Edgar Filing: FEDERAL HOME LOAN MORTGAGE CORP

Federally chartered corporation

8200 Jones Branch Drive

(703) 903-2000

(State or other jurisdiction of incorporation or organization)

McLean, Virginia 22102-3110

(I.R.S. Employer Identification No.)

(Registrant’s telephone number, including area code)

(Address of principal executive offices, including zip code)

(I.R.S. Employer Identification No.)

2014 Q1-10Q

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 March 31, 2014



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

For the transition period from to

Commission File Number: 001-34139

Federal Home Loan Mortgage Corporation

(Exact name of registrant as specified in its charter)

Freddie Mac

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



	Large accelerated filer ý				Accelerated filer ¨
	Non-accelerated filer (Do not check if a smaller reporting company) ¨				Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

As of April 24, 2014, there were 650,040,391 shares of the registrant’s common stock outstanding.

Table of Contents

TABLE OF CONTENTS



	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements	92
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	1
Executive Summary	1
Selected Financial Data	11
Consolidated Results of Operations	12
Consolidated Balance Sheets Analysis	28
Risk Management	44
Liquidity and Capital Resources	79
Fair Value Balance Sheets and Analysis	83
Off-Balance Sheet Arrangements	85
Critical Accounting Policies and Estimates	86
Forward-Looking Statements	86
Risk Management and Disclosure Commitments	87
Legislative and Regulatory Matters	87
Item 3. Quantitative and Qualitative Disclosures About Market Risk	89
Item 4. Controls and Procedures	90
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	163
Item 1A. Risk Factors	163
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	163
Item 6. Exhibits	163
SIGNATURES	164
GLOSSARY	165
EXHIBIT INDEX	E-1



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MD&A TABLE REFERENCE



Table	Description	Page
1	Total Single-Family Loan Workout Volumes	3
2	Mortgage-Related Investments Portfolio	10
3	Selected Financial Data	11
4	Summary Consolidated Statements of Comprehensive Income	12
5	Net Interest Income/Yield and Average Balance Analysis	13
6	Derivative Gains (Losses)	15
7	Other Income (Loss)	16
8	Non-Interest Expense	17
9	REO Operations (Income) Expense	17
10	Composition of Segment Mortgage Portfolios and Credit Risk Portfolios	19
11	Segment Earnings and Key Metrics — Single-Family Guarantee	20
12	Segment Earnings Composition — Single-Family Guarantee Segment	22
13	Segment Earnings and Key Metrics — Investments	25
14	Segment Earnings and Key Metrics — Multifamily	27
15	Investments in Securities	29
16	Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets	30
17	Additional Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets	31
18	Mortgage-Related Securities Purchase Activity	31
19	Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, and Alt-A Loans and Certain Related Credit Statistics	33
20	Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans	34
21	Net Impairment of Available-For-Sale Mortgage-Related Securities Recognized in Earnings	35
22	Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS	37
23	Mortgage Loan Purchases and Other Guarantee Commitment Issuances	39
24	Derivative Fair Values and Maturities	40
25	Freddie Mac Mortgage-Related Securities	42
26	Issuances and Extinguishments of Debt Securities of Consolidated Trusts	43
27	Changes in Total Equity	43
28	Single-Family Credit Guarantee Portfolio Data by Year of Origination	45
29	Characteristics of Purchases for the Single-Family Credit Guarantee Portfolio	46
30	Characteristics of the Single-Family Credit Guarantee Portfolio	47
31	Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio	51
32	Single-Family Loan Workout, Serious Delinquency, and Foreclosure Volumes	54
33	Quarterly Percentages of Modified Single-Family Loans — Current and Performing	55
34	Single-Family Relief Refinance Loans	56
35	Single-Family Serious Delinquency Statistics	58
36	Credit Concentrations in the Single-Family Credit Guarantee Portfolio	60
37	Single-Family Credit Guarantee Portfolio by Attribute Combinations	62
38	Single-Family Credit Guarantee Portfolio Foreclosure and Short Sale Rates	64
39	Multifamily Mortgage Portfolio — by Attribute	65
40	TDRs and Non-Accrual Mortgage Loans	67
41	REO Activity by Region	68
42	Single-Family REO Property Status	69
43	Credit Loss Performance	70
44	Severity Ratios for Single-Family Loans	71
45	Single-Family Impaired Loans with Specific Reserve Recorded	72
46	Single-Family Credit Loss Sensitivity	73



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47	Mortgage Insurance by Counterparty	75
48	Bond Insurance by Counterparty	76
49	Derivative Counterparty Credit Exposure	78
50	Activity in Other Debt	81
51	Freddie Mac Credit Ratings	81
52	Consolidated Fair Value Balance Sheets	84
53	Summary of Change in the Fair Value of Net Assets	85
54	PMVS and Duration Gap Results	90
55	Derivative Impact on PMVS-L (50 bps)	90



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FINANCIAL STATEMENTS




	Page
Consolidated Statements of Comprehensive Income	93
Consolidated Balance Sheets	94
Consolidated Statements of Equity	95
Consolidated Statements of Cash Flows	96
Note 1: Summary of Significant Accounting Policies	97
Note 2: Conservatorship and Related Matters	98
Note 3: Variable Interest Entities	100
Note 4: Mortgage Loans and Loan Loss Reserves	102
Note 5: Impaired Loans	106
Note 6: Real Estate Owned	112
Note 7: Investments in Securities	112
Note 8: Debt Securities and Subordinated Borrowings	118
Note 9: Derivatives	120
Note 10: Collateral and Offsetting of Assets and Liabilities	123
Note 11: Stockholders’ Equity	126
Note 12: Income Taxes	128
Note 13: Segment Reporting	128
Note 14: Financial Guarantees	132
Note 15: Concentration of Credit and Other Risks	133
Note 16: Fair Value Disclosures	139
Note 17: Legal Contingencies	157
Note 18: Regulatory Capital	161
Note 19: Selected Financial Statement Line Items	162



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PART I — FINANCIAL INFORMATION

We continue to operate under the conservatorship that commenced on September 6, 2008, under the direction of FHFA as our Conservator. The Conservator succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any shareholder, officer or director thereof, with respect to the company and its assets. The Conservator has delegated certain authority to our Board of Directors to oversee, and management to conduct, business operations so that the company can continue to operate in the ordinary course. The directors serve on behalf of, and exercise authority as directed by, the Conservator. See “BUSINESS — Conservatorship and Related Matters” in our Annual Report on Form 10-K for the year ended December 31, 2013, or 2013 Annual Report, for information on the terms of the conservatorship, the powers of the Conservator, and related matters, including the terms of our Purchase Agreement with Treasury.

This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-Q and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in: (a) the “FORWARD-LOOKING STATEMENTS” sections of this Form 10-Q and our 2013 Annual Report; and (b) the “RISK FACTORS” and “BUSINESS” sections of our 2013 Annual Report.

Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the “GLOSSARY.”

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read this MD&A in conjunction with our consolidated financial statements and related notes for the three months ended March 31, 2014 included in “FINANCIAL STATEMENTS” and our 2013 Annual Report.

EXECUTIVE SUMMARY

Overview

Freddie Mac is a GSE chartered by Congress in 1970 with a public mission to provide liquidity, stability, and affordability to the U.S. housing market. We have maintained a consistent market presence since our inception, providing essential mortgage liquidity in a wide range of economic environments. We are working to support the continued recovery of the housing market and the nation’s economy by: (a) providing America’s families with access to mortgage funding at low rates while helping distressed borrowers keep their homes and avoid foreclosure, where possible; and (b) providing consistent liquidity to the multifamily mortgage market, which includes providing financing for affordable rental housing. At the same time, we are working with FHFA, our customers and the industry to build a stronger housing finance system for the nation.

Conservatorship and Government Support for Our Business

We continue to operate in conservatorship that began in September 2008, under the direction of FHFA, as our Conservator. The conservatorship and related matters continue to have a wide-ranging impact on us, including our management, business, financial condition, and results of operations. There is significant uncertainty as to our future, as conservatorship has no specified termination date, and it is unknown what changes may occur to our business model during or following conservatorship, including whether we will continue to exist.

We are also subject to certain constraints on our business activities imposed by Treasury due to the terms of, and Treasury’s rights under, the Purchase Agreement. We are dependent upon the continued support of Treasury and FHFA in order to continue operating our business. We cannot over the long term build and retain capital from the earnings generated by our business operations, or return capital to stockholders other than Treasury.

For more information on the conservatorship and government support for our business, including the Purchase Agreement, see “BUSINESS — Conservatorship and Related Matters” and “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS" in our 2013 Annual Report.

Consolidated Financial Results

During the first quarter of 2014, home price growth moderated compared to early periods of 2013. Comprehensive income was $4.5 billion for the first quarter of 2014 compared to $7.0 billion for the first quarter of 2013. Comprehensive income for the first quarter of 2014 consisted of $4.0 billion of net income and $0.5 billion of other comprehensive income. Our results for the first quarter of 2014 include: (a) pre-tax income of $4.5 billion primarily related to settlements of lawsuits regarding our investments in certain residential non-agency mortgage-related securities; partially offset by (b) declines in the fair value of our derivatives due to the decrease in longer-term interest rates. Our total equity was $6.9 billion at March 31, 2014. As a result of our positive net worth at March 31, 2014, no draw is being requested from Treasury under the Purchase Agreement for the first quarter of 2014. Through March 31, 2014, we have paid aggregate cash dividends to Treasury that exceed our aggregate draws received under the Purchase Agreement by $10.4 billion. At March 31, 2014, our aggregate funding received from Treasury under the Purchase Agreement was $71.3 billion.



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Sustainability of Earnings

The level of earnings we have experienced in recent periods is not sustainable over the long term. Our recent financial results, particularly the level of loan loss provisioning, has benefited significantly from strong home price appreciation, which is beginning to moderate. Our 2013 financial results also included a significant benefit related to the release of the deferred tax asset valuation allowance. Additionally, our 2013 and 2014 financial results included settlements of both residential non-agency mortgage-related securities litigation and representation and warranty claims. Our settlements of representation and warranty claims related to pre-conservatorship loan originations are largely complete while residential non-agency mortgage-related securities litigation is ongoing and additional settlements are expected in the remainder of 2014. In addition, declines in the size of our mortgage-related investments portfolio, as required by FHFA and the Purchase Agreement with Treasury, will reduce earnings over time. Our financial results will also continue to be affected by changes in interest rates, yield curves, and mortgage spreads, which can cause significant earnings and net worth variability from period to period.

Our Primary Business Objectives

We are focused on the following primary business objectives: (a) reducing taxpayer exposure to losses by reducing and managing our overall risk profile, especially to mortgage-related risks; (b) supporting U.S. homeowners and renters by providing lenders with a constant source of liquidity for mortgage products even when other sources of financing are scarce; (c) building a commercially strong and efficient business enterprise; and (d) positioning the company, in particular our people and infrastructure, to succeed in a to-be-determined “future state.”

Reducing Taxpayer Exposure to Losses by Reducing and Managing Our Overall Risk Profile, Especially to Mortgage-Related Risks

We continue to actively manage and reduce the high credit risk related to our 2005-2008 Legacy single-family book by: (a) providing homeowners with alternatives that allow them to stay in their homes; (b) maximizing the proceeds from short sales and REO sales; (c) actively managing our servicers; (d) pursuing our rights with our sellers; (e) enforcing our rights with other counterparties; and (f) reducing our mortgage-related investments portfolio over time. The 2005-2008 Legacy single-family book represented 15% of our single-family credit guarantee portfolio at March 31, 2014, but comprised 77% of our credit losses in the first quarter of 2014 compared to 81% in the full-year of 2013.

Providing Homeowners with Alternatives that Allow Them to Stay in Their Homes

We establish guidelines for our servicers to follow and provide them default management programs to use, in part, in determining which type of loan workout would be expected to provide us with an opportunity to manage our exposure to credit losses. Our servicers pursue repayment plans and loan modifications for borrowers facing financial or other hardships because the level of recovery on a reperforming loan may often be much higher than would be the case with a foreclosure or a foreclosure alternative. Since 2009, we have helped approximately 987,000 borrowers experiencing hardship complete a loan workout. Under our loan workout programs, our servicers contact borrowers experiencing hardship with a goal of helping them stay in their homes or avoid foreclosure. Across all of our modification programs, we modified $3.8 billion and $4.5 billion in UPB of loans in the first quarters of 2014 and 2013, respectively. Our servicers seek and also facilitate the completion of foreclosure alternatives when a home retention solution is not possible.

Beginning in 2009, we introduced a variety of borrower-assistance programs, including HAMP, to help keep families in their homes. Our relief refinance initiative, including HARP (which is the portion of our relief refinance initiative for loans with LTV ratios above 80%), is another key program used by our seller/servicers to help keep families in their homes. In the first quarters of 2014 and 2013, we purchased or guaranteed $9.1 billion and $32.9 billion in UPB of relief refinance loans, respectively, which included $5.2 billion and $21.5 billion in UPB of HARP loans, respectively. We have purchased HARP loans provided to nearly 1.3 million borrowers since the initiative began in 2009, including approximately 30,000 borrowers during the first quarter of 2014. See “Table 34 — Single-Family Relief Refinance Loans” for more information about the volume of our relief refinance purchases.

As of March 31, 2014, the borrower’s monthly payment for all of our completed HAMP modifications was reduced on average by an estimated $530, which amounts to an average of $6,360 per year, and a total of $1.5 billion in annual reductions (these amounts are calculated by multiplying the number of completed modifications by the average reduction in monthly payment, and have not been adjusted to reflect the actual performance of the loans following modification).



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The table below presents our single-family loan workout activities for the last five quarterly periods.

Table 1 — Total Single-Family Loan Workout Volumes⁽¹⁾

(1)

Based on workouts completed with borrowers for loans within our single-family credit guarantee portfolio. Excludes those modification, repayment, and forbearance activities for which the borrower has started the required process, but the actions have not been made permanent or effective, such as loans in modification trial periods. Also excludes certain loan workouts where our single-family seller/servicers have executed agreements in the current or prior periods, but these have not been incorporated into certain of our operational systems due to delays in processing. These categories are not mutually exclusive and a loan in one category may also be included within another category in the same period.


(2)	As of March 31, 2014, approximately 22,000 borrowers were in modification trial periods, including approximately 18,000 borrowers in trial periods for our non-HAMP modification.


(3)	Excludes loans with long-term forbearance under a completed loan modification. Many borrowers enter into a short-term forbearance agreement before another loan workout is pursued or completed. We only report forbearance activity for a single loan once during each quarterly period within the year; however, a single loan may be included under separate forbearance agreements in separate periods.

While we believe our home retention programs have been largely successful, many borrowers still need our assistance. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk” for more information about loss mitigation activities and our efforts to keep families in their homes, including through our loan modification initiatives and our relief refinance mortgage initiative.

Maximizing the Proceeds from Short Sales and REO Sales

In cases where repayment plans and loan modifications are not possible or successful, a short sale transaction typically provides us with a comparable or higher level of recovery than a foreclosure and subsequent property sale from our REO inventory. In large part, the benefit of a short sale is that we avoid costs we would otherwise incur to complete the foreclosure and dispose of the property, including maintenance, property taxes, and other expenses associated with holding REO property.

We believe our REO disposition and short sale severity ratios in the first quarter of 2014 were positively affected by changes made in 2012 to our process for evaluating the market value of impaired loan collateral and determining the list price for our REO properties when we offer them for sale.

Actively Managing our Servicers

We continue to face challenges with respect to the performance of certain of our single-family servicers in managing our seriously delinquent loans. Our servicers represent and warrant to us that loans serviced on our behalf will be serviced in accordance with our servicing contract. These contractual obligations provide us with remedies for breaches in servicing. These contractual remedies include the ability to require the servicer to pay compensatory or other fees, repurchase the loan at its current UPB, and/or reimburse us for losses realized. Beginning in 2013, we increased our review of servicing related violations, which included issuing notices of defect to our servicers for certain violations of our servicing standards. As of March 31, 2014, we had: (a) $0.4 billion of outstanding repurchase requests; and (b) $0.4 billion of outstanding notices of



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defect, with our servicers, based on the UPB of the related loans. We also recognized $131 million of compensatory fees in the first quarter of 2014 primarily for servicer failures to complete a foreclosure within our timelines.

We continue to have a large population of seriously delinquent loans, many of which have been delinquent for more than one year; these loans tend to be more challenging to resolve. As of March 31, 2014, our serious delinquency rate for the aggregate of those states that require a judicial foreclosure and all other states was 3.07% and 1.49%, respectively. Foreclosures generally take longer to complete in states where judicial foreclosures are required, compared to other states. In the first quarter of 2014, the average time to foreclose on properties in states that require a judicial foreclosure was 1,033 days compared to 637 days in all other states for loans in our single-family credit guarantee portfolio, excluding those underlying our Other Guarantee Transactions. These averages are based on the loans completing foreclosure during the period.

As part of our efforts to maximize foreclosure alternatives, increase problem loan workouts, and mitigate our credit losses, we have continued to facilitate the transfer of servicing for certain pools of loans with higher credit risk from underperforming servicers to other servicers that specialize in workouts of problem loans. In the first quarter of 2014, we facilitated the transfer of servicing for $7.1 billion in UPB of loans from our primary servicers to specialty servicers.

Pursuing Our Rights with Our Sellers

We have contractual arrangements with our sellers under which they agree to sell us mortgage loans, and represent and warrant that those loans have been originated under specified underwriting standards. If we subsequently discover that the representations and warranties were breached (i.e., that contractual standards were not followed), we can exercise certain contractual remedies to mitigate our actual or potential credit losses. These remedies include the ability to require the seller to repurchase the loan at its current UPB and/or reimburse us for losses realized. Our exposure to single-family mortgage seller/servicers has been high in recent years with respect to their repurchase obligations arising from breaches of representations and warranties made to us for loans they underwrote and sold to us. In 2013, we substantially achieved the goal set for us (in the 2013 Conservatorship Scorecard) to complete our requests for remedies for breaches of seller representations and warranties related to pre-conservatorship loan activity.

We continue to recover credit losses from seller/servicers in the normal course of business related to breaches of representations and warranties for loans they sold to us or service for us. In the first quarter of 2014, we recovered amounts from seller/servicers with respect to $1.0 billion in UPB of loans subject to our repurchase requests, including $0.4 billion in UPB related to settlement agreements. Approximately 17% of the $1.0 billion in UPB associated with repurchase requests in the first quarter of 2014 were satisfied by the reimbursement of losses (excluding amounts related to settlement agreements). As of March 31, 2014 and December 31, 2013, we had $0.8 billion and $1.6 billion, respectively, of outstanding repurchase requests with sellers, based on UPB of the loans.

Enforcing Our Rights with Other Counterparties

We continue to pursue claims for coverage under mortgage insurance policies. We also continue to actively pursue settlements with mortgage insurance counterparties. We use mortgage insurance, which is a form of credit enhancement, to mitigate our credit loss exposure. Primary mortgage insurance is generally required to be purchased at loan origination, typically at the borrower’s expense, for certain mortgages with LTV ratios greater than 80%, from an insurer that is typically selected by the lender.

We received payments under primary and other mortgage insurance of $0.4 billion during both the first quarter of 2014 and the first quarter of 2013. Although the financial condition of certain of our mortgage insurers has improved in recent periods, there is still significant risk that some of these counterparties may fail to fully meet their obligations. We expect to receive substantially less than full payment of our claims from three of our seven larger mortgage insurance counterparties, as they are only permitted to partially pay claims under orders of their regulators.

Our ability to manage our exposure to mortgage insurers is limited as: (a) certain of our mortgage insurers are operating below our eligibility thresholds; and (b) our ability to revoke a mortgage insurer's status as an eligible insurer requires FHFA approval under certain circumstances. We consider the collectability of our claims against our mortgage insurers when determining the carrying amount of our receivables and estimating our loan loss reserves on our consolidated balance sheets.

We are working with FHFA and Fannie Mae to improve mortgage insurance standards. We are developing counterparty risk management standards for mortgage insurers that include revised eligibility requirements. In December 2013, FHFA announced that we and Fannie Mae, in collaboration with our mortgage insurers, had completed development of new master policies, for which the mortgage insurers are expected to seek state regulatory approval. These changes to the master policies are intended to provide greater certainty of coverage, facilitate timely claims processing, and help address the significant problems we faced in recent years in resolving repurchase requests related to mortgage insurance rescission. We expect to implement the new master policies and eligibility standards (including capital requirements) for mortgage insurers during 2014.

At the direction of our Conservator, we are also working to enforce our rights as an investor with respect to the non-agency mortgage-related securities we hold, and are engaged in various efforts, in some cases in conjunction with other investors, to mitigate or recover losses on our investments in these securities. In the first quarter of 2014, we and FHFA reached settlements with a number of institutions pursuant to which we received an aggregate of $4.5 billion. In April 2014, we and



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FHFA entered into agreements with two other institutions to settle FHFA-led litigation related to certain residential non-agency mortgage-related securities we hold. Under these agreements, we will be paid $275 million, which will be reflected in our consolidated financial results for the second quarter of 2014. Lawsuits against a number of large institutions are currently pending. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS” for more information about our recent agreements with non-agency mortgage-related security issuers.

We have also worked to enforce our rights in the Lehman bankruptcy. In February 2014, we reached a settlement with Lehman Brothers Holdings Inc. pursuant to which we received $767 million to resolve our claims related to Lehman’s bankruptcy. The majority of this settlement amount was reflected as an adjustment to our December 31, 2013 estimate of the expected recoveries of our short-term lending receivable. The remaining portion of this settlement related to claims for repurchase requests associated with loans sold to us by Lehman and is included in our results for the first quarter of 2014. For more information, see “NOTE 17: LEGAL CONTINGENCIES."

Reducing Our Mortgage-Related Investments Portfolio Over Time

During the first quarter of 2014, the size of our mortgage-related investments portfolio declined by 6% (or 23% on an annualized basis), or $26.6 billion, to $434.4 billion at March 31, 2014 compared to December 31, 2013. Our less liquid assets (i.e., assets less liquid than agency securities) accounted for $13.1 billion of this decline primarily due to liquidations and $2.4 billion of sales (excluding sales of: (a) multifamily held-for-sale loans; and (b) single-family loans purchased for cash). We plan to continue reducing the balance of our less liquid assets, although we continue to purchase certain of these assets as part of our business strategies (e.g., removal of seriously delinquent loans from PC pools).

Supporting U.S. Homeowners and Renters by Providing Lenders with a Constant Source of Liquidity for Mortgage Products even when Other Sources of Financing are Scarce

We maintain a consistent market presence by providing lenders with a constant source of liquidity for mortgage products even when other sources of financing are scarce. This liquidity provides our customers with confidence to continue lending even in difficult environments. In the first quarters of 2014 and 2013, we purchased or issued other guarantee commitments for $49.2 billion and $131.9 billion in UPB of single-family conforming mortgage loans, respectively, representing approximately 244,000 and 636,000 homes, respectively. Origination volumes in the U.S. residential mortgage market declined significantly during the first quarter of 2014, as compared to the first quarter of 2013, driven by a significant decline in the volume of refinance mortgages. We attribute this decline to higher mortgage interest rates in the 2014 period than in the 2013 period. We estimate that we, Fannie Mae, and Ginnie Mae collectively guaranteed approximately 90% of the single-family conforming mortgages originated in the first quarter of 2014. During the first quarter of 2014, our multifamily new business activity totaled $3.0 billion, and provided financing for 239 properties amounting to approximately 51,000 apartment units. More than 90% of these units were affordable to families earning at or below the median income in their area.

Building a Commercially Strong and Efficient Business Enterprise

Single-Family Guarantee Segment Strategies

Our single-family business is our core business line. We continue to take steps to build a stronger, profitable business model for our ongoing business. Our goal is to strengthen the business model in order to run the business efficiently and effectively in support of homeowners and taxpayers and, if required as part of a future state for the enterprise, to be able to promptly return to private sector ownership.

Our Single-family Guarantee segment is focused on strengthening our business model by:

•

Leveraging the fundamentals: We are leveraging our existing product offerings to better meet the needs of an evolving mortgage market. This includes working to reduce repurchase requests and penalties, in the form of fees, by providing greater certainty for seller/servicers that the loans they sell to us or service for us meet our requirements. We are doing this by enhancing the tools we make available to our customers (including Loan Prospector, Loan Quality Advisor, and Home Value Estimator), and expanding and leveraging the data standards of the Uniform Mortgage Data Program. We intend to continue to simplify, streamline, and strengthen our operations, while keeping pace with regulatory requirements, such as those implemented under the Dodd-Frank Act.


•	Better serving our customers: Our customers are our sellers, servicers, and investor/dealers. Based on feedback we have received directly from our customers through our Customer Advisory Boards, surveys, and ongoing conversations, we are enhancing our processes and programs to improve our customers’ experience when doing business with us.

•

Managing the credit risk of the single-family credit guarantee portfolio: We are managing our credit risk by setting our underwriting standards at a level commensurate with the long-term credit risk appetite of the company. We use a process of delegated underwriting for the single-family mortgages we purchase or securitize. In this process, our contracts with seller/servicers describe mortgage eligibility and underwriting standards, and the seller/servicers represent and warrant to us that the mortgages sold to us meet these standards. Beginning in 2009, we have made various changes to our credit policies, including changes to improve our underwriting standards, purchased fewer loans with higher risk characteristics, and assisted in improving our mortgage insurers’ and lenders’ underwriting



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practices. As a result, the credit quality of the New single-family book is significantly better than that of the 2005-2008 Legacy single-family book, as measured by original LTV ratios, FICO scores, and the proportion of loans underwritten with full documentation, as well as delinquency rates and credit losses. However, in recent periods, as refinancing volumes have declined, the composition of our loan purchase activity has been shifting to a higher proportion of purchase-type loans and our sellers have sold us this type of loan with generally higher original LTV ratios and lower credit scores, in aggregate, than the purchase-type loans sold to us during 2010 through 2012.

•

Transferring the credit risk of the single-family credit guarantee portfolio: We consider risk transfer transactions to be a prudent way to manage risk in our business. In addition to three transactions completed in 2013, we executed one transaction during the first quarter of 2014 that transferred a mezzanine credit loss position on certain groups of loans in the New single-family book. These transactions shift mortgage credit risk from us to private investors. While these transactions have been relatively small compared to our overall mortgage credit risk exposure, we believe they have attracted broad interest in the market. We will continue to seek to expand and refine our offerings of credit risk transfer transactions in the future.

•

Optimizing the economics of the single-family credit guarantee portfolio: We strive to achieve the highest economic returns on our portfolio while considering and balancing our: (a) customer diversification; (b) housing mission and goals; and (c) customers' liquidity needs. We also align our mortgage-related securities offerings and disclosures with customer needs and investor demand to balance the achievement of the above objectives while considering the relative performance of our securities in the market.

Investments Segment Strategies

Our Investments segment is a key business operation, which has certain objectives in 2014, including:


•	Maintaining a presence in the agency mortgage-related securities market. Our activities in this market may include outright purchases and sales, dollar roll transactions, and structuring activities (e.g., resecuritizing existing agency securities into REMICs) and selling some or all of the tranches.

•

Maintaining a portfolio of liquid securities consistent with our liquidity management guidelines. In managing the reduction of our mortgage-related investments, we evaluate the liquidity of these investments based on two categories: (a) single-class and multiclass agency securities; and (b) assets that are less liquid than agency securities. We are focusing our efforts on reducing the balance of less liquid assets in the mortgage-related investments portfolio. Our liquid assets collectively represented approximately 39% of UPB of the portfolio at March 31, 2014, compared to 40% at December 31, 2013.


•	Managing the single-family performing loans obtained through our cash purchase program. We purchase loans from lenders for cash and, in conjunction with the single-family business, securitize the majority of these loans into Freddie Mac agency securities that may be sold to dealers or investors, or retained in our mortgage investments portfolio as agency securities.


•	Managing single-family re-performing loans and performing modified loans. This includes securitizing loans, and could include selling loans or other disposition strategies in the future.


•	Managing single-family delinquent loans along with the single-family business. This includes removing seriously delinquent loans from PC pools and could include selling loans, securitizing loans, or other disposition strategies in the future.


•	Reducing the overall balance of our holdings of non-agency mortgage-related securities through liquidations and sales, subject to a variety of constraints, including market conditions.


•	Managing the treasury function, including funding and liquidity, for the overall company, through the issuance of short-term and long-term unsecured debt. We maintain a liquidity and contingency portfolio of cash and non-mortgage investments for short-term liquidity management.


•	Managing the interest-rate risk for the overall company through the use of derivatives and unsecured debt.

Multifamily Segment Strategies

Our Multifamily business is also a key business operation focusing on financing multifamily rental housing. We provide financing for affordable housing for renters nationwide and are a consistent source of liquidity to the multifamily mortgage market. We maintain a strong credit and capital management discipline while seeking to generate positive Segment Earnings comprehensive income. We accomplish this primarily by focusing on our business model of purchasing, aggregating, and securitizing mortgage loans in order to transfer the expected credit risk associated with the loans to third-party investors. The Multifamily business model aligns with our objective that private investors absorb the first and predominant losses before any taxpayer exposure. We plan to continue to provide and support a consistent supply of affordable rental housing while reducing our exposure to credit risk through securitization. During the first quarter of 2014, we continued our K Certificate securitizations in the multifamily market with K Certificate transactions of $3.9 billion in UPB. In addition to our risk transfers



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though K Certificate transactions, we are seeking to introduce innovative ways to further expand our offerings in support of affordable rental housing while limiting our exposure to mortgage credit risk.

Positioning the Company, in Particular Our People and Infrastructure, to Succeed in a to-be-determined “future state”

Development of a New Secondary Mortgage Market

Under the direction of FHFA, we continue various efforts to build the infrastructure for a future housing finance system, including the following:


•	Common Securitization Platform: We continue to work with FHFA and Fannie Mae on the development of a future new common securitization platform. In October 2013, Common Securitization Solutions, LLC (which is equally owned by us and Fannie Mae) was formed to build and operate the platform.

•

Contractual and Disclosure Framework: FHFA directed us to work with Fannie Mae to implement a set of uniform contractual terms and standards for transparency that can inform the single-family mortgage securitization market in the future. During 2013, a team from Freddie Mac and Fannie Mae performed analysis and developed preliminary recommendations for: (a) fully-guaranteed (GSE) mortgage-related securities; (b) non- or partially guaranteed (GSE) mortgage-related securities; and (c) new master trust agreements for these types of securities.

•

Uniform Mortgage Data Program: We and Fannie Mae are collaborating with the industry to develop and implement uniform data standards for single-family mortgages. We have made significant progress by completing initial phases of this program, including: (a) standard appraisal data elements; (b) the Uniform Collateral Data Portal, which allows us to aggregate this data from sellers; (c) the Uniform Loan Delivery Dataset, which defines common data elements for each loan we acquire or guarantee; and (d) the Uniform Closing Dataset, to support the Consumer Financial Protection Bureau's (or CFPB) new mortgage closing disclosure form.

•

Lender placed insurance standards: As part of the servicing alignment initiative, we announced changes in our servicing standards for situations in which our servicers obtain property hazard insurance on properties securing single-family loans we own or guarantee. As a result, effective June 1, 2014, our seller/servicers may not receive compensation or other payment from insurance carriers nor may they use their own or affiliated entities to insure or reinsure a property.

In addition, we also worked to help our seller/servicers improve their underwriting processes for loans that they sell to us. As part of these efforts we made progress in the following areas during the first quarter of 2014:


•	Continued our initiative for enhanced early-risk assessment by seller/servicers through the use of Loan Quality Advisor, an automated tool for use in evaluating the credit eligibility of loans and identifying non-compliance issues;


•	Implemented requirements for our seller/servicers in response to certain final rules from the CFPB, including rules concerning the requirements for borrowers' ability to repay and high-cost mortgages. See “BUSINESS — Legislative and Regulatory Developments — Dodd-Frank Act” in our 2013 Annual Report for further information on the final rules;


•	Adhered to recently implemented standard timelines, appeal requirements, and alternative remedies for resolution of repurchase obligations as part of our efforts to enhance post-delivery quality control practices and transparency associated with our new representation and warranty framework; and


•	Continued to execute our loan review sampling strategy, specifically focusing on newly purchased mortgage loans, to evaluate compliance with our standards.

Investing in Human, Technology and Other Resources

We continue to make strategic investments to maintain and improve our ability to operate the company for the foreseeable future in conservatorship and potentially afterwards. Our human capital risks have stabilized in recent periods, as increased levels of voluntary turnover experienced in 2011 have abated. The possibility remains that we may experience increased turnover again in the future as the Administration and Congress continue to debate our future business model.

Our information technology risk also continues to decline. For example, in 2013, we completed a three-year multimillion dollar project to move our key legacy applications and infrastructure to current, supported technology. We are investing each year to maintain our technology and are focused on standardizing and simplifying the technology portfolio. We continue to focus on emerging information security risks. We are reviewing our information technology architecture design with a focus on simplifying our information technology environment. We are also building our out-of-region disaster recovery capabilities.

Streamlining, Simplifying and Strengthening Operations

We continue to strengthen our operations. Beginning in mid-2012 and continuing in 2013 and 2014, we took steps to enhance management’s focus on control issues by elevating awareness of those issues across the company and stressing timely remediation. As a result, the number of outstanding control issues reached its lowest level since conservatorship. We also continue to work to improve our operating efficiency. In 2013, we began a multi-year project focused on simplifying our control structure and eliminating redundant control activities. We updated our risk and control framework to increase our



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emphasis on risk management and are conducting detailed operational controls design reviews to identify ways to simplify our controls structure.

Mortgage Market and Economic Conditions

Overview

The U.S. real gross domestic product rose by 0.1% on an annualized basis during the first quarter of 2014, compared to 2.6% in the fourth quarter of 2013 and 1.1% in the first quarter of 2013, according to the Bureau of Economic Analysis. The national unemployment rate was 6.7% in March 2014, the same as in December 2013, based on data from the U.S. Bureau of Labor Statistics. An average of approximately 190,000 monthly net new jobs (non-farm) were added to the economy during the first quarter of 2014, which shows evidence of a slow, but steady positive trend for the economy and the labor market. The average interest rate on new 30-year fixed-rate conforming mortgages largely held steady over the past two quarters, averaging 4.29% during the fourth quarter of 2013 and 4.36% during the first quarter of 2014, based on our weekly Primary Mortgage Market Survey. This compares with the first quarter of 2013, when the average rate on new 30-year fixed-rate conforming mortgages was 3.50%. Higher mortgage interest rates in recent periods, including the first quarter of 2014, contributed to a relatively low volume of single-family refinance mortgage activity in the market during the first quarter of 2014.

Single-Family Housing Market

Although home prices increased on a national basis in the first quarter of 2014 (based on our index), the single-family housing market continued to be affected by weakness in the employment market and a significant inventory of seriously delinquent loans and REO properties in the market.

Based on data from the National Association of Realtors, sales of existing homes in the first quarter of 2014 were 4.60 million (on a seasonally-adjusted annual basis), declining 7% from 4.94 million in the fourth quarter of 2013. Based on data from the U.S. Census Bureau and HUD, sales of new homes in the first quarter of 2014 were approximately 434,000 (on a seasonally-adjusted annual basis), declining 3% from approximately 446,000 in the fourth quarter of 2013. Home prices increased during the first quarter of 2014, with our nationwide index registering approximately a 1.2% increase from December 2013 through March 2014 and a 7.5% increase from March 2013 to March 2014. Despite these increases, our national home price index reflects a cumulative decline of 14.7% since June 2006. These estimates were based on our own price index of mortgage loans on one-family homes funded by us or Fannie Mae. Other indices of home prices may have different results, as they are determined using different pools of mortgage loans and calculated under different conventions than our own.

Multifamily Housing Market

The multifamily market continued to experience positive trends during the first quarter of 2014. The most recent preliminary data reported by Reis, Inc. indicated that the national apartment vacancy rate was 4.0% during the first quarter of 2014, representing the lowest level since 2001. In addition, Reis, Inc. reported that effective rents grew by 0.6% during the first quarter of 2014. Vacancy rates and effective rents are important to loan performance because multifamily loans are generally repaid from the cash flows generated by the underlying property and these factors significantly influence those cash flows. According to the latest information available from Moody's Analytics, Inc. and Real Capital Analytics, Inc., apartment prices continued to increase at the national level in the first quarter of 2014 and are now higher than the peak values observed in 2007. As a result, the multifamily sector continued to experience strong investor interest and continued to outperform most other commercial real estate sectors in the first quarter of 2014.

Outlook

Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates, and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties. For example, a number of factors could cause the actual performance of the housing and mortgage markets and the U.S. economy in the near term to be significantly worse than we expect, including adverse changes in national or international economic conditions and changes in the federal government’s fiscal or monetary policies. See “FORWARD-LOOKING STATEMENTS” for additional information.

Although national home prices have increased in recent periods, home prices at March 31, 2014 remained significantly below their peak levels in many geographical areas. Declines in the market’s inventory of vacant housing have supported stabilization and increases in home prices in a number of metropolitan areas. We believe that home prices will not continue at the same growth rate experienced in 2013, but will continue to gradually moderate during the remainder of 2014 and will return towards growth rates that are consistent with long-term historical averages (approximately 2 to 5 percent growth on an annual basis). To the extent a large volume of loans completes the foreclosure process in a short period, the resulting increase in the market’s inventory of homes for sale could have a negative effect on home prices.



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Single-Family

We continue to expect key macroeconomic drivers of the economy, such as income growth, employment, and inflation, will affect the performance of the housing and mortgage markets during the remainder of 2014. Since we expect that economic growth will continue and mortgage interest rates will remain relatively low compared to historical levels, but trend slowly upward during the remainder of 2014, we believe that housing affordability will remain relatively high in most metropolitan housing markets during the remainder of 2014 for potential home buyers. We expect that the volume of home sales in 2014 will likely remain at about the same level as in 2013. Important factors that we believe will continue to negatively affect single-family housing demand are the relatively high unemployment rate and relatively modest family income growth.

We expect the UPB of our single-family credit guarantee portfolio will be relatively unchanged at the end of 2014 compared to the end of 2013, as an expected decline in purchase volume is expected to be offset by a decline in prepayments. We expect 2014 mortgage origination volumes, including refinancings, to be at the lowest level since 2000. Our loan purchase activity in the first quarter of 2014 declined to $49.2 billion in UPB compared to $131.9 billion in UPB during the first quarter of 2013. Our expectation is for this trend to continue in the remainder of 2014 as refinancing volumes continue to decline. During the first quarter of 2014, refinancings, including HARP, comprised approximately 53% of our single-family purchase and issuance volume compared with 84% in the first quarter of 2013. We expect HARP activity to continue to decline during the remainder of 2014 since the pool of borrowers eligible to participate in the program has declined and mortgage interest rates moved higher in recent periods.

Our charge-offs declined significantly during the first quarter of 2014 compared to the first quarter of 2013. We expect our charge-offs and credit losses to continue to be lower than the level we experienced in 2013 but to remain elevated in the remainder of 2014 in part due to the substantial number of delinquent and underwater mortgage loans in our single-family credit guarantee portfolio that will likely be resolved. For the near term, we also expect:


•	REO disposition and short sale severity ratios to remain high. However, our recovery rates have been positively affected by recent improvements in home prices and home sales; and


•	The number of seriously delinquent loans and the volume of our loan workouts to continue to decline.

Our guarantee fee rate charged on new acquisitions is significantly higher than that of our Legacy single-family books as a result of two across-the-board increases in guarantee fees implemented in 2012. In December 2013, FHFA directed us to make additional changes to our management and guarantee fee rates in 2014. In January 2014, FHFA announced it was delaying the implementation of these changes. FHFA may direct us to implement further changes in our guarantee fees in the future.

Multifamily

We expect that, at the national level, new supply of multifamily housing will not significantly exceed market demand in the near term due to constraints, such as rising construction costs. We expect that demand growth, driven by a strengthening economy and positive demographics, will generally be sufficient for the increase in supply. However, there may be certain local markets where new supply may outpace demand, which would be evidenced by excess supply and rising vacancy rates. As multifamily market fundamentals improved in recent years, other market participants increased their activities in the multifamily market. As a result, we face increased competition and we believe that our portion of new business in the multifamily market will not increase during the full-year 2014 compared to the level in 2013.

As a result of the positive market fundamentals and continuing strong portfolio performance, we expect our credit losses and delinquency rates to remain low during the remainder of 2014. We believe the long-term outlook for the national multifamily market continues to be favorable as strong demand will support healthy cash flows for multifamily properties.

Limits on Investment Activity and Our Mortgage-Related Investments Portfolio

Our mortgage-related investments portfolio consists of agency securities, single-family non-agency mortgage-related securities, CMBS, housing revenue bonds, and single-family and multifamily unsecuritized mortgage loans. Our ability to acquire and sell mortgage assets is significantly constrained by limitations under the Purchase Agreement and those imposed by FHFA. Under the Purchase Agreement and FHFA regulation, the UPB of our mortgage-related investments portfolio is subject to a cap that decreases by 15% each year until the portfolio reaches $250 billion. FHFA has indicated that such portfolio reduction targets should be viewed as minimum reductions and has encouraged us to reduce the mortgage-related investments portfolio at a faster rate than required, while indicating that the pace of reducing the portfolio may be moderated by conditions in the housing and financial markets. The reduction in the mortgage-related investments portfolio will result in a decline in income from this 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.



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Table 2 — Mortgage-Related Investments Portfolio⁽¹⁾



	March 31, 2014		December 31, 2013
	(in millions)
Investments segment — Mortgage investments portfolio	$	312,613	$	331,071
Single-family Guarantee segment — Single-family unsecuritized mortgage loans⁽²⁾	34,825		37,726
Multifamily segment — Mortgage investments portfolio	86,960		92,227
Total mortgage-related investments portfolio	$	434,398	$	461,024
Mortgage-related investments portfolio cap⁽³⁾	$	469,625	$	552,500


(1)	Based on UPB.


(2)	Represents unsecuritized seriously delinquent single-family loans.


(3)	Represents the portfolio cap as discussed above at December 31, 2014 and 2013, respectively.

The UPB of our mortgage-related investments portfolio at March 31, 2014 was $434.4 billion, a decline of 23% on an annualized basis, compared to $461.0 billion at December 31, 2013. We evaluate the liquidity of the assets in our mortgage-related investments portfolio based on two categories: (a) single-class and multiclass agency securities; and (b) assets that are less liquid than agency securities. The reduction in UPB resulted primarily from liquidations (i.e., principal repayments).

During the first quarter of 2014, the UPB of our less liquid assets declined $13.1 billion and collectively represented approximately 61% of the UPB of the portfolio at March 31, 2014 compared to 60% at December 31, 2013. Assets that we consider to be less liquid than agency securities include unsecuritized performing single-family mortgage loans, multifamily mortgage loans, CMBS, housing revenue bonds, unsecuritized seriously delinquent and modified single-family mortgage loans which we removed from PC trusts, and our investments in non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans. During the first quarter of 2014, we sold $2.4 billion of assets (excluding sales of: (a) multifamily held-for-sale loans; and (b) single-family loans purchased for cash) that are less liquid than agency securities.



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SELECTED FINANCIAL DATA

The selected financial data presented below should be reviewed in conjunction with MD&A and our consolidated financial statements and related notes.

Table 3 — Selected Financial Data⁽¹⁾



	Three Months Ended March 31,
	2014			2013
	(dollars in millions, except share-related amounts)
Statements of Comprehensive Income Data
Net interest income	$	3,510		$	4,265
(Provision) benefit for credit losses	(85		)	503
Non-interest income (loss)	3,111			402
Non-interest expense	(771		)	(624		)
Income tax (expense) benefit	(1,745		)	35
Net income	4,020			4,581
Comprehensive income	4,499			6,971
Loss attributable to common stockholders⁽²⁾	(479		)	(2,390		)
Loss per common share – basic and diluted	(0.15		)	(0.74		)
Cash dividends per common share	—			—
Weighted average common shares outstanding (in millions) – basic and diluted⁽³⁾	3,237			3,239

	March 31, 2014			December 31, 2013
	(dollars in millions)
Balance Sheets Data
Mortgage loans held-for-investment, at amortized cost by consolidated trusts (net of allowances for loan losses)	$	1,533,106		$	1,529,905
Total assets	1,921,538			1,966,061
Debt securities of consolidated trusts held by third parties	1,446,477			1,433,984
Other debt	453,848			506,767
All other liabilities	14,314			12,475
Total Freddie Mac stockholders’ equity	6,899			12,835
Portfolio Balances⁽⁴⁾
Mortgage-related investments portfolio	$	434,398		$	461,024
Total Freddie Mac mortgage-related securities⁽⁵⁾	1,595,933			1,592,511
Total mortgage portfolio⁽⁶⁾	1,903,507			1,914,661
TDRs on accrual status⁽⁷⁾	80,725			78,708
Non-accrual loans⁽⁷⁾	39,764			43,469

	Three Months Ended March 31,
	2014			2013
Ratios⁽⁸⁾
Return on average assets⁽⁹⁾	0.8		%	0.9		%
Allowance for loans losses as percentage of mortgage loans, held-for-investment⁽¹⁰⁾	1.4			1.7
Equity to assets ratio⁽¹¹⁾	0.5			0.5


(1)	See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in our 2013 Annual Report and in this Form 10-Q for information regarding our accounting policies and the impact of new accounting policies on our consolidated financial statements.


(2)	For a discussion of how the senior preferred stock dividend is determined and how it affects net income (loss) attributable to common stockholders, see “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Earnings Per Common Share” in our 2013 Annual Report.


(3)	Includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury as part of the Purchase Agreement, because it is unconditionally exercisable by the holder at a cost of $0.00001 per share.


(4)	Based on UPB.


(5)	See ‘‘Table 25 — Freddie Mac Mortgage-Related Securities’’ for the composition of this line item.


(6)	See ‘‘Table 10 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios’’ for the composition of our total mortgage portfolio.


(7)	Based on UPB of the mortgage loans.


(8)	The dividend payout ratio on common stock is not presented because the amount of cash dividends per common share is zero for all periods presented. The return on common equity ratio is not presented because the simple average of the beginning and ending balances of total stockholders’ equity, net of preferred stock (at redemption value) is less than zero for all periods presented.


(9)	Ratio computed as net income (loss) divided by the simple average of the beginning and ending balances of total assets.


(10)	Ratio computed as the allowance for loan losses divided by the total recorded investment of held-for-investment mortgage loans.


(11)	Ratio computed as the simple average of the beginning and ending balances of total stockholders’ equity divided by the simple average of the beginning and ending balances of total assets.



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CONSOLIDATED RESULTS OF OPERATIONS

The following discussion of our consolidated results of operations should be read in conjunction with our consolidated financial statements, including the accompanying notes. Also see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” in our 2013 Annual Report for information concerning certain significant accounting policies and estimates applied in determining our reported results of operations.

Table 4 — Summary Consolidated Statements of Comprehensive Income



	Three Months Ended March 31,
	2014			2013
	(in millions)
Net interest income	$	3,510		$	4,265
(Provision) benefit for credit losses	(85		)	503
Net interest income after (provision) benefit for credit losses	3,425			4,768
Non-interest income (loss):
Gains (losses) on extinguishment of debt securities of consolidated trusts	12			34
Gains (losses) on retirement of other debt	7			(32		)
Derivative gains (losses)	(2,351		)	375
Impairment of available-for-sale securities:
Total other-than-temporary impairment of available-for-sale securities	(331		)	(21		)
Portion of other-than-temporary impairment recognized in AOCI	(33		)	(22		)
Net impairment of available-for-sale securities recognized in earnings	(364		)	(43		)
Other gains (losses) on investment securities recognized in earnings	766			(276		)
Other income (loss)	5,041			344
Total non-interest income (loss)	3,111			402
Non-interest expense:
Administrative expenses	(468		)	(432		)
REO operations income (expense)	(59		)	(6		)
Temporary Payroll Tax Cut Continuation Act of 2011 expense	(178		)	(93		)
Other expenses	(66		)	(93		)
Total non-interest expense	(771		)	(624		)
Income before income tax (expense) benefit	5,765			4,546
Income tax (expense) benefit	(1,745		)	35
Net income	4,020			4,581
Other comprehensive income (loss), net of taxes and reclassification adjustments:
Changes in unrealized gains (losses) related to available-for-sale securities	427			2,280
Changes in unrealized gains (losses) related to cash flow hedge relationships	52			90
Changes in defined benefit plans	—			20
Total other comprehensive income (loss), net of taxes and reclassification adjustments	479			2,390
Comprehensive income	$	4,499		$	6,971

Net Interest Income

The table below presents an analysis of net interest income, including average balances and related yields earned on assets and incurred on liabilities.



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Table 5 — Net Interest Income/Yield and Average Balance Analysis



	Three Months Ended March 31,
	2014								2013
	Average Balance⁽¹⁾			Interest Income (Expense)			Average Rate		Average Balance⁽¹⁾			Interest Income (Expense)			Average Rate
	(dollars in millions)
Interest-earning assets:
Cash and cash equivalents	$	19,641		$	—		—	%	$	35,436		$	7		0.07	%
Federal funds sold and securities purchased under agreements to resell	48,155			5			0.05		35,925			11			0.13
Mortgage-related securities:
Mortgage-related securities⁽²⁾	271,646			2,607			3.84		328,241			3,417			4.16
Extinguishment of PCs held by Freddie Mac	(116,588		)	(1,097		)	(3.77	)	(122,280		)	(1,262		)	(4.13	)
Total mortgage-related securities, net	155,058			1,510			3.90		205,961			2,155			4.19
Non-mortgage-related securities⁽²⁾	5,870			—			0.02		14,980			2			0.06
Mortgage loans held by consolidated trusts⁽³⁾	1,532,416			14,484			3.78		1,495,202			14,504			3.88
Unsecuritized mortgage loans⁽³⁾	178,220			1,662			3.73		219,067			2,009			3.67
Total interest-earning assets	$	1,939,360		$	17,661		3.64		$	2,006,571		$	18,688		3.73
Interest-bearing liabilities:
Debt securities of consolidated trusts including PCs held by Freddie Mac	$	1,547,682		$	(13,340	)	(3.45	)	$	1,518,006		$	(13,292	)	(3.50	)
Extinguishment of PCs held by Freddie Mac	(116,588		)	1,097			3.77		(122,280		)	1,262			4.13
Total debt securities of consolidated trusts held by third parties	1,431,094			(12,243		)	(3.42	)	1,395,726			(12,030		)	(3.45	)
Other debt:
Short-term debt	126,521			(41		)	(0.13	)	119,691			(44		)	(0.15	)
Long-term debt⁽⁴⁾	348,631			(1,788		)	(2.05	)	416,520			(2,218		)	(2.13	)
Total other debt	475,152			(1,829		)	(1.54	)	536,211			(2,262		)	(1.69	)
Total interest-bearing liabilities	1,906,246			(14,072		)	(2.95	)	1,931,937			(14,292		)	(2.96	)
Expense related to derivatives⁽⁵⁾	—			(79		)	(0.02	)	—			(131		)	(0.03	)
Impact of net non-interest-bearing funding	33,114			—			0.05		74,634			—			0.11
Total funding of interest-earning assets	$	1,939,360		$	(14,151	)	(2.92	)	$	2,006,571		$	(14,423	)	(2.88	)
Net interest income/yield				$	3,510		0.72					$	4,265		0.85


(1)	We calculate average balances based on amortized cost.


(2)	Interest income (expense) includes accretion of the portion of impairment charges recognized in earnings where we expect significant increases in cash flows from the impaired securities.


(3)	Mortgage loans on non-accrual status, where interest income is generally recognized when collected, are included in average balances.


(4)	Includes current portion of long-term debt.


(5)	Represents changes in fair value of derivatives in closed cash flow hedge relationships that were previously deferred in AOCI and have been reclassified to earnings as the associated hedged forecasted issuance of debt affects earnings.

Net interest income decreased by $755 million to $3.5 billion for the three months ended March 31, 2014 compared to $4.3 billion for the three months ended March 31, 2013. Net interest yield decreased by 13 basis points to 72 basis points for the three months ended March 31, 2014 compared to 85 basis points for the three months ended March 31, 2013. The decrease in net interest income and net interest yield was primarily due to the negative impact of the reduction in the balance of higher-yielding mortgage-related assets due to continued liquidations. Excluding the impact of the legislated 10 basis point increase in guarantee fees, which was implemented in April 2012, net interest income decreased by $835 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Net interest income includes $172 million and $91 million for the three months ended March 31, 2014 and 2013, respectively, related to this increase in guarantee fees.

We recognize interest income on non-accrual mortgage loans only when cash payments are received. We refer to the interest income that we do not recognize as foregone interest income (i.e., interest income we would have recorded if the loan had been current in accordance with its terms). Foregone interest income and reversals of previously recognized interest income, net of cash received, related to non-accrual mortgage loans was $0.4 billion and $0.6 billion during the three months ended March 31, 2014 and 2013, respectively. These amounts have declined primarily because of the reduction in the number of loans on non-accrual status.

The objectives set for us under our charter and conservatorship, restrictions in the Purchase Agreement and restrictions imposed by FHFA have negatively impacted, and will continue to negatively impact, our net interest income. For example, our mortgage-related investments portfolio is subject to a cap that decreases by 15% each year until the portfolio reaches $250 billion. This decline in asset balances will cause a reduction in our interest income from this portfolio over time. For more information on the various restrictions and limitations on our investment activity and our mortgage-related investments portfolio, see “BUSINESS — Conservatorship and Related Matters — Limits on Investment Activity and Our Mortgage-Related Investments Portfolio” in our 2013 Annual Report.

During the three months ended March 31, 2014, we had sufficient access to the debt markets. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity.”



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(Provision) Benefit for Credit Losses

We maintain loan loss reserves at levels we believe are appropriate to absorb probable incurred losses on mortgage loans held-for-investment and loans underlying our financial guarantees. Our loan loss reserves are increased through the provision for credit losses and are reduced by net charge-offs. The provision for credit losses primarily reflects our estimate of incurred losses for newly impaired loans as well as changes in our estimates of incurred losses for previously impaired loans. Assuming that all other factors remain the same, home price growth can reduce the likelihood that loans will default and may also reduce the amount of credit losses on the loans that do default.

Our (provision) benefit for credit losses was $(0.1) billion in the first quarter of 2014 compared to $0.5 billion in the first quarter of 2013. The provision for credit losses in the first quarter of 2014 reflects incurred losses associated with newly delinquent loans that were partially offset by moderate home price growth. The benefit for credit losses in the first quarter of 2013 reflects a more significant increase in home prices that was partially offset by incurred losses associated with newly delinquent loans.

Our provision for credit losses in the first quarter of 2014 also reflects $0.3 billion of benefit related to settlement agreements with certain sellers to release specified loans from certain repurchase obligations in exchange for one-time cash payments primarily associated with our Legacy single-family books. However, we do not expect future settlement agreements with seller/servicers to have a significant effect on our financial results.

Our provision for credit losses and amount of charge-offs in the future will be affected by a number of factors, including: (a) the actual level of mortgage defaults, including default rates among borrowers that participated in HARP and HAMP; (b) the effect of the MHA Program, the servicing alignment initiative, and other current and future loss mitigation efforts; (c) any government actions or programs that affect the ability of borrowers to refinance underwater mortgages or obtain modifications; (d) changes in property values; (e) regional economic conditions, including unemployment rates; (f) additional delays in the foreclosure process; and (g) third-party mortgage insurance coverage and recoveries.

During the first quarter of 2014, our charge-offs, net of recoveries for single-family loans, were significantly lower than those recorded in the first quarter of 2013 primarily due to: (a) lower volumes of foreclosures and foreclosure alternatives; and (b) improvements in home prices in many of the areas in which we have had significant foreclosure and short sale activity. Our recoveries in the first quarters of 2014 and 2013 included approximately $0.4 billion and $0.3 billion, respectively, related to repurchase requests from our seller/servicers (including $0.3 billion in the first quarter of 2014 with respect to settlement agreements related to repurchase requests from certain sellers). We continue to experience a high volume of foreclosures and foreclosure alternatives as compared to periods prior to 2008. As a result, we expect our credit losses will continue to remain elevated during the remainder of 2014 even if the volume of new seriously delinquent loans continues to decline.

The total number of single-family seriously delinquent loans declined approximately 8% and 7% during the first quarters of 2014 and 2013, respectively. As of March 31, 2014 and March 31, 2013, the UPB of our single-family loans classified as TDRs was $98.7 billion and $90.0 billion, respectively. However, these amounts include $80.1 billion and $68.5 billion, respectively, of single-family TDRs that were no longer seriously delinquent. Loans that have been classified as TDRs remain categorized as such throughout the remaining life of the loan regardless of whether the borrower makes payments which return the loan to a current payment status. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance, seriously delinquent loans, charge-offs, REO assets, our loan loss reserves balance, TDRs, and non-accrual loans.

Non-Interest Income (Loss)

Gains (Losses) on Extinguishment of Debt Securities of Consolidated Trusts

During the three months ended March 31, 2014 and 2013, we extinguished debt securities of consolidated trusts with a UPB of $7.9 billion and $5.9 billion, respectively (representing our purchase of single-family PCs with a corresponding UPB amount). Purchases of single-family PCs increased in 2014 primarily due to investment opportunities. See “Table 18 — Mortgage-Related Securities Purchase Activity” for additional information regarding purchases of mortgage-related securities, including those issued by consolidated PC trusts.

Gains (Losses) on Retirement of Other Debt

Gains (losses) on retirement of other debt were $7 million and $(32) million during the three months ended March 31, 2014 and 2013, respectively. We recognized gains on the retirement of other debt during the three months ended March 31, 2014 primarily as a result of exercising our call option for other debt held at premiums. We recognized losses on the retirement of other debt during the three months ended March 31, 2013 primarily due to the repurchase of higher-cost other debt securities at premiums. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Other Debt Securities.”

Derivative Gains (Losses)

The table below presents derivative gains (losses) reported in our consolidated statements of comprehensive income. See “NOTE 9: DERIVATIVES — Table 9.2 — Gains and Losses on Derivatives” for information about gains and losses related to specific categories of derivatives. Changes in fair value and interest accruals on derivatives not in hedge accounting



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relationships are recorded as derivative gains (losses) in our consolidated statements of comprehensive income. At March 31, 2014 and December 31, 2013, we did not have any derivatives in hedge accounting relationships; however, there are amounts recorded in AOCI related to closed cash flow hedges. Amounts recorded in AOCI associated with these closed cash flow hedges are reclassified to earnings when the forecasted transactions affect earnings. If it is probable that the forecasted transaction will not occur, then the deferred gain or loss associated with the forecasted transaction is reclassified into earnings immediately.

While derivatives are an important aspect of our strategy to manage interest-rate risk, they could increase the volatility of reported net income because, while fair value changes in derivatives from fluctuations in interest rates and yield curves affect net income, fair value changes in several of the types of assets and liabilities being hedged do not affect net income. Therefore, there can be timing mismatches affecting current period earnings, which may not be reflective of the economics of our business.

Table 6 — Derivative Gains (Losses)



	Derivative Gains (Losses)
	Three Months Ended March 31,
	2014			2013
	(in millions)
Interest-rate swaps	$	(1,770	)	$	1,574
Option-based derivatives⁽¹⁾	69			(437		)
Other derivatives⁽²⁾	28			144
Accrual of periodic settlements	(678		)	(906		)
Total	$	(2,351	)	$	375


(1)	Primarily includes purchased call and put swaptions and purchased interest-rate caps and floors.


(2)	Primarily includes futures, foreign-currency swaps, commitments, credit derivatives and swap guarantee derivatives. Our last foreign-currency swaps matured in January 2014.

Gains (losses) on derivatives are principally driven by changes in: (a) interest rates and implied volatility; and (b) the mix and balance of products in our derivative portfolio.

During the three months ended March 31, 2014, we recognized a net loss on derivatives of $2.4 billion. We recognized: (a) fair value losses on our pay-fixed swaps of $3.2 billion primarily driven by a decline in longer-term interest rates; and (b) a net loss of $0.7 billion related to the accrual of periodic settlements on interest-rate swaps as we were a net payer on our interest-rate swaps based on the coupons of the instruments. These losses were partially offset by net gains on our receive-fixed swaps of $1.4 billion.

During the three months ended March 31, 2013, we recognized gains on derivatives of $0.4 billion primarily as a result of an increase in longer-term interest rates. We recognized fair value gains on our pay-fixed swaps of $3.9 billion, which were largely offset by: (a) fair value losses on our receive-fixed swaps of $2.3 billion; (b) net losses of $0.9 billion related to the accrual of periodic settlements on interest-rate swaps as we were a net payer on our interest-rate swaps based on the coupons of the instruments; and (c) fair value losses of $0.4 billion on our option-based derivatives resulting from losses on our purchased call swaptions.

Investment Securities-Related Activities

Impairments of Available-For-Sale Securities

We recorded net impairments of available-for-sale securities recognized in earnings, which were related to non-agency mortgage-related securities, of $364 million and $43 million during the three months ended March 31, 2014 and 2013, respectively. During the three months ended March 31, 2014, these impairments were primarily driven by an increase in the population of available-for-sale securities in an unrealized loss position that we intend to sell. The majority of the impairments recognized in earnings from securities where our intent to sell changed relate to a non-agency mortgage-related securities settlement where a counterparty agreed to purchase these securities as part of the settlement. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities,” as well as “NOTE 7: INVESTMENTS IN SECURITIES” and "NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Non-Agency Mortgage-Related Security Issuers" for additional information.

Other Gains (Losses) on Investment Securities Recognized in Earnings

Other gains (losses) on investment securities recognized in earnings consists of gains (losses) on trading securities and gains (losses) on sales of available-for-sale securities. With the exception of principal-only securities, our agency securities, classified as trading, were valued at a net premium (i.e., net fair value was higher than UPB) as of March 31, 2014.



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We recognized $(7) million and $(377) million related to losses on trading securities during the three months ended March 31, 2014 and 2013, respectively. The losses on trading securities during both periods were primarily due to the movement of securities with unrealized gains towards maturity.

We recognized $773 million and $101 million of gains on sales of available-for-sale securities during the three months ended March 31, 2014 and 2013, respectively. The increase in gains during the three months ended March 31, 2014 resulted from increased sales related to our structuring activity.

Other Income (Loss)

The table below summarizes the significant components of other income.

Table 7 — Other Income (Loss)



	Three Months Ended March 31,
	2014		2013
	(in millions)
Other income (loss):
Non-agency mortgage-related securities settlements	$	4,533	$	6
Gains (losses) on mortgage loans	254		9
Recoveries on loans impaired upon purchase⁽¹⁾	50		74
Guarantee-related income, net⁽²⁾	33		90
All other	171		165
Total other income (loss)	$	5,041	$	344


(1)	Our recoveries principally relate to impaired loans purchased prior to 2010. Consequently, our recoveries on these loans will generally decline over time.


(2)	Most of our guarantee-related income relates to securitized multifamily mortgage loans where we have not consolidated the securitization trusts on our consolidated balance sheets.

Non-Agency Mortgage-Related Securities Settlements

Non-agency mortgage-related securities settlements were $4.5 billion in the first quarter of 2014 compared to $6 million in the first quarter of 2013. We had settlements with five counterparties in the first quarter of 2014, while we had one settlement in the first quarter of 2013. For information on the settlements in 2014, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Non-Agency Mortgage-Related Security Issuers.”

Gains (Losses) on Mortgage Loans

In the first quarters of 2014 and 2013, we recognized gains on mortgage loans of $254 million and $9 million, respectively. The substantial majority of these amounts relate to multifamily loans which we designated for securitization and elected to carry at fair value. The gains in the first quarter of 2014 were due to favorable interest rate movements. During the first quarters of 2014 and 2013, we sold $3.9 billion and $5.6 billion, respectively, in UPB of multifamily loans primarily through K Certificate transactions.

All Other

All other income includes income recognized from transactional fees, fees assessed to our servicers for technology use and late fees or other penalties, changes in fair value of STACR debt notes, and other miscellaneous income. All other income was $171 million in the first quarter of 2014 compared to $165 million in the first quarter of 2013. This slight increase was primarily due to: (a) higher compensatory fees assessed in the first quarter of 2014 on servicers that failed to meet our timelines to complete a foreclosure of a loan; partially offset by (b) fair value losses on STACR debt notes during the first quarter of 2014 (which we began issuing during the third quarter of 2013). We elected the fair value option on STACR debt notes, and recorded fair value losses on these notes during the first quarter of 2014 due to an increase in market prices for these notes.

Non-Interest Expense

The table below summarizes the components of non-interest expense.



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Table 8 — Non-Interest Expense



	Three Months Ended March 31,
	2014		2013
	(in millions)
Administrative expenses:
Salaries and employee benefits	$	233	$	208
Professional services	138		109
Occupancy expense	13		13
Other administrative expense	84		102
Total administrative expenses	468		432
REO operations (income) expense	59		6
Temporary Payroll Tax Cut Continuation Act of 2011 expense	178		93
Other expenses⁽¹⁾	66		93
Total non-interest expense	$	771	$	624


(1)	Includes HAMP servicer incentive fees, costs related to terminations and transfers of mortgage servicing, and other miscellaneous expenses.

Administrative Expenses

Our administrative expenses increased during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 due to increases in professional services expense and salaries and employee benefits expense. Professional services expense increased primarily due to expenses associated with FHFA-led lawsuits regarding our investments in certain residential non-agency mortgage-related securities. The increase in salaries and employee benefits expense was mainly due to expenses associated with our terminated pension plan.

REO Operations (Income) Expense

The table below presents the components of our REO operations (income) expense.

Table 9 — REO Operations (Income) Expense



	Three Months Ended March 31,
	2014			2013
	(dollars in millions)
REO operations (income) expense:
Single-family:
REO property expenses⁽¹⁾	$	249		$	245
Disposition (gains) losses, net⁽²⁾	(129		)	(159		)
Change in holding period allowance, dispositions	(18		)	(11		)
Change in holding period allowance, inventory⁽³⁾	25			23
Recoveries⁽⁴⁾	(68		)	(90		)
Total single-family REO operations (income) expense	59			8
Multifamily REO operations (income) expense	—			(2		)
Total REO operations (income) expense	$	59		$	6


(1)	Consists of costs incurred to maintain or protect a property after it is acquired in a foreclosure transfer, such as legal fees, insurance, taxes, and cleaning and other maintenance charges.


(2)	Represents the difference between the disposition proceeds, net of selling expenses, and the fair value of the property on the date of the foreclosure transfer.


(3)	Represents the (increase) decrease in the estimated fair value of properties that were in inventory during the period.


(4)	Includes recoveries from primary mortgage insurance, pool insurance and seller/servicer repurchases.

REO operations (income) expense was $59 million in the first quarter of 2014, compared to $6 million in the first quarter of 2013. The increase was primarily due to lower disposition volume, resulting in: (a) lower gains on the disposition of REO properties; and (b) lower recoveries on REO properties.

We believe the volume of our single-family REO acquisitions in recent years has been significantly affected by the lengthening of the foreclosure process and an increased volume of foreclosure alternatives. In the first quarter of 2014, our REO dispositions exceeded REO acquisitions, which led to a decline in the level of our REO property inventory in the period. For more information on our REO activity, see “CONSOLIDATED BALANCE SHEETS ANALYSIS — REO, Net” and “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — REO Assets.”

Temporary Payroll Tax Cut Continuation Act of 2011 Expense



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Pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011, we increased the guarantee fee on single-family residential mortgages sold to us by 10 basis points in April 2012. We pay these fees to Treasury on a quarterly basis and refer to this fee increase as the legislated 10 basis point increase in guarantee fees.

Expenses related to the legislated 10 basis point increase in guarantee fees were $178 million and $93 million during the first quarters of 2014 and 2013, respectively. As of March 31, 2014, loans with an aggregate UPB of $727 billion were subject to these fees, and the cumulative total of the amounts paid and due to Treasury was $818 million. We expect these fees will continue to increase in the future.

Income Tax (Expense) Benefit

For the three months ended March 31, 2014 and 2013, we reported an income tax (expense) benefit of $(1.7) billion and $35 million, respectively. The shift to income tax expense in the 2014 period is primarily due to a higher effective tax rate in the 2014 period, which results from the release of the valuation allowance in the second half of 2013. For 2014, we expect that our effective tax rate will be marginally below the corporate statutory rate, which is currently 35%. See “NOTE 12: INCOME TAXES” for additional information.

Comprehensive Income

Our comprehensive income was $4.5 billion and $7.0 billion for the three months ended March 31, 2014 and 2013, respectively, consisting of: (a) $4.0 billion and $4.6 billion of net income, respectively; and (b) $0.5 billion and $2.4 billion of other comprehensive income, respectively. The other comprehensive income in these periods primarily related to fair value gains on our single-family non-agency mortgage-related available-for-sale securities. Other comprehensive income in both periods also reflects the reversals of: (a) unrealized losses due to the recognition of other-than-temporary impairments in earnings; and (b) unrealized gains and losses related to available-for-sale securities sold during the respective period. The decrease of other comprehensive income was primarily due to lower fair value gains on our non-agency mortgage-related securities as spreads tightened less during the three months ended March 31, 2014 compared to the three months ended March 31, 2013. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Total Equity” for additional information regarding total other comprehensive income.

Segment Earnings

Our operations consist of three reportable segments, which are based on the type of business activities each performs — Single-family Guarantee, Investments, and Multifamily. Certain activities that are not part of a reportable segment are included in the All Other category.

The financial performance of our Single-family Guarantee segment is measured based on its contribution to GAAP net income (loss). Our Investments segment and Multifamily segment are measured based on each segment's contribution to GAAP comprehensive income (loss), which consists of the sum of its contribution to: (a) GAAP net income (loss); and (b) GAAP total other comprehensive income (loss), net of taxes.

The Single-family Guarantee segment reflects results from our single-family credit guarantee activities. The Investments segment reflects results from three primary activities: (a) managing the company’s mortgage-related investments portfolio, excluding Multifamily segment investments; (b) managing the treasury function, including funding and liquidity, for the overall company; and (c) managing interest-rate risk for the overall company. The Multifamily segment reflects results from our investment (both purchases and sales), securitization, and guarantee activities in multifamily mortgage loans and securities. For more information, see "NOTE 13: SEGMENT REPORTING" in this Form 10-Q and our 2013 Annual Report.

In presenting Segment Earnings, we make significant reclassifications among certain financial statement line items in order to reflect a measure of management and guarantee income on guarantees and a measure of net interest income on investments that is in line with how we manage our business. These include reclassifying certain credit guarantee-related activities and investment-related activities between various line items on our GAAP consolidated statements of comprehensive income. We also allocate certain revenues and expenses, including certain returns on assets and funding costs, and all administrative expenses to our three reportable segments.

As a result of these reclassifications and allocations, Segment Earnings for our reportable segments differs significantly from, and should not be used as a substitute for, net income (loss) as determined in accordance with GAAP. Our definition of Segment Earnings may differ from similar measures used by other companies. However, we believe that Segment Earnings provides us with meaningful metrics to assess the financial performance of each segment and our company as a whole.

In the first quarter of 2014, we revised our inter-segment allocations between the Multifamily and the Investments segments for the Multifamily segment's investment securities and held-for-sale loans. Previously, changes in fair value of these assets attributed to interest rates were transferred to the Investments segment to offset the gains (losses) of the associated derivative instruments used to economically hedge the assets, while the changes in fair value not related to interest rates (i.e., liquidity and credit) remained in the Multifamily segment. Starting in the first quarter of 2014, the Multifamily segment will reflect the entire change in fair value of these assets in its financial results and the Investments segment will transfer the change in fair value of the derivatives associated with the Multifamily segment's investments securities and held-for-sale loans to the



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Multifamily segment. The purpose of this change is to better reflect the operations of the Multifamily segment on a stand-alone basis. Prior period results have been revised to conform with the current period presentation.

See “BUSINESS — Our Business Segments” in our 2013 Annual Report for further information regarding our segments, including the descriptions and activities of our segments, and “NOTE 13: SEGMENT REPORTING” in this Form 10-Q and our 2013 Annual Report for further information regarding the reclassifications and allocations used to present Segment Earnings.

The table below provides information about our various segment mortgage and credit risk portfolios at March 31, 2014 and December 31, 2013. For a discussion of each segment’s portfolios, see “Segment Earnings — Results.”

Table 10 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios⁽¹⁾



	March 31, 2014			December 31, 2013
	(in millions)
Segment mortgage portfolios:
Single-family Guarantee — Managed loan portfolio:⁽²⁾
Single-family unsecuritized mortgage loans⁽³⁾	$	34,825		$	37,726
Single-family Freddie Mac mortgage-related securities held by us	153,358			165,247
Single-family Freddie Mac mortgage-related securities held by third parties	1,374,287			1,361,972
Single-family other guarantee commitments⁽⁴⁾	19,784			19,872
Total Single-family Guarantee — Managed loan portfolio	1,582,254			1,584,817
Investments — Mortgage investments portfolio:
Single-family unsecuritized mortgage loans⁽⁵⁾	82,732			84,411
Freddie Mac mortgage-related securities	153,358			165,247
Non-agency mortgage-related securities	60,973			64,524
Non-Freddie Mac agency mortgage-related securities	15,550			16,889
Total Investments — Mortgage investments portfolio	312,613			331,071
Multifamily — Guarantee portfolio:
Multifamily Freddie Mac mortgage-related securities held by us	2,526			2,787
Multifamily Freddie Mac mortgage-related securities held by third parties	65,762			62,505
Multifamily other guarantee commitments⁽⁴⁾	9,276			9,288
Total Multifamily — Guarantee portfolio	77,564			74,580
Multifamily — Mortgage investments portfolio:
Multifamily investment securities portfolio	31,012			33,056
Multifamily unsecuritized loan portfolio	55,948			59,171
Total Multifamily — Mortgage investments portfolio	86,960			92,227
Total Multifamily portfolio	164,524			166,807
Less: Freddie Mac single-family and certain multifamily securities⁽⁶⁾	(155,884		)	(168,034		)
Total mortgage portfolio	$	1,903,507		$	1,914,661
Credit risk portfolios:⁽⁷⁾
Single-family credit guarantee portfolio:⁽²⁾
Single-family mortgage loans, on-balance sheet	$	1,628,916		$	1,630,859
Non-consolidated Freddie Mac mortgage-related securities	6,775			6,961
Other guarantee commitments⁽⁴⁾	19,784			19,872
Less: HFA initiative-related guarantees⁽⁸⁾	(3,752		)	(4,051		)
Less: Freddie Mac mortgage-related securities backed by Ginnie Mae certificates⁽⁸⁾	(513		)	(541		)
Total single-family credit guarantee portfolio	$	1,651,210		$	1,653,100
Multifamily mortgage portfolio:
Multifamily mortgage loans, on-balance sheet⁽⁹⁾	$	56,391		$	59,615
Non-consolidated Freddie Mac mortgage-related securities	67,845			64,848
Other guarantee commitments⁽⁴⁾	9,276			9,288
Less: HFA initiative-related guarantees⁽⁸⁾	(875		)	(905		)
Total multifamily mortgage portfolio	$	132,637		$	132,846


(1)	Amounts represent UPB.



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(2)

The balances of the mortgage-related securities in the Single-family Guarantee managed loan portfolio are based on the UPB of the security, whereas the balances of our single-family credit guarantee portfolio presented in this report are based on the UPB of the mortgage loans underlying the related security. The differences in the loan and security balances result from the timing of remittances to security holders, which is typically 45 or 75 days after the mortgage payment cycle of fixed-rate and ARM PCs, respectively.


(3)	Represents unsecuritized seriously delinquent single-family loans.


(4)	Represents the UPB of mortgage-related assets held by third parties for which we provide our guarantee without our securitization of the related assets.


(5)	Excludes unsecuritized seriously delinquent single-family loans. The Single-family Guarantee segment earns management and guarantee fees associated with unsecuritized single-family loans in the Investments segment’s mortgage investments portfolio.

(6)

Freddie Mac single-family mortgage-related securities held by us are included in both our Investments segment’s mortgage investments portfolio and our Single-family Guarantee segment’s managed loan portfolio, and Freddie Mac multifamily mortgage-related securities held by us are included in both the multifamily investment securities portfolio and the multifamily guarantee portfolio. Therefore, these amounts are deducted in order to reconcile to our total mortgage portfolio.


(7)	Represents the UPB of loans for which we present characteristics, delinquency data, and certain other statistics in this report. See “GLOSSARY” for further description.


(8)	We exclude HFA initiative-related guarantees and our resecuritizations of Ginnie Mae certificates from our credit risk portfolios and most related statistics because these guarantees do not expose us to meaningful amounts of credit risk due to the credit enhancement provided on them by the U.S. government.


(9)	Includes both unsecuritized multifamily mortgage loans and multifamily mortgage loans in consolidated trusts.

Segment Earnings — Results

Single-Family Guarantee

The table below presents the Segment Earnings of our Single-family Guarantee segment.

Table 11 — Segment Earnings and Key Metrics — Single-Family Guarantee⁽¹⁾



	Three Months Ended March 31,
	2014			2013
	(dollars in millions)
Segment Earnings:
Net interest income	$	33		$	94
(Provision) benefit for credit losses	(322		)	244
Non-interest income:
Management and guarantee income	1,171			1,243
Other non-interest income	200			241
Total non-interest income	1,371			1,484
Non-interest expense:
Administrative expenses	(278		)	(241		)
REO operations expense	(59		)	(8		)
Temporary Payroll Tax Cut Continuation Act of 2011 expense⁽²⁾	(178		)	(93		)
Other non-interest expense	(39		)	(61		)
Total non-interest expense	(554		)	(403		)
Segment adjustments⁽³⁾	(82		)	(228		)
Segment Earnings before income tax expense	446			1,191
Income tax expense	(133		)	(5		)
Segment Earnings, net of taxes	313			1,186
Total other comprehensive income, net of taxes	—			11
Total comprehensive income	$	313		$	1,197
Key metrics:
Balances and Volume (in billions, except rate):
Average balance of single-family credit guarantee portfolio and HFA guarantees	$	1,654		$	1,635
Issuance — Single-family credit guarantees⁽⁴⁾	$	53		$	136
Fixed-rate products — Percentage of purchases⁽⁵⁾	95		%	97		%
Liquidation rate — Single-family credit guarantees (annualized)⁽⁶⁾	14		%	35		%
Average Management and Guarantee Rate (in bps, annualized):⁽⁷⁾
Segment Earnings management and guarantee income⁽⁸⁾	28.3			30.4
Guarantee fee charged on new acquisitions⁽⁹⁾	56.2			49.1
Credit:
Serious delinquency rate, at end of period	2.20		%	3.03		%
REO inventory, at end of period (number of properties)	43,565			47,968
Single-family credit losses, in bps (annualized)⁽¹⁰⁾	23.1			49.9
Market:
Single-family mortgage debt outstanding (total U.S. market, in billions)⁽¹¹⁾	$	9,863		$	9,877
30-year fixed mortgage rate⁽¹²⁾	4.4		%	3.6		%



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(1)	For reconciliations of the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 13: SEGMENT REPORTING — Table 13.2 — Segment Earnings and Reconciliation to GAAP Results.”


(2)	Represents expenses related to the legislated 10 basis point increase in guarantee fees, which was implemented in April 2012. These fees are remitted to Treasury on a quarterly basis.


(3)	For a description of our segment adjustments, see “NOTE 13: SEGMENT REPORTING — Segment Earnings” in our 2013 Annual Report.


(4)	Represents the UPB of loans underlying Freddie Mac mortgage-related securities and other guarantee commitments.


(5)	Excludes Other Guarantee Transactions.


(6)	Represents principal repayments relating to loans underlying Freddie Mac mortgage-related securities and other guarantee commitments, including those related to our removal of seriously delinquent and modified mortgage loans and balloon/reset mortgage loans from PC pools.


(7)	Includes the effect of pricing adjustments that are based on the price performance of our PCs relative to comparable Fannie Mae securities.


(8)	Consists of the contractual management and guarantee fee rate as well as amortization of delivery and other upfront fees (using the original contractual maturity date of the related loans) for the entire single-family credit guarantee portfolio.


(9)	Represents the estimated rate of management and guarantee fees for new acquisitions during the period assuming amortization of delivery fees using the estimated life of the related loans rather than the original contractual maturity date of the related loans.


(10)	Calculated as the amount of single-family credit losses divided by the sum of the average carrying value of our single-family credit guarantee portfolio and the average balance of our single-family HFA initiative-related guarantees.


(11)	Source: Federal Reserve Financial Accounts of the United States of America dated March 6, 2014. The outstanding amount for March 31, 2014 reflects the balance as of December 31, 2013.


(12)	Based on Freddie Mac’s Primary Mortgage Market Survey rate for the last week in the period, which represents the national average mortgage commitment rate to a qualified borrower exclusive of any fees and points required by the lender. This commitment rate applies only to financing on conforming mortgages with LTV ratios of 80%.

Segment Earnings for our Single-family Guarantee segment decreased to $0.3 billion in the first quarter of 2014 compared to $1.2 billion in the first quarter of 2013. The decrease in the first quarter of 2014 was primarily due to: (a) a shift from benefit for credit losses of $0.2 billion in the first quarter of 2013 to provision for credit losses of $(0.3) billion in the first quarter of 2014; and (b) increased income tax expense.

Segment Earnings for the Single-family Guarantee segment is largely driven by management and guarantee fee income and the (provision) benefit for credit losses. The table below provides summary information about the composition of Segment Earnings for this segment, by guarantee and loan origination years, for the first quarters of 2014 and 2013.



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Table 12 — Segment Earnings Composition — Single-Family Guarantee Segment



	Three Months Ended March 31, 2014
	Segment Earnings Management and Guarantee Income⁽¹⁾			Credit-Related (Expense) Benefit ⁽²⁾⁽³⁾
	Amount		Average Rate⁽⁴⁾	Amount			Average Rate⁽⁴⁾		Net Amount⁽⁵⁾
	(dollars in millions, rates in bps)
Year of origination:⁽⁵⁾
2014	$	26	39.0	$ <	(1	)	(1.2	)	$	26
2013	302		39.0	(7		)	(1.0	)	295
2012	179		29.4	(4		)	(0.6	)	175
2011	67		23.2	(3		)	(0.9	)	64
2010	61		23.5	(5		)	(1.9	)	56
2009	56		19.5	(10		)	(3.5	)	46
Subtotal - New single-family book	691		30.4	(29		)	(1.3	)	662
HARP and other relief refinance loans⁽⁶⁾	276		32.2	(113		)	(12.8	)	163
2005-2008 Legacy single-family book	142		20.8	(235		)	(36.6	)	(93		)
Pre-2005 Legacy single-family book	62		19.1	(4		)	(1.0	)	58
Total	$	1,171	28.3	$	(381	)	(9.1	)	$	790

Administrative expenses									(278		)
Net interest income									33
Other non-interest income (expenses), net									(232		)
Segment Earnings, net of taxes									$	313

	Three Months Ended March 31, 2013
	Segment Earnings Management and Guarantee Income⁽¹⁾			Credit-Related (Expense) Benefit ⁽²⁾
	Amount		Average Rate⁽⁴⁾	Amount			Average Rate⁽⁴⁾		Net Amount⁽⁵⁾
	(dollars in millions, rates in bps)
Year of origination:⁽⁵⁾
2013	$	33	28.2	$	(1	)	(0.6	)	$	32
2012	233		33.9	(5		)	(0.7	)	228
2011	151		40.5	(5		)	(1.4	)	146
2010	135		38.6	(1		)	(0.3	)	134
2009	136		33.2	(2		)	(0.5	)	134
Subtotal - New single-family book	688		35.5	(14		)	(0.7	)	674
HARP and other relief refinance loans⁽⁶⁾	227		30.6	(139		)	(17.5	)	88
2005-2008 Legacy single-family book	225		23.5	298			34.6		523
Pre-2005 Legacy single-family book	103		22.6	91			18.5		194
Total	$	1,243	30.4	$	236		5.7		$	1,479

Administrative expenses									(241		)
Net interest income									94
Other non-interest income (expenses), net									(146		)
Segment Earnings, net of taxes									$	1,186


(1)	Includes amortization of delivery and other upfront fees based on the original contractual maturity date of the related loans of $0.4 billion and $0.6 billion for the first quarters of 2014 and 2013, respectively. Prior period information has been revised to conform with the current period presentation. See endnote (6) for further information.


(2)	Consists of the aggregate of the Segment Earnings (provision) benefit for credit losses and Segment Earnings REO operations (expense) income. Historical rates of average credit-related (expense) benefit may not be representative of future results. Prior period information has been revised to conform with the current period presentation. See endnote (6) for further information.


(3)	Reflects our settlement agreements with certain sellers in the first quarter of 2014 for release of certain repurchase obligations primarily associated with loans in our Legacy single-family books in exchange for one-time cash payments.

(4)

Calculated as the annualized amount of Segment Earnings management and guarantee income or credit-related (expense) benefit, respectively, divided by the sum of the average carrying values of the single-family credit guarantee portfolio and the average balance of our single-family HFA initiative-related guarantees. Prior period information has been revised to conform with the current period presentation. See endnote (6) for further information.



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(5)	Calculated as Segment Earnings management and guarantee income less credit-related (expense) benefit. Prior period information has been revised to conform with the current period presentation. See endnote (6) for further information.

(6)

Segment Earnings management and guarantee income is presented by year of guarantee origination (except for HARP and other relief refinance loans), whereas credit-related (expense) benefit is presented based on year of loan origination. HARP and other relief refinance loans are presented separately rather than in the year that the refinancing occurred (from 2009 to 2014). All other refinance loans are presented in the year that the refinancing occurred. Prior period information has been revised to conform with the current period presentation.

We continue to maintain a consistent market presence by providing lenders with a constant source of liquidity for conforming mortgage products. Issuances of our guarantees were $53 billion and $136 billion in the first quarters of 2014 and 2013, respectively, and included a significant amount of refinance mortgages, including HARP and other relief refinance loans. During the first quarter of 2014, refinancings comprised approximately 53% of our single-family purchase and issuance volume, compared with 84% in the first quarter of 2013. Origination volumes in the U.S. residential mortgage market declined significantly during the first quarter of 2014, as compared to the first quarter of 2013, driven by a significant decline in the volume of refinance mortgages. We attribute this decline to higher mortgage interest rates in the 2014 period as compared to the 2013 period. In addition, many borrowers have already refinanced their loans at interest rates that are at or below the current market level.

We refer to single-family loans we acquired beginning in 2009, excluding HARP and other relief refinance mortgages, as our New single-family book. We do not include relief refinance mortgages, including HARP loans, in our New single-family book, since underwriting procedures for relief refinance mortgages are limited, and, in many cases, do not include all of the changes in underwriting standards we have implemented since 2008. As a result, relief refinance mortgages generally reflect many of the credit risk attributes of the original loans (many of which were originated between 2005 and 2008).

Our New single-family book continues to represent an increasing share of our overall single-family credit guarantee portfolio and comprised 55% of this portfolio as of March 31, 2014. The New single-family book has low delinquency rates and credit losses compared to our 2005-2008 Legacy single-family book. The serious delinquency rate for the New single-family book was 0.24% as of March 31, 2014 and its credit losses were $33 million in the first quarter of 2014, representing 3% of our credit losses. As of March 31, 2014, loans originated after 2008 have, on a cumulative basis, provided management and guarantee income that has exceeded the credit-related and administrative expenses associated with these loans. We expect these loans to continue to be profitable for us over the long term, in aggregate. For more information on the composition of our single-family credit guarantee portfolio, see "Table 28 — Single-Family Credit Guarantee Portfolio Data by Year of Origination."

We executed one STACR debt note transaction during the first quarter of 2014 that transferred a mezzanine credit loss position on certain groups of loans in our New single-family book. The transaction shifts mortgage credit risk from us to private investors. In this transaction, we issued $1.0 billion in UPB of STACR debt notes that provides us with credit protection coverage for $32.3 billion of UPB of loans in the single-family credit guarantee portfolio. We will seek to continue to expand and refine our offerings of credit risk transfer transactions in the future. For more information on our STACR debt note transactions, see "BUSINESS — Our Business Segments — Single-Family Guarantee Segment — Credit Enhancements" in our 2013 Annual Report.

HARP and other relief refinance loans represent a significant portion of our single-family credit guarantee portfolio. Relief refinance mortgages (including HARP loans) generally present higher risk to us than other refinance loans we have purchased since 2009. However, relief refinance mortgages (including HARP loans) generally have performed better than loans with similar characteristics remaining in our single-family credit guarantee portfolio that were originated prior to 2009. For information on the potential credit risks related to these loans, see "RISK MANAGEMENT — Credit Risk —Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program."

Segment Earnings management and guarantee income decreased $72 million in the first quarter of 2014 compared to the first quarter of 2013. This decline was primarily due to decreased amortization of delivery fees resulting from a higher interest rate environment and lower refinancing activity compared to the first quarter of 2013. The average management and guarantee fee we charged for new acquisitions in the first quarter of 2014 was 56.2 basis points, compared to 49.1 basis points in the first quarter of 2013. The guarantee fee we charge on new acquisitions generally consists of a combination of delivery fees as well as a base monthly fee. The average guarantee fee charged on new acquisitions represents our expected guarantee fee rate over the estimated life of the related loans using certain assumptions for prepayments and other liquidations. We seek to issue guarantees with fee terms that we believe are commensurate with the risks assumed and that will, over the long-term: (a) provide management and guarantee fee income that, in aggregate, exceeds our anticipated credit-related and administrative expenses on the single-family credit guarantee portfolio; and (b) provide a return on the capital that would be needed to support the related credit risk.

Our Segment Earnings management and guarantee fee income is influenced by our PC price performance because we adjust our fees based on the relative price performance of our PCs compared to comparable Fannie Mae securities. A decline in security performance could negatively impact our segment financial results. See “RISK FACTORS — Competitive and Market Risks — A significant decline in the price performance of or demand for our PCs could have an adverse effect on the volume and/or profitability of our new single-family guarantee business. The profitability of our multifamily business could be



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adversely affected by a significant decrease in demand for K Certificates” in our 2013 Annual Report for additional information.

In December 2013, FHFA announced a number of increases to our guarantee fee rates. In January 2014, FHFA announced that it was delaying the implementation of these changes.

The UPB of the single-family credit guarantee portfolio was $1.7 trillion at both March 31, 2014 and December 31, 2013. We expect the UPB of our single-family credit guarantee portfolio will be relatively unchanged at the end of 2014 compared to the end of 2013. Our purchase activity in the first quarter of 2014 declined to $49.2 billion in UPB compared to $131.9 billion in UPB during the first quarter of 2013. We expect the reduced purchase volume to continue in the remainder of 2014. However, the expected decline in purchase volume is expected to be offset by a decline in prepayments resulting from higher mortgage interest rates.

The annualized liquidation rate on our single-family credit guarantees was approximately 14% and 35% for the first quarters of 2014 and 2013, respectively. This decline was primarily due to the higher interest rate environment and lower refinancing activity in the first quarter of 2014.

Segment Earnings (provision) benefit for credit losses for the Single-family Guarantee segment was $(322) million and $244 million in the first quarters of 2014 and 2013, respectively. The Segment Earnings provision for credit losses in the first quarter of 2014 reflects incurred losses associated with newly delinquent loans that were partially offset by moderate home price growth. The Segment Earnings benefit for credit losses in the first quarter of 2013 reflects a more significant increase in home prices that was partially offset by incurred losses associated with newly delinquent loans. Assuming that all other factors remain the same, an increase in home prices can reduce the likelihood that loans will default and may also reduce the amount of credit losses on the loans that do default. Our (provision) benefit for credit losses in the first quarter of 2014 also reflects $0.3 billion of benefit related to settlement agreements with certain sellers for the release of repurchase obligations in exchange for one-time cash payments, primarily associated with our Legacy single-family books. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS - Seller/Servicers” for more information about these agreements.

The serious delinquency rate on our single-family credit guarantee portfolio was 2.20% and 2.39% at March 31, 2014 and December 31, 2013, respectively. Charge-offs, net of recoveries, associated with single-family loans were $ 0.9 billion and $2.1 billion in the first quarters of 2014 and 2013, respectively. Our recoveries in the first quarters of 2014 and 2013 included approximately $0.4 billion and $0.3 billion, respectively, related to repurchase requests from our seller/servicers (including amounts related to settlement agreements with certain sellers to release specified loans from certain repurchase obligations in exchange for one-time cash payments). Single-family credit losses as a percentage of the average balance of the single-family credit guarantee portfolio and HFA initiative-related guarantees were 23.1 basis points and 49.9 basis points for the first quarters of 2014 and 2013, respectively. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance, serious delinquency rates, charge-offs, REO assets and non-accrual loans.

Expenses related to the legislated 10 basis point increase in guarantee fees were $178 million and $93 million during the first quarters of 2014 and 2013, respectively, and we recognized a similar amount of associated management and guarantee income in each period. As of March 31, 2014, loans with an aggregate UPB of $727 billion were subject to these fees, and the cumulative total of the amounts paid and due to Treasury was $818 million.

REO operations expense for the Single-family Guarantee segment was $59 million and $8 million in the first quarters of 2014 and 2013, respectively. The increase was primarily due to lower disposition volume, resulting in: (a) lower gains on the disposition of REO properties; and (b) lower recoveries on REO properties.

Our single-family REO inventory (measured in number of properties) declined 8% from December 31, 2013 to March 31, 2014, primarily due to lower foreclosure activity as a result of our loss mitigation efforts and a declining amount of delinquent loans. Although there was an improvement in REO disposition severity during the first quarter of 2014, the REO disposition severity ratios on sales of our REO inventory remain high as compared to periods before 2008. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — REO Assets” for additional information about our REO activity.



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Investments

The table below presents the Segment Earnings of our Investments segment.

Table 13 — Segment Earnings and Key Metrics — Investments⁽¹⁾



	Three Months Ended March 31,
	2014			2013
	(dollars in millions)
Segment Earnings:
Net interest income	$	836		$	1,030
Non-interest income (loss):
Net impairment of available-for-sale securities recognized in earnings	(215		)	8
Derivative gains (losses)	(1,488		)	559
Gains (losses) on trading securities	(55		)	(378		)
Other non-interest income	5,637			757
Total non-interest income (loss)	3,879			946
Non-interest expense:
Administrative expenses	(124		)	(112		)
Other non-interest expense	(4		)	—
Total non-interest expense	(128		)	(112		)
Segment adjustments⁽²⁾	151			289
Segment Earnings before income tax (expense) benefit	4,738			2,153
Income tax (expense) benefit	(1,436		)	267
Segment Earnings, net of taxes	3,302			2,420
Total other comprehensive income, net of taxes	479			2,374
Comprehensive income	$	3,781		$	4,794
Key metrics:
Portfolio balances:
Average balances of interest-earning assets:⁽³⁾
Mortgage-related securities⁽⁴⁾	$	248,228		$	285,996
Non-mortgage-related investments⁽⁵⁾	72,030			86,338
Single-family unsecuritized loans⁽⁶⁾	83,770			91,389
Total average balances of interest-earning assets	$	404,028		$	463,723
Return:
Net interest yield — Segment Earnings basis (annualized)	0.83		%	0.89		%

(1)

In the first quarter of 2014, we revised our inter-segment allocations between the Multifamily and the Investments segments for the Multifamily segment's investment securities and held-for-sale loans. Prior period results have been revised to conform with the current period presentation. For additional information about this change and the reconciliations of the Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 13: SEGMENT REPORTING — Segment Earnings" and "— Table 13.2 — Segment Earnings and Reconciliation to GAAP Results,” respectively.


(2)	For a description of our segment adjustments, see “NOTE 13: SEGMENT REPORTING — Segment Earnings” in our 2013 Annual Report.


(3)	We calculate average balances based on amortized cost.


(4)	Includes our investments in single-family PCs and certain Other Guarantee Transactions, which are consolidated under GAAP on our consolidated balance sheets.


(5)	Includes the average balances of interest-earning cash and cash equivalents, non-mortgage-related securities, and federal funds sold and securities purchased under agreements to resell.


(6)	Excludes unsecuritized seriously delinquent single-family mortgage loans.

Segment Earnings for our Investments segment increased by $0.9 billion to $3.3 billion in the three months ended March 31, 2014 compared to $2.4 billion in the three months ended March 31, 2013, primarily due to increases in other non-interest income from settlements associated with our investments in certain non-agency mortgage-related securities during the three months ended March 31, 2014, partially offset by derivative losses recorded during the three months ended March 31, 2014 compared to derivative gains recorded during the three months ended March 31, 2013. Comprehensive income for our Investments segment decreased by $1.0 billion to $3.8 billion in the three months ended March 31, 2014 compared to $4.8 billion in the three months ended March 31, 2013, primarily due to lower other comprehensive income as a result of lower fair value gains on our non-agency mortgage-related securities.

During the three months ended March 31, 2014, the UPB of the Investments segment mortgage investments portfolio decreased at an annualized rate of 22%. We held $168.9 billion and $182.1 billion of agency securities, $61.0 billion and $64.5 billion of non-agency mortgage-related securities, and $82.7 billion and $84.4 billion of single-family unsecuritized mortgage loans at March 31, 2014 and December 31, 2013, respectively. The decline in UPB of agency securities is due mainly to liquidations, sales of PCs, and sales related to our structuring activity, where we generally sell a portion of the newly



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structured asset. The decline in UPB of non-agency mortgage-related securities is due mainly to the receipt of principal repayments from both the recoveries from liquidated loans and voluntary repayments of the underlying collateral, representing a partial return of our investments in these securities, and sales. The decline in the UPB of single-family unsecuritized mortgage loans is primarily related to prepayments of mortgage loans held and the securitization of mortgage loans that we had purchased for cash, and includes the securitization of reperforming loans and modified loans, partially offset by the addition of newly performing loans from the Single-family Guarantee segment. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” and “— Mortgage Loans” for additional information regarding our mortgage-related securities and mortgage loans.

Segment Earnings net interest income decreased by $194 million and Segment Earnings net interest yield decreased by six basis points during the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The primary driver of the decreases was the negative impact of the reduction in the balance of higher-yielding mortgage-related assets due to continued liquidations.

Segment Earnings non-interest income was $3.9 billion in the three months ended March 31, 2014 compared to $0.9 billion in the three months ended March 31, 2013. The improvement was primarily due to settlements associated with our investments in certain non-agency mortgage-related securities, partially offset by derivative losses recorded during the three months ended March 31, 2014 compared to derivative gains recorded during the three months ended March 31, 2013.

We recorded derivative gains (losses) for this segment of $(1.5) billion during the three months ended March 31, 2014 compared to $0.6 billion during the three months ended March 31, 2013. The losses were primarily due to a decrease in longer-term interest rates during the three months ended March 31, 2014 compared to an increase in longer-term interest rates during the three months ended March 31, 2013, coupled with a change in the mix of our derivatives. See “Non-Interest Income (Loss) — Derivative Gains (Losses)” for additional information on our derivatives.

Net impairment of available-for-sale securities recognized in earnings in our Investments segment was an expense of $215 million during the three months ended March 31, 2014 compared to a benefit of $8 million during the three months ended March 31, 2013. During the three months ended March 31, 2014, these impairments were primarily driven by an increase in the population of available-for-sale securities in an unrealized loss position that we intend to sell. The majority of the impairments recognized in earnings from securities where our intent to sell changed relate to a non-agency mortgage-related securities settlement where a counterparty agreed to purchase these securities as part of the settlement. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities,” as well as “NOTE 7: INVESTMENTS IN SECURITIES” and "NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Non-Agency Mortgage-Related Security Issuers" for additional information.

We recorded gains (losses) on trading securities of $(55) million during the three months ended March 31, 2014 compared to $(378) million during the three months ended March 31, 2013. The losses on trading securities during both periods were primarily due to the movement of securities with unrealized gains towards maturity. The losses on trading securities during the three months ended March 31, 2014 were partially offset by an increase in fair value of our trading securities as a result of the decrease in interest rates during the period.

We recorded other non-interest income for this segment of $5.6 billion during the three months ended March 31, 2014 compared to $757 million during the three months ended March 31, 2013. The increase in other non-interest income primarily resulted from: (a) settlements associated with our investments in certain non-agency mortgage-related securities; and (b) increased gains on sales of available-for-sale securities resulting from sales primarily related to our structuring activity. For information on the settlement agreements, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Non-Agency Mortgage-Related Security Issuers.”

Our Investments segment’s other comprehensive income was $479 million during the three months ended March 31, 2014 compared to $2.4 billion during the three months ended March 31, 2013. The decrease in other comprehensive income was primarily due to lower fair value gains on our non-agency mortgage-related securities as spreads tightened less during the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

For a discussion of items that have affected our Investments segment net interest income over time, and can be expected to continue to do so, see “BUSINESS — Conservatorship and Related Matters — Limits on Investment Activity and Our Mortgage-Related Investments Portfolio” in our 2013 Annual Report.



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Multifamily

The table below presents the Segment Earnings of our Multifamily segment.

Table 14 — Segment Earnings and Key Metrics — Multifamily⁽¹⁾



	Three Months Ended March 31,
	2014			2013
	(dollars in millions)
Segment Earnings:
Net interest income	$	215		$	303
Benefit for credit losses	19			34
Non-interest income:
Management and guarantee income	58			46
Net impairment of available-for-sale securities recognized in earnings	—			(11		)
Gains on mortgage loans	254			9
Derivative gains (losses)	85			830
Other non-interest income	39			100
Total non-interest income	436			974
Non-interest expense:
Administrative expenses	(66		)	(79		)
REO operations income (expense)	—			2
Other non-interest expense	(5		)	(5		)
Total non-interest expense	(71		)	(82		)
Segment Earnings before income tax expense	599			1,229
Income tax expense	(181		)	(226		)
Segment Earnings, net of taxes	418			1,003
Total other comprehensive income, net of taxes	—			5
Total comprehensive income	$	418		$	1,008
Key metrics:
Balances and Volume:
Average balance of Multifamily unsecuritized loan portfolio	$	58,116		$	76,136
Average balance of Multifamily guarantee portfolio	$	76,524		$	54,585
Average balance of Multifamily investment securities portfolio	$	31,894		$	50,641
Multifamily new business activity	$	3,006		$	6,044
Multifamily units financed from new business activity	51,419			86,582
Multifamily K Certificate transactions — guaranteed portion	$	3,270		$	4,770
Multifamily K Certificate transactions — unguaranteed portion⁽²⁾	$	609		$	788
Yield and Rate:
Net interest yield — Segment Earnings basis (annualized)	0.95		%	0.95		%
Average Management and guarantee fee rate, in bps (annualized):⁽³⁾
K Certificate guarantees	20.1			19.3
All other guarantees	75.6			74.0
Total	30.4			33.4
Credit:
Delinquency rate:
Credit-enhanced loans, at period end	0.07		%	0.34		%
Non-credit-enhanced loans, at period end	0.02		%	0.04		%
Total delinquency rate, at period end⁽⁴⁾	0.04		%	0.16		%
Allowance for loan losses and reserve for guarantee losses, at period end	$	132		$	340
Credit losses, in bps (annualized)⁽⁵⁾	—			4.5
REO inventory, at net carrying value	$	26		$	77
REO inventory, at period end (number of properties)	2			6

(1)

In the first quarter of 2014, we revised our inter-segment allocations between the Multifamily and the Investments segments for the Multifamily segment's investment securities and held-for-sale loans. Prior period results have been revised to conform with the current period presentation. For additional information about this change and the reconciliations of Segment Earnings line items to the comparable line items in our consolidated financial statements prepared in accordance with GAAP, see “NOTE 13: SEGMENT REPORTING — Segment Earnings" and "Table 13.2 — Segment Earnings and Reconciliation to GAAP Results,” respectively.


(2)	Represents subordinated securities (i.e., CMBS), which are not issued or guaranteed by us.



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(3)	Represents Multifamily Segment Earnings — management and guarantee income, excluding prepayment and certain other fees for each category, divided by the sum of the average UPB of the related category of guarantee. The average UPB of the all other guarantees category includes the average UPB associated with HFA initiative-related guarantees, excluding certain bonds under the NIBP.


(4)	See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Multifamily Mortgage Credit Risk” for information on our reported multifamily delinquency rate.


(5)	Calculated as the amount of multifamily credit losses (gains) divided by the sum of the average carrying value of our multifamily loans (on-balance sheet) and the average balance of the multifamily guarantee portfolio, including multifamily HFA initiative-related guarantees.

Both Segment Earnings and comprehensive income for our Multifamily segment were $0.4 billion in the first quarter of 2014, compared to $1.0 billion in the first quarter of 2013. Comprehensive income decreased mainly due to lower gains on CMBS securities from less favorable spread movements in the first quarter of 2014, which resulted in decreased fair value gains of $0.3 billion in the first quarter of 2014 compared to the first quarter of 2013.

In the first quarter of 2014, we continued to provide liquidity to the multifamily market and support affordable rental housing by acquiring and securitizing multifamily mortgages. Our multifamily new business activity declined to $3.0 billion in the first quarter of 2014 compared to $6.0 billion for the first quarter of 2013 as a result of increased competition from other market participants in the private sector.

We sold $3.9 billion in UPB of multifamily loans in the first quarter of 2014, primarily through K Certificate transactions, compared to $5.6 billion in the first quarter of 2013. The UPB of the total multifamily portfolio declined to $164.5 billion as of March 31, 2014 from $166.8 billion as of December 31, 2013 primarily due to declines in our multifamily mortgage investments portfolio. This decline was partially offset by an increase in our multifamily guarantee portfolio resulting from our issuance of K Certificates.

Segment Earnings net interest income decreased to $215 million in the first quarter of 2014 compared to $303 million in the first quarter of 2013 primarily due to lower average balances of the multifamily loan and investment securities portfolios.

Segment Earnings non-interest income decreased to $436 million in the first quarter of 2014 compared to $974 million in the first quarter of 2013. This decrease was primarily due to lower gains on derivatives used to hedge investment securities resulting from a decline in longer-term interest rates in the first quarter of 2014 versus an increase in longer-term interest rates in the first quarter of 2013. In addition, lower average balances of the multifamily loan and investment portfolios resulted in lower derivative balances. Derivative gains (losses) for the Multifamily segment are offset by fair value changes of the corresponding assets that the derivatives hedge. The fair value changes of these hedged assets are included in gains on mortgage loans, other non-interest income and total other comprehensive income. As a result, there is no net impact on total comprehensive income for the Multifamily segment from interest rate-related derivatives.

Segment Earnings management and guarantee income increased to $58 million in the first quarter of 2014 compared to $46 million in the first quarter of 2013. The increase in the first quarter of 2014 was primarily due to the higher average balance of the multifamily guarantee portfolio, which was primarily due to increased issuances of K Certificates. However, the average total management and guarantee fee rate on our multifamily guarantee portfolio declined to 30.4 basis points in the first quarter of 2014 from 33.4 basis points in the first quarter of 2013. The decline primarily reflects the increased issuances of guaranteed K Certificates during recent periods, which have lower fees than our other multifamily guarantee activities as a result of our limited credit risk exposure due to the use of subordination.

Segment Earnings benefit for credit losses was $19 million and $34 million in the first quarters of 2014 and 2013, respectively. The recognition of a benefit for credit losses was primarily due to continued improvement in the expected performance of the underlying loans.

As a result of our prudent underwriting standards and practices, and the continued positive multifamily market fundamentals, the credit quality of the multifamily mortgage portfolio remains strong. Multifamily credit losses as a percentage of the combined average balance of our multifamily loan and guarantee portfolios were 0.0 basis points and 4.5 basis points in the first quarters of 2014 and 2013, respectively, and our delinquency rate of 0.04% as of March 31, 2014 continues to be among the industry's lowest. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Multifamily Mortgage Credit Risk” for further information about the credit performance of our multifamily mortgage portfolio.

CONSOLIDATED BALANCE SHEETS ANALYSIS

The following discussion of our consolidated balance sheets should be read in conjunction with our consolidated financial statements, including the accompanying notes. Also, see “CRITICAL ACCOUNTING POLICIES AND ESTIMATES” in our 2013 Annual Report for information concerning certain significant accounting policies and estimates applied in determining our reported financial position.

Cash and Cash Equivalents, Federal Funds Sold and Securities Purchased Under Agreements to Resell

Cash and cash equivalents, federal funds sold and securities purchased under agreements to resell, and other liquid assets discussed in “Investments in Securities — Non-Mortgage-Related Securities,” are important to our cash flow and asset and liability management, and our ability to provide liquidity and stability to the mortgage market. We use these assets to help manage recurring cash flows and meet our other cash management needs. We consider federal funds sold to be overnight unsecured trades executed with insured depository institutions that are members of the Federal Reserve System. Federal funds



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sold trades are not insured. Securities purchased under agreements to resell principally consist of short-term contractual agreements such as reverse repurchase agreements involving Treasury and agency securities.

The short-term assets on our consolidated balance sheets also include those related to our consolidated VIEs, which consisted primarily of restricted cash and cash equivalents and securities purchased under agreements to resell at March 31, 2014. These short-term assets related to our consolidated VIEs decreased by $1.8 billion from December 31, 2013 to March 31, 2014 primarily due to a decrease in the level of refinancing activity.

Excluding amounts related to our consolidated VIEs, we held $10.6 billion and $11.3 billion of cash and cash equivalents (including non-interest bearing deposits of $2.5 billion and $7.2 billion at the Federal Reserve Bank of New York), no federal funds sold, and $24.5 billion and $59.2 billion of securities purchased under agreements to resell at March 31, 2014 and December 31, 2013, respectively. The decrease in these liquid assets at March 31, 2014 compared to December 31, 2013 was due in part to the raising of the U.S. statutory debt limit, thus abating concerns that the U.S. would exhaust its borrowing authority.

Excluding amounts related to our consolidated VIEs, we held on average $16.6 billion of cash and cash equivalents and $38.9 billion of federal funds sold and securities purchased under agreements to resell during the three months ended March 31, 2014.

For information regarding our liquidity management practices and policies, see “MD&A — LIQUIDITY AND CAPITAL RESOURCES” in our 2013 Annual Report.

Investments in Securities

The table below provides detail regarding the fair value of our investments in securities as of March 31, 2014 and December 31, 2013. The table does not include our holdings of single-family PCs and certain Other Guarantee Transactions. For information on our holdings of such securities, see “Table 10 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios.”

Table 15 — Investments in Securities



	March 31, 2014		December 31, 2013
	(in millions)
Investments in securities:
Available-for-sale:
Mortgage-related securities:
Freddie Mac ⁽¹⁾	$	35,165	$	40,659
Fannie Mae	10,139		10,797
Ginnie Mae	160		167
CMBS	28,616		30,338
Subprime	26,540		27,499
Option ARM	6,439		6,574
Alt-A and other	7,606		8,706
Obligations of states and political subdivisions	3,276		3,495
Manufactured housing	676		684
Total available-for-sale mortgage-related securities	118,617		128,919
Total investments in available-for-sale securities	118,617		128,919
Trading:
Mortgage-related securities:
Freddie Mac ⁽¹⁾	14,340		9,349
Fannie Mae	6,452		7,180
Ginnie Mae	92		98
Other	124		141
Total trading mortgage-related securities	21,008		16,768
Non-mortgage-related securities:
Treasury bills	4,574		2,254
Treasury notes	4,405		4,382
Total trading non-mortgage-related securities	8,979