10-Q 1 d554145d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2013

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                                        to

Commission File Number: 001-34139

 

 

Federal Home Loan Mortgage Corporation

(Exact name of registrant as specified in its charter)

Freddie Mac

 

Federally chartered corporation   8200 Jones Branch Drive   52-0904874   (703) 903-2000
(State or other jurisdiction of   McLean, Virginia 22102-3110   (I.R.S. Employer   (Registrant’s telephone number,
incorporation or organization)   (Address of principal executive   Identification No.)   including area code)
  offices, including zip 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.    x Yes    ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x Yes    ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer  ¨     Accelerated filer  x
  Non-accelerated filer (Do not check if a smaller reporting company)  ¨   Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of July 24, 2013, there were 650,039,533 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page   

PART I — FINANCIAL INFORMATION

  

Item 1.         Financial Statements

     104   

Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations

     1   

Executive Summary

     1   

Selected Financial Data

     13   

Consolidated Results of Operations

     14   

Consolidated Balance Sheets Analysis

     34   

Risk Management

     51   

Liquidity and Capital Resources

     88   

Fair Value Balance Sheets and Analysis

     92   

Off-Balance Sheet Arrangements

     95   

Critical Accounting Policies and Estimates

     95   

Forward-Looking Statements

     96   

Risk Management and Disclosure Commitments

     98   

Legislative and Regulatory Matters

     98   

Item 3.          Quantitative and Qualitative Disclosures About Market Risk

     100   

Item 4.         Controls and Procedures

     102   

PART II — OTHER INFORMATION

  

Item 1.         Legal Proceedings

     185   

Item 1A.      Risk Factors

     185   

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds

     185   

Item 6.         Exhibits

     186   

SIGNATURES

     187   

GLOSSARY

     188   

EXHIBIT INDEX

     E-1   

 

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MD&A TABLE REFERENCE

 

Table

    

Description

   Page  
        Selected Financial Data      13  
  1       Total Single-Family Loan Workout Volumes      3  
  2       Single-Family Credit Guarantee Portfolio Summary      5  
  3       Credit Statistics, Single-Family Credit Guarantee Portfolio      7  
  4       Mortgage-Related Investments Portfolio      12  
  5       Summary Consolidated Statements of Comprehensive Income      14  
  6       Net Interest Income/Yield and Average Balance Analysis      15  
  7       Derivative Gains (Losses)      18  
  8       Other Income (Loss)      19  
  9       Non-Interest Expense      20  
  10       REO Operations (Income) Expense, REO Inventory, and REO Dispositions      21  
  11       Composition of Segment Mortgage Portfolios and Credit Risk Portfolios      23  
  12       Segment Earnings and Key Metrics — Investments      24  
  13       Segment Earnings and Key Metrics — Single-Family Guarantee      27  
  14       Segment Earnings Composition — Single-Family Guarantee Segment      28  
  15       Segment Earnings and Key Metrics — Multifamily      32  
  16       Investments in Securities      35  
  17       Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets      36  
  18       Additional Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets      37  
  19       Mortgage-Related Securities Purchase Activity      38  
  20       Non-Agency Mortgage-Related Securities Backed by Subprime First Lien, Option ARM, and Alt-A Loans and Certain Related Credit Statistics      39  
  21       Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans      40  
  22       Net Impairment of Available-For-Sale Mortgage-Related Securities Recognized in Earnings      41  
  23       Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS      43  
  24       Mortgage Loan Purchases and Other Guarantee Commitment Issuances      45  
  25       Derivative Fair Values and Maturities      46  
  26       Changes in Derivative Fair Values      47  
  27       Freddie Mac Mortgage-Related Securities      49  
  28       Issuances and Extinguishments of Debt Securities of Consolidated Trusts      50  
  29       Changes in Total Equity (Deficit)      51  
  30       Single-Family Credit Guarantee Portfolio Data by Year of Origination      52  
  31       Characteristics of Purchases for the Single-Family Credit Guarantee Portfolio      54  
  32       Characteristics of the Single-Family Credit Guarantee Portfolio      55  
  33       Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio      59  
  34       Step-Rate Modified Loans      61  
  35       Single-Family Relief Refinance Loans      63  
  36       Single-Family Loan Workouts, Serious Delinquency, and Foreclosures Volumes      64  
  37       Quarterly Percentages of Modified Single-Family Loans — Current and Performing      65  
  38       Single-Family Serious Delinquency Statistics      66  
  39       Credit Concentrations in the Single-Family Credit Guarantee Portfolio      68  
  40       Single-Family Credit Guarantee Portfolio by Attribute Combinations      69  
  41       Single-Family Credit Guarantee Portfolio Foreclosure and Short Sale Rates      71  
  42       Multifamily Mortgage Portfolio — by Attribute      72  
  43       Non-Performing Assets      74  
  44       REO Activity by Region      75  
  45       Single-Family REO Property Status      76  
  46       Credit Loss Performance      77  
  47       Single-Family Impaired Loans with Specific Reserve Recorded      79  
  48       Single-Family Credit Loss Sensitivity      79  
  49       Repurchase Request Activity and Counterparty Balances      80  
  50       Mortgage Insurance by Counterparty      83  
  51       Bond Insurance by Counterparty      84  
  52       Derivative Counterparty Credit Exposure      86  
  53       Other Debt Security Issuances by Product, at Par Value      89  
  54       Other Debt Security Repurchases and Calls      89  
  55       Freddie Mac Credit Ratings      90  
  56       Consolidated Fair Value Balance Sheets      94  
  57       Summary of Change in the Fair Value of Net Assets      94  
  58       PMVS and Duration Gap Results      102  
  59       Derivative Impact on PMVS-L (50 bps)      102  

 

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FINANCIAL STATEMENTS

 

     Page  

Consolidated Statements of Comprehensive Income

     105   

Consolidated Balance Sheets

     106   

Consolidated Statements of Equity (Deficit)

     107   

Consolidated Statements of Cash Flows

     108   

Note 1: Summary of Significant Accounting Policies

     109   

Note 2: Conservatorship and Related Matters

     110   

Note 3: Variable Interest Entities

     112   

Note 4: Mortgage Loans and Loan Loss Reserves

     115   

Note 5: Individually Impaired and Non-Performing Loans

     120   

Note 6: Real Estate Owned

     126   

Note 7: Investments in Securities

     127   

Note 8: Debt Securities and Subordinated Borrowings

     132   

Note 9: Derivatives

     134   

Note 10: Collateral and Offsetting of Assets and Liabilities

     137   

Note 11: Stockholders’ Equity (Deficit)

     140   

Note 12: Income Taxes

     142   

Note 13: Segment Reporting

     143   

Note 14: Financial Guarantees

     149   

Note 15: Concentration of Credit and Other Risks

     150   

Note 16: Fair Value Disclosures

     155   

Note 17: Legal Contingencies

     178   

Note 18: Regulatory Capital

     182   

Note 19: Selected Financial Statement Line Items

     183   

 

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PART I — FINANCIAL INFORMATION

We continue to operate under the conservatorship that commenced on September 6, 2008, under the direction of FHFA as our Conservator. The Conservator succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any shareholder, officer or director thereof, with respect to the company and its assets. The Conservator has delegated certain authority to our Board of Directors to oversee, and management to conduct, day-to-day operations. The directors serve on behalf of, and exercise authority as directed by, the Conservator. See “BUSINESS Conservatorship and Related Matters” in our Annual Report on Form 10-K for the year ended December 31, 2012, or 2012 Annual Report, for information on the terms of the conservatorship, the powers of the Conservator, and related matters, including the terms of our Purchase Agreement with Treasury.

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 and 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: (a) the “FORWARD-LOOKING STATEMENTS” sections of this Form 10-Q, our 2012 Annual Report, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013; and (b) the “RISK FACTORS” and “BUSINESS” sections of our 2012 Annual Report.

Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the “GLOSSARY.”

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read this MD&A in conjunction with our consolidated financial statements and related notes for the three and six months ended June 30, 2013 included in “FINANCIAL STATEMENTS” and our 2012 Annual Report.

EXECUTIVE SUMMARY

Overview

Freddie Mac is a GSE chartered by Congress in 1970 with a public mission to provide liquidity, stability, and affordability to the U.S. housing market. We have maintained a consistent market presence since our inception, providing mortgage liquidity in a wide range of economic environments. We are working to support the recovery of the housing market and the nation’s economy by providing essential liquidity to the mortgage market and helping to stem the rate of foreclosures. We believe our actions are helping communities across the country by providing America’s families with access to mortgage funding at low rates while helping distressed borrowers keep their homes and avoid foreclosure, where feasible.

Summary of Financial Results

During the second quarter of 2013, we continued to observe improvement in the housing market, which contributed positively to our financial results. Our comprehensive income for the second quarter of 2013 was $4.4 billion, consisting of $5.0 billion of net income and $(631) million of other comprehensive loss. By comparison, our comprehensive income for the second quarter of 2012 was $2.9 billion, consisting of $3.0 billion of net income and $(128) million of other comprehensive loss.

Our total equity was $7.4 billion at June 30, 2013, reflecting our total equity balance of $10.0 billion at March 31, 2013, comprehensive income of $4.4 billion for the second quarter of 2013, and a $7.0 billion dividend payment on the senior preferred stock in June 2013 based on our Net Worth Amount at March 31, 2013. As a result of our positive net worth at June 30, 2013, no draw is being requested from Treasury under the Purchase Agreement for the second quarter of 2013. Based on our Net Worth Amount at June 30, 2013, our dividend obligation to Treasury in September 2013 will be $4.4 billion.

Our Primary Business Objectives

We are focused on the following primary business objectives: (a) providing credit availability for mortgages and maintaining foreclosure prevention activities; (b) minimizing our credit losses; (c) developing mortgage market

 

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enhancements in support of a new infrastructure for the secondary mortgage market; (d) maintaining sound credit quality on the loans we purchase or guarantee; (e) contracting the dominant presence of the GSEs in the marketplace; and (f) strengthening our infrastructure and improving overall efficiency.

Our business objectives reflect direction we have received from the Conservator, including the 2013 Conservatorship Scorecard. The 2013 Conservatorship Scorecard details specific priorities for Freddie Mac and Fannie Mae in 2013 that build upon the three strategic goals announced in FHFA’s Strategic Plan for Freddie Mac and Fannie Mae: (a) build a new infrastructure for the secondary mortgage market; (b) gradually contract Freddie Mac and Fannie Mae’s dominant presence in the marketplace while simplifying and shrinking their operations; and (c) maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. We continue to align our resources and internal business plans to meet the goals and objectives provided to us by FHFA. For information on the 2013 Conservatorship Scorecard and the Strategic Plan, see our current report on Form 8-K dated March 8, 2013 and “BUSINESS — Regulation and Supervision — Legislative and Regulatory Developments — FHFA’s Strategic Plan for Freddie Mac and Fannie Mae Conservatorships” in our 2012 Annual Report.

Providing Credit Availability for Mortgages and Maintaining Foreclosure Prevention Activities

Our consistent market presence provides lenders with a constant source of liquidity for conforming mortgage products even when other sources of capital have withdrawn. We believe this liquidity provides our customers with confidence to continue lending in difficult environments. We estimate that we, Fannie Mae, and Ginnie Mae collectively guaranteed more than 90% of the single-family conforming mortgages originated during the first half of 2013. We also enable mortgage originators to offer homebuyers and homeowners lower mortgage rates on conforming loan products, in part because of the value investors place on GSE-guaranteed mortgage-related securities. We estimate that borrowers were paying an average of 18 basis points less on 30-year, fixed-rate conforming loans than on non-conforming loans in June 2013. These estimates are based on data provided by HSH Associates, a third-party provider of mortgage market data.

During the three and six months ended June 30, 2013, we purchased or issued other guarantee commitments for $129.9 billion and $261.7 billion in UPB of single-family conforming mortgage loans, representing approximately 646,000 and 1,281,000 homes, respectively.

We are focused on reducing the number of foreclosures and helping to keep families in their homes. Since 2009, we have helped approximately 872,000 borrowers experiencing hardship complete a loan workout. Our relief refinance initiative, including HARP (which is the portion of our relief refinance initiative for loans with LTV ratios above 80%), is a significant part of our effort to keep families in their homes. We purchased $41.8 billion and $40.5 billion in UPB of HARP loans in the first half of 2013 and 2012, respectively. We have purchased HARP loans provided to more than 1.1 million borrowers since the initiative began in 2009, including approximately 223,000 borrowers during the first half of 2013.

Under our loan workout programs, our servicers contact borrowers experiencing hardship with a goal of helping them stay in their homes or avoid foreclosure. Our servicers seek and also facilitate the completion of foreclosure alternatives when a home retention solution is not possible. In March 2013, as part of the servicing alignment initiative, we announced a new streamlined modification initiative, which provides an additional modification opportunity to certain borrowers who are at least 90 (but not more than 720) days delinquent. This initiative was implemented in July 2013 (with earlier adoption permitted). See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk” for more information about loss mitigation activities and our efforts to provide credit availability, including through our loan modification initiatives, and our relief refinance mortgage initiative, which includes HARP.

Short sale activity as a percentage of the combined total of short sales and foreclosure transfers increased from 31% in the first half of 2012 to 42% in the first half of 2013. Our short sale activity has remained high compared to historical levels while the volume of foreclosures has declined in recent quarters. Due to changes in our short sale process that we made in the second half of 2012, we believe our short sale activity will continue to remain high for the remainder of 2013.

The table below presents our single-family loan workout activities for the last five quarters.

 

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Table 1 — Total Single-Family Loan Workout Volumes(1)

 

     For the Three Months Ended  
     06/30/2013      03/31/2013      12/31/2012      09/30/2012      06/30/2012  
     (number of loans)  

Loan modifications(2)

     19,277        20,613        19,898        20,864        15,142  

Repayment plans

     7,268        7,644        6,964        7,099        8,712  

Forbearance agreements(3)

     3,198        3,104        2,442        2,190        4,738  

Short sales and deed in lieu of foreclosure transactions

     11,727        14,157        13,849        14,383        12,531  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total single-family loan workouts

     41,470        45,518        43,153        44,536        41,123  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1) Based on actions completed with borrowers for loans within our single-family credit guarantee portfolio. Excludes those modification, repayment, and forbearance activities for which the borrower has started the required process, but the actions have not been made permanent or effective, such as loans in modification trial periods. Also excludes certain loan workouts where our single-family seller/servicers have executed agreements in the current or prior periods, but these have not been incorporated into certain of our operational systems due to delays in processing. These categories are not mutually exclusive and a loan in one category may also be included within another category in the same period.
(2) As of June 30, 2013, approximately 22,000 borrowers were in modification trial periods, including approximately 15,000 borrowers in trial periods for our non-HAMP standard modification.
(3) Excludes loans with long-term forbearance under a completed loan modification. Many borrowers enter into a short-term forbearance agreement before another loan workout is pursued or completed. We only report forbearance activity for a single loan once during each quarterly period; however, a single loan may be included under separate forbearance agreements in separate periods.

Minimizing Our Credit Losses

To help minimize the credit losses related to our guarantee activities, we are focused on:

 

   

pursuing a variety of loan workouts, including foreclosure alternatives, in an effort to reduce the severity of losses we experience over time;

 

   

managing foreclosure timelines to the extent possible, given the lengthy foreclosure process in many states;

 

   

managing our inventory of foreclosed properties to reduce costs and maximize proceeds; and

 

   

pursuing contractual remedies against originators, lenders, servicers, and insurers, as appropriate.

We establish guidelines for our servicers to follow and provide them default management tools to use, in part, in determining which type of loan workout to pursue with borrowers that would be expected to provide us with the opportunity to minimize our exposure to credit losses. Our servicers pursue repayment plans and loan modifications for borrowers facing financial or other hardships because the level of recovery (if a loan reperforms) may often be much higher than would be the case with foreclosure or foreclosure alternatives. In cases where repayment plans and loan modifications are not possible or successful, a short sale transaction typically provides us with a comparable or higher level of recovery than what we would receive through foreclosure and subsequent property sale from our REO inventory. In large part, the benefit of a short sale arises from the avoidance of costs we would otherwise incur to complete the foreclosure and dispose of the property, including maintenance and other property expenses associated with holding REO property.

We continue to face challenges with respect to the performance of certain of our seller/servicers in managing our seriously delinquent loans. As part of our efforts to address this issue and mitigate our credit losses, we have been facilitating the transfer of servicing from certain underperforming servicers to other servicers that specialize in workouts of problem loans.

We have contractual arrangements with our seller/servicers under which they agree to sell us mortgage loans, and represent and warrant that those loans meet specified eligibility and underwriting standards. In addition, our servicers represent and warrant to us that those loans will be serviced in accordance with our servicing contract. If we subsequently discover that the representations and warranties were breached (i.e., contractual standards were not followed), we can exercise certain contractual remedies, including requesting repurchase, to mitigate our actual or potential credit losses. As of June 30, 2013 and December 31, 2012, the UPB of loans subject to repurchase requests issued to our single-family seller/servicers was approximately $3.2 billion and $3.0 billion, respectively (these figures include repurchase requests for which appeals were pending). During the first half of 2013, we began an initiative designed to assist our seller/servicers improve their underwriting process for loans that they sell to us by increasing conformity to certain of our underwriting standards. This new initiative will provide a new automated tool for use by seller/servicers in evaluating the underwriting of loans with real-time feedback on identification of non-compliance issues.

Historically, we have used a process of reviewing a sample of the loans we purchase to validate compliance with our underwriting standards. In addition, as part of our loss mitigation efforts, we review loans that become delinquent. FHFA set

 

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a goal for us (in the 2013 Conservatorship Scorecard) to complete our demands for remedies for breaches of representations and warranties related to pre-conservatorship loan activity. As a result, our repurchase request volumes with our seller/servicers may increase in future periods.

Our credit loss exposure is also partially mitigated by mortgage insurance, which is a form of credit enhancement. Primary mortgage insurance is generally required to be purchased, typically at the borrower’s expense, for certain mortgages with higher LTV ratios. Although we received payments under primary and other mortgage insurance of $0.9 billion and $1.0 billion in the first half of 2013 and 2012, respectively, which helped to mitigate our credit losses, many of our mortgage insurers remain financially weak. As a result, we expect to receive substantially less than full payment of our claims from three of our mortgage insurance counterparties that are currently partially paying claims under orders of their state regulators. See “RISK MANAGEMENT — Credit Risk — Institutional Credit RiskMortgage Insurers” for information on these counterparties. See “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES — Table 4.5 — Recourse and Other Forms of Credit Protection” for more information about credit enhancements of our single-family credit guarantee portfolio.

Developing Mortgage Market Enhancements in Support of a New Infrastructure for the Secondary Mortgage Market

We continue efforts that we believe will create value for the industry by building the infrastructure for a future housing finance system. In this regard, the 2013 Conservatorship Scorecard established the following goals for 2013:

 

   

Common Securitization Platform: Continue the foundational development of the common securitization platform that can be used in a future secondary mortgage market, including by establishing initial ownership and governance for a new business entity that will undertake the effort of building and operating this platform.

 

   

Contractual and Disclosure Framework: Continue the development of the contractual and disclosure framework to meet the requirements for investors in mortgage securities and credit risk, including by identifying and developing standards in mortgage-related data, disclosure of mortgage security information, and seller/servicer contracts.

 

   

Uniform Mortgage Data Program: Continue the development of various data standards for the mortgage industry, including completing the identification and development of data standards for Uniform Mortgage Servicing Data.

Maintaining Sound Credit Quality on the Loans We Purchase or Guarantee

We continue to focus on maintaining credit policies, including our underwriting standards, that allow us to purchase and guarantee loans made to qualified borrowers that we believe will provide management and guarantee fee income (excluding the amounts associated with the Temporary Payroll Tax Cut Continuation Act of 2011), over the long-term, that exceeds our expected credit-related and administrative expenses on such loans.

The credit quality of the single-family loans we acquired beginning in 2009 (excluding HARP and other relief refinance mortgages) is significantly better than that of loans we acquired from 2005 to 2008, as measured by original LTV ratios, FICO scores, and the proportion of loans underwritten with fully documented income. The improvement in credit quality of loans we have purchased since 2008 (excluding HARP and other relief refinance mortgages) is primarily the result of: (a) changes in our credit policies, including changes in our underwriting standards; (b) fewer purchases of loans with higher risk characteristics; and (c) changes in mortgage insurers’ and lenders’ underwriting practices.

Underwriting procedures for relief refinance mortgages are limited in many cases, and such procedures generally do not include all of the changes in underwriting standards we have implemented since 2008. As a result, relief refinance mortgages generally reflect many of the credit risk attributes of the original loans. However, our relief refinance mortgage initiative may help reduce our exposure to credit risk in cases where the borrowers’ payments under their mortgages are reduced, thereby strengthening the borrowers’ potential to make their mortgage payments.

Mortgages originated after 2008, including HARP and other relief refinance mortgages, represented 70% and 63% of the UPB of our single-family credit guarantee portfolio as of June 30, 2013 and December 31, 2012, respectively, while the single-family loans originated from 2005 through 2008 represented 19% and 24% of this portfolio at these dates, respectively. Relief refinance mortgages of all LTV ratios comprised approximately 20% and 18% of the UPB in our total single-family credit guarantee portfolio at June 30, 2013 and December 31, 2012, respectively. HARP loans represented 12% and 11% of the UPB of our single-family credit guarantee portfolio as of June 30, 2013 and December 31, 2012, respectively.

Approximately 97% and 95% of the single-family mortgages we purchased in the first half of 2013 and 2012, respectively, were fixed-rate, first lien amortizing mortgages, based on UPB. Approximately 81% and 84% of the single-family mortgages we purchased in the first half of 2013 and 2012, respectively, were refinance mortgages based on UPB.

 

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HARP loans comprised approximately 16% and 21% of our single-family purchase volume in the first half of 2013 and 2012, respectively, based on UPB.

Due to our participation in HARP, we purchase a significant number of loans that have original LTV ratios over 100%. The proportion of HARP loans we purchased with LTV ratios over 100% was 9% and 11% of our single-family mortgage purchases in the first half of 2013 and 2012, respectively. Over time, HARP loans may not perform as well as other refinance mortgages because the continued high LTV ratios and reduced underwriting standards of these loans increase the probability of default. In addition, HARP loans may not be covered by mortgage insurance for the full excess of their UPB over 80%. However, relief refinance mortgages (including HARP loans) generally have performed better than loans with similar characteristics remaining in our single-family credit guarantee portfolio that were originated prior to 2009.

The table below presents the composition and certain other information about loans in our single-family credit guarantee portfolio, by year of origination at June 30, 2013 and December 31, 2012, and for the first half of 2013 and the year ended December 31, 2012.

Table 2 — Single-Family Credit Guarantee Portfolio Summary(1)

 

     At June 30, 2013     Six Months Ended
June 30, 2013
 
     Percent of
Portfolio
    Average
Credit
Score(2)
     Current
LTV  Ratio(3)
    Current
LTV  Ratio
>100%(3)(4)
    Serious
Delinquency
Rate(5)
    Percent of
Credit  Losses(6)
 

Loans originated — 2009 to 2013:

             

Relief refinance loans:

             

HARP loans

     12     733        101     41     0.90     4.1

Other relief refinance loans

     8       745        57             0.32       0.4  

All other loans

     50       757        65       1       0.25       1.8  
  

 

 

            

 

 

 

Subtotal — 2009 to 2013 originations

     70       752        70       8       0.37       6.3  
  

 

 

            

 

 

 

Loans originated — 2005 to 2008

     19       705        92       35       9.39       84.1  

Loans originated — 2004 and prior

     11       712        53       4       3.26       9.6  
  

 

 

            

 

 

 

Total

     100     739        73       13       2.79       100.0
  

 

 

            

 

 

 
     At December 31, 2012     Year Ended
December 31, 2012
 
     Percent of
Portfolio
    Average
Credit
Score(2)
     Current
LTV  Ratio(3)
    Current
LTV  Ratio
>100%(3)(4)
    Serious
Delinquency
Rate(5)
    Percent of
Credit Losses(6)
 

Loans originated — 2009 to 2012:

             

Relief refinance loans:

             

HARP loans

     11     735        100     40     0.98     2.0

Other relief refinance loans

     7       749        58              0.32       0.2  

All other loans

     45       757        66       <1        0.27       1.4  
  

 

 

            

 

 

 

Subtotal — 2009 to 2012 originations

     63       753        71       7       0.39       3.6  
  

 

 

            

 

 

 

Loans originated — 2005 to 2008

     24       708        98       42       9.56       87.3  

Loans originated — 2004 and prior

     13       715        56       6       3.20       9.1  
  

 

 

            

 

 

 

Total

     100     737        75       15       3.25       100.0
  

 

 

            

 

 

 

 

 

(1) Based on the loans remaining in the portfolio at June 30, 2013 and December 31, 2012, which totaled $1.6 trillion in UPB at both dates, rather than all loans originally guaranteed by us and originated in the respective year. Includes loans acquired under our relief refinance initiative, which began in 2009. For credit scores, LTV ratios, serious delinquency rates, and other information about the loans in our single-family credit guarantee portfolio, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk.”
(2) Credit score data is based on FICO scores, which are ranked on a scale of approximately 300 to 850 points. Although we obtain updated credit information on certain borrowers after the origination of a mortgage, such as those borrowers seeking a modification, the scores presented in this table represent the credit score of the borrower at the time of loan origination and may not be indicative of the borrowers’ current creditworthiness.
(3) We estimate current market values by adjusting the value of the property at origination based on changes in the market value of homes in the same geographical area since origination. See endnote (3) to “Table 32 — Characteristics of the Single-Family Credit Guarantee Portfolio” for information on our calculation of current LTV ratios.
(4) Calculated as a percentage of the aggregate UPB of loans with LTV ratios greater than 100% in relation to the total UPB of loans in the category.
(5) See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-family Mortgage Credit Risk — Delinquencies” for further information about our reported serious delinquency rates.
(6) Historical credit losses for each origination year may not be representative of future results.

 

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Contracting the Dominant Presence of the GSEs in the Marketplace

We continue to take steps toward the goal of gradually contracting our presence in the marketplace. For example, the 2013 Conservatorship Scorecard established the following goals for 2013 (with credit for partial completion allowed):

 

   

Single-family: Demonstrate the viability of multiple types of risk transfer transactions involving single-family mortgages with at least $30 billion in aggregate UPB, subject to certain limitations. These transactions are intended to shift mortgage credit risk from us to private capital investors. In July 2013, we executed one transaction representing $22.5 billion of UPB, of which a majority is designed to qualify toward this goal;

 

   

Multifamily: Reduce the UPB amount of new multifamily business activity (purchases of loans and issuances of other guarantee commitments) relative to 2012 by at least 10% by tightening underwriting, adjusting pricing, and limiting product offerings, while not increasing the proportion of retained risk. While multifamily business activity was strong during the first half of 2013, we have taken measures that are intended to reduce our new business activities during the remainder of the year; and

 

   

Mortgage-related investments portfolio: Reduce the December 31, 2012 mortgage-related investments portfolio balance by selling 5%, or $15.7 billion in UPB, of mortgage-related assets (exclusive of agency securities, multifamily loans classified as held-for-sale, and single-family loans purchased for cash). Through June 30, 2013, we have sold $3.3 billion in UPB of assets that are intended to qualify toward this goal.

The 2013 Conservatorship Scorecard states that our transactions related to these goals should be economically sensible, operationally well-controlled, involve a meaningful transference of credit risk, and be transparent to the marketplace. Changes in market and regulatory conditions will be taken into consideration when evaluating our performance against these goals.

Strengthening Our Infrastructure and Improving Overall Efficiency

We continue to work both to enhance the quality of our infrastructure and to improve our efficiency to preserve the taxpayers’ investment. We are focusing our resources primarily on key projects, many of which are related to FHFA-mandated strategic initiatives (e.g., initiatives under the Conservatorship Scorecards) that will likely take several years to implement. We are also focused on making significant improvements to our systems infrastructure in order to: (a) replace legacy hardware or software systems at the end of their useful lives and to strengthen our disaster recovery capabilities; and (b) improve our data collection and administration capabilities as well as our ability to assist in the servicing of loans.

We continue to actively manage our administrative expenses. Our administrative expenses increased in the three and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012, primarily due to an increase in professional services expense related to legal expenses, initiatives we are implementing under the Conservatorship Scorecards, and other FHFA-mandated strategic initiatives. We believe the various FHFA-mandated strategic initiatives we are pursuing may continue to require significant resources and thus continue to affect our level of administrative expenses.

Single-Family Credit Guarantee Portfolio

The table below provides certain credit statistics for our single-family credit guarantee portfolio.

 

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Table 3 — Credit Statistics, Single-Family Credit Guarantee Portfolio

 

     As of  
     6/30/2013     3/31/2013     12/31/2012     9/30/2012     6/30/2012  

Payment status —

          

One month past due

     1.80     1.70     1.85     2.02     1.79

Two months past due

     0.55     0.56     0.66     0.66     0.60

Seriously delinquent(1)

     2.79     3.03     3.25     3.37     3.45

Non-performing loans (in millions)(2)

   $ 123,681     $ 126,302     $ 128,599     $ 131,106     $ 118,463  

Single-family loan loss reserve (in millions)(3)

   $ 26,197     $ 28,299     $ 30,508     $ 33,298     $ 35,298  

REO inventory (in properties)

     44,623       47,968       49,071       50,913       53,271  

REO assets, net carrying value (in millions)

   $ 3,997     $ 4,246     $ 4,314     $ 4,459     $ 4,715  
     For the Three Months Ended  
     6/30/2013     3/31/2013     12/31/2012     9/30/2012     6/30/2012  
     (in units, unless noted)  

Seriously delinquent loan additions(1)

     57,024       65,281       72,626       76,104       75,904  

Loan workout volume(4)

     41,470       45,518       43,153       44,536       41,123  

REO acquisitions

     16,418       17,881       18,672       20,302       20,033  

REO disposition severity ratio:(5)

          

California

     26.0     31.4     34.4     37.7     41.6

Arizona

     28.3     31.8     35.9     36.3     40.4

Florida

     39.1     40.8     42.6     44.7     46.2

Nevada

     33.9     40.5     45.6     50.6     54.3

Illinois

     43.4     45.7     46.5     47.7     47.8

Total U.S

     31.2     34.4     35.2     36.2     37.9

Single-family provision (benefit) for credit losses (in millions)

   $ (518   $ (469   $ (658   $ 650     $ 177  

Single-family credit losses (in millions)

   $ 1,763     $ 2,063     $ 2,396     $ 2,936     $ 2,858  

 

 

(1) See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Delinquencies” for further information about our reported serious delinquency rates.
(2) Consists of the UPB of loans in our single-family credit guarantee portfolio that have undergone a TDR or that are seriously delinquent. During the third quarter of 2012, we changed the treatment of single-family loans discharged in Chapter 7 bankruptcy to classify these loans as TDRs, regardless of the borrowers’ payment status. As a result, we newly classified approximately $19.5 billion in UPB of loans discharged in Chapter 7 bankruptcy as TDRs in the third quarter of 2012. As of June 30, 2013 and December 31, 2012, approximately $71.0 billion and $65.8 billion in UPB of TDR loans, respectively, were no longer seriously delinquent.
(3) Consists of the combination of: (a) our allowance for loan losses on mortgage loans held for investment; and (b) our reserve for guarantee losses associated with non-consolidated single-family mortgage securitization trusts and other guarantee commitments.
(4) See “Table 1 — Total Single-Family Loan Workout Volumes” for information about our problem loan workout activities.
(5) States presented represent the five states where our credit losses were greatest during the six months ended June 30, 2013. Calculated as the amount of our losses recorded on disposition of REO properties during the respective quarterly period, excluding those subject to repurchase requests made to our seller/servicers, divided by the aggregate UPB of the related loans. The amount of losses recognized on disposition of the properties is equal to the amount by which the UPB of the loans exceeds the amount of sales proceeds from disposition of the properties. Excludes sales commissions and other expenses, such as property maintenance and costs, as well as applicable recoveries from credit enhancements, such as mortgage insurance.

In discussing our credit performance, we often use the terms “credit losses” and “credit-related (benefit) expense”. These terms are significantly different. Our “credit losses” consist of charge-offs and REO operations expense, while our “credit-related (benefit) expense” consists of our provision (benefit) for credit losses and REO operations expense.

Since the beginning of 2008, on an aggregate basis, we have recorded provision for credit losses associated with single-family loans of approximately $74.2 billion, and have recorded an additional $3.8 billion in losses on loans purchased from PC trusts, net of recoveries. The majority of these losses are associated with loans originated in 2005 through 2008. While loans originated in 2005 through 2008 will give rise to additional credit losses that have not yet been incurred and, thus, have not yet been provisioned for, we believe that, as of June 30, 2013, we have reserved for or charged-off the majority of the total expected credit losses for these loans. Nevertheless, various factors, such as increases in unemployment rates or future declines in home prices, could require us to provide for losses on these loans beyond our current expectations.

Our loan loss reserves for single-family loans declined in each of the last six quarters, which in part reflects improvement in both borrower payment performance and lower severity ratios for both REO dispositions and short sale transactions due to the improvements in home prices in most areas during these periods. Our REO inventory also declined in each of the last six quarters primarily due to lower foreclosure activity as well as a significant number of borrowers completing short sales rather than foreclosures.

Our average REO disposition severity ratio improved to 31.2% for the second quarter of 2013 compared to 34.4% and 37.9% for the first quarter of 2013 and second quarter of 2012, respectively. We observed improvements in most areas during the first half of 2013, primarily due to increasing home prices. This ratio improved in each of the last six quarters, but remains high as compared to our experience in periods before 2008. Additionally, our REO disposition severity ratios have also been positively affected by changes made during 2012 to our process for determining the list price for our REO properties when we offer them for sale.

 

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The serious delinquency rate for our single-family credit guarantee portfolio was 2.79% at June 30, 2013, compared to 3.25% at December 31, 2012, and has improved in each of the last six quarters. Excluding relief refinance loans, the improvement in borrower payment performance during these periods reflects an improved credit profile of borrowers with loans originated since 2008. However, several factors, including the lengthening of the foreclosure process, have resulted in loans remaining in serious delinquency for longer periods than experienced prior to 2008, particularly in states that require a judicial foreclosure process. As of June 30, 2013 and December 31, 2012, the percentage of seriously delinquent loans that have been delinquent for more than six months was 74% and 72%, respectively, and most of these loans have been delinquent for more than one year. The longer a loan remains delinquent, the more challenging and costly it is to resolve.

Although the balance of our non-performing loans declined during the first half of 2013, it remained high at June 30, 2013, compared to periods prior to 2009.

The credit losses and loan loss reserves associated with our single-family credit guarantee portfolio remained elevated in the first half of 2013, due, in part, to:

 

   

Losses associated with the continued high volume of foreclosures and foreclosure alternatives. These actions relate to the continued efforts of our servicers to resolve our large inventory of seriously delinquent loans. Due to the length of time necessary for servicers either to complete the foreclosure process or pursue foreclosure alternatives on seriously delinquent loans in our portfolio, we expect our credit losses will continue to remain elevated even if the volume of new seriously delinquent loans continues to decline.

 

   

Continued negative effect of certain loan groups within the single-family credit guarantee portfolio, such as: (a) loans originated in 2005 through 2008; and (b) loans with higher-risk characteristics (such as those underwritten with certain lower documentation standards and interest-only loans), a significant portion of which were originated in 2005 through 2008. These groups continue to be large contributors to our credit losses.

 

   

Although we estimate national home prices increased 9% from June 2012 to June 2013, based on our own index, there has been a cumulative decline in national home prices of 16% since June 2006. As a result of this price decline, approximately 13% of loans in our single-family credit guarantee portfolio, based on UPB, had estimated current LTV ratios in excess of 100% (i.e., underwater loans) as of June 30, 2013.

 

   

Weak financial condition of many of our mortgage insurers, which has reduced our actual recoveries from these counterparties since several of them are deferring payments under regulatory orders.

Some of our loss mitigation activities create fluctuations in our delinquency statistics. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-family Mortgage Credit Risk Credit Performance Delinquencies” for further information about factors affecting our reported delinquency rates.

Conservatorship and Government Support for Our Business

We continue to operate under the direction of FHFA, as our Conservator. We are also subject to certain constraints on our business activities imposed by Treasury due to the terms of, and Treasury’s rights under, the Purchase Agreement. We are dependent upon the continued support of Treasury and FHFA in order to continue operating our business. 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. The conservatorship and related matters have had a wide-ranging impact on us, including our regulatory supervision, management, business, financial condition, and results of operations.

There is significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified termination date, and as to what changes may occur to our business structure during or following conservatorship, including whether we will continue to exist. We are not aware of any current plans of our Conservator to significantly change our business model or capital structure in the near-term. Our future structure and role will be determined by the Administration and Congress, and there are likely to be significant changes beyond the near-term. We have no ability to predict the outcome of these deliberations.

Under the Purchase Agreement, we are required to pay dividends to Treasury to the extent that our Net Worth Amount exceeds the permitted Capital Reserve Amount, established at $3 billion for 2013 and declining to zero in 2018. Accordingly, we do not have the ability over the long term to build and retain the capital generated by our business operations, or return capital to stockholders other than Treasury.

 

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We paid dividends of $7.0 billion in cash on the senior preferred stock during the three months ended June 30, 2013, based on our Net Worth Amount at March 31, 2013. Through June 30, 2013, we have paid aggregate cash dividends to Treasury of $36.6 billion, an amount equal to 51% of our aggregate draws received under the Purchase Agreement. Under the Purchase Agreement, the payment of dividends cannot be used to reduce prior draws from Treasury. Based on our Net Worth Amount at June 30, 2013, our dividend obligation to Treasury in September 2013 will be $4.4 billion.

The aggregate liquidation preference of the senior preferred stock was $72.3 billion at both June 30, 2013 and December 31, 2012. The remaining funding commitment from Treasury under the Purchase Agreement is $140.5 billion. This amount will be reduced by any future draws. Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited and we will not be able to do so for the foreseeable future, if at all. The aggregate liquidation preference of the senior preferred stock will increase further if we receive additional draws. For a discussion of factors that could result in additional draws, see “RISK FACTORS — Conservatorship and Related Matters — We may request additional draws under the Purchase Agreement in future periods” in our 2012 Annual Report.

For more information on the conservatorship and government support for our business, including the Purchase Agreement, see “BUSINESS — Conservatorship and Related Matters” and “— Treasury Agreements” in our 2012 Annual Report.

Consolidated Financial Results

Net income was $5.0 billion for the second quarter of 2013 compared to net income of $3.0 billion for the second quarter of 2012. Key highlights of our financial results include:

 

   

Net interest income for the second quarter of 2013 decreased to $4.1 billion from $4.4 billion for the second quarter of 2012, mainly due to the impact of a reduction in the balance of our higher-yielding mortgage-related assets, partially offset by the effect of a lower balance of loans on non-accrual status and lower funding costs.

 

   

Benefit (provision) for credit losses for the second quarter of 2013 was $623 million, compared to $(155) million for the second quarter of 2012. The shift from a provision for credit losses in the second quarter of 2012 to a benefit for credit losses in the second quarter of 2013 primarily reflects: (a) declines in the volume of newly delinquent loans (largely due to a decline in the portion of our single-family credit guarantee portfolio originated in 2005 through 2008); and (b) lower estimates of incurred loss due to the positive impact of an increase in national home prices.

 

   

Non-interest income (loss) was $678 million for the second quarter of 2013, compared to $(751) million for the second quarter of 2012. The improvement was largely driven by derivative gains during the second quarter of 2013 compared to derivative losses during the second quarter of 2012.

 

   

Non-interest expense decreased to $498 million for the second quarter of 2013, from $536 million for the second quarter of 2012, primarily due to an increase in REO operations income during the second quarter of 2013 compared to the second quarter of 2012.

 

   

Comprehensive income was $4.4 billion for the second quarter of 2013 compared to $2.9 billion for the second quarter of 2012. Comprehensive income for the second quarter of 2013 consisted of $5.0 billion of net income and $(631) million of other comprehensive loss, primarily due to net unrealized losses on our available-for-sale securities.

Mortgage Market and Economic Conditions

Overview

The U.S. real gross domestic product rose by 1.7% on an annualized basis during the second quarter of 2013, compared to 1.1% during the first quarter of 2013, according to the Bureau of Economic Analysis. The national unemployment rate was 7.6% in both June and March 2013, compared to 7.8% in December 2012, based on data from the U.S. Bureau of Labor Statistics. In the data underlying the unemployment rate, an average of approximately 202,000 monthly net new jobs were added to the economy during the six months ended June 30, 2013 compared with an average monthly gain of 195,000 during the six months ended December 31, 2012, which shows evidence of a slow, but steady positive trend for the economy and the labor market. Long-term interest rates, such as those of 30-year fixed-rate mortgages, generally increased during the second quarter of 2013. For example, based on our weekly Primary Mortgage Market Survey, the average rate on 30-year fixed-rate conforming mortgages with an average LTV ratio of 80% rose from 3.5% in March 2013 to 4.5% in June 2013.

 

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Single-Family Housing Market

The single-family housing market continued to show improvement in the second quarter of 2013 despite continued high unemployment rates in most areas of the U.S. and a significant inventory of seriously delinquent loans and REO properties in the market.

Based on data from the National Association of Realtors, sales of existing homes in the second quarter of 2013 averaged 5.06 million (at a seasonally adjusted annual rate), increasing 2.4% from 4.94 million homes in the first quarter of 2013. Based on data from the U.S. Census Bureau and HUD, new home sales in the second quarter of 2013 averaged approximately 470,000 (at a seasonally adjusted annual rate) increasing approximately 4.7% from approximately 449,000 in the first quarter of 2013. Home prices increased during the second quarter of 2013, with our nationwide index registering approximately a 5.2% increase from March 2013 through June 2013 without seasonal adjustment. From June 2012 through June 2013 our nationwide home price index increased approximately 9.3%. These estimates were based on our own price index of mortgage loans on one-family homes funded by us or Fannie Mae. Other indices of home prices may have different results, as they are determined using different pools of mortgage loans and calculated under different conventions than our own.

Multifamily Housing Market

The multifamily market has experienced very strong rent and vacancy trends over the last few years, but the pace has slowed in recent periods. The most recent preliminary data reported by Reis, Inc. indicated that, after three straight years of declines, the national apartment vacancy rate remained unchanged at 4.3% during the second quarter of 2013 when compared to the first quarter of 2013; this represents the lowest level since 2001. In addition, Reis, Inc. reported that effective rents grew by 0.7% during the second quarter of 2013, compared to 0.6% during the first quarter of 2013. According to the latest available information from Real Capital Analytics, Inc., national average apartment property values have risen more than 12% from March 2012 to March 2013 and are near the peak values experienced in the second quarter of 2007. As a result, the multifamily sector continued to experience strong investor interest and continued to outperform other commercial real estate sectors in the first half of 2013. Vacancy rates and effective rents are important to loan performance because multifamily loans are generally repaid from the cash flows generated by the underlying property and these factors significantly influence those cash flows. We expect multifamily market fundamentals (i.e., vacancy rates and effective rents) to remain at favorable levels for the remainder of 2013.

Mortgage Market and Business Outlook

Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates, and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties. For example, a number of factors could cause the actual performance of the housing and mortgage markets and the U.S. economy in the near term to be significantly worse than we expect, including adverse changes in national or international economic conditions and changes in the federal government’s fiscal or monetary policies. See “FORWARD-LOOKING STATEMENTS” for additional information.

Single-Family

We continue to expect key macroeconomic drivers of the economy, such as income growth, employment, and inflation, to affect the performance of the housing and mortgage markets in the remainder of 2013. Since we expect that moderate economic growth will continue and mortgage interest rates will remain relatively low in the remainder of 2013, compared to historical levels, we believe that housing affordability will remain high in the second half of 2013 for potential home buyers. We also expect that the volume of home sales will likely increase in 2013, compared to 2012 but still remain relatively low compared to historical levels. We expect to experience continued levels of refinancing activity in the near term, due to the impact of HARP, but the recent increases in mortgage rates may slow the levels of refinancing activity, potentially significantly, in the second half of 2013 which could, in turn, impact overall purchase volume. For information on the HARP initiative, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program.”

Although national home prices have recorded gains for the last six quarters, home prices during the first half of 2013 remained significantly below their peak levels in many geographical areas. Declines in the market’s inventory of homes for sale have supported stabilization and increases in home prices in a number of metropolitan areas. We believe that home sales

 

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will have only modest growth in the second half of 2013. We also believe that home prices will not continue the same growth rate experienced in the first half of 2013, but will gradually moderate and will return towards growth rates that are consistent with long-term historical averages experienced prior to 2004.

Our charge-offs were elevated during the first half of 2013 compared to levels before 2009 and we expect they will continue to be elevated during the remainder of the year. This is in part due to the substantial number of underwater mortgage loans in our single-family credit guarantee portfolio. For the near term, we also expect:

 

   

REO disposition severity ratios and losses on short sale transactions to remain high. However, our recovery rates have been positively affected by recent improvements in home prices and home sales; and

 

   

the amount of non-performing assets and the volume of our loan workouts to remain high.

Our guarantee fee rate charged on new acquisitions increased in 2013 as a result of two across-the-board increases in guarantee fees in 2012. We expect to introduce further increases in our guarantee fees (consistent with directives from FHFA). As a result of the 2012 increases and expected future increases, the average management and guarantee fee rate we charge for loans in the second half of 2013 and thereafter will generally be higher than the average fee we charged for loans we purchased in previous years.

Multifamily

During the first half of 2013, we continued to serve as a constant and stable source of liquidity and to support the multifamily market and the nation’s renters, as evidenced by our $13.5 billion of multifamily new business activity (the combination of our loan purchases and issuances of other guarantee commitments), which provided financing for more than 750 properties amounting to nearly 185,000 apartment units. The majority of these apartments were affordable to low and moderate income families. We expect lower new business volume for the remainder of 2013, due to increased competition from other market participants and the effect of the steps we have taken during the first half of the year (such as increased pricing) towards meeting the 2013 Conservatorship Scorecard goal of reducing our new business volume by at least 10% as compared to 2012 levels.

New supply of multifamily housing has been relatively low following the recession of the late-2000s, but has been increasing in recent periods as market fundamentals have remained positive. Our expectation is that at the national level, new supply will not accelerate beyond sustainable levels over the near term because of constraints, such as rising construction costs and uncertainties in the capital markets. We expect that demand growth, driven by a strengthening economy and positive demographics, will generally be sufficient for the increased supply. However, there may be certain local markets where new supply could potentially outpace demand, which would be evidenced by excess supply and rising vacancy rates.

As a result of the positive market fundamentals and continuing strong portfolio performance, we expect our credit losses and delinquency rates to remain low in the remainder of 2013. Mortgage credit spreads have been volatile in recent months, which we believe has created some uncertainty regarding the future availability and cost of multifamily credit. Continued volatility in interest rates and credit spreads may reduce investor demand and cause declines in property values. However, we believe the long-term outlook for the multifamily market continues to be favorable.

Limits on Investment Activity and Our Mortgage-Related Investments Portfolio

The conservatorship has significantly affected our investment activity. FHFA has stated that we will not be a substantial buyer or seller of mortgages for our mortgage-related investments portfolio. Under the terms of the Purchase Agreement and FHFA regulation, the UPB of our mortgage-related investments portfolio is subject to a cap that decreases by 15% each year until the portfolio reaches $250 billion. As a result, the UPB of our mortgage-related investments portfolio may not exceed $553 billion as of December 31, 2013. FHFA has indicated that such portfolio reduction targets should be viewed as minimum reductions and has encouraged us to reduce the mortgage-related investments portfolio at a faster rate than required, while indicating that the pace of reducing the portfolio may be moderated by conditions in the housing and financial markets. This strategy is designed to reduce the portfolio and provide the best return to the taxpayer while minimizing market disruption.

In addition, the 2013 Conservatorship Scorecard includes a goal to reduce the December 31, 2012 mortgage-related investments portfolio balance by selling 5%, or $15.7 billion in UPB, of mortgage-related assets (exclusive of agency securities, multifamily loans classified as held-for-sale, and single-family loans purchased for cash). Through June 30, 2013, we have sold $3.3 billion of assets that are intended to qualify toward this goal.

 

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These mortgage-related investments portfolio reduction actions are expected to negatively impact our income from this portfolio for the next several years.

From time to time, we also may undertake actions in an effort to support the liquidity and the relative price performance of our PCs to comparable Fannie Mae securities through a variety of activities in our Investments and Single-family Guarantee segments. These activities can include the purchase and sale of Freddie Mac mortgage-related securities, purchases of loans, and dollar roll transactions, as well as the issuance of REMICs and Other Structured Securities. Our purchases and sales of mortgage-related securities and our issuances of REMICs and Other Structured Securities influence the relative supply and demand (i.e., liquidity) for these securities, helping to support the price performance of our PCs. Depending upon market conditions, including the relative prices, supply and demand for our PCs and comparable Fannie Mae securities, as well as other factors, there may be substantial variability in any period in the total amount of securities we purchase or sell, and in the success of our efforts to support the liquidity and price performance of our PCs. We incur costs in connection with our efforts to support the liquidity and price performance of our PCs, including engaging in transactions that yield less than our target rate of return. For more information, see “BUSINESS — Our Business Segments — Investments Segment — PC Support Activities” in our 2012 Annual Report.

The table below presents the UPB of our mortgage-related investments portfolio, for purposes of the limit imposed by the Purchase Agreement and FHFA regulation.

Table 4 — Mortgage-Related Investments Portfolio(1)

 

     June 30, 2013      December 31, 2012  
     (in millions)  

Investments segment — Mortgage investments portfolio

   $ 358,912      $ 375,924  

Single-family Guarantee segment — Single-family unsecuritized mortgage loans(2)

     45,519        53,333  

Multifamily segment — Mortgage investments portfolio

     116,788        128,287  
  

 

 

    

 

 

 

Total mortgage-related investments portfolio

   $ 521,219      $ 557,544  
  

 

 

    

 

 

 

 

 

(1) Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) Represents unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment.

The UPB of our mortgage-related investments portfolio at June 30, 2013 was $521.2 billion, a decline of $36.3 billion compared to $557.5 billion at December 31, 2012. The reduction in UPB resulted primarily from liquidations and is consistent with our efforts to reduce the size of our mortgage-related investments portfolio as described above. The mortgage-related investments portfolio is comprised of agency securities, single-family non-agency mortgage-related securities, CMBS, housing revenue bonds, and single-family and multifamily unsecuritized mortgage loans.

We consider the liquidity of the assets in our mortgage-related investments portfolio based on three categories: (a) agency securities; (b) assets that are less liquid than agency securities; and (c) illiquid assets. Assets that we consider to be less liquid than agency securities include unsecuritized performing single-family mortgage loans, multifamily mortgage loans, CMBS, and housing revenue bonds. Our less liquid assets collectively represented approximately 26% of the UPB of the portfolio at June 30, 2013, compared to 28% at December 31, 2012. Assets that we consider to be illiquid include unsecuritized seriously delinquent and modified single-family mortgage loans which we removed from PC trusts, and our investments in non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans. Our illiquid assets collectively represented approximately 35% of the UPB of the portfolio at both June 30, 2013 and December 31, 2012.

Legislative and Regulatory Developments

Two bills were recently introduced in the Senate and the House of Representatives to restructure the mortgage finance system, both of which provide for the wind down of Freddie Mac and Fannie Mae. A third bill was introduced to amend the Purchase Agreement. We anticipate that other bills related to Freddie Mac, Fannie Mae and the future of the mortgage finance system will be introduced. We cannot predict whether any of such bills might be enacted. For more information, see “LEGISLATIVE AND REGULATORY MATTERS — Legislation Related to Freddie Mac and its Future Status.”

 

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SELECTED FINANCIAL DATA(1)

The selected financial data presented below should be reviewed in conjunction with MD&A and our consolidated financial statements and related notes.

 

     Three Months Ended
June  30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  
     (dollars in millions, except share-related amounts)  

Statements of Comprehensive Income Data

        

Net interest income

   $ 4,144     $ 4,386     $ 8,409     $ 8,886  

Benefit (provision) for credit losses

     623       (155     1,126       (1,980

Non-interest income (loss)

     678       (751     1,080       (2,267

Non-interest expense

     (498     (536     (1,122     (1,132

Net income

     4,988       3,020       9,569       3,597  

Total comprehensive income

     4,357       2,892       11,328       4,681  

Net income (loss) attributable to common stockholders(2)

     631       1,212       (1,759     (15

Net income (loss) per common share — basic and diluted

     0.19       0.37       (0.54      

Cash dividends per common share

                        

Weighted average common shares outstanding (in thousands) —
basic and diluted(3)

     3,237,825       3,239,711       3,238,411       3,240,627  
                 June 30, 2013     December 31, 2012  
                 (dollars in millions)  

Balance Sheets Data

        

Mortgage loans held-for-investment, at amortized cost by consolidated trusts
(net of allowances for loan losses)

       $ 1,517,887     $ 1,495,932  

Total assets

         1,967,518       1,989,856  

Debt securities of consolidated trusts held by third parties

         1,424,732       1,419,524  

Other debt

         521,184       547,518  

All other liabilities

         14,245       13,987  

Total Freddie Mac stockholders’ equity (deficit)

         7,357       8,827  

Portfolio Balances(4)

        

Mortgage-related investments portfolio

       $ 521,219     $ 557,544  

Total Freddie Mac mortgage-related securities(5)

         1,582,526       1,562,040  

Total mortgage portfolio(6)

         1,945,245       1,956,276  

Non-performing assets(7)

         130,195       135,677  
     Three Months Ended
June  30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Ratios(8)

        

Return on average assets(9)

     1.0     0.6     1.0     0.3

Non-performing assets ratio(10)

     7.2       6.8       7.2       6.8  

Equity to assets ratio(11)

     0.4              0.4         

 

 

(1) See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in our 2012 Annual Report and within this Form 10-Q for information regarding our accounting policies and the impact of new accounting policies on our consolidated financial statements.
(2) For a discussion of how the senior preferred stock dividend affects net income (loss) attributable to common stockholders beginning in the fourth quarter of 2012, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Earnings Per Common Share” in our 2012 Annual Report.
(3) Includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury as part of the Purchase Agreement, because it is unconditionally exercisable by the holder at a cost of $0.00001 per share.
(4) Represents the UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(5) See ‘‘Table 27 — Freddie Mac Mortgage-Related Securities’’ for the composition of this line item.
(6) See ‘‘Table 11 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios’’ for the composition of our total mortgage portfolio.
(7) See ‘‘Table 43 — Non-Performing Assets’’ for a description of our non-performing assets.
(8) The dividend payout ratio on common stock is not presented because the amount of cash dividends per common share is zero for all periods presented. The return on common equity ratio is not presented because the simple average of the beginning and ending balances of total stockholders’ equity (deficit), net of preferred stock (at redemption value) is less than zero for all periods presented.
(9) Ratio computed as net income (loss) divided by the simple average of the beginning and ending balances of total assets.
(10) Ratio computed as non-performing assets divided by the ending UPB of our total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities.
(11) Ratio computed as the simple average of the beginning and ending balances of total stockholders’ equity (deficit) divided by the simple average of the beginning and ending balances of total assets.

 

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CONSOLIDATED RESULTS OF OPERATIONS

The following discussion of our consolidated results of operations should be read in conjunction with our consolidated financial statements, including the accompanying notes. Also see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” for information concerning certain significant accounting policies and estimates applied in determining our reported results of operations.

Table 5 — Summary Consolidated Statements of Comprehensive Income

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2013      2012      2013      2012  
     (in millions)  

Net interest income

   $ 4,144      $ 4,386      $ 8,409      $ 8,886  

Benefit (provision) for credit losses

     623        (155      1,126        (1,980
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after benefit (provision) for credit losses

     4,767        4,231        9,535        6,906  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income (loss):

           

Gains (losses) on extinguishment of debt securities of consolidated trusts

     28        (1      62        (5

Gains (losses) on retirement of other debt

     25        (45      (7      (66

Gains (losses) on debt recorded at fair value

     3        62        15        45  

Derivative gains (losses)

     1,362        (882      1,737        (1,938

Impairment of available-for-sale securities:

           

Total other-than-temporary impairment of available-for-sale securities

     (18      (135      (39      (610

Portion of other-than-temporary impairment recognized in AOCI

     (26      37        (48      (52
  

 

 

    

 

 

    

 

 

    

 

 

 

Net impairment of available-for-sale securities recognized in earnings

     (44      (98      (87      (662

Other gains (losses) on investment securities recognized in earnings

     (497      (356      (773      (644

Other income (loss)

     (199      569        133        1,003  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income (loss)

     678        (751      1,080        (2,267
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expense:

           

Administrative expenses

     (444      (401      (876      (738

REO operations income (expense)

     110        30        104        (141

Other expenses

     (164      (165      (350      (253
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

     (498      (536      (1,122      (1,132
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax benefit

     4,947        2,944        9,493        3,507  

Income tax benefit

     41        76        76        90  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     4,988        3,020        9,569        3,597  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss), net of taxes and reclassification adjustments:

           

Changes in unrealized gains (losses) related to available-for-sale securities

     (717      (238      1,563        909  

Changes in unrealized gains (losses) related to cash flow hedge relationships

     84        107        174        218  

Changes in defined benefit plans

     2        3        22        (43
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     (631      (128      1,759        1,084  
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

   $ 4,357      $ 2,892      $ 11,328      $ 4,681  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Interest Income

The table below presents an analysis of net interest income, including average balances and related yields earned on assets and incurred on liabilities.

 

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Table 6 — Net Interest Income/Yield and Average Balance Analysis

 

     Three Months Ended June 30,  
     2013     2012  
     Average
Balance(1)(2)
    Interest
Income
(Expense)(1)
    Average
Rate
    Average
Balance(1)(2)
    Interest
Income
(Expense)(1)
    Average
Rate
 
     (dollars in millions)  

Interest-earning assets:

            

Cash and cash equivalents

   $ 29,467     $ 3       0.04   $ 32,039     $ 6       0.07

Federal funds sold and securities purchased under agreements to resell

     38,996       9       0.09       37,995       15       0.16  

Mortgage-related securities:

            

Mortgage-related securities(3)

     316,237       3,243       4.10       358,279       4,038       4.51  

Extinguishment of PCs held by Freddie Mac

     (123,582     (1,244     (4.02     (111,351     (1,275     (4.58
  

 

 

   

 

 

     

 

 

   

 

 

   

Total mortgage-related securities, net

     192,655       1,999       4.15       246,928       2,763       4.48  
  

 

 

   

 

 

     

 

 

   

 

 

   

Non-mortgage-related securities(3)

     26,319       20       0.29       24,779       14       0.22  

Mortgage loans held by consolidated trusts(4)

     1,507,578       14,097       3.74       1,538,134       16,806       4.37  

Unsecuritized mortgage loans(4)

     210,508       2,017       3.83       240,693       2,224       3.69  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

   $ 2,005,523     $ 18,145       3.62     $ 2,120,568     $ 21,828       4.12  
  

 

 

   

 

 

     

 

 

   

 

 

   

Interest-bearing liabilities:

            

Debt securities of consolidated trusts including PCs held by Freddie Mac

   $ 1,531,830     $ (12,953     (3.38   $ 1,560,470     $ (15,900     (4.08

Extinguishment of PCs held by Freddie Mac

     (123,582     1,244       4.02       (111,351     1,275       4.58  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total debt securities of consolidated trusts held by third parties

     1,408,248       (11,709     (3.33     1,449,119       (14,625     (4.04

Other debt:

            

Short-term debt

     129,920       (45     (0.14     128,860       (43     (0.13

Long-term debt(5)

     395,137       (2,125     (2.15     464,966       (2,617     (2.25
  

 

 

   

 

 

     

 

 

   

 

 

   

Total other debt

     525,057       (2,170     (1.65     593,826       (2,660     (1.79
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

     1,933,305       (13,879     (2.87     2,042,945       (17,285     (3.38

Expense related to derivatives(6)

           (122     (0.02           (157     (0.03

Impact of net non-interest-bearing funding

     72,218             0.10       77,623             0.12  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total funding of interest-earning assets

   $ 2,005,523     $ (14,001     (2.79   $ 2,120,568     $ (17,442     (3.29
  

 

 

   

 

 

     

 

 

   

 

 

   

Net interest income/yield

     $ 4,144       0.83       $ 4,386       0.83  
    

 

 

       

 

 

   
     Six Months Ended June 30,  
     2013     2012  
     Average
Balance(1)(2)
    Interest
Income
(Expense)(1)
    Average
Rate
    Average
Balance(1)(2)
    Interest
Income
(Expense)(1)
    Average
Rate
 
     (dollars in millions)  

Interest-earning assets:

            

Cash and cash equivalents

   $ 32,451     $ 10       0.06   $ 41,535     $ 10       0.05

Federal funds sold and securities purchased under agreements to resell

     37,460       20       0.11       32,026       24       0.15  

Mortgage-related securities:

            

Mortgage-related securities (3)

     322,239       6,660       4.13       370,753       8,401       4.53  

Extinguishment of PCs held by Freddie Mac

     (122,931     (2,506     (4.08     (118,357     (2,716     (4.59
  

 

 

   

 

 

     

 

 

   

 

 

   

Total mortgage-related securities, net

     199,308       4,154       4.17       252,396       5,685       4.50  
  

 

 

   

 

 

     

 

 

   

 

 

   

Non-mortgage-related securities(3)

     20,650       22       0.21       26,621       30       0.23  

Mortgage loans held by consolidated trusts(4)

     1,501,390       28,601       3.81       1,548,978       34,274       4.43  

Unsecuritized mortgage loans (4)

     214,788       4,026       3.75       247,785       4,536       3.66  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

   $ 2,006,047     $ 36,833       3.67     $ 2,149,341     $ 44,559       4.15  
  

 

 

   

 

 

     

 

 

   

 

 

   

Interest-bearing liabilities:

            

Debt securities of consolidated trusts including PCs held by Freddie Mac

   $ 1,524,918     $ (26,245     (3.44   $ 1,570,609     $ (32,594     (4.15

Extinguishment of PCs held by Freddie Mac

     (122,931     2,506       4.08       (118,357     2,716       4.59  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total debt securities of consolidated trusts held by third parties

     1,401,987       (23,739     (3.39     1,452,252       (29,878     (4.11

Other debt:

            

Short-term debt

     124,805       (89     (0.14     138,995       (83     (0.12

Long-term debt(5)

     405,829       (4,343     (2.14     480,805       (5,393     (2.24
  

 

 

   

 

 

     

 

 

   

 

 

   

Total other debt

     530,634       (4,432     (1.67     619,800       (5,476     (1.77
  

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

     1,932,621       (28,171     (2.91     2,072,052       (35,354     (3.41

Expense related to derivatives(6)

           (253     (0.03           (319     (0.03

Impact of net non-interest-bearing funding

     73,426             0.11       77,289             0.12  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total funding of interest-earning assets

   $ 2,006,047     $ (28,424     (2.83   $ 2,149,341     $ (35,673     (3.32
  

 

 

   

 

 

     

 

 

   

 

 

   

Net interest income/yield

     $ 8,409       0.84       $ 8,886       0.83  
    

 

 

       

 

 

   

 

 

(1) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) We calculate average balances based on amortized cost.
(3) Interest income (expense) includes accretion of the portion of impairment charges recognized in earnings where we expect significant increases in cash flows from the impaired securities.
(4) Non-performing loans, where interest income is generally recognized when collected, are included in average balances.
(5) Includes current portion of long-term debt.
(6) Represents changes in fair value of derivatives in closed cash flow hedge relationships that were previously deferred in AOCI and have been reclassified to earnings as the associated hedged forecasted issuance of debt affects earnings.

 

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Net interest income decreased by $242 million and $477 million for the three and six months ended June 30, 2013, respectively, compared to the three and six months ended June 30, 2012. Net interest yield was unchanged for the three months ended June 30, 2013 and increased by one basis point for the six months ended June 30, 2013, respectively, compared to the three and six months ended June 30, 2012. The decreases in net interest income were primarily due to the reduction in the balance of higher-yielding mortgage-related assets due to continued liquidations, partially offset by the effect of a lower balance of loans on non-accrual status, largely as a result of loans reperforming, and lower funding costs from the replacement of debt at lower rates. The slight increase in net interest yield during the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was primarily due to the effect of a lower balance of loans on non-accrual status and lower funding costs, partially offset by the negative effect of the reduction in the balance of higher-yielding mortgage-related assets.

We recognize interest income on non-performing loans that have been placed on non-accrual status only when cash payments are received. We refer to the interest income that we do not recognize as foregone interest income (i.e., interest income we would have recorded if the loans had been current in accordance with their original terms). Foregone interest income and reversals of previously recognized interest income, net of cash received, related to non-performing loans was $0.5 billion and $1.1 billion during the three and six months ended June 30, 2013, respectively, compared to $0.8 billion and $1.7 billion during the three and six months ended June 30, 2012, respectively. This amount has declined primarily because of the reduction in the volume of non-performing loans on non-accrual status.

During the three and six months ended June 30, 2013, we had sufficient access to the debt markets. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity.”

Benefit (Provision) for Credit Losses

We maintain loan loss reserves at levels we believe are appropriate to absorb probable incurred losses on mortgage loans held-for-investment and loans underlying our financial guarantees. Our loan loss reserves are increased through the provision for credit losses and are reduced by net charge-offs. The provision for credit losses primarily reflects our estimate of incurred losses for newly impaired loans as well as changes in our estimates of incurred losses for previously impaired loans.

Our benefit (provision) for credit losses was $0.6 billion in the second quarter of 2013 compared to $(0.2) billion in the second quarter of 2012, and was $1.1 billion in the first half of 2013 compared to $(2.0) billion in the first half of 2012. The shift from a provision for credit losses in the second quarter and first half of 2012 to a benefit for credit losses in the second quarter and first half of 2013 primarily reflects: (a) declines in the volume of newly delinquent loans (largely due to a decline in the portion of our single-family credit guarantee portfolio originated in 2005 through 2008); and (b) lower estimates of incurred loss due to the positive impact of an increase in national home prices. Assuming that all other factors remain the same, an increase in home prices can reduce the likelihood that loans will default and may also reduce the amount of credit losses on the loans that do default. The provision for credit losses in the three and six months ended June 30, 2012 reflected improvements in the number of newly impaired loans (largely due to a decline in the portion of our single-family credit guarantee portfolio originated in 2005 through 2008) and lower estimates of incurred losses due to the positive impact of an increase in national home prices compared to the preceding periods.

During the three and six months ended June 30, 2013, our charge-offs, net of recoveries for single-family loans, were significantly lower than those recorded in the three and six months ended June 30, 2012, primarily due to improvements in home prices in recent periods in many of the areas in which we have had significant foreclosure and short sale activity. Although our credit losses have significantly declined in the last three quarters, we continue to experience a high volume of foreclosures and foreclosure alternatives as compared to periods prior to 2008. Due to the length of time necessary for servicers either to complete the foreclosure process or pursue foreclosure alternatives on seriously delinquent loans in our portfolio, we expect our credit losses will continue to remain elevated in the second half of 2013 even if the volume of new seriously delinquent loans continues to decline.

The total number of single-family seriously delinquent loans declined approximately 15% and 7% during the first half of 2013 and 2012, respectively. However, our serious delinquency rates remain high compared to the rates we experienced in years prior to 2009. As of June 30, 2013 and December 31, 2012, the UPB of our single-family non-performing loans was $123.7 billion and $128.6 billion, respectively. These amounts include $71.0 billion and $65.8 billion, respectively, of single-family TDRs that were no longer seriously delinquent. However, loans that have been classified as TDRs remain categorized as non-performing throughout the remaining life of the loan regardless of whether the borrower makes payments which

 

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return the loan to a current payment status. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance, serious delinquency rates, charge-offs, our loan loss reserves balance, and our non-performing assets.

While we have recorded a benefit for credit losses in each of the last three quarters, this trend may not continue. Our provision for credit losses and amount of charge-offs in the future will be affected by a number of factors. These factors include: (a) the actual level of mortgage defaults, including default rates among borrowers that participated in HARP and HAMP; (b) the effect of the MHA Program, the servicing alignment initiative, and other current and future loss mitigation efforts; (c) any government actions or programs that affect the ability of borrowers to refinance underwater mortgages or obtain modifications; (d) changes in property values; (e) regional economic conditions, including unemployment rates; (f) additional delays in the foreclosure process; (g) third-party mortgage insurance coverage and recoveries; and (h) the realized rate of seller/servicer repurchases.

We recognized a benefit for credit losses associated with our multifamily mortgage portfolio of $105 million and $22 million for the second quarters of 2013 and 2012, respectively, and $139 million and $41 million for the first half of 2013 and 2012, respectively. Our loan loss reserves associated with our multifamily mortgage portfolio were $236 million and $382 million as of June 30, 2013 and December 31, 2012, respectively. The decline in loan loss reserves for multifamily loans in the first half of 2013 was primarily driven by an improvement in the expected performance of the underlying loans and increases in the property value of collateral underlying loans that have been classified as individually impaired.

Non-Interest Income (Loss)

Gains (Losses) on Extinguishment of Debt Securities of Consolidated Trusts

When we purchase PCs that have been issued by consolidated PC trusts, we extinguish a pro rata portion of the outstanding debt securities of the related consolidated trusts. We recognize a gain (loss) on extinguishment of the debt securities to the extent the amount paid to extinguish the debt security differs from its carrying value.

During the three months ended June 30, 2013 and 2012, we extinguished debt securities of consolidated trusts with a UPB of $17.7 billion and $0.7 billion, respectively (representing our purchase of single-family PCs with a corresponding UPB amount). Gains (losses) on extinguishment of these debt securities of consolidated trusts were $28 million and $(1) million during the three months ended June 30, 2013 and 2012, respectively.

During the six months ended June 30, 2013 and 2012, we extinguished debt securities of consolidated trusts with a UPB of $23.6 billion and $1.4 billion, respectively (representing our purchase of single-family PCs with a corresponding UPB amount). Gains (losses) on extinguishment of these debt securities of consolidated trusts were $62 million and $(5) million during the six months ended June 30, 2013 and 2012, respectively.

The increase in purchases of single-family PCs during the 2013 periods was due to an increase in the volume of transactions to support the market and pricing of our single-family PCs. See “Table 19 — Mortgage-Related Securities Purchase Activity” for additional information regarding purchases of mortgage-related securities, including those issued by consolidated PC trusts.

Gains (Losses) on Retirement of Other Debt

Gains (losses) on retirement of other debt were $25 million and $(45) million during the three months ended June 30, 2013 and 2012, respectively, and $(7) million and $(66) million during the six months ended June 30, 2013 and 2012, respectively. We recognized gains on the retirement of other debt during the three months ended June 30, 2013 primarily due to the repurchase of other debt at a discount. We recognized losses on the retirement of other debt during the six months ended June 30, 2013 primarily due to losses on the repurchase of other debt securities at a premium in the first quarter of 2013. We recognized losses on the retirement of other debt during the three and six months ended June 30, 2012 primarily due to write-offs of unamortized deferred issuance costs related to calls of other debt securities. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Other Debt Securities — Other Debt Retirement Activities.”

Gains (Losses) on Debt Recorded at Fair Value

Gains (losses) on debt recorded at fair value primarily relate to changes in the fair value of our foreign-currency denominated debt. During the three and six months ended June 30, 2013, we recognized gains on debt recorded at fair value of $3 million and $15 million, respectively. We recognized gains in the six months ended June 30, 2013, primarily due to a

 

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combination of the U.S. dollar strengthening relative to the Euro and changes in interest rates. During the three and six months ended June 30, 2012, we recognized gains on debt recorded at fair value of $62 million and $45 million, respectively, primarily due to a combination of the U.S. dollar strengthening relative to the Euro and changes in interest rates. We mitigate changes in the fair value of our foreign-currency denominated debt by using foreign currency swaps and foreign-currency denominated interest-rate swaps.

Derivative Gains (Losses)

The table below presents derivative gains (losses) reported in our consolidated statements of comprehensive income. See “NOTE 9: DERIVATIVES — Table 9.2 — Gains and Losses on Derivatives” for information about gains and losses related to specific categories of derivatives. Changes in fair value and interest accruals on derivatives not in hedge accounting relationships are recorded as derivative gains (losses) in our consolidated statements of comprehensive income. At June 30, 2013 and December 31, 2012, we did not have any derivatives in hedge accounting relationships; however, there are amounts recorded in AOCI related to closed cash flow hedges. Amounts recorded in AOCI associated with these closed cash flow hedges are reclassified to earnings when the forecasted transactions affect earnings. If it is probable that the forecasted transaction will not occur, then the deferred gain or loss associated with the forecasted transaction is reclassified into earnings immediately.

While derivatives are an important aspect of our strategy to manage interest-rate risk, they generally increase the volatility of reported net income because, while fair value changes in derivatives affect net income, fair value changes in several of the types of assets and liabilities being hedged do not affect net income.

Table 7 — Derivative Gains (Losses)

 

     Derivative Gains (Losses)  
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2013             2012             2013             2012      
     (in millions)  

Interest-rate swaps

   $ 3,722     $ (2,506   $ 5,296     $ (1,298

Option-based derivatives(1)

     (1,222     2,276       (1,659     1,199  

Other derivatives(2)

     (205     310       (61     199  

Accrual of periodic settlements(3)

     (933     (962     (1,839     (2,038
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,362     $ (882   $ 1,737     $ (1,938
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) Primarily includes purchased call and put swaptions and purchased interest-rate caps and floors.
(2) Includes futures, foreign-currency swaps, commitments, swap guarantee derivatives, and credit derivatives.
(3) Includes imputed interest on zero-coupon swaps.

Gains (losses) on derivatives are principally driven by changes in: (a) interest rates and implied volatility; and (b) the mix and volume of derivatives in our derivative portfolio.

During the three and six months ended June 30, 2013, we recognized gains on derivatives of $1.4 billion and $1.7 billion, respectively, primarily as a result of an increase in longer-term interest rates. During the same periods, we recognized fair value gains on our pay-fixed swaps of $9.7 billion and $13.6 billion, respectively, which were largely offset by: (a) fair value losses on our receive-fixed swaps of $6.0 billion and $8.3 billion, respectively; (b) net losses of $0.9 billion and $1.8 billion, respectively, related to the accrual of periodic settlements on interest-rate swaps as we were a net payer on our interest-rate swaps based on the coupons of the instruments; and (c) fair value losses of $1.2 billion and $1.7 billion, respectively, on our option-based derivatives resulting from losses on our purchased call swaptions.

During the three and six months ended June 30, 2012, we recognized losses on derivatives of $0.9 billion and $1.9 billion, respectively, due to losses related to the accrual of periodic settlements on interest-rate swaps as we were in a net pay-fixed swap position. During the same periods, we recognized fair value losses on our pay-fixed swaps of $8.0 billion and $4.2 billion, respectively, which were largely offset by: (a) fair value gains on our receive-fixed swaps of $5.4 billion and $2.9 billion, respectively; and (b) fair value gains on our option-based derivatives of $2.3 billion and $1.2 billion, respectively, due to a decrease in longer-term interest rates.

 

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Investment Securities-Related Activities

Impairments of Available-For-Sale Securities

We recorded net impairments of available-for-sale securities recognized in earnings, which were related to non-agency mortgage-related securities, of $44 million and $87 million during the three and six months ended June 30, 2013, respectively, compared to $98 million and $662 million during the three and six months ended June 30, 2012, respectively. The decreases in net impairments recognized in earnings were driven by improvements in forecasted home prices over the expected life of our available-for-sale securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities,” as well as “NOTE 7: INVESTMENTS IN SECURITIES” in our 2012 Annual Report for additional information.

Other Gains (Losses) on Investment Securities Recognized in Earnings

Other gains (losses) on investment securities recognized in earnings primarily consist of gains (losses) on trading securities. With the exception of principal-only securities, our agency securities, classified as trading, were valued at a net premium (i.e., net fair value was higher than UPB) as of June 30, 2013.

We recognized $(751) million and $(1.1) billion related to gains (losses) on trading securities during the three and six months ended June 30, 2013, respectively, compared to $(400) million and $(777) million during the three and six months ended June 30, 2012, respectively. The losses on trading securities during all periods were primarily due to the movement of securities with unrealized gains towards maturity. Higher losses during the three and six months ended June 30, 2013 were largely the result of an increase in interest rates compared to a decline in interest rates during the three and six months ended June 30, 2012.

Other Income (Loss)

The table below summarizes the significant components of other income.

Table 8 — Other Income (Loss)

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2013     2012      2013      2012  
     (in millions)  

Other income (loss):

          

Gains (losses) on sale of mortgage loans

   $ 181     $ 44      $ 232      $ 84  

Gains (losses) on mortgage loans recorded at fair value

     (744     201        (786      340  

Recoveries on loans impaired upon purchase(1)

     75       87        149        176  

Guarantee-related income, net(2)

     69       130        159        200  

All other

     220       107        379        203  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total other income (loss)

   $ (199   $ 569      $ 133      $ 1,003  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

 

(1) Our recoveries principally relate to impaired loans purchased prior to 2010. Consequently, our recoveries on these loans will generally decline over time.
(2) Most of our guarantee-related income relates to securitized multifamily mortgage loans where we have not consolidated the securitization trusts on our consolidated balance sheets.

Gains (Losses) on Sale of Mortgage Loans

During the three months ended June 30, 2013 and 2012, we recognized $181 million and $44 million, respectively, of gains on sale of mortgage loans with associated UPB of $8.8 billion and $6.3 billion, respectively. During the six months ended June 30, 2013 and 2012, we recognized $232 million and $84 million, respectively, of gains on sale of mortgage loans with associated UPB of $14.4 billion and $10.0 billion, respectively. The substantial majority of these amounts relate to our securitizations of multifamily loans on our consolidated balance sheets, which we elected to carry at fair value. We recognized higher gains on sale of mortgage loans during the 2013 periods, compared to the respective periods of 2012, in part due to a higher volume of multifamily securitizations in 2013.

 

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Gains (Losses) on Mortgage Loans Recorded at Fair Value

During the three months ended June 30, 2013 and 2012, we recognized $(744) million and $201 million, respectively, of gains (losses) on mortgage loans recorded at fair value. We recognized $(786) million and $340 million of such gains (losses) during the six months ended June 30, 2013 and 2012, respectively. These amounts relate to multifamily loans which we elected to carry at fair value, of which the substantial majority were designated for securitization. We recognize changes in fair value on multifamily mortgage loans we purchase for securitization as gains (losses) on mortgage loans recorded at fair value while we hold them on our consolidated balance sheets. We recognized losses on mortgage loans recorded at fair value during the 2013 periods primarily due to increases in interest rates during those periods, compared to gains recognized in the respective periods of 2012 which were the result of declines in interest rates.

All Other

All other income consists primarily of transactional fees, fees assessed to our servicers for technology use and late fees or other penalties, and other miscellaneous income. All other income increased to $220 million and $379 million during the three and six months ended June 30, 2013, respectively, compared to $107 million and $203 million during the three and six months ended June 30, 2012, respectively. The increases in the 2013 periods were primarily due to proceeds from two settlement agreements related to lawsuits regarding certain residential non-agency mortgage-related securities we hold. For additional information on our settlement agreements, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Agency and Non-Agency Mortgage-Related Security Issuers.”

Non-Interest Expense

The table below summarizes the components of non-interest expense.

Table 9 — Non-Interest Expense

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  
     (in millions)  

Administrative expenses:

        

Salaries and employee benefits

   $ 211     $ 227     $ 419     $ 403  

Professional services

     134       81       243       152  

Occupancy expense

     14       14       27       28  

Other administrative expense

     85       79       187       155  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total administrative expenses

     444       401       876       738  

REO operations (income) expense

     (110     (30     (104     141  

Other expenses

     164       165       350       253  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

   $ 498     $ 536     $ 1,122     $ 1,132  
  

 

 

   

 

 

   

 

 

   

 

 

 

Administrative Expenses

Administrative expenses increased during the three and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012 primarily due to an increase in professional services expense related to legal expenses, initiatives we are implementing under the Conservatorship Scorecards, and other FHFA-mandated strategic initiatives. We believe the various FHFA-mandated strategic initiatives we are pursuing may continue to require significant resources and thus continue to affect our level of administrative expenses.

REO Operations (Income) Expense

The table below presents the components of our REO operations (income) expense, and information about REO inventory and REO dispositions.

 

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Table 10 — REO Operations (Income) Expense, REO Inventory, and REO Dispositions

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  
     (dollars in millions)  

REO operations (income) expense:

        

Single-family:

        

REO property expenses(1)

   $ 238     $ 293     $ 483     $ 671  

Disposition (gains) losses, net(2)

     (236     (182     (395     (260

Change in holding period allowance, dispositions

     (13     (33     (24     (90

Change in holding period allowance, inventory(3)

     (6     (27     17       (26

Recoveries(4)

     (92     (85     (182     (157
  

 

 

   

 

 

   

 

 

   

 

 

 

Total single-family REO operations (income) expense

     (109     (34     (101     138  

Multifamily REO operations (income) expense

     (1     4       (3     3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total REO operations (income) expense

   $ (110   $ (30   $ (104   $ 141  
  

 

 

   

 

 

   

 

 

   

 

 

 

REO inventory (in properties), at June 30:

        

Single-family

     44,623       53,271       44,623       53,271  

Multifamily

     5       11       5       11  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     44,628       53,282       44,628       53,282  
  

 

 

   

 

 

   

 

 

   

 

 

 

REO property dispositions (in properties):

        

Single-family

     19,763       26,069       38,747       51,102  

Multifamily

     3       7       4       11  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     19,766       26,076       38,751       51,113  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) Consists of costs incurred to maintain or protect a property after it is acquired in a foreclosure transfer, such as legal fees, insurance, taxes, and cleaning and other maintenance charges.
(2) Represents the difference between the disposition proceeds, net of selling expenses, and the fair value of the property on the date of the foreclosure transfer.
(3) Represents the (increase) decrease in the estimated fair value of properties that were in inventory during the period.
(4) Includes recoveries from primary mortgage insurance, pool insurance and seller/servicer repurchases.

REO operations (income) expense was $(110) million in the second quarter of 2013, as compared to $(30) million in the second quarter of 2012 and was $(104) million in the first half of 2013 compared to $141 million in the first half of 2012. The improvements in the 2013 periods were primarily due to: (a) a decline in property expenses associated with a lower number of properties in 2013; and (b) improving home prices in certain geographical areas with significant REO activity, which resulted in increased gains on disposition of properties. For information on our REO activity during the second quarter and first half of 2013, see “CONSOLIDATED BALANCE SHEETS ANALYSIS — REO, Net” and “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Non-Performing Assets.”

Other Expenses

Other expenses were $164 million and $165 million in the second quarters of 2013 and 2012, respectively, and were $350 million and $253 million in the first half of 2013 and 2012, respectively. Other expenses in the second quarter and first half of 2013 include $124 million and $216 million, respectively, of expenses related to the legislated 10 basis point increase in guarantee fees, which was implemented in April 2012. These amounts are remitted to Treasury on a quarterly basis. The amount was not significant during the first half of 2012. Other expenses also include HAMP servicer incentive fees, costs related to terminations and transfers of mortgage servicing, and other miscellaneous expenses.

Income Tax Benefit

For the three months ended June 30, 2013 and 2012, we reported an income tax benefit of $41 million and $76 million, respectively. For the six months ended June 30, 2013 and 2012, we reported an income tax benefit of $76 million and $90 million, respectively. See “NOTE 12: INCOME TAXES” for additional information.

Comprehensive Income

Our comprehensive income was $4.4 billion and $11.3 billion for the three and six months ended June 30, 2013, respectively, consisting of: (a) $5.0 billion and $9.6 billion of net income, respectively; and (b) $(631) million and $1.8 billion of other comprehensive income (loss), respectively, primarily related to fair value losses and gains on our available-for-sale securities.

 

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Our comprehensive income was $2.9 billion and $4.7 billion for the three and six months ended June 30, 2012, respectively, consisting of: (a) $3.0 billion and $3.6 billion of net income, respectively; and (b) $(128) million and $1.1 billion of other comprehensive income (loss), respectively, primarily related to fair value losses and gains on our available-for-sale securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Total Equity (Deficit)” for additional information regarding other comprehensive income (loss).

Segment Earnings

Our operations consist of three reportable segments, which are based on the type of business activities each performs — Investments, Single-family Guarantee, and Multifamily. Certain activities that are not part of a reportable segment are included in the All Other category.

The Investments segment reflects results from our investment, funding and hedging activities. The Single-family Guarantee segment reflects results from our single-family credit guarantee activities. The Multifamily segment reflects results from our investment (both purchases and sales), securitization, and guarantee activities in multifamily mortgage loans and securities. For more information, see “NOTE 13: SEGMENT REPORTING” in our 2012 Annual Report.

In presenting Segment Earnings, we make significant reclassifications among certain financial statement line items in order to reflect a measure of net interest income on investments and a measure of management and guarantee income on guarantees that is in line with how we manage our business. We present Segment Earnings by: (a) reclassifying certain investment-related activities and credit guarantee-related activities between various line items on our GAAP consolidated statements of comprehensive income; and (b) allocating certain revenues and expenses, including certain returns on assets and funding costs, and all administrative expenses to our three reportable segments.

As a result of these reclassifications and allocations, Segment Earnings for our reportable segments differs significantly from, and should not be used as a substitute for, net income (loss) as determined in accordance with GAAP. Our definition of Segment Earnings may differ from similar measures used by other companies. However, we believe that Segment Earnings provides us with meaningful metrics to assess the financial performance of each segment and our company as a whole.

See “NOTE 13: SEGMENT REPORTING” in our 2012 Annual Report for further information regarding the reclassifications and allocations used to present Segment Earnings.

The table below provides information about our various segment mortgage and credit risk portfolios at June 30, 2013 and December 31, 2012. For a discussion of each segment’s portfolios, see “Segment Earnings — Results.”

 

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Table 11 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios(1)

 

     June 30, 2013     December 31, 2012  
     (in millions)  

Segment mortgage portfolios:

    

Investments — Mortgage investments portfolio:

    

Single-family unsecuritized mortgage loans(2)

   $ 86,901     $ 91,411  

Freddie Mac mortgage-related securities

     181,610        184,381  

Non-agency mortgage-related securities

     70,313       76,457  

Non-Freddie Mac agency securities

     20,088       23,675  
  

 

 

   

 

 

 

Total Investments — Mortgage investments portfolio

     358,912        375,924  
  

 

 

   

 

 

 

Single-family Guarantee — Managed loan portfolio:(3)

    

Single-family unsecuritized mortgage loans(4)

     45,519       53,333  

Single-family Freddie Mac mortgage-related securities held by us

     181,610        184,381  

Single-family Freddie Mac mortgage-related securities held by third parties

     1,346,957        1,335,393  

Single-family other guarantee commitments(5)

     16,675       13,798  
  

 

 

   

 

 

 

Total Single-family Guarantee — Managed loan portfolio

     1,590,761       1,586,905  
  

 

 

   

 

 

 

Multifamily — Guarantee portfolio:

    

Multifamily Freddie Mac mortgage related securities held by us

     3,029       2,382  

Multifamily Freddie Mac mortgage related securities held by third parties

     50,930       39,884  

Multifamily other guarantee commitments(5)

     9,464       9,657  
  

 

 

   

 

 

 

Total Multifamily — Guarantee portfolio

     63,423       51,923  
  

 

 

   

 

 

 

Multifamily — Mortgage investments portfolio:

    

Multifamily investment securities portfolio

     47,479       51,718  

Multifamily unsecuritized loan portfolio

     69,309       76,569  
  

 

 

   

 

 

 

Total Multifamily — Mortgage investments portfolio

     116,788       128,287  
  

 

 

   

 

 

 

Total Multifamily portfolio

     180,211       180,210  
  

 

 

   

 

 

 

Less: Freddie Mac single-family and certain multifamily securities(6)

     (184,639     (186,763
  

 

 

   

 

 

 

Total mortgage portfolio

   $ 1,945,245     $ 1,956,276  
  

 

 

   

 

 

 

Credit risk portfolios:(7)

    

Single-family credit guarantee portfolio:(3)

    

Single-family mortgage loans, on-balance sheet

   $ 1,627,224     $ 1,621,774  

Non-consolidated Freddie Mac mortgage-related securities

     7,391       8,897  

Other guarantee commitments(5)

     16,675       13,798  

Less: HFA initiative-related guarantees(8)

     (4,596     (6,270

Less: Freddie Mac mortgage-related securities backed by Ginnie Mae certificates(8)

     (583     (654
  

 

 

   

 

 

 

Total single-family credit guarantee portfolio

   $ 1,646,111     $ 1,637,545  
  

 

 

   

 

 

 

Multifamily mortgage portfolio:

    

Multifamily mortgage loans, on-balance sheet(9)

   $ 69,755     $ 77,017  

Non-consolidated Freddie Mac mortgage-related securities

     53,513       41,819  

Other guarantee commitments(5)

     9,464       9,657  

Less: HFA initiative-related guarantees(8)

     (940     (1,112
  

 

 

   

 

 

 

Total multifamily mortgage portfolio

   $ 131,792     $ 127,381  
  

 

 

   

 

 

 

 

 

 

(1) Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(2) Excludes unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment. The Single-family Guarantee segment earns management and guarantee fees associated with unsecuritized single-family loans in the Investments segment’s mortgage investments portfolio.
(3) The balances of the mortgage-related securities in the Single-family Guarantee managed loan portfolio are based on the UPB of the security, whereas the balances of our single-family credit guarantee portfolio presented in this report are based on the UPB of the mortgage loans underlying the related security. The differences in the loan and security balances result from the timing of remittances to security holders, which are typically 45 or 75 days after the mortgage payment cycle of fixed-rate and ARM PCs, respectively.
(4) Represents unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment.
(5) Represents the UPB of mortgage-related assets held by third parties for which we provide our guarantee without our securitization of the related assets.
(6) Freddie Mac single-family mortgage-related securities held by us are included in both our Investments segment’s mortgage investments portfolio and our Single-family Guarantee segment’s managed loan portfolio, and Freddie Mac multifamily mortgage-related securities held by us are included in both the multifamily investment securities portfolio and the multifamily guarantee portfolio. Therefore, these amounts are deducted in order to reconcile to our total mortgage portfolio.
(7) Represents the UPB of loans for which we present characteristics, delinquency data, and certain other statistics in this report. See “GLOSSARY” for further description.
(8) We exclude HFA initiative-related guarantees and our resecuritizations of Ginnie Mae certificates from our credit risk portfolios and most related statistics because these guarantees do not expose us to meaningful amounts of credit risk due to the credit enhancement provided on them by the U.S. government.
(9) Includes both unsecuritized multifamily mortgage loans and multifamily mortgage loans in consolidated trusts.

 

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Segment Earnings — Results

Investments

The table below presents the Segment Earnings of our Investments segment.

Table 12 — Segment Earnings and Key Metrics — Investments(1)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  
     (dollars in millions)  

Segment Earnings:

        

Net interest income

   $ 839     $ 1,528     $ 1,869     $ 3,252  

Non-interest income (loss):

        

Net impairment of available-for-sale securities recognized in earnings

     49       (14     57       (510

Derivative gains (losses)

     2,380       236       3,767       436  

Gains (losses) on trading securities

     (732     (413     (1,124     (811

Gains (losses) on sale of mortgage loans

     5       6       (11     (8

Gains (losses) on mortgage loans recorded at fair value

     (449     257       (606     219  

Other non-interest income (loss)

     958       704       1,717       1,256  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income (loss)

     2,211       776       3,800       582  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Administrative expenses

     (132     (108     (244     (200

Other non-interest expense

     (1           (1      
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     (133     (108     (245     (200
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment adjustments(2)

     296       164       585       319  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Earnings before income tax benefit

     3,213       2,360       6,009       3,953  

Income tax benefit

     41       108       83       143  
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Earnings, net of taxes

     3,254       2,468       6,092       4,096  

Total other comprehensive income (loss), net of taxes

     (367     27       1,589       362  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 2,887     $ 2,495     $ 7,681     $ 4,458  
  

 

 

   

 

 

   

 

 

   

 

 

 

Key metrics:

        

Portfolio balances:

        

Average balances of interest-earning assets:(3)(4)

        

Mortgage-related securities(5)

   $ 276,553     $ 308,287     $ 281,274     $ 319,439  

Non-mortgage-related investments(6)

     94,781       94,806       90,560       100,173  

Single-family unsecuritized loans(7)

     90,057       98,158       90,723       103,732  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total average balances of interest-earning assets

   $ 461,391     $ 501,251     $ 462,557     $ 523,344  
  

 

 

   

 

 

   

 

 

   

 

 

 

Return:

        

Net interest yield — Segment Earnings basis (annualized)

     0.73     1.22     0.81     1.24

 

 

(1) For reconciliations of the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 13: SEGMENT REPORTING — Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.”
(2) For a description of our segment adjustments, see “NOTE 13: SEGMENT REPORTING — Segment Earnings” in our 2012 Annual Report.
(3) Excludes mortgage loans and mortgage-related securities traded, but not yet settled.
(4) We calculate average balances based on amortized cost.
(5) Includes our investments in single-family PCs and certain Other Guarantee Transactions, which are consolidated under GAAP on our consolidated balance sheets.
(6) Includes the average balances of interest-earning cash and cash equivalents, non-mortgage-related securities, and federal funds sold and securities purchased under agreements to resell.
(7) Excludes unsecuritized seriously delinquent single-family mortgage loans.

Segment Earnings for our Investments segment increased by $786 million and $2.0 billion to $3.3 billion and $6.1 billion in the three and six months ended June 30, 2013, respectively, compared to $2.5 billion and $4.1 billion in the three and six months ended June 30, 2012, respectively, primarily due to an increase in derivative gains.

Comprehensive income for our Investments segment increased by $392 million and $3.2 billion to $2.9 billion and $7.7 billion in the three and six months ended June 30, 2013, respectively, compared to $2.5 billion and $4.5 billion in the three and six months ended June 30, 2012, respectively, primarily due to higher Segment Earnings.

During the three and six months ended June 30, 2013, the UPB of the Investments segment mortgage investments portfolio decreased at an annualized rate of 2% and 9%, respectively. We held $201.7 billion and $208.1 billion of agency securities, $70.3 billion and $76.5 billion of non-agency mortgage-related securities, and $86.9 billion and $91.4 billion of single-family unsecuritized mortgage loans at June 30, 2013 and December 31, 2012, respectively. The decline in UPB of agency securities is due mainly to liquidations. The decline in UPB of non-agency mortgage-related securities is due mainly to the receipt of monthly remittances of principal repayments from both the recoveries from liquidated loans and, to a lesser

 

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extent, voluntary repayments of the underlying collateral, representing a partial return of our investments in these securities, as well as sales during the three months ended June 30, 2013. The decline in the UPB of single-family unsecuritized mortgage loans is primarily related to our securitization of mortgage loans that we had purchased for cash. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” and “— Mortgage Loans” for additional information regarding our mortgage-related securities and mortgage loans.

Segment Earnings net interest income decreased by $689 million and $1.4 billion and Segment Earnings net interest yield decreased by 49 basis points and 43 basis points during the three and six months ended June 30, 2013, respectively, compared to the three and six months ended June 30, 2012. The primary drivers of the decreases were the reduction in the balance of higher-yielding mortgage-related assets due to continued liquidations, partially offset by lower funding costs primarily due to the replacement of debt at lower rates.

Segment Earnings non-interest income was $2.2 billion and $3.8 billion in the three and six months ended June 30, 2013, respectively, compared to $776 million and $582 million in the three and six months ended June 30, 2012, respectively. These improvements were primarily due to increases in derivative gains, improvements in net impairments of available-for-sale securities recognized in earnings and increases in other non-interest income, partially offset by increases in losses on mortgage loans recorded at fair value and increased losses on trading securities.

We recorded derivative gains for this segment of $2.4 billion and $3.8 billion during the three and six months ended June 30, 2013, respectively, compared to $236 million and $436 million during the three and six months ended June 30, 2012, respectively. The increased derivative gains were primarily due to an increase in longer-term interest rates. See “Non-Interest Income (Loss) — Derivative Gains (Losses)” for additional information on our derivatives.

Net impairments in our Investments segment were benefits of $49 million and $57 million during the three and six months ended June 30, 2013, respectively, compared to expenses of $14 million and $510 million during the three and six months ended June 30, 2012, respectively. The improvement in impairments was primarily due to improvements in forecasted home prices over the expected life of the available-for-sale securities during the three and six months ended June 30, 2013. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities,” as well as “NOTE 7: INVESTMENTS IN SECURITIES” in our 2012 Annual Report for additional information on our impairments.

We recorded gains (losses) on trading securities of $(732) million and $(1.1) billion during the three and six months ended June 30, 2013, respectively, compared to $(413) million and $(811) million during the three and six months ended June 30, 2012, respectively. The losses on trading securities during all periods were primarily due to the movement of securities with unrealized gains towards maturity. Higher losses during the three and six months ended June 30, 2013 were largely the result of an increase in interest rates compared to a decline in interest rates during the three and six months ended June 30, 2012.

We recorded gains (losses) on mortgage loans recorded at fair value of $(449) million and $(606) million during the three and six months ended June 30, 2013, respectively, compared to $257 million and $219 million during the three and six months ended June 30, 2012, respectively. The losses on mortgage loans recorded at fair value during the three and six months ended June 30, 2013 were primarily due to an increase in interest rates while the gains on mortgage loans recorded at fair value during the three and six months ended June 30, 2012 were due to a decline in interest rates.

We recorded other non-interest income (loss) for this segment of $958 million and $1.7 billion during the three and six months ended June 30, 2013, respectively, compared to $704 million and $1.3 billion during the three and six months ended June 30, 2012, respectively. The increase in other non-interest income during the three months ended June 30, 2013 primarily resulted from gains related to sales of available-for-sale securities and a gain realized due to a settlement agreement related to lawsuits regarding certain non-agency mortgage-related securities we hold. The improvement in other non-interest income during the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was due to an increase in amortization income related to premiums on debt securities of consolidated trusts held by third parties, gains related to sales of available-for-sale securities, and gains realized due to two settlement agreements related to lawsuits regarding certain non-agency mortgage-related securities we hold. For additional information on our settlement agreements, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Agency and Non-Agency Mortgage-Related Security Issuers.”

Amortization income increased during the six months ended June 30, 2013 due to additional premiums on new debt securities issued by consolidated trusts. Basis adjustments (premiums or discounts) related to these debt securities of

 

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consolidated trusts held by third parties are generated through the securitization and sale of retained mortgage loans or sales of Freddie Mac mortgage-related securities from our mortgage-related investments portfolio.

Our Investments segment’s other comprehensive income (loss) was $(367) million and $1.6 billion during the three and six months ended June 30, 2013, respectively, compared to $27 million and $362 million during the three and six months ended June 30, 2012, respectively. The shift to other comprehensive loss during the three months ended June 30, 2013 compared to other comprehensive income during the three months ended June 30, 2012 was primarily due to increased losses on our agency and Multifamily segment investment securities due to an increase in interest rates during the three months ended June 30, 2013 compared to a decrease in interest rates during the three months ended June 30, 2012. The increase in other comprehensive income during the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was primarily due to higher fair value gains on our non-agency mortgage-related securities due to spread tightening. Changes in fair value of the Multifamily segment investment securities, excluding impacts from the changes in interest rates which are included in the Investments segment, are reflected in the Multifamily segment.

For a discussion of items that have affected our Investments segment net interest income over time, and can be expected to continue to do so, see “BUSINESS — Conservatorship and Related Matters — Limits on Investment Activity and Our Mortgage-Related Investments Portfolio” in our 2012 Annual Report.

Single-Family Guarantee

The table below presents the Segment Earnings of our Single-family Guarantee segment.

 

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Table 13 — Segment Earnings and Key Metrics — Single-Family Guarantee(1)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  
     (dollars in millions)  

Segment Earnings:

        

Net interest income (expense)

   $ 3     $ (1   $ 97     $ (33

Benefit (provision) for credit losses

     345       (462     589       (2,646

Non-interest income:

        

Management and guarantee income

     1,298       1,026       2,541       2,037  

Other non-interest income

     208       171       449       352  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     1,506       1,197       2,990       2,389  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Administrative expenses

     (252     (232     (493     (425

REO operations income (expense)

     109       34       101       (138

Other non-interest expense

     (156     (82     (310     (155
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     (299     (280     (702     (718
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment adjustments(2)

     (214     (192     (442     (388
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Earnings (loss) before income tax expense

     1,341       262       2,532       (1,396

Income tax expense

            (21     (5     (38
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Earnings (loss), net of taxes

     1,341       241       2,527       (1,434

Total other comprehensive income (loss), net of taxes

     1       1       12       (22
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 1,342     $ 242     $ 2,539     $ (1,456
  

 

 

   

 

 

   

 

 

   

 

 

 

Key metrics:

        

Balances and Volume (in billions, except rate):

        

Average balance of single-family credit guarantee portfolio and HFA guarantees

   $ 1,642     $ 1,706     $ 1,639     $ 1,723  

Issuance — Single-family credit guarantees(3)

   $ 133     $ 100     $ 269     $ 210  

Fixed-rate products — Percentage of purchases(4)

     96     95     97     95

Liquidation rate — Single-family credit guarantees (annualized)(5)

     32     32     34     31

Average Management and Guarantee Rate (in bps, annualized):(6)

        

Segment Earnings management and guarantee income(7)

     31.6       24.1       31.0       23.6  

Guarantee fee charged on new acquisitions(8)

     50.7       39.8       49.9       32.7  

Credit:

        

Serious delinquency rate, at end of period

     2.79     3.45     2.79     3.45

REO inventory, at end of period (number of properties)

     44,623       53,271       44,623       53,271  

Single-family credit losses, in bps (annualized)(9)

     42.4       66.7       46.1       72.7  

Market:

        

Single-family mortgage debt outstanding (total U.S. market, in billions)(10)

   $ 9,868     $ 10,026     $ 9,868     $ 10,026  

30-year fixed mortgage rate(11)

     4.5     3.7     4.5     3.7

 

 

(1) For reconciliations of the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 13: SEGMENT REPORTING — Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.”
(2) For a description of our segment adjustments, see “NOTE 13: SEGMENT REPORTING — Segment Earnings” in our 2012 Annual Report.
(3) Based on UPB.
(4) Excludes Other Guarantee Transactions.
(5) Represents principal repayments relating to loans underlying Freddie Mac mortgage-related securities and other guarantee commitments, including those related to our removal of seriously delinquent and modified mortgage loans and balloon/reset mortgage loans out of PC pools.
(6) Includes the effect of the legislated 10 basis point increase in guarantee fees that became effective April 1, 2012. The 2013 periods also include an additional across-the-board increase in guarantee fees that became effective in the fourth quarter of 2012.
(7) Consists of the contractual management and guarantee fee rate as well as amortization of delivery and other upfront fees for the entire single-family credit guarantee portfolio. Also includes the effect of pricing adjustments that are based on the relative performance of our PCs compared to comparable Fannie Mae securities.
(8) Represents the estimated rate of management and guarantee fees for new acquisitions during the period assuming amortization of delivery fees using the estimated life of the related loans rather than the original contractual maturity date of the related loans. Also includes the effect of pricing adjustments that are based on the relative performance of our PCs compared to comparable Fannie Mae securities.
(9) Calculated as the amount of single-family credit losses divided by the sum of the average carrying value of our single-family credit guarantee portfolio and the average balance of our single-family HFA initiative-related guarantees.
(10) Source: Federal Reserve Flow of Funds Accounts of the United States of America dated June 6, 2013. The outstanding amount for June 30, 2013 reflects the balance as of March 31, 2013.
(11) Based on Freddie Mac’s Primary Mortgage Market Survey rate for the last week in the period, which represents the national average mortgage commitment rate to a qualified borrower exclusive of any fees and points required by the lender. This commitment rate applies only to financing on conforming mortgages with LTV ratios of 80%.

Segment Earnings (loss) for our Single-family Guarantee segment improved to $1.3 billion and $2.5 billion for the three and six months ended June 30, 2013, respectively, compared to $0.2 billion and $(1.4) billion for the three and six months ended June 30, 2012, respectively. The improvement was primarily due to a shift from provision for credit losses of $0.5 billion and $2.6 billion in the second quarter and first half of 2012, respectively, to a benefit for credit losses of $0.3 billion and $0.6 billion in the second quarter and first half of 2013, respectively. Segment Earnings (loss) for the Single-family Guarantee segment is largely driven by management and guarantee fee income and the benefit (provision) for credit losses.

 

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The table below provides summary information about the composition of Segment Earnings (loss) for this segment for the six months ended June 30, 2013 and 2012.

Table 14 — Segment Earnings Composition — Single-Family Guarantee Segment

 

     Six Months Ended June 30, 2013  
     Segment Earnings
Management and
Guarantee Income(1)
     Credit-Related
Benefit (Expense) (2)
       
     Amount      Average
Rate(3)
     Amount     Average
Rate(3)
    Net
Amount(4)
 
     (dollars in millions, rates in bps)  

Year of origination:(5)

            

2013

   $ 215        33.5      $ (19     (2.8   $ 196  

2012

     642        33.2        (138     (6.6     504  

2011

     393        37.6        (39     (3.8     354  

2010

     369        36.4        (21     (2.0     348  

2009

     290        33.4        16       1.9       306  

2008

     141        33.1        36       11.2       177  

2007

     135        22.9        357       70.8       492  

2006

     73        19.3        178       47.0       251  

2005

     84        19.7        120       27.9       204  

2004 and prior

     199        22.9        200       21.3       399  
  

 

 

       

 

 

     

 

 

 

Total

   $ 2,541        31.0      $ 690       8.3     $ 3,231  
  

 

 

       

 

 

     

Administrative expenses

               (493

Net interest income (expense)

               97  

Other non-interest income (expenses), net

               (308
            

 

 

 

Segment Earnings (loss), net of taxes

             $ 2,527  
            

 

 

 
     Six Months Ended June 30, 2012  
     Segment Earnings
Management and
Guarantee Income(1)
     Credit-Related
Benefit (Expense) (2)
       
     Amount      Average
Rate(3)
     Amount     Average
Rate(3)
    Net
Amount(4)
 
     (dollars in millions, rates in bps)  

Year of origination:(5)

            

2012

   $ 87        18.2      $ (23     (4.3   $ 64  

2011

     367        25.8        (106     (7.5     261  

2010

     385        26.6        (178     (11.9     207  

2009

     380        27.6        (160     (11.6     220  

2008

     174        26.4        (161     (30.7     13  

2007

     164        19.5        (883     (117.7     (719

2006

     104        19.3        (525     (93.9     (421

2005

     120        19.6        (584     (91.8     (464

2004 and prior

     256        20.6        (164     (12.0     92  
  

 

 

       

 

 

     

 

 

 

Total

   $ 2,037        23.6      $ (2,784     (32.2   $ (747
  

 

 

       

 

 

     

Administrative expenses

               (425

Net interest income (expense)

               (33

Other non-interest income (expenses), net

               (229
            

 

 

 

Segment Earnings (loss), net of taxes

             $ (1,434
            

 

 

 

 

 

(1) Includes amortization of delivery and other upfront fees based on the original contractual maturity date of the related loans of $1,298 million and $785 million for the six months ended June 30, 2013 and 2012, respectively. Includes the effect of the legislated 10 basis point increase in guarantee fees that became effective April 1, 2012. Results for 2013 also include an additional across-the-board increase in guarantee fees that became effective in the fourth quarter of 2012. Beginning in the fourth quarter of 2012, includes amortization of buy-down fees.
(2) Consists of the aggregate of the Segment Earnings benefit (provision) for credit losses and Segment Earnings REO operations income (expense). Historical rates of average credit-related benefit (expenses) may not be representative of future results.
(3) Calculated as the annualized amount of Segment Earnings management and guarantee income or credit-related benefit (expenses), respectively, divided by the sum of the average carrying values of the single-family credit guarantee portfolio and the average balance of our single-family HFA initiative-related guarantees.
(4) Calculated as Segment Earnings management and guarantee income less credit-related benefit (expenses).
(5) Segment Earnings management and guarantee income is presented by year of guarantee origination, whereas credit-related benefit (expenses) are presented based on year of loan origination.

As of June 30, 2013, loans originated after 2008 have, on a cumulative basis, provided management and guarantee income that has exceeded the credit-related and administrative expenses associated with these loans. Nevertheless, various factors, such as continued high unemployment rates, future declines in home prices, or negative impacts of HARP loans (which may not perform as well as other refinance mortgages, due in part to the high LTV ratios of the loans), could require us to incur expenses on these loans beyond our current expectations.

 

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For the first half of 2013, improvements in credit-related expenses for loans originated in 2005 through 2008 resulted from lower estimates of incurred losses due to improvements in home prices. However, our management and guarantee income associated with guarantee issuances in 2005 through 2008 has not been adequate to cover the credit-related and administrative expenses associated with such loans, on a cumulative basis, primarily due to the high rate of defaults on the loans originated in those years coupled with the high volume of refinancing of these loans that has occurred since 2008. High levels of refinancing and delinquency since 2008 have significantly reduced the balance of performing loans originated in 2005 through 2008 that remains in our portfolio and consequently reduced management and guarantee income associated with loans from those years (we do not recognize Segment Earnings management and guarantee income on non-accrual mortgage loans). However, in periods of increasing home prices and improving delinquency rates, such as the first half of 2013, our guarantees of loans originated in 2005 through 2008 may result in management and guarantee income that exceeds related expenses.

Based on our historical experience, the performance of the loans in an individual origination year can vary over time. The aggregate UPB of loans and the corresponding management and guarantee fee income from an origination year will decline over time due to repayments, refinancing, and other liquidation events. In addition, credit-related expenses related to the remaining loans in the origination year may be volatile due to, among other factors, changes in home prices and generally will increase over time, as some borrowers experience financial difficulties and default on their loans. As a result, there will likely be periods when an origination year is not profitable, though it may remain profitable on a cumulative basis. We currently believe our management and guarantee fee rates for guarantee issuances after 2008 (excluding the amounts associated with the Temporary Payroll Tax Cut Continuation Act of 2011), when coupled with the higher credit quality of the mortgages within these new guarantee issuances will provide management and guarantee fee income, over the long term, that exceeds our expected credit-related and administrative expenses associated with the underlying loans.

Segment Earnings management and guarantee income increased in the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012, primarily due to an increase in amortization of upfront fees, including delivery and buy-down fees. The higher amortization of upfront fees was due to: (a) the amortization of buy-down fees, which we began recording in the Single-family Guarantee segment during the fourth quarter of 2012; (b) a higher volume of delivery fees; and (c) increased loan liquidations during the first half of 2013. We amortize upfront fees through the original contractual maturity date of the loan rather than the loan’s estimated life. As a result, the amount of Segment Earnings management and guarantee income we recognize related to upfront fees is lower in the initial years of a loan and increases over time as a result of scheduled monthly loan payments and periods of high refinance activity.

At the direction of FHFA, we implemented two across-the-board increases in guarantee fees in 2012. As a result, the average management and guarantee fee rate we charged for loans originated in 2013 was 50.7 basis points (including the 10 bps that we are required to remit to Treasury) for the three months ended June 30, 2013, which is generally higher than the fee we charged for loans we purchased in previous years. The guarantee fee we charge on new acquisitions generally consists of a combination of delivery fees as well as a base monthly fee. The average guarantee fee charged on new acquisitions represents our expected guarantee fee rate over the estimated life of the related loans using certain assumptions for prepayments and other liquidations.

Our Segment Earnings management and guarantee fee income is also influenced by our PC price performance because we adjust our fees based on the relative price performance of our PCs compared to comparable Fannie Mae securities. A decline in security performance could negatively impact our segment financial results. See “RISK FACTORS — Competitive and Market Risks — A significant decline in the price performance of or demand for our PCs could have an adverse effect on the volume and/or profitability of our new single-family guarantee business” in our 2012 Annual Report for additional information.

The UPB of the Single-family Guarantee managed loan portfolio was $1.6 trillion at both June 30, 2013 and December 31, 2012. The annualized liquidation rate on our securitized single-family credit guarantees was approximately 32% and 34% for the three and six months ended June 30, 2013, respectively. Although the annualized liquidation rate remained high during the first half of 2013, it declined in the second quarter of 2013 compared to the first quarter of 2013 primarily due to an increase in interest rates and lower refinancing activity. Issuances of our guarantees were $269.1 billion and $210.4 billion in the first half of 2013 and 2012, respectively. Our issuance activity remained high in the first half of 2013. However, we expect our issuance volumes to decline, potentially significantly, during the remainder of 2013 compared to the first half of 2013.

 

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Refinance volumes represented 77% and 81% of our single-family mortgage purchase volume during the three and six months ended June 30, 2013, respectively, compared to 81% and 84% during the three and six months ended June 30, 2012, respectively, based on UPB. We believe that refinance volumes will continue to decline from current levels if interest rates continue to increase. For more information on the potential impact of increasing interest rates on our single-family business, see “RISK FACTORS — Competitive and Market Risks — Our refinance volumes could decline if interest rates rise, which could cause our overall new mortgage-related security issuance volumes to decline” in our 2012 Annual Report.

Relief refinance mortgages comprised approximately 31% and 35% of our total refinance volume during the first half of 2013 and 2012, respectively. Approximately 16% and 21% of our single-family purchase volume in the first half of 2013 and 2012, respectively, were HARP loans. Over time, HARP loans may not perform as well as other refinance mortgages because of the continued high LTV ratios and reduced underwriting standards of these loans. Based on our historical experience, there is an increased probability of borrower defaults as LTV ratios increase. In addition, HARP loans may not be covered by mortgage insurance for the full excess of their UPB over 80%. For more information about HARP loans and our relief refinance mortgage initiative, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program.”

The credit quality of the single-family loans we acquired beginning in 2009 (excluding HARP loans and other relief refinance mortgages) is significantly better than that of loans we acquired from 2005 through 2008, as measured by original LTV ratios, FICO scores, and the proportion of loans underwritten with fully documented income. HARP loans represented 12% of the UPB of our single-family credit guarantee portfolio as of June 30, 2013. Relief refinance loans represented 20% of our single-family credit guarantee portfolio as of June 30, 2013. Mortgages originated after 2008, including HARP and other relief refinance loans, represented 70% of the UPB of our single-family credit guarantee portfolio as of June 30, 2013, and the portion of that portfolio represented by such loans continues to increase.

Benefit (provision) for credit losses for the Single-family Guarantee segment was $0.3 billion and $0.6 billion for the three and six months ended June 30, 2013, respectively, compared to $(0.5) billion and $(2.6) billion for the three and six months ended June 30, 2012, respectively. The shift from a provision for credit losses in the second quarter and first half of 2012 to a benefit for credit losses in the second quarter and first half of 2013 primarily reflects: (a) declines in the volume of newly delinquent loans (largely due to a decline in the portion of our single-family credit guarantee portfolio originated in 2005 through 2008); and (b) lower estimates of incurred loss due to the positive impact of an increase in national home prices. Assuming that all other factors remain the same, an increase in home prices can reduce the likelihood that loans will default and may also reduce the amount of credit losses on the loans that do default. Our Segment Earnings provision for credit losses in the three and six months ended June 30, 2012 reflected improvements in the number of newly impaired loans (largely due to a decline in the portion of our single-family credit guarantee portfolio originated in 2005 through 2008) and lower estimates of incurred losses due to the positive impact of an increase in national home prices compared to the preceding periods.

The serious delinquency rate on our single-family credit guarantee portfolio was 2.79% and 3.25% as of June 30, 2013 and December 31, 2012, respectively, and remains high compared to the rates we experienced in years prior to 2009. Charge-offs, net of recoveries, associated with single-family loans were $3.9 billion and $6.2 billion in the first half of 2013 and 2012, respectively. Single-family credit losses as a percentage of the average balance of the single-family credit guarantee portfolio and HFA initiative-related guarantees were 46.1 basis points and 72.7 basis points for the first half of 2013 and 2012, respectively. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk Single-Family Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance, serious delinquency rates, charge-offs, and our non-performing assets.

REO operations income (expense) for the Single-family Guarantee segment was $109 million and $34 million in the second quarters of 2013 and 2012, respectively, and was $101 million and $(138) million in the first half of 2013 and 2012, respectively. The improvements in the 2013 periods, compared to the respective periods in 2012, were primarily due to: (a) a decline in property expenses associated with a lower number of properties in the 2013 periods; and (b) greater improvement in home prices during the 2013 periods in certain geographical areas with significant REO activity, which resulted in increased gains on disposition of properties.

Our REO inventory (measured in number of properties) declined 9% from December 31, 2012 to June 30, 2013 primarily due to lower foreclosure activity as well as a significant number of borrowers completing short sales rather than foreclosures. Although there was an improvement in REO disposition severity during the first half of 2013, the REO disposition severity ratios on sales of our REO inventory remain high as compared to periods before 2008. See “RISK

 

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MANAGEMENT — Credit Risk — Mortgage Credit RiskNon-Performing Assets” for additional information about our REO activity.

Other non-interest expense for the Single-family Guarantee segment was $156 million in the second quarter of 2013, compared to $82 million in the second quarter of 2012 and was $310 million in the first half of 2013, compared to $155 million in the first half of 2012. The increase in the 2013 periods was primarily due to expenses related to the legislated 10 basis point increase to guarantee fees, which we implemented in April 2012. The amount was not significant during the first half of 2012. As of June 30, 2013, the cumulative total of amounts paid and due to Treasury related to this increase was $324 million, including $216 million for the first half of 2013. The increases in expense associated with the legislated increase in guarantee fees was partially offset by declines in HAMP incentive fees in the 2013 periods compared to the respective periods in 2012.

Multifamily

The table below presents the Segment Earnings of our Multifamily segment.

 

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Table 15 — Segment Earnings and Key Metrics — Multifamily(1)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  
     (dollars in millions)  

Segment Earnings:

        

Net interest income

   $ 320     $ 330     $ 623     $ 648  

Benefit for credit losses

     105       22       139       41  

Non-interest income:

        

Management and guarantee income

     49       36       95       69  

Net impairment of available-for-sale securities recognized in earnings

           (19     (11     (35

Gains on sale of mortgage loans

     176       38       243       92  

Gains (losses) on mortgage loans recorded at fair value

     (295     (56     (180     121  

Other non-interest income

     104       119       218       228  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     34       118       365       475  
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense:

        

Administrative expenses

     (60     (61     (139     (113

REO operations income (expense)

     1       (4     3       (3

Other non-interest expense

     (7     (83     (12     (98
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     (66     (148     (148     (214
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Earnings before income tax expense

     393       322       979       950  

Income tax expense

           (4     (1     (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Earnings, net of taxes

     393       318       978       942  

Total other comprehensive income (loss), net of taxes

     (265     (156     158       744  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 128     $ 162     $ 1,136     $ 1,686  
  

 

 

   

 

 

   

 

 

   

 

 

 

Key metrics:

        

Balances and Volume:

        

Average balance of Multifamily unsecuritized loan portfolio

   $ 73,131     $ 81,238     $ 74,634     $ 82,184  

Average balance of Multifamily guarantee portfolio

   $ 60,560     $ 41,368     $ 57,573     $ 39,007  

Average balance of Multifamily investment securities portfolio

   $ 48,424     $ 55,761     $ 49,532     $ 56,895  

Multifamily new loan purchase and other guarantee commitment volume(2)

   $ 7,490     $ 6,661     $ 13,534     $ 12,412  

Multifamily units financed from new volume activity(2)

     98,330       107,049       185,000       193,394  

Multifamily K Certificate issuance — guaranteed portion

   $ 7,391     $ 5,309     $ 12,161     $ 8,448  

Multifamily K Certificate issuance — unguaranteed portion

   $ 1,404     $ 972     $ 2,192     $ 1,554  

Yield and Rate:

        

Net interest yield — Segment Earnings basis (annualized)

     1.04     0.96     1.00     0.93

Average Management and guarantee fee rate, in bps (annualized):(3)

        

K Certificate

     19.7       18.8       19.5       19.1  

All other guarantees

     74.6       68.3       74.3       67.6  

Total

     32.3       36.2       32.8       37.4  

Credit:

        

Delinquency rate:

        

Credit-enhanced loans, at period end

     0.15     0.44     0.15     0.44

Non-credit-enhanced loans, at period end

     0.04     0.19     0.04     0.19

Total delinquency rate, at period end(4)

     0.09     0.27     0.09     0.27

Allowance for loan losses and reserve for guarantee losses, at period end

   $ 236     $ 496     $ 236     $ 496  

Allowance for loan losses and reserve for guarantee losses, in bps

     17.8       40.4       17.8       40.4  

Credit losses, in bps (annualized)(5)

     1.2       3.8       0.4       1.9  

REO inventory, at net carrying value

   $ 54     $ 94     $ 54     $ 94  

REO inventory, at period end (number of properties)

     5       11       5       11  

 

 

(1) For reconciliations of Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 13: SEGMENT REPORTING — Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.”
(2) Excludes our guarantees issued under the HFA initiative and K Certificate issuances.
(3) Represents Multifamily Segment Earnings — management and guarantee income, excluding prepayment and certain other fees for each category, divided by the sum of the average UPB of the related category of guarantee. The average UPB of the all other guarantees category includes the average UPB associated with HFA guarantees, excluding certain bonds under the NIBP.
(4) See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Multifamily Mortgage Credit Risk” for information on our reported multifamily delinquency rate.
(5) Calculated as the amount of multifamily credit losses divided by the sum of the average carrying value of our multifamily loans (on-balance sheet) and the average balance of the multifamily guarantee portfolio, including multifamily HFA initiative-related guarantees.

Segment Earnings for our Multifamily segment increased to $393 million and $978 million for the three and six months ended June 30, 2013, respectively, compared to $318 million and $942 million for the three and six months ended June 30, 2012, respectively. The increase in the 2013 periods was primarily due to higher gains on sale of mortgage loans and increased benefit for credit losses, partially offset by losses on mortgage loans recorded at fair value.

Comprehensive income for our Multifamily segment was $128 million and $1.1 billion for the three and six months ended June 30, 2013, respectively, consisting of: (a) Segment Earnings of $393 million and $978 million, respectively; and (b) $(265) million and $158 million, respectively, of total other comprehensive income (loss). Total other comprehensive

 

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income (loss) for our Multifamily segment in the first half of 2013 was impacted by unfavorable changes in the fair value of available-for-sale CMBS during the second quarter of 2013, which partially offset the favorable changes in fair value of these securities during the first quarter of 2013.

Our multifamily new business activity (loan purchases and other guarantee commitment issuances) increased to $13.5 billion for the first half of 2013 compared to $12.4 billion for the first half of 2012 as the multifamily market remained strong in 2013. We issued guarantees on K Certificates of $7.4 billion and $12.2 billion in UPB for the three and six months ended June 30, 2013, respectively, as compared to $5.3 billion and $8.4 billion for the three and six months ended June 30, 2012, respectively. The UPB of the total multifamily portfolio was $180.2 billion as of both June 30, 2013 and December 31, 2012 as new business activity was largely offset by liquidations and securitizations of our multifamily loans. We expect lower new business volume for the remainder of 2013 compared to the first half of 2013, due to increased competition from other market participants and the effect of steps we have taken during the first half of the year (such as increased pricing) towards meeting the 2013 Conservatorship Scorecard goal of reducing our new business volume by at least 10% as compared to 2012 levels. Our new business activity for 2012 was $28.8 billion.

Segment Earnings net interest income declined by 3%, to $320 million, for the three months ended June 30, 2013 from $330 million for the three months ended June 30, 2012, and was $623 million and $648 million for the six months ended June 30, 2013 and 2012, respectively. The decrease in the 2013 periods was primarily due to lower average balances of the loan and investment securities portfolios in the first half of 2013.

Segment Earnings non-interest income was $34 million and $118 million for the three months ended June 30, 2013 and 2012, respectively, and was $365 million and $475 million for the six months ended June 30, 2013 and 2012, respectively. We recognize changes in fair value on multifamily mortgage loans we purchase for securitization as gains (losses) on mortgage loans recorded at fair value while we hold them on our consolidated balance sheets. In the period we sell these loans (primarily through securitization), we recognize a gain or loss on sale of mortgage loans based on proceeds of the sale. Together, these amounts represent the holding period gains or losses associated with the loans. Segment Earnings gains (losses) on mortgage loans recorded at fair value are presented net of changes in fair value due to changes in interest rates. Unfavorable non-interest rate-related market movements resulted in losses on mortgage loans recorded at fair value during the 2013 periods. Gains on sale of mortgage loans were higher in the 2013 periods, compared to the respective periods in 2012, in part due to a higher volume of multifamily securitizations in 2013.

Segment Earnings management and guarantee income increased to $95 million for the first half of 2013 compared to $69 million for the first half of 2012 primarily due to the higher average balance of the multifamily guarantee portfolio in the first half of 2013, which is attributed to significant K Certificate issuances during the last 12 months. However, the average total management and guarantee fee rate on our multifamily guarantee portfolio declined to 32.8 basis points in the first half of 2013 from 37.4 basis points in the first half of 2012. The decline primarily reflects the issuances of K Certificates during recent periods, which have lower fees than our other multifamily guarantee activities as a result of our reduced credit risk exposure due to the use of subordination. The amount of subordination employed in our K Certificates is based on our expectations of potential future credit losses associated with these transactions.

Segment Earnings benefit for credit losses increased to $105 million for the three months ended June 30, 2013 from $22 million for the three months ended June 30, 2012 and was $139 million and $41 million for the first half of 2013 and 2012, respectively. The increase in the 2013 periods was primarily driven by an improvement in the expected performance of the underlying loans and increases in the property value of collateral underlying loans that have been classified as individually impaired, as compared to the 2012 periods.

As a result of our underwriting standards and practices, which we believe are prudent, and the continued positive multifamily market fundamentals, the credit quality of the multifamily mortgage portfolio remains strong, and multifamily credit losses as a percentage of the combined average balance of our multifamily loan and guarantee portfolios were 0.4 basis points and 1.9 basis points during the first half of 2013 and 2012, respectively. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk Multifamily Mortgage Credit Risk” for further information about the credit performance of our multifamily mortgage portfolio.

 

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CONSOLIDATED BALANCE SHEETS ANALYSIS

The following discussion of our consolidated balance sheets should be read in conjunction with our consolidated financial statements, including the accompanying notes. Also, see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” for information concerning certain significant accounting policies and estimates applied in determining our reported financial position.

Cash and Cash Equivalents, Federal Funds Sold and Securities Purchased Under Agreements to Resell

Cash and cash equivalents, federal funds sold and securities purchased under agreements to resell, and other liquid assets discussed in “Investments in Securities — Non-Mortgage-Related Securities,” are important to our cash flow and asset and liability management, and our ability to provide liquidity and stability to the mortgage market. We use these assets to help manage recurring cash flows and meet our other cash management needs. We consider federal funds sold to be overnight unsecured trades executed with commercial banks that are members of the Federal Reserve System. Securities purchased under agreements to resell principally consist of short-term contractual agreements such as reverse repurchase agreements involving Treasury and agency securities.

The short-term assets on our consolidated balance sheets also include those related to our consolidated VIEs, which consisted primarily of restricted cash and cash equivalents and securities purchased under agreements to resell at June 30, 2013. These short-term assets related to our consolidated VIEs decreased by $5.9 billion from December 31, 2012 to June 30, 2013, primarily due to a decrease in the level of refinancing activity.

Excluding amounts related to our consolidated VIEs, we held $13.9 billion and $8.5 billion of cash and cash equivalents (including non-interest bearing deposits of $13.4 billion and $7.3 billion at the Federal Reserve Bank), no federal funds sold, and $13.0 billion and $18.3 billion of securities purchased under agreements to resell at June 30, 2013 and December 31, 2012, respectively. Excluding amounts related to our consolidated VIEs, we held on average $24.6 billion and $26.0 billion of cash and cash equivalents and $14.6 billion and $15.1 billion of federal funds sold and securities purchased under agreements to resell during the three and six months ended June 30, 2013, respectively.

For information regarding our liquidity management practices and policies, see “MD&A — LIQUIDITY AND CAPITAL RESOURCES” in our 2012 Annual Report.

Investments in Securities

The table below provides detail regarding our investments in securities as of June 30, 2013 and December 31, 2012. The table does not include our holdings of single-family PCs and certain Other Guarantee Transactions. For information on our holdings of such securities, see “Table 11 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios.”

 

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Table 16 — Investments in Securities

 

     Fair Value  
     June 30, 2013      December 31, 2012  
     (in millions)  

Investments in securities:

     

Available-for-sale:

     

Mortgage-related securities:

     

Freddie Mac(1)

   $ 46,493      $ 58,515  

Fannie Mae

     12,613        15,280  

Ginnie Mae

     185        209  

CMBS

     45,757        51,307  

Subprime

     28,004        26,457  

Option ARM

     6,636        5,717  

Alt-A and other

     10,055        10,904  

Obligations of states and political subdivisions

     4,281        5,798  

Manufactured housing

     681        709  
  

 

 

    

 

 

 

Total available-for-sale mortgage-related securities

     154,705        174,896  
  

 

 

    

 

 

 

Total investments in available-for-sale securities

     154,705        174,896  
  

 

 

    

 

 

 

Trading:

     

Mortgage-related securities:

     

Freddie Mac(1)

     8,956