UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended June 30, 2014
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission File Number: 001-34139
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Freddie Mac
Federally chartered corporation | 8200 Jones Branch Drive | 52-0904874 | (703) 903-2000 | |||
(State or other jurisdiction of incorporation or organization) | McLean, Virginia 22102-3110 | (I.R.S. Employer Identification No.) | (Registrant’s telephone number, including area code) | |||
(Address of principal executive offices, including zip code) | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer ¨ | ||||
Non-accelerated filer (Do not check if a smaller reporting company) ¨ | Smaller reporting company ¨ | ||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of July 24, 2014, there were 650,040,391 shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
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i | Freddie Mac | |
MD&A TABLE REFERENCE
Table | Description | Page | |
1 | Total Single-Family Loan Workout Volumes | ||
2 | Mortgage-Related Investments Portfolio | ||
3 | Selected Financial Data | ||
4 | Summary Consolidated Statements of Comprehensive Income | ||
5 | Net Interest Income/Yield and Average Balance Analysis | ||
6 | Derivative Gains (Losses) | ||
7 | Other Income (Loss) | ||
8 | Non-Interest Expense | ||
9 | REO Operations (Income) Expense | ||
10 | Composition of Segment Mortgage Portfolios and Credit Risk Portfolios | ||
11 | Segment Earnings and Key Metrics — Single-Family Guarantee | ||
12 | Segment Earnings Composition — Single-Family Guarantee Segment | ||
13 | Segment Earnings and Key Metrics — Investments | ||
14 | Segment Earnings and Key Metrics — Multifamily | ||
15 | Investments in Securities | ||
16 | Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets | ||
17 | Additional Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets | ||
18 | Mortgage-Related Securities Purchase Activity | ||
19 | Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, and Alt-A Loans and Certain Related Credit Statistics | ||
20 | Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans | ||
21 | Net Impairment of Available-For-Sale Mortgage-Related Securities Recognized in Earnings | ||
22 | Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS | ||
23 | Mortgage Loan Purchases and Other Guarantee Commitment Issuances | ||
24 | Derivative Fair Values and Maturities | ||
25 | Freddie Mac Mortgage-Related Securities | ||
26 | Issuances and Extinguishments of Debt Securities of Consolidated Trusts | ||
27 | Changes in Total Equity | ||
28 | Single-Family Credit Guarantee Portfolio Data by Year of Origination | ||
29 | Characteristics of Purchases for the Single-Family Credit Guarantee Portfolio | ||
30 | Characteristics of the Single-Family Credit Guarantee Portfolio | ||
31 | Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio | ||
32 | Single-Family Loan Workout, Serious Delinquency, and Foreclosure Volumes | ||
33 | Quarterly Percentages of Modified Single-Family Loans — Current or Paid Off | ||
34 | Single-Family Relief Refinance Loans | ||
35 | Single-Family Serious Delinquency Statistics | ||
36 | Credit Concentrations in the Single-Family Credit Guarantee Portfolio | ||
37 | Single-Family Credit Guarantee Portfolio by Attribute Combinations | ||
38 | Multifamily Mortgage Portfolio — by Attribute | ||
39 | TDRs and Non-Accrual Mortgage Loans | ||
40 | REO Activity by Region | ||
41 | Single-Family REO Property Status | ||
42 | Credit Loss Performance | ||
43 | Severity Ratios for Single-Family Loans | ||
44 | Single-Family Impaired Loans with Specific Reserve Recorded | ||
45 | Single-Family Credit Loss Sensitivity | ||
46 | Mortgage Insurance by Counterparty | ||
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47 | Bond Insurance by Counterparty | ||
48 | Derivative Counterparty Credit Exposure | ||
49 | Activity in Other Debt | ||
50 | Freddie Mac Credit Ratings | ||
51 | Consolidated Fair Value Balance Sheets | ||
52 | Summary of Change in the Fair Value of Net Assets | ||
53 | PMVS and Duration Gap Results | ||
54 | Derivative Impact on PMVS-L (50 bps) | ||
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FINANCIAL STATEMENTS
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iv | Freddie Mac | |
PART I — FINANCIAL INFORMATION
We continue to operate under the conservatorship that commenced on September 6, 2008, under the direction of FHFA as our Conservator. The Conservator succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any shareholder, officer or director thereof, with respect to the company and its assets. The Conservator has delegated certain authority to our Board of Directors to oversee, and management to conduct, 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, our 2013 Annual Report, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014; 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 and six months ended June 30, 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 second quarter of 2014, home price growth continued to moderate compared to the first half of 2013. Comprehensive income was $1.9 billion for the second quarter of 2014 compared to $4.4 billion for the second quarter of 2013. Comprehensive income for the second quarter of 2014 consisted of $1.4 billion of net income and $0.5 billion of other comprehensive income. Our results for the second quarter of 2014 include: (a) a benefit for credit losses; and (b) settlements of lawsuits regarding our investments in certain residential non-agency mortgage-related securities; offset by (c) declines in the fair value of our derivatives due to the decrease in longer-term interest rates. Our total equity was $4.3 billion at June 30, 2014. As a result of our positive net worth at June 30, 2014, no draw is being requested from Treasury under the Purchase Agreement for the second quarter of 2014. Through June 30, 2014, we have paid aggregate cash dividends to Treasury that exceed our
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aggregate draws received under the Purchase Agreement by $14.9 billion. At June 30, 2014, our aggregate funding received from Treasury under the Purchase Agreement was $71.3 billion.
Sustainability of Earnings
The level of earnings we have experienced in recent periods is not sustainable over the long term. Our 2013 financial results included a significant benefit related to the release of the deferred tax asset valuation allowance. As a result, we no longer maintain a valuation allowance against our deferred tax asset. Additionally, our 2013 and 2014 financial results included settlements of representation and warranty claims and of residential non-agency mortgage-related securities litigation. We do not expect future settlements, if any, of representation and warranty claims related to pre-conservatorship loan originations to have a significant effect on our financial results. Our recent financial results, particularly the level of loan loss provisioning, also benefited significantly from strong home price appreciation, which is moderating. 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, implied volatility, and mortgage spreads (which impact both derivatives and mortgage-related securities held by us), and therefore can cause significant earnings and net worth variability from period to period.
Our Primary Business Objectives
Our business objectives reflect direction that we have received from the Conservator. 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.”
On May 13, 2014, FHFA issued its 2014 Strategic Plan and the 2014 Conservatorship Scorecard. The 2014 Strategic Plan provides an updated vision for FHFA's implementation of its obligations as conservator of Freddie Mac and Fannie Mae (the “Enterprises”), and establishes three reformulated strategic goals: (a) maintain, in a safe and sound manner, foreclosure prevention activities and credit availability for new and refinanced mortgages to foster liquid, efficient, competitive and resilient national housing finance markets; (b) reduce taxpayer risk through increasing the role of private capital in the mortgage market; and (c) build a new single-family securitization infrastructure for use by the Enterprises and adaptable for use by other participants in the secondary market in the future. The 2014 Conservatorship Scorecard establishes objectives and performance targets and measures for 2014 for the Enterprises related to the strategic goals set forth in the 2014 Strategic Plan. For more information, see "LEGISLATIVE AND REGULATORY MATTERS — FHFA's 2014 Strategic Plan for the Conservatorships of Freddie Mac and Fannie Mae and the 2014 Conservatorship Scorecard."
Reducing Taxpayer Exposure to Losses by Reducing and Managing Our Overall Risk Profile, Especially to Mortgage-Related Risks
We are working diligently with FHFA to reduce the taxpayers' exposure and improve the return on the taxpayers' investment. 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 June 30, 2014, but comprised 81% of our credit losses in the first half of 2014.
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 1,017,000 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 $7.0 billion and $8.5 billion in UPB of loans in the first six months 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 six months of 2014 and 2013, we purchased or guaranteed $16.0 billion and $65.1 billion in UPB of relief refinance loans, respectively, which included $8.9 billion and $41.8 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 51,000 borrowers
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during the first half of 2014. See “Table 34 — Single-Family Relief Refinance Loans” for more information about the volume of our relief refinance purchases.
As of June 30, 2014, the borrower’s monthly payment for all of our completed HAMP modifications was reduced on average by an estimated $529 at the time of modification, which amounts to an average of $6,348 per year, and a total of $1.6 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).
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 June 30, 2014, approximately 23,000 borrowers were in modification trial periods, including approximately 20,000 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. Under the 2014 Conservatorship Scorecard, FHFA set goals for us relating to: (a) encouraging eligible borrowers to refinance their mortgages under HARP; and (b) assessing and developing additional plans for loss mitigation strategies. In June 2014, FHFA announced that it would begin a nationwide outreach campaign. This campaign includes open forum meetings with participation from us and Fannie Mae, in certain cities, to inform community leaders about HARP eligibility criteria and benefits. We are also assessing or piloting other new strategies for loss mitigation with FHFA and Fannie Mae, including implementing a temporary new modification initiative in Detroit, Michigan, to assist troubled borrowers in the city.
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.
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We believe our REO disposition and short sale severity ratios in the first half 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.
Under the 2014 Conservatorship Scorecard, FHFA set a goal for us to develop and implement a plan for targeted sales of non-performing loans and REO properties that facilitate neighborhood stabilization, especially in markets that have been hardest hit by the housing downturn. In the first half of 2014, we worked with FHFA and Fannie Mae to develop a plan for both short sales and REO sales, including expanded auctions of properties, in certain cities that were hardest hit by the housing crisis. In these areas we are also: (a) expanding our efforts with locally-based private entities to facilitate REO dispositions; and (b) expanding our first look opportunities, which provide an initial period for REO properties to be purchased by owner occupants and non-profits dedicated to neighborhood stabilization before permitting investors to make offers.
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 June 30, 2014, we had: (a) $0.4 billion of outstanding repurchase requests for servicing related violations; and (b) an additional $0.3 billion of outstanding notices of defect, with our servicers, based on the UPB of the related loans. We also recognized $179 million of compensatory fees in the first half 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 June 30, 2014, our serious delinquency rate for the aggregate of those states that require a judicial foreclosure and all other states was 2.89% and 1.39%, respectively. Foreclosures generally take longer to complete in states where judicial foreclosures are required, compared to other states. During the six months ended June 30, 2014, the average time to foreclose on properties in states that require a judicial foreclosure was 1,033 days compared to 644 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 that completed foreclosure during the period.
In the first half of 2014, we facilitated the transfer of servicing for $15.1 billion in UPB of loans from our primary servicers to specialty servicers. 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 to servicers that specialize in workouts of problem loans.
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. 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. As a result, our exposure to single-family mortgage seller/servicers has declined with respect to repurchase obligations arising from breaches of representations and warranties made to us for loans they underwrote and sold to us. As of June 30, 2014 and December 31, 2013, we had $0.5 billion and $1.6 billion, respectively, of outstanding repurchase requests with sellers, based on UPB of the loans.
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 half of 2014, we recovered amounts from seller/servicers with respect to $1.4 billion in UPB of loans subject to our repurchase requests for selling and servicing violations, including $0.4 billion in UPB related to settlement agreements. Approximately 18% of the $1.4 billion in UPB associated with resolved repurchase requests in the first half of 2014 were satisfied by the reimbursement of losses (excluding amounts related to settlement agreements).
In May 2014, at the direction of FHFA, we announced certain changes to our representation and warranty framework for loans acquired on and after July 1, 2014. See "RISK MANAGEMENT — Credit Risk — Institutional Credit Risk — Single-Family Mortgage Seller/Servicers" for information about these changes.
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
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mitigate our credit loss exposure. Primary mortgage insurance is generally required to be purchased at loan origination, typically at the borrower’s expense, for 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 $0.6 billion and $0.9 billion during the six months ended June 30, 2014 and 2013, respectively. 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 one of our top five mortgage insurance counterparties, as it is only permitted to partially pay claims under orders of its regulator.
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 developing counterparty risk management standards for mortgage insurers, in conjunction with Fannie Mae, at the direction of FHFA, consisting of the following: (a) revised eligibility requirements, which includes financial requirements under a risk based framework; and (b) revised master policies that provide greater certainty of coverage and facilitate timely claims processing. The revised standards are designed to provide that mortgage insurers are able to withstand a stress economic scenario and fulfill their intended role of providing private capital to the mortgage market. 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 seeking state regulatory approval. Aligning mortgage insurer eligibility requirements is a key component of the 2014 Conservatorship Scorecard and the 2014 Strategic Plan. We have announced that the revised master policies will be implemented October 1, 2014. FHFA has published the draft eligibility requirements for public input during a comment period which will conclude on September 8, 2014. We expect to publish new eligibility requirements by the end of 2014, which will become effective 180 days after the publication date. Approved insurers that do not fully comply with the new financial requirements would be given a transition period of up to two years from the publication date.
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 half of 2014, we and FHFA reached settlements with a number of institutions pursuant to which we received an aggregate of $4.9 billion, which was recognized in our consolidated statement of comprehensive income for the period. 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.
Reducing Our Mortgage-Related Investments Portfolio Over Time
In July 2014, pursuant to the 2014 Conservatorship Scorecard, we submitted a plan to FHFA to meet (even under adverse market conditions) the portfolio reduction requirements of the Purchase Agreement. Under the plan (and as set forth in the 2014 Conservatorship Scorecard), we are focused on reducing the less liquid assets in our mortgage-related investments portfolio. The Scorecard provides that any sales of less liquid assets should be economically sensible transactions that consider impacts to the market and neighborhood stability.
From December 31, 2013 to June 30, 2014, the size of our mortgage-related investments portfolio declined by 9% or $41.1 billion, to $419.9 billion. Our less liquid assets accounted for $27.6 billion of this decline. Our less liquid assets declined primarily due to liquidations and our active efforts to reduce less liquid assets through securitization of $3.5 billion of single-family reperforming and modified loans and sale of $8.2 billion of less liquid assets (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 add certain of these assets to our mortgage-related investments portfolio as part of our business strategies (e.g., removal of seriously delinquent loans from PC pools and acquisitions of multifamily and single-family loans purchased for cash). For more information, see “Limits on Investment Activity and Our Mortgage-Related Investments Portfolio.”
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 six months of 2014 and 2013, we purchased or issued other guarantee commitments for $107.6 billion and $261.7 billion in UPB of single-family conforming mortgage loans, respectively, representing approximately 526,000 and 1,281,000 homes, respectively. Origination volumes in the U.S. residential mortgage market declined significantly during the first half of 2014, as compared to the first half of 2013, driven by a significant decline in the volume of refinance mortgages. We attribute this decline to higher average mortgage interest rates in the first half of 2014
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compared to the first half of 2013. In addition, many borrowers have already refinanced their loans in recent periods at relatively low interest rates, and thus may be less likely to do so in the future. We estimate that we, Fannie Mae, and Ginnie Mae collectively guaranteed approximately 90% of the single-family conforming mortgages originated in the first half of 2014.
During the first half of 2014, our multifamily new business activity totaled $7.1 billion, and provided financing for 508 properties amounting to approximately 114,000 apartment units. Approximately 90% of the units were affordable to families earning at or below the median income in their area.
Under the 2014 Conservatorship Scorecard, FHFA set several goals for us relating to increasing access to single-family mortgage credit for creditworthy borrowers. These goals include continuing to improve, and provide additional clarity regarding, our representation and warranty framework.
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 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, the proportion of loans underwritten with full documentation, 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 home purchase loans and these loans generally have higher original LTV ratios and lower credit scores, in aggregate, than loans sold to us during 2010 through 2012. |
• | Transferring the credit risk of the single-family credit guarantee portfolio: We consider credit risk transfer transactions to be a prudent way to manage risk in our business. In addition to three credit risk transfer transactions completed in 2013, we executed four transactions (two STACR debt note transactions and two Agency Credit Insurance Structure, or ACIS transactions) during the first half of 2014. These transactions shift a portion of the mezzanine credit loss position on certain groups of loans in the New single-family book from us to private investors. While these credit risk transfer 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. The 2014 Conservatorship Scorecard includes a goal for us to complete credit risk transfer transactions for $90 billion in UPB using at least one transaction type in addition to STACR debt note transactions. |
• | 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. However, economic returns on our guarantee activities are limited by, and subject to, FHFA's oversight. 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. |
6 | Freddie Mac | |
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 (excluding certain structured agency securities collateralized by non-agency mortgage-related securities); and (b) assets that are less liquid than the agency securities noted above. We are focusing our efforts on reducing the balance of less liquid assets in the mortgage-related investments portfolio. Our liquid assets collectively represented $161.2 billion and $174.7 billion at June 30, 2014 and December 31, 2013, respectively, or approximately 38% of UPB of the portfolio at both June 30, 2014 and December 31, 2013. |
• | Managing the single-family performing loans obtained through our cash purchase program. In conjunction with the single-family business, we purchase loans from lenders for cash and 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 reperforming loans and performing modified loans. This includes securitizing loans, structuring the resulting securities and selling some or all of the tranches, 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 selling loans, and could include 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 operating 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 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, which we believe generates appropriate risk-adjusted returns on our business for taxpayers. 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.
The 2014 Conservatorship Scorecard includes a goal for us to maintain the dollar volume of new multifamily business activity for 2014 at or below the 2013 cap of $25.9 billion, excluding certain targeted loan types, such as those that support affordable housing. Additionally, the 2014 Conservatorship Scorecard set a goal for us to assess the economics and feasibility of adopting additional types of risk transfer structures and of increasing the amount of risk transferred in current risk transfer structures (i.e., K Certificate transactions). For this purpose, risk is broadly defined to include, but is not limited to, credit, counterparty or aggregation risk. During the first half of 2014, we continued our K Certificate securitizations in the multifamily market with K Certificate transactions of $8.4 billion in UPB.
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 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. As part of the 2014 Conservatorship Scorecard, FHFA set certain goals relating to the continued development of the common securitization platform. We and FHFA expect this will be a multi-year effort. In addition, the 2014 Strategic Plan provides for us and Fannie Mae to work towards the development of a single (common) security as part of this effort. |
7 | Freddie Mac | |
• | Uniform Mortgage Data Program: We and Fannie Mae continue to collaborate with the industry to develop and implement uniform data standards for single-family mortgages. The 2014 Conservatorship Scorecard set a goal for us to provide active support for the following mortgage data standardization initiatives: (a) the Servicing Data and Technology Initiative; (b) the Uniform Closing Disclosure Dataset; and (c) the Uniform Loan Application Dataset. |
• | 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. The 2014 Conservatorship Scorecard includes a goal for us to continue to develop approaches to reduce borrower costs for lender placed insurance. |
In addition, in the first half of 2014 we worked to help our seller/servicers improve their underwriting processes for loans that they sell to us, including the following:
• | We 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; |
• | We implemented requirements for our seller/servicers in response to certain final rules from the Consumer Financial Protection Bureau, including rules concerning the requirements for borrowers' ability to repay and high-cost mortgages. See “BUSINESS — Legislative and Regulatory Developments — Dodd-Frank Act” in our 2013 Annual Report for further information on the final rules; |
• | We 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 |
• | We continued to execute our loan review sampling strategy, specifically focusing on newly purchased mortgage loans, to evaluate compliance with our standards. |
Investing in Human Capital, 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 improving 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 emphasis on risk management and are conducting detailed operational control 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 4.0% on an annualized basis during the second quarter of 2014, compared to decreasing 2.1% in the first quarter of 2014 and increasing 2.5% in the second quarter of 2013, according to the Bureau of Economic Analysis. The national unemployment rate was 6.1% in June 2014, compared to 6.7% in both March 2014 and December 2013, based on data from the U.S. Bureau of Labor Statistics. An average of approximately 233,000 monthly net new jobs (non-farm) were added to the economy during the first half of 2014, which shows evidence of a 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 three quarters, averaging 4.29% during the fourth quarter of 2013, 4.36% in the first quarter of 2014, and 4.23% during the second quarter of 2014, based on our weekly Primary Mortgage Market Survey. This compares with the second quarter of 2013, when the average rate on new 30-year fixed-rate conforming mortgages was 3.67%. Higher mortgage interest rates in recent periods contributed to a relatively low volume of single-family refinance mortgage activity in the market during the first half of 2014.
8 | Freddie Mac | |
Single-Family Housing Market
Although home prices increased on a national basis in the second quarter of 2014 and from June 2013 to June 2014 (based on our index), some localities continued to be affected by weakness in employment growth and a significant inventory of seriously delinquent loans in their markets.
Based on data from the National Association of Realtors, sales of existing homes in the second quarter of 2014 were 5.04 million (on a seasonally-adjusted annual basis), increasing 9.6% from 4.60 million in the first quarter of 2014. Based on data from the U.S. Census Bureau and HUD, sales of new homes in the second quarter of 2014 were approximately 419,000 (on a seasonally-adjusted annual basis), declining 3.5% from approximately 434,000 in the first quarter of 2014. Home price appreciation has continued to moderate, with our nationwide index registering approximately a 6.1% increase from June 2013 to June 2014, compared with a 7.9% increase from March 2013 to March 2014. Despite increases in recent periods, our national home price index reflects a cumulative decline of 11.2% 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 half of 2014. Recent data reported by Reis, Inc. indicated that the national apartment vacancy rate was 4.1% and 4.3% in the second quarter of 2014 and 2013, respectively, and remains low compared to the cyclical peak of 8% reached at the end of 2009. In addition, Reis, Inc. reported that effective rents (i.e., the average rent paid by the tenant over the term of the lease adjusted for concessions by the landlord and costs borne by the tenant) grew by 0.9% during the second 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 are now more than 7% above the peak level reached before the housing crisis, and reflect continued strong demand from investors for apartment properties.
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 June 30, 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 increase 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 concentrated in a particular geographic area 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.
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 second half 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 the full year of 2014 will likely be slightly lower than in 2013. Important factors that we believe will continue to negatively affect single-family housing demand are the relatively high unemployment rate in certain areas 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 mortgage origination volumes in the full year of 2014, including refinancings, to be at the lowest level since 2000. Our loan purchase activity in the first half of 2014 declined to $107.6 billion in UPB compared to $261.7 billion in UPB during the first half of 2013. We expect this trend to continue in the second half of 2014 as refinancing volumes continue to remain low. During the first half of 2014, refinancings, including HARP, comprised approximately 48% of our single-family purchase and issuance volume compared with 81% in the first half of 2013. We expect HARP activity to continue to remain low during
9 | Freddie Mac | |
the second half 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 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 June 2014, FHFA released a request for input on the guarantee fees that we and Fannie Mae charge lenders. We cannot predict what changes, if any, FHFA will require us to make to our guarantee fees as a result of the input received from this request. For more information, see “LEGISLATIVE AND REGULATORY MATTERS — FHFA Request for Input on Guarantee Fees.”
Our charge-offs declined significantly during the first half of 2014 compared to the first half 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. |
Multifamily
We expect that, at the national level, new supply of multifamily housing will be absorbed by market demand in the near term driven by a strengthening economy and positive demographics. 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, particularly banking institutions, 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. We also expect that our new multifamily business activity for the full year of 2014 will be below the cap specified by the 2014 Conservatorship Scorecard of $25.9 billion in UPB.
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 second half of 2014. We expect the performance of the multifamily market to continue to be positive through 2014 and believe the long-term outlook for the multifamily market continues to be favorable.
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 cap reaches $250 billion. 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.
Table 2 — Mortgage-Related Investments Portfolio(1)
June 30, 2014 | December 31, 2013 | ||||||
(in millions) | |||||||
Investments segment — Mortgage investments portfolio | $ | 307,398 | $ | 331,071 | |||
Single-family Guarantee segment — Single-family unsecuritized mortgage loans(2) | 32,443 | 37,726 | |||||
Multifamily segment — Mortgage investments portfolio | 80,039 | 92,227 | |||||
Total mortgage-related investments portfolio | $ | 419,880 | $ | 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. |
We evaluate the liquidity of the assets in our mortgage-related investments portfolio based on two categories: (a) single-class and multiclass agency securities (excluding certain structured agency securities collateralized by non-agency mortgage-related securities); and (b) assets that are less liquid than the agency securities noted above. Assets that we consider to be less liquid than agency securities include unsecuritized performing single-family mortgage loans, multifamily mortgage loans, certain structured agency securities collateralized with non-agency mortgage-related securities, CMBS, housing revenue bonds, unsecuritized seriously delinquent and modified single-family mortgage loans which we removed from PC trusts, and investments in non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans.
10 | Freddie Mac | |
The UPB of our mortgage-related investments portfolio at June 30, 2014 was $419.9 billion, a decline of 9% compared to $461.0 billion at December 31, 2013. Our less liquid assets accounted for $27.6 billion of this decline primarily due to liquidations (i.e., principal repayments) and our active efforts to reduce less liquid assets through securitization of $3.5 billion of single-family reperforming and modified loans and sale of $8.2 billion of less liquid assets (excluding sales of: (a) multifamily held-for-sale loans; and (b) single-family loans purchased for cash). Our less liquid assets collectively represented $258.6 billion and $286.3 billion at June 30, 2014 and December 31, 2013, respectively, or approximately 62% of UPB of the portfolio at both June 30, 2014 and December 31, 2013.
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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 June 30, | Six Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(dollars in millions, except share-related amounts) | |||||||||||||||
Statements of Comprehensive Income Data | |||||||||||||||
Net interest income | $ | 3,503 | $ | 4,144 | $ | 7,013 | $ | 8,409 | |||||||
Benefit for credit losses | 618 | 623 | 533 | 1,126 | |||||||||||
Non-interest income (loss) | (1,406 | ) | 678 | 1,705 | 1,080 | ||||||||||
Non-interest expense | (680 | ) | (498 | ) | (1,451 | ) | (1,122 | ) | |||||||
Income tax (expense) benefit | (673 | ) | 41 | (2,418 | ) | 76 | |||||||||
Net income | 1,362 | 4,988 | 5,382 | 9,569 | |||||||||||
Comprehensive income | 1,890 | 4,357 | 6,389 | 11,328 | |||||||||||
Net income (loss) attributable to common stockholders(2) | (528 | ) | 631 | (1,007 | ) | (1,759 | ) | ||||||||
Net income (loss) per common share – basic and diluted | (0.16 | ) | 0.19 | (0.31 | ) | (0.54 | ) | ||||||||
Cash dividends per common share | — | — | — | — | |||||||||||
Weighted average common shares outstanding (in millions) – basic and diluted(3) | 3,236 | 3,238 | 3,237 | 3,238 | |||||||||||
June 30, 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) | $ | 1,533,521 | $ | 1,529,905 | |||||||||||
Total assets | 1,916,618 | 1,966,061 | |||||||||||||
Debt securities of consolidated trusts held by third parties | 1,453,563 | 1,433,984 | |||||||||||||
Other debt | 445,112 | 506,767 | |||||||||||||
All other liabilities | 13,653 | 12,475 | |||||||||||||
Total stockholders’ equity | 4,290 | 12,835 | |||||||||||||
Portfolio Balances(4) | |||||||||||||||
Mortgage-related investments portfolio(5) | $ | 419,880 | $ | 461,024 | |||||||||||
Total Freddie Mac mortgage-related securities(6) | 1,601,788 | 1,592,511 | |||||||||||||
Total mortgage portfolio(7) | 1,895,319 | 1,914,661 | |||||||||||||
TDRs on accrual status | 81,976 | 78,708 | |||||||||||||
Non-accrual loans | 36,969 | 43,457 | |||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Ratios(8) | |||||||||||||||
Return on average assets(9) | 0.3 | % | 1.0 | % | 0.6 | % | 1.0 | % | |||||||
Allowance for loans losses as percentage of mortgage loans, held-for-investment(10) | 1.3 | 1.5 | 1.3 | 1.5 | |||||||||||
Equity to assets ratio(11) | 0.3 | 0.4 | 0.4 | 0.4 | |||||||||||
(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 2 — Mortgage-Related Investments Portfolio’’ for the composition of this line item. |
(6) | See ‘‘Table 25 — Freddie Mac Mortgage-Related Securities’’ for the composition of this line item. |
(7) | See ‘‘Table 10 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios’’ for the composition of this line item. |
(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 June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(in millions) | ||||||||||||||||
Net interest income | $ | 3,503 | $ | 4,144 | $ | 7,013 | $ | 8,409 | ||||||||
Benefit for credit losses | 618 | 623 | 533 | 1,126 | ||||||||||||
Net interest income after benefit for credit losses | 4,121 | 4,767 | 7,546 | 9,535 | ||||||||||||
Non-interest income (loss): | ||||||||||||||||
Gains (losses) on extinguishment of debt securities of consolidated trusts | (188 | ) | 28 | (176 | ) | 62 | ||||||||||
Gains (losses) on retirement of other debt | 1 | 25 | 8 | (7 | ) | |||||||||||
Derivative gains (losses) | (1,926 | ) | 1,362 | (4,277 | ) | 1,737 | ||||||||||
Impairment of available-for-sale securities: | ||||||||||||||||
Total other-than-temporary impairment of available-for-sale securities | (178 | ) | (18 | ) | (509 | ) | (39 | ) | ||||||||
Portion of other-than-temporary impairment recognized in AOCI | 21 | (26 | ) | (12 | ) | (48 | ) | |||||||||
Net impairment of available-for-sale securities recognized in earnings | (157 | ) | (44 | ) | (521 | ) | (87 | ) | ||||||||
Other gains (losses) on investment securities recognized in earnings | 372 | (497 | ) | 1,138 | (773 | ) | ||||||||||
Other income (loss) | 492 | (196 | ) | 5,533 | 148 | |||||||||||
Total non-interest income (loss) | (1,406 | ) | 678 | 1,705 | 1,080 | |||||||||||
Non-interest expense: | ||||||||||||||||
Administrative expenses | (453 | ) | (444 | ) | (921 | ) | (876 | ) | ||||||||
REO operations income (expense) | 50 | 110 | (9 | ) | 104 | |||||||||||
Temporary Payroll Tax Cut Continuation Act of 2011 expense | (187 | ) | (123 | ) | (365 | ) | (216 | ) | ||||||||
Other expenses | (90 | ) | (41 | ) | (156 | ) | (134 | ) | ||||||||
Total non-interest expense | (680 | ) | (498 | ) | (1,451 | ) | (1,122 | ) | ||||||||
Income before income tax (expense) benefit | 2,035 | 4,947 | 7,800 | 9,493 | ||||||||||||
Income tax (expense) benefit | (673 | ) | 41 | (2,418 | ) | 76 | ||||||||||
Net income | 1,362 | 4,988 | 5,382 | 9,569 | ||||||||||||
Other comprehensive income (loss), net of taxes and reclassification adjustments: | ||||||||||||||||
Changes in unrealized gains (losses) related to available-for-sale securities | 479 | (717 | ) | 906 | 1,563 | |||||||||||
Changes in unrealized gains (losses) related to cash flow hedge relationships | 49 | 84 | 101 | 174 | ||||||||||||
Changes in defined benefit plans | — | 2 | — | 22 | ||||||||||||
Total other comprehensive income (loss), net of taxes and reclassification adjustments | 528 | (631 | ) | 1,007 | 1,759 | |||||||||||
Comprehensive income | $ | 1,890 | $ | 4,357 | $ | 6,389 | $ | 11,328 | ||||||||
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 June 30, | |||||||||||||||||||||
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 | $ | 13,081 | $ | 1 | 0.04 | % | $ | 29,467 | $ | 3 | 0.04 | % | |||||||||
Federal funds sold and securities purchased under agreements to resell | 33,574 | 5 | 0.06 | 38,996 | 9 | 0.09 | |||||||||||||||
Mortgage-related securities: | |||||||||||||||||||||
Mortgage-related securities(2) | 256,665 | 2,557 | 3.98 | 316,237 | 3,243 | 4.10 | |||||||||||||||
Extinguishment of PCs held by Freddie Mac | (110,559 | ) | (1,037 | ) | (3.75 | ) | (123,582 | ) | (1,244 | ) | (4.02 | ) | |||||||||
Total mortgage-related securities, net | 146,106 | 1,520 | 4.16 | 192,655 | 1,999 | 4.15 | |||||||||||||||
Non-mortgage-related securities(2) | 12,318 | 4 | 0.10 | 26,319 | 20 | 0.29 | |||||||||||||||
Mortgage loans held by consolidated trusts(3) | 1,532,968 | 14,249 | 3.72 | 1,507,578 | 14,097 | 3.74 | |||||||||||||||
Unsecuritized mortgage loans(3) | 171,029 | 1,660 | 3.88 | 210,508 | 2,017 | 3.83 | |||||||||||||||
Total interest-earning assets | $ | 1,909,076 | $ | 17,439 | 3.65 | $ | 2,005,523 | $ | 18,145 | 3.62 | |||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||
Debt securities of consolidated trusts including PCs held by Freddie Mac | $ | 1,550,049 | $ | (13,142 | ) | (3.39 | ) | $ | 1,531,830 | $ | (12,953 | ) | (3.38 | ) | |||||||
Extinguishment of PCs held by Freddie Mac | (110,559 | ) | 1,037 | 3.75 | (123,582 | ) | 1,244 | 4.02 | |||||||||||||
Total debt securities of consolidated trusts held by third parties | 1,439,490 | (12,105 | ) | (3.36 | ) | 1,408,248 | (11,709 | ) | (3.33 | ) | |||||||||||
Other debt: | |||||||||||||||||||||
Short-term debt | 110,240 | (34 | ) | (0.12 | ) | 129,920 | (45 | ) | (0.14 | ) | |||||||||||
Long-term debt(4) | 332,560 | (1,721 | ) | (2.07 | ) | 395,137 | (2,125 | ) | (2.15 | ) | |||||||||||
Total other debt | 442,800 | (1,755 | ) | (1.59 | ) | 525,057 | (2,170 | ) | (1.65 | ) | |||||||||||
Total interest-bearing liabilities | 1,882,290 | (13,860 | ) | (2.94 | ) | 1,933,305 | (13,879 | ) | (2.87 | ) | |||||||||||
Expense related to derivatives(5) | — | (76 | ) | (0.02 | ) | — | (122 | ) | (0.02 | ) | |||||||||||
Impact of net non-interest-bearing funding | 26,786 | — | 0.04 | 72,218 | — | 0.10 | |||||||||||||||
Total funding of interest-earning assets | $ | 1,909,076 | $ | (13,936 | ) | (2.92 | ) | $ | 2,005,523 | $ | (14,001 | ) | (2.79 | ) | |||||||
Net interest income/yield | $ | 3,503 | 0.73 | $ | 4,144 | 0.83 | |||||||||||||||
Six Months Ended June 30, | |||||||||||||||||||||
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 | $ | 16,361 | $ | 1 | 0.01 | % | $ | 32,451 | $ | 10 | 0.06 | % | |||||||||
Federal funds sold and securities purchased under agreements to resell | 40,865 | 10 | 0.05 | 37,460 | 20 | 0.11 | |||||||||||||||
Mortgage-related securities: | |||||||||||||||||||||
Mortgage-related securities(2) | 264,155 | 5,164 | 3.91 | 322,239 | 6,660 | 4.13 | |||||||||||||||
Extinguishment of PCs held by Freddie Mac | (113,574 | ) | (2,134 | ) | (3.76 | ) | (122,931 | ) | (2,506 | ) | (4.08 | ) | |||||||||
Total mortgage-related securities, net | 150,581 | 3,030 | 4.03 | 199,308 | 4,154 | 4.17 | |||||||||||||||
Non-mortgage-related securities(2) | 9,094 | 4 | 0.08 | 20,650 | 22 | 0.21 | |||||||||||||||
Mortgage loans held by consolidated trusts(3) | 1,532,692 | 28,733 | 3.75 | 1,501,390 | 28,601 | 3.81 | |||||||||||||||
Unsecuritized mortgage loans(3) | 174,625 | 3,322 | 3.80 | 214,788 | 4,026 | 3.75 | |||||||||||||||
Total interest-earning assets | $ | 1,924,218 | $ | 35,100 | 3.65 | $ | 2,006,047 | $ | 36,833 | 3.67 | |||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||
Debt securities of consolidated trusts including PCs held by Freddie Mac | $ | 1,548,866 | $ | (26,482 | ) | (3.42 | ) | $ | 1,524,918 | $ | (26,245 | ) | (3.44 | ) | |||||||
Extinguishment of PCs held by Freddie Mac | (113,574 | ) | 2,134 | 3.76 | (122,931 | ) | 2,506 | 4.08 | |||||||||||||
Total debt securities of consolidated trusts held by third parties | 1,435,292 | (24,348 | ) | (3.39 | ) | 1,401,987 | (23,739 | ) | (3.39 | ) | |||||||||||
Other debt: | |||||||||||||||||||||
Short-term debt | 118,380 | (75 | ) | (0.13 | ) | 124,805 | (89 | ) | (0.14 | ) | |||||||||||
Long-term debt(4) | 340,596 | (3,509 | ) | (2.06 | ) | 405,829 | (4,343 | ) | (2.14 | ) | |||||||||||
Total other debt | 458,976 | (3,584 | ) | (1.56 | ) | 530,634 | (4,432 | ) | (1.67 | ) | |||||||||||
Total interest-bearing liabilities | 1,894,268 | (27,932 | ) | (2.95 | ) | 1,932,621 | (28,171 | ) | (2.91 | ) | |||||||||||
Expense related to derivatives(5) | — | (155 | ) | (0.02 | ) | — | (253 | ) | (0.03 | ) | |||||||||||
Impact of net non-interest-bearing funding | 29,950 | — | 0.05 | 73,426 | — | 0.11 | |||||||||||||||
Total funding of interest-earning assets | $ | 1,924,218 | $ | (28,087 | ) | (2.92 | ) | $ | 2,006,047 | $ | (28,424 | ) | (2.83 | ) | |||||||
Net interest income/yield | $ | 7,013 | 0.73 | $ | 8,409 | 0.84 | |||||||||||||||
(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. |
14 | Freddie Mac | |
Net interest income decreased by $641 million and $1.4 billion for the three and six months ended June 30, 2014, respectively, compared to the three and six months ended June 30, 2013. The decreases in net interest income were primarily due to the negative impact of the reduction in the balance of 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 $703 million and $1.5 billion for the three and six months ended June 30, 2014, respectively, compared to the three and six months ended June 30, 2013. Net interest income includes $183 million and $355 million for the three and six months ended June 30, 2014, respectively, compared to $121 million and $212 million for the three and six months ended June 30, 2013, respectively, related to this increase in guarantee fees.
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). We recognize interest income on non-accrual mortgage loans only when cash payments are received. Foregone interest income and reversals of previously recognized interest income, net of cash received, related to non-accrual mortgage loans was $0.3 billion and $0.7 billion during the three and six months ended June 30, 2014, respectively, compared to $0.5 billion and $1.1 billion during the three and six months ended June 30, 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 cap 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 June 30, 2014, we had sufficient access to the debt markets. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity.”
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 a benefit for credit losses and 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 may reduce the likelihood that loans will default and may also reduce the amount of credit losses on the loans that do default.
Our benefit for credit losses was $0.6 billion in both the second quarter of 2014 and 2013, and was $0.5 billion in the first half of 2014 compared to $1.1 billion in the first half of 2013. Our benefit for credit losses for the six months ended June 30, 2014 includes benefits from: (a) settlement agreements with certain sellers; (b) an increase in expected recoveries from one of our mortgage insurers; (c) the reduction of loan loss reserves associated with certain seriously delinquent single-family mortgage loans reclassified from held-for-investment to held-for-sale; and (d) moderate home price growth. We do not expect future settlement agreements, if any, with seller/servicers to have a significant effect on our financial results. See “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk” for further information on recent developments concerning our mortgage insurance counterparties. The benefit for credit losses in the first half 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 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 three and six months ended June 30, 2014, our charge-offs, net of recoveries for single-family loans, were significantly lower than those recorded in the three and six months ended June 30, 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 both the first half of 2014 and the first half of 2013 included approximately $0.4 billion, related to repurchase requests from our seller/servicers (including $0.3 billion in the first half 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 second half of 2014 even if the volume of new seriously delinquent loans continues to decline.
15 | Freddie Mac | |
The total number of single-family seriously delinquent loans declined approximately 14% and 15% during the first six months of 2014 and 2013, respectively. As of June 30, 2014 and June 30, 2013, the UPB of our single-family loans classified as TDRs was $99.6 billion and $91.7 billion, respectively. However, these amounts include $81.4 billion and $71.0 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 June 30, 2014 and 2013, we extinguished debt securities of consolidated trusts with a UPB of $14.9 billion and $17.7 billion, respectively (representing our purchase of single-family PCs with a corresponding UPB amount). Gains (losses) on extinguishment of these debt securities of consolidated trusts were $(188) million and $28 million during the three months ended June 30, 2014 and 2013, respectively.
During the six months ended June 30, 2014 and 2013, we extinguished debt securities of consolidated trusts with a UPB of $22.8 billion and $23.6 billion, respectively (representing our purchase of single-family PCs with a corresponding UPB amount). Gains (losses) on extinguishment of these debt securities of consolidated trusts were $(176) million and $62 million during the six months ended June 30, 2014 and 2013, respectively.
We recognized losses in the 2014 periods because interest rates declined between the time of issuance and repurchase of these debt securities. We recognized gains in the 2013 periods because interest rates increased between the time of issuance and repurchase of these debt securities.
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 on retirement of other debt were $1 million and $25 million during the three months ended June 30, 2014 and 2013, respectively. We recognized gains on the retirement of other debt during the three months ended June 30, 2013 primarily due to the repurchase of other debt at a discount.
Gains (losses) on retirement of other debt were $8 million and $(7) million during the six months ended June 30, 2014 and 2013, respectively. We recognized gains on the retirement of other debt during the six months ended June 30, 2014 primarily as a result of exercising our call option on other debt. We recognized losses on the retirement of other debt during the six months ended June 30, 2013 primarily due to losses on the repurchase of other debt at a premium in the first quarter of 2013.
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 relationships are recorded as derivative gains (losses) in our consolidated statements of comprehensive income. At June 30, 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, yield curves, and implied volatility 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.
16 | Freddie Mac | |
Table 6 — Derivative Gains (Losses)
Derivative Gains (Losses) | |||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(in millions) | |||||||||||||||
Interest-rate swaps | $ | (1,551 | ) | $ | 3,722 | $ | (3,321 | ) | $ | 5,296 | |||||
Option-based derivatives(1) | 197 | (1,222 | ) | 266 | (1,659 | ) | |||||||||
Other derivatives(2) | 97 | (205 | ) | 125 | (61 | ) | |||||||||
Accrual of periodic settlements | (669 | ) | (933 | ) | (1,347 | ) | (1,839 | ) | |||||||
Total | $ | (1,926 | ) | $ | 1,362 | $ | (4,277 | ) | $ | 1,737 | |||||
(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, yield curves, and implied volatility; and (b) the mix and balance of products in our derivative portfolio.
During the three and six months ended June 30, 2014, we recognized net losses on derivatives of $1.9 billion and $4.3 billion, respectively, primarily as a result of a decrease in longer-term interest rates. We recognized: (a) net losses on our pay-fixed swaps of $3.2 billion and $6.4 billion, respectively; and (b) net losses of $0.7 billion and $1.3 billion, respectively, 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 of $1.7 billion and $3.1 billion, respectively, on our receive-fixed swaps.
During the three and six months ended June 30, 2013, we recognized gains on derivatives of $1.4 billion and $1.7 billion, respectively, primarily as a result of an increase in longer-term interest rates. During the same periods, we recognized fair value gains on our pay-fixed swaps of $9.7 billion and $13.6 billion, respectively, which were largely offset by: (a) fair value losses on our receive-fixed swaps of $6.0 billion and $8.3 billion, respectively; (b) net losses of $0.9 billion and $1.8 billion, respectively, related to the accrual of periodic settlements on interest-rate swaps as we were a net payer on our interest-rate swaps based on the coupons of the instruments; and (c) fair value losses of $1.2 billion and $1.7 billion, respectively, 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 $157 million and $521 million during the three and six months ended June 30, 2014, respectively, compared to $44 million and $87 million during the three and six months ended June 30, 2013, respectively. During the three and six months ended June 30, 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. 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 June 30, 2014.
We recognized gains (losses) on trading securities of $40 million and $33 million during the three and six months ended June 30, 2014, respectively, compared to $(751) million and $(1.1) billion during the three and six months ended June 30, 2013, respectively. The gains during the three and six months ended June 30, 2014 were primarily due to the impact of a decline in longer-term interest rates during the periods, which more than offset the impact of the movement of these securities with unrealized gains towards maturity. The losses during the three and six months ended June 30, 2013 were primarily due to the movement of securities with unrealized gains towards maturity.
We recognized gains on sales of available-for-sale securities of $332 million and $1.1 billion during the three and six months ended June 30, 2014, respectively, compared to gains on sales of available-for-sale securities of $254 million and $355 million during the three and six months ended June 30, 2013, respectively. The increase in gains during the three and six months ended June 30, 2014 primarily resulted from increased sales related to our structuring activity.
17 | Freddie Mac | |
Other Income (Loss)
The table below summarizes the significant components of other income (loss).
Table 7 — Other Income (Loss)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(in millions) | |||||||||||||||
Other income (loss): | |||||||||||||||
Non-agency mortgage-related securities settlements | $ | 364 | $ | 105 | $ | 4,897 | $ | 111 | |||||||
Gains (losses) on mortgage loans | (39 | ) | (563 | ) | 215 | (554 | ) | ||||||||
Recoveries on loans impaired upon purchase(1) | 59 | 75 | 109 | 149 | |||||||||||
Guarantee-related income, net(2) | 111 | 69 | 144 | 159 | |||||||||||
All other | (3 | ) | 118 | 168 | 283 | ||||||||||
Total other income (loss) | $ | 492 | $ | (196 | ) | $ | 5,533 | $ | 148 | ||||||
(1) | Principally relates to impaired loans purchased prior to 2010. Consequently, our recoveries on these loans will generally decline over time. |
(2) | Principally 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 $0.4 billion and $0.1 billion in the three months ended June 30, 2014 and 2013, respectively, and $4.9 billion and $0.1 billion in the six months ended June 30, 2014 and 2013, respectively. We had eight settlements in the first half of 2014, while we had two settlements in the first half of 2013. For information on the settlements in the first half of 2014, see “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS — Non-Agency Mortgage-Related Security Issuers.”
Gains (Losses) on Mortgage Loans
We recognized gains (losses) on mortgage loans of $(39) million and $(563) million in the three months ended June 30, 2014 and 2013, respectively, and $215 million and $(554) million in the six months ended June 30, 2014 and 2013, respectively. The improvements in the 2014 periods were mainly due to gains on multifamily mortgage loans, primarily due to a decline in longer-term interest rates in the 2014 periods compared to an increase in longer-term interest rates in the 2013 periods. The majority of these multifamily loans were designated for securitization and elected to be carried at fair value. Partially offsetting these gains were losses on seriously delinquent single-family loans that were reclassified from held-for-investment to held-for-sale during the second quarter of 2014 as these loans were adjusted to the lower of cost or fair value. These loans were reclassified in connection with a pilot transaction to sell certain seriously delinquent unsecuritized single-family loans (for which we received FHFA approval in April 2014). We executed a sale of substantially all of these loans in July 2014, which is expected to close in August 2014. During the first half of 2014 and 2013, we sold $8.4 billion and $14.4 billion, respectively, in UPB of multifamily loans primarily through K Certificate transactions. For more information on our sales of mortgage loans, see "NOTE 4: MORTGAGE LOANS AND LOAN LOSS RESERVES."
All Other
All other income (loss) 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 (loss) was $(3) million and $168 million in the three and six months ended June 30, 2014, respectively, compared to $118 million and $283 million in the three and six months ended June 30, 2013, respectively. The decrease in the 2014 periods was primarily due to fair value losses on STACR debt notes due to an increase in market prices for these notes. We began issuing these notes during the third quarter of 2013 and have elected to carry these notes at fair value. Partially offsetting these losses was increased income from the accrual of compensatory fees in the 2014 periods related to servicers that failed to meet our loan foreclosure timelines.
18 | Freddie Mac | |
Non-Interest Expense
The table below summarizes the components of non-interest expense.
Table 8 — Non-Interest Expense
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
(in millions) | |||||||||||||||
Administrative expenses: | |||||||||||||||
Salaries and employee benefits | $ | 223 | $ | 211 | $ | 456 | $ | 419 | |||||||
Professional services | 126 | 134 | 264 | 243 | |||||||||||
Occupancy expense | 14 | 14 | 27 | 27 | |||||||||||
Other administrative expense | 90 | 85 | 174 | 187 | |||||||||||
Total administrative expenses | 453 | 444 | 921 | 876 | |||||||||||
REO operations (income) expense | (50 | ) | (110 | ) | 9 | (104 | ) | ||||||||
Temporary Payroll Tax Cut Continuation Act of 2011 expense | 187 | 123 | 365 | 216 | |||||||||||
Other expenses(1) | 90 | 41 | 156 | 134 | |||||||||||
Total non-interest expense | $ | 680 | $ | 498 | $ | 1,451 | $ | 1,122 | |||||||
(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 six months ended June 30, 2014 compared to the six months ended June 30, 2013 due to increases in salaries and employee benefits expense and professional services expense. The increase in salaries and employee benefits expense was mainly due to expenses associated with our retirement plans. Professional services expense increased primarily due to expenses associated with FHFA-led lawsuits regarding our investments in certain residential non-agency mortgage-related securities.
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 June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(dollars in millions) | ||||||||||||||||
REO operations (income) expense: | ||||||||||||||||
Single-family: | ||||||||||||||||
REO property expenses(1) | $ | 228 | $ | 238 | $ | 477 | $ | 483 | ||||||||
Disposition (gains) losses, net(2) | (152 | ) | (236 | ) | (281 | ) | (395 | ) | ||||||||
Change in holding period allowance, dispositions | (13 | ) | (13 | ) | (31 | ) | (24 | ) | ||||||||
Change in holding period allowance, inventory(3) | (26 | ) | (6 | ) | (1 | ) | 17 | |||||||||
Recoveries(4) | (85 | ) | (92 | ) | (153 | ) | (182 | ) | ||||||||
Total single-family REO operations (income) expense | (48 | ) | (109 | ) | 11 | (101 | ) | |||||||||
Multifamily REO operations (income) expense | (2 | ) | (1 | ) | (2 | ) | (3 | ) | ||||||||
Total REO operations (income) expense | $ | (50 | ) | $ | (110 | ) | $ | 9 | $ | (104 | ) | |||||
(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 $(50) million in the second quarter of 2014, compared to $(110) million in the second quarter of 2013 and was $9 million in the first half of 2014 compared to $(104) million in the first half of 2013. These changes were primarily due to lower gains on the disposition of REO properties. For more information on our REO activity, see “Segment Earnings — Segment Earnings — Results — Single-Family Guarantee,” “CONSOLIDATED BALANCE SHEETS ANALYSIS — REO, Net,” and “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — REO Assets.”
19 | Freddie Mac | |
Temporary Payroll Tax Cut Continuation Act of 2011 Expense
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 $187 million and $123 million during the three months ended June 30, 2014 and 2013, respectively, and $365 million and $216 million during the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, loans with an aggregate UPB of $767.6 billion were subject to these fees, and the cumulative total of the amounts paid and due to Treasury for these fees was $1.0 billion. We expect these fees will continue to increase in the future as we add new business and thus the UPB of loans subject to these fees will continue to increase.
Income Tax (Expense) Benefit
We reported an income tax (expense) benefit of $(673) million and $41 million for the three months ended June 30, 2014 and 2013, respectively, and $(2.4) billion and $76 million in the six months ended June 30, 2014 and 2013, respectively. The change to income tax expense in the 2014 periods from income tax benefit in the 2013 periods 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 $1.9 billion and $6.4 billion for the three and six months ended June 30, 2014, respectively, consisting of: (a) $1.4 billion and $5.4 billion of net income, respectively; and (b) $528 million and $1.0 billion of other comprehensive income, respectively. The other comprehensive income in these periods primarily related to fair value gains on our available-for-sale securities resulting from a decline in longer-term interest rates coupled with the impact of spread tightening on our non-agency mortgage-related securities and the movement of these securities with unrealized losses towards maturity.
Our comprehensive income was $4.4 billion and $11.3 billion for the three and six months ended June 30, 2013, respectively, consisting of: (a) $5.0 billion and $9.6 billion of net income, respectively; and (b) $(631) million and $1.8 billion of other comprehensive income (loss), respectively. The other comprehensive loss during the three months ended June 30, 2013 was primarily due to the impact of an increase in interest rates on our available-for-sale securities, while the other comprehensive income during the six months ended June 30, 2013 was primarily due to gains on our non-agency mortgage-related securities due to spread tightening.
Other comprehensive income (loss) in all 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. 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
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Segment Earnings may differ from similar measures used by other companies. However, we believe that Segment Earnings provides us with meaningful metrics to assess the financial performance of each segment and our company as a whole.
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. With this change, the Multifamily segment reflects the entire change in fair value of these assets in its financial results and the Investments segment transfers the change in fair value of the derivatives associated with the Multifamily segment's investments securities and held-for-sale loans to the 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 June 30, 2014 and December 31, 2013. For a discussion of each segment’s portfolios, see “Segment Earnings — Results.”
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Table 10 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios(1)
June 30, 2014 | December 31, 2013 | |||||||
(in millions) | ||||||||
Segment mortgage portfolios: | ||||||||
Single-family Guarantee — Managed loan portfolio:(2) | ||||||||
Single-family unsecuritized seriously delinquent mortgage loans | $ | 32,443 | $ | 37,726 | ||||
Single-family Freddie Mac mortgage-related securities held by us | 153,133 | 165,247 | ||||||
Single-family Freddie Mac mortgage-related securities held by third parties | 1,376,929 | 1,361,972 | ||||||
Single-family other guarantee commitments(3) | 19,682 | 19,872 | ||||||
Total Single-family Guarantee — Managed loan portfolio | 1,582,187 | 1,584,817 | ||||||
Investments — Mortgage investments portfolio: | ||||||||
Single-family unsecuritized mortgage loans(4) | 84,081 | 84,411 | ||||||
Freddie Mac mortgage-related securities | 153,133 | 165,247 | ||||||
Non-agency mortgage-related securities | 54,622 | 64,524 | ||||||
Non-Freddie Mac agency mortgage-related securities | 15,562 | 16,889 | ||||||
Total Investments — Mortgage investments portfolio | 307,398 | 331,071 | ||||||
Multifamily — Guarantee portfolio: | ||||||||
Multifamily Freddie Mac mortgage-related securities held by us | 2,029 | 2,787 | ||||||
Multifamily Freddie Mac mortgage-related securities held by third parties | 69,697 | 62,505 | ||||||
Multifamily other guarantee commitments(3) | 9,131 | 9,288 | ||||||
Total Multifamily — Guarantee portfolio | 80,857 | 74,580 | ||||||
Multifamily — Mortgage investments portfolio: | ||||||||
Multifamily investment securities portfolio | 27,478 | 33,056 | ||||||
Multifamily unsecuritized loan portfolio | 52,561 | 59,171 | ||||||
Total Multifamily — Mortgage investments portfolio | 80,039 | 92,227 | ||||||
Total Multifamily portfolio | 160,896 | 166,807 | ||||||
Less: Freddie Mac single-family and certain multifamily securities(5) | (155,162 | ) | (168,034 | ) | ||||
Total mortgage portfolio | $ | 1,895,319 | $ | 1,914,661 | ||||
Credit risk portfolios:(6) | ||||||||
Single-family credit guarantee portfolio:(2) | ||||||||
Single-family mortgage loans, on-balance sheet | $ | 1,627,898 | $ | 1,630,859 | ||||
Non-consolidated Freddie Mac mortgage-related securities | 6,601 | 6,961 | ||||||
Other guarantee commitments(3) | 19,682 | 19,872 | ||||||
Less: HFA initiative-related guarantees(7) | (3,612 | ) | (4,051 | ) | ||||
Less: Freddie Mac mortgage-related securities backed by Ginnie Mae certificates(7) | (485 | ) | (541 | ) | ||||
Total single-family credit guarantee portfolio | $ | 1,650,084 | $ | 1,653,100 | ||||
Multifamily mortgage portfolio: | ||||||||
Multifamily mortgage loans, on-balance sheet(8) | $ | 53,003 | $ | 59,615 | ||||
Non-consolidated Freddie Mac mortgage-related securities | 71,285 | 64,848 | ||||||
Other guarantee commitments(3) | 9,131 | 9,288 | ||||||
Less: HFA initiative-related guarantees(7) | (830 | ) | (905 | ) | ||||
Total multifamily mortgage portfolio | $ | 132,589 | $ | 132,846 | ||||
(1) | Amounts represent UPB. |
(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 the UPB of mortgage-related assets held by third parties for which we provide our guarantee without our securitization of the related assets. |
(4) | 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. |
(5) | 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. |
(6) | Represents the UPB of loans for which we present characteristics, delinquency data, and certain other statistics in this report. See “GLOSSARY” for further description. |
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(7) | 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. |
(8) | 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 June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Segment Earnings: | ||||||||||||||||
Net interest income (expense)(2) | $ | (79 | ) | $ | 3 | $ | (46 | ) | $ | 97 | ||||||
Benefit for credit losses | 398 | 345 | 76 | 589 | ||||||||||||
Non-interest income: | ||||||||||||||||
Management and guarantee income | 1,252 | 1,298 | 2,423 | 2,541 | ||||||||||||
Other non-interest income (loss) | (172 | ) | 208 | 28 | 449 | |||||||||||
Total non-interest income | 1,080 | 1,506 | 2,451 | 2,990 | ||||||||||||
Non-interest expense: | ||||||||||||||||
Administrative expenses | (275 | ) | (252 | ) | (553 | ) | (493 | ) | ||||||||
REO operations income (expense) | 48 | 109 | (11 | ) | 101 | |||||||||||
Temporary Payroll Tax Cut Continuation Act of 2011 expense | (187 | ) | (123 | ) | (365 | ) | (216 | ) | ||||||||
Other non-interest expense | (80 | ) | (33 | ) | (119 | ) | (94 | ) | ||||||||
Total non-interest expense | (494 | ) | (299 | ) | (1,048 | ) | (702 | ) | ||||||||
Segment adjustments(3) | (76 | ) | (214 | ) | (158 | ) | (442 | ) | ||||||||
Segment Earnings before income tax expense | 829 | 1,341 | 1,275 | 2,532 | ||||||||||||
Income tax expense | (261 | ) | — | (394 | ) | (5 | ) | |||||||||
Segment Earnings, net of taxes | 568 | 1,341 | 881 | 2,527 | ||||||||||||
Total other comprehensive income, net of taxes | — | 1 | — | 12 | ||||||||||||
Total comprehensive income | $ | 568 | $ | 1,342 | $ | 881 | $ | 2,539 | ||||||||
Key metrics: | ||||||||||||||||
Balances and Volume (in billions, except rate): | ||||||||||||||||
Average balance of single-family credit guarantee portfolio and HFA guarantees | $ | 1,651 | $ | 1,642 | $ | 1,652 | $ | 1,639 | ||||||||
Issuance — Single-family credit guarantees(4) | $ | 58 | $ | 133 | $ | 111 | $ | 269 | ||||||||
Fixed-rate products — Percentage of purchases(5) | 93 | % | 96 | % | 94 | % | 97 | % | ||||||||
Liquidation rate — Single-family credit guarantees (annualized)(6) | 14 | % | 32 | % | 14 | % | 34 | % | ||||||||
Average Management and Guarantee Rate (in bps, annualized)(7) | ||||||||||||||||
Segment Earnings management and guarantee income(8) | 30.4 | 31.6 | 29.3 | 31.0 | ||||||||||||
Guarantee fee charged on new acquisitions(9) | 57.7 | 50.7 | 57.0 | 49.9 | ||||||||||||
Credit: | ||||||||||||||||
Serious delinquency rate, at end of period | 2.07 | % | 2.79 | % | 2.07 | % | 2.79 | % | ||||||||
REO inventory, at end of period (number of properties) | 36,134 | 44,623 | 36,134 | 44,623 | ||||||||||||
Single-family credit losses, in bps (annualized)(10) | 20.4 | 42.4 | 21.7 | 46.1 | ||||||||||||
Market: | ||||||||||||||||
Single-family mortgage debt outstanding (total U.S. market, in billions)(11) | $ | 9,851 | $ | 9,906 | $ | 9,851 | $ | 9,906 | ||||||||
30-year fixed mortgage rate(12) | 4.1 | % | 4.5 | % | 4.1 | % | 4.5 | % | ||||||||
(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) | The first half of 2014 includes interest expense associated with our STACR debt notes that we began issuing in July 2013. |
(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. |
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(9) | Represents the estimated average 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 June 5, 2014. The outstanding amount for June 30, 2014 reflects the balance as of March 31, 2014. |
(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 declined to $0.6 billion and $0.9 billion in the three and six months ended June 30, 2014, respectively, from $1.3 billion and $2.5 billion in the three and six months ended June 30, 2013, respectively. The declines in the 2014 periods were primarily due to: (a) lower non-interest income; (b) increased income tax expense; and (c) lower REO operations income. In addition, we recognized lower benefits for credit losses in the first half of 2014 compared to the first half of 2013.
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 six months ended June 30, 2014 and 2013.
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Table 12 — Segment Earnings Composition — Single-Family Guarantee Segment
Six Months Ended June 30, 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 | $ | 94 | 44.4 | $ | (2 | ) | (1.8 | ) | $ | 92 | ||||||||
2013 | 622 | 40.6 | (15 | ) | (1.1 | ) | 607 | |||||||||||
2012 | 363 | 30.2 | (6 | ) | (0.4 | ) | 357 | |||||||||||
2011 | 139 | 24.4 | (3 | ) | (0.4 | ) | 136 | |||||||||||
2010 | 125 | 24.5 | (5 | ) | (0.8 | ) | 120 | |||||||||||
2009 | 112 | 19.9 | 3 | 0.5 | 115 | |||||||||||||
Subtotal - New single-family book | ||||||||||||||||||