Freddie Mac : Third Quarter 10-Q, 10/30/19

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from

to

Commission File Number: 001-34139

Federal Home Loan Mortgage Corporation

Federally chartered

corporation

(State or other jurisdiction of incorporation or organization)

(Exact name of registrant as specified in its charter)
52-0904874	8200 Jones Branch Drive	22102-3110	[phone]
McLean,	Virginia
(I.R.S. Employer	(Address of principal executive offices)	(Zip Code)	(Registrant's telephone number,
Identification No.)		including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

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.

Yes

No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

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	Accelerated filer
Non-accelerated filer	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

As of October 15, 2019, there were 650,059,033 shares of the registrant's common stock outstanding.

Table of Contents

Table of Contents

	Page
MANAGEMENT'S DISCUSSION AND ANALYSIS OF	1
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction	1
Market Conditions and Economic Indicators	4
Consolidated Results of Operations	6
Consolidated Balance Sheets Analysis	12
Our Business Segments	13
Risk Management	37
Liquidity and Capital Resources	42
Off-Balance Sheet Arrangements	48
Conservatorship and Related Matters	49
Regulation and Supervision	51
Forward-Looking Statements	53
FINANCIAL STATEMENTS	55
OTHER INFORMATION	124
CONTROLS AND PROCEDURES	126
EXHIBIT INDEX	128
SIGNATURES	129
FORM 10-Q INDEX	130

Freddie Mac Form 10-Q

i

Table of Contents

MD&A TABLE INDEX

Table	Description	Page
1	Summary of Consolidated Statements of Comprehensive Income (Loss)	6
2	Components of Net Interest Income	7
3	Analysis of Net Interest Yield	8
4	Components of Mortgage Loans Gains (Losses)	10
5	Components of Debt Gains (Losses)	10
6	Components of Derivative Gains (Losses)	10
7	Summarized Consolidated Balance Sheets	12
8	Single-Family Credit Guarantee Portfolio CRT Issuance	18
9	Details of Credit Enhanced Loans in Our Single-Family Credit Guarantee Portfolio	19
10	Single-Family Credit Guarantee Portfolio Attribute Combinations for Higher Risk Loans	21
11	Alt-A Loans in Our Single-Family Credit Guarantee Portfolio	22
12	Single-Family Credit Guarantee Portfolio Credit Performance Metrics	23
13	Single-Family Individually Impaired Loans with an Allowance Recorded	23
14	Single-Family TDR and Non-Accrual Loans	23
15	Single-Family REO Activity	24
16	Single-Family Guarantee Segment Financial Results	25
17	Multifamily Market Support	27
18	Multifamily Segment Financial Results	33
19	Capital Markets Segment Financial Results	36
20	Capital Markets Segment Interest Rate-Related and Market Spread-Related Fair Value Changes, Net of Tax	36
21	PVS-YC and PVS-L Results Assuming Shifts of the LIBOR Yield Curve	37
22	Duration Gap and PVS Results	38
23	PVS-L Results Before Derivatives and After Derivatives	38
24	PVS-L Average, Minimum, and Maximum	38
25	GAAP Adverse Scenario Before and After Hedge Accounting	39
26	GAAP Adverse Scenario Average, Minimum, and Maximum	39
27	Estimated Net Interest Rate Effect on Comprehensive Income (Loss)	40
28	Estimated Spread Effect on Comprehensive Income (Loss)	41
29	Sources of Liquidity	42
30	Other Investments Portfolio	42
31	Sources of Funding	43
32	Other Debt Activity	44
33	Activity for Debt Securities of Consolidated Trusts Held by Third Parties	46
34	Net Worth Activity	46
35	Return on Conservatorship Capital	47
36	Mortgage-Related Investments Portfolio Details	49
37	2018 Affordable Housing Goal Results	52

Freddie Mac Form 10-Q

ii

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-LookingStatements section of this Form 10-Q, the Risk Factors section of our Form 10-Q for the quarter ended June 30, 2019 and the Business, Forward-LookingStatements, and Risk Factors sections of our Annual Report on Form 10-K for the year ended December 31, 2018, or 2018 Annual Report.

Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the Glossary of our 2018 Annual Report.

You should read the following MD&A in conjunction with our 2018 Annual Report and our condensed consolidated financial statements and accompanying notes for the three and nine months ended September 30, 2019 included in Financial Statements. Throughout this Form 10-Q, we refer to the three months ended September 30, 2019, the three months ended June 30, 2019, the three months ended March 31, 2019, the three months ended December 31, 2018, the three months ended September 30, 2018, the three months ended June 30, 2018, the three months ended March 31, 2018, and the three months ended December 31, 2017 as "3Q 2019," "2Q 2019," "1Q 2019," "4Q 2018," "3Q 2018," "2Q 2018," "1Q 2018," and "4Q 2017," respectively. We refer to the nine months ended September 30, 2019 and the nine months ended September 30, 2018 as "YTD 2019" and "YTD 2018," 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. In addition, we transfer mortgage credit risk exposure to private investors through our credit risk transfer programs, which include securities- and insurance-based offerings. 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.

Business Results

Consolidated Financial Results(1)

1. Net revenues consist of net interest income, guarantee fee income, and other income (loss).

Freddie Mac Form 10-Q

1

Management's Discussion and Analysis

Introduction

Comprehensive income for 3Q 2019 was $1.8 billion, demonstrating strong business performance in a challenging interest rate environment. Net revenues declined $0.8 billion, or 21%, from 3Q 2018 largely due to lower net interest income. Market-related losses were $0.3 billion in 3Q 2019, primarily due to the decline in long-term interest rates.

Our total equity, which is also our Net Worth Amount under the Purchase Agreement with Treasury, was $6.7 billion at September 30, 2019. On September 27, 2019, the Conservator, acting on our behalf, entered into a Letter Agreement with Treasury (the September 2019 Letter Agreement), increasing the applicable Capital Reserve Amount used in calculating our dividend requirement to Treasury from $3.0 billion to $20.0 billion. As a result of this increase in our Capital Reserve Amount, we were not required to pay a dividend on the senior preferred stock to Treasury on September 30, 2019 based on our Net Worth Amount of $4.8 billion as of June 30, 2019, and we will not have a dividend requirement to Treasury in December 2019 based on our Net Worth Amount of $6.7 billion as of September 30, 2019.

The September 2019 Letter Agreement also provides that the liquidation preference of the senior preferred stock will be increased, at the end of each fiscal quarter, beginning on September 30, 2019, by an amount equal to the increase in the Net Worth Amount, if any, during the immediately prior fiscal quarter, until the liquidation preference has increased by $17.0 billion. As a result, the liquidation preference of the senior preferred stock increased from $75.6 billion to $77.5 billion on September 30, 2019 based on the $1.8 billion increase in our Net Worth Amount during 2Q 2019, and will increase to $79.3 billion on December 31, 2019 based on the $1.8 billion increase in our Net Worth Amount during 3Q 2019. See Note 2 for more information about our Purchase Agreement with Treasury.

The amount of available funding remaining under the Purchase Agreement is $140.2 billion and will be reduced by any future draws.

Portfolio Balances

Guarantee Portfolio

Investments Portfolio

Total Guarantee Portfolio

Our total guarantee portfolio grew $120 billion, or 6%, from September 30, 2018 to September 30, 2019, driven by a 5% increase in our single-family credit guarantee portfolio and a 15% increase in our multifamily guarantee portfolio.

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 and our overall share of the single-family

Freddie Mac Form 10-Q

2