Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from                                        to
Commission File Number: 001-34139
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Freddie Mac
 
Federally chartered 
corporation
 
8200 Jones Branch Drive
McLean, Virginia 
22102-3110
 
52-0904874
 
(703) 903-2000
(State or other jurisdiction of incorporation or organization)
 
(Address of principal executive offices, including zip code)
 
(I.R.S. Employer Identification No.)
 
(Registrant’s telephone 
number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    ý Yes    ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý Yes    ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer  ý
 
 
 
Accelerated filer  ¨
 
Non-accelerated filer (Do not check if a smaller reporting company)  ¨
 
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of July 20, 2016, there were 650,046,828 shares of the registrant’s common stock outstanding.




Table of Contents
 
 

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

Freddie Mac Form 10-Q
 
i


Management's Discussion and Analysis
 
Introduction

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in the “Forward-Looking Statements” sections of this Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2015, or 2015 Annual Report, and our Quarterly Report on Form 10-Q for the first quarter of 2016, the “Risk Factors” sections of our 2015 Annual Report and our Quarterly Report on Form 10-Q for the first quarter of 2016, and the “Business” section of our 2015 Annual Report.
Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the “Glossary” of this Form 10-Q and our 2015 Annual Report.
You should read the following MD&A in conjunction with our 2015 Annual Report and our condensed consolidated financial statements and accompanying notes for the three and six months ended June 30, 2016 included in “Financial Statements.” Throughout this Form 10-Q, we refer to the three months ended June 30, 2016 and the three months ended June 30, 2015 as “2Q 2016” and “2Q 2015,” respectively, and we refer to the six months ended June 30, 2016 and the six months ended June 30, 2015 as “YTD 2016” and “YTD 2015,” respectively.
INTRODUCTION
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability, and affordability to the U.S. housing market. We do this primarily by purchasing residential mortgage loans originated by lenders. In most instances, we package these loans into mortgage-related securities, which are guaranteed by us and sold in the global capital markets. We also invest in mortgage loans and mortgage-related securities. We do not originate loans or lend money directly to consumers.
We support the U.S. housing market and the overall economy by enabling America’s families to access mortgage loan funding with better terms and by providing consistent liquidity to the multifamily mortgage market, which we do primarily by providing financing for workforce housing. We have helped many distressed borrowers keep their homes or avoid foreclosure. We are working with FHFA, our customers and the industry to build a better housing finance system for the nation.
CONSOLIDATED FINANCIAL RESULTS
Comprehensive income was $1.1 billion in 2Q 2016 compared to $3.9 billion in 2Q 2015. The decline in comprehensive income was primarily driven by two market-related items, including an estimated:

Freddie Mac Form 10-Q
 
1


Management's Discussion and Analysis
 
Introduction

•
$1.8 billion decline resulting from interest rates decreasing during 2Q 2016 compared to increasing during 2Q 2015; and
•
$0.6 billion decline resulting from less spread tightening during 2Q 2016 compared to 2Q 2015.
Our total equity was $2.1 billion at June 30, 2016. Because our net worth was positive we are not requesting a draw from Treasury under the Purchase Agreement for 2Q 2016. Following payment of our dividend obligation for the second quarter of 2016 of $0.9 billion, our cumulative senior preferred stock dividend payments will total $99.1 billion. Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock, which remains $72.3 billion. The amount of available funding remaining under the Purchase Agreement is $140.5 billion, and would be reduced by any future draws.
VARIABILITY OF EARNINGS
Our financial results are subject to significant earnings variability from period to period. This variability is primarily driven by:
•
Interest-Rate Volatility — We hold assets and liabilities that expose us to interest-rate risk. Through our use of derivatives, we manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models. However, the way we account for our financial assets and liabilities (i.e., some are measured at amortized cost, while others are measured at fair value), including derivatives, creates volatility in our GAAP earnings when interest rates fluctuate. Based upon the composition of our financial assets and liabilities, including derivatives, at June 30, 2016, we generally recognize fair value losses in earnings when interest rates decline. This volatility generally is not indicative of the underlying economics of our business. For information about the sensitivity of our financial results to interest-rate volatility, see "Risk Management - Interest-Rate Risk and Other Market Risks."
•
Spread Volatility — The volatility of spreads (i.e., credit spreads, liquidity spreads, risk premiums, etc.), or OAS, is the risk associated with changes in the excess of interest rates over benchmark rates. We hold assets and liabilities that expose us to spread volatility, which may contribute to significant earnings volatility. For financial assets measured at fair value, we generally recognize fair value losses when spreads widen. Conversely, for financial liabilities measured at fair value, we generally recognize fair value gains when spreads widen.
The variability of earnings and the declining capital reserve required under the terms of the Purchase Agreement (ultimately reaching zero in 2018) increase the risk of our having a negative net worth and thus being required to draw from Treasury. We currently face a risk of a draw for a variety of reasons, including if we were to experience a large decrease in interest rates coupled with a large widening of spreads. In an effort to reduce the probability of a draw due to changes in interest rates, we entered into certain structured transactions that have resulted in additional financial assets being recognized and measured at fair value. In addition, we continue to explore other strategies and activities that may reduce the probability of a draw.

Freddie Mac Form 10-Q
 
2


Management's Discussion and Analysis
 
Introduction

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

Freddie Mac Form 10-Q
 
3


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


KEY ECONOMIC INDICATORS
The following graphs and related discussion present certain macroeconomic indicators that can significantly affect our business and financial results.
SINGLE-FAMILY HOME PRICES
NATIONAL HOME PRICES
(December 2000 = 100)
COMMENTARY
•
Home prices continued to appreciate during 2Q 2016 and YTD 2016, increasing 3.7% and 5.6%, respectively, compared to an increase of 3.7% and 5.5%, respectively, during 2Q 2015 and YTD 2015, based on our own non-seasonally adjusted price index of single-family homes funded by loans owned or guaranteed by us or Fannie Mae.
•
National home prices at June 30, 2016 were approximately 1% below their peak level of 167 reached in June 2006, based on our index.


Freddie Mac Form 10-Q
 
4


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

INTEREST RATES
KEY MARKET INTEREST RATES
Quarterly average rates are computed as the simple average of weekly rates during each respective quarter.
COMMENTARY
•
Both ending and average mortgage interest rates, as indicated by the 30-year PMMS rate, decreased during 2Q 2016 and YTD 2016.
•
The average 30-year PMMS rate was 3.59% and 3.66% during 2Q 2016 and YTD 2016, respectively, compared to 3.82% and 3.77% during 2Q 2015 and YTD 2015, respectively.
•
Longer-term interest rates, as indicated by the 10-year LIBOR and the 10-year Treasury rate, declined during 2Q 2016 and YTD 2016. The decline in longer-term interest rates during the quarter was due, in part, to the United Kingdom's decision to leave the European Union and expectations of lower worldwide economic growth.

Freddie Mac Form 10-Q
 
5


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

UNEMPLOYMENT RATE
UNEMPLOYMENT RATE AND JOB CREATION
Source: U.S. Bureau of Labor Statistics

COMMENTARY
•
An average of approximately 147,000 and 172,000 monthly net new jobs were added to the economy during 2Q 2016 and YTD 2016, respectively. The steady flow of jobs helped the unemployment rate improve slightly.

Freddie Mac Form 10-Q
 
6


Management's Discussion and Analysis
 
Consolidated Results of Operations | Comparison

CONSOLIDATED RESULTS OF OPERATIONS
You should read this discussion of our consolidated results of operations in conjunction with our condensed consolidated financial statements and accompanying notes.
COMPARISON
The table below compares our consolidated results of operations for 2Q 2016 vs. 2Q 2015 and YTD 2016 vs. YTD 2015.
 
 
2Q 2016
 
2Q 2015
 
Change
 
YTD 2016
 
YTD 2015
 
Change
(dollars in millions)
 
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Net interest income
 
$
3,443

 
$
3,969

 
$
(526
)
 
(13
)%
 
$
6,848

 
$
7,616

 
$
(768
)
 
(10
)%
Benefit (provision) for credit losses
 
775

 
857

 
(82
)
 
(10
)%
 
1,242

 
1,356

 
(114
)
 
(8
)%
Net interest income after benefit (provision) for credit losses
 
4,218

 
4,826

 
(608
)
 
(13
)%
 
8,090

 
8,972

 
(882
)
 
(10
)%
Non-interest income (loss):
 
 
 
 
 

 


 
 
 
 
 


 


Losses on extinguishment of debt
 
(119
)
 
(80
)
 
(39
)
 
49
 %
 
(174
)
 
(159
)
 
(15
)
 
9
 %
Derivative gains (losses)
 
(2,058
)
 
3,135

 
(5,193
)
 
(166
)%
 
(6,619
)
 
732

 
(7,351
)
 
(1,004
)%
Net impairment of available-for-sale securities recognized in earnings
 
(72
)
 
(98
)
 
26

 
(27
)%
 
(129
)
 
(191
)
 
62

 
(32
)%
Other gains on investment securities recognized in earnings
 
450

 
152

 
298

 
196
 %
 
753

 
569

 
184

 
32
 %
Other income (loss)
 
(25
)
 
(568
)
 
543

 
(96
)%
 
922

 
(557
)
 
1,479

 
(266
)%
Total non-interest income (loss)
 
(1,824
)
 
2,541

 
(4,365
)
 
(172
)%
 
(5,247
)
 
394

 
(5,641
)
 
(1,432
)%
Non-interest expense:
 
 
 
 
 

 


 
 
 
 
 


 


Administrative expense
 
(475
)
 
(501
)
 
26

 
(5
)%
 
(923
)
 
(952
)
 
29

 
(3
)%
REO operations expense
 
(29
)
 
(52
)
 
23

 
(44
)%
 
(113
)
 
(127
)
 
14

 
(11
)%
Temporary Payroll Tax Cut Continuation Act of 2011 expense
 
(280
)
 
(235
)
 
(45
)
 
19
 %
 
(552
)
 
(457
)
 
(95
)
 
21
 %
Other expense
 
(151
)
 
(501
)
 
350

 
(70
)%
 
(304
)
 
(964
)
 
660

 
(68
)%
Total non-interest expense
 
(935
)
 
(1,289
)
 
354

 
(27
)%
 
(1,892
)
 
(2,500
)
 
608

 
(24
)%
Income before income tax expense
 
1,459

 
6,078

 
(4,619
)
 
(76
)%
 
951

 
6,866

 
(5,915
)
 
(86
)%
Income tax expense
 
(466
)
 
(1,909
)
 
1,443

 
(76
)%
 
(312
)
 
(2,173
)
 
1,861

 
(86
)%
Net income
 
993

 
4,169

 
(3,176
)
 
(76
)%
 
639

 
4,693

 
(4,054
)
 
(86
)%
Total other comprehensive income (loss), net of taxes and reclassification adjustments
 
140

 
(256
)
 
396

 
(155
)%
 
294

 
(34
)
 
328

 
(965
)%
Comprehensive income
 
$
1,133

 
$
3,913

 
$
(2,780
)
 
(71
)%
 
$
933

 
$
4,659

 
$
(3,726
)
 
(80
)%
Key Drivers:
See "Net Interest Income," "Benefit (Provision) for Credit Losses," "Derivative Gains (Losses)," and "Other Comprehensive Income (Loss)" for a discussion of those line items. Key drivers for other line items for 2Q 2016 vs. 2Q 2015 and YTD 2016 vs. YTD 2015 include:
•
Other gains on investment securities recognized in earnings
◦
2Q 2016 vs. 2Q 2015 - increased primarily due to the recognition of unrealized gains on our trading securities as a result of a decline in longer-term interest rates during 2Q 2016 compared to the recognition of unrealized losses on our trading securities as a result of an increase in longer-term interest rates during 2Q 2015.

Freddie Mac Form 10-Q
 
7


Management's Discussion and Analysis
 
Consolidated Results of Operations | Comparison

◦
YTD 2016 vs. YTD 2015 - increased primarily due to the recognition of unrealized gains on our trading securities as a result of a decline in longer-term interest rates during YTD 2016 compared to the recognition of unrealized losses on our trading securities as a result of an increase in longer-term interest rates during YTD 2015. This increase was partially offset by the recognition of unrealized losses due to spread widening on our trading securities during YTD 2016 compared to the recognition of unrealized gains on our trading securities due to spread tightening during YTD 2015 and fewer sales of available-for-sale non-agency mortgage-related securities in an unrealized gain position. This decline in sales was attributable to increased market volatility and weaker investor demand for this product type.
•
Other income (loss)
◦
2Q 2016 vs. 2Q 2015 - other loss declined reflecting:
*
Gains in 2Q 2016 compared to losses during 2Q 2015 on multifamily mortgage loans for which we elected the fair value option driven by a decline in interest rates during 2Q 2016 compared to an increase in interest rates during 2Q 2015;
*
Gains recognized on certain multifamily held-for-sale loan purchase commitments for which we elected the fair value option in 2016; partially offset by
*
Losses on STACR debt notes carried at fair value driven by tightening spreads between STACR yields and LIBOR during 2Q 2016 compared to gains as a result of widening spreads during 2Q 2015.
◦
YTD 2016 vs. YTD 2015 - other income increased reflecting:
*
Reduced lower-of-cost-or-fair-value adjustments as we reclassified fewer seriously delinquent single-family loans from held-for-investment to held-for-sale during YTD 2016; and
*
Larger gains in YTD 2016 compared to YTD 2015 on multifamily mortgage loans for which we elected the fair value option driven by a decline in interest rates in YTD 2016 compared to an increase in interest rates during YTD 2015.
•
Other expense
◦
2Q 2016 vs. 2Q 2015 and YTD 2016 vs. YTD 2015 - decreased primarily due to fewer reclassifications of seriously delinquent single-family loans from held-for-investment to held-for-sale. See "Loan Reclassifications" below for the effect of these loan reclassifications on pre-tax net income.
The three items discussed below affected multiple line items on our consolidated results of operations.
LOAN RECLASSIFICATIONS
During 2Q 2016 and 2Q 2015, we reclassified $3.1 billion and $4.5 billion, respectively, in UPB of seriously delinquent single-family mortgage loans from held-for-investment to held-for-sale. During YTD 2016 and YTD 2015, we reclassified $3.5 billion and $8.1 billion, respectively, in UPB of such mortgage loans. The initial reclassifications of these loans affected several line items on our consolidated results of operations, as shown in the table below.
Lower-of-cost-or-fair-value adjustments were relatively unchanged in 2Q 2016 compared to 2Q 2015. In 2Q 2016, the lower-of-cost-or-fair value adjustment was a greater percentage relative to the UPB of the mortgage loans that were reclassified compared to the mortgage loans reclassified in 2Q 2015 because the mortgage loans reclassified in 2Q 2015 were more deeply seriously delinquent. As a result, the

Freddie Mac Form 10-Q
 
8


Management's Discussion and Analysis
 
Consolidated Results of Operations | Comparison

mortgage loans reclassified in 2Q 2015 had already been charged down closer to collateral value at the time of reclassification.
(in millions)
 
2Q 2016
 
2Q 2015
 
YTD 2016
 
YTD 2015
Benefit for credit losses
 
$
509

 
$
800

 
$
573

 
$
1,492

Other income (loss) - lower-of-cost-or-fair-value adjustment
 
(667
)
 
(632
)
 
(734
)
 
(1,213
)
Other (expense) income - property taxes and insurance associated with these loans
 
(109
)
 
(447
)
 
(140
)
 
(796
)
Effect on income before income tax (expense) benefit
 
$
(267
)
 
$
(279
)
 
$
(301
)
 
$
(517
)
INTEREST-RATE RISK MANAGEMENT ACTIVITIES
We fund our business activities primarily through the issuance of unsecured other debt. The type of debt we issue is based on a variety of factors including market conditions and our liquidity requirements.
We currently favor a mix of shorter- and medium-term debt and derivatives to fund our business and manage interest-rate risk. This funding mix is a less expensive method than relying more extensively on long-term debt.
The table below presents the effect of derivatives used in our interest-rate risk management activities on our comprehensive income, after considering the accrual of periodic cash settlements (which is the economic equivalent of interest expense), and the extent to which the effect of interest rate changes on our derivatives was offset by their effect on other financial instruments. The estimated net interest rate effect on comprehensive income is essentially the derivative gains (losses) attributable to financial instruments that are not measured at fair value.
(in billions)
2Q 2016
 
2Q 2015
 
YTD 2016
 
YTD 2015
Components of derivative gains (losses)
 
 
 
 
 
 
 
Derivative gains (losses)
$
(2.0
)
 
$
3.1

 
$
(6.6
)
 
$
0.7

Less: Accrual of periodic cash settlements
(0.4
)
 
(0.5
)
 
(0.9
)
 
(1.1
)
Derivative fair value changes
$
(1.6
)
 
$
3.6

 
$
(5.7
)
 
$
1.8

Estimated Net Interest Rate Effect
 
 
 
 
 
 
 
Interest rate effect on derivative fair values
$
(1.7
)
 
$
3.6

 
$
(5.7
)
 
$
1.9

Estimate of offsetting interest rate effect related to financial instruments measured at fair value
1.0

 
(1.4
)
 
2.9

 
(0.5
)
Income tax benefit (expense)
0.3

 
(0.8
)
 
1.0

 
(0.5
)
Estimated Net Interest Rate Effect on Comprehensive income
$
(0.4
)
 
$
1.4

 
$
(1.8
)
 
$
0.9

As this table demonstrates, the estimated net effect of derivatives used in our interest-rate risk management activities on our comprehensive income is volatile, and can be significant. For information about the sensitivity of our financial results to interest-rate volatility, see "Risk Management - Interest-Rate Risk and Other Market Risks."
CHANGES IN SPREADS
Comprehensive income was affected by changes in spreads in amounts estimated to be $0.1 billion and $0.7 billion (after-tax) during 2Q 2016 and 2Q 2015, respectively, and $(0.5) billion and $0.7 billion (after-tax) during YTD 2016 and YTD 2015, respectively. During 2Q 2016, less spread tightening on both our

Freddie Mac Form 10-Q
 
9


Management's Discussion and Analysis
 
Consolidated Results of Operations | Comparison

agency and non-agency mortgage-related investments measured at fair value resulted in a smaller increase in comprehensive income compared to 2Q 2015. During YTD 2016, the negative effect on comprehensive income was primarily due to spreads widening on both our agency and non-agency mortgage-related investments measured at fair value. The positive effect during YTD 2015 was primarily due to spreads tightening on these investments.

Freddie Mac Form 10-Q
 
10


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


NET INTEREST INCOME
NET INTEREST YIELD ANALYSIS
The tables below present an analysis of interest-earning assets and interest-bearing liabilities.
 
 
2Q 2016
 
2Q 2015
 
(dollars in millions)
Average
Balance
 
Interest
Income
(Expense)(1)
 
Average
Rate
 
Average
Balance
 
Interest
Income
(Expense)(1)
 
Average
Rate
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
14,948

 
$
9

 
0.23
 %
 
$
10,172

 
$
2

 
0.06
%
 
Securities purchased under agreements to resell
52,643

 
47

 
0.36

 
50,358

 
13

 
0.10

 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
193,637

 
1,851

 
3.82

 
233,416

 
2,270

 
3.89

 
Extinguishment of PCs held by Freddie Mac
(96,002
)
 
(890
)
 
(3.71
)
 
(109,805
)
 
(1,017
)
 
(3.71
)
 
Total mortgage-related securities, net
97,635

 
961

 
3.94

 
123,611

 
1,253

 
4.06

 
Non-mortgage-related securities
12,726

 
17

 
0.53

 
11,739

 
3

 
0.09

 
Loans held by consolidated trusts(1)
1,638,057

 
13,872

 
3.39

 
1,574,817

 
13,730

 
3.49

 
Loans held by Freddie Mac(1)
138,469

 
1,366

 
3.95

 
163,468

 
1,654

 
4.05

 
Total interest-earning assets
$
1,954,478

 
$
16,272

 
3.34

 
$
1,934,165

 
$
16,655

 
3.44

 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
$
1,662,187

 
$
(12,139
)
 
(2.92
)
 
$
1,596,840

 
$
(12,022
)
 
(3.01
)
 
Extinguishment of PCs held by Freddie Mac
(96,002
)
 
890

 
3.71

 
(109,805
)
 
1,017

 
3.71

 
Total debt securities of consolidated trusts held by third parties
1,566,185

 
(11,249
)
 
(2.87
)
 
1,487,035

 
(11,005
)
 
(2.96
)
 
Other debt:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
76,057

 
(82
)
 
(0.42
)
 
103,045

 
(36
)
 
(0.14
)
 
Long-term debt
303,088

 
(1,450
)
 
(1.91
)
 
326,659

 
(1,587
)
 
(1.94
)
 
Total other debt
379,145

 
(1,532
)
 
(1.61
)
 
429,704

 
(1,623
)
 
(1.51
)
 
Total interest-bearing liabilities
1,945,330

 
(12,781
)
 
(2.63
)
 
1,916,739

 
(12,628
)
 
(2.63
)
 
Expense related to derivatives
—

 
(48
)
 
(0.01
)
 
—

 
(58
)
 
(0.01
)
 
Impact of net non-interest-bearing funding
9,148

 
—

 
0.01

 
17,426

 
—

 
0.02

 
Total funding of interest-earning assets
$
1,954,478

 
$
(12,829
)
 
(2.63
)
 
$
1,934,165

 
$
(12,686
)
 
(2.62
)
 
Net interest income/yield
 
 
$
3,443

 
0.71

 
 
 
$
3,969

 
0.82

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Loan fees, primarily consisting of amortization of delivery fees, included in interest income were $634 million and $549 million for loans held by consolidated trusts and were $50 million and $144 million for loans held by Freddie Mac during 2Q 2016 and 2Q 2015, respectively.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Freddie Mac Form 10-Q
 
11


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


 
 
 
 
 
 
 
 
 
 
 
 
 
YTD 2016
 
YTD 2015
(dollars in millions)
Average
Balance
 
Interest
Income
(Expense)(1)
 
Average
Rate
 
Average
Balance
 
Interest
Income
(Expense)(1)
 
Average
Rate
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
13,337

 
$
16

 
0.24
 %
 
$
12,762

 
$
5

 
0.06
%
Securities purchased under agreements to resell
55,282

 
97

 
0.35

 
48,894

 
21

 
0.09

Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
197,620

 
3,767

 
3.81

 
239,039

 
4,636

 
3.88

Extinguishment of PCs held by Freddie Mac
(100,549
)
 
(1,850
)
 
(3.68
)
 
(110,896
)
 
(2,051
)
 
(3.70
)
Total mortgage-related securities, net
97,071

 
1,917

 
3.95

 
128,143

 
2,585

 
4.03

Non-mortgage-related securities
13,494

 
30

 
0.44

 
10,579

 
6

 
0.10

Loans held by consolidated trusts(1)
1,634,351

 
28,133

 
3.44

 
1,569,045

 
27,609

 
3.52

Loans held by Freddie Mac(1)
142,000

 
2,923

 
4.12

 
164,318

 
3,229

 
3.93

Total interest-earning assets
$
1,955,535

 
$
33,116

 
3.39

 
$
1,933,741

 
$
33,455

 
3.46

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
$
1,657,645

 
$
(24,890
)
 
(3.00
)
 
$
1,590,235

 
$
(24,543
)
 
(3.09
)
Extinguishment of PCs held by Freddie Mac
(100,549
)
 
1,850

 
3.68

 
(110,896
)
 
2,051

 
3.70

Total debt securities of consolidated trusts held by third parties
1,557,096

 
(23,040
)
 
(2.96
)
 
1,479,339

 
(22,492
)
 
(3.04
)
Other debt:
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
88,464

 
(175
)
 
(0.39
)
 
112,386

 
(74
)
 
(0.13
)
Long-term debt
301,655

 
(2,954
)
 
(1.95
)
 
325,657

 
(3,150
)
 
(1.93
)
Total other debt
390,119

 
(3,129
)
 
(1.60
)
 
438,043

 
(3,224
)
 
(1.47
)
Total interest-bearing liabilities
1,947,215

 
(26,169
)
 
(2.69
)
 
1,917,382

 
(25,716
)
 
(2.68
)
Expense related to derivatives
—

 
(99
)
 
(0.01
)
 
—

 
(123
)
 
(0.01
)
Impact of net non-interest-bearing funding
8,320

 
—

 
0.01

 
16,359

 
—

 
0.02

Total funding of interest-earning assets
$
1,955,535

 
$
(26,268
)
 
(2.69
)
 
$
1,933,741

 
$
(25,839
)
 
(2.67
)
Net interest income/yield
 
 
$
6,848

 
0.70

 
 
 
$
7,616

 
0.79


(1)
Loan fees, primarily consisting of amortization of delivery fees, included in interest income were $1.1 billion for loans held by consolidated trusts during both YTD 2016 and YTD 2015, and were $131 million and $210 million for loans held by Freddie Mac during YTD 2016 and YTD 2015, respectively.

Freddie Mac Form 10-Q
 
12


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


COMPONENTS OF NET INTEREST INCOME
The table below presents the components of net interest income.
 
2Q 2016
 
2Q 2015
 
Change
 
YTD 2016
 
YTD 2015
 
Change
(dollars in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Contractual net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee fee income
$
680

 
$
628

 
$
52

 
8
 %
 
$
1,390

 
$
1,236

 
$
154

 
12
 %
Guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011
279

 
230

 
49

 
21
 %
 
546

 
447

 
99

 
22
 %
Other contractual net interest income
1,744

 
2,170

 
(426
)
 
(20
)%
 
3,584

 
4,392

 
(808
)
 
(18
)%
Total contractual net interest income
2,703

 
3,028

 
(325
)
 
(11
)%
 
5,520

 
6,075

 
(555
)
 
(9
)%
Net amortization - loans and debt securities of consolidated trusts
774

 
849

 
(75
)
 
(9
)%
 
1,307

 
1,382

 
(75
)
 
(5
)%
Net amortization - other assets and debt
14

 
150

 
(136
)
 
(91
)%
 
120

 
282

 
(162
)
 
(57
)%
Expense related to derivatives
(48
)
 
(58
)
 
10

 
(17
)%
 
(99
)
 
(123
)
 
24

 
(20
)%
Net interest income
$
3,443

 
$
3,969

 
$
(526
)
 
(13
)%
 
$
6,848

 
$
7,616

 
$
(768
)
 
(10
)%

Key Drivers:
•
Other contractual net interest income
◦
2Q 2016 vs. 2Q 2015 and YTD 2016 vs. YTD 2015 - decreased primarily due to the continued reduction in the balance of our mortgage-related investments portfolio pursuant to the portfolio limits established by the Purchase Agreement and FHFA.
•
Net amortization of other assets and debt
◦
2Q 2016 vs. 2Q 2015 and YTD 2016 vs. YTD 2015 - decreased primarily due to less accretion of previously recognized other-than-temporary impairments, coupled with greater premium amortization expense associated with our mortgage-related securities portfolio as a result of agency securities being acquired at premiums. The decrease in accretion is due to a decline in the population of impaired securities as a result of our active disposition of these securities and the recognition of less other-than-temporary impairments due to stabilized collateral performance.


Freddie Mac Form 10-Q
 
13


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


BENEFIT (PROVISION) FOR CREDIT LOSSES
The benefit (provision) for credit losses predominantly relates to single-family loans and includes components for both collectively and individually impaired loans.
The table below presents the components of our benefit (provision) for credit losses.
 
 
2Q 2016
 
2Q 2015
 
Change
 
YTD 2016
 
YTD 2015
 
Change
(dollars in billions)
 
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Provision for newly impaired loans
 
$
(0.2
)
 
$
(0.4
)
 
$
0.2

 
(50
)%
 
$
(0.4
)
 
$
(0.6
)
 
$
0.2

 
(33
)%
Amortization of interest rate concessions
 
0.2

 
0.3

 
(0.1
)
 
(33
)%
 
0.5

 
0.6

 
(0.1
)
 
(17
)%
Reclassifications of held-for-investment loans to held-for-sale loans
 
0.5

 
0.8

 
(0.3
)
 
(38
)%
 
0.6

 
1.5

 
(0.9
)
 
(60
)%
Other, including changes in estimated default probability and loss severity
 
0.3

 
0.2

 
0.1

 
50
 %
 
0.5

 
(0.1
)
 
0.6

 
(600
)%
Benefit (provision) for credit losses
 
$
0.8

 
$
0.9

 
$
(0.1
)
 
(11
)%
 
$
1.2

 
$
1.4

 
$
(0.2
)
 
(14
)%
Key Drivers:
•
2Q 2016 vs. 2Q 2015 - Benefit (provision) for credit losses remained relatively unchanged. Fewer seriously delinquent loans were reclassified from held-for-investment to held-for-sale in 2Q 2016 compared to 2Q 2015. During 2Q 2016, $3.1 billion in UPB of seriously delinquent single-family loans were reclassified to held-for-sale, compared to $4.5 billion during 2Q 2015. See "Loan Reclassifications" for the effect of these loan reclassifications on benefit (provision) for credit losses and pre-tax net income.
•
YTD 2016 vs. YTD 2015 - Benefit (provision) for credit losses remained relatively unchanged. During YTD 2016, $3.5 billion in UPB of seriously delinquent single-family loans were reclassified to held-for-sale, compared to $8.1 billion during YTD 2015. There were also improvements in estimated loss severity and probability of default during YTD 2016.

Freddie Mac Form 10-Q
 
14


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


DERIVATIVE GAINS (LOSSES)
While our sensitivity to interest rates on an economic basis remains low based on our models, our exposure to earnings volatility resulting from our use of derivatives has increased in recent years as we have changed our derivative portfolio to align with the changing duration of our hedged assets and liabilities. We believe the impact of derivatives on our GAAP financial results should be considered in the context of our overall interest-rate risk profile, including our PMVS and duration gap results. For more information about our interest-rate risk management activities and the sensitivity of reported earnings to those activities, see “Risk Management - Interest-Rate Risk and Other Market Risks.”
The table below presents the components of derivative gains (losses).
 
2Q 2016
 
2Q 2015
 
Change
 
YTD 2016
 
YTD 2015
 
Change
(dollars in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Fair value change in interest-rate swaps
$
(2,364
)
 
$
4,840

 
$
(7,204
)
 
(149
)%
 
$
(8,054
)
 
$
2,179

 
$
(10,233
)
 
(470
)%
Fair value change in option-based derivatives
1,141

 
(1,465
)
 
2,606

 
(178
)%
 
3,076

 
(449
)
 
3,525

 
(785
)%
Accrual of periodic cash settlements
(420
)
 
(532
)
 
112

 
(21
)%
 
(910
)
 
(1,103
)
 
193

 
(17
)%
Fair value change in other derivatives
(415
)
 
292

 
(707
)
 
(242
)%
 
(731
)
 
105

 
(836
)
 
(796
)%
Derivative gains (losses)
$
(2,058
)
 
$
3,135

 
$
(5,193
)
 
(166
)%
 
$
(6,619
)
 
$
732

 
$
(7,351
)
 
(1,004
)%
Key Drivers:
•
2Q 2016 vs. 2Q 2015 - We recognized derivative fair value losses during 2Q 2016 primarily due to a decline in interest rates, while recognizing derivative fair value gains during 2Q 2015 primarily due to an increase in interest rates. For example, during 2Q 2016 the 10-year par swap rate declined 26 basis points, while during 2Q 2015 the 10-year par swap rate increased 42 basis points.
•
YTD 2016 vs. YTD 2015 - We recognized derivative fair value losses during YTD 2016 primarily due to a decline in interest rates, while recognizing derivative fair value gains during YTD 2015 primarily due to an increase in interest rates. For example, during YTD 2016 the 10-year par swap rate declined 80 basis points, while during YTD 2015 the 10-year par swap rate increased 16 basis points.
•
See "Our Business Segments - Investments - Market Conditions" for more information about par swap rates.

Freddie Mac Form 10-Q
 
15


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


OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the attribution of the other comprehensive income (loss) reported in our condensed consolidated statements of comprehensive income.
 
2Q 2016
 
2Q 2015
 
Change
 
YTD 2016
 
YTD 2015
 
Change
(in millions)
 
 
 
 
$
 
%
 
 
 
 
 
$
 
%
Other comprehensive income, excluding accretion and reclassifications
$
391

 
$
74

 
$
317

 
428
 %
 
$
612

 
$
537

 
$
75

 
14
 %
Accretion due to significant increases in expected cash flows on previously-impaired available-for-sale securities
(79
)
 
(120
)
 
41

 
(34
)%
 
(169
)
 
(246
)
 
77

 
(31
)%
Reclassifications from AOCI
(172
)
 
(210
)
 
38

 
(18
)%
 
(149
)
 
(325
)
 
176

 
(54
)%
Total other comprehensive income (loss)
$
140

 
$
(256
)

$
396

 
(155
)%
 
$
294


$
(34
)
 
$
328

 
(965
)%
Key Drivers:
•
2Q 2016 vs. 2Q 2015 - Other comprehensive income increased primarily due to a decline in longer-term interest rates during 2Q 2016, which resulted in unrealized gains on our available-for-sale securities, compared to an increase in longer-term interest rates during 2Q 2015, which resulted in unrealized losses on our available-for-sale securities. The increase attributable to interest rate changes was partially offset by less spread tightening for our agency and non-agency available-for-sale mortgage-related securities. Other comprehensive income in both periods reflects the reversals of unrealized losses due to the accretion of other-than-temporary impairments in earnings and the reclassification of unrealized gains and losses related to available-for-sale securities that were sold during the respective periods.
•
YTD 2016 vs. YTD 2015 - Other comprehensive income increased primarily due to a decline in longer-term interest rates during YTD 2016, which resulted in unrealized gains on our available-for-sale securities, compared to an increase in longer-term interest rates during YTD 2015, which resulted in unrealized losses on our available-for-sale securities. The increase attributable to interest rate changes was partially offset by spread widening for our non-agency available-for-sale mortgage-related securities during YTD 2016 compared to spread tightening during YTD 2015. Other comprehensive income in both periods reflects the reversals of unrealized losses due to the accretion of other-than-temporary impairments in earnings and the reclassification of unrealized gains and losses related to available-for-sale securities that were sold during the respective periods.




Freddie Mac Form 10-Q
 
16


Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized consolidated balance sheets.
 
 
June 30, 2016
 
December 31, 2015
 
Change
(dollars in millions)
 
 
 
 
 
$
 
%
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
8,140

 
$
5,595

 
$
2,545

 
45
 %
Restricted cash and cash equivalents
 
17,399

 
14,533

 
2,866

 
20
 %
Securities purchased under agreements to resell
 
48,989

 
63,644

 
(14,655
)
 
(23
)%
Subtotal
 
74,528

 
83,772

 
(9,244
)
 
(11
)%
Investments in securities
 
112,269

 
114,215

 
(1,946
)
 
(2
)%
Mortgage loans, net
 
1,761,585

 
1,754,193

 
7,392

 
—
 %
Accrued interest receivable
 
6,060

 
6,074

 
(14
)
 
—
 %
Derivative assets, net
 
1,479

 
395

 
1,084

 
274
 %
Real estate owned, net
 
1,381

 
1,725

 
(344
)
 
(20
)%
Deferred tax assets, net
 
18,671

 
18,205

 
466

 
3
 %
Other assets
 
10,464

 
7,313

 
3,151

 
43
 %
Total assets
 
$
1,986,437

 
$
1,985,892

 
$
545

 
—
 %
 
 
 
 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Accrued interest payable
 
$
6,057

 
$
6,183

 
$
(126
)
 
(2
)%
Debt, net
 
1,972,103

 
1,970,269

 
1,834

 
—
 %
Derivative liabilities, net
 
1,243

 
1,254

 
(11
)
 
(1
)%
Other liabilities
 
4,901

 
5,246

 
(345
)
 
(7
)%
Total liabilities
 
1,984,304

 
1,982,952

 
1,352

 
—
 %
Total equity
 
2,133

 
2,940

 
(807
)
 
(27
)%
Total liabilities and equity
 
$
1,986,437

 
$
1,985,892

 
$
545

 
—
 %
Key Drivers:
As of June 30, 2016 compared to December 31, 2015:
•
Cash and cash equivalents, restricted cash and cash equivalents, and securities purchased under agreements to resell affect one another, so the changes in the balances should be viewed together. The combined balance declined due to higher near-term cash needs as of December 31, 2015.
•
Investments in securities declined primarily due to repayments, partially offset by increased retention of investment securities from certain structured transactions.
•
Derivative assets, net increased primarily due to an increase in non-cash collateral posted by our derivative counterparties. While we generally offset the obligation to return cash collateral against the fair value of our derivative assets, we do not offset non-cash collateral received against the fair value of our derivative assets.
•
Real estate owned, net continued to decline as we continued to sell our existing inventory.
•
Other assets increased as receivables from servicers increased driven by borrower prepayment activity.

Freddie Mac Form 10-Q
 
17


Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


•
Total equity decreased primarily as a result of dividends paid related to the decline in the Capital Reserve Amount from $1.8 billion to $1.2 billion under the terms of the senior preferred stock.

Freddie Mac Form 10-Q
 
18


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


OUR BUSINESS SEGMENTS
We have three reportable segments, which are based on the way we manage our business. Certain activities that are not part of a reportable segment are included in the All Other category.
•
Single-family Guarantee - reflects results from our purchase, securitization, and guarantee of single-family loans and the management of single-family mortgage credit risk.
•
Multifamily - reflects results from our purchase, securitization, and guarantee of multifamily loans and securities, our investments in those loans and securities, and the management of multifamily mortgage credit risk.
•
Investments - reflects results from managing the company’s mortgage-related investments portfolio (excluding Multifamily investments, single-family seriously delinquent loans, and the credit risk of single-family performing loans), treasury function, and interest-rate risk.
•
All Other - consists of material corporate-level activities that are infrequent in nature and based on decisions outside the control of the management of our reportable segments.
SEGMENT EARNINGS
During the first quarter of 2016, we changed how we calculate certain components of our Segment Earnings for our Single-family Guarantee and Investments segments. Prior period results have been revised to conform to the current period presentation. For more information on these changes and on our segment reclassifications, see Note 11 in this Form 10-Q and Note 12 in our 2015 Annual Report.

Freddie Mac Form 10-Q
 
19


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


SEGMENT COMPREHENSIVE INCOME
The tables below show our comprehensive income by segment, including the All Other category.

Freddie Mac Form 10-Q
 
20


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


SINGLE-FAMILY GUARANTEE
MARKET CONDITIONS
The following graphs and related discussion present certain market indicators that can significantly affect the business and financial results of our Single-family Guarantee segment.
U.S. Single-Family Originations
Source: Inside Mortgage Finance dated June 8, 2016 (latest available IMF purchase/refinance information).

 
Single-Family Serious Delinquency Rates
Source: National Delinquency Survey from the Mortgage Bankers Association. The rates are as of May 12, 2016 (latest available NDS information).


Commentary
•
Single-family loan origination volumes:
◦
2Q 2016 vs. 2Q 2015 - increased to $510 billion in 2Q 2016 compared to $490 billion in 2Q 2015, driven by an increase in refinancing activity due to the decline in interest rates. Mortgage origination data from Inside Mortgage Finance as of July 28, 2016.
◦
YTD 2016 vs. YTD 2015 - was relatively unchanged at $890 billion in YTD 2016 compared to $895 billion in YTD 2015.
•
Single-family serious delinquency (SDQ) rates in the U.S. continued to decline due to macroeconomic factors, such as a stable labor market and continued home price appreciation.

Freddie Mac Form 10-Q
 
21


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


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

(UPB in billions)
        

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

            

Freddie Mac Form 10-Q
 
22


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


Commentary
•
Our loan purchase and guarantee activity:
◦
2Q 2016 vs. 2Q 2015 - declined due to lower refinance loan purchase volume as mortgage interest rates were slightly higher in early 2016 as compared to early 2015.
◦
YTD 2016 vs. YTD 2015 - declined due to lower refinance loan purchase volume as mortgage interest rates declined at a slower pace in the latter part of 2015 and early 2016 than in the latter part of 2014 and early 2015.

Freddie Mac Form 10-Q
 
23


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


Single-Family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfolio
Commentary
•
The Core single-family book grew to 69% of the single-family credit guarantee portfolio at June 30, 2016 compared to 66% at December 31, 2015. The Core single-family book consists of loans that were originated since 2008, excluding HARP and other relief refinance loans.
•
The HARP and other relief refinance book represented 17% of the single-family credit guarantee portfolio at June 30, 2016 compared to 18% at December 31, 2015.
•
The Legacy single-family book declined to 14% of the single-family credit guarantee portfolio at June 30, 2016 compared to 16% at December 31, 2015.
•
We had 10.7 million loans in our single-family credit guarantee portfolio at both June 30, 2016 and December 31, 2015.

Freddie Mac Form 10-Q
 
24


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


Guarantee Fees
The average portfolio Segment Earnings guarantee fee rate recognizes upfront delivery fee income for the entire portfolio over the contractual life of the related loans (usually 30 years) adjusted for actual prepayments, whereas the average guarantee fee rate charged on new acquisitions recognizes these amounts over the estimated life of the related loans using our expectations of prepayments and other liquidations.
Average Portfolio Segment Earnings Guarantee Fee Rate(1)
 
Average Guarantee Fee Rate Charged on New Acquisitions(1)


(1) Excludes the legislated 10 basis point increase in guarantee fees.
Commentary
•
Average portfolio Segment Earnings guarantee fees:
◦
2Q 2016 vs. 2Q 2015 - increased primarily due to higher amortization of upfront fees resulting from the increase in the size of the single-family credit guarantee portfolio. Higher average contractual guarantee fees, reflecting the continued growth in the size of the Core single-family book in our single-family credit guarantee portfolio, also contributed. Average contractual guarantee fees are generally higher on mortgage loans in our Core single-family book compared to those in our Legacy single-family book.
◦
YTD 2016 vs. YTD 2015 - increased primarily due to higher average contractual guarantee fee rates reflecting the continued growth in the size of the Core single-family book during YTD 2016.
•
Average guarantee fee rate charged on new acquisitions:
◦
2Q 2016 vs. 2Q 2015 and YTD 2016 vs. YTD 2015 - increased primarily due to changes in the product mix of our single-family new business purchases as new acquisitions have included a relatively higher proportion of 30-year fixed-rate mortgages which generally have higher guarantee fee rates.

Freddie Mac Form 10-Q
 
25


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


Credit Risk Transfer Activity
Since 2013, STACR debt note and ACIS transactions have been our principal methods of transferring to third parties a portion of the expected credit losses and a significant portion of stress credit losses subsequent to loan acquisition in our Core single-family book. The following charts present transactions that occurred during 2Q 2016 and the cumulative amount of such transactions as of June 30, 2016 by loss position and the party holding each loss position.
New STACR Debt Note and ACIS
Transactions during 2Q 2016(1)
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$82.1
 
Reference Pool

$86.2
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac


$0.2
 
ACIS



$0.9
 
STACR Debt Notes


$2.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
Loss
 
Freddie Mac

$0.6
 
ACIS

$0.1
 
STACR Debt Notes
$0.1
 
 
Cumulative STACR Debt Note and ACIS
Transactions as of June 30, 2016(1) 
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$498.6
 
Reference Pool

$524.5
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac


$1.2
 
ACIS



$4.8
 
STACR Debt Notes


$15.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
Loss
 
Freddie Mac

$2.9
 
ACIS

$0.5
 
STACR Debt Notes
$0.9
 

(1)
The amounts represent the UPB upon issuance of STACR debt notes and execution of ACIS transactions.
•
We continued to transfer a portion of expected credit losses to third-party investors, insurers, and selected sellers through credit risk transfer transactions. During YTD 2016, we transferred a portion of the expected credit losses associated with $140.0 billion in UPB of loans in our Core single-family book through STACR debt note, ACIS, and seller indemnification transactions.
•
The interest and premiums we pay on our issued STACR debt note and ACIS transactions effectively reduce the guarantee fee income we earn on the PCs within the respective reference pools. Our expected guarantee fee income on the PCs within the STACR and ACIS reference pools has been effectively reduced by approximately 34%, on average, for all transactions executed through June 30, 2016. The amount of the effective reduction to our overall guarantee fee income could change over time as we continue our credit risk transfer activities or if there are changes in the economic or regulatory environment that affect the cost of executing these transactions.
•
Due to differences in accounting, there could be a significant lag in time between when we recognize a provision for credit losses and when we recognize the related recovery from our actual loss STACR debt note transactions. A credit expense on a loan in a reference pool related to these transactions is recorded when it is probable that we have incurred a loss, while a recovery is recorded when an actual loss event occurs.
•
As of June 30, 2016, there has not been a significant number of loans in our STACR debt note reference pools that have experienced a credit event. As a result, we experienced minimal write-

Freddie Mac Form 10-Q
 
26


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


downs on our STACR debt notes and filed minimal claims for reimbursement of losses under our ACIS transactions.
•
In 2Q 2016, we executed our first ACIS transaction using collateral other than 30-year fixed-rate mortgages. In this transaction, we transferred a portion of the mezzanine expected credit losses and a significant portion of stress credit losses associated with $11.2 billion in UPB of 15-year fixed-rate mortgages. Also, unlike all prior ACIS transactions, this transaction did not involve loans in a reference pool created for a STACR debt note transaction.

Freddie Mac Form 10-Q
 
27


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


Credit Enhancements
The table below provides information on the credit enhanced loans in our single-family credit guarantee portfolio by book as of June 30, 2016. The table includes all types of single-family credit enhancements, including primary mortgage insurance. See Note 4 for additional information about our single-family credit enhancements.
 
 
As of June 30, 2016
(dollars in millions)
 
Total Current UPB
 
Total Protected UPB(1)
 
Coverage Remaining(2)
 
Collateralized Coverage Remaining(3)
 
Percentage of Coverage Remaining Provided By Credit Risk Transfer Transactions(4)
Core single-family book
 
$
1,184,607

 
$
543,161

 
$
78,461

 
$
16,479

 
26
%
HARP and other relief refinance book
 
286,477

 
31,511

 
8,625

 
—

 
—
%
Legacy single-family book
 
241,882

 
32,159

 
9,934

 
—

 
—
%
Total
 
$
1,712,966

 
$
606,831

 
$
97,020

 
$
16,479

 
21
%

(1)
Represents the UPB for which credit enhancements exist.
(2)
Represents the amounts available for us to recover under the credit enhancements.
(3)
Collateralized coverage includes cash received by Freddie Mac upon issuance of STACR debt notes and unguaranteed whole loan securities, as well as cash and securities pledged for our benefit. All collateralized coverage relates to credit risk transfer transactions in the Core single-family book.
(4)
Credit risk transfer transactions include STACR debt notes, ACIS insurance policies, seller indemnification agreements, and whole loan securities. The substantial majority of single-family loans covered by these transactions were acquired after 2012.
Commentary
•
The Core single-family book had credit protection on 46% of total current UPB as of June 30, 2016 compared to 39% as of December 31, 2015. Credit protection increased primarily as a result of our credit risk transfer transactions.


Freddie Mac Form 10-Q
 
28


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


Mortgage Loan Credit Risk
Certain combinations of loan attributes can indicate a higher degree of credit risk, such as loans with both higher LTV ratios and lower credit scores. The following table presents the combination of credit score and current LTV (CLTV) ratio attributes of loans in our single-family credit guarantee portfolio.
 
 
June 30, 2016
 
 
CLTV ≤ 80

CLTV > 80 to 100

CLTV > 100

All Loans
(credit score)
 
% Portfolio

SDQ Rate

% Portfolio

SDQ Rate

% Portfolio

SDQ Rate

% Portfolio

SDQ Rate
 
% Modified
Core single-family book:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
0.2
%
 
1.99
%
 
—
%
 
3.62
%
 
—
%
 
12.50
%
 
0.2
%
 
2.28
%
 
3.0
%
620 to 659
 
1.4

 
0.91
%
 
0.3

 
1.15
%
 
—

 
6.92
%
 
1.7

 
0.96
%
 
1.3
%
≥ 660
 
58.3

 
0.14
%
 
8.9

 
0.23
%
 
—

 
1.82
%
 
67.2

 
0.15
%
 
0.2
%
Not available
 
—

 
1.37
%
 
—

 
2.72
%
 
0.1

 
7.10
%
 
0.1

 
2.64
%
 
3.6
%
Total
 
59.9
%
 
0.17
%
 
9.2
%
 
0.27
%
 
0.1
%
 
3.17
%
 
69.2
%
 
0.18
%
 
0.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Relief refinance book:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
0.6
%
 
1.55
%
 
0.2
%
 
2.80
%
 
0.1
%
 
4.21
%
 
0.9
%
 
2.12
%
 
3.9
%
620 to 659
 
0.8

 
0.99
%
 
0.3

 
2.09
%
 
0.2

 
3.10
%
 
1.3

 
1.48
%
 
2.2
%
≥ 660
 
10.5

 
0.3
%
 
2.9

 
0.99
%
 
1.1

 
1.80
%
 
14.5

 
0.51
%
 
0.7
%
Not available
 
—

 
1.08
%
 
—

 
0.87
%
 
—

 
—
%
 
—

 
0.94
%
 
1.1
%
Total
 
11.9
%
 
0.40
%
 
3.4
%
 
1.22
%
 
1.4
%
 
2.12
%
 
16.7
%
 
0.67
%
 
1.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legacy single-family book:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
0.8
%
 
5.94
%
 
0.2
%
 
11.94
%
 
0.2
%
 
18.83
%
 
1.2
%
 
7.91
%
 
32.2
%
620 to 659
 
1.5

 
4.24
%
 
0.4

 
9.39
%
 
0.3

 
15.70
%
 
2.2

 
5.84
%
 
26.4
%
≥ 660
 
7.8

 
1.84
%