10-K 1 a20174q10k.htm 10-K Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
Commission File Number: 001-34139
primarylogo.jpg
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Federally chartered
 
52-0904874
 
8200 Jones Branch Drive
 
22102-3110
 
(703) 903-2000
corporation
 
 
McLean, Virginia
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
(Address of principal executive offices)
 
(Zip Code)
 
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Voting Common Stock, no par value per share (OTCQB: FMCC)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCI)
5% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCKK)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCG)
5.1% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCH)
5.79% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCK)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCL)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCM)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCN)
5.81% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCO)
6% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCP)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCJ)
5.7% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCKP)
Variable Rate, Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCCS)
6.42% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCCT)
5.9% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKO)
5.57% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKM)
5.66% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKN)
6.02% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKL)
6.55% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKI)
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKJ)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨ No 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. x  Yes  ¨ No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x  Yes  ¨ No  
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer  x
 
 
 
Accelerated filer   ¨
 
 
Non-accelerated filer (Do not check if a smaller reporting company)   ¨
 
Smaller reporting company   ¨
 
 
Emerging growth company  ¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No  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, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter) was $1.4 billion.
As of February 1, 2018, there were 650,054,731 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None


Table of Contents

Table of Contents
n    About Freddie Mac
n    Our Business
n    Forward-Looking Statements
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
n    Key Economic Indicators
n    Consolidated Results of Operations
n    Consolidated Balance Sheets Analysis
n    Our Business Segments
n    Risk Management
l    Credit Risk
l    Operational Risk
l    Market Risk
n    Liquidity and Capital Resources
n    Conservatorship and Related Matters
n    Regulation and Supervision
n    Contractual Obligations
n    Off-Balance Sheet Arrangements
n    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
n    Directors
n    Corporate Governance
n    Executive Officers
EXECUTIVE COMPENSATION
n    Compensation Discussion and Analysis
n    Compensation and Risk
n    2017 Compensation Information for NEOs
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRINCIPAL ACCOUNTING FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
GLOSSARY
EXHIBIT INDEX
SIGNATURES
FORM 10-K INDEX

FREDDIE MAC  | 2017 Form 10-K
 
i

Introduction
About Freddie Mac

Introduction
This Annual Report on Form 10-K includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-K. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-K. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in the Forward-Looking Statements and Risk Factors sections of this Form 10-K.
Throughout this Form 10-K, we use certain acronyms and terms that are defined in the Glossary.
ABOUT FREDDIE MAC
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability and affordability to the U.S. housing market. We do this primarily by purchasing residential mortgage loans originated by lenders. In most instances, we package these loans into mortgage-related securities, which are guaranteed by us and sold in the global capital markets. We also invest in mortgage loans and mortgage-related securities. We do not originate loans or lend money directly to mortgage borrowers.
We support the U.S. housing market and the overall economy by enabling America’s families to access mortgage loan funding with better terms and by providing consistent liquidity to the multifamily mortgage market. We have helped many distressed borrowers keep their homes or avoid foreclosure. We are working with FHFA, our customers and the industry to build a better housing finance system for the nation.
Conservatorship and Government Support for Our Business
Since September 2008, we have been operating in conservatorship, with FHFA as our Conservator. The conservatorship and related matters significantly affect our management, business activities, financial condition and results of operations. Our future is uncertain, and the conservatorship has no specified termination date. We do not know what changes may occur to our business model during or following conservatorship, including whether we will continue to exist.
Our Purchase Agreement with Treasury and the terms of the senior preferred stock we issued to Treasury also affect our business activities. Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to have adequate liquidity to conduct normal business activities.
In connection with our entry into conservatorship, we entered into the Purchase Agreement with Treasury. Under the Purchase Agreement, we issued to Treasury both senior preferred stock and a

FREDDIE MAC  | 2017 Form 10-K
 
1

Introduction
About Freddie Mac

warrant to purchase common stock. The senior preferred stock and warrant were issued as an initial commitment fee in consideration of Treasury's commitment to provide funding to us under the Purchase Agreement. Treasury, as the holder of the senior preferred stock, is entitled to receive cumulative quarterly cash dividends, when, as and if declared by our Board of Directors. Under the August 2012 amendment to the Purchase Agreement, our cash dividend requirement each quarter is the amount, if any, by which our Net Worth Amount, at the end of the immediately preceding fiscal quarter, less the applicable Capital Reserve Amount, exceeds zero. The applicable Capital Reserve Amount was $600 million in 2017.
On December 21, 2017, the Conservator, acting on our behalf, entered into a Letter Agreement with Treasury. The principal changes pursuant to the Letter Agreement are as follows:
n
The senior preferred stock dividend for the dividend period from October 1, 2017 through and including December 31, 2017 was reduced to $2.25 billion.
n
The applicable Capital Reserve Amount from January 1, 2018 and thereafter will be $3.0 billion, rather than zero as previously provided. If for any reason we were not to pay our dividend requirement on the senior preferred stock in full in any future period, the applicable Capital Reserve Amount would thereafter be zero.
n
The liquidation preference of the senior preferred stock increased by $3.0 billion, to $75.3 billion, on December 31, 2017.
The graph below shows our cumulative draws from Treasury and cumulative dividend payments to Treasury. The Treasury draw amounts shown are the total draws requested based on our quarterly net deficits for the periods presented. Draw requests are funded in the quarter subsequent to any net deficit. Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock. The amount of available funding remaining under the Purchase Agreement is $140.5 billion, and will be reduced by any future draws, including the $312 million draw we will take based on our negative net worth at December 31, 2017. For more information on the conservatorship and government support for our business, see MD&A - Conservatorship and Related Matters and Note 2.

FREDDIE MAC  | 2017 Form 10-K
 
2

Introduction
About Freddie Mac

Draw Requests from and Dividend Payments to Treasury

chart-7b846925afcbfcb792a.jpg





FREDDIE MAC  | 2017 Form 10-K
 
3

Introduction
About Freddie Mac

Business Results
Portfolio Balances

Guarantee Portfolios

chart-53fcf312a4ad2b68504.jpg
 
Investments Portfolios
chart-a0a446fa2517cd95653.jpg

Commentary

Total Guarantee Portfolio
n
2017 vs. 2016 and 2016 vs. 2015 - In 2017, the total guarantee portfolio grew $119 billion, or 6%, driven by a 4% increase in our single-family credit guarantee portfolio and a 28% increase in our multifamily guarantee portfolio. The total guarantee portfolio grew $91 billion, or 5%, in 2016, driven by a 3% increase in our single-family credit guarantee portfolio and a 32% increase in our multifamily guarantee portfolio.
l
The growth in our single-family credit guarantee portfolio in 2017 and 2016 was driven in part by an increase in U.S. single-family mortgage debt outstanding as a result of continued home price

FREDDIE MAC  | 2017 Form 10-K
 
4

Introduction
About Freddie Mac

appreciation, combined with our share of U.S. single-family origination volume remaining stable. In addition, new business acquisitions had a higher average loan size compared to older vintages that continued to run off.
l The considerable growth in our multifamily guarantee portfolio in both 2017 and 2016 was primarily driven by an increase in U.S. multifamily mortgage debt outstanding that can be attributed to strong multifamily market fundamentals and low interest rates, coupled with the growth in our share of market new business volume due to our strategic pricing efforts, expansion of our new product offerings and purchase activity associated with certain targeted loans in underserved markets.
Total Investments Portfolio
n
2017 vs. 2016 and 2016 vs. 2015 - Declined $52 billion, or 13%, and $55 billion, or 12%, in 2017 and 2016, respectively, primarily due to repayments and the active disposition of less liquid assets.
l
We continue to reduce the mortgage-related investments portfolio as required by the Purchase Agreement and FHFA.


FREDDIE MAC  | 2017 Form 10-K
 
5

Introduction
About Freddie Mac

Consolidated Financial Results
Comprehensive Income
chart-842a87b397c7524a96f.jpg
Commentary

Key Drivers:
n
2017 vs. 2016
l
Continued growth in our single-family credit guarantee portfolio and higher average contractual guarantee fee rates, offset by the continued reduction in the balance of our mortgage-related investments portfolio, resulted in lower net interest income.
l
Decline in benefit for credit losses in 2017 primarily driven by estimated losses related to the hurricanes.
l
Increased spread-related fair value gains driven by market spread tightening primarily on non-agency mortgage-related securities, partially offset by increased interest rate-related fair value losses driven by lower levels of volatility.
l
Gains on sales of reperforming loans in 2017, compared to losses on sales of seriously delinquent loans in 2016.
l
Proceeds received in 2017 from the Royal Bank of Scotland plc (or RBS) related to litigation involving certain of our non-agency mortgage-related securities.
l
Higher income tax expense due to a reduction in our net deferred tax asset driven by the impact of the Tax Cuts and Jobs Act enacted in December 2017, which reduced the statutory corporate income tax rate from 35% to 21%.

FREDDIE MAC  | 2017 Form 10-K
 
6

Introduction
About Freddie Mac


n
2016 vs. 2015
l
Continued growth in our single-family credit guarantee portfolio and higher average contractual guarantee fee rates, as well as higher amortization of upfront fees due to increased loan prepayments, offset by the continued reduction in the balance of our mortgage-related investments portfolio, resulted in lower net interest income.
l
Decline in benefit for credit losses in 2016 due to a decrease in the number of seriously delinquent loans reclassified from held-for-investment to held-for-sale.
l
Higher fair value gains in 2016 due to an increase in long-term interest rates compared to 2015 when long-term interest rates declined slightly.
l
Higher fair value gains in 2016 driven by tightening K Certificate benchmark spreads, coupled with improved pricing on K Certificates and SB Certificates and higher new business volume, compared to losses during 2015 as market spreads widened.




FREDDIE MAC  | 2017 Form 10-K
 
7

Introduction
Our Business

OUR BUSINESS
Primary Business Strategies
Our primary business strategies describe how we plan to pursue our Charter Mission through at least 2020. Our core assumption is that the conservatorship will continue with no material changes during that period.
Charter Mission
We are a GSE with a specific and limited corporate purpose (i.e., "Charter Mission") to support the liquidity, stability and affordability of U.S. housing mortgage markets as a participant in the secondary mortgage market, while operating as a commercial enterprise earning an appropriate return. Everything we do must be done within the constraints of our Charter Mission.
Our Twin Goals
We have established overarching twin goals to enable us to reach our Charter Mission:
n
A Better Freddie Mac; and
n
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:
n
Being a very effective operating organization;
n
Being a market leader through customer focus and innovation; and
n
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:
n
Modernizing and improving the functioning of the mortgage markets;
n
Developing greater responsible access to affordable housing; and
n
Reducing taxpayer exposure to mortgage risks.
For further information on our goals and detailed strategies for each of our business segments, see MD&A — Our Business Segments.

FREDDIE MAC  | 2017 Form 10-K
 
8

Introduction
Our Business

Our Charter
Our Charter forms the framework for our business activities. Our Charter Mission is to:
n
Provide stability in the secondary mortgage market for residential loans;
n
Respond appropriately to the private capital market;
n
Provide ongoing assistance to the secondary mortgage market for residential loans (including activities relating to loans for low- and moderate-income families, involving a reasonable economic return that may be less than the return earned on other activities) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing; and
n
Promote access to mortgage loan credit throughout the United States (including central cities, rural areas and other underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing.
Our Charter permits us to purchase first-lien single-family loans with LTV ratios at the time of our purchase of less than or equal to 80%. Our Charter also permits us to purchase first-lien single-family loans that do not meet this criterion if we have certain specified credit protections, which include mortgage insurance from a qualified insurer on the portion of the UPB of the loan that exceeds an 80% LTV ratio, a seller's agreement to repurchase or replace a defaulted loan or the retention by the seller of at least a 10% participation interest in the loan.
This Charter requirement does not apply to multifamily loans or to loans that have the benefit of any guarantee, insurance or other obligation by the United States or any of its agencies or instrumentalities (e.g., the FHA, VA or USDA Rural Development). Additionally, as part of HARP, we purchase single-family refinanced loans we currently own or guarantee without obtaining additional credit enhancement in excess of that already in place for any such loan, even when the LTV ratio of the new loan is above 80%.
Our Charter does not permit us to originate loans or lend money directly to mortgage borrowers in the primary mortgage market. Our Charter limits our purchase of single-family loans to the conforming loan market, which consists of loans originated with UPBs at or below limits determined annually based on changes in FHFA’s housing price index. In most of the United States, the maximum conforming loan limit for a one-family residence has been set at $453,100 for 2018, an increase from $424,100 for 2017 and $417,000 from 2006 to 2016. Higher limits have been established in certain "high-cost" areas (for 2018, up to $679,650 for a one-family residence). Higher limits also apply to two- to four-family residences and to one- to four-family residences in Alaska, Guam, Hawaii and the U.S. Virgin Islands.

FREDDIE MAC  | 2017 Form 10-K
 
9

Introduction
Our Business

Business Segments
We have three reportable segments: Single-family Guarantee, Multifamily and Capital Markets. Certain activities that are not part of a reportable segment are included in the All Other category. For more information on our segments, see MD&A - Our Business Segments and Note 13.
Employees
At February 1, 2018, we had 6,144 full-time and 41 part-time employees.
Properties
Our principal offices consist of four office buildings we own in McLean, Virginia, comprising approximately 1.3 million square feet. We operate our business in the United States and its territories, and accordingly, we generate no revenue from and have no long-lived assets, other than financial instruments, in geographic locations other than the United States and its territories.
Available Information
We file reports and other information with the SEC. In view of the Conservator’s succession to all of the voting power of our stockholders, we have not prepared or provided proxy statements for the solicitation of proxies from stockholders since we entered into conservatorship, and do not expect to do so while we remain in conservatorship. Pursuant to SEC rules, our annual reports on Form 10-K contain certain information typically provided in an annual proxy statement.
We make available, free of charge through our website at www.freddiemac.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all other SEC reports and amendments to those reports as soon as reasonably practicable after we electronically file the material with the SEC. In addition, materials that we file with the SEC are available for review and copying at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC.
We are providing our website addresses and the website address of the SEC here and elsewhere in this Form 10-K solely for your information. Information appearing on our website or on the SEC’s website is not incorporated into this Form 10-K.
Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a material direct financial obligation or become directly or contingently liable for a material obligation under an off-balance sheet arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03 or, if the obligation is incurred in connection with certain types of securities offerings, in prospectuses for those offerings that are filed with the SEC.
Freddie Mac’s securities offerings are exempted from SEC registration requirements. As a result, we do

FREDDIE MAC  | 2017 Form 10-K
 
10

Introduction
Our Business

not file registration statements or prospectuses with the SEC with respect to our securities offerings. To comply with the disclosure requirements of Form 8-K relating to the incurrence of material financial obligations, we report these types of obligations either in offering circulars or offering circular supplements that we post on our website or in a current report on Form 8-K, in accordance with a "no-action" letter we received from the SEC staff. In cases where the information is disclosed in an offering circular or offering circular supplement, the document will be posted on our website within the same time period that a prospectus for a non-exempt securities offering would be required to be filed with the SEC.
The website address for disclosure about our debt securities is www.freddiemac.com/debt. From this address, investors can access the offering circular and related supplements for debt securities offerings under Freddie Mac’s global debt facility, including pricing supplements for individual issuances of debt securities. Similar information about our STACR and SCR debt notes is available at www.freddiemac.com/creditriskofferings and www.freddiemac.com/multifamily/investors/structured-credit-risk, respectively.
Disclosure about the mortgage-related securities we issue, some of which are off-balance sheet obligations (e.g., K Certificates and SB Certificates), can be found at www.freddiemac.com/mbs. From this address, investors can access information and documents about our mortgage-related securities, including offering circulars and offering circular supplements.
We provide additional information, including product descriptions, investor presentations, securities issuance calendars, transaction volumes and details, redemption notices, and Freddie Mac research, in each case as applicable, on the websites for our business segments, which can be found at www.freddiemac.com/singlefamily, www.freddiemac.com/multifamily, and www.freddiemac.com/capital-markets.


FREDDIE MAC  | 2017 Form 10-K
 
11

Introduction
Forward-Looking Statements


FORWARD-LOOKING STATEMENTS
We regularly communicate information concerning our business activities to investors, the news media, securities analysts and others as part of our normal operations. Some of these communications, including this Form 10-K, contain "forward-looking statements." Examples of forward-looking statements include, but are not limited to, statements pertaining to the conservatorship, our current expectations and objectives for the Single-family Guarantee, Multifamily and Capital Markets segments of our business, our efforts to assist the housing market, our liquidity and capital management, economic and market conditions and trends, our market share, the effect of legislative and regulatory developments and new accounting guidance, the credit quality of loans we own or guarantee, the costs and benefits of our credit risk transfer transactions and our results of operations and financial condition on a GAAP, Segment Earnings and fair value basis. Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. Forward-looking statements are often accompanied by, and identified with, terms such as "could," "may," "will," "believe," "expect," "anticipate," "forecast" and similar phrases. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties, including those described in the Risk Factors section of this Form 10-K and:
n
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;
n
The effect of the restrictions on our business due to the conservatorship and the Purchase Agreement, including our dividend requirement on the senior preferred stock;
n
Changes in our Charter or in applicable legislative or regulatory requirements (including any legislation affecting the future status of our company);
n
Changes in the fiscal and monetary policies of the Federal Reserve, including the balance sheet normalization program announced in October 2017 to reduce the Federal Reserve's holdings of mortgage-related securities;
n
Changes in tax laws, including those made by the Tax Cuts and Jobs Act enacted in December 2017;
n
Changes in accounting policies, practices or guidance (e.g., FASB's accounting standards update related to the measurement of credit losses of financial instruments);
n
Changes in economic and market conditions, including changes in employment rates, interest rates, spreads and home prices;
n
Changes in the U.S. residential mortgage market, including changes in the supply and type of loan products (e.g., refinance vs. purchase, and fixed-rate vs. ARM);
n
The success of our efforts to mitigate our losses on our Legacy and relief refinance single-family loan portfolio;
n
The success of our strategy to transfer mortgage credit risk through STACR debt note, ACIS, K Certificate, SB Certificate and other credit risk transfer transactions;
n
Our ability to maintain adequate liquidity to fund our operations;

FREDDIE MAC  | 2017 Form 10-K
 
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Introduction
Forward-Looking Statements


n
Our ability to maintain the security and resiliency of our operational systems and infrastructure (e.g., against cyberattacks);
n
Our ability to effectively execute our business strategies, implement new initiatives and improve efficiency;
n
The adequacy of our risk management framework;
n
Our ability to manage mortgage credit risk, including the effect of changes in underwriting and servicing practices;
n
Our ability to limit or manage our economic exposure and GAAP earnings exposure to interest-rate volatility and spread volatility, including the availability of derivative financial instruments needed for interest-rate risk management purposes;
n
Our operational ability to issue new securities, make timely and correct payments on securities and provide initial and ongoing disclosures;
n
Changes or errors in the methodologies, models, assumptions and estimates we use to prepare our financial statements, make business decisions and manage risks;
n
Changes in investor demand for our debt or mortgage-related securities;
n
Changes in the practices of loan originators, servicers, investors and other participants in the secondary mortgage market;
n
The occurrence of a major natural or other disaster in areas in which our offices or significant portions of our total mortgage portfolio are located; and
n Other factors and assumptions described in this Form 10-K, including in the MD&A section.
Forward-looking statements are made only as of the date of this Form 10-K, and we undertake no obligation to update any forward-looking statements we make to reflect events or circumstances occurring after the date of this Form 10-K.

FREDDIE MAC  | 2017 Form 10-K
 
13

Selected Financial Data

Selected Financial Data
The selected financial data presented below should be reviewed in conjunction with MD&A and our consolidated financial statements and accompanying notes.
 
 
As of or For the Year Ended December 31,
(Dollars in millions, except share-related amounts)
 
2017
2016
2015
2014
2013
 
 
 
 
 
 
 
Statements of Comprehensive Income Data
 
 
 
 
 
 
Net interest income
 

$14,164


$14,379


$14,946


$14,263


$16,468

Benefit (provision) for credit losses
 
84

803

2,665

(58
)
2,465

Non-interest income (loss)
 
6,869

500

(3,599
)
(113
)
8,519

Non-interest expense
 
(4,283
)
(4,043
)
(4,738
)
(3,090
)
(2,089
)
Income tax (expense) benefit
 
(11,209
)
(3,824
)
(2,898
)
(3,312
)
23,305

Net income
 
5,625

7,815

6,376

7,690

48,668

Comprehensive income
 
5,558

7,118

5,799

9,426

51,600

Net income (loss) attributable to common stockholders
 
(3,244
)
97

(23
)
(2,336
)
(3,531
)
Net income (loss) per common share - basic and diluted
 
(1.00
)
0.03

(0.01
)
(0.72
)
(1.09
)
Cash dividends per common share
 





Weighted average common shares outstanding - basic and diluted (in millions)
 
3,234

3,234

3,235

3,236

3,238

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

$1,774,286


$1,690,218


$1,625,184


$1,558,094


$1,529,905

Real estate owned, net
 
892

1,198

1,725

2,558

4,551

Total assets
 
2,049,776

2,023,376

1,985,892

1,945,360

1,965,831

Debt securities of consolidated trusts held by third parties
 
1,720,996

1,648,683

1,556,121

1,479,473

1,433,984

Other debt
 
313,634

353,321

414,148

449,890

506,537

All other liabilities
 
15,458

16,297

12,683

13,346

12,475

Total stockholders' equity
 
(312
)
5,075

2,940

2,651

12,835

 
 
 
 
 
 
 
Portfolio Balances - UPB
 
 
 
 
 
 
Mortgage-related investments portfolio
 

$253,455


$298,426


$346,911


$408,414


$461,024

Total Freddie Mac mortgage-related securities
 
1,962,372

1,832,810

1,729,493

1,637,086

1,592,511

Total mortgage portfolio
 
2,097,630

2,011,414

1,941,587

1,910,106

1,914,661

TDRs on accrual status
 
51,720

77,399

82,347

82,908

78,708

Non-accrual loans
 
17,817

16,272

22,649

33,130

43,457

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

0.7

0.9

1.3

1.4

Equity to assets
 
0.1

0.2

0.1

0.4

0.5



FREDDIE MAC  | 2017 Form 10-K
 
14

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

Management's Discussion and Analysis of Financial Condition and Results of Operations
KEY ECONOMIC INDICATORS
The following graphs and related discussion present certain macroeconomic indicators that can significantly affect our business and financial results.
Single-Family Home Prices
National Home Prices
chart-2692b7fe023659e9be3.jpg

 
Effects on Financial Results

n
Changes in home prices affect the amount of equity that borrowers have in their homes. Borrowers with less equity typically have higher delinquency rates.
n
As home prices decline, the severity of losses we incur on defaulted loans that we hold or guarantee increases because the amount we can recover from the property securing the loan decreases. Increases in home prices lower the losses we incur on defaulted loans.
    
    
Commentary
n
Home prices continued to appreciate during 2017, increasing 7.1%, compared to an increase of 6.4% during 2016, based on our own non-seasonally adjusted price index of single-family homes funded by loans owned or guaranteed by us or Fannie Mae.
n
We expect near-term home price growth will moderate driven by a gradual increase in housing supply and modestly higher mortgage interest rates.

FREDDIE MAC  | 2017 Form 10-K
 
15

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

n
We do not expect national home prices to be substantially affected by the Tax Cuts and Jobs Act, but home price growth in housing markets with higher state and local taxes (e.g., New Jersey and New York) could be affected.

FREDDIE MAC  | 2017 Form 10-K
 
16

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

Interest Rates
Key Market Interest Rates

chart-ca41094d3bf651b9b9a.jpg
 
chart-babf7f59dd4659d990f.jpg
Effects on Financial Results

n
The 30-year Primary Mortgage Market Survey ("PMMS") interest rate is indicative of what a consumer could expect to be offered on a first-lien, prime, home purchase or refinance mortgage with an LTV of 80%. Increases in the PMMS rate typically result in decreases in refinancing activity and originations. Decreases in the PMMS rate typically result in increases in refinancing activity and originations.
n
Changes in the 10-year and 2-year LIBOR interest rates affect the fair value of certain of our assets and liabilities, including derivatives, measured at fair value. A smaller interest rate fluctuation from period to period generally results in smaller fair value gains and losses, while a larger fluctuation generally results in larger fair value gains and losses.

FREDDIE MAC  | 2017 Form 10-K
 
17

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

n
Changes in the 3-month LIBOR rate affect the interest earned on our short-term investments and interest expense on our short-term funding.
n
For additional information on the effect of LIBOR rates on our financial results, see Our Business Segments - Capital Markets - Market Conditions.
Commentary
n
Mortgage interest rates for 30-year fixed-rate loans are closely related to other long-term interest rates such as the 10-year LIBOR rate. When the 10-year LIBOR rate increases, mortgage interest rates for 30-year fixed-rate loans usually also increase. When the 10-year LIBOR rate declines, mortgage interest rates for 30-year fixed-rate loans usually also decline.
n
Mortgage interest rates, as indicated by the PMMS rate, were lower at the end of 2017 than the end of 2016, while long-term interest rates, as indicated by the 10-year LIBOR rate, were higher. The PMMS rate and 10-year LIBOR rate were both higher at the end of 2016 than the end of 2015.
n
The quarterly ending and quarterly average short-term interest rates, as indicated by the 3-month LIBOR rate, were higher at the end of 2017 than the end of 2016 and higher at the end of 2016 than the end of 2015.
n
The Federal Reserve raised short-term interest rates five times over the last three years, most recently in December 2017.

FREDDIE MAC  | 2017 Form 10-K
 
18

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

Unemployment Rate
Unemployment Rate and Job Creation(1) 
chart-50ba8490d1185ca89aa.jpg
Source: U.S. Bureau of Labor Statistics
(1) Excludes Puerto Rico and the U.S. Virgin Islands.

 

Effect on Financial Results
n
Changes in the national unemployment rate can affect several market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies.
n
Decreases in the national unemployment rate typically result in lower levels of delinquencies, which often result in a decrease in expected credit losses on our total mortgage portfolio.
n
Increases in the national unemployment rate typically result in higher levels of delinquencies, which often result in an increase in expected credit losses on our total mortgage portfolio.
Commentary
n
During 2017, average monthly net new jobs (non-farm) decreased, while the national unemployment rate declined to the lowest level since December 2000.



FREDDIE MAC  | 2017 Form 10-K
 
19

Management's Discussion and Analysis
Consolidated Results of Operations

CONSOLIDATED RESULTS OF OPERATIONS
You should read this discussion of our consolidated results of operations in conjunction with our consolidated financial statements and accompanying notes.
The table below compares our consolidated results of operations for the past three years.
 
 
 
 
 
 
Year Over Year Change
 
 
Year Ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
(Dollars in millions)
 
2017
2016
2015
 
$
%
 
$
%
Net interest income
 

$14,164


$14,379


$14,946

 

($215
)
(1
)%
 

($567
)
(4
)%
Benefit (provision) for credit losses
 
84

803

2,665

 
(719
)
(90
)%
 
(1,862
)
(70
)%
Net interest income after benefit (provision) for credit losses
 
14,248

15,182

17,611

 
(934
)
(6
)%
 
(2,429
)
(14
)%
Non-interest income (loss):
 
 
 
 
 




 




Gains (losses) on extinguishment of debt
 
341

(211
)
(240
)
 
552

262
 %
 
29

12
 %
Derivative gains (losses)
 
(1,988
)
(274
)
(2,696
)
 
(1,714
)
(626
)%
 
2,422

90
 %
Net impairment of available-for-sale securities recognized in earnings
 
(18
)
(191
)
(292
)
 
173

91
 %
 
101

35
 %
Other gains (losses) on investment securities recognized in earnings
 
1,054

(78
)
508

 
1,132

1,451
 %
 
(586
)
(115
)%
Other income (loss)
 
7,480

1,254

(879
)
 
6,226

496
 %
 
2,133

243
 %
Total non-interest income (loss)
 
6,869

500

(3,599
)
 
6,369

1,274
 %
 
4,099

114
 %
Non-interest expense:
 
 
 
 
 




 




Administrative expense
 
(2,106
)
(2,005
)
(1,927
)
 
(101
)
(5
)%
 
(78
)
(4
)%
REO operations expense
 
(189
)
(287
)
(338
)
 
98

34
 %
 
51

15
 %
Temporary Payroll Tax Cut Continuation Act of 2011 expense
 
(1,340
)
(1,152
)
(967
)
 
(188
)
(16
)%
 
(185
)
(19
)%
Other expense
 
(648
)
(599
)
(1,506
)
 
(49
)
(8
)%
 
907

60
 %
Total non-interest expense
 
(4,283
)
(4,043
)
(4,738
)
 
(240
)
(6
)%
 
695

15
 %
Income before income tax expense
 
16,834

11,639

9,274

 
5,195

45
 %
 
2,365

26
 %
Income tax expense
 
(11,209
)
(3,824
)
(2,898
)
 
(7,385
)
(193
)%
 
(926
)
(32
)%
Net income (loss)
 
5,625

7,815

6,376

 
(2,190
)
(28
)%
 
1,439

23
 %
Total other comprehensive income (loss), net of taxes and reclassification adjustments
 
(67
)
(697
)
(577
)
 
630

90
 %
 
(120
)
(21
)%
Comprehensive income (loss)
 

$5,558


$7,118


$5,799

 

($1,560
)
(22
)%
 

$1,319

23
 %
See Critical Accounting Policies and Estimates for information concerning certain significant accounting policies and estimates applied in determining our reported results of operations and Note 1 for information on our accounting policies and a summary of other significant accounting policies and the related notes in which information about them can be found.


FREDDIE MAC  | 2017 Form 10-K
 
20

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

Net Interest Income
Explanation of Key Drivers of Net Interest Income
Net interest income consists of several primary components:
n
Contractual net interest income - consists of two components:
l
Guarantee fees on debt securities issued by consolidated trusts. We record interest income on loans held by consolidated trusts and interest expense on the debt securities issued by the trusts. The difference between the interest income on the loans and the interest expense on the debt represents the guarantee fee income we receive as compensation for our guarantee of the principal and interest payments of the issued debt securities. This difference includes the legislated 10 basis point increase in guarantee fees that is remitted to Treasury as part of the Temporary Payroll Tax Cut Continuation Act of 2011; and
l
The difference between the interest income earned on all other interest-earning assets, excluding loans held by consolidated trusts, and the interest expense incurred on the liabilities used to fund those assets.
Contractual net interest income is driven by the volume of assets in the mortgage-related investments portfolio and the interest rate differential between those interest-earning assets and the related interest-bearing liabilities.
n
Amortization of cost basis adjustments - consists of cost basis adjustments, such as premiums and discounts on loans, investment securities and debt that are amortized into interest income or interest expense based on the effective yield over the contractual life of the associated financial instrument.
The largest portion of our total net amortization relates to loans and debt securities of consolidated trusts, which includes amortization of the upfront fees we receive when we acquire a loan. Amortization related to investment securities, other debt and other assets and liabilities makes up a smaller portion.
The net amortization of loans and debt securities of consolidated trusts is primarily driven by actual prepayments on the underlying loans. Increases in actual prepayments result in higher net amortization, while decreases in actual prepayments result in lower net amortization. The timing of amortization of loans may differ from the timing of amortization of the securities backed by the loans, as the proceeds from the loans backing these securities are remitted to the security holders at a date subsequent to the date these proceeds are received by us.
n
Hedge accounting impact - consists of deferred gains and losses on closed cash flow hedges related to forecasted debt issuances that are reclassified from AOCI to net interest income when the related forecasted transaction affects net interest income. Upon adoption of amended hedge accounting guidance in 4Q 2017, for qualifying fair value hedges, we began recording both the change in the fair value of the hedging instrument, including the accrual of periodic cash settlements, and the change in the fair value of the hedged item attributable to the risk being hedged, within net interest income. See Note 9 for additional detail on this change.

FREDDIE MAC  | 2017 Form 10-K
 
21

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

Components of Net Interest Income
The table below presents the components of net interest income.
 
 
 
 
 
 
Year Over Year Change
 
 
Year Ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
(Dollars in millions)
 
2017
2016
2015
 
$
%
 
$
%
Contractual net interest income:
 
 
 
 
 
 
 
 
 
 
Guarantee fee income
 

$3,270


$2,997


$2,722

 

$273

9
 %
 

$275

10
 %
Guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011
 
1,314

1,142

957

 
172

15
 %
 
185

19
 %
Other contractual net interest income
 
6,400

6,896

8,106

 
(496
)
(7
)%
 
(1,210
)
(15
)%
Total contractual net interest income
 
10,984

11,035

11,785

 
(51
)
 %
 
(750
)
(6
)%
Net amortization - loans and debt securities of consolidated trusts
 
3,258

3,333

2,883

 
(75
)
(2
)%
 
450

16
 %
Net amortization - other assets and debt
 
(85
)
202

506

 
(287
)
(142
)%
 
(304
)
(60
)%
Hedge accounting impact
 
7

(191
)
(228
)
 
198

104
 %
 
37

16
 %
Net interest income
 

$14,164


$14,379


$14,946

 

($215
)
(1
)%
 

($567
)
(4
)%
Key Drivers:
n
Guarantee fee income
l
2017 vs. 2016 and 2016 vs. 2015 - increased during both comparative periods as a result of higher average contractual guarantee fee rates, as well as the continued growth in the size of the Core single-family loan portfolio. Average contractual guarantee fees are generally higher on mortgage loans in our Core single-family loan portfolio compared to those in our Legacy and relief refinance single-family loan portfolio.
n
Other contractual net interest income
l
2017 vs. 2016 and 2016 vs. 2015 - decreased during both comparative periods primarily due to the continued reduction in the balance of our mortgage-related investments portfolio, pursuant to the portfolio limits established by the Purchase Agreement and FHFA. See Conservatorship and Related Matters - Limits on Our Mortgage-Related Investments Portfolio and Indebtedness for additional discussion of the limits on the mortgage-related investments portfolio.
n
Net amortization of loans and debt securities of consolidated trusts
l
2016 vs. 2015 - increased primarily due to higher amortization of mortgage loan upfront fees and basis adjustments on debt securities of consolidated trusts. The increase in amortization was primarily driven by higher prepayment rates on single-family loans during 2016 compared to 2015.

FREDDIE MAC  | 2017 Form 10-K
 
22

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

n
Net amortization of other assets and debt
l
2017 vs. 2016 and 2016 vs. 2015 - decreased during both comparative periods primarily due to less accretion of previously recognized other-than-temporary impairments on non-agency mortgage-related securities. The decrease in accretion is due to a decline in the population of impaired securities as a result of our active disposition of these securities and a decline in new other-than-temporary impairments recognized.
n
Hedge accounting impact
l
2017 vs. 2016 - increased primarily due to the inclusion of fair value hedge accounting results within net interest income beginning in 4Q 2017, due to the adoption of amended hedge accounting guidance. In prior periods, this activity was included in other income and derivative gains (losses).


FREDDIE MAC  | 2017 Form 10-K
 
23

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

Net Interest Yield Analysis

The table below presents an analysis of interest-earning assets and interest-bearing liabilities. To calculate the average balances, we generally use a daily weighted average of amortized cost. When daily average balance information is not available, such as for mortgage loans, we use monthly averages. Mortgage loans on non-accrual status, where interest income is generally recognized when collected, are included in the average balances.
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
(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
 

$10,965


$48

0.44
 %
 

$16,932


$42

0.25
 %
 

$12,482


$8

0.06
 %
Securities purchased under agreements to resell
 
57,883

588

1.02

 
59,639

217

0.36

 
51,219

58

0.11

Advances to lenders and other secured lending
 
859

21

2.42

 
484

11

2.28

 
161

4

2.48

Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
164,663

6,402

3.89

 
189,982

7,262

3.82

 
226,162

8,706

3.85

Extinguishment of PCs held by Freddie Mac
 
(87,665
)
(3,264
)
(3.72
)
 
(94,624
)
(3,509
)
(3.71
)
 
(107,986
)
(3,929
)
(3.64
)
Total mortgage-related securities, net
 
76,998

3,138

4.08

 
95,358

3,753

3.94

 
118,176

4,777

4.04

Non-mortgage-related securities
 
17,558

277

1.58

 
15,734

102

0.65

 
10,699

17

0.16

Loans held by consolidated trusts(1)
 
1,730,000

58,746

3.40

 
1,649,727

55,417

3.36

 
1,590,768

55,867

3.51

Loans held by Freddie Mac(1)
 
117,043

4,989

4.26

 
135,882

5,623

4.14

 
157,261

6,359

4.04

Total interest-earning assets
 

$2,011,306


$67,807

3.37
 %
 

$1,973,756


$65,165

3.30
 %
 

$1,940,766


$67,090

3.46
 %
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
 

$1,753,983


($50,920
)
(2.90
)%
 

$1,674,474


($48,108
)
(2.87
)%
 

$1,611,388


($49,465
)
(3.07
)%
Extinguishment of PCs held by Freddie Mac
 
(87,665
)
3,264

3.72

 
(94,624
)
3,509

3.71

 
(107,986
)
3,929

3.64

Total debt securities of consolidated trusts held by third parties
 
1,666,318

(47,656
)
(2.86
)
 
1,579,850

(44,599
)
(2.82
)
 
1,503,402

(45,536
)
(3.03
)
Other debt:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
 
72,071

(615
)
(0.85
)
 
86,284

(350
)
(0.41
)
 
108,096

(173
)
(0.16
)
Long-term debt
 
264,354

(5,372
)
(2.03
)
 
298,040

(5,837
)
(1.96
)
 
313,502

(6,435
)
(2.05
)
Total other debt
 
336,425

(5,987
)
(1.78
)
 
384,324

(6,187
)
(1.61
)
 
421,598

(6,608
)
(1.57
)
Total interest-bearing liabilities
 
2,002,743

(53,643
)
(2.68
)
 
1,964,174

(50,786
)
(2.58
)
 
1,925,000

(52,144
)
(2.71
)
Impact of net non-interest-bearing funding
 
8,563


0.01

 
9,582


0.01

 
15,766


0.02

Total funding of interest-earning assets
 

$2,011,306


($53,643
)
(2.67
)%
 

$1,973,756


($50,786
)
(2.57
)%
 

$1,940,766


($52,144
)
(2.69
)%
Net interest income/yield
 
 

$14,164

0.70
 %
 
 

$14,379

0.73
 %
 
 

$14,946

0.77
 %
(1)
Loan fees, primarily consisting of amortization of upfront fees, included in interest income were $2.4 billion, $2.6 billion and $2.0 billion for loans held by consolidated trusts and $162 million, $215 million and $383 million for loans held by Freddie Mac during 2017, 2016 and 2015, respectively.

FREDDIE MAC  | 2017 Form 10-K
 
24

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

Net Interest Income Rate / Volume Analysis
The table below presents a rate and volume analysis of our net interest income. Our net interest income reflects the reversal of interest income accrued, net of interest received on a cash basis, related to mortgage loans that are on non-accrual status.
 
 
Variance Analysis
 
 
2017 vs. 2016
 
2016 vs. 2015
(Dollars in millions)
 
Rate
Volume
Total Change
 
Rate
Volume
Total Change
Interest-earning assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 

$8


($2
)

$6

 

$34


$—


$34

Securities purchased under agreements to resell
 
380

(9
)
371

 
147

12

159

Advances to lenders and other secured lending
 
1

9

10

 

7

7

Mortgage-related securities:
 
 
 
 
 
 
 
 
Mortgage-related securities
 
123

(983
)
(860
)
 
(61
)
(1,383
)
(1,444
)
Extinguishment of PCs held by Freddie Mac
 
(14
)
259

245

 
(74
)
494

420

Total mortgage-related securities, net
 
109

(724
)
(615
)
 
(135
)
(889
)
(1,024
)
Non-mortgage-related securities
 
161

14

175

 
74

11

85

Loans held by consolidated trusts
 
609

2,720

3,329

 
(2,479
)
2,029

(450
)
Loans held by Freddie Mac
 
165

(799
)
(634
)
 
146

(882
)
(736
)
Total interest-earning assets
 

$1,433


$1,209


$2,642

 

($2,213
)

$288


($1,925
)
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
 

($508
)

($2,304
)

($2,812
)
 

$3,246


($1,889
)

$1,357

Extinguishment of PCs held by Freddie Mac
 
14

(259
)
(245
)
 
74

(494
)
(420
)
Total debt securities of consolidated trusts held by third parties
 
(494
)
(2,563
)
(3,057
)
 
3,320

(2,383
)
937

Other debt:
 
 
 
 
 
 
 
 
Short-term debt
 
(331
)
66

(265
)
 
(218
)
41

(177
)
Long-term debt
 
(214
)
679

465

 
299

299

598

Total other debt
 
(545
)
745

200

 
81

340

421

Total interest-bearing liabilities
 

($1,039
)

($1,818
)

($2,857
)
 

$3,401


($2,043
)

$1,358

Net interest income
 

$394


($609
)

($215
)


$1,188


($1,755
)

($567
)




FREDDIE MAC  | 2017 Form 10-K
 
25

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

Benefit (Provision) for Credit Losses
Explanation of Key Drivers of Provision for Credit Losses
The benefit (provision) for credit losses predominantly relates to single-family loans and includes components for both collectively impaired loans and individually impaired loans.
n
Collectively impaired loans - The provision for collectively impaired loans is primarily driven by the volume of newly impaired loans and changes in estimated probabilities of default and estimated loss severities for these loans. Estimated probabilities of default and estimated loss severities are based on current conditions and historical data and are heavily influenced by changes in home prices. These estimates are also affected by a number of other factors, such as local and regional economic conditions, changes in reperformance and default rates and the success of our borrower assistance programs.
n
Individually impaired loans - The provision for individually impaired loans is primarily driven by the volume of our loss mitigation activity (e.g., loan modifications) that results in loans being considered TDRs, the payment performance of our individually impaired mortgage portfolio and changes in estimated probabilities of default and estimated loss severities, which affect the future cash flows we expect to receive from these loans. Estimated probabilities of default and estimated loss severities for individually impaired loans are based on the same current conditions and historical data and are affected by the same factors noted above for collectively impaired loans.
Our allowance for loan losses and provision for credit losses are significantly affected by the "interest rate concessions" we make on loans that we have modified (i.e., reductions in the contractual interest rate). When a loan is modified and considered individually impaired, we measure impairment based on the present value of the expected future cash flows discounted at the loan’s original effective interest rate. Under this methodology, we record a loss at the time a loan is modified equal to the difference in the present value of expected future cash flows resulting from the change in the modified loan’s contractual interest rate, which increases the provision for credit losses in that period. An increase in mortgage interest rates lengthens the expected life of individually impaired loans, which increases the impairment on these loans and results in an increase in the provision for credit losses. When a modified loan subsequently performs according to its new contractual terms and we receive the new contractual cash flows (i.e., principal and interest payments), a portion of the discount that was previously applied to those cash flows is amortized into earnings each period and is recognized as a reduction in the provision for credit losses in the period in which the cash flows are received. We refer to this reduction in the provision for credit losses as the "amortization of interest rate concessions."
Our benefit (provision) for credit losses and the amount of charge-offs that we record in the future will be affected by a number of factors, such as:
n
Actual level of loan defaults;
n
The effect of loss mitigation efforts;
n
Any government actions or programs that affect the ability of borrowers to refinance loans, such as loans with an LTV ratio greater than 100%, or obtain modifications;
n
Changes in property values;

FREDDIE MAC  | 2017 Form 10-K
 
26

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

n
Regional economic conditions, including unemployment rates;
n
Additional delays in the foreclosure process; and
n
Third-party mortgage insurance coverage and recoveries.
Management adjustments may be necessary to take into consideration external factors and current economic events that have occurred but that are not yet reflected in the factors used to derive the outputs of the models used in our provisioning process. Significant judgment is exercised in making these adjustments.
The amount of our benefit (provision) for credit losses may also vary from period to period based on additional factors, such as reclassification of loans from held-for-investment to held-for-sale.
Components of Benefit (Provision) for Credit Losses
The table below presents the components of our benefit (provision) for credit losses.
 
 
 
 
 
 
Year Over Year Change
 
 
Year Ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
(Dollars in billions)
 
2017
2016
2015
 
$
%
 
$
%
Benefit (provision) for newly impaired loans
 

($0.7
)

($0.8
)

($0.9
)
 

$0.1

13
 %
 

$0.1

11
 %
Amortization of interest rate concessions
 
0.7

0.9

1.2

 
(0.2
)
(22
)%
 
(0.3
)
(25
)%
Reclassifications of held-for-investment loans to held-for-sale loans
 
0.5

0.8

2.3

 
(0.3
)
(38
)%
 
(1.5
)
(65
)%
Other, including changes in estimated default probability and loss severity
 
(0.4
)
(0.1
)
0.1

 
(0.3
)
(300
)%
 
(0.2
)
(200
)%
Benefit (provision) for credit losses
 

$0.1


$0.8


$2.7

 

($0.7
)
(88
)%
 

($1.9
)
(70
)%
Key Drivers:
n
2017 vs. 2016 - Benefit for credit losses declined in 2017 compared to 2016 primarily driven by:
l
Estimated losses related to hurricanes in 2017;
l
A decrease in the accretion of TDR concessions due to a significant increase in the reclassification of reperforming loans from held-for-investment to held-for-sale; and
l
A change in accounting policy that was elected on January 1, 2017 for loan reclassification from held-for-investment to held-for-sale. See Item Affecting Multiple Lines - Single-Family Loan Reclassifications for further information about this change.
This decrease was partially offset by:
l
Improvement in our estimated loss severity.
n
2016 vs. 2015 - Benefit for credit losses declined in 2016 compared to 2015 primarily due to a decrease in the number of seasoned single-family loans reclassified from held-for-investment to held-for sale in 2016.

FREDDIE MAC  | 2017 Form 10-K
 
27

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


Derivative Gains (Losses)
Explanation of Key Drivers of Derivative Gains (Losses)
Derivative instruments are a key component of our interest-rate risk management strategy. We use derivatives to economically hedge our interest-rate risk exposure. We primarily use interest-rate swaps, option-based derivatives such as swaptions and futures to manage our exposure to changes in interest-rates. We consider the cost of derivatives used in interest-rate risk management to be an inherent part of the cost of funding our mortgage-related investments portfolio.
In addition, we routinely enter into commitments to purchase and sell loans and mortgage-related securities. The majority of these commitments are accounted for as derivative instruments.
We continue to align our derivative portfolio with the changing duration of our assets and liabilities so as to economically hedge them. We manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models. We believe the impact of derivatives on our GAAP financial results should be considered in the context of our overall interest-rate risk profile, including our PMVS and duration gap results. For more information about our interest-rate risk management activities and the sensitivity of reported GAAP earnings to those activities, see Risk Management - Market Risk.
During 2017, we started applying hedge accounting to certain single-family mortgage loans and long-term debt to reduce our GAAP earnings volatility. For the first three quarters of 2017, we included gains and losses on derivatives designated in qualifying hedge relationships in other income. Beginning in 4Q 2017, due to the adoption of amended hedge accounting guidance, we included gains and losses on derivatives designated in qualifying hedge relationships in the same line used to present the earnings effect of the hedged item. See Note 9 for more information on hedge accounting and the changes made during 2017.
In addition to fair value changes, derivative gains (losses) include accrual of periodic cash settlements for derivatives while not designated in qualifying hedge relationships. For the first three quarters of 2017, we included the accrual of periodic cash settlements on derivatives in qualifying hedge relationships in derivatives gains (losses). Beginning in 4Q 2017, we included the accrual of periodic cash settlements on derivatives in qualifying hedge relationships in the same line used to present the earnings effect of the hedged item.
n
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.
n
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:
n
Changes in interest rates - Our primary derivative instruments are interest-rate swaps, including pay-fixed and receive-fixed interest-rate swaps. With a pay-fixed interest-rate swap, we pay a fixed

FREDDIE MAC  | 2017 Form 10-K
 
28

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


rate of interest and receive a variable rate of interest based on a specified notional balance (the notional balance is for calculation purposes only). As interest rates decline, we recognize derivative losses, as the amount of interest we pay remains fixed, and the amount of interest we receive declines. As rates rise, we recognize derivative gains, as the amount of interest we pay remains fixed, but the amount of interest we receive increases. With a receive-fixed interest-rate swap, the opposite results occur.
n
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.
n
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).
n
Changes in the composition of our derivative portfolio - The mix and balance of our derivative portfolio changes from period to period as we enter into or terminate derivative instruments to respond to changes in interest rates and changes in the balances and modeled characteristics of our assets and liabilities. Changes in the composition of our derivative portfolio will affect the derivative gains and losses we recognize in a given period, thereby affecting the volatility of comprehensive income.
Components of Derivative Gains (Losses)
The table below presents the components of derivative gains (losses).
 
 
 
 
 
 
Year Over Year Change
 
 
Year Ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
(Dollars in millions)
 
2017
2016
2015
 
$
%
 
$
%
Fair value change in interest-rate swaps
 

$626


$178


($778
)
 

$448

252
 %
 

$956

123
%
Fair value change in option-based derivatives
 
(1,041
)
421

258

 
(1,462
)
(347
)%
 
163

63
%
Fair value change in other derivatives
 
17

887

22

 
(870
)
(98
)%
 
865

3,932
%
Accrual of periodic cash settlements
 
(1,590
)
(1,760
)
(2,198
)
 
170

10
 %
 
438

20
%
Derivative gains (losses)
 

($1,988
)

($274
)

($2,696
)
 

($1,714
)
(626
)%
 

$2,422

90
%
Key Drivers:
n
2017 vs. 2016 - Losses increased, driven by lower levels of volatility during 2017, resulting in larger losses in our options portfolio, coupled with lower fair value gains in our pay-fixed interest rate swaps as long-term interest rates increased less. This was partially offset by reduced fair value losses in our receive-fixed interest rate swaps.
n
2016 vs. 2015 - Derivative losses declined during 2016 primarily due to an increase in longer-term interest rates during the fourth quarter of 2016 resulting in an improvement in the fair value of our

FREDDIE MAC  | 2017 Form 10-K
 
29

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


pay-fixed interest-rate swaps and forward commitments to issue debt securities of consolidated trusts. This improvement in fair value was partially offset by losses in our receive-fixed-interest-rate swaps. The 10-year par swap rate increased 13 basis points during 2016, while the 10-year par swap rate declined 10 basis points during 2015.


FREDDIE MAC  | 2017 Form 10-K
 
30

Management's Discussion and Analysis
Consolidated Results of Operations | Other Income (Loss)

Other Income (Loss)
Explanation of Key Drivers of Other Income (Loss)
The table below presents the components of other income (loss).
 
 
 
 
 
 
Year Over Year Change
                                                                                                                                                                                                                                                                                                                                                                                         
 
Year Ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
(Dollars in millions)
 
2017
2016
2015
 
$
%
 
$
%
Other income (loss)
 
 
 
 
 
 
 
 
 
 
Non-agency mortgage-related securities settlements
 

$4,532


$—


$65

 

$4,532

N/A

 

($65
)
N/A

Gains (losses) on loans
 

$928


($463
)

($2,094
)
 

$1,391

300
 %
 

$1,631

78
 %
Gains (losses) on held-for-sale loan purchase commitments
 
1,098

663


 
435

66
 %
 
663

N/A

All other
 
786

1,054

1,150

 
(268
)
(25
)%
 
(96
)
(8
)%
 Fair value hedge accounting
 
 
 
 
 
 
 
 

 
Change in fair value of derivatives in qualifying hedge relationships
 
(215
)
N/A

N/A

 
(215
)
N/A

 
N/A

N/A

Change in fair value of hedged items in qualifying hedge relationships
 
351

N/A

N/A

 
351

N/A

 
N/A

N/A

Total other income (loss)
 

$7,480


$1,254


($879
)
 

$6,226

496
 %
 

$2,133

243
 %
Key Drivers:
n
2017 vs. 2016 - Other income (loss) increased reflecting:
l
Increased income from our litigation settlement related to our non-agency mortgage-related securities. While we had one large settlement with RBS during 2017, we did not have any significant settlements during 2016; and
l
Greater gains recognized on a higher volume of reperforming loans reclassified from held-for-investment to held-for-sale and subsequently sold, coupled with less loss recognized in 2017 on the reclassification of seriously delinquent loans from held-for-investment to held-for-sale as a result of an accounting policy change in 2017. See Item Affecting Multiple Lines - Single-Family Loan Reclassifications for more information.
n
2016 vs. 2015 - Other income (loss) increased reflecting:
l
Decreased lower-of-cost-or-fair-value adjustments as we reclassified fewer seasoned single-family loans from held-for-investment to held-for-sale during 2016; and
l
Increased gains on multifamily mortgage loans and commitments for which we have elected the fair value option, due to increased market spread-related fair value gains. K Certificate benchmark spreads tightened during 2016 compared to these spreads widening during 2015.

FREDDIE MAC  | 2017 Form 10-K
 
31

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

Other Comprehensive Income (Loss)
Explanation of Key Drivers of Other Comprehensive Income (Loss)
Our investments in securities classified as available-for-sale are measured at fair value on our consolidated balance sheets. The fair value of these securities is primarily affected by changes in interest rates, market spreads and the movement of these securities towards maturity. All unrealized gains and losses on these securities are excluded from earnings and reported in other comprehensive income until realized. We reclassify our unrealized gains and losses from AOCI to earnings upon the sale of the securities or if the securities are determined to be other-than-temporarily impaired.
If, subsequent to the recognition of other-than-temporary impairment, our expectation of the cash flows we will receive on a previously impaired security has significantly increased, we will accrete that increase in cash flows into earnings. The accretion into earnings will generally reduce the amount of unrealized gains that we would have otherwise recognized if not for the accretion.
The following table presents the attribution of the other comprehensive income (loss) reported in our consolidated statements of comprehensive income.
 
 
 
 
 
 
Year Over Year Change
 
 
Year Ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
(Dollars in millions)
 
2017
2016
2015
 
$
%
 
$
%
Other comprehensive income, excluding certain items
 

$1,084


($29
)

$374

 

$1,113

3,838
 %
 

($403
)
(108
)%
Excluded items
 
 
 
 
 
 
 
 
 
 
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities
 
(164
)
(299
)
(449
)
 
135

45
 %
 
150

33
 %
Realized (gains) losses reclassified from AOCI
 
(987
)
(369
)
(502
)
 
(618
)
(167
)%
 
133

26
 %
Total excluded items
 
(1,151
)
(668
)
(951
)
 
(483
)
(72
)%
 
283

30
 %
Total other comprehensive income (loss)
 

($67
)

($697
)

($577
)
 

$630

90
 %
 

($120
)
(21
)%
Key Drivers:
n
Other comprehensive income, excluding certain items
l
2017 vs. 2016 - increased primarily due to market spread related gains as market spreads on non-agency and agency mortgage-related securities tightened more during 2017, coupled with smaller interest rate-related losses due to smaller increases in long-term interest rates during 2017.
l
2016 vs. 2015 - decreased primarily due to unrealized losses resulting from an increase in longer-term interest rates, coupled with a decrease in unrealized gains as our non-agency mortgage-related securities portfolio continued to decline consistent with the reduction of our mortgage-related investments portfolio pursuant to the limits established by the Purchase Agreement and FHFA.

FREDDIE MAC  | 2017 Form 10-K
 
32

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

Excluded items include:
n
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities
l
2017 vs. 2016 and 2016 vs. 2015 - decreased during both comparative periods primarily due to a decline in the population of impaired securities as a result of our active dispositions of these securities, coupled with a decline in new other-than-temporary impairments.
n
Realized (gains) losses reclassified from AOCI
l
2017 vs. 2016 - reflected larger amounts of reclassified gains during 2017 due to higher realized gains on our non-agency and agency mortgage-related securities sold, as a result of additional spread tightening and an increase in sales of non-agency mortgage-related securities.
l
2016 vs. 2015 - reflected smaller amounts of reclassified gains during 2016 primarily due to a decline in sales of non-agency mortgage-related securities in an unrealized gain position.


FREDDIE MAC  | 2017 Form 10-K
 
33

Management's Discussion and Analysis
Consolidated Results of Operations | Other Key Drivers

Other Key Drivers
Explanation of Other Key Drivers
Key drivers for other line items for 2017 vs. 2016 and 2016 vs. 2015 include:
n
Gains (losses) on extinguishment of debt
l
2017 vs. 2016 - improved primarily due to an increase in the amount of gains recognized from the extinguishment of certain fixed-rate debt securities of consolidated trusts (i.e., PCs), as market interest rates increased between the time of issuance and repurchase. The amount of extinguishment gains or losses may vary, as the type and amount of PCs selected for repurchase are based on our investment and funding strategies, including our efforts to support the liquidity and price performance of our PCs.
l
2016 vs. 2015 - losses decreased primarily due to an increase in longer-term interest rates during the fourth quarter of 2016, coupled with a decline in our repurchase of single-family PCs. The increase in longer-term interest rates resulted in net extinguishment gains for PCs repurchased during the fourth quarter, which partially offset the net extinguishment losses recognized for PCs repurchased during the nine months ended September 30, 2016.
n
Other gains (losses) on investment securities recognized in earnings
l
2017 vs. 2016 - improved primarily due to the recognition of smaller fair value losses on our mortgage and non-mortgage-related securities classified as trading as long-term interest rates increased less during 2017, coupled with larger gains due to additional spread tightening during 2017 on our sales of agency and non-agency mortgage-related securities.
l
2016 vs. 2015 - worsened as we recognized net losses during 2016 compared to net gains during 2015, primarily due to losses on our mortgage-related and non-mortgage-related securities as a result of increasing longer-term interest rates, coupled with less realized gains from our available-for-sale securities, as we sold fewer non-agency securities in an unrealized gain position.
n
Net impairment of available-for-sale securities recognized in earnings
l
2017 vs. 2016 and 2016 vs. 2015 - decreased primarily due to a decline in the population of non-agency mortgage-related securities, including those non-agency mortgage-related securities we intend to sell, as we continue to reduce the less liquid assets in our mortgage-related investments portfolio.
n
Other expense
l
2016 vs. 2015 - decreased primarily driven by property taxes and insurance costs associated with seasoned single-family loans reclassified from held-for-investment to held-for-sale as we reclassified fewer loans in 2016 compared to 2015. These costs are considered part of the loan loss reserves while the loans are classified as held-for-investment. See Item Affecting Multiple Lines - Single-Family Loan Reclassifications for more information.
n
Income tax expense
l
2017 vs. 2016 - increased primarily as a result of the impact of the Tax Cuts and Jobs Act enacted in December 2017, which reduced the statutory corporate income tax rate from 35% to 21%. We measured our net deferred tax asset using the reduced rate and recognized a charge to

FREDDIE MAC  | 2017 Form 10-K
 
34

Management's Discussion and Analysis
Consolidated Results of Operations | Other Key Drivers

income tax expense of $5.4 billion.
l
2016 vs. 2015 - increased primarily due to an increase in pre-tax income.

FREDDIE MAC  | 2017 Form 10-K
 
35

Management's Discussion and Analysis
Consolidated Results of Operations | Item Affecting Multiple Lines

Item Affecting Multiple Lines
Single-Family Loan Reclassifications
During 2017, 2016 and 2015, we reclassified $26.2 billion, $4.7 billion and $13.6 billion, respectively, in UPB of seasoned single-family mortgage loans from held-for-investment to held-for-sale, as we continue to focus on reducing the balance of our less liquid assets.
On January 1, 2017, we elected a new accounting policy for reclassifications from held-for-investment to held-for-sale. Under the new policy, when we reclassify (transfer) a loan from held-for-investment to held-for-sale, we charge off the entire difference between the loan’s recorded investment and its fair value if the loan has a history of credit-related issues. Expenses related to property taxes and insurance are included as part of the charge-off. If the charge-off amount exceeds the existing loan loss reserve amount, an additional provision for credit losses is recorded. If the charge-off amount is less than the existing loan loss reserve amount, a benefit for credit losses is recorded. Any declines in loan fair value after the date of transfer will be recognized as a valuation allowance, with an offset recorded to other income (loss).
This new policy election was applied prospectively, as it was not practical to apply it retrospectively.
The table below presents the effect of single-family loan reclassifications on income before income tax expense. Beginning in 2017, benefit (provision) for credit losses is the only line item affected by the loan reclassifications from held-for-investment to held-for-sale. Prior to this change (including 2016 and 2015 as presented below), the reclassifications from held-for-investment to held-for-sale affected several line items on our consolidated results of operations.
 
 
 
 
 
 
Year Over Year Change
 
 
Year Ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
(Dollars in millions)
 
2017
2016
2015
 
$
%
 
$
%
Benefit (provision) for credit losses
 

$546


$812


$2,314

 

($266
)
(33
)%
 

($1,502
)
(65
)%
Other income (loss) - lower-of-cost-or-fair-value adjustment
 

(1,005
)
(2,193
)
 
1,005

100
 %
 
1,188

54
 %
Other (expense) - property taxes and insurance associated with these loans
 

(195
)
(1,178
)
 
195

100
 %
 
983

83
 %
Effect on income before income tax expense
 

$546


($388
)

($1,057
)
 

$934

241
 %
 

$669

63
 %
Key Drivers:
n
2017 vs. 2016 - Effect on income before income tax expense changed to a gain due to a higher volume primarily of reperforming loans reclassified from held-for-investment to held-for-sale during 2017 compared to a loss recognized primarily on seriously delinquent loans reclassified from held-for-investment to held-for-sale during 2016.
n
2016 vs. 2015 - Effect on income before income tax expense decreased due to a decline in the number of seasoned single-family loans reclassified from held-for-investment to held-for-sale.


FREDDIE MAC  | 2017 Form 10-K
 
36

Management's Discussion and Analysis
Consolidated Balance Sheet Analysis


CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized consolidated balance sheets.
 
 
As of December 31,
 
Year Over Year Change
(Dollars in millions)
 
2017
2016
 
$
%
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 

$6,848


$12,369

 

($5,521
)
(45
)%
Restricted cash and cash equivalents
 
2,963

9,851

 
(6,888
)
(70
)%
Securities purchased under agreements to resell
 
55,903

51,548

 
4,355

8
 %
Subtotal
 
65,714

73,768

 
(8,054
)
(11
)%
Investments in securities, at fair value
 
84,318

111,547

 
(27,229
)
(24
)%
Mortgage loans, net
 
1,871,217

1,803,003

 
68,214

4
 %
Accrued interest receivable
 
6,355

6,135

 
220

4
 %
Derivative assets, net
 
375

747

 
(372
)
(50
)%
Deferred tax assets, net
 
8,107

15,818

 
(7,711
)
(49
)%
Other assets
 
13,690

12,358

 
1,332

11
 %
Total assets
 

$2,049,776


$2,023,376

 

$26,400

1
 %
 
 
 
 
 
 


Liabilities and Equity:
 
 
 
 
 


Liabilities:
 
 
 
 
 


Accrued interest payable
 

$6,221


$6,015

 

$206

3
 %
Debt, net
 
2,034,630

2,002,004

 
32,626

2
 %
Derivative liabilities, net
 
269

795

 
(526
)
(66
)%
Other liabilities
 
8,968

9,487

 
(519
)
(5
)%
Total liabilities
 
2,050,088

2,018,301

 
31,787

2
 %
Total equity
 
(312
)
5,075

 
(5,387
)
(106
)%
Total liabilities and equity
 

$2,049,776


$2,023,376

 

$26,400

1
 %
Key Drivers:
As of December 31, 2017 compared to December 31, 2016:
n
Cash and cash equivalents, restricted cash and cash equivalents and securities purchased under agreements to resell affect one another and changes in the balances should be viewed together (e.g., cash and cash equivalents can be invested in securities purchased under agreements to resell or other investments). The decrease in the combined balance was primarily due to lower near term cash needs for fewer upcoming maturities and anticipated calls of other debt, and a decrease in prepayment proceeds received by the custodial account driven by increased interest rates, at the end of 2017 compared to the end of 2016.
n Investments in securities, at fair value decreased as we continued to reduce the mortgage-related investments portfolio during 2017 as required by the Purchase Agreement and FHFA.
n Deferred tax assets, net decreased primarily due to a reduction in the statutory corporate income tax rate as a result of the Tax Cuts and Jobs Act enacted in December 2017.
n Other assets increased primarily due to the recognition of receivables on sales of securities which had traded but not settled at year end.
n Total equity decreased primarily as a result of higher income tax expense due to the reduction of our net deferred tax asset as a result of the Tax Cuts and Jobs Act.

FREDDIE MAC  | 2017 Form 10-K
 
37

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

OUR BUSINESS SEGMENTS
As shown in the table below, we have three reportable segments, which are based on the way we manage our business. Certain activities that are not part of a reportable segment are included in the All Other category.
Segment/Category
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
Guarantee fee income
Credit-related expenses
Administrative expenses
Credit risk transfer expenses
Multifamily
Reflects results from our purchase, sale, securitization and guarantee of multifamily loans and securities, our investments in those loans and securities and the management of multifamily mortgage credit risk and market spread risk
Net interest income
Losses on loans


Guarantee fee income
Investment losses
Gains on loans
Derivative losses
Investment gains