10-Q 1 a20183q10q.htm 10-Q 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 September 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    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  ¨
 
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 October 16, 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 Reports on Form 10-Q for the first and second quarters 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 nine months ended September 30, 2018 included in Financial Statements. Throughout this Form 10-Q, we refer to the three months ended September 30, 2018, the three months ended June 30, 2018, the three months ended March 31, 2018, the three months ended December 31, 2017 and the three months ended September 30, 2017 as "3Q 2018," "2Q 2018," "1Q 2018," "4Q 2017" and "3Q 2017," respectively. We refer to the nine months ended September 30, 2018 and the nine months ended September 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-e0764340caeb53a2974.jpg
 
Investments Portfolios

chart-b96a8dc30dcd5e9ebf3.jpg


Total Guarantee Portfolio
n
Our total guarantee portfolio grew $117 billion, or 6%, from September 30, 2017 to September 30, 2018, driven by a 4% increase in our single-family credit guarantee portfolio and a 23% 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 strong multifamily market fundamentals, coupled with the growth in our share of new business volume due to our strategic pricing efforts 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 $38 billion, or 11%, from September 30, 2017 to September 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 was $2.6 billion in 3Q 2018, compared to $4.7 billion in 3Q 2017.
Key Drivers:
n
Continued reduction in the balance of our mortgage-related investments portfolio, partially offset by continued growth in our single-family credit guarantee portfolio, resulted in lower net interest income.
n
Shift to benefit for credit losses in 3Q 2018, from a provision for credit losses in 3Q 2017, driven by estimated losses from hurricane activity in 3Q 2017 that increased the provision for credit losses in that period.
n
Recognition of $4.5 billion in proceeds received in 3Q 2017 from a settlement with the Royal Bank of Scotland plc (RBS) related to certain of our non-agency mortgage related securities. We did not have any significant settlements in 3Q 2018.
n
Reduction in the statutory corporate income tax rate resulted in lower income tax expense.
Our total equity was $5.6 billion at September 30, 2018. Because our net worth was positive, we are not requesting a draw from Treasury under the Purchase Agreement for 3Q 2018. Based on our Net Worth Amount at September 30, 2018 of $5.6 billion and the applicable Capital Reserve Amount of $3.0 billion, we will have a dividend requirement to Treasury in December 2018 of $2.6 billion.
Our cumulative senior preferred stock dividend payments totaled $114.0 billion as of September 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-5a05f7b920095210821.jpg
Commentary
n
Home prices continued to appreciate, increasing by 0.2% and 1.0% during 3Q 2018 and 3Q 2017, respectively, and by 5.7% and 7.0% 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 home price growth will continue in 2019, although at a slower pace than in 2018, due to a gradual increase in housing supply and a moderate increase in 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-9a782aa6bc905d879d7.jpg chart-b95904db50c3545bb6e.jpg
Commentary
n
The quarterly ending and quarterly average 30-year Primary Mortgage Market Survey ("PMMS") interest rates were higher at September 30, 2018 than September 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. In addition, the GAAP accounting treatment for our financial assets and liabilities (i.e., some are measured at amortized cost, while others are measured at fair value) creates variability in our GAAP earnings when interest rates change. We elect hedge accounting for certain assets and liabilities in an effort to reduce our GAAP earnings variability and better align our GAAP results with the economics of our business.
n
The quarterly ending and quarterly average short-term interest rates, as indicated by the 3-month LIBOR rate, were higher at September 30, 2018 than September 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-5c2e8d0ea74257b591b.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 3Q 2018 than 3Q 2017.
n
The national unemployment rate was lower in 3Q 2018 than 3Q 2017, and in September 2018, declined to the lowest rate since December 1969.
n
Changes in monthly net new jobs and the national unemployment rate can affect several housing market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies. For example, 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)
 
3Q 2018
3Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Net interest income
 

$3,257


$3,489

 

($232
)
(7
)%
 

$9,278


$10,663

 

($1,385
)
(13
)%
Benefit (provision) for credit losses
 
380

(716
)
 
1,096

153

 
377

(178
)
 
555

312

Net interest income after benefit (provision) for credit losses
 
3,637

2,773

 
864

31

 
9,655

10,485

 
(830
)
(8
)
Non-interest income (loss):
 
 
 
 




 
 
 
 




Gains (losses) on extinguishment of debt
 
146

27

 
119

441

 
403

295

 
108

37

Derivative gains (losses)
 
728

(678
)
 
1,406

207

 
2,974

(2,076
)
 
5,050

243

Net impairment of available-for-sale securities recognized in earnings
 
(2
)
(1
)
 
(1
)
(100
)
 
(3
)
(17
)
 
14

82

Other gains (losses) on investment securities recognized in earnings
 
(441
)
723

 
(1,164
)
(161
)
 
(1,021
)
840

 
(1,861
)
(222
)
Other income (loss)
 
394

5,403

 
(5,009
)
(93
)
 
1,526

6,512

 
(4,986
)
(77
)
Total non-interest income (loss)
 
825

5,474

 
(4,649
)
(85
)
 
3,879

5,554

 
(1,675
)
(30
)
Non-interest expense:
 
 
 
 




 
 
 
 




Administrative expense
 
(569
)
(524
)
 
(45
)
(9
)
 
(1,647
)
(1,548
)
 
(99
)
(6
)
REO operations expense
 
(38
)
(35
)
 
(3
)
(9
)
 
(87
)
(128
)
 
41

32

Temporary Payroll Tax Cut Continuation Act of 2011 expense
 
(375
)
(339
)
 
(36
)
(11
)
 
(1,100
)
(990
)
 
(110
)
(11
)
Other expense
 
(218
)
(159
)
 
(59
)
(37
)
 
(619
)
(361
)
 
(258
)
(71
)
Total non-interest expense
 
(1,200
)
(1,057
)
 
(143
)
(14
)
 
(3,453
)
(3,027
)
 
(426
)
(14
)
Income (loss) before income tax (expense) benefit
 
3,262

7,190

 
(3,928
)
(55
)
 
10,081

13,012

 
(2,931
)
(23
)
Income tax (expense) benefit
 
(556
)
(2,519
)
 
1,963

78

 
(1,946
)
(4,466
)
 
2,520

56

Net income (loss)
 
2,706

4,671

 
(1,965
)
(42
)
 
8,135

8,546

 
(411
)
(5
)
Total other comprehensive income (loss), net of taxes and reclassification adjustments
 
(147
)
(21
)
 
(126
)
(600
)
 
(991
)
324

 
(1,315
)
(406
)
Comprehensive income (loss)
 

$2,559


$4,650

 

($2,091
)
(45
)%
 

$7,144


$8,870

 

($1,726
)
(19
)%

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.
 
 
3Q 2018
 
3Q 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
 

$7,114


$15

0.84
 %
 

$10,064


$14

0.53
 %
Securities purchased under agreements to resell
 
45,412

235

2.07

 
57,107

166

1.16

Advances to lenders and other secured lending
 
1,626

11

2.48

 
804

5

2.51

Mortgage-related securities:
 
 
 
 
 
 
 
 
Mortgage-related securities
 
143,113

1,495

4.18

 
159,640

1,572

3.94

Extinguishment of PCs held by Freddie Mac
 
(89,976
)
(885
)
(3.93
)
 
(85,198
)
(811
)
(3.81
)
Total mortgage-related securities, net
 
53,137

610

4.60

 
74,442

761

4.09

Non-mortgage-related securities
 
24,799

145

2.33

 
15,127

60

1.62

Loans held by consolidated trusts(1)
 
1,804,347

15,759

3.49

 
1,731,577

14,617

3.38

Loans held by Freddie Mac(1)
 
97,456

1,028

4.22

 
117,298

1,250

4.26

Total interest-earning assets
 
2,033,891

17,803

3.50

 
2,006,419

16,873

3.37

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
 
1,832,707

(13,712
)
(2.99
)
 
1,755,578

(12,663
)
(2.89
)
Extinguishment of PCs held by Freddie Mac
 
(89,976
)
885

3.93

 
(85,198
)
811

3.81

Total debt securities of consolidated trusts held by third parties
 
1,742,731

(12,827
)
(2.94
)
 
1,670,380

(11,852
)
(2.84
)
Other debt:
 
 
 
 
 
 
 
 
Short-term debt
 
69,435

(361
)
(2.04
)
 
68,868

(173
)
(0.99
)
Long-term debt
 
212,256

(1,358
)
(2.54
)
 
259,075

(1,359
)
(2.08
)
Total other debt
 
281,691

(1,719
)
(2.42
)
 
327,943

(1,532
)
(1.85
)
Total interest-bearing liabilities
 
2,024,422

(14,546
)
(2.87
)
 
1,998,323

(13,384
)
(2.68
)
Impact of net non-interest-bearing funding
 
9,469


0.01

 
8,096


0.01

Total funding of interest-earning assets
 

$2,033,891


($14,546
)
(2.86
)%
 

$2,006,419


($13,384
)
(2.67
)%
Net interest income/yield
 
 

$3,257

0.64
 %
 
 

$3,489

0.70
 %
(1)
Loan fees, primarily consisting of amortization of upfront fees, included in interest income were $620 million and $634 million for loans held by consolidated trusts and $25 million and $37 million for loans held by Freddie Mac during 3Q 2018 and 3Q 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
 

$6,917


$39

0.74
 %
 

$11,417


$38

0.44
 %
Securities purchased under agreements to resell
 
46,743

637

1.82

 
55,903

386

0.92

Advances to lenders and other secured lending
 
1,340

26

2.58

 
651

12

2.42

Mortgage-related securities:
 
 
 
 
 
 
 
 
Mortgage-related securities
 
145,965

4,571

4.18

 
168,819

4,886

3.86

Extinguishment of PCs held by Freddie Mac
 
(89,861
)
(2,577
)
(3.82
)
 
(87,883
)
(2,456
)
(3.73
)
Total mortgage-related securities, net
 
56,104

1,994

4.74

 
80,936

2,430

4.00

Non-mortgage-related securities
 
18,017

302

2.23

 
18,049

207

1.54

Loans held by consolidated trusts(1)
 
1,789,433

45,908

3.42

 
1,720,906

43,810

3.39

Loans held by Freddie Mac(1)
 
100,382

3,174

4.22

 
119,843

3,870

4.31

Total interest-earning assets
 
2,018,936

52,080

3.44

 
2,007,705
50,753
3.37

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
 
1,816,897

(40,573
)
(2.98
)
 
1,744,260

(38,023
)
(2.91
)
Extinguishment of PCs held by Freddie Mac
 
(89,861
)
2,577

3.82

 
(87,883
)
2,456

3.73

Total debt securities of consolidated trusts held by third parties
 
1,727,036

(37,996
)
(2.93
)
 
1,656,377

(35,567
)
(2.86
)
Other debt:
 
 
 
 
 
 
 
 
Short-term debt
 
63,576

(832
)
(1.73
)
 
72,292

(414
)
(0.76
)
Long-term debt
 
220,820

(3,974
)
(2.39
)
 
270,251

(4,109
)
(2.02
)
Total other debt
 
284,396

(4,806
)
(2.24
)
 
342,543

(4,523
)
(1.75
)
Total interest-bearing liabilities
 
2,011,432

(42,802
)
(2.84
)
 
1,998,920

(40,090
)
(2.67
)
Impact of net non-interest-bearing funding
 
7,504


0.01

 
8,785


0.01

Total funding of interest-earning assets
 

$2,018,936


($42,802
)
(2.83
)%
 

$2,007,705


($40,090
)
(2.66
)%
Net interest income/yield
 
 

$9,278

0.61
 %
 
 

$10,663

0.71
 %
(1)
Loan fees, primarily consisting of amortization of upfront fees, included in interest income were $1.8 billion and $1.7 billion for loans held by consolidated trusts and $70 million and $132 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)
 
3Q 2018
3Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Contractual net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee fee income
 

$869


$808

 

$61

8
 %
 

$2,561


$2,495

 

$66

3
 %
Guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011
 
364

333

 
31

9

 
1,067

974

 
93

10

Other contractual net interest income
 
1,346

1,604

 
(258
)
(16
)
 
4,189

4,900

 
(711
)
(15
)
Total contractual net interest income
 
2,579

2,745

 
(166
)
(6
)
 
7,817

8,369

 
(552
)
(7
)
Net amortization - loans and debt securities of consolidated trusts
 
820

822

 
(2
)

 
2,269

2,442

 
(173
)
(7
)
Net amortization - other assets and debt
 
(108
)
(38
)
 
(70
)
(184
)
 
(187
)
(23
)
 
(164
)
(713
)
Hedge accounting impact
 
(34
)
(40
)
 
6

15

 
(621
)
(125
)
 
(496
)
(397
)
Net interest income
 

$3,257


$3,489

 

($232
)
(7
)%
 

$9,278


$10,663

 

($1,385
)
(13
)%
Key Drivers:
n
Guarantee fee income
l
3Q 2018 vs. 3Q 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
3Q 2018 vs. 3Q 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
YTD 2018 vs. YTD 2017 - decreased primarily due to lower 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
YTD 2018 vs. YTD 2017 - losses increased primarily due to less accretion on unsecuritized mortgage loans, as certain of those loans were reclassified from held-for-investment to held-for-sale and ceased amortizing, coupled with less accretion of previously recognized other-than-temporary impairments on non-agency mortgage-related securities. The decrease in accretion of other-than-temporary impairments on non-agency mortgage-related securities 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
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)
 
3Q 2018
3Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Fair value change in interest-rate swaps
 

$736


$23

 

$713

3,100
 %
 

$2,833


$116

 

$2,717

2,342
 %
Fair value change in option-based derivatives
 
(306
)
(198
)
 
(108
)
(55
)
 
(1,020
)
(519
)
 
(501
)
(97
)
Fair value change in other derivatives
 
271

(105
)
 
376

358

 
1,322

(379
)
 
1,701

449

Accrual of periodic cash settlements
 
27

(398
)
 
425

107

 
(161
)
(1,294
)
 
1,133

88

Derivative gains (losses)
 

$728


($678
)
 

$1,406

207
 %
 

$2,974


($2,076
)
 

$5,050

243
 %
Key Drivers:
n
3Q 2018 vs. 3Q 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 18 and 72 basis points during 3Q 2018 and YTD 2018, respectively, compared to a 1 basis point increase and a 4 basis point decline during 3Q 2017 and YTD 2017, respectively. The interest rate increases 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 and certain of our option-based derivatives.

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)
 
3Q 2018
3Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Other income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
Non-agency mortgage-related securities settlements and judgments
 

$—


$4,525

 

($4,525
)
N/A

 

$334


$4,525

 

($4,191
)
(93
)%
Gains (losses) on loans(1)
 
(173
)
203

 
(376
)
(185
)
 
(331
)
410

 
(741
)
(181
)
Gains (losses) on held-for-sale loan purchase commitments(1)
 
267

271

 
(4
)
(1
)
 
564

826

 
(262
)
(32
)
Gains (losses) on debt(1)
 
12

62

 
(50
)
(81
)
 
42

(129
)
 
171

133

All other
 
288

272

 
16

6

 
917

744

 
173

23

 Fair value hedge accounting
 
 
 
 
 

 
 
 
 
 
 
Change in fair value of derivatives in qualifying hedge relationships
 

85

 
(85
)
N/A

 

(215
)
 
215

N/A

Change in fair value of hedged items in qualifying hedge relationships
 

(15
)
 
15

N/A

 

351

 
(351
)
N/A

Total other income (loss)
 

$394


$5,403

 

($5,009
)
(93
)%
 

$1,526


$6,512

 

($4,986
)
(77
)%
(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 3Q 2018 vs. 3Q 2017 - Other income decreased primarily driven by:
l Recognition of $4.5 billion in proceeds received during 3Q 2017 from the RBS settlement related to certain of our non-agency mortgage related securities.
l Larger interest rate-related fair value losses on multifamily mortgage loans for which we have elected the fair value option due to an increase in long-term interest rates, coupled with lower gains on sales of single-family seasoned loans.
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.
n YTD 2018 vs. YTD 2017 - Other income decreased primarily driven by:
l Recognition of $4.5 billion in proceeds received during YTD 2017 from the RBS settlement related to certain of our non-agency mortgage related securities.
l Larger interest rate-related fair value losses on multifamily mortgage loans and commitments for which we have elected the fair value option due to an increase in long-term interest rates, partially offset by increased gains on a higher volume of sales of single-family seasoned loans during YTD 2018 compared to YTD 2017.
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.

Freddie Mac Form 10-Q
 
15

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

Other Comprehensive Income (Loss)
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)
 
3Q 2018
3Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Other comprehensive income (loss), excluding certain items
 

($211
)

$504

 

($715
)
(142
)%
 

($706
)

$1,090

 

($1,796
)
(165
)%
Excluded items:
 
 
 
 
 
 
 
 
 
 
 
 
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities
 
(8
)
(34
)
 
26

76

 
(116
)
(137
)
 
21

15

Realized (gains) losses reclassified from AOCI
 
72

(491
)
 
563

115

 
(169
)
(629
)
 
460

73

Total excluded items
 
64

(525
)

589

112


(285
)
(766
)

481

63

Total other comprehensive income (loss)
 

($147
)

($21
)
 

($126
)
(600
)%
 

($991
)

$324

 

($1,315
)
(406
)%
Key Drivers:
n Other comprehensive income (loss), excluding certain items
l
3Q 2018 vs. 3Q 2017 and YTD 2018 vs. YTD 2017 - shifted to losses in the 2018 periods from income in the 2017 periods 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 during the 2018 periods, while rates remained relatively flat during 3Q 2017 and decreased during YTD 2017, coupled with smaller fair value gains from less market spread tightening and lower balances on our non-agency mortgage-related securities.
Excluded items:
n Realized (gains) losses reclassified from AOCI
l
3Q 2018 vs. 3Q 2017 - reflected reclassified losses during 3Q 2018 compared to reclassified gains during 3Q 2017 due to sales of agency mortgage-related securities in an unrealized loss position and a lower sales volume of non-agency mortgage-related securities classified as available-for-sale as the non-agency mortgage-related securities balance continued to decline.
l
YTD 2018 vs. YTD 2017 - reflected smaller amounts of reclassified gains during YTD 2018 due to a lower sales volume of non-agency mortgage-related securities classified as available-for-sale as the non-agency mortgage-related securities balance continued to decline.

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
3Q 2018 vs. 3Q 2017 and YTD 2018 vs. YTD 2017 - shifted to benefit for credit losses in the 2018 periods from a provision for credit losses in the 2017 periods, driven by estimated losses from hurricane activity in 3Q 2017 that increased the provision for credit losses in the 2017 periods.
n Gains (losses) on extinguishment of debt
l
3Q 2018 vs. 3Q 2017 and YTD 2018 vs. YTD 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.
n Other gains (losses) on investment securities recognized in earnings
l
3Q 2018 vs. 3Q 2017 and YTD 2018 vs. YTD 2017 - shifted to losses in the 2018 periods from gains in the 2017 periods primarily driven by larger fair value losses on our mortgage and non-mortgage-related securities classified as trading as interest rates increased during the 2018 periods, partially offset by lower fair value gains driven by less spread tightening and lower volume on sales of our available-for-sale non-agency mortgage-related securities.
n Other expense
l
3Q 2018 vs. 3Q 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
l
3Q 2018 vs. 3Q 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)
 
9/30/2018
12/31/2017
 
$
%
Assets:
 
 
 
 
 
 
Cash and cash equivalents(1)
 

$7,038


$9,811

 

($2,773
)
(28
)%
Securities purchased under agreements to resell
 
48,540

55,903

 
(7,363
)
(13
)
Subtotal
 
55,578

65,714

 
(10,136
)
(15
)
Investments in securities, at fair value
 
75,930

84,318

 
(8,388
)
(10
)
Mortgage loans, net
 
1,902,428

1,871,217

 
31,211

2

Accrued interest receivable
 
6,600

6,355

 
245

4

Derivative assets, net
 
469

375

 
94

25

Deferred tax assets, net
 
7,876

8,107

 
(231
)
(3
)
Other assets
 
14,576

13,690

 
886

6

Total assets
 

$2,063,457


$2,049,776

 

$13,681

1
 %
 
 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Accrued interest payable
 

$6,418


$6,221

 

$197

3
 %
Debt, net
 
2,041,990

2,034,630

 
7,360


Derivative liabilities, net
 
295

269

 
26

10

Other liabilities
 
9,195

8,968

 
227

3

Total liabilities
 
2,057,898

2,050,088

 
7,810


Total equity
 
5,559

(312
)
 
5,871

1,882

Total liabilities and equity
 

$2,063,457


$2,049,776

 

$13,681

1
 %
(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 September 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 Total equity increased primarily as a result of higher comprehensive income in 3Q 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-60db38e212235f5cb5a.jpg chart-503f87cbea9d58118c7.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-14a804ad76045198ba3.jpgSource: Inside Mortgage Finance dated August 17, 2018 (latest available IMF purchase/refinance information).

 
Single-Family Serious Delinquency Rates
chart-bfa7c56c073f5a77bcb.jpg

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

Commentary
n U.S. single-family loan origination volume decreased to $435 billion in 3Q 2018 from $495 billion in 3Q 2017, driven by lower refinance volume as a result of higher mortgage interest rates in 3Q 2018. Mortgage origination data is from Inside Mortgage Finance as of October 26, 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 2Q 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-d8299ac5801e5ae98aa.jpgchart-b623efff9ff05713add.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-8c08126882295948b1c.jpgchart-89755bc151a35d1d880.jpg
Commentary
n Our loan purchase and guarantee activity decreased during the 2018 periods compared to the 2017 periods 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 single-family credit guarantee portfolio, but we are monitoring the overall credit quality and performance of these loans. Although the volume of our purchases 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-95297faa117e5af8b74.jpg
Commentary
n
The single-family credit guarantee portfolio increased at an annualized rate of approximately 3% from December 31, 2017 to September 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 81% of the single-family credit guarantee portfolio at September 30, 2018, compared to 78% at December 31, 2017.
n
The legacy and relief refinance single-family loan portfolio declined to 19% of the single-family credit guarantee portfolio at September 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-0de2aadb619f55f0a5b.jpgchart-05a561e4d70e548680f.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-53d293d3de965e39883.jpg chart-b9dcc269427f564b95f.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
The average portfolio Segment Earnings guarantee fee rate declined during 3Q 2018 compared to 3Q 2017 due to a decrease in recognition of upfront fees driven by a lower prepayment rate. The guarantee fee rate remained relatively unchanged during YTD 2018 compared to YTD 2017.
n
The average guarantee fee rate charged on new acquisitions decreased during the 2018 periods compared to the 2017 periods due to a decline in loans that were assessed with additional risk-based fees, as the mix of loans we acquired changed.


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 3Q 2018 and the cumulative issuance amounts for all CRT transactions as of September 30, 2018 by loss position and the party holding each loss position, excluding senior subordinate securitization structures and seller indemnification agreements.
New CRT Transactions during 3Q 2018(1)  
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$30.8
 
Reference Pool

$32.0
 
 
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac(5)
               
($0.2)
 
ACIS(3)(5)

             
$0.5
 
Other CRT


$0.6
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
   Loss(4)
 
Freddie Mac(5)

($0.1)
 
ACIS(5)


$0.2
 
Other CRT
 

$0.2
 
 
Cumulative CRT Transactions as of September 30, 2018(1)(2) 
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$1,027.1
 
Reference Pool

$1,074.2
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac


$2.4
 
ACIS(3)



$9.3
 
STACR Debt Notes

$23.6
 
Other CRT


$1.8
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
   Loss(4)
 
Freddie Mac

$5.6
 
ACIS


$1.3
 
STACR
Debt Notes$2.2
 
Other
CRT

$0.9
 

(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 3Q 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.
(5) During 3Q 2018, amounts were transferred from the Freddie Mac category to the ACIS category as we completed new ACIS transactions related to reference pools in transactions executed in prior periods.



Freddie Mac Form 10-Q
 
27

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

Commentary
n
During YTD 2018, we transferred a portion of credit risk associated with $237.9 billion in UPB of loans in our single-family credit guarantee portfolio through STACR debt note, ACIS, senior subordinate securitization structure, seller indemnification and other CRT transactions.
n
As of September 30, 2018, we had cumulatively transferred a portion of credit risk on nearly $1.1 trillion of our single-family mortgages, based upon the UPB at issuance of the CRT transactions.
l
FHFA's Conservatorship Capital Framework (CCF) capital needed for credit risk was reduced by approximately 60% through CRT transactions on originations in the twelve months ended September 30, 2017.
l
The reduction in the amount of CCF capital needed 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, see Risk Management - Conservatorship Capital Framework and Risk Management - Conservatorship Capital Framework - Return on Modeled Conservatorship Capital.
n
In September 2018, we introduced an enhanced CRT structure designed to reduce CCF capital needed for credit risk by approximately 80% on related new originations. This enhanced structure sells more of the first loss position and extends the maturity from 12.5 to 30 years.
n
During YTD 2018, we paid $562 million in interest expense, net of reinvestment income, on our outstanding STACR transactions and $227 million in ACIS premiums, compared to $455 million in interest expense, net of reinvestment income, on our outstanding STACR transactions and $170 million in ACIS premiums during YTD 2017.
n
As of September 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 are continually evaluating our credit risk transfer strategy and make changes depending on market conditions and our business strategy. The aggregate cost of our credit risk transfer activity, as well as the amount of risk transferred, will continue to increase as we continue to do new transactions.


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 September 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.
 
 
September 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
 

$366,731


$93,931

 

$334,189


$85,429

STACR debt note
 
621,350

18,078

 
604,356

17,788

ACIS transactions(3)
 
753,298

8,375

 
625,082

6,933

Senior subordinate securitization structures
 
32,418

3,260

 
12,283

1,913

Other(3)(4)
 
120,315

9,208

 
8,623

6,282

Less: UPB with more than one type of credit enhancement
 
(921,750
)

 
(775,751
)

Single-family credit guarantee portfolio with credit enhancement
 
972,362

132,852

 
808,782

118,345

Single-family credit guarantee portfolio without credit enhancement
 
902,604


 
1,020,098


Total
 

$1,874,966


$132,852

 

$1,828,880


$118,345

(1)
Except for the majority of our STACR and ACIS transactions, our credit enhancements generally provide protection for the first, or initial, credit losses associated with the related loans. For STACR 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 transactions, this represents the outstanding balance 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 $132.9 billion and $118.3 billion on our single-family credit guarantee portfolio as of September 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.
 
 
September 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
%
2.10
%
 
%
NM

 
%
NM

 
0.3
%
2.21
%
3.8
%
620 to 659
 
2.0

1.12

 
0.3

1.15
%
 

NM

 
2.3

1.13

1.9

≥ 660
 
68.2

0.17

 
9.9

0.23

 

NM

 
78.1

0.18

0.3

Not available
 
0.1

1.52

 

NM

 

NM

 
0.1

2.90

3.6

Total
 
70.6
%
0.21
%
 
10.2
%
0.28
%
 
%
NM

 
80.8
%
0.22
%
0.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legacy and relief refinance single-family loan portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
1.2
%
4.21
%
 
0.2
%
8.48
%
 
0.1
%
14.04
%
 
1.5
%
5.04
%
23.6
%
620 to 659
 
1.8

3.18

 
0.3

6.83

 
0.2

11.52

 
2.3

3.81

20.5

≥ 660
 
13.4

1.16

 
1.5

3.56

 
0.4

6.00

 
15.3

1.40

7.4

Not available
 
0.1

4.72

 

NM

 

NM

 
0.1

5.05

19.4

Total
 
16.5
%
1.66
%
 
2.0
%
4.69
%
 
0.7
%
8.15
%
 
19.2
%
2.01
%
10.3
%
(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 September 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 September 30, 2018, we have purchased approximately $36.3 billion of relief refinance loans that were previously categorized as Alt-A loans in our portfolio, including $0.1 billion in 3Q 2018.
The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
 
 
September 30, 2018
 
December 31, 2017
(Dollars in billions)
 
UPB
CLTV
% Modified
SDQ Rate
 
UPB
CLTV
% Modified
SDQ Rate
Alt-A
 

$24.5

64
%
24.0
%
4.40
%
 

$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-6aae2f9c365b5f27b4c.jpg
 
Delinquency Rates for Loans One Month and Two Months Past Due
chart-e9b47280c53c5574baa.jpg

Commentary
n
Total serious delinquency rate on our single-family credit guarantee portfolio was lower as of September 30, 2018 compared to September 30, 2017 due to our continued loss mitigation efforts, sales of certain seriously delinquent loans, home price appreciation, a low unemployment rate, and the reduced impacts from 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)
 
3Q 2018
3Q 2017
 
YTD 2018
YTD 2017
Charge-offs, gross
 

$1,277


$1,140

 

$2,248


$4,033

Recoveries
 
(119
)
(145
)
 
(341
)
(327
)
Charge-offs, net
 
1,158

995

 
1,907

3,706

REO operations expense
 
38

35

 
87

128

Total credit losses
 

$1,196


$1,030

 

$1,994


$3,834

 
 
 
 
 
 
 
Total credit losses (in bps)
 
25.4

22.7

 
14.2

28.4

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.
                                            
 
September 30, 2018
 
September 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
 
45,348

7,066

 
29,867

4,130

Repayments and reclassifications to held-for-sale
 
(92,662
)
(14,875
)
 
(113,933
)
(21,828
)
Foreclosure sales and foreclosure alternatives
 
(5,907
)
(796
)
 
(8,169
)
(1,122
)
TDRs, at September 30
 
311,483

45,810

 
393,474

60,049

Loans impaired upon purchase
 
2,814

188

 
5,782

380

Total impaired loans with an allowance recorded
 
314,297

45,998

 
399,256

60,429

Allowance for loan losses
 
 
(5,137
)
 
 
(7,706
)
Net investment, at September 30
 
 

$40,861

 
 

$52,723

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

$45,073


$51,644

Non-accrual loans
 
11,855

17,748

Total TDRs and non-accrual loans
 

$56,928


$69,392

 
 
 
 
Allowance for loan losses associated with:
 
 
 
  TDRs on accrual status
 

$4,291


$5,257

  Non-accrual loans
 
1,101

1,883

Total
 

$5,392


$7,140

 
 
 
 
(In millions)
 
YTD 2018
YTD 2017
Foregone interest income on TDRs and non-accrual loans(1)
 

$965


$1,325

(1)
Represents the amount of interest income that we did not recognize but would have recognized during the period for loans outstanding at the end of each period had the loans performed according to their original contractual terms.

Freddie Mac Form 10-Q
 
33

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

Commentary
n
As of September 30, 2018, 48% of the allowance for loan losses for single-family mortgage loans related to interest rate concessions provided to borrowers as part of loan modifications.
n
Most of our modified single-family loans, including TDRs, were current and performing at September 30, 2018.
n
We expect our allowance for loan losses associated with existing single-family TDRs to decline over time as we continue to sell reperforming loans. In addition, the allowance for loan losses will decline as borrowers continue to make monthly payments under the modified terms and interest rate concessions are amortized into earnings.
n
See Note 4 for information on our single-family allowance for loan losses.




Freddie Mac Form 10-Q
 
34

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

Loss Mitigation Activities
Loan Workout Activity(1)  
(UPB in billions, number of loan workouts in thousands)
chart-b9e1f06fc5fc504b9ec.jpgchart-fc1873ddd75658d29c3.jpg
(1)
Foreclosure alternatives consist of short sales and deeds in lieu of foreclosure. Home retention actions consist of forbearance agreements, repayment plans and loan modifications.
Commentary
n
Our loan workout activity increased in the 2018 periods, driven by the impact from the hurricanes in 3Q 2017.
n
We continue our loss mitigation efforts through our relief refinance, modification and other initiatives.


Freddie Mac Form 10-Q
 
35

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

REO Activity
The table below presents a summary of our single-family REO activity.
 
 
3Q 2018
 
3Q 2017
 
YTD 2018
 
YTD 2017
(Dollars in millions)
 
Number of Properties
Amount
 
Number of Properties
Amount
 
Number of Properties
Amount
 
Number of Properties
Amount
Beginning balance — REO
 
7,135


$777

 
9,915


$1,046

 
8,299


$900

 
11,418


$1,215

Additions
 
2,506

247

 
2,853

282

 
7,870

759

 
9,697

949

Dispositions
 
(2,622
)
(256
)
 
(3,622