10-Q 1 a20182q10q.htm Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from                                        to
Commission File Number: 001-34139
primarylogoa02.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)
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.    ý 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).    ý Yes    ¨ No
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  ý
 
 
 
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  ý
As of July 17, 2018, there were 650,058,775 shares of the registrant’s common stock outstanding.


Table of Contents

Table of Contents
 
Page
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
n    Introduction
n    Key Economic Indicators
n    Consolidated Results of Operations
n    Consolidated Balance Sheets Analysis
n    Our Business Segments
n    Risk Management
n    Liquidity and Capital Resources
n    Conservatorship and Related Matters
n    Regulation and Supervision
n    Off-Balance Sheet Arrangements
n    Forward-Looking Statements
FINANCIAL STATEMENTS
OTHER INFORMATION
CONTROLS AND PROCEDURES
EXHIBIT INDEX
SIGNATURES
FORM 10-Q INDEX

Freddie Mac Form 10-Q
 
i

Management's Discussion and Analysis
 
Introduction

Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q 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-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. 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 sections of this Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2017, or 2017 Annual Report, and our Quarterly Report on Form 10-Q for the first quarter of 2018, and the Business and Risk Factors sections of our 2017 Annual Report.
Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the Glossary of our 2017 Annual Report.
You should read the following MD&A in conjunction with our 2017 Annual Report and our condensed consolidated financial statements and accompanying notes for the three and six months ended June 30, 2018 included in Financial Statements. Throughout this Form 10-Q, we refer to the three months ended June 30, 2018, the three months ended March 31, 2018, the three months ended December 31, 2017, the three months ended September 30, 2017 and the three months ended June 30, 2017 as "2Q 2018," "1Q 2018," "4Q 2017," "3Q 2017" and "2Q 2017," respectively. We refer to the six months ended June 30, 2018 and the six months ended June 30, 2017 as "YTD 2018" and "YTD 2017," respectively.
INTRODUCTION
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.

Freddie Mac Form 10-Q
 
1

Management's Discussion and Analysis
 
Introduction

Business Results
Portfolio Balances

Guarantee Portfolios

chart-2a0002ba7ccf5686a90.jpg
 
Investments Portfolios

chart-f5baba02ada652cb9e6.jpg


Total Guarantee Portfolio
n
Our total guarantee portfolio grew $117 billion, or 6%, from June 30, 2017 to June 30, 2018, driven by a 4% increase in our single-family credit guarantee portfolio and a 26% increase in our multifamily guarantee portfolio.
l
The growth in our single-family credit guarantee portfolio was primarily driven by an increase in U.S. single-family mortgage debt outstanding as a result of continued home price appreciation. New business acquisitions had a higher average loan size compared to older vintages that continued to run off.
l
The growth in our multifamily guarantee portfolio was primarily driven by an increase in U.S. multifamily mortgage debt outstanding due to strong multifamily market fundamentals, coupled with the growth in our share of new business volume due to our strategic pricing efforts, expansion of our new product offerings and an increase in purchase activity associated with certain targeted loans in underserved markets.

Freddie Mac Form 10-Q
 
2

Management's Discussion and Analysis
 
Introduction

Total Investments Portfolio
n
Our total investments portfolio declined $56 billion, or 15%, from June 30, 2017 to June 30, 2018, 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.
Consolidated Financial Results
Comprehensive income (loss) was $2.4 billion in 2Q 2018, compared to $2.0 billion in 2Q 2017.
Key Drivers:
n
Net interest income declined, primarily driven by the continued reduction in the balance of our mortgage-related investments portfolio, partially offset by continued growth in our single-family credit guarantee portfolio.
n
Benefit for credit losses declined, primarily due to the impact of reclassifications of single-family seasoned mortgage loans between held-for-investment and held-for-sale.
n
Gain from final judgment against Nomura Holding America, Inc. in litigation involving certain of our non-agency mortgage-related securities (Nomura judgment) resulted in an increase in other income. We did not have any significant judgments or settlements in 2Q 2017.
n
Reduction in the statutory corporate income tax rate resulted in lower income tax expense.
Our total equity was $4.6 billion at June 30, 2018. Because our net worth was positive, we are not requesting a draw from Treasury under the Purchase Agreement for 2Q 2018. Based on our Net Worth Amount at June 30, 2018 of $4.6 billion and the applicable Capital Reserve Amount of $3.0 billion, we will have a dividend requirement to Treasury in September 2018 of $1.6 billion.
Our cumulative senior preferred stock dividend payments totaled $112.4 billion as of June 30, 2018. Under the Purchase Agreement the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock, which remains at $75.6 billion. In addition, the amount of available funding remaining under the Purchase Agreement is $140.2 billion and will be reduced by any future draws.
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.

Freddie Mac Form 10-Q
 
3

Management's Discussion and Analysis
 
Introduction

Treasury, as the holder of the senior preferred stock, is entitled to receive cumulative quarterly cash dividends, when, as and if declared by the Conservator, acting as successor to the rights, titles, powers and privileges of our Board of Directors. The dividends we have paid to Treasury on the senior preferred stock have been declared by, and paid at the direction of, the Conservator.
Under the August 2012 amendment to the Purchase Agreement, our dividend requirement each quarter is the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter, less the applicable Capital Reserve Amount, exceeds zero. Pursuant to the December 2017 Letter Agreement, the Capital Reserve Amount is $3.0 billion. If for any reason we were not to pay our dividend requirement on the senior preferred stock in full in any future period, the unpaid amount would be added to the liquidation preference and our applicable Capital Reserve Amount would thereafter be zero, but this would not affect our ability to draw funds from Treasury under the Purchase Agreement.




Freddie Mac Form 10-Q
 
4

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


KEY ECONOMIC INDICATORS
The following graphs and related discussions present certain macroeconomic indicators that can significantly affect our business and financial results.
Single-Family Home Prices
National Home Prices
chart-fbc322ca7e1c589c98d.jpg
Commentary
n
Home prices continued to appreciate, increasing by 3.0% and 3.7% during 2Q 2018 and 2Q 2017, respectively, and by 5.6% and 6.0% during YTD 2018 and YTD 2017, respectively, 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 the rate of home price growth in the second half of 2018 to moderate, driven by a gradual increase in housing supply and higher mortgage interest rates.
n
Increases in home prices typically result in lower delinquency rates and lower loss severity, which generally reduce estimated credit losses on our total mortgage portfolio.
n
Higher single-family home prices may also contribute to an increase in potential multifamily renters.



Freddie Mac Form 10-Q
 
5

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

Interest Rates
Key Market Interest Rates
chart-a8789418365a5146a22.jpg chart-3fba6030c8de5ae6bba.jpg
Commentary
n
The quarterly ending and quarterly average 30-year Primary Mortgage Market Survey ("PMMS") interest rates were higher at June 30, 2018 than June 30, 2017. Increases in the PMMS rate typically result in decreases in refinance activity and U.S. single-family loan originations.
n
The 10-year LIBOR and 2-year LIBOR quarterly ending interest rates had larger fluctuations during the 2018 periods than during the 2017 periods. 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 larger interest rate fluctuation from period to period generally results in larger fair value gains and losses, while a smaller fluctuation from period to period generally results in smaller fair

Freddie Mac Form 10-Q
 
6

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

value gains and losses. However, the majority of these fair value changes are offset by our hedge accounting programs.
n
The quarterly ending and quarterly average short-term interest rates, as indicated by the 3-month LIBOR rate, were higher at June 30, 2018 than June 30, 2017. An increase in short-term interest rates generally increases 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.





Freddie Mac Form 10-Q
 
7

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

Unemployment Rate
Unemployment Rate and Job Creation(1) 
chart-8fd35b1319f0501e80c.jpg
Source: U.S. Bureau of Labor Statistics
(1) Excludes Puerto Rico and the U.S. Virgin Islands.
Commentary
n
Average monthly net new jobs (non-farm) were higher in 2Q 2018 than 2Q 2017.
n
The national unemployment rate was lower in 2Q 2018 than 2Q 2017.
n
Changes in monthly net new jobs and 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 generally result in a decrease in estimated credit losses on our total mortgage portfolio.

Freddie Mac Form 10-Q
 
8

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 condensed consolidated financial statements and accompanying notes.
The table below compares our summarized consolidated results of operations.
 
 
 
 
 
Change
 
 
 
 
Change
(Dollars in millions)
 
2Q 2018
2Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Net interest income
 

$3,003


$3,379

 

($376
)
(11
)%
 

$6,021


$7,174

 

($1,153
)
(16
)%
Benefit (provision) for credit losses
 
60

422

 
(362
)
(86
)
 
(3
)
538

 
(541
)
(101
)
Net interest income after benefit (provision) for credit losses
 
3,063

3,801

 
(738
)
(19
)
 
6,018

7,712

 
(1,694
)
(22
)
Non-interest income (loss):
 
 
 
 




 
 
 
 




Gains (losses) on extinguishment of debt
 
147

50

 
97

194

 
257

268

 
(11
)
(4
)
Derivative gains (losses)
 
416

(1,096
)
 
1,512

138

 
2,246

(1,398
)
 
3,644

261

Net impairment of available-for-sale securities recognized in earnings
 
(1
)
(3
)
 
2

67

 
(1
)
(16
)
 
15

94

Other gains (losses) on investment securities recognized in earnings
 
(348
)
61

 
(409
)
(670
)
 
(580
)
117

 
(697
)
(596
)
Other income (loss)
 
1,011

694

 
317

46

 
1,132

1,109

 
23

2

Total non-interest income (loss)
 
1,225

(294
)
 
1,519

517

 
3,054

80

 
2,974

3,718

Non-interest expense:
 
 
 
 




 
 
 
 




Administrative expense
 
(558
)
(513
)
 
(45
)
(9
)
 
(1,078
)
(1,024
)
 
(54
)
(5
)
REO operations expense
 
(15
)
(37
)
 
22

59

 
(49
)
(93
)
 
44

47

Temporary Payroll Tax Cut Continuation Act of 2011 expense
 
(366
)
(330
)
 
(36
)
(11
)
 
(725
)
(651
)
 
(74
)
(11
)
Other expense
 
(204
)
(126
)
 
(78
)
(62
)
 
(401
)
(202
)
 
(199
)
(99
)
Total non-interest expense
 
(1,143
)
(1,006
)
 
(137
)
(14
)
 
(2,253
)
(1,970
)
 
(283
)
(14
)
Income (loss) before income tax (expense) benefit
 
3,145

2,501

 
644

26

 
6,819

5,822

 
997

17

Income tax (expense) benefit
 
(642
)
(837
)
 
195

23

 
(1,390
)
(1,947
)
 
557

29

Net income (loss)
 
2,503

1,664

 
839

50

 
5,429

3,875

 
1,554

40

Total other comprehensive income (loss), net of taxes and reclassification adjustments
 
(68
)
322

 
(390
)
(121
)
 
(844
)
345

 
(1,189
)
(345
)
Comprehensive income (loss)
 

$2,435


$1,986

 

$449

23
 %
 

$4,585


$4,220

 

$365

9
 %

Freddie Mac Form 10-Q
 
9

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

Net Interest Income
Net Interest Yield Analysis
The tables below present an analysis of interest-earning assets and interest-bearing liabilities.
 
 
 
2Q 2018
 
2Q 2017
 
(Dollars in millions)
 
Average
Balance
Interest
Income
(Expense)(1)
Average
Rate
 
Average
Balance
Interest
Income
(Expense)(1)
Average
Rate
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 

$6,620


$13

0.79
 %
 

$12,135


$15

0.51
 %
 
Securities purchased under agreements to resell
 
43,084

205

1.91

 
56,196

132

0.93

 
Advances to lenders and other secured lending
 
1,403

10

2.68

 
532

3

2.30

 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
144,517

1,495

4.14

 
170,864

1,651

3.87

 
Extinguishment of PCs held by Freddie Mac
 
(88,792
)
(849
)
(3.83
)
 
(89,913
)
(825
)
(3.67
)
 
Total mortgage-related securities, net
 
55,725

646

4.64

 
80,951

826

4.08

 
Non-mortgage-related securities
 
14,476

84

2.32

 
17,957

76

1.68

 
Loans held by consolidated trusts(1)
 
1,787,242

15,290

3.42

 
1,723,103

14,594

3.39

 
Loans held by Freddie Mac(1)
 
100,239

1,054

4.20

 
118,012

1,254

4.25

 
Total interest-earning assets
 
2,008,789

17,302

3.45

 
2,008,886

16,900

3.36

 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
 
1,814,861

(13,504
)
(2.98
)
 
1,746,474

(12,819
)
(2.94
)
 
Extinguishment of PCs held by Freddie Mac
 
(88,792
)
849

3.83

 
(89,913
)
825

3.67

 
Total debt securities of consolidated trusts held by third parties
 
1,726,069

(12,655
)
(2.93
)
 
1,656,561

(11,994
)
(2.90
)
 
Other debt:
 
 
 
 
 
 
 
 
 
Short-term debt
 
53,323

(242
)
(1.80
)
 
74,540

(145
)
(0.77
)
 
Long-term debt
 
221,222

(1,402
)
(2.53
)
 
272,160

(1,382
)
(2.02
)
 
Total other debt
 
274,545

(1,644
)
(2.38
)
 
346,700

(1,527
)
(1.76
)
 
Total interest-bearing liabilities
 
2,000,614

(14,299
)
(2.86
)
 
2,003,261

(13,521
)
(2.70
)
 
Impact of net non-interest-bearing funding
 
8,175


0.01

 
5,625


0.01

 
Total funding of interest-earning assets
 

$2,008,789


($14,299
)
(2.85
)%
 

$2,008,886


($13,521
)
(2.69
)%
 
Net interest income/yield
 
 

$3,003

0.60
 %
 
 

$3,379

0.67
 %
 
 
 
 
 
 
 
 
 
 
 
   (1) Loan fees, primarily consisting of amortization of upfront fees, included in interest income were $627 million and $583 million for loans held by consolidated trusts and $23 million and $33 million for loans held by Freddie Mac during 2Q 2018 and 2Q 2017, respectively.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Freddie Mac Form 10-Q
 
10

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
YTD 2018
 
YTD 2017
(Dollars in millions)
 
Average
Balance
Interest
Income
(Expense)(1)
Average
Rate
 
Average
Balance
Interest
Income
(Expense)(1)
Average
Rate
Interest-earning assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 

$6,818


$24

0.69
 %
 

$12,094


$24

0.40
 %
Securities purchased under agreements to resell
 
47,408

403

1.70

 
55,301

220

0.79

Advances to lenders and other secured lending
 
1,197

16

2.65

 
574

7

2.36

Mortgage-related securities:
 
 
 
 
 
 
 
 
Mortgage-related securities
 
147,391

3,074

4.17

 
173,410

3,314

3.82

Extinguishment of PCs held by Freddie Mac
 
(89,803
)
(1,692
)
(3.77
)
 
(89,226
)
(1,645
)
(3.69
)
Total mortgage-related securities, net
 
57,588

1,382

4.80

 
84,184

1,669

3.97

Non-mortgage-related securities
 
14,626

157

2.14

 
19,509

147

1.51

Loans held by consolidated trusts(1)
 
1,781,975

30,149

3.38

 
1,715,571

29,193

3.40

Loans held by Freddie Mac(1)
 
101,845

2,146

4.21

 
121,115

2,620

4.33

Total interest-earning assets
 
2,011,457

34,277

3.41

 
2,008,348
33,880
3.37

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
 
1,808,992

(26,861
)
(2.97
)
 
1,738,601

(25,360
)
(2.92
)
Extinguishment of PCs held by Freddie Mac
 
(89,803
)
1,692

3.77

 
(89,226
)
1,645

3.69

Total debt securities of consolidated trusts held by third parties
 
1,719,189

(25,169
)
(2.93
)
 
1,649,375

(23,715
)
(2.88
)
Other debt:
 
 
 
 
 
 
 
 
Short-term debt
 
60,647

(471
)
(1.55
)
 
74,003

(241
)
(0.65
)
Long-term debt
 
225,101

(2,616
)
(2.32
)
 
275,840

(2,750
)
(1.99
)
Total other debt
 
285,748

(3,087
)
(2.16
)
 
349,843

(2,991
)
(1.71
)
Total interest-bearing liabilities
 
2,004,937

(28,256
)
(2.82
)
 
1,999,218

(26,706
)
(2.67
)
Impact of net non-interest-bearing funding
 
6,520


0.01

 
9,130


0.01

Total funding of interest-earning assets
 

$2,011,457


($28,256
)
(2.81
)%
 

$2,008,348


($26,706
)
(2.66
)%
Net interest income/yield
 
 

$6,021

0.60
 %
 
 

$7,174

0.71
 %
 
 
 
 
 
 
 
 
 
  (1) Loan fees, primarily consisting of amortization of upfront fees, included in interest income were $1.2 billion and $1.1 billion for loans held by consolidated trusts and $45 million and $95 million for loans held by Freddie Mac during YTD 2018 and YTD 2017, respectively.


Freddie Mac Form 10-Q
 
11

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.
 
 
 
 
 
Change
 
 
 
 
Change
(Dollars in millions)
 
2Q 2018
2Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Contractual net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee fee income
 

$858


$795

 

$63

8
 %
 

$1,692


$1,587

 

$105

7
 %
Guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011
 
356

325

 
31

10

 
703

641

 
62

10

Other contractual net interest income
 
1,386

1,637

 
(251
)
(15
)
 
2,843

3,396

 
(553
)
(16
)
Total contractual net interest income
 
2,600

2,757

 
(157
)
(6
)
 
5,238

5,624

 
(386
)
(7
)
Net amortization - loans and debt securities of consolidated trusts
 
701

667

 
34

5

 
1,449

1,620

 
(171
)
(11
)
Net amortization - other assets and debt
 
(84
)
(3
)
 
(81
)
(2,700
)
 
(79
)
15

 
(94
)
(627
)
Hedge accounting impact
 
(214
)
(42
)
 
(172
)
(410
)
 
(587
)
(85
)
 
(502
)
(591
)
Net interest income
 

$3,003


$3,379

 

($376
)
(11
)%
 

$6,021


$7,174

 

($1,153
)
(16
)%
Key Drivers:
n
Guarantee fee income
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - increased primarily due to the continued growth of the Core single-family loan portfolio.
n
Other contractual net interest income
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - decreased 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 - Reducing Our Mortgage-Related Investments Portfolio Over Time for a discussion of the key drivers of the decline in our mortgage-related investments portfolio.
n
Net amortization of loans and debt securities of consolidated trusts
l
2Q 2018 vs. 2Q 2017 - remained relatively flat.
l
YTD 2018 vs. YTD 2017 - decreased primarily due to a decrease in amortization of debt securities of consolidated trusts driven by a decrease in prepayments as a result of higher interest rates, partially offset by an increase in amortization from higher upfront fees on mortgage loans.
n
Net amortization of other assets and debt
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - losses increased primarily due to less accretion of previously recognized other-than-temporary impairments on non-agency mortgage-related securities. The decrease in accretion was 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.

Freddie Mac Form 10-Q
 
12

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

n
Hedge Accounting Impact
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - losses increased primarily due to the inclusion of fair value hedge accounting results within net interest income during the 2018 periods. This activity was included in other income and derivative gains (losses) until the adoption of the amended hedge accounting guidance in 4Q 2017.

Freddie Mac Form 10-Q
 
13

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


Derivative Gains (Losses)
Components of Derivative Gains (Losses)
We continue to align our derivative portfolio with the changing duration of our assets and liabilities so as to economically hedge their interest-rate risk. 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 earnings to those activities, see Risk Management - Market Risk.
Derivative gains (losses) includes the fair value changes and the accrual of periodic cash settlements for derivatives while not designated in qualifying hedge relationships. In addition, prior to our adoption of amended hedge accounting guidance in 4Q 2017, we included the accrual of periodic cash settlements on derivatives in qualifying hedge relationships in derivatives gains (losses).
The table below presents the components of derivative gains (losses).
 
 
 
 
 
Change
 
 
 
 
Change
(Dollars in millions)
 
2Q 2018
2Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Fair value change in interest-rate swaps
 

$583


($580
)
 

$1,163

201
 %
 

$2,097


$93

 

$2,004

2,155
 %
Fair value change in option-based derivatives
 
(259
)
109

 
(368
)
(338
)
 
(714
)
(321
)
 
(393
)
(122
)
Fair value change in other derivatives
 
135

(196
)
 
331

169

 
1,051

(274
)
 
1,325

484

Accrual of periodic cash settlements
 
(43
)
(429
)
 
386

90

 
(188
)
(896
)
 
708

79

Derivative gains (losses)
 

$416


($1,096
)
 

$1,512

138
 %
 

$2,246


($1,398
)
 

$3,644

261
 %
Key Drivers:
n
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - During the 2018 periods, increases in long-term rates resulted in derivative fair value gains compared to derivative fair value losses during the 2017 periods. The 10-year par swap rate increased 15 and 54 basis points during 2Q 2018 and YTD 2018, respectively, and declined 12 and 5 basis points during 2Q 2017 and YTD 2017, respectively. The interest rate increase during the 2018 periods resulted in fair value gains in our pay-fixed interest rate swaps, forward commitments to issue PCs, and futures, partially offset by fair value losses in our receive-fixed swaps.

Freddie Mac Form 10-Q
 
14

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


Other Income (Loss)
Components of Other Income (Loss)
The table below presents the components of other income (loss).
 
 
 
 
 
Change
 
 
 
 
Change
(Dollars in millions)
 
2Q 2018
2Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Other income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
Non-agency mortgage-related securities settlements and judgments
 

$334


$—

 

$334

N/A

 

$334


$3

 

$331

11,033
 %
Gains (losses) on loans(1)
 
162

193

 
(31
)
(16
)
 
(158
)
207

 
(365
)
(176
)
Gains (losses) on held-for-sale loan purchase commitments(1)
 
192

331

 
(139
)
(42
)
 
297

555

 
(258
)
(46
)
Gains (losses) on debt(1)
 
19

(102
)
 
121

119

 
30

(191
)
 
221

116

All other
 
304

245

 
59

24

 
629

469

 
160

34

 Fair value hedge accounting
 
 
 
 
 

 
 
 
 
 
 
Change in fair value of derivatives in qualifying hedge relationships
 

(365
)
 
365

N/A

 

(300
)
 
300

N/A

Change in fair value of hedged items in qualifying hedge relationships
 

392

 
(392
)
N/A

 

366

 
(366
)
N/A

Total other income (loss)
 

$1,011


$694

 

$317

46
 %
 

$1,132


$1,109

 

$23

2
 %
(1)
Includes fair value gains (losses) on loans, held-for-sale loan purchase commitments and debt for which we have elected the fair value option.
Key Drivers:
n 2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - Other income (loss) increased primarily driven by:
l Recognition of a $0.3 billion gain from the Nomura judgment during 2Q 2018. See Note 14 for additional information on the Nomura judgment.
l Small fair value gains on STACR debt notes in the 2018 periods compared to fair value losses in the 2017 periods as a result of market spreads between STACR yields and LIBOR remaining relatively unchanged in the 2018 periods, while spreads tightened during the 2017 periods.
l Adoption of amended hedge accounting guidance in 4Q 2017, which resulted in fair value changes for derivatives and hedged items in qualifying hedge relationships no longer being recognized in other income (loss). See Note 9 for more information.
This increase was partially offset by:
l Greater interest rate-related fair value losses on multifamily mortgage loans and commitments for which we have elected the fair value option due to a larger increase in long-term interest rates.




Freddie Mac Form 10-Q
 
15

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)
The following table presents the attribution of total other comprehensive income (loss), net of taxes and reclassification adjustments reported in our condensed consolidated statements of comprehensive income.
 
 
 
 
 
Change
 
 
 
 
Change
(Dollars in millions)
 
2Q 2018
2Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Other comprehensive income (loss), excluding certain items
 

($93
)

$423

 

($516
)
(122
)%
 

($495
)

$586

 

($1,081
)
(184
)%
Excluded items:
 
 
 
 
 
 
 
 
 
 
 
 
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities
 
(20
)
(49
)
 
29

59

 
(108
)
(103
)
 
(5
)
(5
)
Realized (gains) losses reclassified from AOCI
 
45

(52
)
 
97

187

 
(241
)
(138
)
 
(103
)
(75
)
Total excluded items
 
25

(101
)

126

125


(349
)
(241
)

(108
)
(45
)
Total other comprehensive income (loss)
 

($68
)

$322

 

($390
)
(121
)%
 

($844
)

$345

 

($1,189
)
(345
)%
Key Drivers:
n Other comprehensive income, excluding certain items
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - decreased primarily due to higher fair value losses compared to fair value gains on agency and non-agency mortgage-related securities classified as available-for-sale as long-term interest rates increased more during the 2018 periods, coupled with smaller fair value gains from less market spread tightening on our non-agency mortgage-related securities.
Excluded items:
n Realized (gains) losses reclassified from AOCI
l
2Q 2018 vs. 2Q 2017 - reflected reclassified losses during 2Q 2018 compared to reclassified gains during 2Q 2017 due to sales of non-agency mortgage-related securities in an unrealized loss position during 2Q 2018.
l
YTD 2018 vs. YTD 2017 - reflected larger amounts of reclassified gains during YTD 2018 due to spread tightening on sales of non-agency mortgage-related securities classified as available-for-sale.

Freddie Mac Form 10-Q
 
16

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

Other Key Drivers
Explanation of Other Key Drivers
Key Drivers:
n Benefit (provision) for credit losses
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - decreased primarily due to the impact of loan reclassifications between held-for-investment and held-for-sale.
n Gains (losses) on extinguishment of debt
l
2Q 2018 vs. 2Q 2017 - 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 rates increased between the time of issuance and repurchase, combined with an increase in the amount of debt securities of consolidated trusts repurchased. 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
YTD 2018 vs. YTD 2017 - remained relatively flat.
n Other gains (losses) on investment securities recognized in earnings
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - decreased primarily driven by larger fair value losses on our mortgage and non-mortgage-related securities classified as trading as interest rates increased more during the 2018 periods, partially offset by lower fair value gains driven by less spread tightening on sales of our available-for-sale non-agency mortgage-related securities.
n Other expense
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - increased primarily due to recoveries in the 2017 periods of amounts previously recognized in other expense. This activity did not repeat in the 2018 periods.
n Income tax (expense) benefit
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - decreased due to the lower statutory corporate income tax rate in the 2018 periods.



Freddie Mac Form 10-Q
 
17

Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized consolidated balance sheets.
 
 
 
 
 
Change
(Dollars in millions)
 
6/30/2018
12/31/2017
 
$
%
Assets:
 
 
 
 
 
 
Cash and cash equivalents(1)
 

$6,752


$9,811

 

($3,059
)
(31
)%
Securities purchased under agreements to resell
 
41,769

55,903

 
(14,134
)
(25
)
Subtotal
 
48,521

65,714

 
(17,193
)
(26
)
Investments in securities, at fair value
 
77,710

84,318

 
(6,608
)
(8
)
Mortgage loans, net
 
1,884,851

1,871,217

 
13,634

1

Accrued interest receivable
 
6,470

6,355

 
115

2

Derivative assets, net
 
391

375

 
16

4

Deferred tax assets, net
 
8,299

8,107

 
192

2

Other assets
 
15,490

13,690

 
1,800

13

Total assets
 

$2,041,732


$2,049,776

 

($8,044
)
 %
 
 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Accrued interest payable
 

$6,377


$6,221

 

$156

3
 %
Debt, net
 
2,021,162

2,034,630

 
(13,468
)
(1
)
Derivative liabilities, net
 
409

269

 
140

52

Other liabilities
 
9,199

8,968

 
231

3

Total liabilities
 
2,037,147

2,050,088

 
(12,941
)
(1
)
Total equity
 
4,585

(312
)
 
4,897

1,570

Total liabilities and equity
 

$2,041,732


$2,049,776

 

($8,044
)
 %
(1) The current and prior period presentation has been modified to include restricted cash and cash equivalents due to recently adopted accounting guidance.
Key Drivers:
As of June 30, 2018 compared to December 31, 2017:
n
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.
n Investments in securities, at fair value decreased as we continued to reduce the mortgage-related investments portfolio during 2018 as required by the Purchase Agreement and FHFA.
n Other Assets increased primarily due to the recognition of receivables on sales of securities which had traded but not settled as of June 30, 2018.
n Total equity increased primarily as a result of higher comprehensive income in 2Q 2018 compared to 4Q 2017, combined with our ability to retain equity as a result of an increase in the applicable Capital Reserve Amount, which is $3.0 billion as of January 1, 2018.

Freddie Mac Form 10-Q
 
18

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


OUR BUSINESS SEGMENTS
We have three reportable segments, which are based on the way we manage our business.
n
Single-family Guarantee - reflects results from our purchase, securitization and guarantee of single-family loans and the management of single-family mortgage credit risk.
n
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.
n
Capital Markets - reflects results from managing our mortgage-related investments portfolio (excluding Multifamily segment investments, single-family seriously delinquent loans and the credit risk of single-family performing and reperforming loans), the treasury function, securitization activities and our interest-rate risk.
Certain activities that are not part of a reportable segment, such as material corporate-level activities that are infrequent in nature and based on decisions outside the control of the management of our reportable segments, are included in the All Other category.
Segment Earnings
We present Segment Earnings by reclassifying certain credit guarantee-related activities and investment-related activities between various line items on our GAAP condensed consolidated statements of comprehensive income and allocating certain revenues and expenses to our three reportable segments. For more information on our segment reclassifications, see Note 13.

Freddie Mac Form 10-Q
 
19

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


Segment Comprehensive Income
The graph below shows our comprehensive income by segment.
(In millions)
chart-84a1569fcf335213a19.jpg chart-c036672fb28396c2144.jpg

Freddie Mac Form 10-Q
 
20

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

Single-Family Guarantee
Market Conditions

The graphs and related discussion below present certain market indicators that can significantly affect the business and financial results of our Single-family Guarantee segment.
U.S. Single-Family Originations
chart-6dbc4b34a9f95214b51.jpgSource: Inside Mortgage Finance dated May 18, 2018 (latest available IMF purchase/refinance information).

 
Single-Family Serious Delinquency Rates
chart-5720ed93ba115b97842.jpg

Source: National Delinquency Survey from the Mortgage Bankers Association. Data as of May 16, 2018 (latest available NDS information).

Commentary
n U.S. single-family loan origination volume decreased to $445 billion in 2Q 2018 from $455 billion in 2Q 2017, driven by lower refinance volume as a result of higher mortgage interest rates in 2Q 2018. Mortgage origination data is from Inside Mortgage Finance as of July 27, 2018.
n We expect continued growth in U.S. single-family home purchase volume due to a gradual increase in housing supply and home price appreciation, while a moderate increase in mortgage interest rates is expected to result in a lower refinance volume. Freddie Mac's single-family loan purchase volumes typically follow a similar trend.
n The single-family serious delinquency rate in the U.S. decreased during 1Q 2018 as the impacts from the hurricanes in 3Q 2017 subsided and the general economy continued to improve. Freddie Mac's serious delinquency rate typically follows a similar trend.

Freddie Mac Form 10-Q
 
21

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

Business Results

The following tables, graphs and related discussion present the business results of our Single-family Guarantee segment.
New Business Activity
UPB of Single-Family Loan Purchases and Guarantees by Loan Purpose
(In billions)
chart-dfe2389b116c5e58bbc.jpgchart-85ed049e0324ed4e2ef.jpg








Freddie Mac Form 10-Q
 
22

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

Percentage of Single-Family Loan Purchases and Guarantees by Loan Purposechart-8ddec79dcfd53e8df7f.jpgchart-bf3ab398ac727f6c1c9.jpg
Commentary
n Our loan purchase and guarantee activity increased during 2Q 2018 compared to 2Q 2017 due to higher home purchase volume, primarily driven by an improving economy and a lower unemployment rate. However, the activity decreased during YTD 2018 primarily due to a decline in refinance activity as a result of higher average mortgage interest rates, partially offset by higher home purchase volume.
n Freddie Mac purchases loans originated by lenders using Fannie Mae's Automated Underwriting System (AUS). Fannie Mae announced changes to its AUS in July 2017, which led to an increase in eligibility for purchase of new loans with debt-to-income ratios between 45% and 50% (high DTI). These loans have minimal impact on our overall single-family credit guarantee portfolio, but we are monitoring the overall credit quality and performance of these loans. Although the purchase of these high DTI loans may increase over time, we expect to purchase fewer loans with high DTI ratios that have other high-risk characteristics.






Freddie Mac Form 10-Q
 
23

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

Single-Family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfoliochart-3406f8571de55a31ae8.jpg
Commentary
n
The single-family credit guarantee portfolio increased at an annualized rate of approximately 3% from December 31, 2017 to June 30, 2018, driven by an increase in U.S. single-family mortgage debt outstanding as a result of continued home price appreciation. New business acquisitions had a higher average loan size compared to older vintages that continued to run off.
n
The Core single-family loan portfolio grew to 80% of the single-family credit guarantee portfolio at June 30, 2018, compared to 78% at December 31, 2017.
n
The Legacy and relief refinance single-family loan portfolio declined to 20% of the single-family credit guarantee portfolio at June 30, 2018, compared to 22% at December 31, 2017, driven primarily by liquidations.

Freddie Mac Form 10-Q
 
24

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

Guarantee Fees
We receive fees for guaranteeing the payment of principal and interest to investors in our mortgage-related securities. These fees consist primarily of a combination of base contractual guarantee fees paid on a monthly basis and initial upfront payments. The average portfolio Segment Earnings guarantee fee rate recognizes upfront fee income over the contractual life of the related loans (usually 30 years). If the related loans prepay, the remaining upfront fee income is recognized immediately. In contrast, the average guarantee fee rate charged on new acquisitions recognizes upfront fee income over the estimated life of the related loans using our expectations of prepayments and other liquidations. See MD&A - Our Business Segments - Single-family Guarantee - Business Overview - Guarantee Fees in our 2017 Annual Report for more information on our guarantee fees.
Average Portfolio Segment Earnings Guarantee Fee Rate(1)(2)  
(In bps)
chart-53eb598598a15d1e847.jpgchart-90ef9e37786d535f853.jpg
Referenced footnotes are included after the next chart.


Freddie Mac Form 10-Q
 
25

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

Average Guarantee Fee Rate(1) Charged on New Acquisitions
(In bps)
chart-e46984bf25486746af7.jpg chart-7cc71ea2f13db07c6da.jpg
(1) Excludes the legislated 10 basis point increase in guarantee fees.
(2) Reflects an average rate for our total single-family credit guarantee portfolio and is not limited to purchases in the applicable period.
Commentary
n
While the average portfolio Segment Earnings guarantee fee rate remained relatively unchanged during 2Q 2018 compared to 2Q 2017, the rate increased slightly during YTD 2018 compared to YTD 2017 due to older vintages being replaced by new loan acquisitions with higher guarantee fees.
n
The average guarantee fee rate charged on new acquisitions decreased during the 2018 periods compared to the 2017 periods due to pricing competition pressures, while maintaining a minimum return threshold established by FHFA.


Freddie Mac Form 10-Q
 
26

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

Credit Risk Transfer (CRT) Activities
We transfer credit risk on a portion of our single-family credit guarantee portfolio to the private market, which reduces the risk of future losses to us and taxpayers when borrowers go into default. Our primary CRT activities are our STACR debt note and ACIS transactions, in which we pay interest to investors or premiums to insurers in exchange for their taking on a portion of the credit risk on the mortgage loans in the related reference pool. These payments effectively reduce our guarantee fee income from the PCs backed by the mortgage loans in the related reference pools. See MD&A - Our Business Segments - Single-Family Guarantee - Business Overview - Credit Risk Transfer Transactions in our 2017 Annual Report for more information on our CRT transactions.
The following charts present the issuance amounts for the CRT transactions that occurred during 2Q 2018 and the cumulative issuance amounts for all CRT transactions as of June 30, 2018 by loss position and the party holding each loss position, excluding senior subordinate securitization structures.
New CRT Transactions during 2Q 2018(1)  
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$96.2
 
Reference Pool

$99.8
 
 
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac
               
$0.3
 
ACIS(3)

             
$0.7
 
Other CRT


$1.2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
   Loss(4)
 
Freddie Mac

$0.6
 
ACIS


$0.1
 
Other CRT
 

$0.7
 
 
Cumulative CRT Transactions as of June 30, 2018(1)(2)  
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$996.3
 
Reference Pool

$1,042.2
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac


$2.6
 
ACIS(3)



$8.8
 
STACR Debt Notes

$23.6
 
Other CRT


$1.2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
   Loss(4)
 
Freddie Mac

$5.7
 
ACIS


$1.1
 
STACR
Debt Notes$2.2
 
Other
CRT

$0.7
 

(1) The amounts represent the UPB upon issuance of CRT transactions.
(2)
For the current outstanding coverage provided by our CRT transactions, see Credit Enhancements.
(3) Starting in 2Q 2018, ACIS transactions include Deep MI CRT transactions which were previously disclosed separately. The 2Q 2018 and Cumulative presentations have been modified to reflect this change.
(4) First loss includes all B tranches in our STACR debt notes and their equivalent in ACIS and Other CRT transactions.
Commentary
n
During YTD 2018, we transferred a portion of credit risk associated with $192.3 billion in UPB of loans in our single-family credit guarantee portfolio through STACR debt note, ACIS, senior subordinate securitization structures and other CRT transactions.
n
As of June 30, 2018, we had cumulatively transferred a portion of credit risk on more than $1 trillion of our single-family mortgages, based upon the UPB at issuance of the CRT transactions.

Freddie Mac Form 10-Q
 
27

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

l
For originations in the twelve months ended June 30, 2017, FHFA's Conservatorship Capital Framework (CCF) capital required for credit risk was reduced approximately 60% by CRT transactions; we plan similar risk reduction transactions for this quarter's originations.
l
The reduction in the amount of CCF capital required for credit risk on new originations is calculated as modeled conservatorship credit capital released from the underlying single-family CRT transaction reference pool divided by total modeled conservatorship credit capital on new originations at the time of purchase. For more information on the CCF and the calculation of modeled conservatorship capital required, see Risk Management - Conservatorship Capital Framework and Risk Management - Conservatorship Capital Framework - Return on Modeled Conservatorship Capital Required.
n
Our expected guarantee fee income on the PCs related to the STACR debt note, ACIS and other CRT transaction reference pool UPB has been effectively reduced by approximately 28%, on average, for all transactions executed through June 30, 2018.
n
As of June 30, 2018, we had experienced minimal write-downs on our STACR debt notes and have filed minimal claims for reimbursement of losses under our ACIS transactions.
We continue to evaluate our credit risk transfer strategy and to make changes depending on market conditions and our business strategy. The aggregate cost of our credit risk transfer activity will continue to increase as we continue to transfer credit risk on new originations.


Freddie Mac Form 10-Q
 
28

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

Credit Enhancements
The table below provides information on the total current and protected UPB and maximum coverage associated with credit enhanced loans in our single-family credit guarantee portfolio as of June 30, 2018 and December 31, 2017, respectively. The table includes all types of single-family credit enhancements. See Note 6 for additional information about our single-family credit enhancements.
 
 
June 30, 2018
 
December 31, 2017
(In millions)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
Primary mortgage insurance
 

$351,776


$90,085

 

$334,189


$85,429

STACR debt note
 
641,850

18,670

 
604,356

17,788

ACIS transactions(3)
 
698,012

7,873

 
625,082

6,933

Senior subordinate securitization structures
 
24,684

2,860

 
12,283

1,913

Other(3)(4)
 
88,554

8,173

 
8,623

6,282

Less: UPB with more than one type of credit enhancement
 
(866,047
)

 
(775,751
)

Single-family credit guarantee portfolio with credit enhancement
 
938,829

127,661

 
808,782

118,345

Single-family credit guarantee portfolio without credit enhancement
 
916,618


 
1,020,098


Total
 

$1,855,447


$127,661

 

$1,828,880


$118,345

(1)
Except for the majority of our STACR debt notes and ACIS transactions, our credit enhancements generally provide protection for the first, or initial, credit losses associated with the related loans. For STACR debt notes and ACIS transactions, total current and protected UPB represents the UPB of the assets included in the reference pool. For senior subordinate securitization structures, total current and protected UPB represents the UPB of the guaranteed securities.
(2)
Except for senior subordinate securitization structures, this represents the remaining amount of loss recovery that is available subject to the terms of counterparty agreements. Specifically, for STACR debt notes, this represents the outstanding balance of STACR debt notes held by third parties, and for ACIS transactions, this represents the remaining aggregate limit of insurance purchased from third parties. For senior subordinate securitization structures, this represents the UPB of the securities that are subordinate to our guarantee and held by third parties, which could provide protection by absorbing first losses.
(3)
Starting in 2Q 2018, ACIS transactions include Deep MI CRT transactions which were previously disclosed under "Other" transactions. The current and prior period presentation has been modified to reflect this change.
(4)
Includes seller indemnification, lender recourse and indemnification agreements, pool insurance, HFA indemnification and other credit enhancements.

Commentary
n We had coverage remaining of $127.7 billion and $118.3 billion on our single-family credit guarantee portfolio as of June 30, 2018 and December 31, 2017, respectively. Credit risk transfer transactions provided 24.5% and 22.4% of the coverage remaining at those dates, respectively.

Freddie Mac Form 10-Q
 
29

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

Mortgage Loan Credit Risk
Certain combinations of loan attributes can indicate a higher degree of credit risk, such as loans with both higher LTV ratios and lower credit scores. The following table presents the combination of credit score and current LTV (CLTV) ratio attributes of loans in our single-family credit guarantee portfolio.
 
 
June 30, 2018
 
 
CLTV ≤ 80

CLTV > 80 to 100

CLTV > 100

All Loans
(Credit score)
 
% Portfolio
SDQ Rate(1)

% Portfolio
SDQ Rate(1)

% Portfolio
SDQ Rate(1)

% Portfolio
SDQ Rate(1)
% Modified
Core single-family loan portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
0.3
%
2.23
%
 
%
NM

 
%
NM

 
0.3
%
2.39
%
3.5
%
620 to 659
 
2.0

1.21

 
0.3

1.36
%
 

NM

 
2.3

1.23

1.7

≥ 660
 
68.2

0.2

 
9.0

0.28

 

NM

 
77.2

0.21

0.3

Not available
 
0.1

1.74

 

NM

 

NM

 
0.1

3.25

3.6

Total
 
70.6
%
0.24
%
 
9.3
%
0.35
%
 
%
NM

 
79.9
%
0.25
%
0.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legacy and relief refinance single-family loan portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
1.2
%
4.44
%
 
0.2
%
8.77
%
 
0.1
%
14.67
%
 
1.5
%
5.32
%
23.4
%
620 to 659
 
1.9

3.41

 
0.3

7.13

 
0.2

12.01

 
2.4

4.07

20.3

≥ 660
 
14.0

1.25

 
1.6

3.83

 
0.5

6.25

 
16.1

1.51

7.4

Not available
 
0.1

4.87

 

NM

 

NM

 
0.1

5.21

18.9

Total
 
17.2
%
1.76
%
 
2.1
%
4.93
%
 
0.8
%
8.46
%
 
20.1
%
2.14
%
10.2
%
(1)
NM - Not meaningful due to the percentage of the portfolio rounding to zero.

Freddie Mac Form 10-Q
 
30

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

Alt-A and Subprime Loans
While we have referred to certain loans as subprime or Alt-A for purposes of the discussion below and elsewhere in this Form 10-Q, there is no universally accepted definition of subprime or Alt-A, and the classification of such loans may differ from company to company. We do not rely on these loan classifications to evaluate the credit risk exposure relating to such loans in our single-family credit guarantee portfolio.
Participants in the mortgage market have characterized single-family loans based upon their overall credit quality at the time of origination, including as prime or subprime. While we have not historically characterized the loans in our single-family credit guarantee portfolio as either prime or subprime, we monitor the amount of loans we have guaranteed with characteristics that indicate a higher degree of credit risk. In addition, we estimate that approximately $0.9 billion and $1.1 billion of security collateral underlying our other securitization products at June 30, 2018 and December 31, 2017, respectively, were identified as subprime based on information provided to us when we entered into these transactions.
Mortgage market participants have classified single-family loans as Alt-A if these loans have credit characteristics that range between the prime and subprime categories, if they are underwritten with lower or alternative income or asset documentation requirements compared to a full documentation loan, or both. Although we have discontinued new purchases of loans with lower documentation standards, we continue to purchase certain amounts of such loans in cases where the loan was either purchased pursuant to a previously issued guarantee, as part of our relief refinance initiative, or as part of another refinance loan initiative and the pre-existing loan was originated under less than full documentation standards. In the event we purchase a refinance loan and the original loan had been previously identified as Alt-A, such refinance loan may no longer be categorized or reported as an Alt-A loan in this Form 10-Q and our other financial reports because the new refinance loan replacing the original loan would not be identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such refinancing not occurred. From the time the relief refinance initiative began in 2009 to June 30, 2018, we have purchased approximately $36.2 billion of relief refinance loans that were previously categorized as Alt-A loans in our portfolio, including $0.1 billion in 2Q 2018.
The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
 
 
June 30, 2018
 
December 31, 2017
(Dollars in billions)
 
UPB
CLTV
% Modified
SDQ Rate
 
UPB
CLTV
% Modified
SDQ Rate
Alt-A
 

$25.3

64
%
24.1
%
4.83
%
 

$27.1

67
%
24.1
%
5.62
%
The UPB of Alt-A loans in our single-family credit guarantee portfolio declined during YTD 2018 primarily due to borrowers refinancing into other mortgage products, foreclosure sales and other liquidation events. Significant portions of the Alt-A loans in our portfolio are concentrated in Arizona, California, Florida and Nevada.

Freddie Mac Form 10-Q
 
31

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

Single-Family Loan Performance
Serious Delinquency Rates chart-74cf5cda840b5f888ab.jpg
 
Delinquency Rates for Loans One Month and Two Months Past Due
chart-d5bf52ce68f453a69b3.jpg

Commentary
n
Total serious delinquency rate on our single-family credit guarantee portfolio was lower as of June 30, 2018 compared to June 30, 2017 due to our continued loss mitigation efforts, sales of certain seriously delinquent loans from our legacy and relief refinance single-family portfolio, home price appreciation and a low unemployment rate, partially offset by the impact of the hurricanes in 3Q 2017. This improvement was also driven by the continued shift in the single-family credit guarantee portfolio mix, as the Legacy and relief refinance single-family loan portfolio runs off and we add higher credit quality loans to our Core single-family loan portfolio. Delinquency rates for both loans one month past due and loans two months past due were similarly affected.

Freddie Mac Form 10-Q
 
32

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

Credit Performance
The table below contains certain credit performance metrics for our single-family credit guarantee portfolio.
(Dollars in millions)
 
2Q 2018
2Q 2017
 
YTD 2018
YTD 2017
Charge-offs, gross
 

$599


$2,153

 

$971


$2,893

Recoveries
 
(126
)
(85
)
 
(222
)
(182
)
Charge-offs, net
 
473

2,068

 
749

2,711

REO operations expense
 
15

37

 
49

93

Total credit losses
 

$488


$2,105

 

$798


$2,804

 
 
 
 
 
 
 
Total credit losses (in bps)
 
10.5

46.7

 
8.6

31.2

The table below summarizes the carrying value for individually impaired single-family loans on our condensed consolidated balance sheets for which we have recorded an allowance determined on an individual basis.
                                            
 
June 30, 2018
 
June 30, 2017
(Dollars in millions)
 
Loan Count
Amount
 
Loan Count
Amount
TDRs, at January 1
 
364,704


$54,415

 
485,709


$78,869

New additions
 
36,796

5,819

 
20,641

2,851

Repayments and reclassifications to held-for-sale
 
(27,650
)
(4,532
)
 
(72,254
)
(14,776
)
Foreclosure sales and foreclosure alternatives
 
(4,203
)
(566
)
 
(5,514
)
(751
)
TDRs, at June 30
 
369,647

55,136

 
428,582

66,193

Loans impaired upon purchase
 
4,031

265

 
6,615

443

Total impaired loans with an allowance recorded
 
373,678

55,401

 
435,197

66,636

Allowance for loan losses
 
 
(6,592
)
 
 
(8,846
)
Net investment, at June 30
 
 

$48,809

 
 

$57,790

The tables below present information about the UPB of single-family TDRs and non-accrual loans on our condensed consolidated balance sheets.
(In millions)
 
June 30, 2018
December 31, 2017
TDRs on accrual status
 

$54,406


$51,644

Non-accrual loans
 
13,301

17,748

Total TDRs and non-accrual loans
 

$67,707


$69,392

 
 
 
 
Allowance for loan losses associated with:
 
 
 
  TDRs on accrual status
 

$5,393


$5,257

  Non-accrual loans
 
1,510

1,883