
(153
)
Loans held by Freddie Mac
 
297

 
(507
)
 
(210
)
 
175

 
(1,300
)
 
(1,125
)
Total interest-earning assets
 
$
(2,673
)
 
$
283

 
$
(2,390
)
 
$
(1,382
)
 
$
(1,840
)
 
$
(3,222
)
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
 
$
4,476

 
$
(1,748
)
 
$
2,728

 
$
1,079

 
$
(877
)
 
$
202

Extinguishment of PCs held by Freddie Mac
 
(129
)
 
(132
)
 
$
(261
)
 
(229
)
 
(626
)
 
$
(855
)
Total debt securities of consolidated trusts held by third parties
 
4,347

 
(1,880
)
 
$
2,467

 
850

 
(1,503
)
 
(653
)
Other debt:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
 
(41
)
 
13

 
(28
)
 
15

 
18

 
33

Long-term debt
 
193

 
368

 
561

 
229

 
1,254

 
1,483

Total other debt
 
152

 
381

 
533

 
244

 
1,272

 
1,516

Total interest-bearing liabilities
 
4,499

 
(1,499
)
 
3,000

 
1,094

 
(231
)
 
863

Expense related to derivatives
 
73

 

 
73

 
154

 

 
154

Total funding of interest-earning assets
 
$
4,572

 
$
(1,499
)
 
$
3,073

 
$
1,248

 
$
(231
)
 
$
1,017

Net interest income
 
$
1,899

 
$
(1,216
)
 
$
683

 
$
(134
)
 
$
(2,071
)
 
$
(2,205
)




Freddie Mac 2015 Form 10-K
 
21



Management's Discussion and Analysis
 
Consolidated Results of Operations | Net Interest Income


COMPONENTS OF NET INTEREST INCOME
The table below presents the components of net interest income.
 
 
Year Ended December 31,
 
Change 2015-2014
 
Change 2014-2013
(in millions)
 
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
Contractual net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management and guarantee fee income
 
$
2,722

 
$
2,399

 
$
2,111

 
$
323

 
13
 %
 
$
288

 
14
 %
Management and guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011
 
957

 
759

 
519

 
198

 
26
 %
 
240

 
46
 %
Other contractual net interest income
 
8,106

 
9,070

 
11,484

 
(964
)
 
(11
)%
 
(2,414
)
 
(21
)%
Total contractual net interest income
 
11,785

 
12,228

 
14,114

 
(443
)
 
(4
)%
 
(1,886
)
 
(13
)%
Net amortization - loans and debt securities of consolidated trusts
 
2,883

 
1,913

 
2,791

 
970

 
51
 %
 
(878
)
 
(31
)%
Net amortization - other assets and debt
 
506

 
423

 
18

 
83

 
20
 %
 
405

 
2,250
 %
Expense related to derivatives
 
(228
)
 
(301
)
 
(455
)
 
73

 
(24
)%
 
154

 
(34
)%
Net interest income
 
$
14,946

 
$
14,263

 
$
16,468

 
$
683

 
5
 %
 
$
(2,205
)
 
(13
)%

Key Drivers:
Management and guarantee fee income increased during 2015, compared to 2014 and 2013, as the rates and volume of our guarantee businesses increased. Specifically, management and guarantee fee rates received on new business are higher than the rates received on older vintages that continue to pay-down. Furthermore, the size of our single-family credit guarantee portfolio continues to grow as we continue to securitize single-family loans into PCs. The increase in management and guarantee fee income, combined with a decline in our other contractual net interest income, resulted in management and guarantee fee income becoming a larger component of our contractual net interest income. We expect this trend to continue in the future. See the Single-family Guarantee segment's "Business Results" section in "Our Business Segments" for additional discussion.
Other contractual net interest income declined in 2015 and 2014, primarily due to the reduction in the balance of our mortgage-related investments portfolio, as we continue to manage the size and composition of this portfolio pursuant to the limits established by the Purchase Agreement and by FHFA. Although we reinvested a portion of the proceeds received from pay-downs and dispositions, the new mortgage-related assets we acquired have lower yields as a result of a lower interest rate environment. We expect our other contractual net interest income to continue to decline in the near future as we reduce our mortgage-related investments portfolio. See "Conservatorship and Related Matters - Limits on Our Mortgage-Related Investments Portfolio and Indebtedness" for additional discussion of the limits on the mortgage-related investments portfolio.
Net amortization of loans and debt securities of consolidated trusts increased in 2015 compared to 2014 due to an increase in the amortization of upfront fees and basis adjustments on debt securities of consolidated trusts. This increase was primarily driven by higher prepayment rates on single-family loans in 2015 compared to 2014. Conversely, net amortization of loans and debt securities of consolidated trusts was lower in 2014 compared to 2013, due to slower prepayment rates on single-family loans and timing differences between the amortization of the loan and debt securities basis adjustments.

Freddie Mac 2015 Form 10-K
 
22



Management's Discussion and Analysis
 
Consolidated Results of Operations | Provision for Credit Losses


BENEFIT (PROVISION) FOR CREDIT LOSSES
EXPLANATION OF KEY DRIVERS OF PROVISION FOR CREDIT LOSSES
The benefit (provision) for credit losses predominantly relates to single-family loans and includes components for both collectively impaired loans and individually impaired loans.
Collectively impaired loans - The provision for collectively impaired loans is primarily driven by the volume of newly delinquent loans and changes in estimated probabilities of default and estimated loss severities for the loans. Estimated probabilities of default and estimated loss severities are based on current conditions and historical data and are heavily influenced by changes in home prices, but are also affected by a number of other factors, such as local and regional economic conditions, changes in reperformance and default rates, and the success of our borrower assistance programs.
Individually impaired loans - The provision for individually impaired loans is primarily driven by the volume of our loss mitigation activity (e.g., loan modifications) that results in loans being considered TDRs, the payment performance of our individually impaired mortgage portfolio, and changes in estimated probabilities of default and estimated loss severities, which affect the future cash flows we expect to receive from these loans. Estimated probabilities of default and estimated loss severities for individually impaired loans are based on the same current conditions and historical data and are affected by the same factors noted above for collectively impaired loans.
As we continue to perform loss mitigation activities that result in loans being considered individually impaired, the portion of our allowance for loan losses and provision for credit losses related to collectively impaired loans continues to decline.
Our allowance for loan losses and provision for credit losses are significantly affected by the "interest rate concessions" we make on loans that we have modified (i.e., reductions in the contractual interest rate). When a loan is modified and considered individually impaired, we generally measure impairment based on the present value of the expected future cash flows discounted at the loan’s original effective interest rate. Under this methodology, we record a loss at the time a loan is modified equal to the difference in the present value of expected cash flows resulting from the change in the modified loan’s contractual interest rate, which increases the provision for credit losses in that period. When a modified loan subsequently performs according to its new contractual terms and we receive the new contractual cash flows (i.e., principal and interest payments), a portion of the discount that was previously applied to those cash flows is amortized into earnings each period and is recognized as a reduction in the provision for credit losses in the period in which the cash flows are received. We refer to this reduction in the provision for credit losses as the "amortization of interest rate concessions."
Our provision for credit losses and the amount of charge-offs that we record in the future will be affected by a number of factors, such as the actual level of loan defaults; the effect of loss mitigation efforts; any government actions or programs that affect the ability of borrowers to refinance loans with an LTV ratio greater than 100% or obtain modifications; changes in property values; regional economic conditions, including unemployment rates; additional delays in the foreclosure process; and third-party mortgage insurance coverage and recoveries.

Freddie Mac 2015 Form 10-K
 
23



Management's Discussion and Analysis
 
Consolidated Results of Operations | Provision for Credit Losses


BENEFIT (PROVISION) FOR CREDIT LOSSES
The table below presents the components of our benefit (provision) for credit losses.
 
 
Year Ended December 31,
 
Change 2015-2014
 
Change 2014-2013
(dollars in billions)
 
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
Provision for newly impaired loans
 
$
(0.9
)
 
$
(1.7
)
 
$
(2.5
)
 
$
0.8

 
47
 %
 
$
0.8

 
32
 %
Amortization of interest rate concessions
 
1.2

 
1.4

 
1.0

 
(0.2
)
 
(14
)%
 
0.4

 
40
 %
Reclassifications of held-for-investment loans to held-for-sale loans
 
2.3

 
0.1

 

 
2.2

 
2,200
 %
 
0.1

 
N/A

Other, including changes in estimated default probability and loss severity
 
0.1

 
0.1

 
4.0

 

 
 %
 
(3.9
)
 
(98
)%
Benefit (provision) for credit losses
 
$
2.7

 
$
(0.1
)
 
$
2.5

 
$
2.8

 
2,800
 %
 
$
(2.6
)
 
(104
)%
Key Drivers:
The main driver of the benefit for credit losses in 2015 was the reclassifications of loans from held-for-investment to held-for sale in connection with our efforts to sell seriously delinquent single-family loans. See "Effect of Loan Reclassifications" for the effect of these loan reclassifications on pre-tax net income.
The provision for newly impaired loans decreased in 2015 and 2014 due to declines in the volume of newly delinquent single-family loans in both years.
The benefit (provision) for credit losses in 2014 and 2013 reflect benefits of $0.3 billion and $1.7 billion, respectively, related to settlement agreements with certain sellers to release specified loans from certain repurchase obligations in exchange for one-time cash payments primarily associated with our Legacy single-family book.

Freddie Mac 2015 Form 10-K
 
24



Management's Discussion and Analysis
 
Consolidated Results of Operations | Derivative Gains (Losses)


DERIVATIVE GAINS (LOSSES)
EXPLANATION OF KEY DRIVERS OF DERIVATIVE GAINS (LOSSES)
Derivative instruments are a key component of our interest-rate risk management strategy. We use derivatives to economically hedge our interest-rate risk exposure. We primarily use interest-rate swaps, option-based derivatives such as swaptions, and futures to manage our exposure to changes in interest-rates. We consider the cost of derivatives used in interest-rate risk management to be an inherent part of the cost of funding our mortgage-related investments portfolio.
In addition, while not part of our interest-rate risk management activities, we routinely enter into commitments to purchase and sell loans and mortgage-related securities. The majority of these commitments are accounted for as derivative instruments.
Derivative gains (losses) consist of both fair value changes and accrual of periodic cash settlements:
Fair value changes - Represent changes in the fair value of our derivatives based on market conditions at the end of the period or at the time the derivative instrument is terminated. These amounts may or may not be realized over time, depending on future changes in market conditions and the terms of our derivative instruments.
Accrual of periodic cash settlements - Consists of the net amount we accrue during a period for interest-rate swap payments that we will make or receive. This accrual represents the ongoing cost of our hedging activities, and is economically equivalent to interest expense.
Gains and losses on derivatives are affected by a number of factors, including:
Changes in interest rates - Our primary derivative instruments are interest-rate swaps, including pay-fixed and receive-fixed interest-rate swaps. With a pay-fixed interest-rate swap, we pay a fixed rate of interest and receive a variable rate of interest based on a specified notional balance (the notional balance is for calculation purposes only). With a pay-fixed interest-rate swap, as interest rates decline, we recognize derivative losses, as the amount of interest we pay remains fixed, and the amount of interest we receive declines. As rates rise, we recognize derivative gains, as the amount of interest we pay remains fixed, but the amount of interest we receive increases. With a receive-fixed interest-rate swap, the opposite results occur.
Implied volatility - Many of our assets and liabilities have embedded prepayment options. We use option-based derivatives, including swaptions, to economically hedge the prepayment options embedded in our mortgage assets and callable debt. Fair value gains and losses on swaptions are sensitive to changes in both interest rates and implied volatility, which reflects the market’s expectation of future changes in interest rates. Assuming all other factors are unchanged, including interest rates, purchased swaptions generally become more valuable as implied volatility increases and less valuable as implied volatility decreases, with the opposite being true for written swaptions.
Changes in the shape of the yield curve - We own assets and have outstanding debt with different cash flows along the yield curve. We use derivatives to hedge the yield exposure of assets and debt, resulting in derivatives with different maturities. As a result, changes in the shape of the yield curve will affect our derivative gains (losses).

Freddie Mac 2015 Form 10-K
 
25



Management's Discussion and Analysis
 
Consolidated Results of Operations | Derivative Gains (Losses)


Changes in the composition of our derivative portfolio - The mix and balance of our derivative portfolio changes from period to period as we enter into or terminate derivative instruments to respond to changes in interest rates and changes in the balances and modeled characteristics of our assets and liabilities. Changes in the composition of our derivative portfolio will affect the derivative gains and losses we recognize in a given period, thereby affecting the volatility of comprehensive income.
While our sensitivity to interest rates on an economic basis remains low based on our models, our exposure to earnings volatility resulting from our use of derivatives has increased in recent years as we have changed the mix of our derivative portfolio to align with the changing duration of our hedged assets and liabilities. We believe the impact of derivatives on our GAAP financial results should be considered in the context of our overall interest-rate risk profile, including our PMVS and duration gap results. For more information about our interest-rate risk management activities and the sensitivity of reported earnings to those activities, see “Risk Management - Interest Rate Risk And Other Market Risks.”
COMPONENTS OF DERIVATIVE GAINS (LOSSES)
The table below presents the components of derivative gains (losses).
 
 
Year Ended December 31,
 
Change 2015-2014
 
Change 2014-2013
(in millions)
 
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
Fair value changes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Change in interest-rate swaps
 
$
(778
)
 
$
(7,294
)
 
$
8,598

 
$
6,516

 
(89
)%
 
$
(15,892
)
 
(185
)%
  Change in option-based derivatives
 
258

 
1,437

 
(2,422
)
 
(1,179
)
 
(82
)
 
3,859

 
(159
)
Accrual of periodic cash settlements
 
(2,198
)
 
(2,625
)
 
(3,467
)
 
427

 
(16
)
 
842

 
(24
)
Other
 
22

 
191

 
(77
)
 
(169
)
 
(88
)
 
268

 
(348
)
Derivative gains (losses)
 
$
(2,696
)
 
$
(8,291
)
 
$
2,632

 
$
5,595

 
(67
)%
 
$
(10,923
)
 
(415
)%
Key Drivers:
We recognized derivative losses in 2015 primarily from the accrual of periodic cash settlements. Fair value changes were less significant in 2015, as interest rates declined slightly.
We recognized derivative losses in 2014 primarily as a result of the impact of a flattening yield curve as shorter-term interest rates increased and longer-term interest rates declined during 2014.
We recognized derivative gains in 2013 primarily as a result of an increase in longer-term interest rates.

Freddie Mac 2015 Form 10-K
 
26



Management's Discussion and Analysis
 
Consolidated Results of Operations | Other Comprehensive Income


OTHER COMPREHENSIVE INCOME (LOSS)
EXPLANATION OF KEY DRIVERS OF OTHER COMPREHENSIVE INCOME (LOSS)
Our investments in securities classified as available-for-sale are measured at fair value on our consolidated balance sheets. The fair value of these securities is primarily affected by changes in interest rates, credit spreads, and the movement of these securities towards maturity. All unrealized gains and losses on these securities are excluded from earnings and reported in other comprehensive income until realized. We reclassify our unrealized gains and losses from AOCI to earnings upon the sale of the securities or if the securities are determined to be other-than-temporarily impaired.
If, subsequent to the recognition of other-than-temporary impairment, our expectation of the cash flows we will receive on a previously impaired security has significantly increased, we will accrete that increase in cash flows into the security's amortized cost basis and use the new amortized cost basis for future impairment evaluation. The increased amortized cost basis will generally reduce the amount of unrealized gains that we would have otherwise recognized if not for the accretion.

The following table presents the attribution of the other comprehensive income (loss) reported in our consolidated statements of comprehensive income.
 
 
Year Ended December 31,
(in millions)
 
2015
 
2014
 
2013
Other comprehensive income, excluding accretion and reclassifications
 
$
374

 
$
2,563

 
$
3,167

Accretion due to significant increases in expected cash flows on previously-impaired available-for-sale securities
 
(449
)
 
(519
)
 
(339
)
Reclassifications from AOCI
 
(502
)
 
(308
)
 
104

Total other comprehensive income (loss)
 
$
(577
)
 
$
1,736

 
$
2,932

Key Drivers:
Other comprehensive income was a loss in 2015 compared to income in 2014, primarily due to less spread tightening for our non-agency mortgage-related securities and less impairment reclassifications from AOCI into earnings. Other comprehensive income declined during 2014 compared to 2013, primarily due to less spread tightening for our non-agency mortgage-related securities, partially offset by a flattening of the yield curve.
We recognized lower unrealized gains as a result of our accretion of the increase in expected cash flows to the amortized cost basis of the previously-impaired available-for-sale securities in all periods presented. Accretion was higher during 2015 and 2014 compared to 2013, as a result of improving collateral performance and declining longer-term interest rates.
We reclassified unrealized gains and losses from AOCI to earnings as a result of our sales of available-for-sale mortgage-related securities in all periods presented. During 2015 and 2014, we reclassified net unrealized gains as a result of improved pricing due to declining longer-term interest rates and stabilized collateral performance. Conversely, during 2013, we reclassified net unrealized losses as a result of rising longer-term interest rates.



Freddie Mac 2015 Form 10-K
 
27



Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized consolidated balance sheets.
 
 
December 31,
 
 
 
 
(dollars in millions)
 
2015
 
2014
 
$ Change
 
% Change
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
5,595

 
$
10,928

 
$
(5,333
)
 
(49
)%
Restricted cash and cash equivalents
 
14,533

 
8,535

 
5,998

 
70

Securities purchased under agreements to resell
 
63,644

 
51,903

 
11,741

 
23

Investments in securities
 
114,215

 
136,987

 
(22,772
)
 
(17
)
Mortgage loans, net
 
1,754,193

 
1,700,580

 
53,613

 
3

Accrued interest receivable
 
6,074

 
6,034

 
40

 
1

Derivative assets, net
 
395

 
822

 
(427
)
 
(52
)
Real estate owned, net
 
1,725

 
2,558

 
(833
)
 
(33
)
Deferred tax assets, net
 
18,205

 
19,498

 
(1,293
)
 
(7
)
Other assets
 
7,471

 
7,694

 
(223
)
 
(3
)
Total assets
 
$
1,986,050

 
$
1,945,539

 
$
40,511

 
2
 %
 
 
 
 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Accrued interest payable
 
$
6,183

 
$
6,325

 
$
(142
)
 
(2
)%
Debt, net
 
1,970,427

 
1,929,542

 
40,885

 
2

Derivative liabilities, net
 
1,254

 
1,963

 
(709
)
 
(36
)
Other liabilities
 
5,246

 
5,058

 
188

 
4

Total liabilities
 
1,983,110

 
1,942,888

 
40,222

 
2

Total equity
 
2,940

 
2,651

 
289

 
11

Total liabilities and equity
 
$
1,986,050

 
$
1,945,539

 
$
40,511

 
2
 %
Key Drivers:
Cash and cash equivalents, restricted cash and cash equivalents, and securities purchased under agreements to resell affect one another, so the changes in the balances should be viewed together. For example, cash and cash equivalents and restricted cash and cash equivalents can be invested in securities purchased under agreements to resell or other investments in securities (i.e., non-mortgage-related securities). The drivers of the increase in the combined balance are higher near-term cash needs for upcoming maturities and anticipated calls of other debt, and an increase in principal and interest payments received from servicers for unsecuritized mortgage loans owned by us.
Investments in securities continued to decline as we continued to reduce the less liquid assets in our mortgage-related investments portfolio, partially offset by increases in Treasury securities for upcoming maturities and anticipated calls of other debt.
Mortgage loans, net increased, driven by an increase in acquisitions of purchase money loans, which resulted from higher volumes of home sales and home price appreciation.
Real estate owned, net continued to decline as we continued to sell our existing inventory and the pace of new REO acquisitions slowed as our population of seriously delinquent loans declined.
Deferred tax assets, net declined primarily due to the reduction of deferred differences related to the allowance for loan losses and credit-related items.

Freddie Mac 2015 Form 10-K
 
28



Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


Debt, net increased as debt securities of consolidated trusts held by third parties rose as a result of the increase in the acquisition and securitization of mortgage loans in 2015 due to higher volumes of home sales and home price appreciation. This increase in debt securities of consolidated trusts held by third parties was partially offset by declines in other debt as we continued to reduce our indebtedness along with the decline in our mortgage-related investments portfolio.
Total equity increased as a result of higher comprehensive income in the fourth quarter of 2015 compared to the fourth quarter of 2014 and was partially offset by dividends paid related to the $600 million decline in the Capital Reserve Amount in 2015.

Freddie Mac 2015 Form 10-K
 
29



Management's Discussion and Analysis
 
Our Business Segments | Segment Earnings


OUR BUSINESS SEGMENTS
As shown in the table below, we have three reportable segments, which are based on the way we manage our business. Certain activities that are not part of a reportable segment are included in the All Other category.
Segment
Description
Primary Income Drivers
Primary Expense Drivers
Single-family Guarantee
Reflects results from our purchase, securitization, and guarantee of single-family loans and the management of single-family mortgage credit risk
Management and guarantee fee income
Credit-related expenses
Administrative expenses
Multifamily
Reflects results from our investment, securitization, and guarantee activities in multifamily loans and securities, and the management of multifamily mortgage credit risk
Net interest income
Gains and losses on loans


Management and guarantee fee income
Investment gains and losses
Derivative gains and losses
Gains and losses on loans
Administrative expenses
 
Investment gains and losses
Credit-related expenses
 
Derivative gains and losses
 
 
Investments
Reflects results from managing the company’s mortgage-related investments portfolio (excluding Multifamily investments and single-family seriously delinquent loans), treasury function, and interest-rate risk
Net interest income
Other-than-temporary impairments on non-agency mortgage-related securities
Investment gains and losses
Derivative gains and losses
 
 
Investment gains and losses
 
 









Derivative gains and losses
 
 
Administrative expenses
All Other
Consists of material corporate level activities that are infrequent in nature and based on decisions outside the control of the management of our reportable segments
 
N/A
 
N/A
SEGMENT EARNINGS
We evaluate segment performance and allocate resources based on a Segment Earnings approach:
We make significant reclassifications among certain line items in our GAAP financial statements to reflect measures of management and guarantee fee income on guarantees and net interest income on investments that are in line with how we manage our business.
We allocate certain revenues and expenses, including certain returns on assets and funding costs, and all administrative expenses to our three reportable segments.
The sum of Segment Earnings for each segment and the All Other category equals GAAP net income (loss) and the sum of comprehensive income (loss) for each segment and the All Other category equals GAAP comprehensive income (loss).
In the second quarter of 2015, we changed our Segment Earnings definition associated with the expense related to the Temporary Payroll Tax Cut Continuation Act of 2011. As a result of this change, the expense related to the legislated 10 basis point increase is now netted within management and guarantee fee income. The purpose of this change is to better reflect how management evaluates the Single-family

Freddie Mac 2015 Form 10-K
 
30



Management's Discussion and Analysis
 
Our Business Segments | Segment Earnings


Guarantee segment. Prior period results have been revised to conform to the current period presentation. We reclassified $775 million and $533 million of Temporary Payroll Tax Cut Continuation Act of 2011 expense into management and guarantee fee income for 2014 and 2013, respectively.
Segment Earnings differs significantly from, and should not be used as a substitute for, net income (loss) as determined in accordance with GAAP. Our definition of Segment Earnings may differ from similar measures used by other companies. We believe that Segment Earnings provides us with meaningful metrics to assess the financial performance of each segment and our company as a whole. See Note 12 for additional details on Segment Earnings, including additional financial information for our segments.
SEGMENT COMPREHENSIVE INCOME
The table below shows our comprehensive income by segment, including the All Other category.


Freddie Mac 2015 Form 10-K
 
31



Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


SINGLE-FAMILY GUARANTEE
BUSINESS OVERVIEW
In our Single-family Guarantee segment, we purchase, securitize, and guarantee single-family loans originated by lenders and we manage our single-family mortgage credit risk. Our Single-family Guarantee segment supports our primary business strategies by creating:
A Better Freddie Mac:
Providing market leadership by delivering quality offerings, programs, and services to an increasingly     diversified customer base and an evolving mortgage market;
Improving the customer experience through continued enhancement of our products, programs, processes, and technology; and
Establishing efficient risk management activities that are appropriate for the expected level of risk.
A Better Housing Finance System:
Developing innovative technology platforms to provide sellers and Freddie Mac with better methods of assessing and managing single-family mortgage credit risk;
Developing and implementing initiatives to reduce taxpayer exposure and offer private investors new and innovative ways to share in the credit risk of the Core single-family book;
Expanding access to mortgage credit in a responsible manner to support our Charter Mission as well as to meet specific mandated goals;
Working with FHFA, Fannie Mae, and Common Securitization Solutions, LLC ("CSS") on the development of a new common securitization platform; and
Implementing the single (common) security initiative for Freddie Mac and Fannie Mae, which is intended to reduce the disparities in trading value between our PCs and Fannie Mae's single-class mortgage-related securities.
The U.S. residential mortgage market consists of a primary mortgage market that links homebuyers and lenders and a secondary mortgage market that links lenders and investors. We participate only in the secondary mortgage market. The size of the U.S. residential mortgage market is affected by many factors, including changes in interest rates, unemployment rates, homeownership rates, housing prices, the supply of housing, lender preferences regarding credit risk, and borrower preferences regarding mortgage debt. The amount of residential mortgage debt available for us to purchase and the mix of available loan products are also affected by several factors, including the volume of loans meeting the requirements of our Charter, our own preference for credit risk reflected in our purchase standards, and the loan purchase and securitization activity of other financial institutions.
Products and Activities
Securitization and Guarantee Products
In a typical loan securitization, we purchase loans that lenders originate and then pool these loans into mortgage-related securities that can be sold in the capital markets. We typically guarantee the payment of principal and interest on the mortgage-related securities in exchange for management and guarantee fee income. We administer the collection of borrowers' payments on their loans and the distribution of payments to the investors in the mortgage-related securities, net of our management and guarantee fee

Freddie Mac 2015 Form 10-K
 
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Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


income. When a borrower prepays a loan that we have securitized, the outstanding balance of the security owned by investors is reduced by the amount of the prepayment. If the borrower becomes delinquent, we continue to make the applicable payments to the investors in the mortgage-related securities pursuant to our guarantee. When that occurs, we work to mitigate our losses through our loan workout programs, which are discussed in more detail in "Risk Management." If we are unable to achieve a successful loan workout, we pursue foreclosure of the underlying property.
We establish trusts for mortgage-related securities we issue pursuant to Master Trust Agreements and serve as trustee for the trusts. We have the option, and in some instances the requirement, to purchase specified loans, including certain delinquent loans, from the trusts at a purchase price equal to the current UPB of the loan, less any outstanding advances of principal that have been previously distributed. For information on an operational risk issue relating to the Master Trust Agreement, see "Risk Management - Operational Risk."
The management and guarantee fee we charge on new acquisitions generally consists of a combination of upfront delivery fees and a base monthly fee paid as a percentage of the UPB of the underlying loan. We may also make upfront payments to buy up the monthly management and guarantee fee rate ("buy-up fees"), or receive upfront payments to buy down the monthly management and guarantee fee rate (“buy-down fees”). These fees are paid in conjunction with the formation of a PC to provide for a uniform coupon rate for the mortgage pool underlying the PC. The payments made to buy up the management and guarantee fee rate are not considered compensation for the credit risk assumed for purposes of our financial statements. Consequently, these amounts are allocated to the Investments segment.
We enter into loan purchase agreements with many of our single-family customers that outline the terms under which we agree to purchase loans from them over a period of time. For the majority of the loans we purchase, the management and guarantee fees are not specified contractually. Instead, we bid for some or all of the lender's loan volume on a monthly basis at a management and guarantee fee rate that we specify. As a result, our loan purchase volumes from individual customers can fluctuate significantly.
We seek to issue guarantees with fee terms that are commensurate with the risks assumed and that will, over the long-term, provide management and guarantee fee income that exceeds the credit-related and administrative expenses on the underlying loans and provide a return on the capital that would be needed to support the related credit risk. We do not have the ability to fully price for our credit risk at the loan level as our base fee does not differentiate by LTV ratio, credit score, and certain other credit-related factors. We must obtain FHFA’s approval to implement across-the-board increases in our management and guarantee fees. To compensate us for higher levels of risk in some loan products, we charge upfront delivery fees above our base fees, which are calculated based on credit risk factors such as the loan product type, loan purpose, LTV ratio, and credit score. While we vary our guarantee and, in certain cases, delivery fee pricing for different customers, loan products, and loan or borrower underwriting characteristics based on our assessment of credit risk, the seller may elect to retain loans with better credit characteristics. The sellers' decisions with respect to loan retention, or sale to us, could result in our purchases having a more adverse credit profile.
In 2012, at FHFA's direction, we increased management and guarantee fees by 10 basis points. Under the Temporary Payroll Tax Cut Continuation Act of 2011, the proceeds from this increase are being remitted to Treasury on a quarterly basis to fund the payroll tax cut. We refer to this fee increase as the legislated 10 basis point increase in management and guarantee fees.

Freddie Mac 2015 Form 10-K
 
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Management's Discussion and Analysis
 
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As part of our Single-family Guarantee business, we issue the types of guarantee and securitization products described below. In these securitization products, Freddie Mac functions in its capacity as depositor, guarantor, administrator, and trustee.
PCs - our primary single-family mortgage securitization and guarantee process involves our issuance of single-class PCs, which are pass-through securities that represent undivided beneficial interests in trusts that hold pools of loans. For our fixed-rate PCs, we guarantee the timely payment of principal and interest. For our ARM PCs, we guarantee the timely payment of the weighted average coupon interest rate for the underlying loans. We also guarantee the full and final payment of principal, but not the timely payment of principal, on ARM PCs.
Guarantor Swap PCs - we issue most of our PCs in guarantor swap transactions in which our customers provide us with loans in exchange for PCs, as shown in the diagram below:
Cash PCs - we also issue PCs in transactions in which we purchase performing loans (which we sometimes refer to as a securitization pipeline) and securitize them for retention in our mortgage-related investments portfolio or for sale to third parties, as shown in the diagram below. We also use this process to securitize reperforming loans.

Freddie Mac 2015 Form 10-K
 
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Management's Discussion and Analysis
 
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Resecuritization Products - our resecuritization products represent beneficial interests in pools of PCs and certain other types of mortgage assets. We create these securities primarily by using PCs or our previously issued resecuritization products as the underlying collateral. We believe our issuance of these securities expands the range of investors in our mortgage-related securities to include those seeking specific security attributes. Similar to our PCs, we guarantee the payment of principal and interest to the investors in our resecuritization products. We do not charge a management and guarantee fee for these securities if the underlying collateral is already guaranteed by us since no additional credit risk is introduced, although we typically receive a transaction fee as compensation for creating the security and future administrative responsibilities. All of the cash flows from the collateral underlying our resecuritization products are generally passed through to investors in these securities. We do not issue resecuritization products that have concentrations of credit risk beyond those embedded in the underlying assets. In many of our resecuritization transactions, securities dealers or investors deliver mortgage assets in exchange for the resecuritization product. In certain cases, we may also exchange our own mortgage assets for the resecuritization product. The following diagram provides a general example of how we create resecuritization products:

Freddie Mac 2015 Form 10-K
 
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Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


We issue the following types of resecuritization products:
Giant PCs - Giant PCs are resecuritizations of previously issued PCs or Giant PCs. Giant PCs are single-class securities that involve the straight pass through of all of the cash flows of the underlying collateral to holders of the beneficial interests.
Stripped Giant PCs - Stripped Giant PCs are multiclass securities that are formed by resecuritizing previously issued PCs or Giant PCs and issuing principal-only and interest-only securities backed by the cash flows from the underlying collateral.
REMICs - REMICs are resecuritizations of previously issued PCs, Giant PCs, Stripped Giant PCs, or REMICs. REMICs are multiclass securities that divide all of the cash flows of the underlying collateral into two or more classes with varying maturities, payment priorities and coupons.
Other securitization products - From time to time, we issue guaranteed mortgage-related securities collateralized by non-Freddie Mac mortgage-related securities. However, we have not entered into these types of transactions as part of our Single-family Guarantee business in several years. In 2009 and 2010, we entered into transactions under Treasury’s NIBP with HFAs. See Note 2 for further information.
Long-term standby commitments - we provide a guarantee on mortgage assets held by third parties, in exchange for management and guarantee fees, without securitizing those assets. Long-term standby commitments obligate us to purchase seriously delinquent loans that are covered by those commitments. From time to time, we have consented to the termination of our long-term standby commitments and simultaneously entered into guarantor swap transactions with the same counterparty, issuing PCs backed by many of the same loans.

Freddie Mac 2015 Form 10-K
 
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Management's Discussion and Analysis
 
Our Business Segments | Single-Family Guarantee


Credit Risk Transfer Transactions
Most of our credit risk transfer transactions are designed to transfer a portion of the credit risk on groups of previously acquired loans to third-party investors. These transactions are intended to attract private capital from new types of investors that have not historically invested in single-family mortgage credit risk. The following strategic considerations were incorporated into the design of our credit risk transfer transactions:
Repeatable and scalable execution with a broad appeal to diversified investors;
Execution at a cost that is economically sensible;
Minimal effect on the TBA market;
Minimize changes required of, and effects on, sellers and servicers by having Freddie Mac serve as the credit manager for investors; and
Avoid or seek to mitigate the risk that our losses are not reimbursed timely and in full.
The value of these transactions to us is dependent on various economic scenarios, and we will primarily benefit from these transactions if we experience significant loan defaults. These new credit risk transfer transactions include:
STACR debt notes - In this transaction, we create a reference pool of loans from our Core single-family book and an associated securitization structure with notional credit risk positions (e.g., first loss, mezzanine, and senior positions). The notional amounts of the credit risk positions are reduced when certain specified credit events occur on the loans in the reference pool. The notional amounts of the credit risk positions may also be reduced based on scheduled and unscheduled principal payments that occur on the loans in the reference pool.
In STACR debt note transactions, losses may be allocated to the notional balances based on calculated losses using a predefined formula or based on the actual losses on the loans in the reference pool. For loans that are covered by credit risk transfer transactions based on calculated losses, we may write down STACR debt notes or receive reimbursement of losses when the loans experience a credit event, which predominantly includes a loan becoming 180 days delinquent. For loans that are covered by credit risk transfer transactions based on actual losses, we may write down STACR debt notes or receive reimbursement of losses once an actual loss event (e.g., third-party foreclosure sale, short sale or REO disposition) occurs.
We issue STACR debt notes related to certain of the notional credit risk positions to third-party investors and retain the remaining credit risk. We make payments of principal and interest on the issued notes, but are not required to repay principal to the extent that the notional credit risk position is reduced as a result of a specified credit event. The interest rate on STACR debt notes is generally higher than on our other unsecured debt securities due to the potential for reductions to their principal balance. The following diagram illustrates a typical STACR debt note transaction:

Freddie Mac 2015 Form 10-K
 
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Management's Discussion and Analysis
 
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ACIS insurance policies - In this transaction, we purchase insurance policies, typically underwritten by a group of insurers and reinsurers, that provide credit protection for certain specified credit events that occur and are allocated to the non-issued notional credit risk positions of a STACR debt note transaction (i.e., the risk positions that Freddie Mac retains). Under each insurance policy, we pay monthly premiums that are determined based on the outstanding balance of the STACR debt note reference pool. When specific credit events occur, we receive compensation from the insurance policy up to an aggregate limit based on a predefined formula or based on actual losses. We require insurers and reinsurers to partially collateralize their exposure to reduce the risk that we will not be reimbursed for our claims under the policies.
In 2015, we began offering two new types of credit risk transfer transactions:
Whole loan securities - In this transaction, we issue guaranteed senior securities and unguaranteed subordinated securities backed by single-family loans. The unguaranteed subordinated securities will absorb first losses on the related loans.
Seller indemnification agreement - In this transaction, we enter into an agreement upon loan acquisition with a seller under which the seller will absorb a portion of losses on the related single-family loans in exchange for a fee or a reduction in our management and guarantee fee. The indemnification amount may be fully or partially collateralized.
We also use other types of credit enhancements, such as primary mortgage insurance, to mitigate our credit risk exposure. See “Risk Management” for additional information on our credit risk transfer transactions, as well as the other types of credit enhancements we use.

Freddie Mac 2015 Form 10-K
 
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Management's Discussion and Analysis
 
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Customers
Our customers in the Single-family Guarantee segment are predominantly lenders that originate loans for new or existing homeowners and sell them to us, and financial institutions that service these loans for us. These companies include mortgage banking companies, commercial banks, community banks, credit unions, other non-depository financial institutions, HFAs, and thrift institutions. Many of these companies are both sellers and servicers for us. In addition, our customers include investors and dealers in our guaranteed mortgage-related securities and investors and counterparties in credit risk transfer transactions.
We acquire a significant portion of our loans from several lenders that are among the largest originators in the U.S. In addition, a significant portion of our single-family loans is serviced by several large servicers. The graphs below present the concentration of our single-family purchase volume for 2015 and our loan servicing as of December 31, 2015 among our top five customers.

Freddie Mac 2015 Form 10-K
 
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Management's Discussion and Analysis
 
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Percentage of Single-Family Purchase Volume
 
Percentage of Single-Family Servicing Volume

For additional information about seller/servicer concentration risk and our relationships with our seller/servicer customers, see “Risk Management - Credit Risk - Institutional Credit Risk - Sellers and Servicers.”

Freddie Mac 2015 Form 10-K
 
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Management's Discussion and Analysis
 
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Competition
Our principal competitors in the Single-family Guarantee segment are Fannie Mae, Ginnie Mae (with FHA/VA), and other financial institutions that retain or securitize loans, such as commercial and investment banks, dealers, and thrift institutions. We compete on the basis of price, products, securities structure, and service. Competition to acquire single-family loans can also be significantly affected by changes in our credit standards. The conservatorship, including direction provided to us by our Conservator, may affect our ability to compete. For more information, see “Risk Factors - Other Risks -Competition from banking and non-banking institutions (including Fannie Mae, Ginnie Mae, and FHA/VA) may harm our business. FHFA’s actions as Conservator of both companies could affect competition between us and Fannie Mae."
Our Segment Earnings management and guarantee fee income is influenced by our PC price performance because we adjust our fees based on the price performance of our PCs relative to comparable Fannie Mae securities (we refer to this as market-adjusted pricing).
From time to time we undertake a variety of actions in an effort to support the liquidity and price performance of our PCs relative to comparable Fannie Mae securities. These actions may include: