CONSOLIDATED RESULTS OF OPERATIONS
This discussion of our consolidated results of operations should be read in conjunction with our consolidated financial statements and accompanying notes.
On January 1, 2020, we adopted CECL, which changed our methodology for accounting for credit losses on financial assets measured at amortized cost, off-balance sheet credit exposures, and investments in debt securities classified as available-for-sale. See Note 1 for additional information on our adoption of CECL. See Note 4, Note 5, Note 6, Note 7, and Note 8 for additional information on the changes in our significant accounting policies as a result of our adoption of CECL.
We have three primary sources of revenue:
n Net interest income - Primarily consists of guarantee portfolio net interest income and investments portfolio net interest income. Guarantee portfolio net interest income primarily consists of the guarantee fee income from our single-family credit guarantee portfolio. We generally consolidate our single-family securitization trusts and, in that case, we record interest income on the loans held by the trust and interest expense on the debt securities issued by the trust. The difference between these amounts represents the guarantee fee income we receive as compensation for our guarantee of the principal and interest payments of the issued debt securities. Investments portfolio net interest income primarily consists of the difference between the interest income earned on the assets in our investments portfolio and the interest expense incurred on the liabilities used to fund those assets, including amortization of cost basis adjustments.
n Guarantee fee income - Primarily consists of the guarantee fee income from our multifamily guarantee portfolio. We generally do not consolidate our multifamily securitization trusts, and therefore, we do not recognize either the interest income on the loans held by the trust or the interest expense on the debt securities issued by the trust. Rather, we separately account for our guarantee to the trust and recognize the revenue from our guarantee as guarantee fee income.
n Net investment gains - Primarily consist of revenues from our multifamily loan purchase and securitization activities, sales of single-family delinquent and re-performing loans, and realized and unrealized gains (losses) on investment securities, net of gains and losses from our debt funding and interest-rate risk management activities. Net investment gains may fluctuate significantly from period-to-period based on the volume and nature of our investment, funding, and hedging activities and changes in market conditions, such as interest rates and market spreads.
We also earn revenue from fees that we charge to our single-family and multifamily sellers and servicers and other customers, which are recognized in other income.
We have two primary expense items:
n Credit-related expenses - Primarily consist of provision for credit losses, credit enhancement expense, benefit for credit enhancement recoveries, and REO operations expense. Upon our adoption of CECL, provision for credit losses primarily represents changes in expected credit losses on our single-family mortgage loans held-for-investment. The accounting for costs and recoveries from credit enhancements varies based on the nature of the contract. Credit enhancement expense and benefit for credit enhancement recoveries includes the costs we incur to transfer credit risk and the changes in expected recoveries, respectively, from credit enhancements that are accounted for as freestanding contracts, but does not include such amounts related to certain other types of credit enhancements that are not accounted for as freestanding contracts. See MD&A - Our Business Segments - Single-Family Guarantee - Products and Activities, MD&A - Our Business Segments - Multifamily - Products and Activities, and Note 8 for additional information on our accounting for credit enhancements. REO operations expense represents expenses related to foreclosed properties.
n Operating expenses - Primarily consist of administrative expenses, the 10 basis point fee related to the Temporary Payroll Tax Cut Continuation Act of 2011, and other expenses we incur to run our business.
The table below compares our consolidated results of operations for the past three years. Certain amounts in prior periods have been reclassified to conform to the current presentation.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
22
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Consolidated Results of Operations
|
Table 1 - Summary of Consolidated Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over Year Change
|
|
|
Year Ended December 31,
|
|
2020 vs. 2019
|
|
2019 vs. 2018
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
|
$
|
%
|
|
$
|
%
|
Net interest income
|
|
$12,771
|
|
$11,848
|
|
$12,021
|
|
|
$923
|
|
8
|
%
|
|
($173)
|
|
(1)
|
%
|
Guarantee fee income
|
|
1,442
|
|
1,089
|
|
866
|
|
|
353
|
|
32
|
|
|
223
|
|
26
|
|
Investment gains (losses), net
|
|
1,813
|
|
818
|
|
1,921
|
|
|
995
|
|
122
|
|
|
(1,103)
|
|
(57)
|
|
Other income (loss)
|
|
633
|
|
323
|
|
762
|
|
|
310
|
|
96
|
|
|
(439)
|
|
(58)
|
|
Net revenues
|
|
16,659
|
|
14,078
|
|
15,570
|
|
|
2,581
|
|
18
|
|
|
(1,492)
|
|
(10)
|
|
Benefit (provision) for credit losses
|
|
(1,452)
|
|
746
|
|
736
|
|
|
(2,198)
|
|
(295)
|
|
|
10
|
|
1
|
|
Credit enhancement expense
|
|
(1,058)
|
|
(749)
|
|
(409)
|
|
|
(309)
|
|
(41)
|
|
|
(340)
|
|
(83)
|
|
Benefit for (decrease in) credit enhancement recoveries
|
|
323
|
|
41
|
|
(8)
|
|
|
282
|
|
688
|
|
|
49
|
|
613
|
|
REO operations expense
|
|
(149)
|
|
(229)
|
|
(169)
|
|
|
80
|
|
35
|
|
|
(60)
|
|
(36)
|
|
Credit-related benefit (expense)
|
|
(2,336)
|
|
(191)
|
|
150
|
|
|
(2,145)
|
|
(1,123)
|
|
|
(341)
|
|
(227)
|
|
Administrative expense
|
|
(2,535)
|
|
(2,564)
|
|
(2,293)
|
|
|
29
|
|
1
|
|
|
(271)
|
|
(12)
|
|
Temporary Payroll Tax Cut
Continuation Act of 2011 expense
|
|
(1,836)
|
|
(1,617)
|
|
(1,484)
|
|
|
(219)
|
|
(14)
|
|
|
(133)
|
|
(9)
|
|
Other expense
|
|
(723)
|
|
(657)
|
|
(469)
|
|
|
(66)
|
|
(10)
|
|
|
(188)
|
|
(40)
|
|
Operating expense
|
|
(5,094)
|
|
(4,838)
|
|
(4,246)
|
|
|
(256)
|
|
(5)
|
|
|
(592)
|
|
(14)
|
|
Income before income tax (expense) benefit
|
|
9,229
|
|
9,049
|
|
11,474
|
|
|
180
|
|
2
|
|
|
(2,425)
|
|
(21)
|
|
Income tax (expense) benefit
|
|
(1,903)
|
|
(1,835)
|
|
(2,239)
|
|
|
(68)
|
|
(4)
|
|
|
404
|
|
18
|
|
Net income (loss)
|
|
7,326
|
|
7,214
|
|
9,235
|
|
|
112
|
|
2
|
|
|
(2,021)
|
|
(22)
|
|
Total other comprehensive income (loss),
net of taxes and reclassification adjustments
|
|
205
|
|
573
|
|
(613)
|
|
|
(368)
|
|
(64)
|
|
|
1,186
|
|
193
|
|
Comprehensive income (loss)
|
|
$7,531
|
|
$7,787
|
|
$8,622
|
|
|
($256)
|
|
(3)
|
%
|
|
($835)
|
|
(10)
|
%
|
See Critical Accounting Policies and Estimates for information concerning certain significant accounting policies and estimates applied in determining our reported results of operations and Note 1 for information on our accounting policies and a summary of other significant accounting policies and the related notes in which information about them can be found.
Net Revenues
Net interest income consists of guarantee portfolio net interest income, investments portfolio net interest income, and income (expense) from hedge accounting.
n Guarantee portfolio net interest income is primarily generated by our single-family guarantee portfolio, as we generally consolidate our single-family securities trusts, and consists of three components:
l Contractual net interest income, which is equal to the difference between the interest income on loans held by consolidated trusts and the interest expense on debt securities issued by consolidated trusts. This amount represents the ongoing contractual monthly guarantee fee we receive for managing the credit risk associated with mortgage loans held by consolidated trusts.
l The legislated 10 basis point increase in guarantee fees that is remitted to Treasury as part of the Temporary Payroll Tax Cut Continuation Act of 2011.
l Deferred fee income, which primarily consists of recognition of premiums and discounts on mortgage loans and debt securities of consolidated trusts and the fees that we receive or pay when we acquire single-family loans, which represent a portion of the guarantee fee compensation we receive for managing the credit risk associated with mortgage loans held by consolidated trusts. These amounts are recognized in net interest income based on the effective yield over the contractual life of the associated financial instrument and may vary significantly from period to period, primarily based on changes in actual prepayments on the underlying loans. Increases in actual prepayments result in a higher rate of amortization, while decreases in actual prepayments result in a lower rate of amortization. The timing of amortization of loans may differ from the timing of amortization of the securities backed by the loans, as the proceeds from the loans backing these securities are remitted to the security holders at a date subsequent to the date these proceeds are received by us.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
23
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Consolidated Results of Operations
|
n Investments portfolio net interest income consists of two components:
l The difference between the interest income earned on the assets in our investments portfolio and the interest expense incurred on the liabilities used to fund those assets, including amortization of cost basis adjustments. These amounts are recognized in net interest income based on the effective yield over the contractual life of the associated financial instrument.
l Interest expense related to CRT debt (STACR debt notes and SCR debt notes).
n Income (expense) from hedge accounting primarily consists of amortization of previously deferred hedge accounting basis adjustments and the earnings mismatch on qualifying fair value hedge relationships, which is equal to the difference between fair value changes for the hedging instrument, including the accrual of periodic cash settlements, and fair value changes for the hedged item attributable to the risk being hedged. See Note 10 for additional detail on hedge accounting.
The table below presents the components of net interest income.
Table 2 - Components of Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over Year Change
|
|
|
Year Ended December 31,
|
|
2020 vs. 2019
|
|
2019 vs. 2018
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
|
$
|
%
|
|
$
|
%
|
Guarantee portfolio net interest income:
|
|
|
|
|
|
|
|
|
|
|
Contractual net interest income
|
|
$5,014
|
|
$3,767
|
|
$3,457
|
|
|
$1,247
|
|
33%
|
|
$310
|
|
9%
|
Net interest income related to the Temporary Payroll Tax Cut Continuation Act of 2011
|
|
1,884
|
|
1,590
|
|
1,438
|
|
|
294
|
|
18
|
|
152
|
|
11
|
Deferred fee income
|
|
3,787
|
|
2,436
|
|
2,900
|
|
|
1,351
|
|
55
|
|
(464)
|
|
(16)
|
Total guarantee portfolio net interest income
|
|
10,685
|
|
7,793
|
|
7,795
|
|
|
2,892
|
|
37
|
|
(2)
|
|
—
|
Investments portfolio net interest income:
|
|
|
|
|
|
|
|
|
|
|
Contractual net interest income and amortization
|
|
5,082
|
|
5,411
|
|
6,251
|
|
|
(329)
|
|
(6)
|
|
(840)
|
|
(13)
|
Interest expense related to CRT debt
|
|
(764)
|
|
(1,104)
|
|
(1,094)
|
|
|
340
|
|
31
|
|
(10)
|
|
(1)
|
Total investments portfolio net interest income
|
|
4,318
|
|
4,307
|
|
5,157
|
|
|
11
|
|
—
|
|
(850)
|
|
(16)
|
Income (expense) from hedge accounting
|
|
(2,232)
|
|
(252)
|
|
(931)
|
|
|
(1,980)
|
|
(786)
|
|
679
|
|
73
|
Net interest income
|
|
$12,771
|
|
$11,848
|
|
$12,021
|
|
|
$923
|
|
8%
|
|
($173)
|
|
(1%)
|
Key Drivers:
n Guarantee portfolio contractual net interest income
l 2020 vs. 2019 - Increased primarily due to the continued growth in the single-family guarantee portfolio coupled with higher contractual guarantee fee rates.
l 2019 vs. 2018 - Increased primarily due to the continued growth of the single-family guarantee portfolio.
n Guarantee portfolio deferred fee income
l 2020 vs. 2019 - Increased primarily due to higher prepayments due to the low mortgage interest rate environment.
l 2019 vs. 2018 - Decreased primarily due to the timing differences in amortization related to prepayments between debt of consolidated trusts and the underlying mortgage loans.
n Investments portfolio contractual net interest income and amortization
l 2020 vs. 2019 - Decreased primarily due to a change in our investment mix as the lower-yielding other investments portfolio represented a larger percentage of our total investments portfolio, partially offset by lower funding costs.
l 2019 vs. 2018 - Decreased primarily due to the lower and flatter interest rate environment, coupled with a change in our investment mix as the lower-yielding other investments portfolio represented a larger percentage of our total investments portfolio.
n Interest expense related to CRT debt
l 2020 vs. 2019 - Decreased primarily due to lower short-term interest rates and a decline in volume as we no longer issue STACR debt notes on a regular basis.
l 2019 vs. 2018 - Remained relatively flat as higher short-term interest rates were offset by a decline in volume as we no longer issue STACR debt notes on a regular basis.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
24
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Consolidated Results of Operations
|
n Income (expense) from hedge accounting
l 2020 vs. 2019 - Expense increased primarily due to amortization of hedge accounting-related basis adjustments driven by higher prepayments, partially offset by higher income related to accruals of periodic cash settlements on derivatives in hedging relationships.
l 2019 vs. 2018 - Expense decreased primarily due to a positive earnings mismatch and lower expense related to accruals of periodic cash settlements on derivatives in hedging relationships, partially offset by amortization of hedge accounting-related basis adjustments.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
25
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Consolidated Results of Operations
|
Net Interest Yield Analysis
The table below presents an analysis of interest-earning assets and interest-bearing liabilities. To calculate the average balances, we generally use a daily weighted average of amortized cost. When daily average balance information is not available, such as for mortgage loans, we use monthly averages. Mortgage loans on non-accrual status, where interest income is generally recognized when collected, are included in the average balances.
Table 3 - Analysis of Net Interest Yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
(Dollars in millions)
|
|
Average
Balance
|
Interest
Income
(Expense)
|
Average
Rate
|
|
Average
Balance
|
Interest
Income
(Expense)
|
Average
Rate
|
|
Average
Balance
|
Interest
Income
(Expense)
|
Average
Rate
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$24,428
|
|
$30
|
|
0.12
|
%
|
|
$8,925
|
|
$187
|
|
2.10
|
%
|
|
$7,189
|
|
$67
|
|
0.93
|
%
|
Securities purchased under agreements to resell
|
|
94,350
|
|
354
|
|
0.38
|
|
|
56,465
|
|
1,284
|
|
2.27
|
|
|
45,360
|
|
880
|
|
1.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured lending
|
|
4,752
|
|
85
|
|
1.79
|
|
|
2,933
|
|
104
|
|
3.55
|
|
|
1,350
|
|
35
|
|
2.58
|
|
Mortgage-related securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related securities
|
|
109,794
|
|
4,645
|
|
4.23
|
|
|
132,735
|
|
5,761
|
|
4.34
|
|
|
143,424
|
|
6,026
|
|
4.20
|
|
Extinguishment of debt securities of consolidated trusts held by Freddie Mac
|
|
(68,005)
|
|
(2,377)
|
|
(3.50)
|
|
|
(85,407)
|
|
(3,524)
|
|
(4.13)
|
|
|
(88,757)
|
|
(3,437)
|
|
(3.87)
|
|
Total mortgage-related securities, net
|
|
41,789
|
|
2,268
|
|
5.43
|
|
|
47,328
|
|
2,237
|
|
4.73
|
|
|
54,667
|
|
2,589
|
|
4.74
|
|
Non-mortgage-related securities
|
|
30,053
|
|
313
|
|
1.04
|
|
|
22,776
|
|
500
|
|
2.19
|
|
|
18,955
|
|
446
|
|
2.35
|
|
Loans held by consolidated trusts(1)
|
|
2,057,249
|
|
56,225
|
|
2.73
|
|
|
1,882,802
|
|
64,927
|
|
3.45
|
|
|
1,799,122
|
|
61,883
|
|
3.44
|
|
Loans held by Freddie Mac(1)
|
|
92,538
|
|
3,065
|
|
3.31
|
|
|
86,973
|
|
3,656
|
|
4.20
|
|
|
98,005
|
|
4,154
|
|
4.24
|
|
Total interest-earning assets
|
|
2,345,159
|
|
62,340
|
|
2.66
|
|
|
2,108,202
|
|
72,895
|
|
3.46
|
|
|
2,024,648
|
|
70,054
|
|
3.46
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities of consolidated trusts including those held by Freddie Mac
|
|
2,088,913
|
|
(48,658)
|
|
(2.33)
|
|
|
1,907,818
|
|
(57,504)
|
|
(3.01)
|
|
|
1,826,429
|
|
(54,966)
|
|
(3.01)
|
|
Extinguishment of debt securities of consolidated trusts held by Freddie Mac
|
|
(68,005)
|
|
2,377
|
|
3.50
|
|
|
(85,407)
|
|
3,524
|
|
4.13
|
|
|
(88,757)
|
|
3,437
|
|
3.87
|
|
Total debt securities of consolidated trusts held by third parties
|
|
2,020,908
|
|
(46,281)
|
|
(2.29)
|
|
|
1,822,411
|
|
(53,980)
|
|
(2.96)
|
|
|
1,737,672
|
|
(51,529)
|
|
(2.97)
|
|
Debt of Freddie Mac:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
75,668
|
|
(606)
|
|
(0.80)
|
|
|
85,492
|
|
(1,910)
|
|
(2.23)
|
|
|
62,893
|
|
(1,193)
|
|
(1.90)
|
|
Long-term debt
|
|
218,447
|
|
(2,682)
|
|
(1.23)
|
|
|
192,100
|
|
(5,157)
|
|
(2.68)
|
|
|
216,484
|
|
(5,311)
|
|
(2.45)
|
|
Total debt of Freddie Mac
|
|
294,115
|
|
(3,288)
|
|
(1.12)
|
|
|
277,592
|
|
(7,067)
|
|
(2.55)
|
|
|
279,377
|
|
(6,504)
|
|
(2.33)
|
|
Total interest-bearing liabilities
|
|
2,315,023
|
|
(49,569)
|
|
(2.14)
|
|
|
2,100,003
|
|
(61,047)
|
|
(2.91)
|
|
|
2,017,049
|
|
(58,033)
|
|
(2.88)
|
|
Impact of net non-interest-bearing funding
|
|
30,136
|
|
—
|
|
0.03
|
|
|
8,199
|
|
—
|
|
0.01
|
|
|
7,599
|
|
—
|
|
0.01
|
|
Total funding of interest-earning assets
|
|
2,345,159
|
|
(49,569)
|
|
(2.11)
|
|
|
2,108,202
|
|
(61,047)
|
|
(2.90)
|
|
|
2,024,648
|
|
(58,033)
|
|
(2.87)
|
|
Net interest income/yield
|
|
|
$12,771
|
|
0.55
|
%
|
|
|
$11,848
|
|
0.56
|
%
|
|
|
$12,021
|
|
0.59
|
%
|
(1) Loan fees included in interest income were $4.5 billion, $3.2 billion, and $2.6 billion for loans held by consolidated trusts and $86 million, $112 million, and $104 million for loans held by Freddie Mac during 2020, 2019, and 2018, respectively.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
26
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Consolidated Results of Operations
|
Net Interest Income Rate / Volume Analysis
The table below presents a rate and volume analysis of our net interest income. Our net interest income reflects the reversal of interest income accrued, net of interest received on a cash basis, related to mortgage loans that are on non-accrual status.
Table 4 - Net Interest Income Rate / Volume Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance Analysis
|
|
|
2020 vs. 2019
|
|
2019 vs. 2018
|
(Dollars in millions)
|
|
Rate
|
Volume
|
Total Change
|
|
Rate
|
Volume
|
Total Change
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
($249)
|
|
$92
|
|
($157)
|
|
|
$101
|
|
$19
|
|
$120
|
|
Securities purchased under agreements to resell
|
|
(1,450)
|
|
520
|
|
(930)
|
|
|
170
|
|
234
|
|
404
|
|
|
|
|
|
|
|
|
|
|
Secured lending
|
|
(66)
|
|
47
|
|
(19)
|
|
|
17
|
|
52
|
|
69
|
|
Mortgage-related securities
|
|
(142)
|
|
(974)
|
|
(1,116)
|
|
|
194
|
|
(459)
|
|
(265)
|
|
Extinguishment of debt securities of consolidated trusts held by Freddie Mac
|
|
492
|
|
655
|
|
1,147
|
|
|
(220)
|
|
133
|
|
(87)
|
|
Total mortgage-related securities, net
|
|
350
|
|
(319)
|
|
31
|
|
|
(26)
|
|
(326)
|
|
(352)
|
|
Non-mortgage-related securities
|
|
(314)
|
|
127
|
|
(187)
|
|
|
(31)
|
|
85
|
|
54
|
|
Loans held by consolidated trusts
|
|
(14,332)
|
|
5,630
|
|
(8,702)
|
|
|
159
|
|
2,885
|
|
3,044
|
|
Loans held by Freddie Mac
|
|
(813)
|
|
222
|
|
(591)
|
|
|
(34)
|
|
(464)
|
|
(498)
|
|
Total interest-earning assets
|
|
(16,874)
|
|
6,319
|
|
(10,555)
|
|
|
356
|
|
2,485
|
|
2,841
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
Debt securities of consolidated trusts including those held by Freddie Mac
|
|
13,939
|
|
(5,093)
|
|
8,846
|
|
|
(85)
|
|
(2,453)
|
|
(2,538)
|
|
Extinguishment of debt securities of consolidated trusts held by Freddie Mac
|
|
(492)
|
|
(655)
|
|
(1,147)
|
|
|
220
|
|
(133)
|
|
87
|
|
Total debt securities of consolidated trusts held by third parties
|
|
13,447
|
|
(5,748)
|
|
7,699
|
|
|
135
|
|
(2,586)
|
|
(2,451)
|
|
Debt of Freddie Mac:
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
1,105
|
|
199
|
|
1,304
|
|
|
(237)
|
|
(480)
|
|
(717)
|
|
Long-term debt
|
|
3,105
|
|
(630)
|
|
2,475
|
|
|
(476)
|
|
630
|
|
154
|
|
Total debt of Freddie Mac
|
|
4,210
|
|
(431)
|
|
3,779
|
|
|
(713)
|
|
150
|
|
(563)
|
|
Total interest-bearing liabilities
|
|
17,657
|
|
(6,179)
|
|
11,478
|
|
|
(578)
|
|
(2,436)
|
|
(3,014)
|
|
Net interest income
|
|
$783
|
|
$140
|
|
$923
|
|
|
($222)
|
|
$49
|
|
($173)
|
|
Guarantee fee income relates primarily to multifamily securitizations, as we generally do not consolidate our multifamily securitization trusts. For additional details on our multifamily securitizations, see MD&A - Our Business Segments - Multifamily - Products and Activities - Securitizations, Guarantees, and Risk Transfer Products.
Guarantee fee income consists of the following:
n Contractual guarantee fees - Consists of the fees earned from guarantees issued to third parties and securitization trusts that we do not consolidate.
n Guarantee obligation amortization - Represents the amortization of our obligation to perform over the term of the guarantee as we are released from risk.
n Guarantee asset fair value changes - Represents the change in fair value of our right to receive contractual guarantee fees. Because our multifamily loans contain prepayment protection, declining interest rates generally result in a higher guarantee asset fair value, with the opposite effect occurring when interest rates increase.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
27
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Consolidated Results of Operations
|
The table below presents the components of guarantee fee income.
Table 5 - Components of Guarantee Fee Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over Year Change
|
|
|
Year Ended December 31,
|
|
2020 vs. 2019
|
|
2019 vs. 2018
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
|
$
|
%
|
|
$
|
%
|
Contractual guarantee fees
|
|
$1,023
|
|
$910
|
|
$810
|
|
|
$113
|
|
12
|
%
|
|
$100
|
|
12
|
%
|
Guarantee obligation amortization
|
|
977
|
|
813
|
|
711
|
|
|
164
|
|
20
|
|
|
102
|
|
14
|
|
Guarantee asset fair value changes
|
|
(558)
|
|
(634)
|
|
(655)
|
|
|
76
|
|
12
|
|
|
21
|
|
3
|
|
Guarantee fee income
|
|
$1,442
|
|
$1,089
|
|
$866
|
|
|
$353
|
|
32
|
%
|
|
$223
|
|
26
|
%
|
Key Drivers:
n 2020 vs. 2019 and 2019 vs. 2018 - Increased primarily driven by multifamily guarantee portfolio growth, coupled with lower fair value losses on our multifamily guarantee assets due to lower interest rates.
Investment Gains (Losses), Net
The table below presents the components of investment gains (losses), net. We use derivatives to economically hedge the interest-rate risk of our financial assets and liabilities. As a result, interest-rate-related fair value gains and losses that we recognize in mortgage loans gains (losses), investment securities gains (losses), and debt gains (losses) generally have offsetting impacts from the derivative instruments that we use to economically hedge interest-rate risk. We recognize these offsetting impacts from derivative instruments in derivative gains (losses).
Table 6 - Components of Investment Gains (Losses), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over Year Change
|
|
|
Year Ended December 31,
|
|
2020 vs. 2019
|
|
2019 vs. 2018
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
|
$
|
%
|
|
$
|
%
|
Mortgage loans gains (losses)
|
|
$5,372
|
|
$4,744
|
|
$746
|
|
|
$628
|
|
13
|
%
|
|
$3,998
|
|
536
|
%
|
Investment securities gains (losses)
|
|
778
|
|
389
|
|
(815)
|
|
|
389
|
|
100
|
|
|
1,204
|
|
148
|
|
Debt gains (losses)
|
|
701
|
|
201
|
|
720
|
|
|
500
|
|
249
|
|
|
(519)
|
|
(72)
|
|
Derivative gains (losses)
|
|
(5,038)
|
|
(4,516)
|
|
1,270
|
|
|
(522)
|
|
(12)
|
|
|
(5,786)
|
|
(456)
|
|
Investment gains (losses), net
|
|
$1,813
|
|
$818
|
|
$1,921
|
|
|
$995
|
|
122
|
%
|
|
($1,103)
|
|
(57
|
%)
|
Mortgage Loans Gains (Losses)
Mortgage loans gains (losses) are primarily generated by our multifamily loan purchase and securitization activities and sales of single-family delinquent and re-performing loans, and consist of the following:
n Gains (losses) on certain multifamily loan purchase commitments - Represents the change in fair value between the commitment date and settlement date for multifamily loan purchase commitments for which we have elected the fair value option.
n Gains (losses) on mortgage loans - Includes changes in fair value on held-for-sale loans, including loans for which we have elected the fair value option, as well as any gains and losses realized on the sales of these loans.
Mortgage loans gains (losses) are affected by a number of factors, including:
n Volume of held-for-sale single-family seasoned mortgage loans;
n Volume of held-for-sale multifamily loans measured at lower-of-cost-or-fair value;
n Volume of multifamily loan purchase commitments and mortgage loans for which we have elected the fair value option; and
n Changes in interest rates and market spreads.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
28
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Consolidated Results of Operations
|
The table below presents the components of mortgage loans gains (losses).
Table 7 - Components of Mortgage Loans Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over Year Change
|
|
|
Year Ended December 31,
|
|
2020 vs. 2019
|
|
2019 vs. 2018
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
|
$
|
%
|
|
$
|
%
|
Single-family:
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on mortgage loans
|
|
$1,248
|
|
$1,902
|
|
$712
|
|
|
($654)
|
|
(34)
|
%
|
|
$1,190
|
|
167
|
%
|
Multifamily:
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on certain loan purchase
commitments
|
|
2,288
|
|
1,913
|
|
$777
|
|
|
375
|
|
20
|
|
|
1,136
|
|
146
|
|
Gains (losses) on mortgage loans
|
|
1,836
|
|
929
|
|
(743)
|
|
|
907
|
|
98
|
|
|
1,672
|
|
225
|
|
Total Multifamily
|
|
4,124
|
|
2,842
|
|
34
|
|
|
1,282
|
|
45
|
|
|
2,808
|
|
8,259
|
|
Mortgage loans gains (losses)
|
|
$5,372
|
|
$4,744
|
|
$746
|
|
|
$628
|
|
13
|
%
|
|
$3,998
|
|
536
|
%
|
Key Drivers:
n 2020 vs. 2019 - Single-family mortgage loans gains decreased primarily due to a lower volume of loan sales and higher losses from lower-of-cost-or-fair-value adjustments. For multifamily, higher initial pricing margins on new loan commitments, coupled with realized gains from the sale of a higher volume of loans measured at lower-of-cost-or-fair-value, resulted in higher gains.
n 2019 vs. 2018 - Single-family mortgage loans gains increased primarily due to a higher volume of loan sales. For multifamily, higher initial pricing margins on new loan commitments, coupled with spread-related fair value improvements, resulted in higher gains.
Investment Securities Gains (Losses)
Investment securities gains (losses) primarily consist of fair value gains and losses recognized on trading securities and realized gains and losses on the sale of available-for-sale securities.
Investment securities gains (losses) are affected by a number of factors, including changes in interest rates and market spreads and volume of sales of available-for-sale securities.
The table below presents the components of investment securities gains (losses).
Table 8 - Components of Investment Securities Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over Year Change
|
|
|
Year Ended December 31,
|
|
2020 vs. 2019
|
|
2019 vs. 2018
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
|
$
|
%
|
|
$
|
%
|
Realized gains (losses) on sales of available-for-sale securities
|
|
$393
|
|
$170
|
|
$324
|
|
|
$223
|
|
131
|
%
|
|
($154)
|
|
(48)
|
%
|
Realized and unrealized gains (losses) on trading securities
|
|
482
|
|
328
|
|
(1,007)
|
|
|
154
|
|
47
|
|
|
1,335
|
|
133
|
|
Other
|
|
(97)
|
|
(109)
|
|
(132)
|
|
|
12
|
|
11
|
|
|
23
|
|
17
|
|
Investment securities gains (losses)
|
|
$778
|
|
$389
|
|
($815)
|
|
|
$389
|
|
100
|
%
|
|
$1,204
|
|
148
|
%
|
Key Drivers:
n 2020 vs. 2019 - Increased primarily due to gains on sales of agency mortgage-related securities and higher gains on trading securities from the decline in long-term interest rates.
n 2019 vs. 2018 - Shifted to gains during 2019 primarily driven by higher gains on trading securities due to decreasing interest rates, partially offset by lower volume of sales at gains of non-agency mortgage-related securities.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
29
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Consolidated Results of Operations
|
Debt gains (losses) are primarily generated by investments in debt securities of consolidated trusts and active management of our debt funding costs and consist of the following:
n Fair value changes - Include the gains and losses on debt for which we have elected the fair value option, primarily certain STACR debt notes.
n Gains (losses) on extinguishment of debt - Represent the difference between the consideration paid and the debt carrying value when we purchase debt securities of consolidated trusts as investments in our mortgage-related investments portfolio and when we repurchase or call debt of Freddie Mac.
Debt gains (losses) are affected by a number of factors, including:
n Changes in the market spreads between debt yields and benchmark interest rates and
n Amount and type of debt selected for repurchase based on our investment and funding strategies, including our efforts to support the liquidity and price performance of our mortgage-related securities.
The table below presents the components of debt gains (losses).
Table 9 - Components of Debt Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over Year Change
|
|
|
Year Ended December 31,
|
|
2020 vs. 2019
|
|
2019 vs. 2018
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
|
$
|
%
|
|
$
|
%
|
Fair value changes:
|
|
|
|
|
|
|
|
|
|
|
Debt securities of consolidated trusts
|
|
$4
|
|
($4)
|
|
$5
|
|
|
$8
|
|
200
|
%
|
|
($9)
|
|
(180)
|
%
|
Debt of Freddie Mac
|
|
335
|
|
136
|
|
137
|
|
|
199
|
|
146
|
|
|
(1)
|
|
(1)
|
|
Total fair value changes
|
|
339
|
|
132
|
|
142
|
|
|
207
|
|
157
|
|
|
(10)
|
|
(7)
|
|
Gains (losses) on extinguishment of debt:
|
|
|
|
|
|
|
|
|
|
|
Debt securities of consolidated trusts
|
|
124
|
|
(258)
|
|
564
|
|
|
382
|
|
148
|
|
|
(822)
|
|
(146)
|
|
Debt of Freddie Mac
|
|
238
|
|
327
|
|
14
|
|
|
(89)
|
|
(27)
|
|
|
313
|
|
2,236
|
|
Total gains (losses) on extinguishment of debt
|
|
362
|
|
69
|
|
578
|
|
|
293
|
|
425
|
|
|
(509)
|
|
(88)
|
|
Debt gains (losses)
|
|
$701
|
|
$201
|
|
$720
|
|
|
$500
|
|
249
|
%
|
|
($519)
|
|
(72)
|
%
|
Key Drivers:
n 2020 vs. 2019 - Increased primarily due to higher gains on extinguishments of debt as a result of more selective debt repurchase activity, coupled with fair value gains on STACR debt notes for which we elected the fair value option as a result of spread widening caused by the significant market volatility related to the COVID-19 pandemic.
n 2019 vs. 2018 - Decreased primarily due to losses from the extinguishment of fixed-rate debt securities of consolidated trusts, as market interest rates declined between the time of issuance and repurchase, partially offset by an increase in gains on callable debt due to an increase in call volume.
Derivative Gains (Losses)
Derivative instruments are a key component of our interest-rate risk management strategy. We use derivatives to economically hedge our interest-rate risk exposure. We primarily use interest-rate swaps, futures, and option-based derivatives, such as swaptions, to manage our exposure to changes in interest-rates. We consider the cost of derivatives used in interest-rate risk management to be an inherent part of the cost of funding our mortgage-related investments portfolio.
In addition, we routinely enter into commitments to purchase and sell loans and mortgage-related securities. The majority of these commitments are accounted for as derivative instruments.
We continue to align our derivative portfolio to economically hedge the changing duration of our 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 PVS and duration gap results. For more information about our interest-rate risk management activities and the sensitivity of reported GAAP earnings to those activities, see MD&A - Risk Management - Market Risk.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
30
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Consolidated Results of Operations
|
Derivative gains (losses) consist of the following:
n Fair value gains (losses) - Represent changes in the fair value of our derivatives while not designated in hedging relationships based on market conditions at the end of the period or at the time the derivative instrument is terminated. These amounts may or may not be realized over time, depending on future changes in market conditions and the terms of our derivative instruments.
n Accrual of periodic cash settlements on swaps - Consists of the net amount we accrue during a period for interest-rate swap payments that we will make or receive for derivatives while not designated in hedging relationships. This accrual represents the ongoing cost of our hedging activities, and is economically equivalent to interest expense.
We apply fair value hedge accounting to certain single-family mortgage loans and long-term debt to reduce our GAAP earnings volatility. We include gains and losses and the accrual of periodic cash settlements on derivatives designated in qualifying hedge relationships in the same line used to present the earnings effect of the hedged item.
Derivative gains (losses) are affected by a number of factors, including:
n Changes in interest rates - Our primary derivative instruments are interest-rate swaps, including pay-fixed and receive-fixed interest-rate swaps. With a pay-fixed interest-rate swap, we pay a fixed rate of interest and receive a variable rate of interest based on a specified notional balance, which is used for calculation purposes only. As interest rates decline, we recognize derivative losses, as the amount of interest we pay remains fixed, and the amount of interest we receive declines. As rates rise, we recognize derivative gains, as the amount of interest we pay remains fixed, but the amount of interest we receive increases. With a receive-fixed interest-rate swap, the opposite results occur.
n Implied volatility - Many of our assets and liabilities have embedded prepayment options. We use option-based derivatives, including swaptions, to economically hedge the prepayment options embedded in our mortgage assets and callable debt. Fair value gains and losses on swaptions are sensitive to changes in both interest rates and implied volatility, which reflects the market's expectation of future changes in interest rates. Assuming all other factors are unchanged, including interest rates, purchased swaptions generally become more valuable as implied volatility increases and less valuable as implied volatility decreases, with the opposite being true for written swaptions.
n Changes in the shape of the yield curve - We own assets and have outstanding debt with cash flows at different tenors along the yield curve. We use derivatives to hedge the yield exposure of assets and debt, resulting in derivatives with different maturities. As a result, changes in the shape of the yield curve will affect our derivative gains (losses).
n Changes in the composition of our derivative portfolio - The mix and balance of our derivative portfolio changes from period to period as we enter into or terminate derivative instruments to respond to changes in interest rates and changes in the balances and modeled characteristics of our assets and liabilities. Changes in the composition of our derivative portfolio will affect the derivative gains and losses we recognize in a given period, thereby affecting the volatility of comprehensive income.
The table below presents the components of derivative gains (losses).
Table 10 - Components of Derivative Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over Year Change
|
|
|
Year Ended December 31,
|
|
2020 vs. 2019
|
|
2019 vs. 2018
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
|
$
|
%
|
|
$
|
%
|
Fair value gains (losses):
|
|
|
|
|
|
|
|
|
|
|
Interest-rate risk management derivatives
|
|
($1,826)
|
|
($3,843)
|
|
$849
|
|
|
$2,017
|
|
52
|
%
|
|
($4,692)
|
|
(553)
|
%
|
Mortgage commitment derivatives
|
|
(1,856)
|
|
(452)
|
|
606
|
|
|
(1,404)
|
|
(311)
|
|
|
(1,058)
|
|
(175)
|
|
CRT-related derivatives
|
|
163
|
|
(1)
|
|
(38)
|
|
|
164
|
|
16,400
|
|
|
37
|
|
97
|
|
Other
|
|
57
|
|
52
|
|
(6)
|
|
|
5
|
|
10
|
|
|
58
|
|
967
|
|
Total fair value gains (losses)
|
|
(3,462)
|
|
(4,244)
|
|
1,411
|
|
|
782
|
|
18
|
|
|
(5,655)
|
|
(401)
|
|
Accrual of periodic cash settlements on swaps
|
|
(1,576)
|
|
(272)
|
|
(141)
|
|
|
(1,304)
|
|
(479)
|
|
|
(131)
|
|
(93)
|
|
Derivative gains (losses)
|
|
($5,038)
|
|
($4,516)
|
|
$1,270
|
|
|
($522)
|
|
(12)
|
%
|
|
($5,786)
|
|
(456)
|
%
|
Key Drivers:
n 2020 vs. 2019 - Increase in derivative losses, primarily driven by losses on commitments to sell mortgage-related securities as prices increased due to spread tightening, partially offset by gains on commitments to purchase mortgage loans.
n 2019 vs. 2018 - Decreases in long-term rates during 2019 resulted in derivative fair value losses compared to derivative fair value gains during 2018. The interest rate decreases during 2019 resulted in fair value losses on our pay-fixed interest rate swaps, forward commitments to issue mortgage-related securities, and futures, partially offset by fair value gains on our receive-fixed swaps and certain of our option-based derivatives.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
31
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Consolidated Results of Operations
|
Credit-Related Expense
Benefit (Provision) for Credit Losses
Our benefit (provision) for credit losses relates primarily to single-family loans held-for-investment and can vary substantially from period to period based on a number of factors, such as changes in actual and forecasted house prices and interest rates, borrower prepayments and delinquency rates, events such as natural disasters or pandemics, the type and volume of our loss mitigation and foreclosure activity, government assistance provided to borrowers, and redesignation of loans between held-for-investment and held-for-sale. Our estimate of expected credit losses is particularly sensitive to changes in forecasted house price growth rates, which affect both the probability and severity of expected credit losses, and changes in forecasted interest rates, as lower (higher) interest rates typically result in higher (lower) expected prepayments and a shorter (longer) estimated loan life, and therefore lower (higher) expected credit losses. See MD&A - Critical Accounting Policies and Estimates for additional information.
The table below presents the components of benefit (provision) for credit losses.
Table 11 - Components of Benefit (Provision) for Credit Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over Year Change
|
|
|
Year Ended December 31,
|
|
2020 vs. 2019
|
|
2019 vs. 2018
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
|
$
|
%
|
|
$
|
%
|
Benefit (provision) for credit losses:
|
|
|
|
|
|
|
|
|
|
|
Single-family
|
|
($1,320)
|
|
$749
|
|
$712
|
|
|
($2,069)
|
|
(276)
|
%
|
|
$37
|
|
5
|
%
|
Multifamily
|
|
(132)
|
|
(3)
|
|
24
|
|
|
(129)
|
|
(4,300)
|
|
|
(27)
|
|
(113)
|
|
Benefit (provision) for credit losses
|
|
($1,452)
|
|
$746
|
|
$736
|
|
|
($2,198)
|
|
(295)
|
%
|
|
$10
|
|
1
|
%
|
n Single-family
l 2020 vs. 2019 - Shifted to a provision primarily due to higher expected credit losses as a result of the COVID-19 pandemic. The higher expected credit losses during 2020 were primarily driven by the following factors:
–Expected credit losses related to COVID-19 relief programs - Our provision for credit losses in 2020 required significant management judgment to estimate the impact of COVID-19-related forbearance and relief programs on our expected credit losses. These judgments included estimates of the number of loans that will receive forbearance, the likely exit paths for loans in forbearance, and the number of loans where forbearance will be unsuccessful and the borrower will ultimately default. These factors resulted in a significant increase in our provision for credit losses for 2020, with the majority of the increase occurring in 1Q 2020. We recognized additional provision for allowances for pre-foreclosure costs and accrued interest receivable related to loans in forbearance due to the COVID-19 pandemic. In total, we increased our provision for credit losses during 2020 by $2.8 billion as a result of the COVID-19 pandemic.
–Portfolio growth - With the adoption of CECL, we recognize expected credit losses over the entire contractual term of the loan at the time of loan acquisition, rather than when it is probable the loan is impaired. In 2020, our single family credit guarantee portfolio grew by $332 billion, or 17%, contributing to the increase in provision for credit losses.
–Growth in realized and forecasted house prices and declines in forecasted interest rates - During 2020, house price appreciation and significant declines in mortgage interest rates partially offset the increase in the provision for credit losses as a result of the COVID-19 pandemic and portfolio growth.
l 2019 vs. 2018 - Remained relatively flat due to the solid credit performance of our single-family portfolio.
n Multifamily
l 2020 vs. 2019 - Increase in provision due to higher expected credit losses as a result of the COVID-19 pandemic.
l 2019 vs. 2018 - Remained relatively flat due to the stable credit performance of our multifamily portfolio.
The decline in economic activity caused by the COVID-19 pandemic, and the corresponding government response, is unprecedented, and as a result, our estimate of expected credit losses is subject to significant uncertainty. See MD&A - Risk Management - Credit Risk for additional information.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
32
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Consolidated Results of Operations
|
Credit Enhancement Expense
Credit enhancement expense primarily relates to certain single-family CRT transactions and includes the premiums paid to transfer credit risk to third parties and transaction and other costs incurred to enter into those transactions. Credit enhancement expense does not include costs associated with CRT-related debt, which are primarily recognized in interest expense, or the costs associated with CRT-related derivatives, which are recognized in investment gains (losses), net.
Key Drivers:
n 2020 vs. 2019 and 2019 vs. 2018 - Increased primarily due to higher outstanding cumulative volumes of CRT transactions.
See MD&A - Our Business Segments - Single-Family Guarantee - Products and Activities, MD&A - Our Business Segments - Multifamily - Products and Activities, and Note 8 for additional information on our credit enhancements.
Benefit for (Decrease in) Credit Enhancement Recoveries
Benefit for (decrease in) credit enhancement recoveries primarily relates to certain single-family CRT transactions and represents changes in expected recoveries from those transactions. We recognize a benefit for (decrease in) recoveries from many of our CRT transactions at the same time that we recognize an allowance for credit losses on the covered loans, measured on the same basis as the allowance for credit losses on the covered loans.
Key Drivers:
n 2020 vs. 2019 - Increase in benefit for credit enhancement recoveries as a result of the corresponding increase in expected credit losses due to the COVID-19 pandemic.
Operating Expense
Key Drivers:
n 2020 vs. 2019 - Increased primarily due to higher Temporary Payroll Tax Cut Continuation Act of 2011 expense driven by an increase in single-family business activity in 2020.
n 2019 vs. 2018 - Increased primarily due to higher salaries and employee benefits driven by the VERP and higher technology costs in 2019.
Other Comprehensive Income (Loss)
Our investments in securities classified as available-for-sale are measured at fair value on our consolidated balance sheets. The fair value of these securities is primarily affected by changes in interest rates and market spreads. All unrealized gains and losses on these securities are excluded from earnings and reported in other comprehensive income until realized, unless we determine that a decline in fair value is the result of a credit loss. We reclassify our unrealized gains and losses from AOCI to earnings upon the sale of the securities.
Key Drivers:
n 2020 vs. 2019 - Decrease of $0.4 billion primarily driven by recognition of realized gains due to sales of available-for-sale securities.
n 2019 vs. 2018 - Increase of $1.2 billion primarily due to fair value gains as long-term interest rates declined, partially offset by fair value losses due to spread widening on our agency mortgage-related securities.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
33
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Consolidated Balance Sheets Analysis
|
CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized consolidated balance sheets.
Beginning January 1, 2020, we elected to offset payables related to securities sold under agreements to repurchase against receivables related to securities purchased under agreements to resell when such amounts meet the conditions for balance sheet offsetting. Prior period amounts have been reclassified to conform to the current presentation. See Note 1 and Note 11 for additional information.
Table 12 - Summarized Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Year Over Year Change
|
(Dollars in millions)
|
|
2020
|
2019
|
|
$
|
%
|
Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$23,889
|
|
$5,189
|
|
|
$18,700
|
|
360
|
%
|
Securities purchased under agreements to resell
|
|
105,003
|
|
56,271
|
|
|
48,732
|
|
87
|
|
Subtotal
|
|
128,892
|
|
61,460
|
|
|
67,432
|
|
110
|
|
Investment securities, at fair value
|
|
59,825
|
|
75,711
|
|
|
(15,886)
|
|
(21)
|
|
Mortgage loans, net
|
|
2,383,888
|
|
2,020,200
|
|
|
363,688
|
|
18
|
|
Accrued interest receivable, net
|
|
7,754
|
|
6,848
|
|
|
906
|
|
13
|
|
Derivative assets, net
|
|
1,205
|
|
844
|
|
|
361
|
|
43
|
|
Deferred tax assets, net
|
|
6,557
|
|
5,918
|
|
|
639
|
|
11
|
|
Other assets
|
|
39,294
|
|
22,799
|
|
|
16,495
|
|
72
|
|
Total assets
|
|
$2,627,415
|
|
$2,193,780
|
|
|
$433,635
|
|
20
|
%
|
|
|
|
|
|
|
|
Liabilities and Equity:
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Accrued interest payable
|
|
$6,210
|
|
$6,559
|
|
|
($349)
|
|
(5)
|
%
|
Debt
|
|
2,592,546
|
|
2,169,685
|
|
|
422,861
|
|
19
|
|
Derivative liabilities, net
|
|
954
|
|
372
|
|
|
582
|
|
156
|
|
Other liabilities
|
|
11,292
|
|
8,042
|
|
|
3,250
|
|
40
|
|
Total liabilities
|
|
2,611,002
|
|
2,184,658
|
|
|
426,344
|
|
20
|
|
Total equity
|
|
16,413
|
|
9,122
|
|
|
7,291
|
|
80
|
|
Total liabilities and equity
|
|
$2,627,415
|
|
$2,193,780
|
|
|
$433,635
|
|
20
|
%
|
Key Drivers:
As of December 31, 2020 compared to December 31, 2019:
n Cash and cash equivalents and securities purchased under agreements to resell increased on a combined basis primarily due to higher loan prepayments and a higher cash window loan purchase forecast. In addition, our compliance with updated minimum liquidity requirements established by FHFA has increased the size of our other investments portfolio. For additional information on the minimum liquidity requirements, see MD&A - Liquidity and Capital Resources.
n Investment securities, at fair value decreased primarily due to sales of agency securities, which allowed us to maintain compliance with the mortgage-related investments portfolio cap imposed by the Purchase Agreement and FHFA while also supporting a higher volume of single-family cash window purchases.
n Mortgage loans, net increased primarily due to a 17% increase in our single-family credit guarantee portfolio.
n Derivative assets, net and derivative liabilities, net increased primarily due to significant changes in the fair value of forward commitments to sell mortgage loans and mortgage-related securities.
n Other assets increased primarily due to higher servicer receivables driven by an increase in mortgage loan payoffs reported but not yet remitted at the end of 4Q 2020.
n Debt increased primarily due an increase in our debt securities of consolidated trusts held by third parties resulting from the increase in our single-family credit guarantee portfolio.
n Total equity increased primarily due to our ability to retain earnings as a result of the increase in the applicable Capital Reserve Amount pursuant to the September 2019 and January 2021 Letter Agreements.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
34
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Segment Earnings
|
OUR BUSINESS SEGMENTS
As shown in the table below, we have three reportable segments, which are based on the way we manage our business. Certain activities that are not part of a reportable segment are included in the All Other category.
|
|
|
|
|
|
Segment/Category
|
Description
|
Single-family Guarantee
|
Reflects results from our purchase, securitization, and guarantee of single-family loans and the management of single-family mortgage credit risk
|
|
|
Multifamily
|
Reflects results from our purchase, sale, securitization, and guarantee of multifamily loans and securities, our investments in those loans and securities, and the management of multifamily mortgage credit risk and market risk
|
|
|
|
Capital Markets
|
Reflects results from managing our mortgage-related investments portfolio (excluding Multifamily segment investments, single-family seriously delinquent loans, and the credit risk of single-family performing and reperforming loans), single-family securitization activities, and treasury function, which includes interest-rate risk management for the company
|
|
|
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
We evaluate segment performance and allocate resources based on a Segment Earnings approach:
n We make significant reclassifications among certain line items in our GAAP financial statements to reflect measures of guarantee fee income on guarantees, net interest income on investments, and benefit (provision) for credit losses on loans that are in line with how we manage our business.
n We allocate certain revenues and expenses, including certain returns on assets, funding and hedging costs, and all administrative expenses to our three reportable segments.
n The sum of Segment Earnings for each segment and the All Other category equals GAAP net income (loss). Likewise, the sum of comprehensive income (loss) for each segment and the All Other category equals GAAP comprehensive income (loss).
Segment Earnings differs significantly from, and should not be used as a substitute for, net income (loss) as determined in accordance with GAAP. Our definition of Segment Earnings may differ from similar measures used by other companies. We believe that Segment Earnings provides us with meaningful metrics to assess the financial performance of each segment and our company as a whole. See Note 17 for additional details on Segment Earnings, including additional financial information for our segments.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
35
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Segment Earnings
|
Segment Comprehensive Income
The graph below shows our comprehensive income by segment.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
36
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
Single-Family Guarantee
The Single-family Guarantee segment provides liquidity and support to the single-family market through a variety of activities that include the purchase, securitization, and guarantee of single-family loans originated by lenders.
The U.S. residential mortgage market consists of a primary mortgage market that links homebuyers and lenders, and a secondary mortgage market that links lenders and investors. The size of the U.S. residential mortgage market is affected by many factors, including changes in interest rates, unemployment rates, homeownership rates, housing prices, the supply of housing, lender preferences regarding credit risk, and borrower preferences regarding mortgage debt.
In accordance with our Charter, we participate in the secondary mortgage market. The mix of loan products we purchase is affected by several factors, including the volume of loans meeting the requirements of our Charter, the volume meeting our risk appetite and originated according to our purchase standards, and the loan purchase and securitization activity of other financial institutions.
Our primary business model is to acquire loans that lenders originate and then pool those loans into mortgage-related securities that transfer interest-rate, prepayment, and liquidity risk to investors and can be sold in the capital markets. To reduce our exposure under our guarantees, we transfer credit risk on a portion of our single-family credit guarantee portfolio to the private market in certain instances. The returns we generate from these activities are primarily derived from the guarantee fees we receive in exchange for providing our guarantee of the principal and interest payments of the issued mortgage-related securities.
In order to issue mortgage-related securities, we establish trusts pursuant to our Master Trust Agreements and serve as the trustee of those trusts. The servicer administers the collection of the borrower's loan payment and remits the collected funds to us. We administer the distribution of payments to the investors in the mortgage-related securities, net of any applicable guarantee fees.
The diagram below illustrates our primary business model.
When a borrower prepays a loan that we have securitized, the outstanding balance of the security owned by investors is reduced by the amount of the prepayment. If the borrower becomes delinquent, we continue to make the applicable payments to the investors in the mortgage-related securities pursuant to our guarantee until we purchase the loan from the trust. We have the option to purchase specified loans, including certain delinquent loans, from the trust at a purchase price equal to the current UPB of the loan, less any outstanding advances of principal that have been previously distributed. At the instruction of FHFA, we generally have been purchasing loans from the trust if they are delinquent for 120 days, and we have the option to purchase sooner under certain circumstances (e.g., imminent default and seller breaches of representations and warranties). We must obtain FHFA's approval to implement changes to our policy to purchase loans from trusts. In response to the COVID-19 pandemic, FHFA has instructed us to maintain loans in payment forbearance plans (including COVID-19 payment forbearance plans) in mortgage-related security pools for at least the duration of the forbearance plan. Once the forbearance period expires, the loans will remain in the related securities pool while they are in certain loan workout programs or offers to enter into these programs remain outstanding. Beginning on January 1, 2021, at the instruction of FHFA and in alignment with Fannie Mae, we extended the trigger to purchase delinquent single-family loans from the trust to 24 months of delinquency, except for loans that meet certain criteria (e.g., permanently modified or foreclosure referral), which may be purchased sooner. We work with delinquent borrowers through our servicers to mitigate our losses through our loan workout programs. If we are unable to achieve a successful loan workout, we will pursue foreclosure of the underlying property, which will result in a third-
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
37
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
party sale or our acquisition of the property as REO. For additional details, see MD&A - Risk Management. The purchase and sale of delinquent loans are done in conjunction with the Capital Markets segment.
We enter into loan purchase agreements with many of our single-family customers that outline the terms under which we agree to purchase loans from them over a period of time. For most of the loans we purchase, the guarantee fees are not specified contractually. Instead, we bid for some or all of the lender's loan volume on a monthly basis at a guarantee fee that we specify. As a result, our loan purchase volumes from individual customers can fluctuate significantly.
We seek to issue guarantees with fee terms that are commensurate with the aggregate risks assumed and that will, over the long-term, provide guarantee fee income that exceeds the credit-related and administrative expenses on the underlying loans and also provide a return on the capital that would be needed to support the related credit risk. The guarantee fees charged on new acquisitions generally consist of:
n A contractual monthly fee paid as a percentage of the UPB of the underlying loan, including the legislated 10 basis point increase in guarantee fees under the Temporary Payroll Tax Cut Continuation Act of 2011 and
n Fees we receive or pay when we acquire a loan, which include delivery fees and buy-up and buy-down fees. Delivery fees are calculated based on credit risk factors such as the loan product type, loan purpose, LTV ratio, and credit score, and are charged to compensate us for higher levels of risk in some loan products. Buy-up and buy-down fees are payments made or received to buy up or buy down, respectively, the monthly contractual guarantee fee and are paid in conjunction with the formation of a security to provide for a uniform coupon rate for the mortgage pool underlying the security. Buy-up fees are allocated to the Capital Markets segment.
We must obtain FHFA's approval to implement across-the-board changes to our risk-based guarantee fees. In addition, from time to time, FHFA issues directives or guidance to us affecting the levels of guarantee fees that we may charge.
Securitization and Guarantee Products
We offer various types of guarantee and securitization products, primarily Level 1 Securitization Products and Resecuritization Products. In these securitization products, Freddie Mac functions in several capacities: depositor, guarantor, administrator, and trustee. We retain the credit risk and transfer the interest-rate, prepayment, and liquidity risks to the investors. While the Single-family Guarantee segment is responsible for the guarantee of our securities, the Capital Markets segment manages the securitization and resecuritization processes.
Level 1 Securitization Products
We offer a variety of Level 1 Securitization Products to our customers. Our Level 1 Securitization Products are pass-through securities that represent undivided beneficial interests in trusts that hold pools of loans. For our fixed-rate Level 1 Securitization Products, we guarantee the timely payment of principal and interest. For our ARM PCs, we guarantee the timely payment of the weighted average coupon interest rate for the underlying loans. We also guarantee the full and final payment of principal, but not the timely payment of principal, on ARM PCs. In exchange for our guarantee, we receive fees as described in the Guarantee Fees section above.
We issue the following types of Level 1 Securitization Products:
n UMBS - Single-class pass-through securities issued through the CSP with a 55-day payment delay for TBA-eligible fixed-rate mortgage loans.
n 55-day MBS - Single-class pass-through securities issued through the CSP with a 55-day payment delay for non-TBA-eligible fixed-rate mortgage loans.
n ARM PCs - Single-class pass-through securities with a 75-day payment delay for ARM products. We do not issue these products through the CSP.
In prior years, we also issued Gold PCs, which were single-class pass-through securities with a 45-day payment delay for fixed-rate mortgage loans. We discontinued the offerings of Gold PCs in 2019. Existing Gold PCs that are not entirely resecuritized are eligible for exchange into UMBS (for TBA-eligible securities) or 55-day MBS (for non-TBA-eligible securities).
All Level 1 Securitization Products are backed only by mortgage loans that we have acquired. We offer (or previously offered) all of the above products through both guarantor swap and cash window programs.
In a guarantor swap execution, we offer transactions in which our customers, primarily large mortgage banking companies and commercial banks, provide us with loans in exchange for a security backed by those same loans, as shown in the diagram below:
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
38
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
In a cash window execution, we purchase mortgage loans from our customers in exchange for cash consideration. Subsequent to purchasing the loans, we typically securitize them for retention in our mortgage-related investments portfolio or for sale to third parties. For the period of time between loan purchase and securitization, we refer to the loan as being in our securitization pipeline. The purchase of loans and sale of securities are managed by the Capital Markets segment.
The January 2021 Letter Agreement requires us to purchase loans for cash consideration; operate this cash window with non-discriminatory pricing; and comply with directives, regulations, restrictions, or other requirements prescribed by FHFA related to equitable secondary market access by community lenders. In addition, beginning on January 1, 2022, we will be required to limit the volume purchased through the cash window to $1.5 billion per lender during any period comprising four calendar quarters. The primary impacts of this requirement will likely be:
n An increase in our counterparty risk as the volume restriction may operationally impact our customers by requiring them to seek additional sources of funding;
n A reduction in our ability to align prepayment profiles and securitization practices with Fannie Mae; and
n A reduction in our cash window loan purchase volume, which may reduce our aggregate single-family loan purchase volume and negatively affect our financial position and results of operations.
There may be additional FHFA guidance in the future that provides additional restrictions not included in the January 2021 Letter Agreement. For additional information about the January 2021 Letter Agreement, see MD&A - Conservatorship and Related Matters.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
39
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
The diagram below illustrates a cash window execution.
Resecuritization Products
We offer resecuritization products to our customers. Our resecuritization products represent beneficial interests in pools of Level 1 Securitization Products and certain other types of mortgage assets. We create these securities by using Level 1 Securitization Products or our previously issued resecuritization products as the underlying collateral. We leverage the issuance of these securities to expand the range of investors in our mortgage-related securities to include those seeking specific security attributes. Similar to our Level 1 Securitization Products, we guarantee the payment of principal and interest to the investors in our resecuritization products. We do not charge a guarantee fee for these securities if the underlying collateral is already guaranteed by us since no additional credit risk is introduced, although we typically receive a transaction fee as compensation for creating the security and future administrative responsibilities.
We have the ability to commingle TBA-eligible Fannie Mae collateral in certain of our resecuritization products. When we resecuritize Fannie Mae securities, which are separately guaranteed by Fannie Mae, in our commingled resecuritization products, our guarantee covers timely payment of principal and interest on such products from underlying Fannie Mae securities. If Fannie Mae were to fail to make a payment on a Fannie Mae security that we resecuritized, we would be responsible for making the payment. We do not currently charge an incremental guarantee fee to commingle Fannie Mae collateral in resecuritization transactions, although we may do so in the future. However, we are required to hold incremental capital for our guarantees of Fannie Mae securities under the ERCF.
All of the cash flows from the collateral underlying our resecuritization products are generally passed through to investors in these securities. We do not issue resecuritization products that have concentrations of credit risk beyond those embedded in the underlying assets. In many of our resecuritization transactions, securities dealers or investors deliver mortgage assets in exchange for the resecuritization product. In certain cases, we may also transfer our own mortgage assets in exchange for the resecuritization product. The resecuritization activities are managed by the Capital Markets segment. The following diagram provides a general example of how we create resecuritization products.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
40
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
We offer the following types of resecuritization products:
n Single-class resecuritization products - Involve the direct pass through of all cash flows of the underlying collateral to the beneficial interest holders and include:
l Supers - Resecuritizations of UMBS and certain other mortgage securities. This structure allows commingling of Freddie Mac and Fannie Mae collateral, where newly issued or exchanged UMBS and Supers issued by us or Fannie Mae may be commingled to back Supers issued by us. Fannie Mae also issues Supers. Supers can be backed by:
–UMBS and/or other Supers issued by us or Fannie Mae;
–Existing TBA-eligible Fannie Mae "MBS" and/or "Megas"; and/or
–UMBS and Supers that we have issued in exchange for TBA-eligible PCs and Giant PCs that have been delivered to us in response to our exchange offer.
l Giant MBS - Resecuritizations of:
–Newly issued 55-day MBS and/or Giant MBS; and/or
–55-day MBS and/or Giant MBS that we have issued in exchange for non-TBA-eligible PCs and non-TBA-eligible Giant PCs that have been delivered to us in response to our exchange offer.
l Giant PCs - Resecuritizations of previously issued PCs or Giant PCs. Although we no longer issue Gold PCs, existing Gold PCs may continue to be resecuritized into Giant PCs. In addition, ARM PCs may continue to be resecuritized into ARM Giant PCs. Fixed-rate Giant PCs are eligible for exchange into Supers (for TBA-eligible securities) or Giant MBS (for non-TBA-eligible securities).
n Multiclass resecuritization products
l REMICs - Resecuritizations of previously issued mortgage securities that divide all cash flows of the underlying collateral into two or more classes of varying maturities, payment priorities, and coupons. This structure allows commingling of TBA-eligible Freddie Mac and Fannie Mae collateral.
l Strips - Resecuritizations of previously issued Level 1 Securitization Products or single-class resecuritization products and issuance of stripped securities, including principal-only and interest-only securities or floating rate and inverse floating rate securities, backed by the cash flows from the underlying collateral. This structure allows commingling of TBA-eligible Freddie Mac and Fannie Mae collateral.
Other Securitization Products
n Senior subordinate securitization structures backed by recently originated loans (consolidated) - In prior years, we created senior subordinate securitization structures in which we issued guaranteed senior securities and unguaranteed subordinated securities backed by recently originated single-family loans. The unguaranteed subordinated securities absorb first losses on the related loans and the loans are serviced in accordance with our Guide. We discontinued regular offerings of these transactions in 2019.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
41
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
n Other securitization products - Guaranteed mortgage-related securities collateralized by non-Freddie Mac mortgage-related securities. However, we have not entered into these types of transactions as part of our Single-family Guarantee business in several years.
We also securitize certain seasoned loans using senior subordinate securitization structures. See the Sales and Securitization of Certain Seasoned Loans section below for additional information.
Long-Term Standby Commitments
We also offer a guarantee on mortgage assets held by third parties, in exchange for guarantee fees, without securitizing those assets. These long-term standby commitments obligate us to purchase seriously delinquent loans that are covered by those commitments. From time to time, we have consented to the termination of our long-term standby commitments and simultaneously entered into guarantor swap transactions with the same counterparty, issuing securities backed by many of the same loans.
CSP
We continue to work with FHFA, Fannie Mae, and CSS to support the CSP and the UMBS market. We use the CSP for many of the securities administration activities for our Level 1 Securitization Products and resecuritization products. We and Fannie Mae issue a single (common) security called the UMBS through CSP. The UMBS market is designed to enhance the overall liquidity of TBA-eligible Freddie Mac and Fannie Mae securities by supporting their fungibility without regard to which company is the issuer. SIFMA permits UMBS TBA contracts to be settled by delivery of UMBS issued by either Freddie Mac or Fannie Mae under its good-delivery guidelines. In addition, we and Fannie Mae are also able to commingle Freddie Mac and Fannie Mae UMBS and other TBA-eligible mortgage securities in certain resecuritization transactions. We have both operational risk and counterparty risk exposure to Fannie Mae as a result of commingling securities and operational risk exposure to CSS through our use of the CSP for securities administration. For additional information, see MD&A - Risk Management - Counterparty Credit Risk and MD&A - Risk Management - Operational Risk.
We no longer issue securities with a 45-day payment delay. As a result, we are offering an optional exchange program for security holders to exchange certain existing fixed-rate Gold PCs and Giant PCs for corresponding UMBS and other applicable 55-day payment delay Freddie Mac mortgage securities. As part of this program, we make a one-time payment to exchanging security holders for the value of the 10 additional days of payment delay, based on "float compensation" rates we calculate. We do not expect the return from this additional float to fully offset our payments to the security holders. During 2020, we exchanged $122.4 billion in UPB of 45-day payment delay securities, including securities owned by Freddie Mac, for 55-day payment delay securities, and paid $46 million in float compensation in connection with these exchanges.
|
|
|
|
|
|
The primary impacts to Segment Earnings are:
|
|
|
•
|
Guarantee fee income earned on our guarantee of principal and interest payments on our mortgage-related securities and
|
|
|
|
|
•
|
Benefit (provision) for credit losses, which is affected by changes in estimated probabilities of default and estimated loss severities, the actual level of loan defaults, the effect of loss mitigation efforts, and payment performance of our mortgage portfolio.
|
CRT Transactions
To reduce our credit risk exposure, we engage in various types of credit enhancements, including CRT transactions and other credit enhancements. We define CRT transactions as those arrangements where we actively transfer the credit risk exposure on mortgages that we own or guarantee. We define other credit enhancements as those arrangements, such as traditional primary mortgage insurance, where we do not actively take part in the transfer of the credit risk exposure. Our CRT transactions are designed to reduce the amount of required capital related to credit risk, to transfer portions of credit losses on groups of previously acquired loans to third-party investors, and to reduce the risk of future losses to us and taxpayers if borrowers go into default. The costs we incur in exchange for this credit protection effectively reduce our guarantee fee income from the associated mortgages.
Each CRT transaction is designed to transfer a certain portion of the credit risk that we assume for loans with certain targeted characteristics. Risk positions may be transferred to third-party investors through one or more CRT transactions. The risk transfer could occur prior to, or simultaneously with, our purchase of the loan (i.e., front-end coverage) or after the purchase of the loan (i.e., back-end coverage). As CRT has become part of our normal business activities, we have established the following programs to regularly transfer portions of credit risk to diversified investors:
STACR and ACIS Offerings
Our two primary CRT programs are STACR and ACIS.
n STACR - Our primary single-family securities-based credit risk sharing vehicle. STACR Trust note transactions transfer risk to the private capital markets through the issuance of unguaranteed notes using a third-party trust. In a STACR transaction, we create a reference pool of loans from our single-family loan portfolio and a trust issues credit notes linked to the reference pool. The trust makes periodic payments of principal and interest on the notes to noteholders, but is not
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
42
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
required to repay principal to the extent that the note balance is reduced as a result of specified credit events on the mortgage loans in the related reference pool. We make payments to the trust to support payment of the interest due on the notes. The amount of risk transferred in each transaction affects the amounts we are required to pay. We receive payments from the trust that otherwise would have been made to the noteholders to the extent there are certain defined credit events on the mortgage loans in the related reference pool. The note balance is reduced by the amount of the payments to us, thereby transferring the related credit risk of the loans in the reference pool to the note investors. Generally, the note balance is also reduced based on principal payments that occur on the loans in the reference pool. Starting in 4Q 2019, the STACR Trust notes issued may qualify for favorable tax treatment for certain types of investors. The following diagram illustrates a typical STACR transaction.
n ACIS - Our primary insurance-based credit risk sharing vehicle. ACIS transactions are insurance policies we enter into with global insurance and reinsurance companies to cover a residual portion of credit risk on the STACR or standalone reference pools. We pay monthly premiums to the insurers or reinsurers in exchange for claim coverage on their portion of the reference pool. We require our ACIS counterparties to partially collateralize their exposure to reduce the risk that we will not be reimbursed for our claims under the policies.
We have established programmatic offerings of STACR and ACIS transactions to regularly transfer credit risk on a targeted population of recently acquired mortgage loans (“on-the-run transactions”). STACR and ACIS are generally complementary programs issued from the same reference pool for on-the-run transactions. The targeted loan population for on-the-run transactions is recently acquired fixed-rate mortgage loans with maturity terms greater than 20 years and LTV ratios between 60% and 97%, excluding loans acquired under our relief refinance programs, government guaranteed loans, and loans that do not meet certain eligibility criteria. Our typical on-the-run transactions are issued on a monthly basis and provide back-end coverage for loans that we acquired approximately two quarters prior to issuance (e.g., a transaction in 4Q 2020 would typically cover loans acquired in 2Q 2020). In a typical on-the-run transaction, we transfer to third-party investors a portion of the credit risk between a specified attachment point and a detachment point which may vary based on numerous factors, such as the type of collateral and market conditions. We generally retain the initial loss position and at least 5% of the credit risk of all the positions sold to align our interests with those of the investors. We also retain all of the senior credit risk position. On-the-run STACR transactions typically have a 30-year maturity and on-the-run ACIS transactions typically have a 12.5-year maturity. The diagram below illustrates a typical on-the-run STACR and ACIS structure.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
43
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
In addition to our regularly issued on-the-run transactions, we also periodically execute “off-the-run” STACR and ACIS transactions that provide back-end coverage on certain loans that are not in the on-the-run transaction targeted loan population. For example, we offer STACR and ACIS transactions that provide coverage on HARP and other relief refinance loans, STACR and ACIS transactions that provide coverage on unissued portions of the reference pools related to previous STACR and ACIS transactions, and ACIS transactions that provide coverage on loans with 15-year maturities not related to any STACR offering.
Prior to 2018, the majority of our STACR transactions were structured as unsecured debt issued directly by us (STACR debt notes) rather than as debt issued by a trust. These transactions operate similarly to STACR Trust notes, except that we make payments of principal and interest on the issued STACR debt notes and are not required to repay principal to the extent that the notional credit risk position is reduced as a result of a specified credit event on a loan in the reference pool. For certain STACR debt notes issued in prior years (generally STACR debt notes issued prior to 2015), losses are allocated to the notional amounts of the credit risk positions based on calculated losses using a predefined formula when the loans experience a credit event, which predominantly occurs when a loan becomes 180 days delinquent. As a result, in these transactions, we receive reimbursement of losses based on these calculated loss amounts rather than based on actual losses. While we may issue STACR debt notes in the future, we expect to predominantly issue STACR Trust notes.
Additional Offerings
In addition to our primary offerings, we also offer the following CRT products:
n ACIS Forward Risk Mitigation (AFRM) - An additional offering in the ACIS program that provides front-end credit risk transfer as loans come into the portfolio. Under each of these insurance policies, we pay monthly premiums that are determined based on the outstanding balance of the reference pool. When specific credit events occur, we generally receive compensation from the insurance policy up to an aggregate limit based on actual losses.
n Integrated Mortgage Insurance (IMAGINSM) - An insurance-based offering that provides loan-level front-end protection for loans with 80% and higher LTV ratios. IMAGIN is designed to expand and diversify sources of private capital supporting low down payment lending. Mortgage insurance provided to each loan is generally underwritten by a group of insurers and reinsurers. IMAGIN is offered to a broad range of Freddie Mac sellers, who can choose IMAGIN or traditional primary mortgage insurance at their discretion. IMAGIN remains a pilot program and our ability to expand is limited by FHFA.
n Lender risk sharing - A variety of transactions in which lenders may retain a portion of the credit risk on loans they originate and/or service. These transactions are generally collateralized so that our exposure to counterparty credit risk is not increased. We discontinued offerings of these transactions in 2020.
We also transfer credit risk on newly originated loans and seasoned loans through senior subordinated securitization structures. See the Securitization and Guarantee Products section above and the Sales and Securitization of Certain Seasoned Loans section below for additional information. For additional information on single-family mortgage loan credit enhancements,
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
44
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
see MD&A - Risk Management - Single-Family Mortgage Credit Risk - Transferring Credit Risk to Third-Party Investors.
|
|
|
|
|
|
The primary impacts to Segment Earnings are:
|
|
|
•
|
Interest expense on our STACR debt notes, net of reinvestment income;
|
|
|
|
|
•
|
Fair value gains and losses recognized on certain CRT transactions;
|
|
|
|
|
•
|
Expenses to transfer credit risk for certain CRT transactions; and
|
|
|
|
|
•
|
Benefits recognized from recoveries under certain CRT transactions.
|
|
|
|
|
Sales and Securitization of Certain Seasoned Loans
We manage the balance of our less liquid single-family mortgage loans, many of which we acquired by purchasing delinquent or modified loans from guaranteed securities. We may offer to sell select seasoned single-family mortgage loans through a variety of methods. In these transactions, we may reduce or eliminate our credit risk, in addition to our interest-rate and prepayment risk, associated with the underlying mortgage loans. The sales of these mortgage loans are managed by the Capital Markets segment. Our seasoned loan transactions include the following:
n Senior subordinate securitization structures backed by seasoned loans (nonconsolidated) - Transactions where we issue guaranteed senior securities and unguaranteed subordinated securities. The collateral for these structures primarily consists of reperforming loans. The unguaranteed subordinated securities absorb first losses on the related loans. Unlike senior subordinate securitization transactions backed by recently originated mortgage loans, in these transactions we transfer servicing to servicers that we believe have capabilities and resources necessary to improve the loss mitigation associated with these loans. As such, the loans are not serviced in accordance with our Guide and we do not control the servicing.
n Level 1 Securitization Products - We securitize certain reperforming loans, depending on market conditions, business strategy, credit risk considerations, and operational efficiency, using Level 1 Securitization Products through a similar process to that discussed above. We may subsequently resecuritize a portion of the guaranteed securities, with some of the resulting interests being sold to third parties.
n Whole loan sales - Sales of seriously delinquent loans for cash.
|
|
|
|
|
|
The primary impact to Segment Earnings is:
|
|
|
•
|
Gains and losses recognized on the reclassification of loans held-for-investment to held-for-sale and subsequent sale of these loans.
|
|
|
Our customers in the Single-family Guarantee segment are predominantly financial institutions that originate, sell, and perform the ongoing servicing of loans for new or existing homeowners. These companies include mortgage banking companies, commercial banks, regional banks, community banks, credit unions, HFAs, savings institutions, and non-depository financial institutions. Many of these companies are both sellers and servicers for us. Our single-family customers also include investors in our CRT offerings. In addition, we maintain relationships with investors and dealers in our guaranteed mortgage-related securities.
We acquire a significant portion of our loans from several lenders that are among the largest originators in the U.S. In addition, a significant portion of our single-family loans is serviced by several large servicers. The following charts show the concentration of our 2020 single-family purchase volume by our largest sellers and our loan servicing by our largest servicers as of December 31, 2020. Any seller or servicer with a 10% or greater share is listed separately.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
45
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
Percentage of Single-Family Purchase Volume
Percentage of Single-Family Servicing Volume(1)
(1) Percentage of servicing volume is based on the total single-family credit guarantee portfolio, which includes loans where we do not exercise servicing control. However, loans where we do not exercise servicing control are not included for purposes of determining the concentration of servicers who serviced more than 10% of our single-family credit guarantee portfolio.
For additional information about seller and servicer concentration risk and our relationships with our seller and servicer customers, see MD&A - Risk Management - Counterparty Credit Risk - Sellers and Servicers and Note 18.
Our principal competitors in the Single-family Guarantee segment are Fannie Mae, FHA/VA (with Ginnie Mae securitization), and other financial institutions that retain or securitize loans, such as commercial and investment banks, dealers, and savings institutions. The conservatorship, including direction provided to us by our Conservator, may affect our ability to compete. The areas in which we and Fannie Mae compete have been limited as we have been required by FHFA to align certain of our single-family mortgage purchase offerings, servicing, and securitization practices with Fannie Mae to achieve market acceptance of the UMBS. FHFA has also placed limits on our and Fannie Mae's ability to compete with each other on our returns and in areas that affect prepayment speeds of single-family mortgage-related securities.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
46
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
Business Results
The following graphs and related discussion present the business results of our Single-family Guarantee segment.
UPB of Single-Family Loan Purchases and Guarantees by Loan Purpose and Average Guarantee Fee Rate(1) Charged on New Acquisitions
(1)Guarantee fee excludes legislated 10 basis point increase and includes deferred fees recognized over the estimated life of the related loans. We enhanced our estimation methodology related to recognition of buy-up fees in 2019.
Number of Families Helped to Own a Home
n As a key player in the secondary mortgage market, we maintain a consistent market presence by providing lenders with a constant source of liquidity for conforming loan products. We have funded approximately 22.6 million single-family homes since January 1, 2009. Our loan purchase and guarantee activity increased in 2020 compared to 2019 primarily due to an increase in refinance activity as a result of the low mortgage interest rate environment.
n The average guarantee fee rate charged on new acquisitions consists of the contractual guarantee fee rate and deferred fee income, including the expected gains (losses) from buy-up fees, recognized over the estimated life of the related loans using our expectations of prepayments and other liquidations. See MD&A - Our Business Segments - Single-Family Guarantee - Business Overview - Guarantee Fees for more information on our guarantee fees. The average guarantee fee rate charged on new acquisitions increased in 2020 compared to 2019 primarily due to an increase in contractual guarantee fees.
n Home sales increased in 2020 compared to 2019 driven by low mortgage interest rates. The low mortgage rate environment, which also led to an increase in mortgage refinance activity during 2020, is expected to continue through 2021 and 2022 as the Federal Reserve stated that it intends to keep interest rates low for an extended period of time.
n We continued working to improve access to affordable housing, including through our Home Possible® loan initiatives. Our Home Possible loan initiatives offer down payment options as low as 3% and are designed to help qualified borrowers with limited savings buy a home. We purchased approximately 145,000 loans under these initiatives in 2020. We also continue to implement programs that support responsibly broadening access to affordable housing by:
l Improving the effectiveness of pre-purchase and early delinquency counseling for borrowers;
l Expanding our ability to support borrowers who do not have a credit score;
l Implementing the Duty to Serve Underserved Markets plan; and
l Increasing support for first-time home buyers and mortgage industry professionals.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
47
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
While we are responsibly expanding our programs and outreach capabilities to better serve low- and moderate-income borrowers and underserved markets, these loans result in increased credit risk. Expanding access to affordable housing will continue to be a top priority in 2021. See MD&A - Regulation and Supervision - Federal Housing Finance Agency - Duty to Serve Underserved Markets Plan for more information.
Single-Family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfolio as of December 31,
Single-Family Loans as of December 31
n The single-family credit guarantee portfolio increased during 2020 by approximately 17%, driven by an increase in U.S. single-family mortgage debt outstanding and higher new business activity. Additionally, continued house price appreciation contributed to new business acquisitions having a higher average loan size compared to older vintages that continued to run off.
n As we continued to purchase new loans, our core single-family loan portfolio grew to 90% of the single-family credit guarantee portfolio at December 31, 2020, compared to 85% at December 31, 2019. Our legacy and relief refinance single-family loan portfolio, which generally has a weaker credit profile, continued to run off, declining to 10% of the single-family credit guarantee portfolio at December 31, 2020, compared to 15% at December 31, 2019.
n The average portfolio Segment Earnings guarantee fee rate recognizes deferred fee income over the contractual life of the related loans (usually 30 years). If the related loans prepay, the remaining fee is recognized immediately. The effect of prepayments may be offset by our upfront fee hedging activities. See MD&A - Our Business Segments - Single-Family Guarantee - Business Overview - Guarantee Fees for more information on our guarantee fees and Note 17 for more information on the effect of our upfront fee hedging activities on Segment Earnings.
n The average portfolio Segment Earnings guarantee fee rate was 49 bps, 40 bps, and 35 bps at December 31, 2020, December 31, 2019, and December 31, 2018, respectively (all excluding the legislated 10 basis point increase in guarantee fees). The rate increased in 2020 compared to 2019 due to an increase in the recognition of deferred fee income driven by faster loan prepayments as a result of the low mortgage interest rate environment, and an increase in contractual guarantee fees as older vintages were replaced by acquisitions of new loans with higher contractual guarantee fees.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
48
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
We transfer credit risk on a portion of our single-family credit guarantee portfolio to the private market, which reduces the risk of future losses to us when borrowers go into default. The graphs below show the issuance amounts associated with CRT transactions for loans in our single-family credit guarantee portfolio.
CRT Issuance Protected UPB CRT Issuance Maximum Coverage
(In billions) (In billions)
n During 2020, 2019, and 2018, 62%, 71%, and 74%, respectively, of our single-family acquisitions were loans in the targeted population for our CRT transactions (primarily 30-year fixed-rate loans with LTV ratios between 60% and 97%). The decline from 2019 to 2020 was primarily driven by a decrease in the number of recently acquired loans with maturity terms greater than 20 years and improved credit quality of recently acquired loans.
n Our CRT issuance amounts increased during 2020 due to our ability to shorten the loan acquisition to CRT issuance timeline from approximately three quarters to two quarters, as well as increases in loan purchase and guarantee activity. These issuances were supported by solid investor demand and subscription levels even though our ability to execute these transactions was negatively impacted by the effects of the COVID-19 pandemic during 2Q 2020. However, the COVID-19 pandemic continues to impose uncertainties and may continue to adversely impact our transactions going forward.
n In November 2020, FHFA released a final rule that establishes the ERCF as a new regulatory capital framework for Freddie Mac and Fannie Mae. The ERCF, which will become effective on February 16, 2021, has a transition period for compliance. In general, the compliance date for the regulatory capital requirements will be the later of the date of termination of our conservatorship and any later compliance date provided in a consent order or other transition order; however, we may begin implementing the ERCF sooner, upon the direction of FHFA or otherwise. The ERCF specifies substantial capital requirements and could affect our CRT business strategies, perhaps significantly. For additional information, see MD&A – Regulation and Supervision – Legislative and Regulatory Developments – FHFA Enterprise Regulatory Capital Framework.
n We evaluate our CRT strategy and make changes to such strategy depending on market conditions, including the significant market volatility caused by the COVID-19 pandemic, and our business strategy. Our risk appetite limits are also governed by FHFA and these limits may lead us to take actions to comply with these limits, including continued execution of CRT transactions. See MD&A - Risk Management - Single-Family Mortgage Credit Risk - Transferring Credit Risk to Third-Party Investors for additional information on our CRT activities and other credit enhancements.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
49
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
Loss Mitigation Activities
The following graph provides details about our completed single-family loan workout activities. The forbearance data below is limited to loans in forbearance that were past due based on the loan’s original contractual terms.
Completed Loan Workout Activity
(UPB in billions, number of loan workouts in thousands)
n Completed loan workout activity includes forbearance plans where borrowers fully reinstated the loan to current status during or at the end of forbearance period, payment deferrals, modifications, successfully completed repayment agreements, short sales, and deeds in lieu of foreclosure. Completed loan workout activity excludes active loss mitigation activity that was ongoing and had not been completed as of the end of the year, such as forbearance plans that had been initiated but not completed and trial period modifications. There were approximately 280,000 loans in forbearance plans and 10,000 loans in other active loss mitigation activity as of December 31, 2020.
n We continue to help struggling families retain their homes or otherwise avoid foreclosure through loan workouts. Our loan workout activity increased significantly in 2020 compared to 2019 primarily driven by the increase in completed forbearance plans and payment deferrals related to the COVID-19 pandemic.
n As part of our strategy to mitigate losses and reduce our holdings of less liquid assets, we may pursue sales of certain seriously delinquent and reperforming loans depending on market conditions, business strategy, credit risk considerations, and operational efficiency. See MD&A - Risk Management - Single-Family Mortgage Credit Risk - Engaging in Loss Mitigation Activities for more information on our loss mitigation activities.
n Pursuant to FHFA guidance and the CARES Act, we offer mortgage relief options for borrowers affected by the COVID-19 pandemic. Among other things, we have been offering forbearance of up to 12 months to single-family borrowers
experiencing a financial hardship, either directly or indirectly, related to COVID-19. Under FHFA’s guidance, we are extending COVID-19 forbearances up to 15 months for eligible borrowers, and this forbearance term may be further extended by FHFA in the future. On July 1, 2020, we began providing servicers a payment deferral option to offer to eligible homeowners. We expect the volume of our loss mitigation activities related to the effects of the pandemic to remain elevated in 2021 as a result of the actions we take to support the mortgage market. For additional information on our responses to the pandemic, see Introduction - About Freddie Mac - COVID-19 Pandemic Response Efforts.
See MD&A - Risk Management for additional information on our loan workout activities.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
50
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
The table below presents the components of the Segment Earnings and comprehensive income for our Single-family Guarantee segment.
Table 13 - Single-Family Guarantee Segment Financial Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over Year Change
|
|
|
Year Ended December 31,
|
|
2020 vs. 2019
|
|
2019 vs. 2018
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
|
$
|
%
|
|
$
|
%
|
Guarantee fee income
|
|
$10,292
|
|
$7,773
|
|
$6,581
|
|
|
$2,519
|
|
32
|
%
|
|
$1,192
|
|
18
|
%
|
Investment gains (losses), net
|
|
956
|
|
964
|
|
307
|
|
|
(8)
|
|
(1)
|
|
|
657
|
|
214
|
|
Other income (loss)
|
|
241
|
|
391
|
|
841
|
|
|
(150)
|
|
(38)
|
|
|
(450)
|
|
(54)
|
|
Net revenues
|
|
11,489
|
|
9,128
|
|
7,729
|
|
|
2,361
|
|
26
|
|
|
1,399
|
|
18
|
|
Benefit (provision) for credit losses
|
|
(1,680)
|
|
418
|
|
448
|
|
|
(2,098)
|
|
(502)
|
|
|
(30)
|
|
(7)
|
|
Credit enhancement expense
|
|
(1,696)
|
|
(1,434)
|
|
(1,069)
|
|
|
(262)
|
|
(18)
|
|
|
(365)
|
|
(34)
|
|
Benefit for (decrease in) credit enhancement recoveries
|
|
305
|
|
41
|
|
(8)
|
|
|
264
|
|
644
|
|
|
49
|
|
613
|
|
REO operations expense
|
|
(152)
|
|
(245)
|
|
(189)
|
|
|
93
|
|
38
|
|
|
(56)
|
|
(30)
|
|
Credit-related expense
|
|
(3,223)
|
|
(1,220)
|
|
(818)
|
|
|
(2,003)
|
|
(164)
|
|
|
(402)
|
|
(49)
|
|
Administrative expense
|
|
(1,609)
|
|
(1,647)
|
|
(1,491)
|
|
|
38
|
|
2
|
|
|
(156)
|
|
(10)
|
|
Other expense
|
|
(943)
|
|
(786)
|
|
(568)
|
|
|
(157)
|
|
(20)
|
|
|
(218)
|
|
(38)
|
|
Operating expense
|
|
(2,552)
|
|
(2,433)
|
|
(2,059)
|
|
|
(119)
|
|
(5)
|
|
|
(374)
|
|
(18)
|
|
Segment Earnings (Losses) before income tax (expense) benefit
|
|
5,714
|
|
5,475
|
|
4,852
|
|
|
239
|
|
4
|
|
|
623
|
|
13
|
|
Income tax (expense) benefit
|
|
(1,178)
|
|
(1,110)
|
|
(944)
|
|
|
(68)
|
|
(6)
|
|
|
(166)
|
|
(18)
|
|
Segment Earnings (Losses), net of taxes
|
|
4,536
|
|
4,365
|
|
3,908
|
|
|
171
|
|
4
|
|
|
457
|
|
12
|
|
Total other comprehensive income (loss), net of tax
|
|
(16)
|
|
(22)
|
|
(3)
|
|
|
6
|
|
27
|
|
|
(19)
|
|
(633)
|
|
Total comprehensive income (loss)
|
|
$4,520
|
|
$4,343
|
|
$3,905
|
|
|
$177
|
|
4
|
%
|
|
$438
|
|
11
|
%
|
Key Drivers:
n 2020 vs. 2019
l Higher guarantee fee income primarily due to portfolio growth, higher deferred fee income recognition driven by faster loan prepayments as a result of the low mortgage interest rate environment, and higher contractual guarantee fee rates.
l Benefit (provision) for credit losses shifted to a provision due to higher expected credit losses as a result of the COVID-19 pandemic and portfolio growth, partially offset by growth in realized and forecasted house prices and declines in forecasted interest rates during 2020.
l Higher credit enhancement expense primarily due to higher outstanding cumulative volumes of CRT transactions.
l Higher benefit for credit enhancement recoveries primarily due to a corresponding increase in expected credit losses as a result of the COVID-19 pandemic.
n 2019 vs. 2018
l Higher guarantee fee income primarily due to higher deferred fee income recognition, partially offset by the amortization of hedge accounting related basis adjustments, driven by faster prepayments, coupled with higher contractual guarantee fee rates.
l Higher investment gains primarily due to higher realized gains on a higher volume of sales of, and lower unrealized lower-of-cost-or-fair-value losses related to, single-family held-for-sale loans.
l Lower other income primarily due to higher non-cash premium/discount amortization expense driven by timing differences between liquidations of the loans and liquidations of the securities backed by these loans.
l Higher credit enhancement expense primarily due to higher outstanding cumulative volumes of CRT transactions.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
51
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Multifamily
|
Multifamily
The Multifamily segment provides liquidity and support to the multifamily mortgage market through a variety of activities that include the purchase, guarantee, sale, and/or securitization of multifamily loans and mortgage-related securities. The overall market demand for multifamily loans is generally affected by local and regional economic factors, such as unemployment rates, construction cycles, property prices, preferences for homeownership versus renting, and the relative affordability of single-family homes, as well as certain macroeconomic factors, such as interest rates.
While we maintain a variety of products and activities, our primary business model is to acquire multifamily loans for aggregation and then securitization. The returns we generate from these activities are primarily derived from (i) the net interest income we earn on the loans prior to their securitization, (ii) the price received upon securitization of the loans versus the price we paid to acquire the loans, and (iii) the ongoing guarantee fee we receive in exchange for providing our guarantee primarily on the issued senior securities. We evaluate these factors collectively to assess the profitability of any given transaction and to maximize our returns.
Our securitization activities generally (i) provide us with a mechanism to finance our loan product offerings, (ii) reduce our credit risk, interest-rate risk, and liquidity risk exposure on the loans that we purchase, and (iii) reduce our conservatorship capital required under CCF. For multifamily loans that we do not intend to securitize, we may pursue other strategies, including the execution of other CRT products designed to transfer to third parties all or a portion of the loan's credit risk.
Our support of the multifamily market generally begins with our underwriting of the loans that we commit to purchase from our Optigo® network of approved lenders and typically ends with the disposition of those loans, generally through a borrower payoff. Through our support of the multifamily mortgage market, borrowers can obtain lower financing costs, which can benefit renters through lower rental rates and/or improved services or amenities. Our commitment to purchase multifamily loans generally begins with an index lock agreement or a loan purchase commitment.
Index Lock Agreements
We offer borrowers an option to lock the Treasury index component of their fixed rate loans anytime during the quote or underwriting process. This option enables borrowers to lock the most volatile part of their coupon, thereby providing an enhanced level of risk mitigation against interest-rate volatility. The index lock period offered for most loans is 60 days and is generally followed by a loan purchase commitment. We economically hedge our interest-rate exposure from these agreements primarily by entering into pay-fixed, receive-float interest-rate swaps. Index lock agreements do not qualify for accounting recognition and therefore our interest-rate risk management activities related to index lock agreements temporarily introduce volatility in our financial results until the index lock agreement becomes a loan purchase commitment.
|
|
|
|
|
|
The primary impact to Segment Earnings is:
|
|
|
•
|
Fair value gains or losses recognized on interest-rate derivatives. These gains or losses are generally offset once an index lock agreement becomes a loan purchase commitment and is accounted for at fair value.
|
|
|
Loan Purchase Commitments
Prior to issuing an unconditional commitment to purchase a multifamily loan, we negotiate with the lender the specific economic terms and conditions of our commitment, including the loan's purchase price, index, and mortgage spread. We price our loans to achieve an initial pricing margin that we expect to realize at securitization. Decisions related to the commitment price and/or mortgage spread will affect our initial pricing margin and are generally influenced by our current business strategy, the type of loan that we acquire (i.e., whether it qualifies as mission-driven, affordable housing), the amount available under the loan purchase cap, current securitization spreads, and changing market conditions. The initial pricing margin, which is based on the price we would receive to sell the mortgage loans in a typical securitization transaction, is recognized at the commitment date for commitments we measure at fair value and at the time of securitization for loans where we do not elect the fair value option.
At the time we commit to purchase a multifamily loan, we preliminarily determine our intent with respect to that loan. For commitments to purchase fixed-rate loans that we intend to sell or securitize (i.e., held-for-sale commitments), we elect the fair value option and therefore recognize and measure these commitments at fair value in our consolidated financial statements. We do not elect the fair value option for commitments to purchase floating-rate loans or loans that we intend to hold for the foreseeable future (i.e., held-for-investment commitments), and therefore these commitments are not recognized in our consolidated financial statements.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
52
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Multifamily
|
Our multifamily commitments and loans measured at fair value are subject to changes in fair value due to two main risks: (i) interest-rate risk and (ii) spread risk. While we use derivatives to economically hedge the interest rate-related fair value changes of these assets measured at fair value, we continue to be exposed to spread-related fair value changes. The fair values of our commitments and loans are generally impacted by changes in K Certificate benchmark spreads, which are market-quoted spreads over the swap rate. We generally recognize spread-related fair value gains (losses) for our commitments and loans measured at fair value when these benchmark spreads tighten (widen). We partially reduce our spread-related fair value exposure by purchasing or entering into certain spread-related derivatives, thereby obtaining some protection against significant adverse movements in market spreads.
|
|
|
|
|
|
The primary impacts to Segment Earnings are:
|
|
|
•
|
At the commitment date, the initial pricing margin is recognized on held-for-sale commitments where we elected the fair value option; and
|
|
|
|
|
•
|
After the commitment date, but prior to purchase, changes in the fair value of commitments where we elected the fair value option are recognized, net of interest-rate risk management activities. These fair value adjustments result from changes in the expected pricing of our securitizations due to changes in interest rates and securitization market spreads.
|
|
|
|
|
Loan Products
Through our Optigo network of approved lenders, we offer borrowers a variety of loan products for the acquisition, refinance, and/or rehabilitation of multifamily properties. While our Optigo lenders originate the loans that we purchase, we use a prior-approval underwriting approach, in contrast to the delegated underwriting approach used in our Single-family Guarantee segment and Fannie Mae's Delegated Underwriting and Servicing (DUS) program. Under this approach, we maintain credit discipline by completing our own underwriting, credit review, and legal review for each loan prior to issuing a loan purchase commitment, including reviewing third-party appraisals and performing cash flow analysis. We also price every loan or transaction based on the specific terms, structure, and type of execution.
Multifamily loans are typically originated by our Optigo lenders without recourse to the borrower, making repayment dependent on the cash flows generated by the underlying property. Cash flows generated by a property are significantly influenced by vacancy and rental rates, as well as conditions in the local rental market, the physical condition of the property, the quality of property management, and the level of operating expenses.
Our primary multifamily loan products include the following:
n Conventional loans - Financing that includes fixed-rate and floating-rate loans, loans in lease-up and with moderate property upgrades, manufactured housing community loans, senior housing loans, student housing loans, supplemental loans, and certain Green Advantage loans.
n Small balance loans - Financing provided to small rental property borrowers for the acquisition or refinance of multifamily properties. Financing ranges from $1 million to $7.5 million and is focused on affordable or workforce housing properties from 5 to 50 units.
n Targeted affordable housing - Financing provided to borrowers in underserved areas that have restricted units affordable to households with low income (earning up to 80% of AMI) and very-low income (earning up to 50% of AMI) and that typically receive government subsidies.
We also continue to support the multifamily mortgage market's LIBOR transition efforts by promoting new floating rate loans indexed to SOFR. Since September 2020, we have successfully quoted, purchased, and securitized new floating rate loans indexed to SOFR. The loans indexed to SOFR will be used as collateral in our SOFR bond offerings, thereby adding liquidity to the market and facilitating the transition to SOFR.
The amount and type of multifamily loans that we purchase is significantly influenced by the multifamily loan purchase cap that is established by FHFA. In 3Q 2019, FHFA announced a multifamily loan purchase cap of $100.0 billion for the five-quarter period from 4Q 2019 through 4Q 2020. This cap applied to all multifamily business activity, with no exclusions. To ensure a strong focus on affordable housing and traditionally underserved markets, at least 37.5% of the multifamily business had to be mission-driven, affordable housing over the same five-quarter period. Examples of multifamily loans that qualify as mission-driven, affordable housing include certain senior housing loans, small balance loans, manufactured housing loans, and targeted affordable housing loans.
In November 2020, FHFA announced that the 2021 multifamily loan purchase cap for the multifamily business will be $70.0 billion. At least 50% of the multifamily new business activity must be mission-driven, affordable housing, generally defined as affordable to renters at 80% of AMI or below, with at least 20% being affordable to renters at 60% of AMI or below. The production cap is subject to reassessment throughout the year by FHFA to determine whether an increase in the cap is appropriate based on a stronger than expected overall market.
The January 2021 Letter Agreement capped multifamily loan purchases at $80 billion in any 52-week period, subject to annual adjustment by FHFA. Based on FHFA guidance, this Purchase Agreement cap is in addition to FHFA's multifamily loan purchase cap for 2021 and the measurement period for the Purchase Agreement cap should be applied prospectively (i.e., this
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
53
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Multifamily
|
cap does not include volumes from the 52 weeks prior to the January 2021 Letter Agreement). At least 50% of the multifamily new business activity in any calendar year must be mission-driven, pursuant to FHFA guidelines. For more information on the January 2021 Letter Agreement, see MD&A - Conservatorship and Related Matters.
We typically elect the fair value option for fixed-rate held-for-sale loans but do not elect the fair value option for floating-rate loans or loans we intend to hold for the foreseeable future or to use as collateral in a PC transaction. The vast majority of all new multifamily loan purchases are initially classified as held-for-sale and included in our securitization pipeline. The holding period for loans in our securitization pipeline generally ranges between two and five months, as we aggregate sufficient loans with similar terms and risk characteristics to securitize. For example, loans purchased during the first quarter will generally be used as collateral for securitizations that settle in the second and third quarters of that same year.
|
|
|
|
|
|
The primary impacts to Segment Earnings are:
|
|
|
•
|
While in our securitization pipeline, changes in fair value recognized on loans classified as held-for-sale and measured at fair value, net of interest-rate risk management activities. These fair value adjustments result from changes in the expected pricing of our securitizations due to changes in interest rates and securitization market spreads; and
|
|
|
•
|
Interest income on loans while held in our mortgage-related investments portfolio.
|
|
|
Securitizations, Guarantees, and Risk Transfer Products
We securitize substantially all of the loans in our securitization pipeline after a short holding period. We enter into various types of securitizations that generally result in the transfer of all or a portion of the underlying collateral's interest-rate risk, liquidity risk, and/or credit risk to third parties.
In our typical securitizations, we guarantee the issued senior securities. In exchange for providing this guarantee, we receive an ongoing guarantee fee that is commensurate with the risks assumed and that will, over the long-term, provide us with guarantee fee income that is expected to exceed the credit-related and administrative expenses of the underlying loans. Structural deal features, such as term, type of underlying loan product, and subordination levels, generally influence the deal's risk profile, which ultimately affects the guarantee fee rate we set at the time of securitization.
For guarantees to non-consolidated entities or other third parties, we generally recognize a guarantee asset at inception. This asset, which represents the right to collect contractual guarantee fees, is recorded at fair value with subsequent changes in fair value recognized in earnings. The fair value of our guarantee assets may vary significantly from period-to-period based on changes in market conditions, including interest rates and credit spreads. Because our multifamily loans contain prepayment protection, decreasing interest rates generally result in a higher guarantee asset fair value, with the opposite effect occurring when interest rates increase. See Note 5 for additional information on our accounting for guarantees.
Our typical securitization structure and level of subordination are designed to achieve appropriate economic returns when we sell loans for securitization. Depending on the securitization product and subordination levels selected, we may realize a higher (lower) gain on sale, but recognize lower (higher) ongoing guarantee fee income.
The ERCF specifies substantial capital requirements and could affect our CRT business strategies, perhaps significantly. We are currently evaluating the impact to our business going forward. Additionally, our risk appetite limits are governed by FHFA and these limits may lead us to continue executing risk transfer transactions in a similar way as in the past despite not receiving as much capital relief under the ERCF. For additional information on ERCF, see MD&A - Introduction – FHFA Enterprise Regulatory Capital Framework.
Primary Securitization Products
Our primary securitization products are K Certificate and SB Certificate transactions, which transfer substantially all of the interest-rate risk, liquidity risk, and credit risk of the underlying collateral. The structures of these transactions typically involve the issuance of senior, mezzanine, and subordinated securities that represent undivided beneficial interests in trusts that hold pools of multifamily loans that we previously purchased. The volume of our primary securitizations is generally influenced by the product mix and size of our securitization pipeline, along with market demand for multifamily securities. As shown in the diagram below, in a typical K Certificate transaction, we sell multifamily loans to a non-Freddie Mac securitization trust that issues senior, mezzanine, and subordinated securities, and simultaneously purchase and place the senior securities into a Freddie Mac securitization trust that issues guaranteed K Certificates. In these transactions, we guarantee the senior securities, but do not issue or guarantee the mezzanine or subordinated securities. As a result, the interest-rate risk, liquidity risk, and a substantial amount of the expected and stressed credit risk is sold to third-party investors through securitization.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
54
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Multifamily
|
n K Certificates - Regularly issued structured pass-through securities backed by recently originated multifamily loans. This product offers investors a wide range of structural and collateral options that provide for stable cash flows and a structured credit enhancement. While the amount of guarantee fee we receive may vary by collateral type, it is generally fixed for those K Certificate series that we issue with regular frequency (e.g., 7- and 10-year fixed-rate K Certificates and our Floating Rate K Certificates). The guarantee fees received on recently issued standard K Certificates range between 30 basis points and 50 basis points.
The guarantee fee on K Certificates that we do not issue on a regular basis, such as our single-sponsor K Certificates, is determined based on the specific risks associated with the underlying collateral and the structure of the securitization, including tranche sizes and risk distribution.
n SB Certificates - Regularly issued securities typically backed by multifamily small balance loans that we underwrite at loan origination and purchase prior to securitization. Similar to our K Certificate transactions, a non-Freddie Mac trust will issue the senior classes of securities, which we guarantee, as well as the unguaranteed subordinated securities. However, unlike our K Certificate transactions, while we may purchase a portion of the senior securities, we generally do not place those securities into a Freddie Mac trust. The guarantee fee we receive in these transactions is generally 35 basis points.
From time to time, we may undertake certain activities to support the liquidity of K Certificates and SB Certificates. For more information, see Risk Factors - Market Risk - The profitability of our multifamily business could be adversely affected by a significant decrease in demand for our K Certificates and SB Certificates. Also, we may undertake certain actions to support the overall multifamily market, including the market's LIBOR transition efforts. In December 2019, we issued the first multifamily real estate securitization with securities indexed to SOFR and have cumulatively issued $9.0 billion in floating rate K Certificates indexed to SOFR. These activities have added liquidity to the market and are intended to facilitate the transition to SOFR.
Other Securitization Products
Our other securitization products involve the issuance of pass-through securities that represent beneficial interests in trusts that hold pools of multifamily loans. The collateral for these securitizations may include loans underwritten and purchased by us at loan origination and loans we do not own prior to securitization and that we underwrite after (rather than at) origination.
Our largest other securitization product is PCs, which are fully guaranteed securities. In these transactions, we securitize multifamily loans into pass-through securities that are similar in structure to our Single-family Guarantee segment Level 1 Securitization Products. Since we guarantee the timely payment of scheduled principal and interest and direct loss mitigation activities, we consolidate the securitization trusts used in these transactions.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
55
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Multifamily
|
Summary of Our Primary Business Model and Its Impacts to Segment Earnings
The following diagram summarizes the activities included in our primary business model for fixed-rate loans measured at fair value and the corresponding impacts to our Segment Earnings.
Other Guarantee Products
n Other mortgage-related guarantees - We guarantee mortgage-related assets held by third parties in exchange for guarantee fee income, without securitizing those assets. For example, we provide guarantees on certain tax-exempt multifamily housing revenue bonds secured by low- and moderate-income multifamily loans.
Other CRT Products
For the multifamily assets for which we have not transferred credit risk through securitization, we may pursue other strategies to reduce our risk exposure. Our other CRT products include the following:
n MCIP - We purchase insurance coverage underwritten by a group of insurers and/or reinsurers that generally provide first loss and/or mezzanine loss credit protection. These transactions are similar in structure to the ACIS contracts purchased by the Single-family Guarantee segment, except the reference pool, in addition to loans, may include bonds underlying our other mortgage-related guarantees. When specific credit events occur, we receive compensation from the insurance policy up to an aggregate limit based on actual losses. We require our counterparties to partially collateralize their exposure to reduce the risk that we will not be reimbursed for our claims under the policies.
n SCR debt notes - Through the issuance of our SCR debt notes, which are unsecured and unguaranteed corporate debt obligations, we transfer to third parties a portion of the credit risk of the loans underlying certain of our consolidated other securitizations and certain of our other mortgage-related guarantees. The interest we pay on our SCR debt notes effectively reduces the income we would otherwise earn on the assets underlying the reference pool. SCR debt notes are generally similar in structure to our Single-family Guarantee segment's STACR debt notes.
In addition to our other CRT products, we engage in whole loan sales, including sales of loans to funds to which we may also provide secured financing, to eliminate our interest-rate risk, liquidity risk, and credit risk exposure to certain loans.
For additional information on multifamily credit enhancements, see MD&A - Risk Management - Multifamily Mortgage Credit Risk - Transferring Credit Risk to Third-Party Investors.
Investing Activities
n Mortgage loans - We hold a portfolio of multifamily loans as part of a buy-and-hold investment strategy or to use as collateral in our PC transactions. However, this strategy is not part of our primary business model.
n Mortgage-related securities - Depending on market conditions and our business strategy, we may purchase or sell guaranteed K Certificates or SB Certificates at issuance or in the secondary market, including interest-only securities. Through our ownership of the interest-only securities, we are exposed to the credit risk on the loans underlying our securitizations.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
56
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Multifamily
|
n Other investments - We invest in certain non-mortgage investments, including LIHTC partnerships and other secured lending activities.
Our multifamily loan activity is generally sourced through our Optigo network of approved lenders, who are primarily non-bank real estate finance companies and banks. We generally provide post-construction financing to apartment project operators with established performance records. The following charts show the concentration of our 2020 multifamily new business activity by our largest sellers and loan servicing by our largest servicers as of December 31, 2020. Any seller or servicer with a 10% or greater share is listed separately.
Percentage of New Business Activity(1)
(1) Excludes LIHTC new business activity.
Percentage of Servicing Volume(2)
(2) Percentage of servicing volume is based on the total multifamily mortgage portfolio, which includes loans where we do not exercise servicing control.
We compete on the basis of price, service and products, including our use of certain securitization structures. Our principal competitors in the multifamily market are Fannie Mae, FHA, commercial and investment banks, CMBS conduits, savings institutions, and life insurance companies.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
57
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Multifamily
|
The graphs, tables, and related discussion below present the business results of our Multifamily segment.
New Business Activity for the Year Ended December 31,
Acquisition of Units by AMI for the Year Ended December 31,
n As of December 31, 2020, our cumulative new business activity subject to the cap was $100.0 billion. Approximately 39% of this activity was mission-driven, affordable housing. The 2021 purchase cap for the multifamily business will be $70 billion as instructed by FHFA.
n Outstanding commitments, including index lock commitments and commitments to purchase or guarantee multifamily assets, were $18.7 billion and $14.6 billion as of December 31, 2020 and December 31, 2019, respectively.
n Our 2020 new business activity was slightly higher than 2019 due to ongoing demand for multifamily financing driven by the low interest-rate environment resulting in continued growth in overall multifamily mortgage debt outstanding.
n The portion of our new mortgage loan purchase activity that was classified as held-for-sale and intended for our securitization pipeline increased slightly to 88% in 2020 from 87% in 2019. The purchase activity that remained in our securitization pipeline as of December 31, 2020, combined with market demand for our securities, will be a driver for our primary securitizations in the first two quarters of 2021.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
58
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Multifamily
|
Securitization, Guarantee, and Risk Transfer Activity
Securitization and Guarantee Activities for the Year Ended December 31,
n Total securitization UPB for 2020 was flat compared to 2019, as the UPB increase attributable to greater PC issuance activity was mostly offset by a decline in deal size of our SB Certificate transactions, which was partially limited by the composition of our securitization pipeline.
n Approximately 88% and 90% of total securitization UPB related to our primary securitizations during 2020 and 2019, respectively.
n The average guarantee fee rate on new guarantee contracts increased during 2020 compared to 2019, primarily driven by higher guarantee fee rates on new K Certificate securitizations as we reduced subordination levels for certain of these transactions by issuing lower amounts of unguaranteed subordinated securities. The lower subordination levels are still expected to absorb a substantial amount of expected and stressed credit losses. Additionally, our average guarantee fee rate increased as we issued a higher volume of PC securitizations that have higher negotiated guarantee fee rates due to the lack of subordination.
n In addition to the credit risk we transferred to third parties through our securitizations, we obtained credit protection of up to $0.3 billion and $0.2 billion on $4.2 billion and $3.0 billion of UPB through our other CRT products and loss sharing arrangements during 2020 and 2019, respectively.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
59
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Multifamily
|
Multifamily Portfolio and Market Support
The following table summarizes our multifamily portfolio and our support of the multifamily market.
Table 14 - Multifamily Portfolio and Market Support
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
December 31, 2020
|
December 31, 2019
|
Guarantee portfolio:
|
|
|
|
Primary securitizations
|
|
$274,393
|
|
$240,134
|
|
Other securitizations
|
|
26,967
|
|
20,205
|
|
Other mortgage-related guarantees
|
|
11,029
|
|
10,514
|
|
Total guarantee portfolio
|
|
312,389
|
|
270,853
|
|
Mortgage-related investments portfolio:
|
|
|
|
Unsecuritized mortgage loans held-for-sale
|
|
23,789
|
|
18,954
|
|
Unsecuritized mortgage loans held-for-investment
|
|
9,618
|
|
10,831
|
|
Mortgage-related securities(1)
|
|
4,180
|
|
5,889
|
|
Total mortgage-related investments portfolio
|
|
37,587
|
|
35,674
|
|
Other investments(2)
|
|
2,838
|
|
2,945
|
|
Total multifamily portfolio
|
|
352,814
|
|
309,472
|
|
Add: Unguaranteed securities(3)
|
|
43,204
|
|
40,666
|
|
Less: Acquired mortgage-related securities(4)
|
|
(4,055)
|
|
(5,709)
|
|
Total multifamily market support
|
|
$391,963
|
|
$344,429
|
|
Total units financed
|
|
4,597,597
|
|
4,305,480
|
|
(1)Includes mortgage-related securities acquired by us from our securitizations.
(2)Includes the carrying value of LIHTC investments and the UPB of non-mortgage loans, including financing provided to whole loan funds.
(3)Reflects the UPB of unguaranteed securities issued as part of our securitizations and amounts related to loans sold to whole loan funds that were not financed by Freddie Mac.
(4)Reflects the UPB of mortgage-related securities that were both issued as part of our securitizations and acquired by us. This UPB must be removed from the mortgage-related securities balance to avoid double-counting the exposure, as it is already reflected within the guarantee portfolio or unguaranteed securities.
n Our total multifamily portfolio increased during 2020, primarily due to our loan purchase and securitization activity. We expect continued growth in our total portfolio in 2021 as purchase and securitization activities should outpace run off.
n At December 31, 2020, approximately 58% of our held-for-sale loans were fixed-rate, while the remaining 42% were floating-rate.
n As of December 31, 2020, we had cumulatively transferred a substantial amount of the expected and stressed credit risk on the multifamily guarantee portfolio primarily through subordination in our securitizations. In addition, nearly all of our securitization activities shifted substantially all of the interest-rate and liquidity risk associated with the underlying collateral away from Freddie Mac to third-party investors.
n We earn guarantee fees in exchange for providing our guarantee of some or all of the securities we issue as part of our securitizations and for our other mortgage-related guarantees. The average guarantee fee rate on our guarantee portfolio was 38 basis points and 37 basis points as of December 31, 2020 and December 31, 2019, respectively, while the average remaining guarantee term was eight years as of both December 31, 2020 and December 31, 2019. While we expect to earn future guarantee fees at the average guarantee fee rate over the average remaining guarantee term, the actual amount earned will depend on the performance of the underlying collateral subject to our financial guarantee.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
60
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Multifamily
|
Net Interest Yield & Average Investment Portfolio Balance
(Weighted average balance in billions)
n 2020 vs. 2019
l Net interest yield remained relatively flat.
l The weighted average investment portfolio balance of interest-earning assets was lower due to a decrease in the average balance of unsecuritized held-for-sale loans primarily driven by the timing of loan purchases and securitizations.
n 2019 vs. 2018
l Net interest yield increased primarily due to a higher yield and higher prepayment income received from mortgage-related securities, coupled with lower funding costs on our held-for-sale mortgage loans driven by lower interest rates.
l The weighted average investment portfolio balance of interest-earning assets decreased due to a reduction of our unsecuritized held-for-investment loans as we securitized more of these loans into PC securitizations.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
61
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Multifamily
|
Mortgage Loans Gains (Losses), Net and Initial Pricing Margin on Commitments
Multifamily Segment Mortgage Loans Gains (Losses), Net
(In millions)
Source of spread data in basis points: Independent Dealers
Initial Pricing Margin on Commitments
(In millions)
(Notional in millions) 2018 2019 2020
New loan commitments
measured at fair value $68,439 $51,253 $42,227
n We primarily recognize revenue from our mortgage loans as mortgage loans gains (losses), net, which is a component of investment gains (losses), net. The amount of mortgage loans gains (losses), net, shown above is net of gains and losses on derivative instruments we use to economically hedge the interest-rate risk of the loan commitments and mortgage loans.
n Mortgage loans gains (losses), net, consists of three components: (1) the initial pricing margin on new loan commitments, which we recognize at the commitment date for commitments we measure at fair value, (2) spread-related fair value changes during the commitment and loan holding periods for loan commitments and mortgage loans we measure at fair value, which are primarily driven by changes in benchmark spreads after the commitment date, and (3) other items, including realized gains on sales of mortgage loans we do not elect to measure at fair value.
n We recognized larger gains in mortgage loans gains (losses), net, during 2020 compared to 2019 primarily due to higher initial pricing margins on new loan commitments and greater realized gains from the sale of a higher volume of loans measured at the lower-of-cost-or-fair-value. While initial pricing margin remains at record levels, changes in market conditions and/or business strategy may reduce these margins in the future.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
62
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Multifamily
|
The table below presents the components of the Segment Earnings and comprehensive income for our Multifamily segment.
Table 15 - Multifamily Segment Financial Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over Year Change
|
|
|
Year Ended December 31,
|
|
2020 vs. 2019
|
|
2019 vs. 2018
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
|
$
|
%
|
|
$
|
%
|
Net interest income
|
|
$943
|
|
$1,069
|
|
$1,096
|
|
|
($126)
|
|
(12)
|
%
|
|
($27)
|
|
(2)
|
%
|
Guarantee fee income
|
|
1,444
|
|
1,101
|
|
861
|
|
|
343
|
|
31
|
|
|
240
|
|
28
|
|
Mortgage loans gains (losses), net
|
|
2,497
|
|
1,202
|
|
193
|
|
|
1,295
|
|
108
|
|
|
1,009
|
|
523
|
|
Other investment gains (losses), net
|
|
(450)
|
|
(626)
|
|
(177)
|
|
|
176
|
|
28
|
|
|
(449)
|
|
(254)
|
|
Investment gains (losses), net
|
|
2,047
|
|
576
|
|
16
|
|
|
1,471
|
|
255
|
|
|
560
|
|
3,500
|
|
Other income (loss)
|
|
176
|
|
108
|
|
129
|
|
|
68
|
|
63
|
|
|
(21)
|
|
(16)
|
|
Net revenues
|
|
4,610
|
|
2,854
|
|
2,102
|
|
|
1,756
|
|
62
|
|
|
752
|
|
36
|
|
Credit-related expense
|
|
(136)
|
|
(18)
|
|
9
|
|
|
(118)
|
|
(656)
|
|
|
(27)
|
|
(300)
|
|
Administrative expense
|
|
(514)
|
|
(503)
|
|
(437)
|
|
|
(11)
|
|
(2)
|
|
|
(66)
|
|
(15)
|
|
Other expense
|
|
(37)
|
|
(41)
|
|
(36)
|
|
|
4
|
|
10
|
|
|
(5)
|
|
(14)
|
|
Operating expense
|
|
(551)
|
|
(544)
|
|
(473)
|
|
|
(7)
|
|
(1)
|
|
|
(71)
|
|
(15)
|
|
Segment Earnings (Losses) before income tax (expense) benefit
|
|
3,923
|
|
2,292
|
|
1,638
|
|
|
1,631
|
|
71
|
|
|
654
|
|
40
|
|
Income tax expense
|
|
(809)
|
|
(465)
|
|
(319)
|
|
|
(344)
|
|
(74)
|
|
|
(146)
|
|
(46)
|
|
Segment Earnings (Losses), net of taxes
|
|
3,114
|
|
1,827
|
|
1,319
|
|
|
1,287
|
|
70
|
|
|
508
|
|
39
|
|
Total other comprehensive income (loss), net of tax
|
|
101
|
|
101
|
|
(83)
|
|
|
—
|
|
—
|
|
|
184
|
|
222
|
|
Total comprehensive income (loss)
|
|
$3,215
|
|
$1,928
|
|
$1,236
|
|
|
$1,287
|
|
67
|
%
|
|
$692
|
|
56
|
%
|
Key Drivers:
n 2020 vs. 2019
l Decrease in net interest income driven by lower average loan and mortgage-related security balances, coupled with a decline in mortgage-related security prepayment income.
l Increase in guarantee fee income driven by continued growth in our guarantee portfolio, coupled with lower fair value losses on our multifamily guarantee assets due to lower interest rates.
l Higher investment gains (net of other comprehensive income) driven by strong initial pricing margins on new loan commitments, coupled with increased realized gains from the sale of a higher volume of loans measured at lower-of-cost-or-fair-value.
l Increase in credit-related expense due to higher expected credit losses as a result of the negative economic effects of the COVID-19 pandemic.
n 2019 vs. 2018
l Net interest income remained relatively flat.
l Increase in guarantee fee income primarily driven by continued growth in our guarantee portfolio, coupled with lower fair value losses on our guarantee assets due to lower interest rates.
l Higher investment gains (net of other comprehensive income) driven by strong initial pricing margins on new loan commitments, coupled with spread-related fair value improvements.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
63
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Capital Markets
|
Capital Markets
The Capital Markets segment is responsible for managing the majority of our mortgage-related investments portfolio, and providing company-wide treasury and interest-rate risk management functions. In addition, we are responsible for managing our securitization and resecuritization activities related to single-family loans, and supporting multifamily securitizations.
Our mortgage portfolio management activities primarily include single-family unsecuritized loans and purchases and sales of agency mortgage-related securities. In addition, we actively engage in the structuring of our agency mortgage-related securities. Our portfolio management activities also include responsibility for maintaining the other investments portfolio, which is primarily used for short-term liquidity management. However, certain portions of the mortgage-related investments portfolio are not managed by us, including the portions of the portfolio related to multifamily assets, single-family seriously delinquent loans, and the credit risk on single-family performing and reperforming loans.
We provide a company-wide treasury function, primarily managing our funding and liquidity needs on both a short- and long-term basis. The primary activities of the treasury function include issuing, calling, and repurchasing debt of Freddie Mac and maintaining a portfolio of non-mortgage investments.
Our interest-rate risk management function consolidates and manages the overall interest-rate risk of the company. We actively monitor and economically hedge this risk, primarily through the use of derivative instruments. In addition, we further reduce these interest-rate exposures through active management of our debt funding mix and through the structuring of our investments in mortgage-related securities. We use fair value hedge accounting to reduce the variability in our GAAP earnings due to changes in interest rates.
Finally, the Capital Markets segment is responsible for management of our securitization and resecuritization activities related to single-family loans, which are discussed in more detail in MD&A - Our Business Segments - Single-Family Guarantee.
Certain business activities are significantly constrained by limitations under the Purchase Agreement and limitations imposed by FHFA. These constraints reduce the size of our mortgage-related investments portfolio, limit investments used for liquidity and contingency, and constrain our future purchase volume through the cash window. These limitations increase our funding costs and negatively impact our results of operations. We may also forgo certain investment opportunities due to the risk that an accounting treatment may create earnings variability. For additional information on the limits on the mortgage-related investments portfolio established by the Purchase Agreement and by FHFA, see MD&A - Conservatorship and Related Matters. For additional information on the limits on the investments used for our liquidity and contingency portfolio established by FHFA, see MD&A - Liquidity and Capital Resources.
Investing, Liquidity Management, and Related Activities
In our Capital Markets segment, our objectives are to make appropriate risk and capital management decisions, effectively execute our strategy and be responsive to market conditions. We manage the following types of products:
n Agency mortgage-related securities - We primarily invest in Freddie Mac mortgage-related securities and may also invest in Fannie Mae and Ginnie Mae mortgage-related securities from time to time. Our activities with respect to these products may include purchases and sales, dollar roll transactions, and structuring activities (e.g., resecuritizing existing agency securities into REMICs and selling some or all of the resulting REMIC tranches).
n Single-family unsecuritized loans - We acquire single-family unsecuritized loans in two primary ways:
l Loans acquired through our cash window that are awaiting securitization - We securitize most of the loans acquired through our cash window into Freddie Mac mortgage-related securities, which may be sold to investors or retained in our mortgage-related investments portfolio; and
l Seriously delinquent or modified loans that we have removed from our consolidated trusts - Certain of these loans may reperform, either on their own or through modification. Reperforming loans are managed by both the Capital Markets and Single-family Guarantee segments, but are included in the Capital Markets segment's financial results. Loans that remain seriously delinquent are also managed by both the Capital Markets and Single-family Guarantee segments, but are included in the Single-family Guarantee segment's financial results. We may continue to reduce the balance of our seriously delinquent and reperforming loans through a variety of methods, including loss mitigation and foreclosure activities and securitizations and sales. For more information on securitization and sales of seasoned loans, see MD&A - Our Business Segments - Single-Family Guarantee - Business Overview - Products and Activities - Sales and Securitization of Certain Seasoned Loans.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
64
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Capital Markets
|
n Other investments portfolio - We invest in other investments, including: (i) the Liquidity and Contingency Operating Portfolio, primarily used for short-term liquidity management, (ii) cash and other investments held by consolidated trusts, (iii) investments used to pledge as collateral, and (iv) secured lending activities.
In our secured lending activities: (i) we provide funds to lenders for mortgage loans that they will subsequently either sell through our cash purchase program or securitize into securities that they will deliver to us, (ii) we enter into securities purchased under agreements to resell as a mechanism to provide financing to investors in Freddie Mac securities to increase liquidity and expand the investor base for those securities, and (iii) we provide secured term financing through revolving lines of credit collateralized by the value of contractual mortgage servicing rights on certain mortgages that we own. However, we no longer extend such lines of credit to new customers.
n Non-agency mortgage-related securities - We generally no longer purchase non-agency mortgage-related securities, and have minimal investments in such securities from our acquisitions in prior years. Our activities with respect to this product are primarily sales. However, we may acquire such securities in connection with our senior subordinate securitization structures backed by seasoned loans. In recent years, we and FHFA reached settlements with a number of institutions to mitigate or recover losses we recognized in prior years.
|
|
|
|
|
|
The primary impacts to Segment Earnings are:
|
|
|
•
|
Interest income on agency and non-agency mortgage-related securities, unsecuritized loans, and our other investments portfolio;
|
|
|
|
|
•
|
Fair value gains and losses due to changes in interest rate and market spreads on our agency and non-agency mortgage-related securities and on certain securities held within our other investments portfolio that are accounted for as investment securities. These amounts are recognized in Segment Earnings or total other comprehensive income (loss) depending upon their classification (trading or available-for-sale, respectively);
|
|
|
|
|
•
|
Amortization of cost basis adjustments, such as net amortization of loans from our cash purchase program and related debt securities in consolidated trusts and hedge accounting related basis adjustments; and
|
|
|
|
|
•
|
Gains and losses on the sale of unsecuritized loans.
|
We evaluate the liquidity of our mortgage-related assets based on three categories (in order of liquidity):
n Liquid - Single-class and multi-class agency securities, excluding certain structured agency securities collateralized by non-agency mortgage-related securities;
n Securitization pipeline - Performing single-family loans purchased for cash and primarily held for a short period until securitized, with the resulting Freddie Mac issued securities being sold or retained; and
n Less liquid - Assets that are less liquid than both agency securities and loans in the securitization pipeline (e.g., reperforming loans and non-agency mortgage-related securities).
We may undertake various activities to support our presence in the agency securities market or to support the liquidity of our securities, including their price performance relative to comparable Fannie Mae securities. These activities may include the purchase and sale of agency securities, dollar roll transactions, and structuring activities, such as resecuritization of existing agency securities and the sale of some or all of the resulting securities. Depending upon market conditions, there may be substantial variability in any period in the total amount of securities we purchase or sell. The purchase or sale of agency securities could, at times, adversely affect the price performance of our securities relative to comparable Fannie Mae securities.
We may incur costs to support our presence in the agency securities market and to support the liquidity and price performance of our securities. For more information, see Risk Factors - Market Risks - A significant decline in the price performance of or demand for our UMBS could have an adverse effect on the volume and/or profitability of our new single-family guarantee business.
Funding and Liquidity Management Activities
Our treasury function manages the funding needs of the company, including the Capital Markets segment, primarily through the issuance of unsecured debt of Freddie Mac. The type and term of debt issued is based on a variety of factors and is designed to meet our ongoing cash needs and to comply with our Liquidity Management Framework. This Framework provides a mechanism for us to sustain periods of market illiquidity, while being able to maintain certain business activities and remain current on our obligations. See MD&A - Liquidity and Capital Resources - Liquidity Management Framework for additional discussion of our Liquidity Management Framework.
We primarily use the following types of products as part of our funding and liquidity management activities:
n Discount notes and Reference Bills® - We issue short-term instruments with maturities of one year or less. These products are generally sold on a discounted basis, paying principal only at maturity. Reference Bills are auctioned to dealers on a regular schedule, while discount notes are issued in response to investor demand and our cash needs.
n Medium-term notes - We issue a variety of fixed-rate and variable-rate medium-term notes, including callable and non-callable securities, and zero-coupon securities, with various maturities.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
65
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Capital Markets
|
n Reference Notes® securities - Reference Notes securities are non-callable fixed-rate securities, which we generally issue with original maturities greater than or equal to two years.
n Securities sold under agreements to repurchase - Collateralized short-term borrowings where we sell securities to a counterparty with an agreement to repurchase those securities at a future date.
In addition, proceeds from STACR debt notes, SCR debt notes, upfront fees and net worth are used to meet the funding needs of the company. We are no longer issuing STACR debt notes on a regular basis as STACR debt note transactions have been replaced with STACR Trust note transactions. For a description of STACR transactions, see MD&A - Our Business Segments - Single-Family Guarantee - Business Overview - Products and Activities, and for a description of SCR debt notes, see MD&A - Our Business Segments - Multifamily - Business Overview - Products and Activities.
The average life of our assets is longer than the average life of our liabilities, which creates liquidity risk. To manage short-term liquidity risk, we may hold a combination of cash, cash-equivalent, and non-mortgage-related investments in our Liquidity and Contingency Operating Portfolio. These instruments are limited to those we expect to be liquid or mature in the short term. We also lend available cash on a short-term basis through transactions where we purchase securities under agreements to resell. This portfolio is designed to allow us to meet all of our obligations in the event that we lose access to the unsecured debt markets for a period of time.
See Liquidity and Capital Resources for a further discussion of our funding and liquidity management activities.
|
|
|
|
|
|
The primary impacts to Segment Earnings are:
|
|
|
•
|
Interest expense on our various funding products and
|
|
|
|
|
•
|
Gains and losses on the early termination (call or repurchase) of our funding products.
|
|
|
Interest-Rate Risk Management Activities
We manage the economic interest-rate risk for the company and have management-approved limits for interest-rate risk, as measured by our models. See MD&A - Risk Management - Market Risk for additional information, including the measurement of the interest-rate sensitivity of our financial assets and liabilities.
There is a cash flow mismatch between our assets and liabilities that we use to fund those assets. This mismatch in cash flows not only leads to liquidity risk, but also results in interest-rate risk. We typically use interest-rate derivatives to reduce the economic risk exposure due to this mismatch. Using our risk management practices described in the MD&A - Risk Management - Market Risk section, we seek to reduce this impact to low levels. Additionally, assets that are likely to be sold prior to their final maturity may have a different debt and derivative mix than assets that we plan to hold for a longer period. As a result, interest-rate risk measurements for those assets may include additional assumptions (such as a view on expected changes in market spreads) concerning their price sensitivity rather than just a longer-term view of cash flows.
To manage our interest-rate risk, we primarily use interest rate swaps, options, swaptions, and futures. When we use derivatives to mitigate our risk exposures, we consider a number of factors, including cost, exposure to counterparty credit risk, and our overall risk management strategy.
While our interest-rate risk management activities are primarily focused on reducing our economic interest-rate risk, we also use hedge accounting strategies to reduce our GAAP earnings variability. We use hedge accounting to better align our earnings with the economics of our business. After dedesignation of a fair value hedging relationship, the amount of amortization of the fair value hedging basis adjustment associated with the previously designated hedged item that we recognize in a period may differ from the change in fair value of the previously designated hedging instrument during that period, which may create variability in our earnings. Hedge accounting is not intended to change the investment and portfolio management decisions that our segment would otherwise make. For more information on our use of hedge accounting see MD&A - Risk Management - Market Risk - Earnings Sensitivity to Market Risk and Note 10.
We have participated in transactions that support the development of the Secured Overnight Financing Rate (SOFR) as an alternative rate to LIBOR and expect to continue to do so for the foreseeable future. These transactions include investment in and issuance of SOFR indexed floating-rate debt securities and securitizations and execution of SOFR indexed derivatives. For additional details on SOFR see Risk Factors - Market Risks - The expected discontinuance of LIBOR could negatively affect the fair value of our financial assets and liabilities, results of operations, and net worth. A transition to an alternative reference interest rate could present operational problems and subject us to possible litigation risk. We may be unable to take a consistent approach across our financial products.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
66
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Capital Markets
|
|
|
|
|
|
|
The primary impacts to Segment Earnings are:
|
|
|
•
|
Fair value gains and losses on derivatives not designated in qualifying hedge relationships;
|
|
|
|
|
•
|
Interest income/expense on derivatives; and
|
|
|
|
|
•
|
Differences between changes in the fair value of the hedged item attributable to the risk being hedged and changes in the fair value of the hedging instrument for derivatives designated in qualifying fair value hedge accounting relationships.
|
|
|
Summary of our Primary Business Model and Its Impacts to Segment Earnings
Securitization Activities
We manage the company's securitization and resecuritization activities related to single-family loans. See MD&A - Our Business Segments - Single-Family Guarantee for a discussion of our single-family securitization and guarantee products.
Our customers include banks and other depository institutions, insurance companies, money managers, central banks, pension funds, state and local governments, REITs, brokers and dealers, and a variety of lenders as discussed in MD&A - Our Business Segments - Single-Family Guarantee - Business Overview - Customers. Our unsecured debt securities and structured mortgage-related securities are initially purchased by dealers and redistributed to their customers.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
67
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Capital Markets
|
Our competitors in the Capital Markets segment are firms that invest in loans and mortgage-related assets and issue corporate debt, including Fannie Mae, REITs, supranationals (international institutions that provide development financing for member countries), commercial and investment banks, dealers, savings institutions, insurance companies, the Federal Farm Credit Banks, the FHLBs, and non-bank loan aggregators, who are both our customers and competitors.
The graphs and related discussion below present the business results of our Capital Markets segment.
The following graphs present the Capital Markets segment's total investments portfolio and the composition of its mortgage investments portfolio by liquidity category.
Investments Portfolio as of December 31,
Mortgage Investments Portfolio as of December 31,
n The balance of our mortgage investments portfolio decreased by $33.8 billion from December 31, 2019 to December 31, 2020 primarily due to mortgage-related investments portfolio constraints imposed by the Purchase Agreement and FHFA, coupled with higher single-family loan purchase volume. See MD&A - Conservatorship and Related Matters for additional details.
n The balance of our other investments portfolio increased 59.4% from $100.3 billion as of December 31, 2019 to $159.9 billion as of December 31, 2020, primarily due to higher near-term cash needs driven by a higher expected single-family cash window loan purchase forecast, coupled with a larger liquidity and contingency operating portfolio as we transitioned to comply with the updated minimum liquidity requirements established by FHFA. In addition, our custodial trust account balance increased due to higher loan prepayments.
n The overall liquidity of our mortgage investments portfolio continued to improve as our less liquid assets decreased during 2020. The percentage of less liquid assets relative to our total mortgage investments portfolio declined from 17.9% at December 31, 2019 to 14.6% at December 31, 2020, primarily due to securitizations and sales.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
68
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Capital Markets
|
Reduction in Less Liquid Assets
Less Liquid Assets as of December 31,
Sales of Less Liquid Assets for the Year Ended December 31,
n Since 2013, we have focused on reducing, in an economically sensible manner, our holdings of certain less liquid assets, including single-family reperforming loans and non-agency mortgage-related securities. Our disposition strategies for our less liquid assets include securitizations and sales.
n During 2020, our sales of less liquid assets included $8.3 billion in UPB of reperforming loans using our senior subordinate securitization structures. As part of these transactions, we retained certain of the guaranteed senior securities for our mortgage-related investments portfolio.
n One of our strategies is to securitize reperforming loans into Level 1 Securitization Products. In 2020, we securitized $1.4 billion of single-family reperforming loans into 55-day MBS. We initially retained the resulting mortgage-related securities and may resecuritize or sell them to third parties.
n Our less liquid assets are likely to increase in future periods due to the effects of the COVID-19 pandemic as we will likely purchase a higher amount of delinquent and modified loans from securities after borrowers exit forbearance plans.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
69
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Capital Markets
|
Net Interest Yield and Average Balances
Net Interest Yield & Average Investments Portfolio Balances
(Weighted average balance in billions)
n 2020 vs. 2019 - Net interest yield decreased primarily due to higher liquidation rates, driven by lower interest rates, resulting in an increase in amortization expense and additional expense due to payments to security holders of the full monthly coupon rate when loans pay off mid-month. In addition, our custodial trust account balance increased due to higher prepayments and earned a minimal yield due to historically low interest rates.
n 2019 vs. 2018 - Net interest yield decreased primarily due to the lower and flatter interest rate environment, coupled with a change in our investment mix, as the other investments portfolio represented a larger percentage of our total investments portfolio, and an increase in amortization expense resulting from higher loan liquidation rates.
n Net interest yield for the Capital Markets segment is not affected by our hedge accounting programs due to reclassifications made for Segment Earnings. See Note 17 for more information.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
70
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Capital Markets
|
The table below presents the components of the Segment Earnings and comprehensive income for our Capital Markets segment.
Table 16 - Capital Markets Segment Financial Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over Year Change
|
|
|
Year Ended December 31,
|
|
2020 vs. 2019
|
|
2019 vs. 2018
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
|
$
|
%
|
|
$
|
%
|
Net interest income
|
|
$522
|
|
$2,486
|
|
$3,217
|
|
|
($1,964)
|
|
(79)
|
%
|
|
($731)
|
|
(23)
|
%
|
Investment gains (losses), net
|
|
(231)
|
|
(36)
|
|
1,803
|
|
|
(195)
|
|
(542)
|
|
|
(1,839)
|
|
(102)
|
|
Other income (loss)
|
|
(266)
|
|
(700)
|
|
340
|
|
|
434
|
|
62
|
|
|
(1,040)
|
|
(306)
|
|
Net revenues
|
|
25
|
|
1,750
|
|
5,360
|
|
|
(1,725)
|
|
(99)
|
|
|
(3,610)
|
|
(67)
|
|
Administrative expense
|
|
(412)
|
|
(414)
|
|
(365)
|
|
|
2
|
|
—
|
|
|
(49)
|
|
(13)
|
|
Other expense
|
|
(21)
|
|
(54)
|
|
(11)
|
|
|
33
|
|
61
|
|
|
(43)
|
|
(391)
|
|
Operating expense
|
|
(433)
|
|
(468)
|
|
(376)
|
|
|
35
|
|
7
|
|
|
(92)
|
|
(24)
|
|
Segment Earnings (Losses) before
income tax (expense) benefit
|
|
(408)
|
|
1,282
|
|
4,984
|
|
|
(1,690)
|
|
(132)
|
|
|
(3,702)
|
|
(74)
|
|
Income tax (expense) benefit
|
|
84
|
|
(260)
|
|
(976)
|
|
|
344
|
|
132
|
|
|
716
|
|
73
|
|
Segment Earnings (Losses), net of taxes
|
|
(324)
|
|
1,022
|
|
4,008
|
|
|
(1,346)
|
|
(132)
|
|
|
(2,986)
|
|
(75)
|
|
Total other comprehensive income (loss), net of tax
|
|
120
|
|
494
|
|
(527)
|
|
|
(374)
|
|
(76)
|
|
|
1,021
|
|
194
|
|
Total comprehensive income (loss)
|
|
($204)
|
|
$1,516
|
|
$3,481
|
|
|
($1,720)
|
|
(113)
|
%
|
|
($1,965)
|
|
(56)
|
%
|
The portion of total comprehensive income (loss) driven by interest rate-related and market spread-related fair value changes, after-tax, is presented in the table below. These amounts affect various line items in the table above, including investment gains (losses), net, income tax expense, and total other comprehensive income (loss), net of tax.
Table 17 - Capital Markets Segment Interest Rate-Related and Market Spread-Related Fair Value Changes, Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Over Year Change
|
|
|
Year Ended December 31,
|
|
2020 vs. 2019
|
|
2019 vs. 2018
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
|
$
|
%
|
|
$
|
%
|
Interest rate-related
|
|
$0.6
|
|
($0.4)
|
|
($0.3)
|
|
|
$1.0
|
|
250
|
%
|
|
($0.1)
|
|
(33)
|
%
|
Market spread-related
|
|
(0.7)
|
|
0.2
|
|
0.4
|
|
|
(0.9)
|
|
(450)
|
|
|
(0.2)
|
|
(50)
|
|
Key Drivers:
n 2020 vs. 2019
l Net interest income decreased primarily due to higher liquidation rates, driven by lower interest rates, resulting in an increase in amortization expense and additional expense due to payments to security holders of the full monthly coupon rate when loans pay off mid-month. In addition, our custodial trust account balance increased due to higher prepayments and earned a minimal yield due to historically low interest rates.
l Decrease in investment gains (losses), net, primarily due to losses on commitments to sell mortgage-related securities as prices increased due to spread tightening, partially offset by gains on commitments to purchase mortgage loans. In addition, we recognized interest rate-related fair value gains as long-term interest rates further declined. The decrease in long-term interest rates resulted in fair value gains on many of our investments in securities (some of which are recorded in other comprehensive income), partially offset by derivative losses and amortization expense from previously deferred fair value hedge accounting basis adjustments related to hedging company-wide interest-rate risk. See MD&A - Risk Management - Market Risk for additional information on the effect of market-related items on our comprehensive income.
l Increase in other income primarily due to higher net amortization of certain basis adjustments on loans and debt securities of consolidated trusts.
n 2019 vs. 2018
l Net interest income decreased primarily due to the lower and flatter interest rate environment, which also resulted in an increase in amortization expense due to higher loan liquidation rates and a change in our investment mix, as the other investments portfolio represented a larger percentage of our total investments portfolio.
l Decrease in investment gains (losses), net of $1.8 billion, partially offset by an increase of $1.0 billion in other comprehensive income. The remaining decline in investment gains (losses) was primarily due to a decline of
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
71
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Capital Markets
|
approximately $0.5 billion in gains from debt repurchase activity and the $0.3 billion increase in interest rate-related and market spread-related fair value losses shown in the table above. Both of these declines were primarily attributable to the decrease in long-term interest rates. Our derivative volume increased beginning in 2Q 2019 as we updated our interest-rate risk measures to include upfront fees (including buy-downs) related to single-family credit guarantee activity recorded in the single-family segment. This increase in derivative volume introduced additional volatility in our financial results that primarily drove our interest rate-related fair value losses. See MD&A - Risk Management - Market Risk for additional information on the effect of market-related items on our comprehensive income.
l Decrease in other income primarily due to lower net amortization income driven by the timing differences in amortization related to prepayment between debt of consolidated trusts and the underlying loans from our cash purchase program. For further discussion on timing differences in amortization, see MD&A - Consolidated Results of Operations.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
72
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Overview
|
RISK MANAGEMENT
Overview
To achieve our mission of providing liquidity, stability, and affordability to the U.S. housing market, we take risks as an integral part of our business activities. Risk is the possibility that events will adversely affect the achievement of our mission, strategy, and business objectives. Risk can manifest itself in many ways and the responsibility for risk management resides at all levels of the company. We seek to take risks in a safe and sound, well-controlled manner to earn acceptable risk-adjusted returns on both a corporate-wide and, where applicable, transaction basis. Our goal is to maintain a strong risk culture where employees are risk aware, collaborative, and transparent, individually accountable for their decisions, and conduct business in an effective, legal, and ethical manner.
We utilize a risk taxonomy to define and classify risks that we face in operating our business. These risks have the potential to adversely affect our current or projected financial and operational resilience. The risk taxonomy is also the basis for aligning corporate risk policies and standards. Risks are classified into the following categories:
n Credit Risk;
n Operational Risk;
n Market Risk;
n Liquidity Risk;
n Strategic Risk; and
n Reputation Risk.
Strategic and reputation risks are factored into business decisions and are a shared responsibility of senior management. For more discussion of these and other risks facing our business, see Risk Factors. See Liquidity and Capital Resources for a discussion of liquidity risk.
Enterprise Risk Framework
The enterprise risk framework is a key component for how we manage risk to achieve our mission, strategy, and business objectives. The enterprise risk framework:
n Defines risk roles and responsibilities across the three lines of defense and
n Promotes accountability and transparency in risk management decisions and execution.
The framework includes the following components:
n Risk Appetite - The risk appetite is the level of risk, both in aggregate and by risk type, within the company's risk capacity that the Board and management are willing to assume to achieve the company's strategic goals. The risk appetite is influenced by our available capital, and integrated and aligned with the strategic plans for the company and each business segment. The risk appetite is approved by the Board of Directors and then by FHFA as Conservator, who may change our risk appetite or risk limits.
n Capital Framework - We have historically used FHFA's CCF, and internal capital methodologies, where available, to measure risk for making economically effective decisions. FHFA issued a new capital rule, the ERCF, under which we will be required to report regulatory capital consistent with the new rule beginning January 1, 2022. We are transitioning to ERCF and may begin implementing sooner, upon the direction of FHFA.
n Risk Profile - The risk profile is a point-in-time assessment and measurement of inherent and/or residual risk for a specific risk type, measured at a divisional or enterprise level for the relevant risk types. The risk profile considers risk trends, elevated, emerging, and top risks, control performance, and risk indicators. The risk profile also incorporates results from, and may inform, stress testing or scenario analysis, judgmental evaluation of external and internal risk drivers, and any development that may affect performance relative to the company's strategy and business objectives.
n Risk Governance - Risk governance defines the way in which we manage risk across the company by articulating specific roles and responsibilities across the three lines of defense, including escalation and reporting. It is formalized through the delegations of authority, corporate risk policies and standards, and the risk governance structure at the division, enterprise, and Board levels.
l Delegations of Authority - The Board of Directors delegates authority to the CEO (and while that office is vacant, to the President), who then delegates to members of executive management.
l Issuance of Corporate Risk Policies and Standards - Corporate risk policies and standards define roles and responsibilities with respect to risk management, establish risk approval requirements, and set forth escalation and reporting requirements.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
73
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Overview
|
l Risk Governance Structure - The risk governance structure consists of management- and Board-level committees and their roles and responsibilities are formalized in their charters.
The diagram below illustrates the components of the enterprise risk framework.
FHFA has increased supervisory expectations related to how risk is managed and overseen by management and the Board, and specifically the role of ERM to provide independent risk oversight and effective challenge. As a result, we must continue to invest in our risk management practices to meet these expectations.
Enterprise Risk Governance Structure
We manage risk using a three-lines-of-defense risk management model and governance structure that includes enterprise-wide oversight by the Board and its committees, the CRO, and the CCO.
The information and diagram below present the responsibilities associated with our three-lines-of-defense risk management model and our risk governance structure. The risk governance structure also includes division risk committees to actively discuss and monitor business-specific risk profiles, risk decisions, and risk appetite metrics, limits and thresholds, and risk type committees to oversee specific risk types that are present in and span across business lines.
For more information on the role of the Board and its committees, see Directors, Corporate Governance, and Executive Officers - Corporate Governance - Board and Committee Information.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
74
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Overview
|
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
75
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Credit Risk
|
Credit Risk
Credit risk is the risk associated with the inability or failure of a borrower, issuer, or counterparty to meet its financial and/or contractual obligations. We are exposed to both mortgage credit risk and counterparty credit risk.
Mortgage credit risk is the risk associated with the inability or failure of a borrower to meet its financial and/or contractual obligations. We are exposed to two types of mortgage credit risk:
n Single-family mortgage credit risk, through our ownership or guarantee of loans in the single-family credit guarantee portfolio and
n Multifamily mortgage credit risk, through our ownership or guarantee of loans in the multifamily mortgage portfolio.
Counterparty credit risk is the risk associated with the inability or failure of a counterparty to meet its contractual obligations.
On January 1, 2020, we adopted CECL, which changed our methodology for accounting for credit losses on financial assets measured at amortized cost and off-balance sheet credit exposures. See Note 1 for additional information on our adoption of CECL. See Note 4, Note 5, and Note 7 for additional information on the changes in our significant accounting policies that affect the accounting for credit losses on our single-family and multifamily credit risk exposures as a result of our adoption of CECL.
In the sections below, we provide a general discussion of our enterprise risk framework and current risk environment for mortgage credit risk and for counterparty credit risk.
Single-Family Mortgage Credit Risk
We manage our exposure to single-family mortgage credit risk, which is a type of consumer credit risk, using the following principal strategies:
n Maintaining prudent underwriting standards and quality control practices and managing seller/servicer performance;
n Transferring credit risk to third-party investors;
n Monitoring loan performance and characteristics;
n Engaging in loss mitigation activities; and
n Managing foreclosure and REO activities.
Maintaining Prudent Underwriting Standards and Quality Control Practices and Managing Seller/Servicer Performance
We employ multiple strategies to maintain loan quality and data transparency:
n Underwriting standards, as published in our Guide and incorporated in Freddie Mac Loan AdvisorSM, establish the requirements for eligibility, documentation, and representations and warranties;
n Loan quality control practices, including post-close credit review and the underwriting defects repurchase process, help to validate that the loan origination process is in compliance with our Guide and that loans perform at or above expected levels; and
n Seller/servicer management, including in-house quality control and performance monitoring, helps to maintain quality control for loans sold and/or serviced by third parties.
Underwriting Standards
We use a delegated underwriting process in connection with our acquisition of single-family loans whereby we set eligibility and underwriting standards, and sellers represent and warrant to us that loans they sell to us meet these standards. Our eligibility and underwriting standards are used to assess loans based on a number of characteristics.
Limits are established on the purchase of loans with certain higher risk characteristics. These limits are designed to balance our credit risk exposure while supporting affordable housing in a responsible manner. Our purchase guidelines generally provide for a maximum original LTV ratio of 97% for creditworthy first-time homebuyers and for a targeted segment of creditworthy borrowers meeting certain AMI requirements under our affordable housing initiatives, a maximum original LTV ratio of 95% for all other home purchase and no cash out refinance loans, a maximum original LTV ratio of 80% for cash-out refinance loans, no maximum LTV ratio for fixed-rate loans, and a 105% maximum LTV ratio for ARMs in our relief refinance programs.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
76
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
Loan Advisor is our main tool for assessing loan eligibility and documentation. Loan Advisor is a set of integrated software applications and services designed to give lenders access to our view of risk, loan quality, and eligibility during the origination process, which promotes efficient commerce between lenders and Freddie Mac. As a key component of Loan Advisor, Loan Product Advisor® ("LPA") takes advantage of proprietary data models and intelligent automation to help validate all loans meet our underwriting standards. LPA features innovative tools and offerings leveraging algorithms to enhance the origination process and generates an assessment of a loan’s credit risk and overall quality.
Historically, the majority of our purchase volume was assessed using either LPA, Fannie Mae's comparable software Desktop Underwriter (DU), or the seller's proprietary automated underwriting system. We have implemented steps to require the loans we purchase to be assessed by one of Freddie Mac's proprietary underwriting software tools, LPA or Loan Quality Advisor®, prior to purchase. By the end of 2020, substantially all of the loans we purchase are now assessed by Freddie Mac proprietary software, helping validate their compatibility with our risk appetite and reducing the volume of loans we acquire with layered risk.
With Loan Advisor, lenders can actively monitor representation and warranty relief earlier in the mortgage loan production process. Loan Advisor offers limited representation and warranty relief for certain loan components that satisfy automated data analytics related to appraisal quality, valuation, borrower assets, and borrower income. In general, limited representation and warranty relief is only offered when information provided by lenders is validated through the use of independent data sources.
If we discover that the representations or warranties related to a loan were breached (i.e., that contractual standards were not followed), we can exercise certain contractual remedies to mitigate our actual or potential credit losses. These contractual remedies include the ability to require the seller or servicer to repurchase the loan at its current UPB, reimburse us for losses realized with respect to the loan after consideration of any other recoveries, and/or indemnify us. Our current remedies framework provides for the categorization of loan origination defects for loans with settlement dates on or after January 1, 2016. Among other items, the framework provides that "significant defects" will result in a repurchase request or a repurchase alternative, such as recourse or indemnification.
Under our current selling and servicing representation and warranty framework for our mortgage loans, we relieve sellers of repurchase obligations for breaches of certain selling representations and warranties for certain types of loans, including:
n Loans that have established an acceptable payment history for 36 months (12 months for relief refinance loans) of consecutive, on-time payments after purchase, subject to certain exclusions and
n Loans that have satisfactorily completed a quality control review.
An independent dispute resolution process for alleged breaches of selling or servicing representations and warranties on our loans allows for a neutral third party to render a decision on demands that remain unresolved after the existing appeal and escalation processes have been exhausted.
Quality Control Practices
We employ a quality control process to review loan underwriting documentation for compliance with our standards using both random and targeted samples. We also perform quality control reviews of many delinquent loans and review loans that have resulted in credit losses before the representations and warranties are relieved. Sellers may appeal our ineligible loan determinations prior to repurchase of the loan.
We use a standard quality control process that facilitates more timely reviews and is designed to identify breaches of representations and warranties early in the life of the loan. Proprietary tools, such as Quality Control Advisor®, provide greater transparency into our customer quality control reviews.
Appraisal Waivers
Since June 2017, Freddie Mac has permitted sellers to originate certain eligible loans without a traditional appraisal by leveraging our proprietary models, along with historical data and public records through our Loan Product Advisor® Automated Collateral Evaluator (ACE). For mortgaged properties meeting certain qualifications as specified in the Guide, the property value (purchase price for purchase transactions and borrower provided estimated value for refinances) along with condition are assessed using ACE. ACE uses our in-house automated valuation model, Home Value Explorer® (HVE). HVE was built and is periodically enhanced for the express purpose of managing collateral risk at Freddie Mac. ACE leverages statistically based, empirically derived confidence scores to assess collateral risk.
In response to the COVID-19 pandemic, in March 2020 we introduced expanded eligibility of ACE waivers to include no cash-out refinance with LTV up to 90% and cash-out refinances for primary residences up to 70% LTV and second homes up to 60% LTV. During the pandemic, homeowners and appraisers expressed concerns with entering properties which potentially could stall the process of closing loans. As a result of this expansion combined with a historically high refinance market (ACE waivers are granted more often for refinanced loans), ACE waiver usage increased substantially during 2020. We monitor the size of ACE waivers relative to Fannie Mae’s appraisal waivers to reduce prepayment misalignment risk in UMBS.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
77
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
Managing Seller/Servicer Performance
We actively monitor seller and servicer performance, including compliance with our standards. We maintain approval standards for our seller/servicers, which include requiring our sellers to maintain an in-house quality control program with written procedures that operates independently of the seller’s underwriting and origination functions. We monitor servicer performance using our Servicer Success Scorecard and periodically review our seller/servicers’ operational processes. We also periodically change seller/servicer guidelines based on the results of our mortgage portfolio monitoring, if warranted.
Temporary Underwriting Changes Due to COVID-19 Pandemic
We have announced temporary changes in our underwriting standards due to the COVID-19 pandemic, which may negatively affect the expected performance of purchased loans that were underwritten under these temporary changes.
In March and May 2020, we introduced a number of temporary measures to help provide sellers with the clarity and flexibility to continue to lend in a prudent and responsible manner during the COVID-19 pandemic. Certain measures have been revised and the application date windows for these measures have been extended as outlined below. These temporary measures include:
n Allowing flexibility in demonstrating a borrower's current employment status for applications received through February 28, 2021.
The following temporary measures are in effect until further notice:
n Requiring income and asset documentation, including that associated with self-employed borrowers, to be dated closer to the loan closing date in order to verify the most up-to-date information is being used to support the borrower's ability to repay;
n Providing additional document requirements and guidance for borrowers whose income is derived from self-employment. These requirements were revised and became effective for applications dated on or after December 14, 2020;
n Requiring mortgages to be sold to Freddie Mac within six months of the note date;
n Establishing underwriting restrictions applicable to a borrower's accounts containing stocks, stock options, and mutual funds due to current market volatility; and
n Verifying that any mortgage that a borrower has is current or is brought current via reinstatement or by making at least three consecutive timely payments under a loss mitigation program.
In March and April 2020, we announced loan processing flexibilities to expedite loan closings and help keep homebuyers, sellers, and appraisers safe during the COVID-19 pandemic. These flexibilities have also been extended to include loans with applications dated on or before February 28, 2021. They include:
n Allowing desktop appraisals or exterior-only inspection appraisals for certain purchase transactions;
n Allowing exterior-only appraisals for certain no cash-out refinances;
n Allowing desktop appraisals on new construction properties (purchase transactions);
n Allowing flexibility on demonstrating that construction has been completed;
n Allowing flexibility for borrowers to provide documentation (rather than requiring an inspection) to allow renovation disbursements (draws);
n Offering flexibility in condominium project reviews; and
n Expanding the use of powers of attorney and remote online notarizations.
The measures related to use of powers of attorney and remote online notarization have been incorporated into our Guide and are therefore no longer temporary. Some of these changes in our underwriting standards due to the COVID-19 pandemic may negatively affect the expected performance of loans purchased while these changes are in effect. The pandemic may also strain sellers' ability to increase their operational capacity to handle the historically high volume of refinance mortgages while maintaining proper quality control, which may further impact the credit quality of the loans we purchase during the affected periods. In addition, the CARES Act requires creditors to report to credit bureaus that loans in relief programs, such as forbearance plans, repayment plans, and loan modification programs, are current as long as the loans were current prior to entering into the relief programs and the borrowers remain in compliance with the programs. This credit reporting requirement applies to all mortgage relief programs entered into between January 31, 2020 and the date that is 120 days after the declaration of the national emergency related to the COVID-19 pandemic ends. As a result, our ability to evaluate purchases of new loans may be adversely affected as credit scores may not fully reflect the impact of relief programs, offered by us or other creditors, into which borrowers may have entered.
We announced in April 2020 that we would temporarily purchase certain single-family mortgage loans that have entered into forbearance as a result of borrower hardship caused by the COVID-19 pandemic in order to help provide liquidity to the mortgage market and allow originators to keep lending. This temporary measure was extended to include mortgage loans with note dates on or after April 1, 2020 and on or before December 31, 2020 and with settlement dates on or before February 28, 2021. The purchases of such loans have been insignificant. We also temporarily halted the purchase of negotiated bulk transactions and the purchase of flow loans with more than six months seasoning in May 2020.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
78
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
We have also announced that, at the instruction of FHFA and in alignment with Fannie Mae, a 50 basis point adverse market refinance fee was implemented for refinance mortgages, excluding those with low balances and certain product types, with settlement dates on or after December 1, 2020 in response to projected credit losses related to the COVID-19 pandemic.
Underwriting Restrictions Related to January 2021 Letter Agreement
The January 2021 Letter Agreement requires us to limit our acquisition of certain single-family mortgage loans.
n A maximum of 6% of purchase money mortgages and 3% of refinance mortgages over the preceding 52-week period can have two or more of the following characteristics at origination: combined LTV ratio greater than 90%; debt-to-income ratio greater than 45%; and FICO or equivalent credit score less than 680.
n Acquisitions of single-family mortgage loans secured by either second homes or investment properties will be limited to 7% of the single-family mortgage loan acquisitions over the preceding 52-week period.
n Subject to such exceptions as FHFA may prescribe to permit us to acquire single-family mortgage loans that are currently eligible for acquisition, we will be required to implement by July 1, 2021 a program reasonably designed to ensure that each single-family mortgage loan acquired is: (i) a qualified mortgage; (ii) exempt from the CFPB’s ability-to-repay requirements; (iii) secured by an investment property, subject to the restrictions above; (iv) a refinancing with streamlined underwriting for high LTV ratios; (v) a loan with temporary underwriting flexibilities due to exigent circumstances, as determined in consultation with FHFA; or (vi) secured by manufactured housing.
Loan Purchase Credit Characteristics
We monitor and evaluate market conditions that could affect the credit quality of our single-family loan purchases. The credit quality of our single-family loan purchases improved during 2020. The graphs below show the credit profile of the single-family loans we purchased or guaranteed.
Weighted Average Original LTV Ratio
Weighted Average Original Credit Score (1)
(1) Original credit score is based on three credit bureaus (Equifax, Experian, and TransUnion).
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
79
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
The table below contains additional information about the single-family loans we purchased or guaranteed in the last three years.
Table 18 - Single-Family New Business Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
(Dollars in millions)
|
|
Amount
|
% of Total
|
|
Amount
|
% of Total
|
|
Amount
|
% of Total
|
30-year or more amortizing fixed-rate
|
|
$866,075
|
|
80
|
%
|
|
$389,515
|
|
86
|
%
|
|
$266,995
|
|
87
|
%
|
20-year amortizing fixed-rate
|
|
53,094
|
|
5
|
|
|
15,381
|
|
3
|
|
|
8,373
|
|
3
|
|
15-year amortizing fixed-rate
|
|
166,814
|
|
15
|
|
|
43,164
|
|
10
|
|
|
28,878
|
|
9
|
|
Adjustable-rate
|
|
3,788
|
|
—
|
|
|
5,257
|
|
1
|
|
|
3,848
|
|
1
|
|
FHA/VA and other governmental
|
|
296
|
|
—
|
|
|
164
|
|
—
|
|
|
103
|
|
—
|
|
Total
|
|
$1,090,067
|
|
100
|
%
|
|
$453,481
|
|
100
|
%
|
|
$308,197
|
|
100
|
%
|
Percentage of purchases
|
|
|
|
|
|
|
|
|
|
DTI ratio > 45%
|
|
|
10
|
%
|
|
|
14
|
%
|
|
|
18
|
%
|
Original LTV ratio > 90%
|
|
|
11
|
|
|
|
19
|
|
|
|
22
|
|
Original credit score < 680
|
|
|
4
|
|
|
|
7
|
|
|
|
9
|
|
Property type:
|
|
|
|
|
|
|
|
|
|
Detached single-family houses
|
|
|
63
|
|
|
|
61
|
|
|
|
60
|
|
Townhouse
|
|
|
30
|
|
|
|
31
|
|
|
|
32
|
|
Condominium or co-op
|
|
|
7
|
|
|
|
8
|
|
|
|
8
|
|
Occupancy type:
|
|
|
|
|
|
|
|
|
|
Primary residence
|
|
|
94
|
|
|
|
92
|
|
|
|
90
|
|
Second home
|
|
|
3
|
|
|
|
4
|
|
|
|
4
|
|
Investment property
|
|
|
3
|
|
|
|
4
|
|
|
|
6
|
|
Loan purpose:
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
30
|
|
|
|
55
|
|
|
|
69
|
|
Cash-out refinance
|
|
|
18
|
|
|
|
18
|
|
|
|
19
|
|
Other refinance
|
|
|
52
|
|
|
|
27
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
80
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
Transferring Credit Risk to Third-Party Investors
Types of Credit Enhancements
Our Charter requires coverage by specified credit enhancements or participation interests on single-family loans with LTV ratios above 80% at the time of purchase. Most of our loans with LTV ratios above 80% are protected by primary mortgage insurance, which provides loan-level protection against loss up to a specified amount, the premium for which is typically paid by the borrower. Generally, an insured loan must be in default and the borrower's interest in the underlying property must have been extinguished, such as through a short sale or foreclosure sale, before a claim can be filed under a primary mortgage insurance policy. The mortgage insurer has a prescribed period of time within which to process a claim and make a determination as to its validity and amount.
In addition to obtaining credit enhancements required by our Charter, we also enter into various CRT transactions in which we transfer mortgage credit risk to third parties. The table below contains a summary of the types of credit enhancements we use to transfer credit risk on our single-family loans. See MD&A - Our Business Segments - Single-Family Guarantee - Business Overview - Products and Activities for more information on our CRT transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
Products
|
CRT
|
Coverage type
|
Accounting treatment
|
Primary mortgage insurance
|
Primary mortgage insurance
|
No
|
Front-end
|
Attached
|
STACR
|
STACR Trust notes
|
Yes
|
Back-end
|
Freestanding
|
STACR debt notes
|
Yes
|
Back-end
|
Debt
|
Insurance/reinsurance
|
ACIS
|
Yes
|
Back-end
|
Freestanding
|
AFRM
|
Yes
|
Front-end
|
Freestanding
|
IMAGIN
|
Yes
|
Front-end
|
Freestanding
|
Subordination
|
Senior subordinate securitization structures backed by seasoned loans (nonconsolidated)
|
Yes
|
Back-end
|
Guarantee
|
Senior subordinate securitization structures backed by recently originated loans (consolidated)
|
Yes
|
Back-end
|
Debt
|
Lender risk sharing
|
Lender risk sharing
|
Yes
|
Front-end
|
Freestanding
|
Single-Family Credit Guarantee Portfolio CRT Issuance
The table below provides the issuance amounts during the applicable periods, including the protected UPB and maximum coverage, associated with CRT transactions for loans in our single-family credit guarantee portfolio. We have enhanced our methodology to identify UPB with more than one type of CRT activity and, as a result, certain prior period amounts have been revised to conform to the current period presentation. Although the COVID-19 pandemic has caused significant volatility in the single-family CRT markets, our CRT issuance amounts increased during 2020 due to our ability to shorten the loan acquisition to CRT issuance timeline from approximately three quarters to two quarters and significant increases in loan purchase and guarantee activity. These issuances were supported by solid investor demand and subscription levels even though our ability to execute these transactions was negatively impacted by the effects of the COVID-19 pandemic during 2Q 2020. However, the COVID-19 pandemic continues to impose uncertainties and may continue to adversely impact our transactions going forward. See Introduction - About Freddie Mac - COVID-19 Pandemic Response Efforts - Business Outlook for additional information.
Table 19 - Single-Family Credit Guarantee Portfolio CRT Issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
(In millions)
|
|
Protected UPB(1)
|
Maximum Coverage(2)
|
|
Protected UPB(1)
|
Maximum Coverage(2)
|
|
Protected UPB(1)
|
Maximum Coverage(2)
|
STACR
|
|
$427,155
|
|
$11,141
|
|
|
$203,239
|
|
$6,671
|
|
|
$243,007
|
|
$6,935
|
|
Insurance/reinsurance
|
|
422,719
|
|
4,181
|
|
|
210,650
|
|
2,687
|
|
|
270,084
|
|
3,140
|
|
Subordination
|
|
7,016
|
|
1,254
|
|
|
11,197
|
|
1,666
|
|
|
30,911
|
|
1,984
|
|
Lender risk sharing
|
|
7,293
|
|
1,125
|
|
|
31,025
|
|
1,860
|
|
|
10,940
|
|
345
|
|
Less: UPB with more than one type of CRT activity
|
|
(388,340)
|
|
(769)
|
|
|
(203,239)
|
|
(723)
|
|
|
(219,072)
|
|
—
|
|
Total CRT Activities
|
|
$475,843
|
|
$16,932
|
|
|
$252,872
|
|
$12,161
|
|
|
$335,870
|
|
$12,404
|
|
(1) For STACR and certain insurance/reinsurance transactions (e.g., ACIS), represents the UPB of the assets included in the reference pool of the transactions. For other insurance/reinsurance transactions, represents the UPB of the assets covered by the insurance policy. For subordination, represents the UPB of the guaranteed securities, which represents the UPB of the assets included in the trust net of the protection provided by the subordinated securities.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
81
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Our Business Segments | Single-Family Guarantee
|
(2) For STACR transactions, represents the balance held by third parties at issuance. For insurance/reinsurance transactions, represents the aggregate limit of insurance purchased from third parties at issuance. For subordination, represents the UPB of the securities that are subordinate to Freddie Mac guaranteed securities and held by third parties.
Single-Family Credit Guarantee Portfolio Credit Enhancement Coverage Outstanding
The tables below provide information on the total protected UPB and maximum coverage associated with credit enhanced loans in our single-family credit guarantee portfolio as of December 31, 2020 and December 31, 2019, respectively. The percentage of loans in single-family credit guarantee portfolio covered by credit enhancement decreased in 2020 compared to 2019 primarily due to increased number of recently acquired loans that are targeted to be included in future on-the-run CRT transactions and have not been included in a reference pool, as well as improved credit quality of recently acquired loans, which results in a lower targeted loan population for on-the-run CRT transactions.
Table 20 - Single-Family Credit Guarantee Portfolio Credit Enhancement Coverage Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(Dollars in millions)
|
|
Protected UPB(1)
|
% of Single-Family Credit Guarantee Portfolio
|
Maximum Coverage(2)
|
Primary mortgage insurance
|
|
$472,881
|
|
20
|
%
|
$116,973
|
|
STACR
|
|
853,733
|
|
37
|
|
29,665
|
|
Insurance/reinsurance
|
|
876,815
|
|
38
|
|
11,586
|
|
Subordination
|
|
38,074
|
|
2
|
|
6,182
|
|
Lender risk sharing
|
|
5,731
|
|
—
|
|
4,831
|
|
Other
|
|
374
|
|
—
|
|
371
|
|
Less: UPB with multiple CRT and/or other credit enhancements
|
|
(1,069,281)
|
|
(46)
|
|
—
|
|
Single-family credit guarantee portfolio - covered by credit enhancement
|
|
1,178,327
|
|
51
|
|
169,608
|
|
Single-family credit guarantee portfolio - other
|
|
1,148,099
|
|
49
|
|
—
|
|
Total
|
|
$2,326,426
|
|
100
|
%
|
$169,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(Dollars in millions)
|
|
Protected UPB(1)
|
% of Single-Family Credit Guarantee Portfolio
|
Maximum Coverage(2)
|
Primary mortgage insurance
|
|
$421,870
|
|
21
|
%
|
$107,690
|
|
STACR
|
|
824,359
|
|
41
|
|
25,112
|
|
Insurance/reinsurance
|
|
863,149
|
|
43
|
|
10,157
|
|
Subordination
|
|
44,941
|
|
2
|
|
5,399
|
|
Lender risk sharing
|
|
24,078
|
|
1
|
|
5,657
|
|
Other
|
|
1,056
|
|
—
|
|
1,051
|
|
Less: UPB with multiple CRT and/or other credit enhancements
|
|
(1,058,402)
|
|
(52)
|
|
—
|
|
Single-family credit guarantee portfolio - covered by credit enhancement
|
|
1,121,051
|
|
56
|
|
155,066
|
|
Single-family credit guarantee portfolio - other
|
|
873,398
|
|
44
|
|
—
|
|
Total
|
|
$1,994,449
|
|
100
|
%
|
$155,066
|
|
(1) For STACR and certain insurance/reinsurance transactions (e.g., ACIS), represents the UPB of the assets included in the reference pool of the transactions. For other insurance/reinsurance transactions, represents the UPB of the assets covered by the insurance policy. For subordination, represents the UPB of the guaranteed securities, which represents the UPB of the assets included in the trust, net of the protection provided by the subordinated securities. For certain transactions, protected UPB may be different from the UPB of the underlying loans due to timing differences in reporting cycles between the transactions and the loans.
(2) For STACR transactions, represents the outstanding balance held by third parties. For insurance/reinsurance transactions, represents the remaining aggregate limit of insurance purchased from third parties. For subordination, represents the outstanding UPB of the securities that are subordinate to Freddie Mac guaranteed securities and held by third parties.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
82
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
Credit Enhancement Coverage Characteristics
The table below provides information on the credit-enhanced and non-credit-enhanced loans in our single-family credit guarantee portfolio. The credit enhanced categories are not mutually exclusive as a single loan may be covered by both primary mortgage insurance and other credit protection.
Table 21 - Credit-Enhanced and Non-Credit-Enhanced Loans in Our Single-Family Credit Guarantee Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
(% of portfolio based on UPB)(1)(2)
|
|
% of Portfolio
|
SDQ Rate
|
|
% of Portfolio
|
SDQ Rate
|
|
|
|
Credit-enhanced
|
|
|
|
|
|
|
|
|
|
Primary mortgage insurance
|
|
21
|
%
|
3.77
|
%
|
|
21
|
%
|
0.79
|
%
|
|
|
|
CRT and other
|
|
41
|
|
3.22
|
|
|
55
|
|
0.40
|
|
|
|
|
Non-credit-enhanced
|
|
50
|
|
2.13
|
|
|
45
|
|
0.70
|
|
|
|
|
Total
|
|
N/A
|
2.64
|
|
|
N/A
|
0.63
|
|
|
|
|
(1)Excludes loans underlying certain securitization products for which loan-level data is not available.
(2)Based on loan UPB, which may be different from the protected UPB of the associated credit enhancement transaction due to timing differences in reporting cycles between the transactions and the loans.
The table below provides information on the amount of credit enhancement coverage by year of origination associated with loans in our single-family credit guarantee portfolio.
Table 22 - Credit Enhancement Coverage by Year of Origination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(Dollars in millions)
|
|
UPB(1)(2)
|
% of UPB with Credit Enhancement
|
|
UPB(1)(2)
|
% of UPB with Credit Enhancement
|
Year of Loan Origination
|
|
|
|
|
|
|
2020
|
|
$971,136
|
|
36
|
%
|
|
N/A
|
N/A
|
2019
|
|
276,315
|
|
73
|
|
|
$383,003
|
|
40
|
%
|
2018
|
|
118,673
|
|
80
|
|
|
221,712
|
|
81
|
|
2017
|
|
147,863
|
|
75
|
|
|
242,605
|
|
77
|
|
2016
|
|
187,085
|
|
69
|
|
|
277,762
|
|
71
|
|
2015 and prior
|
|
624,956
|
|
43
|
|
|
869,043
|
|
44
|
|
Total
|
|
$2,326,028
|
|
50
|
|
|
$1,994,125
|
|
55
|
|
(1)Excludes $505 million and $555 million UPB of loans underlying certain securitization products for which loan-level data was not available as of December 31, 2020 and December 31, 2019, respectively.
(2)Based on loan UPB, which may be different from the protected UPB of the associated credit enhancement transaction due to timing differences in reporting cycles between the transactions and the loans.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
83
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
The following table provides information on the characteristics of the loans in our single-family credit guarantee portfolio currently without credit enhancement.
Table 23 - Single-Family Credit Guarantee Portfolio Without Credit Enhancement(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(Dollars in millions)
|
|
UPB
|
% of Total
|
|
UPB
|
% of Total
|
Low current LTV ratio(1)(2)
|
|
$784,150
|
|
66
|
%
|
|
$671,882
|
|
75
|
%
|
Short-term(1)(3)
|
|
81,681
|
|
7
|
|
|
39,220
|
|
4
|
|
Pre-CRT program inception(1)(4)
|
|
11,327
|
|
1
|
|
|
31,091
|
|
3
|
|
CRT pipeline(1)(5)
|
|
276,611
|
|
24
|
|
|
134,332
|
|
15
|
|
Other(1)(6)
|
|
20,414
|
|
2
|
|
|
23,616
|
|
3
|
|
Total
|
|
$1,174,183
|
|
100
|
%
|
|
$900,141
|
|
100
|
%
|
(1)Loans with multiple characteristics are assigned to categories in this table based on the following order: low current LTV ratio, short-term, pre-CRT program inception, and CRT pipeline.
(2)Represents loans with current LTV ratio less than or equal to 60%.
(3)Represents loans with an original maturity of 20 years or less.
(4)Represents Relief Refinance loans and loans that were acquired before the inception of our CRT programs in 2013.
(5)Represents recently acquired loans that are targeted to be included in the on-the-run CRT transactions and have not been included in a reference pool.
(6)Primarily includes government guaranteed loans, ARM loans, loans with a current LTV ratio greater than 97%, and loans that fail the delinquency requirements for CRT transactions.
Credit Enhancement Expenses and Recoveries
The recognition of expenses and recoveries associated with credit enhancements in our consolidated financial statements depends on the type of credit enhancement as follows:
n Attached credit enhancements - Attached credit enhancements are obtained contemporaneously with, and in contemplation of, the origination of a financial instrument, and effectively travel with the financial instrument upon sale. Attached credit enhancements are accounted for on a net basis with the associated financial instrument. As a result, we do not explicitly recognize a separate expense in our consolidated statements of comprehensive income for attached credit enhancements. Rather, the cost of attached credit enhancements is reflected as lower revenue. For example, we charge a lower guarantee fee for a loan with primary mortgage insurance than we otherwise would for the same loan without primary mortgage insurance. Similarly, credit losses on loans with attached credit enhancements are accounted for on a net basis. We do not recognize a provision for credit losses on loans with attached credit enhancements unless the expected credit loss exceeds the amount of credit protection provided by the attached credit enhancement and do not separately recognize a recovery asset until we derecognize the related loans. For additional information on the effect of attached credit enhancements on our credit losses, see the Monitoring Loan Performance and Characteristics - Credit Losses and Recoveries section below.
n Freestanding credit enhancements - Freestanding credit enhancements are contracts that are entered into separately and apart from any other financial instruments or entered into in conjunction with some other transaction and are legally detachable and separately exercisable. Freestanding credit enhancements are accounted for on a gross basis separately from the associated financial instrument. We recognize the payments we make to transfer credit risk under freestanding credit enhancements as credit enhancement expense. We recognize expected recoveries from freestanding credit enhancements separately in other assets on our consolidated balance sheets, with an offsetting reduction to non-interest expense, at the same time that we recognize an allowance for credit losses on the covered loans, measured on the same basis as the allowance for credit losses on the covered loans.
n Guarantee Credit Enhancements - We obtain credit enhancements for certain of our guarantees through the issuance of subordinated securities that absorb losses prior to our guarantee. The benefit from this type of credit enhancement is considered when measuring the allowance for credit losses for off-balance sheet credit exposures and we recognize an allowance for credit losses only if expected credit losses exceed the amount of subordination. We recognize the guarantee fee income we receive from the guarantee and there is no explicitly recognized separate credit enhancement expense or expected credit enhancement recovery.
n Credit-linked debt - Credit enhancements that are structured as debt issuances are accounted for on a gross basis separately from the associated mortgage loan. We primarily recognize expenses associated with credit-linked debt as interest expense. We recognize recoveries from credit-linked debt as debt extinguishment gains within investment gains (losses) when the loss confirming event occurs and we are legally released from our debt obligation, which typically occurs after we recognize a provision for credit losses on the associated loan. Such recoveries have not been significant. We no longer issue credit-linked debt as part of our primary CRT strategy and therefore expect the effect of these transactions on our financial results to become less significant over time.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
84
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
Certain of our credit enhancements are accounted for at fair value, with changes in fair value recognized in earnings as a component of investment gains (losses), net. See Note 8 for additional information on our credit enhancements.
The table below contains details on the expenses and recoveries associated with our single-family credit enhancements.
Table 24 - Details of Single-Family Credit Enhancement Expenses and Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In millions)
|
|
2020
|
2019
|
2018
|
Credit enhancement expenses:(1)
|
|
|
|
|
Credit enhancement expense
|
|
($1,036)
|
|
($734)
|
|
($394)
|
|
Interest expense related to CRT debt
|
|
(736)
|
|
(1,060)
|
|
(1,047)
|
|
Estimated reinvestment income from proceeds of CRT debt issuance
|
|
76
|
|
360
|
|
372
|
|
Single-family credit enhancement expenses
|
|
($1,696)
|
|
($1,434)
|
|
($1,069)
|
|
Single-family benefit for (decrease in) credit enhancement recoveries
|
|
$305
|
|
$41
|
|
($8)
|
|
(1)Excludes fair value gains and losses on CRT derivatives and CRT debt recorded at fair value. See MD&A - Consolidated Results of Operations for additional information on these items.
The table below presents the details of the credit enhancement recovery receivables we have recognized within other assets on our consolidated balance sheet.
Table 25 - Single-Family Credit Enhancement Receivables
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
December 31, 2020
|
December 31, 2019
|
Freestanding credit enhancement expected recovery receivables, net of allowance
|
|
$653
|
|
$71
|
|
Primary mortgage insurance receivables(1), net of allowance
|
|
74
|
|
76
|
|
Total credit enhancement assets
|
|
$727
|
|
$147
|
|
(1)Excludes $444 million and $464 million of deferred payment obligations associated with unpaid claim amounts as of December 31, 2020 and December 31, 2019, respectively. We have reserved substantially all these unpaid amounts as collectability is uncertain.
Monitoring Loan Performance and Characteristics
We review loan performance, including delinquency statistics and related loan characteristics in conjunction with housing market and economic conditions, including economic impacts associated with the COVID-19 pandemic, to assess credit risk when estimating our allowance for credit losses and to determine if our pricing and eligibility standards reflect the risk associated with the loans we purchase and guarantee. We review the payment performance of our loans to facilitate early identification of potential problem loans, which could inform our loss mitigation strategies. We also review performance metrics for additional loan characteristics that may expose us to concentrations of credit risk, including:
n Higher risk loan attributes and attribute combinations;
n Higher risk loan product types; and
n Geographic concentrations.
Loans in COVID-19 Related Forbearance Plans
Pursuant to FHFA guidance and the CARES Act, we offer mortgage relief options for borrowers affected by the
COVID-19 pandemic. Among other things, we have been offering forbearance of up to 12 months to single-family borrowers
experiencing a financial hardship, either directly or indirectly, related to COVID-19. Under FHFA’s guidance, we are extending COVID-19 forbearances up to 15 months for eligible borrowers, and this forbearance term may be further extended by FHFA in the future. The CARES Act requires our servicers to report to credit bureaus that loans in mortgage relief programs, such as forbearance plans, repayment plans, and loan modification programs, are current as long as the loans were current prior to entering into the mortgage relief programs and the borrowers remain in compliance with the programs. This credit reporting requirement applies to all mortgage relief programs entered into between January 31, 2020 and the date that is 120 days after the declaration of the national emergency related to the COVID-19 pandemic ends. Our ability to monitor the credit quality of loans in our single-family credit guarantee portfolio may be adversely affected as credit scores may not reflect the impact of relief programs, offered by us or other creditors, into which borrowers may have entered.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
85
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
The table below contains details on the characteristics of our single-family loans in forbearance that are past due based on the loan's original contractual terms.
Table 26 - Credit Quality Characteristics of Our Single-Family Loans in Forbearance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(Dollars in billions)
|
|
UPB
|
As a % of Total
|
|
UPB
|
As a % of Total
|
Current LTV ratio:
|
|
|
|
|
|
|
≤ 60
|
|
$29.4
|
|
49
|
%
|
|
$0.2
|
|
33
|
%
|
> 60 to 80
|
|
23.7
|
|
39
|
|
|
0.3
|
|
50
|
|
> 80 to 100
|
|
6.9
|
|
11
|
|
|
0.1
|
|
17
|
|
> 100
|
|
0.3
|
|
1
|
|
|
—
|
|
NM
|
Total
|
|
$60.3
|
|
100
|
%
|
|
$0.6
|
|
100
|
%
|
(1) NM - not meaningful due to the UPB rounding to zero.
Beginning in 4Q 2020, we required single-family servicers to report to us all alternatives to foreclosure, which include forbearance plans on all mortgages, including those where the borrower has continued to make payments in accordance with the loan's original contractual terms and remains in current status. The forbearance data we reported in prior periods was generally limited to loans in forbearance that were past due based on the loan’s original contractual terms. For the purpose of reporting delinquency rates, we report single-family loans in forbearance as delinquent during the forbearance period to the extent that payments are past due based on the loan's original contractual terms, irrespective of the forbearance plan.
The table below presents payment status information of our single-family loans in forbearance.
Table 27 - Single-Family Loans in Forbearance by Payment Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(Dollars in millions)
|
|
Current
|
One Month Past Due
|
Two
Months
Past Due
|
Three
Months to Six Months Past Due(1)
|
Greater Than Six Months Past Due(1)
|
Total
|
|
One Month Past Due
|
Two
Months
Past Due
|
Three
Months or More Past Due
|
|
Total
|
UPB
|
|
$8,907
|
$5,443
|
$4,372
|
$15,366
|
$35,144
|
$69,232
|
|
$131
|
|
$85
|
|
$362
|
|
|
$578
|
Number of loans (in thousands)
|
|
44
|
28
|
22
|
75
|
155
|
324
|
|
1
|
—
|
2
|
|
3
|
As a percentage of our single-family credit guarantee portfolio(2)
|
|
0.37
|
%
|
0.23
|
%
|
0.18
|
%
|
0.63
|
%
|
1.29
|
%
|
2.70
|
%
|
|
0.01
|
%
|
—
|
%
|
0.02
|
%
|
|
0.03
|
%
|
(1)The UPB of loans in forbearance that were three months to six months past due and accruing and that were greater than six months past due and accruing was $13.1 billion and $29.1 billion, respectively, as of December 31, 2020.
(2)Based on loan count.
The CARES Act, as amended by the Consolidated Appropriations Act, 2021, provides temporary relief from the accounting requirements for TDRs for certain loan modifications that are the result of a hardship that is related, either directly or indirectly, to the COVID-19 pandemic. We have elected to apply this temporary relief and therefore do not account for qualifying loan modifications as TDRs. In addition, interpretive guidance issued by federal banking regulators and endorsed by the FASB staff has indicated that government-mandated modification or deferral programs related to the COVID-19 pandemic are not TDRs as the lender did not choose to grant a concession to the borrower. As a result, we expect that substantially all of the forbearance and other relief programs we are offering because of COVID-19 will not be accounted for as TDRs.
We generally place single-family loans on non-accrual status when the loan becomes three monthly payments past due. For loans in active forbearance plans that were current prior to receiving forbearance, we continue to accrue interest income while the loan is in forbearance and is three or more monthly payments past due when we believe the available evidence indicates that collectability of principal and interest is reasonably assured based on management judgment, taking into consideration additional factors, the most important of which is current LTV ratio. When we accrue interest on loans that are three or more monthly payments past due, we measure an allowance for expected credit losses on unpaid accrued interest receivable balances such that the balance sheet reflects the net amount of interest we expect to collect. See Note 4 for additional information on our accounting policies for forbearance programs related to the COVID-19 pandemic.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
86
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
The table below provides the amount of accrued interest receivable, net of the allowance for credit losses, related to our single-family loans in forbearance. Prior period accrued interest receivable balances related to single-family loans in forbearance are not material.
Table 28 - Single-Family Loans in Forbearance(1)
|
|
|
|
|
|
|
|
|
(In millions)
|
|
December 31, 2020
|
Accrued interest receivable:
|
|
|
Less than three months past due
|
|
$74
|
|
Three months to six months past due
|
|
235
|
|
Greater than six months past due(2)
|
|
911
|
|
Accrued interest receivable, gross
|
|
1,220
|
|
Allowance for credit losses
|
|
(138)
|
|
Accrued interest receivable, net
|
|
$1,082
|
|
(1) Excludes loans in certain legacy securitization products.
(2) 90% of the accrued interest receivable greater than six months past due is related to loans with current LTV ratios that are less than or equal to 80%.
Prior to expiration of a borrower's forbearance plan, servicers are required to contact the borrower to determine how the payments missed during the forbearance period will be repaid. Freddie Mac requires servicers to follow a defined loss mitigation hierarchy to determine which options to offer to borrowers. This hierarchy is determined based on certain factors, such as the borrowers’ delinquency status, reasons for delinquency, loan types, and types of hardships. Borrowers are not required to repay all past due amounts in a single lump sum. Upon expiration of the forbearance plan, borrowers may reinstate the loan or enter into either a repayment plan, a payment deferral, or a trial period plan pursuant to a loan modification. If the borrower is not eligible for any of the home retention options, we may seek to pursue a foreclosure alternative or foreclosure. As a result of loans exiting COVID-19 related forbearance plans through payment deferrals or loan modifications during 2020, we deferred $432 million of delinquent interest into non-interest-bearing principal balances that are due at the earlier of the payoff date, maturity date, or sale of the property.
For additional information on actions we have taken in response to the COVID-19 pandemic and on our loss mitigation activities, see Introduction - About Freddie Mac - COVID-19 Pandemic Response Efforts and MD&A - Risk Management - Single-Family Mortgage Credit Risk - Engaging in Loss Mitigation Activities.
The table below presents a summary of single-family loans that received forbearance during 2020 and were past due based on the loans' original contractual terms at some point during the forbearance period.
Table 29 - Status of Single-Family Loans That Received Forbearance
|
|
|
|
|
|
|
|
|
(Loan count in thousands)
|
|
2020
|
Active forbearance plan as of December 31,2020
|
|
280
|
Active forbearance plan exits:
|
|
|
Reinstatement(1)
|
|
228
|
Payment deferral
|
|
166
|
Other(2)
|
|
43
|
Total forbearance plan exits
|
|
437
|
Total single-family loans that received forbearance during 2020(3)
|
|
717
|
(1)Includes forbearance plans where the borrower brought the mortgage current during forbearance or paid the mortgage in full.
(2)Primarily includes forbearance plans where the borrowers remained delinquent and the exit paths were not determined at the end of the forbearance periods. Also includes other exit paths such as repayment plans, modifications, and foreclosure alternatives.
(3)Based on number of forbearance plans. A loan can receive more than one forbearance plan during the period.
Allowance for Credit Losses
Upon the adoption of CECL on January 1, 2020, we recognized an increase to the opening balance of the allowance for credit losses on single-family loans classified as held-for-investment. Under CECL, we recognize an allowance for credit losses before a loss event has been incurred, which results in earlier recognition of credit losses compared to the previous incurred loss impairment methodology. Under CECL, we estimate the allowance for credit losses for loans on a pooled basis using a discounted cash flow model that evaluates a variety of factors to estimate the cash flows we expect to collect. The discounted cash flow model forecasts cash flows over the loan’s remaining contractual life, adjusted for expectations of prepayments and TDRs we reasonably expect will occur, and using our historical experience, adjusted for current and future economic forecasts. These projections require significant management judgment and we face uncertainties and risks related to the models we use
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
87
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
for financial accounting and reporting purposes. In particular, the length and severity of the economic downturn caused by the COVID-19 pandemic and its impact on house prices and the housing market, the number of borrowers that require assistance under the COVID-19 forbearance programs we are offering, and the ultimate success of those programs in resolving borrower hardships are all subject to significant uncertainty and may have a material effect on our allowance for credit losses in future periods. For further information on our accounting policies and methods for estimating our allowance for credit losses and related management judgments, see MD&A - Critical Accounting Policies and Estimates.
Under CECL, upon reclassification from held-for-investment to held-for-sale, we perform a collectability assessment. When we determine that a loan to be reclassified has experienced more-than-insignificant deterioration in credit quality since origination, the excess of the loan’s amortized cost basis over its fair value is written off against the allowance for credit losses prior to the reclassification.
The table below summarizes our single-family allowance for credit losses activity.
Table 30 - Single-Family Allowance for Credit Losses Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
2017
|
2016
|
Beginning balance(1)
|
|
$5,233
|
|
$6,176
|
|
$8,979
|
|
$13,463
|
|
$15,348
|
|
(Benefit) provision for credit losses
|
|
1,320
|
|
(749)
|
|
(712)
|
|
(97)
|
|
(781)
|
|
Charge-offs(2)
|
|
(592)
|
|
(1,737)
|
|
(2,885)
|
|
(5,051)
|
|
(1,938)
|
|
Recoveries collected
|
|
210
|
|
452
|
|
475
|
|
425
|
|
497
|
|
Other
|
|
182
|
|
126
|
|
319
|
|
239
|
|
337
|
|
Ending balance
|
|
$6,353
|
|
$4,268
|
|
$6,176
|
|
$8,979
|
|
$13,463
|
|
Components of ending balance of allowance for credit losses:
|
|
|
|
|
|
|
Mortgage loans held-for-investment
|
|
$5,628
|
|
$4,222
|
|
$6,130
|
|
$8,931
|
|
$13,411
|
|
Advances of pre-foreclosure costs
|
|
536
|
|
N/A
|
N/A
|
N/A
|
N/A
|
Accrued interest receivable
|
|
140
|
|
N/A
|
N/A
|
N/A
|
N/A
|
Off-balance sheet credit exposures
|
|
49
|
|
46
|
|
46
|
|
48
|
|
52
|
|
Total
|
|
$6,353
|
|
$4,268
|
|
$6,176
|
|
$8,979
|
|
$13,463
|
|
As a percentage of our single-family credit guarantee portfolio
|
|
0.27%
|
0.21%
|
0.33%
|
0.49%
|
0.77%
|
(1)Includes transition adjustments recognized upon the adoption of CECL on January 1, 2020. See Note 1 for more information on transition adjustments.
(2)2016 does not include lower-of-cost-or-fair-value adjustments recognized when we transfer loans from held-for-investment to held-for-sale, which totaled $1.2 billion. 2020, 2019, 2018 and 2017 include charge-offs of $0.3 billion, $1.3 billion, $2.1 billion and $3.8 billion, respectively, related to the transfer of loans from held-for-investment to held-for-sale.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
88
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
Credit Losses and Recoveries
The table below contains certain credit performance metrics of our single-family credit guarantee portfolio. Credit losses declined during 2020 as charge-offs related to reclassification of single-family loans from held-for-investment to held-for-sale decreased as a result of a lower volume of reclassifications. Other credit losses also declined as a result of the foreclosure moratorium that is in effect until at least March 31, 2021. It is likely that we will incur additional costs in future periods, such as higher property preservation and maintenance expenses, due to the foreclosure moratorium as the affected borrowers may remain delinquent for an extended period of time.
Table 31 - Single-Family Credit Guarantee Portfolio Credit Performance Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
Charge-offs(1)
|
|
$592
|
|
$1,737
|
|
$2,885
|
|
Recoveries collected(2)
|
|
(210)
|
|
(452)
|
|
(475)
|
|
Charge-offs, net
|
|
382
|
|
1,285
|
|
2,410
|
|
REO operations expense
|
|
149
|
|
229
|
|
170
|
|
Total credit losses
|
|
$531
|
|
$1,514
|
|
$2,580
|
|
Total credit losses(1) (in bps)
|
|
2.5
|
|
7.7
|
|
13.7
|
|
Recoveries from (gains) losses on sales of seriously delinquent loans(3)
|
|
($54)
|
|
($33)
|
|
($88)
|
|
Recoveries collected under freestanding credit enhancements and write-offs of CRT debt
|
|
(13)
|
|
(14)
|
|
22
|
|
(1) 2020, 2019, and 2018 include charge-offs of $0.3 billion, $1.3 billion, and $2.1 billion, respectively, related to the transfer of loans from held-for-investment to held-for-sale.
(2) Includes cash, REO, or other assets such as receivables from primary mortgage insurance.
(3) Excludes (gains) losses on securitization of reperforming loans.
Our credit losses are concentrated in the legacy and relief refinance single-family loan portfolio. In addition, our credit losses are also concentrated within loans having certain characteristics, as shown in the table below. These categories are not mutually exclusive; for example, an Alt-A loan can be associated with a property located in a judicial foreclosure state and/or have a CLTV ratio of greater than 100%. Additional detail on loans in judicial foreclosure states is presented in the Managing Foreclosure and REO Activities section below.
Table 32 - Credit Characteristics of Certain Single-Family Loan Categories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
December 31
|
|
Year Ended December 31
|
|
December 31
|
|
Year Ended December 31
|
|
|
% of Portfolio
|
SDQ Rate
|
|
% of Credit Losses(1)
|
|
% of Portfolio
|
SDQ Rate
|
|
% of Credit Losses
|
CLTV > 100%
|
|
0.1
|
%
|
18.11
|
%
|
|
5
|
%
|
|
0.4
|
%
|
8.22
|
%
|
|
16
|
%
|
Alt-A loans
|
|
1
|
|
10.66
|
|
|
9
|
|
|
1
|
|
3.75
|
|
|
12
|
|
Judicial foreclosure states
|
|
37
|
|
2.93
|
|
|
70
|
|
|
38
|
|
0.81
|
|
|
61
|
|
(1) Excludes credit losses related to charge-offs of accrued interest receivables.
TDRs and Non-Accrual Loan Activity
Single-family loans that have been modified or placed on non-accrual status generally have a higher associated allowance for credit losses. Due to the large number of loan modifications completed in past years, a significant portion of our allowance for credit losses is attributable to TDR loans:
n As of December 31, 2020, 23% of the allowance for credit losses for single-family loans related to interest-rate concessions provided to borrowers as part of loan modifications.
n Most of our modified single-family loans, including TDRs, were current and performing at December 31, 2020.
n In general, we expect our allowance for credit losses associated with existing single-family TDRs to decline over time as borrowers continue to make monthly payments under the modified terms and interest-rate concessions are amortized into earnings. However, the COVID-19 pandemic is likely to cause some borrowers to have difficulty making their monthly payments under the modified terms. In addition, our sales of reperforming loans will decrease these allowances for credit losses. While our ability to sell these loans was negatively affected by the COVID-19 pandemic during the first half of 2020, sales of reperforming loans resumed during the second half of 2020.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
89
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
The tables below present information about the UPB and interest income of single-family TDRs and non-accrual loans on our consolidated balance sheets.
Table 33 - Single-Family TDR and Non-Accrual Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
(Dollars in millions)
|
|
Mortgage Loans Held-for-Investment
|
Mortgage Loans Held-for-Sale
|
Total
|
|
Mortgage Loans Held-for-investment
|
Mortgage Loans Held-for-Sale
|
Total
|
|
Total
|
|
Total
|
|
Total
|
UPB:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDRs on accrual status(1)
|
|
$28,547
|
|
$4,293
|
|
$32,840
|
|
|
$32,188
|
|
$11,576
|
|
$43,764
|
|
|
$41,839
|
|
|
$51,644
|
|
|
$77,122
|
|
Non-accrual loans
|
|
13,679
|
|
5,020
|
|
18,699
|
|
6,529
|
|
4,654
|
|
11,183
|
|
11,197
|
|
17,748
|
|
16,164
|
Total TDRs and non-accrual loans
|
|
$42,226
|
|
$9,313
|
|
$51,539
|
|
$38,717
|
|
$16,230
|
|
$54,947
|
|
|
$53,036
|
|
|
$69,392
|
|
|
$93,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses associated with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDRs on accrual status
|
|
$1,249
|
|
$3
|
|
$1,252
|
|
|
$2,452
|
|
$—
|
|
$2,452
|
|
|
$3,612
|
|
|
$5,257
|
|
|
$10,295
|
|
Non-accrual loans
|
|
631
|
|
228
|
|
859
|
|
|
597
|
|
—
|
|
597
|
|
|
1,003
|
|
|
1,883
|
|
|
2,290
|
Total
|
|
$1,880
|
|
$231
|
|
$2,111
|
|
|
$3,049
|
|
$—
|
|
$3,049
|
|
|
$4,615
|
|
|
$7,140
|
|
|
$12,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance as % of UPB:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDRs on accrual status
|
|
4
|
%
|
—
|
%
|
4
|
%
|
|
8
|
%
|
—
|
%
|
6
|
%
|
|
9
|
%
|
|
10
|
%
|
|
13
|
%
|
Non-accrual loans
|
|
5
|
|
5
|
|
5
|
|
|
9
|
|
—
|
|
5
|
|
|
9
|
|
|
11
|
|
|
14
|
|
Total
|
|
4
|
|
2
|
|
4
|
|
|
8
|
|
—
|
|
6
|
|
|
9
|
|
|
10
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020(3)
|
|
2019(3)
|
|
|
(In millions)
|
|
Mortgage Loans Held-for-Investment
|
Mortgage Loans Held-for-Sale
|
Total
|
|
Mortgage Loans Held-for-Investment
|
Mortgage Loans Held-for-Sale
|
Total
|
|
|
|
|
Interest on TDRs and non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
At original contractual rates
|
|
$1,905
|
|
$504
|
|
$2,409
|
|
|
$1,903
|
|
$867
|
|
$2,770
|
|
|
|
|
|
Recognized
|
|
(1,318)
|
|
(239)
|
|
(1,557)
|
|
|
(1,444)
|
|
(536)
|
|
(1,980)
|
|
|
|
|
|
Foregone interest income on TDRs and non-accrual loans(2)
|
|
$587
|
|
$265
|
|
$852
|
|
|
$459
|
|
$331
|
|
$790
|
|
|
|
|
|
(1) In prior periods, UPB amounts included only loans classified as held-for-investment.
(2) Represents the amount of interest income that we did not recognize but would have recognized during the period for loans outstanding at the end of each period, had the loans performed according to their original contractual terms.
(3) Represents the interest income at original contractual rates, interest income recognized, and foregone interest income based on TDRs and non-accrual loans at the end of each period.
Foregone interest income on TDRs and non-accrual loans was $1,122 million, $1,604 million, and $2,109 million during 2018, 2017, and 2016, respectively.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
90
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
The table below summarizes the UPB of single-family held-for-investment TDR loan activity.
Table 34 - Single-Family TDR Loan Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019(1)
|
|
2018(1)
|
(Dollars in millions)
|
|
Loan Count
|
Amount
|
|
Loan Count
|
Amount
|
|
Loan Count
|
Amount
|
Beginning balance, as of January 1
|
|
249,182
|
|
$35,623
|
|
|
290,255
|
|
$42,254
|
|
|
364,704
|
|
$54,415
|
|
New additions(2)
|
|
26,689
|
|
4,624
|
|
|
30,568
|
|
4,871
|
|
|
52,300
|
|
8,115
|
|
Repayments and reclassifications to held-for-sale
|
|
(44,614)
|
|
(7,248)
|
|
|
(85,181)
|
|
(14,016)
|
|
|
(119,366)
|
|
(19,285)
|
|
Foreclosure sales and foreclosure alternatives
|
|
(1,980)
|
|
(323)
|
|
|
(4,502)
|
|
(605)
|
|
|
(7,383)
|
|
(991)
|
|
Ending balance, as of December 31
|
|
229,277
|
|
32,676
|
|
|
231,140
|
|
32,504
|
|
|
290,255
|
|
42,254
|
|
Loans impaired upon purchase
|
|
—
|
|
—
|
|
|
1,600
|
|
102
|
|
|
2,555
|
|
170
|
|
Total impaired loans with an allowance recorded
|
|
—
|
|
—
|
|
|
232,740
|
|
32,606
|
|
|
292,810
|
|
42,424
|
|
Allowance for credit losses
|
|
|
(1,585)
|
|
|
|
(2,872)
|
|
|
|
(4,369)
|
|
Net investment, at December 31
|
|
|
$31,091
|
|
|
|
$29,734
|
|
|
|
$38,055
|
|
(1) Excludes held-for-investment TDRs with no allowance for credit losses based on the individual impairment assessment according to the previous incurred loss impairment methodology.
(2) Includes certain bankruptcy events and forbearance plans, repayment plans, payment deferrals, and modification activities that do not qualify the temporary relief related to TDR provided by the CARES Act based on servicer reporting at the time of TDR event.
Delinquency Rates
We report single-family delinquency rates based on the number of loans in our single-family guarantee portfolio that are past due as reported to us by our servicers as a percentage of the total number of loans in our single-family guarantee portfolio. The charts below show the credit losses and serious delinquency rates for each of our single-family loan portfolios.
Portfolio Composition and Credit Losses
Serious Delinquency Rates
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
91
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
The total serious delinquency rate on our single-family credit guarantee portfolio increased to 2.64% as of December 31, 2020, compared to 0.63% as of December 31, 2019, driven by an increase in the number of loans in forbearance related to the COVID-19 pandemic. However, 55% of the seriously delinquent loans at December 31, 2020 were covered by credit enhancements that may partially reduce our credit risk exposure. Despite the increase in the serious delinquency rate, our core single-family loan portfolio continued to perform well through December 31, 2020 and accounted for a relatively low percentage of our credit losses. Our legacy and relief refinance single-family loan portfolio continued to decline but also continued to account for the majority of our credit losses. See Note 4 for additional information on the payment status of our single-family mortgage loans.
The ongoing COVID-19 pandemic has caused delinquencies to increase significantly in the mortgage market. We expect the serious delinquency rates for our single-family loan portfolio to remain elevated as a result of the pandemic and the forbearance programs we are offering in response.
The chart below shows the percentage of mortgage loans in our single-family credit guarantee portfolio that are one month and two months past due. Both of these percentages increased during 2020 compared to December 31, 2019 due to the increase in the number of loans that were in forbearance plans related to the COVID-19 pandemic, but generally fell back to pre-pandemic levels by the end of the year as the impact of the pandemic on early-stage delinquencies started to stabilize. The percentage of loans one month past due can be volatile due to servicer reporting methodologies, seasonality, and other factors that may not be indicative of default. As a result, the percentage of loans two months past due tends to be a better early performance indicator than the percentage of loans one month past due. The percentage of loans two months past due was up slightly from 2019 to 2020 but has also generally returned to pre-pandemic levels.
Percentage of Single-Family Loans One Month and Two Months Past Due
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
92
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
Loan Characteristics
The table below contains a description of some of the loan characteristics in our single-family credit guarantee portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
Characteristic
|
Description
|
Impact on Credit Quality
|
LTV ratio
|
Ratio of the UPB of the loan to the value of the underlying property collateralizing the loan. Original LTV ratio is measured at loan origination, while CLTV ratio is defined as the ratio of the current loan UPB to the estimated current property value.
|
•
|
Measures ability of the underlying property to cover our exposure on the loan
|
•
|
Higher LTV ratios indicate higher risk, as proceeds from sale of the property may not cover our exposure on the loan
|
•
|
Lower LTV ratios indicate borrowers are more likely to repay
|
Credit score
|
Statistically-derived number used by lenders to assess a borrower's likelihood to repay debt. We use FICO scores, which are currently the most commonly used credit scores for mortgages. Original credit score represents each borrower's FICO score at the time of origination or our purchase, while current credit score represents each borrower's most recent FICO score, which is obtained by Freddie Mac as of the first month of the most recent quarter
|
•
|
Borrowers with higher credit scores are generally more likely to repay or have the ability to refinance their loans than those with lower scores
|
|
Loan purpose
|
Indicates how the borrower intends to use the proceeds from a loan (i.e., purchase, cash-out refinance, or other refinance)
|
•
|
Cash-out refinancings, which increase the LTV ratios, generally have a higher risk of default than loans originated in purchase or other refinance transactions
|
Property type
|
Indicates whether the property is a detached single-family house, townhouse, condominium, or co-op
|
•
|
Detached single-family houses and townhouses are the predominant type of single-family property
|
•
|
Condominiums historically have experienced greater volatility in house prices than detached single-family houses, which may expose us to more risk
|
Occupancy type
|
Indicates whether the borrower intends to use the property as a primary residence, second home, or investment property
|
•
|
Loans on primary residence properties tend to have lower credit risk than loans on second homes or investment properties
|
Product type
|
Indicates the type of loan based on key loan terms, such as the contractual maturity, type of interest rate, and payment characteristics of the loan
|
•
|
Loan products that contain terms which result in scheduled changes in monthly payments may result in higher risk
|
•
|
Shorter loan terms result in faster repayment of principal and may indicate lower risk
|
Second liens
|
Indicates whether the underlying property is covered by more than one loan at the time of origination
|
•
|
Second liens can increase the risk of default
|
•
|
Borrowers are free to obtain second-lien financing after origination, and we are not entitled to receive notification when a borrower does so
|
DTI ratio
|
Ratio of the borrowers' total monthly debt payments to gross monthly income. One indicator of the creditworthiness of the borrowers, as it measures borrowers' ability to manage monthly payments and repay debts
|
•
|
Borrowers with lower DTI ratios are generally more likely to repay their loans than those with higher DTI ratios, holding all other factors equal
|
•
|
DTI ratios are at the time of origination and may not be indicative of the borrowers' current credit worthiness
|
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
93
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
The tables below contain details on characteristics of the loans in our single-family credit guarantee portfolio.
Table 35 - Credit Quality Characteristics of Our Single-Family Credit Guarantee Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(Dollars in billions)
|
|
UPB
|
Original Credit
Score (1)
|
Current Credit
Score (1)(2)
|
Original
LTV Ratio
|
Current
LTV
Ratio
|
Current
LTV Ratio
>100%
|
Alt-A %
|
Core single-family loan portfolio year of origination:
|
|
|
|
|
|
|
|
|
2020
|
|
$971
|
|
760
|
758
|
71
|
%
|
68
|
%
|
—
|
%
|
—
|
%
|
2019
|
|
276
|
|
747
|
754
|
77
|
|
67
|
|
—
|
|
—
|
|
2018
|
|
117
|
|
739
|
739
|
77
|
|
62
|
|
—
|
|
—
|
|
2017
|
|
143
|
|
743
|
748
|
76
|
|
56
|
|
—
|
|
—
|
|
2016
|
|
180
|
|
750
|
758
|
73
|
|
49
|
|
—
|
|
—
|
|
2015 and prior
|
|
406
|
|
753
|
764
|
71
|
|
39
|
|
—
|
|
—
|
|
Total core single-family loan portfolio
|
|
2,093
|
|
753
|
|
757
|
|
73
|
|
59
|
|
—
|
|
—
|
|
Legacy and relief refinance single-family loan portfolio
|
|
233
|
|
708
|
|
725
|
|
82
|
|
46
|
|
1
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$2,326
|
|
749
|
|
754
|
|
74
|
|
58
|
|
—
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(Dollars in billions)
|
|
UPB
|
Original Credit
Score (1)
|
Current Credit
Score (1)(2)
|
Original
LTV Ratio
|
Current
LTV
Ratio
|
Current
LTV Ratio
>100%
|
Alt-A %
|
Core single-family loan portfolio year of origination:
|
|
|
|
|
|
|
|
|
2019
|
|
$383
|
|
750
|
746
|
77
|
%
|
76
|
%
|
—
|
%
|
—
|
%
|
2018
|
|
220
|
|
744
|
745
|
78
|
|
71
|
|
—
|
|
—
|
|
2017
|
|
237
|
|
746
|
748
|
76
|
|
64
|
|
—
|
|
—
|
|
2016
|
|
269
|
|
751
|
756
|
74
|
|
57
|
|
—
|
|
—
|
|
2015 and prior
|
|
592
|
|
754
|
762
|
72
|
|
45
|
|
—
|
|
—
|
|
Total core single-family loan portfolio
|
|
1,701
|
|
750
|
|
752
|
|
75
|
|
60
|
|
—
|
|
—
|
|
Legacy and relief refinance single-family loan portfolio
|
|
293
|
|
712
|
|
692
|
|
83
|
|
52
|
|
2
|
|
7
|
|
Total
|
|
$1,994
|
|
745
|
|
749
|
|
76
|
|
59
|
|
—
|
|
1
|
|
(1) Original credit score is based on three credit bureaus (Equifax, Experian, and TransUnion). Current credit score is based on Experian only.
(2) Credit scores for certain recently acquired loans may not have been updated by the credit bureau since the loan acquisition and therefore the original credit scores also represented the current credit scores.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
94
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
Table 36 - Characteristics of the Loans in Our Single-Family Credit Guarantee Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(% of portfolio based on UPB)
|
|
2020
|
2019
|
2018
|
|
|
|
|
|
Original LTV ratio range
|
|
|
|
|
60% and below
|
|
22
|
%
|
18
|
%
|
19
|
%
|
Above 60% to 80%
|
|
51
|
|
52
|
|
52
|
|
Above 80% to 100%
|
|
25
|
|
28
|
|
26
|
|
Above 100%
|
|
2
|
|
2
|
|
3
|
|
Portfolio weighted average original LTV ratio
|
|
74
|
|
76
|
|
76
|
|
|
|
|
|
|
Current LTV ratio range
|
|
|
|
|
60% and below
|
|
51
|
|
51
|
|
51
|
|
Above 60% to 80%
|
|
37
|
|
35
|
|
36
|
|
Above 80% to 100%
|
|
12
|
|
14
|
|
12
|
|
Above 100%
|
|
—
|
|
—
|
|
1
|
|
Portfolio weighted average current LTV ratio
|
|
58
|
|
59
|
|
58
|
|
|
|
|
|
|
Original credit score (1)
|
|
|
|
|
740 and above
|
|
64
|
|
61
|
|
60
|
|
700 to 739
|
|
20
|
|
21
|
|
22
|
|
660 to 699
|
|
11
|
|
12
|
|
12
|
|
620 to 659
|
|
4
|
|
4
|
|
4
|
|
Less than 620
|
|
1
|
|
2
|
|
2
|
|
Portfolio weighted average original credit score
|
|
749
|
|
745
|
|
743
|
|
|
|
|
|
|
Current credit score (1)(2)
|
|
|
|
|
740 and above
|
|
70
|
|
66
|
|
66
|
|
700 to 739
|
|
15
|
|
16
|
|
16
|
|
660 to 699
|
|
8
|
|
9
|
|
9
|
|
620 to 659
|
|
4
|
|
4
|
|
4
|
|
Less than 620
|
|
3
|
|
5
|
|
5
|
|
Portfolio weighted average current credit score
|
|
754
|
|
749
|
|
748
|
|
|
|
|
|
|
DTI ratio
|
|
|
|
|
Above 45%
|
|
14
|
|
15
|
|
15
|
|
Portfolio weighted average DTI ratio
|
|
35
|
|
35
|
|
35
|
|
|
|
|
|
|
Loan purpose
|
|
|
|
|
Purchase
|
|
38
|
|
46
|
|
45
|
|
Cash-out refinance
|
|
19
|
|
20
|
|
20
|
|
Other refinance
|
|
43
|
|
34
|
|
35
|
|
(1) Original credit score is based on three credit bureaus (Equifax, Experian, and TransUnion). Current credit score is based on Experian only.
(2) Credit scores for certain recently acquired loans may not have been updated by the credit bureau since the loan acquisition and therefore the original credit scores also represented the current credit scores.
In addition, at December 31, 2020, December 31, 2019, and December 31, 2018:
n More than 90% of our loans were secured by detached homes or townhomes;
n Approximately 90% of our loans were secured by properties used as the borrower's primary residence at origination; and
n More than 90% of our loans were fixed-rate.
At December 31, 2020, approximately 5% of our loans had second-lien financing by the originator or other third party at origination, and these loans comprised approximately 10% of our seriously delinquent loan population. It is likely that additional borrowers have post-origination second-lien financing.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
95
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
Higher Risk Loan Attributes and Attribute Combinations
Certain of the loan attributes shown above may indicate a higher risk of default. For example, loans with original LTV ratios over 90% and/or credit scores below 620 at origination may be higher risk. The tables below provide information on loans in our portfolio with these characteristics. The tables include a presentation of each higher risk category in isolation. A single loan may fall within more than one category.
Table 37 - Single-Family Credit Guarantee Portfolio Higher Risk Loan Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(Dollars in billions)
|
|
UPB
|
CLTV
|
% Modified(1)
|
SDQ Rate
|
Original LTV ratio greater than 90%, HARP loans
|
|
$53.3
|
|
57
|
%
|
1.9
|
%
|
4.26
|
%
|
Original LTV ratio greater than 90%, all other loans
|
|
295.4
|
|
77
|
|
2.4
|
|
4.25
|
|
Loans with credit scores below 620 at origination
|
|
30.9
|
|
54
|
|
10.2
|
|
11.00
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(Dollars in billions)
|
|
UPB
|
CLTV
|
% Modified(1)
|
SDQ Rate
|
Original LTV ratio greater than 90%, HARP loans
|
|
$71.5
|
|
65
|
%
|
2.3
|
%
|
0.89
|
%
|
Original LTV ratio greater than 90%, all other loans
|
|
286.0
|
|
79
|
|
3.0
|
|
0.98
|
|
Loans with credit scores below 620 at origination
|
|
33.1
|
|
60
|
|
13.8
|
|
4.52
|
|
(1) Primarily includes loans modified through Freddie Mac Flex Modification® program. In prior periods, the percentage included loans in the payment deferrals program. Prior periods have been revised to conform to the current period presentation.
In addition, certain combinations of loan attributes can indicate an even higher degree of credit risk, such as loans with both higher LTV ratios and lower credit scores. Under the January 2021 Letter Agreement, we are required to limit our acquisition of single-family loans with such attributes, including loans with the following characteristics at origination: current LTV ratio over 90%, DTI above 45%, and FICO or equivalent credit score below 680. For additional information on the January 2021 Letter Agreement, see MD&A - Conservatorship and Related Matters.
The following tables show the combination of credit score and CLTV ratio attributes of loans in our single-family credit guarantee portfolio.
Table 38 - Single-Family Credit Guarantee Portfolio Attribute Combinations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
CLTV ≤ 60
|
|
CLTV > 60 to 80
|
|
CLTV > 80 to 100
|
|
CLTV > 100
|
|
All Loans
|
(Original Credit score)
|
|
% Portfolio
|
SDQ Rate(1)
|
|
% Portfolio
|
SDQ Rate(1)
|
|
% Portfolio
|
SDQ Rate(1)
|
|
% Portfolio
|
SDQ Rate(1)
|
|
% Portfolio
|
SDQ Rate
|
% Modified(2)
|
Core single-family loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 620
|
|
0.2
|
%
|
9.34
|
%
|
|
0.1
|
%
|
13.76
|
%
|
|
—
|
%
|
NM
|
|
—
|
%
|
NM
|
|
0.3
|
%
|
11.00
|
%
|
2.8
|
%
|
620 to 659
|
|
1.2
|
|
5.88
|
|
|
0.9
|
|
7.54
|
|
|
0.2
|
|
6.80
|
%
|
|
—
|
|
NM
|
|
2.3
|
|
6.51
|
|
1.6
|
|
≥ 660
|
|
41.4
|
|
1.64
|
|
|
34.6
|
|
2.21
|
|
|
11.4
|
|
1.90
|
|
|
—
|
|
NM
|
|
87.4
|
|
1.86
|
|
0.3
|
|
Not available
|
|
—
|
|
NM
|
|
—
|
|
NM
|
|
—
|
|
NM
|
|
—
|
|
NM
|
|
—
|
|
NM
|
NM
|
Total
|
|
42.8
|
%
|
1.82
|
|
|
35.6
|
%
|
2.43
|
|
|
11.6
|
%
|
2.06
|
|
|
—
|
%
|
NM
|
|
90.0
|
%
|
2.04
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy and relief refinance single-family loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 620
|
|
0.7
|
%
|
9.26
|
|
|
0.2
|
%
|
15.39
|
|
0.1
|
%
|
20.77
|
|
—
|
%
|
NM
|
|
1.0
|
%
|
11.01
|
|
11.8
|
|
620 to 659
|
|
0.8
|
|
7.14
|
|
|
0.3
|
|
13.40
|
|
0.1
|
|
19.05
|
|
—
|
|
NM
|
|
1.2
|
|
8.58
|
|
11.8
|
|
≥ 660
|
|
6.2
|
|
3.35
|
|
|
1.2
|
|
8.08
|
|
0.2
|
|
12.59
|
|
0.1
|
|
15.35
|
%
|
|
7.7
|
|
4.03
|
|
4.7
|
|
Not available
|
|
0.1
|
|
8.53
|
|
|
—
|
|
NM
|
|
—
|
|
NM
|
|
—
|
|
NM
|
|
0.1
|
|
9.43
|
|
20.1
|
|
Total
|
|
7.8
|
%
|
4.35
|
|
|
1.7
|
%
|
10.07
|
|
0.4
|
%
|
15.25
|
|
0.1
|
%
|
19.38
|
|
10.0
|
%
|
5.30
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
96
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
CLTV ≤ 60
|
|
CLTV > 60 to 80
|
|
CLTV > 80 to 100
|
|
CLTV > 100
|
|
All Loans
|
(Original Credit score)
|
|
% of Portfolio
|
SDQ Rate
|
|
% of Portfolio
|
SDQ Rate(1)
|
|
% of Portfolio
|
SDQ Rate(1)
|
|
% of Portfolio
|
SDQ Rate(1)
|
|
% of Portfolio
|
SDQ Rate
|
% Modified(2)
|
Core single-family loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 620
|
|
0.2
|
%
|
2.40
|
%
|
|
0.1
|
%
|
3.11
|
%
|
|
—
|
%
|
NM
|
|
—
|
%
|
NM
|
|
0.3
|
%
|
2.87
|
%
|
3.1
|
%
|
620 to 659
|
|
1.1
|
|
1.15
|
|
|
1.0
|
|
1.42
|
|
|
0.4
|
|
1.59
|
%
|
|
—
|
|
NM
|
|
2.5
|
|
1.30
|
|
1.8
|
|
≥ 660
|
|
39.6
|
|
0.16
|
|
|
30.2
|
|
0.26
|
|
|
12.6
|
|
0.26
|
|
|
—
|
|
NM
|
|
82.4
|
|
0.20
|
|
0.3
|
|
Not available
|
|
0.1
|
|
1.32
|
|
|
—
|
|
NM
|
|
—
|
|
NM
|
|
—
|
|
NM
|
|
0.1
|
|
1.96
|
|
3.5
|
|
Total
|
|
41.0
|
%
|
0.20
|
|
|
31.3
|
%
|
0.32
|
|
|
13.0
|
%
|
0.33
|
|
|
—
|
%
|
NM
|
|
85.3
|
%
|
0.26
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy and relief refinance single-family loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
< 620
|
|
0.7
|
%
|
3.56
|
|
|
0.4
|
%
|
5.95
|
|
|
0.2
|
%
|
9.33
|
|
|
0.1
|
%
|
15.03
|
%
|
|
1.4
|
%
|
4.83
|
|
15.8
|
|
620 to 659
|
|
1.0
|
|
2.53
|
|
|
0.5
|
|
4.67
|
|
|
0.2
|
|
7.91
|
|
|
0.1
|
|
12.84
|
|
|
1.8
|
|
3.52
|
|
14.8
|
|
≥ 660
|
|
7.9
|
|
0.86
|
|
|
2.6
|
|
2.09
|
|
|
0.7
|
|
3.91
|
|
|
0.2
|
|
6.32
|
|
|
11.4
|
|
1.23
|
|
5.5
|
|
Not available
|
|
0.1
|
|
3.93
|
|
|
—
|
|
NM
|
|
—
|
|
NM
|
|
—
|
|
NM
|
|
0.1
|
|
4.68
|
|
19.1
|
|
Total
|
|
9.7
|
%
|
1.28
|
|
|
3.5
|
%
|
2.95
|
|
|
1.1
|
%
|
5.39
|
|
|
0.4
|
%
|
8.96
|
|
|
14.7
|
%
|
1.84
|
|
7.7
|
|
(1) NM - not meaningful due to the percentage of the portfolio rounding to zero.
(2) Primarily includes loans modified through the Freddie Mac Flex Modification program. In prior periods, the percentage included loans in the payment deferrals program. Prior periods have been revised to conform to the current period presentation.
Higher Risk Loan Product Types
There are several types of loan products that contain terms which result in scheduled changes in the borrower's monthly payments after specified initial periods, such as interest-only and option ARM loans. These products may result in higher credit risk because the payment changes may increase the borrower's monthly payment, resulting in a higher risk of default. The majority of these loans are in our legacy and relief refinance single-family loan portfolio. Only a small percentage of our core single-family loan portfolio consists of ARM loans. We fully discontinued purchases of option ARM loans in 2007, Alt-A loans in 2009, and interest-only loans in 2010.
The balance of our interest-only and option ARM loans has continued to decline in recent years as many of these borrowers have repaid or refinanced their loans, received loan modifications, or completed foreclosure alternatives or foreclosure sales.
While we have not categorized option ARM loans as either subprime or Alt-A for presentation in this Form 10-K and elsewhere in our reporting, they could exhibit similar credit performance to collateral sometimes referred to as subprime or Alt-A by market participants. For reporting purposes, loans within the option ARM category continue to be presented in that category following a modification of the loan, even though the modified loan no longer provides for optional payment provisions.
The tables below provide credit characteristic information on higher risk loan product types.
Table 39 - Higher Risk Single-Family Loan Credit Characteristics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(Dollars in billions)
|
|
UPB
|
CLTV
|
% Modified
|
SDQ Rate
|
Amortizing ARM and option ARM (1)
|
|
$28.3
|
|
44
|
%
|
3.0
|
%
|
3.99
|
%
|
Interest-only
|
|
9.8
|
|
59
|
|
—
|
|
9.88
|
|
Step-rate modified
|
|
5.5
|
|
52
|
|
100
|
|
16.02
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(Dollars in billions)
|
|
UPB
|
CLTV
|
% Modified
|
SDQ Rate
|
Amortizing ARM and option ARM (1)
|
|
$40.1
|
|
49
|
%
|
2.2
|
%
|
0.84
|
%
|
Interest-only
|
|
10.9
|
|
64
|
|
—
|
|
2.72
|
|
Step-rate modified
|
|
8.7
|
|
59
|
|
100
|
|
6.27
|
|
(1) Includes $2.1 billion and $2.5 billion in UPB of option ARM loans as of December 31, 2020 and December 31, 2019, respectively. As of December 31, 2020 and December 31, 2019, the option ARM loans had: (a) current LTV ratios of 46% and 51%, (b) loan modification percentages of 25.0% and 20.4%, and (c) serious delinquency rates of 9.46% and 2.94%, respectively.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
97
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
The table below shows the timing of scheduled payment changes for certain types of loans within our single-family credit guarantee portfolio. The amounts in the table below are aggregated by product type and categorized by the year in which the loan will experience a payment change. The timing of the actual payment change may differ from that presented in the table due to a number of factors, including if the borrower refinances the loan. Loans where the year of first payment change is 2020 or prior have already had one or more payment changes as of December 31, 2020; loans where the year of first payment change is 2021 or later have not had a payment change as of December 31, 2020 and will not experience a payment change until a future period. Step-rate modified loans are shown in each year that the borrower will experience a scheduled interest-rate increase; therefore, a single loan may be included in multiple periods. However, the total of step-rate loans in the table reflects the ending UPB of such loans as of December 31, 2020.
Table 40 - Timing of Scheduled Payment Changes for Certain Single-Family Loan Types
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(In millions)
|
|
2020 and Prior
|
2021
|
2022
|
2023
|
2024
|
2025
|
Thereafter
|
Total(1)
|
ARM/amortizing
|
|
$8,446
|
|
$2,176
|
|
$3,020
|
|
$2,472
|
|
$2,712
|
|
$1,625
|
|
$5,548
|
|
$25,999
|
|
ARM/interest-only
|
|
3,572
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,572
|
|
Fixed/interest-only
|
|
393
|
|
9
|
|
23
|
|
1
|
|
—
|
|
—
|
|
—
|
|
426
|
|
Step-rate modified
|
|
5,420
|
|
542
|
|
121
|
|
31
|
|
14
|
|
—
|
|
—
|
|
5,538
|
|
Total
|
|
$17,831
|
|
$2,727
|
|
$3,164
|
|
$2,504
|
|
$2,726
|
|
$1,625
|
|
$5,548
|
|
$35,535
|
|
(1) Excludes loans underlying certain other securitization products since the payment change information is not available to us for these loans.
We believe that the performance of these types of loans has been affected by prior adverse macroeconomic conditions, such as unemployment rates and house price declines in many geographic areas, in addition to the increase in the borrower's monthly payment. However, we continue to monitor the performance of these loans as many have experienced a payment change or are scheduled to have a payment change in 2021 or thereafter, which is likely to subject the borrowers to higher monthly payments. Since a substantial portion of these loans were originated in 2005 through 2008 and are located in geographic areas that were most affected by declines in house prices that began in 2006, we believe that the serious delinquency rate for these types of loans will remain high in 2021.
Other Higher Risk Loans - Alt-A and Subprime Loans
While we have referred to certain loans as subprime or Alt-A for purposes of the discussion below and elsewhere in this Form 10-K, there is no universally accepted definition of subprime or Alt-A, and the classification of such loans may differ from company to company. We do not rely on these loan classifications to evaluate the credit risk exposure relating to such loans in our single-family credit guarantee portfolio.
Participants in the mortgage market have characterized single-family loans based upon their overall credit quality at the time of origination, including as prime or subprime. While we have not historically characterized the loans in our single-family credit guarantee portfolio as either prime or subprime, we monitor the amount of loans we have guaranteed with characteristics that indicate a higher degree of credit risk. In addition, we estimate that approximately $0.7 billion and $0.8 billion of security collateral underlying our other securitization products at December 31, 2020 and December 31, 2019, respectively, were identified as subprime based on information provided to us when we entered into these transactions.
Mortgage market participants have classified single-family loans as Alt-A if these loans have credit characteristics that range between their prime and subprime categories, if they are underwritten with lower or alternative income or asset documentation requirements compared to a full documentation loan, or both. Although we have discontinued new purchases of loans with lower documentation standards, we continue to purchase certain amounts of such loans in cases where the loan was either purchased pursuant to a previously issued guarantee, part of our relief refinance initiative or 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-K and our other financial reports because the new refinance loan replacing the original loan would not be identified by the seller or 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 December 31, 2020, we have purchased approximately $36.4 billion of relief refinance loans that were previously categorized as Alt-A loans in our portfolio.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
98
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
Table 41 - Alt-A Loans in Our Single-Family Credit Guarantee Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(Dollars in billions)
|
|
UPB
|
CLTV
|
% Modified
|
SDQ Rate
|
|
UPB
|
CLTV
|
% Modified(1)
|
SDQ Rate
|
Alt-A
|
|
$18.4
|
|
55
|
%
|
14.7
|
%
|
10.66
|
%
|
|
$21.1
|
|
61
|
%
|
17.8
|
%
|
3.75
|
%
|
(1) Primarily includes loans modified through the Freddie Mac Flex Modification program. In prior periods, the percentage included loans in the payment deferrals program. Prior periods have been revised to conform to the current period presentation.
The UPB of Alt-A loans in our single-family credit guarantee portfolio is continuing to decline due to borrowers refinancing into other mortgage products, foreclosure sales, and other liquidation events.
Geographic Concentrations
We purchase mortgage loans from across the U.S. However, local economic conditions can affect the borrower's ability to repay and the value of the underlying collateral, leading to concentrations of credit risk in certain geographic areas. In addition, certain states and municipalities may pass laws that limit our ability to foreclose or evict and make it more difficult and costly to manage our risk.
The table below summarizes the concentration by geographic area of our single-family credit guarantee portfolio as of December 31, 2020 and December 31, 2019, respectively. While our portfolio is diversified geographically, the economic effects of the COVID-19 pandemic may be disproportionately concentrated in certain geographic regions or areas. See Note 18 for more information about credit risk associated with loans that we hold or guarantee.
Table 42 - Concentration of Credit Risk of Our Single-Family Credit Guarantee Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
2020(1)
|
|
2019
|
(Dollars in billions)
|
|
Portfolio UPB
|
% of
Portfolio
|
Serious
Delinquency
Rate
|
|
Portfolio UPB
|
% of
Portfolio
|
Serious
Delinquency
Rate
|
|
Credit Losses Amount
|
% of Credit Losses
|
|
Credit Losses Amount
|
% of Credit Losses
|
Region:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West
|
|
$720
|
|
31
|
%
|
2.41
|
%
|
|
$595
|
|
30
|
%
|
0.36
|
%
|
|
$—
|
|
5
|
%
|
|
$0.2
|
|
12
|
%
|
Northeast
|
|
549
|
|
24
|
|
3.16
|
|
|
475
|
|
24
|
|
0.87
|
|
|
0.2
|
|
40
|
|
|
0.5
|
|
37
|
|
North Central
|
|
357
|
|
15
|
|
2.06
|
|
|
319
|
|
16
|
|
0.61
|
|
|
0.1
|
|
27
|
|
|
0.3
|
|
19
|
|
Southeast
|
|
375
|
|
16
|
|
2.95
|
|
|
326
|
|
16
|
|
0.73
|
|
|
0.1
|
|
18
|
|
|
0.4
|
|
24
|
|
Southwest
|
|
325
|
|
14
|
|
2.59
|
|
|
279
|
|
14
|
|
0.54
|
|
|
—
|
|
10
|
|
|
0.1
|
|
8
|
|
Total
|
|
$2,326
|
|
100
|
%
|
2.64
|
|
|
$1,994
|
|
100
|
%
|
0.63
|
|
|
$0.4
|
|
100
|
%
|
|
$1.5
|
|
100
|
%
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
$424
|
|
18
|
%
|
2.64
|
|
|
$347
|
|
17
|
%
|
0.34
|
|
|
$—
|
|
4
|
%
|
|
$0.1
|
|
8
|
%
|
Texas
|
|
145
|
|
6
|
|
3.11
|
|
|
123
|
|
6
|
|
0.54
|
|
|
—
|
|
3
|
|
|
—
|
|
3
|
|
Florida
|
|
135
|
|
6
|
|
3.70
|
|
|
116
|
|
6
|
|
0.77
|
|
|
—
|
|
9
|
|
|
0.2
|
|
14
|
|
New York
|
|
103
|
|
4
|
|
4.56
|
|
|
94
|
|
5
|
|
1.21
|
|
|
0.1
|
|
13
|
|
|
0.1
|
|
7
|
|
Illinois
|
|
96
|
|
4
|
|
2.96
|
|
|
88
|
|
4
|
|
0.85
|
|
|
0.1
|
|
14
|
|
|
0.2
|
|
10
|
|
All other
|
|
1,423
|
|
62
|
|
2.34
|
|
|
1,226
|
|
62
|
|
0.61
|
|
|
0.2
|
|
57
|
|
|
0.9
|
|
58
|
|
Total
|
|
$2,326
|
|
100
|
%
|
2.64
|
|
|
$1,994
|
|
100
|
%
|
0.63
|
|
|
$0.4
|
|
100
|
%
|
|
$1.5
|
|
100
|
%
|
(1)Excludes credit losses related to charge-offs of accrued interest receivables.
(2)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).
Engaging in Loss Mitigation Activities
Servicers perform loss mitigation activities as well as foreclosures on loans that they service for us. Our loss mitigation strategy emphasizes early intervention by servicers in delinquent loans and offers alternatives to foreclosure by providing servicers with default management programs designed to manage non-performing loans and to assist borrowers in maintaining home ownership or to facilitate foreclosure alternatives.
We offer a variety of borrower assistance programs, including refinance programs for certain eligible loans and loan workout activities for struggling borrowers. Our loan workouts include both home retention options and foreclosure alternatives. We also engage in transfers of servicing for and sales of certain seriously delinquent and reperforming loans.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
99
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
Relief Refinance Program
Our relief refinance initiative allows eligible homeowners whose loans we already own or guarantee to refinance with more favorable terms (such as reduction in payment, reduction in interest rate or movement to a more stable loan product) and without the need to obtain additional mortgage insurance.
The relief refinance initiative includes the Enhanced Relief Refinance program, which provides liquidity for borrowers who are current on their mortgages but are unable to refinance because their LTV ratios exceed our standard refinance limits.
The following table includes information about the performance of our relief refinance mortgage portfolio.
Table 43 - Single-Family Relief Refinance Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
(Dollars in millions)
|
|
UPB
|
Loan Count
|
SDQ Rate
|
|
UPB
|
Loan Count
|
SDQ Rate
|
Above 125% Original LTV
|
|
$11,972
|
|
83,439
|
|
4.41
|
%
|
|
$15,906
|
|
103,401
|
|
0.93
|
%
|
Above 100% to 125% Original LTV
|
|
23,064
|
|
159,542
|
|
4.33
|
|
|
31,072
|
|
200,227
|
|
0.96
|
|
Above 80% to 100% Original LTV
|
|
38,994
|
|
293,582
|
|
3.88
|
|
|
52,020
|
|
362,647
|
|
0.76
|
|
80% and below Original LTV
|
|
55,291
|
|
575,708
|
|
2.70
|
|
|
70,752
|
|
681,232
|
|
0.43
|
|
Total
|
|
$129,321
|
|
1,112,271
|
|
3.38
|
|
|
$169,750
|
|
1,347,507
|
|
0.64
|
|
Loan Workout Activities
Home Retention Options
When refinancing is not practicable, we require our servicers first to evaluate the loan for a forbearance plan, repayment plan, payment deferral, or loan modification, because our level of recovery on a loan that reperforms is often higher than for a loan that proceeds to a foreclosure alternative or foreclosure. Although workout options are often less costly than a foreclosure, we incur costs as a result of our loss mitigation activities. Specifically, payment deferrals result in non-interest-bearing balances we have to finance for the life of the mortgage, resulting in economic costs as a result of this program. Additionally, we incur economic losses on loan modifications that involve an interest rate reduction or principal forbearance, and we incur expenses related to incentive fees we pay to servicers for certain successfully completed loan workouts.
We offer the following types of home retention options:
n Forbearance plans - Arrangements that require reduced or no payments during a defined period, generally less than one year, to allow borrowers to return to compliance with the original mortgage terms or to implement another loan workout. For agreements completed in 2020, the average time period for reduced or suspended payments was between four and five months.
n Repayment plans - Contractual plans that allow borrowers a specific period of time to return to current status by paying the normal monthly payment plus additional agreed upon delinquent amounts. Repayment plans must have a term greater than one month and less than or equal to 12 months and the monthly repayment plan payment amount must not exceed 150% of the contractual mortgage payment. Servicers are paid incentive fees for repayment plans that are paid in full and loans brought to current status. For plans completed in 2020, the average time period to repay past due amounts was approximately four months.
n Payment deferrals - Arrangements that allow borrowers to return to current status by deferring delinquent principal and interest into a non-interest-bearing principal balance that is due at the earlier of the payoff date, maturity date, or sale of the property. The remaining mortgage term, interest rate, payment schedule, and maturity date remain unchanged and no trial period plan is required. The number of months of payments deferred varies based upon the type of hardship the borrower is experiencing.
n Loan modifications - Contractual plans that may involve changing the terms of the loan, adding outstanding indebtedness, such as delinquent interest, to the UPB of the loan, or a combination of both, including principal forbearance. Our modification programs generally require completion of a trial period of at least three months prior to receiving the modification. If a borrower fails to complete the trial period, the loan is considered for our other workout activities. These modification programs offer eligible borrowers extension of the loan's term up to 480 months and a fixed interest rate. Servicers are paid incentive fees for each completed modification, and there are limits on the number of times a loan may be modified. Our primary loan modification program is the Freddie Mac Flex Modification® program, which targets a 20% payment reduction through interest rate reduction, term extension, and principal forbearance. Under the Freddie Mac Flex Modification program, borrowers must complete a 90-day trial period plan prior to permanent modification.
The level of our loan workout activity increased significantly in 2020 compared to 2019 due to the COVID-19 pandemic. Pursuant to FHFA guidance and the CARES Act, we have been offering mortgage relief options for borrowers affected by the COVID-19 pandemic, including forbearance of up to 12 months to single-family borrowers experiencing a related financial
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
100
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
hardship, either directly or indirectly, and a payment deferral option for eligible homeowners who have the financial capacity to resume making their monthly payments, but who are unable to afford the additional monthly contributions required by a repayment plan. Under FHFA's guidance, we are extending COVID-19 forbearances up to 15 months for eligible borrowers, and this forbearance term may be further extended by FHFA in the future.
Foreclosure Alternatives
When a seriously delinquent single-family loan cannot be resolved through an economically sensible home retention option, we typically seek to pursue a foreclosure alternative before we pursue a foreclosure sale. We pay servicers incentive fees for each completed foreclosure alternative. In some cases, we provide cash relocation assistance to the borrower, while allowing the borrower to exit the home in an orderly manner. We offer the following types of foreclosure alternatives:
n Short sale - The borrower sells the property for less than the total amount owed under the terms of the loan. A short sale is preferable to a borrower because we provide limited relief to the borrower from repaying the entire amount owed on the loan. A short sale allows us to avoid the costs we would otherwise incur to complete the foreclosure and subsequently sell the property.
n Deed in lieu of foreclosure - The borrower voluntarily agrees to transfer title of the property to us without going through formal foreclosure proceedings.
The volume of foreclosures declined significantly in 2020, primarily due to the foreclosure moratorium that will remain in effect until at least March 31, 2021. The volume of our short sale transactions declined in 2020 compared to 2019, continuing the trend in recent periods. Similarly, the volume of short sales in the overall market also declined in recent periods as house prices have continued to increase.
The following graphs provide details about our single-family loan workout activities and foreclosure sales. In prior periods, the loan modifications included loans in the payment deferrals program. Prior periods have been revised to conform to the current period presentation.
Home Retention Actions(1)
(1)Forbearance plans in this graph only include those where borrowers fully reinstated the loan to current status during or at the end of forbearance period.
Foreclosure Alternatives and Foreclosure Sales
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
101
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
The tables below contain credit characteristic data on our single-family modified loans.
Table 44 - Credit Characteristics of Single-Family Modified Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(Dollars in billions)
|
|
UPB
|
% of Portfolio
|
CLTV Ratio
|
SDQ Rate
|
Loan Modifications(1)
|
|
$27.6
|
|
1
|
%
|
58
|
%
|
22.39
|
%
|
|
|
|
|
|
|
|
|
December 31, 2019
|
(Dollars in billions)
|
|
UPB
|
% of Portfolio
|
CLTV Ratio
|
SDQ Rate
|
Loan Modifications(1)
|
|
$38.3
|
|
2
|
%
|
65
|
%
|
10.67
|
%
|
(1) Primarily includes loans modified through the Freddie Mac Flex Modification program. In prior periods, the percentage included loans in the payment deferrals program. Prior periods have been revised to conform to the current period presentation.
The table below contains information about the payment performance of modified loans in our single-family credit guarantee portfolio, based on the number of loans that were current, sold or paid off one year and, if applicable, two years after modification.
Table 45 - Payment Performance of Single-Family Modified Loans(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter of Loan Modification Completion
|
|
|
4Q 2019
|
3Q 2019
|
2Q 2019
|
1Q 2019
|
4Q 2018
|
3Q 2018
|
2Q 2018
|
1Q 2018
|
Current, sold or paid off
one year after modification:
|
|
58
|
%
|
59
|
%
|
58
|
%
|
67
|
%
|
67
|
%
|
78
|
%
|
78
|
%
|
65
|
%
|
Current, sold or paid off
two years after modification:
|
|
N/A
|
N/A
|
N/A
|
N/A
|
71
|
|
72
|
|
74
|
|
73
|
|
(1) Primarily includes loans modified through the Freddie Mac Flex Modification program. In prior periods, the percentage included loans in the payment deferrals program. Prior periods have been revised to conform to the current period presentation.
Servicing Transfers and Sales and Securitization of Certain Seasoned Loans
From time to time, we facilitate the transfer of servicing for certain groups of loans that are delinquent or are deemed at risk of default to servicers that we believe have capabilities and resources necessary to improve the loss mitigation associated with the loans. See Sellers and Servicers in Counterparty Credit Risk for additional information on these activities.
We pursue sales of certain seriously delinquent loans when we believe the sale of these loans provides better economic returns than continuing to hold them. The FHFA requirements guiding these transactions include bidder qualifications, loan modifications, and performance reporting. Certain seriously delinquent loans may reperform, either on their own or through modification. In addition to sales of seriously delinquent loans, we sell certain reperforming loans, which typically involves securitization of the loans using our senior subordinate securitization structures or Level 1 Securitization Products, depending on market conditions, business strategy, credit risk considerations, and operational efficiency. Of the $10.7 billion in UPB of single-family loans classified as held-for-sale at December 31, 2020, $4.8 billion related to loans that were seriously delinquent.
While our ability to sell these seasoned loans was negatively affected by the COVID-19 pandemic during the first half of 2020, the market for certain loans improved during the second half of 2020. We sold $8.3 billion in UPB of reperforming loans through securitization during 2020, compared to $12.9 billion during 2019. We completed sales of $0.7 billion in UPB of seriously delinquent loans during 2020, compared to sales of $0.2 billion in UPB of such loans during 2019.
Managing Foreclosure and REO Activities
In a foreclosure, we may acquire the underlying property and later sell it, using the proceeds of the sale to reduce our losses.
We typically acquire properties as a result of borrower defaults and subsequent foreclosures or deeds in lieu of foreclosure on loans that we own or guarantee. We evaluate the condition of, and market for, newly acquired REO properties, determine if repairs will be performed, determine occupancy status and whether there are legal or other issues to be addressed, and determine our sale or disposition strategy. When we sell REO properties, we typically provide an initial period where we consider offers by owner occupants and entities engaged in community stabilization activities before offers by investors. We also consider disposition strategies, such as auctions, as appropriate to improve collateral recoveries and/or when traditional sales strategies (i.e., marketing via Multiple Listing Service and a real estate agent) may not be as effective.
We are subject to various state and local laws that affect the foreclosure process. The pace and volume of REO acquisitions are affected not only by the delinquent loan population but also by when we can initiate the foreclosure process and the length of the process, which extends the time it takes for loans to be foreclosed upon and the underlying properties to transition to REO.
Pursuant to FHFA guidance and the CARES Act, we are required to suspend foreclosures, other than for vacant or abandoned
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
102
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
properties, and evictions due to the COVID-19 pandemic until March 31, 2021, and this suspension period may be extended by FHFA, if necessary.
Delays in Foreclosure Process and Average Length of Foreclosure Process
Our serious delinquency rates and credit losses may be adversely affected by delays in the foreclosure process, particularly in states where a judicial foreclosure process is required. Foreclosures generally take longer to complete in such states, resulting in concentrations of delinquent loans in those states, as shown in the table below. At December 31, 2020, loans in states with a judicial foreclosure process comprised 37% of our single-family credit guarantee portfolio.
The table below presents the length of time our loans have been seriously delinquent, by jurisdiction type.
Table 46 - Seriously Delinquent Single-Family Loans by Jurisdiction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Aging, by locality
|
|
Loan Count
|
%
|
|
Loan Count
|
%
|
|
Loan Count
|
%
|
|
|
|
|
|
|
|
|
|
|
Judicial states
|
|
|
|
|
|
|
|
|
|
<= 1 year
|
|
132,103
|
|
42
|
%
|
|
26,063
|
|
37
|
%
|
|
27,811
|
|
37
|
%
|
> 1 year and <= 2 years
|
|
9,627
|
|
3
|
|
|
7,416
|
|
11
|
|
|
8,268
|
|
11
|
|
> 2 years
|
|
6,072
|
|
2
|
|
|
5,336
|
|
8
|
|
|
6,871
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
Non-judicial states
|
|
|
|
|
|
|
|
|
|
<= 1 year
|
|
158,563
|
|
50
|
|
|
24,997
|
|
36
|
|
|
25,675
|
|
34
|
|
> 1 year and <= 2 years
|
|
6,659
|
|
2
|
|
|
3,928
|
|
5
|
|
|
4,133
|
|
6
|
|
> 2 years
|
|
2,283
|
|
1
|
|
|
1,981
|
|
3
|
|
|
2,382
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
<= 1 year
|
|
290,666
|
|
92
|
|
|
51,060
|
|
73
|
|
|
53,486
|
|
71
|
|
> 1 year and <= 2 years
|
|
16,286
|
|
5
|
|
|
11,344
|
|
16
|
|
|
12,401
|
|
17
|
|
> 2 years
|
|
8,355
|
|
3
|
|
|
7,317
|
|
11
|
|
|
9,253
|
|
12
|
|
Total
|
|
315,307
|
|
100
|
%
|
|
69,721
|
|
100
|
%
|
|
75,140
|
|
100
|
%
|
The longer a loan remains delinquent, the greater the associated costs we incur. Loans that remain delinquent for more than one year are more challenging to resolve as many of these borrowers may not be in contact with the servicer, may not be eligible for loan modifications, or may determine that it is not economically beneficial for them to enter into a loan modification due to the amount of costs incurred on their behalf while the loan was delinquent. We expect the portion of our credit losses related to loans in states with judicial foreclosure processes will remain high as loans awaiting court proceedings in those states transition to REO or other loss events. The number of our single-family loans delinquent for more than one year increased 32% during 2020.
Our servicing guidelines do not allow initiation of the foreclosure process on a primary residence until a loan is at least 121 days delinquent, regardless of where the property is located. However, we evaluate the timeliness of foreclosure completion by our servicers based on the state where the property is located. Our servicing guide provides for instances of allowable foreclosure delays in excess of the expected timelines for specific situations involving delinquent loans, such as when the borrower files for bankruptcy or appeals a denial of a loan modification.
The table below presents average completion times for foreclosures of our single-family loans.
Table 47 - Average Length of Foreclosure Process for Single-Family Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(Average days)
|
|
2020
|
2019
|
2018
|
Judicial states
|
|
|
|
|
Florida
|
|
1,037
|
|
1,143
|
|
1,173
|
|
New Jersey
|
|
983
|
|
1,089
|
|
1,343
|
|
New York
|
|
1,800
|
|
1,765
|
|
1,790
|
|
All other judicial states
|
|
669
|
|
692
|
|
710
|
|
Judicial states, in aggregate
|
|
802
|
|
872
|
|
926
|
|
Non-judicial states, in aggregate
|
|
537
|
|
520
|
|
530
|
|
Total
|
|
690
|
|
730
|
|
766
|
|
As indicated in the table above, the average length of the foreclosure process for our single-family loans has been trending downward in recent years for some jurisdictions but it has remained elevated in others, particularly in states with a judicial foreclosure process, such as Florida and New York.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
103
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Single-Family Mortgage Credit Risk
|
Our REO inventory continued to decline in 2020, and the rate of decline significantly increased primarily due to FHFA guidance and the CARES Act, which required us to suspend certain foreclosures and evictions due to the COVID-19 pandemic. In addition to significantly slower new REO inflows, increased buyer demand resulting from low interest rates and a housing shortage kept REO dispositions at a steady pace. Therefore, our REO inventory declined significantly in 2020 as compared to 2019. Even in the absence of these unique circumstances, the decline of our REO inventory continued to be driven by the improved credit quality of our portfolio, effective loss mitigation and REO disposition strategies, and a large proportion of property sales to third parties at foreclosure. Third-party sales at foreclosure auction allow us to avoid the REO property expenses that we would have otherwise incurred if we held the property in our REO inventory until disposition.
We expect the rate of decline in our REO inventory to slow as long as the aforementioned foreclosure and eviction suspensions remain in effect and inventory available for sale begins to plateau.
The table below shows our single-family REO activity.
Table 48 - Single-Family REO Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
(Dollars in millions)
|
|
Number of Properties
|
Amount
|
|
Number of Properties
|
Amount
|
|
Number of Properties
|
Amount
|
Beginning balance - REO
|
|
4,989
|
|
$565
|
|
|
7,100
|
|
$780
|
|
|
8,299
|
|
$900
|
|
Additions
|
|
2,361
|
|
214
|
|
|
7,910
|
|
786
|
|
|
10,442
|
|
1,012
|
|
Dispositions
|
|
(5,584)
|
|
(580)
|
|
|
(10,021)
|
|
(1,001)
|
|
|
(11,641)
|
|
(1,132)
|
|
Ending balance - REO
|
|
1,766
|
|
199
|
|
|
4,989
|
|
565
|
|
|
7,100
|
|
780
|
|
Beginning balance, valuation allowance
|
|
|
(10)
|
|
|
|
(11)
|
|
|
|
(14)
|
|
Change in valuation allowance
|
|
|
9
|
|
|
|
1
|
|
|
|
3
|
|
Ending balance, valuation allowance
|
|
|
(1)
|
|
|
|
(10)
|
|
|
|
(11)
|
|
Ending balance - REO, net
|
|
|
$198
|
|
|
|
$555
|
|
|
|
$769
|
|
Severity Ratios
Severity ratios are the percentages of our realized losses when loans are resolved by the completion of REO dispositions and third-party foreclosure sales or short sales. Severity ratios are calculated as the amount of our recognized losses divided by the aggregate UPB of the related loans. The amount of recognized losses is equal to the amount by which the UPB of the loans exceeds the amount of sales proceeds from disposition of the properties, net of capitalized repair and selling expenses, if applicable. Loss severity excludes the cost of funding the loans after they are repurchased from the associated security pool.
The table below presents single-family severity ratios.
Table 49 - Single-Family Severity Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
2019
|
2018
|
REO dispositions and third-party foreclosure sales
|
|
20.4
|
%
|
21.7
|
%
|
24.2
|
%
|
Short sales
|
|
22.6
|
|
24.5
|
|
26.6
|
|
Our severity ratios declined during 2020 compared to 2019, primarily driven by house price appreciation as well as effective cost control and disposition strategies.
REO Property Status
A significant portion of our REO portfolio is unable to be marketed at any given time because the properties are occupied, involved in legal matters (e.g., bankruptcy, litigation, etc.), or subject to a redemption period, which is a post-foreclosure period during which borrowers may reclaim a foreclosed property. Redemption periods increase the average holding period of our inventory by as much as 10% or more. As of December 31, 2020, approximately 48% of our REO properties were unable to be marketed because the properties were occupied, located in states with a redemption period or subject to other legal matters. Another 18% of the properties were being prepared for sale (i.e., valued, marketing strategies determined, and repaired). The percentage of REO properties available for sale has declined significantly as new foreclosure inflows have significantly slowed due to the foreclosure and eviction suspensions that have been in place since March 2020 and sales have remained steady. Thus, as of December 31, 2020, approximately 19% of our REO properties were listed and available for sale, and 15% of our inventory was pending the settlement of sales. Though it varied significantly by state, the average holding period of our single-family REO properties, excluding any redemption period, was 250 days and 234 days for our REO dispositions during 2020 and 2019, respectively.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
104
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Multifamily Mortgage Credit Risk
|
Multifamily Mortgage Credit Risk
We manage our exposure to multifamily mortgage credit risk, which is a type of commercial real estate credit risk, using the following principal strategies:
n Maintaining policies and procedures for new business activity, including prudent underwriting standards;
n Managing our portfolio, including loss mitigation activities; and
n Transferring credit risk to third-party investors.
Maintaining Policies and Procedures for New Business Activity, Including Prudent Underwriting Standards
We use a prior approval underwriting approach for multifamily loans, in contrast to the delegated underwriting approach used in our Single-family Guarantee segment and Fannie Mae's DUS program. Under this approach, we maintain credit discipline by completing our own underwriting and credit review for each new loan prior to issuing a loan purchase commitment, including reviewing third-party appraisals and performing cash flow analysis. Our underwriting standards focus on the LTV ratio and DSCR, which estimates a borrower's ability to repay the loan using the secured property's cash flows, after expenses. A higher DSCR indicates lower credit risk. Our standards require maximum LTV ratios and minimum DSCRs that vary based on the characteristics and features of the loan. Loans are generally underwritten with a maximum original LTV ratio of 80% and a DSCR of greater than 1.25, assuming monthly payments that reflect amortization of principal. However, certain loans may have a higher LTV ratio and/or a lower DSCR, typically where this will serve our mission and contribute to achieving our affordable housing goals.
Consideration is also given to other qualitative factors, such as borrower experience, the type of loan, location of the property, and the strength of the local market. Sellers provide certain representations and warranties regarding the loans they sell to us, and are required to repurchase loans for which there has been a breach of representation or warranty. These representations and warranties are made as of the date the loan is sold to Freddie Mac and unless Freddie Mac agrees to an exception to the representation and warranty at purchase, the repurchase remedy may be implemented upon proof of the breach. However, repurchases of multifamily loans have been rare due to our underwriting approach, which is completed prior to issuance of a loan purchase commitment.
Multifamily loans may be amortizing or interest-only (for the full term or a portion thereof) and have a fixed or variable rate of interest. Multifamily loans generally amortize over a thirty-year period, but have shorter contractual maturity terms than single-family loans, typically ranging from five to ten years. As a result, most multifamily loans require a balloon payment at maturity, making a borrower's ability to refinance or pay off the loan at maturity a key attribute. Some borrowers may be unable to refinance during periods of rising interest rates or adverse market conditions, increasing the likelihood of borrower default.
Occasionally, we securitize loans or bonds contributed by third parties that are underwritten by us after origination. Prior to securitization, we are not exposed to the credit risk of these underlying loans or bonds. However, as we may guarantee some or all of the securities issued by the trusts used in these transactions, we effectively assume credit risk equal to the guaranteed UPB. Similar to our primary securitizations, these other securitizations generally provide for structural credit enhancements (e.g., subordination or other loss sharing arrangements) that allocate first loss exposure to third parties.
Notwithstanding the effects of the COVID-19 pandemic on the multifamily market and broader economic environment, the credit quality of our multifamily loan purchases and guarantees remained consistent with prior periods.
The graphs below show the original credit profile of the multifamily loans we purchased or guaranteed.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
105
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Multifamily Mortgage Credit Risk
|
Weighted Average Original LTV Ratio
Weighted Average Original DSCR
The table below presents the percentage of our multifamily new business activity that had certain characteristics that may be considered higher risk.
Table 50 - Percentage of Multifamily New Business Activity With Higher Risk Characteristics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
2019
|
2018
|
Original LTV ratio greater than 80%(1)
|
|
1
|
%
|
2
|
%
|
1
|
%
|
Original DSCR less than or equal to 1.10(1)
|
|
1
|
|
1
|
|
1
|
|
(1) Shown as a percentage of multifamily new business activity.
Managing Our Portfolio, Including Loss Mitigation Activities
To help mitigate our potential losses, we generally require sellers to act as the primary servicer for loans they have sold to us, including property monitoring tasks beyond those typically performed by single-family servicers. We typically transfer the role of master servicer in our K Certificate transactions to third parties, while retaining that role in our SB Certificate transactions. Servicers for unsecuritized loans over $1 million must generally provide us with an assessment of the mortgaged property at least annually based on the servicer's analysis of the property as well as the borrower's financial statements. In situations where a borrower or property is in distress, the frequency of communications with the borrower may be increased. We rate servicing performance on a regular basis, and we may conduct on-site reviews to confirm compliance with our standards.
Substantially all of our guarantees have first loss credit protection provided by subordination. As a result, our primary credit risk exposure stems from unsecuritized loans and consolidated loans underlying our PC securitizations. By their nature, loans awaiting securitization that we hold for sale remain on our balance sheet for a shorter period than loans we hold for investment and are generally covered by general seller representations and warranties. For unsecuritized loans, we may offer a workout option to give the borrower an opportunity to bring the loan current and retain ownership of the property, such as providing a short-term extension of up to 12 months. These arrangements are entered into with the expectation that we will recover our initial investment or minimize our losses. We do not enter into these arrangements in situations where we believe we would experience a loss in the future that is greater than or equal to the loss we would experience if we foreclosed on the property at the time of the agreement. Our multifamily loan modification and other workout activities have been minimal in the last three years.
For consolidated loans underlying our PC securitizations, we generally retain full credit risk exposure through our guarantee, although we may subsequently transfer a portion of that credit risk using other credit risk transfer products.
Various federal, state, and local laws may affect our business processes and financial results. Future changes in these laws may adversely impact our borrowers or make it more difficult and costly for us to manage our credit risk. Rent restrictions and eviction moratoriums may adversely impact the cash flows generated by the underlying properties, while foreclosure moratoriums may limit our ability to pursue certain loss mitigation actions (e.g., foreclosure) upon a borrower default.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
106
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Multifamily Mortgage Credit Risk
|
Loans in COVID-19 Related Forbearance Plans
Pursuant to FHFA guidance and the CARES Act, Freddie Mac and Fannie Mae offer multifamily borrowers mortgage forbearance with the condition that they suspend all evictions during the forbearance period for renters unable to pay rent. Under our forbearance program, multifamily borrowers with a fully performing loan as of February 1, 2020 can defer their loan payments for up to 90 days by showing hardship as a consequence of the COVID-19 pandemic and by gaining lender approval. After the forbearance period, the borrower is required to repay the forborne loan amounts in no more than 12 equal monthly installments.
In June 2020, in coordination with FHFA, we announced three supplemental forbearance relief options that servicers may use to assist borrowers with a forbearance plan who continue to be affected by the COVID-19 pandemic. These supplemental relief options added to the original tenant protections by providing flexibility to tenants to repay past due rent over time and not in a lump sum, and extended the prohibition on charging tenants fees and penalties for past due rent through both the forbearance and repayment periods. The three supplemental relief options include: (i) the option to delay the start of the repayment period following the initial forbearance period, (ii) an extension of the repayment period, and (iii) an extension of the forbearance period with an optional extended repayment period. Borrower requests for supplemental forbearance relief will be reviewed by the applicable servicer to confirm that COVID-19 continues to be the underlying cause of the impairment of the property's performance. If so, the servicer will determine whether any of the three supplemental relief options can reasonably be expected to return the property's performance to its pre-pandemic levels. If none of the options seem appropriate, the loan will be transferred to the appropriate asset resolution group. The selection of the appropriate supplemental relief option is at the discretion of the servicer and will not be an election of the borrower. In December 2020, we extended the deadline for borrowers whose loans have not been more than 30 days past due to request a new COVID-19 forbearance agreement or supplemental relief to March 31, 2021. The forbearance program was initially set to terminate at the end of 2020.
In coordination with FHFA, we have implemented numerous protections for tenants as part of our forbearance program. In May 2020, pursuant to FHFA guidance, we introduced an online multifamily property lookup tool to help renters determine if they are temporarily protected from eviction due to nonpayment of rent during the COVID-19 national health emergency. In August, we modified our forbearance program to introduce requirements for borrowers with a forbearance plan to provide notification to tenants of certain protections available to those tenants. For additional information on our responses to the COVID-19 pandemic, see Introduction - COVID-19 Pandemic Response Efforts.
We report multifamily delinquency rates based on the UPB of loans in our multifamily mortgage portfolio that are two monthly payments or more past due based on the loan's current contractual terms, or in the process of foreclosure, as reported by our servicers. Loans in forbearance are not considered delinquent as long as the borrower is in compliance with the forbearance agreement, including the agreed upon repayment plan.
The following table summarizes the current credit quality of loans under a forbearance program, which includes both the forbearance period and the repayment period.
Table 51 - Current Credit Quality of Multifamily Loans Under a Forbearance Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(Dollars in millions)
|
|
UPB(1)
|
LTV > 80%(2)
|
DSCR < 1.25(2)
|
Forbearance period
|
|
$367
|
|
$53
|
|
$309
|
|
Repayment period
|
|
6,678
|
|
393
|
|
3,699
|
|
Credit-enhanced
|
|
7,045
|
|
446
|
|
4,008
|
|
Forbearance period
|
|
3
|
|
3
|
|
3
|
|
Repayment period
|
|
767
|
|
78
|
|
197
|
|
Non-credit-enhanced
|
|
770
|
|
81
|
|
200
|
|
Total
|
|
$7,815
|
|
$527
|
|
$4,208
|
|
|
|
|
|
|
Weighted average LTV(2)
|
|
64
|
%
|
|
|
Weighted average DSCR(2)
|
|
1.40
|
|
|
|
(1) Represents the entire loan UPB underlying our multifamily mortgage portfolio.
(2) Based on the most recent borrower financial information submissions received from the servicers.
Of the loans in forbearance, 82.1% based on UPB are in securitizations with first loss credit protection provided by subordination, with forbearance requests related to loans underlying our SB Certificate securitizations being the most common. The weighted average subordination level of securitizations with subordination that have loans in forbearance was 14.5% as of December 31, 2020. 17.5% of loans in forbearance are scheduled to mature prior to 2024. In addition, as of December 31, 2020, we have approved supplemental forbearance relief requests totaling $1.2 billion in UPB.
Allowance for Credit Losses
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
107
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Multifamily Mortgage Credit Risk
|
Upon the adoption of CECL on January 1, 2020, we recognized an increase to the opening balance of the allowance for credit losses on multifamily loans classified as held-for-investment and certain other off-balance sheet credit exposures. Under CECL, we recognize an allowance for credit losses before a loss event has been incurred, which results in earlier recognition of credit losses compared to the previous incurred loss impairment methodology.
We estimate the allowance for credit losses using a loss-rate method to estimate the net amount of cash flows we expect to collect. The loss rate method is based on a probability of default and loss given default framework that estimates credit losses by considering a loan’s underlying characteristics and current and forecasted economic conditions. Loan characteristics considered by our model include vintage, loan term, current DSCR, current LTV ratio, occupancy rate, and interest rate hedges. We generally forecast economic conditions over a reasonable and supportable two-year period prior to reverting to historical averages at the model input level over a five-year period, using a linear reversion method. We also consider as model inputs expected prepayments, contractually specified extensions, modifications we reasonably expect will occur, expected recoveries from collateral posting requirements, and expected recoveries from attached credit enhancements. Management adjustments may be necessary to our model output to take into consideration current economic events and other external factors.
While our estimate of credit losses increased during 2020 due to the effects of the COVID-19 pandemic, a significant portion of the credit risk exposure of our multifamily mortgage portfolio is reduced by first loss credit protection provided by subordination from our securitizations.
The following table summarizes the allowance for credit losses on our multifamily mortgage portfolio including our off-balance sheet credit exposures.
Table 52 - Multifamily Allowance for Credit Losses Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2020
|
2019
|
2018
|
2017
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance(1)
|
|
$68
|
$15
|
$44
|
$35
|
$59
|
(Benefit) provision for credit losses
|
|
132
|
|
3
|
(24)
|
|
13
|
|
(22)
|
|
Charge-offs
|
|
—
|
|
—
|
|
(8)
|
|
(4)
|
|
(2)
|
|
Recoveries collected
|
|
—
|
|
—
|
|
3
|
—
|
|
—
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$200
|
|
$18
|
|
$15
|
|
$44
|
|
$35
|
|
|
|
|
|
|
|
|
Components of ending balance of allowance for credit losses:
|
|
|
|
|
|
|
Mortgage loans held-for-investment
|
|
$104
|
$12
|
$9
|
$35
|
$20
|
Off-balance sheet credit exposures
|
|
96
|
|
6
|
6
|
9
|
15
|
Total
|
|
$200
|
|
$18
|
|
$15
|
|
$44
|
|
$35
|
|
(1)Includes transition adjustments recognized upon the adoption of CECL on January 1, 2020. See Note 1 for more information on transition adjustments.
Our multifamily credit losses remain low due to the property performance of the loans underlying our multifamily mortgage portfolio. See Note 7 for additional information regarding multifamily credit losses and allowance for credit losses.
Transferring Credit Risk to Third-Party Investors
Types of Credit Enhancements
In connection with the acquisition, guarantee, or securitization of a loan or group of loans, we may obtain various forms of credit protection that reduce our credit risk exposure to the underlying mortgage borrower and reduce our required conservatorship capital. For example, at the time of loan acquisition or guarantee, we may obtain recourse and/or indemnification protection from our lenders or sellers. After acquisition, we primarily reduce our credit risk exposure to the underlying borrower by using one or more of our securitization products.
The following table summarizes our principal types of credit enhancements. See Our Business Segments - Multifamily - Business Overview - Products and Activities for additional information on our securitization and credit risk transfer products.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
108
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Multifamily Mortgage Credit Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Category
|
Products
|
CRT
|
Coverage Type
|
Accounting Treatment
|
Subordination
|
Primary securitization products
|
Yes
|
Back-end
|
Guarantee
|
Other securitization products:
|
|
• Securitizations of purchased collateral
|
Yes
|
Back-end
|
Guarantee/Debt
|
• Securitizations of collateral contributed by third parties
|
No
|
Front-end
|
Guarantee
|
Lender risk-sharing
|
Securitizations in which we issue fully guaranteed securities and simultaneously enter into a separate loss sharing agreement.
|
Yes
|
Front-end
|
Freestanding
|
Insurance/reinsurance
|
MCIP
|
Yes
|
Back-end
|
Freestanding
|
SCR
|
SCR debt notes
|
Yes
|
Back-end
|
Debt
|
Credit Enhancement Coverage for Multifamily Mortgage Portfolio
The table below presents the UPB, delinquency rates, and forbearance rates for both credit-enhanced and non-credit enhanced loans underlying our multifamily mortgage portfolio.
Table 53 - Credit-Enhanced and Non-Credit-Enhanced Loans Underlying Our Multifamily Mortgage Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
(Dollars in millions)
|
|
UPB
|
Delinquency Rate
|
Forbearance Rate(1)
|
|
|
UPB
|
Delinquency Rate
|
Forbearance Rate(1)
|
Credit-enhanced:
|
|
|
|
|
|
|
|
|
|
Subordination(2)
|
|
$286,092
|
|
0.18
|
%
|
1.99
|
%
|
|
|
$251,008
|
|
0.09
|
%
|
—
|
%
|
Other(3)
|
|
17,353
|
|
0.17
|
|
2.73
|
|
|
|
16,069
|
|
0.06
|
|
—
|
|
Total credit-enhanced
|
|
303,445
|
|
0.18
|
|
2.03
|
|
|
|
267,077
|
|
0.09
|
|
—
|
|
Non-credit-enhanced
|
|
42,098
|
|
0.02
|
|
1.83
|
|
|
|
33,091
|
|
—
|
|
—
|
|
Total
|
|
$345,543
|
|
0.16
|
|
2.01
|
|
|
|
$300,168
|
|
0.08
|
|
—
|
|
(1) Forbearance rate includes loans in our forbearance program including loans in their repayment period. Forbearance loans that fail to comply with the terms of the forbearance agreement are reported in our delinquency rate.
(2) Represents the UPB of the guaranteed securities, which represents the UPB of the assets included in the trust net of the protection provided by the subordinated securities.
(3) Includes lender risk-sharing agreements related to certain securitizations, insurance/reinsurance contracts, SCR debt notes and other credit enhancements.
Our securitizations remain our principal risk transfer mechanism. Through securitizations, we have transferred a substantial amount of the expected and stressed credit risk on the multifamily guarantee portfolio, thereby reducing our overall credit risk exposure and required conservatorship capital. Since 2009, we have transferred a portion of the credit risk related to $460.0 billion in UPB of multifamily loans through our securitizations, primarily K Certificates and SB Certificates, and other credit risk transfer products.
The table below provides information on the level of subordination outstanding on our securitizations with subordination.
Table 54 - Level of Subordination Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
(Dollars in millions)
|
|
UPB
|
Delinquency Rate
|
Forbearance Rate
|
|
UPB
|
Delinquency Rate
|
Forbearance Rate
|
Less than 10%
|
|
$49,227
|
|
0.04
|
%
|
0.14
|
%
|
|
$2,094
|
|
0.04
|
%
|
—
|
%
|
10% or greater
|
|
236,865
|
|
0.21
|
|
2.38
|
|
|
248,914
|
|
0.09
|
|
—
|
|
Total
|
|
$286,092
|
|
0.18
|
|
1.99
|
|
|
$251,008
|
|
0.09
|
|
—
|
|
Weighted average subordination level
|
|
13
|
%
|
|
|
|
14
|
%
|
|
|
The increase in the "Less than 10%" level of subordination outstanding was primarily driven by a reduction in subordination levels for new issuances of our typical K Certificate securitizations. The lower subordination levels are still expected to absorb a substantial amount of expected and stressed credit losses. We have not experienced significant credit losses associated with our guarantees on our primary securitizations.
In addition to the credit enhancements listed above, we have various other credit enhancements related to our multifamily unsecuritized loans, securitizations, and other mortgage-related guarantees, in the form of collateral posting requirements, pool insurance, bond insurance, loss sharing agreements, and other similar arrangements, that along with the proceeds received
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
109
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Multifamily Mortgage Credit Risk
|
from the sale of the underlying mortgage collateral, are designed to enable us to recover all or a portion of our losses on our mortgage loans or the amounts paid under our financial guarantee contracts. Our historical losses paid under our guarantee contracts and related recoveries pursuant to these agreements have not been significant. See Note 8 for more information on the total current and protected UPB of our multifamily mortgage portfolio that is credit-enhanced and the associated maximum coverage.
The table below contains details on the loans underlying our multifamily mortgage portfolio that are not credit-enhanced.
Table 55 - Credit Quality of Our Multifamily Mortgage Portfolio Without Credit Enhancement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
(Dollars in millions)
|
|
UPB
|
Delinquency Rate
|
Forbearance Rate
|
|
|
UPB
|
Delinquency Rate
|
Forbearance Rate
|
Unsecuritized loans:
|
|
|
|
|
|
|
|
|
|
Held-for-sale
|
|
$21,794
|
|
0.04
|
%
|
0.85
|
%
|
|
|
$15,930
|
|
0.01
|
%
|
—
|
%
|
Held-for-investment
|
|
8,655
|
|
—
|
|
1.40
|
|
|
|
9,408
|
|
—
|
|
—
|
|
Securitization-related products
|
|
6,711
|
|
—
|
|
6.84
|
|
|
|
3,656
|
|
—
|
|
—
|
|
Other mortgage-related guarantees
|
|
4,938
|
|
—
|
|
0.07
|
|
|
|
4,097
|
|
—
|
|
—
|
|
Total
|
|
$42,098
|
|
0.02
|
|
1.83
|
|
|
|
$33,091
|
|
—
|
|
—
|
|
REO Activity
Our REO activity has remained low in the past several years as a result of the strong property performance of our multifamily mortgage portfolio. As of December 31, 2020, we had no REO properties.
We are exposed to counterparty credit risk, which is a type of institutional credit risk, as a result of our contracts with sellers and servicers, credit enhancement providers (mortgage insurers, investors, etc.), guarantees of Fannie Mae securities underlying commingled resecuritization transactions, financial intermediaries, clearinghouses, and other counterparties. We manage our exposure to counterparty credit risk using the following principal strategies:
n Maintaining eligibility standards;
n Evaluating creditworthiness and monitoring performance; and
n Working with underperforming counterparties and limiting our losses from their nonperformance of obligations, when possible.
In the sections below, we discuss our management of counterparty credit risk for each type of counterparty to which we have significant exposure.
Overview
In our single-family guarantee business, we do not originate loans or have our own loan servicing operation. Instead, our sellers and servicers perform the primary loan origination and loan servicing functions on our behalf. We establish underwriting and servicing standards for our sellers and servicers to follow and have contractual arrangements with them under which they represent and warrant that the loans they sell to us meet our standards and that they will service loans in accordance with our standards. If we discover that the representations or warranties related to a loan were breached (i.e., that contractual standards were not followed), we can exercise certain contractual remedies to mitigate our actual or potential credit losses. If our sellers or servicers lack appropriate controls, experience a failure in their controls, or experience an operating disruption, including as a result of financial pressure, legal or regulatory actions or ratings downgrades, we could experience a decline in mortgage servicing quality and/or be less likely to recover losses through lender repurchases, recourse agreements, or other credit enhancements, where applicable.
In our multifamily business, we are exposed to the risk that multifamily sellers and servicers could come under financial pressure, which could potentially cause degradation in the quality of the servicing they provide us, including their monitoring of each property's financial performance and physical condition. This could also, in certain cases, reduce the likelihood that we could recover losses through lender repurchases, recourse agreements, or other credit enhancements, where applicable. This risk primarily relates to multifamily loans that we hold on our consolidated balance sheets where we retain all of the related credit risk.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
110
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Counterparty Credit Risk
|
In addition, our single-family guarantee business is exposed to settlement risk on the non-performance of sellers and servicers as a result of our forward settlement loan purchase programs. For additional details, see the Financial Intermediaries, Clearinghouses, and Other Counterparties - Other Counterparties - Forward Settlement Counterparties section below.
Maintaining Eligibility Standards
Our eligibility standards for sellers and servicers require the following: a demonstrated operating history in residential mortgage origination and servicing, or an eligible agent acceptable to us; adequate insurance coverage; a quality control program that meets our standards; and sufficient net worth, capital, liquidity, and funding sources. We and Fannie Mae are coordinating with FHFA to establish new eligibility rules.
Evaluating Counterparty Creditworthiness and Monitoring Performance
We perform ongoing monitoring and review of our exposure to individual sellers or servicers in accordance with our institutional credit risk management framework, including requiring our counterparties to provide regular financial reporting to us. We also monitor and rate our sellers and servicers' compliance with our standards and periodically review their operational processes. We may disqualify or suspend a seller or servicer with or without cause at any time. Once a seller or servicer is disqualified or suspended, we no longer purchase loans originated by that counterparty and generally no longer allow that counterparty to service loans for us, while seeking to transfer servicing of existing portfolios.
As discussed in more detail in MD&A - Our Business Segments, we acquire a significant portion of both our single-family and multifamily loan purchase volume from several large lenders, and a large percentage of our loans are also serviced by several large servicers.
We have significant exposure to non-depository and smaller depository financial institutions in our single-family business. These institutions may not have the same financial strength or operational capacity, or be subject to the same level of regulatory oversight, as large depository institutions.
Although our business with our single-family loan sellers is concentrated, a number of our largest single-family loan seller counterparties reduced or eliminated their purchases of loans from mortgage brokers and correspondent lenders in recent years. As a result, we acquire a greater portion of our single-family business volume directly from non-depository and smaller depository financial institutions.
For our single-family servicing, we utilize both depository institutions and non-depository institutions. Some of these non-depository institutions service a large share of our loans. As the COVID-19 pandemic evolved rapidly, liquidity concerns primarily regarding non-depository financial institutions arose as market conditions changed and borrowers affected by COVID-19 were offered widespread forbearance, including forbearance on loans purchased and securitized by us. Servicers must continue to advance funds during the forbearance period as discussed below, which may increase liquidity pressures on certain of our counterparties.
For our mortgage-backed securities, we guarantee the payment of principal and interest, and when the underlying borrowers do not pay their mortgages, our Guide requires single-family servicers to advance the missed mortgage interest payments from their own funds for up to 120 days. After this time, we will make the missed mortgage principal and interest payments to security holders until the mortgages are no longer held by the securitization trust. At the instruction of FHFA, our practice generally has been to purchase loans from the securitization trusts when the loans have been delinquent for 120 days or more. After the outbreak of COVID-19, FHFA further instructed us to maintain loans in COVID-19 payment forbearance plans in the securitization trusts for at least the duration of the forbearance. Once the forbearance period expires, the loan will remain in the related securities pool while:
n An offer to reinstate the loan or enter into either a payment deferral, repayment plan or a trial period plan pursuant
to a loan modification remains outstanding;
n The loan is in an active repayment plan or trial period plan; or
n A payment deferral solution is in effect.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
111
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Counterparty Credit Risk
|
Beginning on January 1, 2021, at the instruction of FHFA and in alignment with Fannie Mae, we extended the trigger to purchase delinquent single-family loans out of securitization trusts to 24 months of delinquency, except for loans that are paid off, permanently modified, repurchased by sellers or servicers, subject to foreclosure alternatives, or referred to foreclosure.
In addition to principal and interest payments, borrowers are also responsible for other expenses such as property taxes and homeowner's insurance premiums. When borrowers do not pay these expenses, our Guide generally requires single-family servicers to advance the funds for these expenses in order to protect or preserve our interest in or legal right to the properties. These advances are ultimately collectible from the borrowers. If the borrowers reperform through loan workout activities, the missed payments and incurred expenses will be collected from the borrowers. Should the borrower not reinstate, we will reimburse the servicers for the advanced amounts at completion of foreclosures or loan workout activities.
In response to the potential liquidity concerns for certain of our counterparties, we monitor and review the financial stability of our non-depository institutional counterparties. However, if these counterparties experience financial difficulty, we could see a decline in mortgage servicing quality and/or be less likely to recover losses.
The table below summarizes the concentration of non-depository servicers of our single-family credit guarantee portfolio.
Table 56 - Single-Family Credit Guarantee Portfolio Non-Depository Servicers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
% of Portfolio(1)
|
% of Serious Delinquent Single-Family Loans
|
|
% of Portfolio(1)
|
% of Serious Delinquent Single-Family Loans
|
Top five non-depository servicers
|
|
18
|
%
|
17
|
%
|
|
18
|
%
|
13
|
%
|
Other non-depository servicers
|
|
30
|
|
28
|
|
|
20
|
|
55
|
|
Total
|
|
48
|
%
|
45
|
%
|
|
38
|
%
|
68
|
%
|
(1) Excludes loans where we do not exercise control over the associated servicing.
Working with Underperforming Counterparties and Limiting Our Losses from Their Nonperformance of Obligations, When Possible
We actively manage the current quality of loan originations of our largest single-family sellers by performing loan quality control sampling reviews and communicating loan defect rates and the causes of those defects to such sellers on a monthly basis. If necessary, we work with these sellers to develop an appropriate plan of corrective action.
We use a variety of tools and techniques to engage our single-family sellers and servicers and limit our losses, including the following:
n Repurchases and other remedies - For certain violations of our single-family selling or servicing policies, we can require the counterparty to repurchase loans or provide alternative remedies, such as reimbursement of realized losses or indemnification, and/or suspend or terminate the selling and servicing relationship. We typically first issue a notice of defect and allow a period of time to correct the problem prior to issuing a repurchase request. The UPB of loans subject to repurchase requests issued to our single-family sellers and servicers was $0.5 billion and $0.3 billion at December 31, 2020 and December 31, 2019, respectively. See Note 18 for additional information about loans subject to repurchase requests.
n Incentives and compensatory fees - We pay various incentives to single-family servicers for completing workouts of problem loans. We also assess compensatory fees if single-family servicers do not achieve certain benchmarks with respect to servicing delinquent loans.
n Servicing transfers - From time to time, we may facilitate the transfer of servicing as a result of poor servicer performance, or for certain groups of single-family loans that are delinquent or are deemed at risk of default, to servicers that we believe have the capabilities and resources necessary to improve the loss mitigation associated with the loans. We may also facilitate the transfer of servicing on loans at the request of the servicer.
The majority of our multifamily loans are securitized using trusts that are administered by master servicers who bear responsibility to advance funds in the event of payment shortfalls, including principal and interest payments related to loans in forbearance. In the majority of our primary securitization transactions, we utilize one of three large financial depository institutions as master servicers, except for SB Certificate transactions where we serve as master servicer. In instances where payment shortfalls occur, the master servicer is required to make advances as long as such advances have not been deemed non-recoverable. For loans purchased and held in our mortgage-related investment portfolio, the primary servicers are not required to advance funds in the event of payment shortfalls and therefore do not present significant counterparty credit risk.
Credit Enhancement Providers
Overview
We have exposure to credit enhancement providers through credit enhancements we obtain on single-family loans. If any of our
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
112
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Counterparty Credit Risk
|
credit enhancement providers fail to fulfill their obligations, we may not receive reimbursement for credit losses to which we are contractually entitled pursuant to our credit enhancements.
With respect to primary mortgage insurers, we currently cannot differentiate pricing based on counterparty strength or revoke a primary mortgage insurer's status as an eligible insurer without FHFA approval. Further, we generally do not select the insurance provider on a specific loan, because the selection is made by the lender at the time the loan is originated. Accordingly, we are limited in our ability to manage our concentration risk with respect to primary mortgage insurers.
As part of our insurance/reinsurance CRT transactions, we regularly obtain insurance coverage from global insurers and reinsurers. These transactions incorporate several features designed to increase the likelihood that we will recover on the claims we file with the insurers and reinsurers, including the following:
n In each transaction, we require the individual insurers and reinsurers to post collateral to cover portions of their exposure, which helps to promote certainty and timeliness of claim payment and
n While private mortgage insurance companies are required to be monoline (i.e., to participate solely in the mortgage insurance business, although the holding company may be a diversified insurer), our insurers and reinsurers generally participate in multiple types of insurance businesses, which helps to diversify their risk exposure.
Maintaining Eligibility Standards
We maintain eligibility standards for mortgage insurers and other insurers and reinsurers. Our eligibility requirements include financial requirements determined using a risk-based framework and were designed to promote the ability of mortgage insurers to fulfill their intended role of providing consistent liquidity throughout the mortgage cycle. Our mortgage insurers are required to submit audited financial information and certify compliance with the Private Mortgage Insurer Eligibility Requirements on an annual basis.
Evaluating Counterparty Creditworthiness and Monitoring Our Exposure
We monitor our exposure to individual insurers by performing periodic analysis of the financial capacity of each insurer under various adverse economic conditions. Monitoring performance and potentially identifying underperformance allows us to plan for loss mitigation. The COVID-19 pandemic may increase financial strains on our credit enhancement providers, and as a result, we have continued our close monitoring and active communication with our counterparties to assess potential risk impacts. If our credit enhancement providers fail to meet their obligations to reimburse us for claims, we could experience an increase in credit losses.
The table below summarizes our exposure to single-family mortgage insurers as of December 31, 2020. In the event a mortgage insurer fails to perform, the coverage amounts represent our maximum exposure to credit losses resulting from such a failure.
Table 57 - Single-Family Mortgage Insurers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(In millions)
|
|
Credit Rating(1)
|
Credit Rating
Outlook(1)
|
|
UPB
|
Coverage
|
Arch Mortgage Insurance Company
|
|
A-
|
Negative
|
|
$95,324
|
|
$23,786
|
|
Radian Guaranty Inc. (Radian)
|
|
BBB+
|
Negative
|
|
92,906
|
|
22,499
|
|
Mortgage Guaranty Insurance Corporation (MGIC)
|
|
BBB+
|
Negative
|
|
84,164
|
|
20,853
|
|
Essent Guaranty, Inc.
|
|
BBB+
|
Negative
|
|
77,535
|
|
19,068
|
|
Genworth Mortgage Insurance Corporation
|
|
BB+
|
Watch Negative
|
|
72,375
|
|
18,089
|
|
National Mortgage Insurance (NMI)
|
|
BBB
|
Negative
|
|
45,757
|
|
11,506
|
|
PMI Mortgage Insurance Co. (PMI)
|
|
Not Rated
|
N/A
|
|
1,957
|
|
491
|
|
Republic Mortgage Insurance Company (RMIC)
|
|
Not Rated
|
N/A
|
|
1,464
|
|
362
|
|
Triad Guaranty Insurance Corporation (Triad)
|
|
Not Rated
|
N/A
|
|
904
|
|
226
|
|
Others
|
|
N/A
|
N/A
|
|
495
|
|
93
|
|
Total
|
|
|
|
|
$472,881
|
|
$116,973
|
|
(1)Ratings and outlooks are for the corporate entity to which we have the greatest exposure. Coverage amounts may include coverage provided by consolidated affiliates and subsidiaries of the counterparty. Latest rating available as of December 31, 2020. Represents the lower of S&P and Moody's credit ratings and outlooks stated in terms of the S&P equivalent.
Although the financial condition of our mortgage insurers improved in recent years, there is still a risk that some of these counterparties may fail to fully meet their obligations under a stress economic scenario since they are monoline entities primarily exposed to mortgage credit risk.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
113
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Counterparty Credit Risk
|
On October 23, 2016, Genworth Financial, Inc. ("Genworth") announced that it had entered into an agreement to be acquired by China Oceanwide Holdings Group Co., Ltd. Because Genworth Mortgage Insurance Corporation, a subsidiary of Genworth Financial, Inc., is an approved mortgage insurer, Freddie Mac evaluated the planned acquisition and approved China Oceanwide Holdings Group's control of Genworth Mortgage Insurance Corporation. On January 4, 2021, Genworth announced that Genworth and Oceanwide did not extend the end date, December 31, 2020, under the merger agreement due to uncertainty around the completion and timing of the remaining steps required to close the transaction and that Genworth is focusing on executing its contingency plan. Freddie Mac is collaborating with FHFA and Fannie Mae to review the contingency plan and provide necessary approvals.
PMI and Triad are both under the control of their state regulators and no longer issue new insurance. Both of these insurers pay a substantial portion of their claims as deferred payment obligations. RMIC is under regulatory supervision and is no longer issuing new insurance; however, it continues to pay its claims in cash.
If, as we currently expect, PMI and Triad do not pay the full amount of their deferred payment obligations in cash, we would lose a portion of the coverage from these insurers shown in the table above. As of December 31, 2020, we had cumulative unpaid deferred payment obligations of $0.4 billion from these insurers. We have reserved substantially all of these unpaid amounts as collectability is uncertain.
Except for those insurers under regulatory supervision, which no longer issue new coverage, we continue to acquire new loans with mortgage insurance from the mortgage insurers shown in the table above, some of which have credit ratings below investment grade. For more information about counterparty credit risk associated with mortgage insurers, see Note 18.
The table below displays the concentration of our single-family credit risk exposure to our ACIS counterparties.
Table 58 - Single-Family ACIS Counterparties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(Dollars in billions)
|
|
Maximum Coverage(1)
|
% of Total
|
|
Maximum Coverage(1)
|
% of Total
|
Top five ACIS counterparties
|
|
$5.3
|
|
48
|
%
|
|
$5.0
|
|
51
|
%
|
All other ACIS counterparties
|
|
5.8
|
|
52
|
|
|
4.9
|
|
49
|
|
Total
|
|
$11.1
|
|
100
|
%
|
|
$9.9
|
|
100
|
%
|
(1)Represents maximum coverage exclusive of the collateral posted to secure the counterparties' obligations.
As of December 31, 2020 and December 31, 2019, our ACIS counterparties posted collateral of $2.4 billion and $2.0 billion, respectively. There is a possibility that if our ACIS counterparties become insolvent, a third-party involved in the restructure process could cancel a contract or contracts and prevent us from accessing collateral for future claims despite current collateral provisions. We have taken steps to reduce this risk.
For more information on our single-family CRT transactions, see MD&A - Our Business Segments - Single-Family Guarantee - Business Overview - Products and Activities - CRT Transactions, and MD&A - Risk Management - Single-Family Mortgage Credit Risk - Transferring Credit Risk to Third-Party Investors.
We have counterparty credit risk exposure to Fannie Mae through our ability to commingle TBA-eligible Fannie Mae collateral in certain of our resecuritization products. When we resecuritize Fannie Mae securities in our commingled resecuritization products, our guarantee covers timely payments of principal and interest on such securities. If Fannie Mae were to fail to make a payment on a Fannie Mae security that we resecuritized, we would be responsible for making the payment to the securities holders. Our pricing does not currently reflect any incremental credit, liquidity, or operational risk associated with our guarantee of resecuritized Fannie Mae securities. We will be dependent on FHFA, Fannie Mae, and Treasury (pursuant to Fannie Mae's and our respective Purchase Agreements with Treasury) to avoid a liquidity event or default.
For additional information on commingled resecuritizations and the associated risks, see MD&A - Our Business Segments - Single-Family Guarantee and Risk Factors.
Financial Intermediaries, Clearinghouses, and Other Counterparties
Derivative Counterparties
We use cleared derivatives, exchange-traded derivatives, OTC derivatives, and forward sales and purchase commitments to mitigate risk, and are exposed to the non-performance of each of the related financial intermediaries and clearinghouses. The Capital Markets segment manages this risk for the company. Our financial intermediaries and clearinghouse credit exposure relates principally to interest-rate derivative contracts. We maintain internal standards for approving new derivative counterparties, clearinghouses, and clearing members.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
114
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Counterparty Credit Risk
|
n Cleared and exchange-traded derivatives - Cleared and exchange-traded derivatives expose us to counterparty credit risk of central clearinghouses and our clearing members. Our exposure to the clearinghouses we use to clear interest-rate derivatives has increased. The use of cleared and exchange-traded derivatives mitigates our counterparty credit risk exposure to individual counterparties because a central counterparty is substituted for individual counterparties, and changes in the value of open contracts are settled daily via payments made through the clearinghouse. We are required to post initial and variation margin to the clearinghouses. The amount of initial margin we must post for cleared and exchange-traded derivatives may be based, in part, on S&P or Moody's credit rating of our long-term senior unsecured debt securities. Our obligation to post margin may increase as a result of the lowering or withdrawal of our credit rating by S&P or Moody's or by changes in the potential future exposure generated by the derivative transactions.
n OTC derivatives - OTC derivatives expose us to counterparty credit risk of individual counterparties, because these transactions are executed and settled directly between us and each counterparty, exposing us to potential losses if a counterparty fails to meet its contractual obligations. When a counterparty in OTC derivatives that is subject to a master netting agreement has a net obligation to us with a market value above an agreed upon threshold, if any, the counterparty is obligated to deliver collateral in the form of cash, securities, or a combination of both to satisfy its obligation to us under the master netting agreement. Our OTC derivatives also require us to post collateral to counterparties in accordance with agreed upon thresholds, if any, when we are in a derivative liability position. The collateral posting thresholds we assign to our OTC counterparties, as well as the ones they assign to us, are generally based on S&P or Moody's credit rating. The lowering or withdrawal of our or our counterparty's credit rating by S&P or Moody's may increase our or our counterparty's obligation to post collateral, depending on the amount of the counterparty's exposure to Freddie Mac with respect to the derivative transactions. Only OTC derivatives transactions executed prior to March 1, 2017 are subject to collateral posting thresholds. Based upon regulations that took effect March 1, 2017, OTC derivative transactions executed or materially amended after that date require posting of variation margin without the application of any thresholds. Our OTC derivative transactions will become subject to new initial margin requirements on September 1, 2021.
Evaluating Counterparty Creditworthiness and Monitoring Performance
Over time, our exposure to derivative counterparties varies depending on changes in fair values, which are affected by changes in interest rates and other factors. Due to risk limits with certain counterparties, we may be forced to execute transactions with lower returns with other counterparties when managing our interest-rate risk. We manage our exposure through master netting and collateral agreements and stress-testing to evaluate potential exposure under possible adverse market scenarios. Collateral is typically transferred within one business day based on the values of the related derivatives. We regularly review the market values of the securities pledged to us, primarily agency and U.S. Treasury securities, to manage our exposure to loss. We conduct additional reviews of our exposure when market conditions dictate or certain events affecting an individual counterparty occur. When non-cash collateral is posted to us, we require collateral in excess of our exposure to satisfy the net obligation to us in accordance with the counterparty agreement.
In the event a counterparty defaults, our economic loss may be higher than the uncollateralized exposure of our derivatives if we are not able to replace the defaulted derivatives in a timely and cost-effective fashion (e.g., due to a significant interest rate movement during the period or other factors). We could also incur economic losses if non-cash collateral posted to us by the defaulting counterparty cannot be liquidated at prices that are sufficient to recover the amount of such exposure.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
115
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Counterparty Credit Risk
|
The table below compares the gross fair value of our derivative asset positions after counterparty netting with our net exposure to these positions after considering cash and non-cash collateral held.
Table 59 - Derivative Counterparty Credit Exposure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(Dollars in millions)
|
|
Number of Counterparties
|
Fair Value -
Gain positions
|
Fair Value -
Gain positions,
net of collateral
|
OTC interest-rate swap and swaption counterparties (by rating):
|
|
|
|
|
|
|
|
|
|
A+, A, or A-
|
|
12
|
|
$2,634
|
$29
|
|
|
|
|
|
|
|
|
|
|
Cleared and exchange-traded derivatives
|
|
2
|
|
17
|
|
77
|
|
Total
|
|
14
|
|
$2,651
|
|
$106
|
|
Approximately 99% of our exposure at fair value for OTC interest-rate swap and option-based derivatives, excluding amounts related to our posting of cash collateral in excess of our derivative liability determined at the counterparty level, was collateralized at December 31, 2020. The remaining exposure was primarily due to market movements between the measurement of a derivative at fair value and our receipt of the related collateral, as well as exposure amounts below the then applicable counterparty collateral posting threshold, if any. The concentration of our derivative exposure among our primary OTC derivative counterparties remains high and could further increase.
Other Counterparties
We enter into other types of transactions in the ordinary course of business that expose us to counterparty credit risk, including those below. An individual counterparty may be included in more than one transaction type below.
n Other investments - We are exposed to the non-performance of institutions relating to other investments (including non-mortgage-related securities and cash and cash equivalents) transactions, including those entered into on behalf of our securitization trusts. Our policies require that the institution be evaluated using our internal rating model prior to our entering into such transactions. We monitor the financial strength of these institutions and may use collateral maintenance requirements to manage our exposure to individual counterparties.
The major financial institutions with which we transact regarding our other investments (including non-mortgage-related securities and cash and cash equivalents) include other GSEs, Treasury, the Federal Reserve Bank of New York, GSD/FICC, highly-rated supranational institutions, depository and non-depository institutions, brokers and dealers, and government money market funds. For more information on our other investments portfolio, see MD&A - Liquidity and Capital Resources.
We utilize the GSD/FICC as a clearinghouse to transact many of our trades involving securities purchased under agreements to resell, securities sold under agreements to repurchase, and other non-mortgage related securities. As a clearing member of GSD/FICC, we are required to post initial and variation margin payments and are exposed to the counterparty credit risk of GSD/FICC (including its clearing members). In the event a clearing member fails and causes losses to the GSD/FICC clearing system, we could be subject to the loss of the margin that we have posted to the GSD/FICC. Moreover, our exposure could exceed that amount, as members are generally required to cover losses caused by defaulting members on a pro rata basis.
n Forward settlement counterparties - We are exposed to the non-performance (settlement risk) of counterparties relating to the forward settlement of loans and securities (including agency debt, agency RMBS, and cash window loans). Our policies require that the counterparty be evaluated using our internal counterparty rating model prior to our entering into such transactions. We monitor the financial strength of these counterparties and may use collateral maintenance requirements or offsetting transactions to manage our exposure to individual counterparties.
We also execute forward purchase and sale commitments of mortgage-related securities, including dollar roll transactions, that are treated as derivatives for accounting purposes and 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. In the event a clearing member fails and causes losses to the MBSD/FICC clearing system, we could be subject to the loss of the margin that we have posted to the MBSD/FICC. Moreover, our exposure could exceed the amount of margin we have posted to the MBSD/FICC, as clearing members are generally required to cover losses caused by defaulting members on a pro rata basis. As of December 31, 2020, the gross fair value of such forward purchase and sale commitments that were in derivative asset positions was $205 million.
n Secured lending activities - As part of our other investments portfolio, we enter into secured lending arrangements to provide financing for certain Freddie Mac securities and other assets related to our guarantee businesses. These transactions differ from those we use for liquidity purposes, as the borrowers may not be major financial institutions, potentially exposing us to the institutional credit risk of these institutions. We also provide advances to lenders for mortgage loans that they will subsequently either sell through our cash window or securitize into securities that they will
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
116
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Counterparty Credit Risk
|
deliver to us. In addition, we may invest in other secured lending activities. During 1Q 2020, certain of our counterparties that had engaged in securities purchased under agreements to resell on Freddie Mac securities defaulted under the terms of the governing legal agreements by failing to meet margin requirements. The transactions were terminated in accordance with the terms of the agreements and we recognized the collateral at fair value, which was in excess of the counterparties' outstanding obligations. We did not recognize a financial loss as a result of these defaults. For additional information, see Note 18.
Other Market Participants
We have exposure to other market participant counterparties for transactions that we enter into in the ordinary course of business, including the following:
n Document custodians - We use third-party document custodians to provide loan document certification and custody services for the loans that we purchase and securitize. In many cases, our sellers and servicers or their affiliates also serve as document custodians for us. Our ownership rights to the loans that we own or that back our securitization products could be challenged if a seller or servicer intentionally or negligently pledges, sells, or fails to obtain a release of prior liens on the loans that we purchased, which could result in financial losses to us. When a seller or servicer, or one of its affiliates, acts as a document custodian for us, the risk that our ownership interest in the loans may be adversely affected is increased, particularly in the event the seller or servicer were to become insolvent. To manage these risks, we establish qualifying standards for our document custodians and maintain legal and contractual arrangements that identify our ownership interest in the loans. We also monitor the financial strength of our document custodians on an ongoing basis in accordance with our counterparty credit risk management framework, and we require transfer of documents to a different third-party document custodian if we have concerns about the solvency or competency of the document custodian.
n The MERS® System - The MERS System is an electronic registry that is widely used by sellers and servicers, Freddie Mac, and other participants in the mortgage industry to maintain records of beneficial ownership of mortgage loans. A significant portion of the loans we own or guarantee are registered in the MERS System. Our business could be adversely affected if we were prevented from using the MERS System, or if our use of the MERS System adversely affects our ability to enforce our rights with respect to our loans registered in the MERS System.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
117
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Operational Risk
|
Operational Risk
Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people, or systems or from external events. Operational risk is inherent in all of our activities. Operational risk events include breakdowns related to people, process, and/or technology that could result in financial loss, legal actions, regulatory fines, and reputational harm.
Operational Risk Management and Risk Profile
Our operational risk management methodology includes risk identification, measurement, monitoring, controlling, and reporting. When operational risk events are identified, our policies require that the events be documented and analyzed to determine whether changes are required in our systems, people, and/or processes to mitigate the risk of future events.
In order to evaluate and monitor the risks associated with business processes, each business line periodically completes an assessment using the RCSA methodology. The methodology is designed to identify and assess the business line's exposure to operational risk and determine if action is required to manage the risk to an acceptable level.
In addition to the RCSA process, we employ several tools to identify, measure, and monitor operational risks, including loss event data, key risk indicators, root cause analysis, and testing. Our operational risk methodology requires that the primary responsibility for managing both the day-to-day risk and longer-term or emerging risks lies with the business lines, with independent oversight performed by the second line of defense.
We continue to face heightened operational risk and expect the risk to remain elevated for the near term. This elevated risk profile is due to the layering impact of several factors including: legacy systems requiring upgrade for operational resiliency; reliance on manual processes and models; volume and complexity of business initiatives, including the UMBS, as well as new initiatives we are pursuing as required by the Conservatorship Scorecard; external events such as cybersecurity threats and third-party failures; and issues requiring remediation. Other factors contributing to our heightened operational risk are discussed in Risk Factors - Operational Risks. We also continue to manage other operational risks, such as compliance risk.
While our operational risk profile remains elevated, we are continuing to strengthen our operational control environment by building out our operational risk resources within the first line of defense and ERM.
Operational Resiliency Risk
The inability to manage resiliency risk of our critical processes and supporting technology can negatively impact our ability to meet our business objectives. Our operational resiliency risk has increased as a result of the COVID-19 pandemic and is being managed through operational changes. We have successfully completed the company’s infrastructure migration to the cloud designed to provide near continuous availability for select applications across primary and alternate data centers. However, additional deployment of our technology recovery strategy is necessary to further reduce resiliency risks to mission critical processes. A resiliency program is in place that is designed to further help us reduce risk over the next 12 months by achieving faster recovery of critical business functions and supporting assets, with the development of failover/failback capabilities, and demonstrate our ability to sustain our processes operating out of region.
Common Securitization Platform
We continue to make various multi-year investments to build and support the infrastructure for a better housing finance system, including ongoing maintenance and development of the CSP. The CSP is owned and operated by CSS, which is jointly owned by Freddie Mac and Fannie Mae. While we exercise influence over CSS through our representation on the CSS Board of Managers, we do not control its day-to-day operations. Freddie Mac, Fannie Mae, FHFA, and CSS continue to work together to monitor the operational effectiveness of the platform.
We rely on CSS and the CSP for the operation of many of our single-family securitization activities. Our business activities would be adversely affected and the market for Freddie Mac securities would be disrupted if the CSP were to fail or otherwise become unavailable to us or if CSS were unable to perform its obligations to us, including as a result of an operational failure by Fannie Mae. In the event of a CSS operational failure, we may be unable to issue certain new single-family mortgage-related securities, and investors in mortgage-related securities hosted on the CSS platform may experience payment delays.
For additional information, see Risk Factors - Operational Risks - A failure in our operational systems or infrastructure, or those of third parties, could impair our ability to provide market liquidity, disrupt our business, damage our reputation, and cause financial losses.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
118
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Operational Risk
|
Our operations rely on the secure, accurate and timely receipt, processing, storage, and transmission of confidential and other information in our systems and networks and with customers, counterparties, service providers, and financial institutions. Information risks for companies like ours have increased significantly in recent years. Like many companies and government entities, from time to time we have been, and likely will continue to be, the target of attempted cyberattacks and other information security threats.
We continue to invest in the information risk and security area to strengthen our capabilities to prevent, detect, respond to and mitigate risk, and protect our systems, networks, and other technology assets against unauthorized attempts to access confidential information or to disrupt or degrade our business operations. We have obtained insurance coverage relating to cybersecurity risks. However, this insurance may not be sufficient to provide adequate loss coverage. Although to date we have not experienced any cyberattacks resulting in significant impact to the company, there is no assurance that our cybersecurity risk management program will prevent cyberattacks from having significant impacts in the future.
Insider threats remain a top risk as the workforce diversifies to include contractors, third-party vendors, remote workers, and part-time employees. Our third-party vendors and their supply chain connections remain another top risk as we continue to operate from a heightened awareness position focusing on our cybersecurity posture, including those from nation-state cyber threats. We have strengthened our capabilities over critical third-party monitoring with continued focus on our capabilities for monitoring and surveillance to detect deliberate actions such as malicious exploitation, theft or destruction of data, or the compromise of our networks.
For additional information, see Risk Factors - Operational Risks - Potential cybersecurity threats are changing rapidly and growing in sophistication. We may not be able to protect our systems or the confidentiality of our information from cyberattack and other unauthorized access, disclosure, and disruption.
Third party risk is the risk of failure of an individual or entity engaged to deliver a product, service, or process to, or on behalf of, Freddie Mac. We rely on third parties, and their supply chains, to support critical processes and core functions, and are exposed to operational risks as a result of this reliance. These third parties could experience, directly or through their supply chain, failures due to process breakdowns, technology outages, cyberattacks, adverse financial conditions, or other disruptions. For example, we are exposed to risks associated with our third parties and their dependencies on technology providers supporting their operations. We are enhancing our enterprise capabilities to manage third-party operational risks. While we continue to mature our program, we may be exposed to associated elevated risks. Our use of third parties increases exposure to data breaches through third parties that access and store our data and their supply chains. Efforts are underway to improve our controls related to third-party data sharing. We have not experienced significant issues with our third-party service providers, sellers, servicers, or other counterparties during the COVID-19 pandemic. However, our third parties may face operational and financial challenges during this period, which could impact our operations. We have increased our monitoring of third parties we deem to be critical or high risk to our operations.
In addition to credit risk exposure, sellers and servicers expose us to significant operational risk, including legal/compliance, information, and reporting risks. We are enhancing our controls to identify and mitigate operational risks that result from our relationships with sellers and servicers. See MD&A - Risk Management - Counterparty Credit Risk for additional information on our monitoring of our sellers and servicers.
Model risk is the potential for adverse consequences from model errors in prediction or decisions based on incorrect or misused model outputs. The unprecedented events surrounding the COVID-19 pandemic have generated an increased degree of model risk and uncertainty. As a result, we expect our models to face significant challenges in accurately forecasting key inputs into our financial projections. These can include, but are not limited to, projections of mortgage rates, house prices, credit defaults, yields, prepayments and interest rates. In response, we are mitigating this increased risk by monitoring model performance and applying model overlays and adjustments when deemed appropriate. These will be driven by the latest developments and emerging trends in the economy, as well as any additional government interventions and internal policy changes. However, these adjustments incorporate subjectivity and may be based upon judgment. Actual results could differ from our estimates, and the use of different judgments and assumptions related to these estimates could have a material impact on our consolidated financial statements.
Model development, changes to existing models, and model risks are managed in each business line according to our three-lines-of-defense framework. New model development and changes to existing models undergo a review process. Each business periodically reviews model performance, embedded assumptions, limitations, and modeling techniques, and updates its models as it deems appropriate. ERM independently validates the work done by the business lines (e.g., conducting independent assessments of ongoing monitoring results, model risk ratings, performance monitoring, and reporting against thresholds and alerts).
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
119
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Risk Management | Operational Risk
|
Given the importance and complexity of models in our business, model development may take significant time to complete. Delays in our model development process could affect our ability to make sound business and risk management decisions, and increase our exposure to risk. We have procedures designed to mitigate this risk.
We face significant risks associated with our use of models, as discussed in Risk Factors - Operational Risks - We face risks and uncertainties associated with the models that we use to inform business and risk management decisions and for financial accounting and reporting purposes.
Compliance risk is the risk of non-compliance with applicable laws, rules, regulations, conservator requirements, regulatory guidance, internal policies, procedures, standards or ethical codes of conduct (collectively, legal and regulatory obligations). We have established a compliance risk management program, leveraging the three lines of defense enterprise risk framework, to oversee and manage compliance risk, including effective challenge of our business areas’ compliance with such obligations, as appropriate. We maintain policies and procedures that provide the governance framework for the identification, measurement, monitoring, control, reporting and remediation of compliance issues. FHFA has raised concerns that we need to strengthen our compliance risk management practices by documenting and implementing an effective comprehensive framework for identifying, assessing, testing, and reporting compliance risk. As a result, we are focused on strengthening the overall compliance risk management program, including the risk of non-compliance with our legal and regulatory obligations, through planned enhancements of certain compliance program elements, including risk assessments, monitoring, testing, and reporting. Our compliance program is subject to regulatory oversight and examination, which may result in the identification of additional program deficiencies or weaknesses. To the extent additional concerns are identified, we will continue to coordinate with FHFA and our internal auditors to assess the impact and remediate these concerns, as appropriate. For additional information relating to our compliance risk management program, see Risk Factors - Legal and Compliance Risks.
Effectiveness of Our Disclosure Controls and Procedures
Management, including our Principal Executive Officer and CFO, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2020. As of December 31, 2020, we had one material weakness related to conservatorship, which remained unremediated, causing us to conclude that our disclosure controls and procedures were not effective at a reasonable level of assurance. For additional information, see Controls and Procedures.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
120
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Liquidity and Capital Resources
|
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our business activities require that we maintain adequate liquidity to meet our financial obligations as they come due and meet the needs of customers in a timely and cost-efficient manner. We also must maintain adequate capital resources to avoid being placed into receivership by FHFA.
On June 17, 2020, FHFA provided us and Fannie Mae with updated minimum short-, medium-, and long-term liquidity requirements. These requirements are based on cash flows needed under a stressed scenario that assumes, among other things, that for short- and medium-term debt, we may not have access to funding from the market for an extended period of time and therefore must fund our cash needs utilizing certain liquid assets in our portfolio.
The updated FHFA minimum liquidity requirements have four components:
n A 30-day cash flow stress test that assumes we continue to provide liquidity to the market while holding a $10 billion buffer above outflows;
n A 365-day metric that requires us to hold liquidity to meet our expected cash outflows over 365 days and to continue to provide liquidity to the market under certain stress conditions. This metric is also more restrictive than our earlier framework regarding the types of liquid assets we hold;
n A specified minimum long-term debt to less-liquid asset ratio. Less-liquid assets are those that are not eligible to be pledged as collateral to the FICC; and
n A requirement that we fund our assets with liabilities that have a specified minimum term relative to the term of the assets.
These updated liquidity requirements have been effective since December 1, 2020 and are more stringent than our previous liquidity requirements and liquidity requirements of banks and other depository institutions. These updated liquidity requirements result in higher funding costs and negatively affect our net interest income. In addition, they have impacted the size and the allowable investments in our other investments portfolio.
On December 17, 2020, FHFA issued a notice of proposed rulemaking regarding liquidity requirements for Freddie Mac and Fannie Mae. For additional information on the proposed rule, see MD&A – Regulation and Supervision – Legislative and Regulatory Developments – FHFA Proposed Rule on Enterprise Liquidity Requirements.
Sources and Uses of Funds
Our primary source of funding for the assets on our balance sheet is the issuance of debt. In addition to the funding provided by issuing debt, our other sources of funds include:
n Principal payments on and sales of securities and loans that we own;
n Repurchase transactions;
n Interest income on securities and loans that we own;
n Guarantee fees (inclusive of initial upfront fees);
n Net worth; and
n Draws from Treasury under the Purchase Agreement, which are only made if we have a quarterly deficit in our net worth.
We use these sources to fund the assets on our balance sheet. Our primary uses of funds include:
n Principal payments upon the maturity, redemption, or repurchase of our debt;
n Payments of interest on our debt and other expenses;
n Purchases of mortgage loans, including purchases of seriously delinquent or modified loans underlying our securities, mortgage-related securities, and other investments; and
n Payments related to derivative contracts and posting or pledging of collateral to third parties in connection with secured financing and daily trade activities.
In addition to the uses and sources of cash described above, we are involved in various legal proceedings, including those discussed in Legal Proceedings, which may result in a need to use cash to settle claims or pay certain costs or receipt of cash from settlements.
Our securities and other obligations are not guaranteed by the U.S. government and do not constitute a debt or obligation of the U.S. government or any agency or instrumentality thereof, other than Freddie Mac. We continue to manage our debt issuances to remain in compliance with the aggregate indebtedness limits set forth in the Purchase Agreement. For a description of our debt products, see Our Business Segments - Capital Markets.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
127
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Liquidity and Capital Resources
|
Liquidity Management Framework
The support provided by Treasury pursuant to the Purchase Agreement enables us to have adequate liquidity to conduct our normal business activities. However, the costs and availability of our debt funding could vary for a number of reasons, including the uncertainty about the future of the GSEs and any future downgrades in our credit ratings or the credit ratings of the U.S. government.
We make extensive use of the Federal Reserve's payment system in our business activities. The Federal Reserve requires that we fully fund our accounts at the Federal Reserve Bank of New York to the extent necessary to cover cash payments on our debt and mortgage-related securities each day, before the Federal Reserve Bank of New York, acting as our fiscal agent, will initiate such payments. Although we seek to maintain sufficient intraday liquidity to fund our activities through the Federal Reserve's payment system, we have limited access to cash once the debt markets are closed for the day. Insufficient cash may cause our account to be overdrawn, potentially resulting in penalties and reputational harm.
Maintaining sufficient liquidity is of primary importance to, and a cost of, our business. Under our liquidity management practices and policies, we:
n Manage intraday cash needs and provide for the contingency of an unexpected cash demand;
n Maintain cash and non-mortgage investments to enable us to meet ongoing cash obligations for a limited period of time, assuming no access to unsecured debt markets;
n Maintain unencumbered securities with a value greater than or equal to the largest projected daily cash shortfall for an extended period of time, assuming no access to unsecured debt markets; and
n Manage the maturity of our unsecured debt based on our asset profile.
To facilitate cash management, we forecast cash outflows and inflows using assumptions and models. These forecasts help us to manage our liabilities with respect to the timing of our cash flows. Differences between actual and forecasted cash flows have resulted in higher costs from issuing a higher amount of debt than needed or unexpectedly needing to issue debt, and may do so in the future. Differences between actual and forecasted cash flows also could result in our account at the Federal Reserve Bank of New York being overdrawn. We maintain daily cash reserves to manage this risk.
Liquidity Profile
Primary Sources of Liquidity
The following table lists the sources of our liquidity, the balances as of December 31, 2020 and a brief description of their importance to Freddie Mac. Our ability to maintain sufficient liquidity, including by pledging mortgage-related and other securities as collateral to other institutions, could cease or change rapidly and the cost of the available funding could increase significantly due to changes in market interest rates, market confidence, operational risks, and other factors.
Table 64 - Liquidity Sources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source
|
Balance(1)
(In billions)
|
|
Description
|
Liquidity
|
|
|
|
•
|
Other Investments Portfolio - Liquidity and Contingency Operating Portfolio
|
$95.9
|
|
•
|
The Liquidity and Contingency Operating Portfolio, included within our other investments portfolio, is primarily used for short-term liquidity management.
|
•
|
Liquid Portion of the Mortgage-Related Investments Portfolio
|
$67.6
|
|
•
|
The liquid portion of our mortgage-related investments portfolio can be pledged or sold for liquidity purposes. The amount of cash we may be able to successfully raise may be substantially less than the balance.
|
(1)Represents carrying value for the Liquidity and Contingency Operating Portfolio, included within our other investments portfolio, and UPB for the liquid portion of the mortgage-related investments portfolio.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
128
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Liquidity and Capital Resources
|
Other Investments Portfolio
The table below summarizes the balances in our other investments portfolio, which includes the Liquidity and Contingency Operating Portfolio. The investments in our other investments portfolio are important to our cash flow, collateral management, asset and liability management, and ability to provide liquidity and stability to the mortgage market. The other investments portfolio is primarily used for short-term liquidity management, cash and other investments held by consolidated trusts, and other investments, which include investments in debt securities used to pledge as collateral, LIHTC partnerships, and secured lending activities.
Table 65 - Other Investments Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(In billions)
|
|
Liquidity and Contingency Operating Portfolio
|
Custodial Account
|
Other
|
Total Other Investments Portfolio(1)
|
|
Liquidity and Contingency Operating Portfolio
|
Custodial Account
|
Other
|
Total Other Investments Portfolio(1)
|
Cash and cash equivalents
|
|
$6.5
|
|
$17.4
|
|
$—
|
|
$23.9
|
|
|
$4.2
|
|
$0.9
|
|
$0.1
|
|
$5.2
|
|
Securities purchased under agreements to resell
|
|
65.8
|
|
38.4
|
|
0.8
|
|
105.0
|
|
|
40.6
|
|
23.1
|
|
2.4
|
|
66.1
|
|
Non-mortgage related securities
|
|
23.6
|
|
—
|
|
3.3
|
|
26.9
|
|
|
23.2
|
|
—
|
|
3.9
|
|
27.1
|
|
Advances to lenders
|
|
—
|
|
—
|
|
4.2
|
|
4.2
|
|
|
—
|
|
—
|
|
1.9
|
|
1.9
|
|
LIHTC equity investments
|
|
—
|
|
—
|
|
1.4
|
|
1.4
|
|
|
—
|
|
—
|
|
1.0
|
|
1.0
|
|
Secured lending
|
|
—
|
|
—
|
|
1.7
|
|
1.7
|
|
|
—
|
|
—
|
|
2.3
|
|
2.3
|
|
Total
|
|
$95.9
|
|
$55.8
|
|
$11.4
|
|
$163.1
|
|
|
$68.0
|
|
$24.0
|
|
$11.6
|
|
$103.6
|
|
(1)Represents carrying value.
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 and interest-bearing deposits at commercial banks. Our interest-bearing deposits at commercial banks totaled $3.1 billion and $3.7 billion as of December 31, 2020 and December 31, 2019, respectively.
The Liquidity and Contingency Operating Portfolio also included collateral posted to us in the form of cash primarily by derivatives counterparties of $2.8 billion and $2.6 billion as of December 31, 2020 and December 31, 2019, respectively. We have invested this collateral in securities purchased under agreements to resell and non-mortgage-related securities as part of our Liquidity and Contingency Operating Portfolio, although the collateral may be subject to return to our counterparties based on the terms of our master netting and collateral agreements.
Mortgage Loans and Mortgage-Related Securities
We invest principally in mortgage loans and mortgage-related securities, certain categories of which are largely unencumbered and liquid. Our primary source of liquidity among these mortgage assets is our holdings of single-class and multiclass agency securities, excluding certain structured agency securities collateralized by non-agency mortgage-related securities.
In addition, we hold unsecuritized single-family loans and multifamily held-for-sale loans that could be securitized and would then be available for sale or for use as collateral for repurchase agreements. Due to the large size of our portfolio of liquid assets, the amount of mortgage-related assets that we may successfully sell or borrow against in the event of a liquidity crisis or significant market disruption may be substantially less than the amount of mortgage-related assets we hold. There would likely be insufficient market demand for large amounts of these assets over a prolonged period of time, which would limit our ability to sell or borrow against these assets.
We hold other mortgage assets, but given their characteristics, they may not be available for immediate sale or for use as collateral for repurchase agreements. These assets consist of certain structured agency securities collateralized by non-agency mortgage-related securities, non-agency CMBS, non-agency RMBS, and unsecuritized seriously delinquent and modified single-family loans.
We are subject to limits on the amount of mortgage assets we can sell in any calendar month without review and approval by FHFA and, if FHFA so determines, Treasury. In August 2020, FHFA instructed us to: (1) reduce the amount of agency MBS we hold to no more than $50 billion by June 30, 2021 and no more than $20 billion by June 30, 2022, with all dollar caps to be based on UPB; and (2) reduce the UPB of our existing portfolio of collateralized mortgage obligations (CMOs), which are also sometimes referred to as REMICs, to zero by June 30, 2021. We will have a holding period limit to sell any new CMO tranches created but not sold at issuance. CMOs do not include tranches initially retained from reperforming loans senior subordinate
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
129
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Liquidity and Capital Resources
|
securitization structures. See Conservatorship and Related Matters - Managing Our Mortgage-Related Investments Portfolio Over Time for additional details.
Primary Sources of Funding
Debt securities that we issue are classified either as debt securities of consolidated trusts held by third parties or debt of Freddie Mac. The following table lists the sources and balances of our funding as of December 31, 2020 and a brief description of their importance to Freddie Mac.
Table 66 - Funding Sources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source
|
Balance(1)
(In billions)
|
|
Description
|
Funding
|
|
|
|
•
|
Debt of Freddie Mac
|
$284.4
|
|
•
|
Debt of Freddie Mac is used to fund our business activities.
|
•
|
Debt Securities of Consolidated Trusts
|
$2,308.2
|
|
•
|
Debt securities of consolidated trusts are used primarily to fund our single-family guarantee activities. This type of debt is principally repaid by the cash flows of the associated mortgage loans. As a result, our repayment obligation is limited to amounts paid pursuant to our guarantee of principal and interest and to purchase modified or seriously delinquent loans from the trusts.
|
(1)Represents carrying value of debt balances after consideration of offsetting arrangements.
We issue debt of Freddie Mac to fund our operations. Competition for funding can vary with economic, financial market, and regulatory environments.
During 2020, we have had sufficient access to the debt markets, due largely to support from the U.S. government, to meet our financial obligations as they come due. We rely significantly on our ability to issue debt on an ongoing basis to refinance our effective short-term debt. Our effective short-term debt percentage, which represents the percentage of total debt of Freddie Mac that is expected to mature within one year, was 16.9% and 55.2% as of December 31, 2020 and December 31, 2019, respectively.
As of December 31, 2020, our aggregate indebtedness, calculated as the par value of debt of Freddie Mac, was $286.5 billion, which was below the current $300.0 billion debt cap limit imposed by the Purchase Agreement. Pursuant to the January 2021 Letter Agreement, the Purchase Agreement debt limit cap will decrease to $270 billion on January 1, 2023 as a result of the decrease in the Mortgage Asset limit under the Purchase Agreement to $225.0 billion on December 31, 2022. Beginning January 1, 2020, we elected to net securities sold under agreements to repurchase against securities purchased under agreements to resell when such amounts meet the conditions for balance sheet offsetting, both on our consolidated balance sheets and for the purpose of measuring our aggregate indebtedness under the debt cap limit. See Note 11 for additional information. We disclose the amount of our indebtedness on this basis monthly under the caption "Indebtedness Pursuant to Purchase Agreement - Total Debt Outstanding" in our Monthly Volume Summary reports, which are available on our website at www.freddiemac.com/investors/financials/monthly-volume-summaries.html.
To fund our business activities, we depend on the continuing willingness of investors to purchase our debt securities. Changes or perceived changes in the government's support of us could have a severe negative effect on our access to the debt markets and on our debt funding costs.
In addition, any change in applicable legislative or regulatory exemptions, including those described in Regulation and Supervision, could adversely affect our access to some debt investors, thereby potentially increasing our debt funding costs.
Beginning in March 2020, we ceased issuing LIBOR-indexed floating-rate unsecured debt securities that mature beyond the end of 2021. As of December 31, 2020, we did not have any outstanding LIBOR-indexed unsecured debt securities, except for our remaining outstanding STACR debt notes, which we are no longer issuing on a regular basis.
The tables below summarize the par value and the average rate of debt of Freddie Mac securities we issued or paid off, including regularly scheduled principal payments, payments resulting from calls, and payments for repurchases. We call, exchange, or repurchase 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.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
130
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Liquidity and Capital Resources
|
Table 67 - Debt of Freddie Mac Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
(Dollars in millions)
|
|
Short-term
|
Average Rate(1)
|
Long-term
|
Average Rate(1)
|
|
|
|
|
|
|
Discount notes and Reference Bills
|
|
|
|
|
|
Beginning balance
|
|
$60,830
|
|
1.67
|
%
|
$—
|
|
—
|
%
|
Issuances
|
|
147,249
|
|
0.97
|
|
—
|
|
—
|
|
Repurchases
|
|
(5,020)
|
|
0.27
|
|
—
|
|
—
|
|
Maturities
|
|
(203,048)
|
|
1.24
|
|
—
|
|
—
|
|
Ending Balance
|
|
11
|
|
0.69
|
|
—
|
|
—
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
|
|
|
Beginning balance
|
|
9,843
|
|
1.46
|
|
—
|
|
—
|
|
Additions
|
|
999,503
|
|
0.35
|
|
—
|
|
—
|
|
Repayments
|
|
(1,009,346)
|
|
0.36
|
|
—
|
|
—
|
|
Ending Balance
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
Callable debt
|
|
|
|
|
|
Beginning balance
|
|
1,000
|
|
2.36
|
|
94,152
|
|
2.03
|
|
Issuances
|
|
685
|
|
0.10
|
|
191,138
|
|
0.83
|
|
Repurchases
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Calls
|
|
(1,000)
|
|
2.36
|
|
(154,096)
|
|
1.61
|
|
Maturities
|
|
—
|
|
—
|
|
(7,856)
|
|
1.63
|
|
Ending Balance
|
|
685
|
|
0.10
|
|
123,338
|
|
0.71
|
|
|
|
|
|
|
|
Non-callable debt
|
|
|
|
|
|
Beginning balance
|
|
39,407
|
|
2.31
|
|
62,228
|
|
2.86
|
|
Issuances
|
|
14,356
|
|
1.57
|
|
112,180
|
|
0.46
|
|
Repurchases
|
|
(10,588)
|
|
1.85
|
|
(5,849)
|
|
2.40
|
|
Maturities
|
|
(38,916)
|
|
2.24
|
|
(22,999)
|
|
1.70
|
|
Ending Balance
|
|
4,259
|
|
1.51
|
|
145,560
|
|
1.21
|
|
|
|
|
|
|
|
STACR Debt and SCR Debt Notes(2)
|
|
|
|
|
|
Beginning balance
|
|
—
|
|
—
|
|
15,496
|
|
5.55
|
|
Issuances
|
|
—
|
|
—
|
|
769
|
|
1.66
|
|
Repurchases
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Maturities
|
|
—
|
|
—
|
|
(3,777)
|
|
3.44
|
|
Ending Balance
|
|
—
|
|
—
|
|
12,488
|
|
4.09
|
|
|
|
|
|
|
|
Total debt of Freddie Mac
|
|
$4,955
|
|
1.31
|
%
|
$281,386
|
|
1.12
|
%
|
Referenced footnotes are included after the next table.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
131
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
(Dollars in millions)
|
|
Short-term
|
Average Rate(1)
|
Long-term
|
Average Rate(1)
|
|
|
|
|
|
|
Discount notes and Reference Bills
|
|
|
|
|
|
Beginning balance
|
|
$28,787
|
|
2.36
|
%
|
$—
|
|
—
|
%
|
Issuances
|
|
369,992
|
|
2.05
|
|
—
|
|
—
|
|
Repurchases
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Maturities
|
|
(337,949)
|
|
2.20
|
|
—
|
|
—
|
|
Ending Balance
|
|
60,830
|
|
1.67
|
|
—
|
|
—
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
|
|
|
|
Beginning balance
|
|
6,019
|
|
2.40
|
|
—
|
|
—
|
|
Additions
|
|
325,512
|
|
2.04
|
|
—
|
|
—
|
|
Repayments
|
|
(321,689)
|
|
2.07
|
|
—
|
|
—
|
|
Ending Balance
|
|
9,842
|
|
1.46
|
|
—
|
|
—
|
|
|
|
|
|
|
|
Callable debt
|
|
|
|
|
|
Beginning balance
|
|
2,000
|
|
2.53
|
|
105,206
|
|
2.09
|
|
Issuances
|
|
13,590
|
|
2.48
|
|
107,544
|
|
2.38
|
|
Repurchases
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Calls
|
|
(14,590)
|
|
2.52
|
|
(95,172)
|
|
2.65
|
|
Maturities
|
|
—
|
|
—
|
|
(23,426)
|
|
1.35
|
|
Ending Balance
|
|
1,000
|
|
2.36
|
|
94,152
|
|
2.03
|
|
|
|
|
|
|
|
Non-callable debt
|
|
|
|
|
|
Beginning balance
|
|
14,440
|
|
2.04
|
|
80,789
|
|
2.56
|
|
Issuances
|
|
48,984
|
|
2.34
|
|
15,774
|
|
2.43
|
|
Repurchases
|
|
(345)
|
|
1.87
|
|
(869)
|
|
1.87
|
|
Maturities
|
|
(23,671)
|
|
2.19
|
|
(33,465)
|
|
1.68
|
|
Ending Balance
|
|
39,408
|
|
2.31
|
|
62,229
|
|
2.86
|
|
|
|
|
|
|
|
STACR Debt and SCR Debt Notes(2)
|
|
|
|
|
|
Beginning balance
|
|
—
|
|
—
|
|
17,729
|
|
6.02
|
|
Issuances
|
|
—
|
|
—
|
|
723
|
|
2.09
|
|
Repurchases
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Maturities
|
|
—
|
|
—
|
|
(2,956)
|
|
4.49
|
|
Ending Balance
|
|
—
|
|
—
|
|
15,496
|
|
5.55
|
|
|
|
|
|
|
|
Total debt of Freddie Mac
|
|
$111,080
|
|
1.89
|
%
|
$171,877
|
|
2.65
|
%
|
(1)Average rate is weighted based on par value.
(2)STACR debt notes and SCR debt notes are subject to prepayment risk as their payments are based upon the performance of a reference pool of mortgage assets that may be prepaid by the related mortgage borrower at any time generally without penalty and are therefore included as a separate category in the table.
Our outstanding debt of Freddie Mac balance increased during 2020, driven by near-term cash needs resulting from a higher expected single-family cash window purchase forecast. In addition, we increased our liquidity and contingency operating portfolio and the amount of long-term debt issuance as we transitioned to comply with the updated minimum liquidity requirements established by FHFA. However, our aggregate indebtedness to meet these funding needs is constrained by the current $300.0 billion debt cap limit imposed by the Purchase Agreement, which will decrease to $270 billion on January 1, 2023 pursuant to the January 2021 Letter Agreement.
During 2020, our discount notes issuance declined significantly and the outstanding balance at the end of the year was minimal. We replaced a majority of our short-term debt with longer-term callable and non-callable debt in order to comply with the updated minimum liquidity requirements established by FHFA. As a result of this funding mix change, we expect our funding cost to increase. Our callable debt provides us with the option to repay the outstanding principal balance of the debt prior to its contractual maturity date. As of December 31, 2020, $105 billion of the outstanding $124 billion of callable debt may be called within one year, not including callable debt due to contractually mature within one year. We expect our STACR debt balance to continue to decline as run off will primarily be replaced with STACR Trust note transactions.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
132
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Liquidity and Capital Resources
|
Short-Term Debt
The tables below contain details on the characteristics of our short-term debt.
Table 68 - Short-Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
Ending Balance
|
|
Yearly Average
|
|
|
(Dollars in millions)
|
|
Carrying Value
|
Weighted Average Effective Rate(1)
|
|
Carrying Value
|
Weighted Average Effective Rate(1)
|
|
Maximum Carrying Value Outstanding at Any Month End
|
Discount notes and Reference Bills
|
|
$11
|
|
0.69
|
%
|
|
$37,391
|
|
0.97
|
%
|
|
$66,867
|
|
Medium-term notes
|
|
4,944
|
|
1.31
|
|
|
21,068
|
|
1.99
|
|
|
40,310
|
|
Securities sold under agreements to repurchase
|
|
—
|
|
—
|
|
|
7,243
|
|
0.52
|
|
|
14,305
|
|
Total
|
|
$4,955
|
|
1.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Ending Balance
|
|
Yearly Average
|
|
|
(Dollars in millions)
|
|
Carrying Value
|
Weighted Average Effective Rate(1)
|
|
Carrying Value
|
Weighted Average Effective Rate(1)
|
|
Maximum Carrying Value Outstanding at Any Month End
|
Discount notes and Reference Bills
|
|
$60,629
|
|
1.67
|
%
|
|
$44,675
|
|
2.16
|
%
|
|
$60,629
|
|
Medium-term notes
|
|
40,405
|
|
2.31
|
|
|
29,781
|
|
2.36
|
|
|
43,096
|
|
Securities sold under agreements to repurchase
|
|
9,843
|
|
1.46
|
|
|
9,928
|
|
2.16
|
|
|
14,114
|
|
Total
|
|
$110,877
|
|
1.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Ending Balance
|
|
Yearly Average
|
|
|
(Dollars in millions)
|
|
Carrying Value
|
Weighted Average Effective Rate(1)
|
|
Carrying Value
|
Weighted Average Effective Rate(1)
|
|
Maximum Carrying Value Outstanding at Any Month End
|
Discount notes and Reference Bills
|
|
$28,621
|
|
2.36
|
%
|
|
$35,126
|
|
1.79
|
%
|
|
$46,892
|
|
Medium-term notes
|
|
16,440
|
|
2.10
|
|
|
15,403
|
|
1.37
|
|
|
18,200
|
|
Securities sold under agreements to repurchase
|
|
6,019
|
|
2.40
|
|
|
9,411
|
|
1.79
|
|
|
11,719
|
|
Total
|
|
$51,080
|
|
2.28
|
%
|
|
|
|
|
|
(1)Average rate is weighted based on carrying value.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
133
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Liquidity and Capital Resources
|
Maturity and Redemption Dates
The following graphs present debt of Freddie Mac 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 of Freddie Mac.
Contractual Maturity Date as of December 31, 2020(1)
Earliest Redemption Date as of December 31, 2020(1)
(1)STACR debt notes and SCR debt notes are subject to prepayment risk as their payments are based upon the performance of a reference pool of mortgage assets that may be prepaid by the related mortgage borrower at any time generally without penalty and are therefore included as a separate category in the graphs.
Debt Securities of Consolidated Trusts
The largest component of debt on our consolidated balance sheets is debt securities of consolidated trusts, which relates to securitization transactions that we consolidate for accounting purposes. We issue this type of debt by securitizing mortgage loans primarily to fund the majority of our single-family guarantee activities. When we consolidate securitization trusts, we recognize the following on our consolidated balance sheets:
n The assets held by the securitization trusts, the majority of which are mortgage loans. We recognized $2,273.3 billion and $1,940.5 billion of mortgage loans, which represented 86.5%% and 88.1% of our total assets, as of December 31, 2020 and December 31, 2019, respectively.
n The debt securities issued by the securitization trusts, the majority of which are Level 1 Securitization Products that are pass-through securities, where the cash flows of the mortgage loans held by the securitization trust are passed through to the holders of the securities. We recognized $2,308.2 billion and $1,898.4 billion of debt securities of consolidated trusts, which represented 89.0% and 87.1% of our total debt, as of December 31, 2020 and December 31, 2019, respectively.
Debt securities of consolidated trusts represent our liability to third parties that hold beneficial interests in our consolidated securitization trusts. Debt securities of consolidated trusts are principally repaid from the cash flows of the mortgage loans held by the securitization trusts that issued the debt securities. In circumstances when the cash flows of the mortgage loans are not sufficient to repay the debt, we make up the shortfall because we have guaranteed the payment of principal and interest on the debt. In certain circumstances, we have the right and/or obligation to purchase the loan from the trust prior to its contractual maturity. For more information on our purchases of loans from trusts, see Our Business Segments - Single-Family Guarantee - Business Overview.
At December 31, 2020, 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 7 for details on our allowance for credit losses.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
134
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Liquidity and Capital Resources
|
The table below shows the issuance and extinguishment activity for the debt securities of our consolidated trusts.
Table 69 - Activity for Debt Securities of Consolidated Trusts Held by Third Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In millions)
|
|
2020
|
2019
|
Beginning balance
|
|
$1,854,802
|
|
$1,748,738
|
|
Issuances:
|
|
|
|
New issuances to third parties
|
|
669,224
|
|
323,860
|
|
Additional issuances of securities
|
|
561,784
|
|
178,971
|
|
Total issuances
|
|
1,231,008
|
|
502,831
|
|
Extinguishments:
|
|
|
|
Purchases of debt securities from third parties
|
|
(14,112)
|
|
(30,306)
|
|
Debt securities received in settlement of secured lending
|
|
(132,434)
|
|
(46,670)
|
|
Repayments of debt securities
|
|
(698,662)
|
|
(319,791)
|
|
Total extinguishments
|
|
(845,208)
|
|
(396,767)
|
|
Ending balance
|
|
2,240,602
|
|
1,854,802
|
|
Unamortized premiums and discounts
|
|
67,574
|
|
43,553
|
|
Debt securities of consolidated trusts held by third parties
|
|
$2,308,176
|
|
$1,898,355
|
|
The table below provides information on the UPB of debt securities issued by our consolidated trusts.
Table 70 - Debt Securities of Consolidated Trusts Held by Third Parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In millions)
|
|
2020
|
2019
|
Single-family
|
|
|
|
Level 1 Securitization Products:
|
|
|
|
30-year or more amortizing fixed-rate
|
|
$1,813,658
|
|
$1,563,211
|
|
20-year amortizing fixed-rate
|
|
103,822
|
|
80,340
|
|
15-year amortizing fixed-rate
|
|
322,618
|
|
241,835
|
|
Adjustable-rate
|
|
27,079
|
|
38,271
|
|
Interest-only
|
|
3,639
|
|
4,828
|
|
FHA/VA and other governmental
|
|
1,457
|
|
1,718
|
|
Total single-family Level 1 Securitization Products
|
|
2,272,273
|
|
1,930,203
|
|
Other single-family
|
|
1,933
|
|
2,397
|
|
Total single-family
|
|
2,274,206
|
|
1,932,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total multifamily
|
|
14,303
|
|
8,642
|
|
Total Freddie Mac mortgage-related securities
|
|
2,288,509
|
|
1,941,242
|
|
Freddie Mac mortgage-related securities repurchased or retained at issuance
|
|
(47,907)
|
|
(86,440)
|
|
Debt securities of consolidated trusts held by third parties
|
|
$2,240,602
|
|
$1,854,802
|
|
Our ability to access the capital markets and other sources of funding, as well as our cost of funds, may be affected by our credit ratings. The table below indicates our credit ratings as of January 31, 2021.
Table 71 - Freddie Mac Credit Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nationally Recognized Statistical Rating
Organization
|
|
|
S&P
|
Moody's
|
Fitch
|
Senior long-term debt
|
|
AA+
|
Aaa
|
AAA
|
Short-term debt
|
|
A-1+
|
P-1
|
F1+
|
|
|
|
|
|
Preferred stock(1)
|
|
D
|
Ca
|
C
|
Outlook
|
|
Stable
|
Stable
|
Negative
|
(1)Does not include senior preferred stock issued to Treasury.
Our credit ratings and outlooks are primarily based on the support we receive from Treasury and, therefore, are affected by changes in the credit ratings and outlooks of the U.S. government.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
135
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Liquidity and Capital Resources
|
A security rating is not a recommendation to buy, sell, or hold securities. It may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.
Our contractual obligations affect our liquidity and capital resource needs and primarily include the debt (and associated interest payments) and derivative liabilities recognized on our consolidated balance sheets. We also have contractual obligations recognized in other liabilities on our consolidated balance sheets, including payments to our qualified and non-qualified defined contribution plans and other benefit plans, and future cash payments due under our obligations to make delayed equity contributions to LIHTC partnerships.
We also have contractual obligations associated with our commitments to purchase loans and mortgage-related securities from third parties, most of which are accounted for as derivatives, as well as certain off-balance sheet obligations that are enforceable and legally binding, including guarantees, unfunded lending arrangements, and obligations to advance funds upon the occurrence of certain events. See Off-Balance Sheet Arrangements for additional information on the potential effects of our off-balance sheet obligations on our liquidity and capital resources.
The amount and timing of payments due related to debt of Freddie Mac is discussed in Primary Sources of Funding. Most of our purchase commitments are scheduled to occur within the next 12 months. The amount and timing of certain other of our contractual obligations is uncertain, including future payments of principal and interest related to debt securities of consolidated trusts held by third parties, STACR and SCR transactions, cash settlements on derivative agreements not yet accrued, guarantee payments, and commitments to advance funds under certain 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 contractual or notional amount of the transaction that affect our short- and long-term liquidity needs. Certain of these arrangements present credit risk exposure. See MD&A - Risk Management - Credit Risk for additional information on our credit risk exposure on off-balance sheet arrangements.
We have certain off-balance sheet arrangements related to our securitization and other mortgage-related guarantee activities. Our off-balance sheet arrangements related to securitization activities primarily consist of guaranteed K Certificates and SB Certificates. Our guarantee of these securitization activities and other mortgage-related guarantees may result in liquidity needs to cover potential cash flow shortfalls from borrower defaults. As of December 31, 2020 and December 31, 2019, the outstanding UPB of the guaranteed securities was $337.0 billion and $296.5 billion, respectively. In addition to our securitization and other mortgage-related guarantees, we have certain other guarantees that are accounted for as derivative instruments and are recognized on our consolidated balance sheets at fair value. See Note 10 for additional information on these guarantees, which are not included in the totals above.
We have the ability to commingle TBA-eligible Fannie Mae collateral in certain of our resecuritization products. When we resecuritize Fannie Mae securities in our commingled resecuritization products, our guarantee covers timely payments of principal and interest on such securities. Accordingly, commingling Fannie Mae collateral in our resecuritization transactions increases our off-balance sheet liquidity exposure as we do not have control over the Fannie Mae collateral. As of December 31, 2020 and December 31, 2019, the total amount of our off-balance sheet exposure related to Fannie Mae securities backing Freddie Mac resecuritization products was approximately $85.8 billion and $27.4 billion, respectively.
We have entered into certain commitments, including commitments to purchase securities under agreements to resell and firm commitments to purchase multifamily loans, for some of which we have elected the fair value option, and unfunded lending arrangements that are not recorded on our consolidated balance sheets and are not accounted for as derivative instruments. As of December 31, 2020 and December 31, 2019, these commitments and arrangements totaled $59.2 billion and $32.4 billion in notional amount, respectively. We also have other commitments to purchase or sell mortgage loans or mortgage-related securities that are accounted for as derivative instruments and are recognized on our consolidated balance sheets at fair value. See Note 10 for additional information on these commitments, which are not included in the totals above.
In addition, as part of our guarantee arrangements pertaining to certain multifamily housing revenue bonds and securities backed by multifamily housing revenue bonds, we have provided commitments to advance funds, commonly referred to as "liquidity guarantees," which were $4.8 billion and $5.5 billion at December 31, 2020 and December 31, 2019, respectively. These guarantees require us to advance funds to third parties that enable them to repurchase tendered bonds or securities that are unable to be remarketed. At both December 31, 2020 and December 31, 2019, there were no liquidity guarantee advances outstanding.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
136
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Liquidity and Capital Resources
|
n 2020 vs. 2019 - Cash and cash equivalents (including restricted cash and cash equivalents) increased by $18.7 billion from $5.2 billion as of December 31, 2019 to $23.9 billion as of December 31, 2020, primarily due to higher loan prepayments and our transition to comply with updated minimum liquidity requirements established by FHFA.
n 2019 vs. 2018 - Cash and cash equivalents (including restricted cash and cash equivalents) decreased by $2.1 billion from $7.3 billion as of December 31, 2018 to $5.2 billion as of December 31, 2019, as we invested the proceeds from issuances of debt of Freddie Mac in securities purchased under agreements to resell due to higher near-term cash needs for upcoming debt maturities and anticipated calls of debt of Freddie Mac and a higher expected loan purchase forecast.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
137
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Liquidity and Capital Resources
|
Capital Resources
Primary Sources of Capital
Our entry into conservatorship resulted in significant changes to the assessment of our capital adequacy and our management of capital. Under the Purchase Agreement, Treasury made a commitment to provide us with equity funding, under certain conditions, to eliminate deficits in our net worth. Obtaining equity funding from Treasury pursuant to its commitment under the Purchase Agreement enables us to avoid being placed into receivership by FHFA and to maintain the confidence of the debt markets as a very high-quality credit, upon which our business model is dependent.
In connection with the execution of the Purchase Agreement, we, through FHFA, in its capacity as Conservator, issued a warrant to Treasury to purchase 79.9% of our common stock outstanding on a fully diluted basis on the date of exercise. See Note 13 for further information.
In November 2020, FHFA released a final rule that establishes the ERCF as a new regulatory capital framework for Freddie Mac and Fannie Mae. This final rule is substantively similar in terms of overall structure and approach to the proposed capital rule released in May 2020. The final capital rule, which will become effective on February 16, 2021, has a transition period for compliance. In general, the compliance date for the regulatory capital requirements will be the later of the date of termination of our conservatorship and any later compliance date provided in a consent order or other transition order; however, we may begin implementing the ERCF sooner, upon the direction of FHFA or otherwise.
As the ERCF was not yet in effect during 2020, we continued to use the guidance issued to us by FHFA under the CCF to evaluate our transactions and businesses. We will be required to report our regulatory capital under the new framework beginning on January 1, 2022. The ERCF specifies substantial capital requirements and could affect our business strategies, perhaps significantly.
Pursuant to the January 2021 Letter Agreement, the applicable Capital Reserve Amount used in determining the dividend on the senior preferred stock payable to Treasury increased as of October 1, 2020 to the amount of adjusted total capital necessary to meet capital requirements and buffers set forth in the ERCF, rather than $20.0 billion as previously provided. This increased Capital Reserve Amount will remain in effect until the last day of the second fiscal quarter during which we have reached and maintained such level of capital (the Capital Reserve End Date). Based on our Net Worth Amount of $16.4 billion as of December 31, 2020, no dividend is payable to Treasury for the quarter ended December 31, 2020. Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference on the senior preferred stock. See Introduction - About Freddie Mac - Conservatorship and Government Support for Our Business for more information.
If for any reason we were not to pay our dividend requirement on the senior preferred stock in full in any future period until the Capital Reserve End Date, the unpaid amount would be added to the liquidation preference and our applicable Capital Reserve Amount would thereafter be zero, but this would not affect our ability to draw funds from Treasury under the Purchase Agreement. Our cumulative senior preferred stock dividend payments totaled $119.7 billion as of December 31, 2020.
The aggregate liquidation preference of the senior preferred stock owned by Treasury was $86.5 billion and the amount of available funding remaining under the Purchase Agreement was $140.2 billion as of December 31, 2020. To the extent we draw additional funds in the future, the aggregate liquidation preference will increase and the amount of available funding will decrease by the amount of those draws. For additional information on the Purchase Agreement and senior preferred stock, including other reasons for increases in the aggregate liquidation preference, as well as our dividend requirement and the commitment fee to be paid to Treasury after the Capital Reserve End Date, see Introduction - About Freddie Mac - Conservatorship and Government Support for Our Business, MD&A - Conservatorship and Related Matters, and MD&A - Regulation and Supervision.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
138
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Liquidity and Capital Resources
|
The table below presents activity related to our net worth.
Table 72 - Net Worth Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In millions)
|
|
2020
|
2019
|
2018
|
Ending balance, December 31
|
|
$9,122
|
|
$4,477
|
|
($312)
|
|
Cumulative-effect adjustment (1)
|
|
(240)
|
|
—
|
|
—
|
|
Beginning balance, January 1
|
|
8,882
|
|
4,477
|
|
(312)
|
|
Comprehensive income (loss)
|
|
7,531
|
|
7,787
|
|
8,622
|
|
Capital draws from Treasury
|
|
—
|
|
—
|
|
312
|
|
Senior preferred stock dividends declared
|
|
—
|
|
(3,142)
|
|
(4,145)
|
|
Total equity / net worth
|
|
$16,413
|
|
$9,122
|
|
$4,477
|
|
Aggregate draws under Purchase Agreement
|
|
$71,648
|
|
$71,648
|
|
$71,648
|
|
Aggregate cash dividends paid to Treasury
|
|
119,680
|
|
119,680
|
|
116,538
|
|
Liquidation preference of the senior preferred stock
|
|
86,539
|
|
79,322
|
|
75,648
|
|
(1)Cumulative-effect adjustment related to our adoption of CECL. See Note 1 for additional information on our adoption of CECL.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
139
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Conservatorship and Related Matters
|
CONSERVATORSHIP AND RELATED MATTERS
Supervision of Our Company During Conservatorship
FHFA has broad powers when acting as our Conservator. Upon its appointment, the Conservator immediately succeeded to all rights, titles, powers, and privileges of Freddie Mac and of any stockholder, officer, or director of Freddie Mac with respect to Freddie Mac 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.
Under the GSE Act, the Conservator may take any actions it determines are necessary to put us in a safe and solvent condition and appropriate to carry on our business and preserve and conserve our assets and property. The Conservator's powers include the ability to transfer or sell any of our assets or liabilities, subject to certain limitations and post-transfer notice provisions, without any approval, assignment of rights or consent of any party. However, the GSE Act provides that loans and mortgage-related assets that have been transferred to a Freddie Mac securitization trust must be held by the Conservator for the beneficial owners of the trust and cannot be used to satisfy our general creditors.
We conduct our business subject to the direction of FHFA as our Conservator. The Conservator has provided authority to the Board of Directors to oversee management's conduct of our business operations so we can operate in the ordinary course. The directors serve on behalf of, exercise authority as provided by, and owe their fiduciary duties of care and loyalty to the Conservator. The Conservator retains the authority to withdraw or revise the authority it has provided at any time. The Conservator also retains certain significant authorities for itself, and has not provided them to the Board. The Conservator continues to provide strategic direction for the company and directs the efforts of the Board and management to implement its strategy. Many management decisions are subject to review and/or approval by FHFA and management frequently receives direction from FHFA on various matters involving day-to-day operations.
Our current business objectives reflect direction we have received from the Conservator including the Conservatorship Scorecards. At the direction of the Conservator, we have made changes to certain business practices that are designed to provide support for the mortgage market in a manner that serves our public mission and other non-financial objectives. Given our public mission and the important role our Conservator has placed on Freddie Mac in addressing housing and mortgage market conditions, we sometimes take actions that could have a negative impact on our business, operating results or financial condition, and could thus contribute to a need for additional draws under the Purchase Agreement. Certain of these actions are intended to help homeowners and the mortgage market.
Purchase Agreement, Warrant, and Senior Preferred Stock
In connection with our entry into conservatorship, we entered into the Purchase Agreement with Treasury. Under the Purchase Agreement, we issued to Treasury both senior preferred stock and a warrant to purchase common stock. The Purchase Agreement, the warrant, and the senior preferred stock do not contain any provisions causing them to terminate or cease to exist upon the termination of conservatorship. The conservatorship, the Purchase Agreement, the warrant, and the senior preferred stock materially limit the rights of our common and preferred stockholders (other than Treasury).
Pursuant to the Purchase Agreement, which we entered into through FHFA, in its capacity as Conservator, on September 7, 2008, we issued to Treasury one million shares of Variable Liquidation Preference Senior Preferred Stock with an initial liquidation preference of $1 billion and a warrant to purchase, for a nominal price, shares of our common stock equal to 79.9% of the total number of shares outstanding. The senior preferred stock and warrant were issued to Treasury as an initial commitment fee in consideration of Treasury's commitment to provide funding to us under the Purchase Agreement. We did not receive any cash proceeds from Treasury as a result of issuing the senior preferred stock or the warrant. Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited and we will not be able to do so for the foreseeable future, if at all.
The Purchase Agreement provides that, on a quarterly basis, we generally may draw funds up to the amount, if any, by which our total liabilities exceed our total assets, as reflected on our GAAP consolidated balance sheet for the applicable fiscal quarter, provided that the aggregate amount funded under the Purchase Agreement may not exceed Treasury's commitment. The amount of any draw will be added to the aggregate liquidation preference of the senior preferred stock and will reduce the amount of available funding remaining. Deficits in our net worth have made it necessary for us to make substantial draws on Treasury's funding commitment under the Purchase Agreement. Pursuant to the December 2017 Letter Agreement, the liquidation preference of the senior preferred stock increased by $3.0 billion on December 31, 2017. In addition, pursuant to the September 2019 and January 2021 Letter Agreements, the liquidation preference of the senior preferred stock has and will be increased, at the end of each fiscal quarter, from September 30, 2019 through the Capital Reserve End Date, by an amount equal to the increase in the Net Worth Amount, if any, during the immediately prior fiscal quarter. As of December 31, 2020, the aggregate liquidation preference of the senior preferred stock was $86.5 billion, and the amount of available funding remaining under the Purchase Agreement was $140.2 billion.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
140
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Conservatorship and Related Matters
|
Treasury, as the holder of the senior preferred stock, is entitled to receive cumulative quarterly cash dividends, when, as, and if declared by our Board of Directors. The dividends we have paid to Treasury on the senior preferred stock have been declared by, and paid at the direction of, the Conservator, acting as successor to the rights, titles, powers, and privileges of the Board. Under the August 2012 amendment to the Purchase Agreement, our cash dividend requirement each quarter is the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter, less the applicable Capital Reserve Amount, exceeds zero. Under the December 2017 Letter Agreement, the dividend for the dividend period from October 1, 2017 through and including December 31, 2017 was reduced to $2.25 billion, and the applicable Capital Reserve Amount from January 1, 2018 through June 30, 2019 was $3.0 billion. Pursuant to the September 2019 Letter Agreement, from July 1, 2019 through September 30, 2020, the applicable Capital Reserve Amount was $20.0 billion. Pursuant to the January 2021 Letter Agreement, as of October 1, 2020, the applicable Capital Reserve Amount increased to the amount of adjusted total capital necessary to meet capital requirements and buffers set forth in the ERCF. This increased Capital Reserve Amount will remain in effect until the last day of the second fiscal quarter during which we have reached and maintained such level of capital (the Capital Reserve End Date). As a result, we will not have another dividend requirement on the senior preferred stock until we have built sufficient capital to meet the capital requirements and buffers set forth in the ERCF. If for any reason we were not to pay our dividend requirement on the senior preferred stock in full in any future period until the Capital Reserve End Date, the unpaid amount would be added to the liquidation preference and the applicable Capital Reserve Amount would thereafter be zero.
Upon the Capital Reserve End Date, our dividend requirement on the senior preferred stock will be an amount equal to the lesser of (i) 10% per annum on the then-current liquidation preference of the senior preferred stock and (ii) a quarterly amount equal to the increase in the Net Worth Amount, if any, during the immediately prior fiscal quarter. After the Capital Reserve End Date, all or significant portions of our future profits will be distributed to Treasury, and the holders of our common stock and non-senior preferred stock will not receive benefits that could otherwise flow from such profits. If for any reason we were not to pay our dividend requirement on the senior preferred stock in full in any future period after the Capital Reserve End Date the unpaid amount would be added to the liquidation preference and immediately following such failure and for all dividend periods thereafter until the dividend period following the date on which we shall have paid in cash full cumulative dividends, the dividend amount will be 12% per annum on the then-current liquidation preference of the senior preferred stock. This would not affect our ability to draw funds from Treasury under the Purchase Agreement.
The senior preferred stock is senior to our common stock and all other outstanding series of our preferred stock, as well as any capital stock we issue in the future, as to both dividends and rights upon liquidation. We are not permitted to redeem the senior preferred stock prior to the termination of Treasury's funding commitment under the Purchase Agreement.
We are also required under the Purchase Agreement to pay a quarterly commitment fee to Treasury, which was to be determined in an amount mutually agreed to by us and Treasury with reference to the market value of Treasury's funding commitment as then in effect. However, pursuant to the August 2012 amendment to the Purchase Agreement, as further amended by the January 2021 Letter Agreement, for each quarter commencing January 1, 2013, no periodic commitment fee under the Purchase Agreement will be set, accrue, or be payable. Pursuant to the January 2021 Letter Agreement, by the Capital Reserve End Date, we and Treasury, in consultation with the Chairman of the Federal Reserve, will mutually agree on a periodic commitment fee that we will pay for Treasury’s remaining funding commitment with respect to the five-year period commencing on the first January 1 after the Capital Reserve End Date.
The Purchase Agreement and warrant also contain covenants that significantly restrict our business and capital activities. For example, the Purchase Agreement provides that, until the senior preferred stock is repaid or redeemed in full, we may not, without the prior written consent of Treasury:
n Pay dividends on our equity securities, other than the senior preferred stock or warrant, or repurchase our equity securities;
n Issue any additional equity securities, except in limited instances;
n Sell, transfer, lease, or otherwise dispose of any assets, other than dispositions for fair market value in the ordinary course of business, consistent with past practices, and in other limited circumstances; and
n Issue any subordinated debt.
For more information on the Purchase Agreement covenants, see Note 2.
Limits on Our Mortgage-Related Investments Portfolio and Indebtedness
Our ability to acquire and sell mortgage assets is significantly constrained by limitations under the Purchase Agreement and other limitations imposed by FHFA:
n Since 2014, we have been managing the mortgage-related investments portfolio so that it does not exceed 90% of the cap under the Purchase Agreement, which reached $250 billion as of December 31, 2018. In February 2019, FHFA directed us to maintain the mortgage-related investments portfolio at or below $225 billion at all times. In November 2019, FHFA instructed us, by January 31, 2020, to include 10% of the notional value of certain interest-only securities owned by
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
141
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Conservatorship and Related Matters
|
Freddie Mac in the calculation of this portfolio, while continuing to maintain the portfolio below the limit imposed by FHFA. Pursuant to the January 2021 Letter Agreement, the Purchase Agreement cap on our mortgage-related investments portfolio will be lowered from $250 billion to $225 billion at the end of 2022, and the calculation of mortgage assets subject to the cap will also include 10% of the notional value of interest-only securities. Our mortgage-related investments portfolio was $188.8 billion as of December 31, 2020, including $6.6 billion representing 10% of the notional amount of the interest-only securities we held as of December 31, 2020.
n With respect to the composition of our mortgage-related investments portfolio, in August 2020, FHFA instructed us to: (1) reduce the amount of agency MBS we hold to no more than $50 billion by June 30, 2021 and no more than $20 billion by June 30, 2022, with all dollar caps to be based on UPB; and (2) reduce the UPB of our existing portfolio of collateralized mortgage obligations (CMOs), which are also sometimes referred to as REMICs, to zero by June 30, 2021. We will have a holding period limit to sell any new CMO tranches created but not sold at issuance. CMOs do not include tranches initially retained from reperforming loans senior subordinate securitization structures.
n Under the Purchase Agreement, we may not incur indebtedness that would result in the par value of our aggregate indebtedness exceeding 120% of the amount of mortgage assets we are permitted to own on December 31 of the immediately preceding calendar year. Our debt cap under the Purchase Agreement was $346.1 billion in 2018 and reached $300.0 billion on January 1, 2019. As of December 31, 2020, our aggregate indebtedness for purposes of the debt cap was $286.5 billion. Our debt cap under the Purchase Agreement will decrease to $270 billion on January 1, 2023 as a result of the decrease in the mortgage assets limit under the Purchase Agreement to $225 billion on December 31, 2022 pursuant to the January 31, 2021 Letter Agreement.
n FHFA has indicated that any portfolio sales should be commercially reasonable transactions that consider impacts to the market, borrowers, and neighborhood stability.
Our decisions with respect to managing the mortgage-related investments portfolio affect all three business segments. In order to achieve all of our portfolio goals, it is possible that we may forgo economic opportunities in one business segment in order to pursue opportunities in another business segment.
Our results against the limits imposed on our mortgage-related investments portfolio and aggregate indebtedness for the year ended December 31, 2020 are shown below.
Mortgage Assets as of December 31,
Indebtedness as of December 31,
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
142
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Conservatorship and Related Matters
|
Managing Our Mortgage-Related Investments Portfolio Over Time
Our mortgage-related investments portfolio includes assets held by all three business segments and consists of:
n Agency securities, which include both single-family and multifamily Freddie Mac mortgage-related securities and non-Freddie Mac agency mortgage-related securities;
n Non-agency mortgage-related securities, which include single-family non-agency mortgage-related securities, CMBS, housing revenue bonds, and other multifamily securities; and
n Single-family and multifamily unsecuritized loans.
We evaluate the liquidity of the assets in our mortgage-related investments portfolio based on three categories (in order of liquidity):
n Liquid - Single-class and multi-class agency securities, excluding certain structured agency securities collateralized by non-agency mortgage-related securities;
n Securitization Pipeline - Primarily includes performing multifamily and single-family loans purchased for cash and primarily held for a short period until securitized, with the resulting Freddie Mac issued securities being sold or retained; and
n Less Liquid - Assets that are less liquid than both agency securities and loans in the securitization pipeline (e.g., reperforming loans, single-family seriously delinquent loans, and non-agency mortgage-related securities).
Freddie Mac mortgage-related securities include mortgage-related securities issued or guaranteed by Freddie Mac.
The table below presents the UPB of our mortgage-related investments portfolio. For purposes of the limits imposed by the Purchase Agreement and FHFA, our mortgage-related investments portfolio was $188.8 billion as of December 31, 2020, including $6.6 billion representing 10% of the notional amount of the interest-only securities we held as of December 31, 2020.
Table 73 - Mortgage-Related Investments Portfolio Details
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
(Dollars in millions)
|
|
Liquid
|
Securitiz-ation Pipeline
|
Less Liquid
|
Total
|
|
Liquid
|
Securitiz-ation Pipeline
|
Less Liquid
|
Total
|
Capital Markets segment - Mortgage investments portfolio
|
|
|
|
|
|
|
|
|
|
|
Single-family unsecuritized loans
|
|
|
|
|
|
|
|
|
|
|
Performing loans
|
|
$—
|
|
$51,040
|
|
$—
|
|
$51,040
|
|
|
$—
|
|
$19,144
|
|
$—
|
|
$19,144
|
|
Reperforming loans
|
|
—
|
|
—
|
|
16,298
|
|
16,298
|
|
|
—
|
|
—
|
|
26,134
|
|
26,134
|
|
Total single-family unsecuritized loans
|
|
—
|
|
51,040
|
|
16,298
|
|
67,338
|
|
|
—
|
|
19,144
|
|
26,134
|
|
45,278
|
|
Agency securities
|
|
63,892
|
|
—
|
|
2,062
|
|
65,954
|
|
|
119,156
|
|
—
|
|
2,518
|
|
121,674
|
|
Non-agency mortgage-related securities
|
|
—
|
|
—
|
|
1,300
|
|
1,300
|
|
|
—
|
|
—
|
|
1,458
|
|
1,458
|
|
Total Capital Markets segment - Mortgage investments portfolio
|
|
63,892
|
|
51,040
|
|
19,660
|
|
134,592
|
|
|
119,156
|
|
19,144
|
|
30,110
|
|
168,410
|
|
Single-family Guarantee segment - Single-family unsecuritized seriously delinquent loans
|
|
—
|
|
—
|
|
10,005
|
|
10,005
|
|
|
—
|
|
—
|
|
8,589
|
|
8,589
|
|
Multifamily segment
|
|
|
|
|
|
|
|
|
|
|
Unsecuritized mortgage loans
|
|
—
|
|
23,068
|
|
10,339
|
|
33,407
|
|
|
—
|
|
18,531
|
|
11,254
|
|
29,785
|
|
Mortgage-related securities
|
|
3,670
|
|
—
|
|
510
|
|
4,180
|
|
|
5,209
|
|
—
|
|
680
|
|
5,889
|
|
Total Multifamily segment
|
|
3,670
|
|
23,068
|
|
10,849
|
|
37,587
|
|
|
5,209
|
|
18,531
|
|
11,934
|
|
35,674
|
|
Total mortgage-related investments portfolio
|
|
$67,562
|
|
$74,108
|
|
$40,514
|
|
$182,184
|
|
|
$124,365
|
|
$37,675
|
|
$50,633
|
|
$212,673
|
|
Percentage of total mortgage-related investments portfolio
|
|
37
|
%
|
41
|
%
|
22
|
%
|
100
|
%
|
|
58
|
%
|
18
|
%
|
24
|
%
|
100
|
%
|
While we continued to purchase new single-family seriously delinquent loans from securities we guarantee and certain multifamily unsecuritized loans, which are classified as held-for-investment, our active disposition of less liquid assets during 2020 included the following:
n Sales of $8.3 billion in UPB of single-family reperforming loans and $0.7 billion in UPB of seriously delinquent unsecuritized single-family loans;
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
143
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Conservatorship and Related Matters
|
n Securitizations of $1.4 billion in UPB of single-family reperforming loans and $6.0 billion in UPB of less liquid multifamily loans; and
n Transfers of $2.7 billion in UPB of less liquid multifamily loans to the securitization pipeline.
The less liquid assets in our mortgage-related investments portfolio decreased in 2020 but are likely to increase in future periods as we purchase delinquent loans from trusts after the forbearance period ends.
Limits on Certain of Our Other Business Activities
The Purchase Agreement, as amended by the January 2021 Letter Agreement, also established new covenants which placed additional restrictions on our secondary market activities and single-family and multifamily loan acquisitions:
n Secondary Market Activities - We cannot vary the pricing or any other term of the acquisition of a single-family loan based on the size, charter type, or volume of business of the seller of the loan and are required to:
l Purchase loans for cash consideration;
l Operate this cash window with non-discriminatory pricing;
l Beginning on January 1, 2022, limit the volume purchased through the cash window to $1.5 billion per lender during any period comprising four calendar quarters; and
l Comply with directives, regulations, restrictions, or other requirements prescribed by FHFA related to equitable secondary market access by community lenders.
n Multifamily New Business Activity - We are required to cap multifamily loan purchases at $80 billion in any 52-week period, subject to annual adjustment by FHFA based on changes in the Consumer Price Index. At least 50% of our multifamily loan purchases in any calendar year must be, at the time of acquisition, classified as mission-driven pursuant to FHFA guidelines.
n Single-Family Loan Acquisitions - We are required to limit our acquisition of certain single-family mortgage loans.
l A maximum of 6% of purchase money mortgages and 3% of refinance mortgages over the preceding 52-week period can have two or more of the following characteristics at origination: combined LTV ratio greater than 90%; DTI ratio greater than 45%; and FICO or equivalent credit score less than 680.
l We are required to limit acquisitions of single-family mortgage loans secured by either second homes or investment properties to 7% of the single-family mortgage loan acquisitions over the preceding 52-week period.
l Subject to such exceptions as FHFA may prescribe to permit us to acquire single-family mortgage loans that are currently eligible for acquisition, we are required to implement by July 1, 2021 a program reasonably designed to ensure that each single-family mortgage is:
–A qualified mortgage;
–Exempt from the CFPB’s ability-to-repay requirements;
–Secured by an investment property, subject to the restrictions above;
–A refinancing with streamlined underwriting for high LTV ratios;
–A loan with temporary underwriting flexibilities due to exigent circumstances, as determined in consultation with FHFA; or
–Secured by manufactured housing.
In addition, the Purchase Agreement requires us to comply with the ERCF as currently in effect, disregarding any subsequent amendment or other modification to that rule.
We continue to assess the effects of these new Purchase Agreement covenants on our business, and we are developing related business processes and controls, including with respect to monitoring and reporting.
FHFA's Strategic Plan: Fiscal Years 2021-2024
In October 2020, FHFA released its Strategic Plan for fiscal years 2021-2024. This new Strategic Plan establishes new goals needed for FHFA to fulfill its statutory duties, which include responsibly ending the conservatorships of Freddie Mac and Fannie Mae.
This new Strategic Plan formalizes the new direction of FHFA, and its regulated entities, by updating FHFA's mission, vision, and values, and by establishing three new strategic goals:
n Ensuring safe and sound regulated entities through world-class supervision;
n Fostering competitive, liquid, efficient, and resilient (CLEAR) national housing finance markets; and
n Positioning FHFA as a model of operational excellence by strengthening its workforce and infrastructure.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
144
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Conservatorship and Related Matters
|
For more information on the conservatorship and related matters, see Regulation and Supervision, Risk Factors - Conservatorship and Related Matters, Note 2, Note 13, and Directors, Corporate Governance, and Executive Officers - Board and Committee Information - Authority of the Board and Board Committees.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
145
|
|
|
|
|
|
|
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.
Federal Housing Finance Agency
FHFA is an independent agency of the federal government responsible for oversight of the operations of Freddie Mac, Fannie Mae, and the FHLBs.
Under the GSE Act, FHFA has safety and soundness authority that is comparable to, and in some respects broader than, that of the federal banking agencies. FHFA is responsible for implementing the various provisions of the GSE Act that were added by the Reform Act.
Under the GSE Act, FHFA must place us into receivership if FHFA determines in writing that our assets are less than our obligations for a period of 60 days. FHFA notified us that the measurement period for any mandatory receivership determination with respect to our assets and obligations would commence no earlier than the SEC public filing deadline for our quarterly or annual financial statements and would continue for 60 calendar days after that date. FHFA also advised us that, if, during that 60-day period, we receive funds from Treasury in an amount at least equal to the deficiency amount under the Purchase Agreement, the Director of FHFA will not make a mandatory receivership determination. In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other reasons set forth in the GSE Act.
Certain aspects of conservatorship and receivership operations of Freddie Mac, Fannie Mae, and the FHLBs are addressed in an FHFA rule. Among other provisions, the rule indicates that FHFA generally will not permit payment of securities litigation claims during conservatorship and that claims by current or former shareholders arising as a result of their status as shareholders would receive the lowest priority of claim in receivership. In addition, the rule indicates that administrative expenses of the conservatorship will also be deemed to be administrative expenses of receivership and that capital distributions may not be made during conservatorship, except as specified in the rule.
FHFA suspended capital classification of us during conservatorship in light of the Purchase Agreement. The existing statutory and FHFA regulatory capital requirements are not binding during the conservatorship. These capital standards are described in Note 21. Under the GSE Act, FHFA has the authority to increase our minimum capital levels temporarily or to establish additional capital and reserve requirements for particular purposes. See Legislative and Regulatory Developments - FHFA Enterprise Capital Framework below for additional information on the final capital rule issued by FHFA in November 2020.
Pursuant to an FHFA rule, FHFA-regulated entities are required to conduct annual stress tests to determine whether such companies have sufficient capital to absorb losses as a result of adverse economic conditions. Under the rule, Freddie Mac is required to conduct annual stress tests using scenarios specified by FHFA that reflect certain economic and financial conditions and publicly disclose the results of the stress test under the "severely adverse" scenario. In August 2020, FHFA temporarily waived the requirement that we disclose the results of our most recent "severely adverse" scenario stress test so that we could include alternative scenarios considered by the Federal Reserve Board following the onset of COVID-19 that were not included among the scenarios initially issued by FHFA.
The GSE Act requires Freddie Mac and Fannie Mae to obtain the approval of FHFA before initially offering any product (as defined in the statute), subject to certain exceptions. The GSE Act also requires us to provide FHFA with written notice of any new activity that we consider not to be a product. While FHFA published an interim final rule on prior approval of new products to implement these statutory requirements in July 2009, it stated that permitting us to engage in new products is inconsistent with the goals of conservatorship and instructed us not to submit such requests under the interim final rule. In October 2020, FHFA published a proposed rule that, if adopted, will replace the interim final rule. The proposed rule outlines the process for FHFA review and timelines for approving a new product. It sets forth the criteria for evaluating whether a new product is within the Enterprise’s Charter, is in the public interest, and is consistent with maintaining the safety and soundness of the Enterprise or the mortgage finance system. It also establishes a new three-part objective test for determining whether an activity is a new activity. On January 8, 2021, we submitted comments to FHFA regarding the proposed rule. Our comments offered
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
146
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Regulation and Supervision
|
suggestions on the proposed definitions and filing requirements, as well as other technical and procedural recommendations.
We are subject to annual affordable housing goals. We view the purchase of loans that are eligible to count toward our affordable housing goals to be a principal part of our mission and business, and we are committed to facilitating the financing of affordable housing for very low-, low-, and moderate-income families. In light of the affordable housing goals, we may make adjustments to our strategies for purchasing loans, which could potentially increase our credit losses. These strategies could include entering into purchase and securitization transactions with lower expected economic returns than our typical transactions. In February 2010, FHFA stated that it does not intend for us to undertake uneconomic or high-risk activities in support of the housing goals nor does it intend for the state of conservatorship to be a justification for withdrawing our support from these market segments.
Current FHFA housing goals applicable to our purchases consist of four goals and one subgoal for single-family owner-occupied housing, one multifamily affordable housing goal, and two multifamily affordable housing subgoals. Single-family goals are expressed as a percentage of the total number of eligible loans underlying our total single-family loan purchases, while the multifamily goals are expressed in terms of minimum numbers of units financed.
Three of the single-family housing goals and the subgoal target purchase mortgage loans for low-income families, very low-income families, and/or families that reside in low-income areas. The single-family housing goals also include one goal that targets refinancing loans for low-income families. The multifamily affordable housing goal targets multifamily rental housing affordable to low-income families. The multifamily affordable housing subgoals target multifamily rental housing affordable to very low-income families and small (5- to 50-unit) multifamily properties affordable to low-income families.
We may achieve a single-family or multifamily housing goal by meeting or exceeding the FHFA benchmark for that goal (Goal). We also may achieve a single-family goal by meeting or exceeding the actual share of the market that meets the criteria for that goal (Market Level).
If the Director of FHFA finds that we failed (or there is a substantial probability that we will fail) to meet a housing goal and that achievement of the housing goal was or is feasible, the Director may require the submission of a housing plan that describes the actions we will take to achieve the unmet goal. FHFA has the authority to take actions against us if we fail to submit a required housing plan, submit an unacceptable plan, fail to comply with a plan approved by FHFA, or fail to submit certain mortgage purchase data, information or reports as required by law. See Risk Factors - Legal And Regulatory Risks - We may make certain changes to our business in an attempt to meet our housing goals and duty to serve requirements, which may adversely affect our profitability.
Affordable Housing Goal Results
In October 2020, FHFA informed us that, for 2019, we achieved all five of our single-family affordable housing goals and all three of our multifamily goals. Our performance compared to our goals, as determined by FHFA for 2019 and 2018, is set forth below.
Table 74 - 2019 and 2018 Affordable Housing Goals Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Affordable Housing Goals
|
|
Goals
|
Market Level
|
Results
|
|
Goals
|
Market Level
|
Results
|
Single-family purchase money goals (Benchmark levels)
|
|
|
|
|
|
|
|
|
Low-income goal
|
|
24
|
%
|
26.6
|
%
|
27.4
|
%
|
|
24
|
%
|
25.5
|
%
|
25.8
|
%
|
Very low-income goal
|
|
6
|
%
|
6.6
|
%
|
6.8
|
%
|
|
6
|
%
|
6.5
|
%
|
6.3
|
%
|
Low-income areas goal
|
|
19
|
%
|
22.9
|
%
|
22.9
|
%
|
|
18
|
%
|
22.6
|
%
|
22.6
|
%
|
Low-income areas subgoal
|
|
14
|
%
|
18.1
|
%
|
18.0
|
%
|
|
14
|
%
|
18.0
|
%
|
17.3
|
%
|
Single-family refinance low-income goal (Benchmark level)
|
|
21
|
%
|
24.0
|
%
|
22.4
|
%
|
|
21
|
%
|
30.7
|
%
|
27.3
|
%
|
Multifamily (Benchmark levels in units)
|
|
|
|
|
|
|
|
|
Low-income goal
|
|
315,000
|
|
N/A
|
455,451
|
|
|
315,000
|
|
N/A
|
474,062
|
|
Very low-income subgoal
|
|
60,000
|
|
N/A
|
112,773
|
|
|
60,000
|
|
N/A
|
105,612
|
|
Small property low-income subgoal
|
|
10,000
|
|
N/A
|
34,847
|
|
|
10,000
|
|
N/A
|
39,353
|
|
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
147
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Regulation and Supervision
|
2020-2021 Affordable Housing Goals
In December 2020, FHFA announced its single-family and multifamily affordable housing goals for Freddie Mac for 2021. Due to the economic uncertainty related to the COVID-19 pandemic, FHFA announced benchmarks for 2021 only, and those levels remain the same as they were for 2018-2020.
Our current and proposed affordable housing goal benchmark levels are set forth below.
Table 75 - 2020-2021 Affordable Housing Goal Benchmark Levels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2021
|
Single-family purchase money goals (Benchmark levels):
|
|
|
|
Low-income
|
|
24
|
%
|
24
|
%
|
Very low-income
|
|
6
|
%
|
6
|
%
|
Low-income areas
|
|
19
|
%
|
TBD
|
Low-income areas subgoal
|
|
14
|
%
|
14
|
%
|
Single-family refinance low-income goal (Benchmark level)
|
|
21
|
%
|
21
|
%
|
Multifamily low-income goal (In units)
|
|
315,000
|
|
315,000
|
|
Multifamily very low-income subgoal (In units)
|
|
60,000
|
|
60,000
|
|
Multifamily small property low-income subgoal (In units)
|
|
10,000
|
|
10,000
|
|
We expect to report our performance with respect to the 2020 affordable housing goals in March 2021. At this time, based on preliminary information, we believe we met four of our five single-family goals and all three of our multifamily goals. We expect that FHFA will make a final determination on our 2020 performance following the release of market data in 2021. Our risk appetite constraints may make it difficult for us to meet our affordable housing goals in the future.
Duty to Serve Underserved Markets Plan
The GSE Act establishes a duty for Freddie Mac and Fannie Mae to serve three underserved markets (manufactured housing, affordable housing preservation, and rural areas) by providing leadership in developing loan products and flexible underwriting guidelines to facilitate a secondary market for mortgages for very low-, low-, and moderate-income families in those markets.
Freddie Mac is currently operating under an underserved markets plan for 2018-2020. In March 2020, we submitted our 2019 Duty to Serve Annual Report, which included information on activities and objectives undertaken during 2019. In July 2020, FHFA announced that, due to the market disruption and uncertainty caused by the COVID-19 pandemic, it has made temporary adjustments to the Duty to Serve program for 2020 and 2021 by amending the 2020 modification process and extending our 2018-2020 Duty to Serve Underserved Markets Plan by one year to include 2021 activities and objectives. In October 2020, we proposed modifications to our 2020 Duty to Serve Underserved Markets Plan and additions to our 2021 Duty to Serve Underserved Markets Plan. In January 2021, FHFA published our 2021 Duty to Serve Underserved Markets Plan, which became effective on January 1, 2021. FHFA expects that Freddie Mac’s next three-year Duty to Serve Underserved Markets Plan, covering 2022-2024, will be due in May 2021.
Affordable Housing Fund 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 such amount to certain housing funds. FHFA suspended this requirement when we were placed into conservatorship. However, in December 2014, FHFA terminated the suspension and instructed us to begin setting aside and paying amounts into those funds, subject to any subsequent guidance or instruction from FHFA.
During 2020, we completed $1.2 trillion of new business purchases subject to this requirement and accrued $490.7 million of related expense, of which $319.0 million is related to the Housing Trust Fund administered by HUD and $171.7 million is related to the Capital Magnet Fund administered by Treasury. We are prohibited from passing through the costs of these allocations to the originators of the loans that we purchase.
The GSE Act provides FHFA with the power to regulate the size and composition of our mortgage-related investments portfolio. The GSE Act requires FHFA to establish, by regulation, criteria governing portfolio holdings to ensure the holdings are backed by sufficient capital and consistent with our mission and safe and sound operations. FHFA adopted the portfolio holdings criteria established in the Purchase Agreement, as it may be amended from time to time, for so long as we remain subject to
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
148
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Regulation and Supervision
|
the Purchase Agreement. See Conservatorship and Related Matters - Limits on Our Mortgage-Related Investments Portfolio and Indebtedness for more information.
Department of Housing and Urban Development
HUD has regulatory authority over Freddie Mac with respect to fair lending. Our loan purchase activities are subject to federal anti-discrimination laws. In addition, the GSE Act prohibits discriminatory practices in our loan purchase activities, requires us to submit data to HUD to assist in its fair lending investigations of primary market lenders with which we do business, and requires us to undertake remedial actions against such lenders found to have engaged in discriminatory lending practices. HUD periodically reviews and comments on our underwriting and appraisal guidelines for consistency with the Fair Housing Act and the anti-discrimination provisions of the GSE Act.
Department of the Treasury
Treasury has significant rights and powers as a result of the Purchase Agreement. In addition, under our Charter, the Secretary of the Treasury has approval authority over our issuances of notes, debentures, and substantially identical types of unsecured debt obligations (including the interest rates and maturities of these securities), as well as new types of mortgage-related securities issued subsequent to the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The Secretary of the Treasury has performed this debt securities approval function by coordinating GSE debt offerings with Treasury funding activities. Our Charter also authorizes Treasury to purchase Freddie Mac debt obligations not exceeding $2.25 billion in aggregate principal amount at any time.
Consumer Financial Protection Bureau
The CFPB regulates consumer financial products and services. The CFPB adopted a number of final rules relating to loan origination, finance, and servicing practices that generally went into effect in January 2014. The rules include an ability-to-repay rule, which requires loan originators to make a reasonable and good faith determination that a borrower has a reasonable ability to repay the loan according to its terms. This rule provides certain protection from liability for originators making loans that satisfy the definition of a qualified mortgage. The ability-to-repay rule applies to most loans acquired by Freddie Mac, and for loans covered by the rule, FHFA has directed us to limit our single-family acquisitions to loans that generally would constitute qualified mortgages under applicable CFPB regulations. The directive generally restricts us from acquiring loans that are not fully amortizing, have a term greater than 30 years, or have points and fees in excess of 3% of the total loan amount. Under CFPB rules, one category of qualified mortgages consists of loans that are eligible for purchase or guarantee by either Freddie Mac or Fannie Mae. In October 2020, the CFPB issued a final rule that extends the category of qualified mortgages that consists of loans that are eligible for purchase or guarantee by either Freddie Mac or Fannie Mae. Under the final rule, this category of qualified mortgages will expire upon the earlier of the Enterprise’s exit from conservatorship or the mandatory compliance date of final amendments to the definition of a qualified mortgage in the ability-to-repay rule, rather than in January 2021 as previously scheduled. In December 2020, the CFPB issued a final rule that established pricing thresholds for loans to qualify as qualified mortgages, eliminated the DTI threshold, and refined the ability-to-repay definition to require lenders to consider and verify borrowers’ income, assets, and debts. The mandatory compliance date of these final amendments to the definition of qualified mortgage is July 1, 2021. Under the amended ability-to-repay rule, qualified mortgages will include loans for which lenders consider the borrower’s income, assets, debts, and DTI or residual income and that comply with our Guidelines as well as with the previously mentioned requirements regarding product features, pricing, points, and fees. In addition, under the January 2021 Letter Agreement, we are required to implement on or before July 1, 2021 a program that is reasonably designed to ensure that each single-family loan acquired falls within certain categories, one of which is "qualified mortgages."
Securities and Exchange Commission
We are subject to the reporting requirements applicable to registrants under the Exchange Act, including the requirement to file with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Although our common stock is required to be registered under the Exchange Act, we continue to be exempt from certain federal securities law requirements, including the following:
n Securities we issue or guarantee are "exempted securities" and may be sold without registration under the Securities Act of 1933;
n We are excluded from the definitions of "government securities broker" and "government securities dealer" under the Exchange Act;
n The Trust Indenture Act of 1939 does not apply to securities issued by us; and
n We are exempt from the Investment Company Act of 1940 and the Investment Advisers Act of 1940, as we are an "agency, authority, or instrumentality" of the U.S. for purposes of such Acts.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
149
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Regulation and Supervision
|
Legislative and Regulatory Developments
Legislation Related to Freddie Mac and Its Future Status
Our future structure and role will be determined by the Administration, Congress, and FHFA, and it is possible, and perhaps likely, that there will be significant changes beyond the near-term.
Several bills have been introduced in past sessions of Congress concerning the future status of Freddie Mac, Fannie Mae, and the mortgage finance system, including bills that provided for the wind down of Freddie Mac and Fannie Mae and modification of the terms of the Purchase Agreement. None of these bills have been enacted. It is possible that similar or new bills will be introduced and considered in the future. We cannot predict whether any of such bills will be introduced or enacted.
Treasury Blueprint on Next Steps for GSE Reform
On January 14, 2021, Treasury released a blueprint on next steps for GSE reform, which includes building GSE equity capital, determining GSE capital structure, setting a commitment fee for ongoing government support, establishing appropriate pricing oversight, and assessing appropriate market concentration. The blueprint states that while Treasury will continue to evaluate potential administrative actions to end the conservatorships, Congress is best positioned to adopt comprehensive housing finance reform. The goals of the current Administration with respect to the Enterprises and housing market reform are unclear.
January 2021 Letter Agreement with Treasury
On January 14, 2021, we, acting through FHFA as our Conservator, and Treasury entered into a letter agreement to further amend the Purchase Agreement and terms of the senior preferred stock. The principal modifications include:
n Extend Capital Retention - The net worth sweep dividend requirement has been revised to permit us to continue to build capital by retaining our earnings.
l Beginning October 1, 2020, the applicable Capital Reserve Amount used in determining the dividend payable to Treasury is the amount of adjusted total capital necessary to meet capital requirements and buffers set forth in the ERCF, rather than $20.0 billion as previously provided. This increased Capital Reserve Amount will remain in effect until the last day of the second fiscal quarter during which we have reached and maintained such level of capital (the Capital Reserve End Date). For additional information on the ERCF, see FHFA Enterprise Regulatory Capital Framework. The liquidation preference of the senior preferred stock will be increased, at the end of each fiscal quarter, from December 31, 2020 through the Capital Reserve End Date, by the increase in the Net Worth Amount, if any, during the immediately prior fiscal period. If for any reason we were not to pay our dividend requirement on the senior preferred stock in full in any future period until the Capital Reserve End Date, the unpaid amount would be added to the liquidation preference and the applicable Capital Reserve Amount would thereafter be zero.
l Upon the Capital Reserve End Date, our dividend requirement on the senior preferred stock each quarter will be an amount equal to the lesser of (i) 10% per annum on the then-current liquidation preference of the senior preferred stock and (ii) a quarterly amount equal to the increase in the Net Worth Amount, if any, during the immediately prior fiscal quarter. If for any reason we were not to pay our dividend requirement in full in any future period, after the Capital Reserve End Date, the unpaid amount would be added to the liquidation preference and immediately following such failure and for all dividend periods thereafter until the dividend period following the date on which we shall have paid in cash full cumulative dividends, the dividend amount will be 12% per annum on the then-current liquidation preference of the senior preferred stock.
l By the Capital Reserve End Date, we and Treasury, in consultation with the Chairman of the Federal Reserve, will mutually agree on a periodic commitment fee that we will pay for Treasury’s remaining funding commitment with respect to the five-year period commencing on the first January 1 after the Capital Reserve End Date.
n Allow for Common Stock Issuance at Appropriate Time - Treasury will not allow us to issue common stock until: (i) Treasury has exercised in full its warrant to acquire 79.9% of our common stock and (ii) all currently pending material litigation relating to the conservatorship and/or the Purchase Agreement has been resolved or settled. Treasury will allow us to use up to $70 billion in proceeds of such a common stock issuance(s) to be used to build capital.
n Establish Additional Requirements To Exit Conservatorship - FHFA agrees that it will not, without the prior written consent of Treasury, terminate our conservatorship (other than in connection with receivership) unless (i) all currently pending material litigation relating to the conservatorship and/or the Purchase Agreement has been resolved or settled and (ii) for two or more consecutive quarters we have and maintain “common equity tier 1 capital” that (together with any stockholder equity that would result from the consummation of a firm commitment public underwritten offering of our common stock as set forth in an underwriting agreement with one or more broker-dealers reasonably acceptable to Treasury, which is fully consummated concurrently with the termination of conservatorship) is in an amount not less than
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
150
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Regulation and Supervision
|
3% of our “adjusted total assets” (both as defined in the ERCF). “Common equity tier 1 capital” shall not include the senior preferred stock.
n Limit Future Increases to the Retained Mortgage Portfolio - The Purchase Agreement cap on our retained mortgage portfolio will be lowered from $250 billion currently to $225 billion at the end of 2022, and the calculation of mortgage assets subject to the cap will also include 10% of the notional value of interest-only securities. Our debt cap under the Purchase Agreement will decrease to $270 billion on January 1, 2023 as a result of the decrease in the mortgage assets limit under the Purchase Agreement to $225 billion on December 31, 2022. Under the Purchase Agreement, our debt cap is 120% of our mortgage assets limit as of December 31 of the immediately preceding calendar year.
n Provide Small Lender Protections - We cannot vary the pricing or any other term of the acquisition of a single-family loan based on the size, charter type, or volume of business of the seller of the loan. In addition, we are required to (i) purchase loans for cash consideration; (ii) operate the cash window with non-discriminatory pricing; (iii) beginning on January 1, 2022, limit the volume purchased through the cash window to $1.5 billion per lender during any period comprising four calendar quarters; and (iv) comply with directives, regulations, restrictions, or other requirements prescribed by FHFA related to equitable secondary market access by community lenders.
n Memorialize FHFA Multifamily Lending Caps - We are required to cap multifamily loan purchases at $80 billion in any 52-week period, subject to annual adjustment by FHFA based on changes in the Consumer Price Index. At least 50% of our multifamily loan purchases in any calendar year must be, at the time of acquisition, classified as mission-driven pursuant to FHFA guidelines.
n Increase Restrictions on Single-Family Loan Acquisitions - We are required to limit our acquisition of certain single-family mortgage loans.
l A maximum of 6% of purchase money mortgages and 3% of refinance mortgages over the preceding 52-week period can have two or more of the following characteristics at origination: combined LTV ratio greater than 90%; debt-to-income ratio greater than 45%; and FICO or equivalent credit score less than 680.
l Acquisitions of single-family mortgage loans secured by either second homes or investment properties will be limited to 7% of the single-family mortgage loan acquisitions over the preceding 52-week period.
l Subject to such exceptions as FHFA may prescribe to permit us to acquire single-family mortgage loans that are currently eligible for acquisition, we will be required to implement by July 1, 2021 a program reasonably designed to ensure that each single-family mortgage loan acquired is (i) a qualified mortgage; (ii) exempt from the CFPB’s ability-to-repay requirements; (iii) secured by an investment property, subject to the restrictions above; (iv) a refinancing with streamlined underwriting for high LTV ratios; (v) a loan with temporary underwriting flexibilities due to exigent circumstances, as determined in consultation with FHFA; or (vi) secured by manufactured housing.
n Require Compliance with ERCF - For purposes of the Purchase Agreement Capital Covenant, we are required to comply with the ERCF as currently in effect (i.e., disregarding any subsequent modification of that rule).
n Commit to Develop Proposal to Resolve Conservatorship - We and Treasury commit to work to restructure Treasury’s investment and dividend amount in a manner that facilitates our orderly exit from conservatorship, ensures Treasury is appropriately compensated, and permits us to raise third-party capital and make distributions as appropriate.
See Note 2 for more information about our Purchase Agreement with Treasury.
FHFA Enterprise Regulatory Capital Framework
On November 18, 2020, FHFA released a final rule that establishes a new ERCF for Freddie Mac and Fannie Mae. This final capital rule is substantively similar in terms of overall structure and approach to the proposed capital rule released in May 2020, which was a re-proposal of the capital rule published by FHFA in July 2018.
The final capital rule incorporates several bank regulatory concepts that are intended to increase both the quality and quantity of capital that the Enterprises will be required to hold. The final capital rule, which will become effective on February 16, 2021, has a transition period for compliance. In general, the compliance date for the regulatory capital requirements will be the later of the date of termination of our conservatorship and any later compliance date provided in a consent order or other transition order. We will be required to report our regulatory capital beginning on January 1, 2022 and certain buffer requirements become effective upon the termination of conservatorship, even if we are operating under a consent order or other transition order; however, we may begin implementing the ERCF sooner, upon the direction of FHFA or otherwise. The final capital rule specifies substantial capital requirements and could affect our business strategies, perhaps significantly.
The final capital rule establishes six capital requirements for the Enterprises: four risk-based requirements, which, in part, evaluate specified types of capital against a percentage of an Enterprise’s risk-weighted assets, and two leverage requirements, which evaluate specified types of capital against a percentage of an Enterprise’s adjusted total assets. The final capital rule also specifies certain capital buffer amounts. If an Enterprise does not maintain capital levels in excess of these supplemental buffer requirements, its ability to make certain capital distributions and discretionary executive bonus payments would be limited. We may hold capital above the capital requirements and buffers set forth in the ERCF, subject to the
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
151
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Regulation and Supervision
|
restrictions on our ability to do so under the Purchase Agreement, such as post-recapitalization dividends and fees we will be required to pay to Treasury.
The final capital rule includes provisions for an Enterprise to calculate its risk-weighted assets under a “standardized approach,” which requires the Enterprises to determine a risk weight for the Enterprise’s assets and exposures. The standardized approach includes provisions to calculate risk weights for credit exposures to single-family and multifamily loans, credit risk transfers, derivatives, and other on- and off-balance sheet assets and exposures. The standardized approach also specifies requirements for including market and operational risks in the calculation of an Enterprise’s risk-weighted assets. In addition to requiring an Enterprise to use the standardized approach, the final capital rule also requires an Enterprise to calculate its risk-weighted assets using an “advanced approach,” which would rely entirely on the Enterprise’s models. In determining its risk-weighted assets for evaluating capital adequacy, an Enterprise would use the higher of the amounts calculated under the standardized approach and the advanced approach. We would not be required to comply with advanced approach requirements earlier than 2025.
Notable changes from the capital rule proposed in May 2020 include increased risk-weight floors for single-family and multifamily exposures from 15% to 20%, some increased capital relief for CRT, and reduced capital requirements for single-family mortgage exposures subject to COVID-19 related forbearance.
FHFA Proposed Rule on Enterprise Liquidity Requirements
In December 2020, FHFA issued a notice of proposed rulemaking regarding liquidity requirements for Freddie Mac and Fannie Mae. This proposed rule builds on current FHFA requirements and seeks to implement minimum Enterprise liquidity and funding requirements, daily management reporting of the Enterprise’s liquidity positions, monthly public disclosure reporting requirements, and other cash flow and liquidity-related requirements. The proposed rule has four liquidity requirements: two cash-flow based requirements and two long-term liquidity and funding requirements. The proposed requirements could result in higher funding costs and could negatively impact our net interest income. In addition, they could impact the size and the allowable investments in our other investments portfolio. We cannot predict whether and when FHFA will finalize new liquidity requirements for the Enterprises, what these final liquidity requirements will be, or whether FHFA may require us to implement additional or different liquidity requirements in the proposed rule or otherwise.
FHFA Proposed Rule on Resolution Planning
In December 2020, FHFA issued a notice of proposed rulemaking that would require Freddie Mac and Fannie Mae to develop credible resolution plans, also known as living wills. These resolution plans are intended to facilitate a rapid and orderly resolution should FHFA be appointed receiver for Freddie Mac or Fannie Mae. Under the proposed rule, the Enterprises must demonstrate how core or important business lines would be maintained to ensure continued support for mortgage finance and stabilize the housing finance system, without extraordinary government support to prevent an Enterprise from being placed in receivership, indemnify investors against losses, or fund the resolution of an Enterprise. FHFA has instructed us to take actions related to developing, in the near term, a resolution planning process and to provide FHFA with support and information related to its development of a resolution framework. We cannot predict whether or when FHFA will finalize new resolution planning requirements for the Enterprises, what these final resolution planning requirements will be, when we will be required to deliver a resolution plan, or the extent to which FHFA may require us to implement additional resolution planning requirements during conservatorship.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
152
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Critical Accounting Policies and Estimates
|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with GAAP requires us to make a number of judgments, estimates, and assumptions that affect the reported amounts within our consolidated financial statements. Certain of our accounting policies, as well as estimates we make, are critical, as they are both important to the presentation of our financial condition and results of operations and require management to make difficult, complex, or subjective judgments and estimates, often regarding matters that are inherently uncertain. Actual results could differ from our estimates, and the use of different judgments and assumptions related to these policies and estimates could have a material impact on our consolidated financial statements.
Our critical accounting policies and estimates relate to the single-family allowance for credit losses and fair value measurements. For additional information about our critical accounting policies and estimates and other significant accounting policies, as well as recently issued accounting guidance, see Note 1.
Single-Family Allowance for Credit Losses
Beginning on January 1, 2020, upon the adoption of CECL, the single-family allowance for credit losses represents our estimate of expected credit losses over the contractual term of the mortgage loans. The single-family allowance for credit losses pertains to all single-family loans classified as held-for-investment on our consolidated balance sheets.
Determining the appropriateness of the single-family allowance for credit losses is a complex process that is subject to numerous estimates and assumptions requiring significant management judgment about matters that involve a high degree of subjectivity. This process involves the use of models that require us to make judgments about matters that are difficult to predict, the most significant of which are the probability of default, prepayment, and loss severity. We regularly evaluate the underlying estimates and models we use when determining the single-family allowance for credit losses and update our assumptions to reflect our historical experience and current view of economic factors. For additional information on uncertainty and risks related to models, see Risk Factors - Operational Risks - We face risks and uncertainties associated with the models that we use to inform business and risk management decisions and for financial accounting and reporting purposes. Upon adoption of CECL, the single-family allowance for credit losses also includes our reasonable and supportable forecast of certain future economic conditions, such as house prices and interest rates. Changes in our forecasts or the occurrence of actual economic conditions that differ significantly from our forecasts may significantly affect the measurement of our single-family allowance for credit losses. The length and severity of the economic downturn caused by the COVID-19 pandemic, and its impact on the housing market, are subject to significant uncertainty, which makes it difficult to estimate credit losses. These developments may have a material effect on our allowance for credit losses in future periods.
We believe the level of our single-family allowance for credit losses is appropriate based on internal reviews of the factors and methodologies used. No single statistic or measurement determines the appropriateness of the allowance for credit losses. Changes in one or more of the estimates or assumptions used to calculate the single-family allowance for credit losses could have a material impact on the allowance for credit losses and benefit (provision) for credit losses.
Changes in forecasted house price growth rates can have a significant effect on our allowance for credit losses. Our estimate of expected credit losses leverages an internally based model and uses a nationwide house price growth forecast for the next three years. A Monte Carlo simulation generates many possible house price scenarios for up to 40 years for each metropolitan statistical area (MSA). These scenarios are used to estimate loan-level expected future cash flows and credit losses based on each loan’s individual characteristics. The COVID-19 pandemic initially resulted in a decline in our near term forecasted house price growth rates compared to pre-pandemic estimates, but our forecast has since improved. The table below shows our nationwide forecasted house price growth rates for both full-year 2021 and 2022 that were used in determining our allowance for credit losses as of December 31, 2020. These growth rates are used as inputs to our models to develop the detailed forecasted life-of-loan house price growth rates for each MSA.
Table 76 - Forecasted House Price Growth Rates(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
2022
|
Forecasted house price growth rates
|
|
5.4
|
%
|
3.0
|
%
|
(1) Forecasted house price growth rates are from Freddie Mac's Economic and Housing Research Quarterly Forecast dated January 14, 2021.
Inputs used by the model are regularly updated for changes in the underlying data, assumptions, and market conditions. We review the output of this model by considering qualitative factors such as macroeconomic and other factors to see whether the model outputs are consistent with our expectations. Management adjustments may be necessary to take into consideration external factors and current economic events that have occurred but are not yet reflected in the factors used to derive the model outputs. Significant judgment is exercised in making these adjustments.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
153
|
|
|
|
|
|
|
Management's Discussion and Analysis
|
Critical Accounting Policies and Estimates
|
Some examples of the qualitative factors considered include:
n Regional housing trends;
n Applicable house price indices;
n Unemployment and employment dislocation trends;
n The effects of changes in government policies and programs;
n Industry trends;
n Consumer credit statistics;
n Third-party credit enhancements;
n Natural disasters (such as hurricanes and wildfires); and
n Other catastrophic events (such as the COVID-19 pandemic and the impact of associated relief programs).
The inability to realize the benefits of our loss mitigation activities, declines in house prices, deterioration in the financial condition of our mortgage insurers, or increases in delinquency rates would cause our losses to be significantly higher than those currently estimated.
Fair Value Measurements
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. Assets and liabilities within our consolidated financial statements measured at fair value include:
n Mortgage-related and non-mortgage related securities;
n Certain loans held-for-sale;
n Derivative instruments; and
n Certain debt securities of consolidated trusts held by third parties and certain debt of Freddie Mac.
The accounting guidance for fair value measurements establishes a framework for measuring fair value, and also establishes a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on the assumptions a market participant would use at the measurement date. Fair value measurements under this hierarchy are distinguished among quoted market prices, observable inputs, and unobservable inputs. The measurement of fair value requires management to make judgments and assumptions. The process for determining fair value using unobservable inputs is generally more subjective and involves a higher degree of management judgment and assumptions than the measurement of fair value using observable inputs. These judgments and assumptions may have a significant effect on our measurements of fair value, and the use of different judgments and assumptions, as well as changes in market conditions, could have a material effect on our consolidated statements of comprehensive income and consolidated balance sheets. See Note 19 for additional information regarding fair value hierarchy and measurements, valuation risk, and controls over fair value measurement.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
154
|
Risk Factors
The following section discusses material risks and uncertainties that could adversely affect our business, financial condition, results of operations, cash flows, reputation, strategies, and/or prospects.
CONSERVATORSHIP AND RELATED MATTERS
Freddie Mac's future is uncertain.
Our future structure and role will be determined by the Administration, Congress, and FHFA, and it is possible, and perhaps likely, that there will be significant changes beyond the near-term that will materially affect our role in the mortgage industry, business model, structure, and results of operations. Some or all of our functions could be transferred to other institutions, and we could cease to exist as a stockholder-owned company. If any of these events occur, our shares could diminish in value, or cease to have any value. Our stockholders may not receive any compensation for such loss in value.
Several bills have been introduced in past sessions of Congress concerning the future status of Freddie Mac, Fannie Mae, and the mortgage finance system, including bills which provided for the wind down of Freddie Mac and Fannie Mae and modification of the terms of the Purchase Agreement. While none of these bills has been enacted, it is possible that similar or new bills will be introduced and considered in the future. On January 14, 2021, Treasury released a blueprint on next steps for GSE reform, which includes building equity capital, determining capital structure, setting a commitment fee for ongoing government support, establishing appropriate pricing oversight, and assessing appropriate market concentration. The blueprint states that while Treasury will continue to evaluate potential administrative actions to end our conservatorship, Congress is best positioned to adopt comprehensive housing finance reform. The goals of the current Congress and Administration with respect to the Enterprises and housing market reform are unclear.
The conservatorship is indefinite in duration. The timing, likelihood, and circumstances under which we might emerge from conservatorship are uncertain. Under the Purchase Agreement, as amended by the January 2021 Letter Agreement, we cannot exit from conservatorship, other than in connection with receivership, unless all currently pending material litigation relating to the conservatorship and/or the Purchase Agreement has been resolved or settled and for two or more consecutive periods we have common equity tier 1 capital (which does not include our senior preferred stock) of at least 3% of our adjusted total assets. While we will continue to increase our capital level as a result of the increase in the applicable Capital Reserve Amount under the Purchase Agreement, the increases in our capital level since September 30, 2019 have been or will be added to the aggregate liquidation preference of the senior preferred stock. In addition, our ability to increase our capital, other than through retained earnings, is limited, and it may not be possible for us to raise private capital on acceptable terms, if at all. We are permitted to raise up to $70.0 billion to build capital through the issuance of common stock only after Treasury has exercised in full its warrant to purchase 79.9% of our common stock and pending material conservatorship-related litigation has been resolved or settled. Treasury’s potential substantial equity ownership in our company, along with new or increased restrictions imposed on our business, and post-recapitalization dividends and fees we will be required to pay to Treasury, will reduce our attractiveness as an investment opportunity for third-party investors. It is uncertain whether or when we will be able to retain or raise sufficient capital to permit an end to our conservatorship, and this may not happen for several years or at all. For additional information on the January 2021 Letter Agreement, see MD&A – Regulation and Supervision – January 2021 Letter Agreement with Treasury.
Treasury would be required to consent to the termination of our conservatorship other than as discussed above, and there can be no assurance Treasury would do so. Even if the conservatorship is terminated, we would remain subject to the Purchase Agreement and the terms of the senior preferred stock unless they are terminated or amended. It is possible that the conservatorship could end with our being placed into receivership.
Even if the conservatorship ends and the voting rights of common stockholders are restored, we could effectively remain under the control of the U.S. government because of the Purchase Agreement, Treasury's warrant to acquire nearly 80% of our common stock for nominal consideration, or Treasury’s ownership of our common stock after it exercises its warrant. If Treasury exercises the warrant, the ownership interest of our existing common stockholders will be substantially diluted.
Our current Net Worth Amount may not be sufficient to absorb potential losses and could result in our having to request additional draws from Treasury in future periods.
As a result of the net worth sweep dividend requirement, from 2013 to 2017 we could not retain capital from the earnings generated by our business operations in excess of the applicable Capital Reserve Amount, which decreased by $600 million each year, from $3 billion in 2013 to $600 million in 2017. As a result of increases in the applicable Capital Reserve Amount since January 1, 2018, we have been able to retain earnings and build capital, and our Net Worth Amount was $16.4 billion as of December 31, 2020. If we were to have a net worth deficit in a future period as a result of significant future comprehensive losses, we would be required to draw funds from Treasury under the Purchase Agreement.
A variety of factors could influence whether we could require a draw, including many of the other risk factors we have identified, as well as changes in tax rates and related changes in our deferred tax assets and reserves. Additional draws, which will
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
155
|
decrease the amount of Treasury's remaining commitment under the Purchase Agreement, may result in reputational risk and add to the uncertainty regarding our long-term financial sustainability.
FHFA, as our Conservator, controls our business activities. We may be required to take actions that reduce our profitability, are difficult to implement, or expose us to additional risk.
We are under the control of FHFA, as our Conservator, and are not managed to maximize stockholder returns. FHFA determines our strategic direction. We face a variety of different, and sometimes competing, business objectives and FHFA-mandated activities, such as the initiatives we are pursuing under the Conservatorship Scorecards. Some of the activities FHFA has required us to undertake have been costly and/or difficult to implement, such as development and support of the CSP.
FHFA has required us to make changes to our business that have adversely affected our financial results and could require us to make additional changes at any time. For example, FHFA may require us to undertake activities that (i) reduce our profitability; (ii) expose us to additional credit, market, funding, operational, and other risks; or (iii) provide additional support for the mortgage market that serves our public mission, but adversely affects our financial results.
FHFA also has required us to take other actions that may adversely affect our business or financial results, such as requiring us to maintain increased liquidity and directing us to amend the CSS LLC agreement in January 2020 in a manner that reduces our ability to control CSS Board decisions, even after conservatorship, including decisions about strategy, business operations, and funding. FHFA has also appointed three additional CSS Board members, and as a result, the CSS Board members we and Fannie Mae appoint could be outvoted by non-GSE designated Board members on any matter during conservatorship and on a number of significant matters after conservatorship. It is possible that FHFA may require us to make additional changes to the CSS LLC agreement, or may otherwise impose restrictions or provisions relating to CSS or the UMBS, that may adversely affect us.
From time to time, FHFA has prevented us from engaging in business activities or transactions that we believe would be profitable, and it may do so again in the future. For example, FHFA has limited the size and composition of our mortgage-related investments portfolio and the amount and type of new single-family and multifamily loans we may acquire. We may be required to adopt business practices that help serve our public mission and other non-financial objectives, but that may negatively affect our future financial results. Congress or FHFA may require us to set aside or otherwise pay monies to fund third-party initiatives, such as the existing requirement under the GSE Act that we allocate amounts for certain housing funds. FHFA also could require us to take actions that would adversely affect our ability to compete and innovate, such as through its proposed rule for new GSE products and activities; changing our risk appetite and risk limits; and limiting our control over pricing. FHFA is also Conservator of Fannie Mae, our primary competitor. FHFA’s actions, as Conservator of both companies, could require us and Fannie Mae to take a uniform approach to certain activities, limiting innovation and competition and possibly putting us at a competitive disadvantage because of differences in our respective businesses. FHFA also could limit our ability to compete with new entrants and other institutions. The combination of the restrictions on our business activities and our potential inability to generate sufficient revenue through our guarantee activities to offset the effects of those restrictions may have an adverse effect on our results of operations and financial condition.
The Purchase Agreement and the terms of the senior preferred stock significantly limit our business activities. In the event of non-compliance with any Purchase Agreement covenants, Treasury may be entitled to specific performance, damages, and other remedies, and if the corrective actions we were to take were determined by FHFA to be insufficient, FHFA could impose penalties on us or take other remedial actions.
The Purchase Agreement and the terms of the senior preferred stock place significant restrictions on our ability to manage our business, including limiting (i) our secondary market activities; (ii) the amount and type of single-family and multifamily loans we may acquire; (iii) the amount of indebtedness we may incur; (iv) the size of our mortgage-related investments portfolio; (v) our ability to maintain alignment and competitiveness with Fannie Mae issued UMBS; and (vi) our ability to pay dividends, transfer certain assets, raise capital, and pay down the liquidation preference of the senior preferred stock.
The Purchase Agreement prohibits us from taking a variety of actions without Treasury's consent. Treasury has the right to withhold its consent for any reason. The warrant held by Treasury, restrictions on our business under the Purchase Agreement, and the senior status and net worth sweep dividend provisions of the senior preferred stock could adversely affect our ability to attract capital from the private sector in the future, should we be in a position to do so. For more information, see Conservatorship and Related Matters - Freddie Mac's Future is Uncertain.
In the event of non-compliance with any Purchase Agreement covenants, Treasury may be entitled to specific performance, damages, and other such remedies as may be available at law or in equity. In addition, if the corrective actions we were to take or plan to take to comply with such covenants were determined by FHFA to be insufficient or unsuccessful, FHFA could impose penalties on us or take other remedial action.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
156
|
If FHFA placed us into receivership, our assets would be liquidated. The liquidation proceeds might not be sufficient to pay claims outstanding against Freddie Mac, repay the liquidation preference of our preferred stock, or make any distribution to our common stockholders.
We can be put into receivership at the discretion of the Director of FHFA at any time for a number of reasons set forth in the GSE Act. Several bills were introduced in past sessions of Congress that provided for Freddie Mac to be placed into receivership. In addition, FHFA could be required to place us into receivership if Treasury were unable to provide us with funding requested under the Purchase Agreement to address a deficit in our net worth. Treasury might not be able to provide the requested funding if, for example, the U.S. government were not fully operational because Congress had failed to approve funding or the government had reached its borrowing limit. For more information, see MD&A - Regulation and Supervision.
Being placed into receivership would terminate the conservatorship. The purpose of receivership is to liquidate our assets and resolve claims against us. The appointment of FHFA as our receiver would terminate all rights and claims that our stockholders and creditors might have against our assets or under our Charter as a result of their status as stockholders or creditors, other than possible payment upon our liquidation.
The GSE Act provides that, if we were placed into receivership, the receiver would hold the mortgages underlying our mortgage-related securities (and the payments thereon) for the benefit of the holders of those securities. However, payments on the mortgages underlying our mortgage-related securities might not be sufficient to make full payments of principal and interest on the securities. If we were unable to fulfill our guarantee, the holders of our mortgage-related securities would experience delays in receiving payments because the relevant systems are not designed to make partial payments.
If our assets were liquidated, the liquidation proceeds might not be sufficient to pay the secured and unsecured claims against us (including claims on our guarantees), repay the liquidation preference on any series of our preferred stock, or make any distribution to our common stockholders. Proceeds would first be applied to the secured and unsecured claims against us, the administrative expenses of the receiver, and the liquidation preference of the senior preferred stock. Any remaining proceeds would then be available to repay the liquidation preference of other series of preferred stock. Only after the liquidation preference of all series of preferred stock is repaid would any proceeds be available for distribution to the holders of our common stock.
Our business and results of operations may be materially adversely affected if we are unable to attract and retain well-qualified, talented employees across the company. The conservatorship, the uncertainty of our future, and limitations on our compensation structure may put us at a disadvantage compared to other companies in attracting and retaining employees.
Our business is highly dependent on the talents and efforts of our employees. We face competition, particularly from the financial services and technology industries, for qualified talent. If we are unable to attract and retain talent, we increase our risk of operational failures.
Restrictions on employee compensation have been and may be imposed on us, while we remain in conservatorship, by Congress, FHFA, or Treasury. For example, FHFA as Conservator has the authority to approve the terms and amount of our executive compensation and may require us to make changes to our executive and employee compensation programs. For example, FHFA has imposed limits on executive and employee compensation and has required prior approval of certain compensation arrangements. Such limitations on our executive and employee compensation structure, as well as the ongoing conservatorship and uncertainty about our future, could have an adverse effect on our ability to attract and retain talent.
Leadership departures, such as the recent departure of our former CEO, or a combination of such departures at approximately the same time, could materially adversely affect our business, results of operations, and financial condition. For example, turnover in key positions and challenges in integrating new leaders could harm our ability to manage our business effectively and successfully implement current strategic initiatives and could adversely affect our financial performance.
COVID-19 PANDEMIC
The COVID-19 pandemic has significantly and adversely affected general economic conditions and the housing market. These adverse changes, as well as the effects of actions taken in response to the pandemic, such as forbearance for Freddie Mac-owned mortgages and other relief measures, have significantly and adversely affected our business, results of operations, and financial condition and elevated our credit, market, and operational risk levels in 2020 and will likely continue to do so in 2021, and perhaps beyond.
In response to the COVID-19 pandemic, Freddie Mac has taken several steps to support the mortgage market, such as forbearance for Freddie Mac-owned mortgages and other measures to assist homeowners, renters, multifamily property owners, lenders, and sellers. For additional information on our relief efforts, see MD&A - Introduction - COVID-19 Pandemic Response Efforts. These actions may not be successful and may negatively affect our financial condition and results of operations, perhaps significantly. Borrowers that obtain forbearance may be unable to resume making payments on their mortgage loans at the end of the forbearance period, which could result in losses. We expect serious delinquency rates and the volume of loss mitigation activity to remain elevated as a result of the pandemic and our forbearance programs, and we expect
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
157
|
to advance significant amounts to cover principal and interest payments to security holders for loans in forbearance in the coming months. The pandemic and forbearance programs have caused a significant increase in our allowance for credit losses. Estimates of expected credit losses are subject to significant uncertainty and may increase in the future depending on the depth and severity of the economic downturn caused by the pandemic.
The government has taken several actions to provide relief to those negatively affected by COVID-19, such as direct payments and federal unemployment insurance. In addition, the Federal Reserve has supported the financial markets, including by purchasing Freddie Mac mortgage-related securities. If the Federal Reserve discontinued or lessened this support, it could negatively affect our financial position and results of operations. For additional information on federal government relief efforts, see MD&A - Introduction - COVID-19 Pandemic Response Efforts. Current and future government relief efforts taken in response to the COVID-19 pandemic may provide insufficient support for the economy and the housing market.
Our credit risk and market risk levels have increased as a result of the COVID-19 pandemic, and may increase further depending on the duration and severity of the pandemic. For example:
n Our mortgage credit risk level is heightened, as a result of increased forbearance, modifications, and defaults due to the COVID-19 pandemic. These trends have adversely affected our results of operations through increased expected credit losses and are expected to continue. Payment defaults on mortgages could result in accelerated prepayments of certain of our securities as a result of our repurchase practices relating to seriously delinquent mortgages and mortgage modifications, foreclosures, and workouts.
n Our ability to transfer single-family credit risk was, and may in the future be, negatively affected by adverse market conditions resulting from the COVID-19 pandemic.
n We generally fund our obligations to advance principal and interest to security holders for loans in forbearance and our purchase of delinquent and modified loans from our securities trusts through debt issuances. Depending on the extent of forbearance and delinquencies as a result of the COVID-19 pandemic, it is possible that we may not be able to meet our contractual obligations as a result of the aggregate indebtedness limit and mortgage-related investments portfolio limit under the Purchase Agreement, without breaching limits or obtaining the prior written consent of Treasury and FHFA to increase these limits.
n Increased market instability and uncertainty associated with the volume of loans we may purchase from trusts may adversely affect our ability to hedge, and demand for Freddie Mac securities, other than from the Federal Reserve, may decrease substantially.
Our operational risk level has increased as a result of the COVID-19 pandemic. Freddie Mac has instituted temporary operational changes, such as shifting to remote work for the majority of our employees. While we have not experienced material impacts to operations, it is possible that certain procedures we have in place to monitor our employees may not be effective, or any significant technological or infrastructure-related disruptions during this period of remote work could adversely affect our ability to conduct normal business operations. The COVID-19 pandemic has presented potential risks to staffing, such as stress on our workforce as a result of home schooling, caring for themselves and loved ones, and potential burnout, and it is possible that key employees or a significant number of employees may be adversely affected by the virus. In addition, model risk levels are heightened. There is an increased degree of uncertainty concerning key inputs into our financial cash flows, such as projections of mortgage interest rates, house prices, credit defaults, negative yields, prepayments, and interest rates, and we expect our models to face significant challenges in accurately forecasting these inputs. We are attempting to mitigate this increased risk by applying model overlays and adjustments, where deemed appropriate, but these adjustments have an element of subjectivity, and are based upon difficult and complex judgments. Actual results could differ from our estimates, and the use of different judgments and assumptions related to these estimates could have a material impact on our consolidated financial statements. For additional information on operational risk, see MD&A - Risk Management - Operational Risk.
CREDIT RISKS
We are subject to mortgage credit risk. Credit losses and costs related to this risk could adversely affect our financial results.
Mortgage credit risk is the risk that a borrower will fail to make timely payments on a loan we own or guarantee. This exposes us to the risk of credit losses and credit-related expenses, which could adversely affect our financial results. We are primarily exposed to mortgage credit risk with respect to the single-family and multifamily loans and securities reflected as assets on our consolidated balance sheets. We are also exposed to mortgage credit risk with respect to guaranteed securities and guarantee arrangements that are not reflected as assets on our consolidated balance sheets, including K Certificates, SB Certificates, and certain senior subordinate securitization structures.
We continue to have loans in our single-family credit guarantee portfolio with certain characteristics, such as Alt-A loans, interest-only loans, option ARM loans, loans with original LTV ratios greater than 90%, and loans to borrowers with credit scores less than 620 at the time of origination, that expose us to greater credit risk than other types of loans. See MD&A - Risk Management - Single-Family Mortgage Credit Risk - Monitoring Loan Performance and Characteristics. We also expect to continue acquiring loans with higher LTV ratios through our Home Possible and Home One initiatives, as well as
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
158
|
loans with higher DTI ratios, generally up to 50%, which will increase our exposure to credit risk. Our efforts to increase eligible borrowers' access to single-family mortgage credit, including our affordable housing program and our plan for fulfilling our duty to serve underserved markets, expose us to increased mortgage credit risk.
We face significant risks related to our delegated underwriting process for single-family loans, including risks related to data accuracy, mortgage fraud, and our sellers' origination operations. Changes to the process could increase our risks.
We delegate to our sellers the underwriting for the single-family loans we purchase or securitize. Our contracts with sellers describe mortgage eligibility and underwriting standards, and the sellers represent and warrant to us that the loans they deliver to us meet these standards.
We rely on the strength of our sellers' origination processes and controls. We perform risk-based audits to test our counterparties' control environments. However, our review may not detect weak operations that could lead to errors in seller decisions like correspondent approvals, property valuations, and insurance coverage.
We do not independently verify most of the information provided to us before we purchase or securitize a loan. This exposes us to the risk that one or more of the parties involved in a transaction (such as the borrower, property seller, broker, appraiser, title agent, loan officer, or lender) misrepresented facts about the borrower, property, or loan, or otherwise engaged in fraud.
We review a sample of loans after we purchase them to determine if they comply with our contractual standards. However, our review may not detect any misrepresentations by the parties involved in the transaction, deter loan fraud, or reduce our exposure to these risks.
We can exercise certain contractual remedies, including requiring repurchase of the loan, for loans that do not meet our standards. However, at the direction of FHFA, we have significantly revised our representation and warranty framework (including changes to remedies for certain defects) to relieve sellers of certain repurchase obligations in specific cases with respect to single-family loans. As a result, we may face greater exposure to credit and other losses under this revised framework, because our ability to seek recovery or repurchase from sellers is more limited and we must identify breaches of representations and warranties early in the life of the loan.
Our suite of tools, collectively referred to as Loan Advisor, offers limited representation and warranty relief for certain loan components that satisfy automated data analytics related to appraisal quality, collateral valuation, borrower assets, and borrower income. In general, limited representation and warranty relief is offered when information provided by the lender is validated against independent data sources. However, there is a risk that the enhanced tools and processes provided by Loan Advisor will not enable us to identify all breaches in a timely manner. In turn, this could increase our exposure to credit and other losses. For more information, see MD&A - Risk Management - Single-Family Mortgage Credit Risk.
Declines in national or regional house prices or other adverse changes in the housing market could negatively affect both our single-family and multifamily businesses.
Our financial results and business volumes can be negatively affected by declines in house prices and other adverse changes in the housing market. This could (i) significantly increase our expected credit losses; (ii) result in higher stress losses for both the single-family and multifamily portfolios; (iii) increase our losses on foreclosure alternatives, third-party sales, and dispositions of REO properties; (iv) reduce our return or result in losses on our single-family and multifamily guarantee business, as default rates could be higher than we expected when we issued the guarantees; (v) negatively affect loan pricing, which could cause us to change our disposition strategies for our single-family seasoned loans; or (vi) adversely impact our ability to transfer credit risk.
For more information regarding these risks, see MD&A - Risk Management - Credit Risk.
The proportion of our refinance loan purchases to total loan purchases could decrease if mortgage interest rates increase. This could increase our exposure to mortgage credit risk, as refinance loans (particularly those that do not involve "cash-out") generally present less credit risk than purchase loans. Some of our seller/servicer counterparties are highly dependent on refinance loan volumes. A decrease in such volumes could adversely affect these counterparties, which could increase our exposure to counterparty credit risk.
We are exposed to counterparty credit risk with respect to our business counterparties. Our financial results may be adversely affected if one or more of our counterparties fail to meet their contractual obligations to us.
We depend on our institutional counterparties to provide services that are critical to our business. We face the risk that one or more of our counterparties may fail to meet their contractual obligations to us. Our major counterparties include seller/servicers, credit enhancement providers, and counterparties to derivatives, short-term lending, and other funding transactions (e.g., cash and other investments transactions). For more information, see MD&A - Counterparty Credit Risk.
Many of our major counterparties provide several types of services to us. The concentration of our exposure to our counterparties remains high. Efforts we take to reduce exposure to financially weak counterparties could increase the relative concentration of our exposure to other counterparties, increase our costs, and reduce our revenue. It is possible that our counterparties could experience challenging market conditions that could adversely affect their liquidity and financial condition
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
159
|
and cause some of them to fail. Many of our counterparties are subject to increasingly complex regulatory requirements and oversight, which place additional stress on their resources and may affect their ability or willingness to do business with us.
Credit risk related to single-family seller/servicers
We are exposed to credit risk from the seller/servicers of our single-family loans, as described below.
n A decline in servicing performance - A decline in a servicer's performance, such as delayed foreclosures or missed opportunities for loan modifications, could significantly affect our ability to mitigate credit losses and could affect the overall credit performance of our single-family credit guarantee portfolio. A large volume of seriously delinquent loans, the complexity of the servicing function, and heightened liquidity requirements are significant factors contributing to the risk of a decline in performance by servicers. Servicers may experience financial and other difficulties due to the advances they are required to make to us on delinquent single-family mortgages, including mortgages subject to forbearance plans. We could be adversely affected if our servicers lack appropriate controls, experience a failure in their controls, or experience a disruption in their ability to service loans, including as a result of legal or regulatory actions or ratings downgrades. We also are exposed to fraud by third parties in the loan servicing function, particularly with respect to short sales and other dispositions of non-performing assets.
We could attempt to mitigate our exposure to a poorly performing servicer by terminating its right to service our loans; however, in a highly adverse economic environment, there could be a scarce capacity in the marketplace and we may not be able to find successor servicers who have the capacity to service the affected loans and who are also willing to assume the representations and warranties of the terminated servicer. In addition, terminating a large servicer may not be feasible because of the operational and capacity challenges related to transferring large servicing portfolios. There is also a possibility that the performance of some loans may degrade during the transition to new servicers. During a period of heightened delinquencies, we may incur costs and potential increases in servicing fees if we replace a servicer with a high concentration of loans in default which are more costly to service. We may also be exposed to concentrations of credit risk among certain servicers.
n A failure by seller/servicers to fulfill their obligations to repurchase loans or indemnify us as a result of breaches of representations and warranties - While we may have the contractual right to require a seller or servicer to repurchase loans from us, it may be difficult, expensive, and time-consuming to enforce such repurchase obligations. We could enter into settlements to resolve repurchase obligations; however, the amounts we receive under any such settlements may be less than the losses we ultimately incur on the underlying loans.
Under our representation and warranty framework, revised as directed by FHFA, we are required in some cases to utilize an alternative remedy, such as indemnification, in lieu of repurchase. The amount we recover under an alternative remedy may be less than the amount we could have recovered in a repurchase.
n Increased exposure to non-depository and smaller financial institutions - A large and increasing volume of our single-family loans is acquired from and serviced by non-depository and smaller financial institutions. Some of these institutions may not have the same financial strength or operational capacity, or be subject to the same level of regulatory oversight, as large depository institutions. As a result, we face increased risk that these counterparties could fail to perform their obligations to us. In particular, non-depository servicers rapidly grew their servicing portfolios in the last several years. This appears to have resulted in operational strains that have subjected some of these servicers to regulatory scrutiny. This rapid growth could expose us to increased risks if any operational strain adversely affects these servicers' servicing performance or their financial strength. These institutions also service portfolios for other investors and guarantors and operational issues related to those portfolios could affect the performance of our portfolio. In addition, these servicers may not always have ready access to appropriate sources of liquidity to finance their operations, particularly during periods when the mortgage market is experiencing a downturn. If these servicers reduce their servicing portfolios, overall servicing capacity may be constrained.
Our seller/servicers also have a significant role in servicing loans in our multifamily mortgage portfolio. We are exposed to the risk that multifamily seller/servicers could come under financial pressure, which could potentially cause a decline in their servicing performance and cause us to terminate their right to service our loans, potentially resulting in further concentration of exposure to other seller/servicers.
We are also exposed to settlement risk on the non-performance of sellers and servicers as a result of our forward settlement loan purchase programs in our single-family and multifamily businesses.
Credit risk related to counterparties to derivatives, funding, short-term lending, securities, and other transactions
We have significant exposure to institutions in the financial services industry relating to derivatives, funding, short-term lending, securities, securities purchased under agreements to resell, secured lending transactions and forward settlement of our loans and securities, and other transactions (e.g., cash and other investments transactions). These transactions are critical to our business, including our ability to:
n Manage interest-rate risk and other risks related to our investments in mortgage-related assets;
n Fund our business operations; and
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
160
|
n Service our customers.
We face the risk of operational failure of the clearing members, exchanges, clearinghouses, or other financial intermediaries we use to facilitate derivatives, short-term lending, securities, and other transactions. If a clearing member or clearinghouse were to fail, we could lose the collateral or margin posted with the clearing member or clearinghouse.
We are a clearing member of the clearinghouses through which we execute mortgage-related and Treasury securities transactions. As a result, we could be subject to losses because we are required to participate in the coverage of losses incurred by other clearing members if they fail to meet their obligations to the clearinghouse.
If our counterparties to short-term lending transactions fail, we are exposed to losses to the extent the transaction is unsecured or the collateral posted to us is insufficient.
Credit risk related to credit enhancement providers
If a mortgage insurer fails to meet its obligations to reimburse us for claims, our credit losses could increase. In addition, if a regulator determines that a mortgage insurer lacks sufficient capital to pay all claims when due, the regulator could take action that might affect the timing and amount of claim payments made to us. We face similar risks with respect to our counterparties on ACIS transactions.
We cannot differentiate pricing based on the strength of a mortgage insurer or revoke a mortgage insurer's status as an eligible insurer without FHFA approval. In addition, we generally do not select the mortgage insurance provider on a specific loan because the selection is usually made by the lender at the time the loan is originated. As a result, we could acquire a concentration of risk to certain insurance providers. We continue to acquire new loans with mortgage insurance from mortgage insurers that have credit ratings below investment grade.
Our loss mitigation activities may be unsuccessful or costly and may adversely affect our financial results.
Our loss mitigation activities may not be successful. The costs we incur related to loan modifications and other loss mitigation activities have been, and could continue to be, significant. For example, we generally bear the full cost of the monthly payment reductions related to modifications of loans we own or guarantee, as well as all applicable servicer incentive fees for our mortgage modifications.
We could be required to make changes to our loss mitigation activities that could make these activities more costly to us. FHFA, as Conservator, may continue to issue directives and Advisory Bulletins to assist borrowers and align servicing practices for the GSEs. These directives could make these activities more costly to us, especially with regard to loan modification initiatives. FHFA may continue to issue these directives for a variety of reasons, including consumer relief and alignment of the prepayment behavior of our and Fannie Mae's respective UMBS.
We have loans on trial period plans as required under certain loan modification programs. Some of these loans will fail to complete the trial period or fail to qualify for our other borrower assistance programs. For these loans, the trial period will have effectively delayed the foreclosure process and could increase our costs.
Many of our HAMP loans, which initially were set at a below-market interest rate, have provisions for the interest rates to increase gradually until they reach the market rate that was in effect at the time of the modification. The resulting increase in the borrowers' payments may increase the risk that these borrowers will default.
The type of loss mitigation activities we pursue could affect prepayments on our single-family securities (e.g., UMBS, 55-day MBS, PCs, and REMICs), which could affect the value of these securities or the earnings from mortgage-related assets in our Capital Markets segment mortgage investments portfolio. In addition, loss mitigation activities may adversely affect our ability to securitize, resecuritize, and sell the loans subject to those activities.
We devote significant resources to our borrower assistance initiatives. The size and scope of these efforts may compete with other business opportunities or corporate initiatives.
For more information on our loss mitigation activities, see MD&A - Our Business Segments - Single-Family Guarantee - Business Results - Loss Mitigation Activities and MD&A - Risk Management - Single-Family Mortgage Credit Risk - Engaging in Loss Mitigation Activities.
We have been, and will continue to be, adversely affected by delays and deficiencies in the single-family foreclosure process.
The average length of time for foreclosure of a Freddie Mac single-family loan has significantly increased since 2008, particularly in states that require a judicial foreclosure process, and may further increase. Delays in the foreclosure process could:
n Cause our expenses to increase. For example, properties awaiting foreclosure could deteriorate until we acquire them, resulting in increased expenses to repair and maintain the properties and
n Adversely affect trends in house prices regionally or nationally, which could adversely affect our financial results.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
161
|
We are exposed to increased credit losses and credit-related expenses in the event of a major natural disaster, other catastrophic event, including a pandemic, or significant climate change effects.
The occurrence, severity, and duration of a major natural or environmental disaster or other catastrophic event, including a pandemic, as well as significant climate change effects such as rising sea levels or wildfires, in an area where we own or guarantee mortgage loans or REO properties, especially in densely populated geographic areas, could increase our credit losses and credit related expenses. A natural disaster or catastrophic event or other significant climate change effect that either damages or destroys single-family or multifamily real estate underlying mortgage loans or REO properties we own or guarantee, or negatively affects the ability of borrowers to continue to make payments on mortgage loans we own or guarantee, could increase our serious delinquency rates and average loan loss severity in the affected areas. Such events could have a material adverse effect on our business and financial results. We may not have adequate insurance coverage for some of these natural, catastrophic, or climate change-related events.
Our CRT transactions may not be available to us in adverse economic conditions. These transactions also lower our profitability.
Our ability to transfer credit risk (and the cost to us of doing so) could change rapidly depending on market conditions. Adverse market conditions may result in insufficient investor demand for CRT transactions at acceptable prices. It is possible that our CRT strategies may not prevent us from incurring substantial losses. Some of our CRT transactions have termination dates that are earlier than the maturities of the reference mortgage loans, and we are exposed to credit risk on those mortgage loans after termination of such transactions. The costs associated with CRT transactions are significant and may increase. For some CRT transactions, there may be a significant difference in time between when we recognize a credit loss in earnings and when we recognize the related recovery in earnings, and this lag could adversely affect our financial results in the earlier period. In addition, the implementation of the ERCF or additional guidance from FHFA may cause us to modify our credit risk transfer activities and could affect our risk appetite and our capital requirements. For more information regarding these transactions, see Note 8.
MARKET RISKS
Changes in interest rates could negatively affect the fair value of financial assets and liabilities, our results of operations, and our net worth.
Our financial results can be significantly affected by changes in interest rates.
Interest rates can fluctuate for many reasons, including changes in the fiscal and monetary policies of the federal government and its agencies as well as geopolitical events or changes in general economic conditions.
Changes in interest rates could adversely affect the cash flows and prepayment rates on assets that we own and related debt and derivatives. In addition, changes in interest rates could adversely affect the prepayment rate or default rate on the loans that we guarantee. For example:
n When interest rates decrease, borrowers are more likely to prepay their loans by refinancing them at a lower rate. An increased likelihood of prepayment on the loans underlying our mortgage-related securities may adversely affect the value of these securities.
n When interest rates increase:
l Borrowers with higher risk adjustable-rate loans may have fewer opportunities to refinance into fixed-rate loans and
l A borrower's payments on loans with adjustable payment terms, including any additional debt obligations (such as home equity lines of credit and second liens) with such terms, may increase, which in turn increases the risk that the borrower may default on a loan we own or guarantee.
Additionally, we issue callable debt instruments to manage the duration and prepayment risk of expected cash flows of the mortgage assets we own. We may exercise the option to repay the outstanding principal balance when interest rates decrease. However, we may replace the called debt at a higher spread rate due to the market conditions at that time. In the event we decide not to call our debt, we may incur higher hedging costs.
We incur costs as a result of our risk management activities, which may not be successful. Our interest-rate risk management activities are designed to reduce our economic exposure to changes in interest rates to a low level as measured by our models. However the accounting treatment for certain of our assets and liabilities, including derivatives, creates variability in our earnings that may not be indicative of the economics of our business when interest rates fluctuate, as some assets and liabilities are measured at amortized cost and some are measured at fair value, while all derivatives are measured at fair value. In addition, differences in amortization between our assets and the liabilities we use to fund them, including amortization of fair value hedging basis adjustments, may also contribute to earnings variability.
We use hedge accounting for certain single-family mortgage loans and long-term debt, which is intended to reduce the interest-rate volatility in our GAAP earnings. Our single-family mortgage hedge accounting program is complex and unique in the industry. We may fail to properly execute this program and related changes to systems and processes. Even if implemented
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
162
|
properly, our hedge accounting programs may not be effective in reducing earnings volatility, and our hedges may fail in any given future period, which could expose us to significant earnings variability in that period.
Changes in market spreads could negatively affect the fair value of financial assets and liabilities, our results of operations, and net worth.
Changes in market conditions, including changes in interest rates, liquidity, prepayment, and/or default expectations and the level of uncertainty in the market for a particular asset class, may cause fluctuations in market spreads (also referred to as OAS). Our financial results and net worth can be significantly affected by changes in market spreads, especially results driven by financial instruments that are measured at fair value. These instruments include trading securities, available-for-sale securities, derivatives, loans held-for-sale, and loans and debt with the fair value option elected.
A widening of the market spreads on a given asset is typically associated with a decline in the fair value of that asset or tightening of the market spread on a given liability is typically associated with a decline in the fair value of that liability, which may adversely affect our near-term financial results and net worth. While wider market spreads may create favorable investment opportunities, our ability to take advantage of any such opportunities is limited due to various restrictions on our mortgage-related investments portfolio activities. See MD&A - Conservatorship and Related Matters.
A narrowing or tightening of the market spreads on a given asset is typically associated with an increase in the fair value of that asset. Narrowing market spreads may reduce the number of attractive investment opportunities and could increase the cost of our activities to support the liquidity and price performance of our UMBS and other securities. Consequently, a tightening of the market spreads on our assets may adversely affect our future financial results and net worth.
Changes in market spreads also affect the fair value of our debt with the fair value option elected. A narrowing or tightening of the market spreads on a given liability is typically associated with an increase in the fair value of that liability, which is recognized as a loss by us.
A significant decline in the price performance of or demand for our UMBS could have an adverse effect on the volume and/or profitability of our new single-family guarantee business.
Our UMBS are an integral part of our loan purchase program. Our competitiveness in purchasing single-family loans from our sellers and the volume and profitability of our new single-family guarantee business are directly affected by the price performance of UMBS issued by us relative to comparable Fannie Mae-issued UMBS. If our UMBS were to trade at a discount relative to comparable Fannie Mae securities due to prepayment performance or other factors, such a difference in relative pricing may create an incentive for sellers to conduct a disproportionate share of their single-family business with Fannie Mae.
It is possible that a liquid market for our UMBS may not be sustained over the short- or long-term, which could adversely affect their price performance and our single-family market share. A significant reduction in our market share, and thus in the volume of loans that we securitize, or a reduction in the trading volume of our UMBS could reduce the liquidity of our UMBS. While we may decide to employ various strategies to support the liquidity and price performance of our UMBS, any such strategies may fail or adversely affect our business and financial results. We may cease any such activities at any time, or FHFA could require us to do so, which could adversely affect the liquidity and price performance of our UMBS. We may incur costs to support our presence in the agency securities market and to support the liquidity and price performance of our securities.
Liquidity-related price differences could occur between UMBS issued by us and comparable Fannie Mae-issued UMBS due to factors that are largely outside of our control. For example, the level of the Federal Reserve’s purchases and sales of agency mortgage-related securities could affect the demand for and values of our UMBS. Therefore, any strategies we employ to reduce any liquidity-related price differences may not reduce or eliminate any such price differences over the long term.
We may experience price differences with Fannie Mae on individual new production pools of TBA-eligible mortgages, particularly with respect to specified pools and our multilender securities. From time to time, we may need to adjust our pricing for a particular new production pool category to maintain alignment and competitiveness with Fannie Mae with respect to the acquisition of such pools. Depending on the amount of pricing adjustments in any period, it is possible they could adversely affect the profitability of our single-family guarantee business for that period. This risk is heightened with diminished cash window volumes per the amended Purchase Agreement, and FHFA restrictions on pooling, limiting our pooling flexibility and ability to manage alignment. For more information, see MD&A - Our Business Segments - Capital Markets Segment - Business Overview - Products and Activities.
If the UMBS does not continue to receive widespread market acceptance, the liquidity and price performance of our single-family mortgage-related securities and our market share and profitability could be adversely affected. Commingling certain Fannie Mae securities in resecuritizations has increased our counterparty risk.
As part of the combined UMBS market, we have been required by FHFA to align certain of our single-family mortgage purchase offerings, servicing, and securitization programs, policies and practices with Fannie Mae to achieve market acceptance of the UMBS. We cannot provide any assurance that these efforts will reduce the pricing disparities discussed above over the long-term. Aligning prepayment outcomes of Freddie Mac UMBS with Fannie Mae UMBS is the focus of the FHFA Uniform Mortgage-Backed Security Final Rule issued in February 2019. This alignment is more challenging during periods of increased refinances, automation, innovation, and change in the industry, which we experienced in 2020. These alignment activities may
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
163
|
adversely affect our business and our ability to compete with Fannie Mae. We may be required to further align our business processes with those of Fannie Mae. Uncertainty concerning the extent of the alignment between Freddie Mac's and Fannie Mae's mortgage purchase, servicing, and securitization programs, policies, and practices may affect the degree to which the UMBS receives widespread market acceptance.
If investors do not continue to accept the fungibility of Freddie Mac and Fannie Mae UMBS and instead prefer Fannie Mae UMBS over Freddie Mac UMBS, it could have a significant adverse impact on our business, liquidity, financial condition, net worth, and results of operations, and could affect the liquidity or market value of our single-family mortgage-related securities.
We have counterparty credit exposure to Fannie Mae due to investors' ability to commingle certain Freddie Mac and Fannie Mae securities in resecuritizations. When we resecuritize Fannie Mae securities, our guarantee of timely principal and interest extends to the underlying Fannie Mae securities. In the event Fannie Mae were to fail to make a payment on a Fannie Mae security that we resecuritized, Freddie Mac would be responsible for making the payment. We do not control or limit the amount of resecuritized Fannie Mae securities that we could be required to guarantee. We are dependent on FHFA, Fannie Mae, and Treasury (pursuant to Fannie Mae's and our respective Purchase Agreements with Treasury) to avoid a liquidity event or default. We have not modified our liquidity strategies to address the possibility of non-timely payment by Fannie Mae, but we may do so in the future.
We and Fannie Mae both rely on the Federal Reserve Banks to make payments on our respective mortgage-related securities. As noted above, in the event Fannie Mae were to fail to make a payment on a Fannie Mae security that we resecuritized, Freddie Mac would be responsible for providing the Federal Reserve Banks with the funds to make the payment. If we failed to provide the Federal Reserve Banks with all funds to make such payment on such resecuritized Fannie Mae securities, the Federal Reserve Banks would not make any payment on any of our outstanding Freddie Mac-issued UMBS, Supers, REMICs, or other securities to be paid on that payment date, regardless of whether such Freddie Mac-issued securities were backed by Fannie Mae-issued securities.
The profitability of our multifamily business could be adversely affected by a significant decrease in demand for our K Certificates and SB Certificates.
Our current multifamily business model is highly dependent on our ability to finance purchased multifamily loans through securitization into K Certificates and SB Certificates. A significant decrease in demand for K Certificates and SB Certificates could have an adverse impact on the profitability of the multifamily business to the extent that our holding period for the loans increases and we are exposed to credit, spread, and other market risks for a longer period of time or receive reduced proceeds from securitization. We employ various strategies to support the liquidity of our K Certificates and SB Certificates, but those strategies may fail or adversely affect our business. We may cease such activities at any time, or FHFA could require us to do so, which could adversely affect the liquidity and price performance of our K Certificates and SB Certificates.
The expected discontinuance of LIBOR could negatively affect the fair value of our financial assets and liabilities, results of operations, and net worth. A transition to an alternative reference interest rate could present operational problems and subject us to possible litigation risk. We may be unable to take a consistent approach across our financial products.
We are not able to predict whether LIBOR will actually cease to exist in the future, whether SOFR will become the market-accepted benchmark in its place, or what impact such a transition may have on our business, results of operations, and financial condition. In early December 2020, the ICE Benchmark Administration Limited, the administrator of LIBOR, began a consultation on its intention to cease the publication of the most relevant tenors of U.S. Dollar LIBOR after June 2023. The transition from LIBOR could affect the financial performance of instruments we hold, require changes to hedging strategies, and adversely affect our financial performance. For example, if for market or regulatory reasons we are required to prematurely unwind our existing LIBOR-based derivatives or are not allowed to engage in new LIBOR-based derivatives without adequate liquidity in alternate indices such as SOFR, we may incur economic costs. We have various financial products, including mortgage loans, mortgage-related securities, and derivatives, that are tied to LIBOR, and many of these products will mature after June 2023. While the documentation for certain of these products provides us with discretion to select an alternative reference rate if LIBOR is discontinued, there is a possibility of disputes arising with investors and counterparties concerning our exercise of this discretion. In certain cases, the documentation may not provide us with discretion to select an alternative reference rate if LIBOR is discontinued or our discretion may be limited, creating uncertainty and the risk of legal disputes. These potential challenges in implementing an alternative reference rate could result in investors and counterparties acquiring fewer products and entering into fewer transactions, which could adversely affect our business. The large volume of products and transactions that may require changes to documentation or remediation could present substantial operational and legal challenges and result in significant costs. We may be unable to have a consistent approach to a LIBOR transition, including within a particular class of products, which could disrupt the market for that product. It is possible that actions we take in connection with the discontinuance of LIBOR, including the adoption of SOFR or an alternative reference rate for certain products, could subject us to basis risk, monetary losses, and possible litigation.
The use of SOFR as the alternative reference rate for LIBOR-based products may present certain market concerns. Among the concerns, a term structure for SOFR has not yet been developed and there is not yet a generally accepted or endorsed methodology for adjusting SOFR for all our products so that it will be substantially comparable to LIBOR. SOFR represents an
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
164
|
overnight, risk-free rate, whereas LIBOR has various tenors and reflects a credit risk component. There is no guarantee that a market-accepted term structure for SOFR will exist prior to the expected discontinuance of LIBOR. It is still uncertain how soon widespread market adoption of SOFR will occur.
As described above, we have identified material exposures to LIBOR but cannot reasonably estimate the expected impact of such exposure. For additional information regarding the actions we have taken to prepare for an orderly transition from LIBOR, see MD&A - Risk Management - Market Risk - Transition from LIBOR.
LIQUIDITY RISKS
Our activities may be adversely affected by limited availability of financing and increased funding costs.
The amount, type, and cost of our unsecured funding directly affects our interest expense and results of operations. A number of factors could make such financing more difficult to obtain, more expensive, or unavailable on any terms, including market and other factors; changes in U.S. government support for us; and reduced demand for our debt securities.
Market and Other Factors
Our ability to obtain funding in the public unsecured debt markets or by selling or pledging mortgage-related and other securities as collateral to other institutions could change rapidly or cease. The cost of available funding could increase significantly due to changes in interest rates, market confidence, operational risks, regulatory requirements, or other factors.
Prolonged wide market spreads on long-term debt could cause us to reduce our long-term debt issuances and increase our reliance on short-term and callable debt issuances. Such increased reliance on short-term and callable debt could increase the risk that we may be unable to refinance our debt when it becomes due and result in a greater use of derivatives. Greater derivatives use could increase the variability of our comprehensive income or increase our credit exposure to our counterparties. Additionally, we may incur higher hedging costs in the event we decide not to call our debt.
We may incur higher funding costs due to our liquidity management requirements, practices, and procedures. For example, in June 2020, FHFA provided us with updated minimum short-, medium-, and long-term liquidity requirements. These updated requirements have been effective since December 1, 2020, and are more stringent than our previous liquidity requirements and result in higher funding costs. In addition, the updated requirements have impacted the size and the allowable investments in our other investments portfolio.
Our practices and procedures may not provide us with sufficient liquidity to meet our ongoing cash obligations under all circumstances. In particular, we believe that our liquidity contingency plans may be inadequate or difficult to execute during a liquidity crisis or period of significant market turmoil. If we cannot access the unsecured debt markets, our ability to repay maturing indebtedness and fund our operations could be significantly impaired or eliminated, as our alternative sources of liquidity (e.g., cash and other investments) may not be sufficient to meet our liquidity needs. We have limited ability to use the less liquid assets in our mortgage-related investments portfolio as a significant source of liquidity (e.g., through sales or as collateral in secured borrowing transactions).
We make extensive use of the Federal Reserve's payment system in our business activities. The Federal Reserve requires that we fully fund accounts at the Federal Reserve Bank of New York to the extent necessary to cover cash payments on our debt and mortgage-related securities each day, before the Federal Reserve Bank of New York, acting as our fiscal agent, will initiate such payments. Although we seek to maintain sufficient intraday liquidity to fund our activities through the Federal Reserve's payment system, we have limited access to cash once the debt markets are closed for the day. Insufficient cash may cause our account to be overdrawn, potentially resulting in penalties and reputational harm. Unlike certain of our competitors, we do not have access to the Federal Reserve's discount window.
Changes in U.S. Government Support
Treasury supports us through the Purchase Agreement and Treasury's ability to purchase up to $2.25 billion of our obligations under its permanent statutory authority. Changes or perceived changes in the U.S. government's support for us could have a severe negative effect on our access to the unsecured debt markets and our debt funding costs. Our access to the unsecured debt markets and the costs of our debt funding could be adversely affected by several factors relating to U.S. government support, including uncertainty about the future of the GSEs; any concerns by debt investors that we face increasing risk of being placed in receivership; and future draws that significantly reduce the amount of available funding remaining under the Purchase Agreement.
Pursuant to the January 2021 Letter Agreement, it is possible that we may be required to pay a dividend to Treasury in the future that would cause us to fall below our capital requirements under the ERCF. In addition, we and Treasury are required to agree to a periodic commitment fee that we will pay to Treasury for a five-year period (after we have reached prescribed capital levels) in return for Treasury's remaining funding commitment.
Reduced Demand for Debt Securities
If investor demand for our debt securities were to decrease, our liquidity, business, and results of operations could be materially
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
165
|
adversely affected. The willingness of investors to purchase and hold our debt securities can be influenced by many factors, including changes in the world economy, changes in exchange rates, and regulatory and political factors, as well as the availability of and investor preferences for other investments. We compete for debt funding with Fannie Mae, the FHLBs, and other institutions. Our funding costs and liquidity contingency plans may also be affected by changes in the amount of, and demand for, debt issued by Treasury.
If investors were to reduce their purchases of our debt securities or divest their holdings, our funding costs could increase and our business activities could be curtailed. The market for our debt securities may become less liquid as a result of our having reached the Purchase Agreement limits on the size of our mortgage-related investments portfolio and the amount of our unsecured debt. This could lead to a decrease in demand for our debt securities and an increase in our funding costs.
Any downgrade in the credit ratings of the U.S. government would likely be followed by a downgrade in our credit ratings. A downgrade in the credit ratings of our debt could adversely affect our liquidity and other aspects of our business.
Our credit ratings are important to our liquidity. We currently receive ratings for our unsecured debt from three nationally recognized statistical rating organizations (S&P, Moody's, and Fitch). These ratings are primarily based on the support we receive from Treasury, and therefore are affected by changes in the credit ratings of the U.S. government. Any downgrade in the credit ratings of the U.S. government would be expected to be accompanied by a downgrade in our credit ratings.
In addition to a downgrade in the credit ratings of or outlook on the U.S. government, several other events could adversely affect our debt credit ratings, including actions by governmental entities, changes in government support for us, future GAAP losses, and additional draws under the Purchase Agreement. Any such downgrades could lead to major disruptions in the mortgage and financial markets and to our business due to lower liquidity, higher borrowing costs, lower asset values, and higher credit losses, and could cause us to experience net losses and net worth deficits.
For more information, see MD&A - Liquidity and Capital Resources.
OPERATIONAL RISKS
A failure in our operational systems or infrastructure, or those of third parties, could impair our ability to provide market liquidity, disrupt our business, damage our reputation, and cause financial losses.
Operational risk is elevated due to the volume, complexity, and pace of change across the company. We face significant levels of operational risk due to a variety of factors, including the size and complexity of our business operations, the amount of change to our core systems required to keep pace with market demands, regulatory requirements, and business initiatives, and the ever-changing cybersecurity landscape. Shortcomings or failures in our internal processes, people, or systems, or those of third parties with which we interact, could lead to impairment of our liquidity, disruption of our business (e.g., issuing mortgage and/or debt securities), incorrect payments to investors in our securities, errors in our financial statements, liability to customers or investors, further legislative or regulatory intervention, reputational damage, and financial and economic loss.
Our business is highly dependent on our ability to process a large number of transactions on a daily basis and manage and analyze significant amounts of information, much of which is provided by third parties. This information may be incorrect, or we may fail to properly manage or analyze it.
The transactions we process are complex and are subject to various legal, accounting, tax, and regulatory standards, which can change rapidly in response to external events, such as the implementation of government-mandated programs and changes in market conditions. Our financial, accounting, data processing, or other operating systems and facilities may contain design flaws or may fail to operate properly, adversely affecting our ability to process these transactions, including our ability to compile and process legally required information. We have certain systems that require manual support and intervention, which may lead to heightened risk of system failures. The inability of our systems to accommodate an increasing volume of transactions or new types of transactions or products could constrain our ability to pursue new business initiatives or improve existing business activities.
Our technological connections with our customers, counterparties, service providers, and other financial institutions continue to increase, which increases our risk exposure with respect to an operational failure of their infrastructure systems. We have developed, and expect to continue to develop, software tools for use by our customers in the customers' loan production and other processes. These tools may fail to operate properly, which could disrupt our or our customers' business and adversely affect our relationships with our customers.
We continue to increase our use of a third-party cloud infrastructure platform for both customer-facing applications as well as internal-use applications. If we do not implement changes to this platform in a well-managed, secure, and effective manner, we may experience unplanned service disruption or unplanned costs which may harm our business and operating results. In addition, our cloud infrastructure providers, or other service providers, could experience system breakdowns or failures, outages, downtime, cyber-attacks, adverse changes to financial condition, bankruptcy, or other adverse conditions, which could have a material adverse effect on our business and reputation. Thus, our plans to increase the amount of our infrastructure that we outsource to the cloud or to other third parties may increase our risk exposure.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
166
|
We face increased operational risk due to the magnitude and complexity of the new initiatives we are undertaking, including our efforts to help build a better housing finance system. Some of these initiatives require significant changes to our operational systems. In some cases, the changes must be implemented within a short period of time. Our legacy systems may create increased operational risk for these new initiatives. Internal corporate reorganizations may also increase our operational risk, particularly during the period of implementation.
We also face significant risks related to CSS and the operation and continued development of the CSP. We rely on CSS and the CSP (which is owned and operated by CSS) for the operation of many of our single-family securitization activities. Our business activities would be adversely affected and the market for Freddie Mac securities would be disrupted if the CSP were to fail or otherwise become unavailable to us or if CSS were unable to perform its obligations to us, including as a result of an operational failure by Fannie Mae. In the event of a CSS operational failure, we may be unable to issue certain new single-family mortgage-related securities, and investors in mortgage-related securities hosted on the CSS platform may experience payment delays. Any measures we could take to mitigate these risks might not be sufficient to prevent our business from being harmed. We update our internal systems and processes on a regular basis, including to improve existing processes and respond to market and regulatory developments. We could be adversely affected if CSS and/or the CSP are unable to make any necessary corresponding changes to their systems and processes in a timely manner. CSS could adopt or prioritize strategies that could adversely affect its ability to perform its obligations to us. Amendments to the CSS LLC agreement in January 2020 reduced Freddie Mac's and Fannie Mae's ability to control CSS Board decisions, even after conservatorship, including decisions about strategy, business operations, and funding.
Our employees could act improperly for their own or third-party gain and cause unexpected losses or reputational damage. While we have processes and systems in place designed to prevent and detect fraud, these processes may not be successful.
Most of our key business activities are conducted in the Washington D.C. metropolitan area and represent a concentrated risk of people, technology, and facilities. As a result, an infrastructure disruption in or around our offices or affecting the power grid, such as from a terrorist event, active shooter, or natural disaster, could significantly adversely affect our ability to conduct normal business operations. Any measures we take to mitigate this risk may not be sufficient to respond to the full range of events that may occur or allow us to resume normal business operations in a timely manner.
Potential cybersecurity threats are changing rapidly and growing in sophistication. We may not be able to protect our systems or the confidentiality of our information from cyberattack and other unauthorized access, disclosure, and disruption.
Our operations rely on the secure, accurate, and timely receipt, processing, storage, and transmission of confidential and other information in our systems and networks and with counterparties, service providers, and financial institutions.
Information risks for companies like ours have significantly increased in recent years, in part because of the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, and other external parties, including foreign state-sponsored actors. There have been several highly publicized cases involving financial services companies, consumer-based companies, and other organizations reporting the unauthorized disclosure of client, customer, or other confidential information, as well as cyberattacks involving the dissemination, theft, or destruction of corporate information, intellectual property, cash, or other valuable assets. There have also been several highly publicized cases where hackers have requested "ransom" payments in exchange for not disclosing customer information or for not making the targets' computer systems unavailable. In addition, there have been cases where hackers have misled company personnel into making unauthorized transfers of funds to the hackers' accounts.
Like many companies and government entities, from time to time we have been, and likely will continue to be, the target of attempted cyberattacks, including malware, denial-of-service, and phishing, as part of an effort to disrupt operations, potentially test cybersecurity capabilities, or obtain confidential, proprietary, or other information. We could also be adversely affected by cyberattacks that target the infrastructure of the internet, as such attacks could cause widespread unavailability of websites and degrade website performance. Our risk and exposure to these matters remain heightened because of, among other things, the evolving nature of these threats, our role in the financial services industry, the outsourcing of some of our business operations, and the current global economic and political environment.
Because we are interconnected with and dependent on third-party vendors, exchanges, clearinghouses, fiscal and paying agents, and other financial institutions, we could be adversely affected if any of them is subject to a successful cyberattack or other information security event. Third parties with which we do business may also be sources of cybersecurity or other technology risks. We routinely transmit and receive personal, confidential, and proprietary information by electronic means. This information could be subject to interception, misuse, or mishandling. Our exposure to these risks could increase as a result of our migration of core systems and applications to a third-party cloud environment.
Although we devote significant resources to protecting our critical assets and provide employee awareness training about phishing, malware, and other cyber risks, these measures may not provide effective security. Our computer systems, software, end point devices, and networks may be vulnerable to cyberattack, unauthorized access, supply chain disruptions, computer viruses or other malicious code, or other attempts to harm them or misuse or steal information. We routinely identify cyber
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
167
|
threats as well as vulnerabilities in our systems and work to address them, but these efforts may be insufficient. Breaches of our security measures may result from employee error or misconduct. Outside parties may attempt to induce employees, customers, counterparties, service providers, financial institutions, or other users of our systems to disclose sensitive information in order to gain access to our systems and the information they contain. We may not be able to anticipate, detect, or recognize threats to our systems and assets, or implement effective preventative measures against security breaches, especially because the techniques used change frequently or are not recognized until launched.
A cyberattack could occur and persist for an extended period of time without detection. We expect that any investigation of a cyberattack would take time, during which we would not necessarily know the extent of the harm or how best to remediate it. Although to date we have not experienced any cyberattacks resulting in significant impacts to the company, our cybersecurity risk management program may not prevent cyberattacks from having significant impacts in the future. We have obtained insurance coverage relating to cybersecurity risks, but this insurance may not be sufficient to provide adequate loss coverage.
The occurrence of one or more cyberattacks could result in thefts of important assets (such as cash or source code) or the unauthorized disclosure, misuse, or corruption of confidential and other information (including information about our borrowers, our customers, or our counterparties) or could otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. This could result in significant losses or reputational damage, adversely affect our relationships with our customers and counterparties, negatively affect our competitive position, or otherwise harm our business. We could also face regulatory and other legal action, including for any failure to provide timely disclosure concerning, or appropriately to limit trading in our securities following, an attack. We might be required to expend significant additional resources to modify our internal controls and other protective measures or to investigate and remediate vulnerabilities or other exposures, and we might be subject to litigation and financial losses that are not fully insured. In addition, customers, counterparties, financial intermediaries, and governmental organizations may not be adequately protecting the information that we share with them. As a result, a cyberattack on their systems and networks, or a breach of their security measures, may result in harm to our business and business relationships.
We rely on third parties, or their vendors and other business partners, for certain important functions. Any failures by those third parties to deliver products or services, or to manage risks effectively, could disrupt our business operations, or expose us to other operational risks.
Our use of third-parties, including service providers, sellers, servicers and other financial counterparties, exposes us to the risk of failures in their risk and control environments. We outsource certain key functions to these external parties, including some that are critical to financial reporting (including our use of hedge accounting), valuations, our mortgage-related investment activity, loan underwriting, loan servicing, and UMBS issuance and administration (i.e., CSS). We may enter into other key outsourcing relationships in the future and continue to expand our existing reliance on public cloud services. If one or more of these key external parties were not able to perform their functions for a period of time, perform them at an acceptable service level or handle increased volumes, or if one of them experiences a disruption in its own business or technology from any cause, our business operations could be constrained, disrupted, or otherwise negatively affected. Our use of third-parties also exposes us to other harm, such as breach of our data, fraud or damage to our reputation if one or more of these third parties fails to maintain adequate risk and control environments. Our ability to monitor the activities or performance of third-parties may be constrained, which may make it difficult for us to assess and manage the risks associated with these relationships.
We face risks and uncertainties associated with the models that we use to inform business and risk management decisions and for financial accounting and reporting purposes.
We use models to project significant factors in our businesses, including, but not limited to, interest rates and house prices under a variety of scenarios. We also use models to project borrower prepayment and default behavior and loss severity over long periods of time. Models are inherently imperfect predictors of actual results. There is inherent uncertainty associated with model projections of economic variables and the downstream projections of prepayment and default behavior dependent on these variables.
Uncertainty and risks related to models may arise from a number of sources, including the following:
n We could fail to design, implement, operate, adjust, or use our models as intended. We may fail to code a model correctly, we could use incorrect or insufficient data inputs or fail to fully understand the data inputs, or model implementation software could malfunction. We may not have performed user acceptance testing appropriately or correctly, including allowing sufficient testing time and resources and using the right subject matter experts before deploying the model. The complexity and interconnectivity of our models create additional risk regarding the accuracy of model output. We may not be able to deploy or update models in a timely manner.
n When market conditions change in unforeseen ways, our model projections may not accurately reflect these conditions, or we may not fully understand the model outputs. For example, models may not fully reflect the effect of certain government policy changes or new industry trends. In such cases, it is often necessary to make assumptions and judgments to accommodate the effect of scenarios that are not sufficiently well represented in the historical data. While we may adjust our models in response to new events, considerable residual uncertainty remains.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
168
|
n We also use selected third-party models. While the use of such models may reduce our risk where no internal model is available, it exposes us to additional risk, as third parties typically do not provide us with proprietary information regarding their models. We have little control over the processes by which these models are adjusted or changed. As a result, we may be unable to fully evaluate the risks associated with the use of such models.
Our use of models could affect decisions concerning the purchase, sale, securitization, and credit risk transfer of loans; the purchase and sale of securities; funding; the setting of guarantee fee prices; and the management of interest-rate, market, and credit risk. Our use of models also affects our quality-control sampling strategies for loans in our single-family credit guarantee portfolio and potential settlements with our counterparties. We also use models in our financial reporting process, including when measuring our allowance for credit losses and applying hedge accounting. See MD&A - Risk Management - Market Risk and Critical Accounting Policies and Estimates for more information on our use of models.
LEGAL AND COMPLIANCE RISKS
Legislative or regulatory actions could adversely affect our business activities and financial results. We face risk of non-compliance with our legal and regulatory obligations as a result of identified weaknesses in our compliance program.
We operate in a highly regulated industry and are subject to heightened supervision from FHFA, as our Conservator. Our compliance systems and programs may not be adequate to ensure that we are in compliance with all legal and other requirements. We could incur fines or other negative consequences for violations. For example, FHFA has raised concerns that we need to strengthen our compliance risk management practices by documenting and implementing an effective comprehensive framework for identifying, assessing, testing and reporting compliance risk. Although we are taking steps to strengthen our compliance program and address FHFA’s concerns, our efforts may not be successful. Until we satisfactorily remediate FHFA’s concerns, we may be subject to continued regulatory criticism. We also rely upon third parties and their respective compliance risk management programs, and the failure or limits of any such third-party compliance programs may expose us to legal and compliance risk.
Our business may be directly adversely affected by future legislative, regulatory, or judicial actions at the federal, state, and local levels. Such actions could affect us in a number of ways, including by imposing significant additional legal, compliance, and other costs on us, limiting our business activities, and diverting management attention or other resources. Such actions, and any required changes to our business or operations or those of third parties upon whom we rely in response thereto, could result in reduced profitability and increased compliance risk, particularly because of the identified weaknesses in our compliance program noted above. If we were not to comply with our legal and regulatory obligations, this could result in fines and penalties and harm to our reputation.
We may make certain changes to our business in an attempt to meet our housing goals and duty to serve requirements, which may adversely affect our profitability.
We may make adjustments to our loan sourcing and purchase strategies in an effort to meet our housing goals and subgoals, including modifying some of our underwriting standards and expanding the use of targeted initiatives to reach underserved populations. For example, we may purchase loans that offer lower expected returns on our investment and potentially increase our exposure to credit losses. We may also make changes to our business in response to our duty to serve underserved markets that could adversely affect our profitability.
If we do not meet our housing goals or duty to serve requirements, and FHFA finds that the goals or requirements were feasible, we may become subject to a housing plan that could require us to take additional steps that could potentially adversely affect our profitability. At this time, based on preliminary information, we believe we met four of our five single-family goals and all three of our multifamily goals. We expect that FHFA will make a final determination on our 2020 performance following the release of market data in 2021. In addition, our risk appetite constraints may make it difficult for us to meet our affordable housing goals in the future.
|
|
|
|
|
|
|
|
|
FREDDIE MAC | 2020 Form 10-K
|
|
169
|