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FEDERAL HOME LOAN MORTGAGE CORP - Quarter Report: 2018 June (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 June 30, 2018
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
primarylogoa02.jpg
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Federally chartered
 
52-0904874
 
8200 Jones Branch Drive
 
22102-3110
 
(703) 903-2000
corporation
 
 
McLean, Virginia
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
(Address of principal executive offices)
 
(Zip Code)
 
(Registrant’s telephone number,
including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    ý Yes    ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý Yes    ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  ý
 
 
 
Accelerated filer  ¨
 
Non-accelerated filer (Do not check if a smaller reporting company)  ¨
 
Smaller reporting company  ¨
 
Emerging growth company  ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of July 17, 2018, there were 650,058,775 shares of the registrant’s common stock outstanding.

Table of Contents

Table of Contents
 
Page
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
n    Introduction
n    Key Economic Indicators
n    Consolidated Results of Operations
n    Consolidated Balance Sheets Analysis
n    Our Business Segments
n    Risk Management
n    Liquidity and Capital Resources
n    Conservatorship and Related Matters
n    Regulation and Supervision
n    Off-Balance Sheet Arrangements
n    Forward-Looking Statements
FINANCIAL STATEMENTS
OTHER INFORMATION
CONTROLS AND PROCEDURES
EXHIBIT INDEX
SIGNATURES
FORM 10-Q INDEX

Freddie Mac Form 10-Q
 
i
Management's Discussion and Analysis
 
Introduction

Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in the Forward-Looking Statements sections of this Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2017, or 2017 Annual Report, and our Quarterly Report on Form 10-Q for the first quarter of 2018, and the Business and Risk Factors sections of our 2017 Annual Report.
Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the Glossary of our 2017 Annual Report.
You should read the following MD&A in conjunction with our 2017 Annual Report and our condensed consolidated financial statements and accompanying notes for the three and six months ended June 30, 2018 included in Financial Statements. Throughout this Form 10-Q, we refer to the three months ended June 30, 2018, the three months ended March 31, 2018, the three months ended December 31, 2017, the three months ended September 30, 2017 and the three months ended June 30, 2017 as "2Q 2018," "1Q 2018," "4Q 2017," "3Q 2017" and "2Q 2017," respectively. We refer to the six months ended June 30, 2018 and the six months ended June 30, 2017 as "YTD 2018" and "YTD 2017," respectively.
INTRODUCTION
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability and affordability to the U.S. housing market. We do this primarily by purchasing residential mortgage loans originated by lenders. In most instances, we package these loans into mortgage-related securities, which are guaranteed by us and sold in the global capital markets. We also invest in mortgage loans and mortgage-related securities. We do not originate loans or lend money directly to mortgage borrowers.
We support the U.S. housing market and the overall economy by enabling America’s families to access mortgage loan funding with better terms and by providing consistent liquidity to the multifamily mortgage market. We have helped many distressed borrowers keep their homes or avoid foreclosure. We are working with FHFA, our customers and the industry to build a better housing finance system for the nation.

Freddie Mac Form 10-Q
 
1
Management's Discussion and Analysis
 
Introduction

Business Results
Portfolio Balances
Guarantee Portfolios

chart-2a0002ba7ccf5686a90.jpg
 
Investments Portfolios

chart-f5baba02ada652cb9e6.jpg


Total Guarantee Portfolio
n
Our total guarantee portfolio grew $117 billion, or 6%, from June 30, 2017 to June 30, 2018, driven by a 4% increase in our single-family credit guarantee portfolio and a 26% increase in our multifamily guarantee portfolio.
l
The growth in our single-family credit guarantee portfolio was primarily driven by an increase in U.S. single-family mortgage debt outstanding as a result of continued home price appreciation. New business acquisitions had a higher average loan size compared to older vintages that continued to run off.
l
The growth in our multifamily guarantee portfolio was primarily driven by an increase in U.S. multifamily mortgage debt outstanding due to strong multifamily market fundamentals, coupled with the growth in our share of new business volume due to our strategic pricing efforts, expansion of our new product offerings and an increase in purchase activity associated with certain targeted loans in underserved markets.

Freddie Mac Form 10-Q
 
2
Management's Discussion and Analysis
 
Introduction

Total Investments Portfolio
n
Our total investments portfolio declined $56 billion, or 15%, from June 30, 2017 to June 30, 2018, primarily due to repayments and the active disposition of less liquid assets.
l
We continue to reduce the mortgage-related investments portfolio as required by the Purchase Agreement and FHFA.
Consolidated Financial Results
Comprehensive income (loss) was $2.4 billion in 2Q 2018, compared to $2.0 billion in 2Q 2017.
Key Drivers:
n
Net interest income declined, primarily driven by the continued reduction in the balance of our mortgage-related investments portfolio, partially offset by continued growth in our single-family credit guarantee portfolio.
n
Benefit for credit losses declined, primarily due to the impact of reclassifications of single-family seasoned mortgage loans between held-for-investment and held-for-sale.
n
Gain from final judgment against Nomura Holding America, Inc. in litigation involving certain of our non-agency mortgage-related securities (Nomura judgment) resulted in an increase in other income. We did not have any significant judgments or settlements in 2Q 2017.
n
Reduction in the statutory corporate income tax rate resulted in lower income tax expense.
Our total equity was $4.6 billion at June 30, 2018. Because our net worth was positive, we are not requesting a draw from Treasury under the Purchase Agreement for 2Q 2018. Based on our Net Worth Amount at June 30, 2018 of $4.6 billion and the applicable Capital Reserve Amount of $3.0 billion, we will have a dividend requirement to Treasury in September 2018 of $1.6 billion.
Our cumulative senior preferred stock dividend payments totaled $112.4 billion as of June 30, 2018. Under the Purchase Agreement the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock, which remains at $75.6 billion. In addition, the amount of available funding remaining under the Purchase Agreement is $140.2 billion and will be reduced by any future draws.
Conservatorship and Government Support for Our Business
Since September 2008, we have been operating in conservatorship, with FHFA as our Conservator. The conservatorship and related matters significantly affect our management, business activities, financial condition and results of operations. Our future is uncertain, and the conservatorship has no specified termination date. We do not know what changes may occur to our business model during or following conservatorship, including whether we will continue to exist.
Our Purchase Agreement with Treasury and the terms of the senior preferred stock we issued to Treasury also affect our business activities. Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to have adequate liquidity to conduct normal business activities.

Freddie Mac Form 10-Q
 
3
Management's Discussion and Analysis
 
Introduction

Treasury, as the holder of the senior preferred stock, is entitled to receive cumulative quarterly cash dividends, when, as and if declared by the Conservator, acting as successor to the rights, titles, powers and privileges of our Board of Directors. The dividends we have paid to Treasury on the senior preferred stock have been declared by, and paid at the direction of, the Conservator.
Under the August 2012 amendment to the Purchase Agreement, our dividend requirement each quarter is the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter, less the applicable Capital Reserve Amount, exceeds zero. Pursuant to the December 2017 Letter Agreement, the Capital Reserve Amount is $3.0 billion. If for any reason we were not to pay our dividend requirement on the senior preferred stock in full in any future period, the unpaid amount would be added to the liquidation preference and our applicable Capital Reserve Amount would thereafter be zero, but this would not affect our ability to draw funds from Treasury under the Purchase Agreement.




Freddie Mac Form 10-Q
 
4
Management's Discussion and Analysis
 
Key Economic Indicators | Single-Family Home Prices


KEY ECONOMIC INDICATORS
The following graphs and related discussions present certain macroeconomic indicators that can significantly affect our business and financial results.
Single-Family Home Prices
National Home Prices
chart-fbc322ca7e1c589c98d.jpg
Commentary
n
Home prices continued to appreciate, increasing by 3.0% and 3.7% during 2Q 2018 and 2Q 2017, respectively, and by 5.6% and 6.0% during YTD 2018 and YTD 2017, respectively, based on our own non-seasonally adjusted price index of single-family homes funded by loans owned or guaranteed by us or Fannie Mae.
n
We expect the rate of home price growth in the second half of 2018 to moderate, driven by a gradual increase in housing supply and higher mortgage interest rates.
n
Increases in home prices typically result in lower delinquency rates and lower loss severity, which generally reduce estimated credit losses on our total mortgage portfolio.
n
Higher single-family home prices may also contribute to an increase in potential multifamily renters.



Freddie Mac Form 10-Q
 
5
Management's Discussion and Analysis
 
Key Economic Indicators | Interest Rates

Interest Rates
Key Market Interest Rates
chart-a8789418365a5146a22.jpg chart-3fba6030c8de5ae6bba.jpg
Commentary
n
The quarterly ending and quarterly average 30-year Primary Mortgage Market Survey ("PMMS") interest rates were higher at June 30, 2018 than June 30, 2017. Increases in the PMMS rate typically result in decreases in refinance activity and U.S. single-family loan originations.
n
The 10-year LIBOR and 2-year LIBOR quarterly ending interest rates had larger fluctuations during the 2018 periods than during the 2017 periods. Changes in the 10-year and 2-year LIBOR interest rates affect the fair value of certain of our assets and liabilities, including derivatives, measured at fair value. A larger interest rate fluctuation from period to period generally results in larger fair value gains and losses, while a smaller fluctuation from period to period generally results in smaller fair

Freddie Mac Form 10-Q
 
6
Management's Discussion and Analysis
 
Key Economic Indicators | Interest Rates

value gains and losses. However, the majority of these fair value changes are offset by our hedge accounting programs.
n
The quarterly ending and quarterly average short-term interest rates, as indicated by the 3-month LIBOR rate, were higher at June 30, 2018 than June 30, 2017. An increase in short-term interest rates generally increases the interest earned on our short-term investments and interest expense on our short-term funding.
n
For additional information on the effect of LIBOR rates on our financial results, see Our Business Segments - Capital Markets - Market Conditions.





Freddie Mac Form 10-Q
 
7
Management's Discussion and Analysis
 
Key Economic Indicators | Unemployment Rate

Unemployment Rate
Unemployment Rate and Job Creation(1) 
chart-8fd35b1319f0501e80c.jpg
Source: U.S. Bureau of Labor Statistics
(1) Excludes Puerto Rico and the U.S. Virgin Islands.
Commentary
n
Average monthly net new jobs (non-farm) were higher in 2Q 2018 than 2Q 2017.
n
The national unemployment rate was lower in 2Q 2018 than 2Q 2017.
n
Changes in monthly net new jobs and the national unemployment rate can affect several market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies.
n
Decreases in the national unemployment rate typically result in lower levels of delinquencies, which generally result in a decrease in estimated credit losses on our total mortgage portfolio.

Freddie Mac Form 10-Q
 
8
Management's Discussion and Analysis
 
Consolidated Results of Operations


CONSOLIDATED RESULTS OF OPERATIONS
You should read this discussion of our consolidated results of operations in conjunction with our condensed consolidated financial statements and accompanying notes.
The table below compares our summarized consolidated results of operations.
 
 
 
 
 
Change
 
 
 
 
Change
(Dollars in millions)
 
2Q 2018
2Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Net interest income
 

$3,003


$3,379

 

($376
)
(11
)%
 

$6,021


$7,174

 

($1,153
)
(16
)%
Benefit (provision) for credit losses
 
60

422

 
(362
)
(86
)
 
(3
)
538

 
(541
)
(101
)
Net interest income after benefit (provision) for credit losses
 
3,063

3,801

 
(738
)
(19
)
 
6,018

7,712

 
(1,694
)
(22
)
Non-interest income (loss):
 
 
 
 




 
 
 
 




Gains (losses) on extinguishment of debt
 
147

50

 
97

194

 
257

268

 
(11
)
(4
)
Derivative gains (losses)
 
416

(1,096
)
 
1,512

138

 
2,246

(1,398
)
 
3,644

261

Net impairment of available-for-sale securities recognized in earnings
 
(1
)
(3
)
 
2

67

 
(1
)
(16
)
 
15

94

Other gains (losses) on investment securities recognized in earnings
 
(348
)
61

 
(409
)
(670
)
 
(580
)
117

 
(697
)
(596
)
Other income (loss)
 
1,011

694

 
317

46

 
1,132

1,109

 
23

2

Total non-interest income (loss)
 
1,225

(294
)
 
1,519

517

 
3,054

80

 
2,974

3,718

Non-interest expense:
 
 
 
 




 
 
 
 




Administrative expense
 
(558
)
(513
)
 
(45
)
(9
)
 
(1,078
)
(1,024
)
 
(54
)
(5
)
REO operations expense
 
(15
)
(37
)
 
22

59

 
(49
)
(93
)
 
44

47

Temporary Payroll Tax Cut Continuation Act of 2011 expense
 
(366
)
(330
)
 
(36
)
(11
)
 
(725
)
(651
)
 
(74
)
(11
)
Other expense
 
(204
)
(126
)
 
(78
)
(62
)
 
(401
)
(202
)
 
(199
)
(99
)
Total non-interest expense
 
(1,143
)
(1,006
)
 
(137
)
(14
)
 
(2,253
)
(1,970
)
 
(283
)
(14
)
Income (loss) before income tax (expense) benefit
 
3,145

2,501

 
644

26

 
6,819

5,822

 
997

17

Income tax (expense) benefit
 
(642
)
(837
)
 
195

23

 
(1,390
)
(1,947
)
 
557

29

Net income (loss)
 
2,503

1,664

 
839

50

 
5,429

3,875

 
1,554

40

Total other comprehensive income (loss), net of taxes and reclassification adjustments
 
(68
)
322

 
(390
)
(121
)
 
(844
)
345

 
(1,189
)
(345
)
Comprehensive income (loss)
 

$2,435


$1,986

 

$449

23
 %
 

$4,585


$4,220

 

$365

9
 %

Freddie Mac Form 10-Q
 
9
Management's Discussion and Analysis
 
Consolidated Results of Operations | Net Interest Income

Net Interest Income
Net Interest Yield Analysis
The tables below present an analysis of interest-earning assets and interest-bearing liabilities.
 
 
 
2Q 2018
 
2Q 2017
 
(Dollars in millions)
 
Average
Balance
Interest
Income
(Expense)(1)
Average
Rate
 
Average
Balance
Interest
Income
(Expense)(1)
Average
Rate
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 

$6,620


$13

0.79
 %
 

$12,135


$15

0.51
 %
 
Securities purchased under agreements to resell
 
43,084

205

1.91

 
56,196

132

0.93

 
Advances to lenders and other secured lending
 
1,403

10

2.68

 
532

3

2.30

 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
144,517

1,495

4.14

 
170,864

1,651

3.87

 
Extinguishment of PCs held by Freddie Mac
 
(88,792
)
(849
)
(3.83
)
 
(89,913
)
(825
)
(3.67
)
 
Total mortgage-related securities, net
 
55,725

646

4.64

 
80,951

826

4.08

 
Non-mortgage-related securities
 
14,476

84

2.32

 
17,957

76

1.68

 
Loans held by consolidated trusts(1)
 
1,787,242

15,290

3.42

 
1,723,103

14,594

3.39

 
Loans held by Freddie Mac(1)
 
100,239

1,054

4.20

 
118,012

1,254

4.25

 
Total interest-earning assets
 
2,008,789

17,302

3.45

 
2,008,886

16,900

3.36

 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
 
1,814,861

(13,504
)
(2.98
)
 
1,746,474

(12,819
)
(2.94
)
 
Extinguishment of PCs held by Freddie Mac
 
(88,792
)
849

3.83

 
(89,913
)
825

3.67

 
Total debt securities of consolidated trusts held by third parties
 
1,726,069

(12,655
)
(2.93
)
 
1,656,561

(11,994
)
(2.90
)
 
Other debt:
 
 
 
 
 
 
 
 
 
Short-term debt
 
53,323

(242
)
(1.80
)
 
74,540

(145
)
(0.77
)
 
Long-term debt
 
221,222

(1,402
)
(2.53
)
 
272,160

(1,382
)
(2.02
)
 
Total other debt
 
274,545

(1,644
)
(2.38
)
 
346,700

(1,527
)
(1.76
)
 
Total interest-bearing liabilities
 
2,000,614

(14,299
)
(2.86
)
 
2,003,261

(13,521
)
(2.70
)
 
Impact of net non-interest-bearing funding
 
8,175

—

0.01

 
5,625

—

0.01

 
Total funding of interest-earning assets
 

$2,008,789


($14,299
)
(2.85
)%
 

$2,008,886


($13,521
)
(2.69
)%
 
Net interest income/yield
 
 

$3,003

0.60
 %
 
 

$3,379

0.67
 %
 
 
 
 
 
 
 
 
 
 
 
   (1) Loan fees, primarily consisting of amortization of upfront fees, included in interest income were $627 million and $583 million for loans held by consolidated trusts and $23 million and $33 million for loans held by Freddie Mac during 2Q 2018 and 2Q 2017, respectively.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Freddie Mac Form 10-Q
 
10
Management's Discussion and Analysis
 
Consolidated Results of Operations | Net Interest Income

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
YTD 2018
 
YTD 2017
(Dollars in millions)
 
Average
Balance
Interest
Income
(Expense)(1)
Average
Rate
 
Average
Balance
Interest
Income
(Expense)(1)
Average
Rate
Interest-earning assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 

$6,818


$24

0.69
 %
 

$12,094


$24

0.40
 %
Securities purchased under agreements to resell
 
47,408

403

1.70

 
55,301

220

0.79

Advances to lenders and other secured lending
 
1,197

16

2.65

 
574

7

2.36

Mortgage-related securities:
 
 
 
 
 
 
 
 
Mortgage-related securities
 
147,391

3,074

4.17

 
173,410

3,314

3.82

Extinguishment of PCs held by Freddie Mac
 
(89,803
)
(1,692
)
(3.77
)
 
(89,226
)
(1,645
)
(3.69
)
Total mortgage-related securities, net
 
57,588

1,382

4.80

 
84,184

1,669

3.97

Non-mortgage-related securities
 
14,626

157

2.14

 
19,509

147

1.51

Loans held by consolidated trusts(1)
 
1,781,975

30,149

3.38

 
1,715,571

29,193

3.40

Loans held by Freddie Mac(1)
 
101,845

2,146

4.21

 
121,115

2,620

4.33

Total interest-earning assets
 
2,011,457

34,277

3.41

 
2,008,348
33,880
3.37

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
 
1,808,992

(26,861
)
(2.97
)
 
1,738,601

(25,360
)
(2.92
)
Extinguishment of PCs held by Freddie Mac
 
(89,803
)
1,692

3.77

 
(89,226
)
1,645

3.69

Total debt securities of consolidated trusts held by third parties
 
1,719,189

(25,169
)
(2.93
)
 
1,649,375

(23,715
)
(2.88
)
Other debt:
 
 
 
 
 
 
 
 
Short-term debt
 
60,647

(471
)
(1.55
)
 
74,003

(241
)
(0.65
)
Long-term debt
 
225,101

(2,616
)
(2.32
)
 
275,840

(2,750
)
(1.99
)
Total other debt
 
285,748

(3,087
)
(2.16
)
 
349,843

(2,991
)
(1.71
)
Total interest-bearing liabilities
 
2,004,937

(28,256
)
(2.82
)
 
1,999,218

(26,706
)
(2.67
)
Impact of net non-interest-bearing funding
 
6,520

—

0.01

 
9,130

—

0.01

Total funding of interest-earning assets
 

$2,011,457


($28,256
)
(2.81
)%
 

$2,008,348


($26,706
)
(2.66
)%
Net interest income/yield
 
 

$6,021

0.60
 %
 
 

$7,174

0.71
 %
 
 
 
 
 
 
 
 
 
  (1) Loan fees, primarily consisting of amortization of upfront fees, included in interest income were $1.2 billion and $1.1 billion for loans held by consolidated trusts and $45 million and $95 million for loans held by Freddie Mac during YTD 2018 and YTD 2017, respectively.


Freddie Mac Form 10-Q
 
11
Management's Discussion and Analysis
 
Consolidated Results of Operations | Net Interest Income

Components of Net Interest Income
The table below presents the components of net interest income.
 
 
 
 
 
Change
 
 
 
 
Change
(Dollars in millions)
 
2Q 2018
2Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Contractual net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee fee income
 

$858


$795

 

$63

8
 %
 

$1,692


$1,587

 

$105

7
 %
Guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011
 
356

325

 
31

10

 
703

641

 
62

10

Other contractual net interest income
 
1,386

1,637

 
(251
)
(15
)
 
2,843

3,396

 
(553
)
(16
)
Total contractual net interest income
 
2,600

2,757

 
(157
)
(6
)
 
5,238

5,624

 
(386
)
(7
)
Net amortization - loans and debt securities of consolidated trusts
 
701

667

 
34

5

 
1,449

1,620

 
(171
)
(11
)
Net amortization - other assets and debt
 
(84
)
(3
)
 
(81
)
(2,700
)
 
(79
)
15

 
(94
)
(627
)
Hedge accounting impact
 
(214
)
(42
)
 
(172
)
(410
)
 
(587
)
(85
)
 
(502
)
(591
)
Net interest income
 

$3,003


$3,379

 

($376
)
(11
)%
 

$6,021


$7,174

 

($1,153
)
(16
)%
Key Drivers:
n
Guarantee fee income
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - increased primarily due to the continued growth of the Core single-family loan portfolio.
n
Other contractual net interest income
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - decreased due to the continued reduction in the balance of our mortgage-related investments portfolio pursuant to the portfolio limits established by the Purchase Agreement and FHFA. See Conservatorship and Related Matters - Reducing Our Mortgage-Related Investments Portfolio Over Time for a discussion of the key drivers of the decline in our mortgage-related investments portfolio.
n
Net amortization of loans and debt securities of consolidated trusts
l
2Q 2018 vs. 2Q 2017 - remained relatively flat.
l
YTD 2018 vs. YTD 2017 - decreased primarily due to a decrease in amortization of debt securities of consolidated trusts driven by a decrease in prepayments as a result of higher interest rates, partially offset by an increase in amortization from higher upfront fees on mortgage loans.
n
Net amortization of other assets and debt
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - losses increased primarily due to less accretion of previously recognized other-than-temporary impairments on non-agency mortgage-related securities. The decrease in accretion was due to a decline in the population of impaired securities as a result of our active disposition of these securities and a decline in new other-than-temporary impairments recognized.

Freddie Mac Form 10-Q
 
12
Management's Discussion and Analysis
 
Consolidated Results of Operations | Net Interest Income

n
Hedge Accounting Impact
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - losses increased primarily due to the inclusion of fair value hedge accounting results within net interest income during the 2018 periods. This activity was included in other income and derivative gains (losses) until the adoption of the amended hedge accounting guidance in 4Q 2017.

Freddie Mac Form 10-Q
 
13
Management's Discussion and Analysis
 
Consolidated Results of Operations | Derivative Gains (Losses)


Derivative Gains (Losses)
Components of Derivative Gains (Losses)
We continue to align our derivative portfolio with the changing duration of our assets and liabilities so as to economically hedge their interest-rate risk. We manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models. We believe the impact of derivatives on our GAAP financial results should be considered in the context of our overall interest-rate risk profile, including our PMVS and duration gap results. For more information about our interest-rate risk management activities and the sensitivity of reported earnings to those activities, see Risk Management - Market Risk.
Derivative gains (losses) includes the fair value changes and the accrual of periodic cash settlements for derivatives while not designated in qualifying hedge relationships. In addition, prior to our adoption of amended hedge accounting guidance in 4Q 2017, we included the accrual of periodic cash settlements on derivatives in qualifying hedge relationships in derivatives gains (losses).
The table below presents the components of derivative gains (losses).
 
 
 
 
 
Change
 
 
 
 
Change
(Dollars in millions)
 
2Q 2018
2Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Fair value change in interest-rate swaps
 

$583


($580
)
 

$1,163

201
 %
 

$2,097


$93

 

$2,004

2,155
 %
Fair value change in option-based derivatives
 
(259
)
109

 
(368
)
(338
)
 
(714
)
(321
)
 
(393
)
(122
)
Fair value change in other derivatives
 
135

(196
)
 
331

169

 
1,051

(274
)
 
1,325

484

Accrual of periodic cash settlements
 
(43
)
(429
)
 
386

90

 
(188
)
(896
)
 
708

79

Derivative gains (losses)
 

$416


($1,096
)
 

$1,512

138
 %
 

$2,246


($1,398
)
 

$3,644

261
 %
Key Drivers:
n
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - During the 2018 periods, increases in long-term rates resulted in derivative fair value gains compared to derivative fair value losses during the 2017 periods. The 10-year par swap rate increased 15 and 54 basis points during 2Q 2018 and YTD 2018, respectively, and declined 12 and 5 basis points during 2Q 2017 and YTD 2017, respectively. The interest rate increase during the 2018 periods resulted in fair value gains in our pay-fixed interest rate swaps, forward commitments to issue PCs, and futures, partially offset by fair value losses in our receive-fixed swaps.

Freddie Mac Form 10-Q
 
14
Management's Discussion and Analysis
 
Consolidated Results of Operations | Other Income (Loss)


Other Income (Loss)
Components of Other Income (Loss)
The table below presents the components of other income (loss).
 
 
 
 
 
Change
 
 
 
 
Change
(Dollars in millions)
 
2Q 2018
2Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Other income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
Non-agency mortgage-related securities settlements and judgments
 

$334


$—

 

$334

N/A

 

$334


$3

 

$331

11,033
 %
Gains (losses) on loans(1)
 
162

193

 
(31
)
(16
)
 
(158
)
207

 
(365
)
(176
)
Gains (losses) on held-for-sale loan purchase commitments(1)
 
192

331

 
(139
)
(42
)
 
297

555

 
(258
)
(46
)
Gains (losses) on debt(1)
 
19

(102
)
 
121

119

 
30

(191
)
 
221

116

All other
 
304

245

 
59

24

 
629

469

 
160

34

 Fair value hedge accounting
 
 
 
 
 

 
 
 
 
 
 
Change in fair value of derivatives in qualifying hedge relationships
 
—

(365
)
 
365

N/A

 
—

(300
)
 
300

N/A

Change in fair value of hedged items in qualifying hedge relationships
 
—

392

 
(392
)
N/A

 
—

366

 
(366
)
N/A

Total other income (loss)
 

$1,011


$694

 

$317

46
 %
 

$1,132


$1,109

 

$23

2
 %
(1)
Includes fair value gains (losses) on loans, held-for-sale loan purchase commitments and debt for which we have elected the fair value option.
Key Drivers:
n 2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - Other income (loss) increased primarily driven by:
l Recognition of a $0.3 billion gain from the Nomura judgment during 2Q 2018. See Note 14 for additional information on the Nomura judgment.
l Small fair value gains on STACR debt notes in the 2018 periods compared to fair value losses in the 2017 periods as a result of market spreads between STACR yields and LIBOR remaining relatively unchanged in the 2018 periods, while spreads tightened during the 2017 periods.
l Adoption of amended hedge accounting guidance in 4Q 2017, which resulted in fair value changes for derivatives and hedged items in qualifying hedge relationships no longer being recognized in other income (loss). See Note 9 for more information.
This increase was partially offset by:
l Greater interest rate-related fair value losses on multifamily mortgage loans and commitments for which we have elected the fair value option due to a larger increase in long-term interest rates.




Freddie Mac Form 10-Q
 
15
Management's Discussion and Analysis
 
Consolidated Results of Operations | Other Comprehensive Income (Loss)

Other Comprehensive Income (Loss)
Explanation of Key Drivers of Other Comprehensive Income (Loss)
The following table presents the attribution of total other comprehensive income (loss), net of taxes and reclassification adjustments reported in our condensed consolidated statements of comprehensive income.
 
 
 
 
 
Change
 
 
 
 
Change
(Dollars in millions)
 
2Q 2018
2Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Other comprehensive income (loss), excluding certain items
 

($93
)

$423

 

($516
)
(122
)%
 

($495
)

$586

 

($1,081
)
(184
)%
Excluded items:
 
 
 
 
 
 
 
 
 
 
 
 
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities
 
(20
)
(49
)
 
29

59

 
(108
)
(103
)
 
(5
)
(5
)
Realized (gains) losses reclassified from AOCI
 
45

(52
)
 
97

187

 
(241
)
(138
)
 
(103
)
(75
)
Total excluded items
 
25

(101
)

126

125


(349
)
(241
)

(108
)
(45
)
Total other comprehensive income (loss)
 

($68
)

$322

 

($390
)
(121
)%
 

($844
)

$345

 

($1,189
)
(345
)%
Key Drivers:
n Other comprehensive income, excluding certain items
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - decreased primarily due to higher fair value losses compared to fair value gains on agency and non-agency mortgage-related securities classified as available-for-sale as long-term interest rates increased more during the 2018 periods, coupled with smaller fair value gains from less market spread tightening on our non-agency mortgage-related securities.
Excluded items:
n Realized (gains) losses reclassified from AOCI
l
2Q 2018 vs. 2Q 2017 - reflected reclassified losses during 2Q 2018 compared to reclassified gains during 2Q 2017 due to sales of non-agency mortgage-related securities in an unrealized loss position during 2Q 2018.
l
YTD 2018 vs. YTD 2017 - reflected larger amounts of reclassified gains during YTD 2018 due to spread tightening on sales of non-agency mortgage-related securities classified as available-for-sale.

Freddie Mac Form 10-Q
 
16
Management's Discussion and Analysis
Consolidated Results of Operations | Other Key Drivers

Other Key Drivers
Explanation of Other Key Drivers
Key Drivers:
n Benefit (provision) for credit losses
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - decreased primarily due to the impact of loan reclassifications between held-for-investment and held-for-sale.
n Gains (losses) on extinguishment of debt
l
2Q 2018 vs. 2Q 2017 - improved primarily due to an increase in the amount of gains recognized from the extinguishment of certain fixed-rate debt securities of consolidated trusts (i.e., PCs), as market rates increased between the time of issuance and repurchase, combined with an increase in the amount of debt securities of consolidated trusts repurchased. The amount of extinguishment gains or losses may vary, as the type and amount of PCs selected for repurchase are based on our investment and funding strategies, including our efforts to support the liquidity and price performance of our PCs.
l
YTD 2018 vs. YTD 2017 - remained relatively flat.
n Other gains (losses) on investment securities recognized in earnings
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - decreased primarily driven by larger fair value losses on our mortgage and non-mortgage-related securities classified as trading as interest rates increased more during the 2018 periods, partially offset by lower fair value gains driven by less spread tightening on sales of our available-for-sale non-agency mortgage-related securities.
n Other expense
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - increased primarily due to recoveries in the 2017 periods of amounts previously recognized in other expense. This activity did not repeat in the 2018 periods.
n Income tax (expense) benefit
l
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017 - decreased due to the lower statutory corporate income tax rate in the 2018 periods.



Freddie Mac Form 10-Q
 
17
Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized consolidated balance sheets.
 
 
 
 
 
Change
(Dollars in millions)
 
6/30/2018
12/31/2017
 
$
%
Assets:
 
 
 
 
 
 
Cash and cash equivalents(1)
 

$6,752


$9,811

 

($3,059
)
(31
)%
Securities purchased under agreements to resell
 
41,769

55,903

 
(14,134
)
(25
)
Subtotal
 
48,521

65,714

 
(17,193
)
(26
)
Investments in securities, at fair value
 
77,710

84,318

 
(6,608
)
(8
)
Mortgage loans, net
 
1,884,851

1,871,217

 
13,634

1

Accrued interest receivable
 
6,470

6,355

 
115

2

Derivative assets, net
 
391

375

 
16

4

Deferred tax assets, net
 
8,299

8,107

 
192

2

Other assets
 
15,490

13,690

 
1,800

13

Total assets
 

$2,041,732


$2,049,776

 

($8,044
)
—
 %
 
 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Accrued interest payable
 

$6,377


$6,221

 

$156

3
 %
Debt, net
 
2,021,162

2,034,630

 
(13,468
)
(1
)
Derivative liabilities, net
 
409

269

 
140

52

Other liabilities
 
9,199

8,968

 
231

3

Total liabilities
 
2,037,147

2,050,088

 
(12,941
)
(1
)
Total equity
 
4,585

(312
)
 
4,897

1,570

Total liabilities and equity
 

$2,041,732


$2,049,776

 

($8,044
)
—
 %
(1) The current and prior period presentation has been modified to include restricted cash and cash equivalents due to recently adopted accounting guidance.
Key Drivers:
As of June 30, 2018 compared to December 31, 2017:
n
Cash and cash equivalents and securities purchased under agreements to resell affect one another and changes in the balances should be viewed together (e.g., cash and cash equivalents can be invested in securities purchased under agreements to resell or other investments). The decrease in the combined balance was primarily due to lower near term cash needs for fewer upcoming maturities and anticipated calls of other debt.
n Investments in securities, at fair value decreased as we continued to reduce the mortgage-related investments portfolio during 2018 as required by the Purchase Agreement and FHFA.
n Other Assets increased primarily due to the recognition of receivables on sales of securities which had traded but not settled as of June 30, 2018.
n Total equity increased primarily as a result of higher comprehensive income in 2Q 2018 compared to 4Q 2017, combined with our ability to retain equity as a result of an increase in the applicable Capital Reserve Amount, which is $3.0 billion as of January 1, 2018.

Freddie Mac Form 10-Q
 
18
Management's Discussion and Analysis
 
Our Business Segments | Segment Earnings


OUR BUSINESS SEGMENTS
We have three reportable segments, which are based on the way we manage our business.
n
Single-family Guarantee - reflects results from our purchase, securitization and guarantee of single-family loans and the management of single-family mortgage credit risk.
n
Multifamily - reflects results from our purchase, sale, securitization and guarantee of multifamily loans and securities, our investments in those loans and securities and the management of multifamily mortgage credit risk and market spread risk.
n
Capital Markets - reflects results from managing our mortgage-related investments portfolio (excluding Multifamily segment investments, single-family seriously delinquent loans and the credit risk of single-family performing and reperforming loans), the treasury function, securitization activities and our interest-rate risk.
Certain activities that are not part of a reportable segment, such as material corporate-level activities that are infrequent in nature and based on decisions outside the control of the management of our reportable segments, are included in the All Other category.
Segment Earnings
We present Segment Earnings by reclassifying certain credit guarantee-related activities and investment-related activities between various line items on our GAAP condensed consolidated statements of comprehensive income and allocating certain revenues and expenses to our three reportable segments. For more information on our segment reclassifications, see Note 13.

Freddie Mac Form 10-Q
 
19
Management's Discussion and Analysis
 
Our Business Segments | Segment Earnings


Segment Comprehensive Income
The graph below shows our comprehensive income by segment.
(In millions)
chart-84a1569fcf335213a19.jpg chart-c036672fb28396c2144.jpg

Freddie Mac Form 10-Q
 
20
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Single-Family Guarantee
Market Conditions
The graphs and related discussion below present certain market indicators that can significantly affect the business and financial results of our Single-family Guarantee segment.
U.S. Single-Family Originations
chart-6dbc4b34a9f95214b51.jpgSource: Inside Mortgage Finance dated May 18, 2018 (latest available IMF purchase/refinance information).

 
Single-Family Serious Delinquency Rates
chart-5720ed93ba115b97842.jpg

Source: National Delinquency Survey from the Mortgage Bankers Association. Data as of May 16, 2018 (latest available NDS information).

Commentary
n U.S. single-family loan origination volume decreased to $445 billion in 2Q 2018 from $455 billion in 2Q 2017, driven by lower refinance volume as a result of higher mortgage interest rates in 2Q 2018. Mortgage origination data is from Inside Mortgage Finance as of July 27, 2018.
n We expect continued growth in U.S. single-family home purchase volume due to a gradual increase in housing supply and home price appreciation, while a moderate increase in mortgage interest rates is expected to result in a lower refinance volume. Freddie Mac's single-family loan purchase volumes typically follow a similar trend.
n The single-family serious delinquency rate in the U.S. decreased during 1Q 2018 as the impacts from the hurricanes in 3Q 2017 subsided and the general economy continued to improve. Freddie Mac's serious delinquency rate typically follows a similar trend.

Freddie Mac Form 10-Q
 
21
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Business Results
The following tables, graphs and related discussion present the business results of our Single-family Guarantee segment.
New Business Activity
UPB of Single-Family Loan Purchases and Guarantees by Loan Purpose
(In billions)
chart-dfe2389b116c5e58bbc.jpgchart-85ed049e0324ed4e2ef.jpg








Freddie Mac Form 10-Q
 
22
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Percentage of Single-Family Loan Purchases and Guarantees by Loan Purposechart-8ddec79dcfd53e8df7f.jpgchart-bf3ab398ac727f6c1c9.jpg
Commentary
n Our loan purchase and guarantee activity increased during 2Q 2018 compared to 2Q 2017 due to higher home purchase volume, primarily driven by an improving economy and a lower unemployment rate. However, the activity decreased during YTD 2018 primarily due to a decline in refinance activity as a result of higher average mortgage interest rates, partially offset by higher home purchase volume.
n Freddie Mac purchases loans originated by lenders using Fannie Mae's Automated Underwriting System (AUS). Fannie Mae announced changes to its AUS in July 2017, which led to an increase in eligibility for purchase of new loans with debt-to-income ratios between 45% and 50% (high DTI). These loans have minimal impact on our overall single-family credit guarantee portfolio, but we are monitoring the overall credit quality and performance of these loans. Although the purchase of these high DTI loans may increase over time, we expect to purchase fewer loans with high DTI ratios that have other high-risk characteristics.






Freddie Mac Form 10-Q
 
23
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Single-Family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfoliochart-3406f8571de55a31ae8.jpg
Commentary
n
The single-family credit guarantee portfolio increased at an annualized rate of approximately 3% from December 31, 2017 to June 30, 2018, driven by an increase in U.S. single-family mortgage debt outstanding as a result of continued home price appreciation. New business acquisitions had a higher average loan size compared to older vintages that continued to run off.
n
The Core single-family loan portfolio grew to 80% of the single-family credit guarantee portfolio at June 30, 2018, compared to 78% at December 31, 2017.
n
The Legacy and relief refinance single-family loan portfolio declined to 20% of the single-family credit guarantee portfolio at June 30, 2018, compared to 22% at December 31, 2017, driven primarily by liquidations.

Freddie Mac Form 10-Q
 
24
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Guarantee Fees
We receive fees for guaranteeing the payment of principal and interest to investors in our mortgage-related securities. These fees consist primarily of a combination of base contractual guarantee fees paid on a monthly basis and initial upfront payments. The average portfolio Segment Earnings guarantee fee rate recognizes upfront fee income over the contractual life of the related loans (usually 30 years). If the related loans prepay, the remaining upfront fee income is recognized immediately. In contrast, the average guarantee fee rate charged on new acquisitions recognizes upfront fee income over the estimated life of the related loans using our expectations of prepayments and other liquidations. See MD&A - Our Business Segments - Single-family Guarantee - Business Overview - Guarantee Fees in our 2017 Annual Report for more information on our guarantee fees.
Average Portfolio Segment Earnings Guarantee Fee Rate(1)(2)  
(In bps)
chart-53eb598598a15d1e847.jpgchart-90ef9e37786d535f853.jpg
Referenced footnotes are included after the next chart.


Freddie Mac Form 10-Q
 
25
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Average Guarantee Fee Rate(1) Charged on New Acquisitions
(In bps)
chart-e46984bf25486746af7.jpg chart-7cc71ea2f13db07c6da.jpg
(1) Excludes the legislated 10 basis point increase in guarantee fees.
(2) Reflects an average rate for our total single-family credit guarantee portfolio and is not limited to purchases in the applicable period.
Commentary
n
While the average portfolio Segment Earnings guarantee fee rate remained relatively unchanged during 2Q 2018 compared to 2Q 2017, the rate increased slightly during YTD 2018 compared to YTD 2017 due to older vintages being replaced by new loan acquisitions with higher guarantee fees.
n
The average guarantee fee rate charged on new acquisitions decreased during the 2018 periods compared to the 2017 periods due to pricing competition pressures, while maintaining a minimum return threshold established by FHFA.


Freddie Mac Form 10-Q
 
26
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Credit Risk Transfer (CRT) Activities
We transfer credit risk on a portion of our single-family credit guarantee portfolio to the private market, which reduces the risk of future losses to us and taxpayers when borrowers go into default. Our primary CRT activities are our STACR debt note and ACIS transactions, in which we pay interest to investors or premiums to insurers in exchange for their taking on a portion of the credit risk on the mortgage loans in the related reference pool. These payments effectively reduce our guarantee fee income from the PCs backed by the mortgage loans in the related reference pools. See MD&A - Our Business Segments - Single-Family Guarantee - Business Overview - Credit Risk Transfer Transactions in our 2017 Annual Report for more information on our CRT transactions.
The following charts present the issuance amounts for the CRT transactions that occurred during 2Q 2018 and the cumulative issuance amounts for all CRT transactions as of June 30, 2018 by loss position and the party holding each loss position, excluding senior subordinate securitization structures.
New CRT Transactions during 2Q 2018(1)  
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$96.2
 
Reference Pool

$99.8
 
 
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac
               
$0.3
 
ACIS(3)

             
$0.7
 
Other CRT


$1.2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
   Loss(4)
 
Freddie Mac

$0.6
 
ACIS


$0.1
 
Other CRT
 

$0.7
 
 
Cumulative CRT Transactions as of June 30, 2018(1)(2)  
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$996.3
 
Reference Pool

$1,042.2
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac


$2.6
 
ACIS(3)



$8.8
 
STACR Debt Notes

$23.6
 
Other CRT


$1.2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
   Loss(4)
 
Freddie Mac

$5.7
 
ACIS


$1.1
 
STACR
Debt Notes$2.2
 
Other
CRT

$0.7
 

(1) The amounts represent the UPB upon issuance of CRT transactions.
(2)
For the current outstanding coverage provided by our CRT transactions, see Credit Enhancements.
(3) Starting in 2Q 2018, ACIS transactions include Deep MI CRT transactions which were previously disclosed separately. The 2Q 2018 and Cumulative presentations have been modified to reflect this change.
(4) First loss includes all B tranches in our STACR debt notes and their equivalent in ACIS and Other CRT transactions.
Commentary
n
During YTD 2018, we transferred a portion of credit risk associated with $192.3 billion in UPB of loans in our single-family credit guarantee portfolio through STACR debt note, ACIS, senior subordinate securitization structures and other CRT transactions.
n
As of June 30, 2018, we had cumulatively transferred a portion of credit risk on more than $1 trillion of our single-family mortgages, based upon the UPB at issuance of the CRT transactions.

Freddie Mac Form 10-Q
 
27
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

l
For originations in the twelve months ended June 30, 2017, FHFA's Conservatorship Capital Framework (CCF) capital required for credit risk was reduced approximately 60% by CRT transactions; we plan similar risk reduction transactions for this quarter's originations.
l
The reduction in the amount of CCF capital required for credit risk on new originations is calculated as modeled conservatorship credit capital released from the underlying single-family CRT transaction reference pool divided by total modeled conservatorship credit capital on new originations at the time of purchase. For more information on the CCF and the calculation of modeled conservatorship capital required, see Risk Management - Conservatorship Capital Framework and Risk Management - Conservatorship Capital Framework - Return on Modeled Conservatorship Capital Required.
n
Our expected guarantee fee income on the PCs related to the STACR debt note, ACIS and other CRT transaction reference pool UPB has been effectively reduced by approximately 28%, on average, for all transactions executed through June 30, 2018.
n
As of June 30, 2018, we had experienced minimal write-downs on our STACR debt notes and have filed minimal claims for reimbursement of losses under our ACIS transactions.
We continue to evaluate our credit risk transfer strategy and to make changes depending on market conditions and our business strategy. The aggregate cost of our credit risk transfer activity will continue to increase as we continue to transfer credit risk on new originations.


Freddie Mac Form 10-Q
 
28
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Credit Enhancements
The table below provides information on the total current and protected UPB and maximum coverage associated with credit enhanced loans in our single-family credit guarantee portfolio as of June 30, 2018 and December 31, 2017, respectively. The table includes all types of single-family credit enhancements. See Note 6 for additional information about our single-family credit enhancements.
 
 
June 30, 2018
 
December 31, 2017
(In millions)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
Primary mortgage insurance
 

$351,776


$90,085

 

$334,189


$85,429

STACR debt note
 
641,850

18,670

 
604,356

17,788

ACIS transactions(3)
 
698,012

7,873

 
625,082

6,933

Senior subordinate securitization structures
 
24,684

2,860

 
12,283

1,913

Other(3)(4)
 
88,554

8,173

 
8,623

6,282

Less: UPB with more than one type of credit enhancement
 
(866,047
)
—

 
(775,751
)
—

Single-family credit guarantee portfolio with credit enhancement
 
938,829

127,661

 
808,782

118,345

Single-family credit guarantee portfolio without credit enhancement
 
916,618

—

 
1,020,098

—

Total
 

$1,855,447


$127,661

 

$1,828,880


$118,345

(1)
Except for the majority of our STACR debt notes and ACIS transactions, our credit enhancements generally provide protection for the first, or initial, credit losses associated with the related loans. For STACR debt notes and ACIS transactions, total current and protected UPB represents the UPB of the assets included in the reference pool. For senior subordinate securitization structures, total current and protected UPB represents the UPB of the guaranteed securities.
(2)
Except for senior subordinate securitization structures, this represents the remaining amount of loss recovery that is available subject to the terms of counterparty agreements. Specifically, for STACR debt notes, this represents the outstanding balance of STACR debt notes held by third parties, and for ACIS transactions, this represents the remaining aggregate limit of insurance purchased from third parties. For senior subordinate securitization structures, this represents the UPB of the securities that are subordinate to our guarantee and held by third parties, which could provide protection by absorbing first losses.
(3)
Starting in 2Q 2018, ACIS transactions include Deep MI CRT transactions which were previously disclosed under "Other" transactions. The current and prior period presentation has been modified to reflect this change.
(4)
Includes seller indemnification, lender recourse and indemnification agreements, pool insurance, HFA indemnification and other credit enhancements.

Commentary
n We had coverage remaining of $127.7 billion and $118.3 billion on our single-family credit guarantee portfolio as of June 30, 2018 and December 31, 2017, respectively. Credit risk transfer transactions provided 24.5% and 22.4% of the coverage remaining at those dates, respectively.

Freddie Mac Form 10-Q
 
29
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Mortgage Loan Credit Risk
Certain combinations of loan attributes can indicate a higher degree of credit risk, such as loans with both higher LTV ratios and lower credit scores. The following table presents the combination of credit score and current LTV (CLTV) ratio attributes of loans in our single-family credit guarantee portfolio.
 
 
June 30, 2018
 
 
CLTV ≤ 80

CLTV > 80 to 100

CLTV > 100

All Loans
(Credit score)
 
% Portfolio
SDQ Rate(1)

% Portfolio
SDQ Rate(1)

% Portfolio
SDQ Rate(1)

% Portfolio
SDQ Rate(1)
% Modified
Core single-family loan portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
0.3
%
2.23
%
 
—
%
NM

 
—
%
NM

 
0.3
%
2.39
%
3.5
%
620 to 659
 
2.0

1.21

 
0.3

1.36
%
 
—

NM

 
2.3

1.23

1.7

≥ 660
 
68.2

0.2

 
9.0

0.28

 
—

NM

 
77.2

0.21

0.3

Not available
 
0.1

1.74

 
—

NM

 
—

NM

 
0.1

3.25

3.6

Total
 
70.6
%
0.24
%
 
9.3
%
0.35
%
 
—
%
NM

 
79.9
%
0.25
%
0.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legacy and relief refinance single-family loan portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
1.2
%
4.44
%
 
0.2
%
8.77
%
 
0.1
%
14.67
%
 
1.5
%
5.32
%
23.4
%
620 to 659
 
1.9

3.41

 
0.3

7.13

 
0.2

12.01

 
2.4

4.07

20.3

≥ 660
 
14.0

1.25

 
1.6

3.83

 
0.5

6.25

 
16.1

1.51

7.4

Not available
 
0.1

4.87

 
—

NM

 
—

NM

 
0.1

5.21

18.9

Total
 
17.2
%
1.76
%
 
2.1
%
4.93
%
 
0.8
%
8.46
%
 
20.1
%
2.14
%
10.2
%
(1)
NM - Not meaningful due to the percentage of the portfolio rounding to zero.

Freddie Mac Form 10-Q
 
30
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Alt-A and Subprime Loans
While we have referred to certain loans as subprime or Alt-A for purposes of the discussion below and elsewhere in this Form 10-Q, there is no universally accepted definition of subprime or Alt-A, and the classification of such loans may differ from company to company. We do not rely on these loan classifications to evaluate the credit risk exposure relating to such loans in our single-family credit guarantee portfolio.
Participants in the mortgage market have characterized single-family loans based upon their overall credit quality at the time of origination, including as prime or subprime. While we have not historically characterized the loans in our single-family credit guarantee portfolio as either prime or subprime, we monitor the amount of loans we have guaranteed with characteristics that indicate a higher degree of credit risk. In addition, we estimate that approximately $0.9 billion and $1.1 billion of security collateral underlying our other securitization products at June 30, 2018 and December 31, 2017, respectively, were identified as subprime based on information provided to us when we entered into these transactions.
Mortgage market participants have classified single-family loans as Alt-A if these loans have credit characteristics that range between the prime and subprime categories, if they are underwritten with lower or alternative income or asset documentation requirements compared to a full documentation loan, or both. Although we have discontinued new purchases of loans with lower documentation standards, we continue to purchase certain amounts of such loans in cases where the loan was either purchased pursuant to a previously issued guarantee, as part of our relief refinance initiative, or as part of another refinance loan initiative and the pre-existing loan was originated under less than full documentation standards. In the event we purchase a refinance loan and the original loan had been previously identified as Alt-A, such refinance loan may no longer be categorized or reported as an Alt-A loan in this Form 10-Q and our other financial reports because the new refinance loan replacing the original loan would not be identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such refinancing not occurred. From the time the relief refinance initiative began in 2009 to June 30, 2018, we have purchased approximately $36.2 billion of relief refinance loans that were previously categorized as Alt-A loans in our portfolio, including $0.1 billion in 2Q 2018.
The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
 
 
June 30, 2018
 
December 31, 2017
(Dollars in billions)
 
UPB
CLTV
% Modified
SDQ Rate
 
UPB
CLTV
% Modified
SDQ Rate
Alt-A
 

$25.3

64
%
24.1
%
4.83
%
 

$27.1

67
%
24.1
%
5.62
%
The UPB of Alt-A loans in our single-family credit guarantee portfolio declined during YTD 2018 primarily due to borrowers refinancing into other mortgage products, foreclosure sales and other liquidation events. Significant portions of the Alt-A loans in our portfolio are concentrated in Arizona, California, Florida and Nevada.

Freddie Mac Form 10-Q
 
31
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Single-Family Loan Performance
Serious Delinquency Rates chart-74cf5cda840b5f888ab.jpg
 
Delinquency Rates for Loans One Month and Two Months Past Due
chart-d5bf52ce68f453a69b3.jpg

Commentary
n
Total serious delinquency rate on our single-family credit guarantee portfolio was lower as of June 30, 2018 compared to June 30, 2017 due to our continued loss mitigation efforts, sales of certain seriously delinquent loans from our legacy and relief refinance single-family portfolio, home price appreciation and a low unemployment rate, partially offset by the impact of the hurricanes in 3Q 2017. This improvement was also driven by the continued shift in the single-family credit guarantee portfolio mix, as the Legacy and relief refinance single-family loan portfolio runs off and we add higher credit quality loans to our Core single-family loan portfolio. Delinquency rates for both loans one month past due and loans two months past due were similarly affected.

Freddie Mac Form 10-Q
 
32
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Credit Performance
The table below contains certain credit performance metrics for our single-family credit guarantee portfolio.
(Dollars in millions)
 
2Q 2018
2Q 2017
 
YTD 2018
YTD 2017
Charge-offs, gross
 

$599


$2,153

 

$971


$2,893

Recoveries
 
(126
)
(85
)
 
(222
)
(182
)
Charge-offs, net
 
473

2,068

 
749

2,711

REO operations expense
 
15

37

 
49

93

Total credit losses
 

$488


$2,105

 

$798


$2,804

 
 
 
 
 
 
 
Total credit losses (in bps)
 
10.5

46.7

 
8.6

31.2

The table below summarizes the carrying value for individually impaired single-family loans on our condensed consolidated balance sheets for which we have recorded an allowance determined on an individual basis.
                                            
 
June 30, 2018
 
June 30, 2017
(Dollars in millions)
 
Loan Count
Amount
 
Loan Count
Amount
TDRs, at January 1
 
364,704


$54,415

 
485,709


$78,869

New additions
 
36,796

5,819

 
20,641

2,851

Repayments and reclassifications to held-for-sale
 
(27,650
)
(4,532
)
 
(72,254
)
(14,776
)
Foreclosure sales and foreclosure alternatives
 
(4,203
)
(566
)
 
(5,514
)
(751
)
TDRs, at June 30
 
369,647

55,136

 
428,582

66,193

Loans impaired upon purchase
 
4,031

265

 
6,615

443

Total impaired loans with an allowance recorded
 
373,678

55,401

 
435,197

66,636

Allowance for loan losses
 
 
(6,592
)
 
 
(8,846
)
Net investment, at June 30
 
 

$48,809

 
 

$57,790

The tables below present information about the UPB of single-family TDRs and non-accrual loans on our condensed consolidated balance sheets.
(In millions)
 
June 30, 2018
December 31, 2017
TDRs on accrual status
 

$54,406


$51,644

Non-accrual loans
 
13,301

17,748

Total TDRs and non-accrual loans
 

$67,707


$69,392

 
 
 
 
Allowance for loan losses associated with:
 
 
 
  TDRs on accrual status
 

$5,393


$5,257

  Non-accrual loans
 
1,510

1,883

Total
 

$6,903


$7,140

 
 
 
 
(In millions)
 
YTD 2018
YTD 2017
Foregone interest income on TDRs and non-accrual loans(1)
 

$742


$988

(1)
Represents the amount of interest income that we did not recognize but would have recognized during the period for loans outstanding at the end of each period had the loans performed according to their original contractual terms.

Freddie Mac Form 10-Q
 
33
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Commentary
n
As of June 30, 2018, 52% of the allowance for loan losses for single-family mortgage loans related to interest rate concessions provided to borrowers as part of loan modifications.
n
Most of our modified single-family loans, including TDRs, were current and performing at June 30, 2018.
n
We expect our allowance for loan losses associated with existing single-family TDRs to decline over time as we continue to sell reperforming loans. In addition, the allowance for loan losses will decline as borrowers continue to make monthly payments under the modified terms and interest rate concessions are amortized into earnings.
n
See Note 4 for information on our single-family allowance for loan losses.




Freddie Mac Form 10-Q
 
34
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Loss Mitigation Activities
Loan Workout Activity(1)  
(UPB in billions, number of loan workouts in thousands)
chart-f15b608d8b535447aca.jpgchart-50ecd547bec8f10e0ae.jpg
(1)
Foreclosure alternatives consist of short sales and deeds in lieu of foreclosure. Home retention actions consist of forbearance agreements, repayment plans and loan modifications.
Commentary
n
Our loan workout activity increased in the 2018 periods, driven by the impact of the hurricanes in 3Q 2017.
n
We continue our loss mitigation efforts through our relief refinance, modification and other initiatives.


Freddie Mac Form 10-Q
 
35
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

REO Activity
The table below presents a summary of our single-family REO activity.
 
 
2Q 2018
 
2Q 2017
 
YTD 2018
 
YTD 2017
(Dollars in millions)
 
Number of Properties
Amount
 
Number of Properties
Amount
 
Number of Properties
Amount
 
Number of Properties
Amount
Beginning balance — REO
 
7,718


$840

 
10,938


$1,162

 
8,299


$900

 
11,418


$1,215

Additions
 
2,744

266

 
3,299

321

 
5,364

512

 
6,844

667

Dispositions
 
(3,327
)
(329
)
 
(4,322
)
(437
)
 
(6,528
)
(635
)
 
(8,347
)
(836
)
Ending balance — REO
 
7,135

777

 
9,915

1,046

 
7,135

777

 
9,915

1,046

Beginning balance, valuation allowance
 
 
(9
)
 
 
(19
)
 
 
(14
)
 
 
(17
)
Change in valuation allowance
 
 
3

 
 
9

 
 
8

 
 
7

Ending balance, valuation allowance
 


(6
)
 


(10
)
 
 
(6
)
 


(10
)
Ending balance — REO, net
 



$771

 



$1,036

 
 

$771

 



$1,036

Commentary
n
Our REO ending inventory declined in the 2018 periods primarily due to a decrease in REO acquisitions driven by fewer loans in foreclosure and a large proportion of property sales to third parties at foreclosure.

Freddie Mac Form 10-Q
 
36
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Financial Results
The table below presents the components of Segment Earnings and comprehensive income for our Single-family Guarantee segment.
 
 
 
 
 
Change
 
 
 
 
Change
(Dollars in millions)
 
2Q 2018
2Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Guarantee fee income
 

$1,571


$1,506

 

$65

4
 %
 

$3,084


$2,924

 

$160

5
 %
Benefit (provision) for credit losses
 
103

12

 
91

758

 
131

51

 
80

157

Other non-interest income (loss)
 
119

359

 
(240
)
(67
)
 
213

678

 
(465
)
(69
)
Administrative expense
 
(363
)
(332
)
 
(31
)
(9
)
 
(699
)
(665
)
 
(34
)
(5
)
REO operations expense
 
(20
)
(41
)
 
21

51

 
(59
)
(100
)
 
41

41

Other non-interest expense
 
(400
)
(335
)
 
(65
)
(19
)
 
(779
)
(653
)
 
(126
)
(19
)
Segment Earnings before income tax expense
 
1,010

1,169

 
(159
)
(14
)
 
1,891

2,235

 
(344
)
(15
)
Income tax expense
 
(207
)
(391
)
 
184

47

 
(386
)
(747
)
 
361

48

Segment Earnings, net of taxes
 
803

778

 
25

3

 
1,505

1,488

 
17

1

Total other comprehensive income (loss), net of tax
 
(2
)
—

 
(2
)
N/A

 
(6
)
(2
)
 
(4
)
(200
)
Total comprehensive income
 

$801


$778

 

$23

3
 %
 

$1,499


$1,486

 

$13

1
 %
Key Business Drivers:
n 2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017
l Continued growth in our single-family credit guarantee portfolio and higher upfront fee amortization income resulted in increased guarantee fee income.
l Benefit for credit losses remained relatively unchanged.
l Losses in the 2018 periods compared to gains in the 2017 periods on single-family seasoned loan reclassifications between held-for-investment and held-for-sale.
l Small fair value gains on STACR debt notes in the 2018 periods compared to fair value losses in the 2017 periods as a result of market spreads between STACR yields and LIBOR remaining relatively unchanged in the 2018 periods, while spreads tightened during the 2017 periods.





Freddie Mac Form 10-Q
 
37
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Multifamily
Market Conditions
The graphs and related discussion below present certain multifamily market indicators that can significantly affect the business and financial results of our Multifamily segment.
Change in Effective Rents chart-c72559e351bc51a5aa5.jpgSource: REIS, Inc.
 
Apartment Vacancy Rates
chart-c8935409c502568399f.jpgSource: REIS, Inc.


Commentary
n
Growth in effective rent (i.e., the average rent paid by the tenant over the term of the lease, adjusted for concessions by the landlord and costs borne by the tenant) for 2Q 2018 remained strong relative to the long-term average, primarily due to an increase in potential renters driven by healthy employment, higher single-family home prices and a growing demand for rental housing due to lifestyle changes and demographic trends.
n
While vacancy rates rose slightly during 2Q 2018 compared to 1Q 2018, these rates remain well below the long-term average. Net absorptions continued to lag new apartment completions in 2Q 2018. Although we expect continued strong demand, it may take longer to absorb new units compared to prior quarters.
n
Our financial results for 2Q 2018 were not significantly affected by these relatively stable market conditions.

Freddie Mac Form 10-Q
 
38
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


K Certificate Benchmark Spreads
chart-7ba43242327f5e0cbca.jpg
Source: Independent dealers

Commentary
n
The valuation of our securitization pipeline and the profitability of our primary risk transfer securitization product, the K Certificate, are affected by both changes in K Certificate benchmark spreads and deal-specific attributes, such as tranche size, risk distribution and collateral characteristics (loan term, coupon type, prepayment restrictions and underlying property type). These market spread movements and deal-specific attributes contribute to our earnings volatility, which we manage by controlling the size of our securitization pipeline and by entering into certain spread-related derivatives. Spread tightening generally results in fair value gains, while spread widening generally results in fair value losses.
n
K Certificate benchmark spreads are market-quoted spreads over the U.S. swap curve. The 10-year fixed-rate spread represents the spread for the largest guaranteed class of a typical fixed-rate K Certificate, while the 7-year floating-rate spread represents the spread for the largest guaranteed class of a typical floating-rate K Certificate.

Freddie Mac Form 10-Q
 
39
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Business Results
The graphs, tables and related discussion below present the business results of our Multifamily segment.
New Business Activity
Multifamily New Business Activity
(UPB in billions)
chart-8013655fe7c24b166df.jpg chart-b1e1da9136d09a9a187.jpg
Commentary
n
The 2018 Conservatorship Scorecard annual production cap was $35.0 billion, unchanged from 1Q 2018. The production cap is subject to reassessment throughout the year by FHFA to determine whether an increase in the cap is appropriate based on a stronger than expected overall market. Reclassifications between new business activity subject to the production cap and new business activity not subject to the production cap may occur during 2018.
n
Outstanding purchase commitments were $20.9 billion and $19.0 billion as of June 30, 2018 and June 30, 2017, respectively. Both periods include purchase commitments for which we have elected the fair value option.

Freddie Mac Form 10-Q
 
40
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


n
Our new business activity and outstanding purchase commitments were higher for the 2018 periods than the 2017 periods due to continued strong demand for multifamily loan products and our strategic pricing efforts.
n
Approximately 32% and 39% of our multifamily new business activity during 2Q 2018 and YTD 2018, respectively, counted towards the 2018 Conservatorship Scorecard production cap, while the remaining 68% and 61% was considered uncapped.
n
Our uncapped new business activity increased during the 2018 periods compared to the 2017 periods as we continued our efforts to support borrowers in certain property types and communities that meet the criteria for affordability and Green Advantage loans.
n
Approximately 92% of our 2Q 2018 new business activity compared to 91% of our 2Q 2017 new business activity was intended for our securitization pipeline. Combined with market demand for our securities, our 2Q 2018 new business activity will be a driver for securitizations in the second half of 2018.




Freddie Mac Form 10-Q
 
41
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Multifamily Portfolio and Market Support
Total Multifamily Portfolio
chart-29ea9bf33e6555ebbc9.jpg
 
Multifamily Mortgage Investments Portfolio
chart-27badf901c6c5cbb9e1.jpg
Multifamily Market Support
The following table summarizes our support of the multifamily market.
(UPB in millions)
 
June 30, 2018
December 31, 2017
Unsecuritized mortgage loans held-for-sale
 

$16,752


$20,537

Unsecuritized mortgage loans held-for-investment
 
14,531

17,702

Unsecuritized non-mortgage loans(1)
 
564

473

Mortgage-related securities(2)
 
7,214

7,451

Guarantee portfolio
 
220,212

203,074

Total multifamily portfolio
 
259,273

249,237

Add: Unguaranteed securities(3)
 
33,475

30,890

Less: Acquired mortgage-related securities(4)
 
(6,957
)
(7,109
)
Total multifamily market support
 

$285,791


$273,018

(1)
Reflects the UPB of financing provided to investment funds.
(2)
Includes mortgage-related securities acquired by us from our securitizations. We have not invested in unguaranteed securities that are in a first loss position.
(3)
Reflects the UPB of unguaranteed securities issued as part of our securitizations and amounts related to loans sold to investment funds that were not financed by Freddie Mac.
(4)
Reflects the UPB of mortgage-related securities that were both issued and acquired by us. This UPB must be removed to avoid double-counting the exposure, as it is already reflected within the guarantee portfolio and/or unguaranteed securities.

Freddie Mac Form 10-Q
 
42
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Commentary
n
Our total multifamily portfolio increased during YTD 2018 primarily due to new loan purchases. The vast majority of the growth in our guarantee portfolio was associated with ongoing securitizations, primarily K Certificates and SB Certificates.
n
At June 30, 2018, the UPB of our unsecuritized held-for-sale loans, which are measured at fair value or lower-of-cost-or-fair-value, decreased from December 31, 2017. The decrease was primarily driven by ongoing securitizations, partially offset by new held-for-sale loan purchases.
n
At June 30, 2018, approximately 71% of our held-for-sale loans and held-for sale loan commitments were fixed-rate, while the remaining 29% were floating rate.
n
We expect our guarantee portfolio to continue to grow as a result of ongoing securitizations, which we expect to be driven by continued strong new business activity.

Freddie Mac Form 10-Q
 
43
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Net Interest Yield and Weighted Average Portfolio Balance
Net Interest Yield Earned
(Weighted average balance in billions)
chart-e7816c24fbfca79e272.jpg chart-2593d5d8ea489104c74.jpg
Commentary
n
Net interest yield increased during the 2018 periods compared to the 2017 periods primarily due to higher prepayment income received from interest-only securities, coupled with an increase in our interest-only security holdings which generally have higher yields relative to our non-interest-only securities.
n
The weighted average portfolio balance of interest-earning assets decreased during the 2018 periods due to the run-off of our legacy held-for-investment loans.

Freddie Mac Form 10-Q
 
44
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Credit Risk Transfer Activity
Credit Risk Transfer Activity and New Business Activity
(UPB in billions)
chart-5f016f183e2d113b7cb.jpg chart-fb2d176e154e83e7bb6.jpg

Freddie Mac Form 10-Q
 
45
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Credit Risk Transfer Activity(1)  
(UPB in billions)
chart-8320eacfc4400d6a898.jpg chart-1a2b72b5d321b8fa2a9.jpg
(1)
The amounts disclosed in the bar graph above represent the UPB of credit risk transferred to third parties.
Commentary
n
The structures for credit risk transfer transactions, primarily the K Certificate and SB Certificate structures, vary by deal. Structural deal features such as term, type of underlying loan product, and subordination levels generally influence the deal's size and risk profile, which ultimately affect the guarantee fee rate set by Freddie Mac, as Guarantor, at the time of securitization.
n
We executed $14.2 billion in UPB of credit risk transfer transactions during 2Q 2018 and $278.9 billion in UPB since 2009. Through these transactions, we transferred a large majority of the expected and stress credit risk of the underlying assets, primarily by issuing unguaranteed subordinated securities, as part of our K Certificate and SB Certificate transactions. Also, we began selling certain of our loans to investment funds in 3Q 2017, resulting in the transfer of the associated credit risk of those loans to third parties.

Freddie Mac Form 10-Q
 
46
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


n
The UPB of our credit risk transfer transactions was higher during 2Q 2018 compared to 2Q 2017, primarily due to a larger average balance in our securitization pipeline, which was driven by strong new loan purchase activity during the latter part of 2017.
n
As of June 30, 2018, we had cumulatively transferred a large majority of credit risk on the multifamily guarantee portfolio.
l
For originations in the twelve months ended June 30, 2017, CCF capital required for credit risk was reduced approximately 90% by CRT transactions; we plan similar risk reduction transactions for this quarter's originations.
l
The reduction in the amount of CCF capital required for credit risk on new originations is calculated as modeled conservatorship credit capital released from CRT transactions (primarily through K Certificates and SB Certificates) divided by total modeled conservatorship credit capital on new originations at the time of purchase. For more information on the CCF and the calculation of modeled conservatorship capital required, see Risk Management - Conservatorship Capital Framework and Risk Management - Conservatorship Capital Framework - Return on Modeled Conservatorship Capital Required.
n
In addition to transferring a large majority of the expected and stress credit risk, nearly all of our credit risk transfer transactions also shifted certain non-credit risks associated with the underlying assets, such as interest-rate risk and liquidity risk, away from Freddie Mac to third-party investors.
n
Based on the strength of our new business activity and our outstanding purchase commitments for YTD 2018, we expect our credit risk transfer activity for the full year 2018 to exceed our full year 2017 activity.
n
While our K Certificate and SB Certificate issuances continue to be our primary mechanism to transfer multifamily mortgage credit and certain non-credit risk, we expect to continue to develop new risk transfer initiatives throughout 2018.


Freddie Mac Form 10-Q
 
47
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Financial Guarantee Activity
Unearned Guarantee Fees on New Guarantee Contracts
(Dollars in millions)
chart-0af81ef0b26353e3223.jpg chart-323dee48c1728187eb1.jpg
Remaining Unearned Guarantee Fees
chart-411903926b78248c799.jpg

Freddie Mac Form 10-Q
 
48
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Commentary
n
We earn guarantee fees in exchange for providing our guarantee of some or all of the securities we issue as part of our securitization products. Each time we enter into a financial guarantee contract, we initially recognize unearned guarantee fees on our balance sheet, which represent the present value of future guarantee fees we expect to receive in cash. We recognize these fees in segment earnings over the expected remaining guarantee term. While we expect to collect these future fees based on historical performance, the actual amount collected will depend on the performance of the underlying collateral subject to our financial guarantee.
n New unearned guarantee fees increased during the 2018 periods compared to the 2017 periods primarily due to an increase in the UPB of our securitizations, offset by lower average guarantee fee rates due to underlying loan products that, by their nature and design, have less risk and for which we therefore set a lower guarantee fee rate.
n
The remaining balance of unearned guarantee fees increased slightly during YTD 2018, as the increase attributable to the growth of our securitization volume outpaced the decrease due to seasoning and run-off of prior securitizations.



Freddie Mac Form 10-Q
 
49
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Financial Results
The table below presents the components of Segment Earnings and comprehensive income for our Multifamily segment.
 
 
 
 
 
Change
 
 
 
 
Change
(Dollars in millions)
 
2Q 2018
2Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Net interest income
 

$293


$292

 

$1

—
 %
 

$564


$563

 

$1

—
 %
Guarantee fee income
 
204

162

 
42

26

 
399

313

 
86

27

Benefit (provision) for credit losses
 
2

6

 
(4
)
(67
)
 
18

12

 
6

50

Gains (losses) on loans and other non-interest income
 
75

412

 
(337
)
(82
)
 
(355
)
648

 
(1,003
)
(155
)
Derivative gains (losses)
 
224

(180
)
 
404

224

 
879

(53
)
 
932

1,758

Administrative expense
 
(106
)
(95
)
 
(11
)
(12
)
 
(206
)
(190
)
 
(16
)
(8
)
Other non-interest expense
 
(4
)
(12
)
 
8

67

 
(18
)
(33
)
 
15

45

Segment Earnings before income tax expense
 
688

585

 
103

18

 
1,281

1,260

 
21

2

Income tax expense
 
(140
)
(196
)
 
56

29

 
(261
)
(422
)
 
161

38

Segment Earnings, net of taxes
 
548

389

 
159

41

 
1,020

838

 
182

22

Total other comprehensive income (loss), net of tax
 
(24
)
73

 
(97
)
(133
)
 
(92
)
69

 
(161
)
(233
)
Total comprehensive income (loss)
 

$524


$462

 

$62

13
 %
 

$928


$907

 

$21

2
 %
Key Business Drivers:
n
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017
l
Higher net interest yields, offset by a decline in our weighted average portfolio balance of interest-earning assets, resulted in relatively flat net interest income.
l
Continued growth in our multifamily guarantee portfolio resulted in increased guarantee fee income.
l
Derivative gains (losses) are largely offset by interest rate-related fair value changes on the loans and investment securities being economically hedged, resulting in interest rate changes having a minimal net impact on total comprehensive income.
l
Spread widening on non-agency CMBS, coupled with the effects of strategic pricing, resulted in lower fair value gains for our securitization pipeline and investment securities.






Freddie Mac Form 10-Q
 
50
Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


Capital Markets
Market Conditions
The following graphs and related discussion present the par swap rate curves as of the end of each comparative period. Changes in par swap rates can significantly affect the fair value of our debt, derivatives and mortgage and non-mortgage-related securities. However, the majority of these fair value changes recorded in the financial statements are offset by our hedge accounting programs.
Par Swap Rate Curves
chart-c2f507a8dcbc5ab8903.jpg
Source: BlackRock

 
chart-640b8c04afb655a7aeb.jpg

Commentary
n
The par swap curve flattened during 2018 as short-term interest rates increased more than long-term interest rates. Long-term interest rates increased during the 2018 periods compared to small decreases during the 2017 periods. The increases resulted in larger fair value gains for our pay-fixed interest rate swaps, forward commitments to issue PCs, and futures, partially offset by larger fair value losses for our receive-fixed interest rate swaps and the vast majority of our investments in securities. The net amount of these changes in fair value was mostly offset by the change in fair value of the hedged items attributable to interest-rate risk in our hedge accounting programs.

Freddie Mac Form 10-Q
 
51
Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


Business Results
The graphs and related discussion below present the business results of our Capital Markets segment.
Investing Activity
The following graphs present the Capital Markets segment's total investments portfolio and the composition of its mortgage investments portfolio by liquidity category.
Investments Portfolio
chart-7b7cab16570250cf97b.jpg
 
Mortgage Investments Portfolio
chart-fc1574122a9a530d9a5.jpg
Commentary
n
We continue to reduce the size of our mortgage investments portfolio in order to comply with the mortgage-related investments portfolio year-end limits. The balance of our mortgage investments portfolio declined 3.8% from December 31, 2017 to June 30, 2018.
n
The balance of our other investments and cash portfolio declined by 18.0%, primarily due to reduced near term cash needs as of June 30, 2018 compared to December 31, 2017. As part of our secured lending activities, in 2Q 2018, we began providing secured term financing through revolving lines of credit collateralized by the value of contractual mortgage servicing rights on certain mortgages we own.
n
The percentage of less liquid assets relative to our total mortgage investments portfolio declined from 28.4% at December 31, 2017 to 27.2% at June 30, 2018, primarily due to our active disposition of less liquid assets and repayments. We continued to actively reduce our holdings of less liquid assets during YTD 2018 by selling $3.9 billion of reperforming loans and $1.7 billion of non-agency mortgage-related securities. Our sales of reperforming loans involved securitization of the loans using senior subordinate structures.

Freddie Mac Form 10-Q
 
52
Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


n
The overall liquidity of our mortgage investments portfolio continued to improve as our less liquid assets decreased at a faster pace than the overall decline of our mortgage investments portfolio.

Freddie Mac Form 10-Q
 
53
Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


Net Interest Yield and Average Balances
Net Interest Yield & Average Investments Portfolio Balances
(UPB in billions)
chart-7538c92aa7a959f9b33.jpgchart-54f596f3d105c2676a2.jpg
Commentary
n
Net interest yield increased 26 and 16 basis points during 2Q 2018 and YTD 2018, respectively, primarily due to changes in our investment mix as we reduced our less liquid assets and our other investments and cash portfolio, coupled with an increase in the yield on our newly acquired mortgage-related assets and other investments and cash portfolio as interest rates increased. These increased yields were partially offset by an increase in our funding costs.
n Capital Markets segment net interest yield in the graph above is not affected by our hedge accounting programs. See Note 13 in our 2017 Annual Report for more information.


Freddie Mac Form 10-Q
 
54
Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


Financial Results
The table below presents the components of Segment Earnings and comprehensive income for our Capital Markets segment.
 
 
 
 
 
Change
 
 
 
 
Change
(Dollars in millions)
 
2Q 2018
2Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Net interest income
 

$862


$875

 

($13
)
(1
)%
 

$1,679


$1,804

 

($125
)
(7
)%
Net impairment of available-for-sale securities recognized in earnings
 
26

71

 
(45
)
(63
)
 
137

144

 
(7
)
(5
)
Derivative gains (losses)
 
309

(485
)
 
794

164

 
1,611

(433
)
 
2,044

472

Gains (losses) on trading securities
 
(232
)
(46
)
 
(186
)
(404
)
 
(703
)
(181
)
 
(522
)
(288
)
Other non-interest income
 
571

418

 
153

37

 
1,096

1,162

 
(66
)
(6
)
Administrative expense
 
(89
)
(86
)
 
(3
)
(3
)
 
(173
)
(169
)
 
(4
)
(2
)
Segment Earnings before income tax expense
 
1,447

747

 
700

94

 
3,647

2,327

 
1,320

57

Income tax expense
 
(295
)
(250
)
 
(45
)
(18
)
 
(743
)
(778
)
 
35

4

Segment Earnings, net of taxes
 
1,152

497

 
655

132

 
2,904

1,549

 
1,355

87

Total other comprehensive income (loss), net of tax
 
(42
)
249

 
(291
)
(117
)
 
(746
)
278

 
(1,024
)
(368
)
Total comprehensive income (loss)
 

$1,110


$746

 

$364

49
 %
 

$2,158


$1,827

 

$331

18
 %
The portion of total comprehensive income (loss) driven by interest rate-related and market spread-related fair value changes, after-tax, is presented in the table below. These amounts affect various line items in the table above, including net interest income, derivative gains (losses), gains (losses) on trading securities, other non-interest income, income tax expense and total other comprehensive income (loss), net of tax.
 
 
 
 
 
Change
 
 
 
 
Change
(Dollars in billions)
 
2Q 2018
2Q 2017
 
$
%
 
YTD 2018
YTD 2017
 
$
%
Interest rate-related
 

($0.1
)

($0.1
)
 

$—

—
 %
 

($0.1
)

($0.1
)
 

$—

—
 %
Market spread-related
 
—

0.2

 
(0.2
)
(100
)
 
0.2

0.3

 
(0.1
)
(33
)
Key Business Drivers:
n
2Q 2018 vs. 2Q 2017 and YTD 2018 vs. YTD 2017
l
The continued reduction in the balance of our mortgage-related investments portfolio resulted in a decrease in net interest income.
l Interest rate-related fair value changes remained relatively flat. Long-term interest rates increased during the 2018 periods compared to small decreases during the 2017 periods, resulting in higher fair value losses for the vast majority of our investments in securities (some of which are recorded in other comprehensive income) and our receive-fixed interest rate swaps, and higher fair value gains for our pay-fixed interest rate swaps, forward commitments to issue PCs, and futures. The net amount of these changes in fair value was mostly offset by the change in fair value of the hedged items attributable to interest-rate risk in our hedge accounting programs. The remaining amount of interest rate-related fair value changes was primarily attributable to the reversal of previously recognized derivative gains and losses and the implied net cost on instruments such as swaptions, futures, and forward purchase and sale commitments from our

Freddie Mac Form 10-Q
 
55
Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


hedging and interest-rate risk management activities. See Market Risk for additional information on the effect of market-related items on our comprehensive income.
l
Decreased spread related gains during the 2018 periods compared to the 2017 periods due to lower non-agency mortgage-related securities balances and less spread tightening.
l Recognition of a $0.3 billion gain from the Nomura judgment during 2Q 2018. See Note 14 for additional information on the Nomura judgment.
l
Increase in gains on sales of single-family reperforming loans due to a higher volume of loans sold into senior subordinate securitization structures, partially offset by lower execution margin in the 2018 periods.

Freddie Mac Form 10-Q
 
56
Management's Discussion and Analysis
 
Risk Management | Conservatorship Capital Framework



RISK MANAGEMENT
Risk is an inherent part of our business activities. We are exposed to four major types of risk: credit risk, operational risk, market risk and liquidity risk.
For more discussion of these and other risks facing our business and our risk management framework, see MD&A - Risk Management and Risk Factors in our 2017 Annual Report and Liquidity and Capital Resources in this report and in our 2017 Annual Report. See below for updates since our 2017 Annual Report.
Conservatorship Capital Framework
In May 2017, FHFA, as Conservator, issued guidance to us to evaluate and manage our financial risk and to make economic business decisions, while in conservatorship, utilizing a newly-developed Conservatorship Capital Framework (CCF), an economic capital system with detailed formulae provided by FHFA. The CCF also provides the foundation for the risk-based component of the proposed Enterprise Capital Rule published by FHFA in the Federal Register in July 2018. For more information on the proposed rule, see Regulation and Supervision - Legislative and Regulatory Developments - Proposed Enterprise Capital Rule. The CCF assesses capital required under a severe stress event and includes credit, market, counterparty and operational risks, as well as a “going concern” buffer. This severe stress event is generally consistent with the 2016 Dodd-Frank Act Stress Test “severely adverse” scenario, which was publicly reported on August 7, 2017.
The CCF is used to establish the modeled capital required to evaluate business decisions and ensure the company makes such decisions prudently when pricing transactions and managing its businesses. This risk-versus-return framework focuses on the profits earned versus an estimated cost of equity capital required to support the risk assumed to generate those profits. Management relies upon this framework in its decision-making.
For several years, we have used an internal economic capital model to similarly support our risk-versus-return framework for decision making and analysis. As our internal model was largely based upon the same principles used in the development of the CCF, the impact of the implementation of the CCF in 2017 was not significant to our decision-making.
Under the CCF, hypothetical common equity is considered the only type of capital for our risk-versus-return decision-making. We use the estimated cost of equity capital to evaluate returns on transactions and business portfolios.
In addition, under the Purchase Agreement, we are not able to permanently retain capital in excess of the $3.0 billion Capital Reserve Amount. As a result, we do not have capital sufficient to support our aggregate risk-taking activities. Instead, we rely upon the Purchase Agreement to maintain market confidence.
The existing regulatory capital requirements have been suspended by FHFA during conservatorship. Consequently, we refer to the capital required by the CCF for analysis of transactions and businesses as “modeled conservatorship capital required" or simply "CCF capital required."

Freddie Mac Form 10-Q
 
57
Management's Discussion and Analysis
 
Risk Management | Conservatorship Capital Framework



Return on Modeled Conservatorship Capital Required
The table below provides the return on CCF capital required, calculated as (1) annualized comprehensive income for the period divided by (2) average CCF capital required during the period. We calculate the return using both (1) GAAP comprehensive income and (2) comprehensive income excluding significant items, a non-GAAP financial measure which excludes from our GAAP comprehensive income significant items that are not indicative of our on-going operations. We believe that this non-GAAP financial measure provides a more useful measure of our return on modeled conservatorship capital required as it better reflects our on-going financial results.
All modeled conservatorship capital required figures presented below are based on the CCF as of June 30, 2018. The CCF has been and may be further revised by FHFA from time to time, and may be revised specifically in connection with FHFA's consideration and adoption of a final Enterprise Capital Rule, which can result in changes, possibly material, in our modeled conservatorship capital required. For example, the proposed Enterprise Capital Rule includes capital for deferred tax assets, which is not included in the CCF currently, but which is already scheduled to be included beginning in 2019.
The return on CCF capital required shown in the table below is not based on our actual equity capital and does not reflect actual returns on equity capital.
(Dollars in billions)
 
2Q 2018
2Q 2017
YTD 2018
YTD 2017
GAAP comprehensive income
 
$2.4
$2.0
$4.6
$4.2
Significant items:
 
 
 
 
 
Non-agency mortgage-related securities judgment (1)
 
(0.3)
—
(0.3)
—
Tax effect related to judgment (1)
 
0.1
—
0.1
—
   Total significant items
 
(0.2)
—
(0.2)
—
Comprehensive income, excluding significant items
 
$2.2
$2.0
$4.4
$4.2
CCF capital required (average)
 
$53.1
$61.6
$54.3
$62.8
Return on CCF capital required, based on GAAP comprehensive income
 
18.3%
12.9%
16.9%
13.4%
Adjusted return on CCF capital required, based on comprehensive income excluding significant items
 
16.4%
12.9%
15.9%
13.4%
(1)
2Q 2018 GAAP comprehensive income included a benefit of $334 million (pre-tax) from a final judgment against Nomura Holding America, Inc. in litigation involving certain of our non-agency mortgage-related securities. The tax effect related to this judgment was ($70) million.
Our returns on CCF capital required increased over the last several quarters due to our decreasing level of CCF capital required, resulting from home price improvements, the efficient disposition of legacy assets and the increasing credit risk transfer activity in both our Single-family Guarantee and Multifamily businesses.
Our three business segments have different capital requirements, returns and profitability. The return on CCF capital required for our Single-family Guarantee business, which has FHFA-prescribed guidance on guarantee fee levels, is generally lower than the company's overall return, while the returns in our Multifamily and Capital Markets businesses are generally higher.
We find the returns calculated above, as well as the returns calculated on specific transactions and individual business lines, to be a reasonable measure of risk-versus-return to support our decision-

Freddie Mac Form 10-Q
 
58
Management's Discussion and Analysis
 
Risk Management | Conservatorship Capital Framework



making while we remain in conservatorship. These returns may not be indicative of the returns that would be generated if we were to exit conservatorship, especially as the terms and timing of any such exit are not currently known and will depend upon future actions by the U.S. government. Our belief, should we leave conservatorship, is that returns at that time would most likely be below the levels calculated above, assuming the same portfolio of risk assets, as we expect that we would hold capital post-conservatorship above the minimum required regulatory capital. It is also likely the we would be required to pay fees for federal government support, thereby reducing our total comprehensive income.


Freddie Mac Form 10-Q
 
59
Management's Discussion and Analysis
 
Risk Management | Market Risk

Market Risk
Our business segments have embedded exposure to market risk, including interest-rate and spread risks. Interest-rate risk is consolidated and primarily managed by the Capital Markets segment, while spread risk is owned and managed by each individual business segment. Market risk can adversely affect future cash flows, or economic value, as well as earnings and net worth.
Economic Market Risk
The majority of our interest-rate risk comes from our investments in mortgage-related assets (securities and loans) and the debt we issue to fund them. Our primary goal in managing interest-rate risk is to reduce the amount of change in the value of our future cash flows due to future changes in interest rates. We use models to analyze possible future interest-rate scenarios, along with the cash flows of our assets and liabilities over those scenarios.
Our primary interest-rate risk measures are duration gap and PMVS. Duration gap measures the difference in price sensitivity to interest rate changes between our financial assets and liabilities and is expressed in months relative to the market value of assets. PMVS is our estimate of the change in the market value of our financial assets and liabilities from an instantaneous shock to interest rates, assuming spreads are held constant and no rebalancing actions are undertaken. PMVS is measured in two ways, one measuring the estimated sensitivity of our portfolio market value to a 50 basis point parallel movement in interest rates (PMVS-L) and the other to a non-parallel movement resulting from a 25 basis point change in slope of the LIBOR yield curve (PMVS-YC). While we believe that duration gap and PMVS are useful risk management tools, they should be understood as estimates rather than as precise measurements.
The following tables provide our 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. The tables below also provide PMVS-L estimates assuming an immediate 100 basis point shift in the LIBOR yield curve. The interest-rate sensitivity of a mortgage portfolio varies across a wide range of interest rates.
 
 
June 30, 2018
 
December 31, 2017
 
 
PMVS-YC
 
PMVS-L
 
PMVS-YC
 
PMVS-L
(In millions)
 
25 bps
 
50 bps
100 bps
 
25 bps
 
50 bps
100 bps
Assuming shifts of the LIBOR yield curve, (gains) losses on:(1)
 
 
 
 
 
 
 
 
 
 
Assets
 

($513
)
 

($5,590
)

($11,003
)
 

$463

 

$5,587


$11,446

Liabilities
 
(156
)
 
2,176

4,234

 
185

 
(2,377
)
(4,968
)
Derivatives
 
684

 
3,443

6,863

 
(646
)
 
(3,200
)
(6,477
)
Total
 

$15

 

$29


$94

 

$2

 

$10


$1

 
 
 
 
 
 
 
 
 
 
 
PMVS
 

$15

 

$29


$94

 

$2

 

$10


$1

(1)
The categorization of the PMVS impact between assets, liabilities and derivatives on this table is based upon the economic characteristics of those assets and liabilities, not their accounting classification. For example, purchase and sale commitments of mortgage-related securities and debt securities of consolidated trusts held by the mortgage-related investments portfolio are both categorized as assets on this table.

Freddie Mac Form 10-Q
 
60
Management's Discussion and Analysis
 
Risk Management | Market Risk

 
 
2Q 2018
 
2Q 2017
(Duration gap in months, dollars in millions)
 
Duration
Gap
PMVS-YC
25 bps
PMVS-L
50 bps
 
Duration
Gap
PMVS-YC
25 bps
PMVS-L
50 bps
Average
 
(0.1
)

$12


$23

 
0.1


$5


$9

Minimum
 
(0.4
)
—

—

 
(0.2
)
—

—

Maximum
 
0.2

31

77

 
0.3

19

59

Standard deviation
 
0.1

7

21

 
0.1

4

13

 
 
 
 
 
 
 
 
 
 
 
YTD 2018
 
YTD 2017
(Duration gap in months, dollars in millions)
 
Duration
Gap
PMVS-YC
25 bps
PMVS-L
50 bps
 
Duration
Gap
PMVS-YC
25 bps
PMVS-L
50 bps
Average
 
(0.1
)

$10


$16

 
0.1


$6


$7

Minimum
 
(0.4
)
—

—

 
(0.2
)
—

—

Maximum
 
0.2

31

77

 
0.8

22

63

Standard deviation
 
0.1

7

18

 
0.2

5

14

Derivatives enable us to reduce our economic interest-rate risk exposure as we continue to align our derivative portfolio with the changing duration of our economically hedged assets and liabilities. The table below shows that the PMVS-L risk levels, assuming a 50 basis point shift in the LIBOR yield curve for the periods presented, would have been higher if we had not used derivatives.
 
 
PMVS-L (50 bps)
 
 
(In millions)
 
Before
Derivatives
After
Derivatives
 
Effect of
Derivatives
June 30, 2018
 

$3,472


$29

 

($3,443
)
December 31, 2017
 
3,210

10

 
(3,200
)
GAAP Earnings Variability
The GAAP accounting treatment for our financial assets and liabilities (i.e., some are measured at amortized cost, while others are measured at fair value) creates variability in our GAAP earnings when interest rates and spreads change. This variability of GAAP earnings, which may not reflect the economics of our business, increases the risk of our having a negative net worth and thus being required to draw from Treasury.
Interest-rate Volatility
While we manage our interest-rate risk exposure on an economic basis to a low level as measured by our models, our GAAP financial results are still subject to significant earnings variability from period to period. Based upon the composition of our financial assets and liabilities, including derivatives, at June 30, 2018, we generally recognize fair value losses in GAAP earnings when interest rates decline.
In an effort to reduce our GAAP earnings variability and better align our GAAP results with the economics of our business, we elect hedge accounting for certain single-family mortgage loans and certain debt instruments. See Note 9 for additional information on hedge accounting.
The table below presents the effect of derivatives used in our interest-rate risk management activities on our comprehensive income (loss), net of tax, after considering any offsetting interest rate effects related to financial instruments measured at fair value and the effects of fair value hedge accounting.

Freddie Mac Form 10-Q
 
61
Management's Discussion and Analysis
 
Risk Management | Market Risk

(In billions)
 
2Q 2018
2Q 2017
 
YTD 2018
YTD 2017
Interest-rate effect on derivative fair values
 

$1.1


($1.1
)
 

$4.1


($0.6
)
Estimate of offsetting interest-rate effect related to financial instruments measured at fair value(1)
 
(0.7
)
0.5

 
(2.6
)
—

Gains (losses) on mortgage loans and debt in fair value hedge relationships
 
(0.6
)
0.4

 
(1.8
)
0.4

Amortization of deferred hedge accounting gains and losses
 
0.1

—

 
0.1

—

Income tax (expense) benefit
 
—

0.1

 
—

0.1

Estimated net interest rate effect on comprehensive income (loss)
 

($0.1
)

($0.1
)


($0.2
)

($0.1
)
(1)
Includes the interest-rate effect on our trading securities, available-for-sale securities, mortgage loans held-for-sale and other assets and debt for which we elected the fair value option, which is reflected in other non-interest income (loss) and total other comprehensive income (loss) on our condensed consolidated statements of comprehensive income.
The effect from the change in interest rates on derivative fair values is mostly offset by the effect from the change in interest rates related to financial instruments measured at fair value and gains and losses on mortgage loans and debt in fair value hedging relationships. The remaining net interest-rate effect on comprehensive income is largely attributable to the reversal of previously recognized derivative gains and losses and the implied net cost on instruments such as swaptions, futures, and forward purchase and sale commitments from our hedging and interest-rate risk management activities. These remaining effects are recognized in GAAP earnings over time as a component of derivative gains and losses as the instruments approach maturity and are partially offset by the amortization of previously deferred hedge accounting gains and losses.
We evaluate the potential benefits of fair value hedge accounting by evaluating a range of interest rate scenarios and identifying which of those scenarios produces the most adverse GAAP earnings outcome. The interest rate scenarios evaluated include parallel shifts in the yield curve of plus and minus 100 basis points, non-parallel yield curve shifts in which long-term interest rates increase or decrease by 100 basis points and non-parallel yield curve shifts in which short-term and medium-term interest rates increase or decrease by 100 basis points.
n At June 30, 2018 and June 30, 2017, the GAAP adverse scenario before and after fair value hedge accounting was a non-parallel shift in which long-term rates decrease by 100 basis points.
The results of this evaluation are shown in the table below.
 
 
GAAP Adverse Scenario (Before-Tax)
(Dollars in billions)
 
Before Hedge Accounting
After Hedge Accounting
% Change
June 30, 2018
 

($3.4
)

($0.5
)
86
%
June 30, 2017
 
(3.3
)
(1.5
)
55

Spread Volatility
We have limited ability to manage our spread risk exposure in a cost beneficial manner and therefore the volatility of market spreads may contribute to significant GAAP earnings variability. For financial assets measured at fair value, we generally recognize fair value losses when market spreads widen. Conversely, for financial liabilities measured at fair value, we generally recognize fair value gains when market spreads widen.

Freddie Mac Form 10-Q
 
62
Management's Discussion and Analysis
 
Risk Management | Market Risk

The table below shows the estimated effect of spreads on our comprehensive income (loss), after tax, by segment.
(In billions)
 
2Q 2018
2Q 2017
 
YTD 2018
YTD 2017
Capital Markets
 

$—


$0.2

 

$0.2


$0.3

Multifamily
 
0.1

—

 
0.1

0.1

Single-family Guarantee(1)
 
—

(0.1
)
 
—

(0.2
)
Spread effect on comprehensive income (loss)
 

$0.1


$0.1



$0.3


$0.2

(1)
Represents spread exposure on certain STACR debt securities for which we have elected the fair value option.

Freddie Mac Form 10-Q
 
63
Management's Discussion and Analysis
 
Liquidity and Capital Resources | Sources of Liquidity and Capital

LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity and Capital
Our business activities require that we maintain adequate liquidity to fund our operations. We also must maintain adequate capital resources to avoid being placed into receivership by FHFA. For further discussion of our liquidity framework and profile, see MD&A - Liquidity and Capital Resources in our 2017 Annual Report.
Primary Sources of Liquidity, Funding and Capital
The following table lists the sources of our liquidity, funding and capital, the balances as of 2Q 2018 and a brief description of their importance to Freddie Mac.
Source
Balance(1)
 (In billions)
 
Description
Liquidity
 
 
 
•
Other Investments and Cash Portfolio - Liquidity and Contingency Operating Portfolio

$50.3

•
The liquidity and contingency operating portfolio, included within our other investments and cash portfolio, is primarily used for short-term liquidity management.
•
Liquid Portion of the Mortgage-Related Investments Portfolio

$130.1

•

The liquid portion of our mortgage-related investments portfolio can be pledged or sold for liquidity purposes. The amount of cash we may be able to successfully raise may be substantially less than the balance.
Funding
 
 
 
•
Other Debt

$278.2

•
Other debt is used to fund our business activities, including Single-family guarantee activities not funded by debt securities of consolidated trusts.
•
Debt Securities of Consolidated Trusts

$1,746.3

•

Debt securities of consolidated trusts are used primarily to fund our Single-family guarantee activities. This type of debt is principally repaid by the cash flows of the associated mortgage loans. As a result, our repayment obligation is limited to amounts paid pursuant to our guarantee of principal and interest and to purchase modified or seriously delinquent loans from the trusts.
Capital
 
 
 
•
Net Worth

$4.6

•
GAAP net worth represents capital available prior to our dividend requirement to Treasury under the Purchase Agreement.
•
Available Funding under Purchase Agreement

$140.2

•
FHFA may request that available funding under the Purchase Agreement be drawn on our behalf from Treasury.
(1)
Represents carrying value for the liquidity and contingency operating portfolio, included within our other investments and cash portfolio, and net worth. Represents UPB for the liquid portion of the mortgage-related investments portfolio and debt balances.

Freddie Mac Form 10-Q
 
64
Management's Discussion and Analysis
 
Liquidity and Capital Resources | Sources of Liquidity and Capital

Other Investments and Cash Portfolio
The investments in our other investments and cash portfolio are important to our cash flow, collateral management, asset and liability management, and our ability to provide liquidity and stability to the mortgage market. The table below summarizes the balances in our other investments and cash portfolio, which includes the liquidity and contingency operating portfolio.
 
 
June 30, 2018
 
December 31, 2017
(In billions)
 
Liquidity and Contingency Operating Portfolio
Custodial Account
Other
Total Other Investments and Cash Portfolio
 
Liquidity and Contingency Operating Portfolio
Custodial Account
Other
Total Other Investments and Cash Portfolio
Cash and cash equivalents(1)
 

$6.2


$0.6


$—


$6.8

 

$9.3


$0.5


$—


$9.8

Securities purchased under agreements to resell
 
23.4

16.4

2.0

41.8

 
38.9

16.8

0.2

55.9

Non-mortgage-related securities
 
20.7

—

2.8

23.5

 
22.2

—

0.6

22.8

Advances to lenders and other secured lending
 
—

—

1.7

1.7

 
—

—

1.3

1.3

Total
 

$50.3


$17.0


$6.5


$73.8



$70.4


$17.3


$2.1


$89.8

(1) The current and prior period presentation has been modified to include restricted cash and cash equivalents due to recently adopted accounting guidance and re-designation of cash collateral posted to us as part of the liquidity and contingency operating portfolio.
Our non-mortgage-related investments in the liquidity and contingency operating portfolio consist of U.S. Treasury securities and other investments that we could sell to provide us with an additional source of liquidity to fund our business operations. We also maintain non-interest-bearing deposits at the Federal Reserve Bank of New York.
The liquidity and contingency operating portfolio also includes collateral posted to us in the form of cash by derivatives counterparties of $2.3 billion and $2.4 billion as of June 30, 2018 and December 31, 2017, respectively. We have invested this collateral in securities purchased under agreements to resell and non-mortgage-related securities as part of our liquidity and contingency operating portfolio, although the collateral may be subject to return to our counterparties based on the terms of our master netting and collateral agreements.
Mortgage-Related Investments Portfolio
We invest principally in mortgage loans and mortgage-related securities, certain categories of which are largely unencumbered and liquid. Our primary source of liquidity among these mortgage assets is our holdings of single-class and multiclass agency securities, excluding certain structured agency securities collateralized by non-agency mortgage-related securities. Our ability to pledge certain of these assets as collateral or sell them enhances our liquidity profile, although the amount of cash we may be able to successfully raise in the event of a liquidity crisis or significant market disruption may be substantially less than the amount of mortgage-related assets we hold. See Conservatorship and Related Matters for additional details on the liquidity of our mortgage-related investments portfolio.
Other Debt Activities
We issue other debt to fund our operations. Competition for funding can vary with economic, financial market and regulatory environments. We issue other debt based on a variety of factors including market

Freddie Mac Form 10-Q
 
65
Management's Discussion and Analysis
 
Liquidity and Capital Resources | Sources of Liquidity and Capital

conditions and our liquidity requirements. We currently favor a mix of derivatives and shorter- and medium-term debt to fund our business and manage interest-rate risk. This funding mix is a less expensive method than relying more extensively on long-term debt.
The tables below summarize the par value and the average rate of other debt securities we issued or paid off, including regularly scheduled principal payments, payments resulting from calls and payments for repurchases. We call, exchange or repurchase our outstanding debt securities from time to time for a variety of reasons, including managing our funding composition and supporting the liquidity of our debt securities.
 
 
2Q 2018
(Dollars in millions)
 
Short-term
Average Rate(1)
Long-term
Average Rate(1)
Discount notes and Reference Bills:
 
 
 
 
 
Beginning balance
 

$26,958

1.40
%

$—

—
%
Issuances
 
96,181

1.66

—

—

Repurchases
 
—

—

—

—

Maturities
 
(88,368
)
1.52

—

—

Ending Balance
 
34,771

1.83

—

—

Securities sold under agreements to repurchase:
 
 
 
 
 
Beginning balance
 
9,745

1.38

—

—

Additions
 
38,766

1.74

—

—

Repayments
 
(36,792
)
1.60

—

—

Ending Balance
 
11,719

1.87

—

—

Callable debt:
 
 
 
 
 
Beginning balance
 
—

—

113,552

1.66

Issuances
 
—

—

8,199

3.19

Repurchases
 
—

—

(167
)
1.86

Calls
 
—

—

(1,790
)
1.95

Maturities
 
—

—

(7,059
)
1.09

Ending Balance
 
—

—

112,735

1.81

Non-callable debt:(2)
 
 
 
 
 
Beginning balance
 
17,612

1.12

113,064

2.90

Issuances
 
—

—

5,000

2.69

Repurchases
 
—

—

(1,300
)
1.99

Maturities
 
(7,150
)
0.99

(8,300
)
3.47

Ending Balance
 
10,462

1.21

108,464

2.96

Total other debt
 

$56,952

1.73
%

$221,199

2.37
%
 
 
 
 
 
 
Referenced footnotes are included after the next table.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Freddie Mac Form 10-Q
 
66
Management's Discussion and Analysis
 
Liquidity and Capital Resources | Sources of Liquidity and Capital

 
 
YTD 2018
(Dollars in millions)
 
Short-term
Average Rate(1)
Long-term
Average Rate(1)
Discount notes and Reference Bills:
 
 
 
 
 
Beginning balance
 

$45,717

1.19
%

$—

—
%
Issuances
 
170,296

1.50

—

—

Repurchases
 
—

—

—

—

Maturities
 
(181,242
)
1.36

—

—

Ending Balance
 
34,771

1.83

—

—

Securities sold under agreements to repurchase:
 
 
 
 
 
Beginning balance
 
9,681

1.06

—

—

Additions
 
80,560

1.52

—

—

Repayments
 
(78,522
)
1.41

—

—

Ending Balance
 
11,719

1.87

—

—

Callable debt:
 
 
 
 
 
Beginning balance
 
—

—

113,822

1.58

Issuances
 
—

—

13,750

3.04

Repurchases
 
—

—

(722
)
2.07

Calls
 
—

—

(2,682
)
1.96

Maturities
 
—

—

(11,434
)
1.07

Ending Balance
 
—

—

112,734

1.81

Non-callable debt:(2)
 
 
 
 
 
Beginning balance
 
17,792

1.03

129,094

2.52

Issuances
 
1,825

1.44

13,375

2.42

Repurchases
 
—

—

(1,300
)
1.99

Maturities
 
(9,155
)
0.94

(32,704
)
1.50

Ending Balance
 
10,462

1.21

108,465

2.96

Total other debt
 

$56,952

1.73
%

$221,199

2.37
%
(1)
Average rate is weighted based on par value.
(2)
Includes STACR and SCR debt notes and certain multifamily other debt. STACR and SCR debt notes are subject to prepayment risk as their payments are based upon the performance of a reference pool of mortgage assets that may be prepaid by the related mortgage borrower at any time generally without penalty.
During the 2018 periods, our outstanding other debt balance continued to decline as we reduced our indebtedness along with the decline in our mortgage-related investments portfolio. As a result, our total issuances, excluding securities sold under agreements to repurchase, decreased.

Freddie Mac Form 10-Q
 
67
Management's Discussion and Analysis
 
Liquidity and Capital Resources | Sources of Liquidity and Capital

The following graphs present our other debt by contractual maturity date and earliest redemption date. The earliest redemption date refers to the earliest call date for callable debt and the contractual maturity date for all other debt.
Contractual Maturity Date as of June 30, 2018(1) chart-2df6f590d37d54849cf.jpg
 
Earliest Redemption Date as of June 30, 2018(1) chart-1cb364852a9a539ea8e.jpg
(1)
STACR and SCR debt notes are subject to prepayment risk as their payments are based upon the performance of a reference pool of mortgage assets that may be prepaid by the related mortgage borrower at any time generally without penalty and are therefore included as a separate category in the graphs.

Freddie Mac Form 10-Q
 
68
Management's Discussion and Analysis
 
Liquidity and Capital Resources | Sources of Liquidity and Capital

Debt Securities of Consolidated Trusts
The largest component of debt on our condensed consolidated balance sheets is debt securities of consolidated trusts, which relates to securitization transactions that we consolidated for accounting purposes. We issue this type of debt by securitizing mortgage loans primarily to fund the majority of our single-family guarantee activities. When we consolidate securitization trusts, we recognize the following on our condensed consolidated balance sheets:
n
The assets held by the securitization trusts, the majority of which are mortgage loans. We recognized $1,795.5 billion and $1,774.3 billion of mortgage loans, which represented 87.9% and 86.6% of our total assets, as of 2Q 2018 and 4Q 2017, respectively.
n
The debt securities issued by the securitization trusts, the majority of which are PCs. PCs are pass-through securities, where the cash flows of the mortgage loans held by the securitization trust are passed through to the holders of the PCs. We recognized $1,746.3 billion and $1,721.0 billion of debt securities of consolidated trusts, which represented 86.4% and 84.6% of our total debt, as of 2Q 2018 and 4Q 2017, respectively.
Debt securities of consolidated trusts are principally repaid from the cash flows of the mortgage loans held by the securitization trusts that issued the debt securities. In circumstances when the cash flows of the mortgage loans are not sufficient to repay the debt, we make up the shortfall because we have guaranteed the payment of principal and interest on the debt. In certain circumstances, we have the right and/or obligation to purchase the loan from the trust prior to its contractual maturity.
The table below shows the issuance and extinguishment activity for the debt securities of our consolidated trusts.
(In millions)
 
2Q 2018
YTD 2018
Beginning balance
 

$1,679,968


$1,672,605

Issuances:
 
 
 
New issuances to third parties
 
48,620

85,936

Additional issuances of securities
 
49,075

89,275

Total issuances
 
97,695

175,211

Extinguishments:
 
 
 
Purchases of debt securities from third parties
 
(10,785
)
(19,613
)
Debt securities received in settlement of advances to lenders
 
(6,775
)
(11,500
)
Repayments of debt securities
 
(59,623
)
(116,223
)
Total extinguishments
 
(77,183
)
(147,336
)
Ending balance
 
1,700,480

1,700,480

Unamortized premiums and discounts
 
45,818

45,818

Debt securities of consolidated trusts held by third parties
 

$1,746,298


$1,746,298


Freddie Mac Form 10-Q
 
69
Management's Discussion and Analysis
 
Liquidity and Capital Resources | Capital


Capital
Our entry into conservatorship resulted in significant changes to the assessment of our capital adequacy and our management of capital. Under the Purchase Agreement, Treasury made a commitment to provide us with equity funding, under certain conditions, to eliminate deficits in our net worth. As of June 30, 2018, our net worth was $4.6 billion and the amount of available funding remaining under the Purchase Agreement was $140.2 billion. See Note 2 for details of the support we receive from Treasury.
The table below presents activity related to our net worth during 2Q 2018 and YTD 2018.
(In millions)
 
2Q 2018
YTD 2018
Beginning balance
 

$2,150


($312
)
Comprehensive income (loss)
 
2,435

4,585

Capital draw from Treasury
 
—

312

Senior preferred stock dividends declared
 
—

—

Total equity / net worth
 

$4,585


$4,585

Aggregate draws under Purchase Agreement
 

$71,648


$71,648

Aggregate cash dividends paid to Treasury
 
112,393

112,393



Freddie Mac Form 10-Q
 
70
Management's Discussion and Analysis
 
Liquidity and Capital Resources | Cash Flows


Cash Flows
We evaluate our cash flow performance by comparing the net cash flows from operating and investing activities to the net cash flows required to finance those activities. The following graphs present the results of these activities for YTD 2017 and YTD 2018.

Operating Cash Flows Investing Cash Flows Financing Cash Flows
chart-bca591519e2c5888b72.jpgchart-064220269ca552eaa45.jpgchart-2ca622b7c43b5282a7d.jpg
Commentary
n
Cash provided by operating activities increased $3.2 billion primarily due to:
l
An increase in net sales of held-for-sale loans, driven by an increase in the volume of our multifamily securitizations.
n
Cash provided by investing activities decreased $2.4 billion primarily due to:
l
A decrease in net proceeds received from sales and maturities of investment securities due to our continued reduction of the mortgage-related investments portfolio as required by the Purchase Agreement and FHFA; and
l
An increase in purchases of single-family loans.
This decrease was partially offset by:
l
A larger decrease in securities purchased under agreements to resell in 2018, driven by lower near-term cash needs for fewer upcoming maturities and anticipated calls of other debt.
n
Cash used in financing activities decreased $7.2 billion primarily due to:
l
An increase in proceeds from issuance of debt securities of consolidated trusts held by third parties, driven by an increase in the volume of single-family PC issuances for cash; and
l
A decrease in payments of cash dividends on senior preferred stock.
This decrease was partially offset by:
l
An increase in net repayments of other debt as we continued to reduce our indebtedness along with the mortgage-related investments portfolio.

Freddie Mac Form 10-Q
 
71
Management's Discussion and Analysis
Conservatorship and Related Matters


CONSERVATORSHIP AND RELATED MATTERS
Reducing Our Mortgage-Related Investments Portfolio Over Time
The table below presents the UPB of our mortgage-related investments portfolio for purposes of the limit imposed by the Purchase Agreement and FHFA regulation. The cap for this portfolio will decrease to $250 billion at December 31, 2018.
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Liquid
Securitiz-ation Pipeline
Less Liquid
Total
 
Liquid
Securitiz-ation Pipeline
Less Liquid
Total
Capital Markets segment - Mortgage investments portfolio:
 
 
 
 
 
 
 
 
 


Single-family unsecuritized loans
 
 
 
 

 
 
 
 

Performing loans
 

$—


$13,161


$—


$13,161

 

$—


$9,999


$—


$9,999

Reperforming loans
 
—

—

44,538

44,538

 
—

—

46,666

46,666

Total single-family unsecuritized loans
 
—

13,161

44,538

57,699


—

9,999

46,666

56,665

Freddie Mac mortgage-related securities
 
118,620

—

3,452

122,072

 
123,905

—

3,817

127,722

Non-agency mortgage-related securities
 
718

—

3,177

3,895

 
749

—

5,152

5,901

Other Non-Freddie Mac agency mortgage-related securities
 
4,452

—

—

4,452

 
5,211

—

—

5,211

Total Capital Markets segment - Mortgage investments portfolio
 
123,790

13,161

51,167

188,118

 
129,865

9,999

55,635

195,499

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

—

9,778

9,778

 
—

—

12,267

12,267

Multifamily segment:
 
 
 
 

 
 
 
 
 
Unsecuritized loans
 
—

15,987

15,296

31,283

 
—

19,653

18,585

38,238

Mortgage-related securities
 
6,286

—

928

7,214

 
6,181

—

1,270

7,451

Total Multifamily segment
 
6,286

15,987

16,224

38,497

 
6,181

19,653

19,855

45,689

Total mortgage-related investments portfolio
 

$130,076


$29,148


$77,169


$236,393

 

$136,046


$29,652


$87,757


$253,455

Percentage of total mortgage-related investments portfolio
 
55
%
12
%
33
%
100
%
 
54
%
12
%
34
%
100
%
Mortgage-related investments portfolio cap at December 31, 2018 and December 31, 2017
 
 
 
 

$250,000

 
 
 
 

$288,408

90% of mortgage-related investments portfolio cap at December 31, 2018 and December 31, 2017(1)
 
 
 
 

$225,000

 
 
 
 

$259,567

(1)
Represents the amount to which we manage under our Retained Portfolio Plan, subject to certain exceptions.
The decline in our mortgage-related investments portfolio during YTD 2018 was primarily due to the active disposition of less liquid assets and repayments.

Freddie Mac Form 10-Q
 
72
Management's Discussion and Analysis
Conservatorship and Related Matters


While we continued to purchase new single-family seriously delinquent loans and multifamily unsecuritized loans, which are classified as held-for-investment, our active disposition of less liquid assets included the following:
n
Sales of $5.9 billion of less liquid assets, including $3.9 billion in UPB of single-family reperforming loans, $1.7 billion in UPB of single-family non-agency mortgage-related securities, and $0.3 billion in UPB of seriously delinquent unsecuritized single-family loans;
n
Securitizations of $0.5 billion in UPB of less liquid multifamily loans; and
n
Transfers of $0.5 billion in UPB of less liquid multifamily loans to the securitization pipeline.

Freddie Mac Form 10-Q
 
73
Management's Discussion and Analysis
Regulation and Supervision


REGULATION AND SUPERVISION
In addition to our oversight by FHFA as our Conservator, we are subject to regulation and oversight by FHFA under our Charter and the GSE Act and to certain regulation by other government agencies. Furthermore, regulatory activities by other government agencies can affect us indirectly, even if we are not directly subject to such agencies’ regulation or oversight. For example, regulations that modify requirements applicable to the purchase or servicing of mortgages can affect us.
Federal Housing Finance Agency
Affordable Housing Goals
In our Form 10-Q for 1Q 2018, we indicated that we expected to achieve all five of our single-family affordable housing goals and all three of our multifamily goals for 2017. With respect to our single-family low-income purchase and very low-income purchase goals, we indicated that we expected to meet those goals based on meeting or exceeding the actual share of the market that meets the criteria for those goals once such market information is published in late 2018. Recent preliminary market data suggests that the market share for these goals is higher than expected and we now anticipate that we may not meet these two single-family goals. FHFA will ultimately make the determination as to whether we achieved compliance with the housing goals for 2017, based on the published market information.
Affordable Housing Fund Allocations
The GSE Act requires us to set aside in each fiscal year an amount equal to 4.2 basis points of each dollar of total new business purchases and pay this amount to certain housing funds. During 2Q 2018 and YTD 2018, we completed $100 billion and $179 billion, respectively, of new business purchases subject to this requirement and accrued $42 million and $75 million, respectively, of related expense. We expect to pay the YTD 2018 expense amount (and any additional amounts accrued based on our new business purchases during the remainder of 2018) in February 2019. We are prohibited from passing through these costs to the originators of the loans that we purchase.
Legislative and Regulatory Developments
Proposed Enterprise Capital Rule
On July 17, 2018, FHFA published in the Federal Register a proposed rule that would, if adopted, establish post-conservatorship capital requirements for Freddie Mac and Fannie Mae. The proposed rule would implement both risk-based and leverage ratio capital requirements.
FHFA’s predecessor agency, the Office of Federal Housing Enterprise Oversight, implemented risk-based and leverage ratio regulatory capital requirements for the Enterprises during the years before conservatorship. FHFA suspended these requirements after placing the Enterprises into conservatorship in 2008. See Note 17 - Regulatory Capital for further information about these requirements. In 2017, FHFA implemented the CCF as an aligned risk management framework to evaluate Enterprise business decisions in conservatorship and ensure the Enterprises make prudent decisions when pricing

Freddie Mac Form 10-Q
 
74
Management's Discussion and Analysis
Regulation and Supervision


transactions and managing their books of business. See Risk Management - Conservatorship Capital Framework for further information about the CCF.
FHFA indicates that the proposed rule is generally consistent with the regulatory capital framework for large banks, but reflects differences in the charters, business operations and risk profiles of the Enterprises. FHFA notes that the Enterprises are monoline businesses with assets and guarantees heavily concentrated in residential mortgages and with risk profiles that differ from large diversified banks.
The risk-based provisions of the proposed rule, for which the CCF is the foundation, would create capital requirements for specified categories of Enterprise guarantees and portfolio holdings. These requirements would address credit risk and market risk and would also include a risk-invariant requirement for operational risk, as well as a going-concern buffer across all categories. FHFA indicates that these requirements are designed to establish the necessary capital for the Enterprises to continue operating and maintain market confidence after a stress event comparable to the recent financial crisis.
The proposed rule also includes two alternatives for a leverage ratio. The first option would require the Enterprises to hold capital equal to 2.5% of total assets and off-balance sheet guarantees. The second option would require the Enterprises to hold capital equal to 1.5% of “trust assets” (Enterprise mortgage - related securities held by third parties and off-balance sheet guarantees related to securitization activities) and 4% of “non-trust assets” (total assets in accordance with GAAP, plus off-balance sheet guarantees related to securitization activities, less “trust assets”). FHFA requests comment on which of these options best balances the benefit of having a backstop to the risk-based capital requirement against the downside of a leverage requirement that could influence how the Enterprises evaluate risk.
The proposed capital requirements would be suspended after adoption of a final rule while the Enterprises remain in conservatorship. FHFA indicates that it is proposing post-conservatorship capital requirements at this time in order to:
n
Communicate its views as a financial regulator about capital adequacy;
n
Update the existing capital rule by drawing on regulatory developments in response to the recent financial crisis;
n
Permit market participants to comment on proposed capital requirements for the Enterprises; and
n
Inform FHFA’s views about possible refinements to the CCF, which will continue to apply to the Enterprises in conservatorship.
The comment process on FHFA’s rule proposal could result in material changes to both the proposed capital requirements and the CCF.
Proposed Amendment to Corporate Governance Regulation
On April 6, 2018, FHFA published in the Federal Register a proposed rule to amend its corporate governance regulation. The amendment would require the board of directors to adopt a strategic business plan describing how Freddie Mac’s business activities will achieve its statutory purposes. Among other things, the plan would address any significant activities Freddie Mac is planning to undertake, as well as current and emerging risks. The board would be required to review the plan annually, re-adopt it every three years, and monitor its implementation. We submitted a comment letter on this proposal on June 5, 2018, the end of the comment period.

Freddie Mac Form 10-Q
 
75
Management's Discussion and Analysis
Regulation and Supervision


Credit Score Legislation
On May 24, 2018, the President signed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amends Freddie Mac’s charter to allow Freddie Mac’s continued use of third-party credit scores, in purchasing a residential mortgage, if certain procedural requirements are met with respect to the solicitation, validation and approval of third-party credit scoring models. Freddie Mac is permitted to continue to use a credit score model that is in use before November 20, 2018 for two years after that date without validation and approval. After November 20, 2020, if Freddie Mac conditions a purchase on the provision of a credit score, the credit score must have been validated and approved. On July 23, 2018, FHFA announced that, pursuant to this law, it will undertake rulemaking to define the standards and criteria that Freddie Mac will use to validate credit score models.
OMB Reform Plan and Reorganization Recommendations
On June 21, 2018, the Office of Management and Budget released a plan titled Delivering Government Solutions in the 21st Century: Reform Plan and Reorganization Recommendations that includes proposed changes in the government’s role in housing finance, including ending the conservatorships of Freddie Mac and Fannie Mae, reducing the role of the Enterprises in the housing market, and providing an explicit, limited federal backstop that is separate from the federal support for low- and moderate-income homebuyers. OMB indicates that its proposed changes would require broader policy and legislative reforms beyond restructuring federal agencies and programs.




Freddie Mac Form 10-Q
 
76
Management's Discussion and Analysis
 
Off-Balance Sheet Arrangements

OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain off-balance sheet arrangements related to our securitization activities involving guaranteed loans and mortgage-related securities, though most of our securitization activities are on-balance sheet. For a description of our off-balance sheet arrangements, see MD&A - Off-Balance Sheet Arrangements in our 2017 Annual Report. See Note 3 and Note 5 for more information on our off-balance sheet securitization and guarantee activities.
Our maximum potential off-balance sheet exposure to credit losses relating to these securitization activities and guarantees is primarily represented by the UPB of the underlying loans and securities, which was $233.7 billion and $215.7 billion at June 30, 2018 and December 31, 2017, respectively.

Freddie Mac Form 10-Q
 
77
Management's Discussion and Analysis
Forward-Looking Statements


FORWARD-LOOKING STATEMENTS
We regularly communicate information concerning our business activities to investors, the news media, securities analysts and others as part of our normal operations. Some of these communications, including this Form 10-Q, contain "forward-looking statements." Examples of forward-looking statements include, but are not limited to, statements pertaining to the conservatorship, our current expectations and objectives for the Single-family Guarantee, Multifamily and Capital Markets segments of our business, our efforts to assist the housing market, our liquidity and capital management, economic and market conditions and trends, our market share, the effect of legislative and regulatory developments and new accounting guidance, the credit quality of loans we own or guarantee, the costs and benefits of our credit risk transfer transactions and our results of operations and financial condition on a GAAP, Segment Earnings and fair value basis. Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. Forward-looking statements are often accompanied by, and identified with, terms such as "could," "may," "will," "believe," "expect," "anticipate," "forecast" and similar phrases. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties, including those described in the Risk Factors section of our 2017 Annual Report, and:
n
The actions the U.S. government (including FHFA, Treasury and Congress) may take, or require us to take, including to support the housing markets or to implement FHFA’s Conservatorship Scorecards and other objectives for us;
n
The effect of the restrictions on our business due to the conservatorship and the Purchase Agreement, including our dividend requirement on the senior preferred stock;
n
Changes in our Charter or in applicable legislative or regulatory requirements (including any legislation affecting the future status of our company);
n
Changes in the fiscal and monetary policies of the Federal Reserve, including the balance sheet normalization program announced in October 2017 to reduce the Federal Reserve's holdings of mortgage-related securities;
n
Changes in tax laws, including those made by the Tax Cuts and Jobs Act enacted in December 2017;
n
Changes in accounting policies, practices or guidance (e.g., FASB's accounting standards update related to the measurement of credit losses of financial instruments);
n
Changes in economic and market conditions, including changes in employment rates, interest rates, spreads and home prices;
n
Changes in the U.S. residential mortgage market, including changes in the supply and type of loan products (e.g., refinance vs. purchase and fixed-rate vs. ARM);
n
The success of our efforts to mitigate our losses on our Legacy and relief refinance single-family loan portfolio;
n
The success of our strategy to transfer mortgage credit risk through STACR debt note, ACIS, K Certificate, SB Certificate and other credit risk transfer transactions;
n
Our ability to maintain adequate liquidity to fund our operations;
n
Our ability to maintain the security and resiliency of our operational systems and infrastructure (e.g.,

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Management's Discussion and Analysis
Forward-Looking Statements


against cyberattacks);
n
Our ability to effectively execute our business strategies, implement new initiatives and improve efficiency;
n
The adequacy of our risk management framework, including the adequacy of the CCF and our internal capital methodologies for measuring risk;
n
Our ability to manage mortgage credit risk, including the effect of changes in underwriting and servicing practices;
n
Our ability to limit or manage our economic exposure and GAAP earnings exposure to interest-rate volatility and spread volatility, including the availability of derivative financial instruments needed for interest-rate risk management purposes;
n
Our operational ability to issue new securities, make timely and correct payments on securities and provide initial and ongoing disclosures;
n
Changes or errors in the methodologies, models, assumptions and estimates we use to prepare our financial statements, make business decisions and manage risks;
n
Changes in investor demand for our debt or mortgage-related securities;
n
Changes in the practices of loan originators, servicers, investors and other participants in the secondary mortgage market;
n
The occurrence of a major natural or other disaster in areas in which our offices or significant portions of our total mortgage portfolio are located; and
n
Other factors and assumptions described in this Form 10-Q and our 2017 Annual Report, including in the MD&A section.
Forward-looking statements are made only as of the date of this Form 10-Q, and we undertake no obligation to update any forward-looking statements we make to reflect events or circumstances occurring after the date of this Form 10-Q.


Freddie Mac Form 10-Q
 
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Financial Statements
 


Financial Statements

Freddie Mac Form 10-Q
 
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Financial Statements
Condensed Consolidated Statements of Comprehensive Income

FREDDIE MAC
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In millions, except share-related amounts)
 
2Q 2018
2Q 2017
 
YTD 2018
YTD 2017
Interest income
 
 
 
 
 
 
Mortgage loans
 

$16,344


$15,848

 

$32,295


$31,813

Investments in securities
 
730

902

 
1,540

1,816

Other
 
228

150

 
442

251

Total interest income
 
17,302

16,900

 
34,277

33,880

Interest expense
 
(14,299
)
(13,521
)
 
(28,256
)
(26,706
)
Net interest income
 
3,003

3,379

 
6,021

7,174

Benefit (provision) for credit losses
 
60

422

 
(3
)
538

Net interest income after benefit (provision) for credit losses
 
3,063

3,801

 
6,018

7,712

Non-interest income (loss)
 
 
 
 
 
 
Gains (losses) on extinguishment of debt
 
147

50

 
257

268

Derivative gains (losses)
 
416

(1,096
)
 
2,246

(1,398
)
Net impairment of available-for-sale securities recognized in earnings
 
(1
)
(3
)
 
(1
)
(16
)
Other gains (losses) on investment securities recognized in earnings
 
(348
)
61

 
(580
)
117

Other income (loss)
 
1,011

694

 
1,132

1,109

Non-interest income (loss)
 
1,225

(294
)
 
3,054

80

Non-interest expense
 
 
 
 
 
 
Salaries and employee benefits
 
(303
)
(266
)
 
(589
)
(541
)
Professional services
 
(113
)
(118
)
 
(215
)
(230
)
Other administrative expense
 
(142
)
(129
)
 
(274
)
(253
)
Total administrative expense
 
(558
)
(513
)
 
(1,078
)
(1,024
)
Real estate owned operations expense
 
(15
)
(37
)
 
(49
)
(93
)
Temporary Payroll Tax Cut Continuation Act of 2011 expense
 
(366
)
(330
)
 
(725
)
(651
)
Other expense
 
(204
)
(126
)
 
(401
)
(202
)
Non-interest expense
 
(1,143
)
(1,006
)
 
(2,253
)
(1,970
)
Income (loss) before income tax (expense) benefit
 
3,145

2,501

 
6,819

5,822

Income tax (expense) benefit
 
(642
)
(837
)
 
(1,390
)
(1,947
)
Net income (loss)
 
2,503

1,664

 
5,429

3,875

Other comprehensive income (loss), net of taxes and reclassification adjustments:
 
 
 
 
 
 
Changes in unrealized gains (losses) related to available-for-sale securities
 
(96
)
295

 
(896
)
293

Changes in unrealized gains (losses) related to cash flow hedge relationships
 
32

27

 
62

55

Changes in defined benefit plans
 
(4
)
—

 
(10
)
(3
)
Total other comprehensive income (loss), net of taxes and reclassification adjustments
 
(68
)
322

 
(844
)
345

Comprehensive income (loss)
 

$2,435


$1,986

 

$4,585


$4,220

Net income (loss)
 

$2,503


$1,664

 

$5,429


$3,875

Undistributed net worth sweep and senior preferred stock dividends
 
(1,585
)
(1,986
)
 
(1,585
)
(4,220
)
Net income (loss) attributable to common stockholders
 

$918


($322
)
 

$3,844


($345
)
Net income (loss) per common share — basic and diluted
 

$0.28


($0.10
)
 

$1.19


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

3,234

 
3,234

3,234

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

Freddie Mac Form 10-Q
 
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Financial Statements
Condensed Consolidated Balance Sheets

FREDDIE MAC
Condensed Consolidated Balance Sheets (Unaudited)
 
 
June 30,
December 31,
(In millions, except share-related amounts)
 
2018
2017
Assets
 
 
 
Cash and cash equivalents (Notes 1, 3 and 14) (includes $536 and $2,963 of restricted cash and cash equivalents)
 

$6,752


$9,811

Securities purchased under agreements to resell (Notes 3, 10)
 
41,769

55,903

Investments in securities, at fair value (Note 7)
 
77,710

84,318

Mortgage loans held-for-sale (Notes 3, 4) (includes $16,621 and $20,054 at fair value)
 
26,277

34,763

Mortgage loans held-for-investment (Notes 3, 4) (net of allowance for loan losses of $8,397 and $8,966)
 
1,858,574

1,836,454

Accrued interest receivable (Note 3)
 
6,470

6,355

Derivative assets, net (Notes 9, 10)
 
391

375

Deferred tax assets, net (Note 12)
 
8,299

8,107

Other assets (Notes 3, 18) (includes $3,598 and $3,353 at fair value)
 
15,490

13,690

Total assets
 

$2,041,732


$2,049,776

Liabilities and equity
 
 
 
Liabilities
 
 
 
Accrued interest payable (Note 3)
 

$6,377


$6,221

Debt, net (Notes 3, 8) (includes $5,423 and $5,799 at fair value)
 
2,021,162

2,034,630

Derivative liabilities, net (Notes 9, 10)
 
409

269

Other liabilities (Notes 3, 18)
 
9,199

8,968

Total liabilities
 
2,037,147

2,050,088

Commitments and contingencies (Notes 5, 9 and 16)
 


Equity (Note 11)
 
 
 
Senior preferred stock (redemption value of $75,648 and $75,336)
 
72,648

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 650,058,775 shares and 650,054,731 shares outstanding
 
—

—

Additional paid-in capital
 
—

—

Retained earnings (accumulated deficit)
 
(77,922
)
(83,261
)
AOCI, net of taxes, related to:
 
 
 
Available-for-sale securities (includes $350 and $593, related to net unrealized gains on securities for which other-than-temporary impairment has been recognized in earnings)
 
(91
)
662

Cash flow hedge relationships
 
(367
)
(356
)
Defined benefit plans
 
92

83

Total AOCI, net of taxes
 
(366
)
389

Treasury stock, at cost, 75,805,111 shares and 75,809,155 shares
 
(3,884
)
(3,885
)
Total equity (See Note 11 for information on our dividend requirement to Treasury)
 
4,585

(312
)
Total liabilities and equity
 

$2,041,732


$2,049,776

The table below presents the carrying value and classification of the assets and liabilities of consolidated VIEs on our condensed consolidated balance sheets.
 
 
June 30,
December 31,
(In millions)
 
2018
2017
Consolidated Balance Sheet Line Item
 
 
 
Assets: (Note 3)
 
 
 
Mortgage loans held-for-investment
 

$1,795,534


$1,774,286

All other assets
 
25,044

25,753

Total assets of consolidated VIEs
 

$1,820,578


$1,800,039

Liabilities: (Note 3)
 
 
 
Debt, net
 

$1,746,298


$1,720,996

All other liabilities
 
5,124

5,030

Total liabilities of consolidated VIEs
 

$1,751,422


$1,726,026

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

Freddie Mac Form 10-Q
 
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Financial Statements
Condensed Consolidated Statements of Cash Flows



FREDDIE MAC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
 
YTD 2018
YTD 2017
Net cash provided by operating activities
 

$3,494


$299

Cash flows from investing activities
 
 
 
Purchases of trading securities
 
(64,979
)
(92,192
)
Proceeds from sales of trading securities
 
61,764

84,766

Proceeds from maturities and repayments of trading securities
 
3,007

4,867

Purchases of available-for-sale securities
 
(8,938
)
(4,100
)
Proceeds from sales of available-for-sale securities
 
10,750

8,266

Proceeds from maturities and repayments of available-for-sale securities
 
3,250

7,045

Purchases of held-for-investment mortgage loans
 
(71,978
)
(57,373
)
Proceeds from sales of mortgage loans held-for-investment
 
4,817

1,559

Repayments of mortgage loans held-for-investment
 
126,205

133,221

Advances to lenders and other secured lending arrangements
 
(12,237
)
(16,251
)
Net proceeds from dispositions of real estate owned and other recoveries
 
752

989

Net (increase) decrease in securities purchased under agreements to resell
 
14,134

3,757

Derivative premiums and terminations, swap collateral, and exchange settlement payments, net
 
4,037

(1,663
)
Changes in other assets
 
(249
)
(160
)
Net cash provided by investing activities
 
70,335

72,731

Cash flows from financing activities
 
 
 
Proceeds from issuance of debt securities of consolidated trusts held by third parties
 
96,888

83,908

Repayments and redemptions of debt securities of consolidated trusts held by third parties
 
(136,131
)
(145,505
)
Proceeds from issuance of other debt
 
279,522

321,018

Repayments of other debt
 
(317,477
)
(336,829
)
Increase in liquidation preference of senior preferred stock
 
312

—

Payment of cash dividends on senior preferred stock
 
—

(6,709
)
Changes in other liabilities
 
(2
)
(3
)
Net cash used in financing activities
 
(76,888
)
(84,120
)
Net (decrease) increase in cash and cash equivalents (includes restricted cash and cash equivalents)
 
(3,059
)
(11,090
)
Cash and cash equivalents (includes restricted cash and cash equivalents) at beginning of year
 
9,811

22,220

Cash and cash equivalents (includes restricted cash and cash equivalents) at end of period
 

$6,752


$11,130

 
 
 
 
Supplemental cash flow information
 
 
 
Cash paid for:
 
 
 
Debt interest
 

$32,336


$31,970

Income taxes
 
2,125

487

Non-cash investing and financing activities (Note 4 and 7)
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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


Notes to Condensed Consolidated Financial Statements
NOTE 1
Summary of Significant Accounting Policies
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability and affordability to the U.S. housing market. We are regulated by FHFA, the SEC, HUD and Treasury, and are currently operating under the conservatorship of FHFA. For more information on the roles of FHFA and Treasury, see Note 2 in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2017, or 2017 Annual Report. Throughout our unaudited condensed consolidated financial statements and related notes, we use certain acronyms and terms which are defined in the Glossary of our 2017 Annual Report. Throughout this Form 10-Q, we refer to the three months ended June 30, 2018, the three months ended March 31, 2018, the three months ended December 31, 2017, the three months ended September 30, 2017, the three months ended June 30, 2017 and the three months ended March 31, 2017 as "2Q 2018," "1Q 2018," "4Q 2017," "3Q 2017," "2Q 2017" and "1Q 2017," respectively. We refer to the six months ended June 30, 2018 and the six months ended June 30, 2017 as "YTD 2018" and "YTD 2017," respectively.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes in our 2017 Annual Report.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and include our accounts as well as the accounts of other entities in which we have a controlling financial interest. All intercompany balances and transactions have been eliminated.
We are operating under the basis that we will realize assets and satisfy liabilities in the normal course of business as a going concern and as authorized by FHFA through our Board of Directors and management. Certain amounts in prior periods’ condensed consolidated financial statements have been reclassified to conform to the current presentation. In the opinion of management, our unaudited condensed consolidated financial statements contain all adjustments, which include only normal recurring adjustments, necessary for a fair statement of our results.
We evaluate the materiality of identified errors in the financial statements using both an income statement, or "rollover," and a balance sheet, or "iron curtain," approach, based on relevant quantitative and qualitative factors. Net income includes certain adjustments to correct immaterial errors related to previously reported periods.

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


Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, gains and losses during the reporting period. Management has made significant estimates in preparing the financial statements for establishing the allowance for credit losses, valuing financial instruments and other assets and liabilities and assessing impairments on investments. Actual results could be different from these estimates.
Recently Issued Accounting Guidance
Recently Adopted Accounting Guidance

Standard
Description
Date of Adoption
Effect on Condensed Consolidated Financial Statements
ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and ASU 2015-14, Topic 606: Deferral of the Effective Date
The amendment requires entities to recognize revenue to depict the transfer of promised goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2015-14 defers the effective date of ASU 2014-09 for all entities by one year.
January 1, 2018
The adoption of the amendments did not have a material effect on our condensed consolidated financial statements or on our disclosures.

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)
The amendment addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments.
January 1, 2018
The adoption of the amendments did not have a material effect on our condensed consolidated financial statements or on our disclosures.

ASU 2016-08, Topic 606: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
The amendments in this Update do not change the core principle of the guidance in Topic 606. The amendments clarify the implementation guidance on principal versus agent considerations.
January 1, 2018
The adoption of the amendments did not have a material effect on our condensed consolidated financial statements or on our disclosures.

ASU 2016-10, Topic 606: Identifying Performance Obligations and Licensing
The amendments in this Update do not change the core principle of the guidance in Topic 606, but they clarify two issues: i) identifying performance obligations; and ii) licensing. These clarifications are intended to reduce diversity in practice and to reduce the cost and complexity of Topic 606 at transition and on an ongoing basis.
January 1, 2018
The adoption of the amendments did not have a material effect on our condensed consolidated financial statements or on our disclosures.



ASU 2016-12, Topic 606: Narrow-Scope Improvements and Practical Expedients
The amendments in this Update do not change the core principle of the guidance in Topic 606, but affect aspects of the guidance and technical corrections.
January 1, 2018
The adoption of the amendments did not have a material effect on our condensed consolidated financial statements or on our disclosures.


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


Recently Adopted Accounting Guidance

Standard
Description
Date of Adoption
Effect on Condensed Consolidated Financial Statements
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)
The main objective of this Update is to address the diversity in practice that currently exists in regards to how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.
January 1, 2018
Upon adoption, the portion of the cash payment attributable to the accreted interest related to zero-coupon debt is presented in the operating activities section, a classification change from the financing activities section where this item was previously presented. As a result, we reclassified approximately $1.0 billion of cash payments from financing activities to operating activities on our condensed consolidated statements of cash flows for YTD 2017.
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
The amendments in this Update address the diversity in the classification and presentation of changes in restricted cash on the statement of cash flows under Topic 230, Statement of Cash Flows. Specifically, this amendment dictates that the statement of cash flows should explain the change in the period of the total of cash, cash equivalents and restricted cash balances.
January 1, 2018
The adoption of the amendments did not have a material effect on our condensed consolidated financial statements; however, we modified the presentation of restricted cash and cash equivalent balances on our condensed consolidated balance sheets. The presentation of our condensed consolidated statements of cash flows has also been revised to reflect the change of total cash and cash equivalents and restricted cash and cash equivalents balances.

ASU 2016-20, Technical Corrections and Improvements to Topic 606
The amendments in this Update are of a similar nature to the items typically addressed in the Technical Corrections and Improvements project. However, the Board decided to issue a separate Update for technical corrections and improvements to Topic 606 and other Topics amended by Update 2014-09 to increase stakeholders’ awareness of the proposals and to expedite improvements to Update 2014-09.
January 1, 2018
The adoption of the amendments did not have a material effect on our condensed consolidated financial statements or on our disclosures.



ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act.
January 1, 2018
Upon adoption, we reclassified approximately $89 million from accumulated other comprehensive income to retained earnings on our condensed consolidated financial statements.

ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities
The amendments clarify certain aspects of the guidance issued in Update 2016-01 and address six specific issues.
January 1, 2018
The adoption of the amendments did not have a material effect on our condensed consolidated financial statements or on our disclosures.



Freddie Mac Form 10-Q
 
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Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 1


Recently Issued Accounting Guidance, Not Yet Adopted Within Our Condensed Consolidated Financial Statements
Standard
Description
Date of Planned Adoption
Effect on Consolidated Financial Statements
ASU 2016-02, Leases (Topic 842)
The amendment addresses the accounting for lease arrangements.
January 1, 2019
We do not expect that the adoption of this amendment will have a material effect on our consolidated financial statements.
ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
January 1, 2020
We are developing our models to estimate lifetime expected credit losses on our financial instruments measured at amortized cost using discounted cash flow methodology.
The amendment will be applied through a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption.
While we are not able to reasonably estimate the effect that the adoption of this amendment will have on our consolidated financial statements, it may increase (perhaps substantially) our allowance for credit losses in the period of adoption.




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


NOTE 2
Conservatorship and Related Matters
Business Objectives
We operate under the conservatorship that commenced on September 6, 2008, conducting our business under the direction of FHFA, as our Conservator. The conservatorship and related matters significantly affect our management, business activities, financial condition and results of operations. Upon its appointment, FHFA, as Conservator, immediately succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any stockholder, officer or director thereof, with respect to the company and its assets. The Conservator also succeeded to the title to all books, records and assets of Freddie Mac held by any other legal custodian or third party. The Conservator provided for the Board of Directors to perform certain functions and to oversee management, and the board delegated to management authority to conduct business operations so that the company can continue to operate in the ordinary course. The directors serve on behalf of, and perform such functions as provided by, the Conservator.
We are also subject to certain constraints on our business activities under the Purchase Agreement. However, 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.
Impact of Conservatorship and Related Developments on the Mortgage-Related Investments Portfolio
For purposes of the limit imposed by the Purchase Agreement and FHFA regulation, the UPB of our mortgage-related investments portfolio cannot exceed $250 billion at December 31, 2018 and was $236.4 billion at June 30, 2018. Our Retained Portfolio Plan provides for us to manage the UPB of the mortgage-related investments portfolio so that it does not exceed 90% of the cap established by the Purchase Agreement (subject to certain exceptions). Our ability to acquire and sell mortgage assets is significantly constrained by limitations of the Purchase Agreement and those imposed by FHFA.
Government Support for Our Business
We receive substantial support from Treasury and are dependent upon its continued support in order to continue operating our business. Our ability to access funds from Treasury under the Purchase Agreement is critical to:
n
Keeping us solvent;
n
Allowing us to focus on our primary business objectives under conservatorship; and
n
Avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions.
At March 31, 2018, our assets exceeded our liabilities under GAAP; therefore, FHFA, as Conservator, did not request a draw on our behalf and, as a result, we did not receive any funding from Treasury under

Freddie Mac Form 10-Q
 
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Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 2


the Purchase Agreement during 2Q 2018. The amount of available funding remaining under the Purchase Agreement is $140.2 billion and will be reduced by any future draws.
See Note 8 and Note 11 for more information on the conservatorship and the Purchase Agreement.
Related Parties as a Result of Conservatorship
We are deemed related parties with Fannie Mae as both we and Fannie Mae have the same relationships with FHFA and Treasury. CSS was formed in 2013 as a limited liability company equally-owned by Freddie Mac and Fannie Mae. Therefore, CSS is also deemed a related party. During YTD 2018, we contributed $76 million of capital to CSS, and we have contributed $405 million since the fourth quarter of 2014.


Freddie Mac Form 10-Q
 
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Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 3


NOTE 3
Securitization Activities and Consolidation
Our primary business activities in our Single-family Guarantee and Multifamily segments involve the securitization of loans or other mortgage-related assets using trusts that are VIEs. These trusts issue beneficial interests in the loans or other mortgage-related assets that they own. We guarantee the principal and interest payments on some or all of the issued beneficial interests in substantially all of our securitization transactions. We consolidate VIEs when we have a controlling financial interest in the VIE and are therefore considered the primary beneficiary of the VIE. See Note 5 for additional information on our guarantee activities.
Consolidated VIEs
The table below presents the carrying value and classification of the assets and liabilities of consolidated VIEs on our condensed consolidated balance sheets.
(In millions)
 
June 30, 2018
December 31, 2017
Consolidated Balance Sheet Line Item
 
 
 
Assets:
 
 
 
Restricted cash and cash equivalents
 

$500


$518

Securities purchased under agreements to resell
 
16,435

16,750

Mortgage loans held-for-investment
 
1,795,534

1,774,286

Accrued interest receivable
 
5,664

5,747

Other assets
 
2,445

2,738

Total assets of consolidated VIEs
 

$1,820,578


$1,800,039

Liabilities:
 
 
 
Accrued interest payable
 

$5,122


$5,028

Debt, net
 
1,746,298

1,720,996

Other liabilities
 
2

2

Total liabilities of consolidated VIEs
 

$1,751,422


$1,726,026


Freddie Mac Form 10-Q
 
90
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 3


Non-Consolidated VIEs
Our involvement with VIEs for which we are not the primary beneficiary takes one or both of two forms - purchasing an investment in these entities or providing a guarantee to these entities. The following table presents the carrying amounts and classification of the assets and liabilities recorded on our condensed consolidated balance sheets related to our variable interests in non-consolidated VIEs with which we were involved in the design and creation and have a significant continuing involvement, as well as our maximum exposure to loss. 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 6 for additional information on credit enhancement arrangements.
(In millions)
 
June 30, 2018
December 31, 2017
Assets and Liabilities Recorded on our Condensed Consolidated Balance Sheets(1)


 
Assets:


 
Investments in securities


$46,869


$51,494

Accrued interest receivable

228

233

Derivative assets, net
 
22

7

Other assets

2,754

2,591

 Liabilities:

 
 
Derivative liabilities, net

60

—

Other liabilities

2,683

2,489

Maximum Exposure to Loss(2)(3)

219,637

200,196

Total Assets of Non-Consolidated VIEs(3)

255,124

232,762

(1)
Includes our variable interests in REMICs and Stripped Giant PCs, K Certificates, SB Certificates, senior subordinate securitization structures and other securitization products that we do not consolidate.
(2)
Our maximum exposure to loss includes the guaranteed UPB of assets held by the non-consolidated VIEs, the UPB of unguaranteed securities that we acquired from these securitization transactions and the UPB of guarantor advances made to the holders of the guaranteed securities.
(3)
Our maximum exposure to loss and total assets of non-consolidated VIEs exclude our investments in and obligations to REMICs and Stripped Giant PCs, because we already consolidate the underlying collateral of these trusts on our condensed consolidated balance sheets. In addition, our maximum exposure to loss excludes other guarantees measured at fair value related to certain of our REMICs where our exposure may be unlimited. We generally reduce our exposure to these guarantees with unlimited exposure through separate contracts with third parties.
We also obtain interests in various other VIEs created by third parties through the normal course of business. To the extent that we were not involved in the design and creation of these VIEs, they are excluded from the table above. Our interests in these VIEs are generally passive in nature and are not expected to result in us obtaining a controlling financial interest in these VIEs in the future.

Freddie Mac Form 10-Q
 
91
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



NOTE 4
Mortgage Loans and Allowance for Credit Losses
The table below provides details of the loans on our condensed consolidated balance sheets.
 
 
June 30, 2018
 
December 31, 2017
(In millions)
 
Held by Freddie Mac
Held by
Consolidated
Trusts
Total
 
Held by Freddie Mac
Held by
Consolidated
Trusts
Total
Held-for-sale:
 
 
 
 
 
 
 
 
Single-family
 

$11,528


$—


$11,528

 

$17,039


$—


$17,039

Multifamily
 
16,752

—

16,752

 
20,537

—

20,537

Total UPB
 
28,280

—

28,280

 
37,576

—

37,576

Cost basis and fair value adjustments, net
 
(2,003
)
—

(2,003
)
 
(2,813
)
—

(2,813
)
Total held-for-sale loans, net
 
26,277

—

26,277

 
34,763

—

34,763

Held-for-investment:
 
 
 
 
 
 
 
 
Single-family
 
55,948

1,767,684

1,823,632

 
51,893

1,742,736

1,794,629

Multifamily
 
14,531

3,990

18,521

 
17,702

3,747

21,449

Total UPB
 
70,479

1,771,674

1,842,153

 
69,595

1,746,483

1,816,078

Cost basis adjustments
 
(2,541
)
27,359

24,818

 
(2,148
)
31,490

29,342

Allowance for loan losses
 
(4,898
)
(3,499
)
(8,397
)
 
(5,279
)
(3,687
)
(8,966
)
Total held-for-investment loans, net
 
63,040

1,795,534

1,858,574

 
62,168

1,774,286

1,836,454

Total loans, net
 

$89,317


$1,795,534


$1,884,851

 

$96,931


$1,774,286


$1,871,217


Freddie Mac Form 10-Q
 
92
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The table below provides details of the UPB of loans we purchased, reclassified from held-for-investment to held-for-sale, and sold.
(In billions)
 
2Q 2018
 
2Q 2017
 
YTD 2018
 
YTD 2017
Single-family:
 
 
 
 
 
 
 
 
Purchases
 
 
 
 
 
 
 
 
  Held-for-investment loans
 

$84.4

 

$73.3

 

$149.9

 

$158.9

Reclassified from held-for-investment to held-for-sale(1)
 
2.6

 
11.1

 
4.3

 
12.8

Sale of held-for-sale loans(2)
 
2.4

 
1.6

 
4.2

 
1.6

Multifamily:
 
 
 
 
 
 
 
 
Purchases
 
 
 
 
 
 
 
 
  Held-for-investment loans
 
0.7

 
0.6

 
1.7

 
1.9

  Held-for-sale loans
 
14.4

 
12.8

 
26.2

 
24.0

Reclassified from held-for-investment to held-for-sale(1)
 
0.2

 
0.7

 
0.5

 
0.7

Sale of held-for-sale loans(3)
 
14.2

 
12.8

 
30.4

 
22.7

(1)
We reclassify loans from held-for-investment to held-for-sale when we no longer have the intent or ability to hold for the foreseeable future.
(2)
Our sales of single-family loans reflect the sale of seasoned single-family loans. The sale of seasoned single-family mortgage loans is part of our strategy to mitigate and reduce our holdings of less liquid assets.
(3)
Our sales of multifamily loans occur primarily through the issuance of multifamily K Certificates and SB Certificates. See Note 3 for more information on our K Certificates and SB Certificates.
Credit Quality
Single-Family
The current LTV ratio is one key factor we consider when estimating our allowance for credit losses for single-family loans. As current LTV ratios increase, the borrower’s equity in the home decreases, which may negatively affect the borrower’s ability to refinance or to sell the property for an amount at or above the balance of the outstanding loan.
A second-lien loan also reduces the borrower’s equity in the home and has a similar negative effect on the borrower’s ability to refinance or sell the property for an amount at or above the combined balances of the first and second loans. As of both June 30, 2018 and December 31, 2017, based on data collected by us at loan delivery, approximately 9% of loans in our single-family credit guarantee portfolio had second-lien financing by third parties at origination of the first loan. However, borrowers are free to obtain second-lien financing after origination, and we are not entitled to receive notification when a borrower does so. For further information about concentrations of risk associated with our single-family and multifamily loans, see Note 14.
The table below presents the recorded investment of single-family held-for-investment loans by current LTV ratios. Our current LTV ratios are estimates based on available data through the end of each respective period presented.

Freddie Mac Form 10-Q
 
93
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



 
 
June 30, 2018
 
December 31, 2017
 
 
Current LTV Ratio
 Total
 
Current LTV Ratio
 Total
(In millions)
 
 ≤ 80
> 80 to 100
> 100(1)
 
≤ 80
> 80 to 100
> 100(1)
20 and 30-year or more, amortizing fixed-rate(2)
 

$1,299,704


$199,269


$9,861


$1,508,834

 

$1,240,224


$214,177


$13,303


$1,467,704

15-year amortizing fixed-rate(2)
 
262,507

5,356

243

268,106

 
270,266

7,351

381

277,998

Adjustable-rate
 
45,634

2,195

13

47,842

 
48,596

2,963

28

51,587

Alt-A, interest-only, and option ARM
 
19,601

3,078

1,008

23,687

 
21,013

4,256

1,429

26,698

Total single-family loans
 

$1,627,446


$209,898


$11,125


$1,848,469

 

$1,580,099


$228,747


$15,141


$1,823,987

(1)
The serious delinquency rate for the total of single-family held-for-investment mortgage loans with current LTV ratios in excess of 100% was 7.79% and 8.43% as of June 30, 2018 and December 31, 2017, respectively.
(2)
As of June 30, 2018 and December 31, 2017, $14.4 billion and $22.2 billion, respectively, in UPB of modified loans were categorized as fixed-rate loans (instead of as adjustable rate loans), even though the modified loans have rate adjustment provisions. In these cases, while the terms of the modified loans provide for the interest rate to adjust, such rates and the timing of the adjustment are determined at the time of modification rather than at a subsequent date.
For reporting purposes:
n 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
n Loans within the option ARM category continue to be presented in that category following modification, even though the modified loan no longer provides for optional payment or adjustable interest-rate provisions.

Freddie Mac Form 10-Q
 
94
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Multifamily
The table below presents the recorded investment in our multifamily held-for-investment loans, by credit quality indicator based on available data through the end of each period presented. These indicators involve significant management judgment.
(In millions)
 
June 30, 2018
December 31, 2017
Credit risk profile by internally assigned grade:(1)
 
 
 
Pass
 

$17,991


$20,963

Special mention
 
301

301

Substandard
 
210

169

Doubtful
 
—

—

Total
 

$18,502


$21,433

(1)
A loan categorized as: "Pass" is current and adequately protected by the current financial strength and debt service capacity of the borrower; "Special mention" has administrative issues that may affect future repayment prospects but does not have current credit weaknesses; "Substandard" has a weakness that jeopardizes the timely full repayment; and "Doubtful" has a weakness that makes collection or liquidation in full highly questionable and improbable based on existing conditions.
Mortgage Loan Performance
The tables below present the recorded investment of our single-family and multifamily loans, held-for-investment, by payment status.
 
 
June 30, 2018
(In millions)
 
Current
One
Month
Past Due
Two
Months
Past Due
Three Months or
More Past Due,
or in Foreclosure(1)
Total
Non-accrual
Single-family:
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 

$1,481,467


$14,664


$3,718


$8,985


$1,508,834


$8,982

15-year amortizing fixed-rate
 
266,621

978

158

349

268,106

349

Adjustable-rate
 
47,323

306

60

153

47,842

153

Alt-A, interest-only, and option ARM
 
21,027

1,041

383

1,236

23,687

1,236

Total single-family
 
1,816,438

16,989

4,319

10,723

1,848,469

10,720

Total multifamily
 
18,493

—

—

9

18,502

49

Total single-family and multifamily
 

$1,834,931


$16,989


$4,319


$10,732


$1,866,971


$10,769

 
 
 
 
 
 
 
 

 
December 31, 2017
(In millions)
 
Current
One
Month
Past Due
Two
Months
Past Due
Three Months or
More Past Due,
or in Foreclosure(1)
Total
Non-accrual
Single-family:
 






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

$1,431,342


$18,297


$5,660


$12,405


$1,467,704


$12,401

15-year amortizing fixed-rate
 
275,864

1,288

290

556

277,998

556

Adjustable-rate
 
50,915

383

84

205

51,587

205

Alt-A, interest-only, and option ARM
 
23,235

1,297

509

1,657

26,698

1,656

Total single-family
 
1,781,356

21,265

6,543

14,823

1,823,987

14,818

Total multifamily
 
21,414

—

—

19

21,433

64

Total single-family and multifamily
 

$1,802,770


$21,265


$6,543


$14,842


$1,845,420


$14,882

(1)
Includes $3.5 billion and $4.1 billion of loans that were in the process of foreclosure as of June 30, 2018 and December 31, 2017, respectively.

Freddie Mac Form 10-Q
 
95
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The table below summarizes the delinquency rates of loans within our single-family credit guarantee and multifamily mortgage portfolios.
(Dollars in millions)
 
June 30, 2018
December 31, 2017
Single-family:
 
 
 
Non-credit-enhanced portfolio
 
 
 
Serious delinquency rate
 
0.96
%
1.16
%
Total number of seriously delinquent loans
 
62,145

81,668

Credit-enhanced portfolio:(1)
 
 
 
Primary mortgage insurance:
 
 
 
   Serious delinquency rate
 
1.04
%
1.43
%
   Total number of seriously delinquent loans
 
17,417

23,275

Other credit protection:(2)
 
 
 
   Serious delinquency rate
 
0.33
%
0.53
%
   Total number of seriously delinquent loans
 
12,322

16,259

Total single-family:
 
 
 
Serious delinquency rate
 
0.82
%
1.08
%
Total number of seriously delinquent loans
 
88,407

116,662

Multifamily:(3)
 
 
 
Non-credit-enhanced portfolio:
 
 
 
Delinquency rate
 
0.03
%
0.06
%
UPB of delinquent loans
 

$9


$24

Credit-enhanced portfolio:
 
 
 
Delinquency rate
 
0.01
%
0.01
%
UPB of delinquent loans
 

$18


$16

Total multifamily:
 
 
 
Delinquency rate
 
0.01
%
0.02
%
UPB of delinquent loans
 

$27


$40

(1)
The credit-enhanced categories are not mutually exclusive, as a single loan may be covered by both primary mortgage insurance and other credit protection.
(2)
Consists of single-family loans covered by financial arrangements (other than primary mortgage insurance) that are designed to reduce our credit risk exposure. See Note 6 for additional information on our credit enhancements.
(3)
Multifamily delinquency performance is based on UPB of loans that are two monthly payments or more past due or those in the process of foreclosure.
Allowance for Credit Losses
The allowance for credit losses represents estimates of probable incurred credit losses which we recognize by recording a charge to the provision for credit losses in our condensed consolidated statements of comprehensive income. The allowance for credit losses includes:
n Our allowance for loan losses, which pertains to all single-family and multifamily loans classified as held-for-investment on our condensed consolidated balance sheets; and
n Our reserve for guarantee losses, which pertains to single-family and multifamily loans underlying our K Certificates, SB Certificates, senior subordinate securitization structures, other securitization products and other mortgage-related guarantees.


Freddie Mac Form 10-Q
 
96
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The tables below summarize changes in our allowance for credit losses.
 
 
2Q 2018

2Q 2017

 
Allowance for Loan Losses
 Reserve  for
Guarantee
Losses
Total

Allowance for Loan Losses
 Reserve  for
Guarantee
Losses
Total
 (In millions)
 
Held by Freddie Mac
Held By
Consolidated
Trusts

Held by Freddie Mac
Held By
Consolidated
Trusts
Single-family:
 









Beginning balance
 

$5,305


$3,524


$48


$8,877



$9,866


$2,854


$54


$12,774

Provision (benefit) for credit losses
 
(205
)
144

3

(58
)

(512
)
94

2

(416
)
Charge-offs
 
(581
)
(16
)
(2
)
(599
)

(2,119
)
(33
)
(1
)
(2,153
)
Recoveries
 
124

2

—

126


84

1

—

85

Transfers, net(1)
 
165

(165
)
—

—


163

(163
)
—

—

Other(2)
 
79

8

—

87

 
59

2

—

61

Single-family ending balance
 
4,887

3,497

49

8,433


7,541

2,755

55

10,351

Multifamily ending balance
 
11

2

7

20


14

1

7

22

Total ending balance
 

$4,898


$3,499


$56


$8,453



$7,555


$2,756


$62


$10,373


 









 
 
 
 
 
 
 
 
 
 
 
 
 
YTD 2018

YTD 2017

 
Allowance for Loan Losses
 Reserve  for
Guarantee
Losses
Total

Allowance for Loan Losses
 Reserve  for
Guarantee
Losses
Total
 (In millions)
 
Held by Freddie Mac
Held By
Consolidated
Trusts

Held by Freddie Mac
Held By
Consolidated
Trusts
Single-family:
 









Beginning balance
 

$5,251


$3,680


$48


$8,979



$10,442


$2,969


$54


$13,465

Provision (benefit) for credit losses
 
(107
)
123

5

21


(728
)
200

2

(526
)
Charge-offs
 
(936
)
(31
)
(4
)
(971
)

(2,816
)
(76
)
(1
)
(2,893
)
Recoveries
 
219

3

—

222


179

3

—

182

Transfers, net(1)
 
291

(291
)
—

—


344

(344
)
—

—

Other(2)
 
169

13

—

182

 
120

3

—

123

Single-family ending balance
 
4,887

3,497

49

8,433


7,541

2,755

55

10,351

Multifamily ending balance
 
11

2

7

20


14

1

7

22

Total ending balance
 

$4,898


$3,499


$56


$8,453



$7,555


$2,756


$62


$10,373

(1)
Relates to removal of delinquent single-family loans from consolidated trusts and resecuritization after such removal. 
(2)
Primarily includes capitalization of past due interest on modified loans.
A significant number of unsecuritized single-family loans on our condensed consolidated balance sheets are individually evaluated for impairment while substantially all single-family loans held by our consolidated trusts are collectively evaluated for impairment. The allowance for loan losses associated with our held-for-investment unsecuritized loans represented approximately 7.2% and 7.8% of the recorded investment in such loans at June 30, 2018 and December 31, 2017, respectively, and a substantial portion of the allowance associated with these loans represented interest rate concessions provided to borrowers as part of loan modifications. The allowance for loan losses associated with loans held by our consolidated trusts represented approximately 0.2% of the recorded investment in such loans as of both June 30, 2018 and December 31, 2017.

Freddie Mac Form 10-Q
 
97
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The table below presents our allowance for loan losses and our recorded investment in loans, held-for-investment, by impairment evaluation methodology.
 
 
June 30, 2018
 
December 31, 2017
(In millions)
 
Single-family
Multifamily
Total
 
Single-family
Multifamily
Total
Recorded investment:
 
 
 
 
 
 
 
 
Collectively evaluated
 

$1,787,602


$18,384


$1,805,986

 

$1,764,750


$21,301


$1,786,051

Individually evaluated
 
60,867

118

60,985

 
59,237

132

59,369

Total recorded investment
 
1,848,469

18,502

1,866,971

 
1,823,987

21,433

1,845,420

Ending balance of the allowance for loan losses:
 
 
 
 
 
 
 
 
Collectively evaluated
 
(1,792
)
(11
)
(1,803
)
 
(2,301
)
(28
)
(2,329
)
Individually evaluated
 
(6,592
)
(2
)
(6,594
)
 
(6,630
)
(7
)
(6,637
)
Total ending balance of the allowance
 
(8,384
)
(13
)
(8,397
)
 
(8,931
)
(35
)
(8,966
)
Net investment in loans
 

$1,840,085


$18,489


$1,858,574

 

$1,815,056


$21,398


$1,836,454


Freddie Mac Form 10-Q
 
98
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Allowance for Loan Losses Determined on an Individual Basis
Impaired Loans
The tables below present the UPB, recorded investment, related allowance for loan losses, average recorded investment and interest income recognized for individually impaired loans.
 
 
June 30, 2018
 
December 31, 2017
(In millions)
 
UPB
Recorded
Investment
Associated
Allowance
 
UPB
Recorded Investment
Associated
Allowance
Single-family:
 
 
 
 
 
 
 
 
With no allowance recorded:(1)
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 

$4,790


$3,748

N/A

 

$3,768


$2,908

N/A

15-year amortizing fixed-rate
 
24

22

N/A

 
24

21

N/A

Adjustable-rate
 
265

262

N/A

 
259

256

N/A

Alt-A, interest-only, and option ARM
 
1,742

1,434

N/A

 
1,558

1,297

N/A

Total with no allowance recorded
 
6,821

5,466

N/A

 
5,609

4,482

N/A

With an allowance recorded:(2)
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
48,938

47,749


($5,509
)
 
47,897

46,783


($5,505
)
15-year amortizing fixed-rate
 
890

901

(43
)
 
752

757

(24
)
Adjustable-rate
 
230

227

(13
)
 
232

228

(14
)
Alt-A, interest-only, and option ARM
 
6,988

6,524

(1,027
)
 
7,407

6,987

(1,087
)
Total with an allowance recorded
 
57,046

55,401

(6,592
)
 
56,288

54,755

(6,630
)
Combined single-family:
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
53,728

51,497

(5,509
)
 
51,665

49,691

(5,505
)
15-year amortizing fixed-rate
 
914

923

(43
)
 
776

778

(24
)
Adjustable-rate
 
495

489

(13
)
 
491

484

(14
)
Alt-A, interest-only, and option ARM
 
8,730

7,958

(1,027
)
 
8,965

8,284

(1,087
)
Total single-family
 
63,867

60,867

(6,592
)
 
61,897

59,237

(6,630
)
Multifamily:
 
 
 
 
 
 
 
 
With no allowance recorded(1)
 
124

115

N/A

 
106

97

N/A

With an allowance recorded
 
3

3

(2
)
 
35

35

(7
)
Total multifamily
 
127

118

(2
)
 
141

132

(7
)
Total single-family and multifamily
 

$63,994


$60,985


($6,594
)
 

$62,038


$59,369


($6,637
)
Referenced footnotes are included after the last table in the Impaired Loans section.


Freddie Mac Form 10-Q
 
99
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



 
 
2Q 2018
 
2Q 2017
(In millions)
 
Average
Recorded
Investment
Interest
Income
Recognized
Interest Income
Recognized On
Cash Basis(3)
 
Average
Recorded
Investment
Interest
Income
Recognized
Interest Income
Recognized On
Cash Basis(3)
Single-family:
 
 
 
 
 
 
 
 
With no allowance recorded:(1)
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 

$3,700


$91


$3

 

$3,801


$101


$5

15-year amortizing fixed-rate
 
22

2

—

 
27

—

—

Adjustable rate
 
264

3

—

 
306

3

—

Alt-A, interest-only, and option ARM
 
1,427

24

1

 
1,509

27

1

Total with no allowance recorded
 
5,413

120

4

 
5,643

131

6

With an allowance recorded:(2)
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
48,070

509

82

 
59,482

643

60

15-year amortizing fixed-rate
 
882

6

3

 
803

5

1

Adjustable rate
 
219

—

1

 
259

2

—

Alt-A, interest-only, and option ARM
 
6,579

53

8

 
9,446

100

8

Total with an allowance recorded
 
55,750

568

94

 
69,990

750

69

Combined single-family:
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
51,770

600

85

 
63,283

744

65

15-year amortizing fixed-rate
 
904

8

3

 
830

5

1

Adjustable rate
 
483

3

1

 
565

5

—

Alt-A, interest-only, and option ARM
 
8,006

77

9

 
10,955

127

9

Total single-family
 
61,163

688

98

 
75,633

881

75

Multifamily:
 
 
 
 
 
 
 
 
With no allowance recorded(1)
 
115

1

—

 
141

2

—

With an allowance recorded
 
3

—

—

 
23

—

1

Total multifamily
 
118

1

—

 
164

2

1

Total single-family and multifamily
 

$61,281


$689


$98

 

$75,797


$883


$76

Referenced footnotes are included after the last table in the Impaired Loans section.

Freddie Mac Form 10-Q
 
100
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



 
 
 
 
 
 
 
 
 
 
 
YTD 2018
 
YTD 2017
(In millions)
 
Average
Recorded
Investment
Interest
Income
Recognized
Interest Income
Recognized On
Cash Basis(3)
 
Average
Recorded
Investment
Interest
Income
Recognized
Interest Income
Recognized On
Cash Basis(3)
Single-family —
 
 
 
 
 
 
 
 
With no allowance recorded:(1)
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 

$3,506


$185


$10

 

$3,916


$210


$9

15-year amortizing fixed-rate
 
21

3

—

 
27

1

—

Adjustable rate
 
264

6

—

 
308

6

—

Alt-A, interest-only, and option ARM
 
1,392

47

2

 
1,582

56

2

Total with no allowance recorded
 
5,183

241

12

 
5,833

273

11

With an allowance recorded:(2)
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
47,969

1,101

165

 
62,287

1,313

130

15-year amortizing fixed-rate
 
876

14

6

 
814

17

3

Adjustable rate
 
223

2

2

 
266

5

1

Alt-A, interest-only, and option ARM
 
6,707

133

17

 
10,431

207

19

Total with an allowance recorded
 
55,775

1,250

190

 
73,798

1,542

153

Combined single-family:
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
51,475

1,286

175

 
66,203

1,523

139

15-year amortizing fixed-rate
 
897

17

6

 
841

18

3

Adjustable rate
 
487

8

2

 
574

11

1

Alt-A, interest-only, and option ARM
 
8,099

180

19

 
12,013

263

21

Total single-family
 
60,958

1,491

202

 
79,631

1,815

164

Multifamily:
 
 
 
 
 
 
 
 
With no allowance recorded(1)
 
124

3

1

 
284

5

1

With an allowance recorded
 
3

—

—

 
27

1

1

Total multifamily
 
127

3

1

 
311

6

2

Total single-family and multifamily
 

$61,085


$1,494


$203

 

$79,942


$1,821


$166

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


Freddie Mac Form 10-Q
 
101
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Troubled Debt Restructurings
The table below presents the volume of single-family and multifamily loans that were newly classified as TDRs, based on the original product category of the loan before the loan was classified as a TDR. Loans classified as a TDR in one period may be subject to further action (such as a modification or remodification) in a subsequent period. In such cases, the subsequent action would not be reflected in the table below since the loan would already have been classified as a TDR.
 
 
2Q 2018
 
2Q 2017
 
YTD 2018
 
YTD 2017
(Dollars in millions)
 
Number of 
Loans
Post-TDR
Recorded
Investment
 
Number of 
Loans
Post-TDR
Recorded
Investment
 
Number of 
Loans
Post-TDR
Recorded
Investment
 
Number of 
Loans
Post-TDR
Recorded
Investment
Single-family:(1)
 
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
10,991


$1,763

 
8,019


$1,151

 
30,690


$5,068

 
16,983


$2,434

15-year amortizing fixed-rate
 
1,469

139

 
1,090

88

 
4,285

431

 
2,282

176

Adjustable-rate
 
257

38

 
215

32

 
576

95

 
465

67

Alt-A, interest-only, and option ARM
 
641

111

 
601

111

 
1,880

314

 
1,281

225

Total single-family
 
13,358

2,051

 
9,925

1,382

 
37,431

5,908

 
21,011

2,902

Multifamily
 
1


$15

 
—


$—

 
1


$15

 
—


$—

(1)
The pre-TDR recorded investment for single-family loans initially classified as TDR during 2Q 2018 and YTD 2018 was $2.1 billion and $6.0 billion, respectively, compared to $1.4 billion and $2.9 billion during 2Q 2017 and YTD 2017, respectively.
Of the single-family loans that were newly classified as TDRs during 2Q 2018, 2Q 2017, YTD 2018 and YTD 2017 respectively:
n 11%, 41%, 14% and 42% involved interest rate reductions and, in certain cases, term extensions;
n 22%, 12%, 25% and 13% involved principal forbearance in addition to interest rate reductions and, in certain cases, term extensions;
n The average term extension was 116, 174,137 and 173 months; and
n The average interest rate reduction was 0.3%, 0.7%, 0.3% and 0.8%.




Freddie Mac Form 10-Q
 
102
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The table below presents the volume of our TDR modifications that experienced payment defaults (i.e., loans that became two months delinquent or completed a loss event) during the applicable periods and had completed a modification during the year preceding the payment default. The table presents loans based on their original product category before modification.
 
 
2Q 2018
 
2Q 2017
 
YTD 2018
 
YTD 2017
(Dollars in millions)
 
Number of Loans
Post-TDR
Recorded
Investment
 
Number of Loans
Post-TDR
Recorded
Investment
 
Number of Loans
Post-TDR
Recorded
Investment
 
Number of Loans
Post-TDR
Recorded
Investment
Single-family:
 
 
 
 
 
 
 
 
 
 
 
 
20 and 30-year or more, amortizing fixed-rate
 
3,131


$480

 
3,301


$534

 
6,087


$923

 
6,657


$1,087

15-year amortizing fixed-rate
 
149

11

 
146

13

 
319

26

 
314

26

Adjustable-rate
 
42

5

 
53

8

 
86

12

 
109

16

Alt-A, interest-only, and option ARM
 
250

45

 
283

62

 
525

99

 
588

126

Total single-family
 
3,572

541

 
3,783

617

 
7,017

1,060

 
7,668

1,255

Multifamily
 
—


$—

 
—


$—

 
—


$—

 
—


$—

In addition, loans may be initially classified as TDRs as a result of other loss mitigation activities (i.e., repayment plans, forbearance agreements, or loans in modification trial periods). During YTD 2018 and YTD 2017, 4,467 and 3,502, respectively, of such loans (with a post-TDR recorded investment of $0.6 billion and $0.4 billion, respectively) experienced a payment default within a year after the loss mitigation activity occurred.
Loans may also be initially classified as TDRs because the borrowers’ debts were discharged in Chapter 7 bankruptcy (and the loan was not already classified as a TDR for other reasons). During YTD 2018 and YTD 2017, 289 and 465, respectively, of such loans (with a post-TDR recorded investment of $33 million and $54 million, respectively) experienced a payment default within a year after the borrowers' Chapter 7 bankruptcy.
Non-Cash Investing and Financing Activities
During YTD 2018 and YTD 2017, we acquired $80.9 billion and $106.3 billion, respectively, of loans held-for-investment in exchange for the issuance of debt securities of consolidated trusts in guarantor swap transactions. We received approximately $11.8 billion and $16.3 billion of loans from sellers during YTD 2018 and YTD 2017, respectively, to satisfy advances to lenders that were recorded in other assets on our condensed consolidated balance sheets. These loans were primarily included in the guarantor swap transactions.
In addition, we acquire REO properties through foreclosure sales or by deed in lieu of foreclosure. These acquisitions represent non-cash transfers. During YTD 2018 and YTD 2017, we had transfers of $0.5 billion and $0.6 billion, respectively, from loans to REO.


Freddie Mac Form 10-Q
 
103
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 5


NOTE 5
Guarantee Activities
We generate revenue through our guarantee activities by agreeing to absorb the credit risk associated with certain financial instruments that are owned or held by third parties. In exchange for providing this guarantee, we receive an ongoing guarantee fee that is commensurate with the risks assumed and that will, over the long-term, provide us with cash flows that are expected to exceed the credit-related and administrative expenses of the underlying financial instruments. The profitability of our guarantee activities may vary and will be dependent on our guarantee fee and the actual credit performance of the underlying financial instruments that we have guaranteed.
The table below shows our maximum exposure, recognized liability and maximum remaining term of our recognized guarantees to non-consolidated VIEs and other third parties. This table does not include our unrecognized guarantees, such as guarantees to consolidated VIEs or to resecuritization trusts that do not expose us to incremental credit risk. The maximum exposure disclosed in the table 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, including possible recoveries under credit enhancement arrangements. See Note 6 for additional information on our credit enhancement arrangements.
 
 
June 30, 2018

December 31, 2017
(Dollars in millions, terms in years)
 
Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term

Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term
Single-family:
 
 
 







Securitization activity guarantees
 

$13,587


$160

40


$10,817


$120

40
Other mortgage-related guarantees
 
6,015

173

30

6,264

190

31
Total single-family
 

$19,602


$333

 
 

$17,081


$310

 
Multifamily:
 
 
 
 
 
 
 
 
Securitization activity guarantees
 

$203,994


$2,451

39
 

$188,768


$2,305

40
Other mortgage-related guarantees
 
10,138

469

36
 
9,888

466

36
Total multifamily
 

$214,132


$2,920

 
 

$198,656


$2,771

 
Other guarantees measured at fair value
 

$13,322


$186

28
 

$9,661


$141

28
(1)
The maximum exposure represents the contractual amounts that could be lost if counterparties or borrowers defaulted, without consideration of possible recoveries under credit enhancement arrangements, such as recourse provisions, third-party insurance contracts, or from collateral held or pledged. For other guarantees measured at fair value, this amount represents the notional value if it relates to our market value guarantees or guarantees of third party derivative instruments; or the UPB if it relates to a guarantee of a mortgage-related asset. For certain of our other guarantees measured at fair value, our exposure may be unlimited. We generally reduce our exposure to these guarantees with unlimited exposure through separate contracts with third parties.
(2)
For securitization activity guarantees and other mortgage-related guarantees, this amount represents the guarantee obligation on our condensed consolidated balance sheets. This amount excludes our reserve for guarantee losses, which totaled $56 million and $57 million as of June 30, 2018 and December 31, 2017, respectively, and is included within other liabilities on our condensed consolidated balance sheets. For other guarantees measured at fair value, this amount represents the fair value of the contract.

Freddie Mac Form 10-Q
 
104
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 6


NOTE 6
Credit Enhancements
In connection with many of our mortgage loans, securitization activity guarantees, other mortgage-related guarantees and other credit risk transfer transactions, we obtain various forms of credit enhancements that reduce our exposure to credit losses. These credit enhancements may be attached to the underlying mortgage loans, freestanding or embedded in debt instruments.
Attached Credit Enhancements
The table below presents the total current and protected UPB and maximum coverage provided by our attached credit enhancements. For information about counterparty credit risk associated with mortgage insurers, see Note 14.
 
 
June 30, 2018
 
December 31, 2017
(In millions)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
Single-family:
 
 
 
 
 
 
Primary mortgage insurance
 

$351,776


$90,085

 

$334,189


$85,429

(1)
Underlying loans may be covered by more than one form of credit enhancement, including freestanding credit enhancements and debt with embedded credit enhancements.
(2)
Represents the remaining amount of loss recovery that is available subject to the terms of counterparty agreements.

Freddie Mac Form 10-Q
 
105
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 6


Freestanding Credit Enhancements
The table below presents the total current and protected UPB and maximum amounts of potential loss recovery related to our single-family and multifamily freestanding credit enhancements.
 
 
June 30, 2018
 
December 31, 2017
(In millions)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
Single-family:
 
 
 
 
 
 
Subordination (non-consolidated VIEs)
 

$11,962


$2,308

 

$8,953


$1,734

ACIS(3)(4)
 
698,012

7,873

 
625,082

6,933

Other(4)(5)
 
88,554

8,173

 
8,623

6,282

Total single-family
 
 
18,354

 
 
14,949

Multifamily:
 
 
 
 
 
 
Subordination (non-consolidated VIEs)
 
204,157

33,150

 
187,299

30,689

Other(6)
 
1,667

717

 
1,833

726

Total multifamily
 
 
33,867

 
 
31,415

Total single-family and multifamily freestanding credit enhancements
 
 

$52,221

 
 

$46,364

(1)
Underlying loans may be covered by more than one form of credit enhancement, including attached credit enhancements and debt with embedded credit enhancements. For subordination, total current and protected UPB includes the UPB of the guaranteed securities and the UPB of guarantor advances made to the holders of the guaranteed securities.
(2)
For subordination, maximum coverage represents the UPB of the securities that are subordinate to our guarantee and held by third parties. For all other freestanding credit enhancements, maximum coverage represents the remaining amount of loss recovery that is available subject to the terms of counterparty agreements.
(3)
As of June 30, 2018 and December 31, 2017, our counterparties posted collateral on our ACIS transactions of $1.4 billion and $1.1 billion, respectively.
(4)
Starting in 2Q 2018, ACIS transactions include Deep MI CRT transactions which were previously disclosed under "Other" transactions. The current and prior period presentation has been modified to reflect this change.
(5)
Includes seller indemnification, lender recourse and indemnification agreements, pool insurance, HFA indemnification and other credit enhancements.
(6)
Consists of multifamily HFA indemnification and loss reimbursement agreements with third parties obtained in certain of our Q Certificate transactions.
In addition to the credit enhancements disclosed above, the Multifamily segment has other credit enhancements. Recoveries from these other credit enhancements have been minimal as the historical losses on our mortgage loans and amounts paid under our guarantee contracts have not been significant. Therefore, these other credit enhancements have been excluded from the table.

Freddie Mac Form 10-Q
 
106
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 6


Debt with Embedded Credit Enhancements
The table below presents the total current and protected UPB and maximum amounts of potential loss recovery related to debt with embedded credit enhancements.
 
 
June 30, 2018
 
December 31, 2017
(In millions)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
Single-family:
 
 
 
 
 
 
STACR debt notes
 

$641,850


$18,670

 

$604,356


$17,788

Subordination (consolidated VIEs)
 
12,722

552

 
3,330

179

Total single-family
 
 
19,222

 
 
17,967

Multifamily:
 
 
 
 
 
 
SCR debt notes
 
2,690

135

 
2,732

137

Subordination (consolidated VIEs)

 
1,800

180

 
1,800

180

Total multifamily
 
 
315

 
 
317

Total single-family and multifamily debt with embedded credit enhancements
 
 

$19,537

 
 

$18,284

(1)
Underlying loans may be covered by more than one form of credit enhancement, including attached credit enhancements and freestanding credit enhancements. For STACR debt notes and SCR debt notes, total current and protected UPB represents the UPB of the assets included in the reference pool. For subordination, total current and protected UPB represents the UPB of the guaranteed securities.
(2)
For STACR debt notes and SCR debt notes, maximum coverage amount represents the outstanding balance of the STACR debt notes and SCR debt notes held by third parties. For subordination, maximum coverage amount represents the UPB of the securities that are subordinate to our guarantee and held by third parties.

Freddie Mac Form 10-Q
 
107
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


NOTE 7
Investments in Securities
The table below summarizes the fair values of our investments in debt securities by classification.
(In millions)
 
June 30, 2018
December 31, 2017
Trading securities
 

$39,888


$40,721

Available-for-sale securities
 
37,822

43,597

Total
 

$77,710


$84,318

As of June 30, 2018 and December 31, 2017, we did not classify any securities as held-to-maturity, although we may elect to do so in the future.
Trading Securities
The table below presents the estimated fair values of our trading securities by major security type. Our non-mortgage-related securities primarily consist of investments in U.S. Treasury securities.
(In millions)
 
June 30, 2018
December 31, 2017
Mortgage-related securities:
 
 
 
Freddie Mac
 

$12,414


$12,235

Other agency
 
2,641

3,574

Non-agency RMBS
 
706

750

Non-agency CMBS
 
598

1,343

Total mortgage-related securities
 
16,359

17,902

Non-mortgage-related securities
 
23,529

22,819

Total fair value of trading securities
 

$39,888


$40,721

For trading securities held at June 30, 2018, we recorded net unrealized gains (losses) of ($177) million and ($402) million during 2Q 2018 and YTD 2018, respectively. For trading securities held at June 30, 2017, we recorded net unrealized gains (losses) of ($210) million and ($157) million during 2Q 2017 and YTD 2017, respectively.

Freddie Mac Form 10-Q
 
108
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


Available-for-Sale Securities
At June 30, 2018 and December 31, 2017, all available-for-sale securities were mortgage-related securities.
The tables below present the amortized cost, gross unrealized gains and losses and fair value by major security type for our securities classified as available-for-sale.
 
 
June 30, 2018
 
 
Amortized
Cost
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Fair
Value
(In millions)
 
 
Other-Than-Temporary Impairment(1)
Temporary Impairment(2)
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
Freddie Mac
 

$32,085


$244

 

$—


($801
)
 

$31,528

Other agency
 
2,069

42

 
—

(7
)
 
2,104

Non-agency RMBS
 
1,775

452

 
—

(1
)
 
2,226

Non-agency CMBS
 
1,703

—

 
(9
)
(39
)
 
1,655

Obligations of states and political subdivisions
 
306

3

 
—

—

 
309

Total available-for-sale securities
 

$37,938


$741

 

($9
)

($848
)
 

$37,822

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
Amortized
Cost
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Fair
Value
(In millions)
 
 
Other-Than-Temporary Impairment(1)
Temporary Impairment(2)
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
Freddie Mac
 

$35,433


$499

 

$—


($462
)
 

$35,470

Other agency
 
2,008

56

 
—

(11
)
 
2,053

Non-agency RMBS
 
3,012

927

 
(5
)
(1
)
 
3,933

Non-agency CMBS
 
1,773

22

 
(9
)
(2
)
 
1,784

Obligations of states and political subdivisions
 
352

5

 
—

—

 
357

Total available-for-sale securities
 

$42,578


$1,509

 

($14
)

($476
)
 

$43,597

(1)
Represents the gross unrealized losses for securities for which we have previously recognized other-than-temporary impairment in earnings.
(2)
Represents the gross unrealized losses for securities for which we have not previously recognized other-than-temporary impairment in earnings.
The fair value of our available-for-sale securities held at June 30, 2018 scheduled to contractually mature after ten years was $34.5 billion, with an additional $2.7 billion scheduled to contractually mature after five years through ten years.

Freddie Mac Form 10-Q
 
109
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


Available-For-Sale Securities in a Gross Unrealized Loss Position
The tables below present available-for-sale securities in a gross unrealized loss position and whether such securities have been in an unrealized loss position for less than 12 months, or 12 months or greater.
 
 
June 30, 2018
 
 
Less than 12 Months
 
12 Months or Greater
(In millions)
 
Fair
Value
Gross Unrealized Losses
 
Fair
Value
Gross Unrealized Losses
Available-for-sale securities:
 
 
 
 
 
 
Freddie Mac
 

$12,019


($238
)
 

$9,141


($563
)
Other agency
 
225

(1
)
 
831

(7
)
Non-agency RMBS
 
1

—

 
27

(1
)
Non-agency CMBS
 
1,637

(39
)
 
16

(9
)
Obligations of states and political subdivisions
 
14

—

 
12

—

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

$13,896


($278
)
 

$10,027


($580
)
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
Less than 12 Months
 
12 Months or Greater
(In millions)
 
Fair
Value
Gross Unrealized Losses
 
Fair
Value
Gross Unrealized Losses
Available-for-sale securities:
 
 
 
 
 
 
Freddie Mac
 

$10,337


($107
)
 

$9,251


($355
)
Other agency
 
40

—

 
1,079

(11
)
Non-agency RMBS
 
5

—

 
105

(6
)
Non-agency CMBS
 
1,026

(2
)
 
52

(9
)
Obligations of states and political subdivisions
 
12

—

 
21

—

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

$11,420


($109
)
 

$10,508


($381
)
At June 30, 2018, the gross unrealized losses relate to 373 separate securities.
Realized Gains and Losses on Sales of Available-For-Sale Securities
The table below summarizes the gross realized gains and gross realized losses from the sale of available-for-sale securities.
(In millions)
 
2Q 2018
2Q 2017
 
YTD 2018
YTD 2017
Gross realized gains
 

$29


$129

 

$475


$347

Gross realized losses
 
(50
)
(6
)
 
(101
)
(34
)
Net realized gains (losses)
 

($21
)

$123

 

$374


$313

Non-Cash Investing and Financing Activities
During 2Q 2018, we purchased $4.0 billion and sold $4.2 billion of non-mortgage-related securities that were traded, but not settled. We settled our purchase and sale obligations during 3Q 2018.


Freddie Mac Form 10-Q
 
110
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


NOTE 8
Debt Securities and Subordinated Borrowings
The table below summarizes the interest expense per our condensed consolidated statements of comprehensive income and the balances of total debt, net per our condensed consolidated balance sheets.
 
 
Balance, Net
 
Interest Expense
(In millions)
 
June 30, 2018
December 31, 2017
 
2Q 2018
2Q 2017
 
YTD 2018
YTD 2017
Debt securities of consolidated trusts held by third parties
 

$1,746,298


$1,720,996

 

$12,655


$11,994

 

$25,169


$23,715

Other debt:
 
 
 
 
 
 
 
 
 
Short-term debt
 
56,832

73,069

 
242

145

 
471

241

Long-term debt
 
218,032

240,565

 
1,402

1,382

 
2,616

2,750

Total other debt
 
274,864

313,634


1,644

1,527

 
3,087

2,991

Total debt, net
 

$2,021,162


$2,034,630



$14,299


$13,521

 

$28,256


$26,706

Our debt cap under the Purchase Agreement is $346.1 billion in 2018 and will decline to $300 billion on January 1, 2019. As of June 30, 2018, our aggregate indebtedness for purposes of the debt cap was $278.8 billion. Our aggregate indebtedness calculation primarily includes the par value of other short- and long-term debt.
Debt Securities of Consolidated Trusts Held by Third Parties
The table below summarizes the debt securities of consolidated trusts held by third parties based on underlying loan product type.
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Contractual
Maturity
UPB
Carrying Amount(1)
Weighted
Average
Coupon(2)
 
Contractual
Maturity
UPB
Carrying Amount(1)
Weighted
Average
Coupon(2)
Single-family:
 
 
 
 
 
 
 
 
 
 
30-year or more, fixed-rate
 
2018 - 2055

$1,322,573


$1,360,514

3.69
%
 
2018 - 2055

$1,278,911


$1,318,350

3.68
%
20-year fixed-rate
 
2018 - 2038
71,492

73,464

3.42

 
2018 - 2038
73,866

76,022

3.43

15-year fixed-rate
 
2018 - 2033
252,407

257,284

2.86

 
2018 - 2033
260,633

266,241

2.86

Adjustable-rate
 
2018 - 2048
42,965

43,874

2.94

 
2018 - 2048
47,169

48,220

2.85

Interest-only
 
2026 - 2041
6,118

6,181

3.97

 
2026 - 2041
7,303

7,379

3.74

FHA/VA
 
2018 - 2046
781

799

4.81

 
2018 - 2046
847

866

4.85

Total single-family
 
 
1,696,336

1,742,116

 
 
 
1,668,729

1,717,078

 
Multifamily
 
2019-2047
4,144

4,182

3.63

 
2019-2047
3,876

3,918

3.99

Total debt securities of consolidated trusts held by third parties
 
 

$1,700,480


$1,746,298

 
 
 

$1,672,605


$1,720,996

 
(1)
Includes $637 million and $639 million at June 30, 2018 and December 31, 2017, respectively, of debt of consolidated trusts that represents the fair value of debt securities with the fair value option elected.
(2)
The effective interest rate for debt securities of consolidated trusts held by third parties was 2.90% and 2.84% as of June 30, 2018 and December 31, 2017, respectively.

Freddie Mac Form 10-Q
 
111
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


Other Debt
The table below summarizes the balances and effective interest rates for other debt.
 
 
June 30, 2018
 
December 31, 2017
(Dollars in millions)
 
Par Value
Carrying Amount(1)
Weighted
Average
Effective Rate(2)
 
Par Value
Carrying Amount(1)
Weighted
Average
Effective Rate(2)
Other short-term debt:
 
 
 
 
 
 
 
 
Discount notes and Reference Bills®
 

$34,771


$34,651

1.83
%
 

$45,717


$45,596

1.19
%
Medium-term notes
 
10,462

10,462

1.21

 
17,792

17,792

1.03

Securities sold under agreements to repurchase
 
11,719

11,719

1.87

 
9,681

9,681

1.06

Total other short-term debt
 
56,952

56,832

1.72

 
73,190

73,069

1.14

Other long-term debt:
 
 
 
 
 
 
 
 
Original maturities on or before December 31,
 
 
 
 
 
 
 
 
2018
 
27,276

27,281

1.04

 
70,557

70,587

1.16

2019
 
58,142

58,099

1.54

 
57,689

57,637

1.54

2020
 
40,821

40,794

1.74

 
38,117

38,087

1.68

2021
 
27,086

27,093

1.92

 
22,809

22,829

1.80

2022
 
19,456

19,427

2.41

 
18,538

18,506

2.38

Thereafter
 
29,613

27,037

4.29

 
17,281

14,660

5.29

STACR and SCR debt(3)
 
18,805

19,187

5.60

 
17,925

18,338

5.06

Hedging-related basis adjustments
 
N/A

(886
)
 
 
N/A

(79
)
 
Total other long-term debt(4)
 
221,199

218,032

2.34

 
242,916

240,565

2.04

Total other debt
 

$278,151


$274,864



 

$316,106


$313,634

 
(1)
Represents par value, net of associated discounts or premiums and issuance cost. Includes $4.8 billion and $5.2 billion at June 30, 2018 and December 31, 2017, respectively, of other long-term debt that represents the fair value of debt securities with the fair value option elected.
(2)
Based on carrying amount.
(3)
Contractual maturities of these debt securities are not presented because they are subject to prepayment risk, as their payments are based upon the performance of a pool of mortgage assets that may be prepaid by the related mortgage borrower at any time generally without penalty.
(4)
Carrying amount for other long-term debt includes callable debt of $112.7 billion and $113.8 billion at June 30, 2018 and December 31, 2017, respectively.

Freddie Mac Form 10-Q
 
112
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


NOTE 9
Derivatives
Use of Derivatives
We use derivatives primarily to hedge interest-rate sensitivity mismatches between our financial assets and liabilities. We analyze the interest-rate sensitivity of financial assets and liabilities on a daily basis across a variety of interest-rate scenarios based on market prices, models and economics. When we use derivatives to mitigate our exposures, we consider a number of factors, including cost, exposure to counterparty risk and our overall risk management strategy.
We classify derivatives into three categories:
n
Exchange-traded derivatives;
n
Cleared derivatives; and
n
OTC derivatives.
Exchange-traded derivatives include standardized interest-rate futures contracts and options on futures contracts. Cleared derivatives refer to those interest-rate swaps that the U.S. Commodity Futures Trading Commission has determined are subject to the central clearing requirement of the Dodd-Frank Act. OTC derivatives refer to those derivatives that are neither exchange-traded derivatives nor cleared derivatives.
Types of Derivatives
We principally use the following types of derivatives:
n
LIBOR-based interest-rate swaps;
n
LIBOR- and Treasury-based purchased options (including swaptions); and
n
LIBOR- and Treasury-based exchange-traded futures.
We also purchase swaptions on credit indices in order to obtain protection against adverse movements in multifamily spreads which may affect the profitability of our K Certificate or SB Certificate transactions.
In addition to swaps, futures and purchased options, our derivative positions include written options and swaptions, commitments and credit derivatives.
Hedge Accounting
Fair Value Hedges
We apply fair value hedge accounting to certain single-family mortgage loans and certain issuances of debt where we hedge the changes in fair value of these items attributable to the designated benchmark interest rate (i.e., LIBOR), using LIBOR-based interest-rate swaps.
Beginning on October 1, 2017, due to the adoption of amended hedge accounting guidance, if a hedge relationship qualifies for fair value hedge accounting, all changes in fair value of the derivative hedging

Freddie Mac Form 10-Q
 
113
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


instrument, including interest accruals, are recognized in the same condensed consolidated statements of comprehensive income line item used to present the earnings effect of the hedged item. Therefore, changes in the fair value of the hedged item, mortgage loans and debt, attributable to the risk being hedged are recognized in interest income - mortgage loans and interest expense, respectively, along with the changes in the fair value of the respective derivative hedging instruments. Prior to October 1, 2017, if the hedge relationship qualified for hedge accounting, changes in the fair value of the derivative hedging instrument and changes in the fair value of the hedged item attributable to the risk being hedged were recognized in other income (loss) and interest accruals on the derivative hedging instrument were included in derivative gains (losses).
Cash Flow Hedges
There are amounts recorded in AOCI related to discontinued cash flow hedges which are recognized in earnings when the originally forecasted transactions affect earnings. Amounts reclassified from AOCI are recorded in interest expense. During YTD 2018 and YTD 2017, we reclassified from AOCI into earnings, pre-tax losses of $75 million and $85 million, respectively, related to closed cash flow hedges. See Note 11 for information about future reclassifications of deferred net losses related to closed cash flow hedges to net income.

Freddie Mac Form 10-Q
 
114
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


Derivative Assets and Liabilities at Fair Value
The table below presents the notional value and fair value of derivatives reported on our condensed consolidated balance sheets.
 
 
June 30, 2018
 
December 31, 2017
 
 
Notional or
Contractual
Amount
Derivatives at Fair Value
 
Notional or
Contractual
Amount
Derivatives at Fair Value
(In millions)
 
Assets
Liabilities
 
Assets
Liabilities
Not designated as hedges
 
 
 
 
 
 
 
 
Interest-rate swaps:
 
 
 
 
 
 
 
 
Receive-fixed
 

$157,034


$1,295


($390
)
 

$213,717


$2,121


($1,224
)
Pay-fixed
 
160,103

998

(718
)
 
185,400

751

(5,008
)
Basis (floating to floating)
 
5,613

—

—

 
5,244

—

(2
)
Total interest-rate swaps
 
322,750

2,293

(1,108
)
 
404,361

2,872

(6,234
)
Option-based:
 
 
 
 
 
 
 
 
Call swaptions
 
 
 
 
 
 
 
 
Purchased
 
52,400

1,781

—

 
58,975

2,709

—

Written
 
4,850

—

(91
)
 
4,650

—

(101
)
Put swaptions
 
 
 
 
 
 
 
 
Purchased(1)
 
50,790

1,585

—

 
47,810

1,058

—

Written
 
2,700

—

(14
)
 
3,000

—

(20
)
Other option-based derivatives(2)
 
10,572

625

—

 
10,683

757

—

Total option-based
 
121,312

3,991

(105
)
 
125,118

4,524

(121
)
Futures
 
202,296

—

—

 
267,385

—

—

Commitments
 
74,913

74

(151
)
 
54,207

44

(64
)
Credit derivatives
 
2,216

—

(47
)
 
3,569

7

(46
)
Other
 
11,719

23

(79
)
 
2,906

1

(19
)
Total derivatives not designated as hedges
 
735,206

6,381

(1,490
)
 
857,546

7,448

(6,484
)
Designated as fair value hedges
 
 
 
 
 
 
 
 
Interest-rate swaps:
 
 
 
 
 
 
 
 
Receive-fixed
 
88,889

1

(1,402
)
 
83,352

2

(714
)
Pay-fixed
 
81,449

274

(1,906
)
 
69,402

1,388

(291
)
Total derivatives designated as fair value hedges
 
170,338

275

(3,308
)
 
152,754

1,390

(1,005
)
Derivative interest receivable (payable)
 
 
924

(929
)
 
 
1,407

(1,596
)
Netting adjustments(3)
 
 
(7,189
)
5,318

 
 
(9,870
)
8,816

Total derivative portfolio, net
 

$905,544


$391


($409
)
 

$1,010,300


$375


($269
)
(1)
Includes swaptions on credit indices with a notional or contractual amount of $12.3 billion and $13.4 billion at June 30, 2018 and December 31, 2017, respectively, and a fair value of $14.3 million and $5.0 million at June 30, 2018 and December 31, 2017, respectively.
(2)
Primarily consists of purchased interest-rate caps and floors and options on Treasury futures.
(3)
Represents counterparty netting and cash collateral netting.
See Note 10 for information related to our derivative counterparties and collateral held and posted.

Freddie Mac Form 10-Q
 
115
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


Gains and Losses on Derivatives
The table below presents the gains and losses on derivatives, including the accrual of periodic cash settlements, while not designated in qualifying hedge relationships and reported on our condensed consolidated statements of comprehensive income as derivative gains (losses). In addition, for the 2017 periods, the table includes the accrual of periodic cash settlements on derivatives in qualifying hedge relationships.
(In millions)
 
2Q 2018
2Q 2017
 
YTD 2018
YTD 2017
Not designated as hedges
 
 
 
 
 
 
Interest-rate swaps:
 
 
 
 
 
 
Receive-fixed
 

($979
)

$1,093

 

($4,076
)

$524

Pay-fixed
 
1,560

(1,672
)
 
6,201

(430
)
Basis (floating to floating)
 
2

(1
)
 
(28
)
(1
)
Total interest-rate swaps
 
583

(580
)
 
2,097

93

Option based:
 
 
 
 
 
 
Call swaptions
 
 
 
 
 
 
Purchased
 
(296
)
292

 
(990
)
(39
)
Written
 
14

(2
)
 
41

1

Put swaptions
 
 
 
 
 
 
Purchased
 
61

(239
)
 
388

(336
)
Written
 
6

24

 
(21
)
42

Other option-based derivatives(1)
 
(44
)
34

 
(132
)
11

Total option-based
 
(259
)
109

 
(714
)
(321
)
Other:
 
 
 
 
 
 
Futures
 
64

(115
)
 
451

(230
)
Commitments
 
85

(61
)
 
603

(7
)
Credit derivatives
 
(24
)
(15
)
 
(10
)
(31
)
Other
 
10

(5
)
 
7

(6
)
Total other
 
135

(196
)
 
1,051

(274
)
Accrual of periodic cash settlements:
 
 
 
 
 
 
Receive-fixed interest-rate swaps
 
74

410

 
296

855

Pay-fixed interest-rate swaps
 
(118
)
(839
)
 
(486
)
(1,751
)
Other
 
1

—

 
2

—

Total accrual of periodic cash settlements
 
(43
)
(429
)
 
(188
)
(896
)
Total
 

$416


($1,096
)
 

$2,246


($1,398
)
(1)
Primarily consists of purchased interest-rate caps and floors and options on Treasury futures.

Freddie Mac Form 10-Q
 
116
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


Fair Value Hedges
The tables below present the effects of fair value hedge accounting by condensed consolidated statements of comprehensive income line, including the gains and losses on derivatives and hedged items designated in qualifying hedge relationships and other components due to the application of hedge accounting.
 
 
2Q 2018
(In millions)
 
Interest Income - Mortgage Loans
Interest Expense
Other Income (Loss)
Total amounts of income and expense line items presented in our condensed consolidated statements of comprehensive income in which the effects of fair value hedges are recorded:
 

$16,344


($14,299
)

$1,011

 
 
 
 
 
Interest contracts on mortgage loans held-for-investment:
 
 
 
 
Gain or (loss) on fair value hedging relationships:(1)
 
 
 
 
Hedged items
 
(713
)
—

—

Derivatives designated as hedging instruments
 
624

—

—

Interest accruals on hedging instruments
 
(110
)
—

—

Discontinued hedge related basis adjustment amortization
 
32

—

—

Interest contracts on debt:
 
 
 
 
Gain or (loss) on fair value hedging relationships:
 
 
 
 
Hedged items
 
—

132

—

Derivatives designated as hedging instruments
 
—

(87
)
—

Interest accruals on hedging instruments
 
—

(109
)
—

Discontinued hedge related basis adjustment amortization
 
—

(1
)
—

 
 
2Q 2017
(In millions)
 
Interest Income - Mortgage Loans
Interest Expense
Other Income (Loss)
Total amounts of income and expense line items presented in our condensed consolidated statements of comprehensive income in which the effects of fair value hedges are recorded:
 

$15,848


($13,521
)

$694

 
 
 
 
 
Interest contracts on mortgage loans held-for-investment:
 
 
 
 
Gain or (loss) on fair value hedging relationships:(1)
 
 
 
 
Hedged items
 
—

—

392

Derivatives designated as hedging instruments(2)
 
—

—

(365
)
Discontinued hedge related basis adjustment amortization

 
(5
)
—

—

Referenced footnotes are included after the next tables.



Freddie Mac Form 10-Q
 
117
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


 
 
YTD 2018
(In millions)
 
Interest Income - Mortgage Loans
Interest Expense
Other Income (Loss)
Total amounts of income and expense line items presented in our condensed consolidated statements of comprehensive income in which the effects of fair value hedges are recorded:
 

$32,295


($28,256
)

$1,132

 
 
 
 
 
Interest contracts on mortgage loans held-for-investment:
 
 
 
 
Gain or (loss) on fair value hedging relationships:(1)
 
 
 
 
Hedged items
 
(2,686
)
—

—

Derivatives designated as hedging instruments
 
2,311

—

—

Interest accruals on hedging instruments
 
(277
)
—

—

Discontinued hedge related basis adjustment amortization
 
48

—

—

Interest contracts on debt:
 
 
 
 
Gain or (loss) on fair value hedging relationships:
 
 
 
 
Hedged items
 
—

810

—

Derivatives designated as hedging instruments
 
—

(678
)
—

Interest accruals on hedging instruments
 
—

(123
)
—

Discontinued hedge related basis adjustment amortization
 
—

(1
)
—

 
 
YTD 2017
(In millions)
 
Interest Income - Mortgage Loans
Interest Expense
Other Income (Loss)
Total amounts of income and expense line items presented in our condensed consolidated statements of comprehensive income in which the effects of fair value hedges are recorded:
 

$31,813


($26,706
)

$1,109

 
 
 
 
 
Interest contracts on mortgage loans held-for-investment:
 
 
 
 
Gain or (loss) on fair value hedging relationships:(1)
 
 
 
 
Hedged items
 
—

—

366

Derivatives designated as hedging instruments(2)
 
—

—

(300
)
Discontinued hedge related basis adjustment amortization

 
(5
)
—

—

(1)
In 2Q 2017 and YTD 2017, gains or losses on derivatives and hedged items were recorded in other income (loss). Beginning in 4Q 2017, gains and losses and interest accruals are recorded in interest income - mortgage loans in our condensed consolidated statements of comprehensive income due to adoption of amended hedge accounting guidance.
(2)
The gain or (loss) on fair value hedging relationships in 2Q 2017 and YTD 2017 excludes ($93) million and ($176) million, respectively, of interest accruals which were recorded in derivatives gains (losses) in our condensed consolidated statements of comprehensive income.
       





Freddie Mac Form 10-Q
 
118
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


Cumulative Basis Adjustments Due to Fair Value Hedging
The tables below present the hedged item cumulative basis adjustments due to qualifying fair value hedging and the related hedged item carrying amounts by their respective balance sheet line item.
 
 
June 30, 2018
 
 
Carrying Amount Assets / (Liabilities)
 
Cumulative Amount of Fair Value Hedging Basis Adjustment Included in the Carrying Amount
(In millions)
 
 
Total
Discontinued - Hedge Related
Mortgage loans held-for-investment
 

$135,830

 

($2,355
)

($2,355
)
Debt
 
(98,221
)
 
886

(10
)
 
 
 
 
 
 
 
 
December 31, 2017
 
 
Carrying Amount Assets / (Liabilities)
 
Cumulative Amount of Fair Value Hedging Basis Adjustment Included in the Carrying Amount
(In millions)
 
 
Total
Discontinued - Hedge Related
Mortgage loans held-for-investment
 

$128,140

 

$198


$198

Debt
 
(92,277
)
 
79

(14
)


Freddie Mac Form 10-Q
 
119
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 10


NOTE 10
Collateralized Agreements and Offsetting Arrangements
Derivative Portfolio
Derivative Counterparties
Our use of cleared derivatives, exchange-traded derivatives and OTC derivatives exposes us to counterparty credit risk.
Our use of interest-rate swaps and option-based derivatives is subject to internal credit and legal reviews. On an ongoing basis, we review the credit fundamentals of all of our derivative counterparties, clearinghouses and clearing members to confirm that they continue to meet our internal risk management standards.
Over-the-Counter Derivatives
We use master netting and collateral agreements to reduce our credit risk exposure to our OTC derivative counterparties.
In the event that all of our counterparties for OTC derivatives were to have defaulted simultaneously on June 30, 2018, our maximum loss for accounting purposes after applying netting agreements and collateral on an individual counterparty basis would have been approximately $40 million.
Regulations adopted by certain financial institution regulators (including FHFA) that became effective March 1, 2017 require posting of variation margin without the application of any thresholds for OTC derivative transactions executed after that date. As a result, our and the counterparties' credit ratings are no longer used in determining the amount of collateral to be posted in connection with these transactions.
Cleared and Exchange-Traded Derivatives
The majority of our interest-rate swaps are subject to the central clearing requirement of the Dodd-Frank Act. A reduction in our credit ratings could cause the clearinghouses or clearing members we use for our cleared and exchange-traded derivatives to demand additional collateral.
Other Derivatives
We also execute forward purchase and sale commitments of loans and mortgage-related securities, including dollar roll transactions, that are treated as derivatives for accounting purposes. The total net exposure on our forward purchase and sale commitments, which are treated as derivatives, was $74 million and $44 million at June 30, 2018 and December 31, 2017, respectively.
Many of our transactions involving forward purchase and sale commitments of mortgage-related securities utilize the Mortgage Backed Securities Division of the Fixed Income Clearing Corporation

Freddie Mac Form 10-Q
 
120
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 10


("MBSD/FICC") as a clearinghouse. As a clearing member of the clearinghouse, we post margin to the MBSD/FICC and are exposed to the counterparty credit risk of the organization (including its clearing members).
Securities Purchased Under Agreements to Resell
As an investor, we enter into arrangements to purchase securities under agreements to subsequently resell the identical or substantially the same securities to our counterparty. Our counterparties to these transactions are required to pledge the purchased securities as collateral for their obligation to repurchase those securities at a later date. While such transactions involve the legal transfer of securities, they are accounted for as secured financings because the transferor does not relinquish effective control over the securities transferred. Although it is not our practice to repledge collateral that has been pledged to us, these agreements may allow us to repledge all or a portion of the collateral.
We consider the types of securities being pledged to us as collateral when determining how much we lend in transactions involving securities purchased under agreements to resell. Additionally, we regularly review the market values of these securities compared to amounts loaned in an effort to manage our exposure to losses.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are effectively collateralized borrowings where we sell securities with an agreement to repurchase such securities at a future date. We are required to pledge the sold securities to the counterparties to these transactions as collateral for our obligation to repurchase these securities at a later date. Similar to the securities purchased under agreements to resell transactions, these transactions involve the legal transfer of securities. However, they are accounted for as secured financings because they require the identical or substantially the same securities to be subsequently repurchased. These agreements may allow our counterparties to repledge all or a portion of the collateral.
Offsetting of Financial Asset and Liabilities
At June 30, 2018 and December 31, 2017, all amounts of cash collateral related to derivatives with master netting and collateral agreements were offset against derivative assets, net or derivative liabilities, net, as applicable.
The tables below display offsetting and collateral information related to derivatives, securities purchased under agreements to resell and securities sold under agreements to repurchase which are subject to enforceable master netting agreements or similar arrangements. Securities sold under agreements to repurchase are included in debt, net on our condensed consolidated balance sheets. During 1Q 2018, certain rule amendments made by the LCH Group became effective. As a result, the legal characterization of variation margin payments for certain of our cleared swaps changed from posting of margin collateral to settlements. The table below reflects this change as of June 30, 2018.

Freddie Mac Form 10-Q
 
121
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 10


 
 
June 30, 2018
 
 
Gross
Amount
Recognized
 
Amount 
Offset in the
Consolidated
Balance Sheets
 
Net Amount
Presented in the Consolidated
Balance Sheets
Gross Amount
Not Offset in the  Consolidated
Balance Sheets(2)
Net
Amount
(In millions)
 
 
Counterparty Netting
Cash Collateral Netting(1)
 
Assets:
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
OTC derivatives
 

$7,453

 

($5,122
)

($2,168
)
 

$163


($123
)

$40

Cleared and exchange-traded derivatives
 
30

 
(1
)
102

 
131

—

131

Other
 
97

 
—

—

 
97

—

97

Total derivatives
 
7,580

 
(5,123
)
(2,066
)
 
391

(123
)
268

Securities purchased under agreements to resell(3)(4)
 
41,769

 
—

—

 
41,769

(41,769
)
—

Total
 

$49,349

 

($5,123
)

($2,066
)
 

$42,160


($41,892
)

$268

Liabilities:
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
OTC derivatives
 

($5,447
)
 

$5,122


$244

 

($81
)

$—


($81
)
Cleared and exchange-traded derivatives
 
(3
)
 
1

(49
)
 
(51
)
—

(51
)
Other
 
(277
)
 
—

—

 
(277
)
—

(277
)
Total derivatives
 
(5,727
)
 
5,123

195

 
(409
)
—

(409
)
Securities sold under agreements to repurchase(4)
 
(11,719
)
 
—

—

 
(11,719
)
11,719

—

Total
 

($17,446
)
 

$5,123


$195

 

($12,128
)

$11,719


($409
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
Gross
Amount
Recognized
 
Amount 
Offset in the
Consolidated
Balance Sheets
 
Net Amount
Presented in the Consolidated
Balance Sheets
Gross Amount
Not Offset in the  Consolidated
Balance  Sheets(2)
Net
Amount
(In millions)
 
 
Counterparty Netting
Cash Collateral Netting(1)
 
Assets:
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
OTC derivatives
 

$7,648

 

($5,499
)

($1,903
)
 

$246


($205
)

$41

Cleared and exchange-traded derivatives
 
2,545

 
(2,266
)
(202
)
 
77

—

77

Other
 
52

 
—

—

 
52

—

52

Total derivatives
 
10,245

 
(7,765
)
(2,105
)
 
375

(205
)
170

Securities purchased under agreements to resell(3)(4)
 
55,903

 
—

—

 
55,903

(55,903
)
—

Total
 

$66,148

 

($7,765
)

($2,105
)
 

$56,278


($56,108
)

$170

Liabilities:
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
OTC derivatives
 

($6,285
)
 

$5,499


$688

 

($98
)

$—


($98
)
Cleared and exchange-traded derivatives
 
(2,671
)
 
2,266

363

 
(42
)
—

(42
)
Other
 
(129
)
 
—

—

 
(129
)
—

(129
)
Total derivatives
 
(9,085
)
 
7,765

1,051

 
(269
)
—

(269
)
Securities sold under agreements to repurchase(4)
 
(9,681
)
 
—

—

 
(9,681
)
9,681

—

Total
 

($18,766
)
 

$7,765


$1,051

 

($9,950
)

$9,681


($269
)

Freddie Mac Form 10-Q
 
122
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 10


(1)
Excess cash collateral held is presented as a derivative liability, while excess cash collateral posted is presented as a derivative asset.
(2)
Does not include the fair value amount of non-cash collateral posted or held that exceeds the associated net asset or liability, netted by counterparty, presented on the condensed consolidated balance sheets. For cleared and exchange-traded derivatives, does not include non-cash collateral posted by us as initial margin with an aggregate fair value of $3.1 billion as of both June 30, 2018 and December 31, 2017.
(3)
We primarily execute securities purchased under agreements to resell transactions with central clearing organizations where we have the right to repledge the collateral that has been pledged to us, either with the central clearing organization or with other counterparties. At June 30, 2018, and December 31, 2017, we had $23.4 billion and $34.8 billion, respectively, of securities pledged to us in these transactions. In addition, at June 30, 2018 and December 31, 2017, we had $1.9 billion and $3.4 billion, respectively, of securities pledged to us for transactions involving securities purchased under agreements to resell not executed with central clearing organizations that we had the right to repledge.
(4)
Does not include the impacts of netting by central clearing organizations.
Collateral Pledged
Collateral Pledged to Freddie Mac
We have cash pledged to us as collateral primarily related to OTC derivative transactions. At June 30, 2018, we had $2.3 billion pledged to us as collateral that was invested as part of our liquidity and contingency operating portfolio.
Collateral Pledged by Freddie Mac
The tables below summarize the fair value of the securities pledged as collateral by us for derivatives and collateralized borrowing transactions, including securities that the secured party may repledge.
 
 
June 30, 2018
(In millions)
 
Derivatives
Securities sold under agreements to repurchase
Other(3)
Total
Cash equivalents(1)
 

$—


$906


$—


$906

Debt securities of consolidated trusts(2)
 
360

—

301

661

Trading securities
 
2,735

10,828

307

13,870

Total securities pledged
 

$3,095


$11,734


$608


$15,437

 
 
 
 
 
 
 
 
December 31, 2017
(In millions)
 
Derivatives
Securities sold under agreements to repurchase
Other(3)
Total
Debt securities of consolidated trusts(2)
 

$375


$—


$111


$486

Trading securities
 
2,766

9,705

362

12,833

Total securities pledged
 

$3,141


$9,705


$473


$13,319

(1)
Represents U.S. Treasury securities accounted for as cash equivalents.
(2)
Represents PCs held by us in our Capital Markets segment mortgage investments portfolio which are recorded as a reduction to debt securities of consolidated trusts held by third parties on our condensed consolidated balance sheets.
(3)
Includes collateral related to transactions with certain clearinghouses.
The table below summarizes the underlying collateral pledged and the remaining contractual maturity of our gross obligations under securities sold under agreements to repurchase.
 
 
June 30, 2018
(In millions)
 
Overnight and continuous
30 days or less
After 30 days through 90 days
Greater than 90 days
Total
U.S. Treasury securities
 

$—


$11,734


$—


$—


$11,734


Freddie Mac Form 10-Q
 
123
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 11


NOTE 11
Stockholders’ Equity and Earnings Per Share
Accumulated Other Comprehensive Income
The tables below present changes in AOCI after the effects of our federal statutory tax rates of 21% and 35% for YTD 2018 and YTD 2017, respectively, related to available-for-sale securities, closed cash flow hedges and our defined benefit plans.
 
 
YTD 2018
(In millions)
 
AOCI Related
to Available-
For-Sale
Securities
AOCI Related
to Cash Flow
Hedge
Relationships
AOCI Related
to Defined
Benefit Plans
Total
Beginning balance
 

$662


($356
)

$83


$389

Other comprehensive income before reclassifications(1)
 
(601
)
—

(2
)
(603
)
Amounts reclassified from accumulated other comprehensive income
 
(295
)
62

(8
)
(241
)
Changes in AOCI by component
 
(896
)
62

(10
)
(844
)
Cumulative effect of change in accounting principle(2)

 
143

(73
)
19

89

Ending balance
 

($91
)

($367
)

$92


($366
)
 
 
 
 
 
YTD 2017
(In millions)
 
AOCI Related
to Available-
For-Sale
Securities
AOCI Related
to Cash Flow
Hedge
Relationships
AOCI Related
to Defined
Benefit Plans
Total
Beginning balance
 

$915


($480
)

$21


$456

Other comprehensive income before reclassifications(1)
 
486

—

(3
)
483

Amounts reclassified from accumulated other comprehensive income
 
(193
)
55

—

(138
)
Changes in AOCI by component
 
293

55

(3
)
345

Ending balance
 

$1,208


($425
)

$18


$801

(1)
For YTD 2018 and YTD 2017, net of tax expense (benefit) of $0.2 billion and $0.3 billion, respectively, for AOCI related to available-for-sale securities.
(2)
Includes the effect of adopting the accounting guidance on reclassification of stranded tax effects of the Tax Cuts and Jobs Act.
In 1Q 2018, we adopted the accounting guidance related to the reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. The reclassification includes stranded tax effects related to unrealized gains and losses on available-for-sale securities, deferred net losses on closed cash flow hedges and our defined benefit plans.

Freddie Mac Form 10-Q
 
124
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 11


Reclassifications from AOCI to Net Income
The table below presents reclassifications from AOCI to net income, including the affected line item in our condensed consolidated statements of comprehensive income.
(In millions)
 
2Q 2018
2Q 2017
 
YTD 2018
YTD 2017
AOCI related to available-for-sale securities
 
 
 
 
 
 
Affected line items in the consolidated statements of comprehensive income:
 
 
 
 
 
 
Other gains (losses) on investment securities recognized in earnings
 

($21
)

$123

 

$374


$313

Net impairment of available-for-sale securities recognized in earnings
 
(1
)
(3
)
 
(1
)
(16
)
Total before tax
 
(22
)
120

 
373

297

Income tax (expense) or benefit
 
5

(41
)
 
(78
)
(104
)
Net of tax
 
(17
)
79

 
295

193

AOCI related to cash flow hedge relationships
 
 
 
 
 
 
Affected line items in the consolidated statements of comprehensive income:
 
 
 
 
 
 
Interest expense
 
(37
)
(42
)
 
(75
)
(85
)
Income tax (expense) or benefit
 
5

15

 
13

30

Net of tax
 
(32
)
(27
)
 
(62
)
(55
)
AOCI related to defined benefit plans
 
 
 
 
 
 
Affected line items in the consolidated statements of comprehensive income:
 
 
 
 
 
 
Salaries and employee benefits
 
5

—

 
10

—

Income tax (expense) or benefit
 
(1
)
—

 
(2
)
—

Net of tax
 
4

—

 
8

—

Total reclassifications in the period
 

($45
)

$52

 

$241


$138

Future Reclassifications from AOCI to Net Income Related to Closed Cash Flow Hedges
The total AOCI related to derivatives designated as cash flow hedges was a loss of $0.4 billion at both June 30, 2018 and June 30, 2017, composed of deferred net losses on closed cash flow hedges. Closed cash flow hedges involve derivatives that have been terminated or are no longer designated as cash flow hedges. Fluctuations in prevailing market interest rates have no effect on the deferred portion of AOCI relating to losses on closed cash flow hedges.
The previously deferred amount related to closed cash flow hedges remains in our AOCI balance and will be recognized into earnings over the expected time period for which the forecasted transactions affect earnings, unless it is deemed probable that the forecasted transactions will not occur. Over the next 12 months, we estimate that approximately $84 million, net of taxes, of the $0.4 billion of cash flow hedge losses in AOCI at June 30, 2018 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 15 years.

Freddie Mac Form 10-Q
 
125
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 11


Senior Preferred Stock
As of June 30, 2018, our assets exceeded our liabilities under GAAP; therefore, no draw is being requested from Treasury under the Purchase Agreement. Based on our Net Worth Amount of $4.6 billion as of June 30, 2018 and the Capital Reserve Amount of $3.0 billion, our dividend requirement to Treasury in September 2018 will be $1.6 billion. See Note 2 for additional information.
Upon the Conservator, acting as successor to the rights, titles, powers and privileges of the Board of Directors, declaring a senior preferred stock dividend equal to our dividend requirement and directing us to pay it before September 30, 2018, we would pay a dividend of $1.6 billion by September 30, 2018. If for any reason we were not to pay our dividend requirement on the senior preferred stock in full, the unpaid amount would be added to the liquidation preference and our applicable Capital Reserve Amount would thereafter be zero, but this would not affect our ability to draw funds from Treasury under the Purchase Agreement. Our cumulative senior preferred stock dividend payments totaled $112.4 billion as of June 30, 2018. The aggregate liquidation preference of the senior preferred stock owned by Treasury was $75.6 billion and $75.3 billion as of June 30, 2018 and December 31, 2017, respectively.
Stock Issuances and Repurchases
We did not repurchase or issue any of our common shares or non-cumulative preferred stock during 2Q 2018, except for issuances of treasury stock relating to stock-based compensation granted prior to conservatorship.
Earnings Per Share
We have participating securities related to restricted stock units with dividend equivalent rights that receive dividends as declared on an equal basis with common shares but are not obligated to participate in undistributed net losses. These participating securities consist of vested restricted stock units that earn dividend equivalents at the same rate when and as declared on common stock.
Consequently, in accordance with accounting guidance, we use the "two-class" method of computing earnings per common share. The "two-class" method is an earnings allocation formula that determines earnings per share for common stock and participating securities based on dividends declared and participation rights in undistributed earnings.
Basic earnings per common share is computed as net income attributable to common stockholders divided by the weighted average common shares outstanding for the period. The weighted average common shares outstanding for the period includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury pursuant to the Purchase Agreement. These shares are included since the warrant is unconditionally exercisable by the holder at a minimal cost.
Diluted earnings per common share is computed as net income attributable to common stockholders divided by the weighted average common shares outstanding during the period adjusted for the dilutive effect of common equivalent shares outstanding. For periods with net income attributable to common stockholders, the calculation includes the effect of the weighted-average of restricted stock units.
During periods in which a net loss attributable to common stockholders has been incurred, potential

Freddie Mac Form 10-Q
 
126
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 11


common equivalent shares outstanding are not included in the calculation because it would have an antidilutive effect.
There were no stock options outstanding at June 30, 2018 and June 30, 2017.
Dividends Declared
No common dividends were declared during YTD 2018. During 1Q 2018 and 2Q 2018, we also did not pay dividends on the senior preferred stock. In addition, we did not declare or pay dividends on any other series of Freddie Mac preferred stock outstanding during YTD 2018.

Freddie Mac Form 10-Q
 
127
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 12



NOTE 12
Income Taxes
Income Tax Expense
For 2Q 2018 and 2Q 2017, we reported income tax expense of $0.6 billion and $0.8 billion, respectively, resulting in effective tax rates of 20.4% and 33.5%, respectively. For YTD 2018 and YTD 2017, we reported income tax expense of $1.4 billion and $1.9 billion, respectively, resulting in effective tax rates of 20.4% and 33.4%, respectively. Our effective tax rates differed from the statutory tax rates of 21% and 35% in these periods primarily due to our recognition of low income housing tax credits.
Deferred Tax Assets, Net
We had net deferred tax assets of $8.3 billion and $8.1 billion as of June 30, 2018 and December 31, 2017, respectively. At June 30, 2018, our net deferred tax assets consisted primarily of basis differences related to derivative instruments and deferred fees.
Based on all positive and negative evidence available at June 30, 2018, we determined that it is more likely than not that our net deferred tax assets, except for a portion of the deferred tax asset related to our capital loss carryforward, will be realized. As of June 30, 2018, we have a $33 million valuation allowance recorded against our capital loss carryforward deferred tax asset.
Unrecognized Tax Benefits and IRS Examinations
We evaluated all income tax positions and determined that there were no uncertain tax positions that required reserves as of June 30, 2018.

Freddie Mac Form 10-Q
 
128
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


NOTE 13
Segment Reporting
We have three reportable segments, which are based on the type of business activities each performs - Single-family Guarantee, Multifamily and Capital Markets. Material corporate-level activities that are infrequent in nature and based on decisions outside the control of the management of our reportable segments are included in the All Other category. For more information, see our 2017 Annual Report.
Segment Earnings
We present Segment Earnings by reclassifying certain credit guarantee-related activities and investment-related activities between various line items on our GAAP condensed consolidated statements of comprehensive income and allocating certain revenues and expenses, including funding costs and administrative expenses, to our three reportable segments.
We do not consider our assets by segment when evaluating segment performance or allocating resources. We operate our business in the United States and its territories, and accordingly, we generate no revenue from and have no long-lived assets, other than financial instruments, in geographic locations other than the United States and its territories.
We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator. See Note 2 for information about the conservatorship.
The table below presents Segment Earnings by segment.
(In millions)
 
2Q 2018
2Q 2017
 
YTD 2018
YTD 2017
Segment Earnings (loss), net of taxes:
 
 
 
 
 
 
Single-family Guarantee
 

$803


$778

 

$1,505


$1,488

Multifamily
 
548

389

 
1,020

838

Capital Markets
 
1,152

497

 
2,904

1,549

All Other
 
—

—

 
—

—

Total Segment Earnings, net of taxes
 
2,503

1,664

 
5,429

3,875

Net income
 

$2,503


$1,664

 

$5,429


$3,875

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

$801


$778

 

$1,499


$1,486

Multifamily
 
524

462

 
928

907

Capital Markets
 
1,110

746

 
2,158

1,827

All Other
 
—

—

 
—

—

Comprehensive income of segments
 
2,435

1,986

 
4,585

4,220

Comprehensive income
 

$2,435


$1,986

 

$4,585


$4,220


Freddie Mac Form 10-Q
 
129
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


The tables below present detailed reconciliations between our GAAP financial statements and Segment Earnings for our reportable segments and All Other.
 
 
2Q 2018
 
 
Single-family
Guarantee
Multifamily
Capital Markets
All
Other
Total Segment
Earnings (Loss)
Reclassifications
Total per
Consolidated
Statements of
Comprehensive
Income
(In millions)
 
Net interest income
 

$—


$293


$862


$—


$1,155


$1,848


$3,003

Guarantee fee income(1)
 
1,571

204

—

—

1,775

(1,575
)
200

Benefit (provision) for credit losses
 
103

2

—

—

105

(45
)
60

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

—

26

—

26

(27
)
(1
)
Derivative gains (losses)
 
(6
)
224

309

—

527

(111
)
416

Gains (losses) on trading securities
 
—

(95
)
(232
)
—

(327
)
—

(327
)
Gains (losses) on loans
 
—

(62
)
—

—

(62
)
224

162

Other non-interest income (loss)
 
125

232

572

—

929

(154
)
775

Administrative expense
 
(363
)
(106
)
(89
)
—

(558
)
—

(558
)
REO operations expense
 
(20
)
1

(1
)
—

(20
)
5

(15
)
Other non-interest expense
 
(400
)
(5
)
—

—

(405
)
(165
)
(570
)
Income tax expense
 
(207
)
(140
)
(295
)
—

(642
)
—

(642
)
Net income
 
803

548

1,152

—

2,503

—

2,503

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

(23
)
(73
)
—

(96
)
—

(96
)
Changes in unrealized gains (losses) related to cash flow hedge relationships
 
—

—

32

—

32

—

32

Changes in defined benefit plans
 
(2
)
(1
)
(1
)
—

(4
)
—

(4
)
Total other comprehensive income (loss), net of taxes
 
(2
)
(24
)
(42
)
—

(68
)
—

(68
)
Comprehensive income
 

$801


$524


$1,110


$—


$2,435


$—


$2,435

 
Referenced footnote is included after the YTD 2017 table.
 
 
 
YTD 2018
 
 
Single-family
Guarantee
Multifamily
Capital Markets
All
Other
Total Segment
Earnings (Loss)
Reclassifications
Total per
Consolidated
Statements of
Comprehensive
Income
(In millions)
 
Net interest income
 

$—


$564


$1,679


$—


$2,243


$3,778


$6,021

Guarantee fee income(1)
 
3,084

399

—

—

3,483

(3,089
)
394

Benefit (provision) for credit losses
 
131

18

—

—

149

(152
)
(3
)
Net impairment of available-for-sale securities recognized in earnings
 
—

—

137

—

137

(138
)
(1
)
Derivative gains (losses)
 
(12
)
879

1,611

—

2,478

(232
)
2,246

Gains (losses) on trading securities
 
—

(251
)
(703
)
—

(954
)
—

(954
)
Gains (losses) on loans
 
—

(513
)
—

—

(513
)
355

(158
)
Other non-interest income (loss)
 
225

409

1,102

—

1,736

(209
)
1,527

Administrative expense
 
(699
)
(206
)
(173
)
—

(1,078
)
—

(1,078
)
REO operations expense
 
(59
)
1

—

—

(58
)
9

(49
)
Other non-interest expense
 
(779
)
(19
)
(6
)
—

(804
)
(322
)
(1,126
)
Income tax expense
 
(386
)
(261
)
(743
)
—

(1,390
)
—

(1,390
)
Net income
 
1,505

1,020

2,904

—

5,429

—

5,429

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

(90
)
(806
)
—

(896
)
—

(896
)
Changes in unrealized gains (losses) related to cash flow hedge relationships
 
—

—

62

—

62

—

62

Changes in defined benefit plans
 
(6
)
(2
)
(2
)
—

(10
)
—

(10
)
Total other comprehensive income (loss), net of taxes
 
(6
)
(92
)
(746
)
—

(844
)
—

(844
)
Comprehensive income
 

$1,499


$928


$2,158


$—


$4,585


$—


$4,585

Referenced footnote is included after the YTD 2017 table.

Freddie Mac Form 10-Q
 
130
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


 
 
2Q 2017
 
 
Single-family
Guarantee
Multifamily
Capital Markets
All
Other
Total Segment
Earnings (Loss)
Reclassifications
Total per
Consolidated
Statements of
Comprehensive
Income
(In millions)
 
Net interest income
 

$—


$292


$875


$—


$1,167


$2,212


$3,379

Guarantee fee income(1)
 
1,506

162

—

—

1,668

(1,510
)
158

Benefit (provision) for credit losses
 
12

6

—

—

18

404

422

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

—

71

—

71

(74
)
(3
)
Derivative gains (losses)
 
(17
)
(180
)
(485
)
—

(682
)
(414
)
(1,096
)
Gains (losses) on trading securities
 
—

(16
)
(46
)
—

(62
)
—

(62
)
Gains (losses) on loans
 
—

42

—

—

42

151

193

Other non-interest income (loss)
 
376

386

419

—

1,181

(665
)
516

Administrative expense
 
(332
)
(95
)
(86
)
—

(513
)
—

(513
)
REO operations expense
 
(41
)
—

—

—

(41
)
4

(37
)
Other non-interest expense
 
(335
)
(12
)
(1
)
—

(348
)
(108
)
(456
)
Income tax expense
 
(391
)
(196
)
(250
)
—

(837
)
—

(837
)
Net income
 
778

389

497

—

1,664

—

1,664

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

73

222

—

295

—

295

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

—

27

—

27

—

27

Changes in defined benefit plans
 
—

—

—

—

—

—

—

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

73

249

—

322

—

322

Comprehensive income
 

$778


$462


$746


$—


$1,986


$—


$1,986

 
 
 
 
 
 
 
 
 
Referenced footnote is included after the next table.
 
 
 
YTD 2017
 
 
Single-family
Guarantee
Multifamily
Capital Markets
All
Other
Total Segment
Earnings (Loss)
Reclassifications
Total per
Consolidated
Statements of
Comprehensive
Income
(In millions)
 
Net interest income
 

$—


$563


$1,804


$—


$2,367


$4,807


$7,174

Guarantee fee income(1)
 
2,924

313

—

—

3,237

(2,930
)
307

Benefit (provision) for credit losses
 
51

12

—

—

63

475

538

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

(4
)
144

—

140

(156
)
(16
)
Derivative gains (losses)
 
(32
)
(53
)
(433
)
—

(518
)
(880
)
(1,398
)
Gains (losses) on trading securities
 
—

(15
)
(181
)
—

(196
)
—

(196
)
Gains (losses) on loans
 
—

9

—

—

9

198

207

Other non-interest income (loss)
 
710

658

1,167

—

2,535

(1,359
)
1,176

Administrative expense
 
(665
)
(190
)
(169
)
—

(1,024
)
—

(1,024
)
REO operations expense
 
(100
)
—

—

—

(100
)
7

(93
)
Other non-interest expense
 
(653
)
(33
)
(5
)
—

(691
)
(162
)
(853
)
Income tax (expense) benefit
 
(747
)
(422
)
(778
)
—

(1,947
)
—

(1,947
)
Net income (loss)
 
1,488

838

1,549

—

3,875

—

3,875

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

69

224

—

293

—

293

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

—

55

—

55

—

55

Changes in defined benefit plans
 
(2
)
—

(1
)
—

(3
)
—

(3
)
Total other comprehensive income (loss), net of taxes
 
(2
)
69

278

—

345

—

345

Comprehensive income
 

$1,486


$907


$1,827


$—


$4,220


$—


$4,220

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

Freddie Mac Form 10-Q
 
131
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


NOTE 14
Concentration of Credit and Other Risks
Single-Family Credit Guarantee Portfolio
The table below summarizes the concentration by loan portfolio and geographic area of the approximately $1.9 trillion and $1.8 trillion UPB of our single-family credit guarantee portfolio at June 30, 2018 and December 31, 2017, respectively. See Note 4 and Note 7 for more information about credit risk associated with loans and mortgage-related securities that we hold or guarantee.
 
 
June 30, 2018
 
December 31, 2017
 
Percent of Credit Losses
 
 
Percentage  of
Portfolio
Serious
Delinquency
Rate
 
Percentage  of
Portfolio
Serious
Delinquency
Rate
 
YTD 2018
YTD 2017
Core single-family loan portfolio
 
80
%
0.25
%
 
78
%
0.35
%
 
9
%
2
%
Legacy and relief refinance single-family loan portfolio
 
20

2.14

 
22

2.59

 
91

98

Total
 
100
%
0.82

 
100
%
1.08

 
100
%
100
%
Region(1)
 
 
 
 
 
 
 
 
 
West
 
30
%
0.40

 
30
%
0.47

 
14
%
31
%
Northeast
 
24

1.03

 
25

1.24

 
45

32

North Central
 
16

0.66

 
16

0.81

 
18

15

Southeast
 
16

1.32

 
16

1.95

 
17

20

Southwest
 
14

0.68

 
13

0.98

 
6

2

Total
 
100
%
0.82

 
100
%
1.08

 
100
%
100
%
State(2)
 
 
 
 
 
 
 
 
 
New York
 
5
%
1.49

 
5
%
1.74

 
14
%
7
%
New Jersey
 
3

1.38

 
3

1.78

 
12

8

Illinois
 
4

0.90

 
5

1.13

 
9

9

Florida
 
6

1.97

 
6

3.33

 
9

13

California
 
18

0.35

 
18

0.41

 
8

21

All other
 
64

0.71

 
63

0.91

 
48

42

Total
 
100
%
0.82
%
 
100
%
1.08
%
 
100
%
100
%
(1)
Region designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH, NJ, NY, PA, RI, VT, VA, WV); North Central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI); Southwest (AR, CO, KS, LA, MO, NE, NM, OK, TX, WY).
(2)
States presented based on those with the highest percentage of credit losses during YTD 2018.


Freddie Mac Form 10-Q
 
132
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


Credit Performance of Certain Higher Risk Single-Family Loan Categories
Participants in the mortgage market have characterized single-family loans based upon their overall credit quality at the time of origination, including as prime or subprime. Mortgage market participants have classified single-family loans as Alt-A if these loans have credit characteristics that range between their prime and subprime categories, if they are underwritten with lower or alternative income or asset documentation requirements compared to a full documentation loan, or both. Although we discontinued new purchases of loans with lower documentation standards beginning March 1, 2009, we continued to purchase certain amounts of these loans in cases where the loan was either:
n Purchased pursuant to a previously issued other mortgage-related guarantee;
n Part of our relief refinance initiative; or
n In another refinance loan initiative and the pre-existing loan (including Alt-A loans) was originated under less than full documentation standards.
In the event we purchase a refinance loan and the original loan had been previously identified as Alt-A, such refinance loan may no longer be categorized or reported as Alt-A in the table below because the new refinance loan replacing the original loan would not be identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such refinancing not occurred.
Although we do not categorize single-family loans we purchase or guarantee as prime or subprime, we recognize that there are a number of loan types with certain characteristics that indicate a higher degree of credit risk.
For example, a borrower’s credit score is a useful measure for assessing the credit quality of the borrower. Statistically, borrowers with higher credit scores are more likely to repay or have the ability to refinance than those with lower scores.
Presented below is a summary of the serious delinquency rates of certain higher-risk categories (based on characteristics of the loan at origination) of loans in our single-family credit guarantee portfolio. The table includes a presentation of each higher-risk category in isolation. A single loan may fall within more than one category (for example, an interest-only loan may also have an original LTV ratio greater than 90%). Loans with a combination of these attributes will have an even higher risk of delinquency than those with an individual attribute.
 
 
Percentage of Portfolio(1)
 
Serious Delinquency Rate(1)
(Percentage of portfolio based on UPB)
 
June 30, 2018
December 31, 2017
 
June 30, 2018
December 31, 2017
Interest-only
 
1
%
1
%
 
4.10
%
4.97
%
Alt-A
 
1

1

 
4.83

5.62

Original LTV ratio greater than 90%(2)
 
17

17

 
1.24

1.70

Lower credit scores at origination (less than 620)
 
2

2

 
4.97

6.34

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

Freddie Mac Form 10-Q
 
133
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


Sellers and Servicers
Sellers
We acquire a significant portion of our single-family and multifamily loan purchase volume from several large sellers. The tables below summarize the concentration of single-family and multifamily sellers who provided 10% or more of our purchase volume.
Single-family Sellers
 
YTD 2018
YTD 2017
Wells Fargo Bank, N.A.
 
13
%
17
%
Other top 10 sellers
 
36

36

Top 10 single-family sellers
 
49
%
53
%
 
 
 
 
Multifamily Sellers
 
YTD 2018
YTD 2017
CBRE Capital Markets, Inc.
 
16
%
17
%
Berkadia Commercial Mortgage LLC
 
11

10

Holliday Fenoglio Fowler, L.P.
 
11

10

Berkeley Point Capital LLC

 
5

12

Other top 10 sellers
 
36

32

Top 10 multifamily sellers
 
79
%
81
%
In recent years, there has been a shift in our single-family purchase volume from depository institutions to non-depository and smaller depository financial institutions. Some of these non-depository sellers have grown rapidly in recent years, and we purchase a significant share of our loans from them. Our top five non-depository sellers provided approximately 22% and 19% of our single-family purchase volume during YTD 2018 and YTD 2017, respectively.
Servicers
Significant portions of our single-family and multifamily loans are serviced by several large servicers. The tables below summarize the concentration of single-family and multifamily servicers who serviced 10% or more of our single-family credit guarantee portfolio and our multifamily mortgage portfolio, excluding loans underlying multifamily securitizations where we are not in first loss position, primarily K Certificates and SB Certificates.
Single-family Servicers

 
June 30, 2018(1)
December 31, 2017(1)
Wells Fargo Bank, N.A.

 
18
%
18
%
Other top 10 servicers

 
39

40

Top 10 single-family servicers
 
57
%
58
%
(1)
Percentage of servicing volume is based on the total single-family credit guarantee portfolio, excluding loans where we do not exercise control over the associated servicing.
Multifamily Servicers
 
June 30, 2018
December 31, 2017
Wells Fargo Bank, N.A.
 
17
%
16
%
CBRE Capital Markets, Inc.
 
10

12

Berkadia Commercial Mortgage LLC
 
9

11

Other top 10 servicers
 
38

36

Top 10 multifamily servicers
 
74
%
75
%

Freddie Mac Form 10-Q
 
134
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


In recent years, there has been a shift in our single-family servicing from depository institutions to non-depository servicers. Some of these non-depository servicers have grown rapidly in recent years and now service a large share of our loans. As of June 30, 2018 and December 31, 2017, approximately 16% and 15%, respectively, of our single-family credit guarantee portfolio, excluding loans where we do not exercise control over the associated servicing, was serviced by our top five non-depository servicers. We routinely monitor the performance of our largest non-depository servicers.
Mortgage Insurers
We have counterparty credit risk relating to the potential insolvency of, or non-performance by, mortgage insurers that insure single-family loans we purchase or guarantee. We evaluate the recovery and collectability from mortgage insurers as part of the estimate of our allowance for credit losses. See Note 4 for additional information. As of June 30, 2018, mortgage insurers provided coverage with maximum loss limits of $90.2 billion, for $351.9 billion of UPB, in connection with our single-family credit guarantee portfolio. These amounts are based on gross coverage without regard to netting of coverage that may exist to the extent an affected loan is covered under both primary and pool insurance.
The table below summarizes the concentration of mortgage insurer counterparties who provided 10% or more of our overall mortgage insurance coverage. On October 23, 2016, Genworth Financial, Inc. announced that it had entered into an agreement to be acquired by China Oceanwide Holdings Group Co., Ltd. Regulatory approvals of the acquisition are still pending. Genworth Mortgage Insurance Corporation is a subsidiary of Genworth Financial, Inc.
 
 
 
 
Mortgage Insurance Coverage(2)
Mortgage Insurer
 
Credit Rating(1)
 
June 30, 2018
December 31, 2017
Arch Mortgage Insurance Company
 
A-
 
24
%
24
%
Radian Guaranty Inc.
 
BBB-
 
21

21

Mortgage Guaranty Insurance Corporation
 
BBB
 
19

19

Genworth Mortgage Insurance Corporation
 
BB+
 
15

15

Essent Guaranty, Inc.
 
BBB+
 
12

12

Total
 
 
 
91
%
91
%
(1)
Ratings are for the corporate entity to which we have the greatest exposure. Latest rating available as of June 30, 2018. Represents the lower of S&P and Moody’s credit ratings stated in terms of the S&P equivalent.
(2)
Coverage amounts may include coverage provided by affiliates and subsidiaries of the counterparty.
We received proceeds of $0.1 billion and $0.2 billion during YTD 2018 and YTD 2017, 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 $0.1 billion (excluding deferred payment obligations associated with unpaid claim amounts) as of both June 30, 2018 and December 31, 2017. The balance of these receivables, net of an associated allowance for credit losses, was approximately $0.1 billion at both June 30, 2018 and December 31, 2017.
PMI Mortgage Insurance Co. and Triad Guaranty Insurance Corp. are both under the control of their state regulators and are in run-off. A substantial portion of their claims is recorded by us as deferred payment obligations. As of both June 30, 2018 and December 31, 2017, we had cumulative unpaid deferred payment obligations of $0.5 billion from these insurers. We recognized an allowance for credit losses for all of these unpaid amounts as collectability is uncertain. It is not clear how the regulators of these companies will administer their respective deferred payment plans in the future, nor when or if those obligations will be paid.

Freddie Mac Form 10-Q
 
135
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


Cash and Other Investments Counterparties
We are exposed to the non-performance of counterparties relating to cash and other investments (including non-mortgage-related securities and cash equivalents) transactions, including those entered into on behalf of our securitization trusts. Our policies require that the counterparty be evaluated using our internal counterparty rating model prior to our entering into such transactions. We monitor the financial strength of our counterparties to these transactions and may use collateral maintenance requirements to manage our exposure to individual counterparties. The permitted term and dollar limits for each of these transactions are also based on the counterparty's financial strength.
Our cash and other investments (including non-mortgage-related securities and cash equivalents) counterparties are primarily major financial institutions, including other GSEs, Treasury, the Federal Reserve Bank of New York, the Government Securities Division of Fixed Income Clearing Corporation (GSD/FICC), highly-rated supranational institutions and government money market funds. As of June 30, 2018 and December 31, 2017, $1,977 million and $239 million of our securities purchased under agreements to resell were used to provide financing to investors in Freddie Mac securities to increase liquidity and expand the investor base for those securities. These transactions differ from the securities purchased under agreements to resell that we use for liquidity purposes as the counterparties we face may not be major financial institutions and we are exposed to the counterparty risk of these institutions. As of June 30, 2018 and December 31, 2017, including amounts related to our consolidated VIEs, the balance in our other investments and cash portfolio was $73.8 billion and $89.8 billion, respectively. The balances consist primarily of cash and securities purchased under agreements to resell invested with counterparties, U.S. Treasury securities, cash deposited with the Federal Reserve Bank of New York, cash advanced to lenders and other secured lending. As of June 30, 2018, all of our securities purchased under agreements to resell were fully collateralized.
Non-Agency Mortgage-Related Security Issuers
In Note 14 in our 2017 Annual Report, we noted various loss mitigation efforts concerning certain investments in non-agency mortgage related securities, including a pending lawsuit filed by FHFA, as Conservator of Freddie Mac and Fannie Mae, against Nomura Holding America, Inc. and Royal Bank of Scotland Group plc in the U.S. District Court for the Southern District of New York. In May 2015, the District Court ruled against the defendants and ordered them to pay an aggregate of $806 million, of which $779 million was to be paid to Freddie Mac, adjusted by any principal and interest collected by Freddie Mac between the date of the judgment and the date on which the judgment is executed. The judgment also provided for Freddie Mac to transfer to defendants the six mortgage-related securities at issue in the case and ordered the defendants to reimburse Freddie Mac for certain costs, legal fees and expenses. In September 2017, the U.S. Court of Appeals for the Second Circuit affirmed the District Court’s decision. Nomura and RBS filed a petition for writ of certiorari in the U.S. Supreme Court, and on June 25, 2018, the U.S. Supreme Court denied certiorari. On July 20, 2018, Freddie Mac received approximately $652 million, which included post-judgment interest, and tendered to Nomura the six certificates at issue. In addition, Freddie Mac received $16.5 million from Nomura as reimbursement of attorneys' fees and costs. We recognized the benefit of the judgment during 2Q 2018 and recorded a gain of $334 million within non-interest income on our consolidated statements of comprehensive income.

Freddie Mac Form 10-Q
 
136
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


NOTE 15
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 represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or, in the absence of a principal market, in the most advantageous market for the asset or liability.
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain assets and liabilities on a recurring or non-recurring basis.
Fair Value Measurements
The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The levels of the fair value hierarchy are defined as follows in priority order:
n Level 1 - inputs to the valuation techniques are based on quoted prices in active markets for identical assets or liabilities.
n Level 2 - inputs to the valuation techniques are based on observable inputs other than quoted prices in active markets for identical assets or liabilities.
n Level 3 - one or more inputs to the valuation technique are unobservable and significant to the fair value measurement.
We use quoted market prices and valuation techniques that seek to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs. Our inputs are based on the assumptions a market participant would use in valuing the asset or liability. Assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below present our assets and liabilities measured on our condensed consolidated balance sheets at fair value on a recurring basis subsequent to initial recognition, including instruments where we have elected the fair value option.

Freddie Mac Form 10-Q
 
137
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


 
 
June 30, 2018
(In millions)
 
Level 1
Level 2
Level 3
Netting Adjustment(1)
Total
Assets:
 





Investments in securities:
 





Available-for-sale, at fair value:
 





Mortgage-related securities:
 





Freddie Mac
 

$—


$27,148


$4,380


$—


$31,528

Other agency
 
—

1,834

270

—

2,104

Non-agency RMBS
 
—

—

2,226

—

2,226

Non-agency CMBS
 
—

31

1,624

—

1,655

Obligations of states and political subdivisions
 
—

—

309

—

309

Total available-for-sale securities, at fair value
 
—

29,013

8,809

—

37,822

Trading, at fair value:
 


 

 
Mortgage-related securities:
 


 

 
Freddie Mac
 
—

9,986

2,428

—

12,414

Other agency
 
—

2,624

17

—

2,641

All other
 
—

20

1,284

—

1,304

Total mortgage-related securities
 
—

12,630

3,729

—

16,359

Non-mortgage-related securities
 
20,501

3,028

—

—

23,529

Total trading securities, at fair value
 
20,501

15,658

3,729

—

39,888

Total investments in securities
 
20,501

44,671

12,538

—

77,710

Mortgage loans:
 





Held-for-sale, at fair value
 
—

16,621

—

—

16,621

Derivative assets, net:
 
 
 
 
 
 
Interest-rate swaps
 
—

2,568

—

—

2,568

Option-based derivatives
 
—

3,991

—

—

3,991

Other
 
—

74

23

—

97

Subtotal, before netting adjustments
 
—

6,633

23

—

6,656

Netting adjustments(1)
 
—

—

—

(6,265
)
(6,265
)
Total derivative assets, net
 
—

6,633

23

(6,265
)
391

Other assets:
 
 
 
 
 


Guarantee asset, at fair value
 
—

—

3,363

—

3,363

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

132

—

—

132

All other, at fair value
 
—

—

103

—

103

Total other assets
 
—

132

3,466

—

3,598

Total assets carried at fair value on a recurring basis
 

$20,501


$68,057


$16,027


($6,265
)

$98,320

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

$—


$8


$629


$—


$637

Other debt, at fair value
 
—

4,651

135

—

4,786

Derivative liabilities, net:
 





Interest-rate swaps
 
—

4,416

—

—

4,416

Option-based derivatives
 
—

105

—

—

105

Other
 


212

65

—

277

Subtotal, before netting adjustments
 
—

4,733

65

—

4,798

Netting adjustments(1)
 
—

—

—

(4,389
)
(4,389
)
Total derivative liabilities, net
 
—

4,733

65

(4,389
)
409

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

11

—

—

11

Total liabilities carried at fair value on a recurring basis
 

$—


$9,403


$829


($4,389
)

$5,843

Referenced footnote is included after the next table.


Freddie Mac Form 10-Q
 
138
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


 
 
December 31, 2017
(In millions)
 
Level 1
Level 2
Level 3
Netting Adjustment(1)
Total
Assets:
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
Freddie Mac
 

$—


$30,415


$5,055


$—


$35,470

Other agency
 
—

2,007

46

—

2,053

Non-agency RMBS
 
—

—

3,933

—

3,933

Non-agency CMBS
 
—

87

1,697

—

1,784

Obligations of states and political subdivisions
 
—

—

357

—

357

Total available-for-sale securities, at fair value
 
—

32,509

11,088

—

43,597

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

11,393

842

—

12,235

Other agency
 
—

3,565

9

—

3,574

All other
 
—

27

2,066

—

2,093

Total mortgage-related securities
 
—

14,985

2,917

—

17,902

Non-mortgage-related securities
 
20,159

2,660

—

—

22,819

Total trading securities, at fair value
 
20,159

17,645

2,917

—

40,721

Total investments in securities
 
20,159

50,154

14,005

—

84,318

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

20,054

—

—

20,054

Derivative assets, net:
 
 
 
 
 
 
Interest-rate swaps
 
—

4,262

—

—

4,262

Option-based derivatives
 
—

4,524

—

—

4,524

Other
 
—

44

8

—

52

Subtotal, before netting adjustments
 
—

8,830

8

—

8,838

Netting adjustments(1)
 
—

—

—

(8,463
)
(8,463
)
Total derivative assets, net
 
—

8,830

8

(8,463
)
375

Other assets:
 
 
 
 
 
 
Guarantee asset, at fair value
 
—

—

3,171

—

3,171

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

137

—

—

137

All other, at fair value
 
—

—

45

—

45

Total other assets
 
—

137

3,216

—

3,353

Total assets carried at fair value on a recurring basis
 

$20,159


$79,175


$17,229


($8,463
)

$108,100

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

$—


$9


$630


$—


$639

Other debt, at fair value
 
—

5,023

137

—

5,160

Derivative liabilities, net:
 
 
 
 
 
 
Interest-rate swaps
 
—

7,239

—

—

7,239

Option-based derivatives
 
—

121

—

—

121

Other
 
—

64

65

—

129

Subtotal, before netting adjustments
 
—

7,424

65

—

7,489

Netting adjustments(1)
 
—

—

—

(7,220
)
(7,220
)
Total derivative liabilities, net
 
—

7,424

65

(7,220
)
269

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

4

—

—

4

Total liabilities carried at fair value on a recurring basis
 

$—


$12,460


$832


($7,220
)

$6,072

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

Freddie Mac Form 10-Q
 
139
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


Level 3 Fair Value Measurements
The tables below present a reconciliation of all assets and liabilities measured on our condensed consolidated balance sheets at fair value on a recurring basis using significant unobservable inputs (Level 3), including transfers into and out of Level 3. The tables also present gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recognized in our condensed consolidated statements of comprehensive income for Level 3 assets and liabilities. When assets and liabilities are transferred between levels, we recognize the transfer as of the beginning of the period.
 
 
2Q 2018
 
 
Balance,
April 1,
2018
 
Realized and unrealized gains (losses)

Purchases

Issues

Sales

Settlements,
net

Transfers
into
Level 3(1)

Transfers
out of
Level 3(1)

Balance,
June 30,
2018

Unrealized
gains (losses)
still held(3)
(In millions)
 
 
Included in
earnings
 
Included in other
comprehensive
income

Total









 

Assets
 

 

 



















Investments in securities:
 

 

 



















Available-for-sale, at fair value:
 

 

 



















Mortgage-related securities:
 

 

 



 















Freddie Mac
 

$5,127

 

($5
)
 

($36
)
 

($41
)
 

$91

 

$—

 

($312
)
 

($315
)
 

$—

 

($170
)
 

$4,380

 

($2
)
Other agency
 
44

 
—

 
—

 
—

 
239

 
—

 
—

 
(13
)
 
—

 
—

 
270

 
—

Non-agency RMBS
 
2,363

 
46

 
(18
)
 
28

 
—

 
—

 
(33
)
 
(132
)
 
—

 
—

 
2,226

 
14

Non-agency CMBS
 
1,643

 
(2
)
 
(12
)
 
(14
)
 
—

 
—

 
—

 
(5
)
 
—

 
—

 
1,624

 
(2
)
Obligations of states and political subdivisions
 
327

 
—

 
—

 
—

 
—

 
—

 
—

 
(18
)
 
—

 
—

 
309

 
—

Total available-for-sale mortgage-related securities
 
9,504


39


(66
)
 
(27
)
 
330

 
—

 
(345
)

(483
)

—


(170
)

8,809


10

Trading, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Freddie Mac
 
1,456

 
(105
)
 
—

 
(105
)
 
651

 
—

 
(164
)
 
(10
)
 
645

 
(45
)
 
2,428

 
(98
)
Other agency
 
9

 
(1
)
 
—

 
(1
)
 
30

 
—

 
(21
)
 
—

 
—

 
—

 
17

 
(1
)
All other
 
1,583

 
(20
)
 
—

 
(20
)
 
—

 
—

 
(261
)
 
(18
)
 
—

 
—

 
1,284

 
(18
)
Total trading mortgage-related securities
 
3,048


(126
)

—


(126
)

681


—


(446
)

(28
)

645


(45
)

3,729


(117
)
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset
 
3,285

 
(36
)
 
—

 
(36
)
 
—

 
255

 
—

 
(141
)
 
—

 
—

 
3,363

 
(36
)
All other, at fair value
 
88

 
23

 
—

 
23

 
(2
)
 
(6
)
 
—

 
—

 
—

 
—

 
103

 
11

Total other assets
 

$3,373



($13
)


$—



($13
)


($2
)


$249



$—



($141
)


$—



$—



$3,466



($25
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
April 1,
2018
 
Realized and unrealized (gains) losses

Purchases

Issues

Sales

Settlements,
net

Transfers
into
Level 3(1)

Transfers
out of
Level 3(1)

Balance,
June 30,
2018

Unrealized
(gains) losses
still held(3)
 
 
 
Included in
earnings
 
Included in
other
comprehensive
income

Total








 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 

 





 

 

 

 

 

 

 

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

$629

 

$—

 

$—

 

$—

 

$—

 

$—

 

$—

 

$—

 

$—

 

$—

 

$629

 

$—

Other debt, at fair value
 
135

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
135

 
—

Net derivatives(2)
 
40

 
13

 
—

 
13

 
—

 
(4
)
 
—

 
(7
)
 
—

 
—

 
42

 
7

Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All other, at fair value
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Referenced footnotes are included after the prior period tables.


Freddie Mac Form 10-Q
 
140
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


 
YTD 2018
 
Balance,
January 1,
2018
 
Realized and unrealized gains (losses)
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3(1)
 
Transfers
out of
Level 3(1)
 
Balance,
June 30,
2018
 
Unrealized
gains (losses)
still held(3)
(In millions)
 
Included in
earnings
 
Included in
other
comprehensive
income
 
Total
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac

$5,055

 

($6
)
 

($140
)
 

($146
)
 

$91

 

$—

 

($56
)
 

($564
)
 

$—

 

$—

 

$4,380

 

($6
)
Other agency
46

 
—

 
—

 
—

 
239

 
—

 
—

 
(15
)
 
—

 
—

 
270

 
—

Non-agency RMBS
3,933

 
494

 
(469
)
 
25

 
—

 
—

 
(1,500
)
 
(232
)
 
—

 
—

 
2,226

 
28

Non-agency CMBS
1,697

 
(4
)
 
(59
)
 
(63
)
 
—

 
—

 
—

 
(10
)
 
—

 
—

 
1,624

 
(4
)
Obligations of states and political subdivisions
357

 
—

 
(2
)
 
(2
)
 
—

 
—

 
—

 
(46
)
 
—

 
—

 
309

 
—

Total available-for-sale mortgage-related securities
11,088

 
484


(670
)
 
(186
)
 
330


—


(1,556
)

(867
)

—


—

 
8,809

 
18

Trading, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Freddie Mac
842

 
(180
)
 
—

 
(180
)
 
1,225

 
—

 
—

 
(13
)
 
586

 
(32
)
 
2,428

 
(176
)
Other agency
9

 
(1
)
 
—

 
(1
)
 
30

 
—

 
(21
)
 
—

 
—

 
—

 
17

 
(1
)
All other
2,066

 
(67
)
 
—

 
(67
)
 
—

 
—

 
(681
)
 
(34
)
 
—

 
—

 
1,284

 
(55
)
Total trading mortgage-related securities
2,917

 
(248
)
 
—

 
(248
)
 
1,255


—


(702
)

(47
)

586


(32
)
 
3,729

 
(232
)
Other assets:
 
 
 
 


 
 
 
 
 
 
 
 
 
 
 


 


 


 
 
Guarantee asset
3,171

 
(20
)
 
—

 
(20
)
 
—

 
490

 
—

 
(278
)
 
—

 
—

 
3,363

 
(20
)
All other, at fair value
45

 
29

 
—

 
29

 
41

 
(12
)
 
—

 
—

 
—

 
—

 
103

 
14

Total other assets

$3,216

 

$9

 

$—

 

$9

 

$41

 

$478

 

$—

 

($278
)
 

$—

 

$—

 

$3,466

 

($6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1,
2018
 
Realized and unrealized (gains) losses
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3(1)
 
Transfers
out of
Level 3(1)
 
Balance,
June 30,
2018
 
Unrealized
(gains) losses
still held(3)
 
 
Included in
earnings
 
Included in
other
comprehensive
income
 
Total
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value

$630

 

($1
)
 

$—

 

($1
)
 

$—

 

$—

 

$—

 

$—

 

$—

 

$—

 

$629

 

($1
)
Other debt, at fair value

$137

 
—

 
—

 
—

 
—

 
—

 
—

 
(2
)
 
—

 
—

 
135

 
—

Net derivatives(2)
57

 
23

 
—

 
23

 
—

 
(26
)
 
—

 
(12
)
 
—

 
—

 
42

 
13

Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All other, at fair value
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Referenced footnotes are included after the prior period tables.

Freddie Mac Form 10-Q
 
141
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


 
 
2Q 2017
 
 
Balance,
April 1,
2017
 
Realized and unrealized gains (losses)
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3(1)
 
Transfers
out of
Level 3(1)
 
Balance,
June 30,
2017
 
Unrealized
gains (losses)
still held(3)
(In millions)
 
 
Included in
earnings
 
Included in other
comprehensive
income
 
Total
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 

$6,419

 

$10

 

$17

 

$27

 

$258

 

$—

 

($482
)
 

($391
)
 

$—

 

($145
)
 

$5,686

 

($5
)
Other agency
 
62

 
—

 
—

 
—

 
—

 
—

 
—

 
(3
)
 
—

 
(8
)
 
51

 
—

Non-agency RMBS
 
9,270

 
153

 
158

 
311

 
—

 
—

 
(477
)
 
(465
)
 
—

 
—

 
8,639

 
70

Non-agency CMBS
 
3,360

 
2

 
120

 
122

 
—

 
—

 
—

 
(12
)
 
—

 
—

 
3,470

 
2

Obligations of states and political subdivisions
 
560

 
1

 
(1
)
 
—

 
—

 
—

 
—

 
(79
)
 
—

 
—

 
481

 
—

Total available-for-sale mortgage-related securities
 
19,671

 
166

 
294

 
460

 
258

 
—

 
(959
)
 
(950
)
 
—

 
(153
)
 
18,327

 
67

Trading, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 
552

 
(51
)
 
—

 
(51
)
 
474

 
—

 
—

 
—

 
83

 
(170
)
 
888

 
(42
)
Other agency
 
11

 
(1
)
 
—

 
(1
)
 
—

 
—

 
—

 
—

 
—

 
—

 
10

 
—

All other
 
109

 
1

 
—

 
1

 
—

 
—

 
—

 
(2
)
 
—

 
—

 
108

 
2

Total trading mortgage-related securities
 
672

 
(51
)
 
—

 
(51
)
 
474

 
—

 
—

 
(2
)
 
83

 
(170
)
 
1,006

 
(40
)
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset
 
2,340

 
4

 
—

 
4

 
—

 
249

 
—

 
(113
)
 
—

 
—

 
2,480

 
4

All other, at fair value
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total other assets
 

$2,340

 

$4

 

$—

 

$4

 

$—

 

$249

 

$—

 

($113
)
 

$—

 

$—

 

$2,480

 

$4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
April 1,
2017
 
Realized and unrealized gains (losses)
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3(1)
 
Transfers
out of
Level 3(1)
 
Balance,
June 30,
2017
 
Unrealized
gains (losses)
still held(3)
 
 
 
Included in
earnings
 
Included in other
comprehensive
income
 
Total
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value
 

$530

 

$1

 

$—

 

$1

 

$—

 

$—

 

$—

 

$—

 

$—

 

$—

 

$531

 

$1

Other debt, at fair value
 
94

 
—

 
—

 
—

 
—

 
—

 
—

 
(5
)
 
—

 
—

 
89

 
—

Net derivatives(2)
 
61

 
20

 
—

 
20

 
—

 
—

 
—

 
(10
)
 
—

 
—

 
71

 
12

Other Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All other, at fair value
 
10

 
6

 
—

 
6

 
1

 
—

 
—

 
—

 
—

 
—

 
17

 
6

Referenced footnotes are included after the following table.

Freddie Mac Form 10-Q
 
142
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


 
 
YTD 2017
 
 
Balance,
January 1,
2017
 
Realized and unrealized gains (losses)
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3(1)
 
Transfers
out of
Level 3(1)
 
Balance,
June 30,
2017
 
Unrealized
gains (losses)
still held(3)
(In millions)
 
 
Included in
earnings
 
Included in other
comprehensive
income
 
Total
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 

$9,847

 

($1
)
 

$35

 

$34

 

$494

 

$—

 

($907
)
 

($703
)
 

$17

 

($3,096
)
 

$5,686

 

($10
)
Other agency
 
66

 
—

 
(1
)
 
(1
)
 
—

 
—

 
—

 
(6
)
 
—

 
(8
)
 
51

 
—

Non-agency RMBS
 
11,797

 
431

 
60

 
491

 
—

 
—

 
(2,694
)
 
(955
)
 
—

 
—

 
8,639

 
137

Non-agency CMBS
 
3,366

 
2

 
122

 
124

 
—

 
—

 
—

 
(20
)
 
—

 
—

 
3,470

 
2

Obligations of states and political subdivisions
 
665

 
1

 
(1
)
 
—

 
—

 
—

 
—

 
(184
)
 
—

 
—

 
481

 
—

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

 
433

 
215

 
648

 
494

 
—

 
(3,601
)
 
(1,868
)
 
17

 
(3,104
)
 
18,327

 
129

Trading, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 
1,095

 
(84
)
 
—

 
(84
)
 
539

 
—

 
(592
)
 
(9
)
 
131

 
(192
)
 
888

 
(74
)
Other agency
 
12

 
(2
)
 
—

 
(2
)
 
—

 
—

 
—

 
—

 
—

 
—

 
10

 
(2
)
All other
 
113

 
1

 
—

 
1

 
—

 
—

 
—

 
(6
)
 
—

 
—

 
108

 
1

Total trading mortgage-related securities
 
1,220

 
(85
)
 
—

 
(85
)
 
539

 
—

 
(592
)
 
(15
)
 
131

 
(192
)
 
1,006

 
(75
)
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset
 
2,299

 
(3
)
 
—

 
(3
)
 
—

 
413

 
—

 
(229
)
 
—

 
—

 
2,480

 
(3
)
All other, at fair value
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total other assets
 

$2,299

 

($3
)
 

$—

 

($3
)
 

$—

 

$413

 

$—

 

($229
)
 

$—

 

$—

 

$2,480

 

($3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1,
2017
 
Realized and unrealized gains (losses)
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3(1)
 
Transfers
out of
Level 3(1)
 
Balance,
June 30,
2017
 
Unrealized
gains (losses)
still held(3)
 
 
 
Included in
earnings
 
Included in other
comprehensive
income
 
Total
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value
 

$—

 

$1

 

$—

 

$1

 

$—

 

$530

 

$—

 

$—

 

$—


$—


$—

 

$531

 

$1

Other debt, at fair value
 
95

 
—

 
—

 
—

 
—

 
—

 
—

 
(6
)
 
—

 
—

 
89

 
—

Net derivatives(2)
 
50

 
33

 
—

 
33

 
—

 
1

 
—

 
(13
)
 
—

 
—

 
71

 
21

Other Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
All other, at fair value
 
(2
)
 
7

 
—

 
7

 
12

 
—

 
—

 
—

 
—

 
—

 
17

 
7

(1)
Transfers out of Level 3 during 2Q 2018 and YTD 2018 consisted primarily of certain mortgage-related securities due to an increased volume and level of activity in the market and availability of price quotes from dealers and third-party pricing services. Certain Freddie Mac securities are classified as Level 3 at issuance and generally are classified as Level 2 when they begin trading. Transfers into Level 3 during 2Q 2018 and YTD 2018 consisted primarily of certain mortgage-related securities due to a decrease in market activity and the availability of relevant price quotes from dealers and third-party pricing services.
(2)
Amounts are the net of derivative assets and liabilities prior to counterparty netting, cash collateral netting, net trade/settle receivable or payable and net derivative interest receivable or payable.
(3)
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 June 30, 2018 and June 30, 2017, respectively. Included in these amounts are other-than temporary impairments recorded on available-for-sale securities.


Freddie Mac Form 10-Q
 
143
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


The tables below provide valuation techniques, the range and the weighted average of significant unobservable inputs for Level 3 assets and liabilities measured on our condensed consolidated balance sheets at fair value on a recurring basis.
 
 
June 30, 2018
 
 
Level 3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs
(In millions, except for certain unobservable inputs as shown)
 
Type
Range
Weighted
Average
Recurring fair value measurements
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investments in securities
 
 
 
 
 
 
 
 
Available-for-sale, at fair value
 
 
 
 
 
 
 
 
Mortgage-related securities
 
 
 
 
 
 
 
 
Freddie Mac
 

$4,176

 
Discounted cash flows
 
OAS
29 - 325 bps
74 bps

 
 
204

 
Other
 
 
 


Total Freddie Mac
 
4,380

 
 
 
 
 
 
Other agency
 
270

 
Other
 
 
 
 
Non-agency RMBS
 
1,956

 
Median of external sources
 
External pricing sources
$70.9 - $77.7

$74.0

 
 
270

 
Other
 
 
 
 
Total non-agency RMBS
 
2,226

 
 
 
 
 
 
Non-agency CMBS
 
1,624

 
Single external source
 
External pricing sources
$104.0 - $105.2

$104.7

Obligations of states and political subdivisions
 
292

 
Single external source
 
External pricing sources
$97.2 - $107.3

$100.9

 
 
17

 
Other
 
 
 
 
Total obligations of states and political subdivisions
 
309

 
 
 
 
 
 
Total available-for-sale mortgage-related securities
 
8,809

 
 
 
 
 
 
Trading, at fair value
 
 
 
 
 
 
 
 
Mortgage-related securities
 
 
 
 
 
 
 
 
Freddie Mac
 
871

 
Discounted cash flows
 
OAS
(21,945) - 6,521 bps
230 bps

 
 
550

 
Single external source
 
External pricing sources
$0.0 - $6.9

$3.4

 
 
277

 
Risk metrics
 
Effective duration
(15.99) - 12.97 years
7.71 years

 
 
730

 
Other
 
 
 
 
Total Freddie Mac
 
2,428

 
 
 
 
 
 
Other agency
 
17

 
Other
 
 
 
 
All other
 
1,283

 
Single external source
 
External pricing sources
$6.2 - $108.7

$94.8

 
 
1

 
Other
 
 
 
 
Total all other
 
1,284

 
 
 
 
 
 
Total trading mortgage-related securities
 
3,729

 
 
 
 
 
 
Total investments in securities
 

$12,538

 
 
 
 
 
 
Other assets:
 
 
 
 
 
 
 
 
Guarantee asset, at fair value
 

$3,132

 
 Discounted cash flows
 
 OAS
17 - 198 bps
 135 bps

 
 
231

 
Other
 
 
 
 
Total Guarantee asset, at fair value
 
3,363

 
 
 
 
 
 
All other at fair value
 
103

 
Other
 
 
 
 
Total other assets
 
3,466

 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value
 
629

 
 Single external source
 
 External Pricing Sources
$97.0 - $100.5

$100.0

Other debt, at fair value
 
135

 
Other
 
 
 
 
Net derivatives
 
42

 
Other
 
 
 
 

Freddie Mac Form 10-Q
 
144
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15



 
December 31, 2017
 
 
Level 3
Fair
Value

Predominant
Valuation
Technique(s)

Unobservable Inputs
(In millions, except for certain unobservable inputs as shown)
 
Type
Range
Weighted
Average
Recurring fair value measurements
 







Assets
 







Investments in securities:
 







Available-for-sale, at fair value
 







Mortgage-related securities
 







Freddie Mac
 

$4,873

 
Discounted cash flows
 
OAS
27 - 501 bps
68 bps


 
182


Other





Total Freddie Mac
 
5,055








Other agency
 
46


Other





Non-agency RMBS
 
3,665


Median of external sources

External pricing sources
$75.6 - $80.8

$77.7


 
268


Other





Total non-agency RMBS
 
3,933








Non-agency CMBS
 
1,696


Single external source

External pricing sources
$108.4 - $108.9

$108.7


 
1


Other





Total non-agency CMBS
 
1,697








Obligations of states and political subdivisions
 
334


Median of external sources

External pricing sources
$101.2 - $101.6

$101.4


 
23


Other





Total obligations of states and political subdivisions
 
357








Total available-for-sale mortgage-related securities
 
11,088








Trading, at fair value
 
 







Mortgage-related securities
 









Freddie Mac
 
582


Discounted cash flows

OAS
(8,905) - 27,202 bps
(88) bps

 
 
243

 
Risk metrics
 
Effective duration
0.00 - 55.93 years
11.76 years


 
17


Other





Total Freddie Mac
 
842








Other agency
 
9


Other





All other
 
2,065


Single external source

External pricing sources
$6.4 - $113.2

$98.0

 
 
1

 
Other
 
 
 
 
Total all other
 
2,066

 
 
 
 
 
 
Total trading mortgage-related securities
 
2,917








Total investments in securities
 

$14,005








Other assets:
 









Guarantee asset, at fair value
 

$3,171


 Discounted cash flows

OAS
17 - 198 bps
45 bps

All other at fair value
 
45

 
Other
 
 
 
 
Total other assets
 
3,216

 
 
 
 
 
 
Liabilities
 
 







Debt securities of consolidated trusts held by third parties, at fair value
 
630

 
Single external source
 
External Pricing Sources
$99.2 - $100.2

$100.1

Other debt, at fair value
 
137

 
Other
 
 
 
 
Net derivatives
 
57


Other








Freddie Mac Form 10-Q
 
145
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


Assets Measured at Fair Value on a Non-recurring Basis
We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis after our initial recognition. These adjustments usually result from the application of lower-of-cost-or-fair-value accounting or measurement of impairment based on the fair value of the underlying collateral.
The table below presents assets measured on our condensed consolidated balance sheets at fair value on a non-recurring basis.
 
 
June 30, 2018
 
December 31, 2017
(In millions)
 
Level 1
Level 2
Level 3
Total
 
Level 1
Level 2
Level 3
Total
Assets measured at fair value on a non-recurring basis:
 
 
 
 
 
 
 
 
 
 
Mortgage loans(1)
 

$—


$162


$5,823


$5,985

 

$—


$494


$6,199


$6,693

(1)
Includes loans that are classified as held-for-investment and have been measured for impairment based on the fair value of the underlying collateral and held-for-sale loans where the fair value is below cost.

The tables below provide valuation techniques, the range and the weighted average of significant unobservable inputs for Level 3 assets and liabilities measured on our condensed consolidated balance sheets at fair value on a non-recurring basis. Certain of the fair values in the tables below were not obtained as of the period end, but were obtained during the period.
 
 
June 30, 2018
 
 
Level 3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs
(In millions, except for certain unobservable inputs as shown)
 
Type
Range
Weighted
Average
Non-recurring fair value measurements
 
 
 
 
 
 
 
 
Mortgage loans
 

$5,823

 
 
 
 
 
 
 
 
 
 
Internal model
 
Historical sales proceeds
$3,000 - $947,675
$177,666
 
 
 
 
Internal model
 
Housing sales index
42 - 384 bps
104 bps
 
 
 
 
Median of external sources
 
External pricing sources
$35.9 - $94.6
$81.9
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
Level 3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs
(In millions, except for certain unobservable inputs as shown)
 
Type
Range
Weighted
Average
Non-recurring fair value measurements
 
 
 
 
 
 
 
 
Mortgage loans
 

$6,199

 
 
 
 
 
 
 
 
 
 
Internal model
 
Historical sales proceeds
$3,000 - $899,000
$176,558
 
 
 
 
Internal model
 
Housing sales index
43 - 394 bps
102 bps
 
 
 
 
Median of external sources
 
External pricing sources
$36.5 - $94.9
$80.9

Freddie Mac Form 10-Q
 
146
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


Fair Value of Financial Instruments
The tables below present the carrying value and estimated fair value of our financial instruments. For certain types of financial instruments, such as cash and cash equivalents, securities purchased under agreements to resell, advances to lenders and other secured lending and certain debt, the carrying value on our GAAP balance sheets approximates fair value, as these assets and liabilities are short-term in nature and have limited market value volatility.
 
 
 
June 30, 2018
 
 
GAAP Measurement Category(1)
GAAP Carrying  Amount
 
Fair Value
(In millions)
 
 
Level 1
 
Level 2
 
Level 3
 
Netting 
Adjustments(2)
 
Total
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents(3)
 
Amortized cost

$6,752

 

$6,752

 

$—

 

$—

 

$—

 

$6,752

Securities purchased under agreements to resell
 
Amortized cost
41,769

 
—

 
41,769

 
—

 
—

 
41,769

Investments in securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value
 
FV - OCI
37,822

 
—

 
29,013

 
8,809

 
—

 
37,822

Trading, at fair value
 
FV - NI
39,888

 
20,501

 
15,658

 
3,729

 
—

 
39,888

Total investments in securities
 
 
77,710

 
20,501

 
44,671

 
12,538

 
—

 
77,710

Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held by consolidated trusts
 
 
1,795,534

 
—

 
1,630,952

 
129,517

 
—

 
1,760,469

Loans held by Freddie Mac
 
 
89,317

 
—

 
31,457

 
60,424

 
—

 
91,881

Total mortgage loans
 
Various(4)
1,884,851

 
—

 
1,662,409

 
189,941

 
—

 
1,852,350

Derivative assets, net
 
FV - NI
391

 
—

 
6,633

 
23

 
(6,265
)
 
391

Guarantee asset
 
FV - NI
3,363

 
—

 
—

 
3,374

 
—

 
3,374

Non-derivative purchase commitments, at fair value
 
FV - NI
132

 
—

 
132

 
24

 
—

 
156

Advances to lenders and other secured lending
 
Amortized cost
1,700

 
—

 
564

 
890

 
—

 
1,454

Total financial assets
 
 

$2,016,668

 

$27,253

 

$1,756,178

 

$206,790

 

($6,265
)
 

$1,983,956

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

$1,746,298

 

$—

 

$1,703,861

 

$2,329

 

$—

 

$1,706,190

Other debt
 
 
274,864

 
—

 
274,202

 
3,750

 
—

 
277,952

Total debt, net
 
Various(5)
2,021,162

 
—

 
1,978,063

 
6,079

 
—

 
1,984,142

Derivative liabilities, net
 
FV - NI
409

 
—

 
4,733

 
65

 
(4,389
)
 
409

Guarantee obligation
 
Amortized cost
3,250

 
—

 
—

 
3,574

 
—

 
3,574

Non-derivative purchase commitments, at fair value
 
FV - NI
11

 
—

 
11

 
35

 
—

 
46

Total financial liabilities
 
 

$2,024,832

 

$—

 

$1,982,807

 

$9,753

 

($4,389
)
 

$1,988,171

(1)
FV - NI denotes fair value through net income. FV - OCI denotes fair value through other comprehensive income.
(2)
Represents counterparty netting, cash collateral netting and net derivative interest receivable or payable.
(3)
The current and prior period presentation has been modified to include restricted cash and cash equivalents due to recently adopted accounting guidance.
(4)
As of June 30, 2018, the GAAP carrying amounts measured at amortized cost, lower-of-cost-or-fair-value and FV - NII were $1.9 trillion, $9.7 billion and $16.6 billion, respectively.
(5)
As of June 30, 2018, the GAAP carrying amounts measured at amortized cost and FV - NII were $2.0 trillion and $5.4 billion, respectively.

Freddie Mac Form 10-Q
 
147
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


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

$9,811

 

$9,811

 

$—

 

$—

 

$—

 

$9,811

Securities purchased under agreements to resell
 
Amortized cost
55,903

 
—

 
55,903

 
—

 
—

 
55,903

Investments in securities:
 
 
 
 
 
 
 
 
 
 
 
 


Available-for-sale, at fair value
 
FV - OCI
43,597

 
—

 
32,509

 
11,088

 
—

 
43,597

Trading, at fair value
 
FV - NI
40,721

 
20,159

 
17,645

 
2,917

 
—

 
40,721

Total investments in securities
 
 
84,318

 
20,159


50,154


14,005


—

 
84,318

Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 

Loans held by consolidated trusts
 
 
1,774,286

 
—

 
1,635,137

 
145,911

 
—

 
1,781,048

Loans held by Freddie Mac
 
 
96,931

 
—

 
32,169

 
67,932

 
—

 
100,101

Total mortgage loans
 
Various(4)
1,871,217

 
—


1,667,306


213,843


—

 
1,881,149

Derivative assets, net
 
FV - NI
375

 
—

 
8,830

 
8

 
(8,463
)
 
375

Guarantee asset
 
FV - NI
3,171

 
—

 
—

 
3,359

 
—

 
3,359

Non-derivative purchase commitments, at fair value
 
FV - NI
137

 
—

 
137

 
55

 
—

 
192

Advances to lenders and other secured lending
 
Amortized cost
1,269

 
—

 
473

 
796

 
—

 
1,269

Total financial assets
 
 

$2,026,201

 

$29,970



$1,782,803



$232,066



($8,463
)
 

$2,036,376

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 

Debt, net:
 
 
 
 
 
 
 
 
 
 
 
 

Debt securities of consolidated trusts held by third parties
 
 

$1,720,996

 

$—

 

$1,721,091

 

$2,679

 

$—

 

$1,723,770

Other debt
 
 
313,634

 
—

 
313,688

 
3,892

 
—

 
317,580

Total debt, net
 
Various(5)
2,034,630

 
—


2,034,779


6,571


—

 
2,041,350

Derivative liabilities, net
 
FV - NI
269

 
—

 
7,424

 
65

 
(7,220
)
 
269

Guarantee obligation
 
Amortized cost
3,081

 
—

 
—

 
3,742

 
—

 
3,742

Non-derivative purchase commitments, at fair value
 
FV - NI
4

 
—

 
4

 
15

 
—

 
19

Total financial liabilities
 
 

$2,037,984

 

$—



$2,042,207



$10,393



($7,220
)
 

$2,045,380

(1)
FV - NI denotes fair value through net income. FV - OCI denotes fair value through other comprehensive income.
(2)
Represents counterparty netting, cash collateral netting and net derivative interest receivable or payable.
(3)
The current and prior period presentation has been modified to include restricted cash and cash equivalents due to recently adopted accounting guidance.
(4)
As of December 31, 2017, the GAAP carrying amounts measured at amortized cost, lower-of-cost-or-fair-value and FV - NII were $1.8 trillion, $14.7 billion and $20.1 billion, respectively.
(5)
As of December 31, 2017, the GAAP carrying amounts measured at amortized cost and FV - NII were $2.0 trillion and $5.8 billion, respectively.

Freddie Mac Form 10-Q
 
148
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


HARP Loans
The fair value of mortgage loans includes loans refinanced under HARP of $21.6 billion and $30.2 billion as of June 30, 2018 and December 31, 2017, respectively. The fair value of HARP loans reflects the total compensation that we receive for the delivery of a HARP loan, based on 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 on December 31, 2018, the beneficial pricing afforded to HARP loans may no longer be reflected in the pricing structure of our guarantee fees. If these benefits were not reflected in the pricing for these loans, the fair value of our loans would have decreased by $1.5 billion and $2.1 billion as of June 30, 2018 and December 31, 2017, respectively.
Fair Value Option
We elected the fair value option for certain multifamily held-for-sale loans, multifamily held-for-sale loan purchase commitments and certain long-term debt.
The table below presents the fair value and UPB related to certain loans and long-term debt for which we have elected the fair value option.
 
 
June 30, 2018
 
December 31, 2017
(In millions)
 
Multifamily
Held-For-Sale
 Loans
Other Debt -
Long Term
Debt Securities Of Consolidated Trusts Held By Third Parties(1)
 
Multifamily
Held-For-Sale
 Loans
Other Debt -
Long Term
Debt Securities Of Consolidated Trusts Held By Third Parties(1)
Fair value
 

$16,621


$4,786


$629

 

$20,054


$5,160


$630

Unpaid principal balance
 
16,494

4,320

630

 
19,762

4,666

630

Difference
 

$127


$466


($1
)
 

$292


$494


$—

(1)
Does not include interest-only securities with fair value of $8 million and $9 million as of June 30, 2018 and December 31, 2017, respectively.
Changes in Fair Value Under the Fair Value Option Election
The table below presents the changes in fair value included in other income (loss) in our condensed consolidated statements of comprehensive income, related to items for which we have elected the fair value option.
 
 
2Q 2018
2Q 2017
 
YTD 2018
YTD 2017
(In millions)
 
Gains (Losses)
 
Gains (Losses)
Multifamily held-for-sale loans
 

($54
)

$42

 

($512
)

$7

Multifamily held-for-sale loan purchase commitments
 
192

331

 
297

555

Other debt - long term
 
19

(103
)
 
28

(202
)
Debt securities of consolidated trusts held by third parties
 
—

1

 
2

11

Changes in fair value attributable to instrument-specific credit risk were not material for 2Q 2018 and YTD 2018 and for 2Q 2017 and YTD 2017 for any assets or liabilities for which we elected the fair value option.

Freddie Mac Form 10-Q
 
149
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 16


NOTE 16
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's or servicer’s eligibility to sell loans to, and/or service loans for, us. In these cases, the former seller or servicer sometimes seeks damages against us for wrongful termination under a variety of legal theories. In addition, we are sometimes sued in connection with the origination or servicing of loans. These suits typically involve claims alleging wrongful actions of sellers and servicers. Our contracts with our sellers and servicers generally provide for indemnification of Freddie Mac against liability arising from sellers' and servicers' wrongful actions with respect to loans sold to or serviced for Freddie Mac.
Litigation and claims resolution are subject to many uncertainties and are not susceptible to accurate prediction. In accordance with the accounting guidance for contingencies, we reserve for litigation claims and assessments asserted or threatened against us when a loss is probable (as defined in such guidance) and the amount of the loss can be reasonably estimated.
Putative Securities Class Action Lawsuit: Ohio Public Employees Retirement System vs. Freddie Mac, Syron, Et Al.
This putative securities class action lawsuit was filed against Freddie Mac and certain former officers on January 18, 2008 in the U.S. District Court for the Northern District of Ohio purportedly on behalf of a class of purchasers of Freddie Mac stock from August 1, 2006 through November 20, 2007. FHFA later intervened as Conservator, and the plaintiff amended its complaint on several occasions. The plaintiff alleged, among other things, that the defendants violated federal securities laws by making false and misleading statements concerning our business, risk management, and the procedures we put into place to protect the company from problems in the mortgage industry. The plaintiff seeks unspecified damages and interest, and reasonable costs and expenses, including attorney and expert fees.
In October 2013, defendants filed motions to dismiss the complaint. In October 2014, the District Court granted defendants’ motions and dismissed the case in its entirety against all defendants, with prejudice. In November 2014, plaintiff filed a notice of appeal in the U.S. Court of Appeals for the Sixth Circuit. On July 20, 2016, the Court of Appeals reversed the District Court's dismissal and remanded the case to the District Court for further proceedings.
At present, it is not possible for us to predict the probable outcome of this lawsuit or any potential effect on our business, financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible loss or range of possible loss in the event of an adverse judgment in the foregoing matter due to the following factors, among others: the inherent uncertainty of pre-trial litigation and the fact that the District Court has not yet ruled upon motions for class certification or summary judgment. In particular, absent the certification of a class, the identification of a class period, and the identification of the alleged statement or statements that survive dispositive motions, we cannot

Freddie Mac Form 10-Q
 
150
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 16


reasonably estimate any possible loss or range of possible loss.
LIBOR Lawsuit
On March 14, 2013, Freddie Mac filed a lawsuit in the U.S. District Court for the Eastern District of Virginia against the British Bankers Association and the 16 U.S. Dollar LIBOR panel banks and a number of their affiliates. The case was subsequently transferred to the U.S. District Court for the Southern District of New York. The complaint alleges, among other things, that the defendants fraudulently and collusively depressed LIBOR, a benchmark interest rate indexed to trillions of dollars of financial products, and asserts claims for antitrust violations, breach of contract, tortious interference with contract and fraud. Freddie Mac filed an amended complaint in July 2013, and a second amended complaint in October 2014. In August 2015, the District Court dismissed the portion of our claim related to antitrust violations and fraud and we filed a motion for reconsideration. On March 31, 2016, the District Court granted a portion of our motion, finding personal jurisdiction over certain defendants, and denied the portion of our motion with respect to statutes of limitation for our fraud claims. Subsequently, in a related case, the U.S. Court of Appeals for the Second Circuit reversed the District Court’s dismissal of certain plaintiffs’ antitrust claims and remanded the case to the District Court for consideration of whether, among other things, the plaintiffs are "efficient enforcers" of the antitrust laws.
On December 20, 2016, after briefing and argument on the defendants' renewed motions to dismiss on personal jurisdiction and efficient enforcer grounds, the District Court denied defendants' motions in part and granted them in part. The District Court held that Freddie Mac is an efficient enforcer of the antitrust laws, but dismissed on personal jurisdiction grounds Freddie Mac's antitrust claims against all defendants except HSBC USA, N.A. Then, in an order issued February 2, 2017, the District Court effectively dismissed Freddie Mac's remaining antitrust claim against HSBC USA, N.A. At present, Freddie Mac's breach of contract actions against Bank of America, N.A., Barclays Bank, Citibank, N.A., Credit Suisse, Deutsche Bank, Royal Bank of Scotland and UBS AG are its only claims remaining in the District Court.
On February 23, 2018, the Second Circuit reversed the District Court’s dismissal of certain plaintiffs’ state law fraud and unjust enrichment claims on statutes of limitations grounds. While Freddie Mac was not a party to the appeal, this decision could have the effect of reinstating Freddie Mac’s fraud claims against the above-named defendants. The Second Circuit also reversed certain aspects of the District Court’s personal jurisdiction rulings and remanded with instructions to allow the named appellant to amend its complaint. On June 15, 2018, Freddie Mac filed a motion for leave to file an amended complaint, along with a proposed amended complaint.


Freddie Mac Form 10-Q
 
151
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 16


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

Freddie Mac Form 10-Q
 
152
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 16


FHFA, joined by Freddie Mac and Fannie Mae, moved to dismiss the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case and the other related cases in January 2014. Treasury filed a motion to dismiss the same day. In September 2014, the District Court granted the motions and dismissed the plaintiffs’ claims. All plaintiffs appealed that decision, and on February 21, 2017, the U.S. Court of Appeals for the District of Columbia Circuit affirmed in part and remanded in part the decision granting the motions to dismiss. The Court of Appeals affirmed dismissal of all claims except certain claims seeking monetary damages for breach of contract and breach of implied duty of good faith and fair dealing. In March 2017, certain institutional and class plaintiffs filed petitions for panel rehearing with respect to certain claims. On July 17, 2017, the Court of Appeals granted the petitions for rehearing and issued a modified decision, which permitted the institutional plaintiffs to pursue the breach of contract and breach of implied duty of good faith and fair dealing claims that had been remanded. The Court of Appeals also removed language related to the standard to be applied to the implied duty claims, leaving that issue for the District Court to determine on remand. On October 16, 2017, certain institutional and class plaintiffs filed petitions for a writ of certiorari in the U.S. Supreme Court challenging whether HERA's prohibition on injunctive relief against FHFA bars judicial review of the net worth sweep dividend provisions of the August 2012 amendment to the Purchase Agreement, as well as whether HERA bars shareholders from pursuing derivative litigation where they allege the conservator faces a conflict of interest. The Supreme Court denied the petitions on February 20, 2018. On November 1, 2017, certain institutional and class plaintiffs and plaintiffs in another case in which Freddie Mac was not originally a defendant, Fairholme Funds, Inc. v. FHFA, Treasury, and Federal National Mortgage Association, filed proposed amended complaints in the District Court. Each of the proposed amended complaints names Freddie Mac as a defendant for breach of contract and breach of the covenant of good faith and fair dealing claims as well as for new claims alleging breach of fiduciary duty and breach of Virginia corporate law. On January 10, 2018, FHFA, Freddie Mac, and Fannie Mae moved to dismiss the amended complaints.
Angel vs. The Federal Home Loan Mortgage Corporation et al. This case was filed pro se on May 21, 2018 against Freddie Mac, Fannie Mae, certain current and former directors of Freddie Mac and Fannie Mae, and FHFA as a nominal defendant. The complaint alleges, among other things, breach of contract, breach of the implied covenant of good faith and fair dealing, and that defendants aided and abetted the government’s “avoidance” of plaintiff’s dividend rights. On July 12, 2018, the defendants filed a motion to dismiss the complaint.
Litigation in the U.S. Court of Federal Claims
Reid and Fisher vs. the United States of America and Federal Home Loan Mortgage Corporation. This case was filed as a derivative lawsuit, purportedly on behalf of Freddie Mac as a "nominal" defendant, on February 26, 2014. The complaint alleges, among other items, that the net worth sweep dividend provisions of the senior preferred stock constitute an unlawful taking of private property for public use without just compensation. The plaintiffs ask that Freddie Mac be awarded just compensation for the U.S. government’s alleged taking of its property, attorneys’ fees, costs and other expenses. On March 8, 2018, the plaintiffs filed an amended complaint under seal.
Rafter, Rattien and Pershing Square Capital Management vs. the United States of America et al. This case was filed as a shareholder derivative lawsuit, purportedly on behalf of Freddie Mac as a "nominal" defendant, on August 14, 2014. The complaint alleges that the net worth sweep dividend provisions of the senior preferred stock constitute an unlawful taking of private property for public use

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


without just compensation, and the U.S. government breached an implied-in-fact contract with Freddie Mac. In September 2015, plaintiffs filed an amended complaint, which contains one claim involving Freddie Mac. The amended complaint alleges that Freddie Mac’s charter is a contract with its common stockholders, and that, through the August 2012 amendment to the Purchase Agreement, the U.S. government breached the implied covenant of good faith and fair dealing inherent in such contract. Plaintiffs ask that they be awarded damages or other appropriate relief for the alleged breach of contract as well as attorneys’ fees, costs and expenses. Plaintiffs filed a further amended complaint under seal on March 8, 2018, and a redacted public version on April 20, 2018. The amended complaint no longer lists Freddie Mac as a nominal defendant.
Fairholme Funds, Inc., et al. vs. the United States of America, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation. This case was originally filed on July 9, 2013 against the United States of America. On March 8, 2018, plaintiffs filed an amended complaint under seal. A redacted public version was filed on May 11, 2018 and adds Freddie Mac and Fannie Mae as nominal defendants. The amended complaint alleges, among other items, that the net worth sweep dividend provisions of the senior preferred stock constitute an unlawful taking or exaction of private property for public use without just compensation, and that by enacting the net worth sweep, the government breached the fiduciary duty it owed to Freddie Mac and Fannie Mae, and implied-in-fact contracts between the United States on the one hand and Freddie Mac and Fannie Mae on the other. The plaintiffs ask that plaintiffs, Freddie Mac, and Fannie Mae be awarded (1) just compensation for the government’s alleged taking or exaction of their property, (2) damages for the government’s breach of fiduciary duties, and (3) damages for the government’s breach of the alleged implied-in-fact contracts. In addition, plaintiffs seek pre- and post-judgment interest, attorneys’ fees, costs, and other expenses.
Litigation in the U.S. District Court for the District of Delaware
Jacobs and Hindes vs. FHFA and Treasury. This case was filed on August 17, 2015 as a putative class action lawsuit purportedly on behalf of a class of holders of preferred stock or common stock issued by Freddie Mac or Fannie Mae. The case was also filed as a shareholder derivative lawsuit, purportedly on behalf of Freddie Mac and Fannie Mae as "nominal" defendants. The complaint alleges, among other items, that the August 2012 amendment to the Purchase Agreement violated applicable state law and constituted a breach of contract, as well as a breach of covenants of good faith and fair dealing. Plaintiffs seek equitable and injunctive relief (including restitution of the monies paid by Freddie Mac and Fannie Mae to Treasury under the net worth sweep dividend), compensatory damages, attorneys’ fees, costs and expenses. On November 27, 2017, the Court dismissed the case with prejudice after defendants filed a motion to dismiss. On December 21, 2017, plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Third Circuit.
At present, it is not possible for us to predict the probable outcome of the lawsuits discussed above in the U.S. District Courts and the U.S. Court of Federal Claims (including the outcome of any appeal) or any potential effect on our business, financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible loss or range of possible loss in the event of an adverse judgment in the foregoing matters due to a number of factors, including the inherent uncertainty of pre-trial litigation. In addition, with respect to the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case, the plaintiffs have not demanded a stated amount of damages they believe are due, and the Court has not certified a class.

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Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 17


NOTE 17
Regulatory Capital
In October 2008, FHFA announced that it was suspending capital classification of us during conservatorship in light of the Purchase Agreement. FHFA continues to monitor our capital levels, but the existing statutory and FHFA regulatory capital requirements are not binding during conservatorship.
We continue to provide quarterly submissions to FHFA on minimum capital. The table below summarizes our minimum capital requirements and deficits and net worth.
(In millions)
 
June 30, 2018
December 31, 2017
GAAP net worth (deficit)
 

$4,585


($312
)
Core capital (deficit)(1)(2)
 
(67,697
)
(73,037
)
Less: Minimum capital requirement(1)
 
17,809

18,431

Minimum capital surplus (deficit)(1)
 

($85,506
)

($91,468
)
(1)
Core capital and minimum capital figures are estimates and represent amounts submitted to FHFA. FHFA is the authoritative source for our regulatory capital.
(2)
Core capital excludes certain components of GAAP total equity (i.e., AOCI and the liquidation preference of the senior preferred stock) as these items do not meet the statutory definition of core capital.
During 2017, we and Fannie Mae worked with FHFA to develop an overall risk measurement framework for evaluating our risk management and business decisions during conservatorship, known as the CCF. We use both the CCF and our internal capital model, which are aligned, to measure risk for making economically effective decisions. We are required to submit quarterly reports to FHFA related to the CCF requirements.



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Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 18

NOTE 18
Selected Financial Statement Line Items
The table below presents the significant components of other income (loss) on our condensed consolidated statements of comprehensive income.
(In millions)
 
2Q 2018
2Q 2017
 
YTD 2018
YTD 2017
Other income (loss):
 
 
 
 
 
 
Non-agency mortgage-related securities settlements and judgments

 

$334


$—

 

$334


$3

Gains (losses) on loans
 
162

193

 
(158
)
207

Guarantee fee income
 
200

158

 
394

307

Gains (losses) on held-for-sale loan purchase commitments
 
192

331

 
297

555

All other
 
123

12

 
265

37

Total other income (loss)
 

$1,011


$694

 

$1,132


$1,109

The table below presents the significant components of other assets and other liabilities on our condensed consolidated balance sheets.
(In millions)
 
June 30, 2018
December 31, 2017
Other assets:
 
 
 
Real estate owned, net
 

$771


$892

Accounts and other receivables(1)(2)
 
8,026

6,924

Guarantee asset
 
3,363

3,171

Fixed assets
 
883

798

Advances to lenders and other secured lending(2)
 
1,700

1,269

All other
 
747

636

Total other assets
 

$15,490


$13,690

Other liabilities:
 
 
 
Servicer liabilities
 

$370


$628

Guarantee obligation
 
3,250

3,081

Accounts payable and accrued expenses
 
678

754

Payables related to securities
 
4,012

2,813

Income taxes payable
 
—

656

All other
 
889

1,036

Total other liabilities
 

$9,199


$8,968

(1)
Primarily consists of servicer receivables and other non-interest receivables.
(2)
Current and prior period presentation has been modified to reflect certain secured lending activity within advances to lenders and other secured lending. Previously this activity was included in accounts and other receivables.

END OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES

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Other Information

Other Information
LEGAL PROCEEDINGS
We are involved as a party to a variety of legal proceedings. For more information, see Note 16 in this report, our 2017 Annual Report and our Form 10-Q for the first quarter of 2018.
In addition, a number of lawsuits have been filed against the U.S. government related to the conservatorship and the Purchase Agreement. For information on these lawsuits, see the Legal Proceedings section in our 2017 Annual Report and our Form 10-Q for the first quarter of 2018. One of these cases was filed in the U.S. District Court for the Northern District of Illinois. On March 27, 2017, the District Court dismissed this case. On May 3, 2018, the U.S. Court of Appeals for the Seventh Circuit affirmed the District Court’s decision. On May 18, 2018, two additional cases were filed in the U.S. Court of Federal Claims.
Some of these cases also have challenged the constitutionality of the structure of FHFA. One such case was filed in the U.S. District Court for the District of Minnesota. On July 6, 2018, the District Court dismissed this case. Another such case was filed in the U.S. District Court for the Southern District of Texas. On July 16, 2018, the U.S. Court of Appeals for the Fifth Circuit concluded in this case that FHFA’s structure is unconstitutional and remanded the case with instructions to enter judgment declaring that the for-cause limitation on the removal of FHFA’s Director violates the Constitution’s separation-of-powers principles. The Fifth Circuit decision did not invalidate the Purchase Agreement, and the Court affirmed dismissal of the plaintiffs’ other claims challenging the Purchase Agreement pursuant to the Administrative Procedures Act.
Freddie Mac is not a party to any of these lawsuits.
RISK FACTORS
This Form 10-Q should be read together with the Risk Factors section in our 2017 Annual Report, which describes various risks and uncertainties to which we are or may become subject. These risks and uncertainties could, directly or indirectly, adversely affect our business, financial condition, results of operations, cash flows, strategies and/or prospects.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
The securities we issue are "exempted securities" under the Securities Act of 1933, as amended. As a result, we do not file registration statements with the SEC with respect to offerings of our securities.
Following our entry into conservatorship, we suspended the operation of, and ceased making grants under, equity compensation plans. Previously, we had provided equity compensation under those plans to employees and members of the Board of Directors. Under the Purchase Agreement, we cannot issue

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Other Information

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.
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 2017 Annual Report.
Information About Certain Securities Issuances by Freddie Mac
Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a material direct financial obligation or become directly or contingently liable for a material obligation under an off-balance sheet arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03 or, if the obligation is incurred in connection with certain types of securities offerings, in prospectuses for those offerings that are filed with the SEC.
Freddie Mac’s securities offerings are exempted from SEC registration requirements. As a result, we do not file registration statements or prospectuses with the SEC with respect to our securities offerings. To comply with the disclosure requirements of Form 8-K relating to the incurrence of material financial obligations, we report these types of obligations either in offering circulars or offering circular supplements 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 or offering circular supplement, 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 is www.freddiemac.com/debt. From this address, investors can access the offering circular and related supplements for debt securities offerings under Freddie Mac’s global debt facility, including pricing supplements for individual issuances of debt securities. Similar information about our STACR debt notes and SCR debt notes is available at crt.freddiemac.com and mf.freddiemac.com/investors/, respectively.
Disclosure about the mortgage-related securities we issue, some of which are off-balance sheet obligations (e.g., K Certificates and SB Certificates), can be found at www.freddiemac.com/mbs. From this address, investors can access information and documents about our mortgage-related securities, including offering circulars and offering circular supplements.
We provide additional information, including product descriptions, investor presentations, securities issuance calendars, transactions volumes and details, redemption notices and Freddie Mac research, in each case as applicable, on the websites for our business segments, which can be found at www.freddiemac.com/singlefamily, mf.freddiemac.com and www.freddiemac.com/capital-markets.

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Other Information

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

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Controls and Procedures


Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to management of the company, including the company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we must apply judgment in implementing possible controls and procedures.
Management, including the company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2018. 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 June 30, 2018, at a reasonable level of assurance, because we have not been able to update our disclosure controls and procedures to provide reasonable assurance that information known by FHFA on an ongoing basis is communicated from FHFA to Freddie Mac’s management in a manner that allows for timely decisions regarding our required disclosure under the federal securities laws. We consider this situation to be a material weakness in our internal control over financial reporting.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING DURING 2Q 2018
We evaluated the changes in our internal control over financial reporting that occurred during 2Q 2018 and concluded that there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Controls and Procedures


MITIGATING ACTIONS RELATED TO THE MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As described above under Evaluation of Disclosure Controls and Procedures, we have one material weakness in internal control over financial reporting as of June 30, 2018 that we have not remediated.
Based on discussions with FHFA and given the structural nature of this material weakness, we believe it is likely that we will not remediate it while we are under conservatorship. However, both we and FHFA have continued to engage in activities and employ procedures and practices intended to permit accumulation and communication to management of information needed to meet our disclosure obligations under the federal securities laws. These include the following:
n
FHFA has established the Division of Conservatorship, which is intended to facilitate operation of the company with the oversight of the Conservator.
n
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 certain speeches to FHFA personnel for their review and comment prior to release.
n
FHFA personnel, including senior officials, review our SEC filings prior to filing, including this Form 10-Q, and engage in discussions with us regarding issues associated with the information contained in those filings. Prior to filing this Form 10-Q, FHFA provided us with a written acknowledgment that it had reviewed the Form 10-Q, was not aware of any material misstatements or omissions in the Form 10-Q, and had no objection to our filing the Form 10-Q.
n
The Director of FHFA is in frequent communication with our Chief Executive Officer, typically meeting (in person or by phone) on at least a bi-weekly basis.
n
FHFA representatives attend meetings frequently with various groups within the company to enhance the flow of information and to provide oversight on a variety of matters, including accounting, credit and capital markets management, external communications and legal matters.
n
Senior officials within FHFA’s accounting group meet frequently with our senior financial executives regarding our accounting policies, practices and procedures.
In view of our mitigating actions related to this material weakness, we believe that our condensed consolidated financial statements for 2Q 2018 have been prepared in conformity with GAAP.


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Exhibit Index


Exhibit Index
Exhibit
Description*
3.1


 
 
 
 
10.1
 
 
 
 
12.1
 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101.INS
XBRL Instance Document
 
 
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
 
 
101.CAL
XBRL Taxonomy Extension Calculation
 
 
 
 
101.LAB
XBRL Taxonomy Extension Labels
 
 
 
 
101.PRE
XBRL Taxonomy Extension Presentation
 
 
 
 
101.DEF
XBRL Taxonomy Extension Definition
 
 
* The SEC file numbers for the Registrant’s Registration Statement on Form 10, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K are 000-53330 and 001-34139.


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Signatures


Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Federal Home Loan Mortgage Corporation
 
 
By:
 
/s/ Donald H. Layton
 
 
Donald H. Layton
 
 
Chief Executive Officer
Date: July 31, 2018
 
By:
 
/s/ James G. Mackey
 
 
James G. Mackey
 
 
Executive Vice President — Chief Financial Officer
 
 
(Principal Financial Officer)
Date: July 31, 2018
 



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Index



Form 10-Q Index
Item Number
 
Page(s)
PART I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements
80 - 156
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
1 - 79
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
60 - 64
Item 4.
Controls and Procedures
160 - 161
PART II
OTHER INFORMATION
 
Item 1.
Legal Proceedings
Item 1A
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
157 - 159
Item 6.
Exhibits
Exhibit Index
 
Signatures
 


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