Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from                                        to
Commission File Number: 001-34139
primarylogoa04.jpg
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Federally chartered
 
52-0904874
 
8200 Jones Branch Drive
 
22102-3110
 
(703) 903-2000
corporation
 
 
McLean, Virginia
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
(Address of principal executive offices)
 
(Zip Code)
 
(Registrant’s telephone number,
including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý Yes    ¨ No
Indicate by check mark whether the registrant has submitted electronically 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).    ý 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  ý
 
 
 
Accelerated filer  ¨
 
Non-accelerated filer  ¨
 
Smaller reporting company  ¨
 
Emerging growth 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of April 16, 2019, there were 650,059,033 shares of the registrant’s common stock outstanding.

Table of Contents

Table of Contents
 
Page
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
n    Introduction
n    Market Conditions and Economic Indicators
n    Consolidated Results of Operations
n    Consolidated Balance Sheets Analysis
n    Our Business Segments
n    Risk Management
n    Liquidity and Capital Resources
n    Off-Balance Sheet Arrangements
n    Conservatorship and Related Matters
n    Regulation and Supervision
n    Forward-Looking Statements
FINANCIAL STATEMENTS
OTHER INFORMATION
CONTROLS AND PROCEDURES
EXHIBIT INDEX
SIGNATURES
FORM 10-Q INDEX

Freddie Mac Form 10-Q
 
i
Table of Contents

MD&A TABLE INDEX
Table
Description
Page
1
Summary of Consolidated Statements of Comprehensive Income (Loss)

2
Components of Net Interest Income
3
Analysis of Net Interest Yield
4
Components of Mortgage Loans Gains (Losses)
5
Components of Debt Gains (Losses)
6
Components of Derivative Gains (Losses)
7
Summarized Consolidated Balance Sheets
8
Single-Family Credit Guarantee Portfolio CRT Issuance
9
Details of Credit Enhanced Loans in Our Single-Family Credit Guarantee Portfolio
10
Single-Family Credit Guarantee Portfolio Attribute Combinations for Higher Risk Loans
11
Alt-A Loans in Our Single-Family Credit Guarantee Portfolio
12
Single-Family Credit Guarantee Portfolio Credit Performance Metrics
13
Single-Family Individually Impaired Loans with an Allowance Recorded
14
Single-Family TDR and Non-Accrual Loans
15
Single-Family REO Activity
16
Single-Family Guarantee Segment Financial Results
17
Multifamily Market Support
18
Multifamily Segment Financial Results
19
Capital Markets Segment Financial Results
20
Capital Markets Segment Interest Rate-Related and Market Spread-Related Fair Value Changes, Net of Tax
21
PVS-YC and PVS-L Results Assuming Shifts of the LIBOR Yield Curve
22
Duration Gap and PVS Results
23
PVS-L Results Before Derivatives and After Derivatives
24
Estimated Net Interest Rate Effect on Comprehensive Income (Loss)
25
GAAP Adverse Scenario Before and After Hedge Accounting
26
Estimated Spread Effect on Comprehensive Income (Loss)
27
Sources of Liquidity
28
Other Investments Portfolio
29
Sources of Funding
30
Other Debt Activity
31
Activity for Debt Securities of Consolidated Trusts Held by Third Parties
32
Sources of Capital
33
Net Worth Activity
34
Return on Conservatorship Capital
35
Mortgage-Related Investments Portfolio Details

Freddie Mac Form 10-Q
 
ii
Management's Discussion and Analysis
 
Introduction

Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in the Forward-Looking Statements sections of this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2018, or 2018 Annual Report, and the Business and Risk Factors sections of our 2018 Annual Report.
Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the Glossary of our 2018 Annual Report.
You should read the following MD&A in conjunction with our 2018 Annual Report and our condensed consolidated financial statements and accompanying notes for the three months ended March 31, 2019 included in Financial Statements. Throughout this Form 10-Q, we refer to the three months ended March 31, 2019, the three months ended December 31, 2018, the three months ended September 30, 2018, the three months ended June 30, 2018, and the three months ended March 31, 2018 as "1Q 2019," "4Q 2018," "3Q 2018," "2Q 2018," and "1Q 2018," respectively.
INTRODUCTION
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability, and affordability to the U.S. housing market. We do this primarily by purchasing residential mortgage loans originated by lenders. In most instances, we package these loans into mortgage-related securities, which are guaranteed by us and sold in the global capital markets. In addition, we transfer mortgage credit risk exposure to private 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. We are working with FHFA, our customers, and the industry to build a better housing finance system for the nation.
Business Results
Consolidated Financial Results(1) 
chart-b6a9a0059e97cf1dc47.jpg
(1)
Net revenues consist of net interest income, guarantee fee income, and other income (loss).

Freddie Mac Form 10-Q
 
1
Management's Discussion and Analysis
 
Introduction

Comprehensive income for 1Q 2019 was $1.7 billion, driven by solid business revenues, strong credit quality, minimal impact from market-related items, and continued guarantee portfolio growth.
n
Comprehensive income decreased 23% from 1Q 2018, primarily attributable to lower net interest income related to our guarantee and investments portfolios, driven by lower amortization due to lower prepayments on single-family loans and a decline in the balance of our mortgage-related investments portfolio.
n
Net revenues increased 2% from 1Q 2018, primarily due to an increase in guarantee fee income and a positive impact from hedge accounting in 1Q 2019, partially offset by the decline in net interest income related to our guarantee and investments portfolios.
n
Market-related items had minimal impact in 1Q 2019. Other non-interest income decreased, primarily due to interest-rate related fair value losses on derivatives as long-term interest rates declined, largely offset by an increase in other comprehensive income due to interest-rate related fair value gains on available-for-sale securities and the positive hedge accounting impact.
n
Benefit (provision) for credit losses remained relatively flat due to the strong credit performance of both our single-family and multifamily portfolios.
Our total equity was $4.7 billion at March 31, 2019. Based on the applicable Capital Reserve Amount of $3.0 billion, we will have a dividend requirement to Treasury in June 2019 of $1.7 billion.
Our cumulative senior preferred stock dividend payments totaled $118.0 billion as of March 31, 2019. Under the Purchase Agreement, the payment of dividends does not reduce the outstanding liquidation preference of the senior preferred stock, which remains at $75.6 billion. In addition, the amount of available funding remaining under the Purchase Agreement is $140.2 billion and will be reduced by any future draws.
Portfolio Balances
Guarantee Portfolios
chart-b9c8922de1845ebaa2d.jpg

 
Investments Portfolios
chart-12ed5e6e238656a8a6f.jpg




Freddie Mac Form 10-Q
 
2
Management's Discussion and Analysis
 
Introduction

Total Guarantee Portfolio
n
Our total guarantee portfolio grew $108 billion, or 5%, from March 31, 2018 to March 31, 2019, driven by a 4% increase in our single-family credit guarantee portfolio and a 14% increase in our multifamily guarantee portfolio.
l
The growth in our single-family credit guarantee portfolio was primarily driven by an increase in U.S. single-family mortgage debt outstanding as a result of continued home price appreciation and our increased share of the single-family mortgage market. New business acquisitions had a higher average loan size compared to older vintages that continued to run off.
l
The growth in our multifamily guarantee portfolio was primarily driven by strong loan purchase and securitization activity. Continued strong demand for multifamily financing and healthy multifamily market fundamentals resulted in continued growth in overall multifamily mortgage debt outstanding.
Total Investments Portfolio
n
Our total investments portfolio declined $15 billion, or 5%, from March 31, 2018 to March 31, 2019, primarily due to a reduction in the balance of our mortgage-related investments portfolio pursuant to the portfolio limits established by the Purchase Agreement and FHFA. In February 2019, FHFA directed us to maintain the mortgage-related investments portfolio at or below $225 billion at all times.
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.
Our Purchase Agreement with Treasury and the terms of the senior preferred stock we issued to Treasury also affect our business activities. Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. 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. Pursuant to the December 2017 Letter Agreement, the Capital Reserve Amount is $3.0 billion. If for any reason we were not to pay our dividend requirement on the senior preferred stock in full in any future period, the unpaid amount would be added to the liquidation preference and our applicable Capital Reserve Amount would thereafter be zero, but this would not affect our ability to draw funds from Treasury under the Purchase Agreement.

Freddie Mac Form 10-Q
 
3
Management's Discussion and Analysis
 
Market Conditions and Economic Indicators


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) 
chart-003eb0e0302d8627d18.jpg
(1) 30-year PMMS interest rates are as of the last week in each quarter.
Unemployment Rate
chart-5e9a78a9935b84ba2f5.jpg

Source: U.S. Bureau of Labor Statistics
 



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 or refinance 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 and 2-year LIBOR interest rates can significantly affect the fair value of our debt, derivatives, and mortgage and non-mortgage-related securities. In addition, the GAAP accounting treatment for our financial assets and liabilities, including derivatives (i.e., some are measured at amortized cost, while others are measured at fair value) creates variability in our GAAP earnings when interest rates change. We have elected hedge accounting for certain assets and liabilities in an effort to reduce GAAP earnings variability and better align GAAP results with the economics of our business.
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.
n
Long-term rates continued to decline during 1Q 2019, while short-term rates remained relatively flat, resulting in inversion of the yield curve.




n
Changes 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
Continued job growth, a declining unemployment rate, and generally favorable economic conditions resulted in strong credit performance.



Freddie Mac Form 10-Q
 
4
Management's Discussion and Analysis
 
Market Conditions and Economic Indicators

U.S. Single-Family Home Prices
chart-0b323cb31439ef8c2c0.jpg
Source: Freddie Mac House Price Index.

U.S. Single-Family Originations
chart-61d611000ec6f26415d.jpgSource: Inside Mortgage Finance dated April 26, 2019 (latest available IMF purchase/refinance information).

 




n
Changes in home prices affect the amount of equity that borrowers have in their homes. Borrowers with less equity typically have higher delinquency rates. As home prices decline, the severity of losses we incur on defaulted loans that we hold or guarantee increases because the amount we can recover from the property securing the loan decreases.
n
Single-family home prices increased 1.5% during 1Q 2019, compared to an increase of 2.5% during 1Q 2018. We expect home price growth will continue in 2019, although at a slower pace than in full-year 2018, due to increased supply.









n
U.S. single-family loan origination volume decreased to $355 billion in 1Q 2019 from $380 billion in 1Q 2018, driven by lower refinance volume as a result of higher average mortgage interest rates in 1Q 2019.
n
We expect U.S. single-family home purchase volume to increase slightly in 2019, driven by an expected increase in home sales and modest home price growth. Freddie Mac's single-family loan purchase volumes typically follow a similar trend.


Freddie Mac Form 10-Q
 
5
Management's Discussion and Analysis
 
Consolidated Results of Operations


CONSOLIDATED RESULTS OF OPERATIONS
You should read this discussion of our consolidated results of operations in conjunction with our condensed consolidated financial statements and accompanying notes.
The table below compares our summarized consolidated results of operations.
Table 1 - Summary of Consolidated Statements of Comprehensive Income (Loss)
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2019
1Q 2018
 
$
%
Net interest income
 

$3,153


$3,018

 

$135

4
 %
Guarantee fee income
 
217

194

 
23

12

Other income (loss)
 
34

131

 
(97
)
(74
)
Net revenues
 
3,404

3,343

 
61

2

Other non-interest income (loss):
 
 
 
 




Mortgage loans gains (losses)
 
931

(215
)
 
1,146

533

Investment securities gains (losses)
 
174

(232
)
 
406

175

Debt gains (losses)
 
15

121

 
(106
)
(88
)
Derivative gains (losses)
 
(1,606
)
1,830

 
(3,436
)
(188
)
Total other non-interest income (loss)
 
(486
)
1,504

 
(1,990
)
(132
)
Benefit (provision) for credit losses
 
135

(63
)
 
198

314

Non-interest expense
 
(1,288
)
(1,110
)
 
(178
)
(16
)
Income (loss) before income tax (expense) benefit
 
1,765

3,674

 
(1,909
)
(52
)
Income tax (expense) benefit
 
(358
)
(748
)
 
390

52

Net income (loss)
 
1,407

2,926

 
(1,519
)
(52
)
Total other comprehensive income (loss), net of taxes and reclassification adjustments
 
258

(776
)
 
1,034

133

Comprehensive income (loss)
 

$1,665


$2,150

 

($485
)
(23
)%

Freddie Mac Form 10-Q
 
6
Management's Discussion and Analysis
 
Consolidated Results of Operations


Net Interest Income
The table below presents the components of net interest income.
Table 2 - Components of Net Interest Income
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2019
1Q 2018
 
$
%
Net interest income related to guarantee portfolios:
 
 
 
 
 
 
Contractual guarantee fee income
 

$906


$834

 

$72

9
 %
Guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011
 
377

347

 
30

9

Amortization related to guarantee portfolios
 
482

748

 
(266
)
(36
)
Total net interest income related to guarantee portfolios
 
1,765

1,929

 
(164
)
(9
)
Net interest income related to investments portfolios:
 
 
 
 
 
 
Contractual net interest income
 
1,252

1,457

 
(205
)
(14
)
Amortization related to investments portfolios
 
(131
)
5

 
(136
)
(2,720
)
Total net interest income related to investments portfolios
 
1,121

1,462

 
(341
)
(23
)
Hedge accounting impact
 
267

(373
)
 
640

172

Net interest income
 

$3,153


$3,018

 

$135

4
 %
Key Drivers:
n
Contractual guarantee fee income
l
1Q 2019 vs. 1Q 2018 - Increased primarily due to the continued growth of the core single-family loan portfolio.
n
Amortization related to guarantee portfolios
l
1Q 2019 vs. 1Q 2018 - Decreased primarily due to lower prepayments on single-family loans as a result of higher average mortgage interest rates.
n
Contractual net interest income
l
1Q 2019 vs. 1Q 2018 - Decreased primarily due to the reduction in the balance of our mortgage-related investments portfolio pursuant to the portfolio limits established by the Purchase Agreement and FHFA. See Conservatorship and Related Matters - Managing Our Mortgage-Related Investments Portfolio for a discussion of the key drivers of the decline in our mortgage-related investments portfolio.
n
Amortization related to investments portfolios
l
1Q 2019 vs. 1Q 2018 - Decreased primarily due to lower accretion related to previously recognized other-than-temporary impairments as a result of a decline in the population of impaired securities. Amortization related to unsecuritized mortgage loans also decreased, as certain of those loans were reclassified from held-for-investment to held-for-sale and ceased amortizing.
n
Hedge accounting impact
l
1Q 2019 vs. 1Q 2018 - Increased primarily due to the mismatch related to fair value hedge accounting. The mismatch is the amount by which the gain or loss on the designated derivative instrument does not exactly offset the gain or loss on the hedged item attributable to the hedged risk.

Freddie Mac Form 10-Q
 
7
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.
Table 3 - Analysis of Net Interest Yield
 
 
1Q 2019
 
1Q 2018
(Dollars in millions)
 
Average
Balance
Interest
Income
(Expense)(1)
Average
Rate
 
Average
Balance
Interest
Income
(Expense)(1)
Average
Rate
Interest-earning assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 

$7,105


$38

2.14
 %
 

$7,015


$11

0.60
 %
Securities purchased under agreements to resell
 
47,224

297

2.51

 
51,732

197

1.52

Secured lending
 
1,567

16

4.08

 
990

6

2.59

Mortgage-related securities:
 
 
 
 
 
 
 
 
Mortgage-related securities
 
133,925

1,461

4.36

 
150,267

1,580

4.21

Extinguishment of PCs held by Freddie Mac
 
(84,709
)
(895
)
(4.23
)
 
(90,814
)
(843
)
(3.71
)
Total mortgage-related securities, net
 
49,216

566

4.60

 
59,453

737

4.96

Non-mortgage-related securities
 
19,408

123

2.54

 
14,775

73

1.97

Loans held by consolidated trusts(1)
 
1,847,861

16,977

3.68

 
1,776,708

14,859

3.35

Loans held by Freddie Mac(1)
 
89,152

969

4.35

 
103,451

1,092

4.22

Total interest-earning assets
 
2,061,533

18,986

3.68

 
2,014,124

16,975

3.37

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
 
1,871,847

(14,876
)
(3.18
)
 
1,803,122

(13,356
)
(2.96
)
Extinguishment of PCs held by Freddie Mac
 
(84,709
)
895

4.23

 
(90,814
)
842

3.71

Total debt securities of consolidated trusts held by third parties
 
1,787,138

(13,981
)
(3.13
)
 
1,712,308

(12,514
)
(2.92
)
Other debt:
 
 
 
 
 
 
 
 
Short-term debt
 
70,192

(436
)
(2.48
)
 
67,970

(229
)
(1.35
)
Long-term debt
 
199,937

(1,416
)
(2.83
)
 
228,981

(1,214
)
(2.12
)
Total other debt
 
270,129

(1,852
)
(2.74
)
 
296,951

(1,443
)
(1.94
)
Total interest-bearing liabilities
 
2,057,267

(15,833
)
(3.08
)
 
2,009,259

(13,957
)
(2.78
)
Impact of net non-interest-bearing funding
 
4,266

—

0.01

 
4,865

—

0.01

Total funding of interest-earning assets
 

$2,061,533


($15,833
)
(3.07
)%
 

$2,014,124


($13,957
)
(2.77
)%
Net interest income/yield
 
 

$3,153

0.61
 %
 
 

$3,018

0.60
 %
(1)
Loan fees, primarily consisting of amortization of upfront fees, included in interest income were $574 million during both 1Q 2019 and 1Q 2018 for loans held by consolidated trusts and $16 million and $22 million for loans held by Freddie Mac during 1Q 2019 and 1Q 2018, respectively.
Guarantee Fee Income
n
1Q 2019 vs. 1Q 2018 - Increased due to the continued growth in the multifamily guarantee portfolio.

Freddie Mac Form 10-Q
 
8
Management's Discussion and Analysis
 
Consolidated Results of Operations


Other Non-Interest Income (Loss)
Mortgage Loans Gains (Losses)
The table below presents the components of mortgage loans gains (losses).
Table 4 - Components of Mortgage Loans Gains (Losses)
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2019
1Q 2018
 
$
%
Gains (losses) on certain loan purchase commitments
 

$391

$105
 

$286

272
%
Gains (losses) on mortgage loans
 
540

(320
)
 
860

269

Mortgage loans gains (losses)
 

$931


($215
)
 

$1,146

533
%
n
1Q 2019 vs. 1Q 2018 - Increased due to fair value gains on multifamily held-for-sale mortgage loans and commitments as a result of the decline in interest rates and spread tightening, coupled with lower fair value losses on single-family seasoned loans.
Investment Securities Gains (Losses)
n
1Q 2019 vs. 1Q 2018 - Increased primarily due to gains on trading securities driven by decreasing interest rates, partially offset by a decrease in realized gains reclassified from AOCI due to a lower volume of sales of available-for-sale non-agency mortgage-related securities.
Debt Gains (Losses)
The table below presents the components of debt gains (losses).
Table 5 - Components of Debt Gains (Losses)
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2019
1Q 2018
 
$
%
Fair value changes
 

($4
)

$11

 

($15
)
(136
)%
Gains (losses) on extinguishment of debt
 
19

110

 
(91
)
(83
)
Debt gains (losses)
 

$15


$121

 

($106
)
(88
)%
n
1Q 2019 vs. 1Q 2018 - Decreased primarily due to lower gains from the extinguishment of fixed-rate PCs, as market interest rates declined between the time of issuance and repurchase.
Derivative Gains (Losses)
The table below presents the components of derivative gains (losses).
Table 6 - Components of Derivative Gains (Losses)
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2019
1Q 2018
 
$
%
Fair value change in interest-rate swaps
 

($1,047
)

$1,514

 

($2,561
)
(169
)%
Fair value change in option-based derivatives
 
(187
)
(455
)
 
268

59

Fair value change in other derivatives
 
(318
)
916

 
(1,234
)
(135
)
Accrual of periodic cash settlements
 
(54
)
(145
)
 
91

63

Derivative gains (losses)
 

($1,606
)

$1,830

 

($3,436
)
(188
)%
n
1Q 2019 vs. 1Q 2018 - Decreased as long-term interest rates declined during 1Q 2019. The 10-year par swap rate decreased 31 basis points during 1Q 2019, compared to a 39 basis point increase during 1Q 2018. The interest rate decreases during 1Q 2019 resulted in fair value losses on pay-fixed interest rate swaps, forward commitments to issue PCs, and futures, which were partially offset by fair value gains on receive-fixed swaps and certain option-based derivatives.

Freddie Mac Form 10-Q
 
9
Management's Discussion and Analysis
 
Consolidated Results of Operations


Benefit (Provision) for Credit Losses
n
1Q 2019 vs. 1Q 2018 - Remained relatively flat due to the strong credit performance of both our single-family and multifamily portfolios.
Other Comprehensive Income (Loss)
n
1Q 2019 vs. 1Q 2018 - Increased primarily due to fair value gains as long-term interest rates declined, coupled with a decrease in realized gains reclassified from AOCI due to a lower volume of sales of non-agency mortgage-related securities.

Freddie Mac Form 10-Q
 
10
Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized consolidated balance sheets.
Table 7 - Summarized Consolidated Balance Sheets
 
 
 
 
 
Change
(Dollars in millions)
 
3/31/2019
12/31/2018
 
$
%
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 

$6,239


$7,273

 

($1,034
)
(14
)%
Securities purchased under agreements to resell
 
50,134

34,771

 
15,363

44

Subtotal
 
56,373

42,044

 
14,329

34

Investments in securities, at fair value
 
65,496

69,111

 
(3,615
)
(5
)
Mortgage loans, net
 
1,942,088

1,926,978

 
15,110

1

Accrued interest receivable
 
6,684

6,728

 
(44
)
(1
)
Derivative assets, net
 
1,146

335

 
811

242

Deferred tax assets, net
 
6,819

6,888

 
(69
)
(1
)
Other assets
 
14,301

10,976

 
3,325

30

Total assets
 

$2,092,907


$2,063,060

 

$29,847

1
 %
 
 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Accrued interest payable
 

$6,558


$6,652

 

($94
)
(1
)%
Debt, net
 
2,073,614

2,044,950

 
28,664

1

Derivative liabilities, net
 
432

583

 
(151
)
(26
)
Other liabilities
 
7,638

6,398

 
1,240

19

Total liabilities
 
2,088,242

2,058,583

 
29,659

1

Total equity
 
4,665

4,477

 
188

4

Total liabilities and equity
 

$2,092,907


$2,063,060

 

$29,847

1
 %
Key Drivers:
As of March 31, 2019 compared to December 31, 2018:
n
Cash and cash equivalents and securities purchased under agreements to resell increased on a combined basis primarily due to higher near-term cash needs for upcoming maturities and higher anticipated calls of other debt.
n Other assets increased primarily due to the recognition of receivables on sales of securities which had traded but not settled as of March 31, 2019.
n Other liabilities increased primarily due to the recognition of liabilities related to purchases of securities which had traded but not settled as of March 31, 2019.



Freddie Mac Form 10-Q
 
11
Management's Discussion and Analysis
 
Our Business Segments | Segment Earnings


OUR BUSINESS SEGMENTS
We have three reportable segments, which are based on the way we manage our business.
n
Single-Family Guarantee - reflects results from our purchase, securitization, and guarantee of single-family loans and the management of single-family mortgage credit risk.
n
Multifamily - reflects results from our purchase, sale, securitization, and guarantee of multifamily loans and securities, our investments in those loans and securities, and the management of multifamily mortgage credit risk and market spread risk.
n
Capital Markets - reflects results from managing our mortgage-related investments portfolio (excluding Multifamily segment investments, single-family seriously delinquent loans, and the credit risk of single-family performing and reperforming loans), single-family securitization activities, and treasury function, which includes interest-rate risk management for the company.
Certain activities that are not part of a reportable segment, such as material corporate-level activities that are infrequent in nature and based on decisions outside the control of the management of our reportable segments, are included in the All Other category.
Segment Earnings
We present Segment Earnings by reclassifying certain credit guarantee-related activities and investment-related activities between various line items on our GAAP condensed consolidated statements of comprehensive income and allocating certain revenues and expenses to our three reportable segments. For more information on our segment reclassifications, see Note 13.
Segment Comprehensive Income
The graph below shows our comprehensive income by segment.
(In millions)
chart-e7b3b1f4ae095971831.jpg

Freddie Mac Form 10-Q
 
12
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Single-Family Guarantee
Business Results
The following tables, graphs, and related discussion present the business results of our Single-family Guarantee segment.
New Business Activity
UPB of Single-Family Loan Purchases and Guarantees by Loan Purpose
(In billions)
chart-b8ca341f34b254ce9ff.jpg
 
Percentage of Single-Family Loan Purchases and Guarantees by Loan Purposechart-fd279cc259feb70eed5.jpg
n
Our loan purchase and guarantee activity increased in 1Q 2019 compared to 1Q 2018, primarily due to higher home purchase volume, partially offset by a decline in refinance activity as a result of higher average mortgage interest rates in recent quarters.








Freddie Mac Form 10-Q
 
13
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Single-Family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfolio chart-c9ca88c530e6542681d.jpg
n
The single-family credit guarantee portfolio increased at an annualized rate of approximately 4% between December 31, 2018 and March 31, 2019, driven by an increase in U.S. single-family mortgage debt outstanding as a result of continued home price appreciation and our increased share of the single-family mortgage market. New business acquisitions had a higher average loan size compared to older vintages that continued to run off.
n
The core single-family loan portfolio grew to 83% of the single-family credit guarantee portfolio at March 31, 2019, compared to 82% at December 31, 2018.
n
The legacy and relief refinance single-family loan portfolio declined to 17% of the single-family credit guarantee portfolio at March 31, 2019, compared to 18% at December 31, 2018.

Freddie Mac Form 10-Q
 
14
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Guarantee Fees
We receive fees for guaranteeing the payment of principal and interest to investors in our mortgage-related securities. These fees consist primarily of a combination of base contractual guarantee fees paid on a monthly basis and initial upfront payments. The average portfolio Segment Earnings guarantee fee rate recognizes upfront fee income over the contractual life of the related loans (usually 30 years). If the related loans prepay, the remaining upfront fee income is recognized immediately. In contrast, the average guarantee fee rate charged on new acquisitions recognizes upfront fee income over the estimated life of the related loans using our expectations of prepayments and other liquidations. See MD&A - Our Business Segments - Single-Family Guarantee - Business Overview - Guarantee Fees in our 2018 Annual Report for more information on our guarantee fees.
Average Portfolio Segment Earnings Guarantee Fee Rate(1)(2)  
(In bps)
chart-0349dc6e4e5f58ebbba.jpg
 
Average Guarantee Fee Rate(1) Charged on New Acquisitions
(In bps)
chart-81fc5a43ad7c7b2657e.jpg
(1)
Excludes the legislated 10 basis point increase in guarantee fees.
(2)
Reflects an average rate for our total single-family credit guarantee portfolio and is not limited to purchases in the applicable period.
n
The average portfolio Segment Earnings guarantee fee rate declined in 1Q 2019 compared to 1Q 2018 due to a decrease in the recognition of upfront fees driven by a lower prepayment rate. This decrease was partially offset by an increase in contractual guarantee fees as older vintages were replaced by acquisitions of new loans with higher contractual guarantee fees.
n
The average guarantee fee rate charged on new acquisitions remained unchanged in 1Q 2019 compared to 1Q 2018.


Freddie Mac Form 10-Q
 
15
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

CRT Activities
We transfer credit risk on a portion of our single-family credit guarantee portfolio to the private market, which reduces the risk of future losses to us and taxpayers when borrowers go into default. See MD&A - Our Business Segments - Single-Family Guarantee - Business Overview - Products and Activities - Credit Risk Transfer (CRT) Transactions in our 2018 Annual Report for more information on our CRT transactions.
The following table presents the issuance amounts during 1Q 2019 on the protected UPB and maximum coverage by loss position associated with CRT transactions for loans in our single-family credit guarantee portfolio.
Table 8 - Single-Family Credit Guarantee Portfolio CRT Issuance
 
 
Issuance for the Three Months Ended March 31, 2019
 
 
Protected UPB(1)
Maximum Coverage(2)
(In millions)
 
Total
First Loss(3)
Mezzanine
Total
CRT Activities:
 
 
 
 
 
   STACR debt notes
 

$9,000


$60


$220


$280

   STACR Trust transactions
 
65,849

522

1,440

1,962

   ACIS® transactions
 
65,103

243

611

854

Senior subordinate securitization structures
 
1,903

115

79

194

   Other
 
4,187

32

128

160

Less: UPB with more than one type of CRT activity
 
(45,368
)
—

—

—

Total CRT Activities
 

$100,674


$972


$2,478


$3,450

(1)
For STACR and ACIS transactions, represents the UPB of the assets included in the reference pool. For senior subordinate securitization structure transactions, represents the UPB of the guaranteed securities, which represents the UPB of the assets included in the trust net of the protection provided by the subordinated securities.
(2)
For STACR transactions, represents the balance held by third parties at issuance. For ACIS transactions, represents the aggregate limit of insurance purchased from third parties at issuance. For senior subordinate securitization structure transactions, represents the UPB of the securities that are subordinate to Freddie Mac guaranteed securities and held by third parties.
(3)
First loss includes the most subordinate securities (i.e., B tranches) in our STACR transactions and their equivalent in ACIS and Other CRT transactions.
n
We retained exposure to $97.2 billion of the protected UPB for the CRT issuances during 1Q 2019, including first loss and mezzanine positions.
We are continually evaluating our CRT strategy, and we make changes depending on market conditions and our business strategy. The aggregate cost of our CRT activity, as well as the amount of credit risk transferred, will continue to increase as we execute new transactions.

Freddie Mac Form 10-Q
 
16
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Credit Enhancements
To reduce our credit risk exposure, we engage in various credit enhancement arrangements, which include CRT transactions and other credit enhancements.
The tables below provide information on the total protected UPB and maximum coverage associated with credit enhanced loans in our single-family credit guarantee portfolio, measured by UPB, that were covered by one or more forms of credit enhancements as of March 31, 2019 and December 31, 2018, respectively. See MD&A - Risk Management - Single-Family Mortgage Credit Risk - Transferring Credit Risk of the Single-Family Credit Guarantee Portfolio to Investors in New and Innovative Ways in our 2018 Annual Report and Note 6 in this report and our 2018 Annual Report for additional information about our single-family credit enhancements.
Table 9 - Details of Credit Enhanced Loans in Our Single-Family Credit Guarantee Portfolio
 
 
Outstanding as of March 31, 2019
 
 
Protected UPB(1)
Percentage of Single-Family Credit Guarantee Portfolio
Maximum Coverage(2)
(In millions)
 
Total
Total
First Loss(3)
Mezzanine
Total
CRT Activities:
 
 
 
 
 
 
   STACR debt notes
 

$600,857

31
%

$2,213


$15,251


$17,464

   STACR Trust transactions
 
222,837

12

2,144

4,822

6,966

   ACIS transactions
 
853,942

45

1,792

8,011

9,803

Senior subordinate securitization structures
 
41,015

2

1,919

2,107

4,026

  Other
 
17,216

1

5,256

203

5,459

Less: UPB with more than one type of
CRT Activity
 
(764,956
)
(40
)
—

—

—

Total CRT Activities
 

$970,911

51
%

$13,324


$30,394


$43,718

 
 
 
 
 
 
 
Other Credit Enhancements:
 
 
 
 
 
 
  Primary Mortgage Insurance
 
 

$385,483

20
 %

$98,846

—


$98,846

  Other
 
2,435

—

1,312

—

1,312

Less: UPB with both CRT and other credit enhancements
 
(283,923
)
(15
)
—

—

—

Single-family credit guarantee portfolio with credit enhancement
 
1,074,906

56

113,482

30,394

143,876

Single-family credit guarantee portfolio without credit enhancement
 
838,619

44

—

—

—

Total
 

$1,913,525

100
%

$113,482


$30,394


$143,876

Referenced footnotes are included after the next table.

Freddie Mac Form 10-Q
 
17
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

 
 
Outstanding as of December 31, 2018
 
 
Protected UPB(1)
Percentage of Single-Family Credit Guarantee Portfolio
Maximum Coverage(2)
(In millions)
 
Total
Total
First Loss(3)
Mezzanine
Total
CRT Activities:
 
 
 
 
 
 
   STACR debt notes
 

$605,263

32
%

$2,155


$15,441


$17,596

   STACR Trust transactions
 
161,152

8

1,622

3,404

5,026

   ACIS transactions
 
807,885

43

1,552

7,571

9,123

Senior subordinate securitization structures
 
39,860

2

1,807

2,046

3,853

  Other
 
18,136

1

5,049

340

5,389

Less: UPB with more than one type of
CRT Activity
 
(736,334
)
(39
)
—

—

—

Total CRT Activities
 

$895,962

47
%

$12,185


$28,802


$40,987

 
 
 
 
 
 
 
Other Credit Enhancements:
 
 
 
 
 
 
  Primary Mortgage Insurance
 
 

$378,594

20
 %

$96,996

—


$96,996

  Other
 
2,642

—

1,341

—

1,341

Less: UPB with both CRT and other credit enhancements
 
(254,774
)
(13
)
—

—

—

Single-family credit guarantee portfolio with credit enhancement
 
1,022,424

54

110,522

28,802

139,324

Single-family credit guarantee portfolio without credit enhancement
 
873,762

46

—

—

—

Total
 

$1,896,186

100
%

$110,522


$28,802


$139,324

(1)
For STACR and ACIS transactions, represents the UPB of the assets included in the reference pool. For senior subordinate securitization structure transactions, represents the UPB of the guaranteed securities, which represents the UPB of the assets included in the trust net of the protection provided by the subordinated securities.
(2)
For STACR transactions, represents the outstanding balance held by third parties. For ACIS transactions, represents the remaining aggregate limit of insurance purchased from third parties. For senior subordinate securitization structure transactions, represents the outstanding UPB of the securities that are subordinate to Freddie Mac guaranteed securities and held by third parties.
(3)
First loss includes the most subordinate securities (i.e., B tranches) in our STACR transactions and their equivalent in ACIS and Other CRT transactions.
n
We had coverage remaining of $143.9 billion and $139.3 billion on our single-family credit guarantee portfolio as of March 31, 2019 and December 31, 2018, respectively. CRT transactions provided 30.4% and 29.4% of the coverage remaining at those dates.
n
As of March 31, 2019, we had cumulatively transferred a portion of credit risk on nearly $1.3 trillion of our single-family mortgages, based upon the UPB at issuance of the CRT transactions.
l
FHFA's conservatorship capital needed for credit risk was reduced by approximately 65% through CRT transactions on new business activity in the twelve months ended March 31, 2018.
l
The reduction in the amount of conservatorship capital needed for credit risk on new business activity is calculated as conservatorship credit capital released from the CRT transactions (primarily through STACR and ACIS) divided by total conservatorship credit capital on new business activity at the time of purchase. For more information on the CCF and the calculation of conservatorship capital, see Liquidity and Capital Resources - Capital Resources - Conservatorship Capital Framework - Return on Conservatorship Capital.
n
During 1Q 2019, we paid $159 million in interest expense, net of reinvestment income, on our outstanding STACR debt notes and $152 million in premium expense for ACIS and STACR Trust contracts, compared to $165 million in interest expense, net of reinvestment income, on our outstanding STACR debt notes and $67 million in premium expense for ACIS and STACR Trust contracts in 1Q 2018.
n
As of March 31, 2019, we had experienced minimal write-downs on our STACR transactions and have filed minimal claims for reimbursement of losses under our ACIS transactions.





Freddie Mac Form 10-Q
 
18
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Mortgage Loan Credit Risk
Certain combinations of loan attributes can indicate a higher degree of credit risk, such as loans with both higher LTV ratios and lower credit scores. The following table presents the combination of credit score and current LTV (CLTV) ratio attributes of loans in our single-family credit guarantee portfolio.
Table 10 - Single-Family Credit Guarantee Portfolio Attribute Combinations for Higher Risk Loans
 
 
March 31, 2019
 
 
CLTV ≤ 80

CLTV > 80 to 100

CLTV > 100

All Loans
(Credit score)
 
% Portfolio
SDQ Rate

% Portfolio
SDQ Rate(1)

% Portfolio
SDQ Rate(1)

% Portfolio
SDQ Rate
% Modified
Core single-family loan portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
0.3
%
2.19
%
 
0.1
%
3.39
%
 
—
%
NM

 
0.4
%
2.36
%
3.6
%
620 to 659
 
2.1

1.10

 
0.3

1.18

 
—

NM

 
2.4

1.11

2.0

≥ 660
 
69.4

0.17

 
10.3

0.25

 
—

NM

 
79.7

0.18

0.3

Not available
 
0.1

1.25

 
—

NM

 
—

NM

 
0.1

2.32

3.7

Total
 
71.9
%
0.21
%
 
10.7
%
0.30
%
 
—
%
NM

 
82.6
%
0.22
%
0.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legacy and relief refinance single-family loan portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
1.1
%
4.12
%
 
0.2
%
8.52
%
 
0.1
%
14.42
%
 
1.4
%
4.85
%
22.1
%
620 to 659
 
1.7

3.08

 
0.2

7.11

 
0.1

11.82

 
2.0

3.64

19.4

≥ 660
 
12.5

1.11

 
1.1

3.65

 
0.3

6.02

 
13.9

1.31

7.0

Not available
 
0.1

4.58

 
—

NM

 
—

NM

 
0.1

4.90

19.8

Total
 
15.4
%
1.60
%
 
1.5
%
4.85
%
 
0.5
%
8.38
%
 
17.4
%
1.91
%
9.8
%
(1)
NM - Not meaningful due to the percentage of the portfolio rounding to zero.
Alt-A and Subprime Loans
While we have referred to certain loans as subprime or Alt-A for purposes of the discussion below and elsewhere in this Form 10-Q, there is no universally accepted definition of subprime or Alt-A, and the classification of such loans may differ from company to company. We do not rely on these loan classifications to evaluate the credit risk exposure relating to such loans in our single-family credit guarantee portfolio.
Participants in the mortgage market have characterized single-family loans based upon their overall credit quality at the time of origination, including as prime or subprime. While we have not historically characterized the loans in our single-family credit guarantee portfolio as either prime or subprime, we monitor the amount of loans we have guaranteed with characteristics that indicate a higher degree of credit risk. In addition, we estimate that approximately $0.8 billion and $0.9 billion of security collateral underlying our other securitization products at March 31, 2019 and December 31, 2018, respectively, were identified as subprime based on information provided to us when we entered into these transactions.
Mortgage market participants have classified single-family loans as Alt-A if these loans have credit characteristics that range between the prime and subprime categories, if they are underwritten with lower or alternative income or asset documentation requirements compared to a full documentation loan, or both. Although we have discontinued new purchases of loans with lower documentation standards, we continue to purchase certain amounts of such loans in cases where the loan was either purchased pursuant to a previously issued guarantee, as part of our relief refinance initiative, or as part of another refinance loan initiative and the pre-existing loan was originated under less than full documentation standards. In the event we purchase a refinance loan and the original loan had been previously identified as Alt-A, such refinance loan may no longer be categorized or reported as an Alt-A loan in this Form 10-Q and our other financial reports because the new refinance loan replacing the original loan would not be identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such refinancing not occurred. From the time the relief refinance initiative began in 2009 to March 31, 2019, we have purchased approximately $36.4 billion of relief refinance loans that were previously categorized as Alt-A loans in our portfolio, including $0.1 billion in 1Q 2019.

Freddie Mac Form 10-Q
 
19
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
Table 11 - Alt-A Loans in Our Single-Family Credit Guarantee Portfolio
 
 
March 31, 2019
 
December 31, 2018
(Dollars in billions)
 
UPB
CLTV
% Modified
SDQ Rate
 
UPB
CLTV
% Modified
SDQ Rate
Alt-A
 

$23.1

63
%
22.7
%
4.17
%
 

$23.9

63
%
23.2
%
4.13
%
The UPB of Alt-A loans in our single-family credit guarantee portfolio is continuing to decline due to borrowers refinancing into other mortgage products, foreclosure sales, and other liquidation events.
Single-Family Loan Performance
Serious Delinquency Rates chart-4afa73d0778553659fb.jpg
 
Percentage of Single-Family Loans One Month and Two Months Past Due    
chart-2597db554c6e5adbbd4.jpg
n
The total serious delinquency rate on our single-family credit guarantee portfolio was 0.67% as of March 31, 2019. However, 33% of the seriously delinquent loans at March 31, 2019 were covered by credit enhancements designed to reduce our credit risk exposure. See Note 4 for additional information on our single-family delinquency rates.
n
Our total single-family serious delinquency rate was lower as of March 31, 2019 compared to March 31, 2018 due to our continued loss mitigation efforts, sales of certain seriously delinquent loans, home price appreciation, a low unemployment rate, and the reduced impacts from the hurricanes in the third quarter of 2017. This improvement was also driven by the continued shift in the single-family credit guarantee portfolio mix, as the legacy and relief refinance single-family loan portfolio runs off and we add higher credit quality loans to our core single-family loan portfolio. The percentage of our single-family loans two months past due was affected in a similar manner. However, the percentage of our single-family loans one month past due slightly increased as of March 31, 2019, compared to March 31, 2018.

Freddie Mac Form 10-Q
 
20
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Credit Performance
The table below contains certain credit performance metrics for our single-family credit guarantee portfolio.
Table 12 - Single-Family Credit Guarantee Portfolio Credit Performance Metrics
(Dollars in millions)
 
1Q 2019
1Q 2018
Charge-offs, gross
 

$605


$372

Recoveries
 
(106
)
(96
)
Charge-offs, net
 
499

276

REO operations expense
 
33

34

Total credit losses
 

$532


$310

 
 
 
 
Total credit losses (in bps)
 
11.5

6.7

The table below summarizes the carrying value for individually impaired single-family loans on our condensed consolidated balance sheets for which we have recorded an allowance determined on an individual basis.
Table 13 - Single-Family Individually Impaired Loans with an Allowance Recorded
                                            
 
March 31, 2019
 
March 31, 2018
(Dollars in millions)
 
Loan Count
Amount
 
Loan Count
Amount
TDRs, at January 1
 
290,255


$42,254

 
364,704


$54,415

New additions
 
8,734

1,347

 
23,699

3,800

Repayments and reclassifications to held-for-sale
 
(21,347
)
(3,809
)
 
(8,908
)
(1,522
)
Foreclosure sales and foreclosure alternatives
 
(1,373
)
(185
)
 
(2,083
)
(282
)
TDRs, at March 31
 
276,269

39,607

 
377,412

56,411

Loans impaired upon purchase
 
2,403

158

 
4,364

290

Total impaired loans with an allowance recorded
 
278,672

39,765

 
381,776

56,701

Allowance for loan losses
 
 
(3,820
)
 
 
(6,968
)
Net investment, at March 31
 
 

$35,945

 
 

$49,733

The tables below present information about the UPB of single-family TDRs and non-accrual loans on our condensed consolidated balance sheets.
Table 14 - Single-Family TDR and Non-Accrual Loans
(In millions)
 
March 31, 2019
December 31, 2018
TDRs on accrual status
 

$39,409


$41,839

Non-accrual loans
 
10,983

11,197

Total TDRs and non-accrual loans
 

$50,392


$53,036

 
 
 
 
Allowance for loan losses associated with:
 
 
 
  TDRs on accrual status
 

$3,141


$3,612

  Non-accrual loans
 
902

1,003

Total
 

$4,043


$4,615

 
 
 
 
(In millions)
 
1Q 2019
1Q 2018
Foregone interest income on TDRs and non-accrual loans(1)
 

$312


$446

(1)
Represents the amount of interest income that we did not recognize but would have recognized during the period for loans outstanding at the end of each period, had the loans performed according to their original contractual terms.
n
As of March 31, 2019, 44% of the allowance for loan losses for single-family mortgage loans related to interest rate concessions provided to borrowers as part of loan modifications.
n
Most of our modified single-family loans, including TDRs, were current and performing at March 31, 2019.
n
We expect our allowance for loan losses associated with existing single-family TDRs to decline over time as we continue to sell reperforming loans. In addition, the allowance for loan losses will decline as borrowers continue to make monthly payments under the modified terms and interest rate concessions are amortized into earnings.
n
See Note 4 for information on our single-family allowance for loan losses.

Freddie Mac Form 10-Q
 
21
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Loss Mitigation Activities
Loan Workout Activity(1)  
(UPB in billions, number of loan workouts in thousands)
chart-4acc11a8485a572c98e.jpg
(1)
Foreclosure alternatives consist of short sales and deeds in lieu of foreclosure. Home retention actions consist of forbearance agreements, repayment plans, and loan modifications.
n
Our loan workout activity decreased in 1Q 2019 compared to 1Q 2018 driven by the reduced impact from the hurricanes in the third quarter of 2017.
n
We continue our loss mitigation efforts through our relief refinance, modification, and other initiatives.
REO Activity
The table below presents a summary of our single-family REO activity.
Table 15 - Single-Family REO Activity
 
 
1Q 2019
 
1Q 2018
(Dollars in millions)
 
Number of Properties
Amount
 
Number of Properties
Amount
Beginning balance — REO
 
7,100


$780

 
8,299


$900

Additions
 
2,156

208

 
2,620

246

Dispositions
 
(2,542
)
(234
)
 
(3,201
)
(306
)
Ending balance — REO
 
6,714

754

 
7,718

840

Beginning balance, valuation allowance
 
 
(11
)
 
 
(14
)
Change in valuation allowance
 
 
1

 
 
5

Ending balance, valuation allowance
 


(10
)
 


(9
)
Ending balance — REO, net
 



$744

 



$831

n
Our REO ending inventory declined in 1Q 2019, primarily due to a decrease in REO acquisitions driven by fewer loans in foreclosure and a large proportion of property sales to third parties at foreclosure.

Freddie Mac Form 10-Q
 
22
Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Financial Results
The table below presents the components of Segment Earnings and comprehensive income for our Single-family Guarantee segment.
Table 16 - Single-Family Guarantee Segment Financial Results
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2019
1Q 2018
 
$
%
Guarantee fee income
 

$1,633


$1,590

 

$43

3
 %
Benefit (provision) for credit losses
 
8

41

 
(33
)
(80
)
Financial instrument gains (losses)(1)
 
(62
)
28

 
(90
)
(321
)
Other non-interest income (loss)
 
249

81

 
168

207

Administrative expense
 
(374
)
(336
)
 
(38
)
(11
)
REO operations income (expense)
 
(38
)
(39
)
 
1

3

Other non-interest expense
 
(488
)
(379
)
 
(109
)
(29
)
Segment Earnings before income tax expense
 
928

986

 
(58
)
(6
)
Income tax (expense) benefit
 
(188
)
(200
)
 
12

6

Segment Earnings, net of taxes
 
740

786

 
(46
)
(6
)
Total other comprehensive income (loss), net of tax
 
(4
)
(4
)
 
—

—

Total comprehensive income (loss)
 

$736


$782

 

($46
)
(6
)%
(1)
Consists of fair value gains and losses on debt for which we have elected the fair value option and derivatives.
Key Business Drivers:
n 1Q 2019 vs. 1Q 2018
l
Higher guarantee fee income due to continued growth in our single-family credit guarantee portfolio.
l
Fair value losses due to higher losses on STACR transactions driven by changes in market spreads.
l
Higher other non-interest income primarily due to higher gains on single-family seasoned loan reclassifications between held-for-investment and held-for-sale.
l
Higher other non-interest expense primarily due to higher outstanding cumulative volumes of CRT transactions that resulted in increased CRT expense (interest expense on STACR debt notes and premium expense for ACIS and STACR Trust contracts).

Freddie Mac Form 10-Q
 
23
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Multifamily
Business Results
The graphs, tables, and related discussion below present the business results of our Multifamily segment.
New Business Activity
Multifamily New Business Activity
chart-d8e0fab356005adb892.jpg
n
The 2019 Conservatorship Scorecard annual production cap is $35.0 billion, unchanged from 2018. The production cap is subject to reassessment throughout the year by FHFA to determine whether an increase in the cap is appropriate based on a stronger than expected overall market. Reclassifications between new business activity subject to the production cap and new business activity not subject to the production cap may occur during 2019.
n
Outstanding commitments, including index lock commitments and commitments to purchase or guarantee multifamily assets, were $20.8 billion and $17.5 billion as of March 31, 2019 and March 31, 2018, respectively. Both period-end balances include loan purchase commitments for which we have elected the fair value option.
n
The combination of our new business activity and outstanding commitments was higher during 1Q 2019 compared to 1Q 2018 due to continued strong demand for multifamily financing and healthy multifamily market fundamentals resulting in continued growth in the overall multifamily mortgage debt outstanding.
n
Excluding our LIHTC new business activity, approximately 44% of our multifamily new business activity in 1Q 2019 counted towards the 2019 Conservatorship Scorecard production cap, while the remaining 56% was considered uncapped.
n
Our uncapped new business activity increased slightly during 1Q 2019 compared to 1Q 2018 as we continued our efforts to support affordable housing and borrowers in underserved markets.
n
Approximately 92% of our 1Q 2019 and 1Q 2018 new loan purchase activity was intended for our securitization pipeline. Combined with market demand for our securities, our 1Q 2019 new securitization pipeline purchase activity will be a driver for securitizations in the next two quarters of 2019.

Freddie Mac Form 10-Q
 
24
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Multifamily Portfolio and Market Support
Multifamily Market Support
The following table summarizes our support of the multifamily market.
Table 17 - Multifamily Market Support
(In millions)
 
March 31, 2019
December 31, 2018
Guarantee portfolio
 

$243,179


$237,323

Mortgage-related investments portfolio:
 
 
 
Unsecuritized mortgage loans held-for-sale
 

$21,220

23,959

Unsecuritized mortgage loans held-for-investment
 
10,654

10,828

Mortgage-related securities(1)
 
7,140

7,385

Total mortgage-related investments portfolio
 
39,014

42,172

Other investments(2)
 
1,185

708

Total multifamily portfolio
 
283,378

280,203

Add: Unguaranteed securities(3)
 
36,570

35,835

Less: Acquired mortgage-related securities(4)
 
(6,925
)
(7,160
)
Total multifamily market support
 

$313,023


$308,878

(1)
Includes mortgage-related securities acquired by us from our securitizations.
(2)
Includes the carrying value of LIHTC investments and the UPB of non-mortgage loans, including financing provided to whole loan funds.
(3)
Reflects the UPB of unguaranteed securities issued as part of our securitizations and amounts related to loans sold to whole loan funds that were not financed by Freddie Mac.
(4)
Reflects the UPB of mortgage-related securities that were both issued as part of our securitizations and acquired by us. This UPB must be removed to avoid double-counting the exposure, as it is already reflected within the guarantee portfolio or unguaranteed securities.
n
Our total multifamily portfolio increased during 1Q 2019, primarily due to our strong loan purchase and securitization activity. We expect continued growth in our total portfolio in 2019 as purchase and securitization activities should outpace run off.
n
At March 31, 2019, approximately 81% of our held-for-sale loans and held-for-sale loan commitments, both of which are measured at fair value, were fixed-rate, while the remaining 19% were floating-rate.
n
We expect our guarantee portfolio to continue to grow as a result of ongoing securitizations, which we expect to be driven by continued strong new business activity.

Freddie Mac Form 10-Q
 
25
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Net Interest Yield and K Certificate Benchmark Spreads
Net Interest Yield Earned & Average Investment Portfolio Balance chart-bd7d5f908ccfbe2f58d.jpg
 
K Certificate Benchmark Spreadschart-d76aa64dcef27369dff.jpg

n
Net interest yield remained relatively flat in 1Q 2019 compared to 1Q 2018.
n
The weighted average portfolio balance of interest-earning assets decreased during 1Q 2019 compared to 1Q 2018 due to the run-off of our legacy held-for-investment loans.
n
The valuation of our securitization pipeline and the profitability of our primary risk transfer securitization product, the K Certificate, are affected by both changes in K Certificate benchmark spreads and deal-specific attributes, such as tranche size, risk distribution, and collateral characteristics (loan term, coupon type, prepayment restrictions, and underlying property type). These market spread movements and deal-specific attributes contribute to our earnings volatility, which we manage by controlling the size of our securitization pipeline and by entering into certain spread-related derivatives. Spread tightening generally results in fair value gains, while spread widening generally results in fair value losses.
n
K Certificate benchmark spreads tightened during 1Q 2019, primarily resulting in fair value gains on our mortgage loans and commitments.

Freddie Mac Form 10-Q
 
26
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Risk Transfer Activity
UPB of Assets Subject to Risk Transfer Activity
chart-a9f1cf20bf6f2b73e94.jpg
 
Credit Risk Transfer Activity (1)  
chart-8e3ae1223d2f392149a.jpg
(1) The amounts disclosed in the graph above represent the net credit risk transferred to third parties.

n
The UPB of our primary risk transfer securitization transactions was lower in 1Q 2019 compared to 1Q 2018, primarily due to a higher share of certain products in our securitization pipeline that require longer aggregation periods.
n
As of March 31, 2019, we had cumulatively transferred a large majority of credit risk on the multifamily guarantee portfolio.
l
Conservatorship capital needed for credit risk was reduced by approximately 90% through CRT transactions on new business activity in the twelve months ended March 31, 2018; we plan similar risk reduction transactions for this year's new business activity.
l
The reduction in the amount of conservatorship capital needed for credit risk on new business activity is calculated as conservatorship credit capital released from CRT transactions (primarily through K Certificates and SB Certificates) divided by total conservatorship credit capital on new business activity. For more information on the CCF and the calculation of conservatorship capital, see Liquidity and Capital Resources - Capital Resources - Conservatorship Capital Framework - Return on Conservatorship Capital.
n
In addition to transferring a large majority of credit risk, nearly all of our risk transfer securitization activities also shifted substantially all the interest-rate and liquidity risk associated with the underlying collateral away from Freddie Mac to third-party investors.

Freddie Mac Form 10-Q
 
27
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Guarantee Activities
Unearned Guarantee Fee Assets on New Guarantee Contracts chart-2da6a1bc90d3634689c.jpg
 
Remaining Unearned Guarantee Fees chart-990463a585739413cd6.jpg
n
We earn guarantee fees in exchange for providing our guarantee of some or all of the securities we issue as part of our risk transfer securitization activities. Each time we enter into a financial guarantee contract, we initially recognize unearned guarantee fee assets on our balance sheet, which represent the present value of future guarantee fees we expect to receive in cash. We recognize these fees in Segment Earnings over the remaining average guarantee term, which was eight years as of March 31, 2019. While we expect to collect these future fees based on historical performance, the actual amount collected will depend on the credit and prepayment performance of the underlying collateral subject to our financial guarantee.
n
New unearned guarantee fees increased during 1Q 2019 compared to 1Q 2018, primarily due to a decline in interest rates and a longer average guarantee term, partially offset by a lower average guarantee fee rate.
n
The balance of unearned guarantee fees increased during 1Q 2019 due to the continued growth of our multifamily guarantee business, as our risk transfer securitization volume continued to be strong, outpacing run off.

Freddie Mac Form 10-Q
 
28
Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Financial Results
The table below presents the components of Segment Earnings and comprehensive income for our Multifamily segment.
Table 18 - Multifamily Segment Financial Results
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2019
1Q 2018
 
$
%
Net interest income
 

$247


$271

 

($24
)
(9
)%
Guarantee fee income
 
216

195

 
21

11

Benefit (provision) for credit losses
 
(1
)
16

 
(17
)
(106
)
Financial instrument gains (losses)(1)
 
(29
)
161

 
(190
)
(118
)
Administrative expense
 
(112
)
(100
)
 
(12
)
(12
)
Other non-interest income (expense)
 
93

51

 
42

82

Segment Earnings before income tax expense
 
414

594

 
(180
)
(30
)
Income tax (expense) benefit
 
(84
)
(121
)
 
37

31

Segment Earnings, net of taxes
 
330

473

 
(143
)
(30
)
Total other comprehensive income (loss), net of tax
 
65

(68
)
 
133

196

Total comprehensive income (loss)
 

$395


$405

 

($10
)
(2
)%
(1)
Consists of fair value gains and losses on loan purchase commitments, mortgage loans and debt for which we have elected the fair value option, certain investment securities, and derivatives.
Key Business Drivers:
n
1Q 2019 vs. 1Q 2018
l
Decrease in net interest income due to a decline in our weighted average portfolio balance of interest-earning assets, partially offset by higher net interest yields on an increased balance of interest-only securities.
l
Higher guarantee fee income due to continued growth in our multifamily guarantee portfolio.
l
Decrease in fair value gains primarily due to higher fair value losses on swaptions on credit indices and lower gains on available-for-sale securities, partially offset by spread-related fair value gains on held-for-sale loans and commitments in 1Q 2019.

Freddie Mac Form 10-Q
 
29
Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


Capital Markets
Business Results
The graphs and related discussion below present the business results of our Capital Markets segment.
Investing Activity
The following graphs present the Capital Markets segment's total investments portfolio and the composition of its mortgage investments portfolio by liquidity category.
Investments Portfolio
chart-36533b25f0995ef3af6.jpg
 
Mortgage Investments Portfolio
chart-7fc2ae315ba05504ace.jpg
n
The balance of our mortgage investments portfolio remained relatively flat from December 31, 2018 to March 31, 2019. See Conservatorship and Related Matters - Managing Our Mortgage-Related Investments Portfolio for additional details.
n
The balance of our other investments portfolio increased by 21.9%, primarily due to higher near-term cash needs as of March 31, 2019 compared to December 31, 2018 for upcoming maturities and anticipated calls of other debt.
n
The percentage of less liquid assets relative to our total mortgage investments portfolio declined from 26.6% at December 31, 2018 to 24.8% at March 31, 2019, primarily due to repayments, sales, and securitizations of our less liquid assets. We continued to actively reduce our holdings of less liquid assets during 1Q 2019 by selling $2.1 billion of reperforming loans. Our sales of reperforming loans involved securitization of the loans using senior subordinate securitization structures.
n
The overall liquidity of our mortgage investments portfolio continued to improve as our less liquid assets decreased while our liquid assets increased during 1Q 2019.
n
We continue to participate in transactions that support the development of the Secured Overnight Financing Rate (SOFR) as an alternative rate to LIBOR. These transactions include investment in and issuance of SOFR indexed floating-rate debt securities and execution of SOFR indexed derivatives.

Freddie Mac Form 10-Q
 
30
Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


Net Interest Yield and Average Balances
Net Interest Yield & Average Investments Portfolio Balances
(UPB in billions)
chart-e34a8289e35c57a5939.jpg
n
Net interest yield increased 9 basis points during 1Q 2019 compared to 1Q 2018, primarily due to:
l
Higher yields on newly acquired mortgage-related assets and other investments as a result of increases in interest rates;
l
Changes in our investment mix due to a reduction in our less liquid assets, offset by an increase in the percentage of our other investments portfolio relative to our total investments portfolio; and
l
Larger benefit from funding provided by non-interest bearing liabilities due to an increase in short-term interest rates.
n Net interest yield for the Capital Markets segment is not affected by our hedge accounting programs, due to reclassifications made for Segment Earnings. See Note 13 in our 2018 Annual Report for more information.


Freddie Mac Form 10-Q
 
31
Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


Financial Results
The table below presents the components of Segment Earnings and comprehensive income for our Capital Markets segment.
Table 19 - Capital Markets Segment Financial Results
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2019
1Q 2018
 
$
%
Net interest income
 

$758


$771

 

($13
)
(2
)%
Investment securities gains (losses)
 
195

37

 
158

427

Debt gains (losses)
 
(7
)
105

 
(112
)
(107
)
Derivative gains (losses)
 
(667
)
1,302

 
(1,969
)
(151
)
Other non-interest income (expense)
 
236

(37
)
 
273

738

Administrative expense
 
(92
)
(84
)
 
(8
)
(10
)
Segment Earnings before income tax expense
 
423

2,094

 
(1,671
)
(80
)
Income tax (expense) benefit
 
(86
)
(427
)
 
341

80

Segment Earnings, net of taxes
 
337

1,667

 
(1,330
)
(80
)
Total other comprehensive income (loss), net of tax
 
197

(704
)
 
901

128

Total comprehensive income (loss)
 

$534


$963

 

($429
)
(45
)%
The portion of total comprehensive income (loss) driven by interest rate-related and market spread-related fair value changes, after-tax, is presented in the table below. These amounts affect various line items in the table above, including net interest income, investment securities gains (losses), debt gains (losses), derivative gains (losses), income tax (expense) benefit, and total other comprehensive income (loss), net of tax.
Table 20 - Capital Markets Segment Interest Rate-Related and Market Spread-Related Fair Value Changes, Net of Tax
 
 
 
 
 
Change
(Dollars in billions)
 
1Q 2019
1Q 2018
 
$
%
Interest rate-related
 

$0.1


$—

 

$0.1

N/A

Market spread-related
 
—

0.2

 
(0.2
)
(100
)
Key Business Drivers:
n
1Q 2019 vs. 1Q 2018
l
Net interest income was relatively unchanged.
l
Relatively flat interest rate-related fair value gains. Long-term interest rates decreased during 1Q 2019, resulting in fair value gains on many of our investments in securities (some of which are recorded in other comprehensive income) and fair value losses on derivatives. The net amount of these changes in fair value was mostly offset by the change in the fair value of the hedged items attributable to interest-rate risk in our hedge accounting programs.
l
Lower spread related gains primarily due to spread widening on our agency securities combined with less spread tightening on a lower balance of our non-agency securities.
l
Decrease in debt gains (losses) primarily due to lower gains from the extinguishment of fixed-rate PCs, as market interest rates declined between the time of issuance and repurchase.
l Increase in non-interest income primarily due to the mismatch related to fair value hedge accounting, partially offset by lower amortization of debt securities of consolidated trusts driven by lower prepayments.

Freddie Mac Form 10-Q
 
32
Management's Discussion and Analysis
 
Risk Management



RISK MANAGEMENT
Risk is an inherent part of our business activities. We are exposed to the following key types of risk: credit risk, operational risk, market risk, liquidity risk, strategic risk, and reputation risk.
For more discussion of these and other risks facing our business and our enterprise risk framework, see MD&A - Risk Management and Risk Factors in our 2018 Annual Report and Liquidity and Capital Resources in this report and in our 2018 Annual Report. See below for updates since our 2018 Annual Report.
Market Risk
Overview
Our business segments have embedded exposure to market risk, which is the economic risk associated with adverse changes in interest rates, volatility, and spreads. Interest-rate risk is consolidated and primarily managed by the Capital Markets segment, while spread risk is owned by each individual business segment. Market risk can adversely affect future cash flows, or economic value, as well as earnings and net worth.
The majority of our interest-rate risk comes from our investments in mortgage-related assets (securities and loans) and the debt we issue to fund them. Our primary goal in managing interest-rate risk is to reduce the amount of change in the value of our future cash flows due to future changes in interest rates. We use models to analyze possible future interest-rate scenarios, along with the cash flows of our assets and liabilities over those scenarios.
Interest-Rate Risk
Our primary interest-rate risk measures are duration gap and PVS. Duration gap measures the difference in price sensitivity to interest rate changes between our financial assets and liabilities and is expressed in months relative to the value of assets. PVS is our estimate of the change in the value of our financial assets and liabilities from an instantaneous shock to interest rates, assuming spreads are held constant and no rebalancing actions are undertaken. PVS is measured in two ways, one measuring the estimated sensitivity of our portfolio value to a 50 basis point parallel movement in interest rates (PVS-L) and the other to a non-parallel movement resulting from a 25 basis point change in slope of the LIBOR yield curve (PVS-YC). While we believe that duration gap and PVS are useful risk management tools, they should be understood as estimates rather than as precise measurements.
In 1Q 2019, we changed the name of the Portfolio Market Value Sensitivity (PMVS) metrics to Portfolio Value Sensitivity (PVS). We removed "market" from these metrics as we economically hedge the present value of cash flows, which may not necessarily be the fair value of an instrument.
The following tables provide our duration gap, estimated point-in-time and minimum and maximum PVS-L and PVS-YC results, and an average of the daily values and standard deviation. The tables below also provide PVS-L estimates assuming an immediate 100 basis point shift in the LIBOR yield curve. The interest-rate sensitivity of a mortgage portfolio varies across a wide range of interest rates.
Table 21 - PVS-YC and PVS-L Results Assuming Shifts of the LIBOR Yield Curve
 
 
March 31, 2019
 
December 31, 2018
 
 
PVS-YC
 
PVS-L
 
PVS-YC
 
PVS-L
(In millions)
 
25 bps
 
50 bps
100 bps
 
25 bps
 
50 bps
100 bps
Assuming shifts of the LIBOR yield curve, (gains) losses on:(1)
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Investments
 

($447
)
 

$5,377


$11,076

 

($536
)
 

$5,792


$11,761

Guarantees(2)
 
103

 
(576
)
(1,072
)
 
89

 
(425
)
(773
)
Total Assets
 
(344
)
 
4,801

10,004

 
(447
)
 
5,367

10,988

Liabilities
 
(101
)
 
(1,613
)
(3,411
)
 
(109
)
 
(1,889
)
(3,948
)
Derivatives
 
467

 
(3,146
)
(6,474
)
 
560

 
(3,446
)
(6,917
)
Total
 

$22

 

$42


$119

 

$4

 

$32


$123

 
 
 
 
 
 
 
 
 
 
 
PVS
 

$22

 

$42


$119

 

$4

 

$32


$123


Freddie Mac Form 10-Q
 
33
Management's Discussion and Analysis
 
Risk Management 

(1)
The categorization of the PVS impact between assets, liabilities, and derivatives on this table is based upon the economic characteristics of those assets and liabilities, not their accounting classification. For example, purchase and sale commitments of mortgage-related securities and debt securities of consolidated trusts held by the mortgage-related investments portfolio are both categorized as assets on this table.
(2)
Represents the interest-rate risk from our single-family guarantee portfolio, which currently includes buy-ups and float.
Table 22 - Duration Gap and PVS Results
 
 
1Q 2019
 
1Q 2018
(Duration gap in months, dollars in millions)
 
Duration
Gap
PVS-YC
25 bps
PVS-L
50 bps
 
Duration
Gap
PVS-YC
25 bps
PVS-L
50 bps
Average
 
0.1


$10


$15

 
—


$9


$8

Minimum
 
(0.2
)
—

—

 
(0.3
)
—

—

Maximum
 
0.4

30

46

 
0.2

24

30

Standard deviation
 
0.1

8

15

 
0.1

5

8

Derivatives enable us to reduce our economic interest-rate risk exposure as we continue to align our derivative portfolio with the changing duration of our economically hedged assets and liabilities. The table below shows that the PVS-L risk levels, assuming a 50 basis point shift in the LIBOR yield curve for the periods presented, would have been higher if we had not used derivatives.
Table 23 - PVS-L Results Before Derivatives and After Derivatives
 
 
PVS-L (50 bps)
 
 
(In millions)
 
Before
Derivatives
After
Derivatives
 
Effect of
Derivatives
March 31, 2019
 

$3,188


$42

 

($3,146
)
December 31, 2018
 
3,478

32

 
(3,446
)
We plan to update our interest-rate risk measures in the second quarter of 2019 to include upfront fees (including buy-downs) related to single-family credit guarantee activity as we have changed our strategy to incorporate upfront fees into our asset and liability interest-rate risk management strategy and definition. Upon incorporation, this update will reflect that the present value of upfront fees related to single-family credit guarantee activity decreases (increases) when interest rates increase (decrease). The update will materially increase our duration gap and PVS results in the short-term until we have fully economically hedged upfront fees.
We are also considering modifying our interest-rate risk measures to include net worth, which is not currently incorporated in our asset and liability interest-rate risk management strategy and definition. If this update was included, it would reflect that we view net worth as having long-term duration rather than short-term duration, and that the present value of net worth therefore increases (decreases) when interest rates increase (decrease).
GAAP Earnings Variability
The GAAP accounting treatment for our financial assets and liabilities (i.e., some are measured at amortized cost, while others are measured at fair value) creates variability in our GAAP earnings when interest rates and spreads change. This variability of GAAP earnings, which may not reflect the economics of our business, increases the risk of our having a negative net worth and thus being required to draw from Treasury. Although we manage our business on an economic basis, we may execute certain transactions on a non-economic basis in an effort to manage our spread and interest-rate risks.
Interest-Rate Volatility
While we manage our interest-rate risk exposure on an economic basis to a low level as measured by our models, our GAAP financial results are still subject to significant earnings variability from period to period. Based upon the composition of our financial assets and liabilities, including derivatives, at March 31, 2019, we generally recognize fair value losses in GAAP earnings when interest rates decline.
In an effort to reduce our GAAP earnings variability and better align our GAAP results with the economics of our business, we elect hedge accounting for certain single-family mortgage loans and certain debt instruments. See Note 9 for additional information on hedge accounting.
The table below presents the effect of derivatives used in our interest-rate risk management activities on our comprehensive income (loss), net of tax, after considering any offsetting interest rate effects related to financial instruments measured at fair value and the effects of fair value hedge accounting.

Freddie Mac Form 10-Q
 
34
Management's Discussion and Analysis
 
Risk Management 

Table 24 - Estimated Net Interest Rate Effect on Comprehensive Income (Loss)
(In billions)
 
1Q 2019
1Q 2018
Interest-rate effect on derivative fair values
 

($2.2
)

$3.1

Estimate of offsetting interest-rate effect related to financial instruments measured at fair value(1)
 
1.2

(1.9
)
Gains (losses) on mortgage loans and debt in fair value hedge relationships
 
1.1

(1.3
)
Amortization of deferred hedge accounting gains and losses
 
—

—

Income tax (expense) benefit
 
—

—

Estimated net interest rate effect on comprehensive income (loss)
 

$0.1


($0.1
)
(1)
Includes the interest-rate effect on our trading securities, available-for-sale securities, mortgage loans held-for-sale, and other assets and debt for which we elected the fair value option, which is reflected in non-interest income (loss) and total other comprehensive income (loss) on our condensed consolidated statements of comprehensive income.
The effect from the change in interest rates on derivative fair values is mostly offset by the effect from the change in interest rates related to financial instruments measured at fair value and gains and losses on mortgage loans and debt in fair value hedging relationships. The remaining net interest-rate effect on comprehensive income is largely attributable to the reversal of previously recognized derivative gains and losses and the implied net cost on instruments such as swaptions, futures, and forward purchase and sale commitments from our hedging and interest-rate risk management activities. These remaining effects are recognized in GAAP earnings over time as a component of derivative gains and losses as the instruments approach maturity and are partially offset by the amortization of previously deferred hedge accounting gains and losses.
We evaluate the potential benefits of fair value hedge accounting by evaluating a range of interest rate scenarios and identifying which of those scenarios produces the most adverse GAAP earnings outcome. The interest rate scenarios evaluated include parallel shifts in the yield curve of plus and minus 100 basis points, non-parallel yield curve shifts in which long-term interest rates increase or decrease by 100 basis points, and non-parallel yield curve shifts in which short-term and medium-term interest rates increase or decrease by 100 basis points.
n At March 31, 2019, the GAAP adverse scenario before fair value hedge accounting was a non-parallel shift in which long-term rates decrease by 100 basis points, while the adverse scenario after fair value hedge accounting was a non-parallel shift in which long-term rates increase by 100 basis points.
n At March 31, 2018, the GAAP adverse scenario before and after fair value hedge accounting was a non-parallel shift in which long-term rates decrease by 100 basis points.
The results of this evaluation are shown in the table below.
Table 25 - GAAP Adverse Scenario Before and After Hedge Accounting
 
 
GAAP Adverse Scenario (Before-Tax)
(Dollars in billions)
 
Before Hedge Accounting
After Hedge Accounting
% Change
March 31, 2019
 

($2.1
)

($0.2
)
89
%
March 31, 2018
 
(3.3
)
(0.6
)
83

Hedge accounting is designed to reduce the impact to GAAP earnings in the adverse scenario described above. However, the after hedge accounting impact may not always result in an improvement over the before hedge accounting impact. For example, there are certain interest-rate scenarios in which the after hedge accounting impact would result in a lower gain or a larger loss than the before hedge accounting impact. We expect that our GAAP adverse scenario after hedge accounting reduction will decrease due to the additional hedging of upfront fees.

Freddie Mac Form 10-Q
 
35
Management's Discussion and Analysis
 
Risk Management 

Spread Volatility
We have limited ability to manage our spread risk exposure in a cost beneficial manner, and therefore the volatility of market spreads may contribute to significant GAAP earnings variability. For financial assets measured at fair value, we generally recognize fair value losses when market spreads widen. Conversely, for financial liabilities measured at fair value, we generally recognize fair value gains when market spreads widen. The table below shows the estimated effect of spreads on our comprehensive income (loss), after tax, by segment.
Table 26 - Estimated Spread Effect on Comprehensive Income (Loss)
(In billions)
 
1Q 2019
1Q 2018
Capital Markets
 

$—


$0.2

Multifamily
 
(0.1
)
—

Single-family Guarantee(1)
 
—

—

Spread effect on comprehensive income (loss)
 

($0.1
)

$0.2

(1)
Represents spread exposure on certain STACR debt securities for which we have elected the fair value option.

Freddie Mac Form 10-Q
 
36
Management's Discussion and Analysis
 
Liquidity and Capital Resources 


LIQUIDITY AND CAPITAL RESOURCES
Our business activities require that we maintain adequate liquidity to meet our financial obligations as they come due and meet the needs of customers in a timely and cost-efficient manner. We also must maintain adequate capital resources to avoid being placed into receivership by FHFA. For further discussion of our liquidity framework and profile, see MD&A - Liquidity and Capital Resources in our 2018 Annual Report.
Liquidity
Primary Sources of Liquidity
The following table lists the sources of our liquidity, the balances as of March 31, 2019, and a brief description of their importance to Freddie Mac.
Table 27 - Sources of Liquidity
Source
Balance(1)
 (In billions)
 
Description
Liquidity
 
 
 
•
Other Investments Portfolio - Liquidity and Contingency Operating Portfolio

$54.6

•
The liquidity and contingency operating portfolio, included within our other investments portfolio, is primarily used for short-term liquidity management.
•
Liquid Portion of the Mortgage-Related Investments Portfolio

$122.7

•

The liquid portion of our mortgage-related investments portfolio can be pledged or sold for liquidity purposes. The amount of cash we may be able to successfully raise may be substantially less than the balance.
(1)
Represents carrying value for the liquidity and contingency operating portfolio, included within our other investments portfolio, and UPB for the liquid portion of the mortgage-related investments portfolio.
Other Investments Portfolio
The investments in our other investments portfolio are important to our cash flow, collateral management, asset and liability management, and ability to provide liquidity and stability to the mortgage market. The table below summarizes the balances in our other investments portfolio, which includes the liquidity and contingency operating portfolio.
Table 28 - Other Investments Portfolio
 
 
March 31, 2019
 
December 31, 2018
(In billions)
 
Liquidity and Contingency Operating Portfolio
Custodial Account
Other
Total Other Investments Portfolio
 
Liquidity and Contingency Operating Portfolio
Custodial Account
Other
Total Other Investments Portfolio
Cash and cash equivalents
 

$5.5


$0.7


$—


$6.2

 

$6.7


$0.6


$—


$7.3

Securities purchased under agreements to resell
 
34.7

13.5

1.9

50.1

 
20.2

12.1

2.5

34.8

Non-mortgage related securities
 
14.4

—

3.1

17.5

 
16.8

—

2.4

19.2

Secured lending and other
 
—

—

3.2

3.2

 
—

—

1.8

1.8

Total
 

$54.6


$14.2


$8.2


$77.0



$43.7


$12.7


$6.7


$63.1

Our non-mortgage-related investments in the liquidity and contingency operating portfolio consist of U.S. Treasury securities and other investments that we could sell to provide us with an additional source of liquidity to fund our business operations. We also maintain non-interest-bearing deposits at the Federal Reserve Bank of New York and interest-bearing deposits at commercial banks. Our interest-bearing deposits at commercial banks totaled $3.0 billion and $1.5 billion as of March 31, 2019 and December 31, 2018, respectively.
The liquidity and contingency operating portfolio also included collateral posted to us in the form of cash primarily by derivatives counterparties of $2.3 billion and $3.0 billion as of March 31, 2019 and December 31, 2018, respectively. We have invested this collateral in securities purchased under agreements to resell and non-mortgage-related securities as part of our liquidity and contingency operating portfolio, although the collateral may be subject to return to our counterparties based on the terms of our master netting and collateral agreements.

Freddie Mac Form 10-Q
 
37
Management's Discussion and Analysis
 
Liquidity and Capital Resources 


Mortgage Loans and Mortgage-Related Securities
We invest principally in mortgage loans and mortgage-related securities, certain categories of which are largely unencumbered and liquid. Our primary source of liquidity among these mortgage assets is our holdings of single-class and multiclass agency securities, excluding certain structured agency securities collateralized by non-agency mortgage-related securities. Our ability to pledge certain of these assets as collateral or sell them enhances our liquidity profile, although the amount of cash we may be able to successfully raise in the event of a liquidity crisis or significant market disruption may be substantially less than the amount of mortgage-related assets we hold. See Conservatorship and Related Matters for additional details on the liquidity of our mortgage-related investments portfolio.
Primary Sources of Funding
The following table lists the sources and balances of our funding as of March 31, 2019 and a brief description of their importance to Freddie Mac.
Table 29 - Sources of Funding
Source
Balance(1)
 (In billions)
 
Description
Funding
 
 
 
•
Other Debt

$272.1

•
Other debt is used to fund our business activities, including single-family guarantee activities not funded by debt securities of consolidated trusts.
•
Debt Securities of Consolidated Trusts

$1,803.7

•

Debt securities of consolidated trusts are used primarily to fund our single-family guarantee activities. This type of debt is principally repaid by the cash flows of the associated mortgage loans. As a result, our repayment obligation is limited to amounts paid pursuant to our guarantee of principal and interest and purchasing modified or seriously delinquent loans from the trusts.
(1)
Represents UPB of debt balances.
Other Debt Activities
We issue other debt to fund our business activities. Competition for funding can vary with economic, financial market, and regulatory environments. We issue other debt based on a variety of factors, including market conditions and our liquidity requirements. We currently favor a mix of derivatives and shorter- and medium-term debt to fund our business and manage interest-rate risk. Generally, this funding mix is a less expensive method than relying more extensively on long-term debt.
The table below summarizes the par value and the average rate of other debt securities we issued or paid off, including regularly scheduled principal payments, payments resulting from calls, and payments for repurchases. We call, exchange, or repurchase our outstanding debt securities from time to time for a variety of reasons, including managing our funding composition and supporting the liquidity of our debt securities.

Freddie Mac Form 10-Q
 
38
Management's Discussion and Analysis
 
Liquidity and Capital Resources 


Table 30 - Other Debt Activity
 
 
1Q 2019
 
1Q 2018
(Dollars in millions)
 
Short-term
Average Rate(1)
Long-term
Average Rate(1)
 
Short-term
Average Rate(1)
Long-term
Average Rate(1)
Discount notes and Reference Bills®
 
 
 
 
 
 
 
 
 
 
Beginning balance
 

$28,787

2.36
%

$—

—
%
 

$45,717

1.19
%

$—

—
%
Issuances
 
94,886

2.34

—

—

 
74,116

1.29

—

—

Repurchases
 
—

—

—

—

 
—

—

—

—

Maturities
 
(77,819
)
2.28

—

—

 
(92,875
)
1.21

—

—

Ending Balance
 
45,854

2.46

—

—

 
26,958

1.40

—

—

 
 
 
 
 
 
 
 
 
 
 
Securities sold under agreements to repurchase
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
6,019

2.40

—

—

 
9,681

1.06

—

—

Additions
 
50,157

2.45

—

—

 
41,794

1.32

—

—

Repayments
 
(41,214
)
2.43

—

—

 
(41,730
)
1.24

—

—

Ending Balance
 
14,962

2.50

—

—

 
9,745

1.38

—

—

 
 
 
 
 
 
 
 
 
 
 
Callable debt
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
2,000

2.53

105,206

2.09

 
—

—

113,822

1.58

Issuances
 
—

—

14,120

2.99

 
—

—

5,551

2.82

Repurchases
 
—

—

—

—

 
—

—

(554
)
2.13

Calls
 
(2,000
)
2.78

(14,171
)
3.10

 
—

—

(892
)
1.97

Maturities
 
—

—

(3,681
)
1.23

 
—

—

(4,375
)
1.05

Ending Balance
 
—

—

101,474

2.10

 
—

—

113,552

1.66

 
 
 
 
 
 
 
 
 
 
 
Non-callable debt
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
14,440

2.04

80,789

2.56

 
17,792

1.03

111,169

2.11

Issuances
 
8,119

2.43

—

—

 
1,825

1.44

6,490

1.84

Repurchases
 
—

—

(221
)
1.50

 
—

—

—

—

Maturities
 
(6,050
)
1.87

(4,872
)
2.89

 
(2,005
)
0.77

(23,914
)
0.77

Ending Balance
 
16,509

2.29

75,696

2.62

 
17,612

1.12

93,745

2.42

 
 
 
 
 
 
 
 
 
 
 
STACR and SCR Debt(2)
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
—

—

17,729

6.02

 
—

—

17,925

5.04

Issuances
 
—

—

280

2.48

 
—

—

1,885

3.67

Repurchases
 
—

—

—

—

 
—

—

—

—

Maturities
 
—

—

(412
)
4.65

 
—

—

(491
)
3.67

Ending Balance
 
—

—

17,597

6.17

 
—

—

19,319

5.22

 
 
 
 
 
 
 
 
 
 
 
Total other debt
 

$77,325

2.43
%

$194,767

2.67
%
 

$54,315

1.31
%

$226,616

2.28
%
(1)
Average rate is weighted based on par value.
(2)
Includes STACR and SCR debt notes and certain multifamily other debt. STACR and SCR debt notes are subject to prepayment risk as their payments are based upon the performance of a reference pool of mortgage assets that may be prepaid by the related mortgage borrower at any time generally without penalty.
Our outstanding other debt balance decreased during 1Q 2019 compared to 1Q 2018, primarily driven by the decline of our long-term debt as we have reduced our indebtedness along with the decline in our mortgage-related investments portfolio. The decrease was offset by issuances of short-term debt for upcoming maturities and anticipated calls. In addition, STACR debt should continue to decline as run off will primarily be replaced with STACR Trust transactions.

Freddie Mac Form 10-Q
 
39
Management's Discussion and Analysis
 
Liquidity and Capital Resources 


Maturity and Redemption Dates
The following graphs present our other debt by contractual maturity date and earliest redemption date. The earliest redemption date refers to the earliest call date for callable debt and the contractual maturity date for all other debt.
Contractual Maturity Date as of March 31, 2019(1) chart-ad9f86a93023553f81b.jpg
 
Earliest Redemption Date as of March 31, 2019(1) chart-53db20820f7a53a8a66.jpg
(1)
STACR and SCR debt notes are subject to prepayment risk as their payments are based upon the performance of a reference pool of mortgage assets that may be prepaid by the related mortgage borrower at any time generally without penalty and are therefore included as a separate category in the graphs.
Debt Securities of Consolidated Trusts
The largest component of debt on our condensed consolidated balance sheets is debt securities of consolidated trusts, which relates to securitization transactions that we consolidated for accounting purposes. We issue this type of debt by securitizing mortgage loans primarily to fund the majority of our single-family guarantee activities. When we consolidate securitization trusts, we recognize the following on our condensed consolidated balance sheets:
n
The assets held by the securitization trusts, the majority of which are mortgage loans. We recognized $1,858.1 billion and $1,842.9 billion of mortgage loans, which represented 88.8% and 89.3% of our total assets, as of March 31, 2019 and December 31, 2018, respectively.
n
The debt securities issued by the securitization trusts, the majority of which are PCs. PCs are pass-through securities, where the cash flows of the mortgage loans held by the securitization trust are passed through to the holders of the PCs. We recognized $1,803.7 billion and $1,792.7 billion of debt securities of consolidated trusts, which represented 87.0% and 87.7% of our total debt, as of March 31, 2019 and December 31, 2018, respectively.
Debt securities of consolidated trusts are principally repaid from the cash flows of the mortgage loans held by the securitization trusts that issued the debt securities. In circumstances when the cash flows of the mortgage loans are not sufficient to repay the debt, we make up the shortfall because we have guaranteed the payment of principal and interest on the debt. In certain circumstances, we have the right and/or obligation to purchase the loan from the trust prior to its contractual maturity.

Freddie Mac Form 10-Q
 
40
Management's Discussion and Analysis
 
Liquidity and Capital Resources 


The table below shows the issuance and extinguishment activity for the debt securities of our consolidated trusts.
Table 31 - Activity for Debt Securities of Consolidated Trusts Held by Third Parties
(In millions)
 
1Q 2019
1Q 2018
Beginning balance
 

$1,748,738


$1,672,605

Issuances:
 
 
 
New issuances to third parties
 
43,604

37,316

Additional issuances of securities
 
27,832

40,200

Total issuances
 
71,436

77,516

Extinguishments:
 
 
 
Purchases of debt securities from third parties
 
(6,015
)
(8,828
)
Debt securities received in settlement of secured lending
 
(5,947
)
(4,725
)
Repayments of debt securities
 
(48,185
)
(56,600
)
Total extinguishments
 
(60,147
)
(70,153
)
Ending balance
 
1,760,027

1,679,968
Unamortized premiums and discounts
 
43,680

47,001

Debt securities of consolidated trusts held by third parties
 

$1,803,707


$1,726,969

Cash Flows
Cash and cash equivalents (including restricted cash and cash equivalents) decreased by $2.4 billion from $8.6 billion as of 1Q 2018 to $6.2 billion as of 1Q 2019, primarily driven by an increase in securities purchased under agreements to resell during 1Q 2019 due to higher near-term cash needs for upcoming maturities and higher anticipated calls of other debt. The decrease in cash and cash equivalents (including restricted cash and cash equivalents) was partially offset by an increase in proceeds from the issuance of short-term debt for upcoming maturities and anticipated calls.
Capital Resources
Primary Sources of Capital
The following table lists the sources and balances of our capital as of March 31, 2019 and a brief description of their importance to Freddie Mac.
Table 32 - Sources of Capital
Source
Balance(1)
 (In billions)
 
Description
Capital
 
 
 
•
Net Worth

$4.7

•
GAAP net worth represents capital available prior to our dividend requirement to Treasury under the Purchase Agreement.
•
Available Funding under Purchase Agreement

$140.2

•
FHFA may request draws on our behalf from Treasury up to the amount of available funding under the Purchase Agreement.
(1)
Represents carrying value of net worth.
Our entry into conservatorship resulted in significant changes to the assessment of our capital adequacy and our management of capital. Under the Purchase Agreement, Treasury made a commitment to provide us with equity funding, under certain conditions, to eliminate deficits in our net worth. At March 31, 2019, our assets exceeded our liabilities under GAAP; therefore, no draw is being requested from Treasury under the Purchase Agreement. Based on our Net Worth Amount of $4.7 billion and the applicable Capital Reserve Amount of $3.0 billion, our dividend requirement to Treasury in June 2019 will be $1.7 billion. See Note 2 for details of the support we receive from Treasury.

Freddie Mac Form 10-Q
 
41
Management's Discussion and Analysis
 
Liquidity and Capital Resources


The table below presents activity related to our net worth during 1Q 2019 and 1Q 2018.
Table 33 - Net Worth Activity
(In millions)
 
1Q 2019
1Q 2018
Beginning balance
 

$4,477


($312
)
Comprehensive income (loss)
 
1,665

2,150

Capital draw from Treasury
 
—

312

Senior preferred stock dividends declared
 
(1,477
)
—

Total equity / net worth
 

$4,665


$2,150

Aggregate draws under Purchase Agreement
 

$71,648


$71,648

Aggregate cash dividends paid to Treasury
 
118,015

112,393

Conservatorship Capital Framework
In May 2017, FHFA, as Conservator, issued guidance to us to evaluate and manage our financial risk and to make economic business decisions, while in conservatorship, utilizing a newly-developed risk-based CCF, an economic capital system with detailed formulae provided by FHFA. The CCF also provides the foundation for the risk-based component of the proposed Enterprise Capital Rule published by FHFA in the Federal Register in July 2018.
We have adopted the CCF for internal capital measurement to evaluate business decisions and ensure the company makes such decisions prudently when pricing transactions and managing its businesses. This framework focuses on the profits earned versus an estimated cost of equity capital needed to support the risk assumed to generate those profits.
The existing regulatory capital requirements have been suspended by FHFA during conservatorship. Consequently, we refer to the capital needed under the CCF for analysis of transactions and businesses as "conservatorship capital."
Under the Purchase Agreement, we are not able to retain total equity, as calculated under GAAP, in excess of the $3.0 billion Capital Reserve Amount. As a result, we do not have capital sufficient to support our aggregate risk-taking activities. Instead, we rely upon the Purchase Agreement to maintain market confidence.
Return on Conservatorship Capital
The table below provides the ROCC, calculated as (1) annualized comprehensive income for the period divided by (2) average conservatorship capital during the period.
All conservatorship capital figures presented below are based on the CCF in effect as of March 31, 2019. The CCF has been and may be further revised by FHFA from time to time, and may be revised specifically in connection with FHFA's consideration and adoption of a final Enterprise Capital Rule, which could possibly result in material changes in our conservatorship capital.
The ROCC shown in the table below is not based on our total equity and does not reflect actual returns on total equity. We do not believe that returns on total equity are meaningful because of the current $3.0 billion limit on the amount of total equity that we are able to retain under the Purchase Agreement.
Table 34 - Return on Conservatorship Capital
(Dollars in billions)
 
1Q 2019
 
1Q 2018
Comprehensive income
 
$1.7
 
$2.2
Conservatorship capital (average during the period)(1)
 
52.4
 
58.5
ROCC, based on comprehensive income
 
12.7%
 
14.7%
(1)
Prior period conservatorship capital results have been revised to include capital for deferred tax assets.
Our 1Q 2019 ROCC decreased compared to the 1Q 2018 ROCC, driven by the decrease in comprehensive income in 1Q 2019, partially offset by the lower level of conservatorship capital needed in 1Q 2019, resulting from the increasing CRT activity in both our Single-family Guarantee and Multifamily segments, home price appreciation, and the efficient disposition of legacy assets.
We find the returns calculated above, as well as the returns calculated on specific transactions and individual business lines, to be a reasonable measure of return-versus-risk to support our decision-making while we remain in conservatorship. These returns may not be indicative of the returns that would be generated if we were to exit conservatorship, especially as the terms

Freddie Mac Form 10-Q
 
42
Management's Discussion and Analysis
 
Liquidity and Capital Resources


and timing of any such exit are not currently known and will depend upon future actions by the U.S. government. Our belief, should we leave conservatorship, is that returns at that time would most likely be below the levels calculated above, assuming the same portfolio of risk assets, as we expect that we would hold capital post-conservatorship above the minimum required regulatory capital. It is also likely that we would be required to pay fees for federal government support, thereby reducing our total comprehensive income.
OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain off-balance sheet arrangements related to our securitization activities involving guaranteed loans and mortgage-related securities, though most of our securitization activities are on-balance sheet. For a description of our off-balance sheet arrangements, see MD&A - Off-Balance Sheet Arrangements in our 2018 Annual Report. See Note 3 and Note 5 for more information on our off-balance sheet securitization and guarantee activities.
Our maximum potential off-balance sheet exposure to credit losses relating to these securitization activities and guarantees is primarily represented by the UPB of the underlying loans and securities, which was $262.9 billion and $254.9 billion at March 31, 2019 and December 31, 2018, respectively.

Freddie Mac Form 10-Q
 
43
Management's Discussion and Analysis
Conservatorship and Related Matters


CONSERVATORSHIP AND RELATED MATTERS
Managing Our Mortgage-Related Investments Portfolio
The table below presents the UPB of our mortgage-related investments portfolio. In February 2019, FHFA directed us to maintain this portfolio at or below $225 billion at all times.
Table 35 - Mortgage-Related Investments Portfolio Details
 
 
March 31, 2019
 
December 31, 2018
(Dollars in millions)
 
Liquid
Securitiz-ation Pipeline
Less Liquid
Total
 
Liquid
Securitiz-ation Pipeline
Less Liquid
Total
Capital Markets segment - Mortgage investments portfolio:
 
 
 
 
 
 
 
 
 


Single-family unsecuritized loans
 
 
 
 

 
 
 
 

Performing loans
 

$—


$12,591


$—


$12,591

 

$—


$8,955


$—


$8,955

Reperforming loans
 
—

—

37,400

37,400

 
—

—

39,402

39,402

Total single-family unsecuritized loans
 
—

12,591

37,400

49,991


—

8,955

39,402

48,357

Freddie Mac mortgage-related securities
 
112,477

—

2,962

115,439

 
109,880

—

3,108

112,988

Non-agency mortgage-related securities
 
—

—

2,069

2,069

 
—

—

2,122

2,122

Other Non-Freddie Mac agency mortgage-related securities
 
3,830

—

—

3,830

 
3,968

—

—

3,968

Total Capital Markets segment - Mortgage investments portfolio
 
116,307

12,591

42,431

171,329

 
113,848

8,955

44,632

167,435

Single-family Guarantee segment - Single-family unsecuritized seriously delinquent loans
 
—

—

8,597

8,597

 
—

—

8,473

8,473

Multifamily segment:
 
 
 
 

 
 
 
 
 
Unsecuritized loans
 
—

20,455

11,419

31,874

 
—

23,203

11,584

34,787

Mortgage-related securities
 
6,357

—

783

7,140

 
6,570

—

815

7,385

Total Multifamily segment
 
6,357

20,455

12,202

39,014

 
6,570

23,203

12,399

42,172

Total mortgage-related investments portfolio
 

$122,664


$33,046


$63,230


$218,940

 

$120,418


$32,158


$65,504


$218,080

Percentage of total mortgage-related investments portfolio
 
56
%
15
%
29
%
100
%
 
55
%
15
%
30
%
100
%
While we continued to purchase new single-family seriously delinquent loans and certain multifamily unsecuritized loans, which are classified as held-for-investment, our active disposition of less liquid assets included the following:
n
Sales of $2.1 billion in UPB of single-family reperforming loans;
n
Securitizations of $0.2 billion in UPB of less liquid multifamily loans; and
n
Transfers of $0.5 billion in UPB of less liquid multifamily loans to the securitization pipeline.



Freddie Mac Form 10-Q
 
44
Management's Discussion and Analysis
Regulation and Supervision


REGULATION AND SUPERVISION
In addition to our oversight by FHFA as our Conservator, we are subject to regulation and oversight by FHFA under our Charter and the GSE Act and to certain regulation by other government agencies. Furthermore, regulatory activities by other government agencies can affect us indirectly, even if we are not directly subject to such agencies' regulation or oversight. For example, regulations that modify requirements applicable to the purchase or servicing of mortgages can affect us.
Federal Housing Finance Agency
FHFA is an independent agency of the federal government responsible for oversight of the operations of Freddie Mac, Fannie Mae, and the FHLBs. On April 15, 2019, Mark Calabria was sworn in as the next Director of FHFA.
Under the GSE Act, FHFA has safety and soundness authority that is comparable to, and in some respects broader than, that of the federal banking agencies. FHFA is responsible for implementing the various provisions of the GSE Act that were added by the Reform Act.
Affordable Housing Goals
In March 2019, we filed our Annual Housing Activities Report with FHFA. For 2018, we have determined that we achieved all five of our single-family affordable housing goal benchmarks and all three of our multifamily affordable housing goals.
FHFA will make the final determination as to whether we achieved compliance with our housing goals for 2018.
Duty to Serve
The GSE Act and FHFA regulation establish a duty for us to facilitate a secondary mortgage market for mortgages on housing for very low-, low-, and moderate-income families in three underserved markets: manufactured housing, affordable housing preservation, and rural areas. We are providing leadership in developing products, purchasing loans, supporting outreach to communities, and making investments in support of our duty to serve. In March 2019, we submitted our first annual report containing information on activities and objectives undertaken during 2018. FHFA will use this report to evaluate our 2018 performance under our underserved markets plan for 2018-2020.
Affordable Housing Fund Allocations
The GSE Act requires us to set aside in each fiscal year an amount equal to 4.2 basis points of each dollar of total new business purchases, and pay this amount to certain housing funds. In April 2019, at the direction of FHFA, we paid the funds allocated for 2018 through the following payments: $105.1 million to the Housing Trust Fund administered by HUD and $56.5 million to the Capital Magnet Fund administered by Treasury.
During 1Q 2019, we completed $83 billion of new business purchases subject to this requirement and accrued $35 million of related expense. We are prohibited from passing through these costs to the originators of the loans that we purchase.
Legislative and Regulatory Developments
Presidential Memorandum on Federal Housing Finance Reform
On March 27, 2019, President Trump issued a memorandum on federal housing finance reform. The President directed the Secretary of the Treasury to develop a plan for administrative and legislative reforms as soon as practicable to achieve housing reform goals that include the following: ending the conservatorships of the GSEs; facilitating competition in the housing finance market; establishing regulation of the GSEs that safeguards their safety and soundness and minimizes the risks they pose to the financial stability of the United States; and providing that the federal government is properly compensated for any explicit or implicit support it provides to the GSEs. 
The President further directed that Treasury's plan include reform proposals to: preserve access for qualified homebuyers to 30 year fixed-rate mortgages and other mortgage options that best serve the financial needs of potential homebuyers; maintain equal access to the federal housing finance system for all lenders; establish appropriate capital and liquidity requirements for the GSEs; increase competition and participation of the private sector in the mortgage market; mitigate the risks undertaken by the GSEs; recommend appropriate size and risk profiles for the GSEs' retained mortgage and investment portfolios; define the role of the GSEs in multifamily mortgage finance; evaluate the GSEs' exemption from certain requirements of the "qualified mortgage" determination; define the GSEs' role in promoting affordable housing; and set the conditions necessary for the

Freddie Mac Form 10-Q
 
45
Management's Discussion and Analysis
Regulation and Supervision


termination of the conservatorships, including that the federal government is fully compensated for the explicit and implicit guarantees provided to the GSEs or any successor entities, the GSEs' activities are restricted to their core statutory mission and the size of their investment and retained portfolios is appropriately limited, and the GSEs are subjected to heightened prudential requirements and safety and soundness standards, including increased capital requirements.
UMBS Update
On March 5, 2019, FHFA published in the Federal Register a final rule on the UMBS that requires Freddie Mac and Fannie Mae to align programs, policies, and practices that affect the cash flows of TBA-eligible mortgage-backed securities. This rule will be effective on May 6, 2019.
On March 7, 2019, SIFMA announced that its TBA Guidelines Advisory Council approved changes to the good delivery guidelines to enable TBA-trading of UMBS with trade dates on or after March 12, 2019 and settlement dates on or after June 3, 2019. UMBS issued by either Freddie Mac or Fannie Mae will be deliverable into TBA contracts for settlement starting June 3, 2019. In conjunction with these announcements, forward trading has begun for June 2019 settlement into UMBS.
Beginning on May 7, 2019, we plan to offer holders of certain existing 45-day payment delay fixed-rate Gold PCs and Giant PCs the option to exchange their eligible 45-day securities for 55-day payment delay Freddie Mac securities. Freddie Mac will no longer issue Gold PCs with a 45-day payment delay after May 31, 2019.



Freddie Mac Form 10-Q
 
46
Management's Discussion and Analysis
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-Q, 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, 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 our 2018 Annual Report, and:
n
The actions the U.S. government (including FHFA, Treasury, and Congress) may take, or require us to take, including to support the housing markets or to implement FHFA's Conservatorship Scorecards and other objectives for us;
n
The effect of the restrictions on our business due to the conservatorship and the Purchase Agreement, including our dividend requirement on the senior preferred stock;
n
Changes in our Charter or in applicable legislative or regulatory requirements (including any legislation affecting the future status of our company);
n
Changes in the fiscal and monetary policies of the Federal Reserve, including the balance sheet normalization program to reduce the Federal Reserve's holdings of mortgage-related securities;
n
Changes in tax laws;
n
Changes in accounting policies, practices, or guidance (e.g., FASB's accounting standards update related to the measurement of credit losses of financial instruments);
n
Changes in economic and market conditions, including changes in employment rates, interest rates, spreads, and home prices;
n
Changes 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);
n
The success of our efforts to mitigate our losses on our legacy and relief refinance single-family loan portfolio;
n
The success of our strategy to transfer mortgage credit risk through STACR debt note, STACR Trust, ACIS, K Certificate, SB Certificate, and other CRT transactions;
n
Our ability to maintain adequate liquidity to fund our operations;
n
Our ability to maintain the security and resiliency of our operational systems and infrastructure, including against cyberattacks;
n
Our ability to effectively execute our business strategies, implement new initiatives, and improve efficiency;
n
The adequacy of our risk management framework, including the adequacy of the CCF for measuring risk;
n
Our ability to manage mortgage credit risk, including the effect of changes in underwriting and servicing practices;
n
Our 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;
n
Our operational ability to issue new securities, make timely and correct payments on securities, and provide initial and ongoing disclosures;
n
Our reliance on CSS and the CSP for the operation of the majority of our single-family securitization activities;
n
Changes or errors in the methodologies, models, assumptions, and estimates we use to prepare our financial statements, make business decisions, and manage risks;
n
Changes in investor demand for our debt or mortgage-related securities, as well as market acceptance of the UMBS;
n
Changes in the practices of loan originators, servicers, investors, and other participants in the secondary mortgage market;
n
The occurrence of a major natural or other disaster 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-Q and our 2018 Annual Report, including in the MD&A section.
Forward-looking statements are made only as of the date of this Form 10-Q, 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-Q.

Freddie Mac Form 10-Q
 
47
Financial Statements
 


Financial Statements

Freddie Mac Form 10-Q
 
48
Financial Statements
Condensed Consolidated Statements of Comprehensive Income

FREDDIE MAC
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In millions, except share-related amounts)
 
1Q 2019
1Q 2018
Interest income
 
 
 
Mortgage loans
 

$17,946


$15,951

Investments in securities
 
689

810

Other
 
351

214

Total interest income
 
18,986

16,975

Interest expense
 
(15,833
)
(13,957
)
Net interest income
 
3,153

3,018

Benefit (provision) for credit losses
 
135

(63
)
Net interest income after benefit (provision) for credit losses
 
3,288

2,955

Non-interest income (loss)
 
 
 
Guarantee fee income
 
217

194

Mortgage loans gains (losses)
 
931

(215
)
Investment securities gains (losses)
 
174

(232
)
Debt gains (losses)
 
15

121

Derivative gains (losses)
 
(1,606
)
1,830

Other income (loss)
 
34

131

Non-interest income (loss)
 
(235
)
1,829

Non-interest expense
 
 
 
Salaries and employee benefits
 
(322
)
(286
)
Professional services
 
(105
)
(102
)
Other administrative expense
 
(151
)
(132
)
Total administrative expense
 
(578
)
(520
)
Real estate owned operations expense
 
(33
)
(34
)
Temporary Payroll Tax Cut Continuation Act of 2011 expense
 
(390
)
(359
)
Other expense
 
(287
)
(197
)
Non-interest expense
 
(1,288
)
(1,110
)
Income (loss) before income tax (expense) benefit
 
1,765

3,674

Income tax (expense) benefit
 
(358
)
(748
)
Net income (loss)
 
1,407

2,926

Other comprehensive income (loss), net of taxes and reclassification adjustments:
 
 
 
Changes in unrealized gains (losses) related to available-for-sale securities
 
246

(800
)
Changes in unrealized gains (losses) related to cash flow hedge relationships
 
18

30

Changes in defined benefit plans
 
(6
)
(6
)
Total other comprehensive income (loss), net of taxes and reclassification adjustments
 
258

(776
)
Comprehensive income (loss)
 

$1,665


$2,150

Net income (loss)
 

$1,407


$2,926

Undistributed net worth sweep and senior preferred stock dividends
 
(1,665
)
—

Net income (loss) attributable to common stockholders
 

($258
)

$2,926

Net income (loss) per common share — basic and diluted
 

($0.08
)

$0.90

Weighted average common shares outstanding (in millions) — basic and diluted
 
3,234

3,234

The accompanying notes are an integral part of these condensed consolidated financial statements.

Freddie Mac Form 10-Q
 
49
Financial Statements
Condensed Consolidated Balance Sheets

FREDDIE MAC
Condensed Consolidated Balance Sheets (Unaudited)
 
 
March 31,
December 31,
(In millions, except share-related amounts)
 
2019
2018
Assets
 
 
 
Cash and cash equivalents (Notes 1, 3, 14) (includes $735 and $596 of restricted cash and cash equivalents)
 

$6,239


$7,273

Securities purchased under agreements to resell (Notes 3, 10)
 
50,134

34,771

Investments in securities, at fair value (Note 7)
 
65,496

69,111

Mortgage loans held-for-sale (Notes 3, 4) (includes $20,576 and $23,106 at fair value)
 
39,818

41,622

Mortgage loans held-for-investment (Notes 3, 4) (net of allowance for loan losses of $5,546 and $6,139)
 
1,902,270

1,885,356

Accrued interest receivable (Note 3)
 
6,684

6,728

Derivative assets, net (Notes 9, 10)
 
1,146

335

Deferred tax assets, net (Note 12)
 
6,819

6,888

Other assets (Notes 3, 18) (includes $4,182 and $3,929 at fair value)
 
14,301

10,976

Total assets
 

$2,092,907


$2,063,060

Liabilities and equity
 
 
 
Liabilities
 
 
 
Accrued interest payable (Note 3)
 

$6,558


$6,652

Debt, net (Notes 3, 8) (includes $5,067 and $5,112 at fair value)
 
2,073,614

2,044,950

Derivative liabilities, net (Notes 9, 10)
 
432

583

Other liabilities (Notes 3, 18)
 
7,638

6,398

Total liabilities
 
2,088,242

2,058,583

Commitments and contingencies (Notes 5, 9, 16)
 


Equity (Note 11)
 
 
 
Senior preferred stock (redemption value of $75,648 and $75,648)
 
72,648

72,648

Preferred stock, at redemption value
 
14,109

14,109

Common stock, $0.00 par value, 4,000,000,000 shares authorized, 725,863,886 shares issued and 650,059,033 shares and 650,058,775 shares outstanding
 
—

—

Additional paid-in capital
 
—

—

Retained earnings (accumulated deficit)
 
(78,330
)
(78,260
)
AOCI, net of taxes, related to:
 
 
 
Available-for-sale securities (includes $261 and $221, related to net unrealized gains on securities for which other-than-temporary impairment has been recognized in earnings)
 
329

83

Cash flow hedge relationships
 
(297
)
(315
)
Defined benefit plans
 
91

97

Total AOCI, net of taxes
 
123

(135
)
Treasury stock, at cost, 75,804,853 shares and 75,805,111 shares
 
(3,885
)
(3,885
)
Total equity (See Note 11 for information on our dividend requirement to Treasury)
 
4,665

4,477

Total liabilities and equity
 

$2,092,907


$2,063,060

The table below presents the carrying value and classification of the assets and liabilities of consolidated VIEs on our condensed consolidated balance sheets.
 
 
March 31,
December 31,
(In millions)
 
2019
2018
Consolidated Balance Sheet Line Item
 
 
 
Assets: (Note 3)
 
 
 
Mortgage loans held-for-investment
 

$1,858,079


$1,842,850

All other assets
 
22,508

20,237

Total assets of consolidated VIEs
 

$1,880,587


$1,863,087

Liabilities: (Note 3)
 
 
 
Debt, net
 

$1,803,707


$1,792,677

All other liabilities
 
5,386

5,335

Total liabilities of consolidated VIEs
 

$1,809,093


$1,798,012

The accompanying notes are an integral part of these condensed consolidated financial statements.

Freddie Mac Form 10-Q
 
50
Financial Statements
Condensed Consolidated Statements of Equity


FREDDIE MAC
Condensed Consolidated Statements of Equity (Unaudited)
 
 
Shares Outstanding
Senior
Preferred
Stock
Preferred
Stock, at
Redemption
Value
Common
Stock, at
Par Value
Additional
Paid-In
Capital
Retained
Earnings
(Accumulated
Deficit)
AOCI,
Net of
Tax
Treasury
Stock, at
Cost
Total
Equity
(In millions)
 
Senior
Preferred
Stock
Preferred
Stock
Common
Stock
Balance at December 31, 2017
 
1

464

650


$72,336


$14,109


$—


$—


($83,261
)

$389


($3,885
)

($312
)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
—

—

—

—

—

—

—

2,926

—

—

2,926

Other comprehensive income (loss), net of taxes
 
—

—

—

—

—

—

—

—

(776
)
—

(776
)
Comprehensive income (loss)
 
—

—

—

—

—

—

—

2,926

(776
)
—

2,150

Cumulative effect of change in accounting principle
 
—

—

—

—

—

—

—

(89
)
89

—

—

Increase in liquidation preference
 
—

—

—

312

—

—

—

—

—

—

312

Ending balance at March 31, 2018
 
1

464

650


$72,648


$14,109


$—


$—


($80,424
)

($298
)

($3,885
)

$2,150

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
 
1

464

650


$72,648


$14,109


$—


$—


($78,260
)

($135
)

($3,885
)

$4,477

Comprehensive income (loss):
 





















Net income (loss)
 
—

—

—

—

—

—

—

1,407

—

—

1,407

Other comprehensive income (loss), net of taxes
 
—

—

—

—

—

—

—

—

258

—

258

Comprehensive income (loss)
 
—

—

—

—

—

—

—

1,407

258

—

1,665

Senior preferred stock dividends declared
 
—

—

—

—

—

—

—

(1,477
)
—

—

(1,477
)
Ending balance at March 31, 2019
 
1

464

650


$72,648


$14,109


$—


$—


($78,330
)

$123


($3,885
)

$4,665

The accompanying notes are an integral part of these condensed consolidated financial statements.

Freddie Mac Form 10-Q
 
51
Financial Statements
Condensed Consolidated Statements of Cash Flows



FREDDIE MAC
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
 
1Q 2019
1Q 2018
Net cash provided by (used in) operating activities
 

$4,274


$4,643

Cash flows from investing activities
 
 
 
Purchases of trading securities
 
(22,738
)
(29,949
)
Proceeds from sales of trading securities
 
23,099

32,487

Proceeds from maturities and repayments of trading securities
 
1,754

1,471

Purchases of available-for-sale securities
 
(2,298
)
(4,266
)
Proceeds from sales of available-for-sale securities
 
3,032

6,351

Proceeds from maturities and repayments of available-for-sale securities
 
932

1,541

Purchases of held-for-investment mortgage loans
 
(34,756
)
(30,737
)
Proceeds from sales of mortgage loans held-for-investment
 
2,308

2,282

Repayments of mortgage loans held-for-investment
 
52,425

60,542

Advances under secured lending arrangements
 
(7,997
)
(4,944
)
Repayments of secured lending arrangements
 
290

—

Net proceeds from dispositions of real estate owned and other recoveries
 
268

352

Net (increase) decrease in securities purchased under agreements to resell
 
(15,363
)
14,075

Derivative premiums and terminations, swap collateral, and exchange settlement payments, net
 
(3,142
)
2,958

Changes in other assets
 
(187
)
(143
)
Net cash provided by (used in) investing activities
 
(2,373
)
52,020

Cash flows from financing activities
 
 
 
Proceeds from issuance of debt securities of consolidated trusts held by third parties
 
36,092

42,558

Repayments and redemptions of debt securities of consolidated trusts held by third parties
 
(54,327
)
(65,614
)
Proceeds from issuance of other debt
 
167,026

131,574

Repayments of other debt
 
(150,248
)
(166,686
)
Increase in liquidation preference of senior preferred stock
 
—

312

Payment of cash dividends on senior preferred stock
 
(1,477
)
—

Changes in other liabilities
 
(1
)
(1
)
Net cash provided by (used in) financing activities
 
(2,935
)
(57,857
)
Net increase (decrease) in cash and cash equivalents (includes restricted cash and cash equivalents)
 
(1,034
)
(1,194
)
Cash and cash equivalents (includes restricted cash and cash equivalents) at beginning of year
 
7,273

9,811

Cash and cash equivalents (includes restricted cash and cash equivalents) at end of period
 

$6,239


$8,617

 
 
 
 
Supplemental cash flow information
 
 
 
Cash paid for:
 
 
 
Debt interest
 

$17,366


$16,306

Income taxes
 
—

—

Non-cash investing and financing activities (Notes 4 and 7)
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

Freddie Mac Form 10-Q
 
52
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 1


Notes to Condensed Consolidated Financial Statements
NOTE 1
Summary of Significant Accounting Policies
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 are regulated by FHFA, the SEC, HUD, and Treasury, and are currently operating under the conservatorship of FHFA. For more information on the roles of FHFA and Treasury, see Note 2 in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2018, or 2018 Annual Report. Throughout our unaudited condensed consolidated financial statements and related notes, we use certain acronyms and terms which are defined in the Glossary of our 2018 Annual Report. Throughout this Form 10-Q, we refer to the three months ended March 31, 2019, the three months ended December 31, 2018, the three months ended September 30, 2018, the three months ended June 30, 2018, and the three months ended March 31, 2018 as "1Q 2019," "4Q 2018," "3Q 2018," "2Q 2018," and "1Q 2018," respectively.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes in our 2018 Annual Report.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and include our accounts as well as the accounts of other entities in which we have a controlling financial interest. All intercompany balances and transactions have been eliminated.
We are operating under the basis that we will realize assets and satisfy liabilities in the normal course of business as a going concern and in accordance with the authority provided by FHFA to our Board of Directors to oversee management's conduct of our business operations. Certain amounts in prior periods' condensed consolidated financial statements have been reclassified to conform to the current presentation. In the opinion of management, our unaudited condensed consolidated financial statements contain all adjustments, which include only normal recurring adjustments, necessary for a fair statement of our results.
We evaluate the materiality of identified errors in the financial statements using both an income statement, or "rollover," and a balance sheet, or "iron curtain," approach, based on relevant quantitative and qualitative factors. Net income includes certain adjustments to correct immaterial errors related to previously reported periods.

Freddie Mac Form 10-Q
 
53
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 1


Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, gains, and losses during the reporting period. Management has made significant estimates in preparing the financial statements for establishing the allowance for credit losses and valuing financial instruments and other assets and liabilities. Actual results could be different from these estimates.
Recently Issued Accounting Guidance
Recently Adopted Accounting Guidance

Standard
Description
Date of Adoption
Effect on Condensed Consolidated Financial Statements
ASU 2016-02, Leases (Topic 842)
The amendment in this Update addresses the accounting for lease arrangements.
January 1, 2019
The adoption of the amendment did not have a material effect on our condensed consolidated financial statements or on our disclosures.
ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
The amendments in this Update permit the OIS rate based on SOFR, as an eligible U.S. benchmark interest rate for purposes of applying hedge accounting under Topic 815.
January 1, 2019
The adoption of the amendment did not have a material effect on our condensed consolidated financial statements or on our disclosures.

ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors
The amendments in this Update address certain ASU 2016-02 implementation issues including the recognition of taxes collected from lessees, lessor costs paid directly by a lessee, and recognition of variable payments for contracts with lease and non-lease components.
January 1, 2019
The adoption of the amendments did not have a material effect on our condensed consolidated financial statements or on our disclosures.


Freddie Mac Form 10-Q
 
54
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 1


Recently Issued Accounting Guidance, Not Yet Adopted Within Our Condensed Consolidated Financial Statements
Standard
Description
Date of Planned Adoption
Effect on Consolidated Financial Statements
ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.
January 1, 2020
We have developed our models to estimate lifetime expected credit losses on our financial instruments measured at amortized cost primarily using a discounted cash flow methodology. These models are currently undergoing testing and validation, which includes executing our process for estimating the allowance for credit losses under the new standard in parallel with our existing process for estimating the allowance for credit losses under current GAAP and developing an appropriate governance process for our estimate of expected credit losses under the new standard. The amendments will be applied through a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption.
While we are not able to reasonably estimate the effect that the adoption of these amendments will have on our consolidated financial statements, it may increase (perhaps substantially) our allowance for credit losses in the period of adoption.


ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurements, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. Certain disclosure requirements were either removed, modified, or added.

January 1, 2020
On October 1, 2018, we early adopted the amendments to remove or modify certain disclosures, which did not have a material effect on our consolidated financial statements. We are delaying adoption of the amendments to add certain disclosures until their effective date. We do not expect that the adoption of the additional disclosures will have a material effect on our consolidated financial statements.
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
The amendments in this Update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).
January 1, 2020
We do not expect that the adoption of these amendments will have a material effect on our consolidated financial statements.
ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
The amendments in this Update require that indirect interests held through related parties under common control be considered on a proportional basis when determining whether fees paid to decision makers or service providers are variable interests. These amendments align with the determination of whether a reporting entity within a related party group is the primary beneficiary of a VIE.
January 1, 2020
We do not expect that the adoption of these amendments will have a material effect on our consolidated financial statements.
ASU 2019-01, Leases (Topic 842): Narrow-Scope Improvements for Lessors
The amendments in this Update provide guidance for the: (1) lessor's fair value determination of the lease's underlying asset; (2) lessor's statement of cash flows presentation of cash received from sales-type and direct financing leases; and (3) removal of interim transition disclosure requirements related to changes in accounting principles.
January 1, 2020
We do not expect that the adoption of these amendments will have a material effect on our consolidated financial statements.


Freddie Mac Form 10-Q
 
55
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 2


NOTE 2
Conservatorship and Related Matters
Business Objectives
We operate under the conservatorship that commenced on September 6, 2008, conducting our business under the direction of FHFA, as our Conservator. The conservatorship and related matters significantly affect our management, business activities, financial condition, and results of operations. Upon its appointment, FHFA, as Conservator, immediately succeeded to all rights, titles, powers, and privileges of Freddie Mac, and of any stockholder, officer, or director thereof, with respect to the company and its assets. The Conservator also succeeded to the title to all books, records, and assets of Freddie Mac held by any other legal custodian or third party. The Conservator provided for the Board of Directors to perform certain functions and to oversee management, and the Board delegated to management authority to conduct business operations so that the company can continue to operate in the ordinary course. The directors serve on behalf of, and perform such functions as provided by, the Conservator.
We are subject to certain constraints on our business activities under the Purchase Agreement. However, the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain our access to the debt markets and to have adequate liquidity to conduct our normal business activities, although the costs of our debt funding could vary. Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent.
Impact of Conservatorship and Related Developments on the Mortgage-Related Investments Portfolio
In February 2019, FHFA directed us to maintain the UPB of our mortgage-related investments portfolio at or below $225 billion at all times, and the UPB of this portfolio was $218.9 billion at March 31, 2019. Our ability to acquire and sell mortgage assets continues to be significantly constrained by limitations imposed by the Purchase Agreement and FHFA.
Government Support for Our Business
We receive substantial support from Treasury and are dependent upon its continued support in order to continue operating our business. Our ability to access funds from Treasury under the Purchase Agreement is critical to:
n
Keeping us solvent;
n
Allowing us to focus on our primary business objectives under conservatorship; and
n
Avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions.
At December 31, 2018, our assets exceeded our liabilities under GAAP; therefore, FHFA, as Conservator, did not request a draw on our behalf and, as a result, we did not receive any funding from Treasury under the Purchase Agreement during 1Q 2019. The amount of available funding remaining under the Purchase Agreement is $140.2 billion and will be reduced by any future draws.
See Note 8 and Note 11 for more information on the conservatorship and the Purchase Agreement.
Related Parties As a Result of Conservatorship
We are deemed related parties with Fannie Mae as both we and Fannie Mae have the same relationships with FHFA and Treasury. CSS was formed in 2013 as a limited liability company equally-owned by Freddie Mac and Fannie Mae. Therefore, CSS is also deemed a related party. During 1Q 2019, we contributed $36 million of capital to CSS, and we have contributed $500 million since the fourth quarter of 2014.


Freddie Mac Form 10-Q
 
56
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 3


NOTE 3
Securitization Activities and Consolidation
Our primary business activities in our Single-family Guarantee and Multifamily segments involve the securitization of loans or other mortgage-related assets using trusts that are VIEs. These trusts issue beneficial interests in the loans or other mortgage-related assets that they own. We guarantee the principal and interest payments on some or all of the issued beneficial interests in substantially all of our securitization transactions. We consolidate VIEs when we have a controlling financial interest in the VIE and are therefore considered the primary beneficiary of the VIE. See Note 5 for additional information on our guarantee activities.
Consolidated VIEs
The table below presents the carrying value and classification of the assets and liabilities of consolidated VIEs on our condensed consolidated balance sheets.
Table 3.1 - Consolidated VIEs
(In millions)
 
As of March 31, 2019
As of December 31, 2018
Consolidated Balance Sheet Line Item
 
 
 
Assets:
 
 
 
Cash and cash equivalents (includes $695 and $566 of restricted cash and cash equivalents)
 

$696


$567

Securities purchased under agreements to resell
 
13,500

12,125

Mortgage loans held-for-investment
 
1,858,079

1,842,850

Accrued interest receivable
 
5,991

5,914

Other assets
 
2,321

1,631

Total assets of consolidated VIEs
 

$1,880,587


$1,863,087

Liabilities:
 
 
 
Accrued interest payable
 

$5,386


$5,335

Debt, net
 
1,803,707

1,792,677

Total liabilities of consolidated VIEs
 

$1,809,093


$1,798,012


Freddie Mac Form 10-Q
 
57
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 3


Non-Consolidated VIEs
Our involvement with VIEs for which we are not the primary beneficiary takes one or both of two forms - purchasing an investment in these entities or providing a guarantee to these entities. The following table presents the carrying amounts and classification of the assets and liabilities recorded on our condensed consolidated balance sheets related to non-consolidated VIEs with which we were involved in the design and creation and have a significant continuing involvement, as well as our maximum exposure to loss. We do not believe the maximum exposure to loss disclosed in the table below is representative of the actual loss we are likely to incur, based on our historical loss experience and after consideration of proceeds from related collateral liquidation, including possible recoveries under credit enhancement arrangements. See Note 6 for additional information on credit enhancement arrangements.
Table 3.2 - Non-Consolidated VIEs
(In millions)
 
As of March 31, 2019
As of December 31, 2018
Assets and Liabilities Recorded on our Condensed Consolidated Balance Sheets(1)


 
Assets:


 
Investments in securities, at fair value


$42,219


$44,020

Accrued interest receivable

213

235

Derivative assets, net
 
9

1

Other assets

3,272

3,119

 Liabilities:

 
 
Derivative liabilities, net

82

88

Other liabilities

3,111

3,049

Maximum Exposure to Loss(2)(3)


$248,263


$241,055

Total Assets of Non-Consolidated VIEs(3)


$294,746


$284,724

(1)
Includes our variable interests in REMICs and Stripped Giant PCs, K Certificates, SB Certificates, certain senior subordinate securitization structures, other securitization products, and other risk transfer securitizations that we do not consolidate.
(2)
Our maximum exposure to loss includes the guaranteed UPB of assets held by the non-consolidated VIEs, the UPB of unguaranteed securities that we acquired from these securitization transactions, and the UPB of guarantor advances made to the holders of the guaranteed securities.
(3)
Our maximum exposure to loss and total assets of non-consolidated VIEs exclude our investments in and obligations to REMICs and Stripped Giant PCs, because we already consolidate the underlying collateral of these trusts on our condensed consolidated balance sheets. In addition, our maximum exposure to loss excludes certain securitization activity and other mortgage-related guarantees measured at fair value where our exposure may be unlimited. We generally reduce our exposure to these guarantees with unlimited exposure through separate contracts with third parties.
We also obtain interests in various other VIEs created by third parties through the normal course of business. To the extent that we were not involved in the design and creation of these VIEs, they are excluded from the table above. Our interests in these VIEs are generally passive in nature and are not expected to result in us obtaining a controlling financial interest in these VIEs in the future.

Freddie Mac Form 10-Q
 
58
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



NOTE 4
Mortgage Loans and Allowance for Credit Losses
The table below provides details of the loans on our condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018.
Table 4.1 - Mortgage Loans
 
 
March 31, 2019
 
December 31, 2018
(In millions)
 
Held by Freddie Mac
Held by
Consolidated
Trusts
Total
 
Held by Freddie Mac
Held by
Consolidated
Trusts
Total
Held-for-sale:
 
 
 
 
 
 
 
 
Single-family
 

$21,696


$—


$21,696

 

$20,946


$—


$20,946

Multifamily
 
21,220

—

21,220

 
23,959

—

23,959

Total UPB
 
42,916

—

42,916

 
44,905

—

44,905

Cost basis and fair value adjustments, net
 
(3,098
)
—

(3,098
)
 
(3,283
)
—

(3,283
)
Total held-for-sale loans, net
 
39,818

—

39,818

 
41,622

—

41,622

Held-for-investment:
 
 
 
 
 
 
 
 
Single-family
 
36,892

1,827,546

1,864,438

 
35,885

1,814,008

1,849,893

Multifamily
 
10,654

3,968

14,622

 
10,828

4,220

15,048

Total UPB
 
47,546

1,831,514

1,879,060

 
46,713

1,818,228

1,864,941

Cost basis adjustments
 
(882
)
29,638

28,756

 
(1,198
)
27,752

26,554

Allowance for loan losses
 
(2,473
)
(3,073
)
(5,546
)
 
(3,009
)
(3,130
)
(6,139
)
Total held-for-investment loans, net
 
44,191

1,858,079

1,902,270

 
42,506

1,842,850

1,885,356

Total mortgage loans, net
 

$84,009


$1,858,079


$1,942,088

 

$84,128


$1,842,850


$1,926,978

The table below provides details of the UPB of loans we purchased, reclassified from held-for-investment to held-for-sale, and sold.
Table 4.2 - Loans Purchased, Reclassified from Held-for-Investment to Held-for-Sale, and Sold
(In billions)
 
1Q 2019
1Q 2018
Single-family:
 
 
 
Purchases
 
 
 
  Held-for-investment loans
 

$69.7


$65.5

Reclassified from held-for-investment to held-for-sale(1)
 
4.1

1.7

Sale of held-for-sale loans(2)
 
2.1

1.8

Multifamily:
 
 
 
Purchases
 
 
 
  Held-for-investment loans
 
1.0

1.0

  Held-for-sale loans
 
11.6

11.8

Reclassified from held-for-investment to held-for-sale(1)
 
0.5

0.3

Sale of held-for-sale loans(3)
 
14.7

16.2

(1)
We reclassify loans from held-for-investment to held-for-sale when we no longer have the intent or ability to hold for the foreseeable future. For additional information regarding the fair value of our loans classified as held-for-sale, see Note 15.
(2)
Our sales of single-family loans reflect the sale of seasoned single-family mortgage loans. The sale of seasoned single-family mortgage loans is part of our strategy to mitigate and reduce our holdings of less liquid assets.
(3)
Our sales of multifamily loans occur primarily through the issuance of multifamily K Certificates and SB Certificates. See Note 3 for more information on our K Certificates and SB Certificates.

Freddie Mac Form 10-Q
 
59
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Credit Quality
Single-Family
The current LTV ratio is one key factor we consider when estimating our allowance for credit losses for single-family loans. As current LTV ratios increase, the borrower's equity in the home decreases, which may negatively affect the borrower's ability to refinance (outside of the Enhanced Relief Refinance program) or to sell the property for an amount at or above the balance of the outstanding loan.
A second-lien loan also reduces the borrower's equity in the home, and has a similar negative effect on the borrower's ability to refinance or sell the property for an amount at or above the combined balances of the first and second loans. However, borrowers are free to obtain second-lien financing after origination, and we are not entitled to receive notification when a borrower does so. For further information about concentrations of risk associated with our single-family and multifamily loans, see Note 14.
The table below presents the recorded investment of single-family held-for-investment loans by current LTV ratios. Our current LTV ratios are estimates based on available data through the end of each respective period presented.
Table 4.3 - Recorded Investment of Single-Family Held-for-Investment Loans by Current LTV Ratios
 
 
March 31, 2019
 
December 31, 2018
 
 
Current LTV Ratio
 Total
 
Current LTV Ratio
 Total
(In millions)
 
 ≤ 80
> 80 to 100
> 100(1)
 
≤ 80
> 80 to 100
> 100(1)
20- and 30-year or more, amortizing fixed-rate
 

$1,354,643


$221,796


$5,721


$1,582,160

 

$1,336,310


$214,703


$6,654


$1,557,667

15-year amortizing fixed-rate
 
245,503

4,366

130

249,999

 
251,152

4,522

157

255,831

Adjustable-rate
 
41,593

1,930

8

43,531

 
42,117

1,883

7

44,007

Alt-A, interest-only, and option ARM
 
15,490

1,610

422

17,522

 
16,498

1,903

559

18,960

Total single-family loans
 

$1,657,229


$229,702


$6,281


$1,893,212

 

$1,646,077


$223,011


$7,377


$1,876,465

(1)
The serious delinquency rate for the total of single-family held-for-investment mortgage loans with current LTV ratios in excess of 100% was 6.89% and 7.24% as of March 31, 2019 and December 31, 2018, respectively.
For reporting purposes:
n
Loans within the Alt-A category continue to be presented in that category following modification, even though the borrower may have provided full documentation of assets and income to complete the modification and
n
Loans within the option ARM category continue to be presented in that category following modification, even though the modified loan no longer provides for optional payment provisions.
Multifamily
The table below presents the recorded investment in our multifamily held-for-investment loans, by credit quality indicator based on available data through the end of each period presented. These indicators involve significant management judgment.
Table 4.4 - Recorded Investment of Multifamily Held-for-Investment Loans by Credit Quality Indicator
(In millions)
 
March 31, 2019
December 31, 2018
Credit risk profile by internally assigned grade:(1)
 
 
 
Pass
 

$14,275


$14,648

Special mention
 
117

201

Substandard
 
212

181

Doubtful
 
—

—

Total
 

$14,604


$15,030

(1)
A loan categorized as: "Pass" is current and adequately protected by the current financial strength and debt service capacity of the borrower; "Special mention" has administrative issues that may affect future repayment prospects but does not have current credit weaknesses; "Substandard" has a weakness that jeopardizes the timely full repayment; and "Doubtful" has a weakness that makes collection or liquidation in full highly questionable and improbable based on existing conditions.


Freddie Mac Form 10-Q
 
60
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Mortgage Loan Performance
The tables below present the recorded investment of our single-family and multifamily loans, held-for-investment, by payment status.
Table 4.5 - Recorded Investment of Held-for-Investment Loans by Payment Status
 
 
March 31, 2019
(In millions)
 
Current
One
Month
Past Due
Two
Months
Past Due
Three Months or
More Past Due,
or in Foreclosure(1)
Total
Non-accrual
Single-family:
 
 
 
 
 
 
 
20- and 30-year or more, amortizing fixed-rate
 

$1,558,264


$14,059


$3,359


$6,478


$1,582,160


$6,476

15-year amortizing fixed-rate
 
248,583

991

166

259

249,999

259

Adjustable-rate
 
43,092

272

58

109

43,531

109

Alt-A, interest-only, and option ARM
 
15,715

782

280

745

17,522

745

Total single-family
 
1,865,654

16,104

3,863

7,591

1,893,212

7,589

Total multifamily
 
14,604

—

—

—

14,604

14

Total single-family and multifamily
 

$1,880,258


$16,104


$3,863


$7,591


$1,907,816


$7,603

 
 
 
 
 
 
 
 

 
December 31, 2018
(In millions)
 
Current
One
Month
Past Due
Two
Months
Past Due
Three Months or
More Past Due,
or in Foreclosure(1)
Total
Non-accrual
Single-family:
 






20- and 30-year or more, amortizing fixed-rate
 

$1,532,499


$14,683


$3,602


$6,883


$1,557,667


$6,881

15-year amortizing fixed-rate
 
254,376

1,021

171

263

255,831

263

Adjustable-rate
 
43,549

287

58

113

44,007

113

Alt-A, interest-only, and option ARM
 
16,975

793

327

865

18,960

864

Total single-family
 
1,847,399

16,784

4,158

8,124

1,876,465

8,121

Total multifamily
 
15,030

—

—

—

15,030

17

Total single-family and multifamily
 

$1,862,429


$16,784


$4,158


$8,124


$1,891,495


$8,138

(1)
Includes $2.6 billion and $2.9 billion of single-family loans that were in the process of foreclosure as of March 31, 2019 and December 31, 2018, respectively.

Freddie Mac Form 10-Q
 
61
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



The table below summarizes the delinquency rates of loans within our single-family credit guarantee and multifamily mortgage portfolios.
Table 4.6 - Delinquency Rates
(Dollars in millions)
 
March 31, 2019
December 31, 2018
Single-family:
 
 
 
Non-credit-enhanced portfolio
 
 
 
Serious delinquency rate
 
0.82
%
0.83
%
Total number of seriously delinquent loans
 
49,009

51,197

Credit-enhanced portfolio:(1)
 
 
 
Primary mortgage insurance:
 
 
 
   Serious delinquency rate
 
0.82
%
0.86
%
   Total number of seriously delinquent loans
 
14,841

15,287

Other credit protection:(2)
 
 
 
   Serious delinquency rate
 
0.31
%
0.31
%
   Total number of seriously delinquent loans
 
13,817

12,920

Total single-family:
 
 
 
Serious delinquency rate
 
0.67
%
0.69
%
Total number of seriously delinquent loans
 
73,574

75,649

Multifamily:(3)
 
 
 
Non-credit-enhanced portfolio:
 
 
 
Delinquency rate
 
—
%
—
%
UPB of delinquent loans
 

$2


$2

Credit-enhanced portfolio:
 
 
 
Delinquency rate
 
0.03
%
0.01
%
UPB of delinquent loans
 

$70


$28

Total multifamily:
 
 
 
Delinquency rate
 
0.03
%
0.01
%
UPB of delinquent loans
 

$72


$30

(1)
The credit-enhanced categories are not mutually exclusive, as a single loan may be covered by both primary mortgage insurance and other credit protection.
(2)
Consists of single-family loans covered by financial arrangements (other than primary mortgage insurance) that are designed to reduce our credit risk exposure. See Note 6 for additional information on our credit enhancements.
(3)
Multifamily delinquency performance is based on the UPB of loans that are two monthly payments or more past due or those in the process of foreclosure.
Allowance for Credit Losses
The allowance for credit losses represents estimates of probable incurred credit losses which we recognize by recording a charge to the provision for credit losses on our condensed consolidated statements of comprehensive income. The allowance for credit losses includes:
n
Our allowance for loan losses, which pertains to all single-family and multifamily loans classified as held-for-investment on our condensed consolidated balance sheets and
n
Our reserve for guarantee losses, which pertains to single-family and multifamily loans underlying our senior subordinate securitization structures (non-consolidated), other securitization products, and other mortgage-related guarantees.

Freddie Mac Form 10-Q
 
62
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Table 4.7 - Details of Allowance for Credit Losses
The table below summarizes changes in our allowance for credit losses.

 
1Q 2019

1Q 2018

 
Allowance for Loan Losses
 Reserve  for
Guarantee
Losses
Total

Allowance for Loan Losses
 Reserve  for
Guarantee
Losses
Total
 (In millions)
 
Held by Freddie Mac
Held By
Consolidated
Trusts

Held by Freddie Mac
Held By
Consolidated
Trusts
Single-family:
 









Beginning balance
 

$3,003


$3,127


$46


$6,176



$5,251


$3,680


$48


$8,979

Provision (benefit) for credit losses
 
(201
)
64

1

(136
)

98

(21
)
2

79

Charge-offs
 
(585
)
(19
)
(1
)
(605
)

(355
)
(15
)
(2
)
(372
)
Recoveries
 
103

3

—

106


95

1

—

96

Transfers, net(1)
 
107

(107
)
—

—


126

(126
)
—

—

Other(2)
 
38

3

—

41

 
90

5

—

95

Single-family ending balance
 
2,465

3,071

46

5,582


5,305

3,524

48

8,877

Multifamily ending balance
 
8

2

5

15


17

2

7

26

Total ending balance
 

$2,473


$3,073


$51


$5,597



$5,322


$3,526


$55


$8,903

(1)
Relates to removal of delinquent loans from consolidated trusts and resecuritization after such removal. 
(2)
Primarily includes capitalization of past due interest on modified loans.
A significant number of unsecuritized single-family loans on our condensed consolidated balance sheets are individually evaluated for impairment while substantially all single-family loans held by our consolidated trusts are collectively evaluated for impairment. The allowance for loan losses associated with our held-for-investment unsecuritized loans represented approximately 5.3% and 6.6% of the recorded investment in such loans at March 31, 2019 and December 31, 2018, respectively, and a substantial portion of the allowance associated with these loans represented interest rate concessions provided to borrowers as part of loan modifications. The allowance for loan losses associated with loans held by our consolidated trusts represented approximately 0.2% of the recorded investment in such loans as of both March 31, 2019 and December 31, 2018.
The table below presents our allowance for loan losses and our recorded investment in loans, held-for-investment, by impairment evaluation methodology.
Table 4.8 - Net Investment in Loans
 
 
March 31, 2019
 
December 31, 2018
(In millions)
 
Single-family
Multifamily
Total
 
Single-family
Multifamily
Total
Recorded investment:
 
 
 
 
 
 
 
 
Collectively evaluated
 

$1,849,607


$14,521


$1,864,128

 

$1,830,044


$14,945


$1,844,989

Individually evaluated
 
43,605

83

43,688

 
46,421

85

46,506

Total recorded investment
 
1,893,212

14,604

1,907,816

 
1,876,465

15,030

1,891,495

Ending balance of the allowance for loan losses:
 
 
 
 
 
 
 
 
Collectively evaluated
 
(1,716
)
(10
)
(1,726
)
 
(1,761
)
(9
)
(1,770
)
Individually evaluated
 
(3,820
)
—

(3,820
)
 
(4,369
)
—

(4,369
)
Total ending balance of the allowance
 
(5,536
)
(10
)
(5,546
)
 
(6,130
)
(9
)
(6,139
)
Net investment in loans
 

$1,887,676


$14,594


$1,902,270

 

$1,870,335


$15,021


$1,885,356


Freddie Mac Form 10-Q
 
63
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Allowance for Loan Losses Determined on an Individual Basis
Impaired Loans
The tables below present the UPB, recorded investment, related allowance for loan losses, average recorded investment, and interest income recognized for individually impaired loans.
Table 4.9 - Individually Impaired Loans
 
 
March 31, 2019
 
December 31, 2018
(In millions)
 
UPB
Recorded
Investment
Associated
Allowance
 
UPB
Recorded Investment
Associated
Allowance
Single-family:
 
 
 
 
 
 
 
 
With no allowance recorded:(1)
 
 
 
 
 
 
 
 
20- and 30-year or more, amortizing fixed-rate
 

$3,336


$2,645

N/A

 

$3,335


$2,666

N/A

15-year amortizing fixed-rate
 
21

21

N/A

 
23

22

N/A

Adjustable-rate
 
222

220

N/A

 
227

226

N/A

Alt-A, interest-only, and option ARM
 
1,128

954

N/A

 
1,286

1,083

N/A

Total with no allowance recorded
 
4,707

3,840

N/A

 
4,871

3,997

N/A

With an allowance recorded:(2)
 
 
 
 
 
 
 
 
20- and 30-year or more, amortizing fixed-rate
 
35,264

34,720


($3,201
)
 
37,579

36,959


($3,660
)
15-year amortizing fixed-rate
 
700

711

(18
)
 
703

713

(19
)
Adjustable-rate
 
154

153

(8
)
 
164

162

(8
)
Alt-A, interest-only, and option ARM
 
4,419

4,181

(593
)
 
4,867

4,590

(682
)
Total with an allowance recorded
 
40,537

39,765

(3,820
)
 
43,313

42,424

(4,369
)
Combined single-family:
 
 
 
 
 
 
 
 
20- and 30-year or more, amortizing fixed-rate
 
38,600

37,365

(3,201
)
 
40,914

39,625

(3,660
)
15-year amortizing fixed-rate
 
721

732

(18
)
 
726

735

(19
)
Adjustable-rate
 
376

373

(8
)
 
391

388

(8
)
Alt-A, interest-only, and option ARM
 
5,547

5,135

(593
)
 
6,153

5,673

(682
)
Total single-family
 
45,244

43,605

(3,820
)
 
48,184

46,421

(4,369
)
Multifamily:
 
 
 
 
 
 
 
 
With no allowance recorded(1)
 
70

66

N/A

 
89

82

N/A

With an allowance recorded
 
19

17

—

 
3

3

—

Total multifamily
 
89

83

—

 
92

85

—

Total single-family and multifamily
 

$45,333


$43,688


($3,820
)
 

$48,276


$46,506


($4,369
)
Referenced footnotes are included after the next table.


Freddie Mac Form 10-Q
 
64
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



 
 
1Q 2019
 
1Q 2018
(In millions)
 
Average
Recorded
Investment
Interest
Income
Recognized
Interest Income
Recognized On
Cash Basis(3)
 
Average
Recorded
Investment
Interest
Income
Recognized
Interest Income
Recognized On
Cash Basis(3)
Single-family:
 
 
 
 
 
 
 
 
With no allowance recorded:(1)
 
 
 
 
 
 
 
 
20- and 30-year or more, amortizing fixed-rate
 

$2,686


$73


$4

 

$3,311


$94


$7

15-year amortizing fixed-rate
 
21

—

—

 
20

1

—

Adjustable rate
 
224

3

—

 
263

3

—

Alt-A, interest-only, and option ARM
 
981

18

1

 
1,356

23

1

Total with no allowance recorded
 
3,912

94

5

 
4,950

121

8

With an allowance recorded:(2)
 
 
 
 
 
 
 
 
20- and 30-year or more, amortizing fixed-rate
 
35,338

484

57

 
47,868

592

83

15-year amortizing fixed-rate
 
686

6

1

 
869

8

3

Adjustable rate
 
147

1

1

 
226

2

1

Alt-A, interest-only, and option ARM
 
4,325

62

7

 
6,834

80

9

Total with an allowance recorded
 
40,496

553

66

 
55,797

682

96

Combined single-family:
 
 
 
 
 
 
 
 
20- and 30-year or more, amortizing fixed-rate
 
38,024

557

61

 
51,179

686

90

15-year amortizing fixed-rate
 
707

6

1

 
889

9

3

Adjustable rate
 
371

4

1

 
489

5

1

Alt-A, interest-only, and option ARM
 
5,306

80

8

 
8,190

103

10

Total single-family
 
44,408

647

71

 
60,747

803

104

Multifamily:
 
 
 
 
 
 
 
 
With no allowance recorded(1)
 
66

1

—

 
84

2

1

With an allowance recorded
 
16

—

—

 
36

—

—

Total multifamily
 
82

1

—

 
120

2

1

Total single-family and multifamily
 

$44,490


$648


$71

 

$60,867


$805


$105

 
 
 
 
 
 
 
 
 
(1)
Individually impaired loans with no allowance primarily represent those loans for which the collateral value is sufficiently in excess of the loan balance to result in recovery of the entire recorded investment if the property were foreclosed upon or otherwise subject to disposition.
(2)
Consists primarily of loans classified as TDRs.
(3)
Consists of income recognized during the period related to loans on non-accrual status.
Troubled Debt Restructurings (TDRs)
The table below presents the volume of single-family and multifamily loans that were newly classified as TDRs, based on the original product category of the loan before the loan was classified as a TDR. Loans classified as a TDR in one period may be subject to further action (such as a modification or remodification) in a subsequent period. In such cases, the subsequent action would not be reflected in the table below since the loan would already have been classified as a TDR.



Freddie Mac Form 10-Q
 
65
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 4



Table 4.10 - TDR Activity
 
 
1Q 2019
 
1Q 2018
(Dollars in millions)
 
Number of 
Loans
Post-TDR
Recorded
Investment
 
Number of 
Loans
Post-TDR
Recorded
Investment
Single-family:(1)
 
 
 
 
 
 
20- and 30-year or more, amortizing fixed-rate
 
7,459


$1,200

 
19,699


$3,305

15-year amortizing fixed-rate
 
946

92

 
2,816

292

Adjustable-rate
 
157

25

 
319

57

Alt-A, interest-only, and option ARM
 
329

53

 
1,239

203

Total single-family
 
8,891

1,370

 
24,073

3,857

Multifamily
 
—


$—

 
—


$—

(1)
The pre-TDR recorded investment for single-family loans initially classified as TDR during 1Q 2019 and 1Q 2018 was $1.4 billion and $3.9 billion, respectively.
Of the single-family loans that were newly classified as TDRs during 1Q 2019 and 1Q 2018, respectively:
n 8% and 19% involved interest rate reductions and, in certain cases, term extensions;
n 23% and 29% involved principal forbearance in addition to interest rate reductions and, in certain cases, term extensions;
n The average term extension was 164 and 166 months; and
n The average interest rate reduction was 0.1% and 0.4%.
The table below presents the volume of our TDR modifications that experienced payment defaults (i.e., loans that became two months delinquent or completed a loss event) during the applicable periods and had completed a modification during the year preceding the payment default. The table presents loans based on their original product category before modification.
Table 4.11 - Payment Defaults of Completed TDR Modifications
 
 
1Q 2019
 
1Q 2018
(Dollars in millions)
 
Number of Loans
Post-TDR
Recorded
Investment
 
Number of Loans
Post-TDR
Recorded
Investment
Single-family:
 
 
 
 
 
 
20- and 30-year or more, amortizing fixed-rate
 
3,856


$409

 
2,956


$443

15-year amortizing fixed-rate
 
125

7

 
170

15

Adjustable-rate
 
34

3

 
44

7

Alt-A, interest-only, and option ARM
 
310

44

 
275

54

Total single-family
 
4,325

463

 
3,445

519

Multifamily
 
—


$—

 
—


$—

In addition, loans may be initially classified as TDRs as a result of other loss mitigation activities (i.e., repayment plans, forbearance agreements, or loans in modification trial periods). During 1Q 2019 and 1Q 2018, 1,464 and 1,710, respectively, of such loans (with a post-TDR recorded investment of $0.2 billion for both periods) experienced a payment default within a year after the loss mitigation activity occurred.
Non-Cash Investing and Financing Activities
During 1Q 2019 and 1Q 2018, we acquired $37.0 billion and $36.1 billion, respectively, of loans held-for-investment in exchange for the issuance of debt securities of consolidated trusts in guarantor swap transactions. We received approximately $6.5 billion and $4.8 billion of loans from sellers during 1Q 2019 and 1Q 2018, respectively, to satisfy advances to lenders that were recorded in other assets on our condensed consolidated balance sheets. These loans were primarily included in the guarantor swap transactions.


Freddie Mac Form 10-Q
 
66
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 5


NOTE 5
Guarantee Activities
We generate revenue through our guarantee activities by agreeing to absorb the credit risk associated with certain financial instruments that are owned or held by third parties. In exchange for providing this guarantee, we receive an ongoing guarantee fee that is commensurate with the risks assumed and that will, over the long-term, provide us with cash flows that are expected to exceed the credit-related and administrative expenses of the underlying financial instruments. The profitability of our guarantee activities may vary and will be dependent on our guarantee fee and the actual credit performance of the underlying financial instruments that we have guaranteed.
The table below shows our maximum exposure, recognized liability, and maximum remaining term of our recognized guarantees to non-consolidated VIEs and other third parties. This table does not include our unrecognized guarantees, such as guarantees to consolidated VIEs or to resecuritization trusts that do not expose us to incremental credit risk. The maximum exposure disclosed in the table is not representative of the actual loss we are likely to incur, based on our historical loss experience and after consideration of proceeds from related collateral liquidation, including possible recoveries under credit enhancement arrangements. See Note 6 for additional information on our credit enhancement arrangements.
Table 5.1 - Financial Guarantees
 
 
March 31, 2019

December 31, 2018
(Dollars in millions, terms in years)
 
Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term

Maximum
Exposure(1)
Recognized
Liability(2)
Maximum
Remaining
Term
Single-family:
 
 
 







Securitization activity guarantees
 

$19,347


$242

40


$17,783


$220

40
Other mortgage-related guarantees
 
6,391

170

30

6,139

167

30
Total single-family
 

$25,738


$412

 
 

$23,922


$387

 
Multifamily:
 
 
 
 
 
 
 
 
Securitization activity guarantees
 

$226,875


$2,808

39
 

$221,245


$2,746

40
Other mortgage-related guarantees
 
10,261

447

35
 
9,779

428

35
Total multifamily
 

$237,136


$3,255

 
 

$231,024


$3,174

 
Other guarantees measured at fair value
 

$22,568


$295

30
 

$16,251


$242

30
(1)
The maximum exposure represents the contractual amounts that could be lost if counterparties or borrowers defaulted, without consideration of possible recoveries under credit enhancement arrangements, such as recourse provisions, third-party insurance contracts, or from collateral held or pledged. For other guarantees measured at fair value, this amount represents the notional value if it relates to our market value guarantees or guarantees of third-party derivative instruments or the UPB if it relates to a guarantee of a mortgage-related asset. For certain of our other guarantees measured at fair value, our exposure may be unlimited. We generally reduce our exposure to these guarantees with unlimited exposure through separate contracts with third parties.
(2)
For securitization activity guarantees and other mortgage-related guarantees, this amount represents the guarantee obligation on our condensed consolidated balance sheets. This amount excludes our reserve for guarantee losses, which totaled $51 million and $52 million as of March 31, 2019 and December 31, 2018, respectively, and is included within other liabilities on our condensed consolidated balance sheets. For other guarantees measured at fair value, this amount represents the fair value of the contract.

Freddie Mac Form 10-Q
 
67
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 6


NOTE 6
Credit Enhancements
In connection with many of our mortgage loans, securitization activity guarantees, other mortgage-related guarantees, and other credit risk transfer transactions, we obtain various forms of credit enhancements that reduce our exposure to credit losses. These credit enhancements may be associated with mortgage loans or guarantees recognized on our condensed consolidated balance sheets or embedded in debt instruments recognized on our condensed consolidated balance sheets.
Mortgage Loan Credit Enhancements
The table below presents the total current and protected UPB and maximum amounts of potential loss recovery related to our mortgage loan credit enhancements. For information about counterparty credit risk associated with mortgage insurers, see Note 14.
Table 6.1 - Mortgage Loan Credit Enhancements
 
 
March 31, 2019
 
December 31, 2018
(In millions)
 
Total Current and Protected UPB(1)
Maximum Coverage
 
Total Current and Protected UPB(1)
Maximum Coverage
Single-family:
 
 
 
 
 
 
Primary mortgage insurance
 

$385,483


$98,846

 

$378,594


$96,996

ACIS transactions(2)
 
853,942

9,803

 
807,885

9,123

STACR Trust transactions
 
222,837

6,966

 
161,152

5,026

Other
 
17,216

5,459

 
18,136

5,389

Total mortgage loan credit enhancements
 
 

$121,074

 
 

$116,534

(1)
Underlying loans may be covered by more than one form of credit enhancement.
(2)
As of March 31, 2019 and December 31, 2018, our counterparties posted collateral on our ACIS transactions of $1.8 billion and $1.5 billion, respectively.
Guarantee Credit Enhancements
The table below presents the total current and protected UPB and maximum amounts of potential loss recovery related to our single-family and multifamily guarantee credit enhancements.
Table 6.2 - Guarantee Credit Enhancements
 
 
March 31, 2019
 
December 31, 2018
(In millions)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
Single-family:
 
 
 
 
 
 
Subordination (non-consolidated VIEs)
 

$17,724


$3,120

 

$16,271


$2,933

Other
 
1,201

1,201

 
1,226

1,226

   Total single-family
 
 
4,321

 

4,159

Multifamily:
 
 


 
 


Subordination (non-consolidated VIEs)
 
226,446

36,396

 
220,733

35,661

Other
 
2,267

793

 
2,349

815

   Total multifamily
 
 
37,189

 


36,476

Total guarantee credit enhancements
 
 

$41,510

 
 

$40,635

(1)
Underlying loans may be covered by more than one form of credit enhancement. For subordination, total current and protected UPB includes the UPB of the guaranteed securities, which represents the UPB of the assets included in the trust net of the protection provided by the subordinated securities, and the UPB of guarantor advances made to the holders of the guaranteed securities.
(2)
For subordination, maximum coverage represents the outstanding UPB of the securities that are subordinate to Freddie Mac guaranteed securities and held by third parties. For all other credit enhancements, maximum coverage represents the remaining amount of loss recovery that is available subject to the terms of counterparty agreements.

Freddie Mac Form 10-Q
 
68
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 6


The Multifamily segment also has other credit enhancements in the form of collateral posting requirements, indemnification, pool insurance, bond insurance, recourse, and other similar arrangements. These credit enhancements, along with the proceeds received from the sale of the underlying mortgage collateral, are designed to recover all or a portion of our losses on our mortgage loans or the amounts paid under our financial guarantee contracts. Our historical losses and related recoveries pursuant to these agreements have not been significant and therefore these other types of credit enhancements are excluded from the table above.
Debt with Embedded Credit Enhancements
The table below presents the total current and protected UPB and maximum amounts of potential loss recovery related to debt with embedded credit enhancements.
Table 6.3 - Debt with Embedded Credit Enhancements
 
 
March 31, 2019
 
December 31, 2018
(In millions)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
Single-family:
 
 
 
 
 
 
STACR debt notes
 

$600,857


$17,464

 

$605,263


$17,596

Subordination (consolidated VIEs)
 
24,525

1,018

 
25,006

1,036

Total single-family
 
 
18,482

 
 
18,632

Multifamily:
 
 
 
 
 
 
SCR notes
 
2,655

133

 
2,667

133

Subordination (consolidated VIEs)

 
2,700

280

 
2,700

280

Total multifamily
 
 
413

 
 
413

Total debt with embedded credit enhancements
 
 

$18,895

 
 

$19,045

(1)
Underlying loans may be covered by more than one form of credit enhancement. For STACR debt notes and SCR notes, total current and protected UPB represents the UPB of the assets included in the reference pool. For subordination, total current and protected UPB represents the UPB of the guaranteed securities, which represents the UPB of the assets included in the trust net of the protection provided by the subordinated securities.
(2)
For STACR debt notes and SCR notes, maximum coverage amount represents the outstanding balance of the STACR debt notes and SCR notes held by third parties. For subordination, maximum coverage amount represents the outstanding UPB of the securities that are subordinate to Freddie Mac guaranteed securities and held by third parties.


Freddie Mac Form 10-Q
 
69
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


NOTE 7
Investments in Securities
The table below summarizes the fair values of our investments in debt securities by classification.
Table 7.1 - Investments in Securities
(In millions)
 
March 31, 2019
December 31, 2018
Trading securities
 

$33,552


$35,548

Available-for-sale securities
 
31,944

33,563

Total fair value of investments in securities
 

$65,496


$69,111

As of March 31, 2019 and December 31, 2018, we did not classify any securities as held-to-maturity, although we may elect to do so in the future.
Trading Securities
The table below presents the estimated fair values of our trading securities by major security type. Our non-mortgage-related securities primarily consist of investments in U.S. Treasury securities.
Table 7.2 - Trading Securities
(In millions)
 
March 31, 2019
December 31, 2018
Mortgage-related securities:
 
 
 
Freddie Mac
 

$13,310


$13,821

Other agency
 
2,788

2,551

Non-agency
 
1

1

Total mortgage-related securities
 
16,099

16,373

Non-mortgage-related securities
 
17,453

19,175

Total fair value of trading securities
 

$33,552


$35,548

For trading securities held at March 31, 2019 and 2018, we recorded net unrealized gains (losses) of $97 million and ($212) million during 1Q 2019 and 1Q 2018, respectively.
Available-for-Sale Securities
At March 31, 2019 and December 31, 2018, all available-for-sale securities were mortgage-related securities.
The tables below present the amortized cost, gross unrealized gains and losses, and fair value by major security type for our securities classified as available-for-sale.
Table 7.3 - Available-for-Sale Securities
 
 
March 31, 2019
 
 
Amortized
Cost
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Fair
Value
(In millions)
 
 
Other-Than-Temporary Impairment(1)
Temporary Impairment(2)
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
Freddie Mac
 

$28,841


$378

 

$—


($309
)
 

$28,910

Other agency
 
1,367

23

 
—

(8
)
 
1,382

Non-agency and other
 
1,320

333

 
—

(1
)
 
1,652

Total available-for-sale securities
 

$31,528


$734

 

$—


($318
)
 

$31,944


Freddie Mac Form 10-Q
 
70
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


 
 
December 31, 2018
 
 
Amortized
Cost
Gross
Unrealized
Gains
 
Gross Unrealized Losses
 
Fair
Value
(In millions)
 
 
Other-Than-Temporary Impairment(1)
Temporary Impairment(2)
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
Freddie Mac
 

$30,407


$320

 

$—


($528
)
 

$30,199

Other agency
 
1,675

38

 
—

(7
)
 
1,706

Non-agency and other
 
1,378

282

 
—

(2
)
 
1,658

Total available-for-sale securities
 

$33,460


$640

 

$—


($537
)
 

$33,563

(1)
Represents the gross unrealized losses for securities for which we have previously recognized other-than-temporary impairment in earnings.
(2)
Represents the gross unrealized losses for securities for which we have not previously recognized other-than-temporary impairment in earnings.
The fair value of our available-for-sale securities held at March 31, 2019 scheduled to contractually mature after ten years was $26.9 billion, with an additional $4.5 billion scheduled to contractually mature after five years through ten years.
Available-for-Sale Securities in a Gross Unrealized Loss Position
The tables below present available-for-sale securities in a gross unrealized loss position and whether such securities have been in an unrealized loss position for less than 12 months, or 12 months or greater.
Table 7.4 - Available-for-Sale Securities in a Gross Unrealized Loss Position
 
 
March 31, 2019
 
 
Less than 12 Months
 
12 Months or Greater
(In millions)
 
Fair
Value
Gross Unrealized Losses
 
Fair
Value
Gross Unrealized Losses
Available-for-sale securities:
 
 
 
 
 
 
Freddie Mac
 

$2,627


($7
)
 

$12,646


($302
)
Other agency
 
323

(1
)
 
579

(7
)
Non-agency and other
 
13

—

 
3

(1
)
Total available-for-sale securities in a gross unrealized loss position
 

$2,963


($8
)
 

$13,228


($310
)
 
 
December 31, 2018
 
 
Less than 12 Months
 
12 Months or Greater
(In millions)
 
Fair
Value
Gross Unrealized Losses
 
Fair
Value
Gross Unrealized Losses
Available-for-sale securities:
 
 
 
 
 
 
Freddie Mac
 

$4,259


($38
)
 

$14,751


($490
)
Other agency
 
351

(1
)
 
638

(6
)
Non-agency and other
 
43

(1
)
 
6

(1
)
Total available-for-sale securities in a gross unrealized loss position
 

$4,653


($40
)
 

$15,395


($497
)
At March 31, 2019, the gross unrealized losses relate to 275 separate securities.

Freddie Mac Form 10-Q
 
71
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 7


Realized Gains and Losses on Sales of Available-for-Sale Securities
The table below summarizes the gross realized gains and gross realized losses from the sale of available-for-sale securities.
Table 7.5 - Gross Realized Gains and Gross Realized Losses from Sales of Available-for-Sale Securities
(In millions)
 
1Q 2019
1Q 2018
Gross realized gains
 

$63


$446

Gross realized losses
 
(29
)
(51
)
Net realized gains (losses)
 

$34


$395

Non-Cash Investing and Financing Activities
During 1Q 2019, we purchased $1.4 billion and sold $1.6 billion of non-mortgage-related securities that were traded, but not settled. We settled our purchase and sale obligations during the second quarter of 2019.


Freddie Mac Form 10-Q
 
72
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


NOTE 8
Debt Securities and Subordinated Borrowings
The table below summarizes the balances of total debt, net per our condensed consolidated balance sheets and the interest expense per our condensed consolidated statements of comprehensive income.
Table 8.1 - Total Debt, Net
 
 
Balance, Net
 
Interest Expense
(In millions)
 
March 31, 2019
December 31, 2018
 
1Q 2019
1Q 2018
Debt securities of consolidated trusts held by third parties
 

$1,803,707


$1,792,677

 

$13,981


$12,514

Other debt:
 
 
 
 
 
 
Short-term debt
 
77,130

51,080

 
436

229

Long-term debt
 
192,777

201,193

 
1,416

1,214

Total other debt
 
269,907

252,273


1,852

1,443

Total debt, net
 

$2,073,614


$2,044,950



$15,833


$13,957

As of March 31, 2019, our aggregate indebtedness was $272.8 billion, which was below the $300.0 billion debt cap limit imposed by the Purchase Agreement for 2019. Our aggregate indebtedness calculation primarily includes the par value of other short- and long-term debt.
Debt Securities of Consolidated Trusts Held by Third Parties
The table below summarizes the debt securities of consolidated trusts held by third parties based on underlying loan product type.
Table 8.2 - Debt Securities of Consolidated Trusts Held by Third Parties
 
 
March 31, 2019
 
December 31, 2018
(Dollars in millions)
 
Contractual
Maturity
UPB
Carrying Amount(1)
Weighted
Average
Coupon(2)
 
Contractual
Maturity
UPB
Carrying Amount(1)
Weighted
Average
Coupon(2)
Single-family:
 
 
 
 
 
 
 
 
 
 
30-year or more, fixed-rate
 
2019 - 2057

$1,408,759


$1,445,766

3.73
%
 
2019 - 2057

$1,389,113


$1,426,060

3.72
%
20-year fixed-rate
 
2019 - 2039
69,854

71,618

3.43

 
2019 - 2039
70,547

72,354

3.43

15-year fixed-rate
 
2019 - 2034
234,062

238,129

2.89

 
2019 - 2034
240,310

244,587

2.89

Adjustable-rate
 
2019 - 2049
37,201

37,951

3.20

 
2019 - 2049
38,361

39,153

3.12

Interest-only
 
2026 - 2041
4,940

5,001

4.64

 
2026 - 2048
5,322

5,386

4.41

FHA/VA
 
2020 - 2046
696

713

4.76

 
2019 - 2046
720

736

4.78

Total single-family
 
 
1,755,512

1,799,178

 
 
 
1,744,373

1,788,276

 
Multifamily
 
 2019-2047
4,515

4,529

3.70

 
2019 - 2047
4,365

4,401

4.02

Total debt securities of consolidated trusts held by third parties
 
 

$1,760,027


$1,803,707

 
 
 

$1,748,738


$1,792,677

 
(1)
Includes $737 million and $755 million at March 31, 2019 and December 31, 2018, respectively, of debt of consolidated trusts that represents the fair value of debt securities with the fair value option elected.
(2)
The effective interest rate for debt securities of consolidated trusts held by third parties was 3.10% and 3.07% as of March 31, 2019 and December 31, 2018, respectively.

Freddie Mac Form 10-Q
 
73
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 8


Other Debt
The table below summarizes the balances and effective interest rates for other debt.
Table 8.3 - Total Other Debt
 
 
March 31, 2019
 
December 31, 2018
(Dollars in millions)
 
Par Value
Carrying Amount(1)
Weighted
Average
Effective Rate(2)
 
Par Value
Carrying Amount(1)
Weighted
Average
Effective Rate(2)
Other short-term debt:
 
 
 
 
 
 
 
 
Discount notes and Reference Bills
 

$45,854


$45,660

2.46
%
 

$28,787


$28,621

2.36
%
Medium-term notes
 
16,509

16,508

2.29

 
16,440

16,440

2.10

Securities sold under agreements to repurchase
 
14,962

14,962

2.50

 
6,019

6,019

2.40

Total other short-term debt
 
77,325

77,130

2.43

 
51,246

51,080

2.28

Other long-term debt:
 
 
 
 
 
 
 
 
Original maturities on or before December 31,
 
 
 
 
 
 
 
 
2019
 
49,106

49,078

1.43

 
58,002

57,968

1.54

2020
 
40,721

40,705

1.82

 
42,296

42,275

1.78

2021
 
29,817

29,820

2.06

 
30,898

30,901

2.06

2022
 
23,253

23,228

2.50

 
20,802

20,775

2.46

2023
 
10,812

10,792

3.00

 
15,929

15,906

3.09

Thereafter
 
23,461

21,004

4.71

 
18,068

15,579

5.91

STACR and SCR debt(3)
 
17,597

17,876

6.19

 
17,729

18,004

6.04

Hedging-related basis adjustments
 
N/A

274

 
 
N/A

(215
)
 
Total other long-term debt
 
194,767

192,777

2.63

 
203,724

201,193

2.58

Total other debt(4)
 

$272,092


$269,907



 

$254,970


$252,273

 
(1)
Represents par value, net of associated discounts or premiums and issuance cost. Includes $4.3 billion and $4.4 billion at March 31, 2019 and December 31, 2018, respectively, of other long-term debt that represents the fair value of debt securities with the fair value option elected.
(2)
Based on carrying amount.
(3)
Contractual maturities of these debt securities are not presented because they are subject to prepayment risk, as their payments are based upon the performance of a pool of mortgage assets that may be prepaid by the related mortgage borrower at any time generally without penalty.
(4)
Carrying amount for other debt includes callable debt of $101.4 billion and $107.2 billion at March 31, 2019 and December 31, 2018, respectively.

Freddie Mac Form 10-Q
 
74
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


NOTE 9
Derivatives
Use of Derivatives
We use derivatives primarily to hedge interest-rate sensitivity mismatches between our financial assets and liabilities. We analyze the interest-rate sensitivity of financial assets and liabilities on a daily basis across a variety of interest-rate scenarios based on market prices, models, and economics. When we use derivatives to mitigate our exposures, we consider a number of factors, including cost, exposure to counterparty risk, and our overall risk management strategy.
We classify derivatives into three categories:
n
Exchange-traded derivatives;
n
Cleared derivatives; and
n
OTC derivatives.
Exchange-traded derivatives include standardized interest-rate futures contracts and options on futures contracts. Cleared derivatives refer to those interest-rate swaps that the U.S. Commodity Futures Trading Commission has determined are subject to the central clearing requirement of the Dodd-Frank Act. OTC derivatives refer to those derivatives that are neither exchange-traded derivatives nor cleared derivatives.
Types of Derivatives
We principally use the following types of derivatives:
n
LIBOR- and SOFR-based interest-rate swaps;
n
LIBOR- and Treasury-based purchased options (including swaptions); and
n
LIBOR-, Treasury-, and SOFR-based exchange-traded futures.
We also purchase swaptions on credit indices in order to obtain protection against adverse movements in multifamily spreads which may affect the profitability of our K Certificate or SB Certificate transactions.
In addition to swaps, futures, and purchased options, our derivative positions include written options and swaptions, commitments, and credit derivatives.
Hedge Accounting
Fair Value Hedges
We apply fair value hedge accounting to certain single-family mortgage loans and certain issuances of debt where we hedge the changes in fair value of these items attributable to the designated benchmark interest rate (i.e., LIBOR), using LIBOR-based interest-rate swaps.
If a hedge relationship qualifies for fair value hedge accounting, all changes in fair value of the derivative hedging instrument, including interest accruals, are recognized in the same condensed consolidated statements of comprehensive income line item used to present the earnings effect of the hedged item. Therefore, changes in the fair value of the hedged item, mortgage loans and debt, attributable to the risk being hedged are recognized in interest income - mortgage loans and interest expense, respectively, along with the changes in the fair value of the respective derivative hedging instruments.
Cash Flow Hedges
There are amounts recorded in AOCI related to discontinued cash flow hedges which are recognized in earnings when the originally forecasted transactions affect earnings. Amounts reclassified from AOCI are recorded in interest expense. During 1Q 2019 and 1Q 2018, we reclassified from AOCI into earnings, pre-tax losses of $23 million and $38 million, respectively, related to closed cash flow hedges. See Note 11 for information about future reclassifications of deferred net losses related to closed cash flow hedges to net income.

Freddie Mac Form 10-Q
 
75
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


Derivative Assets and Liabilities at Fair Value
The table below presents the notional value and fair value of derivatives reported on our condensed consolidated balance sheets.
Table 9.1 - Derivative Assets and Liabilities at Fair Value
 
 
March 31, 2019
 
December 31, 2018
 
 
Notional or
Contractual
Amount
Derivatives at Fair Value
 
Notional or
Contractual
Amount
Derivatives at Fair Value
(In millions)
 
Assets
Liabilities
 
Assets
Liabilities
Not designated as hedges
 
 
 
 
 
 
 
 
Interest-rate swaps:
 
 
 
 
 
 
 
 
Receive-fixed
 

$162,499


$1,637


($103
)
 

$145,386


$1,380


($181
)
Pay-fixed
 
192,212

126

(3,095
)
 
170,899

476

(2,287
)
Basis (floating to floating)
 
5,924

—

—

 
5,404

1

—

Total interest-rate swaps
 
360,635

1,763

(3,198
)
 
321,689

1,857

(2,468
)
Option-based:
 
 
 
 
 
 
 
 
Call swaptions
 
 
 
 
 
 
 
 
Purchased
 
54,250

2,458

—

 
43,625

2,007

—

Written
 
6,900

—

(186
)
 
4,400

—

(133
)
Put swaptions
 
 
 
 
 
 
 
 
Purchased(1)
 
76,545

1,036

—

 
88,075

1,565

—

Written
 
3,750

—

(9
)
 
1,750

—

(4
)
Other option-based derivatives(2)
 
10,444

653

—

 
10,481

628

—

Total option-based
 
151,889

4,147

(195
)
 
148,331

4,200

(137
)
Futures
 
126,627

—

—

 
161,185

—

—

Commitments
 
76,516

188

(245
)
 
36,044

90

(179
)
Credit derivatives
 
1,966

—

(34
)
 
2,030

—

(35
)
Other
 
15,412

10

(98
)
 
12,212

1

(103
)
Total derivatives not designated as hedges
 
733,045

6,108

(3,770
)
 
681,491

6,148

(2,922
)
Designated as fair value hedges
 
 
 
 
 
 
 
 
Interest-rate swaps:
 
 
 
 
 
 
 
 
Receive-fixed
 
111,898

45

(520
)
 
117,038

23

(935
)
Pay-fixed
 
74,060

121

(450
)
 
77,513

247

(571
)
Total derivatives designated as fair value hedges
 
185,958

166

(970
)
 
194,551

270

(1,506
)
Derivative interest and other receivable (payable)
 
 
1,117

(979
)
 
 
889

(1,096
)
Netting adjustments(3)
 
 
(6,245
)
5,287

 
 
(6,972
)
4,941

Total derivative portfolio, net
 

$919,003


$1,146


($432
)
 

$876,042


$335


($583
)
(1)
Includes swaptions on credit indices with a notional or contractual amount of $30.2 billion and $45.9 billion at March 31, 2019 and December 31, 2018, respectively, and a fair value of $9.0 million and $113.0 million at March 31, 2019 and December 31, 2018, respectively.
(2)
Primarily consists of purchased interest-rate caps and floors.
(3)
Represents counterparty netting and cash collateral netting.
See Note 10 for information related to our derivative counterparties and collateral held and posted.

Freddie Mac Form 10-Q
 
76
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


Gains and Losses on Derivatives
The table below presents the gains and losses on derivatives, including the accrual of periodic cash settlements, while not designated in qualifying hedge relationships and reported on our condensed consolidated statements of comprehensive income as derivative gains (losses).
Table 9.2 - Gains and Losses on Derivatives
(In millions)
 
1Q 2019
1Q 2018
Not designated as hedges
 
 
 
Interest-rate swaps:
 
 
 
Receive-fixed
 

$1,837


($3,097
)
Pay-fixed
 
(2,888
)
4,641

Basis (floating to floating)
 
4

(30
)
Total interest-rate swaps
 
(1,047
)
1,514

Option-based:
 
 
 
Call swaptions
 
 
 
Purchased
 
454

(694
)
Written
 
(56
)
27

Put swaptions
 
 
 
Purchased
 
(626
)
327

Written
 
16

(27
)
Other option-based derivatives(1)
 
25

(88
)
Total option-based
 
(187
)
(455
)
Other:
 
 
 
Futures
 
(242
)
387

Commitments
 
(96
)
518

Credit derivatives
 
(4
)
14

Other
 
24

(3
)
Total other
 
(318
)
916

Accrual of periodic cash settlements:
 
 
 
Receive-fixed interest-rate swaps
 
(51
)
222

Pay-fixed interest-rate swaps
 
(36
)
(368
)
Other
 
33

1

Total accrual of periodic cash settlements
 
(54
)
(145
)
Total
 

($1,606
)

$1,830

(1)
Primarily consists of purchased interest-rate caps and floors.

Freddie Mac Form 10-Q
 
77
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 9


Fair Value Hedges
The table below presents the effects of fair value hedge accounting by condensed consolidated statements of comprehensive income line, including the gains and losses on derivatives and hedged items designated in qualifying hedge relationships and other components due to the application of hedge accounting.
Table 9.3 - Gains and Losses on Fair Value Hedges
 
 
1Q 2019
1Q 2018
(In millions)
 
Interest Income - Mortgage Loans
Interest Expense
Interest Income - Mortgage Loans
Interest Expense
Total amounts of income and expense line items presented in our condensed consolidated statements of comprehensive income in which the effects of fair value hedges are recorded:
 

$17,946


($15,833
)

$15,951


($13,957
)
 
 
 
 
 
 
Interest contracts on mortgage loans held-for-investment:
 
 
 
 
 
Gain (loss) on fair value hedging relationships:
 
 
 
 
 
Hedged items
 
1,542

—

(1,973
)
—

Derivatives designated as hedging instruments
 
(1,243
)
—

1,687

—

Interest accruals on hedging instruments
 
38

—

(167
)
—

Discontinued hedge related basis adjustment amortization
 
28

—

16

—

Interest contracts on debt:
 
 
 
 
 
Gain (loss) on fair value hedging relationships:
 
 
 
 
 
Hedged items
 
—

(505
)
—

678

Derivatives designated as hedging instruments
 
—

546

—

(591
)
Interest accruals on hedging instruments
 
—

(125
)
—

(14
)
Discontinued hedge related basis adjustment amortization
 
—

9

—

—

Cumulative Basis Adjustments Due to Fair Value Hedging
The tables below present the hedged item cumulative basis adjustments due to qualifying fair value hedging and the related hedged item carrying amounts by their respective balance sheet line item.
Table 9.4 - Cumulative Basis Adjustments Due to Fair Value Hedging
 
 
March 31, 2019
 
 
Carrying Amount Assets / (Liabilities)
 
Cumulative Amount of Fair Value Hedging Basis Adjustment Included in the Carrying Amount
(In millions)
 
 
Total
Discontinued - Hedge Related
Mortgage loans held-for-investment
 

$211,939

 

$333


$333

Debt
 
(122,078
)
 
(274
)
(118
)
 
 
 
 
 
 
 
 
December 31, 2018
 
 
Carrying Amount Assets / (Liabilities)
 
Cumulative Amount of Fair Value Hedging Basis Adjustment Included in the Carrying Amount
(In millions)
 
 
Total
Discontinued - Hedge Related
Mortgage loans held-for-investment
 

$193,547

 

($1,237
)

($1,237
)
Debt
 
(127,215
)
 
216

(8
)

Freddie Mac Form 10-Q
 
78
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 10


NOTE 10
Collateralized Agreements and Offsetting Arrangements
Derivative Portfolio
Derivative Counterparties
Our use of cleared derivatives, exchange-traded derivatives, and OTC derivatives exposes us to counterparty credit risk.
Our use of interest-rate swaps and option-based derivatives is subject to internal credit and legal reviews. On an ongoing basis, we review the credit fundamentals of all of our derivative counterparties, clearinghouses, and clearing members to confirm that they continue to meet our internal risk management standards.
Over-the-Counter Derivatives
We use master netting and collateral agreements to reduce our credit risk exposure to our OTC derivative counterparties.
In the event that all of our counterparties for OTC derivatives were to default simultaneously on March 31, 2019, our maximum loss for accounting purposes after applying netting agreements and collateral on an individual counterparty basis would have been approximately $55 million.
Cleared and Exchange-Traded Derivatives
The majority of our interest-rate swaps are subject to the central clearing requirement of the Dodd-Frank Act. A reduction in our credit ratings could cause the clearinghouses or clearing members we use for our cleared and exchange-traded derivatives to demand additional collateral.
Other Derivatives
We also execute forward purchase and sale commitments of loans and mortgage-related securities, including dollar roll transactions, that are treated as derivatives for accounting purposes. The total net exposure on our forward purchase and sale commitments, which are treated as derivatives, was $188 million and $90 million at March 31, 2019 and December 31, 2018, respectively.
Many of our transactions involving forward purchase and sale commitments of mortgage-related securities utilize the Mortgage Backed Securities Division of the Fixed Income Clearing Corporation ("MBSD/FICC") as a clearinghouse. As a clearing member of the clearinghouse, we post margin to the MBSD/FICC and are exposed to the counterparty credit risk of the organization (including its clearing members).
Securities Purchased Under Agreements to Resell
As an investor, we enter into arrangements to purchase securities under agreements to subsequently resell the identical or substantially the same securities to our counterparty. Our counterparties to these transactions are required to pledge the purchased securities as collateral for their obligation to repurchase those securities at a later date. While such transactions involve the legal transfer of securities, they are accounted for as secured financings because the transferor does not relinquish effective control over the securities transferred. Although it is not our practice to repledge collateral that has been pledged to us, these agreements may allow us to repledge all or a portion of the collateral.
We consider the types of securities being pledged to us as collateral when determining how much we lend in transactions involving securities purchased under agreements to resell. Additionally, we regularly review the market values of these securities compared to amounts loaned in an effort to manage our exposure to losses.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are effectively collateralized borrowings where we sell securities with an agreement to repurchase such securities at a future date. We are required to pledge the sold securities to the counterparties to these transactions as collateral for our obligation to repurchase these securities at a later date. Similar to the securities purchased under agreements to resell transactions, these transactions involve the legal transfer of securities. However, they are

Freddie Mac Form 10-Q
 
79
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 10


accounted for as secured financings because they require the identical or substantially the same securities to be subsequently repurchased. These agreements may allow our counterparties to repledge all or a portion of the collateral.
Offsetting of Financial Assets and Liabilities
At March 31, 2019 and December 31, 2018, all amounts of cash collateral related to derivatives with master netting and collateral agreements were offset against derivative assets, net or derivative liabilities, net, as applicable.
In 1Q 2018, we changed the characterization of variation margin payments from posting of margin collateral to settlements for certain of our cleared swaps transacted with LCH group, as a result of certain rule amendments made by the organization.
The tables below display offsetting and collateral information related to derivatives, securities purchased under agreements to resell, and securities sold under agreements to repurchase which are subject to enforceable master netting agreements or similar arrangements. Securities sold under agreements to repurchase are included in debt, net on our condensed consolidated balance sheets.
Table 10.1 - Offsetting and Collateral Information of Financial Assets and Liabilities
 
 
March 31, 2019
 
 
Gross
Amount
Recognized
 
Amount 
Offset in the
Consolidated
Balance Sheets
 
Net Amount
Presented in the Consolidated
Balance Sheets
Gross Amount
Not Offset in the  Consolidated
Balance Sheets(2)
Net
Amount
(In millions)
 
 
Counterparty Netting
Cash Collateral Netting(1)
 
Assets:
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
OTC derivatives
 

$6,980

 

($4,625
)

($1,717
)
 

$638


($583
)

$55

Cleared and exchange-traded derivatives
 
213

 
(1
)
98

 
310

—

310

Other
 
198

 
—

—

 
198

—

198

Total derivatives
 
7,391

 
(4,626
)
(1,619
)
 
1,146

(583
)
563

Securities purchased under agreements to resell(3)
 
50,134

 
—

—

 
50,134

(50,134
)
—

Total
 

$57,525

 

($4,626
)

($1,619
)
 

$51,280


($50,717
)

$563

Liabilities:
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
OTC derivatives
 

($5,331
)
 

$4,625


$654

 

($52
)

$—


($52
)
Cleared and exchange-traded derivatives
 
(11
)
 
1

7

 
(3
)
—

(3
)
Other
 
(377
)
 
—

—

 
(377
)
—

(377
)
Total derivatives
 
(5,719
)
 
4,626

661

 
(432
)
—

(432
)
Securities sold under agreements to repurchase(3)
 
(14,962
)
 
—

—

 
(14,962
)
14,962

—

Total
 

($20,681
)
 

$4,626


$661

 

($15,394
)

$14,962


($432
)
Referenced footnotes are included after the next table.

Freddie Mac Form 10-Q
 
80
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 10


 
 
December 31, 2018
 
 
Gross
Amount
Recognized
 
Amount 
Offset in the
Consolidated
Balance Sheets
 
Net Amount
Presented in the Consolidated
Balance Sheets
Gross Amount
Not Offset in the  Consolidated
Balance  Sheets(2)
Net
Amount
(In millions)
 
 
Counterparty Netting
Cash Collateral Netting(1)
 
Assets:
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
OTC derivatives
 

$7,213

 

($4,544
)

($2,448
)
 

$221


($173
)

$48

Cleared and exchange-traded derivatives
 
3

 
—

20

 
23

—

23

Other
 
91

 
—

—

 
91

—

91

Total derivatives
 
7,307

 
(4,544
)
(2,428
)
 
335

(173
)
162

Securities purchased under agreements to resell(3)
 
34,771

 
—

—

 
34,771

(34,771
)
—

Total
 

$42,078

 

($4,544
)

($2,428
)
 

$35,106


($34,944
)

$162

Liabilities:
 
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
 
OTC derivatives
 

($4,963
)
 

$4,544


$296

 

($123
)

$—


($123
)
Cleared and exchange-traded derivatives
 
(244
)
 
—

101

 
(143
)
—

(143
)
Other
 
(317
)
 
—

—

 
(317
)
—

(317
)
Total derivatives
 
(5,524
)
 
4,544

397

 
(583
)
—

(583
)
Securities sold under agreements to repurchase(3)
 
(6,019
)
 
—

—

 
(6,019
)
6,019

—

Total
 

($11,543
)
 

$4,544


$397

 

($6,602
)

$6,019


($583
)
(1)
Excess cash collateral held is presented as a derivative liability, while excess cash collateral posted is presented as a derivative asset.
(2)
Does not include the fair value amount of non-cash collateral posted or held that exceeds the associated net asset or liability, netted by counterparty, presented on the condensed consolidated balance sheets. For cleared and exchange-traded derivatives, does not include non-cash collateral posted by us as initial margin with an aggregate fair value of $2.4 billion and $2.5 billion as of March 31, 2019 and December 31, 2018, respectively.
(3)
Does not include the impacts of netting by central clearing organizations.
We primarily execute securities purchased under agreements to resell transactions with central clearing organizations where we have the right to repledge the collateral that has been pledged to us, either with the central clearing organization or with other counterparties. At March 31, 2019, and December 31, 2018, we had $34.8 billion and $20.1 billion, respectively, of securities pledged to us in these transactions. In addition, at March 31, 2019 and December 31, 2018, we had $1.9 billion and $2.5 billion, respectively, of securities pledged to us for transactions involving securities purchased under agreements to resell not executed with central clearing organizations that we had the right to repledge.

Freddie Mac Form 10-Q
 
81
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 10


Collateral Pledged
Collateral Pledged to Freddie Mac
We have cash pledged to us as collateral primarily related to OTC derivative transactions. At March 31, 2019, we had $2.3 billion pledged to us as collateral that was invested as part of our liquidity and contingency operating portfolio.
Collateral Pledged by Freddie Mac
The tables below summarize the fair value of the securities pledged as collateral by us for derivatives and collateralized borrowing transactions, including securities that the secured party may repledge.
Table 10.2 - Collateral in the Form of Securities Pledged
 
 
March 31, 2019
(In millions)
 
Derivatives
Securities sold under agreements to repurchase
Other(3)
Total
Cash equivalents(1)
 

$—


$686


$—


$686

Debt securities of consolidated trusts(2)
 
300

—

183

483

Available-for-sale securities
 
—

2,934

3

2,937

Trading securities
 
2,130

11,432

23

13,585

Total securities pledged
 

$2,430


$15,052


$209


$17,691

 
 
December 31, 2018
(In millions)
 
Derivatives
Securities sold under agreements to repurchase
Other(3)
Total
Cash equivalents(1)
 

$—


$2,595


$—


$2,595

Debt securities of consolidated trusts(2)
 
362

—

179

541

Available-for-sale securities
 
—

—

1

1

Trading securities
 
2,160

3,432

73

5,665

Total securities pledged
 

$2,522


$6,027


$253


$8,802

(1)
Represents U.S. Treasury securities accounted for as cash equivalents.
(2)
Represents PCs held by us in our Capital Markets segment mortgage investments portfolio which are recorded as a reduction to debt securities of consolidated trusts held by third parties on our condensed consolidated balance sheets.
(3)
Includes other collateralized borrowings and collateral related to transactions with certain clearinghouses.
The table below summarizes the underlying collateral pledged and the remaining contractual maturity of our gross obligations under securities sold under agreements to repurchase.
Table 10.3 - Underlying Collateral Pledged
 
 
March 31, 2019
(In millions)
 
Overnight and continuous
30 days or less
After 30 days through 90 days
Greater than 90 days
Total
U.S. Treasury securities and other
 

$2,940


$12,112


$—


$—


$15,052


Freddie Mac Form 10-Q
 
82
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 11


NOTE 11
Stockholders' Equity and Earnings Per Share
Accumulated Other Comprehensive Income
The tables below present changes in AOCI after the effects of our federal statutory tax rate of 21% for 1Q 2019 and 1Q 2018, related to available-for-sale securities, closed cash flow hedges, and our defined benefit plans.
Table 11.1 - Changes in AOCI by Component, Net of Taxes
 
 
1Q 2019
(In millions)
 
AOCI Related
to Available-
For-Sale
Securities
AOCI Related
to Cash Flow
Hedge
Relationships
AOCI Related
to Defined
Benefit Plans
Total
Beginning balance
 

$83


($315
)

$97


($135
)
Other comprehensive income before reclassifications
 
273

—

(2
)
271

Amounts reclassified from accumulated other comprehensive income
 
(27
)
18

(4
)
(13
)
Changes in AOCI by component
 
246

18

(6
)
258

Ending balance
 

$329


($297
)

$91


$123

 
 
 
 
 
1Q 2018
(In millions)
 
AOCI Related
to Available-
For-Sale
Securities
AOCI Related
to Cash Flow
Hedge
Relationships
AOCI Related
to Defined
Benefit Plans
Total
Beginning balance
 

$662


($356
)

$83


$389

Other comprehensive income before reclassifications
 
(488
)
—

(2
)
(490
)
Amounts reclassified from accumulated other comprehensive income
 
(312
)
30

(4
)
(286
)
Changes in AOCI by component
 
(800
)
30

(6
)
(776
)
Cumulative effect of change in accounting principle(1)

 
143

(73
)
19

89

Ending balance
 

$5


($399
)

$96


($298
)
(1)
Includes the effect of adopting the accounting guidance on reclassification of stranded tax effects of the Tax Cuts and Jobs Act in 1Q 2018.

Freddie Mac Form 10-Q
 
83
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 11


Reclassifications from AOCI to Net Income
The table below presents reclassifications from AOCI to net income, including the affected line item in our condensed consolidated statements of comprehensive income.
Table 11.2 - Reclassifications from AOCI to Net Income
(In millions)
 
1Q 2019
1Q 2018
AOCI related to available-for-sale securities
 
 
 
Affected line items in the consolidated statements of comprehensive income:
 
 
 
Investment securities gains (losses)
 

$34


$395

Total before tax
 
34

395

Income tax (expense) or benefit
 
(7
)
(83
)
Net of tax
 
27

312

AOCI related to cash flow hedge relationships
 
 
 
Affected line items in the consolidated statements of comprehensive income:
 
 
 
Interest expense
 
(23
)
(38
)
Income tax (expense) or benefit
 
5

8

Net of tax
 
(18
)
(30
)
AOCI related to defined benefit plans
 
 
 
Affected line items in the consolidated statements of comprehensive income:
 
 
 
Salaries and employee benefits
 
5

5

Income tax (expense) or benefit
 
(1
)
(1
)
Net of tax
 
4

4

Total reclassifications in the period net of tax
 

$13


$286

Future Reclassifications from AOCI to Net Income Related to Closed Cash Flow Hedges
The total AOCI related to derivatives designated as cash flow hedges was a loss of $0.3 billion and $0.4 billion at March 31, 2019 and March 31, 2018, respectively, composed of deferred net losses on closed cash flow hedges. Closed cash flow hedges involve derivatives that have been terminated or are no longer designated as cash flow hedges. Fluctuations in prevailing market interest rates have no effect on the deferred portion of AOCI relating to losses on closed cash flow hedges.
The previously deferred amount related to closed cash flow hedges remains in our AOCI balance and will be recognized into earnings over the expected time period for which the forecasted transactions affect earnings, unless it is deemed probable that the forecasted transactions will not occur. Over the next 12 months, we estimate that approximately $69 million, net of taxes, of the $0.3 billion of cash flow hedge losses in AOCI at March 31, 2019 will be reclassified into earnings. The maximum remaining length of time over which we have hedged the exposure related to the variability in future cash flows on forecasted transactions, primarily forecasted debt issuances, is 15 years.

Freddie Mac Form 10-Q
 
84
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 11


Senior Preferred Stock
As of March 31, 2019, our assets exceeded our liabilities under GAAP; therefore, no draw is being requested from Treasury under the Purchase Agreement. Based on our Net Worth Amount of $4.7 billion as of March 31, 2019 and the Capital Reserve Amount of $3.0 billion, our dividend requirement to Treasury in June 2019 will be $1.7 billion. See Note 2 for additional information.
Upon the Conservator, acting as successor to the rights, titles, powers, and privileges of the Board of Directors, declaring a senior preferred stock dividend equal to our dividend requirement and directing us to pay it before June 30, 2019, we would pay a dividend of $1.7 billion by June 30, 2019. If for any reason we were not to pay our dividend requirement on the senior preferred stock in full, the unpaid amount would be added to the liquidation preference and our applicable Capital Reserve Amount would thereafter be zero, but this would not affect our ability to draw funds from Treasury under the Purchase Agreement. Our cumulative senior preferred stock dividend payments totaled $118.0 billion as of March 31, 2019. The aggregate liquidation preference of the senior preferred stock owned by Treasury was $75.6 billion as of both March 31, 2019 and December 31, 2018.
Stock Issuances and Repurchases
We did not repurchase or issue any of our common shares or non-cumulative preferred stock during 1Q 2019, except for issuances of treasury stock relating to stock-based compensation granted prior to Conservatorship. During 1Q 2019, the deferral period lapsed on 351 RSUs. At March 31, 2019, 702 RSUs remained outstanding.
Earnings Per Share
We have participating securities related to restricted stock units with dividend equivalent rights that receive dividends as declared on an equal basis with common shares but are not obligated to participate in undistributed net losses. These participating securities consist of vested RSUs that earn dividend equivalents at the same rate when and as declared on common stock.
Consequently, in accordance with accounting guidance, we use the "two-class" method of computing earnings per common share. The "two-class" method is an earnings allocation formula that determines earnings per share for common stock and participating securities based on dividends declared and participation rights in undistributed earnings.
Basic earnings per common share is computed as net income attributable to common stockholders divided by the weighted average common shares outstanding for the period. The weighted average common shares outstanding for the period includes the weighted average number of shares that are associated with the warrant for our common stock issued to Treasury pursuant to the Purchase Agreement. These shares are included since the warrant is unconditionally exercisable by the holder at a minimal cost.
Diluted earnings per common share is computed as net income attributable to common stockholders divided by the weighted average common shares outstanding during the period adjusted for the dilutive effect of common equivalent shares outstanding. For periods with net income attributable to common stockholders, the calculation includes the effect of the weighted-average of RSUs.
During periods in which a net loss attributable to common stockholders has been incurred, potential common equivalent shares outstanding are not included in the calculation because it would have an antidilutive effect.
There were no stock options outstanding at both March 31, 2019 and March 31, 2018.
Dividends and Dividend Restrictions
No common dividends were declared during 1Q 2019. At the direction of our Conservator, we paid dividends of $1.5 billion in cash on the senior preferred stock during 1Q 2019. We did not declare or pay dividends on any other series of Freddie Mac preferred stock outstanding during 1Q 2019.
Our payment of dividends on Freddie Mac common stock or any series of Freddie Mac preferred stock (other than senior preferred stock) is subject to certain restrictions as described in Note 11 in our 2018 Annual Report.


Freddie Mac Form 10-Q
 
85
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 12



NOTE 12
Income Taxes
Income Tax Expense
For 1Q 2019 and 1Q 2018, we reported income tax expense of $0.4 billion and $0.7 billion, respectively, resulting in effective tax rates of 20.3% and 20.4%, respectively. Our effective tax rate differed from the statutory tax rate of 21% in these periods primarily due to our recognition of low income housing tax credits.
Deferred Tax Assets, Net
We had net deferred tax assets of $6.8 billion and $6.9 billion as of March 31, 2019 and December 31, 2018, respectively. At March 31, 2019, our net deferred tax assets consisted primarily of basis differences related to derivative instruments and deferred fees.
Based on all positive and negative evidence available at March 31, 2019, we determined that it is more likely than not that our net deferred tax assets, except for a portion of the deferred tax asset related to our capital loss carryforward, will be realized. As of March 31, 2019, we have a $46 million valuation allowance recorded against our capital loss carryforward deferred tax asset.
Unrecognized Tax Benefits
We evaluated all income tax positions and determined that there were no uncertain tax positions that required reserves as of March 31, 2019.

Freddie Mac Form 10-Q
 
86
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


NOTE 13
Segment Reporting
We have three reportable segments, which are based on the type of business activities each performs - Single-family Guarantee, Multifamily, and Capital Markets. Material corporate-level activities that are infrequent in nature and based on decisions outside the control of the management of our reportable segments are included in the All Other category. For more information, see our 2018 Annual Report.
Segment Earnings
We present Segment Earnings by reclassifying certain credit guarantee-related activities and investment-related activities between various line items on our GAAP condensed consolidated statements of comprehensive income and allocating certain revenues and expenses, including certain returns on assets, funding and hedging costs, and administrative expenses, to our three reportable segments.
We do not consider our assets by segment when evaluating segment performance or allocating resources. 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.
We evaluate segment performance and allocate resources based on a Segment Earnings approach, subject to the conduct of our business under the direction of the Conservator. See Note 2 for information about the conservatorship.
The table below presents Segment Earnings by segment.
Table 13.1 - Segment Earnings
(In millions)
 
1Q 2019
1Q 2018
Segment Earnings (loss), net of taxes:
 
 
 
Single-family Guarantee
 

$740


$786

Multifamily
 
330

473

Capital Markets
 
337

1,667

All Other
 
—

—

Total Segment Earnings, net of taxes
 
1,407

2,926

Net income (loss)
 

$1,407


$2,926

Comprehensive income (loss) of segments:
 
 
 
Single-family Guarantee
 

$736


$782

Multifamily
 
395

405

Capital Markets
 
534

963

All Other
 
—

—

Comprehensive income (loss) of segments
 
1,665

2,150

Comprehensive income (loss)
 

$1,665


$2,150


Freddie Mac Form 10-Q
 
87
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 13


The tables below present detailed reconciliations between our GAAP condensed consolidated statements of comprehensive income and Segment Earnings for our reportable segments and All Other.
Table 13.2 - Segment Earnings and Reconciliations to GAAP Condensed Consolidated Statements of Comprehensive Income
 
 
1Q 2019
 
 
Single-family
Guarantee
Multifamily
Capital Markets
All
Other
Total Segment
Earnings (Loss)
Reclassifications
Total per
Consolidated
Statements of
Comprehensive
Income
(In millions)
 
Net interest income
 

$—


$247


$758


$—


$1,005


$2,148


$3,153

Guarantee fee income
 
1,633

216

—

—

1,849

(1,632
)
217

Benefit (provision) for credit losses
 
8

(1
)
—

—

7

128

135

Mortgage loans gains (losses)
 
—

731

—

—

731

200

931

Investment securities gains (losses)
 
—

(17
)
195

—

178

(4
)
174

Debt gains (losses)
 
(21
)
29

(7
)
—

1

14

15

Derivative gains (losses)
 
(41
)
(772
)
(667
)
—

(1,480
)
(126
)
(1,606
)
Other income (loss)
 
249

104

237

—

590

(556
)
34

Administrative expense
 
(374
)
(112
)
(92
)
—

(578
)
—

(578
)
REO operations (expense) income
 
(38
)
—

—

—

(38
)
5

(33
)
Other non-interest (expense) income
 
(488
)
(11
)
(1
)
—

(500
)
(177
)
(677
)
Income tax (expense) benefit
 
(188
)
(84
)
(86
)
—

(358
)
—

(358
)
Net income (loss)
 
740

330

337

—

1,407

—

1,407

Changes in unrealized gains (losses) related to available-for-sale securities
 
—

66

180

—

246

—

246

Changes in unrealized gains (losses) related to cash flow hedge relationships
 
—

—

18

—

18

—

18

Changes in defined benefit plans
 
(4
)
(1
)
(1
)
—

(6
)
—

(6
)
Total other comprehensive income (loss), net of taxes
 
(4
)
65

197

—

258

—

258

Comprehensive income (loss)
 

$736


$395


$534


$—


$1,665


$—


$1,665


 
 
1Q 2018
 
 
Single-family
Guarantee
Multifamily
Capital Markets
All
Other
Total Segment
Earnings (Loss)
Reclassifications
Total per
Consolidated
Statements of
Comprehensive
Income
(In millions)
 
Net interest income
 

$—


$271


$771


$—


$1,042


$1,976


$3,018

Guarantee fee income
 
1,590

195

—

—

1,785

(1,591
)
194

Benefit (provision) for credit losses
 
41

16

—

—

57

(120
)
(63
)
Mortgage loans gains (losses)
 
—

(346
)
—

—

(346
)
131

(215
)
Investment securities gains (losses)
 
—

(158
)
37

—

(121
)
(111
)
(232
)
Debt gains (losses)
 
34

10

105

—

149

(28
)
121

Derivative gains (losses)
 
(6
)
655

1,302

—

1,951

(121
)
1,830

Other income (loss)
 
81

64

(31
)
—

114

17

131

Administrative expense
 
(336
)
(100
)
(84
)
—

(520
)
—

(520
)
REO operations (expense) income
 
(39
)
—

—

—

(39
)
5

(34
)
Other non-interest (expense) income
 
(379
)
(13
)
(6
)
—

(398
)
(158
)
(556
)
Income tax (expense) benefit
 
(200
)
(121
)
(427
)
—

(748
)
—

(748
)
Net income (loss)
 
786

473

1,667

—

2,926

—

2,926

Changes in unrealized gains (losses) related to available-for-sale securities
 
—

(67
)
(733
)
—

(800
)
—

(800
)
Changes in unrealized gains (losses) related to cash flow hedge relationships
 
—

—

30

—

30

—

30

Changes in defined benefit plans
 
(4
)
(1
)
(1
)
—

(6
)
—

(6
)
Total other comprehensive income (loss), net of taxes
 
(4
)
(68
)
(704
)
—

(776
)
—

(776
)
Comprehensive income (loss)
 

$782


$405


$963


$—


$2,150


$—


$2,150



Freddie Mac Form 10-Q
 
88
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


NOTE 14
Concentration of Credit and Other Risks
Single-Family Credit Guarantee Portfolio
The table below summarizes the concentration by loan portfolio and geographic area of the approximately $1.9 trillion UPB of our single-family credit guarantee portfolio as of both March 31, 2019 and December 31, 2018. See Note 4 and Note 7 for more information about credit risk associated with loans and mortgage-related securities that we hold or guarantee.
Table 14.1 - Concentration of Credit Risk of Our Single-Family Credit Guarantee Portfolio
 
 
March 31, 2019
 
December 31, 2018
 
Percent of Credit Losses
 
 
Percentage  of
Portfolio
Serious
Delinquency
Rate
 
Percentage  of
Portfolio
Serious
Delinquency
Rate
 
1Q 2019
1Q 2018
Core single-family loan portfolio
 
83
%
0.22
%
 
82
%
0.22
%
 
12
%
6
%
Legacy and relief refinance single-family loan portfolio
 
17

1.91

 
18

1.93

 
88

94

Total
 
100
%
0.67

 
100
%
0.69

 
100
%
100
%
Region(1)
 
 
 
 
 
 
 
 
 
West
 
30
%
0.38

 
30
%
0.38

 
15
%
17
%
Northeast
 
24

0.95

 
24

0.96

 
37

41

North Central
 
16

0.62

 
16

0.63

 
16

19

Southeast
 
16

0.83

 
16

0.90

 
25

18

Southwest
 
14

0.54

 
14

0.57

 
7

5

Total
 
100
%
0.67

 
100
%
0.69

 
100
%
100
%
State(2)
 
 
 
 
 
 
 
 
 
Florida
 
6
%
0.91

 
6
%
1.01

 
18
%
10
%
New York
 
5

1.33

 
5

1.37

 
12

9

New Jersey
 
3

1.21

 
3

1.24

 
10

13

California
 
18

0.35

 
18

0.35

 
10

13

Illinois
 
4

0.86

 
5

0.86

 
10

9

All other
 
64

0.62

 
63

0.64

 
40

46

Total
 
100
%
0.67
%
 
100
%
0.69
%
 
100
%
100
%
(1)
Region designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA); Northeast (CT, DE, DC, MA, ME, MD, NH, NJ, NY, PA, RI, VT, VA, WV); North Central (IL, IN, IA, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI); Southwest (AR, CO, KS, LA, MO, NE, NM, OK, TX, WY).
(2)
States presented based on those with the highest percentage of credit losses during 1Q 2019.
Credit Performance of Certain Higher Risk Single-Family Loan Categories
Participants in the mortgage market have characterized single-family loans based upon their overall credit quality at the time of origination, including as prime or subprime. Mortgage market participants have classified single-family loans as Alt-A if these loans have credit characteristics that range between their prime and subprime categories, if they are underwritten with lower or alternative income or asset documentation requirements compared to a full documentation loan, or both. Although we discontinued new purchases of loans with lower documentation standards beginning March 1, 2009, we continued to purchase certain amounts of these loans in cases where the loan was either:
n
Purchased pursuant to a previously issued other mortgage-related guarantee;
n
Part of our relief refinance initiative; or
n
In another refinance loan initiative and the pre-existing loan (including Alt-A loans) was originated under less than full documentation standards.
In the event we purchase a refinance loan and the original loan had been previously identified as Alt-A, such refinance loan may no longer be categorized or reported as Alt-A in the table below because the new refinance loan replacing the original loan would not be identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such refinancing not occurred.

Freddie Mac Form 10-Q
 
89
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


Although we do not categorize single-family loans we purchase or guarantee as prime or subprime, we recognize that there are a number of loan types with certain characteristics that indicate a higher degree of credit risk.
For example, a borrower's credit score is a useful measure for assessing the credit quality of the borrower. Statistically, borrowers with higher credit scores are more likely to repay or have the ability to refinance than those with lower scores.
Presented below is a summary of the serious delinquency rates of certain higher-risk categories (based on characteristics of the loan at origination) of loans in our single-family credit guarantee portfolio. The table includes a presentation of each higher-risk category in isolation. A single loan may fall within more than one category (for example, an interest-only loan may also have an original LTV ratio greater than 90%). Loans with a combination of these attributes will have an even higher risk of delinquency than those with an individual attribute.
Table 14.2 - Certain Higher Risk Categories in Our Single-Family Credit Guarantee Portfolio
 
 
Percentage of Portfolio(1)
 
Serious Delinquency Rate(1)
(Percentage of portfolio based on UPB)
 
March 31, 2019
December 31, 2018
 
March 31, 2019
December 31, 2018
Interest-only
 
1
%
1
%
 
3.35
%
3.43
%
Alt-A
 
1

1

 
4.17

4.13

Original LTV ratio greater than 90%(2)
 
18

18

 
0.99

1.04

Lower credit scores at origination (less than 620)
 
2

2

 
4.50

4.59

(1)
Excludes loans underlying certain other securitization products for which data was not available.
(2)
Includes HARP loans, which we purchased as part of our participation in the MHA Program.
Sellers and Servicers
Sellers
We acquire a significant portion of our single-family and multifamily loan purchase volume from several large sellers. The tables below summarize the concentration of single-family and multifamily sellers who provided 10% or more of our purchase volume.
Table 14.3 - Seller Concentration
Single-family Sellers
 
1Q 2019
1Q 2018
JPMorgan Chase Bank, N.A.
 
16
%
6
%
United Shore Financial Services, LLC (1)
 
10

N/A

Wells Fargo Bank, N.A.
 
8

15

Other top 10 sellers
 
23

30

Top 10 single-family sellers
 
57
%
51
%
 
 
 
 
Multifamily Sellers
 
1Q 2019
1Q 2018
CBRE Capital Markets, Inc.
 
15
%
14
%
Berkadia Commercial Mortgage LLC
 
13

11

Walker & Dunlop, LLC
 
9

12

Holliday Fenoglio Fowler, L.P.
 
5

10

Other top 10 sellers
 
35

32

Top 10 multifamily sellers
 
77
%
79
%
(1)
United Shore Financial Services, LLC was not a top 10 single-family seller in 1Q 2018.
In recent years, there has been a shift in our single-family purchase volume from depository institutions to non-depository and smaller depository financial institutions. Some of these non-depository sellers have grown in recent years, and we purchase a significant share of our loans from them. Our top five non-depository sellers provided approximately 26% and 22% of our single-family purchase volume during 1Q 2019 and 1Q 2018, respectively.
Servicers
Significant portions of our single-family and multifamily loans are serviced by several large servicers. The tables below summarize the concentration of single-family and multifamily servicers who serviced 10% or more of our single-family credit guarantee portfolio and our multifamily mortgage portfolio, excluding loans underlying multifamily securitizations where we are not in first loss position, primarily K Certificates and SB Certificates.

Freddie Mac Form 10-Q
 
90
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


Table 14.4 - Servicer Concentration
Single-family Servicers

 
March 31, 2019(1)
December 31, 2018(1)
Wells Fargo Bank, N.A.

 
17
%
17
%
Other top 10 servicers

 
40

39

Top 10 single-family servicers
 
57
%
56
%
Multifamily Servicers
 
March 31, 2019
December 31, 2018
Wells Fargo Bank, N.A.
 
14
%
14
%
CBRE Capital Markets, Inc.
 
11

14

Berkadia Commercial Mortgage LLC
 
11

11

Other top 10 servicers
 
39

36

Top 10 multifamily servicers
 
75
%
75
%
(1)
Percentage of servicing volume is based on the total single-family credit guarantee portfolio, excluding loans where we do not exercise control over the associated servicing.
In recent years, there has been a shift in our single-family servicing from depository institutions to non-depository servicers. Some of these non-depository servicers have grown in recent years and now service a large share of our loans. As of March 31, 2019 and December 31, 2018, approximately 18% and 16%, respectively, of our single-family credit guarantee portfolio, excluding loans where we do not exercise control over the associated servicing, was serviced by our top five non-depository servicers. We actively manage the performance of our largest non-depository servicers.
Credit Enhancement Providers
We have counterparty credit risk relating to the potential insolvency of, or non-performance by, mortgage insurers that insure single-family loans we purchase or guarantee. We also have similar exposure to insurers and reinsurers through our ACIS transactions where we purchase insurance policies as part of our CRT activities.
In March 2019, we implemented a set of revised Private Mortgage Insurer Eligibility Requirements (PMIERs) with enhancements to the risk-based capital requirements for mortgage insurers. In addition, we revised master policies with mortgage insurers which provide contract certainty and improve our ability to collect claims for mortgage insurance obligations. These policies were approved by FHFA and are expected to become effective during 2020.
We evaluate the recovery and collectability from mortgage insurers as part of the estimate of our allowance for credit losses. See Note 4 for additional information. As of March 31, 2019, mortgage insurers provided coverage with maximum loss limits of $98.9 billion, for $385.5 billion of UPB, in connection with our single-family credit guarantee portfolio. These amounts are based on gross coverage without regard to netting of coverage that may exist to the extent an affected loan is covered under both primary and pool insurance.
The table below summarizes the concentration of mortgage insurer counterparties who provided 10% or more of our overall mortgage insurance coverage. On October 23, 2016, Genworth Financial, Inc. announced that it had entered into an agreement to be acquired by China Oceanwide Holdings Group Co., Ltd. Because Genworth Mortgage Insurance Corporation, a subsidiary of Genworth Financial, Inc., is an approved mortgage insurer, Freddie Mac has evaluated the planned acquisition and approved China Oceanwide Holdings Group's control of Genworth Mortgage Insurance Corporation. Regulatory and other approvals of the acquisition are still pending.




Freddie Mac Form 10-Q
 
91
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 14


Table 14.5 - Mortgage Insurer Concentration
 
 
 
 
Mortgage Insurance Coverage(2)
Mortgage Insurer
 
Credit Rating(1)
 
March 31, 2019
December 31, 2018
Arch Mortgage Insurance Company
 
A-
 
23
%
24
%
Radian Guaranty Inc.
 
BBB
 
20

20

Mortgage Guaranty Insurance Corporation
 
BBB
 
18

19

Genworth Mortgage Insurance Corporation
 
BB+
 
15

14

Essent Guaranty, Inc.
 
BBB+
 
14

14

Total
 
 
 
90
%
91
%
(1)
Ratings are for the corporate entity to which we have the greatest exposure. Latest rating available as of March 31, 2019. Represents the lower of S&P and Moody’s credit ratings stated in terms of the S&P equivalent.
(2)
Includes primary mortgage insurance and pool insurance. Coverage amounts may include coverage provided by affiliates and subsidiaries of the counterparty.
During both 1Q 2019 and 1Q 2018, we received proceeds of $0.1 billion from our primary and pool mortgage insurance policies for recovery of losses on our single-family loans. We had outstanding receivables from mortgage insurers of $0.1 billion (excluding deferred payment obligations associated with unpaid claim amounts) as of both March 31, 2019 and December 31, 2018. The balance of these receivables, net of associated reserves, was approximately $0.1 billion at both March 31, 2019 and December 31, 2018.
PMI Mortgage Insurance Co. and Triad Guaranty Insurance Corp. are both under the control of their state regulators and are in run-off. A substantial portion of their claims is recorded by us as deferred payment obligations. As of both March 31, 2019 and December 31, 2018, we had cumulative unpaid deferred payment obligations of $0.5 billion from these insurers. We have reserved substantially all of these unpaid amounts as collectability is uncertain. It is not clear how the regulators of these companies will administer their respective deferred payment plans in the future, nor when or if those obligations will be paid.
As part of our ACIS and other CRT transactions, we regularly obtain insurance coverage from insurers and reinsurers. These transactions incorporate several features designed to increase the likelihood that we will recover on the claims we file with the insurers and reinsurers, including the following:
n
In each transaction, we require the individual insurers and reinsurers to post collateral to cover portions of their exposure, which helps to promote certainty and timeliness of claim payment and
n
While private mortgage insurance companies are required to be monoline (i.e., to participate solely in the mortgage insurance business, although the holding company may be a diversified insurer), many of our insurers and reinsurers in these transactions participate in multiple types of insurance business, which helps diversify their risk exposure.
Other Investments Counterparties
We are exposed to the non-performance of counterparties relating to other investments (including non-mortgage-related securities and cash equivalents) transactions, including those entered into on behalf of our securitization trusts. Our policies require that the counterparty be evaluated using our internal counterparty rating model prior to our entering into such transactions. We monitor the financial strength of our counterparties to these transactions and may use collateral maintenance requirements to manage our exposure to individual counterparties. The permitted term and dollar limits for each of these transactions are also based on the counterparty's financial strength.
Our other investments (including non-mortgage-related securities and cash equivalents) counterparties are primarily major financial institutions, including other GSEs, Treasury, the Federal Reserve Bank of New York, GSD/FICC, highly-rated supranational institutions, depository and non-depository institutions, brokers and dealers, and government money market funds. As of March 31, 2019 and December 31, 2018, including amounts related to our consolidated VIEs, the balance in our other investments was $77.0 billion and $63.1 billion, respectively. The balances consist primarily of cash and securities purchased under agreements to resell invested with counterparties, U.S. Treasury securities, cash deposited with the Federal Reserve Bank of New York, and secured lending activities. As of March 31, 2019, all of our securities purchased under agreements to resell were fully collateralized. As of March 31, 2019 and December 31, 2018, $1.9 billion and $2.5 billion of our securities purchased under agreements to resell were used to provide financing to investors in Freddie Mac securities to increase liquidity and expand the investor base for those securities. These transactions differ from the securities purchased under agreements to resell that we use for liquidity purposes as the counterparties we face may not be major financial institutions and we are exposed to the counterparty risk of these institutions.

Freddie Mac Form 10-Q
 
92
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


NOTE 15
Fair Value Disclosures
The accounting guidance for fair value measurements and disclosures defines fair value, establishes a framework for measuring fair value, and sets forth disclosure requirements regarding fair value measurements. This guidance applies whenever other accounting guidance requires or permits assets or liabilities to be measured at fair value. Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or, in the absence of a principal market, in the most advantageous market for the asset or liability.
We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain assets and liabilities on a recurring or non-recurring basis.
Fair Value Measurements
The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The levels of the fair value hierarchy are defined as follows in priority order:
n
Level 1 - inputs to the valuation techniques are based on quoted prices in active markets for identical assets or liabilities.
n
Level 2 - inputs to the valuation techniques are based on observable inputs other than quoted prices in active markets for identical assets or liabilities.
n
Level 3 - one or more inputs to the valuation technique are unobservable and significant to the fair value measurement.
We use quoted market prices and valuation techniques that seek to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs. Our inputs are based on the assumptions a market participant would use in valuing the asset or liability. Assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below present our assets and liabilities measured on our condensed consolidated balance sheets at fair value on a recurring basis subsequent to initial recognition, including instruments where we have elected the fair value option.

Freddie Mac Form 10-Q
 
93
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


Table 15.1 - Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
 
March 31, 2019
(In millions)
 
Level 1
Level 2
Level 3
Netting Adjustment(1)
Total
Assets:
 





Investments in securities:
 





Available-for-sale, at fair value:
 





Mortgage-related securities:
 





Freddie Mac
 

$—


$25,347


$3,563


$—


$28,910

Other agency
 
—

1,346

36

—

1,382

Non-agency and other
 
—

19

1,633

—

1,652

Total available-for-sale securities, at fair value
 
—

26,712

5,232

—

31,944

Trading, at fair value:
 


 

 
Mortgage-related securities:
 


 

 
Freddie Mac
 
—

10,259

3,051

—

13,310

Other agency
 
—

2,781

7

—

2,788

All other
 
—

—

1

—

1

Total mortgage-related securities
 
—

13,040

3,059

—

16,099

Non-mortgage-related securities
 
14,782

2,671

—

—

17,453

Total trading securities, at fair value
 
14,782

15,711

3,059

—

33,552

Total investments in securities
 
14,782

42,423

8,291

—

65,496

Mortgage loans:
 





Held-for-sale, at fair value
 
—

20,576

—

—

20,576

Derivative assets, net:
 
 
 
 
 
 
Interest-rate swaps
 
—

1,929

—

—

1,929

Option-based derivatives
 
—

4,147

—

—

4,147

Other
 
—

187

11

—

198

Subtotal, before netting adjustments
 
—

6,263

11

—

6,274

Netting adjustments(1)
 
—

—

—

(5,128
)
(5,128
)
Total derivative assets, net
 
—

6,263

11

(5,128
)
1,146

Other assets:
 
 
 
 
 


Guarantee asset, at fair value
 
—

—

3,795

—

3,795

Non-derivative held-for-sale purchase commitments, at fair value
 
—

237

—

—

237

All other, at fair value
 
—

—

150

—

150

Total other assets
 
—

237

3,945

—

4,182

Total assets carried at fair value on a recurring basis
 

$14,782


$69,499


$12,247


($5,128
)

$91,400

Liabilities:
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value
 

$—


$7


$731


$—


$738

Other debt, at fair value
 
—

4,115

214

—

4,329

Derivative liabilities, net:
 





Interest-rate swaps
 
—

4,168

—

—

4,168

Option-based derivatives
 
—

195

—

—

195

Other
 
—

319

58

—

377

Subtotal, before netting adjustments
 
—

4,682

58

—

4,740

Netting adjustments(1)
 
—

—

—

(4,308
)
(4,308
)
Total derivative liabilities, net
 
—

4,682

58

(4,308
)
432

Other liabilities:
 
 
 
 
 
 
Non-derivative held-for-sale purchase commitments, at fair value
 
—

4

—

—

4

All other, at fair value
 
—

—

1

—

1

Total liabilities carried at fair value on a recurring basis
 

$—


$8,808


$1,004


($4,308
)

$5,504

Referenced footnote is included after the next table.


Freddie Mac Form 10-Q
 
94
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


 
 
December 31, 2018
(In millions)
 
Level 1
Level 2
Level 3
Netting Adjustment(1)
Total
Assets:
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
Freddie Mac
 

$—


$26,102


$4,097


$—


$30,199

Other agency
 
—

1,668

38

—

1,706

Non-agency and other
 
—

18

1,640

—

1,658

Total available-for-sale securities, at fair value
 
—

27,788

5,775

—

33,563

Trading, at fair value:
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
Freddie Mac
 
—

10,535

3,286

—

13,821

Other agency
 
—

2,544

7

—

2,551

All other
 
—

—

1

—

1

Total mortgage-related securities
 
—

13,079

3,294

—

16,373

Non-mortgage-related securities
 
15,885

3,290

—

—

19,175

Total trading securities, at fair value
 
15,885

16,369

3,294

—

35,548

Total investments in securities
 
15,885

44,157

9,069

—

69,111

Mortgage loans:
 
 
 
 
 
 
Held-for-sale, at fair value
 
—

23,106

—

—

23,106

Derivative assets, net:
 
 
 
 
 
 
Interest-rate swaps
 
—

2,127

—

—

2,127

Option-based derivatives
 
—

4,200

—

—

4,200

Other
 
—

90

1

—

91

Subtotal, before netting adjustments
 
—

6,417

1

—

6,418

Netting adjustments(1)
 
—

—

—

(6,083
)
(6,083
)
Total derivative assets, net
 
—

6,417

1

(6,083
)
335

Other assets:
 
 
 
 
 
 
Guarantee asset, at fair value
 
—

—

3,633

—

3,633

Non-derivative held-for-sale purchase commitments, at fair value
 
—

159

—

—

159

All other, at fair value
 
—

—

137

—

137

Total other assets
 
—

159

3,770

—

3,929

Total assets carried at fair value on a recurring basis
 

$15,885


$73,839


$12,840


($6,083
)

$96,481

Liabilities:
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value
 

$—


$27


$728


$—


$755

Other debt, at fair value
 
—

4,223

134

—

4,357

Derivative liabilities, net:
 
 
 
 
 
 
Interest-rate swaps
 
—

3,974

—

—

3,974

Option-based derivatives
 
—

137

—

—

137

Other
 
—

225

92

—

317

Subtotal, before netting adjustments
 
—

4,336

92

—

4,428

Netting adjustments(1)
 
—

—

—

(3,845
)
(3,845
)
Total derivative liabilities, net
 
—

4,336

92

(3,845
)
583

Other liabilities:
 
 
 
 
 
 
Non-derivative held-for-sale purchase commitments, at fair value
 
—

17

—

—

17

Total liabilities carried at fair value on a recurring basis
 

$—


$8,603


$954


($3,845
)

$5,712

(1)
Represents counterparty netting, cash collateral netting, and net derivative interest receivable or payable.

Freddie Mac Form 10-Q
 
95
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


Level 3 Fair Value Measurements
The tables below present a reconciliation of all assets and liabilities measured on our condensed consolidated balance sheets at fair value on a recurring basis using significant unobservable inputs (Level 3), including transfers into and out of Level 3. The tables also present gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recognized on our consolidated statements of comprehensive income for Level 3 assets and liabilities.
Table 15.2 - Fair Value Measurements of Assets and Liabilities Using Significant Unobservable Inputs
 
 
1Q 2019
 
 
Balance,
January 1,
2019
 
Realized and unrealized gains (losses)

Purchases

Issues

Sales

Settlements,
net

Transfers
into
Level 3(1)

Transfers
out of
Level 3(1)

Balance,
March 31,
2019

Unrealized
gains (losses)
still held(3)
(In millions)
 
 
Included in
earnings
 
Included in other
comprehensive
income

Total









 

Assets
 

 

 



















Investments in securities:
 

 

 



















Available-for-sale, at fair value:
 

 

 



















Mortgage-related securities:
 

 

 



 















Freddie Mac
 

$4,097

 

($18
)
 

$72

 

$54

 

$52

 

$—

 

($486
)
 

($96
)
 

$—

 

($58
)
 

$3,563

 

($1
)
Other agency
 
38

 
—

 
—

 
—

 
—

 
—

 
—

 
(2
)
 
—

 
—

 
36

 
—

Non-agency and other
 
1,640

 
4

 
50

 
54

 
—

 
—

 
—

 
(61
)
 
—

 
—

 
1,633

 
4

Total available-for-sale mortgage-related securities
 
5,775


(14
)

122

 
108

 
52

 
—

 
(486
)

(159
)

—


(58
)

5,232


3

Trading, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Freddie Mac
 
3,286

 
(59
)
 
—

 
(59
)
 
143

 
—

 
(115
)
 
(24
)
 
—

 
(180
)
 
3,051

 
(61
)
Other agency
 
7

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
7

 
—

All other
 
1

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
—

Total trading mortgage-related securities
 
3,294


(59
)

—


(59
)

143


—


(115
)

(24
)

—


(180
)

3,059


(61
)
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset
 
3,633

 
35

 
—

 
35

 
—

 
282

 
—

 
(155
)
 
—

 
—

 
3,795

 
35

All other, at fair value
 
137

 
(34
)
 
—

 
(34
)
 
52

 
9

 
(12
)
 
(2
)
 
—

 
—

 
150

 
(33
)
Total other assets
 

$3,770



$1



$—



$1



$52



$291



($12
)


($157
)


$—



$—



$3,945



$2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1,
2019
 
Realized and unrealized (gains) losses

Purchases

Issues

Sales

Settlements,
net

Transfers
into
Level 3(1)

Transfers
out of
Level 3(1)

Balance,
March 31,
2019

Unrealized
(gains) losses
still held(3)
 
 
 
Included in
earnings
 
Included in
other
comprehensive
income

Total








 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 

 

 





 

 

 

 

 

 

 

Debt securities of consolidated trusts held by third parties, at fair value
 

$728

 

$2

 

$—

 

$2

 

$—

 

$—

 

$—

 

$—

 

$—

 

$—

 

$730

 

$2

Other debt, at fair value
 
134

 
—

 
—

 
—

 
—

 
80

 
—

 
—

 
—

 
—

 
214

 
—

Net derivatives(2)
 
91

 
(38
)
 
—

 
(38
)
 
—

 
—

 
—

 
(5
)
 
—

 
—

 
48

 
(43
)
All other, at fair value
 
—

 
(2
)
 
—

 
(2
)
 
3

 
—

 
—

 
—

 
—

 
—

 
1

 
(2
)
Referenced footnotes are included after the prior period tables.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Freddie Mac Form 10-Q
 
96
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


 
 
1Q 2018
 
 
Balance,
January 1,
2018
 
Realized and unrealized gains (losses)
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3(1)
 
Transfers
out of
Level 3(1)
 
Balance,
March 31,
2018
 
Unrealized
gains (losses)
still held(3)
(In millions)
 
 
Included in
earnings
 
Included in other
comprehensive
income
 
Total
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 

$6,751

 

($6
)
 

($152
)
 

($158
)
 

$433

 

$—

 

$—

 

($257
)
 

$—

 

$—

 

$6,769

 

($6
)
Other agency
 
46

 
—

 
—

 
—

 
—

 
—

 
—

 
(2
)
 
—

 
—

 
44

 
—

Non-agency and other
 
4,291

 
449

 
(453
)
 
(4
)
 
—

 
—

 
(1,467
)
 
(129
)
 
—

 
—

 
2,691

 
17

Total available-for-sale mortgage-related securities
 
11,088

 
443

 
(605
)
 
(162
)
 
433

 
—

 
(1,467
)
 
(388
)
 
—

 
—

 
9,504

 
11

Trading, at fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 
2,907

 
(124
)
 
—

 
(124
)
 
817

 
—

 
(455
)
 
(21
)
 
—

 
(86
)
 
3,038

 
(111
)
Other agency
 
9

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
9

 
—

All other
 
1

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
—

Total trading mortgage-related securities
 
2,917

 
(124
)
 
—

 
(124
)
 
817

 
—

 
(455
)
 
(21
)
 
—

 
(86
)
 
3,048

 
(111
)
Other assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee asset
 
3,171

 
16

 
—

 
16

 
—

 
235

 
—

 
(137
)
 
—

 
—

 
3,285

 
16

All other, at fair value
 
45

 
6

 
—

 
6

 
43

 
9

 
(15
)
 
—

 
—

 
—

 
88

 
3

Total other assets
 

$3,216

 

$22

 

$—

 

$22

 

$43

 

$244

 

($15
)
 

($137
)
 

$—

 

$—

 

$3,373

 

$19

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance,
January 1,
2018
 
Realized and unrealized gains (losses)
 
Purchases
 
Issues
 
Sales
 
Settlements,
net
 
Transfers
into
Level 3(1)
 
Transfers
out of
Level 3(1)
 
Balance,
March 31,
2018
 
Unrealized
gains (losses)
still held(3)
 
 
 
Included in
earnings
 
Included in other
comprehensive
income
 
Total
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value
 

$630

 

($1
)
 

$—

 

($1
)
 

$—

 

$—

 

$—

 

$—

 

$—

 

$—

 

$629

 

($1
)
Other debt, at fair value
 
137

 
—

 
—

 
—

 
—

 
—

 
—

 
(2
)
 
—

 
—

 
135

 
—

Net derivatives(2)
 
57

 
9

 
—

 
9

 
—

 
(22
)
 
—

 
(4
)
 
—

 
—

 
40

 
6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Transfers out of Level 3 during 1Q 2019 and 1Q 2018 consisted primarily of certain mortgage-related securities due to an increased volume and level of activity in the market and availability of price quotes from dealers and third-party pricing services. Certain Freddie Mac securities are classified as Level 3 at issuance and generally are classified as Level 2 when they begin trading. Transfers into Level 3 during 1Q 2019 and 1Q 2018 consisted primarily of certain mortgage-related securities due to a decrease in market activity and the availability of relevant price quotes from dealers and third-party pricing services.
(2)
Amounts are the net of derivative assets and liabilities prior to counterparty netting, cash collateral netting, net trade/settle receivable or payable, and net derivative interest receivable or payable.
(3)
Represents the amount of total gains or losses for the period, included in earnings, attributable to the change in unrealized gains and losses related to assets and liabilities classified as Level 3 that were still held at March 31, 2019 and March 31, 2018, respectively. Included in these amounts are other-than temporary impairments recorded on available-for-sale securities.


Freddie Mac Form 10-Q
 
97
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


The tables below provide valuation techniques, the range, and the weighted average of significant unobservable inputs for Level 3 assets and liabilities measured on our condensed consolidated balance sheets at fair value on a recurring basis.
Table 15.3 - Quantitative Information about Recurring Level 3 Fair Value Measurements
 
 
March 31, 2019
 
 
Level 3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs
(Dollars in millions, except for certain unobservable inputs as shown)

 
Type
 
Range
 
Weighted
Average
Assets
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value
 
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
 
 
 
 
 
 
 
 
 
Freddie Mac
 

$2,770

 
Discounted cash flows
 
OAS
 
30 - 261 bps
 
87 bps

 
 
793

 
Single external source
 
External pricing sources
 
$96.5 - $106.5

 

$103.8

Non-agency and other
 
1,416

 
Median of external sources
 
External pricing sources
 
 $64.9 - $70.5
 

$67.4

 
 
217

 
Single external source
 
External pricing sources
 
 $97.7 - $114.4
 

$101.1

Trading, at fair value
 


 
 
 
 
 
 
 
 
Mortgage-related securities
 


 
 
 
 
 
 
 
 
Freddie Mac
 
2,043

 
Single external source
 
External pricing sources
 
$0.0 - $99.6
 

$46.7

 
 
1,008

 
Discounted cash flows
 
OAS
 
(21,945) - 8,039 bps
 
617 bps

Guarantee asset, at fair value
 
3,543

 
 Discounted cash flows
 
OAS
 
17-198 bps
 
44 bps

 
 
251

 
Other
 
 
 
 
 
 
Insignificant Level 3 assets(1)
 
195

 
 
 
 
 

 
 
Total level 3 assets
 

$12,236

 
 
 
 
 
 
 
 
Liabilities
 


 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties, at fair value
 

$731

 
Single External Source
 
External Pricing Sources
 
98.0 -102.2 bps
 

$100.0

Insignificant Level 3 liabilities(1)
 
263

 
 
 
 
 
 
 
 
Referenced footnote is included after the next table.


Freddie Mac Form 10-Q
 
98
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


 
 
December 31, 2018
 
 
Level 3
Fair
Value

Predominant
Valuation
Technique(s)

Unobservable Inputs
(Dollars in millions, except for certain unobservable inputs as shown)
 
Type

Range
 
Weighted
Average
Assets
 







 
 
Available-for-sale, at fair value
 







 
 
Mortgage-related securities
 







 
 
Freddie Mac
 

$2,838


Discounted cash flows

OAS

30 - 325 bps
 
81 bps


 
1,259


Single external source

External pricing sources

$96.1 - $104.1
 

$102.3

Non-agency and other
 
1,403

 
Median of external sources
 
External pricing sources
 
$64.3 - $71.1
 

$67.3


 
237


Single external source

External pricing sources

$93.1 - $110.7
 

$100.7

Trading, at fair value
 








 
 
Mortgage-related securities
 








 
 
Freddie Mac
 
1,587


Single external source

External pricing sources

$0.0 - $99.2
 

$56.6


 
1,178


Discounted cash flows

OAS

(21,945) - 6,639 bps
 
90 bps


 
521


Other




 
 
Guarantee asset, at fair value
 
3,391


 Discounted cash flows

OAS

17-198 bps
 
49 bps


 
242


Other




 
 
Insignificant Level 3 assets(1)
 
184







 
 
Total level 3 assets
 

$12,840







 
 
Liabilities
 








 
 
Debt securities of consolidated trusts held by third parties, at fair value
 

$728


Single External Source

External Pricing Sources

$97.4 - $101.1
 

$99.6

Insignificant Level 3 liabilities(1)
 
226







 
 
(1)
Represents the aggregate amount of Level 3 assets or liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant.




Freddie Mac Form 10-Q
 
99
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


Assets Measured at Fair Value on a Non-Recurring Basis
We may be required, from time to time, to measure certain assets at fair value on a non-recurring basis after our initial recognition. These adjustments usually result from the application of lower-of-cost-or-fair-value accounting or measurement of impairment based on the fair value of the underlying collateral. Certain of the fair values in the tables below were not obtained as of the period end, but were obtained during the period.
The table below presents assets measured on our condensed consolidated balance sheets at fair value on a non-recurring basis.
Table 15.4 - Assets Measured at Fair Value on a Non-Recurring Basis
 
 
March 31, 2019
 
December 31, 2018
(In millions)
 
Level 1
Level 2
Level 3
Total
 
Level 1
Level 2
Level 3
Total
Assets measured at fair value on a non-recurring basis:
 
 
 
 
 
 
 
 
 
 
Mortgage loans(1)
 

$—


$91


$5,414


$5,505

 

$—


$24


$7,519


$7,543

(1)
Includes loans that are classified as held-for-investment and have been measured for impairment based on the fair value of the underlying collateral and held-for-sale loans where the fair value is below cost.
The tables below provide valuation techniques, the range, and the weighted average of significant unobservable inputs for Level 3 assets and liabilities measured on our condensed consolidated balance sheets at fair value on a non-recurring basis.
Table 15.5 - Quantitative Information about Non-Recurring Level 3 Fair Value Measurements
 
 
March 31, 2019
 
 
Level 3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs
(Dollars in millions, except for certain unobservable inputs as shown)
 
Type
Range
Weighted
Average
Non-recurring fair value measurements
 
 
 
 
 
 
 
 
Mortgage loans
 

$5,414

 
 
 
 
 
 
 
 
 
 
Internal model
 
Historical sales proceeds
$3,400 - $782,100
$177,593
 
 
 
 
Internal model
 
Housing sales index
44 - 486 bps
108 bps
 
 
 
 
Median of external sources
 
External pricing sources
$32.3 - $95.0
$83.7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
Level 3
Fair
Value
 
Predominant
Valuation
Technique(s)
 
Unobservable Inputs
(Dollars in millions, except for certain unobservable inputs as shown)
 
Type
Range
Weighted
Average
Non-recurring fair value measurements
 
 
 
 
 
 
 
 
Mortgage loans
 

$7,519

 
 
 
 
 
 
 
 
 
 
Internal model
 
Historical sales proceeds
$3,000 - $750,500
$177,725
 
 
 
 
Internal model
 
Housing sales index
44 - 480 bps
108 bps
 
 
 
 
Median of external sources
 
External pricing sources
$36.2 - $94.6
$82.5

Freddie Mac Form 10-Q
 
100
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


Fair Value of Financial Instruments
The tables below present the carrying value and estimated fair value of our financial instruments. For certain types of financial instruments, such as cash and cash equivalents, securities purchased under agreements to resell, secured lending and other, and certain debt, the carrying value on our GAAP balance sheets approximates fair value, as these assets and liabilities are short-term in nature and have limited fair value volatility.
Table 15.6 - Fair Value of Financial Instruments
 
 
 
March 31, 2019
 
 
GAAP Measurement Category(1)
GAAP Carrying  Amount
 
Fair Value
(In millions)
 
 
Level 1
 
Level 2
 
Level 3
 
Netting 
Adjustments(2)
 
Total
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
Amortized cost

$6,239

 

$6,179

 

$60

 

$—

 

$—

 

$6,239

Securities purchased under agreements to resell
 
Amortized cost
50,134

 
—

 
50,134

 
—

 
—

 
50,134

Investments in securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale, at fair value
 
FV - OCI
31,944

 
—

 
26,712

 
5,232

 
—

 
31,944

Trading, at fair value
 
FV - NI
33,552

 
14,782

 
15,711

 
3,059

 
—

 
33,552

Total investments in securities
 
 
65,496

 
14,782

 
42,423

 
8,291

 
—

 
65,496

Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held by consolidated trusts
 
 
1,858,079

 
—

 
1,640,585

 
216,487

 
—

 
1,857,072

Loans held by Freddie Mac
 
 
84,009

 
—

 
34,688

 
51,860

 
—

 
86,548

Total mortgage loans
 
Various(3)
1,942,088

 
—

 
1,675,273

 
268,347

 
—

 
1,943,620

Derivative assets, net
 
FV - NI
1,146

 
—

 
6,263

 
11

 
(5,128
)
 
1,146

Guarantee asset
 
FV - NI
3,795

 
—

 
—

 
3,803

 
—

 
3,803

Non-derivative purchase commitments, at fair value
 
FV - NI
237

 
—

 
237

 
5

 
—

 
242

Secured lending and other
 
Amortized cost
3,151

 
—

 
544

 
1,759

 
—

 
2,303

Total financial assets
 
 

$2,072,286

 

$20,961

 

$1,774,934

 

$282,216

 

($5,128
)
 

$2,072,983

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt, net:
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts held by third parties
 
 

$1,803,707

 

$—

 

$1,797,267

 

$3,238

 

$—

 

$1,800,505

Other debt
 
 
269,907

 
—

 
269,561

 
3,713

 
—

 
273,274

Total debt, net
 
Various(4)
2,073,614

 
—

 
2,066,828

 
6,951

 
—

 
2,073,779

Derivative liabilities, net
 
FV - NI
432

 
—

 
4,682

 
58

 
(4,308
)
 
432

Guarantee obligation
 
Amortized cost
3,667

 
—

 
—

 
3,988

 
—

 
3,988

Non-derivative purchase commitments, at fair value
 
FV - NI
4

 
—

 
4

 
21

 
—

 
25

Total financial liabilities
 
 

$2,077,717

 

$—

 

$2,071,514

 

$11,018

 

($4,308
)
 

$2,078,224

(1)
FV - NI denotes fair value through net income. FV - OCI denotes fair value through other comprehensive income.
(2)
Represents counterparty netting, cash collateral netting, and net derivative interest receivable or payable.
(3)
As of March 31, 2019, the GAAP carrying amounts measured at amortized cost, lower-of-cost-or-fair-value, and FV - NI were $1.9 trillion, $19.2 billion, and $20.6 billion, respectively.
(4)
As of March 31, 2019, the GAAP carrying amounts measured at amortized cost and FV - NI were $2.1 trillion and $5.1 billion, respectively.

Freddie Mac Form 10-Q
 
101
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


 
 
 
December 31, 2018
 
 
GAAP Measurement Category(1)
GAAP Carrying  Amount
 
Fair Value
(In millions)
 
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments(2)
 
Total
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
Amortized cost

$7,273

 

$7,273

 

$—

 

$—

 

$—

 

$7,273

Securities purchased under agreements to resell
 
Amortized cost
34,771

 
—

 
34,771

 
—

 
—

 
34,771

Investments in securities:
 
 
 
 
 
 
 
 
 
 
 
 


Available-for-sale, at fair value
 
FV - OCI
33,563

 
—

 
27,788

 
5,775

 
—

 
33,563

Trading, at fair value
 
FV - NI
35,548

 
15,885

 
16,369

 
3,294

 
—

 
35,548

Total investments in securities
 
 
69,111

 
15,885


44,157


9,069


—

 
69,111

Mortgage loans:
 
 
 
 
 
 
 
 
 
 
 
 

Loans held by consolidated trusts
 
 
1,842,850

 
—

 
1,605,874

 
209,542

 
—

 
1,815,416

Loans held by Freddie Mac
 
 
84,128

 
—

 
33,946

 
52,212

 
—

 
86,158

Total mortgage loans
 
Various(3)
1,926,978

 
—


1,639,820


261,754


—

 
1,901,574

Derivative assets, net
 
FV - NI
335

 
—

 
6,417

 
1

 
(6,083
)
 
335

Guarantee asset
 
FV - NI
3,633

 
—

 
—

 
3,642

 
—

 
3,642

Non-derivative purchase commitments, at fair value
 
FV - NI
159

 
—

 
159

 
2

 
—

 
161

Secured lending and other
 
Amortized cost
1,805

 
—

 
195

 
873

 
—

 
1,068

Total financial assets
 
 

$2,044,065

 

$23,158



$1,725,519



$275,341



($6,083
)
 

$2,017,935

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
 
 

Debt, net:
 
 
 
 
 
 
 
 
 
 
 
 

Debt securities of consolidated trusts held by third parties
 
 

$1,792,677

 

$—

 

$1,759,911

 

$2,698

 

$—

 

$1,762,609

Other debt
 
 
252,273

 
—

 
251,543

 
3,629

 
—

 
255,172

Total debt, net
 
Various(4)
2,044,950

 
—


2,011,454


6,327


—

 
2,017,781

Derivative liabilities, net
 
FV - NI
583

 
—

 
4,336

 
92

 
(3,845
)
 
583

Guarantee obligation
 
Amortized cost
3,561

 
—

 
—

 
4,146

 
—

 
4,146

Non-derivative purchase commitments, at fair value
 
FV - NI
17

 
—

 
17

 
11

 
—

 
28

Total financial liabilities
 
 

$2,049,111

 

$—



$2,015,807



$10,576



($3,845
)
 

$2,022,538

(1)
FV - NI denotes fair value through net income. FV - OCI denotes fair value through other comprehensive income.
(2)
Represents counterparty netting, cash collateral netting, and net derivative interest receivable or payable.
(3)
As of December 31, 2018, the GAAP carrying amounts measured at amortized cost, lower-of-cost-or-fair-value, and FV - NII were $1.9 trillion, $18.5 billion, and $23.1 billion, respectively.
(4)
As of December 31, 2018, the GAAP carrying amounts measured at amortized cost and FV - NII were $2.0 trillion and $5.1 billion, respectively.
Fair Value Option
We elected the fair value option for certain multifamily held-for-sale loans, multifamily held-for-sale loan purchase commitments, and certain long-term debt.
The table below presents the fair value and UPB related to certain loans and long-term debt for which we have elected the fair value option. This table does not include interest-only securities related to debt securities of consolidated trusts and other debt held by third parties with a fair value of $88 million and $26 million and multifamily held-for-sale loan purchase commitments with a fair value of $233 million and $142 million, as of March 31, 2019 and December 31, 2018, respectively.

Freddie Mac Form 10-Q
 
102
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 15


Table 15.7 - Difference between Fair Value and UPB for Certain Financial Instruments with Fair Value Option Elected
 
 
March 31, 2019
 
December 31, 2018
(In millions)
 
Multifamily
Held-For-Sale
 Loans
Other Debt -
Long Term
Debt Securities Of Consolidated Trusts Held By Third Parties
 
Multifamily
Held-For-Sale
 Loans
Other Debt -
Long Term
Debt Securities Of Consolidated Trusts Held By Third Parties
Fair value
 

$20,576


$4,248


$730

 

$23,106


$4,357


$728

UPB
 
19,793

3,889

730

 
22,693

3,998

730

Difference
 

$783


$359


$—

 

$413


$359


($2
)
Changes in Fair Value Under the Fair Value Option Election
The table below presents the changes in fair value included in non-interest income (loss) in our condensed consolidated statements of comprehensive income, related to items for which we have elected the fair value option.
Table 15.8 - Changes in Fair Value Under the Fair Value Option Election
 
 
1Q 2019
1Q 2018
(In millions)
 
Gains (Losses)
Multifamily held-for-sale loans
 

$341


($458
)
Multifamily held-for-sale loan purchase commitments
 
390

105

Other debt - long term
 
(2
)
9

Debt securities of consolidated trusts held by third parties
 
(2
)
2

Changes in fair value attributable to instrument-specific credit risk were not material for 1Q 2019 and 1Q 2018 for any assets or liabilities for which we elected the fair value option.

Freddie Mac Form 10-Q
 
103
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 16


NOTE 16
Legal Contingencies
We are involved as a party in a variety of legal and regulatory proceedings arising from time to time in the ordinary course of business including, among other things, contractual disputes, personal injury claims, employment-related litigation, and other legal proceedings incidental to our business. We are frequently involved, directly or indirectly, in litigation involving mortgage foreclosures. From time to time, we are also involved in proceedings arising from our termination of a seller's or servicer's eligibility to sell loans to, and/or service loans for, us. In these cases, the former seller or servicer sometimes seeks damages against us for wrongful termination under a variety of legal theories. In addition, we are sometimes sued in connection with the origination or servicing of loans. These suits typically involve claims alleging wrongful actions of sellers and servicers. Our contracts with our sellers and servicers generally provide for indemnification of Freddie Mac against liability arising from sellers' and servicers' wrongful actions with respect to loans sold to or serviced for Freddie Mac.
Litigation and claims resolution are subject to many uncertainties and are not susceptible to accurate prediction. In accordance with the accounting guidance for contingencies, we reserve for litigation claims and assessments asserted or threatened against us when a loss is probable (as defined in such guidance) and the amount of the loss can be reasonably estimated.
Putative Securities Class Action Lawsuit: Ohio Public Employees Retirement System vs. Freddie Mac, Syron, Et Al.
This putative securities class action lawsuit was filed against Freddie Mac and certain former officers on January 18, 2008 in the U.S. District Court for the Northern District of Ohio purportedly on behalf of a class of purchasers of Freddie Mac stock from August 1, 2006 through November 20, 2007. FHFA later intervened as Conservator, and the plaintiff amended its complaint on several occasions. The plaintiff alleged, among other things, that the defendants violated federal securities laws by making false and misleading statements concerning our business, risk management, and the procedures we put into place to protect the company from problems in the mortgage industry. The plaintiff seeks unspecified damages and interest, and reasonable costs and expenses, including attorney and expert fees.
In October 2013, defendants filed motions to dismiss the complaint. In October 2014, the District Court granted defendants' motions and dismissed the case in its entirety against all defendants, with prejudice. In November 2014, plaintiff filed a notice of appeal in the U.S. Court of Appeals for the Sixth Circuit. On July 20, 2016, the Court of Appeals reversed the District Court's dismissal and remanded the case to the District Court for further proceedings. On August 14, 2018, the District Court denied the plaintiff's motion for class certification. On January 23, 2019, the Court of Appeals denied plaintiff's petition for leave to appeal that decision.
At present, it is not possible for us to predict the probable outcome of this lawsuit or any potential effect on our business, financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible loss or range of possible loss in the event of an adverse judgment in the foregoing matter due to the following factors, among others: pre-trial litigation is inherently uncertain; while the District Court denied plaintiff's motion for class certification, this denial may be appealed upon the entry of final judgment; and the District Court has not yet ruled upon motions for summary judgment. In particular, absent a final resolution of whether a class will be certified, the identification of a class if one is certified, and the identification of the alleged statement or statements that survive dispositive motions, we cannot reasonably estimate any possible loss or range of possible loss.
LIBOR Lawsuit
On March 14, 2013, Freddie Mac filed a lawsuit in the U.S. District Court for the Eastern District of Virginia against the British Bankers Association and the 16 U.S. Dollar LIBOR panel banks and a number of their affiliates. The case was subsequently transferred to the U.S. District Court for the Southern District of New York. The complaint alleges, among other things, that the defendants fraudulently and collusively depressed LIBOR, a benchmark interest rate indexed to trillions of dollars of financial products, and asserts claims for antitrust violations, breach of contract, tortious interference with contract, and fraud. Freddie Mac filed an amended complaint in July 2013, and a second amended complaint in October 2014. In August 2015, the District Court dismissed the portion of our claim related to antitrust violations and fraud and we filed a motion for reconsideration. On March 31, 2016, the District Court granted a portion of our motion, finding personal jurisdiction over certain defendants, and denied the portion of our motion with respect to statutes of limitation for our fraud claims. Subsequently, in a related case, the U.S. Court of Appeals for the Second Circuit reversed the District Court's dismissal of certain plaintiffs' antitrust claims and remanded the case to the District Court for consideration of whether, among other things, the plaintiffs are "efficient enforcers" of the antitrust laws.

Freddie Mac Form 10-Q
 
104
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 16


On December 20, 2016, after briefing and argument on the defendants' renewed motions to dismiss on personal jurisdiction and efficient enforcer grounds, the District Court denied defendants' motions in part and granted them in part. The District Court held that Freddie Mac is an efficient enforcer of the antitrust laws, but dismissed on personal jurisdiction grounds Freddie Mac's antitrust claims against all defendants except HSBC USA, N.A. Then, in an order issued February 2, 2017, the District Court effectively dismissed Freddie Mac's remaining antitrust claim against HSBC USA, N.A. At present, Freddie Mac's breach of contract actions against Bank of America, N.A., Barclays Bank, Citibank, N.A., Credit Suisse, Deutsche Bank, Royal Bank of Scotland, and UBS AG are its only claims remaining in the District Court.
On February 23, 2018, the Second Circuit reversed the District Court's dismissal of certain plaintiffs' state law fraud and unjust enrichment claims on statutes of limitations grounds. While Freddie Mac was not a party to the appeal, this decision could have the effect of reinstating Freddie Mac's fraud claims against the above-named defendants. The Second Circuit also reversed certain aspects of the District Court's personal jurisdiction rulings and remanded with instructions to allow the named appellant to amend its complaint. The District Court subsequently granted in part Freddie Mac's motion for leave to amend its complaint, and Freddie Mac amended its complaint on April 16, 2019.
Litigation Concerning the Purchase Agreement
Since July 2013, a number of lawsuits have been filed against us concerning the August 2012 amendment to the Purchase Agreement, which created the net worth sweep dividend provisions of the senior preferred stock. The plaintiffs in the lawsuits allege that they are holders of common stock and/or junior preferred stock issued by Freddie Mac and Fannie Mae. (For purposes of this discussion, junior preferred stock refers to the various series of preferred stock of Freddie Mac and Fannie Mae other than the senior preferred stock issued to Treasury.) It is possible that similar lawsuits will be filed in the future. The lawsuits against us are described below.
Litigation in the U.S. District Court for the District of Columbia
In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations. This case is the result of the consolidation of three putative class action lawsuits: Cacciapelle and Bareiss vs. Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and FHFA, filed on July 29, 2013; American European Insurance Company vs. Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and FHFA, filed on July 30, 2013; and Marneu Holdings, Co. vs. FHFA, Treasury, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, filed on September 18, 2013. (The Marneu case was also filed as a shareholder derivative lawsuit.) A consolidated amended complaint was filed in December 2013. In the consolidated amended complaint, plaintiffs allege, among other items, that the August 2012 amendment to the Purchase Agreement breached Freddie Mac's and Fannie Mae's respective contracts with the holders of junior preferred stock and common stock and the covenant of good faith and fair dealing inherent in such contracts. Plaintiffs sought unspecified damages, equitable and injunctive relief, and costs and expenses, including attorney and expert fees.
The Cacciapelle and American European Insurance Company lawsuits were filed purportedly on behalf of a class of purchasers of junior preferred stock issued by Freddie Mac or Fannie Mae who held stock prior to, and as of, August 17, 2012. The Marneu lawsuit was filed purportedly on behalf of a class of purchasers of junior preferred stock and purchasers of common stock issued by Freddie Mac or Fannie Mae over a not-yet-defined period of time.
Arrowood Indemnity Company vs. Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, FHFA, and Treasury. This case was filed on September 20, 2013. The allegations and demands made by plaintiffs in this case were generally similar to those made by the plaintiffs in the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case described above. Plaintiffs in the Arrowood lawsuit also requested that, if injunctive relief were not granted, the Arrowood plaintiffs be awarded damages against the defendants in an amount to be determined including, but not limited to, the aggregate par value of their junior preferred stock, the total of which they stated to be approximately $42 million.
American European Insurance Company, Cacciapelle, and Miller vs. Treasury and FHFA. This case was filed as a shareholder derivative lawsuit, purportedly on behalf of Freddie Mac as a "nominal" defendant, on July 30, 2014. The complaint alleged that, through the August 2012 amendment to the Purchase Agreement, Treasury and FHFA breached their respective fiduciary duties to Freddie Mac, causing Freddie Mac to suffer damages. The plaintiffs asked that Freddie Mac be awarded compensatory damages and disgorgement, as well as attorneys' fees, costs, and other expenses.
FHFA, joined by Freddie Mac and Fannie Mae, moved to dismiss the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case and the other related cases in January 2014. Treasury filed a motion to dismiss the same day. In September 2014, the District Court granted the motions and dismissed the plaintiffs' claims. All plaintiffs appealed that decision, and on February 21, 2017, the U.S. Court of Appeals for the District of Columbia Circuit affirmed in part and remanded in part the decision granting the motions to dismiss. The Court of Appeals affirmed dismissal of all claims except certain claims seeking monetary damages for breach of contract and breach of implied duty of good faith and

Freddie Mac Form 10-Q
 
105
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 16


fair dealing. In March 2017, certain institutional and class plaintiffs filed petitions for panel rehearing with respect to certain claims. On July 17, 2017, the Court of Appeals granted the petitions for rehearing and issued a modified decision, which permitted the institutional plaintiffs to pursue the breach of contract and breach of implied duty of good faith and fair dealing claims that had been remanded. The Court of Appeals also removed language related to the standard to be applied to the implied duty claims, leaving that issue for the District Court to determine on remand. On October 16, 2017, certain institutional and class plaintiffs filed petitions for a writ of certiorari in the U.S. Supreme Court challenging whether HERA's prohibition on injunctive relief against FHFA bars judicial review of the net worth sweep dividend provisions of the August 2012 amendment to the Purchase Agreement, as well as whether HERA bars shareholders from pursuing derivative litigation where they allege the conservator faces a conflict of interest. The Supreme Court denied the petitions on February 20, 2018. On November 1, 2017, certain institutional and class plaintiffs and plaintiffs in another case in which Freddie Mac was not originally a defendant, Fairholme Funds, Inc. v. FHFA, Treasury, and Federal National Mortgage Association, filed proposed amended complaints in the District Court. Each of the proposed amended complaints names Freddie Mac as a defendant for breach of contract and breach of the covenant of good faith and fair dealing claims as well as for new claims alleging breach of fiduciary duty and breach of Virginia corporate law. On January 10, 2018, FHFA, Freddie Mac, and Fannie Mae moved to dismiss the amended complaints. On August 16, 2018, plaintiffs in the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case filed a motion for class certification in the District Court. On September 28, 2018, the District Court dismissed all of the claims except those alleging breach of the implied covenant of good faith and fair dealing. On October 15, 2018, defendants filed a motion seeking reconsideration of the denial of the motion to dismiss as to the implied covenant claims. Discovery is ongoing.
Angel vs. The Federal Home Loan Mortgage Corporation et al. This case was filed pro se on May 21, 2018 against Freddie Mac, Fannie Mae, certain current and former directors of Freddie Mac and Fannie Mae, and FHFA as a nominal defendant. The complaint alleged, among other things, breach of contract, breach of the implied covenant of good faith and fair dealing, and that defendants aided and abetted the government's "avoidance" of plaintiff's dividend rights. On March 6, 2019, the U.S. District Court for the District of Columbia granted the defendants' motion to dismiss the case. On March 18, 2019, Mr. Angel filed a motion seeking to alter or amend the judgment and for leave to file an amended complaint, which defendants have opposed.
Litigation in the U.S. Court of Federal Claims
Reid and Fisher vs. the United States of America and Federal Home Loan Mortgage Corporation. This case was filed as a derivative lawsuit, purportedly on behalf of Freddie Mac as a "nominal" defendant, on February 26, 2014. The complaint alleges, among other items, that the net worth sweep dividend provisions of the senior preferred stock constitute an unlawful taking of private property for public use without just compensation. The plaintiffs ask that Freddie Mac be awarded just compensation for the U.S. government's alleged taking of its property, attorneys' fees, costs, and other expenses. On March 8, 2018, the plaintiffs filed an amended complaint under seal, with a redacted copy filed on November 14, 2018. Defendants filed a motion to dismiss on August 1, 2018 and an amended motion to dismiss on October 1, 2018.
Rafter, Rattien and Pershing Square Capital Management vs. the United States of America et al. This case was filed as a shareholder derivative lawsuit, purportedly on behalf of Freddie Mac as a "nominal" defendant, on August 14, 2014. The complaint alleges that the net worth sweep dividend provisions of the senior preferred stock constitute an unlawful taking of private property for public use without just compensation, and the U.S. government breached an implied-in-fact contract with Freddie Mac. In September 2015, plaintiffs filed an amended complaint, which contains one claim involving Freddie Mac. The amended complaint alleges that Freddie Mac's charter is a contract with its common stockholders, and that, through the August 2012 amendment to the Purchase Agreement, the U.S. government breached the implied covenant of good faith and fair dealing inherent in such contract. Plaintiffs ask that they be awarded damages or other appropriate relief for the alleged breach of contract as well as attorneys' fees, costs, and expenses. Plaintiffs filed a further amended complaint under seal on March 8, 2018, and a redacted public version on April 20, 2018. The amended complaint no longer lists Freddie Mac as a nominal defendant.
Fairholme Funds, Inc., et al. vs. the United States of America, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation. This case was originally filed on July 9, 2013 against the United States of America. On March 8, 2018, plaintiffs filed an amended complaint under seal. A redacted public version was filed on May 11, 2018 and adds Freddie Mac and Fannie Mae as nominal defendants. The amended complaint alleges, among other items, that the net worth sweep dividend provisions of the senior preferred stock constitute an unlawful taking or exaction of private property for public use without just compensation, and that by enacting the net worth sweep, the government breached the fiduciary duty it owed to Freddie Mac and Fannie Mae, and implied-in-fact contracts between the United States on the one hand and Freddie Mac and Fannie Mae on the other. The plaintiffs ask that plaintiffs, Freddie Mac, and Fannie Mae be awarded (1) just compensation for the government's alleged taking or exaction of their property, (2) damages for the government's breach of fiduciary duties, and (3) damages for the government's breach of the alleged implied-in-fact contracts. In addition, plaintiffs seek pre- and post-judgment interest, attorneys' fees, costs, and other expenses. Defendants filed a motion to dismiss on August 1, 2018 and an amended motion to dismiss on October 1, 2018.

Freddie Mac Form 10-Q
 
106
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 16


Perry Capital LLC vs. the United States of America, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation. This case was filed as a derivative lawsuit, purportedly on behalf of Freddie Mac and Fannie Mae as "nominal" defendants, on August 15, 2018. The complaint alleges, among other items, that the net worth sweep dividend provisions of the senior preferred stock constitute an unlawful taking of private property for public use without just compensation or an illegal exaction in violation of the Fifth Amendment, and that by enacting the net worth sweep, the government breached the fiduciary duty it owed to Freddie Mac and Fannie Mae, and implied-in-fact contracts between the United States on the one hand and Freddie Mac and Fannie Mae on the other. The plaintiffs ask that plaintiffs, Freddie Mac, and Fannie Mae be awarded just compensation for the government's alleged taking of their property or damages for the illegal exaction; damages for the government's breach of fiduciary duties; and damages for the government's breach of the alleged implied-in-fact contracts. The proceedings have been stayed pending a ruling on defendants' motion to dismiss in the Fairholme Funds, Inc. litigation.
Litigation in the U.S. District Court for the District of Delaware
Jacobs and Hindes vs. FHFA and Treasury. This case was filed on August 17, 2015 as a putative class action lawsuit purportedly on behalf of a class of holders of preferred stock or common stock issued by Freddie Mac or Fannie Mae. The case was also filed as a shareholder derivative lawsuit, purportedly on behalf of Freddie Mac and Fannie Mae as "nominal" defendants. The complaint alleges, among other items, that the August 2012 amendment to the Purchase Agreement violated applicable state law and constituted a breach of contract, as well as a breach of covenants of good faith and fair dealing. Plaintiffs seek equitable and injunctive relief (including restitution of the monies paid by Freddie Mac and Fannie Mae to Treasury under the net worth sweep dividend), compensatory damages, attorneys' fees, costs and expenses. On November 27, 2017, the Court dismissed the case with prejudice after defendants filed a motion to dismiss. On December 21, 2017, plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Third Circuit, and on November 14, 2018, the Court of Appeals affirmed the dismissal.
At present, it is not possible for us to predict the probable outcome of the lawsuits discussed above in the U.S. District Courts and the U.S. Court of Federal Claims (including the outcome of any appeal) or any potential effect on our business, financial condition, liquidity, or results of operations. In addition, we are unable to reasonably estimate the possible loss or range of possible loss in the event of an adverse judgment in the foregoing matters due to a number of factors, including the inherent uncertainty of pre-trial litigation. In addition, with respect to the In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations case, the plaintiffs have not demanded a stated amount of damages they believe are due, and the Court has not certified a class.

Freddie Mac Form 10-Q
 
107
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 17


NOTE 17
Regulatory Capital
In October 2008, FHFA announced that it was suspending capital classification of us during conservatorship in light of the Purchase Agreement. FHFA continues to monitor our capital levels, but the existing statutory and FHFA regulatory capital requirements are not binding during conservatorship.
We continue to provide quarterly submissions to FHFA on minimum capital. The table below summarizes our minimum capital requirements and deficits and net worth.
Table 17.1 - Net Worth and Minimum Capital
(In millions)
 
March 31, 2019
December 31, 2018
GAAP net worth (deficit)
 

$4,665


$4,477

Core capital (deficit)(1)(2)
 
(68,106
)
(68,036
)
Less: Minimum capital requirement(1)
 
18,127

17,553

Minimum capital surplus (deficit)(1)
 

($86,233
)

($85,589
)
(1)
Core capital and minimum capital figures are estimates and represent amounts submitted to FHFA. FHFA is the authoritative source for our regulatory capital.
(2)
Core capital excludes certain components of GAAP total equity (i.e., AOCI and the liquidation preference of the senior preferred stock) as these items do not meet the statutory definition of core capital.
In May 2017, FHFA, as Conservator, issued guidance to us to evaluate and manage our financial risk and to make economic business decisions, while in conservatorship, utilizing a newly-developed risk-based CCF, an economic capital system with detailed formulae provided by FHFA. We use the CCF to measure risk for making economically effective decisions. We are required to submit quarterly reports to FHFA related to the CCF requirements.



Freddie Mac Form 10-Q
 
108
Financial Statements
Notes to the Condensed Consolidated Financial Statements | Note 18

NOTE 18
Selected Financial Statement Line Items
The table below presents the significant components of other income (loss) on our condensed consolidated statements of comprehensive income (loss).
Table 18.1 - Significant Components of Other Income (Loss)
(In millions)
 
1Q 2019
1Q 2018
Other income (loss):
 
 
 
Income on guarantee obligation
 

$192


$171

All other
 
(158
)
(40
)
Total other income (loss)
 

$34


$131

The table below presents the significant components of other assets and other liabilities on our condensed consolidated balance sheets.
Table 18.2 - Significant Components of Other Assets and Other Liabilities
(In millions)
 
March 31, 2019
December 31, 2018
Other assets:
 
 
 
Real estate owned, net
 

$744


$769

Accounts and other receivables(1)
 
4,462

2,447

Guarantee asset
 
3,795

3,633

Secured lending and other
 
3,151

1,805

All other
 
2,149

2,322

Total other assets
 

$14,301


$10,976

Other liabilities:
 
 
 
Guarantee obligation
 

$3,667


$3,561

Payables related to securities
 
1,442

—

All other
 
2,529

2,837

Total other liabilities
 

$7,638


$6,398

(1)
Primarily consists of servicer receivables and other non-interest receivables.

END OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES

Freddie Mac Form 10-Q
 
109
Other Information

Other Information
LEGAL PROCEEDINGS
We are involved as a party to a variety of legal proceedings. For more information, see Note 16 in this report and in our 2018 Annual Report.
In addition, a number of lawsuits have been filed against the U.S. government related to the conservatorship and the Purchase Agreement. Some of these cases also have challenged the constitutionality of the structure of FHFA. For information on these lawsuits, see the Legal Proceedings section in our 2018 Annual Report. Freddie Mac is not a party to any of these lawsuits.
RISK FACTORS
This Form 10-Q should be read together with the Risk Factors section in our 2018 Annual Report, which describes various risks and uncertainties to which we are or may become subject. These risks and uncertainties could, directly or indirectly, adversely affect our business, financial condition, results of operations, cash flows, strategies, and/or prospects.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
The securities we issue are "exempted securities" under the Securities Act of 1933, as amended. As a result, we do not file registration statements with the SEC with respect to offerings of our securities.
Following our entry into conservatorship, we suspended the operation of, and ceased making grants under, equity compensation plans. Previously, we had provided equity compensation under those plans to employees and members of the Board of Directors. Under the Purchase Agreement, we cannot issue any new options, rights to purchase, participations, or other equity interests without Treasury's prior approval. However, grants outstanding as of the date of the Purchase Agreement remain in effect in accordance with their terms.
Information About Certain Securities Issuances by Freddie Mac
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 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 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. From this address, 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, transactions 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 www.freddiemac.com/singlefamily, mf.freddiemac.com, and www.freddiemac.com/capital-markets.
EXHIBITS
The exhibits are listed in the Exhibit Index of this Form 10-Q.

Freddie Mac Form 10-Q
 
110
Controls and Procedures


Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC's rules and forms and that such information is accumulated and communicated to management of the company, including the company's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we must apply judgment in implementing possible controls and procedures.
Management, including the company's Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2019. As a result of management's evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2019, at a reasonable level of assurance, because we have not been able to update our disclosure controls and procedures to provide reasonable assurance that information known by FHFA on an ongoing basis is communicated from FHFA to Freddie Mac's management in a manner that allows for timely decisions regarding our required disclosure under the federal securities laws. We consider this situation to be a material weakness in our internal control over financial reporting.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING DURING 1Q 2019
We evaluated the changes in our internal control over financial reporting that occurred during 1Q 2019 and concluded that there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
MITIGATING ACTIONS RELATED TO THE MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As described above under Evaluation of Disclosure Controls and Procedures, we have one material weakness in internal control over financial reporting as of March 31, 2019 that we have not remediated.
Given the structural nature of this material weakness, we believe it is likely that we will not remediate it while we are under conservatorship. However, both we and FHFA have continued to engage in activities and employ procedures and practices intended to permit accumulation and communication to management of information needed to meet our disclosure obligations under the federal securities laws. These include the following:
n
FHFA has established the Division of Conservatorship, which is intended to facilitate operation of the company with the oversight of the Conservator.
n
We provide drafts of our SEC filings to FHFA personnel for their review and comment prior to filing. We also provide drafts of external press releases, statements, and certain speeches to FHFA personnel for their review and comment prior to release.
n
FHFA personnel, including senior officials, review our SEC filings prior to filing, including this Form 10-Q, and engage in discussions with us regarding issues associated with the information contained in those filings. Prior to filing this Form 10-Q, FHFA provided us with a written acknowledgment that it had reviewed the Form 10-Q, was not aware of any material misstatements or omissions in the Form 10-Q, and had no objection to our filing the Form 10-Q.
n
The Director of FHFA is in frequent communication with our Chief Executive Officer, typically meeting (in person or by phone) on at least a bi-weekly basis.
n
FHFA representatives attend meetings frequently with various groups within the company to enhance the flow of information and to provide oversight on a variety of matters, including accounting, credit and capital markets management, external communications, and legal matters.

Freddie Mac Form 10-Q
 
111
Controls and Procedures


n
Senior officials within FHFA's accounting group meet frequently with our senior financial executives regarding our accounting policies, practices, and procedures.
In view of our mitigating actions related to this material weakness, we believe that our condensed consolidated financial statements for 1Q 2019 have been prepared in conformity with GAAP.


Freddie Mac Form 10-Q
 
112
Exhibit Index


Exhibit Index
Exhibit
Description*
4.1

 
 
 
 
10.1

 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101.INS
XBRL Instance Document
 
 
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
 
 
101.CAL
XBRL Taxonomy Extension Calculation
 
 
 
 
101.LAB
XBRL Taxonomy Extension Labels
 
 
 
 
101.PRE
XBRL Taxonomy Extension Presentation
 
 
 
 
101.DEF
XBRL Taxonomy Extension Definition
 
 
* The SEC file numbers for the Registrant’s Registration Statement on Form 10, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K are 000-53330 and 001-34139.


Freddie Mac Form 10-Q
 
113
Signatures


Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Federal Home Loan Mortgage Corporation
 
 
By:
 
/s/ Donald H. Layton
 
 
Donald H. Layton
 
 
Chief Executive Officer
Date: May 1, 2019
 
By:
 
/s/ James G. Mackey
 
 
James G. Mackey
 
 
Executive Vice President — Chief Financial Officer
 
 
(Principal Financial Officer)
Date: May 1, 2019
 



Freddie Mac Form 10-Q
 
114
Form 10-Q Index



Form 10-Q Index
Item Number
 
Page(s)
PART I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements
48 - 109
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
1 - 47
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
33 - 36
Item 4.
Controls and Procedures
111 - 112
PART II
OTHER INFORMATION
 
Item 1.
Legal Proceedings
Item 1A
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
Exhibit Index
 
Signatures
 


Freddie Mac Form 10-Q
 
115