fmcc-20201231
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the fiscal year ended December 31, 2020
or
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)
corporation McLean, Virginia
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
None N/A N/A
Securities registered pursuant to Section 12(g) of the Act:
Voting Common Stock, no par value per share (OTCQB: FMCC)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCI)
5% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCKK)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCG)
5.1% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCH)
5.79% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCK)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCL)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCM)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCN)
5.81% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCO)
6% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCP)
Variable Rate, Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCCJ)
5.7% Non-Cumulative Preferred Stock, par value $1.00 per share (OTCQB: FMCKP)
Variable Rate, Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCCS)
6.42% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCCT)
5.9% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKO)
5.57% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKM)
5.66% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKN)
6.02% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKL)
6.55% Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKI)
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, par value $1.00 per share (OTCQB: FMCKJ)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐No☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐No☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. ☒Yes☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒Yes
☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Emerging growth company ☐
Non-accelerated filer ☐ Smaller reporting company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common stock held by non-affiliates computed by reference to the price at which the common stock was last sold on June 30, 2020 (the last business day of the registrant's most recently completed second fiscal quarter) was $1.4 billion.
As of January 29, 2021, there were 650,059,292 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
Table of Contents
Table of Contents
INTRODUCTION 1
n About Freddie Mac 1
n Our Business 11
n Forward-Looking Statements 15
n Market Conditions and Economic Indicators 17
n Consolidated Results of Operations 22
n Consolidated Balance Sheets Analysis 34
n Our Business Segments 35
n Risk Management 73
l Credit Risk 76
l Operational Risk 118
l Market Risk 121
n Liquidity and Capital Resources 127
n Conservatorship and Related Matters 140
n Regulation and Supervision 146
n Critical Accounting Policies and Estimates 153
RISK FACTORS 155
LEGAL PROCEEDINGS 170
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 172
CONTROLS AND PROCEDURES 282
DIRECTORS, CORPORATE GOVERNANCE, AND EXECUTIVE OFFICERS 284
n Corporate Governance 290
n Executive Officers 298
EXECUTIVE COMPENSATION 300
n Compensation Discussion and Analysis 300
n Compensation and Risk 314
n CEO Pay Ratio 315
n 2020 Compensation Information for NEOs 316
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 325
PRINCIPAL ACCOUNTING FEES AND SERVICES 327
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 329
EXHIBIT INDEX 339
Table of Contents MD&A Table Index
MD&A TABLE INDEX
Table Description Page
1 Summary of Consolidated Statements of Comprehensive Income (Loss) 22
2 Components of Net Interest Income 24
3 Analysis of Net Interest Yield 26
4 Net Interest Income Rate / Volume Analysis 27
5 Components of Guarantee Fee Income 28
6 Components of Investment Gains (Losses), Net 28
7 Components of Mortgage Loans Gains (Losses) 29
8 Components of Investment Securities Gains (Losses) 29
9 Components of Debt Gains (Losses) 30
10 Components of Derivative Gains (Losses) 31
11 Components of Benefit (Provision) for Credit Losses 32
12 Summarized Consolidated Balance Sheets 34
13 Single-Family Guarantee Segment Financial Results 51
14 Multifamily Portfolio and Market Support 60
15 Multifamily Segment Financial Results 63
16 Capital Markets Segment Financial Results 71
18 Single-Family New Business Activity 80
19 Single-Family Credit Guarantee Portfolio CRT Issuance 81
22 Credit Enhancement by Year of Origination 83
23 Single-Family Credit Guarantee Portfolio Without Credit Enhancement 84
24 Details of Single-Family Credit Enhancement Expenses and Recoveries 85
25 Single-Family Credit Enhancement Receivables 85
26 Credit Quality Characteristics of Our Single-Family Loans in Forbearance 86
27 Single-Family Loans in Forbearance by Payment Status 86
28 Single-Family Loans in Forbearance 87
29 Status of Single-Family Loans That Received Forbearance 87
30 Single-Family Allowance for Credit Losses Activity 88
31 Single-Family Credit Guarantee Portfolio Performance Metrics 89
32 Credit Characteristics of Certain Single-Family Loan Categories 89
33 Single-Family TDR and Non-Accrual Loans 90
34 Single-Family TDR Loan Activity 91
37 Single-Family Credit Guarantee Portfolio Higher Risk Loan Data 96
38 Single-Family Credit Guarantee Portfolio Attribute Combinations 96
39 Higher Risk Single-Family Loan Credit Characteristics 97
40 Timing of Scheduled Payment Changes for Certain Single-Family Loan Types 98
41 Alt-A Loans in Our Single Family Credit Guarantee Portfolio 99
43 Single-Family Relief Refinance Loans 100
44 Credit Characteristics of Single-Family Modified Loans 102
45 Payment Performance of Single-Family Modified Loans 102
FREDDIE MAC | 2020 Form 10-K ii
Table of Contents MD&A Table Index
Table Description Page
46 Seriously Delinquent Single-Family Loans by Jurisdiction 103
47 Average Length of Foreclosure Process for Single-Family Loans 103
48 Single-Family REO Activity 104
49 Single-Family Severity Ratios 104
50 Multifamily New Business Activity Key Risk Characteristics 106
51 Current Credit Quality of Multifamily Loans Under a Forbearance Program 107
52 Multifamily Allowance for Credit Losses Activity 108
54 Level of Subordination Outstanding 109
56 Single-Family Credit Guarantee Portfolio Non-Depository Servicers 112
57 Single-Family Mortgage Insurers 113
58 Single-Family ACIS Counterparties 114
59 Derivative Counterparty Credit Exposure 116
60 PVS-YC and PVS-L Results Assuming Shifts of the LIBOR Yield Curve 123
61 Duration Gap and PVS Results 123
62 PVS-L Results Before Derivatives and After Derivatives 123
63 Earnings Sensitivity to Changes in Interest Rates 125
65 Other Investments Portfolio 129
67 Debt of Freddie Mac Activity 131
69 Activity for Debt Securities of Consolidated Trusts Held by Third Parties 135
70 Debt Securities of Consolidated Trusts Held by Third Parties 135
71 Freddie Mac Credit Ratings 135
73 Mortgage-Related Investments Portfolio Details 143
76 Forecasted House Price Growth Rates 153
77 Board Compensation Levels 296
78 Director Compensation 296
82 Compensation Summary 316
83 Grants of Plan-Based Awards 317
84 SERP and SERP II Benefits 318
86 Stock Ownership by Directors and Executive Officers 323
87 Stock Ownership by Greater Than 5% Holders 324
FREDDIE MAC | 2020 Form 10-K iii
Introduction About Freddie Mac
Introduction
This Annual Report on Form 10-K includes forward-looking statements that are based on current expectations, including with respect to the effects the COVID-19 pandemic and the actions taken in response may have on our liquidity, business activities, financial condition, and results of operations, and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-K. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-K. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in theForward-Looking Statements and Risk Factors sections of this Form 10-K.
Throughout this Form 10-K, we use certain acronyms and terms that are defined in the Glossary.
ABOUT FREDDIE MAC
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability, and affordability to the U.S. housing market. We do this primarily by purchasing residential mortgage loans originated by lenders. In most instances, we package these loans into guaranteed mortgage-related securities, which are sold in the global capital markets, and transfer interest-rate and liquidity risks to third-party investors. In addition, we transfer mortgage credit risk exposure to third-party investors through our credit risk transfer programs, which include securities- and insurance-based offerings. We also invest in mortgage loans and mortgage-related securities. We do not originate loans or lend money directly to mortgage borrowers.
We support the U.S. housing market and the overall economy by enabling America's families to access mortgage loan funding with better terms and by providing consistent liquidity to the multifamily mortgage market. We have helped many distressed borrowers keep their homes or avoid foreclosure and have helped many distressed renters avoid eviction. We are working with FHFA, our customers, and the industry to build a better housing finance system for the nation.
COVID-19 Pandemic Response Efforts
Late in 2019, a novel coronavirus disease, later named COVID-19, was detected. The outbreak of COVID-19 was declared a pandemic by the World Health Organization on March 11, 2020. The COVID-19 pandemic was declared a national emergency in the United States on March 13, 2020 and continued to evolve throughout 2020 and into 2021, both globally and domestically, with significant adverse effects on populations and economies.
We have remained focused on serving our mission and the crucial role we play in the U.S. housing finance system while supporting the health and safety of our communities, customers, and staff. We continue to actively monitor the situation and make decisions based on guidance from national, state, and local governments and public health authorities, including the U.S. CDC. Our Crisis Management Team (CMT), consisting of representatives from across the company, meets regularly, closely monitoring the situation, and providing frequent updates to our Board of Directors and staff. We continue to take actions in line with guidance from national and state governments and public health authorities to maintain business continuity. In March 2020, we required more than 95% of our staff to work remotely. While a small number of staff voluntarily returned to the office in 4Q 2020, more than 95% of our staff continued to work remotely as of December 31, 2020.
In addition to these actions, we have been engaging with FHFA and third parties to maintain continuity of critical business activities that will allow us to serve our mission and support the U.S. housing finance system during this pandemic.
Providing Assistance to Homeowners and Supporting the Single-Family Mortgage Market
We have taken actions to help homeowners with Freddie Mac-owned mortgages who are directly or indirectly affected by the COVID-19 pandemic stay in their homes during this challenging time. We have announced a number of mortgage-relief options for borrowers affected by the COVID-19 pandemic, including providing up to 12 months of mortgage forbearance during which a borrower’s payments are temporarily reduced or suspended. Under FHFA's guidance, we are extending COVID-19 forbearances up to 15 months for eligible borrowers, and this forbearance term may be further extended by FHFA in the future. We have also established a foreclosure and eviction moratorium for homeowners with Freddie Mac-owned single-family mortgages, which FHFA recently instructed us to extend until at least March 31, 2021. In addition, we have introduced a number of temporary measures to help provide sellers with the clarity and flexibility to continue to lend in a prudent and responsible manner and to expedite loan closings and help keep homebuyers, sellers, and other critical participants in the mortgage process safe during the COVID-19 pandemic. For additional information on these temporary measures, see MD&A - Risk Management- Single-Family Mortgage Credit Risk.
As of December 31, 2020, 2.70% of loans in our single-family credit guarantee portfolio, based on loan count, were in forbearance, including loans where the borrower has continued to make payments in accordance with the loan's original contractual terms and remains in current status. All information included in this Form 10-K related to single-family loans in forbearance is based on information reported to us by our servicers. Beginning in 4Q 2020, we required single-family servicers
Introduction About Freddie Mac
to report to us all alternatives to foreclosure, which include forbearance plans on all mortgages, including those where the borrower has continued to make payments in accordance with the loan's original contractual terms and remains in current status. The forbearance data we reported in prior periods was generally limited to loans in forbearance that were past due based on the loan’s original contractual terms. For the purpose of reporting delinquency rates, we report single-family loans in forbearance as delinquent during the forbearance period to the extent that payments are past due based on the loan's original contractual terms, irrespective of the forbearance plan. For additional information on our support of the single-family mortgage market during the COVID-19 pandemic, see MD&A - Risk Management- Single-Family Mortgage Credit Risk.
Providing Assistance to Renters and Multifamily Borrowers and Supporting the Multifamily Mortgage Market
We have also provided support to the multifamily mortgage market, including by offering multifamily borrowers mortgage forbearance with the condition that they suspend all evictions during the forbearance period for renters unable to pay rent. Under our forbearance program, which is based on our existing natural disaster response program, multifamily borrowers with a fully performing loan as of February 1, 2020 can defer their loan payments for up to 90 days by showing hardship as a consequence of the COVID-19 pandemic and by gaining lender approval. In June 2020, in coordination with FHFA, we announced several supplemental forbearance relief options that lenders may use to assist borrowers who have a forbearance plan in place and continue to be materially affected by the COVID-19 pandemic. These supplemental relief options added to the original renter protections by providing flexibility to renters to repay past due rent over time and not in a lump sum, and extended the prohibition on charging renters fees and penalties for past due rent through both the forbearance and repayment periods. In December 2020, we extended the deadline to March 31, 2021 for borrowers whose loans have not been more than 30 days past due to request a new COVID-19 forbearance agreement or supplemental relief. The forbearance program was initially set to terminate at the end of 2020.
As of December 31, 2020, 2.01% of the loans in our multifamily mortgage portfolio, based on UPB, were enrolled in our forbearance program, approximately 95% of which were in their repayment period. Approximately 82% of the total loans in our forbearance program are included in securitizations with first loss credit protection provided by subordination, which reduces our credit risk exposure to those loans. We report multifamily loans in forbearance as current as long as the borrowers are in compliance with the forbearance agreement, including the agreed upon repayment plan. Loans in forbearance are therefore not included in our multifamily delinquency rates if the borrowers are in compliance with their forbearance agreement. For additional information on our support of the multifamily mortgage market during the COVID-19 pandemic, see MD&A - Risk Management- Multifamily Mortgage Credit Risk.
Business Outlook
We expect the COVID-19 pandemic to have an adverse effect on our business in 2021, and perhaps beyond. The duration and continued severity of the COVID-19 pandemic will determine the extent of the effect on our business. The impact the pandemic has had on the economy is unprecedented, and as a result, our economic and business forecasts are more uncertain than usual, and there are significant downside risks.
After the sharp decline in economic conditions seen in the first half of 2020, the economy rebounded during the second half of the year, although recent data indicates the recovery may be stalling. The housing market, however, is one segment of the economy that overall has performed well during the COVID-19 pandemic, with mortgage refinance originations increasing significantly during 2020 as many homeowners took advantage of historically low mortgage interest rates. We expect the low mortgage interest rate environment to continue through 2021 and 2022 as the Federal Reserve stated that it intends to keep interest rates low for an extended period of time. Low interest rates and the ability for many to work remotely have driven home sales to levels not seen since 2006. We expect total annual sales to remain strong in 2021 with only a modest decline in 2022. Unsold home inventory has hit an all-time low due to the increase in home sales, which in turn has driven increased house prices, although we expect house price growth to moderate in 2021 and 2022. Low mortgage interest rates, higher home sales, and increasing house prices also increased 2020 mortgage originations. We expect mortgage originations to decline in 2021 and decrease further in 2022.
Both supply and demand for rental housing will be affected over the next year or two due to the COVID-19 pandemic. However, a $900 billion stimulus package was enacted in December 2020, with more stimulus expected in the coming months. The additional stimulus packages are expected to boost economic conditions in 2021 and help stabilize the rental market. Longer term, labor market conditions will be key to future rental market performance. At a national level, average rents declined in 2020, with rent growth performance varying by geographic market. Large markets such as San Francisco, New York, Miami, and Washington D.C. have been hardest hit, with some experiencing double-digit rent declines; however, rent continues to grow in over half of the U.S. markets tracked. Apartment prices have held up as investors continue to believe there is a need for additional rental housing in the U.S., both during and after the pandemic, and the investment environment remains attractive because of low interest rates.After an initial surge in forbearance requests by borrowers, peaking in July 2020, the number of multifamily properties in forbearance has declined slightly over the past several months. While these loans are not considered delinquent, they are an indication of stress in the market. For additional information on market and macroeconomic indicators that can affect our multifamily business and financial results, see MD&A - Market Conditions and Economic Indicators.
Our single-family allowance for credit losses increased significantly during 2020. We expect single-family serious delinquency rates and the volume of loss mitigation activity to remain elevated as a result of the COVID-19 pandemic and the forbearance
Introduction About Freddie Mac
programs and foreclosure and eviction moratoriums we have announced. While we expect that the actions we have taken to support the mortgage markets as a result of the COVID-19 pandemic will improve borrower outcomes, these actions may not be as successful as we expect. In addition, these actions may continue to negatively affect our financial condition and results of operations, perhaps significantly. The ultimate success of these programs will depend on the duration and severity of the economic downturn. For additional information, see MD&A - Risk Management- Credit Risk.
After falling sharply in 2Q 2020 due to the effects of the COVID-19 pandemic, single-family CRT issuance resumed during 3Q 2020 with solid investor demand and subscription levels. However, the COVID-19 pandemic continues to impose uncertainties and may continue to impact our transactions going forward. We continue to evaluate our CRT strategy and make changes depending on market conditions, including the significant market volatility caused by the COVID-19 pandemic, and our business strategy. The ERCF specifies substantial capital requirements and could affect our CRT strategy, perhaps significantly. In addition, our risk appetite limits are governed by FHFA and these limits may lead us to take actions to comply with these limits, including continued execution of CRT transactions. For additional information on the ERCF, see Introduction - About Freddie Mac -FHFA Enterprise Regulatory Capital Framework.
Our debt funding needs and debt funding costs may increase as we expect to advance significant amounts to cover principal and interest payments to security holders for loans in forbearance and to purchase delinquent loans from trusts after borrowers exit forbearance plans. Therefore, the less liquid assets in our mortgage-related investments portfolio are likely to increase in future periods.
Introduction About Freddie Mac
Business Results
Consolidated Financial Results
Net Revenues, Net Income, and Comprehensive Income
Total Equity as of December 31,
Key Drivers:
n2020 vs. 2019
lNet income was $7.3 billion for 2020, an increase of $0.1 billion, or 2%, from 2019. Comprehensive income was $7.5 billion for 2020, a decrease of $0.3 billion, or 3%, from 2019. The changes in net income and comprehensive income were primarily driven by higher net revenues, partially offset by higher provision for credit losses.
lNet revenues increased $2.6 billion, or 18%, compared to 2019, primarily due to higher net interest income and higher investment gains (losses), net.
lTotal equity was $16.4 billion as of December 31, 2020, up from $9.1 billion as of December 31, 2019.
lWe recognized a decrease to retained earnings of $0.2 billion upon our adoption of CECL on January 1, 2020. See Note 1 for additional information about our adoption of CECL.
n2019 vs. 2018
lNet income was $7.2 billion for 2019, a decrease of $2.0 billion, or 22%, from 2018. Comprehensive income was $7.8 billion for 2019, a decrease of $0.8 billion, or 10%, from 2018. The declines in both net income and comprehensive income were primarily due to higher costs related to transferring credit risk and investments to improve the efficiency of our business operations.
lNet revenues declined $1.5 billion, or 10%, compared to 2018, primarily due to lower investment gains (losses), net, partially offset by higher contractual net interest income on the single-family guarantee portfolio and higher income on the multifamily guarantee portfolio. The decline in net revenues was also partially offset by a $1.2 billion increase in other comprehensive income.
lTotal equity was $9.1 billion as of December 31, 2019, up from $4.5 billion as of December 31, 2018.
Introduction About Freddie Mac
Market Liquidity
Market Liquidity
We support the U.S. housing market by executing our Charter Mission to provide liquidity and help maintain credit availability for new and refinanced single-family mortgages as well as for rental housing. Despite the significant challenges presented by the COVID-19 pandemic, we provided $1.2 trillion in liquidity to the mortgage market in 2020, which enabled the financing of 4.6 million home purchases, refinancings, or rental units. Single-family refinance activity increased significantly compared to 2019, as borrowers took advantage of low mortgage interest rates during 2020.
Introduction About Freddie Mac
Portfolio Balances
Guarantee Portfolio as of December 31,
Investments Portfolio as of December 31,
nThe total guarantee portfolio grew $373 billion, or 16%, in 2020, driven by a 17% increase in our single-family credit guarantee portfolio and a 15% increase in our multifamily guarantee portfolio. The total guarantee portfolio grew $132 billion, or 6%, in 2019, driven by a 5% increase in our single-family credit guarantee portfolio and a 14% increase in our multifamily guarantee portfolio.
lThe growth in our single-family credit guarantee portfolio in 2020 was driven by an increase in U.S. single-family mortgage debt outstanding and higher new business activity. Additionally, continued house price appreciation contributed to new business acquisitions having a higher average loan size compared to older vintages that continued to run off.
lOur multifamily guarantee portfolio grew in 2020, primarily driven by increased loan purchase and securitization activity attributable to continued high demand for multifamily financing.
nOur total investments portfolio increased $29 billion, or 9%, in 2020 and $35 billion, or 12%, in 2019, primarily due to an increase in our other investments portfolio during both periods.
lThe increase in the other investments portfolio in 2020 was driven by higher loan prepayments and higher near-term cash needs for higher expected single-family cash window loan purchases, as well as our transition to comply with updated minimum liquidity requirements established by FHFA. For additional information on the updated minimum liquidity requirements, see MD&A - Liquidity and Capital Resources.
lThe increase in the other investments portfolio in 2019 was primarily driven by higher loan prepayments, higher near-term cash needs for upcoming debt maturities and anticipated calls of debt of Freddie Mac, and higher expected cash window loan purchases.
lIn February 2019, FHFA instructed us to maintain the mortgage-related investments portfolio at or below $225 billion at all times. In November 2019, FHFA instructed us to include 10% of the notional value of certain interest-only securities owned by Freddie Mac in the calculation of this portfolio. In August 2020, FHFA instructed us to further limit the amount and type of assets we hold in our mortgage-related investments portfolio. Pursuant to the January 2021 Letter Agreement, the calculation of mortgage assets subject to the Purchase Agreement cap also includes 10% of the
Introduction About Freddie Mac
notional value of interest-only securities, and at the end of 2022, the Purchase Agreement cap on our mortgage-related investments portfolio will be lowered from $250 billion to $225 billion. See MD&A - Conservatorship and Related Matters for additional information.
Credit Risk Transfer
Single-Family Credit Guarantee Portfolio with Credit Enhancement as of December 31,
Multifamily Mortgage Portfolio with Credit Enhancement as of December 31,
In addition to transferring interest-rate and liquidity risk to third-party investors through our securitization activities, we have developed CRT programs that distribute mortgage credit risk to third-party investors. Our programmatic offerings regularly transfer a portion of the credit risk primarily on recently acquired loans, with the percentage of our single-family credit guarantee portfolio and the percentage of our multifamily mortgage portfolio covered by credit enhancements at 51% and 88%, respectively, as of December 31, 2020. Credit enhancement coverage of the single-family credit guarantee portfolio decreased from December 31, 2019, primarily due to the high volume of new business activity which has not been included in CRT transactions but may be included in future periods.
For additional information, see Introduction - About Freddie Mac- COVID-19 Pandemic Response Efforts - Business Outlook. See MD&A - Our Business Segments - Single-Family Guarantee-Business Overview - Products and Activities and MD&A - Our Business Segments - Multifamily -Business Overview - Products and Activities for additional information on our credit enhancements.
New Accounting Guidance for Credit Losses on Financial Instruments
On January 1, 2020, we adopted CECL, which replaced the previous incurred loss impairment methodology with a new methodology that measures the allowance for credit losses for financial instruments at amortized cost and off-balance sheet credit exposures based on current expected credit losses. CECL also changed the methodology for accounting for credit losses on debt securities classified as available-for-sale. We recorded a cumulative-effect adjustment on January 1, 2020, to recognize the impact of adopting CECL. This adjustment reduced our opening retained earnings balance by $0.2 billion, net of income taxes. See Note 1 for additional information on our adoption of CECL. See Note 4, Note 5, Note 6, Note 7, and Note 8 for additional information on the changes in our significant accounting policies as a result of our adoption of CECL.
The adoption of CECL significantly changed how we measure credit losses on mortgage loans classified as held-for-investment and off-balance sheet credit exposures and may result in additional volatility in our credit-related expenses, as our estimate of credit losses now incorporates both our forecasts of certain future economic conditions and our expectations of credit losses over the entire contractual term of the instruments, which for many of our mortgage loans is 30 years. The length and severity
Introduction About Freddie Mac
of the economic downturn caused by the COVID-19 pandemic, and its impact on the housing market, is subject to significant uncertainty, which makes it difficult to estimate such credit losses. These developments may have a material effect on our allowance for credit losses in future periods. See Risk Management - Credit Risk and Critical Accounting Policies and Estimates for additional information.
FHFA Enterprise Regulatory Capital Framework
In November 2020, FHFA released a final rule that establishes the ERCF as a new regulatory capital framework for Freddie Mac and Fannie Mae. This final rule is substantively similar in terms of overall structure and approach to the proposed capital rule released in May 2020. The final capital rule, which will become effective on February 16, 2021, has a transition period for compliance. In general, the compliance date for the regulatory capital requirements will be the later of the date of termination of our conservatorship and any later compliance date provided in a consent order or other transition order; however, we may begin implementing the ERCF sooner, upon the direction of FHFA or otherwise. As the ERCF was not yet in effect during 2020, we continued to use the guidance issued to us by FHFA under the CCF to evaluate our transactions and businesses. We will be required to report our regulatory capital under the new framework beginning on January 1, 2022. The final capital rule specifies substantial capital requirements and could affect our business strategies, perhaps significantly. For additional information, see MD&A – Liquidity and Capital Resources and MD&A – Regulation and Supervision– Legislative and Regulatory Developments – FHFA Enterprise Regulatory Capital Framework.
Conservatorship and Government Support for Our Business
Since September 2008, we have been operating in conservatorship, with FHFA as our Conservator. The conservatorship and related matters significantly affect our management, business activities, financial condition, and results of operations. Our future is uncertain, and the conservatorship has no specified termination date. We do not know what changes may occur to our business model during or following conservatorship, including whether we will continue to exist.
In connection with our entry into conservatorship, we entered into the Purchase Agreement with Treasury, under which we issued Treasury both senior preferred stock and a warrant to purchase common stock. The senior preferred stock and warrant were issued as an initial commitment fee in consideration for Treasury's commitment to provide funding to us under the Purchase Agreement.
Our Purchase Agreement with Treasury and the terms of the senior preferred stock we issued to Treasury affect our business activities and are critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to have adequate liquidity to conduct normal business activities.
Treasury, as the holder of the senior preferred stock, is entitled to receive cumulative quarterly cash dividends, when, as, and if declared by the Conservator, acting as successor to the rights, titles, powers, and privileges of our Board of Directors. The dividends we have paid to Treasury on the senior preferred stock have been declared by, and paid at the direction of, the Conservator.
Under the August 2012 amendment to the Purchase Agreement, our cash dividend requirement each quarter is the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter, less the applicable Capital Reserve Amount, exceeds zero. From 2013 through 2017, the applicable Capital Reserve Amount decreased by $600 million each year, from $3 billion in 2013 to $600 million in 2017, limiting our ability to retain earnings and build capital. The applicable Capital Reserve Amount was then increased to $3 billion as of January 1, 2018 pursuant to the December 2017 Letter Agreement and to $20 billion as of September 30, 2019 pursuant to the September 2019 Letter Agreement. Pursuant to the January 2021 Letter Agreement, the applicable Capital Reserve Amount was further increased as of October 1, 2020 to the amount of adjusted total capital necessary to meet the capital requirements and buffers set forth in the ERCF. This increased Capital Reserve Amount will remain in effect until the last day of the second fiscal quarter during which we have reached and maintained such level of capital (the Capital Reserve End Date). As a result of the increases in the applicable Capital Reserve Amount, we have been able to retain earnings and build capital, but the increases in our Net Worth Amount from December 31, 2017 until we have built sufficient capital to meet the capital requirements and buffers set forth in the ERCF have been, or will be, added to the aggregate liquidation preference of the senior preferred stock. If for any reason we were not to pay our dividend requirement on the senior preferred stock in full in any future period until the Capital Reserve End Date, the unpaid amount would be added to the liquidation preference and the applicable Capital Reserve Amount would thereafter be zero. This would not affect our ability to draw funds from Treasury at the request of FHFA, our conservator, under the Purchase Agreement.
Beginning with the first quarter after the Capital Reserve End Date, our cash dividend requirement each quarter will be an amount equal to the lesser of (i) 10% per annum on the then-current liquidation preference of the senior preferred stock and (ii) a quarterly amount equal to the increase in the Net Worth Amount, if any, during the immediately prior fiscal quarter. If for any reason we were not to pay our dividend requirement in full in any future period after the Capital Reserve End Date, the unpaid amount would be added to the liquidation preference and immediately following such failure and for all dividend periods thereafter until the dividend period following the date on which we shall have paid in cash full cumulative dividends, the dividend amount will be 12% per annum on the then-current liquidation preference of the senior preferred stock.
Introduction About Freddie Mac
The January 2021 Letter Agreement also provides that by the Capital Reserve End Date, we and Treasury, in consultation with the Chairman of the Federal Reserve, will mutually agree on a periodic commitment fee that we will pay for Treasury's remaining funding commitment with respect to the five-year period commencing on the first January 1 after the Capital Reserve End Date.
Accordingly, after the Capital Reserve End Date, we will be able to retain further earnings and build further capital (or, with Treasury's prior written consent, pay dividends on our preferred stock, other than our senior preferred stock, or our common stock) only if and to the extent that the increase in the Net Worth Amount in any quarter, after the payment of a new periodic commitment fee to Treasury, exceeds 2.5% (10% annualized) of the then-current liquidation preference of the senior preferred stock.
The January 2021 Letter Agreement also establishes new or modified covenants which impose additional requirements for us to exit from conservatorship, including with respect to capital and the resolution of currently pending material litigation related to our conservatorship and the Purchase Agreement; allows us to issue common stock after Treasury’s exercise in full of its warrant to acquire 79.9% of our common stock and resolution of currently pending material litigation relating to our conservatorship and the Purchase Agreement and to use up to $70 billion in proceeds from such issuances to build capital; and imposes further limits on our business, including limits on our retained mortgage portfolio and indebtedness, secondary market activities, and single-family and multifamily loan acquisitions. With respect to capital, we are required to comply with the ERCF as reflected in FHFA’s recent final capital rule, disregarding any subsequent amendment or other modifications to that rule. Treasury and Freddie Mac also commit to work to restructure Treasury’s investment and dividend amount in a manner that facilitates our orderly exit from conservatorship, ensures Treasury is appropriately compensated, and permits us to raise third-party capital and make distributions as appropriate.
We continue to assess the effects of these new Purchase Agreement covenants on our business, and we are developing related business processes and controls, including with respect to monitoring and reporting.
See MD&A - Regulation and Supervision and Note 2 for additional information on our Purchase Agreement with Treasury and the January 2021 Letter Agreement.
The graphs below show, as of December 31, 2020, our net worth, the liquidation preference of the senior preferred stock, the remaining amount of Treasury's funding commitment to us, the cumulative senior preferred stock dividends we have paid to Treasury, and the cumulative funds we have drawn from Treasury pursuant to its funding commitment.
Net Worth Amount, Liquidation Preference, and
Treasury Commitment
(In billions)
Dividend Payments and Draws
(In billions)
Introduction About Freddie Mac
Pursuant to the Purchase Agreement and terms of the senior preferred stock, both as amended:
nOur Net Worth Amount was $16.4 billion as of December 31, 2020, up from $9.1 billion on December 31, 2019. As our Net Worth Amount as of December 31, 2020 was below the amount necessary to meet the capital requirements and buffers set forth in the ERCF, we will not have a dividend requirement to Treasury on the senior preferred stock for 4Q 2020, and we do not expect to have a dividend requirement on the senior preferred stock until we reach such capital levels.
nThe liquidation preference of the senior preferred stock increased from $84.1 billion on September 30, 2020 to $86.5 billion on December 31, 2020 based on the $2.4 billion increase in our Net Worth Amount during 3Q 2020, and will increase to $89.1 billion on March 31, 2021 based on the $2.5 billion increase in the Net Worth Amount during 4Q 2020.
At December 31, 2020, our assets exceeded our liabilities under GAAP; therefore, no draw is being requested from Treasury under the Purchase Agreement. As of December 31, 2020, our aggregate funding received from Treasury under the Purchase Agreement was $71.6 billion. The remaining Treasury commitment under the Purchase Agreement was $140.2 billion at December 31, 2020, and will be reduced by any future draws.
For more information on the conservatorship and government support for our business, including our dividend requirements on and increases in the liquidation preference of the senior preferred stock, see MD&A - Conservatorship and Related Matters, MD&A - Regulation and Supervision, and Note 2.
Introduction Our Business
OUR BUSINESS
Primary Business Strategies
Freddie Mac's overall strategic direction is established by management and affirmed by the Board through its approval of a strategic plan, which sets forth our primary business strategies and generally covers a three-year timeframe. FHFA, the Administration, or Congress could take actions that cause us to alter our strategic plan. FHFA, as Conservator, has influenced, and may in the future influence, our strategic direction, such as through our new initiatives, credit and pricing policies, and capital, liquidity, and risk appetite constraints.
Charter Mission
We are a GSE with a specific and limited corporate purpose (i.e., Charter Mission) to support the liquidity, stability, and affordability of the U.S. housing market as a participant in the secondary mortgage market, while operating as a commercial enterprise earning an appropriate return. Everything we do must be done within the constraints of our Charter Mission.
Our Strategic Goals
Our primary business strategies are currently focused on three strategic goals: exit conservatorship, create a world class operating platform, and become the leader in housing.
Exit Conservatorship
We seek to exit from conservatorship with an attractive, sustainable business model. We are focused on meeting or exceeding milestones set by FHFA and Treasury, including those relating to capital, remediation of deficiencies, and risk management, as well as our own internal metrics designed to facilitate our exit from conservatorship.
Create a World-Class Operating Platform
We seek to create and operate a modern, resilient, flexible, and efficient platform that allows us to better assess and manage risk, while also enabling us to best meet the needs and demands of our company, customers, business partners, and the market in a safe, sound, and efficient manner by focusing on activities such as:
nEnhancing our capability to effectively manage risk and capital through our underwriting, purchase, servicing, and credit risk distribution activities;
nIncreasing the resiliency of our infrastructure and operations;
nReducing costs for us and our customers in order to pass through savings to borrowers and renters; and
nManaging the risks and opportunities that arise from Environmental, Social, and Governance (ESG) issues in connection with executing our mission.
Become the Leader in Housing
We seek to emerge from conservatorship as the leader in housing by continuing to provide leadership through innovation and collaboration to enhance liquidity, stability, and affordability. We seek to help the housing industry better serve the needs of homebuyers and renters, particularly in the context of the current affordability challenges, including from fundamental problems related to housing supply. We intend to do so by identifying and implementing new ways to expand fair and responsible access to credit, including achieving the single-family and multifamily housing goals and Duty to Serve plan, and engaging in activities to support the UMBS.
Introduction Our Business
Our Charter
Our Charter forms the framework for our business activities. Our Charter Mission is to:
nProvide stability in the secondary mortgage market for residential loans;
nRespond appropriately to the private capital market;
nProvide ongoing assistance to the secondary mortgage market for residential loans (including activities relating to loans for low- and moderate-income families, involving a reasonable economic return that may be less than the return earned on other activities) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing; and
nPromote access to mortgage loan credit throughout the United States (including central cities, rural areas, and other underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing.
Our Charter permits us to purchase first-lien single-family loans with LTV ratios at the time of our purchase of less than or equal to 80%. Our Charter also permits us to purchase first-lien single-family loans that do not meet this criterion if we have certain specified credit protections, which include mortgage insurance from a qualified insurer on the portion of the UPB of the loan that exceeds an 80% LTV ratio, a seller's agreement to repurchase or replace a defaulted loan, or the retention by the seller of at least a 10% participation interest in the loan.
This Charter requirement does not apply to multifamily loans or to loans that have the benefit of any guarantee, insurance, or other obligation by the United States or any of its agencies or instrumentalities (e.g., the FHA, VA, or USDA Rural Development). Additionally, as part of our Enhanced Relief RefinanceSM program, we purchase single-family refinanced loans we currently own or guarantee without obtaining additional credit enhancement in excess of that already in place for any such loan, even when the LTV ratio of the new loan is above 80%.
Our Charter does not permit us to originate loans or lend money directly to mortgage borrowers in the primary mortgage market. Our Charter limits our purchase of single-family loans to the conforming loan market, which consists of loans originated with UPBs at or below limits determined annually based on changes in FHFA's housing price index. In most of the United States, the maximum conforming loan limit for a one-family residence has been set at $548,250 for 2021, an increase from $510,400 for 2020, $484,350 for 2019, $453,100 for 2018, $424,100 for 2017, and $417,000 from 2006 to 2016. Higher limits have been established in certain "high-cost" areas (for 2021, up to $822,375 for a one-family residence). Higher limits also apply to two- to four-family residences and to one- to four-family residences in Alaska, Guam, Hawaii, and the U.S. Virgin Islands.
Business Segments
We have three reportable segments: Single-family Guarantee, Multifamily, and Capital Markets. Certain activities that are not part of a reportable segment are included in the All Other category. For more information on our segments, see MD&A - Our Business Segments and Note 17.
Government Regulation and Supervision
Our business is subject to extensive regulation and supervision. The laws and regulations to which we are subject cover all key aspects of our business, and directly and indirectly affect our product offerings, pricing, competitive position and strategic plan, relationship with sellers and servicers, capital structure, cash needs and uses, borrowers’ and others’ privacy, and information security. As a result, such laws and regulations have a significant effect on key drivers of our results of operations, including, for example, our capital and liquidity, guarantee fees, product offerings, risk management, and costs of compliance. We could also incur fines or other financial penalties for failure to comply with all legal and regulatory requirements. Our business and results of operations may also be directly and adversely affected by future legislative, regulatory, or judicial actions. Such actions could affect us in a number of ways, including by imposing significant additional legal, compliance, and other costs on us and limiting our business activities. For example, recent changes to our capital requirements will affect our business and risk management strategies, including our risk appetite, our risk-adjusted returns, and the impact of our CRT transactions on our capital needs, and will increase the amount of capital we will be required to retain or raise to exit from conservatorship.
In addition, our conservatorship and related matters significantly affect our management, business activities, financial condition, and results of operations. We are under the control of FHFA, as our Conservator, and are not managed to maximize stockholder returns. FHFA determines our strategic direction. We face a variety of different, and sometimes competing, business objectives and FHFA-mandated activities. FHFA has required us to make changes to our business that have adversely affected our financial results and could require us to make additional changes at any time. For example, FHFA may require us to undertake activities that reduce our profitability, expose us to additional credit, market, funding, operational, and other risks, or provide additional support for the mortgage market that serves our public mission, but adversely affects our financial results.
Introduction Our Business
Further, we can be put into receivership at the discretion of the Director of FHFA at any time for a number of reasons set forth in the GSE Act.
FHFA is also Conservator of Fannie Mae, our primary competitor. FHFA’s actions, as Conservator of both companies, could affect competition between us. It is also possible that FHFA could require us and Fannie Mae to take a uniform approach to certain activities, limiting innovation and competition and possibly putting us at a competitive disadvantage because of differences in our respective businesses. FHFA also could limit our ability to compete with new entrants and other institutions. For additional information on conservatorship and related risks, see Introduction – About Freddie Mac–Conservatorship and Government Support for Our Business and Risk Factors–Conservatorship and Related Matters.
Human Capital Management
Our people are integral to our company’s success. It is our goal to sustain an inclusive culture with a highly engaged workforce focused on delivering on our corporate mission. We seek to be an employer of choice that attracts top talent through our commitment to inclusion and diversity, employee engagement, training, and other professional development opportunities. We also seek to implement appropriate compensation policies and practices within the constraints of our conservatorship status. We evaluate the success of our human capital management by measuring and monitoring the performance, development, and retention of our employees.
Employees
At January 31, 2021, we had 6,905 full-time and 34 part-time employees. Our headquarters are in McLean, Virginia, and the majority of our employees reside in the Washington D.C. metropolitan area.
Board of Directors and FHFA Oversight
We work collaboratively with the Compensation and Human Capital Committee (or CHC Committee) of the Board to support the oversight of compensation and benefits, inclusion and diversity, talent development, and strategies to strengthen our culture.
Although the CHC Committee plays a significant role in these matters, FHFA is actively involved in its role as our Conservator and as our regulator. For example, while we are in conservatorship, our directors serve on behalf of the Conservator and exercise their authority as provided by the Conservator. FHFA retains the authority not only to approve both the terms and amount of any compensation prior to payment to any of our executive officers, but also to modify any existing compensation arrangements. In addition, under the terms of the Purchase Agreement, FHFA is required to consult with Treasury on any increases in compensation or new compensation arrangements for our executive officers. FHFA requires us to submit to it proposed new compensation arrangements or increased amounts or benefits payable under existing compensation arrangements for executive officers. For more information, see Directors, Corporate Governance, and Executive Officers —Board and Committee Information — Authority of the Board and Board Committees.
Attracting, Developing, and Retaining Talent
We seek to be an employer of choice, but the competition for top talent is ever increasing, and our ability to compete could be limited as a result of our conservatorship, uncertainty about our future, and limitations on executive and employee compensation. For example, Congress by statute has limited the compensation of our CEO. In addition, FHFA has imposed limits on both executive and employee compensation, including limiting base salaries for all employees, and has required prior approval of certain compensation arrangements. These compensation restrictions could make it harder for us to attract and retain well-qualified leadership. For more information, see Executive Compensation. For the majority of employees, who are not subject to these restrictions, we seek to offer compensation that is competitive, fair, and equitable.
We also seek to promote the attraction, development, and retention of employees through comprehensive benefit and well-being programs, which have helped support our employees during the COVID-19 pandemic, and professional development opportunities to enhance workforce competencies and capabilities. We periodically survey our employees to better understand employee engagement and capture insights into our employees' needs and perspectives so that we can shape our workforce strategies accordingly.
We measure the success of our efforts through our workforce turnover. Our turnover was relatively low in 2020. In 4Q 2019, we offered a Voluntary Early Retirement Program (VERP) to Vice Presidents and non-officer employees meeting certain age and service requirements. On December 31, 2020, the VERP was completed, with over 600 employees accepting the VERP, with separation dates occurring throughout 2020. In addition, we have experienced leadership changes, including the hiring of a new CFO in June 2020 and the departure of our CEO in January 2021.
Introduction Our Business
Inclusion and Diversity
We are committed to embedding inclusion and diversity in our business and culture. FHFA's Office of Minority and Women Inclusion has adopted regulations with respect to the promotion of diversity and inclusion and has provided us with guidance on areas of improvement. We have partnered with our CHC Committee to enhance our inclusion and diversity strategic plan.
We place a priority on attracting and recruiting a pipeline of diverse candidates while advancing a culture of inclusion where everyone at the company feels welcome and valued. We work with third party partners to help ensure diverse candidate slates for open positions. Our diversity efforts are reflected in the composition of our workforce, leadership, and Board. For example, we are a majority minority company, and women make up nearly half of our workforce and lead two of our three business lines. For additional information on Board composition, see Directors, Corporate Governance, and Executive Officers – Directors – Director Criteria, Diversity, Qualifications, Experience, and Tenure.
We have 10 business resource groups (BRGs) as well as division-specific teams that support employee engagement by providing learning and networking opportunities that foster an inclusive and diverse workforce. We have also expanded diversity through other programs, such as our neurodiversity hiring programs.
For more information on risks related to workforce attraction and retention, see Risk Factors –Conservatorship and Related Matters and Risk Factors – COVID-19 Pandemic.
Properties
Our principal offices consist of four office buildings we own in McLean, Virginia, comprising approximately 1.3 million square feet. We operate our business in the United States and its territories, and accordingly, we generate no revenue from and have no long-lived assets, other than financial instruments, in geographic locations other than the United States and its territories.
Available Information
We file reports and other information with the SEC. In view of the Conservator's succession to all of the voting power of our stockholders, we have not prepared or provided proxy statements for the solicitation of proxies from stockholders since we entered into conservatorship, and do not expect to do so while we remain in conservatorship. Pursuant to SEC rules, our annual reports on Form 10-K contain certain information typically provided in an annual proxy statement.
We make available, free of charge through our website at www.freddiemac.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all other SEC reports and amendments to those reports as soon as reasonably practicable after we electronically file the material with the SEC. The SEC also maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding companies that file electronically with the SEC.
We are providing our website addresses and the website address of the SEC here and elsewhere in this Form 10-K solely for your information. Information appearing on our website or on the SEC's website is not incorporated into this Form 10-K.
We provide disclosure about our debt securities on our website at www.freddiemac.com/debt. From this address, investors can access the offering circular and related supplements for debt securities offerings under Freddie Mac's global debt facility, including pricing supplements for individual issuances of debt securities. Similar information about our STACR® transactions and SCR debt notes is available at crt.freddiemac.com and mf.freddiemac.com/investors, respectively.
We provide disclosure about our mortgage-related securities, some of which are off-balance sheet obligations (e.g., K Certificates and SB Certificates), on our website at www.freddiemac.com/mbs and mf.freddiemac.com/investors. From these addresses, investors can access information and documents, including offering circulars and offering circular supplements, for mortgage-related securities offerings.
We provide additional information, including product descriptions, investor presentations, securities issuance calendars, transaction volumes and details, redemption notices, Freddie Mac research, and material developments or other events that may be important to investors, in each case as applicable, on the websites for our business segments, which can be found at sf.freddiemac.com, mf.freddiemac.com, and www.freddiemac.com/capital-markets.
Introduction Forward-Looking Statements
FORWARD-LOOKING STATEMENTS
We regularly communicate information concerning our business activities to investors, the news media, securities analysts, and others as part of our normal operations. Some of these communications, including this Form 10-K, contain "forward-looking statements." Examples of forward-looking statements include, but are not limited to, statements pertaining to the conservatorship, our current expectations and objectives for the Single-family Guarantee, Multifamily, and Capital Markets segments of our business, our efforts to assist the housing market, our liquidity and capital management, economic and market conditions and trends, the effects of the COVID-19 pandemic and actions taken in response thereto on our business, financial condition, and liquidity, our market share, the effect of legislative and regulatory developments and new accounting guidance, the credit quality of loans we own or guarantee, the costs and benefits of our CRT transactions, and our results of operations and financial condition on a GAAP, Segment Earnings, and fair value basis. Forward-looking statements involve known and unknown risks and uncertainties, some of which are beyond our control. Forward-looking statements are often accompanied by, and identified with, terms such as "could," "may," "will," "believe," "expect," "anticipate," "forecast," and similar phrases. These statements are not historical facts, but rather represent our expectations based on current information, plans, judgments, assumptions, estimates, and projections. Actual results may differ significantly from those described in or implied by such forward-looking statements due to various factors and uncertainties, including those described in the Risk Factors section of this Form 10-K and:
nUncertainty regarding the duration and severity of the COVID-19 pandemic and the effects of the pandemic and actions taken in response thereto on the United States economy and housing market, which could, in turn, adversely affect our business in numerous ways, including, for example, by increasing our credit losses, impairing the value of our mortgage-backed securities, decreasing our liquidity and capital levels, and increasing our credit risk and operational risk;
nThe actions the U.S. government (including FHFA, Treasury, and Congress) may take, restrict us from taking, or require us to take, including actions to support the housing markets (such as programs implemented in response to the COVID-19 pandemic or to implement the recommendations in FHFA's Conservatorship Scorecards and other objectives for us);
nThe effect of the restrictions on our business due to the conservatorship and the Purchase Agreement;
nChanges in our Charter or in applicable legislative or regulatory requirements (including any legislation affecting the future status of our company);
nChanges to our capital requirements and potential effects of the ERCF on our business strategies;
nChanges in the fiscal and monetary policies of the Federal Reserve (including purchasing agency MBS and agency CMBS in amounts needed to support the market during the COVID-19 pandemic);
nChanges in tax laws;
nChanges in accounting policies, practices, or guidance, such as our adoption of CECL;
nChanges in economic and market conditions generally, and as a result of the COVID-19 pandemic, including changes in employment rates, interest rates, spreads, and house prices;
nChanges in the U.S. residential mortgage market, including changes in the supply and type of loan products (e.g., refinance vs. purchase and fixed-rate vs. ARM);
nThe success of our efforts to mitigate our losses on our single-family credit guarantee portfolio;
nThe success of our strategy to transfer mortgage credit risk through STACR debt note, STACR Trust note, ACIS®, K Certificate, SB Certificate, and other CRT transactions;
nOur ability to maintain adequate liquidity to fund our operations;
nOur ability to maintain the security and resiliency of our operational systems and infrastructure, including against cyberattacks;
nOur ability to effectively execute our business strategies, implement new initiatives, and improve efficiency;
nThe adequacy of our risk management framework, including the adequacy of the CCF for measuring risk;
nOur ability to manage mortgage credit risk, including the effect of changes in underwriting and servicing practices;
nOur ability to limit or manage our economic exposure and GAAP earnings exposure to interest-rate volatility and spread volatility, including the availability of derivative financial instruments needed for interest-rate risk management purposes and our ability to apply hedge accounting;
nOur operational ability to issue new securities, make timely and correct payments on securities, and provide initial and ongoing disclosures;
nOur reliance on CSS and the CSP for the operation of the majority of our single-family securitization activities, our reduced influence over CSS Board decisions as a result of FHFA-required changes to the CSS LLC agreement in January 2020 and FHFA's subsequent appointment of three new CSS Board members, and any additional changes FHFA may require in our relationship with, or support of, CSS;
nChanges or errors in the methodologies, models, assumptions, and estimates we use to prepare our financial statements, make business decisions, and manage risks;
nChanges in investor demand for our debt or mortgage-related securities;
Introduction Forward-Looking Statements
nOur ability to maintain market acceptance of the UMBS, including our ability to continue to align the prepayment speeds of our and Fannie Mae's respective UMBS;
nChanges in the practices of loan originators, servicers, investors, and other participants in the secondary mortgage market;
nThe discontinuance of, transition from, or replacement of LIBOR and the adverse consequences it could have on our business and operations;
nThe occurrence of a major natural disaster or other catastrophic event in areas in which our offices or significant portions of our total mortgage portfolio are located; and
n Other factors and assumptions described in this Form 10-K, including in the MD&A section.
Forward-looking statements are made only as of the date of this Form 10-K, and we undertake no obligation to update any forward-looking statements we make to reflect events or circumstances occurring after the date of this Form 10-K.
Management's Discussion and Analysis Market Conditions and Economic Indicators
Management's Discussion and Analysis of Financial Condition and Results of Operations
MARKET CONDITIONS AND ECONOMIC INDICATORS
The following graphs and related discussions present certain market and macroeconomic indicators that can significantly affect our business and financial results.
Interest Rates(1)
(1) 30-year PMMS interest rates are as of the last week in each quarter. SOFR interest rates are 30-day average rates.
n The 30-year Primary Mortgage Market Survey (PMMS) interest rate is indicative of what a consumer could expect to be offered on a first-lien prime conventional conforming home purchase mortgage with an LTV of 80%. Increases (decreases) in the PMMS rate typically result in decreases (increases) in refinancing activity and originations.
n Changes in the 10-year LIBOR interest rate and other benchmark rates can significantly affect the fair value of our financial instruments. We have elected hedge accounting for certain assets and liabilities in an effort to reduce GAAP earnings variability attributable to changes in benchmark interest rates.
n Changes in the 3-month LIBOR rate affect the interest earned on our short-term investments and interest expense on our short-term funding and derivatives.
n SOFR is a benchmark rate for secured overnight dollar denominated financing identified by certain banking regulators and market participants as a potential replacement for LIBOR.
n Interest rates declined significantly early in 2020 as a result of the COVID-19 pandemic and the associated government response, and ended the year at or near historical lows.
Unemployment Rate and Monthly Net New Jobs
Source: U.S. Bureau of Labor Statistics.
nChanges in the national unemployment rate can affect several market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies.
n In response to the COVID-19 pandemic, many state and local governments enacted measures designed to curb the spread of COVID-19 that severely curtailed economic activity and significantly increased unemployment levels. The labor market has recovered from the lows reached in April 2020 but continues to be weak. The availability of a COVID-19 vaccine and its widespread distribution may steer the economy towards recovery, but the timeline remains unknown.
Management's Discussion and Analysis Market Conditions and Economic Indicators
Single-Family Housing and Mortgage Market Conditions
Sources: National Association of Realtors, U.S. Census Bureau, and Freddie Mac House Price Index.
U.S. Single-Family Mortgage Originations
Source: Inside Mortgage Finance.
nLow interest rates and the ability for many to work remotely drove significant increases in home sales in 2020. In 2021, we expect U.S. single-family home purchase volume to remain strong due to low mortgage interest rates. Freddie Mac's single-family loan purchase volumes typically follow a similar trend.
n Changes in house prices affect the amount of equity that borrowers have in their homes. Borrowers with less equity typically have higher delinquency rates. As house prices decline, the severity of losses we incur on defaulted loans that we hold or guarantee increases because the amount we can recover from the property securing the loan decreases.
nSingle-family house prices grew 11.6% in 2020 compared to 4.3% during 2019. We expect house price growth to moderate in 2021.
nU.S. single-family loan origination volumes increased in 2020 compared to 2019 as a result of the low average mortgage interest rates, higher home sales, and increasing house prices.
Management's Discussion and Analysis Market Conditions and Economic Indicators
Multifamily Housing and Mortgage Market Conditions
Source: Reis.
Apartment Completions and Net Absorption
Source: Reis.
nCompletions in 2020 were at their lowest level over the past several years due to the COVID-19 pandemic slowing construction. While low absorption levels resulted in higher vacancy rates, these rates remain below the long-term average (between 2000 and 2020) of 5.4%. However, vacancy rates may continue to increase in the future as the COVID-19 relief programs, including federal stimulus packages, expire.
nEffective rent growth (i.e., the average rent paid by the renter over the term of the lease, adjusted for concessions by the landlord and costs borne by the renter) was negative at a national level and declined significantly in 2020 due to the COVID-19 pandemic, falling below the long-term average (between 2000 and 2020) of 2.8%.
nDespite lower effective rent growth and higher vacancy rates, multifamily property prices grew at an 8.3% annualized growth rate in 2020, as investors continue to believe there is a need for additional rental housing in the U.S. and the overall investment environment remains attractive given historically low interest rates.
nBoth supply and demand for rental housing will be affected over the next year or two due to the COVID-19 pandemic, which will flow through to multifamily fundamentals.
nDespite a slow down in completions due to COVID-19, the supply of multifamily units exceeded demand in 2020.
nAlthough we expect the increase in demand observed in late 2020 to continue into 2021, new completions are expected to be elevated and likely to outpace absorptions.
Management's Discussion and Analysis Market Conditions and Economic Indicators
Mortgage Debt Outstanding
Single-Family Mortgage Debt Outstanding as of December 31,
Source: Federal Reserve Financial Accounts of the United States of America. For 2020, the amount is as of September 30, 2020 (latest available information).
Multifamily Mortgage Debt Outstanding as of December 31,
Source: Federal Reserve Financial Accounts of the United States of America. For 2020, the amount is as of September 30, 2020 (latest available information).
nU.S. single-family mortgage debt outstanding increased in 2020 compared to 2019, primarily driven by house price appreciation. An increase in U.S. single-family mortgage debt outstanding typically results in growth of our single-family credit guarantee portfolio.
nPrior to March 2020, multifamily market fundamentals were driven by a healthy job market, population growth, high propensity to rent among young adults, and rising single-family house prices. Since then, the effects of the COVID-19 pandemic have slowed the economy significantly, impacting these market drivers.
nWhile the multifamily mortgage market grew, our share of total multifamily mortgage debt outstanding remained flat during 2020 due to ongoing competition from other market participants and the purchase limitations imposed by the multifamily loan purchase cap. The loan purchase cap was $100.0 billion for the five-quarter period from 4Q 2019 through 4Q 2020 and applied to all multifamily business activity, with no exclusions. At least 37.5% of new multifamily business had to be mission-driven, affordable housing over the same five-quarter period.
Management's Discussion and Analysis Market Conditions and Economic Indicators
Delinquency Rates
Source: National Delinquency Survey from the Mortgage Bankers Association. For 2020, the total mortgage market rate is as of September 30, 2020 (latest available information).
Source: Freddie Mac, FDIC Quarterly Banking Profile, Intex Solutions, Inc., and Wells Fargo Securities (Multifamily CMBS market, excluding REOs), American Council of Life Insurers (ACLI). For 2020, the amounts for FDIC insured institutions and ACLI investment bulletin are as of September 30, 2020 (latest available information) and the amount for the Multifamily CMBS market is as of December 31, 2020.
nOur single-family serious delinquency rate is based on the number of loans in our single-family guarantee portfolio that are three monthly payments or more past due or in the process of foreclosure. We report single-family loans in forbearance as delinquent during the forbearance period to the extent that payments are past due based on the loans' original contractual terms, irrespective of the forbearance plan.
nOur single-family serious delinquency rate was higher as of December 31, 2020 compared to December 31, 2019, driven by loans in forbearance due to the COVID-19 pandemic. However, 55% of the seriously delinquent loans at December 31, 2020 were covered by credit enhancements that may partially reduce our credit risk exposure.
nWe expect our single-family serious delinquency rate to remain elevated as a result of the COVID-19 pandemic and the forbearance programs we are offering in response.
nOur multifamily delinquency rate is based on the UPB of loans in our multifamily mortgage portfolio that are two monthly payments or more past due or in the process of foreclosure. We report multifamily loans in forbearance as current as long as the borrowers are in compliance with their forbearance agreement, including the agreed upon repayment plan. Loans in forbearance are therefore not included in our multifamily delinquency rate if the borrowers are in compliance with the forbearance agreement.
nOur multifamily delinquency rate was higher as of December 31, 2020 compared to December 31, 2019, due to the effects of the COVID-19 pandemic, but remains low compared to many other market participants. See MD&A - Risk Management -Multifamily Mortgage Credit Risk for additional information on our delinquency and forbearance rates.
n Multifamily delinquency rates could increase further in the near term due to the continuing effects of the COVID-19 pandemic. However, we currently do not expect to experience significant credit losses as a large portion of the credit risk exposure on our multifamily mortgage portfolio is reduced by first loss credit protection provided by subordination from our securitizations. See MD&A - Risk Management -Multifamily Mortgage Credit Risk for additional information on the subordination levels of our securitizations.
Management's Discussion and Analysis Consolidated Results of Operations
CONSOLIDATED RESULTS OF OPERATIONS
This discussion of our consolidated results of operations should be read in conjunction with our consolidated financial statements and accompanying notes.
On January 1, 2020, we adopted CECL, which changed our methodology for accounting for credit losses on financial assets measured at amortized cost, off-balance sheet credit exposures, and investments in debt securities classified as available-for-sale. See Note 1 for additional information on our adoption of CECL. See Note 4, Note 5, Note 6, Note 7, and Note 8 for additional information on the changes in our significant accounting policies as a result of our adoption of CECL.
We have three primary sources of revenue:
nNet interest income - Primarily consists of guarantee portfolio net interest income and investments portfolio net interest income. Guarantee portfolio net interest income primarily consists of the guarantee fee income from our single-family credit guarantee portfolio. We generally consolidate our single-family securitization trusts and, in that case, we record interest income on the loans held by the trust and interest expense on the debt securities issued by the trust. The difference between these amounts represents the guarantee fee income we receive as compensation for our guarantee of the principal and interest payments of the issued debt securities. Investments portfolio net interest income primarily consists of the difference between the interest income earned on the assets in our investments portfolio and the interest expense incurred on the liabilities used to fund those assets, including amortization of cost basis adjustments.
nGuarantee fee income - Primarily consists of the guarantee fee income from our multifamily guarantee portfolio. We generally do not consolidate our multifamily securitization trusts, and therefore, we do not recognize either the interest income on the loans held by the trust or the interest expense on the debt securities issued by the trust. Rather, we separately account for our guarantee to the trust and recognize the revenue from our guarantee as guarantee fee income.
nNet investment gains - Primarily consist of revenues from our multifamily loan purchase and securitization activities, sales of single-family delinquent and re-performing loans, and realized and unrealized gains (losses) on investment securities, net of gains and losses from our debt funding and interest-rate risk management activities. Net investment gains may fluctuate significantly from period-to-period based on the volume and nature of our investment, funding, and hedging activities and changes in market conditions, such as interest rates and market spreads.
We also earn revenue from fees that we charge to our single-family and multifamily sellers and servicers and other customers, which are recognized in other income.
We have two primary expense items:
nCredit-related expenses - Primarily consist of provision for credit losses, credit enhancement expense, benefit for credit enhancement recoveries, and REO operations expense. Upon our adoption of CECL, provision for credit losses primarily represents changes in expected credit losses on our single-family mortgage loans held-for-investment. The accounting for costs and recoveries from credit enhancements varies based on the nature of the contract. Credit enhancement expense and benefit for credit enhancement recoveries includes the costs we incur to transfer credit risk and the changes in expected recoveries, respectively, from credit enhancements that are accounted for as freestanding contracts, but does not include such amounts related to certain other types of credit enhancements that are not accounted for as freestanding contracts. See MD&A - Our Business Segments - Single-Family Guarantee- Products and Activities, MD&A - Our Business Segments - Multifamily- Products and Activities, and Note 8 for additional information on our accounting for credit enhancements. REO operations expense represents expenses related to foreclosed properties.
nOperating expenses - Primarily consist of administrative expenses, the 10 basis point fee related to the Temporary Payroll Tax Cut Continuation Act of 2011, and other expenses we incur to run our business.
The table below compares our consolidated results of operations for the past three years. Certain amounts in prior periods have been reclassified to conform to the current presentation.
Management's Discussion and Analysis Consolidated Results of Operations
Table 1 - Summary of Consolidated Statements of Comprehensive Income (Loss)
Year Over Year Change
See Critical Accounting Policies and Estimates for information concerning certain significant accounting policies and estimates applied in determining our reported results of operations and Note 1 for information on our accounting policies and a summary of other significant accounting policies and the related notes in which information about them can be found.
Net Revenues
Net Interest Income
Net interest income consists of guarantee portfolio net interest income, investments portfolio net interest income, and income (expense) from hedge accounting.
nGuarantee portfolio net interest income is primarily generated by our single-family guarantee portfolio, as we generally consolidate our single-family securities trusts, and consists of three components:
lContractual net interest income, which is equal to the difference between the interest income on loans held by consolidated trusts and the interest expense on debt securities issued by consolidated trusts. This amount represents the ongoing contractual monthly guarantee fee we receive for managing the credit risk associated with mortgage loans held by consolidated trusts.
lThe legislated 10 basis point increase in guarantee fees that is remitted to Treasury as part of the Temporary Payroll Tax Cut Continuation Act of 2011.
lDeferred fee income, which primarily consists of recognition of premiums and discounts on mortgage loans and debt securities of consolidated trusts and the fees that we receive or pay when we acquire single-family loans, which represent a portion of the guarantee fee compensation we receive for managing the credit risk associated with mortgage loans held by consolidated trusts. These amounts are recognized in net interest income based on the effective yield over the contractual life of the associated financial instrument and may vary significantly from period to period, primarily based on changes in actual prepayments on the underlying loans. Increases in actual prepayments result in a higher rate of amortization, while decreases in actual prepayments result in a lower rate of amortization. The timing of amortization of loans may differ from the timing of amortization of the securities backed by the loans, as the proceeds from the loans backing these securities are remitted to the security holders at a date subsequent to the date these proceeds are received by us.
Management's Discussion and Analysis Consolidated Results of Operations
nInvestments portfolio net interest income consists of two components:
lThe difference between the interest income earned on the assets in our investments portfolio and the interest expense incurred on the liabilities used to fund those assets, including amortization of cost basis adjustments. These amounts are recognized in net interest income based on the effective yield over the contractual life of the associated financial instrument.
lInterest expense related to CRT debt (STACR debt notes and SCR debt notes).
nIncome (expense) from hedge accountingprimarily consists of amortization of previously deferred hedge accounting basis adjustments and the earnings mismatch on qualifying fair value hedge relationships, which is equal to the difference between fair value changes for the hedging instrument, including the accrual of periodic cash settlements, and fair value changes for the hedged item attributable to the risk being hedged. See Note 10 for additional detail on hedge accounting.
The table below presents the components of net interest income.
Table 2 - Components of Net Interest Income
Year Over Year Change
Guarantee portfolio net interest income:
Investments portfolio net interest income:
Key Drivers:
nGuarantee portfolio contractual net interest income
l2020 vs. 2019 - Increased primarily due to the continued growth in the single-family guarantee portfolio coupled with higher contractual guarantee fee rates.
l2019 vs. 2018 - Increased primarily due to the continued growth of the single-family guarantee portfolio.
nGuarantee portfolio deferred fee income
l2020 vs. 2019 - Increased primarily due to higher prepayments due to the low mortgage interest rate environment.
l2019 vs. 2018 - Decreased primarily due to the timing differences in amortization related to prepayments between debt of consolidated trusts and the underlying mortgage loans.
nInvestments portfolio contractual net interest income and amortization
l2020 vs. 2019 - Decreased primarily due to a change in our investment mix as the lower-yielding other investments portfolio represented a larger percentage of our total investments portfolio, partially offset by lower funding costs.
l2019 vs. 2018 - Decreased primarily due to the lower and flatter interest rate environment, coupled with a change in our investment mix as the lower-yielding other investments portfolio represented a larger percentage of our total investments portfolio.
nInterest expense related to CRT debt
l2020 vs. 2019 - Decreased primarily due to lower short-term interest rates and a decline in volume as we no longer issue STACR debt notes on a regular basis.
l2019 vs. 2018 - Remained relatively flat as higher short-term interest rates were offset by a decline in volume as we no longer issue STACR debt notes on a regular basis.
Management's Discussion and Analysis Consolidated Results of Operations
nIncome (expense) from hedge accounting
l2020 vs. 2019 - Expense increased primarily due to amortization of hedge accounting-related basis adjustments driven by higher prepayments, partially offset by higher income related to accruals of periodic cash settlements on derivatives in hedging relationships.
l2019 vs. 2018 - Expense decreased primarily due to a positive earnings mismatch and lower expense related to accruals of periodic cash settlements on derivatives in hedging relationships, partially offset by amortization of hedge accounting-related basis adjustments.
Management's Discussion and Analysis Consolidated Results of Operations
Net Interest Yield Analysis
The table below presents an analysis of interest-earning assets and interest-bearing liabilities. To calculate the average balances, we generally use a daily weighted average of amortized cost. When daily average balance information is not available, such as for mortgage loans, we use monthly averages. Mortgage loans on non-accrual status, where interest income is generally recognized when collected, are included in the average balances.
Table 3 - Analysis of Net Interest Yield
Year Ended December 31,
Interest-earning assets:
Mortgage-related securities:
Interest-bearing liabilities:
Debt of Freddie Mac:
(1) Loan fees included in interest income were $4.5 billion, $3.2 billion, and $2.6 billion for loans held by consolidated trusts and $86 million, $112 million, and $104 million for loans held by Freddie Mac during 2020, 2019, and 2018, respectively.
Management's Discussion and Analysis Consolidated Results of Operations
Net Interest Income Rate / Volume Analysis
The table below presents a rate and volume analysis of our net interest income. Our net interest income reflects the reversal of interest income accrued, net of interest received on a cash basis, related to mortgage loans that are on non-accrual status.
Table 4 - Net Interest Income Rate / Volume Analysis
Variance Analysis
(Dollars in millions) Rate Volume Total Change Rate Volume Total Change
Interest-earning assets:
Interest-bearing liabilities:
Debt of Freddie Mac:
Guarantee Fee Income
Guarantee fee income relates primarily to multifamily securitizations, as we generally do not consolidate our multifamily securitization trusts. For additional details on our multifamily securitizations, see MD&A -Our Business Segments - Multifamily - Products and Activities - Securitizations, Guarantees, and Risk Transfer Products.
Guarantee fee income consists of the following:
nContractual guarantee fees - Consists of the fees earned from guarantees issued to third parties and securitization trusts that we do not consolidate.
nGuarantee obligation amortization - Represents the amortization of our obligation to perform over the term of the guarantee as we are released from risk.
nGuarantee asset fair value changes - Represents the change in fair value of our right to receive contractual guarantee fees. Because our multifamily loans contain prepayment protection, declining interest rates generally result in a higher guarantee asset fair value, with the opposite effect occurring when interest rates increase.
Management's Discussion and Analysis Consolidated Results of Operations
The table below presents the components of guarantee fee income.
Table 5 - Components of Guarantee Fee Income
Year Over Year Change
Key Drivers:
n2020 vs. 2019 and 2019 vs. 2018- Increased primarily driven by multifamily guarantee portfolio growth, coupled with lower fair value losses on our multifamily guarantee assets due to lower interest rates.
Investment Gains (Losses), Net
The table below presents the components of investment gains (losses), net. We use derivatives to economically hedge the interest-rate risk of our financial assets and liabilities. As a result, interest-rate-related fair value gains and losses that we recognize in mortgage loans gains (losses), investment securities gains (losses), and debt gains (losses) generally have offsetting impacts from the derivative instruments that we use to economically hedge interest-rate risk. We recognize these offsetting impacts from derivative instruments in derivative gains (losses).
Table 6 - Components of Investment Gains (Losses), Net
Year Over Year Change
Mortgage Loans Gains (Losses)
Mortgage loans gains (losses) are primarily generated by our multifamily loan purchase and securitization activities and sales of single-family delinquent and re-performing loans, and consist of the following:
nGains (losses) on certain multifamily loan purchase commitments - Represents the change in fair value between the commitment date and settlement date for multifamily loan purchase commitments for which we have elected the fair value option.
nGains (losses) on mortgage loans - Includes changes in fair value on held-for-sale loans, including loans for which we have elected the fair value option, as well as any gains and losses realized on the sales of these loans.
Mortgage loans gains (losses) are affected by a number of factors, including:
nVolume of held-for-sale single-family seasoned mortgage loans;
nVolume of held-for-sale multifamily loans measured at lower-of-cost-or-fair value;
nVolume of multifamily loan purchase commitments and mortgage loans for which we have elected the fair value option; and
nChanges in interest rates and market spreads.
Management's Discussion and Analysis Consolidated Results of Operations
The table below presents the components of mortgage loans gains (losses).
Table 7 - Components of Mortgage Loans Gains (Losses)
Year Over Year Change
Single-family:
Multifamily:
Key Drivers:
n 2020 vs. 2019 - Single-family mortgage loans gains decreased primarily due to a lower volume of loan sales and higher losses from lower-of-cost-or-fair-value adjustments. For multifamily, higher initial pricing margins on new loan commitments, coupled with realized gains from the sale of a higher volume of loans measured at lower-of-cost-or-fair-value, resulted in higher gains.
n 2019 vs. 2018 - Single-family mortgage loans gains increased primarily due to a higher volume of loan sales. For multifamily, higher initial pricing margins on new loan commitments, coupled with spread-related fair value improvements, resulted in higher gains.
Investment Securities Gains (Losses)
Investment securities gains (losses) primarily consist of fair value gains and losses recognized on trading securities and realized gains and losses on the sale of available-for-sale securities.
Investment securities gains (losses) are affected by a number of factors, including changes in interest rates and market spreads and volume of sales of available-for-sale securities.
The table below presents the components of investment securities gains (losses).
Table 8 - Components of Investment Securities Gains (Losses)
Year Over Year Change
Key Drivers:
n 2020 vs. 2019 - Increased primarily due to gains on sales of agency mortgage-related securities and higher gains on trading securities from the decline in long-term interest rates.
n 2019 vs. 2018 - Shifted to gains during 2019 primarily driven by higher gains on trading securities due to decreasing interest rates, partially offset by lower volume of sales at gains of non-agency mortgage-related securities.
Management's Discussion and Analysis Consolidated Results of Operations
Debt Gains (Losses)
Debt gains (losses) are primarily generated by investments in debt securities of consolidated trusts and active management of our debt funding costs and consist of the following:
nFair value changes - Include the gains and losses on debt for which we have elected the fair value option, primarily certain STACR debt notes.
nGains (losses) on extinguishment of debt - Represent the difference between the consideration paid and the debt carrying value when we purchase debt securities of consolidated trusts as investments in our mortgage-related investments portfolio and when we repurchase or call debt of Freddie Mac.
Debt gains (losses) are affected by a number of factors, including:
nChanges in the market spreads between debt yields and benchmark interest rates and
nAmount and type of debt selected for repurchase based on our investment and funding strategies, including our efforts to support the liquidity and price performance of our mortgage-related securities.
The table below presents the components of debt gains (losses).
Table 9 - Components of Debt Gains (Losses)
Year Over Year Change
Fair value changes:
Debt securities of consolidated trusts $4 ($4) $5 $8 200 % ($9) (180) %
Gains (losses) on extinguishment of debt:
Key Drivers:
n 2020 vs. 2019 - Increased primarily due to higher gains on extinguishments of debt as a result of more selective debt repurchase activity, coupled with fair value gains on STACR debt notes for which we elected the fair value option as a result of spread widening caused by the significant market volatility related to the COVID-19 pandemic.
n 2019 vs. 2018 - Decreased primarily due to losses from the extinguishment of fixed-rate debt securities of consolidated trusts, as market interest rates declined between the time of issuance and repurchase, partially offset by an increase in gains on callable debt due to an increase in call volume.
Derivative Gains (Losses)
Derivative instruments are a key component of our interest-rate risk management strategy. We use derivatives to economically hedge our interest-rate risk exposure. We primarily use interest-rate swaps, futures, and option-based derivatives, such as swaptions, to manage our exposure to changes in interest-rates. We consider the cost of derivatives used in interest-rate risk management to be an inherent part of the cost of funding our mortgage-related investments portfolio.
In addition, we routinely enter into commitments to purchase and sell loans and mortgage-related securities. The majority of these commitments are accounted for as derivative instruments.
We continue to align our derivative portfolio to economically hedge the changing duration of our assets and liabilities. We manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models. We believe the impact of derivatives on our GAAP financial results should be considered in the context of our overall interest-rate risk profile, including our PVS and duration gap results. For more information about our interest-rate risk management activities and the sensitivity of reported GAAP earnings to those activities, see MD&A - Risk Management - Market Risk.
Management's Discussion and Analysis Consolidated Results of Operations
Derivative gains (losses) consist of the following:
nFair value gains (losses) - Represent changes in the fair value of our derivatives while not designated in hedging relationships based on market conditions at the end of the period or at the time the derivative instrument is terminated. These amounts may or may not be realized over time, depending on future changes in market conditions and the terms of our derivative instruments.
nAccrual of periodic cash settlements on swaps - Consists of the net amount we accrue during a period for interest-rate swap payments that we will make or receive for derivatives while not designated in hedging relationships. This accrual represents the ongoing cost of our hedging activities, and is economically equivalent to interest expense.
We apply fair value hedge accounting to certain single-family mortgage loans and long-term debt to reduce our GAAP earnings volatility. We include gains and losses and the accrual of periodic cash settlements on derivatives designated in qualifying hedge relationships in the same line used to present the earnings effect of the hedged item.
Derivative gains (losses) are affected by a number of factors, including:
nChanges in interest rates - Our primary derivative instruments are interest-rate swaps, including pay-fixed and receive-fixed interest-rate swaps. With a pay-fixed interest-rate swap, we pay a fixed rate of interest and receive a variable rate of interest based on a specified notional balance, which is used for calculation purposes only. As interest rates decline, we recognize derivative losses, as the amount of interest we pay remains fixed, and the amount of interest we receive declines. As rates rise, we recognize derivative gains, as the amount of interest we pay remains fixed, but the amount of interest we receive increases. With a receive-fixed interest-rate swap, the opposite results occur.
nImplied volatility - Many of our assets and liabilities have embedded prepayment options. We use option-based derivatives, including swaptions, to economically hedge the prepayment options embedded in our mortgage assets and callable debt. Fair value gains and losses on swaptions are sensitive to changes in both interest rates and implied volatility, which reflects the market's expectation of future changes in interest rates. Assuming all other factors are unchanged, including interest rates, purchased swaptions generally become more valuable as implied volatility increases and less valuable as implied volatility decreases, with the opposite being true for written swaptions.
nChanges in the shape of the yield curve - We own assets and have outstanding debt with cash flows at different tenors along the yield curve. We use derivatives to hedge the yield exposure of assets and debt, resulting in derivatives with different maturities. As a result, changes in the shape of the yield curve will affect our derivative gains (losses).
nChanges in the composition of our derivative portfolio - The mix and balance of our derivative portfolio changes from period to period as we enter into or terminate derivative instruments to respond to changes in interest rates and changes in the balances and modeled characteristics of our assets and liabilities. Changes in the composition of our derivative portfolio will affect the derivative gains and losses we recognize in a given period, thereby affecting the volatility of comprehensive income.
The table below presents the components of derivative gains (losses).
Table 10 - Components of Derivative Gains (Losses)
Year Over Year Change
Fair value gains (losses):
Key Drivers:
n2020 vs. 2019 - Increase in derivative losses, primarily driven by losses on commitments to sell mortgage-related securities as prices increased due to spread tightening, partially offset by gains on commitments to purchase mortgage loans.
n2019 vs. 2018 - Decreases in long-term rates during 2019 resulted in derivative fair value losses compared to derivative fair value gains during 2018. The interest rate decreases during 2019 resulted in fair value losses on our pay-fixed interest rate swaps, forward commitments to issue mortgage-related securities, and futures, partially offset by fair value gains on our receive-fixed swaps and certain of our option-based derivatives.
Management's Discussion and Analysis Consolidated Results of Operations
Credit-Related Expense
Benefit (Provision) for Credit Losses
Our benefit (provision) for credit losses relates primarily to single-family loans held-for-investment and can vary substantially from period to period based on a number of factors, such as changes in actual and forecasted house prices and interest rates, borrower prepayments and delinquency rates, events such as natural disasters or pandemics, the type and volume of our loss mitigation and foreclosure activity, government assistance provided to borrowers, and redesignation of loans between held-for-investment and held-for-sale. Our estimate of expected credit losses is particularly sensitive to changes in forecasted house price growth rates, which affect both the probability and severity of expected credit losses, and changes in forecasted interest rates, as lower (higher) interest rates typically result in higher (lower) expected prepayments and a shorter (longer) estimated loan life, and therefore lower (higher) expected credit losses. See MD&A - Critical Accounting Policies and Estimates for additional information.
The table below presents the components of benefit (provision) for credit losses.
Table 11 - Components of Benefit (Provision) for Credit Losses
Year Over Year Change
Benefit (provision) for credit losses:
nSingle-family
l2020 vs. 2019 - Shifted to a provision primarily due to higher expected credit losses as a result of the COVID-19 pandemic. The higher expected credit losses during 2020 were primarily driven by the following factors:
–Expected credit losses related to COVID-19 relief programs - Our provision for credit losses in 2020 required significant management judgment to estimate the impact of COVID-19-related forbearance and relief programs on our expected credit losses. These judgments included estimates of the number of loans that will receive forbearance, the likely exit paths for loans in forbearance, and the number of loans where forbearance will be unsuccessful and the borrower will ultimately default. These factors resulted in a significant increase in our provision for credit losses for 2020, with the majority of the increase occurring in 1Q 2020. We recognized additional provision for allowances for pre-foreclosure costs and accrued interest receivable related to loans in forbearance due to the COVID-19 pandemic. In total, we increased our provision for credit losses during 2020 by $2.8 billion as a result of the COVID-19 pandemic.
–Portfolio growth - With the adoption of CECL, we recognize expected credit losses over the entire contractual term of the loan at the time of loan acquisition, rather than when it is probable the loan is impaired. In 2020, our single family credit guarantee portfolio grew by $332 billion, or 17%, contributing to the increase in provision for credit losses.
–Growth in realized and forecasted house prices and declines in forecasted interest rates - During 2020, house price appreciation and significant declines in mortgage interest rates partially offset the increase in the provision for credit losses as a result of the COVID-19 pandemic and portfolio growth.
l2019 vs. 2018 - Remained relatively flat due to the solid credit performance of our single-family portfolio.
nMultifamily
l2020 vs. 2019 - Increase in provision due to higher expected credit losses as a result of the COVID-19 pandemic.
l2019 vs. 2018 - Remained relatively flat due to the stable credit performance of our multifamily portfolio.
The decline in economic activity caused by the COVID-19 pandemic, and the corresponding government response, is unprecedented, and as a result, our estimate of expected credit losses is subject to significant uncertainty. See MD&A - Risk Management- Credit Risk for additional information.
Management's Discussion and Analysis Consolidated Results of Operations
Credit Enhancement Expense
Credit enhancement expense primarily relates to certain single-family CRT transactions and includes the premiums paid to transfer credit risk to third parties and transaction and other costs incurred to enter into those transactions. Credit enhancement expense does not include costs associated with CRT-related debt, which are primarily recognized in interest expense, or the costs associated with CRT-related derivatives, which are recognized in investment gains (losses), net.
Key Drivers:
n2020 vs. 2019 and 2019 vs. 2018 - Increased primarily due to higher outstanding cumulative volumes of CRT transactions.
See MD&A - Our Business Segments - Single-Family Guarantee-Products and Activities, MD&A - Our Business Segments - Multifamily -Products and Activities, andNote 8 for additional information on our credit enhancements.
Benefit for (Decrease in) Credit Enhancement Recoveries
Benefit for (decrease in) credit enhancement recoveries primarily relates to certain single-family CRT transactions and represents changes in expected recoveries from those transactions. We recognize a benefit for (decrease in) recoveries from many of our CRT transactions at the same time that we recognize an allowance for credit losses on the covered loans, measured on the same basis as the allowance for credit losses on the covered loans.
Key Drivers:
n2020 vs. 2019 - Increase in benefit for credit enhancement recoveries as a result of the corresponding increase in expected credit losses due to the COVID-19 pandemic.
Operating Expense
Key Drivers:
n2020 vs. 2019 - Increased primarily due to higher Temporary Payroll Tax Cut Continuation Act of 2011 expense driven by an increase in single-family business activity in 2020.
n2019 vs. 2018 - Increased primarily due to higher salaries and employee benefits driven by the VERP and higher technology costs in 2019.
Other Comprehensive Income (Loss)
Our investments in securities classified as available-for-sale are measured at fair value on our consolidated balance sheets. The fair value of these securities is primarily affected by changes in interest rates and market spreads. All unrealized gains and losses on these securities are excluded from earnings and reported in other comprehensive income until realized, unless we determine that a decline in fair value is the result of a credit loss. We reclassify our unrealized gains and losses from AOCI to earnings upon the sale of the securities.
Key Drivers:
n2020 vs. 2019 - Decrease of $0.4 billion primarily driven by recognition of realized gains due to sales of available-for-sale securities.
n2019 vs. 2018 - Increase of $1.2 billion primarily due to fair value gains as long-term interest rates declined, partially offset by fair value losses due to spread widening on our agency mortgage-related securities.
Management's Discussion and Analysis Consolidated Balance Sheets Analysis
CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized consolidated balance sheets.
Beginning January 1, 2020, we elected to offset payables related to securities sold under agreements to repurchase against receivables related to securities purchased under agreements to resell when such amounts meet the conditions for balance sheet offsetting. Prior period amounts have been reclassified to conform to the current presentation. See Note 1 and Note 11 for additional information.
Table 12 - Summarized Consolidated Balance Sheets
December 31, Year Over Year Change
Assets: