FEDERAL HOME LOAN MORTGAGE CORP - Quarter Report: 2013 September (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2013
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission File Number: 001-34139
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Freddie Mac
Federally chartered corporation | 8200 Jones Branch Drive | 52-0904874 | (703) 903-2000 | |||
(State or other jurisdiction of incorporation or organization) | McLean, Virginia 22102-3110 | (I.R.S. Employer Identification No.) | (Registrant’s telephone number, including area code) | |||
(Address of principal executive offices, including zip code) | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. 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 ¨ | Accelerated filer ý | ||||
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 October 24, 2013, there were 650,039,533 shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
Page | |
i | Freddie Mac | |
MD&A TABLE REFERENCE
Table | Description | Page | |
1 | Total Single-Family Loan Workout Volumes | ||
2 | Single-Family Mortgage Loan Purchases and Other Guarantee Commitment Issuances, by Loan Purpose | ||
3 | Single-Family Credit Guarantee Portfolio Summary | ||
4 | Credit Statistics, Single-Family Credit Guarantee Portfolio | ||
5 | Mortgage-Related Investments Portfolio | ||
6 | Selected Financial Data | ||
7 | Summary Consolidated Statements of Comprehensive Income | ||
8 | Net Interest Income/Yield and Average Balance Analysis | ||
9 | Derivative Gains (Losses) | ||
10 | Other Income (Loss) | ||
11 | Non-Interest Expense | ||
12 | REO Operations (Income) Expense, REO Inventory, and REO Dispositions | ||
13 | Composition of Segment Mortgage Portfolios and Credit Risk Portfolios | ||
14 | Segment Earnings and Key Metrics — Investments | ||
15 | Segment Earnings and Key Metrics — Single-Family Guarantee | ||
16 | Segment Earnings Composition — Single-Family Guarantee Segment | ||
17 | Segment Earnings and Key Metrics — Multifamily | ||
18 | Investments in Securities | ||
19 | Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets | ||
20 | Additional Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets | ||
21 | Mortgage-Related Securities Purchase Activity | ||
22 | Non-Agency Mortgage-Related Securities Backed by Subprime First Lien, Option ARM, and Alt-A Loans and Certain Related Credit Statistics | ||
23 | Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans | ||
24 | Net Impairment of Available-For-Sale Mortgage-Related Securities Recognized in Earnings | ||
25 | Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS | ||
26 | Mortgage Loan Purchases and Other Guarantee Commitment Issuances | ||
27 | Derivative Fair Values and Maturities | ||
28 | Changes in Derivative Fair Values | ||
29 | Freddie Mac Mortgage-Related Securities | ||
30 | Issuances and Extinguishments of Debt Securities of Consolidated Trusts | ||
31 | Changes in Total Equity (Deficit) | ||
32 | Single-Family Credit Guarantee Portfolio Data by Year of Origination | ||
33 | Characteristics of Purchases for the Single-Family Credit Guarantee Portfolio | ||
34 | Characteristics of the Single-Family Credit Guarantee Portfolio | ||
35 | Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio | ||
36 | Step-Rate Modified Loans | ||
37 | Single-Family Loan Workout, Serious Delinquency, and Foreclosure Volumes | ||
38 | Quarterly Percentages of Modified Single-Family Loans — Current and Performing | ||
39 | Single-Family Relief Refinance Loans | ||
40 | Single-Family Serious Delinquency Statistics | ||
41 | Credit Concentrations in the Single-Family Credit Guarantee Portfolio | ||
42 | Single-Family Credit Guarantee Portfolio by Attribute Combinations | ||
43 | Single-Family Credit Guarantee Portfolio Foreclosure and Short Sale Rates | ||
44 | Multifamily Mortgage Portfolio — by Attribute | ||
45 | Non-Performing Assets | ||
ii | Freddie Mac | |
46 | REO Activity by Region | ||
47 | Single-Family REO Property Status | ||
48 | Credit Loss Performance | ||
49 | Single-Family Impaired Loans with Specific Reserve Recorded | ||
50 | Single-Family Credit Loss Sensitivity | ||
51 | Repurchase Request Activity and Counterparty Balances | ||
52 | Mortgage Insurance by Counterparty | ||
53 | Bond Insurance by Counterparty | ||
54 | Derivative Counterparty Credit Exposure | ||
55 | Other Debt Security Issuances by Product, at Par Value | ||
56 | Other Debt Security Repurchases and Calls | ||
57 | Freddie Mac Credit Ratings | ||
58 | Consolidated Fair Value Balance Sheets | ||
59 | Summary of Change in the Fair Value of Net Assets | ||
60 | Affordable Housing Goals and Results for 2012 | ||
61 | PMVS and Duration Gap Results | ||
62 | Derivative Impact on PMVS-L (50 bps) | ||
iii | Freddie Mac | |
FINANCIAL STATEMENTS
Page | |
iv | Freddie Mac | |
PART I — FINANCIAL INFORMATION
We continue to operate under the conservatorship that commenced on September 6, 2008, under the direction of FHFA as our Conservator. The Conservator succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any shareholder, officer or director thereof, with respect to the company and its assets. The Conservator has delegated certain authority to our Board of Directors to oversee, and management to conduct, day-to-day operations. The directors serve on behalf of, and exercise authority as directed by, the Conservator. See “BUSINESS — Conservatorship and Related Matters” in our Annual Report on Form 10-K for the year ended December 31, 2012, or 2012 Annual Report, for information on the terms of the conservatorship, the powers of the Conservator, and related matters, including the terms of our Purchase Agreement with Treasury.
This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-Q and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in: (a) the “FORWARD-LOOKING STATEMENTS” sections of this Form 10-Q, our 2012 Annual Report, and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013; (b) the “RISK FACTORS” sections of this Form 10-Q and our 2012 Annual Report; and (c) the “BUSINESS” section of our 2012 Annual Report.
Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the “GLOSSARY.”
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read this MD&A in conjunction with our consolidated financial statements and related notes for the three and nine months ended September 30, 2013 included in “FINANCIAL STATEMENTS” and our 2012 Annual Report.
EXECUTIVE SUMMARY
Overview
Freddie Mac is a GSE chartered by Congress in 1970 with a public mission to provide liquidity, stability, and affordability to the U.S. housing market. We have maintained a consistent market presence since our inception, providing mortgage liquidity in a wide range of economic environments. We are working to support the recovery of the housing market and the nation’s economy by providing essential liquidity to the mortgage market and helping to stem the rate of foreclosures. We believe our actions are helping communities across the country by providing America’s families with access to mortgage funding at low rates while helping distressed borrowers keep their homes and avoid foreclosure, where feasible.
Summary of Financial Results
During the third quarter of 2013, we continued to observe improvement in the housing market, which contributed positively to our financial results. Our comprehensive income for the third quarter of 2013 was $30.4 billion, consisting of $30.5 billion of net income and $(49) million of other comprehensive loss. By comparison, our comprehensive income for the third quarter of 2012 was $5.6 billion, consisting of $2.9 billion of net income and $2.7 billion of other comprehensive income. Our net income for the third quarter of 2013 includes a benefit for federal income taxes of $23.9 billion that resulted from our conclusion to release our valuation allowance against our net deferred tax assets. Absent the benefit for federal income taxes, our comprehensive income for the third quarter of 2013 was $6.5 billion.
Our total equity was $33.4 billion at September 30, 2013, reflecting our total equity balance of $7.4 billion at June 30, 2013, comprehensive income of $30.4 billion for the third quarter of 2013, and a $4.4 billion dividend payment on the senior preferred stock in September 2013 based on our Net Worth Amount at June 30, 2013. As a result of our positive net worth at September 30, 2013, no draw is being requested from Treasury under the Purchase Agreement for the third quarter of 2013. Based on our Net Worth Amount at September 30, 2013, our dividend obligation to Treasury in December 2013 will be$30.4 billion.
Our Primary Business Objectives
Our business objectives reflect direction we have received from the Conservator, including the 2013 Conservatorship Scorecard. We are focused on the following primary business objectives: (a) providing credit availability for mortgages and maintaining foreclosure prevention activities; (b) managing our credit losses; (c) developing mortgage market enhancements in support of a proposed new infrastructure for the secondary mortgage market; (d) maintaining sound credit quality on the loans we purchase or guarantee; (e) contracting the dominant presence of the GSEs in the marketplace; and (f) strengthening our infrastructure and improving operating efficiency.
1 | Freddie Mac | |
The 2013 Conservatorship Scorecard details specific priorities for Freddie Mac and Fannie Mae in 2013 that build upon the three strategic goals announced in FHFA’s Strategic Plan for Freddie Mac and Fannie Mae: (a) build a new infrastructure for the secondary mortgage market; (b) gradually contract Freddie Mac and Fannie Mae’s dominant presence in the marketplace while simplifying and shrinking their operations; and (c) maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. We continue to align our resources and internal business plans to meet the goals and objectives provided to us by FHFA. For information on the 2013 Conservatorship Scorecard and the Strategic Plan, see our current report on Form 8-K dated March 8, 2013 and “BUSINESS — Regulation and Supervision — Legislative and Regulatory Developments — FHFA’s Strategic Plan for Freddie Mac and Fannie Mae Conservatorships” in our 2012 Annual Report.
Providing Credit Availability for Mortgages and Maintaining Foreclosure Prevention Activities
Our consistent market presence provides lenders with a constant source of liquidity for conforming mortgage products even when other sources of capital have withdrawn. We believe this liquidity provides our customers with confidence to continue lending in difficult environments. We estimate that we, Fannie Mae, and Ginnie Mae collectively guaranteed more than 90% of the single-family conforming mortgages originated during the first nine months of 2013. We also enable mortgage originators to offer homebuyers and homeowners lower mortgage rates on conforming loan products, in part because of the value investors place on GSE-guaranteed mortgage-related securities. Historically, interest rates on 30-year, fixed-rate conforming loans have been less than those on non-conforming loans. However, in recent periods the average gap in interest rates between these loan types has declined. We estimate that borrowers were paying an average of 20 basis points less on 30-year, fixed-rate conforming loans than on non-conforming loans in September 2013, as compared to 43 basis points less in December 2012. These estimates are based on data provided by HSH Associates, a third-party provider of mortgage market data.
In addition to being a source of liquidity for the market, we have also been engaged in efforts to assist our seller/servicers improve their underwriting processes for loans that they sell to us. As part of these efforts and in accordance with the 2013 Conservatorship Scorecard, we have made progress in the following areas during 2013:
• | Began an initiative for enhanced early-risk assessment by seller/servicers, including implementation of a new automated tool for use in evaluating the credit eligibility of loans and identifying non-compliance issues; |
• | Announced requirements for our seller/servicers in response to certain final rules from the Consumer Financial Protection Bureau, including rules concerning the requirements for borrowers' ability to repay and high-cost mortgages, that are to be implemented beginning in 2014. See “BUSINESS — Legislative and Regulatory Developments — Dodd-Frank Act” in our 2012 Annual Report for further information on the final rules; |
• | Implemented standard timelines, appeal requirements, and alternative remedies for resolution of repurchase obligations as part of our efforts to enhance post-delivery quality control practices and transparency associated with our representation and warranty framework; and |
• | Expanded our loan review sampling strategy, specifically focused on newly purchased mortgage loans, to evaluate compliance with our standards. |
In addition, we attempt to manage our exposure to mortgage insurers by establishing eligibility standards and monitoring our exposure to individual insurers. Our monitoring includes performing periodic analysis of the estimated financial capacity of individual insurers under different adverse economic conditions. We are also working on developing counterparty risk management standards for mortgage insurers that include eligibility requirements. We expect to publish changes to the capital requirements and other standards for mortgage insurer eligibility by the end of 2013. In addition, working with FHFA and Fannie Mae, we have guided mortgage insurers in their adoption of new master policies, for which the mortgage insurers are expected to seek state regulatory approval.
We also remain focused on reducing the number of foreclosures and helping to keep families in their homes. Since 2009, we have helped approximately 913,000 borrowers experiencing hardship complete a loan workout. Our relief refinance initiative, including HARP (which is the portion of our relief refinance initiative for loans with LTV ratios above 80%), is a significant part of our effort to keep families in their homes. We purchased $54.9 billion and $65.1 billion in UPB of HARP loans in the first nine months of 2013 and 2012, respectively. We have purchased HARP loans provided to more than 1.2 million borrowers since the initiative began in 2009, including approximately 297,000 borrowers during the first nine months of 2013.
During the three and nine months ended September 30, 2013, we purchased or issued other guarantee commitments for $97.8 billion and $359.6 billion in UPB of single-family conforming mortgage loans, representing approximately 472,000 and 1,753,000 homes, respectively.
Under our loan workout programs, our servicers contact borrowers experiencing hardship with a goal of helping them stay in their homes or avoid foreclosure. Our servicers seek and also facilitate the completion of foreclosure alternatives when a home retention solution is not possible. In July 2013, as part of the servicing alignment initiative, we implemented a new
2 | Freddie Mac | |
streamlined modification initiative, which provides an additional modification opportunity to certain borrowers who are at least 90 (but not more than 720) days delinquent. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk” for more information about loss mitigation activities and our efforts to provide credit availability, including through our loan modification initiatives, and our relief refinance mortgage initiative, which includes HARP.
The table below presents our single-family loan workout activities for the last five quarters.
Table 1 — Total Single-Family Loan Workout Volumes(1)
For the Three Months Ended | ||||||||||||||
9/30/2013 | 6/30/2013 | 3/31/2013 | 12/31/2012 | 9/30/2012 | ||||||||||
(number of loans) | ||||||||||||||
Loan modifications(2) | 20,541 | 19,277 | 20,613 | 19,898 | 20,864 | |||||||||
Repayment plans | 6,603 | 7,268 | 7,644 | 6,964 | 7,099 | |||||||||
Forbearance agreements(3) | 2,586 | 3,198 | 3,104 | 2,442 | 2,190 | |||||||||
Short sales and deed in lieu of foreclosure transactions | 10,998 | 11,727 | 14,157 | 13,849 | 14,383 | |||||||||
Total single-family loan workouts | 40,728 | 41,470 | 45,518 | 43,153 | 44,536 | |||||||||
(1) | Based on actions completed with borrowers for loans within our single-family credit guarantee portfolio. Excludes those modification, repayment, and forbearance activities for which the borrower has started the required process, but the actions have not been made permanent or effective, such as loans in modification trial periods. Also excludes certain loan workouts where our single-family seller/servicers have executed agreements in the current or prior periods, but these have not been incorporated into certain of our operational systems due to delays in processing. These categories are not mutually exclusive and a loan in one category may also be included within another category in the same period. |
(2) | As of September 30, 2013, approximately 34,000 borrowers were in modification trial periods, including approximately 28,000 borrowers in trial periods for our non-HAMP modification. |
(3) | Excludes loans with long-term forbearance under a completed loan modification. Many borrowers enter into a short-term forbearance agreement before another loan workout is pursued or completed. We only report forbearance activity for a single loan once during each quarterly period; however, a single loan may be included under separate forbearance agreements in separate periods. |
Our short sale activity has remained high compared to historical levels, while the volume of completed foreclosures has declined in recent quarters. Our short sale activity declined for the two most recent quarters, which we believe is due to increasing interest rates and strengthening home prices in most geographical areas.
Managing Our Credit Losses
To help manage the credit losses related to our guarantee activities, we are focused on:
• | pursuing a variety of loan workouts, including foreclosure alternatives, in an effort to reduce the severity of losses we experience over time; |
• | managing foreclosure timelines to the extent possible, given the lengthy foreclosure process in many states; |
• | managing our inventory of foreclosed properties to reduce costs and maximize proceeds; and |
• | pursuing contractual remedies against seller/servicers, and insurers, as appropriate. |
We establish guidelines for our servicers to follow and provide them default management tools to use, in part, in determining which type of loan workout to pursue with borrowers that would be expected to provide us with the opportunity to manage our exposure to credit losses. Our servicers pursue repayment plans and loan modifications for borrowers facing financial or other hardships because the level of recovery (if a loan reperforms) may often be much higher than would be the case with foreclosure or foreclosure alternatives. In cases where repayment plans and loan modifications are not possible or successful, a short sale transaction typically provides us with a comparable or higher level of recovery than what we would receive through foreclosure and subsequent property sale from our REO inventory. In large part, the benefit of a short sale arises from the avoidance of costs we would otherwise incur to complete the foreclosure and dispose of the property, including maintenance and other property expenses associated with holding REO property.
We continue to face challenges with respect to the performance of certain of our seller/servicers in managing our seriously delinquent loans. As part of our efforts to address this issue and mitigate our credit losses, we have continued to facilitate the transfer of servicing for certain pools of loans with higher credit risk from underperforming servicers to other servicers that specialize in workouts of problem loans.
We have contractual arrangements with our seller/servicers under which they agree to sell us mortgage loans, and represent and warrant that those loans meet specified eligibility and underwriting standards. In addition, our servicers represent and warrant to us that those loans will be serviced in accordance with our servicing contract. If we subsequently discover that the representations and warranties were breached (i.e., contractual standards were not followed), we can exercise certain contractual remedies, including requesting repurchase, to mitigate our actual or potential credit losses.
3 | Freddie Mac | |
Historically, we have used a process of reviewing a sample of the loans we purchase to validate compliance with our underwriting standards. In addition, as part of our loss mitigation efforts, we review loans that become delinquent. FHFA set a goal for us (in the 2013 Conservatorship Scorecard) to complete our demands for remedies for breaches of representations and warranties related to pre-conservatorship loan origination activity. As of September 30, 2013 and December 31, 2012, the UPB of loans subject to repurchase requests issued to our single-family seller/servicers was approximately $3.4 billion and $3.0 billion, respectively (these figures include repurchase requests for which appeals were pending). During the third quarter of 2013, we entered into agreements with certain of our seller/servicers (as discussed below), which we believe will contribute to our substantial completion of the FHFA goal. Due to our efforts to complete this goal, our repurchase request volume with our seller/servicers was high in the third quarter of 2013 and may remain high in the near term.
During the third quarter of 2013, we entered into agreements with Wells Fargo Bank, N.A., CitiMortgage, Inc., Citibank, N.A., and SunTrust Mortgage, Inc. to release specified loans from certain repurchase obligations in exchange for one-time cash payments. In connection with these agreements, we received $1.3 billion in the aggregate (less credits of $0.2 billion for repurchases already made and other reconciling adjustments), related to approximately 10.7 million loans that we had purchased from them. As of September 30, 2013, there was an aggregate of $184.1 billion in UPB of single-family mortgage loans that were subject to these agreements.
On October 25, 2013, we entered into agreements with JPMorgan Chase & Co. and certain affiliated entities (collectively, JPMorgan). Under the terms of the agreements, JPMorgan will pay: (a) approximately $2.7 billion to Freddie Mac to settle litigation related to our investments in certain residential non-agency mortgage-related securities we hold that were largely originated, issued or underwritten by JPMorgan; and (b) approximately $0.5 billion to release specified loans from certain repurchase obligations. These agreements will be reflected in our fourth quarter 2013 financial results.
We use mortgage insurance, which is a form of credit enhancement, to partially mitigate our credit loss exposure. Primary mortgage insurance is generally required to be purchased, typically at the borrower’s expense, for certain mortgages with higher LTV ratios. We received payments under primary and other mortgage insurance of $1.6 billion and $1.5 billion in the first nine months of 2013 and 2012, respectively, which helped to mitigate our credit losses. However, many of our mortgage insurers remain financially weak. We expect to receive substantially less than full payment of our claims from three of our mortgage insurance counterparties that are currently partially paying claims under orders of their state regulators. During the third quarter of 2013, we entered into an agreement with Radian Guaranty Inc. (Radian) that generally resolves outstanding and future primary mortgage insurance claims by us against Radian with respect to a large group of loans. This did not have a significant impact on our consolidated statements of comprehensive income in the third quarter of 2013. See “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Mortgage Insurers” for information on these counterparties as well as our agreement with Radian. See “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES —Table 4.5 — Recourse and Other Forms of Credit Protection” for more information about credit enhancements of our single-family credit guarantee portfolio.
Developing Mortgage Market Enhancements in Support of a Proposed New Infrastructure for the Secondary Mortgage Market
Under the direction of FHFA, we continue efforts to build the infrastructure for a future housing finance system. In this regard, the 2013 Conservatorship Scorecard established the following goals for 2013:
• | Common Securitization Platform: Continue the foundational development of the common securitization platform that can be used in a future secondary mortgage market, including by establishing initial ownership and governance for a new business entity that will undertake the effort of building and operating this platform. On October 7, 2013, FHFA announced the formation of Common Securitization Solutions, LLCSM (CSS). In addition, FHFA announced that: (a) office space has been leased for CSS; and (b) an executive recruitment firm has been retained to identify candidates for the positions of Chief Executive Officer and Chairman of the Board of Managers of CSS. CSS is equally-owned by Freddie Mac and Fannie Mae. In connection with the formation of CSS, we entered into a limited liability company agreement with Fannie Mae in October 2013 and anticipate entering into additional agreements with Fannie Mae relating to CSS in the future. |
• | Contractual and Disclosure Framework: Continue the development of the contractual and disclosure framework to meet the requirements for investors in mortgage securities and credit risk, including by identifying and developing standards in mortgage-related data, disclosure of mortgage security information, and seller/servicer contracts. |
• | Uniform Mortgage Data Program: Continue the development of various data standards for the mortgage industry by working with industry participants and government agencies on the scope and implementation of these standards, including effective dates. We are building on the successful completion of our uniform loan data delivery and uniform appraisal data programs in the development of the uniform closing data and uniform loan application data standards. We currently plan to announce the implementation dates and scope of the first phase of our uniform mortgage servicing data program by the end of 2013. |
4 | Freddie Mac | |
Maintaining Sound Credit Quality on the Loans We Purchase or Guarantee
We continue to focus on maintaining credit policies, including our underwriting standards, that allow us to purchase and guarantee loans made to qualified borrowers that we believe will provide management and guarantee fee income, over the long-term, that exceeds our expected credit-related and administrative expenses on such loans.
The credit quality of the single-family loans we acquired beginning in 2009 (excluding HARP and other relief refinance mortgages) is significantly better than that of loans we acquired from 2005 to 2008, as measured by original LTV ratios, FICO scores, and the proportion of loans underwritten with fully documented income. The improvement in the credit quality of loans we have purchased since 2008 (excluding HARP and other relief refinance mortgages) is primarily the result of: (a) changes in our credit policies, including changes in our underwriting standards; (b) fewer purchases of loans with higher risk characteristics; and (c) changes in mortgage insurers’ and lenders’ underwriting practices.
Underwriting procedures for relief refinance mortgages are limited in many cases, and such procedures generally do not include all of the changes in underwriting standards we have implemented since 2008. As a result, relief refinance mortgages generally reflect many of the credit risk attributes of the original loans. However, our relief refinance mortgage initiative may help reduce our exposure to credit risk in cases where the borrowers’ payments under their mortgages are reduced, thereby strengthening the borrowers’ potential to make their mortgage payments.
Mortgages originated after 2008 (including HARP and other relief refinance mortgages) represented 73% and 63% of the UPB of our single-family credit guarantee portfolio as of September 30, 2013 and December 31, 2012, respectively, while the mortgages originated from 2005 through 2008 represented 17% and 24% of this portfolio at these dates, respectively. Approximately 96% and 95% of the single-family mortgages we purchased in the first nine months of 2013 and 2012, respectively, were fixed-rate, first lien amortizing mortgages, based on UPB.
The table below presents single-family loan purchases and other guarantee commitment issuances during the nine months ended September 30, 2013 and 2012, by loan purpose.
Table 2 — Single-Family Mortgage Loan Purchases and Other Guarantee Commitment Issuances, by Loan Purpose(1)
For the Three Months Ended | ||||||||||||||||||||||||||||
September 30, 2013 | June 30, 2013 | March 31, 2013 | December 31, 2012 | |||||||||||||||||||||||||
UPB | % of Total | UPB | % of Total | UPB | % of Total | UPB | % of Total | |||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||
Loan Purpose: | ||||||||||||||||||||||||||||
Purchase loans | $ | 33,937 | 35 | % | $ | 30,185 | 23 | % | $ | 20,545 | 16 | % | $ | 23,970 | 18 | % | ||||||||||||
Refinance loans: | ||||||||||||||||||||||||||||
HARP loans | 13,181 | 13 | 20,311 | 16 | 21,458 | 16 | 21,796 | 17 | ||||||||||||||||||||
Other relief refinance loans | 8,372 | 9 | 11,901 | 9 | 11,415 | 9 | 10,521 | 8 | ||||||||||||||||||||
Total relief refinance loans | 21,553 | 22 | 32,212 | 25 | 32,873 | 25 | 32,317 | 25 | ||||||||||||||||||||
Other refinance loans | 42,343 | 43 | 67,461 | 52 | 78,466 | 59 | 73,998 | 57 | ||||||||||||||||||||
Total refinance loans | 63,896 | 65 | 99,673 | 77 | 111,339 | 84 | 106,315 | 82 | ||||||||||||||||||||
Total single-family mortgage loan purchases and other guarantee commitment issuances | $ | 97,833 | 100 | % | $ | 129,858 | 100 | % | $ | 131,884 | 100 | % | $ | 130,285 | 100 | % | ||||||||||||
(1) Based on UPB. Excludes mortgage loans traded but not yet settled. Also excludes the removal of seriously delinquent loans and balloon/reset mortgages from PC trusts under the terms of the trust agreements. Includes other guarantee commitments associated with mortgage loans.
Due to our participation in HARP, we purchase a significant number of loans that have original LTV ratios over 100%. The proportion of HARP loans we purchased with LTV ratios over 100% was 8% and 13% of our single-family mortgage purchases in the first nine months of 2013 and 2012, respectively. Over time, HARP loans may not perform as well as other refinance mortgages because the continued high LTV ratios and reduced underwriting standards of these loans increase the probability of default. In addition, HARP loans may not be covered by mortgage insurance for the full excess of their UPB over 80%. However, relief refinance mortgages (including HARP loans) generally have performed better than loans with similar characteristics remaining in our single-family credit guarantee portfolio that were originated prior to 2009.
5 | Freddie Mac | |
The table below presents the composition and certain other information about loans in our single-family credit guarantee portfolio, by year of origination at September 30, 2013 and December 31, 2012, and for the first nine months of 2013 and the year ended December 31, 2012.
Table 3 — Single-Family Credit Guarantee Portfolio Summary(1)
At September 30, 2013 | Nine Months Ended September 30, 2013 | |||||||||||||||||
Percent of Portfolio | Average Credit Score(2) | Current LTV Ratio(3) | Current LTV Ratio >100%(3)(4) | Serious Delinquency Rate(5) | Percent of Credit Losses(6) | |||||||||||||
Loans originated — 2009 to 2013: | ||||||||||||||||||
Relief refinance loans: | ||||||||||||||||||
HARP loans | 13 | % | 732 | 98 | % | 36 | % | 0.88 | % | 5.6 | % | |||||||
Other relief refinance loans | 8 | 744 | 55 | — | 0.31 | 0.5 | ||||||||||||
All other loans | 52 | 757 | 63 | <1 | 0.25 | 2.5 | ||||||||||||
Subtotal — 2009 to 2013 originations | 73 | 751 | 68 | 7 | 0.36 | 8.6 | ||||||||||||
Loans originated — 2005 to 2008 | 17 | 704 | 89 | 31 | 9.15 | 82.0 | ||||||||||||
Loans originated — 2004 and prior | 10 | 712 | 51 | 3 | 3.29 | 9.4 | ||||||||||||
Total | 100 | % | 739 | 70 | 11 | 2.58 | 100.0 | % | ||||||||||
At December 31, 2012 | Year Ended December 31, 2012 | |||||||||||||||||
Percent of Portfolio | Average Credit Score(2) | Current LTV Ratio(3) | Current LTV Ratio >100%(3)(4) | Serious Delinquency Rate(5) | Percent of Credit Losses(6) | |||||||||||||
Loans originated — 2009 to 2012: | ||||||||||||||||||
Relief refinance loans: | ||||||||||||||||||
HARP loans | 11 | % | 735 | 100 | % | 40 | % | 0.98 | % | 2.0 | % | |||||||
Other relief refinance loans | 7 | 749 | 58 | — | 0.32 | 0.2 | ||||||||||||
All other loans | 45 | 757 | 66 | <1 | 0.27 | 1.4 | ||||||||||||
Subtotal — 2009 to 2012 originations | 63 | 753 | 71 | 7 | 0.39 | 3.6 | ||||||||||||
Loans originated — 2005 to 2008 | 24 | 708 | 98 | 42 | 9.56 | 87.3 | ||||||||||||
Loans originated — 2004 and prior | 13 | 715 | 56 | 6 | 3.20 | 9.1 | ||||||||||||
Total | 100 | % | 737 | 75 | 15 | 3.25 | 100.0 | % | ||||||||||
(1) | Based on the loans remaining in the portfolio at September 30, 2013 and December 31, 2012, which totaled $1.7 trillion and $1.6 trillion in UPB, respectively, rather than all loans originally guaranteed by us and originated in the respective period. Includes loans acquired under our relief refinance initiative, which began in 2009. For credit scores, LTV ratios, serious delinquency rates, and other information about the loans in our single-family credit guarantee portfolio, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk.” |
(2) | Credit score data is based on FICO scores, which are ranked on a scale of approximately 300 to 850 points. Although we obtain updated credit information on certain borrowers after the origination of a mortgage, such as those borrowers seeking a modification, the scores presented in this table represent the credit score of the borrower at the time of loan origination and may not be indicative of the borrowers’ current creditworthiness. |
(3) | We estimate current market values by adjusting the value of the property at origination based on changes in the market value of homes in the same geographical area since origination. See endnote (3) to “Table 34 — Characteristics of the Single-Family Credit Guarantee Portfolio” for information on our calculation of current LTV ratios. |
(4) | Calculated as a percentage of the aggregate UPB of loans with LTV ratios greater than 100% in relation to the total UPB of loans in the category. |
(5) | See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-family Mortgage Credit Risk — Delinquencies” for further information about our reported serious delinquency rates. |
(6) | Historical credit losses for each origination year may not be representative of future results. |
Contracting the Dominant Presence of the GSEs in the Marketplace
We continue to take steps toward the goal of gradually contracting our presence in the marketplace. For example, the 2013 Conservatorship Scorecard established the following goals for 2013 (with credit for partial completion allowed):
• | Single-family: Demonstrate the viability of multiple types of risk transfer transactions involving single-family mortgages with at least $30 billion in aggregate UPB, subject to certain limitations. These transactions are intended to shift mortgage credit risk from us to private capital investors. In July 2013, we executed one transaction representing $22.5 billion of UPB, of which we believe $18.5 billion qualifies toward this goal. A second transaction, representing $35.3 billion of UPB, is scheduled to settle on November 12, 2013. We plan to execute an additional risk transfer transaction in the fourth quarter of 2013; |
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• | Multifamily: Reduce the UPB amount of new multifamily business activity (purchases of loans and issuances of other guarantee commitments) relative to 2012 by at least 10% by tightening underwriting, adjusting pricing, and limiting product offerings, while not increasing the proportion of retained risk. Although multifamily new business activity was strong during the first half of 2013, new business activity moderated during the third quarter due to certain recent measures we have taken, combined with the impacts of rising interest rates and increased competition from other market participants; and |
• | Mortgage-related investments portfolio: Reduce the December 31, 2012 mortgage-related investments portfolio balance by selling 5%, or $15.7 billion in UPB, of mortgage-related assets (exclusive of agency securities, multifamily loans classified as held-for-sale, and single-family loans purchased for cash). Through September 30, 2013, we have sold $11.7 billion in UPB of assets that are intended to qualify toward this goal. |
The 2013 Conservatorship Scorecard states that our transactions related to these goals should be economically sensible, operationally well-controlled, involve a meaningful transference of credit risk, and be transparent to the marketplace. FHFA has stated that changes in market and regulatory conditions will be taken into consideration when evaluating our performance against these goals.
Other steps we have taken to gradually contract our presence in the marketplace include the two across-the-board increases in guarantee fees we implemented in 2012, at the direction of FHFA, including one increase associated with the Temporary Payroll Tax Cut Continuation Act of 2011. Pursuant to this Act, we increased our guarantee fees on single-family mortgages by 10 basis points in April 2012, and the proceeds are remitted to Treasury to fund the payroll tax cut. We generally refer to this as the legislated 10 basis point increase in guarantee fees. For additional information, see “BUSINESS — Executive Summary — Our Primary Business Objectives — Contracting the Dominant Presence of the GSEs in the Marketplace” in our 2012 Annual Report.
Strengthening Our Infrastructure and Improving Operating Efficiency
We continue to work to enhance the quality of our infrastructure and improve our operating efficiency. We are focusing our resources on supporting various multi-year FHFA initiatives, including those under the Conservatorship Scorecard, and making improvements to our infrastructure to, among other things, replace legacy hardware and software applications and strengthen our disaster recovery capabilities.
Our administrative expenses increased in the three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012, primarily due to an increase in professional services expense related to: (a) FHFA-led lawsuits regarding our investments in certain residential non-agency mortgage-related securities; (b) quality control reviews for single-family loans we acquired prior to being placed in conservatorship; (c) Conservatorship Scorecard initiatives, including development of the common securitization platform; and (d) infrastructure improvement projects, including establishment of an off-site, back-up data facility.
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Single-Family Credit Guarantee Portfolio
The table below provides certain credit statistics for our single-family credit guarantee portfolio.
Table 4 — Credit Statistics, Single-Family Credit Guarantee Portfolio
As of | |||||||||||||||||||
9/30/2013 | 6/30/2013 | 3/31/2013 | 12/31/2012 | 9/30/2012 | |||||||||||||||
Payment status — | |||||||||||||||||||
One month past due | 1.68 | % | 1.80 | % | 1.70 | % | 1.85 | % | 2.02 | % | |||||||||
Two months past due | 0.55 | % | 0.55 | % | 0.56 | % | 0.66 | % | 0.66 | % | |||||||||
Seriously delinquent(1) | 2.58 | % | 2.79 | % | 3.03 | % | 3.25 | % | 3.37 | % | |||||||||
Non-performing loans (in millions)(2) | $ | 121,154 | $ | 123,681 | $ | 126,302 | $ | 128,599 | $ | 131,106 | |||||||||
Single-family loan loss reserve (in millions)(3) | $ | 24,783 | $ | 26,197 | $ | 28,299 | $ | 30,508 | $ | 33,298 | |||||||||
REO inventory (in properties) | 47,119 | 44,623 | 47,968 | 49,071 | 50,913 | ||||||||||||||
REO assets, net carrying value (in millions) | $ | 4,366 | $ | 3,997 | $ | 4,246 | $ | 4,314 | $ | 4,459 | |||||||||
For the Three Months Ended | |||||||||||||||||||
9/30/2013 | 6/30/2013 | 3/31/2013 | 12/31/2012 | 9/30/2012 | |||||||||||||||
(in units, unless noted) | |||||||||||||||||||
Seriously delinquent loan additions(1) | 58,176 | 57,024 | 65,281 | 72,626 | 76,104 | ||||||||||||||
Loan workout volume(4) | 40,728 | 41,470 | 45,518 | 43,153 | 44,536 | ||||||||||||||
REO acquisitions | 19,441 | 16,418 | 17,881 | 18,672 | 20,302 | ||||||||||||||
REO disposition severity ratio:(5) | |||||||||||||||||||
Florida | 40.5 | % | 42.9 | % | 44.5 | % | 46.2 | % | 48.1 | % | |||||||||
California | 28.7 | % | 30.2 | % | 35.2 | % | 38.1 | % | 41.4 | % | |||||||||
Illinois | 43.7 | % | 47.2 | % | 49.9 | % | 50.1 | % | 51.3 | % | |||||||||
Nevada | 36.4 | % | 37.9 | % | 44.1 | % | 49.0 | % | 53.6 | % | |||||||||
Maryland | 38.0 | % | 39.0 | % | 42.3 | % | 47.8 | % | 49.2 | % | |||||||||
Total U.S | 34.9 | % | 35.8 | % | 39.1 | % | 39.5 | % | 40.3 | % | |||||||||
Short sale severity ratio(6) | 34.5 | % | 36.5 | % | 38.0 | % | 38.6 | % | 39.6 | % | |||||||||
Single-family provision (benefit) for credit losses (in millions) | $ | (1,110 | ) | $ | (518 | ) | $ | (469 | ) | $ | (658 | ) | $ | 650 | |||||
Single-family credit losses (in millions) | $ | 564 | $ | 1,763 | $ | 2,063 | $ | 2,396 | $ | 2,936 | |||||||||
(1) | See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Delinquencies” for further information about our reported serious delinquency rates. |
(2) | Consists of the UPB of loans in our single-family credit guarantee portfolio that have undergone a TDR or that are seriously delinquent. As of September 30, 2013 and December 31, 2012, approximately $73.4 billion and $65.8 billion in UPB of TDR loans, respectively, were no longer seriously delinquent. |
(3) | Consists of the combination of: (a) our allowance for loan losses on mortgage loans held for investment; and (b) our reserve for guarantee losses associated with non-consolidated single-family mortgage securitization trusts and other guarantee commitments. |
(4) | See “Table 1 — Total Single-Family Loan Workout Volumes” for information about our problem loan workout activities. |
(5) | States presented represent the five states where our credit losses were greatest during the nine months ended September 30, 2013. Calculated as the amount of our losses recorded on disposition of REO properties during the respective quarterly period, excluding those subject to repurchase requests made to our seller/servicers, divided by the aggregate UPB of the related loans. The amount of losses recognized on disposition of the properties is equal to the amount by which the UPB of the loans exceeds the amount of sales proceeds from disposition of the properties, net of selling expenses. |
(6) | Calculated as the amount of our losses recorded on short sales during the respective quarterly period divided by the aggregate UPB of the related loans. The amount of losses recognized on short sales is equal to the amount by which the UPB of the loans exceeds the amount of sales proceeds, net of selling expenses. |
In discussing our credit performance, we often use the terms “credit losses” and “credit-related (benefit) expense”. These terms are significantly different. Our “credit losses” consist of charge-offs, net of recoveries, and REO operations expense, while our “credit-related (benefit) expense” consists of our provision (benefit) for credit losses and REO operations expense. Our single-family credit losses in the third quarter of 2013 benefited from approximately $1.1 billion of charge-off recoveries related to agreements with certain of our seller/servicers to release specified loans from certain repurchase obligations in exchange for one-time cash payments.
Since the beginning of 2008, on an aggregate basis, we have recorded provision for credit losses associated with single-family loans of approximately $73.1 billion (net of benefits in certain periods), and have recorded an additional $3.7 billion in
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losses on loans purchased from PC trusts, net of recoveries. The majority of these losses are associated with loans originated in 2005 through 2008. While loans originated in 2005 through 2008 will give rise to additional credit losses that have not yet been incurred and, thus, have not yet been provisioned for, we believe that, as of September 30, 2013, we have reserved for or charged-off the majority of the total expected credit losses for these loans. Nevertheless, various factors, such as increases in unemployment rates or future declines in home prices, could require us to provide for losses on these loans beyond our current expectations.
Our loan loss reserves for single-family loans declined in each of the last seven quarters, which in part reflects improvement in both borrower payment performance and lower severity ratios for both REO dispositions and short sale transactions due to the improvements in home prices in most areas during these periods. These declines also reflect continued high levels of loan charge-offs compared to levels before 2009.
Although our REO inventory has generally declined in recent periods, it increased in the third quarter of 2013 as foreclosure activity increased in judicial foreclosure states and disposition activity moderated. We observed improvements to our average REO disposition severity ratio in most areas during the first nine months of 2013, primarily due to increasing home prices. Our average REO disposition severity ratio improved to 34.9% for the third quarter of 2013 compared to 35.8% and 40.3% for the second quarter of 2013 and third quarter of 2012, respectively. This ratio improved in each of the last seven quarters, but remains high as compared to our experience in periods before 2008. Additionally, our REO disposition severity ratios have also been positively affected by changes made to our process for evaluating the market value and determining the list price for our REO properties when we offer them for sale, as well as repairing a higher percentage of our REO properties prior to listing them.
The serious delinquency rate for our single-family credit guarantee portfolio was 2.58% at September 30, 2013, compared to 3.25% at December 31, 2012, and has improved in each of the last seven quarters and is at the lowest level since April 2009. Excluding relief refinance loans, the improvement in borrower payment performance during these periods reflects an improved credit profile of borrowers with loans originated since 2008. However, several factors, including the lengthening of the foreclosure process, have resulted in loans remaining in serious delinquency for longer periods than experienced prior to 2008, particularly in states that require a judicial foreclosure process. At both September 30, 2013 and December 31, 2012, the percentage of seriously delinquent loans that have been delinquent for more than six months was 72%, and most of these loans have been delinquent for more than one year. The longer a loan remains delinquent, the more challenging and costly it is to resolve.
Although the balance of our non-performing loans declined during the first nine months of 2013, it remained high at September 30, 2013, compared to periods prior to 2009. The credit losses and loan loss reserves associated with our single-family credit guarantee portfolio remained elevated in the first nine months of 2013, due, in part, to:
• | Losses associated with the continued high volume of foreclosures and foreclosure alternatives. These actions relate to the continued efforts of our servicers to resolve our large inventory of seriously delinquent loans. Due to the length of time necessary for servicers either to complete the foreclosure process or pursue foreclosure alternatives on seriously delinquent loans in our portfolio, we expect our credit losses will continue to remain elevated even if the volume of new seriously delinquent loans continues to decline. |
• | Continued negative effect of certain loan groups within the single-family credit guarantee portfolio, such as: (a) loans originated in 2005 through 2008; and (b) loans with higher-risk characteristics (such as those underwritten with certain lower documentation standards and interest-only loans), a significant portion of which were originated in 2005 through 2008. These groups continue to be large contributors to our credit losses. |
• | Although we estimate national home prices increased 11% from September 2012 to September 2013, based on our own index, there has been a cumulative decline in national home prices of 14% since June 2006. As a result of this price decline, approximately 11% of loans in our single-family credit guarantee portfolio, based on UPB, had estimated current LTV ratios in excess of 100% (i.e., underwater loans) as of September 30, 2013. |
• | Weak financial condition of many of our mortgage insurers, which has reduced our actual recoveries from these counterparties since several of them are deferring payments under regulatory orders. |
Some of our loss mitigation activities create fluctuations in our delinquency statistics. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-family Mortgage Credit Risk — Credit Performance — Delinquencies” for further information about factors affecting our reported delinquency rates.
Conservatorship and Government Support for Our Business
We continue to operate under the direction of FHFA, as our Conservator. We are also subject to certain constraints on our business activities imposed by Treasury due to the terms of, and Treasury’s rights under, the Purchase Agreement. We are dependent upon the continued support of Treasury and FHFA in order to continue operating our business. Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver
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by FHFA under statutory mandatory receivership provisions. The conservatorship and related matters have had a wide-ranging impact on us, including our regulatory supervision, management, business, financial condition, and results of operations.
There is significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified termination date, and as to what changes may occur to our business structure during or following conservatorship, including whether we will continue to exist. We are not aware of any current plans of our Conservator to significantly change our business model or capital structure in the near-term. Our future structure and role will be determined by the Administration and Congress, and there are likely to be significant changes beyond the near-term. We have no ability to predict the outcome of these deliberations.
Under the Purchase Agreement, we are required to pay dividends to Treasury to the extent that our Net Worth Amount exceeds the permitted Capital Reserve Amount, established at $3 billion for 2013 and declining to zero in 2018. Accordingly, we do not have the ability over the long term to build and retain the capital generated by our business operations, or return capital to stockholders other than Treasury.
We paid dividends of $4.4 billion in cash on the senior preferred stock during the three months ended September 30, 2013, based on our Net Worth Amount at June 30, 2013. Through September 30, 2013, we have paid aggregate cash dividends to Treasury of $40.9 billion, an amount equal to 57% of our aggregate draws received under the Purchase Agreement. Under the Purchase Agreement, the payment of dividends cannot be used to reduce prior draws from Treasury. Based on our Net Worth Amount at September 30, 2013, our dividend obligation to Treasury in December 2013 will be $30.4 billion. Once this dividend payment is made to Treasury, we will have paid slightly more in aggregate cash dividends to Treasury than aggregate cash draws received from Treasury under the Purchase Agreement.
The aggregate liquidation preference of the senior preferred stock was $72.3 billion at September 30, 2013, which includes the initial $1.0 billion liquidation preference of senior preferred stock that we issued to Treasury in September 2008 as an initial commitment fee and for which no cash was received. The remaining funding commitment from Treasury under the Purchase Agreement is $140.5 billion. This amount will be reduced by any future draws. Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited and we will not be able to do so for the foreseeable future, if at all. The aggregate liquidation preference of the senior preferred stock will increase further if we receive additional draws. For a discussion of factors that could result in additional draws, see “RISK FACTORS — Conservatorship and Related Matters — We may request additional draws under the Purchase Agreement in future periods” in our 2012 Annual Report.
For more information on the conservatorship and government support for our business, including the Purchase Agreement, see “BUSINESS — Conservatorship and Related Matters” and “— Treasury Agreements” in our 2012 Annual Report.
Consolidated Financial Results
Net income was $30.5 billion for the third quarter of 2013 compared to net income of $2.9 billion for the third quarter of 2012. Our net income for the third quarter of 2013 includes a benefit for federal income taxes of $23.9 billion that resulted from our conclusion to release our valuation allowance against our net deferred tax assets. For a discussion of the factors that led to our conclusion to release the valuation allowance against our net deferred tax assets, see “CONSOLIDATED BALANCE SHEETS ANALYSIS – Deferred Tax Assets and Liabilities” and “NOTE 12: INCOME TAXES.” Key highlights of our financial results include:
• | Net interest income was $4.3 billion for both the third quarter of 2013 and the third quarter of 2012. The third quarter of 2013 reflects a lower balance of our higher-yielding mortgage-related assets offset by improved returns on mortgage loans held by consolidated trusts and lower funding costs on our other debt. |
• | Benefit (provision) for credit losses for the third quarter of 2013 was $1.1 billion, compared to $(610) million for the third quarter of 2012. The shift from a provision for credit losses in the third quarter of 2012 to a benefit for credit losses in the third quarter of 2013 primarily reflects: (a) $0.9 billion related to counterparty agreements in the third quarter of 2013; (b) declines in the volume of newly delinquent loans (largely due to a decline in the portion of our single-family credit guarantee portfolio originated in 2005 through 2008); and (c) lower estimates of incurred loss due to the positive impact of an increase in national home prices. |
• | Non-interest income (loss) was $1.7 billion for the third quarter of 2013, compared to $(560) million for the third quarter of 2012. The improvement was largely driven by an increase in gains on sales of available-for-sale securities and settlement agreements regarding our investments in certain non-agency mortgage-related securities. |
• | Non-interest expense increased to $577 million for the third quarter of 2013, from $473 million for the third quarter of 2012, primarily due to an increase in expense related to the Temporary Payroll Tax Cut Continuation Act of 2011 during the third quarter of 2013 compared to the third quarter of 2012. |
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• | Comprehensive income was $30.4 billion for the third quarter of 2013 compared to $5.6 billion for the third quarter of 2012. Comprehensive income for the third quarter of 2013 consisted of $30.5 billion of net income and $(49) million of other comprehensive loss. The other comprehensive loss primarily related to the reversal of fair value gains deferred in AOCI associated with certain available-for-sale securities that were sold and fair value losses on our agency mortgage-related available-for-sale securities, partially offset by fair value gains on our single-family non-agency mortgage-related available-for-sale securities. |
Mortgage Market and Economic Conditions
Overview
The U.S. real gross domestic product for the third quarter of 2013 was not available due to the U.S. government shutdown in October. However, we believe that modest growth continued following the 2.5% increase during the second quarter of 2013 that was reported by the Bureau of Economic Analysis. The national unemployment rate was 7.2% in September 2013, compared to 7.6% in June and March 2013, based on data from the U.S. Bureau of Labor Statistics. In the data underlying the unemployment rate, an average of approximately 178,000 monthly net new jobs were added to the economy during the first nine months of 2013, which shows evidence of a slow, but steady positive trend for the economy and the labor market. Long-term interest rates, such as those of 30-year fixed-rate mortgages, generally increased during the first nine months of 2013. For example, based on our weekly Primary Mortgage Market Survey, the rate on 30-year fixed-rate conforming mortgages with an average LTV ratio of 80% averaged 4.4% in the third quarter of 2013 compared to 3.7% and 3.5% in the second and first quarters of 2013, respectively.
Single-Family Housing Market
The single-family housing market continued to show improvement in the third quarter of 2013 despite continued high unemployment rates in most areas of the U.S. and a significant inventory of seriously delinquent loans and REO properties in the market.
Based on data from the National Association of Realtors, sales of existing homes in the third quarter of 2013 averaged 5.36 million (at a seasonally adjusted annual rate), increasing 6% from 5.06 million homes in the second quarter of 2013. Based on data from the U.S. Census Bureau and HUD, new home sales in July and August of 2013 averaged approximately 406,000 (at a seasonally adjusted annual rate) declining approximately 8% from approximately 443,000 in the second quarter of 2013. Home prices increased during the third quarter of 2013, with our nationwide index registering approximately a 2.2% increase from June 2013 through September 2013 without seasonal adjustment. From September 2012 through September 2013 our nationwide home price index increased approximately 11%. These estimates were based on our own price index of mortgage loans on one-family homes funded by us or Fannie Mae. Other indices of home prices may have different results, as they are determined using different pools of mortgage loans and calculated under different conventions than our own.
Multifamily Housing Market
The multifamily market has experienced very strong rent and occupancy trends over the last few years, although the pace slowed in recent periods. The most recent preliminary data reported by Reis, Inc. indicated that the national apartment vacancy rate declined by 10 basis points during the third quarter of 2013 to 4.2% and represents the lowest level since 2001. In addition, Reis, Inc. reported that effective rents grew by 1% during the third quarter of 2013, compared to 0.7% during the second quarter of 2013. Vacancy rates and effective rents are important to loan performance because multifamily loans are generally repaid from the cash flows generated by the underlying property and these factors significantly influence those cash flows. According to the latest available information from Moody's Analytics, Inc. and Real Capital Analytics, Inc., apartment prices have risen more than 15% nationally in the first half of 2013 and have returned to the peak values experienced in 2007 for most markets. As a result, the multifamily sector continued to experience strong investor interest and continued to outperform other commercial real estate sectors in the first nine months of 2013. We expect multifamily market fundamentals (i.e., vacancy rates and effective rents) to remain at favorable levels for the remainder of 2013 and into 2014.
Mortgage Market and Business Outlook
Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates, and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties. For example, a number of factors could cause the actual performance of the housing and mortgage markets and the U.S. economy in the near term to be significantly worse than we expect, including adverse changes in national or international economic conditions and changes in the federal government’s fiscal or monetary policies.
On October 17, 2013, President Obama signed legislation that reopened the federal government until January 15, 2014, and extended the federal statutory debt limit until February 7, 2014. The legislation also provided for budget negotiations over major deficit issues, which are to conclude by December 13, 2013. It is uncertain if Congress will be able to meet these or any
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future deadlines with respect to the federal budget and the debt limit. Sustained uncertainty relating to the U.S. government’s inability to provide a long-term resolution to its budget and debt limit issues could have adverse impacts on the U.S. and global financial markets, the U.S. mortgage market and on our business and financial results. For more information, see “RISK FACTORS - Sustained uncertainty relating to the U.S. government’s inability to provide a long-term resolution to its budget and debt limit issues could adversely affect our business and financial results.” See “FORWARD-LOOKING STATEMENTS” for additional information.
Sustainability of Earnings
Our level of earnings in recent periods is not sustainable over the long term. Our recent financial results have benefited significantly from strong home price appreciation, and we expect home price growth to moderate in future periods. Our recent financial results have also included benefits related to settlements of both private-label securities litigation and loan repurchase claims. In addition, declines in the size of our mortgage-related investments portfolio, as required by FHFA and the Purchase Agreement with Treasury, will reduce earnings over time. Our financial results will also continue to be affected by changes in interest rates and mortgage spreads, which can cause significant mark-to-market variability in our results.
Single-Family
We continue to expect key macroeconomic drivers of the economy, such as income growth, employment, and inflation, to affect the performance of the housing and mortgage markets in the near term. Since we expect that moderate economic growth will continue and mortgage interest rates will remain relatively low in the near term, compared to historical levels, we believe that housing affordability will also remain high in the remainder of 2013 and into 2014 for potential home buyers. We also expect that the volume of home sales will likely increase in 2014, compared to 2013. However, we believe that the recent increase and potential further increases in mortgage interest rates will result in a decline, which could be significant, in overall single-family mortgage originations in 2014 compared with 2013, driven by a decline in refinancings. During the third quarter of 2013, refinancings, including HARP, comprised approximately 65% of our single-family purchase and issuance volume, compared with 81% in the first half of 2013 and approximately 82% for all of 2012. As a result of the expected declines in overall originations, our purchase volumes will likely also decline, potentially significantly, during the fourth quarter of 2013 and the full year of 2014. However, we expect the UPB of our single-family credit guarantee portfolio will be relatively unchanged at the end of December 2014 compared to September 30, 2013, due to an expected decline in prepayments resulting from higher mortgage interest rates.
We expect to experience continued high levels of HARP activity in the near term, but the recent increases in mortgage rates could also slow the levels of this activity. For information on the HARP initiative, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program.”
Although national home prices have recorded gains for the last seven quarters, home prices during the first nine months of 2013 remained significantly below their peak levels in many geographical areas. Declines in the market’s inventory-to-sales ratio for homes have supported stabilization and increases in home prices in a number of metropolitan areas. We believe that home sales will have only modest growth in the fourth quarter of 2013. We also believe that home prices will not continue at the same growth rate experienced in the first nine months of 2013, but will gradually moderate and will return towards growth rates that are consistent with long-term historical averages experienced prior to 2004.
Our charge-offs were elevated during the nine months ended September 30, 2013 compared to levels before 2009 and we expect they will continue to be elevated during the remainder of the year. This is in part due to the substantial number of underwater mortgage loans in our single-family credit guarantee portfolio. For the near term, we also expect:
• | REO disposition and short sale severity ratios to remain high. However, our recovery rates have been positively affected by recent improvements in home prices and home sales; and |
• | The amount of non-performing assets and the volume of our loan workouts to remain high. |
Our guarantee fee rate charged on new acquisitions increased in 2013 as a result of two across-the-board increases in guarantee fees implemented in 2012. FHFA may direct us to implement further increases in our guarantee fees in the future. As a result of the 2012 increases, our average management and guarantee fee we charge in 2013 and thereafter will be higher than the average fee we charged in previous years.
Multifamily
During the first nine months of 2013, we continued to serve as a constant and stable source of liquidity and to support the multifamily market and the nation’s renters, as evidenced by our $18.8 billion of multifamily new business activity (the combination of our loan purchases and issuances of other guarantee commitments), which provided financing for more than 1,000 properties amounting to nearly 258,000 apartment units. The majority of these apartments were affordable to low and moderate income families. We expect to meet the 2013 Conservatorship Scorecard goal of reducing our new business volume
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by at least 10% as compared to 2012 levels as a result of the measures we have taken during the first nine months of 2013 (such as adjusting prices), combined with the effects of rising interest rates and increased competition from other market participants.
New supply of multifamily housing has been relatively low following the recession of the late-2000s, but has been increasing in recent periods as market fundamentals have remained positive. Our expectation is that at the national level, new supply will not accelerate beyond sustainable levels over the near term because of constraints, such as rising construction costs and uncertainties in the capital markets. We expect that demand growth, driven by a strengthening economy and positive demographics, will generally be sufficient for the increased supply. However, there may be certain local markets where new supply could potentially outpace demand, which would be evidenced by excess supply and rising vacancy rates.
As a result of the positive market fundamentals and continuing strong portfolio performance, we expect our credit losses and delinquency rates to remain low in the fourth quarter of 2013 and into the first half of 2014. We believe the long-term outlook for the national multifamily market continues to be favorable as strong demand will support cash flows and stable property values.
Limits on Investment Activity and Our Mortgage-Related Investments Portfolio
The conservatorship has significantly affected our investment activity. FHFA has stated that we will not be a substantial buyer or seller of mortgages for our mortgage-related investments portfolio. Under the terms of the Purchase Agreement and FHFA regulation, the UPB of our mortgage-related investments portfolio is subject to a cap that decreases by 15% each year until the portfolio reaches $250 billion. As a result, the UPB of our mortgage-related investments portfolio may not exceed $553 billion as of December 31, 2013. FHFA has indicated that such portfolio reduction targets should be viewed as minimum reductions and has encouraged us to reduce the mortgage-related investments portfolio at a faster rate than required, while indicating that the pace of reducing the portfolio may be moderated by conditions in the housing and financial markets. This strategy is designed to reduce the portfolio and provide the best return to the taxpayer while minimizing market disruption.
In addition, the 2013 Conservatorship Scorecard includes a goal to reduce the December 31, 2012 mortgage-related investments portfolio balance by selling 5%, or $15.7 billion in UPB, of mortgage-related assets (exclusive of agency securities, multifamily loans classified as held-for-sale, and single-family loans purchased for cash). Through September 30, 2013, we have sold $11.7 billion in UPB of assets that are intended to qualify toward this goal.
The reduction in the mortgage-related investments portfolio will result in the decline in the income from this portfolio over time.
From time to time, we also may undertake actions in an effort to support the liquidity and the relative price performance of our PCs to comparable Fannie Mae securities through a variety of activities in our Investments and Single-family Guarantee segments. These activities can include the purchase and sale of Freddie Mac mortgage-related securities, purchases of loans, and dollar roll transactions, as well as the issuance of REMICs and Other Structured Securities. Our purchases and sales of mortgage-related securities and our issuances of REMICs and Other Structured Securities influence the relative supply and demand (i.e., liquidity) for these securities, helping to support the price performance of our PCs. Depending upon market conditions, including the relative prices, supply and demand for our PCs and comparable Fannie Mae securities, as well as other factors, there may be substantial variability in any period in the total amount of securities we purchase or sell, and in the success of our efforts to support the liquidity and price performance of our PCs. In some cases, purchasing or selling PCs could adversely impact our security performance. We incur costs in connection with our efforts to support the liquidity and price performance of our PCs, including engaging in transactions that yield less than our target rate of return. For more information, see “BUSINESS — Our Business Segments — Investments Segment — PC Support Activities” in our 2012 Annual Report.
The table below presents the UPB of our mortgage-related investments portfolio, for purposes of the limit imposed by the Purchase Agreement and FHFA regulation.
Table 5 — Mortgage-Related Investments Portfolio(1)
September 30, 2013 | December 31, 2012 | ||||||
(in millions) | |||||||
Investments segment — Mortgage investments portfolio | $ | 353,044 | $ | 375,924 | |||
Single-family Guarantee segment — Single-family unsecuritized mortgage loans(2) | 41,268 | 53,333 | |||||
Multifamily segment — Mortgage investments portfolio | 103,502 | 128,287 | |||||
Total mortgage-related investments portfolio | $ | 497,814 | $ | 557,544 | |||
(1) | Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled. |
(2) | Represents unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment. |
The UPB of our mortgage-related investments portfolio at September 30, 2013 was $497.8 billion, a decline of $59.7 billion compared to $557.5 billion at December 31, 2012. The reduction in UPB resulted primarily from liquidations (i.e.
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principal repayments) and is consistent with our efforts to reduce the size of our mortgage-related investments portfolio as described above. The mortgage-related investments portfolio is comprised of agency securities, single-family non-agency mortgage-related securities, CMBS, housing revenue bonds, and single-family and multifamily unsecuritized mortgage loans.
We consider the liquidity of the assets in our mortgage-related investments portfolio based on three categories: (a) agency securities; (b) assets that are less liquid than agency securities; and (c) illiquid assets. Assets that we consider to be less liquid than agency securities include unsecuritized performing single-family mortgage loans, multifamily mortgage loans, CMBS, and housing revenue bonds. Our less liquid assets collectively represented approximately 23% of the UPB of the portfolio at September 30, 2013, compared to 28% at December 31, 2012. Assets that we consider to be illiquid include unsecuritized seriously delinquent and modified single-family mortgage loans which we removed from PC trusts, and our investments in non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans. Our illiquid assets collectively represented approximately 36% of the UPB of the portfolio at September 30, 2013, compared to 35% at December 31, 2012.
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SELECTED FINANCIAL DATA
The selected financial data presented below should be reviewed in conjunction with MD&A and our consolidated financial statements and related notes.
Table 6 — Selected Financial Data(1)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(dollars in millions, except share-related amounts) | |||||||||||||||
Statements of Comprehensive Income Data | |||||||||||||||
Net interest income | $ | 4,276 | $ | 4,269 | $ | 12,685 | $ | 13,155 | |||||||
Benefit (provision) for credit losses | 1,138 | (610 | ) | 2,264 | (2,590 | ) | |||||||||
Non-interest income (loss) | 1,689 | (560 | ) | 2,769 | (2,827 | ) | |||||||||
Non-interest expense | (577 | ) | (473 | ) | (1,699 | ) | (1,605 | ) | |||||||
Income tax benefit | 23,960 | 302 | 24,036 | 392 | |||||||||||
Net income | 30,486 | 2,928 | 40,055 | 6,525 | |||||||||||
Total comprehensive income | 30,437 | 5,630 | 41,765 | 10,311 | |||||||||||
Net income (loss) attributable to common stockholders(2) | 50 | 1,119 | (1,709 | ) | 1,104 | ||||||||||
Net income (loss) per common share — basic and diluted | 0.02 | 0.35 | (0.53 | ) | 0.34 | ||||||||||
Cash dividends per common share | — | — | — | — | |||||||||||
Weighted average common shares outstanding (in thousands) — basic and diluted(3) | 3,237,771 | 3,239,477 | 3,238,196 | 3,240,241 | |||||||||||
September 30, 2013 | December 31, 2012 | ||||||||||||||
(dollars in millions) | |||||||||||||||
Balance Sheets Data | |||||||||||||||
Mortgage loans held-for-investment, at amortized cost by consolidated trusts (net of allowances for loan losses) | $ | 1,526,070 | $ | 1,495,932 | |||||||||||
Total assets | 1,981,785 | 1,989,856 | |||||||||||||
Debt securities of consolidated trusts held by third parties | 1,419,909 | 1,419,524 | |||||||||||||
Other debt | 515,668 | 547,518 | |||||||||||||
All other liabilities | 12,772 | 13,987 | |||||||||||||
Total Freddie Mac stockholders’ equity (deficit) | 33,436 | 8,827 | |||||||||||||
Portfolio Balances(4) | |||||||||||||||
Mortgage-related investments portfolio | $ | 497,814 | $ | 557,544 | |||||||||||
Total Freddie Mac mortgage-related securities(5) | 1,584,448 | 1,562,040 | |||||||||||||
Total mortgage portfolio(6) | 1,927,394 | 1,956,276 | |||||||||||||
Non-performing assets(7) | 127,649 | 135,677 | |||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
Ratios(8) | |||||||||||||||
Return on average assets(9) | 6.2 | % | 0.6 | % | 2.7 | % | 0.4 | % | |||||||
Non-performing assets ratio(10) | 7.1 | 7.6 | 7.1 | 7.6 | |||||||||||
Equity to assets ratio(11) | 1.0 | 0.1 | 1.1 | 0.1 | |||||||||||
(1) | See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in our 2012 Annual Report and within this Form 10-Q for information regarding our accounting policies and the impact of new accounting policies on our consolidated financial statements. |
(2) | For a discussion of how the senior preferred stock dividend affects net income (loss) attributable to common stockholders beginning in the fourth quarter of 2012, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Earnings Per Common Share” in our 2012 Annual Report. |
(3) | Includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury as part of the Purchase Agreement, because it is unconditionally exercisable by the holder at a cost of $0.00001 per share. |
(4) | Represents the UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled. |
(5) | See ‘‘Table 29 — Freddie Mac Mortgage-Related Securities’’ for the composition of this line item. |
(6) | See ‘‘Table 13 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios’’ for the composition of our total mortgage portfolio. |
(7) | See ‘‘Table 45 — Non-Performing Assets’’ for a description of our non-performing assets. |
(8) | The dividend payout ratio on common stock is not presented because the amount of cash dividends per common share is zero for all periods presented. The return on common equity ratio is not presented because the simple average of the beginning and ending balances of total stockholders’ equity (deficit), net of preferred stock (at redemption value) is less than zero for all periods presented. |
(9) | Ratio computed as net income (loss) divided by the simple average of the beginning and ending balances of total assets. |
(10) | Ratio computed as non-performing assets divided by the ending UPB of our total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities. |
(11) | Ratio computed as the simple average of the beginning and ending balances of total stockholders’ equity (deficit) divided by the simple average of the beginning and ending balances of total assets. |
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CONSOLIDATED RESULTS OF OPERATIONS
The following discussion of our consolidated results of operations should be read in conjunction with our consolidated financial statements, including the accompanying notes. Also see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” for information concerning certain significant accounting policies and estimates applied in determining our reported results of operations.
Table 7 — Summary Consolidated Statements of Comprehensive Income
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in millions) | ||||||||||||||||
Net interest income | $ | 4,276 | $ | 4,269 | $ | 12,685 | $ | 13,155 | ||||||||
Benefit (provision) for credit losses | 1,138 | (610 | ) | 2,264 | (2,590 | ) | ||||||||||
Net interest income after benefit (provision) for credit losses | 5,414 | 3,659 | 14,949 | 10,565 | ||||||||||||
Non-interest income (loss): | ||||||||||||||||
Gains (losses) on extinguishment of debt securities of consolidated trusts | 135 | (34 | ) | 197 | (39 | ) | ||||||||||
Gains (losses) on retirement of other debt | 143 | 11 | 136 | (55 | ) | |||||||||||
Gains (losses) on debt recorded at fair value | (28 | ) | (10 | ) | (13 | ) | 35 | |||||||||
Derivative gains (losses) | (74 | ) | (488 | ) | 1,663 | (2,426 | ) | |||||||||
Impairment of available-for-sale securities: | ||||||||||||||||
Total other-than-temporary impairment of available-for-sale securities | (130 | ) | (332 | ) | (169 | ) | (942 | ) | ||||||||
Portion of other-than-temporary impairment recognized in AOCI | 4 | 65 | (44 | ) | 13 | |||||||||||
Net impairment of available-for-sale securities recognized in earnings | (126 | ) | (267 | ) | (213 | ) | (929 | ) | ||||||||
Other gains (losses) on investment securities recognized in earnings | 620 | (330 | ) | (153 | ) | (974 | ) | |||||||||
Other income (loss) | 1,019 | 558 | 1,152 | 1,561 | ||||||||||||
Total non-interest income (loss) | 1,689 | (560 | ) | 2,769 | (2,827 | ) | ||||||||||
Non-interest expense: | ||||||||||||||||
Administrative expenses | (455 | ) | (401 | ) | (1,331 | ) | (1,139 | ) | ||||||||
REO operations income (expense) | 79 | 49 | 183 | (92 | ) | |||||||||||
Other expenses | (201 | ) | (121 | ) | (551 | ) | (374 | ) | ||||||||
Total non-interest expense | (577 | ) | (473 | ) | (1,699 | ) | (1,605 | ) | ||||||||
Income before income tax benefit | 6,526 | 2,626 | 16,019 | 6,133 | ||||||||||||
Income tax benefit | 23,960 | 302 | 24,036 | 392 | ||||||||||||
Net income | 30,486 | 2,928 | 40,055 | 6,525 | ||||||||||||
Other comprehensive income (loss), net of taxes and reclassification adjustments: | ||||||||||||||||
Changes in unrealized gains (losses) related to available-for-sale securities | (127 | ) | 2,599 | 1,436 | 3,508 | |||||||||||
Changes in unrealized gains (losses) related to cash flow hedge relationships | 76 | 102 | 250 | 320 | ||||||||||||
Changes in defined benefit plans | 2 | 1 | 24 | (42 | ) | |||||||||||
Total other comprehensive income (loss), net of taxes and reclassification adjustments | (49 | ) | 2,702 | 1,710 | 3,786 | |||||||||||
Comprehensive income | $ | 30,437 | $ | 5,630 | $ | 41,765 | $ | 10,311 | ||||||||
Net Interest Income
The table below presents an analysis of net interest income, including average balances and related yields earned on assets and incurred on liabilities.
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Table 8 — Net Interest Income/Yield and Average Balance Analysis
Three Months Ended September 30, | |||||||||||||||||||||
2013 | 2012 | ||||||||||||||||||||
Average Balance(1)(2) | Interest Income (Expense)(1) | Average Rate | Average Balance(1)(2) | Interest Income (Expense)(1) | Average Rate | ||||||||||||||||
(dollars in millions) | |||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||
Cash and cash equivalents | $ | 32,549 | $ | 1 | 0.02 | % | $ | 30,246 | $ | 5 | 0.07 | % | |||||||||
Federal funds sold and securities purchased under agreements to resell | 38,249 | 6 | 0.05 | 48,062 | 21 | 0.17 | |||||||||||||||
Mortgage-related securities: | |||||||||||||||||||||
Mortgage-related securities(3) | 317,824 | 3,184 | 4.01 | 346,738 | 3,807 | 4.39 | |||||||||||||||
Extinguishment of PCs held by Freddie Mac | (137,329 | ) | (1,323 | ) | (3.85 | ) | (117,146 | ) | (1,300 | ) | (4.44 | ) | |||||||||
Total mortgage-related securities, net | 180,495 | 1,861 | 4.12 | 229,592 | 2,507 | 4.37 | |||||||||||||||
Non-mortgage-related securities(3) | 23,715 | 10 | 0.18 | 20,363 | 15 | 0.30 | |||||||||||||||
Mortgage loans held by consolidated trusts(4) | 1,516,255 | 14,197 | 3.75 | 1,517,472 | 15,838 | 4.17 | |||||||||||||||
Unsecuritized mortgage loans(4) | 199,385 | 1,872 | 3.76 | 229,601 | 2,108 | 3.67 | |||||||||||||||
Total interest-earning assets | $ | 1,990,648 | $ | 17,947 | 3.61 | $ | 2,075,336 | $ | 20,494 | 3.95 | |||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||
Debt securities of consolidated trusts including PCs held by Freddie Mac | $ | 1,536,566 | $ | (12,846 | ) | (3.34 | ) | $ | 1,541,339 | $ | (14,884 | ) | (3.86 | ) | |||||||
Extinguishment of PCs held by Freddie Mac | (137,329 | ) | 1,323 | 3.85 | (117,146 | ) | 1,300 | 4.44 | |||||||||||||
Total debt securities of consolidated trusts held by third parties | 1,399,237 | (11,523 | ) | (3.29 | ) | 1,424,193 | (13,584 | ) | (3.82 | ) | |||||||||||
Other debt: | |||||||||||||||||||||
Short-term debt | 139,675 | (45 | ) | (0.13 | ) | 126,430 | (47 | ) | (0.15 | ) | |||||||||||
Long-term debt(5) | 386,354 | (1,996 | ) | (2.07 | ) | 447,067 | (2,446 | ) | (2.19 | ) | |||||||||||
Total other debt | 526,029 | (2,041 | ) | (1.55 | ) | 573,497 | (2,493 | ) | (1.74 | ) | |||||||||||
Total interest-bearing liabilities | 1,925,266 | (13,564 | ) | (2.82 | ) | 1,997,690 | (16,077 | ) | (3.22 | ) | |||||||||||
Expense related to derivatives(6) | — | (107 | ) | (0.02 | ) | — | (148 | ) | (0.03 | ) | |||||||||||
Impact of net non-interest-bearing funding | 65,382 | — | 0.09 | 77,646 | — | 0.12 | |||||||||||||||
Total funding of interest-earning assets | $ | 1,990,648 | $ | (13,671 | ) | (2.75 | ) | $ | 2,075,336 | $ | (16,225 | ) | (3.13 | ) | |||||||
Net interest income/yield | $ | 4,276 | 0.86 | $ | 4,269 | 0.82 | |||||||||||||||
Nine Months Ended September 30, | |||||||||||||||||||||
2013 | 2012 | ||||||||||||||||||||
Average Balance(1)(2) | Interest Income (Expense)(1) | Average Rate | Average Balance(1)(2) | Interest Income (Expense)(1) | Average Rate | ||||||||||||||||
(dollars in millions) | |||||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||||
Cash and cash equivalents | $ | 32,484 | $ | 11 | 0.05 | % | $ | 37,772 | $ | 15 | 0.05 | % | |||||||||
Federal funds sold and securities purchased under agreements to resell | 37,723 | 26 | 0.09 | 37,371 | 45 | 0.16 | |||||||||||||||
Mortgage-related securities: | |||||||||||||||||||||
Mortgage-related securities(3) | 320,768 | 9,844 | 4.09 | 362,748 | 12,208 | 4.49 | |||||||||||||||
Extinguishment of PCs held by Freddie Mac | (127,730 | ) | (3,829 | ) | (4.00 | ) | (117,953 | ) | (4,016 | ) | (4.54 | ) | |||||||||
Total mortgage-related securities, net | 193,038 | 6,015 | 4.15 | 244,795 | 8,192 | 4.46 | |||||||||||||||
Non-mortgage-related securities(3) | 21,671 | 32 | 0.20 | 24,535 | 45 | 0.25 | |||||||||||||||
Mortgage loans held by consolidated trusts(4) | 1,506,345 | 42,798 | 3.79 | 1,538,476 | 50,112 | 4.34 | |||||||||||||||
Unsecuritized mortgage loans(4) | 209,653 | 5,898 | 3.75 | 241,724 | 6,644 | 3.67 | |||||||||||||||
Total interest-earning assets | $ | 2,000,914 | $ | 54,780 | 3.65 | $ | 2,124,673 | $ | 65,053 | 4.09 | |||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||
Debt securities of consolidated trusts including PCs held by Freddie Mac | $ | 1,528,800 | $ | (39,091 | ) | (3.41 | ) | $ | 1,560,852 | $ | (47,478 | ) | (4.06 | ) | |||||||
Extinguishment of PCs held by Freddie Mac | (127,730 | ) | 3,829 | 4.00 | (117,953 | ) | 4,016 | 4.54 | |||||||||||||
Total debt securities of consolidated trusts held by third parties | 1,401,070 | (35,262 | ) | (3.36 | ) | 1,442,899 | (43,462 | ) | (4.02 | ) | |||||||||||
Other debt: | |||||||||||||||||||||
Short-term debt | 129,762 | (134 | ) | (0.14 | ) | 134,807 | (130 | ) | (0.13 | ) | |||||||||||
Long-term debt(5) | 399,337 | (6,339 | ) | (2.12 | ) | 469,559 | (7,839 | ) | (2.22 | ) | |||||||||||
Total other debt | 529,099 | (6,473 | ) | (1.63 | ) | 604,366 | (7,969 | ) | (1.76 | ) | |||||||||||
Total interest-bearing liabilities | 1,930,169 | (41,735 | ) | (2.88 | ) | 2,047,265 | (51,431 | ) | (3.35 | ) | |||||||||||
Expense related to derivatives(6) | — | (360 | ) | (0.02 | ) | — | (467 | ) | (0.03 | ) | |||||||||||
Impact of net non-interest-bearing funding | 70,745 | — | 0.10 | 77,408 | — | 0.12 | |||||||||||||||
Total funding of interest-earning assets | $ | 2,000,914 | $ | (42,095 | ) | (2.80 | ) | $ | 2,124,673 | $ | (51,898 | ) | (3.26 | ) | |||||||
Net interest income/yield | $ | 12,685 | 0.85 | $ | 13,155 | 0.83 | |||||||||||||||
(1) | Excludes mortgage loans and mortgage-related securities traded, but not yet settled. |
17 | Freddie Mac | |
(2) | We calculate average balances based on amortized cost. |
(3) | Interest income (expense) includes accretion of the portion of impairment charges recognized in earnings where we expect significant increases in cash flows from the impaired securities. |
(4) | Non-performing loans, where interest income is generally recognized when collected, are included in average balances. |
(5) | Includes current portion of long-term debt. |
(6) | Represents changes in fair value of derivatives in closed cash flow hedge relationships that were previously deferred in AOCI and have been reclassified to earnings as the associated hedged forecasted issuance of debt affects earnings. |
Net interest income increased by $7 million and decreased by $470 million for the three and nine months ended September 30, 2013, respectively, compared to the three and nine months ended September 30, 2012. Excluding the impact of the legislated 10 basis point increase in guarantee fees, which was implemented in April 2012, net interest income decreased by $106 million and $785 million for the three and nine months ended September 30, 2013, respectively, compared to the three and nine months ended September 30, 2012. These decreases in net interest income were primarily due to the reduction in the balance of higher-yielding mortgage-related assets due to continued liquidations, partially offset by improved returns on mortgage loans held by consolidated trusts and lower funding costs on other debt. Net interest yields increased during the three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012 primarily due to lower funding costs, partially offset by the reduction in the balance of higher-yielding mortgage-related assets.
We recognize interest income on non-performing loans that have been placed on non-accrual status only when cash payments are received. We refer to the interest income that we do not recognize as foregone interest income (i.e., interest income we would have recorded if the loans had been current in accordance with their original terms). Foregone interest income and reversals of previously recognized interest income, net of cash received, related to non-performing loans was $0.5 billion and $1.6 billion during the three and nine months ended September 30, 2013, respectively, compared to $0.8 billion and $2.4 billion during the three and nine months ended September 30, 2012, respectively. This amount has declined primarily because of the reduction in the volume of non-performing loans on non-accrual status.
During the three and nine months ended September 30, 2013, we had sufficient access to the debt markets. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity.”
Benefit (Provision) for Credit Losses
We maintain loan loss reserves at levels we believe are appropriate to absorb probable incurred losses on mortgage loans held-for-investment and loans underlying our financial guarantees. Our loan loss reserves are increased through the provision for credit losses and are reduced by net charge-offs. The provision for credit losses primarily reflects our estimate of incurred losses for newly impaired loans as well as changes in our estimates of incurred losses for previously impaired loans.
Our benefit (provision) for credit losses was $1.1 billion in the third quarter of 2013 compared to $(0.6) billion in the third quarter of 2012, and was $2.3 billion in the nine months ended September 30, 2013 compared to $(2.6) billion in the nine months ended September 30, 2012. The significant improvement in provision for credit losses in the 2013 periods reflects: (a) declines in the volume of newly delinquent loans (largely due to a decline in the portion of our single-family credit guarantee portfolio originated in 2005 through 2008); (b) lower estimates of incurred loss due to the positive impact of an increase in national home prices; and (c) $0.9 billion related to counterparty agreements in the third quarter of 2013. Assuming that all other factors remain the same, an increase in home prices can reduce the likelihood that loans will default and may also reduce the amount of credit losses on the loans that do default.
During the three and nine months ended September 30, 2013, our charge-offs, net of recoveries for single-family loans, were significantly lower than those recorded in the three and nine months ended September 30, 2012, primarily due to: (a) higher recoveries resulting from agreements with our counterparties; and (b) improvements in home prices in many of the areas in which we have had significant foreclosure and short sale activity. Our recoveries in the third quarter of 2013 included approximately $1.1 billion related to agreements with certain of our seller/servicers to release specified loans from certain repurchase obligations in exchange for one-time cash payments. Although our credit losses have declined in each of the last four quarters, we continue to experience a high volume of foreclosures and foreclosure alternatives as compared to periods prior to 2008. We expect our credit losses will continue to remain elevated in the fourth quarter of 2013 even if the volume of new seriously delinquent loans continues to decline.
The total number of single-family seriously delinquent loans declined approximately 22% and 11% during the nine months ended September 30, 2013 and 2012, respectively. As of September 30, 2013 and December 31, 2012, the UPB of our single-family non-performing loans was $121.2 billion and $128.6 billion, respectively. However, these amounts include $73.4 billion and $65.8 billion, respectively, of single-family TDRs that were no longer seriously delinquent. Loans that have been classified as TDRs remain categorized as non-performing throughout the remaining life of the loan regardless of whether the borrower makes payments which return the loan to a current payment status. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance, serious delinquency rates, charge-offs, our loan loss reserves balance, and our non-performing assets.
18 | Freddie Mac | |
While we have recorded a benefit for credit losses in each of the last four quarters, this trend may not continue. Our provision for credit losses and amount of charge-offs in the future will be affected by a number of factors. These factors include: (a) the actual level of mortgage defaults, including default rates among borrowers that participated in HARP and HAMP; (b) the effect of the MHA Program, the servicing alignment initiative, and other current and future loss mitigation efforts; (c) any government actions or programs that affect the ability of borrowers to refinance underwater mortgages or obtain modifications; (d) changes in property values; (e) regional economic conditions, including unemployment rates; (f) additional delays in the foreclosure process; (g) third-party mortgage insurance coverage and recoveries; and (h) the realized rate of seller/servicer repurchases.
We recognized a benefit for credit losses associated with our multifamily mortgage portfolio of $28 million and $40 million for the third quarters of 2013 and 2012, respectively, and $167 million and $81million for the nine months ended September 30, 2013 and 2012, respectively. Our loan loss reserves associated with our multifamily mortgage portfolio were $205 million and $382 million as of September 30, 2013 and December 31, 2012, respectively. The decline in loan loss reserves for multifamily loans in the first nine months of 2013 was primarily driven by an improvement in the expected performance of the underlying loans and a decline in the number of loans that have been classified as individually impaired.
Non-Interest Income (Loss)
Gains (Losses) on Extinguishment of Debt Securities of Consolidated Trusts
When we purchase PCs that have been issued by consolidated PC trusts, we extinguish a pro rata portion of the outstanding debt securities of the related consolidated trusts. We recognize a gain (loss) on extinguishment of the debt securities to the extent the amount paid to extinguish the debt security differs from its carrying value.
During the three months ended September 30, 2013 and 2012, we extinguished debt securities of consolidated trusts with a UPB of $15.5 billion and $2.5 billion, respectively (representing our purchase of single-family PCs with a corresponding UPB amount). Gains (losses) on extinguishment of these debt securities of consolidated trusts were $135 million and $(34) million during the three months ended September 30, 2013 and 2012, respectively.
During the nine months ended September 30, 2013 and 2012, we extinguished debt securities of consolidated trusts with a UPB of $39.0 billion and $3.9 billion, respectively (representing our purchase of single-family PCs with a corresponding UPB amount). Gains (losses) on extinguishment of these debt securities of consolidated trusts were $197 million and $(39) million during the nine months ended September 30, 2013 and 2012, respectively.
The increase in purchases of single-family PCs during the 2013 periods was due to investment opportunities. See “Table 21 — Mortgage-Related Securities Purchase Activity” for additional information regarding purchases of mortgage-related securities, including those issued by consolidated PC trusts.
Gains (Losses) on Retirement of Other Debt
Gains (losses) on retirement of other debt were $143 million and $11 million during the three months ended September 30, 2013 and 2012, respectively, and $136 million and $(55) million during the nine months ended September 30, 2013 and 2012, respectively. We recognized gains on the retirement of other debt during the three and nine months ended September 30, 2013 as a result of exercising our call option for other debt held at premiums. We recognized losses on the retirement of other debt during the nine months ended September 30, 2012 primarily due to write-offs of unamortized deferred issuance costs related to calls of other debt securities. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Other Debt Securities — Other Debt Retirement Activities.”
Gains (Losses) on Debt Recorded at Fair Value
Gains (losses) on debt recorded at fair value primarily relate to changes in the fair value of our foreign-currency denominated debt. During the three and nine months ended September 30, 2013, we recognized losses on debt recorded at fair value of $28 million and $13 million, respectively, primarily due to a combination of the U.S. dollar weakening relative to the Euro and changes in interest rates. For the three and nine months ended September 30, 2012, we recognized gains (losses) on debt recorded at fair value of $(10) million and $35 million, respectively.
Losses recognized for the three months ended September 30, 2012 were primarily from Euro Reference Notes due to the U.S. dollar weakening relative to the Euro. Gains during the nine months ended September 30, 2012 were primarily from Euro Reference Notes due to a combination of the U.S. dollar strengthening relative to the Euro in the first half of 2012 and changes in interest rates. We mitigate changes in the fair value of our foreign-currency denominated debt by using foreign currency swaps and foreign-currency denominated interest-rate swaps.
Derivative Gains (Losses)
The table below presents derivative gains (losses) reported in our consolidated statements of comprehensive income. See “NOTE 9: DERIVATIVES — Table 9.2 — Gains and Losses on Derivatives” for information about gains and losses related to
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specific categories of derivatives. Changes in fair value and interest accruals on derivatives not in hedge accounting relationships are recorded as derivative gains (losses) in our consolidated statements of comprehensive income. At September 30, 2013 and December 31, 2012, we did not have any derivatives in hedge accounting relationships; however, there are amounts recorded in AOCI related to closed cash flow hedges. Amounts recorded in AOCI associated with these closed cash flow hedges are reclassified to earnings when the forecasted transactions affect earnings. If it is probable that the forecasted transaction will not occur, then the deferred gain or loss associated with the forecasted transaction is reclassified into earnings immediately.
While derivatives are an important aspect of our strategy to manage interest-rate risk, they could increase the volatility of reported net income because, while fair value changes in derivatives affect net income, fair value changes in several of the types of assets and liabilities being hedged do not affect net income.
Table 9 — Derivative Gains (Losses)
Derivative Gains (Losses) | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(in millions) | |||||||||||||||
Interest-rate swaps | $ | 1,112 | $ | 62 | $ | 6,408 | $ | (1,236 | ) | ||||||
Option-based derivatives(1) | (238 | ) | 197 | (1,897 | ) | 1,396 | |||||||||
Other derivatives(2) | (40 | ) | 148 | (101 | ) | 347 | |||||||||
Accrual of periodic settlements | (908 | ) | (895 | ) | (2,747 | ) | (2,933 | ) | |||||||
Total | $ | (74 | ) | $ | (488 | ) | $ | 1,663 | $ | (2,426 | ) | ||||
(1) | Primarily includes purchased call and put swaptions and purchased interest-rate caps and floors. |
(2) | Includes futures, foreign-currency swaps, commitments, and swap guarantee derivatives. |
Gains (losses) on derivatives are principally driven by changes in: (a) interest rates and implied volatility; and (b) the mix and balance of products in our derivative portfolio.
During the three months ended September 30, 2013, we recognized a loss on derivatives of $74 million as net fair value gains of $1.1 billion on our interest-rate swap portfolio were more than offset by: (a) a net loss of $908 million related to the accrual of periodic settlements on interest-rate swaps as we were a net payer on our interest-rate swaps based on the coupons of the instruments; and (b) a fair value loss of $238 million on our option-based derivatives. The net fair value gains on our interest-rate swap portfolio were primarily driven by time decay, as we continue to pay periodic settlements to counterparties as our interest-rate swaps moved closer to maturity.
During the nine months ended September 30, 2013, we recognized gains on derivatives of $1.7 billion primarily as a result of an increase in longer-term interest rates. We recognized fair value gains on our pay-fixed swaps of $14.8 billion which were largely offset by: (a) fair value losses on our receive-fixed swaps of $8.3 billion; (b) a net loss of $2.7 billion related to the accrual of periodic settlements on interest-rate swaps as we were a net payer on our interest-rate swaps based on the coupons of the instruments; and (c) fair value losses of $1.9 billion on our option-based derivatives resulting from losses on our purchased call swaptions.
During the three and nine months ended September 30, 2012, we recognized losses on derivatives of $0.5 billion and $2.4 billion, respectively, primarily due to losses related to the accrual of periodic settlements on interest-rate swaps as we were in a net pay-fixed swap position. We recognized fair value losses on our pay-fixed swaps of $1.1 billion and $5.2 billion, respectively, which were offset by: (a) fair value gains on our receive-fixed swaps of $1.1 billion and $4.0 billion, respectively; and (b) fair value gains on our option-based derivatives of $0.2 billion and $1.4 billion, respectively, resulting from gains on our purchased call swaptions due to a decrease in interest rates.
Investment Securities-Related Activities
Impairments of Available-For-Sale Securities
We recorded net impairments of available-for-sale securities recognized in earnings, which were related to non-agency mortgage-related securities, of $126 million and $213 million during the three and nine months ended September 30, 2013, respectively, compared to $267 million and $929 million during the three and nine months ended September 30, 2012, respectively. The decreases in net impairments recognized in earnings were driven by improvements in forecasted home prices over the expected life of our available-for-sale securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities,” as well as “NOTE 7: INVESTMENTS IN SECURITIES” in our 2012 Annual Report for additional information.
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Other Gains (Losses) on Investment Securities Recognized in Earnings
Other gains (losses) on investment securities recognized in earnings consists of gains (losses) on trading securities and gains (losses) on sales of available-for-sale securities. With the exception of principal-only securities, our agency securities, classified as trading, were valued at a net premium (i.e., net fair value was higher than UPB) as of September 30, 2013.
We recognized $(207) million and $(1.3) billion related to gains (losses) on trading securities during the three and nine months ended September 30, 2013, respectively, compared to $(338) million and $(1.1) billion during the three and nine months ended September 30, 2012, respectively. The losses on trading securities during all periods were primarily due to the movement of securities with unrealized gains towards maturity.
We recognized $827 million and $1.2 billion of gains on sales of available-for-sale securities during the three and nine months ended September 30, 2013, respectively, compared to $8 million and $141 million during the three and nine months ended September 30, 2012, respectively. The increase in gains on sales of available-for-sale securities resulted from increased sales volume as we work toward our 2013 Conservatorship Scorecard goal to sell 5% of certain mortgage-related assets.
Other Income (Loss)
The table below summarizes the significant components of other income.
Table 10 — Other Income (Loss)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in millions) | ||||||||||||||||
Other income (loss): | ||||||||||||||||
Gains (losses) on mortgage loans | $ | 114 | $ | 427 | $ | (440 | ) | $ | 851 | |||||||
Recoveries on loans impaired upon purchase(1) | 64 | 101 | 213 | 277 | ||||||||||||
Guarantee-related income, net(2) | 120 | 69 | 279 | 269 | ||||||||||||
All other | 721 | (39 | ) | 1,100 | 164 | |||||||||||
Total other income (loss) | $ | 1,019 | $ | 558 | $ | 1,152 | $ | 1,561 | ||||||||
(1) | Our recoveries principally relate to impaired loans purchased prior to 2010. Consequently, our recoveries on these loans will generally decline over time. |
(2) | Most of our guarantee-related income relates to securitized multifamily mortgage loans where we have not consolidated the securitization trusts on our consolidated balance sheets. |
Gains (Losses) on Mortgage Loans
We recognized gains (losses) on mortgage loans of $114 million and $427 million during the three months ended September 30, 2013 and 2012, respectively, and $(440) million and $851 million during the nine months ended September 30, 2013 and 2012, respectively. These amounts relate to multifamily loans which we elected to carry at fair value, of which the substantial majority were designated for securitization. The decreases in the 2013 periods were primarily due to lower gains on mortgage loans resulting from an increase in interest rates, compared to declines in interest rates in the 2012 periods. During the nine months ended September 30, 2013 and 2012, we sold $20.8 billion and $13.9 billion, respectively, in UPB of multifamily loans for securitization and issuance of our K Certificates.
All Other
All other income (loss) consists of income recognized from settlement agreements, transactional fees, fees assessed to our servicers for technology use and late fees or other penalties, and other miscellaneous income. All other income (loss) was $0.7 billion and $1.1 billion during the three and nine months ended September 30, 2013, respectively, compared to $(39) million and $164 million during the three and nine months ended September 30, 2012, respectively. The improvements in the 2013 periods were primarily due to settlements related to lawsuits regarding our investments in certain residential non-agency mortgage-related securities, resulting in additional income recognition of $0.5 billion and $0.6 billion for the three and nine months ended September 30, 2013, respectively. For additional information on these settlements, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS.” All other income (loss) was also lower in the 2012 periods due, in part, to the correction of certain prior period accounting errors not material to our financial statements that were recorded during the 2012 periods, the largest of which reduced other income by approximately $0.1 billion during the third quarter of 2012. This correction related to an error associated with the consolidation of certain of our REMIC trusts for which we held substantially all of the beneficial interest issued by the trusts, but did not consolidate the trusts in prior periods.
Non-Interest Expense
The table below summarizes the components of non-interest expense.
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Table 11 — Non-Interest Expense
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(in millions) | |||||||||||||||
Administrative expenses: | |||||||||||||||
Salaries and employee benefits | $ | 207 | $ | 202 | $ | 626 | $ | 605 | |||||||
Professional services | 144 | 93 | 387 | 245 | |||||||||||
Occupancy expense | 14 | 15 | 41 | 43 | |||||||||||
Other administrative expense | 90 | 91 | 277 | 246 | |||||||||||
Total administrative expenses | 455 | 401 | 1,331 | 1,139 | |||||||||||
REO operations (income) expense | (79 | ) | (49 | ) | (183 | ) | 92 | ||||||||
Other expenses | 201 | 121 | 551 | 374 | |||||||||||
Total non-interest expense | $ | 577 | $ | 473 | $ | 1,699 | $ | 1,605 | |||||||
Administrative Expenses
Our administrative expenses increased in the three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012, primarily due to an increase in professional services expense related to: (a) FHFA-led lawsuits regarding our investments in certain residential non-agency mortgage-related securities; (b) quality control reviews for single-family loans we acquired prior to being placed in conservatorship; (c) Conservatorship Scorecard initiatives, including development of the common securitization platform; and (d) infrastructure improvement projects, including establishment of an off-site, back-up data facility.
REO Operations (Income) Expense
The table below presents the components of our REO operations (income) expense, and information about REO inventory and REO dispositions.
Table 12 — REO Operations (Income) Expense, REO Inventory, and REO Dispositions
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(dollars in millions) | ||||||||||||||||
REO operations (income) expense: | ||||||||||||||||
Single-family: | ||||||||||||||||
REO property expenses(1) | $ | 238 | $ | 259 | $ | 721 | $ | 930 | ||||||||
Disposition (gains) losses, net(2) | (200 | ) | (219 | ) | (595 | ) | (479 | ) | ||||||||
Change in holding period allowance, dispositions | (3 | ) | (8 | ) | (27 | ) | (98 | ) | ||||||||
Change in holding period allowance, inventory(3) | (5 | ) | 9 | 12 | (17 | ) | ||||||||||
Recoveries(4) | (97 | ) | (81 | ) | (279 | ) | (238 | ) | ||||||||
Total single-family REO operations (income) expense | (67 | ) | (40 | ) | (168 | ) | 98 | |||||||||
Multifamily REO operations (income) | (12 | ) | (9 | ) | (15 | ) | (6 | ) | ||||||||
Total REO operations (income) expense | $ | (79 | ) | $ | (49 | ) | $ | (183 | ) | $ | 92 | |||||
REO inventory (in properties), at September 30: | ||||||||||||||||
Single-family | 47,119 | 50,913 | 47,119 | 50,913 | ||||||||||||
Multifamily | 1 | 6 | 1 | 6 | ||||||||||||
Total | 47,120 | 50,919 | 47,120 | 50,919 | ||||||||||||
REO property dispositions (in properties): | ||||||||||||||||
Single-family | 16,945 | 22,660 | 55,692 | 73,762 | ||||||||||||
Multifamily | 4 | 7 | 8 | 18 | ||||||||||||
Total | 16,949 | 22,667 | 55,700 | 73,780 | ||||||||||||
(1) | Consists of costs incurred to maintain or protect a property after it is acquired in a foreclosure transfer, such as legal fees, insurance, taxes, and cleaning and other maintenance charges. |
(2) | Represents the difference between the disposition proceeds, net of selling expenses, and the fair value of the property on the date of the foreclosure transfer. |
(3) | Represents the (increase) decrease in the estimated fair value of properties that were in inventory during the period. |
(4) | Includes recoveries from primary mortgage insurance, pool insurance and seller/servicer repurchases. |
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REO operations (income) expense was $(79) million in the third quarter of 2013, as compared to $(49) million in the third quarter of 2012 and was $(183) million in the nine months ended September 30, 2013 compared to $92 million in the nine months ended September 30, 2012. The improvements in the 2013 periods were primarily due to: (a) a decline in REO property expenses associated with a lower number of REO properties owned in 2013; and (b) improving home prices in certain geographical areas with significant REO activity. For information on our REO activity during the three and nine months ended September 30, 2013, see “CONSOLIDATED BALANCE SHEETS ANALYSIS — REO, Net” and “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Non-Performing Assets.”
Other Expenses
Other expenses were $201 million and $121 million in the third quarters of 2013 and 2012, respectively, and were $551 million and $374 million in the nine months ended September 30, 2013 and 2012, respectively. Other expenses were higher in the 2013 periods compared to the same periods of 2012 primarily due to expenses related to the legislated 10 basis point increase in guarantee fees, which was implemented in April 2012. The expense for these fees was $150 million and $366 million in the three and nine months ended September 30, 2013, respectively, compared to $34 million and $44 million for the three and nine months ended September 30, 2012, respectively. These fees are remitted to Treasury on a quarterly basis. Other expenses also include HAMP servicer incentive fees, costs related to terminations and transfers of mortgage servicing, and other miscellaneous expenses.
Income Tax Benefit
For both the three and nine months ended September 30, 2013, we reported an income tax benefit of $24.0 billion, of which $23.9 billion relates to the release of the valuation allowance against our net deferred tax assets. For the three and nine months ended September 30, 2012, we reported an income tax benefit of $302 million and $392 million, respectively. See “NOTE 12: INCOME TAXES” for a discussion of the factors that led to our conclusion to release the valuation allowance against our net deferred tax assets.
Comprehensive Income
Our comprehensive income was $30.4 billion and $41.8 billion for the three and nine months ended September 30, 2013, respectively, consisting of: (a) $30.5 billion and $40.1 billion of net income, respectively; and (b) $(49) million and $1.7 billion of other comprehensive income (loss), respectively. The other comprehensive loss for the three months ended September 30, 2013 was primarily related to the reversal of fair value gains deferred in AOCI associated with certain available-for-sale securities that were sold and fair value losses on our agency mortgage-related available-for-sale securities, partially offset by fair value gains on our single-family non-agency mortgage-related available-for-sale securities. Other comprehensive income for the nine months ended September 30, 2013 was primarily due to fair value gains on our single-family non-agency mortgage-related available-for-sale securities.
Our comprehensive income was $5.6 billion and $10.3 billion for the three and nine months ended September 30, 2012, respectively, consisting of: (a) $2.9 billion and $6.5 billion of net income, respectively; and (b) $2.7 billion and $3.8 billion of other comprehensive income, respectively. Other comprehensive income primarily related to a reduction in net unrealized losses related to our available-for-sale securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Total Equity (Deficit)” for additional information regarding other comprehensive income (loss).
Segment Earnings
Our operations consist of three reportable segments, which are based on the type of business activities each performs — Investments, Single-family Guarantee, and Multifamily. Certain activities that are not part of a reportable segment are included in the All Other category.
The Investments segment reflects results from our investment, funding and hedging activities. The Single-family Guarantee segment reflects results from our single-family credit guarantee activities. The Multifamily segment reflects results from our investment (both purchases and sales), securitization, and guarantee activities in multifamily mortgage loans and securities. For more information, see “NOTE 13: SEGMENT REPORTING” in our 2012 Annual Report.
In presenting Segment Earnings, we make significant reclassifications among certain financial statement line items in order to reflect a measure of net interest income on investments and a measure of management and guarantee income on guarantees that is in line with how we manage our business. We present Segment Earnings by: (a) reclassifying certain investment-related activities and credit guarantee-related activities between various line items on our GAAP consolidated statements of comprehensive income; and (b) allocating certain revenues and expenses, including certain returns on assets and funding costs, and all administrative expenses to our three reportable segments.
As a result of these reclassifications and allocations, Segment Earnings for our reportable segments differs significantly from, and should not be used as a substitute for, net income (loss) as determined in accordance with GAAP. Our definition of
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Segment Earnings may differ from similar measures used by other companies. However, we believe that Segment Earnings provides us with meaningful metrics to assess the financial performance of each segment and our company as a whole.
Our Segment Earnings for the three and nine months ended September 30, 2013 includes a benefit for federal income taxes of $23.9 billion within our All Other category that resulted from our conclusion to release our valuation allowance against our net deferred tax assets.
See “NOTE 13: SEGMENT REPORTING” in our 2012 Annual Report for further information regarding the reclassifications and allocations used to present Segment Earnings.
The table below provides information about our various segment mortgage and credit risk portfolios at September 30, 2013 and December 31, 2012. For a discussion of each segment’s portfolios, see “Segment Earnings — Results.”
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Table 13 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios(1)
September 30, 2013 | December 31, 2012 | |||||||
(in millions) | ||||||||
Segment mortgage portfolios: | ||||||||
Investments — Mortgage investments portfolio: | ||||||||
Single-family unsecuritized mortgage loans(2) | $ | 84,680 | $ | 91,411 | ||||
Freddie Mac mortgage-related securities | 180,458 | 184,381 | ||||||
Non-agency mortgage-related securities | 66,961 | 76,457 | ||||||
Non-Freddie Mac agency mortgage-related securities | 20,945 | 23,675 | ||||||
Total Investments — Mortgage investments portfolio | 353,044 | 375,924 | ||||||
Single-family Guarantee — Managed loan portfolio:(3) | ||||||||
Single-family unsecuritized mortgage loans(4) | 41,268 | 53,333 | ||||||
Single-family Freddie Mac mortgage-related securities held by us | 180,458 | 184,381 | ||||||
Single-family Freddie Mac mortgage-related securities held by third parties | 1,345,139 | 1,335,393 | ||||||
Single-family other guarantee commitments(5) | 19,104 | 13,798 | ||||||
Total Single-family Guarantee — Managed loan portfolio | 1,585,969 | 1,586,905 | ||||||
Multifamily — Guarantee portfolio: | ||||||||
Multifamily Freddie Mac mortgage related securities held by us | 2,820 | 2,382 | ||||||
Multifamily Freddie Mac mortgage related securities held by third parties | 56,031 | 39,884 | ||||||
Multifamily other guarantee commitments(5) | 9,306 | 9,657 | ||||||
Total Multifamily — Guarantee portfolio | 68,157 | 51,923 | ||||||
Multifamily — Mortgage investments portfolio: | ||||||||
Multifamily investment securities portfolio | 38,679 | 51,718 | ||||||
Multifamily unsecuritized loan portfolio | 64,823 | 76,569 | ||||||
Total Multifamily — Mortgage investments portfolio | 103,502 | 128,287 | ||||||
Total Multifamily portfolio | 171,659 | 180,210 | ||||||
Less: Freddie Mac single-family and certain multifamily securities(6) | (183,278 | ) | (186,763 | ) | ||||
Total mortgage portfolio | $ | 1,927,394 | $ | 1,956,276 | ||||
Credit risk portfolios:(7) | ||||||||
Single-family credit guarantee portfolio:(3) | ||||||||
Single-family mortgage loans, on-balance sheet | $ | 1,631,084 | $ | 1,621,774 | ||||
Non-consolidated Freddie Mac mortgage-related securities | 7,189 | 8,897 | ||||||
Other guarantee commitments(5) | 19,104 | 13,798 | ||||||
Less: HFA initiative-related guarantees(8) | (4,374 | ) | (6,270 | ) | ||||
Less: Freddie Mac mortgage-related securities backed by Ginnie Mae certificates(8) | (570 | ) | (654 | ) | ||||
Total single-family credit guarantee portfolio | $ | 1,652,433 | $ | 1,637,545 | ||||
Multifamily mortgage portfolio: | ||||||||
Multifamily mortgage loans, on-balance sheet(9) | $ | 65,268 | $ | 77,017 | ||||
Non-consolidated Freddie Mac mortgage-related securities | 58,405 | 41,819 | ||||||
Other guarantee commitments(5) | 9,306 | 9,657 | ||||||
Less: HFA initiative-related guarantees(8) | (916 | ) | (1,112 | ) | ||||
Total multifamily mortgage portfolio | $ | 132,063 | $ | 127,381 | ||||
(1) | Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled. |
(2) | Excludes unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment. The Single-family Guarantee segment earns management and guarantee fees associated with unsecuritized single-family loans in the Investments segment’s mortgage investments portfolio. |
(3) | The balances of the mortgage-related securities in the Single-family Guarantee managed loan portfolio are based on the UPB of the security, whereas the balances of our single-family credit guarantee portfolio presented in this report are based on the UPB of the mortgage loans underlying the related security. The differences in the loan and security balances result from the timing of remittances to security holders, which are typically 45 or 75 days after the mortgage payment cycle of fixed-rate and ARM PCs, respectively. |
(4) | Represents unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment. |
(5) | Represents the UPB of mortgage-related assets held by third parties for which we provide our guarantee without our securitization of the related assets. |
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(6) | Freddie Mac single-family mortgage-related securities held by us are included in both our Investments segment’s mortgage investments portfolio and our Single-family Guarantee segment’s managed loan portfolio, and Freddie Mac multifamily mortgage-related securities held by us are included in both the multifamily investment securities portfolio and the multifamily guarantee portfolio. Therefore, these amounts are deducted in order to reconcile to our total mortgage portfolio. |
(7) | Represents the UPB of loans for which we present characteristics, delinquency data, and certain other statistics in this report. See “GLOSSARY” for further description. |
(8) | We exclude HFA initiative-related guarantees and our resecuritizations of Ginnie Mae certificates from our credit risk portfolios and most related statistics because these guarantees do not expose us to meaningful amounts of credit risk due to the credit enhancement provided on them by the U.S. government. |
(9) | Includes both unsecuritized multifamily mortgage loans and multifamily mortgage loans in consolidated trusts. |
Segment Earnings — Results
Investments
The table below presents the Segment Earnings of our Investments segment.
Table 14 — Segment Earnings and Key Metrics — Investments(1)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(dollars in millions) | |||||||||||||||
Segment Earnings: | |||||||||||||||
Net interest income | $ | 883 | $ | 1,342 | $ | 2,752 | $ | 4,594 | |||||||
Non-interest income (loss): | |||||||||||||||
Net impairment of available-for-sale securities recognized in earnings | 16 | (180 | ) | 73 | (690 | ) | |||||||||
Derivative gains (losses) | 1,007 | 557 | 4,774 | 993 | |||||||||||
Gains (losses) on trading securities | (187 | ) | (364 | ) | (1,311 | ) | (1,175 | ) | |||||||
Gains (losses) on mortgage loans | (129 | ) | 112 | (746 | ) | 323 | |||||||||
Other non-interest income (loss) | 1,937 | 520 | 3,654 | 1,776 | |||||||||||
Total non-interest income (loss) | 2,644 | 645 | 6,444 | 1,227 | |||||||||||
Non-interest expense: | |||||||||||||||
Administrative expenses | (133 | ) | (110 | ) | (377 | ) | (310 | ) | |||||||
Other non-interest expense | — | (1 | ) | (1 | ) | (1 | ) | ||||||||
Total non-interest expense | (133 | ) | (111 | ) | (378 | ) | (311 | ) | |||||||
Segment adjustments(2) | 269 | 191 | 854 | 510 | |||||||||||
Segment Earnings before income tax benefit | 3,663 | 2,067 | 9,672 | 6,020 | |||||||||||
Income tax benefit | 34 | 405 | 117 | 548 | |||||||||||
Segment Earnings, net of taxes | 3,697 | 2,472 | 9,789 | 6,568 | |||||||||||
Total other comprehensive income, net of taxes | 638 | 2,015 | 2,227 | 2,377 | |||||||||||
Comprehensive income | $ | 4,335 | $ | 4,487 | $ | 12,016 | $ | 8,945 | |||||||
Key metrics: | |||||||||||||||
Portfolio balances: | |||||||||||||||
Average balances of interest-earning assets:(3)(4) | |||||||||||||||
Mortgage-related securities(5) | $ | 283,478 | $ | 299,700 | $ | 282,009 | $ | 312,859 | |||||||
Non-mortgage-related investments(6) | 94,150 | 98,664 | 91,756 | 99,670 | |||||||||||
Single-family unsecuritized loans(7) | 88,444 | 90,832 | 89,963 | 99,432 | |||||||||||
Total average balances of interest-earning assets | $ | 466,072 | $ | 489,196 | $ | 463,728 | $ | 511,961 | |||||||
Return: | |||||||||||||||
Net interest yield — Segment Earnings basis (annualized) | 0.76 | % | 1.10 | % | 0.79 | % | 1.20 | % | |||||||
(1) | For reconciliations of the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 13: SEGMENT REPORTING — Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.” For a full discussion of our segment activities, see “NOTE 13: SEGMENT REPORTING — Segment Earnings” in our 2012 Annual Report. |
(2) | For a description of our segment adjustments, see “NOTE 13: SEGMENT REPORTING — Segment Earnings” in our 2012 Annual Report. |
(3) | Excludes mortgage loans and mortgage-related securities traded, but not yet settled. |
(4) | We calculate average balances based on amortized cost. |
(5) | Includes our investments in single-family PCs and certain Other Guarantee Transactions, which are consolidated under GAAP on our consolidated balance sheets. |
(6) | Includes the average balances of interest-earning cash and cash equivalents, non-mortgage-related securities, and federal funds sold and securities purchased under agreements to resell. |
(7) | Excludes unsecuritized seriously delinquent single-family mortgage loans. |
Segment Earnings for our Investments segment increased by $1.2 billion and $3.2 billion to $3.7 billion and $9.8 billion in the three and nine months ended September 30, 2013, respectively, compared to $2.5 billion and $6.6 billion in the three and
26 | Freddie Mac | |
nine months ended September 30, 2012, respectively, primarily due to increases in derivative gains and other non-interest income.
Comprehensive income for our Investments segment decreased by $152 million to $4.3 billion in the three months ended September 30, 2013, compared to $4.5 billion in the three months ended September 30, 2012 as lower fair value gains on our available-for-sale mortgage-related securities more than offset higher Segment Earnings. Comprehensive income for our Investments segment increased by $3.1 billion to $12.0 billion in the nine months ended September 30, 2013, compared to $8.9 billion in the nine months ended September 30, 2012 primarily due to higher Segment Earnings.
During the three and nine months ended September 30, 2013, the UPB of the Investments segment mortgage investments portfolio decreased at an annualized rate of 7% and 8%, respectively. We held $201.4 billion and $208.1 billion of agency securities, $67.0 billion and $76.5 billion of non-agency mortgage-related securities, and $84.7 billion and $91.4 billion of single-family unsecuritized mortgage loans at September 30, 2013 and December 31, 2012, respectively. The decline in UPB of agency securities is due mainly to liquidations. The decline in UPB of non-agency mortgage-related securities is due mainly to the receipt of monthly remittances of principal repayments from both the recoveries from liquidated loans and voluntary repayments of the underlying collateral, representing a partial return of our investments in these securities, and sales during the three and nine months ended September 30, 2013. The decline in the UPB of single-family unsecuritized mortgage loans is primarily related to our securitization of mortgage loans that we had purchased for cash, and includes the securitization of reperforming loans and modified loans. As of September 30, 2013, included in the agency security balance is $3.1 billion of securitized reperforming loans and securitized modified loans. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” and “— Mortgage Loans” for additional information regarding our mortgage-related securities and mortgage loans.
Segment Earnings net interest income decreased by $459 million and $1.8 billion and Segment Earnings net interest yield decreased by 34 basis points and 41 basis points during the three and nine months ended September 30, 2013, respectively, compared to the three and nine months ended September 30, 2012. The primary drivers of the decreases were the reduction in the balance of higher-yielding mortgage-related assets due to continued liquidations, partially offset by lower funding costs primarily due to the replacement of debt at lower rates.
Segment Earnings non-interest income was $2.6 billion and $6.4 billion in the three and nine months ended September 30, 2013, respectively, compared to $645 million and $1.2 billion in the three and nine months ended September 30, 2012, respectively. These improvements were primarily due to increases in derivative gains, improvements in net impairments of available-for-sale securities recognized in earnings and increases in other non-interest income, partially offset by losses on mortgage loans.
We recorded derivative gains for this segment of $1.0 billion during the three months ended September 30, 2013 compared to $557 million during the three months ended September 30, 2012. The increase in derivative gains was primarily due to the change in the mix of our derivative portfolio coupled with an increase in interest rates. We recorded derivative gains for this segment of $4.8 billion during the nine months ended September 30, 2013 compared to $1.0 billion during the nine months ended September 30, 2012. The increase in derivative gains was primarily due to an increase in longer-term interest rates during the nine months ended September 30, 2013 compared to a decrease in longer-term interest rates during the nine months ended September 30, 2012. See “Non-Interest Income (Loss) — Derivative Gains (Losses)” for additional information on our derivatives.
Net impairments in our Investments segment were benefits of $16 million and $73 million during the three and nine months ended September 30, 2013, respectively, compared to expenses of $180 million and $690 million during the three and nine months ended September 30, 2012, respectively. The improvement in impairments was primarily due to improvements in forecasted home prices over the expected life of the available-for-sale securities during the three and nine months ended September 30, 2013. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities,” as well as “NOTE 7: INVESTMENTS IN SECURITIES” in our 2012 Annual Report for additional information on our impairments.
We recorded gains (losses) on trading securities of $(187) million and $(1.3) billion during the three and nine months ended September 30, 2013, respectively, compared to $(364) million and $(1.2) billion during the three and nine months ended September 30, 2012, respectively. The losses on trading securities during all periods were primarily due to the movement of securities with unrealized gains towards maturity.
We recorded gains (losses) on mortgage loans of $(129) million and $(746) million during the three and nine months ended September 30, 2013, respectively, compared to $112 million and $323 million during the three and nine months ended September 30, 2012, respectively. The losses on mortgage loans during the three and nine months ended September 30, 2013 were primarily due to an increase in interest rates while the gains on mortgage loans during the three and nine months ended September 30, 2012 were due to a decline in interest rates.
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We recorded other non-interest income for this segment of $1.9 billion and $3.7 billion during the three and nine months ended September 30, 2013, respectively, compared to $520 million and $1.8 billion during the three and nine months ended September 30, 2012, respectively. The increases in other non-interest income during the three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012 primarily resulted from: (a) increased gains on sales of available-for-sale securities resulting from increased sales volume as we work toward our 2013 Conservatorship Scorecard goal to sell 5% of certain mortgage-related assets; (b) gains realized due to settlement agreements primarily related to lawsuits regarding our investments in certain non-agency mortgage-related securities; and (c) increased gains on the retirement of other debt largely due to higher premiums held on the debt that was called in 2013. The gains on sales of available-for-sale securities includes the estimated amount of gains on sales of Multifamily segment CMBS attributed to changes in interest rates. For additional information on the settlement agreements, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Agency and Non-Agency Mortgage-Related Security Issuers.”
Our Investments segment’s other comprehensive income was $638 million and $2.2 billion during the three and nine months ended September 30, 2013, respectively, compared to $2.0 billion and $2.4 billion during the three and nine months ended September 30, 2012, respectively. The decrease in other comprehensive income during the three months ended September 30, 2013 compared to the three months ended September 30, 2012 was primarily due to lower gains on our non-agency mortgage-related securities, as these securities were affected by spread widening, and lower fair value gains related to the movement of these securities with unrealized losses towards maturity. The decrease in other comprehensive income during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 was primarily due to losses on our agency mortgage-related securities resulting from the increase in long-term interest rates, partially offset by higher fair value gains on our single-family non-agency mortgage-related securities, as these securities were impacted by spread tightening in the first half of 2013. Changes in fair value of the Multifamily segment investment securities, excluding impacts from the changes in interest rates which are included in the Investments segment, are reflected in the Multifamily segment.
Significant strategy changes, either from management, FHFA, or Treasury, could have an adverse impact on the earnings from our Investments segment.
Our current loss mitigation activities may lead to faster prepayments, which also could have an impact on the earnings from mortgage-related assets we hold in our Investments segment mortgage investments portfolio. In addition, loss mitigation activities may adversely affect our ability to securitize and sell the loans subject to those activities (e.g. modified single-family mortgage loans).
For a discussion of items that have affected our Investments segment net interest income over time, and can be expected to continue to do so, see “BUSINESS — Conservatorship and Related Matters — Limits on Investment Activity and Our Mortgage-Related Investments Portfolio” in our 2012 Annual Report. For more information on our loss mitigation activities, see “BUSINESS — Our Business Segments — Single-Family Guarantee Segment — Loss Mitigation and Loan Workout Activities” in our 2012 Annual Report.
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Single-Family Guarantee
The table below presents the Segment Earnings of our Single-family Guarantee segment.
Table 15 — Segment Earnings and Key Metrics — Single-Family Guarantee(1)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Segment Earnings: | ||||||||||||||||
Net interest income (expense) | $ | 203 | $ | (61 | ) | $ | 300 | $ | (94 | ) | ||||||
Benefit (provision) for credit losses | 885 | (931 | ) | 1,474 | (3,577 | ) | ||||||||||
Non-interest income: | ||||||||||||||||
Management and guarantee income | 1,230 | 1,108 | 3,771 | 3,145 | ||||||||||||
Other non-interest income | 246 | 219 | 695 | 571 | ||||||||||||
Total non-interest income | 1,476 | 1,327 | 4,466 | 3,716 | ||||||||||||
Non-interest expense: | ||||||||||||||||
Administrative expenses | (263 | ) | (228 | ) | (756 | ) | (653 | ) | ||||||||
REO operations income (expense) | 67 | 40 | 168 | (98 | ) | |||||||||||
Other non-interest expense | (195 | ) | (111 | ) | (505 | ) | (266 | ) | ||||||||
Total non-interest expense | (391 | ) | (299 | ) | (1,093 | ) | (1,017 | ) | ||||||||
Segment adjustments(2) | (154 | ) | (189 | ) | (596 | ) | (577 | ) | ||||||||
Segment Earnings (loss) before income tax expense | 2,019 | (153 | ) | 4,551 | (1,549 | ) | ||||||||||
Income tax expense | — | (10 | ) | (5 | ) | (48 | ) | |||||||||
Segment Earnings (loss), net of taxes | 2,019 | (163 | ) | 4,546 | (1,597 | ) | ||||||||||
Total other comprehensive income (loss), net of taxes | 2 | 1 | 14 | (21 | ) | |||||||||||
Total comprehensive income (loss) | $ | 2,021 | $ | (162 | ) | $ | 4,560 | $ | (1,618 | ) | ||||||
Key metrics: | ||||||||||||||||
Balances and Volume (in billions, except rate): | ||||||||||||||||
Average balance of single-family credit guarantee portfolio and HFA guarantees | $ | 1,648 | $ | 1,671 | $ | 1,642 | $ | 1,706 | ||||||||
Issuance — Single-family credit guarantees(3) | $ | 101 | $ | 107 | $ | 370 | $ | 318 | ||||||||
Fixed-rate products — Percentage of purchases(4) | 95 | % | 96 | % | 96 | % | 95 | % | ||||||||
Liquidation rate — Single-family credit guarantees (annualized)(5) | 26 | % | 35 | % | 31 | % | 32 | % | ||||||||
Average Management and Guarantee Rate (in bps, annualized):(6) | ||||||||||||||||
Segment Earnings management and guarantee income(7) | 29.8 | 26.5 | 30.6 | 24.6 | ||||||||||||
Guarantee fee charged on new acquisitions(8) | 53.2 | 42.0 | 50.8 | 35.8 | ||||||||||||
Credit: | ||||||||||||||||
Serious delinquency rate, at end of period | 2.58 | % | 3.37 | % | 2.58 | % | 3.37 | % | ||||||||
REO inventory, at end of period (number of properties) | 47,119 | 50,913 | 47,119 | 50,913 | ||||||||||||
Single-family credit losses, in bps (annualized)(9) | 13.5 | 69.8 | 35.2 | 71.8 | ||||||||||||
Market: | ||||||||||||||||
Single-family mortgage debt outstanding (total U.S. market, in billions)(10) | $ | 9,833 | $ | 9,943 | $ | 9,833 | $ | 9,943 | ||||||||
30-year fixed mortgage rate(11) | 4.3 | % | 3.4 | % | 4.3 | % | 3.4 | % | ||||||||
(1) | For reconciliations of the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 13: SEGMENT REPORTING — Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.” |
(2) | For a description of our segment adjustments, see “NOTE 13: SEGMENT REPORTING — Segment Earnings” in our 2012 Annual Report. |
(3) | Represents the UPB of loans underlying Freddie Mac mortgage-related securities and other guarantee commitments. |
(4) | Excludes Other Guarantee Transactions. |
(5) | Represents principal repayments relating to loans underlying Freddie Mac mortgage-related securities and other guarantee commitments, including those related to our removal of seriously delinquent and modified mortgage loans and balloon/reset mortgage loans from PC pools. |
(6) | Includes the effect of the legislated 10 basis point increase in guarantee fees that became effective April 1, 2012. The 2013 periods also include an additional across-the-board increase in guarantee fees that became effective in the fourth quarter of 2012. |
(7) | Consists of the contractual management and guarantee fee rate as well as amortization of delivery and other upfront fees (using the original contractual maturity date of the related loans) for the entire single-family credit guarantee portfolio. Also includes the effect of pricing adjustments that are based on the relative performance of our PCs compared to comparable Fannie Mae securities. |
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(8) | Represents the estimated rate of management and guarantee fees for new acquisitions during the period assuming amortization of delivery fees using the estimated life of the related loans rather than the original contractual maturity date of the related loans. Also includes the effect of pricing adjustments that are based on the relative performance of our PCs compared to comparable Fannie Mae securities. |
(9) | Calculated as the amount of single-family credit losses divided by the sum of the average carrying value of our single-family credit guarantee portfolio and the average balance of our single-family HFA initiative-related guarantees. |
(10) | Source: Federal Reserve Flow of Funds Accounts of the United States of America dated September 25, 2013. The outstanding amount for September 30, 2013 reflects the balance as of June 30, 2013. |
(11) | Based on Freddie Mac’s Primary Mortgage Market Survey rate for the last week in the period, which represents the national average mortgage commitment rate to a qualified borrower exclusive of any fees and points required by the lender. This commitment rate applies only to financing on conforming mortgages with LTV ratios of 80%. |
Segment Earnings (loss) for our Single-family Guarantee segment improved to $2.0 billion and $4.5 billion for the three and nine months ended September 30, 2013, respectively, compared to $(0.2) billion and $(1.6) billion for the three and nine months ended September 30, 2012, respectively. The improvement was primarily due to a shift from provision for credit losses of $0.9 billion and $3.6 billion in the three and nine months ended September 30, 2012, respectively, to a benefit for credit losses of $0.9 billion and $1.5 billion in the three and nine months ended September 30, 2013, respectively.
Segment Earnings (loss) for the Single-family Guarantee segment is largely driven by management and guarantee fee income and the benefit (provision) for credit losses. The table below provides summary information about the composition of Segment Earnings (loss) for this segment, by guarantee and loan origination years, for the nine months ended September 30, 2013 and 2012.
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Table 16 — Segment Earnings Composition — Single-Family Guarantee Segment
Nine Months Ended September 30, 2013 | ||||||||||||||||||
Segment Earnings Management and Guarantee Income(1) | Credit-Related Benefit (Expense) (2) | |||||||||||||||||
Amount | Average Rate(3) | Amount | Average Rate(3) | Net Amount(4) | ||||||||||||||
(dollars in millions, rates in bps) | ||||||||||||||||||
Year of origination:(5) | ||||||||||||||||||
2013 | $ | 494 | 35.0 | $ | (45 | ) | (3.1 | ) | $ | 449 | ||||||||
2012 | 935 | 32.8 | (205 | ) | (6.6 | ) | 730 | |||||||||||
2011 | 543 | 35.9 | (60 | ) | (4.0 | ) | 483 | |||||||||||
2010 | 513 | 35.2 | (45 | ) | (3.0 | ) | 468 | |||||||||||
2009 | 391 | 31.7 | 9 | 0.7 | 400 | |||||||||||||
2008 | 196 | 32.3 | 168 | 36.7 | 364 | |||||||||||||
2007 | 194 | 23.0 | 568 | 78.8 | 762 | |||||||||||||
2006 | 105 | 19.4 | 401 | 74.1 | 506 | |||||||||||||
2005 | 120 | 19.7 | 464 | 75.1 | 584 | |||||||||||||
2004 and prior | 280 | 22.5 | 387 | 28.7 | 667 | |||||||||||||
Total | $ | 3,771 | 30.6 | $ | 1,642 | 13.2 | $ | 5,413 | ||||||||||
Administrative expenses | (756 | ) | ||||||||||||||||
Net interest income (expense) | 300 | |||||||||||||||||
Other non-interest income (expenses), net | (411 | ) | ||||||||||||||||
Segment Earnings (loss), net of taxes | $ | 4,546 | ||||||||||||||||
Nine Months Ended September 30, 2012 | ||||||||||||||||||
Segment Earnings Management and Guarantee Income(1) | Credit-Related Benefit (Expense) (2) | |||||||||||||||||
Amount | Average Rate(3) | Amount | Average Rate(3) | Net Amount(4) | ||||||||||||||
(dollars in millions, rates in bps) | ||||||||||||||||||
Year of origination:(5) | ||||||||||||||||||
2012 | $ | 245 | 23.0 | $ | (78 | ) | (6.6 | ) | $ | 167 | ||||||||
2011 | 566 | 27.3 | (174 | ) | (8.5 | ) | 392 | |||||||||||
2010 | 582 | 27.9 | (255 | ) | (11.8 | ) | 327 | |||||||||||
2009 | 562 | 28.5 | (211 | ) | (10.7 | ) | 351 | |||||||||||
2008 | 253 | 26.9 | (176 | ) | (23.6 | ) | 77 | |||||||||||
2007 | 238 | 19.7 | (1,161 | ) | (107.8 | ) | (923 | ) | ||||||||||
2006 | 151 | 19.5 | (767 | ) | (95.9 | ) | (616 | ) | ||||||||||
2005 | 174 | 19.7 | (743 | ) | (81.5 | ) | (569 | ) | ||||||||||
2004 and prior | 374 | 20.8 | (110 | ) | (5.6 | ) | 264 | |||||||||||
Total | $ | 3,145 | 24.6 | $ | (3,675 | ) | (28.6 | ) | $ | (530 | ) | |||||||
Administrative expenses | (653 | ) | ||||||||||||||||
Net interest income (expense) | (94 | ) | ||||||||||||||||
Other non-interest income (expenses), net | (320 | ) | ||||||||||||||||
Segment Earnings (loss), net of taxes | $ | (1,597 | ) | |||||||||||||||
(1) | Includes amortization of delivery and other upfront fees based on the original contractual maturity date of the related loans of $1.8 billion and $1.2 billion for the nine months ended September 30, 2013 and 2012, respectively. Includes the effect of the legislated 10 basis point increase in guarantee fees that became effective April 1, 2012. Results for 2013 also include an additional across-the-board increase in guarantee fees that became effective in the fourth quarter of 2012. Beginning in the fourth quarter of 2012, includes amortization of buy-down fees. |
(2) | Consists of the aggregate of the Segment Earnings benefit (provision) for credit losses and Segment Earnings REO operations income (expense). Historical rates of average credit-related benefit (expense) may not be representative of future results. |
(3) | Calculated as the annualized amount of Segment Earnings management and guarantee income or credit-related benefit (expense), respectively, divided by the sum of the average carrying values of the single-family credit guarantee portfolio and the average balance of our single-family HFA initiative-related guarantees. |
(4) | Calculated as Segment Earnings management and guarantee income less credit-related benefit (expense). |
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(5) | Segment Earnings management and guarantee income is presented by year of guarantee origination, whereas credit-related benefit (expense) is presented based on year of loan origination. Refinance loans, including HARP and other relief refinance loans, are presented in the year the refinancing occurred. |
The credit quality of the single-family loans we acquired beginning in 2009 (excluding HARP loans and other relief refinance mortgages) is significantly better than that of loans we acquired from 2005 through 2008, as measured by original LTV ratios, FICO scores, and the proportion of loans underwritten with fully documented income. Mortgages originated after 2008, including HARP and other relief refinance mortgages, represented 73% of the UPB of our single-family credit guarantee portfolio as of September 30, 2013, and the portion of that portfolio represented by such loans continues to increase. For more information on the composition of our single-family credit guarantee portfolio, see "Table 2 — Single-Family Mortgage Loan Purchases and Other Guarantee Commitment Issuances, by Loan Purpose" and "Table 3 — Single-Family Credit Guarantee Portfolio Summary."
As of September 30, 2013, loans originated after 2008 have, on a cumulative basis, provided management and guarantee income that has exceeded the credit-related and administrative expenses associated with these loans. For the nine months ended September 30, 2013, credit-related expenses for loans originated in 2005 through 2008 benefited from improvements in home prices, which resulted in lower estimates of incurred losses. However, on a cumulative basis, our management and guarantee income associated with guarantee issuances in 2005 through 2008 has not been adequate to cover the credit-related and administrative expenses associated with such loans, primarily due to the high rate of defaults on the loans originated in those years.
HARP and other relief refinance loans represent a significant and increasing portion of the portfolio. Relief refinance mortgages (including HARP loans) generally present higher risk to us than other refinance loans we have purchased since 2009 because:
• | underwriting procedures for relief refinance mortgages are limited in many cases, and such procedures generally do not include all of the changes in underwriting standards we have implemented since 2008; |
• | many of these loans have relatively high LTV ratios (e.g., greater than 90%), which can increase the probability of default and increase the amount of our loss if the borrower does default; |
• | HARP loans may not be covered by mortgage insurance for the full excess of their UPB over 80%; and |
• | beginning with changes announced in the fourth quarter of 2011, we have relieved the lenders of certain representations and warranties on the original mortgage being refinanced, which limits our ability to seek recovery or repurchase from the seller for breach. |
For information on the potential credit risks related to these loans, see "RISK MANAGEMENT - Credit Risk —Mortgage Credit Risk - Single-Family Mortgage Credit Risk - Single-Family Loan Workouts and the MHA Program."
Segment Earnings management and guarantee income increased in the three and nine months ended September 30, 2013, as compared to the three and nine months ended September 30, 2012, primarily due to an increase in amortization of buy-down fees, which we began recording in the Single-family Guarantee segment during the fourth quarter of 2012. We amortize these upfront fees based on the original contractual maturity date of the loan rather than the loan’s estimated life. As a result, the amount of Segment Earnings management and guarantee income we recognize related to upfront fees is lower in the initial years of a loan and increases during periods of high refinance or prepayment activity, as unamortized upfront fees for loans are recognized in income when the loans are refinanced or prepaid.
Segment Earnings management and guarantee income also benefited in 2013 from higher guarantee fees. At the direction of FHFA, we implemented two across-the-board increases in guarantee fees in 2012. As a result, our average management and guarantee fee we charge in 2013 and thereafter will be higher than the average fee we charged in previous years. The average management and guarantee fee we charged for new acquisitions in the third quarter of 2013 was 53.2 basis points (including the legislated 10 bps increase), compared to 42.0 basis points in the third quarter of 2012. The guarantee fee we charge on new acquisitions generally consists of a combination of delivery fees as well as a base monthly fee. The average guarantee fee charged on new acquisitions represents our expected guarantee fee rate over the estimated life of the related loans using certain assumptions for prepayments and other liquidations.
Our Segment Earnings management and guarantee fee income is also influenced by our PC price performance because we adjust our fees based on the relative price performance of our PCs compared to comparable Fannie Mae securities. A decline in security performance could negatively impact our segment financial results. See “RISK FACTORS — Competitive and Market Risks — A significant decline in the price performance of or demand for our PCs could have an adverse effect on the volume and/or profitability of our new single-family guarantee business” in our 2012 Annual Report for additional information.
The UPB of the Single-family Guarantee managed loan portfolio was $1.6 trillion at both September 30, 2013 and December 31, 2012. Issuances of our guarantees for this portfolio were $370 billion and $318 billion in the nine months ended September 30, 2013 and 2012, respectively, and predominantly consisted of refinance mortgages, including HARP and other
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relief refinance loans. During the third quarter of 2013, refinancings, including HARP, comprised approximately 65% of our single-family purchase and issuance volume, compared with 81% in the first half of 2013 and approximately 82% for all of 2012. We believe that the recent increase in mortgage interest rates and potential further increases will result in a decline, which could be significant, in overall single-family mortgage originations. As a result, we expect our purchase volumes will likely also decline, potentially significantly, during the fourth quarter of 2013 and the full year of 2014. However, we expect the UPB of our single-family credit guarantee portfolio will be relatively unchanged at the end of December 2014 compared to September 30, 2013, due to an expected decline in prepayments resulting from higher mortgage interest rates. For more information, see “RISK FACTORS — Competitive and Market Risks — Our refinance volumes could decline if interest rates rise, which could cause our overall new mortgage-related security issuance volumes to decline” in our 2012 Annual Report.
The annualized liquidation rate on our single-family credit guarantees was approximately 26% and 31% for the three and nine months ended September 30, 2013, respectively. Although the annualized liquidation rate remained high during the nine months ended September 30, 2013, it declined in the third quarter of 2013 compared to the second quarter of 2013 primarily due to an increase in interest rates and lower refinancing activity.
Benefit (provision) for credit losses for the Single-family Guarantee segment was $0.9 billion in the third quarter of 2013 compared to $(0.9) billion in the third quarter of 2012, and was $1.5 billion in the nine months ended September 30, 2013 compared to $(3.6) billion in the nine months ended September 30, 2012. The significant improvement in provision for credit losses in the 2013 periods reflects: (a) declines in the volume of newly delinquent loans (largely due to a decline in the portion of our single-family credit guarantee portfolio originated in 2005 through 2008); (b) lower estimates of incurred loss due to the positive impact of an increase in national home prices; and (c) $0.9 billion related to counterparty agreements in the third quarter of 2013. Assuming that all other factors remain the same, an increase in home prices can reduce the likelihood that loans will default and may also reduce the amount of credit losses on the loans that do default.
The serious delinquency rate on our single-family credit guarantee portfolio was 2.58% and 3.25% as of September 30, 2013 and December 31, 2012, respectively. Charge-offs, net of recoveries, associated with single-family loans were $4.6 billion and $9.1 billion in the nine months ended September 30, 2013 and 2012, respectively. Single-family credit losses as a percentage of the average balance of the single-family credit guarantee portfolio and HFA initiative-related guarantees were 35.2 basis points and 71.8 basis points for the nine months ended September 30, 2013 and 2012, respectively. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance, serious delinquency rates, charge-offs, and our non-performing assets.
REO operations income (expense) for the Single-family Guarantee segment was $67 million and $40 million in the third quarters of 2013 and 2012, respectively, and was $168 million and $(98) million in the nine months ended September 30, 2013 and 2012, respectively. The improvements in the 2013 periods, compared to the respective periods in 2012, were primarily due to: (a) a decline in REO property expenses associated with a lower number of REO properties owned in the 2013 periods; and (b) improving home prices in certain geographical areas with significant REO activity.
Our REO inventory (measured in number of properties) declined 4% from December 31, 2012 to September 30, 2013 primarily due to lower foreclosure activity as a result of our loss mitigation efforts and a declining amount of delinquent loans. Although there was an improvement in REO disposition severity during the nine months ended September 30, 2013, the REO disposition severity ratios on sales of our REO inventory remain high as compared to periods before 2008. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Non-Performing Assets” for additional information about our REO activity.
Other non-interest expense for the Single-family Guarantee segment was $195 million and $111 million in the third quarters of 2013 and 2012, respectively, and was $505 million and $266 million in the nine months ended September 30, 2013 and 2012, respectively. The increase in the 2013 periods was primarily due to expenses related to the legislated 10 basis point increase to guarantee fees, which we implemented in April 2012. The amount was not significant during the nine months ended September 30, 2012. As of September 30, 2013, the cumulative total of amounts paid and due to Treasury related to this increase was $474 million, including $366 million for the nine months ended September 30, 2013. The increase in expense associated with the legislated increase in guarantee fees was partially offset by a decline in HAMP incentive fees in the 2013 periods compared to the respective periods in 2012.
Multifamily
The table below presents the Segment Earnings of our Multifamily segment.
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Table 17 — Segment Earnings and Key Metrics — Multifamily(1)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Segment Earnings: | ||||||||||||||||
Net interest income | $ | 321 | $ | 334 | $ | 944 | $ | 982 | ||||||||
Benefit for credit losses | 28 | 40 | 167 | 81 | ||||||||||||
Non-interest income: | ||||||||||||||||
Management and guarantee income | 52 | 38 | 147 | 107 | ||||||||||||
Net impairment of available-for-sale securities recognized in earnings | (4 | ) | (29 | ) | (15 | ) | (64 | ) | ||||||||
Gains on mortgage loans | 243 | 315 | 306 | 528 | ||||||||||||
Other non-interest income | 257 | 77 | 475 | 305 | ||||||||||||
Total non-interest income | 548 | 401 | 913 | 876 | ||||||||||||
Non-interest expense: | ||||||||||||||||
Administrative expenses | (59 | ) | (63 | ) | (198 | ) | (176 | ) | ||||||||
REO operations income (expense) | 12 | 9 | 15 | 6 | ||||||||||||
Other non-interest expense | (6 | ) | (9 | ) | (18 | ) | (107 | ) | ||||||||
Total non-interest expense | (53 | ) | (63 | ) | (201 | ) | (277 | ) | ||||||||
Segment Earnings before income tax expense | 844 | 712 | 1,823 | 1,662 | ||||||||||||
Income tax expense | — | (2 | ) | (1 | ) | (10 | ) | |||||||||
Segment Earnings, net of taxes | 844 | 710 | 1,822 | 1,652 | ||||||||||||
Total other comprehensive income (loss), net of taxes | (689 | ) | 686 | (531 | ) | 1,430 | ||||||||||
Total comprehensive income | $ | 155 | $ | 1,396 | $ | 1,291 | $ | 3,082 | ||||||||
Key metrics: | ||||||||||||||||
Balances and Volume: | ||||||||||||||||
Average balance of Multifamily unsecuritized loan portfolio | $ | 67,710 | $ | 80,627 | $ | 72,326 | $ | 81,665 | ||||||||
Average balance of Multifamily guarantee portfolio | $ | 66,673 | $ | 45,060 | $ | 60,606 | $ | 41,024 | ||||||||
Average balance of Multifamily investment securities portfolio | $ | 43,383 | $ | 53,989 | $ | 47,483 | $ | 55,926 | ||||||||
Multifamily new business activity(2) | $ | 5,266 | $ | 6,810 | $ | 18,800 | $ | 19,222 | ||||||||
Multifamily units financed from new business activity(2) | 72,716 | 109,080 | 257,714 | 302,474 | ||||||||||||
Multifamily K Certificate issuance — guaranteed portion | $ | 5,313 | $ | 3,239 | $ | 17,474 | $ | 11,687 | ||||||||
Multifamily K Certificate issuance — unguaranteed portion | $ | 1,041 | $ | 617 | $ | 3,233 | $ | 2,171 | ||||||||
Yield and Rate: | ||||||||||||||||
Net interest yield — Segment Earnings basis (annualized) | 1.15 | % | 0.99 | % | 1.04 | % | 0.95 | % | ||||||||
Average Management and guarantee fee rate, in bps (annualized):(3) | ||||||||||||||||
K Certificate | 19.3 | 18.5 | 19.4 | 18.9 | ||||||||||||
All other guarantees | 75.4 | 67.2 | 74.7 | 67.5 | ||||||||||||
Total | 30.8 | 34.1 | 32.1 | 36.2 | ||||||||||||
Credit: | ||||||||||||||||
Delinquency rate: | ||||||||||||||||
Credit-enhanced loans, at period end | 0.06 | % | 0.45 | % | 0.06 | % | 0.45 | % | ||||||||
Non-credit-enhanced loans, at period end | 0.05 | % | 0.18 | % | 0.05 | % | 0.18 | % | ||||||||
Total delinquency rate, at period end(4) | 0.05 | % | 0.27 | % | 0.05 | % | 0.27 | % | ||||||||
Allowance for loan losses and reserve for guarantee losses, at period end | $ | 205 | $ | 453 | $ | 205 | $ | 453 | ||||||||
Allowance for loan losses and reserve for guarantee losses, in bps | 15.4 | 35.8 | 15.4 | 35.8 | ||||||||||||
Credit losses (gains), in bps (annualized)(5) | (2.7 | ) | (1.7 | ) | (0.6 | ) | 0.6 | |||||||||
REO inventory, at net carrying value | $ | 2 | $ | 43 | $ | 2 | $ | 43 | ||||||||
REO inventory, at period end (number of properties) | 1 | 6 | 1 | 6 | ||||||||||||
(1) | For reconciliations of Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 13: SEGMENT REPORTING — Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.” |
(2) | Represents loan purchases and other guarantee commitment issuances. Excludes our guarantees issued under the HFA initiative and K Certificate issuances. |
34 | Freddie Mac | |
(3) | Represents Multifamily Segment Earnings — management and guarantee income, excluding prepayment and certain other fees for each category, divided by the sum of the average UPB of the related category of guarantee. The average UPB of the all other guarantees category includes the average UPB associated with HFA guarantees, excluding certain bonds under the NIBP. |
(4) | See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Multifamily Mortgage Credit Risk” for information on our reported multifamily delinquency rate. |
(5) | Calculated as the amount of multifamily credit losses (gains) divided by the sum of the average carrying value of our multifamily loans (on-balance sheet) and the average balance of the multifamily guarantee portfolio, including multifamily HFA initiative-related guarantees. |
Segment Earnings for our Multifamily segment increased to $0.8 billion and $1.8 billion for the three and nine months ended September 30, 2013, respectively, compared to $0.7 billion and $1.7 billion for the three and nine months ended September 30, 2012, respectively. The increase in the 2013 periods was primarily due to increased other non-interest income, partially offset by decreased gains on mortgage loans.
Comprehensive income for our Multifamily segment was $0.2 billion and $1.3 billion for the three and nine months ended September 30, 2013, respectively, consisting of: (a) Segment Earnings of $0.8 billion and $1.8 billion, respectively; and (b) $(0.7) billion and $(0.5) billion, respectively, of total other comprehensive income (loss). Total other comprehensive income (loss) for our Multifamily segment in the 2013 periods is primarily related to the reversal of fair value gains deferred in AOCI associated with certain available-for-sale securities that were sold during 2013.
Our multifamily new business activity (loan purchases and other guarantee commitment issuances) decreased to $18.8 billion for the first nine months of 2013 compared to $19.2 billion for the first nine months of 2012 as a result of the measures we have taken (such as adjusting prices) combined with the effects of rising interest rates and increased competition from other market participants. We expect to meet the 2013 Conservatorship Scorecard goal of reducing our new multifamily business volume by at least 10% as compared to 2012 levels. Our new business activity for the full year of 2012 was $28.8 billion. We issued guarantees on K Certificates of $5.3 billion and $17.5 billion in UPB for the three and nine months ended September 30, 2013, respectively, compared to $3.2 billion and $11.7 billion for the three and nine months ended September 30, 2012, respectively. The UPB of the total multifamily portfolio declined to $171.7 billion from $180.2 billion as of September 30, 2013 and December 31, 2012, respectively, primarily due to the sale of available-for-sale CMBS as we work toward our 2013 Conservatorship Scorecard goal to sell 5% of certain mortgage-related assets.
Segment Earnings net interest income declined by 4%, to $321 million, for the three months ended September 30, 2013 from $334 million for the three months ended September 30, 2012, and was $944 million and $982 million for the nine months ended September 30, 2013 and 2012, respectively. The decrease in the 2013 periods was primarily due to lower average balances of the multifamily loan and investment securities portfolios in the first nine months of 2013.
Segment Earnings non-interest income was $548 million and $401 million for the three months ended September 30, 2013 and 2012, respectively, and was $913 million and $876 million for the nine months ended September 30, 2013 and 2012, respectively. The increase in the 2013 periods was primarily due to higher other non-interest income which resulted from increased gains on sale of available-for-sale CMBS compared to the 2012 periods as discussed above.
Segment Earnings management and guarantee income increased to $52 million and $147 million for the three and nine months ended September 30, 2013, respectively, compared to $38 million and $107 million for the three and nine months ended September 30, 2012, respectively. The increase in the 2013 periods was primarily due to the higher average balance of the multifamily guarantee portfolio in 2013, which is attributed to K Certificate issuances during the last 12 months. However, the average total management and guarantee fee rate on our multifamily guarantee portfolio declined to 30.8 basis points and 32.1 basis points in the third quarter and first nine months of 2013, respectively, from 34.1 basis points and 36.2 basis points in the third quarter and first nine months of 2012, respectively. This decline primarily reflects the issuances of K Certificates during recent periods, which have lower fees than our other multifamily guarantee activities as a result of our reduced credit risk exposure due to the use of subordination.
Segment Earnings benefit for credit losses was $28 million and $40 million for the three months ended September 30, 2013 and 2012, respectively, and was $167 million and $81 million for the first nine months of 2013 and 2012, respectively. The continued benefit for credit losses in the 2013 periods was primarily due to an improvement in the expected performance of the underlying loans and a decline in the number of loans that have been classified as individually impaired.
As a result of our underwriting standards and practices, which we believe are prudent, and the continued positive multifamily market fundamentals, the credit quality of the multifamily mortgage portfolio remains strong, and multifamily credit (gains) losses as a percentage of the combined average balance of our multifamily loan and guarantee portfolios were (0.6) basis points and 0.6 basis points during the first nine months of 2013 and 2012, respectively. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Multifamily Mortgage Credit Risk” for further information about the credit performance of our multifamily mortgage portfolio.
35 | Freddie Mac | |
CONSOLIDATED BALANCE SHEETS ANALYSIS
The following discussion of our consolidated balance sheets should be read in conjunction with our consolidated financial statements, including the accompanying notes. Also, see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” for information concerning certain significant accounting policies and estimates applied in determining our reported financial position.
Cash and Cash Equivalents, Federal Funds Sold and Securities Purchased Under Agreements to Resell
Cash and cash equivalents, federal funds sold and securities purchased under agreements to resell, and other liquid assets discussed in “Investments in Securities — Non-Mortgage-Related Securities,” are important to our cash flow and asset and liability management, and our ability to provide liquidity and stability to the mortgage market. We use these assets to help manage recurring cash flows and meet our other cash management needs. We consider federal funds sold to be overnight unsecured trades executed with insured depository institutions that are members of the Federal Reserve System. Federal funds sold trades are not insured. Securities purchased under agreements to resell principally consist of short-term contractual agreements such as reverse repurchase agreements involving Treasury and agency securities.
The short-term assets on our consolidated balance sheets also include those related to our consolidated VIEs, which consisted primarily of restricted cash and cash equivalents and securities purchased under agreements to resell at September 30, 2013. These short-term assets related to our consolidated VIEs decreased by $16.6 billion from December 31, 2012 to September 30, 2013, primarily due to a decrease in the level of refinancing activity.
Excluding amounts related to our consolidated VIEs, we held $9.5 billion and $8.5 billion of cash and cash equivalents (including non-interest bearing deposits of $6.1 billion and $7.3 billion at the Federal Reserve Bank), no federal funds sold, and $29.7 billion and $18.3 billion of securities purchased under agreements to resell at September 30, 2013 and December 31, 2012, respectively. Excluding amounts related to our consolidated VIEs, we held on average $23.2 billion and $25.1 billion of cash and cash equivalents and $24.4 billion and $18.2 billion of federal funds sold and securities purchased under agreements to resell during the three and nine months ended September 30, 2013, respectively.
For information regarding our liquidity management practices and policies, see “MD&A — LIQUIDITY AND CAPITAL RESOURCES” in our 2012 Annual Report.
Investments in Securities
The table below provides detail regarding our investments in securities as of September 30, 2013 and December 31, 2012. The table does not include our holdings of single-family PCs and certain Other Guarantee Transactions. For information on our holdings of such securities, see “Table 13 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios.”
36 | Freddie Mac | |
Table 18 — Investments in Securities
Fair Value | |||||||
September 30, 2013 | December 31, 2012 | ||||||
(in millions) | |||||||
Investments in securities: | |||||||
Available-for-sale: | |||||||
Mortgage-related securities: | |||||||
Freddie Mac(1) | $ | 44,145 | $ | 58,515 | |||
Fannie Mae | 11,561 | 15,280 | |||||
Ginnie Mae | 176 | 209 | |||||
CMBS | 36,368 | 51,307 | |||||
Subprime | 27,572 | 26,457 | |||||
Option ARM | 6,424 | 5,717 | |||||
Alt-A and other | 9,103 | 10,904 | |||||
Obligations of states and political subdivisions | 3,761 | 5,798 | |||||
Manufactured housing | 688 | 709 | |||||
Total available-for-sale mortgage-related securities | 139,798 | 174,896 | |||||
Total investments in available-for-sale securities | 139,798 | 174,896 | |||||
Trading: | |||||||
Mortgage-related securities: | |||||||
Freddie Mac(1) | 10,060 | 10,354 | |||||
Fannie Mae | 10,675 | 10,338 | |||||
Ginnie Mae | 105 | 131 | |||||
Other | 166 | 156 | |||||
Total trading mortgage-related securities | 21,006 | 20,979 | |||||
Non-mortgage-related securities: | |||||||
Asset-backed securities | — | 292 | |||||
Treasury bills | 4,854 | 1,160 | |||||
Treasury notes | 26,787 | 19,061 | |||||
Total trading non-mortgage-related securities | 31,641 | 20,513 | |||||
Total investments in trading securities | 52,647 | 41,492 | |||||
Total investments in securities | $ | 192,445 | $ | 216,388 | |||
(1) | For information on the types of instruments that are included, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities” in our 2012 Annual Report. |
Non-Mortgage-Related Securities
Our investments in non-mortgage-related securities provide an additional source of liquidity. We held investments in non-mortgage-related securities with a fair value of $31.6 billion and $20.5 billion as of September 30, 2013 and December 31, 2012, respectively.
Mortgage-Related Securities
Our investments in mortgage-related securities consist of securities issued by Fannie Mae, Ginnie Mae, and other financial institutions. We also invest in our own mortgage-related securities. However, the single-family PCs and certain Other Guarantee Transactions we purchase as investments are not accounted for as investments in securities on our consolidated balance sheets because we recognize the underlying mortgage loans on our consolidated balance sheets through consolidation of the related trusts.
The table below provides the UPB of our investments in mortgage-related securities classified as available-for-sale or trading on our consolidated balance sheets. The table below does not include our holdings of our own single-family PCs and certain Other Guarantee Transactions. For further information on our holdings of such securities, see “Table 13 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios.”
37 | Freddie Mac | |
Table 19 — Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets
September 30, 2013 | December 31, 2012 | ||||||||||||||||||||||
Fixed Rate | Variable Rate(1) | Total | Fixed Rate | Variable Rate(1) | Total | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Freddie Mac mortgage-related securities:(2) | |||||||||||||||||||||||
Single-family | $ | 41,497 | $ | 4,870 | $ | 46,367 | $ | 50,979 | $ | 7,256 | $ | 58,235 | |||||||||||
Multifamily | 1,365 | 1,455 | 2,820 | 750 | 1,632 | 2,382 | |||||||||||||||||
Total Freddie Mac mortgage-related securities | 42,862 | 6,325 | 49,187 | 51,729 | 8,888 | 60,617 | |||||||||||||||||
Non-Freddie Mac mortgage-related securities: | |||||||||||||||||||||||
Agency securities:(3) | |||||||||||||||||||||||
Fannie Mae: | |||||||||||||||||||||||
Single-family | 10,723 | 9,981 | 20,704 | 10,864 | 12,518 | 23,382 | |||||||||||||||||
Multifamily | 3 | — | 3 | 35 | 49 | 84 | |||||||||||||||||
Ginnie Mae: | |||||||||||||||||||||||
Single-family | 160 | 81 | 241 | 202 | 91 | 293 | |||||||||||||||||
Multifamily | 15 | — | 15 | 15 | — | 15 | |||||||||||||||||
Total Non-Freddie Mac agency securities | 10,901 | 10,062 | 20,963 | 11,116 | 12,658 | 23,774 | |||||||||||||||||
Non-agency mortgage-related securities: | |||||||||||||||||||||||
Single-family:(4) | |||||||||||||||||||||||
Subprime | 120 | 40,664 | 40,784 | 311 | 44,086 | 44,397 | |||||||||||||||||
Option ARM | — | 10,755 | 10,755 | — | 12,012 | 12,012 | |||||||||||||||||
Alt-A and other | 1,512 | 10,284 | 11,796 | 1,774 | 13,036 | 14,810 | |||||||||||||||||
CMBS | 14,761 | 20,118 | 34,879 | 17,657 | 30,300 | 47,957 | |||||||||||||||||
Obligations of states and political subdivisions(5) | 3,774 | 15 | 3,789 | 5,637 | 19 | 5,656 | |||||||||||||||||
Manufactured housing | 692 | 107 | 799 | 741 | 121 | 862 | |||||||||||||||||
Total non-agency mortgage-related securities(6) | 20,859 | 81,943 | 102,802 | 26,120 | 99,574 | 125,694 | |||||||||||||||||
Total UPB of mortgage-related securities | $ | 74,622 | $ | 98,330 | 172,952 | $ | 88,965 | $ | 121,120 | 210,085 | |||||||||||||
Premiums, discounts, deferred fees, impairments of UPB and other basis adjustments | (13,239 | ) | (13,922 | ) | |||||||||||||||||||
Net unrealized gains (losses) on mortgage-related securities, pre-tax | 1,091 | (288 | ) | ||||||||||||||||||||
Total carrying value of mortgage-related securities | $ | 160,804 | $ | 195,875 | |||||||||||||||||||
(1) | Variable-rate mortgage-related securities include those with a contractual coupon rate that, prior to contractual maturity, is either scheduled to change or is subject to change based on changes in the composition of the underlying collateral. |
(2) | When we purchase REMICs and Other Structured Securities and certain Other Guarantee Transactions that we have issued, we account for these securities as investments in debt securities as we are investing in the debt securities of a non-consolidated entity. We do not consolidate our resecuritization trusts unless we are deemed to be the primary beneficiary of such trusts. We are subject to the credit risk associated with the mortgage loans underlying our Freddie Mac mortgage-related securities. Mortgage loans underlying our issued single-family PCs and certain Other Guarantee Transactions are recognized on our consolidated balance sheets as held-for-investment mortgage loans, at amortized cost. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities” in our 2012 Annual Report for further information. |
(3) | Agency securities are generally not separately rated by nationally recognized statistical rating organizations, but have historically been viewed as having a level of credit quality at least equivalent to non-agency mortgage-related securities AAA-rated or equivalent. |
(4) | For information about how these securities are rated, see ‘‘Table 25 — Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS.’’ |
(5) | Consists of housing revenue bonds. Approximately 28% and 36% of these securities held at September 30, 2013 and December 31, 2012, respectively, were AAA-rated as of those dates, based on the UPB and the lowest rating available. |
(6) | Credit ratings for most non-agency mortgage-related securities are designated by no fewer than two nationally recognized statistical rating organizations. Approximately 18% and 21% of total non-agency mortgage-related securities held at September 30, 2013 and December 31, 2012, respectively, were AAA-rated as of those dates, based on the UPB and the lowest rating available. |
The table below provides the UPB and fair value of our investments in mortgage-related securities classified as available-for-sale or trading on our consolidated balance sheets.
38 | Freddie Mac | |
Table 20 — Additional Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets
September 30, 2013 | December 31, 2012 | ||||||||||||||
UPB | Fair Value | UPB | Fair Value | ||||||||||||
(in millions) | |||||||||||||||
Agency pass-through securities(1) | $ | 16,623 | $ | 17,736 | $ | 17,614 | $ | 19,125 | |||||||
Agency REMICs and Other Structured Securities: | |||||||||||||||
Interest-only securities(2) | — | 1,750 | — | 2,023 | |||||||||||
Principal-only securities(3) | 2,860 | 2,446 | 2,291 | 2,169 | |||||||||||
Inverse floating-rate securities(4) | 1,743 | 2,554 | 2,804 | 4,106 | |||||||||||
Other Structured Securities(5) | 48,924 | 52,236 | 61,682 | 67,404 | |||||||||||
Total agency securities | 70,150 | 76,722 | 84,391 | 94,827 | |||||||||||
Non-agency securities(6) | 102,802 | 84,082 | 125,694 | 101,048 | |||||||||||
Total mortgage-related securities | $ | 172,952 | $ | 160,804 | $ | 210,085 | $ | 195,875 | |||||||
(1) | Represents an undivided beneficial interest in trusts that hold pools of mortgages. |
(2) | Represents securities where the holder receives only the interest cash flows. |
(3) | Represents securities where the holder receives only the principal cash flows. |
(4) | Represents securities where the holder receives interest cash flows that change inversely with the reference rate (i.e., higher cash flows when reference rates are low and lower cash flows when reference rates are high). Additionally, these securities receive a portion of principal cash flows associated with the underlying collateral. |
(5) | Includes REMICs and Other Structured Securities. See “GLOSSARY” for more information on these securities. |
(6) | Includes fair values of $2 million and $3 million of interest-only securities at September 30, 2013 and December 31, 2012, respectively. |
The total UPB of our investments in mortgage-related securities on our consolidated balance sheets decreased from $210.1 billion at December 31, 2012 to $173.0 billion at September 30, 2013, while the fair value of these investments decreased from $195.9 billion at December 31, 2012 to $160.8 billion at September 30, 2013. The reduction in UPB of agency mortgage-related securities primarily resulted from liquidations. The reduction in non-agency mortgage-related securities is due to the receipt of monthly remittances of principal repayments from both the recoveries from liquidated loans and voluntary repayments of the underlying collateral, representing a partial return of our investments in these securities, and sales, consistent with our efforts to reduce the size of our mortgage-related investments portfolio, as described in “EXECUTIVE SUMMARY — Limits on Investment Activity and Our Mortgage-Related Investments Portfolio.”
The table below summarizes our mortgage-related securities purchase activity for the three and nine months ended September 30, 2013 and 2012. This activity primarily consists of purchases of: (a) single-family PCs; and (b) mortgage-related securities in connection with issuances of multifamily Other Guarantee Transactions (i.e., K Certificates). Our purchases of single-family PCs and certain Other Guarantee Transactions issued by trusts that we consolidated are recorded as an extinguishment of debt securities of consolidated trusts held by third parties on our consolidated balance sheets.
39 | Freddie Mac | |
Table 21 — Mortgage-Related Securities Purchase Activity(1)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(in millions) | |||||||||||||||
Non-Freddie Mac mortgage-related securities purchased for resecuritization: | |||||||||||||||
Ginnie Mae Certificates | $ | 21 | $ | 5 | $ | 24 | $ | 10 | |||||||
Non-Freddie Mac mortgage-related securities purchased as investments in securities: | |||||||||||||||
Agency securities: | |||||||||||||||
Fannie Mae: | |||||||||||||||
Fixed-rate | 3,300 | — | 4,016 | — | |||||||||||
Variable-rate | — | — | 50 | 50 | |||||||||||
Total agency securities | 3,300 | — | 4,066 | 50 | |||||||||||
Non-agency mortgage-related securities: | |||||||||||||||
CMBS: | |||||||||||||||
Fixed-rate | 20 | — | 30 | 10 | |||||||||||
Variable-rate | 35 | 23 | 65 | 58 | |||||||||||
Total non-agency mortgage-related securities | 55 | 23 | 95 | 68 | |||||||||||
Total non-Freddie Mac mortgage-related securities purchased as investments in securities | 3,355 | 23 | 4,161 | 118 | |||||||||||
Total non-Freddie Mac mortgage-related securities purchased | $ | 3,376 | $ | 28 | $ | 4,185 | $ | 128 | |||||||
Freddie Mac mortgage-related securities purchased: | |||||||||||||||
Single-family: | |||||||||||||||
Fixed-rate | $ | 33,069 | $ | 21,649 | $ | 82,566 | $ | 34,115 | |||||||
Variable-rate | 94 | 1,317 | 904 | 4,452 | |||||||||||
Multifamily: | |||||||||||||||
Fixed-rate | — | — | — | 39 | |||||||||||
Total Freddie Mac mortgage-related securities purchased | $ | 33,163 | $ | 22,966 | $ | 83,470 | $ | 38,606 | |||||||
Mortgage-related securities purchased for Other Guarantee Transactions(2) | $ | 5,313 | $ | 3,240 | $ | 17,474 | $ | 11,673 | |||||||
(1) | Based on UPB. Excludes mortgage-related securities traded but not yet settled. |
(2) | Primarily consists of purchases of mortgage-related securities backed by Freddie Mac underwritten loans for the subsequent issuances of multifamily K Certificates. |
The purchases of Freddie Mac mortgage-related securities that we made during the three and nine months ended September 30, 2013, as reflected in the table above, primarily related to our investment activities. In addition, during the periods presented above, we purchased mortgage-related securities backed by Freddie Mac underwritten loans in connection with our subsequent issuances of multifamily K Certificates. For more information, see “BUSINESS — Our Business Segments — Investments Segment — PC Support Activities” and “RISK FACTORS — Competitive and Market Risks — A significant decline in the price performance of or demand for our PCs could have an adverse effect on the volume and/or profitability of our new single-family guarantee business” in our 2012 Annual Report.
Unrealized Losses on Available-For-Sale Mortgage-Related Securities
At September 30, 2013, our gross unrealized losses, pre-tax, on available-for-sale mortgage-related securities were $6.1 billion, compared to $12.4 billion at December 31, 2012. The decrease was largely the result of fair value gains related to our investments in single-family non-agency mortgage-related securities, primarily due to the impact of spread tightening and the movement of these securities with unrealized losses towards maturity. We believe the unrealized losses related to these securities at September 30, 2013 were mainly attributable to poor underlying collateral performance, limited liquidity and large risk premiums in the market for residential non-agency mortgage-related securities. All available-for-sale securities in an unrealized loss position are evaluated to determine if the impairment is other-than-temporary. See “Total Equity (Deficit)” and “NOTE 7: INVESTMENTS IN SECURITIES” for additional information regarding unrealized losses on our available-for-sale securities.
Higher-Risk Components of Our Investments in Mortgage-Related Securities
As discussed below, we have exposure to subprime, option ARM, interest-only, and Alt-A and other loans as part of our investments in mortgage-related securities as follows:
• | Single-family non-agency mortgage-related securities: We hold non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans. |
• | Single-family Freddie Mac mortgage-related securities: We hold certain Other Guarantee Transactions as part of our investments in securities. There are subprime and option ARM loans underlying some of these Other Guarantee |
40 | Freddie Mac | |
Transactions. For more information on single-family loans with certain higher-risk characteristics underlying our issued securities, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk.”
Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, and Alt-A Loans
We categorize our investments in non-agency mortgage-related securities as subprime, option ARM, or Alt-A if the securities were identified as such based on information provided to us when we entered into these transactions. We have not identified option ARM, CMBS, obligations of states and political subdivisions, and manufactured housing securities as either subprime or Alt-A securities. Since the first quarter of 2008, we have not purchased any non-agency mortgage-related securities backed by subprime, option ARM, or Alt-A loans. The table below presents information about our holdings of available-for-sale non-agency mortgage-related securities backed by subprime, option ARM and Alt-A loans.
41 | Freddie Mac | |
Table 22 — Non-Agency Mortgage-Related Securities Backed by Subprime First Lien, Option ARM, and Alt-A Loans and Certain Related Credit Statistics(1)
As of | |||||||||||||||||||
9/30/2013 | 6/30/2013 | 3/31/2013 | 12/31/2012 | 9/30/2012 | |||||||||||||||
(dollars in millions) | |||||||||||||||||||
UPB: | |||||||||||||||||||
Subprime first lien(2) | $ | 40,491 | $ | 41,608 | $ | 42,998 | $ | 44,066 | $ | 45,166 | |||||||||
Option ARM | 10,755 | 11,190 | 11,617 | 12,012 | 12,477 | ||||||||||||||
Alt-A(3) | 9,866 | 11,118 | 12,243 | 12,634 | 13,055 | ||||||||||||||
Gross unrealized losses, pre-tax:(4) | |||||||||||||||||||
Subprime first lien(2) | $ | 4,666 | $ | 5,281 | $ | 6,085 | $ | 9,128 | $ | 10,464 | |||||||||
Option ARM | 619 | 635 | 1,226 | 1,785 | 2,502 | ||||||||||||||
Alt-A(3) | 304 | 579 | 781 | 1,093 | 1,488 | ||||||||||||||
Present value of expected future credit losses:(5) | |||||||||||||||||||
Subprime first lien (2) | $ | 3,575 | $ | 4,047 | $ | 6,195 | $ | 7,159 | $ | 7,129 | |||||||||
Option ARM | 1,683 | 2,094 | 2,896 | 3,542 | 3,442 | ||||||||||||||
Alt-A (3) | 1,149 | 1,338 | 1,450 | 1,739 | 1,699 | ||||||||||||||
Collateral delinquency rate:(6) | |||||||||||||||||||
Subprime first lien(2) | 36 | % | 37 | % | 38 | % | 39 | % | 39 | % | |||||||||
Option ARM | 33 | 34 | 36 | 38 | 40 | ||||||||||||||
Alt-A(3) | 22 | 22 | 22 | 23 | 24 | ||||||||||||||
Average credit enhancement:(7) | |||||||||||||||||||
Subprime first lien(2) | 10 | % | 12 | % | 14 | % | 15 | % | 17 | % | |||||||||
Option ARM | — | 1 | 2 | 3 | 4 | ||||||||||||||
Alt-A(3) | 1 | 3 | 4 | 4 | 5 | ||||||||||||||
Cumulative collateral loss:(8) | |||||||||||||||||||
Subprime first lien(2) | 29 | % | 29 | % | 27 | % | 26 | % | 25 | % | |||||||||
Option ARM | 24 | 23 | 22 | 21 | 20 | ||||||||||||||
Alt-A(3) | 13 | 12 | 11 | 10 | 10 | ||||||||||||||
(1) | See “Ratings of Non-Agency Mortgage-Related Securities” for additional information about these securities. The book and fair values of our mortgage-related securities and the information in this table were generally not impacted by the settlement amounts we received in 2013 related to our investments in certain non-agency mortgage-related securities. For more information, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Agency and Non-Agency Mortgage-Related Security Issuers.” |
(2) | Excludes non-agency mortgage-related securities backed exclusively by subprime second liens. Certain securities identified as subprime first lien may be backed in part by subprime second-lien loans, as the pools of loans underlying these securities were permitted to include a small percentage of subprime second-lien loans. |
(3) | Excludes non-agency mortgage-related securities backed by other loans, which are primarily comprised of securities backed by home equity lines of credit. |
(4) | Represents the aggregate of the amount by which amortized cost, after other-than-temporary impairments, exceeds fair value measured at the individual lot level. |
(5) | Represents our estimate of the present value of future contractual cash flows that we do not expect to collect, discounted at the effective interest rate determined based on the security’s contractual cash flows and the initial acquisition costs. This discount rate is only utilized to analyze the cumulative credit deterioration for securities since acquisition and may be lower than the discount rate used to measure ongoing other-than-temporary impairment to be recognized in earnings for securities that have experienced a significant improvement in expected cash flows since the last recognition of other-than-temporary impairment recognized in earnings. |
(6) | Determined based on the number of loans that are two monthly payments or more past due that underlie the securities using information obtained from a third-party data provider. |
(7) | Reflects the ratio of the current principal amount of the securities issued by a trust that will absorb losses in the trust before any losses are allocated to securities that we own. Percentage generally calculated based on: (a) the total UPB of securities subordinate to the securities we own, divided by (b) the total UPB of all of the securities issued by the trust (excluding notional balances). Only includes credit enhancement provided by subordinated securities; excludes credit enhancement provided by bond insurance. |
(8) | Based on the actual losses incurred on the collateral underlying these securities. Actual losses incurred on the securities that we hold are significantly less than the losses on the underlying collateral as presented in this table, as non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A loans were generally structured to include credit enhancements, particularly through subordination and other structural enhancements. |
For purposes of our cumulative credit deterioration analysis, our estimate of the present value of expected future credit losses on our available-for-sale non-agency mortgage-related securities decreased to $6.9 billion at September 30, 2013 from $7.9 billion at June 30, 2013. All of these amounts have been reflected in our net impairment of available-for-sale securities recognized in earnings in this period or prior periods. The decrease in the present value of expected future credit losses was primarily driven by: (a) improvements in forecasted home prices over the expected life of our available-for-sale securities; and (b) realized cash shortfalls.
42 | Freddie Mac | |
Since the beginning of 2007, we have incurred actual principal cash shortfalls of $3.6 billion on impaired available-for-sale non-agency mortgage-related securities, including $248 million and $803 million related to the three and nine months ended September 30, 2013, respectively. Many of the trusts that issued non-agency mortgage-related securities we hold were structured so that realized collateral losses in excess of structural credit enhancements are not passed on to investors until the investment matures.
The investments in non-agency mortgage-related securities we hold backed by subprime, option ARM, and Alt-A loans were generally structured to include credit enhancements, particularly through subordination and other structural enhancements. Bond insurance is an additional credit enhancement covering some of the non-agency mortgage-related securities. These credit enhancements are the primary reason we expect our actual losses, through principal or interest shortfalls, to be less than the underlying collateral losses in the aggregate. During the three and nine months ended September 30, 2013, we continued to experience the erosion of structural credit enhancements on many securities backed by subprime, option ARM, and Alt-A loans due to poor performance of the underlying collateral, as noted in “Table 22 — Non-Agency Mortgage-Related Securities Backed by Subprime First Lien, Option ARM, and Alt-A Loans and Certain Related Credit Statistics.” For more information on bond insurance coverage, see “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Bond Insurers.”
The table below provides principal repayment and cash shortfall information for our investments in non-agency mortgage-related securities backed by subprime, option ARM, Alt-A and other loans.
Table 23 — Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans(1)
Three Months Ended | |||||||||||||||||||
9/30/2013 | 6/30/2013 | 3/31/2013 | 12/31/2012 | 9/30/2012 | |||||||||||||||
(in millions) | |||||||||||||||||||
Principal repayments and cash shortfalls:(2) | |||||||||||||||||||
Subprime: | |||||||||||||||||||
Principal repayments | $ | 1,048 | $ | 1,087 | $ | 1,065 | $ | 1,106 | $ | 1,149 | |||||||||
Principal cash shortfalls | 35 | 15 | 14 | 7 | 4 | ||||||||||||||
Option ARM: | |||||||||||||||||||
Principal repayments | $ | 226 | $ | 239 | $ | 217 | $ | 239 | $ | 269 | |||||||||
Principal cash shortfalls | 161 | 188 | 178 | 226 | 211 | ||||||||||||||
Alt-A and other: | |||||||||||||||||||
Principal repayments | $ | 418 | $ | 418 | $ | 385 | $ | 423 | $ | 393 | |||||||||
Principal cash shortfalls | 51 | 74 | 84 | 81 | 101 | ||||||||||||||
(1) | See “Ratings of Non-Agency Mortgage-Related Securities” for additional information about these securities. The book and fair values of our mortgage-related securities and the information in this table were generally not impacted by the settlement amounts we received in 2013 related to our investments in certain non-agency mortgage-related securities. For more information, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Agency and Non-Agency Mortgage-Related Security Issuers.” |
(2) | In addition to the contractual interest payments, we receive monthly remittances of principal repayments from both the recoveries from liquidated loans and voluntary repayments of the underlying collateral of these securities representing a partial return of our investment in these securities. |
We and FHFA, as Conservator, are involved in various efforts to mitigate or recover our losses as an investor with respect to certain of the non-agency mortgage-related securities we hold. See “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Agency and Non-Agency Mortgage-Related Security Issuers” for more information.
Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities
The table below provides information about the mortgage-related securities for which we recognized other-than-temporary impairments in earnings, consisting entirely of non-agency mortgage-related securities.
43 | Freddie Mac | |
Table 24 — Net Impairment of Available-For-Sale Mortgage-Related Securities Recognized in Earnings
Net Impairment of Available-For-Sale Securities Recognized in Earnings | |||||||||||||||||||
Three Months Ended | |||||||||||||||||||
9/30/2013 | 6/30/2013 | 3/31/2013 | 12/31/2012 | 9/30/2012 | |||||||||||||||
(in millions) | |||||||||||||||||||
Subprime:(1) | |||||||||||||||||||
2006 & 2007 | $ | 4 | $ | 12 | $ | 27 | $ | 591 | $ | 159 | |||||||||
Other years | 41 | 1 | 6 | 24 | 1 | ||||||||||||||
Total subprime | 45 | 13 | 33 | 615 | 160 | ||||||||||||||
Option ARM: | |||||||||||||||||||
2006 & 2007 | 1 | 4 | — | 306 | 62 | ||||||||||||||
Other years | 11 | 1 | — | 122 | — | ||||||||||||||
Total option ARM | 12 | 5 | — | 428 | 62 | ||||||||||||||
Alt-A: | |||||||||||||||||||
2006 & 2007 | 1 | 1 | — | 37 | — | ||||||||||||||
Other years | 64 | 24 | — | 100 | — | ||||||||||||||
Total Alt-A | 65 | 25 | — | 137 | — | ||||||||||||||
Other loans | 1 | — | — | — | — | ||||||||||||||
Total subprime, option ARM, Alt-A and other loans | 123 | 43 | 33 | 1,180 | 222 | ||||||||||||||
CMBS | 3 | — | 10 | 58 | 45 | ||||||||||||||
Manufactured housing | — | 1 | — | 1 | — | ||||||||||||||
Total available-for-sale mortgage-related securities | $ | 126 | $ | 44 | $ | 43 | $ | 1,239 | $ | 267 | |||||||||
(1) | Includes all first and second liens. |
We recorded net impairment of available-for-sale mortgage-related securities recognized in earnings of $126 million and $213 million during the three and nine months ended September 30, 2013, respectively, compared to $267 million and $929 million during the three and nine months ended September 30, 2012, respectively. We review our investments in available-for-sale mortgage-related securities which are in an unrealized loss position to determine which securities, if any, we intend to sell, given market conditions and other information as of the balance sheet date. For any available-for-sale security for which we concluded we had the intent to sell as of September 30, 2013, we recorded the unrealized loss as a net impairment of available-for-sale securities recognized in earnings. The intent to sell population is determined using management judgment based on a variety of factors, including economics and other considerations and, in the case of residential non-agency mortgage-related securities, whether such securities are subject to FHFA-led lawsuits or other loss mitigation measures. During the three and nine months ended September 30, 2013, we recorded net impairment of available-for-sale securities recognized in earnings of $118 million and $134 million, respectively, due to our intent to sell certain securities. We recorded the remaining impairments because our estimate of the present value of expected future credit losses on certain individual available-for-sale securities increased during the period. The securities that we have the intent to sell are based on our current operational plans, models and strategies. If there is a change in our operational plans, models or strategies, it could change the population of securities we intend to sell and thereby have a potentially significant impact on earnings. For more information, see “NOTE 7: INVESTMENTS IN SECURITIES — Other-Than-Temporary Impairments on Available-for-Sale Securities” in our 2012 Annual Report.
While it is reasonably possible that collateral losses on our available-for-sale mortgage-related securities where we have not recorded an impairment charge in earnings could exceed our credit enhancement levels, we do not believe that those conditions were likely at September 30, 2013. Based on our conclusion that we do not intend to sell our remaining available-for-sale mortgage-related securities that are in an unrealized loss position (other than those securities noted above) and it is not more likely than not that we will be required to sell these securities before a sufficient time to recover all unrealized losses and our consideration of other available information, we have concluded that the reduction in fair value of these securities was temporary at September 30, 2013 and have recorded these unrealized losses in AOCI.
The credit performance of loans underlying our holdings of non-agency mortgage-related securities declined since 2007 and, although stabilizing in recent periods, remains weak. This decline has been particularly severe for subprime, option ARM, and Alt-A and other loans. Economic factors that have negatively affected the performance of our investments in non-agency mortgage-related securities at various times since 2007 include high unemployment, a large inventory of seriously delinquent mortgage loans and unsold homes, tight credit conditions, and weak consumer confidence. In addition, subprime, option ARM, and Alt-A and other loans backing the securities we hold have significantly greater concentrations in the states that have undergone the greatest economic stress during the housing crisis that began in 2006, such as California and Florida. Loans in
44 | Freddie Mac | |
these states are more likely to become seriously delinquent and the credit losses associated with such loans are likely to be higher than in other states.
We rely on bond insurance, including secondary coverage, to provide credit protection on some of our investments in non-agency mortgage-related securities. We have determined that there is substantial uncertainty surrounding certain bond insurers’ ability to pay our future claims on expected credit losses related to our non-agency mortgage-related security investments. See “RISK MANAGEMENT - Credit Risk - Institutional Credit Risk - Bond Insurers” and “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS - Bond Insurers” for additional information.
Our assessments concerning other-than-temporary impairment require significant judgment and the use of models, and are subject to potentially significant change as conditions evolve. In addition, changes in the performance of the individual securities and in mortgage market conditions may also affect our impairment assessments. Given the uncertainty of the housing and economic environment, it is difficult to estimate the future performance of mortgage loans and mortgage-related securities with high assurance, and actual results could differ materially from our expectations. Furthermore, various market participants could arrive at materially different conclusions regarding estimates of future cash shortfalls. For more information on the factors that may affect our impairment assessments, see “MD&A — CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Higher Risk Components of Our Investments in Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities” in our 2012 Annual Report.
For more information on risks associated with the use of models, see “RISK FACTORS — Operational Risks — We face risks and uncertainties associated with the models that we use for financial accounting and reporting purposes, to make business decisions, and to manage risks. Market conditions have raised these risks and uncertainties” in our 2012 Annual Report.
Ratings of Non-Agency Mortgage-Related Securities
The table below shows the ratings of non-agency mortgage-related securities backed by subprime, option ARM, Alt-A and other loans, and CMBS held at September 30, 2013 based on their ratings as of September 30, 2013, as well as those held at December 31, 2012 based on their ratings as of December 31, 2012. Ratings presented represent the lower of S&P, Fitch and Moody's credit ratings, with Fitch and Moody's stated in terms of the S&P equivalent.
45 | Freddie Mac | |
Table 25 — Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS
Credit Ratings as of September 30, 2013 | UPB | Percentage of UPB | Amortized Cost | Gross Unrealized Losses | Bond Insurance Coverage(1) | |||||||||||||
(dollars in millions) | ||||||||||||||||||
Subprime loans: | ||||||||||||||||||
AAA-rated | $ | 91 | — | % | $ | 88 | $ | (1 | ) | $ | 2 | |||||||
Other investment grade | 1,492 | 4 | 1,426 | (32 | ) | 359 | ||||||||||||
Below investment grade(2) | 39,201 | 96 | 30,473 | (4,634 | ) | 1,349 | ||||||||||||
Total | $ | 40,784 | 100 | % | $ | 31,987 | $ | (4,667 | ) | $ | 1,710 | |||||||
Option ARM loans: | ||||||||||||||||||
AAA-rated | $ | — | — | % | $ | — | $ | — | $ | — | ||||||||
Other investment grade | 25 | — | 25 | (1 | ) | 18 | ||||||||||||
Below investment grade(2) | 10,730 | 100 | 6,790 | (618 | ) | 9 | ||||||||||||
Total | $ | 10,755 | 100 | % | $ | 6,815 | $ | (619 | ) | $ | 27 | |||||||
Alt-A and other loans: | ||||||||||||||||||
AAA-rated | $ | 28 | — | % | $ | 28 | $ | — | $ | 6 | ||||||||
Other investment grade | 590 | 5 | 581 | (45 | ) | 217 | ||||||||||||
Below investment grade(2) | 11,178 | 95 | 8,472 | (304 | ) | 1,671 | ||||||||||||
Total | $ | 11,796 | 100 | % | $ | 9,081 | $ | (349 | ) | $ | 1,894 | |||||||
CMBS: | ||||||||||||||||||
AAA-rated | $ | 17,007 | 49 | % | $ | 17,024 | $ | — | $ | 41 | ||||||||
Other investment grade | 15,573 | 45 | 15,516 | (127 | ) | 1,691 | ||||||||||||
Below investment grade(2) | 2,299 | 6 | 2,287 | (167 | ) | 1,559 | ||||||||||||
Total | $ | 34,879 | 100 | % | $ | 34,827 | $ | (294 | ) | $ | 3,291 | |||||||
Total subprime, option ARM, Alt-A and other loans, and CMBS: | ||||||||||||||||||
AAA-rated | $ | 17,126 | 17 | % | $ | 17,140 | $ | (1 | ) | $ | 49 | |||||||
Other investment grade | 17,680 | 18 | 17,548 | (205 | ) | 2,285 | ||||||||||||
Below investment grade(2) | 63,408 | 65 | 48,022 | (5,723 | ) | 4,588 | ||||||||||||
Total | $ | 98,214 | 100 | % | $ | 82,710 | $ | (5,929 | ) | $ | 6,922 | |||||||
Total investments in mortgage-related securities | $ | 172,952 | ||||||||||||||||
Percentage of subprime, option ARM, Alt-A and other loans, and CMBS of total investments in mortgage-related securities | 57 | % | ||||||||||||||||
Credit Ratings as of December 31, 2012 | ||||||||||||||||||
Subprime loans: | ||||||||||||||||||
AAA-rated | $ | 263 | 1 | % | $ | 263 | $ | (20 | ) | $ | 13 | |||||||
Other investment grade | 2,033 | 4 | 1,988 | (112 | ) | 371 | ||||||||||||
Below investment grade(2) | 42,101 | 95 | 33,252 | (8,997 | ) | 1,474 | ||||||||||||
Total | $ | 44,397 | 100 | % | $ | 35,503 | $ | (9,129 | ) | $ | 1,858 | |||||||
Option ARM loans: | ||||||||||||||||||
AAA-rated | $ | — | — | % | $ | — | $ | — | $ | — | ||||||||
Other investment grade | 40 | — | 40 | (4 | ) | 32 | ||||||||||||
Below investment grade(2) | 11,972 | 100 | 7,414 | (1,781 | ) | 12 | ||||||||||||
Total | $ | 12,012 | 100 | % | $ | 7,454 | $ | (1,785 | ) | $ | 44 | |||||||
Alt-A and other loans: | ||||||||||||||||||
AAA-rated | $ | 48 | — | % | $ | 48 | $ | (2 | ) | $ | 6 | |||||||
Other investment grade | 1,272 | 9 | 1,283 | (120 | ) | 261 | ||||||||||||
Below investment grade(2) | 13,490 | 91 | 10,532 | (1,079 | ) | 1,862 | ||||||||||||
Total | $ | 14,810 | 100 | % | $ | 11,863 | $ | (1,201 | ) | $ | 2,129 | |||||||
CMBS: | ||||||||||||||||||
AAA-rated | $ | 24,646 | 51 | % | $ | 24,676 | $ | (4 | ) | $ | 41 | |||||||
Other investment grade | 20,615 | 43 | 20,568 | (87 | ) | 1,698 | ||||||||||||
Below investment grade(2) | 2,696 | 6 | 2,490 | (90 | ) | 1,568 | ||||||||||||
Total | $ | 47,957 | 100 | % | $ | 47,734 | $ | (181 | ) | $ | 3,307 | |||||||
Total subprime, option ARM, Alt-A and other loans, and CMBS: | ||||||||||||||||||
AAA-rated | $ | 24,957 | 21 | % | $ | 24,987 | $ | (26 | ) | $ | 60 | |||||||
Other investment grade | 23,960 | 20 | 23,879 | (323 | ) | 2,362 | ||||||||||||
Below investment grade(2) | 70,259 | 59 | 53,688 | (11,947 | ) | 4,916 | ||||||||||||
Total | $ | 119,176 | 100 | % | $ | 102,554 | $ | (12,296 | ) | $ | 7,338 | |||||||
Total investments in mortgage-related securities | $ | 210,085 | ||||||||||||||||
Percentage of subprime, option ARM, Alt-A and other loans, and CMBS of total investments in mortgage-related securities | 57 | % | ||||||||||||||||
46 | Freddie Mac | |
(1) | Represents the amount of UPB covered by bond insurance. This amount does not represent the maximum amount of losses we could recover, as the bond insurance also covers interest. |
(2) | Includes securities with S&P equivalent credit ratings below BBB– and certain securities that are no longer rated. |
Mortgage Loans
The UPB of mortgage loans on our consolidated balance sheets was $1.7 trillion at both September 30, 2013 and December 31, 2012. Most of the loans on our consolidated balance sheets are securitized (e.g., held in PC trusts). The unsecuritized loans on our consolidated balance sheets generally consist of loans held for investment purposes, loans that are awaiting securitization, or delinquent or modified loans that we removed from PC trusts.
The UPB of unsecuritized single-family mortgage loans declined by $18.8 billion to $125.9 billion at September 30, 2013 from $144.7 billion at December 31, 2012, primarily due to: (a) loan prepayments, foreclosure transfers, and foreclosure alternative activities; and (b) securitization of loans through our PC cash auction process, net of related purchases. This decline was partially offset by our purchases of seriously delinquent single-family loans from PC trusts.
Based on the amount of the recorded investment of single-family loans on our consolidated balance sheets, approximately $45.4 billion, or 2.8%, of these loans were seriously delinquent or in foreclosure as of September 30, 2013, compared to $59.8 billion, or 3.6%, as of December 31, 2012. For more information on seriously delinquent single-family loans, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-family Mortgage Credit Risk — Credit Performance — Delinquencies.” The majority of these seriously delinquent loans are unsecuritized, and were removed by us from our PC trusts. As guarantor, we have the right to remove mortgages that back our PCs from the underlying loan pools under certain circumstances. See “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS” for more information on our removal of single-family loans from PC trusts.
The UPB of unsecuritized multifamily mortgage loans was $64.8 billion at September 30, 2013 and $76.6 billion at December 31, 2012. This decline is primarily the result of our securitization of loans through issuance of K Certificates and principal repayments, which were partially offset by our purchases of loans for securitization.
We maintain an allowance for loan losses on mortgage loans that we classify as held-for-investment on our consolidated balance sheets. We also maintain a reserve for guarantee losses that is associated with Freddie Mac mortgage-related securities backed by multifamily loans, certain single-family Other Guarantee Transactions, and other guarantee commitments for which we have incremental credit risk. Collectively, we refer to our allowance for loan losses and our reserve for guarantee losses as our loan loss reserves. Our loan loss reserves were $25.0 billion and $30.9 billion at September 30, 2013 and December 31, 2012, respectively, including $24.8 billion and $30.5 billion, respectively, related to single-family loans. At September 30, 2013 and December 31, 2012, our loan loss reserves, as a percentage of our total mortgage portfolio, excluding non-Freddie Mac securities, were 1.4% and 1.7%, respectively, and as a percentage of the UPB associated with our non-performing loans were 20.3% and 23.5%, respectively. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” and “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES” for further detail about the mortgage loans and associated allowance for loan losses recorded on our consolidated balance sheets.
The table below summarizes the amount of mortgages we purchased and the amount of guarantees we issued in the applicable periods. The activity presented in the table consists of: (a) mortgage loans in consolidated single-family PCs issued in the period (regardless of whether such securities are held by us or third parties); (b) single-family and multifamily mortgage loans purchased, but not securitized, in the period; and (c) mortgage loans underlying our mortgage-related financial guarantees issued in the period, which are not consolidated on our balance sheets.
47 | Freddie Mac | |
Table 26 — Mortgage Loan Purchases and Other Guarantee Commitment Issuances(1)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||||||||||||||
UPB Amount | % of Total | UPB Amount | % of Total | UPB Amount | % of Total | UPB Amount | % of Total | |||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||
Mortgage loan purchases and guarantee issuances: | ||||||||||||||||||||||||||||
Single-family: | ||||||||||||||||||||||||||||
30-year or more amortizing fixed-rate | $ | 67,818 | 66 | % | $ | 68,083 | 62 | % | $ | 240,929 | 63 | % | $ | 185,757 | 59 | % | ||||||||||||
20-year amortizing fixed-rate | 5,116 | 5 | 7,414 | 7 | 18,972 | 5 | 22,084 | 7 | ||||||||||||||||||||
15-year amortizing fixed-rate | 19,886 | 19 | 22,931 | 21 | 85,475 | 23 | 74,667 | 24 | ||||||||||||||||||||
Adjustable-rate(2) | 4,940 | 5 | 4,319 | 4 | 13,974 | 4 | 13,783 | 4 | ||||||||||||||||||||
FHA/VA and other governmental | 73 | <1 | 94 | <1 | 225 | <1 | 273 | <1 | ||||||||||||||||||||
Total single-family(3) | 97,833 | 95 | 102,841 | 94 | 359,575 | 95 | 296,564 | 94 | ||||||||||||||||||||
Multifamily | 5,266 | 5 | 6,810 | 6 | 18,800 | 5 | 19,222 | 6 | ||||||||||||||||||||
Total mortgage loan purchases and other guarantee commitment issuances(4) | $ | 103,099 | 100 | % | $ | 109,651 | 100 | % | $ | 378,375 | 100 | % | $ | 315,786 | 100 | % | ||||||||||||
Percentage of mortgage purchases and other guarantee commitment issuances with credit enhancements(5) | 18 | % | 13 | % | 15 | % | 11 | % | ||||||||||||||||||||
(1) | Based on UPB. Excludes mortgage loans traded but not yet settled. Excludes the removal of seriously delinquent loans and balloon/reset mortgages from PC trusts. Includes other guarantee commitments associated with mortgage loans. See endnote (4) for further information. |
(2) | Includes amortizing ARMs with 1-, 3-, 5-, 7-, and 10-year initial fixed-rate periods. We have not purchased option ARM loans in our single-family credit guarantee portfolio since 2007. |
(3) | Includes $24.8 billion and $21.9 billion of conforming jumbo loan purchases and $0.9 billion and $0.7 billion of conforming jumbo loans underlying other guarantee commitments for the nine months ended September 30, 2013 and 2012, respectively. |
(4) | Includes issuances of other guarantee commitments on single-family loans of $8.4 billion and $5.3 billion and issuances of other guarantee commitments on multifamily loans of $0.4 billion and $1.7 billion during the nine months ended September 30, 2013 and 2012, respectively. |
(5) | See “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES — Credit Protection and Other Forms of Credit Enhancement” for further details on credit enhancement of mortgage loans in our multifamily mortgage and single-family credit guarantee portfolios. |
See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk” and “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Table 15.2 — Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio” for information about certain mortgage loans in our single-family credit guarantee portfolio that we believe have higher-risk characteristics.
Derivative Assets and Liabilities, Net
The composition of our derivative portfolio changes from period to period as a result of purchases and terminations of derivatives, assignments of derivatives prior to their contractual maturity, and expiration of derivatives at their contractual maturity. See “NOTE 9: DERIVATIVES” for additional information regarding our derivatives and “NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES — Collateral Pledged” for more information about collateral held and posted.
The table below shows the fair value for each derivative type, the weighted average fixed rate of our pay-fixed and receive-fixed swaps, and the maturity profile of our derivative positions reconciled to the amounts presented on our consolidated balance sheets as of September 30, 2013. A positive fair value in the table below for each derivative type is the estimated amount, prior to netting where allowable, that we would be entitled to receive at that date if the derivatives of that type were terminated. A negative fair value for a derivative type is the estimated amount, prior to netting where allowable, that we would owe at that date if the derivatives of that type were terminated.
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Table 27 — Derivative Fair Values and Maturities
September 30, 2013 | |||||||||||||||||||||||
Notional or Contractual Amount(2) | Fair Value(1) | ||||||||||||||||||||||
Total Fair Value | Less than 1 Year | 1 to 3 Years | Greater than 3 and up to 5 Years | In Excess of 5 Years | |||||||||||||||||||
(dollars in millions) | |||||||||||||||||||||||
Interest-rate swaps: | |||||||||||||||||||||||
Receive-fixed: | |||||||||||||||||||||||
Swaps | $ | 278,984 | $ | 3,950 | $ | 163 | $ | 937 | $ | 1,397 | $ | 1,453 | |||||||||||
Weighted average fixed rate(3) | 1.00 | % | 1.10 | % | 1.58 | % | 2.88 | % | |||||||||||||||
Forward-starting swaps(4) | 19,600 | 185 | — | — | 53 | 132 | |||||||||||||||||
Weighted average fixed rate(3) | — | % | — | % | 1.80 | % | 3.66 | % | |||||||||||||||
Total receive-fixed | 298,584 | 4,135 | 163 | 937 | 1,450 | 1,585 | |||||||||||||||||
Basis (floating to floating) | 300 | 4 | — | — | 4 | — | |||||||||||||||||
Pay-fixed: | |||||||||||||||||||||||
Swaps | 254,919 | (10,615 | ) | (85 | ) | (2,682 | ) | (3,243 | ) | (4,605 | ) | ||||||||||||
Weighted average fixed rate(3) | 2.03 | % | 2.52 | % | 3.23 | % | 3.17 | % | |||||||||||||||
Forward-starting swaps(4) | 5,900 | (466 | ) | — | — | — | (466 | ) | |||||||||||||||
Weighted average fixed rate(3) | — | % | — | % | — | % | 4.08 | % | |||||||||||||||
Total pay-fixed | 260,819 | (11,081 | ) | (85 | ) | (2,682 | ) | (3,243 | ) | (5,071 | ) | ||||||||||||
Total interest-rate swaps | 559,703 | (6,942 | ) | 78 | (1,745 | ) | (1,789 | ) | (3,486 | ) | |||||||||||||
Option-based: | |||||||||||||||||||||||
Call swaptions | |||||||||||||||||||||||
Purchased | 48,890 | 3,079 | 2,056 | 116 | 559 | 348 | |||||||||||||||||
Written | 6,195 | (325 | ) | (245 | ) | (80 | ) | — | — | ||||||||||||||
Put swaptions | |||||||||||||||||||||||
Purchased | 37,260 | 649 | 169 | 110 | 64 | 306 | |||||||||||||||||
Other option-based derivatives(5) | 25,227 | 1,170 | 60 | — | — | 1,110 | |||||||||||||||||
Total option-based | 117,572 | 4,573 | 2,040 | 146 | 623 | 1,764 | |||||||||||||||||
Futures | 17,159 | — | — | — | — | — | |||||||||||||||||
Foreign-currency swaps | 519 | 30 | 30 | — | — | — | |||||||||||||||||
Commitments | 26,690 | 1 | 1 | — | — | — | |||||||||||||||||
Swap guarantee derivatives | 3,537 | (32 | ) | — | (1 | ) | (3 | ) | (28 | ) | |||||||||||||
Subtotal | 725,180 | (2,370 | ) | $ | 2,149 | $ | (1,600 | ) | $ | (1,169 | ) | $ | (1,750 | ) | |||||||||
Credit derivatives | 5,575 | (4 | ) | ||||||||||||||||||||
Subtotal | 730,755 | (2,374 | ) | ||||||||||||||||||||
Derivative interest receivable (payable), net | (818 | ) | |||||||||||||||||||||
Derivative cash collateral (held) posted, net | 3,731 | ||||||||||||||||||||||
Total | $ | 730,755 | $ | 539 | |||||||||||||||||||
(1) | Fair value is categorized by maturity based on the period from September 30, 2013 until the contractual maturity of the derivative. |
(2) | Notional or contractual amounts are used to calculate the periodic settlement amounts to be received or paid and generally do not represent actual amounts to be exchanged. Notional or contractual amounts are not recorded as assets or liabilities on our consolidated balance sheets. |
(3) | Represents the notional weighted average rate for the fixed leg of the swaps. |
(4) | Represents interest-rate swap agreements that are scheduled to begin on future dates ranging from less than one year to twelve years as of September 30, 2013. |
(5) | Primarily includes purchased interest-rate caps and floors. |
At September 30, 2013, the net fair value of our total derivative portfolio was $539 million, as compared to $479 million at December 31, 2012. The derivative portfolio notional amount decreased to $731 billion at September 30, 2013 compared to $746 billion at December 31, 2012. During the nine months ended September 30, 2013, we changed the mix and balance of products in our derivative portfolio in response to an increase in longer-term interest rates. See “NOTE 9: DERIVATIVES” for the notional or contractual amounts and related fair values of our total derivative portfolio by product type at September 30, 2013 and December 31, 2012, as well as “NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES — Collateral Pledged” for information about derivative collateral held and posted.
The table below summarizes the changes in derivative fair values.
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Table 28 — Changes in Derivative Fair Values
Nine Months Ended September 30, | |||||||
2013(1) | 2012(2) | ||||||
(in millions) | |||||||
Beginning balance, at January 1 — Net asset (liability) | $ | (6,896 | ) | $ | (8,662 | ) | |
Net change in: | |||||||
Commitments | 28 | 156 | |||||
Credit derivatives | — | 1 | |||||
Swap guarantee derivatives | 3 | 1 | |||||
Other derivatives:(3) | |||||||
Changes in fair value | 4,585 | 141 | |||||
Fair value of new contracts entered into during the period(4) | 829 | 5 | |||||
Contracts realized or otherwise settled during the period | (923 | ) | 459 | ||||
Ending balance, at September 30 — Net asset (liability) | $ | (2,374 | ) | $ | (7,899 | ) | |
(1) | Refer to ‘‘Table 27 — Derivative Fair Values and Maturities’’ for a reconciliation of net fair value to the amounts presented on our consolidated balance sheets as of September 30, 2013. |
(2) | At September 30, 2012, fair value in this table excludes derivative interest receivable or (payable), net of $(998) million and derivative cash collateral posted, net of $9.4 billion. |
(3) | Includes fair value changes for interest-rate swaps, option-based derivatives, futures, and foreign-currency swaps. |
(4) | Consists primarily of cash premiums paid or received on options. |
See “CONSOLIDATED RESULTS OF OPERATIONS — Non-Interest Income (Loss) — Derivative Gains (Losses)” for a description of gains (losses) on our derivative positions.
REO, Net
We acquire properties, which are recorded as REO assets on our consolidated balance sheets, typically as a result of borrower defaults (and subsequent foreclosures) on mortgage loans that we own or guarantee. The balance of our REO, net, was $4.4 billion at both September 30, 2013 and December 31, 2012, despite a 4% decline in our REO inventory, due to the positive impact of improvements in home prices in most geographical areas during 2013. The volume of our single-family REO acquisitions in recent periods has been significantly affected by: (a) the length of the foreclosure process, which extends the time it takes for loans to be foreclosed upon and the underlying properties to transition to REO; and (b) a high volume of foreclosure alternatives, which result in fewer loans proceeding to foreclosure, and thus fewer properties transitioning to REO. We expect that the length of the foreclosure process will continue to remain above historical levels and may increase further. Additionally, we expect our REO activity to remain at elevated levels, as we have a large inventory of seriously delinquent loans in our single-family credit guarantee portfolio. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Non-Performing Assets” for additional information about our REO activity.
Deferred Tax Assets and Liabilities
We had a net deferred tax asset of $23.9 billion as of September 30, 2013 compared to a net deferred tax asset of $778 million as of December 31, 2012. During the nine months ended September 30, 2013 the change in our net deferred tax asset of $23.2 billion was primarily the result of a valuation allowance release which resulted in a tax benefit. The release is allocated between the third quarter and the fourth quarter of 2013. See "NOTE 12: INCOME TAXES" for additional information.
After weighing all of the evidence at September 30, 2013, we determined that the positive evidence, particularly the evidence that was objectively verifiable, outweighed the negative evidence. Accordingly, we concluded that it is more likely than not that our deferred tax assets will be realized and we have released the valuation allowance against our net deferred tax assets.
The valuation allowance release of $2.4 billion allocated to the fourth quarter of 2013 is expected to be used to offset the estimated tax associated with estimated income expected to be earned during that period. If the actual income before income tax in the fourth quarter of 2013 is greater than our current estimate, we will realize a provision for federal income taxes in that quarter. Conversely, if the actual income before income tax during the fourth quarter of 2013 is lower than our current estimate, we will realize an additional benefit for income taxes in that quarter.
Deferred tax assets reflect timing differences between the recognition of income/expenses under GAAP and the recognition of income/expenses under tax. Deferred tax assets are created when: (a) expenses are recognized under GAAP prior to the corresponding recognition of expenses for tax; and/or (b) income is recognized for tax prior to the corresponding recognition of income for GAAP. The realization of these net deferred tax assets is dependent upon the generation of sufficient
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taxable income of the appropriate character (i.e., ordinary income or capital gains) in the available carryback and carryforward years available under the tax law, which would include reversals of existing taxable temporary differences and liabilities associated with unrecognized tax benefits. Valuation allowances are recorded to reduce net deferred tax assets when it is more likely than not that a tax benefit will not be realized.
On a quarterly basis, we determine whether a valuation allowance is necessary on our net deferred tax asset. In doing so, we consider all evidence available, both positive and negative, in determining whether, based on the weight of the evidence, it is more likely than not that the deferred tax assets will be realized. In conducting our assessment, we evaluate all available objective evidence including, but not limited to: (a) our three-year cumulative income position as of September 30, 2013; (b) the trend of our financial and tax results; (c) the amount of taxable income reported in our 2012 federal tax return; (d) our tax net operating loss and tax credit carryforwards and the length of carry forward periods available to utilize these assets under current tax law; and (e) our access to capital under the agreements associated with conservatorship. Furthermore, we evaluate all available subjective evidence including, but not limited to: (a) difficulty in predicting unsettled circumstances related to the conservatorship; (b) the amount of our forecasted 2013 taxable income; and (c) forecasts of future book and tax income. Our consideration of the evidence requires significant judgment regarding estimates and assumptions that are inherently uncertain, particularly about our future business structure and financial results.
Our analysis is not permitted to consider the impacts proposed legislation may have on our business operations or the mortgage industry because the timing and certainty of those actions is unknown and beyond our control.
The positive evidence at September 30, 2013, that outweighed the negative evidence included the following:
• | Our three-year cumulative income position as of September 30, 2013; |
• | The strong positive trend in our financial performance over the last six quarters, including the quarter ended September 30, 2013; |
• | The 2012 taxable income reported in our federal tax return which was filed in the quarter ended September 30, 2013; |
• | Our forecasted 2013 and future period taxable income; |
• | Our net operating loss carryforwards do not begin to expire until 2030; and |
• | The continuing positive trend in the housing market. |
We also continue to update and analyze a range of forecast scenarios of future tax and book income to determine whether these forecasts support full realization of our deferred tax assets. Forecasts are inherently uncertain and rely on significant assumptions and judgments. These assumptions and judgments can change over time. Due to the significant uncertainties related to the conservatorship and ongoing changes to our business as a result of public policy, it is very difficult for us to make projections concerning our financial performance beyond the near term.
When comparing evidence available at September 30, 2013 versus June 30, 2013 we noted a number of positive developments. During the quarter ended September 30, 2013, we filed our 2012 federal tax return, which reflected taxable income versus the break-even position forecasted at June 30, 2013. This was our first year reporting taxable income since 2007. Furthermore, we continued an improved trend in earnings with pre-tax income of $6.5 billion for the quarter ended September 30, 2013. Our current base forecast of taxable income also improved resulting in a decline in the number of years of projected income required in order to fully realize our net deferred tax asset. These positive developments in addition to the positive evidence discussed above resulted in our conclusion to release the valuation allowance against our net deferred tax assets.
In future quarters we will continue to evaluate our ability to realize the net deferred tax asset. If evidence in future periods changes such that it is more likely than not that part or all of the net deferred tax asset will not be realized, we will reestablish a valuation allowance at that time. Examples of factors that could affect our assessment are: (a) a significant downturn in the housing markets or economy that negatively impacts our future financial results; (b) changes to our business operations resulting from enacted legislation; and (c) a change in corporate legal structure that would limit our ability to realize the assets under existing tax laws. If we determine that it is appropriate to establish a valuation allowance in the future, it would result in an additional income tax expense and might require additional draws under the Purchase Agreement.
For 2014 we expect that our effective tax rate will approximate the corporate statutory rate which is currently 35%.
Other Assets
Other assets consist of accounts and other receivables, the guarantee asset related to non-consolidated trusts and other guarantee commitments, and other miscellaneous assets. Other assets decreased to $8.0 billion as of September 30, 2013 from $13.8 billion as of December 31, 2012 primarily due to a decrease in servicer receivables resulting from a decrease in mortgage loans paid off by borrowers at the end of the period that had not yet been remitted to us. For more information on other assets, see “NOTE 19: SELECTED FINANCIAL STATEMENT LINE ITEMS.”
Total Debt, Net
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Total debt, net on our consolidated balance sheets consists of: (a) debt securities of consolidated trusts held by third parties; and (b) other debt.
• | PCs and Other Guarantee Transactions issued by our consolidated trusts and held by third parties are recognized as debt securities of consolidated trusts held by third parties on our consolidated balance sheets. Debt securities of consolidated trusts held by third parties represent our liability to third parties that hold beneficial interests in our consolidated trusts. The debt securities of our consolidated trusts may be prepaid at any time, as the loans that collateralize the debt may be prepaid without penalty at any time. |
• | Other debt consists of unsecured short-term and long-term debt securities we issue to third parties to fund our business activities. It is classified as either short-term or long-term based on the contractual maturity of the debt instrument. See “LIQUIDITY AND CAPITAL RESOURCES” for information about our other debt. |
The table below presents the UPB for Freddie Mac-issued mortgage-related securities by the underlying mortgage product type.
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Table 29 — Freddie Mac Mortgage-Related Securities(1)
September 30, 2013 | December 31, 2012 | |||||||||||||||||||||||
Issued by Consolidated Trusts | Issued by Non-Consolidated Trusts | Total | Issued by Consolidated Trusts | Issued by Non-Consolidated Trusts | Total | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Single-family: | ||||||||||||||||||||||||
30-year or more amortizing fixed-rate | $ | 1,034,075 | $ | — | $ | 1,034,075 | $ | 1,039,439 | $ | — | $ | 1,039,439 | ||||||||||||
20-year amortizing fixed-rate | 81,324 | — | 81,324 | 78,122 | — | 78,122 | ||||||||||||||||||
15-year amortizing fixed-rate | 292,343 | — | 292,343 | 270,032 | — | 270,032 | ||||||||||||||||||
Adjustable-rate(2) | 67,368 | — | 67,368 | 68,470 | — | 68,470 | ||||||||||||||||||
Interest-only(3) | 31,095 | — | 31,095 | 41,275 | — | 41,275 | ||||||||||||||||||
FHA/VA and other governmental | 3,329 | — | 3,329 | 3,084 | — | 3,084 | ||||||||||||||||||
Total single-family | 1,509,534 | — | 1,509,534 | 1,500,422 | — | 1,500,422 | ||||||||||||||||||
Multifamily | — | 4,023 | 4,023 | — | 4,224 | 4,224 | ||||||||||||||||||
Total single-family and multifamily | 1,509,534 | 4,023 | 1,513,557 | 1,500,422 | 4,224 | 1,504,646 | ||||||||||||||||||
Other Guarantee Transactions: | ||||||||||||||||||||||||
Non-HFA bonds: | ||||||||||||||||||||||||
Single-family(4) | 8,875 | 3,172 | 12,047 | 10,455 | 3,415 | 13,870 | ||||||||||||||||||
Multifamily | 445 | 53,635 | 54,080 | 448 | 36,732 | 37,180 | ||||||||||||||||||
Total Non-HFA bonds | 9,320 | 56,807 | 66,127 | 10,903 | 40,147 | 51,050 | ||||||||||||||||||
HFA Initiative Bonds:(5) | ||||||||||||||||||||||||
Single-family | — | 3,447 | 3,447 | — | 4,827 | 4,827 | ||||||||||||||||||
Multifamily | — | 747 | 747 | — | 863 | 863 | ||||||||||||||||||
Total HFA Initiative Bonds | — | 4,194 | 4,194 | — | 5,690 | 5,690 | ||||||||||||||||||
Total Other Guarantee Transactions | 9,320 | 61,001 | 70,321 | 10,903 | 45,837 | 56,740 | ||||||||||||||||||
REMICs and Other Structured Securities backed by Ginnie Mae certificates(6) | — | 570 | 570 | — | 654 | 654 | ||||||||||||||||||
Total Freddie Mac Mortgage-Related Securities | $ | 1,518,854 | $ | 65,594 | $ | 1,584,448 | $ | 1,511,325 | $ | 50,715 | $ | 1,562,040 | ||||||||||||
Less: Repurchased Freddie Mac Mortgage-Related Securities(7) | (132,417 | ) | (124,066 | ) | ||||||||||||||||||||
Total UPB of debt securities of consolidated trusts held by third parties | $ | 1,386,437 | $ | 1,387,259 | ||||||||||||||||||||
(1) | Amounts are based on UPB of the securities and exclude mortgage-related securities traded, but not yet settled. |
(2) | Includes $0.9 billion and $1.0 billion in UPB of option ARM mortgage loans as of September 30, 2013 and December 31, 2012, respectively. See endnote (4) for additional information on option ARM loans that back our Other Guarantee Transactions. |
(3) | Represents loans where the borrower pays interest only for a period of time before the borrower begins making principal payments. Includes both fixed- and variable-rate interest-only loans. |
(4) | Backed by non-agency mortgage-related securities that include prime, FHA/VA, and subprime mortgage loans and also include $5.7 billion and $6.3 billion in UPB of securities backed by option ARM mortgage loans at September 30, 2013 and December 31, 2012, respectively. |
(5) | Consists of bonds we acquired and resecuritized under the NIBP. |
(6) | Backed by FHA/VA loans. |
(7) | Represents the UPB of repurchased Freddie Mac mortgage-related securities that are consolidated on our balance sheets and includes certain remittance amounts associated with our security trust administration that are payable to third-party mortgage-related security holders. Our holdings of non-consolidated Freddie Mac mortgage-related securities are presented in “Table 19 — Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets.” |
Excluding Other Guarantee Transactions, the percentage of amortizing fixed-rate single-family loans underlying our consolidated trust debt securities, based on UPB, was approximately 93% at both September 30, 2013 and December 31, 2012. The UPB of multifamily Other Guarantee Transactions, excluding HFA initiative-related bonds, increased to $54.1 billion as of September 30, 2013 from $37.2 billion as of December 31, 2012, due to multifamily loan securitization activity related to our issuance of K Certificates.
The table below presents additional details regarding our issued and guaranteed mortgage-related securities.
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Table 30 — Issuances and Extinguishments of Debt Securities of Consolidated Trusts(1)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(in millions) | |||||||||||||||
Beginning balance of debt securities of consolidated trusts held by third parties | $ | 1,389,185 | $ | 1,443,223 | $ | 1,387,259 | $ | 1,452,476 | |||||||
Issuances to third parties of debt securities of consolidated trusts: | |||||||||||||||
Issuances based on underlying mortgage product type: | |||||||||||||||
30-year or more amortizing fixed-rate | 67,805 | 69,276 | 243,603 | 197,302 | |||||||||||
20-year amortizing fixed-rate | 5,322 | 8,728 | 19,220 | 23,815 | |||||||||||
15-year amortizing fixed-rate | 19,481 | 23,947 | 84,585 | 77,547 | |||||||||||
Adjustable-rate | 4,896 | 4,230 | 14,055 | 13,815 | |||||||||||
FHA/VA | 494 | — | 494 | — | |||||||||||
Debt securities of consolidated trusts retained by us at issuance(2) | (10,137 | ) | (15,991 | ) | (33,474 | ) | (27,432 | ) | |||||||
Net issuances of debt securities of consolidated trusts | 87,861 | 90,190 | 328,483 | 285,047 | |||||||||||
Reissuances of debt securities of consolidated trusts previously held by us(3) | 18,012 | 3,013 | 39,493 | 25,665 | |||||||||||
Total issuances to third parties of debt securities of consolidated trusts | 105,873 | 93,203 | 367,976 | 310,712 | |||||||||||
Extinguishments, net(4) | (108,621 | ) | (132,336 | ) | (368,798 | ) | (359,098 | ) | |||||||
Ending balance of debt securities of consolidated trusts held by third parties | $ | 1,386,437 | $ | 1,404,090 | $ | 1,386,437 | $ | 1,404,090 | |||||||
(1) | Based on UPB. |
(2) | Represents the UPB of mortgage loans that we had purchased for cash, subsequently securitized, and retained in our mortgage-related investments portfolio. |
(3) | Represents our sales of PCs and certain Other Guarantee Transactions previously held by us. |
(4) | Represents: (a) UPB of our purchases from third parties of PCs and Other Guarantee Transactions issued by our consolidated trusts; (b) principal repayments related to PCs and Other Guarantee Transactions issued by our consolidated trusts; and (c) certain remittance amounts associated with our trust security administration that are payable to third-party mortgage-related security holders as of September 30, 2013 and 2012. |
Extinguishments, net decreased during the three months ended September 30, 2013 compared to the three months ended September 30, 2012 primarily due to a decrease in refinance activity resulting from an increase in interest rates. Total issuances to third parties of debt securities of consolidated trusts increased during the three months ended September 30, 2013 compared to the three months ended September 30, 2012 primarily due to increased sales from the mortgage-related investments portfolio.
Extinguishments, net and total issuances to third parties of debt securities of consolidated trusts increased during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 primarily due significant refinance activity caused by historically low interest rates.
Other Liabilities
Other liabilities consist of servicer liabilities, the guarantee obligation, the reserve for guarantee losses on non-consolidated trusts and other mortgage-related financial guarantees, accounts payable and accrued expenses, and other miscellaneous liabilities. Other liabilities of $5.9 billion as of September 30, 2013 declined slightly compared to $6.1 billion as of December 31, 2012 primarily due to a decline in servicer liabilities as a result of a decrease in the population of seriously delinquent loans. See “NOTE 19: SELECTED FINANCIAL STATEMENT LINE ITEMS” for additional information.
Total Equity (Deficit)
The table below presents the changes in total equity (deficit) and certain capital-related disclosures.
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Table 31 — Changes in Total Equity (Deficit)
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
9/30/2013 | 6/30/2013 | 3/31/2013 | 12/31/2012 | 9/30/2012 | 9/30/2013 | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Beginning balance | $ | 7,357 | $ | 9,971 | $ | 8,827 | $ | 4,907 | $ | 1,086 | $ | 8,827 | |||||||||||
Net income | 30,486 | 4,988 | 4,581 | 4,457 | 2,928 | 40,055 | |||||||||||||||||
Other comprehensive income (loss), net of taxes: | |||||||||||||||||||||||
Changes in unrealized gains (losses) related to available-for-sale securities | (127 | ) | (717 | ) | 2,280 | 1,261 | 2,599 | 1,436 | |||||||||||||||
Changes in unrealized gains (losses) related to cash flow hedge relationships(1) | 76 | 84 | 90 | 94 | 102 | 250 | |||||||||||||||||
Changes in defined benefit plans | 2 | 2 | 20 | (84 | ) | 1 | 24 | ||||||||||||||||
Comprehensive income | 30,437 | 4,357 | 6,971 | 5,728 | 5,630 | 41,765 | |||||||||||||||||
Capital draw funded by Treasury | — | — | — | — | — | — | |||||||||||||||||
Senior preferred stock dividends declared | (4,357 | ) | (6,971 | ) | (5,827 | ) | (1,808 | ) | (1,809 | ) | (17,155 | ) | |||||||||||
Other | (1 | ) | — | — | — | — | (1 | ) | |||||||||||||||
Total equity (deficit)/Net worth | $ | 33,436 | $ | 7,357 | $ | 9,971 | $ | 8,827 | $ | 4,907 | $ | 33,436 | |||||||||||
Aggregate draws under the Purchase Agreement (as of period end)(2) | $ | 71,336 | $ | 71,336 | $ | 71,336 | $ | 71,336 | $ | 71,336 | $ | 71,336 | |||||||||||
Aggregate senior preferred stock dividends paid to Treasury in cash (as of period end) | $ | 40,909 | $ | 36,552 | $ | 29,581 | $ | 23,754 | $ | 21,946 | $ | 40,909 | |||||||||||
(1) | Represents the reclassification of losses into earnings related to our closed cash flow hedges as the originally forecasted transactions affected earnings. |
(2) | Does not include the initial $1.0 billion liquidation preference of senior preferred stock that we issued to Treasury in September 2008 as an initial commitment fee and for which no cash was received. Under the Purchase Agreement, the payment of dividends cannot be used to reduce prior draws from Treasury. |
At September 30, 2013, our assets exceeded our liabilities under GAAP; therefore no draw is being requested from Treasury under the Purchase Agreement for the third quarter of 2013. We paid cash dividends to Treasury of $17.2 billion during the nine months ended September 30, 2013. Based on our Net Worth Amount at September 30, 2013, our dividend obligation to Treasury in December 2013 will be $30.4 billion.
Our available-for-sale securities net unrealized loss was $8 million and $1.4 billion at September 30, 2013 and December 31, 2012, respectively. This $1.4 billion improvement in AOCI was primarily due to fair value gains related to: (a) the impact of spread tightening on our non-agency mortgage-related securities; and (b) the movement of our single-family non-agency mortgage-related securities with unrealized losses towards maturity.
RISK MANAGEMENT
Our investment and credit guarantee activities expose us to three broad categories of risk: (a) credit risk; (b) interest-rate risk and other market risk; and (c) operational risk. See “RISK FACTORS” in our 2012 Annual Report for additional information regarding these and other risks.
Credit Risk
We are subject primarily to two types of credit risk: mortgage credit risk and institutional credit risk. Mortgage credit risk is the risk that a borrower will fail to make timely payments on a mortgage we own or guarantee. Institutional credit risk is the risk that a counterparty that has entered into a business contract or arrangement with us will fail to meet its obligations to us.
Mortgage Credit Risk
We are exposed to mortgage credit risk principally in our single-family credit guarantee and multifamily mortgage portfolios because we either hold the mortgage assets or have guaranteed mortgages in connection with the issuance of a Freddie Mac mortgage-related security, or other guarantee commitment. All mortgages that we purchase or guarantee have an inherent risk of default. We are also exposed to mortgage credit risk related to our investments in non-Freddie Mac mortgage-related securities. For information about our holdings of these securities, see “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities.”
Single-Family Mortgage Credit Risk
Single-family mortgage credit risk is primarily influenced by the credit profile of the borrower of the mortgage (e.g., credit score, credit history, and monthly income relative to debt payments), documentation level, the number of borrowers, the features of the mortgage itself, the purpose of the mortgage, occupancy type, property type and value, the LTV ratio, and local and regional economic conditions, including home prices and unemployment rates.
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We use a process of delegated underwriting for the single-family mortgages we purchase or securitize. In this process, our contracts with seller/servicers describe mortgage eligibility and underwriting standards and the seller/servicers represent and warrant to us that the mortgages sold to us meet these standards. Through our delegated underwriting process, mortgage loans and the borrowers’ ability to repay the loans are evaluated using a number of critical risk characteristics, including, but not limited to, the borrower’s credit score and credit history, the borrower’s monthly income relative to debt payments, the original LTV ratio, the type of mortgage product, the property type and market value, and the occupancy type of the loan. For more information on the underwriting process, see “BUSINESS — Our Business Segments — Single-Family Guarantee Segment — Underwriting Requirements and Quality Control Standards” in our 2012 Annual Report.
Conditions in the mortgage market improved in most geographical areas during the first nine months of 2013. However, many single-family mortgage loans, especially those originated from 2005 through 2008, have been adversely affected by the compounding pressures on household wealth caused by significant declines in home values during the housing crisis that began in 2006 and the ongoing weak employment environment in many areas. The UPB of our single-family non-performing loans has declined but remained at elevated levels during the first nine months of 2013 compared to our historical experience.
The table below presents certain credit information about loans in our single-family credit guarantee portfolio by year of origination as of September 30, 2013 and for the nine months ended September 30, 2013.
Table 32 — Single-Family Credit Guarantee Portfolio Data by Year of Origination(1)
At September 30, 2013 | Nine Months Ended September 30, 2013 | ||||||||||||||||||||
Percent of Portfolio | Average Credit Score(2) | Original LTV Ratio | Current LTV Ratio(3) | Current LTV Ratio >100%(3)(4) | Serious Delinquency Rate(5) | Percent of Credit Losses | |||||||||||||||
Year of Origination | |||||||||||||||||||||
2013 | 18 | % | 749 | 75 | % | 74 | % | 9 | % | 0.02 | % | — | % | ||||||||
2012 | 24 | 754 | 78 | 70 | 9 | 0.15 | 2 | ||||||||||||||
2011 | 11 | 751 | 72 | 63 | 3 | 0.37 | 1 | ||||||||||||||
2010 | 11 | 750 | 72 | 64 | 3 | 0.63 | 3 | ||||||||||||||
2009 | 9 | 748 | 71 | 65 | 3 | 1.05 | 3 | ||||||||||||||
Combined-2009 to 2013 | 73 | 751 | 75 | 68 | 7 | 0.36 | 9 | ||||||||||||||
2008 | 3 | 715 | 74 | 81 | 18 | 7.05 | 10 | ||||||||||||||
2007 | 5 | 696 | 77 | 97 | 42 | 11.73 | 35 | ||||||||||||||
2006 | 4 | 702 | 75 | 94 | 38 | 10.61 | 23 | ||||||||||||||
2005 | 5 | 709 | 73 | 80 | 20 | 6.86 | 14 | ||||||||||||||
Combined-2005 to 2008 | 17 | 704 | 75 | 89 | 31 | 9.15 | 82 | ||||||||||||||
2004 and prior | 10 | 712 | 72 | 51 | 3 | 3.29 | 9 | ||||||||||||||
Total | 100 | % | 739 | 74 | 70 | 11 | 2.58 | 100 | % | ||||||||||||
(1) | Based on the loans remaining in the portfolio at September 30, 2013, which totaled $1.7 trillion, rather than all loans originally guaranteed by us and originated in the respective year. Includes loans acquired under our relief refinance initiative, which began in 2009. |
(2) | Based on FICO score of the borrower as of the date of loan origination and may not be indicative of the borrowers’ current creditworthiness. Excludes less than 1% of loans in the portfolio because the FICO scores at origination were not available. |
(3) | We estimate current market values by adjusting the value of the property at origination based on changes in the market value of homes in the same geographical area since origination. |
(4) | Calculated as a percentage of the aggregate UPB of loans with LTV ratios greater than 100% in relation to the total UPB of loans in the category. |
(5) | See “Credit Performance — Delinquencies” for further information about our reported serious delinquency rates. |
Improvement in home prices in many areas of the U.S. during the first nine months of 2013 generally led to improved current LTV ratios of the loans in our portfolio as of September 30, 2013. However, we estimate that as of September 30, 2013 and December 31, 2012, approximately 31% and 42%, respectively, of the loans originated in 2005 through 2008 that remained in our single-family credit guarantee portfolio as of those dates had current LTV ratios greater than 100%. Loans with current LTV ratios greater than 100% comprised 11% and 15%, of our single-family credit guarantee portfolio, based on UPB at September 30, 2013 and December 31, 2012, respectively, and comprised approximately 72% and 83% of our credit losses recognized in the first nine months of 2013 and 2012, respectively. For the loans in our single-family credit guarantee portfolio with estimated current LTV ratios greater than 80%, the borrowers had a weighted average credit score at origination of 722 at both September 30, 2013 and December 31, 2012.
As of September 30, 2013, 7.8% of the total number of single-family loans we purchased or guaranteed that were originated in 2005 to 2008 had been foreclosed or completed a short sale transaction resulting in a loss (before consideration of recoveries). In addition, approximately 9.2% of loans originated in those years that remained in our single-family guarantee portfolio as of September 30, 2013 were seriously delinquent. We believe the gradual replacement of the loans originated in
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2005 to 2008 has positively impacted the payment performance of our single-family credit guarantee portfolio. However, the rate at which this replacement is occurring continues to be negatively affected by a low volume of new purchase mortgage originations and a lengthy foreclosure process in many states.
Characteristics of the Single-Family Credit Guarantee Portfolio
The average UPB of loans in our single-family credit guarantee portfolio was approximately $154,000 and $151,000 at September 30, 2013 and December 31, 2012, respectively. We purchased loans or issued other guarantee commitments for approximately 472,000 and 491,000 single-family loans totaling $97.8 billion and $102.8 billion of UPB during the third quarters of 2013 and 2012, respectively. Our single-family credit guarantee portfolio predominately consists of first-lien, fixed-rate mortgage loans secured by the borrower’s primary residence. Approximately 95% and 96% of the single-family mortgages we purchased or guaranteed in the three and nine months ended September 30, 2013, respectively, were first-lien, fixed-rate amortizing mortgages, based on UPB, and the remainder were first-lien, ARM mortgage loans. Approximately 76% of the single-family mortgages we purchased or guaranteed in the first nine months of 2013 were refinance mortgages, including approximately 24% that were relief refinance mortgages, based on UPB.
The credit quality of the single-family loans we acquired beginning in 2009 (excluding HARP and other relief refinance mortgages) is significantly better than that of loans we acquired from 2005 through 2008, as measured by original LTV ratios, FICO scores, and the proportion of loans underwritten with fully documented income. Mortgages originated after 2008, including HARP and other relief refinance loans, comprised an increasing proportion of the portfolio during the first nine months of 2013, and the proportion of loans originated prior to 2009 within the portfolio continued to decline.
The percentage of home purchase loans in our loan acquisition volume was at low levels and refinance loan activity was high during the first half of 2013. During the third quarter and first nine months of 2013, we purchased or guaranteed more than 324,000 and 1.37 million, respectively, of single-family loans that were refinance mortgages, totaling $63.9 billion and $274.9 billion in UPB, respectively. Our purchases of refinance mortgages declined for the two most recent quarters, which we believe was primarily a result of higher mortgage interest rates. As of September 30, 2013 and December 31, 2012, there were approximately 10.7 million and 10.9 million loans, respectively, in our single-family credit guarantee portfolio, including 2.0 million and 1.6 million relief refinance mortgages, respectively.
The tables below provide additional characteristics of single-family mortgage loans purchased during the nine months ended September 30, 2013 and 2012, and of our single-family credit guarantee portfolio at September 30, 2013 and December 31, 2012.
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Table 33 — Characteristics of Purchases for the Single-Family Credit Guarantee Portfolio(1)
Percent of Purchases During the Nine Months Ended September 30, | ||||||||||||||||||
2013 | 2012 | |||||||||||||||||
Relief Refi | All Other | Total | Relief Refi | All Other | Total | |||||||||||||
Original LTV Ratio Range | ||||||||||||||||||
60% and below | 4 | % | 20 | % | 24 | % | 4 | % | 21 | % | 25 | % | ||||||
Above 60% to 70% | 2 | 13 | 15 | 2 | 12 | 14 | ||||||||||||
Above 70% to 80% | 3 | 31 | 34 | 3 | 29 | 32 | ||||||||||||
Above 80% to 100% | 7 | 12 | 19 | 9 | 7 | 16 | ||||||||||||
Above 100% to 125% | 5 | — | 5 | 8 | — | 8 | ||||||||||||
Above 125% | 3 | — | 3 | 5 | — | 5 | ||||||||||||
Total | 24 | % | 76 | % | 100 | % | 31 | % | 69 | % | 100 | % | ||||||
Weighted average original LTV ratio | 91 | % | 70 | % | 75 | % | 98 | % | 68 | % | 77 | % | ||||||
Credit Score(2) | ||||||||||||||||||
740 and above | 12 | % | 55 | % | 67 | % | 18 | % | 54 | % | 72 | % | ||||||
700 to 739 | 5 | 14 | 19 | 6 | 11 | 17 | ||||||||||||
660 to 699 | 4 | 6 | 10 | 4 | 4 | 8 | ||||||||||||
620 to 659 | 2 | 1 | 3 | 2 | — | 2 | ||||||||||||
Less than 620 | 1 | — | 1 | 1 | — | 1 | ||||||||||||
Not available | — | — | — | — | — | — | ||||||||||||
Total | 24 | % | 76 | % | 100 | % | 31 | % | 69 | % | 100 | % | ||||||
Weighted average credit score: | ||||||||||||||||||
Total mortgages | 728 | 757 | 750 | 740 | 763 | 756 | ||||||||||||
Percent of Purchases During the Nine Months Ended September 30, | |||||
2013 | 2012 | ||||
Loan Purpose | |||||
Purchase | 24 | % | 18 | % | |
Cash-out refinance | 16 | 14 | |||
Other refinance(3) | 60 | 68 | |||
Total | 100 | % | 100 | % | |
Property Type | |||||
Detached/townhome(4) | 93 | % | 94 | % | |
Condo/Co-op | 7 | 6 | |||
Total | 100 | % | 100 | % | |
Occupancy Type | |||||
Primary residence | 88 | % | 91 | % | |
Second/vacation home | 4 | 4 | |||
Investment | 8 | 5 | |||
Total | 100 | % | 100 | % | |
(1) | Percentages are based on the UPB of the single-family credit guarantee portfolio. |
(2) | Credit score data is based on FICO scores, which are ranked on a scale of approximately 300 to 850 points. Although we obtain updated credit information on certain borrowers after the origination of a mortgage, such as those borrowers seeking a modification, the scores presented in this table represent the credit score of the borrower at the time of loan origination and may not be indicative of the borrowers’ current creditworthiness. |
(3) | Other refinance loans include: (a) refinance mortgages with “no cash out” to the borrower; and (b) refinance mortgages for which the delivery data provided was not sufficient for us to determine whether the mortgage was a cash-out or a no cash-out refinance transaction. |
(4) | Includes manufactured housing and homes within planned unit development communities. The UPB of manufactured housing mortgage loans purchased during the nine months ended September 30, 2013 and 2012 was $615 million and $472 million, respectively. |
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Table 34 — Characteristics of the Single-Family Credit Guarantee Portfolio(1)
Portfolio Balance at(2) | ||||||
September 30, 2013 | December 31, 2012 | |||||
Original LTV Ratio Range | ||||||
60% and below | 22 | % | 22 | % | ||
Above 60% to 70% | 15 | 15 | ||||
Above 70% to 80% | 38 | 40 | ||||
Above 80% to 100% | 19 | 18 | ||||
Above 100% | 6 | 5 | ||||
Total | 100 | % | 100 | % | ||
Weighted average original LTV ratio | 74 | % | 74 | % | ||
Estimated Current LTV Ratio Range(3) | ||||||
60% and below | 33 | % | 28 | % | ||
Above 60% to 70% | 17 | 14 | ||||
Above 70% to 80% | 20 | 21 | ||||
Above 80% to 90% | 12 | 13 | ||||
Above 90% to 100% | 7 | 9 | ||||
Above 100% to 120% | 6 | 8 | ||||
Above 120% | 5 | 7 | ||||
Total | 100 | % | 100 | % | ||
Weighted average estimated current LTV ratio: | ||||||
Relief refinance mortgages(4) | 82 | % | 83 | % | ||
All other mortgages | 67 | 74 | ||||
Total mortgages | 70 | 75 | ||||
Credit Score(5) | ||||||
740 and above | 58 | 56 | ||||
700 to 739 | 20 | 21 | ||||
660 to 699 | 13 | 14 | ||||
620 to 659 | 6 | 6 | ||||
Less than 620 | 3 | 3 | ||||
Not available | <1 | <1 | ||||
Total | 100 | % | 100 | % | ||
Weighted average credit score: | ||||||
Relief refinance mortgages(4) | 736 | 741 | ||||
All other mortgages | 740 | 736 | ||||
Total mortgages | 739 | 737 | ||||
Loan Purpose | ||||||
Purchase | 25 | % | 27 | % | ||
Cash-out refinance | 22 | 24 | ||||
Other refinance(6) | 53 | 49 | ||||
Total | 100 | % | 100 | % | ||
Property Type | ||||||
Detached/townhome(7) | 92 | % | 92 | % | ||
Condo/Co-op | 8 | 8 | ||||
Total | 100 | % | 100 | % | ||
Occupancy Type | ||||||
Primary residence | 90 | % | 90 | % | ||
Second/vacation home | 4 | 5 | ||||
Investment | 6 | 5 | ||||
Total | 100 | % | 100 | % | ||
(1) | Ending balances are based on the UPB of the single-family credit guarantee portfolio. Other Guarantee Transactions with ending balances of $1 billion at both September 30, 2013 and December 31, 2012 are excluded since these securities are backed by non-Freddie Mac issued securities for which the loan characteristics data was not available. |
(2) | Includes loans acquired under our relief refinance initiative, which began in 2009. |
(3) | The current LTV ratios are management estimates, which are updated on a monthly basis. Current market values are estimated by adjusting the value of the property at origination based on changes in the market value of homes in the same geographical area since that time. |
(4) | Relief refinance mortgages of all LTV ratios comprised approximately 20% and 18% of our single-family credit guarantee portfolio by UPB as of September 30, 2013 and December 31, 2012, respectively. |
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(5) | Credit score data is based on FICO scores, which are ranked on a scale of approximately 300 to 850 points. Although we obtain updated credit information on certain borrowers after the origination of a mortgage, such as those borrowers seeking a modification, the scores presented in this table represent the credit score of the borrower at the time of loan origination and may not be indicative of the borrowers’ current creditworthiness. Excludes less than 1% of loans in the portfolio because the FICO scores at origination were not available at September 30, 2013. |
(6) | Other refinance loans include: (a) refinance mortgages with “no cash out” to the borrower; and (b) refinance mortgages for which the delivery data provided was not sufficient for us to determine whether the mortgage was a cash-out or a no cash-out refinance transaction. |
(7) | Includes manufactured housing and homes within planned unit development communities. |
An increase in the estimated current LTV ratio of a loan indicates that the borrower’s equity in the home has declined, and can negatively affect the borrower’s ability to refinance or sell the property for an amount at or above the balance of the outstanding mortgage loan. Based on our historical experience, there is an increase in borrower default risk as LTV ratios increase. Due to our participation in HARP, we purchase a significant number of loans that have LTV ratios over 100%. HARP loans with LTV ratios over 100% represented 8% and 13% of our single-family mortgage purchases in the first nine months of 2013 and 2012, respectively. The percentage of mortgages in our single-family credit guarantee portfolio with estimated current LTV ratios greater than 100% was 11% and 15% at September 30, 2013 and December 31, 2012, respectively, and the serious delinquency rate for these loans was 10.5% and 12.7%, respectively. The portion of our single-family credit guarantee portfolio with current LTV ratios greater than 100% declined during 2013 primarily due to improving home prices during the period.
Attribute Combinations
Certain combinations of loan characteristics often can indicate a higher degree of credit risk. For example, single-family mortgages with both high LTV ratios and borrowers who have lower credit scores typically experience higher rates of serious delinquency and default. We estimate that there were $12.8 billion and $12.0 billion at September 30, 2013 and December 31, 2012, respectively, of loans in our single-family credit guarantee portfolio with both original LTV ratios greater than 90% and FICO scores less than 620 at the time of loan origination. We continue to purchase certain of these loans if they are covered by credit enhancements for the UPB in excess of 80% or if they are HARP loans. Certain mortgage product types, including interest-only or option ARM loans, have features that may also add to credit risk. See “Table 42 — Single-Family Credit Guarantee Portfolio by Attribute Combinations” for information about certain attribute combinations of our single-family mortgage loans.
Single-Family Mortgage Product Types
Product mix affects the credit risk profile of our total mortgage portfolio. The primary mortgage products in our single-family credit guarantee portfolio are first lien, fixed-rate mortgage loans secured by the borrower’s primary residence. Effective January 1, 2013, we no longer purchase balloon/reset mortgages. See “Other Categories of Single-Family Mortgage Loans” below for additional information on higher-risk mortgages in our single-family credit guarantee portfolio.
For purposes of presentation within this Form 10-Q and elsewhere in our reporting, we have categorized a number of modified loans as fixed-rate loans (instead of as adjustable rate loans), even though the modified loans have rate adjustment provisions. In these cases, while the terms of the modified loans provide for the interest rate to adjust in the future, such future rates are determined at the time of modification rather than at a subsequent date.
The following paragraphs provide information on the interest-only, option ARM, and conforming jumbo loans in our single-family credit guarantee portfolio. Interest-only and option ARM loans are higher-risk mortgage products based on the features of these types of loans, and have experienced significantly higher serious delinquency rates than fixed-rate amortizing mortgage products.
Interest-Only Loans
Interest-only loans have an initial period during which the borrower pays only interest, and at a specified date the monthly payment increases to begin reflecting repayment of principal. Interest-only loans represented approximately 2% and 3% of the UPB of our single-family credit guarantee portfolio at September 30, 2013 and December 31, 2012, respectively. We discontinued purchasing such loans on September 1, 2010. The balance of these loans has declined significantly in recent years as many of these borrowers have repaid their loans, completed foreclosure transfers or foreclosure alternatives, refinanced or received loan modifications into an amortizing loan product (and thus these loans are no longer classified as interest-only loans).
Option ARM Loans
Most option ARM loans have initial periods during which the borrower has various options as to the amount of each monthly payment, until a specified date, when the terms are recast. We have not purchased option ARM loans in our single-family credit guarantee portfolio since 2007. At both September 30, 2013 and December 31, 2012, option ARM loans represented less than 1% of the UPB of our single-family credit guarantee portfolio. Included in this exposure was $5.7 billion and $6.3 billion of option ARM securities underlying certain of our Other Guarantee Transactions at September 30, 2013 and December 31, 2012, respectively. While we have not categorized these option ARM securities as either subprime or Alt-A securities for presentation within this Form 10-Q and elsewhere in our reporting, they could exhibit similar credit performance
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to collateral identified as subprime or Alt-A. 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. As of September 30, 2013 and December 31, 2012, approximately 10.3% and 8.1%, respectively, of the option ARM loans within our single-family credit guarantee portfolio had been modified. For information on our exposure to option ARM loans through our holdings of non-agency mortgage-related securities, see “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities.”
Conforming Jumbo Loans
For loans originated after September 30, 2011, conforming jumbo loans on a one-family residence have UPB at origination that is greater than $417,000 and up to $625,500 in certain “high-cost” areas. We purchased or guaranteed $25.7 billion and $22.6 billion of conforming jumbo loans during the nine months ended September 30, 2013 and 2012, respectively. The UPB of conforming jumbo loans in our single-family credit guarantee portfolio as of September 30, 2013 and December 31, 2012 was $66.6 billion and $57.0 billion, and comprised 4% and 3% of the portfolio, respectively. The average size of these loans was approximately $521,000 and $530,000 at September 30, 2013 and December 31, 2012, respectively. See “BUSINESS — Our Business” in our 2012 Annual Report for further information on the conforming loan limits.
Other Categories of Single-Family Mortgage Loans
While we have classified certain loans as subprime or Alt-A for purposes of the discussion below and elsewhere in this Form 10-Q, there is no universally accepted definition of subprime or Alt-A, and our classification of such loans may differ from those used by other companies. For example, some financial institutions may use FICO scores to delineate certain residential mortgages as subprime. In addition, we do not rely primarily on these loan classifications to evaluate the credit risk exposure relating to such loans in our single-family credit guarantee portfolio. For a definition of the subprime and Alt-A single-family loans and securities in this Form 10-Q, see “GLOSSARY.”
Subprime Loans
Participants in the mortgage market may characterize single-family loans based upon their overall credit quality at the time of origination, generally considering them to be prime or subprime. While we have not historically characterized the loans in our single-family credit guarantee portfolio as either prime or subprime, we do monitor the amount of loans we have guaranteed with characteristics that indicate a higher degree of credit risk (see “Higher-Risk Loans in the Single-Family Credit Guarantee Portfolio” and “Table 42 — Single-Family Credit Guarantee Portfolio by Attribute Combinations” for further information). In addition, we estimate that approximately $1.9 billion and $2.0 billion of security collateral underlying our Other Guarantee Transactions at September 30, 2013 and December 31, 2012, respectively, were identified as subprime based on information provided to us when we entered into these transactions.
We also categorize our investments in non-agency mortgage-related securities as subprime if they were identified as such based on information provided to us when we entered into these transactions. At September 30, 2013 and December 31, 2012, we held $40.8 billion and $44.4 billion, respectively, in UPB of non-agency mortgage-related securities backed by subprime loans. Approximately 4% and 5% of these securities were investment grade at September 30, 2013 and December 31, 2012, respectively. The credit performance of loans underlying these securities deteriorated significantly since 2008. For more information on our exposure to subprime mortgage loans through our investments in non-agency mortgage-related securities see “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities.”
Alt-A Loans
Although there is no universally accepted definition of Alt-A, many mortgage market participants classify single-family loans with credit characteristics that range between their prime and subprime categories as Alt-A because these loans have a combination of characteristics of each category, may be underwritten with lower or alternative income or asset documentation requirements compared to a full documentation mortgage loan, or both. The UPB of Alt-A loans in our single-family credit guarantee portfolio declined to $60.0 billion as of September 30, 2013 from $73.7 billion as of December 31, 2012 primarily due to refinancing into other mortgage products, foreclosure transfers, and other liquidation events. For reporting purposes, loans within the Alt-A category continue to be reported in that category following a modification of the loan, even though the borrower may have provided full documentation of assets and income before completing the modification. As of September 30, 2013 and December 31, 2012, approximately 15.2% and 11.8%, respectively, of the Alt-A loans within our single-family credit guarantee portfolio had completed a modification. As of September 30, 2013, for Alt-A loans in our single-family credit guarantee portfolio, the average FICO score at origination was 711. Although Alt-A mortgage loans comprised approximately 4% of our single-family credit guarantee portfolio as of September 30, 2013, these loans represented approximately 38% and 25% of our credit losses during the three and nine months ended September 30, 2013, respectively.
Although we discontinued new purchases of mortgage loans with lower documentation standards for assets or income beginning March 1, 2009, we continued to purchase certain amounts of these mortgages in cases where the loan was either: (a) purchased pursuant to a previously issued other guarantee commitment; (b) part of our relief refinance mortgage initiative;
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or (c) in another refinance mortgage initiative and the pre-existing mortgage (including Alt-A loans) was originated under less than full documentation standards. In the event we purchase a refinance mortgage 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 mortgage in this Form 10-Q and our other financial reports because the new refinance loan replacing the original loan would not be identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such refinancing not occurred. From the time the relief refinance initiative began in 2009 to September 30, 2013, we have purchased approximately $27.8 billion of relief refinance mortgages that were previously categorized as Alt-A loans in our portfolio, including $5.7 billion during the nine months ended September 30, 2013.
We also hold investments in non-agency mortgage-related securities backed by single-family Alt-A loans. At September 30, 2013 and December 31, 2012, we held investments of $11.8 billion and $14.8 billion in UPB, respectively, of non-agency mortgage-related securities backed by Alt-A and other mortgage loans. Approximately 5% and 9% of these securities were categorized as investment grade at September 30, 2013 and December 31, 2012, respectively. The credit performance of loans underlying these securities deteriorated significantly since 2008. We categorize our investments in non-agency mortgage-related securities as Alt-A if the securities were identified as such based on information provided to us when we entered into these transactions. For more information on our exposure to Alt-A mortgage loans through our investments in non-agency mortgage-related securities see “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities.”
Higher-Risk Loans in the Single-Family Credit Guarantee Portfolio
The table below presents information about certain categories of single-family mortgage loans within our single-family credit guarantee portfolio that we believe have certain higher-risk characteristics. These loans include categories based on product type and borrower characteristics present at origination. The table includes a presentation of each higher risk category in isolation. A single loan may fall within more than one category (for example, an interest-only loan may also have an original LTV ratio greater than 90%). Loans with a combination of these characteristics will have an even higher risk of default than those with a single characteristic.
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Table 35 — Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio(1)
As of September 30, 2013 | ||||||||||||
UPB | Estimated Current LTV(2) | Percentage Modified(3) | Serious Delinquency Rate(4) | |||||||||
(dollars in billions) | ||||||||||||
Loans with one or more specified characteristics | $ | 364.5 | 95 | % | 7.9 | % | 5.8 | % | ||||
Categories (individual characteristics): | ||||||||||||
Alt-A | 60.0 | 89 | 15.2 | 10.7 | ||||||||
Interest-only(5) | 37.4 | 95 | 0.3 | 13.5 | ||||||||
Option ARM(6) | 6.6 | 89 | 10.3 | 13.3 | ||||||||
Original LTV ratio greater than 90%, non-HARP mortgages | 100.5 | 92 | 10.1 | 6.1 | ||||||||
Original LTV ratio greater than 90%, HARP mortgages | 151.9 | 105 | 0.4 | 0.9 | ||||||||
Lower FICO scores at origination (less than 620)(7) | 48.5 | 84 | 16.7 | 10.4 | ||||||||
As of December 31, 2012 | ||||||||||||
UPB | Estimated Current LTV(2) | Percentage Modified(3) | Serious Delinquency Rate(4) | |||||||||
(dollars in billions) | ||||||||||||
Loans with one or more specified characteristics | $ | 355.3 | 101 | % | 7.6 | % | 7.5 | % | ||||
Categories (individual characteristics): | ||||||||||||
Alt-A | 73.7 | 100 | 11.8 | 11.4 | ||||||||
Interest-only(5) | 50.2 | 110 | 0.3 | 16.3 | ||||||||
Option ARM(6) | 7.3 | 105 | 8.1 | 16.3 | ||||||||
Original LTV ratio greater than 90%, non-HARP mortgages | 98.5 | 100 | 9.4 | 7.8 | ||||||||
Original LTV ratio greater than 90%, HARP mortgages | 120.4 | 108 | 0.2 | 1.0 | ||||||||
Lower FICO scores at origination (less than 620)(7) | 50.9 | 89 | 15.3 | 12.2 | ||||||||
(1) | Categories are not additive and a single loan may be included in multiple categories if more than one characteristic is associated with the loan. |
(2) | See endnote (3) to “Table 34 — Characteristics of the Single-Family Credit Guarantee Portfolio” for information on our calculation of current LTV ratios. |
(3) | Represents the percentage of loans based on loan count in our single-family credit guarantee portfolio at period end that have been modified, including those with no changes in the interest rate or maturity date, but where past due amounts are added to the outstanding principal balance of the loan. Excludes loans underlying certain Other Guarantee Transactions for which data was not available. |
(4) | See “Credit Performance — Delinquencies” for further information about our reported serious delinquency rates. |
(5) | When an interest-only loan is modified to require repayment of principal, the loan is removed from the interest-only category. The percentages of interest-only loans which have been modified at period end reflect loans that have not yet been assigned to their new product category (post-modification), primarily due to delays in processing. |
(6) | For reporting purposes, loans within the option ARM category continue to be reported in that category following modification, even though the modified loan no longer provides for optional payment provisions. |
(7) | See endnote (2) to “Table 33 — Characteristics of Purchases for the Single-Family Credit Guarantee Portfolio” for information on our presentation of FICO scores. |
The total UPB of loans in our single-family credit guarantee portfolio with one or more of these higher-risk characteristics was $364.5 billion and $355.3 billion as of September 30, 2013 and December 31, 2012, respectively, and comprised approximately 22% of the portfolio at both dates. The serious delinquency rates associated with loans with one or more of the above characteristics declined to 5.8% as of September 30, 2013 from 7.5% as of December 31, 2012.
A significant portion of the loans in the higher-risk categories presented in the table above were originated in 2005 through 2008. We have fully discontinued purchases of Alt-A (effective March 1, 2009), interest-only (effective September 1, 2010), and option ARM (since 2007) loans. The UPB of loans with one or more of these higher-risk characteristics in our single-family credit guarantee portfolio increased during the first nine months of 2013 primarily due to increased purchases of loans with original LTV ratios greater than 90% resulting from significant HARP activity. The balance of our non-HARP mortgages with original LTV ratios greater than 90% increased $2.0 billion from December 31, 2012 to September 30, 2013, since we continue to purchase certain of these loans if they are covered by credit enhancements for the UPB in excess of 80%. We also continue to purchase single-family loans with FICO scores below 620 in limited amounts if they meet our underwriting standards.
Credit Enhancements
The use of credit enhancements is intended to mitigate some of our potential credit losses. Our charter requires that single-family mortgages with LTV ratios above 80% at the time of purchase be covered by specified credit enhancements or participation interests (subject to certain exceptions, such as discussed below with respect to HARP). As guarantor, we remain
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responsible for the payment of principal and interest if mortgage insurance or other credit enhancements do not provide full reimbursement for covered losses. Our credit losses could increase if an entity that provides credit enhancement fails to fulfill its obligation (e.g., a mortgage insurer fails to pay a claim), as this would reduce the amount of our credit loss recoveries.
The 2013 Conservatorship Scorecard contains a goal for us to demonstrate the viability of multiple types of risk transfer transactions involving single-family mortgages with at least $30 billion in aggregate UPB, subject to certain limitations. These transactions are intended to shift mortgage credit risk from us to private capital investors. In July 2013, we executed one transaction representing $22.5 billion of UPB, of which we believe $18.5 billion qualifies toward this goal. A second transaction, representing $35.3 billion of UPB, is scheduled to settle on November 12, 2013. We plan to execute an additional risk transfer transaction in the fourth quarter of 2013.
At both September 30, 2013 and December 31, 2012, our credit-enhanced mortgages represented 13% of our single-family credit guarantee portfolio, excluding those backing Ginnie Mae Certificates and HFA bonds guaranteed by us under the HFA initiative, based on UPB. Our financial guarantees backed by Ginnie Mae Certificates and HFA bonds under the HFA initiative are excluded because we consider the incremental credit risk to which we are exposed to be insignificant. In recent periods, the percentage of our single-family loan purchases with credit enhancement coverage has been affected by high volumes of refinance activity. Refinance loans (other than HARP loans) typically have lower LTV ratios than home purchase loans, and are more likely to have an LTV ratio below 80% and not require credit protection as specified in our charter. Under HARP, we allow eligible borrowers who have mortgages with current LTV ratios over 80% to refinance their mortgages without obtaining new mortgage insurance in excess of the insurance coverage that was already in place.
We recognized recoveries from credit enhancements (excluding recoveries that represent reimbursements for our expenses, including REO operations expenses) of $1.2 billion and $1.0 billion that reduced our charge-offs of single-family loans during the nine months ended September 30, 2013 and 2012, respectively. Substantially all of these amounts represent recoveries associated with our primary and pool mortgage insurance policies. REO operations income (expenses) included recoveries from credit enhancements of $139 million and $88 million during the nine months ended September 30, 2013 and 2012, respectively, primarily associated with our primary and pool mortgage insurance policies. During the third quarter of 2013, we entered into an agreement with one of our mortgage insurers to resolve outstanding and future primary mortgage insurance claims related to certain loans. We recognized recoveries of $0.2 billion in the third quarter of 2013 related to this agreement. As a result, our recoveries in the three and nine months ended September 30, 2013 were higher than they otherwise would have been without this agreement.
See “Institutional Credit Risk” for information about our counterparties that provide credit enhancement on loans in our single-family credit guarantee portfolio, including information about pool insurance coverage and our mortgage loan insurers. See “BUSINESS — Our Business Segments —Single-Family Guarantee Segment — Credit Enhancements” in our 2012 Annual Report and “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES” for additional information about credit protection and other forms of credit enhancements covering loans in our single-family credit guarantee portfolio. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities” for credit enhancement and other information about our investments in non-Freddie Mac mortgage-related securities.
Single-Family Loan Workouts and the MHA Program
Loan workout activities are a key component of our loss mitigation strategy for managing and resolving troubled assets and lowering credit losses. Our loan workouts consist of: (a) forbearance agreements; (b) repayment plans; (c) loan modifications; and (d) foreclosure alternatives (i.e., short sales or deed in lieu of foreclosure transactions). Our single-family loss mitigation strategy emphasizes early intervention by servicers in delinquent mortgages and provides alternatives to foreclosure. In connection with our loss mitigation efforts, we participate in the MHA Program, which is primarily designed to help in the housing recovery, promote liquidity and housing affordability, and expand foreclosure prevention efforts. HAMP and HARP are key components of the MHA Program. See “BUSINESS — Our Business Segments — Single-Family Guarantee Segment — Loss Mitigation and Loan Workout Activities” in our 2012 Annual Report for more information on the MHA Program and our loss mitigation activities, including a description of our loan workouts (e.g., HAMP) and HARP. During the first nine months of 2013, we helped approximately 128,000 borrowers either stay in their homes or sell their properties and avoid foreclosures through our various workout programs, including HAMP, and we completed approximately 64,000 foreclosures. We bear the full costs associated with our loan workouts and foreclosure alternatives on mortgages that we own or guarantee, including the cost of any monthly payment reductions, and do not receive any reimbursement from Treasury.
Home Affordable Modification Program and Non-HAMP Standard Modifications
Our primary loan modification initiatives are HAMP and our non-HAMP standard loan modification initiative. HAMP was previously scheduled to end in December 2013, but has been extended to December 2015.
In March 2013, as part of the servicing alignment initiative, we announced a new streamlined modification initiative, which provides an additional modification opportunity to certain borrowers who are at least 90 (but not more than 720) days
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delinquent. This initiative was implemented in July 2013 (with earlier adoption permitted), and it is scheduled to expire on December 31, 2015. Borrowers are not required to apply for assistance or provide income or hardship documentation. However, they must complete a trial period of at least three months prior to being offered a permanent modification, which will provide the same mortgage terms as the non-HAMP standard modification. We expect that our new streamlined modification initiative will cause our non-HAMP modification volume to continue to increase in the fourth quarter of 2013 and into the first half of 2014.
During the third quarter of 2013, approximately 20,500 borrowers having loans with aggregate UPB of $4.3 billion completed modifications, and, as of September 30, 2013, approximately 34,000 borrowers were in the modification trial period. For information about the percentage of completed loan modifications that remained current, see “Table 38 — Quarterly Percentages of Modified Single-Family Loans — Current and Performing.”
The portion of our modification volume that was HAMP-related declined and the portion of modifications that were non-HAMP-related increased in the first nine months of 2013 compared to the first nine months of 2012. We attribute this shift in the composition of our modification volume to both the availability of our non-HAMP modifications and the fact that a large number of the borrowers that were eligible for HAMP have already completed a modification or attempted but failed to complete the modification.
Based on information provided by the MHA Program administrator, our servicers had completed more than 235,000 loan modifications under HAMP from the introduction of the initiative in 2009 through September 30, 2013, compared to approximately 217,000 cumulative HAMP completions as of December 31, 2012. According to the administrator, the number of our loans in the HAMP trial period declined to 5,452 as of September 30, 2013 from 9,440 as of December 31, 2012.
As of September 30, 2013, the borrower’s monthly payment for all of our completed HAMP modifications was reduced on average by an estimated $532, which amounts to an average of $6,384 per year, and a total of $1.5 billion in annual reductions (these amounts are calculated by multiplying the number of completed modifications by the average reduction in monthly payment, and have not been adjusted to reflect the actual performance of the loans following modification). As of September 30, 2013, the percentage of our HAMP modifications that were completed in 2009, 2010, 2011, and 2012 or thereafter that subsequently became seriously delinquent, proceeded to foreclosure transfer, completed a short sale, or were remodified was approximately 27%, 25%, 18%, and 8%, respectively.
The costs we incur related to HAMP have been, and will likely continue to be significant. We incurred $26 million and $84 million of servicer incentive expenses on HAMP loans during the three and nine months ended September 30, 2013, respectively, as compared to $43 million and $142 million of such incentives during the three and nine months ended September 30, 2012, respectively. We also incur certain incentives for borrowers that comply with HAMP, which are included within our benefit (provision) for credit losses on our consolidated statements of comprehensive income. The servicer incentive costs we incur related to our non-HAMP modifications may also be significant. We recently announced that we will be discontinuing certain servicer incentive fees for HAMP modifications completed on or after April 1, 2014.
Many of our HAMP loans have provisions for reduced interest rates that remain fixed for the first five years of the modification and then increase at a rate of one percent per year (or such lesser amount as may be needed) until the interest rate has been adjusted to the market rate that was in effect at the time of the modification. Certain of our other non-HAMP loan modifications have similar features and collectively, we refer to these types of loans as “step-rate modified loans”. The risk of default may increase for borrowers with step-rate modified loans due to the increase in monthly payments resulting from these scheduled increases in the contractual interest rate of the loan. A significant number of HAMP loan modifications were completed in 2010 and these loans will begin to experience their scheduled interest rate increases in 2015. As of September 30, 2013, the average current contractual interest rate for all step-rate modified loans was 2.3% and the average final interest rate that these loans are scheduled to reach in the future was 4.5%.
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The table below presents information about step-rate modified loans.
Table 36 — Step-Rate Modified Loans(1)
As of September 30, 2013 | Year of Payment Change(3) | ||||||||||||||||||||||
UPB | Serious Delinquency(2) | 2014 | 2015 | 2016 | 2017 and After | ||||||||||||||||||
(in billions, except rates) | |||||||||||||||||||||||
Year of completed modification: | |||||||||||||||||||||||
2009 | $ | 4.4 | 11 | % | $ | 4.4 | $ | 4.1 | $ | 3.7 | $ | 0.9 | |||||||||||
2010 | 18.8 | 12 | 18.8 | 17.3 | 15.2 | ||||||||||||||||||
2011 | 10.8 | 11 | 10.8 | 9.8 | |||||||||||||||||||
2012 and after | 10.1 | 6 | 10.1 | ||||||||||||||||||||
Total | $ | 44.1 | 10 | % | $ | 4.4 | $ | 22.9 | $ | 31.8 | $ | 36.0 | |||||||||||
(1) | Consists of step-rate modified loans (HAMP and non-HAMP) remaining in the single-family credit guarantee portfolio, excluding those underlying Other Guarantee Transactions. Step-rate modifications generally have terms that gradually increase the contractual interest rate on an annual basis after a five-year period. Includes a portion of UPB that is non-interest bearing under the terms of the modification. Excludes loans in a modification trial period and those that were subsequently remodified under a non-HAMP initiative and no longer have step-rate terms. |
(2) | Based on loan count. |
(3) | Represents the UPB of all step-rate modified loans that are scheduled to experience an increase in their contractual interest rate in a given year. Individual loans will appear in each year for which they are scheduled to experience a rate increase. |
Loan Workout Volumes and Modification Performance
The table below presents single-family loan workout volumes, serious delinquency rates, and foreclosure volumes for the three and nine months ended September 30, 2013 and 2012.
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Table 37 — Single-Family Loan Workout, Serious Delinquency, and Foreclosure Volumes(1)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||||||||||||||
Number of Loans | Loan Balances | Number of Loans | Loan Balances | Number of Loans | Loan Balances | Number of Loans | Loan Balances | |||||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||||||
Home retention actions: | ||||||||||||||||||||||||||||
Loan modifications | ||||||||||||||||||||||||||||
with no change in terms(2) | 43 | $ | 6 | 17 | $ | 3 | 127 | $ | 15 | 501 | $ | 91 | ||||||||||||||||
with term extension | 2,161 | 200 | 1,316 | 34 | 4,310 | 347 | 2,957 | 273 | ||||||||||||||||||||
with reduction of contractual interest rate and, in certain cases, term extension | 11,678 | 1,679 | 10,590 | 1,481 | 33,966 | 4,768 | 28,529 | 4,830 | ||||||||||||||||||||
with rate reduction, term extension and principal forbearance | 6,659 | 2,405 | 8,941 | 2,988 | 22,028 | 7,666 | 17,696 | 5,611 | ||||||||||||||||||||
Total loan modifications(3) | 20,541 | 4,290 | 20,864 | 4,506 | 60,431 | 12,796 | 49,683 | 10,805 | ||||||||||||||||||||
Repayment plans(4) | 6,603 | 926 | 7,099 | 1,006 | 21,515 | 3,016 | 26,386 | 3,754 | ||||||||||||||||||||
Forbearance agreements(5) | 2,586 | 488 | 2,190 | 405 | 8,888 | 1,730 | 10,584 | 2,107 | ||||||||||||||||||||
Total home retention actions | 29,730 | 5,704 | 30,153 | 5,917 | 90,834 | 17,542 | 86,653 | 16,666 | ||||||||||||||||||||
Foreclosure alternatives: | ||||||||||||||||||||||||||||
Short sale | 10,230 | 2,223 | 14,055 | 3,140 | 35,211 | 7,717 | 38,388 | 8,610 | ||||||||||||||||||||
Deed in lieu of foreclosure transactions | 768 | 125 | 328 | 59 | 1,671 | 270 | 771 | 134 | ||||||||||||||||||||
Total foreclosure alternatives | 10,998 | 2,348 | 14,383 | 3,199 | 36,882 | 7,987 | 39,159 | 8,744 | ||||||||||||||||||||
Total single-family loan workouts | 40,728 | $ | 8,052 | 44,536 | $ | 9,116 | 127,716 | $ | 25,529 | 125,812 | $ | 25,410 | ||||||||||||||||
Seriously delinquent loan additions | 58,176 | 76,104 | 180,481 | 232,823 | ||||||||||||||||||||||||
Single-family foreclosures(6) | 21,644 | 26,039 | 64,158 | 81,043 | ||||||||||||||||||||||||
Seriously delinquent loans, at period end | 276,124 | 369,595 | 276,124 | 369,595 | ||||||||||||||||||||||||
(1) | Based on completed actions with borrowers for loans within our single-family credit guarantee portfolio. Excludes those modification, repayment and forbearance activities for which the borrower has started the required process, but the actions have not been made permanent or effective, such as loans in modification trial periods. Also excludes certain loan workouts where our single-family seller/servicers have executed agreements in the current or prior periods, but these have not been incorporated into certain of our operational systems, due to delays in processing. These categories are not mutually exclusive and a loan in one category may also be included within another category in the same period (see endnote 5). |
(2) | Under this modification type, past due amounts are added to the principal balance and amortized based on the original contractual loan terms. |
(3) | Includes completed loan modifications under HAMP; however, the number of such completions differs from that reported by the MHA Program administrator in part due to differences in the timing of recognizing the completions by us and the administrator. |
(4) | Represents the number of borrowers as reported by our seller/servicers that have completed the full term of a repayment plan for past due amounts. Excludes borrowers that are actively repaying past due amounts under a repayment plan, which totaled 17,089 and 16,713 borrowers as of September 30, 2013 and 2012, respectively. |
(5) | Excludes loans with long-term forbearance under a completed loan modification. Many borrowers complete a short-term forbearance agreement before another loan workout is pursued or completed. We only report forbearance activity for a single loan once during each quarter; however, a single loan may be included under separate forbearance agreements in separate periods. |
(6) | Represents the number of our single-family loans that complete foreclosure transfers, including third-party sales at foreclosure auction in which ownership of the property is transferred directly to a third-party rather than to us. |
Although the balance of seriously delinquent loans has declined during 2013, our loan modification volume remained high in both the three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2012. We expect loan modification volume will continue to remain high, as compared to our historical experience, in the fourth quarter of 2013 due to the impact of our streamlined modification initiative as well as the large number of borrowers that were in the modification trial period at September 30, 2013 that we expect will successfully complete the trial period during the fourth quarter.
The UPB of loans in our single-family credit guarantee portfolio for which we have completed a loan modification increased to $80 billion as of September 30, 2013 from $75 billion as of December 31, 2012. The number of modified loans in our single-family credit guarantee portfolio continued to increase and such loans comprised approximately 3.7% and 3.4% of our single-family credit guarantee portfolio as of September 30, 2013 and December 31, 2012, respectively. For the nine months ended September 30, 2013, approximately 59% of our loan modifications related to loans which were 180 days or more delinquent prior to the modification effective date. The estimated weighted average current LTV ratio for all modified loans in our single-family credit guarantee portfolio was 102% at September 30, 2013. The serious delinquency rate on these loans was 13.9% as of September 30, 2013.
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The volume of short sale transactions remained at elevated levels in the three and nine months ended September 30, 2013 compared to our historical experience. However, our short sale activity has declined for the two most recent quarters, which we believe is due to increasing interest rates and strengthening home prices in most geographical areas.
The table below presents the percentage of modified single-family loans that were current and performing in each of the last eight quarterly periods.
Table 38 — Quarterly Percentages of Modified Single-Family Loans — Current and Performing(1)
Quarter of Loan Modification Completion(2) | ||||||||||||||||||||||||
HAMP loan modifications: | 2Q 2013 | 1Q 2013 | 4Q 2012 | 3Q 2012 | 2Q 2012 | 1Q 2012 | 4Q 2011 | 3Q 2011 | ||||||||||||||||
Time since modification: | ||||||||||||||||||||||||
3 to 5 months | 88 | % | 89 | % | 88 | % | 87 | % | 89 | % | 89 | % | 89 | % | 86 | % | ||||||||
6 to 8 months | 85 | 85 | 85 | 85 | 84 | 85 | 84 | |||||||||||||||||
9 to 11 months | 83 | 82 | 84 | 81 | 81 | 81 | ||||||||||||||||||
12 to 14 months | 80 | 81 | 81 | 79 | 78 | |||||||||||||||||||
15 to 17 months | 80 | 79 | 79 | 76 | ||||||||||||||||||||
18 to 20 months | 77 | 77 | 76 | |||||||||||||||||||||
21 to 23 months | 76 | 75 | ||||||||||||||||||||||
24 to 26 months | 74 | |||||||||||||||||||||||
Quarter of Loan Modification Completion(2) | ||||||||||||||||||||||||
Non-HAMP loan modifications: | 2Q 2013 | 1Q 2013 | 4Q 2012 | 3Q 2012 | 2Q 2012 | 1Q 2012 | 4Q 2011 | 3Q 2011 | ||||||||||||||||
Time since modification: | ||||||||||||||||||||||||
3 to 5 months | 83 | % | 84 | % | 83 | % | 82 | % | 84 | % | 72 | % | 78 | % | 73 | % | ||||||||
6 to 8 months | 78 | 79 | 79 | 79 | 64 | 69 | 70 | |||||||||||||||||
9 to 11 months | 75 | 75 | 77 | 60 | 62 | 64 | ||||||||||||||||||
12 to 14 months | 72 | 74 | 62 | 58 | 59 | |||||||||||||||||||
15 to 17 months | 71 | 59 | 59 | 56 | ||||||||||||||||||||
18 to 20 months | 56 | 57 | 56 | |||||||||||||||||||||
21 to 23 months | 56 | 54 | ||||||||||||||||||||||
24 to 26 months | 54 | |||||||||||||||||||||||
Quarter of Loan Modification Completion(2) | ||||||||||||||||||||||||
Total (HAMP and Non-HAMP): | 2Q 2013 | 1Q 2013 | 4Q 2012 | 3Q 2012 | 2Q 2012 | 1Q 2012 | 4Q 2011 | 3Q 2011 | ||||||||||||||||
Time since modification: | ||||||||||||||||||||||||
3 to 5 months | 85 | % | 86 | % | 85 | % | 84 | % | 87 | % | 85 | % | 86 | % | 81 | % | ||||||||
6 to 8 months | 81 | 81 | 82 | 83 | 80 | 80 | 79 | |||||||||||||||||
9 to 11 months | 78 | 78 | 81 | 77 | 75 | 75 | ||||||||||||||||||
12 to 14 months | 76 | 78 | 76 | 73 | 71 | |||||||||||||||||||
15 to 17 months | 77 | 74 | 73 | 69 | ||||||||||||||||||||
18 to 20 months | 73 | 71 | 69 | |||||||||||||||||||||
21 to 23 months | 70 | 67 | ||||||||||||||||||||||
24 to 26 months | 67 | |||||||||||||||||||||||
(1) | Represents the percentage of loans that are current and performing (no payment is 30 days or more past due) or have been paid in full. Excludes loans in modification trial periods. |
(2) | Loan modifications are recognized as completed in the quarterly period in which the servicer has reported the modification as effective and the agreement has been accepted by us. For loans that have been remodified (e.g., where a borrower has received a new modification after defaulting on the prior modification) the rates reflect the status of each modification separately. For example, in the case of a remodified loan where the borrower is performing, the previous modification would be presented as being in default in the applicable period. |
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Relief Refinance Mortgage Initiative and Home Affordable Refinance Program
Our relief refinance mortgage initiative, including HARP (which is the portion of our relief refinance initiative for loans with LTV ratios above 80%), gives eligible homeowners with existing loans that are owned or guaranteed by us an opportunity to refinance into loans with more affordable monthly payments and/or fixed-rate terms. While HARP is targeted at borrowers with current LTV ratios above 80%, our relief refinance initiative also allows borrowers with LTV ratios of 80% and below to participate. We implemented a number of changes to HARP in late 2011 and during 2012. These changes allow more borrowers to participate in the program and benefit from refinancing their home mortgages, including borrowers whose mortgages have LTV ratios above 125%. In addition, in April 2013, we extended HARP by two years to December 31, 2015, at the direction of FHFA. The program was previously set to expire December 31, 2013.
Relief refinance mortgages (including HARP loans) generally present higher risk to us than other refinance loans we have purchased since 2009 because:
• | underwriting procedures for relief refinance mortgages are limited in many cases, and such procedures generally do not include all of the changes in underwriting standards we have implemented since 2008; |
• | many of these loans have relatively high LTV ratios (e.g., greater than 90%), which can increase the probability of default and increase the amount of our loss if the borrower does default; |
• | HARP loans may not be covered by mortgage insurance for the full excess of their UPB over 80%; and |
• | beginning with changes announced in the fourth quarter of 2011, we have relieved the lenders of certain representations and warranties on the original mortgage being refinanced, which limits our ability to seek recovery or repurchase from the seller for breach. All relief refinance mortgages with application dates on or after November 19, 2012 have reduced representations and warranties from the seller. We continue to bear the credit risk for refinanced loans under this program, to the extent that such risk is not covered by existing mortgage insurance or other existing credit enhancements. |
However, relief refinance mortgages (including HARP loans) generally have performed better than loans with similar characteristics remaining in our single-family credit guarantee portfolio that were originated prior to 2009 because, under the relief refinance initiative:
• | borrowers must meet eligibility requirements, such as having no more than one late payment within the previous 12 months and no late payments within the six months prior to refinancing; and |
• | the new mortgage results in one or more of the following borrower benefits compared to the original loan: (a) a reduced monthly payment; (b) a lower interest rate; (c) a shorter loan term; or (d) replacement of an adjustable interest rate with a fixed interest rate. |
Although refinancing activity moderated in the third quarter of 2013, relief refinance activity remained high in the first nine months of 2013 driven by relatively low interest rates compared to historical levels and the changes to the HARP program noted above. The following table provides information about the volume of our relief refinance purchases during the nine months ended September 30, 2013 and 2012 as well as information about the balance and serious delinquency rates of these loans as of September 30, 2013 and December 31, 2012.
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Table 39 — Single-Family Relief Refinance Loans(1)
Nine Months Ended September 30, 2013 | Nine Months Ended September 30, 2012 | |||||||||||||||||||||
UPB | Number of Loans | Average Loan Balance(2) | UPB | Number of Loans | Average loan Balance(2) | |||||||||||||||||
(dollars in millions, except for average loan balances) | ||||||||||||||||||||||
Purchases of relief refinance mortgages: | ||||||||||||||||||||||
HARP: | ||||||||||||||||||||||
Above 125% LTV ratio | $ | 10,494 | 56,282 | $ | 186,000 | $ | 15,253 | 73,000 | $ | 209,000 | ||||||||||||
Above 100% to 125% LTV ratio | 18,511 | 96,626 | 192,000 | 22,356 | 108,162 | 207,000 | ||||||||||||||||
Above 80% to 100% LTV ratio | 25,944 | 144,037 | 180,000 | 27,494 | 140,856 | 195,000 | ||||||||||||||||
Other (80% and below LTV ratio) | 31,689 | 233,575 | 136,000 | 25,356 | 173,550 | 146,000 | ||||||||||||||||
Total relief refinance mortgages | $ | 86,638 | 530,520 | 163,000 | $ | 90,459 | 495,568 | 183,000 | ||||||||||||||
As of September 30, 2013 | As of December 31, 2012 | |||||||||||||||||||||
UPB | Number of Loans | Serious Delinquency Rate | UPB | Number of Loans | Serious Delinquency Rate | |||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||
Balance of relief refinance mortgages: | ||||||||||||||||||||||
HARP: | ||||||||||||||||||||||
Above 125% LTV ratio | $ | 29,856 | 152,998 | 0.73 | % | $ | 20,163 | 98,371 | 0.29 | % | ||||||||||||
Above 100% to 125% LTV ratio | 67,264 | 335,339 | 1.00 | 52,761 | 251,497 | 1.20 | ||||||||||||||||
Above 80% to 100% LTV ratio | 113,704 | 597,374 | 0.86 | 100,122 | 499,125 | 1.00 | ||||||||||||||||
Other (80% and below LTV ratio) | 126,794 | 916,290 | 0.31 | 114,164 | 774,212 | 0.32 | ||||||||||||||||
Total relief refinance mortgages | $ | 337,618 | 2,002,001 | 0.62 | % | $ | 287,210 | 1,623,205 | 0.66 | % | ||||||||||||
(1) | Consists of all single-family relief refinance mortgage loans that we either purchased or guaranteed during the period, including those associated with other guarantee commitments and Other Guarantee Transactions. |
(2) | Rounded to the nearest thousand. |
For more information on the composition of our single-family credit guarantee portfolio, see "Table 2 — Single-Family Mortgage Loan Purchases and Other Guarantee Commitment Issuances, by Loan Purpose" and "Table 3 — Single-Family Credit Guarantee Portfolio Summary."
Credit Performance
Delinquencies
We report single-family serious delinquency rate information based on the number of loans that are three monthly payments or more past due or in the process of foreclosure, as reported by our servicers. Mortgage loans that have been modified are not counted as seriously delinquent as long as the borrower is less than three monthly payments past due under the modified terms. Single-family loans for which the borrower is subject to a forbearance agreement or a repayment plan will continue to reflect the past due status of the borrower.
Our single-family delinquency rates include all single-family loans that we own, that back Freddie Mac securities, and that are covered by our other guarantee commitments, except Freddie Mac financial guarantees that are backed by either Ginnie Mae Certificates or HFA bonds due to the credit enhancements provided on them by the U.S. government.
Some of our workout and other loss mitigation activities create fluctuations in our delinquency statistics. For example, single-family loans that we report as seriously delinquent before they enter a modification trial period continue to be reported as seriously delinquent for purposes of our delinquency reporting until the modifications become effective and the loans are removed from delinquent status by our servicers. Consequently, the volume and timing of loan modifications impact our reported serious delinquency rate. In addition, there may be temporary timing differences, or lags, in the reporting of payment status and modification completion due to differing practices of our servicers that can affect our delinquency reporting.
Our serious delinquency rates have been affected by delays, including those due to increases in foreclosure process timeframes, general constraints on servicer capacity (which affects the rate at which servicers modify or foreclose upon loans), and court backlogs (in states that require a judicial foreclosure process). As of both September 30, 2013 and December 31, 2012, the percentage of seriously delinquent loans that have been delinquent for more than six months was 72%, and most of these loans have been delinquent for longer than one year. Loans that have been delinquent for more than a year are more challenging to resolve as many of these borrowers: (a) may not be in contact with the servicer; (b) may not be eligible for modifications; or (c) are in geographic areas where the foreclosure process has lengthened or is subject to judicial review. The
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longer a loan remains delinquent, the greater the associated costs we incur, in part due to expenses associated with loss mitigation and foreclosure.
The table below presents serious delinquency rates and information about seriously delinquent loans in our single-family credit guarantee portfolio.
Table 40 — Single-Family Serious Delinquency Statistics
As of September 30, 2013 | As of December 31, 2012 | |||||||||||||||||
Percentage of Portfolio | Serious Delinquency Rate | Percentage of Portfolio | Serious Delinquency Rate | |||||||||||||||
Credit Protection: | ||||||||||||||||||
Non-credit-enhanced | 87 | % | 2.20 | % | 87 | % | 2.66 | % | ||||||||||
Credit-enhanced(1) | 13 | 5.20 | 13 | 7.34 | ||||||||||||||
Total(2) | 100 | % | 2.58 | 100 | % | 3.25 | ||||||||||||
# of Seriously Delinquent Loans | Percent | Serious Delinquency Rate | # of Seriously Delinquent Loans | Percent | Serious Delinquency Rate | |||||||||||||
State:(3)(4) | ||||||||||||||||||
Florida | 48,825 | 18 | % | 7.26 | % | 69,034 | 20 | % | 9.87 | % | ||||||||
New York | 21,986 | 8 | 4.51 | 22,592 | 6 | 4.59 | ||||||||||||
New Jersey | 20,172 | 7 | 6.45 | 21,742 | 6 | 6.87 | ||||||||||||
California | 17,997 | 7 | 1.51 | 27,620 | 8 | 2.34 | ||||||||||||
Illinois | 17,007 | 6 | 3.05 | 22,923 | 7 | 4.08 | ||||||||||||
All others | 147,484 | 54 | 1.97 | 185,683 | 53 | 2.45 | ||||||||||||
Total | 273,471 | 100 | % | 349,594 | 100 | % | ||||||||||||
# of Seriously Delinquent Loans | Percent | # of Seriously Delinquent Loans | Percent | |||||||||||||||
Aging, by locality:(4) | ||||||||||||||||||
Judicial review states:(5) | ||||||||||||||||||
Less than or equal to 1 year | 60,943 | 22 | % | 79,422 | 23 | % | ||||||||||||
More than 1 year and less than or equal to 2 years | 33,756 | 12 | 50,506 | 14 | ||||||||||||||
More than 2 years | 67,306 | 25 | 77,766 | 22 | ||||||||||||||
Non-judicial states:(5) | ||||||||||||||||||
Less than or equal to 1 year | 66,405 | 25 | 87,641 | 25 | ||||||||||||||
More than 1 year and less than or equal to 2 years | 22,063 | 8 | 30,435 | 9 | ||||||||||||||
More than 2 years | 22,998 | 8 | 23,824 | 7 | ||||||||||||||
Combined:(5) | ||||||||||||||||||
Less than or equal to 1 year | 127,348 | 47 | 167,063 | 48 | ||||||||||||||
More than 1 year and less than or equal to 2 years | 55,819 | 20 | 80,941 | 23 | ||||||||||||||
More than 2 years | 90,304 | 33 | 101,590 | 29 | ||||||||||||||
Total | 273,471 | 100 | % | 349,594 | 100 | % | ||||||||||||
(1) | See “Institutional Credit Risk” for information about our counterparties that provide credit enhancement on loans in our single-family credit guarantee portfolio. |
(2) | As of September 30, 2013 and December 31, 2012, approximately 63% and 68%, respectively, of the single-family loans reported as seriously delinquent were in the process of foreclosure. |
(3) | Represent the states with the highest number of seriously delinquent loans as of September 30, 2013. |
(4) | Excludes loans underlying certain single-family Other Guarantee Transactions since the geographic information is not available to us for these loans. |
(5) | For this presentation, the states and territories classified as having a judicial foreclosure process consist of: CT, DE, FL, HI, IA, IL, IN, KS, KY, LA, ME, ND, NE, NJ, NM, NY, OH, OK, PA, PR, SC, SD, VI, VT, and WI. All other states are classified as having a non-judicial foreclosure process. |
The serious delinquency rate of our single-family credit guarantee portfolio declined to 2.58% as of September 30, 2013 (which is the lowest level since April 2009) from 3.25% as of December 31, 2012, continuing the trend of improvement that began in 2010. As of September 30, 2013, our serious delinquency rate for the aggregate of those states that require a judicial
71 | Freddie Mac | |
foreclosure and all other states was 3.58% and 1.81%, respectively, compared to 4.32% and 2.35%, respectively, as of December 31, 2012.
During the nine months ended September 30, 2013 and 2012, the nationwide average for completion of a foreclosure (as measured from the date of the last scheduled payment made by the borrower) on our single-family delinquent loans, excluding those underlying our Other Guarantee Transactions, was 760 days and 603 days, respectively, which included: (a) an average of 927 days and 765 days, respectively, for foreclosures completed in states that require a judicial foreclosure process; and (b) an average of 561 days and 469 days, respectively, for foreclosures completed in states that do not require a judicial foreclosure process. During the nine months ended September 30, 2013, a significant number of loans that had been subject to delays discussed above (and that had been delinquent for more than a year) completed the foreclosure process, which caused the nationwide average for foreclosure completions to increase compared to the nine months ended September 30, 2012.
Serious delinquency rates for interest-only and option ARM products (which together represented approximately 2% of our total single-family credit guarantee portfolio at September 30, 2013) were 13.5% and 13.3% as of September 30, 2013, respectively, as compared to 16.3% for both at December 31, 2012. Serious delinquency rates of single-family fixed rate, amortizing loans with a term of 20 years or more, a more traditional mortgage product, were approximately 3.0% and 3.7% at September 30, 2013 and December 31, 2012, respectively.
The tables below present serious delinquency rates categorized by borrower and loan characteristics, including geographic region and origination year, which indicate that certain concentrations of loans have been more adversely affected by declines in home prices and weak economic conditions during the housing crisis that began in 2006. We purchased significant amounts of loans with higher-risk characteristics in 2005 through 2008 and, as of September 30, 2013, we continued to experience high serious delinquency rates on those loans.
72 | Freddie Mac | |
Table 41 — Credit Concentrations in the Single-Family Credit Guarantee Portfolio
As of September 30, 2013 | ||||||||||||||||||||||||
Alt-A UPB | Non Alt-A UPB | Total UPB | Estimated Current LTV Ratio(1) | Percentage Modified(2) | Serious Delinquency Rate | |||||||||||||||||||
(dollars in billions) | ||||||||||||||||||||||||
Geographical distribution: | ||||||||||||||||||||||||
Arizona, California, Florida, and Nevada(3) | $ | 24 | $ | 396 | $ | 420 | 70 | % | 5.8 | % | 3.4 | % | ||||||||||||
All other states | 36 | 1,196 | 1,232 | 70 | 3.2 | 2.3 | ||||||||||||||||||
Year of origination: | ||||||||||||||||||||||||
2013 | — | 296 | 296 | 74 | — | — | ||||||||||||||||||
2012 | — | 388 | 388 | 70 | — | 0.2 | ||||||||||||||||||
2011 | — | 183 | 183 | 63 | 0.1 | 0.4 | ||||||||||||||||||
2010 | — | 185 | 185 | 64 | 0.2 | 0.6 | ||||||||||||||||||
2009 | — | 148 | 148 | 65 | 0.6 | 1.1 | ||||||||||||||||||
2008 | 4 | 50 | 54 | 81 | 11.3 | 7.1 | ||||||||||||||||||
2007 | 18 | 71 | 89 | 97 | 20.7 | 11.7 | ||||||||||||||||||
2006 | 16 | 51 | 67 | 94 | 18.0 | 10.6 | ||||||||||||||||||
2005 | 12 | 64 | 76 | 80 | 10.1 | 6.9 | ||||||||||||||||||
2004 and prior | 10 | 156 | 166 | 51 | 4.3 | 3.3 | ||||||||||||||||||
As of September 30, 2012 | ||||||||||||||||||||||||
Alt-A UPB | Non Alt-A UPB | Total UPB | Estimated Current LTV Ratio(1) | Percentage Modified(2) | Serious Delinquency Rate | |||||||||||||||||||
(dollars in billions) | ||||||||||||||||||||||||
Geographical distribution: | ||||||||||||||||||||||||
Arizona, California, Florida, and Nevada(3) | $ | 32 | $ | 388 | $ | 420 | 85 | % | 5.2 | % | 5.4 | % | ||||||||||||
All other states | 47 | 1,186 | 1,233 | 74 | 2.8 | 2.8 | ||||||||||||||||||
Year of origination: | ||||||||||||||||||||||||
2012 | — | 245 | 245 | 77 | — | <0.1 | ||||||||||||||||||
2011 | — | 247 | 247 | 68 | — | 0.2 | ||||||||||||||||||
2010 | — | 262 | 262 | 69 | <0.1 | 0.5 | ||||||||||||||||||
2009 | <1 | 232 | 232 | 70 | 0.2 | 0.8 | ||||||||||||||||||
2008 | 6 | 82 | 88 | 89 | 6.4 | 6.5 | ||||||||||||||||||
2007 | 24 | 107 | 131 | 109 | 13.4 | 12.2 | ||||||||||||||||||
2006 | 21 | 76 | 97 | 107 | 12.1 | 11.3 | ||||||||||||||||||
2005 | 15 | 96 | 111 | 91 | 6.7 | 7.0 | ||||||||||||||||||
2004 and prior | 13 | 227 | 240 | 58 | 3.1 | 3.1 | ||||||||||||||||||
Nine Months Ended September 30, 2013 | Nine Months Ended September 30, 2012 | |||||||||||||||||||||||
Alt-A | Non Alt-A | Total | Alt-A | Non Alt-A | Total | |||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Credit Losses | ||||||||||||||||||||||||
Geographical distribution: | ||||||||||||||||||||||||
Arizona, California, Florida, and Nevada(3) | $ | 702 | $ | 1,445 | $ | 2,147 | $ | 1,456 | $ | 3,601 | $ | 5,057 | ||||||||||||
All other states | 380 | 1,863 | 2,243 | 717 | 3,455 | 4,172 | ||||||||||||||||||
Year of origination: | ||||||||||||||||||||||||
2013 | — | 1 | 1 | N/A | N/A | N/A | ||||||||||||||||||
2012 | — | 63 | 63 | — | 1 | 1 | ||||||||||||||||||
2011 | — | 60 | 60 | — | 29 | 29 | ||||||||||||||||||
2010 | — | 120 | 120 | — | 115 | 115 | ||||||||||||||||||
2009 | — | 133 | 133 | <1 | 170 | 170 | ||||||||||||||||||
2008 | 34 | 413 | 447 | 79 | 757 | 836 | ||||||||||||||||||
2007 | 410 | 1,112 | 1,522 | 813 | 2,505 | 3,318 | ||||||||||||||||||
2006 | 372 | 654 | 1,026 | 776 | 1,607 | 2,383 | ||||||||||||||||||
2005 | 226 | 381 | 607 | 425 | 1,140 | 1,565 | ||||||||||||||||||
2004 and prior | 40 | 371 | 411 | 80 | 732 | 812 | ||||||||||||||||||
(1) | See endnote (3) to “Table 34 — Characteristics of the Single-Family Credit Guarantee Portfolio” for information on our calculation of estimated current LTV ratios. |
(2) | Represents the percentage of loans, based on loan count, in our single-family credit guarantee portfolio at period end that have been modified, including those with no changes in interest rate or maturity date, but where past due amounts are added to the outstanding principal balance of the loan. |
(3) | Represents the four states that had the largest cumulative declines in home prices during the housing crisis that began in 2006, as measured using Freddie Mac’s home price index. |
73 | Freddie Mac | |
Table 42 — Single-Family Credit Guarantee Portfolio by Attribute Combinations
As of September 30, 2013 | |||||||||||||||||||||||||||
Current LTV Ratio ≤ 80(1) | Current LTV Ratio of > 80 to 100(1) | Current LTV > 100(1) | Current LTV Ratio All Loans(1) | ||||||||||||||||||||||||
Percentage of Portfolio(2) | Serious Delinquency Rate | Percentage of Portfolio(2) | Serious Delinquency Rate | Percentage of Portfolio(2) | Serious Delinquency Rate | Percentage of Portfolio(2) | Percentage Modified(3) | Serious Delinquency Rate | |||||||||||||||||||
By Product Type | |||||||||||||||||||||||||||
FICO scores < 620: | |||||||||||||||||||||||||||
20 and 30- year or more amortizing fixed-rate | 1.1 | % | 7.9 | % | 0.7 | % | 12.6 | % | 0.7 | % | 18.8 | % | 2.5 | % | 20.6 | % | 11.4 | % | |||||||||
15- year amortizing fixed-rate | 0.2 | 3.8 | <0.1 | 4.2 | <0.1 | 3.6 | 0.2 | 1.1 | 3.9 | ||||||||||||||||||
ARMs/adjustable rate(4) | 0.1 | 10.0 | <0.1 | 17.1 | <0.1 | 28.4 | 0.1 | 12.5 | 13.3 | ||||||||||||||||||
Interest-only(5) | <0.1 | 13.3 | <0.1 | 20.9 | 0.1 | 32.5 | 0.1 | 0.4 | 24.0 | ||||||||||||||||||
Other(6) | <0.1 | 3.6 | <0.1 | 9.5 | <0.1 | 16.8 | <0.1 | 5.4 | 5.4 | ||||||||||||||||||
Total FICO scores < 620 | 1.4 | 7.0 | 0.7 | 12.6 | 0.8 | 19.2 | 2.9 | 16.7 | 10.4 | ||||||||||||||||||
FICO scores of 620 to 659: | |||||||||||||||||||||||||||
20 and 30- year or more amortizing fixed-rate | 2.4 | 5.4 | 1.1 | 9.5 | 1.3 | 15.9 | 4.8 | 15.7 | 8.4 | ||||||||||||||||||
15- year amortizing fixed-rate | 0.5 | 2.3 | 0.1 | 2.8 | <0.1 | 3.1 | 0.6 | 0.6 | 2.3 | ||||||||||||||||||
ARMs/adjustable rate(4) | 0.1 | 5.0 | 0.1 | 11.5 | <0.1 | 25.2 | 0.2 | 3.3 | 9.1 | ||||||||||||||||||
Interest-only(5) | 0.1 | 10.0 | 0.1 | 17.4 | 0.1 | 28.8 | 0.3 | 0.4 | 20.7 | ||||||||||||||||||
Other(6) | <0.1 | 3.2 | <0.1 | 4.7 | <0.1 | 6.8 | <0.1 | 2.3 | 4.5 | ||||||||||||||||||
Total FICO scores of 620 to 659 | 3.1 | 4.6 | 1.4 | 9.4 | 1.4 | 16.6 | 5.9 | 12.1 | 7.6 | ||||||||||||||||||
FICO scores of ≥ 660: | |||||||||||||||||||||||||||
20 and 30- year or more amortizing fixed-rate | 45.6 | 1.1 | 14.7 | 2.9 | 6.8 | 7.7 | 67.1 | 3.6 | 2.1 | ||||||||||||||||||
15- year amortizing fixed-rate | 15.8 | 0.4 | 1.2 | 0.5 | 0.4 | 0.9 | 17.4 | 0.1 | 0.4 | ||||||||||||||||||
ARMs/adjustable rate(4) | 3.4 | 1.0 | 0.5 | 5.2 | 0.2 | 16.3 | 4.1 | 0.8 | 2.5 | ||||||||||||||||||
Interest-only(5) | 0.6 | 4.5 | 0.6 | 10.4 | 0.8 | 19.8 | 2.0 | 0.2 | 12.3 | ||||||||||||||||||
Other(6) | <0.1 | 1.9 | 0.1 | 1.6 | <0.1 | 3.3 | 0.1 | 0.9 | 2.0 | ||||||||||||||||||
Total FICO scores ≥ 660 | 65.4 | 0.9 | 17.1 | 2.9 | 8.2 | 8.5 | 90.7 | 2.5 | 1.8 | ||||||||||||||||||
Total FICO scores not available | 0.3 | 5.6 | 0.1 | 12.1 | 0.1 | 23.8 | 0.5 | 7.6 | 8.5 | ||||||||||||||||||
All FICO scores: | |||||||||||||||||||||||||||
20 and 30- year or more amortizing fixed-rate | 49.3 | 1.6 | 16.6 | 3.9 | 8.8 | 9.8 | 74.7 | 5.3 | 3.0 | ||||||||||||||||||
15- year amortizing fixed-rate | 16.5 | 0.6 | 1.3 | 0.7 | 0.4 | 1.1 | 18.2 | 0.1 | 0.6 | ||||||||||||||||||
ARMs/adjustable rate(4) | 3.6 | 1.6 | 0.6 | 6.4 | 0.3 | 18.4 | 4.5 | 1.4 | 3.4 | ||||||||||||||||||
Interest-only(5) | 0.7 | 5.2 | 0.7 | 11.4 | 0.9 | 21.3 | 2.3 | 0.3 | 13.5 | ||||||||||||||||||
Other(6) | 0.1 | 9.1 | 0.1 | 6.2 | 0.1 | 12.6 | 0.3 | 8.9 | 8.6 | ||||||||||||||||||
Total single-family credit guarantee portfolio(7) | 70.2 | % | 1.3 | % | 19.3 | % | 4.0 | % | 10.5 | % | 10.5 | % | 100.0 | % | 3.7 | % | 2.6 | % | |||||||||
By Region(8) | |||||||||||||||||||||||||||
FICO scores < 620: | |||||||||||||||||||||||||||
North Central | 0.1 | % | 5.5 | % | 0.2 | % | 9.1 | % | 0.2 | % | 14.0 | % | 0.5 | % | 16.0 | % | 8.4 | % | |||||||||
Northeast | 0.4 | 10.4 | 0.2 | 19.1 | 0.2 | 26.6 | 0.8 | 18.6 | 14.9 | ||||||||||||||||||
Southeast | 0.3 | 7.4 | 0.1 | 12.7 | 0.2 | 22.5 | 0.6 | 17.5 | 11.9 | ||||||||||||||||||
Southwest | 0.3 | 5.1 | 0.1 | 10.6 | <0.1 | 15.6 | 0.4 | 11.5 | 6.6 | ||||||||||||||||||
West | 0.3 | 5.1 | 0.1 | 9.5 | 0.2 | 13.7 | 0.6 | 19.4 | 7.9 | ||||||||||||||||||
Total FICO scores < 620 | 1.4 | 7.0 | 0.7 | 12.6 | 0.8 | 19.2 | 2.9 | 16.7 | 10.4 | ||||||||||||||||||
FICO scores of 620 to 659: | |||||||||||||||||||||||||||
North Central | 0.5 | 3.7 | 0.3 | 6.9 | 0.3 | 11.6 | 1.1 | 11.5 | 6.0 | ||||||||||||||||||
Northeast | 0.9 | 6.6 | 0.4 | 14.4 | 0.3 | 23.6 | 1.6 | 12.8 | 10.6 | ||||||||||||||||||
Southeast | 0.5 | 5.2 | 0.3 | 9.7 | 0.4 | 19.6 | 1.2 | 12.7 | 9.2 | ||||||||||||||||||
Southwest | 0.5 | 3.2 | 0.2 | 7.1 | <0.1 | 12.3 | 0.7 | 7.6 | 4.3 | ||||||||||||||||||
West | 0.7 | 3.5 | 0.2 | 8.2 | 0.4 | 13.1 | 1.3 | 15.7 | 6.3 | ||||||||||||||||||
Total FICO scores of 620 to 659 | 3.1 | 4.6 | 1.4 | 9.4 | 1.4 | 16.6 | 5.9 | 12.1 | 7.6 | ||||||||||||||||||
FICO scores ≥ 660: | |||||||||||||||||||||||||||
North Central | 10.6 | 0.6 | 3.8 | 2.0 | 1.6 | 5.6 | 16.0 | 2.0 | 1.3 | ||||||||||||||||||
Northeast | 17.4 | 1.2 | 4.6 | 4.5 | 1.5 | 12.3 | 23.5 | 2.3 | 2.3 | ||||||||||||||||||
Southeast | 9.2 | 1.2 | 3.2 | 3.1 | 2.2 | 10.9 | 14.6 | 2.9 | 2.7 | ||||||||||||||||||
Southwest | 8.5 | 0.7 | 1.9 | 1.6 | 0.2 | 4.2 | 10.6 | 1.1 | 0.9 | ||||||||||||||||||
West | 19.7 | 0.6 | 3.6 | 3.2 | 2.7 | 7.0 | 26.0 | 3.6 | 1.5 | ||||||||||||||||||
Total FICO scores ≥ 660 | 65.4 | 0.9 | 17.1 | 2.9 | 8.2 | 8.5 | 90.7 | 2.5 | 1.8 | ||||||||||||||||||
Total FICO scores not available | 0.3 | 5.6 | 0.1 | 12.1 | 0.1 | 23.8 | 0.5 | 7.6 | 8.5 | ||||||||||||||||||
All FICO scores: | |||||||||||||||||||||||||||
North Central | 11.4 | 1.0 | 4.3 | 2.8 | 2.1 | 7.2 | 17.8 | 3.2 | 1.9 | ||||||||||||||||||
Northeast | 18.7 | 1.9 | 5.3 | 6.0 | 2.0 | 15.4 | 26.0 | 3.6 | 3.4 | ||||||||||||||||||
Southeast | 10.1 | 1.8 | 3.7 | 4.3 | 2.9 | 13.1 | 16.7 | 4.4 | 3.8 | ||||||||||||||||||
Southwest | 9.2 | 1.1 | 2.0 | 2.7 | 0.3 | 7.0 | 11.5 | 2.2 | 1.4 | ||||||||||||||||||
West | 20.8 | 0.8 | 4.0 | 3.8 | 3.2 | 8.0 | 28.0 | 4.6 | 1.9 | ||||||||||||||||||
Total single-family credit guarantee portfolio(7) | 70.2 | % | 1.3 | % | 19.3 | % | 4.0 | % | 10.5 | % | 10.5 | % | 100.0 | % | 3.7 | % | 2.6 | % | |||||||||
74 | Freddie Mac | |
As of December 31, 2012 | |||||||||||||||||||||||||||
Current LTV Ratio ≤ 80(1) | Current LTV Ratio of > 80 to 100(1) | Current LTV > 100(1) | Current LTV Ratio All Loans(1) | ||||||||||||||||||||||||
Percentage of Portfolio(2) | Serious Delinquency Rate | Percentage of Portfolio(2) | Serious Delinquency Rate | Percentage of Portfolio(2) | Serious Delinquency Rate | Percentage of Portfolio(2) | Percentage Modified(3) | Serious Delinquency Rate | |||||||||||||||||||
By Product Type | |||||||||||||||||||||||||||
FICO scores < 620: | |||||||||||||||||||||||||||
20 and 30- year or more amortizing fixed-rate | 1.0 | % | 8.3 | % | 0.8 | % | 13.4 | % | 0.9 | % | 22.9 | % | 2.7 | % | 18.8 | % | 13.4 | % | |||||||||
15- year amortizing fixed-rate | 0.2 | 4.2 | <0.1 | 8.0 | <0.1 | 9.5 | 0.2 | 1.2 | 4.5 | ||||||||||||||||||
ARMs/adjustable rate(4) | 0.1 | 10.0 | <0.1 | 16.5 | <0.1 | 26.7 | 0.1 | 11.4 | 14.1 | ||||||||||||||||||
Interest-only(5) | <0.1 | 15.0 | <0.1 | 20.8 | 0.1 | 33.6 | 0.1 | 0.6 | 27.6 | ||||||||||||||||||
Other(6) | <0.1 | 4.0 | <0.1 | 8.4 | <0.1 | 14.9 | <0.1 | 4.9 | 5.7 | ||||||||||||||||||
Total FICO scores < 620 | 1.3 | 7.2 | 0.8 | 13.4 | 1.0 | 23.2 | 3.1 | 15.3 | 12.2 | ||||||||||||||||||
FICO scores of 620 to 659: | |||||||||||||||||||||||||||
20 and 30- year or more amortizing fixed-rate | 2.2 | 5.5 | 1.3 | 9.7 | 1.7 | 18.8 | 5.2 | 13.8 | 9.8 | ||||||||||||||||||
15- year amortizing fixed-rate | 0.6 | 2.5 | <0.1 | 5.1 | <0.1 | 8.4 | 0.6 | 0.6 | 2.7 | ||||||||||||||||||
ARMs/adjustable rate(4) | 0.1 | 5.1 | 0.1 | 11.7 | 0.1 | 23.7 | 0.3 | 2.6 | 10.9 | ||||||||||||||||||
Interest-only(5) | <0.1 | 10.7 | 0.1 | 17.2 | 0.2 | 30.0 | 0.3 | 0.5 | 24.4 | ||||||||||||||||||
Other(6) | <0.1 | 2.8 | <0.1 | 4.6 | <0.1 | 7.0 | <0.1 | 1.9 | 4.7 | ||||||||||||||||||
Total FICO scores of 620 to 659 | 2.9 | 4.7 | 1.5 | 9.7 | 2.0 | 19.5 | 6.4 | 10.7 | 9.0 | ||||||||||||||||||
FICO scores of ≥ 660: | |||||||||||||||||||||||||||
20 and 30- year or more amortizing fixed-rate | 40.1 | 1.1 | 17.0 | 2.9 | 9.8 | 9.4 | 66.9 | 3.3 | 2.6 | ||||||||||||||||||
15- year amortizing fixed-rate | 14.7 | 0.4 | 1.0 | 0.9 | 0.3 | 2.3 | 16.0 | 0.1 | 0.5 | ||||||||||||||||||
ARMs/adjustable rate(4) | 3.0 | 1.0 | 0.7 | 4.6 | 0.5 | 15.4 | 4.2 | 0.6 | 3.4 | ||||||||||||||||||
Interest-only(5) | 0.4 | 4.2 | 0.7 | 9.7 | 1.6 | 20.6 | 2.7 | 0.2 | 15.0 | ||||||||||||||||||
Other(6) | <0.1 | 1.9 | 0.1 | 1.5 | 0.1 | 2.5 | 0.2 | 0.7 | 1.9 | ||||||||||||||||||
Total FICO scores ≥ 660 | 58.2 | 0.9 | 19.5 | 3.0 | 12.3 | 10.6 | 90.0 | 2.3 | 2.3 | ||||||||||||||||||
Total FICO scores not available | 0.3 | 5.4 | 0.1 | 11.6 | 0.1 | 23.0 | 0.5 | 6.5 | 8.9 | ||||||||||||||||||
All FICO scores: | |||||||||||||||||||||||||||
20 and 30- year or more amortizing fixed-rate | 43.4 | 1.7 | 19.1 | 4.0 | 12.6 | 11.8 | 75.1 | 4.9 | 3.7 | ||||||||||||||||||
15- year amortizing fixed-rate | 15.4 | 0.6 | 1.1 | 1.2 | 0.3 | 2.8 | 16.8 | 0.1 | 0.6 | ||||||||||||||||||
ARMs/adjustable rate(4) | 3.3 | 1.6 | 0.8 | 5.8 | 0.6 | 17.1 | 4.7 | 1.2 | 4.3 | ||||||||||||||||||
Interest-only(5) | 0.5 | 4.9 | 0.8 | 10.7 | 1.8 | 22.0 | 3.1 | 0.2 | 16.3 | ||||||||||||||||||
Other(6) | 0.1 | 9.6 | 0.1 | 6.8 | 0.1 | 10.2 | 0.3 | 7.9 | 8.9 | ||||||||||||||||||
Total single-family credit guarantee portfolio(7) | 62.7 | % | 1.4 | % | 21.9 | % | 4.1 | % | 15.4 | % | 12.7 | % | 100.0 | % | 3.4 | % | 3.3 | % | |||||||||
By Region(8) | |||||||||||||||||||||||||||
FICO scores < 620: | |||||||||||||||||||||||||||
North Central | 0.2 | % | 5.9 | % | 0.2 | % | 10.4 | % | 0.2 | % | 18.1 | % | 0.6 | % | 14.8 | % | 10.5 | % | |||||||||
Northeast | 0.5 | 10.4 | 0.2 | 19.7 | 0.2 | 30.6 | 0.9 | 16.6 | 16.1 | ||||||||||||||||||
Southeast | 0.2 | 7.9 | 0.2 | 13.5 | 0.3 | 27.7 | 0.7 | 16.0 | 14.5 | ||||||||||||||||||
Southwest | 0.2 | 5.2 | 0.1 | 11.2 | <0.1 | 19.5 | 0.3 | 10.6 | 7.4 | ||||||||||||||||||
West | 0.2 | 4.9 | 0.1 | 10.2 | 0.3 | 17.3 | 0.6 | 18.0 | 10.1 | ||||||||||||||||||
Total FICO scores < 620 | 1.3 | 7.2 | 0.8 | 13.4 | 1.0 | 23.2 | 3.1 | 15.3 | 12.2 | ||||||||||||||||||
FICO scores of 620 to 659: | |||||||||||||||||||||||||||
North Central | 0.5 | 3.9 | 0.3 | 7.7 | 0.4 | 14.5 | 1.2 | 10.2 | 7.5 | ||||||||||||||||||
Northeast | 0.9 | 6.6 | 0.4 | 14.4 | 0.4 | 25.8 | 1.7 | 11.1 | 11.5 | ||||||||||||||||||
Southeast | 0.5 | 5.4 | 0.3 | 10.2 | 0.5 | 23.9 | 1.3 | 11.0 | 11.3 | ||||||||||||||||||
Southwest | 0.5 | 3.3 | 0.2 | 7.6 | 0.1 | 14.5 | 0.8 | 6.8 | 4.8 | ||||||||||||||||||
West | 0.5 | 3.4 | 0.3 | 8.0 | 0.6 | 16.1 | 1.4 | 14.2 | 8.3 | ||||||||||||||||||
Total FICO scores of 620 to 659 | 2.9 | 4.7 | 1.5 | 9.7 | 2.0 | 19.5 | 6.4 | 10.7 | 9.0 | ||||||||||||||||||
FICO scores of ≥ 660: | |||||||||||||||||||||||||||
North Central | 9.4 | 0.7 | 4.4 | 2.2 | 2.3 | 7.0 | 16.1 | 1.9 | 1.7 | ||||||||||||||||||
Northeast | 15.9 | 1.2 | 5.2 | 4.6 | 1.9 | 14.2 | 23.0 | 2.0 | 2.6 | ||||||||||||||||||
Southeast | 8.3 | 1.3 | 3.5 | 3.3 | 3.0 | 14.2 | 14.8 | 2.5 | 3.7 | ||||||||||||||||||
Southwest | 8.0 | 0.7 | 2.1 | 2.0 | 0.3 | 5.9 | 10.4 | 1.1 | 1.0 | ||||||||||||||||||
West | 16.6 | 0.6 | 4.3 | 2.8 | 4.8 | 9.1 | 25.7 | 3.4 | 2.3 | ||||||||||||||||||
Total FICO scores ≥ 660 | 58.2 | 0.9 | 19.5 | 3.0 | 12.3 | 10.6 | 90.0 | 2.3 | 2.3 | ||||||||||||||||||
Total FICO scores not available | 0.3 | 5.4 | 0.1 | 11.6 | 0.1 | 23.0 | 0.5 | 6.5 | 8.9 | ||||||||||||||||||
All FICO scores: | |||||||||||||||||||||||||||
North Central | 10.1 | 1.0 | 4.8 | 3.0 | 3.0 | 9.0 | 17.9 | 3.0 | 2.5 | ||||||||||||||||||
Northeast | 17.1 | 1.9 | 5.9 | 6.1 | 2.5 | 17.6 | 25.5 | 3.3 | 3.8 | ||||||||||||||||||
Southeast | 9.1 | 1.9 | 4.0 | 4.5 | 3.8 | 16.7 | 16.9 | 4.0 | 5.0 | ||||||||||||||||||
Southwest | 8.9 | 1.1 | 2.5 | 3.2 | 0.4 | 9.3 | 11.8 | 2.1 | 1.7 | ||||||||||||||||||
West | 17.5 | 0.8 | 4.7 | 3.3 | 5.7 | 10.2 | 27.9 | 4.4 | 2.8 | ||||||||||||||||||
Total single-family credit guarantee portfolio(7) | 62.7 | % | 1.4 | % | 21.9 | % | 4.1 | % | 15.4 | % | 12.7 | % | 100.0 | % | 3.4 | % | 3.3 | % | |||||||||
(1) | The current LTV ratios are our estimates. See endnote (3) to “Table 34 — Characteristics of the Single-Family Credit Guarantee Portfolio” for further information. |
(2) | Based on UPB of the single-family credit guarantee portfolio. |
(3) | See endnote (2) to “Table 41 — Credit Concentrations in the Single-Family Credit Guarantee Portfolio” for further information. |
(4) | Includes balloon/reset and option ARM mortgage loans. |
(5) | Includes both fixed rate and adjustable rate loans. The percentages of interest-only loans which have been modified at period end reflect that a number of these loans have not yet been assigned to their new product category (post-modification), primarily due to delays in processing. |
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(6) | Consist of FHA/VA and other government guaranteed mortgages. |
(7) | The total of all FICO scores categories may not sum due to the inclusion of loans where FICO scores are not available in the respective totals for all loans. See endnote (5) to “Table 34 — Characteristics of the Single-Family Credit Guarantee Portfolio” for further information about our presentation of FICO scores. |
(8) | Presentation with the following regional 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); and Southwest (AR, CO, KS, LA, MO, NE, NM, OK, TX, WY). |
The table below presents foreclosure and short sale rate information for loans in our single-family credit guarantee portfolio based on year of origination.
Table 43 — Single-Family Credit Guarantee Portfolio Foreclosure and Short Sale Rates
As of September 30, 2013 | As of December 31, 2012 | ||||||||||
Year of Loan Origination | Percentage of Portfolio | Foreclosure and Short Sale Rate(1) | Percentage of Portfolio | Foreclosure and Short Sale Rate(1) | |||||||
2013 | 18 | % | — | % | N/A | N/A | |||||
2012 | 24 | 0.05 | 22 | % | <0.01% | ||||||
2011 | 11 | 0.15 | 14 | 0.06 | |||||||
2010 | 11 | 0.33 | 15 | 0.20 | |||||||
2009 | 9 | 0.47 | 12 | 0.34 | |||||||
Combined — 2009 to 2013 | 73 | 0.22 | 63 | 0.17 | |||||||
2008 | 3 | 3.90 | 6 | 3.26 | |||||||
2007 | 5 | 11.10 | 7 | 9.74 | |||||||
2006 | 4 | 9.72 | 5 | 8.66 | |||||||
2005 | 5 | 5.76 | 6 | 5.11 | |||||||
Combined — 2005 to 2008 | 17 | 7.81 | 24 | 6.87 | |||||||
2004 and prior(2) | 10 | 1.32 | 13 | 1.20 | |||||||
Total | 100 | % | 100 | % | |||||||
(1) | Calculated for each year of origination as the number of loans that have proceeded to foreclosure transfer or short sale and resulted in a credit loss, excluding any subsequent recoveries, during the period from origination to September 30, 2013 and December 31, 2012, respectively, divided by the number of loans originated in that year that were acquired in our single-family credit guarantee portfolio. |
(2) | The foreclosure and short sale rate presented for loans originated in 2004 and prior represents the rate associated with loans originated in 2000 through 2004. |
Loans originated from 2005 through 2008 have experienced higher foreclosure and short sale rates than loans originated in other years. We attribute this performance to a number of factors, including: (a) the expansion of credit terms under which loans were underwritten during these years; (b) an increase in the origination and our purchase of interest-only and Alt-A mortgage products in these years; and (c) an environment of persistently high unemployment, decreasing home sales, and broadly declining home prices in the periods following the loans’ origination.
Multifamily Mortgage Credit Risk
To manage our multifamily mortgage portfolio credit risk, we focus on several key areas: (a) underwriting standards and processes we believe to be prudent; (b) selling significant portions of the expected credit risk through subordination by issuance of our multifamily K Certificates; (c) portfolio diversification, particularly by product and geographical area; and (d) portfolio management activities, including loss mitigation and use of credit enhancements. We monitor the loan performance, the underlying properties and a variety of mortgage loan characteristics that may affect the default experience on our multifamily mortgage portfolio, such as DSCR, LTV ratio, geographic location, payment type, and loan maturity. See “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS” for information about loss mitigation activities that we have classified as TDRs and subsequent performance information of these loans. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS” for more information about the loans in our multifamily mortgage portfolio, including geographic concentrations of these loans.
The table below provides certain attributes of our multifamily mortgage portfolio at September 30, 2013 and December 31, 2012.
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Table 44 — Multifamily Mortgage Portfolio — by Attribute
UPB at | Delinquency Rate(1) at | |||||||||||||
September 30, 2013 | December 31, 2012 | September 30, 2013 | December 31, 2012 | |||||||||||
(dollars in billions) | ||||||||||||||
Original LTV ratio | ||||||||||||||
Below 75% | $ | 92.1 | $ | 87.6 | 0.03 | % | 0.04 | % | ||||||
75% to 80% | 34.8 | 34.0 | 0.06 | 0.22 | ||||||||||
Above 80% | 5.2 | 5.8 | 0.33 | 2.31 | ||||||||||
Total | $ | 132.1 | $ | 127.4 | 0.05 | % | 0.19 | % | ||||||
Weighted average LTV ratio at origination | 70 | % | 70 | % | ||||||||||
Maturity Dates | ||||||||||||||
2013 | $ | 0.5 | $ | 3.3 | 1.73 | % | 0.86 | % | ||||||
2014 | 3.4 | 5.8 | — | — | ||||||||||
2015 | 7.8 | 9.8 | — | 0.53 | ||||||||||
2016 | 11.9 | 13.0 | 0.04 | 0.05 | ||||||||||
2017 | 10.4 | 10.9 | 0.17 | 0.02 | ||||||||||
Beyond 2017 | 98.1 | 84.6 | 0.04 | 0.19 | ||||||||||
Total | $ | 132.1 | $ | 127.4 | 0.05 | % | 0.19 | % | ||||||
Year of Acquisition or Guarantee(2) | ||||||||||||||
2004 and prior | $ | 6.5 | $ | 9.2 | 0.03 | % | 0.35 | % | ||||||
2005 | 5.8 | 6.5 | — | 0.17 | ||||||||||
2006 | 8.9 | 9.5 | — | — | ||||||||||
2007 | 15.8 | 17.8 | 0.29 | 0.86 | ||||||||||
2008 | 14.1 | 16.6 | 0.15 | 0.30 | ||||||||||
2009 | 11.5 | 12.2 | — | — | ||||||||||
2010 | 11.4 | 12.0 | — | — | ||||||||||
2011 | 16.4 | 17.0 | — | — | ||||||||||
2012 | 24.1 | 26.6 | — | — | ||||||||||
2013 | 17.6 | N/A | — | N/A | ||||||||||
Total | $ | 132.1 | $ | 127.4 | 0.05 | % | 0.19 | % | ||||||
Current Loan Size | ||||||||||||||
Above $25 million | $ | 50.8 | $ | 48.5 | — | % | 0.06 | % | ||||||
Above $5 million to $25 million | 72.4 | 70.0 | 0.07 | 0.26 | ||||||||||
$5 million and below | 8.9 | 8.9 | 0.23 | 0.37 | ||||||||||
Total | $ | 132.1 | $ | 127.4 | 0.05 | % | 0.19 | % | ||||||
Legal Structure | ||||||||||||||
Unsecuritized loans | $ | 64.9 | $ | 76.6 | 0.05 | % | 0.08 | % | ||||||
Freddie Mac mortgage-related securities | 58.1 | 41.4 | 0.07 | 0.41 | ||||||||||
Other guarantee commitments | 9.1 | 9.4 | — | 0.13 | ||||||||||
Total | $ | 132.1 | $ | 127.4 | 0.05 | % | 0.19 | % | ||||||
Credit Enhancement | ||||||||||||||
Credit-enhanced | $ | 64.1 | $ | 47.8 | 0.06 | % | 0.36 | % | ||||||
Non-credit-enhanced | 68.0 | 79.6 | 0.05 | 0.10 | ||||||||||
Total | $ | 132.1 | $ | 127.4 | 0.05 | % | 0.19 | % | ||||||
Payment Type | ||||||||||||||
Interest-only | $ | 20.5 | $ | 22.8 | 0.04 | % | 0.05 | % | ||||||
Partial interest-only(3) | 33.1 | 29.8 | — | 0.05 | ||||||||||
Amortizing | 78.5 | 74.8 | 0.08 | 0.30 | ||||||||||
Total | $ | 132.1 | $ | 127.4 | 0.05 | % | 0.19 | % | ||||||
(1) | See “Multifamily Delinquencies” below for more information about our multifamily delinquency rates. |
(2) | Based on either: (a) the year of acquisition, for loans recorded on our consolidated balance sheets; or (b) the year that we issued our guarantee, for the remaining loans in our multifamily mortgage portfolio. |
(3) | Represent loans that have an interest-only period and where the borrower’s payments were interest-only at the respective reporting date. Loans which have reached the end of their interest-only period by the respective reporting date have converted to, and are classified as, amortizing loans. |
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Multifamily Product Types
Our multifamily mortgage portfolio consists of product types that are categorized based on loan terms. Multifamily loans may: (a) be amortizing or interest-only (for the full term or a portion thereof); and (b) have a fixed or variable rate of interest. Our multifamily loans generally have shorter terms than single-family mortgages and typically have balloon maturities ranging from five to ten years. At both September 30, 2013 and December 31, 2012, approximately 59% of our multifamily mortgage portfolio consisted of amortizing loans, which reduce our credit exposure over time since the UPB of the loan declines with each mortgage payment. In addition, as of September 30, 2013 and December 31, 2012, approximately 25% and 23%, respectively, of our multifamily mortgage portfolio consisted of partial interest-only loans, which after a defined period of time will begin to include amortization of principal.
Because most multifamily loans require a significant lump sum (i.e., balloon) payment of unpaid principal at maturity, the borrower’s potential inability to refinance or pay off the loan at maturity is a primary concern for us. Borrowers may be less able to refinance their obligations during periods of rising interest rates, which could lead to default if the borrower is unable to find affordable refinancing. Of the $132.1 billion in UPB of our multifamily mortgage portfolio as of September 30, 2013, less than 1% and 3% will mature during 2013 and 2014, respectively, and the remaining 97% will mature in 2015 and beyond.
Multifamily Credit Enhancements
Our primary business model in the Multifamily segment is to purchase multifamily mortgage loans for aggregation and then securitization through issuance of multifamily K Certificates, which we categorize as Other Guarantee Transactions. With this model, we have securitized more than $63.7 billion in UPB of multifamily loans since 2009 and have attracted private capital to the multifamily market by selling subordinate securities of these transactions to private investors. These securities are backed by loans that are sourced by our seller/servicers and directly underwritten by us. Our K Certificates are structured such that private investors are the first to absorb losses. As a result, we believe private investors will absorb most of the potential losses in these transactions. As of September 30, 2013, we have not realized any credit losses on our K Certificate guarantees. At September 30, 2013 and December 31, 2012, the UPB of guaranteed multifamily K Certificates with subordination coverage was $53.6 billion and $36.7 billion, respectively, and the average subordination coverage on these securities was 18% and 17%, respectively. See “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES” for additional information about credit protections and other forms of credit enhancements covering loans in our multifamily mortgage portfolio.
Multifamily Delinquencies
We report multifamily delinquency rates based on UPB of mortgage loans in our multifamily mortgage portfolio that are two monthly payments or more past due or in the process of foreclosure, as reported by our servicers. Mortgage loans that have been modified are not counted as delinquent as long as the borrower is less than two monthly payments past due under the modified terms.
There were 15 and 33 delinquent loans in our multifamily mortgage portfolio at September 30, 2013 and December 31, 2012, respectively. Our multifamily mortgage portfolio delinquency rate was 0.05% at September 30, 2013 and 0.19% at December 31, 2012. Our delinquency rate for credit-enhanced loans was 0.06% and 0.36% at September 30, 2013 and December 31, 2012, respectively, and for non-credit-enhanced loans was 0.05% and 0.10% at September 30, 2013 and December 31, 2012, respectively. As of September 30, 2013, more than 55% of our multifamily loans that were two or more monthly payments past due, measured on a UPB basis, had credit enhancements that we currently believe will mitigate our expected losses on those loans and guarantees.
Non-Performing Assets
Non-performing assets consist of non-performing loans and REO assets, net. We place non-performing loans on non-accrual status when we believe the collectability of interest and principal on a loan is not reasonably assured, unless the loan is well secured and in the process of collection. When a loan is placed on non-accrual status, any interest income accrued but uncollected is reversed. Thereafter, interest income is recognized only upon receipt of cash payments.
We classify TDRs as non-performing loans. TDRs represent those loans where we have granted a concession to a borrower that is experiencing financial difficulties. Loans that have been classified as TDRs remain categorized as non-performing throughout the remaining life of the loan regardless of whether the borrower makes payments which return the loan to a current payment status. TDRs include HAMP and non-HAMP loan modifications, as well as loans in modification trial periods and loans subject to certain other loss mitigation actions. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in our 2012 Annual Report and “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS” for further information about our TDRs.
The table below provides detail on non-performing loans and REO assets on our consolidated balance sheets and non-performing loans underlying our financial guarantees.
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Table 45 — Non-Performing Assets(1)
September 30, 2013 | December 31, 2012 | September 30, 2012 | ||||||||||
(dollars in millions) | ||||||||||||
Non-performing mortgage loans — on balance sheet: | ||||||||||||
Single-family TDRs: | ||||||||||||
Less than three monthly payments past due | $ | 73,416 | $ | 65,784 | $ | 64,432 | ||||||
Seriously delinquent | 20,378 | 22,008 | 22,321 | |||||||||
Multifamily TDRs(2) | 737 | 815 | 793 | |||||||||
Total TDRs | 94,531 | 88,607 | 87,546 | |||||||||
Other seriously delinquent single-family loans(3) | 26,440 | 39,711 | 43,218 | |||||||||
Other multifamily loans(4) | 896 | 1,411 | 1,638 | |||||||||
Total non-performing mortgage loans — on balance sheet | 121,867 | 129,729 | 132,402 | |||||||||
Non-performing mortgage loans — off-balance sheet: | ||||||||||||
Single-family loans | 920 | 1,096 | 1,135 | |||||||||
Multifamily loans | 494 | 474 | 461 | |||||||||
Total non-performing mortgage loans — off-balance sheet | 1,414 | 1,570 | 1,596 | |||||||||
Real estate owned, net | 4,368 | 4,378 | 4,502 | |||||||||
Total non-performing assets | $ | 127,649 | $ | 135,677 | $ | 138,500 | ||||||
Loan loss reserves as a percentage of our non-performing mortgage loans | 20.3 | % | 23.5 | % | 25.2 | % | ||||||
Total non-performing assets as a percentage of the total mortgage portfolio, excluding non-Freddie Mac securities | 7.1 | % | 7.5 | % | 7.6 | % | ||||||
(1) | Mortgage loan amounts are based on UPB and REO, net is based on carrying values. |
(2) | Of these amounts, $732 million, $806 million and $779 million of UPB were current at September 30, 2013, December 31, 2012 and September 30, 2012, respectively. |
(3) | Represents loans recognized by us on our consolidated balance sheets, including loans removed from PC trusts due to the borrower’s serious delinquency. |
(4) | Of these amounts, $0.9 billion, $1.4 billion and $1.5 billion of UPB were current at September 30, 2013, December 31, 2012 and September 30, 2012, respectively. |
Our loan loss reserves as a percentage of our non-performing mortgage loans declined at September 30, 2013 compared to December 31, 2012 primarily due to a decline in our loan loss reserves. See “Credit Loss Performance - Loan Loss Reserves” for more information.
Our non-performing assets declined to $127.6 billion as of September 30, 2013, from $135.7 billion as of December 31, 2012. We expect our non-performing assets, including loans deemed to be TDRs, to remain at elevated levels for the remainder of 2013 and into 2014.
The table below provides detail by region for REO activity. Our REO activity consists almost entirely of single-family residential properties. See “Table 42 — Single-Family Credit Guarantee Portfolio by Attribute Combinations” for information about regional serious delinquency rates of loans in our portfolio.
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Table 46 — REO Activity by Region(1)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
(number of properties) | ||||||||||||
REO Inventory | ||||||||||||
Beginning property inventory | 44,628 | 53,282 | 49,077 | 60,555 | ||||||||
Properties acquired by region: | ||||||||||||
Northeast | 3,317 | 2,001 | 7,217 | 5,688 | ||||||||
Southeast | 6,697 | 5,425 | 17,795 | 18,416 | ||||||||
North Central | 5,488 | 7,075 | 16,542 | 21,450 | ||||||||
Southwest | 1,668 | 2,607 | 5,446 | 7,922 | ||||||||
West | 2,271 | 3,196 | 6,743 | 10,668 | ||||||||
Total properties acquired | 19,441 | 20,304 | 53,743 | 64,144 | ||||||||
Properties disposed by region: | ||||||||||||
Northeast | (1,618 | ) | (1,887 | ) | (5,047 | ) | (5,765 | ) | ||||
Southeast | (5,137 | ) | (6,619 | ) | (15,795 | ) | (19,964 | ) | ||||
North Central | (5,959 | ) | (6,813 | ) | (20,091 | ) | (21,108 | ) | ||||
Southwest | (1,965 | ) | (2,945 | ) | (6,637 | ) | (9,477 | ) | ||||
West | (2,270 | ) | (4,403 | ) | (8,130 | ) | (17,466 | ) | ||||
Total properties disposed | (16,949 | ) | (22,667 | ) | (55,700 | ) | (73,780 | ) | ||||
Ending property inventory | 47,120 | 50,919 | 47,120 | 50,919 | ||||||||
(1) | See endnote (8) to “Table 42 — Single-Family Credit Guarantee Portfolio by Attribute Combinations” for a description of these regions. |
Our REO inventory (measured in number of properties) declined 4% from December 31, 2012 to September 30, 2013 primarily due to lower foreclosure activity, as compared to the first nine months of 2012, as well as a significant number of borrowers completing short sales rather than foreclosures. Although our REO inventory has generally declined in recent periods, it increased in the third quarter of 2013 as foreclosure activity increased in judicial foreclosure states and disposition activity moderated. We expect our REO acquisitions and dispositions to remain at elevated levels in the fourth quarter of 2013, as we have a large inventory of seriously delinquent loans in our single-family credit guarantee portfolio.
The volume of our single-family REO acquisitions in recent periods has been significantly affected by the lengthening of the foreclosure process, which extends the time it takes for loans to be foreclosed upon and the underlying property to transition to REO. We expect that the length of the foreclosure process will continue to remain above historical levels, particularly in states that require a judicial foreclosure process. Foreclosures generally take longer to complete in states where judicial foreclosures (those conducted under the supervision of a court) are required than in states where non-judicial foreclosures are permitted. In addition, our expanded loss mitigation efforts are providing borrowers with viable alternatives to foreclosure. As a result of the continued high level of loss mitigation efforts and a declining amount of delinquent loans, fewer of our loans proceeded through foreclosure and to REO acquisition during the first nine months of 2013.
Our single-family REO acquisitions in the first nine months of 2013 were most significant in the states of Florida, Illinois, Michigan, and Ohio, which collectively represented 40% of total single-family REO acquisitions during that period, based on the number of properties, and comprised 42% of our total single-family REO property inventory at September 30, 2013. The North Central region comprised 37% and 42% of our REO property inventory, based on the number of properties, as of September 30, 2013 and December 31, 2012, respectively. This region generally has experienced more challenging economic conditions, includes a number of states with longer foreclosure timelines due to the local laws and foreclosure process, and has housing markets with generally lower demand and lower home values than in other regions. See "NOTE 6: REAL ESTATE OWNED" for more information on our REO properties.
Our REO acquisition activity is disproportionately high for certain types of loans in our single-family credit guarantee portfolio, including loans with certain higher-risk characteristics. For example, the percentage of interest-only and Alt-A loans in our single-family credit guarantee portfolio, based on UPB, was approximately 2% and 4%, respectively, at September 30, 2013 and was 5% on a combined basis. The percentage of our REO acquisitions in the first nine months of 2013 that had been financed by either of these loan types represented approximately 24% of our total REO acquisitions, based on loan amount prior to acquisition. In addition, loans originated in 2005 through 2008 comprised approximately 78% of our REO acquisition activity during the first nine months of 2013.
80 | Freddie Mac | |
We continue to experience significant variability in the average time for foreclosure by state. For example, during the first nine months of 2013, the average time for completion of foreclosures associated with loans in our single-family credit guarantee portfolio, excluding Other Guarantee Transactions, ranged from 393 days in Michigan to 1,221 days in Florida.
We are unable to market a significant portion of our REO property inventory at any given time, which can increase the average holding period of our inventory. For example, some jurisdictions require a period of time after foreclosure during which the borrower may reclaim the property. During this period, we generally are not able to sell the property. As of September 30, 2013 and December 31, 2012, the percentage of our single-family REO property inventory that had been held for sale longer than one year was 6.0% and 5.8%, respectively. Though it varied significantly in different states, the average holding period of our single-family REO properties, excluding any post-foreclosure period during which borrowers may reclaim a foreclosed property, was 205 days for our REO dispositions during the nine months ended September 30, 2013.
The table below provides information about our REO properties at September 30, 2013 and December 31, 2012.
Table 47 — Single-Family REO Property Status
As of September 30, 2013 | As of December 31, 2012 | |||||
(Percent of properties) | ||||||
Unable to market: | ||||||
Redemption status(1) | 13 | % | 15 | % | ||
Occupied (waiting for eviction or vacancy) | 17 | 18 | ||||
Other(2) | 4 | 3 | ||||
Subtotal — unable to market | 34 | 36 | ||||
Pre-listing(3) | 28 | 23 | ||||
Pending settlement for sale(4) | 13 | 14 | ||||
Available for sale | 25 | 27 | ||||
Total | 100 | % | 100 | % | ||
(1) | Consists of properties located in jurisdictions that require a period of time after foreclosure during which the borrower may reclaim the property. |
(2) | Includes properties where marketing is on hold, including where we are involved in litigation or other legal and regulatory issues concerning the property. |
(3) | Consists of properties that are not being actively marketed because we are evaluating the property condition and preparing the property for sale. |
(4) | Consists of properties where we have an executed sales contract and settlement has not yet occurred. |
As shown in the table above, a significant portion of the properties in our REO inventory are unable to be marketed because they remain occupied or are located in states with a redemption period, particularly in the states of Illinois, Michigan, and Minnesota. The percentage of our REO inventory that is in the pre-listing category also remained high at September 30, 2013, primarily because many of these properties are under repair or are otherwise being prepared for sale.
Credit Loss Performance
Many loans that are seriously delinquent, or in foreclosure, result in credit losses. The table below provides detail on our credit loss performance associated with mortgage loans and REO assets on our consolidated balance sheets and underlying our non-consolidated mortgage-related financial guarantees.
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Table 48 — Credit Loss Performance
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(dollars in millions) | |||||||||||||||
REO | |||||||||||||||
REO balances, net: | |||||||||||||||
Single-family | $ | 4,366 | $ | 4,459 | $ | 4,366 | $ | 4,459 | |||||||
Multifamily | 2 | 43 | 2 | 43 | |||||||||||
Total | $ | 4,368 | $ | 4,502 | $ | 4,368 | $ | 4,502 | |||||||
REO operations (income) expense: | |||||||||||||||
Single-family | $ | (67 | ) | $ | (40 | ) | $ | (168 | ) | $ | 98 | ||||
Multifamily | (12 | ) | (9 | ) | (15 | ) | (6 | ) | |||||||
Total | $ | (79 | ) | $ | (49 | ) | $ | (183 | ) | $ | 92 | ||||
Charge-offs | |||||||||||||||
Single-family: | |||||||||||||||
Charge-offs, gross(1) (including $2.3 billion, $3.5 billion, $7.3 billion and $10.4 billion relating to loan loss reserves, respectively) | $ | 2,361 | $ | 3,522 | $ | 7,474 | $ | 10,677 | |||||||
Recoveries(2) | (1,730 | ) | (546 | ) | (2,916 | ) | (1,546 | ) | |||||||
Single-family, net | $ | 631 | $ | 2,976 | $ | 4,558 | $ | 9,131 | |||||||
Multifamily: | |||||||||||||||
Charge-offs, gross(1) (including $3 million, $3 million, $4 million and $11 million relating to loan loss reserves, respectively) | $ | 3 | $ | 3 | $ | 10 | $ | 11 | |||||||
Recoveries(2) | — | — | (1 | ) | — | ||||||||||
Multifamily, net | $ | 3 | $ | 3 | $ | 9 | $ | 11 | |||||||
Total Charge-offs: | |||||||||||||||
Charge-offs, gross(1) (including $2.3 billion, $3.5 billion, $7.3 billion and $10.4 billion relating to loan loss reserves, respectively) | $ | 2,364 | $ | 3,525 | $ | 7,484 | $ | 10,688 | |||||||
Recoveries(2) | (1,730 | ) | (546 | ) | (2,917 | ) | (1,546 | ) | |||||||
Total Charge-offs, net | $ | 634 | $ | 2,979 | $ | 4,567 | $ | 9,142 | |||||||
Credit Losses (Gains)(3) | |||||||||||||||
Single-family | $ | 564 | $ | 2,936 | $ | 4,390 | $ | 9,229 | |||||||
Multifamily | (9 | ) | (6 | ) | (6 | ) | 5 | ||||||||
Total | $ | 555 | $ | 2,930 | $ | 4,384 | $ | 9,234 | |||||||
Total (in bps)(4) | 12.3 | 64.8 | 32.6 | 67.0 | |||||||||||
(1) | Represent the carrying amount of a loan that has been discharged in order to remove the loan from our consolidated balance sheet at the time of resolution, regardless of when the impact of the credit loss was recorded on our consolidated statements of comprehensive income through the provision for credit losses or losses on loans purchased. Charge-offs primarily result from foreclosure transfers and short sales and are generally calculated as the recorded investment of a loan at the date it is discharged less the estimated value in final disposition or actual net sales in a short sale. |
(2) | Recoveries of charge-offs primarily result from foreclosure alternatives and REO acquisitions on loans where: (a) a share of default risk has been assumed by mortgage insurers, servicers, or other third parties through credit enhancements; or (b) we received a reimbursement of our losses from a seller/servicer associated with a repurchase request on a loan that experienced a foreclosure transfer or a foreclosure alternative. Includes $1.6 billion and $0.4 billion for the nine months ended September 30, 2013 and 2012, respectively, related to repurchase requests from our seller/servicers (including amounts related to agreements with certain seller/servicers to release specified loans from certain repurchase obligations in exchange for one-time cash payments). |
(3) | Excludes foregone interest on non-performing loans, which reduces our net interest income but is not reflected in our total credit losses. In addition, excludes other market-based credit losses: (a) incurred on our investments in mortgage loans and mortgage-related securities; and (b) recognized in our consolidated statements of comprehensive income. |
(4) | Calculated as credit losses divided by the average carrying value of our total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities and that portion of REMICs and Other Structured Securities that are backed by Ginnie Mae Certificates. |
Our credit losses generally measure losses at the conclusion of the loan and related collateral resolution process. Our expenses associated with home retention actions (e.g., loan modifications) are generally not reflected in our credit losses. There is a significant lag in time from the start of loan workout activities by our servicers on problem loans (e.g., seriously delinquent loans) to the final resolution of those loans by the completion of foreclosures (and subsequent REO sales) and foreclosure alternatives (e.g., short sales). Single-family charge-offs, gross, for the three and nine months ended September 30, 2013 were $2.4 billion and $7.5 billion, respectively, compared to $3.5 billion and $10.7 billion for the three and nine months ended September 30, 2012, respectively. These charge-offs were associated with approximately $5.5 billion and $17.3 billion in UPB of loans for the three and nine months ended September 30, 2013, respectively, and $7.2 billion and $21.4 billion for the three and nine months ended September 30, 2012. Our single-family charge-offs, gross, declined in the first nine months of 2013, compared to the first nine months of 2012, primarily due to improvements in home prices in recent periods in many of the areas
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in which we have had significant foreclosure and short sale activity. The decline in single-family charge-offs, net, in the 2013 periods also includes recoveries of: (a) $1.1 billion related to agreements with certain seller/servicers to release specified loans from certain repurchase obligations in exchange for one-time cash payments; and (b) $0.2 billion related to an agreement to resolve outstanding and future primary mortgage insurance claims on certain loans with one of our mortgage insurers.
To a lesser extent, charge-offs also declined due to slowing volumes of foreclosures in our single-family guarantee portfolio since fewer loans have transitioned to foreclosure in the first nine months of 2013, compared to the first nine months of 2012. We expect our charge-offs and credit losses to continue to remain elevated in the fourth quarter of 2013 due to the large number of single-family non-performing loans that will likely be resolved.
Our single-family credit losses during the first nine months of 2013 were high in California (since it represents a significant portion of our single-family credit guarantee portfolio) and credit losses continued to be disproportionately high in Florida, Nevada, and Arizona. Collectively, these states comprised approximately 35% and 49% of our total credit losses in the three and nine months ended September 30, 2013, respectively. We estimate that these four states had the largest cumulative declines in home prices during the housing crisis that began in 2006, as measured by our home price index. Loans originated in 2005 through 2008 comprised approximately 17% of our single-family credit guarantee portfolio, based on UPB at September 30, 2013; however, these loans accounted for approximately 82% of our credit losses during the first nine months of 2013. In addition, although Alt-A loans comprised approximately 4% of our single-family credit guarantee portfolio at September 30, 2013, these loans accounted for approximately 25% of our credit losses during the first nine months of 2013. At September 30, 2013, loans in states with a judicial foreclosure process comprised 38% of our single-family credit guarantee portfolio, based on UPB, while loans in these states contributed to approximately 58% of our credit losses recognized in the first nine months of 2013. We expect the portion of our credit losses related to loans in states with judicial foreclosure processes will remain high in the near term as the substantial backlog of loans awaiting court proceedings in those states transitions to REO or other loss events. See “Table 4 — Credit Statistics, Single-Family Credit Guarantee Portfolio” for information on short sale and REO disposition severity ratios, and “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS” for additional information about our credit losses.
Loan Loss Reserves
We maintain mortgage-related loan loss reserves at levels we believe appropriate to absorb probable incurred losses on mortgage loans held-for-investment on our consolidated balance sheets and those underlying Freddie Mac mortgage-related securities and other guarantee commitments. Determining the loan loss reserves is complex and requires significant management judgment about matters that involve a high degree of subjectivity. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in our 2012 Annual Report for information on our accounting policies for loan loss reserves and impaired loans.
Our single-family loan loss reserves declined from $30.5 billion at December 31, 2012 to $24.8 billion at September 30, 2013, which reflects continued high levels of loan charge-offs compared to levels before 2009. This decline was also due to improvement in both borrower payment performance and lower severity ratios for REO dispositions and short sale transactions due to the improvements in home prices in most areas during the period.
In recent periods, including the first nine months of 2013, the portion of our loan loss reserves attributable to individually impaired loans increased while the portion of our loan loss reserves determined on a collective basis declined since the number of loans classified as TDRs has significantly increased in the last two years. Although the housing market continued to significantly improve in many geographic areas, we expect that our loan loss reserves may remain elevated for an extended period because: (a) the resolution of problem loans takes considerable time, often several years in the case of foreclosure; and (b) a significant portion of our reserves are associated with performing loans classified as individually impaired and will require us to maintain a loss reserve until the loans are fully repaid or complete a short sale or foreclosure.
As of September 30, 2013 and December 31, 2012, the recorded investment of individually impaired single-family mortgage loans was $94.5 billion and $89.3 billion, respectively, and the loan loss reserves associated with these loans were $18.1 billion and $17.9 billion, respectively. Our loan loss reserve associated with individually impaired single-family loans as a percentage of the total recorded investment of these loans was 19% and 20% of the balance as of September 30, 2013 and December 31, 2012, respectively. Our loan loss reserve associated with collectively evaluated single-family loans as a percentage of the total recorded investment of these loans was 0.4% and 0.8% of the balance as of September 30, 2013 and December 31, 2012, respectively. See “Table 4.4 — Net Investment in Mortgage Loans” for information about collectively evaluated and individually evaluated loans on our consolidated balance sheets. See “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS” for additional information about our impaired loans. See “CONSOLIDATED RESULTS OF OPERATIONS — Provision for Credit Losses,” for a discussion of our provision for credit losses.
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The table below summarizes our net investment for individually impaired single-family mortgage loans on our consolidated balance sheets for which we have recorded a specific reserve.
Table 49 — Single-Family Impaired Loans with Specific Reserve Recorded
2013 | 2012 | ||||||||||||
# of Loans | Amount | # of Loans | Amount | ||||||||||
(in millions) | (in millions) | ||||||||||||
TDRs (recorded investment): | |||||||||||||
TDRs, at beginning of year | 449,145 | $ | 83,484 | 252,749 | $ | 53,494 | |||||||
New additions | 87,271 | 13,967 | 209,506 | 32,671 | |||||||||
Repayments | (23,191 | ) | (3,980 | ) | (4,646 | ) | (1,013 | ) | |||||
Loss events(1) | (26,260 | ) | (4,748 | ) | (11,805 | ) | (2,385 | ) | |||||
September 30, balance | 486,965 | 88,723 | 445,804 | 82,767 | |||||||||
Other (recorded investment)(2) | 14,545 | 1,281 | 21,514 | 1,987 | |||||||||
Total impaired loans with specific reserve | 501,510 | 90,004 | 467,318 | 84,754 | |||||||||
Total allowance for loan losses of individually impaired single-family loans | (18,092 | ) | (18,501 | ) | |||||||||
Net investment, September 30, | $ | 71,912 | $ | 66,253 | |||||||||
(1) | Foreclosure transfers or foreclosure alternatives, such as a deed in lieu of foreclosure or short sale transaction. |
(2) | Loans impaired upon purchase as of September 30. |
Credit Risk Sensitivity
Under a 2005 agreement with FHFA, then OFHEO, we are required to disclose the estimated increase in the NPV of future expected credit losses for our single-family credit guarantee portfolio over a ten year period as the result of an immediate 5% decline in home prices nationwide, followed by a stabilization period and return to the base case. This sensitivity analysis is hypothetical and may not be indicative of our actual results. We do not use this analysis for determination of our reported results under GAAP. Although slightly increased in the third quarter of 2013, the estimate of our portfolio’s credit sensitivity to a 5% home price decline (with this scenario’s assumptions) has decreased in recent periods, which we believe is primarily due to the combination of improvement in home prices in most of the U.S. as well as the decline in the composition of our portfolio of loans originated in 2005 through 2008.
The table below presents the estimated credit loss sensitivity of our single-family credit guarantee portfolio, based on assumptions required by FHFA, both before and after consideration of credit enhancements, measured at the end of the last five quarterly periods.
Table 50 — Single-Family Credit Loss Sensitivity
Before Receipt of Credit Enhancements(1) | After Receipt of Credit Enhancements(2) | |||||||||||
NPV(3) | NPV Ratio(4) | NPV(3) | NPV Ratio(4) | |||||||||
(dollars in millions, ratios in bps) | ||||||||||||
At: | ||||||||||||
September 30, 2013 | $ | 4,059 | 24.6 | $ | 3,734 | 22.6 | ||||||
June 30, 2013 | $ | 4,000 | 24.3 | $ | 3,663 | 22.2 | ||||||
March 31, 2013 | $ | 4,961 | 30.3 | $ | 4,575 | 27.9 | ||||||
December 31, 2012 | $ | 6,356 | 38.8 | $ | 5,908 | 36.1 | ||||||
September 30, 2012 | $ | 6,479 | 39.2 | $ | 6,085 | 36.8 | ||||||
(1) | Assumes that none of the credit enhancements currently covering our mortgage loans have any mitigating effect on our credit losses. |
(2) | Assumes we collect amounts due from credit enhancement providers after giving effect to certain assumptions about counterparty default rates. |
(3) | Based on the single-family credit guarantee portfolio, excluding REMICs and Other Structured Securities backed by Ginnie Mae Certificates. |
(4) | Calculated as the ratio of NPV of increase in credit losses to the single-family credit guarantee portfolio, defined in note (3) above. |
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Institutional Credit Risk
Single-family Mortgage Seller/Servicers
We acquire a significant portion of our single-family mortgage purchase volume from several large lenders, or seller/servicers. Our top 10 single-family seller/servicers provided approximately 65% of our single-family purchase volume during the nine months ended September 30, 2013. Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A., accounted for 18% and 13%, respectively, of our single-family mortgage purchase volume and were the only single-family seller/servicers that comprised 10% or more of our purchase volume during the nine months ended September 30, 2013.
We are exposed to institutional credit risk arising from the potential insolvency of or non-performance by our mortgage seller/servicers, including non-performance of their repurchase obligations arising from breaches of the representations and warranties made to us for loans they underwrote and sold to us or failure to honor their recourse and indemnification obligations to us. This exposure remained high during the nine months ended September 30, 2013.
We have contractual arrangements with our seller/servicers under which they agree to sell us mortgage loans, and represent and warrant that those loans meet specified eligibility and underwriting standards. In addition, our servicers represent and warrant to us that those loans will be serviced in accordance with our servicing contract. If we subsequently discover that the representations and warranties were breached (i.e., 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/servicer to repurchase the loan at its current UPB and/or make us whole for losses realized with respect to the loan after consideration of other recoveries, if any. We require that a seller/servicer repurchase a mortgage after we issue a repurchase request, unless the seller/servicer avails itself of an appeals process provided for in our contracts, in which case the deadline for repurchase is extended pending our decision on the appeal. Our practices for repurchases associated with the loans we purchase on or after January 1, 2013 are subject to our new representation and warranty framework. For information on this framework, see “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Single-family Mortgage Seller/Servicers” in our 2012 Annual Report.
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The table below provides a summary of our repurchase request activity for the nine months ended September 30, 2013 and 2012.
Table 51 — Repurchase Request Activity and Counterparty Balances(1)
Nine Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
(in millions) | ||||||||
Beginning balance | $ | 3,028 | $ | 2,716 | ||||
New requests issued | 8,266 | 7,127 | ||||||
Requests collected(2) | (3,379 | ) | (2,849 | ) | ||||
Requests cancelled(3) | (4,391 | ) | (4,025 | ) | ||||
Other(4) | (165 | ) | (33 | ) | ||||
Ending balance | $ | 3,359 | $ | 2,936 | ||||
As of September 30, | As of December 31, | |||||||
2013 | 2012 | |||||||
(in millions) | ||||||||
Seller/servicer counterparty(5): | ||||||||
Bank of America, N.A. | $ | 1,404 | $ | 1,029 | ||||
JPMorgan Chase Bank, N.A. | 827 | 279 | ||||||
U.S. Bank, N.A. | 116 | 113 | ||||||
PNC Bank, N.A. | 81 | 45 | ||||||
Provident Funding Associates, L.P. | 64 | 29 | ||||||
All other counterparties | 867 | 1,533 | ||||||
Total | $ | 3,359 | $ | 3,028 | ||||
(1) | Amounts are based on the UPB of the loans associated with the repurchase requests. |
(2) | Requests collected are based on the UPB of the loans associated with the repurchase requests, which in many cases is more than the amount of payments received for reimbursement of losses for requests associated with foreclosed mortgage loans, negotiated agreements, and other alternative remedies. For the nine months ended September 30, 2013 and 2012, approximately 34% and 33%, respectively, of the requests collected in each period were satisfied by reimbursement of losses associated with the request. Includes $0.9 billion in the nine months ended September 30, 2013 related to agreements with certain seller/servicers to release specified loans from certain repurchase obligations in exchange for one-time cash payments. |
(3) | Consists primarily of those requests that were resolved by the servicer providing missing documentation or rescinded through a successful appeal of the request. |
(4) | Other includes items that affect the UPB of the loan while the repurchase request is outstanding, such as changes in UPB due to payments made on the loan. Also includes requests deemed uncollectible due to the insolvency or other failure of the counterparty. |
(5) | Counterparties presented represent the five with the largest outstanding balances at September 30, 2013. All other includes certain counterparties that were within the top five balances at December 31, 2012, but subsequently entered agreements that resolved many of their outstanding repurchase requests. See endnote (2) for additional information. |
The UPB of loans subject to open repurchase requests increased to $3.4 billion at September 30, 2013 from $3.0 billion at December 31, 2012 as the volume of new request issuances exceeded the combined volume of requests collected and cancelled. As measured by UPB, approximately 31% and 41% of the repurchase requests outstanding at September 30, 2013 and December 31, 2012, respectively, were outstanding for four months or more since issuance of the initial request (these figures include repurchase requests for which appeals were pending). FHFA set a goal for us (in the 2013 Conservatorship Scorecard) to complete our demands for remedies for breaches of representations and warranties related to pre-conservatorship loan activity. Although we resolved a significant amount of requests in the first nine months of 2013, including through negotiated agreements, the balance of repurchase requests outstanding has increased in 2013 due to our efforts to meet this goal. We are continuing our reviews of loans originated prior to 2009 in accordance with FHFA’s guidance. Consequently, our repurchase request volumes with our seller/servicers may remain high in the near term.
As of September 30, 2013, two of our largest seller/servicers (Bank of America, N.A. and JPMorgan Chase Bank, N.A.) had aggregate repurchase requests outstanding, based on UPB, of $2.2 billion, and approximately 36% of these requests were outstanding for four months or more since issuance of the initial request. The amount we expect to collect on the outstanding requests is significantly less than the UPB of the loans subject to the repurchase requests primarily because many of these requests will likely be satisfied by reimbursement of our realized credit losses by seller/servicers, instead of repurchase of loans at their UPB. Some of these requests also may be rescinded in the course of the contractual appeal process. Based on our historical loss experience and the fact that many of these loans are covered by credit enhancements (e.g., mortgage insurance), we expect the actual credit losses experienced by us should we fail to collect on these repurchase requests will also be less than the UPB of the loans.
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Repurchase requests related to mortgage insurance rescission and claim denial tend to be outstanding longer than other repurchase requests. Of the total amount of repurchase requests outstanding at September 30, 2013 and December 31, 2012, approximately $0.6 billion and $1.2 billion, respectively, were issued due to mortgage insurance rescission or mortgage insurance claim denial.
For more information on our contractual remedies concerning breaches of representations and warranties, including (a) the impact of the expansion of our relief refinance initiative in late 2011 and during 2012, and (b) repurchase requests associated with mortgage insurance rescission, see “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Single-family Mortgage Seller/Servicers” and “RISK FACTORS — Competitive and Market Risks — Our financial condition or results of operations may be adversely affected if mortgage seller/servicers fail to repurchase loans sold to us in breach of representations and warranties or fail to honor any related indemnification or recourse obligations” in our 2012 Annual Report.
Historically, we have used a process of reviewing a sample of the loans we purchase to validate compliance with our underwriting standards. In addition, we review many delinquent loans and loans that have resulted in credit losses, such as through foreclosure or short sale. The loan review and appeal process is lengthy, but we have completed a substantial number of reviews and compiled results of our review of 2012 originations. Based on reviews completed through September 2013, the average aggregate deficiency rate across all seller/servicers for loans funded during 2012, 2011, and 2010 was approximately 3%, 5%, and 13%, respectively. The most common underwriting deficiencies found in our review of loans funded during 2012 were related to insufficient income and inadequate or missing documentation to support borrower qualification. In recent periods, we also made revisions to our loan review process that are designed to standardize the process and facilitate more timely review of loans we purchase.
During the first quarter of 2013, we entered into an agreement with GMAC Mortgage, LLC (in connection with its bankruptcy proceeding) to release specified loans from certain repurchase obligations in exchange for a one-time cash payment. During the third quarter of 2013, we entered into similar agreements with Wells Fargo Bank, N.A., CitiMortgage, Inc., Citibank, N.A., and SunTrust Mortgage, Inc., and in October 2013, we entered into a similar agreement with JPMorgan Chase Bank, N.A., to release specified loans from certain repurchase obligations. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS” for more information about these agreements.
Our estimate of recoveries from seller/servicer repurchase obligations is considered in our allowance for loan losses; however, our actual recoveries may be different than our estimates. Such differences are reflected in our allowance for loan losses and impact the amount of the provision for credit losses that we record during a given period. We believe we have appropriately provided for these exposures, based upon our estimates of incurred losses, in our loan loss reserves; however, our actual losses may exceed our estimates.
A significant portion of our single-family mortgage loans are serviced by several large seller/servicers. Because we are the master servicer and delegate the primary servicing function to our servicers, if our servicers lack appropriate process controls, experience a failure in their controls, or experience an operating disruption in their ability to service mortgage loans, our business and financial results could be adversely affected. Our top two single-family loan servicers, Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A., serviced approximately 24% and 13%, respectively, of our single-family mortgage loans as of September 30, 2013, and together serviced approximately 37% of our single-family mortgage loans. We continue to face challenges with respect to the performance of certain of our seller/servicers in managing our seriously delinquent loans. As part of our efforts to address this issue and mitigate our credit losses, we have continued to facilitate the transfer of servicing for certain pools of loans with higher credit risk from certain underperforming servicers to other servicers that specialize in workouts of problem loans. Some of these specialized servicers have grown rapidly in the last two years and now service a large share of our loans. We also seek remedies such as compensatory fees for underperformance.
We rely on our seller/servicers to perform loan workout activities as well as foreclosures on loans that they service for us. We also continue to be adversely affected by the length of the foreclosure timeline, particularly in states that require a judicial foreclosure process, which has provided challenges to our seller/servicers because they have had to change their processes for compliance with the requirements of each jurisdiction.
In recent periods, including the first quarter of 2013, we made changes to our programs for reviewing the performance of our servicers. Under the programs, we assess certain fees to compensate us for deficiencies in servicer performance. These fees are recorded in other expenses, and other income, respectively, within our consolidated statements of comprehensive income. These fees were not significant to our consolidated financial results for the nine months ended September 30, 2013.
Multifamily Mortgage Seller/Servicers
We acquire a significant portion of our multifamily purchase volume from several large sellers. We are exposed to certain institutional credit risks arising from the potential non-performance by our multifamily sellers and mortgage servicers. For the nine months ended September 30, 2013, our top two multifamily sellers, CBRE Capital Markets, Inc. and Berkadia
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Commercial Mortgage LLC, accounted for 23% and 17%, respectively, of our multifamily purchase and guarantee issuance volume. Our top 10 multifamily sellers represented an aggregate of approximately 84% of our multifamily purchase and guarantee issuance volume for the nine months ended September 30, 2013.
A significant portion of our multifamily mortgage portfolio is serviced by several large multifamily servicers. As of September 30, 2013, our top three multifamily servicers, Berkadia Commercial Mortgage LLC, CBRE Capital Markets, Inc., and Wells Fargo Bank, N.A., each serviced more than 10% of our multifamily mortgage portfolio, excluding Other Guarantee Transactions, and together serviced approximately 40% of this portfolio.
Mortgage Insurers
We have institutional credit risk relating to the potential insolvency of, or non-performance by, mortgage insurers that insure single-family mortgages we purchase or guarantee. As a guarantor, we remain responsible for the payment of principal and interest if a mortgage insurer fails to meet its obligations to reimburse us for claims. If any of our mortgage insurers fail to fulfill their obligation, we could experience increased credit losses.
We attempt to manage this risk by establishing eligibility standards for mortgage insurers and by monitoring our exposure to individual mortgage insurers. Our monitoring includes performing periodic analysis of the estimated financial capacity of individual mortgage insurers under different adverse economic conditions. The 2013 Conservatorship Scorecard includes a goal for us to develop counterparty risk management standards for mortgage insurers that include uniform master policies and eligibility requirements. In connection with this goal, we expect to publish changes to the capital requirements and other standards for mortgage insurer eligibility by the end of 2013. In addition, working with FHFA and Fannie Mae, we have guided mortgage insurers in their adoption of new master policies, for which the mortgage insurers are expected to seek state regulatory approval.
As part of the estimate of our loan loss reserves, we evaluate the recovery and collectability related to mortgage insurance policies on mortgage loans we own or guarantee. We also evaluate the collectability of outstanding receivables from these counterparties related to unpaid claims. The majority of our mortgage insurance exposure is concentrated with four counterparties, certain of which have been under financial stress during the last several years. Some of our eligible mortgage insurers have, in the past, exceeded risk to capital ratios required by their state insurance regulators. Although the financial condition of some of our primary mortgage insurance counterparties improved in recent periods, there is still a significant risk that these counterparties may fail to fully perform on their obligations to pay our claims. Except for those insurers under regulatory or court ordered supervision, which no longer issue new coverage, we continue to acquire new loans with mortgage insurance from the mortgage insurers shown in the table below. In addition, in recent years, new entrants have emerged that may diversify a concentrated industry.
The table below summarizes our exposure to mortgage insurers as of September 30, 2013. In the event that a mortgage insurer fails to perform, the coverage outstanding represents our maximum exposure to credit losses resulting from such failure. Our most significant exposure to these insurers is through primary mortgage insurance. As of September 30, 2013, we had primary mortgage insurance coverage on loans that represented approximately 12% of the UPB of our single-family credit guarantee portfolio.
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Table 52 — Mortgage Insurance by Counterparty(1)
As of September 30, 2013 | ||||||||||||||||||||
UPB of Covered Loans | Coverage Outstanding | |||||||||||||||||||
Counterparty Name | Credit Rating | Credit Rating Outlook | Primary Insurance(2) | Pool Insurance(2) | Primary Insurance(3) | Pool Insurance(3) | ||||||||||||||
(in billions) | ||||||||||||||||||||
Mortgage Guaranty Insurance Corporation (MGIC) | B | Stable | $ | 44.6 | $ | 1.6 | $ | 11.1 | <0.1 | |||||||||||
Radian Guaranty Inc. (Radian) | B | Stable | 42.3 | 3.9 | 10.5 | 1.0 | ||||||||||||||
United Guaranty Residential Insurance Company | BBB+ | Stable | 39.4 | 0.1 | 9.8 | <0.1 | ||||||||||||||
Genworth Mortgage Insurance Corporation | B | Negative | 28.0 | 0.4 | 7.0 | <0.1 | ||||||||||||||
PMI Mortgage Insurance Co. (PMI)(4) | Not Rated | N/A | 15.2 | 0.4 | 3.7 | 0.1 | ||||||||||||||
Republic Mortgage Insurance Company (RMIC)(5) | Not Rated | N/A | 12.4 | 0.7 | 3.1 | 0.1 | ||||||||||||||
Essent Guaranty, Inc. | BBB+ | Stable | 9.2 | — | 2.3 | — | ||||||||||||||
Triad Guaranty Insurance Corporation (Triad)(6) | Not Rated | N/A | 5.5 | 0.2 | 1.4 | <0.1 | ||||||||||||||
CMG Mortgage Insurance Company | BBB- | Negative | 2.8 | <0.1 | 0.7 | — | ||||||||||||||
Total | $ | 199.4 | $ | 7.3 | $ | 49.6 | $ | 1.2 | ||||||||||||
(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 October 24, 2013. Represents the lower of S&P and Moody’s credit ratings and outlooks stated in terms of the S&P equivalent. |
(2) | These amounts are based on gross coverage without regard to netting of coverage that may exist to the extent an affected mortgage is covered under both types of insurance. See “Table 4.5 — Recourse and Other Forms of Credit Protection” in “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES” for further information. |
(3) | Represents the remaining aggregate contractual limit for reimbursement of losses under the respective policy type. These amounts are based on gross coverage without regard to netting of coverage that may exist to the extent an affected mortgage is covered under both types of insurance. |
(4) | In April 2013, PMI began paying valid claims 55% in cash and 45% in deferred payment obligations and made a one-time cash payment to us for claims that were previously settled for 50% in cash. |
(5) | Under a plan announced in November 2012, RMIC is paying all valid claims settled on or after January 19, 2012, 60% in cash and 40% in deferred payment obligations. |
(6) | In June 2009, Triad began paying valid claims 60% in cash and 40% in deferred payment obligations under order of its state regulator. In October 2013, Triad’s plan of rehabilitation was approved, under which the cash portion of claims payments would be increased to 75% with a one-time cash payment for claims previously settled for 60% in cash. The plan could go into effect as early as January 2014. |
We received proceeds of $1.6 billion and $1.5 billion during the nine months ended September 30, 2013 and 2012, respectively, from our primary and pool mortgage insurance policies for recovery of losses on our single-family loans (including $255 million in the third quarter of 2013 associated with the Radian agreement discussed below). We had outstanding receivables from mortgage insurers (including deferred payment obligations associated with unpaid claim amounts), net of associated reserves, of $0.6 billion and $0.8 billion at September 30, 2013 and December 31, 2012, respectively.
In August 2013, we entered into an agreement with Radian involving approximately 26,000 single-family loans held by us and insured by Radian that were in default as of December 31, 2011. The agreement generally resolves outstanding and future primary mortgage insurance claims by us against Radian with respect to these loans. In connection with this agreement, Radian paid us $255 million and also deposited $205 million in an escrow account in which we hold a secured interest. Subject to the terms and conditions of the agreement, the funds in the escrow account will be returned to Radian to the extent of Radian's final rescission, cancellation, curtailment or denial of filed claims. Freddie Mac will receive any funds in the account that are not returned to Radian. The agreement does not affect our right to pursue repurchase remedies against seller/servicers related to Radian's insurance rescissions and claim denials on these loans. This agreement did not have a significant impact on our financial results for the third quarter of 2013.
PMI, RMIC, and Triad are all under regulatory or court ordered supervision, and a substantial portion of their claims are recorded by us as deferred payment obligations. These insurers continue to pay a portion of their respective claims in cash. However, the state regulators of these companies have generally not allowed them to pay their respective deferred payment obligations. If, as we currently expect, these insurers do not pay the full amount of their deferred payment obligations, we would lose a portion of the coverage from these counterparties shown in the table above. As of September 30, 2013, we had cumulative unpaid deferred payment obligations of $0.7 billion from these insurers. We reserved for substantially all of these unpaid amounts as collectibility is uncertain.
Recently, some of our mortgage insurance counterparties have been able to obtain additional capital and we expect that they will continue to explore additional opportunities to further improve their capital position as the housing market continues to improve.
89 | Freddie Mac | |
Our mortgage insurance exposure has become concentrated among a smaller number of counterparties in recent years and could become more concentrated in the future. For more information, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Mortgage Insurers” in our 2012 Annual Report.
Bond Insurers
Bond insurance, which may be either primary or secondary policies, is a credit enhancement covering certain of the non-agency mortgage-related securities we hold. Primary policies are acquired by the securitization trust issuing the securities we purchase, while secondary policies are acquired by us. Bond insurance exposes us to the risk that the bond insurer will be unable to satisfy claims.
The table below presents our coverage amounts of bond insurance, including secondary coverage, for the non-agency mortgage-related securities we hold. In the event a bond insurer fails to perform, the coverage outstanding represents our maximum principal exposure to credit losses related to such a failure.
Table 53 — Bond Insurance by Counterparty(1)
As of September 30, 2013 | |||||||||||
Counterparty Name | Credit Rating | Credit Rating Outlook | Coverage Outstanding(2) | Percent of Total Coverage Outstanding(2) | |||||||
(dollars in millions) | |||||||||||
Ambac Assurance Corporation (Ambac)(3) | Not Rated | N/A | $ | 3,712 | 46 | % | |||||
Financial Guaranty Insurance Company (FGIC)(3) | Not Rated | N/A | 1,433 | 18 | |||||||
National Public Finance Guarantee Corp. | BBB+ | Positive | 1,095 | 14 | |||||||
MBIA Insurance Corp. | B- | Positive | 926 | 12 | |||||||
Assured Guaranty Municipal Corp. | A | Stable | 732 | 9 | |||||||
Syncora Guarantee Inc. (Syncora)(3) | Not Rated | N/A | 50 | 1 | |||||||
CIFG Assurance Corporation | Not Rated | N/A | 30 | <1 | |||||||
Total | $ | 7,978 | 100 | % | |||||||
(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 ratings available as of October 24, 2013. Represents the lower of S&P and Moody’s credit ratings stated in terms of the S&P equivalent. |
(2) | Represents maximum principal exposure to credit losses. |
(3) | Ambac, FGIC, and Syncora are currently operating under regulatory or court ordered supervision. |
We monitor the financial strength of our bond insurers in accordance with our risk management policies. Some of our larger bond insurers are in runoff mode where no new business is being written. We expect to receive substantially less than full payment of our claims from Ambac and FGIC as these companies are insolvent. We believe that we will also likely receive substantially less than full payment of our claims from some of our other bond insurers because we believe they also lack sufficient ability to fully meet all of their expected lifetime claims-paying obligations to us as such claims emerge.
On June 11, 2013, FGIC’s plan of rehabilitation was approved by the appropriate authorities. Under the plan, permitted claims will be paid 17% in cash and the remainder in deferred payment obligations. On August 19, 2013, FGIC announced that state regulatory authorities had approved their payment of initial permitted claims and settlement of deferred obligations in accordance with the plan. Ambac, which had not paid claims since March 2010, began paying a portion of its claims in cash in the third quarter of 2012. For more information concerning Ambac and FGIC, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Bond Insurers” in our 2012 Annual Report.
In the event one or more of our other bond insurers were to become subject to a regulatory order or insolvency proceeding, our ability to recover certain unrealized losses on our non-agency mortgage-related securities would be negatively affected. We considered our expectations regarding our bond insurers’ ability to meet their obligations in making our impairment determinations on our non-agency mortgage-related securities at September 30, 2013 and December 31, 2012. See “NOTE 7: INVESTMENTS IN SECURITIES — Other-Than-Temporary Impairments on Available-For-Sale Securities” for additional information regarding impairment losses on securities covered by bond insurers.
Cash and Other Investments Counterparties
We are exposed to institutional credit risk arising from the potential insolvency or non-performance of counterparties of non-mortgage-related investment agreements and cash equivalent transactions, including those entered into on behalf of our securitization trusts. These financial instruments are investment grade at the time of purchase and primarily short-term in nature, which mitigates institutional credit risk for these instruments.
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Our cash and other investment counterparties are primarily major financial institutions, Treasury, and the Federal Reserve Bank. As of September 30, 2013 and December 31, 2012, including amounts related to our consolidated VIEs, there were $56.3 billion and $60.7 billion, respectively, of: (a) cash and securities purchased under agreements to resell invested with institutional counterparties; (b) Treasury securities classified as cash equivalents; or (c) cash deposited with the Federal Reserve Bank. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS” for further information on counterparty credit ratings and concentrations within our cash and other investments.
For information about institutional credit risk associated with our investments in non-mortgage-related securities, see “NOTE 7: INVESTMENTS IN SECURITIES — Table 7.8 — Trading Securities.”
Agency and Non-Agency Mortgage-Related Security Issuers
Our investments in securities expose us to institutional credit risk to the extent that servicers, issuers, guarantors, or third parties providing credit enhancements become insolvent or do not perform their obligations. Our investments in non-Freddie Mac mortgage-related securities include both agency and non-agency securities. Agency securities have historically presented minimal institutional credit risk due to the guarantee provided by those institutions, and the U.S. government’s support of those institutions. However, we recognized impairment charges in the nine months ended September 30, 2013 related to certain of our investments in non-agency mortgage-related securities. The servicing of loans underlying these securities is significantly concentrated with several counterparties and our ability to mitigate this concentration is limited. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” for further information about these securities, including a discussion of the higher-risk components of these investments.
At the direction of our Conservator, we are working to enforce our rights as an investor with respect to the non-agency mortgage-related securities we hold, and are engaged in various efforts to mitigate or recover losses on our investments in these securities, in some cases in conjunction with other investors. We and FHFA reached settlements with General Electric Company and affiliates (in January 2013), Citigroup Inc. and affiliates (in May 2013), UBS Americas, Inc. (in July 2013), Wells Fargo Bank, N.A. and affiliates (August 2013), Ally Financial Inc. (October 2013), and JPMorgan Chase & Co. and certain affiliates (October 2013). Lawsuits with a number of groups are currently pending. The effectiveness of our efforts is highly uncertain and any potential recoveries may take significant time to realize. For more information on these efforts, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS” in this Form 10-Q and in our 2012 Annual Report and “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Non-Agency Mortgage-Related Security Issuers” in our 2012 Annual Report.
Derivative Counterparties
We use cleared derivatives, exchange-traded derivatives, and OTC derivatives, and are exposed to institutional credit risk with respect to these derivatives. OTC derivatives refer to those derivatives that are neither cleared derivatives nor exchange-traded derivatives, as described below. For more information about the institutional credit risk associated with our use of derivatives, and our strategies to manage our exposures related to such risk, see “MD&A — RISK MANAGEMENT — Credit Risk —Institutional Credit Risk — Derivative Counterparties” in our 2012 Annual Report.
The relative concentration of our derivative exposure among our primary OTC derivative counterparties remains high as compared to historical levels. This concentration has increased significantly since 2008 primarily due to industry consolidation and the failure or weakening of certain counterparties, and could further increase. See “NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES” for additional information.
The Dodd-Frank Act requires central clearing and trading on exchanges or comparable trading facilities of many types of derivatives. Pursuant to the Dodd-Frank Act, the U.S. Commodity Futures Trading Commission has determined that the types of interest-rate swaps that we use most frequently are subject to the central clearing requirement, for transactions executed or modified on or after June 10, 2013. We refer to these interest-rate swaps as cleared derivatives. As a result, our exposure to the clearinghouse we use to clear such interest-rate derivatives, and to the clearing firms that administer our transactions once accepted for clearing, will increase and become more concentrated over time. However, our exposure to individual counterparties associated with OTC interest-rate swaps will decrease over time.
The table below summarizes our exposure to our derivative counterparties, which represents the net positive fair value of derivative contracts, related accrued interest and collateral held by us from our counterparties, after netting by counterparty where allowable (i.e., net amounts due to us under derivative contracts which are recorded as derivative assets). For OTC interest-rate swaps, option-based derivatives, and foreign-currency swaps that are in an asset position, we hold collateral against those positions in accordance with agreed upon thresholds. The collateral posting thresholds we assign our counterparties depend on the credit rating of the counterparty and are based on our credit risk policies. In addition, we have OTC interest-rate swap, option-based derivative, and foreign-currency swap liabilities where we post collateral to counterparties in accordance with agreed upon thresholds. Pursuant to certain collateral agreements we have with OTC interest-rate swap, option-based derivative, and foreign-currency swap counterparties, the collateral posting threshold we are assigned is based on S&P or Moody’s credit rating of our long-term senior unsecured debt securities. The lowering or withdrawal of our
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credit rating by S&P or Moody’s may increase our obligation to post collateral, depending on the amount of the counterparty’s exposure to Freddie Mac with respect to the derivative transactions. At September 30, 2013, our collateral posted exceeded our collateral held. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Derivative Assets and Liabilities, Net” and “Table 27 — Derivative Fair Values and Maturities” for a reconciliation of fair value to the amounts presented on our consolidated balance sheets as of September 30, 2013, which includes both cash collateral held and posted by us, net.
Table 54 — Derivative Counterparty Credit Exposure
As of September 30, 2013 | |||||||||||||||||||
Rating(1) | Number of Counterparties(2) | Notional or Contractual Amount(3) | Total Exposure at Fair Value(4) | Exposure, Net of Collateral(5) | Weighted Average Contractual Maturity (in years) | Collateral Posting Threshold | |||||||||||||
(dollars in millions) | |||||||||||||||||||
AA- | 4 | $ | 55,082 | $ | 207 | $ | 40 | 4.6 | $10 million or less | ||||||||||
A+ | 3 | 32,600 | 1,090 | 5 | 6.1 | $1 million or less | |||||||||||||
A | 7 | 298,806 | — | 20 | 5.4 | $1 million or less | |||||||||||||
A- | 3 | 139,316 | 255 | 11 | 5.5 | $1 million or less | |||||||||||||
BBB+ | 2 | 38,476 | 2 | — | 5.7 | $ — | |||||||||||||
Subtotal | 19 | 564,280 | 1,554 | 76 | 5.4 | ||||||||||||||
Cleared and exchange-traded derivatives | 127,366 | 313 | 203 | ||||||||||||||||
Commitments | 26,690 | 203 | 203 | ||||||||||||||||
Swap guarantee derivatives | 3,537 | — | — | ||||||||||||||||
Other derivatives(6) | 8,882 | — | — | ||||||||||||||||
Total derivatives | $ | 730,755 | $ | 2,070 | $ | 482 | |||||||||||||
As of December 31, 2012 | |||||||||||||||||||
Rating(1) | Number of Counterparties(2) | Notional or Contractual Amount(3) | Total Exposure at Fair Value(4) | Exposure, Net of Collateral(5) | Weighted Average Contractual Maturity (in years) | Collateral Posting Threshold | |||||||||||||
(dollars in millions) | |||||||||||||||||||
AA- | 4 | $ | 41,169 | $ | — | $ | — | 5.6 | $10 million or less | ||||||||||
A+ | 4 | 86,717 | 1,220 | 15 | 6.0 | $1 million or less | |||||||||||||
A | 5 | 343,353 | 734 | 32 | 5.8 | $1 million or less | |||||||||||||
A- | 4 | 148,271 | 6 | 22 | 5.7 | $1 million or less | |||||||||||||
BBB+ | 1 | 42,643 | — | — | 6.0 | $ — | |||||||||||||
Subtotal | 18 | 662,153 | 1,960 | 69 | 5.8 | ||||||||||||||
Cleared and exchange-traded derivatives | 42,673 | 66 | 66 | ||||||||||||||||
Commitments | 25,530 | 20 | 20 | ||||||||||||||||
Swap guarantee derivatives | 3,628 | — | — | ||||||||||||||||
Other derivatives(6) | 11,847 | 1 | 1 | ||||||||||||||||
Total derivatives | $ | 745,831 | $ | 2,047 | $ | 156 | |||||||||||||
(1) | Ratings of our OTC interest-rate swap, options-based derivative (excluding certain written options), and foreign-currency swap derivative counterparties. We use the lower of S&P and Moody’s ratings to manage collateral requirements. In this table, the Moody’s rating of the legal entity is stated in terms of the S&P equivalent. |
(2) | Based on legal entities. |
(3) | Notional or contractual amounts are used to calculate the periodic settlement amounts to be received or paid and generally do not represent actual amounts to be exchanged. |
(4) | For each counterparty, this amount includes derivatives with a positive fair value (recorded as derivative assets, net), including the related accrued interest receivable/payable, when applicable. For counterparties included in the subtotal and the cleared and exchange-traded derivatives category, positions are shown netted at the counterparty or clearing member level, as applicable, including accrued interest receivable/payable and trade/settle fees. |
(5) | Calculated as Total Exposure at Fair Value less both cash and non-cash collateral held as determined at the counterparty level. At September 30, 2013 and December 31, 2012, $446 million and $501 million, respectively, of non-cash collateral had been posted to us. Includes amounts related to our posting of cash collateral in excess of our derivative liability as determined at the counterparty level. For more information about margin we have posted in connection with cleared and exchange-traded derivatives, see “NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES - Collateral Pledged.” |
(6) | Consists primarily of certain written options and certain credit derivatives. Written options do not present counterparty credit exposure because we receive a one-time up-front premium in exchange for giving the holder the right to execute a contract under specified terms, which generally puts us in a liability position. |
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Over time, our exposure to individual counterparties for derivatives varies depending on changes in fair values, which are affected by changes in period-end interest rates, the implied volatility of interest rates, foreign-currency exchange rates, and the amount of derivatives held. See “NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES — Derivative Portfolio — Master Netting and Collateral Agreements” for more information about our maximum loss for accounting purposes and concentrations of counterparty risk related to derivative counterparties.
Approximately 96% of our counterparty credit exposure for OTC interest-rate swap, option-based, and foreign-currency swap derivatives was collateralized at September 30, 2013 (excluding amounts related to our posting of cash collateral in excess of our derivative liability as determined at the counterparty level). The remaining exposure was primarily due to exposure amounts below the applicable counterparty collateral posting threshold, as well as market movements during the time period between when a derivative was marked to fair value and the date we received the related collateral. In some instances, these market movements result in us having provided collateral that has fair value in excess of our obligation, which represents our overcollateralization exposure. Collateral is typically transferred within one business day based on the values of the related derivatives.
In the event an OTC derivative 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 loss if non-cash collateral posted to us by the defaulting counterparty and held by the custodian cannot be liquidated at prices that are sufficient to recover the amount of such exposure. We regularly review the market values of the securities pledged to us to manage our exposure to loss. 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.
As noted above, beginning with contracts executed or modified on or after June 10, 2013, the types of interest-rate swaps that we use most frequently became subject to the central clearing requirement. Our exposure to cleared and exchange-traded derivatives was $203 million and $66 million as of September 30, 2013 and December 31, 2012, respectively. We are required to post margin in connection with our cleared and exchange-traded derivatives. At September 30, 2013, the majority of our exposure for our cleared and exchange-traded derivatives resulted from our posting of initial margin, which is the collateral that we post to a derivative clearinghouse in order to do business with such clearinghouse. The amount of initial margin we must post for cleared and exchange-traded derivatives is based, in part, on S&P or Moody’s credit rating of our long-term senior unsecured debt securities. The amount of initial margin varies over time. The lowering or withdrawal of our credit rating by S&P or Moody’s may increase our obligation to post collateral, depending on the amount of the counterparty’s exposure to Freddie Mac with respect to the derivative transactions. For information about margin we have posted in connection with cleared and exchange-traded derivatives, see “NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES — Collateral Pledged.”
The total exposure on our forward purchase and sale commitments for mortgages and mortgage-related securities, treated as derivatives for accounting purposes, was $203 million and $20 million at September 30, 2013 and December 31, 2012, respectively. Our exposure to commitments increased primarily due to the effect of a higher volume of commitments to purchase mortgage-related securities. Approximately 86% of our total exposure to commitments at September 30, 2013 settled in October 2013. We do not require master netting and collateral agreements for the counterparties of these commitments. However, the typical maturity of our forward purchase and sale commitments is less than 60 days, and we monitor the credit fundamentals of the counterparties to these commitments on an ongoing basis in an effort to ensure that they continue to meet our internal risk-management standards. Many of our transactions involving forward purchase and sale commitments of mortgage-related securities, including our dollar roll transactions, 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 institutional credit risk of the organization.
Selected European Sovereign and Non-Sovereign Exposures
The sovereign debt of Spain, Italy, Ireland, Portugal, Greece, and Cyprus (which we refer to herein as the “troubled European countries”) and the credit status of financial institutions with significant exposure to the troubled European countries has been adversely affected due to ongoing weaknesses in the economic and fiscal situations of those countries. As of September 30, 2013, we did not hold any debt issued by the governments of the troubled European countries and did not hold any financial instruments entered into with sovereign governments in those countries. As of that date, we also did not hold any debt issued by corporations or financial institutions domiciled in the troubled European countries and did not hold any other financial instruments entered into with corporations or financial institutions domiciled in those countries. For purposes of this discussion, we consider an entity to be domiciled in a country if its parent entity is headquartered in that country. However, we believe a number of our counterparties have direct or indirect exposure to the troubled European countries. It is possible that continued adverse developments in Europe could significantly affect such counterparties, which in turn could adversely affect
93 | Freddie Mac | |
their ability to meet their obligations to us. For more information, see “MD&A — RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Selected European Sovereign and Non-Sovereign Exposures” in our 2012 Annual Report.
Operational Risks
We continue to face significant levels of operational risk, due to a variety of factors, including: (a) the complexity of our business operations; (b) the amount of change to our core systems required to keep pace with regulatory and other requirements; and (c) the fact that we face a variety of different, and potentially competing, business objectives and new FHFA-mandated activities (e.g., the initiatives we are pursuing under the 2013 Conservatorship Scorecard). For more information, see “MD&A — RISK MANAGEMENT — Operational Risks” and “RISK FACTORS — Operational Risks” in our 2012 Annual Report.
Management, including the company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2013. As of September 30, 2013, we had one material weakness in our internal control over financial reporting, 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.”
Interest Rate and Other Market Risks
For a discussion of our interest rate and other market risks, see “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.”
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our business activities require that we maintain adequate liquidity to fund our operations, which may include the need to make payments of principal and interest on our debt securities, including securities issued by our consolidated trusts, and otherwise make payments related to our guarantees of mortgage assets; make payments upon the maturity, redemption or repurchase of our other debt securities; make net payments on derivative instruments; pay dividends on our senior preferred stock; purchase mortgage-related securities and other investments; purchase mortgage loans; and remove modified or seriously delinquent loans from PC trusts.
We fund our cash requirements primarily by issuing short-term and long-term debt. Other sources of cash include:
• | receipts of principal and interest payments on securities or mortgage loans we hold; |
• | other cash flows from operating activities, including the management and guarantee fees we receive in connection with our guarantee activities (excluding those fees we remit to Treasury pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011); |
• | borrowings against mortgage-related securities and other investment securities we hold; and |
• | sales of securities we hold. |
We have also received substantial amounts of cash from Treasury pursuant to draws under the Purchase Agreement, which are made to address quarterly deficits in our net worth. Our most recent draw request of $19 million occurred in May 2012, to address our deficit in net worth at March 31, 2012.
We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain our access to the debt markets and to have adequate liquidity to conduct our normal business activities. 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. For more information, see “Other Debt Securities — Credit Ratings.”
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.
Liquidity Management
Maintaining sufficient liquidity is of primary importance and we continually strive to enhance our liquidity management practices and policies. Under these practices and policies, we maintain an amount of cash and cash equivalent reserves in the form of liquid, high quality short-term investments that is intended to enable us to meet ongoing cash obligations for an extended period, in the event we do not have access to the short- or long-term unsecured debt markets. We also actively manage the concentration of debt maturities and closely monitor our monthly maturity profile. For a discussion of our liquidity management practices and policies, see “MD&A — LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Liquidity Management” in our 2012 Annual Report.
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Throughout the nine months ended September 30, 2013, we complied with all requirements under our liquidity management policies or FHFA guidance, as applicable. During the nine months ended September 30, 2013, the majority of the funds used to cover our short-term cash liquidity needs was deposited with the Federal Reserve Bank, invested in short-term assets with a rating of A-1/P-1 or AAA, or was issued by a counterparty with that rating. In the event of a downgrade of a position or counterparty, as applicable, below minimum rating requirements, our credit governance policies require us to exit from the position within a specified period.
Notwithstanding these practices and policies, our ability to maintain sufficient liquidity, including by pledging mortgage-related and other securities as collateral to other financial 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, and other factors. For more information, see “RISK FACTORS — Competitive and Market Risks — Our investment activities may be adversely affected by limited availability of financing and increased funding costs” in our 2012 Annual Report.
Other Debt Securities
During the three months ended September 30, 2013, we had sufficient access to the debt markets due largely to support from the U.S. government. Our effective short-term debt was 43% of outstanding other debt at September 30, 2013 as compared to 42% at December 31, 2012. Effective short-term debt is the aggregate of short-term debt and the current portion of long-term debt (the portion due within one year). The categories of short-term debt (due within one year) and long-term debt (due after one year) are based on the original contractual maturity of the debt instruments classified as other debt. We rely significantly on our ability to issue debt on an on-going basis to refinance our short-term debt.
Our debt cap under the Purchase Agreement is $780.0 billion in 2013 and will decline to $663.0 billion on January 1, 2014. As of September 30, 2013, we estimate that our aggregate indebtedness was $259.7 billion below the applicable debt cap. Our aggregate indebtedness is calculated as the par value of other debt. We disclose the amount of our indebtedness on this basis monthly under the caption “Other Debt Activities — Total Debt Outstanding” in our Monthly Volume Summary reports, which are available on our web site at www.freddiemac.com and in current reports on Form 8-K we file with the SEC.
Other Debt Issuance Activities
The table below summarizes the par value of other debt securities we issued, based on settlement dates, during the three and nine months ended September 30, 2013 and 2012.
Table 55 — Other Debt Security Issuances by Product, at Par Value(1)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(in millions) | ||||||||||||||||
Other short-term debt(2): | ||||||||||||||||
Reference Bills® securities and discount notes | $ | 69,120 | $ | 72,291 | $ | 227,110 | $ | 214,374 | ||||||||
Medium-term notes — non-callable | — | — | 3,500 | — | ||||||||||||
Total other short-term debt | 69,120 | 72,291 | 230,610 | 214,374 | ||||||||||||
Other long-term debt: | ||||||||||||||||
Medium-term notes — callable(3) | 11,870 | 21,543 | 51,141 | 66,416 | ||||||||||||
Medium-term notes — non-callable | 8,011 | 5,983 | 13,187 | 18,264 | ||||||||||||
U.S. dollar Reference Notes® securities — non-callable | 3,500 | 8,500 | 16,500 | 40,500 | ||||||||||||
Total other long-term debt | 23,381 | 36,026 | 80,828 | 125,180 | ||||||||||||
Total other debt issued | $ | 92,501 | $ | 108,317 | $ | 311,438 | $ | 339,554 | ||||||||
(1) | Excludes federal funds purchased and securities sold under agreements to repurchase, and lines of credit. Also excludes debt securities of consolidated trusts held by third parties. |
(2) | Due within one year based on the original contractual maturity of the debt instruments. |
(3) | During the three and nine months ended September 30, 2013, includes $500 million of single-family risk transfer transactions. |
Other Debt Retirement Activities
We repurchase, call, or exchange our outstanding medium- and long-term debt securities from time to time for a variety of reasons, including: (a) to help support the liquidity of the market for our other debt securities; (b) to manage our mix of liabilities funding our assets; or (c) for economic reasons.
The table below provides the par value, based on settlement dates, of other debt securities we repurchased and called during the three and nine months ended September 30, 2013 and 2012.
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Table 56 — Other Debt Security Repurchases and Calls(1)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(in millions) | |||||||||||||||
Repurchases of outstanding medium-term notes | $ | 314 | $ | — | $ | 2,060 | $ | 1,747 | |||||||
Calls of callable medium-term notes | 7,325 | 14,763 | 42,354 | 95,770 | |||||||||||
(1) | Excludes debt securities of consolidated trusts held by third parties. |
Credit Ratings
Our ability to access the capital markets and other sources of funding, as well as our cost of funds, is highly dependent upon our credit ratings. The table below indicates our credit ratings as of October 24, 2013.
Table 57 — Freddie Mac Credit Ratings
Nationally Recognized Statistical Rating Organization | |||||
S&P | Moody’s | Fitch | |||
Senior long-term debt(1) | AA+ | Aaa | AAA | ||
Short-term debt(2) | A-1+ | P-1 | F1+ | ||
Subordinated debt(3) | A | Aa2 | AA- | ||
Preferred stock(4) | C | Ca | C/RR6(5) | ||
Outlook | Stable | Stable | Rating Watch Negative (includes AAA-rated long-term Issuer Default Rating) | ||
(1) | Consists of medium-term notes, U.S. dollar Reference Notes® securities and €Reference Notes® securities. |
(2) | Consists of Reference Bills® securities and discount notes. |
(3) | Consists of Freddie SUBS® securities. |
(4) | Does not include senior preferred stock issued to Treasury. |
(5) | Preferred stock is not on Rating Watch Negative. |
Our credit 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. On October 16, 2013, Fitch placed our AAA-rated long-term Issuer Default Rating (IDR), as well as our senior long-term debt, short-term debt and subordinated debt ratings, on Rating Watch Negative (RWN). This action followed Fitch’s placement of the U.S. government's debt ratings on RWN.
For information about factors that could lead to future ratings actions, and the potential impact of a downgrade in our credit ratings, see “RISK FACTORS — Competitive and Market Risks — 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” in our 2012 Annual Report.
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.
Cash and Cash Equivalents, Federal Funds Sold, Securities Purchased Under Agreements to Resell, and Non-Mortgage-Related Securities
Excluding amounts related to our consolidated VIEs, we held $70.9 billion and $47.3 billion in the aggregate of cash and cash equivalents, securities purchased under agreements to resell, and non-mortgage-related securities at September 30, 2013 and December 31, 2012, respectively. These investments are important to our cash flow and asset and liability management and our ability to provide liquidity and stability to the mortgage market. The balance increased in anticipation of the need to make a potential significant dividend payment to Treasury in December 2013. At September 30, 2013, our non-mortgage-related securities consisted primarily of Treasury notes that we could sell to provide us with an additional source of liquidity to fund our business operations. We also maintained non-interest-bearing deposits at the Federal Reserve Bank, which are included in cash and cash equivalents on our consolidated balance sheets. For additional information on these assets, see “CONSOLIDATED BALANCE SHEETS ANALYSIS — Cash and Cash Equivalents, Federal Funds Sold and Securities Purchased Under Agreements to Resell” and “— Investments in Securities — Non-Mortgage-Related Securities.”
Mortgage Loans and Mortgage-Related Securities
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We invest principally in mortgage loans and mortgage-related securities, certain categories of which are largely unencumbered and highly liquid. Our primary source of liquidity among these mortgage assets is our holdings of agency securities. While our holdings of unsecuritized performing single-family mortgage loans and CMBS are also potential sources of liquidity, we consider them to be less liquid than agency securities. Our holdings of non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans are considered to be illiquid due to market conditions and the continued poor credit quality of the underlying assets. Our holdings of unsecuritized seriously delinquent and modified single-family mortgage loans are also considered to be illiquid.
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. See “EXECUTIVE SUMMARY — Limits on Investment Activity and Our Mortgage-Related Investments Portfolio” for more information on the relative liquidity of our mortgage assets.
Cash Flows
Our cash and cash equivalents increased by $1.0 billion to $9.5 billion during the nine months ended September 30, 2013, as compared to a decrease of $20.7 billion to $7.8 billion during the nine months ended September 30, 2012. Cash flows provided by operating activities during the nine months ended September 30, 2013 and 2012 were $9.4 billion and $6.2 billion, respectively, primarily driven by cash proceeds from net interest income. Cash flows provided by investing activities during the nine months ended September 30, 2013 and 2012 were $322.1 billion and $357.4 billion, respectively, primarily resulting from net proceeds received as a result of repayments of single-family held-for-investment mortgage loans. Cash flows used for financing activities during the nine months ended September 30, 2013 and 2012 were $330.4 billion and $384.2 billion, respectively, largely attributable to funds used to repay debt securities of consolidated trusts held by third parties.
Capital Resources, the Purchase Agreement, and the Dividend Obligation on the Senior Preferred Stock
Since our entry into conservatorship, Treasury and FHFA have taken a number of actions that affect our cash requirements and ability to fund those requirements. The conservatorship, and the resulting support we have received from Treasury, has enabled us to access debt funding on terms sufficient for our needs. Under the Purchase Agreement, Treasury made a commitment to provide us with funding, under certain conditions, to eliminate deficits in our net worth. The amount of available funding remaining under the Purchase Agreement is currently $140.5 billion. This amount will be reduced by any future draws.
At September 30, 2013, our assets exceeded our liabilities under GAAP; therefore no draw is being requested from Treasury under the Purchase Agreement. In future periods, we may experience variability in our net income and/or comprehensive income due to changes in factors such as interest rates, mortgage spreads, and home prices. Such changes could adversely affect our net worth and result in additional draws under the Purchase Agreement. For more information, see “RISK FACTORS — Conservatorship and Related Matters — We may request additional draws under the Purchase Agreement in future periods” in our 2012 Annual Report.
Under the GSE Act, FHFA must place us into receivership if FHFA determines in writing that our assets are and have been less than our obligations for a period of 60 days. Obtaining funding from Treasury pursuant to its commitment under the Purchase Agreement enables us to avoid being placed into receivership by FHFA. See “BUSINESS — Regulation and Supervision — Federal Housing Finance Agency — Receivership” in our 2012 Annual Report for additional information on mandatory receivership.
During the three months ended September 30, 2013, we experienced a significant non-cash increase in our net worth due to a benefit for federal income taxes of $23.9 billion that resulted from our conclusion to release our valuation allowance against our net deferred tax assets. Based on our Net Worth Amount at September 30, 2013, our dividend obligation to Treasury in December 2013 will be $30.4 billion. Once this dividend payment is made to Treasury, we will have paid slightly more in aggregate cash dividends to Treasury than aggregate cash draws received from Treasury under the Purchase Agreement. We paid dividends of $4.4 billion in cash on the senior preferred stock during the three months ended September 30, 2013, based on our Net Worth Amount at June 30, 2013. Through September 30, 2013, we have paid aggregate cash dividends to Treasury of $40.9 billion, an amount equal to 57% of our aggregate draws received under the Purchase Agreement.
At September 30, 2013, our aggregate funding received from Treasury under the Purchase Agreement was $71.3 billion. This aggregate funding amount does not include the initial $1.0 billion liquidation preference of senior preferred stock that we issued to Treasury in September 2008 as an initial commitment fee and for which no cash was received.
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. In addition, under the Purchase Agreement, the payment of dividends cannot be used to reduce prior draws from Treasury. Accordingly, while we have paid aggregate cash dividends to Treasury of $40.9 billion, the liquidation preference on the senior preferred stock remains $72.3 billion.
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For more information on these matters, see “BUSINESS — Conservatorship and Related Matters” and “— Regulation and Supervision” in our 2012 Annual Report.
FAIR VALUE BALANCE SHEETS AND ANALYSIS
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain assets and liabilities on a recurring or non-recurring basis. Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
We categorize assets and liabilities recorded or disclosed at fair value within the fair value hierarchy based on the valuation processes used to derive their fair values and our judgment regarding the observability of the related inputs. Those judgments are based on our knowledge and observations of the markets relevant to the individual assets and liabilities and may vary based on current market conditions. In applying our judgments, we review ranges of third-party prices and transaction volumes, and hold discussions with dealers and pricing service vendors to understand and assess the extent of market benchmarks available and the judgments or modeling required in their processes. Based on these factors, we determine whether the inputs are observable and whether the principal markets are active or inactive. For additional information regarding our classification of assets, liabilities, and equity within the fair value hierarchy and the valuation techniques used to measure fair value, see “MD&A — FAIR VALUE MEASUREMENTS AND ANALYSIS” in our 2012 Annual Report and “NOTE 16: FAIR VALUE DISCLOSURES.”
Level 3 Recurring Fair Value Measurements
At September 30, 2013 and December 31, 2012, we measured and recorded: (a) 26% and 28% of total assets carried at fair value on a recurring basis; and (b) 12% and 7% of total liabilities carried at fair value on a recurring basis using unobservable inputs (Level 3). These percentages were calculated before the impact of counterparty and cash collateral netting. 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. See “NOTE 16: FAIR VALUE DISCLOSURES — Changes in Fair Value Levels” for a discussion of changes in our Level 3 assets and liabilities and “—Table 16.2 — Fair Value Measurements of Assets and Liabilities Using Significant Unobservable Inputs” for the Level 3 reconciliation.
Consideration of Credit Risk in Our Valuation
We consider credit risk in the valuation of our assets and liabilities through consideration of credit risk of the counterparty in asset valuations and through consideration of our own institutional credit risk in liability valuations on our GAAP consolidated balance sheets.
We consider credit risk in our valuation of investments in securities based on fair value measurements that are largely the result of price quotes received from multiple dealers or pricing services. Some of the key valuation drivers of such fair value measurements include the collateral type, collateral performance, credit quality of the issuer, tranche type, weighted average life, vintage, coupon, and interest rates. We also make adjustments for items such as credit enhancements or other types of subordination and liquidity, where applicable. In cases where internally developed models are used, we maximize the use of market-based inputs or calibrate such inputs to market data. For a discussion of types and characteristics of mortgage loans underlying our mortgage-related securities, see “Table 19 — Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets” and “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk.”
We also consider credit risk when we evaluate the valuation of our derivative positions, including the impact of institutional credit risk in the event that the counterparty does not honor its payment obligation. However, our fair value of derivatives is not adjusted for credit risk because we obtain collateral from, or post collateral to, counterparties, typically within one business day of the daily market value calculation. See “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Derivative Counterparties” for a discussion of our counterparty credit risk.
Consolidated Fair Value Balance Sheets Analysis
The consolidated fair value balance sheets in the table below are a supplemental disclosure not intended to be in conformity with GAAP, and present our estimates of the fair value of our assets and liabilities at September 30, 2013 and December 31, 2012. The valuations of financial instruments included on our consolidated fair value balance sheets are in accordance with the accounting guidance for fair value measurements and disclosures. In conjunction with the preparation of our consolidated fair value balance sheets, we use a number of financial models. See “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — Interest-Rate Risk and Other Market Risks,” in this Form 10-Q and our 2012 Annual Report, and “RISK FACTORS” and “RISK MANAGEMENT — Operational Risks” in our 2012 Annual Report for information concerning the risks associated with these models.
Limitations
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Our consolidated fair value balance sheets do not capture all elements of value that are implicit in our operations as a going concern because our consolidated fair value balance sheets only capture the values of the current investment and securitization portfolios as of the dates presented. For example, our consolidated fair value balance sheets do not capture the value of new investment and securitization business that would likely replace current business (for example, as prepayments and other liquidations occur), nor do they include any estimation of intangible or goodwill values. Thus, the fair value of net assets presented on our consolidated fair value balance sheets does not represent an estimate of our net realizable, liquidation, or market value as a whole. Furthermore, amounts we ultimately realize from the disposition of assets or settlement of liabilities may vary significantly from the fair values presented.
Judgments, assumptions and methodologies used by management may have a significant effect on our measurements of fair value, and the use of different judgments, assumptions and methodologies, as well as changes in market conditions, could have a material effect on the fair value of net assets presented on our consolidated fair value balance sheets. For example, the fair value of certain financial instruments is based on our current principal market (i.e., the market with the greatest volume and level of activity for the financial instruments) as of the dates presented. As market conditions change or new markets evolve, our principal market may change, which could significantly affect the fair value of those instruments.
We report certain assets and liabilities that are not financial instruments, such as property and equipment, REO, and our net deferred tax assets, as well as certain financial instruments that are not covered by the disclosure requirements in the accounting guidance for financial instruments, such as pension liabilities, at their carrying amounts in accordance with GAAP on our consolidated fair value balance sheets. We do not believe these items have a significant impact on our overall fair value results. Other non-financial assets and liabilities on our GAAP consolidated balance sheets represent deferrals of costs and revenues that are amortized in accordance with GAAP, such as deferred debt issuance costs and deferred fees. Cash receipts and payments related to these items are generally recognized in the fair value of net assets when received or paid, with no basis reflected on our fair value balance sheets.
Our senior preferred stock held by Treasury in connection with the Purchase Agreement is recorded at the stated liquidation preference for purposes of the consolidated fair value balance sheets, which is the same as the carrying value in our GAAP consolidated balance sheets, and does not reflect fair value. As the senior preferred stock is restricted as to its redemption, we consider the liquidation preference to be the most appropriate measure for purposes of the consolidated fair value balance sheets.
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Table 58 — Consolidated Fair Value Balance Sheets
September 30, 2013 | December 31, 2012 | ||||||||||||||
Carrying Amount(1) | Fair Value | Carrying Amount(1) | Fair Value | ||||||||||||
(in billions) | |||||||||||||||
Assets | |||||||||||||||
Cash and cash equivalents | $ | 9.5 | $ | 9.5 | $ | 8.5 | $ | 8.5 | |||||||
Restricted cash and cash equivalents | 5.8 | 5.8 | 14.6 | 14.6 | |||||||||||
Federal funds sold and securities purchased under agreements to resell | 41.0 | 41.0 | 37.6 | 37.6 | |||||||||||
Investments in securities: | |||||||||||||||
Available-for-sale, at fair value | 139.8 | 139.8 | 174.9 | 174.9 | |||||||||||
Trading, at fair value | 52.6 | 52.6 | 41.5 | 41.5 | |||||||||||
Total investments in securities | 192.4 | 192.4 | 216.4 | 216.4 | |||||||||||
Mortgage loans: | |||||||||||||||
Mortgage loans held by consolidated trusts | 1,526.1 | 1,524.9 | 1,495.9 | 1,540.1 | |||||||||||
Unsecuritized mortgage loans | 163.4 | 146.3 | 190.4 | 167.6 | |||||||||||
Total mortgage loans | 1,689.5 | 1,671.2 | 1,686.3 | 1,707.7 | |||||||||||
Derivative assets, net | 0.9 | 0.9 | 0.7 | 0.7 | |||||||||||
Other assets | 42.7 | 42.6 | 25.8 | 25.8 | |||||||||||
Total assets | $ | 1,981.8 | $ | 1,963.4 | $ | 1,989.9 | $ | 2,011.3 | |||||||
Liabilities | |||||||||||||||
Debt, net: | |||||||||||||||
Debt securities of consolidated trusts held by third parties | $ | 1,419.9 | $ | 1,439.2 | $ | 1,419.5 | $ | 1,487.1 | |||||||
Other debt | 515.7 | 524.0 | 547.5 | 565.6 | |||||||||||
Total debt, net | 1,935.6 | 1,963.2 | 1,967.0 | 2,052.7 | |||||||||||
Derivative liabilities, net | 0.4 | 0.4 | 0.2 | 0.2 | |||||||||||
Other liabilities | 12.4 | 17.9 | 13.8 | 16.7 | |||||||||||
Total liabilities | 1,948.4 | 1,981.5 | 1,981.0 | 2,069.6 | |||||||||||
Net assets | |||||||||||||||
Senior preferred stock | 72.3 | 72.3 | 72.3 | 72.3 | |||||||||||
Preferred stock | 14.1 | 2.9 | 14.1 | 0.9 | |||||||||||
Common stock | (53.0 | ) | (93.3 | ) | (77.5 | ) | (131.5 | ) | |||||||
Total net assets | 33.4 | (18.1 | ) | 8.9 | (58.3 | ) | |||||||||
Total liabilities and net assets | $ | 1,981.8 | $ | 1,963.4 | $ | 1,989.9 | $ | 2,011.3 | |||||||
(1) | Equals the amount reported on our GAAP consolidated balance sheets. |
Discussion of Fair Value Results
The table below summarizes the change in the fair value of net assets for the nine months ended September 30, 2013.
Table 59 — Summary of Change in the Fair Value of Net Assets
Nine Months Ended September 30, 2013 | |||
(in billions) | |||
Beginning balance | $ | (58.3 | ) |
Changes in fair value of net assets, before capital transactions | 57.4 | ||
Capital transactions: | |||
Dividends and share issuances, net(1) | (17.2 | ) | |
Ending balance | $ | (18.1 | ) |
(1) | We did not receive funds from Treasury for the nine months ended September 30, 2013 under the Purchase Agreement. |
During the nine months ended September 30, 2013, the fair value of net assets, before capital transactions, increased by $57.4 billion. The increase in the fair value of net assets, before capital transactions, during the nine months ended September 30, 2013 was primarily due to: (a) the release of our valuation allowance against our net deferred tax assets; (b) an increase in the fair value of our single-family mortgage loans as the result of continued improvement in realized and expected
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home prices; and (c) improvement in the overall credit environment coupled with high estimated core spread income on our mortgage-related securities and a tightening of OAS levels on our non-agency single-family mortgage-related securities. See “Table 58 — Consolidated Fair Value Balance Sheets” for additional details.
When the OAS on a given asset widens, the fair value of that asset will typically decline, all other market factors being equal. However, we believe such OAS widening has the effect of increasing the likelihood that, in future periods, we will recognize income at a higher spread on this existing asset. The reverse is true when the OAS on a given asset tightens — current period fair values for that asset typically increase due to the tightening in OAS, while future income recognized on the asset is more likely to be earned at a reduced spread. However, as market conditions change, our estimate of expected fair value gains and losses from OAS may also change, and the actual core spread income recognized in future periods could be significantly different from current estimates.
OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain business arrangements that are not recorded on our consolidated balance sheets or may be recorded in amounts that differ from the full contract or notional amount of the transaction and that may expose us to potential losses in excess of the amounts recorded on our consolidated balance sheets.
We guarantee the payment of principal and interest on non-consolidated Freddie Mac mortgage-related securities we issue and on mortgage loans covered by our other guarantee commitments. Our maximum potential off-balance sheet exposure to credit losses relating to these securitization activities and the other guarantee commitments is primarily represented by the UPB of the underlying loans and securities, which was $94.0 billion and $74.2 billion at September 30, 2013 and December 31, 2012, respectively. We also enter into purchase commitments primarily related to future guarantor swap transactions for single-family loans, and, to a lesser extent, commitments to purchase or guarantee multifamily mortgage loans. These non-derivative commitments totaled $286.1 billion and $291.5 billion in notional amount at September 30, 2013 and December 31, 2012, respectively.
As part of the guarantee arrangements pertaining to certain multifamily housing revenue bonds and securities backed by multifamily housing revenue bonds, we provided commitments to advance funds, commonly referred to as “liquidity guarantees,” which were $9.9 billion and $10.2 billion at September 30, 2013 and December 31, 2012, 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. In addition, as part of the HFA initiative, we, together with Fannie Mae, provide liquidity guarantees for certain variable-rate single-family and multifamily housing revenue bonds, under which Freddie Mac generally is obligated to purchase 50% of any tendered bonds that cannot be remarketed within five business days. At September 30, 2013 and December 31, 2012, there were no liquidity guarantee advances outstanding.
We own interests in numerous entities that are considered to be VIEs for which we are not the primary beneficiary and which we do not consolidate in accordance with the accounting guidance for the consolidation of VIEs. These VIEs relate primarily to our investment activity in mortgage-related assets and non-mortgage assets, and include LIHTC partnerships, certain Other Guarantee Transactions, and certain asset-backed investment trusts. Our consolidated balance sheets reflect only our investment in the VIEs, rather than the full amount of the VIEs’ assets and liabilities. See “NOTE 3: VARIABLE INTEREST ENTITIES” in our 2012 Annual Report for additional information related to our variable interests in these VIEs.
For further information on our off-balance sheet arrangements, see “MD&A — Off-Balance Sheet Arrangements” in our 2012 Annual Report.
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: (a) the allowance for loan losses and the reserve for guarantee losses; (b) fair value measurements; (c) impairment recognition on investments in securities; and (d) our ability to realize net deferred tax assets. For additional information about our critical accounting policies and estimates and other significant accounting policies, as well as recently issued accounting guidance, see “MD&A — CRITICAL ACCOUNTING POLICIES AND ESTIMATES” in our 2012 Annual Report and “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in this Form 10-Q and our 2012 Annual Report. For additional information about our ability to realize net deferred tax assets, see “CONSOLIDATED BALANCE SHEETS ANALYSIS — Deferred Tax Assets and Liabilities.”
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FORWARD-LOOKING STATEMENTS
We regularly communicate information concerning our business activities to investors, the news media, securities analysts, and others as part of our normal operations. Some of these communications, including this Form 10-Q, contain “forward-looking statements,” including statements pertaining to the conservatorship, our current expectations and objectives for our efforts under the MHA Program, the servicing alignment initiative and other programs to assist the U.S. residential mortgage market, future business plans, liquidity, capital management, economic and market conditions and trends, market share, the effect of legislative and regulatory developments, implementation of new accounting guidance, credit losses, internal control remediation efforts, and results of operations and financial condition on a GAAP, Segment Earnings, and fair value basis. Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. Forward-looking statements are often accompanied by, and identified with, terms such as “objective,” “expect,” “trend,” “forecast,” “anticipate,” “believe,” “intend,” “could,” “future,” “may,” “will,” and similar phrases. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates, and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties, including those described in the “RISK FACTORS” sections of this Form 10-Q and our 2012 Annual Report, and:
• | the actions FHFA, Treasury, the Federal Reserve, the SEC, HUD, other federal agencies, the Administration, Congress, and our management may take, including actions related to implementing FHFA’s strategic plan for Freddie Mac and Fannie Mae’s conservatorships and the Conservatorship Scorecards; |
• | the effect of the restrictions and other terms of the conservatorship, the Purchase Agreement and the Warrant on our business, including payment of our dividend obligation on the senior preferred stock; |
• | our ability to maintain adequate liquidity to fund our operations, including following any changes in the support provided to us by Treasury or FHFA, a change in the credit ratings of our debt securities or a change in the credit rating of the U.S. government; |
• | changes in our charter or applicable legislative or regulatory requirements (including any restructuring or reorganization in the form of our company, whether we will remain a stockholder-owned company or continue to exist and whether we will be wound down or placed under receivership), regulations under the GSE Act, the Reform Act, or the Dodd-Frank Act, regulatory or legislative actions that require us to support non-mortgage market initiatives, changes to affordable housing goals regulation, reinstatement of regulatory capital requirements, or the exercise or assertion of additional regulatory or administrative authority; |
• | changes in housing or economic conditions, legislation or other factors that affect our assessment of our ability to realize our net deferred tax asset, and cause us to establish a valuation allowance against our net deferred tax asset; |
• | changes in the federal government’s fiscal and monetary policy (including the completion, modification or termination of the Federal Reserve’s program of purchasing Treasury securities and agency mortgage-related securities, or any sales of such securities, and any resulting impact on interest rates, home prices and the national economy); |
• | changes in the regulation of the mortgage, housing finance, and financial services industries, including changes caused by the Dodd-Frank Act, or any other legislative, regulatory, or judicial action at the federal, state, or local level; |
• | actions against mortgage originators and servicers, mortgage insurers, and other mortgage industry participants by federal or state authorities; |
• | the scope of various initiatives designed to help in the housing recovery (including the extent to which borrowers participate in HAMP, HARP, the non-HAMP standard loan modification initiative, the streamlined non-HAMP modification initiative, and the recent short sale initiative), and the effect of such programs on our credit losses, expenses, and the size and composition of our mortgage-related investments portfolio; |
• | the effect of the lengthening of the foreclosure timeline; |
• | the ability of our financial, accounting, data processing, and other operating systems or infrastructure, and those of our vendors to process the complexity and volume of our transactions; |
• | changes in accounting or tax guidance or in our accounting policies or estimates, and our ability to effectively implement any such changes in guidance, policies, or estimates; |
• | changes in general regional, national, or international economic, business, or market conditions and competitive pressures, including changes in employment rates and interest rates; |
• | changes in the U.S. residential mortgage market, including changes in the rate of growth in total outstanding U.S. residential mortgage debt, the size of the U.S. residential mortgage market, and home prices; |
• | our ability to effectively implement our business strategies, including any efforts to improve the supply and liquidity of, and demand for, our mortgage-related and debt securities, and restrictions on our ability to offer new products or engage in new activities; |
• | our ability to recruit and retain executive officers and other key employees; |
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• | our ability to effectively identify and manage credit, interest-rate, operational, and other risks in our business, including changes to the credit environment and the levels and volatilities of interest rates, as well as the shape and slope of the yield curves; |
• | the effects of internal control deficiencies and our ability to effectively identify, assess, evaluate, manage, mitigate, or remediate control deficiencies and risks, including material weaknesses and significant deficiencies, in our internal control over financial reporting and disclosure controls and procedures; |
• | incomplete or inaccurate information provided by customers and counterparties; |
• | consolidation among, or adverse changes in the financial condition of, our customers and counterparties; |
• | the failure of our customers and counterparties to fulfill their obligations to us, and the potential cost and difficulty of legally enforcing those obligations. These obligations include, for example: (a) the obligation of seller/servicers to repurchase loans sold to us in breach of their representations and warranties, and (b) the obligation of mortgage insurers to pay our claims in full; |
• | changes in our judgments, assumptions, forecasts, or estimates regarding the volume of our business and spreads we expect to earn; |
• | the availability of options, interest-rate and currency swaps, and other derivative financial instruments of the types and quantities, on acceptable terms, and with acceptable counterparties needed for investment funding and risk management purposes; |
• | changes in pricing, valuation or other methodologies, models, assumptions, judgments, estimates and/or other measurement techniques, or their respective reliability; |
• | changes in mortgage-to-debt OAS; |
• | the potential effect on the market for our securities resulting from any purchases or sales by any large investor, including the Federal Reserve, of Freddie Mac debt or mortgage-related securities; |
• | adverse judgments or settlements in connection with legal proceedings, governmental investigations, and IRS examinations; |
• | volatility of reported results due to changes in the fair value of certain instruments or assets; |
• | the development of different types of mortgage servicing structures and servicing compensation; |
• | preferences of originators in selling into the secondary mortgage market; |
• | changes to our underwriting or servicing requirements (including servicing alignment efforts under the servicing alignment initiative), our practices with respect to the disposition of REO properties, or investment standards for mortgage-related products; |
• | investor preferences for mortgage loans and mortgage-related and debt securities compared to other investments; |
• | borrower preferences for fixed-rate mortgages versus ARMs; |
• | the occurrence of a major natural or other disaster in geographic areas in which our offices or portions of our total mortgage portfolio are concentrated; |
• | other factors and assumptions described in this Form 10-Q, our Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013, and our 2012 Annual Report, including in the “MD&A” sections; |
• | our assumptions and estimates regarding the foregoing and our ability to anticipate the foregoing factors and their effects; and |
• | market reactions to the foregoing. |
Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statements we make to reflect events or circumstances occurring after the date of this Form 10-Q.
RISK MANAGEMENT AND DISCLOSURE COMMITMENTS
Under an agreement with FHFA, we have committed to provide certain disclosures, including the interest-rate risk and credit risk sensitivity disclosures discussed below. FHFA has suspended certain other disclosure commitments under the agreement. For more information, see “MD&A — RISK MANAGEMENT AND DISCLOSURE COMMITMENTS” in our 2012 Annual Report.
For disclosures concerning our PMVS and duration gap, see “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — Interest-Rate and Other Market Risks — PMVS and Duration Gap.” Our monthly average PMVS results, duration gap, and related disclosures are provided in our Monthly Volume Summary reports, which are available on our web site, www.freddiemac.com and in current reports on Form 8-K we file with the SEC. For disclosures concerning credit risk sensitivity, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Credit Risk Sensitivity.”
LEGISLATIVE AND REGULATORY MATTERS
Legislation Related to Freddie Mac and its Future Status
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Our future structure and role will be determined by the Administration and Congress, and there are likely to be significant changes beyond the near-term. Congress continues to hold hearings and consider legislation on the future state of Freddie Mac, Fannie Mae and the housing finance system.
Several bills related to Freddie Mac, Fannie Mae and the future of the mortgage finance system were introduced in Congress in June and July 2013, as discussed in “MD&A — LEGISLATIVE AND REGULATORY MATTERS - Legislation Related to Freddie Mac and its Future Status” in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013. We anticipate that other bills will be introduced. We cannot predict whether any of such bills might be enacted.
For more information, see “RISK FACTORS — Conservatorship and Related Matters — The future status and role of Freddie Mac is uncertain and could be materially adversely affected by legislative and regulatory action that alters the ownership, structure, and mission of the company” in our 2012 Annual Report.
FHFA Advisory Bulletin
On April 9, 2012, FHFA issued Advisory Bulletin AB 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention.” This Advisory Bulletin will, among other provisions, require that we classify the portion of the loan balance in excess of the fair value of the underlying property, less costs to sell, adjusted for any credit enhancements, as a “loss” no later than when an outstanding single-family loan becomes 180 days delinquent, except in certain specified circumstances (such as those involving properly secured loans with an LTV ratio equal to or less than 60%). The Advisory Bulletin also requires classification of the portion of the loan balance in excess of the fair value of the underlying property, less costs to sell, adjusted for any credit enhancements, as a “loss” for single-family loans within 60 days of notification of a bankruptcy filing by the borrower, unless it can be clearly demonstrated and documented that repayment is likely to occur. For multifamily loans, the Advisory Bulletin will require any portion of a loan balance that exceeds the amount secured by the fair value of the collateral, less costs to sell, where there are no available and reliable sources of repayment other than the sale of the underlying real estate collateral, to be classified as a “loss.”
The Advisory Bulletin will require us to charge off the portion of the loan classified as a “loss.” Under our existing accounting policy and upon adoption of the Advisory Bulletin, the ultimate amount of losses we realize on loans will be the same; however, the timing of when the losses will be recorded will differ.
On May 13, 2013, FHFA issued an additional Advisory Bulletin clarifying the implementation timeline for AB 2012-02, requiring that: (a) the asset classification provisions of AB 2012-02 should be implemented by January 1, 2014; and (b) the charge-off provisions of AB 2012-02 should be implemented no later than January 1, 2015.
The Advisory Bulletin will require us to change our practice for determining when a loan is deemed to be uncollectible. We will work with FHFA to consider how the Advisory Bulletin may impact our credit risk management practices. Our current practice is based on our historical loss data and results in a loan being deemed to be uncollectible at the date of foreclosure or other liquidation event (such as a deed-in-lieu of foreclosure or a short sale). The Advisory Bulletin will require us to determine a loan is uncollectible when the loan becomes 180 days delinquent.
The Advisory Bulletin will not have an impact on the approach we use to estimate the allowance for loan losses for our single-family and multifamily loans that are not classified as a “loss.” We establish an allowance for loan losses against these loans either through our collective loss reserve or through our loss reserve for individually impaired loans. Thus, at the time loans become 180 days delinquent, we have already established loss reserves against them. However, under the Advisory Bulletin, the amount of the charge-off for loans classified as a “loss” is likely to exceed the allowance for loan losses because the charge-off will not be reduced by the benefit we expect from borrower reperformance on those loans, which is considered in our current allowance for loan losses methodology. As a result, we will record an additional provision for loan losses at the time a loan is classified as a “loss,” and we will record an offsetting amount of income in future periods as certain loans that are classified as a “loss” reperform.
Our financial results will be impacted by two separate populations of loans upon adoption of the Advisory Bulletin: (a) single-family loans that are classified as a “loss” because they are 180 days or more delinquent; and (b) single-family loans that are classified as a “loss” due to a bankruptcy filing by the borrower. We do not expect a significant impact to our financial results from multifamily loans that are classified as a “loss.”
As of September 30, 2013, we estimate that single-family loans with an unpaid principal balance of approximately $29.6 billion were 180 days or more delinquent and would have been classified as a “loss” under the provisions of the Advisory Bulletin. As of September 30, 2013, we have recognized an allowance for loan losses of $6.8 billion for probable incurred losses on those loans. By measuring impairment for those loans based on the fair value of the underlying collateral without consideration for estimated cash flows from borrowers that may reperform, we estimate that the amount of the charge-off we would need to record on those loans would be $8.7 billion. As a result, if we were to adopt the Advisory Bulletin as of September 30, 2013, we would need to record additional losses of $1.9 billion in order to write those loans down to the fair value of the underlying collateral. We would expect to record loss recoveries as additional income on those loans in future periods, as certain of those loans reperform and we recover amounts previously charged off. We also estimate that the amount of the additional losses that we will need to record with respect to loans that are 180 days or more delinquent to adopt the
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Advisory Bulletin on January 1, 2015, will be lower than the $1.9 billion estimate as of September 30, 2013 because we expect our population of loans that are 180 days or more delinquent to decline between September 30, 2013 and December 31, 2014.
As of September 30, 2013, we are not able to assess the impact of adoption of the Advisory Bulletin on our financial results with respect to the population of single-family loans that would be classified as a “loss” due to a bankruptcy filing by the borrower. However, we believe that the impact of adoption with respect to those loans will be substantially lower than the impact from the population of loans that are 180 days or more delinquent.
The estimates presented above, which required significant management judgment, are based on our current interpretation of certain significant issues under the Advisory Bulletin, such as how to apply the guidance to loans that reperform after having previously been 180 days or more delinquent. In turn, these interpretations are based on discussions with and guidance from FHFA. These discussions are ongoing, and we continue to work with FHFA and Fannie Mae to assess the operational and accounting impacts of the Advisory Bulletin. As a result, these estimates are subject to potentially significant change.
In addition, we have received a comment letter from the SEC Division of Corporation Finance, dated August 6, 2013, regarding our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. This comment letter contains a comment and several questions specifically related to our adoption of the Advisory Bulletin. We filed written responses to the comments with the SEC on August 20, 2013. We continue to work with the SEC staff to clarify the impact of the adoption of the Advisory Bulletin on our financial results.
Dodd-Frank Act
The Dodd-Frank Act, which was signed into law on July 21, 2010, significantly changed the regulation of the financial services industry, including by creating new standards related to regulatory oversight of systemically important financial companies, derivatives, capital requirements, asset-backed securitization, mortgage underwriting, and consumer financial protection. The Dodd-Frank Act has directly affected and will continue to directly affect the business and operations of Freddie Mac by subjecting us to new and additional regulatory oversight and standards, including with respect to our activities and products. We may also be affected by provisions of the Dodd-Frank Act and implementing regulations that affect the activities of servicers, banks, savings institutions, insurance companies, securities dealers, and other regulated entities that are our customers and counterparties.
Recent developments with respect to Dodd-Frank rulemakings that may have a significant impact on Freddie Mac include an August 2013 rule proposal concerning credit risk retention. This rule, jointly proposed by six agencies, including FHFA, revises a 2011 proposal that would implement the credit risk retention requirements of the Dodd-Frank Act. The rule generally would require a securitizer of asset-backed securities to retain no less than five percent of the credit risk of the assets underlying such securities. The rule would provide an exemption from this requirement for asset-backed securities collateralized exclusively by qualified residential mortgages (or “QRMs”), and would define a QRM by reference to the definition of a “qualified mortgage” under the Truth in Lending Act. The proposal also requests comment on an alternative definition of QRM that would significantly reduce the number of loans that would qualify as QRM. As in the 2011 proposal, Freddie Mac’s fully guaranteed securitizations generally would satisfy the risk retention requirements for so long as we are in conservatorship or receivership and receiving federal financial support. This exemption would not apply to securitization structures that are not fully guaranteed. The effective date of any final risk retention rule with respect to residential mortgage securitizations will be one year after such rule is finalized.
We continue to review and assess the impact of rulemakings and other activities under the Dodd-Frank Act. For more information, see “RISK FACTORS — Legal and Regulatory Risks — The Dodd-Frank Act and related regulation may adversely affect our business activities and financial results” in our 2012 Annual Report.
FHFA Request for Public Input on Reducing Freddie Mac and Fannie Mae Multifamily Businesses
On August 9, 2013, FHFA announced that it is evaluating alternatives for reducing Freddie Mac and Fannie Mae’s presence in the multifamily housing finance market in 2014 and is seeking public input on the potential market impact of various strategies. FHFA stated that the strategies may include:
• | Restrictions on available loan terms; |
• | Simplification and standardization of loan products; |
• | Limits on property financing; |
• | Limits on business activities; and, |
• | Other options that FHFA should consider to contract the enterprises’ multifamily businesses. |
Input from the public was due October 8, 2013 in order for FHFA to consider the responses for potential inclusion in our 2014 Conservatorship Scorecard and provide for continued gradual contraction of the GSEs' multifamily business.
Litigation Against the U.S. Government Concerning Conservatorship and the Purchase Agreement
In June, July and September 2013, a number of lawsuits were filed against the U.S. government and, in some cases, the Secretary of the Treasury and the Acting Director of FHFA challenging certain government actions related to the
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conservatorship (including actions taken in connection with the imposition of conservatorship) and the Purchase Agreement. Several of the lawsuits seek to invalidate the net worth sweep dividend provisions of the senior preferred stock, which were implemented pursuant to the August 2012 amendment to the Purchase Agreement. Another lawsuit seeks to require us to make payments to an affordable housing trust fund managed by HUD, as discussed in “LEGAL PROCEEDINGS.” It is possible that similar lawsuits will be filed in the future. Freddie Mac is not a party to these lawsuits. However, a number of lawsuits have been filed against Freddie Mac concerning the August 2012 amendment to the Purchase Agreement. See “NOTE 17: LEGAL CONTINGENCIES- Litigation Concerning the Purchase Agreement” for more information.
It is not possible for us to predict the outcome of these lawsuits, or the actions the U.S. government (including Treasury or FHFA) might take in response to any ruling or finding in any of these lawsuits or any future lawsuits. However, it is possible that we could be adversely affected by these events, including, for example, by changes to the Purchase Agreement, or any resulting actual or perceived changes in the level of U.S. government support for our business.
Termination of Certain Retirement Plans
On October 24, 2013, we received a directive from FHFA to terminate our tax-qualified defined benefit plan and certain non-qualified retirement plans. There will be no further accruals under these plans after December 31, 2013. For additional information, see our current report on Form 8-K dated October 25, 2013 that was filed with the SEC.
Affordable Housing Goals and Results for 2012
In October 2013, FHFA informed us that it had reviewed our performance with respect to the affordable housing goals for 2012, and determined that we achieved all of our single-family affordable housing goals and both multifamily goals. Our performance on the goals, as determined by FHFA, is set forth below.
Table 60 — Affordable Housing Goals and Results for 2012
Goals for 2012 | Market Level for 2012(1) | Results for 2012 | |||||||
Single-family purchase money goals (benchmark levels): | |||||||||
Low-income | 23 | % | 26.6 | % | 24.4 | % | |||
Very low-income | 7 | % | 7.7 | % | 7.1 | % | |||
Low-income areas(2) | 20 | % | 20.5 | % | 20.6 | % | |||
Low-income areas subgoal | 11 | % | 13.6 | % | 11.4 | % | |||
Single-family refinance low-income goal (benchmark level) | 20 | % | 22.3 | % | 22.4 | % | |||
Multifamily low-income goal (in units) | 225,000 | N/A | 298,529 | ||||||
Multifamily low-income subgoal (in units) | 59,000 | N/A | 60,084 | ||||||
(1) | Determined by FHFA based on its analysis of market data for 2012. |
(2) | FHFA will annually set the benchmark level for the low-income areas goal based on the benchmark level for the low-income areas subgoal, plus an adjustment factor reflecting the additional incremental share of mortgages for low- and moderate-income families in designated disaster areas in the most recent year for which such data are available. For 2012, FHFA set the benchmark level for the low-income areas goal at 20%. |
For more information, see "BUSINESS — Regulation and Supervision — Federal Housing Finance Agency — Affordable Housing Goals" in our 2012 Annual Report.
Lender-Placed Insurance
On November 5, 2013, FHFA announced that it has directed Freddie Mac and Fannie Mae to prohibit servicers from being reimbursed for expenses associated with captive reinsurance arrangements. In March 2013, FHFA published a notice on certain lender-placed insurance practices and indicated that it planned a broader review of lender-placed insurance issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest-Rate Risk and Other Market Risks
Our investments in mortgage assets (i.e., mortgage loans and mortgage-related securities) expose us to interest-rate risk and other market risks, including basis and spread risk, arising primarily from the uncertainty as to when borrowers will pay the outstanding principal balance of mortgage loans and mortgage-related securities, known as prepayment risk, and the resulting potential mismatch in the timing of our receipt of cash flows related to our assets versus the timing of payment of cash flows related to the liabilities we use to fund those assets. Differences from expectations or changes in prepayments, basis, or spreads could result in significant economic losses and have an adverse impact on earnings. In addition, these risks could result in realized losses upon the sale of assets. While we do manage interest rate risk, we have limited ability to manage basis and spread risk. See “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK — Interest-Rate Risk and Other Market Risks” in our 2012 Annual Report for a discussion of our market risk exposures, including those related to derivatives, institutional counterparties, and other market risks.
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PMVS and Duration Gap
Our primary interest-rate risk measures are PMVS and duration gap.
PMVS is an estimate of the change in the market value of our net assets and liabilities from an instantaneous 50 basis point shock to interest rates, assuming no rebalancing actions are undertaken and assuming the mortgage-to-LIBOR basis does not change. PMVS is measured in two ways, one measuring the estimated sensitivity of our portfolio market value to parallel movements in interest rates (PMVS-Level or PMVS-L) and the other to nonparallel movements (PMVS-YC).
Duration gap measures the difference in price sensitivity to interest rate changes between our assets and liabilities, and is expressed in months relative to the market value of assets. For example, assets with a six month duration and liabilities with a five month duration would result in a positive duration gap of one month. A duration gap of zero implies that the duration of our assets equals the duration of our liabilities.
The 50 basis point shift and 25 basis point change in slope of the LIBOR yield curve used for our PMVS measures reflect reasonably possible near-term changes that we believe provide a meaningful measure of our interest-rate risk sensitivity. Our PMVS measures assume instantaneous shocks. Therefore, these PMVS measures do not consider the effects on fair value of any rebalancing actions that we would typically expect to take to reduce our risk exposure.
Limitations of Market Risk Measures
Our PMVS and duration gap estimates are determined using models that involve our judgment of interest-rate and prepayment assumptions. Accordingly, while we believe that PMVS and duration gap are useful risk management tools, they should be understood as estimates rather than as precise measurements. There could be times when we hedge differently than our model estimates during the period (e.g., when we are making changes or market updates to these models). In those cases where we hedge differently than the model estimate, we still operate within our risk limits. While PMVS and duration gap estimate our exposure to changes in interest rates, they do not capture the potential impact of certain other market risks, such as changes in volatility, basis, and foreign-currency risk. The impact of these other market risks can be significant.
There are inherent limitations in any methodology used to estimate exposure to changes in market interest rates. Our sensitivity analyses for PMVS and duration gap contemplate only certain movements in interest rates and are performed at a particular point in time based on the estimated fair value of our existing portfolio. These sensitivity analyses do not consider other factors that may have a significant effect on our financial instruments, most notably business activities and strategic actions that management may take in the future to manage interest-rate risk. As such, these analyses are not intended to provide precise forecasts of the effect a change in market interest rates would have on the estimated fair value of our net assets.
In addition, it has been more difficult in recent years to measure and manage the interest-rate risk related to mortgage assets as risk for prepayment model error remains high due to the low interest rate environment and uncertainty regarding default rates, unemployment, government policy changes and programs, loan modifications, and the volatility and impact of home price movements on mortgage durations. Misestimation of prepayments could result in significant economic losses and have an adverse impact on earnings. In addition, this misestimation could result in realized losses upon the sale of assets.
Duration Gap and PMVS Results
The table below provides duration gap, estimated point-in-time and minimum and maximum PMVS-L and PMVS-YC results, and an average of the daily values and standard deviation for the three and nine months ended September 30, 2013 and 2012. The table below also provides PMVS-L estimates assuming an immediate 100 basis point shift in the LIBOR yield curve. We do not hedge the entire prepayment risk exposure embedded in our mortgage assets. The interest-rate sensitivity of a mortgage portfolio varies across a wide range of interest rates. Therefore, the difference between PMVS at 50 basis points and 100 basis points is non-linear.
Our PMVS-L (50 basis points) exposure at September 30, 2013 was $399 million, which increased compared to December 31, 2012 primarily due to an increase in our duration exposure. On an average basis for the three and nine months ended September 30, 2013, our PMVS-L (50 basis points) was $271 million and $287 million, respectively, primarily resulting from our negative convexity exposure on our mortgage assets.
To improve the accuracy of our models, we make changes to the underlying assumptions or modeling techniques on a periodic basis.
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Table 61 — PMVS and Duration Gap Results
PMVS-YC | PMVS-L | |||||||||||||||||||||
25 bps | 50 bps | 100 bps | ||||||||||||||||||||
(in millions) | ||||||||||||||||||||||
Assuming shifts of the LIBOR yield curve: | ||||||||||||||||||||||
September 30, 2013 | $ | 60 | $ | 399 | $ | 874 | ||||||||||||||||
December 31, 2012 | $ | 61 | $ | 209 | $ | 737 | ||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||
Duration Gap | PMVS-YC 25 bps | PMVS-L 50 bps | Duration Gap | PMVS-YC 25 bps | PMVS-L 50 bps | |||||||||||||||||
(in months) | (dollars in millions) | (in months) | (dollars in millions) | |||||||||||||||||||
Average | (0.5 | ) | $ | 26 | $ | 271 | (0.6 | ) | $ | 52 | $ | 215 | ||||||||||
Minimum | (1.6 | ) | $ | 2 | $ | 159 | (2.4 | ) | $ | 1 | $ | — | ||||||||||
Maximum | 0.8 | $ | 67 | $ | 451 | 0.6 | $ | 116 | $ | 661 | ||||||||||||
Standard deviation | 0.5 | $ | 18 | $ | 64 | 0.6 | $ | 35 | $ | 159 | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||
2013 | 2012 | |||||||||||||||||||||
Duration Gap | PMVS-YC 25 bps | PMVS-L 50 bps | Duration Gap | PMVS-YC 25 bps | PMVS-L 50 bps | |||||||||||||||||
(in months) | (dollars in millions) | (in months) | (dollars in millions) | |||||||||||||||||||
Average | (0.1 | ) | $ | 24 | $ | 287 | (0.2 | ) | $ | 29 | $ | 198 | ||||||||||
Minimum | (1.6 | ) | $ | — | $ | 152 | (2.4 | ) | $ | 1 | $ | — | ||||||||||
Maximum | 1.6 | $ | 68 | $ | 586 | 0.6 | $ | 116 | $ | 661 | ||||||||||||
Standard deviation | 0.5 | $ | 16 | $ | 75 | 0.5 | $ | 28 | $ | 105 | ||||||||||||
Derivatives have historically enabled us to reduce our interest-rate risk exposure, which could have been higher without the use of derivatives. The table below shows that the PMVS-L risk levels for the periods presented would have been higher if we had not used derivatives. The derivative impact on our PMVS-L (50 basis points) was $(1.3) billion at September 30, 2013, an increase of $0.4 billion from December 31, 2012. The increase was primarily driven by hedging an increase in the duration of our mortgage assets caused by the increase in interest rates during 2013.
Table 62 — Derivative Impact on PMVS-L (50 bps)
Before Derivatives | After Derivatives | Effect of Derivatives | |||||||||
(in millions) | |||||||||||
At: | |||||||||||
September 30, 2013 | $ | 1,687 | $ | 399 | $ | (1,288 | ) | ||||
December 31, 2012 | $ | 1,102 | $ | 209 | $ | (893 | ) | ||||
The disclosure in our Monthly Volume Summary reports, which are available on our web site at www.freddiemac.com and in current reports on Form 8-K we file with the SEC, reflects the average of the daily PMVS-L, PMVS-YC and duration gap estimates for a given reporting period (a month, quarter or year).
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to management of the company, including the company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we must apply judgment in implementing possible controls and procedures.
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Management, including the company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2013. As a result of management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2013, at a reasonable level of assurance, because we have not been able to update our disclosure controls and procedures to provide reasonable assurance that information known by FHFA on an ongoing basis is communicated from FHFA to Freddie Mac’s management in a manner that allows for timely decisions regarding our required disclosure. Based on discussions with FHFA and the structural nature of this continuing weakness, we believe it is likely that we will not remediate this material weakness while we are under conservatorship. We consider this situation to be a material weakness in our internal control over financial reporting. For more information, see “CONTROLS AND PROCEDURES — Management’s Report on Internal Control Over Financial Reporting” in our 2012 Annual Report.
Changes in Internal Control Over Financial Reporting During the Quarter Ended September 30, 2013
We evaluated the changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2013 and concluded that the following matters have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:
• | Linda B. Bammann, a member of Freddie Mac's Board of Directors and Chair of the Board's Business and Risk Committee, resigned from the Board effective July 31, 2013. Steven W. Kohlhagen was subsequently appointed as Chair of the Committee on an interim basis. |
• | On September 30, 2013, we announced that James G. Mackey will be joining Freddie Mac during the week of November 11, 2013 as our new Executive Vice President — Chief Financial Officer. |
Mitigating Actions Related to the Material Weakness in Internal Control Over Financial Reporting
As described above in “Evaluation of Disclosure Controls and Procedures,” we have one material weakness in internal control over financial reporting as of September 30, 2013 that we have not remediated.
Given the structural nature of this material weakness, we believe it is likely that we will not remediate it while we are under conservatorship. However, both we and FHFA have continued to engage in activities and employ procedures and practices intended to permit accumulation and communication to management of information needed to meet our disclosure obligations under the federal securities laws. These include the following:
• | FHFA has established the Office of Conservatorship Operations, which is intended to facilitate operation of the company with the oversight of the Conservator. |
• | We provide drafts of our SEC filings to FHFA personnel for their review and comment prior to filing. We also provide drafts of external press releases, statements and speeches to FHFA personnel for their review and comment prior to release. |
• | FHFA personnel, including senior officials, review our SEC filings prior to filing, including this Form 10-Q, and engage in discussions regarding issues associated with the information contained in those filings. Prior to filing this Form 10-Q, FHFA provided us with a written acknowledgement that it had reviewed the Form 10-Q, was not aware of any material misstatements or omissions in the Form 10-Q, and had no objection to our filing the Form 10-Q. |
• | The Acting Director of FHFA is in frequent communication with our Chief Executive Officer, typically meeting (in person or by phone) on at least a bi-weekly basis. |
• | FHFA representatives hold frequent meetings with various groups within the company to enhance the flow of information and to provide oversight on a variety of matters, including accounting, credit and capital markets management, external communications, and legal matters. |
• | Senior officials within FHFA’s accounting group meet frequently with our senior financial executives regarding our accounting policies, practices, and procedures. |
In view of our mitigating actions related to this material weakness, we believe that our interim consolidated financial statements for the quarter ended September 30, 2013 have been prepared in conformity with GAAP.
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ITEM 1. FINANCIAL STATEMENTS
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FREDDIE MAC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(in millions, except share-related amounts) | |||||||||||||||
Interest income | |||||||||||||||
Mortgage loans: | |||||||||||||||
Held by consolidated trusts | $ | 14,197 | $ | 15,838 | $ | 42,798 | $ | 50,112 | |||||||
Unsecuritized | 1,872 | 2,108 | 5,898 | 6,644 | |||||||||||
Total mortgage loans | 16,069 | 17,946 | 48,696 | 56,756 | |||||||||||
Investments in securities | 1,871 | 2,522 | 6,047 | 8,237 | |||||||||||
Other | 7 | 26 | 37 | 60 | |||||||||||
Total interest income | 17,947 | 20,494 | 54,780 | 65,053 | |||||||||||
Interest expense | |||||||||||||||
Debt securities of consolidated trusts | (11,523 | ) | (13,584 | ) | (35,262 | ) | (43,462 | ) | |||||||
Other debt | (2,041 | ) | (2,493 | ) | (6,473 | ) | (7,969 | ) | |||||||
Total interest expense | (13,564 | ) | (16,077 | ) | (41,735 | ) | (51,431 | ) | |||||||
Expense related to derivatives | (107 | ) | (148 | ) | (360 | ) | (467 | ) | |||||||
Net interest income | 4,276 | 4,269 | 12,685 | 13,155 | |||||||||||
Benefit (provision) for credit losses | 1,138 | (610 | ) | 2,264 | (2,590 | ) | |||||||||
Net interest income after benefit (provision) for credit losses | 5,414 | 3,659 | 14,949 | 10,565 | |||||||||||
Non-interest income (loss) | |||||||||||||||
Gains (losses) on extinguishment of debt securities of consolidated trusts | 135 | (34 | ) | 197 | (39 | ) | |||||||||
Gains (losses) on retirement of other debt | 143 | 11 | 136 | (55 | ) | ||||||||||
Gains (losses) on debt recorded at fair value | (28 | ) | (10 | ) | (13 | ) | 35 | ||||||||
Derivative gains (losses) | (74 | ) | (488 | ) | 1,663 | (2,426 | ) | ||||||||
Impairment of available-for-sale securities: | |||||||||||||||
Total other-than-temporary impairment of available-for-sale securities | (130 | ) | (332 | ) | (169 | ) | (942 | ) | |||||||
Portion of other-than-temporary impairment recognized in AOCI | 4 | 65 | (44 | ) | 13 | ||||||||||
Net impairment of available-for-sale securities recognized in earnings | (126 | ) | (267 | ) | (213 | ) | (929 | ) | |||||||
Other gains (losses) on investment securities recognized in earnings | 620 | (330 | ) | (153 | ) | (974 | ) | ||||||||
Other income (loss) | 1,019 | 558 | 1,152 | 1,561 | |||||||||||
Non-interest income (loss) | 1,689 | (560 | ) | 2,769 | (2,827 | ) | |||||||||
Non-interest expense | |||||||||||||||
Salaries and employee benefits | (207 | ) | (202 | ) | (626 | ) | (605 | ) | |||||||
Professional services | (144 | ) | (93 | ) | (387 | ) | (245 | ) | |||||||
Occupancy expense | (14 | ) | (15 | ) | (41 | ) | (43 | ) | |||||||
Other administrative expenses | (90 | ) | (91 | ) | (277 | ) | (246 | ) | |||||||
Total administrative expenses | (455 | ) | (401 | ) | (1,331 | ) | (1,139 | ) | |||||||
Real estate owned operations income (expense) | 79 | 49 | 183 | (92 | ) | ||||||||||
Other expenses | (201 | ) | (121 | ) | (551 | ) | (374 | ) | |||||||
Non-interest expense | (577 | ) | (473 | ) | (1,699 | ) | (1,605 | ) | |||||||
Income before income tax benefit | 6,526 | 2,626 | 16,019 | 6,133 | |||||||||||
Income tax benefit | 23,960 | 302 | 24,036 | 392 | |||||||||||
Net income | 30,486 | 2,928 | 40,055 | 6,525 | |||||||||||
Other comprehensive income (loss), net of taxes and reclassification adjustments: | |||||||||||||||
Changes in unrealized gains (losses) related to available-for-sale securities | (127 | ) | 2,599 | 1,436 | 3,508 | ||||||||||
Changes in unrealized gains (losses) related to cash flow hedge relationships | 76 | 102 | 250 | 320 | |||||||||||
Changes in defined benefit plans | 2 | 1 | 24 | (42 | ) | ||||||||||
Total other comprehensive income (loss), net of taxes and reclassification adjustments | (49 | ) | 2,702 | 1,710 | 3,786 | ||||||||||
Comprehensive income | $ | 30,437 | $ | 5,630 | $ | 41,765 | $ | 10,311 | |||||||
Net income | $ | 30,486 | $ | 2,928 | $ | 40,055 | $ | 6,525 | |||||||
Undistributed net worth sweep and senior preferred stock dividends | (30,436 | ) | (1,809 | ) | (41,764 | ) | (5,421 | ) | |||||||
Net income (loss) attributable to common stockholders | $ | 50 | $ | 1,119 | $ | (1,709 | ) | $ | 1,104 | ||||||
Net income (loss) per common share — basic and diluted | $ | 0.02 | $ | 0.35 | $ | (0.53 | ) | $ | 0.34 | ||||||
Weighted average common shares outstanding (in thousands) — basic and diluted | 3,237,771 | 3,239,477 | 3,238,196 | 3,240,241 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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FREDDIE MAC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 2013 | December 31, 2012 | ||||||
(in millions, except share-related amounts) | |||||||
Assets | |||||||
Cash and cash equivalents (includes $1 and $1, respectively, related to our consolidated VIEs) | $ | 9,532 | $ | 8,513 | |||
Restricted cash and cash equivalents (includes $5,651 and $14,289, respectively, related to our consolidated VIEs) | 5,755 | 14,592 | |||||
Federal funds sold and securities purchased under agreements to resell (includes $11,300 and $19,250, respectively, related to our consolidated VIEs) | 41,023 | 37,563 | |||||
Investments in securities: | |||||||
Available-for-sale, at fair value (includes $79 and $132, respectively, pledged as collateral that may be repledged) | 139,798 | 174,896 | |||||
Trading, at fair value (includes $215 and $0, respectively, pledged as collateral that may be repledged) | 52,647 | 41,492 | |||||
Total investments in securities | 192,445 | 216,388 | |||||
Mortgage loans: | |||||||
Held-for-investment, at amortized cost: | |||||||
By consolidated trusts (net of allowances for loan losses of $2,733 and $4,919, respectively) | 1,526,070 | 1,495,932 | |||||
Unsecuritized (net of allowances for loan losses of $22,128 and $25,788, respectively) | 152,949 | 176,177 | |||||
Total held-for-investment mortgage loans, net | 1,679,019 | 1,672,109 | |||||
Held-for-sale, at fair value | 10,475 | 14,238 | |||||
Total mortgage loans, net | 1,689,494 | 1,686,347 | |||||
Accrued interest receivable (includes $5,127 and $5,426, respectively, related to our consolidated VIEs) | 6,340 | 6,875 | |||||
Derivative assets, net | 928 | 657 | |||||
Real estate owned, net (includes $44 and $45, respectively, related to our consolidated VIEs) | 4,368 | 4,378 | |||||
Deferred tax assets, net | 23,930 | 778 | |||||
Other assets (Note 19) (includes $2,542 and $7,986, respectively, related to our consolidated VIEs) | 7,970 | 13,765 | |||||
Total assets | $ | 1,981,785 | $ | 1,989,856 | |||
Liabilities and equity (deficit) | |||||||
Liabilities | |||||||
Accrued interest payable (includes $4,695 and $5,142, respectively, related to our consolidated VIEs) | $ | 6,504 | $ | 7,710 | |||
Debt, net: | |||||||
Debt securities of consolidated trusts held by third parties (includes $72 and $70 at fair value, respectively) | 1,419,909 | 1,419,524 | |||||
Other debt (includes $2,031 and $2,187 at fair value, respectively) | 515,668 | 547,518 | |||||
Total debt, net | 1,935,577 | 1,967,042 | |||||
Derivative liabilities, net | 389 | 178 | |||||
Other liabilities (Note 19) (includes $1 and $1, respectively, related to our consolidated VIEs) | 5,879 | 6,099 | |||||
Total liabilities | 1,948,349 | 1,981,029 | |||||
Commitments and contingencies (Notes 9, 14, and 17) | |||||||
Equity (deficit) | |||||||
Senior preferred stock, at redemption value | 72,336 | 72,336 | |||||
Preferred stock, at redemption value | 14,109 | 14,109 | |||||
Common stock, $0.00 par value, 4,000,000,000 shares authorized, 725,863,886 shares issued and 650,039,533 shares and 650,033,623 shares outstanding, respectively | — | — | |||||
Additional paid-in capital | — | 1 | |||||
Retained earnings (accumulated deficit) | (47,896 | ) | (70,796 | ) | |||
AOCI, net of taxes, related to: | |||||||
Available-for-sale securities (includes $2,644 and $6,606, respectively, related to net unrealized losses on securities for which other-than-temporary impairment has been recognized in earnings) | (8 | ) | (1,444 | ) | |||
Cash flow hedge relationships | (1,066 | ) | (1,316 | ) | |||
Defined benefit plans | (154 | ) | (178 | ) | |||
Total AOCI, net of taxes | (1,228 | ) | (2,938 | ) | |||
Treasury stock, at cost, 75,824,353 shares and 75,830,263 shares, respectively | (3,885 | ) | (3,885 | ) | |||
Total equity (deficit) (See NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT) for information on our dividend obligation to Treasury) | 33,436 | 8,827 | |||||
Total liabilities and equity (deficit) | $ | 1,981,785 | $ | 1,989,856 | |||
The accompanying notes are an integral part of these consolidated financial statements.
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FREDDIE MAC
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
(UNAUDITED)
Shares Outstanding | Senior Preferred Stock, at Redemption Value | Preferred Stock, at Redemption Value | Common Stock, at Par Value | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | AOCI, Net of Tax | Treasury Stock, at Cost | Total Equity (Deficit) | ||||||||||||||||||||||||||||||||
Senior Preferred Stock | Preferred Stock | Common Stock | ||||||||||||||||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2011 | 1 | 464 | 650 | $ | 72,171 | $ | 14,109 | $ | — | $ | 3 | $ | (74,525 | ) | $ | (7,995 | ) | $ | (3,909 | ) | $ | (146 | ) | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | 6,525 | — | — | 6,525 | |||||||||||||||||||||||||||||
Other comprehensive income, net of taxes | — | — | — | — | — | — | — | — | 3,786 | — | 3,786 | |||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | — | — | 6,525 | 3,786 | — | 10,311 | |||||||||||||||||||||||||||||
Increase in liquidation preference | — | — | — | 165 | — | — | — | — | — | — | 165 | |||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 2 | — | — | — | 2 | |||||||||||||||||||||||||||||
Income tax benefit from stock-based compensation | — | — | — | — | — | — | 1 | — | — | — | 1 | |||||||||||||||||||||||||||||
Common stock issuances | — | — | — | — | — | — | (24 | ) | — | — | 24 | — | ||||||||||||||||||||||||||||
Transfer from retained earnings (accumulated deficit) to additional paid-in capital | — | — | — | — | — | — | 19 | (19 | ) | — | — | — | ||||||||||||||||||||||||||||
Senior preferred stock dividends declared | — | — | — | — | — | — | — | (5,425 | ) | — | — | (5,425 | ) | |||||||||||||||||||||||||||
Dividend equivalent payments on expired stock options | — | — | — | — | — | — | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||||||||||||
Ending balance at September 30, 2012 | 1 | 464 | 650 | $ | 72,336 | $ | 14,109 | $ | — | $ | 1 | $ | (73,445 | ) | $ | (4,209 | ) | $ | (3,885 | ) | $ | 4,907 | ||||||||||||||||||
Balance as of December 31, 2012 | 1 | 464 | 650 | $ | 72,336 | $ | 14,109 | $ | — | $ | 1 | $ | (70,796 | ) | $ | (2,938 | ) | $ | (3,885 | ) | $ | 8,827 | ||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | 40,055 | — | — | 40,055 | |||||||||||||||||||||||||||||
Other comprehensive income, net of taxes | — | — | — | — | — | — | — | — | 1,710 | — | 1,710 | |||||||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | — | — | 40,055 | 1,710 | — | 41,765 | |||||||||||||||||||||||||||||
Common stock issuances | — | — | — | — | — | — | (1 | ) | — | — | — | (1 | ) | |||||||||||||||||||||||||||
Senior preferred stock dividends declared | — | — | — | — | — | — | — | (17,155 | ) | — | — | (17,155 | ) | |||||||||||||||||||||||||||
Ending balance at September 30, 2013 | 1 | 464 | 650 | $ | 72,336 | $ | 14,109 | $ | — | $ | — | $ | (47,896 | ) | $ | (1,228 | ) | $ | (3,885 | ) | $ | 33,436 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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FREDDIE MAC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30, | |||||||
2013 | 2012 | ||||||
(in millions) | |||||||
Cash flows from operating activities | |||||||
Net income | $ | 40,055 | $ | 6,525 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Derivative gains | (4,408 | ) | (504 | ) | |||
Asset related amortization — premiums, discounts, and basis adjustments | 3,939 | 3,120 | |||||
Debt related amortization — premiums and discounts on certain debt securities and basis adjustments | (5,638 | ) | (3,857 | ) | |||
Net discounts paid on retirements of other debt | (1,514 | ) | (723 | ) | |||
Net premiums received from issuance of debt securities of consolidated trusts | 2,621 | 2,937 | |||||
(Gains) losses on extinguishment of debt securities of consolidated trusts and other debt | (333 | ) | 94 | ||||
(Benefit) provision for credit losses | (2,264 | ) | 2,590 | ||||
Losses on investment activity | 806 | 1,051 | |||||
Losses (gains) on debt recorded at fair value | 13 | (35 | ) | ||||
Deferred income tax benefit | (24,041 | ) | (47 | ) | |||
Purchases of held-for-sale mortgage loans | (17,695 | ) | (16,882 | ) | |||
Sales of mortgage loans acquired as held-for-sale | 20,866 | 14,553 | |||||
Repayments of mortgage loans acquired as held-for-sale | 147 | 45 | |||||
Payments to servicers for pre-foreclosure expense and servicer incentive fees | (974 | ) | (941 | ) | |||
Change in: | |||||||
Accrued interest receivable | 535 | 888 | |||||
Accrued interest payable | (1,149 | ) | (1,285 | ) | |||
Income taxes receivable or payable | 5 | (287 | ) | ||||
Other, net | (1,610 | ) | (1,069 | ) | |||
Net cash provided by operating activities | 9,361 | 6,173 | |||||
Cash flows from investing activities | |||||||
Purchases of trading securities | (48,608 | ) | (23,816 | ) | |||
Proceeds from sales of trading securities | 30,319 | 11,795 | |||||
Proceeds from maturities of trading securities | 5,558 | 22,389 | |||||
Purchases of available-for-sale securities | (6,363 | ) | (2,823 | ) | |||
Proceeds from sales of available-for-sale securities | 15,586 | 1,523 | |||||
Proceeds from maturities of available-for-sale securities | 27,348 | 29,143 | |||||
Purchases of held-for-investment mortgage loans | (66,848 | ) | (52,153 | ) | |||
Repayments of mortgage loans acquired as held-for-investment | 346,938 | 377,453 | |||||
Decrease in restricted cash | 8,837 | 19,304 | |||||
Net proceeds from mortgage insurance and acquisitions and dispositions of real estate owned | 8,231 | 8,719 | |||||
Net increase in federal funds sold and securities purchased under agreements to resell | (3,460 | ) | (33,761 | ) | |||
Derivative premiums and terminations and swap collateral, net | 4,545 | (393 | ) | ||||
Net cash provided by investing activities | 322,083 | 357,380 | |||||
Cash flows from financing activities | |||||||
Proceeds from issuance of debt securities of consolidated trusts held by third parties | 85,213 | 71,290 | |||||
Repayments of debt securities of consolidated trusts held by third parties | (367,871 | ) | (354,829 | ) | |||
Proceeds from issuance of other debt | 525,393 | 546,877 | |||||
Repayments of other debt | (555,999 | ) | (642,281 | ) | |||
Increase in liquidation preference of senior preferred stock | — | 165 | |||||
Payment of cash dividends on senior preferred stock | (17,155 | ) | (5,425 | ) | |||
Excess tax benefits associated with stock-based awards | — | 1 | |||||
Payments of low-income housing tax credit partnerships notes payable | (6 | ) | (10 | ) | |||
Net cash used in financing activities | (330,425 | ) | (384,212 | ) | |||
Net increase (decrease) in cash and cash equivalents | 1,019 | (20,659 | ) | ||||
Cash and cash equivalents at beginning of period | 8,513 | 28,442 | |||||
Cash and cash equivalents at end of period | $ | 9,532 | $ | 7,783 | |||
Supplemental cash flow information | |||||||
Cash paid (received) for: | |||||||
Debt interest | $ | 50,519 | $ | 57,962 | |||
Net derivative interest carry | 2,775 | 3,007 | |||||
Income taxes | — | (58 | ) | ||||
Non-cash investing and financing activities: | |||||||
Underlying mortgage loans related to guarantor swap transactions | 289,416 | 250,738 | |||||
Debt securities of consolidated trusts held by third parties established for guarantor swap transactions | 289,416 | 250,738 | |||||
Elimination of investments in securities and debt securities of consolidated trusts held by third parties related to consolidation of variable interest entities for which we are the primary beneficiary | (2,180 | ) | (4,407 | ) | |||
Transfers from held-for-investment mortgage loans to held-for-sale mortgage loans | 17 | — | |||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Freddie Mac was chartered by Congress in 1970 to stabilize the nation’s residential mortgage market and expand opportunities for home ownership and affordable rental housing. Our statutory mission is to provide liquidity, stability and affordability to the U.S. housing market. We are a GSE regulated by FHFA, the SEC, HUD, and Treasury, and are currently operating under the conservatorship of FHFA. For more information on the roles of FHFA and Treasury, see “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS” in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2012, or our 2012 Annual Report.
We are involved in the U.S. housing market by participating in the secondary mortgage market. We do not participate directly in the primary mortgage market. Our participation in the secondary mortgage market includes providing our credit guarantee for mortgages originated by mortgage lenders in the primary mortgage market and investing in mortgage loans and mortgage-related securities.
Our operations consist of three reportable segments, which are based on the type of business activities each performs — Single-family Guarantee, Investments, and Multifamily. Our Single-family Guarantee segment reflects results from our single-family credit guarantee activities. In our Single-family Guarantee segment, we purchase single-family mortgage loans originated by our seller/servicers in the primary mortgage market. In most instances, we use the mortgage securitization process to package the loans into guaranteed mortgage-related securities. We guarantee the payment of principal and interest on the mortgage-related securities in exchange for management and guarantee fees. Our Investments segment reflects results from our investment, funding, and hedging activities. In our Investments segment, we invest principally in mortgage-related securities and single-family performing mortgage loans, which are funded by debt issuances and hedged using derivatives. Our Multifamily segment reflects results from our investment (both purchases and sales), securitization, and guarantee activities in multifamily mortgage loans and securities. In our Multifamily segment, our primary business strategy is to purchase multifamily mortgage loans for aggregation and then securitization. See “NOTE 13: SEGMENT REPORTING” in our 2012 Annual Report for additional information.
Our business objectives reflect direction we have received from the Conservator, including the 2013 Conservatorship Scorecard. We are focused on the following primary business objectives: (a) providing credit availability for mortgages and maintaining foreclosure prevention activities; (b) managing our credit losses; (c) developing mortgage market enhancements in support of a proposed new infrastructure for the secondary mortgage market; (d) maintaining sound credit quality on the loans we purchase or guarantee; (e) contracting the dominant presence of the GSEs in the marketplace; and (f) strengthening our infrastructure and improving operating efficiency. For information regarding these objectives, see “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS — Business Objectives.”
Throughout our consolidated financial statements and related notes, we use certain acronyms and terms which are defined in the “GLOSSARY.”
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and include our accounts as well as the accounts of other entities in which we have a controlling financial interest. All intercompany balances and transactions have been eliminated. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes in our 2012 Annual Report. We are operating under the basis that we will realize assets and satisfy liabilities in the normal course of business as a going concern and in accordance with the delegation of authority from FHFA to our Board of Directors and management. Certain financial statement information that is normally included in annual financial statements prepared in conformity with GAAP but is not required for interim reporting purposes has been condensed or omitted. Certain amounts in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation. In the opinion of management, all adjustments, which include only normal recurring adjustments, have been recorded for a fair presentation of our unaudited consolidated financial statements.
We recorded the cumulative effect of the correction of certain miscellaneous errors related to previously reported periods in the three and nine months ended September 30, 2013. We concluded that these errors are not material individually or in the aggregate to our previously issued consolidated financial statements for any of the periods affected, or to our estimated earnings for the full year ending December 31, 2013, or to the trend of earnings.
Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect: (a) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and (b) the reported amounts of revenues and expenses and gains and losses during the reporting period. Management has made significant estimates in preparing the financial statements, including, but not limited to, establishing the allowance for loan
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losses and reserve for guarantee losses, valuing financial instruments and other assets and liabilities, assessing impairments on investments, and assessing our ability to realize net deferred tax assets. Actual results could be different from these estimates.
Single-Family Loan Loss Reserve Severity
During the second quarter of 2013, we updated our method of estimating loss severity rates for single-family loan loss reserves to change from the most recent six months of sales experience on our distressed property dispositions to the most recent three months of sales experience on our distressed property dispositions. This change did not have a material impact on our consolidated financial statements.
Earnings Per Common Share
The August 2012 amendment to the Purchase Agreement changed the manner in which the dividend on the senior preferred stock is determined. For each quarter from January 1, 2013 through and including December 31, 2017, the dividend payment will be 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. See “NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT) — Senior Preferred Stock” for additional information regarding the Capital Reserve Amount. For each quarter beginning January 1, 2018, the dividend payment will be the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter exceeds zero. The dividend is presented in the period in which it is determinable for the senior preferred stock as a reduction to net income (loss) available to common stockholders and net income (loss) per common share. The dividend is generally declared and paid in the following period and recorded as a reduction to equity in the period declared.
Because we have participating securities, we use the “two-class” method of computing earnings per common share. Basic earnings per common share is computed as net income attributable to common stockholders divided by the weighted average common shares outstanding for the period. The weighted average common shares outstanding for the period includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury pursuant to the Purchase Agreement. This warrant is included since it is unconditionally exercisable by the holder at a minimal cost. See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS” in our 2012 Annual Report for further information.
Diluted earnings per common share is computed as net income attributable to common stockholders divided by the weighted average common shares outstanding during the period adjusted for the dilutive effect of common equivalent shares outstanding. For periods with net income attributable to common stockholders, the calculation includes the effect of the following common equivalent shares outstanding: (a) the weighted average shares related to stock options if the average market price during the period exceeds the exercise price; and (b) the weighted average of unvested restricted stock units. During periods in which a net loss attributable to common stockholders has been incurred, potential common equivalent shares outstanding are not included in the calculation because it would have an antidilutive effect. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Earnings Per Common Share” in our 2012 Annual Report for further discussion of our significant accounting policies regarding our calculation of earnings per common share and “NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT) — Stock-Based Compensation” in this Form 10-Q for additional information on our earnings-per-share calculation.
NOTE 2: CONSERVATORSHIP AND RELATED MATTERS
Business Objectives
We continue to operate under the conservatorship that commenced on September 6, 2008, conducting our business under the direction of FHFA, as our Conservator. The conservatorship and related matters have had a wide-ranging impact on us, including our regulatory supervision, management, business, financial condition and results of operations. Upon its appointment, FHFA, as Conservator, immediately succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any stockholder, officer or director thereof, with respect to the company and its assets. The Conservator also succeeded to the title to all books, records, and assets of Freddie Mac held by any other legal custodian or third party. During the conservatorship, the Conservator has delegated certain authority to the Board of Directors to oversee, and management to conduct, day-to-day operations so that the company can continue to operate in the ordinary course of business. The directors serve on behalf of, and exercise authority as directed by, the Conservator.
We are also subject to certain constraints on our business activities by Treasury due to the terms of, and Treasury’s rights under, the Purchase Agreement. However, we believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain our access to the debt markets and to have adequate liquidity to conduct our normal business activities, although the costs of our debt funding could vary. Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent.
The Conservator continues to determine, and direct the efforts of the Board of Directors and management to address, the strategic direction for the company. While the Conservator has delegated certain authority to management to conduct day-to-
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day operations, many management decisions are subject to review and approval by FHFA and Treasury. In addition, management frequently receives directions 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), and have changed considerably since we entered into conservatorship. 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 but may not contribute to our profitability.
Certain of these objectives are intended to help homeowners and the mortgage market and may help to mitigate future credit losses. However, some of our initiatives are expected to have an adverse impact on our near- and long-term financial results. Given the important role the Administration and our Conservator have placed on Freddie Mac in addressing housing and mortgage market conditions and our public mission, we may be required to take additional actions that could have a negative impact on our business, operating results or financial condition.
The Conservator stated that it is taking actions in support of the objectives of gradual transition to greater private capital participation in housing finance and greater distribution of risk to participants other than the government. The Conservator also stated that it is focusing on retaining value in the business operations of Freddie Mac and Fannie Mae, overseeing remediation of identified weaknesses in corporate operations and risk management, and ensuring that sound corporate governance principles are followed.
On February 21, 2012, FHFA sent to Congress a strategic plan for the next phase of the conservatorships of Freddie Mac and Fannie Mae. The plan sets forth objectives and steps FHFA is taking or will take to meet FHFA’s obligations as Conservator. FHFA stated that the steps envisioned in the plan are consistent with each of the housing finance reform frameworks set forth in the report delivered by the Administration to Congress in February 2011, as well as with the leading congressional proposals previously introduced. FHFA indicated that the plan leaves open all options for Congress and the Administration regarding the resolution of the conservatorships and the degree of government involvement in supporting the secondary mortgage market in the future.
FHFA’s plan provides lawmakers and the public with an outline of how FHFA, as Conservator, intends to guide Freddie Mac and Fannie Mae over the next few years, and identifies three strategic goals:
• | Build. Build a new infrastructure for the secondary mortgage market; |
• | Contract. Gradually contract Freddie Mac and Fannie Mae’s dominant presence in the marketplace while simplifying and shrinking their operations; and |
• | Maintain. Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. |
The Conservatorship Scorecards, instituted by FHFA, established objectives, performance targets and measures, and provided the implementation roadmap for FHFA’s strategic plan. We continue to align our resources and internal business plans to meet the goals and objectives provided to us by FHFA.
We regularly receive direction from our Conservator on how to pursue our objectives under conservatorship, including direction to focus our efforts on assisting homeowners in the housing and mortgage markets. The Conservator and Treasury have also, from time to time, not authorized us to engage in certain business activities and transactions, including the purchase or sale of certain assets, which we believe might have had a beneficial impact on our results of operations or financial condition, if executed. Our inability to execute such transactions may adversely affect our profitability, and thus contribute to our need to draw additional funds in the future under the Purchase Agreement.
There is significant uncertainty as to the ultimate impact that our efforts to aid the housing and mortgage markets, including our efforts in connection with the MHA Program, will have on our future capital or liquidity needs.
As a result of the net worth sweep dividend provisions of the senior preferred stock, we do not have the ability over the long term to build and retain the capital generated by our business operations, or return capital to stockholders other than Treasury. There is significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified termination date, and as to what changes may occur to our business structure during or following conservatorship, including whether we will continue to exist. The Acting Director of FHFA stated on November 15, 2011 that “the long-term outlook is that neither [Freddie Mac nor Fannie Mae] will continue to exist, at least in its current form, in the future.” We are not aware of any current plans of our Conservator to significantly change our business model or capital structure in the near-term. Our future structure and role will be determined by the Administration and Congress, and there are likely to be significant changes beyond the near-term. We have no ability to predict the outcome of these deliberations.
Impact of Conservatorship and Related Developments on the Mortgage-Related Investments Portfolio
The UPB of our mortgage-related investments portfolio, for purposes of the limit imposed by the Purchase Agreement, as amended on August 17, 2012, and FHFA regulation, may not exceed $553 billion at December 31, 2013 and was $498 billion at September 30, 2013. The annual 15% reduction in the size of our mortgage-related investments portfolio until it reaches $250
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billion is calculated based on the maximum allowable size of the mortgage-related investments portfolio, rather than the actual UPB of the mortgage-related investments portfolio, as of December 31 of the preceding year. The limitation is determined without giving effect to the January 1, 2010 change in the accounting guidance related to transfers of financial assets and consolidation of VIEs. FHFA has stated that we will not be a substantial buyer or seller of mortgages for our mortgage-related investments portfolio. The 2013 Conservatorship Scorecard includes a goal to reduce the December 31, 2012 mortgage-related investments portfolio balance (exclusive of agency securities, multifamily held-for-sale loans, and single-family loans purchased for cash) by selling 5% of mortgage-related assets.
Government Support for our Business
We receive substantial support from Treasury and FHFA, as our Conservator and regulator, and are dependent upon their continued support in order to continue operating our business. This support includes our ability to access funds from Treasury under the Purchase Agreement, which is critical to: (a) keeping us solvent; (b) allowing us to focus on our primary business objectives under conservatorship; and (c) avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. At June 30, 2013, our assets exceeded our liabilities under GAAP; therefore FHFA did not request a draw on our behalf and, as a result, we did not receive any funding from Treasury under the Purchase Agreement during the three months ended September 30, 2013. Since conservatorship began through September 30, 2013, we have paid cash dividends of $40.9 billion to Treasury at the direction of the Conservator.
At September 30, 2013, our assets exceeded our liabilities under GAAP; therefore no draw is being requested from Treasury under the Purchase Agreement for the third quarter of 2013.
See “NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS” and “NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT)” in our 2012 Annual Report for more information on the terms of the conservatorship and the Purchase Agreement.
NOTE 3: VARIABLE INTEREST ENTITIES
We use securitization trusts in our securities issuance process, and are required to evaluate the trusts for consolidation on an ongoing basis. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” and “NOTE 3: VARIABLE INTEREST ENTITIES” in our 2012 Annual Report for further information regarding the consolidation of certain VIEs, including our REMICs and Other Structured Securities, and Other Guarantee Transactions.
Based on our evaluation of whether we hold a controlling financial interest in these VIEs, we determined that we are the primary beneficiary of trusts that issue our single-family PCs and certain Other Guarantee Transactions. Therefore, we consolidate on our balance sheet the assets and liabilities of these trusts. At both September 30, 2013 and December 31, 2012, we were the primary beneficiary of, and therefore consolidated, single-family PC trusts with assets totaling $1.5 trillion, as measured using the UPB of issued PCs. In addition, we concluded that we are the primary beneficiary of Other Guarantee Transactions with underlying assets totaling $9.4 billion and $11.0 billion at September 30, 2013 and December 31, 2012, respectively.
VIEs for which We are not the Primary Beneficiary
The table below presents the carrying amounts and classification of the assets and liabilities recorded on our consolidated balance sheets related to our variable interests in non-consolidated VIEs, as well as our maximum exposure to loss as a result of our involvement with these VIEs. Our involvement with VIEs for which we are not the primary beneficiary generally takes one of two forms: (a) purchasing an investment in these entities; or (b) providing a guarantee to these entities. Our maximum exposure to loss for those VIEs in which we have purchased an investment is calculated as the maximum potential charge that we would recognize in earnings if that investment were to become worthless. This amount does not include other-than-temporary impairments or other write-downs that we previously recognized through earnings. Our maximum exposure to loss for those VIEs for which we have provided a guarantee represents the contractual amounts that could be lost under the guarantees if counterparties or borrowers defaulted, without consideration of possible recoveries under credit enhancement arrangements. We do not believe the maximum exposure to loss disclosed in the table below is representative of the actual loss we are likely to incur, based on our historical loss experience and after consideration of proceeds from related collateral liquidation, including possible recoveries under credit enhancement arrangements. See “NOTE 3: VARIABLE INTEREST ENTITIES” in our 2012 Annual Report for more information about VIEs for which we are not the primary beneficiary.
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Table 3.1 — Variable Interests in VIEs for which We are not the Primary Beneficiary
September 30, 2013 | |||||||||||||||||||
Mortgage-Related Security Trusts | |||||||||||||||||||
Asset-Backed Investment Trusts(1) | Freddie Mac Securities(2) | Non-Freddie Mac Securities(1) | Unsecuritized Multifamily Loans (3) | Other(1) | |||||||||||||||
(in millions) | |||||||||||||||||||
Assets and Liabilities Recorded on our Consolidated Balance Sheets | |||||||||||||||||||
Assets: | |||||||||||||||||||
Cash and cash equivalents | $ | — | $ | — | $ | — | $ | 18 | $ | — | |||||||||
Restricted cash and cash equivalents | — | 22 | — | 20 | 61 | ||||||||||||||
Investments in securities: | |||||||||||||||||||
Available-for-sale, at fair value | — | 44,144 | 91,892 | — | — | ||||||||||||||
Trading, at fair value | — | 10,060 | 10,941 | — | — | ||||||||||||||
Mortgage loans: | |||||||||||||||||||
Held-for-investment, unsecuritized | — | — | — | 53,922 | — | ||||||||||||||
Held-for-sale | — | — | — | 10,475 | — | ||||||||||||||
Accrued interest receivable | — | 28 | 496 | 268 | 7 | ||||||||||||||
Other assets | — | 718 | 3 | 261 | 464 | ||||||||||||||
Liabilities: | |||||||||||||||||||
Derivative liabilities, net | — | (2 | ) | — | — | (36 | ) | ||||||||||||
Other liabilities | — | (795 | ) | (254 | ) | (43 | ) | (566 | ) | ||||||||||
Maximum Exposure to Loss | $ | — | $ | 65,836 | $ | 105,654 | $ | 64,963 | $ | 10,466 | |||||||||
Total Assets of Non-Consolidated VIEs(4) | $ | — | $ | 77,218 | $ | 639,156 | $ | 112,364 | $ | 23,553 | |||||||||
December 31, 2012 | |||||||||||||||||||
Mortgage-Related Security Trusts | |||||||||||||||||||
Asset-Backed Investment Trusts(1) | Freddie Mac Securities(2) | Non-Freddie Mac Securities(1) | Unsecuritized Multifamily Loans(3) | Other(1) | |||||||||||||||
(in millions) | |||||||||||||||||||
Assets and Liabilities Recorded on our Consolidated Balance Sheets | |||||||||||||||||||
Assets: | |||||||||||||||||||
Restricted cash and cash equivalents | $ | — | $ | 24 | $ | — | $ | 22 | $ | 119 | |||||||||
Investments in securities: | |||||||||||||||||||
Available-for-sale, at fair value | — | 58,515 | 110,583 | — | — | ||||||||||||||
Trading, at fair value | 292 | 10,354 | 10,617 | — | — | ||||||||||||||
Mortgage loans: | |||||||||||||||||||
Held-for-investment, unsecuritized | — | — | — | 62,245 | — | ||||||||||||||
Held-for-sale | — | — | — | 14,238 | — | ||||||||||||||
Accrued interest receivable | — | 324 | 350 | 326 | 7 | ||||||||||||||
Derivative assets, net | — | — | — | — | 1 | ||||||||||||||
Other assets | — | 558 | 2 | 381 | 482 | ||||||||||||||
Liabilities: | |||||||||||||||||||
Derivative liabilities, net | — | (1 | ) | — | — | (40 | ) | ||||||||||||
Other liabilities | — | (667 | ) | (2 | ) | (29 | ) | (635 | ) | ||||||||||
Maximum Exposure to Loss | $ | 292 | $ | 51,045 | $ | 128,475 | $ | 77,213 | $ | 10,871 | |||||||||
Total Assets of Non-Consolidated VIEs(4) | $ | 10,901 | $ | 59,302 | $ | 768,704 | $ | 130,512 | $ | 25,004 | |||||||||
(1) | For our involvement with non-consolidated asset-backed investment trusts, non-Freddie Mac security trusts and certain other VIEs where we do not provide a guarantee, our maximum exposure to loss is computed as the carrying amount if the security is classified as trading or the amortized cost if the security is classified as available-for-sale for our investments and related assets recorded on our consolidated balance sheets, including any unrealized amounts recorded in AOCI for securities classified as available-for-sale. See “NOTE 7: INVESTMENTS IN SECURITIES” in our 2012 Annual Report for additional information regarding our asset-backed investments and non-Freddie Mac securities. |
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(2) | Freddie Mac securities include our variable interests in single-family multiclass REMICs and Other Structured Securities, multifamily PCs, multifamily Other Structured Securities, and Other Guarantee Transactions that we do not consolidate. Our maximum exposure to loss includes guaranteed UPB of assets held by the non-consolidated VIEs related to multifamily PCs, multifamily Other Structured Securities, and Other Guaranteed Transactions for which we record a guarantee asset (component of Other Assets) and guarantee obligation (component of Other Liabilities) on our consolidated balance sheets. Our maximum exposure to loss excludes most of our investments in single-family multiclass REMICs and Other Structured Securities as we already consolidate most of the collateral of these trusts on our consolidated balance sheets. Our investments in single-family REMICs and Other Structured Securities that are not consolidated do not give rise to any additional exposure to credit loss as we already consolidate the underlying collateral. |
(3) | For unsecuritized multifamily loans, our maximum exposure to loss includes accrued interest receivable associated with these loans. See “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES” for additional information about our unsecuritized multifamily loans. |
(4) | Except for unsecuritized multifamily loans, this represents the remaining UPB of assets held by non-consolidated VIEs using the most current information available, where our continuing involvement is significant. For unsecuritized multifamily loans, this represents the fair value of the property serving as collateral for the loan. We do not include the assets of our non-consolidated trusts related to single-family REMICs and Other Structured Securities backed by our PCs in this amount as we already consolidate the underlying collateral of these trusts on our consolidated balance sheets. |
NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES
We own both single-family mortgage loans, which are secured by one to four unit residential properties, and multifamily mortgage loans, which are secured by properties with five or more residential rental units. Our single-family loans are predominately first lien, fixed-rate mortgages secured by the borrower’s primary residence. For a discussion of our significant accounting policies regarding our mortgage loans and loan loss reserves, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in our 2012 Annual Report.
The table below summarizes the types of loans on our consolidated balance sheets as of September 30, 2013 and December 31, 2012.
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Table 4.1 — Mortgage Loans
September 30, 2013 | December 31, 2012 | ||||||||||||||||||||||
Unsecuritized | Held by Consolidated Trusts | Total | Unsecuritized | Held by Consolidated Trusts | Total | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Single-family:(1) | |||||||||||||||||||||||
Fixed-rate | |||||||||||||||||||||||
Amortizing | $ | 116,482 | $ | 1,395,905 | $ | 1,512,387 | $ | 131,061 | $ | 1,356,030 | $ | 1,487,091 | |||||||||||
Interest-only | 1,678 | 5,446 | 7,124 | 2,445 | 8,874 | 11,319 | |||||||||||||||||
Total fixed-rate | 118,160 | 1,401,351 | 1,519,511 | 133,506 | 1,364,904 | 1,498,410 | |||||||||||||||||
Adjustable-rate | |||||||||||||||||||||||
Amortizing | 2,037 | 66,476 | 68,513 | 2,630 | 67,067 | 69,697 | |||||||||||||||||
Interest-only | 5,088 | 25,164 | 30,252 | 7,323 | 31,590 | 38,913 | |||||||||||||||||
Total adjustable-rate | 7,125 | 91,640 | 98,765 | 9,953 | 98,657 | 108,610 | |||||||||||||||||
Other Guarantee Transactions | — | 8,830 | 8,830 | — | 10,407 | 10,407 | |||||||||||||||||
FHA/VA and other governmental | 663 | 3,315 | 3,978 | 1,285 | 3,062 | 4,347 | |||||||||||||||||
Total single-family | 125,948 | 1,505,136 | 1,631,084 | 144,744 | 1,477,030 | 1,621,774 | |||||||||||||||||
Multifamily:(1) | |||||||||||||||||||||||
Fixed-rate | 54,454 | 445 | 54,899 | 66,384 | 448 | 66,832 | |||||||||||||||||
Adjustable-rate | 10,366 | — | 10,366 | 10,182 | — | 10,182 | |||||||||||||||||
Other governmental | 3 | — | 3 | 3 | — | 3 | |||||||||||||||||
Total multifamily | 64,823 | 445 | 65,268 | 76,569 | 448 | 77,017 | |||||||||||||||||
Total UPB of mortgage loans | 190,771 | 1,505,581 | 1,696,352 | 221,313 | 1,477,478 | 1,698,791 | |||||||||||||||||
Deferred fees, unamortized premiums, discounts and other cost basis adjustments | (4,986 | ) | 23,222 | 18,236 | (5,376 | ) | 23,373 | 17,997 | |||||||||||||||
Fair value adjustments on loans held-for sale(2) | (233 | ) | — | (233 | ) | 266 | — | 266 | |||||||||||||||
Allowance for loan losses on mortgage loans held-for-investment | (22,128 | ) | (2,733 | ) | (24,861 | ) | (25,788 | ) | (4,919 | ) | (30,707 | ) | |||||||||||
Total mortgage loans, net | $ | 163,424 | $ | 1,526,070 | $ | 1,689,494 | $ | 190,415 | $ | 1,495,932 | $ | 1,686,347 | |||||||||||
Mortgage loans, net: | |||||||||||||||||||||||
Held-for-investment | $ | 152,949 | $ | 1,526,070 | $ | 1,679,019 | $ | 176,177 | $ | 1,495,932 | $ | 1,672,109 | |||||||||||
Held-for-sale | 10,475 | — | 10,475 | 14,238 | — | 14,238 | |||||||||||||||||
Total mortgage loans, net | $ | 163,424 | $ | 1,526,070 | $ | 1,689,494 | $ | 190,415 | $ | 1,495,932 | $ | 1,686,347 | |||||||||||
(1) | Based on UPB and excluding mortgage loans traded, but not yet settled. |
(2) | Consists of fair value adjustments associated with multifamily mortgage loans for which we have made a fair value election. |
During the three months ended September 30, 2013 and 2012, we purchased $94.6 billion and $101.6 billion, respectively, in UPB of single-family mortgage loans, and $0.3 billion during each of these periods in UPB of multifamily loans that were classified as held-for-investment. During the nine months ended September 30, 2013 and 2012, we purchased $351.2 billion and $291.2 billion, respectively, in UPB of single-family mortgage loans, and $0.7 billion during each of these periods in UPB of multifamily loans that were classified as held-for-investment. Our sales of multifamily mortgage loans occur primarily through the issuance of multifamily K Certificates, which we categorize as Other Guarantee Transactions. See “NOTE 14: FINANCIAL GUARANTEES” for more information on our issuances of Other Guarantee Transactions. We did not have significant reclassifications of mortgage loans into held-for-sale from held-for-investment during the three and nine months ended September 30, 2013.
Credit Quality of Mortgage Loans
We evaluate the credit quality of single-family loans using different criteria than the criteria we use to evaluate multifamily loans. The current LTV ratio is one key factor we consider when estimating our loan loss reserves for single-family loans. As estimated current LTV ratios increase, the borrower’s equity in the home decreases, which negatively affects the borrower’s ability to refinance (outside of HARP) or to sell the property for an amount at or above the balance of the outstanding mortgage loan. A second-lien mortgage also reduces the borrower’s equity in the home, and has a similar negative effect on the borrower’s ability to refinance or sell the property for an amount at or above the combined balances of the first and second mortgages. As of both September 30, 2013 and December 31, 2012, based on data collected by us at loan delivery, approximately 14% of loans in our single-family credit guarantee portfolio had second-lien financing by third parties at
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origination of the first mortgage. However, borrowers are free to obtain second-lien financing after origination, and we are not entitled to receive notification when a borrower does so. Therefore, it is likely that additional borrowers have post-origination second-lien mortgages. For further information about concentrations of risk associated with our single-family and multifamily mortgage loans, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS.”
The table below presents information on the estimated current LTV ratios of single-family loans on our consolidated balance sheets, all of which are held-for-investment. Our current LTV ratio estimates are based on available data through the end of each respective period presented.
Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio
As of September 30, 2013 | As of December 31, 2012 | ||||||||||||||||||||||||||||||
Estimated Current LTV Ratio(1) | Estimated Current LTV Ratio(1) | ||||||||||||||||||||||||||||||
≤ 80 | > 80 to 100 | > 100(2) | Total | ≤ 80 | > 80 to 100 | > 100(2) | Total | ||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||
Single-family loans: | |||||||||||||||||||||||||||||||
20 and 30-year or more, amortizing fixed-rate(3) | $ | 799,684 | $ | 270,384 | $ | 135,146 | $ | 1,205,214 | $ | 699,386 | $ | 309,099 | $ | 188,048 | $ | 1,196,533 | |||||||||||||||
15-year amortizing fixed-rate(3) | 270,226 | 20,964 | 6,123 | 297,313 | 249,666 | 18,473 | 5,433 | 273,572 | |||||||||||||||||||||||
Adjustable-rate(4) | 56,378 | 7,116 | 1,970 | 65,464 | 50,764 | 10,341 | 4,845 | 65,950 | |||||||||||||||||||||||
Alt-A, interest-only, and option ARM(5) | 30,497 | 22,298 | 28,550 | 81,345 | 27,642 | 24,030 | 52,057 | 103,729 | |||||||||||||||||||||||
Total single-family loans | $ | 1,156,785 | $ | 320,762 | $ | 171,789 | 1,649,336 | $ | 1,027,458 | $ | 361,943 | $ | 250,383 | 1,639,784 | |||||||||||||||||
Multifamily loans | 54,544 | 63,032 | |||||||||||||||||||||||||||||
Total recorded investment of held-for-investment loans | $ | 1,703,880 | $ | 1,702,816 | |||||||||||||||||||||||||||
(1) | The current LTV ratios are management estimates, which are updated on a monthly basis. Current market values are estimated by adjusting the value of the property at origination based on changes in the market value of homes in the same geographical area since that time. The value of a property at origination is based on: (a) for purchase mortgages, either the lesser of the appraised value of the property at the time of mortgage origination or the mortgage borrower’s purchase price; or (b) for refinance mortgages, a third-party appraisal. Changes in market value are derived from our internal index which measures price changes for repeat sales and refinancing activity on the same properties using Freddie Mac and Fannie Mae single-family mortgage acquisitions, including foreclosure sales. Estimates of the current LTV ratio include the credit-enhanced portion of the loan and exclude any secondary financing by third parties. The existence of a second lien reduces the borrower’s equity in the property and, therefore, can increase the risk of default. |
(2) | The serious delinquency rate for the total of single-family held-for-investment mortgage loans with estimated current LTV ratios in excess of 100% was 10.5% and 12.7% as of September 30, 2013 and December 31, 2012, respectively. |
(3) | The majority of our loan modifications result in new terms that include fixed interest rates after modification. As of September 30, 2013 and December 31, 2012, we have categorized UPB of approximately $44.1 billion and $43.4 billion, respectively, of modified loans as fixed-rate loans (instead of as adjustable rate loans), even though the modified loans have rate adjustment provisions. In these cases, while the terms of the modified loans provide for the interest rate to adjust in the future, such future rates are determined at the time of modification rather than at a subsequent date. |
(4) | Includes balloon/reset mortgage loans and excludes option ARMs. |
(5) | We have discontinued our purchases of Alt-A, interest-only, and option ARM loans. For reporting purposes: (a) loans within the Alt-A category continue to be presented in that category following modification, even though the borrower may have provided full documentation of assets and income to complete the modification; and (b) loans within the option ARM category continue to be presented in that category following modification, even though the modified loan no longer provides for optional payment provisions. |
For information about the payment status of single-family and multifamily mortgage loans, including the amount of such loans we deem impaired, see “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS.” For a discussion of certain indicators of credit quality for the multifamily loans on our consolidated balance sheets, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Multifamily Mortgage Portfolio.”
Allowance for Loan Losses and Reserve for Guarantee Losses, or Loan Loss Reserves
Our loan loss reserve consists of: (a) our allowance for loan losses on mortgage loans that we classify as held-for-investment on our consolidated balance sheets; and (b) our reserve for guarantee losses associated with Freddie Mac mortgage-related securities backed by multifamily loans, certain single-family Other Guarantee Transactions, and other guarantee commitments, for which we have incremental credit risk.
A significant portion of the unsecuritized single-family loans on our consolidated balance sheets are seriously delinquent and/or TDR loans that we previously removed from our PC pools. These seriously delinquent and TDR loans typically have a higher associated allowance for loan loss than loans that remain in consolidated trusts. Single-family loans that remain in consolidated trusts are generally aggregated and measured collectively for impairment based on similar risk characteristics of the loans.
The table below presents our loan loss reserves activity for the single-family and multifamily loans that we own or guarantee.
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Table 4.3 — Detail of Loan Loss Reserves
Three Months Ended September 30, | |||||||||||||||||||||||||||||||
2013 | 2012 | ||||||||||||||||||||||||||||||
Allowance for Loan Losses | Reserve for Guarantee Losses(1) | Allowance for Loan Losses | Reserve for Guarantee Losses(1) | ||||||||||||||||||||||||||||
Unsecuritized | Held By Consolidated Trusts | Total | Unsecuritized | Held By Consolidated Trusts | Total | ||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||
Single-family: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 22,862 | $ | 3,222 | $ | 113 | $ | 26,197 | $ | 28,849 | $ | 6,258 | $ | 191 | $ | 35,298 | |||||||||||||||
Provision (benefit) for credit losses | (1,528 | ) | 430 | (12 | ) | (1,110 | ) | (837 | ) | 1,485 | 2 | 650 | |||||||||||||||||||
Charge-offs(2) | (1,917 | ) | (379 | ) | (2 | ) | (2,298 | ) | (3,190 | ) | (259 | ) | (3 | ) | (3,452 | ) | |||||||||||||||
Recoveries(3) | 1,470 | 260 | — | 1,730 | 496 | 50 | — | 546 | |||||||||||||||||||||||
Transfers, net(4) | 1,064 | (800 | ) | — | 264 | 2,003 | (1,746 | ) | (1 | ) | 256 | ||||||||||||||||||||
Ending balance | $ | 21,951 | $ | 2,733 | $ | 99 | $ | 24,783 | $ | 27,321 | $ | 5,788 | $ | 189 | $ | 33,298 | |||||||||||||||
Multifamily: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 206 | $ | — | $ | 30 | $ | 236 | $ | 449 | $ | — | $ | 47 | $ | 496 | |||||||||||||||
Provision (benefit) for credit losses | (26 | ) | — | (2 | ) | (28 | ) | (39 | ) | — | (1 | ) | (40 | ) | |||||||||||||||||
Charge-offs(2) | (3 | ) | — | — | (3 | ) | (2 | ) | — | (1 | ) | (3 | ) | ||||||||||||||||||
Ending balance | $ | 177 | $ | — | $ | 28 | $ | 205 | $ | 408 | $ | — | $ | 45 | $ | 453 | |||||||||||||||
Total: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 23,068 | $ | 3,222 | $ | 143 | $ | 26,433 | $ | 29,298 | $ | 6,258 | $ | 238 | $ | 35,794 | |||||||||||||||
Provision (benefit) for credit losses | (1,554 | ) | 430 | (14 | ) | (1,138 | ) | (876 | ) | 1,485 | 1 | 610 | |||||||||||||||||||
Charge-offs(2) | (1,920 | ) | (379 | ) | (2 | ) | (2,301 | ) | (3,192 | ) | (259 | ) | (4 | ) | (3,455 | ) | |||||||||||||||
Recoveries(3) | 1,470 | 260 | — | 1,730 | 496 | 50 | — | 546 | |||||||||||||||||||||||
Transfers, net(4) | 1,064 | (800 | ) | — | 264 | 2,003 | (1,746 | ) | (1 | ) | 256 | ||||||||||||||||||||
Ending balance | $ | 22,128 | $ | 2,733 | $ | 127 | $ | 24,988 | $ | 27,729 | $ | 5,788 | $ | 234 | $ | 33,751 | |||||||||||||||
Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2013 | 2012 | ||||||||||||||||||||||||||||||
Allowance for Loan Losses | Reserve for Guarantee Losses(1) | Allowance for Loan Losses | Reserve for Guarantee Losses(1) | ||||||||||||||||||||||||||||
Unsecuritized | Held By Consolidated Trusts | Total | Unsecuritized | Held By Consolidated Trusts | Total | ||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||
Single-family: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 25,449 | $ | 4,918 | $ | 141 | $ | 30,508 | $ | 30,406 | $ | 8,351 | $ | 159 | $ | 38,916 | |||||||||||||||
Provision (benefit) for credit losses | (3,182 | ) | 1,117 | (32 | ) | (2,097 | ) | (1,725 | ) | 4,352 | 44 | 2,671 | |||||||||||||||||||
Charge-offs(2) | (6,594 | ) | (691 | ) | (7 | ) | (7,292 | ) | (9,689 | ) | (734 | ) | (9 | ) | (10,432 | ) | |||||||||||||||
Recoveries(3) | 2,597 | 319 | — | 2,916 | 1,451 | 95 | — | 1,546 | |||||||||||||||||||||||
Transfers, net(4) | 3,681 | (2,930 | ) | (3 | ) | 748 | 6,878 | (6,276 | ) | (5 | ) | 597 | |||||||||||||||||||
Ending balance | $ | 21,951 | $ | 2,733 | $ | 99 | $ | 24,783 | $ | 27,321 | $ | 5,788 | $ | 189 | $ | 33,298 | |||||||||||||||
Multifamily: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 339 | $ | 1 | $ | 42 | $ | 382 | $ | 506 | $ | — | $ | 39 | $ | 545 | |||||||||||||||
Provision (benefit) for credit losses | (159 | ) | (1 | ) | (7 | ) | (167 | ) | (88 | ) | — | 7 | (81 | ) | |||||||||||||||||
Charge-offs(2) | (4 | ) | — | — | (4 | ) | (10 | ) | — | (1 | ) | (11 | ) | ||||||||||||||||||
Recoveries(3) | 1 | — | — | 1 | — | — | — | — | |||||||||||||||||||||||
Transfers, net(4) | — | — | (7 | ) | (7 | ) | — | — | — | — | |||||||||||||||||||||
Ending balance | $ | 177 | $ | — | $ | 28 | $ | 205 | $ | 408 | $ | — | $ | 45 | $ | 453 | |||||||||||||||
Total: | |||||||||||||||||||||||||||||||
Beginning balance | $ | 25,788 | $ | 4,919 | $ | 183 | $ | 30,890 | $ | 30,912 | $ | 8,351 | $ | 198 | $ | 39,461 | |||||||||||||||
Provision (benefit) for credit losses | (3,341 | ) | 1,116 | (39 | ) | (2,264 | ) | (1,813 | ) | 4,352 | 51 | 2,590 | |||||||||||||||||||
Charge-offs(2) | (6,598 | ) | (691 | ) | (7 | ) | (7,296 | ) | (9,699 | ) | (734 | ) | (10 | ) | (10,443 | ) | |||||||||||||||
Recoveries(3) | 2,598 | 319 | — | 2,917 | 1,451 | 95 | — | 1,546 | |||||||||||||||||||||||
Transfers, net(4) | 3,681 | (2,930 | ) | (10 | ) | 741 | 6,878 | (6,276 | ) | (5 | ) | 597 | |||||||||||||||||||
Ending balance | $ | 22,128 | $ | 2,733 | $ | 127 | $ | 24,988 | $ | 27,729 | $ | 5,788 | $ | 234 | $ | 33,751 | |||||||||||||||
Total loan loss reserve as a percentage of the total mortgage portfolio, excluding non-Freddie Mac securities | 1.39 | % | 1.86 | % | |||||||||||||||||||||||||||
(1) | Loans associated with our reserve for guarantee losses are those loans that underlie our non-consolidated securitization trusts and other guarantee commitments and are evaluated for impairment on a collective basis. Our reserve for guarantee losses is included in other liabilities on our consolidated balance sheets. |
123 | Freddie Mac | |
(2) | Charge-offs represent the amount of a loan that has been discharged to remove the loan from our consolidated balance sheet principally due to either foreclosure transfers or short sales. Charge-offs exclude $63 million and $70 million for the three months ended September 30, 2013 and 2012, respectively, and $188 million and $245 million for the nine months ended September 30, 2013 and 2012, respectively, recorded as losses on loans purchased within other expenses on our consolidated statements of comprehensive income, which relate to certain loans purchased under financial guarantees. We record charge-offs and recoveries on loans held by consolidated trusts when a loss event (such as a foreclosure transfer or foreclosure alternative) occurs on a loan while it remains in a consolidated trust. |
(3) | Recoveries of charge-offs primarily result from foreclosure alternatives and REO acquisitions on loans where: (a) a share of default risk has been assumed by mortgage insurers, servicers, or other third parties through credit enhancements; or (b) we received a reimbursement of our losses from a seller/servicer associated with a repurchase request on a loan that experienced a foreclosure transfer or a foreclosure alternative. |
(4) | Consists of: (a) approximately $0.8 billion and $1.8 billion during the three months ended September 30, 2013 and 2012, respectively, and $2.9 billion and $6.3 billion during the nine months ended September 30, 2013 and 2012, respectively, of reclassified single-family reserves related to our removal of loans previously held by consolidated trusts; (b) approximately $267 million and $262 million during the three months ended September 30, 2013 and 2012, respectively, and $743 million and $592 million during the nine months ended September 30, 2013 and 2012, respectively, attributable to capitalization of past due interest on modified mortgage loans; and (c) $(3) million and $(5) million during the three months ended September 30, 2013 and 2012, respectively, and $5 million and $6 million during the nine months ended September 30, 2013 and 2012, respectively, of other transfers. |
The table below presents our allowance for loan losses and our recorded investment in mortgage loans, held-for-investment, by impairment evaluation methodology.
Table 4.4 — Net Investment in Mortgage Loans
September 30, 2013 | December 31, 2012 | ||||||||||||||||||||||
Single-family | Multifamily | Total | Single-family | Multifamily | Total | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Recorded investment: | |||||||||||||||||||||||
Collectively evaluated | $ | 1,554,815 | $ | 52,938 | $ | 1,607,753 | $ | 1,550,493 | $ | 60,836 | $ | 1,611,329 | |||||||||||
Individually evaluated | 94,521 | 1,606 | 96,127 | 89,291 | 2,196 | 91,487 | |||||||||||||||||
Total recorded investment | 1,649,336 | 54,544 | 1,703,880 | 1,639,784 | 63,032 | 1,702,816 | |||||||||||||||||
Ending balance of the allowance for loan losses: | |||||||||||||||||||||||
Collectively evaluated | (6,592 | ) | (56 | ) | (6,648 | ) | (12,432 | ) | (135 | ) | (12,567 | ) | |||||||||||
Individually evaluated | (18,092 | ) | (121 | ) | (18,213 | ) | (17,935 | ) | (205 | ) | (18,140 | ) | |||||||||||
Total ending balance of the allowance | (24,684 | ) | (177 | ) | (24,861 | ) | (30,367 | ) | (340 | ) | (30,707 | ) | |||||||||||
Net investment in mortgage loans | $ | 1,624,652 | $ | 54,367 | $ | 1,679,019 | $ | 1,609,417 | $ | 62,692 | $ | 1,672,109 | |||||||||||
A significant number of unsecuritized single-family mortgage loans on our consolidated balance sheets are individually evaluated for impairment and substantially all single-family mortgage loans held by our consolidated trusts are collectively evaluated for impairment. The ending balance of the allowance for loan losses associated with our held-for-investment unsecuritized mortgage loans represented approximately 12.6% and 12.8% of the recorded investment in such loans at September 30, 2013 and December 31, 2012, respectively. The ending balance of the allowance for loan losses associated with mortgage loans held by our consolidated trusts represented approximately 0.2% and 0.3% of the recorded investment in such loans as of September 30, 2013 and December 31, 2012, respectively.
Credit Protection and Other Forms of Credit Enhancement
In connection with many of our mortgage loans held-for-investment and other mortgage-related guarantees, we have credit protection in the form of primary mortgage insurance, pool insurance, recourse to lenders, and other forms of credit enhancements.
The table below presents the UPB of loans on our consolidated balance sheets or underlying our financial guarantees with credit protection and the maximum amounts of potential loss recovery by type of credit protection.
124 | Freddie Mac | |
Table 4.5 — Recourse and Other Forms of Credit Protection(1)
UPB at | Maximum Coverage(2) at | ||||||||||||||
September 30, 2013 | December 31, 2012 | September 30, 2013 | December 31, 2012 | ||||||||||||
(in millions) | |||||||||||||||
Single-family: | |||||||||||||||
Primary mortgage insurance | $ | 199,383 | $ | 188,419 | $ | 49,586 | $ | 46,685 | |||||||
Structured debt(3) | 22,242 | — | 492 | — | |||||||||||
Lender recourse and indemnifications | 7,274 | 7,875 | 6,934 | 7,718 | |||||||||||
Pool insurance(4) | 5,204 | 7,307 | 1,236 | 1,355 | |||||||||||
HFA indemnification(5) | 4,374 | 6,270 | 3,323 | 3,323 | |||||||||||
Subordination(6) | 2,720 | 2,960 | 419 | 503 | |||||||||||
Other credit enhancements | 48 | 62 | 48 | 62 | |||||||||||
Total | $ | 241,245 | $ | 212,893 | $ | 62,038 | $ | 59,646 | |||||||
Multifamily: | |||||||||||||||
HFA indemnification(5) | $ | 916 | $ | 1,112 | $ | 699 | $ | 699 | |||||||
Subordination(6) | 57,308 | 40,549 | 9,920 | 6,698 | |||||||||||
Other credit enhancements | 6,806 | 7,235 | 2,004 | 2,263 | |||||||||||
Total | $ | 65,030 | $ | 48,896 | $ | 12,623 | $ | 9,660 | |||||||
(1) | Includes the credit protection associated with unsecuritized mortgage loans, loans held by our consolidated trusts as well as our non-consolidated mortgage guarantees and excludes FHA/VA and other governmental loans. Except for subordination coverage, these amounts exclude credit protection associated with $12.0 billion and $13.8 billion in UPB of single-family loans underlying Other Guarantee Transactions as of September 30, 2013 and December 31, 2012, respectively, for which the information was not available. Also excludes repurchase obligations (subject to certain conditions and limitations) we have under representations and warranties provided by our agreements with seller/servicers to underwrite loans and service them in accordance with our standards. |
(2) | Except for subordination, this represents the remaining amount of loss recovery that is available subject to terms of counterparty agreements. |
(3) | Represents a structured agency credit risk transaction in which we issue and sell debt securities, the principal balance of which is subject to the credit and principal risk of a reference pool of single-family mortgage loans owned or guaranteed by Freddie Mac. UPB amounts presented represent the UPB of the loans in the reference pool. Maximum coverage amounts presented represent the outstanding balance of the debt securities held by third parties. |
(4) | Maximum coverage amounts presented have been limited to the remaining UPB at period end. Excludes approximately $2.1 billion and $3.3 billion in UPB at September 30, 2013 and December 31, 2012, respectively, where the related loans are also covered by primary mortgage insurance. |
(5) | Represents the amount of potential reimbursement of losses on securities we have guaranteed that are backed by state and local HFA bonds related to the HFA initiative, under which Treasury bears initial losses on these securities up to 35% of the original UPB issued under the HFA initiative on a combined program-wide basis. Treasury will also bear losses of unpaid interest. |
(6) | Represents Freddie Mac issued mortgage-related securities with subordination protection, excluding those backed by state and local HFA bonds related to the HFA initiative. Excludes mortgage-related securities where subordination coverage was exhausted. Maximum coverage amounts are limited to the remaining UPB. |
Primary mortgage insurance is the most prevalent type of credit enhancement protecting our single-family credit guarantee portfolio, and is typically provided on a loan-level basis. Pool insurance contracts provide insurance on a group of mortgage loans up to a stated aggregate loss limit. We have not purchased pool insurance on single-family loans since March 2008. We also reached the maximum limit of recovery on certain pool insurance contracts. For information about counterparty risk associated with mortgage insurers, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Mortgage Insurers.”
We also have credit enhancements protecting our multifamily mortgage portfolio. Subordination, primarily through our K Certificates, is the most prevalent type, whereby we mitigate our credit risk exposure by structuring our securities to transfer a significant portion of expected credit losses to private investors through the sale of subordinate tranches.
We also have credit protection for certain of the mortgage loans on our consolidated balance sheets that are covered by insurance or partial guarantees issued by federal agencies (such as FHA, VA, and USDA). The total UPB of these loans was $4.0 billion and $4.3 billion as of September 30, 2013 and December 31, 2012, respectively.
NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS
Individually Impaired Loans
Individually impaired single-family loans include performing and non-performing TDRs, as well as loans acquired under our financial guarantees with deteriorated credit quality. Individually impaired multifamily loans include performing and non-performing TDRs, loans three monthly payments or more past due, and loans that are impaired based on management judgment. For a discussion of our significant accounting policies regarding impaired and non-performing loans, which are applied consistently for multifamily loans and single-family loan classes, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in our 2012 Annual Report.
125 | Freddie Mac | |
Total loan loss reserves consist of a specific valuation allowance related to individually impaired mortgage loans, and a general reserve for other probable incurred losses. Our recorded investment in individually impaired mortgage loans and the related specific valuation allowance are summarized in the table below by product class (for single-family loans).
Table 5.1 — Individually Impaired Loans
Balance at September 30, 2013 | For The Three Months Ended September 30, 2013 | For The Nine Months Ended September 30, 2013 | |||||||||||||||||||||||||||||||||||||
UPB | Recorded Investment | Associated Allowance | Net Investment | Average Recorded Investment | Interest Income Recognized | Interest Income Recognized On Cash Basis(1) | Average Recorded Investment | Interest Income Recognized | Interest Income Recognized On Cash Basis(1) | ||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||
Single-family — | |||||||||||||||||||||||||||||||||||||||
With no specific allowance recorded(2): | |||||||||||||||||||||||||||||||||||||||
20 and 30-year or more, amortizing fixed-rate(3) | $ | 6,182 | $ | 3,450 | $ | — | $ | 3,450 | $ | 3,430 | $ | 100 | $ | 7 | $ | 3,346 | $ | 304 | $ | 27 | |||||||||||||||||||
15-year amortizing fixed-rate(3) | 60 | 30 | — | 30 | 32 | 1 | — | 30 | 5 | 1 | |||||||||||||||||||||||||||||
Adjustable rate(4) | 22 | 16 | — | 16 | 14 | — | — | 13 | 1 | — | |||||||||||||||||||||||||||||
Alt-A, interest-only, and option ARM(5) | 1,780 | 1,021 | — | 1,021 | 1,016 | 18 | — | 957 | 53 | 5 | |||||||||||||||||||||||||||||
Total with no specific allowance recorded | 8,044 | 4,517 | — | 4,517 | 4,492 | 119 | 7 | 4,346 | 363 | 33 | |||||||||||||||||||||||||||||
With specific allowance recorded:(6) | |||||||||||||||||||||||||||||||||||||||
20 and 30-year or more, amortizing fixed-rate(3) | 72,388 | 71,310 | (13,942 | ) | 57,368 | 70,632 | 518 | 63 | 68,962 | 1,571 | 218 | ||||||||||||||||||||||||||||
15-year amortizing fixed-rate(3) | 1,156 | 1,152 | (43 | ) | 1,109 | 1,115 | 12 | 3 | 1,095 | 37 | 8 | ||||||||||||||||||||||||||||
Adjustable rate(4) | 892 | 886 | (84 | ) | 802 | 862 | 5 | 1 | 848 | 16 | 4 | ||||||||||||||||||||||||||||
Alt-A, interest-only, and option ARM(5) | 16,997 | 16,656 | (4,023 | ) | 12,633 | 16,514 | 84 | 10 | 16,508 | 273 | 53 | ||||||||||||||||||||||||||||
Total with specific allowance recorded | 91,433 | 90,004 | (18,092 | ) | 71,912 | 89,123 | 619 | 77 | 87,413 | 1,897 | 283 | ||||||||||||||||||||||||||||
Combined single-family: | |||||||||||||||||||||||||||||||||||||||
20 and 30-year or more, amortizing fixed-rate(3) | 78,570 | 74,760 | (13,942 | ) | 60,818 | 74,062 | 618 | 70 | 72,308 | 1,875 | 245 | ||||||||||||||||||||||||||||
15-year amortizing fixed-rate(3) | 1,216 | 1,182 | (43 | ) | 1,139 | 1,147 | 13 | 3 | 1,125 | 42 | 9 | ||||||||||||||||||||||||||||
Adjustable rate(4) | 914 | 902 | (84 | ) | 818 | 876 | 5 | 1 | 861 | 17 | 4 | ||||||||||||||||||||||||||||
Alt-A, interest-only, and option ARM(5) | 18,777 | 17,677 | (4,023 | ) | 13,654 | 17,530 | 102 | 10 | 17,465 | 326 | 58 | ||||||||||||||||||||||||||||
Total single-family(7) | $ | 99,477 | $ | 94,521 | $ | (18,092 | ) | $ | 76,429 | $ | 93,615 | $ | 738 | $ | 84 | $ | 91,759 | $ | 2,260 | $ | 316 | ||||||||||||||||||
Multifamily — | |||||||||||||||||||||||||||||||||||||||
With no specific allowance recorded(8) | $ | 871 | $ | 846 | $ | — | $ | 846 | $ | 848 | $ | 11 | $ | 4 | $ | 1,099 | $ | 39 | $ | 16 | |||||||||||||||||||
With specific allowance recorded | 762 | 760 | (121 | ) | 639 | 761 | 10 | 8 | 888 | 33 | 27 | ||||||||||||||||||||||||||||
Total multifamily | $ | 1,633 | $ | 1,606 | $ | (121 | ) | $ | 1,485 | $ | 1,609 | $ | 21 | $ | 12 | $ | 1,987 | $ | 72 | $ | 43 | ||||||||||||||||||
Total single-family and multifamily | $ | 101,110 | $ | 96,127 | $ | (18,213 | ) | $ | 77,914 | $ | 95,224 | $ | 759 | $ | 96 | $ | 93,746 | $ | 2,332 | $ | 359 | ||||||||||||||||||
126 | Freddie Mac | |
Balance at December 31, 2012 | For The Three Months Ended September 30, 2012 | For The Nine Months Ended September 30, 2012 | |||||||||||||||||||||||||||||||||||||
UPB | Recorded Investment | Associated Allowance | Net Investment | Average Recorded Investment | Interest Income Recognized | Interest Income Recognized On Cash Basis(1) | Average Recorded Investment | Interest Income Recognized | Interest Income Recognized On Cash Basis(1) | ||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||
Single-family — | |||||||||||||||||||||||||||||||||||||||
With no specific allowance recorded(2): | |||||||||||||||||||||||||||||||||||||||
20 and 30-year or more, amortizing fixed-rate(3) | $ | 6,582 | $ | 3,236 | $ | — | $ | 3,236 | $ | 3,009 | $ | 86 | $ | 10 | $ | 3,052 | $ | 247 | $ | 34 | |||||||||||||||||||
15-year amortizing fixed-rate(3) | 64 | 30 | — | 30 | 21 | 1 | — | 21 | 5 | 1 | |||||||||||||||||||||||||||||
Adjustable rate(4) | 19 | 12 | — | 12 | 6 | — | — | 6 | — | — | |||||||||||||||||||||||||||||
Alt-A, interest-only, and option ARM(5) | 1,799 | 857 | — | 857 | 826 | 16 | 3 | 836 | 45 | 9 | |||||||||||||||||||||||||||||
Total with no specific allowance recorded | 8,464 | 4,135 | — | 4,135 | 3,862 | 103 | 13 | 3,915 | 297 | 44 | |||||||||||||||||||||||||||||
With specific allowance recorded:(6) | |||||||||||||||||||||||||||||||||||||||
20 and 30-year or more, amortizing fixed-rate(3) | 67,473 | 66,501 | (13,522 | ) | 52,979 | 50,471 | 359 | 65 | 47,731 | 1,004 | 203 | ||||||||||||||||||||||||||||
15-year amortizing fixed-rate(3) | 1,134 | 1,125 | (55 | ) | 1,070 | 361 | 4 | 2 | 350 | 12 | 5 | ||||||||||||||||||||||||||||
Adjustable rate(4) | 883 | 874 | (107 | ) | 767 | 300 | 2 | 1 | 282 | 5 | 3 | ||||||||||||||||||||||||||||
Alt-A, interest-only, and option ARM(5) | 16,946 | 16,656 | (4,251 | ) | 12,405 | 12,973 | 76 | 19 | 12,480 | 207 | 56 | ||||||||||||||||||||||||||||
Loans with borrowers in bankruptcy(9) | — | — | — | — | 19,376 | 200 | 7 | 6,459 | 200 | 7 | |||||||||||||||||||||||||||||
Total with specific allowance recorded | 86,436 | 85,156 | (17,935 | ) | 67,221 | 83,481 | 641 | 94 | 67,302 | 1,428 | 274 | ||||||||||||||||||||||||||||
Combined single-family: | |||||||||||||||||||||||||||||||||||||||
20 and 30-year or more, amortizing fixed-rate(3) | 74,055 | 69,737 | (13,522 | ) | 56,215 | 53,480 | 445 | 75 | 50,783 | 1,251 | 237 | ||||||||||||||||||||||||||||
15-year amortizing fixed-rate(3) | 1,198 | 1,155 | (55 | ) | 1,100 | 382 | 5 | 2 | 371 | 17 | 6 | ||||||||||||||||||||||||||||
Adjustable rate (4) | 902 | 886 | (107 | ) | 779 | 306 | 2 | 1 | 288 | 5 | 3 | ||||||||||||||||||||||||||||
Alt-A, interest-only, and option ARM(5) | 18,745 | 17,513 | (4,251 | ) | 13,262 | 13,799 | 92 | 22 | 13,316 | 252 | 65 | ||||||||||||||||||||||||||||
Loans with borrowers in bankruptcy(9) | — | — | — | — | 19,376 | 200 | 7 | 6,459 | 200 | 7 | |||||||||||||||||||||||||||||
Total single-family(7) | $ | 94,900 | $ | 89,291 | $ | (17,935 | ) | $ | 71,356 | $ | 87,343 | $ | 744 | $ | 107 | $ | 71,217 | $ | 1,725 | $ | 318 | ||||||||||||||||||
Multifamily — | |||||||||||||||||||||||||||||||||||||||
With no specific allowance recorded(8) | $ | 978 | $ | 966 | $ | — | $ | 966 | $ | 1,044 | $ | 14 | $ | 8 | $ | 1,296 | $ | 46 | $ | 28 | |||||||||||||||||||
With specific allowance recorded | 1,248 | 1,230 | (205 | ) | 1,025 | 1,372 | 18 | 14 | 1,509 | 53 | 41 | ||||||||||||||||||||||||||||
Total multifamily | $ | 2,226 | $ | 2,196 | $ | (205 | ) | $ | 1,991 | $ | 2,416 | $ | 32 | $ | 22 | $ | 2,805 | $ | 99 | $ | 69 | ||||||||||||||||||
Total single-family and multifamily | $ | 97,126 | $ | 91,487 | $ | (18,140 | ) | $ | 73,347 | $ | 89,759 | $ | 776 | $ | 129 | $ | 74,022 | $ | 1,824 | $ | 387 | ||||||||||||||||||
(1) | Consists of income recognized during the period related to loans categorized as non-accrual. |
(2) | Individually impaired loans with no specific related valuation allowance primarily represent mortgage loans purchased from PC pools and accounted for in accordance with the accounting guidance for loans and debt securities acquired with deteriorated credit quality that have not experienced further deterioration. |
(3) | See endnote (3) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.” |
(4) | Includes balloon/reset mortgage loans and excludes option ARMs. |
(5) | See endnote (5) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.” |
(6) | Consists primarily of mortgage loans classified as TDRs. |
(7) | As of September 30, 2013 and December 31, 2012 includes $91.4 billion and $86.4 billion, respectively, of UPB associated with loans for which we have recorded a specific allowance, and $8.0 billion and $8.5 billion, respectively, of UPB associated with loans that have no specific allowance recorded. See endnote (2) for additional information. |
(8) | Individually impaired multifamily loans with no specific related valuation allowance primarily represent those loans for which the collateral value is sufficiently in excess of the loan balance to result in recovery of the entire recorded investment if the property were foreclosed upon or otherwise subject to disposition. |
(9) | In the third quarter of 2012, we began to classify single-family loans as TDRs where the borrowers' debts have been discharged in Chapter 7 bankruptcy but the loans were not already classified as TDRs for other reasons. These types of TDR loans are shown separately for the 2012 periods but are included in their respective product categories in the 2013 periods. |
127 | Freddie Mac | |
Interest income foregone on individually impaired loans was $0.7 billion and $2.0 billion for the three and nine months ended September 30, 2013, respectively, compared to $0.6 billion and $1.7 billion for the three and nine months ended September 30, 2012, respectively.
Mortgage Loan Performance
We do not accrue interest on loans three months or more past due.
The table below presents the recorded investment of our single-family and multifamily mortgage loans, held-for-investment, by payment status.
Table 5.2 — Payment Status of Mortgage Loans(1)
September 30, 2013 | |||||||||||||||||||||||
Current | One Month Past Due | Two Months Past Due | Three Months or More Past Due, or in Foreclosure | Total | Non-accrual | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Single-family — | |||||||||||||||||||||||
20 and 30-year or more, amortizing fixed-rate(2) | $ | 1,147,434 | $ | 19,182 | $ | 6,519 | $ | 32,079 | $ | 1,205,214 | $ | 31,981 | |||||||||||
15-year amortizing fixed-rate(2) | 294,965 | 1,149 | 266 | 933 | 297,313 | 930 | |||||||||||||||||
Adjustable-rate(3) | 63,817 | 526 | 146 | 975 | 65,464 | 974 | |||||||||||||||||
Alt-A, interest-only, and option ARM(4) | 65,858 | 2,920 | 1,161 | 11,406 | 81,345 | 11,312 | |||||||||||||||||
Total single-family | 1,572,074 | 23,777 | 8,092 | 45,393 | 1,649,336 | 45,197 | |||||||||||||||||
Total multifamily | 54,471 | 43 | 4 | 26 | 54,544 | 933 | |||||||||||||||||
Total single-family and multifamily | $ | 1,626,545 | $ | 23,820 | $ | 8,096 | $ | 45,419 | $ | 1,703,880 | $ | 46,130 | |||||||||||
December 31, 2012 | |||||||||||||||||||||||
Current | One Month Past Due | Two Months Past Due | Three Months or More Past Due, or in Foreclosure | Total | Non-accrual | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Single-family — | |||||||||||||||||||||||
20 and 30-year or more, amortizing fixed-rate(2) | $ | 1,125,996 | $ | 21,509 | $ | 8,051 | $ | 40,977 | $ | 1,196,533 | $ | 40,833 | |||||||||||
15-year amortizing fixed-rate(2) | 270,730 | 1,320 | 338 | 1,184 | 273,572 | 1,177 | |||||||||||||||||
Adjustable-rate(3) | 63,736 | 614 | 212 | 1,388 | 65,950 | 1,383 | |||||||||||||||||
Alt-A, interest-only, and option ARM(4) | 82,438 | 3,439 | 1,582 | 16,270 | 103,729 | 16,237 | |||||||||||||||||
Total single-family | 1,542,900 | 26,882 | 10,183 | 59,819 | 1,639,784 | 59,630 | |||||||||||||||||
Total multifamily | 63,000 | — | 2 | 30 | 63,032 | 1,457 | |||||||||||||||||
Total single-family and multifamily | $ | 1,605,900 | $ | 26,882 | $ | 10,185 | $ | 59,849 | $ | 1,702,816 | $ | 61,087 | |||||||||||
(1) | Based on recorded investment in the loan. Mortgage loans that have been modified are not counted as past due as long as the borrower is current under the modified terms. The payment status of a loan may be affected by temporary timing differences, or lags, in the reporting of this information to us by our servicers. |
(2) | See endnote (3) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.” |
(3) | Includes balloon/reset mortgage loans and excludes option ARMs. |
(4) | See endnote (5) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.” |
We have the option under our PC agreements to remove mortgage loans that underlie our PCs under certain circumstances to resolve an existing or impending delinquency or default. Our practice generally has been to remove loans from PC trusts when the loans have been delinquent for 120 days or more. As of September 30, 2013, there were $1.1 billion in UPB of loans underlying our PCs that were 120 days or more delinquent, and that met our criteria for removing the loan from the PC trust. Generally, we remove these delinquent loans from the PC trust, and thereby extinguish the related PC debt, at the next scheduled PC payment date, unless the loans proceed to foreclosure transfer, complete a foreclosure alternative or are paid in full by the borrower before such date.
When we remove mortgage loans from PC trusts, we reclassify the loans from mortgage loans held-for-investment by consolidated trusts to unsecuritized mortgage loans held-for-investment and record an extinguishment of the corresponding portion of the debt securities of the consolidated trusts. We removed $4.0 billion and $14.6 billion in UPB of loans from PC trusts (or purchased delinquent loans associated with other guarantee commitments) during the three and nine months ended September 30, 2013, respectively, compared to $6.7 billion and $23.4 billion during the three and nine months ended September 30, 2012, respectively.
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The table below summarizes the delinquency rates of mortgage loans within our single-family credit guarantee and multifamily mortgage portfolios.
Table 5.3 — Delinquency Rates(1)
September 30, 2013 | December 31, 2012 | ||||||
Single-family: | |||||||
Non-credit-enhanced portfolio (excluding Other Guarantee Transactions): | |||||||
Serious delinquency rate | 2.14 | % | 2.62 | % | |||
Total number of seriously delinquent loans | 198,241 | 244,533 | |||||
Credit-enhanced portfolio (excluding Other Guarantee Transactions): | |||||||
Serious delinquency rate | 4.71 | % | 6.83 | % | |||
Total number of seriously delinquent loans | 61,461 | 90,747 | |||||
Other Guarantee Transactions:(2) | |||||||
Serious delinquency rate | 11.63 | % | 10.60 | % | |||
Total number of seriously delinquent loans | 16,422 | 17,580 | |||||
Total single-family: | |||||||
Serious delinquency rate | 2.58 | % | 3.25 | % | |||
Total number of seriously delinquent loans | 276,124 | 352,860 | |||||
Multifamily:(3) | |||||||
Non-credit-enhanced portfolio: | |||||||
Delinquency rate | 0.05 | % | 0.10 | % | |||
UPB of delinquent loans (in millions) | $ | 31 | $ | 76 | |||
Credit-enhanced portfolio: | |||||||
Delinquency rate | 0.06 | % | 0.36 | % | |||
UPB of delinquent loans (in millions) | $ | 38 | $ | 172 | |||
Total Multifamily: | |||||||
Delinquency rate | 0.05 | % | 0.19 | % | |||
UPB of delinquent loans (in millions) | $ | 69 | $ | 248 | |||
(1) | Single-family mortgage loans that have been modified are not counted as seriously delinquent if the borrower is less than three monthly payments past due under the modified terms. Serious delinquencies on single-family mortgage loans underlying certain REMICs and Other Structured Securities, Other Guarantee Transactions, and other guarantee commitments may be reported on a different schedule due to variances in industry practice. |
(2) | Single-family Other Guarantee Transactions generally have underlying mortgage loans with higher risk characteristics, but some single-family Other Guarantee Transactions may provide inherent credit protections from losses due to underlying subordination, excess interest, overcollateralization and other features. |
(3) | Multifamily delinquency performance is based on UPB of mortgage loans that are two monthly payments or more past due or those in the process of foreclosure and includes multifamily Other Guarantee Transactions. Excludes mortgage loans that have been modified as long as the borrower is less than two monthly payments past due under the modified contractual terms. |
We continue to implement a number of initiatives to modify and restructure loans, including the MHA Program. As part of accomplishing certain of these initiatives, we pay various incentives to servicers and borrowers. We bear the full costs associated with these loan workout and foreclosure alternatives on mortgages that we own or guarantee, including the cost of any monthly payment reductions, and do not receive any reimbursement from Treasury.
Troubled Debt Restructurings
Single-Family TDRs
For information about our loss mitigation activities that can result in our granting a concession to a borrower, including our participation in HAMP, see “NOTE 5: INDIVIDUALLY IMPAIRED AND NON-PERFORMING LOANS” in our 2012 Annual Report.
During the three and nine months ended September 30, 2013, approximately 57% and 56% of completed single-family loan modifications that were classified as TDRs involved interest rate reductions and term extensions and approximately 32% and 36%, respectively, involved principal forbearance in addition to interest rate reductions and term extensions. During the three and nine months ended September 30, 2013, the average term extension was 164 and 155 months and the average interest rate reduction was 2.1% and 2.2%, respectively, on completed single-family loan modifications classified as TDRs.
TDR Activity and Performance
The table below presents the volume of single-family and multifamily loans that were newly classified as TDRs during the three and nine months ended September 30, 2013 and 2012, based on the original category of the loan before the loan was classified as a TDR. Loans classified as a TDR in one period may be subject to further action (such as a modification or
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remodification) in a subsequent period. In such cases, the subsequent action would not be reflected in the table below since the loan would already have been classified as a TDR.
Table 5.4 — TDR Activity, by Segment
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||||||||||||||
# of Loans | Post-TDR Recorded Investment | # of Loans | Post-TDR Recorded Investment | # of Loans | Post-TDR Recorded Investment | # of Loans | Post-TDR Recorded Investment | ||||||||||||||||||||
(dollars in millions) | |||||||||||||||||||||||||||
Single-family(1) | |||||||||||||||||||||||||||
20 and 30-year or more, amortizing fixed-rate(2) | 25,289 | $ | 3,916 | 19,214 | $ | 3,432 | 69,681 | $ | 11,149 | 54,778 | $ | 9,717 | |||||||||||||||
15-year amortizing fixed-rate | 2,020 | 156 | 949 | 92 | 6,617 | 486 | 3,014 | 284 | |||||||||||||||||||
Adjustable-rate(3) | 694 | 122 | 478 | 90 | 2,372 | 382 | 1,487 | 282 | |||||||||||||||||||
Alt-A, interest-only, and option ARM(4) | 4,356 | 952 | 4,311 | 1,099 | 13,063 | 2,960 | 12,967 | 3,299 | |||||||||||||||||||
Loans with borrowers in bankruptcy(5) | — | — | 145,637 | 20,011 | — | — | 145,637 | 20,011 | |||||||||||||||||||
Total Single-family | 32,359 | 5,146 | 170,589 | 24,724 | 91,733 | 14,977 | 217,883 | 33,593 | |||||||||||||||||||
Multifamily | 3 | 25 | — | — | 8 | 98 | 14 | 117 | |||||||||||||||||||
Total | 32,362 | $ | 5,171 | 170,589 | $ | 24,724 | 91,741 | $ | 15,075 | 217,897 | $ | 33,710 | |||||||||||||||
(1) | The pre-TDR recorded investment for single-family loans initially classified as TDR during the three and nine months ended September 30, 2013 was $5.1 billion and $14.9 billion, respectively, compared to $24.7 billion and $33.5 billion during the three and nine months ended September 30, 2012, respectively. |
(2) | See endnote (3) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.” |
(3) | Includes balloon/reset mortgage loans. |
(4) | See endnote (5) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.” |
(5) | During the third quarter of 2012, we changed the treatment of single-family loans discharged in Chapter 7 bankruptcy to classify these loans as TDRs, regardless of the borrowers’ payment status and when the loans were not already classified as TDRs for other reasons. As a result, in the third quarter of 2012, we classified loans with a recorded investment of $20.0 billion that were discharged in Chapter 7 bankruptcy as TDRs. These types of TDR loans are shown separately in the 2012 periods but are included in their respective product categories in the 2013 periods. |
The table below presents the volume of payment defaults (i.e., loans that became two months delinquent or completed a loss event) of our TDR modifications based on the original category of the loan before modification and excludes loans subject to other loss mitigation activity that were classified as TDRs during the period. Substantially all of our completed single-family loan modifications classified as a TDR during the nine months ended September 30, 2013 resulted in a modified loan with a fixed interest rate.
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Table 5.5 — Payment Defaults of Completed TDR Modifications, by Segment(1)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||||||||||||||
# of Loans | Post-TDR Recorded Investment(2) | # of Loans | Post-TDR Recorded Investment(2) | # of Loans | Post-TDR Recorded Investment(2) | # of Loans | Post-TDR Recorded Investment(2) | ||||||||||||||||||||
(dollars in millions) | |||||||||||||||||||||||||||
Single-family | |||||||||||||||||||||||||||
20 and 30-year or more, amortizing fixed-rate(3) | 3,943 | $ | 726 | 3,323 | $ | 596 | 10,726 | $ | 1,989 | 12,360 | $ | 2,280 | |||||||||||||||
15-year amortizing fixed-rate | 106 | 12 | 143 | 14 | 323 | 36 | 580 | 59 | |||||||||||||||||||
Adjustable-rate | 64 | 14 | 78 | 16 | 167 | 34 | 278 | 60 | |||||||||||||||||||
Alt-A, interest-only, and option ARM(4) | 590 | 155 | 629 | 166 | 1,652 | 437 | 2,517 | 665 | |||||||||||||||||||
Total single-family | 4,703 | $ | 907 | 4,173 | $ | 792 | 12,868 | $ | 2,496 | 15,735 | $ | 3,064 | |||||||||||||||
Multifamily | — | $ | — | — | $ | — | — | $ | — | 2 | $ | 27 | |||||||||||||||
(1) | Represents TDR loans that experienced a payment default during the period and had completed a modification during the year preceding the payment default. A payment default occurs when a borrower either: (a) became two or more months delinquent; or (b) completed a loss event, such as a short sale or foreclosure transfer. We only include payment defaults for a single loan once during each quarterly period within a year; however, a single loan will be reflected more than once if the borrower experienced another payment default in a subsequent quarterly period. |
(2) | Represents the recorded investment at the end of the period in which the loan was modified and does not represent the recorded investment as of September 30. |
(3) | See endnote (3) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.” |
(4) | See endnote (5) of “Table 4.2 — Recorded Investment of Held-For-Investment Mortgage Loans, by LTV Ratio.” |
In addition to modifications, loans may be initially classified as TDRs as a result of other loss mitigation activities (i.e., repayment plans, forbearance agreements, or trial period modifications). During the nine months ended September 30, 2013 and 2012, 6,136 and 6,981 of such loans, respectively, with a post-TDR recorded investment of $1.0 billion and $1.1 billion, respectively, experienced a payment default.
Loans may also be initially classified as TDRs because the borrowers’ debts were discharged in Chapter 7 bankruptcy (and the loan was not already classified as a TDR for other reasons). During the nine months ended September 30, 2013 and 2012, 15,611 and 5,883, respectively, of such loans (with a post-TDR recorded investment of $2.6 billion and $1.0 billion, respectively) experienced a payment default.
NOTE 6: REAL ESTATE OWNED
We obtain REO properties: (a) when we are the highest bidder at foreclosure sales of properties that collateralize non-performing single-family and multifamily mortgage loans owned by us; or (b) when a delinquent borrower chooses to transfer the mortgaged property to us in lieu of going through the foreclosure process (i.e., deed in lieu of foreclosure). See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in our 2012 Annual Report for a discussion of our significant accounting policies for REO.
The table below provides a summary of the change in the carrying value of our combined single-family and multifamily REO balances. For the periods presented in the table below, the weighted average holding period for our disposed properties was less than one year.
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Table 6.1 — REO(1)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(in millions) | |||||||||||||||
Beginning balance — REO | $ | 4,073 | $ | 4,839 | $ | 4,407 | $ | 5,827 | |||||||
Additions | 1,832 | 1,750 | 4,820 | 5,390 | |||||||||||
Dispositions | (1,523 | ) | (2,056 | ) | (4,845 | ) | (6,684 | ) | |||||||
Ending balance — REO | 4,382 | 4,533 | 4,382 | 4,533 | |||||||||||
Beginning balance, valuation allowance | (22 | ) | (30 | ) | (29 | ) | (147 | ) | |||||||
Change in valuation allowance | 8 | (1 | ) | 15 | 116 | ||||||||||
Ending balance, valuation allowance | (14 | ) | (31 | ) | (14 | ) | (31 | ) | |||||||
Ending balance — REO, net | $ | 4,368 | $ | 4,502 | $ | 4,368 | $ | 4,502 | |||||||
(1) | In the fourth quarter of 2012, we revised our presentation of REO activity to include the initial estimated costs to sell within REO activities rather than within the change in valuation allowance. Prior period amounts have been revised to conform to current period presentation. |
The REO balance, net at September 30, 2013 and December 31, 2012 associated with single-family properties was $4.4 billion and $4.3 billion, respectively, and the balance associated with multifamily properties was $2 million and $64 million, respectively. The Southeast region represented approximately 34% and 27% of our single-family REO additions during the three months ended September 30, 2013 and 2012, respectively, based on the number of properties, and the North Central region represented approximately 28% and 35% of our single-family REO additions during these periods. Our single-family REO inventory consisted of 47,119 properties and 49,071 properties at September 30, 2013 and December 31, 2012, respectively. In recent years, the foreclosure process has been significantly slowed in many geographical areas due to lengthening of the foreclosure process, particularly in states that require a judicial foreclosure process, which extends the time it takes for loans to be foreclosed upon and the underlying property to transition to REO. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS” for additional information about regional concentrations in our portfolio.
Our REO operations expenses include: (a) REO property expenses; (b) net gains or losses incurred on disposition of REO properties; (c) adjustments to the holding period allowance associated with REO properties to record them at the lower of their carrying amount or fair value less the estimated costs to sell; and (d) recoveries from insurance and other credit enhancements. An allowance for estimated declines in the REO fair value during the period properties are held reduces the carrying value of REO property. Excluding holding period valuation adjustments and recoveries, we recognized gains of $212 million and $230 million on REO dispositions during the three months ended September 30, 2013 and 2012, respectively, and $608 million and $491 million on REO dispositions during the nine months ended September 30, 2013 and 2012, respectively. We increased (decreased) our valuation allowance for properties in our REO inventory by $(5) million and $9 million during the three months ended September 30, 2013 and 2012, respectively, and $12 million and $(15) million during the nine months ended September 30, 2013 and 2012, respectively.
REO property acquisitions that result from extinguishment of our mortgage loans held on our consolidated balance sheets are treated as non-cash transfers. The amount of non-cash acquisitions of REO properties during the nine months ended September 30, 2013 and 2012 was $4.5 billion and $5.2 billion, respectively.
NOTE 7: INVESTMENTS IN SECURITIES
The table below summarizes amortized cost, estimated fair values, and corresponding gross unrealized gains and gross unrealized losses for available-for-sale securities by major security type. At September 30, 2013 and December 31, 2012, all available-for-sale securities are mortgage-related securities.
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Table 7.1 — Available-For-Sale Securities
September 30, 2013 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||
(in millions) | |||||||||||||||
Available-for-sale securities: | |||||||||||||||
Freddie Mac | $ | 41,814 | $ | 2,434 | $ | (103 | ) | $ | 44,145 | ||||||
Fannie Mae | 10,851 | 712 | (2 | ) | 11,561 | ||||||||||
Ginnie Mae | 155 | 21 | — | 176 | |||||||||||
CMBS | 34,676 | 1,986 | (294 | ) | 36,368 | ||||||||||
Subprime | 31,987 | 252 | (4,667 | ) | 27,572 | ||||||||||
Option ARM | 6,815 | 228 | (619 | ) | 6,424 | ||||||||||
Alt-A and other | 9,080 | 372 | (349 | ) | 9,103 | ||||||||||
Obligations of states and political subdivisions | 3,784 | 30 | (53 | ) | 3,761 | ||||||||||
Manufactured housing | 650 | 50 | (12 | ) | 688 | ||||||||||
Total available-for-sale securities | $ | 139,812 | $ | 6,085 | $ | (6,099 | ) | $ | 139,798 | ||||||
December 31, 2012 | |||||||||||||||
Available-for-sale securities: | |||||||||||||||
Freddie Mac | $ | 53,965 | $ | 4,602 | $ | (52 | ) | $ | 58,515 | ||||||
Fannie Mae | 14,183 | 1,099 | (2 | ) | 15,280 | ||||||||||
Ginnie Mae | 183 | 26 | — | 209 | |||||||||||
CMBS | 47,606 | 3,882 | (181 | ) | 51,307 | ||||||||||
Subprime | 35,503 | 83 | (9,129 | ) | 26,457 | ||||||||||
Option ARM | 7,454 | 48 | (1,785 | ) | 5,717 | ||||||||||
Alt-A and other | 11,861 | 244 | (1,201 | ) | 10,904 | ||||||||||
Obligations of states and political subdivisions | 5,647 | 154 | (3 | ) | 5,798 | ||||||||||
Manufactured housing | 716 | 24 | (31 | ) | 709 | ||||||||||
Total available-for-sale securities | $ | 177,118 | $ | 10,162 | $ | (12,384 | ) | $ | 174,896 | ||||||
Available-For-Sale Securities in a Gross Unrealized Loss Position
The table below shows the fair value of available-for-sale securities in a gross unrealized loss position, and whether they have been in that position less than 12 months, or 12 months or greater, including the non-credit-related portion of other-than-temporary impairments, which have been recognized in AOCI.
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Table 7.2 — Available-For-Sale Securities in a Gross Unrealized Loss Position
Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||||||||||||||||||||||||||
Gross Unrealized Losses | Gross Unrealized Losses | Gross Unrealized Losses | |||||||||||||||||||||||||||||||||||||||||||||
September 30, 2013 | Fair Value | Other-Than- Temporary Impairment(1) | Temporary Impairment(2) | Total | Fair Value | Other-Than- Temporary Impairment(1) | Temporary Impairment(2) | Total | Fair Value | Other-Than- Temporary Impairment(1) | Temporary Impairment(2) | Total | |||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Freddie Mac | $ | 3,462 | $ | — | $ | (85 | ) | $ | (85 | ) | $ | 300 | $ | — | $ | (18 | ) | $ | (18 | ) | $ | 3,762 | $ | — | $ | (103 | ) | $ | (103 | ) | |||||||||||||||||
Fannie Mae | 254 | — | (1 | ) | (1 | ) | 18 | — | (1 | ) | (1 | ) | 272 | — | (2 | ) | (2 | ) | |||||||||||||||||||||||||||||
CMBS | 1,321 | (8 | ) | (56 | ) | (64 | ) | 2,106 | (10 | ) | (220 | ) | (230 | ) | 3,427 | (18 | ) | (276 | ) | (294 | ) | ||||||||||||||||||||||||||
Subprime | 897 | (57 | ) | — | (57 | ) | 23,994 | (3,992 | ) | (618 | ) | (4,610 | ) | 24,891 | (4,049 | ) | (618 | ) | (4,667 | ) | |||||||||||||||||||||||||||
Option ARM | 667 | (54 | ) | — | (54 | ) | 3,475 | (558 | ) | (7 | ) | (565 | ) | 4,142 | (612 | ) | (7 | ) | (619 | ) | |||||||||||||||||||||||||||
Alt-A and other | 940 | (18 | ) | — | (18 | ) | 3,336 | (257 | ) | (74 | ) | (331 | ) | 4,276 | (275 | ) | (74 | ) | (349 | ) | |||||||||||||||||||||||||||
Obligations of states and political subdivisions | 1,632 | (6 | ) | (42 | ) | (48 | ) | 23 | — | (5 | ) | (5 | ) | 1,655 | (6 | ) | (47 | ) | (53 | ) | |||||||||||||||||||||||||||
Manufactured housing | 20 | — | — | — | 113 | (10 | ) | (2 | ) | (12 | ) | 133 | (10 | ) | (2 | ) | (12 | ) | |||||||||||||||||||||||||||||
Total available-for-sale securities in a gross unrealized loss position | $ | 9,193 | $ | (143 | ) | $ | (184 | ) | $ | (327 | ) | $ | 33,365 | $ | (4,827 | ) | $ | (945 | ) | $ | (5,772 | ) | $ | 42,558 | $ | (4,970 | ) | $ | (1,129 | ) | $ | (6,099 | ) | ||||||||||||||
Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||||||||||||||||||||||||||
Gross Unrealized Losses | Gross Unrealized Losses | Gross Unrealized Losses | |||||||||||||||||||||||||||||||||||||||||||||
December 31, 2012 | Fair Value | Other-Than- Temporary Impairment(1) | Temporary Impairment(2) | Total | Fair Value | Other-Than- Temporary Impairment(1) | Temporary Impairment(2) | Total | Fair Value | Other-Than- Temporary Impairment(1) | Temporary Impairment(2) | Total | |||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Freddie Mac | $ | 1,811 | $ | — | $ | (25 | ) | $ | (25 | ) | $ | 1,872 | $ | — | $ | (27 | ) | $ | (27 | ) | $ | 3,683 | $ | — | $ | (52 | ) | $ | (52 | ) | |||||||||||||||||
Fannie Mae | 170 | — | — | — | 55 | — | (2 | ) | (2 | ) | 225 | — | (2 | ) | (2 | ) | |||||||||||||||||||||||||||||||
CMBS | 340 | — | (3 | ) | (3 | ) | 3,425 | (22 | ) | (156 | ) | (178 | ) | 3,765 | (22 | ) | (159 | ) | (181 | ) | |||||||||||||||||||||||||||
Subprime | 298 | (23 | ) | — | (23 | ) | 25,676 | (7,830 | ) | (1,276 | ) | (9,106 | ) | 25,974 | (7,853 | ) | (1,276 | ) | (9,129 | ) | |||||||||||||||||||||||||||
Option ARM | 82 | (3 | ) | — | (3 | ) | 5,182 | (1,759 | ) | (23 | ) | (1,782 | ) | 5,264 | (1,762 | ) | (23 | ) | (1,785 | ) | |||||||||||||||||||||||||||
Alt-A and other | 50 | (4 | ) | — | (4 | ) | 7,938 | (961 | ) | (236 | ) | (1,197 | ) | 7,988 | (965 | ) | (236 | ) | (1,201 | ) | |||||||||||||||||||||||||||
Obligations of states and political subdivisions | 37 | — | (1 | ) | (1 | ) | 45 | — | (2 | ) | (2 | ) | 82 | — | (3 | ) | (3 | ) | |||||||||||||||||||||||||||||
Manufactured housing | 46 | — | — | — | 222 | (26 | ) | (5 | ) | (31 | ) | 268 | (26 | ) | (5 | ) | (31 | ) | |||||||||||||||||||||||||||||
Total available-for-sale securities in a gross unrealized loss position | $ | 2,834 | $ | (30 | ) | $ | (29 | ) | $ | (59 | ) | $ | 44,415 | $ | (10,598 | ) | $ | (1,727 | ) | $ | (12,325 | ) | $ | 47,249 | $ | (10,628 | ) | $ | (1,756 | ) | $ | (12,384 | ) | ||||||||||||||
(1) | Represents the gross unrealized losses for securities for which we have previously recognized other-than-temporary impairments in earnings. |
(2) | Represents the gross unrealized losses for securities for which we have not previously recognized other-than-temporary impairments in earnings. |
At September 30, 2013, total gross unrealized losses on available-for-sale securities were $6.1 billion. The gross unrealized losses relate to 1,084 individual lots representing 1,042 separate securities, including securities with non-credit-related other-than-temporary impairments recognized in AOCI. We purchase multiple lots of individual securities at different times and at different costs. We determine gross unrealized gains and gross unrealized losses by specifically evaluating investment positions at the lot level; therefore, some of the lots we hold for a single security may be in an unrealized gain position while other lots for that security may be in an unrealized loss position, depending upon the amortized cost of the specific lot.
Impairment Recognition on Investments in Securities
We recognize impairment losses on available-for-sale securities within our consolidated statements of comprehensive income as net impairment of available-for-sale securities recognized in earnings when we conclude that a decrease in the fair value of a security is other-than-temporary.
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See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” and “NOTE 7: INVESTMENTS IN SECURITIES” in our 2012 Annual Report for information on our accounting policy for impairment recognition on investments in securities and our methodologies for measuring impairment on investments in securities, respectively.
As noted in “Table 7.4 — Net Impairment of Available-For-Sale Securities Recognized in Earnings,” our net impairment on available-for-sale securities during the three and nine months ended September 30, 2013 includes certain securities that we have the intent to sell prior to the recovery of the unrealized loss. In cases where we have the intent to sell or it is more likely than not that we will be required to sell the security before recovery of its amortized cost, the security’s entire decline in fair value would be deemed to be other-than-temporary and is recorded within our consolidated statements of comprehensive income as net impairment of available-for-sale securities recognized in earnings. For the remaining available-for-sale securities in an unrealized loss position at September 30, 2013, we have asserted that we have no intent to sell and that we believe it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis.
The table below presents the modeled attributes, including default rates, prepayment rates, and severities, without regard to subordination, that are used to determine whether our interests in certain available-for-sale non-agency mortgage-related securities will experience a cash shortfall.
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Table 7.3 — Significant Modeled Attributes for Certain Available-For-Sale Non-Agency Mortgage-Related Securities
September 30, 2013 | |||||||||||||||||||
Alt-A(1) | |||||||||||||||||||
Subprime First Lien(2) | Option ARM | Fixed Rate | Variable Rate | Hybrid Rate | |||||||||||||||
(dollars in millions) | |||||||||||||||||||
Issuance Date | |||||||||||||||||||
2004 and prior: | |||||||||||||||||||
UPB | $ | 964 | $ | 51 | $ | 550 | $ | 359 | $ | 601 | |||||||||
Weighted average collateral defaults(3) | 37 | % | 23 | % | 13 | % | 32 | % | 22 | % | |||||||||
Weighted average collateral severities(4) | 59 | % | 47 | % | 47 | % | 44 | % | 39 | % | |||||||||
Weighted average voluntary prepayment rates(5) | 7 | % | 8 | % | 12 | % | 7 | % | 8 | % | |||||||||
Average credit enhancements(6) | 38 | % | 5 | % | 15 | % | 16 | % | 11 | % | |||||||||
2005: | |||||||||||||||||||
UPB | $ | 3,940 | $ | 2,311 | $ | 800 | $ | 658 | $ | 3,200 | |||||||||
Weighted average collateral defaults(3) | 48 | % | 35 | % | 21 | % | 41 | % | 25 | % | |||||||||
Weighted average collateral severities(4) | 61 | % | 52 | % | 47 | % | 49 | % | 41 | % | |||||||||
Weighted average voluntary prepayment rates(5) | 4 | % | 7 | % | 10 | % | 7 | % | 9 | % | |||||||||
Average credit enhancements(6) | 47 | % | 4 | % | — | % | 21 | % | 2 | % | |||||||||
2006: | |||||||||||||||||||
UPB | $ | 16,941 | $ | 5,020 | $ | 414 | $ | 866 | $ | 936 | |||||||||
Weighted average collateral defaults(3) | 56 | % | 45 | % | 29 | % | 49 | % | 27 | % | |||||||||
Weighted average collateral severities(4) | 62 | % | 53 | % | 48 | % | 54 | % | 40 | % | |||||||||
Weighted average voluntary prepayment rates(5) | 2 | % | 6 | % | 8 | % | 6 | % | 10 | % | |||||||||
Average credit enhancements(6) | 6 | % | (4 | )% | 1 | % | (8 | )% | (3 | )% | |||||||||
2007: | |||||||||||||||||||
UPB | $ | 18,646 | $ | 3,373 | $ | 140 | $ | 1,109 | $ | 233 | |||||||||
Weighted average collateral defaults(3) | 55 | % | 46 | % | 47 | % | 47 | % | 44 | % | |||||||||
Weighted average collateral severities(4) | 62 | % | 53 | % | 51 | % | 52 | % | 48 | % | |||||||||
Weighted average voluntary prepayment rates(5) | 2 | % | 6 | % | 6 | % | 6 | % | 7 | % | |||||||||
Average credit enhancements(6) | 5 | % | 5 | % | (1 | )% | (19 | )% | — | % | |||||||||
Total: | |||||||||||||||||||
UPB | $ | 40,491 | $ | 10,755 | $ | 1,904 | $ | 2,992 | $ | 4,970 | |||||||||
Weighted average collateral defaults(3) | 54 | % | 43 | % | 22 | % | 45 | % | 26 | % | |||||||||
Weighted average collateral severities(4) | 62 | % | 53 | % | 48 | % | 51 | % | 41 | % | |||||||||
Weighted average voluntary prepayment rates(5) | 3 | % | 6 | % | 10 | % | 6 | % | 9 | % | |||||||||
Average credit enhancements(6) | 10 | % | — | % | 5 | % | (3 | )% | 2 | % | |||||||||
(1) | Excludes non-agency mortgage-related securities backed by other loans, which are primarily comprised of securities backed by home equity lines of credit. |
(2) | Excludes non-agency mortgage-related securities backed exclusively by subprime second liens. Certain securities identified as subprime first lien may be backed in part by subprime second-lien loans, as the underlying loans of these securities were permitted to include a small percentage of subprime second-lien loans. |
(3) | The expected cumulative default rate is expressed as a percentage of the current collateral UPB. |
(4) | The expected average loss given default is calculated as the ratio of cumulative loss over cumulative default for each security. |
(5) | The security’s voluntary prepayment rate represents the average of the monthly voluntary prepayment rate weighted by the security’s outstanding UPB. |
(6) | Reflects the amount of subordination and other financial support (excluding credit enhancement provided by bond insurance) that will incur losses in the securitization structure before any losses are allocated to securities that we own. Percentage generally calculated based on: (a) the total UPB of securities subordinate to the securities we own; divided by (b) the total UPB of all of the securities issued by the trust (excluding notional balances). Negative values are shown when collateral losses that have yet to be applied to the tranches exceed the remaining credit enhancement, if any. The level of credit enhancement, including those securities with negative values, has been considered in our assessment of other-than temporary impairment. |
Other-Than-Temporary Impairments on Available-for-Sale Securities
The table below summarizes our net impairment of available-for-sale securities recognized in earnings by security type.
136 | Freddie Mac | |
Table 7.4 — Net Impairment of Available-For-Sale Securities Recognized in Earnings
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(in millions) | |||||||||||||||
Available-for-sale securities:(1) | |||||||||||||||
CMBS | $ | (3 | ) | $ | (45 | ) | $ | (13 | ) | $ | (80 | ) | |||
Subprime | (45 | ) | (160 | ) | (91 | ) | (659 | ) | |||||||
Option ARM | (12 | ) | (62 | ) | (17 | ) | (128 | ) | |||||||
Alt-A and other | (66 | ) | — | (91 | ) | (59 | ) | ||||||||
Manufactured housing | — | — | (1 | ) | (3 | ) | |||||||||
Total net impairment of available-for-sale securities recognized in earnings | $ | (126 | ) | $ | (267 | ) | $ | (213 | ) | $ | (929 | ) | |||
(1) | Includes $118 million and $134 million of other-than-temporary impairments recognized in earnings for the three and nine months ended September 30, 2013, respectively, as we had the intent to sell the related securities before recovery of their amortized cost basis. |
The table below presents the changes in the unrealized credit-related other-than-temporary impairment component of the amortized cost related to available-for-sale securities: (a) that we have written down for other-than-temporary impairment; and (b) for which the credit component of the loss has been recognized in earnings. The credit-related other-than-temporary impairment component of the amortized cost represents the difference between the present value of expected future cash flows, including the estimated proceeds from bond insurance, and the amortized cost basis of the security prior to considering credit losses. The beginning balances represent the other-than-temporary impairment credit loss components related to available-for-sale securities for which other-than-temporary impairment occurred prior to July 1, 2013, July 1, 2012, January 1, 2013, and January 1, 2012, respectively, but will not be realized until the securities are sold, written off, or mature. Net impairment of available-for-sale securities recognized in earnings is presented as additions in two components based upon whether the current period is: (a) the first time the debt security was credit-impaired; or (b) not the first time the debt security was credit-impaired. The credit loss component is reduced if we sell, intend to sell or believe we will be required to sell previously credit-impaired available-for-sale securities. Additionally, the credit loss component is reduced by the amortization resulting from significant increases in cash flows expected to be collected that are recognized over the remaining life of the security.
Table 7.5 — Other-Than-Temporary Impairments Related to Credit Losses on Available-For-Sale Securities
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(in millions) | |||||||||||||||
Credit-related other-than-temporary impairments on available-for-sale securities recognized in earnings: | |||||||||||||||
Beginning balance — remaining credit losses on available-for-sale securities where other-than-temporary impairments were recognized in earnings | $ | 15,772 | $ | 15,863 | $ | 16,745 | $ | 15,988 | |||||||
Additions: | |||||||||||||||
Amounts related to credit losses for which an other-than-temporary impairment was not previously recognized | 4 | 48 | 20 | 88 | |||||||||||
Amounts related to credit losses for which an other-than-temporary impairment was previously recognized | 4 | 219 | 59 | 841 | |||||||||||
Reductions: | |||||||||||||||
Amounts related to securities which were sold, written off, or matured | (261 | ) | (318 | ) | (1,066 | ) | (974 | ) | |||||||
Amounts for which we intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis | (182 | ) | — | (291 | ) | (15 | ) | ||||||||
Amounts related to amortization resulting from significant increases in cash flows expected to be collected and/or due to the passage of time that are recognized over the remaining life of the security | (137 | ) | 48 | (267 | ) | (68 | ) | ||||||||
Ending balance — remaining credit losses on available-for-sale securities where other-than-temporary impairments were recognized in earnings(1) | $ | 15,200 | $ | 15,860 | $ | 15,200 | $ | 15,860 | |||||||
(1) | Excludes other-than-temporary impairments on securities that we intend to sell or it is more likely than not that we will be required to sell before recovery of the unrealized losses. |
Realized Gains and Losses on Sales of Available-For-Sale Securities
The table below illustrates the gross realized gains and gross realized losses received from the sale of available-for-sale securities.
137 | Freddie Mac | |
Table 7.6 — Gross Realized Gains and Gross Realized Losses on Sales of Available-For-Sale Securities
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(in millions) | |||||||||||||||
Gross realized gains | |||||||||||||||
Mortgage-related securities: | |||||||||||||||
Freddie Mac | $ | 172 | $ | — | $ | 248 | $ | 34 | |||||||
Fannie Mae | 1 | — | 17 | 13 | |||||||||||
CMBS | 685 | — | 892 | 82 | |||||||||||
Option ARM | — | — | — | 3 | |||||||||||
Alt-A and other | 10 | — | 56 | — | |||||||||||
Obligations of states and political subdivisions | 1 | 8 | 13 | 9 | |||||||||||
Total mortgage-related securities gross realized gains | 869 | 8 | 1,226 | 141 | |||||||||||
Gross realized gains | 869 | 8 | 1,226 | 141 | |||||||||||
Gross realized losses | |||||||||||||||
Mortgage related securities:(1) | |||||||||||||||
Freddie Mac | (19 | ) | — | (19 | ) | — | |||||||||
Option ARM | (4 | ) | — | (4 | ) | — | |||||||||
Alt-A and other | (18 | ) | — | (18 | ) | — | |||||||||
Subprime | (1 | ) | — | (3 | ) | — | |||||||||
Total mortgage-related securities gross realized losses | (42 | ) | — | (44 | ) | — | |||||||||
Gross realized losses | (42 | ) | — | (44 | ) | — | |||||||||
Net realized gains (losses) | $ | 827 | $ | 8 | $ | 1,182 | $ | 141 | |||||||
(1) | The individual sales do not change our conclusion, at period end, that we do not intend to sell our remaining mortgage-related available-for-sale securities that are in an unrealized loss position and it is not more likely than not that we will be required to sell these securities before a sufficient time to recover all unrealized losses. |
Maturities of Available-For-Sale Securities
The table below summarizes the remaining contractual maturities of available-for-sale securities.
Table 7.7 — Maturities of Available-For-Sale Securities(1)
September 30, 2013 | Amortized Cost | Fair Value | |||||
(in millions) | |||||||
Available-for-sale securities: | |||||||
Due within 1 year or less | $ | 21 | $ | 22 | |||
Due after 1 through 5 years | 1,725 | 1,832 | |||||
Due after 5 through 10 years | 984 | 1,043 | |||||
Due after 10 years | 137,082 | 136,901 | |||||
Total available-for-sale securities | $ | 139,812 | $ | 139,798 | |||
(1) | Maturity information provided is based on contractual maturities, which may not represent the expected life as obligations underlying these securities may be prepaid at any time without penalty. |
Trading Securities
The table below summarizes the estimated fair values by major security type for trading securities. Our trading securities mainly consist of Treasury securities, agency fixed-rate and variable-rate pass-through mortgage-related securities, and agency REMICs, including inverse floating rate, interest-only and principal-only securities.
138 | Freddie Mac | |
Table 7.8 — Trading Securities
September 30, 2013 | December 31, 2012 | ||||||
(in millions) | |||||||
Mortgage-related securities: | |||||||
Freddie Mac | $ | 10,060 | $ | 10,354 | |||
Fannie Mae | 10,675 | 10,338 | |||||
Ginnie Mae | 105 | 131 | |||||
Other | 166 | 156 | |||||
Total mortgage-related securities | 21,006 | 20,979 | |||||
Non-mortgage-related securities: | |||||||
Asset-backed securities | — | 292 | |||||
Treasury bills | 4,854 | 1,160 | |||||
Treasury notes | 26,787 | 19,061 | |||||
Total non-mortgage-related securities | 31,641 | 20,513 | |||||
Total fair value of trading securities | $ | 52,647 | $ | 41,492 | |||
With the exception of principal-only securities, our agency securities, classified as trading, were valued at a net premium (i.e., net fair value was higher than UPB) as of September 30, 2013.
For the three and nine months ended September 30, 2013, we recorded net unrealized losses on trading securities held at those dates of $0.2 billion and $1.3 billion, respectively. For the three and nine months ended September 30, 2012, we recorded net unrealized losses on trading securities held at those dates of $0.4 billion and $1.2 billion, respectively.
NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS
Debt securities that we issue are classified on our consolidated balance sheets as either debt securities of consolidated trusts held by third parties or other debt. We issue other debt to fund our operations.
Under the Purchase Agreement, without the prior written consent of Treasury, 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 allowed to own on December 31 of the immediately preceding calendar year. Because of this debt limit, we may be restricted in the amount of debt we are allowed to issue to fund our operations. Under the Purchase Agreement, the amount of our “indebtedness” is determined without giving effect to the January 1, 2010 change in the accounting guidance related to transfers of financial assets and consolidation of VIEs. Therefore, “indebtedness” does not include debt securities of consolidated trusts held by third parties. We also cannot become liable for any subordinated indebtedness without the prior consent of Treasury. See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS” for information regarding restrictions on the amount of mortgage-related securities that we may own.
Our debt cap under the Purchase Agreement is $780.0 billion in 2013 and will decline to $663.0 billion on January 1, 2014. As of September 30, 2013, we estimate that our aggregate indebtedness was $259.7 billion below the applicable debt cap. Our aggregate indebtedness is calculated as the par value of other debt.
In the tables below, the categories of short-term debt (due within one year) and long-term debt (due after one year) are based on the original contractual maturity of the debt instruments classified as other debt.
The table below summarizes the interest expense and the balances of total debt, net.
139 | Freddie Mac | |
Table 8.1 — Total Debt, Net
Interest Expense For The | |||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Balance, Net(1) | |||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | September 30, 2013 | December 31, 2012 | ||||||||||||||||||
(in millions) | (in millions) | ||||||||||||||||||||||
Other debt: | |||||||||||||||||||||||
Short-term debt | $ | 45 | $ | 47 | $ | 134 | $ | 130 | $ | 136,030 | $ | 117,889 | |||||||||||
Long-term debt: | |||||||||||||||||||||||
Senior debt | 1,988 | 2,437 | 6,316 | 7,816 | 379,241 | 429,245 | |||||||||||||||||
Subordinated debt | 8 | 9 | 23 | 23 | 397 | 384 | |||||||||||||||||
Total long-term debt | 1,996 | 2,446 | 6,339 | 7,839 | 379,638 | 429,629 | |||||||||||||||||
Total other debt | 2,041 | 2,493 | 6,473 | 7,969 | 515,668 | 547,518 | |||||||||||||||||
Debt securities of consolidated trusts held by third parties | 11,523 | 13,584 | 35,262 | 43,462 | 1,419,909 | 1,419,524 | |||||||||||||||||
Total debt, net | $ | 13,564 | $ | 16,077 | $ | 41,735 | $ | 51,431 | $ | 1,935,577 | $ | 1,967,042 | |||||||||||
(1) | Represents par value, net of associated discounts, premiums, and hedge-related basis adjustments, with $2.0 billion and $2.2 billion, respectively, of other long-term debt that represents the fair value of debt securities with the fair value option elected at September 30, 2013 and December 31, 2012. |
During the three months ended September 30, 2013 and 2012, we recognized fair value gains (losses) of $(17) million and $(10) million, respectively, on our foreign-currency denominated debt, of which $(21) million and $(15) million, respectively, are gains (losses) related to foreign-currency translation. During the nine months ended September 30, 2013 and 2012, we recognized fair value gains (losses) of $(7) million and $35 million, respectively, on our foreign-currency denominated debt, of which $(22) million and $21 million, respectively, are gains (losses) related to foreign-currency translation.
Other Debt
The table below summarizes the balances and effective interest rates for other debt. We had no balances in federal funds purchased and securities sold under agreements to repurchase at either September 30, 2013 or December 31, 2012.
Table 8.2 — Other Debt
September 30, 2013 | December 31, 2012 | ||||||||||||||||||||
Par Value | Balance, Net(1) | Weighted Average Effective Rate(2) | Par Value | Balance, Net(1) | Weighted Average Effective Rate(2) | ||||||||||||||||
(dollars in millions) | |||||||||||||||||||||
Other short-term debt: | |||||||||||||||||||||
Reference Bills® securities and discount notes | $ | 132,577 | $ | 132,530 | 0.12 | % | $ | 117,930 | $ | 117,889 | 0.15 | % | |||||||||
Medium-term notes | 3,500 | 3,500 | 0.16 | — | — | — | |||||||||||||||
Total other short-term debt | $ | 136,077 | $ | 136,030 | 0.12 | $ | 117,930 | $ | 117,889 | 0.15 | |||||||||||
Other long-term debt: | |||||||||||||||||||||
Original maturities on or before December 31, | |||||||||||||||||||||
2013 | $ | 28,707 | $ | 28,713 | 1.22 | % | $ | 115,577 | $ | 115,527 | 1.66 | % | |||||||||
2014 | 79,971 | 79,883 | 1.87 | 85,798 | 85,665 | 1.78 | |||||||||||||||
2015 | 68,254 | 68,234 | 1.53 | 52,968 | 52,927 | 1.91 | |||||||||||||||
2016 | 56,893 | 56,970 | 2.36 | 38,882 | 38,954 | 3.14 | |||||||||||||||
2017 | 49,838 | 49,813 | 2.17 | 57,664 | 57,676 | 2.08 | |||||||||||||||
Thereafter | 100,607 | 96,025 | 2.53 | 83,653 | 78,880 | 2.97 | |||||||||||||||
Total other long-term debt(3) | 384,270 | 379,638 | 2.04 | 434,542 | 429,629 | 2.15 | |||||||||||||||
Total other debt | $ | 520,347 | $ | 515,668 | $ | 552,472 | $ | 547,518 | |||||||||||||
(1) | Represents par value, net of associated discounts or premiums and hedge-related basis adjustments. |
(2) | Represents the weighted average effective rate that remains constant over the life of the instrument, which includes the amortization of discounts or premiums, issuance costs, and hedge-related basis adjustments. |
(3) | Balance, net for other long-term debt includes callable debt of $106.4 billion and $102.1 billion at September 30, 2013 and December 31, 2012, respectively. |
Debt Securities of Consolidated Trusts Held by Third Parties
140 | Freddie Mac | |
Debt securities of consolidated trusts held by third parties represents our liability to third parties that hold beneficial interests in our consolidated securitization trusts (i.e., single-family PC trusts and certain single-family and multifamily Other Guarantee Transactions).
The table below summarizes the debt securities of consolidated trusts held by third parties based on underlying mortgage product type.
Table 8.3 — Debt Securities of Consolidated Trusts Held by Third Parties
September 30, 2013 | December 31, 2012 | ||||||||||||||||||||||||
Contractual Maturity(1) | UPB | Balance, Net(2) | Weighted Average Coupon(1) | Contractual Maturity(1) | UPB | Balance, Net(2) | Weighted Average Coupon(1) | ||||||||||||||||||
(dollars in millions) | (dollars in millions) | ||||||||||||||||||||||||
Single-family:(3) | |||||||||||||||||||||||||
30-year or more, fixed-rate | 2013 – 2048 | $ | 952,464 | $ | 975,810 | 4.17 | % | 2013 – 2048 | $ | 960,176 | $ | 982,718 | 4.53 | % | |||||||||||
20-year fixed-rate | 2013 – 2033 | 76,016 | 78,356 | 3.83 | 2013 – 2033 | 73,902 | 76,079 | 4.09 | |||||||||||||||||
15-year fixed-rate | 2013 – 2028 | 271,152 | 277,642 | 3.25 | 2013 – 2028 | 257,083 | 263,244 | 3.59 | |||||||||||||||||
Adjustable-rate | 2013 – 2047 | 61,885 | 63,042 | 2.66 | 2013 – 2047 | 62,424 | 63,649 | 2.88 | |||||||||||||||||
Interest-only(4) | 2026 – 2041 | 23,127 | 23,176 | 3.84 | 2026 – 2041 | 31,588 | 31,642 | 4.37 | |||||||||||||||||
FHA/VA | 2014 – 2041 | 1,348 | 1,367 | 5.68 | 2013 – 2041 | 1,638 | 1,663 | 5.67 | |||||||||||||||||
Total single-family | 1,385,992 | 1,419,393 | 1,386,811 | 1,418,995 | |||||||||||||||||||||
Multifamily(5) | 2018 – 2019 | 445 | 516 | 4.96 | 2018 – 2019 | 448 | 529 | 4.96 | |||||||||||||||||
Total debt securities of consolidated trusts held by third parties(6) | $ | 1,386,437 | $ | 1,419,909 | $ | 1,387,259 | $ | 1,419,524 | |||||||||||||||||
(1) | Based on the contractual maturity and interest rate of debt securities of our consolidated trusts held by third parties. |
(2) | Represents par value, net of associated discounts, premiums, and other basis adjustments. |
(3) | Debt securities of consolidated trusts held by third parties are prepayable as the loans that collateralize the debt may prepay without penalty at any time. |
(4) | Includes interest-only securities and interest-only mortgage loans that allow the borrowers to pay only interest for a fixed period of time before the loans begin to amortize. |
(5) | Balance, Net includes interest-only securities recorded at fair value. |
(6) | The effective rate for debt securities of consolidated trusts held by third parties was 3.31% and 3.49% as of September 30, 2013 and December 31, 2012, respectively. |
Line of Credit
At both September 30, 2013 and December 31, 2012, we had one secured, uncommitted intraday line of credit with a third party totaling $10 billion. We use this line of credit regularly to provide us with additional liquidity to fund our intraday payment activities through the Fedwire system in connection with the Federal Reserve’s payments system risk policy, which restricts or eliminates daylight overdrafts by the GSEs. No amounts were drawn on this line of credit at September 30, 2013 and December 31, 2012. We expect to continue to use the current facility to satisfy our intraday financing needs; however, as the line is uncommitted, we may not be able to draw on it if and when needed.
Subordinated Debt Interest and Principal Payments
The terms of certain of our subordinated debt securities provide for us to defer payments of interest in the event we fail to maintain specified capital levels. However, in a September 23, 2008 statement concerning the conservatorship, the Director of FHFA stated that we would continue to make interest and principal payments on our subordinated debt, even if we fail to maintain required capital levels.
NOTE 9: DERIVATIVES
Use and Types of Derivatives
We use derivatives primarily to manage the interest rate and prepayment risk associated with our investments in mortgage-related assets, net of related liabilities. When we use derivatives to mitigate our exposures, we consider a number of factors, including cost, exposure to counterparty risk, and our overall risk management strategy.
We principally use the following types of derivatives:
• | LIBOR- and Euribor-based interest-rate swaps; |
• | LIBOR- and Treasury-based options (including swaptions); |
• | LIBOR- and Treasury-based exchange-traded futures; and |
• | Foreign-currency swaps. |
141 | Freddie Mac | |
In addition to swaps, futures, and purchased options, our derivative positions include written options and swaptions, commitments, swap guarantees, and credit derivatives.
We classify these derivatives into three categories: (a) exchange-traded derivatives; (b) cleared derivatives; and (c) OTC derivatives. Cleared derivatives refer to those interest-rate swaps that the U.S. Commodity Futures Trading Commission has determined are subject to the central clearing requirement of the Dodd-Frank Act. OTC derivatives refer to those derivatives that are neither exchange-traded derivatives nor cleared derivatives.
For additional information regarding our use of derivatives, and the types of derivatives that we use, see “NOTE 10: DERIVATIVES” in our 2012 Annual Report. For a discussion of our significant accounting policies related to derivatives, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Derivatives” in our 2012 Annual Report.
Derivative Assets and Liabilities at Fair Value
The table below presents the location and fair value of derivatives reported on our consolidated balance sheets.
Table 9.1 — Derivative Assets and Liabilities at Fair Value
At September 30, 2013 | At December 31, 2012 | ||||||||||||||||||||||
Notional or Contractual Amount | Derivatives at Fair Value | Notional or Contractual Amount | Derivatives at Fair Value | ||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Total derivative portfolio | |||||||||||||||||||||||
Derivatives not designated as hedging instruments under the accounting guidance for derivatives and hedging | |||||||||||||||||||||||
Interest-rate swaps: | |||||||||||||||||||||||
Receive-fixed | $ | 298,584 | $ | 6,146 | $ | (2,011 | ) | $ | 275,099 | $ | 13,782 | $ | (97 | ) | |||||||||
Pay-fixed | 260,819 | 3,924 | (15,005 | ) | 270,092 | 177 | (30,147 | ) | |||||||||||||||
Basis (floating to floating) | 300 | 4 | — | 2,300 | 6 | — | |||||||||||||||||
Total interest-rate swaps | 559,703 | 10,074 | (17,016 | ) | 547,491 | 13,965 | (30,244 | ) | |||||||||||||||
Option-based: | |||||||||||||||||||||||
Call swaptions | |||||||||||||||||||||||
Purchased | 48,890 | 3,079 | — | 37,650 | 7,360 | — | |||||||||||||||||
Written | 6,195 | — | (325 | ) | 6,195 | — | (749 | ) | |||||||||||||||
Put Swaptions | |||||||||||||||||||||||
Purchased | 37,260 | 649 | — | 43,200 | 288 | — | |||||||||||||||||
Other option-based derivatives(1) | 25,227 | 1,172 | (2 | ) | 31,540 | 2,449 | (1 | ) | |||||||||||||||
Total option-based | 117,572 | 4,900 | (327 | ) | 118,585 | 10,097 | (750 | ) | |||||||||||||||
Futures | 17,159 | — | — | 41,123 | 37 | (2 | ) | ||||||||||||||||
Foreign-currency swaps | 519 | 30 | — | 1,167 | 73 | (6 | ) | ||||||||||||||||
Commitments | 26,690 | 203 | (202 | ) | 25,530 | 20 | (47 | ) | |||||||||||||||
Credit derivatives | 5,575 | — | (4 | ) | 8,307 | 1 | (5 | ) | |||||||||||||||
Swap guarantee derivatives | 3,537 | — | (32 | ) | 3,628 | — | (35 | ) | |||||||||||||||
Total derivatives not designated as hedging instruments | 730,755 | 15,207 | (17,581 | ) | 745,831 | 24,193 | (31,089 | ) | |||||||||||||||
Derivative interest receivable (payable) | 1,166 | (1,984 | ) | 1,409 | (2,239 | ) | |||||||||||||||||
Netting adjustments(2) | (15,445 | ) | 19,176 | (24,945 | ) | 33,150 | |||||||||||||||||
Total derivative portfolio, net | $ | 730,755 | $ | 928 | $ | (389 | ) | $ | 745,831 | $ | 657 | $ | (178 | ) | |||||||||
(1) | Primarily includes purchased interest-rate caps and floors. |
(2) | Represents counterparty netting and cash collateral netting. Net cash collateral posted was $3.7 billion and $8.2 billion at September 30, 2013 and December 31, 2012, respectively. |
The carrying value of our derivatives on our consolidated balance sheets is equal to their fair value, including net derivative interest receivable or payable and net trade/settle receivable or payable, and is net of cash collateral held or posted, where allowable. Derivatives in a net asset position are reported as derivative assets, net. Similarly, derivatives in a net liability position are reported as derivative liabilities, net.
Non-cash collateral held is not recognized on our consolidated balance sheets as we do not obtain effective control over the collateral, and non-cash collateral posted is not de-recognized from our consolidated balance sheets as we do not relinquish effective control over the collateral. Therefore, non-cash collateral held or posted is not presented as an offset against derivative assets or derivative liabilities on our consolidated balance sheets.
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For OTC derivatives, we are subject to collateral posting thresholds based on S&P or Moody’s credit rating of our long-term senior unsecured debt securities. The amount of initial margin we must post for cleared and exchange-traded derivatives is also based, in part, on S&P or Moody’s credit rating of our long-term senior unsecured debt securities. The amount of initial margin varies over time. The lowering or withdrawal of our credit rating by S&P or Moody’s may increase our obligation to post collateral, depending on the amount of the counterparty’s exposure to Freddie Mac with respect to the derivative transactions. See “NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES — Collateral Pledged” for more information about collateral held and posted.
At September 30, 2013 and December 31, 2012, there were no amounts of cash collateral that were not offset against derivative assets, net or derivative liabilities, net, as applicable, related to derivatives. See “NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES” for further information related to our derivative counterparties.
Gains and Losses on Derivatives
The table below presents the gains and losses on derivatives reported in our consolidated statements of comprehensive income.
Table 9.2 — Gains and Losses on Derivatives
Derivatives not designated as hedging instruments under the accounting guidance for derivatives and hedging | Derivative Gains (Losses)(1) | ||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(in millions) | |||||||||||||||
Interest-rate swaps: | |||||||||||||||
Receive-fixed | |||||||||||||||
Foreign-currency denominated | $ | (5 | ) | $ | (7 | ) | $ | (16 | ) | $ | (22 | ) | |||
U.S. dollar denominated | (68 | ) | 1,123 | (8,326 | ) | 3,994 | |||||||||
Total receive-fixed swaps | (73 | ) | 1,116 | (8,342 | ) | 3,972 | |||||||||
Pay-fixed | 1,184 | (1,056 | ) | 14,752 | (5,217 | ) | |||||||||
Basis (floating to floating) | 1 | 2 | (2 | ) | 9 | ||||||||||
Total interest-rate swaps | 1,112 | 62 | 6,408 | (1,236 | ) | ||||||||||
Option based: | |||||||||||||||
Call swaptions | |||||||||||||||
Purchased | (94 | ) | 197 | (1,954 | ) | 1,541 | |||||||||
Written | 42 | (6 | ) | 424 | (83 | ) | |||||||||
Put swaptions | |||||||||||||||
Purchased | (157 | ) | (23 | ) | (29 | ) | (245 | ) | |||||||
Written | — | — | — | 6 | |||||||||||
Other option-based derivatives(2) | (29 | ) | 29 | (338 | ) | 177 | |||||||||
Total option-based | (238 | ) | 197 | (1,897 | ) | 1,396 | |||||||||
Futures | (3 | ) | (55 | ) | 52 | 16 | |||||||||
Foreign-currency swaps | 20 | 12 | 20 | (35 | ) | ||||||||||
Commitments | (59 | ) | 190 | (180 | ) | 362 | |||||||||
Swap guarantee derivatives | 2 | 1 | 7 | 4 | |||||||||||
Subtotal | 834 | 407 | 4,410 | 507 | |||||||||||
Accrual of periodic settlements:(3) | |||||||||||||||
Receive-fixed interest-rate swaps | 1,005 | 940 | 2,831 | 2,583 | |||||||||||
Pay-fixed interest-rate swaps | (1,913 | ) | (1,835 | ) | (5,579 | ) | (5,521 | ) | |||||||
Foreign-currency swaps | — | — | — | 4 | |||||||||||
Other | — | — | 1 | 1 | |||||||||||
Total accrual of periodic settlements | (908 | ) | (895 | ) | (2,747 | ) | (2,933 | ) | |||||||
Total | $ | (74 | ) | $ | (488 | ) | $ | 1,663 | $ | (2,426 | ) | ||||
(1) | Gains (losses) are reported as derivative gains (losses) on our consolidated statements of comprehensive income. |
(2) | Primarily includes purchased interest-rate caps and floors. |
(3) | For derivatives not in qualifying hedge accounting relationships, the accrual of periodic cash settlements is recorded in derivative gains (losses) on our consolidated statements of comprehensive income. |
Hedge Designation of Derivatives
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At September 30, 2013 and December 31, 2012, we did not have any derivatives in hedge accounting relationships; however, there are deferred net losses recorded in AOCI related to closed cash flow hedges. Derivatives that meet specific criteria may be accounted for as cash flow hedges. Net deferred gains and losses on closed cash flow hedges (i.e., where the derivative is either terminated or redesignated) are included in AOCI until the related forecasted transaction affects earnings or is determined to be probable of not occurring. For the three and nine months ended September 30, 2013 and 2012, no amounts of gains or (losses) were recognized in AOCI on derivatives (effective portion) and in other income (ineffective portion and amount excluded from effectiveness testing). Amounts reported in AOCI linked to interest payments on long-term debt are recorded in other debt interest expense and amounts not linked to interest payments on long-term debt are recorded in expense related to derivatives. In the three months ended September 30, 2013 and 2012, we reclassified from AOCI into earnings (effective portion) a loss of $110 million and $151 million, respectively, related to closed cash flow hedges. In the nine months ended September 30, 2013 and 2012, we reclassified from AOCI into earnings (effective portion) a loss of $365 million and $474 million, respectively, related to closed cash flow hedges. See “NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT) — Accumulated Other Comprehensive Income — Future Reclassifications from AOCI to Net Income Related to Closed Cash Flow Hedges” for information about future reclassifications of deferred net losses related to closed cash flow hedges to net income.
NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES
Derivative Portfolio
Derivative Counterparties
Our use of cleared derivatives, exchange-traded derivatives, and OTC derivatives exposes us to institutional credit risk. The requirement that we post initial and variation margin with our clearing firms in connection with cleared and exchange-traded derivatives, such as cleared interest-rate swaps and futures contracts, exposes us to institutional credit risk in the event that our clearing firms or the financial clearinghouses fail to meet their obligations. The use of cleared and exchange-traded derivatives decreases our institutional credit risk exposure to individual counterparties because a central counterparty is substituted for individual counterparties. OTC derivatives expose us to institutional credit risk to individual counterparties because transactions are executed and settled between us and each counterparty, exposing us to potential losses if a counterparty fails to meet its obligations.
Our use of OTC interest-rate swaps, option-based derivatives, and foreign-currency swaps is subject to internal credit and legal reviews. On an ongoing basis, we review the credit fundamentals of all of our OTC derivative counterparties, clearinghouses, and clearing firms to confirm that they continue to meet our internal risk management standards.
Master Netting and Collateral Agreements
We use master netting and collateral agreements to reduce our credit risk exposure to our derivative counterparties for OTC interest-rate swap, option-based, and foreign-currency swap derivatives. Master netting agreements provide for the netting of amounts receivable and payable from an individual counterparty, which reduces our exposure to a single counterparty in the event of default. On a daily basis, the market value of each counterparty’s derivatives outstanding is calculated to determine the amount of our net credit exposure, which is equal to derivatives in a net gain position by counterparty after giving consideration to collateral posted. Our collateral agreements require most counterparties to post collateral to us for the amount of our net exposure to them above the counterparty’s collateral posting threshold. Collateral posting thresholds are tied to a counterparty’s credit rating. Bilateral collateral agreements are in place for all of our active OTC derivative counterparties. Collateral is typically transferred within one business day based on the values of the related derivatives. This time lag in posting collateral can affect our net uncollateralized exposure to derivative counterparties.
Collateral posted by a derivative counterparty is typically in the form of cash, although U.S. Treasury securities and Freddie Mac mortgage-related securities may also be posted. In the event a counterparty defaults on its obligations under the derivatives agreement and the default is not remedied in the manner prescribed in the agreement, we have the right under the agreement to direct the custodian bank to transfer the collateral to us or to sell the collateral and transfer the proceeds to us.
Our net uncollateralized exposure to derivative counterparties for OTC interest-rate swap, option-based, and foreign-currency swap derivatives was $76 million and $69 million at September 30, 2013 and December 31, 2012, respectively. In the event that all of our counterparties for these derivatives were to have defaulted simultaneously on September 30, 2013, our maximum loss for accounting purposes after applying netting agreements and collateral on an individual counterparty basis would have been approximately $76 million. Four counterparties each accounted for greater than 10% and collectively accounted for 91% of our net uncollateralized exposure to derivative counterparties, excluding cleared and exchange-traded derivatives, commitments, swap guarantee derivatives, certain written options, and certain credit derivatives at September 30, 2013. These counterparties were Toronto Dominion Bank, Wells Fargo Bank, Credit Suisse International and Royal Bank of Scotland, all of which were rated “A-” or above using the lower of S&P’s or Moody’s rating stated in terms of the S&P equivalent as of October 24, 2013.
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Beginning with contracts executed or modified on or after June 10, 2013, the types of interest-rate swaps that we use most frequently became subject to the central clearing requirement. Our exposure to cleared and exchange-traded derivatives was $203 million and $66 million as of September 30, 2013 and December 31, 2012, respectively. We are required to post margin in connection with our cleared and exchange-traded derivatives. At September 30, 2013, the majority of our exposure for our cleared and exchange-traded derivatives resulted from our posting of initial margin, which is the collateral we post to a clearinghouse in order to do business with such clearinghouse. The amount of initial margin we must post for cleared and exchange-traded derivatives is based, in part, on S&P or Moody’s credit rating of our long-term senior unsecured debt securities. The amount of initial margin varies over time. For information about margin we have posted in connection with cleared and exchange-traded derivatives, see “ — Collateral Pledged.”
The total exposure on our forward purchase and sale commitments, which are treated as derivatives, was $203 million and $20 million at September 30, 2013 and December 31, 2012, respectively. We do not require master netting and collateral agreements for the counterparties of these commitments. However, the typical maturity of our forward purchase and sale commitments is less than 60 days, and we monitor the credit fundamentals of the counterparties to these commitments on an ongoing basis to ensure that they continue to meet our internal risk-management standards. Many of our transactions involving forward purchase and sale commitments of mortgage-related securities, including our dollar roll transactions, 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 institutional credit risk of the organization.
The table below displays information related to derivatives and securities purchased under agreements to resell on our consolidated balance sheets.
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Table 10.1 — Offsetting of Financial Assets and Liabilities
September 30, 2013 | |||||||||||||||||||
Gross Amount Recognized(1) | Amount Offset in the Consolidated Balance Sheets | Net Amount Presented in the Consolidated Balance Sheets(2) | Gross Amount Not Offset in the Consolidated Balance Sheets | Net Amount | |||||||||||||||
(in millions) | |||||||||||||||||||
Assets: | |||||||||||||||||||
Derivatives: | |||||||||||||||||||
Over-the-counter interest-rate and foreign-currency swaps, and option-based derivatives | $ | 15,178 | $ | (14,656 | ) | $ | 522 | $ | (446 | ) | $ | 76 | |||||||
Cleared and exchange-traded derivatives | 992 | (789 | ) | 203 | — | 203 | |||||||||||||
Other(3) | 203 | — | 203 | — | 203 | ||||||||||||||
Total derivatives | 16,373 | (15,445 | ) | 928 | (446 | ) | 482 | ||||||||||||
Securities purchased under agreements to resell | 41,023 | — | 41,023 | (41,023 | ) | — | |||||||||||||
Total | $ | 57,396 | $ | (15,445 | ) | $ | 41,951 | $ | (41,469 | ) | $ | 482 | |||||||
Liabilities: | |||||||||||||||||||
Derivatives: | |||||||||||||||||||
Over-the-counter interest-rate and foreign-currency swaps, and option-based derivatives | $ | (18,511 | ) | $ | 18,363 | $ | (148 | ) | $ | — | $ | (148 | ) | ||||||
Cleared and exchange-traded derivatives | (814 | ) | 813 | (1 | ) | — | (1 | ) | |||||||||||
Other(3) | (240 | ) | — | (240 | ) | — | (240 | ) | |||||||||||
Total | $ | (19,565 | ) | $ | 19,176 | $ | (389 | ) | $ | — | $ | (389 | ) | ||||||
December 31, 2012 | |||||||||||||||||||
Gross Amount Recognized(1) | Amount Offset in the Consolidated Balance Sheets | Net Amount Presented in the Consolidated Balance Sheets(2) | Gross Amount Not Offset in the Consolidated Balance Sheets | Net Amount | |||||||||||||||
(in millions) | |||||||||||||||||||
Assets: | |||||||||||||||||||
Derivatives: | |||||||||||||||||||
Over-the-counter interest-rate and foreign-currency swaps, and option-based derivatives | $ | 25,515 | $ | (24,945 | ) | $ | 570 | $ | (501 | ) | $ | 69 | |||||||
Cleared and exchange-traded derivatives | 66 | — | 66 | — | 66 | ||||||||||||||
Other(3) | 21 | — | 21 | — | 21 | ||||||||||||||
Total derivatives | 25,602 | (24,945 | ) | 657 | (501 | ) | 156 | ||||||||||||
Securities purchased under agreements to resell | 37,563 | — | 37,563 | (37,563 | ) | — | |||||||||||||
Total | $ | 63,165 | $ | (24,945 | ) | $ | 38,220 | $ | (38,064 | ) | $ | 156 | |||||||
Liabilities: | |||||||||||||||||||
Derivatives: | |||||||||||||||||||
Over-the-counter interest-rate and foreign-currency swaps, and option-based derivatives | $ | (33,233 | ) | $ | 33,150 | $ | (83 | ) | $ | — | $ | (83 | ) | ||||||
Cleared and exchange-traded derivatives | (8 | ) | — | (8 | ) | — | (8 | ) | |||||||||||
Other(3) | (87 | ) | — | (87 | ) | — | (87 | ) | |||||||||||
Total | $ | (33,328 | ) | $ | 33,150 | $ | (178 | ) | $ | — | $ | (178 | ) | ||||||
(1) | For derivatives, includes interest receivable or payable and trade/settle receivable or payable. |
(2) | For derivatives, includes cash collateral posted or held in excess of exposure. |
(3) | Includes commitments, swap guarantee derivatives, certain written options and credit derivatives. |
Collateral Pledged
Collateral Pledged to Freddie Mac
Our counterparties are required to pledge collateral for transactions involving securities purchased under agreements to resell. Also, most derivative instruments are subject to collateral posting thresholds as prescribed by the collateral agreements with our counterparties. Under the derivative collateral agreements, U.S. Treasury securities, Freddie Mac mortgage-related securities, and cash may be pledged. We consider the types of securities being pledged to us as collateral when determining how much we lend in transactions involving securities purchased under agreements to resell. Additionally, we regularly review the market values of these securities compared to amounts loaned and derivative counterparty collateral posting thresholds in an effort to minimize our exposure to losses. We had cash and cash equivalents pledged to us related to OTC derivative
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instruments of $1.1 billion and $1.5 billion at September 30, 2013 and December 31, 2012, respectively. At September 30, 2013 and December 31, 2012, we had $446 million and $501 million, respectively, of collateral in the form of securities pledged to and held by us related to OTC derivative instruments. Although it is our practice not to repledge assets held as collateral, a portion of the collateral may be repledged based on master netting agreements related to our derivative instruments. In addition, we had $245 million of cash pledged to us related to cleared derivatives at September 30, 2013. Also, at September 30, 2013 and December 31, 2012, we had $3.0 billion and $1.5 billion, respectively, of securities pledged to us for transactions involving securities purchased under agreements to resell that we had the right to repledge. From time to time we may obtain pledges of collateral from certain seller/servicers as additional security for certain of their obligations to us, including their obligations to repurchase mortgages sold to us in breach of representations and warranties. This collateral may, at our discretion, take the form of cash, cash equivalents, or agency securities.
In addition, we hold cash and cash equivalents as collateral in connection with certain of our multifamily guarantees and mortgage loans as credit enhancements. The cash and cash equivalents held as collateral related to these transactions at September 30, 2013 and December 31, 2012 was $97 million and $158 million, respectively.
We consider federal funds sold to be overnight unsecured trades executed with insured depository institutions that are members of the Federal Reserve System. Federal funds sold trades are uninsured. We did not hold any federal funds sold at September 30, 2013 and December 31, 2012.
Collateral Pledged by Freddie Mac
We are required to pledge collateral for margin requirements with third-party custodians in connection with secured financings and derivative transactions with some counterparties. The amount of collateral pledged related to our derivative instruments is determined after giving consideration to our credit rating. As of September 30, 2013, we had one secured, uncommitted intraday line of credit with a third party in connection with the Federal Reserve’s payments system risk policy, which restricts or eliminates daylight overdrafts by the GSEs, in connection with our use of the Fedwire system. In certain circumstances, the line of credit agreement gives the secured party the right to repledge the securities underlying our financing to other third parties, including the Federal Reserve Bank. We pledge collateral to meet our collateral requirements under the line of credit agreement upon demand by the counterparty.
The table below summarizes all securities pledged as collateral by us, including assets that the secured party may repledge and those that may not be repledged.
Table 10.2 — Collateral in the Form of Securities Pledged
September 30, 2013 | December 31, 2012 | ||||||
(in millions) | |||||||
Securities pledged with the ability for the secured party to repledge: | |||||||
Debt securities of consolidated trusts held by third parties(1) | $ | 10,752 | $ | 10,390 | |||
Available-for-sale securities | 79 | 132 | |||||
Trading securities | 215 | — | |||||
Securities pledged without the ability for the secured party to repledge: | |||||||
Debt securities of consolidated trusts held by third parties(1) | — | 148 | |||||
Total securities pledged | $ | 11,046 | $ | 10,670 | |||
(1) | Represents PCs held by us in our Investments segment mortgage investments portfolio and pledged as collateral which are recorded as a reduction to debt securities of consolidated trusts held by third parties on our consolidated balance sheets. |
Securities Pledged with the Ability of the Secured Party to Repledge
At September 30, 2013, we pledged securities with the ability of the secured party to repledge of $11.0 billion, of which $10.5 billion was collateral posted in connection with our secured uncommitted intraday line of credit with a third party as discussed above. Of the remainder at September 30, 2013, we pledged $0.5 billion in connection with derivatives and securities transactions.
At December 31, 2012, we pledged securities with the ability of the secured party to repledge of $10.5 billion, of which $10.5 billion was collateral posted in connection with our secured uncommitted intraday line of credit with a third party as discussed above. Of the remainder at December 31, 2012, we pledged $65 million in connection with derivative transactions.
Securities Pledged without the Ability of the Secured Party to Repledge
At September 30, 2013 and December 31, 2012, we pledged securities, without the ability of the secured party to repledge, of $0 million and $148 million, respectively, at a clearinghouse in connection with our securities transactions.
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Cash Pledged
At September 30, 2013, we pledged $5.2 billion of collateral in the form of cash and cash equivalents, of which $4.8 billion related to our OTC derivative agreements as we had $4.9 billion of such derivatives in a net loss position. At December 31, 2012, we pledged $9.8 billion of collateral in the form of cash and cash equivalents, of which $9.7 billion related to our OTC derivative agreements as we had $9.7 billion of such derivatives in a net loss position. The remaining $357 million and $110 million was posted at clearinghouses in connection with derivatives and securities transactions at September 30, 2013 and December 31, 2012, respectively. The aggregate fair value of all OTC derivative instruments with credit-risk-related contingent features that were in a liability position on September 30, 2013, was $4.9 billion for which we posted collateral of $4.8 billion in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on September 30, 2013, we would be required to post an additional $0.1 billion of collateral to our counterparties.
NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT)
Senior Preferred Stock
No cash was received from Treasury under the Purchase Agreement in the third quarter of 2013, because we had positive net worth at June 30, 2013 and, consequently, FHFA did not request a draw on our behalf. At September 30, 2013, our assets exceeded our liabilities under GAAP; therefore no draw is being requested from Treasury under the Purchase Agreement. Our quarterly senior preferred stock dividend is the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter exceeds the applicable Capital Reserve Amount, which was established at $3.0 billion for 2013 and declines to zero in 2018. Based on our Net Worth Amount at September 30, 2013, our dividend obligation to Treasury in December 2013 will be $30.4 billion. See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS — Government Support for our Business” in our 2012 Annual Report for additional information. The aggregate liquidation preference on the senior preferred stock owned by Treasury was $72.3 billion and $72.3 billion as of September 30, 2013 and December 31, 2012, respectively. See “NOTE 18: REGULATORY CAPITAL” for additional information.
Stock-Based Compensation
We did not repurchase or issue any of our common shares or non-cumulative preferred stock during the three or nine months ended September 30, 2013. For a discussion regarding our stock-based compensation plans, see “NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT)” in our 2012 Annual Report.
For purposes of the earnings-per-share calculation, all stock-based compensation plan options outstanding at September 30, 2013 and 2012 were out of the money and excluded from the computation of dilutive potential common shares for the three and nine months ended September 30, 2013 and 2012, respectively. The weighted average common shares outstanding for the period includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury pursuant to the Purchase Agreement.
Dividends Declared
No common dividends were declared during the nine months ended September 30, 2013. During the three months ended March 31, 2013, June 30, 2013, and September 30, 2013, we paid dividends of $5.8 billion, $7.0 billion, and $4.4 billion respectively, in cash on the senior preferred stock at the direction of our Conservator. We did not declare or pay dividends on any other series of Freddie Mac preferred stock outstanding during the nine months ended September 30, 2013.
Accumulated Other Comprehensive Income
The table below presents changes in AOCI after the effects of our 35% federal statutory tax rate related to available-for-sale securities, closed cash flow hedges, and our defined benefit plans.
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Table 11.1 — Changes in AOCI by Component, Net of Tax
Nine Months Ended September 30, 2013 | |||||||||||||||
AOCI Related to Available- For-Sale Securities(1) | AOCI Related to Cash Flow Hedge Relationships(2) | AOCI Related to Defined Benefit Plans | Total | ||||||||||||
(in millions) | |||||||||||||||
Beginning balance | $ | (1,444 | ) | $ | (1,316 | ) | $ | (178 | ) | $ | (2,938 | ) | |||
Other comprehensive income before reclassifications(3) | 2,066 | — | 18 | 2,084 | |||||||||||
Amounts reclassified from accumulated other comprehensive income | (630 | ) | 250 | 6 | (374 | ) | |||||||||
Changes in AOCI by component | 1,436 | 250 | 24 | 1,710 | |||||||||||
Ending balance | $ | (8 | ) | $ | (1,066 | ) | $ | (154 | ) | $ | (1,228 | ) | |||
Nine Months Ended September 30, 2012 | |||||||||||||||
AOCI Related to Available- For-Sale Securities(1) | AOCI Related to Cash Flow Hedge Relationships(2) | AOCI Related to Defined Benefit Plans | Total | ||||||||||||
(in millions) | |||||||||||||||
Beginning balance | $ | (6,213 | ) | $ | (1,730 | ) | $ | (52 | ) | $ | (7,995 | ) | |||
Other comprehensive income before reclassifications(3) | 2,996 | — | (47 | ) | 2,949 | ||||||||||
Amounts reclassified from accumulated other comprehensive income(4) | 512 | 320 | 5 | 837 | |||||||||||
Changes in AOCI by component | 3,508 | 320 | (42 | ) | 3,786 | ||||||||||
Ending balance | $ | (2,705 | ) | $ | (1,410 | ) | $ | (94 | ) | $ | (4,209 | ) | |||
(1) | The amounts reclassified from AOCI represent the gain or loss recognized in earnings due to a sale of an available-for-sale security or the recognition of a net impairment recognized in earnings. See “NOTE 7: INVESTMENTS IN SECURITIES” for more information. |
(2) | The amounts reclassified from AOCI represent the AOCI amount that was recognized in earnings as the originally hedged forecasted transactions affected earnings, unless it was deemed probable that the forecasted transaction would not occur. If it is probable that the forecasted transaction will not occur, then the deferred gain or loss associated with the hedge related to the forecasted transaction would be reclassified into earnings immediately. See “NOTE 9: DERIVATIVES” for more information about our derivatives. |
(3) | For the nine months ended September 30, 2013 and 2012, net of tax expense of $1.1 billion and $1.6 billion, respectively, for AOCI related to available-for-sale securities. |
(4) | For the nine months ended September 30, 2012, net of tax benefit of $276 million for AOCI related to available-for-sale securities and net of tax benefit of $154 million for AOCI related to cash flow hedge relationships. |
Reclassifications from AOCI to Net Income
The table below presents reclassifications from AOCI to net income, including the affected line item in our consolidated statements of comprehensive income.
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Table 11.2 — Reclassifications from AOCI to Net Income
Details about Accumulated Other Comprehensive Income Components | Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2013 | Affected Line Item in the Consolidated Statements of Comprehensive Income | |||||||
(in millions) | ||||||||||
AOCI related to available-for-sale securities | ||||||||||
$ | 827 | $ | 1,182 | Other gains (losses) on investment securities recognized in earnings | ||||||
(126 | ) | (213 | ) | Net impairment of available-for-sale securities recognized in earnings | ||||||
701 | 969 | Total before tax | ||||||||
(246 | ) | (339 | ) | Tax (expense) or benefit | ||||||
455 | 630 | Net of tax | ||||||||
AOCI related to cash flow hedge relationships | ||||||||||
(2 | ) | (4 | ) | Interest expense — Other debt | ||||||
(108 | ) | (361 | ) | Expense related to derivatives | ||||||
(110 | ) | (365 | ) | Total before tax | ||||||
34 | 115 | Tax (expense) or benefit | ||||||||
(76 | ) | (250 | ) | Net of tax | ||||||
AOCI related to defined benefit plans | ||||||||||
(2 | ) | (6 | ) | Salaries and employee benefits | ||||||
— | — | Tax (expense) or benefit | ||||||||
(2 | ) | (6 | ) | Net of tax | ||||||
Total reclassifications in the period | $ | 377 | $ | 374 | Net of tax | |||||
Future Reclassifications from AOCI to Net Income Related to Closed Cash Flow Hedges
As shown in “Table 11.1 — Changes in AOCI by Component, Net of Tax,” the total AOCI related to derivatives designated as cash flow hedges was a loss of $1.1 billion and $1.4 billion at September 30, 2013 and 2012, respectively, composed of deferred net losses on closed cash flow hedges. Closed cash flow hedges involve derivatives that have been terminated or are no longer designated as cash flow hedges. Fluctuations in prevailing market interest rates have no effect on the deferred portion of AOCI relating to losses on closed cash flow hedges.
The previously deferred amount related to closed cash flow hedges remains in our AOCI balance and will be recognized into earnings over the expected time period for which the forecasted transactions affect earnings. Over the next 12 months, we estimate that approximately $229 million, net of taxes, of the $1.1 billion of cash flow hedge losses in AOCI at September 30, 2013 will be reclassified into earnings. The maximum remaining length of time over which we have hedged the exposure related to the variability in future cash flows on forecasted transactions, primarily forecasted debt issuances, is 21 years. However, over 70% and 90% of AOCI relating to closed cash flow hedges at September 30, 2013 will be reclassified to earnings over the next five and ten years, respectively.
NOTE 12: INCOME TAXES
Income Tax Benefit
For both the three and nine months ended September 30, 2013, we reported an income tax benefit of $24.0 billion, resulting in effective tax rates of (367.1)% and (150.0)%, respectively. The income tax benefit for these periods includes $23.9 billion related to the release of the valuation allowance against our net deferred tax assets. For the three and nine months ended September 30, 2012, we reported an income tax benefit of $302 million and $392 million, respectively, resulting in effective tax rates of (11.5)% and (6.4)%, respectively. For the three and nine months ended September 30, 2013, our effective tax rate was different from the statutory rate of 35% primarily as a result of the release of the valuation allowance against our net deferred tax assets.
Deferred Tax Assets and Liabilities
During the three months ended September 30, 2013, we released our valuation allowance previously recorded on our net deferred tax asset. The table below presents the balance of significant deferred tax assets, liabilities, and the valuation allowance at September 30, 2013 and December 31, 2012.
150 | Freddie Mac | |
Table 12.1 — Deferred Tax Assets and Liabilities
September 30, 2013 | December 31, 2012 | ||||||
(in millions) | |||||||
Deferred tax assets: | |||||||
Deferred fees | $ | 5,030 | $ | 4,330 | |||
Basis differences related to derivative instruments | 7,870 | 10,294 | |||||
Credit related items and allowance for loan losses | 4,013 | 6,785 | |||||
Unrealized (gains) losses related to available-for-sale securities | 5 | 778 | |||||
LIHTC and AMT credit carryforward | 3,761 | 3,408 | |||||
Net operating loss carryforward | 6,815 | 11,479 | |||||
Other items, net | 125 | 146 | |||||
Total deferred tax assets | 27,619 | 37,220 | |||||
Deferred tax liabilities: | |||||||
Basis differences related to assets held for investment(1) | (1,143 | ) | (4,609 | ) | |||
Basis differences related to debt | (103 | ) | (149 | ) | |||
Total deferred tax liabilities | (1,246 | ) | (4,758 | ) | |||
Valuation allowance | (2,443 | ) | (31,684 | ) | |||
Deferred tax assets (liabilities), net | $ | 23,930 | $ | 778 | |||
(1) | The deferred tax liability balance for basis differences related to assets held for investment includes a basis adjustment on seriously delinquent loans. This deferred tax liability offsets a portion of the deferred tax asset for credit related items and the allowance for loan losses. |
Valuation Allowance Against Net Deferred Tax Assets
Deferred tax assets reflect timing differences between the recognition of income/expenses under GAAP and the recognition of income/expenses under tax. Deferred tax assets are created when: (a) expenses are recognized under GAAP prior to the corresponding recognition of expenses for tax; and/or (b) income is recognized for tax prior to the corresponding recognition of income for GAAP. The realization of these net deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character (i.e., ordinary income or capital gains) in the available carryback and carryforward years available under the tax law, which would include reversals of existing taxable temporary differences and liabilities associated with unrecognized tax benefits. Valuation allowances are recorded to reduce net deferred tax assets when it is more likely than not that a tax benefit will not be realized.
On a quarterly basis, we determine whether a valuation allowance is necessary on our net deferred tax asset. In doing so, we consider all evidence available, both positive and negative, in determining whether, based on the weight of the evidence, it is more likely than not that the deferred tax assets will be realized. In conducting our assessment, we evaluate all available objective evidence including, but not limited to: (a) our three-year cumulative income position as of September 30, 2013; (b) the trend of our financial and tax results; (c) the amount of taxable income reported in our 2012 federal income tax return; (d) our tax net operating loss and tax credit carryforwards and the length of carry forward periods available to utilize these assets under current tax law; and (e) our access to capital under the agreements associated with conservatorship. Furthermore, we evaluate all available subjective evidence, including but not limited to: (a) difficulty in predicting unsettled circumstances related to the conservatorship; (b) our estimated 2013 taxable income; and (c) forecasts of future book and tax income. Our consideration of the evidence requires significant judgment regarding estimates and assumptions that are inherently uncertain, particularly about our future business structure and financial results.
Our analysis is not permitted to consider the impacts proposed legislation may have on our business operations or the mortgage industry because the timing and certainty of those actions is unknown and beyond our control.
After weighing all of the evidence at September 30, 2013, we determined that the positive evidence, particularly the evidence that was objectively verifiable, outweighed the negative evidence. Accordingly, we concluded that it is more likely than not that our deferred tax assets will be realized and we have released the valuation allowance against our net deferred tax assets. The release is allocated between the third quarter and the fourth quarter of 2013.
The positive evidence at September 30, 2013, that outweighed the negative evidence included the following:
• | Our three-year cumulative income position as of September 30, 2013; |
• | The strong positive trend in our financial performance over the last six quarters, including the quarter ended September 30, 2013; |
• | The 2012 taxable income reported in our federal tax return which was filed in the quarter ended September 30, 2013; |
• | Our forecasted 2013 and future period taxable income; |
• | Our net operating loss carryforwards do not begin to expire until 2030; and |
• | The continuing positive trend in the housing market. |
151 | Freddie Mac | |
We also continue to update and analyze a range of forecast scenarios of future tax and book income to determine whether these forecasts support full realization of our deferred tax assets. Forecasts are inherently uncertain and rely on significant assumptions and judgments. These assumptions and judgments can change over time. Due to the significant uncertainties related to the conservatorship and ongoing changes to our business as a result of public policy, it is very difficult for us to make projections concerning our financial performance beyond the near term.
When comparing evidence available at September 30, 2013 versus June 30, 2013 we noted a number of positive developments. During the quarter ended September 30, 2013, we filed our 2012 federal tax return, which reflected taxable income versus the break-even position forecasted at June 30, 2013. This was our first year reporting taxable income since 2007. Furthermore, we continued an improved trend in earnings with pre-tax income of $6.5 billion for the quarter ended September 30, 2013. Our current base forecast of taxable income also improved resulting in a decline in the number of years of projected income required in order to fully realize our net deferred tax asset. These positive developments in addition to the positive evidence discussed above resulted in our conclusion to release the valuation allowance against our net deferred tax assets.
In future quarters we will continue to evaluate our ability to realize the net deferred tax asset. If evidence in future periods changes such that it is more likely than not that part or all of the net deferred tax asset will not be realized, we will reestablish a valuation allowance at that time.
IRS Examinations and Unrecognized Tax Benefits
The IRS is currently examining our income tax returns for tax years 2008 through 2011. As of September 30, 2013, we have evaluated all income tax positions and determined that there are no uncertain tax positions that require reserves. For additional information, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” and “NOTE 12: INCOME TAXES” in our 2012 Annual Report, and “NOTE 17: LEGAL CONTINGENCIES.”
NOTE 13: SEGMENT REPORTING
We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator. See “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS” for additional information about the conservatorship.
We present Segment Earnings by: (a) reclassifying certain investment-related activities and credit guarantee-related activities between various line items on our GAAP consolidated statements of comprehensive income; and (b) allocating certain revenues and expenses, including certain returns on assets and funding costs, and all administrative expenses to our three reportable segments. These reclassifications and allocations are described in “NOTE 13: SEGMENT REPORTING” in our 2012 Annual Report.
We do not consider our assets by segment when evaluating segment performance or allocating resources. We conduct our operations solely in the U.S. and its territories. Therefore, we do not generate any revenue from geographic locations outside of the U.S. and its territories.
Segments
Our operations consist of three reportable segments, which are based on the type of business activities each performs — Investments, Single-family Guarantee, and Multifamily. See “NOTE 13: SEGMENT REPORTING” in our 2012 Annual Report for a description of our reportable segments and the activities and items included in each.
Segment Earnings
The financial performance of our Single-family Guarantee segment and Multifamily segment are measured based on each segment’s contribution to GAAP net income (loss). Our Investments segment is measured on its contribution to GAAP comprehensive income (loss), which consists of the sum of its contribution to: (a) GAAP net income (loss); and (b) GAAP total other comprehensive income (loss), net of taxes.
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). However, the accounting principles we apply to present certain financial statement line items in Segment Earnings for our reportable segments, in particular Segment Earnings net interest income and management and guarantee income, differ significantly from those applied in preparing the comparable line items in our consolidated financial statements prepared in accordance with GAAP. Accordingly, the results of such line items differ significantly from, and should not be used as a substitute for, the comparable line items as determined in accordance with GAAP. For reconciliations of the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.”
Segment Adjustments
152 | Freddie Mac | |
In presenting Segment Earnings net interest income and management and guarantee income, we make adjustments to better reflect how management measures and assesses the performance of each segment and the company as a whole. These adjustments relate to amounts that are not reflected in net income (loss) as determined in accordance with GAAP. These adjustments are reversed through the segment adjustments line item within Segment Earnings, so that Segment Earnings (loss) for each segment equals GAAP net income (loss) for each segment. Segment adjustments consist of the following:
• | We adjust our Segment Earnings net interest income for the Investments segment to include the amortization of cash premiums and discounts, as well as buy-up fees, on the consolidated Freddie Mac mortgage-related securities we purchase as investments. As of September 30, 2013, the unamortized balance of such premiums and discounts, net was $3.5 billion and the unamortized balance of buy-up fees was $0.5 billion. These adjustments are necessary to reflect the effective yield realized on investments in consolidated Freddie Mac mortgage-related securities purchased at a premium or discount or with buy-up fees. |
• | We adjust our Segment Earnings management and guarantee income for the Single-family Guarantee segment to include the amortization of buy-down fees and credit delivery fees recorded in periods prior to the January 1, 2010 adoption of accounting guidance for the transfers of financial assets and the consolidation of VIEs. As of September 30, 2013, the unamortized balance of buy-down fees was $0.4 billion and the unamortized balance of credit delivery fees was $1.0 billion. We consider such fees to be part of the effective rate of the guarantee fee on guaranteed mortgage loans. These adjustments are necessary to better reflect the realization of revenue associated with guarantee contracts over the life of the underlying loans. |
The table below presents Segment Earnings by segment.
Table 13.1 — Summary of Segment Earnings and Comprehensive Income (Loss)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(in millions) | |||||||||||||||
Segment Earnings (loss), net of taxes: | |||||||||||||||
Investments | $ | 3,697 | $ | 2,472 | $ | 9,789 | $ | 6,568 | |||||||
Single-family Guarantee | 2,019 | (163 | ) | 4,546 | (1,597 | ) | |||||||||
Multifamily | 844 | 710 | 1,822 | 1,652 | |||||||||||
All Other(1) | 23,926 | (91 | ) | 23,898 | (98 | ) | |||||||||
Total Segment Earnings, net of taxes | 30,486 | 2,928 | 40,055 | 6,525 | |||||||||||
Net income | $ | 30,486 | $ | 2,928 | $ | 40,055 | $ | 6,525 | |||||||
Comprehensive income (loss) of segments: | |||||||||||||||
Investments | $ | 4,335 | $ | 4,487 | $ | 12,016 | $ | 8,945 | |||||||
Single-family Guarantee | 2,021 | (162 | ) | 4,560 | (1,618 | ) | |||||||||
Multifamily | 155 | 1,396 | 1,291 | 3,082 | |||||||||||
All Other(1) | 23,926 | (91 | ) | 23,898 | (98 | ) | |||||||||
Comprehensive income of segments | 30,437 | 5,630 | 41,765 | 10,311 | |||||||||||
Comprehensive income | $ | 30,437 | $ | 5,630 | $ | 41,765 | $ | 10,311 | |||||||
(1) | For the three and nine months ended September 30, 2013, includes a benefit for federal income taxes that resulted from our conclusion to release our valuation allowance against our net deferred tax assets. |
The table below presents detailed reconciliations between our GAAP financial statements and Segment Earnings by financial statement line item for our reportable segments and All Other.
153 | Freddie Mac | |
Table 13.2 — Segment Earnings and Reconciliation to GAAP Results
Three Months Ended September 30, 2013 | |||||||||||||||||||||||||||||||||||
Total Segment Earnings (Loss), Net of Tax | Reconciliation to Consolidated Statements of Comprehensive Income | Total per Consolidated Statements of Comprehensive Income | |||||||||||||||||||||||||||||||||
Investments | Single-family Guarantee | Multifamily | All Other | Reclassifications(1) | Segment Adjustments(2) | Total Reconciling Items | |||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||
Net interest income | $ | 883 | $ | 203 | $ | 321 | $ | — | $ | 1,407 | $ | 2,600 | $ | 269 | $ | 2,869 | $ | 4,276 | |||||||||||||||||
Benefit (provision) for credit losses | — | 885 | 28 | — | 913 | 225 | — | 225 | 1,138 | ||||||||||||||||||||||||||
Non-interest income (loss): | |||||||||||||||||||||||||||||||||||
Management and guarantee income(3) | — | 1,230 | 52 | — | 1,282 | (1,058 | ) | (154 | ) | (1,212 | ) | 70 | |||||||||||||||||||||||
Net impairment of available-for-sale securities recognized in earnings | 16 | — | (4 | ) | — | 12 | (138 | ) | — | (138 | ) | (126 | ) | ||||||||||||||||||||||
Derivative gains (losses) | 1,007 | — | 2 | — | 1,009 | (1,083 | ) | — | (1,083 | ) | (74 | ) | |||||||||||||||||||||||
Gains (losses) on trading securities | (187 | ) | — | (20 | ) | — | (207 | ) | — | — | — | (207 | ) | ||||||||||||||||||||||
Gains (losses) on mortgage loans | (129 | ) | — | 243 | — | 114 | — | — | — | 114 | |||||||||||||||||||||||||
Other non-interest income (loss) | 1,937 | 246 | 275 | — | 2,458 | (546 | ) | — | (546 | ) | 1,912 | ||||||||||||||||||||||||
Non-interest expense: | |||||||||||||||||||||||||||||||||||
Administrative expenses | (133 | ) | (263 | ) | (59 | ) | — | (455 | ) | — | — | — | (455 | ) | |||||||||||||||||||||
REO operations income (expense) | — | 67 | 12 | — | 79 | — | — | — | 79 | ||||||||||||||||||||||||||
Other non-interest expense | — | (195 | ) | (6 | ) | — | (201 | ) | — | — | — | (201 | ) | ||||||||||||||||||||||
Segment adjustments(2) | 269 | (154 | ) | — | — | 115 | — | (115 | ) | (115 | ) | — | |||||||||||||||||||||||
Income tax benefit | 34 | — | — | 23,926 | 23,960 | — | — | — | 23,960 | ||||||||||||||||||||||||||
Net income | 3,697 | 2,019 | 844 | 23,926 | 30,486 | — | — | — | 30,486 | ||||||||||||||||||||||||||
Total other comprehensive income (loss), net of taxes | 638 | 2 | (689 | ) | — | (49 | ) | — | — | — | (49 | ) | |||||||||||||||||||||||
Comprehensive income | $ | 4,335 | $ | 2,021 | $ | 155 | $ | 23,926 | $ | 30,437 | $ | — | $ | — | $ | — | $ | 30,437 | |||||||||||||||||
Nine Months Ended September 30, 2013 | |||||||||||||||||||||||||||||||||||
Total Segment Earnings (Loss), Net of Tax | Reconciliation to Consolidated Statements of Comprehensive Income | Total per Consolidated Statements of Comprehensive Income | |||||||||||||||||||||||||||||||||
Investments | Single-family Guarantee | Multifamily | All Other | Reclassifications(1) | Segment Adjustments(2) | Total Reconciling Items | |||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||
Net interest income | $ | 2,752 | $ | 300 | $ | 944 | $ | — | $ | 3,996 | $ | 7,835 | $ | 854 | $ | 8,689 | $ | 12,685 | |||||||||||||||||
Benefit (provision) for credit losses | — | 1,474 | 167 | — | 1,641 | 623 | — | 623 | 2,264 | ||||||||||||||||||||||||||
Non-interest income (loss): | |||||||||||||||||||||||||||||||||||
Management and guarantee income(3) | — | 3,771 | 147 | — | 3,918 | (3,129 | ) | (596 | ) | (3,725 | ) | 193 | |||||||||||||||||||||||
Net impairment of available-for-sale securities recognized in earnings | 73 | — | (15 | ) | — | 58 | (271 | ) | — | (271 | ) | (213 | ) | ||||||||||||||||||||||
Derivative gains (losses) | 4,774 | — | 11 | — | 4,785 | (3,122 | ) | — | (3,122 | ) | 1,663 | ||||||||||||||||||||||||
Gains (losses) on trading securities | (1,311 | ) | — | (24 | ) | — | (1,335 | ) | — | — | — | (1,335 | ) | ||||||||||||||||||||||
Gains (losses) on mortgage loans | (746 | ) | — | 306 | — | (440 | ) | — | — | — | (440 | ) | |||||||||||||||||||||||
Other non-interest income (loss) | 3,654 | 695 | 488 | — | 4,837 | (1,936 | ) | — | (1,936 | ) | 2,901 | ||||||||||||||||||||||||
Non-interest expense: | |||||||||||||||||||||||||||||||||||
Administrative expenses | (377 | ) | (756 | ) | (198 | ) | — | (1,331 | ) | — | — | — | (1,331 | ) | |||||||||||||||||||||
REO operations income (expense) | — | 168 | 15 | — | 183 | — | — | — | 183 | ||||||||||||||||||||||||||
Other non-interest expense | (1 | ) | (505 | ) | (18 | ) | (27 | ) | (551 | ) | — | — | — | (551 | ) | ||||||||||||||||||||
Segment adjustments(2) | 854 | (596 | ) | — | — | 258 | — | (258 | ) | (258 | ) | — | |||||||||||||||||||||||
Income tax (expense) benefit | 117 | (5 | ) | (1 | ) | 23,925 | 24,036 | — | — | — | 24,036 | ||||||||||||||||||||||||
Net income | 9,789 | 4,546 | 1,822 | 23,898 | 40,055 | — | — | — | 40,055 | ||||||||||||||||||||||||||
Total other comprehensive income (loss), net of taxes | 2,227 | 14 | (531 | ) | — | 1,710 | — | — | — | 1,710 | |||||||||||||||||||||||||
Comprehensive income | $ | 12,016 | $ | 4,560 | $ | 1,291 | $ | 23,898 | $ | 41,765 | $ | — | $ | — | $ | — | $ | 41,765 | |||||||||||||||||
154 | Freddie Mac | |
Three Months Ended September 30, 2012 | |||||||||||||||||||||||||||||||||||
Total Segment Earnings (Loss), Net of Tax | Reconciliation to Consolidated Statements of Comprehensive Income | Total per Consolidated Statements of Comprehensive Income | |||||||||||||||||||||||||||||||||
Investments | Single-family Guarantee | Multifamily | All Other | Reclassifications(1) | Segment Adjustments(2) | Total Reconciling Items | |||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||
Net interest income | $ | 1,342 | $ | (61 | ) | $ | 334 | $ | — | $ | 1,615 | $ | 2,463 | $ | 191 | $ | 2,654 | $ | 4,269 | ||||||||||||||||
Benefit (provision) for credit losses | — | (931 | ) | 40 | — | (891 | ) | 281 | — | 281 | (610 | ) | |||||||||||||||||||||||
Non-interest income (loss): | |||||||||||||||||||||||||||||||||||
Management and guarantee income(3) | — | 1,108 | 38 | — | 1,146 | (906 | ) | (189 | ) | (1,095 | ) | 51 | |||||||||||||||||||||||
Net impairment of available-for-sale securities recognized in earnings | (180 | ) | — | (29 | ) | — | (209 | ) | (58 | ) | — | (58 | ) | (267 | ) | ||||||||||||||||||||
Derivative gains (losses) | 557 | — | 2 | — | 559 | (1,047 | ) | — | (1,047 | ) | (488 | ) | |||||||||||||||||||||||
Gains (losses) on trading securities | (364 | ) | — | 26 | — | (338 | ) | — | — | — | (338 | ) | |||||||||||||||||||||||
Gains (losses) on mortgage loans | 112 | — | 315 | — | 427 | — | — | — | 427 | ||||||||||||||||||||||||||
Other non-interest income (loss) | 520 | 219 | 49 | — | 788 | (733 | ) | — | (733 | ) | 55 | ||||||||||||||||||||||||
Non-interest expense: | |||||||||||||||||||||||||||||||||||
Administrative expenses | (110 | ) | (228 | ) | (63 | ) | — | (401 | ) | — | — | — | (401 | ) | |||||||||||||||||||||
REO operations income (expense) | — | 40 | 9 | — | 49 | — | — | — | 49 | ||||||||||||||||||||||||||
Other non-interest expense | (1 | ) | (111 | ) | (9 | ) | — | (121 | ) | — | — | — | (121 | ) | |||||||||||||||||||||
Segment adjustments(2) | 191 | (189 | ) | — | — | 2 | — | (2 | ) | (2 | ) | — | |||||||||||||||||||||||
Income tax (expense) benefit | 405 | (10 | ) | (2 | ) | (91 | ) | 302 | — | — | — | 302 | |||||||||||||||||||||||
Net income (loss) | 2,472 | (163 | ) | 710 | (91 | ) | 2,928 | — | — | — | 2,928 | ||||||||||||||||||||||||
Total other comprehensive income, net of taxes | 2,015 | 1 | 686 | — | 2,702 | — | — | — | 2,702 | ||||||||||||||||||||||||||
Comprehensive income (loss) | $ | 4,487 | $ | (162 | ) | $ | 1,396 | $ | (91 | ) | $ | 5,630 | $ | — | $ | — | $ | — | $ | 5,630 | |||||||||||||||
Nine Months Ended September 30, 2012 | |||||||||||||||||||||||||||||||||||
Total Segment Earnings (Loss), Net of Tax | Reconciliation to Consolidated Statements of Comprehensive Income | Total per Consolidated Statements of Comprehensive Income | |||||||||||||||||||||||||||||||||
Investments | Single-family Guarantee | Multifamily | All Other | Reclassifications(1) | Segment Adjustments(2) | Total Reconciling Items | |||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||
Net interest income | $ | 4,594 | $ | (94 | ) | $ | 982 | $ | — | $ | 5,482 | $ | 7,163 | $ | 510 | $ | 7,673 | $ | 13,155 | ||||||||||||||||
Benefit (provision) for credit losses | — | (3,577 | ) | 81 | — | (3,496 | ) | 906 | — | 906 | (2,590 | ) | |||||||||||||||||||||||
Non-interest income (loss): | |||||||||||||||||||||||||||||||||||
Management and guarantee income(3) | — | 3,145 | 107 | — | 3,252 | (2,530 | ) | (577 | ) | (3,107 | ) | 145 | |||||||||||||||||||||||
Net impairment of available-for-sale securities recognized in earnings | (690 | ) | — | (64 | ) | — | (754 | ) | (175 | ) | — | (175 | ) | (929 | ) | ||||||||||||||||||||
Derivative gains (losses) | 993 | — | 6 | — | 999 | (3,425 | ) | — | (3,425 | ) | (2,426 | ) | |||||||||||||||||||||||
Gains (losses) on trading securities | (1,175 | ) | — | 60 | — | (1,115 | ) | — | — | — | (1,115 | ) | |||||||||||||||||||||||
Gains (losses) on mortgage loans | 323 | — | 528 | — | 851 | — | — | — | 851 | ||||||||||||||||||||||||||
Other non-interest income (loss) | 1,776 | 571 | 239 | — | 2,586 | (1,939 | ) | — | (1,939 | ) | 647 | ||||||||||||||||||||||||
Non-interest expense: | |||||||||||||||||||||||||||||||||||
Administrative expenses | (310 | ) | (653 | ) | (176 | ) | — | (1,139 | ) | — | — | — | (1,139 | ) | |||||||||||||||||||||
REO operations expense | — | (98 | ) | 6 | — | (92 | ) | — | — | — | (92 | ) | |||||||||||||||||||||||
Other non-interest expense | (1 | ) | (266 | ) | (107 | ) | — | (374 | ) | — | — | — | (374 | ) | |||||||||||||||||||||
Segment adjustments(2) | 510 | (577 | ) | — | — | (67 | ) | — | 67 | 67 | — | ||||||||||||||||||||||||
Income tax (expense) benefit | 548 | (48 | ) | (10 | ) | (98 | ) | 392 | — | — | — | 392 | |||||||||||||||||||||||
Net income (loss) | 6,568 | (1,597 | ) | 1,652 | (98 | ) | 6,525 | — | — | — | 6,525 | ||||||||||||||||||||||||
Total other comprehensive income (loss), net of taxes | 2,377 | (21 | ) | 1,430 | — | 3,786 | — | — | — | 3,786 | |||||||||||||||||||||||||
Comprehensive income (loss) | $ | 8,945 | $ | (1,618 | ) | $ | 3,082 | $ | (98 | ) | $ | 10,311 | $ | — | $ | — | $ | — | $ | 10,311 | |||||||||||||||
(1) | See “NOTE 13: SEGMENT REPORTING — Segment Earnings — Investment Activity-Related Reclassifications” and “— Credit Guarantee Activity-Related Reclassifications” in our 2012 Annual Report for information regarding these reclassifications. |
(2) | See “Segment Earnings — Segment Adjustments” for information regarding these adjustments. |
(3) | Management and guarantee income total per consolidated statements of comprehensive income is included in other income on our GAAP consolidated statements of comprehensive income. |
The table below presents comprehensive income (loss) by segment.
155 | Freddie Mac | |
Table 13.3 — Comprehensive Income (Loss) of Segments
Three Months Ended September 30, 2013 | |||||||||||||||||||||||
Other Comprehensive Income (Loss), Net of Taxes | |||||||||||||||||||||||
Net Income (Loss) | Changes in Unrealized Gains (Losses) Related to Available-For-Sale Securities | Changes in Unrealized Gains (Losses) Related to Cash Flow Hedge Relationships | Changes in Defined Benefit Plans | Total Other Comprehensive Income (Loss), Net of Taxes | Comprehensive Income (Loss) | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Total comprehensive income (loss) of segments: | |||||||||||||||||||||||
Investments | $ | 3,697 | $ | 562 | $ | 76 | $ | — | $ | 638 | $ | 4,335 | |||||||||||
Single-family Guarantee | 2,019 | — | — | 2 | 2 | 2,021 | |||||||||||||||||
Multifamily | 844 | (689 | ) | — | — | (689 | ) | 155 | |||||||||||||||
All Other | 23,926 | — | — | — | — | 23,926 | |||||||||||||||||
Total per consolidated statements of comprehensive income | $ | 30,486 | $ | (127 | ) | $ | 76 | $ | 2 | $ | (49 | ) | $ | 30,437 | |||||||||
Nine Months Ended September 30, 2013 | |||||||||||||||||||||||
Other Comprehensive Income (Loss), Net of Taxes | |||||||||||||||||||||||
Net Income (Loss) | Changes in Unrealized Gains (Losses) Related to Available-For-Sale Securities | Changes in Unrealized Gains (Losses) Related to Cash Flow Hedge Relationships | Changes in Defined Benefit Plans | Total Other Comprehensive Income (Loss), Net of Taxes | Comprehensive Income (Loss) | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Total comprehensive income (loss) of segments: | |||||||||||||||||||||||
Investments | $ | 9,789 | $ | 1,969 | $ | 250 | $ | 8 | $ | 2,227 | $ | 12,016 | |||||||||||
Single-family Guarantee | 4,546 | — | — | 14 | 14 | 4,560 | |||||||||||||||||
Multifamily | 1,822 | (533 | ) | — | 2 | (531 | ) | 1,291 | |||||||||||||||
All Other | 23,898 | — | — | — | — | 23,898 | |||||||||||||||||
Total per consolidated statements of comprehensive income | $ | 40,055 | $ | 1,436 | $ | 250 | $ | 24 | $ | 1,710 | $ | 41,765 | |||||||||||
Three Months Ended September 30, 2012 | |||||||||||||||||||||||
Other Comprehensive Income (Loss), Net of Taxes | |||||||||||||||||||||||
Net Income (Loss) | Changes in Unrealized Gains (Losses) Related to Available-For-Sale Securities | Changes in Unrealized Gains (Losses) Related to Cash Flow Hedge Relationships | Changes in Defined Benefit Plans | Total Other Comprehensive Income (Loss), Net of Taxes | Comprehensive Income (Loss) | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Total comprehensive income (loss) of segments: | |||||||||||||||||||||||
Investments | $ | 2,472 | $ | 1,913 | $ | 102 | $ | — | $ | 2,015 | $ | 4,487 | |||||||||||
Single-family Guarantee | (163 | ) | — | — | 1 | 1 | (162 | ) | |||||||||||||||
Multifamily | 710 | 686 | — | — | 686 | 1,396 | |||||||||||||||||
All Other | (91 | ) | — | — | — | — | (91 | ) | |||||||||||||||
Total per consolidated statements of comprehensive income | $ | 2,928 | $ | 2,599 | $ | 102 | $ | 1 | $ | 2,702 | $ | 5,630 | |||||||||||
Nine Months Ended September 30, 2012 | |||||||||||||||||||||||
Other Comprehensive Income (Loss), Net of Taxes | |||||||||||||||||||||||
Net Income (Loss) | Changes in Unrealized Gains (Losses) Related to Available-For-Sale Securities | Changes in Unrealized Gains (Losses) Related to Cash Flow Hedge Relationships | Changes in Defined Benefit Plans | Total Other Comprehensive Income (Loss), Net of Taxes | Comprehensive Income (Loss) | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Total comprehensive income (loss) of segments: | |||||||||||||||||||||||
Investments | $ | 6,568 | $ | 2,074 | $ | 320 | $ | (17 | ) | $ | 2,377 | $ | 8,945 | ||||||||||
Single-family Guarantee | (1,597 | ) | — | — | (21 | ) | (21 | ) | (1,618 | ) | |||||||||||||
Multifamily | 1,652 | 1,434 | — | (4 | ) | 1,430 | 3,082 | ||||||||||||||||
All Other | (98 | ) | — | — | — | — | (98 | ) | |||||||||||||||
Total per consolidated statements of comprehensive income | $ | 6,525 | $ | 3,508 | $ | 320 | $ | (42 | ) | $ | 3,786 | $ | 10,311 | ||||||||||
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NOTE 14: FINANCIAL GUARANTEES
When we securitize single-family mortgages that we purchase, we issue mortgage-related securities that can be sold to investors or held by us. During the three and nine months ended September 30, 2013, we issued approximately $98.0 billion and $362.0 billion, respectively, compared to $106.2 billion and $312.5 billion for the three and nine months ended September 30, 2012, respectively, in UPB of Freddie Mac mortgage-related securities backed by single-family mortgage loans (excluding those backed by HFA bonds). We do not recognize a financial guarantee for such arrangements as we instead recognize both the mortgage loans and the debt securities of these securitization trusts on our consolidated balance sheets. See “NOTE 9: FINANCIAL GUARANTEES” in our 2012 Annual Report for a description of the nature of the transactions that give rise to our financial guarantees.
For securities issued by non-consolidated securitization trusts and other guarantee commitments for which we are exposed to incremental credit risk, we recognize a guarantee asset, guarantee obligation and a reserve for guarantee losses, as necessary. Our guarantee obligation represents the recognized liability, net of cumulative amortization, associated with our guarantee.
The table below presents our maximum potential exposure, our recognized liability, and the maximum remaining term of our financial guarantees that are not consolidated on our balance sheets.
Table 14.1 — Financial Guarantees
September 30, 2013 | December 31, 2012 | ||||||||||||||||||
Maximum Exposure(1) | Recognized Liability | Maximum Remaining Term | Maximum Exposure(1) | Recognized Liability | Maximum Remaining Term | ||||||||||||||
(dollars in millions, terms in years) | |||||||||||||||||||
Non-consolidated Freddie Mac securities(2) | $ | 65,594 | $ | 616 | 40 | $ | 50,715 | $ | 430 | 41 | |||||||||
Other guarantee commitments | 28,410 | 758 | 36 | 23,455 | 575 | 37 | |||||||||||||
Derivative instruments(3) | 9,421 | 363 | 32 | 10,306 | 789 | 33 | |||||||||||||
Servicing-related premium guarantees | 277 | — | 5 | 210 | — | 5 | |||||||||||||
(1) | Maximum exposure represents the contractual amounts that could be lost under the non-consolidated guarantees if counterparties or borrowers defaulted, without consideration of possible recoveries under credit enhancement arrangements, such as recourse provisions, third-party insurance contracts, or from collateral held or pledged. The maximum exposure disclosed above is not representative of the actual loss we are likely to incur, based on our historical loss experience and after consideration of proceeds from related collateral liquidation. The maximum exposure for our liquidity guarantees is not mutually exclusive of our default guarantees on the same securities; therefore, these amounts are included within the maximum exposure of non-consolidated Freddie Mac securities and other guarantee commitments. |
(2) | In addition to our guarantee of principal and interest, we also provide liquidity guarantees for certain multifamily housing revenue bonds included in this category. However, no advances under these liquidity guarantees were outstanding at September 30, 2013 and December 31, 2012. |
(3) | See “NOTE 9: DERIVATIVES” for information about these derivative guarantees. |
Non-Consolidated Freddie Mac Securities
During the three and nine months ended September 30, 2013 we issued approximately $5.3 billion and $17.5 billion, respectively, compared to $3.2 billion and $11.7 billion during the three and nine months ended September 30, 2012, respectively, in UPB of non-consolidated Freddie Mac securities primarily backed by multifamily mortgage loans, for which a guarantee asset and guarantee obligation were recognized.
We recognize a reserve for guarantee losses, which is included within other liabilities on our consolidated balance sheets, which totaled $127 million and $183 million at September 30, 2013 and December 31, 2012, respectively. For many of the loans underlying our non-consolidated guarantees, there are credit protections from third parties, including subordination, covering a portion of our exposure. See “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES” for information about credit protections on loans we guarantee.
Other Guarantee Commitments
We provide long-term standby commitments to certain of our customers, which obligate us to purchase seriously delinquent loans that are covered by those agreements. During the nine months ended September 30, 2013 and 2012, we issued and guaranteed $8.4 billion and $5.3 billion, respectively, in UPB of long-term standby commitments. These long-term standby commitments totaled $18.2 billion and $12.4 billion of UPB at September 30, 2013 and December 31, 2012, respectively. We also had other guarantee commitments on multifamily housing revenue bonds that were issued by HFAs of $9.1 billion and $9.4 billion in UPB at September 30, 2013 and December 31, 2012, respectively. In addition, as of September 30, 2013 and December 31, 2012, we had issued guarantees under the TCLFP on securities backed by HFA bonds with UPB of $1.1 billion and $1.7 billion, respectively.
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NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS
Single-Family Credit Guarantee Portfolio
Our business activity is to participate in and support the residential mortgage market in the United States, which we pursue by both issuing guaranteed mortgage securities and investing in mortgage loans and mortgage-related securities.
The table below summarizes the concentration by year of origination and geographical area of the approximately $1.7 trillion and $1.6 trillion UPB of our single-family credit guarantee portfolio at September 30, 2013 and December 31, 2012, respectively. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in our 2012 Annual Report and “NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES” and “NOTE 7: INVESTMENTS IN SECURITIES” for more information about credit risk associated with loans and mortgage-related securities that we hold.
Table 15.1 — Concentration of Credit Risk — Single-Family Credit Guarantee Portfolio
September 30, 2013 | December 31, 2012 | Percent of Credit Losses(1) Nine Months Ended | |||||||||||||||
Percentage of Portfolio(2) | Serious Delinquency Rate | Percentage of Portfolio(2) | Serious Delinquency Rate | September 30, 2013 | September 30, 2012 | ||||||||||||
Year of Origination | |||||||||||||||||
2013 | 18 | % | — | % | N/A | N/A | — | % | N/A | ||||||||
2012 | 24 | 0.2 | 22 | % | 0.1 | % | 2 | <1 | % | ||||||||
2011 | 11 | 0.4 | 14 | 0.3 | 1 | <1 | |||||||||||
2010 | 11 | 0.6 | 15 | 0.5 | 3 | 1 | |||||||||||
2009 | 9 | 1.1 | 12 | 0.9 | 3 | 2 | |||||||||||
2008 | 3 | 7.1 | 6 | 6.8 | 10 | 9 | |||||||||||
2007 | 5 | 11.7 | 7 | 12.4 | 35 | 36 | |||||||||||
2006 | 4 | 10.6 | 5 | 11.4 | 23 | 26 | |||||||||||
2005 | 5 | 6.9 | 6 | 7.2 | 14 | 17 | |||||||||||
2004 and prior | 10 | 3.3 | 13 | 3.2 | 9 | 9 | |||||||||||
Total | 100 | % | 2.6 | % | 100 | % | 3.3 | % | 100 | % | 100 | % | |||||
Region(3) | |||||||||||||||||
West | 28 | % | 1.9 | % | 28 | % | 2.8 | % | 27 | % | 44 | % | |||||
Northeast | 26 | 3.4 | 25 | 3.8 | 13 | 8 | |||||||||||
North Central | 18 | 1.9 | 18 | 2.5 | 23 | 20 | |||||||||||
Southeast | 17 | 3.8 | 17 | 5.0 | 34 | 24 | |||||||||||
Southwest | 11 | 1.4 | 12 | 1.7 | 3 | 4 | |||||||||||
Total | 100 | % | 2.6 | % | 100 | % | 3.3 | % | 100 | % | 100 | % | |||||
State(4) | |||||||||||||||||
California | 17 | % | 1.5 | % | 16 | % | 2.3 | % | 14 | % | 25 | % | |||||
Florida | 6 | 7.3 | 6 | 9.9 | 28 | 16 | |||||||||||
Illinois | 5 | 3.1 | 5 | 4.1 | 12 | 9 | |||||||||||
Maryland | 3 | 3.5 | 3 | 4.5 | 4 | 1 | |||||||||||
Nevada | 1 | 5.7 | 1 | 8.1 | 5 | 6 | |||||||||||
All other | 68 | 2.2 | 69 | 2.6 | 37 | 43 | |||||||||||
Total | 100 | % | 2.6 | % | 100 | % | 3.3 | % | 100 | % | 100 | % | |||||
(1) | Credit losses consist of the aggregate amount of charge-offs, net of recoveries, and REO operations expense in each of the respective periods and exclude foregone interest on non-performing loans and other market-based losses recognized on our consolidated statements of comprehensive income. |
(2) | Based on the UPB of our single-family credit guarantee portfolio, which includes unsecuritized single-family mortgage loans held by us on our consolidated balance sheets and those underlying Freddie Mac mortgage-related securities, or covered by our other guarantee commitments. |
(3) | 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). |
(4) | States presented are those with the highest percentage of credit losses during the nine months ended September 30, 2013. Our top five states based on the highest percentage of UPB as of September 30, 2013 are: California (17%), Florida (6%), New York (5%), Illinois (5%), and Texas (4%) which collectively comprised 37% of our single-family credit guarantee portfolio as of September 30, 2013. |
Credit Performance of Certain Higher Risk Single-Family Loan Categories
Participants in the mortgage market often characterize single-family loans based upon their overall credit quality at the time of origination, generally considering them to be prime or subprime. Many mortgage market participants classify single-
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family loans with credit characteristics that range between their prime and subprime categories as Alt-A because these loans have a combination of characteristics of each category, may be underwritten with lower or alternative income or asset documentation requirements compared to a full documentation mortgage loan, or both. However, there is no universally accepted definition of subprime or Alt-A. Although we discontinued new purchases of mortgage loans with lower documentation standards for assets or income beginning March 1, 2009, we continued to purchase certain amounts of these mortgages in cases where the loan was either: (a) purchased pursuant to a previously issued other guarantee commitment; (b) part of our relief refinance mortgage initiative; or (c) in another refinance mortgage initiative and the pre-existing mortgage (including Alt-A loans) was originated under less than full documentation standards. In the event we purchase a refinance mortgage and the original loan had been previously identified as Alt-A, such refinance loan may no longer be categorized or reported as Alt-A in the table below because the new refinance loan replacing the original loan would not be identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such refinancing not occurred.
Although we do not categorize single-family mortgage loans we purchase or guarantee as prime or subprime, we recognize that there are a number of mortgage loan types with certain characteristics that indicate a higher degree of credit risk. For example, a borrower’s credit score is a useful measure for assessing the credit quality of the borrower. Statistically, borrowers with higher credit scores are more likely to repay or have the ability to refinance than those with lower scores.
Presented below is a summary of the serious delinquency rates of certain higher-risk categories (based on characteristics of the loan at origination) of single-family loans in our single-family credit guarantee portfolio. The table includes a presentation of each higher-risk category in isolation. A single loan may fall within more than one category (for example, an interest-only loan may also have an original LTV ratio greater than 90%). Loans with a combination of these attributes will have an even higher risk of delinquency than those with an individual attribute.
Table 15.2 — Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio(1)
Percentage of Portfolio(1) | Serious Delinquency Rate | ||||||||||
September 30, 2013 | December 31, 2012 | September 30, 2013 | December 31, 2012 | ||||||||
Interest-only | 2 | % | 3 | % | 13.5 | % | 16.3 | % | |||
Option ARM(2) | <1 | <1 | 13.3 | 16.3 | |||||||
Alt-A(3) | 4 | 5 | 10.7 | 11.4 | |||||||
Original LTV ratio greater than 90%(4) | 15 | 13 | 3.5 | 4.8 | |||||||
Lower FICO scores at origination (less than 620) | 3 | 3 | 10.4 | 12.2 | |||||||
(1) | Based on UPB. |
(2) | For reporting purposes, loans within the option ARM category continue to be reported in that category following modification, even though the modified loan no longer provides for optional payment provisions. |
(3) | Alt-A loans may not include those loans that were previously classified as Alt-A and that have been refinanced as either a relief refinance mortgage or in another refinance mortgage initiative. |
(4) | Includes HARP loans, which we are required to purchase as part of our participation in the MHA Program. |
The percentage of borrowers in our single-family credit guarantee portfolio, based on UPB, with estimated current LTV ratios greater than 100% was 11% and 15% at September 30, 2013 and December 31, 2012, respectively. As estimated current LTV ratios increase, the borrower’s equity in the home decreases, which negatively affects the borrower’s ability to refinance (outside of HARP) or to sell the property for an amount at or above the balance of the outstanding mortgage loan. The serious delinquency rate for single-family loans with estimated current LTV ratios greater than 100% was 10.5% and 12.7% as of September 30, 2013 and December 31, 2012, respectively. Loans originated in 2005 through 2008 have been more affected by declines in home prices during the housing crisis that began in 2006 than loans originated in other years. Loans originated in 2005 through 2008 comprised approximately 17% of our single-family credit guarantee portfolio, based on UPB at September 30, 2013, and these loans accounted for approximately 82% and 88% of our credit losses during the nine months ended September 30, 2013 and 2012, respectively.
We categorize our investments in non-agency mortgage-related securities as subprime, option ARM, or Alt-A if the securities were identified as such based on information provided to us when we entered into these transactions. We have not identified option ARM, CMBS, obligations of states and political subdivisions, and manufactured housing securities as either subprime or Alt-A securities. See “NOTE 7: INVESTMENTS IN SECURITIES” for further information on these categories and other concentrations in our investments in securities.
Multifamily Mortgage Portfolio
The table below summarizes the concentration of multifamily mortgages in our multifamily mortgage portfolio by certain attributes. Information presented for multifamily mortgage loans includes certain categories based on loan or borrower characteristics present at origination. The table includes a presentation of each category in isolation. A single loan may fall
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within more than one category (for example, a loan with original LTV ratio greater than 80% may also have an original DSCR below 1.10).
Table 15.3 — Concentration of Credit Risk — Multifamily Mortgage Portfolio
September 30, 2013 | December 31, 2012 | ||||||||||||
UPB | Delinquency Rate(1) | UPB | Delinquency Rate(1) | ||||||||||
(dollars in billions) | |||||||||||||
State(2) | |||||||||||||
California | $ | 21.9 | — | % | $ | 21.1 | 0.12 | % | |||||
Texas | 16.3 | 0.04 | 15.9 | 0.13 | |||||||||
New York | 11.3 | 0.09 | 10.7 | 0.09 | |||||||||
Florida | 9.3 | — | 8.4 | 0.12 | |||||||||
Virginia | 7.1 | — | 6.6 | — | |||||||||
Maryland | 6.8 | — | 6.9 | — | |||||||||
All other states | 59.4 | 0.09 | 57.8 | 0.32 | |||||||||
Total | $ | 132.1 | 0.05 | % | $ | 127.4 | 0.19 | % | |||||
Region(3) | |||||||||||||
Northeast | $ | 37.9 | 0.04 | % | $ | 36.1 | 0.04 | % | |||||
West | 33.1 | 0.05 | 31.8 | 0.09 | |||||||||
Southwest | 25.7 | 0.06 | 25.4 | 0.22 | |||||||||
Southeast | 24.4 | 0.09 | 23.4 | 0.54 | |||||||||
North Central | 11.0 | — | 10.7 | 0.19 | |||||||||
Total | $ | 132.1 | 0.05 | % | $ | 127.4 | 0.19 | % | |||||
Category(4) | |||||||||||||
Original LTV ratio greater than 80% | $ | 5.2 | 0.33 | % | $ | 5.8 | 2.31 | % | |||||
Original DSCR below 1.10 | 2.0 | 0.30 | 2.3 | 2.97 | |||||||||
(1) | Based on the UPB of multifamily mortgages two monthly payments or more delinquent or in foreclosure. |
(2) | Represents the six states with the highest UPB at September 30, 2013. |
(3) | See endnote (3) to “Table 15.1 — Concentration of Credit Risk — Single-Family Credit Guarantee Portfolio” for a description of these regions. |
(4) | These categories are not mutually exclusive and a loan in one category may also be included within another category. |
One indicator of risk for mortgage loans in our multifamily mortgage portfolio is the amount of a borrower’s equity in the underlying property. A borrower’s equity in a property decreases as the LTV ratio increases. Higher LTV ratios negatively affect a borrower’s ability to refinance or sell a property for an amount at or above the balance of the outstanding mortgage. The DSCR is another indicator of future credit performance. The DSCR estimates a multifamily borrower’s ability to service its mortgage obligation using the secured property’s cash flow, after deducting non-mortgage expenses from income. The higher the DSCR, the more likely it is that a multifamily borrower will be able to continue servicing its mortgage obligation.
We estimate that the percentage of loans in our multifamily mortgage portfolio with a current LTV ratio of greater than 100% was approximately 2% and 3% at September 30, 2013 and December 31, 2012, respectively, and our estimate of the current average DSCR for these loans was 0.9 and 1.0, respectively. We estimate that the percentage of loans in our multifamily mortgage portfolio with a current DSCR less than 1.0 was 3% at both September 30, 2013 and December 31, 2012, and the average current LTV ratio of these loans was 97% and 111%, respectively. Our estimates of current DSCRs are based on the latest available income information for these properties and our assessments of market conditions. Our estimates of the current LTV ratios for multifamily loans are based on values we receive from a third-party service provider as well as our internal estimates of property value, for which we may use changes in tax assessments, market vacancy rates, rent growth and comparable property sales in local areas as well as third-party appraisals for a portion of the portfolio. We periodically perform our own valuations or obtain third-party appraisals in cases where a significant deterioration in a borrower’s financial condition has occurred, the borrower has applied for refinancing, or in certain other circumstances where we deem it appropriate to reassess the property value. Although we use the most recently available financial results of our multifamily borrowers to estimate a property’s value, there may be a significant lag in reporting, which could be six months or more, as they complete their financial results in the normal course of business. Our internal estimates of property valuation are derived using techniques that include income capitalization, discounted cash flows, comparable sales, or replacement costs.
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Seller/Servicers
We acquire a significant portion of our single-family mortgage purchase volume from several large seller/servicers with whom we have entered into mortgage purchase volume commitments that provide for the lenders to deliver us up to a certain volume of mortgages during a specified period of time. Our top 10 single-family seller/servicers provided approximately 65% of our single-family purchase volume during the nine months ended September 30, 2013. Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A., accounted for 18% and 13%, respectively, of our single-family mortgage purchase volume and were the only single-family seller/servicers that comprised 10% or more of our purchase volume during the nine months ended September 30, 2013. We are exposed to the risk that we could lose purchase volume to the extent these arrangements are terminated without replacement from other lenders.
We are exposed to institutional credit risk arising from the potential insolvency or non-performance by our seller/servicers of their obligations to repurchase mortgages or (at our option) indemnify us in the event of: (a) breaches of the representations and warranties they made when they sold the mortgages to us; or (b) failure to comply with our servicing requirements. Our contracts require that a seller/servicer repurchase a mortgage after we issue a repurchase request, unless the seller/servicer avails itself of an appeals process provided for in our contracts, in which case the deadline for repurchase is extended until we decide on the appeal. As of September 30, 2013 and December 31, 2012 the UPB of loans subject to our repurchase requests issued to our single-family seller/servicers was approximately $3.4 billion and $3.0 billion, and approximately 31% and 41% of these requests, respectively, were outstanding for four months or more since issuance of our initial repurchase request as measured by the UPB of the loans subject to the requests (these figures include repurchase requests for which appeals were pending). As of September 30, 2013, two of our largest seller/servicers (Bank of America, N.A. and JPMorgan Chase Bank, N.A.) had aggregate repurchase requests outstanding, based on UPB, of $2.2 billion, and approximately 36% of these requests were outstanding for four months or more since issuance of the initial request. During the three and nine months ended September 30, 2013, we recovered amounts that covered losses with respect to $1.6 billion and $3.4 billion, respectively, of UPB on loans subject to our repurchase requests.
During the first quarter of 2013, we entered into an agreement with GMAC Mortgage, LLC (in connection with its bankruptcy proceeding) to release specified loans from certain repurchase obligations in exchange for a one-time cash payment. Loans totaling approximately $0.7 billion in UPB were subject to this agreement.
During the third quarter of 2013, we entered into agreements with Wells Fargo Bank, N.A., CitiMortgage, Inc., Citibank, N.A., and SunTrust Mortgage, Inc. to release specified loans from certain repurchase obligations in exchange for one-time cash payments. In connection with these agreements, we received $1.3 billion, in aggregate (less credits of $0.2 billion for repurchases already made and other reconciling adjustments), related to approximately 10.7 million loans that we purchased. As of September 30, 2013, there was an aggregate of $184.1 billion in UPB of single-family mortgage loans that were subject to these agreements.
On October 25, 2013, we entered into an agreement with JPMorgan Chase Bank, N.A. to release specified loans from certain repurchase obligations in exchange for a one-time cash payment. In connection with this agreement, we will receive $0.5 billion (less credits up to $0.1 billion for repurchases already made and for reconciling adjustments). This agreement will be reflected in our fourth quarter 2013 financial results.
The ultimate amounts of recovery payments we receive from seller/servicers related to their repurchase obligations may be significantly less than the amount of our estimates of potential exposure to losses. Our estimate of probable incurred losses for exposure to seller/servicers for their repurchase obligations is considered in our allowance for loan losses. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Allowance for Loan Losses and Reserve for Guarantee Losses” in our 2012 Annual Report for further information. We believe we have appropriately provided for these exposures, based upon our estimates of incurred losses, in our loan loss reserves; however, our actual losses may exceed our estimates.
We are also exposed to the risk that seller/servicers might fail to service mortgages in accordance with our contractual requirements, resulting in increased credit losses. For example, our seller/servicers have an active role in our loss mitigation efforts, including under the servicing alignment initiative and the MHA Program, and therefore, we have exposure to them to the extent a decline in their performance results in a failure to realize the anticipated benefits of our loss mitigation plans.
A significant portion of our single-family mortgage loans are serviced by several large seller/servicers. Our top two single-family loan servicers, Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A., serviced approximately 24% and 13%, respectively, of our single-family mortgage loans, as of September 30, 2013 and together serviced approximately 37% of our single-family mortgage loans. Since we do not have our own servicing operation, if our servicers lack appropriate process controls, experience a failure in their controls, or experience an operating disruption in their ability to service mortgage loans, it could have an adverse impact on our business and financial results.
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As of September 30, 2013 our top three multifamily servicers, Berkadia Commercial Mortgage LLC, CBRE Capital Markets, Inc., and Wells Fargo Bank, N.A., each serviced more than 10% of our multifamily mortgage portfolio, excluding Other Guarantee Transactions, and together serviced approximately 40% of this portfolio.
Mortgage Insurers
We have institutional credit risk relating to the potential insolvency of, or non-performance by, mortgage insurers that insure single-family mortgages we purchase or guarantee. We evaluate the recovery and collectability from insurance policies for mortgage loans that we hold for investment as well as loans underlying our non-consolidated Freddie Mac mortgage-related securities or covered by other guarantee commitments as part of the estimate of our loan loss reserves. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Allowance for Loan Losses and Reserve for Guarantee Losses” in our 2012 Annual Report for additional information. As of September 30, 2013, mortgage insurers provided coverage with maximum loss limits of $50.8 billion, for $206.7 billion of UPB, in connection with our single-family credit guarantee portfolio. These amounts are based on gross coverage without regard to netting of coverage that may exist to the extent an affected mortgage is covered under both primary and pool insurance. Our top four mortgage insurer counterparties, Mortgage Guaranty Insurance Corporation, Radian Guaranty Inc. (or Radian), United Guaranty Residential Insurance Company, and Genworth Mortgage Insurance Corporation each accounted for more than 10% and collectively represented approximately 78% of our overall mortgage insurance coverage at September 30, 2013. Certain of our mortgage insurance counterparties are no longer rated by either S&P or Moody’s because they are under court-ordered or state supervision. Of our four largest counterparties, three are rated B, and one is rated BBB+, as of October 24, 2013, based on the lower of the S&P or Moody’s rating scales and stated in terms of the S&P equivalent.
We received proceeds of $1.6 billion and $1.5 billion during the nine months ended September 30, 2013 and 2012, respectively, from our primary and pool mortgage insurance policies for recovery of losses on our single-family loans. We had outstanding receivables from mortgage insurers of $0.9 billion and $1.3 billion (excluding unpaid deferred payment obligations) as of September 30, 2013 and December 31, 2012, respectively. The balance of our outstanding accounts receivable from mortgage insurers, net of associated reserves, was approximately $0.6 billion and $0.8 billion at September 30, 2013 and December 31, 2012, respectively.
In August 2013, we entered into an agreement with Radian involving approximately 26,000 single-family loans held by us and insured by Radian that were in default as of December 31, 2011. The agreement generally resolves outstanding and future primary mortgage insurance claims by us against Radian with respect to these loans. In connection with this agreement, Radian paid us $255 million and also deposited $205 million in an escrow account in which we hold a secured interest. Subject to terms and conditions of the agreement, the funds in the escrow account will be returned to Radian to the extent of Radian's final rescission, cancellation, curtailment or denial of filed claims. Freddie Mac will receive any funds in the account that are not returned to Radian. The agreement does not affect our right to pursue repurchase remedies against seller/servicers related to Radian's insurance rescissions and claim denials on these loans. This agreement did not have a significant impact on our financial results for the third quarter of 2013.
In August 2011, we suspended PMI Mortgage Insurance Co. (or PMI) and its affiliates as approved mortgage insurers for Freddie Mac loans, making loans insured by them ineligible for sale to Freddie Mac (except relief refinance loans with pre-existing insurance). PMI ceased writing new business during the third quarter 2011 and was put under state supervision. PMI instituted a partial claim payment plan in October 2011, under which claim payments were made 50% in cash, with the remaining amount deferred as a policyholder claim. In April 2013, PMI began paying valid claims 55% in cash and 45% in deferred payment obligations and made a one-time cash payment to us for claims that were previously settled at 50% in cash. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS” in our 2012 Annual Report for further information on our mortgage insurance counterparties.
Bond Insurers
Bond insurance, which may be either primary or secondary policies, is a credit enhancement covering some of the non-agency mortgage-related securities we hold. Primary policies are acquired by the securitization trust issuing the securities we purchase, while secondary policies are acquired by us. At September 30, 2013, the maximum principal exposure to credit losses related to such policies was $8.0 billion. At September 30, 2013, our top four bond insurers, Ambac Assurance Corporation (or Ambac), Financial Guaranty Insurance Company (or FGIC), National Public Finance Guarantee Corp., and MBIA Insurance Corp., each accounted for more than 10% of our overall bond insurance coverage and collectively represented approximately 90% of our total coverage. We expect to receive substantially less than full payment of our claims from Ambac and FGIC as these companies are insolvent. We believe that we will also likely receive substantially less than full payment of our claims from some of our other bond insurers, because we believe they also lack sufficient ability to fully meet all of their expected lifetime claims-paying obligations to us as such claims emerge. We evaluate the expected recovery from primary bond insurance policies as part of our impairment analysis for our investments in securities. See “NOTE 7: INVESTMENTS IN
162 | Freddie Mac | |
SECURITIES” in our 2012 Annual Report for further information on our evaluation of impairment on securities covered by bond insurance.
Cash and Other Investments Counterparties
We are exposed to institutional credit risk arising from the potential insolvency or non-performance of counterparties of non-mortgage-related investment agreements and cash equivalent transactions, including those entered into on behalf of our securitization trusts. These financial instruments are investment grade at the time of purchase and primarily short-term in nature, which mitigates institutional credit risk for these instruments.
Our cash and other investment counterparties are primarily major financial institutions, Treasury, and the Federal Reserve Bank. As of September 30, 2013 and December 31, 2012, including amounts related to our consolidated VIEs, there were $56.3 billion and $60.7 billion, respectively, of: (a) cash and securities purchased under agreements to resell invested with institutional counterparties; (b) Treasury securities classified as cash equivalents; or (c) cash deposited with the Federal Reserve Bank. As of September 30, 2013 these included:
• | $35.0 billion of securities purchased under agreements to resell with 10 counterparties that had short-term S&P ratings of A-1 or above; |
• | $0.1 billion of securities purchased under agreements to resell with one counterparty that had a short-term S&P rating of A-2; |
• | $6.0 billion of securities purchased under agreements to resell with one counterparty that does not have a short-term S&P or other third party credit rating, but was evaluated under the company's counterparty credit risk system and was determined to be eligible for this transaction (by providing more than 100% in approved collateral); |
• | $2.9 billion of cash equivalents invested in Treasury securities; and |
• | $11.8 billion of cash deposited with the Federal Reserve Bank (as a non-interest-bearing deposit). |
Agency and Non-Agency Mortgage-Related Security Issuers
As discussed below, we are engaged in various loss mitigation efforts concerning certain investments in non-agency mortgage-related securities. The effectiveness of these various loss mitigation efforts is highly uncertain, in part because our rights as an investor are limited, and any potential recoveries may take significant time to realize.
In 2011, FHFA, as Conservator for Freddie Mac and Fannie Mae, filed lawsuits against 18 corporate families of financial institutions and related defendants seeking to recover losses and damages sustained by Freddie Mac and Fannie Mae as a result of their investments in certain residential non-agency mortgage-related securities issued or sold by, or backed by mortgages originated by, these financial institutions or control persons thereof. These institutions include some of our largest seller/servicers and counterparties, including counterparties to debt funding and derivatives transactions. Recent developments include:
• | We and FHFA reached settlements with General Electric Company and affiliates (in January 2013), Citigroup Inc., and affiliates (in May 2013), and UBS Americas, Inc. (in July 2013). |
• | On October 25, 2013, we and FHFA reached a settlement with JPMorgan Chase & Co. and certain affiliated entities (collectively, JPMorgan) and other persons. Under the terms of the agreement, JPMorgan will pay approximately $2.7 billion to Freddie Mac to settle litigation related to our investments in certain residential non-agency mortgage-related securities largely originated, issued or underwritten by JPMorgan. On October 29, 2013, Ally Financial Inc. announced that it had reached a settlement with FHFA for pending litigation and related claims. These agreements will be reflected in our fourth quarter 2013 financial results. |
Lawsuits with a number of other groups are currently pending. In addition, in the third quarter of 2013, we reached a settlement with Wells Fargo Bank, N.A. and affiliates concerning claims related to certain residential non-agency mortgage-related securities.
During the three and nine months ended September 30, 2013, we recognized $0.5 billion and $0.7 billion, respectively, within non-interest income on our consolidated statements of comprehensive income associated with these settlements.
Derivative Portfolio
For a discussion of our derivative counterparties and related master netting and collateral agreements, see “NOTE 10: COLLATERAL AND OFFSETTING OF ASSETS AND LIABILITIES.”
NOTE 16: FAIR VALUE DISCLOSURES
The accounting guidance for fair value measurements and disclosures defines fair value, establishes a framework for measuring fair value, and sets forth disclosure requirements regarding fair value measurements. This guidance applies whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value. Fair value
163 | Freddie Mac | |
measurement assumes that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or, in the absence of a principal market, in the most advantageous market for the asset or liability.
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain assets and liabilities on a recurring or non-recurring basis.
Fair Value Measurements
The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority, Level 1, to measurements based on quoted prices in active markets for identical assets or liabilities. The next highest priority, Level 2, is given to measurements based on observable inputs other than quoted prices in active markets for identical assets or liabilities. The lowest priority, Level 3, is given to measurements based on unobservable inputs. Assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
During the first quarter of 2012, we adopted an amendment to the guidance pertaining to fair value measurements and disclosure. The amendment changed the definition of the principal market to the perspective of the overall market for the particular asset or liability being valued, with less emphasis on the perspective of the reporting entity. As a result of adopting this guidance, we made a change to our principal market assessment for certain single-family mortgage loans, primarily for loans that have not been modified and are delinquent four months or more or are in foreclosure. For these loans, we changed our principal market assessment to the whole loan market. The resulting impact was a decrease of $13.8 billion to our fair value of net assets in our consolidated fair value balance sheets.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The table below presents our assets and liabilities measured in our consolidated balance sheets at fair value on a recurring basis subsequent to initial recognition, including instruments where we have elected the fair value option, as of September 30, 2013 and December 31, 2012.
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Table 16.1 — Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair Value at September 30, 2013 | |||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Netting Adjustment(1) | Total | |||||||||||||||
(in millions) | |||||||||||||||||||
Assets: | |||||||||||||||||||
Investments in securities: | |||||||||||||||||||
Available-for-sale, at fair value: | |||||||||||||||||||
Mortgage-related securities: | |||||||||||||||||||
Freddie Mac | $ | — | $ | 40,559 | $ | 3,586 | $ | — | $ | 44,145 | |||||||||
Fannie Mae | — | 11,424 | 137 | — | 11,561 | ||||||||||||||
Ginnie Mae | — | 163 | 13 | — | 176 | ||||||||||||||
CMBS | — | 33,174 | 3,194 | — | 36,368 | ||||||||||||||
Subprime | — | — | 27,572 | — | 27,572 | ||||||||||||||
Option ARM | — | — | 6,424 | — | 6,424 | ||||||||||||||
Alt-A and other | — | — | 9,103 | — | 9,103 | ||||||||||||||
Obligations of states and political subdivisions | — | — | 3,761 | — | 3,761 | ||||||||||||||
Manufactured housing | — | — | 688 | — | 688 | ||||||||||||||
Total available-for-sale securities, at fair value | — | 85,320 | 54,478 | — | 139,798 | ||||||||||||||
Trading, at fair value: | |||||||||||||||||||
Mortgage-related securities: | |||||||||||||||||||
Freddie Mac | — | 8,753 | 1,307 | — | 10,060 | ||||||||||||||
Fannie Mae | — | 10,499 | 176 | — | 10,675 | ||||||||||||||
Ginnie Mae | — | 27 | 78 | — | 105 | ||||||||||||||
Other | — | 158 | 8 | — | 166 | ||||||||||||||
Total mortgage-related securities | — | 19,437 | 1,569 | — | 21,006 | ||||||||||||||
Non-mortgage-related securities: | |||||||||||||||||||
Treasury bills | 4,854 | — | — | — | 4,854 | ||||||||||||||
Treasury notes | 26,787 | — | — | — | 26,787 | ||||||||||||||
Total non-mortgage-related securities | 31,641 | — | — | — | 31,641 | ||||||||||||||
Total trading securities, at fair value | 31,641 | 19,437 | 1,569 | — | 52,647 | ||||||||||||||
Total investments in securities | 31,641 | 104,757 | 56,047 | — | 192,445 | ||||||||||||||
Mortgage loans: | |||||||||||||||||||
Held-for-sale, at fair value | — | 10,475 | — | — | 10,475 | ||||||||||||||
Derivative assets, net: | |||||||||||||||||||
Interest-rate swaps | 796 | 9,264 | 14 | — | 10,074 | ||||||||||||||
Option-based derivatives | 60 | 4,840 | — | — | 4,900 | ||||||||||||||
Other | — | 232 | 1 | — | 233 | ||||||||||||||
Subtotal, before netting adjustments | 856 | 14,336 | 15 | — | 15,207 | ||||||||||||||
Netting adjustments(1) | — | — | — | (14,279 | ) | (14,279 | ) | ||||||||||||
Total derivative assets, net | 856 | 14,336 | 15 | (14,279 | ) | 928 | |||||||||||||
Other assets: | |||||||||||||||||||
Guarantee asset, at fair value | — | — | 1,432 | — | 1,432 | ||||||||||||||
All other, at fair value | — | — | 10 | — | 10 | ||||||||||||||
Total other assets | — | — | 1,442 | — | 1,442 | ||||||||||||||
Total assets carried at fair value on a recurring basis | $ | 32,497 | $ | 129,568 | $ | 57,504 | $ | (14,279 | ) | $ | 205,290 | ||||||||
Liabilities: | |||||||||||||||||||
Debt securities of consolidated trusts held by third parties, at fair value | $ | — | $ | 72 | $ | — | $ | — | $ | 72 | |||||||||
Other debt, at fair value | — | — | 2,031 | — | 2,031 | ||||||||||||||
Derivative liabilities, net: | |||||||||||||||||||
Interest-rate swaps | 585 | 16,206 | 225 | — | 17,016 | ||||||||||||||
Option-based derivatives | — | 325 | 2 | — | 327 | ||||||||||||||
Other | — | 201 | 37 | — | 238 | ||||||||||||||
Subtotal, before netting adjustments | 585 | 16,732 | 264 | — | 17,581 | ||||||||||||||
Netting adjustments(1) | — | — | — | (17,192 | ) | (17,192 | ) | ||||||||||||
Total derivative liabilities, net | 585 | 16,732 | 264 | (17,192 | ) | 389 | |||||||||||||
Total liabilities carried at fair value on a recurring basis | $ | 585 | $ | 16,804 | $ | 2,295 | $ | (17,192 | ) | $ | 2,492 | ||||||||
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Fair Value at December 31, 2012 | |||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Netting Adjustment(1) | Total | |||||||||||||||
(in millions) | |||||||||||||||||||
Assets: | |||||||||||||||||||
Investments in securities: | |||||||||||||||||||
Available-for-sale, at fair value: | |||||||||||||||||||
Mortgage-related securities: | |||||||||||||||||||
Freddie Mac | $ | — | $ | 56,713 | $ | 1,802 | $ | — | $ | 58,515 | |||||||||
Fannie Mae | — | 15,117 | 163 | — | 15,280 | ||||||||||||||
Ginnie Mae | — | 193 | 16 | — | 209 | ||||||||||||||
CMBS | — | 47,878 | 3,429 | — | 51,307 | ||||||||||||||
Subprime | — | — | 26,457 | — | 26,457 | ||||||||||||||
Option ARM | — | — | 5,717 | — | 5,717 | ||||||||||||||
Alt-A and other | — | — | 10,904 | — | 10,904 | ||||||||||||||
Obligations of states and political subdivisions | — | — | 5,798 | — | 5,798 | ||||||||||||||
Manufactured housing | — | — | 709 | — | 709 | ||||||||||||||
Total available-for-sale securities, at fair value | — | 119,901 | 54,995 | — | 174,896 | ||||||||||||||
Trading, at fair value: | |||||||||||||||||||
Mortgage-related securities: | |||||||||||||||||||
Freddie Mac | — | 9,189 | 1,165 | — | 10,354 | ||||||||||||||
Fannie Mae | — | 10,026 | 312 | — | 10,338 | ||||||||||||||
Ginnie Mae | — | 39 | 92 | — | 131 | ||||||||||||||
Other | — | 135 | 21 | — | 156 | ||||||||||||||
Total mortgage-related securities | — | 19,389 | 1,590 | — | 20,979 | ||||||||||||||
Non-mortgage-related securities: | |||||||||||||||||||
Asset-backed securities | — | 292 | — | — | 292 | ||||||||||||||
Treasury bills | 1,160 | — | — | — | 1,160 | ||||||||||||||
Treasury notes | 19,061 | — | — | — | 19,061 | ||||||||||||||
Total non-mortgage-related securities | 20,221 | 292 | — | — | 20,513 | ||||||||||||||
Total trading securities, at fair value | 20,221 | 19,681 | 1,590 | — | 41,492 | ||||||||||||||
Total investments in securities | 20,221 | 139,582 | 56,585 | — | 216,388 | ||||||||||||||
Mortgage loans: | |||||||||||||||||||
Held-for-sale, at fair value | — | — | 14,238 | — | 14,238 | ||||||||||||||
Derivative assets, net: | |||||||||||||||||||
Interest-rate swaps | 27 | 13,920 | 18 | — | 13,965 | ||||||||||||||
Option-based derivatives | — | 10,097 | — | — | 10,097 | ||||||||||||||
Other | 37 | 92 | 2 | — | 131 | ||||||||||||||
Subtotal, before netting adjustments | 64 | 24,109 | 20 | — | 24,193 | ||||||||||||||
Netting adjustments(1) | — | — | — | (23,536 | ) | (23,536 | ) | ||||||||||||
Total derivative assets, net | 64 | 24,109 | 20 | (23,536 | ) | 657 | |||||||||||||
Other assets: | |||||||||||||||||||
Guarantee asset, at fair value | — | — | 1,029 | — | 1,029 | ||||||||||||||
All other, at fair value | — | — | 114 | — | 114 | ||||||||||||||
Total other assets | — | — | 1,143 | — | 1,143 | ||||||||||||||
Total assets carried at fair value on a recurring basis | $ | 20,285 | $ | 163,691 | $ | 71,986 | $ | (23,536 | ) | $ | 232,426 | ||||||||
Liabilities: | |||||||||||||||||||
Debt securities of consolidated trusts held by third parties, at fair value | $ | — | $ | 70 | $ | — | $ | — | $ | 70 | |||||||||
Other debt, at fair value | — | — | 2,187 | — | 2,187 | ||||||||||||||
Derivative liabilities, net: | |||||||||||||||||||
Interest-rate swaps | 5 | 30,213 | 26 | — | 30,244 | ||||||||||||||
Option-based derivatives | — | 749 | 1 | — | 750 | ||||||||||||||
Other | 3 | 52 | 40 | — | 95 | ||||||||||||||
Subtotal, before netting adjustments | 8 | 31,014 | 67 | — | 31,089 | ||||||||||||||
Netting adjustments(1) | — | — | — | (30,911 | ) | (30,911 | ) | ||||||||||||
Total derivative liabilities, net | 8 | 31,014 | 67 | (30,911 | ) | 178 | |||||||||||||
Total liabilities carried at fair value on a recurring basis | $ | 8 | $ | 31,084 | $ | 2,254 | $ | (30,911 | ) | $ | 2,435 | ||||||||
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(1) | Represents counterparty netting, cash collateral netting and net derivative interest receivable or payable. The net cash collateral posted was $3.7 billion and $8.2 billion, respectively, at September 30, 2013 and December 31, 2012. The net interest receivable (payable) of derivative assets and derivative liabilities was $(0.8) billion at both September 30, 2013 and December 31, 2012, which was mainly related to interest rate swaps. |
Changes in Fair Value Levels
We monitor the availability of observable market data to: (a) assess the appropriate classification of financial instruments within the fair value hierarchy; and (b) transfer assets and liabilities between Level 1, Level 2, and Level 3 accordingly. Observable market data includes, but is not limited to, quoted prices and market transactions. Changes in economic conditions or the volume and level of activity in a market generally will drive changes in availability of observable market data. Changes in availability of observable market data, which also may result in changing the valuation technique used, are generally the cause of transfers between Level 1, 2, or 3.
For the three months ended September 30, 2013 and 2012, we had no transfers between Level 1 and Level 2 assets and liabilities. For the nine months ended September 30, 2013 and 2012, our transfers between Level 1 and Level 2 assets and liabilities were less than $1 million.
The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2013 and 2012, including transfers into and out of Level 3 assets and liabilities. The table also presents gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recognized in our consolidated statements of comprehensive income for Level 3 assets and liabilities for the three and nine months ended September 30, 2013 and 2012. When assets and liabilities are transferred between levels, we recognize the transfer as of the beginning of the period.
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Table 16.2 — Fair Value Measurements of Assets and Liabilities Using Significant Unobservable Inputs
Three Months Ended September 30, 2013 | |||||||||||||||||||||||||||||||||||||||||||||||
Realized and unrealized gains (losses) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2013 | Included in earnings(1)(2)(3)(4) | Included in other comprehensive income(1) | Total | Purchases | Issues | Sales | Settlements, net | Transfers into Level 3(5) | Transfers out of Level 3(5) | Balance, September 30, 2013 | Unrealized gains (losses) still held(6) | ||||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||||||||||||||
Investments in securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale, at fair value: | |||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-related securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Freddie Mac | $ | 2,325 | $ | — | $ | 122 | $ | 122 | $ | 1,781 | $ | — | $ | — | $ | (67 | ) | $ | — | $ | (575 | ) | $ | 3,586 | $ | — | |||||||||||||||||||||
Fannie Mae | 143 | — | (1 | ) | (1 | ) | — | — | — | (5 | ) | — | — | 137 | — | ||||||||||||||||||||||||||||||||
Ginnie Mae | 14 | — | — | — | — | — | — | (1 | ) | — | — | 13 | — | ||||||||||||||||||||||||||||||||||
CMBS | 3,239 | — | (40 | ) | (40 | ) | — | — | — | (5 | ) | — | — | 3,194 | — | ||||||||||||||||||||||||||||||||
Subprime | 28,004 | (46 | ) | 639 | 593 | — | — | (46 | ) | (979 | ) | — | — | 27,572 | (45 | ) | |||||||||||||||||||||||||||||||
Option ARM | 6,636 | (16 | ) | 20 | 4 | — | — | (38 | ) | (178 | ) | — | — | 6,424 | (12 | ) | |||||||||||||||||||||||||||||||
Alt-A and other | 10,055 | (73 | ) | 353 | 280 | — | — | (826 | ) | (406 | ) | — | — | 9,103 | (65 | ) | |||||||||||||||||||||||||||||||
Obligations of states and political subdivisions | 4,281 | — | (51 | ) | (51 | ) | — | — | (7 | ) | (462 | ) | — | — | 3,761 | — | |||||||||||||||||||||||||||||||
Manufactured housing | 681 | — | 28 | 28 | — | — | — | (21 | ) | — | — | 688 | — | ||||||||||||||||||||||||||||||||||
Total available-for-sale mortgage-related securities | 55,378 | (135 | ) | 1,070 | 935 | 1,781 | — | (917 | ) | (2,124 | ) | — | (575 | ) | 54,478 | (122 | ) | ||||||||||||||||||||||||||||||
Trading, at fair value: | |||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-related securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Freddie Mac | 597 | 9 | — | 9 | 1,360 | — | (335 | ) | (5 | ) | — | (319 | ) | 1,307 | 5 | ||||||||||||||||||||||||||||||||
Fannie Mae | 188 | (8 | ) | — | (8 | ) | — | — | — | (4 | ) | — | — | 176 | (8 | ) | |||||||||||||||||||||||||||||||
Ginnie Mae | 81 | — | — | — | — | — | — | (3 | ) | — | — | 78 | — | ||||||||||||||||||||||||||||||||||
Other | 9 | — | — | — | — | — | — | (1 | ) | — | — | 8 | — | ||||||||||||||||||||||||||||||||||
Total trading mortgage-related securities | 875 | 1 | — | 1 | 1,360 | — | (335 | ) | (13 | ) | — | (319 | ) | 1,569 | (3 | ) | |||||||||||||||||||||||||||||||
Mortgage loans: | |||||||||||||||||||||||||||||||||||||||||||||||
Held-for-sale, at fair value | 11,696 | — | — | — | — | — | — | — | — | (11,696 | ) | — | — | ||||||||||||||||||||||||||||||||||
Other assets: | |||||||||||||||||||||||||||||||||||||||||||||||
Guarantee asset(7) | 1,289 | 14 | — | 14 | — | 156 | — | (27 | ) | — | — | 1,432 | 14 | ||||||||||||||||||||||||||||||||||
All other, at fair value | 8 | 2 | — | 2 | — | — | — | — | — | — | 10 | 2 | |||||||||||||||||||||||||||||||||||
Total other assets | 1,297 | 16 | — | 16 | — | 156 | — | (27 | ) | — | — | 1,442 | 16 | ||||||||||||||||||||||||||||||||||
Realized and unrealized (gains) losses | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2013 | Included in earnings(1)(2)(3)(4) | Included in other comprehensive income(1) | Total | Purchases | Issues | Sales | Settlements, net | Transfers into Level 3(5) | Transfers out of Level 3(5) | Balance, September 30, 2013 | Unrealized (gains) losses still held(6) | ||||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
Other debt, at fair value | $ | 1,508 | $ | 31 | $ | — | $ | 31 | $ | — | $ | 500 | $ | — | $ | (8 | ) | $ | — | $ | — | $ | 2,031 | $ | 31 | ||||||||||||||||||||||
Net derivatives(8) | 343 | (96 | ) | — | (96 | ) | — | 2 | — | 2 | — | (2 | ) | 249 | (84 | ) | |||||||||||||||||||||||||||||||
168 | Freddie Mac | |
Nine Months Ended September 30, 2013 | |||||||||||||||||||||||||||||||||||||||||||||||
Realized and unrealized gains (losses) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2013 | Included in earnings(1)(2)(3)(4) | Included in other comprehensive income(1) | Total | Purchases | Issues | Sales | Settlements, net | Transfers into Level 3(5) | Transfers out of Level 3(5) | Balance, September 30, 2013 | Unrealized gains (losses) still held(6) | ||||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||||||||||||||
Investments in securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale, at fair value: | |||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-related securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Freddie Mac | $ | 1,802 | $ | — | $ | 113 | $ | 113 | $ | 1,780 | $ | — | $ | — | $ | (109 | ) | $ | — | $ | — | $ | 3,586 | $ | — | ||||||||||||||||||||||
Fannie Mae | 163 | — | (3 | ) | (3 | ) | — | — | — | (23 | ) | — | — | 137 | — | ||||||||||||||||||||||||||||||||
Ginnie Mae | 16 | — | — | — | — | — | — | (3 | ) | — | — | 13 | — | ||||||||||||||||||||||||||||||||||
CMBS | 3,429 | — | (216 | ) | (216 | ) | — | — | — | (19 | ) | — | — | 3,194 | — | ||||||||||||||||||||||||||||||||
Subprime | 26,457 | (94 | ) | 4,632 | 4,538 | — | — | (346 | ) | (3,077 | ) | — | — | 27,572 | (91 | ) | |||||||||||||||||||||||||||||||
Option ARM | 5,717 | (21 | ) | 1,346 | 1,325 | — | — | (38 | ) | (580 | ) | — | — | 6,424 | (17 | ) | |||||||||||||||||||||||||||||||
Alt-A and other | 10,904 | (52 | ) | 980 | 928 | — | — | (1,572 | ) | (1,157 | ) | — | — | 9,103 | (91 | ) | |||||||||||||||||||||||||||||||
Obligations of states and political subdivisions | 5,798 | 13 | (173 | ) | (160 | ) | (10 | ) | — | (533 | ) | (1,334 | ) | — | — | 3,761 | — | ||||||||||||||||||||||||||||||
Manufactured housing | 709 | (1 | ) | 46 | 45 | — | — | — | (66 | ) | — | — | 688 | (1 | ) | ||||||||||||||||||||||||||||||||
Total available-for-sale mortgage-related securities | 54,995 | (155 | ) | 6,725 | 6,570 | 1,770 | — | (2,489 | ) | (6,368 | ) | — | — | 54,478 | (200 | ) | |||||||||||||||||||||||||||||||
Trading, at fair value: | |||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-related securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Freddie Mac | 1,165 | (51 | ) | — | (51 | ) | 1,177 | 229 | (360 | ) | (37 | ) | — | (816 | ) | 1,307 | (54 | ) | |||||||||||||||||||||||||||||
Fannie Mae | 312 | (57 | ) | — | (57 | ) | 2 | — | (2 | ) | (12 | ) | — | (67 | ) | 176 | (57 | ) | |||||||||||||||||||||||||||||
Ginnie Mae | 92 | (1 | ) | — | (1 | ) | 3 | — | — | (12 | ) | — | (4 | ) | 78 | (1 | ) | ||||||||||||||||||||||||||||||
Other | 21 | — | — | — | — | — | — | (3 | ) | — | (10 | ) | 8 | — | |||||||||||||||||||||||||||||||||
Total trading mortgage-related securities | 1,590 | (109 | ) | — | (109 | ) | 1,182 | 229 | (362 | ) | (64 | ) | — | (897 | ) | 1,569 | (112 | ) | |||||||||||||||||||||||||||||
Mortgage loans: | |||||||||||||||||||||||||||||||||||||||||||||||
Held-for-sale, at fair value | 14,238 | — | — | — | — | — | — | — | — | (14,238 | ) | — | — | ||||||||||||||||||||||||||||||||||
Other assets: | |||||||||||||||||||||||||||||||||||||||||||||||
Guarantee asset(7) | 1,029 | (2 | ) | — | (2 | ) | — | 484 | — | (79 | ) | — | — | 1,432 | (2 | ) | |||||||||||||||||||||||||||||||
All other, at fair value | 114 | 31 | — | 31 | — | — | (135 | ) | — | — | — | 10 | 8 | ||||||||||||||||||||||||||||||||||
Total other assets | 1,143 | 29 | — | 29 | — | 484 | (135 | ) | (79 | ) | — | — | 1,442 | 6 | |||||||||||||||||||||||||||||||||
Realized and unrealized (gains) losses | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2013 | Included in earnings(1)(2)(3)(4) | Included in other comprehensive income(1) | Total | Purchases | Issues | Sales | Settlements, net | Transfers into Level 3(5) | Transfers out of Level 3(5) | Balance, September 30, 2013 | Unrealized (gains) losses still held(6) | ||||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
Other debt, at fair value | $ | 2,187 | $ | 23 | $ | — | $ | 23 | $ | — | $ | 500 | $ | — | $ | (679 | ) | $ | — | $ | — | $ | 2,031 | $ | (15 | ) | |||||||||||||||||||||
Net derivatives(8) | 47 | 232 | — | 232 | — | 6 | — | (36 | ) | — | — | 249 | 200 | ||||||||||||||||||||||||||||||||||
169 | Freddie Mac | |
Three Months Ended September 30, 2012 | |||||||||||||||||||||||||||||||||||||||||||||||
Realized and unrealized gains (losses) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2012 | Included in earnings(1)(2)(3)(4) | Included in other comprehensive income(1) | Total | Purchases | Issues | Sales | Settlements, net | Transfers into Level 3 | Transfers out of Level 3 | Balance, September 30, 2012 | Unrealized gains (losses) still held(6) | ||||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||||||||||||||
Investments in securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale, at fair value: | |||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-related securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Freddie Mac | $ | 1,833 | $ | — | $ | 8 | $ | 8 | $ | — | $ | — | $ | — | $ | (17 | ) | $ | — | $ | — | $ | 1,824 | $ | — | ||||||||||||||||||||||
Fannie Mae | 179 | — | 2 | 2 | — | — | — | (8 | ) | — | — | 173 | — | ||||||||||||||||||||||||||||||||||
Ginnie Mae | 18 | — | — | — | — | — | — | (1 | ) | — | — | 17 | — | ||||||||||||||||||||||||||||||||||
CMBS | 3,702 | — | 78 | 78 | — | — | — | (4 | ) | — | (347 | ) | 3,429 | — | |||||||||||||||||||||||||||||||||
Subprime | 25,778 | (160 | ) | 2,360 | 2,200 | — | — | — | (1,158 | ) | — | — | 26,820 | (160 | ) | ||||||||||||||||||||||||||||||||
Option ARM | 5,428 | (62 | ) | 523 | 461 | — | — | — | (265 | ) | — | — | 5,624 | (62 | ) | ||||||||||||||||||||||||||||||||
Alt-A and other | 10,733 | — | 702 | 702 | — | — | — | (433 | ) | — | — | 11,002 | — | ||||||||||||||||||||||||||||||||||
Obligations of states and political subdivisions | 7,308 | 7 | 20 | 27 | — | — | (281 | ) | (527 | ) | — | — | 6,527 | — | |||||||||||||||||||||||||||||||||
Manufactured housing | 726 | — | 22 | 22 | — | — | — | (28 | ) | — | — | 720 | — | ||||||||||||||||||||||||||||||||||
Total available-for-sale mortgage-related securities | 55,705 | (215 | ) | 3,715 | 3,500 | — | — | (281 | ) | (2,441 | ) | — | (347 | ) | 56,136 | (222 | ) | ||||||||||||||||||||||||||||||
Trading, at fair value: | |||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-related securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Freddie Mac | 1,419 | (105 | ) | — | (105 | ) | — | — | — | (76 | ) | 361 | — | 1,599 | (105 | ) | |||||||||||||||||||||||||||||||
Fannie Mae | 374 | (13 | ) | — | (13 | ) | — | — | — | (23 | ) | 135 | — | 473 | (13 | ) | |||||||||||||||||||||||||||||||
Ginnie Mae | 111 | — | — | — | — | — | — | (4 | ) | — | — | 107 | — | ||||||||||||||||||||||||||||||||||
Other | 58 | — | — | — | — | 21 | — | (2 | ) | — | (45 | ) | 32 | — | |||||||||||||||||||||||||||||||||
Total trading mortgage-related securities | 1,962 | (118 | ) | — | (118 | ) | — | 21 | — | (105 | ) | 496 | (45 | ) | 2,211 | (118 | ) | ||||||||||||||||||||||||||||||
Mortgage loans: | |||||||||||||||||||||||||||||||||||||||||||||||
Held-for-sale, at fair value | 10,120 | 427 | — | 427 | 6,420 | — | (4,108 | ) | (14 | ) | — | — | 12,845 | 294 | |||||||||||||||||||||||||||||||||
Other assets: | |||||||||||||||||||||||||||||||||||||||||||||||
Guarantee asset(7) | 862 | (1 | ) | — | (1 | ) | — | 76 | — | (22 | ) | — | — | 915 | (1 | ) | |||||||||||||||||||||||||||||||
All other, at fair value | 139 | (10 | ) | — | (10 | ) | — | — | — | — | — | — | 129 | (10 | ) | ||||||||||||||||||||||||||||||||
Total other assets | 1,001 | (11 | ) | — | (11 | ) | — | 76 | — | (22 | ) | — | — | 1,044 | (11 | ) | |||||||||||||||||||||||||||||||
Realized and unrealized (gains) losses | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2012 | Included in earnings(1)(2)(3)(4) | Included in other comprehensive income(1) | Total | Purchases | Issues | Sales | Settlements, net | Transfers into Level 3 | Transfers out of Level 3 | Balance, September 30, 2012 | Unrealized (gains) losses still held(6) | ||||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
Other debt, at fair value | $ | 2,158 | $ | 10 | $ | — | $ | 10 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2,168 | $ | 10 | |||||||||||||||||||||||
Net derivatives(8) | 20 | 7 | — | 7 | — | — | — | — | — | — | 27 | — | |||||||||||||||||||||||||||||||||||
Other liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||
All other, at fair value | 1 | (1 | ) | — | (1 | ) | — | — | — | — | — | — | — | (1 | ) | ||||||||||||||||||||||||||||||||
170 | Freddie Mac | |
Nine Months Ended September 30, 2012 | |||||||||||||||||||||||||||||||||||||||||||||||
Realized and unrealized gains (losses) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2012 | Included in earnings(1)(2)(3)(4) | Included in other comprehensive income(1) | Total | Purchases | Issues | Sales | Settlements, net | Transfers into Level 3 | Transfers out of Level 3 | Balance, September 30, 2012 | Unrealized gains (losses) still held(6) | ||||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||||||||||||||
Investments in securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale, at fair value: | |||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-related securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Freddie Mac | $ | 2,048 | $ | — | $ | 19 | $ | 19 | $ | — | $ | — | $ | — | $ | (123 | ) | $ | — | $ | (120 | ) | $ | 1,824 | $ | — | |||||||||||||||||||||
Fannie Mae | 172 | — | 2 | 2 | — | — | — | (22 | ) | 21 | — | 173 | — | ||||||||||||||||||||||||||||||||||
Ginnie Mae | 12 | — | — | — | — | — | — | (3 | ) | 8 | — | 17 | — | ||||||||||||||||||||||||||||||||||
CMBS | 3,756 | 76 | (44 | ) | 32 | — | — | (330 | ) | (29 | ) | — | — | 3,429 | — | ||||||||||||||||||||||||||||||||
Subprime | 27,999 | (659 | ) | 2,953 | 2,294 | — | — | — | (3,473 | ) | — | — | 26,820 | (659 | ) | ||||||||||||||||||||||||||||||||
Option ARM | 5,865 | (124 | ) | 684 | 560 | — | — | (15 | ) | (786 | ) | — | — | 5,624 | (128 | ) | |||||||||||||||||||||||||||||||
Alt-A and other | 10,868 | (59 | ) | 1,364 | 1,305 | — | — | — | (1,182 | ) | 11 | — | 11,002 | (59 | ) | ||||||||||||||||||||||||||||||||
Obligations of states and political subdivisions | 7,824 | 9 | 135 | 144 | — | — | (289 | ) | (1,152 | ) | — | — | 6,527 | — | |||||||||||||||||||||||||||||||||
Manufactured housing | 766 | (3 | ) | 34 | 31 | — | — | — | (77 | ) | — | — | 720 | (3 | ) | ||||||||||||||||||||||||||||||||
Total available-for-sale mortgage-related securities | 59,310 | (760 | ) | 5,147 | 4,387 | — | — | (634 | ) | (6,847 | ) | 40 | (120 | ) | 56,136 | (849 | ) | ||||||||||||||||||||||||||||||
Trading, at fair value: | |||||||||||||||||||||||||||||||||||||||||||||||
Mortgage-related securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Freddie Mac | 1,866 | (338 | ) | — | (338 | ) | 25 | 50 | (76 | ) | (205 | ) | 417 | (140 | ) | 1,599 | (339 | ) | |||||||||||||||||||||||||||||
Fannie Mae | 538 | (106 | ) | — | (106 | ) | (5 | ) | — | 5 | (71 | ) | 168 | (56 | ) | 473 | (106 | ) | |||||||||||||||||||||||||||||
Ginnie Mae | 22 | 1 | — | 1 | — | — | — | (14 | ) | 98 | — | 107 | 1 | ||||||||||||||||||||||||||||||||||
Other | 90 | — | — | — | 9 | 21 | (10 | ) | (3 | ) | — | (75 | ) | 32 | — | ||||||||||||||||||||||||||||||||
Total trading mortgage-related securities | 2,516 | (443 | ) | — | (443 | ) | 29 | 71 | (81 | ) | (293 | ) | 683 | (271 | ) | 2,211 | (444 | ) | |||||||||||||||||||||||||||||
Mortgage loans: | |||||||||||||||||||||||||||||||||||||||||||||||
Held-for-sale, at fair value | 9,710 | 851 | — | 851 | 16,882 | — | (14,553 | ) | (45 | ) | — | — | 12,845 | 391 | |||||||||||||||||||||||||||||||||
Other assets: | |||||||||||||||||||||||||||||||||||||||||||||||
Guarantee asset(7) | 752 | (11 | ) | — | (11 | ) | — | 232 | — | (58 | ) | — | — | 915 | (11 | ) | |||||||||||||||||||||||||||||||
All other, at fair value | 151 | (22 | ) | — | (22 | ) | — | — | — | — | — | — | 129 | (22 | ) | ||||||||||||||||||||||||||||||||
Total other assets | 903 | (33 | ) | — | (33 | ) | — | 232 | — | (58 | ) | — | — | 1,044 | (33 | ) | |||||||||||||||||||||||||||||||
Realized and unrealized (gains) losses | |||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2012 | Included in earnings(1)(2)(3)(4) | Included in other comprehensive income(1) | Total | Purchases | Issues | Sales | Settlements, net | Transfers into Level 3 | Transfers out of Level 3 | Balance, September 30, 2012 | Unrealized (gains) losses still held(6) | ||||||||||||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||
Other debt, at fair value | $ | — | $ | (35 | ) | $ | — | $ | (35 | ) | $ | — | $ | — | $ | — | $ | (812 | ) | $ | 3,015 | $ | — | $ | 2,168 | $ | (24 | ) | |||||||||||||||||||
Net derivatives(8) | (17 | ) | 15 | — | 15 | — | — | — | (4 | ) | — | 33 | 27 | 2 | |||||||||||||||||||||||||||||||||
(1) | Changes in fair value for available-for-sale investment securities are recorded in AOCI, while gains and losses from sales are recorded in other gains (losses) on investment securities recognized in earnings on our consolidated statements of comprehensive income. For mortgage-related securities classified as trading, the realized and unrealized gains (losses) are recorded in other gains (losses) on investment securities recognized in earnings on our consolidated statements of comprehensive income. |
(2) | Changes in fair value of derivatives not designated as accounting hedges are recorded in derivative gains (losses) on our consolidated statements of comprehensive income. |
171 | Freddie Mac | |
(3) | Changes in fair value of the guarantee asset are recorded in other income on our consolidated statements of comprehensive income. |
(4) | For held-for-sale mortgage loans with the fair value option elected, gains (losses) on fair value changes and from sales of mortgage loans are recorded in other income on our consolidated statements of comprehensive income. |
(5) | Transfers out of Level 3 during the three and nine months ended September 30, 2013 are the result of our enhancement to our pricing methodology for multifamily mortgage loans, held-for-sale, to more directly reflect the increasing observable nature of our exit market of loan securitization. |
(6) | Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in unrealized gains and losses related to assets and liabilities classified as Level 3 that were still held at September 30, 2013 and 2012, respectively. Included in these amounts are credit-related other-than-temporary impairments recorded on available-for-sale securities. |
(7) | We estimate that all amounts recorded for unrealized gains and losses on our guarantee asset relate to those guarantee asset amounts still recorded on our balance sheet. The amounts reflected as included in earnings represent the periodic fair value changes of our guarantee asset. |
(8) | Net derivatives include derivative assets and derivative liabilities prior to counterparty netting, cash collateral netting, net trade/settle receivable or payable and net derivative interest receivable or payable. |
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis. These adjustments usually result from application of lower-of-cost-or-fair-value accounting or write-downs of individual assets. These assets include impaired held-for-investment multifamily mortgage loans and REO, net.
The table below presents assets measured in our consolidated balance sheets at fair value on a non-recurring basis at September 30, 2013 and December 31, 2012, respectively.
Table 16.3 — Assets Measured at Fair Value on a Non-Recurring Basis
Fair Value at September 30, 2013 | Fair Value at December 31, 2012 | ||||||||||||||||||||||||||||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||||
Assets measured at fair value on a non-recurring basis: | |||||||||||||||||||||||||||||||
Mortgage loans:(1) | |||||||||||||||||||||||||||||||
Held-for-investment | $ | — | $ | — | $ | 639 | $ | 639 | $ | — | $ | — | $ | 1,025 | $ | 1,025 | |||||||||||||||
REO, net(2) | — | — | 295 | 295 | — | — | 776 | 776 | |||||||||||||||||||||||
Total assets measured at fair value on a non-recurring basis | $ | — | $ | — | $ | 934 | $ | 934 | $ | — | $ | — | $ | 1,801 | $ | 1,801 | |||||||||||||||
Total Gains (Losses)(3) | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(in millions) | |||||||||||||||
Assets measured at fair value on a non-recurring basis: | |||||||||||||||
Mortgage loans:(1) | |||||||||||||||
Held-for-investment | $ | 3 | $ | (18 | ) | $ | 16 | $ | (54 | ) | |||||
REO, net(2) | (5 | ) | (18 | ) | (12 | ) | (14 | ) | |||||||
Total gains (losses) | $ | (2 | ) | $ | (36 | ) | $ | 4 | $ | (68 | ) | ||||
(1) | Represents carrying value and related write-downs of loans for which adjustments are based on the fair value amounts. These loans consist of impaired multifamily mortgage loans that are classified as held-for-investment and have a related valuation allowance. |
(2) | Represents the fair value and related losses of foreclosed properties that were measured at fair value subsequent to their initial classification as REO, net. The carrying amount of REO, net was written down to fair value of $0.3 billion, less estimated costs to sell of $19 million (or approximately $0.3 billion) at September 30, 2013. The carrying amount of REO, net was written down to fair value of $0.8 billion, less estimated costs to sell of $50 million (or approximately $0.7 billion) at December 31, 2012. |
(3) | Represents the total net gains (losses) recorded on items measured at fair value on a non-recurring basis as of September 30, 2013 and 2012, respectively. |
Valuation Processes and Controls Over Fair Value Measurement
We have control processes designed to ensure that our fair value measurements are appropriate and reliable, that they are based on observable inputs where possible, and that our valuation approaches are consistently applied and the assumptions and inputs are reasonable. Our control processes provide a framework that ensures a segregation of duties and oversight of our fair value methodologies, techniques, validation procedures, and results.
172 | Freddie Mac | |
Groups within our Finance division, independent of our business functions, execute and validate the valuation processes and are responsible for determining the fair values of the majority of our financial assets and liabilities. In determining fair value, we consider the credit risk of our counterparties in estimating the fair values of our assets and our own credit risk in estimating the fair values of our liabilities. The fair values determined by our Finance division are further verified by an independent group within our Enterprise Risk Management (ERM) division.
The validation procedures performed by ERM are intended to ensure that the prices we receive from third parties are consistent with our observations of market activity, and that fair value measurements developed using internal data reflect the assumptions that a market participant would use in pricing our assets and liabilities. These validation procedures include performing a monthly independent verification of fair value measurements through independent modeling, analytics, and comparisons to other market source data, if available. Where applicable, prices are back-tested by comparing actual settlement prices to our fair value measurements. Analytical procedures include automated checks consisting of prior-period variance analysis, comparisons of actual prices to internally calculated expected prices based on observable market changes, analysis of changes in pricing ranges, relative value comparisons, and comparisons using modeled yields. Thresholds are set for each product category by ERM to identify exceptions that require further analysis. If a price is outside of our established thresholds, we perform additional validation procedures, including supplemental analytics and/or follow up discussions with the third-party provider. If we are unable to validate the reasonableness of a given price, we ultimately do not use that price for fair value measurements in our consolidated financial statements. These reviews are risk-based and cover all product categories, and are executed before we finalize the prices used in preparing our fair value measurements for our financial statements.
In addition to performing the validation procedures noted above, ERM provides independent risk governance over all valuation processes by establishing and maintaining corporate-wide valuation control policies. ERM also independently reviews key judgments, methodologies, and valuation techniques to ensure compliance with its established policies.
Our Valuation & Finance Model Committee (“Valuation Committee”), which includes representation from our business areas, ERM, and Finance divisions, provides senior management’s governance over valuation processes, methodologies, controls and fair value measurements. Identified exceptions are reviewed and resolved through the verification process and the fair value measurements used in the financial statements are approved at the Valuation Committee.
Where models are employed to assist in the measurement and verification of fair values, changes made to those models during the period are reviewed and approved according to the corporate model change governance process, which specifies that all material changes be reviewed at the Valuation Committee. Inputs used by models are regularly updated for changes in the underlying data, assumptions, valuation inputs, and market conditions, and are subject to the valuation controls noted above.
Use of Third-Party Pricing Data in Fair Value Measurement
As discussed in the sections that follow, many of our valuation techniques use, either directly or indirectly, data provided by third-party pricing services or dealers. The techniques used by these pricing services and dealers to develop the prices generally are either: (a) a comparison to transactions involving instruments with similar collateral and risk profiles, adjusted as necessary based on specific characteristics of the asset or liability being valued; or (b) industry-standard modeling, such as a discounted cash flow model. The prices provided by the pricing services and dealers reflect their observations and assumptions related to market activity, including risk premiums and liquidity adjustments. The models and related assumptions used by the pricing services and dealers are owned and managed by them and, in many cases, the significant inputs used in the valuation techniques are not reasonably available to us. However, we have an understanding of the processes and assumptions used to develop the prices based on our ongoing due diligence, which includes discussions with our vendors at least annually and often more frequently. We believe that the procedures executed by the pricing services and dealers, combined with our internal verification and analytical procedures, provide assurance that the prices used in our financial statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use in pricing our assets and liabilities. The price quotes we receive are non-binding both to us and to our counterparties.
In many cases, we receive prices from third-party pricing services or dealers and use those prices without adjustment, and the significant inputs used to develop the prices are not reasonably available to us. For a large majority of the assets and liabilities we value using pricing services and dealers, we obtain prices from multiple external sources and use the median of the prices to measure fair value. This technique is referred to below as “median of external sources.” The significant inputs used in the fair value measurement of assets and liabilities that are valued using the median of external sources pricing technique are the third-party prices. Significant increases (decreases) in any of the third-party prices in isolation may result in a significantly higher (lower) fair value measurement. In limited circumstances, we may be able to receive pricing information from only a single external source. This technique is referred to below as “single external source.”
In limited circumstances, we receive prices or pricing-related data that we adjust or use as an input to our models or other valuation techniques to measure fair value, as described in “Valuation Techniques for Assets and Liabilities Measured at Fair Value in Our Consolidated Balance Sheets — Derivative Assets, Net and Derivative Liabilities, Net.” In other limited circumstances, we receive prices from a third-party provider and use those prices without adjustment, but the inputs used by the
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third-party provider to develop the prices are reasonably available to us, as described in “Valuation Techniques for Assets and Liabilities Measured at Fair Value in Our Consolidated Balance Sheets — Mortgage Loans, Held-for-Sale” and “Other Assets and Other Liabilities.”
Valuation Techniques for Assets and Liabilities Measured at Fair Value in Our Consolidated Balance Sheets
We categorize assets and liabilities that we measure and report at fair value in our consolidated balance sheets within the fair value hierarchy based on the valuation techniques used to derive the fair value and our judgment regarding the observability of the related inputs. The following is a description of the valuation techniques we use for fair value measurement and disclosure; the significant inputs used in those techniques (if applicable); our basis for classifying the measurements as Level 1, Level 2, or Level 3 of the fair value hierarchy; and, for those measurements classified as Level 3 of the hierarchy, a narrative description of the sensitivity of the fair value measurement to changes in significant unobservable inputs and a description of any interrelationships between those unobservable inputs. Although the sensitivities of the unobservable inputs are generally discussed below in isolation, interrelationships exist among the inputs such that a change in one unobservable input typically results in a change to one or more of the other inputs. For example, the most common interrelationship that impacts the majority of our fair value measurements is between future interest rates, prepayment speeds, and probabilities of default. Generally, a change in the assumption used for future interest rates results in a directionally opposite change in the assumption used for prepayment speeds and a directionally similar change in the assumption used for probabilities of default.
Each technique discussed below may not be used in a given reporting period, depending on the composition of our assets and liabilities measured at fair value and relevant market activity during that period.
Investments in Securities
Mortgage-Related Securities
Agency Securities
Agency securities, both trading and available-for-sale, consist of mortgage-related securities issued and guaranteed by Freddie Mac, Fannie Mae, and Ginnie Mae. The valuation techniques for agency securities vary depending on the type of security.
Fixed-rate single-class securities are valued using observable prices for similar securities in the TBA market. The observable TBA prices vary based on agency, term, coupon, and settlement date. In addition, we may adjust the TBA price accordingly based on matrices we receive from external dealers for securities with specific collateral characteristics if we observe those collateral characteristics to be trading at a premium or discount to the TBA price. Significant inputs used in this technique are the TBA prices and the security characteristics mentioned above. These securities have observable market pricing and are classified as Level 2.
Adjustable-rate single-class securities and the majority of multiclass securities are valued using the median of external sources. For certain multiclass securities, we are able to receive prices from only a single external source. Adjustable-rate single-class securities and the multiclass securities valued using these techniques generally have observable market prices and are classified as Level 2. However, certain multiclass securities valued using these techniques are classified as Level 3 when there is a low volume or level of activity in the market for those securities.
Certain multiclass securities for which we are not able to obtain external prices due to limited relevant market activity are valued using a discounted cash flow technique. Under this technique, securities are valued by starting with a third-party market price for a similar security within our portfolio. We then use our proprietary prepayment and interest rate models to calculate an OAS for the similar security, which is used to determine the net present value of the projected cash flows for the security to be valued. The significant unobservable input used in the fair value measurement of these securities is the OAS. Significant increases (decreases) in the OAS in isolation would result in a significantly lower (higher) fair value measurement. These securities are classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
Certain complex multiclass securities for which current cash flow information is not readily available are valued using a risk-metric pricing technique. Under this technique, securities are valued by starting with a prior period price and adjusting that price for market changes in certain key risk metrics such as key rate durations. If necessary, our judgment is applied to adjust the price based on specific security characteristics. The significant unobservable inputs used in the fair value measurement of these securities are the key risk metrics. Significant increases (decreases) in key rate durations in isolation would result in a significantly lower (higher) fair value measurement. These securities are classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
Commercial Mortgage-Backed Securities
The majority of our CMBS are valued using the median of external sources. For a small number of CMBS, we are able to receive prices from only a single external source. CMBS valued using these techniques generally have observable market
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pricing and are classified as Level 2. However, certain CMBS valued using these techniques are classified as Level 3 when there is a low volume or level of activity in the market for those securities.
Subprime, Option ARM, and Alt-A and Other (Mortgage-Related); Obligations of States and Political Subdivisions; and Manufactured Housing
Subprime, option ARM, and Alt-A and other securities consist of non-agency mortgage-related securities backed by subprime, option ARM, and/or Alt-A and other collateral. Obligations of states and political subdivisions consist primarily of housing revenue bonds. Manufactured housing securities consist of non-agency mortgage-related securities backed by loans on manufactured housing properties. These types of securities are all valued based on the median of external sources and are classified as Level 3 due to the low volume and level of activity in the markets for these securities.
Non-Mortgage-Related Securities
Asset-Backed Securities
Asset-backed securities consist primarily of private-label non-mortgage-related securities. These securities are valued using the median of external sources. These securities have observable market pricing and are classified as Level 2.
Treasury Bills and Treasury Notes
Treasury bills and Treasury notes are valued using quoted prices in active markets for identical assets and are classified as Level 1.
Mortgage Loans, Held-for-Sale
Mortgage loans, held-for-sale consist of multifamily mortgage loans with the fair value option elected and are measured at fair value on a recurring basis. Mortgage loans, held-for-sale are primarily valued using market prices from a third-party pricing service that uses a discounted cash flow technique calibrated to the exit price for these loans as reflected in the K Certificate securitization market. Under this technique, the pricing service forecasts cash flows for the various mortgage loans and discounts them at a market rate, including a spread that is based on our recent securitization activity, which we have defined as our principal exit market. These loans are classified as Level 2 given the observable nature of our securitization pricing.
Mortgage Loans, Held-for-Investment
Mortgage loans, held-for-investment are measured at fair value on a non-recurring basis and represent multifamily mortgage loans that have been written down to the fair value of the underlying collateral due to impairment. The underlying collateral is primarily valued using either an income capitalization technique or third-party appraisals.
Under the income capitalization technique, the collateral is valued by discounting the present value of future cash flows by applying an overall capitalization rate to the forecasted net operating income. The significant unobservable input used in the fair value measurement of these loans is the capitalization rate, which is determined through analysis of the DSCR. Significant increases (decreases) in the capitalization rate in isolation would result in a significantly lower (higher) fair value measurement.
Under the third-party appraisal technique, we use the prices provided by third-party appraisers without adjustment. The third-party appraisers consider the physical condition of the property and use comparable sales and other market data in determining the appraised value.
Impaired multifamily mortgage loans held-for-investment are classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
Derivative Assets, Net and Derivative Liabilities, Net
Derivative assets and derivative liabilities consist of interest-rate swaps, option-based derivatives, and other derivatives, such as exchange-traded futures, foreign-currency swaps, and certain forward purchase and sale commitments.
Interest-Rate Swaps
Interest-rate swaps consist of receive-fixed, pay-fixed, and basis swaps. The majority of our interest-rate swaps are valued using a discounted cash flow technique. Under this technique, interest-rate swaps are valued by using the appropriate yield curves to discount the expected cash flows of both the fixed and variable rate components of the swap contracts. The significant inputs used in the fair value measurement of these derivatives are market-based interest rates. These derivatives are classified as Level 2 as the significant inputs used in the fair value measurement are observable in active markets. Certain interest rate swaps that are exchange traded are classified in Level 1.
Option-Based Derivatives
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Option-based derivatives consist of interest rate caps, interest rate floors, call swaptions, and put swaptions. We value the majority of our option-based derivatives using option-pricing models. Dealer-supplied interest rate volatility matrices are a key input into these models. Within each matrix, prices are provided for a range of option terms, swap terms, and strikes. Our models then interpolate to determine the volatility for each instrument and use that volatility as an input to the option-pricing model. These derivatives are classified as Level 2 as the significant inputs used are observable in active markets.
Other Derivatives
Other derivatives consist of exchange-traded futures, foreign-currency swaps, and certain forward purchase and sale commitments.
Exchange-traded futures are valued using quoted prices in active markets for identical assets or liabilities and are classified as Level 1.
Foreign-currency swaps are valued using a discounted cash flow technique. Under this technique, foreign-currency swaps are valued using yield curves derived from observable market data to calculate and discount the expected cash flows for the swap contracts. The significant inputs used in the fair value measurement of these derivatives are market-based interest rates and foreign currency exchange rates. These derivatives are classified as Level 2 as the significant inputs used in the fair value measurement are observable in active markets.
Certain purchase and sale commitments are also considered to be derivatives and are valued using the same techniques we use to value the underlying instruments we are committing to purchase or sell. These instruments generally have observable market pricing and are classified as Level 2. Valuation techniques for commitments to purchase or sell investment securities and to extinguish or issue debt securities of consolidated trusts are further discussed in “Investments in Securities.” Valuation techniques for commitments to purchase single-family mortgage loans are further discussed in “Valuation Techniques for Assets and Liabilities Not Measured at Fair Value in Our Consolidated Balance Sheets, but for Which the Fair Value is Disclosed — Mortgage Loans.”
Other Assets and Other Liabilities
Other assets consist of our guarantee asset related to guarantees issued to unconsolidated securitization trusts and mortgage servicing rights. Other liabilities, from time to time, consist of mortgage servicing rights.
Guarantee Asset
Our guarantee asset is primarily related to our multifamily guarantees. The multifamily guarantee asset is valued using a discounted cash flow technique. Under this technique, the present value of future cash flows related to our management and guarantee fee is discounted based on the current OAS-to-benchmark interest rates for new guarantees, which are driven by changes in our estimates of credit risk and changes in the credit profile of the multifamily guarantee portfolio. The significant unobservable input used in the fair value measurement of the guarantee asset is the OAS-to-benchmark rates. Significant increases (decreases) in the OAS in isolation would result in a significantly lower (higher) fair value measurement.
Our guarantee asset also consists of single family guarantees primarily related to long-term standby commitments, the vast majority of which is valued using the median of external sources. Under this technique, we obtain multiple price quotes from dealers, who provide estimates based on pricing for comparable benchmark securities with specific adjustments to reflect the unique characteristics of this asset class.
The guarantee asset is classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
All Other Assets and Liabilities
All other assets and, from time to time, other liabilities consist primarily of mortgage servicing rights. Mortgage servicing rights are valued using a discounted cash flow technique by a third-party vendor that specializes in valuing and brokering sales of mortgage servicing rights. Under this technique, the cash flows from the mortgage servicing rights are discounted based on estimated prepayment rates, estimated costs to service both performing and non-performing loans, and estimated servicing income per loan (including ancillary income). The significant unobservable inputs used in the fair value measurement of mortgage servicing rights are the estimates of prepayment rates, costs to service per loan, and servicing income per loan. Significant increases (decreases) in cost to service per loan, and prepayment rate in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in servicing income per loan in isolation would result in a significantly higher (lower) fair value measurement. Mortgage servicing rights are classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
REO, Net
REO, net consists primarily of single-family REO. REO, net is initially measured at its fair value less costs to sell, and is subsequently measured at the lower of cost or fair value less costs to sell. REO, net is valued using an internal model. Under
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this technique, our internal model uses actual disposition prices on REO for the past three months to determine the average sales proceeds per property at the state level expressed as a fixed percentage based on the ratio of the disposition price to the UPB of the associated loan immediately prior to our acquisition of the property. This fixed percentage is then applied to the individual property to determine its fair value. Certain adjustments, such as state-level adjustments, are made to the estimated fair value, as applicable. The significant unobservable input used in the fair value measurement of REO, net is the historical average sales proceeds per property by state. Significant increases (decreases) in the historical average sales proceeds per property by state in isolation would result in a significantly higher (lower) fair value measurement. REO, net is classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
Debt Securities of Consolidated Trusts Held by Third Parties, at Fair Value
We elected the fair value option for certain debt securities of consolidated trusts held by third parties. These consist of certain multifamily K certificates and certain REMIC interest-only mortgage-related debt securities. These are valued using either the median of external sources or a single external source (which may be the counterparty to the transaction) and are classified as Level 2 due to market pricing that is observable. See “Fair Value Option — Debt Securities of Consolidated Trusts Held by Third Parties” for additional information.
Other Debt, at Fair Value
We elected the fair value option for foreign-currency denominated debt instruments and certain other debt securities. These are valued using either the median of external sources or a single external source (which may be the counterparty to the transaction) and are classified as Level 3 due to the low volume and level of activity in the market for these types of debt instruments. See “Fair Value Option — Other Debt” for additional information.
Quantitative Information about Level 3 Fair Value Measurements for Assets and Liabilities Measured at Fair Value in Our Consolidated Balance Sheets
The table below provides valuation techniques, the range, and the weighted average of significant unobservable inputs for assets and liabilities measured at fair value in our consolidated balance sheets on a recurring basis using unobservable inputs (Level 3) as of September 30, 2013 and December 31, 2012.
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Table 16.4 — Quantitative Information about Recurring Level 3 Fair Value Measurements
September 30, 2013 | |||||||||||||||||
Total Fair Value | Level 3 Fair Value | Predominant Valuation Technique(s) | Unobservable Inputs(1) | ||||||||||||||
Type | Range | Weighted Average | |||||||||||||||
(dollars in millions) | |||||||||||||||||
Recurring fair value measurements | |||||||||||||||||
Assets | |||||||||||||||||
Investments in securities | |||||||||||||||||
Available-for-sale, at fair value | |||||||||||||||||
Mortgage-related securities | |||||||||||||||||
Agency securities: | |||||||||||||||||
Freddie Mac | $ | 1,954 | Risk metric | Effective duration(2) | 1.46 - 5.07 years | 1.95 years | |||||||||||
1,340 | Discounted cash flows | OAS | 8 - 238 bps | 24 bps | |||||||||||||
292 | Other | ||||||||||||||||
Total Freddie Mac | $ | 44,145 | 3,586 | ||||||||||||||
Fannie Mae | 65 | Median of external sources | External pricing sources | $104.5 - $105.9 | $ | 105.2 | |||||||||||
56 | Single external source | External pricing source | $114.2 - $114.2 | $ | 114.2 | ||||||||||||
16 | Other | ||||||||||||||||
Total Fannie Mae | 11,561 | 137 | |||||||||||||||
Ginnie Mae | 7 | Median of external sources | |||||||||||||||
6 | Discounted cash flows | ||||||||||||||||
Total Ginnie Mae | 176 | 13 | |||||||||||||||
CMBS | 2,637 | Single external source | External pricing source | $93.5 - $93.5 | $ | 93.5 | |||||||||||
557 | Other | ||||||||||||||||
Total CMBS | 36,368 | 3,194 | |||||||||||||||
Subprime, option ARM, and Alt-A: | |||||||||||||||||
Subprime | 25,419 | Median of external sources | External pricing sources | $62.5 - $72.2 | $ | 66.9 | |||||||||||
2,153 | Other | ||||||||||||||||
Total subprime | 27,572 | 27,572 | |||||||||||||||
Option ARM | 5,384 | Median of external sources | External pricing sources | $57.1 - $63.8 | $ | 60.3 | |||||||||||
1,040 | Other | ||||||||||||||||
Total option ARM | 6,424 | 6,424 | |||||||||||||||
Alt-A and other | 4,315 | Median of external sources | External pricing sources | $72.3 - $78.8 | $ | 75.8 | |||||||||||
4,217 | Single external source | External pricing source | $77.9 - $77.9 | $ | 77.9 | ||||||||||||
571 | Other | ||||||||||||||||
Total Alt-A and other | 9,103 | 9,103 | |||||||||||||||
Obligations of states and political subdivisions | 3,514 | Median of external sources | External pricing sources | $99.1 - $100.2 | $ | 99.6 | |||||||||||
247 | Other | ||||||||||||||||
Total obligations of states and political subdivisions | 3,761 | 3,761 | |||||||||||||||
Manufactured housing | 561 | Median of external sources | External pricing sources | $84.2 - $90.6 | $ | 86.9 | |||||||||||
127 | Other | ||||||||||||||||
Total manufactured housing | 688 | 688 | |||||||||||||||
Total available-for-sale mortgage-related securities | 139,798 | 54,478 | |||||||||||||||
Trading, at fair value | |||||||||||||||||
Mortgage-related securities | |||||||||||||||||
Agency securities: | |||||||||||||||||
Freddie Mac | 1,249 | Discounted cash flows | OAS | (52) - 9,441 bps | 59 bps | ||||||||||||
58 | Other | ||||||||||||||||
Total Freddie Mac | 10,060 | 1,307 | |||||||||||||||
Fannie Mae | 176 | Discounted cash flows | OAS | (120) - 2,123 bps | 309 bps | ||||||||||||
Total Fannie Mae | 10,675 | 176 | |||||||||||||||
Ginnie Mae | 78 | Median of external sources | |||||||||||||||
Total Ginnie Mae | 105 | 78 | |||||||||||||||
Other | 6 | Median of external sources | |||||||||||||||
1 | Discounted cash flows | ||||||||||||||||
1 | Other | ||||||||||||||||
Total other | 166 | 8 | |||||||||||||||
Total trading mortgage-related securities | 21,006 | 1,569 | |||||||||||||||
Total investments in securities | $ | 160,804 | $ | 56,047 | |||||||||||||
Other assets: | |||||||||||||||||
Guarantee asset, at fair value | 1,037 | Discounted cash flows | OAS | 16 - 202 bps | 54 bps | ||||||||||||
395 | Median of external sources | External pricing sources | $10.7 - $22.8 | $ | 18.0 | ||||||||||||
Total guarantee asset, at fair value | 1,432 | 1,432 | |||||||||||||||
All other, at fair value | 10 | Other | |||||||||||||||
Total all other, at fair value | 10 | 10 | |||||||||||||||
Total other assets | 1,442 | 1,442 | |||||||||||||||
Liabilities | |||||||||||||||||
Other debt, at fair value | 769 | Median of external sources | External pricing source | $101.1 - $101.2 | $ | 101.1 | |||||||||||
1,262 | Other | ||||||||||||||||
Total other debt recorded at fair value | 2,031 | 2,031 | |||||||||||||||
Net derivatives | 211 | Single external source | External pricing source | $0.6 - $0.6 | $ | 0.6 | |||||||||||
38 | Other | ||||||||||||||||
Total net derivatives | (539 | ) | 249 | ||||||||||||||
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December 31, 2012 | |||||||||||||||||
Total Fair Value | Level 3 Fair Value | Predominant Valuation Technique(s) | Unobservable Inputs(1) | ||||||||||||||
Type | Range | Weighted Average | |||||||||||||||
(dollars in millions) | |||||||||||||||||
Recurring fair value measurements | |||||||||||||||||
Assets | |||||||||||||||||
Investments in securities | |||||||||||||||||
Available-for-sale, at fair value | |||||||||||||||||
Mortgage-related securities | |||||||||||||||||
Agency securities: | |||||||||||||||||
Freddie Mac | $ | 1,477 | Risk metric | Effective duration(2) | 0.89 -1.98 years | 0.89 years | |||||||||||
325 | Other | ||||||||||||||||
Total Freddie Mac | $ | 58,515 | 1,802 | ||||||||||||||
Fannie Mae | 78 | Median of external sources | External pricing sources | $103.9 - $106.0 | $ | 105.2 | |||||||||||
65 | Single external source | External pricing source | $116.0 - $116.0 | $ | 116.0 | ||||||||||||
20 | Other | ||||||||||||||||
Total Fannie Mae | 15,280 | 163 | |||||||||||||||
Ginnie Mae | 8 | Discounted cash flows | |||||||||||||||
8 | Median of external sources | ||||||||||||||||
Total Ginnie Mae | 209 | 16 | |||||||||||||||
CMBS | 2,462 | Single external source | External pricing source | $99.4 - $99.4 | $ | 99.4 | |||||||||||
432 | Risk metric | Effective duration(2) | 9.3 -14.8 years | 12.0 years | |||||||||||||
535 | Other | ||||||||||||||||
Total CMBS | 51,307 | 3,429 | |||||||||||||||
Subprime, option ARM, and Alt-A: | |||||||||||||||||
Subprime | 24,890 | Median of external sources | External pricing sources | $54.4 - $64.4 | $ | 59.2 | |||||||||||
1,567 | Other | ||||||||||||||||
Total subprime | 26,457 | 26,457 | |||||||||||||||
Option ARM | 5,631 | Median of external sources | External pricing sources | $43.8 - $52.6 | $ | 47.9 | |||||||||||
86 | Other | ||||||||||||||||
Total option ARM | 5,717 | 5,717 | |||||||||||||||
Alt-A and other | 8,562 | Median of external sources | External pricing sources | $69.6 - $77.9 | $ | 73.8 | |||||||||||
1,901 | Single external source | External pricing source | $71.8 - $71.8 | $ | 71.8 | ||||||||||||
441 | Other | ||||||||||||||||
Total Alt-A and other | 10,904 | 10,904 | |||||||||||||||
Obligations of states and political subdivisions | 5,533 | Median of external sources | External pricing sources | $102.3 - $103.2 | $ | 102.7 | |||||||||||
265 | Other | ||||||||||||||||
Total obligations of states and political subdivisions | 5,798 | 5,798 | |||||||||||||||
Manufactured housing | 693 | Median of external sources | External pricing sources | $80.0 - $85.5 | $ | 82.8 | |||||||||||
16 | Other | ||||||||||||||||
Total manufactured housing | 709 | 709 | |||||||||||||||
Total available-for-sale mortgage-related securities | 174,896 | 54,995 | |||||||||||||||
Trading, at fair value | |||||||||||||||||
Mortgage-related securities | |||||||||||||||||
Agency securities: | |||||||||||||||||
Freddie Mac | 1,112 | Discounted cash flows | OAS | (33,702) - 3,251 bps | 502 bps | ||||||||||||
53 | Other | ||||||||||||||||
Total Freddie Mac | 10,354 | 1,165 | |||||||||||||||
Fannie Mae | 312 | Discounted cash flows | OAS | (1,263) - 3,251 bps | 810 bps | ||||||||||||
Total Fannie Mae | 10,338 | 312 | |||||||||||||||
Ginnie Mae | 87 | Median of external sources | |||||||||||||||
5 | Other | ||||||||||||||||
Total Ginnie Mae | 131 | 92 | |||||||||||||||
Other | 12 | Discounted cash flows | |||||||||||||||
9 | Median of external sources | ||||||||||||||||
Total other | 156 | 21 | |||||||||||||||
Total trading mortgage-related securities | 20,979 | 1,590 | |||||||||||||||
Total investments in securities | $ | 195,875 | $ | 56,585 | |||||||||||||
Mortgage loans: | |||||||||||||||||
Held-for-sale, at fair value | $ | 14,238 | $ | 14,238 | Discounted cash flows | DSCR | 1.25 - 6.88 | 1.97 | |||||||||
Current LTV | 19% - 80% | 69 | % | ||||||||||||||
Other assets: | |||||||||||||||||
Guarantee asset, at fair value | 870 | Discounted cash flows | OAS | 0 - 368 bps | 55 bps | ||||||||||||
159 | Other | ||||||||||||||||
Total guarantee asset, at fair value | 1,029 | 1,029 | |||||||||||||||
All other, at fair value | 112 | Discounted cash flows | Prepayment rate | 7.73% -39.87% | 21.23 | % | |||||||||||
Servicing income per loan | 0.19% - 0.52% | 0.25 | % | ||||||||||||||
Cost to service per loan | $78 - $354 | $ | 141 | ||||||||||||||
2 | Other | ||||||||||||||||
Total all other, at fair value | 114 | 114 | |||||||||||||||
Total other assets | 1,143 | 1,143 | |||||||||||||||
Liabilities | |||||||||||||||||
Other debt, at fair value | 1,188 | Median of external sources | External pricing sources | $101.7 - $102.0 | $ | 101.7 | |||||||||||
999 | Single external source | External pricing source | $99.9 - $99.9 | $ | 99.9 | ||||||||||||
Total other debt recorded at fair value | 2,187 | 2,187 | |||||||||||||||
Net derivatives | (479 | ) | 47 | Other | |||||||||||||
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(1) | Certain unobservable input types, range, and weighted average data are not disclosed in this table if they are associated with a class: (a) that has a Level 3 fair value measurement that is not considered material; or (b) where we have disclosed the predominant valuation technique with related unobservable inputs for the most significant portion of that class. |
(2) | Effective duration is used as a proxy to represent the aggregate impact of key rate durations. |
The table below provides valuation techniques, the range, and the weighted average of significant unobservable inputs for assets and liabilities measured at fair value in our consolidated balance sheets on a non-recurring basis using unobservable inputs (Level 3) as of September 30, 2013 and December 31, 2012.
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Table 16.5 — Quantitative Information about Non-Recurring Level 3 Fair Value Measurements
September 30, 2013 | |||||||||||||||||
Total Fair Value | Level 3 Fair Value | Predominant Valuation Technique(s) | Unobservable Inputs(1) | ||||||||||||||
Type | Range | Weighted Average | |||||||||||||||
(dollars in millions) | |||||||||||||||||
Non-recurring fair value measurements | |||||||||||||||||
Mortgage loans | |||||||||||||||||
Held-for-investment | $ | 432 | Income capitalization | Capitalization rates(2) | 6% - 9% | 7% | |||||||||||
207 | Third-party appraisal | Property value | $2 million - $32 million | $21 million | |||||||||||||
Total held-for-investment | $ | 639 | 639 | ||||||||||||||
REO, net | 295 | Internal model(3) | Historical average sales proceeds per property by state(4) | $48,434 - $359,295 | $ | 107,719 | |||||||||||
Total REO, net | 295 | 295 | |||||||||||||||
December 31, 2012 | |||||||||||||||||
Total Fair Value | Level 3 Fair Value | Predominant Valuation Technique(s) | Unobservable Inputs(1) | ||||||||||||||
Type | Range | Weighted Average | |||||||||||||||
(dollars in millions) | |||||||||||||||||
Non-recurring fair value measurements | |||||||||||||||||
Mortgage loans | |||||||||||||||||
Held-for-investment | $ | 711 | Income capitalization | Capitalization rates(2) | 5% - 9% | 7% | |||||||||||
314 | Third-party appraisal | Property value | $2 million - $43 million | $21 million | |||||||||||||
Total held-for-investment | $ | 1,025 | 1,025 | ||||||||||||||
REO, net | 771 | Internal model(3) | Historical average sales proceeds per property by state(4) | $32,186 - $356,397 | $102,697 | ||||||||||||
5 | Other | ||||||||||||||||
Total REO, net | 776 | 776 | |||||||||||||||
(1) | Certain unobservable input types, range, and weighted average data are not disclosed in this table if they are associated with a class: (a) that has a Level 3 fair value measurement that is not considered material; or (b) where we have disclosed the predominant valuation technique with related unobservable inputs for the most significant portion of that class. |
(2) | The capitalization rate “Range” and “Weighted Average” represent those loans that are valued using the Income Capitalization approach, which is the predominant valuation technique used for this population. Certain loans in this population are valued using other techniques, and the capitalization rate for those is not represented in the “Range” or “Weighted Average” above. |
(3) | Represents internal models that use distressed property sales proceeds by state based on a three month average to measure the initial value of REO and the subsequent write-down to measure the current fair value for REO properties. |
(4) | Represents the average of three months of REO sales proceeds by state. The national average REO disposition severity ratio was 34.9% and 39.5% for the three months ended September 30, 2013 and December 31, 2012, respectively. |
Fair Value of Financial Instruments
The table below presents the carrying value and estimated fair value of our financial instruments as of September 30, 2013 and December 31, 2012.
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Table 16.6 — Fair Value of Financial Instruments
September 30, 2013 | |||||||||||||||||||||||
Fair Value | |||||||||||||||||||||||
Carrying Amount(1) | Level 1 | Level 2 | Level 3 | Netting Adjustments | Total | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Financial Assets | |||||||||||||||||||||||
Cash and cash equivalents | $ | 9,532 | $ | 6,641 | $ | 2,891 | $ | — | $ | — | $ | 9,532 | |||||||||||
Restricted cash and cash equivalents | 5,755 | 5,752 | 3 | — | — | 5,755 | |||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | 41,023 | — | 41,023 | — | — | 41,023 | |||||||||||||||||
Investments in securities: | |||||||||||||||||||||||
Available-for-sale, at fair value | 139,798 | — | 85,320 | 54,478 | — | 139,798 | |||||||||||||||||
Trading, at fair value | 52,647 | 31,641 | 19,437 | 1,569 | — | 52,647 | |||||||||||||||||
Total investments in securities | 192,445 | 31,641 | 104,757 | 56,047 | — | 192,445 | |||||||||||||||||
Mortgage loans: | |||||||||||||||||||||||
Mortgage loans held by consolidated trusts | 1,526,070 | — | 1,251,795 | 273,127 | — | 1,524,922 | |||||||||||||||||
Unsecuritized mortgage loans | 163,424 | — | 18,624 | 127,628 | — | 146,252 | |||||||||||||||||
Total mortgage loans | 1,689,494 | — | 1,270,419 | 400,755 | — | 1,671,174 | |||||||||||||||||
Derivative assets, net | 928 | 856 | 14,336 | 15 | (14,279 | ) | 928 | ||||||||||||||||
Guarantee asset | 1,432 | — | — | 1,699 | — | 1,699 | |||||||||||||||||
Total financial assets | $ | 1,940,609 | $ | 44,890 | $ | 1,433,429 | $ | 458,516 | $ | (14,279 | ) | $ | 1,922,556 | ||||||||||
Financial Liabilities | |||||||||||||||||||||||
Debt, net: | |||||||||||||||||||||||
Debt securities of consolidated trusts held by third parties | $ | 1,419,909 | $ | — | $ | 1,436,999 | $ | 2,207 | $ | — | $ | 1,439,206 | |||||||||||
Other debt | 515,668 | — | 511,409 | 12,616 | — | 524,025 | |||||||||||||||||
Total debt, net | 1,935,577 | — | 1,948,408 | 14,823 | — | 1,963,231 | |||||||||||||||||
Derivative liabilities, net | 389 | 585 | 16,732 | 264 | (17,192 | ) | 389 | ||||||||||||||||
Guarantee obligation | 1,374 | — | — | 2,913 | — | 2,913 | |||||||||||||||||
Total financial liabilities | $ | 1,937,340 | $ | 585 | $ | 1,965,140 | $ | 18,000 | $ | (17,192 | ) | $ | 1,966,533 | ||||||||||
December 31, 2012 | |||||||||||||||||||||||
Fair Value | |||||||||||||||||||||||
Carrying Amount(1) | Level 1 | Level 2 | Level 3 | Netting Adjustments | Total | ||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Financial Assets | |||||||||||||||||||||||
Cash and cash equivalents | $ | 8,513 | $ | 8,513 | $ | — | $ | — | $ | — | $ | 8,513 | |||||||||||
Restricted cash and cash equivalents | 14,592 | 14,576 | 16 | — | — | 14,592 | |||||||||||||||||
Federal funds sold and securities purchased under agreements to resell | 37,563 | — | 37,563 | — | — | 37,563 | |||||||||||||||||
Investments in securities: | |||||||||||||||||||||||
Available-for-sale, at fair value | 174,896 | — | 119,901 | 54,995 | — | 174,896 | |||||||||||||||||
Trading, at fair value | 41,492 | 20,221 | 19,681 | 1,590 | — | 41,492 | |||||||||||||||||
Total investments in securities | 216,388 | 20,221 | 139,582 | 56,585 | — | 216,388 | |||||||||||||||||
Mortgage loans: | |||||||||||||||||||||||
Mortgage loans held by consolidated trusts | 1,495,932 | — | 1,130,438 | 409,722 | — | 1,540,160 | |||||||||||||||||
Unsecuritized mortgage loans | 190,415 | — | 16,428 | 151,175 | — | 167,603 | |||||||||||||||||
Total mortgage loans | 1,686,347 | — | 1,146,866 | 560,897 | — | 1,707,763 | |||||||||||||||||
Derivative assets, net | 657 | 64 | 24,109 | 20 | (23,536 | ) | 657 | ||||||||||||||||
Guarantee asset | 1,029 | — | — | 1,325 | — | 1,325 | |||||||||||||||||
Total financial assets | $ | 1,965,089 | $ | 43,374 | $ | 1,348,136 | $ | 618,827 | $ | (23,536 | ) | $ | 1,986,801 | ||||||||||
Financial Liabilities | |||||||||||||||||||||||
Debt, net: | |||||||||||||||||||||||
Debt securities of consolidated trusts held by third parties | $ | 1,419,524 | $ | — | $ | 1,484,228 | $ | 2,867 | $ | — | $ | 1,487,095 | |||||||||||
Other debt | 547,518 | — | 546,955 | 18,646 | — | 565,601 | |||||||||||||||||
Total debt, net | 1,967,042 | — | 2,031,183 | 21,513 | — | 2,052,696 | |||||||||||||||||
Derivative liabilities, net | 178 | 8 | 31,014 | 67 | (30,911 | ) | 178 | ||||||||||||||||
Guarantee obligation | 1,004 | — | — | 2,487 | — | 2,487 | |||||||||||||||||
Total financial liabilities | $ | 1,968,224 | $ | 8 | $ | 2,062,197 | $ | 24,067 | $ | (30,911 | ) | $ | 2,055,361 | ||||||||||
(1) | Equals the amount reported on our GAAP consolidated balance sheets. |
Valuation Techniques for Assets and Liabilities Not Measured at Fair Value in Our Consolidated Balance Sheets, but for Which the Fair Value is Disclosed
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The following is a description of the valuation techniques we use for items not measured at fair value in our consolidated balance sheets, but for which the fair value is disclosed, the significant inputs used in those techniques (if applicable), and our basis for classifying the measurements as Level 1, Level 2, or Level 3 of the valuation hierarchy. Each technique discussed below may not be used in a given reporting period, depending on the composition of our assets and liabilities measured at fair value and relevant market activity during that period.
Cash and Cash Equivalents (including Restricted Cash and Cash Equivalents)
Cash and cash equivalents (including restricted cash and cash equivalents) largely consist of highly liquid investment securities with an original maturity of three months or less used for cash management purposes, as well as cash held at financial institutions and cash collateral posted by our derivative counterparties. Given that these assets are short-term in nature with limited market value volatility, the carrying amount on our GAAP consolidated balance sheets is deemed to be a reasonable approximation of fair value. Cash and restricted cash are classified as Level 1. Cash equivalents (including restricted cash equivalents) are primarily classified as Level 2 because we use observable inputs other than quoted prices in active markets for identical assets to determine the fair value measurement. However, cash equivalents (including restricted cash equivalents) for which we can obtain quoted prices in active markets for identical assets are classified as Level 1.
Federal Funds Sold and Securities Purchased Under Agreements to Resell
Federal funds sold and securities purchased under agreements to resell principally consist of short-term contractual agreements such as reverse repurchase agreements involving Treasury and agency securities and federal funds sold. Given that these assets are short-term in nature, the carrying amount on our GAAP consolidated balance sheets is deemed to be a reasonable approximation of fair value. Federal funds sold and securities purchased under agreements to resell are classified as Level 2 because these assets have observable market pricing, but quoted prices for identical assets are not available.
Mortgage Loans
Single-family and certain multifamily mortgage loans are classified as held-for-investment and recorded at amortized cost. Other multifamily mortgage loans that are held for investment are recorded at the fair value of the underlying collateral upon impairment. Multifamily held-for-sale mortgage loans are recorded at fair value due to the election of the fair value option.
Single-Family Loans
Determination of Principal Market
In determining the fair value of single-family mortgage loans, valuation outcomes can vary widely based on management judgments and decisions used in determining: (a) the principal market; (b) modeling assumptions, including default, severity, home prices, and risk premiums; and (c) inputs used to determine variables including risk premiums, credit costs, security pricing, and implied management and guarantee fees. Our principal markets include the GSE securitization market and the whole loan market. To determine the principal market, we considered the market with the greatest volume and level of activity and our ability to access that market. In the absence of a market with active trading, we determined the market that would maximize the amount we would receive upon sale. We determined that the principal market is the whole loan market for loans that are four or more months delinquent, loans that are in foreclosure, loans that have completed a HAMP loan modification, and loans that have completed a non-HAMP loan modification but have not been current for at least 12 consecutive months. The total UPB of loans where the whole loan market is the principal market was approximately $102.0 billion and $110.0 billion as of September 30, 2013 and December 31, 2012, respectively. We determined that the principal market for all other loans, regardless of whether the loan is currently securitized or whether the loan is eligible for purchase under current underwriting standards, is the GSE securitization market. The total UPB of loans where the GSE securitization market is the principal market was approximately $1.5 trillion as of both September 30, 2013 and December 31, 2012.
Whole Loan Market as Principal Market
Loans where we determine that the principal market is the whole loan market are valued using the median of external sources. Under the median of external sources technique, prices for single-family loans are obtained from multiple dealers. These dealers reference market activity for deeply delinquent and modified loans, where available, and use internal models and their judgment to determine default rates, severity rates, home prices, and risk premiums. Single-family mortgage loans valued using this technique are classified as Level 3 due to the low volume and level of activity in this market.
GSE Securitization Market as Principal Market
Loans where we determine that the principal market is the GSE securitization market are valued using the build-up technique. Under the build-up technique, the fair value of single-family mortgage loans is based on the estimate of the price we would receive if we were to securitize the loans. These loans are valued by starting with benchmark security pricing for actively traded mortgage-related securities with similar characteristics; adding in the value of our management and guarantee
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fee, which is the compensation we receive for performing our management and guarantee activities; and subtracting the value of the credit obligation related to performing our guarantee.
The security price is based on benchmark security pricing for similar actively traded mortgage-related securities, adjusted as necessary based on security characteristics. This security pricing process is consistent with our approach for valuing similar securities retained in our investment portfolio or issued as debt to third parties. See “Valuation Techniques for Assets and Liabilities Measured at Fair Value in Our Consolidated Balance Sheets — Investments in Securities.”
The management and guarantee fee is valued by estimating the present value of the additional cash flows related to our management and guarantee fee. The management and guarantee fees for the majority of our loans are valued using third-party dealer prices on hypothetical interest-only securities based on collateral characteristics from our single-family credit guarantee portfolio. For loans where third-party market data is not readily available, we use a discounted cash flow approach, leveraging the dealer prices received for the majority of our loans and including only those cash flows related to our management and guarantee fee.
The credit obligation related to performing our guarantee is valued by estimating the fair value of the related credit and other costs (such as general and administrative expenses) and benefits (such as credit enhancements) inherent in our guarantee obligation. For loans that qualify for purchase under current underwriting standards, we use the delivery and guarantee fees that we charge under our current market pricing as a market observation. For loans that do not qualify for purchase based on current underwriting standards, we use our internal credit models, which incorporate factors such as loan characteristics, loan performance status information, expected losses, and risk premiums without further adjustment.
Single-family mortgage loans that qualify for purchase under current underwriting standards are classified as Level 2 as the significant inputs used for the valuation of these loans, such as security pricing, our externally published credit pricing matrices, and third-party prices used in valuing the management and guarantee fee, are observable, while the unobservable inputs, such as general and administrative expenses and credit enhancements, are not significant to the fair value measurement. Single-family mortgage loans that do not qualify for purchase under current underwriting standards are classified as Level 3 as the credit cost is based on our internal credit models which use unobservable inputs that are significant to the fair value measurement.
HARP Loans
For loans that have been refinanced under HARP, we value our guarantee obligation using the delivery and guarantee fees currently charged by us under that initiative. HARP loans valued using this technique are classified as Level 2, as the fees charged by us are observable. If, subsequent to delivery, the refinanced loan no longer qualifies for purchase based on current underwriting standards (such as becoming past due or being modified), the fair value of the guarantee obligation is then measured using: (a) our internal credit models; or (b) the median of external sources, if the loan’s principal market has changed to the whole loan market. HARP loans valued using either of these techniques are classified as Level 3 as significant inputs are unobservable. The majority of our HARP loans are classified as Level 2.
The total compensation that we receive for the delivery of a HARP loan reflects the pricing that we are willing to offer because HARP is a part of a broader government program intended to provide assistance to homeowners and prevent foreclosures. When HARP ends, the beneficial pricing afforded to HARP loans will no longer be reflected in our delivery and guarantee fee pricing structure. If these benefits were not reflected in the pricing for these loans, the fair value of our mortgage loans would have decreased by $12.4 billion and $11.2 billion as of September 30, 2013 and December 31, 2012, respectively. The total fair value of the loans in our portfolio that reflects the pricing afforded to HARP loans as of September 30, 2013 and December 31, 2012 as presented in our consolidated fair value balance sheets is $151.7 billion and $153.1 billion, respectively.
Multifamily Loans
For a discussion of the techniques used to determine the fair value of held-for-sale and impaired held-for-investment multifamily mortgage loans, see “Valuation Techniques for Assets and Liabilities Measured at Fair Value in Our Consolidated Balance Sheets — Mortgage Loans, Held-for-Sale” and “— Mortgage Loans, Held-for-Investment,” respectively. Non-impaired multifamily mortgage loans are primarily valued using market prices from a third-party pricing service that uses a discounted cash-flow technique. Under this technique, the pricing service forecasts cash flows for the various mortgage loans and discounts them at a market rate, including a spread that is based on pricing data obtained from purchases and sales of similar mortgage loans, adjusted based on the mortgage's current LTV ratio and DSCR. The significant unobservable inputs used in the fair value measurement of these loans are the current LTV ratio and DSCR. These loans are classified as Level 3 as significant inputs used in the fair value measurement are unobservable.
Total Debt, Net
Total debt, net represents debt securities of consolidated trusts held by third parties and other debt that we issued to finance our assets. On our consolidated GAAP balance sheets, total debt, net, excluding debt securities for which the fair value
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option has been elected, is reported at amortized cost, which is net of deferred items, including premiums, discounts, and hedging-related basis adjustments.
For debt securities of consolidated trusts, the valuation techniques we use are similar to the techniques we use to value our investments in agency securities for GAAP purposes. See “Valuation Techniques for Assets and Liabilities Measured at Fair Value in Our Consolidated Balance Sheets — Investments in Securities — Mortgage-Related Securities — Agency Securities” for additional information regarding the valuation techniques we use.
Other debt includes short-term zero-coupon discount notes, callable debt, and non-callable debt. Short-term zero-coupon discount notes are valued using a yield analysis technique. Under this technique, the debt instruments are valued using published yield matrices which are based on the days to maturity of the debt and converted into a price. Significant inputs used in this technique are the published yield matrices. Short-term zero-coupon discount notes are classified as Level 2 as the significant inputs used are observable in active markets. Other debt securities, including both callable and non-callable debt, are valued using a single external source or median of external sources. These debt securities generally have observable market pricing and are classified as Level 2. However, certain other debt securities are classified as Level 3 when there is a low volume or level of activity in the market for those types of debt securities.
Total debt, net for which we have elected the fair value option includes certain debt securities of consolidated trusts held by third parties, foreign-currency denominated debt and certain other debt. We report these items at fair value on our GAAP consolidated balance sheets. See “Valuation Techniques for Assets and Liabilities Measured at Fair Value in Our Consolidated Balance Sheets — Debt Securities of Consolidated Trusts Held by Third Parties, at Fair Value” and “— Other Debt, at Fair Value” for additional information.
Guarantee Obligation
Our guarantee obligation is classified as Level 3 as significant inputs used in the fair value measurement are unobservable. The technique for estimating the fair value of our guarantee obligation is described in the “Mortgage Loans — Single-Family Loans” section above.
Fair Value Option
We elected the fair value option for certain types of investments in securities, multifamily held-for-sale mortgage loans, and certain debt.
Investments in Securities
We elected the fair value option for certain mortgage-related securities to better reflect the natural offset these securities provide to fair value changes recorded historically on our guarantee asset at the time of our election. In addition, upon adoption of the accounting guidance for the fair value option, we elected this option for securities within the scope of the accounting guidance for investments in beneficial interests in securitized financial assets to better reflect any valuation changes that would occur subsequent to impairment write-downs previously recorded on these instruments. Related interest income continues to be reported as interest income in our consolidated statements of comprehensive income. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Investments in Securities” in our 2012 Annual Report for additional information about the measurement and recognition of interest income on investments in securities. For information regarding the net unrealized gains (losses) on trading securities, which include gains (losses) for other items that are not selected for the fair value option, see Gains (loss) on trading securities within “Table 13.2 — Segment Earnings and Reconciliation to GAAP Results."
Multifamily Held-For-Sale Mortgage Loans
We elected the fair value option for multifamily mortgage loans that were purchased for securitization. These multifamily mortgage loans are classified as held-for-sale mortgage loans in our consolidated balance sheets to reflect our intent to sell in the future. Related interest income continues to be reported as interest income in our consolidated statements of comprehensive income. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Mortgage Loans” in our 2012 Annual Report for additional information about the measurement and recognition of interest income on our mortgage loans.
Debt Securities of Consolidated Trusts Held by Third Parties
We elected the fair value option for certain debt securities of consolidated trusts held by third parties. These consist of certain multifamily K certificates and certain REMIC interest-only mortgage-related debt securities. We elected the fair value option on these debt instruments as they contain embedded derivatives that require bifurcation. Fair value changes for debt securities of consolidated trusts held by third parties are recorded in gains (losses) on debt recorded at fair value in our consolidated statements of comprehensive income. Related interest expense continues to be reported as interest expense in our consolidated statements of comprehensive income. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
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POLICIES — Debt Securities Issued” in our 2012 Annual Report for additional information about the measurement and recognition of interest expense on debt securities issued.
Other Debt
We elected the fair value option for foreign-currency denominated debt and certain other debt securities. In the case of foreign-currency denominated debt, we have entered into derivative transactions that effectively convert these instruments to U.S. dollar denominated floating rate instruments. We elected the fair value option on these debt instruments to better reflect the economic offset that naturally results from the debt due to changes in interest rates. We also elected the fair value option for certain other debt securities containing potential embedded derivatives that required bifurcation. Fair value changes for debt for which we have elected the fair value option are recorded in gains (losses) on debt recorded at fair value in our consolidated statements of comprehensive income. Related interest expense continues to be reported as interest expense in our consolidated statements of comprehensive income. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Debt Securities Issued” in our 2012 Annual Report for additional information about the measurement and recognition of interest expense on debt securities issued.
The table below presents the fair value and UPB related to certain items for which we have elected the fair value option at September 30, 2013 and December 31, 2012.
Table 16.7 — Difference between Fair Value and Unpaid Principal Balance for Certain Financial Instruments with Fair Value Option Elected
September 30, 2013 | December 31, 2012 | ||||||||||||||
Multifamily Held-For-Sale Mortgage Loans | Other Debt - Long Term | Multifamily Held-For-Sale Mortgage Loans | Other Debt - Long Term | ||||||||||||
(in millions) | |||||||||||||||
Fair value | $ | 10,475 | $ | 2,031 | $ | 14,238 | $ | 2,187 | |||||||
Unpaid principal balance | 10,708 | 2,011 | 13,972 | 2,167 | |||||||||||
Difference | $ | (233 | ) | $ | 20 | $ | 266 | $ | 20 | ||||||
Changes in Fair Value under the Fair Value Option Election
We recorded gains (losses) of $113 million and $427 million for the three months ended September 30, 2013 and 2012, respectively, and $(441) million and $851 million for the nine months ended September 30, 2013 and 2012, respectively, from the change in fair value on multifamily held-for-sale mortgage loans recorded at fair value in other income in our consolidated statements of comprehensive income.
Gains (losses) on debt securities with the fair value option elected were $(28) million and $(10) million for the three months ended September 30, 2013 and 2012, respectively, and $(13) million and $35 million for the nine months ended September 30, 2013 and 2012, respectively, and were recorded in gains (losses) on debt recorded at fair value in our consolidated statements of comprehensive income.
Changes in fair value attributable to instrument-specific credit risk were not material for the three and nine months ended September 30, 2013 or 2012 for any assets or liabilities for which we elected the fair value option.
NOTE 17: LEGAL CONTINGENCIES
We are involved as a party in a variety of legal and regulatory proceedings arising from time to time in the ordinary course of business including, among other things, contractual disputes, personal injury claims, employment-related litigation and other legal proceedings incidental to our business. We are frequently involved, directly or indirectly, in litigation involving mortgage foreclosures. From time to time, we are also involved in proceedings arising from our termination of a seller/servicer’s eligibility to sell mortgages to, and/or service mortgages for, us. In these cases, the former seller/servicer sometimes seeks damages against us for wrongful termination under a variety of legal theories. In addition, we are sometimes sued in connection with the origination or servicing of mortgages. These suits typically involve claims alleging wrongful actions of seller/servicers. Our contracts with our seller/servicers generally provide for indemnification against liability arising from their wrongful actions with respect to mortgages sold to or serviced for Freddie Mac.
Litigation and claims resolution are subject to many uncertainties and are not susceptible to accurate prediction. In accordance with the accounting guidance for contingencies, we reserve for litigation claims and assessments asserted or threatened against us when a loss is probable (as defined in such guidance) and the amount of the loss can be reasonably estimated.
During the nine months ended September 30, 2013, we paid approximately $7 million for the advancement of legal fees and expenses of former officers and directors pursuant to our indemnification obligations to them. These fees and expenses
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related to certain of the matters described below. This figure does not include certain administrative support costs and certain costs related to document production and storage.
Putative Securities Class Action Lawsuits
Ohio Public Employees Retirement System (“OPERS”) vs. Freddie Mac, Syron, et al. This putative securities class action lawsuit was filed against Freddie Mac and certain former officers on January 18, 2008 in the U.S. District Court for the Northern District of Ohio purportedly on behalf of a class of purchasers of Freddie Mac stock from August 1, 2006 through November 20, 2007. FHFA later intervened as Conservator. The plaintiff alleges that the defendants violated federal securities laws by making false and misleading statements concerning our business, risk management and the procedures we put into place to protect the company from problems in the mortgage industry. The plaintiff seeks unspecified damages and interest, and reasonable costs and expenses, including attorney and expert fees. The plaintiff amended its complaint on several occasions. Defendants filed motions to dismiss the second and third amended complaints, which the Court denied. On April 13, 2013, the judge who had presided over the case since 2008 recused himself, and the case was reassigned to a new judge. On August 23, 2013, the new judge granted defendants' motion to vacate the previous judge's orders denying our motions to dismiss. Defendants filed a new motion to dismiss the complaint on October 8, 2013. Discovery has been stayed.
At present, it is not possible for us to predict the probable outcome of this lawsuit or any potential effect on our business, financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible loss or range of possible loss in the event of an adverse judgment in the foregoing matter due to the following factors, among others: the inherent uncertainty of pre-trial litigation; the fact that the Court has not yet ruled upon defendants' new motion to dismiss the complaint; and the fact that the Court has not yet ruled upon motions for class certification or summary judgment. In particular, absent the certification of a class, the identification of a class period, and the identification of the alleged statement or statements that survive dispositive motions, we cannot reasonably estimate any possible loss or range of possible loss.
Kuriakose vs. Freddie Mac, Syron, Piszel and Cook. Another putative class action lawsuit was filed against Freddie Mac and certain former officers on August 15, 2008 in the U.S. District Court for the Southern District of New York for alleged violations of federal securities laws. The case is purportedly brought on behalf of a class of purchasers of Freddie Mac stock from November 21, 2007 through September 7, 2008. FHFA later intervened as Conservator. The plaintiffs claimed that defendants made false and misleading statements about Freddie Mac’s business that artificially inflated the price of Freddie Mac’s common stock, and sought unspecified damages, costs, and attorneys’ fees. The plaintiffs twice amended their complaint, and sought leave to amend a third time. On September 24, 2012, the Court granted with prejudice defendants’ motions to dismiss plaintiffs’ second amended complaint in its entirety, denied plaintiffs’ motion to file a third amended complaint, and directed that the case be closed. Judgment was entered in favor of the defendants on September 27, 2012. On October 26, 2012, plaintiffs filed a notice of appeal in the U.S. Court of Appeals for the Second Circuit. By order dated November 5, 2013, the U.S. Court of Appeals for the Second Circuit affirmed the District Court's decisions granting defendants' motions to dismiss and denying plaintiffs' motion to file a third amended complaint.
At present, it is not possible for us to predict the probable outcome of this lawsuit or any potential effect on our business, financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible loss or range of possible loss in the event of an adverse judgment in the foregoing matter due to the following factors, among others: the inherent uncertainty of the appellate process, including the outcome of any petition for rehearing, rehearing en banc or for certiorari; the inherent uncertainty of pre-trial litigation in the event the case is ultimately remanded to the District Court in whole or in part; and the fact that the parties have not briefed and the District Court has not yet ruled upon motions for class certification or summary judgment. In particular, absent resolution of the appellate process, the certification of a class, the identification of a class period, and the identification of the alleged statement or statements that survive dispositive motions, we cannot reasonably estimate any possible loss or range of possible loss.
Related Third Party Litigation and Indemnification Requests
On December 16, 2011, the SEC announced that it had charged three former executives of Freddie Mac with securities laws violations. These executives are former Chairman of the Board and Chief Executive Officer Richard F. Syron, former Executive Vice President and Chief Business Officer Patricia L. Cook, and former Executive Vice President for the single-family guarantee business Donald J. Bisenius.
On September 23, 2008, a plaintiff filed a putative class action securities lawsuit in the U.S. District Court for the Southern District of New York styled Mark vs. Goldman, Sachs & Co., J.P. Morgan Chase & Co., and Citigroup Global Markets Inc. On January 29, 2009, another plaintiff filed a putative class action lawsuit in the same Court styled Kreysar vs. Syron, et al. The cases, which were subsequently consolidated by the Court, concern the company’s November 29, 2007 public offering of $6 billion of 8.375% Fixed to Floating Rate Non-Cumulative Perpetual Preferred Stock.
In the consolidated complaint, plaintiffs alleged that three former Freddie Mac officers (including Syron and former Executive Vice President and Chief Financial Officer Anthony S. Piszel), certain underwriters and Freddie Mac’s auditor violated federal securities laws by making material false and misleading statements in connection with the company’s November 2007 public offering. The complaint further alleged that certain defendants and others made additional false
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statements following the offering. After a series of motions and amendments to the complaint, only Syron and Piszel remain as defendants.
The plaintiffs moved for class certification, which motion was ultimately denied by the Court. On May 31, 2012, the U.S. Court of Appeals for the Second Circuit denied plaintiffs’ motion for leave to appeal on an interlocutory basis the denial of class certification. In August 2012, plaintiffs sought leave to file another motion for class certification, which request the Court denied on September 25, 2012.
Freddie Mac is not named as a defendant in the consolidated lawsuit, but the underwriters previously gave notice to Freddie Mac of their intention to seek full indemnity and contribution under the underwriting agreement in this case, including reimbursement of fees and disbursements of their legal counsel. At present, it is not possible for us to predict the probable outcome of the lawsuit or any potential effect on our business, financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible loss or range of possible loss in the event of an adverse judgment in the foregoing matter due to the inherent uncertainty of litigation and the fact that plaintiffs may appeal the denial of class certification. Absent the certification of a specified class, the identification of a class period, and the identification of the alleged statement or statements that survive dispositive motions, we cannot reasonably estimate any possible loss or range of possible loss.
Two other lawsuits have been filed against certain underwriters of the company’s November 2007 public offering. Plaintiffs in the cases generally allege that the underwriters made materially misleading statements and omissions in connection with the offering. Freddie Mac is not named as a defendant in either lawsuit. On July 6, 2011, a lawsuit styled Liberty Mutual Insurance Company, Peerless Insurance Company, Employers Insurance Company of Wausau, Safeco Corporation and Liberty Life Assurance Company of Boston vs. Goldman, Sachs & Co. was filed in the U.S. District Court for Massachusetts. In a second lawsuit, Western and Southern Life Insurance Company and others asserted claims against GS Mortgage Securities Corp., Goldman Sachs Mortgage Company and Goldman Sachs & Co. in the Court of Common Pleas, Hamilton County, Ohio.
Lehman Bankruptcy
On September 15, 2008, Lehman filed a chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the Southern District of New York. Thereafter, many of Lehman’s U.S. subsidiaries and affiliates also filed bankruptcy petitions (collectively, the “Lehman Entities”). Freddie Mac had numerous relationships with the Lehman Entities which gave rise to several claims. On September 22, 2009, Freddie Mac filed proofs of claim in the Lehman bankruptcies aggregating approximately $2.1 billion. On December 6, 2011, the Court confirmed Lehman’s chapter 11 plan of liquidation, which provides for the liquidation of the bankruptcy estate’s assets over the next three years. Our most significant claims are a $1.2 billion claim relating to losses incurred on short-term lending transactions with certain Lehman Entities and an $868 million claim relating to Lehman’s repurchase obligations. The plan addresses these claims as follows:
• | The plan leaves open for subsequent determination whether our claim relating to the short-term lending transactions will be accorded priority status. The Lehman estate has set aside $1.2 billion to be available for payment of our claim in full if, after litigation or settlement, this claim is allowed as a priority claim. In the event that this claim is not ultimately accorded priority status, it will be treated as a senior unsecured claim under the plan, pursuant to which Freddie Mac would ultimately receive an estimated distribution of approximately 21% (or approximately $250 million). On September 13, 2013, Lehman filed its motion to classify and allow the claim as a senior unsecured claim, which Freddie Mac has opposed. The issue of the proper classification of the claim is, therefore, now in litigation between the parties. |
• | The plan does not adjudge or allow our claim relating to Lehman’s repurchase obligations, and instead permits claims allowance proceedings to continue. To the extent this claim is allowed, it will be treated as a general unsecured claim, for which Freddie Mac would ultimately receive a distribution of approximately 19.9% of the allowed amount. |
Taylor, Bean & Whitaker and Ocala Funding, LLC Bankruptcies
On August 24, 2009, TBW, which had been one of our single-family seller/servicers, filed for bankruptcy in the U.S. Bankruptcy Court for the Middle District of Florida. We entered into a settlement regarding the TBW bankruptcy in 2011. However, we continue to be involved in certain matters relating to the TBW bankruptcy, as described below.
On July 10, 2012, Ocala Funding, LLC, or Ocala, which is a wholly owned subsidiary of TBW, filed for bankruptcy in the U.S. Bankruptcy Court for the Middle District of Florida. In connection with the bankruptcy filing, Ocala also filed a motion seeking an examination of and subsequent document discovery from Freddie Mac and FHFA, asserting that it has “viable, legitimate and valuable causes of action against Freddie Mac” to recover approximately $805 million of funds that were allegedly transferred from Ocala to Freddie Mac custodial accounts maintained by TBW, prior to the TBW bankruptcy. In its filings, Ocala also indicated that it wishes to use the examination to obtain information relating to whether it may have other claims against Freddie Mac relating to TBW’s fraudulent conduct prior to the TBW bankruptcy. In June 2013, the Court confirmed Ocala’s plan of liquidation. The plan established a liquidation trust, and authorizes it to investigate and initiate actions to recover on claims and causes of action, such as those asserted against Freddie Mac. Discovery is proceeding.
On or about May 14, 2010, certain underwriters at Lloyds, London and London Market Insurance Companies brought an adversary proceeding in the U.S. Bankruptcy Court for the Middle District of Florida against TBW, Freddie Mac and other
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parties seeking a declaration rescinding $90 million of mortgage bankers bonds providing fidelity and errors and omissions insurance coverage. Several excess insurers on the bonds thereafter filed similar claims in that action. Freddie Mac has filed a proof of loss under the bonds. The underwriters moved for partial summary judgment against Freddie Mac in April 2013. Discovery is proceeding. We are unable at this time to estimate our potential recovery, if any, in this case.
IRS Litigation
In 2010 and 2011, we received Statutory Notices from the IRS assessing a total of $3.0 billion of additional income taxes and penalties for the 1998 to 2007 tax years. We filed a petition with the U.S. Tax Court on October 22, 2010 in response to the Statutory Notices for the 1998 to 2005 tax years and, in 2012, paid the tax assessed in the Statutory Notices for the years 2006 and 2007 of $36 million. In the fourth quarter of 2012 we reached an agreement in principle with the IRS for all years, including 2006 and 2007, to favorably resolve the matters in dispute and reduced the previously unrecognized tax benefits to zero. We are currently working with the IRS to finalize the stipulation of settled issues and closing agreement, and expect that a final decision can be entered within the next 12 months.
Lawsuits Involving Real Estate Transfer Taxes
Beginning in 2011 in Michigan, counties in numerous states filed lawsuits challenging Freddie Mac and Fannie Mae’s statutory exemption from real estate transfer taxes imposed on the transfer of real property for which Freddie Mac or Fannie Mae was the grantor or grantee. Currently, approximately 35 lawsuits are pending in 21 states and the District of Columbia, including 24 appeals. We have received 35 favorable court rulings, and the one unfavorable ruling in Michigan was overturned on appeal in May 2013. Plaintiffs in these cases are generally seeking a declaration that Freddie Mac and Fannie Mae are not exempt from transfer taxes, damages for unpaid transfer taxes, as well as other items, which may include penalties, interest, liquidated penalties, pre-judgment interest, costs and attorneys’ fees. In these actions, FHFA, Freddie Mac and Fannie Mae assert that the enterprises are not liable for the transfer taxes based on federal statutory tax exemptions applicable to each.
At present, it is not possible for us to predict the probable outcome of these lawsuits or any potential effect on our business, financial condition, liquidity, or results of operation. In addition, we are unable to reasonably estimate the possible loss or range of possible loss with respect to these lawsuits due to the following factors, among others: (a) none of the plaintiffs have demanded a stated amount of damages they believe are due; and (b) discovery regarding the amount of damages has not yet been conducted.
LIBOR Lawsuit
On March 14, 2013, Freddie Mac filed a lawsuit in the U.S. District Court for the Eastern District of Virginia against the British Bankers Association and the 16 U.S. Dollar LIBOR panel banks and a number of their affiliates. The case was subsequently transferred to the U.S. District Court for the Southern District of New York. The complaint alleges, among other things, that the defendants fraudulently and collusively suppressed LIBOR, a benchmark interest rate indexed to trillions of dollars of financial products, and asserts claims for antitrust violations, breach of contract, tortious interference with contract and fraud. Freddie Mac filed an amended complaint on July 22, 2013.
Litigation Concerning the Purchase Agreement
In July and September 2013, four lawsuits were filed against us in the U.S. District Court for the District of Columbia concerning the August 2012 amendment to the Purchase Agreement. It is possible that similar lawsuits will be filed in the future. The lawsuits are as follows:
• | A putative class action lawsuit filed on July 29, 2013 styled Cacciapelle and Bareiss vs. Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and FHFA; |
• | A putative class action lawsuit filed on July 30, 2013 styled American European Insurance Company vs. Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and FHFA; |
• | A putative class action and shareholder derivative lawsuit filed on September 18, 2013 styled Marneu Holdings, Co. vs. FHFA, Treasury, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation; and |
• | A lawsuit filed on September 20, 2013 styled Arrowood Indemnity Company vs. Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, FHFA and Treasury. |
The Cacciapelle and American European Insurance Company lawsuits were filed purportedly on behalf of a class of purchasers of junior preferred stock issued by Freddie Mac or Fannie Mae who held stock prior to, and as of, August 17, 2012. The Marneu lawsuit was filed purportedly on behalf of a class of purchasers of junior preferred stock and purchasers of common stock issued by Freddie Mac or Fannie Mae over a not-yet-defined period of time. Plaintiffs in the Arrowood lawsuit are holders of junior preferred stock issued by Freddie Mac and Fannie Mae. (For purposes of this discussion, junior preferred stock refers to the various series of preferred stock of Freddie Mac and Fannie Mae other than the senior preferred stock issued to Treasury.)
In the lawsuits, plaintiffs allege that, in amending the Purchase Agreement in August 2012 (which amendment implemented the net worth sweep dividend provisions of the senior preferred stock), Freddie Mac and Fannie Mae breached their respective contracts with the holders of junior preferred stock and common stock and breached the covenant of good faith
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and fair dealing inherent in such contracts. Plaintiffs seek unspecified damages, equitable and injunctive relief, and costs and expenses, including attorney and expert fees. Plaintiffs in the Arrowood lawsuit also request that, if injunctive relief is not granted, the Arrowood plaintiffs be awarded damages against the defendants in an amount to be determined including, but not limited to, the aggregate par value of their junior preferred stock, the total of which they state is $42,297,500.
Plaintiffs in the Marneu and Arrowood lawsuits also make certain claims against, and seek certain remedies from, Treasury and FHFA.
The Court has directed the parties in these four cases, as well as six other related cases, to submit a joint status report by November 6, 2013, outlining the best way to handle the litigation going forward.
At present, it is not possible for us to predict the probable outcome of these lawsuits or any potential effect on our business, financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible loss or range of possible loss in the event of an adverse judgment in the foregoing matters due to a number of factors, including the inherent uncertainty of pre-trial litigation. In addition, with respect to the Cacciapelle, American European Insurance Company and Marneu lawsuits, the plaintiffs have not demanded a stated amount of damages they believe are due and the Court has not certified a class.
On October 22, 2013, we received a letter addressed to the Chief Executive Officer, the Board of Directors and the Acting Director of FHFA, purportedly on behalf of holders of common stock and junior preferred stock of Freddie Mac. The letter demands that Freddie Mac commence legal action against the U.S. government to recover all losses sustained by Freddie Mac as a result of the August 2012 amendment to the Purchase Agreement. The letter also demands that Freddie Mac take action to terminate the August 2012 amendment to the Purchase Agreement.
NOTE 18: REGULATORY CAPITAL
On October 9, 2008, FHFA announced that it was suspending capital classification of us during conservatorship in light of the Purchase Agreement. FHFA continues to closely monitor our capital levels, but the existing statutory and FHFA-directed regulatory capital requirements are not binding during conservatorship. We continue to provide our quarterly submission to FHFA on minimum capital, but no longer provide our submission on risk-based capital.
Our regulatory minimum capital is a leverage-based measure that is generally calculated based on GAAP and reflects a 2.50% capital requirement for on-balance sheet assets and a 0.45% capital requirement for off-balance sheet obligations. Based upon our adoption of amendments to the accounting guidance for transfers of financial assets and consolidation of VIEs, we determined that, under the new consolidation guidance, we are the primary beneficiary of trusts that issue our single-family PCs and certain Other Guarantee Transactions and, therefore, effective January 1, 2010, we consolidated on our balance sheet the assets and liabilities of these trusts. Pursuant to regulatory guidance from FHFA, our minimum capital requirement was not automatically affected by adoption of these amendments. Specifically, upon adoption of these amendments, FHFA directed us, for purposes of minimum capital, to continue reporting single-family PCs and certain Other Guarantee Transactions held by third parties using a 0.45% capital requirement. FHFA reserves the authority under the GSE Act to raise the minimum capital requirement for any of our assets or activities.
The table below summarizes our minimum capital requirements and deficits and net worth.
Table 18.1 — Net Worth and Minimum Capital
September 30, 2013 | December 31, 2012 | ||||||
(in millions) | |||||||
GAAP net worth(1) | $ | 33,436 | $ | 8,827 | |||
Core capital (deficit)(2)(3) | $ | (37,672 | ) | $ | (60,571 | ) | |
Less: Minimum capital requirement(2) | 22,025 | 22,063 | |||||
Minimum capital surplus (deficit)(2) | $ | (59,697 | ) | $ | (82,634 | ) | |
(1) | Net worth (deficit) represents the difference between our assets and liabilities under GAAP. |
(2) | Core capital and minimum capital figures for September 30, 2013 are estimates. FHFA is the authoritative source for our regulatory capital. |
(3) | Core capital excludes certain components of GAAP total equity (deficit) (i.e., AOCI and the liquidation preference of the senior preferred stock) as these items do not meet the statutory definition of core capital. |
Following our entry into conservatorship and consistent with the objectives of conservatorship, we have focused our risk and capital management on, among other things, maintaining a positive balance of GAAP equity in order to reduce the likelihood that we will need to make additional draws on the Purchase Agreement with Treasury. The Purchase Agreement provides that, if FHFA determines as of quarter end that our liabilities have exceeded our assets under GAAP, Treasury will contribute funds to us in an amount at least equal to the difference between such liabilities and assets.
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Under the GSE Act, FHFA must place us into receivership if FHFA determines in writing that our assets are and have been less than our obligations for a period of 60 days. FHFA has 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 has 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. If funding has been requested under the Purchase Agreement to address a deficit in our net worth, and Treasury is unable to provide us with such funding within the 60-day period specified by FHFA, FHFA would be required to place us into receivership if our assets remain less than our obligations during that 60-day period.
At September 30, 2013, our assets exceeded our liabilities under GAAP; therefore no draw is being requested from Treasury under the Purchase Agreement. As of September 30, 2013, our aggregate funding received from Treasury under the Purchase Agreement was $71.3 billion. This aggregate funding amount does not include the initial $1.0 billion liquidation preference of senior preferred stock that we issued to Treasury in September 2008 as an initial commitment fee and for which no cash was received. We paid quarterly dividends of $5.8 billion, $7.0 billion and $4.4 billion on the senior preferred stock in cash in March 2013, June 2013, and September 2013, respectively, at the direction of the Conservator.
NOTE 19: SELECTED FINANCIAL STATEMENT LINE ITEMS
Settlement agreements primarily related to lawsuits regarding our investments in certain non-agency mortgage-related securities are significant components of other income during the three and nine months ended September 30, 2013 and 2012. For more information, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Agency and Non-Agency Mortgage-Related Security Issuers.”
The table below presents the significant components of other assets and other liabilities on our consolidated balance sheets.
Table 19.1 — Significant Components of Other Assets and Other Liabilities on Our Consolidated Balance Sheets
September 30, 2013 | December 31, 2012 | ||||||
(in millions) | |||||||
Other assets: | |||||||
Accounts and other receivables(1) | $ | 4,087 | $ | 10,091 | |||
Guarantee asset | 1,432 | 1,029 | |||||
All other | 2,451 | 2,645 | |||||
Total other assets | $ | 7,970 | $ | 13,765 | |||
Other liabilities: | |||||||
Servicer liabilities | $ | 2,406 | $ | 3,304 | |||
Guarantee obligation | 1,374 | 1,004 | |||||
Accounts payable and accrued expenses | 1,001 | 984 | |||||
All other | 1,098 | 807 | |||||
Total other liabilities | $ | 5,879 | $ | 6,099 | |||
(1) | Primarily consists of servicer receivables. |
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved as a party to a variety of legal proceedings arising from time to time in the ordinary course of business. See “NOTE 17: LEGAL CONTINGENCIES” for more information regarding our involvement as a party to various legal proceedings.
In addition, on July 9, 2013, plaintiffs filed a lawsuit in the U.S. District Court for the Southern District of Florida styled Samuels et al. vs. FHFA and DeMarco. Freddie Mac is not a party to this lawsuit. In the lawsuit, plaintiffs challenge FHFA’s decision to suspend Freddie Mac and Fannie Mae’s payments to an affordable housing trust fund managed by HUD. For more information, see "LEGAL PROCEEDINGS" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.
ITEM 1A. RISK FACTORS
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This Form 10-Q should be read together with the “RISK FACTORS” section in our 2012 Annual Report, which describes various risks and uncertainties to which we are or may become subject, and is supplemented by the discussion below. These risks and uncertainties could, directly or indirectly, adversely affect our business, financial condition, results of operations, cash flows, strategies, and/or prospects.
Sustained uncertainty relating to the U.S. government's inability to provide a long-term resolution to its budget and debt limit issues could adversely affect our business and financial results.
On October 17, 2013, President Obama signed legislation that reopened the federal government until January 15, 2014, and extended the federal statutory debt limit until February 7, 2014. The legislation also provided for budget negotiations over major deficit issues, which are to conclude by December 13, 2013. It is uncertain if Congress will be able to meet these or any future deadlines with respect to the federal budget and the debt limit. Sustained uncertainty relating to the U.S. government’s inability to provide a long-term resolution to its budget and debt limit issues could cause the U.S. and global financial markets to experience significant turmoil, perhaps over an extended period. This uncertainty could also have significant adverse impacts on the U.S. mortgage market and on our business and financial results. For example, yields on U.S. Treasury securities could increase, which could cause mortgage and market rates to increase. Increases in mortgage interest rates could cause mortgage originations to decrease, which could cause our purchase volumes to decrease. Increases in market interest rates could increase our funding costs. The value of U.S. Treasury securities and our ability to sell these securities could also be adversely affected, which would directly affect us, as we hold significant amounts of such securities. Given the uncertainty, we may hold elevated amounts of cash as opposed to investing that cash, resulting in a loss of potential interest income. We might not be able to obtain funding from Treasury, if needed, under the Purchase Agreement if the debt limit were reached and Treasury did not have sufficient funds to cover a draw request or the federal government were shut down. FHFA would be required to place us in receivership if Treasury is unable to provide requested funding. Also, it is possible that the credit ratings of the U.S. government could be downgraded, which would likely be followed by a downgrade in our credit ratings. In turn, this could adversely affect our liquidity and other aspects of our business. On October 16, 2013, Fitch placed our AAA-rated long-term Issuer Default Rating (IDR), as well as our senior long-term debt, short-term debt and subordinated debt ratings, on Rating Watch Negative (RWN). This action followed Fitch's placement of the U.S. government's debt rating on RWN. For additional information, see “MD&A — LIQUIDITY AND CAPITAL RESOURCES - Liquidity - Liquidity Management - Credit Ratings” in this Form 10-Q and “RISK FACTORS - Competitive and Market Risks - 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” in our 2012 Annual Report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
The securities we issue are “exempted securities” under the Securities Act of 1933, as amended. As a result, we do not file registration statements with the SEC with respect to offerings of our securities.
Following our entry into conservatorship, we suspended the operation of, and ceased making grants under, equity compensation plans. Previously, we had provided equity compensation under those plans to employees and members of our Board of Directors. Under the Purchase Agreement, we cannot issue any new options, rights to purchase, participations, or other equity interests without Treasury’s prior approval. However, grants outstanding as of the date of the Purchase Agreement remain in effect in accordance with their terms.
No stock options were exercised during the three months ended September 30, 2013. See “NOTE 11: STOCKHOLDERS’ EQUITY (DEFICIT)” in our 2012 Annual Report for more information.
Dividend Restrictions
Our payment of dividends on Freddie Mac common stock or any series of Freddie Mac preferred stock (other than senior preferred stock) is subject to certain restrictions as described in “MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES — Dividends and Dividend Restrictions” in our 2012 Annual Report.
Information about Certain Securities Issuances by Freddie Mac
Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a material direct financial obligation or become directly or contingently liable for a material obligation under an off-balance sheet arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03 or, if the obligation is incurred in connection with certain types of securities offerings, in prospectuses for that offering that are filed with the SEC.
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Freddie Mac’s securities offerings are exempted from SEC registration requirements. As a result, we are not required to and do not file registration statements or prospectuses with the SEC with respect to our securities offerings. To comply with the disclosure requirements of Form 8-K relating to the incurrence of material financial obligations, we report our incurrence of these types of obligations either in offering circulars (or supplements thereto) that we post on our web site or in a current report on Form 8-K, in accordance with a “no-action” letter we received from the SEC staff. In cases where the information is disclosed in an offering circular posted on our web site, the document will be posted on our web site within the same time period that a prospectus for a non-exempt securities offering would be required to be filed with the SEC.
The web site address for disclosure about our debt securities, other than debt securities of consolidated trusts, is www.freddiemac.com/debt. From this address, investors can access the offering circular and related supplements for debt securities offerings under Freddie Mac’s global debt facility, including pricing supplements for individual issuances of debt securities.
Disclosure about the mortgage-related securities we issue, some of which are off-balance sheet obligations, can be found at www.freddiemac.com/mbs. From this address, investors can access information and documents about our mortgage-related securities, including offering circulars and related offering circular supplements.
ITEM 6. EXHIBITS
The exhibits are listed in the Exhibit Index at the end of this Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Federal Home Loan Mortgage Corporation | ||
By: | /s/ Donald H. Layton | |
Donald H. Layton | ||
Chief Executive Officer | ||
Date: November 7, 2013
By: | /s/ Ross J. Kari | |
Ross J. Kari | ||
Executive Vice President — Chief Financial Officer | ||
(Principal Financial Officer) | ||
Date: November 7, 2013
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GLOSSARY
This Glossary includes acronyms and defined terms that are used throughout this report.
Administration — Executive branch of the U.S. government.
Agency securities — Generally refers to mortgage-related securities issued by the GSEs or government agencies.
Alt-A loan — Although there is no universally accepted definition of Alt-A, many mortgage market participants classify single-family loans with credit characteristics that range between their prime and subprime categories as Alt-A because these loans have a combination of characteristics of each category, may be underwritten with lower or alternative income or asset documentation requirements compared to a full documentation mortgage loan, or both. In determining our Alt-A exposure on loans underlying our single-family credit guarantee portfolio, we classified mortgage loans as Alt-A if the lender that delivers them to us classified the loans as Alt-A, or if the loans had reduced documentation requirements as well as a combination of certain credit characteristics and expected performance characteristics at acquisition which, when compared to full documentation loans in our portfolio, indicate that the loan should be classified as Alt-A. In the event we purchase a refinance mortgage in either our relief refinance mortgage initiative or in another mortgage refinance initiative 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 mortgage in this report and our other financial reports because the new refinance loan replacing the original loan would not be identified by the 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. For non-agency mortgage-related securities that are backed by Alt-A loans, we categorize our investments in non-agency mortgage-related securities as Alt-A if the securities were identified as such based on information provided to us when we entered into these transactions.
AOCI — Accumulated other comprehensive income (loss), net of taxes
ARM — Adjustable-rate mortgage — A mortgage loan with an interest rate that adjusts periodically over the life of the mortgage loan based on changes in a benchmark index.
Bond insurers — Companies that provide credit insurance principally covering securitized assets in both the primary issuance and secondary markets.
BPs — Basis points — One one-hundredth of 1%. This term is commonly used to quote the yields of debt instruments or movements in interest rates.
Cash and other investments portfolio — Our cash and other investments portfolio is comprised of our cash and cash equivalents, federal funds sold and securities purchased under agreements to resell, and investments in non-mortgage-related securities.
Charter — The Federal Home Loan Mortgage Corporation Act, as amended, 12 U.S.C. § 1451 et seq.
CMBS — Commercial mortgage-backed security — A security backed by mortgages on commercial property (often including multifamily rental properties) rather than one-to-four family residential real estate. Although the mortgage pools underlying CMBS can include mortgages financing multifamily properties and commercial properties, such as office buildings and hotels, the classes of CMBS that we hold receive distributions of scheduled cash flows only from multifamily properties. Military housing revenue bonds are included as CMBS within investments-related disclosures. We have not identified CMBS as either subprime or Alt-A securities.
Comprehensive income (loss) — Consists of net income (loss) plus total other comprehensive income (loss).
Conforming loan/Conforming jumbo loan/Conforming loan limit — A conventional single-family mortgage loan with an original principal balance that is equal to or less than the applicable statutory conforming loan limit, which is a dollar amount cap on the size of the original principal balance of single-family mortgage loans we are permitted by law to purchase or securitize. The conforming loan limit is determined annually based on changes in FHFA’s housing price index. Any decreases in the housing price index are accumulated and used to offset any future increases in the housing price index so that statutory conforming loan limits do not decrease from year-to-year. Since 2006, the base conforming loan limit for a one-family residence has been set at $417,000, and higher limits have been established in certain “high-cost” areas (currently, up to $625,500 for a one-family residence). Higher limits also apply to two- to four-family residences, and for mortgages secured by properties in Alaska, Guam, Hawaii and the U.S. Virgin Islands.
Actual high-cost area loan limits are set by FHFA for each county (or equivalent), and the loan limit for specific high-cost areas may be lower than the maximum amounts. We refer to loans that we have purchased with UPB exceeding the base conforming loan limit (i.e., $417,000) as conforming jumbo loans.
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Beginning in 2008, pursuant to a series of laws, our loan limits in certain high-cost areas were increased temporarily above the limits that otherwise would have been applicable (up to $729,750 for a one-family residence). The latest of these increases expired on September 30, 2011.
Conservator — The Federal Housing Finance Agency, acting in its capacity as conservator of Freddie Mac.
Convexity — A measure of how much a financial instrument’s duration changes as interest rates change.
Core spread income — Refers to a fair value estimate of the net current period accrual of income from the spread between mortgage-related investments and debt, calculated on an option-adjusted basis.
Credit enhancement — Any number of different financial arrangements that are designed to reduce credit risk by partially or fully compensating an investor in the event of certain financial losses. Examples of credit enhancements include mortgage insurance, overcollateralization, indemnification agreements, and government guarantees.
Credit losses — Consists of charge-offs and REO operations expense.
Credit-related (benefit) expense (or credit-related expense) — Consists of our provision (benefit) for credit losses and REO operations expense.
Deed in lieu of foreclosure — An alternative to foreclosure in which the borrower voluntarily conveys title to the property to the lender and the lender accepts such title (sometimes together with an additional payment by the borrower) in full satisfaction of the mortgage indebtedness.
Delinquency — A failure to make timely payments of principal or interest on a mortgage loan. For single-family mortgage loans, we generally report delinquency rate information based on the number of loans that are seriously delinquent. For multifamily loans, we report delinquency rate information based on the UPB of loans that are two monthly payments or more past due or in the process of foreclosure.
Derivative — A financial instrument whose value depends upon the characteristics and value of an underlying financial asset or index, such as a security or commodity price, interest or currency rates, or other financial indices.
Dodd-Frank Act — Dodd-Frank Wall Street Reform and Consumer Protection Act.
Dollar roll transactions — Transactions whereby we enter into an agreement to sell and subsequently repurchase (or purchase and subsequently resell) agency securities.
DSCR — Debt Service Coverage Ratio — An indicator of future credit performance for multifamily loans. The DSCR estimates a multifamily borrower’s ability to service its mortgage obligation using the secured property’s cash flow, after deducting non-mortgage expenses from income. The higher the DSCR, the more likely a multifamily borrower will be able to continue servicing its mortgage obligation.
Duration — Duration is a measure of a financial instrument’s price sensitivity to changes in interest rates.
Duration gap — One of our primary interest-rate risk measures. Duration gap is a measure of the difference between the estimated durations of our interest rate sensitive assets and liabilities. We present the duration gap of our financial instruments in units expressed as months. A duration gap of zero implies that the change in value of our interest rate sensitive assets from an instantaneous change in interest rates would be expected to be accompanied by an equal and offsetting change in the value of our debt and derivatives, thus leaving the net fair value of equity unchanged.
Effective rent — The average rent actually paid by the tenant over the term of a lease.
Euribor — Euro Interbank Offered Rate
Exchange Act — Securities and Exchange Act of 1934, as amended
Fannie Mae — Federal National Mortgage Association
FASB — Financial Accounting Standards Board
FDIC — Federal Deposit Insurance Corporation
Federal Reserve — Board of Governors of the Federal Reserve System
FHA — Federal Housing Administration
FHFA — Federal Housing Finance Agency — An independent agency of the U.S. government with responsibility for regulating Freddie Mac, Fannie Mae, and the FHLBs.
FHLB — Federal Home Loan Bank
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FICO score — A credit scoring system developed by Fair, Isaac and Co. FICO scores are the most commonly used credit scores today. FICO scores are ranked on a scale of approximately 300 to 850 points with a higher value indicating a lower likelihood of credit default.
Fixed-rate mortgage — Refers to a mortgage originated at a specific rate of interest that remains constant over the life of the loan. For purposes of presentation in this report and elsewhere in our reporting, we have categorized a number of modified loans as fixed-rate loans (instead of as adjustable rate loans), even though the modified loans have rate adjustment provisions. In these cases, while the terms of the modified loans provide for the interest rate to adjust in the future, such future rates are determined at the time of the modification rather than at a subsequent date.
Foreclosure alternative — A workout option pursued when a home retention action is not successful or not possible. A foreclosure alternative is either a short sale or deed in lieu of foreclosure.
Foreclosure transfer — Refers to our completion of a transaction provided for by the foreclosure laws of the applicable state, in which a delinquent borrower’s ownership interest in a mortgaged property is terminated and title to the property is transferred to us or to a third party. State foreclosure laws commonly refer to such transactions as foreclosure sales, sheriff’s sales, or trustee’s sales, among other terms. When we, as mortgage holder, acquire a property in this manner, we pay for it by extinguishing some or all of the mortgage debt.
Freddie Mac mortgage-related securities — Securities we issue and guarantee, including PCs, REMICs and Other Structured Securities, and Other Guarantee Transactions.
GAAP — Generally accepted accounting principles in the United States of America.
Ginnie Mae — Government National Mortgage Association
GSE Act — The Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Reform Act.
GSEs — Government sponsored enterprises — Refers to certain legal entities created by the U.S. government, including Freddie Mac, Fannie Mae, and the FHLBs.
Guarantee fee — The fee that we receive for guaranteeing the payment of principal and interest to mortgage security investors, which consists primarily of a combination of management and guarantee fees paid on a monthly basis, as a percentage of the UPB of the underlying loans, and initial upfront payments, such as delivery fees.
HAFA — Home Affordable Foreclosures Alternative program — In 2009, the Treasury Department introduced the HAFA program to provide an option for HAMP-eligible homeowners who are unable to keep their homes. The HAFA program took effect on April 5, 2010 and we implemented it effective August 1, 2010.
HAMP — Home Affordable Modification Program — Refers to the effort under the MHA Program whereby the U.S. government, Freddie Mac and Fannie Mae commit funds to help eligible homeowners avoid foreclosure and keep their homes through mortgage modifications.
HARP — Home Affordable Refinance Program — Refers to the effort under the MHA Program that seeks to help eligible borrowers with existing loans that are guaranteed by us or Fannie Mae to refinance into loans with more affordable monthly payments and/or fixed-rate terms without obtaining new mortgage insurance in excess of what is already in place. Originally, only borrowers who had mortgages sold to Freddie Mac or Fannie Mae with note dates on or before May 31, 2009 with current LTV ratios above 80% (and up to 125%) were eligible to refinance their mortgages under the program. In October 2011, HARP was expanded to allow eligible borrowers who have mortgages with current LTV ratios above 125% to refinance under the program. The relief refinance initiative, under which we also allow borrowers with LTV ratios of 80% and below to participate, is our implementation of HARP for our loans.
HFA — State or local Housing Finance Agency
HFA initiative — An initiative among Treasury, FHFA, Freddie Mac, and Fannie Mae that commenced in 2009. Under the HFA initiative, we and Fannie Mae provide assistance to state and local HFAs so that the HFAs can continue to meet their mission of providing affordable financing for both single-family and multifamily housing. The HFA initiative includes the NIBP and the TCLFP.
HUD — U.S. Department of Housing and Urban Development —HUD has authority over Freddie Mac with respect to fair lending.
Implied volatility — A measurement of how the value of a financial instrument changes due to changes in the market’s expectation of potential changes in future interest rates. A decrease in implied volatility generally increases the estimated fair value of our mortgage assets and decreases the estimated fair value of our callable debt and options-based derivatives, while an increase in implied volatility generally has the opposite effect.
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Initial margin — The collateral that we post with a derivatives clearinghouse in order to do business with such clearinghouse. The amount of initial margin varies over time.
Interest-only loan — A mortgage loan that allows the borrower to pay only interest (either fixed-rate or adjustable-rate) for a fixed period of time before principal amortization payments are required to begin. After the end of the interest-only period, the borrower can choose to refinance the loan, pay the principal balance in total, or begin paying the monthly scheduled principal due on the loan.
IRS — Internal Revenue Service
K Certificates — Multifamily regularly-issued, structured pass-through securities backed primarily by recently originated multifamily mortgage loans. We categorize K Certificates that we guarantee as Other Guarantee Transactions. See “Other Guarantee Transactions” for more information. Also includes non-guaranteed K Certificates.
LIBOR — London Interbank Offered Rate
LIHTC partnerships — Low-income housing tax credit partnerships — Prior to 2008, we invested as a limited partner in LIHTC partnerships, which are formed for the purpose of providing funding for affordable multifamily rental properties. These LIHTC partnerships invest directly in limited partnerships that own and operate multifamily rental properties that generate federal income tax credits and deductible operating losses.
Liquidation preference — Generally refers to an amount that holders of preferred securities are entitled to receive out of available assets, upon liquidation of a company. The initial liquidation preference of our senior preferred stock was $1.0 billion. The aggregate liquidation preference of our senior preferred stock includes the initial liquidation preference plus amounts funded by Treasury under the Purchase Agreement. In addition, dividends and periodic commitment fees not paid in cash are added to the liquidation preference of the senior preferred stock. We may make payments to reduce the liquidation preference of the senior preferred stock only in limited circumstances.
LTV ratio — Loan-to-value ratio — The ratio of the unpaid principal amount of a mortgage loan to the value of the property that serves as collateral for the loan, expressed as a percentage. Loans with high LTV ratios generally tend to have a higher risk of default and, if a default occurs, a greater risk that the amount of the gross loss will be high compared to loans with lower LTV ratios. We report LTV ratios based solely on the amount of the loan purchased or guaranteed by us, generally excluding any second-lien mortgages (unless we own or guarantee the second lien).
MD&A — Management’s Discussion and Analysis of Financial Condition and Results of Operations
MHA Program — Making Home Affordable Program — Formerly known as the Housing Affordability and Stability Plan, the MHA Program was announced by the Administration in February 2009. The MHA Program is designed to help in the housing recovery, promote liquidity and housing affordability, expand foreclosure prevention efforts and set market standards. The MHA Program includes HARP and HAMP.
Mortgage assets — Refers to both mortgage loans and the mortgage-related securities we hold in our mortgage-related investments portfolio.
Mortgage-related investments portfolio — Our investment portfolio, which consists principally of mortgage-related securities and single-family and multifamily mortgage loans. The size of our mortgage-related investments portfolio under the Purchase Agreement is determined without giving effect to the January 1, 2010 change in accounting guidance related to transfers of financial assets and consolidation of VIEs. Accordingly, for purposes of the portfolio limit, when PCs and certain Other Guarantee Transactions are purchased into the mortgage-related investments portfolio, this is considered the acquisition of assets rather than the reduction of debt.
Mortgage-to-debt OAS — The net OAS between the mortgage and agency debt sectors. This is an important factor in determining the expected level of net interest yield on a new mortgage asset. Higher mortgage-to-debt OAS means that a newly purchased mortgage asset is expected to provide a greater return relative to the cost of the debt issued to fund the purchase of the asset and, therefore, a higher net interest yield. Mortgage-to-debt OAS tends to be higher when there is weak demand for mortgage assets and lower when there is strong demand for mortgage assets.
Multifamily mortgage — A mortgage loan secured by a property with five or more residential rental units.
Multifamily mortgage portfolio — Consists of multifamily mortgage loans held by us on our consolidated balance sheets as well as our guarantee of non-consolidated Freddie Mac mortgage-related securities, and other guarantee commitments, but excluding those underlying our guarantees of HFA bonds under the HFA initiative and non-guaranteed K Certificates.
Net worth (deficit) — The amount by which our total assets exceed (or are less than) our total liabilities as reflected on our consolidated balance sheets prepared in conformity with GAAP.
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Net worth sweep dividend, Net Worth Amount, and Capital Reserve Amount — For each quarter from January 1, 2013 through and including December 31, 2017, the dividend payment on the senior preferred stock will be 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. The term Net Worth Amount is defined as: (a) the total assets of Freddie Mac (excluding Treasury’s commitment and any unfunded amounts thereof), less; (b) our total liabilities (excluding any obligation in respect of capital stock), in each case as reflected on our consolidated balance sheets prepared in accordance with GAAP. If the calculation of the dividend payment for a quarter does not exceed zero, then no dividend shall accrue or be payable for that quarter. The applicable Capital Reserve Amount will be $3 billion for 2013 and will be reduced by $600 million each year thereafter until it reaches zero on January 1, 2018. For each quarter beginning January 1, 2018, the dividend payment will be the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter exceeds zero.
NIBP — New Issue Bond Program is a component of the HFA initiative in which we and Fannie Mae issued partially-guaranteed pass-through securities to Treasury that are backed by bonds issued by various state and local HFAs. The program provides financing for HFAs to issue new housing bonds. Treasury is obligated to absorb any losses under the program up to a certain level before we are exposed to any losses.
Non-performing loan — Single-family and multifamily loans that have undergone a TDR, single-family seriously delinquent loans, multifamily loans that are three or more payments past due or in the process of foreclosure, and multifamily loans that are deemed impaired based on management judgment.
NPV — Net present value
OAS — Option-adjusted spread — An estimate of the incremental yield spread between a particular financial instrument (e.g., a security, loan or derivative contract) and a benchmark yield curve (e.g., LIBOR or agency or U.S. Treasury securities). This includes consideration of potential variability in the instrument’s cash flows resulting from any options embedded in the instrument, such as prepayment options.
Option ARM loan — Mortgage loans that permit a variety of repayment options, including minimum, interest-only, fully amortizing 30-year and fully amortizing 15-year payments. The minimum payment alternative for option ARM loans allows the borrower to make monthly payments that may be less than the interest accrued for the period. The unpaid interest, known as negative amortization, is added to the principal balance of the loan, which increases the outstanding loan balance. For our non-agency mortgage-related securities that are backed by option ARM loans, we categorize securities as option ARM if the securities were identified as such based on information provided to us when we entered into these transactions. We have not identified option ARM securities as either subprime or Alt-A securities.
OTC — Over-the-counter
Original LTV Ratio — A credit measure for mortgage loans, calculated as the UPB of the mortgage we guarantee including the credit-enhanced portion, divided by the lesser of the appraised value of the property at the time of mortgage origination or the mortgage borrower’s purchase price. Second liens not owned or guaranteed by us are excluded from the LTV ratio calculation. The existence of a second-lien mortgage reduces the borrower’s equity in the home and, therefore, can increase the risk of default.
Other guarantee commitments — Mortgage-related assets held by third parties for which we provide our guarantee without our securitization of the related assets.
Other Guarantee Transactions — Transactions in which third parties transfer non-Freddie Mac mortgage-related securities to trusts specifically created for the purpose of issuing mortgage-related securities, or certificates, in the Other Guarantee Transactions. In the securities market, our non-HFA initiative related multifamily Other Guarantee Transactions are known as “K Certificates.”
PCs — Participation Certificates — Securities that we issue as part of a securitization transaction. Typically we purchase mortgage loans from parties who sell mortgage loans, place a pool of loans into a PC trust and issue PCs from that trust. The PCs are generally transferred to the seller of the mortgage loans in consideration of the loans or are sold to third-party investors if we purchased the mortgage loans for cash.
PMVS — Portfolio Market Value Sensitivity — One of our primary interest-rate risk measures. PMVS measures are estimates of the amount of average potential pre-tax loss in the market value of our net assets due to parallel (PMVS-L) and non-parallel (PMVS-YC) changes in LIBOR.
Primary mortgage market — The market where lenders originate mortgage loans and lend funds to borrowers. We do not lend money directly to homeowners and do not participate in this market.
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Purchase Agreement / Senior Preferred Stock Purchase Agreement — An agreement the Conservator, acting on our behalf, entered into with Treasury on September 7, 2008, which was subsequently amended and restated on September 26, 2008 and further amended on May 6, 2009, December 24, 2009, and August 17, 2012.
Recorded Investment — The dollar amount of a loan recorded on our consolidated balance sheets, excluding any valuation allowance, such as the allowance for loan losses, but which does reflect direct write-downs of the investment. For mortgage loans, direct write-downs consist of valuation allowances associated with recording our initial investment in loans acquired with evidence of credit deterioration at the time of purchase. Recorded investment excludes accrued interest income.
Reform Act — The Federal Housing Finance Regulatory Reform Act of 2008, which, among other things, amended the GSE Act by establishing a single regulator, FHFA, for Freddie Mac, Fannie Mae, and the FHLBs.
Relief refinance mortgage — A single-family mortgage loan delivered to us for purchase or guarantee that meets the criteria of the Freddie Mac Relief Refinance Mortgagesm initiative. Part of this initiative is our implementation of HARP for our loans, and relief refinance options are also available for certain non-HARP loans. Although HARP is targeted at borrowers with current LTV ratios above 80%, our initiative also allows borrowers with LTV ratios of 80% and below to participate.
REMIC — Real Estate Mortgage Investment Conduit — A type of multiclass mortgage-related security that divides the cash flows (principal and interest) of the underlying mortgage-related assets into two or more classes that meet the investment criteria and portfolio needs of different investors.
REMICs and Other Structured Securities (or in the case of Multifamily securities, Other Structured Securities) — Single- and multiclass securities issued by Freddie Mac that represent beneficial interests in pools of PCs and certain other types of mortgage-related assets. REMICs and Other Structured Securities that are single-class securities pass through the cash flows (principal and interest) on the underlying mortgage-related assets. REMICs and Other Structured Securities that are multiclass securities divide the cash flows of the underlying mortgage-related assets into two or more classes designed to meet the investment criteria and portfolio needs of different investors. Our principal multiclass securities qualify for tax treatment as REMICs.
REO — Real estate owned — Real estate which we have acquired through foreclosure or through a deed in lieu of foreclosure.
S&P — Standard & Poor’s
SEC — Securities and Exchange Commission
Secondary mortgage market — A market consisting of institutions engaged in buying and selling mortgages in the form of whole loans (i.e., mortgages that have not been securitized) and mortgage-related securities. We participate in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for investment and by issuing guaranteed mortgage-related securities, principally PCs.
Senior preferred stock — The shares of Variable Liquidation Preference Senior Preferred Stock issued to Treasury under the Purchase Agreement.
Seriously delinquent — Single-family mortgage loans that are three monthly payments or more past due or in the process of foreclosure as reported to us by our servicers.
Short sale — Typically an alternative to foreclosure consisting of a sale of a mortgaged property in which the homeowner sells the home at market value and the lender accepts proceeds (sometimes together with an additional payment or promissory note from the borrower) that are less than the outstanding mortgage indebtedness in full satisfaction of the loan.
Single-family credit guarantee portfolio — Consists of unsecuritized single-family loans, single-family loans held by consolidated trusts, and single-family loans underlying non-consolidated Other Guarantee Transactions and covered by other guarantee commitments. Excludes our REMICs and Other Structured Securities that are backed by Ginnie Mae Certificates and our guarantees under the HFA initiative.
Single-family mortgage — A mortgage loan secured by a property containing four or fewer residential dwelling units.
Spread — The difference between the yields of two debt securities, or the difference between the yield of a debt security and a benchmark yield, such as LIBOR.
Strips — Mortgage pass-through securities created by separating the principal and interest payments on a pool of mortgage loans. A principal-only strip entitles the security holder to principal cash flows, but no interest cash flows, from the underlying mortgages. An interest-only strip entitles the security holder to interest cash flows, but no principal cash flows, from the underlying mortgages.
Subprime — Participants in the mortgage market may characterize single-family loans based upon their overall credit quality at the time of origination, generally considering them to be prime or subprime. Subprime generally refers to the credit risk
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classification of a loan. There is no universally accepted definition of subprime. The subprime segment of the mortgage market primarily serves borrowers with poorer credit payment histories and such loans typically have a mix of credit characteristics that indicate a higher likelihood of default and higher loss severities than prime loans. Such characteristics might include, among other factors, a combination of high LTV ratios, low credit scores or originations using lower underwriting standards, such as limited or no documentation of a borrower’s income. While we have not historically characterized the loans in our single-family credit guarantee portfolio as either prime or subprime, we do monitor the amount of loans we have guaranteed with characteristics that indicate a higher degree of credit risk. Notwithstanding our historical characterizations of the single family credit guarantee portfolio, certain security collateral underlying our Other Guarantee Transactions has been identified as subprime based on information provided to Freddie Mac when the transactions were entered into. We also categorize our investments in non-agency mortgage-related securities as subprime if they were identified as such based on information provided to us when we entered into these transactions.
Swaption — An option contract to enter into an interest-rate swap. In exchange for an option premium, a buyer obtains the right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date.
TBA — To be announced
TCLFP — Temporary Credit and Liquidity Facility Program is a component of the HFA initiative in which we and Fannie Mae issued credit and liquidity guarantees to holders of variable-rate demand obligations issued by various state and local HFAs. Treasury is obligated to absorb any losses under the program up to a certain level before we are exposed to any losses. The program was scheduled to expire on December 31, 2012. However, Treasury gave participants the option to extend their individual TCLFP facilities to December 31, 2015. Certain participants elected to extend their TCLFP facilities to December 2015.
TDR — Troubled debt restructuring — A type of loan modification in which the changes to the contractual terms result in concessions to borrowers that are experiencing financial difficulties. Beginning in the third quarter of 2012, TDRs also include single-family loans discharged in Chapter 7 bankruptcy, regardless of the borrowers’ payment status.
Total other comprehensive income (loss) (or other comprehensive income (loss)) — Consists of the after-tax changes in: (a) the unrealized gains and losses on available-for-sale securities; (b) the effective portion of derivatives accounted for as cash flow hedge relationships; and (c) defined benefit plans.
Total mortgage portfolio — Includes mortgage loans and mortgage-related securities held on our consolidated balance sheets as well as the balances of our non-consolidated issued and guaranteed single-class and multiclass securities, and other mortgage-related financial guarantees issued to third parties.
Treasury — U.S. Department of the Treasury
ULDD — Uniform Loan Delivery Dataset
UMDP — Uniform Mortgage Data Program
UPB — Unpaid principal balance
USDA — U.S. Department of Agriculture
VA — U.S. Department of Veterans Affairs
Variation margin — Payments we make to a derivatives clearinghouse based on the change in fair value of a derivative instrument. Variation margin is typically transferred within one business day.
VIE — Variable Interest Entity — A VIE is an entity: (a) that has a total equity investment at risk that is not sufficient to finance its activities without additional subordinated financial support provided by another party; or (b) where the group of equity holders does not have: (i) the ability to make significant decisions about the entity’s activities; (ii) the obligation to absorb the entity’s expected losses; or (iii) the right to receive the entity’s expected residual returns.
Warrant — Refers to the warrant we issued to Treasury on September 7, 2008 pursuant to the Purchase Agreement. The warrant provides Treasury the ability to purchase, for a nominal price, shares of our common stock equal to 79.9% of the total number of shares of Freddie Mac common stock outstanding on a fully diluted basis on the date of exercise.
Workout, or loan workout — A workout is either: (a) a home retention action, which is either a loan modification, repayment plan, or forbearance agreement; or (b) a foreclosure alternative, which is either a short sale or a deed in lieu of foreclosure.
XBRL — eXtensible Business Reporting Language
Yield curve — A graphical display of the relationship between yields and maturity dates for bonds of the same credit quality. The slope of the yield curve is an important factor in determining the level of net interest yield on a new mortgage asset, both initially and over time. For example, if a mortgage asset is purchased when the yield curve is inverted (i.e., short-term rates
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higher than long-term rates), our net interest yield on the asset will tend to be lower initially and then increase over time. Likewise, if a mortgage asset is purchased when the yield curve is steep (i.e., short-term rates lower than long-term rates), our net interest yield on the asset will tend to be higher initially and then decrease over time.
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EXHIBIT INDEX
Exhibit No. | Description | |
10.1 | Memorandum Agreement, dated September 24, 2013, between Freddie Mac and James Mackey (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, as filed on September 30, 2013) | |
10.2 | Restrictive Covenant and Confidentiality Agreement, dated September 25, 2013, between Freddie Mac and James Mackey (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, as filed on September 30, 2013) | |
10.3 | PC Master Trust Agreement, dated October 24, 2013 | |
10.4 | Fifth Amendment to the Federal Home Loan Mortgage Corporation Supplemental Executive Retirement Plan (as Amended and Restated January 1, 2008) (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, as filed on October 25, 2013) | |
12.1 | Statement re: computation of ratio of earnings to fixed charges and computation of ratio of earnings to combined fixed charges and preferred stock dividends | |
31.1 | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a) | |
31.2 | Certification of Executive Vice President — Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a) | |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 | |
32.2 | Certification of Executive Vice President — Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema | |
101.CAL | XBRL Taxonomy Extension Calculation | |
101.LAB | XBRL Taxonomy Extension Labels | |
101.PRE | XBRL Taxonomy Extension Presentation | |
101.DEF | XBRL Taxonomy Extension Definition | |
E-1 | Freddie Mac | |