Edgar Filing: FEDERAL HOME LOAN MORTGAGE CORP

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10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2012

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

For the transition period from to

Commission File Number: 001-34139

Federal Home Loan Mortgage Corporation

(Exact name of registrant as specified in its charter)

Freddie Mac


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

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

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

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

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

As of October 24, 2012, there were 650,033,623 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS


	Page
PART 1 — FINANCIAL INFORMATION
Item 1. Financial Statements		113
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1
Executive Summary		1
Selected Financial Data		14
Consolidated Results of Operations		15
Consolidated Balance Sheets Analysis		37
Risk Management		54
Liquidity and Capital Resources		92
Fair Value Measurements and Analysis		97
Off-Balance Sheet Arrangements		100
Critical Accounting Policies and Estimates		100
Forward-Looking Statements		100
Risk Management and Disclosure Commitments		102
Legislative and Regulatory Matters		103
Item 3. Quantitative and Qualitative Disclosures About Market Risk		108
Item 4. Controls and Procedures		110
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		202
Item 1A. Risk Factors		202
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		203
Item 5. Other Information		205
Item 6. Exhibits		206
SIGNATURES		207
GLOSSARY		208
EXHIBIT INDEX		E-1


		i		Freddie Mac

MD&A TABLE REFERENCE


Table		Description	Page
	—	Selected Financial Data		14
	1	Total Single-Family Loan Workout Volumes		3
	2	Single-Family Credit Guarantee Portfolio Data by Year of Origination		6
	3	Credit Statistics, Single-Family Credit Guarantee Portfolio		8
	4	Mortgage-Related Investments Portfolio		13
	5	Summary Consolidated Statements of Comprehensive Income		15
	6	Net Interest Income/Yield and Average Balance Analysis		16
	7	Derivative Gains (Losses)		20
	8	Other Income		21
	9	Non-Interest Expense		22
	10	REO Operations (Income) Expense, REO Inventory, and REO Dispositions		23
	11	Composition of Segment Mortgage Portfolios and Credit Risk Portfolios		26
	12	Segment Earnings and Key Metrics — Investments		27
	13	Segment Earnings and Key Metrics — Single-Family Guarantee		30
	14	Segment Earnings Composition — Single-Family Guarantee Segment		31
	15	Segment Earnings and Key Metrics — Multifamily		35
	16	Investments in Securities		38
	17	Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets		39
	18	Additional Characteristics of Mortgage-Related Securities on Our Consolidated Balance Sheets		40
	19	Mortgage-Related Securities Purchase Activity		41
	20	Non-Agency Mortgage-Related Securities Backed by Subprime First Lien, Option ARM, and Alt-A Loans and Certain Related Credit Statistics		43
	21	Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans		44
	22	Net Impairment of Available-For-Sale Mortgage-Related Securities Recognized in Earnings		44
	23	Ratings of Non-Agency Mortgage-Related Securities Backed by Subprime, Option ARM, Alt-A and Other Loans, and CMBS		47
	24	Mortgage Loan Purchases and Other Guarantee Commitment Issuances		49
	25	Derivative Fair Values and Maturities		50
	26	Changes in Derivative Fair Values		51
	27	Freddie Mac Mortgage-Related Securities		52
	28	Issuances and Extinguishments of Debt Securities of Consolidated Trusts		53
	29	Changes in Total Equity (Deficit)		54
	30	Repurchase Request Activity		56
	31	Mortgage Insurance by Counterparty		59
	32	Bond Insurance by Counterparty		60
	33	Derivative Counterparty Credit Exposure		62
	34	Characteristics of Purchases for the Single-Family Credit Guarantee Portfolio		66
	35	Characteristics of the Single-Family Credit Guarantee Portfolio		67
	36	Certain Higher-Risk Categories in the Single-Family Credit Guarantee Portfolio		71
	37	Single-Family Relief Refinance Loans		75
	38	Single-Family Loan Workouts, Serious Delinquency, and Foreclosures Volumes		76
	39	Quarterly Percentages of Modified Single-Family Loans — Current and Performing		78
	40	Single-Family Serious Delinquency Rates		80
	41	Credit Concentrations in the Single-Family Credit Guarantee Portfolio		81
	42	Single-Family Credit Guarantee Portfolio by Attribute Combinations		82
	43	Single-Family Credit Guarantee Portfolio by Year of Loan Origination		84
	44	Multifamily Mortgage Portfolio — by Attribute		85
	45	Non-Performing Assets		87
	46	REO Activity by Region		88
	47	Credit Loss Performance		90
	48	Single-Family Impaired Loans with Specific Reserve Recorded		91
	49	Single-Family Credit Loss Sensitivity		92
	50	Other Debt Security Issuances by Product, at Par Value		95
	51	Other Debt Security Repurchases, Calls, and Exchanges		95
	52	Freddie Mac Credit Ratings		96
	53	Summary of Assets and Liabilities Measured at Fair Value on a Recurring Basis on Our Consolidated Balance Sheets		98
	54	Summary of Change in the Fair Value of Net Assets		99
	55	Proposed Affordable Housing Goals for 2012 to 2014		107
	56	Affordable Housing Goals and Results for 2011		108
	57	PMVS and Duration Gap Results		110
	58	Derivative Impact on PMVS-L (50 bps)		110


		ii		Freddie Mac

FINANCIAL STATEMENTS


	Page
Freddie Mac Consolidated Statements of Comprehensive Income		114
Freddie Mac Consolidated Balance Sheets		115
Freddie Mac Consolidated Statements of Equity (Deficit)		116
Freddie Mac Consolidated Statements of Cash Flows		117
Note 1: Summary of Significant Accounting Policies		118
Note 2: Conservatorship and Related Matters		120
Note 3: Variable Interest Entities		123
Note 4: Mortgage Loans and Loan Loss Reserves		128
Note 5: Individually Impaired and Non-Performing Loans		133
Note 6: Real Estate Owned		139
Note 7: Investments in Securities		139
Note 8: Debt Securities and Subordinated Borrowings		148
Note 9: Financial Guarantees		150
Note 10: Derivatives		152
Note 11: Stockholders’ Equity (Deficit)		157
Note 12: Income Taxes		158
Note 13: Segment Reporting		158
Note 14: Regulatory Capital		166
Note 15: Concentration of Credit and Other Risks		167
Note 16: Fair Value Disclosures		174
Note 17: Legal Contingencies		196
Note 18: Significant Components of Other Assets and Other Liabilities on our Consolidated Balance Sheets		201


		iii		Freddie Mac

PART I — FINANCIAL INFORMATION

We continue to operate under the conservatorship that commenced on September 6, 2008, under the direction of FHFA as our Conservator. The Conservator succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any shareholder, officer or director thereof, with respect to the company and its assets. The Conservator has delegated certain authority to our Board of Directors to oversee, and management to conduct, day-to-day operations. The directors serve on behalf of, and exercise authority as directed by, the Conservator. See “BUSINESS — Conservatorship and Related Matters” in our Annual Report on Form 10-K for the year ended December 31, 2011, or 2011 Annual Report, and “Legislative and Regulatory Matters” in this Form 10-Q for information on the terms of the conservatorship, the powers of the Conservator, and related matters, including the terms of our Purchase Agreement with Treasury.

This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-Q and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in: (a) the “FORWARD-LOOKING STATEMENTS” sections of this Form 10-Q, our 2011 Annual Report, and our Quarterly Reports on Form 10-Q for the first and second quarters of 2012; (b) the “RISK FACTORS” section of this Form 10-Q and our 2011 Annual Report; and (c) the “BUSINESS” section of our 2011 Annual Report.

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

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

AND RESULTS OF OPERATIONS

You should read this MD&A in conjunction with our consolidated financial statements and related notes for the three and nine months ended September 30, 2012 included in “FINANCIAL STATEMENTS,” and our 2011 Annual Report.

EXECUTIVE SUMMARY

Overview

Freddie Mac is a GSE chartered by Congress in 1970 with a public mission to provide liquidity, stability, and affordability to the U.S. housing market. We have maintained a consistent market presence since our inception, providing mortgage liquidity in a wide range of economic environments. We are working to support the recovery of the housing market and the nation’s economy by providing essential liquidity to the mortgage market and helping to stem the rate of foreclosures. We believe our actions are helping communities across the country by providing America’s families with access to mortgage funding at low rates while helping distressed borrowers keep their homes and avoid foreclosure, where feasible.

Summary of Financial Results

We continue to be affected by the ongoing weakness in the economy. However, certain actions taken since early 2009, including our participation in HAMP and HARP, are helping to stabilize the housing market. During the nine months ended September 30, 2012, we observed certain signs of stabilization in the housing market, which contributed positively to our financial results in the third quarter of 2012. Our comprehensive income for the third quarter of 2012 was $5.6 billion, consisting of $2.9 billion of net income and $2.7 billion of total other comprehensive income. By comparison, our comprehensive income (loss) for the third quarter of 2011 was $(4.4) billion, consisting of $(4.4) billion of net income (loss) and $46 million of total other comprehensive income.

Our total equity was $4.9 billion at September 30, 2012, reflecting our total equity balance of $1.1 billion at June 30, 2012, comprehensive income of $5.6 billion for the third quarter of 2012 and our dividend payment of $1.8 billion on our senior preferred stock in September 2012. As a result of our positive net worth at September 30, 2012, no draw is being requested from Treasury under the Purchase Agreement for the third quarter of 2012.


		1		Freddie Mac

Amendment to the Purchase Agreement with Treasury

On August 17, 2012, Freddie Mac, acting through FHFA, as Conservator, and Treasury entered into a third amendment to the Purchase Agreement that, among other items, replaced the fixed dividend rate on our senior preferred stock with a net worth sweep dividend beginning in the first quarter of 2013. This effectively ends the circular practice of Treasury advancing funds to us to pay dividends back to Treasury. As a result of this amendment, over the long term, our future profits will effectively be distributed to Treasury. The amendment also accelerates the wind down of our mortgage-related investments portfolio. See “LEGISLATIVE AND REGULATORY MATTERS — Amendment to the Purchase Agreement” for additional information regarding these changes.

Our Primary Business Objectives

We are focused on the following primary business objectives: (a) providing credit availability for mortgages and maintaining foreclosure prevention activities; (b) minimizing our credit losses; (c) developing mortgage market enhancements in support of a new infrastructure for the secondary mortgage market; (d) maintaining sound credit quality on the loans we purchase or guarantee; (e) contracting the dominant presence of the GSEs in the marketplace; and (f) strengthening our infrastructure and improving overall efficiency while also focusing on retention of key employees.

Our business objectives reflect direction we have received from the Conservator. On March 8, 2012, FHFA instituted a scorecard for use by both us and Fannie Mae that establishes objectives, performance targets and measures for 2012, and provides the implementation roadmap for FHFA’s strategic plan for Freddie Mac and Fannie Mae. We continue to align our resources and internal business plans to meet the goals and objectives laid out in the 2012 conservatorship scorecard. See “LEGISLATIVE AND REGULATORY MATTERS — FHFA’s Strategic Plan for Freddie Mac and Fannie Mae Conservatorships and 2012 Conservatorship Scorecard.” Based on our charter, other legislation, public statements from FHFA and Treasury officials, and other guidance and directives from our Conservator, we have a variety of different, and potentially competing, objectives. For more information, see “BUSINESS — Conservatorship and Related Matters — Impact of Conservatorship and Related Actions on Our Business” in our 2011 Annual Report.

Providing Credit Availability for Mortgages and Maintaining Foreclosure Prevention Activities

Our consistent market presence provides lenders with a constant source of liquidity for conforming mortgage products even when other sources of capital have withdrawn. We believe this liquidity provides our customers with confidence to continue lending in difficult environments. We estimate that we, Fannie Mae, and Ginnie Mae collectively guaranteed more than 90% of the single-family conforming mortgages originated during the third quarter of 2012. We also enable mortgage originators to offer homebuyers and homeowners lower mortgage rates on conforming loan products, in part because of the value investors place on GSE-guaranteed mortgage-related securities. In September 2012, we estimate that borrowers were paying an average of 53 basis points less on these conforming loans than on non-conforming loans. These estimates are based on data provided by HSH Associates, a third-party provider of mortgage market data.

During the three and nine months ended September 30, 2012, we purchased or guaranteed $102.8 billion and $296.6 billion in UPB of single-family conforming mortgage loans, representing approximately 491,000 and 1,415,000 loans, respectively.

We are focused on reducing the number of foreclosures and helping to keep families in their homes. Our relief refinance initiative, including HARP (which is the portion of our relief refinance initiative for loans with LTV ratios above 80%), is a significant part of our effort to keep families in their homes. HARP loans have been provided to more than 802,000 borrowers since the initiative began in 2009, including approximately 322,000 borrowers during the nine months ended September 30, 2012.

Pursuant to the policies in our servicing guide, we have authorized our mortgage servicers to provide a full range of mortgage relief options to homeowners with mortgages owned or guaranteed by us whose homes were damaged or destroyed by Hurricane Sandy and are located in jurisdictions that the Administration has declared to be Major Disaster Areas and where the Administration has made federal Individual Assistance programs available to affected individuals and households. The options available to the servicers include: (a) forbearance on mortgage payments for up to one year; (b) suspending foreclosure and eviction proceedings for up to twelve months; (c) waiving assessments of penalties or late fees against borrowers with disaster-damaged homes; and (d) not reporting forbearance or delinquencies caused by the disaster to the nation’s credit bureaus. We have communicated this authorization to our servicers and referred them to relevant policies in our servicing guide for further information.


		2		Freddie Mac

Our loan workout programs, including HAMP and the non-HAMP standard modification, are designed to help borrowers experiencing hardship avoid foreclosure. Under each of these programs, borrowers are required to complete a trial period before the loan modification becomes effective. Based on information provided by the MHA Program administrator, our servicers had completed 209,851 loan modifications under HAMP from the introduction of the initiative in 2009 through September 30, 2012. As of September 30, 2012, approximately 25,000 borrowers were in modification trial periods, including approximately 15,000 borrowers in trial periods for our non-HAMP standard modification. Our completed modification volume during the first six months of 2012 was below what otherwise would be expected, as servicers completed the transition to the non-HAMP standard modification initiative; the volume of our non-HAMP standard modifications however, increased in the third quarter of 2012 compared to the second quarter of 2012.

Short sale activity continues to increase. Short sale activity as a percentage of the combined total of short sales and foreclosure transfers increased from 27% in the third quarter of 2011 to 35% in the third quarter of 2012 primarily resulting from our increased focus on this foreclosure alternative. At the direction of FHFA and as part of the servicing alignment initiative, we announced a new standard short sale process during the third quarter of 2012 designed to help more struggling borrowers use short sales to avoid foreclosure. This new process became effective November 1, 2012, and represents a significant change from our previous process. We believe that these changes will lead to further increases in short sales in the future.

Since 2009, we have helped more than 742,000 borrowers experiencing hardship complete a loan workout. The table below presents our single-family loan workout activities for the last five quarters.

T able 1 — Total Single-Family Loan Workout Volumes⁽ ¹⁾


	For the Three Months Ended
	09/30/2012		06/30/2012		03/31/2012		12/31/2011		09/30/2011
	(number of loans)
Loan modifications		20,864		15,142		13,677		19,048		23,919
Repayment plans		7,099		8,712		10,575		8,008		8,333
Forbearance agreements⁽²⁾		2,190		4,738		3,656		3,867		4,262
Short sales and deed in lieu of foreclosure transactions		14,383		12,531		12,245		12,675		11,744

Total single-family loan workouts		44,536		41,123		40,153		43,598		48,258

(1)

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

(2)

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

A number of FHFA-directed changes to HARP were announced in late 2011, including provisions for reduced representations and warranties by the seller. In July 2012, we announced changes to broaden the number of loans eligible for reduced representations and warranties by the seller on relief refinance mortgages. In September 2012, we announced further changes to our relief refinance process that are intended to reduce the seller/servicers’ operational complexities associated with originating these loans. These changes allow more borrowers to participate in the program and benefit from refinancing their home mortgages, including borrowers whose mortgages have LTV ratios above 125%. Our purchases of HARP loans increased to $65.1 billion in the first nine months of 2012, compared to $31.2 billion in the first nine months of 2011. However, the volume of our HARP and other relief refinance loan purchases has been limited by the ability of individual lenders, mortgage insurers, and other market participants to modify their processes to accommodate the recent changes in program requirements.

Minimizing Our Credit Losses

To help minimize the credit losses related to our guarantee activities, we are focused on:

•

pursuing a variety of loan workouts, including foreclosure alternatives, in an effort to reduce the severity of losses we experience over time;

•

managing foreclosure timelines to the extent possible, given the prolonged foreclosure process in many states;


		3		Freddie Mac

•

managing our inventory of foreclosed properties to reduce costs and maximize proceeds; and

•

pursuing contractual remedies against originators, lenders, servicers, and insurers, as appropriate.

We establish guidelines for our servicers to follow and provide them default management tools to use, in part, in determining which type of loan workout would be expected to provide the best opportunity for minimizing our credit losses. We require our single-family seller/servicers to first evaluate problem loans for a repayment or forbearance plan before considering modification. If a borrower is not eligible for a modification, our seller/servicers pursue other workout options before considering foreclosure.

We have contractual arrangements with our seller/servicers under which they agree to sell us mortgage loans, and represent and warrant that those loans have been originated under specified underwriting standards. In addition, our servicers represent and warrant to us that those loans will be serviced in accordance with our servicing contract. If we subsequently discover that the representations and warranties were breached (i.e., contractual standards were not followed), we can exercise certain contractual remedies to mitigate our actual or potential credit losses. These contractual remedies include the ability to require the seller/servicer to repurchase the loan at its current UPB or make us whole for any credit losses realized with respect to the loan, after consideration of other recoveries, if any. The amount we expect to collect on outstanding repurchase requests is significantly less than the UPB of the loans subject to the repurchase requests primarily because many of these requests will likely be satisfied by the seller/servicers reimbursing us for realized credit losses. Some of these requests also may be rescinded in the course of the contractual appeals process. As of September 30, 2012, the UPB of loans subject to repurchase requests issued to our single-family seller/servicers was approximately $2.9 billion, and approximately 42% of these requests were outstanding for more than four months since issuance of our initial repurchase request (this figure includes repurchase requests for which appeals were pending). Of the total amount of repurchase requests outstanding at September 30, 2012, approximately $1.2 billion were issued due to mortgage insurance rescission or mortgage insurance claim denial.

Our credit loss exposure is also partially mitigated by mortgage insurance, which is a form of credit enhancement. Primary mortgage insurance is generally required to be purchased, typically at the borrower’s expense, for certain mortgages with higher LTV ratios. Although we received payments under primary and other mortgage insurance of $1.5 billion and $2.0 billion in the nine months ended September 30, 2012 and 2011, respectively, which helped to mitigate our credit losses, many of our mortgage insurers remain financially weak. We expect to receive substantially less than full payment of our claims from three of our mortgage insurance counterparties that are currently partially paying claims under orders of their state regulators. We believe that certain other of our mortgage insurance counterparties lack sufficient ability to meet all their expected lifetime claims paying obligations to us as those claims emerge.

On September 11, 2012, FHFA announced that Freddie Mac and Fannie Mae are launching a new representation and warranty framework for conventional loans purchased by the GSEs on or after January 1, 2013. The objective of the new framework, developed at the direction of FHFA, is to clarify lenders’ repurchase exposure and liability on future deliveries of mortgage loans to Freddie Mac and Fannie Mae. With the new framework, FHFA has directed Freddie Mac and Fannie Mae to:

•

Conduct quality control reviews earlier in the loan process, generally between 30 to 120 days after loan purchase;

•

Establish consistent timelines for lenders to submit requested loan files for review;

•

Evaluate loan files on a more comprehensive basis to ensure a focus on identifying significant deficiencies;

•

Leverage data from the tools used by Freddie Mac and Fannie Mae to enable earlier identification of potentially defective loans; and

•

Make available more transparent appeals processes for lenders to appeal repurchase requests.

The new framework does not affect existing seller/servicer obligations under their contracts with us. For more information, see “LEGISLATIVE AND REGULATORY MATTERS — New Representation and Warranty Framework” and “CREDIT RISK — Institutional Credit Risk — Single-Family Mortgage Seller/Servicers.”

Developing Mortgage Market Enhancements in Support of a New Infrastructure for the Secondary Mortgage Market

We continue efforts that we believe will create value for the industry by building the infrastructure for a future housing finance system. These efforts include the implementation of the Uniform Mortgage Data Program, or UMDP, which provides us with the ability to collect additional data that we believe will improve our risk management practices. In the first quarter


		4		Freddie Mac

of 2012, we completed a key milestone of the UMDP with the launch of the Uniform Collateral Data Portal for the electronic submission of appraisal reports for conventional mortgages. The implementation of the portal was effective for mortgages with application dates after November 30, 2011 that were delivered to us after March 22, 2012. In the second quarter of 2012, we implemented the Uniform Loan Delivery Dataset, or ULDD, which provides for the efficient collection and use of consistent information about loan terms, collateral, and borrowers. The implementation of ULDD was effective for mortgages with application dates after November 30, 2011, which were delivered to us after July 22, 2012, with a transition period allowing for optional usage of ULDD for mortgages delivered to us between April 23, 2012 and July 22, 2012.

We are also working with FHFA and others to develop a plan for the design and development of a single securitization platform that can be used in a future secondary mortgage market. On October 4, 2012, FHFA released a white paper for industry comment that described a proposed framework for a new securitization platform and a model pooling and servicing agreement. FHFA has stated that it anticipates that Freddie Mac and Fannie Mae will each maintain its own distinct securitization operations and continue to issue its own securities.

We are continuing to work with FHFA and Fannie Mae to develop recommendations to align certain of the terms of the contracts we and Fannie Mae use with our respective single-family seller/servicers, as well as certain practices we follow in managing our remedies and our respective business relationships with these companies. On October 3, 2012, we announced, pursuant to a directive by FHFA, changes to requirements in certain areas related to loan servicing, including the implementation of a servicer scorecard. These changes align our and Fannie Mae’s requirements in these areas. See “RISK MANAGEMENT — Institutional Credit Risk — Single-Family Mortgage Seller/Servicers” for additional information.

Maintaining Sound Credit Quality on the Loans We Purchase or Guarantee

We continue to focus on maintaining credit policies, including our underwriting standards, that allow us to purchase and guarantee loans made to qualified borrowers that we believe will provide management and guarantee fee income (excluding the amounts associated with the Temporary Payroll Tax Cut Continuation Act of 2011), over the long-term, that exceeds our expected credit-related and administrative expenses on such loans.

HARP loans represented 9% of the UPB of our single-family credit guarantee portfolio as of September 30, 2012. Mortgages originated after 2008, including HARP loans, represented 60% of the UPB of our single-family credit guarantee portfolio as of September 30, 2012, while the single-family loans originated from 2005 through 2008 represented 26% of this portfolio. Relief refinance mortgages of all LTV ratios comprised approximately 16% and 11% of the UPB in our total single-family credit guarantee portfolio at September 30, 2012 and December 31, 2011, respectively.

Approximately 96% and 95% of the single-family mortgages we purchased in the three and nine months ended September 30, 2012, respectively, were fixed-rate, first lien amortizing mortgages, based on UPB. Approximately 79% and 82% of the single-family mortgages we purchased in the three and nine months ended September 30, 2012, respectively, were refinance mortgages, and approximately 30% and 27%, respectively, of these refinance mortgages were HARP loans, based on UPB. HARP loans comprised approximately 22% and 13% of our single-family purchase volume in the nine months ended September 30, 2012 and 2011, respectively.

Due to our participation in HARP, we purchase a significant number of loans that have original LTV ratios over 100%. The proportion of loans we purchased with LTV ratios over 100% increased from approximately 5% of our single-family mortgage purchases (including HARP loans) in the nine months ended September 30, 2011 to 13% of our single-family mortgage purchases in the nine months ended September 30, 2012 due to the changes in HARP announced in the fourth quarter of 2011, which allow borrowers with higher LTV ratios to refinance.

The credit quality of the single-family loans we acquired in the nine months ended September 30, 2012 (excluding HARP and other relief refinance mortgages, which represented approximately 31% of our single-family purchase volume during the nine months ended September 30, 2012) is significantly better than that of loans we acquired from 2005 through 2008 as measured by original LTV ratios, FICO scores, and the proportion of loans underwritten with fully documented income. The improvement in credit quality of loans we have purchased since 2008 (excluding HARP and other relief refinance mortgages) is primarily the result of: (a) changes in our credit policies, including changes in our underwriting standards; (b) fewer purchases of loans with higher risk characteristics; and (c) changes in mortgage insurers’ and lenders’ underwriting practices.

Our underwriting procedures for relief refinance mortgages are limited in many cases, and such procedures generally do not include all of the changes in underwriting standards we have implemented since 2008. As a result, relief refinance


		5		Freddie Mac

mortgages generally reflect many of the credit risk attributes of the original loans. However, borrower participation in our relief refinance mortgage initiative may help reduce our exposure to credit risk in cases where borrower payments under their mortgages are reduced, thereby strengthening the borrower’s potential to make their mortgage payments.

Over time, HARP loans may not perform as well as other refinance mortgages because the continued high LTV ratios of these loans increases the probability of default. In addition, HARP loans may not be covered by mortgage insurance for the full excess of their UPB over 80%.

The table below presents the composition, loan characteristics, and serious delinquency rates of loans in our single-family credit guarantee portfolio, by year of origination at September 30, 2012.

Table 2 — Single-Family Credit Guarantee Portfolio Data by Year of Origination⁽¹⁾


	At September 30, 2012																	For the Nine Months Ended September 30, 2012
	Percent of Portfolio			Average Credit Score⁽²⁾		Original LTV Ratio⁽³⁾			Current LTV Ratio⁽⁴⁾			Current LTV Ratio >100%⁽⁴⁾⁽⁵⁾			Serious Delinquency Rate⁽⁶⁾			Percent of Credit Losses
Year of Origination
2012		15	%		755		78	%		77	%		15	%		0.02	%		<1	%
2011		15			753		71			68			4			0.19			<1
2010		16			752		71			69			5			0.45			1
2009		14			751		70			70			4			0.77			2

Combined-2009 to 2012		60			753		73			71			7			0.37			3

2008		5			721		74			89			31			6.50			9
2007		8			701		77			109			57			12.20			36
2006		6			706		75			107			52			11.31			26
2005		7			713		73			91			34			7.02			17

Combined-2005 to 2008		26			710		75			100			45			9.38			88

2004 and prior		14			716		72			58			7			3.08			9

Total		100	%		737		73			77			17			3.37			100	%

(1)

Based on the loans remaining in the portfolio at September 30, 2012, which totaled $1.65 trillion, rather than all loans originally guaranteed by us and originated in the respective year. Includes loans acquired under our relief refinance initiative, which began in 2009. For credit scores, LTV ratios, serious delinquency rates, and other information about relief refinance mortgages, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk.”

(2)	Based on FICO score of the borrower as of the date of loan origination and may not be indicative of the borrowers’ creditworthiness at September 30, 2012. Excludes less than 1% of loans in the portfolio because the FICO scores at origination were not available.

(3)	See endnote (3) to “Table 34 — Characteristics of Purchases for the Single-Family Credit Guarantee Portfolio” for information on our calculation of original LTV ratios.

(4)

We estimate current market values by adjusting the value of the property at origination based on changes in the market value of homes in the same geographical area since origination. See endnote (4) to “Table 35 — Characteristics of the Single-Family Credit Guarantee Portfolio” for information on our calculation of current LTV ratios.

(5)	Calculated as a percentage of the aggregate UPB of loans with LTV ratios greater than 100% in relation to the total UPB of loans in the category.

(6)	See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-family Mortgage Credit Risk — Delinquencies” for further information about our reported serious delinquency rates.

Contracting the Dominant Presence of the GSEs in the Marketplace

We continue to take steps toward the goal of gradually shifting mortgage credit risk from Freddie Mac to private investors, while simplifying and shrinking certain of our operations. In the case of single-family credit guarantees, we are exploring several ways to accomplish this goal, including increasing guarantee fees, establishing loss-sharing arrangements, and evaluating new risk-sharing transactions beyond the traditional charter-required mortgage insurance coverage. Two increases in guarantee fees have occurred or were announced by FHFA in recent months, and FHFA has proposed additional fee adjustments, as discussed in “LEGISLATIVE AND REGULATORY MATTERS — Increases to Guarantee Fees.”

The recent amendment to the Purchase Agreement accelerates the wind down of our mortgage-related investments portfolio. We are also studying the steps necessary for our competitive disposition of certain investment assets, including non-performing loans.


		6		Freddie Mac

Strengthening Our Infrastructure and Improving Overall Efficiency While Also Focusing On Retention of Key Employees

We are working to both enhance the quality of our infrastructure and improve our efficiency in order to preserve the taxpayers’ investment. We are focusing our resources primarily on key projects, many of which are related to FHFA mandated initiatives and will likely take several years to fully implement.

We continue to actively manage our general and administrative expenses, while also continuing to focus on retaining key talent. In the first half of 2012, we introduced a new compensation program for employees to help mitigate the uncertainty surrounding compensation. Under the program, the majority of employees have a more predictable income, as the program generally reduces the amount of compensation that is subject to variability. While uncertainty surrounding our future business model has contributed to employee turnover and low employee engagement, employee turnover in the second and third quarters of 2012 was lower than in the corresponding quarters of 2011. We are continuing to explore various strategic arrangements with outside firms to provide operational capability and staffing for key functions, as needed.

We believe the initiatives we are pursuing under the 2012 conservatorship scorecard and other FHFA-mandated initiatives will require additional resources and continue to affect our level of administrative expenses going forward.

Single-Family Credit Guarantee Portfolio

The UPB of our single-family credit guarantee portfolio declined approximately 5% during the nine months ended September 30, 2012, as the amount of single-family loan liquidations exceeded new loan purchase and guarantee activity. We believe this is due, in part, to declines in the amount of single-family mortgage debt outstanding in the market and a decline in our competitive position compared to other market participants.

The table below provides certain credit statistics for our single-family credit guarantee portfolio.


		7		Freddie Mac

Table 3 — Credit Statistics, Single-Family Credit Guarantee Portfolio


	As of
	9/30/2012			6/30/2012			3/31/2012			12/31/2011			9/30/2011
Payment status —
One month past due		2.02	%		1.79	%		1.63	%		2.02	%		1.94	%
Two months past due		0.66	%		0.60	%		0.57	%		0.70	%		0.70	%
Seriously delinquent⁽¹⁾		3.37	%		3.45	%		3.51	%		3.58	%		3.51	%
Non-performing loans (in millions)⁽²⁾	$	131,106		$	118,463		$	119,599		$	120,514		$	119,081
Single-family loan loss reserve (in millions)⁽³⁾	$	33,298		$	35,298		$	37,771		$	38,916		$	39,088
REO inventory (in properties)		50,913			53,271			59,307			60,535			59,596
REO assets, net carrying value (in millions)	$	4,459		$	4,715		$	5,333		$	5,548		$	5,539

	For the Three Months Ended
	9/30/2012			6/30/2012			3/31/2012			12/31/2011			9/30/2011
	(in units, unless noted)
Seriously delinquent loan additions⁽¹⁾		76,104			75,904			80,815			95,661			93,850
Loan modifications⁽⁴⁾		20,864			15,142			13,677			19,048			23,919
REO acquisitions		20,302			20,033			23,805			24,758			24,378
REO disposition severity ratio:⁽⁵⁾
California		37.7	%		41.6	%		44.2	%		44.6	%		45.5	%
Arizona		36.3	%		40.4	%		45.0	%		46.7	%		48.7	%
Florida		44.7	%		46.2	%		48.6	%		50.1	%		53.3	%
Nevada		50.6	%		54.3	%		56.5	%		54.2	%		53.2	%
Illinois		47.7	%		47.8	%		49.3	%		51.2	%		50.5	%
Total U.S		36.2	%		37.9	%		40.3	%		41.2	%		41.9	%
Single-family provision for credit losses (in millions)	$	650		$	177		$	1,844		$	2,664		$	3,643
Single-family credit losses (in millions)	$	2,936		$	2,858		$	3,435		$	3,209		$	3,440

(1)	See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Delinquencies” for further information about our reported serious delinquency rates.

(2)

Consists of the UPB of loans in our single-family credit guarantee portfolio that have undergone a TDR or that are seriously delinquent. As of September 30, 2012 and December 31, 2011, approximately $64.4 billion and $44.4 billion in UPB of TDR loans, respectively, were no longer seriously delinquent. During the third quarter of 2012, we changed the treatment of single-family loans discharged in Chapter 7 bankruptcy to classify these loans as TDRs, regardless of the borrowers’ payment status. As a result, we newly classified approximately $19.5 billion in UPB of loans discharged in Chapter 7 bankruptcy as TDRs. The majority of these loans were not seriously delinquent as of September 30, 2012.

(3)	Consists of the combination of: (a) our allowance for loan losses on mortgage loans held for investment; and (b) our reserve for guarantee losses associated with non-consolidated single-family mortgage securitization trusts and other guarantee commitments.

(4)	Represents the number of modification agreements with borrowers completed during the quarter. Excludes forbearance agreements, repayment plans, and loans in modification trial periods.

(5)

States presented represent the five states where our credit losses were greatest during 2011 and the nine months ended September 30, 2012. Calculated as the amount of our losses recorded on disposition of REO properties during the respective quarterly period, excluding those subject to repurchase requests made to our seller/servicers, divided by the aggregate UPB of the related loans. The amount of losses recognized on disposition of the properties is equal to the amount by which the UPB of the loans exceeds the amount of sales proceeds from disposition of the properties. Excludes sales commissions and other expenses, such as property maintenance and costs, as well as applicable recoveries from credit enhancements, such as mortgage insurance.

In discussing our credit performance, we often use the terms “credit losses” and “credit-related expenses.” These terms are significantly different. Our “credit losses” consist of charge-offs and REO operations income (expense), while our “credit-related expenses” consist of our provision for credit losses and REO operations income (expense).

Since the beginning of 2008, on an aggregate basis, we have recorded provision for credit losses associated with single-family loans of approximately $75.9 billion, and have recorded an additional $4.0 billion in losses on loans purchased from PC trusts, net of recoveries. The majority of these losses are associated with loans originated in 2005 through 2008. While loans originated in 2005 through 2008 will give rise to additional credit losses that have not yet been incurred and, thus, have not yet been provisioned for, we believe that, as of September 30, 2012, we have reserved for or charged-off the majority of the total expected credit losses for these loans. Nevertheless, various factors, such as continued high unemployment rates or future declines in home prices, could require us to provide for losses on these loans beyond our current expectations.

The serious delinquency rate for our single-family credit guarantee portfolio improved at September 30, 2012, compared to December 31, 2011 and June 30, 2012; however, the earlier-stage (i.e., loans one or two months past due) delinquency rates worsened during the third quarter of 2012. We believe the increase in these early stage rates was largely due to there being fewer business days in the month of September, which resulted in a shorter period of time than our servicers normally have in a month to pursue collection from these borrowers. Excluding relief refinance loans, the improvement in borrower payment performance during 2012 reflects an improved credit profile of borrowers with loans originated since 2008. However, several factors, including the lengthening of the foreclosure process, have resulted in loans remaining in serious delinquency for longer periods than prior to 2008, particularly in states that require a judicial foreclosure process. As of September 30, 2012 and December 31, 2011, the percentage of seriously delinquent loans that have been delinquent for more than six months was 73% and 70%, respectively.


		8		Freddie Mac

The credit losses and loan loss reserves associated with our single-family credit guarantee portfolio remained elevated in the nine months ended September 30, 2012, due, in part, to:

•

Losses associated with the continued high volume of foreclosures and foreclosure alternatives. These actions relate to the continued efforts of our servicers to resolve our large inventory of seriously delinquent loans. Due to the length of time necessary for servicers either to complete the foreclosure process or pursue foreclosure alternatives on seriously delinquent loans in our portfolio, we expect our credit losses will continue to remain high even if the volume of new serious delinquencies declines.

•

Continued negative effect of certain loan groups within the single-family credit guarantee portfolio, such as those underwritten with certain lower documentation standards and interest-only loans, as well as 2005 through 2008 vintage loans. These groups continue to be large contributors to our credit losses.

•

Cumulative decline in national home prices of 22% since June 2006, based on our own index. As a result of this price decline, approximately 17% of loans in our single-family credit guarantee portfolio, based on UPB, had estimated current LTV ratios in excess of 100% (i.e., underwater loans) as of September 30, 2012.

•

Weak financial condition of many of our mortgage insurers, which has reduced our actual recoveries from these counterparties as well as our estimates of expected recoveries.

Some of our loss mitigation activities create fluctuations in our delinquency statistics. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-family Mortgage Credit Risk — Credit Performance — Delinquencies” for further information about factors affecting our reported delinquency rates.

Conservatorship and Government Support for our Business

We have been operating under conservatorship, with FHFA acting as our conservator, since September 6, 2008. The conservatorship and related matters have had a wide-ranging impact on us, including our regulatory supervision, management, business, financial condition, and results of operations. While the conservatorship has benefited us, we are subject to certain constraints on our business activities imposed by Treasury due to the terms of, and Treasury’s rights under, the Purchase Agreement and by FHFA, as our Conservator.

We are dependent upon the continued support of Treasury and FHFA in order to continue operating our business. 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. Under the Purchase Agreement, Treasury made a commitment to provide funding, under certain conditions, to eliminate deficits in our net worth. The $200 billion cap on Treasury’s funding commitment will increase as necessary to eliminate any net worth deficits we may have during 2010, 2011, and 2012. We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain our access to the debt markets and to have adequate liquidity to conduct our normal business activities, although the costs of our debt funding could vary.

We currently pay cash dividends to Treasury at an annual rate of 10%. On August 17, 2012, Freddie Mac, acting through FHFA, as Conservator, and Treasury entered into a third amendment to the Purchase Agreement, that, among other items, changed our dividend payments on the senior preferred stock. For each quarter from January 1, 2013 through and including December 31, 2017, the dividend payment will be the amount, if any, by which our net worth at the end of the immediately preceding fiscal quarter, less the applicable capital reserve amount, exceeds zero. The applicable capital reserve amount will be $3 billion for 2013 and will be reduced by $600 million each year thereafter until it reaches zero on January 1, 2018. For each quarter beginning January 1, 2018, the dividend payment will be the amount, if any, by which our net worth at the end of the immediately preceding fiscal quarter exceeds zero. If the calculation of the dividend payment for a quarter does not exceed zero, then no dividend will accrue or be payable for that quarter. For a discussion of factors that could result in additional draws, see “RISK FACTORS — We may request additional draws under the Purchase Agreement in future periods.” For more information on the changes to the Purchase Agreement, see “LEGISLATIVE AND REGULATORY MATTERS — Amendment to the Purchase Agreement.”

The aggregate liquidation preference of the senior preferred stock remained unchanged at $72.3 billion at September 30, 2012 from June 30, 2012. At September 30, 2012, our assets exceeded our liabilities under GAAP; therefore no draw is being requested from Treasury under the Purchase Agreement.


		9		Freddie Mac

Through September 30, 2012, we paid aggregate cash dividends to Treasury of $21.9 billion, an amount equal to 31% of our aggregate draws received under the Purchase Agreement. We expect to make a dividend payment of $1.8 billion to Treasury on the senior preferred stock during the fourth quarter of 2012.

Neither the U.S. government nor any other agency or instrumentality of the U.S. government is obligated to fund our mortgage purchase or financing activities or to guarantee our securities or other obligations.

On September 13, 2012, the Federal Reserve announced that it will purchase an additional $40 billion of agency mortgage-related securities per month and stated it will continue to reinvest principal payments from its holdings of agency debt and agency mortgage-related securities in agency mortgage-related securities. The Federal Reserve stated that these and other related actions should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. The Federal Reserve stated that, if the outlook for the labor market does not improve substantially, it will continue its purchases of agency mortgage-related securities and take other actions as appropriate until such improvement is achieved. These purchases may not continue, and changes to Federal Reserve policy (including changes to these purchase programs) could negatively affect the market for agency mortgage-related securities.

For more information on conservatorship and the Purchase Agreement, see “BUSINESS — Conservatorship and Related Matters” in our 2011 Annual Report.

Consolidated Financial Results

Net income (loss) was $2.9 billion and $(4.4) billion for the third quarters of 2012 and 2011, respectively. Key highlights of our financial results include:

•

Net interest income for the third quarter of 2012 decreased to $4.3 billion from $4.6 billion in the third quarter of 2011, mainly due to the impact of a reduction in the average balances of our higher-yielding mortgage-related assets, partially offset by lower funding costs.

•

Provision for credit losses for the third quarter of 2012 declined to $610 million, compared to $3.6 billion for the third quarter of 2011. The decrease in the provision for credit losses primarily reflects declines in the volume of new seriously delinquent loans (largely due to a decline in the size of our single-family credit guarantee portfolio originated in 2005 through 2008), and lower estimates of incurred loss due to the positive impact of an increase in national home prices.

•

Non-interest income (loss) was $(560) million for the third quarter of 2012, compared to $(4.8) billion for the third quarter of 2011. The improvement was largely driven by a decrease in derivative losses during the third quarter of 2012 compared to the third quarter of 2011.

•

Non-interest expense declined to $473 million in the third quarter of 2012, from $687 million in the third quarter of 2011, primarily due to REO operations income in the third quarter of 2012 due to improvements in home prices.

•

Comprehensive income (loss) was $5.6 billion for the third quarter of 2012 compared to $(4.4) billion for the third quarter of 2011. Comprehensive income for the third quarter of 2012 consisted of $2.9 billion of net income and $2.7 billion of other comprehensive income, primarily due to a reduction in net unrealized losses on our available-for-sale securities as spreads tightened on our non-agency mortgage-related securities.

Mortgage Market and Economic Conditions

Overview

The U.S. real gross domestic product rose by 2.0% on an annualized basis during the third quarter of 2012, compared to 1.3% during the second quarter of 2012, according to the Bureau of Economic Analysis. The national unemployment rate was 7.8% in September 2012, compared to 8.2% in both June and March of 2012, based on data from the U.S. Bureau of Labor Statistics. In the data underlying the unemployment rate, an average of approximately 146,000 monthly net new jobs were added to the economy during the third quarter of 2012, which shows evidence of a slow, but steady positive trend for the economy and the labor market.

Single-Family Housing Market

The single-family housing market continued to exhibit certain signs of stabilization in the third quarter of 2012 despite continued weakness in the employment market and a significant inventory of seriously delinquent loans and REO properties in the market.


		10		Freddie Mac

Based on data from the National Association of Realtors, sales of existing homes in the third quarter of 2012 averaged 4.68 million (at a seasonally adjusted annual rate), increasing 3.1% from 4.54 million in the second quarter of 2012. Based on data from the U.S. Census Bureau and HUD, new home sales in the third quarter of 2012 averaged approximately 377,000 (at a seasonally adjusted annual rate) increasing approximately 4.1% from approximately 362,000 in the second quarter of 2012. Home prices increased during the third quarter of 2012, with our nationwide index registering approximately a 1.3% increase from June 2012 through September 2012 without seasonal adjustment. From September 2011 through September 2012 our nationwide home price index increased approximately 4.3%. These estimates were based on our own price index of mortgage loans on one-family homes funded by us or Fannie Mae. Other indices of home prices may have different results, as they are determined using different pools of mortgage loans and calculated under different conventions than our own.

The foreclosure process has lengthened significantly in recent years, due to a number of factors, but particularly in states that require a judicial foreclosure process. There have also been a number of legislative and regulatory developments in recent periods affecting single-family mortgage servicing and foreclosure practices. These developments have resulted in significant changes to mortgage servicing and foreclosure practices and further changes are possible that could adversely affect our business. For information on these matters, see “RISK FACTORS — Operational Risks — We have incurred, and will continue to incur, expenses and we may otherwise be adversely affected by delays and deficiencies in the foreclosure process” in our 2011 Annual Report and “LEGISLATIVE AND REGULATORY MATTERS — Developments Concerning Single-Family Servicing Practices.”

Multifamily Housing Market

Multifamily market fundamentals continued to improve on a national level during the third quarter of 2012, although at a slower pace as compared to recent quarters. As reported by REIS, Inc., the national apartment vacancy rate was 4.6% and 4.7% at the end of the third and second quarters of 2012, respectively, and continues to remain at historic lows. The multifamily sector continued to experience strong interest from prospective borrowers and investors and continued to outperform other components of the commercial real estate sector. Vacancy rates and effective rents are important to loan performance because multifamily loans are generally repaid from the cash flows generated by the underlying property and these factors significantly influence those cash flows. We believe positive market fundamentals, such as low vacancy rates and increasing effective rents, as well as optimism about demand for multifamily housing have contributed to improvement in property values in most markets during 2012.

Mortgage Market and Business Outlook

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

Overview

We continue to expect key macroeconomic drivers of the economy, such as income growth, employment, and inflation, will affect the performance of the housing and mortgage markets in the near term. Since we expect that economic growth will continue and mortgage interest rates will remain low in 2012, we believe that housing affordability will remain relatively high in the near term for potential home buyers. We also expect that the volume of home sales will likely continue to remain high in the fourth quarter of 2012, compared to the volume in the same period of 2011, but still remain relatively weak compared to historical levels. Important factors that we believe will continue to negatively impact single-family housing demand are the relatively high unemployment rate and relatively low consumer confidence measures. Consumer confidence measures, while up from recession lows, remain below long-term averages and suggest that households will likely continue to be cautious in home buying. We also expect to continue to experience a high level of refinancing activity in the near term, due to the impact of the expanded HARP initiative as well as the historically low interest rates on fixed-rate single-family mortgages. For information on the HARP initiative, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program.”


		11		Freddie Mac

While home prices remain at significantly lower levels from their peak in most areas, declines in the market’s inventory of vacant housing have supported stabilization in home prices in a number of metropolitan areas. However, to the extent a large volume of loans complete the foreclosure process in a short time period, the resulting increase in the market’s inventory of homes for sale could have a negative impact on home prices. National home prices increased in the second and third quarters of 2012. The increase in home prices during the third quarter of 2012 represents the first such increase in the July to September months in more than five years. While second and third quarter improvements were supported by economic growth, our expectation is that national average home prices will be weak (on an inflation-adjusted basis) in the fourth quarter of 2012 and a long-term housing recovery will begin with modest price increases in 2013.

Single-Family

Our charge-offs remained high during the first nine months of 2012, and we expect they will likely remain high during the fourth quarter of 2012 and into 2013. This is in part due to the substantial number of underwater mortgage loans in our single-family credit guarantee portfolio. For the near term, we also expect:

•

REO disposition severity ratios and losses on short sale transactions to remain high, though home prices and the rate of home sales have seen recent improvements in many key markets and our recovery rates have been positively impacted by recent changes in our process for determining property list prices;

•

the amount of non-performing assets and the volume of our loan workouts to continue to remain high; and

•

continued high volume of loans in the foreclosure process as well as prolonged foreclosure timelines.

Multifamily

We expect continued strength in the multifamily market during the next twelve months. As a result of the positive market fundamentals and continuing strong portfolio performance, we expect our credit losses and delinquency rates to remain low in the near term.

We continued to serve as a stable source of liquidity and continued our support of the multifamily market and the nation’s renters as evidenced by our $19.2 billion of multifamily purchase and guarantee volume in the first nine months of 2012, which provided financing for approximately 1,150 properties amounting to approximately 302,000 apartment units. The majority of these apartments were affordable to low and moderate income families. We expect an increase in our purchase and guarantee volumes for the full-year of 2012 when compared to 2011 levels as demand for multifamily financing remains strong.

Long-Term Outlook

There is significant uncertainty as to whether or when we will emerge from conservatorship, as it has no specified termination date, and as to what changes may occur to our business structure during or following conservatorship, including whether we will continue to exist. We are not aware of any current plans of our Conservator to significantly change our business model or capital structure in the near-term. Our future structure and role will be determined by the Administration and Congress, and there are likely to be significant changes beyond the near-term. We have no ability to predict the outcome of these deliberations. For a discussion of FHFA’s strategic plan for us, see “LEGISLATIVE AND REGULATORY MATTERS — FHFA’s Strategic Plan for Freddie Mac and Fannie Mae Conservatorships and 2012 Conservatorship Scorecard.”

We do not have the ability over the long term to retain any capital generated by our business operations. Under the third amendment to the Purchase Agreement, we will be required to pay dividends to the extent that our net worth exceeds the permitted capital reserve. Accordingly, over the long term, we will not be able to build or retain any net worth surplus. The Acting Director of FHFA stated on September 19, 2011 that “it ought to be clear to everyone at this point, given [Freddie Mac and Fannie Mae’s] losses since being placed into conservatorship and the terms of the Treasury’s financial support agreements, that [Freddie Mac and Fannie Mae] will not be able to earn their way back to a condition that allows them to emerge from conservatorship.”

Limits on Investment Activity and Our Mortgage-Related Investments Portfolio

The conservatorship has significantly impacted our investment activity. FHFA has stated that we will not be a substantial buyer or seller of mortgages for our mortgage-related investments portfolio. Additionally, the third amendment to the Purchase Agreement changed the limits on our investment activity. Under the terms of the amended Purchase Agreement


		12		Freddie Mac

and FHFA regulation, the UPB of our mortgage-related investments portfolio will not be allowed to exceed: (a) $650 billion on December 31, 2012; or (b) on December 31 of each year thereafter, 85% of the aggregate amount of the UPB we were permitted to own as of December 31 of the immediately preceding calendar year, until the portfolio reaches $250 billion. FHFA has indicated that such portfolio reduction targets should be viewed as minimum reductions and has encouraged us to reduce the mortgage-related investments portfolio at a faster rate than required, while indicating that the pace of reducing the portfolio may be moderated by conditions in the housing and financial markets. This strategy is designed to reduce the portfolio and provide the best return to the taxpayer while minimizing market disruption. In addition, we are subject to limits on the amount of mortgage assets we can sell in any calendar month without review and approval by FHFA and, if FHFA so determines, Treasury.

From time to time, we seek to support the liquidity of the market for our PCs and the relative price performance of our PCs to comparable Fannie Mae securities through a variety of activities conducted by our Investments segment. These activities can include the purchase and sale of Freddie Mac securities, purchases of loans, and dollar roll transactions, as well as the issuance of REMICs and Other Structured Securities. Dollar roll transactions are transactions in which we enter into an agreement to purchase and subsequently resell (or sell and subsequently repurchase) PCs. In the first half of 2012, we curtailed mortgage-related investments portfolio purchase and retention activities that were undertaken for the primary purpose of supporting the price performance of our PCs. However, during the third quarter of 2012, we began certain activities, as noted above, intended to improve the price performance of our PCs while minimizing market disruption. We may increase, reduce, or discontinue these or other related activities at any time. This could affect the liquidity and price performance of our mortgage-related securities.

The table below presents the UPB of our mortgage-related investments portfolio, for purposes of the limit imposed by the Purchase Agreement and FHFA regulation.

Table 4 — Mortgage-Related Investments Portfolio⁽¹⁾


	September 30, 2012		December 31, 2011
	(in millions)
Investments segment — Mortgage investments portfolio	$	377,951	$	449,273
Single-family Guarantee segment — Single-family unsecuritized mortgage loans⁽²⁾		56,596		62,469
Multifamily segment — Mortgage investments portfolio		133,419		141,571

Total mortgage-related investments portfolio	$	567,966	$	653,313

(1)	Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.

(2)	Represents unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment.

We consider the liquidity of our assets in our mortgage-related investments portfolio based on three categories: (a) agency securities; (b) assets that are less liquid than agency securities; and (c) illiquid assets. Assets that are less liquid than agency securities include unsecuritized performing single-family mortgage loans, multifamily mortgage loans, CMBS, and housing revenue bonds. Our less liquid assets collectively represented approximately 28% of the UPB of the portfolio at September 30, 2012, compared to 32% as of December 31, 2011. Illiquid assets include unsecuritized seriously delinquent and modified single-family mortgage loans which we removed from PC trusts, and our investments in non-agency mortgage-related securities backed by subprime, option ARM, and Alt-A and other loans. Our illiquid assets collectively represented approximately 35% of the UPB of the portfolio at September 30, 2012, as compared to 29% as of December 31, 2011. The elevated level of illiquid assets is primarily due to our removal of seriously delinquent and modified loans from PC trusts. The changing composition of our mortgage-related investments portfolio to a greater proportion of assets that are less liquid than agency securities and illiquid may influence our decisions regarding funding and hedging. The description above of the relative liquidity of our assets is based on our own internal expectations given current market conditions. Changes in market conditions could adversely affect the liquidity of our assets at any given time.


		13		Freddie Mac

SE LECTED FINANCIAL DATA⁽¹⁾

The selected financial data presented below should be reviewed in conjunction with MD&A and our consolidated financial statements and related notes for the three and nine months ended September 30, 2012.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(dollars in millions, except share-related amounts)
Statements of Comprehensive Income Data
Net interest income	$	4,269		$	4,613		$	13,155		$	13,714
Provision for credit losses		(610	)		(3,606	)		(2,590	)		(8,124	)
Non-interest income (loss)		(560	)		(4,798	)		(2,827	)		(9,907	)
Non-interest expense		(473	)		(687	)		(1,605	)		(1,930	)
Net income (loss)		2,928			(4,422	)		6,525			(5,885	)
Comprehensive income (loss)		5,630			(4,376	)		10,311			(2,736	)
Net income (loss) attributable to common stockholders		1,119			(6,040	)		1,104			(10,725	)
Net income (loss) per common share:
Basic		0.35			(1.86	)		0.34			(3.30	)
Diluted		0.35			(1.86	)		0.34			(3.30	)
Cash dividends per common share		—			—			—			—
Weighted average common shares outstanding (in thousands):⁽²⁾
Basic		3,239,477			3,244,496			3,240,241			3,245,473
Diluted		3,239,477			3,244,496			3,240,241			3,245,473

							September 30, 2012			December 31, 2011
							(dollars in millions)
Balance Sheets Data
Mortgage loans held-for-investment, at amortized cost by consolidated trusts (net of allowances for loan losses)							$	1,505,576		$	1,564,131
Total assets								2,016,503			2,147,216
Debt securities of consolidated trusts held by third parties								1,432,632			1,471,437
Other debt								565,036			660,546
All other liabilities								13,928			15,379
Total equity (deficit)								4,907			(146	)
Portfolio Balances⁽³⁾
Mortgage-related investments portfolio							$	567,966		$	653,313
Total Freddie Mac mortgage-related securities⁽⁴⁾								1,568,311			1,624,684
Total mortgage portfolio⁽⁵⁾								1,972,905			2,075,394
Non-performing assets⁽⁶⁾								138,500			129,152

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Ratios⁽⁷⁾
Return on average assets⁽⁸⁾		0.6	%		(0.8	)%		0.4	%		(0.4	)%
Non-performing assets ratio⁽⁹⁾		7.6			6.6			7.6			6.6
Equity to assets ratio⁽¹⁰⁾		0.1			(0.2	)		0.1			(0.1	)

(1)	See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” in our 2011 Annual Report and within this Form 10-Q for information regarding our accounting policies and the impact of new accounting policies on our consolidated financial statements.

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

(3)	Represents the UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.

(4)	See “Table 27 — Freddie Mac Mortgage-Related Securities” for the composition of this line item.

(5)	See “Table 11 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios” for the composition of our total mortgage portfolio.

(6)	See “Table 45 — Non-Performing Assets” for a description of our non-performing assets.

(7)

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

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

(9)	Ratio computed as non-performing assets divided by the ending UPB of our total mortgage portfolio, excluding non-Freddie Mac mortgage-related securities.

(10)	Ratio computed as the simple average of the beginning and ending balances of total equity (deficit) divided by the simple average of the beginning and ending balances of total assets.


		14		Freddie Mac

CONSOLIDATED RESULTS OF OPERATIONS

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

Table 5 — Summary Consolidated Statements of Comprehensive Income


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(in millions)
Net interest income	$	4,269		$	4,613		$	13,155		$	13,714
Provision for credit losses		(610	)		(3,606	)		(2,590	)		(8,124	)

Net interest income after provision for credit losses		3,659			1,007			10,565			5,590

Non-interest income (loss):
Gains (losses) on extinguishment of debt securities of consolidated trusts		(34	)		(310	)		(39	)		(212	)
Gains (losses) on retirement of other debt		11			19			(55	)		34
Gains (losses) on debt recorded at fair value		(10	)		133			35			15
Derivative gains (losses)		(488	)		(4,752	)		(2,426	)		(8,986	)
Impairment of available-for-sale securities:
Total other-than-temporary impairment of available-for-sale securities		(332	)		(459	)		(942	)		(1,743	)
Portion of other-than-temporary impairment recognized in AOCI		65			298			13			37

Net impairment of available-for-sale securities recognized in earnings		(267	)		(161	)		(929	)		(1,706	)
Other gains (losses) on investment securities recognized in earnings		(330	)		(541	)		(974	)		(452	)
Other income		558			814			1,561			1,400

Total non-interest income (loss)		(560	)		(4,798	)		(2,827	)		(9,907	)

Non-interest expense:
Administrative expenses		(401	)		(381	)		(1,139	)		(1,126	)
REO operations income (expense)		49			(221	)		(92	)		(505	)
Other expenses		(121	)		(85	)		(374	)		(299	)

Total non-interest expense		(473	)		(687	)		(1,605	)		(1,930	)

Income (loss) before income tax benefit		2,626			(4,478	)		6,133			(6,247	)
Income tax benefit		302			56			392			362

Net income (loss)		2,928			(4,422	)		6,525			(5,885	)

Other comprehensive income (loss), net of taxes and reclassification adjustments:
Changes in unrealized gains (losses) related to available-for-sale securities		2,599			(80	)		3,508			2,764
Changes in unrealized gains (losses) related to cash flow hedge relationships		102			124			320			391
Changes in defined benefit plans		1			2			(42	)		(6	)

Total other comprehensive income (loss), net of taxes and reclassification adjustments		2,702			46			3,786			3,149

Comprehensive income (loss)	$	5,630		$	(4,376	)	$	10,311		$	(2,736	)

Net Interest Income

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


		15		Freddie Mac

Table 6 — Net Interest Income/Yield and Average Balance Analysis


	Three Months Ended September 30,
	2012									2011
	Average Balance⁽¹⁾⁽²⁾			Interest Income (Expense)⁽¹⁾			Average Rate			Average Balance⁽¹⁾⁽²⁾			Interest Income (Expense)⁽¹⁾			Average Rate
	(dollars in millions)
Interest-earning assets:
Cash and cash equivalents	$	30,246		$	5			0.07	%	$	51,225		$	4			0.03	%
Federal funds sold and securities purchased under agreements to resell		48,062			21			0.17			16,434			4			0.08
Mortgage-related securities:
Mortgage-related securities⁽³⁾		346,738			3,807			4.39			443,135			5,050			4.56
Extinguishment of PCs held by Freddie Mac		(117,146	)		(1,300	)		(4.44	)		(166,356	)		(1,918	)		(4.61	)

Total mortgage-related securities, net		229,592			2,507			4.37			276,779			3,132			4.53

Non-mortgage-related securities⁽³⁾		20,363			15			0.30			18,175			18			0.40
Mortgage loans held by consolidated trusts⁽⁴⁾		1,517,472			15,838			4.17			1,626,583			19,140			4.71
Unsecuritized mortgage loans⁽⁴⁾		229,601			2,108			3.67			243,162			2,282			3.75

Total interest-earning assets	$	2,075,336		$	20,494			3.95		$	2,232,358		$	24,580			4.41

Interest-bearing liabilities:
Debt securities of consolidated trusts including PCs held by Freddie Mac	$	1,541,339		$	(14,884	)		(3.86	)	$	1,641,905		$	(18,633	)		(4.54	)
Extinguishment of PCs held by Freddie Mac		(117,146	)		1,300			4.44			(166,356	)		1,918			4.61

Total debt securities of consolidated trusts held by third parties		1,424,193			(13,584	)		(3.82	)		1,475,549			(16,715	)		(4.53	)
Other debt:
Short-term debt		126,430			(47	)		(0.15	)		188,004			(70	)		(0.14	)
Long-term debt⁽⁵⁾		447,067			(2,446	)		(2.19	)		495,188			(3,002	)		(2.42	)

Total other debt		573,497			(2,493	)		(1.74	)		683,192			(3,072	)		(1.79	)

Total interest-bearing liabilities		1,997,690			(16,077	)		(3.22	)		2,158,741			(19,787	)		(3.67	)
Expense related to derivatives⁽⁶⁾		—			(148	)		(0.03	)		—			(180	)		(0.03	)
Impact of net non-interest-bearing funding		77,646			—			0.12			73,617			—			0.12

Total funding of interest-earning assets	$	2,075,336		$	(16,225	)		(3.13	)	$	2,232,358		$	(19,967	)		(3.58	)

Net interest income/yield				$	4,269			0.82					$	4,613			0.83


	Nine Months Ended September 30,
	2012									2011
	Average Balance⁽¹⁾⁽²⁾			Interest Income (Expense)⁽¹⁾			Average Rate			Average Balance⁽¹⁾⁽²⁾			Interest Income (Expense)⁽¹⁾			Average Rate
	(dollars in millions)
Interest-earning assets:
Cash and cash equivalents	$	37,772		$	15			0.05	%	$	40,817		$	30			0.10	%
Federal funds sold and securities purchased under agreements to resell		37,371			45			0.16			32,174			30			0.12
Mortgage-related securities:
Mortgage-related securities⁽³⁾		362,748			12,208			4.49			450,227			15,581			4.61
Extinguishment of PCs held by Freddie Mac		(117,953	)		(4,016	)		(4.54	)		(166,734	)		(5,947	)		(4.76	)

Total mortgage-related securities, net		244,795			8,192			4.46			283,493			9,634			4.53

Non-mortgage-related securities⁽³⁾		24,535			45			0.25			24,520			74			0.40
Mortgage loans held by consolidated trusts⁽⁴⁾		1,538,476			50,112			4.34			1,640,276			58,986			4.79
Unsecuritized mortgage loans⁽⁴⁾		241,724			6,644			3.67			242,063			6,890			3.80

Total interest-earning assets	$	2,124,673		$	65,053			4.09		$	2,263,343		$	75,644			4.46

Interest-bearing liabilities:
Debt securities of consolidated trusts including PCs held by Freddie Mac	$	1,560,852		$	(47,478	)		(4.06	)	$	1,654,554		$	(57,326	)		(4.62	)
Extinguishment of PCs held by Freddie Mac		(117,953	)		4,016			4.54			(166,734	)		5,947			4.76

Total debt securities of consolidated trusts held by third parties		1,442,899			(43,462	)		(4.02	)		1,487,820			(51,379	)		(4.60	)
Other debt:
Short-term debt		134,807			(130	)		(0.13	)		192,326			(280	)		(0.19	)
Long-term debt⁽⁵⁾		469,559			(7,839	)		(2.22	)		504,603			(9,690	)		(2.56	)

Total other debt		604,366			(7,969	)		(1.76	)		696,929			(9,970	)		(1.91	)

Total interest-bearing liabilities		2,047,265			(51,431	)		(3.35	)		2,184,749			(61,349	)		(3.74	)
Expense related to derivatives⁽⁶⁾		—			(467	)		(0.03	)		—			(581	)		(0.04	)
Impact of net non-interest-bearing funding		77,408			—			0.12			78,594			—			0.13

Total funding of interest-earning assets	$	2,124,673		$	(51,898	)		(3.26	)	$	2,263,343		$	(61,930	)		(3.65	)

Net interest income/yield				$	13,155			0.83					$	13,714			0.81

(1)	Excludes mortgage loans and mortgage-related securities traded, but not yet settled.

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

(3)	Interest income (expense) includes accretion of the portion of impairment charges recognized in earnings where we expect a significant improvement in cash flows.

(4)	Non-performing loans, where interest income is generally recognized when collected, are included in average balances.

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

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


		16		Freddie Mac

Net interest income decreased by $344 million and $559 million during the three and nine months ended September 30, 2012, respectively, compared to the three and nine months ended September 30, 2011. Net interest yield decreased by one basis point during the three months ended September 30, 2012 and increased by two basis points during the nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011, respectively. The primary driver of the decreases in net interest income during the three and nine months ended September 30, 2012 and the decrease in net interest yield for the three months ended September 30, 2012 was the reduction in the average balance of higher-yielding mortgage-related assets due to continued liquidations, partially offset by lower funding costs from the replacement of debt at lower rates. The increase in net interest yield for the nine months ended September 30, 2012 was primarily due to the benefits of lower funding costs, partially offset by the negative impact of the reduction in the average balance of higher-yielding mortgage-related assets.

We recognize interest income on non-performing loans that have been placed on non-accrual status only when cash payments are received. We refer to the interest income that we do not recognize as foregone interest income (i.e., interest income we would have recorded if the loans had been current in accordance with their original terms). Foregone interest income and reversals of previously recognized interest income, net of cash received, related to non-performing loans was $0.8 billion and $2.4 billion during the three and nine months ended September 30, 2012, respectively, compared to $1.0 billion and $2.9 billion during the three and nine months ended September 30, 2011, respectively. These reductions were primarily due to the decreased volume of non-performing loans on non-accrual status.

During the three and nine months ended September 30, 2012, spreads on our debt and our access to the debt markets remained favorable relative to historical levels. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity.”

Provision for Credit Losses

We maintain loan loss reserves at levels we believe are appropriate to absorb probable incurred losses on mortgage loans held-for-investment and loans underlying our financial guarantees. Our loan loss reserves are increased through the provision for credit losses and are reduced by net charge-offs. The provision for credit losses primarily reflects our estimate of incurred losses for newly impaired loans as well as changes in our estimates of loss for previously impaired loans based on the likelihood of ultimate transition to loss events and the expected severity rates of incurred losses.

Our provision for credit losses declined to $0.6 billion in the third quarter of 2012, compared to $3.6 billion in the third quarter of 2011, and was $2.6 billion in the nine months ended September 30, 2012 compared to $8.1 billion in the nine months ended September 30, 2011. The decrease in the provision for credit losses for the three and nine months ended September 30, 2012 compared to the respective periods in 2011 primarily reflects declines in the volume of new seriously delinquent loans (largely due to a decline in the size of our single-family credit guarantee portfolio originated in 2005 through 2008), and lower estimates of incurred loss due to the positive impact of an increase in national home prices. The provision for credit losses in the third quarter of 2012 also includes $0.2 billion related to the classification of single-family loans discharged in Chapter 7 bankruptcy as TDRs. Prior to the third quarter of 2012, we did not classify loans discharged in Chapter 7 bankruptcy as TDRs (unless they were already classified as such for other reasons) and we measured those loans collectively for impairment. In the third quarter of 2012, we classified all such loans as TDRs and measured them for impairment on an individual basis. This change represents the correction of an error that was not material to our previously reported financial statements. At September 30, 2012, the majority of these loans were not seriously delinquent and, in many cases, the borrower was continuing to make timely payments. The provision for credit losses in the third quarter of 2011 reflected a decline in the volume of early stage delinquencies and seriously delinquent loans, while the provision for credit losses in the nine months ended September 30, 2011 compared to 2010 reflected declines in the rate at which delinquent loans transition into serious delinquency.

During the three and nine months ended September 30, 2012, our charge-offs, net of recoveries for single-family loans exceeded the amount of our provision for credit losses. We believe our charge-offs in the nine months ended September 30, 2012 were less than they otherwise would have been because of the continued suppression of loan and collateral resolution activity due to the length of the foreclosure process. We believe the level of our charge-offs will continue to remain high for the fourth quarter of 2012 and into 2013.

As of September 30, 2012 and December 31, 2011, the UPB of our single-family non-performing loans was $131.1 billion and $120.5 billion, respectively. These amounts include $64.4 billion and $44.4 billion, respectively, of single-family TDRs that are less than three months past due. However, TDRs remain categorized as non-performing throughout the


		17		Freddie Mac

remaining life of the loan regardless of whether the borrower makes payments that return the loan to a current payment status after modification. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance, charge-offs, our loan loss reserves balance, and our non-performing assets.

The total number of seriously delinquent loans declined approximately 11% during the nine months ended September 30, 2012. However, our serious delinquency rates remain high compared to the rates we experienced in years prior to 2009 due to the continued weakness in home prices in the last several years, persistently high unemployment, extended foreclosure timelines, and continued challenges faced by servicers in processing large volumes of problem loans including adjusting their processes to accommodate changes in servicing standards, such as those dictated by legislative or regulatory authorities. Our seller/servicers have an active role in our loan workout activities, including under the servicing alignment initiative and the MHA Program, and a decline in their performance could result in a failure to realize the anticipated benefits of our loss mitigation plans.

Since the beginning of 2008, on an aggregate basis, we have recorded provision for credit losses associated with single-family loans of approximately $75.9 billion, and have recorded an additional $4.0 billion in losses on loans purchased from our PCs, net of recoveries. The majority of these losses are associated with loans originated in 2005 through 2008. While loans originated in 2005 through 2008 will give rise to additional credit losses that have not yet been incurred, and thus have not been provisioned for, we believe that, as of September 30, 2012, we have reserved for or charged-off the majority of the total expected credit losses for these loans. Nevertheless, various factors, such as continued high unemployment rates or future declines in home prices, could require us to provide for losses on these loans beyond our current expectations. See “Table 3 — Credit Statistics, Single-Family Credit Guarantee Portfolio” for certain quarterly credit statistics for our single-family credit guarantee portfolio.

Our provision for credit losses and amount of charge-offs in the future will be affected by a number of factors. These factors include: (a) the actual level of mortgage defaults; (b) the effect of the MHA Program, the servicing alignment initiative, and other loss mitigation efforts, including any requirement to utilize principal forgiveness in our loan modification initiatives; (c) any government actions or programs that affect the ability of troubled borrowers to obtain modifications, including legislative changes to bankruptcy laws; (d) changes in property values; (e) regional economic conditions, including unemployment rates; (f) additional delays in the foreclosure process; (g) third-party mortgage insurance coverage and recoveries; and (h) the realized rate of seller/servicer repurchases.

In addition, in April 2012, FHFA issued an advisory bulletin that could have an effect on our provision for credit losses in the future. The accounting methods outlined in FHFA’s advisory bulletin are significantly different from our current methods of accounting for single-family loans that are 180 days or more delinquent. We are currently assessing the operational and accounting impacts of this advisory bulletin and have not yet determined when or how we will implement this bulletin or its impact on our consolidated financial statements. We are also awaiting additional guidance from FHFA that we expect will have a significant impact on how and when we implement this bulletin. See “LEGISLATIVE AND REGULATORY DEVELOPMENTS — FHFA Advisory Bulletin” for additional information. See “RISK MANAGEMENT — Credit Risk — Institutional Credit Risk” for information on mortgage insurers and seller/servicer repurchase obligations.

We recognized a benefit for credit losses associated with our multifamily mortgage portfolio of $40 million and $37 million for the third quarters of 2012 and 2011, respectively, and $81 million and $110 million for the nine months ended September 30, 2012 and 2011, respectively. Our loan loss reserves associated with our multifamily mortgage portfolio were $453 million and $545 million as of September 30, 2012 and December 31, 2011, respectively. The decline in loan loss reserves for multifamily loans during the first nine months of 2012 was primarily caused by a decrease in our general reserve, which is the portion of our reserves associated with loans that are collectively evaluated for impairment, based on improvement in the expected performance of the related loans.

Non-Interest Income (Loss)

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

When we purchase PCs that have been issued by consolidated PC trusts, we extinguish a pro rata portion of the outstanding debt securities of the related consolidated trusts. We recognize a gain (loss) on extinguishment of the debt securities to the extent the amount paid to extinguish the debt security differs from its carrying value.


		18		Freddie Mac

Losses on extinguishment of debt securities of consolidated trusts were $34 million and $310 million for the three months ended September 30, 2012 and 2011, respectively. For the three months ended September 30, 2012 and 2011, we extinguished debt securities of consolidated trusts with a UPB of $2.5 billion and $22.8 billion, respectively (representing our purchase of single-family PCs with a corresponding UPB amount). The losses during the three months ended September 30, 2012 and 2011 were primarily due to the repurchase of our debt securities of consolidated trusts at a net purchase premium driven by a decline in interest rates during the periods.

Losses on extinguishment of debt securities of consolidated trusts were $39 million and $212 million for the nine months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, we extinguished debt securities of consolidated trusts with a UPB of $3.9 billion and $69.8 billion, respectively (representing our purchase of single-family PCs with a corresponding UPB amount). The losses during the nine months ended September 30, 2012 were primarily due to the repurchase of our debt securities of consolidated trusts at a net purchase premium driven by a decline in interest rates during the period. The losses for the nine months ended September 30, 2011 were due to the repurchase of our debt securities of consolidated trusts at a net purchase premium during the second and third quarters of 2011 driven by a decline in interest rates during those periods. The purchase of single-family PCs during the 2011 periods was primarily due to dollar roll transactions that were done primarily to support the market and pricing of our single-family PCs. See “Table 19 — Mortgage-Related Securities Purchase Activity” for additional information regarding purchases of mortgage-related securities, including those issued by consolidated PC trusts.

Gains (Losses) on Retirement of Other Debt

Gains on retirement of other debt were $11 million and $19 million during the three months ended September 30, 2012 and 2011, respectively. Gains (losses) on retirement of other debt were $(55) million and $34 million during the nine months ended September 30, 2012 and 2011, respectively. We recognized gains on the retirement of other debt in the three months ended September 30, 2012 primarily due to the call of other debt securities held at premiums. We recognized losses on the retirement of other debt in the nine months ended September 30, 2012 primarily due to write-offs of unamortized deferred issuance costs related to calls of other debt securities. We recognized gains on the retirement of other debt in the three and nine months ended September 30, 2011 primarily due to calls of other debt securities held at premiums and the repurchase of other debt securities at less than par. For more information, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Other Debt Securities — Other Debt Retirement Activities.”

Gains (Losses) on Debt Recorded at Fair Value

Gains (losses) on debt recorded at fair value primarily relate to changes in the fair value of our foreign-currency denominated debt. For the three and nine months ended September 30, 2012, we recognized gains (losses) on debt recorded at fair value of $(10) million and $35 million, respectively. Losses recognized for the three months ended September 30, 2012 were primarily from Euro Reference Notes due to the U.S. dollar weakening relative to the Euro. Gains during the nine months ended September 30, 2012 were primarily from Euro Reference Notes due to a combination of the U.S. dollar strengthening relative to the Euro in the first half of 2012 and changes in interest rates. For the three and nine months ended September 30, 2011, we recognized gains on debt recorded at fair value of $133 million and $15 million, respectively, primarily from Euro Reference Notes due to the U.S. dollar strengthening relative to the Euro. We mitigate changes in the fair value of our foreign-currency denominated debt by using foreign currency swaps and foreign-currency denominated interest-rate swaps.

Derivative Gains (Losses)

The table below presents derivative gains (losses) reported in our consolidated statements of comprehensive income. See “NOTE 10: DERIVATIVES — Table 10.2 — Gains and Losses on Derivatives” for information about gains and losses related to specific categories of derivatives. Changes in fair value and interest accruals on derivatives not in hedge accounting relationships are recorded as derivative gains (losses) in our consolidated statements of comprehensive income. At both September 30, 2012 and December 31, 2011, we did not have any derivatives in hedge accounting relationships; however, there are amounts recorded in AOCI related to discontinued cash flow hedges. Amounts recorded in AOCI associated with these closed cash flow hedges are reclassified to earnings when the forecasted transactions affect earnings. If it is probable that the forecasted transaction will not occur, then the deferred gain or loss associated with the forecasted transaction is reclassified into earnings immediately.


		19		Freddie Mac

While derivatives are an important aspect of our strategy to manage interest-rate risk, they generally increase the volatility of reported net income because, while fair value changes in derivatives affect net income, fair value changes in several of the types of assets and liabilities being hedged do not affect net income. Beginning in the fourth quarter of 2011, we began to increase the portion of our debt issued with longer-term maturities. This allows us to take advantage of attractive long-term rates while decreasing our reliance on interest-rate swaps.

Table 7 — Derivative Gains (Losses)


	Derivative Gains (Losses)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(in millions)
Interest-rate swaps	$	62		$	(8,278	)	$	(1,236	)	$	(10,304	)
Option-based derivatives⁽¹⁾		197			5,887			1,396			6,682
Other derivatives⁽²⁾		148			(1,092	)		347			(1,494	)
Accrual of periodic settlements⁽³⁾		(895	)		(1,269	)		(2,933	)		(3,870	)

Total	$	(488	)	$	(4,752	)	$	(2,426	)	$	(8,986	)

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

(2)	Includes futures, foreign-currency swaps, commitments, swap guarantee derivatives, and credit derivatives.

(3)	Includes imputed interest on zero-coupon swaps.

Gains (losses) on derivatives not accounted for in hedge accounting relationships are principally driven by changes in: (a) interest rates and implied volatility; and (b) the mix and volume of derivatives in our derivative portfolio.

During the three and nine months ended September 30, 2012, we recognized losses on derivatives of $0.5 billion and $2.4 billion, respectively, primarily due to losses related to the accrual of periodic settlements on interest-rate swaps as we were in a net pay-fixed swap position. We recognized fair value losses on our pay-fixed swaps of $1.1 billion and $5.2 billion, respectively, which were offset by: (a) fair value gains on our receive-fixed swaps of $1.1 billion and $4.0 billion, respectively; and (b) fair value gains on our option-based derivatives of $0.2 billion and $1.4 billion, respectively, resulting from gains on our purchased call swaptions due to a decrease in interest rates. During the three and nine months ended September 30, 2012, the effect of the decline in interest rates was partially mitigated due to a change in the mix of our derivatives portfolio, whereby we increased our holdings of receive-fixed swaps relative to pay-fixed swaps to rebalance our portfolio during a period of steadily declining interest rates and increased our issuances of debt with longer-term maturities.

During the three and nine months ended September 30, 2011, we recognized losses on derivatives of $4.8 billion and $9.0 billion, respectively, primarily due to declines in interest rates in the second and third quarters. Specifically, during the three months and nine months ended September 30, 2011, we recognized fair value losses on our pay-fixed swap positions of $19.1 billion and $22.4 billion, respectively, partially offset by fair value gains on our receive-fixed swaps of $10.8 billion and $12.1 billion, respectively. We also recognized fair value gains of $5.9 billion and $6.7 billion during the three and nine months ended September 30, 2011, respectively, on our option-based derivatives, resulting from gains on our purchased call swaptions as interest rates decreased during the second and third quarters of 2011. Additionally, we recognized losses related to the accrual of periodic settlements during the three and nine months ended September 30, 2011 due to our net pay-fixed swap position in the prevailing interest rate environment.

Investment Securities-Related Activities

Impairments of Available-For-Sale Securities

We recorded net impairments of available-for-sale securities recognized in earnings, which were related to non-agency mortgage-related securities, of $267 million and $929 million during the three and nine months ended September 30, 2012, respectively, compared to $161 million and $1.7 billion during the three and nine months ended September 30, 2011, respectively. The increase in net impairments recognized in earnings during the three months ended September 30, 2012 was primarily driven by higher estimated defaults on certain of our investments in subprime mortgage-related securities, partially offset by improvements in forecasted home prices over the expected life of our available-for-sale securities. The decrease in net impairments recognized in earnings during the nine months ended September 30, 2012 was primarily driven by improvements in forecasted home prices over the expected life of our available-for-sale securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary


		20		Freddie Mac

Impairments on Available-For-Sale Mortgage-Related Securities” and “NOTE 7: INVESTMENTS IN SECURITIES” for additional information.

Other Gains (Losses) on Investment Securities Recognized in Earnings

Other gains (losses) on investment securities recognized in earnings primarily consist of gains (losses) on trading securities. Trading securities mainly include Treasury securities, agency fixed-rate and variable-rate pass-through mortgage-related securities, and agency REMICs, including inverse floating-rate, interest-only and principal-only securities. We recognized $(338) million and $(1.1) billion related to gains (losses) on trading securities during the three and nine months ended September 30, 2012, respectively, compared to $(547) million and $(473) million during the three and nine months ended September 30, 2011, respectively.

The increase in losses on trading securities during the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011, was primarily due to the movement of securities with unrealized gains towards maturity, partially offset by the increase in the fair value of our trading securities as a result of the decline in interest rates. In addition, a widening of OAS levels on principal-only and certain other agency securities contributed to losses recognized during the three months ended September 30, 2011.

Other Income

The table below summarizes the significant components of other income.

Table 8 — Other Income


	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012		2011
	(in millions)
Other income:
Gains (losses) on sale of mortgage loans	$	117		$	46	$	201	$	302
Gains (losses) on mortgage loans recorded at fair value		310			216		650		319
Recoveries on loans impaired upon purchase		101			119		277		376
Guarantee-related income, net⁽¹⁾		69			40		269		175
All other		(39	)		393		164		228

Total other income	$	558		$	814	$	1,561	$	1,400

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

Gains (Losses) on Sale of Mortgage Loans

During the three months ended September 30, 2012 and 2011, we recognized $117 million and $46 million, respectively, of gains on sale of mortgage loans with associated UPB of $3.9 billion and $2.4 billion, respectively. During the nine months ended September 30, 2012 and 2011, we recognized $201 million and $302 million, respectively, of gains on sale of mortgage loans with associated UPB of $13.9 billion and $10.1 billion, respectively. All such amounts relate to our securitizations of multifamily loans on our consolidated balance sheets, which we elected to carry at fair value. We experienced increased investor demand for our multifamily securitizations during the third quarter of 2012, compared to the third quarter of 2011, which resulted in higher gains in the third quarter of 2012. We had lower gains on sale of mortgage loans during the nine months ended September 30, 2012, compared to the same period of 2011, as a significant portion of the improved fair value of the loans was recognized within gains (losses) on mortgage loans recorded at fair value during periods prior to the loans’ securitization.

Gains (Losses) on Mortgage Loans Recorded at Fair Value

During the three months ended September 30, 2012 and 2011, we recognized $310 million and $216 million, respectively, of gains on mortgage loans recorded at fair value, and we recognized $650 million and $319 million of such gains during the nine months ended September 30, 2012 and 2011, respectively. All such amounts relate to multifamily loans which we had elected to carry at fair value and were designated for securitization. We held higher balances of these loans on our consolidated balance sheets during the three and nine months ended September 30, 2012, compared to the same periods in 2011 which, when combined with improving fair values on those loans, resulted in higher gains during the 2012 periods.


		21		Freddie Mac

Recoveries on Loans Impaired upon Purchase

Recoveries on loans impaired upon purchase represent the recapture into income of previously recognized losses associated with purchases of delinquent loans from our PCs in conjunction with our guarantee activities. Recoveries occur when a loan that was impaired upon purchase is repaid in full or when at the time of foreclosure the estimated fair value of the acquired property, less costs to sell, exceeds the carrying value of the loan. For impaired loans where the borrower has made required payments that return the loan to less than three months past due, the recovery amounts are recognized as interest income over time as periodic payments are received.

During the three months ended September 30, 2012 and 2011, we recognized recoveries on loans impaired upon purchase of $101 million and $119 million, respectively, and these recoveries were $277 million and $376 million during the nine months ended September 30, 2012 and 2011, respectively. Our recoveries on loans impaired upon purchase declined in the three and nine months ended September 30, 2012, compared to the same periods of 2011, due to a lower volume of foreclosure transfers and payoffs associated with loans impaired upon purchase.

All Other

All other income consists primarily of transactional fees, fees assessed to our servicers, such as for technology use and late fees or other penalties, and other miscellaneous income. During the nine months ended September 30, 2012 and 2011, we recorded corrections of certain prior period accounting errors not material to our financial statements within all other income. The largest correction during the third quarter of 2012 related to an error associated with the consolidation of certain of our REMIC trusts for which we held substantially all of the beneficial interests issued by the trusts, but did not consolidate the trusts in prior periods. This correction reduced other income by approximately $106 million during the third quarter of 2012.

The largest correction in 2011 related to an error associated with the accrual of interest income for certain impaired mortgage-related securities during 2010 and 2009. This correction reduced other income by approximately $293 million during the second quarter of 2011 and increased other income by approximately $122 million in the third quarter of 2011 for a net decrease of approximately $171 million in the nine months ended September 30, 2011.

Non-Interest Expense

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

Table 9 — Non-Interest Expense


	Three Months Ended September 30,					Nine Months Ended September 30,
	2012			2011		2012		2011
	(in millions)
Administrative expenses:
Salaries and employee benefits	$	202		$	212	$	605	$	638
Professional services		93			73		245		193
Occupancy expense		15			14		43		44
Other administrative expense		91			82		246		251

Total administrative expenses		401			381		1,139		1,126
REO operations (income) expense		(49	)		221		92		505
Other expenses		121			85		374		299

Total non-interest expense	$	473		$	687	$	1,605	$	1,930

Administrative Expenses

Administrative expenses increased during the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011 due to an increase in professional services expense which was partially offset by lower salaries and employee benefits expense. Professional services expense increased as a result of initiatives we are pursuing under the 2012 conservatorship scorecard and other FHFA-mandated initiatives.

We currently expect that our general and administrative expenses for the full-year 2012 will be marginally higher than those we experienced in the full-year 2011, resulting from increased professional services expense, in part due to: (a) our need to respond to developments in the continually changing mortgage market; (b) an environment in which we are subject to


		22		Freddie Mac

increased regulatory oversight and mandates; and (c) strategic arrangements that we may enter into with outside firms to provide operational capability and staffing for key functions. We believe the initiatives we are pursuing under the 2012 conservatorship scorecard and other FHFA-mandated initiatives will require additional resources and continue to affect our level of administrative expenses going forward.

REO Operations (Income) Expense

The table below presents the components of our REO operations (income) expense, and REO inventory and disposition information.

Table 10 — REO Operations (Income) Expense, REO Inventory, and REO Dispositions


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(dollars in millions)
REO operations (income) expense:
Single-family:
REO property expenses⁽¹⁾	$	259		$	298		$	930		$	906
Disposition (gains) losses, net⁽²⁾		(219	)		29			(479	)		211
Change in holding period allowance, dispositions		(8	)		(87	)		(98	)		(371	)
Change in holding period allowance, inventory⁽³⁾		9			127			(17	)		283
Recoveries ⁽⁴⁾		(81	)		(141	)		(238	)		(511	)

Total single-family REO operations (income) expense		(40	)		226			98			518
Multifamily REO operations (income) expense		(9	)		(5	)		(6	)		(13	)

Total REO operations (income) expense	$	(49	)	$	221		$	92		$	505

REO inventory (in properties), at September 30:
Single-family		50,913			59,596			50,913			59,596
Multifamily		6			20			6			20

Total		50,919			59,616			50,919			59,616

REO property dispositions (in properties):
Single-family		22,660			25,381			73,762			86,356
Multifamily		7			6			18			14

Total		22,667			25,387			73,780			86,370

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

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

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

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

REO operations (income) expense was $(49) million for the third quarter of 2012, as compared to $221 million during the third quarter of 2011, and was $92 million in the nine months ended September 30, 2012 compared to $505 million for the nine months ended September 30, 2011. The decline in expense for the 2012 periods was primarily due to improving home prices in certain geographical areas with significant REO activity, which resulted in gains on disposition of properties as well as lower write-downs of single-family REO inventory. Recoveries on REO properties also declined during the three and nine months ended September 30, 2012, compared to the same periods of 2011. Lower recoveries on REO properties were primarily due to lower REO disposition volume, reduced recoveries from mortgage insurers, and a decline in reimbursements of losses from seller/servicers associated with repurchase requests.

We believe the volume of our single-family REO acquisitions during the nine months ended September 30, 2012 was less than it otherwise would have been due to: (a) the length of the foreclosure process, particularly in states that require a judicial foreclosure process; and (b) resource constraints on foreclosure activities for five larger servicers involved in a recent settlement with a coalition of state attorneys general and federal agencies. In addition, our loss mitigation efforts, including short sales, are affecting our REO acquisition volumes. As a result of these efforts, fewer loans are being resolved through foreclosure and subsequent REO sales. The lower acquisition rate, coupled with high disposition levels, led to a lower REO property inventory level at September 30, 2012, compared to December 31, 2011. We expect that the length of the foreclosure process will continue to remain above historical levels. Additionally, we expect our REO activity to remain at elevated levels, as we have a large inventory of seriously delinquent loans in our single-family credit guarantee portfolio. To the extent a large volume of loans completes the foreclosure process in a short period of time, the resulting increase in the


		23		Freddie Mac

inventory of homes for sale could have a negative effect on the housing market. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Non-Performing Assets” for additional information about our REO activity.

Other Expenses

Other expenses were $121 million and $85 million in the third quarters of 2012 and 2011, respectively, and were $374 million and $299 million in the nine months ended September 30, 2012 and 2011, respectively. Other expenses consist primarily of the legislated 10 basis point increase in guarantee fees, HAMP servicer incentive fees, costs related to terminations and transfers of mortgage servicing, and other miscellaneous expenses. Other expenses included approximately $34 million and $44 million of expenses in the three and nine months ended September 30, 2012 associated with the legislated 10 basis point increase in guarantee fees.

Income Tax Benefit

For the three months ended September 30, 2012 and 2011, we reported an income tax benefit of $302 million and $56 million, respectively. For the nine months ended September 30, 2012 and 2011, we reported an income tax benefit of $392 million and $362 million, respectively. See “NOTE 12: INCOME TAXES” for additional information.

Comprehensive Income (Loss)

Our comprehensive income (loss) was $5.6 billion and $10.3 billion for the three and nine months ended September 30, 2012, respectively, consisting of: (a) $2.9 billion and $6.5 billion of net income, respectively; and (b) $2.7 billion and $3.8 billion of total other comprehensive income, respectively, primarily related to a reduction in net unrealized losses related to our available-for-sale securities.

Our comprehensive income (loss) was $(4.4) billion and $(2.7) billion for the three and nine months ended September 30, 2011, respectively, consisting of: (a) $(4.4) billion and $(5.9) billion of net income (loss), respectively; and (b) $46 million and $3.1 billion of total other comprehensive income, respectively, primarily due to changes in unrealized gains (losses) on cash flow hedge relationships and a reduction in net unrealized losses related to our available-for-sale securities, respectively. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Total Equity (Deficit)” for additional information regarding total other comprehensive income.

Segment Earnings

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

The Investments segment reflects results from our investment, funding and hedging activities. In our Investments segment, we invest principally in mortgage-related securities and single-family performing mortgage loans, which are funded by other debt issuances and hedged using derivatives. In our Investments segment, we also provide funding and hedging management services to the Single-family Guarantee and Multifamily segments. The Investments segment reflects changes in the fair value of the Multifamily segment CMBS and held-for-sale loans that are associated with changes in interest rates. Segment Earnings for this segment consist primarily of the returns on these investments, less the related funding, hedging, and administrative expenses.

The Single-family Guarantee segment reflects results from our single-family credit guarantee activities. In our Single-family Guarantee segment, we purchase single-family mortgage loans originated by our seller/servicers in the primary mortgage market. In most instances, we use the mortgage securitization process to package the purchased mortgage loans into guaranteed mortgage-related securities. We guarantee the payment of principal and interest on the mortgage-related securities in exchange for management and guarantee fees. Segment Earnings for this segment consist primarily of management and guarantee fee revenues, including amortization of upfront fees, less credit-related expenses, administrative expenses, allocated funding costs, and amounts related to net float benefits or expenses.

The Multifamily segment reflects results from our investment (both purchases and sales), securitization, and guarantee activities in multifamily mortgage loans and securities. Although we hold multifamily mortgage loans and non-agency CMBS that we purchased for investment, our purchases of such multifamily mortgage loans for investment have declined significantly since 2010, and our purchases of CMBS have declined significantly since 2008. The only CMBS that we have purchased since 2008 have been senior, mezzanine, and interest-only tranches related to certain of our securitization


		24		Freddie Mac

transactions, and these purchases have not been significant. Our primary business strategy is to purchase multifamily mortgage loans for aggregation and then securitization. We guarantee the senior tranches of these securitizations in Other Guarantee Transactions. Our Multifamily segment also issues Other Structured Securities, but does not issue REMIC securities. Our Multifamily segment also enters into other guarantee commitments for multifamily HFA bonds and housing revenue bonds held by third parties. Segment Earnings for this segment consist primarily of the interest earned on assets related to multifamily investment activities and management and guarantee fee income, less credit-related expenses, administrative expenses, and allocated funding costs. In addition, the Multifamily segment reflects gains on sale of mortgages and the impact of changes in fair value of CMBS and held-for-sale loans associated with market factors other than changes in interest rates, such as liquidity and credit.

We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator. The financial performance of our Single-family Guarantee segment and Multifamily segment are measured based on each segment’s contribution to GAAP net income (loss). Our Investments segment is measured on its contribution to GAAP comprehensive income (loss), which consists of the sum of its contribution to: (a) GAAP net income (loss); and (b) GAAP total other comprehensive income (loss), net of taxes. The sum of Segment Earnings for each segment and the All Other category equals GAAP net income (loss). Likewise, the sum of comprehensive income (loss) for each segment and the All Other category equals GAAP comprehensive income (loss).

The All Other category consists of material corporate level expenses that are: (a) infrequent in nature; and (b) based on management decisions outside the control of the management of our reportable segments. By recording these types of activities to the All Other category, we believe the financial results of our three reportable segments reflect the decisions and strategies that are executed within the reportable segments and provide greater comparability across time periods. The All Other category also includes the deferred tax asset valuation allowance associated with previously recognized income tax credits carried forward.

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

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

See “NOTE 14: SEGMENT REPORTING” in our 2011 Annual Report for further information regarding our segments, including the descriptions and activities of the segments and the reclassifications and allocations used to present Segment Earnings.


		25		Freddie Mac

The table below provides information about our various segment mortgage and credit risk portfolios at September 30, 2012 and December 31, 2011. For a discussion of each segment’s portfolios, see “Segment Earnings — Results.”

Table 11 — Composition of Segment Mortgage Portfolios and Credit Risk Portfolios⁽¹⁾


	September 30, 2012			December 31, 2011
	(in millions)
Segment mortgage portfolios:
Investments — Mortgage investments portfolio:
Single-family unsecuritized mortgage loans⁽²⁾	$	88,836		$	109,190
Freddie Mac mortgage-related securities		184,401			220,659
Non-agency mortgage-related securities		79,012			86,526
Non-Freddie Mac agency securities		25,702			32,898

Total Investments — Mortgage investments portfolio		377,951			449,273

Single-family Guarantee — Managed loan portfolio:⁽³⁾
Single-family unsecuritized mortgage loans⁽⁴⁾		56,596			62,469
Single-family Freddie Mac mortgage-related securities held by us		184,401			220,659
Single-family Freddie Mac mortgage-related securities held by third parties		1,347,634			1,378,881
Single-family other guarantee commitments⁽⁵⁾		13,538			11,120

Total Single-family Guarantee — Managed loan portfolio		1,602,169			1,673,129

Multifamily — Guarantee portfolio:
Multifamily Freddie Mac mortgage related securities held by us		2,326			3,008
Multifamily Freddie Mac mortgage related securities held by third parties		33,950			22,136
Multifamily other guarantee commitments⁽⁵⁾		9,817			9,944

Total Multifamily — Guarantee portfolio		46,093			35,088

Multifamily — Mortgage investments portfolio
Multifamily investment securities portfolio		53,151			59,260
Multifamily loan portfolio		80,268			82,311

Total Multifamily — Mortgage investments portfolio		133,419			141,571

Total Multifamily portfolio		179,512			176,659

Less : Freddie Mac single-family and certain multifamily securities⁽⁶⁾		(186,727	)		(223,667	)

Total mortgage portfolio	$	1,972,905		$	2,075,394

Credit risk portfolios:⁽⁷⁾
Single-family credit guarantee portfolio:⁽³⁾
Single-family mortgage loans, on-balance sheet	$	1,637,442		$	1,733,215
Non-consolidated Freddie Mac mortgage-related securities		9,646			10,735
Other guarantee commitments⁽⁵⁾		13,538			11,120
Less: HFA-related guarantees ⁽⁸⁾		(7,104	)		(8,637	)
Less: Freddie Mac mortgage-related securities backed by Ginnie Mae certificates⁽⁸⁾		(678	)		(779	)

Total single-family credit guarantee portfolio	$	1,652,844		$	1,745,654

Multifamily mortgage portfolio:
Multifamily mortgage loans, on-balance sheet	$	80,268		$	82,311
Non-consolidated Freddie Mac mortgage-related securities		36,276			25,144
Other guarantee commitments⁽⁵⁾		9,817			9,944
Less: HFA-related guarantees ⁽⁸⁾		(1,188	)		(1,331	)

Total multifamily mortgage portfolio	$	125,173		$	116,068

(1)	Based on UPB and excludes mortgage loans and mortgage-related securities traded, but not yet settled.

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

(3)

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

(4)	Represents unsecuritized seriously delinquent single-family loans managed by the Single-family Guarantee segment.

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

(6)

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

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

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


		26		Freddie Mac

Segment Earnings — Results

Investments

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

Table 12 — Segment Earnings and Key Metrics — Investments⁽¹⁾


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(dollars in millions)
Segment Earnings:
Net interest income	$	1,368		$	1,905		$	4,690		$	5,384
Non-interest income (loss):
Net impairment of available-for-sale securities recognized in earnings		(180	)		(116	)		(690	)		(1,284	)
Derivative gains (losses)		557			(3,144	)		993			(4,197	)
Gains (losses) on trading securities		(364	)		(525	)		(1,175	)		(503	)
Gains (losses) on sale of mortgage loans		7			—			(1	)		16
Gains (losses) on mortgage loans recorded at fair value		105			358			324			442
Other non-interest income (loss)		494			345			1,680			702

Total non-interest income (loss)		619			(3,082	)		1,131			(4,824	)

Non-interest expense:
Administrative expenses		(110	)		(97	)		(310	)		(293	)
Other non-interest expense		(1	)		(1	)		(1	)		(2	)

Total non-interest expense		(111	)		(98	)		(311	)		(295	)

Segment adjustments⁽²⁾		191			137			510			466

Segment Earnings (loss) before income tax benefit		2,067			(1,138	)		6,020			731
Income tax benefit		405			59			548			337

Segment Earnings (loss), net of taxes		2,472			(1,079	)		6,568			1,068
Total other comprehensive income, net of taxes		2,015			1,347			2,377			3,106

Comprehensive income	$	4,487		$	268		$	8,945		$	4,174

Key metrics:
Portfolio balances:
Average balances of interest-earning assets:⁽³⁾⁽⁴⁾
Mortgage-related securities⁽⁵⁾	$	299,700		$	387,428		$	312,859		$	393,301
Non-mortgage-related investments⁽⁶⁾		98,664			85,819			99,670			97,505
Single-family unsecuritized loans⁽⁷⁾		90,832			97,059			99,432			91,638

Total average balances of interest-earning assets	$	489,196		$	570,306		$	511,961		$	582,444

Return:
Net interest yield — Segment Earnings basis (annualized)		1.12	%		1.34	%		1.22	%		1.23	%

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

(2)	For a description of our segment adjustments, see “NOTE 14: SEGMENT REPORTING — Segment Earnings” in our 2011 Annual Report.

(3)	Excludes mortgage loans and mortgage-related securities traded, but not yet settled.

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

(5)	Includes our investments in single-family PCs and certain Other Guarantee Transactions, which have been consolidated under GAAP on our consolidated balance sheet since January 1, 2010.

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

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

Segment Earnings for our Investments segment increased by $3.6 billion and $5.5 billion to $2.5 billion and $6.6 billion during the three and nine months ended September 30, 2012, respectively, compared to $(1.1) billion and $1.1 billion during the three and nine months ended September 30, 2011, respectively, primarily due to derivative gains during the three and nine months ended September 30, 2012 versus losses during the three and nine months ended September 30, 2011.

Comprehensive income for our Investments segment increased by $4.2 billion and $4.8 billion to $4.5 billion and $8.9 billion during the three and nine months ended September 30, 2012, respectively, compared to $268 million and $4.2 billion during the three and nine months ended September 30, 2011, respectively, primarily due to higher Segment Earnings.

During the three and nine months ended September 30, 2012, the UPB of the Investments segment mortgage investments portfolio decreased at an annualized rate of 8.8% and 21.2%, respectively. We held $210.1 billion of agency securities and $79.0 billion of non-agency mortgage-related securities as of September 30, 2012, compared to $253.6 billion


		27		Freddie Mac

of agency securities and $86.5 billion of non-agency mortgage-related securities as of December 31, 2011. The decline in UPB of agency securities is due mainly to liquidations and reduced purchase activities. The decline in UPB of non-agency mortgage-related securities is due mainly to the receipt of monthly remittances of principal repayments from both the recoveries of liquidated loans and, to a lesser extent, voluntary repayments of the underlying collateral, representing a partial return of our investments in these securities. Since the beginning of 2007, we have incurred actual principal cash shortfalls of $2.4 billion on impaired non-agency mortgage-related securities in the Investments segment. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” for additional information regarding our mortgage-related securities.

During the three and nine months ended September 30, 2012, the UPB of the Investments segment single-family unsecuritized mortgage loans declined by $3.6 billion and $20.4 billion, respectively. The decline in the UPB of single-family unsecuritized mortgage loans is primarily related to our securitization of mortgage loans that we had purchased for cash.

Segment Earnings net interest income decreased by $537 million and $694 million and net interest yield decreased by 22 basis points and one basis point during the three and nine months ended September 30, 2012, respectively, compared to the three and nine months ended September 30, 2011, respectively. The primary driver of the decreases was the reduction in the average balance of higher-yielding mortgage-related assets due to continued liquidations, partially offset by lower funding costs, primarily due to the replacement of debt at lower rates.

Segment Earnings non-interest income (loss) was $619 million and $1.1 billion during the three and nine months ended September 30, 2012, respectively, compared to $(3.1) billion and $(4.8) billion during the three and nine months ended September 30, 2011, respectively. This improvement was primarily due to: (a) derivative gains during the three and nine months ended September 30, 2012 versus losses during the three and nine months ended September 30, 2011; (b) improvements in other non-interest income; and (c) lower net impairments of available-for-sale securities recognized in earnings for the nine months ended September 30, 2012. For the nine months ended September 30, 2012, these factors were partially offset by an increase in losses on trading securities, compared to the nine months ended September 30, 2011.

Impairments recorded in our Investments segment were $180 million and $690 million during the three and nine months ended September 30, 2012, respectively, compared to $116 million and $1.3 billion during the three and nine months ended September 30, 2011. The decrease in net impairments recognized in earnings during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011, was primarily driven by improvements in forecasted home prices over the expected life of the available-for-sale securities. During the three months ended September 30, 2012 compared to the three months ended September 30, 2011, larger net impairments recognized in earnings was driven by higher estimated defaults on certain of our investments in subprime mortgage-related securities, partially offset by improvements in forecasted home prices over the expected life of our available-for-sale securities. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale Mortgage-Related Securities” for additional information on our impairments.

We recorded gains (losses) on trading securities of $(364) million and $(1.2) billion during the three and nine months ended September 30, 2012, respectively, compared to $(525) million and $(503) million during the three and nine months ended September 30, 2011, respectively. The increase in losses on trading securities during the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011, was primarily due to the movement of securities with unrealized gains towards maturity, partially offset by the increase in the fair value of our trading securities as a result of the decline in interest rates. In addition, a widening of OAS levels on principal-only and certain other agency securities contributed to losses recognized during the three months ended September 30, 2011.

While derivatives are an important aspect of our strategy to manage interest-rate risk, they generally increase the volatility of reported Segment Earnings, because while fair value changes in derivatives affect Segment Earnings, fair value changes in several of the types of assets and liabilities being hedged do not affect Segment Earnings. We recorded derivative gains (losses) for this segment of $557 million and $993 million during the three and nine months ended September 30, 2012, respectively, compared to $(3.1) billion and $(4.2) billion during the three and nine months ended September 30, 2011, respectively. During the three and nine months ended September 30, 2012 and 2011, we recognized fair value losses on our pay-fixed swaps, which were more than offset by: (a) fair value gains on our receive-fixed swaps; and (b) fair value gains on our option-based derivatives, primarily related to our purchased call swaptions due to a decline in interest rates. During the three and nine months ended September 30, 2012, the effect of the decline in interest rates was partially mitigated by a change in the mix of our derivatives portfolio, whereby we increased our holdings of receive-fixed swaps relative to


		28		Freddie Mac

pay-fixed swaps as we rebalanced our portfolio during a period of steadily declining interest rates and increased our issuances of debt with longer-term maturities. In addition, during the three and nine months ended September 30, 2012 we also recognized gains on other derivative transactions, such as commitments to purchase mortgage loans. See “Non-Interest Income (Loss) — Derivative Gains (Losses)” for additional information on our derivatives.

Other non-interest income (loss) for this segment was $494 million and $1.7 billion during the three and nine months ended September 30, 2012, respectively, compared to $345 million and $702 million during the three and nine months ended September 30, 2011, respectively. The improvement in other non-interest income was primarily due to an increase in amortization income related to premiums on debt securities of consolidated trusts held by third parties. This amortization income increased due to additional prepayments on the debt securities of consolidated trusts held by third parties due in part to the low interest rate environment. Basis adjustments related to these debt securities of consolidated trusts held by third parties are generated through the securitization and sale of retained mortgage loans or sales of Freddie Mac mortgage-related securities from our mortgage-related investments portfolio.

Our Investments segment’s total other comprehensive income was $2.0 billion and $2.4 billion during the three and nine months ended September 30, 2012, respectively, compared to $1.3 billion and $3.1 billion during the three and nine months ended September 30, 2011, respectively. Net unrealized losses in AOCI on our available-for-sale securities for this segment decreased by $1.9 billion and $2.1 billion during the three and nine months ended September 30, 2012, respectively. The decrease in our net unrealized losses during the three and nine months ended September 30, 2012, was primarily due to fair value gains related to the movement of non-agency mortgage-related securities with unrealized losses towards maturity and fair value gains due to the impact of the decline in interest rates. In addition, during the three months ended September 30, 2012, the impact of tightening OAS levels on our non-agency single-family mortgage-related securities decreased our net unrealized losses, while during the nine months ended September 30, 2012, the impact of widening OAS levels on these securities partially offset the fair value gains mentioned above. The changes in fair value of CMBS, excluding impacts from the changes in interest rates which are included in the Investments segment, are reflected in the Multifamily segment.

For a discussion of items that may impact our Investments segment net interest income over time, see “EXECUTIVE SUMMARY — Limits on Investment Activity and Our Mortgage-Related Investments Portfolio.”


		29		Freddie Mac

Single-Family Guarantee

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

Table 13 — Segment Earnings and Key Metrics — Single-Family Guarantee⁽ ¹⁾


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(dollars in millions)
Segment Earnings:
Net interest income (expense)	$	(61	)	$	(98	)	$	(94	)	$	(28	)
Provision for credit losses		(931	)		(4,008	)		(3,577	)		(9,178	)
Non-interest income:
Management and guarantee income		1,108			913			3,145			2,631
Other non-interest income		219			331			571			750

Total non-interest income		1,327			1,244			3,716			3,381

Non-interest expense:
Administrative expenses		(228	)		(227	)		(653	)		(670	)
REO operations income (expense)		40			(226	)		(98	)		(518	)
Other non-interest expense		(111	)		(69	)		(266	)		(241	)

Total non-interest expense		(299	)		(522	)		(1,017	)		(1,429	)

Segment adjustments⁽²⁾		(189	)		(161	)		(577	)		(489	)

Segment Earnings (loss) before income tax (expense) benefit		(153	)		(3,545	)		(1,549	)		(7,743	)
Income tax (expense) benefit		(10	)		—			(48	)		(8	)

Segment Earnings (loss), net of taxes		(163	)		(3,545	)		(1,597	)		(7,751	)
Total other comprehensive income (loss), net of taxes		1			—			(21	)		(3	)

Comprehensive income (loss)	$	(162	)	$	(3,545	)	$	(1,618	)	$	(7,754	)

Key metrics:
Balances and Volume (in billions, except rate):
Average balance of single-family credit guarantee portfolio and HFA guarantees	$	1,671		$	1,800		$	1,706		$	1,811
Issuance — Single-family credit guarantees⁽³⁾	$	107		$	68		$	318		$	226
Fixed-rate products — Percentage of purchases⁽⁴⁾		96	%		89	%		95	%		91	%
Liquidation rate — Single-family credit guarantees (annualized)⁽⁵⁾		35	%		20	%		32	%		22	%

Management and Guarantee Fee Rate (in bps, annualized):
Contractual management and guarantee fees⁽⁶⁾		15.7			13.8			14.9			13.7
Amortization of delivery fees		10.8			6.5			9.7			5.7

Segment Earnings management and guarantee income		26.5			20.3			24.6			19.4

Credit:
Serious delinquency rate, at end of period		3.37	%		3.51	%		3.37	%		3.51	%
REO inventory, at end of period (number of properties)		50,913			59,596			50,913			59,596
Single-family credit losses, in bps (annualized)⁽⁷⁾		69.8			76.3			71.8			71.9
Market:
Single-family mortgage debt outstanding (total U.S. market, in billions)⁽⁸⁾	$	10,028		$	10,224		$	10,028		$	10,224
30-year fixed mortgage rate⁽⁹⁾		3.4	%		4.0	%		3.4	%		4.0	%

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

(2)	For a description of our segment adjustments, see “NOTE 14: SEGMENT REPORTING — Segment Earnings” in our 2011 Annual Report.

(3)	Based on UPB.

(4)	Excludes Other Guarantee Transactions.

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

(6)	Results for the 2012 periods include the effect of the legislated 10 basis point increase in guarantee fees that became effective April 1, 2012.

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

(8)	Source: Federal Reserve Flow of Funds Accounts of the United States of America dated September 20, 2012. The outstanding amount for September 30, 2012 reflects the balance as of June 30, 2012.

(9)

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

Segment Earnings (loss) for our Single-family Guarantee segment improved to $(0.2) billion and $(1.6) billion for the three and nine months ended September 30, 2012, respectively, compared to $(3.5) billion and $(7.8) billion for the three and nine months ended September 30, 2011, respectively, primarily due to a decline in Segment Earnings provision for credit losses.


		30		Freddie Mac

The table below provides summary information about the composition of Segment Earnings (loss) for this segment for the nine months ended September 30, 2012 and 2011.

Table 14 — Segment Earnings Composition — Single-Family Guarantee Segment


	Nine Months Ended September 30, 2012
	Segment Earnings Management and Guarantee Income⁽¹⁾				Credit Expenses⁽²⁾
	Amount		Average Rate⁽³⁾		Amount			Average Rate⁽³⁾		Net Amount⁽⁴⁾
	(dollars in millions, rates in bps)
Year of origination:⁽⁵⁾
2012	$	245		23.0	$	(78	)		6.6	$	167
2011		566		27.3		(174	)		8.5		392
2010		582		27.9		(255	)		11.8		327
2009		562		28.5		(211	)		10.7		351
2008		253		26.9		(176	)		23.6		77
2007		238		19.7		(1,161	)		107.8		(923	)
2006		151		19.5		(767	)		95.9		(616	)
2005		174		19.7		(743	)		81.5		(569	)
2004 and prior		374		20.8		(110	)		5.6		264

Total	$	3,145		24.6	$	(3,675	)		28.6	$	(530	)

Administrative expenses											(653	)
Net interest income (expense)											(94	)
Other non-interest income and expenses, net											(320	)

Segment Earnings (loss), net of taxes										$	(1,597	)


	Nine Months Ended September 30, 2011
	Segment Earnings Management and Guarantee Income⁽¹⁾				Credit Expenses⁽²⁾
	Amount		Average Rate⁽³⁾		Amount			Average Rate⁽³⁾		Net Amount⁽⁴⁾
	(dollars in millions, rates in bps)
Year of origination:⁽⁵⁾
2011	$	202		19.9	$	(45	)		5.7	$	157
2010		555		21.2		(220	)		8.1		335
2009		498		18.7		(256	)		9.3		242
2008		292		23.1		(870	)		82.7		(578	)
2007		283		18.6		(3,354	)		239.2		(3,071	)
2006		172		17.4		(2,606	)		249.2		(2,434	)
2005		194		17.1		(1,617	)		135.0		(1,423	)
2004 and prior		435		18.3		(728	)		27.7		(293	)

Total	$	2,631		19.4	$	(9,696	)		71.4	$	(7,065	)

Administrative expenses											(670	)
Net interest income (expense)											(28	)
Other non-interest income and expenses, net											12

Segment Earnings (loss), net of taxes										$	(7,751	)

(1)	Includes amortization of delivery fees of $1.2 billion and $769 million for the nine months ended September 30, 2012 and 2011, respectively.

(2)

Consists of the aggregate of the Segment Earnings provision for credit losses and Segment Earnings REO operations expense. Historical rates of average credit expenses may not be representative of future results. In the first quarter of 2012, we enhanced our method of allocating credit expenses by loan origination year. Prior period amounts have been revised to conform to the current period presentation.

(3)

Calculated as the annualized amount of Segment Earnings management and guarantee income or credit expenses, respectively, divided by the sum of the average carrying values of the single-family credit guarantee portfolio and the average balance of our single-family HFA initiative guarantees. Segment Earnings management and guarantee income and average rate for the nine months ended September 30, 2012 include the effect of the legislated 10 basis point increase in guarantee fees that became effective April 1, 2012.

(4)	Calculated as Segment Earnings management and guarantee income less credit expenses.

(5)	Segment Earnings management and guarantee income is presented by year of guarantee origination, whereas credit expenses are presented based on year of loan origination.

As of September 30, 2012, loans originated after 2008 have, on a cumulative basis, provided management and guarantee income that has exceeded the credit-related and administrative expenses associated with these loans. We currently believe our management and guarantee fee rates for guarantee issuances after 2008, when coupled with the higher credit quality of the mortgages within these new guarantee issuances, will provide management and guarantee fee income (excluding the amounts associated with the Temporary Payroll Tax Cut Continuation Act of 2011), over the long term, that exceeds our expected credit-related and administrative expenses associated with the underlying loans. Nevertheless, various factors, such as continued high unemployment rates, future declines in home prices, or negative impacts of HARP loans (which may not


		31		Freddie Mac

perform as well as other refinance mortgages, due in part to the high LTV ratios of the loans), could require us to incur expenses on these loans beyond our current expectations.

Based on our historical experience, we expect that the performance of the loans in an individual origination year will vary over time. The aggregate UPB of the loans from an origination year will decline over time due to repayments, refinancing, and other liquidation events, resulting in declining management and guarantee fee income from the loans in that origination year in future periods. In addition, we expect that the credit-related expenses related to the remaining loans in the origination year will increase over time, as some borrowers experience financial difficulties and default on their loans. As a result, there will likely be periods when an origination year is not profitable, though it may remain profitable on a cumulative basis.

Our management and guarantee income associated with guarantee issuances in 2005 through 2008 has not been adequate to cover the credit and administrative expenses associated with such loans, on a cumulative basis, primarily due to the high rate of defaults on the loans originated in those years coupled with the high volume of refinancing of these loans that has occurred since 2008. High levels of refinancing and delinquency since 2008 have significantly reduced the balance of performing loans from those years that remain in our portfolio and consequently reduced management and guarantee income associated with loans originated in 2005 through 2008 (we do not recognize Segment Earnings management and guarantee income on non-accrual mortgage loans). We also believe that the management and guarantee fees associated with originations after 2008 will not be sufficient to offset the future expenses associated with our 2005 to 2008 guarantee issuances for the foreseeable future. Consequently, we will likely report a net loss for the Single-family Guarantee segment for the full-year of 2012.

Segment Earnings management and guarantee income increased during the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011, respectively, primarily due to an increase in amortization of delivery fees. This was driven by a higher volume of delivery fees in recent periods and a lower interest rate environment during the nine months ended September 30, 2012, which increased refinance activity.

Effective April 1, 2012, at the direction of FHFA, we increased the guarantee fee on single-family residential mortgages sold to Freddie Mac by 10 basis points. Under the Temporary Payroll Tax Cut Continuation Act of 2011, the proceeds from this legislated increase are being remitted to Treasury to fund the payroll tax cut. We pay such fees to Treasury on a quarterly basis. The receipt of these fees is recognized within Segment Earnings management and guarantee income, and the remittance of these fees to Treasury is reported in Segment Earnings non-interest expense. We recognized $34 million of expense in the third quarter of 2012 (and a similar amount of income) associated with the legislated 10 basis point increase to single-family guarantee fees. While we expect these fees to become significant over time, the effect of the legislated 10 basis point increase was not significant to the average rate of our aggregate Segment Earnings management and guarantee income in the third quarter of 2012. As of September 30, 2012, there were approximately 919,000 loans totaling $189.0 billion in UPB in our single-family credit guarantee portfolio that are subject to the 10 basis point increase in guarantee fees associated with this legislation.

In August 2012, FHFA announced that it has directed us and Fannie Mae to further increase our guarantee fees on single-family mortgages sold to us by an average of 10 basis points. The announcement stated that the changes to the guarantee fee pricing represent a step toward encouraging greater participation in the mortgage market by private firms. For commitments on mortgage loans we purchase in cash transactions, the increase was effective starting November 1, 2012. For settlements of mortgage loans exchanged for mortgage-related securities, the increase will be effective December 1, 2012. FHFA stated that these changes to our guarantee fees are also intended to reduce disparities in fee pricing based on customer size, loan term, and certain other factors. In September 2012, FHFA also requested public comment on a proposed approach under which we and Fannie Mae would adjust the guarantee fees charged on single-family mortgages in states where costs related to foreclosure practices are statistically higher than the national average. FHFA stated that it expects to direct us and Fannie Mae to implement these pricing adjustments in 2013.

The UPB of the Single-family Guarantee managed loan portfolio was $1.6 trillion and $1.7 trillion at September 30, 2012 and December 31, 2011, respectively. The annualized liquidation rate on our securitized single-family credit guarantees was approximately 35% and 32% for the three and nine months ended September 30, 2012, respectively, and remained high in the third quarter of 2012 due to recent declines in interest rates and, to a lesser extent, the impact of the expanded HARP initiative, that resulted in significant refinancing activity. Refinance activity also resulted in an increase in our guarantee issuances from $226 billion in the nine months ended September 30, 2011 to $318 billion in the nine months ended


		32		Freddie Mac

September 30, 2012. However, we expect the size of our Single-family Guarantee managed loan portfolio will continue to decline during the remainder of 2012.

Refinance volumes represented 79% and 82% of our single-family mortgage purchase volume during the three and nine months ended September 30, 2012, respectively, compared to 67% and 75% of our single-family mortgage purchase volume during the three and nine months ended September 30, 2011, respectively, based on UPB. Relief refinance mortgages comprised approximately 37% and 35% of our total refinance volume during the nine months ended September 30, 2012 and 2011, respectively. Over time, relief refinance mortgages with LTV ratios above 80% (i.e., HARP loans) may not perform as well as other refinance mortgages because the continued high LTV ratios of these loans increase the probability of default. Based on our historical experience, there is an increase in borrower default risk as LTV ratios increase, particularly for loans with LTV ratios above 80%. In addition, HARP loans may not be covered by mortgage insurance for the full excess of their UPB over 80%. Approximately 22% and 13% of our single-family purchase volume in the nine months ended September 30, 2012 and 2011, respectively, were HARP loans. For more information about HARP loans and our relief refinance mortgage initiative, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk — Single-Family Loan Workouts and the MHA Program.”

The credit quality of the single-family loans we acquired beginning in 2009 (excluding HARP loans and other relief refinance mortgages) is significantly better than that of loans we acquired from 2005 through 2008, as measured by original LTV ratios, FICO scores, and the proportion of loans underwritten with fully documented income. HARP loans represented 9% of the UPB of our single-family credit guarantee portfolio as of September 30, 2012. Including HARP loans, mortgages originated after 2008 represent 60% of the UPB of our single-family credit guarantee portfolio as of September 30, 2012, and their composition of that portfolio continues to grow. Relief refinance mortgages of all LTV ratios comprised approximately 16% and 11% of the UPB in our total single-family credit guarantee portfolio at September 30, 2012 and December 31, 2011, respectively.

Provision for credit losses for the Single-family Guarantee segment declined to $0.9 billion and $3.6 billion for the three and nine months ended September 30, 2012, respectively, compared to $4.0 billion and $9.2 billion for the three and nine months ended September 30, 2011, respectively The decrease in Segment Earnings provision for credit losses for the three and nine months ended September 30, 2012 compared to the respective periods in 2011 primarily reflects declines in the volume of new seriously delinquent loans (largely due to a decline in the size of our single-family credit guarantee portfolio originated in 2005 through 2008), and lower estimates of incurred loss due to the positive impact of an increase in national home prices. Segment Earnings provision for credit losses in the third quarter of 2012 also includes approximately $0.2 billion related to the classification of single-family loans discharged in Chapter 7 bankruptcy as TDRs. Prior to the third quarter of 2012, we did not classify loans discharged in Chapter 7 bankruptcy as TDRs (unless they were already classified as such for other reasons) and we measured those loans collectively for impairment. In the third quarter of 2012, we classified all such loans as TDRs and measured them for impairment on an individual basis. This change represents the correction of an error that was not material to our previously reported financial statements. At September 30, 2012, the majority of these loans were not seriously delinquent and, in many cases, the borrower was continuing to make timely payments. The Segment Earnings provision for credit losses in the third quarter of 2011 reflected a decline in the volume of early stage delinquencies and seriously delinquent loans, while the provision for credit losses in the nine months ended September 30, 2011 compared to 2010 reflected declines in the rate at which delinquent loans transition into serious delinquency. See “Table 3 — Credit Statistics, Single-Family Credit Guarantee Portfolio” for certain quarterly credit statistics for our single-family credit guarantee portfolio.

Single-family credit losses as a percentage of the average balance of the single-family credit guarantee portfolio and HFA-related guarantees were 72 basis points for both the nine months ended September 30, 2012 and 2011. Charge-offs, net of recoveries, associated with single-family loans were $9.1 billion and $9.3 billion in the nine months ended September 30, 2012 and 2011, respectively. See “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Single-Family Mortgage Credit Risk” for further information on our single-family credit guarantee portfolio, including credit performance, charge-offs, and our non-performing assets.

The serious delinquency rate on our single-family credit guarantee portfolio was 3.37% and 3.58% as of September 30, 2012 and December 31, 2011, respectively, and declined during the nine months ended September 30, 2012 primarily due to a slowdown in new serious delinquencies, and the impact of our loss mitigation efforts, including short sales. Our serious delinquency rate remains high compared to the rates we experienced in years prior to 2009, due to the continued weakness in home prices, persistently high unemployment, extended foreclosure timelines, and continued challenges faced by servicers in


		33		Freddie Mac

processing large volumes of problem loans including adjusting their processes to accommodate changes in servicing standards, such as those dictated by legislative or regulatory authorities. In addition, our serious delinquency rate was higher than it otherwise would have been due to the decline in the size of our single-family credit guarantee portfolio during the nine months ended September 30, 2012 because this rate is calculated on a smaller number of loans at the end of the period.

REO operations income (expense) for the Single-family Guarantee segment was $40 million for the third quarter of 2012, as compared to $(226) million during the third quarter of 2011 and $(98) million in the nine months ended September 30, 2012 compared to $(518) million for the nine months ended September 30, 2011. The decline in expense for the 2012 periods was primarily due to improving home prices in certain geographical areas with significant REO activity, which resulted in gains on disposition of properties as well as lower write-downs of single-family REO inventory. Recoveries on REO properties also declined during the three and nine months ended September 30, 2012, compared to the same periods of 2011. Lower recoveries on REO properties were primarily due to lower REO disposition volume, reduced recoveries from mortgage insurers, and a decline in reimbursements of losses from seller/servicers associated with repurchase requests.

Our REO inventory (measured in number of properties) declined 16% from December 31, 2011 to September 30, 2012 as the volume of single-family REO dispositions exceeded the volume of single-family REO acquisitions. Although there was an improvement in REO disposition severity during the nine months ended September 30, 2012, the REO disposition severity ratios on sales of our REO inventory remain high as compared to periods before 2008. Likewise, the cumulative declines in property values have negatively impacted the proceeds and loss severity associated with our short sale transactions. We believe the volume of our single-family REO acquisitions during the nine months ended September 30, 2012 was less than it otherwise would have been due to: (a) the length of the foreclosure process, particularly in states that require a judicial foreclosure process; and (b) resource constraints on foreclosure activities for five larger servicers involved in a recent settlement with a coalition of state attorneys general and federal agencies. In addition, our loss mitigation efforts, including short sales, are affecting our REO acquisition volumes. As a result of these efforts, fewer loans are being resolved through foreclosure and subsequent REO sales.


		34		Freddie Mac

Multifamily

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

Table 15 — Segment Earnings and Key Metrics — Multifamily⁽¹⁾


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(dollars in millions)
Segment Earnings:
Net interest income	$	334		$	314		$	982		$	897
(Provision) benefit for credit losses		40			37			81			110
Non-interest income (loss):
Management and guarantee income		38			32			107			90
Net impairment of available-for-sale securities recognized in earnings		(29	)		(27	)		(64	)		(344	)
Gains (losses) on sale of mortgage loans		110			46			202			286
Gains (losses) on mortgage loans recorded at fair value		205			(142	)		326			(123	)
Other non-interest income (loss)		77			12			305			55

Total non-interest income (loss)		401			(79	)		876			(36	)

Non-interest expense:
Administrative expenses		(63	)		(57	)		(176	)		(163	)
REO operations income (expense)		9			5			6			13
Other non-interest expense		(9	)		(15	)		(107	)		(56	)

Total non-interest expense		(63	)		(67	)		(277	)		(206	)

Segment Earnings before income tax benefit (expense)		712			205			1,662			765
Income tax benefit (expense)		(2	)		—			(10	)		(1	)

Segment Earnings, net of taxes		710			205			1,652			764
Total other comprehensive income (loss), net of taxes		686			(1,301	)		1,430			46

Comprehensive income	$	1,396		$	(1,096	)	$	3,082		$	810

Key metrics:
Balances and Volume:
Average balance of Multifamily loan portfolio	$	80,627		$	82,128		$	81,665		$	83,875
Average balance of Multifamily guarantee portfolio	$	45,060		$	31,283		$	41,024		$	28,566
Average balance of Multifamily investment securities portfolio	$	53,989		$	60,868		$	55,926		$	61,873
Multifamily new loan purchase and other guarantee commitment volume	$	6,810		$	4,888		$	19,222		$	12,449
Multifamily units financed from new volume activity		109,080			80,929			302,474			207,821
Multifamily Other Guarantee Transaction issuance	$	3,239		$	2,096		$	11,687		$	8,688
Yield and Rate:
Net interest yield — Segment Earnings basis (annualized)		0.99	%		0.87	%		0.95	%		0.82	%
Average Management and guarantee fee rate, in bps (annualized)⁽²⁾		34.1			41.5			36.2			43.5
Credit:
Delinquency rate:
Credit-enhanced loans, at period end		0.45	%		0.77	%		0.45	%		0.77	%
Non-credit-enhanced loans, at period end		0.18	%		0.18	%		0.18	%		0.18	%
Total delinquency rate, at period end⁽³⁾		0.27	%		0.33	%		0.27	%		0.33	%
Allowance for loan losses and reserve for guarantee losses, at period end	$	453		$	656		$	453		$	656
Allowance for loan losses and reserve for guarantee losses, in bps		35.8			57.6			35.8			57.6
Credit losses (gains), in bps (annualized)⁽⁴⁾		(1.7	)		4.0			0.6			5.3
REO inventory, at net carrying value	$	43		$	91		$	43		$	91
REO inventory, at period end (number of properties)		6			20			6			20

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

(2)

Represents Multifamily Segment Earnings — management and guarantee income, excluding prepayment and certain other fees, divided by the sum of the average balance of the multifamily guarantee portfolio and the average balance of guarantees associated with the HFA initiative, excluding certain bonds under the NIBP.

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

(4)	Calculated as the amount of multifamily credit losses divided by the sum of the average carrying value of our multifamily loan portfolio and the average balance of the multifamily guarantee portfolio, including multifamily HFA initiative guarantees.

Segment Earnings for our Multifamily segment increased to $0.7 billion and $1.7 billion for the three and nine months ended September 30, 2012, respectively, compared to $0.2 billion and $0.8 billion for the three and nine months ended September 30, 2011, respectively. The improvements in the 2012 periods were primarily due to increased gains on mortgage loans recorded at fair value in the three and nine months ended September 30, 2012 compared to the same periods in 2011. Segment Earnings were also higher in the nine months ended September 30, 2012 compared to the 2011 period due to lower impairments of available-for-sale securities and improvement in other non-interest income during 2012.


		35		Freddie Mac

Comprehensive income for our Multifamily segment was $1.4 billion and $3.1 billion for the three and nine months ended September 30, 2012 respectively, consisting of: (a) Segment Earnings of $0.7 billion and $1.7 billion, respectively; and (b) $0.7 billion and $1.4 billion, respectively, of total other comprehensive income (loss), which was mainly attributable to favorable changes in fair value of available-for-sale securities during the three and nine month ended September 30, 2012. This increase was driven by favorable non-interest rate-related market spread movements in 2012.

Our multifamily loan purchase and guarantee volume increased to $6.8 billion for the third quarter of 2012, compared to $4.9 billion for the third quarter of 2011, representing an increase of 39%. We expect an increase in our purchase and guarantee volumes for the full-year of 2012 when compared to 2011 levels since demand for multifamily financing remains strong as historically low interest rates combined with positive multifamily market fundamentals are encouraging borrower interest. We completed Other Guarantee Transactions of $3.2 billion and $11.7 billion in UPB of multifamily loans in the three and nine months ended September 30, 2012, respectively, as compared to $2.1 billion and $8.7 billion in the three and nine months ended September 30, 2011, respectively. The UPB of the total multifamily portfolio increased slightly to $179.5 billion at September 30, 2012 from $176.7 billion at December 31, 2011. During the first nine months of 2012, increased issuances of new guarantees were partially offset by higher liquidations of our multifamily investment securities and multifamily loan portfolios.

Segment Earnings net interest income increased by $85 million, or 9%, to $982 million, in the nine months ended September 30, 2012 from $897 million in the nine months ended September 30, 2011, primarily due to the cumulative effect of new business volumes since 2008, which have higher yields relative to allocated funding costs. Net interest yield was 95 and 82 basis points for the nine months ended September 30, 2012 and 2011, respectively.

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