Edgar Filing: FEDERAL HOME LOAN MORTGAGE CORP

Large accelerated filer [ X ]

Accelerated filer [ ]

Non-accelerated filer (Do not check if a smaller reporting company) [ ]

Smaller reporting company [ ]

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

Commission File Number: 001-34139

Federal Home Loan Mortgage Corporation

(Exact name of registrant as specified in its charter)

Freddie Mac



Federally chartered	8200 Jones Branch Drive	52-0904874	(703) 903-2000
corporation	McLean, Virginia 22102-3110	(I.R.S. Employer	(Registrant’s telephone number,
(State or other jurisdiction of incorporation or organization)	(Address of principal executive offices, including zip code)	Identification No.)	including area code)

Securities registered pursuant to Section 12(b) of the Act: None

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

Voting Common Stock, no par value per share (OTCQB: FMCC)

Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCI)

5% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCKK)

Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCG)

5.1% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCH)

5.79% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCK)

Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCL)

Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCM)

Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCN)

5.81% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCO)

6% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCP)

Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCJ)

5.7% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCKP)

Variable Rate, Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCCS)

6.42% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCCT)

5.9% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKO)

5.57% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKM)

5.66% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKN)

6.02% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKL)

6.55% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKI)

Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKJ)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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.

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

The aggregate market value of the common stock held by non-affiliates computed by reference to the price at which the common equity was last sold on June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter) was $1.2 billion.

As of February 2, 2017, there were 650,053,863 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: None

Table of Contents

TABLE OF CONTENTS



	Page
INTRODUCTION	1
ABOUT FREDDIE MAC	1
OUR BUSINESS	5
FORWARD-LOOKING STATEMENTS	9
SELECTED FINANCIAL DATA	11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12
KEY ECONOMIC INDICATORS	12
CONSOLIDATED RESULTS OF OPERATIONS	16
CONSOLIDATED BALANCE SHEETS ANALYSIS	32
OUR BUSINESS SEGMENTS	34
RISK MANAGEMENT	92
CREDIT RISK	95
OPERATIONAL RISK	142
MARKET RISK	145
LIQUIDITY AND CAPITAL RESOURCES	152
CONSERVATORSHIP AND RELATED MATTERS	163
REGULATION AND SUPERVISION	169
CONTRACTUAL OBLIGATIONS	175
OFF-BALANCE SHEET ARRANGEMENTS	177
CRITICAL ACCOUNTING POLICIES AND ESTIMATES	179
RISK FACTORS	181
LEGAL PROCEEDINGS	208
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	209
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	212
CONTROLS AND PROCEDURES	337
DIRECTORS, CORPORATE GOVERNANCE, AND EXECUTIVE OFFICERS	341
DIRECTORS	341
CORPORATE GOVERNANCE	351
EXECUTIVE OFFICERS	360
EXECUTIVE COMPENSATION	363
COMPENSATION DISCUSSION AND ANALYSIS	363
COMPENSATION AND RISK	380
2016 COMPENSATION INFORMATION FOR NEOs	381
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	387
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	390
PRINCIPAL ACCOUNTING FEES AND SERVICES	393
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	395
SIGNATURES	396
GLOSSARY	399
FORM 10-K INDEX	411
EXHIBIT INDEX	E-1



Freddie Mac 2016 Form 10-K		i



Introduction	About Freddie Mac

INTRODUCTION

This Annual Report on Form 10-K 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-K. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-K. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in the “Forward-Looking Statements” and “Risk Factors” sections of this Form 10-K.

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

ABOUT FREDDIE MAC

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

We support the U.S. housing market and the overall economy by enabling America’s families to access mortgage loan funding with better terms and by providing consistent liquidity to the multifamily mortgage market, which we do primarily by providing financing for workforce housing. We have helped many distressed borrowers keep their homes or avoid foreclosure. We are working with FHFA, our customers and the industry to build a better housing finance system for the nation.

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. However, the support provided by Treasury pursuant to the Purchase Agreement also enables us to have adequate liquidity to conduct our normal business activities. The Purchase Agreement requires our future profits to be distributed to Treasury, and we cannot retain capital from the earnings generated by our business operations (other than a limited amount that will decrease to zero in 2018) or return capital to stockholders other than Treasury. Consequently, our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions.

For more information on the conservatorship and government support for our business, see “MD&A - Conservatorship and Related Matters” and Note 2.

The tables and graphs below show our cumulative draws from Treasury and cumulative dividend payments to Treasury under the Purchase Agreement. The Treasury draw amounts shown are the total draws requested based on our quarterly net deficits for the periods presented. Draw requests are funded



Freddie Mac 2016 Form 10-K		1



Introduction	About Freddie Mac

in the quarter subsequent to any net deficit. Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock, which remains $72.3 billion. The amount of available funding remaining under the Purchase Agreement is $140.5 billion, and would be reduced by any future draws.

Draws From Treasury



(In billions)	Total
Total Senior Preferred Stock Outstanding		$72.3
Less: Initial Liquidation Preference	1.0
Treasury Draws		$71.3

Dividend Payments to Treasury



(In billions)	Total
Dividend Payments as of 12/31/16		$101.4
Scheduled Q1 2017 Dividend Obligation	4.5
Total Dividend Payments		$105.9



Freddie Mac 2016 Form 10-K		2



Introduction	About Freddie Mac

CONSOLIDATED FINANCIAL RESULTS

Comprehensive Income

Our comprehensive income for 2016 increased compared to 2015, primarily as a result of the following items:


•	Lower derivative fair value losses due to an increase in longer-term interest rates during 2016 compared to 2015 when longer-term interest rates declined slightly;

•

Higher other income primarily as a result of improved pricing on K Certificates and SB Certificates, coupled with increased fair value gains on multifamily mortgage loans for which we have elected the fair value option and multifamily mortgage loan purchase commitments for which we newly elected the fair value option beginning in 2016, due to market spread tightening in 2016 compared to widening in 2015; partially offset by the following:


•	Lower net interest income due primarily to continued reduction in the balance of our mortgage-related investments portfolio; and


•	Increased losses on investment securities primarily as a result of an increase in interest rates during 2016 compared to 2015 when longer-term interest rates declined slightly, coupled with a decrease in realized gains in 2016 as we sold fewer non-agency securities in an unrealized gain position.

Our comprehensive income for 2015 declined compared to 2014, primarily as a result of the following items:



Freddie Mac 2016 Form 10-K		3



Introduction	About Freddie Mac


•	Lower other income, as we did not have any significant litigation settlements in 2015 related to our investments in non-agency mortgage-related securities. By comparison, we had a number of favorable significant litigation settlements in 2014;


•	We recorded fair value losses in 2015 on certain mortgage loans and mortgage-related securities that are measured at fair value due to market spread widening, while in 2014 we recorded gains due to market spread tightening; partially offset by


•	Lower derivative fair value losses in 2015 than in 2014. Longer-term interest rates declined less in 2015 than in 2014, when the yield curve also flattened, leading to lower losses.

Variability of Earnings

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

•

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 (i.e., some are measured at amortized cost, while others are measured at fair value), including derivatives, creates volatility in our GAAP earnings when interest rates fluctuate. Based upon the composition of our financial assets and liabilities, including derivatives, at December 31, 2016, we generally recognize fair value losses in earnings when interest rates decline. This volatility generally is not indicative of the underlying economics of our business. For information about our interest-rate risk management activities and the sensitivity of our financial results to interest-rate volatility, see "MD&A - Consolidated Results of Operations - Derivative Gains (Losses) - Explanation of Key Drivers of Derivative Gains (Losses)", "MD&A - Consolidated Results of Operations - Other Key Drivers - Items Affecting Multiple Lines - Debt Funding Strategies and Interest-Rate Risk Management Activities," and "MD&A - Risk Management - Market Risk."

•

Spread Volatility — The volatility of market spreads (i.e., credit spreads, liquidity spreads, risk premiums, etc.), or OAS, is the risk associated with changes in the excess of market interest rates over benchmark rates. We hold assets and liabilities that expose us to spread volatility, which may contribute to significant GAAP earnings volatility. For financial assets measured at fair value, we generally recognize fair value losses when market spreads widen. Conversely, for financial liabilities measured at fair value, we generally recognize fair value gains when market spreads widen.

The variability of GAAP earnings and the declining capital reserve required under the terms of the Purchase Agreement (ultimately reaching zero in 2018) increase the risk of our having a negative net worth and thus being required to draw from Treasury. We could face a risk of a draw for a variety of reasons, including if we were to experience a large decrease in interest rates, which would result in GAAP losses due to measurement differences, coupled with a large widening of market spreads.

In an effort to reduce the probability of a draw due to changes in interest rates, we entered into certain transactions, including structured transactions, during 2016 that have resulted in additional financial assets being recognized and measured at fair value, which will help to reduce the measurement differences. In addition, in the first quarter of 2017, we began using hedge accounting for certain single-family mortgage loans, which is intended to partially reduce the interest-rate volatility in our GAAP earnings by eliminating a portion of the measurement differences between our GAAP financial results and the underlying economics of our business.



Freddie Mac 2016 Form 10-K		4



Introduction	Our Business

OUR BUSINESS

PRIMARY BUSINESS STRATEGIES

Our primary business strategies describe how we plan to pursue our Charter Mission over a timeframe of two to four years, or approximately through 2018 to 2020. Our core assumption is that the conservatorship will continue with no material changes during that period. These strategies complement FHFA's annual Conservatorship Scorecards.

Charter Mission

We are a GSE with a specific and limited corporate purpose (i.e., “Charter Mission”) to support the liquidity, stability and affordability of U.S. housing mortgage markets as a participant in the secondary mortgage market, while operating as a commercial enterprise earning an appropriate return. Everything we do must be done within the specific constraints of our Charter Mission.

Our Twin Goals

We established overarching twin goals to enable us to reach our Charter Mission:


•	A Better Freddie Mac; and


•	A Better Housing Finance System

Our Key Strategies

A Better Freddie Mac

We are focused on operating as a very well-run large financial institution by:


•	Being a very effective operating organization;


•	Being a market leader through customer focus and innovation; and


•	Managing risk and economic capital for quality risk-adjusted returns.

A Better Housing Finance System

We are focused on providing leadership, through innovation and constructive forward-looking engagement with FHFA, to improve the liquidity, stability, and affordability of the U.S. housing markets by:


•	Modernizing and improving the functioning of the mortgage markets;


•	Developing greater responsible access to housing finance; and


•	Reducing taxpayer exposure to mortgage risks.

For further information on our goals and detailed strategies for each of our business segments, see "MD&A — Our Business Segments."



Freddie Mac 2016 Form 10-K		5



Introduction	Our Business

OUR CHARTER

Our Charter forms the framework for our business activities. Our Charter Mission is to:


•	Provide stability in the secondary market for residential loans;


•	Respond appropriately to the private capital market;

•

Provide ongoing assistance to the secondary market for residential loans (including activities relating to loans for low- and moderate-income families, involving a reasonable economic return that may be less than the return earned on other activities) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing; and


•	Promote access to mortgage loan credit throughout the U.S. (including central cities, rural areas, and other underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing.

Our Charter permits us to purchase first-lien single-family loans with LTV ratios at the time of our purchase of less than or equal to 80%. Our Charter also permits us to purchase first-lien single-family loans that do not meet this criterion if we have certain specified credit protections, which include mortgage insurance on the portion of the UPB of the loan that exceeds an 80% LTV ratio, a seller's agreement to repurchase or replace a defaulted loan, or the retention by the seller of at least a 10% participation interest in the loan.

This Charter requirement does not apply to multifamily loans or to loans that have the benefit of any guarantee, insurance or other obligation by the U.S. or any of its agencies or instrumentalities (e.g., the FHA, the VA, or the USDA Rural Development). Additionally, as part of HARP, we purchase single-family loans that refinance loans we currently own or guarantee without obtaining additional credit enhancement in excess of that already in place for any such loan, even when the LTV ratio of the new loan is above 80%.

Our Charter does not permit us to originate loans or lend money directly to borrowers in the primary mortgage market. Our Charter limits our purchase of single-family loans to the conforming loan market, which consists of loans originated with UPBs at or below limits determined annually based on changes in FHFA’s housing price index. The base conforming loan limit for a one-family residence has been set at $424,100 for 2017, and was set at $417,000 from 2006 to 2016. Higher limits have been established in certain “high-cost” areas (for 2017, up to $636,150 for a one-family residence). Higher limits also apply to two- to four-family residences and to loans secured by properties in Alaska, Guam, Hawaii, and the U.S. Virgin Islands.



Freddie Mac 2016 Form 10-K		6



Introduction	Our Business

BUSINESS SEGMENTS

We have three reportable segments: Single-family Guarantee, Multifamily, and Investments. Certain activities that are not part of a reportable segment are included in the All Other category. For more information on our segments, see “MD&A - Our Business Segments" and Note 11.

EMPLOYEES

At February 2, 2017, we had 5,959 full-time and 45 part-time employees.

PROPERTIES

Our principal offices consist of four office buildings we own in McLean, Virginia, comprising approximately 1.3 million square feet. We operate our business in the United States and its territories, and accordingly, we generate no revenue from and have no long-lived assets, other than financial instruments, in geographic locations other than the United States and its territories.

AVAILABLE INFORMATION

We file reports and other information with the SEC. In view of the Conservator’s succession to all of the voting power of our stockholders, we have not prepared or provided proxy statements for the solicitation of proxies from stockholders since we entered into conservatorship, and do not expect to do so while we remain in conservatorship. Pursuant to SEC rules, our annual reports on Form 10-K contain certain information typically provided in an annual proxy statement.

We make available, free of charge through our website at www.freddiemac.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all other SEC reports and amendments to those reports as soon as reasonably practicable after we electronically file the material with the SEC. In addition, materials that we file with the SEC are available for review and copying at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding companies that file electronically with the SEC.

We are providing our website addresses and the website address of the SEC here and elsewhere in this Form 10-K solely for your information. Information appearing on our website or on the SEC’s website is not incorporated into this Form 10-K.

Pursuant to SEC regulations, public companies are required to disclose certain information when they incur a material direct financial obligation or become directly or contingently liable for a material obligation under an off-balance sheet arrangement. The disclosure must be made in a current report on Form 8-K under Item 2.03 or, if the obligation is incurred in connection with certain types of securities offerings, in prospectuses for that offering that are filed with the SEC.

Freddie Mac’s securities offerings are exempted from SEC registration requirements. As a result, we do not file registration statements or prospectuses with the SEC with respect to our securities offerings. To comply with the disclosure requirements of Form 8-K relating to the incurrence of material financial



Freddie Mac 2016 Form 10-K		7



Introduction	Our Business

obligations, we report these types of obligations either in offering circulars or supplements thereto that we post on our website or in a current report on Form 8-K, in accordance with a “no-action” letter we received from the SEC staff. In cases where the information is disclosed in an offering circular, the document will be posted on our website within the same time period that a prospectus for a non-exempt securities offering would be required to be filed with the SEC.

The website address for disclosure about our debt securities is www.freddiemac.com/debt. From this address, investors can access the offering circular and related supplements for debt securities offerings under Freddie Mac’s global debt facility, including pricing supplements for individual issuances of debt securities. Similar information about our STACR and SCR debt notes is available at www.freddiemac.com/creditriskofferings and www.freddiemac.com/multifamily/investors/structured-credit-risk, respectively.

Disclosure about the mortgage-related securities we issue, some of which are off-balance sheet obligations (e.g., K Certificates), can be found at www.freddiemac.com/mbs. From this address, investors can access information and documents about our mortgage-related securities, including offering circulars and related offering circular supplements.



Freddie Mac 2016 Form 10-K		8



Introduction	Forward-Looking Statements

FORWARD-LOOKING STATEMENTS

We regularly communicate information concerning our business activities to investors, the news media, securities analysts, and others as part of our normal operations. Some of these communications, including this Form 10-K, contain “forward-looking statements.” Examples of forward-looking statements include, but are not limited to, statements pertaining to the conservatorship, our current expectations and objectives for the Single-family Guarantee, Multifamily, and Investments segments of our business, our efforts to assist the housing market, our liquidity and capital management, economic and market conditions and trends, our market share, the effect of legislative and regulatory developments and new accounting guidance, the credit quality of loans we own or guarantee, the costs and benefits of our credit risk transfer transactions, and our results of operations and financial condition on a GAAP, Segment Earnings and fair value basis. Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. Forward-looking statements are often accompanied by, and identified with, terms such as “objective,” “expect,” “possible,” “trend,” “forecast,” “anticipate,” “believe,” “intend,” “could,” “future,” “may,” “will,” and similar phrases. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates, and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties, including those described in the “Risk Factors” section of this Form 10-K, and:


•	The actions the U.S. government (including FHFA, Treasury, and Congress) may take, or require us to take, including to support the housing markets or to implement FHFA’s Conservatorship Scorecards and other objectives for us;


•	The effect of the restrictions on our business due to the conservatorship and the Purchase Agreement, including our dividend obligation on the senior preferred stock;


•	Changes in our Charter or in applicable legislative or regulatory requirements (including any legislation affecting the future status of our company);


•	Changes in the fiscal and monetary policies of the Federal Reserve, including any changes to its policy of maintaining sizable holdings of mortgage-related securities and any future sales of such securities;


•	Changes in economic and market conditions, including changes in employment rates, interest rates, spreads, and home prices;


•	Changes in the U.S. residential mortgage market, including changes in the supply and type of loan products (e.g., refinance versus purchase, and fixed-rate versus ARM);


•	The success of our efforts to mitigate our losses on our Legacy single-family book and our investments in non-agency mortgage-related securities;


•	The success of our strategy to transfer mortgage credit risk through STACR debt note, ACIS, K Certificate and other credit risk transfer transactions;


•	Our ability to maintain adequate liquidity to fund our operations;


•	Our ability to maintain the security of our operating systems and infrastructure (e.g., against cyberattacks);


•	Our ability to effectively execute our business strategies, implement new initiatives, and improve efficiency;


•	The adequacy of our risk management framework;


•	Our ability to manage mortgage credit risks, including the effect of changes in underwriting and servicing practices;


•	Our ability to limit or manage our economic exposure and GAAP earnings exposure to interest-rate



Freddie Mac 2016 Form 10-K		9



Introduction	Forward-Looking Statements

volatility and spread volatility, including the availability of derivative financial instruments needed for interest-rate risk management purposes;


•	Changes or errors in the methodologies, models, assumptions, and estimates we use to prepare our financial statements, make business decisions, and manage risks;


•	Changes in investor demand for our debt or mortgage-related securities (e.g., single-family PCs and multifamily K Certificates);


•	Changes in the practices of loan originators, investors and other participants in the secondary mortgage market; and


•	Other factors and assumptions described in this Form 10-K, including in the “MD&A” section.

Forward-looking statements are made only as of the date of this Form 10-K, and we undertake no obligation to update any forward-looking statements we make to reflect events or circumstances occurring after the date of this Form 10-K.



Freddie Mac 2016 Form 10-K		10

Selected Financial Data

SELECTED FINANCIAL DATA

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



	At or For the Year Ended December 31,
(Dollars in millions, except share-related amounts)	2016			2015			2014			2013			2012
Statements of Comprehensive Income Data
Net interest income		$14,379			$14,946			$14,263			$16,468			$17,611
Benefit (provision) for credit losses	803			2,665			(58		)	2,465			(1,890		)
Non-interest income (loss)	500			(3,599		)	(113		)	8,519			(4,083		)
Non-interest expense	(4,043		)	(4,738		)	(3,090		)	(2,089		)	(2,193		)
Income tax (expense) benefit	(3,824		)	(2,898		)	(3,312		)	23,305			1,537
Net income	7,815			6,376			7,690			48,668			10,982
Comprehensive income	7,118			5,799			9,426			51,600			16,039
Net income (loss) attributable to common stockholders	97			(23		)	(2,336		)	(3,531		)	(2,074		)
Net income (loss) per common share - basic and diluted	0.03			(0.01		)	(0.72		)	(1.09		)	(0.64		)
Cash dividends per common share	—			—			—			—			—
Weighted average common shares outstanding - basic and diluted (in millions)	3,234			3,235			3,236			3,238			3,240

Balance Sheets Data
Loans held-for-investment, at amortized cost by consolidated trusts (net of allowances for loan losses)		$1,690,218			$1,625,184			$1,558,094			$1,529,905			$1,495,932
Real estate owned, net	1,198			1,725			2,558			4,551			4,378
Total assets	2,023,376			1,985,892			1,945,360			1,965,831			1,989,557
Debt securities of consolidated trusts held by third parties	1,648,683			1,556,121			1,479,473			1,433,984			1,419,524
Other Debt	353,321			414,148			449,890			506,537			547,219
All other liabilities	16,297			12,683			13,346			12,475			13,987
Total stockholders' equity	5,075			2,940			2,651			12,835			8,827

Portfolio Balances - UPB
Mortgage-related investments portfolio		$298,426			$346,911			$408,414			$461,024			$557,544
Total Freddie Mac mortgage-related securities	1,832,810			1,729,493			1,637,086			1,592,511			1,562,040
Total mortgage portfolio	2,011,414			1,941,587			1,910,106			1,914,661			1,956,276
TDRs on accrual status	77,399			82,347			82,908			78,708			66,590
Non-accrual loans	16,272			22,649			33,130			43,457			63,005

Ratios
Return on average assets	0.4		%	0.3		%	0.4		%	2.5		%	0.5		%
Allowance for loan losses as percentage of loans, held-for-investment	0.7			0.9			1.3			1.4			1.8
Equity to assets	0.2			0.1			0.4			0.5			0.2



Freddie Mac 2016 Form 10-K		11



Management's Discussion and Analysis	Key Economic Indicators \| Single-Family Home Prices

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

KEY ECONOMIC INDICATORS

The following graphs and related discussion present certain macroeconomic indicators that can significantly affect our business and financial results.

SINGLE-FAMILY HOME PRICES

NATIONAL HOME PRICES

(December 2000 = 100)

EFFECT ON FINANCIAL RESULTS


•	Changes in home prices affect the amount of equity that borrowers have in their homes. Borrowers with less equity typically have higher delinquency rates.


•	As home prices decline, the severity of losses we incur on defaulted loans that we hold or guarantee increases because the amount we can recover from the property securing the loan decreases. Increases in home prices lower the losses we incur on defaulted loans.


•	Declines in home prices typically result in increases in expected credit losses on the mortgage-related securities we hold.


•	Declines in home prices may result in declines in the value of our non-agency mortgage-related securities as lower home values may increase default rates and affect the prepayment activities of the borrowers.

COMMENTARY


•	Home prices continued to appreciate during 2016, increasing 6.5%, compared to an increase of 6.2% during 2015, based on our own non-seasonally adjusted price index of single-family homes funded by loans owned or guaranteed by us or Fannie Mae.


•	National home prices at the end of 2016 surpassed their pre-financial crisis peak reached in June 2006, based on our index.


•	We expect near-term home price growth rates to moderate gradually and return to growth rates consistent with long-term historical averages of approximately 2% to 5% per year.



Freddie Mac 2016 Form 10-K		12



Management's Discussion and Analysis	Key Economic Indicators \| Interest Rates

INTEREST RATES

KEY MARKET INTEREST RATES

EFFECT ON FINANCIAL RESULTS


•	The 30-year Primary Mortgage Market Survey ("PMMS") interest rate is indicative of what a consumer could expect to be offered on a first-lien, prime, home purchase mortgage with an LTV of 80%. Increases in the PMMS rate typically result in decreases in refinance activity and originations. Decreases in the PMMS rate typically result in increases in refinancing activity and originations.


•	Changes in interest rates affect the fair value of certain of our assets and liabilities, including derivatives, measured at fair value on a recurring basis on our consolidated balance sheets.


•	For additional information on the effect of LIBOR swap rates on our financial results, see "Our Business Segments - Investments - Market Conditions."



Freddie Mac 2016 Form 10-K		13



Management's Discussion and Analysis	Key Economic Indicators \| Interest Rates

COMMENTARY


•	Mortgage interest rates for 30-year fixed-rate loans are typically closely related to other long-term interest rates such as the 10-year Treasury rate and the 10-year LIBOR rate. When these rates increase, mortgage interest rates for 30-year fixed-rate loans usually also increase. When these rates decline, mortgage interest rates for 30-year fixed-rate loans usually also decline.

•

Longer-term interest rates, as indicated by the 10-year LIBOR rate and the 10-year Treasury rate, and mortgage interest rates, as indicated by the 30-year PMMS rate, both increased significantly during the fourth quarter of 2016, which caused rates to be higher at the end of 2016 than the end of 2015. However, average interest rates were lower in 2016 compared to 2015 and lower in 2015 compared to 2014.


•	The Federal Reserve raised short-term interest rates in December 2015 and again in December 2016.



Freddie Mac 2016 Form 10-K		14



Management's Discussion and Analysis	Key Economic Indicators \| Unemployment Rate

UNEMPLOYMENT RATE

UNEMPLOYMENT RATE AND JOB CREATION

Source: U.S. Bureau of Labor Statistics

EFFECT ON FINANCIAL RESULTS


•	Changes in the unemployment rate can affect several market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies.


•	Decreases in the unemployment rate typically result in lower levels of delinquencies, which often result in a decrease in expected credit losses on our total mortgage portfolio.


•	Increases in the unemployment rate typically result in higher levels of delinquencies, which often result in an increase in expected credit losses on our total mortgage portfolio.

COMMENTARY


•	Monthly net new job growth decreased during 2016.


•	The unemployment rate declined slightly in 2016.



Freddie Mac 2016 Form 10-K		15



Management's Discussion and Analysis	Consolidated Results of Operations

CONSOLIDATED RESULTS OF OPERATIONS

You should read this discussion of our consolidated results of operations in conjunction with our consolidated financial statements and accompanying notes.

The table below compares our consolidated results of operations for the past three years.



	Year Ended December 31,									Change 2016-2015					Change 2015-2014
(Dollars in millions)	2016			2015			2014			$			%		$			%
Net interest income		$14,379			$14,946			$14,263			($567	)	(4	)%		$683		5	%
Benefit (provision) for credit losses	803			2,665			(58		)	(1,862		)	(70	)%	2,723			4,695	%
Net interest income after benefit (provision) for credit losses	15,182			17,611			14,205			(2,429		)	(14	)%	3,406			24	%
Non-interest income (loss):
Gains (losses) on extinguishment of debt	(211		)	(240		)	(422		)	29			12	%	182			43	%
Derivative gains (losses)	(274		)	(2,696		)	(8,291		)	2,422			90	%	5,595			67	%
Net impairment of available-for-sale securities recognized in earnings	(191		)	(292		)	(938		)	101			35	%	646			69	%
Other gains (losses) on investment securities recognized in earnings	(78		)	508			1,494			(586		)	(115	)%	(986		)	(66	)%
Other income (loss)	1,254			(879		)	8,044			2,133			243	%	(8,923		)	(111	)%
Total non-interest income (loss)	500			(3,599		)	(113		)	4,099			114	%	(3,486		)	(3,085	)%
Non-interest expense:
Administrative expense	(2,005		)	(1,927		)	(1,881		)	(78		)	(4	)%	(46		)	(2	)%
REO operations expense	(287		)	(338		)	(196		)	51			15	%	(142		)	(72	)%
Temporary Payroll Tax Cut Continuation Act of 2011 expense	(1,152		)	(967		)	(775		)	(185		)	(19	)%	(192		)	(25	)%
Other expense	(599		)	(1,506		)	(238		)	907			60	%	(1,268		)	(533	)%
Total non-interest expense	(4,043		)	(4,738		)	(3,090		)	695			15	%	(1,648		)	(53	)%
Income before income tax expense	11,639			9,274			11,002			2,365			26	%	(1,728		)	(16	)%
Income tax expense	(3,824		)	(2,898		)	(3,312		)	(926		)	(32	)%	414			13	%
Net income	7,815			6,376			7,690			1,439			23	%	(1,314		)	(17	)%
Total other comprehensive income (loss), net of taxes and reclassification adjustments	(697		)	(577		)	1,736			(120		)	(21	)%	(2,313		)	(133	)%
Comprehensive income		$7,118			$5,799			$9,426			$1,319		23	%		($3,627	)	(38	)%

See “Critical Accounting Policies and Estimates” for information concerning certain significant accounting policies and estimates applied in determining our reported results of operations and Note 1 for information on our accounting policies and a summary of other significant accounting policies and the related notes in which information about them can be found.



Freddie Mac 2016 Form 10-K		16



Management's Discussion and Analysis	Consolidated Results of Operations \| Net Interest Income

NET INTEREST INCOME

EXPLANATION OF KEY DRIVERS OF NET INTEREST INCOME

Net interest income consists of several primary components:


•	Contractual net interest income - consists of two primary components:

◦

Guarantee fees on debt securities issued by consolidated trusts. We record interest income on loans held by consolidated trusts and interest expense on the debt securities issued by the trusts. The difference between the interest income on the loans and the interest expense on the debt represents the guarantee fee income we receive as compensation for our guarantee of the principal and interest payments of the issued debt securities. This difference includes the legislated 10 basis point increase in guarantee fees that is remitted to Treasury as part of the Temporary Payroll Tax Cut Continuation Act of 2011; and


◦	The difference between the interest income earned on all other interest-earning assets, excluding loans held by consolidated trusts, and the interest expense incurred on the liabilities used to fund those assets.

Contractual net interest income is primarily driven by the volume of assets in the mortgage-related investments portfolio and the interest rate differential between those interest-earning assets and the related interest-bearing liabilities.


•	Amortization of cost basis adjustments - consists of cost basis adjustments, such as premiums and discounts on loans, investment securities, and debt that are amortized into interest income or interest expense based on the effective yield over the contractual life of the associated financial instrument.

The largest portion of our total net amortization relates to loans and debt securities of consolidated trusts. Amortization related to investment securities, other debt, and other assets and liabilities makes up a smaller portion. Net amortization of loans and debt securities of consolidated trusts generally increases net interest income as it includes amortization of the upfront delivery fees we receive when we acquire a loan.

The net amortization of loans and debt securities of consolidated trusts is primarily driven by actual prepayments on the underlying loans. Increases in actual prepayments result in higher net amortization, while decreases in actual prepayments result in lower net amortization. The timing of amortization of loans may differ from the timing of amortization of the securities backed by the loans, as the proceeds from the loans backing these securities are remitted to the security holders at a date subsequent to the date these proceeds are received by us.


•	Expense related to derivatives - consists of deferred gains and losses on closed cash flow hedges related to forecasted debt issuances that are reclassified from AOCI to net interest income when the related forecasted transaction affects net interest income.



Freddie Mac 2016 Form 10-K		17



Management's Discussion and Analysis	Consolidated Results of Operations \| Net Interest Income

NET INTEREST YIELD ANALYSIS

The table below presents an analysis of interest-earning assets and interest-bearing liabilities. To calculate the average balances, we generally use a daily weighted average of amortized cost. When daily average balance information is not available, such as for mortgage loans, we use monthly averages. Mortgage loans on non-accrual status, where interest income is generally recognized when collected, are included in the average balances.



	Year Ended December 31,
	2016								2015								2014
(Dollars in millions)	Average Balance			Interest Income (Expense)			Average Rate		Average Balance			Interest Income (Expense)			Average Rate		Average Balance			Interest Income (Expense)			Average Rate
Interest-earning assets:
Cash and cash equivalents		$16,932			$42		0.25	%		$12,482			$8		0.06	%		$13,889			$4		0.03	%
Securities purchased under agreements to resell	59,639			217			0.36		51,219			58			0.11		42,905			28			0.06
Advances to lenders	484			11			2.28		161			4			2.48		—			—			—
Mortgage-related securities:
Mortgage-related securities	189,982			7,262			3.82		226,162			8,706			3.85		256,548			10,027			3.91
Extinguishment of PCs held by Freddie Mac	(94,624		)	(3,509		)	(3.71	)	(107,986		)	(3,929		)	(3.64	)	(111,545		)	(4,190		)	(3.76	)
Total mortgage-related securities, net	95,358			3,753			3.94		118,176			4,777			4.04		145,003			5,837			4.03
Non-mortgage-related securities	15,734			102			0.65		10,699			17			0.16		9,983			6			0.06
Loans held by consolidated trusts⁽¹⁾	1,649,727			55,417			3.36		1,590,768			55,867			3.51		1,540,570			57,036			3.70
Loans held by Freddie Mac⁽¹⁾	135,882			5,623			4.14		157,261			6,359			4.04		170,017			6,569			3.86
Total interest-earning assets		$1,973,756			$65,165		3.30			$1,940,766			$67,090		3.46			$1,922,367			$69,480		3.61
Interest-bearing liabilities:
Debt securities of consolidated trusts including PCs held by Freddie Mac		$1,674,474			($48,108	)	(2.87	)		$1,611,388			($49,465	)	(3.07	)		$1,557,895			($52,193	)	(3.35	)
Extinguishment of PCs held by Freddie Mac	(94,624		)	3,509			3.71		(107,986		)	3,929			3.64		(111,545		)	4,190			3.76
Total debt securities of consolidated trusts held by third parties	1,579,850			(44,599		)	(2.82	)	1,503,402			(45,536		)	(3.03	)	1,446,350			(48,003		)	(3.32	)
Other debt:
Short-term debt	86,284			(350		)	(0.41	)	108,096			(173		)	(0.16	)	118,211			(145		)	(0.12	)
Long-term debt	298,040			(5,646		)	(1.89	)	313,502			(6,207		)	(1.98	)	331,887			(6,768		)	(2.04	)
Total other debt	384,324			(5,996		)	(1.56	)	421,598			(6,380		)	(1.51	)	450,098			(6,913		)	(1.54	)
Total interest-bearing liabilities	1,964,174			(50,595		)	(2.57	)	1,925,000			(51,916		)	(2.70	)	1,896,448			(54,916		)	(2.89	)
Expense related to derivatives	—			(191		)	(0.01	)	—			(228		)	(0.01	)	—			(301		)	(0.02	)
Impact of net non-interest-bearing funding	9,582			—			0.01		15,766			—			0.02		25,919			—			0.04
Total funding of interest-earning assets		$1,973,756			($50,786	)	(2.57	)		$1,940,766			($52,144	)	(2.69	)		$1,922,367			($55,217	)	(2.87	)
Net interest income/yield					$14,379		0.73	%					$14,946		0.77	%					$14,263		0.74	%



Freddie Mac 2016 Form 10-K		18



Management's Discussion and Analysis	Consolidated Results of Operations \| Net Interest Income


(1)	Loan fees, primarily consisting of amortization of delivery fees, included in interest income were $2.6 billion, $2.0 billion, and $1.4 billion for loans held by consolidated trusts and $215 million, $383 million, and $373 million for loans held by Freddie Mac during 2016, 2015, and 2014, respectively.

NET INTEREST INCOME RATE / VOLUME ANALYSIS

The table below presents a rate and volume analysis of our net interest income. Our net interest income reflects the reversal of interest income accrued, net of interest received on a cash basis, related to mortgage loans that are on non-accrual status.



	2016 vs. 2015 Variance Due to									2015 vs. 2014 Variance Due to
(Dollars in millions)	Rate			Volume			Total Change			Rate			Volume			Total Change
Interest-earning assets:
Cash and cash equivalents		$34			$—			$34			$6			($2	)		$4
Securities purchased under agreements to resell	147			12			159			24			6			30
Advances to lenders	—			7			7			—			4			4
Mortgage-related securities:
Mortgage-related securities	(61		)	(1,383		)	(1,444		)	(149		)	(1,172		)	(1,321		)
Extinguishment of PCs held by Freddie Mac	(74		)	494			420			129			132			261
Total mortgage-related securities, net	(135		)	(889		)	(1,024		)	(20		)	(1,040		)	(1,060		)
Non-mortgage-related securities	74			11			85			11			—			11
Loans held by consolidated trusts	(2,479		)	2,029			(450		)	(2,991		)	1,822			(1,169		)
Loans held by Freddie Mac	146			(882		)	(736		)	297			(507		)	(210		)
Total interest-earning assets		($2,213	)		$288			($1,925	)		($2,673	)		$283			($2,390	)
Interest-bearing liabilities:
Debt securities of consolidated trusts including PCs held by Freddie Mac		$3,246			($1,889	)		$1,357			$4,476			($1,748	)		$2,728
Extinguishment of PCs held by Freddie Mac	74			(494		)		($420	)	(129		)	(132		)		($261	)
Total debt securities of consolidated trusts held by third parties	3,320			(2,383		)		$937		4,347			(1,880		)	2,467
Other debt:
Short-term debt	(218		)	41			(177		)	(41		)	13			(28		)
Long-term debt	262			299			561			193			368			561
Total other debt	44			340			384			152			381			533
Total interest-bearing liabilities	3,364			(2,043		)	1,321			4,499			(1,499		)	3,000
Expense related to derivatives	37			—			37			73			—			73
Total funding of interest-earning assets		$3,401			($2,043	)		$1,358			$4,572			($1,499	)		$3,073
Net interest income		$1,188			($1,755	)		($567	)		$1,899			($1,216	)		$683



Freddie Mac 2016 Form 10-K		19



Management's Discussion and Analysis	Consolidated Results of Operations \| Net Interest Income

COMPONENTS OF NET INTEREST INCOME

The table below presents the components of net interest income.



	Year Ended December 31,									Change 2016-2015					Change 2015-2014
(Dollars in millions)	2016			2015			2014			$			%		$			%
Contractual net interest income:
Guarantee fee income		$2,997			$2,722			$2,399			$275		10	%		$323		13	%
Guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011	1,142			957			759			185			19	%	198			26	%
Other contractual net interest income	6,896			8,106			9,070			(1,210		)	(15	)%	(964		)	(11	)%
Total contractual net interest income	11,035			11,785			12,228			(750		)	(6	)%	(443		)	(4	)%
Net amortization - loans and debt securities of consolidated trusts	3,333			2,883			1,913			450			16	%	970			51	%
Net amortization - other assets and debt	202			506			423			(304		)	(60	)%	83			20	%
Expense related to derivatives	(191		)	(228		)	(301		)	37			16	%	73			24	%
Net interest income		$14,379			$14,946			$14,263			($567	)	(4	)%		$683		5	%

Key Drivers:


•	Guarantee fee income (contractual)

◦

2016 vs. 2015 and 2015 vs. 2014 - increased during both comparative periods as a result of higher average contractual guarantee fee rates, reflecting continued growth in the size of the Core single-family book, and a larger overall single-family credit guarantee portfolio. Average contractual guarantee fees are generally higher on mortgage loans in our Core single-family book compared to those in our Legacy single-family guarantee book. See "Our Business Segments - Single-Family Guarantee" for additional discussion.


•	Other contractual net interest income

◦

2016 vs. 2015 and 2015 vs. 2014 - decreased during both comparative periods primarily due to the continued reduction in the balance of our mortgage-related investments portfolio, as we continue to manage the size and composition of this portfolio pursuant to the limits established by the Purchase Agreement and FHFA. We expect this trend to continue in the future as we reduce our mortgage-related investments portfolio. See "Conservatorship and Related Matters - Limits on Our Mortgage-Related Investments Portfolio and Indebtedness" for additional discussion of the limits on the mortgage-related investments portfolio.


•	Net amortization of loans and debt securities of consolidated trusts


◦	2016 vs. 2015 and 2015 vs. 2014 - increased during both comparative periods primarily due to an increase in the amortization of upfront delivery fees and basis adjustments on debt securities of consolidated trusts. The increase in amortization was primarily driven by higher prepayment rates on single-family loans during 2016 compared to 2015 and 2015 compared to 2014.


•	Net amortization of other assets and debt


◦	2016 vs. 2015 - decreased primarily due to less accretion of previously recognized other-than-temporary impairments. The decrease in accretion is due to a decline in the population of impaired securities as a result of our active disposition of these securities and a decline in new other-than-temporary impairments recognized.



Freddie Mac 2016 Form 10-K		20



Management's Discussion and Analysis	Consolidated Results of Operations \| Provision for Credit Losses

BENEFIT (PROVISION) FOR CREDIT LOSSES

EXPLANATION OF KEY DRIVERS OF PROVISION FOR CREDIT LOSSES

The benefit (provision) for credit losses predominantly relates to single-family loans and includes components for both collectively impaired loans and individually impaired loans.

•

Collectively impaired loans - The provision for collectively impaired loans is primarily driven by the volume of newly delinquent loans and changes in estimated probabilities of default and estimated loss severities for the loans. Estimated probabilities of default and estimated loss severities are based on current conditions and historical data and are heavily influenced by changes in home prices, but are also affected by a number of other factors, such as local and regional economic conditions, changes in reperformance and default rates, and the success of our borrower assistance programs.

•

Individually impaired loans - The provision for individually impaired loans is primarily driven by the volume of our loss mitigation activity (e.g., loan modifications) that results in loans being considered TDRs, the payment performance of our individually impaired mortgage portfolio, and changes in estimated probabilities of default and estimated loss severities, which affect the future cash flows we expect to receive from these loans. Estimated probabilities of default and estimated loss severities for individually impaired loans are based on the same current conditions and historical data and are affected by the same factors noted above for collectively impaired loans.

As we continue to perform loss mitigation activities that result in loans being considered individually impaired, the portion of our allowance for loan losses and provision for credit losses related to collectively impaired loans continues to decline.

Our allowance for loan losses and provision for credit losses are significantly affected by the "interest rate concessions" we make on loans that we have modified (i.e., reductions in the contractual interest rate). When a loan is modified and considered individually impaired, we generally measure impairment based on the present value of the expected future cash flows discounted at the loan’s original effective interest rate. Under this methodology, we record a loss at the time a loan is modified equal to the difference in the present value of expected future cash flows resulting from the change in the modified loan’s contractual interest rate, which increases the provision for credit losses in that period. An increase in mortgage interest rates lengthens the expected life of individually impaired loans, which increases the impairment on these loans and results in an increase in the provision for credit losses. When a modified loan subsequently performs according to its new contractual terms and we receive the new contractual cash flows (i.e., principal and interest payments), a portion of the discount that was previously applied to those cash flows is amortized into earnings each period and is recognized as a reduction in the provision for credit losses in the period in which the cash flows are received. We refer to this reduction in the provision for credit losses as the "amortization of interest rate concessions."

Our provision for credit losses and the amount of charge-offs that we record in the future will be affected by a number of factors, such as the actual level of loan defaults; the effect of loss mitigation efforts; any government actions or programs that affect the ability of borrowers to refinance loans with an LTV ratio greater than 100% or obtain modifications; changes in property values; regional economic conditions, including unemployment rates; additional delays in the foreclosure process; and third-party mortgage insurance coverage and recoveries. Management adjustments may be necessary to take into consideration external factors and current economic events that have occurred but that are not yet



Freddie Mac 2016 Form 10-K		21



Management's Discussion and Analysis	Consolidated Results of Operations \| Provision for Credit Losses

reflected in the factors used to derive the model outputs. Significant judgment is exercised in making these adjustments.

The amount of our benefit (provision) for credit losses may also vary from period to period based on additional factors such as reclassification of loans from held-for-investment to held-for-sale.

BENEFIT (PROVISION) FOR CREDIT LOSSES

The table below presents the components of our benefit (provision) for credit losses.



	Year Ended December 31,									Change 2016-2015					Change 2015-2014
(Dollars in billions)	2016			2015			2014			$			%		$			%
Provision for newly impaired loans		($0.8	)		($0.9	)		($1.7	)		$0.1		11	%		$0.8		47	%
Amortization of interest rate concessions	0.9			1.2			1.4			(0.3		)	(25	)%	(0.2		)	(14	)%
Reclassifications of held-for-investment loans to held-for-sale loans	0.8			2.3			0.1			(1.5		)	(65	)%	2.2			2,200	%
Other, including changes in estimated default probability and loss severity	(0.1		)	0.1			0.1			(0.2		)	(200	)%	—			—
Benefit (provision) for credit losses		$0.8			$2.7			($0.1	)		($1.9	)	(70	)%		$2.8		2,800	%

Key Drivers:

•

2016 vs. 2015 - benefit for credit losses declined in 2016 compared to 2015 primarily due to a decrease in the number of seasoned single-family loans reclassified from held-for-investment to held-for sale in 2016. During 2016, $4.7 billion in UPB of single-family loans was reclassified to held-for-sale, compared to $13.6 billion during 2015. See "Effect of Loan Reclassifications" for the effect of these loan reclassifications on pre-tax net income.


•	2015 vs. 2014 - changed to a benefit in 2015 from a (provision) in 2014 primarily due to:


◦	An increase in the number of seasoned single-family loans reclassified from held-for-investment to held-for-sale in 2015. During 2014, $0.7 billion in UPB of seasoned single-family loans were reclassified to held-for-sale.


◦	A decrease in the provision for newly impaired loans in 2015 compared to 2014 due to a decline in the volume of newly delinquent single-family loans.



Freddie Mac 2016 Form 10-K		22



Management's Discussion and Analysis	Consolidated Results of Operations \| Derivative Gains (Losses)

DERIVATIVE GAINS (LOSSES)

EXPLANATION OF KEY DRIVERS OF DERIVATIVE GAINS (LOSSES)

Derivative instruments are a key component of our interest-rate risk management strategy. We use derivatives to economically hedge our interest-rate risk exposure. We primarily use interest-rate swaps, option-based derivatives such as swaptions, and futures to manage our exposure to changes in interest-rates. We consider the cost of derivatives used in interest-rate risk management to be an inherent part of the cost of funding our mortgage-related investments portfolio.

In addition, we routinely enter into commitments to purchase and sell loans and mortgage-related securities. The majority of these commitments are accounted for as derivative instruments.

We continue to align our derivative portfolio with the changing duration of our hedged assets and liabilities. Although our use of derivatives creates volatility in our GAAP earnings, we manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models. Therefore, we believe the impact of derivatives on our GAAP financial results should be considered in the context of our overall interest-rate risk profile, including our PMVS and duration gap results. For more information about our interest-rate risk management activities and the sensitivity of reported GAAP earnings to those activities, see “Risk Management - Market Risk.”

Derivative gains (losses) consist of both fair value changes and accrual of periodic cash settlements:


•	Fair value changes - Represent changes in the fair value of our derivatives based on market conditions at the end of the period or at the time the derivative instrument is terminated. These amounts may or may not be realized over time, depending on future changes in market conditions and the terms of our derivative instruments.


•	Accrual of periodic cash settlements - Consists of the net amount we accrue during a period for interest-rate swap payments that we will make or receive. This accrual represents the ongoing cost of our hedging activities, and is economically equivalent to interest expense.

Gains and losses on derivatives are affected by a number of factors, including:

•

Changes in interest rates - Our primary derivative instruments are interest-rate swaps, including pay-fixed and receive-fixed interest-rate swaps. With a pay-fixed interest-rate swap, we pay a fixed rate of interest and receive a variable rate of interest based on a specified notional balance (the notional balance is for calculation purposes only). As interest rates decline, we recognize derivative losses, as the amount of interest we pay remains fixed, and the amount of interest we receive declines. As rates rise, we recognize derivative gains, as the amount of interest we pay remains fixed, but the amount of interest we receive increases. With a receive-fixed interest-rate swap, the opposite results occur.

•

Implied volatility - Many of our assets and liabilities have embedded prepayment options. We use option-based derivatives, including swaptions, to economically hedge the prepayment options embedded in our mortgage assets and callable debt. Fair value gains and losses on swaptions are sensitive to changes in both interest rates and implied volatility, which reflects the market’s expectation of future changes in interest rates. Assuming all other factors are unchanged, including



Freddie Mac 2016 Form 10-K		23



Management's Discussion and Analysis	Consolidated Results of Operations \| Derivative Gains (Losses)

interest rates, purchased swaptions generally become more valuable as implied volatility increases and less valuable as implied volatility decreases, with the opposite being true for written swaptions.


•	Changes in the shape of the yield curve - We own assets and have outstanding debt with different cash flows along the yield curve. We use derivatives to hedge the yield exposure of assets and debt, resulting in derivatives with different maturities. As a result, changes in the shape of the yield curve will affect our derivative gains (losses).

•

Changes in the composition of our derivative portfolio - The mix and balance of our derivative portfolio changes from period to period as we enter into or terminate derivative instruments to respond to changes in interest rates and changes in the balances and modeled characteristics of our assets and liabilities. Changes in the composition of our derivative portfolio will affect the derivative gains and losses we recognize in a given period, thereby affecting the volatility of comprehensive income.

COMPONENTS OF DERIVATIVE GAINS (LOSSES)

The table below presents the components of derivative gains (losses).



	Year Ended December 31,									Change 2016-2015				Change 2015-2014
(Dollars in millions)	2016			2015			2014			$		%		$			%
Fair value change in interest-rate swaps		$178			($778	)		($7,294	)		$956	123	%		$6,516		89	%
Fair value change in option-based derivatives	421			258			1,437			163		63	%	(1,179		)	(82	)%
Fair value change in other derivatives	887			22			191			865		3,932	%	(169		)	(88	)%
Accrual of periodic cash settlements	(1,760		)	(2,198		)	(2,625		)	438		20	%	427			16	%
Derivative gains (losses)		($274	)		($2,696	)		($8,291	)		$2,422	90	%		$5,595		67	%

Key Drivers:

•

2016 vs. 2015 - derivative losses declined during 2016 primarily due to an increase in longer-term interest rates during the fourth quarter of 2016 resulting in an improvement in the fair value of our pay-fixed interest-rate swaps and forward commitments to issue PC debt. This improvement in fair value was partially offset by losses in our receive-fixed-interest-rate swaps. The 10-year par swap rate increased 13 basis points during 2016, while the 10-year par swap rate declined 10 basis points during 2015.


•	2015 vs. 2014 - derivative losses declined during 2015 primarily due to a smaller decline in interest rates in 2015 than in 2014. We recognized larger derivative losses during 2014 primarily as a result of the impact of a flattening yield curve as shorter-term interest rates increased and longer-term interest rates declined. The 10-year par swap rate declined 78 basis points during 2014.


•	See "Our Business Segments - Investments - Market Conditions" for more information about par swap rates.



Freddie Mac 2016 Form 10-K		24



Management's Discussion and Analysis	Consolidated Results of Operations \| Other Comprehensive Income

OTHER COMPREHENSIVE INCOME (LOSS)

EXPLANATION OF KEY DRIVERS OF OTHER COMPREHENSIVE INCOME (LOSS)

Our investments in securities classified as available-for-sale are measured at fair value on our consolidated balance sheets. The fair value of these securities is primarily affected by changes in interest rates, market spreads, and the movement of these securities towards maturity. All unrealized gains and losses on these securities are excluded from earnings and reported in other comprehensive income until realized. We reclassify our unrealized gains and losses from AOCI to earnings upon the sale of the securities or if the securities are determined to be other-than-temporarily impaired.

If, subsequent to the recognition of other-than-temporary impairment, our expectation of the cash flows we will receive on a previously impaired security has significantly increased, we will accrete that increase in cash flows into earnings. The accretion into earnings will generally reduce the amount of unrealized gains that we would have otherwise recognized if not for the accretion.

The following table presents the attribution of the other comprehensive income (loss) reported in our consolidated statements of comprehensive income.



	Year Ended December 31,									Change 2016 - 2015					Change 2015 - 2014
(Dollars in millions)	2016			2015			2014			$			%		$			%
Other comprehensive income, excluding reclassifications		($29	)		$374			$2,563			($403	)	(108	)%		($2,189	)	(85	)%
Reclassifications from AOCI:
Accretion due to significant increases in expected cash flows on previously-impaired available-for-sale securities	(299		)	(449		)	(519		)	150			33	%	70			13	%
Realized gains (losses) reclassified from AOCI	(369		)	(502		)	(308		)	133			26	%	(194		)	(63	)%
Total reclassifications from AOCI	(668		)	(951		)	(827		)	283			30	%	(124		)	(15	)%
Total other comprehensive income (loss)		($697	)		($577	)		$1,736			($120	)	(21	)%		($2,313	)	(133	)%

Key Drivers:


•	Other comprehensive income, excluding reclassifications

◦

2016 vs. 2015 - was a loss in 2016 compared to income in 2015, primarily due to unrealized losses resulting from an increase in longer-term interest rates, coupled with a decrease in unrealized gains as our non-agency securities portfolio continues to decline consistent with the reduction of our mortgage-related investments portfolio pursuant to the limits established by the Purchase Agreement and FHFA.


◦	2015 vs. 2014 - decreased primarily due to less market spread tightening for our non-agency securities.

Reclassifications from AOCI


•	Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities


◦	2016 vs. 2015 and 2015 vs. 2014 - decreased during both comparative periods primarily due to a decline in the population of impaired securities as a result of our active dispositions of these securities, coupled with a decline in new other-than-temporary impairments.



Freddie Mac 2016 Form 10-K		25



Management's Discussion and Analysis	Consolidated Results of Operations \| Other Comprehensive Income


•	Realized gains (losses) reclassified from AOCI


◦	2016 vs. 2015 - decreased primarily due to a decline in sales of non-agency securities in an unrealized gain position. Our sales of non-agency securities will continue to vary as the portion of our portfolio that we are able to sell, based on a variety of criteria, has decreased.


◦	2015 vs. 2014 - increased primarily due to greater sales of agency and non-agency securities in an unrealized gain position. The increase in sales was a result of improved pricing due to declining longer-term interest rates and stabilized collateral performance.



Freddie Mac 2016 Form 10-K		26



Management's Discussion and Analysis	Consolidated Results of Operations

OTHER KEY DRIVERS

Key drivers for other line items for 2016 vs. 2015 and 2015 vs. 2014 include:


•	Gains (losses) on extinguishment of debt

◦

2016 vs. 2015 - losses decreased primarily due to an increase in longer-term interest rates during the fourth quarter of 2016, coupled with a decline in our repurchase of single-family PCs. The increase in longer-term interest rates resulted in net extinguishment gains for PCs repurchased during the fourth quarter, which partially offset the net extinguishment losses recognized for PCs repurchased during the nine months ended September 30, 2016. The amount of extinguishment gains or losses may vary, as the type and amount of PCs selected for repurchase are based on our investment and funding strategies, including our efforts to support the liquidity and price performance of our PCs.


◦	2015 vs. 2014 - losses decreased primarily due to a significant decline in our repurchase of single-family PCs, coupled with a smaller decline in longer-term interest rates in 2015 compared to 2014.


•	Net impairments of available-for-sale securities recognized in earnings


◦	2016 vs. 2015 - decreased primarily due to a decline in the population of non-agency securities, including those non-agency securities that we intend to sell. Our intent to sell population declined, as the portion of our non-agency securities that we are able to sell, based on a variety of criteria, has decreased.

◦

2015 vs. 2014 - decreased as the unrealized losses associated with securities we intend to sell were lower due to improvements in forecasted home prices, a smaller decline in market interest rates in 2015 compared to 2014, and continued tightening of market spreads for our non-agency securities. Furthermore, the portion of the net impairment related to additional credit losses declined as a result of improved security pricing, stabilized collateral performance, and our efforts to sell certain of the previously impaired non-agency securities. See "Conservatorship And Related Matters - Limits On Our Mortgage-Related Investments Portfolio And Indebtedness" for additional information concerning our efforts to reduce our less liquid assets.


•	Other gains (losses) on investment securities recognized in earnings


◦	2016 vs. 2015 - decreased as we recognized net losses during 2016 compared to net gains during 2015, primarily due to losses on our mortgage-related and non-mortgage-related securities as a result of increasing longer-term interest rates, coupled with less realized gains from our available-for-sale securities, as we sold fewer non-agency securities in an unrealized gain position.


◦	2015 vs. 2014 - decreased primarily due to a decline in sales of our agency mortgage-related securities.


•	Other income (loss)


◦	2016 vs. 2015 - other income (loss) improved reflecting:


▪	Decreased lower-of-cost-or-fair-value adjustments as we reclassified fewer seasoned single-family loans from held-for-investment to held-for-sale during 2016; and


▪	Increased gains on multifamily mortgage loans and commitments for which we have elected the fair value option, due to increased market spread-related fair value gains. K Certificate benchmark spreads tightened during 2016 compared to these spreads widening during 2015.



Freddie Mac 2016 Form 10-K		27



Management's Discussion and Analysis	Consolidated Results of Operations


◦	2015 vs. 2014 - other income (loss) declined reflecting:


▪	Decreased income from non-agency mortgage-related securities litigation settlements;


▪	Increased write-downs due to lower-of-cost-or-fair-value adjustments for seasoned single-family loans reclassified from held-for-investment to held-for-sale; and


▪	Decreased fair value of multifamily mortgage loans for which we have elected the fair value option, due to the widening of K Certificate benchmark spreads observed in the market.


•	REO operations expense


◦	2016 vs. 2015 - decreased resulting from a decline in REO inventory due to a decline in the number of seriously delinquent loans as the housing market and economy continued to improve.


◦	2015 vs. 2014 - increased due to a decrease in gains on the disposition of REO properties and recoveries from mortgage insurance.


•	Temporary Payroll Tax Cut Continuation Act of 2011 expense

◦

2016 vs. 2015 and 2015 vs. 2014 - continued to increase as a result of the increase in the population of loans subject to this expense. As of December 31, 2016 and 2015, respectively, $1.3 trillion and $1.1 trillion of UPB of loans (or 72% and 63% of the single-family credit guarantee portfolio) were subject to these fees. We expect the amount of these fees will continue to increase as we add new business and the population of loans subject to these fees increases.


•	Other expense

◦

2016 vs. 2015 - decreased primarily driven by property taxes and insurance costs associated with seasoned single-family loans reclassified from held-for-investment to held-for-sale as we reclassified fewer loans in 2016 compared to 2015. These costs are considered part of the loan loss reserves while the loans are classified as held-for-investment. See "Single-Family Loan Reclassifications" for more information.

◦

2015 vs. 2014 - increased primarily driven by property taxes and insurance costs associated with seasoned single-family loans reclassified from held-for-investment to held-for-sale as we reclassified more loans in 2015 compared to 2014. These costs are considered part of the loan loss reserves while the loans are classified as held-for-investment. In addition, beginning January 1, 2015, FHFA directed us to set aside funds that will be distributed to certain housing funds pursuant to the GSE Act. During 2015, we completed $393.8 billion of new business purchases subject to this requirement and accrued $165 million of related expense. See "MD&A - Regulation and Supervision - Affordable Housing Fund Allocations" for more information.


•	Income tax expense


◦	2016 vs. 2015 - increased in 2016 compared to 2015 primarily due to an increase in pre-tax income.


◦	2015 vs. 2014 - decreased in 2015 compared to 2014 primarily due to a decrease in pre-tax income.



Freddie Mac 2016 Form 10-K		28



Management's Discussion and Analysis	Consolidated Results of Operations

ITEMS AFFECTING MULTIPLE LINES

The following items affected multiple lines on our consolidated results of operations.

Single-Family Loan Reclassifications

During 2016, 2015, and 2014, we reclassified $4.7 billion, $13.6 billion, and $0.7 billion, respectively, in UPB of seasoned seriously delinquent as well as reperforming single-family mortgage loans from held-for-investment to held-for-sale. The initial reclassifications of these loans affected several line items on our consolidated results of operations, as shown in the table below.



	Year Ended December 31,
(Dollars in millions)	2016			2015			2014
Benefit for credit losses		$812			$2,314			$147
Other income (loss) - lower-of-cost-or-fair-value adjustment	(1,005		)	(2,193		)	(195		)
Other (expense) - property taxes and insurance associated with these loans	(195		)	(1,178		)	(62		)
Effect on income before income tax (expense) benefit		($388	)		($1,057	)		($110	)

Debt Funding Strategies and Interest-Rate Risk Management Activities

We issue debt based on a variety of factors including market conditions and our liquidity requirements.

We use derivatives to economically hedge interest-rate sensitivity mismatches between our assets and liabilities. For example, depending on our strategic objectives and the duration of our mortgage-related assets, we may fund our business using longer-term debt or using a mix of derivatives and shorter- and medium-term debt. 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.

We currently favor a mix of derivatives and shorter- and medium-term debt to fund our business and manage interest-rate risk. This funding mix is a less expensive method than relying more extensively on long-term debt, and it provides greater flexibility and opportunity to match the duration of our assets and liabilities in the future as we reduce the mortgage-related investments portfolio in accordance with the requirements of the Purchase Agreement and FHFA.

While our interest-rate risk management activities reduce our economic exposure to interest-rate risk to a low level, as measured by our models, the accounting treatment for our assets and liabilities, including derivatives, creates volatility in our GAAP 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 volatility in our GAAP earnings that generally is not indicative of the underlying economics of our business. In order to help reduce the measurement differences, we entered into certain transactions, including structured transactions, during 2016 that have resulted in additional financial assets being recognized and measured at fair value. In addition, in the first quarter of 2017, we began using hedge accounting for certain single-family mortgage loans, which is intended to partially reduce the interest-rate volatility in our GAAP earnings by eliminating a portion of the measurement differences between our GAAP financial results and the underlying economics of our business.



Freddie Mac 2016 Form 10-K		29



Management's Discussion and Analysis	Consolidated Results of Operations

The table below presents the effect of derivatives used in our interest-rate risk management activities on our comprehensive income, after considering the accrual of periodic cash settlements (which is the economic equivalent of interest expense), the non-interest rate effect (e.g., market spread effect) on derivative fair values, and any offsetting interest rate effect related to financial instruments measured at fair value. The estimated net interest rate effect on comprehensive income is essentially the derivative gains (losses) attributable to financial instruments that are not measured at fair value on a recurring basis .



	Year Ended December 31,
(Dollars in billions)	2016			2015			2014
Derivative gains (losses)		($0.3	)		($2.7	)		($8.3	)
Less:
Accrual of periodic cash settlements	(1.8		)	(2.2		)	(2.6		)
Non-interest rate effect on derivative fair values	(0.1		)	—			(0.2		)
Interest rate effect on derivative fair values	1.6			(0.5		)	(5.5		)
Add:
Estimate of offsetting interest rate effect related to financial instruments measured at fair value⁽¹⁾	(1.2		)	0.2			2.0
Income tax benefit (expense)	(0.1		)	0.1			1.2
Estimated Net Interest Rate Effect on Comprehensive income		$0.3			($0.2	)		($2.3	)


(1)	Includes the interest-rate effect on our trading securities, available-for-sale securities, mortgage loans held-for-sale, and other assets and debt for which we elected the fair value option, which is reflected in other non-interest income (loss) and total other comprehensive income (loss) on our consolidated statements of comprehensive income.

As this table demonstrates, the estimated net effect of derivatives on our comprehensive income is volatile, and can be significant. For more information about our interest-rate risk management activities and the sensitivity of reported GAAP earnings to these activities, see “Risk Management - Market Risk.”

Changes in Market Spreads

Our financial results and net worth can be significantly affected by changes in market spreads, especially results driven by financial instruments that are measured at fair value. We have limited ability to mitigate exposure to such changes. These instruments include trading securities, available-for-sale securities, mortgage loans held-for-sale, and other assets and debt for which we elected the fair value option.

During the fourth quarter of 2016, we began purchasing certain swaptions on credit indices that provide protection against adverse movements in multifamily market spreads. While these swaptions mitigate a portion of our exposure to changes in multifamily market spreads, they do not mitigate our exposure to changes in other market spreads.

Comprehensive income (loss) was affected by changes in market spreads in amounts estimated to be $0.1 billion, $(0.3) billion, and $1.9 billion (after-tax) during 2016, 2015, and 2014, respectively. During 2016, market spread tightening on our agency and non-agency mortgage-related securities and multifamily mortgage loans and commitments measured at fair value resulted in an increase in comprehensive income. During 2015, market spread widening on our agency mortgage-related securities and multifamily mortgage loans measured at fair value resulted in a decrease in comprehensive income. During 2014, the impact of market spread tightening on mortgage-related securities and mortgage loans



Freddie Mac 2016 Form 10-K		30



Management's Discussion and Analysis	Consolidated Results of Operations

measured at fair value resulted in an increase in comprehensive income. In the fourth quarter of 2016, we separated the market spread related gains (losses) on held-for-sale multifamily mortgage loans and commitments from the effect of improved pricing on K Certificates and SB Certificates. The effect of this improved pricing is now excluded from the estimated spread change effect.



Freddie Mac 2016 Form 10-K		31



Management's Discussion and Analysis	Consolidated Balance Sheets Analysis

CONSOLIDATED BALANCE SHEETS ANALYSIS

The table below compares our summarized consolidated balance sheets.



	December 31,
(Dollars in millions)	2016		2015		$ Change			% Change
Assets:
Cash and cash equivalents		$12,369		$5,595		$6,774		121	%
Restricted cash and cash equivalents	9,851		14,533		(4,682		)	(32	)%
Securities purchased under agreements to resell	51,548		63,644		(12,096		)	(19	)%
Subtotal	73,768		83,772		(10,004		)	(12	)%
Investments in securities, at fair value	111,547		114,215		(2,668		)	(2	)%
Mortgage loans, net	1,803,003		1,754,193		48,810			3	%
Accrued interest receivable	6,135		6,074		61			1	%
Derivative assets, net	747		395		352			89	%
Deferred tax assets, net	15,818		18,205		(2,387		)	(13	)%
Other assets	12,358		9,038		3,320			37	%
Total assets		$2,023,376		$1,985,892		$37,484		2	%

Liabilities and Equity:
Liabilities:
Accrued interest payable		$6,015		$6,183		($168	)	(3	)%
Debt, net	2,002,004		1,970,269		31,735			2	%
Derivative liabilities, net	795		1,254		(459		)	(37	)%
Other liabilities	9,487		5,246		4,241			81	%
Total liabilities	2,018,301		1,982,952		35,349			2	%
Total equity	5,075		2,940		2,135			73	%
Total liabilities and equity		$2,023,376		$1,985,892		$37,484		2	%

Key Drivers:

As of December 31, 2016 compared to December 31, 2015:

•

Cash and cash equivalents, restricted cash and cash equivalents, and securities purchased under agreements to resell affect one another, so the changes in the balances should be viewed together. For example, cash and cash equivalents and restricted cash and cash equivalents can be invested in securities purchased under agreements to resell or other investments in securities (i.e., non-mortgage-related securities). The decrease in the combined balance was due to lower near-term cash needs for upcoming maturities and anticipated calls of other debt at the end of 2016 compared to the end of 2015.


•	Deferred tax assets, net decreased primarily due to an increase in longer-term interest rates during 2016, which caused the difference between the GAAP and tax basis of derivative instruments to decline.


•	Other assets increased primarily because of higher receivables from servicers and an increase in current income tax receivable. Lower average mortgage interest rates during 2016 caused an increase in prepayments, and thus, an increase in receivables from servicers. The increase in the current income tax receivable is primarily due to an increase in estimated tax payments on account with the IRS.



Freddie Mac 2016 Form 10-K		32



Management's Discussion and Analysis	Consolidated Balance Sheets Analysis


•	Other liabilities increased primarily due to purchases of non-mortgage-related securities that were traded prior to December 31, 2016 and recognized on the consolidated balance sheets, but settled after December 31, 2016.


•	Total equity increased as a result of higher comprehensive income in the fourth quarter of 2016 compared to the fourth quarter of 2015 and was partially offset by dividends paid related to the $600 million decline in the Capital Reserve Amount in 2016.



Freddie Mac 2016 Form 10-K		33



Management's Discussion and Analysis	Our Business Segments \| Segment Earnings

OUR BUSINESS SEGMENTS

As shown in the table below, we have three reportable segments, which are based on the way we manage our business. Certain activities that are not part of a reportable segment are included in the All Other category.



Segment	Description	Primary Income Drivers		Primary Expense Drivers
Single-family Guarantee	Reflects results from our purchase, securitization, and guarantee of single-family loans and the management of single-family credit risk	•	Guarantee fee income	•	Credit-related expenses
				•	Administrative expenses
				•	Credit risk transfer expenses
Multifamily	Reflects results from our purchase, securitization, and guarantee of multifamily loans and securities, our investments in those loans and securities, and the management of multifamily mortgage credit risk and mortgage market spread risk	•	Net interest income	•	Losses on loans
		•	Guarantee fee income	•	Investment losses
		•	Gains on loans	•	Derivative losses
		•	Investment gains	•	Administrative expenses
		•	Derivative gains	•	Credit-related expenses

Investments	Reflects results from managing the company’s mortgage-related investments portfolio (excluding Multifamily segment investments, single-family seriously delinquent loans, and the credit risk of single-family performing loans), treasury function, and interest-rate risk	•	Net interest income	•	Investment losses
		•	Investment gains	•	Derivative losses
		•	Derivative gains	•	Other-than-temporary impairments on non-agency mortgage-related securities
				•	Administrative expenses


All Other	Consists of material corporate level activities that are infrequent in nature and based on decisions outside the control of the management of our reportable segments		N/A		N/A

SEGMENT EARNINGS

We evaluate segment performance and allocate resources based on a Segment Earnings approach:


•	We make significant reclassifications among certain line items in our GAAP financial statements to reflect measures of guarantee fee income on guarantees, net interest income on investments, and benefit (provision) for credit losses on loans that are in line with how we manage our business.


•	We allocate certain revenues and expenses, including certain returns on assets and funding costs, and all administrative expenses to our three reportable segments.


•	The sum of Segment Earnings for each segment and the All Other category equals GAAP net income (loss) and the sum of comprehensive income (loss) for each segment and the All Other category equals GAAP comprehensive income (loss).



Freddie Mac 2016 Form 10-K		34



Management's Discussion and Analysis	Our Business Segments \| Segment Earnings

During the first and third quarters of 2016, we changed how we calculate certain components of our Segment Earnings for our Single-family Guarantee, Multifamily, and Investments segments. Prior period results have been revised to conform to the current period presentation. See Note 11 for more information on these changes.

Segment Earnings differs significantly from, and should not be used as a substitute for, net income (loss) as determined in accordance with GAAP. Our definition of Segment Earnings may differ from similar measures used by other companies. We believe that Segment Earnings provides us with meaningful metrics to assess the financial performance of each segment and our company as a whole. See Note 11 for additional details on Segment Earnings, including additional financial information for our segments.

SEGMENT COMPREHENSIVE INCOME

The table below shows our comprehensive income by segment, including the All Other category.



Freddie Mac 2016 Form 10-K		35



Management's Discussion and Analysis	Our Business Segments \| Single-Family Guarantee

SINGLE-FAMILY GUARANTEE

BUSINESS OVERVIEW

In our Single-family Guarantee segment, we purchase, securitize, and guarantee single-family loans originated by seller/servicers and we manage our single-family credit risk. The U.S. residential mortgage market consists of a primary mortgage market that links homebuyers and lenders and a secondary mortgage market that links lenders and investors. We participate only in the secondary mortgage market. The size of the U.S. residential mortgage market is affected by many factors, including changes in interest rates, unemployment rates, homeownership rates, housing prices, the supply of housing, lender preferences regarding credit risk, and borrower preferences regarding mortgage debt. The amount of residential mortgage debt available for us to purchase and the mix of available loan products are also affected by several factors, including the volume of loans meeting the requirements of our Charter, our own preference for credit risk reflected in our purchase standards, and the loan purchase and securitization activity of other financial institutions.

Our Single-family Guarantee segment supports our primary business strategies by creating:

A Better Freddie Mac:


•	Providing market leadership by delivering quality offerings, programs, and services to an increasingly diversified customer base and an evolving mortgage market;


•	Improving the customer experience through continued enhancement of our products, programs, processes, and technology; and


•	Establishing effective risk management activities that are appropriate for the expected level of risk.

A Better Housing Finance System:


•	Developing innovative technology platforms to provide sellers and Freddie Mac with better methods of assessing and managing single-family mortgage credit risk;


•	Developing and implementing initiatives to reduce taxpayer exposure and offer private investors new and innovative ways to share in the credit risk of the Core single-family book;


•	Expanding access to mortgage credit in a responsible manner to support our Charter Mission as well as to meet specific mandated goals;


•	Working with FHFA, Fannie Mae, and CSS on the development of a new common securitization platform; and


•	Implementing the single (common) security initiative for Freddie Mac and Fannie Mae, which is intended to increase the liquidity of the TBA market and to reduce the disparities in trading value between our PCs and Fannie Mae's single-class mortgage-related securities.

Products and Activities

Securitization and Guarantee Products

In a typical loan securitization, we purchase loans that lenders originate and then pool those loans into mortgage-related securities that can be sold in the capital markets. In order to issue the mortgage-related securities, we establish trusts pursuant to our Master Trust Agreements and serve as the trustee of those trusts. We administer the collection of borrowers' payments on their loans and the distribution of payments to the investors in the mortgage-related securities, net of any applicable guarantee fees. We



Freddie Mac 2016 Form 10-K		36



Management's Discussion and Analysis	Our Business Segments \| Single-Family Guarantee

typically guarantee the payment of principal and interest on these mortgage-related securities and generally retain the guarantee fee income.

When a borrower prepays a loan that we have securitized, the outstanding balance of the security owned by investors is reduced by the amount of the prepayment. If the borrower becomes delinquent, we continue to make the applicable payments to the investors in the mortgage-related securities pursuant to our guarantee until we purchase the loan out of the trust. We have the option to purchase specified loans, including certain delinquent loans, from the trusts at a purchase price equal to the current UPB of the loan, less any outstanding advances of principal that have been previously distributed. After a loan is purchased, we work with the borrowers to mitigate our losses through our loan workout programs, which are discussed in more detail in "Risk Management." If we are unable to achieve a successful loan workout, we either sell the loan to a third party or pursue foreclosure of the underlying property. The purchase of delinquent loans and the sale of loans are done in conjunction with the Investments segment.

The guarantee fee we charge on new acquisitions generally consists of a combination of upfront delivery fees and a base contractual monthly fee paid as a percentage of the UPB of the underlying loan. We may also make upfront payments to buy up the monthly guarantee fee rate ("buy-up fees"), or receive upfront payments to buy down the monthly guarantee fee rate (“buy-down fees”). These fees are paid in conjunction with the formation of a PC to provide for a uniform coupon rate for the mortgage pool underlying the PC. The payments made to buy up the guarantee fee rate are not considered compensation for the credit risk assumed for purposes of our financial statements. Consequently, these amounts are allocated to the Investments segment.

We enter into loan purchase agreements with many of our single-family customers that outline the terms under which we agree to purchase loans from them over a period of time. For the majority of the loans we purchase, the guarantee fees are not specified contractually. Instead, we bid for some or all of the lender's loan volume on a monthly basis at a guarantee fee rate that we specify. As a result, our loan purchase volumes from individual customers can fluctuate significantly.

We seek to issue guarantees with fee terms that are commensurate w