Edgar Filing: FEDERAL HOME LOAN MORTGAGE CORP

Federally chartered corporation

8200 Jones Branch Drive

(703) 903-2000

(State or other jurisdiction of incorporation or organization)

McLean, Virginia 22102-3110

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

(Registrant’s telephone number, including area code)

(Address of principal executive offices, including zip code)

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

10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2015



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

For the transition period from to

Commission File Number: 001-34139

Federal Home Loan Mortgage Corporation

(Exact name of registrant as specified in its charter)

Freddie Mac

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

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

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



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

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

As of October 21, 2015, there were 650,045,962 shares of the registrant’s common stock outstanding.

Table of Contents

TABLE OF CONTENTS



	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements	76
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1
Executive Summary	1
Selected Financial Data	11
Consolidated Results of Operations	12
Consolidated Balance Sheets Analysis	31
Risk Management	40
Liquidity and Capital Resources	66
Fair Value Hierarchy and Valuations	69
Off-Balance Sheet Arrangements	70
Critical Accounting Policies and Estimates	70
Forward-Looking Statements	70
Legislative and Regulatory Matters	71
Item 3. Quantitative and Qualitative Disclosures About Market Risk	72
Item 4. Controls and Procedures	74
PART II — OTHER INFORMATION	139
Item 1. Legal Proceedings	139
Item 1A. Risk Factors	139
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	139
Item 6. Exhibits	139
SIGNATURES	141
GLOSSARY	142
EXHIBIT INDEX	E-1



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MD&A TABLE REFERENCE



Table	Description	Page
1	Total Single-Family Mortgage Loan Workout Volumes	3
2	Mortgage-Related Investments Portfolio	10
3	Selected Financial Data	11
4	Summary Consolidated Statements of Comprehensive Income	12
5	Net Interest Income/Yield and Average Balance Analysis	13
6	Single-Family Impaired Mortgage Loans with Specific Reserve Recorded	15
7	TDRs and Non-Accrual Mortgage Loans	16
8	Credit Loss Performance	17
9	Severity Ratios for Single-Family Mortgage Loans	18
10	Derivative Gains (Losses)	18
11	Other Gains (Losses) on Investment Securities Recognized in Earnings	19
12	Other Income (Loss)	20
13	Non-Interest Expense	21
14	Components of Other Comprehensive Income (Loss)	22
15	Composition of Segment Mortgage Portfolios and Credit Risk Portfolios	23
16	Segment Earnings and Key Metrics — Single-Family Guarantee	24
17	Segment Earnings and Key Metrics — Investments	27
18	Segment Earnings and Key Metrics — Multifamily	29
19	Investments in Securities on Our Consolidated Balance Sheets	31
20	Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets	32
21	Additional Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets	33
22	Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, and Alt-A Loans and Certain Related Credit Statistics	34
23	Mortgage Loan Purchases and Other Guarantee Commitment Issuances	36
24	Freddie Mac Mortgage-Related Securities	38
25	Issuances and Extinguishments of Debt Securities of Consolidated Trusts	39
26	Changes in Total Equity	39
27	Characteristics of Purchases for the Single-Family Credit Guarantee Portfolio	42
28	STACR Debt Note and ACIS Transactions	44
29	Characteristics of the Single-Family Credit Guarantee Portfolio	46
30	Single-Family Credit Guarantee Portfolio Data by Year of Origination	47
31	Single-Family Serious Delinquency Rate Trend	48
32	Single-Family Serious Delinquency Statistics	49
33	Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio	50
34	Single-Family Mortgage Loans with Scheduled Payment Changes by Year at September 30, 2015	51
35	Credit Concentrations in the Single-Family Credit Guarantee Portfolio	53
36	Single-Family Credit Guarantee Portfolio by Attribute Combinations	54
37	Single-Family Relief Refinance Mortgage Loans	55
38	Single-Family Mortgage Loan Workout, Serious Delinquency, and Foreclosure Volumes	56
39	Quarterly Percentages of Modified Single-Family Mortgage Loans — Current or Paid Off	57
40	Foreclosure Timelines for Single-Family Mortgage Loans	58
41	Multifamily Mortgage Portfolio — by Attribute	59
42	Mortgage Insurance by Counterparty	63
43	Derivative Counterparty Credit Exposure	64
44	Activity in Other Debt	67
45	Freddie Mac Credit Ratings	68
46	Affordable Housing Goals and Results for 2014	72



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47	Affordable Housing Goals for 2015 to 2017	72
48	PMVS and Duration Gap Results	74
49	Derivative Impact on PMVS-L (50 bps)	74



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FINANCIAL STATEMENTS




	Page
Condensed Consolidated Statements of Comprehensive Income	77
Condensed Consolidated Balance Sheets	78
Condensed Consolidated Statements of Cash Flows	79
Note 1: Summary of Significant Accounting Policies	80
Note 2: Conservatorship and Related Matters	82
Note 3: Variable Interest Entities	83
Note 4: Mortgage Loans and Loan Loss Reserves	84
Note 5: Impaired Mortgage Loans	90
Note 6: Real Estate Owned	96
Note 7: Investments in Securities	96
Note 8: Debt Securities and Subordinated Borrowings	100
Note 9: Derivatives	102
Note 10: Collateral and Offsetting of Assets and Liabilities	104
Note 11: Stockholders’ Equity	107
Note 12: Income Taxes	109
Note 13: Segment Reporting	110
Note 14: Financial Guarantees	115
Note 15: Concentration of Credit and Other Risks	116
Note 16: Fair Value Disclosures	121
Note 17: Legal Contingencies	134
Note 18: Regulatory Capital	137
Note 19: Selected Financial Statement Line Items	137



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PART I — FINANCIAL INFORMATION

This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in: (a) the “FORWARD-LOOKING STATEMENTS” sections of this Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2014, or 2014 Annual Report, and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2015 and June 30, 2015; and (b) the “RISK FACTORS” and “BUSINESS” sections of our 2014 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 2014 Annual Report and our condensed consolidated financial statements and accompanying notes for the three and nine months ended September 30, 2015 included in “FINANCIAL STATEMENTS.”

EXECUTIVE SUMMARY

Overview

Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability, and affordability to the U.S. housing market. We do this primarily by purchasing residential mortgage loans originated by mortgage lenders. In most instances, we package these mortgage loans into mortgage-related securities, which are guaranteed by us and sold in the global capital markets. We also invest in mortgage loans and mortgage-related securities. We do not originate mortgage loans or lend money directly to consumers.

We support the U.S. housing market and the overall economy by: (a) providing America’s families with access to mortgage funding at lower rates; (b) helping distressed borrowers keep their homes and avoid foreclosure; and (c) providing consistent liquidity to the multifamily mortgage market, which primarily includes providing financing for workforce rental housing. We are also 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

Since September 2008, we have been operating in conservatorship, with FHFA acting as our Conservator. The conservatorship and related matters significantly affect our management, business activities, financial condition, and results of operations. Our future is uncertain, and the conservatorship has no specified termination date. We do not know what changes may occur to our business model during or following conservatorship, including whether we will continue to exist.

Our Purchase Agreement with Treasury and the terms of the senior preferred stock we issued to Treasury constrain our business activities. We are dependent upon the continued support of Treasury and FHFA in order to continue operating our business. We cannot retain capital from the earnings generated by our business operations or return capital to stockholders other than Treasury.

Consolidated Financial Results

Comprehensive income (loss) was $(0.5) billion for the third quarter of 2015, compared to $2.8 billion for the third quarter of 2014. Comprehensive income (loss) for the third quarter of 2015 consisted of $(0.5) billion of net income (loss). The main drivers of our results for the third quarter of 2015 include net interest income and fair value losses on our derivatives.

During the third quarter of 2015 our results were negatively impacted by market-related items. We estimate that $1.5 billion of loss was driven by losses on derivatives used to economically hedge the interest rate risk related to certain financial assets and liabilities that were not measured at fair value. These derivative losses were driven by a decrease in interest rates and yield curve flattening during the quarter. In addition, an estimated $0.6 billion of loss was driven by changes in the fair value of certain mortgage loans and mortgage-related securities that are measured at fair value, due to credit spread widening.

Our total equity was $1.3 billion at September 30, 2015. Because our net worth was positive at September 30, 2015, we are not requesting a draw from Treasury under the Purchase Agreement for the third quarter of 2015. Through September 30, 2015, we have received aggregate funding of $71.3 billion from Treasury under the Purchase Agreement, and have paid $96.5 billion in aggregate cash dividends to Treasury.

Variability of Earnings

Our financial results are subject to significant earnings variability from period to period. This variability is primarily driven by:



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•

Interest-Rate Volatility — We hold assets and liabilities that expose us to interest-rate risk. Through our use of derivatives, we manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models. However, the way we account for our financial assets and liabilities, including derivatives (i.e., some are measured at amortized cost, while others are measured at fair value), creates volatility in our earnings when interest rates fluctuate. This volatility is not indicative of the underlying economics of our business.

Given this volatility and the declining capital reserve permitted under the terms of the Purchase Agreement (ultimately reaching zero in 2018), the risk of our having a negative net worth and being required to make a draw from Treasury will increase. To mitigate this risk, we may enter into transactions or take other steps that could increase our costs or lower our returns.

•

Spread Volatility — Spread volatility (i.e., credit spreads, liquidity spreads, risk premiums, etc.), or option-adjusted spreads, is the risk associated with changes in interest rates in excess of benchmark rates. We hold assets and liabilities that expose us to spread volatility. However, we have limited ability to manage spread volatility. Changes in spreads may contribute to significant earnings volatility period to period.

For information on how option-adjusted spreads may affect our earnings, see "RISK FACTORS — Competitive and Market Risks — Changes in OAS could materially affect our results of operations and net worth" in our 2014 Annual Report.


•	Non-Recurring Events — From time to time, we have experienced and will likely continue to experience significant earnings volatility from non-recurring events related to the financial crisis, including settlements with counterparties and changes in certain valuation allowances (i.e., allowance for loan losses and deferred tax asset).

Our Primary Business Objectives

Our primary business objectives are:


•	to support U.S. homeowning and renting families by maintaining mortgage availability even when other sources of financing are scarce and providing struggling homeowners with alternatives that allow them to stay in their homes or to avoid foreclosure;


•	to reduce taxpayer exposure to losses by increasing the role of private capital in the mortgage market and reducing our overall risk profile;


•	to build a commercially strong and efficient business enterprise to succeed in a to-be-determined “future state”; and


•	to support and improve the secondary mortgage market.

Our business objectives reflect direction that we have received from the Conservator, including the 2015 Conservatorship Scorecard. For information on the Scorecard and the related 2014 Strategic Plan, see “BUSINESS — Regulation and Supervision — Legislative and Regulatory Developments — FHFA’s Strategic Plan for Freddie Mac and Fannie Mae Conservatorships” in our 2014 Annual Report.

Supporting U.S. Homeowning and Renting Families

Maintaining Mortgage Availability

We maintain a consistent presence in the secondary mortgage market, and we are available to purchase mortgage loans even when other sources of financing are scarce. By providing this consistent source of liquidity for mortgage loans, we help provide our customers with confidence to continue lending even in difficult environments. During the nine months ended September 30, 2015, we purchased, or issued other guarantee commitments for, $274.9 billion in UPB of single-family conforming mortgage loans (representing approximately 1.2 million homes), compared to $184.3 billion during the nine months ended September 30, 2014 (representing approximately 884,000 homes). Origination volumes in the U.S. residential mortgage market increased during the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014, due to an increase in the volume of refinance mortgage loans driven by lower long-term mortgage interest rates.

During the nine months ended September 30, 2015, our total multifamily new business activity was $34.1 billion in UPB, which provided financing for more than 2,300 multifamily properties (representing approximately 480,000 apartment units). Nearly 90% of the units were affordable to families earning at or below the median income in their area. During the nine months ended September 30, 2014, our total multifamily new business activity was $14.1 billion in UPB, which provided financing for more than 900 multifamily properties (representing approximately 214,000 apartment units).

Providing Struggling Homeowners with Alternatives that Allow Them to Stay in Their Homes or to Avoid Foreclosure

We use a variety of borrower-assistance programs (such as HARP and HAMP) designed to provide struggling borrowers with alternatives to help them stay in their homes. We establish guidelines for our servicers to follow and provide them with default management programs to use in determining which type of borrower-assistance program (i.e., one of our mortgage loan workout activities or our relief refinance initiative) would be expected to enable us to manage our exposure to credit losses. In May 2015, FHFA announced an extension of our participation in HARP and HAMP through 2016.



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During the nine months ended September 30, 2015, we purchased or guaranteed $15.9 billion in UPB of relief refinance mortgage loans, including $6.2 billion of HARP mortgage loans. During the nine months ended September 30, 2014, we purchased or guaranteed $21.6 billion in UPB of relief refinance mortgage loans, including $11.6 billion of HARP mortgage loans. We have purchased HARP mortgage loans that were provided to nearly 1.4 million borrowers since the initiative began in 2009, including more than 36,000 borrowers during the nine months ended September 30, 2015.

During the nine months ended September 30, 2015 and the nine months ended September 30, 2014, we modified $7.8 billion and $10.1 billion in UPB of mortgage loans, respectively. When a home retention solution is not practicable, we require our servicers to pursue foreclosure alternatives, such as short sales, before initiating foreclosure. Since 2009, we have helped approximately 1.1 million borrowers experiencing hardship to complete a mortgage loan workout under our programs.

The table below presents our completed workout activities for mortgage loans within our single-family credit guarantee portfolio during the last five quarters.

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

Number of mortgage loans (000)


(1)	Excludes modification, repayment, and forbearance activities that have not been made effective, such as mortgage loans in modification trial periods. As of September 30, 2015, more than 23,000 borrowers were in modification trial periods. These categories are not mutually exclusive and a mortgage loan in one category may also be included in another category in the same period.

As shown in the table above, the volume of completed mortgage loan workouts has generally declined over the past five quarters. We attribute this decline to overall improvements in the economy and mortgage market, including rising home prices, declining unemployment rates, and declining serious delinquency rates. While we believe our borrower-assistance programs have been largely successful, many borrowers still need assistance. We continue our efforts to: (a) encourage eligible borrowers to refinance their mortgage loans under HARP; (b) develop additional loss mitigation strategies and modify existing programs, as needed; and (c) execute certain neighborhood stabilization activities. As part of these efforts:


•	We participated with FHFA and Fannie Mae in open forum meetings in several cities to inform community leaders about HARP eligibility criteria and benefits.


•	In June 2015, we announced that we are extending our streamlined modification program indefinitely. In September 2015, we announced changes designed to expand the pool of borrowers eligible to participate in our modification programs.



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•	We also continued to work with FHFA and Fannie Mae to develop and execute neighborhood stabilization plans in certain cities. In these cities we continue to work with locally-based private entities to facilitate REO dispositions and provide an initial period for REO properties to be purchased by owner occupants and others before we consider offers from investors.

Reducing Taxpayer Exposure to Losses and Reducing our Risk Profile

We are working diligently with FHFA to reduce the taxpayers' exposure to losses and our risk profile by:


•	transferring to private investors, insurers and selected sellers part of the credit risk of our New single-family book and our total multifamily portfolio;


•	managing the performance of our servicers through our contracts with them;


•	selling non-performing single-family mortgage loans;


•	improving our returns on property dispositions;


•	pursuing our rights against mortgage insurers;


•	recovering losses on non-agency mortgage-related securities; and


•	reducing our mortgage-related investments portfolio over time.

As discussed above, many of our borrower-assistance programs, such as mortgage loan modifications, also help reduce our risk of credit losses.

Transferring Credit Risk

We continue to reduce our exposure to credit risk in our New single-family book through the use of credit risk transfer transactions. During the nine months ended September 30, 2015, we completed six STACR debt note transactions, six ACIS transactions, one whole loan security transaction, and one seller indemnification transaction. These transactions transferred a portion of credit risk on certain groups of mortgage loans in the New single-family book to third-party investors, insurers and selected sellers. The value of these transactions to us is dependent on various economic scenarios, and we will primarily benefit from these transactions if we experience significant mortgage loan defaults.

During the nine months ended September 30, 2015, we completed 17 K Certificate transactions in which we transferred the first loss position associated with the underlying multifamily mortgage loans to third-party investors. We continue to develop other strategies intended to reduce our exposure to multifamily mortgage loans and securities by transferring credit risk to third parties.

Managing the Performance of Our Servicers

We continue to review and monitor the performance of our servicers and to seek improvements for the servicing of non-performing mortgage loans in our portfolio. From time to time, we facilitate the transfer of servicing for certain groups of mortgage loans that are delinquent or are deemed at risk of default to servicers that we believe have the capabilities and resources necessary to improve the loss mitigation associated with the mortgage loans.

As of September 30, 2015, the serious delinquency rate of our single-family credit guarantee portfolio was 1.41%, which is the lowest level since October 2008, compared to 1.88% as of December 31, 2014. Our loss mitigation activities (including sales of certain seriously delinquent mortgage loans) and foreclosures have contributed to this decline. However, we continue to have a large number of mortgage loans that have been seriously delinquent for extended periods of time in certain states, such as New York and New Jersey. The longer a mortgage loan remains delinquent, the more costs we incur. The number of our single-family mortgage loans delinquent for more than one year declined 28% during the nine months ended September 30, 2015.

Selling Non-Performing Single-Family Mortgage Loans

As part of our strategy to mitigate losses and reduce our holdings of less liquid assets, we sold seriously delinquent mortgage loans totaling $1.9 billion in UPB during the nine months ended September 30, 2015. As of September 30, 2015, we held an additional $7.1 billion in UPB of seriously delinquent single-family mortgage loans for sale. We believe the sale of these mortgage loans provides better economic returns than continuing to hold them.

Improving Our Returns on Property Dispositions

When a seriously delinquent single-family mortgage loan cannot be resolved through a home retention solution (e.g., a mortgage loan modification), we typically seek to pursue a short sale transaction. A short sale is preferable to a borrower because we provide limited relief to the borrower from repaying the entire amount owed on the mortgage loan and, in some cases, we also provide cash relocation assistance, while allowing the borrower to exit the home in an orderly manner. A short sale allows Freddie Mac to avoid the costs we would otherwise incur to complete the foreclosure. However, some of our seriously delinquent mortgage loans ultimately proceed to foreclosure. In a foreclosure, we may acquire the underlying property (which we refer to as REO), and later sell it, using the proceeds of the sale to reduce our losses.



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Pursuing Our Rights Against Mortgage Insurers

We received payments under primary and other mortgage insurance policies of $0.5 billion and $1.0 billion during the nine months ended September 30, 2015 and the nine months ended September 30, 2014, respectively. Although the financial condition of certain of our mortgage insurers has improved in recent years, some have failed to fully meet their obligations to us and there remains a significant risk that others may fail to do so. We expect to receive substantially less than full payment of our claims from two of our mortgage insurers, as they are only permitted to make partial payments under orders from their respective regulators. Many of our mortgage insurers are currently operating below our newly issued eligibility standards that are scheduled to go into effect on December 31, 2015; however, these mortgage insurers have announced that they expect to be in compliance by the effective date.

We cannot differentiate pricing based on the financial strength of a mortgage insurer or revoke a mortgage insurer's status as an eligible insurer without FHFA approval. Further, we do not select the insurance provider on a specific mortgage loan. Instead, the selection is made by the lender at the time the mortgage loan is originated. Accordingly, we are unable to manage our concentration risk related to mortgage insurers.

Recovering Losses on Non-Agency Mortgage-Related Securities

We incurred substantial losses on our investments in non-agency mortgage-related securities in prior years. We are working, in some cases in conjunction with other investors, to mitigate or recover our losses through litigation and other means. In recent years, we and FHFA reached settlements with a number of institutions. Lawsuits against other institutions are currently pending. For more information on these lawsuits, see "NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS."

Reducing Our Mortgage-Related Investments Portfolio Over Time

We are required to reduce the size of our mortgage-related investments portfolio over time pursuant to the Purchase Agreement and by FHFA. We are particularly focused on reducing the balance of less liquid assets in this portfolio. During the nine months ended September 30, 2015, the size of our mortgage-related investments portfolio declined by 10% or $41.3 billion, to $367.1 billion. Reductions in our less liquid assets accounted for the majority of this decline. Our less liquid assets are reduced through: (a) liquidations (including scheduled repayments, prepayments, charge-offs and cash shortfalls); (b) sales (including sales related to settlements of non-agency mortgage-related securities litigation); and (c) securitizations.

Building a Commercially Strong and Efficient Business Enterprise to Succeed in a To-Be-Determined “Future State”

We continue to take steps to build a stronger, profitable business model. Our goal is to strengthen the business model so we can run our business efficiently and effectively in support of homeowning and renting families and taxpayers and, if required as part of a future state for the enterprise, be ready to return to private sector ownership.

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

•

Better serving our customers: We continue to enhance our processes and programs to improve our customers' experience when doing business with us. This includes providing seller/servicers with greater certainty that the mortgage loans they sell to us or service for us meet our requirements. We continue to improve the tools we make available to our customers, including expanding and leveraging the data standards of the Uniform Mortgage Data Program. In 2015, we launched Loan Coverage Advisor, a new tool that allows our sellers to track significant events for the mortgage loans they sell us, including the dates when the seller obtains relief from certain representations and warranties. Additionally, effective June 1, 2015, we no longer charge a fee to use our Loan Prospector automated underwriting tool. Improvements in our latest customer satisfaction surveys show that our efforts are being recognized by our sellers and servicers. In October 2015, at the direction of FHFA, we and Fannie Mae released a uniform framework for representations and warranties remedies. The enhanced framework is intended to provide more clarity and transparency to lenders who do business with Freddie Mac on the process followed in categorizing origination defects, seller corrections of such defects, and available remedies. Also in October 2015, we announced Loan Advisor Suite, which is a set of integrated software applications designed to give lenders a way to originate and deliver high quality mortgage loans to us and to acquire insight into representation and warranty relief earlier in the mortgage loan production process.

•

Providing market leadership and innovation: We continue to develop innovative programs and services that benefit the mortgage industry and better meet the needs of an evolving mortgage market. We accomplish this primarily by: (a) continuing to execute our credit risk transfer transactions, including transactions that provide coverage based on actual losses as well as first losses realized on reference pools of single-family mortgage loans and seeking to expand and refine these offerings in the future; (b) expanding access to credit for credit-worthy borrowers, such as through the initiative we announced in December 2014 for loans with LTV ratios up to 97%; and (c) continuing to work with FHFA and Fannie Mae on enhancing the secondary mortgage loan market, including through the development of a new common securitization platform and a single (common) security. In July 2015, we began offering two new types of credit risk transfer transactions, including a whole loan security, which uses a senior/subordinated security structure



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and a seller indemnification transaction, in which the seller guarantees a portion of the credit losses. We expect to complete more of these transactions in the future, subject to market conditions.

•

Maintaining sound underwriting practices: We manage our credit risk by setting our underwriting standards at a level commensurate with the long-term credit risk appetite of the company. We believe the credit quality of the single-family mortgage loans in our New single-family book reflects sound underwriting standards as evidenced by their average original LTV ratios and credit scores as well as their credit performance in recent periods.

•

Reducing our credit losses and addressing emerging credit risks: As part of our loss mitigation strategy, we sold certain seriously delinquent mortgage loans during the nine months ended September 30, 2015. In addition, our mortgage portfolio includes several mortgage loan products with terms that may result in scheduled increases in monthly payments after specified initial periods (e.g., HAMP mortgage loans). A significant number of these mortgage loans have experienced, or will experience, payment changes beginning in 2015, which could increase the risk that the borrowers will default. We introduced several initiatives in 2015 designed to help reduce the risk that borrowers will default on their HAMP mortgage loans.

•

Optimizing the economics of our single-family business: We seek to achieve strong economic returns on our single-family credit guarantee portfolio while considering and balancing our: (a) housing mission and goals; (b) seller diversification and market share; and (c) security price performance (i.e., the disparities in the trading value of our PCs relative to comparable Fannie Mae securities in the market). However, economic returns on our guarantee activities are limited by, and subject to, FHFA's oversight.

•

Broadening access to credit: We continue to explore the feasibility of: (a) increasing our purchases of mortgage loans securitized by manufactured housing; (b) improving the effectiveness of pre-purchase and early delinquency counseling for borrowers; (c) utilizing alternative credit score models and credit history standards in mortgage loan eligibility decisions; and (d) increasing support for first-time home buyers. We are responsibly expanding our programs and outreach capabilities to better serve low and moderate income borrowers and underserved markets. In October 2015, we announced a partnership with Quicken Loans to pilot several new initiatives aimed at helping provide more families with the opportunity to achieve homeownership. This program will feature unique co-developed products designed to meet the needs of emerging markets and will also include continued home buyer education.

Our Investments segment is focused on strengthening our business model by:


•	Reducing the balance of less liquid mortgage-related assets, specifically non-agency mortgage-related securities and single-family reperforming, performing modified and delinquent mortgage loans;


•	Managing the corporate treasury function, including managing funding, interest-rate and liquidity risks, through the use of derivatives, our liquidity and contingency operating portfolio and unsecured debt;


•	Continuing to maintain a presence and provide secondary market liquidity for our agency mortgage-related securities; and


•	Continuing to manage our business based on economics, although we may forgo certain opportunities for a variety of reasons, including the mandated cap on the size of our mortgage-related investments portfolio or the potential accounting impacts. For more information on the mortgage-related investments portfolio cap, see "Limits on Our Mortgage-Related Investments Portfolio."

Our Multifamily segment is focused on strengthening our business model by:

•

Increasing our commitment to customers: We consider customer focus to be a key priority in our efforts to build value and support the creation of a strong, long-lasting rental housing system that positively affects the economy and communities nationwide. We look to increase efficiencies for our customers by standardizing and improving the ways in which they provide data to us in order to foster greater transparency and liquidity in the market.

•

Providing a reliable flow of capital for workforce housing: In May 2015, FHFA expanded the affordable housing categories that are excluded from the volume limit in our 2015 Scorecard. These revisions will enable us to further support the needs of the affordable rental housing market across more communities. In addition, we are continuing to grow our presence in the small balance mortgage loan and manufactured housing community mortgage loan markets.


•	Continuing to create innovative programs to transfer credit risk: We are developing and enhancing programs and offerings that support risk transfer activities. We are pursuing alternative methods to transfer credit risk of our multifamily mortgage portfolio using transactions other than our existing K Certificates to reduce exposure to mortgage credit risk for the company and U.S. taxpayers.


•	Improving our risk-adjusted returns: By leveraging private capital in our K Certificate and other credit risk transfer transactions, we are able to reduce capital allocation costs, decrease our potential exposure to credit losses, and build a steady source of management and guarantee fee income while increasing overall returns.

We continue to invest in our infrastructure and operations by:


•	Improving our infrastructure: We are improving our information technology in a manner designed to address the evolving requirements of the company, the Conservator, and the mortgage industry. We have ongoing efforts to



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improve our information security and our out-of-region disaster recovery capability. We strive to operate our information technology at world class levels by investing in capabilities that will support the future mortgage market while also seeking to act as good stewards of our technology assets by maintaining, standardizing and simplifying our existing technology portfolio.

•

Strengthening and streamlining our operations: We continue to strengthen and streamline our operations. We are improving our risk management capabilities by strengthening our three-lines-of-defense risk management framework. We are expanding our second-line-of-defense testing capabilities over our operational controls. We are also conducting a multi-year project focused on identifying and eliminating redundant control activities. In addition, we are conducting select organizational design reviews focused on reducing the number of operating layers within the organization.

Supporting and Improving the 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:

•

Build the Common Securitization Platform: We continue to work with FHFA, Fannie Mae, and Common Securitization Solutions, LLC (or CSS) on the development of a new common securitization platform. CSS is equally owned by us and Fannie Mae, and was formed to build and operate the platform. We and FHFA expect this will be a multi-year effort. On September 15, 2015, FHFA issued a report titled "An Update on the Common Securitization Platform," which provides an update on this project. The update indicates that Freddie Mac will be the first GSE to use the platform, with FHFA planning to announce in 2016 the date on which this will occur.

•

Implement the Single Security Initiative: FHFA is seeking ways to improve the overall liquidity of mortgage-related securities issued by us and Fannie Mae. This includes working towards the development of a single (common) security, which is intended to reduce the disparities in trading value between our PCs and Fannie Mae's single-class mortgage-related securities. The proposed single (common) security would be issued and guaranteed by either Freddie Mac or Fannie Mae. One of the goals for the proposed single security is for Freddie Mac PCs and Fannie Mae mortgage-related securities to be fungible with the single security to facilitate trading in a single TBA market for these securities. We continue to work on a detailed implementation plan, and we expect that the implementation will be a multi-year effort.

•

Improve seller and servicer eligibility standards: In the second quarter of 2015, at the direction of FHFA, we and Fannie Mae announced changes to our single-family seller and servicer eligibility requirements. These changes include revisions to net worth requirements, adoption of new capital and liquidity requirements and enhancements to certain servicer operational requirements. Our revised operational requirements took effect on August 18, 2015 and our revised financial requirements will take effect on December 31, 2015.

•

Implement the Uniform Mortgage Data Program: We and Fannie Mae continue to collaborate with the industry to develop and implement uniform data standards for single-family mortgage loans. This involves support for the mortgage loan data standardization initiatives, including the Uniform Closing Dataset and the Uniform Loan Application Dataset. This will enable us and Fannie Mae to drive improved loan quality and improve risk management.

•

Improve mortgage insurer eligibility standards: In the second quarter of 2015, at the direction of FHFA, we published revised eligibility requirements for mortgage insurers that include financial requirements determined using a risk-based framework. The revised eligibility requirements will become effective for all Freddie Mac-approved mortgage insurers on December 31, 2015. These revised eligibility requirements are designed to strengthen the mortgage insurance industry and enable a financially strong and resilient system that can provide consistent liquidity throughout the mortgage cycle.


•	Improve the underwriting processes with our single-family sellers: We meet with selected sellers to review and discuss improvements in their underwriting process. We also continually seek improvements to our automated tools for use in evaluating the credit and product eligibility of mortgage loans and identifying non-compliance issues.

Mortgage Market and Economic Conditions

Overview


•	The U.S. real gross domestic product rose by 1.5% on an annualized basis during the third quarter of 2015, compared to an annualized increase of 3.6% during the second quarter of 2015, according to the Bureau of Economic Analysis.


•	The national unemployment rate continued its trend of improvement and was 5.1% in September 2015, compared to 5.6% in December 2014, based on data from the U.S. Bureau of Labor Statistics.


•	An average of approximately 198,000 and 260,000 monthly net new jobs (non-farm) were added to the economy during the nine months ended September 30, 2015 and the full year of 2014, respectively.


•	The average interest rate on new 30-year fixed-rate conforming mortgage loans was 4.0% during the third quarter of 2015 and 3.8% during the nine months ended September 30, 2015, compared to 3.8% during the second quarter of



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2015 and 4.2% during the nine months ended September 30, 2014, based on our weekly Primary Mortgage Market Survey.


•	As reported by the U.S. Census Bureau, the U.S. homeownership rate was 63.7% in the third quarter of 2015, which was 5.5% lower than the high point of 69.2% in the fourth quarter of 2004.


•	Long-term interest rates, including the 10-year LIBOR, declined in 2015. The 10-year LIBOR declined 44 basis points and 28 basis points during the three and nine months ended September 30, 2015, respectively, while the 10-year LIBOR increased 5 basis points and 41 basis points during the three and nine months ended September 30, 2014, respectively.

Single-Family Housing Market


•	Sales of existing homes during the third quarter of 2015 were 5.48 million, increasing 3.4% from 5.30 million during the second quarter of 2015 (on a seasonally-adjusted annual basis), based on data from the National Association of Realtors.


•	Sales of new homes during the third quarter of 2015 were approximately 500,000, increasing 0.6% from approximately 497,000 during the second quarter of 2015 (on a seasonally-adjusted annual basis), based on data from the U.S. Census Bureau and HUD.


•	Total mortgage loan origination volume increased during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, as lower average long-term mortgage interest rates caused the volume of refinance activity to increase.


•	There was continued home price appreciation during the three and nine months ended September 30, 2015.

◦

Home prices increased on a national basis by 0.8% during the third quarter of 2015 and 5.8% since September 2014 (based on our non-seasonally adjusted index), compared to a 0.4% increase during the third quarter of 2014 and a 4.9% increase from September 2013 to September 2014. These estimates were based on our own price index of one-family homes funded by mortgage loans owned or guaranteed by us or Fannie Mae.


◦	Declines in the market’s inventory of vacant housing have supported stabilization and increases in home prices in a number of metropolitan areas.


◦	National home prices at September 30, 2015 were approximately 5.8% below their peak levels in June 2006 (based on our index).

Multifamily Housing Market


•	The multifamily housing market is in its sixth straight year of growth. Based on data reported by Reis, Inc.:


◦	The national apartment vacancy rate was 4.3% at September 30, 2015 and remains low compared to the long-term average of 5.6% since 1980.


◦	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 4.3% on an annualized basis during the third quarter of 2015, more than 1% higher than the long-term average. The annual growth rate in effective rents has not been less than 3% since 2011.

Significant Trends and Developments

Forward-looking statements, such as those discussed below, involve known and unknown risks and uncertainties, some of which are beyond our control. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties. See “FORWARD-LOOKING STATEMENTS” for additional information.

Single-Family Housing Market and our Single-Family Guarantee Segment


•	Market Conditions - Near-term performance of the single-family housing market is affected by key macroeconomic drivers of the economy, such as income growth, employment, and inflation. In the near term, we believe:


◦	Home price growth rates will continue to be consistent with long-term historical averages (approximately 2 to 5% per year).


◦	Mortgage loan interest rates will remain relatively low compared to historical levels, but begin trending slowly upward.


◦	Housing affordability for potential home buyers will remain relatively high in most metropolitan housing markets.


◦	The volume of home sales during 2015 will likely be slightly higher than during 2014.


◦	Relatively weak employment rates in certain areas and relatively modest family income growth are important factors that will continue to have a negative effect on single-family housing demand.


•	Mortgage Loan Volumes



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◦	Our mortgage loan purchase activity during the nine months ended September 30, 2015 increased to $274.9 billion in UPB, compared to $184.3 billion in UPB during the nine months ended September 30, 2014. We expect that the volume of refinance mortgage loans as a percentage of total originations will be lower during the fourth quarter of 2015 compared to the same period of 2014.


◦	Refinance mortgage loans comprised approximately 58% of our single-family mortgage loan volume during the nine months ended September 30, 2015, compared to 46% during the nine months ended September 30, 2014.


◦	The volume of our HARP mortgage loan purchases will likely remain low during the fourth quarter of 2015 since the pool of borrowers eligible to participate in the program has declined.


•	Credit Performance


◦	Our charge-offs, gross, were $0.7 billion during the third quarter of 2015 compared to $1.1 billion during the third quarter of 2014. We expect our charge-offs and credit losses to decline over time, but to remain elevated in the near term.


◦	For the near term, we also expect REO disposition and short sale severity ratios to remain high relative to historic levels while the number of seriously delinquent mortgage loans and the volume of our mortgage loan workouts may continue to decline.

Multifamily Housing Market and our Multifamily Segment


•	Market Conditions


◦	Low vacancy rates and higher average rents present favorable conditions for the multifamily market and our business, as multifamily mortgage loans are dependent on the cash flow of the underlying properties.


◦	We believe demand for rental housing will remain strong in the near term because of a strengthening job market and growth of household formations.


◦	We expect that new supply of multifamily housing, at the national level, will be absorbed by market demand in the near term, driven by continued improvements in the economy and favorable demographics.

◦

We believe there has been significant growth in the multifamily market during the nine months ended September 30, 2015. As reported by the Federal Reserve, total multifamily mortgage loan debt outstanding was more than $1.0 trillion at June 30, 2015 (the latest available information), representing an increase of $92.7 billion (or 9.8%) since June 30, 2014, the largest annual increase ever reported by the Federal Reserve.


•	New Business Volumes


◦	Our new multifamily business activity during the nine months ended September 30, 2015 was $34.1 billion compared to $14.1 billion during the nine months ended September 30, 2014.


◦	Based on FHFA's revised 2015 Scorecard guidance, approximately 70% of our $34.1 billion in new business activity during the nine months ended September 30, 2015 was counted towards the 2015 volume limit of $30.0 billion and the remaining 30% was excluded from the limit.


◦	While we continue exploring opportunities to provide financing for workforce housing, we expect to remain within the 2015 Scorecard limit for new business volume.


•	Securitization Activity


◦	Since the beginning of 2009, we have sold approximately $115 billion of mortgage loans through K Certificate transactions and transferred the expected credit risk to third party investors through the use of subordination, as this has become the primary focus of our business model.


•	Credit Performance


◦	The delinquency rate on our multifamily mortgage portfolio was 0.01% at September 30, 2015. Multifamily credit losses as a percentage of the average balance of our multifamily mortgage portfolio were 0.8 basis points in the nine months ended September 30, 2015.


◦	We expect the credit losses and delinquency rates for the multifamily mortgage portfolio to remain low in the near term.

Limits on Our Mortgage-Related Investments Portfolio

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. As a result, the UPB of our mortgage-related investments portfolio may not exceed $399 billion as of December 31, 2015. Our 2014 Retained Portfolio Plan provides for us to manage the UPB of the mortgage-related investments portfolio so that it does not exceed 90% of the annual cap established by the Purchase Agreement, subject to certain exceptions. For more information on the plan, see “BUSINESS — Executive Summary — Our Primary Business Objectives — Reducing Taxpayer Exposure to Losses — Reducing Our Mortgage-Related Investments Portfolio Over Time” in our 2014 Annual Report.



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Our decisions with respect to managing the decline of the mortgage-related investments portfolio may affect all three business segments. We plan to continue to reduce the balance of the portfolio over the remainder of 2015. In order to achieve all of our portfolio reduction goals, it is possible that we may forgo economic opportunities in one business segment in order to pursue opportunities in another business segment. 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.

Table 2 — Mortgage-Related Investments Portfolio



	September 30, 2015									December 31, 2014
	More Liquid			Less Liquid			Total			More Liquid			Less Liquid			Total
	(in millions)
Investments segment — Mortgage investments portfolio:
Single-family unsecuritized mortgage loans	$	—		$	77,843		$	77,843		$	—		$	82,778		$	82,778
Freddie Mac mortgage-related securities	143,603			6,365			149,968			150,852			7,363			158,215
Non-agency mortgage-related securities	—			30,020			30,020			—			44,230			44,230
Non-Freddie Mac agency mortgage-related securities	14,063			—			14,063			16,341			—			16,341
Total Investments segment — Mortgage investments portfolio	157,666			114,228			271,894			167,193			134,371			301,564
Single-family Guarantee segment — Single-family unsecuritized seriously delinquent mortgage loans	—			21,352			21,352			—			28,738			28,738
Multifamily segment — Mortgage investments portfolio	3,573			70,326			73,899			1,911			76,201			78,112
Total mortgage-related investments portfolio	$	161,239		$	205,906		$	367,145		$	169,104		$	239,310		$	408,414
Percentage of total mortgage-related investments portfolio	44		%	56		%	100		%	41		%	59		%	100		%
Mortgage-related investments portfolio cap at December 31, 2015 and 2014, respectively							$	399,181								$	469,625
90% of mortgage-related investments portfolio cap at December 31, 2015⁽¹⁾							$	359,263


(1)	Represents the amount that we manage to under our 2014 Retained Portfolio Plan, subject to certain exceptions.

We evaluate the liquidity of the assets in our mortgage-related investments portfolio based on two categories:


•	Single-class and multiclass agency securities (excluding certain structured agency securities collateralized by non-agency mortgage-related securities); and


•	Assets that are less liquid than the agency securities noted above. Assets that we consider to be less liquid than agency securities include unsecuritized single-family and multifamily mortgage loans, certain structured agency securities collateralized by non-agency mortgage-related securities, and our investments in non-agency mortgage-related securities.

We sold $12.5 billion of less liquid assets in the first nine months of 2015, including $1.9 billion in UPB of seriously delinquent unsecuritized single-family loans. In addition, we securitized $7.4 billion in UPB of single-family reperforming and modified loans, which includes HAMP loans, in the first nine months of 2015. These amounts do not include sales of mortgage loans we purchased for cash and subsequently securitized.



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SELECTED FINANCIAL DATA

The selected financial data presented below should be reviewed in conjunction with our condensed consolidated financial statements and accompanying notes.

Table 3 — Selected Financial Data



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(dollars in millions, except share-related amounts)
Statements of Comprehensive Income Data
Net interest income	$	3,743		$	3,663		$	11,359		$	10,676
Benefit (provision) for credit losses	528			(574		)	1,884			(41		)
Non-interest income (loss)	(3,841		)	764			(3,447		)	2,469
Non-interest expense	(1,099		)	(816		)	(3,599		)	(2,267		)
Income tax benefit (expense)	194			(956		)	(1,979		)	(3,374		)
Net income (loss)	(475		)	2,081			4,218			7,463
Comprehensive income (loss)	(501		)	2,786			4,158			9,175
Net income (loss) attributable to common stockholders⁽¹⁾	(475		)	(705		)	(441		)	(1,712		)
Net income (loss) per common share – basic and diluted	(0.15		)	(0.22		)	(0.14		)	(0.53		)
Cash dividends per common share	—			—			—			—
Weighted average common shares outstanding (in millions) – basic and diluted	3,234			3,236			3,235			3,236

							September 30, 2015			December 31, 2014
							(dollars in millions)
Balance Sheets Data
Mortgage loans held-for-investment, at amortized cost by consolidated trusts (net of allowances for loan losses)							$	1,615,291		$	1,558,094
Total assets							1,962,147			1,945,539
Debt securities of consolidated trusts held by third parties							1,539,108			1,479,473
Other debt							408,281			450,069
All other liabilities							13,459			13,346
Total stockholders’ equity							1,299			2,651
Portfolio Balances - UPB
Mortgage-related investments portfolio							$	367,145		$	408,414
Total Freddie Mac mortgage-related securities⁽²⁾							1,706,672			1,637,086
Total mortgage portfolio							1,931,342			1,910,106
TDRs on accrual status							83,169			82,908
Non-accrual loans							24,584			33,130

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Ratios⁽³⁾
Return on average assets⁽⁴⁾	(0.1		)%	0.4		%	0.3		%	0.5		%
Allowance for loans losses as percentage of mortgage loans, held-for-investment⁽⁵⁾	0.9			1.3			0.9			1.3
Equity to assets ratio⁽⁶⁾	0.2			0.2			0.1			0.5


(1)	For a discussion of the manner in which 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 2014 Annual Report.


(2)	See ‘‘Table 24 — Freddie Mac Mortgage-Related Securities’’ for the composition of this line item.


(3)	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.


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


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


(6)	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

You should read this discussion of our consolidated results of operations in conjunction with our condensed consolidated financial statements, including the accompanying notes.

Table 4 — Summary Consolidated Statements of Comprehensive Income



	Three Months Ended September 30,									Nine Months Ended September 30,
	2015			2014			Variance			2015			2014			Variance
	(in millions)
Net interest income	$	3,743		$	3,663		$	80		$	11,359		$	10,676		$	683
Benefit (provision) for credit losses	528			(574		)	1,102			1,884			(41		)	1,925
Net interest income after benefit (provision) for credit losses	4,271			3,089			1,182			13,243			10,635			2,608
Non-interest income (loss):
Gains (losses) on extinguishment of debt securities of consolidated trusts	(5		)	(132		)	127			(139		)	(308		)	169
Gains (losses) on retirement of other debt	9			(8		)	17			(16		)	—			(16		)
Derivative gains (losses)	(4,172		)	(617		)	(3,555		)	(3,440		)	(4,894		)	1,454
Net impairment of available-for-sale securities recognized in earnings	(54		)	(166		)	112			(245		)	(687		)	442
Other gains (losses) on investment securities recognized in earnings	256			(109		)	365			825			1,029			(204		)
Other income (loss)	125			1,796			(1,671		)	(432		)	7,329			(7,761		)
Total non-interest income (loss)	(3,841		)	764			(4,605		)	(3,447		)	2,469			(5,916		)
Non-interest expense:
Administrative expense	(465		)	(472		)	7			(1,417		)	(1,393		)	(24		)
REO operations expense	(116		)	(103		)	(13		)	(243		)	(112		)	(131		)
Temporary Payroll Tax Cut Continuation Act of 2011 expense	(248		)	(198		)	(50		)	(705		)	(563		)	(142		)
Other expense	(270		)	(43		)	(227		)	(1,234		)	(199		)	(1,035		)
Total non-interest expense	(1,099		)	(816		)	(283		)	(3,599		)	(2,267		)	(1,332		)
Income (loss) before income tax benefit (expense)	(669		)	3,037			(3,706		)	6,197			10,837			(4,640		)
Income tax benefit (expense)	194			(956		)	1,150			(1,979		)	(3,374		)	1,395
Net income (loss)	(475		)	2,081			(2,556		)	4,218			7,463			(3,245		)
Other comprehensive income (loss), net of taxes and reclassification adjustments	(26		)	705			(731		)	(60		)	1,712			(1,772		)
Comprehensive income (loss)	$	(501	)	$	2,786		$	(3,287	)	$	4,158		$	9,175		$	(5,017	)

Effects of Interest-Rate Risk Management on Consolidated Statements of Comprehensive Income

We use derivatives primarily to manage the interest rate risk associated with our investments in financial assets and related liabilities. We use derivatives to hedge interest-rate sensitivity mismatches between our assets and liabilities. For example, if rates increase and the duration of our assets extends more than the duration of our liabilities, we would rebalance our interest-rate exposure by entering into pay-fixed interest-rate swaps or selling Treasury-derivatives. If rates decrease and the duration of our assets shortens more than the duration of our liabilities, we would rebalance our interest rate exposure by entering into receive-fixed interest-rate swaps or purchasing Treasury-derivatives. Through our use of derivatives, we manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models. For information about our interest-rate risk management, see “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.”

While our economic exposure to interest-rate risk is reduced, the accounting treatment for these assets and liabilities, including derivatives, creates volatility in our earnings when interest rates fluctuate. Some assets and liabilities are measured at amortized cost and some are measured at fair value, while all derivatives are measured at fair value. These measurement differences create interest rate volatility in our earnings that is not indicative of the underlying economics of our business.

During the three months ended September 30, 2015, derivative losses were $4.2 billion, which included a $0.5 billion loss for the accrual of periodic settlements, which is the net amount we accrued during the period for interest-rate swap payments we will make, and a $3.6 billion loss for changes in fair value of our derivatives during the period. Approximately $1.4 billion of the $3.6 billion loss for changes in fair value of our derivatives was offset by changes in fair value of assets and liabilities that are measured at fair value, which are recognized in non-interest income (loss) and other comprehensive income (loss), net of taxes. The remaining $2.2 billion of derivative losses, or $1.5 billion after taxes, is attributable to assets and liabilities not measured at fair value. For information about our derivative gains (losses), see “Derivative Gains (Losses).”

Net Interest Income

Net interest income represents the difference between interest income and interest expense (which includes income from management and guarantee fees) and is a primary source of our revenue. For securitization trusts that are consolidated, we record interest income on the loans held by the trust and interest expense on the debt securities (e.g. single-family PCs) issued



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by the trust. The difference between the interest income on the loans and the interest expense on the debt represents the management and guarantee fee we receive as compensation for our guarantee of the principal and interest payments of the issued debt securities. The table below presents an analysis of net interest income, including average balances and related yields earned on assets and incurred on liabilities.

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



	Three Months Ended September 30,
	2015								2014
	Average Balance			Interest Income (Expense)			Average Rate		Average Balance			Interest Income (Expense)			Average Rate
	(dollars in millions)
Interest-earning assets:
Cash and cash equivalents	$	11,849		$	1		0.04	%	$	9,842		$	1		0.04	%
Federal funds sold and securities purchased under agreements to resell	53,046			18			0.13		43,205			7			0.06
Mortgage-related securities:
Mortgage-related securities	217,830			2,092			3.84		252,205			2,465			3.91
Extinguishment of PCs held by Freddie Mac	(105,709		)	(951		)	(3.60	)	(110,511		)	(1,043		)	(3.78	)
Total mortgage-related securities, net	112,121			1,141			4.07		141,694			1,422			4.01
Non-mortgage-related securities	8,738			4			0.17		11,668			1			0.02
Mortgage loans held by consolidated trusts⁽¹⁾	1,601,069			14,032			3.51		1,539,913			14,148			3.68
Unsecuritized mortgage loans⁽¹⁾	156,248			1,563			4.00		167,683			1,643			3.92
Total interest-earning assets	$	1,943,071		$	16,759		3.45		$	1,914,005		$	17,222		3.60
Interest-bearing liabilities:
Debt securities of consolidated trusts including PCs held by Freddie Mac	$	1,621,197		$	(12,315	)	(3.04	)	$	1,558,023		$	(12,845	)	(3.30	)
Extinguishment of PCs held by Freddie Mac	(105,709		)	951			3.60		(110,511		)	1,043			3.78
Total debt securities of consolidated trusts held by third parties	1,515,488			(11,364		)	(3.00	)	1,447,512			(11,802		)	(3.26	)
Other debt:
Short-term debt	99,050			(40		)	(0.16	)	116,624			(35		)	(0.12	)
Long-term debt	310,204			(1,559		)	(2.01	)	326,610			(1,647		)	(2.01	)
Total other debt	409,254			(1,599		)	(1.56	)	443,234			(1,682		)	(1.52	)
Total interest-bearing liabilities	1,924,742			(12,963		)	(2.70	)	1,890,746			(13,484		)	(2.84	)
Expense related to derivatives⁽²⁾	—			(53		)	(0.01	)	—			(75		)	(0.02	)
Impact of net non-interest-bearing funding	18,329			—			0.03		23,259			—			0.03
Total funding of interest-earning assets	$	1,943,071		$	(13,016	)	(2.68	)	$	1,914,005		$	(13,559	)	(2.83	)
Net interest income/yield				$	3,743		0.77					$	3,663		0.77

	Nine Months Ended September 30,
	2015								2014
	Average Balance			Interest Income (Expense)			Average Rate		Average Balance			Interest Income (Expense)			Average Rate
	(dollars in millions)
Interest-earning assets:
Cash and cash equivalents	$	12,458		$	6		0.06	%	$	14,188		$	2		0.02	%
Federal funds sold and securities purchased under agreements to resell	50,278			39			0.11		41,645			17			0.06
Mortgage-related securities:
Mortgage-related securities	231,969			6,728			3.87		260,172			7,629			3.91
Extinguishment of PCs held by Freddie Mac	(109,167		)	(3,002		)	(3.67	)	(112,553		)	(3,177		)	(3.76	)
Total mortgage-related securities, net	122,802			3,726			4.05		147,619			4,452			4.02
Non-mortgage-related securities	9,965			10			0.12		9,952			5			0.06
Mortgage loans held by consolidated trusts⁽¹⁾	1,579,720			41,641			3.51		1,535,099			42,881			3.72
Unsecuritized mortgage loans⁽¹⁾	161,628			4,792			3.95		172,311			4,965			3.84
Total interest-earning assets	$	1,936,851		$	50,214		3.46		$	1,920,814		$	52,322		3.63
Interest-bearing liabilities:
Debt securities of consolidated trusts including PCs held by Freddie Mac	$	1,600,556		$	(36,858	)	(3.07	)	$	1,551,918		$	(39,327	)	(3.38	)
Extinguishment of PCs held by Freddie Mac	(109,167		)	3,002			3.67		(112,553		)	3,177			3.76
Total debt securities of consolidated trusts held by third parties	1,491,389			(33,856		)	(3.03	)	1,439,365			(36,150		)	(3.35	)
Other debt:
Short-term debt	107,941			(114		)	(0.14	)	117,795			(110		)	(0.12	)
Long-term debt	320,506			(4,709		)	(1.96	)	335,934			(5,156		)	(2.05	)
Total other debt	428,447			(4,823		)	(1.50	)	453,729			(5,266		)	(1.55	)
Total interest-bearing liabilities	1,919,836			(38,679		)	(2.69	)	1,893,094			(41,416		)	(2.91	)
Expense related to derivatives⁽²⁾	—			(176		)	(0.01	)	—			(230		)	(0.02	)
Impact of net non-interest-bearing funding	17,015			—			0.02		27,720			—			0.04
Total funding of interest-earning assets	$	1,936,851		$	(38,855	)	(2.68	)	$	1,920,814		$	(41,646	)	(2.89	)
Net interest income/yield				$	11,359		0.78					$	10,676		0.74


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


(2)	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 interest expense associated with the hedged forecasted issuance of debt affects earnings.



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Net interest income increased in the three and nine months ended September 30, 2015 compared to the three and nine months ended September 30, 2014. Net interest yield remained flat for the three months ended September 30, 2015 and increased for the nine months ended September 30, 2015 compared to the same periods in 2014. These results were driven by:

•

Higher management and guarantee fee income — Management and guarantee fee income increased in the three and nine months ended September 30, 2015, compared to the same periods in 2014, as the management and guarantee fees received on new business are higher than older vintages that continue to run off. The percentage of our net interest income derived from management and guarantee fees continues to increase, and we expect this trend will continue. We estimate that more than 40% of our net interest income during the three and nine months ended September 30, 2015 was derived from management and guarantee fee income. Net interest income includes the legislated 10 basis point increase in management and guarantee fees, which is remitted to Treasury as part of the Temporary Payroll Tax Cut Continuation Act of 2011. Net interest income includes $247 million and $699 million during the three and nine months ended September 30, 2015, respectively, compared to $196 million and $551 million during the three and nine months ended September 30, 2014, respectively, related to these fees.

•

Increased amortization of upfront fees and basis adjustments — During the three and nine months ended September 30, 2015, average mortgage interest rates declined as compared to the same periods in 2014. This decline in average mortgage interest rates caused an increase in borrower refinance activity. As borrowers refinance and our liquidation rate increases, the amortization of the upfront fees and basis adjustments associated with these mortgage loans and the securities that are backed by these mortgage loans increases, which generally has a positive effect on net interest income and net interest yield. The timing of the amortization for the mortgage loans differs from the timing of the amortization for the securities that are backed by these mortgage loans, because proceeds received from the mortgage loans backing these securities are remitted to the security holders at a later date. This timing difference can contribute to short-term volatility in net interest income period over period. In addition, our balance of deferred upfront fees and basis adjustments continues to increase as we add new business.


•	A decline in the average balance of our higher-yielding assets — The balance of our higher-yielding assets continues to decline, consistent with the required reduction of our mortgage-related investments portfolio. This decline has placed downward pressure on our net interest income and net interest yield and will likely continue to do so in the future.

Benefit (Provision) for Credit Losses

Our benefit (provision) for credit losses predominantly relates to single-family mortgage loans and reflects: (a) our estimate of incurred losses for newly impaired mortgage loans; (b) changes in our estimates of incurred losses for previously impaired mortgage loans; (c) a reduction of the portion of the loan loss reserve related to interest rate concessions as borrowers make payments under the terms of their mortgage loan modifications; and (d) reductions in our loan loss reserves associated with reclassifying mortgage loans from held-to-investment to held-for-sale.

The benefit for credit losses for the three and nine months ended September 30, 2015 was driven by the reclassification of mortgage loans from held-to-investment to held-for-sale. Excluding the effect of the reclassification of mortgage loans, the amount of our benefit (provision) for credit losses for the three and nine months ended September 30, 2015 was not significant. In the three and nine months ended September 30, 2015, we reclassified $2.5 billion and $10.6 billion, respectively, in UPB of certain seriously delinquent single-family mortgage loans from held-for-investment to held-for-sale. This reclassification and other related subsequent activity affects several line items. The benefit for credit losses due to the reclassification and other related subsequent activity was $0.5 billion and $2.0 billion in the three and nine months ended September 30, 2015, respectively, and was offset by: (a) lower-of-cost-or-fair-value losses of approximately $0.3 billion and $1.5 billion for the three and nine months ended September 30, 2015, respectively, which were included in other non-interest income; and (b) increased non-interest expense of approximately $0.2 billion and $0.9 billion for the three and nine months ended September 30, 2015, respectively, related to property taxes and insurance associated with these mortgage loans.

The provision for credit losses for the three months ended September 30, 2014 reflected a slight increase in our estimate of incurred losses on previously impaired mortgage loans due to declines in home prices in certain areas. The provision for credit losses for the nine months ended September 30, 2014 reflected an increase in our loan loss reserve for newly impaired mortgage loans that was slightly offset by improvements in our estimate of incurred losses on previously impaired mortgage loans primarily due to the positive effect of an increase in home prices.

Our single-family loan loss reserves declined from $21.8 billion at December 31, 2014 to $16.4 billion at September 30, 2015, primarily reflecting a high level of mortgage loan charge-offs related to our initial adoption of regulatory guidance that changed when we deem a mortgage loan uncollectible and the reclassification of certain seriously delinquent single-family mortgage loans from held-for-investment to held-for-sale.

On January 1, 2015, we adopted regulatory guidance issued by FHFA that establishes guidelines for adverse classification and identification of specified single-family and multifamily assets, including guidelines for recognizing charge-offs on certain single-family mortgage loans. Upon adoption, we changed the timing of when we deem certain single-family mortgage loans to



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be uncollectible, and we began to charge-off the amount of recorded investment in excess of the fair value of the underlying collateral for mortgage loans that have been deemed uncollectible prior to foreclosure. These additional charge-offs did not have a material impact on our comprehensive income during the nine months ended September 30, 2015, as we had already reserved for these losses in our allowance for loan losses in prior periods. This adoption resulted in a reduction to both the recorded investment of mortgage loans, held-for-investment, and our allowance for loan losses of $1.9 billion on January 1, 2015.

As of September 30, 2015, approximately 64% of the loan loss reserves for single-family mortgage loans related to interest rate concessions associated with TDRs. A concession can result from various changes in a mortgage loan's contractual terms, but generally arises from a reduction in a mortgage loan's contractual interest rate when a mortgage loan is modified. Due to the large number of mortgage loan modifications completed in recent years, our loan loss reserves attributable to TDRs remain high.

Most of our modified mortgage loans were current and performing at September 30, 2015. However, we establish a reserve for TDR mortgage loans at the time of modification that largely relates to the reduction in the contractual interest rate of the mortgage loan for its remaining term. The portion of the reserve related to the interest rate concession is generally reduced over time as the borrower makes payments under the terms of the modification. We expect our loan loss reserves associated with existing TDRs will continue to decline over time as borrowers continue to make monthly payments under the modified terms and the interest rate concessions are recognized as income.

Mortgage loans that have been individually evaluated for impairment, such as modified mortgage loans, generally have a higher associated loan loss reserve than mortgage loans that have been collectively evaluated for impairment. As of September 30, 2015 and December 31, 2014, the recorded investment of single-family impaired mortgage loans with specific reserves recorded was $88.3 billion and $95.1 billion, respectively, and the loan loss reserves associated with these mortgage loans were $14.8 billion and $17.8 billion, respectively.

The table below summarizes our net investment for individually impaired single-family mortgage loans on our consolidated balance sheets for which we have recorded a specific reserve.

Table 6 — Single-Family Impaired Mortgage Loans with Specific Reserve Recorded



	2015					2014
	Number of Mortgage Loans		Amount ⁽¹⁾			Number of Mortgage Loans		Amount
	(dollars in millions)
TDRs, at January 1,	539,590		$	94,401		514,497		$	92,505
New additions	44,439		6,176			61,345		8,891
Repayments, charge-offs, and reclassifications to/from held-for-sale	(52,947	)	(10,695		)	(20,972	)	(3,802		)
Foreclosure transfers and foreclosure alternatives	(14,625	)	(2,304		)	(19,432	)	(3,356		)
TDRs, at September 30,	516,457		87,578			535,438		94,238
Mortgage loans impaired upon purchase	10,327		747			10,308		785
Total impaired mortgage loans with specific reserve	526,784		88,325			545,746		95,023
Total allowance for loan losses of individually impaired single-family mortgage loans			(14,847		)			(18,199		)
Net investment, at September 30,			$	73,478				$	76,824


(1)	The net investment amount for 2015 includes charge-offs related to our January 1, 2015 adoption of regulatory guidance that changed when we deem mortgage loans to be uncollectible.

See "NOTE 5: IMPAIRED MORTGAGE LOANS" for further information about our TDRs and non-accrual and other impaired mortgage loans.



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The table below provides information about the UPB of TDRs and non-accrual mortgage loans on our consolidated balance sheets.

Table 7 — TDRs and Non-Accrual Mortgage Loans



	September 30, 2015		December 31, 2014		September 30, 2014
	(dollars in millions)
TDRs on accrual status:
Single-family	$	82,830	$	82,373	$	82,152
Multifamily	339		535		597
Subtotal —TDRs on accrual status	83,169		82,908		82,749
Non-accrual mortgage loans:
Single-family	24,342		32,745		34,145
Multifamily⁽¹⁾	242		385		411
Subtotal — non-accrual mortgage loans	24,584		33,130		34,556
Total TDRs and non-accrual mortgage loans⁽²⁾	$	107,753	$	116,038	$	117,305

Loan loss reserves associated with:
TDRs on accrual status	$	12,791	$	13,749	$	14,079
Non-accrual mortgage loans	2,975		6,966		7,336
Total loan loss reserves associated with TDRs and non-accrual mortgage loans	$	15,766	$	20,715	$	21,415

Ratio of total loan loss reserves (excluding reserves for TDR concessions) to annualized net charge-offs for single-family mortgage loans	2.9		2.7		3.1
Ratio of total loan loss reserves to annualized net charge-offs for single-family mortgage loans	8.2		5.6		6.3

	Nine Months Ended September 30,
	2015				2014
	(in millions)
Foregone interest income on TDR and non-accrual mortgage loans:
Single-family	$	2,172			$	2,574
Multifamily	3				4
Total foregone interest income on TDR and non-accrual mortgage loans	$	2,175			$	2,578


(1)	Includes $242 million, $385 million, and $402 million in UPB of mortgage loans that were current as of September 30, 2015, December 31, 2014, and September 30, 2014, respectively.


(2)	As of January 1, 2015, we adopted regulatory guidance that changed when we deem mortgage loans to be uncollectible. As of September 30, 2015, there was $6.4 billion in UPB of our TDR and non-accrual mortgage loans, of which we had charged-off $1.8 billion during the nine months ended September 30, 2015 that reduced our recorded investment in these mortgage loans.

Credit Loss Performance

Our single-family charge-offs, gross, were higher during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 due to our adoption on January 1, 2015 of regulatory guidance that changed when we deem a mortgage loan to be uncollectible. The level of charge-offs should decline as we continue our loss mitigation activities and our efforts to sell seriously delinquent single-family mortgage loans. Our single-family charge-offs, gross, were lower during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 primarily due to lower REO acquisitions.

The table below provides detail on our credit loss performance associated with mortgage loans and REO assets on our consolidated balance sheets and mortgage loans underlying our non-consolidated mortgage-related financial guarantees.



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Table 8 — Credit Loss Performance



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(dollars in millions)
REO
REO balances, net:
Single-family	$	1,787		$	2,911		$	1,787		$	2,911
Multifamily	8			—			8			—
Total	$	1,795		$	2,911		$	1,795		$	2,911
REO operations expense (income):
Single-family	$	116		$	109		$	243		$	120
Multifamily	—			(6		)	—			(8		)
Total	$	116		$	103		$	243		$	112
Charge-offs
Single-family:
Charge-offs, gross⁽¹⁾	$	703		$	1,109		$	4,558		$	3,826
Recoveries⁽²⁾	(177		)	(190		)	(547		)	(1,100		)
Single-family, net	$	526		$	919		$	4,011		$	2,726
Multifamily:
Charge-offs, gross	$	3		$	—		$	9		$	2
Recoveries	—			(1		)	—			(1		)
Multifamily, net	$	3		$	(1	)	$	9		$	1
Total Charge-offs:
Charge-offs, gross	$	706		$	1,109		$	4,567		$	3,828
Recoveries	(177		)	(191		)	(547		)	(1,101		)
Total Charge-offs, net	$	529		$	918		$	4,020		$	2,727
Credit Losses:
Single-family	$	642		$	1,028		$	4,254		$	2,846
Multifamily	3			(7		)	9			(7		)
Total	$	645		$	1,021		$	4,263		$	2,839
Total (in bps)⁽³⁾	13.8			22.6			30.7			20.9

(1)

Charge-offs include $23 million and $21 million during the three months ended September 30, 2015 and the three months ended September 30, 2014, respectively, and $75 million and $59 million during the nine months ended September 30, 2015 and the nine months ended September 30, 2014, respectively, related to losses on mortgage loans purchased under financial guarantees that were recorded within other expenses on our consolidated statements of comprehensive income.

(2)

Includes $0.5 billion during the nine months ended September 30, 2014 related to repurchase requests made to our seller/servicers (including $0.3 billion related to settlement agreements with certain sellers to release specified mortgage loans from certain repurchase obligations in exchange for one-time cash payments). Excludes certain recoveries, such as pool insurance, which are included in non-interest income on our consolidated statements of comprehensive income.


(3)	Includes charge-offs of $1.9 billion associated with our initial adoption of regulatory guidance on January 1, 2015. Excluding this amount, the total credit losses (in bps) during the nine months ended September 30, 2015 were 16.8.

Our 2005-2008 Legacy single-family book comprised approximately 11% of our single-family credit guarantee portfolio, based on UPB, at September 30, 2015; however, these mortgage loans accounted for approximately 80% of our credit losses during the nine months ended September 30, 2015. Our single-family credit losses during the nine months ended September 30, 2015 were highest in Florida and New Jersey. Collectively, these two states comprised approximately 34% of our total credit losses during the nine months ended September 30, 2015.

At September 30, 2015, mortgage loans in states with a judicial foreclosure process comprised 39% of our single-family credit guarantee portfolio, based on UPB, while mortgage loans in these states contributed to approximately 72% of our credit losses during the nine months ended September 30, 2015. Foreclosures generally take longer to complete in states where a judicial foreclosure is required, compared to other states. We expect the portion of our credit losses related to mortgage loans in states with judicial foreclosure processes will remain high in the near term as the substantial backlog of mortgage loans awaiting court proceedings in those states transitions to REO or other loss events. See “NOTE 15: CONCENTRATION OF CREDIT AND OTHER RISKS” for additional information about our credit losses.

The table below provides information on the severity of losses we experienced on mortgage loans in our single-family credit guarantee portfolio.



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Table 9 — Severity Ratios for Single-Family Mortgage Loans



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Severity ratios:
REO dispositions and third-party sales⁽¹⁾	34.3	%	33.3	%	34.5	%	33.8	%
Short sales	29.8		32.0		30.3		31.6


(1)	Calculated as combined collateral losses on REO dispositions and third-party sales at foreclosure auction, divided by the combined UPB of the related mortgage loans. Includes selling and repair expenses. Excludes recoveries related to settlement agreements with certain sellers to release specified mortgage loans from certain repurchase obligations in exchange for one-time cash payments.

In recent periods, third-party sales at foreclosure auction have comprised an increasing portion of foreclosure transfers. Third-party sales at foreclosure auction allow us to avoid the REO property expenses that we would have otherwise incurred if we held the property in our REO inventory until disposition. Our severity ratios have remained relatively stable during the 2015 periods, compared to the 2014 periods. These severity ratios are influenced by several factors, including the geographic location of the property and the related selling expenses.

Non-Interest Income (Loss)

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

During the three and nine months ended September 30, 2015, we purchased single-family PCs which resulted in an extinguishment of debt securities of consolidated trusts with a UPB of $15.6 billion and $40.6 billion, respectively.

During the three and nine months ended September 30, 2014, we purchased single-family PCs which resulted in an extinguishment of debt securities of consolidated trusts with a UPB of $14.8 billion and $37.6 billion, respectively.

Losses recognized in the 2015 and 2014 periods as a result of these purchases were driven by interest rate declines between the time of issuance and the time of repurchase of these 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.

We did not have any derivatives in hedge accounting relationships at September 30, 2015 or December 31, 2014. However, AOCI includes amounts related to closed cash flow hedges.

While derivatives are an important aspect of our strategy to manage interest-rate risk, they increase the volatility of reported comprehensive income because fair value changes on derivatives are included in comprehensive income, while fair value changes associated with some of the assets and liabilities being economically hedged are not. These differences in measurement (i.e., some are measured at amortized cost, while others are measured at fair value) create volatility in our earnings when interest rates fluctuate. This volatility is not indicative of the underlying economics of our business. The mix of our derivative portfolio, in conjunction with the mix of our assets and liabilities, also affects the volatility of comprehensive income.

Table 10 — Derivative Gains (Losses)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(in millions)
Interest-rate swaps	$	(4,693	)	$	(184	)	$	(2,514	)	$	(3,505	)
Option-based derivatives	1,171			78			722			344
Other derivatives⁽¹⁾	(114		)	116			(9		)	241
Accrual of periodic settlements	(536		)	(627		)	(1,639		)	(1,974		)
Total	$	(4,172	)	$	(617	)	$	(3,440	)	$	(4,894	)


(1)	Primarily includes futures, commitments, credit derivatives and swap guarantee derivatives.

Gains (losses) on our derivative portfolio include both derivative fair value changes and the accrual of periodic cash settlements. Gains (losses) on our derivative portfolio can change based on changes in interest rates, implied volatility, and the mix and balance of products in our derivative portfolio. The mix and balance of products in our derivative portfolio change from period to period as we respond to changing interest rate environments, as well as changes in our asset and liability balances and characteristics.

While our sensitivity to interest rates on an economic basis remains low as measured by our models, our exposure to earnings volatility resulting from our use of derivatives has increased in recent periods as we have changed the mix of our derivatives to align with the changing duration of our economically hedged assets and liabilities.



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During the three and nine months ended September 30, 2015, we recognized net losses on derivatives primarily as a result of a decline in longer-term interest rates. During these periods, we recognized fair value losses on our interest-rate swaps of $4.7 billion and $2.5 billion, respectively, and losses of $0.5 billion and $1.6 billion, respectively, related to the accrual of periodic settlements as we were a net payer based on the terms of the instruments. These losses were partially offset by fair value gains on our option-based derivatives of $1.2 billion and $0.7 billion, respectively.

During the three and nine months ended September 30, 2014, we recognized net losses on derivatives primarily as a result of a flattening of the yield curve as short-term interest rates increased and longer-term interest rates declined. During these periods, we recognized fair value losses on our interest-rate swaps of $0.2 billion and $3.5 billion, respectively and net losses of $0.6 billion and $2.0 billion, respectively, related to the accrual of periodic settlements as we were a net payer on our interest-rate swaps based on the terms of the instruments.

Impairments of Available-For-Sale Securities

During the three and nine months ended September 30, 2015 and 2014, we recorded net impairments of available-for-sale securities recognized in earnings related to non-agency mortgage-related securities. The impairments during all periods were mostly driven by the inclusion of additional securities in the population of available-for-sale securities in an unrealized loss position that we intend to sell. The addition of securities to this population during these periods generally reflects our efforts to reduce the balance of less liquid assets in the mortgage-related investments portfolio. During the three and nine months ended September 30, 2014, the impairments included amounts where our intent to sell changed as a result of the settlement of a non-agency mortgage-related securities lawsuit where a counterparty agreed to purchase the securities as part of the settlement. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities,” and “NOTE 7: INVESTMENTS IN SECURITIES” for additional information.

Other Gains (Losses) on Investment Securities Recognized in Earnings

The table below presents our other gains (losses) on investment securities recognized in earnings.

Table 11 — Other Gains (Losses) on Investment Securities Recognized in Earnings



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(in millions)
Gains (losses) on trading securities	$	(56	)	$	(216	)	$	(329	)	$	(183	)
Gains (losses) on sales of available-for-sale securities	312			107			1,154			1,212
Total	$	256		$	(109	)	$	825		$	1,029

The losses on trading securities during the 2015 periods were primarily due to reductions in the fair value of securities carried at a premium (i.e., fair value exceeds par value), as these securities moved closer to their maturity. These losses were partially offset by gains due to declines in interest rates. As of September 30, 2015, our agency securities classified as trading were generally in an unrealized gain position, so we expect to recognize losses on these securities as they approach maturity and move closer to par.

The gains on sales of available-for-sale securities during the 2015 periods were primarily due to sales of non-agency mortgage-related securities consistent with our efforts to reduce the amount of less liquid assets we hold. The gains during the 2014 periods primarily resulted from sales related to our structuring activities. The structuring activities include resecuritizing existing agency securities into REMICs and selling some or all of the REMIC tranches.

Other Income (Loss)

The table below summarizes the significant components of other income (loss).



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Table 12 — Other Income (Loss)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2015			2014		2015			2014
	(in millions)
Other income (loss):
Non-agency mortgage-related securities settlements	$	—		$	1,187	$	—		$	6,084
Gains (losses) on mortgage loans	(197		)	168		(1,321		)	383
Recoveries on mortgage loans acquired with deteriorated credit quality⁽¹⁾	30			53		95			162
Management and guarantee fee-related income, net⁽²⁾	85			40		321			184
All other	207			348		473			516
Total other income (loss)	$	125		$	1,796	$	(432	)	$	7,329


(1)	Primarily relates to mortgage loans acquired with deteriorated credit quality prior to 2010. Consequently, our recoveries on these mortgage loans will generally decline over time.


(2)	Primarily relates to securitized mortgage loans that we guarantee and have not consolidated the securitization trusts on our consolidated balance sheets.

Non-Agency Mortgage-Related Securities Settlements

We received proceeds from ten settlements of lawsuits regarding our investment in certain non-agency mortgage-related securities during the nine months ended September 30, 2014. We did not have any such settlements in the nine months ended September 30, 2015.

Gains (Losses) on Mortgage Loans

Gains (losses) on mortgage loans consist of three components:

•

Gains (losses) on mortgage loans held-for-sale related to lower-of-cost-or-fair-value adjustments were $(0.3) billion and $0.1 billion during the three months ended September 30, 2015 and the three months ended September 30, 2014, respectively, and were $(1.5) billion and $(0.1) billion during the nine months ended September 30, 2015 and the nine months ended September 30, 2014, respectively. The higher losses during the 2015 periods were primarily due to a larger volume of mortgage loans reclassified from held-for-investment to held-for-sale during the 2015 periods, compared to the 2014 periods.


•	During the three and nine months ended September 30, 2015, we reclassified $2.5 billion and $10.6 billion, respectively, in UPB of single-family mortgage loans from held-for-investment to held-for-sale, compared to $0.7 billion in UPB during the nine months ended September 30, 2014. We did not have any such reclassification during the three months ended September 30, 2014.


•	During the three and nine months ended September 30, 2015, we reclassified $1.8 billion and $2.1 billion, respectively, in UPB of multifamily mortgage loans from held-for-investment to held-for-sale. We did not have any such reclassification during the comparable 2014 periods.


•	We held $7.1 billion and $2.1 billion in UPB of single-family and multifamily mortgage loans, respectively, for sale and evaluated at lower-of-cost-or-fair-value on our consolidated balance sheet at September 30, 2015.


•	Gains (losses) realized on the sale of mortgage loans were not significant for the three and nine months ended September 30, 2015, or the comparable 2014 periods, as gains from declining interest rates were offset by losses from widening spreads.


•	We sold $6.0 billion and $21.2 billion in UPB of multifamily mortgage loans during the three and nine months ended September 30, 2015, respectively. We sold $4.5 billion and $12.9 billion in UPB of multifamily mortgage loans during the comparable 2014 periods.


•	We sold $0.6 billion and $1.9 billion in UPB of single-family mortgage loans during the three and nine months ended September 30, 2015, respectively. We sold $0.6 billion in UPB of single-family mortgage loans during the comparable 2014 periods.

•

Gains resulting from changes in the fair value of multifamily mortgage loans for which we have elected the fair value option were $0.2 billion and $0.3 billion during the three and nine months ended September 30, 2015, respectively, compared to $0.1 billion and $0.4 billion during the three and nine months ended September 30, 2014, respectively. These gains were primarily due to declining interest rates, partially offset by losses due to widening spreads.



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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 (as we have elected to carry certain of these notes at fair value), and other miscellaneous income. The decrease in the third quarter of 2015 compared to the third quarter of 2014 was primarily due to lower fair value gains on certain STACR debt notes as credit spreads widened to a lesser extent and lower compensatory fees assessed on servicers in the 2015 period. The decrease in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 was primarily due to lower compensatory fees assessed on servicers and higher costs associated with the common securitization platform in the 2015 period. This decrease was partially offset by an increase in certain credit enhancement recoveries in the 2015 period associated with single-family mortgage loans. Previously, these recoveries were recognized within our provision for credit losses.

Non-Interest Expense

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

Table 13 — Non-Interest Expense



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in millions)
Administrative expense:
Salaries and employee benefits	$	231	$	231	$	742	$	687
Professional services	130		128		361		392
Occupancy expense	14		16		40		43
Other administrative expense	90		97		274		271
Total administrative expense	465		472		1,417		1,393
REO operations expense	116		103		243		112
Temporary Payroll Tax Cut Continuation Act of 2011 expense	248		198		705		563
Other expense	270		43		1,234		199
Total non-interest expense	$	1,099	$	816	$	3,599	$	2,267

Administrative Expense

Administrative expense was relatively flat during the three and nine months ended September 30, 2015 compared to the three and nine months ended September 30, 2014. During the nine months ended September 30, 2015, salaries and employee benefits expense increased primarily because of costs associated with the termination of our pension plans. This increase was partially offset by lower professional services expense driven by lower expenses associated with FHFA-led lawsuits regarding our investments in certain residential non-agency mortgage-related securities.

REO Operations Expense

Our REO operations expense includes: (a) REO property expenses; (b) net gains or losses incurred on disposition of REO properties; (c) adjustments to the holding period allowance associated with REO properties to record them at the lower of their carrying amount or fair value less the estimated costs to sell; and (d) recoveries from mortgage insurance and other credit enhancements. The increases in REO operations expense during the 2015 periods were primarily due to lower gains on REO dispositions and lower recoveries from mortgage insurance during the 2015 periods. For more information on our REO activity, see “CONSOLIDATED BALANCE SHEETS ANALYSIS — REO, Net.”

Temporary Payroll Tax Cut Continuation Act of 2011 Expense

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

As of September 30, 2015 and September 30, 2014, mortgage loans with an aggregate UPB of $1.0 trillion (or 60% of the single-family credit guarantee portfolio) and $820.3 billion, respectively, were subject to these fees. As of September 30, 2015, the cumulative total of the amounts paid and due to Treasury for these fees was $2.1 billion. We expect the amount of these fees to continue to increase in the future as we add new business and increase the UPB of mortgage loans subject to these fees.

Other Expense

Other expense includes property taxes and insurance associated with mortgage loans reclassified as held-for-sale, HAMP servicer incentive fees, costs related to terminations and transfers of mortgage loan servicing, and other miscellaneous expenses. The increases during the 2015 periods were primarily driven by property taxes and insurance associated with mortgage loans reclassified as held-for-sale. Property tax and insurance amounts are included in loan loss reserves while the mortgage loans are classified as held-for-investment.



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Beginning January 1, 2015, FHFA directed us to allocate funds to the Housing Trust Fund and Capital Magnet Fund. During the nine months ended September 30, 2015, we completed $305.6 billion of new business purchases subject to this allocation and accrued $128 million of related expense. We expect to pay these amounts (and any additional amounts to be accrued based on our new business purchases in the fourth quarter of 2015) in February 2016.

Other Comprehensive Income (Loss)

The table below presents components of other comprehensive income (loss) reported in our condensed consolidated statements of comprehensive income.

Table 14 — Components of Other Comprehensive Income (Loss)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in millions)
Other comprehensive income, excluding reclassifications and amortization	$	217	$	750	$	754	$	2,289