UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2017
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
McLean, Virginia 
22102-3110
 
52-0904874
 
(703) 903-2000
(State or other jurisdiction of incorporation or organization)
 
(Address of principal executive offices, including zip code)
 
(I.R.S. Employer Identification No.)
 
(Registrant’s telephone 
number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.     ý  Yes     ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ý  Yes     ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   ý
 
 
 
Accelerated filer  ¨
 
Non-accelerated filer (Do not check if a smaller reporting company)   ¨
 
Smaller reporting company   ¨
 
Emerging growth company   ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
As of April 18, 2017 , there were 650,054,731 shares of the registrant’s common stock outstanding.




Table of Contents
 
 

TABLE OF CONTENTS
 
Page
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
KEY ECONOMIC INDICATORS
CONSOLIDATED RESULTS OF OPERATIONS
CONSOLIDATED BALANCE SHEETS ANALYSIS
OUR BUSINESS SEGMENTS
RISK MANAGEMENT
LIQUIDITY AND CAPITAL RESOURCES
CONSERVATORSHIP AND RELATED MATTERS
REGULATION AND SUPERVISION
OFF-BALANCE SHEET ARRANGEMENTS
FORWARD-LOOKING STATEMENTS
FINANCIAL STATEMENTS
OTHER INFORMATION
CONTROLS AND PROCEDURES
SIGNATURES
FORM 10-Q INDEX
EXHIBIT INDEX

Freddie Mac Form 10-Q
 
i



Management's Discussion and Analysis
 
Introduction

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in the “Forward-Looking Statements” section of this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016, or 2016 Annual Report, and the “Business” and "Risk Factors" sections of our 2016 Annual Report.
Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the “Glossary” of our 2016 Annual Report.
You should read the following MD&A in conjunction with our 2016 Annual Report and our condensed consolidated financial statements and accompanying notes for the three months ended March 31, 2017 included in “Financial Statements.” Throughout this Form 10-Q, we refer to the three months ended March 31, 2017 and the three months ended March 31, 2016 as “1Q 2017” and “1Q 2016,” respectively.
INTRODUCTION
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability, and affordability to the U.S. housing market. We do this primarily by purchasing residential mortgage loans originated by lenders. In most instances, we package these loans into mortgage-related securities, which are guaranteed by us and sold in the global capital markets. We also invest in mortgage loans and mortgage-related securities. We do not originate loans or lend money directly to borrowers.
We support the U.S. housing market and the overall economy by enabling America’s families to access mortgage loan funding with better terms and by providing consistent liquidity to the multifamily mortgage market, which we do primarily by providing financing for workforce housing. We have helped many distressed borrowers keep their homes or avoid foreclosure. We are working with FHFA, our customers and the industry to build a better housing finance system for the nation.
CONSOLIDATED FINANCIAL RESULTS
Comprehensive income (loss) was $2.2 billion in 1Q 2017, compared to ($0.2) billion in 1Q 2016, driven by the continued solid business environment and our growing guarantee businesses. The change in comprehensive income was primarily driven by:
Increase in guarantee fee income driven by an increase in the size of the single-family book combined with higher average contractual guarantee fee rates, as well as a large percentage increase in the size of the multifamily guarantee book;
Increase in the rate of amortization of upfront-paid single-family guarantee fees due to an increase in

Freddie Mac Form 10-Q
 
1



Management's Discussion and Analysis
 
Introduction

loan prepayments;
Interest-rate-related fair value gain near zero in 1Q 2017 resulting from a slight increase in interest rates, compared to a ($1.4) billion estimated fair value loss in 1Q 2016 resulting from a large decline in long-term interest rates; and
Spread-related gain of an estimated $0.1 billion in 1Q 2017 resulting from market spreads tightening, compared to an estimated ($0.6) billion loss in 1Q 2016 resulting from market spreads widening.
Our total equity was $2.8 billion at March 31, 2017 . Because our net worth was positive, we are not requesting a draw from Treasury under the Purchase Agreement for 1Q 2017. Following payment of our scheduled dividend obligation of $2.2 billion in June 2017, our cumulative senior preferred stock dividend payments will total $108.2 billion. Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock, which remains $72.3 billion. The amount of available funding remaining under the Purchase Agreement is $140.5 billion and would be reduced by any future draws.
VARIABILITY OF EARNINGS
Our financial results are subject to significant earnings variability from period to period. This variability is primarily driven by:
Interest-Rate Volatility — We hold assets and liabilities that expose us to interest-rate risk. Through our use of derivatives, we manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models. However, the way we account for our financial assets and liabilities (i.e., some are measured at amortized cost, while others are measured at fair value), including derivatives, creates volatility in our GAAP earnings when interest rates fluctuate. Based upon the composition of our financial assets and liabilities, including derivatives, at March 31, 2017 , we generally recognize fair value losses in earnings when long-term interest rates decline. This volatility generally is not indicative of the underlying economics of our business. For information about the sensitivity of our financial results to interest-rate volatility, see "Risk Management - Market Risk."
Spread Volatility — The volatility of market spreads (i.e., credit spreads, liquidity spreads, risk premiums, etc.), or OAS, is the risk associated with changes in the excess of market interest rates over benchmark rates. We hold assets and liabilities that expose us to spread volatility, which may contribute to significant GAAP earnings volatility. For financial assets measured at fair value, we generally recognize fair value losses when market spreads widen. Conversely, for financial liabilities measured at fair value, we generally recognize fair value gains when market spreads widen.
The variability of GAAP earnings and the declining capital reserve required under the terms of the Purchase Agreement (ultimately reaching zero in 2018) increase the risk of our having a negative net worth and thus being required to draw from Treasury. We could face a risk of a draw for a variety of reasons.
In an effort to reduce our GAAP earnings volatility, and thereby the probability of a draw due to changes in interest rates, we entered into certain transactions including structured transactions that have resulted in additional financial assets being recognized and measured at fair value, which help to reduce the measurement differences. In addition, on February 2, 2017, we began using fair value hedge accounting for certain single-family mortgage loans, which further reduces the interest-rate sensitivity in our GAAP

Freddie Mac Form 10-Q
 
2



Management's Discussion and Analysis
 
Introduction

earnings. These transactions, and especially the application of fair value hedge accounting, have significantly reduced the volatility in our GAAP earnings and have more closely aligned GAAP earnings with the underlying economics of our business.
CONSERVATORSHIP AND GOVERNMENT SUPPORT FOR OUR BUSINESS
Since September 2008, we have been operating in conservatorship, with FHFA acting as our Conservator. The conservatorship and related matters significantly affect our management, business activities, financial condition, and results of operations. Our future is uncertain, and the conservatorship has no specified termination date. We do not know what changes may occur to our business model during or following conservatorship, including whether we will continue to exist.
Our Purchase Agreement with Treasury and the terms of the senior preferred stock we issued to Treasury constrain our business activities. The Purchase Agreement also requires our future profits to effectively be distributed to Treasury, and we cannot retain capital from the earnings generated by our business operations (other than a limited capital reserve amount that will decrease to zero in 2018) or return capital to stockholders other than Treasury. Consequently, our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to have adequate liquidity to conduct our normal business activities.

Freddie Mac Form 10-Q
 
3



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


KEY ECONOMIC INDICATORS
The following graphs and related discussion present certain macroeconomic indicators that can significantly affect our business and financial results.
SINGLE-FAMILY HOME PRICES
NATIONAL HOME PRICES
A20171Q10Q_CHART-08851.JPG
(December 2000 = 100)
COMMENTARY
Home prices continued to appreciate, increasing 1.9% during 1Q 2017, compared to an increase of 1.5% during 1Q 2016, based on our own non-seasonally adjusted price index of single-family homes funded by loans owned or guaranteed by us or Fannie Mae.
National home prices at March 31, 2017 exceeded their pre-financial crisis peak level of 167 reached in June 2006, based on our index.


Freddie Mac Form 10-Q
 
4



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

INTEREST RATES
KEY MARKET INTEREST RATES

A20171Q10Q_CHART-07190.JPG A20171Q10Q_CHART-09558.JPG
COMMENTARY
Quarterly ending long-term interest rates, as indicated by the 10-year LIBOR and 10-year Treasury rates, and mortgage interest rates, as indicated by the 30-year PMMS rate, were higher at March 31, 2017 compared to March 31, 2016.
The Federal Reserve raised short-term interest rates during 1Q 2017.
Increases in the PMMS rate typically result in decreases in refinance activity and originations.
The rise in interest rates affects the fair value of certain assets and liabilities, including derivatives, measured at fair value.
For additional information on the effect of LIBOR rates on our financial results, see "Our Business Segments - Investments - Market Conditions."



Freddie Mac Form 10-Q
 
5



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

UNEMPLOYMENT RATE
UNEMPLOYMENT RATE AND JOB CREATION
A20171Q10Q_CHART-17314.JPG
Source: U.S. Bureau of Labor Statistics

COMMENTARY
Average monthly net new jobs decreased during 1Q 2017 compared to 1Q 2016.
The unemployment rate declined slightly in 1Q 2017.
Changes in the unemployment rate can affect several market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies.
Decreases in the unemployment rate typically result in lower levels of delinquencies, which often result in a decrease in expected credit losses on our total mortgage portfolio.

Freddie Mac Form 10-Q
 
6



Management's Discussion and Analysis
 
Consolidated Results of Operations


CONSOLIDATED RESULTS OF OPERATIONS
You should read this discussion of our consolidated results of operations in conjunction with our condensed consolidated financial statements and accompanying notes.
The table below compares our consolidated results of operations for 1Q 2017 vs. 1Q 2016.
 
 
1Q 2017
 
1Q 2016
 
Change
(Dollars in millions)
 
 
 
 
 
$
 
%
Net interest income
 

$3,795

 

$3,405

 

$390

 
11
 %
Benefit (provision) for credit losses
 
116

 
467

 
(351
)
 
(75
)%
Net interest income after benefit (provision) for credit losses
 
3,911

 
3,872

 
39

 
1
 %
Non-interest income (loss):
 
 
 
 
 

 


Gains (losses) on extinguishment of debt
 
218

 
(55
)
 
273

 
496
 %
Derivative gains (losses)
 
(302
)
 
(4,561
)
 
4,259

 
93
 %
Net impairment of available-for-sale securities recognized in earnings
 
(13
)
 
(57
)
 
44

 
77
 %
Other gains on investment securities recognized in earnings
 
56

 
303

 
(247
)
 
(82
)%
Other income (loss)
 
415

 
947

 
(532
)
 
(56
)%
Total non-interest income (loss)
 
374

 
(3,423
)
 
3,797

 
111
 %
Non-interest expense:
 
 
 
 
 

 


Administrative expense
 
(511
)
 
(448
)
 
(63
)
 
(14
)%
REO operations expense
 
(56
)
 
(84
)
 
28

 
33
 %
Temporary Payroll Tax Cut Continuation Act
of 2011 expense
 
(321
)
 
(272
)
 
(49
)
 
(18
)%
Other expense
 
(76
)
 
(153
)
 
77

 
50
 %
Total non-interest expense
 
(964
)
 
(957
)
 
(7
)
 
(1
)%
Income (loss) before income tax (expense) benefit
 
3,321

 
(508
)
 
3,829

 
754
 %
Income tax (expense) benefit
 
(1,110
)
 
154

 
(1,264
)
 
(821
)%
Net income (loss)
 
2,211

 
(354
)
 
2,565

 
725
 %
Total other comprehensive income (loss), net of taxes and reclassification adjustments
 
23

 
154

 
(131
)
 
(85
)%
Comprehensive income (loss)
 

$2,234

 

($200
)
 

$2,434

 
1,217
 %

Freddie Mac Form 10-Q
 
7



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


NET INTEREST INCOME
NET INTEREST YIELD ANALYSIS
The table below presents an analysis of interest-earning assets and interest-bearing liabilities.
 
 
1Q 2017
 
1Q 2016
 
(Dollars in millions)
Average
Balance
 
Interest
Income
(Expense) (1)
 
Average
Rate
 
Average
Balance
 
Interest
Income
(Expense) (1)
 
Average
Rate
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents

$12,053

 

$9

 
0.29
 %
 

$11,726

 

$7

 
0.25
%
 
Securities purchased under agreements to resell
54,406

 
88

 
0.66

 
57,667

 
48

 
0.33

 
Advances to lenders
617

 
4

 
2.40

 
254

 
2

 
3.43

 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
175,955

 
1,663

 
3.78

 
201,604

 
1,916

 
3.80

 
Extinguishment of PCs held by Freddie Mac
(88,539
)
 
(820
)
 
(3.71
)
 
(105,097
)
 
(960
)
 
(3.65
)
 
Total mortgage-related securities, net
87,416

 
843

 
3.85

 
96,507

 
956

 
3.96

 
Non-mortgage-related securities
21,061

 
71

 
1.36

 
14,261

 
13

 
0.36

 
Loans held by consolidated trusts (1)
1,708,039

 
14,599

 
3.42

 
1,630,646

 
14,261

 
3.50

 
Loans held by Freddie Mac (1)
124,217

 
1,366

 
4.40

 
145,531

 
1,557

 
4.28

 
Total interest-earning assets

$2,007,809

 

$16,980

 
3.38

 

$1,956,592

 

$16,844

 
3.45

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

$1,730,728

 

($12,541
)
 
(2.90
)
 

$1,653,105

 

($12,751
)
 
(3.09
)
 
Extinguishment of PCs held by Freddie Mac
(88,539
)
 
820

 
3.71

 
(105,097
)
 
960

 
3.65

 
Total debt securities of consolidated trusts held by third parties
1,642,189

 
(11,721
)
 
(2.86
)
 
1,548,008

 
(11,791
)
 
(3.05
)
 
Other debt:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
73,467

 
(96
)
 
(0.52
)
 
100,871

 
(93
)
 
(0.37
)
 
Long-term debt
279,519

 
(1,325
)
 
(1.90
)
 
300,221

 
(1,504
)
 
(2.00
)
 
Total other debt
352,986

 
(1,421
)
 
(1.61
)
 
401,092

 
(1,597
)
 
(1.59
)
 
Total interest-bearing liabilities
1,995,175

 
(13,142
)
 
(2.63
)
 
1,949,100

 
(13,388
)
 
(2.75
)
 
Expense related to derivatives

 
(43
)
 
(0.01
)
 

 
(51
)
 
(0.01
)
 
Impact of net non-interest-bearing funding
12,634

 

 
0.02

 
7,492

 

 
0.01

 
Total funding of interest-earning assets

$2,007,809

 

($13,185
)
 
(2.62
)
 

$1,956,592

 

($13,439
)
 
(2.75
)
 
Net interest income/yield
 
 

$3,795

 
0.76

 
 
 

$3,405

 
0.70

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Loan fees, primarily consisting of amortization of delivery fees, included in interest income were $506 million and $485 million for loans held by consolidated trusts and $62 million and $81 million for loans held by Freddie Mac during 1Q 2017 and 1Q 2016, respectively.

 
 

Freddie Mac Form 10-Q
 
8



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


COMPONENTS OF NET INTEREST INCOME
The table below presents the components of net interest income.
 
1Q 2017
 
1Q 2016
 
Change
(Dollars in millions)
 
 
 
 
$
 
%
Contractual net interest income:
 
 
 
 
 
 
 
Guarantee fee income

$843

 

$710

 

$133

 
19
 %
Guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011
316

 
267

 
49

 
18
 %
Other contractual net interest income
1,708

 
1,840

 
(132
)
 
(7
)%
Total contractual net interest income
2,867

 
2,817

 
50

 
2
 %
Net amortization - loans and debt securities of consolidated trusts
953

 
533

 
420

 
79
 %
Net amortization - other assets and debt
18

 
106

 
(88
)
 
(83
)%
Expense related to derivatives
(43
)
 
(51
)
 
8

 
16
 %
Net interest income

$3,795

 

$3,405

 

$390

 
11
 %

Key Drivers:
Guarantee fee income
1Q 2017 vs. 1Q 2016 - increased during 1Q 2017 due to higher average contractual guarantee fee rates and the continued growth in the size of the Core single-family book. Average contractual guarantee fee rates are generally higher on mortgage loans in our Core single-family book compared to those in our Legacy single-family book.
Other contractual net interest income
1Q 2017 vs. 1Q 2016 - decreased during 1Q 2017 primarily due to the continued reduction in the balance of our mortgage-related investments portfolio pursuant to the portfolio limits established by the Purchase Agreement and FHFA. See "Conservatorship and Related Matters - Reducing Our Mortgage-Related Investments Portfolio Over Time" for a discussion of the key drivers of the decline in our mortgage-related investments portfolio.
Net amortization of loans and debt securities of consolidated trusts
1Q 2017 vs. 1Q 2016 - increased during 1Q 2017 primarily due to an increase in amortization of debt securities of consolidated trusts due to an increase in prepayments.
Net amortization of other assets and debt
1Q 2017 vs. 1Q 2016 - decreased during 1Q 2017 primarily due to less accretion of previously recognized other-than-temporary impairment. The decrease in accretion during 1Q 2017 is due to a decline in the population of impaired securities as a result of our active disposition of these securities.


Freddie Mac Form 10-Q
 
9



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


BENEFIT (PROVISION) FOR CREDIT LOSSES
The benefit (provision) for credit losses predominantly relates to single-family loans and includes components for both collectively and individually impaired loans.
The table below presents the components of our benefit (provision) for credit losses.
 
 
1Q 2017
 
1Q 2016
 
Change
(Dollars in billions)
 
 
 
 
 
$
 
%
Benefit (provision) for newly impaired loans
 

($0.2
)
 

($0.2
)
 

$—

 
 %
Amortization of interest rate concessions
 
0.2

 
0.3

 
(0.1
)
 
(33
)%
Reclassifications of held-for-investment loans to held-for-sale loans
 

 
0.1

 
(0.1
)
 
(100
)%
Other, including changes in estimated default probability and loss severity
 
0.1

 
0.3

 
(0.2
)
 
(67
)%
Benefit (provision) for credit losses
 

$0.1

 

$0.5

 

($0.4
)
 
(80
)%
Key Drivers:
1Q 2017 vs. 1Q 2016 - Benefit for credit losses decreased in 1Q 2017, compared to 1Q 2016, primarily due to stable probability of default and estimated loss severity in 1Q 2017, compared to improvements in probability of default and estimated loss severity in 1Q 2016.


Freddie Mac Form 10-Q
 
10



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


DERIVATIVE GAINS (LOSSES)
We continue to align our derivative portfolio with the changing duration of our economically hedged assets and liabilities. We manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models. We believe the impact of derivatives on our GAAP financial results should be considered in the context of our overall interest-rate risk profile, including our PMVS and duration gap results. For more information about our interest-rate risk management activities and the sensitivity of reported earnings to those activities, see “Risk Management - Market Risk.”
On February 2, 2017, we began using fair value hedge accounting for certain single-family mortgage loans, which is intended to reduce our GAAP earnings volatility due to large interest-rate movements. Changes in the fair value of the derivatives while in fair value hedge relationships are recognized in other income (loss) on our condensed consolidated statements of comprehensive income. See Note 7 for further information on fair value hedge accounting.
The table below presents the gains and losses on derivatives while not designated in fair value hedge relationships and the accrual of periodic cash settlements on all derivatives.
 
1Q 2017
 
1Q 2016
 
Change
(Dollars in millions)
 
 
 
 
$
 
%
Fair value change in interest-rate swaps

$673

 

($5,690
)
 

$6,363

 
112
 %
Fair value change in option-based derivatives
(430
)
 
1,935

 
(2,365
)
 
(122
)%
Fair value change in other derivatives
(78
)
 
(316
)
 
238

 
75
 %
Accrual of periodic cash settlements
(467
)
 
(490
)
 
23

 
5
 %
Derivative gains (losses)

($302
)
 

($4,561
)
 

$4,259

 
93
 %
Key Drivers:
1Q 2017 vs. 1Q 2016 - Derivative fair value losses declined during 1Q 2017 compared to 1Q 2016 as long-term interest rates increased slightly during 1Q 2017 compared to a decline during 1Q 2016. The 10-year par swap rate increased 7 basis points during 1Q 2017 and declined 54 basis points during 1Q 2016. The interest rate increase in 1Q 2017 resulted in an improvement in the fair value of our pay-fixed interest rate swaps and forward commitments to issue PCs. The improvement in fair value was partially offset by losses in our receive-fixed swaps and option-based derivatives.

Freddie Mac Form 10-Q
 
11



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


OTHER INCOME (LOSS)
The table below presents the components of other income (loss).
 
1Q 2017
 
1Q 2016
 
Change
(Dollars in millions)
 
 
 
 
$
 
%
Other income (loss)
 
 
 
 
 
 
 
Gains (losses) on loans

$14

 

$478

 

($464
)
 
(97
)%
Gains (losses) on held-for-sale loan purchase commitments
224

 
38

 
186

 
489
 %
(Losses) gains on debt where we elected the fair value option
(89
)
 
13

 
(102
)
 
(785
)%
All other
227

 
418

 
(191
)
 
(46
)%
 Fair value hedge accounting
 
 
 
 
 
 

Change in fair value of derivatives in qualifying hedge relationships
65

 

 
65

 
N/A

Change in fair value of hedged items in qualifying hedge relationships
(26
)
 

 
(26
)
 
N/A

Ineffectiveness related to fair value hedge accounting
39

 

 
39

 
N/A

Total other income (loss)

$415

 

$947

 

($532
)
 
(56
)%
Key Drivers:
1Q 2017 vs. 1Q 2016 - Other income (loss) declined reflecting:
Gains (losses) on loans declined as multifamily loans for which we elected the fair value option benefited significantly in 1Q 2016 from a large decline in long-term interest rates, while such rates increased slightly in 1Q 2017.
Losses on debt where we elected the fair value option were primarily driven by tightening spreads between STACR yields and LIBOR during 1Q 2017 compared to minimal gains in 1Q 2016 when spreads were relatively unchanged.
All other declined primarily because we received settlement proceeds related to the TBW bankruptcy in 1Q 2016.
These items were partially offset by:
Gains on multifamily held-for-sale loan purchase commitments in 1Q 2017 due to K Certificate spreads tightening from improved pricing and market movements versus K Certificate spreads widening in 1Q 2016 and an increase in the outstanding balance of commitments at the end of 1Q 2017 as compared to the end of 1Q 2016.
Ineffectiveness related to fair value hedge accounting in 1Q 2017. The ineffectiveness is the amount by which the gain or loss on the designated derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the hedged risk. We adopted fair value hedge accounting in 1Q 2017, while there was no fair value hedge accounting during 2016.




Freddie Mac Form 10-Q
 
12



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

OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the attribution of the other comprehensive income (loss) reported in our condensed consolidated statements of comprehensive income.
 
1Q 2017
 
1Q 2016
 
Change
(Dollars in millions)
 
 
 
 
$
 
%
Other comprehensive income, excluding reclassifications

$163

 

$221

 

($58
)
 
(26
)%
Reclassifications from AOCI:
 
 
 
 
 
 
 
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities
(54
)
 
(90
)
 
36

 
40
 %
Realized (gains) losses reclassified from AOCI
(86
)
 
23

 
(109
)
 
(474
)%
Total reclassifications from AOCI
(140
)

(67
)

(73
)

(109
)%
Total other comprehensive income (loss)

$23

 

$154



($131
)
 
(85
)%
Key Drivers:
Other comprehensive income, excluding reclassifications
1Q 2017 vs. 1Q 2016 - decreased primarily due to changes in long-term interest rates and market spreads. During 1Q 2017, gains driven by market spread tightening for non-agency mortgage-related securities were partially offset by losses due to slight increases in long-term interest rates. During 1Q 2016, we recognized larger gains due to decreases in long-term interest rates, partially offset by spread widening on our non-agency mortgage-related securities.
Reclassifications from AOCI
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities
1Q 2017 vs. 1Q 2016 - decreased during 1Q 2017 primarily due to a decline in the population of impaired securities as a result of our active dispositions of these securities.
Realized (gains) losses reclassified from AOCI
1Q 2017 vs. 1Q 2016 - reflected reclassified gains during 1Q 2017 compared to reclassified losses during 1Q 2016, due to greater sales of non-agency mortgage-related securities in an unrealized gain position during 1Q 2017 compared to 1Q 2016.

Freddie Mac Form 10-Q
 
13



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

OTHER KEY DRIVERS
Key drivers of other line items for 1Q 2017 vs. 1Q 2016 include:
Gains (losses) on extinguishment of debt
1Q 2017 vs. 1Q 2016 - improved primarily due to an increase in the amount of gains recognized from the extinguishment of certain fixed-rate debt securities of consolidated trusts, as market interest rates increased between the time of issuance and repurchase. The amount of extinguishment gains or losses may vary, as the type and amount of PCs selected for repurchase are based on our investment and funding strategies, including our efforts to support the liquidity and price performance of our PCs.
Other gains on investment securities recognized in earnings
1Q 2017 vs. 1Q 2016 - decreased primarily due to the recognition of losses on our mortgage and non-mortgage related securities classified as trading as long-term interest rates increased slightly during 1Q 2017 but decreased during 1Q 2016. This was partially offset by an increase in sales of available-for-sale non-agency mortgage-related securities in an unrealized gain position.

Freddie Mac Form 10-Q
 
14



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


ITEMS AFFECTING MULTIPLE LINES
The following items affected multiple line items on our consolidated results of operations.
SINGLE-FAMILY LOAN RECLASSIFICATIONS
During 1Q 2017 and 1Q 2016, we reclassified $1.7 billion and $0.4 billion, respectively, in UPB of seasoned single-family mortgage loans from held-for-investment to held-for-sale. Seasoned single-family mortgage loans include seriously delinquent loans and/or reperforming loans. On January 1, 2017, we elected a new accounting policy for reclassifications from held-for-investment to held-for-sale. Under the new policy, when we reclassify (transfer) a loan from held-for-investment to held-for-sale, we charge off the entire difference between the loan’s recorded investment and its fair value if the loan has a history of credit-related issues. Expenses related to property taxes and insurance are included as part of the charge-off. If the charge-off amount exceeds the existing loan loss reserve amount, an additional provision for credit losses is recorded. Any declines in loan fair value after the date of transfer will be recognized as a valuation allowance, with an offset recorded to other income (loss).
This new policy election was applied prospectively, as it was not practical to apply it retrospectively.
Beginning in 1Q 2017, benefit (provision) for credit losses is the only line item affected by the loan reclassifications from held-for-investment to held-for-sale. Prior to this change (including 1Q 2016 as presented below), the reclassifications from held-for-investment to held-for-sale affected several line items on our consolidated results of operations, as shown in the table below.
(In millions)
 
1Q 2017
 
1Q 2016
Benefit (provision) for credit losses
 

($14
)
 

$64

Other income (loss) - lower-of-cost-or-fair-value adjustment
 

 
(67
)
Other expense - property taxes and insurance associated with these loans
 

 
(31
)
Effect on income before income tax (expense) benefit
 

($14
)
 

($34
)
DEBT FUNDING STRATEGIES AND INTEREST-RATE RISK MANAGEMENT ACTIVITIES
We issue debt based on a variety of factors including market conditions and our liquidity requirements.
We currently favor a mix of derivatives and shorter- and medium-term debt to fund our business and manage interest-rate risk. This funding mix is a less expensive method than relying more extensively on long-term debt.
On February 2, 2017, we began using fair value hedge accounting for certain single-family mortgage loans, which is intended to reduce our GAAP earnings volatility due to large interest-rate movements.
The table below presents the effect of derivatives used in our interest-rate risk management activities on our comprehensive income, after considering the accrual of periodic cash settlements (which is the economic equivalent of interest expense), the non-interest rate effect (e.g., market spread effect) on derivative fair values, any offsetting interest rate effect related to financial instruments measured at fair value, and the effect of fair value hedge accounting. The estimated net interest rate effect on comprehensive income is essentially the gains (losses) on derivatives while not designated in fair value

Freddie Mac Form 10-Q
 
15



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


hedge accounting relationships that are attributable to financial instruments that are not measured at fair value.
(In billions)
1Q 2017
 
1Q 2016
Derivative gains (losses) (1)

($0.3
)
 

($4.6
)
Gains (losses) on derivatives in fair value hedge relationships
0.1

 
N/A

Less:
 
 
 
Accrual of periodic cash settlements
(0.5
)
 
(0.5
)
Non-interest rate effect on derivative fair values
(0.2
)
 
(0.1
)
Interest rate effect on derivative fair values

$0.5

 

($4.0
)
Add:
 
 
 
Estimate of offsetting interest rate effect related to financial instruments measured at fair value (2)
(0.5
)
 
1.9

Gains (losses) on mortgage loans in fair value hedge relationships

 
N/A

Income tax (expense) benefit

 
0.7

Estimated net interest rate effect on comprehensive income (loss)

$—

 

($1.4
)

(1)
Includes fair value gains (losses) on derivatives while not in fair value hedge relationships.
(2)
Includes the interest-rate effect on our trading securities, available-for-sale securities, mortgage loans held-for-sale, and other assets and debt for which we elected the fair value option, which is reflected in other non-interest income (loss) and total other comprehensive income (loss) on our condensed consolidated statements of comprehensive income.
As this table demonstrates, the estimated net effect of derivatives on our comprehensive income is volatile and can be significant. With the adoption of fair value hedge accounting for certain single-family mortgage loans in 1Q 2017, as well as certain transactions, including structured transactions, that have resulted in additional financial assets being recognized and measured at fair value, such volatility has been reduced and our GAAP earnings are more closely aligned with the underlying economics of our business.
However, the effect of fair value hedge accounting on our comprehensive income depends on a number of factors and is heavily influenced by the magnitude of the change in interest rates during the period. During 1Q 2017, the effect of fair value hedge accounting on our comprehensive income was relatively minor as the change in interest rates was relatively small. We expect that the application of fair value hedge accounting will have a larger impact on comprehensive income in periods in which there are larger changes in interest rates.
For information about the sensitivity of our financial results to interest-rate volatility, see "Risk Management - Market Risk."
CHANGES IN MARKET SPREADS
Comprehensive income (loss) was affected by changes in market spreads in amounts estimated to be $0.1 billion and $(0.6) billion (after-tax) during 1Q 2017 and 1Q 2016, respectively. During 1Q 2017, market spread tightening on our agency and non-agency mortgage-related securities and our multifamily mortgage loans and commitments measured at fair value resulted in an increase in comprehensive income. During 1Q 2016, the effect on comprehensive income was primarily due to market spreads widening on our non-agency mortgage-related investments measured at fair value.

Freddie Mac Form 10-Q
 
16



Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


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

$10,679

 

$12,369

 

($1,690
)
 
(14
)%
Restricted cash and cash equivalents
 
1,837

 
9,851

 
(8,014
)
 
(81
)%
Securities purchased under agreements to resell
 
51,257

 
51,548

 
(291
)
 
(1
)%
Subtotal
 
63,773

 
73,768

 
(9,995
)
 
(14
)%
Investments in securities, at fair value
 
108,627

 
111,547

 
(2,920
)
 
(3
)%
Mortgage loans, net
 
1,827,616

 
1,803,003

 
24,613

 
1
 %
Accrued interest receivable
 
6,221

 
6,135

 
86

 
1
 %
Derivative assets, net
 
569

 
747

 
(178
)
 
(24
)%
Deferred tax assets, net
 
15,806

 
15,818

 
(12
)
 
 %
Other assets
 
9,696

 
12,358

 
(2,662
)
 
(22
)%
Total assets
 

$2,032,308

 

$2,023,376

 

$8,932

 
 %
 
 
 
 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Accrued interest payable
 

$5,897

 

$6,015

 

($118
)
 
(2
)%
Debt, net
 
2,018,444

 
2,002,004

 
16,440

 
1
 %
Derivative liabilities, net
 
335

 
795

 
(460
)
 
(58
)%
Other liabilities
 
4,798

 
9,487

 
(4,689
)
 
(49
)%
Total liabilities
 
2,029,474

 
2,018,301

 
11,173

 
1
 %
Total equity
 
2,834

 
5,075

 
(2,241
)
 
(44
)%
Total liabilities and equity
 

$2,032,308

 

$2,023,376

 

$8,932

 
 %
Key Drivers:
As of March 31, 2017 compared to December 31, 2016:
Cash and cash equivalents , restricted cash and cash equivalents , and securities purchased under agreements to resell affect one another, so the changes in the balances should be viewed together. The combined balance as of March 31, 2017 decreased due to a decrease in prepayment proceeds received by the custodial account as of March 31, 2017 compared to December 31, 2016.
Other assets decreased primarily because of lower receivables from servicers and a decrease in the current income tax receivable. Higher mortgage interest rates during 1Q 2017 caused a decrease in prepayments, and thus, a decrease in receivables from servicers. When a borrower prepays, there is a brief delay before the servicer remits the payoff proceeds to us. In addition, the current income tax receivable decreased primarily due to the accrual of current period tax expense and a reduction of receivables related to prior years.
Other liabilities decreased primarily due to the elimination of liabilities related to our purchases of non-mortgage-related securities that traded and were recognized on the condensed consolidated balance sheets during 4Q 2016 but were settled during 1Q 2017.

Freddie Mac Form 10-Q
 
17



Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


Total equity decreased as a result of lower comprehensive income in 1Q 2017 than in 4Q 2016 coupled with additional dividends paid related to the $600 million decline in the Capital Reserve Amount in 1Q 2017.

Freddie Mac Form 10-Q
 
18



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


OUR BUSINESS SEGMENTS
We have three reportable segments, which are based on the way we manage our business. Certain activities that are not part of a reportable segment are included in the All Other category.
Single-family Guarantee - reflects results from our purchase, securitization, and guarantee of single-family loans and the management of single-family credit risk.
Multifamily - reflects results from our purchase, securitization, and guarantee of multifamily loans and securities, our investments in those loans and securities, and the management of multifamily credit risk and market spread risk.
Investments - reflects results from managing the company’s mortgage-related investments portfolio (excluding multifamily investments, single-family seriously delinquent loans, and the credit risk of single-family performing loans), treasury function, and interest-rate risk.
All Other - consists of material corporate-level activities that are infrequent in nature and based on decisions outside the control of the management of our reportable segments.
SEGMENT EARNINGS
During 1Q 2017, we changed how we calculate certain components of our Segment Earnings for our Investments segment. Prior period results have been revised to conform to the current period presentation. For more information on this change and on our segment reclassifications, see Note 11.
SEGMENT COMPREHENSIVE INCOME
The graphs below show our comprehensive income by segment, including the All Other category.
A20171Q10Q_CHART-21633.JPG

Freddie Mac Form 10-Q
 
19



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


SINGLE-FAMILY GUARANTEE
MARKET CONDITIONS

The following graphs and related discussion present certain market indicators that can significantly affect the business and financial results of our Single-family Guarantee segment.
U.S. Single-Family Originations
A20171Q10Q_CHART-07641.JPG
Source: Inside Mortgage Finance dated April 28, 2017 (latest available IMF purchase/refinance information).

 
Single-Family Serious Delinquency Rates
A20171Q10Q_CHART-10474.JPG
Source: National Delinquency Survey from the Mortgage Bankers Association. Data as of December 31, 2016 (latest available NDS information).

Commentary

Single-family loan origination volumes increased slightly to $385 billion in 1Q 2017 compared to $380 billion in 1Q 2016. Mortgage origination data is from Inside Mortgage Finance as of April 28, 2017.
Single-family serious delinquency (SDQ) rates in the U.S. generally continued to decline on a year-over-year basis due to macroeconomic factors, such as a stable labor market and continued home price appreciation.

Freddie Mac Form 10-Q
 
20



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


BUSINESS RESULTS

The following tables, graphs and related discussion present the business results of our Single-family Guarantee segment.
New Business Activity
Single-Family Loan Purchases and Guarantees

(UPB in billions)
A20171Q10Q_CHART-07161.JPG

 
Percentage of Single-Family Loan Purchases and Guarantees by Loan Purpose

A20171Q10Q_CHART-09110.JPG
    
Commentary
Our loan purchase and guarantee activity increased in 1Q 2017 due to higher refinance and home purchase loan volume driven by lower rates in late 2016 compared to late 2015. It can take up to three months between the time a mortgage is originated and when we purchase the loan.
If mortgage interest rates continue to increase in 2017, we would expect the volume and the mix by loan purpose of our single-family loan purchases and guarantees to change, primarily as a result of lower refinance loan volume. Home purchase loans generally present more credit risk than refinance loans (particularly those that do not involve "cash-out").

Freddie Mac Form 10-Q
 
21



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


Single-Family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfolio
A20171Q10Q_CHART-17451.JPG
Commentary
The single-family credit guarantee portfolio grew to $1,779 billion at March 31, 2017 from $1,755 billion at December 31, 2016, an increase of approximately 1%. We had 10.8 million and 10.6 million loans in our single-family credit guarantee portfolio at March 31, 2017 and December 31, 2016 , respectively.
The Core single-family book grew to 74% of the single-family credit guarantee portfolio at March 31, 2017 compared to 73% at December 31, 2016 . The Core single-family book consists of loans that were originated since 2008, excluding HARP and other relief refinance loans.
The HARP and other relief refinance book represented 15% of the single-family credit guarantee portfolio at both March 31, 2017 and December 31, 2016 .
The Legacy single-family book declined to 11% of the single-family credit guarantee portfolio at March 31, 2017 compared to 12% at December 31, 2016, primarily as a result of liquidations.

Freddie Mac Form 10-Q
 
22



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


Guarantee Fees
The average portfolio Segment Earnings guarantee fee rate recognizes upfront delivery fee income over the contractual life of the related loans (usually 30 years). If the related loans prepay, the remaining upfront delivery fee income is recognized immediately. In addition, the average portfolio Segment Earnings guarantee fee rate reflects an average of our total mortgage portfolio and is not limited to purchases in the applicable period.
The average guarantee fee rate charged on new acquisitions includes upfront delivery fee income over the estimated life of the related loans using our expectations of prepayments and other liquidations.
Average Portfolio Segment Earnings Guarantee Fee Rate (1) A20171Q10Q_CHART-13614.JPG
 
Average Guarantee Fee Rate Charged on New Acquisitions (1)
A20171Q10Q_CHART-14836.JPG

(1) Excludes the legislated 10 basis point increase in guarantee fees.
Commentary
Average portfolio Segment Earnings guarantee fee rates:
1Q 2017 vs. 1Q 2016 - increased primarily due to higher average contractual guarantee fees, reflecting the continued growth in the size of the Core single-family book. Average contractual guarantee fees are generally higher on mortgage loans in our Core single-family book compared to those in our Legacy single-family book.
Average guarantee fee rate charged on new acquisitions:
1Q 2017 vs. 1Q 2016 - decreased due to a longer expected life of mortgage loans reflecting the increase in quarterly average mortgage interest rates which resulted in lower annualized upfront delivery fees. Rising mortgage interest rates generally reduce prepayments, which extends the period over which we recognize upfront delivery fee income.

Freddie Mac Form 10-Q
 
23



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


Credit Risk Transfer (CRT) Activity
Since 2013, STACR debt note and ACIS transactions have been our principal methods of transferring a small portion of the expected credit losses and a significant portion of credit losses in a stressed economic environment subsequent to loan acquisition in our Core single-family book. The following charts present the issuance amounts for the STACR and ACIS transactions that occurred during 1Q 2017 and the cumulative issuance amount of all STACR and ACIS transactions as of March 31, 2017 by loss position and the party holding each loss position.
New STACR Debt Note and ACIS Transactions during 1Q 2017 (1)
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$61.1
 
Reference Pool

$63.6
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac


$0.1
 
ACIS



$0.5






 
STACR Debt Notes


$1.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
Loss
 
Freddie Mac

$0.4
 
ACIS

$0.1
 
STACR Debt Notes
$0.2
 
 
Cumulative STACR Debt Note and ACIS
Transactions as of March 31, 2017 (1)(2)  
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$626.7
 
Reference Pool

$658.4
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac


$1.5
 
ACIS



$6.1






 
STACR Debt Notes


$18.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
 Loss
 
Freddie Mac

$3.7
 
ACIS

$0.7
 
STACR
Debt Notes
$1.2
 

(1)
The amounts represent the UPB upon issuance of STACR debt notes and execution of ACIS transactions.
(2)
For the current outstanding coverage provided by our STACR debt note and ACIS transactions, see "Credit Enhancements."
Commentary
We continued to transfer a small portion of expected credit losses and a significant portion of credit losses in a stressed economic environment to third-party investors, insurers, and selected sellers through CRT transactions. During 1Q 2017, we transferred credit losses associated with $65.4 billion in UPB of loans in our Core single-family book through STACR debt note, ACIS, whole loan security, and deep mortgage insurance credit risk transfer, or Deep MI, transactions.
The interest and premiums we pay on our issued STACR debt note and ACIS transactions to transfer credit risk effectively reduce the guarantee fee income we earn on the PCs related to the respective reference pools. Our expected guarantee fee income on the PCs related to the STACR and ACIS reference pools has been effectively reduced by approximately 33% , on average, for all transactions executed through March 31, 2017 . The amount of the effective reduction to our overall guarantee fee income could be affected over time by changes in:
Our risk transfer strategy;
Prepayment and credit experience of the reference pools; or

Freddie Mac Form 10-Q
 
24



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


The economic or regulatory environment that affect the cost of executing these transactions.
In 1Q 2017, we changed our credit risk transfer strategy and generally will transfer less expected credit losses. However, we continue to transfer a significant portion of credit losses in a stressed economic environment. This will generally result in Freddie Mac retaining slightly more guarantee fee income. The aggregate cost of our credit risk transfer activity will continue to increase as we continue to transfer risk on new originations.
Due to differences in accounting, there could be a significant time lag between when we recognize a provision for credit losses and when we recognize the related recovery from our actual loss STACR debt note transactions. A credit expense on a loan in a reference pool related to these transactions is recorded when it is probable that we have incurred a loss, while a benefit is recorded when an actual loss event occurs.
As of March 31, 2017 , there has not been a significant number of loans in our STACR debt note and ACIS reference pools that have experienced a credit event. As a result, we experienced minimal write-downs on our STACR debt notes and filed minimal claims for reimbursement of losses under our ACIS transactions.
As of March 31, 2017, we have transferred a portion of the credit risk on nearly 30% of the total outstanding single-family credit guarantee portfolio.

Freddie Mac Form 10-Q
 
25



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


Credit Enhancements
The table below provides information on the credit enhanced loans in our single-family credit guarantee portfolio by book as of March 31, 2017 and December 31, 2016. The table includes all types of single-family credit enhancements, including primary mortgage insurance. See Note 4 for additional information about our single-family credit enhancements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2017
 
December 31, 2016
(In millions)
 
Total Current and Protected UPB
 
Coverage Remaining
 
Collateralized Coverage Remaining (1)
 
Total Current and Protected UPB
 
Coverage Remaining
 
Collateralized Coverage Remaining (1)
Credit enhancements at the time we acquire the loan:
 
 
 
 
 
 
 
 
 
 
 
 
Primary mortgage insurance
 

$300,100

 

$76,604

 

$—

 

$291,217

 

$74,345

 

$—

Seller indemnification (2)
 
1,009

 
10

 
10

 
1,030

 
10

 
10

Deep MI (2)
 
4,177

 
111

 

 
3,067

 
81

 

Lender recourse and indemnification agreements
 
5,407

 
4,804

 

 
5,247

 
4,911

 

Pool insurance
 
1,638

 
594

 

 
1,719

 
618

 

Other
 
 
 
 
 
 
 
 
 
 
 
 
HFA Indemnifications
 
1,602

 
1,602

 

 
1,747

 
1,747

 

Subordination
 
1,817

 
216

 

 
1,874

 
230

 

Other credit enhancements
 
17

 
6

 

 
17

 
6

 

Credit enhancements subsequent to our purchase or guarantee of the loan:
 
 
 
 
 
 
 
 
 
 
 
 
STACR debt note (2)
 
475,851

 
15,487

 
15,487

 
427,978

 
14,507

 
14,507

ACIS transactions (2)
 
500,558

 
5,691

 
872

 
453,670

 
5,355

 
877

Whole loan security and senior subordinate securitization structures (2)
 
3,057

 
396

 
396

 
2,494

 
375

 
375

Less: UPB with more than one type of credit enhancement
 
(632,376
)
 

 

 
(559,400
)
 

 

Single-family book with credit enhancement
 
662,857

 
105,521

 
16,765

 
630,660

 
102,185

 
15,769

Single-family book without credit enhancement
 
1,115,969

 

 

 
1,124,066

 

 

Total
 

$1,778,826

 

$105,521

 

$16,765

 

$1,754,726

 

$102,185

 

$15,769


(1)
Collateralized coverage includes cash received by Freddie Mac upon issuance of STACR debt notes and unguaranteed whole loan securities, as well as cash and securities pledged for our benefit primarily related to ACIS transactions.
(2)
Credit risk transfer transactions. The substantial majority of single-family loans covered by these transactions were acquired after 2012.
Commentary
We had coverage remaining of $105.5 billion and $102.2 billion on our single-family credit guarantee portfolio as of March 31, 2017 and December 31, 2016, respectively. Credit risk transfer transactions provided 20.6% and 19.9% of the coverage remaining at those dates.

Freddie Mac Form 10-Q
 
26



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


Mortgage Loan Credit Risk
Certain combinations of loan attributes can indicate a higher degree of credit risk, such as loans with both higher LTV ratios and lower credit scores. The following table presents the combination of credit score and current LTV (CLTV) ratio attributes of loans in our single-family credit guarantee portfolio.
 
 
March 31, 2017
 
 
CLTV ≤ 80

CLTV > 80 to 100

CLTV > 100

All Loans
(Credit score)
 
% Portfolio

SDQ Rate (1)

% Portfolio

SDQ Rate (1)

% Portfolio

SDQ Rate (1)

% Portfolio

SDQ Rate (1)
 
% Modified
Core single-family book:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
0.2
%
 
2.11
%
 
%
 
NM

 
%
 
NM

 
0.2
%
 
2.33
%
 
3.1
%
620 to 659
 
1.6

 
0.97
%
 
0.3

 
1.09
%
 

 
NM

 
1.9

 
0.99
%
 
1.3
%
≥ 660
 
62.3

 
0.15
%
 
9.5

 
0.22
%
 
0.1

 
1.79
%
 
71.9

 
0.16
%
 
0.2
%
Not available
 

 
NM

 
0.1

 
3.38
%
 

 
NM

 
0.1

 
2.61
%
 
4.0
%
Total
 
64.1
%
 
0.18
%
 
9.9
%
 
0.26
%
 
0.1
%
 
3.13
%
 
74.1
%
 
0.19
%
 
0.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Relief refinance book:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
0.6
%
 
1.67
%
 
0.1
%
 
3.31
%
 
0.1
%
 
4.52
%
 
0.8
%
 
2.20
%
 
4.9
%
620 to 659
 
0.8

 
1.06
%
 
0.3

 
2.30
%
 
0.1

 
3.44
%
 
1.2

 
1.49
%
 
2.8
%
≥ 660
 
9.8

 
0.32
%
 
2.0

 
1.1
%
 
0.7

 
1.93
%
 
12.5

 
0.50
%
 
0.8
%
Not available
 

 
NM

 

 
NM

 

 
NM

 

 
NM

 
1.4
%
Total
 
11.2
%
 
0.44
%
 
2.4
%
 
1.39
%
 
0.9
%
 
2.31
%
 
14.5
%
 
0.67
%
 
1.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legacy single-family book:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
0.7
%
 
5.83
%
 
0.2
%
 
12.22
%
 
0.1
%
 
19.37
%
 
1.0
%
 
7.50
%
 
34.5
%
620 to 659
 
1.3

 
4.20
%
 
0.3

 
9.47
%
 
0.2

 
16.15
%
 
1.8

 
5.51
%
 
28.6
%
≥ 660
 
6.7

 
1.90
%
 
1.2

 
6.59
%
 
0.6

 
12.01
%
 
8.5

 
2.55
%
 
13.9
%
Not available
 
0.1

 
4.86
%
 

 
NM

 

 
NM

 
0.1

 
5.48
%
 
16.6
%
Total
 
8.8
%
 
2.58
%
 
1.7
%
 
7.91
%
 
0.9
%
 
14.16
%
 
11.4
%
 
3.45
%
 
17.7
%
(1)
NM - Not meaningful due to the percentage of the portfolio rounding to zero.


Freddie Mac Form 10-Q
 
27



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


Alt-A and Subprime Loans
W hile we refer to certain loans as subprime or Alt-A for purposes of the discussion below and elsewhere in this Form 10-Q, there is no universally accepted definition of subprime or Alt-A, and the classification of such loans may differ from company to company. For example, some financial institutions may use credit scores to delineate certain residential loans as subprime. We do not rely on these loan classifications to evaluate the credit risk exposure relating to such loans in our single-family credit guarantee portfolio.
Participants in the mortgage market may characterize single-family loans based upon their overall credit quality at the time of origination, generally considering them to be prime or subprime. While we have not historically characterized the loans in our single-family credit guarantee portfolio as either prime or subprime, we monitor the amount of loans we have guaranteed with characteristics that indicate a higher degree of credit risk. In addition, we estimate that approximately $1.3 billion of security collateral underlying our other securitization products at both March 31, 2017 and December 31, 2016 were identified as subprime based on information provided to us when we entered into these transactions.
Many mortgage market participants classify single-family loans with credit characteristics that range between their prime and subprime categories as Alt-A because these loans have a combination of characteristics of each category, may be underwritten with lower or alternative income or asset documentation requirements compared to a full documentation loan, or both. Although we have discontinued new purchases of loans with lower documentation standards, we continue to purchase certain amounts of such loans in cases where the loan was either purchased pursuant to a previously issued guarantee, as part of our relief refinance initiative, or as part of another refinance loan initiative and the pre-existing loan was originated under less than full documentation standards. In the event we purchase a refinance loan and the original loan had been previously identified as Alt-A, such refinance loan may no longer be categorized or reported as an Alt-A loan in this Form 10-Q and our other financial reports because the new refinance loan replacing the original loan would not be identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such refinancing not occurred. From the time the relief refinance initiative began in 2009 to March 31, 2017 , we have purchased approximately $35.0 billion of relief refinance loans that were previously categorized as Alt-A loans in our portfolio, including $0.5 billion in 1Q 2017.
The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
 
 
March 31, 2017
 
December 31, 2016
(Dollars in billions)
 
UPB
 
CLTV
 
% Modified
 
SDQ Rate
 
UPB
 
CLTV
 
% Modified
 
SDQ Rate
Alt-A
 

$31.3

 
70
%
 
26.7
%
 
5.11
%
 

$32.6

 
72
%
 
25.9
%
 
5.21
%
The UPB of Alt-A loans in our single-family credit guarantee portfolio declined during 1Q 2017 primarily due to borrowers refinancing into other mortgage products, foreclosure transfers, and other liquidation events. Significant portions of the Alt-A loans in our portfolio are concentrated in Arizona, California, Florida, and Nevada.

Freddie Mac Form 10-Q
 
28



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


Single-Family Loan Performance
Serious Delinquency Rates
A20171Q10Q_CHART-07295.JPG
Commentary
Serious delinquency rates generally declined on a year-over-year basis on our single-family credit guarantee portfolio due to the continued strong performance of loans in the growing Core single-family book, continued home price appreciation, a stable labor market, continued loss mitigation, and foreclosure activities for loans primarily in the Legacy single-family book, as well as sales of certain non-performing loans.
Delinquency rates declined to 1.08% and 0.32% for loans one month and two months past due, respectively, as of March 31, 2017 compared to 1.37% and 0.40%, respectively, as of December 31, 2016 .

Freddie Mac Form 10-Q
 
29



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


Credit Performance
The table below contains certain credit performance metrics of our single-family credit guarantee portfolio. On January 1, 2017, we elected a new accounting policy for loan reclassifications from held-for-investment to held-for-sale that increased the amount of charge-offs recognized in 1Q 2017. Under the new policy, when we reclassify (transfer) a loan from held-for-investment to held-for-sale, we charge off the entire difference between the loan’s recorded investment and its fair value if the loan has a history of credit-related issues. Expenses related to property taxes and insurance are included as part of the charge-off. See Note 4 for further information about this change.
(Dollars in millions)
1Q 2017
 
1Q 2016
Charge-offs, gross (1)

$740

 

$569

Recoveries
(97
)
 
(128
)
Charge-offs, net
643

 
441

REO operations expense
56

 
84

Total credit losses

$699

 

$525

 
 
 
 
Total credit losses (in bps)
15.6

 
12.2

Ratio of total loan loss reserves (excluding reserves for TDR concessions) to annualized net charge-offs for single-family loans
1.9

 
2.7

Ratio of total loan loss reserves to annualized net charge-offs for single-family loans
5.0

 
8.2


(1)
1Q 2016 does not include lower-of-cost-or-fair-value adjustments and other expenses related to property taxes and insurance recognized when we transfer loans from held-for-investment to held-for-sale, which totaled $98 million. 1Q 2017 includes charge-offs of $364 million related to the transfer of loans from held-for-investment to held-for-sale.
The table below summarizes the carrying value for individually impaired single-family loans on our consolidated balance sheets for which we have recorded a specific reserve.
 
 
March 31, 2017
 
March 31, 2016
(Dollars in millions)
 
Loan Count
 
Amount
 
Loan Count
 
Amount
TDRs, at January 1
 
485,709

 

$78,869

 
512,253

 

$85,960

New additions
 
10,838

 
1,486

 
12,470

 
1,701

Repayments and reclassifications to held-for-sale
 
(15,881
)
 
(3,290
)
 
(10,426
)
 
(1,945
)
Foreclosure transfers and foreclosure alternatives
 
(2,774
)
 
(373
)
 
(2,962
)
 
(426
)
TDRs, at March 31,
 
477,892

 
76,692

 
511,335

 
85,290

Loans impaired upon purchase
 
7,165

 
485

 
8,137

 
604

Total impaired loans with specific reserve
 
485,057

 
77,177

 
519,472

 
85,894

Allowance for loan losses
 
 
 
(11,268
)
 
 
 
(13,315
)
Net investment, at March 31,
 
 
 

$65,909

 
 
 

$72,579


Freddie Mac Form 10-Q
 
30



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


The table below presents information about the UPB of single-family TDRs and non-accrual loans on our consolidated balance sheets.
(In millions)
 
March 31, 2017
 
December 31, 2016
TDRs on accrual status
 

$75,296

 

$77,122

Non-accrual loans
 
15,133

 
16,164

Total TDRs and non-accrual loans
 

$90,429

 

$93,286

 
 
 
 
 
Loan loss reserves associated with:
 
 
 
 
  TDRs on accrual status
 

$9,626

 

$10,295

  Non-accrual loans
 
2,213

 
2,290

Total
 

$11,839

 

$12,585

 
 
 
 
 
(In millions)
 
1Q 2017
 
1Q 2016
 
 
 
 
 
Foregone interest income on TDRs and non-accrual loans (1)
 

$554

 

$697

(1)
Represents the amount of interest income that we would have recognized for loans outstanding at the end of each period, had the loans performed according to their original contractual terms.
Commentary

As of March 31, 2017 , 62% of the loan loss reserves for single-family mortgage loans related to interest rate concessions which were provided to borrowers as part of loan modifications.
Most of our modified single-family loans, including TDRs, were current and performing at March 31, 2017 .
We expect our loan loss reserves associated with existing single-family TDRs to continue to decline over time as borrowers continue to make monthly payments under the modified terms and interest-rate concessions are amortized into earnings.
Charge-offs, net were higher in 1Q 2017 compared to 1Q 2016 mainly due to the policy change for loan reclassifications from held-for-investment to held-for-sale. See Note 4 for further information about this change.
See Note 4 for information on our single-family loan loss reserves.

Freddie Mac Form 10-Q
 
31



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


Loss Mitigation Activities
Loan Workout Activity
(UPB in billions, number of loan workouts in thousands)
A20171Q10Q_CHART-11203.JPG
Commentary

Our loan workout activity declined consistent with the decline in the number of delinquent loans in the single-family credit guarantee portfolio as the economy continued to improve.
We continue our loss mitigation efforts through our loan refinance, modification, and other initiatives.

Freddie Mac Form 10-Q
 
32



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


REO Activity

The table below presents a summary of our single-family REO activity.
 
 
1Q 2017
 
1Q 2016
(Dollars in millions)
 
Number of Properties
 
Amount
 
Number of Properties
 
Amount
Beginning balance — REO
 
11,418

 

$1,215

 
17,004

 

$1,774

Additions
 
3,545

 
346

 
4,631

 
440

Dispositions
 
(4,025
)
 
(399
)
 
(6,226
)
 
(603
)
Ending balance — REO
 
10,938

 
1,162

 
15,409

 
1,611

Beginning balance, valuation allowance
 
 
 
(17
)
 
 
 
(52
)
Change in valuation allowance
 
 
 
(2
)
 
 
 
8

Ending balance, valuation allowance
 


 
(19
)
 


 
(44
)
Ending balance — REO, net
 


 

$1,143

 


 

$1,567

Commentary
Our REO ending inventory declined in 1Q 2017 compared to 1Q 2016 primarily due to REO dispositions exceeding acquisitions. REO acquisitions continued to decline due to fewer seriously delinquent loans, driven in part by sales of certain seriously delinquent loans in 2016, and a large proportion of property sales to third parties at foreclosure.

Freddie Mac Form 10-Q
 
33



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


FINANCIAL RESULTS
The table below presents the components of the Segment Earnings and comprehensive income for our Single-family Guarantee segment.
 
 
1Q 2017
 
1Q 2016
 
Change
(Dollars in millions)
 
 
 
 
 
$
 
%
Guarantee fee income
 

$1,418

 

$1,285

 

$133

 
10
 %
Benefit (provision) for credit losses
 
39

 
289

 
(250
)
 
(87
)%
Other non-interest income (loss)
 
319

 
224

 
95

 
42
 %
Administrative expense
 
(333
)
 
(295
)
 
(38
)
 
(13
)%
REO operations expense
 
(59
)
 
(87
)
 
28

 
32
 %
Other non-interest expense
 
(318
)
 
(252
)
 
(66
)
 
(26
)%
Segment Earnings before income tax expense
 
1,066

 
1,164

 
(98
)
 
(8
)%
Income tax expense
 
(356
)
 
(354
)
 
(2
)
 
(1
)%
Segment Earnings, net of taxes
 
710

 
810

 
(100
)
 
(12
)%
Total other comprehensive income (loss), net of tax
 
(2
)
 
1

 
(3
)
 
(300
)%
Total comprehensive income
 

$708

 

$811

 

($103
)
 
(13
)%
Key Drivers:
Guarantee fee income
1Q 2017 vs. 1Q 2016 - increased primarily due to higher average contractual guarantee fees and continued growth in the size of the Core single-family book.
Benefit (provision) for credit losses
1Q 2017 vs. 1Q 2016 - decreased primarily due to stable probability of default and estimated loss severity in 1Q 2017, compared to improvements in probability of default and estimated loss severity in 1Q 2016.
Other non-interest income (loss)
1Q 2017 vs. 1Q 2016 - increased primarily due to:
An increase in non-cash amortization income in 1Q 2017 as compared to 1Q 2016 due to higher prepayments related to PCs in 1Q 2017; and
Lower property tax and insurance expense associated with reperforming mortgage loans classified as held-for-sale in 1Q 2017 as compared to seriously delinquent mortgage loans with higher expenses that were classified as held-for-sale in 1Q 2016.
These items were partially offset by:
Fair value losses on certain STACR debt notes due to tightening spreads between STACR yields and LIBOR in 1Q 2017 compared to 1Q 2016 when spreads were relatively unchanged; and
Settlement proceeds related to the TBW bankruptcy received in 1Q 2016.
Other non-interest expense
1Q 2017 vs. 1Q 2016 - increased primarily due to higher credit risk transfer expense reflecting higher outstanding cumulative volumes in 1Q 2017 as compared to 1Q 2016.

Freddie Mac Form 10-Q
 
34



Management's Discussion and Analysis
 
Our Business Segments | Multifamily


MULTIFAMILY
MARKET CONDITIONS
The graphs and related discussion below present certain multifamily market indicators that can significantly affect the business and financial results of our Multifamily segment.
Change in Effective Rents A20171Q10Q_CHART-07230.JPG
Source: REIS, Inc.

 
Apartment Vacancy Rates
A20171Q10Q_CHART-08926.JPG
Source: REIS, Inc.
Commentary
Effective rent growth slowed, while vacancy rates rose slightly during 1Q 2017 compared to 4Q 2016, primarily due to new apartment completions outpacing net absorptions.
While we expect these trends in market conditions to continue in the upcoming quarters, we do not expect our financial results for the remainder of the year to be significantly affected by them.

Freddie Mac Form 10-Q
 
35



Management's Discussion and Analysis
 
Our Business Segments | Multifamily


K Certificate Benchmark Spreads
A20171Q10Q_CHART-07392.JPG

Source: Independent dealers

Commentary
The profitability of our K Certificate transactions (as measured by gains and losses on sales of mortgage loans) is affected by the change in K Certificate benchmark spreads during the period between loan purchase commitment and execution of the K Certificate transaction. These market spread impacts contribute to our earnings volatility, which we try to manage through the size of our securitization pipeline of held-for-sale mortgage loans and through our purchase of swaptions on credit indices.
K Certificate benchmark spreads tightened slightly during 1Q 2017, ending at 62 bps, which had a positive effect on K Certificate profitability. The primary drivers of spread tightening were overall market spread improvement, an increase in our investor base, and structural enhancements made to our K Certificate transactions. By comparison, our K Certificate benchmark spreads were more volatile during 1Q 2016, as a result of certain macroeconomic market conditions, resulting in a negative effect on our K Certificate profitability.

Freddie Mac Form 10-Q
 
36



Management's Discussion and Analysis
 
Our Business Segments | Multifamily


BUSINESS RESULTS

The graphs and related discussion below present the business results of our Multifamily segment.
New Business Activity

Multifamily New Business Activity

(UPB in billions)

A20171Q10Q_CHART-07253.JPG

Commentary
The 2017 FHFA scorecard production cap remains at $36.5 billion. Business activity associated with certain targeted loan types is considered uncapped for purposes of determining the dollar volume of multifamily new business. Reclassifications between new business activity subject to the production cap and new business activity not subject to the production cap may occur during 2017.
Outstanding loan purchase commitments were $14.0 billion and $9.5 billion as of March 31, 2017 and March 31, 2016, respectively. Both periods include loan purchase commitments for which we have elected the fair value option.
The dollar volume of our multifamily new business activity was lower during 1Q 2017 compared to 1Q 2016. However, after considering outstanding loan purchase commitments, our overall activity was

Freddie Mac Form 10-Q
 
37



Management's Discussion and Analysis
 
Our Business Segments | Multifamily


relatively flat during 1Q 2017 compared to 1Q 2016. We expect our full year new business activity volume for 2017 to be consistent with 2016 volumes.
Approximately 55 percent of our multifamily new business activity during 1Q 2017 counted towards the 2017 scorecard production cap, while the remaining 45 percent was not subject to the production cap.



Freddie Mac Form 10-Q
 
38



Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Multifamily Portfolio

Total Multifamily Portfolio
A20171Q10Q_CHART-07134.JPG
 
Multifamily Mortgage Investments Portfolio A20171Q10Q_CHART-09026.JPG
Commentary
Our total multifamily portfolio grew during 1Q 2017 due to an increase in the guarantee portfolio, which was primarily attributable to our securitization of loans in K Certificate and SB Certificate transactions.
Our securitization pipeline of held-for-sale loans was $17.6 billion at March 31, 2017, relatively unchanged from December 31, 2016.
The decline in less liquid assets during 1Q 2017 was primarily due to continued runoff of our held-for-investment mortgage loan and CMBS portfolios.
Our multifamily delinquency rate at March 31, 2017 was 0.03%.


Freddie Mac Form 10-Q
 
39



Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Credit Risk Transfer Activity

New K Certificate and SB Certificate Issuances
A20171Q10Q_CHART-09744.JPG
 
Average Guarantee Fee Rate Charged on New K Certificates, K Certificates without Subordination, and SB Certificates
A20171Q10Q_CHART-11783.JPG

Commentary
K Certificate and SB Certificate structures vary by deal. Structural deal features such as term, type of underlying loan product, and subordination levels generally influence the deal's size (UPB) and its risk profile, which ultimately affects the guarantee fee rate received by Freddie Mac, as Guarantor.
The dollar volume of our K Certificate and SB Certificate issuances was relatively flat during 1Q 2017 compared to 1Q 2016. While we may purchase certain unguaranteed subordinated securities related to these issuances, to date we have not purchased any of the unguaranteed securities that are in the first loss position, nor do we currently hold any in our portfolio.
The average guarantee fee rate on newly issued K Certificate and SB Certificate issuances was lower during 1Q 2017 compared to 1Q 2016, primarily due to higher average subordination rates in 1Q 2017 coupled with greater securitization of underlying loan products that by their nature and design have less risk and for which we therefore charge a lower guarantee fee rate.


Freddie Mac Form 10-Q
 
40



Management's Discussion and Analysis
 
Our Business Segments | Multifamily


FINANCIAL RESULTS
The table below presents the components of the Segment Earnings and comprehensive income for our Multifamily segment.
 
 
1Q 2017
 
1Q 2016
 
Change
(Dollars in millions)
 
 
 
 
 
$
 
%
Net interest income
 

$271

 

$252

 

$19

 
8
 %
Guarantee fee income
 
151

 
108

 
43

 
40
 %
Benefit (provision) for credit losses
 
6

 
5

 
1

 
20
 %
Gains (losses) on loans and other non-interest income
 
236

 
737

 
(501
)
 
(68
)%
Derivative gains (losses)
 
127

 
(787
)
 
914

 
116
 %
Administrative expense
 
(95
)
 
(80
)
 
(15
)
 
(19
)%
Other non-interest expense
 
(21
)
 
(24
)
 
3

 
13
 %
Segment Earnings before income tax (expense) benefit
 
675

 
211

 
464

 
220
 %
Income tax (expense) benefit
 
(226
)
 
(64
)
 
(162
)
 
(253
)%
Segment Earnings, net of taxes
 
449

 
147

 
302

 
205
 %
Total other comprehensive income (loss), net of tax
 
(4
)
 
3

 
(7
)
 
(233
)%
Total comprehensive income (loss)
 

$445

 

$150

 

$295

 
197
 %

Key Drivers:
Guarantee fee income
1Q 2017 vs. 1Q 2016 - increased primarily due to higher average multifamily guarantee portfolio balances as a result of ongoing issuances of K Certificates and SB Certificates.
Gains (losses) on loans and other non-interest income, derivative gains (losses), and total other comprehensive income (loss) are evaluated together as they are collectively driven by a combination of market spread-related and interest rate-related fair value changes. We use derivatives in the Multifamily segment to economically offset interest rate-related fair value changes of certain assets. The fair value changes of these economically hedged assets are included in gains (losses) on loans and other non-interest income and total other comprehensive income (loss) . The interest rate-related portion of these changes and the interest rate-related derivative fair value changes that are included in derivative gains (losses) largely offset each other and, as a result, there is minimal net impact on total comprehensive income for the Multifamily segment from interest rate-related derivatives. We also purchase swaptions on credit indices to economically offset a portion of the market spread-related fair value changes of certain assets.
1Q 2017 vs. 1Q 2016 - we recognized gains, in the aggregate, during 1Q 2017 compared to losses, in the aggregate, during 1Q 2016, primarily due to improved pricing on K Certificates and SB Certificates as well as improved market spread-related fair value changes. During 1Q 2017, we recognized spread-related gains primarily due to K Certificate benchmark spreads tightening, compared to spread-related losses during 1Q 2016 due to increased volatility in the K Certificate spreads and non-agency CMBS spreads widening on our available-for-sale securities.

Freddie Mac Form 10-Q
 
41



Management's Discussion and Analysis
 
Our Business Segments | Investments


INVESTMENTS
MARKET CONDITIONS
The following graphs and related discussion present the par swap rate curves as of the end of each comparative period. Changes in par swap rates can significantly affect the fair value of our debt, derivatives, and mortgage and non-mortgage-related securities. As a result, changes in par swap rates will affect the business and financial results of our Investments segment.
Par Swap Rate Curves
A20171Q10Q_CHART-14438.JPG A20171Q10Q_CHART-16140.JPG
Sources: BlackRock
Commentary
Long-term interest rates increased slightly during 1Q 2017, resulting in higher fair values for our pay-fixed interest rate swaps and lower fair values for our receive-fixed interest rate swaps, certain of our option contracts, and the vast majority of our investments in securities. Conversely, long-term interest rates decreased during 1Q 2016, resulting in lower fair values for our pay-fixed interest rate swaps and higher fair values for our receive-fixed interest rate swaps, certain of our option contracts, and the vast majority of our investments in securities.



Freddie Mac Form 10-Q
 
42



Management's Discussion and Analysis
 
Our Business Segments | Investments


BUSINESS RESULTS

The graphs and related discussion below present the business results of our Investments segment.
Investing Activity

The following graphs present the Investments segment's total investments portfolio and the composition of its mortgage investments portfolio by liquidity category.

Investments Portfolio
A20171Q10Q_CHART-07144.JPG
 
Mortgage Investments Portfolio
A20171Q10Q_CHART-08904.JPG
Commentary
We continue to reduce the size of our mortgage investments portfolio in order to comply with the mortgage-related investments portfolio year-end limits. The balance of our mortgage investments portfolio declined 2.1% from December 31, 2016 to March 31, 2017 .
The overall liquidity of our mortgage investments portfolio continued to improve as our less liquid assets decreased at a faster pace than the overall decline of our mortgage investments portfolio. The percentage of less liquid assets relative to our total mortgage investments portfolio declined from 34.4% at December 31, 2016 to 33.8% at March 31, 2017 , primarily due to repayments and sales of our less liquid assets. We continued to actively reduce the size of our less liquid assets during 1Q 2017 by selling $2.3 billion of non-agency mortgage-related securities.
The balance of our other investments and cash portfolio declined by 4.5% primarily due to a decrease in prepayment proceeds received by the custodial account as of March 31, 2017 compared to December 31, 2016.

Freddie Mac Form 10-Q
 
43



Management's Discussion and Analysis
 
Our Business Segments | Investments


Net Interest Yield and Average Balances
Net Interest Yield & Average Investments Portfolio Balance
A20171Q10Q_CHART-11875.JPG
Commentary
Net Interest Yield
1Q 2017 vs. 1Q 2016 - remained relatively flat.
Average Investments Portfolio Balance
The average investments portfolio balance for 1Q 2017 declined compared to 1Q 2016 primarily due to the repayments of mortgage-related securities, the sale of non-agency mortgage-related securities, and the repayment of certain reperforming loans and performing modified loans, partially offset by an increase in our purchases of U.S. Treasury securities, which are classified as non-mortgage-related assets. The overall decline in our average investments portfolio balance is consistent with our efforts to comply with the mortgage-related investments portfolio year-end limits.

Freddie Mac Form 10-Q
 
44



Management's Discussion and Analysis
 
Our Business Segments | Investments


FINANCIAL RESULTS
The table below presents the components of the Segment Earnings and comprehensive income for our Investments segment.
 
1Q 2017
 
1Q 2016
 
Change
(Dollars in millions)
 
 
 
 
$
 
%
Net interest income

$929

 

$1,029

 

($100
)
 
(10
)%
Net impairment of available-for-sale securities recognized in earnings
73

 
81

 
(8
)
 
(10
)%
Derivative gains (losses)
52

 
(3,276
)
 
3,328

 
102
 %
Gains (losses) on trading securities
(135
)
 
169

 
(304
)
 
(180
)%
Other non-interest income
744

 
187

 
557

 
298
 %
Administrative expense
(83
)
 
(73
)
 
(10
)
 
(14
)%
Segment Earnings before income tax (expense) benefit
1,580

 
(1,883
)
 
3,463

 
184
 %
Income tax (expense) benefit
(528
)
 
572

 
(1,100
)
 
(192
)%
Segment Earnings, net of taxes
1,052

 
(1,311
)
 
2,363

 
180
 %
Total other comprehensive income (loss), net of tax
29

 
150

 
(121
)
 
(81
)%
Total comprehensive income (loss)

$1,081

 

($1,161
)
 

$2,242

 
193
 %
Key Drivers:
Net interest income
1Q 2017 vs. 1Q 2016 - decreased primarily due to a reduction in the balance of our higher yielding mortgage-related assets due to repayments.
Derivative gains (losses)
1Q 2017 vs. 1Q 2016 - improved during 1Q 2017 compared to 1Q 2016 as long-term interest rates increased slightly during 1Q 2017 compared to a decline during 1Q 2016, resulting in an improvement in the fair value of our pay-fixed interest rate swaps and forward commitments to issue PCs. This improvement in fair value was partially offset by losses in our receive-fixed swaps and option-based derivatives. See "Consolidated Results of Operations - Derivative Gains (Losses)" for additional information.
Gains (losses) on trading securities
1Q 2017 vs. 1Q 2016 - decreased primarily due to losses from a slight increase in long-term interest rates during 1Q 2017 compared to gains from a decrease in long-term interest rates during 1Q 2016.
Other non-interest income
1Q 2017 vs. 1Q 2016 - increased primarily due to an increase in the amount of gains recognized from the extinguishment of certain fixed-rate debt securities of consolidated trusts, as market interest rates increased between the time of issuance and repurchase, coupled with an increase in sales of available-for-sale non-agency mortgage-related securities in an unrealized gain position. The volume of our sales of non-agency mortgage-related securities will continue to vary as our portfolio that is saleable, based on a variety of criteria, has decreased.
Other comprehensive income (loss)
1Q 2017 vs. 1Q 2016 - decreased primarily due to an increase in sales of available-for-sale non-agency mortgage-related securities in an unrealized gain position, which resulted in more unrealized gains being reclassified from accumulated other comprehensive income to other non-

Freddie Mac Form 10-Q
 
45



Management's Discussion and Analysis
 
Our Business Segments | Investments


interest income . In addition, we recognized unrealized gains during 1Q 2017 as a result of spreads tightening on our mortgage-related securities partially offset by unrealized losses due to slight increases in interest rates. During 1Q 2016, we recognized unrealized gains due to a decrease in interest rates partially offset by losses on our non-agency mortgage related securities due to spread widening.



Freddie Mac Form 10-Q
 
46



Management's Discussion and Analysis
 
Risk Management



RISK MANAGEMENT
Risk is an inherent part of our business activities. We are exposed to four major types of risk: credit risk, market risk, liquidity risk, and operational risk.
For more discussion of these and other risks facing our business and our risk management framework, see "MD&A - Risk Management" and "Risk Factors" in our 2016 Annual Report and "Liquidity and Capital Resources" in this report and in our 2016 Annual Report. See below for updates since our 2016 Annual Report.

Freddie Mac Form 10-Q
 
47



Management's Discussion and Analysis
 
Risk Management | Market Risk

MARKET RISK
Our business segments have inherent exposure to market risk, including interest-rate and spread risks. Interest-rate risk is consolidated and primarily managed by the Investments segment, while spread risk is owned and managed by each individual business segment. Market risk can adversely affect future cash flows, or economic value, as well as earnings and net worth.
The majority of our interest-rate risk comes from our investments in mortgage-related assets (securities and loans) and the debt we issue to fund them. Our primary goal in managing interest-rate risk is to reduce the amount of change in the value of our future cash flows due to future changes in interest rates. We use models to analyze possible future interest-rate scenarios, along with the cash flows of our assets and liabilities over those scenarios.
Our primary interest-rate risk measures are duration gap and PMVS. Duration gap measures the difference in price sensitivity to interest rate changes between our financial assets and liabilities and is expressed in months relative to the market value of assets. PMVS is an estimate of the change in the market value of our financial assets and liabilities with spreads held constant from an instantaneous shock to interest rates, assuming no rebalancing actions are undertaken. PMVS is measured in two ways, one measuring the estimated sensitivity of our portfolio market value to a 50 basis point parallel movement in interest rates (PMVS-Level or PMVS-L) and the other to a non-parallel movement resulting from a 25 basis point change in slope of the LIBOR yield curve (PMVS-Yield Curve or PMVS-YC). While we believe that duration gap and PMVS are useful risk management tools, they should be understood as estimates rather than as precise measurements.
The table below provides duration gap, estimated point-in-time and minimum and maximum PMVS-L and PMVS-YC results, and an average of the daily values and standard deviation for 1Q 2017 and 1Q 2016. The table below also provides PMVS-L estimates assuming an immediate 100 basis point shift in the LIBOR yield curve. The interest-rate sensitivity of a mortgage portfolio varies across a wide range of interest rates.
 
 
PMVS-YC
 
PMVS-L
(In millions)
 
25 bps
 
50 bps
 
100 bps
Assuming shifts of the LIBOR yield curve:
 
 
 
 
 
 
March 31, 2017
 

$2

 

$—

 

$—

December 31, 2016
 

$7

 

$—

 

$—

 
 
1Q 2017
 
1Q 2016
(Duration gap in months, dollars in millions)
 
Duration
Gap
 
PMVS-YC
25 bps
 
PMVS-L
50 bps
 
Duration
Gap
 
PMVS-YC
25 bps
 
PMVS-L
50 bps
Average
 
0.1

 

$7

 

$5

 
0.2

 

$8

 

$29

Minimum
 
(0.2
)
 

$—

 

$—

 
(0.2
)
 

$—

 

$—

Maximum
 
0.8

 

$22

 

$63

 
0.7

 

$31

 

$92

Standard deviation
 
0.2

 

$5

 

$15

 
0.2

 

$6

 

$26

Derivatives enable us to reduce our interest-rate risk exposure. The table below shows that the PMVS-L risk levels, assuming a 50 basis point shift in the LIBOR yield curve for the periods presented, would have been higher if we had not used derivatives.

Freddie Mac Form 10-Q
 
48



Management's Discussion and Analysis
 
Risk Management | Market Risk

 
PMVS-L (50 bps)
 
 
(In millions)
Before
Derivatives
 
After
Derivatives
 
Effect of
Derivatives
March 31, 2017

$3,734

 

$—

 

($3,734
)
December 31, 2016

$3,651

 

$—

 

($3,651
)
While we manage our interest-rate risk exposure on an economic basis to a low level as measured by our models, the accounting treatment for our financial assets and liabilities (i.e., some are measured at amortized cost, while others are measured at fair value), including derivatives, creates volatility in our earnings when interest rates fluctuate. On February 2, 2017, we began using fair value hedge accounting for certain single-family mortgage loans, which reduced such volatility. Based upon the composition of our financial assets and liabilities, including derivatives, at March 31, 2017 , we generally recognize fair value losses in earnings when long-term interest rates decline.
To evaluate the potential benefits of fair value hedge accounting, we determine the most adverse GAAP earnings outcome, under a range of scenarios, before hedge accounting (the “Before Hedge Accounting” GAAP adverse scenario) and compare this to the most adverse GAAP earnings outcome, under the same range of scenarios, after hedge accounting (the “After Hedge Accounting” GAAP adverse scenario). To do this, we evaluate the estimated adverse net effect on before-tax earnings of certain immediate shifts in interest rates both before and after the application of fair value hedge accounting. The interest rate scenarios evaluated include parallel shifts in the yield curve of plus and minus 100 basis points, non-parallel yield curve shifts in which long-term interest rates increase or decrease by 100 basis points, and non-parallel yield curve shifts in which short-term and medium-term interest rates increase or decrease by 100 basis points.
At March 31, 2017, the GAAP adverse scenario both before and after fair value hedge accounting was a non-parallel shift in which long-term rates decrease by 100 basis points. The results of this evaluation are shown by the table below.
 
GAAP Adverse Scenario (Before-Tax)
(Dollars in billions)
Before Hedge Accounting
 
After Hedge Accounting
 
% Change
March 31, 2017

($3.5
)
 

($1.8
)
 
50
%
March 31, 2016

($3.2
)
 
N/A

 
N/A

See Note 7 for actual results of fair value hedge accounting on our condensed consolidated statements of comprehensive income for 1Q 2017.


Freddie Mac Form 10-Q
 
49



Management's Discussion and Analysis
 
Liquidity and Capital Resources | Liquidity Profile

LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY PROFILE
OTHER DEBT ACTIVITIES
Debt securities that we issue are classified either as debt securities of consolidated trusts held by third parties or other debt. We issue other debt to fund our operations. Competition for funding can vary with economic, financial market, and regulatory environments.
The tables below summarize the par value and the average rate of other debt securities we issued or paid off, including regularly scheduled principal payments, payments resulting from calls, and payments for repurchases. We repurchase, call, or exchange our outstanding debt securities from time to time for a variety of reasons, including managing our funding composition and supporting the liquidity of our debt securities.
 
1Q 2017
(Dollars in millions)
Short-term
 
Average Rate
 
Long-term
 
Average Rate
Discount notes and Reference Bills:
 
 
 
 
 
 
 
Beginning balance

$61,042

 
0.47
%
 

$—

 
%
Issuances
100,504

 
0.59
%
 

 
%
Repurchases
(57
)
 
0.91
%
 

 
%
Maturities
(100,416
)
 
0.47
%
 

 
%
Ending Balance
61,073

 
0.66
%
 

 
%
Securities sold under agreements to repurchase:
 
 
 
 
 
 
 
Beginning balance
3,040

 
0.42
%
 

 
%
Additions
36,976

 
0.26
%
 

 
%
Repayments
(33,469
)
 
0.23
%
 

 
%
Ending Balance
6,547

 
0.41
%
 

 
%
Callable debt:
 
 
 
 
 
 
 
Beginning balance

 
%
 
98,420

 
1.44
%
Issuances

 
%
 
18,008

 
1.91
%
Repurchases

 
%
 

 
%
Calls

 
%
 
(1,460
)
 
2.02
%
Maturities

 
%
 
(2,178
)
 
0.76
%
Ending Balance

 
%
 
112,790

 
1.52
%
Non-callable debt: (1)
 
 
 
 
 
 
 
Beginning balance
7,435

 
0.41
%
 
186,806

 
2.10
%
Issuances
4,572

 
0.69
%
 
5,134

 
2.23
%
Repurchases

 
%
 

 
%
Maturities

 
%
 
(26,346
)
 
1.30
%
Ending Balance
12,007

 
0.51
%
 
165,594

 
2.25
%
Total other debt

$79,627

 
0.62
%
 

$278,384

 
1.95
%

Freddie Mac Form 10-Q
 
50



Management's Discussion and Analysis
 
Liquidity and Capital Resources | Liquidity Profile

 
 
1Q 2016
(Dollars in millions)
 
Short-term
 
Average Rate
 
Long-term
 
Average Rate
Discount notes and Reference Bills:
 
 
 
 
 
 
 
 
Beginning balance
 

$104,088

 
0.28
%
 

$—

 
%
Issuances
 
105,653

 
0.32
%
 

 
%
Maturities
 
(134,082
)
 
0.23
%
 

 
%
Ending Balance
 
75,659

 
0.42
%
 

 
%
Securities sold under agreements to repurchase:
 
 
 
 
 
 
 
 
Beginning balance
 

 
%
 

 
%
Additions
 
300

 
0.50
%
 

 
%
Repayments
 
(300
)
 
0.50
%
 

 
%
Ending Balance
 

 
%
 

 
%
Callable debt:
 
 
 
 
 
 
 
 
Beginning balance
 

 
%
 
107,675

 
1.61
%
Issuances
 

 
%
 
28,930

 
1.43
%
Repurchases
 

 
%
 

 
%
Calls
 

 
%
 
(27,691
)
 
1.72
%
Maturities
 

 
%
 
(250
)
 
0.47
%
Ending Balance
 

 
%
 
108,664

 
1.49
%
Non-callable debt: (1)
 
 
 
 
 
 
 
 
Beginning balance
 
9,545

 
0.20
%
 
196,713

 
2.34
%
Issuances
 

 
%
 
9,910

 
1.37
%
Repurchases
 

 
%
 

 
%
Maturities
 

 
%
 
(9,169
)
 
2.41
%
Ending Balance
 
9,545

 
0.20
%
 
197,454

 
2.32
%
Total other debt
 

$85,204

 
0.40
%
 

$306,118

 
2.02
%
(1) Includes STACR debt notes and certain multifamily other debt.

We continue to rely on short-term and medium-term other debt to meet our overall funding needs. Medium-term other debt is classified as long-term in the table above. During 1Q 2017, we increased our volume of securities sold under agreements to repurchase as these borrowing transactions reduced the cost of our funding. To replace the medium-term and long-term debt that was called or matured during 1Q 2017, we primarily issued a combination of callable and non-callable debt.

Our long-term other debt issuances decreased during 1Q 2017 compared to 1Q 2016, as we called less debt due to the higher rate environment in 1Q 2017. Our outstanding other debt balance continues to decline as we reduce our indebtedness along with the decline in our mortgage-related investments portfolio.

Freddie Mac Form 10-Q
 
51



Management's Discussion and Analysis
 
Liquidity and Capital Resources | Liquidity Profile

The following graphs present our other debt by contractual maturity date and earliest redemption date. The earliest redemption date refers to the earliest call date for callable debt and the contractual maturity date for all other debt.
Contractual Maturity Date as of March 31, 2017
A20171Q10Q_CHART-21361.JPG
 
Earliest Redemption Date as of March 31, 2017 A20171Q10Q_CHART-22874.JPG





Freddie Mac Form 10-Q
 
52



Management's Discussion and Analysis
 
Liquidity and Capital Resources | Liquidity Profile

DEBT SECURITIES OF CONSOLIDATED TRUSTS
The table below shows the issuance and extinguishment activity for the debt securities of our consolidated trusts.
(In millions)
1Q 2017
 
1Q 2016
Beginning balance

$1,602,162

 

$1,513,089

Issuances:
 
 
 
New issuances to third parties
71,002

 
51,607

Additional issuances of securities
30,804

 
28,264

Total issuances
101,806

 
79,871

Extinguishments:
 
 
 
Purchases of debt securities from third parties
(12,515
)
 
(9,587
)
Debt securities received in settlement of advances to lenders
(8,231
)
 
(3,659
)
Repayments of debt securities
(65,061
)
 
(55,490
)
Total extinguishments
(85,807
)
 
(68,736
)
Ending balance

$1,618,161

 

$1,524,224

Unamortized premiums and discounts
45,650

 
43,959

Debt securities of consolidated trusts held by third parties

$1,663,811

 

$1,568,183

Debt securities of our consolidated trusts represent our liability to third parties that hold beneficial interests in our consolidated securitization trusts. Our exposure on debt securities of consolidated trusts is limited to the guarantee we provide on the payment of principal and interest on these securities, as the primary source of repayment of these debt securities comes from the cash flows of the mortgage loans held by the trusts which back the securities. At March 31, 2017 , our estimated exposure (including the amounts that are due to Freddie Mac for debt securities of consolidated trusts that we purchased) to these debt securities is recognized as the allowance for credit losses on mortgage loans held by consolidated trusts. See Note 4 for details on our allowance for loan losses.
OTHER INVESTMENTS AND CASH PORTFOLIO
The investments in our other investments and cash portfolio are important to our cash flow, collateral management, and asset and liability management and our ability to provide liquidity and stability to the mortgage market. The table below summarizes the balances in our other investments and cash portfolio, which includes the liquidity and contingency operating portfolio.

Freddie Mac Form 10-Q
 
53



Management's Discussion and Analysis
 
Liquidity and Capital Resources | Liquidity Profile

 
 
March 31, 2017
 
December 31, 2016
(In billions)
 
Liquidity and Contingency Operating Portfolio
 
Custodial Account
 
Other (1)
 
Total Other Investments and Cash Portfolio
 
Liquidity and Contingency Operating Portfolio
 
Custodial Account
 
Other (1)
 
Total Other Investments and Cash Portfolio
Cash and cash equivalents
 

$10.7

 

$—

 

$—

 

$10.7

 

$12.4

 

$—

 

$—

 

$12.4

Restricted cash and cash equivalents
 

 
1.4

 
0.4

 
1.8

 

 
9.5

 
0.4

 
9.9

Securities purchased under agreements to resell
 
34.9

 
15.7

 
0.7

 
51.3

 
37.5

 
13.6

 
0.4

 
51.5

Non-mortgage related securities
 
25.5

 

 
1.7

 
27.2

 
19.6

 

 
1.5

 
21.1

Other assets (2)
 

 

 
1.1

 
1.1

 

 

 
1.3

 
1.3

Total
 

$71.1



$17.1



$3.9



$92.1



$69.5



$23.1



$3.6



$96.2


(1)
Consists of amounts related to collateral held by us from derivative and other counterparties, investments in unsecured agency debt that we may not otherwise invest in, other than to pledge as collateral to our counterparties when our derivatives are in a liability position, and advances to lenders.
(2)
Consists of advances to lenders.
Our non-mortgage-related investments in the liquidity and contingency operating portfolio consist of U.S. Treasury securities and other investments that we could sell to provide us with an additional source of liquidity to fund our business operations. We also maintain non-interest-bearing deposits at the Federal Reserve Bank of New York.


Freddie Mac Form 10-Q
 
54



Management's Discussion and Analysis
 
Liquidity and Capital Resources | Cash Flows


CASH FLOWS
We evaluate our cash flow performance by comparing the net cash flows from operating and investing activities to the net cash flows required to finance those activities. The following graphs present the results of these activities for 1Q 2016 and 1Q 2017.
A20171Q10Q_CHART-07107.JPG A20171Q10Q_CHART-08850.JPG A20171Q10Q_CHART-10097.JPG

Commentary
Cash provided by operating activities increased $4.2 billion primarily due to the following:
Decrease in net purchases of mortgage loans acquired as held-for-sale, primarily due to a decrease in purchases of multifamily loans.
Cash provided by investing activities decreased $22.2 billion primarily due to the following:
Balances of securities purchased under agreements to resell remaining relatively flat during 1Q 2017, but declining significantly during 1Q 2016 due to lower near-term cash needs;
Increase in net purchases of trading securities, primarily due to an increase in our purchases of U.S. Treasury securities; and
Increase in advances to lenders; partially offset by
Decrease in restricted cash due to a reduction in amounts held by consolidated trusts due to a decrease in prepayment proceeds.
Cash used in financing activities decreased $15.8 billion primarily due to the following:
Increase in net proceeds from issuance of other debt, as we called less debt due to the higher interest-rate environment; partially offset by
Increase in net repayments and redemptions of debt securities of consolidated trusts held by third parties due to higher PC liquidation rates.

Freddie Mac Form 10-Q
 
55



Management's Discussion and Analysis
 
Liquidity and Capital Resources | Capital Resources


CAPITAL RESOURCES
Our entry into conservatorship resulted in significant changes to the assessment of our capital adequacy and our management of capital. Since our entry into conservatorship, Treasury and FHFA have taken a number of actions that affect our cash requirements and our ability to fund those requirements. Under the Purchase Agreement, Treasury made a commitment to provide us with funding, under certain conditions, to eliminate deficits in our net worth. Obtaining funding from Treasury pursuant to its commitment under the Purchase Agreement enables us to avoid being placed into receivership by FHFA. The amount of available funding remaining under the Purchase Agreement is $140.5 billion. This amount will be reduced by any future draws.
At March 31, 2017 , our assets exceeded our liabilities under GAAP; therefore, no draw is being requested from Treasury under the Purchase Agreement. Based on our Net Worth Amount at March 31, 2017 and the 2017 Capital Reserve Amount of $600 million, our scheduled dividend obligation to Treasury in June 2017 will be $2.2 billion . Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock. As a result of the net worth sweep dividend on the senior preferred stock, our future profits will effectively be distributed to Treasury, and we cannot retain capital from the earnings generated by our business operations (other than a limited capital reserve amount that will decrease to zero in 2018) or return capital to stockholders other than Treasury.
In June 2016, FASB issued an Accounting Standards Update (ASU 2016-13) related to the measurement of credit losses on financial instruments that will be effective as of January 1, 2020, with early adoption permitted as of January 1, 2019. This Update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects lifetime expected credit losses. While we are still evaluating the effect that the adoption of this Update will have on our financial results, it will increase (perhaps substantially) our provision for credit losses in the period of adoption. As our capital reserve will decline to zero in 2018, this Update increases the risk that we will need to request a draw from Treasury for the period of adoption.
The table below presents activity related to our net worth during 1Q 2017 and 1Q 2016.
(In millions)
1Q 2017
 
1Q 2016
Beginning balance

$5,075

 

$2,940

Comprehensive (loss) income
2,234

 
(200
)
Capital draw from Treasury

 

Senior preferred stock dividends declared
(4,475
)
 
(1,740
)
Total equity / net worth

$2,834

 

$1,000

Aggregate draws under Purchase Agreement

$71,336

 

$71,336

Aggregate cash dividends paid to Treasury

$105,923

 

$98,205



Freddie Mac Form 10-Q
 
56



Management's Discussion and Analysis
Conservatorship and Related Matters


CONSERVATORSHIP AND RELATED MATTERS
REDUCING OUR MORTGAGE-RELATED INVESTMENTS PORTFOLIO OVER TIME
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. The cap for this portfolio will decrease to approximately $288 billion at December 31, 2017.
 
March 31, 2017
 
December 31, 2016
(Dollars in millions)
Liquid
 
Securitiz-ation Pipeline
 
Less Liquid
 
Total
 
Liquid
 
Securitiz-ation Pipeline
 
Less Liquid
 
Total
Investments segment - Mortgage investments portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single-family unsecuritized loans
 
 
 
 
 
 

 
 
 
 
 
 
 

Performing loans

$—

 

$7,722

 

$—

 

$7,722

 

$—

 

$13,113

 

$—

 

$13,113

Reperforming loans and performing modified loans

 

 
58,290

 
58,290

 

 

 
58,326

 
58,326

Total single-family unsecuritized loans


7,722


58,290


66,012



 
13,113

 
58,326


71,439

Freddie Mac mortgage-related securities
130,259

 

 
4,537

 
134,796

 
125,652

 

 
4,776

 
130,428

Non-agency mortgage-related securities
109

 

 
13,215

 
13,324

 
113

 

 
16,059

 
16,172

Non-Freddie Mac agency mortgage-related securities
10,778

 

 

 
10,778

 
11,759

 

 

 
11,759

Total Investments segment - Mortgage investments portfolio
141,146

 
7,722

 
76,042

 
224,910

 
137,524

 
13,113

 
79,161

 
229,798

Single-family Guarantee segment - Single-family unsecuritized seriously delinquent loans

 

 
12,988

 
12,988

 

 

 
13,692

 
13,692

Multifamily segment - unsecuritized loans and mortgage-related securities
7,544

 
17,572

 
28,196

 
53,312

 
7,447

 
16,372

 
31,117

 
54,936

Total mortgage-related investments portfolio

$148,690

 

$25,294

 

$117,226

 

$291,210

 

$144,971

 

$29,485

 

$123,970

 

$298,426

Percentage of total mortgage-related investments portfolio
51
%
 
9
%
 
40
%
 
100
%
 
49
%
 
10
%
 
41
%
 
100
%
Mortgage-related investments portfolio cap at December 31, 2017 and December 31, 2016
 
 
 
 
 
 

$288,408

 
 
 
 
 
 
 

$339,304

90% of mortgage-related investments portfolio cap at December 31, 2017 and December 31, 2016 (1)
 
 
 
 
 
 

$259,567

 
 
 
 
 
 
 

$305,374


(1)
Represents the amount that we manage to under our Retained Portfolio Plan, subject to certain exceptions.
The decline in our mortgage-related investments portfolio during 1Q 2017 was primarily due to repayments.
While we continued to purchase new single-family seriously delinquent loans, our active disposition of less liquid assets included the following:
Sales of $2.3 billion of non-agency mortgage-related securities; and
Securitizations of $0.2 billion in UPB of less liquid multifamily loans.

Freddie Mac Form 10-Q
 
57



Management's Discussion and Analysis
Regulation and Supervision


REGULATION AND SUPERVISION
In addition to our oversight by FHFA as our Conservator, we are subject to regulation and oversight by FHFA under our Charter and the GSE Act and to certain regulation by other government agencies. Furthermore, regulatory activities by other government agencies can affect us indirectly, even if we are not directly subject to such agencies’ regulation or oversight. For example, regulations that modify requirements applicable to the purchase or servicing of mortgages can affect us.
AFFORDABLE HOUSING ALLOCATIONS
The GSE Act requires us to set aside in each fiscal year an amount equal to 4.2 basis points of each dollar of total new business purchases and pay this amount to certain housing funds. During 1Q 2017, we completed $98 billion of new business purchases subject to this requirement and accrued $41 million of related expense. We expect to pay this amount (and any additional amounts accrued based on our new business purchases during the remainder of 2017) in February 2018. We are prohibited from passing through these costs to the originators of the loans that we purchase.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
AFFORDABLE HOUSING GOALS

In March 2017, we reported to FHFA that we believe that we achieved three of the five single-family affordable housing benchmarks and all three multifamily affordable housing goals for 2016. We may achieve a single-family housing goal by meeting or exceeding either:
the FHFA benchmark for that goal; or
the actual share of the market that meets the criteria for that goal.
FHFA will ultimately make the determination as to whether we achieved compliance with the housing goals for 2016.
DUTY TO SERVE UNDERSERVED MARKETS PLAN
On April 13, 2017, we submitted our draft Duty to Serve Underserved Markets Plan to FHFA, as required by the recently finalized Duty to Serve Rule. We understand that FHFA will release our draft plan for public comment in May 2017.
COMMON SECURITIZATION PLATFORM AND THE SINGLE (COMMON) SECURITY UPDATE

In March 2017, FHFA published "An Update on Implementation of the Single Security and the Common Securitization Platform," which included the timeframe for implementation of Release 2 of the common securitization platform, planned for the second quarter of 2019. Release 2 will allow Freddie Mac and Fannie Mae to issue a single (common) mortgage-related security, to be called the Uniform Mortgage-Backed Security or UMBS. Release 2 will add to the functionality of Release 1, by, among other things, including the ability to commingle Freddie Mac and Fannie Mae UMBS. Freddie Mac intends to offer an

Freddie Mac Form 10-Q
 
58



Management's Discussion and Analysis
Regulation and Supervision


optional exchange program to enable holders to exchange existing 45-day delay fixed-rate Gold PCs for 55-day delay Freddie Mac PCs, which includes UMBS.

Freddie Mac Form 10-Q
 
59



Management's Discussion and Analysis
 
Off-Balance Sheet Arrangements

OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain business arrangements that are not recorded on our consolidated balance sheets or that may be recorded in amounts that differ from the full contract or notional amount of the transaction and that may expose us to potential losses in excess of the amounts recorded on our consolidated balance sheets. For a description of our off-balance sheet arrangements, see "MD&A - Off-Balance Sheet Arrangements" in our 2016 Annual Report. See Note 3 for more information on our off-balance sheet securitization activities and other guarantees.
We have certain off-balance sheet arrangements related to our securitization activities involving guaranteed loans and mortgage-related securities, though most of our securitization activities are on-balance sheet. Our off-balance sheet arrangements related to these securitization activities primarily consist of K Certificates. We also have off-balance sheet arrangements related to certain other securitization products and other mortgage-related guarantees. Our maximum potential off-balance sheet exposure to credit losses relating to these securitization activities and guarantees is primarily represented by the UPB of the underlying loans and securities, which was $172.3 billion and $166.7 billion at March 31, 2017 and December 31, 2016, respectively.

Freddie Mac Form 10-Q
 
60



Management's Discussion and Analysis
Forward-Looking Statements


FORWARD-LOOKING STATEMENTS
We regularly communicate information concerning our business activities to investors, the news media, securities analysts, and others as part of our normal operations. Some of these communications, including this Form 10-Q, contain “forward-looking statements.” Examples of forward-looking statements include, but are not limited to, statements pertaining to the conservatorship, our current expectations and objectives for the Single-family Guarantee, Multifamily, and Investments segments of our business, our efforts to assist the housing market, our liquidity and capital management, economic and market conditions and trends, our market share, the effect of legislative and regulatory developments and new accounting guidance, the credit quality of loans we own or guarantee, and our results of operations and financial condition on a GAAP, Segment Earnings and fair value basis. Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. Forward-looking statements are often accompanied by, and identified with, terms such as “objective,” “expect,” “possible,” “trend,” “forecast,” “anticipate,” “believe,” “intend,” “could,” “future,” “may,” “will,” and similar phrases. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates, and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties, including those described in the “Risk Factors” section of our 2016 Annual Report, and:
The actions the U.S. government (including FHFA, Treasury, and Congress) may take, or require us to take, including to support the housing markets or to implement FHFA’s Conservatorship Scorecards and other objectives for us;
The effect of the restrictions on our business due to the conservatorship and the Purchase Agreement, including our dividend obligation on the senior preferred stock;
Changes in our Charter or in applicable legislative or regulatory requirements (including any legislation affecting the future status of our company);
Changes in the fiscal and monetary policies of the Federal Reserve, including any changes to its policy of maintaining sizable holdings of mortgage-related securities and any future sales of such securities;
Changes in economic and market conditions, including changes in employment rates, interest rates, spreads, and home prices;
Changes in the U.S. residential mortgage market, including changes in the supply and type of loan products (e.g., refinance vs. purchase, and fixed-rate vs. ARM);
The success of our efforts to mitigate our losses on our Legacy single-family book and our investments in non-agency mortgage-related securities;
The success of our strategy to transfer mortgage credit risk through STACR debt note, ACIS, K Certificate and other credit risk transfer transactions;
Our ability to maintain adequate liquidity to fund our operations;
Our ability to maintain the security and resiliency of our operational systems and infrastructure (e.g., against cyberattacks);
Our ability to effectively execute our business strategies, implement new initiatives, and improve efficiency;
The adequacy of our risk management framework;
Our ability to manage mortgage credit risks, including the effect of changes in underwriting and servicing practices;
Our ability to limit or manage our economic exposure and GAAP earnings exposure to interest-rate

Freddie Mac Form 10-Q
 
61



Management's Discussion and Analysis
Forward-Looking Statements


volatility and spread volatility, including the availability of derivative financial instruments needed for interest-rate risk management purposes;
Our ability to issue new securities, make timely payments and provide initial and ongoing disclosures;
Changes or errors in the methodologies, models, assumptions, and estimates we use to prepare our financial statements, make business decisions, and manage risks;
Changes in investor demand for our debt or mortgage-related securities (e.g., single-family PCs and multifamily K Certificates);
Changes in the practices of loan originators, investors and other participants in the secondary mortgage market; and
Other factors and assumptions described in this Form 10-Q and our 2016 Annual Report, including in the “MD&A” section.
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statements we make to reflect events or circumstances occurring after the date of this Form 10-Q.


Freddie Mac Form 10-Q
 
62



Financial Statements
 







FINANCIAL STATEMENTS


Freddie Mac Form 10-Q
 
63



Financial Statements
Condensed Consolidated Statements of Comprehensive Income

FREDDIE MAC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In millions, except share-related amounts)
1Q 2017
 
1Q 2016
Interest income
 
 
 
Mortgage loans

$15,965

 

$15,818

Investments in securities
914

 
969

Other
101

 
57

Total interest income
16,980

 
16,844

Interest expense
(13,142
)
 
(13,388
)
Expense related to derivatives
(43
)
 
(51
)
Net interest income
3,795

 
3,405

Benefit (provision) for credit losses
116

 
467

Net interest income after benefit (provision) for credit losses
3,911

 
3,872

Non-interest income (loss)
 
 
 
Gains (losses) on extinguishment of debt
218

 
(55
)
Derivative gains (losses)
(302
)
 
(4,561
)
Net impairment of available-for-sale securities recognized in earnings
(13
)
 
(57
)
Other gains on investment securities recognized in earnings
56

 
303

Other income (loss)
415

 
947

Non-interest income (loss)
374

 
(3,423
)
Non-interest expense
 
 
 
Salaries and employee benefits
(275
)
 
(239
)
Professional services
(112
)
 
(101
)
Occupancy expense
(13
)
 
(13
)
Other administrative expense
(111
)
 
(95
)
Total administrative expense
(511
)
 
(448
)
Real estate owned operations expense
(56
)
 
(84
)
Temporary Payroll Tax Cut Continuation Act of 2011 expense
(321
)
 
(272
)
Other expense
(76
)
 
(153
)
Non-interest expense
(964
)
 
(957
)
Income (loss) before income tax (expense) benefit
3,321

 
(508
)
Income tax (expense) benefit
(1,110
)
 
154

Net income (loss)
2,211

 
(354
)
Other comprehensive income (loss), net of taxes and reclassification adjustments:
 
 
 
Changes in unrealized gains (losses) related to available-for-sale securities
(2
)
 
119

Changes in unrealized gains (losses) related to cash flow hedge relationships
28

 
34

Changes in defined benefit plans
(3
)
 
1

Total other comprehensive income (loss), net of taxes and reclassification adjustments
23

 
154

Comprehensive income (loss)

$2,234

 

($200
)
Net income (loss)

$2,211

 

($354
)
Undistributed net worth sweep and senior preferred stock dividends
(2,234
)
 

Net income (loss) attributable to common stockholders

($23
)
 

($354
)
Net income (loss) per common share — basic and diluted

($0.01
)
 

($0.11
)
Weighted average common shares outstanding (in millions) — basic and diluted
3,234

 
3,234

The accompanying notes are an integral part of these condensed consolidated financial statements.

Freddie Mac Form 10-Q
 
64


Financial Statements
Condensed Consolidated Balance Sheets


FREDDIE MAC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
 
March 31,
 
December 31,
(In millions, except share-related amounts)
 
2017
 
2016
Assets
 
 
 
 
Cash and cash equivalents (Note 12)
 

$10,679

 

$12,369

Restricted cash and cash equivalents (Notes 3, 12)
 
1,837

 
9,851

Securities purchased under agreements to resell (Notes 3, 8)
 
51,257

 
51,548

Investments in securities, at fair value (Note 5)
 
108,627

 
111,547

Mortgage loans held-for-sale (Note 4) (includes $17,687 and $16,255 at fair value)
 
19,666

 
18,088

Mortgage loans held-for-investment (Notes 3, 4) (net of allowance for loan losses of $12,739 and $13,431)
 
1,807,950

 
1,784,915

Accrued interest receivable (Note 3)
 
6,221

 
6,135

Derivative assets, net (Notes 7, 8)
 
569

 
747

Deferred tax assets, net (Note 10)
 
15,806

 
15,818

Other assets (Notes 3, 16) (includes $2,474 and $2,408 at fair value)
 
9,696

 
12,358

Total assets
 

$2,032,308

 

$2,023,376

Liabilities and equity
 
 
 
 
Liabilities
 
 
 
 
Accrued interest payable (Note 3)
 

$5,897

 

$6,015

Debt, net (Notes 3, 6) (includes $6,253 and $6,010 at fair value)
 
2,018,444

 
2,002,004

Derivative liabilities, net (Notes 7, 8)
 
335

 
795

Other liabilities (Notes 3, 16)
 
4,798

 
9,487

Total liabilities
 
2,029,474

 
2,018,301

Commitments and contingencies (Notes 3, 7, and 14)
 

 

Equity (Note 9)
 
 
 
 
Senior preferred stock
 
72,336

 
72,336

Preferred stock, at redemption value
 
14,109

 
14,109

Common stock, $0.00 par value, 4,000,000,000 shares authorized, 725,863,886 shares issued and 650,054,731 shares and 650,046,828 shares outstanding
 

 

Additional paid-in capital
 

 

Retained earnings (accumulated deficit)
 
(80,207
)
 
(77,941
)
AOCI, net of taxes, related to:
 
 
 
 
Available-for-sale securities (includes $716 and $782, related to net unrealized gains on securities for which other-than-temporary impairment has been recognized in earnings)
 
913

 
915

Cash flow hedge relationships
 
(452
)
 
(480
)
Defined benefit plans
 
18

 
21

Total AOCI, net of taxes
 
479

 
456

Treasury stock, at cost, 75,809,155 shares and 75,817,058 shares
 
(3,883
)
 
(3,885
)
Total equity (See Note 9 for information on our dividend obligation to Treasury)
 
2,834

 
5,075

Total liabilities and equity
 

$2,032,308

 

$2,023,376

The table below presents the carrying value and classification of the assets and liabilities of consolidated VIEs on our consolidated balance sheets.
 
 
March 31,
 
December 31,
(In millions)
 
2017
 
2016
Consolidated Balance Sheet Line Item
 
 
 
 
Assets: (Note 3)
 
 
 
 
Mortgage loans held-for-investment
 

$1,720,208

 

$1,690,218

All other assets
 
24,989

 
32,262

Total assets of consolidated VIEs
 

$1,745,197

 

$1,722,480

Liabilities: (Note 3)
 
 
 
 
Debt, net
 

$1,663,811

 

$1,648,683

All other liabilities
 
4,872

 
4,846

Total liabilities of consolidated VIEs
 

$1,668,683

 

$1,653,529

The accompanying notes are an integral part of these condensed consolidated financial statements.

Freddie Mac Form 10-Q
 
65



Financial Statements
Condensed Consolidated Statements of Cash Flows



FREDDIE MAC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
1Q 2017
 
1Q 2016
Net cash provided by (used in) operating activities

$54

 

($4,086
)
Cash flows from investing activities
 
 
 
Purchases of trading securities
(55,647
)
 
(8,104
)
Proceeds from sales of trading securities
44,936

 
3,234

Proceeds from maturities and repayments of trading securities
2,383

 
7,692

Purchases of available-for-sale securities
(2,610
)
 
(3,009
)
Proceeds from sales of available-for-sale securities
5,327

 
2,404

Proceeds from maturities and repayments of available-for-sale securities
3,796

 
4,808

Purchases of held-for-investment mortgage loans
(26,993
)
 
(28,577
)
Proceeds from sales of mortgage loans held-for-investment
96

 
832

Repayments of mortgage loans held-for-investment
64,253

 
64,343

(Increase) decrease in restricted cash
8,014

 
(2,138
)
Advances to lenders
(8,251
)
 
(3,579
)
Net proceeds from dispositions of real estate owned and other recoveries
473

 
665

Net (increase) decrease in securities purchased under agreements to resell
291

 
23,546

Derivative premiums and terminations and swap collateral, net
(240
)
 
(4,094
)
Changes in other assets
(77
)
 
(73
)
Net cash provided by investing activities
35,751

 
57,950

Cash flows from financing activities
 
 
 
Proceeds from issuance of debt securities of consolidated trusts held by third parties
43,036

 
40,722

Repayments and redemptions of debt securities of consolidated trusts held by third parties
(77,193
)
 
(65,494
)
Proceeds from issuance of other debt
165,060

 
145,003

Repayments of other debt
(163,923
)
 
(171,791
)
Payment of cash dividends on senior preferred stock
(4,475
)
 
(1,740
)
Changes in other liabilities

 
(1
)
Net cash used in financing activities
(37,495
)
 
(53,301
)
Net (decrease) increase in cash and cash equivalents
(1,690
)
 
563

Cash and cash equivalents at beginning of year
12,369

 
5,595

Cash and cash equivalents at end of period

$10,679

 

$6,158

 
 
 
 
Supplemental cash flow information
 
 
 
Cash paid for:
 
 
 
Debt interest

$15,647

 

$15,438

Income taxes

 
573

Non-cash investing and financing activities (Note 4)
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

Freddie Mac Form 10-Q
 
66



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 1


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability, and affordability to the U.S. housing market. We are regulated by FHFA, the SEC, HUD, and Treasury, and are currently operating under the conservatorship of FHFA. For more information on the roles of FHFA and Treasury, see Note 2 in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2016, or 2016 Annual Report. Throughout our unaudited condensed consolidated financial statements and related notes, we use certain acronyms and terms which are defined in the “Glossary” of our 2016 Annual Report. Throughout this Form 10-Q, we refer to the three months ended March 31, 2017 and the three months ended March 31, 2016 as “1Q 2017” and “1Q 2016,” respectively.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes in our 2016 Annual Report.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and include our accounts as well as the accounts of other entities in which we have a controlling financial interest. All intercompany balances and transactions have been eliminated.
We are operating under the basis that we will realize assets and satisfy liabilities in the normal course of business as a going concern and in accordance with the delegation of authority from FHFA to our Board of Directors and management. Certain amounts in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation. In the opinion of management, all adjustments, which include only normal recurring adjustments, have been recorded for a fair presentation of our unaudited condensed consolidated financial statements.
We evaluate the materiality of identified errors in the financial statements using both an income statement, or “rollover,” and a balance sheet, or “iron curtain,” approach, based on relevant quantitative and qualitative factors. Net income includes certain adjustments to correct immaterial errors related to previously reported periods.
USE OF ESTIMATES
The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, gains, and losses during the reporting period. Management has made significant estimates in preparing the financial statements for establishing the allowance for loan losses and reserve for guarantee losses, valuing financial instruments and other assets and liabilities, and assessing impairments on investments. Actual results could be different from these estimates.

Freddie Mac Form 10-Q
 
67



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 1



RECENTLY ISSUED ACCOUNTING GUIDANCE
Recently Adopted Accounting Guidance
Standard
Description
Date of Adoption
Effect on Consolidated Financial Statements
ASU 2016-06, Derivatives and Hedging (Topic 815)
The amendment clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendment is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence.
January 1, 2017
The adoption of this amendment did not have a material effect on our consolidated financial statements.
ASU 2016-17 - Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control
The Board is issuing this Update to amend the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE.
January 1, 2017
The adoption of this amendment did not have a material effect on our consolidated financial statements.

Freddie Mac Form 10-Q
 
68



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 1


Recently Issued Accounting Guidance, Not Yet Adopted Within Our Condensed Consolidated Financial Statements
Standard
Description
Date of Adoption
Effect on Consolidated Financial Statements
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
The main objective of this Update is to address the diversity in practice that currently exists in regards to how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.
January 1, 2018
We are evaluating the effect that the adoption of this amendment will have on our consolidated financial statements.
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
The amendments in this Update address the diversity in the classification and presentation of changes in restricted cash on the statement of cash flows under Topic 230, Statement of Cash Flows. Specifically, this amendment dictates that the statement of cash flows should explain the change in the period of the total of cash, cash equivalents, and restricted cash balances.
January 1, 2018
The adoption of this amendment will not have a material effect on our consolidated financial statements.

ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
January 1, 2020
While we are evaluating the effect that the adoption of this amendment will have on our consolidated financial statements, it will increase (perhaps substantially) our provision for credit losses in the period of adoption.


Freddie Mac Form 10-Q
 
69



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 2


NOTE 2: CONSERVATORSHIP AND RELATED MATTERS
BUSINESS OBJECTIVES
We operate under the conservatorship that commenced on September 6, 2008, conducting our business under the direction of FHFA, as our Conservator. The conservatorship and related matters significantly affect our management, business activities, financial condition and results of operations. Upon its appointment, FHFA, as Conservator, immediately succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any stockholder, officer or director thereof, with respect to the company and its assets. The Conservator also succeeded to the title to all books, records, and assets of Freddie Mac held by any other legal custodian or third party. The Conservator delegated certain authority to the Board of Directors to oversee, and management to conduct, business operations so that the company can continue to operate in the ordinary course. The directors serve on behalf of, and exercise authority as directed by, the Conservator.
We are also subject to certain constraints on our business activities under the Purchase Agreement. However, we believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain our access to the debt markets and to have adequate liquidity to conduct our normal business activities, although the costs of our debt funding could vary.
IMPACT OF CONSERVATORSHIP AND RELATED DEVELOPMENTS ON THE MORTGAGE-RELATED INVESTMENTS PORTFOLIO
For purposes of the limit imposed by the Purchase Agreement and FHFA regulation, the UPB of our mortgage-related investments portfolio cannot exceed $288.4 billion at December 31, 2017 and was $291.2 billion at March 31, 2017 . Our Retained Portfolio Plan provides for us to manage the UPB of the mortgage-related investments portfolio so that it does not exceed 90% of the annual cap established by the Purchase Agreement (subject to certain exceptions). Our mortgage-related investments portfolio cap is reduced by 15% annually until it reaches $250 billion . This amount is calculated based on the maximum allowable size of the mortgage-related investments portfolio, rather than the actual UPB of the mortgage-related investments portfolio, as of December 31 of the preceding year. Our ability to acquire and sell mortgage assets is significantly constrained by limitations of the Purchase Agreement and those imposed by FHFA.
GOVERNMENT SUPPORT FOR OUR BUSINESS
We receive substantial support from Treasury and are dependent upon its continued support in order to continue operating our business. Our ability to access funds from Treasury under the Purchase Agreement is critical to:
Keeping us solvent;
Allowing us to focus on our primary business objectives under conservatorship; and
Avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions.
At December 31, 2016, our assets exceeded our liabilities under GAAP; therefore, FHFA did not request a draw on our behalf and, as a result, we did not receive any funding from Treasury under the Purchase Agreement during 1Q 2017. Since conservatorship began through March 31, 2017 , we have paid cash dividends of $105.9 billion to Treasury at the direction of the Conservator.

Freddie Mac Form 10-Q
 
70



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 2


See Note 6 and Note 9 for more information on the conservatorship and the Purchase Agreement.
RELATED PARTIES AS A RESULT OF CONSERVATORSHIP
We are deemed related parties with Fannie Mae as both we and Fannie Mae have the same relationships with FHFA and Treasury. Common Securitization Solutions, LLC (CSS), was formed in 2013 as a limited liability company equally-owned by Freddie Mac and Fannie Mae. Therefore, CSS is also deemed a related party. During 1Q 2017, we contributed $35 million of capital to CSS.


Freddie Mac Form 10-Q
 
71



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 3


NOTE 3: SECURITIZATION AND GUARANTEE ACTIVITIES
Our primary business activities in our Single-family Guarantee and Multifamily segments involve the securitization of loans or other mortgage-related assets using trusts that are VIEs. These trusts issue beneficial interests in the loans or other mortgage-related assets that they own. We guarantee the principal and interest payments on some or all of the issued beneficial interests in substantially all of our securitization transactions. We consolidate VIEs when we have a controlling financial interest in the VIE and are therefore considered the primary beneficiary of the VIE.
VIEs FOR WHICH WE ARE THE PRIMARY BENEFICIARY
The table below presents the carrying value and classification of the assets and liabilities of consolidated VIEs on our consolidated balance sheets.
(In millions)
 
March 31, 2017
 
December 31, 2016
Consolidated Balance Sheet Line Item
 
 
 
 
Assets:
 
 
 
 
Restricted cash and cash equivalents
 

$1,382

 

$9,431

Securities purchased under agreements to resell
 
15,725

 
13,550

Mortgage loans held-for-investment
 
1,720,208

 
1,690,218

Accrued interest receivable
 
5,547

 
5,454

Other assets
 
2,335

 
3,827

Total assets of consolidated VIEs
 

$1,745,197

 

$1,722,480

Liabilities:
 
 
 
 
Accrued interest payable
 

$4,872

 

$4,846

Debt, net
 
1,663,811

 
1,648,683

Total liabilities of consolidated VIEs
 

$1,668,683

 

$1,653,529


Freddie Mac Form 10-Q
 
72



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 3


VIEs FOR WHICH WE ARE NOT THE PRIMARY BENEFICIARY
Our involvement with VIEs for which we are not the primary beneficiary takes one or both of two forms - purchasing an investment in these entities or providing a guarantee to these entities. The following table presents the carrying amounts and classification of the assets and liabilities recorded on our consolidated balance sheets related to our variable interests in unconsolidated VIEs with which we were involved in the design and creation and have a significant continuing involvement, as well as our maximum exposure to loss.
 
 
March 31, 2017
 
December 31, 2016
(In millions)


 
 
Assets and Liabilities Recorded on our Consolidated Balance Sheets (1)


 
 
Assets:


 
 
Investments in securities


$55,471

 

$58,995

Accrued interest receivable

244

 
254

Other assets

1,767

 
1,708

 Liabilities:

 
 
 
Other liabilities

1,629

 
1,604

Maximum Exposure to Loss


$156,242

 

$150,227

Total Assets of Non-Consolidated VIEs


$182,716

 

$175,713


(1)
Includes our variable interests in REMICs and Stripped Giant PCs, K Certificates, SB Certificates, senior subordinate securitization structures, and other securitization products that we do not consolidate. Our maximum exposure to loss includes the guaranteed UPB of assets held by the non-consolidated VIEs related to K Certificates, SB Certificates, senior subordinate securitization structures, and other securitization products. Our maximum exposure to loss excludes investments in REMICs and Stripped Giant PCs, because we already consolidate the collateral of these trusts on our consolidated balance sheets.
We also obtain interests in various other VIEs created by third parties through the normal course of business, such as through our investments in non-Freddie Mac mortgage-related securities, purchases of multifamily loans, guarantees of multifamily housing revenue bonds, as a derivative counterparty, or through other activities.
FINANCIAL GUARANTEES
The table below shows our maximum potential exposure, recognized liability, and maximum remaining term of our recognized financial guarantees to unconsolidated VIEs and other third parties. This table does not include our unrecognized financial guarantees, such as guarantees to consolidated VIEs or to resecuritization trusts that do not expose us to incremental credit risk.
 
March 31, 2017

December 31, 2016
(Dollars in millions, terms in years)
Maximum
Exposure
(1)

Recognized
Liability
(2)

Maximum
Remaining
Term

Maximum
Exposure
(1)

Recognized
Liability
(2)

Maximum
Remaining
Term
K Certificates, SB Certificates, senior subordinate securitization structures, and other securitization products

$156,215



$1,563


40


$150,227



$1,532


40
Other mortgage-related guarantees
16,099


668


34

16,445


679


34
Derivative instruments
8,783


121


28

6,396


127


29
(1)
The maximum exposure represents the contractual amounts that could be lost if counterparties or borrowers defaulted, without consideration of possible recoveries under credit enhancement arrangements, such as recourse provisions, third-party insurance contracts, or from collateral held or pledged. For derivative instruments, this amount represents the notional value.

Freddie Mac Form 10-Q
 
73



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 3


(2)
For K Certificates, SB Certificates, senior subordinate securitization structures, other securitization products, and other mortgage-related guarantees, this amount represents the guarantee obligation on our consolidated balance sheets. This amount excludes our reserve for guarantee losses, which totaled $64 million and $67 million as of March 31, 2017 and December 31, 2016 , respectively, and is included within other liabilities on our consolidated balance sheets.
CREDIT ENHANCEMENTS
For many of the loans underlying our single-family PCs, other securitization products, and other mortgage-related guarantees, we obtained credit enhancements from third parties covering a portion of our credit risk exposure. See Note 4 for information about credit enhancements on single-family loans.
In connection with the securitization activities of the Multifamily segment, we have various forms of credit protection. The most prevalent type is subordination, primarily through our K Certificates and SB Certificates. Through subordination, we mitigate our credit risk exposure by structuring our securities to transfer a large majority of expected and stress credit losses to private investors who purchase the subordinate tranches, as shown in the table below.
 
 
UPB at
 
Maximum Coverage  (1)  at
(In millions)
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
K Certificates and SB Certificates
 

$145,793

 

$139,416

 

$25,104

 

$23,864

Other securitization products
 
6,403

 
5,545

 
1,391

 
1,359

Total
 

$152,196

 

$144,961

 

$26,495

 

$25,223


(1)
For K Certificates and SB Certificates, this represents the UPB of the securities that are subordinate to our guarantee. For other securitization products, this represents the remaining amount of loss recovery that is available subject to the terms of the counterparty agreement or the UPB of the securities that are subordinate to our guarantee.
In addition to subordination, the Multifamily segment also has various other credit enhancements, primarily related to our mortgage loans and other mortgage-related guarantees, in the form of collateral posting requirements, loss sharing agreements, credit-linked notes, and other similar arrangements. These credit enhancements will enable us to recover all or a portion of our losses or the amounts paid under our guarantee. Our historical losses and related recoveries pursuant to these agreements have not been significant.



Freddie Mac Form 10-Q
 
74



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES
The table below provides details of the loans on our consolidated balance sheets.
 
 
March 31, 2017
 
December 31, 2016
(In millions)
 
Held by Freddie Mac
 
Held by
consolidated
trusts
 
Total
 
Held by Freddie Mac
 
Held by
consolidated
trusts
 
Total
Held-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Single-family
 

$2,429

 

$—

 

$2,429

 

$2,092

 

$—

 

$2,092

Multifamily
 
17,758

 

 
17,758

 
16,544

 

 
16,544

Total UPB
 
20,187

 

 
20,187

 
18,636

 

 
18,636

Cost basis and fair value adjustments, net
 
(521
)
 

 
(521
)
 
(548
)
 

 
(548
)
Total held-for-sale loans
 
19,666

 

 
19,666

 
18,088

 

 
18,088

Held-for-investment:
 
 
 
 
 
 
 
 
 
 
 
 
Single-family
 
76,571

 
1,690,177

 
1,766,748

 
83,040

 
1,659,591

 
1,742,631

Multifamily
 
24,642

 
3,165

 
27,807

 
25,873

 
3,048

 
28,921

Total UPB
 
101,213

 
1,693,342

 
1,794,555

 
108,913

 
1,662,639

 
1,771,552

Cost basis adjustments
 
(3,587
)
 
29,721

 
26,134

 
(3,755
)
 
30,549

 
26,794

Allowance for loan losses
 
(9,884
)
 
(2,855
)
 
(12,739
)
 
(10,461
)
 
(2,970
)
 
(13,431
)
Total held-for-investment loans
 
87,742

 
1,720,208

 
1,807,950

 
94,697

 
1,690,218

 
1,784,915

Total loans, net
 

$107,408

 

$1,720,208

 

$1,827,616

 

$112,785

 

$1,690,218

 

$1,803,003

On February 2, 2017, we started applying fair value hedge accounting to certain single-family mortgage loans. The fair value hedge accounting related loan basis adjustments are included in the table above.
During 1Q 2017 and 1Q 2016, we purchased $85.6 billion and $68.2 billion , respectively, in UPB of single-family loans and $1.3 billion and $0.8 billion , respectively, in UPB of multifamily loans that were classified as held-for-investment.
Our sales of multifamily loans occur primarily through the issuance of multifamily K Certificates and SB Certificates. During 1Q 2017 and 1Q 2016, we sold $9.9 billion and $10.8 billion , respectively, in UPB of held-for-sale multifamily loans. See Note 3 for more information on our issuances of K Certificates and SB Certificates.
As part of our strategy to mitigate losses and reduce our holdings of less liquid assets, we completed sales of $0.8 billion in UPB of seasoned single-family loans during 1Q 2016. Seasoned single-family mortgage loans include seriously delinquent loans and/or reperforming loans. We did not have sales of seasoned single-family loans in 1Q 2017.
We reclassified $1.7 billion and $0.4 billion in UPB of seasoned single-family loans from held-for-investment to held-for-sale during 1Q 2017 and 1Q 2016, respectively. For additional information regarding the fair value of our loans classified as held-for-sale, see Note 13.
CREDIT QUALITY
The current LTV ratio is one key factor we consider when estimating our loan loss reserves for single-family loans. As current LTV ratios increase, the borrower’s equity in the home decreases, which negatively affects the borrower’s ability to refinance (outside of HARP) or to sell the property for an amount at or above the balance of the outstanding loan. A second-lien loan also reduces the borrower’s equity in the home and has a similar negative effect on the borrower’s ability to refinance or sell the

Freddie Mac Form 10-Q
 
75



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



property for an amount at or above the combined balances of the first and second loans. As of both March 31, 2017 and December 31, 2016 , based on data collected by us at loan delivery, approximately 11% of loans in our single-family credit guarantee portfolio had second-lien financing by third parties at origination of the first loan. However, borrowers are free to obtain second-lien financing after origination, and we are not entitled to receive notification when a borrower does so. For further information about concentrations of risk associated with our single-family and multifamily loans, see Note 12.
For reporting purposes:
Loans within the Alt-A category continue to be presented in that category following modification, even though the borrower may have provided full documentation of assets and income to complete the modification; and
Loans within the option ARM category continue to be presented in that category following modification, even though the modified loan no longer provides for optional payment or adjustable interest-rate provisions.
The table below presents the recorded investment of single-family held-for-investment loans by current LTV ratios. Our current LTV ratios are estimates based on available data through the end of each respective period presented.
 
March 31, 2017
 
December 31, 2016
 
Current LTV Ratio
 
 
 
Current LTV Ratio
 
 
(In millions)
 ≤ 80
 
> 80 to 100
 
> 100 (1)
 
Total
 
≤ 80
 
> 80 to 100
 
> 100 (1)
 
Total
20 and 30-year or more, amortizing fixed-rate (2)

$1,156,759

 

$230,440

 

$26,133

 

$1,413,332

 

$1,120,722

 

$236,111

 

$30,063

 

$1,386,896

15-year amortizing fixed-rate (2)
276,869

 
10,128

 
717

 
287,714

 
274,967

 
11,016

 
887

 
286,870

Adjustable-rate
51,395

 
3,040

 
64

 
54,499

 
52,319

 
2,955

 
85

 
55,359

Alt-A, interest-only, and option ARM
25,559

 
8,076

 
3,722

 
37,357

 
26,293

 
9,392

 
4,634

 
40,319

Total single-family loans

$1,510,582

 

$251,684

 

$30,636

 

$1,792,902

 

$1,474,301

 

$259,474

 

$35,669

 

$1,769,444

 
(1)
The serious delinquency rate for the total of single-family held-for-investment mortgage loans with current LTV ratios in excess of 100% was 6.99% and 6.80% as of March 31, 2017 and December 31, 2016 , respectively.
(2)
The majority of our loan modifications result in new terms that include fixed interest rates after modification. As of March 31, 2017 and December 31, 2016 , we have categorized UPB of approximately $30.8 billion and $32.0 billion , respectively, of modified loans as fixed-rate loans (instead of as adjustable rate loans), even though the modified loans have rate adjustment provisions. In these cases, while the terms of the modified loans provide for the interest rate to adjust, such rates and the timing of the adjustment are determined at the time of modification rather than at a subsequent date.
The following table presents the recorded investment in our multifamily held-for-investment loans, by credit quality indicator based on available data through the end of each period presented. These indicators involve significant management judgment.
(In millions)
 
March 31, 2017
 
December 31, 2016
Credit risk profile by internally assigned grade: (1)
 
 
 
 
Pass
 

$26,907

 

$27,830

Special mention
 
654

 
502

Substandard
 
226

 
570

Doubtful
 

 

Total
 

$27,787

 

$28,902


(1)
A loan categorized as: "Pass" is current and adequately protected by the current financial strength and debt service capacity of the borrower; "Special mention" has signs of potential financial weakness; "Substandard" has a weakness that jeopardizes the timely full repayment; and "Doubtful" has a weakness that makes collection or liquidation in full highly questionable and improbable based on existing conditions.

Freddie Mac Form 10-Q
 
76



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



MORTGAGE LOAN PERFORMANCE
The following table presents the recorded investment of our single-family and multifamily loans, held-for-investment, by payment status.
 
March 31, 2017
(In millions)
Current
 
One
Month
Past Due
 
Two
Months
Past Due
 
Three 
Months or
More Past Due,
or in
 Foreclosure (1)
 
Total
 
Non-accrual
Single-family:
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate

$1,385,588

 

$13,183

 

$3,958

 

$10,603

 

$1,413,332

 

$10,595

15-year amortizing fixed-rate
286,493

 
753

 
151

 
317

 
287,714

 
317

Adjustable-rate
53,963

 
272

 
67

 
197

 
54,499

 
197

Alt-A, interest-only, and option ARM
33,429

 
1,461

 
548

 
1,919

 
37,357

 
1,917

Total single-family
1,759,473

 
15,669

 
4,724

 
13,036

 
1,792,902

 
13,026

Total multifamily
27,787

 

 

 

 
27,787

 
70

Total single-family and multifamily

$1,787,260

 

$15,669

 

$4,724

 

$13,036

 

$1,820,689

 

$13,096

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
(In millions)
Current

One
Month
Past Due

Two
Months
Past Due

Three 
Months or
More Past Due,
or in
 Foreclosure
(1)

Total

Non-accrual
Single-family:











20 and 30-year or more, amortizing fixed-rate

$1,354,511

 

$16,645

 

$4,865

 

$10,875



$1,386,896



$10,868

15-year amortizing fixed-rate
285,373

 
1,010

 
178

 
309


286,870


309

Adjustable-rate
54,738

 
354

 
77

 
190


55,359


190

Alt-A, interest-only, and option ARM
35,994

 
1,748

 
650

 
1,927


40,319


1,927

Total single-family
1,730,616


19,757


5,770


13,301


1,769,444


13,294

Total multifamily
28,902

 

 

 


28,902


89

Total single-family and multifamily

$1,759,518



$19,757



$5,770



$13,301



$1,798,346



$13,383


(1)
Includes $5.6 billion and $5.3 billion of loans that were in the process of foreclosure as of March 31, 2017 and December 31, 2016 , respectively.

Freddie Mac Form 10-Q
 
77



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The table below summarizes the delinquency rates of loans within our single-family credit guarantee and multifamily mortgage portfolios.
(Dollars in millions)
 
March 31, 2017
 
December 31, 2016
Single-family: (1)
 
 
 
 
Non-credit-enhanced portfolio
 
 
 
 
Serious delinquency rate
 
0.96
%
 
1.02
%
Total number of seriously delinquent loans
 
72,249

 
77,662

Credit-enhanced portfolio: (2)
 
 
 
 
Primary mortgage insurance:
 
 
 
 
   Serious delinquency rate
 
1.31
%
 
1.46
%
   Total number of seriously delinquent loans
 
19,670

 
21,460

Other credit protection: (3)
 
 
 
 
   Serious delinquency rate
 
0.37
%
 
0.43
%
   Total number of seriously delinquent loans
 
9,147

 
9,455

Total single-family:
 
 
 
 
Serious delinquency rate
 
0.92
%
 
1.00
%
Total number of seriously delinquent loans
 
99,570

 
107,170

Multifamily: (4)
 
 
 
 
Non-credit-enhanced portfolio:
 
 
 
 
Delinquency rate
 
0.05
%
 
0.04
%
UPB of delinquent loans
 

$23

 

$19

Credit-enhanced portfolio:
 
 
 
 
Delinquency rate
 
0.02
%
 
0.02
%
UPB of delinquent loans
 

$37

 

$37

Total Multifamily:
 
 
 
 
Delinquency rate
 
0.03
%
 
0.03
%
UPB of delinquent loans
 

$60

 

$56

 
(1)
Serious delinquencies on single-family loans underlying certain REMICs, other securitization products, and other mortgage-related guarantees may be reported on a different schedule due to variances in industry practice.
(2)
The credit-enhanced categories are not mutually exclusive, as a single loan may be covered by both primary mortgage insurance and other credit protection.
(3)
Consists of single-family loans covered by financial arrangements (other than primary mortgage insurance) that are designed to reduce our credit risk exposure. See "Credit Protection and Other Forms of Credit Enhancement" for more information.
(4)
Multifamily delinquency performance is based on UPB of loans that are two monthly payments or more past due or those in the process of foreclosure.
LOAN LOSS RESERVES
The loan loss reserves represent estimates of probable incurred credit losses. We recognize probable incurred losses by recording a charge to the provision for credit losses in our consolidated statements of comprehensive income. The loan loss reserves include:
Our allowance for loan losses, which pertains to all single-family and multifamily loans classified as held-for-investment on our consolidated balance sheets; and
Our reserve for guarantee losses, which pertains to single-family and multifamily loans underlying our K Certificates, other securitization products, and other mortgage-related guarantees.
On January 1, 2017, we elected a new accounting policy for loan reclassifications from held-for-investment to held-for-sale. See the Loan Reclassifications section below for further information about this change.

Freddie Mac Form 10-Q
 
78



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The table below presents our loan loss reserves activity.
 
1Q 2017

1Q 2016
 
Allowance for Loan Losses

 Reserve  for
Guarantee
Losses

 

Allowance for Loan Losses

 Reserve  for
Guarantee
Losses

 
 (In millions)
Held by Freddie Mac

Held By
Consolidated
Trusts


Total

Held by Freddie Mac

Held By
Consolidated
Trusts


Total
Single-family:















Beginning balance

$10,442



$2,969



$54



$13,465



$12,516



$2,775



$57



$15,348

Provision (benefit) for credit losses
(216
)

106




(110
)

(435
)

(29
)

2


(462
)
Charge-offs (1)
(697
)

(43
)



(740
)

(499
)

(68
)

(2
)

(569
)
Recoveries
95


2




97


126


2




128

Transfers, net (2)
242


(180
)



62


(41
)

139




98

Ending balance
9,866


2,854


54


12,774


11,667


2,819


57


14,543

Multifamily ending balance
18


1


10


29


34


1


17


52

Total ending balance

$9,884



$2,855



$64



$12,803



$11,701



$2,820



$74



$14,595


(1)
1Q 2016 does not include lower-of-cost-or-fair-value adjustments and other expenses related to property taxes and insurance recognized when we transfer loans from held-for-investment to held-for-sale, which totaled $98 million . 1Q 2017 includes charge-offs of $364 million related to the transfer of loans from held-for-investment to held-for-sale.
(2)
Consists of approximately $0.1 billion during both 1Q 2017 and 1Q 2016 attributable to capitalization of past due interest on modified loans. Also includes amounts associated with reclassified single-family reserves related to our removal of loans previously held by consolidated trusts, net of reclassifications for single-family loans subsequently resecuritized after such removal.

The allowance for loan losses associated with our held-for-investment unsecuritized loans represented approximately 10.1% and 9.9% of the recorded investment in such loans at March 31, 2017 and December 31, 2016 , respectively, and a substantial portion of the allowance associated with these loans represented interest rate concessions provided to borrowers as part of loan modifications. The allowance for loan losses associated with loans held by our consolidated trusts represented approximately 0.2% of the recorded investment in such loans as of both March 31, 2017 and December 31, 2016 .
The table below presents the volume of single-family and multifamily loans that were newly classified as TDRs, based on the original category of the loan before the loan was classified as a TDR. Loans classified as a TDR in one period may be subject to further action (such as a modification or remodification) in a subsequent period. In such cases, the subsequent action would not be reflected in the table below since the loan would already have been classified as a TDR.
 
 
1Q 2017
 
1Q 2016
(Dollars in millions)
 
Number of 
Loans
 
Post-TDR
Recorded
Investment
 
Number of 
Loans
 
Post-TDR
Recorded
Investment
Single-family: (1)
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
8,964

 

$1,283

 
10,332

 

$1,456

15-year amortizing fixed-rate
 
1,192

 
88

 
1,318

 
94

Adjustable-rate
 
250

 
35

 
274

 
40

Alt-A, interest-only, and option ARM
 
680

 
114

 
919

 
169

Total single-family
 
11,086

 
1,520

 
12,843

 
1,759

Multifamily
 

 

 
2

 
8

Total
 
11,086

 

$1,520

 
12,845

 

$1,767

 
(1)
The pre-TDR recorded investment for single-family loans initially classified as TDR during 1Q 2017 and 1Q 2016 was $1.5 billion and $1.8 billion , respectively.

Freddie Mac Form 10-Q
 
79



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The table below presents the volume of our TDR modifications that experienced payment defaults (i.e., loans that became two months delinquent or completed a loss event) during the applicable periods and had completed a modification during the year preceding the payment default. The table presents loans based on their original product category before modification.
 
1Q 2017
 
1Q 2016
(Dollars in millions)
Number of Loans
 
Post-TDR
Recorded
Investment
 
Number of Loans
 
Post-TDR
Recorded
Investment
Single-family:
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
3,356

 

$553

 
3,992

 

$634

15-year amortizing fixed-rate
168

 
13

 
233

 
18

Adjustable-rate
56

 
8

 
73

 
11

Alt-A, interest-only, and option ARM
305

 
64

 
459

 
98

Total single-family
3,885

 

$638

 
4,757

 

$761

Multifamily

 

$—

 

 

$—

In addition to modifications, loans may be initially classified as TDRs as a result of other loss mitigation activities (i.e., repayment plans, forbearance agreements, or loans in modification trial periods). During 1Q 2017 and 1Q 2016, 1,590 and 2,216 , respectively, of such loans (with a post-TDR recorded investment of $0.2 billion and $0.3 billion , respectively) experienced a payment default within a year after the loss mitigation activity occurred.
Loans may also be initially classified as TDRs because the borrowers’ debts were discharged in Chapter 7 bankruptcy (and the loan was not already classified as a TDR for other reasons). During 1Q 2017 and 1Q 2016, 258 and 336 , respectively, of such loans (with a post-TDR recorded investment of $30 million and $40 million , respectively) experienced a payment default within a year after the borrowers' Chapter 7 bankruptcy.
Single-Family TDRs
During 1Q 2017 and 1Q 2016, approximately 43% and 41% of the single-family loan modifications completed during the respective periods that were classified as TDRs involved interest rate reductions and, in certain cases, term extensions. During 1Q 2017 and 1Q 2016, approximately 14% and 16% of the single-family loan modifications completed during the respective periods that were classified as TDRs involved principal forbearance in addition to interest rate reductions and, in certain cases, term extensions. During 1Q 2017 and 1Q 2016, the average term extension was 172 months and 181 months, respectively, and the average interest rate reduction was 0.9% and 0.8% , respectively, on completed single-family loan modifications classified as TDRs.

Freddie Mac Form 10-Q
 
80



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Impaired Loans
The tables below present the UPB, recorded investment, related allowance for loan losses, average recorded investment and interest income recognized for individually impaired loans.
 
 
March 31, 2017
December 31, 2016
(In millions)
 
UPB
 
Recorded
Investment
 
Associated
Allowance
UPB
 
Recorded Investment
 
Associated
Allowance
Single-family —
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance recorded: (1)
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 

$5,277

 

$3,997

 
N/A


$4,963

 

$3,746

 
N/A

15-year amortizing fixed-rate
 
30

 
26

 
N/A

31

 
26

 
N/A

Adjustable-rate
 
310

 
307

 
N/A

292

 
289

 
N/A

Alt-A, interest-only, and option ARM
 
1,999

 
1,625

 
N/A

1,935

 
1,561

 
N/A

Total with no specific allowance recorded
 
7,616

 
5,955

 
N/A

7,221

 
5,622

 
N/A

With specific allowance recorded: (2)
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
66,572

 
64,877

 

($9,208
)
67,853

 
66,143

 

($9,678
)
15-year amortizing fixed-rate
 
843

 
845

 
(26
)
847

 
851

 
(25
)
Adjustable-rate
 
291

 
284

 
(19
)
319

 
312

 
(19
)
Alt-A, interest-only, and option ARM
 
11,763

 
11,171

 
(2,015
)
12,699

 
12,105

 
(2,258
)
Total with specific allowance recorded
 
79,469

 
77,177

 
(11,268
)
81,718

 
79,411

 
(11,980
)
Combined single-family:
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
71,849

 
68,874

 
(9,208
)
72,816

 
69,889

 
(9,678
)
15-year amortizing fixed-rate
 
873

 
871

 
(26
)
878

 
877

 
(25
)
Adjustable-rate
 
601

 
591

 
(19
)
611

 
601

 
(19
)
Alt-A, interest-only, and option ARM
 
13,762

 
12,796

 
(2,015
)
14,634

 
13,666

 
(2,258
)
Total single-family
 

$87,085

 

$83,132

 

($11,268
)

$88,939

 

$85,033

 

($11,980
)
Multifamily —
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance recorded (1)
 

$280

 

$268

 
N/A


$321

 

$308

 
N/A

With specific allowance recorded
 
42

 
40

 

($8
)
44

 
42

 

($9
)
Total multifamily
 

$322

 

$308

 

($8
)

$365

 

$350

 

($9
)
Total single-family and multifamily
 

$87,407

 

$83,440

 

($11,276
)

$89,304

 

$85,383

 

($11,989
)


Freddie Mac Form 10-Q
 
81



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



 
 
1Q 2017
 
1Q 2016
(In millions)
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Interest
Income
Recognized
On Cash
Basis (3)
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Interest
Income
Recognized
On Cash
Basis (3)
Single-family —
 
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance recorded: (1)
 
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 

$4,031

 

$109

 

$4

 

$4,015

 

$102

 

$2

15-year amortizing fixed-rate
 
26

 
1

 

 
37

 
1

 

Adjustable rate
 
311

 
3

 

 
222

 
2

 

Alt-A, interest-only, and option ARM
 
1,655

 
29

 
1

 
1,195

 
25

 
1

Total with no specific allowance recorded
 
6,023

 
142

 
5

 
5,469

 
130

 
3

With specific allowance recorded: (2)
 
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
65,091

 
670

 
70

 
70,731

 
685

 
74

15-year amortizing fixed-rate
 
825

 
12

 
2

 
942

 
12

 
2

Adjustable rate
 
274

 
3

 
1

 
461

 
5

 
1

Alt-A, interest-only, and option ARM
 
11,416

 
107

 
11

 
13,673

 
124

 
10

Total with specific allowance recorded
 
77,606

 
792

 
84

 
85,807

 
826

 
87

Combined single-family:
 
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
69,122

 
779

 
74

 
74,746

 
787

 
76

15-year amortizing fixed-rate
 
851

 
13

 
2

 
979

 
13

 
2

Adjustable rate
 
585

 
6

 
1

 
683

 
7

 
1

Alt-A, interest-only, and option ARM
 
13,071

 
136

 
12

 
14,868

 
149

 
11

Total single-family
 

$83,629

 

$934

 

$89

 

$91,276

 

$956

 

$90

Multifamily —
 
 
 
 
 
 
 
 
 
 
 
 
With no specific allowance recorded (1)
 

$271

 

$3

 

$1

 

$271

 

$3

 

$1

With specific allowance recorded
 
41

 
1

 

 
148

 
2

 
1

Total multifamily
 

$312

 

$4

 

$1

 

$419

 

$5

 

$2

Total single-family and multifamily
 

$83,941

 

$938

 

$90

 

$91,695

 

$961

 

$92

 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Individually impaired loans with no specific related valuation allowance primarily represent those loans for which the collateral value is sufficiently in excess of the loan balance to result in recovery of the entire recorded investment if the property were foreclosed upon or otherwise subject to disposition.
(2)
Consists primarily of loans classified as TDRs.
(3)
Consists of income recognized during the period related to loans on non-accrual status.

Freddie Mac Form 10-Q
 
82



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The table below presents our allowance for loan losses and our recorded investment in loans, held-for-investment, by impairment evaluation methodology.
 
 
March 31, 2017
 
December 31, 2016
(In millions)
 
Single-family
 
Multifamily
 
Total
 
Single-family
 
Multifamily
 
Total
Recorded investment:
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated
 

$1,709,770

 

$27,479

 

$1,737,249

 

$1,684,411

 

$28,552

 

$1,712,963

Individually evaluated
 
83,132

 
308

 
83,440

 
85,033

 
350

 
85,383

Total recorded investment
 
1,792,902

 
27,787

 
1,820,689

 
1,769,444

 
28,902

 
1,798,346

Ending balance of the allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated
 
(1,452
)
 
(11
)
 
(1,463
)
 
(1,431
)
 
(11
)
 
(1,442
)
Individually evaluated
 
(11,268
)
 
(8
)
 
(11,276
)
 
(11,980
)
 
(9
)
 
(11,989
)
Total ending balance of the allowance
 
(12,720
)
 
(19
)
 
(12,739
)
 
(13,411
)
 
(20
)
 
(13,431
)
Net investment in loans
 

$1,780,182

 

$27,768

 

$1,807,950

 

$1,756,033

 

$28,882

 

$1,784,915

CREDIT PROTECTION AND OTHER FORMS OF CREDIT ENHANCEMENT
In connection with many of our single-family loans and other mortgage-related guarantees, we have various forms of credit protection.
The table below presents the UPB of single-family loans on our consolidated balance sheets or underlying certain of our financial guarantees with credit protection and the maximum amounts of potential loss recovery by type of credit protection.
 
 
UPB (1)  at
 
Maximum Coverage (1)(2)  at
(In millions)
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
Credit enhancements at the time we acquire the loan:
 
 
 
 
 
 
 
 
Primary mortgage insurance
 

$300,100

 

$291,217

 

$76,604

 

$74,345

Seller indemnification (3)
 
1,009

 
1,030

 
10

 
10

Deep MI (3)(4)
 
4,177

 
3,067

 
111

 
81

Lender recourse and indemnification agreements (5)
 
5,407

 
5,247

 
4,804

 
4,911

Pool insurance (5)
 
1,638

 
1,719

 
594

 
618

Other:
 
 
 
 
 
 
 
 
HFA indemnification
 
1,602

 
1,747

 
1,602

 
1,747

Subordination
 
1,817

 
1,874

 
216

 
230

Other credit enhancements (5)
 
17

 
17

 
6

 
6

Credit enhancements subsequent to our purchase or guarantee of the loan:
 
 
 
 
 
 
 
 
STACR debt note (3)(6)
 
475,851

 
427,978

 
15,487

 
14,507

ACIS transactions (3)(7)
 
500,558

 
453,670

 
5,691

 
5,355

Whole loan securities and senior subordinate securitization structures (3)
 
3,057

 
2,494

 
396

 
375

Less: UPB with more than one type of credit enhancement
 
(632,376
)
 
(559,400
)
 

 

Total
 

$662,857

 

$630,660

 

$105,521

 

$102,185

 

Freddie Mac Form 10-Q
 
83



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



(1)
Except for the majority of our single-family credit risk transfer transactions, our credit enhancements generally provide protection for the first, or initial, credit losses associated with the related loans. Excludes: (a) FHA/VA and other governmental loans; (b) credit protection associated with $6.4 billion and $6.7 billion in UPB of single-family loans underlying other structured transactions where data was not available as of March 31, 2017 and December 31, 2016 , respectively; and (c) repurchase rights (subject to certain conditions and limitations) we have under representations and warranties provided by our agreements with seller/servicers to underwrite loans and service them in accordance with our standards. The UPB of single-family loans covered by insurance or partial guarantees issued by federal agencies (such as FHA, VA and USDA) was $2.7 billion and $2.8 billion as of March 31, 2017 and December 31, 2016 , respectively.
(2)
Except for subordination and whole loan securities, this represents the remaining amount of loss recovery that is available subject to terms of counterparty agreements. For subordination and whole loan securities, this represents the UPB of the securities that are subordinate to our guarantee, which could provide protection by absorbing first losses.
(3)
Credit risk transfer transactions. The substantial majority of single-family loans covered by these transactions were acquired after 2012.
(4)
Includes approximately $4.2 billion and $3.1 billion in UPB at March 31, 2017 and December 31, 2016 , where the related loans are also covered by primary mortgage insurance. Deep MI credit risk transfer, or Deep MI, began in the third quarter of 2016.
(5)
In aggregate, includes approximately $0.9 billion and $1.0 billion in UPB at March 31, 2017 and December 31, 2016 , respectively, where the related loans are also covered by primary mortgage insurance.
(6)
Includes approximately $147.8 billion and $123.5 billion in UPB at March 31, 2017 and December 31, 2016 , respectively, where the related loans are also covered by primary mortgage insurance. Maximum coverage amounts presented represent the outstanding balance of STACR debt notes held by third parties.
(7)
Includes $151.4 billion and $127.4 billion in UPB at March 31, 2017 and December 31, 2016 , respectively, where the related loans are also covered by primary mortgage insurance. Maximum coverage amounts presented represent the remaining aggregate limit of insurance purchased from third parties in ACIS transactions.
Primary mortgage insurance and credit risk transfer transactions are the most prevalent types of credit enhancement protecting our single-family credit guarantee portfolio. For information about counterparty risk associated with mortgage insurers, see Note 12.
Our credit risk transfer transactions provide credit enhancement by transferring a portion of our expected credit losses to third-party investors, insurers, and selected sellers. The value of these transactions to us is dependent on various economic scenarios, and we will primarily benefit from these transactions if we experience significant mortgage loan defaults.
LOAN RECLASSIFICATIONS
On January 1, 2017, we elected a new accounting policy for loan reclassifications from held-for-investment to held-for-sale. Under the new policy, when we reclassify (transfer) a loan from held-for-investment to held-for-sale, we charge off the entire difference between the loan’s recorded investment and its fair value if the loan has a history of credit-related issues. Expenses related to property taxes and insurance are included as part of the charge-off. If the charge-off amount exceeds the existing loan loss reserve amount, an additional provision for credit losses is recorded. Any declines in loan fair value after the date of transfer will be recognized as a valuation allowance, with an offset recorded to other income (loss). This new policy election was applied prospectively, as it was not practical to apply it retrospectively.
The new policy election did not affect our net income; however, it affected where the loan reclassifications from held-for-investment to held-for-sale were recorded in our condensed consolidated statements of comprehensive income. Prior to the policy change, upon a loan reclassification from held-for-investment to held-for-sale, we reversed the related allowance for loan losses to the benefit (provision) for credit losses, recorded a valuation allowance for any difference between the loan's recorded investment and its fair value to other income (loss), and recorded property taxes and insurance expenses related to the transferred loans in other expense. Under the new policy, benefit (provision) for credit losses is the only line item affected when a transfer occurs.

Freddie Mac Form 10-Q
 
84



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



NON-CASH INVESTING AND FINANCING ACTIVITIES
During 1Q 2017 and 1Q 2016, we acquired $60.6 billion and $42.5 billion , respectively, of loans held-for-investment in exchange for the issuance of debt securities of consolidated trusts in guarantor swap transactions. The guarantor swap transactions during 1Q 2017 and 1Q 2016 included approximately $8.4 billion and $3.8 billion , respectively, of loans received from sellers to satisfy advances that were recorded in other assets on our consolidated balance sheets.
In addition, we acquired REO properties as a result of the derecognition of loans held on our consolidated balance sheets upon foreclosure of the underlying collateral or by deed in lieu of foreclosure. These acquisitions represent non-cash transfers. During 1Q 2017 and 1Q 2016, we had transfers of $0.3 billion , and $0.4 billion , respectively, from loans to REO.


Freddie Mac Form 10-Q
 
85



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 5


NOTE 5: INVESTMENTS IN SECURITIES
The table below summarizes the fair values of our investments in securities by classification.
(In millions)
March 31, 2017
 
December 31, 2016
Trading securities

$48,122

 

$44,790

Available-for-sale securities
60,505

 
66,757

Total

$108,627

 

$111,547

As of March 31, 2017 and December 31, 2016, we did not classify any securities as held-to-maturity, although we may elect to do so in the future.
TRADING SECURITIES
The table below presents the estimated fair values of our trading securities by major security type. Our non-mortgage-related securities primarily consist of investments in U.S. Treasury securities.
(In millions)
 
March 31, 2017
 
December 31, 2016
Mortgage-related securities:
 
 
 
 
Freddie Mac
 

$13,419

 

$15,343

Other agency
 
7,379

 
8,161

All other
 
136

 
149

Total mortgage-related securities
 
20,934

 
23,653

Non-mortgage-related securities
 
27,188

 
21,137

Total fair value of trading securities
 

$48,122

 

$44,790

During 1Q 2017 and 1Q 2016, we recorded net unrealized gains (losses) on trading securities held at those dates of $43 million and $197 million , respectively.


Freddie Mac Form 10-Q
 
86



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 5


AVAILABLE-FOR-SALE SECURITIES
At March 31, 2017 and December 31, 2016, all available-for-sale securities were mortgage-related securities.
The table below presents the amortized cost, gross unrealized gains and losses, and fair value by major security type for our securities classified as available-for-sale.
 
 
March 31, 2017
 
 
 
 
 
 
Gross Unrealized Losses
 
 
(In millions)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Other-Than-Temporary Impairment (1)
 
Temporary Impairment (2)
 
Fair
Value
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 

$41,819

 

$598

 

$—

 

($499
)
 

$41,918

Other agency
 
3,874

 
110

 

 
(27
)
 
3,957

Non-agency RMBS
 
8,178

 
1,150

 
(46
)
 
(12
)
 
9,270

Non-agency CMBS
 
4,679

 
145

 
(2
)
 
(22
)
 
4,800

Obligations of states and political subdivisions
 
552

 
8

 

 

 
560

Total available-for-sale securities
 

$59,102

 

$2,011

 

($48
)
 

($560
)
 

$60,505

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 

 
Gross Unrealized Losses
 
 
(In millions)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Other-Than-Temporary Impairment (1)
 
Temporary Impairment (2)
 
Fair
Value
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 

$43,671

 

$563

 

$—

 

($582
)
 

$43,652

Other agency
 
4,127

 
119

 

 
(25
)
 
4,221

Non-agency RMBS
 
10,606

 
1,271

 
(62
)
 
(18
)
 
11,797

Non-agency CMBS
 
6,288

 
160

 
(3
)
 
(23
)
 
6,422

Obligations of states and political subdivisions
 
657

 
8

 

 

 
665

Total available-for-sale securities
 

$65,349

 

$2,121

 

($65
)
 

($648
)
 

$66,757


(1)
Represents the gross unrealized losses for securities for which we have previously recognized other-than-temporary impairment in earnings.
(2)
Represents the gross unrealized losses for securities for which we have not previously recognized other-than-temporary impairment in earnings.

Freddie Mac Form 10-Q
 
87



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 5


Available-For-Sale Securities in a Gross Unrealized Loss Position
The table below presents available-for-sale securities in a gross unrealized loss position and whether such securities have been in an unrealized loss position for less than 12 months, or 12 months or greater.
 
 
March 31, 2017
 
 
Less than 12 Months
 
12 Months or Greater
(In millions)
 
Fair
Value
 
Gross Unrealized Losses
 
Fair
Value
 
Gross Unrealized Losses
Available-for-sale securities:
 
 
 
 
 
 
 
 
Freddie Mac
 

$18,253

 

($482
)
 

$1,609

 

($17
)
Other agency
 
239

 
(5
)
 
2,077

 
(22
)
Non-agency RMBS
 
172

 
(5
)
 
1,308

 
(53
)
Non-agency CMBS
 
143

 
(1
)
 
202

 
(23
)
Obligations of states and political subdivisions
 
50

 

 

 

Total available-for-sale securities in a gross unrealized loss position
 

$18,857

 

($493
)
 

$5,196

 

($115
)
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
Less than 12 Months
 
12 Months or Greater
(In millions)
 
Fair
Value
 
Gross Unrealized Losses
 
Fair
Value
 
Gross Unrealized Losses
Available-for-sale securities:
 
 
 
 
 
 
 
 
Freddie Mac
 

$19,786

 

($559
)
 

$1,732

 

($23
)
Other agency
 
542

 
(6
)
 
2,040

 
(19
)
Non-agency RMBS
 
309

 
(1
)
 
2,188

 
(79
)
Non-agency CMBS
 
383

 
(2
)
 
204

 
(24
)
Obligations of states and political subdivisions
 
83

 

 

 

Total available-for-sale securities in a gross unrealized loss position
 

$21,103

 

($568
)
 

$6,164

 

($145
)
At March 31, 2017 , the gross unrealized losses relate to 332 separate securities.
Impairment Recognition on Investments in Securities
We recognized $13 million and $57 million in net impairment of available-for-sale securities in earnings, including $3 million and $52 million related to change in status from intent to hold to intent to sell during 1Q 2017 and 1Q 2016, respectively. For our available-for-sale securities in an unrealized loss position at March 31, 2017 , we have asserted that we have no intent to sell and believe it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis.

Freddie Mac Form 10-Q
 
88



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 5


Non-Agency Residential Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans
The table below presents the modeled attributes for the related collateral that are used to determine whether our interests in certain available-for-sale non-agency RMBS backed by subprime, option ARM, and Alt-A loans will experience a cash shortfall.
(Dollars in millions)
March 31, 2017
UPB

$11,623

Weighted average collateral cumulative loss
22
%
Weighted average voluntary prepayment rates
6
%
Our internal models also consider the remaining amount of subordination and other financial support (excluding credit enhancements provided by bond insurance) that will incur losses in the securitization structure before any losses are allocated to securities that we own. Unallocated collateral losses also have been considered in our assessment of other-than-temporary-impairment.
Other-Than-Temporary Impairment on Available-for-Sale Securities
The following table is a rollforward of the amount of credit-related other-than-temporary impairment that has been recognized in earnings for available-for-sale securities that we continue to hold.
(In millions)
1Q 2017
 
1Q 2016
Credit-related other-than-temporary impairment on available-for-sale securities recognized in earnings:
 
 
 
Beginning balance — remaining credit losses on available-for-sale securities where a portion of other-than-temporary impairment was recognized in other comprehensive income

$4,136

 

$5,306

Additions:
 
 
 
Amounts related to credit losses on securities for which an other-than-temporary impairment was previously recognized
10

 
5

Reductions:
 
 
 
Amounts related to securities which were sold, written off, or matured
(22
)
 
(55
)
Amounts related to securities which we intend to sell or it is more likely than not that we will be required to sell before recovery of amortized cost basis
(288
)
 
(636
)
Amounts related to amortization resulting from significant increases in cash flows expected to be collected and/or due to the passage of time that are recognized over the remaining life of the security
(57
)
 
(69
)
Ending balance — remaining credit losses on available-for-sale securities where a portion of other-than-temporary impairment was recognized in other comprehensive income

$3,779

 

$4,551


Freddie Mac Form 10-Q
 
89



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 5


Realized Gains and Losses on Sales of Available-For-Sale Securities
The table below summarizes the gross realized gains and gross realized losses from the sale of available-for-sale securities.
(In millions)
1Q 2017
 
1Q 2016
Gross realized gains

$218

 

$80

Gross realized losses
(28
)
 
(8
)
Net realized gains (losses)

$190

 

$72


Maturities of Available-For-Sale Securities
The table below presents the remaining contractual maturities of available-for-sale securities by security type.
 
 
As of March 31, 2017
 
 
 
 
 
 
 
 
 
 
After One Year Through Five Years
 
After Five Years Through Ten Years
 
 
 
 
 
 
Total Amortized Cost
 
Total Fair Value
 
One Year or Less
 
 
 
After Ten Years
 
 
 
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
(In millions)
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 

$41,819

 

$41,918

 

$—

 

$—

 

$215

 

$215

 

$3,013

 

$3,018

 

$38,591

 

$38,685

Other agency
 
3,874

 
3,957

 
1

 
1

 
7

 
7

 
67

 
74

 
3,799

 
3,875

Non-agency RMBS
 
8,178

 
9,270

 

 

 
5

 
5

 
22

 
28

 
8,151

 
9,237

Non-agency CMBS
 
4,679

 
4,800

 
1

 
1

 

 

 

 

 
4,678

 
4,799

Obligations of states and political subdivisions
 
552

 
560

 
6

 
6

 
12

 
12

 
46

 
49

 
488

 
493

Total available-for-sale securities
 

$59,102

 

$60,505

 

$8

 

$8

 

$239

 

$239

 

$3,148

 

$3,169

 

$55,707

 

$57,089


Freddie Mac Form 10-Q
 
90



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 6


NOTE 6: DEBT SECURITIES AND SUBORDINATED BORROWINGS
The table below summarizes the interest expense per our condensed consolidated statements of comprehensive income and the balances of total debt, net per our condensed consolidated balance sheets.
 
Balance, Net
 
Interest Expense
(In millions)
March 31, 2017
 
December 31, 2016
 
1Q 2017
 
1Q 2016
Debt securities of consolidated trusts held by third parties

$1,663,811

 

$1,648,683

 

$11,721

 

$11,791

Other debt:
 
 
 
 
 
 
 
Short-term debt
79,521

 
71,451

 
96

 
93

Long-term debt
275,112

 
281,870

 
1,325

 
1,504

Total other debt
354,633

 
353,321


1,421


1,597

Total debt, net

$2,018,444

 

$2,002,004



$13,142



$13,388

Our debt cap under the Purchase Agreement is $407.2 billion in 2017 and will decline to $346.1 billion on January 1, 2018. As of March 31, 2017 , our aggregate indebtedness for purposes of the debt cap was $358.5 billion . Our aggregate indebtedness calculation primarily includes the par value of other short- and long-term debt.
DEBT SECURITIES OF CONSOLIDATED TRUSTS HELD BY THIRD PARTIES
The table below summarizes the debt securities of consolidated trusts held by third parties based on underlying loan product type.
 
March 31, 2017
 
December 31, 2016
(Dollars in millions)
Contractual
Maturity
 
UPB
 
Carrying Amount
 
Weighted
Average
Coupon (1)
 
Contractual
Maturity
 
UPB
 
Carrying Amount
 
Weighted
Average
Coupon (1)
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30-year or more, fixed-rate (2)
2017 - 2055
 

$1,211,494

 

$1,247,588

 
3.69
%
 
2017 - 2055
 

$1,193,329

 

$1,229,849

 
3.71
%
20-year fixed-rate
2017 - 2037
 
73,961

 
76,194

 
3.47

 
2017 - 2037
 
74,033

 
76,331

 
3.49

15-year fixed-rate
2017 - 2032
 
267,726

 
273,763

 
2.88

 
2017 - 2032
 
267,739

 
273,978

 
2.90

Adjustable-rate
2017 - 2047
 
51,472

 
52,631

 
2.72

 
2017 - 2047
 
52,991

 
54,205

 
2.69

Interest-only
2026 - 2041
 
9,294

 
9,348

 
3.56

 
2026 - 2041
 
10,007

 
10,057

 
3.47

FHA/VA
2017 - 2046
 
971

 
994

 
4.90

 
2017 - 2046
 
1,015

 
1,038

 
4.92

Total single-family
 
 
1,614,918

 
1,660,518

 
 
 
 
 
1,599,114

 
1,645,458

 
 
Multifamily (2)
2019 - 2034
 
3,243

 
3,293

 
4.27

 
2019 - 2033
 
3,048

 
3,225

 
4.63

Total debt securities of consolidated trusts held by third parties
 
 

$1,618,161

 

$1,663,811

 
 
 
 
 

$1,602,162

 

$1,648,683

 
 
 
(1)
The effective interest rate for debt securities of consolidated trusts held by third parties was 2.92% and 2.63% as of March 31, 2017 and December 31, 2016, respectively.
(2)
Carrying amount includes securities recorded at fair value.


Freddie Mac Form 10-Q
 
91



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 6


Other Debt
The table below summarizes the balances and effective interest rates for other debt. Securities sold under agreements to repurchase are effectively collateralized borrowing transactions where we sell securities with an agreement to repurchase such securities. These agreements require the underlying securities to be delivered to the counterparties to the transactions.
 
 
March 31, 2017
 
December 31, 2016
(Dollars in millions)
 
Par Value
 
Carrying Amount (1)
 
Weighted
Average
Effective Rate (2)
 
Par Value
 
Carrying Amount (1)
 
Weighted
Average
Effective Rate (2)
Other short-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes and Reference Bills ®
 

$61,073

 

$60,967

 
0.66
%
 

$61,042

 

$60,976

 
0.47
%
Medium-term notes
 
12,007

 
12,007

 
0.51

 
7,435

 
7,435

 
0.41

Securities sold under agreements to repurchase
 
6,547

 
6,547

 
0.41

 
3,040

 
3,040

 
0.42

Total other short-term debt
 

$79,627

 

$79,521

 
0.62

 

$71,517

 

$71,451

 
0.47

Other long-term debt:
 
 
 
 
 
 
 
 
 
 
 
 
Original maturities on or before December 31,
 
 
 
 
 
 
 
 
 
 
 
 
2017
 

$64,886

 

$64,892

 
1.52
%
 

$92,831

 

$92,855

 
1.43
%
2018
 
72,755

 
72,843

 
1.17

 
71,392

 
71,500

 
1.18

2019
 
50,841

 
50,787

 
1.58

 
46,436

 
46,378

 
1.59

2020
 
22,459

 
22,434

 
1.65

 
13,274

 
13,254

 
1.54

2021
 
20,532

 
20,500

 
1.81

 
20,372

 
20,341

 
1.81

Thereafter
 
46,911

 
43,656

 
4.20

 
40,921

 
37,542

 
4.36

Total other long-term debt (3)
 
278,384

 
275,112

 
1.90

 
285,226

 
281,870

 
1.81

Total other debt
 

$358,011

 

$354,633

 
 
 

$356,743

 

$353,321

 
 

(1)
Represents par value, net of associated discounts or premiums, issuance cost and hedge-related basis adjustments. Includes $5.7 billion and $5.9 billion at March 31, 2017 and December 31, 2016, respectively, of other long-term debt that represents the fair value of debt securities with the fair value option elected.
(2)
Based on carrying amount.
(3)
Carrying amount for other long-term debt includes callable debt of $112.0 billion and $97.7 billion at March 31, 2017 and December 31, 2016, respectively.

Freddie Mac Form 10-Q
 
92



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


NOTE 7: DERIVATIVES
USE OF DERIVATIVES
We use derivatives primarily to hedge economic interest-rate sensitivity mismatches between our financial assets and liabilities. We analyze the interest-rate sensitivity of financial assets and liabilities on a daily basis across a variety of interest-rate scenarios based on market prices, models and economics. When we use derivatives to mitigate our exposures, we consider a number of factors, including cost, exposure to counterparty risk, and our overall risk management strategy.
We classify derivatives into three categories:
Exchange-traded derivatives;
Cleared derivatives; and
OTC derivatives.
Exchange-traded derivatives include standardized interest-rate futures contracts and options on futures contracts. Cleared derivatives refer to those interest-rate swaps that the U.S. Commodity Futures Trading Commission has determined are subject to the central clearing requirement of the Dodd-Frank Act. OTC derivatives refer to those derivatives that are neither exchange-traded derivatives nor cleared derivatives.
TYPES OF DERIVATIVES
We principally use the following types of derivatives:
LIBOR-based interest-rate swaps;
LIBOR- and Treasury-based options (including swaptions); and
LIBOR- and Treasury-based exchange-traded futures.
We also purchase swaptions on credit indices in order to obtain protection against adverse movements in multifamily spreads which may affect the profitability of our K Certificate or SB Certificate transactions.
In addition to swaps, futures, and purchased options, our derivative positions include written options and swaptions, commitments, and credit derivatives.
HEDGE ACCOUNTING
Fair Value Hedges
On February 2, 2017, we started applying fair value hedge accounting to certain single-family mortgage loans where we hedge the changes in fair value of these loans attributable to the designated benchmark interest rate (i.e., LIBOR), using LIBOR-based interest-rate swaps. The hedge period is one day, and we re-balance our hedge relationships on a daily basis.
We apply hedge accounting to qualifying hedge relationships. A qualifying hedge relationship exists when changes in the fair value of a derivative hedging instrument are expected to be highly effective in offsetting changes in the fair value of the hedged item attributable to the risk being hedged during the term of the hedge relationship. To assess hedge effectiveness, we use a statistical regression analysis.

Freddie Mac Form 10-Q
 
93



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


We prepare formal contemporaneous documentation, at inception of the hedge relationship, of our risk management objective and strategies for undertaking the hedge.
If a hedge relationship qualifies for hedge accounting, changes in fair value of the hedging instrument (swaps) are recognized in other income (loss), rather than derivative gains (losses), and changes in the fair value of the hedged item (loans) attributable to the risk being hedged are also recognized in other income (loss). The amount by which the gain or loss on the designated derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the risk being hedged is hedge ineffectiveness. Changes in the fair value of the hedged item attributable to the risk being hedged are recognized as a cumulative basis adjustment against the loans. The basis adjustments are amortized into interest income in the same manner as all other basis adjustments related to the loans (i.e., effective interest method over the remaining contractual maturity of the loan).
Cash Flow Hedges
There are amounts recorded in AOCI related to discontinued cash flow hedges which are recognized in earnings when the originally forecasted transactions affect earnings. Amounts reclassified from AOCI linked to interest payments on other debt are recorded in interest expense and amounts not linked to interest payments on other debt are recorded in expense related to derivatives. During 1Q 2017 and 1Q 2016, we reclassified from AOCI into earnings, pre-tax losses of $43 million and $51 million , respectively, related to closed cash flow hedges. See Note 9 for information about future reclassifications of deferred net losses related to closed cash flow hedges to net income.
For additional discussion of significant accounting policies related to derivatives, see Note 7 in our 2016 Annual Report.

Freddie Mac Form 10-Q
 
94



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


DERIVATIVE ASSETS AND LIABILITIES AT FAIR VALUE
The table below presents the notional value and fair value of derivatives reported on our condensed consolidated balance sheets.
 
March 31, 2017
 
December 31, 2016
 
Notional or
Contractual
Amount
 
Derivatives at Fair Value
 
Notional or
Contractual
Amount
 
Derivatives at Fair Value
(In millions)
Assets
 
Liabilities
 
Assets
 
Liabilities
Not designated as hedges
 
 
 
 
 
 
 
 
 
 
 
Interest-rate swaps:
 
 
 
 
 
 
 
 
 
 
 
Receive-fixed

$308,289

 

$2,376

 

($2,273
)
 

$313,106

 

$4,337

 

($2,703
)
Pay-fixed
225,251

 
1,676

 
(6,115
)
 
271,477

 
2,586

 
(9,684
)
Basis (floating to floating)
1,450

 

 

 
1,450

 
1

 

Total interest-rate swaps
534,990

 
4,052

 
(8,388
)
 
586,033

 
6,924

 
(12,387
)
Option-based:
 
 
 
 
 
 
 
 
 
 
 
Call swaptions
 
 
 
 
 
 
 
 
 
 
 
Purchased
69,755

 
2,936

 

 
60,730

 
2,817

 

Written
3,250

 

 
(82
)
 
1,350

 

 
(78
)
Put swaptions
 
 
 
 
 
 
 
 
 
 
 
Purchased (1)
52,205

 
1,597

 

 
48,080

 
1,442

 

Written
3,850

 

 
(19
)
 
3,200

 

 
(28
)
Other option-based derivatives (2)
13,636

 
772

 

 
11,032

 
795

 

Total option-based
142,696

 
5,305

 
(101
)
 
124,392

 
5,054

 
(106
)
Futures
162,748

 

 

 
138,294

 

 

Commitments
62,409

 
144

 
(147
)
 
45,353

 
289

 
(151
)
Credit derivatives
2,816

 

 
(37
)
 
2,951

 
1

 
(27
)
Other
2,918

 
1

 
(20
)
 
2,879

 

 
(21
)
Total derivatives not designated as hedges
908,577

 
9,502

 
(8,693
)
 
899,902

 
12,268

 
(12,692
)
Designated as fair value hedges
 
 
 
 
 
 
 
 
 
 
 
Interest-rate swaps:
 
 
 
 
 
 
 
 
 
 
 
Pay-fixed
44,874

 
854

 
(113
)
 

 

 

Total derivatives designated as fair value hedges
44,874

 
854

 
(113
)
 

 

 

Derivative interest receivable (payable)
 
 
1,113

 
(1,577
)
 
 
 
1,442

 
(1,770
)
Netting adjustments (3)
 
 
(10,900
)
 
10,048

 
 
 
(12,963
)
 
13,667

Total derivative portfolio, net

$953,451

 

$569

 

($335
)
 

$899,902

 

$747

 

($795
)

(1)
Includes swaptions on credit indices with a notional or contractual amount of $14.9 billion and $10.9 billion , and a fair value of $4 million and $5 million at March 31, 2017 and December 31, 2016 , respectively.
(2)
Primarily consists of purchased interest-rate caps and floors and options on Treasury futures.
(3)
Represents counterparty netting and cash collateral netting.
See Note 8 for information related to our derivative counterparties and collateral held and posted.

Freddie Mac Form 10-Q
 
95



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


GAINS AND LOSSES ON DERIVATIVES
The table below presents the gains and losses on derivatives while not designated in fair value hedge relationships and the accrual of periodic cash settlements on all derivatives. These amounts are reported in our condensed consolidated statements of comprehensive income as derivative gains (losses).
(In millions)
1Q 2017
 
1Q 2016
Not designated as hedges
 
 
 
Interest-rate swaps:
 
 
 
Receive-fixed

($569
)
 

$2,944

Pay-fixed
1,242

 
(8,635
)
Basis (floating to floating)

 
1

Total interest-rate swaps
673

 
(5,690
)
Option based:
 
 
 
Call swaptions
 
 
 
Purchased
(331
)
 
2,099

Written
3

 
(71
)
Put swaptions
 
 
 
Purchased
(97
)
 
(278
)
Written
18

 
38

Other option-based derivatives (1)
(23
)
 
147

Total option-based
(430
)
 
1,935

Other:
 
 
 
Futures
(115
)
 
(181
)
Commitments
54

 
(126
)
Credit derivatives
(16
)
 
(8
)
Other
(1
)
 
(1
)
Total other
(78
)
 
(316
)
Accrual of periodic cash settlements:
 
 
 
Receive-fixed interest-rate swaps
445

 
617

Pay-fixed interest-rate swaps
(912
)
 
(1,107
)
Total accrual of periodic cash settlements
(467
)
 
(490
)
Total

($302
)
 

($4,561
)
 
(1)
Primarily consists of purchased interest-rate caps and floors and options on Treasury futures.
The table below presents the gains and losses on derivatives while designated in qualifying fair value hedge relationships. We designate fair value hedge relationships on a daily basis. For each day during 1Q 2017 where we had designated fair value hedges, the hedges qualified for hedge accounting treatment. During 2016, there were no derivatives designated in qualifying fair value hedge relationships.
 
1Q 2017
 
Gains (Losses) Recorded in Net Income
 
(In millions)
Derivative (1)
Hedged Item (1)
Hedge Ineffectiveness (2)
Interest rate risk on mortgage loans held-for-investment

$65


($26
)

$39


(1)
Gains or losses on derivatives while in fair value hedge relationships and changes in the fair value of the related hedged items attributable to the risk being hedged are both recorded in other income (loss) in our condensed consolidated statements of comprehensive income.
(2)
No amounts have been excluded from the assessment of effectiveness.


Freddie Mac Form 10-Q
 
96



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


NOTE 8: COLLATERALIZED AGREEMENTS AND OFFSETTING ARRANGEMENTS
DERIVATIVE PORTFOLIO
Derivative Counterparties
Our use of cleared derivatives, exchange-traded derivatives, and OTC derivatives exposes us to counterparty credit risk. For additional information, see Note 8 in our 2016 Annual Report.
Our use of interest-rate swaps and option-based derivatives is subject to internal credit and legal reviews. On an ongoing basis, we review the credit fundamentals of all of our derivative counterparties, clearinghouses, and clearing members to confirm that they continue to meet our internal risk management standards.
Over-The-Counter Derivatives
We use master netting and collateral agreements to reduce our credit risk exposure to our OTC derivative counterparties.
In the event that all of our counterparties for OTC derivatives were to have defaulted simultaneously on March 31, 2017 , our maximum loss for accounting purposes after applying netting agreements and collateral on an individual counterparty basis would have been approximately $39 million .
Regulations adopted by certain financial institution regulators (including FHFA) that became effective March 1, 2017 require posting of variation margin without the application of any thresholds for OTC derivative transactions executed after that date. As a result, our and the counterparties' credit ratings are no longer used in determining the amount of collateral to be posted in connection with these transactions.
Cleared and Exchange-Traded Derivatives
The majority of our interest-rate swaps are subject to the central clearing requirement. A reduction in our credit ratings could cause the clearinghouses or clearing members we use for our cleared and exchange-traded derivatives to demand additional collateral.
Other Derivatives
We also execute forward purchase and sale commitments of loans and mortgage-related securities, including dollar roll transactions, that are treated as derivatives for accounting purposes. The total exposure on our forward purchase and sale commitments, which are treated as derivatives,
was $144 million and $289 million at March 31, 2017 and December 31, 2016, respectively.
Many of our transactions involving forward purchase and sale commitments of mortgage-related securities utilize the Mortgage Backed Securities Division of the Fixed Income Clearing Corporation (“MBSD/FICC”) as a clearinghouse. As a clearing member of the clearinghouse, we post margin to the MBSD/FICC and are exposed to the counterparty credit risk of the organization (including its clearing members).

Freddie Mac Form 10-Q
 
97



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
As an investor, we enter into arrangements to purchase securities under agreements to subsequently resell the identical or substantially the same securities to our counterparty. Our counterparties to these transactions are required to pledge the purchased securities as collateral for their obligation to repurchase those securities at a later date. While such transactions involve the legal transfer of securities, they are accounted for as secured financings because the transferor does not relinquish effective control over the securities transferred. These agreements may allow us to repledge all or a portion of the collateral.
We consider the types of securities being pledged to us as collateral when determining how much we lend in transactions involving securities purchased under agreements to resell. Additionally, we regularly review the market values of these securities compared to amounts loaned in an effort to manage our exposure to losses.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are effectively collateralized borrowings where we sell securities with an agreement to repurchase such securities at a future date. We are required to pledge the sold securities to the counterparties to these transactions as collateral for our obligation to repurchase these securities at a later date. Similar to the securities purchased under agreements to resell transactions, these transactions involve the legal transfer of securities. However, they are accounted for as secured financings because they require the identical or substantially the same securities to be subsequently repurchased. These agreements may allow our counterparties to repledge all or a portion of the collateral.
OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES
At March 31, 2017 and December 31, 2016 , all amounts of cash collateral related to derivatives with master netting and collateral agreements were offset against derivative assets, net or derivative liabilities, net, as applicable.
During 1Q 2017, we began to utilize the Government Securities Division of the Fixed Income Clearing Corporation (“GSD/FICC”) as a clearing house to transact many of our trades involving securities purchased under agreements to resell and securities sold under agreements to repurchase. As a clearing member of GSD/FICC, we are required to post initial and variation margin payments, which expose us to the counterparty credit risk of GSD/FICC and its clearing members. Although our membership provides us with the right to offset certain of our open receivable and payable positions by collateral type, we have elected not to offset these positions within our condensed consolidated balance sheets. As of March 31, 2017, our net exposure to GSD/FICC involving securities purchased under agreements to resell and securities sold under agreements to repurchase is fully collateralized.

Freddie Mac Form 10-Q
 
98



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


The table below displays offsetting and collateral information related to derivatives, securities purchased under agreements to resell, and securities sold under agreements to repurchase. Securities sold under agreements to repurchase are included in debt, net on our condensed consolidated balance sheets. During 1Q 2017, certain rule amendments made by the Chicago Mercantile Exchange became effective. As a result, the legal characterization of variation margin payments for certain of our cleared swaps changed from posting of margin collateral to a settlement. The table below reflects this change as of March 31, 2017.

Freddie Mac Form 10-Q
 
99



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


 
March 31, 2017
 
Gross
Amount
Recognized
Amount 
Offset in the 
Consolidated
Balance Sheets
Net Amount
Presented in
the  Consolidated
Balance Sheets
 
Gross Amount
Not Offset in
the  Consolidated
Balance 
Sheets (2)
 
Net
Amount
(In millions)
 
Counterparty Netting
 
Cash Collateral Netting (1)
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
OTC derivatives

$8,604

 

($6,161
)
 

($2,119
)
 

$324

 

($285
)
 

$39

Cleared and exchange-traded derivatives
2,720

 
(2,419
)
 
(201
)
 
100

 

 
100

Other
145

 

 

 
145

 

 
145

Total derivatives
11,469

 
(8,580
)
 
(2,320
)
 
569

 
(285
)
 
284

Securities purchased under agreements to resell (3)
51,257

 

 

 
51,257

 
(51,257
)
 

Total

$62,726

 

($8,580
)
 

($2,320
)
 

$51,826

 

($51,542
)
 

$284

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
OTC derivatives

($6,881
)
 

$6,161

 

$634

 

($86
)
 

$3

 

($83
)
Cleared and exchange-traded derivatives
(3,298
)
 
2,430

 
823

 
(45
)
 

 
(45
)
Other
(204
)
 

 

 
(204
)
 

 
(204
)
Total derivatives
(10,383
)
 
8,591

 
1,457

 
(335
)
 
3

 
(332
)
Securities sold under agreements to repurchase
(6,547
)
 

 

 
(6,547
)
 
6,547

 

Total

($16,930
)
 

$8,591

 

$1,457

 

($6,882
)
 

$6,550

 

($332
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Gross
Amount
Recognized
Amount 
Offset in the 
Consolidated
Balance Sheets
Net Amount
Presented in
the  Consolidated
Balance Sheets
 
Gross Amount
Not Offset in
the  Consolidated
Balance 
Sheets (2)
 
Net
Amount
(In millions)
 
Counterparty Netting
 
Cash Collateral Netting (1)
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
OTC derivatives

$8,531

 

($6,367
)
 

($1,760
)
 

$404

 

($353
)
 

$51

Cleared and exchange-traded derivatives
4,889

 
(4,674
)
 
(162
)
 
53

 

 
53

Other
290

 

 

 
290

 

 
290

Total derivatives
13,710

 
(11,041
)

(1,922
)
 
747

 
(353
)
 
394

Securities purchased under agreements to resell (3)
51,548

 

 

 
51,548

 
(51,548
)
 

Total

$65,258

 

($11,041
)


($1,922
)
 

$52,295

 

($51,901
)
 

$394

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
OTC derivatives

($7,298
)
 

$6,367

 

$469

 

($462
)
 

$274

 

($188
)
Cleared and exchange-traded derivatives
(6,965
)
 
4,705

 
2,126

 
(134
)
 

 
(134
)
Other
(199
)
 

 

 
(199
)
 

 
(199
)
Total derivatives
(14,462
)
 
11,072


2,595

 
(795
)
 
274

 
(521
)
Securities sold under agreements to repurchase
(3,040
)
 

 

 
(3,040
)
 
3,040

 

Total

($17,502
)
 

$11,072



$2,595

 

($3,835
)
 

$3,314

 

($521
)

Freddie Mac Form 10-Q
 
100



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


(1)
Excess cash collateral held is presented as a derivative liability, while excess cash collateral posted is presented as a derivative asset.
(2)
Does not include the fair value amount of non-cash collateral posted or held that exceeds the associated net asset or liability, netted by counterparty, presented on the consolidated balance sheets. For cleared and exchange-traded derivatives, does not include non-cash collateral posted by us as initial margin with an aggregate fair value of $3.6 billion and $3.4 billion as of March 31, 2017 and December 31, 2016, respectively.
(3)
At March 31, 2017 and December 31, 2016, we had $6.5 billion and $4.0 billion , respectively, of securities pledged to us for transactions involving securities purchased under agreements to resell that we had the right to repledge.
COLLATERAL PLEDGED
Collateral Pledged to Freddie Mac
We have cash pledged to us as collateral primarily related to OTC derivative transactions. The table below shows the line item presentation of the collateral recognized on our condensed consolidated balance sheets. A portion of the cash collateral amount has been re-invested by us in securities purchased under agreements to resell and non-mortgage-related securities.
(In millions)
 
March 31, 2017
 
December 31, 2016
Restricted cash and cash equivalents (1)
 

$429

 

$399

Securities purchased under agreements to resell
 
735

 
426

Investments in securities - Trading securities
 
1,101

 
1,000

Total (2)
 

$2,265

 

$1,825

(1)
Includes collateral related to cleared derivatives and certain other counterparties.
(2)
Includes cash collateral held in excess of exposure.

Freddie Mac Form 10-Q
 
101



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


Collateral Pledged by Freddie Mac
The table below summarizes the fair value of the securities we pledged as collateral for derivatives and other transactions where the secured party may repledge the collateral.
 
 
March 31, 2017
(In millions)
 
Derivatives
 
Securities sold under agreements to repurchase
 
Other (2)
 
Total
Debt securities of consolidated trusts held by third parties (1)
 

$273

 

$—

 

$98

 

$371

Available-for-sale securities
 

 

 
260

 
260

Trading securities
 
3,380

 
6,655

 
61

 
10,096

Total securities pledged that may be repledged by the secured party
 

$3,653

 

$6,655

 

$419

 

$10,727

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
(In millions)
 
Derivatives
 
Securities sold under agreements to repurchase
 
Other (2)
 
Total
Debt securities of consolidated trusts held by third parties (1)
 

$686

 

$—

 

$—

 

$686

Available-for-sale securities
 

 

 
260

 
260

Trading securities
 
3,014

 
3,070

 

 
6,084

Total securities pledged that may be repledged by the secured party
 

$3,700

 

$3,070

 

$260

 

$7,030


(1)
Represents PCs held by us in our Investments segment mortgage investments portfolio and pledged as collateral which are recorded as a reduction to debt securities of consolidated trusts held by third parties on our consolidated balance sheets.
(2)
Includes other collateralized borrowings and collateral related to transactions with certain clearinghouses.
The table below summarizes the underlying collateral pledged and the remaining contractual maturity of our gross obligations under securities sold under agreements to repurchase.
 
 
March 31, 2017
(In millions)
 
Overnight and continuous
 
30 days or less
 
After 30 days through 90 days
 
Greater than 90 days
 
Total
U.S. Treasury securities
 

$—

 

$5,778

 

$877

 

$—

 

$6,655


Freddie Mac Form 10-Q
 
102



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


NOTE 9: STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE
ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below presents changes in AOCI after the effects of our 35% federal statutory tax rate related to available-for-sale securities, closed cash flow hedges, and our defined benefit plans.
 
 
1Q 2017
(In millions)
 
AOCI Related
to Available-
For-Sale
Securities
 
AOCI Related
to Cash Flow
Hedge
Relationships
 
AOCI Related
to Defined
Benefit Plans
 
Total
Beginning balance
 

$915

 

($480
)
 

$21

 

$456

Other comprehensive income before reclassifications (1)
 
112

 

 
(3
)
 
109

Amounts reclassified from accumulated other comprehensive income
 
(114
)
 
28

 

 
(86
)
Changes in AOCI by component
 
(2
)
 
28

 
(3
)
 
23

Ending balance
 

$913

 

($452
)
 

$18

 

$479

 
 
 
 
 
 
 
 
 
 
 
1Q 2016
(In millions)
 
AOCI Related
to Available-
For-Sale
Securities
 
AOCI Related
to Cash Flow
Hedge
Relationships
 
AOCI Related
to Defined
Benefit Plans
 
Total
Beginning balance
 

$1,740

 

($621
)
 

$34

 

$1,153

Other comprehensive income before reclassifications (1)
 
129

 

 
2

 
131

Amounts reclassified from accumulated other comprehensive income
 
(10
)
 
34

 
(1
)
 
23

Changes in AOCI by component
 
119

 
34

 
1

 
154

Ending balance
 

$1,859

 

($587
)
 

$35

 

$1,307

 
(1)
For both 1Q 2017 and 1Q 2016, net of tax expense of $0.1 billion for AOCI related to available-for-sale securities.

Freddie Mac Form 10-Q
 
103



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


Reclassifications from AOCI to Net Income
The table below presents reclassifications from AOCI to net income, including the affected line item in our condensed consolidated statements of comprehensive income.
Details about Accumulated Other
Comprehensive Income Components
 
 
 
 
Affected Line Item in the Condensed Consolidated Statements of Comprehensive Income
(In millions)
 
1Q 2017
 
1Q 2016
 
AOCI related to available-for-sale securities
 
 
 
 
 
 
 

$190

 

$72

Other gains (losses) on investment securities recognized in earnings
 
 
(13
)
 
(57
)
Net impairment of available-for-sale securities recognized in earnings
 
 
177

 
15

Total before tax
 
 
(63
)
 
(5
)
Tax (expense) or benefit
 
 
114

 
10

Net of tax
AOCI related to cash flow hedge relationships
 
 
 
 
 
 
 

 

Interest expense
 
 
(43
)
 
(51
)
Expense related to derivatives
 
 
(43
)
 
(51
)
Total before tax
 
 
15

 
17

Tax (expense) or benefit
 
 
(28
)
 
(34
)
Net of tax
AOCI related to defined benefit plans
 
 
 
 
 
 
 

 
1

Salaries and employee benefits
 
 

 

Tax (expense) or benefit
 
 

 
1

Net of tax
Total reclassifications in the period
 

$86

 

($23
)
Net of tax
Future Reclassifications from AOCI to Net Income Related to Closed Cash Flow Hedges
The total AOCI related to derivatives designated as cash flow hedges was a loss of $0.5 billion and $0.6 billion at March 31, 2017 and March 31, 2016, respectively, composed of deferred net losses on closed cash flow hedges. Closed cash flow hedges involve derivatives that have been terminated or are no longer designated as cash flow hedges. Fluctuations in prevailing market interest rates have no effect on the deferred portion of AOCI relating to losses on closed cash flow hedges.
The previously deferred amount related to closed cash flow hedges remains in our AOCI balance and will be recognized into earnings over the expected time period for which the forecasted transactions affect earnings, unless it is deemed probable that the forecasted transactions will not occur. Over the next 12 months, we estimate that approximately $120 million , net of taxes, of the $0.5 billion of cash flow hedge losses in AOCI at March 31, 2017 will be reclassified into earnings. The maximum remaining length of time over which we have hedged the exposure related to the variability in future cash flows on forecasted transactions, primarily forecasted debt issuances, is 17 years.

Freddie Mac Form 10-Q
 
104



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


SENIOR PREFERRED STOCK
At March 31, 2017 , our assets exceeded our liabilities under GAAP; therefore, no draw is being requested from Treasury under the Purchase Agreement. Based on our Net Worth Amount at March 31, 2017 and the Capital Reserve Amount of $600 million in 2017, our scheduled dividend obligation to Treasury in June 2017 will be $2.2 billion . See Note 2 for additional information. The aggregate liquidation preference on the senior preferred stock owned by Treasury was $72.3 billion as of both March 31, 2017 and December 31, 2016.
STOCK ISSUANCES AND REPURCHASES
We did not repurchase or issue any of our common shares or non-cumulative preferred stock during 1Q 2017, except for issuances of treasury stock relating to stock-based compensation granted prior to conservatorship.
EARNINGS PER SHARE
We have participating securities related to options and restricted stock units with dividend equivalent rights that receive dividends as declared on an equal basis with common shares but are not obligated to participate in undistributed net losses. These participating securities consist of:
Vested options to purchase common stock; and
Vested restricted stock units that earn dividend equivalents at the same rate when and as declared on common stock.
Consequently, in accordance with accounting guidance, we use the “two-class” method of computing earnings per common share. The “two-class” method is an earnings allocation formula that determines earnings per share for common stock and participating securities based on dividends declared and participation rights in undistributed earnings.
Basic earnings per common share is computed as net income attributable to common stockholders divided by the weighted average common shares outstanding for the period. The weighted average common shares outstanding for the period includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury pursuant to the Purchase Agreement. These shares are included since the warrant is unconditionally exercisable by the holder at a minimal cost.
Diluted earnings per common share is computed as net income attributable to common stockholders divided by the weighted average common shares outstanding during the period adjusted for the dilutive effect of common equivalent shares outstanding. For periods with net income attributable to common stockholders, the calculation includes the effect of the following common stock equivalent shares outstanding:
Weighted average shares related to stock options if the average market price during the period exceeds the exercise price; and
The weighted-average of restricted stock units.
During periods in which a net loss attributable to common stockholders has been incurred, potential common equivalent shares outstanding are not included in the calculation because it would have an

Freddie Mac Form 10-Q
 
105



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


antidilutive effect.
For purposes of the earnings-per-share calculation, all stock options outstanding at March 31, 2017 and March 31, 2016 were out of the money and excluded from the computation of dilutive potential common shares during both 1Q 2017 and 1Q 2016.
DIVIDENDS DECLARED
No common dividends were declared during 1Q 2017. During 1Q 2017, we paid dividends of $4.5 billion in cash on the senior preferred stock at the direction of our Conservator. We did not declare or pay dividends on any other series of Freddie Mac preferred stock outstanding during 1Q 2017.

Freddie Mac Form 10-Q
 
106



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 10


NOTE 10: INCOME TAXES
INCOME TAX (EXPENSE) BENEFIT
For 1Q 2017 and 1Q 2016, we reported an income tax (expense) benefit of ($1.1) billion and $154 million , respectively, resulting in effective tax rates of 33.4% and 30.3% , respectively. Our effective tax rate differed from the statutory rate of 35% in these periods primarily due to our recognition of low income housing tax credits.
DEFERRED TAX ASSETS, NET
We had net deferred tax assets of $15.8 billion as of both March 31, 2017 and December 31, 2016 . At March 31, 2017 , our net deferred tax assets consisted primarily of basis differences related to derivative instruments and deferred fees.
Based on all positive and negative evidence available at March 31, 2017 , we determined that it is more likely than not that our net deferred tax assets will be realized. Therefore, a valuation allowance was not necessary.
UNRECOGNIZED TAX BENEFITS
We evaluated all income tax positions and determined that there were no uncertain tax positions that required reserves as of March 31, 2017 .

Freddie Mac Form 10-Q
 
107



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 11


NOTE 11: SEGMENT REPORTING
We have three reportable segments, which are based on the type of business activities each performs - Single-family Guarantee, Multifamily, and Investments. The chart below provides a summary of our three reportable segments and the All Other category. For more information, see our 2016 Annual Report.
Segment
Description
Financial Performance Measurement Basis
Single-family Guarantee
The Single-family Guarantee segment reflects results from our purchase, securitization, and guarantee of single-family loans and the management of single-family credit risk.
Contribution to GAAP net income (loss)
Multifamily
The Multifamily segment reflects results from our purchase, securitization, and guarantee of multifamily loans and securities, our investments in those loans and securities, and the management of multifamily credit risk and market spread risk.
Contribution to GAAP comprehensive income (loss)
Investments
The Investments segment reflects results from managing the company's mortgage-related investments portfolio (excluding Multifamily segment investments, single-family seriously delinquent loans, and the credit risk of single-family performing loans), treasury function, and interest-rate risk.
Contribution to GAAP comprehensive income (loss)
All Other
The All Other category consists of material corporate-level activities that are infrequent in nature and based on decisions outside the control of the management of our reportable segments.
N/A
SEGMENT EARNINGS
We present Segment Earnings by reclassifying certain credit guarantee-related activities and investment-related activities between various line items on our GAAP consolidated statements of comprehensive income and allocating certain revenues and expenses, including certain returns on assets and funding costs, and all administrative expenses to our three reportable segments.
We do not consider our assets by segment when evaluating segment performance or allocating resources. We operate our business in the United States and its territories, and accordingly, we generate no revenue from and have no long-lived assets, other than financial instruments, in geographic locations other than the United States and its territories.
We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator. See Note 2 for information about the conservatorship.
During 1Q 2017, we changed how we calculate certain components of our Segment Earnings for our Investments segment. The purpose of this change is to simplify Segment Earnings results relative to GAAP results in order to better reflect how management evaluates the Investments segment. Prior period results have been revised to conform to the current period presentation. The change includes:
The discontinuation of adjustments to net interest income which reflected the reclassification of amortization of upfront cash paid and received upon acquisitions and issuances of swaptions and options from derivative gains (losses) to net interest income for the Investments segment. The discontinuation of the adjustments resulted in an increase to net interest income for the Investments segment of $281 million for 1Q 2016 to align with the current presentation.


Freddie Mac Form 10-Q
 
108



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 11


The table below presents Segment Earnings by segment.
(In millions)
1Q 2017
 
1Q 2016
Segment Earnings (loss), net of taxes:
 
 
 
Single-family Guarantee

$710

 

$810

Multifamily
449

 
147

Investments
1,052

 
(1,311
)
All Other

 

Total Segment Earnings, net of taxes
2,211

 
(354
)
Net income

$2,211

 

($354
)
Comprehensive income (loss) of segments:
 
 
 
Single-family Guarantee

$708

 

$811

Multifamily
445

 
150

Investments
1,081

 
(1,161
)
All Other

 

Comprehensive income of segments
2,234

 
(200
)
Comprehensive income

$2,234

 

($200
)

The tables below present detailed reconciliations between our GAAP financial statements and Segment Earnings for our reportable segments and All Other.
 
1Q 2017
 
 
 
 
 
 
 
 
 
Total Segment
Earnings (Loss)
 
 
Total per Condensed
Consolidated
Statements of
Comprehensive
Income
(In millions)
Single-family
Guarantee
 
Multifamily
 
Investments
 
All
Other
 
 
Reclassifications
 
Net interest income

$—

 

$271

 

$929

 

$—

 

$1,200

 

$2,595

 

$3,795

Guarantee fee income (1)
1,418

 
151

 

 

 
1,569

 
(1,420
)
 
149

Benefit for credit losses
39

 
6

 

 

 
45

 
71

 
116

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

 
(4
)
 
73

 

 
69

 
(82
)
 
(13
)
Derivative gains (losses)
(15
)
 
127

 
52

 

 
164

 
(466
)
 
(302
)
Gains (losses) on trading securities

 
1

 
(135
)
 

 
(134
)
 

 
(134
)
Gains (losses) on loans

 
(33
)
 

 

 
(33
)
 
47

 
14

Other non-interest income (loss)
334

 
272

 
748

 

 
1,354

 
(694
)
 
660

Administrative expenses
(333
)
 
(95
)
 
(83
)
 

 
(511
)
 

 
(511
)
REO operations expense
(59
)
 

 

 

 
(59
)
 
3

 
(56
)
Other non-interest expense
(318
)
 
(21
)
 
(4
)
 

 
(343
)
 
(54
)
 
(397
)
Income tax expense
(356
)
 
(226
)
 
(528
)
 

 
(1,110
)
 

 
(1,110
)
Net income
710

 
449

 
1,052

 

 
2,211

 

 
2,211

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

 
(4
)
 
2

 

 
(2
)
 

 
(2
)
Changes in unrealized gains (losses) related to cash flow hedge relationships

 

 
28

 

 
28

 

 
28

Changes in defined benefit plans
(2
)
 

 
(1
)
 

 
(3
)
 

 
(3
)
Total other comprehensive income (loss), net of taxes
(2
)
 
(4
)
 
29

 

 
23

 

 
23

Comprehensive income

$708

 

$445

 

$1,081

 

$—

 

$2,234

 

$—

 

$2,234



Freddie Mac Form 10-Q
 
109



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 11


 
1Q 2016
 
 
 
 
 
 
 
 
 
Total Segment
Earnings (Loss)
 
 
Total per Condensed
Consolidated
Statements of
Comprehensive
Income
(In millions)
Single-family
Guarantee
 
Multifamily
 
Investments
 
All
Other
 
 
Reclassifications
 
Net interest income

$—

 

$252

 

$1,029

 

$—

 

$1,281

 

$2,124

 

$3,405

Guarantee fee income (1)
1,285

 
108

 

 

 
1,393

 
(1,283
)
 
110

Benefit (provision) for credit losses
289

 
5

 

 

 
294

 
173

 
467

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

 

 
81

 

 
81

 
(138
)
 
(57
)
Derivative gains (losses)
(8
)
 
(787
)
 
(3,276
)
 

 
(4,071
)
 
(490
)
 
(4,561
)
Gains (losses) on trading securities

 
62

 
169

 

 
231

 

 
231

Gains (losses) on loans

 
497

 

 

 
497

 
(19
)
 
478

Other non-interest income (loss)
232

 
178

 
189

 

 
599

 
(223
)
 
376

Administrative expenses
(295
)
 
(80
)
 
(73
)
 

 
(448
)
 

 
(448
)
REO operations expense
(87
)
 

 

 

 
(87
)
 
3

 
(84
)
Other non-interest expense
(252
)
 
(24
)
 
(2
)
 

 
(278
)
 
(147
)
 
(425
)
Income tax expense
(354
)
 
(64
)
 
572

 

 
154

 

 
154

Net income
810


147


(1,311
)


 
(354
)
 

 
(354
)
Changes in unrealized gains (losses) related to available-for-sale securities

 
3

 
116

 

 
119

 

 
119

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

 

 
34

 

 
34

 

 
34

Changes in defined benefit plans
1

 

 

 

 
1

 

 
1

Total other comprehensive income (loss), net of taxes
1


3


150



 
154

 

 
154

Comprehensive income

$811

 

$150

 

($1,161
)
 

$—

 

($200
)
 

$—

 

($200
)

(1)
Guarantee fee income is included in other income (loss) on our GAAP condensed consolidated statements of comprehensive income.

Freddie Mac Form 10-Q
 
110



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 12



NOTE 12: CONCENTRATION OF CREDIT AND OTHER RISKS
SINGLE-FAMILY CREDIT GUARANTEE PORTFOLIO
The table below summarizes the concentration by book and geographic area of the approximately $1.8 trillion UPB of our single-family credit guarantee portfolio at both March 31, 2017 and December 31, 2016. See Note 4 and Note 5 for more information about credit risk associated with loans and mortgage-related securities that we hold or guarantee.
 
March 31, 2017
 
December 31, 2016
 
Percent of Credit Losses
 
Percentage  of
Portfolio
 
Serious
Delinquency
Rate
 
Percentage  of
Portfolio
 
Serious
Delinquency
Rate
 
1Q 2017
 
1Q 2016
Book of Business

 
 
 
 
 
 
 
 
 
 
Core single-family book
74
%
 
0.19
%
 
73
%
 
0.20
%
 
3
%
 
6
%
HARP and other relief refinance book
15

 
0.67
%
 
15

 
0.69
%
 
9

 
15

Legacy single-family book
11

 
3.45
%
 
12

 
3.59
%
 
88

 
79

Total
100
%
 
0.92
%
 
100
%
 
1.00
%
 
100
%
 
100
%
Region (1)(3)
 
 
 
 
 
 
 
 
 
 
 
West
30
%
 
0.53
%
 
30
%
 
0.57
%
 
31
%
 
12
%
Northeast
25

 
1.36
%
 
25

 
1.45
%
 
32

 
37

North Central
16

 
0.85
%
 
16

 
0.93
%
 
17

 
25

Southeast
16

 
1.10
%
 
16

 
1.19
%
 
17

 
21

Southwest
13

 
0.70
%
 
13

 
0.78
%
 
3

 
5

Total
100
%
 
0.92
%
 
100
%
 
1.00
%
 
100
%
 
100
%
State (2)(3)
 
 
 
 
 
 
 
 
 
 
 
California
18
%
 
0.43
%
 
18
%
 
0.46
%
 
23
%
 
6
%
Florida
6

 
1.30
%
 
6

 
1.42
%
 
11

 
10

Illinois
5

 
1.23
%
 
5

 
1.34
%
 
9

 
10

New Jersey
3

 
2.10
%
 
3

 
2.26
%
 
10

 
9

New York
5

 
1.93
%
 
5

 
2.05
%
 
6

 
10

All other
63

 
0.83
%
 
63

 
0.90
%
 
41

 
55

Total
100
%
 
0.92
%
 
100
%
 
1.00
%
 
100
%
 
100
%

(1)
Region designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH, NJ, NY, PA, RI, VT, VA, WV); North Central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI); Southwest (AR, CO, KS, LA, MO, NE, NM, OK, TX, WY).
(2)
States presented based on those with the highest percentage of credit losses during 1Q 2017.
(3)
On January 1, 2017, we elected a new accounting policy for reclassifications of loans from held-for-investment to held-for-sale. The charge-offs taken under the new policy affected some states more than others. See Note 4 for further information about this change.

Freddie Mac Form 10-Q
 
111



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 12



CREDIT PERFORMANCE OF CERTAIN HIGHER RISK SINGLE-FAMILY LOAN CATEGORIES
Participants in the mortgage market often characterize single-family loans based upon their overall credit quality at the time of origination, generally considering them to be prime or subprime. Many mortgage market participants classify single-family loans with credit characteristics that range between their prime and subprime categories as Alt-A. Although we discontinued new purchases of loans with lower documentation standards beginning March 1, 2009, we continued to purchase certain amounts of these loans in cases where the loan was either:
Purchased pursuant to a previously issued other mortgage-related guarantee;
Part of our relief refinance initiative; or
In another refinance loan initiative and the pre-existing loan (including Alt-A loans) was originated under less than full documentation standards.
In the event we purchase a refinance loan and the original loan had been previously identified as Alt-A, such refinance loan may no longer be categorized or reported as Alt-A in the table below because the new refinance loan replacing the original loan would not be identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such refinancing not occurred.
Although we do not categorize single-family loans we purchase or guarantee as prime or subprime, we recognize that there are a number of loan types with certain characteristics that indicate a higher degree of credit risk.
For example, a borrower’s credit score is a useful measure for assessing the credit quality of the borrower. Statistically, borrowers with higher credit scores are more likely to repay or have the ability to refinance than those with lower scores.
Presented below is a summary of the serious delinquency rates of certain higher-risk categories (based on characteristics of the loan at origination) of loans in our single-family credit guarantee portfolio. The table includes a presentation of each higher-risk category in isolation. A single loan may fall within more than one category (for example, an interest-only loan may also have an original LTV ratio greater than 90%). Loans with a combination of these attributes will have an even higher risk of delinquency than those with an individual attribute.
 
Percentage of Portfolio (1)
 
Serious Delinquency Rate (1)
(Percentage of portfolio based on UPB)
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
Interest-only
1
%
 
1
%
 
4.47
%
 
4.34
%
Alt-A
2
%
 
2
%
 
5.11
%
 
5.21
%
Original LTV ratio greater than 90% (2)
16
%
 
16
%
 
1.45
%
 
1.58
%
Lower credit scores at origination (less than 620)
2
%
 
2
%
 
5.32
%
 
5.73
%

(1)
Excludes loans underlying certain other securitization products for which data was not available.
(2)
Includes HARP loans, which we purchase as part of our participation in the MHA Program.

Freddie Mac Form 10-Q
 
112



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 12



SELLERS AND SERVICERS
We acquire a significant portion of our single-family and multifamily loan purchase volume from several large sellers. The table below summarizes the concentration of single-family and multifamily sellers who provided 10% or more of our purchase volume.
 
 
1Q 2017
 
1Q 2016
Single-family Sellers
 
 
 
 
Wells Fargo Bank, N.A.
 
18
%
 
13
%
Other top 10 sellers
 
38

 
35

Top 10 single-family sellers
 
56
%
 
48
%
Multifamily Sellers
 
 
 
 
Berkadia Commercial Mortgage LLC
 
15
%
 
26
%
CBRE Capital Markets, Inc.
 
15

 
19

Holliday Fenoglio Fowler, L.P.
 
12

 
6

Walker & Dunlop, LLC
 
8

 
14

Other top 10 sellers
 
32

 
23

Top 10 multifamily sellers
 
82
%
 
88
%
In recent years, there has been a shift in our purchase volume from depository institutions to non-depository and smaller depository financial institutions. Some of these non-depository sellers have grown rapidly in recent years, and we purchase a significant share of our loans from them. Our top three non-depository sellers provided approximately 13% of our single-family purchase volume during 1Q 2017.
Significant portions of our single-family and multifamily loans are serviced by several large servicers. The table below summarizes the concentration of single-family and multifamily servicers who serviced 10% or more of our single-family credit guarantee portfolio and our multifamily mortgage portfolio, excluding loans where we are not in first loss position, primarily K Certificates and SB Certificates.
 
 
March 31, 2017
 
December 31, 2016
Single-family Servicers
 
 
 
 
Wells Fargo Bank, N.A.
 
19
%
 
19
%
Other top 10 servicers
 
40

 
41

Top 10 single-family servicers
 
59
%
 
60
%
Multifamily Servicers
 
 
 
 
Wells Fargo Bank, N.A.
 
15
%
 
15
%
CBRE Capital Markets, Inc.
 
12

 
14

Berkadia Commercial Mortgage LLC
 
11

 
11

Other top 10 servicers
 
40

 
39

Top 10 multifamily servicers
 
78
%
 
79
%
In recent years, there has been a shift in our servicing from depository institutions to non-depository servicers. Some of these non-depository servicers have grown rapidly in recent years and now service a large share of our loans. As of both March 31, 2017 and December 31, 2016, approximately 10% of our single-family credit guarantee portfolio was serviced by our top three non-depository servicers, on a

Freddie Mac Form 10-Q
 
113



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 12



combined basis. Several of these non-depository servicers also service a large share of the loans underlying our investments in non-agency mortgage-related securities. We routinely monitor the performance of our largest non-depository servicers.
MORTGAGE INSURERS
We have counterparty credit risk relating to the potential insolvency of, or non-performance by, mortgage insurers that insure single-family loans we purchase or guarantee. We evaluate the recovery and collectability from mortgage insurers as part of the estimate of our loan loss reserves. See Note 4 for additional information. As of March 31, 2017 , mortgage insurers provided coverage with maximum loss limits of $77.2 billion , for $301.7 billion of UPB, in connection with our single-family credit guarantee portfolio. These amounts are based on gross coverage without regard to netting of coverage that may exist to the extent an affected loan is covered under both primary and pool insurance.
The table below summarizes the concentration of mortgage insurer counterparties who provided 10% or more of our overall mortgage insurance coverage. On January 3, 2017, Arch Capital Group Ltd. announced that it had completed its purchase of United Guaranty Corporation at the end of 2016. The table below reflects this transaction. On October 23, 2016, Genworth Financial, Inc. announced that it had entered into an agreement to be acquired by China Oceanwide Holdings Group Co., Ltd. Genworth Mortgage Insurance Corporation is a subsidiary of Genworth Financial, Inc .
 
 
 
 
Mortgage Insurance Coverage
 
 
Credit Rating (1)
 
March 31, 2017
 
December 31, 2016
Arch Mortgage Insurance Company
 
BBB+
 
24
%
 
25
%
Radian Guaranty Inc.
 
BBB-
 
21

 
21

Mortgage Guaranty Insurance Corporation
 
BBB-
 
20

 
20

Genworth Mortgage Insurance Corporation
 
BB+
 
15

 
15

Essent Guaranty, Inc.
 
BBB
 
11

 
10
%
Total
 
 
 
91
%
 
91
%
(1)
Ratings are for the corporate entity to which we have the greatest exposure. Coverage amounts may include coverage provided by affiliates and subsidiaries of the counterparty. Latest rating available as of March 31, 2017. Represents the lower of S&P and Moody’s credit ratings stated in terms of the S&P equivalent.
We received proceeds of $0.1 billion during both 1Q 2017 and 1Q 2016 from our primary and pool mortgage insurance policies for recovery of losses on our single-family loans. We had outstanding receivables from mortgage insurers of $0.1 billion (excluding deferred payment obligations associated with unpaid claim amounts) as of both March 31, 2017 and December 31, 2016. The balance of these receivables, net of associated reserves, was approximately $0.1 billion at both March 31, 2017 and December 31, 2016.
PMI Mortgage Insurance Co. and Triad Guaranty Insurance Corp. are both under the control of their state regulators and are in run-off. A substantial portion of their claims is recorded by us as deferred payment obligations. As of both March 31, 2017 and December 31, 2016, we had cumulative unpaid deferred payment obligations of $0.5 billion from these insurers. We reserved for all of these unpaid amounts as collectability is uncertain. It is not clear how the regulators of these companies will administer their respective deferred payment plans in the future, nor when or if those obligations will be paid.

Freddie Mac Form 10-Q
 
114



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 12



OTHER INVESTMENTS AND CASH COUNTERPARTIES
We are exposed to counterparty credit risk relating to the potential insolvency of, or the non-performance by, counterparties relating to other investments and cash (including non-mortgage-related securities and cash equivalents) transactions, including those entered into on behalf of our securitization trusts. Our policies require that the issuer be rated as investment grade at the time the financial instrument is purchased. We base the permitted term and dollar limits for each of these transactions on the counterparty's financial strength in order to further mitigate our risk.
Our other investments and cash counterparties are primarily major financial institutions, including other GSEs, Treasury, the Federal Reserve Bank of New York, highly-rated supranational institutions, and government money market funds. As of March 31, 2017 and December 31, 2016, including amounts related to our consolidated VIEs, there were $63.8 billion and $73.8 billion , respectively, of cash and securities purchased under agreements to resell invested with counterparties, U.S. Treasury securities classified as cash equivalents, or cash deposited with the Federal Reserve Bank of New York. As of March 31, 2017 , all of our securities purchased under agreements to resell were fully collateralized.
NON-AGENCY MORTGAGE-RELATED SECURITY ISSUERS
We are engaged in various loss mitigation efforts concerning certain investments in non-agency mortgage-related securities, including the matters described below.
In 2011, FHFA, as Conservator for Freddie Mac and Fannie Mae, filed lawsuits against a number of corporate families of financial institutions and related defendants alleging securities laws violations and, in some cases, fraud. The lawsuit against Nomura Holding America, Inc. (or Nomura) and the Royal Bank of Scotland Group PLC (or RBS) in New York and the separate lawsuit against RBS in Connecticut remain outstanding. In March 2015, FHFA’s case against Nomura and RBS went to trial in the U.S. District Court for the Southern District of New York. In May 2015, the judge ruled against the defendants and ordered them to pay an aggregate of $806 million , of which $779 million will be paid to Freddie Mac. The order also provides for Freddie Mac to transfer the mortgage-related securities at issue in this trial to the defendants. The defendants have agreed to pay for certain costs, legal fees and expenses if FHFA prevails in the litigation. This expense reimbursement payment is subject to various conditions, and is capped at $33 million (half of any such payment would be made to Freddie Mac). The defendants filed a notice of appeal, and the case is pending before the U.S. Court of Appeals for the Second Circuit.
We worked with an investor consortium to enforce certain claims with J.P. Morgan Chase & Co. relating to a number of non-agency mortgage-related securities. A settlement agreement was entered into with respect to these claims. The settlement is subject to certain conditions, which have not yet been satisfied. Our expected benefit from the settlement, which currently totals approximately $30 million , will be recognized in earnings over the expected remaining life of the securities, unless the securities are sold, at which time the benefit would be considered in the sales price of the securities.
The majority of the single-family loans underlying our investments in non-agency mortgage-related securities are serviced by non-depository servicers. As of March 31, 2017 and December 31, 2016, approximately $7.7 billion and $8.4 billion , respectively, in UPB of loans underlying our investments in single-family non-agency mortgage-related securities were serviced by subsidiaries and/or affiliates of Ocwen Financial Corp. Ocwen and its subsidiaries and/or affiliates have been the subject of significant adverse regulatory scrutiny. On April 20, 2017, the CFPB and numerous state regulators initiated legal

Freddie Mac Form 10-Q
 
115



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 12



and regulatory actions against Ocwen and its subsidiaries and/or affiliates challenging various aspects of their mortgage servicing practices. We continue to closely monitor Ocwen's performance.

Freddie Mac Form 10-Q
 
116



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


NOTE 13: FAIR VALUE DISCLOSURE
The accounting guidance for fair value measurements and disclosures defines fair value, establishes a framework for measuring fair value, and sets forth disclosure requirements regarding fair value measurements. This guidance applies whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value. Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or, in the absence of a principal market, in the most advantageous market for the asset or liability.
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain assets and liabilities on a recurring or non-recurring basis.
FAIR VALUE MEASUREMENTS
The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The levels of the fair value hierarchy are defined as follows in priority order:
Level 1 - inputs to the valuation techniques are based on quoted prices in active markets for identical assets or liabilities.
Level 2 - inputs to the valuation techniques are based on observable inputs other than quoted prices in active markets for identical assets or liabilities.
Level 3 - one or more inputs to the valuation technique are unobservable and significant to the fair value measurement.
We use quoted market prices and valuation techniques that seek to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs. Our inputs are based on the assumptions a market participant would use in valuing the asset or liability. Assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
VALUATION RISK AND CONTROLS OVER FAIR VALUE MEASUREMENTS
Valuation risk is the risk that fair values used for financial disclosures, risk metrics and performance measures do not reasonably reflect market conditions and prices.
We designed our control processes so that our fair value measurements are appropriate and reliable, that they are based on observable inputs where possible, and that our valuation approaches are consistently applied and the assumptions and inputs are reasonable. Our control processes provide a framework for segregation of duties and oversight of our fair value methodologies, techniques, validation procedures, and results.

Freddie Mac Form 10-Q
 
117



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


VALUATION TECHNIQUES
HARP Loans

For loans that have been refinanced under HARP, we value our guarantee obligation using the guarantee fees currently charged by us under that initiative. HARP loans valued using this technique are classified as Level 2, as the fees charged by us are observable. The majority of our HARP loans are classified as Level 2. If, subsequent to delivery, the refinanced loan no longer qualifies for purchase based on current underwriting standards (such as becoming past due or being modified), the fair value of the guarantee obligation is then measured using our internal credit models or the median of external sources, if the loan’s principal market has changed to the whole loan market. HARP loans valued using either of these techniques are classified as Level 3 as significant inputs are unobservable.
The total compensation that we receive for the delivery of a HARP loan reflects the pricing that we are willing to offer because HARP is a part of a broader government program intended to provide assistance to homeowners and prevent foreclosures. When HARP ends in September 2017, the beneficial pricing afforded to HARP loans may no longer be reflected in the pricing structure of our guarantee fees. If these benefits were not reflected in the pricing for these loans, the fair value of our loans would have decreased by $4.1 billion and $5.3 billion as of March 31, 2017 and December 31, 2016 , respectively. The total fair value of the loans in our portfolio that reflect the pricing afforded to HARP loans as of March 31, 2017 and December 31, 2016 is $47.0 billion and $52.8 billion , respectively.
ASSETS AND LIABILITIES ON OUR CONDENDSED CONSOLIDATED BALANCE SHEETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
The following tables present our assets and liabilities measured on our condensed consolidated balance sheets at fair value on a recurring basis subsequent to initial recognition, including instruments where we have elected the fair value option.









Freddie Mac Form 10-Q
 
118



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
March 31, 2017
(Dollars in millions)
Level 1

Level 2

Level 3

Netting Adjustment (1)

Total
Assets:









Investments in securities:









Available-for-sale, at fair value:









Mortgage-related securities:



 

 



Freddie Mac

$—

 

$35,499

 

$6,419

 

$—

 

$41,918

Other agency

 
3,895

 
62

 

 
3,957

Non-agency RMBS

 

 
9,270

 

 
9,270

Non-agency CMBS

 
1,440

 
3,360

 

 
4,800

Obligations of states and political subdivisions

 

 
560

 

 
560

Total available-for-sale securities, at fair value

 
40,834


19,671

 

 
60,505

Trading, at fair value:




 



 
Mortgage-related securities:




 



 
Freddie Mac

 
12,867

 
552

 

 
13,419

Other agency

 
7,368

 
11

 

 
7,379

All other

 
27

 
109

 

 
136

Total mortgage-related securities

 
20,262

 
672

 

 
20,934

Non-mortgage-related securities
24,623

 
2,565

 

 

 
27,188

Total trading securities, at fair value
24,623

 
22,827

 
672

 

 
48,122

Total investments in securities
24,623

 
63,661

 
20,343

 

 
108,627

Mortgage loans:

 

 

 

 

Held-for-sale, at fair value

 
17,687

 

 

 
17,687

Derivative assets, net:
 
 
 
 
 
 
 
 
 
Interest-rate swaps

 
4,906

 

 

 
4,906

Option-based derivatives

 
5,305

 

 

 
5,305

Other

 
143

 
2

 


 
145

Subtotal, before netting adjustments

 
10,354

 
2

 

 
10,356

Netting adjustments (1)

 

 

 
(9,787
)
 
(9,787
)
Total derivative assets, net

 
10,354

 
2

 
(9,787
)
 
569

Other assets:
 
 
 
 
 
 
 
 


Guarantee asset, at fair value

 

 
2,340

 

 
2,340

Non-derivative held-for-sale purchase commitments, at fair value

 
134

 

 

 
134

All other, at fair value

 

 

 

 

Total other assets

 
134

 
2,340

 

 
2,474

Total assets carried at fair value on a recurring basis

$24,623

 

$91,836

 

$22,685

 

($9,787
)
 

$129,357

Liabilities:
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value

$—

 

$21

 

$530

 

$—

 

$551

Other debt, at fair value


 
5,608

 
94

 


 
5,702

Derivative liabilities, net:

 

 

 

 

Interest-rate swaps

 
8,501

 

 

 
8,501

Option-based derivatives

 
101

 

 

 
101

Other


 
141

 
63

 

 
204

Subtotal, before netting adjustments

 
8,743

 
63

 

 
8,806

Netting adjustments (1)

 

 

 
(8,471
)
 
(8,471
)
Total derivative liabilities, net

 
8,743

 
63

 
(8,471
)
 
335

Other liabilities:
 
 
 
 
 
 
 
 
 
Non-derivative held-for-sale purchase commitments, at fair value

 
38

 

 

 
38

All other, at fair value

 

 
10

 
 
 
10

Total liabilities carried at fair value on a recurring basis

$—

 

$14,410



$697

 

($8,471
)
 

$6,636


Freddie Mac Form 10-Q
 
119



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
December 31, 2016
(Dollars in millions)
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
Freddie Mac

$—

 

$33,805

 

$9,847

 

$—

 

$43,652

Other agency

 
4,155

 
66

 

 
4,221

Non-agency RMBS

 

 
11,797

 

 
11,797

Non-agency CMBS

 
3,056

 
3,366

 

 
6,422

Obligations of states and political subdivisions

 

 
665

 

 
665

Total available-for-sale securities, at fair value

 
41,016

 
25,741

 

 
66,757

Trading, at fair value:
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
Freddie Mac

 
14,248

 
1,095

 

 
15,343

Other agency

 
8,149

 
12

 

 
8,161

All other

 
36

 
113

 

 
149

Total mortgage-related securities

 
22,433

 
1,220

 

 
23,653

Non-mortgage-related securities
19,402

 
1,735

 

 

 
21,137

Total trading securities, at fair value
19,402

 
24,168

 
1,220

 

 
44,790

Total investments in securities
19,402

 
65,184

 
26,961

 

 
111,547

Mortgage loans:
 
 
 
 
 
 
 
 
 
Held-for-sale, at fair value

 
16,255

 

 

 
16,255

Derivative assets, net:
 
 
 
 
 
 
 
 
 
Interest-rate swaps

 
6,924

 

 

 
6,924

Option-based derivatives

 
5,054

 

 

 
5,054

Other

 
287

 
3

 

 
290

Subtotal, before netting adjustments

 
12,265


3



 
12,268

Netting adjustments (1)

 

 

 
(11,521
)
 
(11,521
)
Total derivative assets, net

 
12,265


3


(11,521
)
 
747

Other assets:
 
 
 
 
 
 
 
 
 
Guarantee asset, at fair value

 

 
2,298

 

 
2,298

Non-derivative held-for-sale purchase commitments, at fair value

 
108

 

 

 
108

All other, at fair value

 

 
2

 

 
2

Total other assets

 
108

 
2,300

 

 
2,408

Total assets carried at fair value on a recurring basis

$19,402

 

$93,812



$29,264



($11,521
)
 

$130,957

Liabilities:
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value

$—

 

$144

 

$—

 

$—

 

$144

Other debt, at fair value

 
5,771

 
95

 

 
5,866

Derivative liabilities, net:
 
 
 
 
 
 
 
 
 
Interest-rate swaps

 
12,387

 

 

 
12,387

Option-based derivatives

 
106

 

 

 
106

Other

 
147

 
52

 

 
199

Subtotal, before netting adjustments

 
12,640


52



 
12,692

Netting adjustments (1)

 

 

 
(11,897
)
 
(11,897
)
Total derivative liabilities, net

 
12,640


52


(11,897
)
 
795

Other liabilities:
 
 
 
 
 
 
 
 
 
Non-derivative held-for-sale purchase commitments, at fair value

 
37

 

 

 
37

Total liabilities carried at fair value on a recurring basis

$—

 

$18,592



$147



($11,897
)
 

$6,842


(1)
Represents counterparty netting, cash collateral netting and net derivative interest receivable or payable.

Freddie Mac Form 10-Q
 
120



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


ASSETS ON OUR CONDENSED CONSOLIDATED BALANCE SHEETS MEASURED AT FAIR VALUE ON A NON-RECURRING BASIS
We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis after our initial recognition. These adjustments usually result from the application of lower-of-cost-or-fair-value accounting or measurement of impairment based on the fair value of the underlying collateral.
The table below presents assets measured on our condensed consolidated balance sheets at fair value on a non-recurring basis.
 
March 31, 2017
 
December 31, 2016
(Dollars in millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets measured at fair value on a non-recurring basis:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans (1)

$—

 

$123

 

$2,290

 

$2,413

 

$—

 

$199

 

$2,483

 

$2,682

 
(1)
Includes loans that are classified as held-for-investment and have been measured for impairment based on the fair value of the underlying collateral and held-for-sale loans where the fair value is below cost.
LEVEL 3 FAIR VALUE MEASUREMENTS
The table below presents a reconciliation of all assets and liabilities measured on our condensed consolidated balance sheets at fair value on a recurring basis using significant unobservable inputs (Level 3), including transfers into and out of Level 3 assets and liabilities. The table also presents gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recognized in our condensed consolidated statements of comprehensive income for Level 3 assets and liabilities. When assets and liabilities are transferred between levels, we recognize the transfer as of the beginning of the period.

Freddie Mac Form 10-Q
 
121



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
1Q 2017
 
 
 
Realized and unrealized gains (losses)

 

 

 

 

 

 

 

 
 
Balance,
January 1,
2017
 
Included in
earnings
 
Included in
other
comprehensive
income

Total

Purchases

Issues

Sales

Settlements,
net

Transfers
into
Level 3
(1)

Transfers
out of
Level 3
(1)

Balance,
March 31,
2017

Unrealized
gains (losses)
still held
 
(In millions)
Assets

 

 



















Investments in securities:

 

 



















Available-for-sale, at fair value:

 

 



















Mortgage-related securities:

 

 



 















Freddie Mac

$9,847

 

($2
)
 

$21

 

$19

 

$647

 

$—

 

($699
)
 

($316
)
 

$17

 

($3,096
)
 

$6,419

 

($6
)
Other agency
66

 

 

 

 

 

 

 
(4
)
 

 

 
62

 

Non-agency RMBS
11,797

 
277

 
(98
)
 
179

 

 

 
(2,217
)
 
(489
)
 

 

 
9,270

 
69

Non-agency CMBS
3,366

 
1

 
2

 
3

 

 

 

 
(9
)
 

 

 
3,360

 
1

Obligations of states and political subdivisions
665

 

 

 

 

 

 

 
(105
)
 

 

 
560

 

Total available-for-sale mortgage-related securities
25,741


276


(75
)
 
201

 
647

 

 
(2,916
)

(923
)

17


(3,096
)

19,671


64

Trading, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Freddie Mac
1,095

 
(47
)
 

 
(47
)
 
103

 

 
(592
)
 
(9
)
 
154

 
(152
)
 
552

 
(41
)
Other agency
12

 
(1
)
 

 
(1
)
 

 

 

 

 

 

 
11

 
(1
)
All other
113

 

 

 

 

 

 

 
(4
)
 

 

 
109

 

Total trading mortgage-related securities
1,220


(48
)



(48
)

103




(592
)

(13
)

154


(152
)

672


(42
)
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset
2,299

 
(7
)
 

 
(7
)
 

 
164

 

 
(116
)
 

 

 
2,340

 
(7
)
All other, at fair value

 

 

 

 

 

 

 

 

 

 

 

Total other assets
2,299

 
(7
)
 

 
(7
)
 

 
164

 

 
(116
)
 

 

 
2,340

 
(7
)


 

 



















 
 
 
Realized and unrealized (gains) losses

 

 

 

 

 

 

 

 
 
Balance,
January 1,
2017
 
Included in
earnings
 
Included in
other
comprehensive
income

Total

Purchases

Issues

Sales

Settlements,
net

Transfers
into
Level 3
(1)

Transfers
out of
Level 3
(1)

Balance,
March 31,
2017

Unrealized
(gains)
losses
still held
 
(In millions)
Liabilities

 

 





 

 

 

 

 

 

 

Debt securities of consolidated trusts held by third parties, at fair value

$—

 

$—

 

$—

 

$—

 

$—

 

$530

 

$—

 

$—

 

$—

 

$—

 

$530

 

$—

Other debt, at fair value
95

 

 

 

 

 

 

 
(1
)
 

 

 
94

 

Net derivatives (2)
50

 
21

 

 
21

 

 
1

 

 
(11
)
 

 

 
61

 
13

Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All other, at fair value
(2
)
 
2

 

 
2

 
10

 

 

 

 

 

 
10

 
2


Freddie Mac Form 10-Q
 
122



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1Q 2016
 
 
 
Realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1,
2016
 
Included in
earnings
 
Included in
other
comprehensive
income
 
Total
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Balance,
March 31,
2016
 
Unrealized
gains (losses)
still held
 
(In millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac

$2,608

 

$14

 

$1

 

$15

 

$1,755

 

$—

 

($362
)
 

($89
)
 

$714

 

($272
)
 

$4,369

 

$—

Other agency
91

 

 

 

 

 

 

 
(6
)
 

 

 
85

 

Non-agency RMBS
20,333

 
118

 
(302
)
 
(184
)
 

 

 
(575
)
 
(806
)
 

 

 
18,768

 
74

Non-agency CMBS
3,530

 

 
88

 
88

 
17

 

 

 
(8
)
 

 

 
3,627

 

Obligations of states and political subdivisions
1,205

 

 
(2
)
 
(2
)
 

 

 

 
(191
)
 

 

 
1,012

 

Total available-for-sale mortgage-related securities
27,767

 
132

 
(215
)
 
(83
)
 
1,772

 

 
(937
)
 
(1,100
)
 
714

 
(272
)
 
27,861

 
74

Trading, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
331

 
(5
)
 

 
(5
)
 
50

 
11

 
(139
)
 
(2
)
 
8

 
(131
)
 
123

 
(2
)
Other agency
41

 
1

 

 
1

 

 

 
(13
)
 

 

 

 
29

 
(1
)
All other
2

 

 

 

 

 

 

 
(1
)
 

 

 
1

 

Total trading mortgage-related securities
374

 
(4
)
 

 
(4
)
 
50

 
11

 
(152
)
 
(3
)
 
8

 
(131
)
 
153

 
(3
)
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset
1,753

 
58

 

 
58

 
142

 
16

 

 
(75
)
 

 

 
1,894

 
58

Total other assets
1,753

 
58

 

 
58

 
142

 
16

 

 
(75
)
 

 

 
1,894

 
58

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized and unrealized (gains) losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1,
2016
 
Included in
earnings
 
Included in
other
comprehensive
income
 
Total
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Balance,
March 31,
2016
 
Unrealized
(gains) losses
still held
 
(In millions)
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net derivatives (2)

$8

 

$18

 

$—

 

$18

 

$—

 

$—

 

$—

 

($15
)
 

$—

 

$—

 

$11

 

$3

Other Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All other, at fair value
10

 
(2
)
 

 
(2
)
 

 

 

 

 

 

 
8

 
8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(1)
Transfers out of Level 3 during 1Q 2017 consisted primarily of certain mortgage-related securities due to an increased volume and level of activity in the market and availability of price quotes from dealers and third-party pricing services. Certain Freddie Mac securities are classified as Level 3 at issuance and generally are classified as Level 2 when they begin trading. Transfers into Level 3 during 1Q 2017 consisted primarily of certain mortgage-related securities due to a lack of market activity and relevant price quotes from dealers and third-party pricing services.
(2)
Amounts are prior to counterparty netting, cash collateral netting, net trade/settle receivable or payable and net derivative interest receivable or payable.

Freddie Mac Form 10-Q
 
123



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


The table below provides valuation techniques, the range, and the weighted average of significant unobservable inputs for assets and liabilities measured on our condensed consolidated balance sheets at fair value on a recurring basis using unobservable inputs (Level 3).
March 31, 2017
 
Level 3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs
(Dollars in millions, except for certain unobservable inputs as shown)
Type
 
Range
 
Weighted
Average
Recurring fair value measurements
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Investments in securities
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
 
 
 
 
 
 
 
 
Freddie Mac
$6,103
 
Discounted cash flows
 
OAS
 
(56) - 500 bps
 
 92 bps
 
316
 
Other
 
 
 
 
 

Total Freddie Mac
6,419
 
 
 
 
 
 
 
 
Other agency
31
 
Median of external sources
 
 
 
 
 
 
 
22
 
Single external source
 
 
 
 
 
 
 
9
 
Other
 
 
 
 
 
 
Total other agency
62
 
 
 
 
 
 
 
 
Non-agency RMBS
7,903
 
Median of external sources
 
External pricing sources
 
$69.5 - $74.7
 
$71.2
 
1,367
 
Other
 
 
 
 
 
 
Total non-agency RMBS
9,270
 
 
 
 
 
 
 
 
Non-agency CMBS
3,359
 
Risk Metrics
 
Effective duration
 
1.90 - 9.77 years
 
8.32 years
 
1
 
Other
 
 
 
 
 
 
Total non-agency CMBS
3,360
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
502
 
Median of external sources
 
External pricing sources
 
$101.2 - $101.8
 
$101.5
 
58
 
Other
 
 
 
 
 
 
Total obligations of states and political subdivisions
560
 
 
 
 
 
 
 
 
Total available-for-sale mortgage-related securities
19,671
 
 
 
 
 
 
 
 
Trading, at fair value
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
 
 
 
 
 
 
 
 
Freddie Mac
320
 
Discounted cash flows
 
OAS
 
(8,557) - 5,451 bps
 
(165) bps
 
10
 
Risk metrics
 
 
 
 
 
 
 
5
 
Single external source
 
 
 
 
 
 
 
3
 
Median of external sources
 
 
 
 
 
 
 
214
 
Other
 
 
 
 
 
 
Total Freddie Mac
552
 
 
 
 
 
 
 
 
Other agency
11
 
Discounted cash flows
 
 
 
 
 
 
All other
108
 
Risk metrics
 
Effective duration
 
0.00 - 4.19 years
 
2.55 years
 
1
 
Other
 
 
 
 
 
 
Total trading mortgage-related securities
672
 
 
 
 
 
 
 
 
Total investments in securities
$20,343
 
 
 
 
 
 
 
 
Other assets:
 
 
 
 
 
 
 
 
 
Guarantee asset, at fair value
$2,340
 
 Discounted cash flows
 
OAS
 
17 - 198 bps
 
46 bps
Liabilities
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value
530
 
Single External Source
 
External Pricing Sources
 
$99.78 - $100.12
 
$100.1
Other debt, at fair value
94
 
Other
 
 
 
 
 
 
Net derivatives
61
 
Other
 
 
 
 
 
 
Other liabilities
 
 
 
 
 
 
 
 
 
All other, at fair value
10
 
Other
 
 
 
 
 
 

Freddie Mac Form 10-Q
 
124



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 December 31, 2016
 
Level 3
Fair
Value

Predominant
Valuation
Technique(s)

Unobservable Inputs
(Dollars in millions, except for certain unobservable inputs as shown)
Type

Range

Weighted
Average
Recurring fair value measurements









Assets









Investments in securities









Available-for-sale, at fair value









Mortgage-related securities









Freddie Mac
$7,619
 
Discounted cash flows
 
OAS
 
(146) - 500 bps
 
 91 bps

 
129
 
Median of external sources
 
External pricing sources
 
$100.8 - $103.3
 

$101.8

 
66
 
Single external source
 
 
 
 
 
 
 
60
 
Risk Metrics
 
 
 
 
 
 

1,973

Other







Total Freddie Mac
9,847









Other agency
32
 
Median of external sources
 
 
 
 
 


 
23
 
Single external source
 
 
 
 
 
 

11

Other







Total other agency
66









Non-agency RMBS
9,974

Median of external sources

External pricing sources

$74.0 - $78.8


$76.0


1,823

Other







Total non-agency RMBS
11,797









Non-agency CMBS
3,365

Risk Metrics

Effective duration

2.15 - 10.02 years

8.57 years


1

Other







Total non-agency CMBS
3,366









Obligations of states and political subdivisions
619

Median of external sources

External pricing sources

$100.9 - $101.5


$101.2


46

Other







Total obligations of states and political subdivisions
665









Total available-for-sale mortgage-related securities
25,741









Trading, at fair value
 









Mortgage-related securities










Freddie Mac
452

Risk metrics

Effective duration

(5.07) - 46.37 years

6.94 years

 
311
 
Discounted cash flows
 
OAS
 
(3,346) - 2,460 bps
 
(224) bps

 
5
 
Single external source
 
 
 
 
 
 
 
4
 
Median of external sources
 
 
 
 
 
 

323

Other







Total Freddie Mac
1,095









Other agency
12

Discounted cash flows







All other
113

Risk metrics

Effective duration

0.14 - 4.08 years

2.52 years

Total trading mortgage-related securities
1,220









Total investments in securities
$26,961









Other assets:










Guarantee asset, at fair value
$2,091

 Discounted cash flows

OAS

17 - 198 bps

50 bps


207

Other







Total guarantee asset, at fair value
2,298









All other at fair value
2
 
Other
 
 
 
 
 
 
Total other assets
2,300
 
 
 
 
 
 
 
 
Liabilities
 









Other debt, at fair value
95
 
Other
 
 
 
 
 
 
Net derivatives
49

Other








Freddie Mac Form 10-Q
 
125



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


The table below provides valuation techniques, the range, and the weighted average of significant unobservable inputs for assets and liabilities measured on our consolidated balance sheets at fair value on a non-recurring basis using unobservable inputs (Level 3). Certain of the fair values in the table below were not obtained as of the period end, but were obtained during the period.
March 31, 2017
 
Level 3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs
(Dollars in millions, except for certain unobservable inputs as shown)
Type
 
Range
 
Weighted
Average
Non-recurring fair value measurements
 
 
 
 
 
 
 
 
 
Mortgage loans

$2,290

 
 
 
 
 
 
 
 
 
 
 
Internal model
 
Historical sales
proceeds
 
$3,000 - $770,000
 
$182,916
 
 
 
Internal model
 
Housing sales index
 
42 - 368 bps
 
97 bps
 
 
 
Income capitalization (1)
 
Capitalization rates
 
7% - 10%
 
7%
 
 
 
Median of external sources
 
External pricing sources
 
$35.7-$95.0
 
$75.9
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 December 31, 2016
 
Level 3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs
(Dollars in millions, except for certain unobservable inputs as shown)
Type
 
Range
 
Weighted
Average
Non-recurring fair value measurements
 
 
 
 
 
 
 
 
 
Mortgage loans

$2,483

 
 
 
 
 
 
 
 
 
 
 
Internal model
 
Historical sales
proceeds
 
$3,000 - $770,000
 
$167,137
 
 
 
Internal model
 
Housing sales index
 
42 - 374 bps
 
96 bps
 
 
 
Income capitalization (1)
 
Capitalization rates
 
7%- 10%
 
7%
 
 
 
Median of external sources
 
External pricing sources
 
$37.0 - $94.3
 
$75.0

(1)
The predominant valuation technique used for multifamily loans. Certain loans in this population are valued using other techniques, and the capitalization rate for those is not represented in the “Range” or “Weighted Average” above.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below presents the carrying value and estimated fair value of our financial instruments. For certain types of financial instruments, such as cash and cash equivalents, restricted cash and cash equivalents, securities purchased under agreements to resell, advances to lenders and certain other debt, including securities sold under agreements to repurchase, the carrying value on our GAAP balance sheets approximates fair value, and these assets are short-term in nature and have limited market value volatility.

Freddie Mac Form 10-Q
 
126



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
March 31, 2017
 
 
 
Fair Value
(In millions)
GAAP Carrying  Amount
 
Level 1
 
Level 2
 
Level 3
 
Netting 
Adjustments (1)
 
Total
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents

$10,679

 

$10,679

 

$—

 

$—

 

$—

 

$10,679

Restricted cash and cash equivalents
1,837

 
1,837

 

 

 

 
1,837

Securities purchased under agreements to resell
51,257

 

 
51,257

 

 

 
51,257

Investments in securities:

 

 

 

 

 
 
Available-for-sale, at fair value
60,505

 

 
40,834

 
19,671

 

 
60,505

Trading, at fair value
48,122

 
24,623

 
22,827

 
672

 

 
48,122

Total investments in securities
108,627

 
24,623

 
63,661

 
20,343

 

 
108,627

Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
Loans held by consolidated trusts
1,720,208

 

 
1,588,203

 
136,161

 

 
1,724,364

Loans held by Freddie Mac
107,408

 

 
27,940

 
81,594

 

 
109,534

Total mortgage loans
1,827,616

 

 
1,616,143

 
217,755

 

 
1,833,898

Derivative assets, net
569

 


 
10,354

 
2

 
(9,787
)
 
569

Guarantee asset
2,340

 

 

 
2,756

 

 
2,756

Non-derivative purchase commitments, at fair value
134

 

 
134

 
23

 

 
157

Advances to lenders
1,085

 

 

 
1,085

 

 
1,085

Total financial assets

$2,004,144

 

$37,139

 

$1,741,549

 

$241,964

 

($9,787
)
 

$2,010,865

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
Debt, net:
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties

$1,663,811

 

$—

 

$1,662,408

 

$2,532

 

$—

 

$1,664,940

Other debt
354,633

 

 
354,526

 
4,607

 

 
359,133

Total debt, net
2,018,444

 

 
2,016,934

 
7,139

 

 
2,024,073

Derivative liabilities, net
335

 

 
8,743

 
63

 
(8,471
)
 
335

Guarantee obligation
2,229

 

 

 
3,183

 

 
3,183

Non-derivative purchase commitments, at fair value
38

 

 
38

 
33

 

 
71

Total financial liabilities

$2,021,046

 

$—

 

$2,025,715

 

$10,418

 

($8,471
)
 

$2,027,662


Freddie Mac Form 10-Q
 
127



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
December 31, 2016
 
 
 
Fair Value
(In millions)
GAAP Carrying Amount
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments (1)
 
Total
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash
equivalents

$12,369

 

$12,369

 

$—

 

$—

 

$—

 

$12,369

Restricted cash and cash equivalents
9,851

 
9,851

 

 

 

 
9,851

Securities purchased under agreements to resell
51,548

 

 
51,548

 

 

 
51,548

Investments in securities:
 
 
 
 
 
 
 
 
 
 


Available-for-sale, at fair value
66,757

 

 
41,016

 
25,741

 

 
66,757

Trading, at fair value
44,790

 
19,402

 
24,168

 
1,220

 

 
44,790

Total investments in securities
111,547

 
19,402


65,184


26,961



 
111,547

Mortgage loans:
 
 
 
 
 
 
 
 
 
 


Loans held by consolidated trusts
1,690,218

 

 
1,554,143

 
142,121

 

 
1,696,264

Loans held by Freddie Mac
112,785

 

 
31,004

 
84,227

 

 
115,231

Total mortgage loans
1,803,003

 


1,585,147


226,348



 
1,811,495

Derivative assets, net
747

 

 
12,265

 
3

 
(11,521
)
 
747

Guarantee asset
2,298

 

 

 
2,490

 

 
2,490

Non-derivative purchase commitments, at fair value
108

 

 
108

 
18

 

 
126

Advances to lenders
1,278

 

 

 
1,278

 

 
1,278

Total financial assets

$1,992,749

 

$41,622



$1,714,252



$257,098



($11,521
)
 

$2,001,451

Financial Liabilities
 
 
 
 
 
 
 
 
 
 


Debt, net:
 
 
 
 
 
 
 
 
 
 


Debt securities of consolidated trusts held by third parties

$1,648,683

 

$—

 

$1,651,313

 

$605

 

$—

 

$1,651,918

Other debt
353,321

 

 
352,837

 
4,809

 

 
357,646

Total debt, net
2,002,004

 


2,004,150


5,414



 
2,009,564

Derivative liabilities, net
795

 

 
12,640

 
52

 
(11,897
)
 
795

Guarantee obligation
2,208

 

 

 
3,399

 

 
3,399

Non-derivative purchase commitments, at fair value
37

 

 
37

 
45

 

 
82

Total financial liabilities

$2,005,044

 

$—



$2,016,827



$8,910



($11,897
)
 

$2,013,840

(1)
Represents counterparty netting, cash collateral netting and net derivative interest receivable or payable.

Freddie Mac Form 10-Q
 
128



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


FAIR VALUE OPTION
We elected the fair value option for certain multifamily held-for-sale loans, multifamily held-for-sale loan purchase commitments, and certain debt.
The table below presents the fair value and UPB related to certain items for which we have elected the fair value option.
 
 
March 31, 2017
 
December 31, 2016
(In millions)
 
Multifamily
Held-For-Sale
 Loans
 
Other Debt -
Long Term
 
Debt securities of consolidated trusts held by third parties  (1)
 
Multifamily
Held-For-Sale
 Loans
 
Other Debt -
Long Term
 
Debt securities of consolidated trusts held by third parties (1)
Fair value
 

$17,687

 

$5,702

 

$530

 

$16,255

 

$5,866

 

$—

Unpaid principal balance
 
17,514

 
5,320

 
530

 
16,231

 
5,584

 

Difference
 

$173

 

$382



$—

 

$24

 

$282



$—

(1) Does not include interest-only securities with fair value of $21 million and $144 million as of March 31, 2017 and December 31, 2016, respectively.
Changes in Fair Value under the Fair Value Option Election
We recorded gains (losses) of ($35) million and $0.5 billion for 1Q 2017 and 1Q 2016, respectively, from the change in fair value on multifamily held-for-sale loans recorded at fair value in other income (loss) in our condensed consolidated statements of comprehensive income.
We recorded gains of $224 million and $38 million for 1Q 2017 and 1Q 2016, respectively, from the change in fair value of multifamily held-for-sale loan purchase commitments recorded at fair value in other income (loss) in our condensed consolidated statements of comprehensive income.
Gains (losses) on debt securities with the fair value option elected were ($89) million and $13 million for 1Q 2017 and 1Q 2016, respectively, and were recorded in other income (loss) in our condensed consolidated statements of comprehensive income.
Changes in fair value attributable to instrument-specific credit risk were not material for 1Q 2017 and 1Q 2016 for any assets or liabilities for which we elected the fair value option.

Freddie Mac Form 10-Q
 
129



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


NOTE 14: LEGAL CONTINGENCIES
We are involved as a party in a variety of legal and regulatory proceedings arising from time to time in the ordinary course of business including, among other things, contractual disputes, personal injury claims, employment-related litigation and other legal proceedings incidental to our business. We are frequently involved, directly or indirectly, in litigation involving mortgage foreclosures. From time to time, we are also involved in proceedings arising from our termination of a seller/servicer’s eligibility to sell loans to, and/or service loans for, us. In these cases, the former seller/servicer sometimes seeks damages against us for wrongful termination under a variety of legal theories. In addition, we are sometimes sued in connection with the origination or servicing of loans. These suits typically involve claims alleging wrongful actions of seller/servicers. Our contracts with our seller/servicers generally provide for indemnification of Freddie Mac against liability arising from seller/servicers' wrongful actions with respect to loans sold to or serviced for Freddie Mac.
Litigation and claims resolution are subject to many uncertainties and are not susceptible to accurate prediction. In accordance with the accounting guidance for contingencies, we reserve for litigation claims and assessments asserted or threatened against us when a loss is probable (as defined in such guidance) and the amount of the loss can be reasonably estimated.
PUTATIVE SECURITIES CLASS ACTION LAWSUIT: OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM VS. FREDDIE MAC, SYRON, ET AL.

This putative securities class action lawsuit was filed against Freddie Mac and certain former officers on January 18, 2008 in the U.S. District Court for the Northern District of Ohio purportedly on behalf of a class of purchasers of Freddie Mac stock from August 1, 2006 through November 20, 2007. FHFA later intervened as Conservator, and the plaintiff amended its complaint on several occasions. The plaintiff alleged, among other things, that the defendants violated federal securities laws by making false and misleading statements concerning our business, risk management, and the procedures we put into place to protect the company from problems in the mortgage industry. The plaintiff seeks unspecified damages and interest, and reasonable costs and expenses, including attorney and expert fees.
In October 2013, defendants filed motions to dismiss the complaint. In October 2014, the District Court granted defendants’ motions and dismissed the case in its entirety against all defendants, with prejudice. In November 2014, plaintiff filed a notice of appeal in the U.S. Court of Appeals for the Sixth Circuit. On July 20, 2016, the Court of Appeals reversed the District Court's dismissal and remanded the case to the District Court for further proceedings.
At present, it is not possible for us to predict the probable outcome of this lawsuit or any potential effect on our business, financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible loss or range of possible loss in the event of an adverse judgment in the foregoing matter due to the following factors, among others: the inherent uncertainty of pre-trial litigation and the fact that the District Court has not yet ruled upon motions for class certification or summary judgment. In particular, absent the certification of a class, the identification of a class period, and the identification of the alleged statement or statements that survive dispositive motions, we cannot reasonably estimate any possible loss or range of possible loss.

Freddie Mac Form 10-Q
 
130



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


LITIGATION RELATED TO THE TAYLOR, BEAN & WHITAKER (TBW) BANKRUPTCY
In August 2009, TBW, which had been one of our single-family seller/servicers, filed for bankruptcy in Florida. We entered into a settlement with TBW and the TBW creditors' committee regarding the TBW bankruptcy in 2011. However, we continue to be involved in litigation with other parties relating to the TBW bankruptcy, as described below.
On or about May 14, 2010, certain underwriters at Lloyds, London and London Market Insurance Companies brought an adversary proceeding in the U.S. Bankruptcy Court for the Middle District of Florida against TBW, Freddie Mac and other parties seeking a declaration rescinding $90 million of mortgage bankers bonds providing fidelity and errors and omissions insurance coverage. Several excess insurers on the bonds thereafter filed similar claims in that action. Freddie Mac filed a proof of loss under the bonds. On April 25, 2016, the Bankruptcy Court approved a settlement agreement among the parties. On May 6, 2016, Sovereign Bank, which was not a party to the settlement agreement, appealed the order approving the settlement agreement and various other prior Bankruptcy Court orders to the U.S. District Court for the Middle District of Florida. Sovereign's appeal and related motions were denied on March 1, 2017.
LIBOR LAWSUIT

On March 14, 2013, Freddie Mac filed a lawsuit in the U.S. District Court for the Eastern District of Virginia against the British Bankers Association and the 16 U.S. Dollar LIBOR panel banks and a number of their affiliates. The case was subsequently transferred to the U.S. District Court for the Southern District of New York. The complaint alleges, among other things, that the defendants fraudulently and collusively depressed LIBOR, a benchmark interest rate indexed to trillions of dollars of financial products, and asserts claims for antitrust violations, breach of contract, tortious interference with contract and fraud. Freddie Mac filed an amended complaint in July 2013, and a second amended complaint in October 2014. In August 2015, the District Court dismissed the portion of our claim related to antitrust violations and fraud and we filed a motion for reconsideration. On March 31, 2016, the District Court granted a portion of our motion, finding personal jurisdiction over certain defendants, and denied the portion of our motion with respect to statutes of limitation for our fraud claims. Subsequently, in a related case, the U.S. Court of Appeals for the Second Circuit reversed the District Court’s dismissal of certain plaintiffs’ antitrust claims and remanded the case to the District Court for consideration of whether, among other things, the plaintiffs are “efficient enforcers” of the antitrust laws.
On December 20, 2016, after briefing and argument on the defendants' renewed motions to dismiss on personal jurisdiction and efficient enforcer grounds, the District Court denied defendants' motions in part and granted them in part. The District Court held that Freddie Mac is an efficient enforcer of the antitrust laws, but dismissed on personal jurisdiction grounds Freddie Mac's antitrust claims against all defendants except HSBC USA, N.A. Freddie Mac and other plaintiffs requested clarification of the District Court's ruling to determine whether it intended to dismiss defendants located in the United States for lack of personal jurisdiction, which request the District Court denied on February 2, 2017. The Court also effectively dismissed Freddie Mac's remaining antitrust claim against HSBC USA, N.A. Freddie Mac filed a motion for reconsideration of the District Court's opinion dismissing Freddie Mac's (and other plaintiffs') antitrust claims on personal jurisdiction grounds. On February 16, 2017, the Court denied Freddie Mac's

Freddie Mac Form 10-Q
 
131



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


motion for reconsideration. On March 14, 2017, Freddie Mac and other plaintiffs sought leave to file an appeal of the dismissal of the antitrust and fraud claims. That motion for leave is still pending.
LITIGATION CONCERNING THE PURCHASE AGREEMENT
Since July 2013, a number of lawsuits have been filed against us concerning the August 2012 amendment to the Purchase Agreement, which created the net worth sweep dividend provisions of the senior preferred stock. The plaintiffs in the lawsuits allege that they are holders of common stock and/or junior preferred stock issued by Freddie Mac and Fannie Mae. (For purposes of this discussion, junior preferred stock refers to the various series of preferred stock of Freddie Mac and Fannie Mae other than the senior preferred stock issued to Treasury.) It is possible that similar lawsuits will be filed in the future. The lawsuits against us are described below.
Litigation in the U.S. District Court for the District of Columbia
In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations . This case is the result of the consolidation of three putative class action lawsuits: Cacciapelle and Bareiss vs. Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and FHFA , filed on July 29, 2013; American European Insurance Company vs. Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and FHFA , filed on July 30, 2013; and Marneu Holdings, Co. vs. FHFA, Treasury, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation , filed on September 18, 2013. (The Marneu case was also filed as a shareholder derivative lawsuit.) A consolidated amended complaint was filed in December 2013. In the consolidated amended complaint, plaintiffs allege, among other items, that the August 2012 amendment to the Purchase Agreement breached Freddie Mac's and Fannie Mae's respective contracts with the holders of junior preferred stock and common stock and the covenant of good faith and fair dealing inherent in such contracts. Plaintiffs sought unspecified damages, equitable and injunctive relief, and costs and expenses, including attorney and expert fees.
The Cacciapelle and American European Insurance Company lawsuits were filed purportedly on behalf of a class of purchasers of junior preferred stock issued by Freddie Mac or Fannie Mae who held stock prior to, and as of, August 17, 2012. The Marneu lawsuit was filed purportedly on behalf of a class of purchasers of junior preferred stock and purchasers of common stock issued by Freddie Mac or Fannie Mae over a not-yet-defined period of time.
Arrowood Indemnity Company vs. Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, FHFA and Treasury . This case was filed on September 20, 2013. The allegations and demands made by plaintiffs in this case were generally similar to those made by the plaintiffs in the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case described above. Plaintiffs in the Arrowood lawsuit also requested that, if injunctive relief were not granted, the Arrowood plaintiffs be awarded damages against the defendants in an amount to be determined including, but not limited to, the aggregate par value of their junior preferred stock, the total of which they stated to be approximately $42 million .
American European Insurance Company, Cacciapalle and Miller vs. Treasury and FHFA . This case was filed as a shareholder derivative lawsuit, purportedly on behalf of Freddie Mac as a “nominal” defendant, on July 30, 2014. The complaint alleged that, through the August 2012 amendment to the Purchase Agreement, Treasury and FHFA breached their respective fiduciary duties to Freddie Mac, causing

Freddie Mac Form 10-Q
 
132



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


Freddie Mac to suffer damages. The plaintiffs asked that Freddie Mac be awarded compensatory damages and disgorgement, as well as attorneys’ fees, costs and other expenses.
FHFA, joined by Freddie Mac and Fannie Mae, moved to dismiss the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case and the other related cases in January 2014. Treasury filed a motion to dismiss the same day. In September 2014, the District Court granted the motions and dismissed the plaintiffs’ claims. In October 2014, plaintiffs in the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case filed a notice of appeal of the District Court’s decision. The scope of this appeal includes the American European Insurance Company shareholder derivative lawsuit. In October 2014, Arrowood filed a notice of appeal of the District Court’s decision. On February 21, 2017, the U.S. Court of Appeals for the District of Columbia Circuit affirmed in part and remanded in part the appealed decision granting the motions to dismiss. The Court of Appeals affirmed dismissal of all claims except certain claims seeking monetary damages for breach of contract and breach of implied duty of good faith and fair dealing. On March 24, 2017, institutional plaintiffs including Arrowood filed a petition for panel rehearing, and on March 31, 2017, the class plaintiffs in the American European Insurance Company litigation also filed a petition for panel rehearing with respect to certain of the claims. On April 18, 2017, the court ordered a response to both petitions from the Appellees.
Litigation in the U.S. Court of Federal Claims
Reid and Fisher vs. the United States of America and Federal Home Loan Mortgage Corporation. This case was filed as a derivative lawsuit, purportedly on behalf of Freddie Mac as a “nominal” defendant, on February 26, 2014. The complaint alleges, among other items, that the net worth sweep dividend provisions of the senior preferred stock constitute an unlawful taking of private property for public use without just compensation. The plaintiffs ask that Freddie Mac be awarded just compensation for the U.S. government’s alleged taking of its property, attorneys’ fees, costs and other expenses.
Rafter, Rattien and Pershing Square Capital Management vs. the United States of America et al. This case was filed as a shareholder derivative lawsuit, purportedly on behalf of Freddie Mac as a “nominal” defendant, on August 14, 2014. The complaint alleges that the net worth sweep dividend provisions of the senior preferred stock constitute an unlawful taking of private property for public use without just compensation, and the U.S government breached an implied-in-fact contract with Freddie Mac. In September 2015, plaintiffs filed an amended complaint, which contains one claim involving Freddie Mac. The amended complaint alleges that Freddie Mac’s charter is a contract with its common stockholders, and that, through the August 2012 amendment to the Purchase Agreement, the U.S. government breached the implied covenant of good faith and fair dealing inherent in such contract. Plaintiffs ask that they be awarded damages or other appropriate relief for the alleged breach of contract as well as attorneys’ fees, costs and expenses .
Litigation in the U.S. District Court for the District of Delaware
Jacobs and Hindes vs. FHFA and Treasury. This case was filed on August 17, 2015 as a putative class action lawsuit purportedly on behalf of a class of holders of preferred stock or common stock issued by Freddie Mac or Fannie Mae. The case was also filed as a shareholder derivative lawsuit, purportedly on behalf of Freddie Mac and Fannie Mae as “nominal” defendants. The complaint alleges, among other items, that the August 2012 amendment to the Purchase Agreement violated applicable state law and constituted a breach of contract, as well as a breach of covenants of good faith and fair dealing. Plaintiffs

Freddie Mac Form 10-Q
 
133



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


seek equitable and injunctive relief (including restitution of the monies paid by Freddie Mac and Fannie Mae to Treasury under the net worth sweep dividend), compensatory damages, attorneys’ fees, costs and expenses. The case was stayed pending resolution of FHFA's motion to the U.S. Judicial Panel on Multidistrict Litigation to transfer this case to the U.S. District Court for the District of Columbia. This motion was denied on June 2, 2016, and the stay was lifted on July 13, 2016. Plaintiffs filed an application for certification of a question to the Delaware and Virginia Supreme Courts, which was denied on September 12, 2016. On September 7, 2016, plaintiffs filed a motion to amend the complaint, which the Court granted on February 24, 2017. On April 17, 2017, FHFA, Freddie Mac, Fannie Mae, and Treasury each moved to dismiss the amended complaint.
Litigation in the U.S. District Court for the Eastern District of Virginia
Pagliara vs. Federal Home Loan Mortgage Corporation . This case was filed on March 14, 2016 in the Circuit Court of Fairfax County, Virginia, and subsequently removed to the U.S. District Court for the Eastern District of Virginia. The plaintiff sought an order to permit inspection and copying of corporate records under Virginia law, primarily for the purpose of investigating potential claims arising from the net worth sweep. The case was stayed pending resolution of FHFA's request to the U.S. Judicial Panel on Multidistrict Litigation to transfer this case to the U.S. District Court for the District of Columbia, which was denied on June 2, 2016. On June 17, 2016, Freddie Mac and FHFA filed a motion to dismiss or, in the alternative, substitute FHFA as plaintiff in the case. On August 23, 2016, the U.S. District Court for the Eastern District of Virginia dismissed the case. The plaintiff filed a notice of appeal on September 21, 2016, which was dismissed at plaintiff's request on January 30, 2017.
At present, it is not possible for us to predict the probable outcome of the lawsuits discussed above in the U.S. District Courts and the U.S. Court of Federal Claims (including the outcome of any appeal) or any potential effect on our business, financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible loss or range of possible loss in the event of an adverse judgment in the foregoing matters due to a number of factors, including the inherent uncertainty of pre-trial litigation. In addition, with respect to the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case, the plaintiffs have not demanded a stated amount of damages they believe are due, and the Court has not certified a class.



Freddie Mac Form 10-Q
 
134



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


NOTE 15: REGULATORY CAPITAL
In October 2008, FHFA announced that it was suspending capital classification of us during conservatorship in light of the Purchase Agreement. FHFA continues to monitor our capital levels, but the existing statutory and FHFA-directed regulatory capital requirements are not binding during conservatorship. We continue to provide quarterly submissions to FHFA on minimum capital.
The table below summarizes our minimum capital requirements and deficits and net worth.
(In millions)
 
March 31, 2017
 
December 31, 2016
GAAP net worth
 

$2,834

 

$5,075

Core capital (deficit) (1)(2)
 

($69,981
)
 

($67,717
)
Less: Minimum capital requirement (1)
 
18,900

 
18,933

Minimum capital surplus (deficit) (1)
 

($88,881
)
 

($86,650
)
 
(1)
Core capital and minimum capital figures are estimates and represent amounts submitted to FHFA. FHFA is the authoritative source for our regulatory capital.
(2)
Core capital excludes certain components of GAAP total equity (i.e., AOCI and the liquidation preference of the senior preferred stock) as these items do not meet the statutory definition of core capital.

Freddie Mac Form 10-Q
 
135



Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 16


NOTE 16: SELECTED FINANCIAL STATEMENT LINE ITEMS
The table below presents the significant components of other income (loss) on our condensed consolidated statements of comprehensive income.
(In millions)
1Q 2017
 
1Q 2016
Other income (loss):
 
 
 
Gains (losses) on loans

$14

 

$478

Gains (losses) on held-for-sale loan purchase commitments
224

 
38

All other
177

 
431

Total other income (loss)

$415

 

$947

The table below presents the significant components of other assets and other liabilities on our condensed consolidated balance sheets.
(In millions)
March 31, 2017
 
December 31, 2016
Other assets:
 
 
 
Real estate owned, net

$1,143

 

$1,198

Accounts and other receivables (1)
3,882

 
5,083

Guarantee asset
2,340

 
2,298

Advances to lenders
1,085

 
1,278

All other
1,246

 
2,501

Total other assets

$9,696

 

$12,358

Other liabilities:
 
 
 
Guarantee obligation
2,229

 
2,208

Payables related to securities
99

 
4,510

All other
2,470

 
2,769

Total other liabilities

$4,798

 

$9,487

 
(1)
Primarily consists of servicer receivables and other non-interest receivables.

END OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES

Freddie Mac Form 10-Q
 
136



Other Information
 
 

OTHER INFORMATION
LEGAL PROCEEDINGS
We are involved as a party to a variety of legal proceedings. For more information, see Note 14 in this report and Note 14 in our 2016 Annual Report.
In addition, a number of lawsuits have been filed against the U.S. government related to the conservatorship and the Purchase Agreement. For information on these lawsuits, see the “Legal Proceedings” section in our 2016 Annual Report. Some of these cases were filed in the U.S. District Court for the District of Columbia, the U.S. District Court for the Northern District of Illinois and the U.S. District Court for the Northern District of Iowa. On February 21, 2017, the U.S. Court of Appeals for the District of Columbia Circuit affirmed in part and remanded in part the decision by the U.S. District Court for the District of Columbia dismissing the case in that Court. The Court of Appeals affirmed dismissal of all claims except certain claims seeking monetary damages for breach of contract and breach of implied duty of good faith and fair dealing. On March 24, 2017, institutional plaintiffs filed a petition for panel rehearing with respect to certain claims. On April 18, 2017, the court ordered a response to the petition. On March 20, 2017, the U.S. District Court for the Northern District of Illinois dismissed the case in that Court, and on March 27, 2017, the U.S. District Court for the Northern District of Iowa dismissed the case in that Court. Freddie Mac is not a party to any of these lawsuits.
RISK FACTORS
This Form 10-Q should be read together with the “Risk Factors” section in our 2016 Annual Report, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties could, directly or indirectly, adversely affect our business, financial condition, results of operations, cash flows, strategies, and/or prospects.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
The securities we issue are “exempted securities” under the Securities Act of 1933, as amended. As a result, we do not file registration statements with the SEC with respect to offerings of our securities.
Following our entry into conservatorship, we suspended the operation of, and ceased making grants under, equity compensation plans. Previously, we had provided equity compensation under those plans to employees and members of the Board of Directors. Under the Purchase Agreement, we cannot issue any new options, rights to purchase, participations, or other equity interests without Treasury’s prior approval. However, grants outstanding as of the date of the Purchase Agreement remain in effect in accordance with their terms.
No stock options were exercised during 1Q 2017. See Note 9 in our 2016 Annual Report for more information.

Freddie Mac Form 10-Q
 
137



Other Information
 
 

DIVIDEND RESTRICTIONS
Our payment of dividends on Freddie Mac common stock or any series of Freddie Mac preferred stock (other than senior preferred stock) is subject to certain restrictions as described in "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Dividends and Dividend Restrictions” in our 2016 Annual Report.
INFORMATION ABOUT CERTAIN SECURITIES ISSUANCES BY FREDDIE MAC
Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a material direct financial obligation or become directly or contingently liable for a material obligation under an off-balance sheet arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03 or, if the obligation is incurred in connection with certain types of securities offerings, in prospectuses for those offerings that are filed with the SEC.
Freddie Mac’s securities offerings are exempted from SEC registration requirements. As a result, we do not file registration statements or prospectuses with the SEC with respect to our securities offerings. To comply with the disclosure requirements of Form 8-K relating to the incurrence of material financial obligations, we report these types of obligations either in offering circulars or supplements thereto that we post on our web site or in a current report on Form 8-K, in accordance with a “no-action” letter we received from the SEC staff. In cases where the information is disclosed in an offering circular posted on our web site, the document will be posted within the same time period that a prospectus for a non-exempt securities offering would be required to be filed with the SEC.
The web site address for disclosure about our debt securities, other than debt securities of consolidated trusts, is www.freddiemac.com/debt. From this address, investors can access the offering circular and related supplements for debt securities offerings under Freddie Mac’s global debt facility, including pricing supplements for individual issuances of debt securities. Similar information about our STACR debt notes, Whole Loan Securities and SCR debt notes is available at www.freddiemac.com/creditriskofferings and www.freddiemac.com/multifamily/investors/structured-credit-risk, respectively.
Disclosure about the mortgage-related securities we issue, some of which are off-balance sheet obligations (e.g., K Certificates), can be found at www.freddiemac.com/mbs. From this address, investors can access information and documents about our mortgage-related securities, including offering circulars and related offering circular supplements.

EXHIBITS
The exhibits are listed in the Exhibit Index at the end of this Form 10-Q.

Freddie Mac Form 10-Q
 
138



Controls and Procedures
 
 


CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to management of the company, including the company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we must apply judgment in implementing possible controls and procedures.
Management, including the company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2017 . As a result of management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2017 , at a reasonable level of assurance, because we have not been able to update our disclosure controls and procedures to provide reasonable assurance that information known by FHFA on an ongoing basis is communicated from FHFA to Freddie Mac’s management in a manner that allows for timely decisions regarding our required disclosure under the federal securities laws. We consider this situation to be a material weakness in our internal control over financial reporting.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING DURING 1Q 2017
We evaluated the changes in our internal control over financial reporting that occurred during 1Q 2017 and concluded that there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Freddie Mac Form 10-Q
 
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Controls and Procedures
 
 


MITIGATING ACTIONS RELATED TO THE MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As described above under “Evaluation of Disclosure Controls and Procedures,” we have one material weakness in internal control over financial reporting as of March 31, 2017 that we have not remediated.
Based on discussions with FHFA and given the structural nature of this material weakness, we believe it is likely that we will not remediate it while we are under conservatorship. However, both we and FHFA have continued to engage in activities and employ procedures and practices intended to permit accumulation and communication to management of information needed to meet our disclosure obligations under the federal securities laws. These include the following:
FHFA has established the Division of Conservatorship, which is intended to facilitate operation of the company with the oversight of the Conservator.
We provide drafts of our SEC filings to FHFA personnel for their review and comment prior to filing. We also provide drafts of external press releases, statements and speeches to FHFA personnel for their review and comment prior to release.
FHFA personnel, including senior officials, review our SEC filings prior to filing, including this Form 10-Q, and engage in discussions with us regarding issues associated with the information contained in those filings. Prior to filing this Form 10-Q, FHFA provided us with a written acknowledgment that it had reviewed the Form 10-Q, was not aware of any material misstatements or omissions in the Form 10-Q, and had no objection to our filing the Form 10-Q.
The Director of FHFA is in frequent communication with our Chief Executive Officer, typically meeting (in person or by phone) on at least a bi-weekly basis.
FHFA representatives attend meetings frequently with various groups within the company to enhance the flow of information and to provide oversight on a variety of matters, including accounting, credit and capital markets management, external communications, and legal matters.
Senior officials within FHFA’s accounting group meet frequently with our senior financial executives regarding our accounting policies, practices, and procedures.
In view of our mitigating actions related to this material weakness, we believe that our condensed consolidated financial statements for 1Q 2017 have been prepared in conformity with GAAP.


Freddie Mac Form 10-Q
 
140



Signatures
 
 


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Federal Home Loan Mortgage Corporation
 
 
By:
 
/s/ Donald H. Layton
 
 
Donald H. Layton
 
 
Chief Executive Officer
Date: May 2, 2017
 
By:
 
/s/ James G. Mackey
 
 
James G. Mackey
 
 
Executive Vice President — Chief Financial Officer
 
 
(Principal Financial Officer)
Date: May 2, 2017
 



Freddie Mac Form 10-Q
 
141



Index
 
 



FORM 10-Q INDEX

Item Number
 
Page(s)
PART I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION
 
Item 1.
Legal Proceedings
Item 1A
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
 
SIGNATURES
 
EXHIBIT INDEX


Freddie Mac Form 10-Q
 
142


Exhibit Index
 
 


EXHIBIT INDEX
 
Exhibit No.
 
Description*
4.1
 
Federal Home Loan Mortgage Corporation Global Debt Facility Agreement, dated February 16, 2017
 
 
 
12.1
  
Statement re: computation of ratio of earnings to fixed charges and computation of ratio of earnings to combined fixed charges and preferred stock dividends
 
 
 
31.1
  
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)
 
  
 
31.2
  
Certification of Executive Vice President —Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)
 
  
 
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
 
  
 
32.2
  
Certification of Executive Vice President —Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101.INS
  
XBRL Instance Document
 
  
 
101.SCH
  
XBRL Taxonomy Extension Schema
 
  
 
101.CAL
  
XBRL Taxonomy Extension Calculation
 
  
 
101.LAB
  
XBRL Taxonomy Extension Labels
 
  
 
101.PRE
  
XBRL Taxonomy Extension Presentation
 
  
 
101.DEF
  
XBRL Taxonomy Extension Definition
 
*
The SEC file numbers for the Registrant’s Registration Statement on Form 10, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K are 000-53330 and 001-34139.
 
 


Freddie Mac Form 10-Q
 
E-1


Exhibit 4.1
FEDERAL HOME LOAN MORTGAGE CORPORATION
GLOBAL DEBT FACILITY AGREEMENT
AGREEMENT , dated as of February 16, 2017, among the Federal Home Loan Mortgage Corporation (“Freddie Mac” ) and Holders of Debt Securities (each as hereinafter defined).
Whereas:
(a) Freddie Mac is a corporation duly organized and existing under and by virtue of the laws of the United States (Title III of the Emergency Home Finance Act of 1970, as amended (the “Freddie Mac Act ”)) and has full corporate power and authority to enter into this Agreement and to undertake the obligations undertaken by it herein;
(b) Pursuant to Section 306(a) of the Freddie Mac Act, Freddie Mac is authorized, upon such terms and conditions as it may prescribe, to borrow, to pay interest or other return, and to issue notes, bonds or other obligations or securities; and
(c) To provide funds to permit Freddie Mac to engage in activities consistent with its statutory purposes, Freddie Mac has established a Global Debt Facility (the “Facility” ) and authorized the issuance, from time to time, pursuant to this Agreement, of unsecured general obligations of Freddie Mac or, if so provided in the applicable Supplemental Agreement (as hereinafter defined), secured obligations of Freddie Mac (“Debt Securities” ).
NOW, THEREFORE , in consideration of the premises and mutual covenants herein contained, it is hereby agreed that the following terms and conditions of this Agreement (including, as to each issue of the Debt Securities, the applicable Supplemental Agreement) shall govern the Debt Securities and the rights and obligations of Freddie Mac and Holders with respect to the Debt Securities.
ARTICLE I
Definitions
Whenever used in this Agreement, the following words and phrases shall have the following meanings, unless the context otherwise requires.
Additional Debt Securities:     Debt Securities issued by Freddie Mac with the same terms (other than Issue Date, interest commencement date and issue price) and conditions as Debt Securities for which settlement has previously occurred so as to form a single series of Debt Securities as specified in the applicable Supplemental Agreement.
Agreement:     This Global Debt Facility Agreement dated as of February 16, 2017, as it may be amended or supplemented from time to time, and successors thereto pursuant to which Freddie Mac issues the Debt Securities.
Amortizing Debt Securities:     Debt Securities on which Freddie Mac makes periodic payments of principal during the terms of such Debt Securities as described in the related Supplemental Agreement.
Beneficial Owner:     The entity or individual that beneficially owns a Debt Security.
Bonds:     Callable or non-callable, puttable or non-puttable Debt Securities with maturities of more than ten years.
Book-Entry Rules:     The Department of Housing and Urban Development regulations (24 C.F.R. Part 81, Subpart H) applicable to the Fed Book-Entry Debt Securities, FHFA regulations, 12 C.F.R. Part 1249, and such procedures as to which Freddie Mac and the FRBNY may agree.
 
Business Day:     (i) With respect to Fed Book-Entry Debt Securities, any day other than (a) a Saturday, (b) a Sunday, (c) a day on which the FRBNY is closed, (d) as to any Holder of a Fed Book-Entry Debt Security, a day on which the Federal Reserve Bank that maintains the Holder’s account is closed, or (e) a day on which Freddie Mac’s offices are closed; and (ii) with respect to Registered Debt Securities, any day other than (a) a Saturday, (b) a Sunday, (c) a day on which banking institutions are closed in (i) the City of New York, if the Specified Payment Currency is U.S. dollars or (2) the Principal Financial Center of the country of such Specified Payment Currency, if the Specified Payment Currency is other than U.S. dollars or euro, (d) if the Specified Payment Currency is euro, a day on which the TARGET2 system is not open for settlements, or a day on which payments in euro cannot be settled in the international interbank market as determined by the Global Agent, (e) for any required payment, a day on which banking institutions are closed in the place of payment, or (f) a day on which Freddie Mac’s offices are closed.
Calculation Agent:     Freddie Mac or a bank or broker-dealer designated by Freddie Mac in the applicable Supplemental Agreement as the entity responsible for determining the interest rate on a Variable Rate Debt Security.
Calculation Date:     In each year, each of those days in the calendar year that are specified in the applicable Supplemental Agreement as being the scheduled Interest Payment Dates regardless, for this purpose, of whether any such date is in fact an Interest Payment Date and, for the avoidance of doubt, a “Calculation Date” may occur prior to the Issue Date or after the last Principal Payment Date.

1



Cap:     A maximum interest rate at which interest may accrue on a Variable Rate Debt Security during any Interest Reset Period.
Citibank  - London:     Citibank, N.A., London office, the Global Agent for Registered Debt Securities.
Citigroup  - Frankfurt:     Citigroup Global Markets Deutschland AG, the Registrar for Registered Debt Securities.
Clearstream, Luxembourg:     Clearstream Banking, société anonyme, which holds securities for its participants and facilitates the clearance and settlement of securities transactions between its participants through electronic book-entry changes in accounts of its participants.
CMS Determination Date:     The second New York Banking Day preceding the applicable Reset Date.
CMS Rate:     The rate determined by the Calculation Agent in accordance with Section 2.07(i)(N).
CMT Determination Date:     The second New York Banking Day preceding the applicable Reset Date.
CMT Rate:     The rate determined by the Calculation Agent in accordance with Section 2.07(i)(M).
Code:     The Internal Revenue Code of 1986, as amended.
Common Depositary:     The common depositary for Euroclear, Clearstream, Luxembourg and/or any other applicable clearing system, which will hold Other Registered Debt Securities on behalf of Euroclear, Clearstream, Luxembourg and/or any such other applicable clearing system.
CUSIP Number:     A unique nine-character designation assigned to each Debt Security by the CUSIP Service Bureau and used to identify each issuance of Debt Securities on the records of the Federal Reserve Banks or DTC, as applicable.
Day Rate:     The arithmetic mean for each day in a Seven-Day Period as determined by the Calculation Agent in accordance with Section 2.07(i)(P)(2).
 
Dealers:     Firms that engage in the business of dealing or trading in debt securities as agents, brokers or principals.
Debt Securities:     Unsecured subordinated or unsubordinated notes, bonds and other debt securities issued from time to time by Freddie Mac under the Facility, or if so provided in the applicable Supplemental Agreement, secured obligation issued from time to time by Freddie Mac under the Facility.
Deleverage Factor:     A Multiplier of less than one by which an applicable Index is multiplied.
Depository:     DTC or any successor.
Deposits:     Deposits commencing on the applicable Reset Date.
Designated EURIBOR Reuters Page:     The display on Reuters Page EURIBOR01, or any successor page or such other page (or any successor page) on that service or any successor service specified in the applicable Supplemental Agreement for the purpose of displaying rates for Deposits in euro.
Designated EUR-LIBOR Reuters Page:     The display on Reuters Page LIBOR01 or any successor page or such other page (or any successor page) on that service or any successor service specified in the applicable Supplemental Agreement for the purpose of displaying rates for Deposits in euro.
Designated Reuters Page:     The display on Reuters Page LIBOR01 (or where the Index Currency is Australian dollars, Swiss francs or Yen, Page LIBOR02) or any successor page or such other page (or any successor page) on that service or any successor service specified in the applicable Supplemental Agreement for the purpose of displaying British Bankers’ Association interest settlement rates for Deposits in the Index Currency.
Determination Date:     The date as of which the rate of interest applicable to an Interest Reset Period is determined.
Determination Period:     The period from, and including, one Calculation Date to, but excluding, the next Calculation Date.
DTC:     The Depository Trust Company, a limited-purpose trust company, which holds securities for DTC participants and facilitates the clearance and settlement of transactions between DTC participants through electronic book-entry changes in accounts of DTC participants.
DTC Registered Debt Securities:     Registered Debt Securities registered in the name of a nominee of DTC, which will clear and settle through the system operated by DTC.
EURIBOR:     The rate determined by the Calculation Agent in accordance with Section 2.07(i)(J).
EURIBOR Determination Date:     The second TARGET2 Business Day preceding the applicable Reset Date, unless EURIBOR is determined in accordance with Section 2.07(i)(J)(3), in which case it means the applicable Reset Date.
EUR-LIBOR:     The rate determined by the Calculation Agent in accordance with Section 2.07(i)(I).

2



EUR-LIBOR Determination Date:     The second TARGET2 Business Day preceding the applicable Reset Date.
 
Euroclear:     Euroclear System, a depositary that holds securities for its participants and clears and settles transactions between its participants through simultaneous electronic book-entry delivery against payment.
Euro Representative Amount:     A principal amount of not less than the equivalent of U.S. $1,000,000 in euro that, in the Calculation Agent’s sole judgment, is representative for a single transaction in the relevant market at the relevant time.
Euro-Zone:     The region consisting of member states of the European Union that adopt the single currency in accordance with the Treaty.
Event of Default:     As defined in Section 7.01(a).
Extendible Variable Rate Securities:     Variable Rate Debt Securities, the maturity of which may be extended at a Benefical Owner’s option effective as of certain specified dates, subject to a final maturity date, and that bear interest at variable rates subject to different Spreads for different specified periods.
Facility:     The Global Debt Facility described in the Offering Circular dated February 16, 2017under which Freddie Mac issues the Debt Securities.
Fed Book-Entry Debt Securities:     U.S. dollar denominated Debt Securities issued and maintained in book-entry form on the Fed Book-Entry System.
Fed Book-Entry System:     The book-entry system of the Federal Reserve Banks which provides book-entry holding and settlement for U.S. dollar denominated securities issued by the U.S. Government, certain of its agencies, instrumentalities, government-sponsored enterprises and international organizations of which the United States is a member.
Federal Funds Rate (Daily):     The rate determined by the Calculation Agent in accordance with Section 2.07(i)(O).
Federal Funds Rate (Daily) Determination Date:     The applicable Reset Date; provided, however, that if the Reset Date is not a Business Day, then the Federal Funds Rate (Daily) Determination Date means the Business Day immediately following the applicable Reset Date.
Federal Funds Rate (Weekly Average):     The rate determined by the Calculation Agent in accordance with Section 2.07(i)(P).
Federal Reserve:     The Board of Governors of the Federal Reserve System.
Federal Reserve Bank:     Each U.S. Federal Reserve Bank that maintains Debt Securities in book-entry form.
Federal Reserve Banks:     Collectively, the Federal Reserve Banks.
Fiscal Agency Agreement:     The Uniform Fiscal Agency Agreement between Freddie Mac and the FRBNY.
Fiscal Agent:     The FRBNY is fiscal agent for Fed Book-Entry Debt Securities.
Fixed Principal Repayment Amount:     An amount equal to 100% of the principal amount of a Debt Security, payable on the applicable Maturity Date or earlier date of redemption or repayment or a specified amount above or below such principal amount, as provided in the applicable Supplemental Agreement.
 
Fixed Rate Debt Securities:     Debt Securities that bear interest at a single fixed rate.
Fixed/Variable Rate Debt Securities:     Debt Securities that bear interest at a single fixed rate during one or more specified periods and at a variable rate determined by reference to one or more Indices, or otherwise, during one or more other periods. As to any such fixed rate period, the provisions of this Agreement relating to Fixed Rate Debt Securities shall apply, and, as to any such variable rate period, the provisions of this Agreement relating to Variable Rate Debt Securities shall apply.
Floor:     A minimum interest rate at which interest may accrue on a Debt Security during any Interest Reset Period.
Freddie Mac:     Federal Home Loan Mortgage Corporation, a stockholder-owned company chartered by Congress pursuant to the Freddie Mac Act.
Freddie Mac Act:     Title III of the Emergency Home Finance Act of 1970, as amended, 12 U.S.C. § 1451-1459.
FRBNY:     The Federal Reserve Bank of New York.
Global Agency Agreement:     The agreement between Freddie Mac, the Global Agent and the Registrar.
Global Agent:     The entity selected by Freddie Mac to act as its fiscal, transfer and paying agent for Registered Debt Securities.

3



H.15(519):     The weekly statistical release entitled “Statistical Release H.15(519), Selected Interest Rates” as published by the Federal Reserve, or any successor publication of the Federal Reserve available on its website at http://www.federalreserve.gov/releases/h15/or any successor site.
H.15 Daily Update: The daily update of H.15(519), available on the website of the Federal Reserve at http://www.federalreserve.gov/releases/h15/update/default.htm, or any successor site or publication.
Holder:     In the case of Fed Book-Entry Debt Securities, the entity whose name appears on the book-entry records of a Federal Reserve Bank as Holder; in the case of Registered Debt Securities in global registered form, the depository, or its nominee, in whose name the Registered Debt Securities are registered on behalf of a related clearing system; and, in the case of Registered Debt Securities in definitive registered form, the person or entity in whose name such Debt Securities are registered in the Register.
Holding Institutions:     Entities eligible to maintain book-entry accounts with a Federal Reserve Bank.
Index:     LIBOR, EUR-LIBOR, EURIBOR, Prime Rate, Treasury Rate, CMT Rate, CMS Rate, Federal Funds Rate (Daily), or Federal Funds (Weekly Average) or other specified interest rate, exchange rate or other index, as the case may be.
Index Currency:     The currency or currency unit specified in the applicable Supplemental Agreement with respect to which an Index will be calculated for a Variable Rate Debt Security; provided, however, that if euro are substituted for such currency or currency unit, the Index Currency will be euro and, with respect to LIBOR, the determination provisions for EUR-LIBOR will apply to such Debt Securities upon such substitution. If no such currency or currency unit is specified in the applicable Supplemental Agreement, the Index Currency will be U.S. dollars.
 
Index Maturity:     The period with respect to which an Index will be calculated for a Variable Rate Debt Security that is specified in the applicable Supplemental Agreement.
Interest Component:     Each future interest payment, or portion thereof, due on or prior to the Maturity Date, or if the Debt Security is subject to redemption or repayment prior to the Maturity Date, the first date on which such Debt Security is subject to redemption or repayment.
Interest Payment Date:     The date or dates on which interest on Debt Securities will be payable in arrears.
Interest Payment Period:     Unless otherwise provided in the applicable Supplemental Agreement, the period beginning on (and including) the Issue Date or the most recent Interest Payment Date, as the case may be, and ending on (but excluding) the earlier of the next Interest Payment Date or the Principal Payment Date.
Interest Reset Period:     The period beginning on the applicable Reset Date and ending on the calendar day preceding the next Reset Date.
Issue Date:     The date on which Freddie Mac wires an issue of Debt Securities to Holders or other date specified in the applicable Supplemental Agreement.
Leverage Factor:     A Multiplier of greater than one by which an applicable Index is multiplied.
LIBOR:     The rate determined by the Calculation Agent in accordance with Section 2.07(i)(H).
LIBOR Determination Date:     The second London Banking Day preceding the applicable Reset Date unless the Index Currency is Sterling, in which case it means the applicable Reset Date.
London Banking Day:     Any day on which commercial banks are open for business (including dealings in foreign exchange and deposits in the Index Currency) in London.
Maturity Date:     The date, one day or longer from the Issue Date, on which a Debt Security will mature unless extended, redeemed or repaid prior thereto.
Mortgage Linked Amortizing Debt Securities:     Amortizing Debt Securities on which Freddie Mac makes periodic payments of principal based on the rate of payments on referenced mortgage or mortgage-related assets, as described in the related Supplemental Agreement.
Multiplier:     A constant or variable number (which may be greater than or less than one) to be multiplied by the relevant Index for a Variable Rate Debt Security.
Non-U.S. Currency:      Specified Currency other than U.S. dollars.
Notes:     Callable or non-callable, puttable or non-puttable Debt Securities with maturities of more than one day.
New York Banking Day:     Any day other than (a) a Saturday, (b) a Sunday, (c) a day on which banking institutions in the City of New York are required or permitted by law or executive order to close, or (d) a day on which the FRBNY is closed.

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Offering Circular:     The Freddie Mac Global Debt Facility Offering Circular dated February 16, 2017 (including any related Offering Circular Supplement) and successors thereto.
OID Determination Date:     The last day of the last accrual period ending prior to the date of the meeting of Holders (or, for consents not at a meeting, prior to a date established by Freddie Mac). The accrual period will be the same as the accrual period used by Freddie Mac to determine its deduction for accrued original issue discount under section 163 (e) of the Code.
 
Other Registered Debt Securities:     Registered Debt Securities that are not DTC Registered Debt Securities, that are deposited with a Common Depositary and that will clear and settle through the systems operated by Euroclear, Clearstream, Luxembourg and/or any such other applicable clearing system other than DTC.
Pricing Supplement:     A supplement to the Offering Circular that describes the specific terms, of, and provides pricing information and other information for, an issue of Debt Securities or which otherwise amends, modifies or supplements the terms of the Offering Circular.
Prime Rate:     The rate determined by the Calculation Agent in accordance with Section 2.07(i)(K).
Prime Rate Determination Date:     The New York Banking Day preceding the applicable Reset Date.
Principal Component:     The principal payment plus any interest payments that are either due after the date specified in, or are specified as ineligible for stripping in, the applicable Supplemental Agreement.
Principal Financial Center:     (1) with respect to U.S. dollars, Sterling, Yen and Swiss francs, the City of New York, London, Tokyo and Zurich, respectively; or (2) with respect to any other Index Currency, the city specified in the related Pricing Supplement.
Principal Payment Date:     The Maturity Date, or the earlier date of redemption or repayment, if any (whether such redemption or repayment is in whole or in part).
Range Accrual Debt Securities:     Variable Rate Debt Securities on which no interest may accrue during periods when the applicable Index is outside a specified range as described in the related Supplemental Agreement.
Record Date:     As to Registered Debt Securities issued in global form, the close of business on the Business Day immediately preceding such Interest Payment Date. As to Registered Debt Securities issued in definitive form, the fifteenth calendar day preceding an Interest Payment Date. Interest on a Registered Debt Security will be paid to the Holder of such Registered Debt Security as of the close of business on the Record Date.
Reference Bonds:     U.S dollar denominated, non-callable and non-puttable Reference Securities with maturities of more than ten years.
Reference Notes:     U.S dollar denominated, non-callable and non-puttable Reference Securities with maturities of more than one year.
Reference Securities:     Scheduled U.S. dollar denominated issues of Debt Securities in large principal amounts, which may be either Reference Bonds or Reference Notes.
Register:     A register of the Holders of Registered Debt Securities maintained by the Registrar.
Registered Debt Securities:     Debt Securities issued and maintained in global registered or definitive registered form on the books and records of the Registrar.
Registrar:     The entity selected by Freddie Mac to maintain the Register.
Representative Amount:     A principal amount of not less than U.S. $1,000,000 (or, if the Index Currency is other than U.S. dollars, a principal amount not less than the equivalent in the Index Currency) that, in the Calculation Agent’s sole judgment, is representative for a single transaction in the relevant market at the relevant time.
 
Reset Date:     The date on which a new rate of interest on a Debt Security becomes effective.
Reuters:     Reuters Group PLC or any successor service.
Reuters USAUCTION10 Page:     The display designated as “USAUCTION10” (or any successor page) provided by Reuters.
Reuters USAUCTION11 Page:     The display designated as “USAUCTION11” (or any successor page) provided by Reuters.
Reuters US PRIME1 Page:     The display designated as page “USPRIME1”’ (or any successor page) provided by Reuters
Seven-Day Period:     As defined in Section 2.07(i)(P)(1).

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Specified Currency: The currency or currency unit in which a Debt Security may be denominated and in which payments of principal of and interest on a Debt Security may be made.
Specified Interest Currency:      The Specified Currency provided for the payment of interest on
Debt Securities.
Specified Payment Currency:      The term to which the Specified Interest Currency and Specified
Principal Currency are referred collectively.
Specified Principal Currency:      The Specified Currency provided for the payment of principal on
Debt Securities.
Spread:     A constant or variable percentage or number to be added to or subtracted from the relevant Index for a Variable Rate Debt Security.
Step Debt Securities:     Debt Securities that bear interest at different fixed rates during different specified periods.
Sterling:     British pounds sterling.
Supplemental Agreement:     An agreement which, as to the related issuance of Debt Securities, supplements the other provisions of this Agreement and identifies and establishes the particular offering of Debt Securities issued in respect thereof. A Supplemental Agreement may be documented by a supplement to this Agreement, a Pricing Supplement, a confirmation or a terms sheet. A Supplemental Agreement may, as to any particular issuance of Debt Securities, modify, amend or supplement the provisions of this Agreement in any respect whatsoever. A Supplemental Agreement shall be effective and binding as of its publication, whether or not executed by Freddie Mac.
TARGET2:     The Trans-European Automated Real-Time Gross Settlement Express Transfer payment system which utilizes a single shared platform and which was launched on November 19, 2007.
TARGET2 Business Day:     A day on which the TARGET2 system or its successor is operating.
Treasury Auction:     The most recent auction of Treasury Bills prior to a given Reset Date.
Treasury Bills:     Direct obligations of the United States.
Treasury Department:     United States Department of the Treasury.
Treasury Rate:     The rate determined by the Calculation Agent in accordance with Section 2.07(i)(L).
Treasury Rate Determination Date:     The day of the week in which the Reset Date falls on which Treasury Bills would normally be auctioned or, if no auction is held for a particular week, the first Business Day of that week. Treasury Bills are normally sold at auction on Monday of each week, unless that day is a legal holiday, in which case the auction is normally held on the following Tuesday, except that the auction may be held on the preceding Friday; provided, however, that if an auction is held on the Friday of the week preceding the Reset Date, the Treasury Rate Determination Date will be that preceding Friday; and provided, further, that if the Treasury Rate Determination Date would otherwise fall on the Reset Date, that Reset Date will be postponed to the next succeeding Business Day.
Variable Principal Repayment Amount:     The principal amount determined by reference to one or more Indices or otherwise, payable on the applicable Maturity Date or date of redemption or repayment of a Debt Security, as specified in the applicable Supplemental Agreement.
Variable Rate Debt Securities:     Debt Securities that bear interest at a variable rate, and reset periodically, determined by reference to one or more Indices or otherwise. The formula for a variable rate may include a Spread.
Yen:     Japanese yen.
Zero Coupon Debt Securities:     Debt Securities that do not bear interest and are issued at a discount to their principal amount.
ARTICLE II
Authorization; Certain Terms
Section 2.01. Authorization.
Debt Securities shall be issued by Freddie Mac in accordance with the authority vested in Freddie Mac by Section 306(a) of the Freddie Mac Act. The indebtedness represented by the Debt Securities shall be unsecured general obligations of Freddie Mac, or, if so provided in the applicable Supplemental Agreement, secured obligations of Freddie Mac. Debt Securities shall be offered from time to time by Freddie Mac in an unlimited amount and shall be known by the designation given them, and have the Maturity Dates stated, in the applicable Supplemental Agreement. Freddie Mac, in its

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discretion and at any time, may offer Additional Debt Securities having the same terms and conditions as Debt Securities previously offered. The Debt Securities may be issued as Reference Securities, which includes Reference Notes and Reference Bonds, or may be issued as any other Debt Securities denominated in U.S. dollars or other currencies, with maturities of one day or longer and may be in the form of Notes or Bonds or otherwise. Issuances may consist of new issues of Debt Securities or reopenings of an existing issue of Debt Securities.
Section 2.02. Other Debt Securities Issued Hereunder.
Freddie Mac may from time to time create and issue Debt Securities hereunder which contain terms and conditions not specified in this Agreement. Such Debt Securities shall be governed by the applicable Supplemental Agreement and, to the extent that the terms of this Agreement are not inconsistent with Freddie Mac’s intent in creating and issuing such Debt Securities, by the terms of this Agreement. Such Debt Securities shall be secured or unsecured obligations of Freddie Mac. If the Debt Securities are secured obligations of Freddie Mac, the provisions of Article V hereof shall apply to such Debt Securities.
Section 2.03. Specified Currencies and Specified Payment Currencies.
(a) Each Debt Security shall be denominated and payable in such Specified Currency as determined by Freddie Mac. Fed Book-Entry Debt Securities will be denominated and payable in U.S. dollars only.
(b) Except under the circumstances provided in Section 2.03(c)(i) and (ii) and Article VI hereof, Freddie Mac shall make payments of any interest on Debt Securities in the Specified Interest Currency and shall make payments of the principal of Debt Securities in the Specified Principal Currency. The Specified Currency for the payment of interest and principal with respect to any Debt Security shall be set forth in the applicable Supplemental Agreement.
 
Section 2.04. Minimum Denominations.
The Debt Securities shall be issued and maintained in the minimum denominations of U.S. $1,000 and additional increments of U.S. $1,000 for U.S. dollar denominated Debt Securities, unless otherwise provided in the applicable Supplemental Agreement and as may be allowed or required from time to time by the relevant regulatory authority or any laws or regulations applicable to the relevant Specified Currency. In the case of Zero Coupon Debt Securities, denominations will be expressed in terms of the principal amount payable on the Maturity Date.
Section 2.05. Maturity.
(a)  Each Debt Security shall mature on its Maturity Date, as provided in the applicable Supplemental Agreement, unless redeemed at the option of Freddie Mac or repaid at the option of the Holder prior thereto in accordance with the provisions described under Section 2.06. Debt Securities may be issued with minimum or maximum maturities or variable maturities allowed or required from time to time by the relevant regulatory or stock exchange authority or clearing systems or any laws or regulations applicable to the Specified Currency.
(b)  If so provided in the applicable Supplemental Agreement, certain Debt Securities may have provision permitting their Beneficial Owner to elect to extend the initial Maturity Date specified in such Supplemental Agreement, or any later date to which the maturity of such Debt Securities has been extended, on specified dates. However, the maturity of such Debt Securities may not be extended beyond the final Maturity Date specified in the Supplemental Agreement.
(c)  The principal amount payable on the Maturity Date of a Debt Security shall be a Fixed Principal Repayment Amount or a Variable Principal Repayment Amount, in each case as provided in the applicable Supplemental Agreement.
Section 2.06. Optional Redemption and Optional Repayment.
(a)  The Supplemental Agreement for any particular issue of Debt Securities shall provide whether such Debt Securities may be redeemed at Freddie Mac’s option or repayable at the Holder’s option, in whole or in part, prior to their Maturity Date. If so provided in the applicable Supplemental Agreement, an issue of Debt Securities shall be subject to redemption at the option of Freddie Mac, or repayable at the option of the Holders, in whole or in part, on one or more specified dates, at any time on or after a specified date, or during one or more specified periods of time. The redemption or repayment price for such Debt Securities (or such part of such Debt Securities as is redeemed or repaid) shall be an amount provided in, or determined in a manner provided in, the applicable Supplemental Agreement, together with accrued and unpaid interest to the date fixed for redemption or repayment.
(b)  Unless otherwise provided in the applicable Supplemental Agreement, notice of optional redemption shall be given to Holders of the related Debt Securities not less than 5 Business Days prior to the date of redemption in the manner provided in Section 8.07. The date that we provide such notice constitutes the first Business Day for purposes of this minimum notice


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period. Freddie Mac also announces its intent to redeem certain Debt Securities on the Freddie Mac website at http://www.freddiemac.com/debt/html/redemption_release.html.
(c)  In the case of a partial redemption of an issue of Fed Book-Entry Debt Securities by Freddie Mac, such Fed Book-Entry Debt Securities shall be redeemed pro rata. In the case of a partial redemption of an issue of Registered Debt Securities by Freddie Mac, one or more of such Registered Debt Securities shall be reduced by the Global Agent in the amount of such redemption, subject to the principal amount of such Registered Debt Securities after redemption remaining in an authorized denomination. The effect of any partial redemption of an issue of Registered Debt Securities on the Beneficial Owners of such Registered Debt Securities will depend on the procedures of the applicable clearing system and, if such Beneficial Owner is not a participant therein, on the procedures of the participant through which such Beneficial Owner owns its interest.
(d)  If so provided in the applicable Supplemental Agreement, certain Debt Securities shall be repayable, in whole or in part, by Freddie Mac at the option of the relevant Holders thereof or otherwise, on one or more specified dates, at any time on or after a specified date, or during one or more specified periods of time, upon terms and procedures provided in the applicable Supplemental Agreement. Unless otherwise provided in the applicable Supplemental Agreement, in the case of a Registered Debt Security, to exercise such option, the Holder shall deposit with the Global Agent (i) such Registered Debt Security; and (ii) a duly completed notice of optional repayment in the form obtainable from the Global Agent, in each case not more than the number of days nor less than the number of days specified in the applicable Supplemental Agreement prior to the date fixed for repayment. Unless otherwise specified in the applicable Supplemental Agreement, no such Registered Debt Security (or notice of repayment) so deposited may be withdrawn without the prior consent of Freddie Mac or the Global Agent. Unless otherwise provided in the applicable Supplemental Agreement, in the case of a Fed Book-Entry Debt Security, if the Beneficial Owner wishes to exercise such option, then the Beneficial Owner shall give notice thereof to Freddie Mac through the relevant Holding Institution as provided in the applicable Supplemental Agreement.
(e)  The principal amount payable upon redemption or repayment of a Debt Security shall be a Fixed Principal Repayment Amount or a Variable Principal Repayment Amount, in each case as provided in the applicable Supplemental Agreement.
Section 2.07. Payment Terms of the Debt Securities.
(a)  Debt Securities shall bear interest at one or more fixed rates or variable rates or may not bear interest. If so provided in the applicable Supplemental Agreement, Debt Securities may be separated by a Holder into one or more Interest Components and Principal Components. The Offering Circular or the applicable Supplemental Agreement for such Debt Securities shall specify the procedure for stripping such Debt Securities into such Interest and Principal Components.
(b)  The applicable Supplemental Agreement shall specify the frequency with which interest, if any, is payable on the related Debt Securities. Interest on Debt Securities shall be payable in arrears on the Interest Payment Dates specified in the applicable Supplemental Agreement and on each Principal Payment Date.
(c)  Each issue of interest-bearing Debt Securities shall bear interest during each Interest Payment Period. No interest on the principal of any Debt Security will accrue on or after the Principal Payment Date on which such principal is repaid.
(d)  The determination by the Calculation Agent of the interest rate on, or any Index in relation to, a Variable Rate Debt Security and the determination of any payment on any Debt Security (or any interim calculation in the determination of any such interest rate, index or payment) shall, absent manifest error, be final and binding on all parties. If a principal or interest payment error occurs, Freddie Mac may correct it by adjusting payments to be made on later Interest Payment Dates or Principal Payment Dates (as appropriate) or in any other manner Freddie Mac considers appropriate. If the source of an Index changes in format, but the Calculation Agent determines that the Index source continues to disclose the information necessary to determine the related interest rate substantially as required, the Calculation Agent will amend the procedure for obtaining information from that source to reflect the changed format. All Index values used to determine principal or interest payments are subject to correction within 30 days from the applicable payment. The source of a corrected value must be the same source from which the original value was obtained. A correction might result in an adjustment on a later date to the amount paid to the Holder.
(e)  Payments on Debt Securities shall be rounded, in the case of U.S dollars, to the nearest cent or, in the case of a Specified Payment Currency other than U.S. dollars, to the nearest smallest transferable unit (with one-half cent or unit being rounded upwards).
(f)  In the event that any jurisdiction imposes any withholding or other tax on any payment made by Freddie Mac (or our agent or any other person potentially required to withhold) with respect to a Debt Security, Freddie Mac (or our agent or such other person) will deduct the amount required to be withheld from such payment, and Freddie Mac (or our agent or such other person) will not be required to pay additional interest or other amounts, or redeem or repay the Debt Securities prior to the applicable Maturity Date, as a result.

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(g)   Fixed Rate Debt Securities
Fixed Rate Debt Securities shall bear interest at a single fixed interest rate. The applicable Supplemental Agreement shall specify the fixed interest rate per annum on a Fixed Rate Debt Security. Unless otherwise specified in the applicable Supplemental Agreement, interest on a Fixed Rate Debt Security shall be computed on the basis of a 360-day year consisting of twelve 30-day months.
(h)   Step Debt Securities
Step Debt Securities shall bear interest from their Issue Date to a specified date at their initial fixed interest rate and from that date to their Maturity Date at one or more different fixed interest rates that shall be prescribed as of the Issue Date. A Step Debt Security will have one or more step periods. The applicable Supplemental Agreement shall specify the fixed interest rate per annum payable on Step Debt Securities for each related period from issuance to maturity. Unless otherwise specified in the applicable Supplemental Agreement, interest on a Step Debt Security shall be computed on the basis of a 360-day year consisting of twelve 30-day months.
(i)   Variable Rate Debt Securities
(A)  Variable Rate Debt Securities shall bear interest at a variable rate determined on the basis of a direct or an inverse relationship to one or more specified Indices or otherwise, (x) plus or minus a Spread, if any, or (y) multiplied by one or more Leverage or Deleverage Factors, if any, as specified in the applicable Supplemental Agreement. Variable Rate Debt Securities also may bear interest in any other manner described in the applicable Supplemental Agreement.
(B)  Variable Rate Debt Securities may have a Cap and/or a Floor.
(C)  The applicable Supplemental Agreement shall specify the accrual method (i.e., the day count convention) for calculating interest or any relevant accrual factor on the related Variable Rate Debt Securities. The accrual method may incorporate one or more of the following defined terms:
“Actual/360” shall mean that interest or any other relevant accrual factor shall be calculated on the basis of the actual number of days elapsed in a year of 360 days.
 
“Actual/365 (fixed)” shall mean that interest or any other relevant accrual factor shall be calculated on the basis of the actual number of days elapsed in a year of 365 days, regardless of whether accrual or payment occurs during a calendar leap year.
“Actual/Actual” shall mean, unless otherwise indicated in the applicable Supplemental Agreement, that interest or any other relevant accrual factor shall be calculated on the basis of (x) the actual number of days elapsed in the Interest Payment Period divided by 365, or (y) if any portion of the Interest Payment Period falls in a calendar leap year, (A) the actual number of days in that portion divided by 366 plus (B) the actual number of days in the remaining portion divided by 365. If so indicated in the applicable Supplemental Agreement, “Actual/Actual” shall mean interest or any other relevant accrual factor shall be calculated in accordance with the definition of “Actual/Actual” adopted by the International Securities Market Association ( “Actual/Actual (ISMA)” ), which means a calculation on the basis of the following:
(1)  where the number of days in the relevant Interest Payment Period is equal to or shorter than the Determination Period during which such Interest Payment Period ends, the number of days in such Interest Payment Period divided by the product of (A) the number of days in such Determination Period and (B) the number of Interest Payment Dates that would occur in one calendar year; or
(2)  where the Interest Payment Period is longer than the Determination Period during which the Interest Payment Period ends, the sum of (A) the number of days in such Interest Payment Period falling in the Determination Period in which the Interest Payment Period begins divided by the product of (X) the number of days in such Determination Period and (Y) the number of Interest Payment Dates that would occur in one calendar year; and (B) the number of days in such Interest Payment Period falling in the next Determination Period divided by the product of (X) the number of days in such Determination Period and (Y) the number of Interest Payment Dates that would occur in one calendar year.
(D)  The applicable Supplemental Agreement shall specify the frequency with which the rate of interest on the related Variable Rate Debt Securities shall reset. The applicable Supplemental Agreement also shall specify the Reset Date. If the interest rate will reset within an Interest Payment Period, then the interest rate in effect on the sixth Business Day preceding an Interest Payment Date will be the interest rate for the remainder of that Interest Payment Period and the first day of each Interest Payment Period also will be a Reset Date. Variable Rate Debt Securities may bear interest prior to the initial Reset Date at an initial interest rate, if any, specified in the applicable Supplemental Agreement. If so, then the first day of the first Interest Payment Period will not be a Reset Date. The rate of interest applicable to each Interest Reset Period shall be determined as provided below or in the applicable Supplemental Agreement.

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Except for a Variable Rate Debt Security as to which the rate of interest thereon is determined by reference to LIBOR, EUR-LIBOR, EURIBOR, Prime Rate, Treasury Rate, CMT Rate, CMS Rate, Federal Funds Rate (Daily), or Federal Funds Rate (Weekly Average) or as otherwise set forth in the applicable Supplemental Agreement, the Determination Date for a Variable Rate Debt Security means the second Business Day preceding the Reset Date applicable to an Interest Reset Period.
(E)  If the rate of interest on a Variable Rate Debt Security is subject to adjustment within an Interest Payment Period, accrued interest shall be calculated by multiplying the principal amount of such Variable Rate Debt Security by an accrued interest factor. Unless otherwise specified in the applicable Supplemental Agreement, this accrued interest factor shall be computed by adding the interest factor calculated for each Interest Reset Period in such Interest Payment Period and rounding the sum to nine decimal places. The interest factor for each such Interest Reset Period shall be computed by (1) multiplying the number of days in the Interest Reset Period by the interest rate (expressed as a decimal) applicable to such Interest Reset Period; and (2) dividing the product by the number of days in the year referred to in the accrual method specified in the applicable Supplemental Agreement.
(F)  For each issue of Variable Rate Debt Securities, the Calculation Agent shall also cause the interest rate for the applicable Interest Reset Period and the amount of interest accrued on the minimum denomination specified for such issue to be made available to Holders as soon as practicable after its determination but in no event later than two Business Days thereafter. Such interest amounts so made available may subsequently be amended (or appropriate alternative arrangements made by way of adjustment) without notice in the event of an extension or shortening of the Interest Reset Period.
(G)  If the applicable Supplemental Agreement specifies LIBOR as the applicable Index for determining the rate of interest for the related Variable Rate Debt Security, the following provisions shall apply (unless otherwise specified in the applicable Supplemental Agreement):
“LIBOR” shall mean, with respect to any Reset Date (in the following order of priority):
(1)  the rate (expressed as a percentage per annum) for Deposits in the Index Currency having the Index Maturity that appears on the Designated Reuters Page at 11:00 a.m. (London time) on such LIBOR Determination Date;
(2)  if such rate does not so appear pursuant to clause (1) above, the Calculation Agent shall request the principal London offices of four leading banks in the London interbank market selected by the Calculation Agent (after consultation with Freddie Mac, if Freddie Mac is not then acting as Calculation Agent) to provide such banks’ offered quotations (expressed as a percentage per annum) to prime banks in the London interbank market for Deposits in the Index Currency having the Index Maturity at 11:00 a.m. (London time) on such LIBOR Determination Date and in a Representative Amount. If at least two quotations are provided, LIBOR shall be the arithmetic mean (if necessary rounded upwards) of such quotations;
(3)  if fewer than two such quotations are provided as requested in clause (2) above, the Calculation Agent shall request four major banks in the applicable Principal Financial Center selected by the Calculation Agent (after consultation with Freddie Mac, if Freddie Mac is not then acting as Calculation Agent) to provide such banks’ offered quotations (expressed as a percentage per annum) to leading European banks for a loan in the Index Currency for a period of time corresponding to the Index Maturity, commencing on such Reset Date, at approximately 11:00 a.m. in the Principal Financial Center on such LIBOR Determination Date and in a Representative Amount. If at least two such quotations are provided, LIBOR shall be the arithmetic mean (if necessary rounded upwards) of such quotations; and
(4)  if fewer than two such quotations are provided as requested in clause (3) above, LIBOR shall be LIBOR determined with respect to the Reset Date immediately preceding such Reset Date or, in the case of the first Reset Date, shall be the rate for Deposits in the Index Currency having the Index Maturity at 11:00 a.m. (London time) on the most recent London Banking Day preceding the related LIBOR Determination Date for which such rate shall have been displayed on the Designated Reuters Page with respect to Deposits commencing on the second London Banking Day following such date (or, if the Index Currency is Sterling, commencing on such date).
(I)  If the applicable Supplemental Agreement specifies EUR-LIBOR as the applicable Index for determining the rate of interest for the related Variable Rate Debt Security, the following provisions shall apply (unless otherwise specified in the applicable Supplemental Agreement):
“EUR-LIBOR” shall mean, with respect to any Reset Date (in the following order of priority):
(1)  the rate (expressed as a percentage per annum) for Deposits in euro having the Index Maturity that appears on the Designated EUR-LIBOR Reuters Page at 11:00 a.m. (London time) on the related EUR-LIBOR Determination Date;

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(2)  if such rate does not so appear pursuant to clause (1) above, the Calculation Agent shall request the principal London offices of four leading banks in the London interbank market selected by the Calculation Agent (after consultation with Freddie Mac, if Freddie Mac is not then acting as Calculation Agent) to provide such banks’ offered quotations (expressed as a percentage per annum) to prime banks in the London interbank market for Deposits in euro having the Index Maturity at 11:00 a.m. (London time) on such EUR-LIBOR Determination Date and in a Euro Representative Amount. If at least two quotations are provided, EUR-LIBOR shall be the arithmetic mean (if necessary rounded upwards) of such quotations;
(3)  if fewer than two such quotations are provided as requested in clause (2) above, the Calculation Agent shall request four major banks in London selected by the Calculation Agent (after consultation with Freddie Mac, if Freddie Mac is not then acting as Calculation Agent) to provide such banks’ offered quotations (expressed as a percentage per annum) to leading European banks for a loan in euro for a period of time corresponding to the Index Maturity, commencing on such Reset Date, at approximately 11:00 a.m. (London time) on such EUR-LIBOR Determination Date and in a Euro Representative Amount. If at least two such quotations are provided, EUR-LIBOR shall be the arithmetic mean (if necessary rounded upwards) of such quotations; and
(4)  if fewer than two such quotations are provided as requested in clause (3) above, EUR-LIBOR shall be EUR-LIBOR determined with respect to the Reset Date immediately preceding such Reset Date or, in the case of the first Reset Date, will be the rate for Deposits in euro having the Index Maturity at 11:00 a.m. (London time) on the most recent TARGET Business Day preceding the EUR-LIBOR Determination Date for which such rate was displayed on the Designated EUR-LIBOR Reuters Page for deposits starting on the second TARGET Business Day following such date.
 
(J)  If the applicable Supplemental Agreement specifies EURIBOR as the applicable Index for determining the rate of interest for the related Variable Rate Debt Security, the following provisions shall apply (unless otherwise specified in the applicable Supplemental Statement):
“EURIBOR” shall mean, with respect to a Reset Date (in the following order of priority):
(1)  the rate (expressed as a percentage per annum) for Deposits in euro having the Index Maturity that appears on the Designated EURIBOR Reuters Page at 11:00 a.m., Brussels time, on the relevant EURIBOR Determination Date;
(2)  if such rate does not so appear pursuant to clause (1) above, then the Calculation Agent will request the principal offices of four major banks in the Euro-Zone selected by the Calculation Agent (after consultation with Freddie Mac, if Freddie Mac is not then acting as Calculation Agent) to provide such banks’ offered quotations (expressed as a percentage per annum) to prime banks in the Euro-Zone interbank market for Deposits in euro having the Index Maturity at 11:00 a.m. Brussels time on such EURIBOR Determination Date and in a Euro Representative Amount. If at least two quotations are provided, EURIBOR for that date will be the arithmetic mean (if necessary, rounded upwards) of the quotations;
(3)  if fewer than two such quotations are provided as requested in clause (2) above, EURIBOR for that date will be the arithmetic mean (if necessary, rounded upwards) of the rates quoted by major banks in the Euro-Zone, selected by the Calculation Agent (after consultation with Freddie Mac, if Freddie Mac is not then acting as Calculation Agent), at approximately 11:00 a.m., Brussels time, on the EURIBOR Determination Date for loans in euro to leading European banks for a period of time corresponding to the Index Maturity and in a Euro Representative Amount. If at least two quotations are provided, EURIBOR for that date will be the arithmetic mean (if necessary, rounded upwards) of the quotations; and
(4)  if fewer than two quotations are provided as requested in clause (3) above, EURIBOR will be EURIBOR as determined for the immediately preceding Reset Date or, in the case of the first Reset Date, the interest rate payable for the new Interest Reset Period will be the initial interest rate.
(K)  If the applicable Supplemental Agreement specifies the Prime Rate as the applicable Index for determining the rate of interest for the related Variable Rate Debt Securities, the following provisions shall apply:
The “Prime Rate” means, with respect to any Reset Date (in the following order of priority):
(1)  the rate for the Prime Rate Determination Date, as published in H.15(519) Daily Update opposite the caption “Bank prime loan”;
(2)  if the rate is not published by 5:00 p.m., New York City time, on the Reset Date pursuant to clause (1), the rate for the Prime Rate Determination Date as published in H.15(519) opposite the caption “Bank prime loan”;
(3)  if the rate is not published in either H.15(519) or the H.15 Daily Update by 5:00 p.m., New York City time, on the Reset Date, then the Prime Rate will be the arithmetic mean, determined by the Calculation Agent, of the rates (after eliminating certain rates, as described below in this clause (3)) that appear, at 11:00 a.m., New York

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City time, on the Prime Rate Determination Date, on Reuters USPRIME1 Page as the U.S. dollar prime rate or base lending rate of each bank appearing on that page; provided, that at least three rates appear. In determining the arithmetic mean:
(i)  if 20 or more rates appear, the highest five rates (or in the event of equality, five of the highest) and the lowest five rates (or in the event of equality, five of the lowest) will be eliminated,
(ii)  if fewer than 20 but 10 or more rates appear, the highest two rates (or in the event of equality, two of the highest) and the lowest two rates (or in the event of equality, two of the lowest) will be eliminated, or
(iii)  if fewer than 10 but five or more rates appear, the highest rate (or in the event of equality, one of the highest) and the lowest rate (or in the event of equality, one of the lowest) will be eliminated;
(4)  if fewer than three rates so appear on Reuters USPRIME1 Page pursuant to clause (3) above, then the Calculation Agent will request five major banks in the City of New York selected by the Calculation Agent (after consultation with Freddie Mac, if Freddie Mac is not then acting as Calculation Agent) to provide a quotation of such banks’ U.S. dollar prime rates or base lending rates on the basis of the actual number of days in the year divided by 360 as of the close of business on the Prime Rate Determination Date. If at least three quotations are provided, then the Prime Rate will be the arithmetic mean determined by the Calculation Agent of the quotations obtained (and, if five quotations are provided, eliminating the highest quotation (or in the event of equality, one of the highest) and the lowest quotation (or in the event of equality, one of the lowest));
(5)  if fewer than three quotations are so provided pursuant to clause (4) above, the Calculation Agent will request five banks or trust companies organized and doing business under the laws of the United States or any state, each having total equity capital of at least U.S. $500,000,000 and being subject to supervision or examination by federal or state authority, selected by the Calculation Agent (after consultation with Freddie Mac, if Freddie Mac is not then acting as Calculation Agent), to provide a quotation of such banks’ or trust companies’ U.S. dollar prime rates or base lending rates on the basis of the actual number of days in the year divided by 360 as of the close of business on the Prime Rate Determination Date. In making such selection of five banks or trust companies, the Calculation Agent will include each bank, if any, that provided a quotation as requested in clause (4) above and exclude each bank that failed to provide a quotation as requested in clause (4). If at least three quotations are provided, then the Prime Rate will be the arithmetic mean determined by the Calculation Agent of the quotations obtained; and
(6)  if fewer than three quotations are so provided pursuant to clause (5) above, then the Prime Rate will be the Prime Rate determined for the immediately preceding Reset Date. If the applicable Reset Date is the first Reset Date, then the Prime Rate will be the rate calculated pursuant to clause (1) or (2) for the most recent New York Banking Day preceding the Reset Date for which such rate was published in H.15(519) or H.15 Daily Update.
 
(L)  If the applicable Supplemental Agreement specifies the Treasury Rate as the applicable Index for determining the rate of interest for the related Variable Rate, the following provisions shall apply:
The “Treasury Rate” means, with respect to any Reset Date (in the following order of priority):
(1)  the rate for the Treasury Determination Date of Treasury Bills having the Index Maturity, as published in H.15 Daily Update under the caption “U.S. government securities/Treasury bills/(secondary market)”;
(2)  if the rate described in clause (1) above does not appear in H.15 Daily Update by 5:00 p.m., New York City time, on the Reset Date, then the rate for the Treasury Rate Determination Date of Treasury Bills having the Index Maturity, as published in the H.15 (519), or other recognized electronic source used for the purpose of displaying that rate under the caption “U.S. government securities/Treasury bills (secondary market)”;
(3)  if the rate described in clause (2) above is not so published by 3.00 p.m., New York City time, on the Reset Date, then the rate from Treasury Auction of Treasury Bills having the Index Maturity, as that rate appears under the caption “INVEST RATE” on the display on Reuters USAUCTION10 Page or Reuters USAUCTION11 Page;
(4)  if the rate described in clause (3) above is not published by 5:00 p.m., New York City time, on the Reset Date, then the auction average rate for Treasury Bills having the Index Maturity obtained from the applicable Treasury Auction as announced by the Treasury Department in the form of a press release under the heading “Investment Rate” by 5:00 p.m. on such Reset Date;
(5)  if the rate describe in clause (4) above is not so announced by the Treasury Department by 5:00 p.m., New York City time, on the Reset Date, then auction average rate obtained from the Treasury Auction of the applicable Treasury Bills, as otherwise announced by the Treasury Department by 5:00 p.m., New York City time, on the Reset Date as determined by the Calculation Agent;

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(6)  if such rate described in clause (5) is not so announced by the Treasury Department by 5:00 p.m., New York City time, on the Reset Date, the Calculation Agent will request five leading primary United States government securities dealers in the City of New York selected by the Calculation Agent (after consultation with Freddie Mac, if Freddie Mac is not then acting as Calculation Agent) to provide a quotation of such dealers’ secondary market bid yields, as of 3:00 p.m. on the Reset Date, for Treasury Bills with a remaining maturity closest to the Index Maturity (or, in the event that the remaining maturities are equally close, the longer remaining maturity). If at least three quotations are provided, then the Treasury Rate will be the arithmetic mean determined by the Calculation Agent of the quotations obtained; and
(7)  if fewer than three quotations are so provided pursuant to clause (6) above, then the Treasury Rate for the immediately preceding Reset Date. If the applicable Reset Date is the first Reset Date, then the auction average rate for Treasury Bills having the Index Maturity from the most recent auction of Treasury Bills prior to the Reset Date for which such rate was announced by the Treasury Department in the form of a press release under the heading “Investment Rate.”
 
The rate (including the auction average rate) for Treasury Bills and the secondary market bid yield for Treasury Bills will be obtained and expressed as a bond equivalent on the basis of a year of 365 or 366 days, as applicable (or, if not so expressed, will be converted by the Calculation Agent to such a bond equivalent yield).
(M)  If the applicable Supplemental Agreement specifies the CMT Rate as the applicable Index for determining the rate of interest for the related Variable Rate, the following provisions shall apply:
The “CMT Rate” means, with respect to any Reset Date (in the following order of priority):
(1)  for any CMT Determination Date, the daily rate for the Index Maturity that appears on page “FRBCMT” on Reuters (or any other page that replaces the FRBCMT page on that service or any successor service) under the heading “...Treasury Constant Maturities. Federal Reserve Board Release H.15...Mondays Approximately 3:45 p.m.”;
(2)  if the applicable rate described in clause (1) is not displayed on Reuters page FRBCMT at 3:45 p.m., New York City time, on the CMT Determination Date, then the CMT Rate will be the Treasury constant maturity rate for the Index Maturity applicable for the CMT Determination Date as published in H.15 (519);
(3)  if the CMT Rate is not determined pursuant to clause (1) and the applicable rate described in clause (2) does not appear in H.15 (519) at 3:45 p.m., New York City time, on the CMT Determination Date, then the CMT Rate will be the Treasury constant maturity rate, or other U.S. Treasury rate, applicable to an Index Maturity with reference to the CMT Determination Date, that:
(i)  is published by the Federal Reserve or the Treasury Department; and
(ii)  Freddie Mac has determined to be comparable to the applicable rate formerly displayed on Reuters page 7051 and published in H.15 (519);
(4)  if the CMT Rate is not determined pursuant to clause (1) or (2) and the rate described in clause (3) above does not appear at 3:45 p.m., New York City time, on the CMT Determination Date, then the CMT Rate will be the yield to maturity of the arithmetic mean of the secondary market offered rates for U.S. Treasury securities with an original maturity of approximately the Index Maturity and a remaining term to maturity of no more than one year shorter than the Index Maturity, and in a Representative Amount, as of approximately 3:45 p.m., New York City time, on the CMT Determination Date, as quoted by three primary U.S. government securities dealers in New York City that Freddie Mac selects. In selecting these offered rates, Freddie Mac will request quotations from five primary dealers and will disregard the highest quotation or, if there is equality, one of the highest and the lowest quotation or, if there is equality, one of the lowest. If two U.S. Treasury securities with an original maturity longer than the Index Maturity have remaining terms to maturity that are equally close to the Index Maturity, Freddie Mac will obtain quotations for the U.S. Treasury security with the shorter remaining term to maturity;
(5)  if the CMT Rate is not determined pursuant to clause (1), (2) or (3) and fewer than five but more than two primary dealers are quoting offered rates as described in clause (4), then the CMT Rate for the CMT Determination Date will be based on the arithmetic mean of the offered rates so obtained, and neither the highest nor the lowest of those quotations will be disregarded;
 
(6)  if the CMT Rate is not determined pursuant to clause (1), (2), (3) or (4) and two or fewer primary dealers are quoting offered rates as described in clause (5), then the CMT Rate will be the yield to maturity of the arithmetic mean of the secondary market offered rates for U.S. Treasury securities having an original maturity longer than the Index Maturity and a remaining term to maturity closest to the Index Maturity, and in a Representative Amount, as of approximately 3:45 p.m., New York City time, on the CMT Determination Date,

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as quoted by three primary U.S. government securities dealers in New York City that Freddie Mac selects. In selecting these offered rates, Freddie Mac will request quotations from five primary dealers and will disregard the highest quotation, or, if there is equality, one of the highest and the lowest quotation or, if there is equality, one of the lowest;
(7)  if the CMT Rate is not determined pursuant to clauses (1) through (6) above and fewer than five but more than two primary dealers are quoting offered rates as described in clause (6), then the CMT Rate for the CMT Determination date will be based on the arithmetic mean of the offered rates so obtained, and neither the highest nor the lowest of those quotations will be disregarded; and
(8)  if the Calculation Agent obtains fewer than three quotations of the kind described in clause (6), the CMT Rate in effect for the new Interest Reset Period will be the CMT Rate in effect for the prior Interest Rate Period, or if the applicable Reset Date is the first Reset Date, the rate of interest payable for the new Interest Reset Period will be the initial interest rate.
(N)  If the applicable Supplemental Agreement specifies the CMS Rate as the applicable Index for determining the rate of interest for the related Variable Rate, the following provisions shall apply:
The “CMS Rate” means, with respect to any Reset Date:
(1)  the most recent rate for U.S. dollar swap transactions for the applicable Index Currency and applicable Index Maturity, as specified in the applicable Supplemental Agreement for the Debt Securities, expressed as a percentage, which appears on the Reuters page “ISDAFIX1” (or such other page that may replace that page on that service or a successor service) at 11:00 a.m., New York City time, on the applicable CMS Determination Date;
(2)  if the most recent CMS Rate as described in clause (1) above was first available prior to ten calendar days before the applicable CMS Determination Date, then the CMS Rate will be determined by the Calculation Agent on the basis of the mid-market semi-annual swap rate quotations provided by the five leading swaps dealers in the New York City interbank market (which may include Dealers and their affiliates), and for this purpose, “mid-market semi-annual swap rate” means the arithmetic mean of the bid and offered rate quotations for the semi-annual fixed leg, calculated on a 30/360 day count basis, of a fixed-for-floating United States dollars denominated interest rate swap transaction with the applicable Index Currency and Index Maturity, as specified in the applicable Supplemental Agreement for the Debt Securities, commencing on the Reset Date for the relevant Interest Period, and for a relevant representative amount in the relevant market at the relevant time, with an acknowledged dealer of good credit in the swap market, where the floating leg, calculated on an Actual/360 day count basis, is equivalent to USD-LIBOR-BBA (as defined in the 2006 ISDA Definitions published by the International Swaps and Derivatives Association, Inc.) with a designated maturity of three months. The Calculation Agent will request the principal New York City office of each of the five leading swaps dealers selected by the Calculation Agent to provide a quotation of its rate. If at least five quotations are provided, the rate for that CMS Determination Date will be the arithmetic mean of the quotations, eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest);
(3)  if two, three or four (and not five) of such swaps dealers are quoting as described in clause (2) above, then the CMS Rate will be based on the arithmetic mean of the bid prices obtained and neither the highest nor lowest of such quotations will be eliminated; and
(4)  if fewer than two rate quotations are provided, then the CMS Rate for the Reset Date will be the CMS Rate in effect on the preceding Reset Date, or if the applicable Reset Date is the first Reset Date, the rate of interest payable for the new Interest Reset Period will be the initial interest rate.
(O)  If the applicable Supplemental Agreement specifies the Federal Funds Rate (Daily) as the applicable Index for determining the rate of interest for the related Variable Rate, the following provisions shall apply:
The “Federal Funds Rate (Daily)” means, with respect to any Reset Date:
(1)  the rate for the Business Day preceding the Federal Funds Rate (Daily) Determination Date for U.S. dollar federal funds, as published in the latest H.15 Daily Update opposite the caption “Federal funds (effective)”;
(2)  if the rate specified in clause (1) is not published by 5:00 p.m., New York City Time, on the Federal Funds Rate (Daily) Determination Date, the Federal Funds Rate (Daily) will be the rate for that Fed Funds Rate (Daily) Determination Date as published in the H.15 Daily Update, or other recognized electronic source used for the purpose of displaying the applicable rate, opposite the caption “Federal funds (effective)”;
(3)  if the rate specified in clause (2) is not published by 5:00 p.m., New York City time, on the Federal Funds Rate Determination Date, then the Calculation Agent will request five leading brokers (which may include the

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related Dealers or their affiliates) of federal funds transactions in the City of New York selected by the Calculation Agent (after consultation with Freddie Mac, if Freddie Mac is not then acting as Calculation Agent) each to provide a quotation of the broker’s effective rate for transactions in overnight federal funds arranged by the broker settling on the Business Day preceding the Federal Funds Rate (Daily) Determination Date. If at least two quotations are provided, then the Federal Funds Rate (Daily) will be the arithmetic mean determined by the Calculation Agent of the quotations obtained (and, if five quotations are provided, eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest));
(4)  if fewer than two quotations are so provided pursuant to clause (3) above, then the Calculation Agent will request five leading brokers (which may include the related Dealers or their affiliates) of federal funds transactions in the City of New York selected by the Calculation Agent (after consultation with Freddie Mac, if Freddie Mac is not then acting as Calculation Agent) each to provide a quotation of the broker’s rates for the last transaction in overnight federal funds arranged by the broker as of 11:00 a.m., New York City time, on the Business Day preceding the Federal Funds Rate (Daily) Determination Date. If at least two quotations are provided, then the Federal Funds Rate (Daily) will be the arithmetic mean determined by the Calculation Agent of the quotations obtained (and, if five quotations are provided, eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)); and
(5)  if fewer than two quotations are so provided pursuant to clause (4) above, then the Federal Funds Rate (Daily) as of such Federal Funds Rate (Daily) Determination Date will be the Federal Funds Rate (Daily) determined for the immediately preceding Reset Date. If the applicable Reset Date is the first Reset Date, then the rate of interest payable for the new Interest Rate Period will be the initial interest rate.
(P)  If the applicable Supplemental Agreement specifies the Federal Funds Rate (Weekly Average) as the applicable Index for determining the rate of interest for the related Variable Rate, the following provisions shall apply:
The “Federal Funds Rate (Weekly Average)” means, with respect to any Reset Date:
(1)  the most recent rate published in the latest H.15(519) available by 5:00 p.m., New York City time, on the Reset Date, opposite the caption “Federal funds (effective)” and under the caption “Week Ending” for the Friday immediately preceding the Reset Date. (As described in the footnotes to the H.15(519), the rate shown for the week ending on a Friday preceding a Reset Date actually will be the rate for the week ending on (and including) the Wednesday preceding the Reset Date (the “Seven-Day Period” ));
(2)  if a rate is not so published pursuant to clause (1) above, then the Federal Funds Rate (Weekly Average) will be the arithmetic mean determined by the Calculation Agent of the rate, determined in the manner described in subclauses (y) and (z) below (as applicable), for each day in the Seven-Day Period (each a “Day Rate” ); provided, that the Calculation Agent determines a Day Rate for each day in the Seven-Day Period;
(y)  The Day Rate for a Business Day will be the rate that is published, by 5:00 p.m., New York City time, on the Reset Date, in the H.15 Daily Update or other recognized electronic source used for the purpose of displaying the applicable rate, opposite the caption “Federal funds (effective)” for that Business Day. If a rate for that Business Day does not appear on H.15 Daily Update by 5:00 p.m., New York City time, on the Reset Date, the Calculation Agent will request five leading brokers (which may include the related Dealers or their affiliates) of federal funds transactions in the City of New York selected by the Calculation Agent (after consultation with Freddie Mac, if Freddie Mac is not then acting as Calculation Agent) each to provide a quotation of the broker’s rate for the last transaction in overnight federal funds arranged by the broker as of 11:00 a.m. on that Business Day. If at least two quotations are provided, then the Day Rate will be the arithmetic mean determined by the Calculation Agent of the quotations obtained (and, if five quotations are provided, eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)); and
(z)  The Day Rate for a day other than a Business Day will be the rate for the preceding Business Day, whether or not the Business Day falls within the relevant Seven-Day Period, determined in accordance with the provisions of subclause (y) above; and
(3)  if the Day Rate for each day in the Seven-Day Period is not so determined pursuant to either clause (1) or (2) above, then the Federal Funds Rate (Weekly Average) as of such Reset Date will be the Federal Funds Rate (Weekly Average) determined for the immediately preceding Reset Date. If the applicable Reset Date is the first Reset Date, then the rate of interest payable for the new Interest Reset Period will be the initial interest rate.

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(j)   Fixed/Variable Rate Debt Securities
Fixed/Variable Rate Debt Securities shall bear interest at a single fixed rate for one or more specified periods and at a rate determined by reference to one or more Indices, or otherwise, for one or more other specified periods. Fixed/Variable Rate Debt Securities also may bear interest at a rate that Freddie Mac may elect to convert from a fixed rate to a variable rate or from a variable rate to a fixed rate, if so provided in the applicable Supplemental Agreement.
If Freddie Mac may convert the interest rate on a Fixed/Variable Rate Debt Security from a fixed rate to a variable rate, or from a variable rate to a fixed rate, accrued interest for each Interest Payment Period may be calculated using an accrued interest factor in the manner described in Section 2.07(i)(E).
(k)   Zero Coupon Debt Securities
Zero Coupon Debt Securities shall not bear interest.
(l)   Amortizing Debt Securities
Amortizing Debt Securities are those on which Freddie Mac makes periodic payments of principal during the terms of such Debt Securities as described in the related Supplemental Agreement. Amortizing Debt Securities may bear interest at fixed or variable rates.
(m)   Debt Securities with Variable Principal Repayment Amounts
Variable Principal Repayment Amount Debt Securities are those on which the amount of principal payable is determined with reference to an Index specified in the related Supplemental Agreement.
(n)   Mortgage Linked Amortizing Debt Securities
Mortgage Linked Amortizing Debt Securities are Amortizing Debt Securities on which Freddie Mac makes periodic payments of principal based on the rate of payments on referenced mortgage or mortgage-related assets, as described in the related Supplemental Agreement. Mortgage Linked Amortizing Debt Securities may bear interest at fixed or variable rates.
(o)   Range Accrual Debt Securities
Range Accrual Debt Securities are Variable Rate Debt Securities on which no interest may accrue during periods when the applicable Index is outside a specified range as described in the related Supplemental Agreement.
(p)   Extendible Variable Rate Debt Securities
Extendible Variable Rate Debt Securities’ are Variable Rate Debt Securities, the maturity of which may be extended at a Beneficial Owner’s option effective as of specified dates, subject to a final maturity date, and that bear interest at variable rates subject to different Spreads for different specified periods, as described in the related Supplemental Agreement.
Section 2.08. Business Day Convention.
Unless otherwise specified in the applicable Supplemental Agreement, in any case in which an Interest Payment Date or Principal Payment Date is not a Business Day, payment of any interest on or the principal of the Debt Securities shall not be made on such date but shall be made on the next Business Day with the same force and effect as if made on such Interest Payment Date or Principal Payment Date, as the case may be. Unless otherwise provided in the applicable Supplemental Agreement, no interest on such payment shall accrue for the period from and after such Interest Payment Date or Principal Payment Date, as the case may be, to the actual date of such payment.
Section 2.09. Reopened Issues and Repurchases.
Freddie Mac reserves the right, in its discretion and at any time, to offer additional Debt Securities which have the same terms (other than Issue Date, interest commencement date and issue price) and conditions as Debt Securities for which settlement has previously occurred or been scheduled so as to form a single series of Debt Securities as specified in the applicable Supplemental Agreement.
Freddie Mac reserves the right, in its discretion and at any time, to purchase Debt Securities or otherwise acquire (either for cash or in exchange for securities) some or all of an issue of Debt Securities at any price or prices in the open market or otherwise. Such Debt Securities may be held, resold or canceled by Freddie Mac.
ARTICLE III
Form; Clearance and Settlement Procedures
Section 3.01. Form of Fed Book-Entry Debt Securities.
(a)   General

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Fed Book-Entry Debt Securities shall be issued and maintained only on the Fed Book-Entry System. Fed Book-Entry Debt Securities shall not be exchangeable for definitive Debt Securities. The Book-Entry Rules are applicable to Fed Book-Entry Debt Securities.
(b)   Title
Fed Book-Entry Debt Securities shall be held of record only by Holding Institutions. Such entities whose names appear on the book-entry records of a Federal Reserve Bank as the entities to whose accounts Fed Book-Entry Debt Securities have been deposited shall be the Holders of such Fed Book-Entry Debt Securities. The rights of the Beneficial Owner of a Fed Book-Entry Debt Security with respect to Freddie Mac and the Federal Reserve Banks may be exercised only through the Holder of the Fed Book-Entry Debt Security. Freddie Mac and the Federal Reserve Banks shall have no direct obligation to a Beneficial Owner of a Fed Book-Entry Debt Security that is not also the Holder of the Fed Book-Entry Debt Security. The Federal Reserve Banks shall act only upon the instructions of the Holder in recording transfers of a Debt Security maintained on the Fed Book-Entry System. Freddie Mac and the Federal Reserve Banks may treat the Holders as the absolute owners of Fed Book-Entry Debt Securities for the purpose of making payments in respect thereof and for all other purposes, whether or not such Fed Book-Entry Debt Securities shall be overdue and notwithstanding any notice to the contrary.
The Holders and each other financial intermediary holding such Fed Book-Entry Debt Securities directly or indirectly on behalf of the Beneficial Owners shall have the responsibility of remitting payments for the accounts of their customers. All payments on Fed Book-Entry Debt Securities shall be subject to any applicable law or regulation.
 
(c)   Fiscal Agent
The FRBNY shall be the Fiscal Agent for Fed Book-Entry Debt Securities.
In acting under the Fiscal Agency Agreement, the FRBNY shall act solely as Fiscal Agent of Freddie Mac and does not assume any obligation or relationship of agency or trust for or with any Holder of a Fed Book-Entry Debt Security.
Section 3.02. Form of Registered Debt Securities.
(a)   General
As specified in the applicable Supplemental Agreement, Registered Debt Securities shall be deposited with (i) a custodian for, and registered in the name of a nominee of, DTC, or (ii) a Common Depositary, and registered in the name of such Common Depositary or a nominee of such Common Depositary.
(b)   Title
The person in whose name a Registered Debt Security is registered in the Register shall be the Holder of such Registered Debt Security. Beneficial interests in a Registered Debt Security shall be represented, and transfers thereof shall be effected, only through book-entry accounts of financial institutions acting on behalf of the Beneficial Owners of such Registered Debt Security, as a direct or indirect participant in the applicable clearing system for such Registered Debt Security.
Freddie Mac, the Global Agent and the Registrar may treat the Holders as the absolute owners of Registered Debt Securities for the purpose of making payments and for all other purposes, whether or not such Registered Debt Securities shall be overdue and notwithstanding any notice to the contrary. Owners of beneficial interests in a Registered Debt Security shall not be considered by Freddie Mac, the Global Agent or the Registrar as the owner or Holder of such Registered Debt Security and, except as provided in Section 4.02(a), shall not be entitled to have Debt Securities registered in their names and shall not receive or be entitled to receive definitive Debt Securities. Any Beneficial Owner shall rely on the procedures of the applicable clearing system and, if such Beneficial Owner is not a participant therein, on the procedures of the participant through which such Beneficial Owner holds its interest, to exercise any rights of a Holder of such Registered Debt Securities.
Payments by DTC participants to Beneficial Owners of DTC Registered Debt Securities held through DTC participants shall be the responsibility of such participants. Payments with respect to Other Registered Debt Securities held through Euroclear, Clearstream, Luxembourg or any other applicable clearing system shall be credited to Euroclear participants, Clearstream, Luxembourg participants or participants of any other applicable clearing system in accordance with the relevant system’s rules and procedures.
(c)   Global Agent
In acting under the Global Agency Agreement, the Global Agent acts solely as a fiscal agent of Freddie Mac and does not assume any obligation or relationship of agency or trust for or with any Holder of a Registered Debt Security, except that any moneys held by the Global Agent for payment on a Registered Debt Security shall be held in trust for the Holder as provided in the Global Agency Agreement.
 
(d)   Registrar

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In acting under the Global Agency Agreement, the Registrar does not assume any obligation or relationship of agency or trust for, or with, any Holder of a Registered Debt Security.
Section 3.03. Clearance and Settlement Procedures.
(a)   General
Unless otherwise provided in the applicable Supplemental Agreement:
(i)  Most Debt Securities denominated and payable in U.S. dollars and distributed within the United States shall clear and settle through the Fed Book-Entry System.
(ii)  Most Debt Securities denominated and payable in U.S. dollars and distributed simultaneously within and outside of the United States, including all Reference Securities, shall clear and settle, within the United States, through the Fed Book-Entry System and, outside of the United States, through the systems operated by Euroclear, Clearstream, Luxembourg and/or any other designated clearing system.
(iii) Debt Securities denominated or payable in a Specified Currency other than U.S. dollars (and Debt Securities denominated and payable in U.S. dollars that are not cleared and settled in accordance with clause (i) and (ii) above and distributed solely within the United States will clear and settle through the system operated by DTC.
(iv) Debt Securities denominated or payable in a Specified Currency other than U.S. dollars (and Debt Securities denominated and payable in U.S. dollars that are not cleared and settled in accordance with clauses (i) and (ii) above) and distributed simultaneously within and outside of the United States shall clear and settle through the systems operated by DTC, Euroclear, Clearstream, Luxembourg and/or any other designated clearing system.
(v)  Debt Securities, irrespective of the Specified Currency in which such Debt Securities are denominated or payable, distributed solely outside of the United States shall clear and settle through the systems operated by Euroclear, Clearstream, Luxembourg and/or any other designated clearing system or, in certain cases, DTC.
(b)   Primary Distribution
(i)   General.     On initial issue, Debt Securities shall be credited through one or more of the systems specified below or any other system specified in the applicable Supplemental Agreement.
(ii)   Federal Reserve Banks.     Fed Book-Entry Debt Securities shall be issued and settled through the Fed-Book-Entry System in same-day funds and shall be held by designated Holding Institutions. After initial issue, all Fed Book-Entry Debt Securities shall continue to be held by such Holding Institutions in the Fed Book-Entry System unless arrangements are made for the transfer thereof to another Holding Institution. Fed Book-Entry Debt Securities shall not be exchangeable for definitive Debt Securities.
(iii)   DTC.     DTC participants acting on behalf of investors holding DTC Registered Debt Securities through DTC shall follow the delivery practices applicable to securities eligible for DTC’s Same-Day Funds Settlement System. DTC Registered Debt Securities shall be credited to DTC participants’ securities accounts following confirmation of receipt of payment to Freddie Mac on the relevant Issue Date.
(iv)   Euroclear and Clearstream, Luxembourg.     Investors holding Other Registered Debt Securities through Euroclear, Clearstream, Luxembourg or such other clearing system shall follow the settlement procedures applicable to conventional Eurobonds in registered form. Such Other Registered Debt Securities shall be credited to Euroclear, Clearstream, Luxembourg or such other clearing system participants’ securities accounts either on the relevant Issue Date or on the settlement day following the relevant Issue Date against payment in same-day funds (for value on the relevant Issue Date).
 
(c)   Secondary Market Transfers
(i)   Fed Book-Entry Debt Securities.     Transfers of Fed Book-Entry Debt Securities shall take place only in book-entry form on the Fed Book-Entry System. Such transfers shall occur between Holding Institutions in accordance with the rules of the Fed Book-Entry System.
(ii)   Registered Debt Securities.     Transfers of beneficial interests in Registered Debt Securities within the various systems that may be clearing and settling interests therein shall be made in accordance with the usual rules and operating procedures of the relevant system applicable to the Registered Debt Securities and the nature of the transfer.
(iii)  Freddie Mac shall not bear responsibility for the performance by any system or the performance of the system’s respective direct or indirect participants or accountholders of the respective obligations of such participants or account holders under the rules and procedures governing such system’s operations.

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ARTICLE IV
Payments, Exchange for Definitive Debt Securities
Section 4.01. Payments.
(a)   Payments on Fed Book-Entry Debt Securities
Payments of principal of and any interest on Fed Book-Entry Debt Securities shall be made in U.S. dollars (except as otherwise provided in the applicable Supplemental Agreement) on the applicable payment dates to Holders thereof as of the end of the Business Day preceding each such payment date. Payments on Fed Book-Entry Debt Securities shall be made by credit of the payment amount to the Holders’ accounts at the relevant Federal Reserve Bank. All payments to or upon the order of a Holder shall be valid and effective to discharge the liability of Freddie Mac and the Fiscal Agent in respect of the related Fed Book-Entry Debt Securities.
(b)   Payments on Registered Debt Securities
(i)  Payments in respect of Registered Debt Securities shall be made in immediately available funds to DTC, Euroclear, Clearstream, Luxembourg or any other applicable clearing system, or their respective nominees, as the case may be, as the Holders thereof. Except as provided in Section 2.03(c) and Article VII hereof , such payments shall be made in the Specified Payment Currency. All payments to or upon the order of the Holder of a Registered Debt Security shall be valid and effective to discharge the liability of Freddie Mac in respect of such Registered Debt Security. Ownership positions within each system shall be determined in accordance with the normal conventions observed by such system. Freddie Mac, the Global Agent and the Registrar shall not have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a Registered Debt Security or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.
(ii)  Interest on a Registered Debt Security shall be paid on the applicable Interest Payment Date. Such interest payment shall be made to the Holder of such Registered Debt Security as of the close of business on the related Record Date. The first payment of interest on any Registered Debt Security originally issued between a Record Date and the related Interest Payment Date shall be made on the Interest Payment Date following the next Record Date to the Holder on such next Record Date. The principal of each Registered Debt Security, together with accrued and unpaid interest thereon, shall be paid to the Holder thereof against presentation and surrender of such Registered Debt Security.
(iii)  All payments on Registered Debt Securities are subject to any applicable law or regulation. If a payment outside the United States is illegal or effectively precluded by exchange controls or other similar restrictions, payments in respect of the related Registered Debt Securities shall be made at the office of any paying agent in the United States.
Section 4.02. Exchange for Definitive Debt Securities.
In the event that Freddie Mac issues definitive Debt Securities in exchange for Registered Debt Securities issued in global form, such definitive Debt Securities shall have terms identical to the Registered Debt Securities for which they were exchanged except as described below.
(a)   Issuance of Definitive Debt Securities
Unless otherwise provided in the applicable Supplemental Agreement, beneficial interests in Registered Debt Securities issued in global form shall be subject to exchange for definitive Debt Securities only if such exchange is permitted by applicable law and (i) in the case of a DTC Registered Debt Security, DTC notifies Freddie Mac that it is no longer willing or able to discharge properly its responsibilities as depositary with respect to such DTC Registered Debt Security, or ceases to be a “clearing agency” registered under the Securities Exchange Act of 1934 (if so required), or is at any time no longer eligible to act as such, and in each case Freddie Mac is unable to locate a successor within 90 calendar days of receiving notice of such ineligibility on the part of DTC; (ii) in the case of any Other Registered Debt Security, if all of the systems through which it is cleared or settled are closed for business for a continuous period of 14 calendar days (other than by reason of holidays, statutory or otherwise) or are permanently closed for business or have announced an intention permanently to cease business and in any such situations Freddie Mac is unable to locate a single successor within 90 calendar days of such closure; or (iii) an Event of Default has occurred and continues unremedied. In such circumstances, Freddie Mac shall cause sufficient definitive Debt Securities to be executed and delivered as soon as practicable (and in any event within 45 calendar days of Freddie Mac’s receiving notice of the occurrence of such circumstances) to the Global Agent or its agent for completion, authentication and delivery to the relevant registered holders of such definitive Debt Securities. A person having an interest in a DTC Registered Debt Security or Other Registered Debt Security issued in global form shall provide Freddie Mac or the Global Agent with a written order containing instructions and such other information as Freddie Mac or the Global Agent may require to complete, execute and deliver such definitive Debt Securities in authorized denominations.
(b)   Title

19



The person in whose name a definitive Debt Security is registered in the Register shall be the “Holder” of such definitive Debt Security. Freddie Mac, the Global Agent and the Registrar may treat the Holders as the absolute owners of definitive Debt Securities for the purpose of making payments and for all other purposes, whether or not such definitive Debt Securities shall be overdue and notwithstanding any notice to the contrary.
(c)   Payments
Interest on a definitive Debt Security shall be paid on the applicable Interest Payment Date. Such interest payments shall be made by check mailed to the Holder thereof at the close of business on the Record Date preceding such Interest Payment Date at such Holder’s address appearing in the Register. The principal of each definitive Debt Security, together with accrued and unpaid interest thereon, shall be due on the Principal Payment Date (subject to the right of the Holder thereof on the related Record Date to receive interest due on an Interest Payment Date that is on or prior to such Principal Payment Date) and shall be paid against presentation and surrender of such definitive Debt Security at the offices of the Global Agent or other paying agent. Payments on the Principal Payment Date shall be made by check provided at the appropriate office of the Global Agent or other paying agent or mailed by the Global Agent to the Holder of such definitive Debt Security. U.S. dollar checks shall be drawn on a bank in the United States. Checks in a Specified Payment Currency other than U.S. dollars shall be drawn on a bank office located outside the United States.
Notwithstanding the provisions described in the preceding paragraph relating to payments by check, the Holder of an aggregate principal amount of at least $10,000,000 of an issue of Debt Securities of which definitive Debt Securities form a part (or, in the case of a definitive Debt Security denominated in a Specified Currency other than U.S. dollars, the Specified Currency equivalent of at least $10,000,000) may elect to receive payments thereon by wire transfer of immediately available funds in the Specified Payment Currency to an account in such Specified Payment Currency with a bank designated by such Holder that is acceptable to Freddie Mac; provided, that such bank has appropriate facilities therefor and accepts such transfer and such transfer is permitted by any applicable law or regulation and will not subject Freddie Mac to any liability, requirement or unacceptable charge. In order for such Holder to receive such payments, the relevant paying agent (including the Global Agent) must receive at its office from such Holder (i) in the case of payments on an Interest Payment Date, a written request therefor not later than the close of business (a) on the related Record Date in the case of a definitive Debt Security or (b) 15 days prior to such Interest Payment Date in the case of a Registered Debt Security issued in the global form; or (ii) in the case of payments on the Principal Payment Date, a written request therefor not later than the close of business on the date 15 days prior to such Principal Payment Date and the related definitive Debt Security not later than two Business Days prior to such Principal Payment Date. Such written request must be delivered to the relevant paying agent (including the Global Agent) by mail, by hand delivery or by tested or authenticated telex. Any such request shall remain in effect until the relevant paying agent receives written notice to the contrary.
All payments on definitive Debt Securities shall be subject to any applicable law or regulation. If a payment outside the United States is illegal or effectively precluded by exchange controls or similar restrictions, payments in respect of the related definitive Debt Securities may be made at the office of any paying agent in the United States.
(d)   Partial Redemption
Definitive Debt Securities subject to redemption in part by Freddie Mac shall be selected by the Global Agent by lot or in such other manner as the Global Agent deems fair and appropriate, subject to the requirement that the principal amount of each outstanding definitive Debt Security after such redemption is in an authorized denomination.
(e)   Transfer and Exchange
Definitive Debt Securities shall be presented for registration of transfer or exchange (with the form of transfer included thereon properly endorsed, or accompanied by a written instrument of transfer, with such evidence of due authorization and guaranty of signature as may be required by the Registrar, duly executed) at the office of the Registrar or any other transfer agent upon payment of any taxes and other governmental charges and other amounts, but without payment of any service charge to the Registrar or such transfer agent for such transfer or exchange. A transfer or exchange shall not be effective unless, and until, recorded in the Register.
 
A transfer or exchange of a definitive Debt Security shall be effected upon satisfying the Registrar with regard to the documents and identity of the person making the request and subject to such reasonable regulations as Freddie Mac may from time to time agree with the Registrar. Such documents may include forms prescribed by U.S. tax authorities to establish the applicability of, or the exemption from, withholding or other taxes regarding the transferee Holder. Definitive Debt Securities may be transferred or exchanged in whole or in part only in the authorized denominations of the DTC Registered Debt Securities or Other Registered Debt Securities issued in global form for which they were exchanged. In the case of a transfer of a definitive Debt Security in part, a new definitive Debt Security in respect of the balance not transferred shall be issued to the transferor. In addition, replacement of mutilated, destroyed, stolen or lost definitive Debt Securities also is subject to the conditions discussed above with respect to transfers and exchanges generally. Each new definitive Debt Security to be issued upon transfer of such a definitive Debt Security, as well as the definitive Debt Security issued in respect of the balance not

20



transferred, shall be mailed to such address as may be specified in the form or instrument of transfer at the risk of the Holder entitled thereto in accordance with the customary procedures of the Registrar.
ARTICLE V
Secured Debt Securities
If so provided in the applicable Supplemental Agreement, the indebtedness represented by certain Debt Securities shall be secured obligations of Freddie Mac. In such event, the description of the security interest and the terms of the grant of the security interest shall be set forth in the applicable Supplemental Agreement.
ARTICLE VI
Currency Conversions
Section 6.01. Currency Conversions for DTC Registered Debt Securities.

(a) In the case of DTC Registered Debt Securities whose Specified Payment Currency is other than U.S. dollars, the Currency Exchange Bank specified in the applicable Supplemental Agreement, for Holders of such DTC Registered Debt Securities, shall convert any amounts paid by Freddie Mac in such Specified Payment Currency into U.S. dollars, unless such Holders elect to receive payments in such Specified Payment Currency as hereinafter described. Freddie Mac shall have no responsibility for the conversion of the Specified Payment Currency for such DTC Registered Debt Securities into U.S. dollars.
(b) The U.S. dollar amount to be received by a Holder of a DTC Registered Debt Security in respect of which payments are to be converted from the Specified Payment Currency into U.S. dollars shall be determined by the Currency Exchange Bank in the morning of the day that would be considered the date for “spot” settlement of the Specified Payment Currency on the applicable payment date in accordance with market convention (generally two New York business days prior to such payment date) at the market rate determined by the Currency Exchange Bank to accomplish the conversion on such payment date of the aggregate amount of the Specified Payment Currency payable in respect of DTC Registered Debt Securities scheduled to receive payments converted into U.S. dollars. All currency exchange costs shall be borne by the Holders of such DTC Registered Debt Securities (and, accordingly, by the related Beneficial Owners) by deductions from such payments. In the event all or any portion of a Specified Payment Currency is not convertible into U.S. dollars, Holders of such DTC Registered Debt Securities shall receive payment in the Specified Payment Currency.

(c) A Holder of a DTC Registered Debt Security to be paid in a Specified Payment Currency other than U.S. dollars shall have the option to receive payments of the principal of and any interest on such DTC Registered Debt Security in the Specified Payment Currency by notifying DTC no later than the date 12 days prior to such Principal Payment Date or Interest Payment date, as applicable.
ARTICLE VII
Events of Default and Remedies
Section 7.01. Events of Default.
(a)  An “ Event of Default ” with respect to a specific issue of Debt Securities shall consist of (i) any failure by Freddie Mac to pay to Holders of such Debt Securities any required payment that continues unremedied for 30 days; (ii) any failure by Freddie Mac to perform in any material respect any other covenant or agreement in this Agreement, which failure continues unremedied for 60 days after the giving of notice of such failure to Freddie Mac by the Holders of not less than 25% of the outstanding principal amount (or notional principal amount) of such Debt Securities; (iii) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of Freddie Mac in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoint a receiver, liquidator, assignee, custodian, or sequestrator (or other similar official) of Freddie Mac or for all or substantially all of its property, or order the winding up or liquidation of its affairs, and such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (iv) Freddie Mac shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, or

21



sequestrator (or other similar official) of Freddie Mac or any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due.
The appointment of a conservator (or other similar official) by a regulator having jurisdiction over Freddie Mac, whether or not Freddie Mac consents to such appointment, will not constitute an Event of Default. Any payment made in U.S. dollars or in euro as provided under Section 2.03(c)(ii) shall not constitute an Event of Default.
Section 7.02. Rights Upon Event of Default.
(a)  As long as an Event of Default under this Agreement remains unremedied, Holders of not less than 50% of the outstanding principal amount (or notional principal amount) of an issue of Debt Securities to which such Event of Default relates may, by written notice to Freddie Mac, declare such Debt Securities due and payable and accelerate the maturity of such Debt Securities. Upon such acceleration, the principal amount of such Debt Securities and the interest accrued thereon shall be due and payable.
(b)  No Holder has any right under this Agreement to institute any action or proceeding at law or in equity or in bankruptcy or otherwise, or for the appointment of a receiver or trustee, or for any other remedy, unless (i) such Holder previously has given to Freddie Mac written notice of an Event of Default and of the continuance thereof; (ii) the Holders of not less than 50% of the outstanding principal amount (or notional principal amount) of an issue of Debt Securities to which such Event of Default relates have given written notice to Freddie Mac of such Event of Default; and (iii) such Event of Default continues uncured for a period of 60 days following such notice. No Holder of an issue of Debt Securities has any right in any manner whatsoever by virtue of or by availing itself of any provision of this Agreement to affect, disturb or prejudice the rights of any other such Holder, or to obtain or seek to obtain preference or priority over any other such Holder or to enforce any right under this Agreement, except in the manner provided in this Agreement and for the ratable and common benefit of all such Holders.
(c)  Prior to or after the institution of any action or proceeding relating to an issue of Debt Securities, the Holders of not less than 50% of the outstanding principal amount (or notional principal amount) of such Debt Securities may waive an Event of Default, whether or not it has resulted in a declaration of an acceleration of the maturity of such Debt Securities, and may rescind and annul any previously declared acceleration.
(d)  Whenever in this Agreement it is provided that the Holders of a specified percentage in outstanding principal amount (or notional principal amount) of an issue of Debt Securities may take any action (including the making of any demand or request, or the giving of any authorization, notice, consent or waiver), the fact that at the time of taking any such action the Holders of such specified percentage have joined therein may be evidenced by a writing, or any number of writings of similar tenor, executed by Holders in person, or by an agent or proxy appointed in writing.
 
ARTICLE VIII
Miscellaneous Provisions
Section 8.01. Limitations on Liability of Freddie Mac and Others.
Neither Freddie Mac nor any of its directors, officers, employees or agents shall be under any liability to the Holders or Beneficial Owners for any action taken, or not taken, by them in good faith under this Agreement or for errors in judgment. This provision will not protect Freddie Mac or any other related person against any liability which would otherwise be imposed by reason of willful misfeasance, bad faith or gross negligence or by reason of reckless disregard of obligations and duties under this Agreement. Freddie Mac and such related persons shall have no liability of whatever nature for special, indirect or consequential damages, lost profits or business, or any other liability or claim (other than for direct damages), even if reasonably foreseeable or Freddie Mac has been advised of the possibility of such loss, damage, liability or claim.
In performing its responsibilities under this Agreement, Freddie Mac may employ agents or independent contractors. Except upon an Event of Default (as defined herein), Freddie Mac shall not be subject to the control of Holders in any manner in the discharge of its responsibilities pursuant to this Agreement.
Freddie Mac shall not be under any obligation to appear in, prosecute or defend any legal action that is not incidental to its responsibilities under this Agreement and which in its opinion may involve it in any expense or liability. However, Freddie Mac may in its discretion undertake any such legal action which it may deem necessary or desirable in the interests of the Holders. In such event, the legal expenses and costs of such action shall be expenses and costs of Freddie Mac.
Section 8.02. Binding Effect of this Agreement.
(a)  By receiving and accepting a Debt Security, each Holder, financial intermediary and Beneficial Owner of such Debt Security unconditionally agrees, without any signature or further manifestation of assent, to be bound by the terms and conditions of this Agreement, as supplemented, modified or amended pursuant to its terms.

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(b)  This Agreement shall be binding upon and inure to the benefit of any successor to Freddie Mac.
Section 8.03. Replacement.
Any Registered Debt Security in definitive form that becomes mutilated, destroyed, stolen or lost shall be replaced by Freddie Mac at the expense of the Holder upon delivery to the Global Agent of evidence of the destruction, theft or loss thereof, and an indemnity satisfactory to Freddie Mac and the Global Agent. Upon the issuance of any substituted Registered Debt Security, Freddie Mac or the Global Agent may require the payment by the Holder of a sum sufficient to cover any taxes and expenses connected therewith.
Section 8.04. Conditions to Payment, Transfer or Exchange.
Freddie Mac, its agent or any other person potentially required to withhold with respect to payments on a Debt Security shall have the right to require a Holder of a Debt Security, as a condition to payment of principal of or interest on such Debt Security, or as a condition to transfer or exchange of such Debt Security, to present at such place as Freddie Mac, its agent or such other person shall designate a certificate in such form as Freddie Mac, its agent or such other person may from time to time prescribe, to enable Freddie Mac, its agent or such other person to determine its duties and liabilities with respect to (i) any taxes, assessments or governmental charges which Freddie Mac, any Federal Reserve Bank, the Global Agent or such other person, as the case may be, may be required to deduct or withhold from payments in respect of such Debt Security under any present or future law of the United States or jurisdiction therein or any regulation or interpretation of any taxing authority thereof; and (ii) any reporting or other requirements under such laws, regulations or interpretations. Freddie Mac, its agent or such other person shall be entitled to determine its duties and liabilities with respect to such deduction, withholding, reporting or other requirements on the basis of information contained in such certificate or, if no certificate shall be presented, on the basis of any presumption created by any such law, regulation or interpretation, and shall be entitled to act in accordance with such determination.
Section 8.05. Amendment.
(a)  Freddie Mac may modify, amend or supplement this Agreement and the terms of an issue of Debt Securities, without the consent of the Holders or Beneficial Owners, (i) to cure any ambiguity, or to correct or supplement any defective provision or to make any other provision with respect to matters or questions arising under this Agreement or the terms of any Debt Security that are not inconsistent with any other provision of this Agreement or the Debt Security; (ii) to add to the covenants of Freddie Mac for the benefit of the Holders or surrender any right or power conferred upon Freddie Mac; (iii) to evidence the succession of another entity to Freddie Mac and its assumption of the covenants of Freddie Mac; (iv) to conform the terms of an issue of Debt Securities or cure any ambiguity or discrepancy resulting from any changes in the Book-Entry Rules or any regulation or document that are applicable to book-entry securities of Freddie Mac; (v) to increase the amount of an issue of Debt Securities as contemplated under Section 2.09; or (vi) in any other manner that Freddie Mac may determine and that will not adversely affect in any material respect the interests of Holders or Beneficial Owners at the time of such modification, amendment or supplement.
(b)  In addition, either (i) with the written consent of the Holders of at least 50% of the aggregate then outstanding principal amount or notional principal amount of an issue of Debt Securities affected thereby, excluding any such Debt Securities owned by Freddie Mac; or (ii) by the adoption of a resolution at a meeting of Holders at which a quorum is present, by the Holders of at least 50% of the aggregate then outstanding principal amount or notional principal amount of an issue of Debt Securities represented at such meeting, excluding any such Debt Securities owned by Freddie Mac, Freddie Mac may from time to time and at any time modify, amend or supplement the terms of an issue of Debt Securities for the purpose of adding any provisions to or changing in any manner or eliminating any provisions of such Debt Securities or modifying in any manner the rights of the Holders; provided, however, that no such modification, amendment or supplement may, without the written consent or affirmative vote of each Holder of a Debt Security; (A) change the Maturity Date or any Interest Payment Date of such Debt Security; (B) materially modify the redemption or repayment provisions, if any, relating to the redemption or repayment price of, or any redemption or repayment date or period for, such Debt Security; (C) reduce the principal amount of, delay the principal payment of, or materially modify the rate of interest or the calculation of the rate of interest on, such Debt Security; (D) in the case of Registered Debt Securities only, change the Specified Payment Currency of such Registered Debt Security; or (E) reduce the percentage of Holders whose consent or affirmative vote is necessary to modify, amend or supplement the terms of the relevant issue of Debt Securities. A quorum at any meeting of Holders called to adopt a resolution shall be Holders entitled to vote a majority of the then aggregate outstanding principal amount or notional principal amount of an issue of such Debt Securities called to such meeting and, at any reconvened meeting adjourned for lack of a quorum, 25% of the then aggregate outstanding principal amount or notional principal amount of such issue of Debt Securities, in both cases excluding any such Debt Securities owned by Freddie Mac. It shall not be necessary for the Holders to approve the particular form of any proposed amendment, but it shall be sufficient if such consent or resolution approves the substance of such change. If any modification, amendment or supplement of the terms of an issue of Debt Securities that have been separated into Interest and Principal Components requires the consent of Holders, only the

23



Holders of the Principal Components will be entitled to give or withhold that consent. Holders of Interest Components will have no right to give or withhold such consent.
(c)  The “principal amount,” for purposes of the preceding paragraph, for a Debt Security that is a Zero Coupon Debt Security or for a Debt Security issued at an “issue price” of 80% or less of its principal amount will be equal to (i) the issue price of such Debt Security; plus (ii) the original issue discount that has accrued from the Issue Date of such Debt Security to the OID Determination Date; minus (iii) any amount considered as part of the “stated redemption price at maturity” of such Debt Security that has been paid from the Issue Date of such Debt Security to the OID Determination Date.
The “principal amount,” for purposes of the second preceding paragraph, of a Debt Security whose Specified Principal Currency is other than U.S. dollars will be the U.S. dollar equivalent, determined on the Issue Date, of the principal amount (or, in the case of the Debt Securities referred to in the preceding paragraph, the amount determined in accordance with the provisions described in such preceding paragraph) of such Debt Security. The “principal amount” of a Debt Security with principal determined by reference to an Index will be described in the applicable Supplemental Agreement. The “principal amount” of a Debt Security with principal determined by reference to an Index will be described in the applicable Supplemental Agreement.
(d)  Freddie Mac may establish a record date for the determination of Holders entitled to vote at any meeting of Holders of Debt Securities, to grant any consent in respect of Debt Securities and to notice with respect to any such meeting or consent.
(e)  Any instrument given by or on behalf of any Holder of a Debt Security in connection with any consent to any such modification, amendment or supplement shall be irrevocable once given and shall be conclusive and binding on all subsequent Holders of such Debt Security or any Debt Security issued, directly or indirectly, in exchange or substitution therefor, irrespective of whether or not notation in regard thereto is made thereon. Any modification, amendment or supplement of this Agreement or of the terms of Debt Securities shall be conclusive and binding on all Holders of Debt Securities affected thereby, whether or not they have given such consent or were present at any meeting (unless by the terms of this Agreement a written consent or an affirmative vote of such Holders is required), and whether or not notation of such modification, amendment or supplement is made upon the Debt Securities.
Section 8.06. Securities Acquired by Freddie Mac.
Freddie Mac may, from time to time, repurchase or otherwise acquire (either for cash or in exchange for newly-issued Debt Securities) all or a portion of any issue of Debt Securities. Any Debt Securities owned by Freddie Mac shall have an equal and proportionate benefit under the provisions of this Agreement, without preference, priority or distinction as among such Debt Securities, except that in determining whether the Holders of the required percentage of the outstanding principal amount (or notional principal amount) of an issue of Debt Securities have given any required demand, authorization, notice, consent or waiver under this Agreement, any Debt Securities owned by Freddie Mac or any person directly or indirectly controlling or controlled by or under direct or indirect common control with Freddie Mac shall be disregarded and deemed not to be outstanding for the purpose of such determination.
Section 8.07. Notice.
(a)  Any notice, demand or other communication which by any provision of this Agreement is required or permitted to be given to or served upon any Holder may be given or served in writing by deposit thereof, postage prepaid, in the mail, addressed to such Holder as such Holder’s name and address may appear in the records of Freddie Mac, a Federal Reserve Bank or the Registrar, as the case may be, or, in the case of a Holder of a Fed Book-Entry Debt Security by transmission to such Holder through the communication system linking the Federal Reserve Banks, or, in the case of a Holder of a Debt Security maintained on DTC, by transmission to such Holder through the DTC communication system. Such notice, demand or other communication to or upon any Holder shall be deemed to have been sufficiently given or made, for all purposes, upon mailing or transmission.
(b)  Any notice, demand or other communication which by any provision of this Agreement is required or permitted to be given to or served upon Freddie Mac shall be given in writing addressed (until another address is published by Freddie Mac) as follows: Federal Home Loan Mortgage Corporation, 8200 Jones Branch Drive, McLean, Virginia 22102 Attention: General Counsel and Secretary. Such notice, demand or other communication to or upon Freddie Mac shall be deemed to have been sufficiently given or made only upon actual receipt of the writing by Freddie Mac.
Section 8.08. Governing Law.
THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE HOLDERS AND FREDDIE MAC WITH RESPECT TO THE DEBT SECURITIES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE UNITED STATES. INSOFAR AS THERE MAY BE NO APPLICABLE PRECEDENT, AND INSOFAR AS TO DO SO WOULD NOT FRUSTRATE THE PURPOSES OF THE FREDDIE MAC ACT OR ANY

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PROVISION OF THIS AGREEMENT OR THE TRANSACTIONS GOVERNED THEREBY, THE LAWS OF THE STATE OF NEW YORK SHALL BE DEEMED REFLECTIVE OF THE LAWS OF THE UNITED STATES.
Section 8.09. Headings.
The Article, Section and Subsection headings are for convenience only and shall not affect the construction of this Agreement.
FEDERAL HOME LOAN MORTGAGE CORPORATION



25


Exhibit 12.1
RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
 
 
 
 
Year Ended December 31,
  
1Q 2017
 
1Q 2016
 
2016
 
2015
 
2014
 
2013
 
2012
 
(Dollars in millions)
Net income (loss) before income tax (expense) benefit and cumulative effect of changes in accounting principles
$
3,321

 
$
(508
)
 
$
11,639

 
$
9,274

 
$
11,002

 
$
25,363

 
$
9,445

Add:
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest expense
13,142

 
13,388

 
50,595

 
51,916

 
54,916

 
55,779

 
66,502

Interest factor in rental expenses
1

 
1

 
3

 
2

 
5

 
4

 
4

Earnings, as adjusted
$
16,464


$
12,881


$
62,237

 
$
61,192

 
$
65,923

 
$
81,146

 
$
75,951

Fixed charges:
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest expense
$
13,142

 
$
13,388

 
$
50,595

 
$
51,916

 
$
54,916

 
$
55,779

 
$
66,502

Interest factor in rental expenses
1

 
1

 
3

 
2

 
5

 
4

 
4

Total fixed charges
$
13,143


$
13,389


$
50,598

 
$
51,918

 
$
54,921

 
$
55,783

 
$
66,506

Senior preferred stock and preferred stock dividends (1)
6,679

 
1,740

 
7,437

 
5,510

 
19,610

 
47,591

 
7,229

Total fixed charges including preferred stock dividends
$
19,822


$
15,129


$
58,035

 
$
57,428

 
$
74,531

 
$
103,374

 
$
73,735

Ratio of earnings to fixed charges (2)
1.25




1.23

 
1.18

 
1.20


1.45


1.14

Ratio of earnings to combined fixed charges and preferred stock dividends (3)




1.07

 
1.07

 




1.03

 
(1)
Senior preferred stock and preferred stock dividends represent pre-tax earnings required to cover any senior preferred stock and preferred stock dividend requirements computed using our effective tax rate, whenever there is an income tax provision, for the relevant periods.
(2)
Ratio of earnings to fixed charges is computed by dividing earnings, as adjusted by total fixed charges. For the ratio to equal 1.00, earnings, as adjusted must increase by $508 million for 1Q 2016.
(3)
Ratio of earnings to combined fixed charges and preferred stock dividends is computed by dividing earnings, as adjusted by total fixed charges including preferred stock dividends. For the ratio to equal 1.00, earnings, as adjusted must increase by $3.4 billion, $2.2 billion, $8.6 billion and $22.2 billion for 1Q 2017 and 1Q 2016 and for the years ended December 31, 2014 and 2013, respectively.




Exhibit 31.1
CERTIFICATION
PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a)
I, Donald H. Layton, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 of the Federal Home Loan Mortgage Corporation;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 2, 2017

 
 
/s/ Donald H. Layton
 
 
Donald H. Layton
 
 
Chief Executive Officer




Exhibit 31.2
CERTIFICATION
PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(a)
I, James G. Mackey, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 of the Federal Home Loan Mortgage Corporation;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 2, 2017

 
 
/s/ James G. Mackey
 
 
James G. Mackey
 
 
Executive Vice President — Chief Financial Officer




Exhibit 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 of the Federal Home Loan Mortgage Corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Donald H. Layton, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 2, 2017
 
 
 
/s/ Donald H. Layton
 
 
Donald H. Layton
 
 
Chief Executive Officer




Exhibit 32.2
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 of the Federal Home Loan Mortgage Corporation (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James G. Mackey, Executive Vice President – Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
 
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 2, 2017
 
 
 
/s/ James G. Mackey
 
 
James G. Mackey
 
 
Executive Vice President — Chief Financial Officer